$10,000 Gold? 
SAN FRANCISCO – It has never been easy to have a rational conversation about the value of gold. 
Lately, with gold prices up more than 300% over the last decade, it is harder than ever. Just last December, fellow economists Martin Feldstein and Nouriel Roubini each penned op-eds bravely questioning bullish market sentiment, sensibly pointing out gold’s risks. 
Wouldn’t you know it? 
Since their articles appeared, the price of gold has moved up still further. 
Gold prices even hit a record-high $1,300 recently. 
Last December, many gold bugs were arguing that the price was inevitably headed for $2,000. 
Now, emboldened by continuing appreciation, some are suggesting that gold could be headed even higher than that. 
One successful gold investor recently explained to me that stock prices languished for a more than a decade before the Dow Jones index crossed the 1,000 mark in the early 1980’s. 
Since then, the index has climbed above 10,000. 
Now that gold has crossed the magic $1,000 barrier, why can’t it increase ten-fold, too? 
Admittedly, getting to a much higher price for gold is not quite the leap of imagination that it seems. 
After adjusting for inflation, today’s price is nowhere near the all-time high of January 1980. Back then, gold hit $850, or well over $2,000 in today’s dollars. 
But January 1980 was arguably a “freak peak” during a period of heightened geo-political instability. 
At $1,300, today’s price is probably more than double very long-term, inflation-adjusted, average gold prices. 
So what could justify another huge increase in gold prices from here? 
One answer, of course, is a complete collapse of the US dollar. 
With soaring deficits, and a rudderless fiscal policy, one does wonder whether a populist administration might recklessly turn to the printing press. 
And if you are really worried about that, gold might indeed be the most reliable hedge. 
Sure, some might argue that inflation-indexed bonds offer a better and more direct inflation hedge than gold. 
But gold bugs are right to worry about whether the government will honor its commitments under more extreme circumstances. 
In fact, as Carmen Reinhart and I discuss in our recent book on the history of financial crises, This Time is Different, cash-strapped governments will often forcibly convert indexed debt to non-indexed debt, precisely so that its value might be inflated away. 
Even the United States abrogated indexation clauses in bond contracts during the Great Depression of the 1930’s. So it can happen anywhere. 
Even so, the fact that very high inflation is possible does not make it probable, so one should be cautious in arguing that higher gold prices are being driven by inflation expectations. 
Some have argued instead that gold’s long upward march has been partly driven by the development of new financial instruments that make it easier to trade and speculate in gold. 
There is probably some slight truth – and also a certain degree of irony – to this argument. 
After all, medieval alchemists engaged in what we now consider an absurd search for ways to transform base metals into gold. 
Wouldn’t it be paradoxical, then, if financial alchemy could make an ingot of gold worth dramatically more? 
In my view, the most powerful argument to justify today’s high price of gold is the dramatic emergence of Asia, Latin America, and the Middle East into the global economy. 
As legions of new consumers gain purchasing power, demand inevitably rises, driving up the price of scarce commodities. 
At the same time, emerging-market central banks need to accumulate gold reserves, which they still hold in far lower proportion than do rich-country central banks. 
With the euro looking less appetizing as a diversification play away from the dollar, gold’s appeal has naturally grown. 
So, yes, there are solid fundamentals that arguably support today’s higher gold price, although it is far more debatable whether and to what extent they will continue to support higher prices in the future. 
Indeed, another critical fundamental factor that has been sustaining high gold prices might prove far more ephemeral than globalization. 
Gold prices are extremely sensitive to global interest-rate movements. 
After all, gold pays no interest and even costs something to store. 
Today, with interest rates near or at record lows in many countries, it is relatively cheap to speculate in gold instead of investing in bonds. 
But if real interest rates rise significantly, as well they might someday, gold prices could plummet. 
Most economic research suggests that gold prices are very difficult to predict over the short to medium term, with the odds of gains and losses being roughly in balance. 
It is therefore dangerous to extrapolate from short-term trends. 
Yes, gold has had a great run, but so, too, did worldwide housing prices until a couple of years ago. 
If you are a high-net-worth investor, a sovereign wealth fund, or a central bank, it makes perfect sense to hold a modest proportion of your portfolio in gold as a hedge against extreme events. 
But, despite gold’s heightened allure in the wake of an extraordinary run-up in its price, it remains a very risky bet for most of us. 
Of course, such considerations might have little influence on prices. 
What was true for the alchemists of yore remains true today: gold and reason are often difficult to reconcile. 

Is Iraq the Next Afghanistan? 
At the onset of the US-led war in Iraq, two competing views shaped predictions about the outcome. 
The first contended that overthrowing Saddam Hussein's regime would usher in a democratic era in Iraq that would serve as a model and catalyst for democratic change regionally. 
Derided by detractors as a new "domino theory," this view presented intervention in Iraq as similar to America's role in post-WWII Japan. 
Against the optimism of that "Japan scenario," pessimists argued that a "Somalia scenario" was more likely. 
They staked their claim on the tribal, sectarian, and multiethnic nature of Iraq, which, in the absence of dictatorship, would supposedly incite Iraq's collapse into a "failed state," with rampant warlordism, ethnic and religious feuds, and harboring of terrorist organizations. 
But the main question now is whether Iraq will drift along lines somewhere between these two scenarios, increasingly resembling Afghanistan. 
This "Afghan scenario" implies a weak state with nominal power over effectively autonomous fiefdoms that are headed by strongmen who are represented in the central government. 
Bad as it sounds, this prospect appears to be a "realistic" compromise between the supposedly utopian vision of a flourishing, unified democracy and the wretchedness of a failed state. 
Many of the actions and policies of the Coalition Provisional Authority (CPA), as well as higher-level Bush administration decisions, seem to point to a resigned acceptance that early hopes that Iraq would embrace Western-style democracy were misplaced. 
Indeed, such hopes were misplaced. 
Iraq's political culture - and that of most of the Middle East - is incompatible with the basic components of a recognizable Western-style democracy: notions of individual rights and responsibilities are lacking, the concept of a patriarchal state is deeply rooted, and individual cultural identity is rarely tied to the national community. 
On the other hand, much circular logic figures in analyses that consider the "traditional" nature of Iraqi society an obstacle to liberal democracy. 
For these analyses are hardly neutral, but unwittingly enter an ongoing confrontation. 
In Iraq, as elsewhere in the Arab and Muslim worlds, a cultural war is being waged between two paradigms: grand narratives that accept and promote a collectivistic understanding (nationalism, socialism, Islamism), versus an implicit paradigm of individualistic modernity that is locally rooted yet informed by the global experience. 
The frontlines of this war are notions of the individual, cultural identity, civil society, and the nation-state. 
The religious Islamic component in Iraqi social life should not be underestimated. 
But it also should not be equated with the political Islamism that strives to capitalize on it. 
Nationalist and leftist political discourses did leave an imprint on the Iraqi value system, but they are not its sole components. 
Indeed, the nominal acceptance of grand narratives of "democracy" and "human rights" as common bases for political discourse represents a crucial shift in demarcating the cultural battle. 
This cultural debate is not limited to the Arab scene. 
There are also vigorous discussions in the West about the applicability of democratic institutions to the Arab context. 
Advocates of the notion of "Arab exceptionalism," which questions the ability of Arab societies to adapt democratic systems are in fact objectively allied with "grand narrative" ideologues - and also with the beneficiaries of the Arab world's patronage-based political order. 
The models used in the West, both in political circles and in academia, for the analysis and interpretation of Arab societies are seriously deficient. 
In particular, many analyses nowadays promote an ethnic model, reducing Iraq to an artificial construct that rests atop a fragmented "reality" of separate communities. 
Some have even suggested hastening the outcome predicted by this faulty view by dividing Iraq into its "genuine" original components: Sunni, Shi`i, and Kurd. 
In fact, Iraqi society is more complex than this. 
The reception and adoption of democracy is not a function of sectarian belonging, but a reflection of the multi-dimensional historical, cultural, religious, and political identities of Iraqi individuals. 
Given the right circumstances, it is eminently possible to mobilize Iraqi society towards a democratic formulation of its state-to-be. 
The fall of Saddam ushers in the right circumstances. 
Indeed, the seeming failure of a recognizable democratic core to emerge in Iraq within the first few months of the collapse of Saddam's dictatorship is due more to idiosyncrasies of the process than to any presumed essential nature of Iraqi society. 
Upon Saddam's fall, a large "middle ground" existed in Iraq that was positively disposed towards democratic discourse and practice. 
Policy mistakes and reversals eroded this middle ground, opening a path for ideological Islamism and a reconstituted neo-Ba`athism. 
The key mistake was the failure of occupation forces to equip and empower the small group of Iraqi liberal democratic figures to tap into this middle ground. 
As a result, the space for a liberal democratic outcome receded. 
But to treat this setback as a failure would be a self-fulfilling prophecy. 
Iraqi democrats must re-assess and develop a clear public strategy. 
The CPA, and the world community, must not prejudice the outcome of their efforts by accepting a facile and bogus view of Iraqi society. 
Even if such efforts succeed, the road to a full-fledged democratic system in Iraq will still be arduous and expensive. 
But instead of succumbing to a "Somalia scenario," dreaming of a "Japan scenario," or settling for an "Afghanistan scenario," Iraq may yet become a "scenario" for successful intervention in the 21 st century. 

“Neo-Ottoman” Turkey? 
ANKARA – Nowadays, the international media are obsessed with the question of who “lost” Turkey and what that supposed loss means for Europe and the West. 
More alarmingly, some commentators liken Turkey’s neighborhood policy to a revival of Ottoman imperialism. 
Recently, a senior Turkish columnist went so far as to quote Foreign Minister Ahmet Davutoğlu as saying that “we are indeed neo-Ottoman.” 
As someone who was present when Davutoğlu made his presentation to the parliamentary faction of Turkey’s ruling Justice and Development Party (AKP), I can attest to the fact that he did not use such terminology. 
In fact, Davutoğlu and all of us in the AKP foreign-policy community never use this term, because it is simply a mispresentation of our position. 
Turkey’s neighborhood policy is devised to reintegrate Turkey into its immediate neighborhoods, including the Balkans, the Black Sea, the Caucasus, the Middle East, and the Eastern Mediterranean. 
We aim to deepen our political dialogue, increase our trade, and multiply our people-to-people contacts with our neighbors in the form of sports, tourism, and cultural actvities. 
When Egon Bahr formulated his Ostpolitik in the 1960’s, no one asked Will Brandt whether Germany was lost. 
God bestowed upon Turkey a geographical position that fundamentally requires for us to engage with East and West, North and South. 
This is neither a choice nor a luxury – it is a necessity. 
The symbol of the Byzantine and the Selçuk Empires, which occupied roughly the same geography that Turkey does today, was a double-headed eagle looking both east and west. 
It should be no wonder that Turkey is also seeking to engage both ends of its territories and feels that its security is best consolidated by minimizing risks together with its neighbors. 
So we find the current debate on Turkey’s orientation rather superflous, and in some cases ill-intentioned. 
Our neighborhood policy needs support, not criticism. 
Turkey has become an invaluable asset in the make-up of our surrounding regions, and is already changing the status quo in favor of more stability and predictability. 
Our efforts at normalization with Armenia, for example, are destined to bring change to the entire South Caucasus. 
We are doing our part in terms of burden-sharing. 
Sensible Europeans understand that. 
To be sure, some of our neighbors are difficult. 
But no country has the luxury of choosing its neighbors. 
Turkey’s neighborhood policy is very realistic, based on genuine interests, not some romantic neo-Ottoman nostagia, as more than a few international commentators have suggested. 
True, there is a neo-Ottoman revival in the cultural field, and our citizens are eager to rediscover Ottoman life, culture, and practices. 
As Turkey is normalizing domestically, it is also reinterpreting its national historical narrative. 
This is a natural byproduct of consolidating our democracy. 
However, trying to paint our carefully constructed foreign-policy initiatives with imperialist overtones is not only a stark mispresentation, but also does gross injustice to our well-intentioned efforts to stabilize our region. 
In Roman mythology, Janus was the god of gates, doorways, beginnings, and endings. 
Turkey today is a Janus-like geography that offers gates and doorways to the East and West. 
It offers beginnings and endings to the Caucasus, the Black Sea, the Balkans, and the Mediterranean. 
In this capacity, Turkey complements and contributes to a unique transitional passage between otherwise difficult regions, for it signifies centuries-old co-existence and adjustment. 
Turkish foreign policy contributes to that coming together and helps its immeditate neighborhoods to connect with one another. 
Contrary to recent charges, Turkey’s foreign policymakers are not seeking to revive the Ottoman Empire. 
Instead, we seek Turkey’s historic reintegration into its immediate neighborhoods, thereby correcting an anomaly of the Cold War years. 
Such re-integration would only benefit the European Union and our other Western, NATO allies. 
None of them, therefore, has any reason to express discomfort with Turkey. 

 


1929 or 1989? 
PARIS – As the economic crisis deepens and widens, the world has been searching for historical analogies to help us understand what has been happening. 
At the start of the crisis, many people likened it to 1982 or 1973, which was reassuring, because both dates refer to classical cyclical downturns. 
Today, the mood is much grimmer, with references to 1929 and 1931 beginning to abound, even if some governments continue to behave as if the crisis was more classical than exceptional. 
The tendency is either excessive restraint (Europe) or a diffusion of the effort (the United States). 
Europe is being cautious in the name of avoiding debt and defending the euro, whereas the US has moved on many fronts in order not to waste an ideal opportunity to implement badly needed structural reforms. 
For geo-strategists, however, the year that naturally comes to mind, in both politics and economics, is 1989. 
Of course, the fall of the house of Lehman Brothers has nothing to do with the fall of the Berlin Wall. 
Indeed, on the surface it seems to be its perfect antithesis: the collapse of a wall symbolizing oppression and artificial divisions versus the collapse of a seemingly indestructible and reassuring institution of financial capitalism. 
Yet 2008-2009, like 1989, may very well correspond to an epochal change, whose unfolding consequences will be felt for decades. 
The end of the East-West ideological divide and the end of absolute faith in markets are historical turning points. 
And what happens in 2009 may jeopardize some of the positive results of 1989, including the peaceful reunification of Europe and the triumph of democratic principles over nationalist, if not xenophobic, tendencies. 
In 1989, liberal democracy triumphed over the socialist ideology incarnated and promoted by the Soviet Bloc. 
For many of his supporters, it was President Ronald Reagan who, with his deliberate escalation of the arms race, pushed the Soviet economy to the brink, thereby fully demonstrating the superiority of liberal societies and free markets. 
Of course, there are obvious differences between 1989 and now. 
First, and perhaps above all, the revolutions of 1989 and the subsequent collapse of the Soviet Union put an end to global bipolarity. 
By contrast, 2009 is likely to pave the way to a new form of bipolarity, but with China substituting for the Soviet Union. 
Second, whereas democracy and market capitalism appeared as clear – if more fragile than expected – winners in 1989, it is difficult in 2009, with the spread of the global crisis, to distinguish winners from losers. 
Everyone seems to be a loser, even if some are more affected than others. 
Yet, history is unfair, and the US, despite its greater responsibility for today’s global crisis, may emerge in better shape than most countries from the morass. 
In better shape, but not alone. 
As a visiting professor at Harvard and MIT, I am getting a good preview of what the world could look like when the crisis finally passes. 
One senses something like the making of an American-Asian dominated universe. 
From the incredible media lab at MIT to the mathematics and economics departments at Harvard, Asians – Chinese and Indians, in particular – are everywhere, like the Romans in Athens in the first century BC: full of admiration for those from whom they were learning so much, and whom they would overcome in the coming decades. 
But before this new order appears, the world may be faced with spreading disorder, if not outright chaos. 
What, for example, will happen to a country as central and vulnerable as Egypt when hundred of thousands of Egyptians working in the Gulf are forced to return to their homeland as a result of the crisis in the oil-producing countries? 
When the rich get less rich, the poor get poorer. 
And what about the foreign workers who have reached for the “European dream” and are now faced with potential explosions of xenophobia in Europe’s supposedly open countries? 
The consequences of 1989 ended up being less enduring than many observers, including me, would have assumed. 
We can only hope that, in the end, the consequences of 2009 similarly prove to be far less dramatic than we now – intuitively and in our historical reflexes – feel them to be. 

The End of 1945 
NEW YORK – On May 8, 1945, when World War II in Europe officially ended, much of the world lay in ruins. 
But if the human capacity for destruction knows few limits, the ability to start over again is just as remarkable. 
Perhaps that is why mankind has so far managed to survive. 
No doubt, millions of people at the end of the war were too hungry and exhausted to do anything much beyond staying alive. 
But, at the same time, a wave of idealism swept across the wreckage, a collective sense of determination to build a more equal, peaceful, and safer world. 
That is why the war’s great hero, Winston Churchill, was voted out of office in the summer of 1945, even before Japan surrendered. 
Men and women had not risked their lives simply to return to the old days of class privilege and social deprivation. 
They wanted better housing, education, and free health care for all. 
Similar demands were heard all over Europe, where the anti-Nazi or anti-fascist resistance was often led by leftists, or indeed Communists, and prewar conservatives were frequently tainted by collaboration with fascist regimes. 
There was talk of revolution in countries such as France, Italy, and Greece. 
This did not happen, because neither the Western Allies nor the Soviet Union supported it. 
Stalin was content to settle for an empire in Eastern Europe. 
But even Charles de Gaulle, a resistance leader of the right, had to accept Communists in his first postwar government, and he agreed to nationalize industries and banks. 
The swing to the left, to social-democratic welfare states, occurred all over Western Europe. 
It was part of the 1945 consensus. 
A different kind of revolution was taking place in Europe’s former colonies in Asia, where native peoples had no desire to be ruled once more by Western powers, which had been so ignominiously defeated by Japan. 
Vietnamese, Indonesians, Filipinos, Burmese, Indians, and Malays wanted their freedom, too. 
These aspirations were often voiced in the United Nations, founded in 1945. 
The UN, like the dream of European unity, was also part of the 1945 consensus. 
For a short while, many prominent people – Albert Einstein, for one – believed that only a world government would be able to ensure global peace. 
This dream quickly faded when the Cold War divided the world into two hostile blocs. 
But in some ways the 1945 consensus, in the West, was strengthened by Cold War politics. 
Communism, still wrapped in the laurel leaf of anti-fascism, had a wide intellectual and emotional appeal, not only in the so-called Third World, but also in Western Europe. 
Social democracy, with its promise of greater equality and opportunities for all, served as an ideological antidote. 
Most social democrats were in fact fiercely anti-communist. 
Today, 70 years later, much of the 1945 consensus no longer survives. 
Few people can muster great enthusiasm for the UN. 
The European dream is in crisis. 
And the post-war social-democratic welfare state is being eroded more and more every day. 
The rot began during the 1980s, under Ronald Reagan and Margaret Thatcher. 
Neoliberals attacked the expense of entitlement programs and the vested interests of trade unions. 
Citizens, it was thought, had to become more self-reliant; government welfare programs were making everyone soft and dependent. 
In Thatcher’s famous words, there was no such thing as “society,” only families and individuals who ought to be taking care of themselves. 
But the 1945 consensus was dealt a much greater blow precisely when we all rejoiced at the collapse of the Soviet Empire, the other great twentieth-century tyranny. 
In 1989, it looked as if the dark legacy of World War II, the enslavement of Eastern Europe, was finally over. 
And in many ways, it was. 
But much else collapsed with the Soviet model. 
Social democracy lost its raison d’être as an antidote to Communism. 
All forms of leftist ideology – indeed, everything that smacked of collective idealism – came to be viewed as misguided utopianism that could lead only to the Gulag. 
Neoliberalism filled the vacuum, creating vast wealth for some people, but at the expense of the ideal of equality that had emerged from World War II. 
The extraordinary reception of Thomas Piketty’s Capital in the Twenty-First Century shows how keenly the consequences of the collapse of the left have been felt. 
In recent years, other ideologies have also emerged to fill the human need for collective ideals. 
The rise of right-wing populism reflects revived yearnings for pure national communities that keep immigrants and minorities out. 
And, perversely, American neo-conservatives have transformed the internationalism of the old left by seeking to impose a democratic world order by US military force. 
The answer to these alarming developments is not nostalgia. 
We cannot simply return to the past. 
Too much has changed. 
But a new aspiration toward social and economic equality, and international solidarity, is badly needed. 
It cannot be the same as the 1945 consensus, but we would do well, on this anniversary, to remember why that consensus was forged in the first place. 

Modernity with Chinese Characteristics 
HONG KONG – At the start of the 19th National Congress of the Chinese Communist Party (CCP) this month, President Xi Jinping unveiled his “two-stage development plan” to turn China into a “modern socialist state” by 2035. 
Since then, commentators have furiously debated the theme of “China rising” and Xi’s concentration of power in his own hands. 
They are missing the point. 
In fact, Xi’s plan is far more comprehensive and forward-looking than most observers seem to think. 
Much like his predecessors Mao Zedong and Deng Xiaoping, Xi has established a strategy for transforming China into a “prosperous, strong, democratic, culturally advanced, harmonious, and beautiful” country over the next decades. 
The key to success will be the balance between modernity and CCP-led socialism. 
When Xi took over as leader of the CCP in 2012, deep cracks had appeared in both the development model bequeathed to him by Deng and the dominant Western neoliberal model, based on free and open markets. 
China’s rapid industrial growth had brought rampant corruption, growing income inequality, and high levels of pollution. 
Western countries, too, were facing rising inequality, as they reeled from a global crisis of their own making – a crisis that, among other things, weakened their appetite for Chinese imports. 
Recognizing that sustainable development would be possible only within a context of social stability and credible, transparent governance, Xi devoted the last five years to an unprecedented anti-corruption campaign that has brought down 440 senior officials. 
He also implemented more than 1,500 reform measures designed to rebalance the economy, thereby stabilizing annual GDP growth at a “new normal” rate of 6.7%, on average, during his first term. 
Xi’s first term thus laid the groundwork for the ambitious plan that he unveiled at the 19th National Congress. 
That plan establishes a clear and realistic short-term objective of making China a “moderately prosperous society” by 2021, including by increasing per capita income to more than $12,000 per year, the World Bank threshold for a high-income economy. 
Xi’s report also sets out a longer-term strategy for realizing Xi’s much-touted “China Dream” – that is, the country’s “rejuvenation” and establishment as a global leader, on par with the United States and other advanced countries – by 2049. 
According to Xi’s vision, a transparent, accountable, empowered, and socially responsible CCP will act as the guardian of this transition. 
It is a perfectly logical, albeit complex plan. 
Yet it seems somewhat incomprehensible to people outside China. 
This may be because, unlike the standard Western model of competitive party politics that uses periodic elections to direct policy, the Chinese development model relies on a one-party leadership’s ability to learn and adapt its agenda accordingly. 
For a country as large and diverse as China, this approach makes sense, as it balances stability with flexibility. 
The country’s development is guided not by outcomes in decentralized markets, but by the choices of a central government, which presides over the provision of public goods, sets rules, and manages institutions. 
In order to avoid the types of social disruption that political competition could entail, the central government also appoints key provincial and municipal officials and resolves disputes among regions. 
Meanwhile, regional and municipal governments engage in policy experimentation at the local level, where markets and communities interact, with the results of those experiments informing national policy. 
Regional competition not only fuels overall economic growth; it also ensures that the particular needs of each area, from megacities like Beijing to the tiny villages that dot China’s countryside, are met. 
As the situation on the ground changes, with new solutions often creating new and unforeseeable problems, continual adaptation at every level is vital. 
Of course, the predominance of the state does not mean that markets do not have an important role to play. 
But that role is often misunderstood. 
In recent decades, China used state-owned enterprises (SOEs) to build key infrastructure, in order to support the development of China’s markets. 
Today, SOEs still play an important role in social engineering and research and development, but their business models are under pressure from globalization and disruptive technologies. 
That is why Xi has included in his plan measures to support the continued opening of markets, including the use of competition law to enable markets to dictate prices, improve resource allocation, and boost productivity. 
But market liberalization, in a context of globalization and rapid technological change, has also given rise to another potentially damaging trend: the emergence of a few ultra-dominant tech giants. 
Moreover, market liberalization has often outpaced progress in regulation and enforcement, allowing for abuses like speculation and tax avoidance. 
Given this, China’s government has, in recent years, strengthened regulation and enforcement in virtually all sectors. 
It is this apparent contradiction – between the stated objective of liberalizing markets and the reality of tightened regulations – that seems to confuse outsiders. 
But the fact is that rising social imbalances can be addressed only by effective government intervention that avoids state capture or the kind of paralysis that can arise from excessive political competition. 
Another seemingly contradictory element of Xi’s plan is its insistence on party leadership in all national affairs, alongside a pledge to strengthen the rule of law. 
But, again, a closer look reveals a straightforward logic: the transition to a future in which the rule of law is paramount will require China to overcome its legacy of bureaucratic silos that entrench resistance to reform from vested interests. 
Doing so will demand strong leadership. 
In a world comprising a diverse array of countries, each with its own complex, dynamic, and evolving system, there can be no one-size-fits-all development path. 
Though countries may all aspire toward similar lifestyles, business environments, and social systems, they will get there in their own way, determined according to their particular needs, preferences, structures, and legacies. 
For China, that way has now been mapped, with the understanding that the map can and will be revised as needed. 

One Hundred Years of Ineptitude 
BERLIN – The global financial and economic crisis that began in 2008 was the greatest economic stress-test since the Great Depression, and the greatest challenge to social and political systems since World War II. 
It not only put financial markets and currencies at risk; it also exposed serious regulatory and governance shortcomings that have yet to be fully addressed. 
In fact, the 2008 crisis will most likely be remembered as a watershed moment, but not because it led to reforms that strengthened economic resilience and removed vulnerabilities. 
On the contrary, leaders’ failure to discern, much less act on, the lessons of the Great Recession may open the way for a series of fresh crises, economic and otherwise, in the coming decades. 
However serious those crises turn out to be, historians a century from now will likely despair at our shortsightedness. 
They will note that analysts and regulators were narrowly focused on fixing the financial system by strengthening national oversight regimes. 
While this was a worthy goal, historians will point out, it was far from the only imperative. 
To prepare the world to confront the challenges posed by globalization and technological development in a way that supports sustainable and equitable growth, governance institutions and regulations at both the national and international levels must be drastically improved. 
Yet not nearly enough has been invested in this effort. 
Beyond regional bodies like the European Union, international financial governance has remained largely untouched. 
Worse, because the partial fixes to the financial system will enable even more globalization, they will end up making matters worse, as strain on already-inadequate governance and regulatory frameworks increases, not only in finance, but also in other economic and technological fields. 
Meanwhile, enormous financial investments focused on securing a higher rate of return are likely to fuel technological innovation, further stressing regulatory systems in finance and beyond. 
Major technological advances fueled by cheap money can cause markets to change so fast that policy and institutional change cannot keep up. 
And new markets can emerge that offer huge payoffs for early adopters or investors, who benefit from remaining several steps ahead of national and international regulators. 
This is what happened in the run-up to the 2008 crisis. 
New technology-enabled financial instruments created opportunities for some to make huge amounts of money. 
But regulators were unable to keep up with the innovations, which ended up generating risks that affected the entire economy. 
This points to a fundamental difference between global crises of the twenty-first century and, say, the Great Depression in the 1930s or, indeed, any past stock-market crashes. 
Because of the financial sector’s growth, more actors benefit from under-regulation and weak governance in the short term, making today’s crises more difficult to prevent. 
Complicating matters further, the systems affected by today’s crises extend well beyond any one regulatory body’s jurisdiction. 
That makes crises far unrulier, and their consequences – including their long-term influence on societies and politics – more difficult to predict. 
The next crises – made more likely by rising nationalism and a growing disregard for science and fact-based policymaking – may be financial, but they could also implicate realms as varied as migration, trade, cyberspace, pollution, and climate change. 
In all of these areas, national and international governance institutions are weak or incomplete, and there are few independent actors, such as watchdog groups, demanding transparency and accountability. 
This makes it harder not only to prevent crises – not least because it creates opportunities for actors to game the system and shirk responsibility – but also to respond to them. 
The 2008 crisis cast a harsh spotlight on just how bad we are at responding quickly to disasters, especially those fueled by fragmented governance. 
To be sure, as the Hertie School’s 2018 Governance Report shows, there have been some improvements in preparing for and managing crises. 
But we must become more alert to how developments in a wide range of fields – from finance to digital technologies and climate change – can elude the governance capacities of national and international institutions. 
We should be running crisis scenarios and preparing emergency plans for upheaval in all of these fields, and taking stronger steps to mitigate risks, including by managing debt levels, which today remain much higher in the advanced economies than they were before the 2008 crisis. 
Moreover, we should ensure that we provide international institutions with the needed resources and responsibilities. 
And by punishing those who exacerbate risks for the sake of their own interests, we would strengthen the legitimacy of global governance and the institutions that are meant to conduct it. 
As it stands, inadequate cross-border coordination and enforcement of international agreements is a major impediment to crisis prevention and management. 
Yet, far from addressing this weakness, the world is reviving an outdated model of national sovereignty that makes crises of various kinds more likely. 
Unless we change course soon, the world of 2118 will have much reason to regard us with scorn. 

2011: My Space Odyssey 
MOSCOW – Most people who know of me think of me as an information-technology expert, someone who probably lives in California and invests in edgy Internet start-ups. 
In fact, my formal residence is in New York City, but I am about to spend most of the next five months in Russia, training to be a cosmonaut in Star City, just outside Moscow. 
It all came about in a number of ways. 
First of all, as a kid, I just assumed that I would go to the moon, without having to do much in particular to make it happen. 
I just took it for granted that, by the time I was, say, 40, space travel would be a common thing. 
My father was involved with the United States space program, and we had some moon rocks at home, so I thought it was no big deal. 
Then I got distracted for about 40 years. 
A few years ago, however, I started paying attention to space again. 
A lot of people I knew in the IT industry were doing the same: Elon Musk, a co-founder of PayPal, founded Space-X; 
Jeff Bezos of Amazon started a spacecraft company called Blue Origin; 
Jeff Greason, a senior manager at Intel, started XCOR Aerospace (in which I’m an investor). 
In 2005, the last year I held my PC Forum conference for IT entrepreneurs, I started a conference called Flight School for entrepreneurs in space and private aviation. 
Meanwhile, in about 2005, I was in South Africa with a small group advising former President Thabo Mbeki and his government about its IT policy. 
One of the group was Mark Shuttleworth, founder of Thawte (sold to VeriSign), who had recently come back from a trip to the space station as the second “space tourist.” 
One evening, the group sat around a campfire as the sun set, and around 50 African schoolchildren were bussed in. 
Altogether, there were about 100 of us, President Mbeki included, around a roaring fire. 
Once it was dark, a screen was set up and Mark showed home videos from space. 
He gave a fascinating talk about his adventures, complete with clips of him floating around, catching bubbles in his mouth, and so on. 
The kids loved it, and I'm sure some of them decided then and there to study math and science. 
Eventually, I invested in Space Adventures, the company that organized Shuttleworth’s trip into space. 
Later, I went on a tour that they organized to watch the launch of Charles Simonyi, the fifth (and soon seventh) space tourist, from Baikonur in Kazakhstan. 
(Simonyi wrote the Microsoft Word program, and now has another start-up, Intentional Software, and a foundation, as well as a Web site, CharlesinSpace.org.) 
Soon after, I started casually discussing the notion of becoming a backup cosmonaut with the Space Adventures team. 
Yes, I would love to actually go, but the trip to space costs $35 to $40 million, whereas backup training costs “only” $3 million. 
So I had vague thoughts that I might go into space sometime in 2011 - the year that Google co-founder Sergey Brin is (very) tentatively slated to go. 
Space Adventures was pushing for 2009, but I was pretty busy. 
Then something happened last spring: my sister Emily discovered that she had cancer and had a double mastectomy. 
(She is doing well now and, in fact, just won a mini-marathon.) 
A couple of weeks later, I was faced with one of those conflicts: a board meeting here, a conference there, another opportunity at the same time somewhere else. 
“Aaagh,” I thought, “if only I had a double mastectomy: I could cancel all these things and no one would complain!” 
Good grief! 
I realized my priorities were all out of whack. 
So in some odd way, this sabbatical in Russia is my alternative to a double mastectomy – a positive one, to be sure, but the same kind of reset-button experience. 

A Comeback Strategy for Europe 
STOCKHOLM/MADRID – When Pope Francis addressed the European Parliament last November, he compared the European Union to a grandmother – pleasant and rich with experience, but lacking the vitality and energy of the past. 
It is high time, Francis argued, that EU leaders shed their dozy image, recognize the strategic challenges that Europe faces, and forge a clear policy for tackling them. 
Admittedly, the pope’s characterization was alarmingly accurate in some respects. 
But, despite its seeming lassitude, Europe retains significant strengths. 
It is a hub of high-level thought and innovation; it is home to some of the world’s most competitive regions and industries; and, perhaps most impressive, it has built a community and market encompassing a half-billion people. 
But the world is changing: the Asia-Pacific region is increasingly influencing global developments, economic and otherwise. 
The Trans-Pacific Partnership – by which the United States and 11 other countries would create a mega-regional free-trade zone – would most likely accelerate this shift (all the more so if China eventually joins). 
Though the TPP faces no shortage of hurdles to clear before an agreement is finalized, its potential to augment Asia’s economic power cannot be underestimated. 
Europe must work to secure its position in the new world order – beginning by enhancing its own trade and investment ties with the US. 
The problem is that, as the TPP negotiations progress, talks on the EU-US Transatlantic Trade and Investment Partnership (TTIP) have become so deeply mired in domestic controversies that the entire project may well be scuttled. 
Business leaders on both sides of the Atlantic are convinced that a successful TTIP agreement would bring substantial economic benefits – a perception that many studies reinforce. 
Yet trivial issues – for example, the use of chlorinated chicken and settlements of investor disputes – continue to dominate the debate. 
The TTIP’s goal is to unleash the power of the transatlantic economy, which remains by far the world’s largest and wealthiest market, accounting for three-quarters of global financial activity and more than half of world trade. 
(If the TTIP was opened to other economies – such as Turkey, Mexico, and Canada – the benefits would be even greater.) 
Even more compelling than the benefits of achieving an agreement, though, are the potentially catastrophic consequences of failure. 
For starters, a breakdown of TTIP talks would give considerable ammunition to those in the United Kingdom who advocate withdrawal from the EU; conversely, if the TTIP were implemented, the UK would be unwise – and thus unlikely – to leave. 
Moreover, the perception that the EU’s internal squabbles had led it to squander a strategic opportunity would probably drive the US to accelerate its disengagement from the continent. 
And Russian President Vladimir Putin would invariably regard the EU’s failure as a major opportunity to exert more influence over parts of Europe. 
All of this contributes to a starkly fundamental strategic risk: If the TTIP stalls or collapses, while the TPP moves forward and succeeds, the global balance will tip strongly in Asia’s favor – and Europe will have few options, if any, for regaining its economic and geopolitical influence. 
When the TTIP was first proposed, Europe seemed to recognize its value. 
Indeed, it was the EU that pushed the US, which initially doubted Europe’s commitment, to launch the negotiation process in June 2013. 
The ambition was to complete the negotiations on “one tank of gas.” 
No one wanted to endure protracted talks – or the associated political pain. 
But EU leaders essentially abandoned the project, seemingly confirming American fears. 
Trade negotiators struggled to make headway, while anti-globalization groups seized control of the public discourse, presenting the TTIP as a threat to everything from Europe’s democracy to its health. 
This is dangerously inaccurate talk, and EU leaders must prevent it from gaining any more traction by making the strategic case for the agreement. 
And they must revive their commitment to conclude the talks successfully in 2015. 
This is not to say that resolving the remaining issues in the TTIP negotiations will be simple. 
But establishing a trade agreement, especially one that entails so many regulatory issues, is always difficult, as it must account for the complexity and changeability of modern economies. 
The fact is that the challenges inherent in completing the TTIP are no more intractable than those that EU leaders have faced in the last few years of crisis. 
When the TTIP negotiations resume next month, EU leaders must push for genuine progress, with the goal of completing a deal by the end of the year. 
The good news is that the recent midterm elections in the US might have improved their chances. 
President Barack Obama now might get so-called fast-track negotiating authority from Congress. 
If he does, Congress would simply approve or reject any negotiated agreement, rather than picking it apart. 
The US presidential election season is starting, and other issues in the new year could easily take over the EU agenda. 
That is why Europe’s leaders have no time to waste. 
They must seize economic opportunity – and avert strategic disaster. 

The Year That Ended an Epoch? 
MADRID – As 2016 comes to an end, the outlook for 2017 is shrouded in uncertainty. 
Tensions in the Middle East are rising, and populist movements have appeared in Europe and the United States. 
In the Middle East, the tragic conflict in Syria continues, despite several fruitless attempts at rapprochement, which were marred by the fundamental disagreement about Syrian President Bashar al-Assad’s future role in any peace process or political transition. 
Meanwhile, over the past week, Syrian government troops, backed by Russia and Iran, have retaken almost all of Aleppo – once Syria’s largest city, now utterly devastated by the war. 
The world’s priority for the coming year must be to achieve peace in Syria, which will require close regional and international cooperation. 
On December 27, Iran, Russia, and Turkey will hold a tripartite meeting in Moscow to discuss a political solution for the Syria conflict. 
That meeting, if it takes place, is likely to be overshadowed by the fallout from the assassination of Russia’s ambassador to Turkey. 
But it is nothing if not surprising that these parties, and not the US and the European Union, would be negotiating such an agreement. 
One positive development this year came in March, when the EU and Turkey signed an agreement to address the refugee crisis. 
Turkey has now taken in some three million Syrian refugees since the beginning of the conflict. 
Although EU-Turkey relations are currently not at their best, the dialogue between the two sides must continue in 2017, not least because of their common interests, which are based not only on economic interdependence, but also on the refugee crisis and the collective fight against terrorism. 
European politics next year, meanwhile, will be consumed by the Brexit negotiations. 
In March, the United Kingdom will likely invoke Article 50 of the Treaty of Lisbon, triggering the formal procedure for withdrawal from the EU. 
The challenge will be to reach an agreement that guarantees the wellbeing of future EU-UK relations. 
This will not be easy, and EU negotiators have already set a timeline of only 18 months. 
While much remains uncertain, what is clear is that if the UK wants to retain access to the European single market, it will have to accept the EU’s four freedoms, including the free movement of workers. 
In 2017, several European countries will hold general elections, and there is a risk that isolationist, anti-European populist movements will make a strong showing. 
For the EU to lose a country as militarily and economically important as the UK is bad enough; but to lose a founding EU member state, such as France, would be tragic. 
Fortunately, many Europeans’ views toward the EU actually improved in the aftermath of the Brexit referendum. 
But this will not lessen the challenge for EU governments in the year ahead. 
They must unite societies divided by powerful global forces, such as globalization and rapid technological innovation. 
The Brexit referendum, followed by Donald Trump’s victory in the US presidential election, signaled the rise of populism in the West. 
But now that Trump is filling his cabinet with oligarchs and former military men, we have reason to doubt that he will keep his promise to govern without the Washington “establishment.” 
Trump’s incoming administration is full of unknowns, but there can be no doubt that his rejection of multilateral institutions will endanger international efforts to cooperate on solutions to the world’s biggest problems. 
This holds peril for US-EU relations. 
In previous years, the Paris climate agreement and the nuclear agreement with Iran were rays of light in a world closing itself off to multilateralism. 
In the coming years, such rays may become scarcer still. 
Now more than ever, we need the kind of dialogue that builds strategic trust between great powers. 
And yet, Trump’s statements casting doubt on continued US adherence to a “One China” policy vis-à-vis Taiwan could severely damage relations between the world’s two largest economies. 
Similarly, notwithstanding the pro-Russian leanings of some among Trump’s team, the US-Russian relationship also lacks strategic trust, owing to Russia’s military intervention in Syria, its invasion of eastern Ukraine, and its alleged interference in the US election. 
The coming year will be particularly important for Europe. 
Relations between the EU and the US must remain strong, rooted in mutual respect for democracy, freedom, and human rights. 
After a turbulent 2016, and with little positive news in international politics, 2017 is shaping up to be a year of challenges and uncertainty. 
But the biggest uncertainty of all is whether this is simply the end of another year, or the end of a geopolitical epoch. 

Another Slow Year for the Global Economy 
WASHINGTON, DC – Last April, the International Monetary Fund projected that the world economy would grow by 3.5% in 2015. 
In the ensuing months, that forecast was steadily whittled down, reaching 3.1% in October. 
But the IMF continues to insist – as it has, with almost banal predictability, for the last seven years – that next year will be better. 
But it is almost certainly wrong yet again. 
For starters, world trade is growing at an anemic annual rate of 2%, compared to 8% from 2003 to 2007. 
Whereas trade growth during those heady years far exceeded that of world GDP, which averaged 4.5%, lately, trade and GDP growth rates have been about the same. 
Even if GDP growth outstrips growth in trade this year, it will likely amount to no more than 2.7%. 
The question is why. 
According to Christina and David Romer of the University of California, Berkeley, the aftershocks of modern financial crises – that is, since World War II – fade after 2-3 years. 
The Harvard economists Carmen Reinhart and Kenneth Rogoff say that it takes five years for a country to dig itself out of a financial crisis. 
And, indeed, the financial dislocations of 2007-2008 have largely receded. 
So what accounts for the sluggish economic recovery? 
One popular explanation lies in the fuzzy notion of “secular stagnation”: long-term depressed demand for goods and services is undermining incentives to invest and hire. 
But demand would remain weak only if people lacked confidence in the future. 
The only logical explanation for this enduring lack of confidence, as Northwestern University’s Robert Gordon has painstakingly documented and argued, is slow productivity growth. 
Before the crisis – and especially from 2003 to 2007 – slow productivity growth was being obscured by an illusory sense of prosperity in much of the world. 
In some countries – notably, the United States, Spain, and Ireland – rising real-estate prices, speculative construction, and financial risk-taking were mutually reinforcing. 
At the same time, countries were amplifying one another’s growth through trade. 
Central to the global boom was China, the rising giant that flooded the world with cheap exports, putting a lid on global inflation. 
Equally important, China imported a huge volume of commodities, thereby bolstering many African and Latin American economies, and purchased German cars and machines, enabling Europe’s largest economy to keep its regional supply chains humming. 
This dynamic reversed around March 2008, when the US rescued its fifth-largest investment bank, Bear Sterns, from collapse. 
With the eurozone banks also deeply implicated in the subprime mortgage mess and desperately short of US dollars, America and much of Europe began a remorseless slide into recession. 
Whereas in the boom years, world trade had spread the bounty, it was now spreading the malaise. 
As each country’s GDP growth slowed, so did its imports, causing its trading partners’ growth to slow as well. 
The US economy began to emerge from its recession in the second half of 2009, thanks largely to aggressive monetary policy and steps to stabilize the financial system. 
Eurozone policymakers, by contrast, rejected monetary stimulus and implemented fiscal austerity measures, while ignoring the deepening distress of their banks. 
The eurozone thus pushed the world into a second global recession. 
Just when that recession seemed to have run its course, emerging economies began to unravel. 
For years, observers had been touting the governance and growth-enhancing reforms that these countries’ leaders had supposedly introduced. 
In October 2012, the IMF celebrated emerging economies’ “resilience.” 
As if on cue, that facade began to crumble, revealing an inconvenient truth: factors like high commodity prices and massive capital inflows had been concealing serious economic weaknesses, while legitimizing a culture of garish inequality and rampant corruption. 
These problems are now being compounded by the growth slowdown in China, the fulcrum of global trade. 
And the worst is yet to come. 
China’s huge industrial overcapacity and property glut needs to be wound down; the hubris driving its global acquisitions must be reined in; and its corruption networks have to be dismantled. 
In short, the factors that dragged down the global economy in 2015 will persist – and in some cases even intensify – in the new year. 
Emerging economies will remain weak. 
The eurozone, having enjoyed a temporary reprieve from austerity, will be constrained by listless global trade. 
Rising interest rates on corporate bonds portend slower growth in the US. 
China’s collapsing asset values could trigger financial turbulence. 
And policymakers are adrift, with little political leverage to stem these trends. 
The IMF should stop forecasting renewed growth and issue a warning that the global economy will remain weak and vulnerable unless world leaders act energetically to spur innovation and growth. 
Such an effort is long overdue. 

Trumpian Uncertainty 
NEW YORK – Every January, I try to craft a forecast for the coming year. 
Economic forecasting is notoriously difficult; but, notwithstanding the truth expressed in Harry Truman’s request for a one-armed economist (who wouldn’t be able to say “on the other hand”), my record has been credible. 
In recent years, I correctly foresaw that, in the absence of stronger fiscal stimulus (which was not forthcoming in either Europe or the United States), recovery from the Great Recession of 2008 would be slow. 
In making these forecasts, I have relied more on analysis of underlying economic forces than on complex econometric models. 
For example, at the beginning of 2016, it seemed clear that the deficiencies of global aggregate demand that have been manifest for the last several years were unlikely to change dramatically. 
Thus, I thought that forecasters of a stronger recovery were looking at the world through rose-tinted glasses. 
Economic developments unfolded much as I anticipated. 
Not so the political events of 2016. 
I had been writing for years that unless growing inequality – especially in the US, but also in many countries throughout the world – was addressed, there would be political consequences. 
But inequality continued to worsen – with striking data showing that average life expectancy in the US was on the decline. 
These results were foreshadowed by a study last year, by Anne Case and Angus Deaton, which showed that life expectancy was on the decline for large segments of the population – including America’s so-called angry men of the Rust Belt. 
But, with the incomes of the bottom 90% having stagnated for close to a third of a century (and declining for a significant proportion), the health data simply confirmed that things were not going well for very large swaths of the country. 
And while America might be at the extreme of this trend, things were little better elsewhere. 
But, if it seemed clear that there would be political consequences, their form and timing were far less obvious. 
Why did the backlash in the US come just when the economy seemed to be on the mend, rather than earlier? 
And why did it manifest itself in a lurch to the right? 
After all, it was the Republicans who had blocked assistance to those losing their jobs as a result of the globalization they pushed assiduously. 
It was the Republicans who, in 26 states, refused to allow the expansion of Medicaid, thereby denying health insurance to those at the bottom. 
And why was the victor somebody who made his living from taking advantage of others, openly admitted not paying his fair share of taxes, and made tax avoidance a point of pride? 
Donald Trump grasped the spirit of the time: things weren’t going well, and many voters wanted change. 
Now they will get it: there will be no business as usual. 
But seldom has there been more uncertainty. 
Which policies Trump will pursue remains unknown, to say nothing of which will succeed or what the consequences will be. 
Trump seems hell-bent on having a trade war. 
But how will China and Mexico respond? 
Trump may well understand that what he proposes will violate World Trade Organization rules, but he may also know that it will take a long time for the WTO to rule against him. 
And by then, America’s trade account may have been rebalanced. 
But two can play that game: China can take similar actions, though its response is likely to be more subtle. 
If a trade war were to break out, what would happen? 
Trump may have reason to think he could win; after all, China is more dependent on exports to the US than the US is on exports to China, which gives the US an advantage. 
But a trade war is not a zero-sum game. 
The US stands to lose as well. 
China may be more effective in targeting its retaliation to cause acute political pain. 
And the Chinese may be in a better position to respond to US attempts to inflict pain on them than the US is to respond to the pain that China might inflict on Americans. 
It’s anybody’s guess who can stand the pain better. 
Will it be the US, where ordinary citizens have already suffered for so long, or China, which, despite troubled times, has managed to generate growth in excess of 6%? 
More broadly, the Republican/Trump agenda, with its tax cuts even more weighted toward the rich than the standard GOP recipe would imply, is based on the idea of trickle-down prosperity – a continuation of the Reagan era’s supply-side economics, which never actually worked. 
Fire-breathing rhetoric, or raving three a.m. tweets, may assuage the anger of those left behind by the Reagan revolution, at least for a while. 
But for how long? 
And what happens then? 
Trump might like to repeal the ordinary laws of economics, as he goes about his version of voodoo economics. 
But he can’t. 
Still, as the world’s largest economy leads the way into uncharted political waters in 2017 and beyond, it would be foolhardy for a mere mortal to attempt a forecast, other than to state the obvious: the waters will almost certainly be choppy, and many – if not most – pundit ships will sink along the way. 

Europe’s Coming Year of Reckoning 
BERLIN – Politically, 2019 will be an extraordinarily important year for the European Union. 
The United Kingdom is currently on track to leave the EU on March 29, 2019. 
And, following elections to the European Parliament in May, nearly all of the most important leadership positions across EU institutions will turn over. 
Thus, depending on how parliamentary seats are distributed, Europe could witness a major realignment of power among member states, within EU institutions, and between member states and the Parliament. 
The new distribution of power within EU institutions will be reflected largely through personnel. 
New presidents of the European Commission, the European Council, and the European Central Bank will be appointed, and a new High Representative of the Union for Foreign Affairs and Security Policy will be chosen. 
If nationalist Euroskeptic parties become the largest group in the European Parliament, these appointments could represent an abrupt break from the past. 
EU member states are more divided now than ever, even on the most fundamental issues concerning the European project. 
The broad pro-European consensus of the past has been replaced by a resurgent nationalism. 
Moreover, east is increasingly pitted against west, and north against south. 
And there is good reason to fear that these widening rifts will be reflected in the new composition of the Parliament, making majority governance difficult if not impossible. 
Today’s de facto grand coalition between the conservative European People’s Party (EPP) and the Progressive Alliance of Socialists and Democrats (S&D) most likely will not survive beyond the elections. 
The S&D, in particular, is in deep – indeed, existential – crisis across Europe. 
And there are new players on the field, including French President Emmanuel Macron’s centrist La République En Marche! and a smattering of radical Euroskeptic and nationalist parties. 
Given the unprecedented prominence of nationalist parties in this election cycle, the usual pro forma European campaign issues will inevitably take a back seat. 
This will be a contest about Europe and the future of European democracy. 
Recent developments in a number of member states have challenged foundational EU principles such as the rule of law and the separation of powers. 
These democratic institutions, as well as questions of European solidarity and sovereignty, will all effectively be on the ballot. 
Needless to say, the parliamentary elections will have far-reaching implications for Europe’s future in a rapidly changing world. 
The current president of the United States has such disdain for the EU that many now talk of “the end of the West.” 
An increasingly revanchist Russia is waging wars along the European periphery and in Syria. 
Turkish President Recep Tayyip Erdoğan is taking his country down the path of authoritarianism. 
And China is demanding recognition as a global power. 
Worse still, US President Donald Trump’s recent decision to withdraw the US from the 1987 Intermediate-Range Nuclear Forces Treaty with Russia raises the threat of a renewed arms race. 
And this is coinciding with an escalating climate crisis and a global contest for predominance in artificial intelligence, the risks of which are still largely unaccounted for. 
Against this dismal backdrop, the question is what will become of Europe. 
Will Europeans manage to hold on to their sovereignty, or will their self-inflicted disunity render them ever more dependent on other powers? 
Pro-EU parties must make Europe’s place in the world a central issue of the parliamentary election campaign; otherwise, they will suffer a shattering defeat at the hands of the new nationalists. 
The nationalists want to return to the past; it is up to the pro-Europeans to offer answers for the future. 
Make no mistake: a nationalist victory next year would rock the EU to its core and throw it into another deep crisis. 
It would represent a defeat for the fundamental values of the European project. 
Given the scale of the threat, pro-Europeans cannot count on business as usual. 
Recent upheavals in many member states’ party systems have altered the electoral calculus, and the pro-Europeans must adapt accordingly. 
For my part, I foresee next year’s elections auguring dramatic change in Europe. 
For better or worse, the question of Europe itself has been politicized, and now it must be decided. 
There will either be a rebirth of nationalism or a victory for EU-level democracy and unity. 
Sadly, pro-Europeans cannot hope for any help from abroad. 
In fact, the opposite is true: Europe must be vigilant in policing foreign interference in its affairs – including its elections. 
In recent years, there has been much talk of the EU suffering from a “democratic deficit.” 
But the fight for a majority in the European Parliament actually represents a major opportunity for democracy. 
Pro-Europeans need only wake up in time to seize it – or Europe’s enemies will. 

9/11 and the New Authoritarianism 
Five years after the attacks on the Twin Towers in New York and the Pentagon in Washington, “9/11” is no longer a mere date. 
It has entered the history books as the beginning of something new, a new era perhaps, but in any case a time of change. 
The terrorist bombings in Madrid and London and elsewhere will also be remembered; but it is “9/11” that has become the catchphrase, almost like “August 1914.” 
But was it really a war that started on September 11, 2001? 
Not all are happy about this American notion. 
During the heyday of Irish terrorism in the UK, successive British governments went out of their way not to concede to the IRA the notion that a war was being waged. 
“War” would have meant acceptance of the terrorists as legitimate enemies, in a sense as equals in a bloody contest for which there are accepted rules of engagement. 
This is neither a correct description nor a useful terminology for terrorist acts, which are more correctly described as criminal. 
By calling them war – and naming an opponent, usually al-Qaeda and its leader, Osama bin Laden – the United States government has justified domestic changes that, before the 9/11 attacks, would have been unacceptable in any free country. 
Most of these changes were embodied in the so-called “USA Patriot Act.” 
Though some of the changes simply involved administrative regulations, the Patriot Act’s overall effect was to erode the great pillars of liberty, such as habeas corpus , the right to recourse to an independent court whenever the state deprives an individual of his freedom. 
From an early date, the prison camp at Guantánamo Bay in Cuba became the symbol of something unheard of: the arrest without trial of “illegal combatants” who are deprived of all human rights. 
The world now wonders how many more of these non-human humans are there in how many places. 
For everyone else, a kind of state of emergency was proclaimed that has allowed state interference in essential civil rights. 
Controls at borders have become an ordeal for many, and police persecution now burdens quite a few. 
A climate of fear has made life hard for anyone who looks suspicious or acts suspiciously, notably for Muslims. 
Such restrictions on freedom did not meet with much public opposition when they were adopted. 
On the contrary, by and large it was the critics, not the supporters, of these measures who found themselves in trouble. 
In Britain, where Prime Minister Tony Blair supported the US attitude entirely, the government introduced similar measures and even offered a new theory. 
Blair was the first to argue that security is the first freedom. 
In other words, liberty is not the right of individuals to define their own lives, but the right of the state to restrict individual freedom in the name of a security that only the state can define. 
This is the beginning of a new authoritarianism. 
The problem exists in all countries affected by the threat of terrorism, though in many it has not become quite as specific. 
In most countries of continental Europe, “9/11” has remained an American date. 
There is even a debate – and indeed some evidence – concerning the question of whether involvement in the “war against terrorism” has actually increased the threat of terrorist acts. 
Germans certainly use this argument to stay out of the action wherever possible. 
This stance, however, has not prevented the spread of something for which a German word is used in other languages, too: Angst . 
A diffuse anxiety is gaining ground. 
People feel uneasy and worried, especially when traveling. 
Any train accident or airplane crash is now at first suspected of being an act of terrorism. 
Thus, 9/11 has meant, directly or indirectly, a great shock, both psychologically and to our political systems. 
While terrorism is fought in the name of democracy, the fight has in fact led to a distinct weakening of democracy, owing to official legislation and popular angst. 
One of the worrying features of the 9/11 attacks is that it is hard to see their purpose beyond the perpetrators’ resentment of the West and its ways. 
But the West’s key features, democracy and the rule of law, have taken a far more severe battering at the hands of their defenders than by their attackers. 
Two steps, above all, are needed to restore confidence in liberty within the democracies affected by the legacy of 9/11. 
First, we must make certain that the relevant legislation to meet the challenge of terrorism is strictly temporary. 
Some of today’s restrictions on habeas corpus and civil liberties have sunset clauses restricting their validity; all such rules should be re-examined by parliaments regularly. 
Second, and more importantly, our leaders must seek to calm, rather than exploit, public anxiety. 
The terrorists with whom we are currently at “war” cannot win, because their dark vision will never gain broad popular legitimacy. 
That is all the more reason for democrats to stand tall in defending our values – first and foremost by acting in accordance with them. 

9/11 in Perspective 
NEW YORK – It was a decade ago that 19 terrorists took control of four planes, flew two into the twin towers of the World Trade Center, hit the Pentagon with a third, and crashed the fourth in a field in Pennsylvania after passengers resisted and made it impossible for the terrorists to complete their malevolent mission. 
In a matter of hours, more than 3,000 innocent people, mostly Americans, but also people from 115 other countries, had their lives suddenly and violently taken from them. 
September 11, 2001, was a terrible tragedy by any measure, but it was not a historical turning point. 
It did not herald a new era of international relations in which terrorists with a global agenda prevailed, or in which such spectacular terrorist attacks became commonplace. 
On the contrary, 9/11 has not been replicated. 
Despite the attention devoted to the “Global War on Terrorism,” the most important developments of the last ten years have been the introduction and spread of innovative information technologies, globalization, the wars in Iraq and Afghanistan, and the political upheavals in the Middle East. 
As for the future, it is much more likely to be defined by the United States’ need to put its economic house in order; China’s trajectory within and beyond its borders; and the ability of the world’s governments to cooperate on restoring economic growth, stemming the spread of nuclear weapons, and meeting energy and environmental challenges. 
It is and would be wrong to make opposition to terrorism the centerpiece of what responsible governments do in the world. 
Terrorists continue to be outliers with limited appeal at best. 
They can destroy but not create. 
It is worth noting that the people who went into the streets of Cairo and Damascus calling for change were not shouting the slogans of Al Qaeda or supporting its agenda. 
Moreover, measures have been implemented to push back, successfully, against terrorists. 
Intelligence assets have been redirected. 
Borders have been made more secure and societies more resilient. 
International cooperation has increased markedly, in part because governments that cannot agree on many things can agree on the need to cooperate in this area. 
Military force has played a role as well. 
Al Qaeda lost its base in Afghanistan when the Taliban government that had provided it sanctuary was ousted from power. 
Osama bin-Laden was finally found and killed by US Special Forces in the suburbs of Islamabad. 
Drones – unmanned aircraft that are remotely steered – have proven to be effective in killing a significant number of terrorists, including many of the most important leaders. 
Weak governments can be made stronger; governments that tolerate or support terrorism must be held accountable. 
But progress is not to be confused with victory. 
Terrorists and terrorism cannot be eliminated any more than we can rid the world of disease. 
There will always be those who will resort to force against innocent men, women, and children in pursuit of political goals. 
Indeed, terrorists are advancing in some areas. 
Pakistan remains a sanctuary for Al Qaeda and some of the world’s other most dangerous terrorists. 
A mixture of instability, government weakness, and ideology in countries such as Yemen, Libya, Somalia, and Nigeria are providing fertile territory for terrorists to organize, train, and mount operations – much as they did in Afghanistan did a decade ago. 
New groups constantly emerge from the ruins of old ones. 
There is also a growing danger of homegrown terrorism. 
We have seen it in Great Britain and the US. 
The Internet, one of the great inventions of the modern Western world, has shown itself to be a weapon that can be used to incite and train those who wish to cause harm to that world. 
The question raised in October 2003 by then US Secretary of Defense Donald Rumsfeld is no less relevant today: “Are we capturing, killing, or deterring and dissuading more terrorists every day than the madrassas and the radical clerics are recruiting, training, and deploying against us?” 
All things being equal, we probably are. 
But even small terrorist successes are costly in terms of lives, money, and making open societies less so. 
What is to be done? 
Alas, there is no single or silver bullet. 
The establishment of a Palestinian state will not be enough for those terrorists who want to see the elimination of the Jewish state, any more than reaching a compromise over Kashmir will satisfy those Pakistan-based terrorists with bigger agendas vis-à-vis India. 
Reducing unemployment is desirable, of course, but many terrorists do not come from poverty. 
Helping to make societies in the Middle East and elsewhere more democratic might reduce the alienation that can lead to radicalism and worse, but this is easier said than done. 
Of course, we want to continue to find ways to make ourselves less vulnerable and terrorists more so. 
But what may be most important, particularly in the Arab and Islamic communities, is to end any acceptance of terrorism. 
The Nigerian father who warned the US embassy in Lagos that he feared what his own son might do – before that same young man attempted to detonate a bomb aboard a flight to Detroit on Christmas Day 2009 – is an example of just this. 
Only when more parents, teachers, and community leaders behave likewise will recruitment of terrorists dry up and law-enforcement authorities receive full cooperation from the populations they police. 
Terrorism must lose its legitimacy among those who have historically supported or tolerated it before it will lose its potency. 

A “Portfolio” Approach to Climate Change 
The world has tried with little success to cut carbon emissions under the Kyoto Protocol. 
The enormous effort expended to bring the Protocol into force nonetheless indicates how much work will be required to produce the next treaty, due to be agreed in Copenhagen in December 2009. Campaigners will push for tough and far-reaching policies, but strong resistance will continue from countries concerned about their economic vitality. 
The new negotiations will have one advantage over the earlier efforts, because governments now understand the need for a portfolio of adaptation, mitigation, and research efforts. 
New research that my colleagues and I undertook for the Copenhagen Consensus Center in Denmark explores the effectiveness of different responses to this global challenge, but it strongly supports the portfolio approach for several reasons. 
First, we now know that adaptation will be essential, because temperatures will rise by another 0.6°C by 2100 even if greenhouse gas emissions are eliminated tomorrow. 
We also know that the impact of climate change will not be evenly distributed across the globe. 
In some areas, modestly warmer temperatures could produce higher crop yields if associated changes in precipitation patterns are not adverse and/or irrigation remains viable. 
Even with 0.6°C warming, however, Africa and South Asia will experience almost immediate reductions in the viability of many crops and, eventually, increased vulnerability to infectious disease. 
These impacts will clearly hit the planet’s worst-off inhabitants hardest: the “bottom billion” who already bear the heaviest burden of disease, poverty, conflict and malnutrition. 
Ensuring that adaptive capacity is expanded and exploited where it is most needed is thus a key challenge. 
Long-term development may give countries more capacity to soften the impact of climate change on the environment and citizens’ health, but in the meantime the planet’s poorest people will need help from the rich. 
Our analysis investigated, for example, the merits of more targeted policies for the near term: purchasing mosquito-resistant bed nets and oral re-hydration malaria therapy for children in the poorest nations affected by climate change. 
The goal was to deal aggressively and proactively with some of the marginal health impacts of global warming. 
Benefits would appear almost immediately, but would dissipate over time as economies developed. 
Even as development improves conditions, however, reducing carbon emissions would become increasingly important over the longer term as the impact of climate change become more severe. 
Since the effects of climate change have been observed in many areas around the world, thinking about mitigation makes sense everywhere. 
But we found that mitigation alone did not meet a standard cost-benefit test. 
We allowed specified annual costs of climate policy to grow in proportion with global GDP through 2100 from an initial annual benchmark of $18 billion. 
The discounted cost of the resulting stream of fixed annual costs totaled $800 billion, but damages avoided by this approach amounted to a discounted value of only $685 billion. 
The Copenhagen Consensus study also examined a portfolio option of the sort heralded by the United Nations’ Intergovernmental Panel on Climate Change. 
We allocated $50 billion to research into greener technology, so that only $750 billion could be absorbed by the economic cost of adaptation and mitigation. 
The gap between the cost of carbon-free and carbon-emitting technology fell, and the taxes designed to mitigate emissions became more effective. 
As a result, the research and development program essentially paid for itself, and total discounted benefits for the $800 billion investment climbed to more than $2.1 trillion. 
Ensuring that research and development is part of the world’s climate change response portfolio would make mitigation efforts more efficient and significantly enhance their ability to reduce carbon emissions over the next century. 
But these favorable net benefits reflect very conservative assumptions regarding the timing of emissions reductions and when the developing world would “come onboard.” 
Optimizing investment in the portfolio over time would, for example, increase the discounted benefits by more than a factor of three. 
Expected benefits would increase further if we included the chance that potentially higher climate sensitivities would exacerbate damages, even though doing so would require including similarly plausible lower climate sensitivities, which would push in the opposite direction. 
Fighting climate change can be a sound investment, even though neither mitigation nor adaptation alone will be enough to “solve” the problem. 
To make a real difference, especially in the near term, the world must combine mitigation and adaptation with increased research and development into carbon-saving and sequestering technology, which in turn requires designing and exploiting market-based incentives. 

A “Reset” Button for Europe’s Backyard 
STOCKHOLM – One year after the war in Georgia of last August, pushing the “reset” button on diplomatic relations is a popular endeavor nowadays. 
President Barack Obama recently journeyed to Moscow in order to “reset” strained United States-Russian ties. 
The European Union, though not in need of a “reset” because of strained ties with its eastern neighbors, is involved in a deep strategic reconstruction of those relations. 
When the EU launched its new “Eastern Partnership” in May, the purpose was to promote further integration with the Union’s six immediate eastern neighbors – Armenia, Azerbaijan, Belarus, Georgia, Moldova, and Ukraine. 
The global financial crisis had made an updated and strengthened policy for the EU’s eastern neighborhood an urgent need. 
Equally important was the fact that all the countries concerned expressed an ambition to move closer to the EU. 
The Eastern Partnership – originating from a Polish/Swedish initiative – offers to the six countries a substantial upgrading and deepening of relations with the EU in key areas. 
In trade and economic relations, it clearly sets out the objective of establishing deep and comprehensive free-trade areas between the EU and the partner countries. 
It confirms full visa liberalization as a long-term goal (with visa facilitation agreements in the meantime), promises enhanced cooperation on energy security, diversification, and efficiency, and comes with dedicated programs and projects to help the neighbors in their integration and reform efforts in all these areas. 
Sweden’s assumption of the EU Presidency this month should help these efforts. 
However, it comes at a time when the Union’s eastern neighborhood faces severe challenges, with the financial and economic crisis hitting many of the partner countries hard. 
Ukraine suffers from the sharp drop in global demand and trade, severely undermining its steel industry. 
Georgia’s economic success has been largely dependent on direct foreign investment, for which there is hardly any appetite today. 
Partner countries that are less integrated into the global market, such as Moldova, have seen the crisis arrive more slowly, but the real effect might be equally as bad, and they are likely to recover more slowly. 
The Eastern Partnership does not offer any quick remedies to the crisis. 
But it can provide a political framework and institution-building support to improve the deficiencies that made these countries so vulnerable to the crisis: imperfect market economies, weak state institutions, and continued corruption. 
The Eastern Partnership’s offer of deep integration with the EU in the areas such as trade and energy carries with it considerable transformational power. 
The other type of crisis that most of the partner countries are enduring is political. 
In most of these countries, democratic development has not yet reached a point where a change in government is a routine part of political life and can take place without risking the country’s stability. 
The Eastern Partnership is based on the profound values of democracy, human rights, and the rule of law. 
Political association with the EU, and the process of integration under this Partnership, will promote reforms in these key areas. 
The Swedish EU Presidency will concentrate on starting up the concrete work – the nuts and bolts – of the Partnership. 
The establishment of “Comprehensive Institution-Building Programs,” designed to support reform of key institutions in each partner country, should take place before the year’s end. 
Some flagship initiatives proposed by the European Commission will finally see the light of day as well, and new projects and initiatives are likely to be developed. 
Here, Sweden will attach particular importance to energy efficiency programs, which will serve not only the purposes of enhancing energy security and reducing costs, but will also be an important contribution to the fight against climate change. 
The Swedish Presidency, together with the European Commission, intends to organize the first meeting of the Eastern Partnership Civil Society Forum this autumn. 
We hope to see the start of parliamentary cooperation, as well as exchanges between local and regional authorities of the thirty-three EU and partner countries. 
At the end of the year, a meeting of EU foreign ministers and their colleagues from the six partners will assess the progress made so far and give guidance on the way ahead. 
The Eastern Partnership is about EU integration, about the six countries moving closer to the EU’s values, legislation, and ways of working, and about the EU being there to support and help this convergence. 
In Russia, there is a perception that is sometimes fostered which suggests that the Partnership is directed against it. 
But this, of course, is untrue. 
On the contrary, Russia, like Turkey, will be welcome to take part in relevant activities within the Partnership’s multilateral dimensions. 
The Eastern Partnership is not an answer to all the problems and difficulties that the six partners are facing. 
Nevertheless, it does represent a clear commitment by the EU to lend its political and economic support to their transition and reform – a process that should bring prosperity and stability to the whole region. 

A “Third Way” for Confronting Russia 
PARIS – “Let’s engage Russia if we can, but contain it if we must.” 
These two alternatives already defined Western strategy toward Russia in the mid-1990’s. 
Since then, Russia may have changed dramatically, but not our questions about it. 
What do you do when your big neighbor widens the gap that exists between its culture, which is European, and its political system, which is becoming increasingly “Asian,” at least in the bad old sense of “Oriental despotism”? 
Should the best answer to the return of Russia’s imperial ambitions be a modern version of a Holy Alliance of stability designed to contain the world’s new maverick? 
Or is a latter-day Yalta Conference, aimed at redrawing the political boundaries of Europe, necessary? 
Could the answer be a bit of both? 
If Russia is becoming what revolutionary France was under Napoleon, or reverting to Soviet form – shorn of a totalitarian ideology but with an appetite for conquest and re-conquest – what is needed is not the “league of democracies” advocated by some conservatives in America. 
What is needed, instead, is a “stability league” that includes prominent actors like China, India, and other countries that are more interested in economic growth than in “rocking the boat” of the international system. 
Such a strategy implies, first of all, a solid partnership with China, not because it is evolving in the direction of democracy, but because it is a status-quo power. 
Such a strategy could lead to the opening of negotiations with Iran, and of course to a further closing of ranks within NATO. 
The message to the Kremlin here would be crystal clear. 
“Do not fool yourself. 
Nationalism and imperialism will lead you nowhere; you cannot expand geographically without serious costs to your economic growth and your personal enrichment. 
Europe may be weak and divided, America may no longer be what it was, but with your falling population and the sad state of your economy beyond oil and gas, you simply are not equipped to be in the league of great global powers. 
China is; you are not.” 
But the containment argument fails, because the Kremlin can still make mischief around the world by acting with Syria or Venezuela in an irresponsible manner. 
More importantly, rallying the world solely against Russia would mean taking Russia’s great power pretensions too seriously. 
For example, many Asians believe that Russia is a problem for Europe, but no longer for the world. 
At the Cold War’s end, Japan remained obsessed with Russia as the heir to the Soviet Union. 
Today, the Japanese are so concerned with China that they have little time for fears about Russia. 
The other alternative to a rebirth of “containment” would consist in accepting the Russian argument, or more precisely, Russian “emotions.” 
It would mean saying, in effect, “We have unnecessarily humiliated you over the last ten years. 
From NATO enlargement to the grant of independence to Kosovo, we have deliberately ignored your sensitivities and your interests. 
Let’s sit down together like Churchill, Roosevelt, and Stalin at Yalta and redesign a twenty-first-century map of Europe. 
What do you want back? 
What do we keep?” 
This approach might recognize Russia’s droit de regard on the future evolution of the Caucasus. 
Indeed, while talking tough under the guidance of Nicolas Sarkozy’s France, which currently holds the EU presidency, Europe has de facto resigned itself to Georgia’s dismemberment. 
Russian troops are to remain in South Ossetia and Abkhazia. 
The West is not about to declare war on Russia for the sake of a Georgia whose credibility has been greatly eroded by its president’s irresponsible behavior. 
As for Ukraine, it may one day become part of the European Union, but its future is not in NATO. 
Yet, between all-out containment, which is very unlikely and not necessarily desirable or realistic, and accommodation which borders on appeasement, which would be dangerous for Europe’s future, a third way, based on a few firm principles, must be found. 
These principles are clear. 
First, Ukraine’s territorial integrity is not negotiable. 
This has been said many times, but repetition does not diminish its importance. 
Russia without Ukraine is a manageable nation-state; 
Russia with Ukraine is an unmanageable empire. 
Second, even if the West condemns Georgia’s irresponsibility and incorporates into its policy Russia’s sensitivities on the complex historical feelings related to its ex-imperial territories, the Kremlin’s shameless brutality is unacceptable. 
After all, this is Europe more than six decades after World War II, and nearly 20 years after the collapse of the Soviet Union. 
The use of force to settle scores and impose one nation’s will upon another cannot be accepted passively. 
In the short term, time may be on Russia’s side. 
In the long run – economically, demographically, politically, strategically – time is on “our” side, if we stick to our values and our principles. 

A "Yes" Vote for Euroskepticism 
The drubbing that many governments suffered in the recent elections to the European Union Parliament places them in a difficult position as they maneuver ahead of this week's EU Summit. 
Only an incurable optimist can hope that the summit will bring glory to any of them. 
The summit has two purposes: to finalize the text of a new EU Constitution, and to appoint the next President of the Commission. 
These negotiations will be much harder in view of the spectacular repudiation of a number of key governments at the ballot box, together with the potent rise of protest and Euroskeptic parties in several member states. 
The problem for Europe's leaders is that their own repudiation by voters does not necessarily carry the same message as the rise of the Euroskeptic parties. 
The record slump in the vote for Gerhard Schröder's governing Social Democrats in Germany has little to do with his policy towards Europe, but a great deal to do with the perceived failure of his economic policies - and the persistence of low growth and high unemployment - at home. 
Despite nationalist parties' success in France, the same is true of the setback for President Jacques Chirac's centre-right party. 
In Britain, by contrast, where the economy is strong and unemployment low, the main factor behind the collapse in the vote for the governing Labor Party has been anger with Tony Blair's determination to go to war in Iraq beside George Bush. 
Nevertheless, the rise of Euroskeptic parties, in a number of countries including Britain, France, Belgium, Poland, and the Czech Republic, has worrying implications for a summit meeting whose purpose is to take European integration a small but unmistakable step forward. 
In Britain, in particular, the spectacular surge of the UK Independence Party (UKIP) can only strengthen the government's long-standing latent Euroskepticism. 
The proposed constitution will contain a Charter of Fundamental Rights, which is intended to enhance the political and moral legitimacy of the EU. 
But will it really enhance the rights of EU citizens? 
Or, as the British government insists, will it merely be a declaratory document that only describes rights already existing under national legislation in the member states. 
The draft constitution would enhance the policymaking powers of the Union, with a bit more majority voting in the Council of Ministers, and a stronger role for the European Parliament. 
But, despite Tony Blair's one-time declaration that he would take Britain "into the heart of Europe," he remains viscerally opposed to the prospect of further integration, and he will resist any new encroachment on British sovereignty in his "red line" areas of tax, foreign policy, and EU budget finance. 
Blair's Euroskepticism is understandable insofar as it chimes with the British mood. 
Opinion polls consistently show that British voters are unenthusiastic about the EU, and the picture is confirmed by the latest Eurobarometer poll, conducted throughout the Union for the Commission - but before the recent enlargement from 15 to 25 member states. 
One question always asked in this poll is whether voters tend to trust or mistrust different institutions, such as national parliaments, national governments, and the European Union. 
Overall, the general level of trust in the European Union is not high: only 41% of voters tend to trust the EU, whereas 42% tend not to trust it. 
But in Britain, the figures are dramatically different: only 19% trust the EU, while 55% distrust it. 
By contrast, the European Parliament has a better reputation than the EU as a whole: the average EU-wide level of trust in the European Parliament is 54%, whereas in Britain it is 30%. 
Across the EU, 48% think EU membership is a good thing; in Britain, this figure falls to 29%. 
On virtually every question, British voters are less enthusiastic about the EU than voters in any other country. 
One might think that Britons' aversion to the EU would be reflected in support for, and pride in, their national institutions. 
Not so. 
British trust in the European Parliament may stand at only 30%; but trust in the Westminster Parliament is much lower, at only 19% - the lowest figure in the EU. 
Trust in the national government is a bit higher, but still only 25%, while trust in national political parties is only 10%. 
Both figures are, again, the lowest in the EU. 
Voters in other states have more confidence in EU institutions, but their opinion of their own institutions is also low. 
In France, 57% trust the European Parliament, but only 29% trust the French parliament; while the corresponding figures for Germany are 51% and 23%. 
But the puzzle in the poll is that, even if Europe's voters are unenthusiastic about the EU and its existing institutions as they stand now, 65% of them would support a common foreign policy for Europe, and 72% would support a common defense and security policy; even in Britain, there is 52% support for the idea of a common defense policy. 
This may be a reaction to the American-led war in Iraq; but Tony Blair will exclude it precisely for that reason, and a common European defense policy without Britain makes little sense. 
The predicament for Europe's leaders at this week's summit is that they stand at the cusp of an unstable process of European integration. 
With the accession of 10 new members, the EU must become more integrated if it is to function. 
But it is not at all clear that those governments that would normally support more integration can sell it to their disillusioned electorates. 
Tony Blair has promised a referendum on the new EU constitution, which he cannot possibly win. 
The central question will be whether Europe's "leaders" deliberately play for failure, in the hope that the problem will go away. 

A Bad Deal for America’s Future 
WASHINGTON, DC – The painfully negotiated US budget legislation that President Barack Obama signed on August 2 combines an increase in America’s government debt ceiling with reductions in federal spending, thus averting the prospect of the first default in the 224-year history of the United States. 
But the agreement has three major flaws. 
Two of them offset each other, but the third threatens what America needs most in the coming years: economic growth. 
The first flaw is that the spending reductions are badly timed: coming as they do when the US economy is weak, they risk triggering another recession. 
The measure’s second shortcoming, however, is that the spending reductions that it mandates are modest. 
While the legislation does too little to address America’s problem of chronic and rising budget deficits, the damage that it inflicts on the economy in the short term is likely to be limited. 
The third and most damaging flaw, however, is that the spending cuts come in the wrong places. 
Because the Democrats in Congress have an almost religious commitment to preserving, intact, America’s principal welfare programs for senior citizens, Social Security and Medicare, the legislation does not touch either of them. 
These programs’ costs will rise sharply as the 78-million-strong baby-boom generation – those born between 1946 and 1964 – retires and collects benefits, accounting for the largest increase in government spending and prospective deficits in the years ahead. 
And, because the Republicans in Congress have an equally strong allergy to raising any taxes, any time, under any circumstances, the bill does not rely at all on tax increases – not even for the wealthiest Americans – for the deficit reduction that it provides. 
All of the spending cuts come from the “discretionary” part of the federal budget, which excludes Social Security, Medicare, the Medicaid program for the poor, and interest on the national debt. 
That leaves only about one-third of total federal spending from which to cut, and much of that goes to the defense budget, which Republicans will attempt to protect in the future. 
So the structure established by the August 2 law concentrates deficit reduction on the “discretionary non-defense” part of the federal budget, which is only about 10% of it. 
This is too small a pool of money from which to achieve deficit reduction on the scale that the US will need in the years ahead. 
Worse yet, discretionary non-defense spending includes programs that are indispensable for economic growth – and economic growth is indispensable for America’s future prosperity and global standing. 
Growth is, in the first place, the best way to reduce the country’s budget deficits. 
The higher the growth rate, the more revenues the government will collect without raising tax rates; and higher revenues enable smaller deficits. 
Moreover, economic growth is necessary to keep the promise – enormously important to individual Americans – that each generation will have the opportunity to become more prosperous than the preceding one, the popular term for which is “the American dream.” 
Just as important for non-Americans, only robust economic growth can ensure that the US sustains its expansive role in the world, which supports the global economy and contributes to stability in Europe, East Asia, and the Middle East. 
As Thomas L. Friedman and I explain in our forthcoming book That Used To Be Us: How America Fell Behind in the World It Invented and How We Can Come Back, a crucial factor in America's economic success has been an ongoing public-private partnership, which dates back to the founding of the country, that is imperiled by the pattern of budget cuts established by the August 2 legislation. 
That partnership has five components: wider opportunities for education in order to produce a workforce with cutting-edge skills; investment in infrastructure – roads, power plants, and ports – that supports commerce; funds for research and development to expand the frontiers of knowledge in ways that generate new products; an immigration policy that attracts and retains talented people from beyond America’s borders; and business regulations strong enough to prevent disasters such as the near-meltdown of the financial system in 2008 but not so stringent as to stifle the risk-taking and innovation that produce growth. 
The first three elements of the American formula for growth cost money, and that money is included in the “discretionary non-defense” part of the federal budget now targeted by the debt-ceiling legislation. 
Cutting these programs will lower American economic growth in the long term, with negative consequences both at home and abroad. 
Reducing the deficit by cutting funds for education, infrastructure, and research and development is akin to trying to lose weight by cutting off three fingers. 
Most of the weight will remain, and one’s life prospects will have worsened significantly. 
Reducing deficits in order to raise the debt ceiling was the right thing to do, but the August 2 law does it in the wrong way. 
Unless more deficit reduction, which is inevitable, comes from curbing entitlement benefits and increasing revenues, and less from programs vital for economic growth, the result will be a poorer, weaker US – and a more uncertain, if not unstable, world. 

A Balanced EU Constitution 
EU Commission President Romano Prodi has proposed a scheme to strengthen the Union's executive. 
Britain, France, and Spain are working on an opposing plan that will consolidate EU executive powers among the biggest EU states. 
What's the ordinary European to think? 
Europe's citizens scarcely grasp the issues at the heart of the European Constitutional Convention in Brussels. 
Mountains of detail obscure problems; sterile, misleading national discussions that pit "Euroskeptics" against "Europhiles" muster sound and fury but clarify nothing. 
So complicated do many issues seem that some newspapers and broadcasters have abandoned reporting about the Convention. 
EU citizens can secure a clearer understanding of what the Convention should achieve by asking this question: how should governmental functions be divided between the EU and its member nations? 
To answer this, we need to grasp government's true purpose. 
Government should provide citizens with public goods: collective defense, legislation and regulation, enforcement of the rule of law. 
These can be provided at different levels: local, regional, national, or supranational government, i.e., the EU. 
But what is the right level? 
In some areas, decentralization works because it recognizes diverse local or national communities. 
However, local decisions often have repercussions on citizens in other communities. 
So certain services should be allocated to a broader geographic unit because they have externalities (that is, interdependence of effects). 
Europe's allocation of governmental powers should be based on the principle that institutions carry out only those activities with clear economies of scale and where differences of opinion are modest. 
The lower a government activity's externalities, the more it should be localized. 
Low externalities imply limited benefits to be gained from centralization; deep differences among citizens imply that the costs of harmonization would be too high. 
The euro, for example, delivers clear advantages of scale by favoring international commerce and avoiding negative externalities. 
No longer can the lira be devalued to favor Italian exports to the detriment of the French, followed by a French reaction, etc. 
Although the imperfectly synchronized economic cycles of EU members causes friction over monetary and exchange rate policy, the euro's benefits outweigh the costs of diversity. 
In educational policy, however, to impose the same system on all members would not create economies of scale. 
Cultural differences are too strong to win voluntary compliance. It would be absurd to delegate education and culture to a supranational level. 
Of the areas of public policy with high economies of scale or externalities, two stand out: the common market and competition; and foreign policy and defense. 
The former covers antitrust, trade, and the common currency. 
Some think that fiscal policies - from the structure of taxation to welfare, to budget balances - should also be harmonized. 
But national preferences are diverse, and if mechanically imposed, fiscal centralization might incite resistance. 
Nor do centralized fiscal policies have any real raison d'être from a constitutional point of view. The US Constitution, for example, does not prescribe balanced budgets for the states. 
Only in exceptional circumstances is fiscal harmonization justified: prohibitions, say, on fiscal incentives aimed at limiting competition, impeding commerce, or restricting the movement of capital. 
Foreign policy and defense belong, par excellence, at government's apex. 
There are clear externalities and economies of scale. 
It would be absurd if New York pursued a different foreign policy than Texas. 
Much the same is true in Europe. 
The addition of new EU members implies that more internal differences will occur, which means that fewer centralized policies are justified. 
These considerations suggest a series of principles for the Convention to consider: 
1. 
The EU Constitution should establish unequivocally which prerogatives belong to Europe and which to member countries. 
When in doubt, the principle of subsidiarity suggests that national states remain supreme; 
2. 
European-level institutions should guarantee the functioning of markets, including competition, commercial, and monetary policies; 
3. 
Fiscal policy should remain largely decentralized, save for a few exceptions; 
4. 
Foreign policy and defense are areas of federal competence, to be delegated to Europe at a proper time; 
5. 
The creation of new areas of federal competence should be accompanied by decision-making mechanisms found in genuinely representative democracies. 
So "No centralization without representation." 
Today's EU diverges enormously from these principles (see table), as is demonstrated by the fact that agriculture, which represents 2% of European GDP, accounts for 40% of EU expenditures. 
Activities of EU Institutions (percent of total) 
Source of Table: "What Does the European Union do?" A. Alesina, I. Angeloni & L.Schuknecht, CEPR Discussion Paper no. 
3115. 
Europe faces an historic opportunity. 
America's founding fathers wrote a Constitution that has lasted over 200 years. 
Members of the European Convention obviously face a far more complex and diverse society-and thus a more daunting constitutional challenge. 
But they can succeed by displaying comparable wisdom and foresight. 

A Balanced Look at Sino-American Imbalances 
BEIJING – Before July 2007, most economists agreed that global imbalances were the most important threat to global growth. 
It was argued that the United States’ rising net foreign debt-to-GDP ratio – the result of chronic current-account deficits – would put a sharp brake on capital inflows, in turn weakening the dollar, driving up interest rates, and plunging the US economy into crisis. 
But this scenario failed to materialize. 
Instead, the crisis stemmed from the US sub-prime debacle, which quickly dragged the global economy into its deepest recession since the 1930’s. 
Most economists failed to foresee the economic dynamics that actually led to the crisis, because they failed to pay enough attention to the rapid increase in US total debt. 
Instead, they focused exclusively on US foreign debt, ignoring household debt (mortgage and consumer debt), public debt, business debt, and financial debt. 
In particular, they should have paid greater attention to the sustainability of US mortgage and consumer debt. 
In 2007, the mortgage and consumer debt-to-GDP ratio was more than 90%, compared to 24% for net foreign debt. 
Of course, the various components of debt differ considerably in their character and sources of financing – and thus in their sustainability. 
But all parts of a country’s total debt and how it is financed are interconnected. 
This means two things. First, funds from different sources of finance are interchangeable to a certain degree: deficiency of funds for one component of total debt can be supplemented by surplus funds originally aimed at financing other components. 
Second, troubles in any single component of total debt will have an impact on all the other components. 
After the subprime crisis erupted, mortgage and consumer debt was paid down by households either with their savings or by default. 
The fall in US total debt, and the narrowing of the financing gap between total debt and domestic funds, led to a significant improvement in the US current-account deficit in 2008-2009, disproving US Federal Reserve Board Chairman Ben Bernanke’s claim that the deficit was caused by a global “saving glut.” 
Indeed, America’s current-account position strengthened despite the dollar’s appreciation in the face of safe-haven demand. 
Unfortunately, as a result of the private-sector deleveraging and an increase in household savings, the US economy, driven by debt and consumption, slid into recession. 
To offset the negative impact of private-sector deleveraging on growth, the US government has maintained expansionary fiscal and monetary policies. 
Now, with household debt sustained on a knife-edge after feverish government intervention, the fiscal position has deteriorated dramatically and the current-account balance has worsened again. 
Sustainability of public debt has replaced sustainability of private debt as the biggest threat to financial stability, and the focus of debate about the US current account has shifted from the sustainability of foreign debt to the impact of reducing the external deficit on growth and employment. 
The dilemma facing US policymakers is how to stimulate growth while lowering the level of total debt. 
The most important way to achieve both objectives is to increase exports by strengthening US competitiveness. 
But where will increased competitiveness come from? 
Devaluation of the dollar could improve US competitiveness in the short run, but it is not a solution. 
Because rapid fiscal deterioration now has investors worrying about capital losses on US government securities, devaluation would make foreigners more hesitant to finance America’s budget deficit. 
If foreign financing is not forthcoming, yields on US government debt will rise and the US economy will fall back into recession. 
In the long run, America’s growth pattern must undergo a structural shift from reliance on debt and consumption one based on Americans vaunted capacity for creativity and innovation. 
Only then will America improve its competitiveness enough to allow the government to reduce both private and public debt to sustainable levels while maintaining a respectable growth rate. 
But neither improved competitiveness, nor reduction of total debt, can be achieved overnight. 
In the short run, the US current-account deficit will remain, regardless of which country runs bilateral surpluses. 
Thus, China’s continued reinvestment of its current-account surplus in US government securities is of utmost important for US growth and financial stability. 
Given that America benefits mightily from China’s purchases of US government securities, it is difficult to understand why the US government and Congress have been complaining so much about the bilateral current-account deficit. 
It is also difficult to grasp why China is so reluctant to reduce its bilateral surplus, given meager returns on its massive holdings of US government securities and a sustained risk of large capital losses in the future. 
The good news is that, following President Hu Jintao’s recent visit to Washington, both America and China have been taking positive steps to resolve their differences over the bilateral current-account balance. 
That augurs well for a more rational and constructive Sino-American dialogue on global imbalances, which would certainly benefit the global economy. 

A Better and Safer Europe 
To many, myself included, NATO's enlargement to take in, among others, the Baltic states of Estonia, Latvia, and Lithuania -- which were once Soviet republics -- is an impossible dream come true. 
When the idea was first floated some 10 years ago, expansion into the Baltics was taken seriously by few people. 
Until recently, Russia's robust opposition to the idea posed a serious obstacle, because it sharpened the impression that Russia regarded its so-called "near abroad" as a zone of special interest and influence. 
NATO's enlargement makes it crystal clear that no country in the new Europe can be regarded as part of another country's "zone." 
It assures the three small Baltic countries that the nightmare of occupation by big neighbors (Hitler's Reich and Stalin's USSR), which they endured for half-a-century -- will not be repeated. 
By putting paid to any revanchist tendencies in Russia concerning the Baltics, Europe is made a safer place, and Russia is helped in its effort to redefine itself as a national state and not an empire. 
Expansion will also create a better Europe because enlargement widens the territory in which countries are committed to NATO's political values, including individual rights as well as the rights of minorities. 
Fortunately Russia now seems to grasp the value of this political aspect of NATO-enlargement. 
Rightly so: enlargement of NATO is not an "expansion" that threatens Russia or other countries which strive for democratic political reforms. 
On the contrary, expansion takes away the worries - be they real or imagined - that surround the situation of the large Russian-speaking populations that now live outside of Russia but within the borders of the former Soviet Union. 
The civil rights of the Russian minorities in the Baltics and elsewhere are now enshrined in law, due in no small part to NATO demands. 
Those civil rights initiatives on the part of NATO reflect the increasingly workmanlike way that Russia, Europe, and America now work out their disagreements. 
Indeed, enlargement of NATO comes only a few days after a deal was struck between Russia and the EU on the tricky question of access to the Russian enclave of Kaliningrad. 
This small piece of Russia, with 1 million inhabitants and bordering on the Baltic Sea, is squeezed between Poland and Lithuania, two future members of the EU. This could have incited a complicated situation where Russians were faced with tough visa requirements when travelling between Kaliningrad and Russia proper. 
A deal was struck between President Putin and the EU that makes access much easier without compromising the status of Lithuania and Poland within the EU-regime. 
This, in turn, created once again the kind of win-win situation that is so important for future relations between the EU and Russia. 
When the enlargement of the EU into Central and Eastern Europe is finally decided by the European Council in Copenhagen next month, the conclusion is clear: Europe has become a much better and safer place to live in, thanks to the decisions taken by NATO and the EU during the crucial autumn of 2002. 
But this is no cause for complacency. For the really hard work is only now beginning: dealing with all the internal practical and political problems that these enlargements will bring, as well as reckoning with countries in the membership waiting rooms, in particular Russia. 
Relations with Russia are of vital importance if Europe is to continue to improve the quality of life of its citizens and address concerns of safety. 
The common threat of international terrorism must be faced jointly. 
We need to convince each other that the fight against this common enemy has to be fought with a keen eye to balancing the needs of security with those of human and minority rights. 
Kaliningrad could be a litmus test of these relations. 
The first hurdle has been overcome with the agreement on access to the enclave. 
The next hurdle is to support Kalingrad's fight against disease and crime as well as strengthening its economic and social structures. 
This calls for generosity from the EU and flexibility from Moscow. 
In a wider context this could lead to a strengthening of the so-called Northern Dimension of the EU, where the goal is a free trade area to include all the countries around the Baltic Sea. 
Such a grand project can be achieved if the political will exists and asserts itself. 
Only a few years ago EU and NATO enlargement were regarded as wild dreams. 
But determination and political will has now made the dreams come true. 
Now is the time to set new ambitious goals for Europe. 

A Better Way to Reduce Nuclear Risks 
In 1977, when I served in President Jimmy Carter's State Department, I was sent to India to dissuade that country's leaders from developing a nuclear bomb. 
My hosts replied that they needed to keep up with China. 
I said that Pakistan would inevitably follow suit and the world would become less safe. 
India promised that it would not export its weapons technology. 
So far as we know, its leaders have kept their word. 
But revelations about the nuclear weapons smuggling network organized by A. Q. Khan, the father of Pakistan's bomb, confirm the danger I predicted back then. 
Some call Khan's network an effort to spread an "Islamic bomb," but given that North Korea was on the list of recipients along with Libya and Iran, it might better be termed a corrupt bomb. 
As events in Pakistan illustrate, the spread of nuclear technology does not extend the stability that comes with mutual deterrence. 
Rather, it increases the prospects of corrupt leakage that may allow terrorist groups access to nuclear weapons. 
That makes everyone less safe. 
Any pathological group of extremists could destroy New Delhi, Tokyo, Paris, or any city they chose. 
Now the world's attention is focussed on Iran, one recipient of Pakistani technology, as the country seemingly keenest to create its own nuclear arsenal. 
According to the International Atomic Energy Agency (IAEA), Iran began enriching uranium at a pilot centrifuge plant last August, and is constructing larger underground enrichment facilities. 
Iran proclaims that its programs are for peaceful generation of nuclear energy, but inspectors have already found traces of highly enriched weapons-grade uranium. 
Last October, Mohamed El Baradei, the head of the IAEA, announced that Iran had accepted enhanced inspection procedures. 
In addition, after visits by the French, British, and German foreign ministers, Iran announced a temporary suspension of its enrichment program. 
Now it hints that it may resume enrichment, and recent press reports about the imports from Pakistan suggest Iran failed to disclose everything to the IAEA. 
Iran claims that as a party to the Non-Proliferation Treaty, it has the right to enrich uranium for peaceful purposes. 
Correct, because the NPT was born with a loophole. 
Even if a country agrees to broad ranging IAEA inspections, it can legally accumulate enriched uranium (or reprocessed plutonium) under the guise of a peaceful energy program, and then suddenly declare that circumstances have changed and withdraw from the treaty - with the ability to produce nuclear weapons on short notice. 
If Iran did this, it would not only add to the dangers in an unstable region, but would likely begin a process of unravelling the non-proliferation regime worldwide. 
Iran may ask what right others have to demand that it forego nuclear weapons. 
The answer lies both in the fact that it promised not to do so when it signed the NPT and in the consequences that it would impose on others. 
For these reasons, President Bush declared an Iranian nuclear weapon unacceptable. 
However, America's unilateral options are limited. 
Not only is the US military busy trying in Iraq, but the way the US went into Iraq - which proved to have fewer nuclear capabilities than Iran - undermined American credibility, making it difficult to recruit allies to contain Iran's nuclear ambitions. 
Fortunately, there is a multilateral option and an existing precedent. 
In the mid-1970's, many parties to the NPT planned to import and develop enrichment and reprocessing facilities. 
Realizing the threat to the non-proliferation regime, countries as diverse as the Soviet Union, France, Germany, and Japan formed a "Nuclear Suppliers Group" that restrained the export of enrichment and reprocessing facilities. 
That plugged part of the loophole in the treaty without amending it. 
Today, such countries should join together to offer Iran (and others) a deal. 
Countries that wish to develop nuclear energy but not nuclear bombs should be given international guarantees of fuel supply and disposal of spent fuel. 
For example, Russia, which is helping Iran construct a nuclear reactor at Bushehr, should offer Iran a guarantee of low enriched uranium fuel and reprocessing of the reactor's spent fuel by sending it back to Russia if Iran agrees to forego enrichment and reprocessing. 
This deal could then be given teeth by the UN Security Council. 
The Council would declare that further proliferation of nuclear weapons is a threat to peace, and that any country moving in that direction is subject to sanctions. 
Such a resolution would also include a carrot by guaranteeing Iran access to the non-dangerous parts of the nuclear energy fuel cycle. 
The pot could be further sweetened by offers to relax existing sanctions and provide a security guarantee if Iran remains non-nuclear. 
European foreign ministers have already expressed their concerns about Iran's nuclear program. 
Russia indicates that it is willing to provide such fuel services. 
It is time for the Security Council to try to internationalize the most dangerous parts of the nuclear fuel cycle. 
It is not too late to learn the lessons of the misadventures of A. Q. Khan. 

A Big Chance for Small Farmers 
NEW YORK – The G-8’s $20 billion initiative on smallholder agriculture, launched at the group’s recent summit in L’Aquila, Italy, is a potentially historic breakthrough in the fight against hunger and extreme poverty. 
With serious management of the new funds, food production in Africa will soar. 
Indeed, the new initiative, combined with others in health, education, and infrastructure, could be the greatest step so far toward achieving the Millennium Development Goals, the internationally agreed effort to reduce extreme poverty, disease, and hunger by half by 2015 . 
During 2002-2006, I led the United Nations Millennium Project, which aimed to achieve the Millennium Development Goals, for then-UN Secretary General Kofi Annan. 
One cornerstone of the project was “smallholder farmers,” meaning peasant farm families in Africa, Latin America, and Asia – working farms of around one hectare (2.5 acres) or less. 
These are some of the poorest households in the world, and, ironically, some of the hungriest as well, despite being food producers. 
They are hungry because they lack the ability to buy high-yield seeds, fertilizer, irrigation equipment, and other tools needed to increase productivity. 
As a result, their output is meager and insufficient for their subsistence. 
Their poverty causes low farm productivity, and low farm productivity reinforces their poverty. 
It’s a vicious circle, technically known as a poverty trap. 
The UN Millennium Project’s Hunger Task Force, led by two world-leading scientists, M. S. Swaminathan and Pedro Sanchez, examined how to break this vicious circle. 
The Hunger Task Force determined that Africa could substantially increase its food production if help was given to smallholder farmers, in the form of agricultural inputs. 
The Millennium Project recommended a big increase in global funding for this purpose. 
Drawing on that work and related scientific findings, Annan launched a call in 2004 for an African Green Revolution, based on an expanded partnership between Africa and donor countries. 
Many of us, notably current UN Secretary General Ban Ki-moon, have worked hard to make this possible, with Ban repeatedly emphasizing the special emergency arising from the global food, financial, and energy crises of the past two years. 
The G-8 announcement reflects these years of effort, and of course the boost from the leadership of US President Barack Obama, Spanish Prime Minister Jose Luis Zapatero, Australian Prime Minister Kevin Rudd, World Bank President Robert Zoellick, European Commissioner Louis Michel, European Parliamentarian Thijs Berman, and others. 
Now the key is to make this effort work. 
The lessons of history are clear. 
Getting seed and fertilizer to smallholder farmers at highly subsidized prices (or even free in some cases) will make a lasting difference. 
Not only will food yields rise in the short term, but farm households will use their higher incomes and better health to accumulate all sorts of assets: cash balances, soil nutrients, farm animals, and their children’s health and education. 
That boost in assets will, in turn, enable local credit markets, such as micro-finance, to begin operating. 
Farmers will be able to buy inputs, either out of their own cash, or by borrowing against their improved creditworthiness. 
A consensus has now been reached on the need to assist smallholders, but obstacles remain. 
Perhaps the main risk is that the “aid bureaucracies” now trip over each other to try to get their hands on the $20 billion, so that much of it gets taken up by meetings, expert consultations, overhead, reports, and further meetings. 
“Partnerships” of donors can become an expensive end in themselves, merely delaying real action. 
If donor governments really want results, they should take the money out of the hands of thirty or more separate aid bureaucracies and pool it in one or two places, the most logical being the World Bank in Washington and the International Fund for Agricultural Development (IFAD) in Rome. 
One or both of these agencies would then have an account with several billion dollars. 
Governments in hunger-stricken regions, especially Africa, would then submit national action plans that would provide details on how they would use the donor funds to get high-yield seeds, fertilizer, irrigation, farm tools, storage silos, and local advice to impoverished farmers. 
An independent expert panel would review the national plans to verify their scientific and managerial coherence. 
Assuming that a plan passes muster, the money to support it would quickly be disbursed. 
Afterward, each national program would be monitored, audited, and evaluated. 
This approach is straightforward, efficient, accountable, and scientifically sound. 
Two major recent success stories in aid have used this approach: the Global Alliance on Vaccines and Immunizations, which successfully gets immunizations to young children, and the Global Fund to Fight AIDS, TB, and Malaria, which supports national action plans to battle these killer diseases. 
Both have saved millions of lives during the past decade, and have paved the way to a new more efficient and scientifically sound method of development assistance. 
Not surprisingly, many UN agencies and aid agencies in rich countries fight this approach. 
All too often, the fight is about turf, rather than about the most effective way to speed help to the poor. 

A Black and White Question 
NEW YORK – In the afternoon of July 16 two men appeared to be breaking into a fine house in an expensive area of Cambridge, Massachusetts. 
Alerted by a telephone call, a policeman arrived smartly on the scene. 
He saw one black male standing inside the house and asked him to come out. 
The man refused. 
He was then told to identify himself. 
The man, still refusing to step out, said he was a Harvard professor, showed his ID, and warned the cop not to mess with him. 
He said something about black men in America being singled out, and asked the cop, who was white, for his name and identification. 
The cop, joined by several colleagues, arrested the professor for disorderly conduct. 
We now know that the professor had broken into his own home, with the help of his chauffeur, because the door was jammed. 
What was unusual here was not the cop’s heavy-handedness. 
Most people in the US know that if you talk back to the police, they will get nasty very fast. 
The fact that the man was black might or might not have made the cop go for his handcuffs even sooner than he might normally have done. 
That, too, would not have been unusual. 
What made this case special was that Henry Louis “Skip” Gates is one of the most celebrated professors in the country, famous for his books, his articles, and numerous television appearances. 
He is a grandee, a mover and shaker in the academic and media world, a friend of President Barack Obama. 
That is why he warned the cop, Sgt. James Crowley, a veteran of the Cambridge police force, not to mess with him. 
Class and race overlap in the US. 
In this instance, it is impossible to pry them apart. 
Gates, deeply conscious, indeed a specialist of the terrible history of race relations in his country, instinctively assumed that he was a victim of prejudice. 
From his words it appears that he was equally conscious of not getting the proper respect due to a distinguished Harvard professor and media celebrity. 
As he put it to his daughter in an interview published online: “[Crowley] should have gotten out of there and said, ‘I’m sorry, sir, good luck. 
Loved your [television] series—check with you later!’” 
Alas, Sgt.Crowley had never heard of Professor Gates. 
A local man whose brothers all serve in the police force, a sports fan, and an amateur basketball coach, Crowley does not move in the same social circles as Gates. 
As it happens, the charges were duly dropped, and there the case might have rested if President Obama, tired and frustrated after weeks of fighting for his healthcare bill, had not weighed in on behalf of his “friend” Gates, and called the police “stupid.” 
Both he and Gates then spoke of “learning” from the incident. 
Gates might even be planning a television documentary on racial profiling. 
One thing to be learned, if we didn’t know this already, is how close racial sensitivities are to the surface of US life, despite the election of a black president. 
The complexities of black anger, white guilt, and of black, and white fear, are so vexed that most Americans prefer not to talk about race at all. 
The field is too full of mines. One of Obama’s great achievements is that he made it into a serious topic through the brilliance and subtlety of his rhetoric. 
And there remains plenty to talk about: the grotesquely disproportionate number of black men in US prisons; the lack of educational opportunities in poor, mostly black areas; the appalling healthcare system; and the very real brutality used by police officers against blacks, who don’t have the privilege of a Harvard ID. 
It is probably true that many white policemen, even if they are trained to avoid racial profiling, as Sgt. Crowley was, need to be convinced that a black man can be at home in one of the finer houses of Cambridge, or any other American city. 
But is the Gates affair the right way to enter into this discussion? 
One might argue that it was. 
If not Professor Gates, then who? 
Precisely because he is a grandee, he is in the position to draw national attention to a serious issue. 
If the same thing had happened to an unknown man in Harlem, or some other poor, or predominantly black district, no one would ever have heard about it. 
The fact that it happened to a professor in Cambridge makes everyone sit up and take notice. 
There is, however, a danger that it will have an adverse affect on the necessary national discussion about race. 
By having made such a big issue out of what was in fact a relatively minor event Gates could be accused of trivializing much worse instances of abuse. 
Indeed, we don’t even know for certain whether this was such an instance. 
Crowley never mentioned the color of Gates’ skin. 
There was no question of violence. 
There were just very raw nerves and hypersensitivity to hints of disrespect, on the part of the professor, and of the cop. 
Outrage about a professor who is not to be messed with is not the best way to discuss the plight of countless, poor, anonymous people, whom most of us find it too easy to ignore. 

A Bollywood Bride for Sarkozy? 
PARIS -- Ever since French President Nicolas Sarkozy took himself off his country’s most-eligible-bachelor list by publicly acknowledging his affair with supermodel-turned-pop-musician Carla Bruni during a romantic trip to Euro Disney, he’s run into trouble. 
His ratings have dipped below 50% for the first time. 
Older French citizens don’t find the public spectacle of their leader in love very amusing. 
Abroad, Egyptian lawmakers were so exercised over the prospect of the French head of state sharing a bed with his girlfriend that several vented their disapproval on the floor of the parliament. 
Likewise, India is all in a quandary over how to handle protocol during Sarkozy’s impending visit to the subcontinent as the guest of honor at the country’s Republic Day celebrations on January 26. 
Should the First Girlfriend have her own motorcade, as a first lady would? 
Meanwhile, the same hard-right Hindu groups that protest Valentine’s Day as a decadent Western holiday have warned that if Sarkozy arrives with his girlfriend in tow, they’ll be out in the streets to welcome him. 
This controversy has threatened to cast a pall over a much-heralded summit between two of the world’s great democracies. 
With lucrative deals at stake for the big-ticket products that drive the French economy – military hardware, nuclear power plants, and Airbus planes – France has a strong interest in a successful summit in India. 
So, as rumors fly of secret marriage ceremonies either already concluded or in the works, could the trouble brewing in India over the French president’s very public love life be behind the rush to have the couple legally wed? 
The news in Sarkozy’s favored media outlet Journal du Dimanche that the couple plan to marry touched off a flurry of fevered speculation on when the happy event might occur. 
The couple exchanged significant tokens of their mutual affection: he offered her a heart-shaped pink diamond ring by Dior, she offered him a Swiss watch. 
It’s “serious,” the smitten president admitted. 
But he refused, even under direct questioning by reporters, to reveal an exact date. 
“You’ll probably find out after it’s happened,” he taunted. 
Rumor has it the couple has set February 8 or 9 for the wedding. 
Others say that Sarkozy has already outsmarted the media by secretly marrying in the Elysee Palace, even as he was dodging wedding questions. 
If that is true, then Sarkozy missed the romantic opportunity of a lifetime. 
If the couple sizzled for cameras with Luxor and Petra as the backdrop, just imagine how hot things could get at the most romantic spot on Earth, the Taj Mahal. 
And, given the current rage for all things Bollywood in France, a lavish Indian wedding would be fitting. 
Bruni’s own life path closely resembles any number of Bollywood stars who have made the transition from model to actress. 
A comely brunette who sings is perfect for a Bollywood makeover. 
The Indian government will be nothing if not relieved to see the first girlfriend made a wife. 
As one of India’s leading daily newspapers, the Indian Express, spelled it out, lest anyone be confused, “a girlfriend is not a wife or spouse.” 
Once wed, all protocol worries about the French delegation would simply disappear. 
Despite the sometimes downright pornographic on-screen writhing of Bollywood starlets, India is still a deeply conservative society. 
Divorce is anathema. 
(Sarkozy is now twice divorced.) 
And, while mistresses abound among the privileged classes, they do not strut publicly by their power-mates’ sides. 
Kissing and fondling in public, even by spouses, is taboo. 
In this respect, India more resembles the France with which Sarkozy wants to make a clean break than the current one. 
Most Indians, as it seems many French, would prefer not to shed the “hypocrisy” Sarkozy laments on the part of his predecessors (read: former French President François Mitterrand, who had a child with his mistress about whom the public knew nothing until the man’s funeral). 
Sarkozy, of all people, should know that a large part of the gravitas of office derives from pomp and circumstance. 
Statecraft is a realm where appearances are meant to be deceiving. 
When Sarkozy, who otherwise has such finely tuned media instincts, protests that he’s no different from any other man, he comes dangerously close to confusing the office and the person of the president. 
Most French people could only dream of an exotic wedding in India. 
Sarkozy could make that dream come true. 
If he really is as head-over-heels in love with Bruni as he claims, and plans to marry her imminently, why not take advantage of his upcoming trip to India and make this a wedding to remember? 
He could meet his bride seated majestically on the caparison of an elaborately decorated elephant, and she would look ravishing swathed and bejeweled in Indian finery. 
The “bling-bling” president, as Sarkozy has been dubbed, can wear all the gold he wants and heap yet more diamonds on his bride. 
The cameras would roll, Indians would smile, and France would be treated to a Bollywood spectacle beyond its wildest dreams. 

A Bomb in Every Reactor 
BERLIN – Twenty-five years after the nuclear disaster at Chernobyl, the ongoing catastrophe at the Fukushima nuclear reactor in Japan has – it must be hoped – made clear once and for all that the purported blessings of the nuclear age are mere illusions: nuclear power is neither clean nor safe nor cheap. 
Indeed, the opposite is true. 
Nuclear power is saddled with three major unresolved risks: plant safety, nuclear waste, and, most menacing of all, the risk of military proliferation. 
Moreover, the alternatives to nuclear energy – and to fossil fuels – are well known and technically much more advanced and sustainable. 
Taking on nuclear risk is not a necessity; it is a deliberate political choice. 
Fossil-fuel and nuclear energy belong to the technological utopias of the nineteenth and twentieth centuries, which were based on a belief in the innocence of the technologically feasible and on the fact that, at the time, only a minority of people worldwide, largely in the West, benefited from technological progress. 
By contrast, the twenty-first century will be informed by the realization that the global ecosystem and its resources, which are indispensable for human survival, are finite, and that this implies an enduring responsibility to preserve what we have. 
Meeting this imperative entails both an enormous technological challenge and an opportunity to redefine the meaning of modernity. 
The energy future of nine billion people, which is what the world population will be in the middle of the century, lies neither in fossil fuels nor in nuclear energy, but in renewable energy sources and dramatic improvements in energy efficiency. 
We already know this. 
Why, then, do the most advanced countries, in particular, take on the risk of a mega-catastrophe by seeking to create energy from radioactive fission? 
The answer, ultimately, doesn’t lie with any civilian use of nuclear energy, but first and foremost with its military applications. 
The energy derived from splitting uranium and plutonium atoms was originally used for the ultimate weapon, the atomic bomb. 
Being a nuclear power provides sovereign states with protection and prestige. 
Even today, the Bomb divides the world into two classes: the few states have it, and the many that do not. 
The old Cold War world order was based on the nuclear arms race between the two superpowers, the United States and Soviet Union. 
To stop others from trying to become nuclear powers, which would have multiplied and spread the risk of nuclear confrontation, the Non-Proliferation Treaty (NPT) was framed in the 1960’s. To this day, it governs the relationships between the nuclear powers and the rest of the world, imposing renunciation on the have-nots and nuclear-disarmament obligations on the haves. 
Of course, the NPT has repeatedly been violated or circumvented by states that never subscribed to it. 
To this day, therefore, the risk remains that the number of nuclear powers will increase, particularly given small and medium powers’ hope to enhance their prestige and position in regional conflicts. 
Iran is the most current example of this. 
The nuclearization of these not-always-stable states threatens to make the regional conflicts of the twenty-first century much more dangerous, and will also substantially increase the risk that nuclear weapons eventually end up in the hands of terrorists. 
Despite the NPT, a clear separation between civilian and military use of nuclear energy hasn’t always worked, or worked completely, because the NPT’s rules permit all signatory states to develop and use – under international supervision – all of the components of the nuclear fuel cycle for civilian purposes. 
From here, then, all that is required to become a nuclear power are a few small technical steps and political leaders’ decision to take them. 
This political power, not the requirements of energy policy, is what makes giving up nuclear energy so difficult. 
As a rule, the path to nuclear-power status always begins with so-called “civilian” nuclear programs. 
The supposed “civilian” nuclear ambitions of Iran have thus, for instance, led to a large number of such “civilian” programs in neighboring states. 
Honni soit qui mal y pense! 
And, of course, the reactions of the nuclear powers to the disaster at Fukushima will be watched and analyzed closely by the so-called “clandestine threshold countries.” 
So how will the world – first and foremost, the main nuclear powers – react to the Fukushima disaster? 
Will the tide truly turn, propelling the world towards nuclear disarmament and a future free of nuclear weapons? 
Or will we witness attempts to downplay the calamity and return to business as usual as soon as possible? 
Fukushima has presented the world with a far-reaching, fundamental choice. 
It was Japan, the high-tech country par excellence (not the latter-day Soviet Union) that proved unable to take adequate precautions to avert disaster in four reactor blocks. 
What, then, will a future risk assessment look like if significantly less organized and developed countries begin – with the active assistance of the nuclear powers – to acquire civilian nuclear-energy capabilities? 
Any decision to continue as before would send an unambiguous message to the clandestine threshold countries that are secretly pursuing nuclear weapons: despite lofty rhetoric and wordy documents, the nuclear powers lack the political will to change course. 
Were they to abandon nuclear energy, however, their epochal change of heart would constitute a seminal contribution to global nuclear security – and thus to the fight against nuclear proliferation. 

A Born-Again CAP 
WAGENINGEN, NETHERLANDS – Born in 1957, the Common Agricultural Policy (CAP) is now more than 50 years old, and the European Commission is proposing what it calls a health check for its middle-aged child. 
But superficial repairs will not meet the European Union’s future needs. 
The CAP must be born again. 
Work on its renewal is due to start now, with the completed project ready in 2013. 
But a much more profound re-think is needed. 
The CAP’s original aim was to provide a secure source of food for the six original member states of the Union, which were importers of food and sought a degree of self-sufficiency. 
Good, healthy, and cheap food had to be accessible for all citizens. 
Improved agricultural productivity would benefit rural areas and give farmers a comparative share in the Union’s growing wealth. 
Instruments to achieve those objectives were developed, and food security was achieved. 
The CAP quickly came to be seen as the jewel in the crown of the European project. 
As the EU has evolved and expanded, food systems have become more complex, involving production, processing, supply-chain organization, and wholesale and retail distribution, with all of these involving new issues like health and the environment. 
The use of land is also receiving more serious scrutiny. 
A 1991 study by the Netherlands Scientific Council for Governmental Policy, entitled Ground for Choices, demonstrated that the EU’s food supply could be met with 50% less cultivated land, 80% less pesticides, and at 50% less cost. 
Pollution would be reduced by 70% as a result of fewer nitrates in the surface water, and greenhouse gases would be cut. 
Those figures were for an EU of 15 countries, so with today’s 27 members the possibilities are even greater. 
A Dutch analysis of land use has shown that by employing the best technical and ecological means on the best available land, substantial gains could be made in food production. 
So it is not surprising that the number of farmers needed has fallen substantially. 
Viewed from the standpoint of food security and the wealth of rural areas, there is now an urgent need to revisit the CAP’s main instruments so that a new policy formula can be introduced. 
Perverse subsidies must be removed and recent new ones favoring products such as bio-fuels reconsidered. 
The status quo clearly has to be changed. 
Rural policy in the EU is too often reduced to income guarantees for the farming community. 
But that attitude is undermining change. 
Competition must be encouraged, as more rural entrepreneurship will strengthen the farming community, with fewer farmers but better farms. 
A simplified CAP would encourage cleaner, more productive, and efficient agriculture. 
A side benefit for the EU’s standing in the world could be that the World Trade Organization’s stalled Doha negotiations could be restarted once farmers in developing countries are assured of getting a fair deal from Europe. 
Moreover, the CAP’s role as a motor of political and social integration in Europe could be restored once renewed policies are in place. 
But renewal of this sort cannot be left to global market forces, as the results might not necessarily benefit European agriculture and society. 
If the market “misbehaves,” farmers could be reduced to poverty, leading to the neglect of large areas of Europe. 
That is a real enough danger to which policymakers must give serious thought as they reform the CAP on the basis of the following five pillars. 
1. 
The EU needs a knowledge and innovation policy that strengthens European agriculture’s competitiveness. 
Such a policy has been successful in the Netherlands, substantially contributing to the development and power of the country’s agribusiness. 
Ten of 21 branches of Dutch agribusiness, including horticultural seeds, ornamentals, seed potatoes, and veal, are among the top contributors to the national economy and the country’s trade balance. 
In the EU as a whole, a policy directed toward research programs stimulating scientific excellence and greater coherence in the European knowledge system would greatly strengthen agriculture’s competitiveness and contribute to food security and sustainable development. 
2. 
Europe also needs a restructuring policy for land use. 
Many structural improvement programs have been financed at the European level, but agricultural production and land use are not among them. 
The development of an Agricultural Main Structure would compliment the European Ecological Main Structure. 
Reforestation and the repair of natural ecosystems should also be part of a land use policy. 
3. 
A policy for European food systems would treat production, processing, distribution, logistics, and retailing in combination. 
Consumption patterns and preferences are an integral part of such systems. 
Preliminary studies by the European Science Foundation’s “Forward Look on European Food Systems” could prove useful in devising an EU-wide policy. 
4. 
Metropolitan agriculture in a rapidly urbanizing world can provide high-quality produce on small amounts of land. 
It offers an answer to rising demand for healthy food with minimal environmental side effects. 
5. 


A Breakthrough Against Hunger 
NEW YORK – Today’s world hunger crisis is unprecedentedly severe and requires urgent measures. 
Nearly one billion people are trapped in chronic hunger – perhaps 100 million more than two years ago. 
Spain is taking global leadership in combating hunger by inviting world leaders to Madrid in late January to move beyond words to action. 
With Spain’s leadership and United Nations Secretary General Ban Ki-moon’s partnership, several donor governments are proposing to pool their financial resources so that the world’s poorest farmers can grow more food and escape the poverty trap. 
The benefits of some donor help can be remarkable. 
Peasant farmers in Africa, Haiti, and other impoverished regions currently plant their crops without the benefit of high-yield seed varieties and fertilizers. 
The result is a grain yield (for example, maize) that is roughly one-third less than what could be achieved with better farm inputs. 
African farmers produce roughly one ton of grain per hectare, compared with more than four tons per hectare in China, where farmers use fertilizers heavily. 
African farmers know that they need fertilizer; they just can’t afford it. 
With donor help, they can. 
Not only do these farmers then feed their families, but they also can begin to earn market income and to save for the future. 
By building up savings over a few years, the farmers eventually become creditworthy, or have enough cash to purchase vitally necessary inputs on their own. 
There is now widespread agreement on the need for increased donor financing for small farmers (those with two hectares or less of land, or impoverished pastoralists), which is especially urgent in Africa. 
The UN Secretary General led a steering group last year that determined that African agriculture needs around $8 billion per year in donor financing – roughly four times the current total – with a heavy emphasis on improved seeds, fertilizer, irrigation systems, and extension training. 
In addition to direct help for small farms, donors should provide more help for the research and development needed to identify new high-yielding seed varieties, especially to breed plants that can withstand temporary flooding, excess nitrogen, salty soils, crop pests, and other challenges to sustainable food production. 
Helping the poor with today’s technologies, while investing in future improved technologies, is the optimum division of labor. 
This investment pays off wonderfully, with research centers such as the International Rice Research Institute and the International Maize and Wheat Improvement Centre providing the high-yield seeds and innovative farming strategies that together triggered the Asian Green Revolution. 
These centers are not household names, but they deserve to be. 
Their scientific breakthroughs have helped to feed the world, and we’ll need more of them. 
Dozens of low-income, food-deficit countries, perhaps as many as 40-50, have elaborated urgent programs for increased food production by small farms, but are currently held back by the lack of donor funding. 
These countries have appealed to the World Bank for financing, and the Bank made a valiant effort in 2008 to help through its new Global Food Crisis Response Program (GFCRP). 
But the Bank does not yet have sufficient funds to meet these countries’ urgent needs, and has had to ration assistance to a small fraction of the flows that could be effectively and reliably used. 
Hundreds of millions of people, in the meantime, remain trapped in hunger. 
Many individual donor countries have declared that they are now prepared to increase their financial support for smallholder agriculture, but are searching for the appropriate mechanisms to do so. 
The current aid structures are inadequate. 
The more than 20 bilateral and multilateral donor agencies for agriculture are highly fragmented and of insufficient scale individually and collectively. 
Despite the dedicated efforts of many professionals, the response to the hunger crisis remains utterly inadequate. 
The 2008 planting seasons came and went with much too little additional help for impoverished small farmers. 
African countries search endlessly, and mostly fruitlessly, for the small amounts of funding needed for their purchases of fertilizer and improved seeds. 
My colleagues and I, serving on an advisory committee for the Spanish initiative, have recommended that donors pool their funds into a single international account, which we call the Financial Coordination Mechanism (FCM). 
These pooled funds would enable farmers in poor countries to obtain the fertilizer, improved seed varieties, and small-scale irrigation equipment that they urgently need. 
Poor countries would receive prompt and predictable financing for agricultural inputs from a single account, rather than from dozens of distinct and fragmented donors. 
By pooling financial resources into a single-donor FCM, aid programs’ administrative costs could be kept low, the availability of aid flows could be assured, and poor countries would not have to negotiate 25 times in order to receive help. 
The time for business as usual is over. 
The donors promised to double aid to Africa by 2010, but are still far off track. 
Indeed, during the past 20 years, they actually cut aid for agriculture programs, and only now are reversing course. 
Meanwhile, a billion people go hungry each day. 
We need a breakthrough that is demonstrable, public, clear, and convincing, that can mobilize the public’s hearts and minds, and that can demonstrate success. 
History can be made in Madrid at the end of January, when the world’s richest and poorest countries converge to seek solutions to the global hunger crisis. 
The lives of the billion poorest people depend on it. 

A Breakthrough Opportunity for Global Health 
NEW YORK – Every year, millions of people die from preventable and treatable diseases, especially in poor countries. 
In many cases, lifesaving medicines can be cheaply mass-produced, but are sold at prices that block access to those who need them. 
And many die simply because there are no cures or vaccines, because so little of the world’s valuable research talent and limited resources is devoted to addressing the diseases of the poor. 
This state of affairs represents a failure of economics and law that urgently needs to be corrected. 
The good news is that there are now opportunities for change, most promisingly through an international effort headed by the World Health Organization that would begin to fix the broken intellectual-property regime that is holding back the development and availability of cheap drugs. 
Two main problems limit the availability of medicines today. 
One is that they are very costly; or, more accurately, the price charged for them is very high, though the cost of producing them is but a fraction of that amount. 
Second, drug development is geared toward maximizing profit, not social benefit, which skews efforts directed at the creation of medicines that are essential to human welfare. 
Because the poor have so little money to spend, drug companies, under current arrangements, have little incentive to do research on the diseases that afflict them. 
It doesn’t have to be this way. 
Drug companies argue that high prices are necessary to fund research and development. 
But, in the United States, it is actually the government that finances most health-related research and development – directly, through public support (National Institutes of Health, National Science Foundation), and indirectly, through public purchases of medicine, both in the Medicare and Medicaid programs. 
Even the part that is not government-financed is not a conventional market; most individuals’ purchases of prescription medicines are covered by insurance. 
Government finances health-care research because improved medicines are a public good. 
The resulting knowledge benefits everyone by stopping epidemics and limiting the economic and human toll of widespread illness. 
Efficiency requires sharing research as widely as possible as soon as it is available. 
Thomas Jefferson compared knowledge to candles: when one is used to light another, it does not diminish the light of the first. 
On the contrary, everything becomes brighter. 
Yet, in America and most of the world, drug prices are still exorbitant and the spread of knowledge is tightly limited. 
That is because we have created a patent system that gives innovators a temporary monopoly over what they create, which encourages them to hoard their knowledge, lest they help a competitor. 
While this system does provide incentives for certain kinds of research by making innovation profitable, it allows drug companies to drive up prices, and the incentives do not necessarily correspond to social returns. 
In the health-care sector, it may be more profitable to devote research to a “me-too” drug than to the development of a treatment that really makes a difference. 
The patent system may even have adverse effects on innovation, because, while the most important input into any research is prior ideas, the patent system encourages secrecy. 
A solution to both high prices and misdirected research is to replace the current model with a government-supported prize fund. 
With a prize system, innovators are rewarded for new knowledge, but they do not retain a monopoly on its use. 
That way, the power of competitive markets can ensure that, once a drug is developed, it is made available at the lowest possible price – not at an inflated monopoly price. 
Fortunately, some US lawmakers are taking a strong interest in this approach. 
The Prize Fund for HIV/AIDS Act, a congressional bill introduced by Senator Bernie Sanders, is just such an initiative. 
His bill also contains an important provision aimed at encouraging open-source research, which would move the current research model away from secrecy toward sharing. 
But, globally, our innovation system needs much bigger changes. 
The WHO’s efforts to encourage broad reforms at the international level are crucial. 
This spring, the WHO released a report that recommends solutions similar to those proposed in the US Senate bill, but on a global level. 
Importantly, the report, “Research and Development to Meet Health Needs in Developing Countries,” recommends a comprehensive approach, including mandatory funding contributions from governments for research on developing countries’ health needs; international coordination of health-care priorities and implementation; and a global observatory that would monitor where needs are greatest. 
In late May, the international community will have a chance to begin implementing these ideas at the WHO World Health Assembly – a moment of hope for public health around the world. 
Reforming our innovation system is not just a matter of economics. 
It is, in many cases, a matter of life and death. 
It is therefore essential to de-link R&D incentives from drug prices, and to promote greater sharing of scientific knowledge. 
For America, the Sanders bill marks important progress. 
For the world, the WHO’s recommendations represent a once-in-a-generation opportunity to remedy a long-standing and egregious inequity in health care, and, more broadly, to set a model for governance of global public goods befitting an era of globalization. 
We cannot afford to let this opportunity pass us by. 

India’s Change of Guard 
SINGAPORE – In August, Raghuram Rajan was appointed Governor of the Reserve Bank of India. 
On one level, this was a routine announcement that many had anticipated – after all, Rajan is arguably the best-known Indian economist of his generation. 
On another level, however, his appointment can be seen as part of a broader generational shift. 
Rajan, just 50, will be the first RBI governor born after India became a republic in 1950. 
Similar changes are taking place in all walks of Indian life, including politics, the arts, sports, and social development. 
And India will be better for it. 
Although the country is one of the youngest in the world, with an average age of just 26 years, until recently aging stalwarts incongruously dominated most fields, from politics to the arts and even business and sports. 
But now younger entrants are rising everywhere, bringing with them energy and new ideas. 
In politics, as the country prepares for next year’s general election, the leading contenders to replace 81-year-old Prime Minister Manmohan Singh are the Bharatiya Janata Party’s Narendra Modi, 62, and Rahul Gandhi, who is just 43. 
Either man would be the first prime minister who was not born in the British Raj. 
The arts were one of the first areas to witness this generational change. 
For a long time, Indian literature, especially in English, was dominated by a clique who wrote mainly for a niche audience and literary recognition. 
Then, a few years ago, a group of young writers – such as Chetan Bhagat and Amish Tripathi, both former bankers – changed the rules of the game by writing for the mass market. 
Rather than write for literary critics, they began to use a simpler language, including Indian turns of phrase. 
They also chose new themes: Tripathi dipped into ancient mythology to write a trilogy about the god Shiva, while Bhagat began to write about the lives of India’s young, upwardly mobile middle class. 
Predictably, the purists pounced and the critics ridiculed. 
But people have bought their books in the millions, and film deals have followed. 
As a result, the market for books has dramatically expanded and publishers have been forced to change their entire business strategies. 
Something similar has happened in the music industry. 
Previously dominated by a small cabal of singers and music directors, the market has been transformed by TV talent contests, similar to American Idol, which provide a national showcase for the wealth of India’s talent. 
The shows have made participants, some drawn from remote towns, into overnight stars, and many of them have gone on to sign lucrative careers. 
Thanks partly to this parade of new talent, the Indian music industry is experiencing a period of extraordinary innovation and expansion. 
The output of the US and European music industries sounds stale in comparison, owing to a dearth of innovation over the last two decades. 
Generational change has even come to India’s most popular sport – cricket. 
Such was the adulation once heaped upon its aging stars that many of them remained on the national team long past their peak. 
But a mere two years after winning the World Cup in 2011, several members of that victorious team have been replaced – a decision that until recently would have seemed unthinkable. 
India’s social sector has also been transformed. 
Development policy used to be dominated by career activists wedded to socialist-era thinking. 
But the arrival of new faces from the world of business, such as Ashish Dhawan, Jayant Sinha, and Ramesh and Swati Ramanathan, has meant that development issues are at last being assessed according to the problem-solving approach of social entrepreneurs, rather than through the ideological lens of activists. 
Ironically, it is the world of business that remains slow to change. 
The growth of the IT sector in the 1990’s seemed to promise that change would be rapid and far-reaching, but the old business families still dominate. 
There is hope, though. 
Entrepreneurs like Manish Sabharwal of Teamlease, and Binny and Sachin Bansal of Flipkart, an online retailer, are fundamentally changing the way India does business. 
Similarly, Indian academia may be moribund, but new public intellectuals like Pratap Bhanu Mehta have emerged from outside the mainstream. 
Yes, India’s economy has slowed sharply, the rupee has plunged, and scandals and protests dominate the headlines. 
But, behind the gloom, a new generation is taking over, bringing with it fresh ideas and visions for India. 

A Centerless Euro Cannot Hold 
CAMBRIDGE – With youth unemployment touching 50% in eurozone countries such as Spain and Greece, is a generation being sacrificed for the sake of a single currency that encompasses too diverse a group of countries to be sustainable? 
If so, does enlarging the euro’s membership really serve Europe’s apparent goal of maximizing economic integration without necessarily achieving full political union? 
The good news is that economic research does have a few things to say about whether Europe should have a single currency. 
The bad news is that it has become increasingly clear that, at least for large countries, currency areas will be highly unstable unless they follow national borders. 
At a minimum, currency unions require a confederation with far more centralized power over taxation and other policies than European leaders envision for the eurozone. 
What of Nobel Prize winner Robert Mundell’s famous 1961 conjecture that national and currency borders need not significantly overlap? 
In his provocative American Economic Review paper “A Theory of Optimum Currency Areas,” Mundell argued that as long as workers could move within a currency region to where the jobs were, the region could afford to forgo the equilibrating mechanism of exchange-rate adjustment. 
He credited another (future) Nobel Prize winner, James Meade, for having recognized the importance of labor mobility in earlier work, but criticized Meade for interpreting the idea too stringently, especially in the context of Europe’s nascent integration. 
Mundell did not emphasize financial crises, but presumably labor mobility is more important today than ever. 
Not surprisingly, workers are leaving the eurozone’s crisis countries, but not necessarily for its stronger northern region. 
Instead, Portuguese workers are fleeing to booming former colonies such as Brazil and Macau. 
Irish workers are leaving in droves to Canada, Australia, and the United States. 
Spanish workers are streaming into Romania, which until recently had been a major source of agricultural labor in Spain. 
Still, if intra-eurozone mobility were anything like Mundell’s ideal, today we would not be seeing 25% unemployment in Spain while Germany’s unemployment rate is below 7%. 
Later writers came to recognize that there are other essential criteria for a successful currency union, which are difficult to achieve without deep political integration. 
Peter Kenen argued in the late 1960’s that without exchange-rate movements as a shock absorber, a currency union requires fiscal transfers as a way to share risk. 
For a normal country, the national income-tax system constitutes a huge automatic stabilizer across regions. 
In the US, when oil prices go up, incomes in Texas and Montana rise, which means that these states then contribute more tax revenue to the federal budget, thereby helping out the rest of the country. 
Europe, of course, has no significant centralized tax authority, so this key automatic stabilizer is essentially absent. 
Some European academics tried to argue that there was no need for US-like fiscal transfers, because any desired degree of risk sharing can, in theory, be achieved through financial markets. 
This claim was hugely misguided. 
Financial markets can be fragile, and they provide little capacity for sharing risk related to labor income, which constitutes the largest part of income in any advanced economy. 
Kenen was mainly concerned with short-term transfers to smooth out cyclical bumpiness. 
But, in a currency union with huge differences in income and development levels, the short term can stretch out for a very long time. 
Many Germans today rightly feel that any system of fiscal transfers will morph into a permanent feeding tube, much the way that northern Italy has been propping up southern Italy for the last century. 
Indeed, more than 20 years on, Western Germans still see no end in sight for the bills from German unification. 
Later, Maurice Obstfeld pointed out that, in addition to fiscal transfers, a currency union needs clearly defined rules for the lender of last resort. 
Otherwise, bank runs and debt panics will be rampant. 
Obstfeld had in mind a bailout mechanism for banks, but it is now abundantly clear that one also needs a lender of last resort and a bankruptcy mechanism for states and municipalities. 
A logical corollary of the criteria set forth by Kenen and Obstfeld, and even of Mundell’s labor-mobility criterion, is that currency unions cannot survive without political legitimacy, most likely involving region-wide popular elections. 
Europe’s leaders cannot carry out large transfers across countries indefinitely without a coherent European political framework. 
European policymakers today often complain that, were it not for the US financial crisis, the eurozone would be doing just fine. 
Perhaps they are right. 
But any financial system must be able to withstand shocks, including big ones. 
Europe may never be an “optimum” currency area by any standard. 
But, without further profound political and economic integration – which may not end up including all current eurozone members – the euro may not make it even to the end of this decade. 

 

A Chinese Champion of Peace and Freedom 
PRAGUE – On Christmas Day last year, one of China’s best-known human rights activists, the writer and university professor Liu Xiaobo, was condemned to 11 years in prison. 
Liu is one of the main drafters of Charter 08, a petition inspired by Czechoslovakia’s Charter 77, calling on the Chinese government to adhere to its own laws and constitution, and demanding the open election of public officials, freedom of religion and expression, and the abolition of “subversion” laws. 
For his bravery and clarity of thought about China’s future, Liu deserves the 2010 Nobel Peace Prize. 
There are two reasons why we believe that Liu would be a worthy recipient of that prestigious award. 
First and foremost, he stands in the tradition of Nobel Peace Prize laureates who have been recognized for their contribution to the struggle for human rights. 
Nobel laureates such as Martin Luther King, Lech Walesa, and Aung San Suu Kyi are but a few of the many examples that the Nobel Committee has recognized in previous years. 
We are convinced that the concepts that Liu and his colleagues put down on paper in December 2008 are both universal and timeless. 
These ideals – respect for human rights and human dignity, and the responsibility of citizens to ensure that their governments respect those rights – represent humanity’s highest aspirations. 
Should the Nobel Committee choose to recognize Liu’s courage and sacrifice in articulating these ideals, it would not only draw global attention to the injustice of Liu’s 11-year sentence. 
It would also help to amplify within China the universal and humanistic values for which Liu has spent so much of his life fighting. 
The second reason why Liu deserves the Nobel Peace Prize resonates with Alfred Nobel’s original intent for the award. 
In working to promote human rights, political reform, and democratization in China, Liu has made a significant contribution to the values of peace and fraternity among nations that Nobel had in mind when he created the award more than a century ago. 
Of course, democratization does not automatically guarantee better behavior on the world stage. 
But it does facilitate a full and rigorous public debate over key questions of a state’s foreign and domestic policies. 
This active and searching conversation, the hallmark of a democratic polity, is the best hope for better decisions by governments, both at home and abroad. 
Liu’s committed advocacy on behalf of democracy in China is, above all, intended for the benefit of the Chinese people. 
But his courage and example may help to accelerate the dawn of the day when China’s participation in international affairs is aided by the expertise and oversight of civil-society groups, an independent media, and an engaged citizenry able to express its views through the ballot box. 
It is primarily for these two reasons that we believe that Liu would be a worthy recipient of the 2010 Nobel Peace Prize. 
In conferring on Liu one of the world’s highest honors, the Committee would be signaling once again the importance of human rights and democracy on the one hand, and world peace and international solidarity on the other. 
Liu’s harsh prison sentence was meant as an exemplary measure, a stern warning to all other Chinese who might want to follow his path. 
We are convinced that there are moments when exemplary civic engagement, such as Liu’s, requires an exemplary response. 
Awarding him the Nobel Peace Prize is precisely the response that his courage deserves. 

 

A Climate Deal is Not Enough 
AMSTERDAM – During the COP15 climate summit in Copenhagen, world leaders have been negotiating the future of our planet. 
All the signs suggest that they are unlikely to sign a global climate treaty. 
The views of the various countries, and of the various industrial and political power blocs, differ too much. 
The politicians, civil servants, and other participants at the Copenhagen summit have mainly been bombarding each other with numbers. 
Figures on how much various countries should reduce CO2 emissions, the amount of money they should put up in coming years, the exact nature of their responsibilities, how much temperature increase Earth will be able to endure, and how long we can continue to wait. 
These are all very important issues. 
But the mere figures are simply not enough. 
A different approach to the problem of climate change is needed. 
The climate issue can only be solved on the basis of shared, deeply felt ethical principles. 
Humanity has reached a critical moment in Earth’s history, at which peoples and nations will have to recognize their solidarity – with each other and with the Earth – and start acting upon it. 
Similar to the way world leaders adopted the United Nations Millennium Declaration in September 2000, and embraced the resulting Millennium Development Goals, today’s climate negotiators will have to commit themselves to creating a basis of shared fundamental ethical principles. 
Such a basis is not hard to find. 
Its inspiration can be the Earth Charter, which, launched in 2000, was initiated by, among others, former USSR President Mikhail Gorbachev and Wangari Mathaai, who received the 2004 Nobel Peace Prize for her efforts in the Green Belt Movement, a pan-African tree-planting initiative. 
The climate problem does not stop at borders. 
In the next few decades, a low-lying country like the Netherlands will need to invest billions of euros to intensify its age-old struggle against rising water. 
But in many other countries, the water is already flooding over the dikes, both literally and figuratively. 
Climate change affects particularly those countries that lack the money needed to take adequate measures against rising sea levels, persistent droughts, or devastating storms, even though they had nothing to do with the primary cause of these problems – industrialization in the developed countries. 
Apart from the necessary, often infrastructural adaptations to survive the effects of climate change, enormous efforts to prevent even worse things from happening are required. 
Large investments in forestation, agriculture, and energy supply are called for. 
In devising solutions, the role of women should be the main focus. 
Women are often the first people who have to address the problem of gaining access to natural resources, and they are capable of playing a major role as pioneers in finding solutions to climate change and the way humankind should adapt to it. 
In the short term, the world should become a sustainable global society of low CO2 emitters. 
This is a mission for all humankind, in which patriotic feelings and thinking in terms of power blocs have no place. 
The pursuit of a sustainable global society of low CO2 emitters requires a tremendous effort. 
Precisely for this reason, it also requires a broadly shared ethical basis. 
This would guide the negotiating parties in such a way that they look not only for solutions to a part of the problem, but first and foremost at a comprehensive solution to the entire problem. 
The climate change issue is too important to be left in the care of politicians. 
In Copenhagen, it is therefore imperative that not only nation states, but the business community and citizens combine their efforts to save our planet’s climate. 
That is not only a scientific necessity; it is an ethical imperative. 

A Cloud over Airplane Safety 
PRINCETON – When airports across Europe reopened after the closure caused by the eruption of Iceland’s Eyjafjallajökull volcano, it was not because the amount of ash in the atmosphere had dropped, but because the risk that the ash posed to airplane safety had been reassessed. 
Was it new scientific information that led to the lifting of the flight ban, or was it a reflection of the hardship, both personal and economic, that the ban was causing? 
Over six days, about 95,000 flights were canceled, at a cost to airlines of more than $1 billion. 
An estimated five million people were stranded or delayed. 
The British economy lost £1.5 billion, and others were similarly affected. 
Flower growers in Kenya, who depend on air transport to take their short-lived product to Europe, suddenly had no income. 
Sixteen cancer patients in critical need of bone marrow for transplants were put at risk because the matching marrow could not be flown in from the United States or Canada. 
In the past, jets flying into ash from volcanoes in the US, Indonesia, the Philippines, and Mexico have temporarily lost engine power, and in one case, dropped thousands of feet, although all managed to land safely. 
But there was no evidence that the more widely dispersed ash blowing over Europe from Iceland would cause similar problems. 
The decision to ground flights was based on the view that any level of ash in the atmosphere posed some risk to aircraft, and that no matter how slight that risk might be, the government’s job was, as British Prime Minister Gordon Brown put it, “to make sure that safety was paramount.” 
Indeed, in closing their skies, European governments seem to have given safety absolute priority over everything else. 
Yet none of them act on that principle in other areas. 
Some 3,000 people die on the world’s roads every day. 
Cutting speed limits to, say, 10 kilometers per hour would prevent most accidents and save many lives. 
We don’t do it, because we give safety a lower priority than our desire to spend less time driving. 
The price we are willing to pay for safety cannot be infinite. 
It is distasteful to put a price on human life, but the more we spend on safety, the less we will have for our other goals. 
The British government uses a figure of a little more than £1 million as a general limit to the amount it is prepared to pay to save a statistical life – for example, by improving road safety. 
In the US, the Department of Transportation is prepared to go up to $5.8 million – nearly four times as much, at current exchange rates – for the same purpose. 
Does that mean that safety is paramount in the US, but not in Britain? 
Giovanni Bisignani, the head of the International Air Transport Association, an industry group, criticized the shutdown, saying that no risk assessment had been undertaken. 
On the whole, though, the public seemed to support the decision. 
Stranded travelers, interviewed at airports, typically said that they would rather be stuck at an airport than in a plane falling out of the sky. 
But what if some travelers have a higher tolerance of risk, or just a more urgent need to travel, than others? 
John Stuart Mill, in his classic book On Liberty, considered a situation in which a man sets out to cross a bridge that we know is unsafe. 
In Mill’s view, we are justified in stopping him only to make sure that he is aware of the danger. 
Once he knows of it, the decision is his to make, because only he can judge the importance of his journey, and balance that against the risk he is running. 
Air safety is slightly different, because a crashing plane can kill people on the ground, but the greatest risks by far are borne by the passengers and crew. 
If they are fully informed of the risks, and are still willing to fly – perhaps the crew has been offered more money, as workers in dangerous occupations often are – should we prevent them from making the decision to fly? 
In the end, after test flights with no passengers aboard had shown no engine damage, and aircraft engine manufacturers told aviation authorities that their engines could operate safely with a low level of ash in the atmosphere, Europe’s skies were reopened. 
The International Civil Aviation Authority has announced that it will convene a group of experts to help it provide guidance for the industry to decide what level of ash in the atmosphere makes it unsafe to fly. 
Now that we have seen the costs of giving absolute priority to safety, we know that this is not only a technical question. 
I trust that among the experts will be some who have pondered the underlying ethical question: how safe should we aim to be? 

A Communist Party without Communism 
PRINCETON – Russian President Vladimir Putin’s anointment of Alexander Medvedev to succeed him in what is supposed to be a democratic presidential election next March shows that Russia’s leaders have not changed a whit. 
It looks increasingly likely that, as under Leonid Brezhnev, we will see the same names in the news for decades to come. 
According to Gleb Pavlovsky, the Putin regime’s leading ideologist, the current Russian system is perfect in all respects but one: it doesn’t know its enemies. 
Indeed, it seems as if everyone in the Kremlin is reading Carl Schmitt, the Nazi legal theorist who taught that naming your enemy is the central mission of politics. 
In the spirit of Schmitt, Putin’s men designated a liberal party, the Union of Right Forces, as their ur-enemy. 
Its public meetings were broken up by armed police; its leaders arrested and beaten; 
Putin called its supporters “coyotes.” 
What is surprising is that this aggressive behavior occurred in response to no visible danger. 
Oil prices are soaring, as are Putin’s approval ratings. 
His appointees control everything that matters, from Gazprom to the Central Electoral Committee. 
Since the pacification of Chechnya with violence and subsidies, the incarceration or emigration of a few financially viable opponents, and the massive “social investments” of recent years, which, under Medvedev’s personal supervision, have bribed the population, no credible force can seriously challenge Putin’s men. 
Yet their regime is in crisis, and they know it. 
Russia’s economy is more dependent on gas and oil than ever before. 
Military reform has been reversed. 
Despite increasing incomes, Russians are less educated and less healthy than they were when Putin came to power; they still die at a shockingly young age. 
Russian involvement in world affairs is tainted by poison and corruption. 
State monopolies undo what private businesses created. 
With more money, ill-educated bureaucrats hire more ill-educated bureaucrats; as a result, the regime fails to rule the country. 
The country is unruly, and its rulers know it. 
So they panic. 
Putin’s aim was to subject all power to the control of Russia’s security forces. 
His generation of KGB officers watched the collapse of the Communist Party and all the governmental bodies that it “directed and controlled,” including the KGB. 
Under Putin, the security service has had its revenge. 
Its people have become powerful, arrogant, and enormously rich. 
They have also become disobedient. 
In 2004, General Viktor Cherkesov, then Putin’s representative in northwest Russia, published an essay that glorified the KGB as the only unspoiled authority in a corrupted country. 
This essay, more than anything else, defined Putin’s second term. 
In October 2007, Cherkesov (now chief of one of the most obscure and powerful services, the Federal Anti-Drug Administration) published another essay in which he lamented his colleagues’ degradation: warriors had turned into traders, he complained. 
Earlier, generals from a competing service, the FSB, had arrested Cherkesov’s deputy for “illegal bugging.” 
In a public gesture of despair, Cherkesov admitted the failure of Putin’s project to reanimate Russian governance by subordinating it to the security services. 
Cherkesov’s deputy remains in prison. 
Most believe that Putin is unable to intervene in his defense. 
In the absence of Communist Party control, these security officers betrayed their corporate ethic and engaged in horse-trading, applying force when a trade did not go well. 
That this happens to ordinary Russians is clear; what Cherkesov revealed was that Putin’s circle also confronts this situation. 
What is to be done when ex-KGB warriors turn their swords and bugs against one another? 
Cherkesov’s case exemplifies Putin’s nightmare. 
But if your instincts betray you, you go back to even deeper ones. 
Now that Putin’s people have left their predecessors’ neo-liberal ideas behind and feel disenchanted with the ex-KGB clique, the task is to recreate an omnipresent political party that controls the security services, the administration, business, and much else. 
This party will be centralized under personal leadership and will reduce the state to a legal fiction. 
Preaching nationalism, its managers will believe in their universal competence, as opposed to KGB-style professionalism and corporatism. 
Boris Yeltsin forbade party cells in state-controlled institutions by decree. 
Putin’s lawyers will reverse that decision; the party will have cells or committees in every factory, corporation, military unit, university department, etc. 
Integrated by the leader’s charisma and party discipline, party members will direct and unify the desolated country. 
This is Putin’s plan. 
Like former Soviet leader Yuri Andropov, the only other KGB man to rule Russia, Putin will become the party’s general secretary. 
As in the Soviet era, state and governmental officials will be reduced to party ciphers – the role that President Medvedev will play under General Secretary Putin. 
And, of course, being General Secretary carries no constitutional term limit. 
In the end, Putin has what history left him: not ideas, just a faction yearning to consolidate its grip on power. 
Lenin and Trotsky needed a party to make their ideology a reality; 
Putin and Medvedev are devising an ideology to solidify their party. 
It is a bizarre ideology. 
Accusing warriors of being traders and traders of being thieves, it shuns its Marxist origins. 
It will subordinate all who really do work – traders, warriors, journalists, and others – to party ideologues whose sole job is to search for enemies. 

A Confederation for Kosovo 
Time is running out in Kosovo. 
If a United Nations-backed settlement is not reached by early December, the province’s majority Albanian population is likely to declare independence unilaterally – a move that the United States has announced it may support. 
That would be a disastrous step. 
Russia would be furious, because it fears that Kosovo’s secession – whether or not it is internationally recognized – might fuel separatist movements in the former Soviet empire. 
Serbia is even more strongly opposed. 
Dusan Prorokovic, Serbia’s state secretary for Kosovo, has said that his country might use force to maintain its sovereignty. 
Even if the government hesitates, ultranationalist groups might push Prime Minister Vojislav Kostunica to send in troops: the current UN presence in Kosovo is very thin (only 40 “military observers” and 2,116 policemen) but the stationing of 15,000 NATO troops could make any armed clash very dangerous. 
After eight years of international administration, Kosovo’s Albanian majority has tasted freedom and is eager for full independence. 
But Serbia claims that the province remains an essential part of its historical and cultural tradition. 
Moreover, independence would not be accepted by the Serbian public, which has already watched in dismay as “Great Serbia” has been gradually whittled away, most recently with the secession of Montenegro. 
Serbia is prepared to concede only “enhanced autonomy” to Kosovo, and some capacity to enter into international agreements. 
Yet, while the two parties now seem irreconcilable, it is not too late for compromise. 
But this is possible only by resuscitating – and updating – an old institution of the international community: a confederation of states. 
By means of a binding UN Security Council resolution, Kosovo could be granted full and exclusive authority over its citizens and territory, as well as limited capacity for action on the international scene. 
It could be authorized to enter into trade agreements as well as agreements concerning individuals (for example, admission and circulation of foreigners, or extradition), plus the right to seek admission to the UN (which does not require full sovereignty and independence). 
Kosovo would thus gain some essential trappings of statehood. 
However, a decision-making body consisting of delegates from Kosovo, Serbia, and the European Union would be given full authority over major foreign policy issues (for example, alliances and relations with international economic institutions), defence, borders (in case Kosovo wished to join with Albania), and the treatment of Kosovo’s Serbian minority. 
As a result, Kosovo and Serbia would constitute two distinct international subjects, bound by a confederation hinging on a common decision-making body. 
Of course, this confederation would be asymmetrical, because the Serbian government’s sovereignty over the rest of Serbia would remain intact and unlimited, whereas the Kosovar government’s “sovereignty” over Kosovo would be restrained. 
To avoid one of the two parties getting the upper hand and imposing arbitrary decisions, the common decision-making body should consist of four Serbian delegates, two Kosovar delegates, and three representatives of the EU, thus requiring both sides to gain the support of the European delegates. 
In addition, the EU should create a small but effective military force (say, 5,000 troops) to back up the common body’s decisions. 
As with any compromise, the contending parties would both gain and lose from this arrangement. 
Serbia would save face, and would continue to have a say on crucial matters concerning Kosovo, including the treatment of the Serbian minority. 
Kosovo would acquire limited independence, with its status rising from a province of a sovereign state to an international subject capable of entering into certain agreements with other states and even joining the UN. 
The EU would benefit as well, by contributing to the stabilization of a highly volatile area. 
Subsequently, the EU would monitor Kosovo and prevent any dispute that might turn violent. 
A final advantage of this solution is that it would be temporary. 
Historically, confederations sooner or later either become federations (as occurred in the US, Germany, and Switzerland) or, pushed by centrifugal forces, split up (as with the United Arab Republic, established in 1958, which split three years later into Egypt and Syria). 
The confederation I advocate would thus constitute an intermediate stage (lasting five or ten years), at the end of which Kosovo is likely to become fully independent. 
Delaying a final solution in this way would provide time to verify Kosovo’s prospects of joining the EU and thus eventually sharing “sovereign authority” with other independent states, which could deflate Kosovars’ dangerously robust nationalistic demands. 

A Conservative Europe 
Last week Tony Blair, Jacques Chirac, and Gerhard Schroeder met in Berlin. They departed pledging to revive Europe's growth. 
We've heard that empty promise before. 
Instead, the European Union needs a new direction. 
I say this as leader of the party which has been at the forefront of Britain's engagement with Europe. 
It was a Conservative government that first applied for membership in the early 1960's. 
A Conservative government took the United Kingdom into the European Economic Community in 1973. 
Margaret Thatcher worked with Jacques Delors to forge the Single Market in 1986. 
So I have no doubt that Britain must remain influential within the Union. 
But British policy towards the EU has often led to worse rather than better relations among member states. 
Faced with a new EU initiative, our traditional response has often been to oppose it, vote against it, lose the vote, then sulkily to adopt it while blaming everyone else. 
Many Europeans are sick of British vetoes. 
So am I. 
Of course there are basic requirements that all member states must accept. 
Foremost are the four freedoms of the single market; free movement of goods, services, people and capital. 
But a single market does not require a single social or industrial policy, far less a common taxation policy. 
Allowing countries to pursue their own policies in these areas encourages competitiveness. 
Forcing common standards means that Europe will fall further behind as member states shuffle their costs onto their neighbours. 
Which areas should be applied to every member state, and which should be optional? 
I believe that every member state should administer those policies that do not directly and significantly affect other member states. 
In areas which serve their national interest, individual members should decide whether to retain wholly national control or whether to co‑operate with others. 
The Union's members should form a series of overlapping circles: different combinations of members should be able to pool their responsibilities in different areas of their own choosing. 
Precedents exist for this. NATO has been flexible since its inception. 
France signed up for membership but later refused to submit her armed forces to NATO's central command. 
Similar flexibility exists with the Euro, the Schengen Agreement, and the Social Chapter. 
These precedents can be extended. 
So far, everyone has had to move forward together, with individual countries negotiating specific opt‑outs. 
But since 1998, there has been a procedure within the Treaties - called enhanced co‑operation - that could allow some members to go ahead with further integration in a specific area without involving every other member. 
Instead of individual member states having fraught negotiations to opt‑out of a new initiative, those that support it can simply opt‑in. 
Countries that want to integrate further can do so. 
They don't need to drag Britain and others kicking and screaming in their wake because the others are not compelled to join them. 
In this way we can break free of the institutionalised tug of war that has characterised EU relations. 
I am not talking about a two‑speed Europe. 
That implies that we all agree on the destination and differ only about the speed of the journey. 
I don't want to reach the destination that some of our partners may aspire to. 
But I don't want to block their way. 
There are some who say that this would mean a loss of influence on the part of those countries which choose not to integrate more closely. 
But influence is not an end in itself - it is a means to an end. 
Britain does not need a seat at the table when decisions on the Euro are taken. 
Our economy has not been adversely affected by staying out. 
Keeping the pound does not mean that we oppose the Euro, or hope for its failure. 
The European Union should stop trying to do everything and concentrate on doing fewer things more effectively. 
It should give member states the chance to develop an approach to Europe that suits their national traditions, within the EU framework. 
It is on this basis that British Conservatives oppose the proposed constitution. 
We disagree with many of its contents, of course, but also oppose the idea of having an EU constitution at all. 
There is a world of difference between an association of nation states bound together by treaty, and a single entity, whether you call it a state or not, with its own legal personality, deriving its authority from its own constitution. 
If this constitution were accepted in anything like the proposed form, the EU would gain many attributes and trappings of statehood: its own president and foreign minister, its own legal system. 
The supremacy of EU law would derive not from Acts of national Parliaments but from a supra‑national constitution. 
That is a radical change, not the mere tidying‑up exercise some suggest. 
I do not believe it is right to make a change of such magnitude without specifically consulting the people on whose behalf we govern. 
Elected parliaments do not own our liberties. 
They safeguard them, and should not diminish those liberties without an explicit mandate. 
Any proposal for a new constitution must be put to the British people and to the people in each EU member state. 

A Conspiracy So Immense 
NEW YORK – Is this the Age of the Conspiracy Theory? 
Plenty of evidence suggests that we are in something of a golden age for citizen speculation, documentation, and inference that takes shape – usually on the Internet – and spreads virally around the globe. 
In the process, conspiracy theories are pulled from the margins of public discourse, where they were generally consigned in the past, and sometimes into the very heart of politics. 
I learned this by accident. 
Having written a book about the hijacking of executive power in the United States in the Bush years, I found myself, in researching new developments, stumbling upon conversations online that embrace narratives of behind-the-scenes manipulation. 
There are some major themes. 
A frequent one in the US is that global elites are plotting – via the Bilderberg Group and the Council on Foreign Relations, among others – to establish a “One World Government” dominated by themselves rather than national governments. 
Sometimes, more folkloric details come into play, broadening the members of this cabal to include the Illuminati, the Freemasons, Rhodes Scholars, or, as always, the Jews. 
The hallmarks of this narrative are familiar to anyone who has studied the transmission of certain story categories in times of crisis. 
In literary terms, this conspiracy theory closely resembles The Protocols of the Elders of Zion , featuring secretive global elite with great power and wicked aims. 
Historically, there tends to be the same set of themes: fearsome, uncontrolled transformative change led by educated, urbanized cosmopolitans. 
Students of Weimar Germany know that sudden dislocations and shocks – rapid urbanization, disruption of traditional family and social ties, loosening of sexual restrictions, and economic collapse – primed many Germans to become receptive to simplistic theories that seemed to address their confusion and offer a larger meaning to their suffering. 
Similarly, the “9/11 Truth Movement” asserts that al-Qaeda’s attack on the Twin Towers was an “inside job.” 
In the Muslim world, there is a widespread conspiracy theory that the Israelis were behind those attacks, and that all Jews who worked in the buildings stayed home that day. 
Usually, conspiracy theories surface where people are poorly educated and a rigorous independent press is lacking. 
So why are such theories gaining adherents in the US and other affluent democracies nowadays? 
Today’s explosion of conspiracy theories has been stoked by the same conditions that drove their acceptance in the past: rapid social change and profound economic uncertainty. 
A clearly designated “enemy” with an unmistakable “plan” is psychologically more comforting than the chaotic evolution of social norms and the workings – or failures – of unfettered capitalism. 
And, while conspiracy theories are often patently irrational, the questions they address are often healthy, even if the answers are frequently unsourced or just plain wrong. 
In seeking answers, these citizens are reacting rationally to irrational realities. 
Many citizens believe, rightly, that their mass media are failing to investigate and document abuses. 
Newspapers in most advanced countries are struggling or folding, and investigative reporting is often the first thing they cut. 
Concentration of media ownership and control further fuels popular mistrust, setting the stage for citizen investigation to enter the vacuum. 
Likewise, in an age when corporate lobbyists have a free hand in shaping – if not drafting – public policies, many people believe, again rightly, that their elected officials no longer represent them. 
Hence their impulse to believe in unseen forces. 
Finally, even rational people have become more receptive to certain conspiracy theories because, in the last eight years, we actually have seen some sophisticated conspiracies. 
The Bush administration conspired to lead Americans and others into an illegal war, using fabricated evidence to do so. 
Is it any wonder, then, that so many rational people are trying to make sense of a political reality that really has become unusually opaque? 
When even the 9/11 commissioners renounce their own conclusions (because they were based on evidence derived from torture), is it surprising that many want a second investigation? 
Frequently enough, it is citizens digging at the margins of the discourse – pursuing such theories – who report on news that the mainstream media ignores. 
For example, it took a “conspiracy theorist,” Alex Jones, to turn up documentation of microwave technologies to be used by police forces on US citizens. 
The New Yorker confirmed the story much later – without crediting the original source. 
The mainstream media’s tendency to avoid checking out or reporting what is actually newsworthy in Internet conspiracy theories partly reflects class bias. 
Conspiracy theories are seen as vulgar and lowbrow. 
So even good, critical questions or well-sourced data unearthed by citizen investigators tend to be regarded as radioactive to highly educated formal journalists. 
The real problem with this frantic conspiracy theorizing is that it leaves citizens emotionally agitated but without a solid ground of evidence upon which to base their worldview, and without constructive directions in which to turn their emotions. 
This is why so many threads of discussion turn from potentially interesting citizen speculation to hate speech and paranoia. 
In a fevered environment, without good editorial validation or tools for sourcing, citizens can be preyed upon and whipped up by demagogues, as we saw in recent weeks at Sarah Palin’s rallies after Internet theories painted Barack Obama as a terrorist or in league with terrorists. 
We need to change the flow of information in the Internet age. 
Citizens should be able more easily to leak information, pitch stories, and send leads to mainstream investigative reporters. 
They should organize new online entities in which they pay a fee for direct investigative reporting, unmediated by corporate pressures. 
And citizen investigators should be trained in basic journalism: finding good data, confirming stories with two independent sources, using quotes responsibly, and eschewing anonymity – that is, standing by their own bylines, as conventional reporters do. 
This is how citizens can be taken – and take themselves – seriously as documenters and investigators of our common situation. 
In a time of official lies, healthy investigative energy should shed light, not just generate heat. 

A Constitutional Coup in Ukraine 
Changing constitutions is always a risky business. 
But it is a downright dangerous one when undertaken to benefit one man alone. 
Indeed, when a president volunteers to reduce the powers of his own office, you can be certain that he is up to no good. 
That is exactly what is going on in Ukraine, where President Leonid Kuchma proposes to junk our presidential system and replace it with a strange type of parliamentary system he has concocted. 
Kuchma has not suddenly converted to the view that parliamentary democracies are better than presidential ones. 
No, Kuchma wants to change Ukraine's constitution for no other reason than to maintain his grip on power. 
Today, Kuchma rules as an all-powerful president. 
But his term ends next year and he cannot run again. 
So, instead of retiring gracefully, as presidents from Bill Clinton to Boris Yeltsin routinely do, Kuchma wants to change the constitution in order to become an all-powerful prime minister who will never face a limit on the length of his term. 
Of course, constitutions are not meant to protect the status quo if the status quo is rotten. 
Constitutions can, and should, accommodate reform when necessary. 
A powerful president, however, is not necessarily wrong for Ukraine. 
In our wrenching postcommunist transition, it is essential that a government can act decisively. 
To change a system that seems best suited to Ukraine's circumstances, you need a good reason. 
The Ukraine president is authorized to appoint and sack the prime minister, dissolve parliament if he wishes, and rule by decree if he judges that the country's institutions are in danger. 
He maintains day-to-day control over every aspect of government. 
So puissant a Caesar must be above reproach. 
Kuchma is not. 
On the contrary, what is rotten in Ukraine is not its constitution, but its president, who is mired in charges of corruption and orchestrating the murder of journalists, and who is shunned by other world leaders. 
As president, Kuchma is grotesquely unpopular. 
Even Slobodan Milosevic had more support in Yugoslavia before his fall. 
So Kuchma knows that he cannot rely on handpicking his successor, as Yeltsin did in Russia. 
Unable to assure himself of a tame presidential successor, Kuchma wants what he calls a "parliamentary republic" with a weak president and powerful prime minister. 
But the parliament he has in mind is a mutant, one where the authoritarian rule of the criminal clans Kuchma controls will continue, unabated, behind the facade of parliamentary procedure. 
People too easily forget Ukraine, this big country on the border of the soon-to-be enlarged European Union. 
But any attempt to prolong Kuchma's rule will create such a political mess that it is not absurd to fear that Ukraine could follow Belarus and the Balkans of the early 1990's into outright dictatorship and chaos. 
Indeed, this scenario could worsen, because Russia is unlikely to sit around idly and watch Ukraine unravel. 
Intervention of some type seems more likely in such circumstances. 
Only an imperial Russia, however, would dare reabsorb Ukraine. 
But an imperial Russia cannot be a democratic Russia. 
So Kuchma endangers freedom and human rights not only in Ukraine, but ultimately threatens Russia's democracy as well. 
Luckily, there has never been a better time for the West--particularly the EU--to nudge Ukraine back from the brink. 
With EU expansion coming next spring, all Ukrainians fear that a new wall will cut their country off from the Union's easternmost border in Poland. 
Although the job of maintaining Ukraine's democracy is primarily one for Ukrainians, the EU can help if it takes practical steps to reassure Ukrainians that they won't be cut off from the rest of Europe. 
A generous visa regime and the use of regional development funds in Ukraine that will benefit impoverished eastern Poland, are two possible inducements. 
But these should be made conditional on Kuchma leaving the country's constitution and democracy alone. 
The EU should not fret about interfering in Ukraine's domestic affairs. 
After all, it hesitated little a few years ago to put a current member state, Austria, on notice that it was watching out for the welfare of that country's democracy. 
The wayward Kuchma is far more deserving of Europe imposing safeguards to ensure his good behavior. 
Similarly, the US should cast a wary eye at Kuchma's decision to send troops to Iraq. 
It cannot be the case that America's fidelity to democracy in Ukraine can be so cynically purchased. 
Within Ukraine, a government capable of truly governing should seek to adopt EU laws and norms in exactly the manner that the countries poised to join the Union have done, thus helping to clean up the murky system in which Kuchma's criminal cronies flourish. 
The constitution must be reformed, but not to shift power from one unaccountable leader to another. 
What is needed are clear checks on arbitrary rule, and transparency in decision-making. 
No one should doubt that Kuchma intends to stay in power, no matter what. 
Less certain is whether he will feel secure enough to hold a presidential election (or any other kind of election) if he cannot change the constitution in a way that guarantees his continued misrule. 
It is, after all, President Kuchma who is discredited, not Ukraine's constitutional arrangements. 

A Contagion of Bad Ideas 
NEW YORK – The Great Recession of 2008 has morphed into the North Atlantic Recession: it is mainly Europe and the United States, not the major emerging markets, that have become mired in slow growth and high unemployment. 
And it is Europe and America that are marching, alone and together, to the denouement of a grand debacle. 
A busted bubble led to a massive Keynesian stimulus that averted a much deeper recession, but that also fueled substantial budget deficits. 
The response – massive spending cuts – ensures that unacceptably high levels of unemployment (a vast waste of resources and an oversupply of suffering) will continue, possibly for years. 
The European Union has finally committed itself to helping its financially distressed members. 
It had no choice: with financial turmoil threatening to spread from small countries like Greece and Ireland to large ones like Italy and Spain, the euro’s very survival was in growing jeopardy. 
Europe’s leaders recognized that distressed countries’ debts would become unmanageable unless their economies could grow, and that growth could not be achieved without assistance. 
But, even as Europe’s leaders promised that help was on the way, they doubled down on the belief that non-crisis countries must cut spending. 
The resulting austerity will hinder Europe’s growth, and thus that of its most distressed economies: after all, nothing would help Greece more than robust growth in its trading partners. 
And low growth will hurt tax revenues, undermining the proclaimed goal of fiscal consolidation. 
The discussions before the crisis illustrated how little had been done to repair economic fundamentals. 
The European Central Bank’s vehement opposition to what is essential to all capitalist economies – the restructuring of failed or insolvent entities’ debt – is evidence of the continuing fragility of the Western banking system. 
The ECB argued that taxpayers should pick up the entire tab for Greece’s bad sovereign debt, for fear that any private-sector involvement (PSI) would trigger a “credit event,” which would force large payouts on credit-default swaps (CDSs), possibly fueling further financial turmoil. 
But, if that is a real fear for the ECB – if it is not merely acting on behalf of private lenders – surely it should have demanded that the banks have more capital. 
Likewise, the ECB should have barred banks from the risky CDS market, where they are held hostage to ratings agencies’ decisions about what constitutes a “credit event.” 
Indeed, one positive achievement by European leaders at the recent Brussels summit was to begin the process of reining in both the ECB and the power of the American ratings agencies. 
Indeed, the most curious aspect of the ECB’s position was its threat not to accept restructured government bonds as collateral if the ratings agencies decided that the restructuring should be classified as a credit event. 
The whole point of restructuring was to discharge debt and make the remainder more manageable. 
If the bonds were acceptable as collateral before the restructuring, surely they were safer after the restructuring, and thus equally acceptable. 
This episode serves as a reminder that central banks are political institutions, with a political agenda, and that independent central banks tend to be captured (at least “cognitively”) by the banks that they are supposed to regulate. 
And matters are little better on the other side of the Atlantic. 
There, the extreme right threatened to shut down the US government, confirming what game theory suggests: when those who are irrationally committed to destruction if they don’t get their way confront rational individuals, the former prevail. 
As a result, President Barack Obama acquiesced in an unbalanced debt-reduction strategy, with no tax increases – not even for the millionaires who have done so well during the past two decades, and not even by eliminating tax giveaways to oil companies, which undermine economic efficiency and contribute to environmental degradation. 
Optimists argue that the short run macroeconomic impact of the deal to raise America’s debt ceiling and prevent sovereign default will be limited – roughly $25 billion in expenditure cuts in the coming year. 
But the payroll-tax cut (which put more than $100 billion into the pockets of ordinary Americans) was not renewed, and surely business, anticipating the contractionary effects down the line, will be even more reluctant to lend. 
The end of the stimulus itself is contractionary. 
And, with housing prices continuing to fall, GDP growth faltering, and unemployment remaining stubbornly high (one of six Americans who would like a full-time job still cannot get one), more stimulus, not austerity, is needed – for the sake of balancing the budget as well. 
The single most important driver of deficit growth is weak tax revenues, owing to poor economic performance; the single best remedy would be to put America back to work. 
The recent debt deal is a move in the wrong direction. 
There has been much concern about financial contagion between Europe and America. 
After all, America’s financial mismanagement played an important role in triggering Europe’s problems, and financial turmoil in Europe would not be good for the US – especially given the fragility of the US banking system and the continuing role it plays in non-transparent CDSs. 
But the real problem stems from another form of contagion: bad ideas move easily across borders, and misguided economic notions on both sides of the Atlantic have been reinforcing each other. 
The same will be true of the stagnation that those policies bring. 

A Cool Calculus of Global Warming 
The British government recently issued the most comprehensive study to date of the economic costs and risks of global warming, and of measures that might reduce greenhouse gas emissions, in the hope of averting some of the direst consequences. 
Written under the leadership of Sir Nicholas Stern of the London School of Economics, who succeeded me as Chief Economist of the World Bank, the report makes clear that the question is no longer whether we can afford to do anything about global warming, but whether we can afford not to. 
The report proposes an agenda whose cost would be equivalent to just 1% of annual consumption, but would save the world risk equivalent costs that are five times greater. 
The reported costs of global warming are higher than in earlier studies because it takes into account the mounting evidence that the process of global warming is highly complex and non-linear, with a non-negligible chance that it may proceed much faster than had previously been thought and that the extent of warming may be much greater than had previously been thought. 
Indeed, the study may actually significantly underestimate the costs: for instance, climate change may lead to more weather variability, a possible disappearance or major shift of the Gulf Stream – of particular concern to Europe – and a flourishing of disease. 
When I served in 1995 on the Intergovernmental Panel on Climate Change, the scientific group that periodically assesses the science of global warming, there was overwhelming evidence that the concentration of greenhouse gases in the atmosphere had increased markedly since the beginning of the industrial revolution, that human activity had contributed significantly to those increases, and that they would have profound effects on climate and sea levels. 
But few saw, for instance, the Artic ice cap melting as rapidly as now seems to be the case. 
Still, some suggest that because we are not certain about how bad global warming will be, we should do little or nothing. 
To me, uncertainty should make us act more resolutely today, not less. 
As one scientist friend puts it: if you are driving on a mountain road, approaching a cliff, in a car whose brakes may fail, and a fog bank rolls in, should you drive more or less cautiously? 
Global warming is one of those rare instances where the scientific community is more fearful of what may be happening than the population at large. 
Scientists have glimpsed what the future may portend. 
As the Stern report points out, as usual, the poor are the most vulnerable. 
A third of Bangladesh will be underwater by the end of this century. 
The Maldives and a host of Pacific Island states will disappear: our twenty-first-century Atlantis. 
To an economist, the problem is obvious: polluters are not paying the full costs of the damage they cause. 
Pollution is a global externality of enormous proportions. 
The advanced countries might mean Bangladesh and the disappearing island states no harm, but no war could be more devastating. 
A global externality can best be dealt with by a globally agreed tax rate. 
This does not mean an increase in overall taxation, but simply a substitution in each country of a pollution (carbon) tax for some current taxes. 
It makes much more sense to tax things that are bad, like pollution, than things that are good, like savings and work. 
Although President George W. Bush says he believes in markets, in this case he has called for voluntary action. 
But it makes far more sense to use the force of markets – the power of incentives – than to rely on goodwill, especially when it comes to oil companies that regard their sole objective as maximizing profits, regardless of the cost to others. 
Exxon has reportedly been funding so-called think tanks to undermine confidence in the science of global warming, just as the tobacco industry funded “research” to question the validity of statistical findings showing the link between smoking and cancer. 
Some companies even seem to celebrate the melting of the polar ice cap, because it will reduce the cost of extracting the oil that lies beneath the Arctic Ocean. 
The good news is that there are many ways by which improved incentives could reduce emissions – partly by eliminating the myriad of subsidies for inefficient usages. 
The US subsidizes corn-based ethanol, and imposes tariffs on sugar-based ethanol; hidden in the tax code are billions of dollars of subsidies to the oil and gas industries. 
Most importantly, price signals that show the true social costs of energy derived from fossil fuels will encourage innovation and conservation. 
Small changes in practices, when replicated by hundreds of millions of people, can make an enormous difference. 
For example, simply changing the color of roofs in warm climates to reflect sunlight or planting trees around houses can lead to great savings on energy used for air conditioning. 
We have but one planet, and should treasure it. 
Global warming is a risk that we simply cannot afford to ignore anymore. 

A Cool Head for the Hottest Issues 
LONDON – Reading Barack Obama’s Dreams from My Father, the US president’s beautifully written reflections on his early life and identity, most people are struck by his cool and intellectual approach. 
This is not to say that he is unemotional. 
Obama can rage and weep. 
But he rarely seems to act on the basis of raw sentiment or instinctive prejudice. 
Pragmatic and highly intelligent, sooner or later every issue receives the full attention of his forensic curiosity. 
Recalling Hillary Clinton’s famous Democratic primary television advertisement, Obama, it turns out, is exactly the sort of president that most of us would want to have in the post for that 3 a.m. phone call about an international crisis. 
He would not be afraid to act, but he would be prepared to think first. 
I do not think, therefore, that Obama will be too vexed by some of the criticism he faces at the end of his first year in office, though he will undoubtedly grimace at the defeat of the Democratic candidate in the special election in Massachusetts to fill Ted Kennedy’s old seat. 
Obama was praised extravagantly a year ago; 12 months on, the criticism is over the top, too. 
Obama inherited a terrible legacy – recession, financial meltdown, Iraq, Afghanistan. 
He has not solved all of these problems. 
But it is difficult to see any really bad mistakes, except perhaps allowing himself to be pushed around by Israeli Prime Minister Netanyahu and giving China the impression that he was prepared for a bilateral relationship entirely on China’s terms. 
That seems to be changing now. 
Obama may have come to understand that when you are the leader of the world’s only superpower, you need to be feared just a little if you are to be respected. 
The left in America criticizes Obama for not turning the economy around already. 
The right angrily denounces him as a crypto-communist because he wants every American to have health care. 
With a dispassionate eye on the long game, what will the president himself be thinking? 
One issue that Obama is certain to have in his sights is a problem that shadowed the world for years. 
When I was growing up in the 1950’s and 1960’s, world peace was based on the nuclear standoff between the US and the Soviet Union. 
The main strategic assessment on both sides of the Berlin Wall was that if either side made a wrong move, all of us might end up consumed in the flames of a nuclear holocaust. 
This was called, in the geostrategic jargon of the day, “mutually assured destruction,” or MAD. 
The acronym was entirely appropriate. 
We have forgotten those days. 
Yet there are still 23,000 nuclear warheads on our planet, with the explosive power of 150,000 Hiroshima bombs. 
Terrorist groups would undoubtedly like to get their hands on one. 
In all, there are eight nuclear-weapon states – the US, Russia, Britain, France, China, Israel, India, and Pakistan. 
North Korea may also have a few bombs. 
Iran is believed by many to be trying to develop one. 
Other states, which have their own civil nuclear capacity, have the potential to develop a weapon. 
The number of countries in this category is bound to increase as the number of nuclear power reactors doubles over the next 20 years. 
The Nuclear Non-Proliferation Treaty (NPT) has contained the number of nuclear states. 
A conference is to be held in May to renew and review it. 
Obama clearly recognizes that the NPT needs to be strengthened in order to prevent countries from turning their civil nuclear-power capacity into weapons. 
But Obama also knows that if the existing nuclear states want others to accept tougher restrictions, they will have to cut back their nuclear arsenals. 
This is principally an issue for the US and Russia, which possess 95% of the world’s nuclear weapons. 
In addition, it would help if the US could take a strong lead by ratifying the Comprehensive Nuclear-Test-Ban Treaty. 
The nuclear issue is one of the biggest items on the Obama agenda. 
How it is handled will help to define his presidency. 
Even before the talking gets serious in May, there will be the question of Iran to sort out. 
Iran says that it seeks no more than its own ability to produce nuclear power. 
Disbelief grows with every revelation of secret Iranian facilities and plans, and with every refusal by Iran to negotiate safeguards that would allow for civil use while preventing weaponization. 
The US, the European Union, and Russia have tried to engage Iran on this issue, so far without success. 
China seems likely to block effective sanctions on Iran because of its close energy relationship with the country. 
How China eventually handles this will profoundly affect its standing in the US and Europe. 
These are going to be some of the major questions for Obama over the next year and more. 
If he gets them right, he can forget about his short-term critics. 
Fortunately, he is smart enough to know this. 

A Corporate Manifesto 
Around the world, countries are undergoing transitions to democracy. 
Although democratic development varies, democratization always changes relations between business and government. 
In Mexico, for example, liberalization of elections expanded the opposition's representation in parliament, ending domination of the executive over legislation and policy. 
Now small businesses have new opportunities to make their voices heard. 
In every country, there are differences in interests and goals within the business community. 
Small firms have different interests from large multinationals in areas such as labor relations, tax policy and health care. 
The degree to which business interests are fragmented based on policy issues, cronyism or other factors often indicates the degree of distortion in the underlying market economy. 
One split divides firms dependent upon import protection from those engaged in international trade. 
In many countries, protectionism nurtures "hot-house industries" that cannot compete in world markets. 
The influence that bureaucrats enjoy here fosters corruption. 
The result is a form of state socialism whose major beneficiary is a well-connected business elite that excludes genuine entrepreneurs and their employees. 
Major differences also divide firms that remain publicly owned from those privatized, as well as from those always private. 
Public sector firms have incentives to lobby for subsidies, protection and cheap credit. 
They use their work forces to stall reform. 
Conversely, private firms tend to support a more open and competitive economy and society. 
These splits have implications for how business can affect policymaking. 
Although every country and region is unique, businesses can forge unified positions based on national goals and a common strategy. 
In some Latin American countries, business organizations draw their members from the small business community, companies engaged in international trade, or business leaders who invest in new technologies. 
In some countries - say, Nicaragua and El Salvador - economies had so worsened that nearly all business people joined in opposition to the status quo, though disagreements existed about future goals. 
Their challenge was to unite many businesspersons and others to argue for opening the economy, reforming fiscal and tax policies, and other fundamental changes. 
In Mexico during the 1980s, COPARMEX, the Mexican employer's association, was one of the few voluntary business associations. 
It opposed statist economic policies, as well as the cat's cradle of business, government, and the vast machinery of the Institutional Revolutionary Party (PRI) which governs Mexico. 
Throughout the 1980s, COPARMEX lobbied for Mexico to join GATT, implement fiscal and tax reform, and initiate a privatization process. 
Today, COPARMEX is the leader in public educational meetings concerning the role of business in a democratic society, communicating a public policy agenda, and the need for free enterprise. 
As Latin America, the Philippines and others abandon import substitution and adjust to the international market economy, business interests change as well. 
According to Hernan Buchi, an architect of Chile's economic reforms, some of the strongest opposition came from government-owned enterprises and firms engaged in business with the government. 
After Chile embarked upon market reforms, those firms adapted in time. 
The public policy interests of business are not fixed, shifting according to changes in the overall economy, trends in domestic and international markets, and the actions of business leaders. 
Such shifts occurred in India with the economic reform program begun by Rajiv Ghandi and deepened by finance minister, Manmohan Singh. 
Several Indian businesses, especially larger firms, resisted, clinging to benefits protectionist measures introduced under Nehru. 
Some firms - particularly companies interested in world markets and dependent upon imports - called for change. 
Over time, the association of these companies grew and became the Confederation of Indian Industry. 
A vital tool to affect public policy is a national business agenda identifying the highest priority reforms. 
The agenda specifies the needed laws and regulations and offers concrete suggestions for change. 
For example, the Federation of Egyptian Industry is working on a national agenda including: 
1. 
Analyzing policies and forming recommendations; 
2. 
Meeting with members in open forums to discuss alternatives; 
3. 
Publishing in the media to gain input from concerned parties; 
4. 
Formulating policy reform programs; 
5. 
Publicizing the agenda; 
6. 
Advocacy directed at government. 
Elsewhere, the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture (NACCIMA) used its agenda over several years to coordinate economic reform. 
In 1999, this task assumed critical importance due to the country's opening to democracy. 
A legislative advisory program is another tool business can use to influence public policy. 
To shape legislation such programs require: 
* sound economic analysis, and background papers readily available for technocrats and others to study; 
* calls to the country's general interests, as opposed to the interests of particular groups, such as business or labor; 
* broad dissemination, with arrangements made with the media in order to provide even wider coverage. 
In their attempts to affect public policy, business organizations influence government personnel, as well as legislators. 
In India, although economic policy changes have been made, state-level government officials need to be convinced that reforms benefit their communities before they drop entrenched opposition. 
The New Delhi-based PHD Chamber of Commerce has organized 31 business-government dialogues throughout northern India to reach state-level government officials, senior business people and academics. 
The seminars: 
* instill a "can do" rather than "can't do" attitude among officials; 
* eliminate the "anti-profit" mentality; 
* expedite permits and licenses by creating one-stop shops in state offices. 
In postcommunist countries, where business is often deeply divided, influence on public policy has been catalyzed through strategic coalitions. 
Romania's International Center for Entrepreneurial Studies (ICES) found that most business associations were captive to either government-owned enterprises or to firms privatized by the former communist nomenklatura. 
ICES began to work with entrepreneurs and found that several sectoral associations - such as software - and small business associations from outlying areas of Romania were pushing for a market economy. 
However, they were individually weak and unaware of each other's efforts. 
During a training program on management, the associations began to coalesce. 
Today, SABA's members are implementing a detailed legislative advisory program. 
The manner in which business crafts its case can affect the likelihood of success. 
Business must define issues to attract popular attention. 
Job creation and economic growth are two essential lures. 
Other highly visible issues - corporate governance and combating corruption - also attract large followings. 
Indeed, the Asian and Russian economic crises raised corporate governance to the first rank of policy issues. 
Interlocking relations among companies in South Korea, Indonesia and elsewhere, coupled with the lack of standards and requirement for disclosure, were key factors in Asia's crisis. 
The World Bank, International Monetary Fund, international investors, and domestic constituencies are currently demanding change. 
Business organizations in many countries have a unique opportunity to step in and promote reform in order to help reshape the structure of their business environments. 
If they fail to do so, the environment may be reshaped around them in adverse ways. 
Another strategy to advance economic reform is to combat corruption. 
Transparency International, an international nonprofit organization, is mobilizing a broad constituency behind efforts to reform government procurement systems by advocating a code of conduct for government purchases. 
Other groups fight corruption in their own countries. 
For example, the Ecuadorian Association of Businessmen (ANDE) recently launched an anti-corruption program that focused on the root causes of corruption. 
A survey of existing laws and regulations found that many of them were contradictory and overlapping. 
ANDE proposed creation of a new court by amending the constitution. 
It was successful due to strong public support for combating corruption. 
The new court is empowered to reconcile or revoke laws that contain conflicts and duplications. 
Each firm and business association must decide on the best strategies and tactics to pursue in their countries. 
The important thing is for business leaders to get together and respond to these challenges. 

A Crisis of Trust 
LONDON – Public trust in financial institutions, and in the authorities that are supposed to regulate them, was an early casualty of the financial crisis. 
That is hardly surprising, as previously revered firms revealed that they did not fully understand the very instruments they dealt in or the risks they assumed. 
It is difficult not to take some private pleasure in this comeuppance for the Masters of the Universe. 
But, unfortunately, if this loss of trust persists, it could be costly for us all. 
As Ralph Waldo Emerson remarked, “Our distrust is very expensive.” 
The Nobel laureate Kenneth Arrow made the point in economic terms almost 40 years ago: “It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence.” 
Indeed, much economic research has demonstrated a powerful relationship between the level of trust in a community and its aggregate economic performance. 
Without mutual trust, economic activity is severely constrained. 
Even within Europe, there is powerful evidence that countries where mutual trust is higher achieve higher levels of investment, particularly through venture capital investment, and are prepared to use more flexible contracts, which are also beneficial for growth and investment. 
So if it is true that trust in financial institutions – and in the governments that oversee them – has been damaged by the crisis, we should care a lot, and we should be devising responses which seek to rebuild that trust. 
In fact, the evidence for a crisis of trust is rather difficult to interpret. 
In the United Kingdom, recent survey results are ambiguous. 
Surveys promoted by financial firms tend to show that trust in them has not diminished much, and that people continue to trust them even more than they do the National Health Service or the BBC. 
Surveys promoted by the BBC tend to show the reverse. 
Banks quote statistics to show that they are more trusted than supermarkets, whereas supermarkets cite evidence that the opposite is true, and are expanding into financial services in the belief that the public will trust them more than they trust the banks, which have had to be expensively bailed out by the government. 
The market will prove one side right before too long. 
In the United States, there is now a more systematic, independent survey promoted by economists at the University of Chicago Booth School of Business. 
Their financial trust index, based on a large-scale survey of financial decision-makers in American households, did show a sharp fall in trust in late 2008 and early 2009, following the collapse of Lehman Brothers. 
That fall in confidence affected banks, the stock market, and the government and its regulators. 
Furthermore, the survey showed that declining trust was strongly correlated with financial behavior. 
In other words, if your trust in the market and in the way it is regulated fell sharply, you were less likely to deposit money in banks or invest in stocks. 
So falling trust had real economic consequences. 
Fortunately, the latest survey, published in July this year, shows that trust in banks and bankers has begun to recover, and quite sharply. 
This has been positive for the stock market. 
There is also a little more confidence in the government’s response and in financial regulation than there was at the end of last year. 
The latter point, which no doubt reflects the Obama administration’s attempts to reform the dysfunctional system it inherited, is particularly important, as the sharpest declines in investment intentions were among those who had lost confidence in the government’s ability to regulate. 
It would seem that rebuilding confidence in the Federal Reserve and the Securities and Exchange Commission is economically more important than rebuilding trust in Citibank or AIG. 
Continuing disputes in Congress about the precise details of reform could, therefore, have an economic cost if a perception that the system will not be overhauled gains ground. 
All these data are at an aggregate level and reflect average views among voters and investors. 
Yet we also know that individual views are remarkably heterogeneous. 
Some people are very trusting of others, and of the firms and institutions with which they do business. 
Others are congenitally distrustful. 
Researchers at the European University Institute in Florence and UCLA recently demonstrated that there is a relationship between trust and individuals’ income. 
A pan-European opinion survey, which has been carried out for many years, allows us to relate the two. 
It asks simple but powerful questions about how far individuals are inclined to trust those with whom they deal. 
The data show, intriguingly, that those who show levels of trust well below the average for the country they live in are likely to have lower incomes. 
Is that just because low-income people feel that life is unfair and therefore distrust those around them? 
It would seem not, as it is also true that very trusting people also have lower incomes than the average. 
In other words, if you diverge markedly from society’s average level of trust, you are likely to lose out, either because you are so distrustful of others that you miss out on opportunities for investment and mutually beneficial exchange, or because you are so trusting that you leave yourself open to being cheated and abused. 
When anyone I don’t know says “trust me” – an irritating conversational tic – I usually close my wallet. 
Perhaps most academics, who are at the lower end of the skill and qualification-adjusted income scale, do the same. 
Maybe we should trust each other more – but not too much. 

A Crisis of Understanding 
NEW HAVEN – Few economists predicted the current economic crisis, and there is little agreement among them about its ultimate causes. 
So, not surprisingly, economists are not in a good position to forecast how quickly it will end, either. 
Of course, we all know the proximate causes of an economic crisis: people are not spending, because their incomes have fallen, their jobs are insecure, or both. 
But we can take it a step further back: people’s income is lower and their jobs are insecure because they were not spending a short time ago – and so on, backwards in time, in a repeating feedback loop. 
It is a vicious circle, but where and why did it start? 
Why did it worsen? 
What will reverse it? 
It is to these questions that economists have been unable to offer clear answers. 
The state of economic knowledge was just as bad in the Great Depression that followed the 1929 stock market crash. 
Economists did not predict that event, either. 
In the 1920’s, some warned about an overpriced stock market, but they did not predict a decade-long depression affecting the entire economy. 
Late in the Great Depression, in August 1938, an article by Ralph M. Blagden in The Christian Science Monitor reported an informal set of interviews with US “professors, banking experts, union leaders, and representatives of business associations and political factions,” all of whom were given the same question: “What causes recessions?” 
The multiplicity of answers seemed bewildering, and did not inspire confidence that anyone knew what was causing the deepest crisis of capitalism. 
The causes given were “distributed widely among government, labor, industry, international politics and policies.” 
They included misguided government interference with markets, high income and capital gains taxes, mistaken monetary policy, pressures towards high wages, monopoly, overstocked inventories, uncertainty caused by the reorganization plan for the Supreme Court, rearmament in Europe and fear of war, government encouragement of labor disputes, a savings glut because of population shrinkage, the passing of the frontier, and easy credit before the depression. 
Although economic theory today is much improved, if we ask people about the cause of the current crisis, we will mostly get the same answers. 
We would certainly hear some new ones, too: unprecedented real-estate bubbles, a global savings glut, international trade imbalances, exotic financial contracts, sub-prime mortgages, unregulated over-the-counter markets, rating agencies’ errors, compromised real-estate appraisals, and complacency about counterparty risk. 
More likely than not, many or most of these people would be mostly or partly right, for the economic crisis was caused by a confluence of many factors, the chance co-occurrence of a lot of bad things, which pushed the financial system beyond its breaking point. 
At that point, the trouble grabbed widespread attention, destroyed public confidence, and set in motion a negative feedback loop. 
Our attention, after all, is naturally drawn to the worst events. 
Precisely because the worst events are statistical outliers, their causes are probably multiple. 
Consider the question of predicting events like the January 2010 earthquake in Haiti, which killed more than 200,000 people. 
It captured our attention because it was so bad in terms of lives and property damage. 
But if one went beyond trying to predict the occurrence of earthquakes to predicting the extent of the damage, one could surely devise a long list of contributing factors – including even political, financial, and insurance factors – that resembles the list of factors that caused the global economic crisis. 
Indeed, the crisis knows no end to the list of its causes. 
For, in a complicated economic system that feeds back on itself in many ways, events that start a vicious cycle might be as seemingly trivial as the proverbial butterfly in the Amazon, which, by flapping its wings, sets off a chain of events that eventually results in a far-away hurricane. 
Chaos theory in mathematics explains such dependency on remote and seemingly trivial initial conditions, and explains why even the extrapolation of apparently precise planetary motion becomes impossible when taken far enough into the future. 
Weather forecasters cannot forecast far into the future, either, but at least they have precise mathematical models. 
Massive parallel computers are programmed to yield numerical solutions of differential equations derived from the theory of fluid dynamics and thermodynamics. 
Scientists appear to know the mechanism that generates weather, even if it is inherently difficult to extrapolate very far. 
The problem for macroeconomics is that the types of causes mentioned for the current crisis are difficult to systematize. 
The mathematical models that macroeconomists have may resemble weather models in some respects, but their structural integrity is not guaranteed by anything like a solid, immutable theory. 
The most important new book about the origins of the economic crisis, Carmen Reinhart’s and Kenneth Rogoff’s This Time Is Different, is essentially a summary of lessons learned from virtually every financial crisis in every country in recorded history. 
But the book is almost entirely non-theoretical. 
It merely documents recurrent patterns. 
Unfortunately, in 800 years of financial history, there is only one example of a really massive worldwide contraction, namely the Great Depression of the 1930’s. 
So it is hard to know exactly what to expect in the current contraction based on the Reinhart-Rogoff analysis. 

A Cure for Fiscal Failure? 
CAMBRIDGE – Should more countries create independent fiscal advisory councils to infuse greater objectivity into national budget debates? 
Jailed swindler Bernie Madoff recently summed up a lot of people’s feelings about fiscal policy, declaring that “the whole government is a Ponzi scheme.” 
Perhaps this was just wishful thinking from a man who will die in prison after his own record-breaking $50 billion pyramid scheme collapsed in 2008. 
Personally, I suspect Madoff’s unenviable place in the record books will be secure for quite a while. 
Still, with many of the world’s largest governments facing a lethal combination of unsustainable conventional debt, unprecedented old-age pension obligations, and a downshift in growth, one has to wonder what the fiscal plan is. 
In a new paper, “A Decade of Debt,” Carmen M. Reinhart and I show that general government debt in the United States, including federal, state, and local debt, has now surpassed the record 120% of GDP reached at the end of World War II. 
Japan, of course, is in even worse shape, with government debt totaling more than 200% of GDP. 
Though this is partially offset by foreign-exchange reserves, Japan now faces massive disaster-relief costs – and this on top of its depressing demographic trends. 
Many other rich countries’ debt levels are also uncomfortably close to 150-year highs, despite relative peace in much of the world. 
There is a no easy way out. 
For now, low world interest rates are restraining debt-service costs, but debt levels can be reduced only very gradually over long periods, whereas real (inflation-adjusted) interest rates can rise far more quickly, even for rich countries. 
Debt crises tend to come out of the blue, hitting countries whose debt trajectories simply have no room for error or unplanned adversity. 
The single most immediate and direct impact of having an independent fiscal policy would be to reign in spending by producing a counterpoint to Panglossian government growth and revenue forecasts. 
In principle, an independent and respected advisory council could also force governments to acknowledge the hidden costs of government guarantees and off-balance sheet debts. 
It is high time to consider novel approaches. 
Of course, no one simple change will eliminate the huge bias towards deficit spending in most modern political systems. 
And no one simple change will preclude the risk of future debt and inflation crises. 
Many countries require sweeping reforms to make their tax systems more efficient and their entitlement programs – including their pension schemes – more realistic. 
The recent advent of fiscal advisory councils is a promising institutional start. 
A number of countries, including Denmark, the Netherlands, the US, and Belgium, have long-standing fiscal watchdog agencies, such as the US Congressional Budget Office (CBO). 
But, while these older institutions have proven enormously useful, they are typically quite constrained. 
The CBO, for example, is free to issue long-term fiscal projections based on its own best estimates of growth, but is largely forced to accept politically implausible future “fixes” at face value, somewhat neutralizing the potential effectiveness of any critique of deficit policies. 
To enhance credibility, a number of governments are gingerly moving towards creating fiscal councils with greater independence, often with central banks as a role model. 
The new vanguard includes councils in Sweden, the United Kingdom, Slovenia, and Canada. 
The remit of Sweden’s fiscal council is particularly broad, giving it a mandate not only to forecast, but also to look more deeply at the motivations and consequences of government policy. 
In principle, an independent fiscal council could have provided invaluable help during the financial crisis. 
In the US, such an agency could have weighed in on the costs and benefits of bailout plans, perhaps helping to end congressional paralysis and steeling nerves to give taxpayers more upside risk. 
It is too much to expect that these new fiscal institutions will become as important or powerful as central banks, at least anytime soon. 
There is far more consensus over monetary policy than over fiscal policy. 
And fiscal policy is far more complex and multi-dimensional. 
Still, the general principle seems like an important step towards fiscal sanity. 
Of course, fiscal councils by themselves are not enough, no matter how well designed they are. 
It will remain very tempting for each generation to say, “My grandchildren will be two or three times richer than I, so who cares if they have to pay some debt?” 
Moreover, the political cycle creates a very strong deficit bias, as leaders seek to embellish feelings of economic health and prosperity by raising visible expenditures at the cost of hidden debts and lower long-term investment. 
To resist these powerful pressures, fiscal councils will need to have their work audited periodically by international agencies such as the International Monetary Fund, both to protect their independence and to promote accountability. 
To be sure, Bernie Madoff may yet be proved right, and his will not turn out to be the biggest Ponzi scheme ever. 
But greater transparency and a more systematic independent evaluation of government policies could be a very helpful step towards solving the perpetual conundrum of outsized deficits. 
It is certainly one of the more innovative and promising ideas to emerge from a rather barren policy landscape. 

A Customs Union for the Balkans 
The fall of Milosevic does not cure the political woes of the Balkans; indeed, it raises their urgency. 
Yugoslavia has disintegrated, but the disintegration is incomplete. 
It was in Yugoslavia that Vojislav Kostunica was elected president, but his mandate comes solely from support in Serbia. 
Montenegro, Serbia’s junior partner in the Yugoslav federation, mostly boycotted the election while Albanians in Kosovo ignored them. 
Yet it was Yugoslavia, whose foundations are unstable, that was recently admitted to the UN. 
A host of problems remain unresolved: relations between Serbia and Montenegro and the status of Kosovo (not to mention Serbia’s northern province of Vojvodina). 
Any resolution – any suggestion of change – will engender new conflicts because of conflicting claims of sovereignty. 
However tempting it may be to solve the puzzle by drawing new borders or establishing new entities, this conundrum cannot be resolved in terms of sovereignty. 
That traditional solution would only perpetuate the problems of the Balkans. 
A new approach is needed: the European Union should use the prospect of European integration as the way to promote regional integration. 
The EU could act as a magnet to bring the region closer together by bringing the region as a whole closer to Europe. 
This idea has great appeal to people in the region, but only the EU can make it happen. 
After NATO intervention in Kosovo, European leaders made this approach the cornerstone of their vision for the Balkans. 
It was enshrined in the Stability Pact signed at the Sarajevo Summit of July, 1999. 
But the Stability Pact is merely a shell – it needs to be filled with content. 
The time to do so is at the Zagreb Conference on November 24 called by France as the current EU president. 
The European Union should now propose a three-point plan for the Balkans: 
$ a customs union with preferential access to EU markets within one year. 
The existing EU-Turkey customs union should be used as a model. 
Once all these countries reach agreement with the EU there would automatically be free trade throughout the Balkans. 
This will take some time to implement. 
But from the start, the EU should give a signal by unilaterally opening its border to imports from the region. 
This cannot endanger any EU interests as the countries at issue now have far less than 1% of the EU market. 
$ a regional VAT to replace the lost customs revenues should be established within two years. 
Differences in indirect taxes such as VAT pose another way in which borders become obstacles to trade. 
They should be unified throughout the region. Regional VAT rates might be increased slightly if expenditure restraint is not sufficient to offset the loss of tariff revenues due to the customs union. 
$ Temporary budgetary support on a declining scale for three years, subject to EU supervision over budgetary expenditures. 
Because it will take time to collect revenues from the regional VAT, the EU should provide financial help during the transition. 
The area covered by this plan would include Bulgaria, Croatia and Albania as well as Serbia, Bosnia, Macedonia, Montenegro and Kosovo. 
Participation by Romania and Moldova is optional. 
Bulgaria and Croatia could be persuaded to participate provided it would not interfere with their candidacy for EU membership. 
Depending on the country, there could be more or less budgetary support. 
(Bulgaria, for example, might not need compensation since to a great extent it has already eliminated tariffs). 
In comparison to the cost of military intervention and peacekeeping, the financial costs here are ridiculously low. 
I estimate that Euro 750 million in the first year, Euro 500 million in the second year and Euro 250 million in the third year would do the trick. 
(If Romania and Moldova were included the figures would be slightly higher). 
These figures are well within range of pledges already made by the EU for the Stability Pact and they could be easily accommodated within the confines of the Berlin Accord on the EU budget for 2000-2005 if EU member states agree to a reallocation of unspent funds. 
Budgetary support in the context of a Customs Union would be a more effective way to disburse EU funds than conventional methods. 
This three-point program would lay the ground for economic resurgence. 
It would remove two major sources of corruption and inefficiency: the customs service and the misuse of public funds in general. 
It would create a trade area large enough to generate both local and foreign investment. 
The Deutsche Mark, already widely used in the region, now functions as the de facto common currency. Any ban on its use should be lifted to make borders irrelevant for trade and investment. 
Improved economic prospects and the strengthening of institutions, in turn, would have a positive impact on the political climate throughout the Balkans. 
Serbia has climbed part of the way out of the abyss. 
Success in peacefully removing a tyrant has set in motion a process of national renewal. 
But that process has a long way to go. 
The opposition inherited a bankrupt country whose institutions are in ruins. 
The population, frustrated by ever deepening impoverishment and isolation, is beginning to question what happened over the past decade in Serbia. 
People are asking about crimes committed by the Milosevic regime against Serbs. 
They must begin to come to terms with the crimes committed against others - in Croatia, Bosnia and Kosovo. 
Once that process is underway, many problems that now seem intractable will be resolved more easily. 
Kostunica’s election as President of Yugoslavia amounts to an incomplete revolution: many of the old guard are still in place. 
The momentum created by Milosevic’s overthrow needs to be maintained. 
Milosevic was overthrown in the hope of ending Serbia’s isolation. 
Europe must now fulfill its promise. 
If the French Presidency fails to seize the moment in Zagreb, an historic opportunity will be lost. 

A Czech Moment 
PRAGUE – As I listened to what some Europeans were saying as my country prepared to take over the presidency of the European Union, I heard dim echoes of Neville Chamberlain’s infamous description of Czechoslovakia as “a faraway country of which we know little.” 
I suppose that Donald Rumsfeld’s misguided bid a few years ago to incite a divide between “new and old” Europe contributed to the re-emergence of that disdainful attitude. 
The reality is that there is no such thing as “old and new” Europe, and there never was. 
The break with communism and reunification of Europe is now almost two decades old. 
We Czechs are 100% European, and were even when the Iron Curtain cut us off from democratic Europe. 
Indeed, our pro-EU sentiments may be all the stronger because our membership in the Union, like our freedom, is so comparatively new. 
So no one in Europe needs to fear that the Czech Republic has some nostalgic or idiosyncratic agenda that it wants to impose on the Union. 
On the contrary, events have imposed an agenda on Europe that we cannot escape and for which solidarity – true union – will be needed. 
The primary, and most pressing, of the problems we face is the financial and economic crisis that is enveloping the EU. 
Unfortunately, conditions across the Union will likely worsen before they begin to improve. 
The type of social unrest recently witnessed in Greece may spread, because the downturn is likely to take a disproportionate toll on Europe’s young people, who are seeking jobs at a time when hard-pressed European businesses will be able to offer them very few. 
It will fall to the Union, once again, to help transform despair into hope. 
We Czechs know something about this, as the wrenching economic transition that we underwent in the 1990’s taught us much about how the right policies can break the grip of hopelessness. 
To contain today’s financial and economic crisis, Europe will also need to continue the cooperation that it has shown up to this point. 
The very existence of our Union, and particularly of the euro, has already helped to prevent the competitive devaluations and beggar-thy-neighbor policies that ravaged Europe during the 1930’s – the last time the continent faced so brutal an economic downturn. 
But we cannot be complacent that the forces of national egoism will remain in check. 
For now, EU governments’ coordinated fiscal stimulus has deprived populists of their usual charge that the EU is indifferent to the fate of individuals. 
Even more policy coordination will be needed both to confront the crisis and to re-establish EU norms once the storm clouds begin to dissipate. 
Although it is right that the Stability and Growth Pact has become more flexible in these extraordinary times, its rules did secure a successful first decade for the euro. 
These rules must eventually be restored intact if Europe is to return to the path of sustainable growth, and a consensus will need to be forged now to make that happen. 
The second key challenge that we will face during our European presidency is that of Russia. 
A new Partnership and Cooperation Agreement (PCA) between the EU and the Russian Federation must be negotiated. 
Those negotiations should have begun seriously last year, but the war in Georgia intervened to put them on hold. 
Now those talks have resumed, but the background to the negotiations has changed dramatically. 
Russia’s economy is now in far worse shape than that of EU members. 
The collapse of world oil and gas prices has wounded Russia’s budget, and lack of investment in the country’s energy sector over the years is now causing the declining production that economists have long predicted. 
Until now, Russia has cared less about a new PCA than the EU, because two-thirds of Russia’s exports to the Union comprise natural resources, which bring in cash even without the strong rules that a PCA provides. 
Given the stark changes in economic conditions, however, it is now in Russia’s national interest to reassure international markets that it is a reliable place to do business, for which a new PCA would serve as an ideal signal. 
Moreover, without a new PCA, individual European countries may feel it necessary to seek even more bilateral agreements with Russia. 
Indeed, many EU members have been in a race with each other to see who will be Russia’s closest friend in the Union. 
But the bilateral deals that have emerged from this race sometimes come at the expense of other Union members, and may unbalance relations within the Union as a whole. 
Only a rules-based EU framework can provide a firm foundation for both bilateral and Union-wide relations with Russia. 
Europe’s main strength in foreign policy is not its commitment to a rules-based multilateralism, important as that undoubtedly is, but its unity. 
When the Georgia crisis erupted, Europe united around a single position on Russia’s withdrawal. 
It is the Czech Republic’s task, and that of the Swedish EU presidency that will follow our own, to maintain this unity as the PCA negotiations move forward. 
During the 1990’s, the US and Europe erred in treating Russia with benign neglect. 

A Daughter of Dictatorship and Democracy 
SEOUL – It is something of a cliché question in South Korea nowadays: Who would be the country’s next president if the election were held tomorrow, rather than in December 2012? 
Numerous opinion polls show Park Geun-hye of the ruling Grand National Party (GNP) to be the leading candidate. 
If elected, she would be South Korea’s first woman president, and, for her rivals, her dominant position in the race is an uncomfortable but unassailable fact. 
South Korean voters of all ages and regions have welcomed Park as a candidate for their country’s leadership. 
Her political style is both refreshing and relevant, because she comes across as sincere and forthright at a time when the public is hungry for moral leadership. 
And she has an astonishing talent for simplifying complicated issues accurately, which she likely learned – along with how to interpret and manipulate the political connotations of every issue – from her father, former President Park Chung-hee. 
Acclaimed as a national hero among radical right-wingers, the iron-fisted Park Chung-hee ruled South Korea from 1963 to 1979, in the wake of the 1961 military coup, only to be assassinated by his intelligence chief. 
His daughter is proud of his legacy, which marked the beginning of South Korea’s economic boom. 
Indeed, as a pillar of export-oriented modernity, Park Chung-hee was once lionized as the archetype of a modernizing political leadership in military-authoritarian states. 
At home, he still ranks first in popularity among the country’s heads of state, kindling nostalgia like a popular old record – a corollary to people’s frustration and anger at the current government of President Lee Myung-bak. 
Park, who lost her first bid for the GNP’s nomination to Lee in 2007, needs to ensure that no rupture with her erstwhile rival knocks her off the path to victory in 2012. 
An astute politician, Park did not hesitate to campaign wholeheartedly for Lee the last time around – a move that, as part of long-term political strategy, made perfect sense. 
To many South Koreans, the election is now Park’s to lose. 
No candidate on the horizon seems able to stop her. 
If she wins, it will be the result of her seriousness and tenacity, not her political heritage. 
No one in South Korea’s conservative movement doubts that Park is one of them. And, as an icon of the right, she is well aware that she cannot afford to betray her status. 
Despite her charisma, Park is neither a Sarah Palin nor an Eva Peron. 
Indeed, she looks more like a Korean Margaret Thatcher – a lady not for turning, in Thatcher’s famous phrase, and with clearly thought-through political principles animating her actions. 
In any case, she seems destined to establish a new South Korea focusing on her landmark pledge ‘jul pu se,’ literally meaning ‘reduce-loosen-strengthen tax-cuts,’ deregulation, and law and order, not just to add another chapter to her father’s old book. 
Her administration would mark a fresh departure from the country’s troubled recent past. 
Left-leaning pundits claim that the dictator’s daughter has the same autocratic vision as her father, though Park invariably prefers incremental change to radical measures, and cut her political teeth in the tough-minded politics of the GNP. 
Others take a flagrantly sexist stance, arguing that a woman president would be a non-starter as long as the North Korean regime continues to threaten national security. 
Although these criticisms don’t seem to bother the electorate very much, Park’s path to victory may yet prove narrower than her supporters expect. 
She has been called the “Queen of Elections,” in particular since she won a campaign in 2006 after being slashed with a box cutter by a deranged man. 
But she must convincingly outline practical strategies to resolve South Korea’s most serious problems, including high unemployment, worsening educational performance, and North Korea’s nuclear weapons program. 
Ms. Park once pledged to provide loans for working-class families from elementary school to college years, while contending that local universities should be empowered to have more autonomy. 
She favors engagement policy and the six-party talks so as to resolve the nuclear troubles. 
Come presidential election-day in 2012, South Korean voters will pick the candidate who embodies pragmatism and centrism over a partisan or ideologue. 
Park’s success will depend, in the end, on the effectiveness of her campaign in further defining her character along those lines. 
Unlike former Peruvian dictator Alberto Fujimori’s daughter, who lost her presidential bid in Peru last month, Park is likely to defy her family’s tragic history. 
If she does, she will be Asia’s most powerful woman, perhaps the most powerful in the world, at the end of next year. 

A Day for Planetary Justice 
PRINCETON – What we are doing to our planet, to our children and grandchildren, and to the poor, by our heedless production of greenhouse gases, is one of the great moral wrongs of our age. 
On October 24, you can stand up against this injustice. 
October 24 is 350 Day. 
The name comes from the number of parts per million of carbon dioxide in the atmosphere that, according to Jim Hansen, perhaps the world’s leading climate scientist, we should not exceed if we are to avoid potentially catastrophic climate change. 
It is a measure of the seriousness of our problem that CO2 is already at 386 ppm, and is rising by two ppm each year. 
The need to cut greenhouse gases has become increasingly clear as predictions of global warming – denounced as “alarmist” when they were first made just a few years ago – have repeatedly turned out to have been too conservative. 
We are approaching a point of no return, at which feedback loops will kick in and continue to warm the planet, no matter what we do. 
The melting of arctic ice is one example. 
Four hundred years ago, explorers sought the legendary “Northeast Passage” across the north of Europe and Russia to China. 
They found the arctic ice impenetrable, and soon gave up their quest. 
This year, commercial vessels successfully navigated the Northeast Passage. 
That is one of many recent dramatic signs that our climate is changing and that our planet is warmer than it has been for a very long time. 
But ice-free arctic waters are more than a symptom of global warming. 
They are themselves a cause of further warming: ice and snow reflect the sun’s rays. 
An ice-free surface absorbs more warmth from the sun than one covered in snow or ice. 
In other words, our greenhouse gas emissions have, by causing enough warming to melt the arctic ice, created a feedback loop that will generate more warming, and melt more ice, even if we were to stop emitting all greenhouse gases tomorrow. 
Other feedback loops pose a similar danger. 
In Siberia, vast quantities of methane, an extremely potent greenhouse gas, are locked up in what used to be called “permafrost” – regions in which it was assumed that the ground was permanently frozen. 
But areas that used to be frozen are now thawing, releasing methane and thus contributing to further warming – and to further thawing, which releases more methane. 
Developing nations are grasping just how outrageous the current distribution of greenhouse-gas emissions really is. 
At the United Nations Summit on Climate Change in September, President Paul Kagame of Rwanda pointed out that, while developed nations outside Africa are almost entirely responsible for the problem, its greatest impact will probably be on Africa, which has few resources to cope with the challenge. 
Kagame then suggested giving every country an annual per capita quota for CO2 emissions, and allowing developing countries that are below the quota to trade their excess quota with countries that are above theirs. 
The money that developing countries would receive for this would not be aid, but rather a recognition that the rich nations must pay for something that in the past they simply appropriated: far more than their fair share of our atmosphere’s capacity to absorb our waste gases. 
Sri Lanka took a similar stance, using studies from the UN Intergovernmental Panel on Climate Change to calculate that in 2008, environmentally permissible carbon emissions totaled no more than 2,172 kilograms per person. 
In fact, the world’s per capita emissions were 4,700 kilograms, or more than double the permissible limit. 
But, while emissions in the rich nations were far above the permissible limit, Sri Lankan emissions were, at 660 kilograms, well below it. 
As Sri Lanka’s government pointed out, “That means low-emitting countries like us could not emit more because our space has already been exploited by developed or global heavy polluting countries without our consent.” 
This situation is an injustice of vast proportions, reminiscent of – and arguably much worse than – the now-repudiated colonialism of the Western powers in the nineteenth century. 
The task of remedying it must begin at the meeting on climate change that will be held in Copenhagen in December. 
Many political leaders have expressed support for strong action on climate change, but what most of them regard as “strong action” will not be enough to get us back below 350 ppm. 
In some countries, including the United States, there are major political obstacles to taking even modest steps. 
On October 24, people in nearly every country will be taking action to raise awareness of the need for an international treaty to bring our atmosphere back to 350 ppm of CO2. 
There will be climbers hanging banners high in the Himalayas, where the glaciers are melting, and scuba divers at Australia’s Great Barrier Reef, which is threatened by climate change. 
Churches will ring bells 350 times, 350 cyclists will circle towns, and, in many places, 350 trees will be planted. 
At www.350.org you can find out what is happening near you and join in, or put your own idea online. 
But don’t just sit back and hope that others will do enough to make an impact. 

A Day of Liberation 
When I was seven years old, in 1960, my grandmother Angelica opened my eyes to the meaning of 8 May 1945, the day when Nazi Germany surrendered and World War II ended in Europe. 
We were spending our summer holidays in Normandy where the liberation of Europe from Nazism had started on D-Day, 6 June 1944. 
One evening, I listened to my parents and my grandmother talking about the past. 
I have forgotten the details of their conversation, but I can still hear my grandmother’s sigh of relief when she said “Thank God we lost that war!” 
From a child’s perspective, it wasn’t self-evident that losing was a good thing. 
But of course, my grandmother was right to equate defeat with liberation. 
The more I have thought about the lesson she taught me 45 years ago, the clearer I have seen another, less obvious dimension in what she said: It is “we” who lost the war. 
Collectively, the Germans had not been the innocent victims of a small gang of criminal outsiders called “Nazis” – Nazism had been an inside ideology supported by millions of Germans, and every German was liable for its atrocities whether or not he or she had adhered to it individually. 
In today’s Germany, an overwhelming majority subscribes to the proposition that 8 May 1945 was a day of liberation – not only for Europe, but also for Germany itself. 
Compared to public opinion in 1960, that’s certainly an enormous progress. 
But paradoxically, it may also contain an element of forgetfulness, because it tends to conceal the fact that liberation required a military defeat. 
To use my grandmother’s parlance, it is not “us” who were the liberators, but “them”. 
The way people see the past tells us more about their present attitudes than about the past itself. 
This is what the term “politics of memory” is meant to indicate. 
And this is why it doesn’t matter whether the relevant events happened 60 years ago (as World War II), 90 years (as in the case of the Armenian genocide) or even 600 years (such as the battle of Kosovo in 1389). 
A violent conflict in the past may survive as a war of memories in the present, as can be observed in the current dispute between China and South Korea on one side, and Japan on the other. 
A war of memories, in turn, may sometimes lead to a violent conflict in the future. 
Former perpetrators often try to de-legitimize their former victims’ moral superiority by claiming they were victims themselves. 
Therefore, the 60th anniversary of the firebombing of Dresden by Allied forces on 13 February 1945 has probably been a more crucial moment in terms of the German “politics of memory” than the 60th anniversary of 8 May 1945 is going to be. 
Far-right groups infamously dubbed the attack by which at least 30,000 people were killed “Dresden’s Holocaust of bombs.” 
Fortunately, their propaganda campaign has been a failure. 
Although it is true that thousands of the civilians killed in Dresden and other German cities were innocent at an individual level, there can be no doubt it was morally imperative that Germany be defeated collectively. 
On the left side of the German political spectrum, the proposition that 8 May 1945 was a day of liberation remains unchallenged. 
However, it is sometimes repressed that the massive use of force had been necessary to achieve that result. 
Left-wing pacifism tends to overlook this simple fact. 
Its slogan “Never again war!” is only half the truth – the other half is “Never again appeasement!” 8 May 1945 was not “zero hour,” as a popular saying in Germany goes. 
It had an antecedent, that is, a lack of pre-emptive resistance at home and abroad to the threat that built up in Nazi Germany during the 1930’s. 
There is yet another lesson to be learned. 
Yes, 8 May 1945 was a day of liberation to which the Soviet army contributed decisively. 
But for millions of Central and East Europeans, liberation was followed by Stalin’s oppressive regime. 
The current war of memories between the Baltic republics and Russia, with regard to the international celebration in Moscow on 9 May this year, reminds Germany of a special historic responsibility. 
The German-Soviet non-aggression treaty, the so-called Hitler-Stalin pact, concluded in August 1939, had been supplemented by a secret appendix dividing the border states Finland, Estonia, Latvia, Lithuania, Poland and Romania into spheres of interest for the two parties. 
But excusing Nazi atrocities by pointing to Stalinist crimes is an intellectually and morally unacceptable stratagem. 
When Chancellor Schröder travels to Moscow for the Red Square celebrations, he should bear in mind Nazi Germany’s contribution to the Baltic tragedy. 
On 8 May this year, public speakers will remind us how important it is not to forget. 
They will stress that if the lessons of history are not learned, history is bound to repeat itself. 
All this is perfectly true. 
But personally, I will also remember my grandmother’s sentence “Thank God we lost that war!” 
Thank God – and thanks to all those brave Allied soldiers who sacrificed their lives for the sake of Europe’s liberty. 

A De-Globalized World? 
Cambridge – It may take a few months or a couple of years, but one way or another the United States and other advanced economies will eventually recover from today’s crisis. 
The world economy, however, is unlikely to look the same. 
Even with the worst of the crisis over, we are likely to find ourselves in a somewhat de-globalized world, one in which international trade grows at a slower pace, there is less external finance, and rich countries’ appetite for running large current-account deficits is significantly diminished. 
Will this spell doom for developing countries? 
Not necesarily. 
Growth in the developing world tends to come in three distinct variants. 
First comes growth driven by foreign borrowing. 
Second is growth as a by-product of commodity booms. 
Third is growth led by economic restructuring and diversification into new products. 
The first two models are at greater risk than the third. 
But we should not lose sleep over them, because they are flawed and ultimately unsustainable. 
What should be of greater concern is the potential plight of countries in the last group. 
These countries will need to undertake major changes in their policies to adjust to today’s new realities. 
The first two growth models invariably come to a bad end. 
Foreign borrowing can enable consumers and governments to live beyond their means for a while, but reliance on foreign capital is an unwise strategy. 
The problem is not only that foreign capital flows can easily reverse direction, but also that they produce the wrong kind of growth, based on overvalued currencies and investments in non-traded goods and services, such as housing and construction. 
Growth driven by high commodity prices is also susceptible to busts, for similar reasons. 
Commodity prices tend to move in cycles. 
When they are high, they are apt to crowd out investments in manufactures and other, non-traditional tradables. 
Moreover, commodity booms frequently produce ugly politics in countries with weak institutions, leading to costly struggles for resource rents, which are rarely invested wisely. 
So it is no surprise that the countries that have produced steady, long-term growth during the last six decades are those that relied on a different strategy: promoting diversification into manufactured and other “modern” goods. 
By capturing a growing share of world markets for manufactures and other non-primary products, these countries increased their domestic employment opportunities in high-productivity activities. 
Their governments pursued not just good “fundamentals” (e.g., macroeconomic stability and an outward orientation), but also what might be called “productivist” policies: undervalued currencies, industrial policies, and financial controls. 
China exemplified this approach. 
Its growth was fueled by an extraordinarily rapid structural transformation towards an increasingly sophisticated set of industrial goods. 
In recent years, China also got hooked on a large trade surplus vis-à-vis the US – the counterpart of its undervalued currency. 
But it wasn’t just China. 
Countries that had been growing rapidly in the run-up to the great crash of 2008 typically had trade surpluses (or very small deficits). 
These countries did not want to be recipients of capital inflows, because they realized that this would wreak havoc with their need to maintain competitive currencies. 
It is now part of conventional wisdom that large external balances – typified by the bilateral US-China trade relationship – played a major contributing role in the great crash. 
Global macroeconomic stability requires that we avoid such large current-account imbalances in the future. 
But a return to high growth in developing countries requires that they resume their push into tradable goods and services. 
In the past, this push was accommodated by the willingness of the US and a few other developed nations to run large trade deficits. 
This is no longer a feasible strategy for large or middle-income developing countries. 
So, are the requirements of global macroeconomic stability and of growth for developing countries at odds with each other? 
Will developing countries’ need to generate large increases in the supply of industrial products inevitably clash with the world’s intolerance of trade imbalances? 
There is in fact no inherent conflict, once we understand that what matters for growth in developing countries is not the size of their trade surpluses, nor even the volume of their exports. 
What matters is their output of modern industrial goods (and services), which can expand without limit as long as domestic demand expands simultaneously. 
Maintaining an undervalued currency has the upside that it subsidizes the production of such goods; but it also has the downside that it taxes domestic consumption – which is why it generates a trade surplus. 
By encouraging industrial production directly, it is possible to have the upside without the downside. 
There are many ways that this can be done, including reducing the cost of domestic inputs and services through targeted investments in infrastructure. 
Explicit industrial policies can be an even more potent instrument. 
The key point is that developing countries that are concerned about the competitiveness of their modern sectors can afford to allow their currencies to appreciate (in real terms) as long as they have access to alternative policies that promote industrial activities more directly. 
So the good news is that developing countries can continue to grow rapidly even if world trade slows in and there is reduced appetite for capital flows and trade imbalances. 
Their growth potential need not be severely affected as long as the implications of this new world for domestic and international policies are understood. 
One such implication is that developing countries will have to substitute real industrial policies for those that operate through the exchange rate. 
Another is that external policy actors (for example, the World Trade Organization) will have to be more tolerant of these policies as long as the effects on trade balances are neutralized through appropriate adjustments in the real exchange rate. 

A Decade of Hugo Chávez 
SAN JOSE – We should have known that something was amiss when, during President Hugo Chávez’s inauguration on February 2, 1999, he swore on Venezuela’s 40-year-old Constitution by declaring it “moribund.” 
Under “the moribund,” as the Constitution came to be known, Venezuela not only had eight peaceful presidential transitions, but also enjoyed the fruits of democratic pluralism and strong civil and political liberties. 
Of course, during this period Venezuela produced as much corruption and political irresponsibility as it did barrels of oil. 
Nonetheless, Venezuela fared far better than the average Latin American country. 
It wasn’t Switzerland, but, by anyone’s measure, it was a genuine democracy. 
Not anymore. 
Elections are still held, but the legacy of Chávez’s decade in power consists, first and foremost, in the demolition of democratic institutions. 
Elected in a landslide to clean up the political vices of the previous establishment, Chávez chose to throw the baby out with the bathwater. 
The previous regime, including its system of checks and balances and its tradition of political tolerance, did disappear, but its vices – particularly graft and demagoguery – became worse than ever. 
Pretty much like 10 years ago, Venezuela, once a destination for immigrants from around the world, remains under-developed. 
More fundamentally, Chávez represents ideas that have long stifled Latin America’s political and economic growth. 
This includes the notion that social justice can be achieved only by abandoning the path of reform and rejecting “bourgeois” democratic forms in favor of “real” democracy, born of revolutionary purity and the leader’s millenarian dreams. 
That’s simply false. 
Though the Chávez revolution has made progress against poverty and inequality, it is hardly sustainable and reeks of patronage. 
In fact, one can find similar achievements in Chile and Brazil, which have not given up on democratic checks and balances, political pluralism, or freedom of the press, and have not enjoyed the luxury of $300 billion in oil revenue in the space of one decade. 
Moreover, it ought not to be forgotten that between 1950 and 1980, Venezuela itself reduced extreme poverty from 43% to 8% of the population, one of the lowest figures in Latin America. 
It did so with democracy and freedom. 
Chávez also repeats, ad nauseam, the idea that others are to blame for Latin America’s ills. 
This is the pernicious victimization narrative – still very popular in universities across Latin America – the late Venezuelan journalist Carlos Rangel eloquently refuted in books such as The Third World Ideology. 
It is obvious that Yankee imperialism cannot be blamed for Venezuela’s emaciated tax system, dismally bad schools, rampant corruption, high crime rate, and feeble political institutions. 
In all of these areas, Venezuela is faring poorly even by Latin America’s low standards. 
This is particularly true in the case of institutional weakness. 
When Chávez declares “moribund” a legitimate constitution, or when he proclaims l’état c’est moi by declaring a national holiday to commemorate his 10 years in power, we see eloquent examples of a homemade institutional farce that would doom any country to the ninth circle of misery. 
None of these ideas would fly, of course, in a contented nation. 
In this sense, Venezuela’s experience speaks to all of Latin America. 
The combination of economic growth (now in reverse because of the global crisis) and atrocious levels of inequality and social segmentation will continue to breed the same unmet expectations and social resentment that cleared Chávez’s path to power. 
As long as Latin America’s democracies fail to take seriously the tasks of reducing inequality, spreading opportunity, and nurturing more cohesive societies, they will continue to court disaster. 
To avoid this outcome, it is vital to purge certain reactionary and numbing beliefs, including the idea that reducing poverty obviates the need to address inequality, or that development is possible without introducing modern and progressive tax systems. 
If the tenth anniversary of Chávez’s tenure can serve as a reminder of the perils that beset unjust democracies – especially now that a new electoral cycle in Latin America looms – then Venezuela’s agonizing recent history would, at least, be redeemed. 

A Declaration of Independence from the US 
George W. Bush is obsessed with the war on terrorism, especially with the military response to terrorism. 
American foreign policy reflects that obsession. 
This year, the US will spend around $450 billion for the military, including the costs of the Iraq War, while it will spend no more than $15 billion to overcome global poverty, global environmental degradation, and global diseases. 
In other words, US foreign policy spending is thirty times more focused on the military than on building global prosperity, global public health, and a sustainable environment. 
Throughout 2003, the world lived with Bush's obsession. 
Debate over Iraq dominated international diplomacy, and took up almost the entire UN agenda. 
The war in Iraq cost countless innocent lives, such as when the UN headquarters in Baghdad was bombed. 
At the same time, Bush's emphasis on a one-dimensional, militarized approach to global problems has fueled unrest and instability throughout the Islamic world, leading to increased terrorism in Turkey, North Africa, Saudi Arabia, and Southeast Asia. 
The nature of suffering around the world hardly justifies this narrow strategy. 
Focusing on terrorism to the exclusion of other issues, and emphasizing the military response to it, will not bring prosperity and peace, or even a significant reduction in the number of attacks. 
While 3,000 innocent people died in the US on September 11, 2001, in Africa 8,000 innocent children die every day from malaria. 
Yet malaria is preventable and treatable. 
The problem is that most of Africa is too poor to mobilize the methods of prevention (bed nets) and treatments (anti-malarial medicines) that could save millions of children every year. 
The US spends more on Iraq each day than it does on Africa's malaria in a year. 
As 2003 draws to a close, it is time for world leaders to help guide the world away from the obsessive, failing approach of America's government. 
President Bush should be made to understand that the US will find no true international support if America speaks incessantly about terrorism while doing almost nothing about the problems that really affect most of the world: poverty, lack of access to safe water and sanitation, vulnerability to disease, and climate change. 
Ironically, President Bush claims that the UN does not follow through on its word. 
He declared in London recently that "the credibility of the UN depends on a willingness to keep its word and to act when action is required." 
Yet the US repeatedly violates its own UN pledges. 
For example, at the International Conference on Financing for Development, in Monterrey, Mexico in March 2002, America signed the Monterrey Consensus, which includes a promise by rich countries to raise their development assistance towards 0.7% of national income. 
That would bring an additional $60 billion per year in foreign assistance from the US--approximately what it spent on Iraq this year. 
Yet President Bush has simply ignored this promise. 
There are many other similar commitments that the US has made in recent years to the UN that remain utterly unfulfilled. 
The US promised action to fight man-made climate change as a signatory to the UN Framework Convention on Climate Change (UNFCC) in 1992. 
It has so far failed to act. 
America also promised--in the Doha Declaration in 2001--to open its markets to the world's poorest countries. 
Yet at Cancun, Mexico earlier this summer, it refused to open its markets even to exports from struggling African economies. 
The list goes on and on. 
At the Millennium Assembly in 2000, the US promised to pursue reduction of global poverty, yet it has taken few steps in that direction. 
At the World Summit on Sustainable Development in Johannesburg in 2002, America committed itself to protect global ecosystems, yet little has been seen or heard from US policy makers on this issue since then. 
America is certainly not alone in failing to promote the international goals adopted in the UN. 
But because the US is the richest, most powerful country in the world, its neglect is devastating. 
If the US really wants to undercut terrorism, it must recognize the interconnectedness of extremism, poverty, and environmental degradation, and it will need to understand the struggles for survival that are underway among the poor everywhere. 
But the world should not wait for the America to come to its senses. 
The US represents just 5% of the world's population, and just one vote of 191 countries in the UN General Assembly. 
Poor countries, especially the democracies of the developing world--Brazil, South Africa, India, Mexico, Ghana, the Philippines--should say, "We need to act on the issues that concern us, not just on the issues that concern the US." 
What the world needs most in 2004 is a declaration of independence from American willfulness. 

A Democratic Windfall for Turkey? 
Turkey's seeming fall from grace with the US may turn out to be a blessing in disguise. 
The Iraq war and the tortured diplomacy that led up to it may help resolve Turkey's conflict between its "strategic alliance" with America and its drive to join the EU. 
The elections last November that brought the Justice and Development Party (AKP) to power were preceded by a dispute between the members of the then-ruling coalition over enacting the reforms demanded by the EU. 
Some liberal elements of that "secular" coalition resigned from the government and joined with the Islamists to push the reforms through parliament. 
After coming to power, the AKP's leaders, former Islamists who had reinvented themselves as "conservative democrats," energetically engaged with the US, the EU, and the UN on issues ranging from Cyprus to Iraq, from Kurdish language rights to other human rights issues within Turkey. 
Having suffered the oppressive practices of Turkey's "secular" state and recognizing that human rights must be protected across-the-board, the AKP emerged as a credible interlocutor with the West. 
The US, preoccupied with the supposed specter of a "clash of civilizations" between Islam and the West, saw the AKP's modern, westernized face as an opportunity and urged the EU to admit Turkey. 
Today, both "conservative democrats" and liberals advocate passing all the reforms needed to gain accession to the EU, while opponents include extreme nationalists, of both left and right, as well as some elements of the "secular" establishment. 
The Europeans could have tipped the balance decisively in favor of the reformers by finally rewarding the efforts of the pro-EU Turks at last December's summit of EU leaders. 
Instead, the EU kept Turkey waiting yet again, putting off formal negotiations that, in any case, may take years to complete. 
Europe's persistent reluctance puts the Turks in a quandary. 
The Americans want full EU membership for Turkey--a longstanding NATO member and close American ally--while Europeans complain about the Turkish military's domestic political role. 
The paradox is that, by maintaining a political distance and thus limiting Turkey's options, Europe may end up reinforcing Turkey's status as a military outpost of the US. 
At least, that was how things were shaping up prior to the war in Iraq. 
Then, despite massive US pressure, Turkey's parliament unexpectedly rejected the government's proposal to allow US troops in Turkey to launch an invasion from Turkish territory. 
Turkey's refusal to grant the Americans access to military bases on its territory effectively ruled out a northern front in the war. 
The Turkish government even attempted a regional initiative for a peaceful solution to the crisis, an effort no current EU member could have contemplated. 
Parliament's rejection of US troops powerfully refutes suggestions that Turkey was primarily concerned about the size of the American aid package on offer as an inducement to cooperate. 
Suggestions that characterized the vote as revealing the government's true "Islamic" character ignore the fact that the only opposition party in parliament, the Republican People's Party--founded by Atatürk and still fully "secularist"--voted against the plan. 
Likewise, other elements of Turkey's secular establishment, including the President and the military leadership, either opposed or were lukewarm, at best, to the idea of war in Iraq. 
Turkey's military initially remained silent on the issue, uncharacteristically watching the civilian political process unfold. 
By contrast, the military had earlier publicly criticized AKP initiatives on Cyprus. 
Their silence on Iraq reflected their apprehension about unwanted alternatives: either support the US plan and risk encouraging Kurdish moves toward an independent state, or oppose the Americans and jeopardize a critical strategic relationship. 
They chose to defer to the civilian leadership and to parliament, which, in voting down the US plan, reflected overwhelming public sentiment against the war. 
Only after the vote did the Chief of Staff publicly endorse the original proposal to bring in American troops. 
In fact, the allegedly Islamic party had skilfully managed to negotiate with an unrelenting US, consult with the Turkish military and President, and share all information with the public and parliament. 
Walking a fine line in what was essentially a lose-lose situation, the party leadership laid out the stakes clearly and judiciously left the final decision to parliament. 
The outcome was a victory for Turkish democracy and recognized as such internationally. 
After the US military action in Iraq, the tables may be turning in surprising ways. 
As America establishes itself in Iraq, Turkey's geopolitical military significance may decline. 
Yet the declared American aim of building a Muslim democracy in Iraq will only enhance Turkey's symbolic importance as a role model. 
This shift in Turkey's strategic role may also be reflected in a new domestic balance between the military and the forces pushing for reform. 
With careful management, Turkey may find itself drawing closer to Europe, while rebuilding its relationship with America. 

A Dissident in China 
TOKYO – 2009 was a good year for China. 
The Chinese economy still roared ahead in the midst of a worldwide recession. 
American President Barack Obama visited China, more in the spirit of a supplicant to an imperial court than the leader of the world’s greatest superpower. 
Even the Copenhagen summit on climate change ended just the way China wanted: failure in its attempt to commit China, or any other industrial nation, to making significant cuts in carbon emissions, with the United States getting the blame. 
The Chinese government, under the Communist Party, has every reason to feel confident. 
So why did a gentle former literature professor named Liu Xiaobo have to be sentenced to 11 years in prison, just because he publicly advocated freedom of expression and an end to one-party rule? 
Liu was co-author in 2008 of a petition, Charter 08, signed by thousands of Chinese, calling for basic rights to be respected. 
Liu is not a violent rebel. 
His opinions, in articles published on the Internet, are entirely peaceful. 
Yet he was jailed for “inciting subversion of state power.” 
The notion that Liu might be capable of subverting the immense power of the Communist Party of China is patently absurd. 
And yet the authorities clearly believe that they had to make an example of him, to prevent others from expressing similar views. 
Why does a regime that appears to be so secure consider mere opinions, or even peaceful petitions, so dangerous? 
Perhaps because the regime does not feel as secure as it looks. 
Without legitimacy, no government can rule with any sense of confidence. 
There are many ways to legitimize political arrangements. 
Liberal democracy is only a recent invention. 
Hereditary monarchy, often backed by divine authority, has worked in the past. 
And some modern autocrats, such as Robert Mugabe, have been bolstered by their credentials as national freedom fighters. 
China has changed a great deal in the last century, but it has remained the same in one respect: it is still ruled by a religious concept of politics. 
Legitimacy is not based on the give and take, the necessary compromises, and the wheeling and dealing that form the basis of an economic concept of politics such as that which underpins liberal democracy. 
Instead, the foundation of religious politics is a shared belief, imposed from above, in ideological orthodoxy. 
In imperial China, this meant Confucian orthodoxy. 
The ideal of the Confucian state is “harmony.” 
If all people conform to a particular set of beliefs, including moral codes of behavior, conflicts will disappear. 
The ruled, in this ideal system, will naturally obey their rulers, just as sons obey their fathers. 
After the various revolutions in the early decades of the twentieth century, Confucianism was replaced by a Chinese version of Communism. 
Marxism appealed to Chinese intellectuals, because it was bookish, introduced a modern moral orthodoxy, and was based, like Confucianism, on a promise of perfect harmony. 
Ultimately, in the Communist utopia, conflicts of interests would melt away. 
Chairman Mao’s rule combined elements of the Chinese imperial system with Communist totalitarianism. 
This orthodoxy, however, was also destined to fade away. 
Few Chinese, even in the top ranks of the Communist Party, are convinced Marxists anymore. 
This left an ideological vacuum, swiftly filled in the 1980’s by greed, cynicism, and corruption. 
Out of this crisis came the demonstrations all over China, collectively known as “Tiananmen.” 
Liu Xiaobo was an active spokesman in 1989 for the student protests against official corruption and in favor of greater freedom. 
Soon after the bloody crackdown on Tiananmen, a new orthodoxy replaced Chinese Marxism: Chinese nationalism. 
Only one-party rule would guarantee the continuing rise of China and put an end to centuries of national humiliation. 
The Communist Party represented China’s destiny as a great power. 
To doubt this was not just mistaken, but unpatriotic, even “anti-Chinese.” 
From this perspective, Liu Xiaobo’s critical views were indeed subversive. 
They cast doubt on the official orthodoxy, and thus on the legitimacy of the state. 
To wonder, as many have, why the Chinese regime refused to negotiate with the students in 1989 – or to find some accommodation with its critics today – is to misunderstand the nature of religious politics. 
Negotiation, compromise, and accommodation are the marks of economic politics, where every deal has its price. 
By contrast, those who rule according to a shared belief cannot afford to negotiate, for that would undermine the belief itself. 
This is not to say that the economic concept of politics is utterly strange to the Chinese – or, for that matter, that the religious notion of politics is unknown in the democratic West. 
But the insistence on orthodoxy is still sufficiently strong in China to remain the default defense against political critics. 
These things can change. 
Other Confucian societies, such as South Korea, Taiwan, and Japan, now have thriving liberal democracies, and there is no reason to believe that such a transition is impossible in China. 
But external pressure is unlikely to bring it about. 
Many non-Chinese, including me, have signed a letter of protest against the jailing of Liu Xiaobo. 
One hopes that this will lend comfort to him, and give a moral boost to Chinese who share his views. 
But it is unlikely to impress those who believe in the current orthodoxy of Chinese nationalism. 
Until China is released from the grip of religious politics, Liu’s ideals are unlikely to take root. 
This does not bode well for China, or, indeed, for the rest of the world. 

A Doomsday Scenario 
As America debates whether or not to invade Iraq, fears that the country's economic recovery will stall are beginning to creep into the discussion; with that, worries about the health of the global economy are growing, too. 
A consensus is emerging that the gap between the US economy's growth potential and its actual performance will remain large for some time to come. 
Can the situation get worse? 
Yes, it can: much worse. 
A number of worrying factors about the US economy have been around for a long time: 
huge trade deficits have persisted since Ronald Reagan's misguided tax cuts of 1981 converted America from the world's largest creditor into the world's largest debtor. 
Today, these deficits set new records by the month; 
America's appallingly low savings rate. 
When American wealth seemed to be growing year after year as the stock market boomed, this was understandable; individual Americans were becoming richer without savings, so why bother? 
Today's savings rate, while it has increased slightly, still finds America at the bottom of the world's savings league tables; 
lax accounting standards. 
The Arthur Anderson, Enron, and WorldCom scandals didn't emerge out of thin air, but had their origins in the mid-1990s, when the US Treasury actually intervened to stop attempts by the supposedly independent accounting standards board to improve matters. 
Bad accounting contributed to the recent stock market bubble; bad information led to stock prices that did not reflect underlying realities; and these in turn provided incentives for the excess investment in telecoms that caused today's excess capacity. 
To this old brew, new ingredients have been added, notably the most rapid change in a nation's fiscal posture the world has probably ever seen. 
In a "now you see it, now you don't" move only a magician should love, the $3 trillion, ten year (non social security) US budget surplus was - in a matter of months - converted into a gaping deficit of $2 trillion dollars. 
Of course, excuses are at hand: the magnitude of the economic downturn was not anticipated and the increased expenditures to fight terrorism could not be foretold. 
Excuses, excuses. 
As the old saying goes: Don't count your chickens before they hatch. 
The Bush Administration not only counted its chickens, it sold them forward! 
To anyone with decent eyesight, it was clear that the rosy budget projections of two years ago were nonsense. 
Clear, too, was the fact that, in promoting its tax cuts, the Bush Administration was engaging (on a multi-billion dollar scale) in dishonest, Enron-like accounting. 
So if things are so bad now, how can they get worse? 
Here's a plausible scenario. 
To finance its trade deficit, America must borrow from abroad over a billion dollars a day. 
When America was the only safe haven for global investors, this was easy. 
But America today appears less safe. 
The combination of lack of confidence in US corporate accounts, lack of confidence in America's economic policy management (compounded by the mounting deficits), and America's soft underlying economic fundamentals, has dented the US economy's global reputation. 
As foreigners start pulling their money out of a country they suspect, the dollar will weaken. 
As the dollar weakens, America looks even less safe. 
So a rush to the door begins. 
While a weak dollar may be good for exports, a falling dollar will be accompanied by stock market losses and greater declines in confidence. 
Eventually, even the almighty American consumer will be shaken and realize that he is poorer today than three years ago and that he better start putting money away for his retirement, especially given Bush's proposed risky experiments with the social security system. 
At that point, Americans will join the stampede out of their economy. 
Why shouldn't they? 
They're free to choose where to put their money. 
Europe's stock markets will begin to look like an attractive alternative. 
But this scenario offers no happy ending for Europe. 
A weakening US economy and the strengthening Euro will dampen European exports. 
The European Central Bank, fixated on inflation, will be slow to lower interest rates, and the European Stability Pact will make it impossible for fiscal policy to offset these weaknesses. 
Europe will join America in a downturn, reinforcing America's decline and setting in motion a global downward spiral. 
I am not predicting that this will happen. 
I hope that the Bush Administration will enact policies to strengthen the US economy: a tax cut that might made minimal sense when it seemed that the US had a multi-trillion dollar surplus no longer makes any sense at all. 
The Bush Administration should admit this, and redesign a tax program to strengthen the economy by making the country live within its means. 
President Bush could even stabilize the economy, offering better unemployment benefits to provide needed stimulus if the downturn continues. 
America is strong, and the global economy is strong. 
Should the disastrous events contemplated here occur, a new global economy will eventually emerge from the ashes. 
Downturns, of course, can never be fully prevented. 
We can, however, decrease their frequency; we can make them shallower; we can ensure that fewer people are hurt and that those that get hurt are better protected. 
Sadly, we are doing less than is possible to prevent things from getting worse and doing less than necessary to protect ourselves from the consequences. 

A Double-Dip Recession for the US? 
Last winter, America's central bank - the Federal Reserve - was busy patting itself on the back. 
The Fed's cut in its basic interest rate to 1.75% per year seemed to have worked: the recession was ending. 
Despite sobered expectations about the high-tech revolution's impact on productivity and profits, as well as the jitters inspired by the terror attack on the World Trade Center, American businesses, it was believed, would soon start investing again big-time because borrowing money at 1.75% was too good a deal to pass up. 
By late spring, those expectations had disintegrated alongside the collapse of Enron, WorldCom, and Arthur Andersen. 
Suddenly, everyone doubted the integrity of the financial accounts of American companies. Suddenly, everyone saw just how much America's system of corporate surveillance and control had deteriorated during the bubble of the 1990s. 
The American stock market fell 15-20% below its winter levels. 
Spreads between the interest rate at which America's government could borrow and the interest rates at which America's corporations could borrow widened. 
Suddenly, the Fed stopped congratulating itself: a 1.75% interest rate might be the right interest rate to fuel a recovery when the Dow-Jones stock market index stands at 10,000, but not when the Dow-Jones index stands at 8,500. 
Throughout the summer, corporate investment news remained disappointing. 
More and more analysts began to speak about the possibility of a "double dip" recession. 
Yet throughout all this, the Federal Reserve remained passive. 
The short-term interest rates it controlled didn't budge. 
Only in mid-August did the Fed hint that interest rates might be cut. 
The informal and unofficial rationale leaking out of the Fed for its inaction had two parts. 
First, short-term interest rates were already so low that everyone would see further cuts as temporary only. 
They would thus have little effect on the longer-term rates that really drive business investment. 
Second, short-term interest rates were so low that additional cuts would spook the financial markets: if even the Fed thought conditions warranted cuts, the argument went, businesses would respond not by increasing their investments but by reducing them. 
The Fed's judgment appeared to be that it was largely (if not completely) powerless: it had done all that it could, and the levers of monetary policy were no longer strongly connected to determining the level of economic activity. 
So the US in 2002 joined Japan in what economists have for sixty-five years called a Liquidity Trap: a situation in which the short-term nominal interest rates the central bank controls are so low and so loosely connected to the level of aggregate demand that further reductions are ineffective in fighting a recession. 
America's situation was not unique: Japan had been in been in thrall to a liquidity trap since the mid-1990s. 
But there had been no other examples since the Great Depression of the 1930s. 
Whether America now really is in a liquidity trap is uncertain. 
How long this state of affairs will last is unknown. 
Nevertheless, even if America is only on the edge of a liquidity trap, and even if it moves away from the current state of affairs soon, this is a frightening situation. 
If monetary policy is not effective, the only lever the American government has to manage its economy is fiscal policy: changes in the government's tax and spending plans to change the government's direct contribution to aggregate demand. 
But the lesson of the decades since World War II is that the US government - with its complex, baroque, eighteenth-century organization - is incapable of changing policy fast enough to make effective use of fiscal policy as a tool for managing the economy. 
It simply takes too long for changes in taxes and spending to work their way through Congress and the bureaucracy. 
An America caught in a liquidity trap is, quite simply, a country with no effective tools of macroeconomic management. 
There have been two eras since World War II when policymakers - American policymakers, at least - believed that they had solved the riddle of the business cycle and had learned how to manage a modern industrial or post-industrial economy. 
The first was the Keynesian high-water mark of confidence in demand management of the 1960s. 
It was destroyed by the inflation of the Vietnam era and the oil-price shocks of the 1970s. 
The second was the decade of successful business-cycle management by Alan Greenspan's independent, apolitical, and technocratic Fed during the 1990s. 
This second era now appears to have been as fleeting as the first. 
Eighty years ago, John Maynard Keynes argued that governments needed to take responsibility for maintaining full employment and price stability - that the pre-World War I gold standard had not been the golden age people thought it was, and that its successes were the result of a lucky combination of circumstances unlikely to be repeated. 
Keynes was an optimist in believing that governments could learn to manage the business cycle. 
He would be shocked to look at today's world: a Europe with stubbornly high unemployment, a Japan mired in a decade of near stagnation, and now an America lacking the policy tools to deal with any additional unexpected economic bad news. 



A Europe for All 
Longtime members of the European Union now seem to doubt the Union’s future, but we in Ukraine look at the European Union with hope and admiration. 
To join in the EU’s progress is the basic object of our foreign policy, for Ukraine has discovered that nationhood is not an end, but a beginning. 
Indeed, European unity is indivisible: when one nation is ostracized, all are not free. 
We Europeans are caught in an inescapable net, tied in a single garment of destiny. 
Every aspect of our shared culture, if not the last century of shared suffering, confirms that for us. 
Whatever affects one European directly, affects all indirectly. 
Never again can we afford to live with the narrow notion of two Europes, of haves and have-nots, of insiders and outsiders. 
Anyone who lives within the European continent cannot – indeed, must not – be considered a stranger to its Union. 
Today’s great Pax Europa and today’s pan-European prosperity depend on this. 
Of course, some people mutter that Ukraine is not Europe. 
Let them come to Kyiv and speak to the people, young and old, factory worker, farmer’s wife, the lawyers and doctors and teachers who stood and stayed in the cold and snow for weeks on end last winter to defend their freedoms. 
Are they not united with those who stood alongside General de Gaulle in the French Resistance? 
Are they not one with those who died fighting for the Spanish Republic in the 1930’s, who liberated Budapest in 1956 and ended fascism in Spain and Portugal in the 1970’s? 
Are they not animated by the same spirit as Poland’s Solidarity and the peaceful masses that created Prague’s Velvet Revolution in 1989? 
That is the true European spirit, and no doubts can crush it. 
To those who say that Ukraine is too backward for EU membership, I say: Let them, too, come to my country and see the mothers who stay late at night at work teaching their children to use their workplace computer. 
Let them come to the language classes in every village and city where young people are readying themselves for Europe by learning French and German and English.Those who doubt Ukraine’s European vocation should understand that Europe is not a matter of hardware and superhighways; it is the unquenchable desire for freedom, prosperity, and solidarity. 
I believe that our future is as promising as Europe’s past is proud, and that our destiny lies not as a forgotten borderland on a troubled region, but as a maker and shaper of Europe’s peace and Europe’s unity. 
Self-determination no longer means isolation, because achieving national independence nowadays means only to return to the world scene with a new status. 
New nations can build with their former occupiers the same kind of fruitful relationship that France established with Germany – a relationship founded on equality and mutual interests. 
That is the type of relationship that my government seeks with Russia, and achieving it is how we can help extend the zone of Europe’s peace. 
Of course, it is premature to do more than indicate the high regard with which we view the prospect of EU membership. 
We know that our part in that great edifice will not be built overnight. 
We know that the great works of European unification lay not in documents and declarations, but in innovative action designed to better the lives and insure the security of all Europeans. 
Building a Ukraine worthy of EU membership will not be easy, cheap, or fast. 
But, like the Union itself, it will be built and it will be done. 
We know the challenge is great, but the prize is worth the struggle, and Europe should know that this is our goal. 
Part of the work of renewing Ukraine is a creative battle to put an end to a nightmarish century during which fascism and communism – ideologies born in the heart of Europe – battled for mastery. 
Only a few months ago, in cities throughout Ukraine, our children and our parents confronted armed troops, snarling dogs, and even death. 
Only a few years ago, a young journalist, Georgi Gongadze, seeking to inform the public about our old regime’s corruption, was brutalized and beheaded by that regime’s thugs. 
But our Orange Revolution last winter shows that Ukraine’s people prevailed. 
So, despite today’s doubts and difficulties, I retain an abiding faith in Europe. 
I refuse to accept despair as the final response to the ambiguities and horrors of Ukraine’s history. 
I refuse to accept the view that Ukraine is so tragically bound to the starless midnight of communism’s legacy that we can never see the bright daybreak of peace and true European unity. 
When the EU’s citizens ponder Ukraine’s place in Europe, they should look both beyond and more closely at the face they see. 
They should look beyond the ravaged wastelands that communism inflicted, beyond the poverty, and beyond the social divisions through which our discarded ex-leaders sought to prolong their misrule. 
Instead, they should look closely at the face of our president, Viktor Yushchenko, ravaged by poison during last year’s election campaign, and recall the words of the great Frenchman André Malraux, for whom “the most beautiful faces are those that have been wounded.” 

A Europe of Provinces, Not States 
As the European Constitutional Convention assembles to debate the fine points of the European Union's future institutions, now is the moment to think the unthinkable about where Europe is heading. 
Or at least, to consider perhaps a quite different question: where would it be reasonable for the EU to move? 
Communism's fall saw the appearance of several small states in Europe. 
Estonia, Latvia, and Lithuania reemerged from Soviet occupation. 
Czechoslovakia split into two separate states. 
Yugoslavia gave way to Slovenia, Croatia, Bosnia, Serbia, Macedonia; it may perhaps shortly disgorge Kosovo and Montenegro as well. 
Although the Baltic republics merely reestablished their pre-WWII independence, and Yugoslavia's breakup was a bloody affair like so many other wars of independence, there is something tantalizing new in all this as well. 
In the interwar years, the Baltic states were often viewed as impractical, artificial creations of the Great Powers. 
Czechoslovakia and Yugoslavia came into existence because their constituent parts were not seen as viable independent states. 
Why was this? 
Because 80 years ago, when Wilson, Clemenceau, and Lloyd George redrew the map of Europe, small states were dysfunctional in times of both war and peace. 
To be viable, a state needed to be large enough to defend itself and to constitute a relatively self-contained economic market. 
None of this holds true today. 
With the prospect of entry into the EU, national markets matter less. 
Both EU and NATO membership make war among European member states unthinkable, and an attack on even the smallest NATO member would bring a response from all NATO members. 
Lacking such external threats, the ties between, say, Czechs and Slovaks (to say nothing of Serbs and Croats!) are too weak to warrant a common national level of government. 
Does this tell us something about the future of Europe as a whole? 
The difference between Czechoslovakia and Italy or Germany is mostly one of 50 years. 
After all, wasn't Italy, until 1860s, a collection of kingdoms and principalities? 
Wasn't Germany's unification a matter of ``blood and iron''? 
France and Spain are older, but is the marriage of Basques, Catalans, and Corsicans with their national states that much happier than the former Czech/Slovak marriage? 
Is there really that much reason why the Scots and Welsh should be part of the same national state as the English? 
Abstract for a second from the idea of French or German or Italian identity, patriotism, the collective memories of war and carnage that cemented the consciousness of today's linguistic communities and think of this: why do Europeans need an intermediate level of government, between the common European framework and their local institutions? 
Why do Piemontese, Bavarians, or Scots need intermediate national bureaucracies to run their tax policies, welfare programs, securities laws, and the largely useless, duplicative armies? 
Wouldn't life be easier if a common market, currency, foreign policy, army, and a few other things were run on a Europe-wide basis, with the rest left to more meaningful local units? 
It is fashionable to mock the bureaucratic minutia of European regulation. 
But European regulation is as nothing compared to the mountains of national laws and decrees, billions wasted in political patronage, and the colossal state machines that eat up 30-40% of the economic product of Europe's nation states. 
Could any common European state do worse? 
Indeed, the creation of a European federal government and the elimination of national intermediaries would probably lead to the greatest liberalization of the economy (and society as a whole) in Europe's entire history. 
Look at America in 1787: creation of the federal government swept away the balkanized system of pre-revolutionary colonies, ushering in an era of entrepreneurial expansion across the entire American Continent. 
The simple fact is that Europe as a whole is too diverse to be captured by the economic and political interest groups that now dominate national states. 
It is only as an additional level of government that the EU appears onerous and bureaucratic. 
If it were to displace national governments, its burden would be weightless in comparison to what exists today. 
Nations also put Europe's constitutional balance out of kilter. 
Germany and Italy are simply too big, as compared to Portugal or Belgium (itself a rather questionable amalgam of the Flemish and the Walloons), and this creates the types of imbalances reminiscent of the heavy foot of Prussia in the old Bismarckian empire. 
Could a federal Europe replace today's national identities? 
Could the French and the British feel as spiritually at home in ``Europe'' as they feel in their national states? 
No, but must they? 
When Europeans think of future institutions, the tension is always seen as that between national differences and the common European identity. 
But what if common European institutions are not viewed through the prism of national institutions? 
What if the evolution of European consciousness proceeds not by an upward transfer of attachment to supranational institutions, but by a devolution of loyalties, and a revival of smaller, more meaningful, communities? 
Of course, the demise of national states is not imminent, but not because they are so deeply rooted in the consciousness of their citizens. 
Indeed, national identities are mostly impoverishing abstractions, clichés, like race, class, and other ideological creations. 
Think of how much more genuine diversity would there be in a united Europe if national states did not squat in the middle. 
But Europe's nation states are not going to disappear for a while because they are centers of power. 
After all, forty cents out of every euro of GDP is a lot to fight about. 
If, however, Europeans gain a sense of where they should be going, perhaps in time the national identities forged in the last couple of hundred years (for they are not much older than that) will become like the appendix - a part of the human body responsible for little else but an occasional inflammation. 

A Failed Global Recovery 
NEW HAVEN – The global economy is in the midst of its second growth scare in less than two years. 
Get used to it. In a post-crisis world, these are the footprints of a failed recovery. 
The reason is simple. 
The typical business cycle has a natural cushioning mechanism that wards off unexpected blows. 
The deeper the downturn, the more powerful the snapback, and the greater the cumulative forces of self-sustaining revival. 
Vigorous V-shaped rebounds have a built-in resilience that allows them to shrug off shocks relatively easily. 
But a post-crisis recovery is a very different animal. 
As Carmen Reinhart and Kenneth Rogoff have shown in their book This Time is Different, over the long sweep of history, post-crisis recoveries in output and employment tend to be decidedly subpar. 
Such weak recoveries, by definition, lack the cushion of V-shaped rebounds. 
Consequently, external shocks quickly expose their vulnerability. 
If the shocks are sharp enough – and if they hit a weakened global economy that is approaching its “stall speed” of around 3% annual growth – the relapse could turn into the dreaded double-dip recession. 
That is the risk today. 
There can be no mistaking the decidedly subpar character of the current global recovery. 
Superficially, the numbers look strong: world GDP rebounded by 5.1% in 2010, and is expected to rise another 4.3% in 2011, according to the International Monetary Fund. 
But because these gains follow the massive contraction that occurred during the Great Recession of 2008-2009, they are a far cry from the trajectory of a classic V-shaped recovery. 
Indeed, if the IMF’s latest forecast proves correct, global GDP at the end of 2012 will still be about 2.2 percentage points below the level that would have been reached had the world remained on its longer-term 3.7% annual-growth path. 
Even if the global economy holds at a 4.3% cruise speed – a big “if,” in my view – it will remain below its trend-line potential for over eight years in a row, through 2015. 
This protracted “global output gap” underscores the absence of a cushion in today’s world economy, as well as its heightened sensitivity to shocks. 
And there have certainly been numerous such blows in recent months – from Europe’s sovereign-debt crisis and Japan’s natural disasters to sharply higher oil prices and another setback in the US housing recovery. 
While none of these shocks appears to have been severe enough to have derailed the current global recovery, the combined effect is worrisome, especially in a still-weakened post-crisis world. 
Most pundits dismiss the possibility of a double-dip recession. 
Labeling the current slowdown a temporary “soft patch,” they pin their optimism on the inevitable rebound that follows any shock. 
For example, a boost is expected from Japan’s reconstruction and supply-chain resumption. 
Another assist may come from America’s recent move to tap its strategic petroleum reserves in an effort to push oil prices lower. 
But in the aftermath of the worst crisis and recession of modern times – when shocks can push an already weakened global economy to its tipping point a lot faster than would be the case under a stronger growth scenario – the escape velocity of self-sustaining recovery is much harder to achieve. 
The soft patch may be closer to a quagmire. 
This conclusion should not be lost on high-flying emerging-market economies, especially in Asia – currently the world’s fastest-growing region and the leader of what many now call a two-speed world. 
Yet with exports still close to a record 45% of pan-regional GDP, Asia can hardly afford to take external shocks lightly – especially if they hit an already weakened baseline growth trajectory in the post-crisis developed world. 
The recent slowdown in Chinese industrial activity underscores this very risk. 
Policymakers are ill prepared to cope with a steady stream of growth scares. 
They continue to favor strategies that are better suited to combating crisis than to promoting post-crisis healing. 
That is certainly true of the United States. 
While the US Federal Reserve Board’s first round of quantitative easing was effective in ending a wrenching crisis, the second round has done little to sustain meaningful recovery in the labor market and the real economy. 
America’s zombie consumers need to repair their damaged balance sheets, and US workers need to align new skills with new jobs. 
Open-ended liquidity injections accomplish neither. 
European authorities are caught up in a similar mindset. 
Mistaking a solvency problem for a liquidity shortfall, Europe has become hooked on the drip feed of bailouts. 
However, this works only if countries like Greece grow their way out of a debt trap or abrogate their deeply entrenched social contracts. 
The odds on either are exceedingly poor. 
The likelihood of recurring growth scares for the next several years implies little hope for new and creative approaches to post-crisis monetary and fiscal policies. 
Driven by short-term electoral horizons, policymakers repeatedly seek a quick fix – another bailout or one more liquidity injection. 
Yet, in the aftermath of a balance-sheet recession in the US, and in the midst of a debt trap in Europe, that approach is doomed to failure. 
Liquidity injections and bailouts serve only one purpose – to buy time. 
Yet time is not the answer for economies desperately in need of the structural repairs of fiscal consolidation, private-sector deleveraging, labor-market reforms, or improved competitiveness. 
Nor does time cushion anemic post-crisis recoveries from the inevitable next shock. 
It’s hard to know when the next shock will hit, or what form it will take; otherwise, it wouldn’t be a shock. 
But, as night follows day, such a disruption is inevitable. 
With policymakers reluctant to focus on the imperatives of structural healing, the result will be yet another growth scare – or worse. 
A failed recovery underscores the risks of an increasingly treacherous endgame in today’s post-crisis world. 

A Fair Deal for Turkey 
Turkey has been given what looks like an ultimatum from the EU Commission: open your ports for ships from Cyprus within a month, or you may risk a halt to the EU accession talks now underway. 
At the same time, the Commission’s latest report on Turkey’s progress toward accession notes that political reforms have slowed down, further calling into question the country’s future EU membership. 
The Commission’s progress report will be dealt with by the European Council next month. 
At that meeting, European leaders should ask themselves the following questions: Has the EU given Turkey a fair deal in the case of Cyprus? 
Has the EU’s behavior been consistent in supporting political reform in Turkey? 
What are the EU’s long-term interests vis-à-vis Turkey? 
If the answers to the first two questions are “no” – as I believe they are – the third question becomes vitally important. 
True, Turkey has closed its ports to ships from (Greek) Cyprus, and this is a violation of agreements. 
But it is also true that the northern Turkish part of Cyprus is denied access to free trade and other benefits from EU-membership. 
This is because Cyprus remains a divided island. 
It was assumed that Cyprus should be united when the country joined the EU in 2004. 
A United Nations plan for unification was accepted by the Turkish part. 
But the Greek Cypriots voted against the plan because their leaders did not live up to the implicit deal with the EU to support it. 
Nevertheless, Cyprus became an EU member – but only the Greek part. 
This was clearly a mistake, because it made the EU part of the conflict. 
It gave Greek Cypriot leaders the possibility of blocking progress in negotiations between the EU and Turkey. 
So how can Turkey under these conditions maintain confidence in the EU’s fairness? 
Political and legal reforms in Turkey in recent years have been remarkably far-reaching, for they have clearly been spurred by Turks’ wish to move closer to the EU. 
But Turkish public support for EU membership has fallen dramatically as Turks have grown to feel that they are not being given a fair deal. 
This has given new strength to those who want Turkey to develop in another direction, towards a more Islamic society instead of a modern secular state. 
Therefore, the recent lack of progress in Turkey’s reform process can to a large extent be explained by the EU’s behavior. 
This leaves us with the third question: what kind of Turkey does the EU want? 
There should be no doubt about the answer: it is clearly in the EU’s interest to see Turkey’s democracy and economy continue to strengthen. 
More than 40 years ago, it was promised that once Turkey lives up to the preconditions for membership, it will be welcome in the EU. 
It is high time that European leaders take this promise seriously. 
It is a sad fact that a large majority of voters in the EU are against Turkish membership. 
But they are reacting to the current situation. 
When they are asked if they would like a reformed Turkey as a partner – a Turkey that lives up fully to the conditions for membership described in the Copenhagen Criteria (democracy, rule of law, respect for human rights, and an effective market economy) – many more are inclined to say yes. 
European leaders must therefore take up two challenges. 
First, they should say clearly to their own voters that the EU must live up to its promises to Turkey, and that this is in the larger interest of all Europeans. 
Second, they should give Turkey a fair deal in the negotiations. 
The first litmus test on European leadership concerns the practical problem of access to harbors. 
Here the Finns, who chair the EU right now, have taken an initiative to implement a pragmatic solution that takes into consideration both sides in the conflict. 
The Finnish initiative should be given strong support from all European leaders. 
At the same time, a new effort should be made to bring life to the UN’s proposals regarding Cyprus. 
If this means putting pressure on some actors within the EU’s own ranks, so be it. 

A Fair Deal on Climate Change 
The agreement on climate change reached at Heiligendamm by the G8 leaders merely sets the stage for the real debate to come: how will we divide up the diminishing capacity of the atmosphere to absorb our greenhouse gases? 
The G8 leaders agreed to seek “substantial” cuts in greenhouse gas emissions and to give “serious consideration” to the goal of halving such emissions by 2050 – an outcome hailed as a triumph by German Chancellor Angela Merkel and British Prime Minister Tony Blair. 
Yet the agreement commits no one to any specific targets, least of all the United States, whose president, George W. Bush, will no longer be in office in 2009, when the tough decisions have to be made. 
One could reasonably ask why anyone thinks such a vague agreement is any kind of advance at all. 
At the United Nations Conference on Environment and Development in Rio de Janeiro in 1992, 189 countries, including the US, China, India, and all the European nations, signed the UN Framework Convention on Climate Change, thereby agreeing to stabilize greenhouse gases “at a low enough level to prevent dangerous anthropogenic interference with the climate system.” 
Fifteen years later, no country has done that. 
US per capita greenhouse gas emissions, already the highest of any major nation when Bush took office, have continued to rise. 
In March, a leaked Bush administration report showed that US emissions were expected to rise almost as fast over the next decade as they did during the previous decade. 
Now we have yet another agreement to do what these same nations said they would do 15 years ago. 
That’s a triumph? 
If Bush or his successor wants to ensure that the next round of talks fails, that will be easy enough. 
In justifying his refusal to sign the Kyoto Protocol, Bush has always referred to the fact that it did not commit China and India to mandatory emission limits. 
Now, in response to suggestions by Bush and other G8 leaders that the larger developing nations must be part of the solution to climate change, Ma Kai, the head of China’s National Development and Reform Commission, has said that China will not commit to any quantified emissions reduction targets. 
Likewise, the spokesman of India’s foreign minister, Navtej Sarna, has said that his country would reject such mandatory restrictions. 
Are China and India being unreasonable? 
Their leaders have consistently pointed out that our current problems are the result of the gases emitted by the industrialized nations over the past century. 
That is true: most of those gases are still in the atmosphere, and without them the problem would not be nearly as urgent as it now is. 
China and India claim the right to proceed with industrialization and development as the developed nations did, unhampered by limits on their greenhouse gas emissions. 
China, India, and other developing nations, have a point – or rather, three points. 
First, if we apply the principle “You broke it, you fix it,” then the developed nations have to take responsibility for our “broken” atmosphere, which can no longer absorb more greenhouse gases without the world’s climate changing. 
Second, even if we wipe the slate clean and forget about who caused the problem, it remains true that the typical US resident is responsible for about six times more greenhouse gas emissions than the typical Chinese, and as much as 18 times more than the average Indian. 
Third, the richer nations are better able than less well-off nations to absorb the costs of fixing the problem without causing serious harm to their populations. 
But it is also true that if China and India continue to increase their output of greenhouse gases, they will eventually undo all the good that would be achieved by deep emissions cuts in the industrialized nations. 
This year or next, China will overtake the US as the world’s biggest greenhouse gas emitter – on a national, rather than a per capita basis, of course. 
In 25 years, according to Fatih Birol, chief economist at the International Energy Agency, China’s emissions could be double those of the US, Europe, and Japan combined. 
But there is a solution that is both fair and practical: 
The fairness of giving every person on earth an equal share of the atmosphere’s capacity to absorb our greenhouse gas emissions is difficult to deny. 
Why should anyone have a greater entitlement than others to use the earth’s atmosphere? 
But, in addition to being fair, this scheme also has practical benefits. 
It would give developing nations a strong incentive to accept mandatory quotas, because if they can keep their per capita emissions low, they will have excess emissions rights to sell to the industrialized nations. 
The rich countries will benefit, too, because they will be able to choose their preferred mix of reducing emissions and buying up emissions rights from developing nations. 

A Farewell to (Glorious) War 
In recent days, Italy’s government fell after losing a parliamentary vote on the country’s troop deployment in Afghanistan, while Britain and Denmark announced that they are to begin withdrawing their troops from Iraq. 
Whereas the Bush administration is deploying an additional 21,000 American soldiers in Iraq, and is pushing for more allied troops in Afghanistan, America’s allies are rejecting its Middle East policy. 
They are increasingly convinced that “victory” will be elusive in any asymmetric conflict between states, however powerful, and religiously driven armed insurgents. 
Donald Rumsfeld’s dogma of military “transformation” – the technological upgrading of an army’s capacity to enable decisive victory with fewer troops – failed resoundingly in Iraq. 
Nor could Israel, with its overwhelming technological advantage, defeat Hezbollah in Lebanon. 
More rockets and missiles fell on northern Israel in 33 days than hit Britain during all of World War II. 
So the Israelis now must reckon with an entirely new phenomenon: an asymmetric entity, Hezbollah, with nation-state firepower. 
So the fierce debate over whether to increase the size of American ground forces in Iraq is beside the point. 
Neither the Soviet experience in Afghanistan in the 1980’s nor NATO’s today vindicates the claim that troop numbers are what matter most on the modern battlefield. 
When geo-strategic military front lines are non-existent, as in Kosovo, Afghanistan, and Iraq, mass no longer equals victory. 
The great military thinker Carl von Clausewitz’s notion of “decisive battles” as the “center of gravity” of war is simply irrelevant to conflicts that have no visible “center of gravity.” 
Indeed, while wars from the time of Hannibal’s defeat of the Romans in 216 B.C. to the Gulf War of 1991 had this center of gravity, with a massive concentration of force capable of bringing an enemy to its knees, such industrial inter-state wars have now become an historical anachronism. 
Most states nowadays lie within borders that are widely accepted as legitimate, and they increasingly abide by international norms of behavior in times of war. 
In fact, the obligation of states to abide by humanitarian rules of conduct while their enemies are free to barbarize warfare is what makes asymmetric wars especially insoluble. 
Moreover, in an era of global media and international war crimes courts, the criteria for states’ use of military force have become more complex than ever. 
Inter-state combat may still occur where strategic front lines can be found, such as Israel’s border with Syria, India’s border with Pakistan, and the border dividing the two Koreas. 
In such cases, war, as the Egyptians showed in 1973, might still serve as an avenue to resolving a conflict. 
The Syrians might be tempted to launch an offensive against Israel with the objective of breaking the deadlock over the future of the Golan Heights. 
However, in the case of Kashmir, the asymmetric conflict currently fought by proxies and terrorist groups might not degenerate into all-out war precisely because India and Pakistan have mutual nuclear deterrence.Indeed, such asymmetric conflicts through proxies have become the new conventional way that states avoid the price of a general war. 
This changing nature of the battlefield essentially means that war as a conclusive event in an international conflict has become obsolete. 
The facile Clausewitzian wisdom that military action ultimately leads to a political solution is no longer convincing. 
“Victory” cannot bring peace, simply because there will always be a war after the war. 
Thus, for example, the conventional war in Kosovo lasted for two months, only to usher in a six-year asymmetric conflict. 
Likewise, America’s three-week “shock and awe” campaign in Iraq in 2003 ended in “victory,” but opened the gates of hell for occupiers and ordinary Iraqis alike. 
And six months after the merciless pounding of southern Lebanon, Hezbollah is as strong as it was before. 
Nor does the return of the Taliban in Afghanistan six years after their overthrow now seen too far-fetched. 
It is during the war after the war that the occupier’s inferiority is revealed, with constant reinforcements increasing the number of targets for the insurgents far more quickly than the occupier can adapt to the changing battlefield. 
The insurgents in Iraq, as the British admit, were able in just three years to cope with their enemies’ technological superiority in a way that the IRA in Northern Ireland was unable to do in 30 years. 
The Iraq war and Israel’s wars with Hamas and Hezbollah show the limits of what military power can achieve, as well as vindicate diplomacy and conflict resolution. 
When it comes to tackling complex political and cultural conflicts, forging international and regional alliances around a legitimate objective is more important than sheer military capacity. 
That said, it would be dangerously naïve to believe that the exercise of power and the capacity to intimidate are unnecessary. 
But the objectives of the use of force need to be linked to the recognition that in today’s asymmetric conflicts, victory is no longer achieved on the battlefield. 
Only better-informed foreign policies that can address the genuine anxieties of civilizations in crisis will yield more sustainable results. 

A Farewell to Nuclear Arms 
MOSCOW – Twenty-five years ago this month, I sat across from Ronald Reagan in Reykjavik, Iceland to negotiate a deal that would have reduced, and could have ultimately eliminated by 2000, the fearsome arsenals of nuclear weapons held by the United States and the Soviet Union. 
For all our differences, Reagan and I shared the strong conviction that civilized countries should not make such barbaric weapons the linchpin of their security. 
Even though we failed to achieve our highest aspirations in Reykjavik, the summit was nonetheless, in the words of my former counterpart, “a major turning point in the quest for a safer and secure world.” 
The next few years may well determine if our shared dream of ridding the world of nuclear weapons will ever be realized. 
Critics present nuclear disarmament as unrealistic at best, and a risky utopian dream at worst. 
They point to the Cold War’s “long peace” as proof that nuclear deterrence is the only means of staving off a major war. 
As someone who has commanded these weapons, I strongly disagree. 
Nuclear deterrence has always been a hard and brittle guarantor of peace. 
By failing to propose a compelling plan for nuclear disarmament, the US, Russia, and the remaining nuclear powers are promoting through inaction a future in which nuclear weapons will inevitably be used. 
That catastrophe must be forestalled. 
As I, along with George P. Shultz, William J. Perry, Henry A. Kissinger, Sam Nunn, and others, pointed out five years ago, nuclear deterrence becomes less reliable and more risky as the number of nuclear-armed states increases. 
Barring preemptive war (which has proven counterproductive) or effective sanctions (which have thus far proven insufficient), only sincere steps toward nuclear disarmament can furnish the mutual security needed to forge tough compromises on arms control and nonproliferation matters. 
The trust and understanding built at Reykjavik paved the way for two historic treaties. 
The 1987 Intermediate-Range Nuclear Forces (INF) Treaty destroyed the feared quick-strike missiles then threatening Europe’s peace. 
And, in 1991, the first Strategic Arms Reduction Treaty (START I) cut the bloated US and Soviet nuclear arsenals by 80% over a decade. 
But prospects for progress on arms control and nonproliferation are darkening in the absence of a credible push for nuclear disarmament. 
I learned during those two long days in Reykjavik that disarmament talks could be as constructive as they are arduous. 
By linking an array of interrelated matters, Reagan and I built the trust and understanding needed to moderate a nuclear-arms race of which we had lost control. 
In retrospect, the Cold War’s end heralded the coming of a messier arrangement of global power and persuasion. 
The nuclear powers should adhere to the requirements of the 1968 Non-Proliferation Treaty and resume “good faith” negotiations for disarmament. 
This would augment the diplomatic and moral capital available to diplomats as they strive to restrain nuclear proliferation in a world where more countries than ever have the wherewithal to construct a nuclear bomb. 
Only a serious program of universal nuclear disarmament can provide the reassurance and the credibility needed to build a global consensus that nuclear deterrence is a dead doctrine. 
We can no longer afford, politically or financially, the discriminatory nature of the current system of nuclear “haves” and “have-nots.” 
Reykjavik proved that boldness is rewarded. 
Conditions were far from favorable for a disarmament deal in 1986. 
Before I became Soviet leader in 1985, relations between the Cold War superpowers had hit rock bottom. 
Reagan and I were nonetheless able to create a reservoir of constructive spirit through constant outreach and face-to-face interaction. 
What seem to be lacking today are leaders with the boldness and vision to build the trust needed to reintroduce nuclear disarmament as the centerpiece of a peaceful global order. 
Economic constraints and the Chernobyl disaster helped spur us to action. 
Why has the Great Recession and the disastrous meltdown at Fukushima Daiichi in Japan not elicited a similar response today? 
A first step would be for the US finally to ratify the 1996 Comprehensive Test Ban Treaty (CTBT). 
President Barack Obama has endorsed this treaty as a vital instrument to discourage proliferation and avert nuclear war. 
It’s time for Obama to make good on commitments he made in Prague in 2009, take up Reagan’s mantle as Great Communicator, and persuade the US Senate to formalize America’s adherence to the CTBT. 
This would compel the remaining holdouts – China, Egypt, India, Indonesia, Iran, Israel, North Korea, and Pakistan – to reconsider the CTBT as well. 
That would bring us closer to a global ban on nuclear tests in any environment – the atmosphere, undersea, in outer space, or underground. 
A second necessary step is for the US and Russia to follow up on the New START agreement and begin deeper weapons cuts, especially tactical and reserve weapons, which serve no purpose, waste funds, and threaten security. 
This step must be related to limits on missile defense, one of the key issues that undermined the Reykjavik summit. 
A fissile material cut-off treaty (FMCT), long stalled in multilateral talks in Geneva, and a successful second Nuclear Security Summit next year in Seoul, will help secure dangerous nuclear materials. 
This will also require that the 2002 Global Partnership, dedicated to securing and eliminating all weapons of mass destruction – nuclear, chemical, and biological – is renewed and expanded when it convenes next year in the US. 
Our world remains too militarized. 
In today’s economic climate, nuclear weapons have become loathsome money pits. 
If, as seems likely, economic troubles continue, the US, Russia, and other nuclear powers should seize the moment to launch multilateral arms reductions through new or existing channels such as the UN Conference on Disarmament. These deliberations would yield greater security for less money. 
But the buildup of conventional military forces – driven in large part by the enormous military might deployed globally by the US – must be addressed as well. 
As we engage in furthering our Conventional Forces in Europe (CFE) agreement, we should seriously consider reducing the burden of military budgets and forces globally. 
US President John F. Kennedy once warned that “every man, woman, and child lives under a nuclear sword of Damocles, hanging by the slenderest of threads, capable of being cut at any moment.” 
For more than 50 years, humanity has warily eyed that lethal pendulum while statesmen debated how to mend its fraying cords. 
The example of Reykjavik should remind us that palliative measures are not enough. 
Our efforts 25 years ago can be vindicated only when the Bomb ends up beside the slave trader’s manacles and the Great War’s mustard gas in the museum of bygone savagery. 

A Field Guide to Israeli Hawks 
Prime Minister Ariel Sharon's announcement that he plans to dismantle Jewish settlements in the Gaza Strip, as well as some settlements in the West Bank, has shocked and caught people off guard both in Israel and around the world. 
Many denounced Sharon's plan as a trick. 
But that surprise was wrong-headed from the start. 
Despite the way it often looks to outsiders, debates in Israel about the future of the occupied territories have never been confined to hawks and doves. 
Like everything in Israel, the process is more complicated, especially where the hawks are concerned. 
Basically, there are two species of Israeli hawks: call one kind ideological and the other strategic. 
Ideological hawks view the occupied territories as an integral part of the historical Land of Israel, the homeland of the Jewish people. 
For them, the territories are part of the Jewish patrimony, which is why they insist on referring to the West Bank by its Hebrew historical appellation - Judea and Samaria. 
Not all ideological hawks are religious, although those who are base their claim on divine promises and prophecies. 
But many ideological hawks are secular nationalists, and their jargon is similar to that of typical Central and Eastern European nationalists. 
Former Prime Minister Menachem Begin and Yitzhak Shamir belonged to that category. 
Ideological hawks usually come from the National-Religious Party and from members of the Likud. 
They are inspired by the nationalist ideology connected with Vladimir Jabotinsky, who founded "Revisionist" Zionism as a challenge to the more moderate version espoused by Israel's Founding Fathers like Chaim Weizmann and David Ben-Gurion. 
Then there are the strategic hawks. 
For them, given Israel's narrow and vulnerable geographic shape and continuing Arab enmity, controlling the West Bank and Gaza is not an ideological imperative, but is driven by security considerations. 
For them, Jewish settlements in the territories are not a return to historical lands, but security outposts, aimed at preventing - or repelling from a better strategic position - an attack on the Israeli heartland. 
They may be right or wrong in this assessment, but it is not an ideological one. 
Ariel Sharon, who comes from a military background - he grew up in a social milieu much nearer to Labor than to Jabotinsky's ideas - is a strategic hawk. 
For ideological hawks, compromises are treason: how can you jeopardize the historical patrimony of the Jewish people, let alone God's promise to Abraham? 
Strategic hawks, however, are open to practical bargains and compromises - if the circumstances are right and if the security considerations justify it in their eyes. 
It is in this context that Sharon's moves should be seen. 
He was elected on the promise that he would bring peace and security. He has brought neither. 
With the defeat and demise of Saddam Hussein, the danger of an "Eastern front" against Israel has diminished. 
Absent a Palestinian partner, and given continuing Palestinian terrorism - which Israel's harsh responses fail to quell - what Sharon appears to be doing now follows from his strategic-oriented thinking: set up an effective barrier, move some of the isolated and strategically untenable settlements, and wait for another day. 
If one follows Sharon's statements in the last year, a clear pattern emerges. 
First, he admitted that "eventually" a Palestinian state would emerge - something unthinkable for dyed-in-the-wool ideological hawks. 
A few months later, he scandalized his own Likud party conference by stating that occupation is wrong and untenable - another shock for those who always speak of "liberated" rather than "occupied" territories. 
Last December, he explicitly stated that Israel is headed towards unilateral disengagement, and that this would entail the "relocation" of some settlements. 
Although this was still merely verbiage, it was novel language for a Likud prime minister. 
Sharon's latest statements, though, explicitly specified the settlements to be evacuated; the Director of the National Security Council, General Giora Eiland, was appointed to chair an inter-ministerial Relocation Committee and work out plans for conducting the evacuations, including compensation for relocated settlers. 
All of this has radically altered Israel's domestic political map. 
Some ideological hawks in Sharon's government threatened to resign; 
Shimon Peres announced that Labor will offer Sharon a parliamentary safety net; there is even talk about Labor joining a national unity government. 
The test, of course, is not in the planning, but in the implementation of withdrawal, and the road is long and bumpy. 
Sharon's timing may have been determined by his problems with police investigations into alleged corruption. 
Yet anyone who would like to predict Sharon's future behavior should remember that unlike Begin and Shamir, Sharon comes from the military, and for him security - not ideology - is supreme. 
So his apparent pragmatism should come as no surprise. 


A Foreign Policy for New and Old Europe 
Watching the news from Iraq, I recall when I was Poland's Prime Minister during the Gulf War in 1991. 
I watched from home on CNN as the first cruise missiles hit Baghdad. 
Hours later our military informed me that armed conflict was underway in Iraq. ``Yes, I know,'' I said. ``I've been watching the bombardment on TV.'' 
Twelve years later, Poland's Prime Minister didn't need a belated call from his military to know that war was underway in Iraq. 
All the details of the attack were provided in advance by the US, now Poland's NATO ally. 
Indeed, Poland has secured a leading role in Iraq's occupation. 
What a distance Poland has travelled since communism's collapse in 1989! 
Little of this, however, is the result of design, for (unfortunately) we in Poland have not thought through what sort of foreign policy we need as a member of NATO and putative member of the European Union. 
We remain narrowly focussed on whether an initiative will be immediately good or bad for us. 
Couple this with a form of foreign policy schizophrenia--some Poles think that by ``simply existing'' we influence Europe's fate; others suffer crippling pessimism, consigning Poland to permanent ``second-class'' status--and you have a recipe for inertia. Our attitude seems to be that somehow things will sort themselves out. 
Much of Europe seems to be stuck in the same mindset: we say that we want a common foreign and security policy, but we do nothing about it until a crisis emerges. 
Then we squabble about what to do. 
The time for such laxity is over. 
For Poland and the other countries of East-Central Europe that have or are about to join NATO, membership in the Alliance didn't really require debate. 
Our histories of oppression by powerful neighbours told us that collective security within NATO was the only real option. 
EU membership and the global war on terror, however, demand a more deeply considered response. 
Why? 
Because EU membership affects every aspect of a state, economy, and society, while the war on terror demands a completely new way to conduct diplomacy and security policy. 
Today's crisis in transatlantic relations, and our accidental involvement in it as part of Donald Rumsfeld's ``New Europe,'' means that Poland (like every other European state) must now decide what it really wants from the EU and NATO. 
We must consider both our attitude to global problems that were once deemed peripheral to European interests, as well what it really means to be an EU partner. Only answers to these questions can reconcile the divide between the ``new'' and ``old'' Europe, as well as the new and old Atlantic worlds. 
Poland as an ally of the US is not the real headache facing President Jacques Chirac or Chancellor Gerhard Schroeder. 
Instead, the French and German leaders are really responding to the growing unpredictability of today's emerging European order. 
They see new players (say, Spain) rising to shape EU policy, particularly foreign policy, and sense that their traditional leadership is being challenged. 
But an EU with 10 new members simply cannot be run as it has for decades. 
So the challenge to France and Germany does not arise because Poland is some sort of American ``Trojan Horse.'' 
Instead, the EU's structure now demands not only a new consensus about Europe's role in the world, but also new means to achieve consensus. 
History cannot be put on hold as Europe sorts out its internal balance of power. 
The world needs a united continent, ready to go into action. 
That consensus must include the US. 
During the Cold War, most Europeans tolerated America's tendency to lead unilaterally, because of the Soviet threat and the preponderance of US power. 
But America is having a hard time understanding the new circumstances of the post-Cold war era. 
Its difficulties are exacerbated by the dramatic disparity in military forces on either side of the Atlantic, and its belief that Europe's ambitions to become a military power will come to nothing because Europeans won't spend the money necessary to achieve that goal. 
Here is where Poland can help bridge the Atlantic divide and forge a European consensus. 
September 1939 taught every Pole that military power must be real to be effective. 
Intentions don't deter invasions. 
As Danish Premier Anders Fogh Rasmussen recently said, ``France and Germany are not in a position to guarantee our country's security. 
The US is, but security does not come free of charge.'' 
Most Poles think that Poland's situation is akin to Denmark's. 
Indeed, all of Europe is in thrall to American power. 
But this dependence should not disguise the fact that there is a commonality of foreign policy interests between Europe and America. 
If the EU builds its foreign and security policy on the basis of recognition of this truth, many of today's divisions will disappear. 
The EU's foreign policy should be guided by the following goals: 
fight terrorism; 
prevent local conflict; 
promote human rights and democracy; 
oblige unpredictable countries to become responsible; 
maintain close cooperation between Europe and the US; 
help poor countries. 
Polish foreign policy, like that of the EU, can only be effective in the long term if it takes realistic steps--and spends the necessary money--to realize these objectives. 
They are the only possible bedrock in transatlantic relations, in an expanded Union, and in relations between the ``New'' and ``Old'' Europe. 

A French Cure for the Resource Curse 
NEW YORK – The campaign to ensure that companies engaged in extractive activities disclose all of their payments in their host countries is gaining momentum – and France is leading the effort. 
President Nicolas Sarkozy should be applauded for supporting a new initiative promoting strict transparency standards for petroleum, gas, and mining companies listed on European stock exchanges. 
France, at the heart of the European Union and President of both the G-8 and G-20 this year, is in an exceptional position to encourage such a regulatory move. 
With French leadership, 2011 offers a golden opportunity for the most important capital markets to adopt clear, precise rules requiring full financial disclosure by extractive-industry companies to governmental authorities. 
Oil, gas, and mining generate billions of dollars per year for governments and companies. 
Moreover, these industries often play a central role in the economic development of resource-rich countries. 
Yet, despite great natural wealth, a majority of people in these countries lives in poverty. 
The actual taxes and payments made by mining, oil, and other extractive-industry companies to governments are usually a well-kept secret, even though most of these governments claim to use the revenue for the public good. 
In reality, in far too many countries, ordinary citizens do not benefit from any of this money; in fact, they must bear the brunt of the environmental and social costs imposed by mining and drilling operations. 
Indeed, these well-kept industry and government secrets can have serious and widespread repercussions. 
Witness the upheaval in North Africa and the Middle East. 
In these countries, many of which are rich in oil and gas, citizens are staging protests against corruption and political repression. 
At bottom, they are protesting against the mismanagement of their countries’ wealth and resources – with implications that affect the security and affordability of the entire world’s energy supplies. 
Transparency is an essential part of the solution. 
Citizens everywhere must be assured that oil and gas firms, as well as mining companies, publish all of their relevant financial information, broken down by country and by project, and including all payments made to host-country public budgets. 
If European regulators can agree on this requirement for all extractive-industry companies listed on their stock exchanges, this transparency norm will be applied to companies regardless of where their headquarters are located. 
Regulators must also stipulate that company reports be made available on a regular, timely basis, and that they are easily accessible and comparable across countries and other extractive companies. 
The United States has already passed legislation requiring public disclosure of payments to governments, through the 2010 Dodd-Frank law. 
That law’s requirement that companies fully disclose their revenue streams by country and by project applies to 90% of international oil and gas companies and to eight of the ten largest mining companies. 
This will help citizens track how that money is used, but it will not help them to assess whether their governments are collecting a fair share. 
If the EU were to require companies to publish detailed information regarding production and operational numbers, financial and accounting balances, and payments to authorities, companies would become truly accountable to citizens, and government revenues would be augmented. 
Such regulatory reform is now under consideration by the European Commission, and French support is imperative if the EU is to announce this month the necessary legislative moves to promote transparency. 
French Finance Minister Christine Lagarde recently highlighted the necessity of promoting “initiatives within industrial sectors that aim to enhance governance, integrity, and transparency in economic transactions.” 
At its just-completed summit in Deauville, France, the G-8 called for the first time for mandatory reporting by oil, gas, and mining companies. 
This is an important advance, but, unfortunately, it is qualified by language that allows voluntary approaches as an alternative, and it focuses only on payments transparency. 
Now the world must look to the G-20 summit in Cannes this November to make an unequivocal commitment to the reporting requirements needed, given that important emerging economies such as Brazil, India, and China, as well as South Africa and other resource-rich African countries, will be at the table. 
The importance of financial transparency in the extractive industries is not limited to one country or era – and it is too important to be left to voluntary efforts alone. 
Greater accountability and stronger governance for such companies could potentially change lives, economies, and political systems around the world. 

A French Presidential Primer 
The late British Prime Minister Harold Wilson used to quip that “a week is a long time in politics.” 
So, in the 30 or so weeks between now and the next French presidential election, any prediction made today could be reversed, and reversed again, before the vote. 
But two candidates have emerged as clear and constant favorites in opinion polls: Nicolas Sarkozy on the right and Ségolène Royal on the left. 
In fact, they have more in common than meets the eye, for each speaks of a rupture with the past while incarnating a form of continuity. 
For Sarkozy, “rupture” reflects both mundanely tactical and deeply personal choices. 
The 12 years of Jacques Chirac‘s presidency, together with France’s tradition of alternation in power, suggests a victory for the left. 
Positioning himself as the candidate who represents a sharp break with today’s unpopular politics is the only means to escape that fate. 
This is reflected in Sarkozy’s openly pro-American stance – an act of political courage in a France where anti-Americanism is running high. 
Sarkozy’s message is that Chirac and Villepin were right in substance to oppose America’s military adventure in Iraq, but that their style was disastrously wrong. 
Thus, his deep admiration for “American values,” while sincere, implies no embrace of President George W. Bush. 
It also reassures the French business community, which was shocked by Dominique de Villepin’s flamboyant opposition to the United States when he was Chirac’s foreign minister. 
At home, Sarkozy has aimed his message particularly at the young, issuing a patriotic call to the values of work and discipline, a counter-revolutionary revolution. 
The revolution that must be overcome is that of May 1968, whose leaders and supporters, according to Sarkozy, may have lost politically to de Gaulle, but deeply weakened France over the succeeding decades with their emphasis on “false values.” 
By contrast, rebelling against one’s parents’ generation and rediscovering traditional moral stances will save France – a message that is highly applicable to issues, such as education and immigration, that may dominate the electoral campaign. 
In the case of Royal, the meaning of “rupture” is both more obvious and more visible. 
She is seeking to become the first woman President of the French Republic. 
To achieve her goal, she prefers to emphasize her “essence,” thereby countering Sarkozy’s stress on his record as a “doer.” 
Her appeal to voters is simple: “I am a woman, and you have never tried a woman, so be modern and try one now.” 
Hiding behind the originality (in French presidential politics) of her gender, Royal has avoided specifying a detailed program. 
When challenged by inquisitive journalists demanding greater precision about her policy agenda, her highly effective line of defense (so far!) has been: “You would not dare to ask me such a question if I were not a woman!” 
Thus, Royal’s program is her popularity. 
In foreign policy, one can only guess what her priorities would be. 
As far as Europe is concerned, she seems as “agnostic” as Sarkozy, who, like her, incarnates a new generation of “post-European” leaders. 
In terms of values, Royal, too, seems to represent a rupture with May 1968, with her emphasis on discipline and family. 
According to public opinion polls, Royal is the clear favorite of the left and the only candidate able to defeat Sarkozy. 
Her support is particularly strong among women voters. 
For the Socialist Party, which is eager to return to power but has not yet recovered from the humiliating defeat of Lionel Jospin in the first round of the presidential election in 2002, the question is whether it can afford to resist the wave of favorable public opinion behind Royal. 
In the opinion of Royal’s many opponents among Socialist leaders and militants, the dominance of the media in the political process is leading to mediocrity: the qualities required to be elected are becoming nearly incompatible with those needed to govern. 
According to Royal’s Socialist critics, the “Hollywoodization” of politics from which she benefits entails a new approach in which leaders follow and followers lead. 
But the same criticism can be directed at Sarkozy. 
Moreover, both candidates embody continuity – with Chirac’s Gaullist side for Sarkozy and with François Mitterrand for Royal – as much as rupture. 
Royal openly claims Mitterand’s legacy as she searches for legitimacy, while Sarkozy’s rejection of Chirac’s legacy has more to do with form than substance. 
To a large extent, Sarkozy can be seen as Chirac with more, whereas Royal is clearly Mitterrand with less. 
When the voters decide in the spring of 2007, their choice may depend more on negative than positive considerations, as it did in 2002, when Chirac faced the odious nationalist Jean-Marie Le Pen in the second round. 
As in 2002, the winner next year will be whomever the electorate dislikes or fears less. 
But one way or the other, personalities will prevail over programs. 

A Fresh Start for China and Japan? 
Edmonton – Chinese President Hu Jintao will make a high-profile visit to Japan from May 6-10, making him the second Chinese head of state ever to travel there. 
The trip is being carefully managed by both countries, and is being watched closely around the world, with good reason: Sino-Japanese relations over the past decade have been turbulent, to say the least. 
When Hu’s predecessor, Jiang Zemin, traveled to Japan ten years ago, bilateral relations were deteriorating: China was unhappy with the Japanese government’s refusal to extend the same apology offered to South Korea for past aggression; 
Japan was worried about a rising China and thus turning more confrontational. 
The Japanese media’s coverage of the visit was overwhelmingly negative, and it was remembered as a public-relations disaster. 
Hu succeeded Jiang in 2002, almost as former Prime Minister Junichiro Koizumi was coming to power in Japan, and encouraged “New Thinking” in China’s Japan policy, which would entail moving away from historical grievances and promoting better ties. 
But, instead of accepting China’s olive branch, Koizumi implemented a more nationalistic agenda, including annual visits to the Yasukuni Shine, which is regarded as a symbol of Japanese militarism by Japan’s neighbors. 
His hard-line approach isolated Japan and angered China, leading to an outburst of anti-Japanese demonstrations in China in 2005. 
But both Japan and China recognize that further tension will serve neither country’s long-term interests. Koizumi’s successors, Prime Ministers Shinzo Abe and Yasuo Fukuda, have sought to engage China over the past two years, with summits in Beijing and a successful visit by Chinese Premier Wen Jiabao to Japan last year. 
Hu’s trip is likely follow the example set by Wen. 
He will emphasize common strategic interests, highlight mutual economic benefits, generate positive public opinion, and promote further exchanges. 
Japan is not only one of China’s largest trade and investment partners, it is also the most powerful neighbor with which China wants to be on good terms, partly to showcase that China’s rise is not a threat to Asia and the rest of the world. 
Japan, whose economic recovery is attributable largely to its deepening ties with China in recent years, is also eager to demonstrate that it regards China not as a threat but as an opportunity, as least in economic terms. 
It was 30 years ago that former Prime Minister Takeo Fukuda, the father of today’s prime minister, signed a Peace and Friendship Treaty with China. 
The two governments will certainly use Hu’s visit to celebrate the anniversary with new programs designed to enhance bilateral understanding and friendship. 
But, unlike three decades ago, when the Japanese regarded China as one of their most favored countries, public opinion in both countries nowadays registers more negative feelings than positive ones. 
Behind the smiles, the polite interactions, and the cautiously worded diplomatic language, strong undercurrents of suspicion remain. 
One problem is the disputed waters of the East China Sea. 
Despite new joint projects in energy efficiency and environmental protection, areas in which China ranks Japan as the best performer among industrialized countries, the two sides remain in bitterly divided over these territorial waters, which contain huge potential oil, gas, and other mineral deposits. 
Even after many rounds of talks, no resolution is in sight, and Hu’s visit is not expected to produce any breakthroughs. 
Then there are strategic suspicions. 
Fukuda has dropped Abe’s talk about an “arch of freedom” – an effort to forge a bloc with the United States, Australia, and India. 
But Japan remains concerned about China’s rapidly modernizing military, while China worries about a potential US-Japan containment strategy for China, especially in the case of a crisis in the Taiwan Straits. 
So, although both sides endorse the idea of a “mutually beneficial strategic relationship,” and despite progress bilateral on military exchanges, mutual trust and confidence-building have a long way to go. 
Moreover, today’s “warm politics, cool economics” trend is the reverse of the “cold politics, warm economics” pattern under Koizumi. 
Last year, Japan’s committed investment projects in China fell 24% from 2006, while actual investment volume decreased by 25%, partly owing to regulatory changes in China regarding foreign investment. 
Recent food safety issues, such as the “poisoned dumplings” cases, have clearly heightened the Japanese public’s sensitivity about Chinese exports. 
Finally, historical issues could still resurface to cause new problems. 
While Fukuda has made it clear that he will not visit the Yasukuni Shrine, 160 other parliamentarians paid homage at the site last month, an indication that conservative forces in Japan remain strong and that future prime ministers may not abstain from visiting Yasukuni. 
And Japan has so far failed to live up to its treaty obligations to clean up between 700,000 and two million chemical weapons that were abandoned in China by the Japanese army at the end of World War II, another potential flash point if any of these weapons causes casualties in China. 

A Fresh Start for Europe in Latin America? 
MILAN – By 2050, Brazil and Mexico will be among the world’s six leading economies, according to analysts at the investment bank Goldman Sachs. 
Does the European Union care? 
Is Latin America to be Europe’s next missed business opportunity? 
Latin America has a population of 550 million, with average yearly per capita income of $4,000, immense natural resources, and substantial human capital. 
It accounts for 8% of world production and grew by more than 5% in each of the past three years. 
Although the United States remains the main destination of Latin American and Caribbean exports, Asia is becoming an increasingly important market for goods based on natural resources. 
During the past four years, Latin America attracted an annual average of $61 billion in foreign direct investment, 60% of which went to Brazil and Mexico. 
In the 1990’s, foreign investors were chiefly attracted by privatization programs in the region, but more recently mergers and acquisitions and greenfield projects have been the most common type of investment. 
Predictably, Spain is the most important European investor in the region, though several important Spanish operations have recently passed to Italian companies, among them the utility Endesa, acquired by Enel, which is now the biggest private energy distributor in Latin America. 
Meanwhile, Latin American businesses have been increasing their own foreign investments. 
In 2006, Brazil invested $28.2 billion abroad, compared to inflows of $18.8 billion. 
Indeed, emerging giants from Latin America and Asia will be at the center of worldwide investment in the coming decades. 
In 2006, Italy’s Fiat Group and India’s Tata Motors established a joint venture to make passenger vehicles and engines in India. 
The following year, they extended their partnership to Latin America, investing $80 million in production of a Tata pick-up truck at Fiat’s factory in Cordoba, Argentina. 
It is to be hoped that many more major European corporations will follow suit. 
But small and medium sized enterprises (SMEs) – the majority of firms in both Latin America and Europe – find it difficult to trade and invest at international level, in part because of high transaction and information costs. 
In Europe, clusters of SMEs appear able to achieve economies of scale and scope, and thus to succeed collectively in global markets. 
This European experience is now being widely studied in Latin America. 
In Brazil, four local production systems have combined to form Project Promos/Sebrae/BID, based on the example of Italy’s industrial districts. 
Between 2002 and 2006, Brazil’s SME support services and the Milan Chamber of Commerce created partnerships involving furniture, shoes, designer lingerie, and handicrafts from different regions of the country. 
This approach may well be the shape of things to come. 
But, while the EU’s association agreement with Mexico is 10 years old, it does not yet have a strategic partnership with Brazil. This is partly because of the never-ending negotiation process with Mercosur, the troubled – and still incomplete – Latin American customs union. 
The EU is currently negotiating trade liberalization deals with all of Latin America’s regional blocs: Mercosur, the Caribbean Community, the Central America Common Market, and the Andean Community. 
The EU must urge its Latin American partners towards further integration. 
Adopting a common “rule of origin” for their products would be an incentive to liberalize their international trade further, thus increasing it. 
Full trade liberalization in Latin America, although difficult to achieve, must be made central to EU strategy, and would boost economic growth. 
But even if tariffs and quotas are progressively reduced, trade flows may remain low if other trade costs remain high. 
EU cooperation thus should be directed to lowering trade costs. 
The crucial issue is market access. 
Most Latin American countries still get poor results from their efforts to export to Europe, the exceptions being raw materials and energy resources. 
After the establishment of the EU-Chile free-trade area, Chilean exports to the EU increased substantially. 
But in the case of EU-Mexico trade liberalization, the growth of imports from the EU has exceeded the growth of exports to Europe, resulting in a widening Mexican trade deficit with the EU. 
This is at odds with the EU’s proclamations since the 1999 Rio summit that Latin America is a vital political and economic partner. 
A change in Europe’s approach is needed if a strategic partnership is to be created. 
The European Commission understands this. 
Although the EU does not have a strategic partnership with Brazil, it intends to push ahead with one as fast as possible. 
In mid-2007, the Commission confirmed that it will revisit the EU’s dialogue with Mercosur, with the aim of giving new impetus to negotiations. 
But there is also keen awareness that the EU’s hope for a special relationship with Brazil must not be allowed to hinder regional integration or worsen asymmetries and imbalances within the bloc. 
If Latin America is to become a strategic partner for the EU and a more attractive market for European companies, European institutions must become more open to the region’s needs. 
A fresh start by the EU with Brazil and Mexico could prove promising, because of the “pull” it might have on other countries. 
But this must be accompanied by measures to keep all Latin American countries on board. 
Otherwise, Latin America may well prove to be Europe’s next missed business opportunity. 

A Fresh Start for Europe 
As Europe’s leaders gather in Portugal to put the finishing touches on the new, slimmed down, Reform Treaty, it might be helpful if they all pretended that the last 50 years of European integration had never taken place. 
Let’s then imagine what Europe needs to do to confront its most pressing challenges, especially if it were able to do so without the political constraints of 50 years of EU deal-making and ramshackle institution-building. 
On top of that, let us make a major leap of imagination and suppose that even though this scenario of the EU at “Year Zero” means we would not have a half-century of intra-European cooperation to draw on, the nations that today make up the EU would nevertheless be keen to adopt far-reaching joint policies. 
Let’s suspend our disbelief, then, and try to imagine what Europe could and should be doing to tackle some of the most far-reaching and obstinate policy challenges that will determine whether the next 50 years are as constructive as the last. 
Or, to put it another way, let’s look at our problems in the light of the EU’s existing mechanisms and its potential for creating far-reaching new policies, and then let’s ask ourselves why the EU isn’t realizing its own potential and delivering the goods. 
Broadly, we see three areas in which Europe’s policymakers at both the national and EU levels can do better: global challenges where Europe could show greater leadership, the creation and strengthening of human capital within the EU and worldwide, and improvement in the effectiveness of the EU’s own political machinery. 
Europe needs a clearer and more recognizable global agenda. 
It needs to build substantially on its leadership on climate change by adopting much tougher EU goals, and then use its international economic and trade clout to champion new global emissions standards that scientific opinion can accept as meaningful. 
On conflict and security issues, Europe should be advancing to a new phase in which it takes much clearer and unambiguous positions on issues ranging from nuclear proliferation to sanctions against Burma’s military regime. 
The purpose must be to establish Europe as a forceful and fair-minded player on the world stage, rather than as a “broad church” in which different viewpoints co-exist. 
The aim should be that “soft power” instruments like EU development aid and economic partnerships would be linked with a growing sense of political and security outreach to ensure Europe is a global player to be reckoned with. 
That means, of course, that the EU should seek to widen its transatlantic thinking so that the EU and the United States cooperate more closely on defining – and thus protecting – their common interests in a world where together they account for little more than 10% of the total population. 
These points are far from a blanket criticism of the EU’s efforts to create a common foreign and security policy. 
But they are intended to underline what many people in Europe know very well, which is that the speed with which problems concerning international development and conflict are growing easily outpaces the EU’s policy responses so far. 
Building more human capital in Europe and worldwide is a crucially important element in future EU activities. 
Education is by far the most profitable investment Europe can make, so it should be launching its most ambitious strategy ever to create a new knowledge dynamic and employment inside the EU while helping to expand greatly education in the world’s poorest countries. 
Europe also must at last grasp the nettle of immigration policy – something that has persistently eluded generations of political leaders. 
Agreed EU-wide immigration rules are needed to reconcile shrinking Europe’s hunger for imported labor with widespread fears of cultural tensions and social unrest. 
It won’t be easy to create a fairer and more multi-cultural Europe, but failure to address this problem openly will carry an even heavier price. 
By much the same token, Europe’s governments should be making a determined new effort to strengthen Europeans’ sense of a shared history and common values. 
A stronger European identity is the soundest basis for creating the more multi-cultural society that demographers regard as inevitable. 
Meanwhile, doubts still surround the political and institutional machinery the EU will need to realize these and other ambitious goals. 
Sighs of relief greeted EU leaders’ mid-year agreement on a Reform Treaty aimed at overhauling the Union’s decision-making mechanisms, but it is still uncertain whether the new pact will survive the ratification process in 27 countries. 
We believe, though, that the increased use of qualified majority voting by member governments embodied in the new treaty should also be applied to the ratification process itself. 
That way, if a small minority of EU governments prove unable to ratify the treaty, it would not be torpedoed the way that its predecessor, the Constitutional Treaty, was in 2005. 



A Gasp from Europe 
French President Jacques Chirac has alarmed the EU candidate countries of Central and Eastern Europe. 
The French president has accused them of being "childish" and "irresponsible" in voicing their pro-US stance on the Iraq issue, and warned that their position could be "dangerous," as the decision to let them into the EU has not yet been ratified. 
Quite a salvo. 
Then the French president assumed the role of kindergarten instructor vis-à-vis what he called "badly brought up" candidate countries, telling them that they were "ill-behaved" and that "they missed a great opportunity to shut up." 
To anyone who remembers that 40 years ago President Charles de Gaulle slammed Europe's door shut in the face of Britain's request to join the European community--the General thought the British too tied to the US to enter the European family--these remarks are worrying. 
But put things in perspective: Jacques Chirac is not Charles de Gaulle; and Europe has moved far beyond the time when its agenda was unilaterally written by France. 
President Chirac's self-appointed role as an expert in diplomatic good behavior cannot be taken seriously, even by those of us who know (and love) France. 
Instead, his outburst is best explained as a sign of frustration over the fact that French influence in the EU is being diluted. 
Like King Lear after he lost his kingdom, there is nothing France can do about its lost influence but rage impotently. 
But this dispute within Europe goes deeper than the matter of France's lapsed primacy. 
I have always been skeptical about the rhetoric of a "common" foreign policy for the EU. 
How can you possibly expect a country such as, say, France to accept being voted down by its EU partners on vital foreign and security policy issues? 
At best, Europe should hope for a "more common" foreign and security policy, even though this fails to answer Henry Kissinger's old question: If you want to speak to "Europe," whom do you call? 
I have long worked to secure a "much more common" foreign policy within the EU. Therefore I am worried by today's split within the EU as well as between some member countries and the US over Iraq. 
When eight European leaders published their appeal to heal the growing transatlantic rift, they were accused of undermining European unity. 
Nothing could be more incorrect. 
They were only exposing the lack of unity that already existed. 
It all began last autumn when German Chancellor Gerhard Schröder, desperate to hold on to power, made Iraq an issue in the German election campaign. 
He played on Germany's well-known and respectable pacifist feelings. 
But by declaring that he would not, under any circumstance, participate in military actions against Iraq, he undermined the efforts at the UN to put maximum pressure behind the demands that Iraq disarm. 
Then France embraced Germany. 
French ways in foreign policy are often murky and difficult to decipher, unless it is crystal clear where France regards its interests to lie. 
Usually France likes to keep its options open. 
But when the French and German governments celebrated the fortieth anniversary of the Elysée Treaty last month, France seemed to paint herself into a corner by supporting the German view. 
All this was done without consultations between the French and German governments and their partners within the EU. 
It was a demonstration of the special relationship between France and Germany that has for so many years been the driving force in European integration. 
The history of Franco-German reconciliation is impressive indeed. 
But it can no longer be taken for granted that other EU countries will automatically ratify the agreements that they reach between themselves as the lodestar for common policies. 
This is particularly true when their objective is to establish an "alternative" to American leadership in security policy. 
Enlargement of the EU with a number of Central and Eastern European countries will strengthen resistance to Franco-German initiatives in this direction. 
The letter from the eight European leaders--and the later statement from the "Vilnius Ten" group of Central and Eastern European countries--demonstrated that France (and Germany) cannot dictate a European agenda that creates transatlantic rifts. 
This has obviously caused frustrations. 
But it should not have been a surprise to anyone. 
The split within the EU and NATO has increased the risk of armed conflict with Iraq because the pressure on Iraq to comply with the UN resolutions was weakened. 
Chirac and Schröder do not seem to grasp this. 
So this has not been one of Europe's finest hours, especially not while the EU's institutional convention is discussing a text that calls for EU governments to "actively and unreservedly support the Union's common foreign policy." 
The German acronym for the EU's "common foreign and security policy" is GASP. 
That seems an entirely appropriate expression for what we have been witnessing. 

A Gazan Education 
GAZA – This was supposed to be my first year of medical school. 
Instead, I am stuck here in Gaza, in my father’s house inside the Jabalia refugee camp, with few options and no way out. 
After I finished high school last year, I decided to become a doctor. 
Gaza cries out for bone specialists, but the training I need is available only abroad. 
When I won a place at a medical college in Germany, my parents were proud. 
I was excited to follow my older brother, who is already studying there. 
In February, the German authorities granted me an entrance visa. I wasted no time in asking the Israeli authorities for permission to travel to Europe. 
But I was told that only patients in need of emergency medical evacuation would be allowed out – not students. 
Hundreds of other young people trapped in the Gaza Strip have won admission to study abroad. 
For many of us, this is our only opportunity to continue our education. 
Gaza is one of the most densely populated places on earth, and one of the poorest – 1.5 million of us live on a patch of land about 41 kilometers long and 6-12 kilometers wide. 
The local hospitals lack the equipment needed to perform many important procedures, like radiation treatments for cancer patients and heart surgery. 
Universities in Gaza are overcrowded and starved for supplies. 
Many subjects are not even taught, and there are few post-graduate programs. 
Instructors from abroad cannot enter Gaza. 
Without the ability to go overseas, we cannot learn. 
In June, after the United States pressured Israel to allow Fulbright scholarship winners to leave the Gaza Strip, the Israeli military announced that it would grant exit permits for a few more students with “recognized” scholarships – but not “hundreds.” 
So hundreds of us are still waiting, most without prestigious scholarships to draw the world’s attention. 
I am sure to be one of the many who will not be allowed to leave. 
Life in Gaza has bled away my optimism. 
My father is a teacher and owns a children’s clothing shop. 
My mother is a housekeeper. 
I have six brothers and three sisters. 
We returned to Palestine in 1996 from Saudi Arabia, where my father had been working as a teacher. 
That was at the height of the peace process. 
My parents put their hope in the Oslo Accords signed in 1993, and decided that they could give us a better life here. 
But when I was ten, the second intifada began. 
The peace process was collapsing throughout my teenage years. 
During my third year of high school, the Israeli authorities closed off the Gaza Strip. 
Israeli border controls have reduced the flow of people crossing the border to a trickle, and have suffocated Gaza’s economy, choking off imports and exports and cutting fuel deliveries and electricity. 
There is no clothing left in my father’s shop, which was supposed to support my brother and me during our studies. 
With the backing of the US, Canada, and the European Union, Israel has maintained its blockade in an attempt to defeat Hamas, which won the elections here in 2006. 
But the blockade only makes people more desperate. 
Hamas and other armed groups, I know, have launched rocket attacks from the Gaza Strip that have killed civilians in Israeli towns and villages. 
But I also have witnessed how Israel has retaliated with air strikes and armed incursions into the Gaza Strip, including Jabalia. 
Israel’s blockade amounts to collective punishment. It is hurting all of us, whether we support Hamas or not. 
It is also destroying my dream to write “Specialist in Bone Medicine” after my name. 
Sometimes, I am sorry that I am from Gaza. 
But my hope is still to go abroad, learn skills, and return to help others here. 
Sometimes, when there is electricity, I watch television and see how people live in other places. 
I ask myself why they have the opportunity to travel, to study, to take vacations, when I cannot go abroad even to learn medicine. 
We are students, not soldiers. 
We are not fighters in this conflict. 
Why doesn’t Israel let us go study? 
Why do Europe and America support a blockade of young minds? 
Soon, my fellow classmates at the medical college will be starting classes. 
When they do, I will probably still be here in my father’s house, waiting for the blockade to end. 

A Gender Divided 
OXFORD – The top and the bottom of the list of countries in Newsweek’s recent cover story, “The 2011 Global Women’s Progress Report,” evoke images of two different worlds. 
At the top of the list – the “Best Places to be a Woman” – we see the usual suspects: Iceland and the Scandinavian countries, the Netherlands, Switzerland, and Canada. 
On that planet, we see rankings in the upper 90’s for the survey’s five categories: justice, health, education, economics, and politics. 
Women are out-earning men in college degrees (United States), domestic abusers are being banned from their homes and tracked with electronic monitors (Turkey), and female prime ministers are being elected (Denmark and Australia). 
Now look at the other planet, “The Worst Places in the World to be a Woman.” 
In Chad, the worst of the worst, woman have “almost no legal rights,” and girls as young as ten are legally married off, which is also true in Niger, the seventh worst place for a woman. 
Most women in Mali – the fifth worst – have been traumatized by female genital mutilation. 
In Democratic Republic of Congo, 1,100 women are raped every day. 
In Yemen, you are free to beat your wife whenever you like. 
Though it is stunning to see these two worlds in such stark and detailed relief, their existence is not news: development specialists and human rights groups have been calling attention to these inequities for years. 
But the systemic oppression of women tends to be cast in terms of claims for empathy: we shouldn’t follow these policies because they are not nice, not enlightened. 
Some development researchers have started to make a compelling case, too, that oppression of women impedes countries’ efforts to escape poverty. 
But the data in the Newsweek list show that we need to frame this issue in stronger, more sweeping terms: When poor countries choose to oppress their own women, they are to some extent choosing their own continued poverty. 
Female oppression is a moral issue; but it also must be seen as a choice that countries make for short-term “cultural” comfort, at the expense of long-term economic and social progress. 
It is not politically correct to attribute any share of very poor countries’ suffering to their own decisions. 
But it is condescending to refuse to hold many of them partly responsible for their own plight. 
Obviously, the legacy of colonialism – widespread hunger, illiteracy, lack of property or legal recourse, and vulnerability to state violence – is a major factor in their current poverty. 
But how can we blame that legacy while turning a blind eye to a kind of colonialism against women in these same countries’ private homes and public institutions? 
When the poorest countries – most of them in Africa or with Muslim majorities – choose to sustain and even devise new policies that oppress women, we have to be willing to say that, in some measure, they are choosing the economic misfortune that follows. 
The developed world’s silence suggests that it takes the mistreatment of black and brown women by black and brown men for granted, rather than holding all people to one standard of justice. 
The “surprises” on the Newsweek list confirm that educating women boosts economic prosperity. 
Many countries with histories of colonialism and other forms of tyranny, as well as countries without abundant natural resources, have chosen to educate women and grant them legal rights. 
Some continue to struggle economically, but none is abjectly poor – and some are booming. 
Think of China, India, Malaysia, Indonesia, Brazil, South Korea, and Turkey. 
The low status of women on Planet Worst cannot be blamed on cultural stasis: many of the “surprise” countries – Romania, Portugal, the Philippines, and India – treated women far more unequally a mere 50-100 years ago. 
In Pakistan, marital rape is not illegal today, and there are 800 honor killings a year. 
What kind of economic boom might stagnating Pakistan enjoy if patriarchy relaxed its grip? 
If you are not innumerate, you can start a business. 
If you are not living in mortal fear of rape and beatings at home, you can organize your community to dig a new well. 
If you are not subjecting your daughter to traumatic genital injury at three and marrying her off at ten, she can go to school. 
And, when she does marry and has children of her own, they will benefit from two educated, employed parents, which means twice as much literate conversation in the home, twice the contacts, and twice the encouragement to succeed. 
Educated, pushy mothers make all the difference. 
As US Secretary of State Hillary Clinton put it in the Newsweek issue, “The world needs to think more strategically and creatively about tapping into women’s potential for growth. 
Studies show that helping women access trade and grow businesses helps create jobs and boost incomes.” 
But on Planet Worst, forcing terrified, uneducated women to remain at home is more socially acceptable than facing the fact that this means choosing to drag down incomes for everyone. 
It is time to stop tiptoeing around the poorest countries’ responsibility to do something essential about their own plight: emancipate their women. 

A general's trial 
BUCHAREST: As Chile’s former dictator, General Augusto Pinochet, under house arrest outside of London, awaits a final decision on whether he is to be extradited to Spain to face charges of having committed crimes against humanity, Romania has tried and convicted one of its own military leaders for his role in the massacre of civilians in the city of Timisoara ten years ago. 
The confused reaction to this verdict should, perhaps, give pause to all those who think that putting the past on trial is a straightforward thing. 
Generals Atanase Stanculescu and Mihai Chitac were found guilty of ordering the killings of dozens of innocent people in Timisoara in 1989. 
Both were sentenced each to long prison terms. 
The rulings were met with fierce criticism by some journalists and politicians but were enthusiastically welcomed by others. 
Undoubtedly, these verdicts will remain divisive in a society not yet able to come to terms with its past. 
The story of General Stanculescu, sentenced to 15 years in prison, reads like a cheap novel, with treason thrown into the mix. 
The tall, good-looking officer was among Nicolae Ceausescu’s closest aides. 
As the uprising against the Ceausescu regime broke out in December 1989 in Timisoara, Stanculescu (together with General Chitac) was dispatched to the city and ordered to suppress all demonstrations by any available means. 
He carried out these orders ruthlessly, his troops shooting down over 100 unarmed street demonstrators. 
Summoned back to Bucharest two days later, Stanculescu apparently had second thoughts about his loyalty to the dictator. 
He recognized that Ceausescu was doomed. 
Pretending to have a broken leg, he stalled in making his reappearance. 
Then, on the 22 December, as crowds stormed the Central Committee headquarters in Bucharest, Stanculescu arranged for a helicopter to rescue Nicolae and Elena Ceausescu from the building’s roof terrace. 
Minutes before the helicopter took off, Elena told the General, who was wearing a fake plaster cast around his leg: “Dearest Victor, look after my children!” 
By then, however, the General had turned coats: he had joined "the people" and the newly-born National Salvation Front. 
The helicopter was taking the dictator and his wife to prison, not freedom. 
Within days, Stanculescu was among those masterminding the show-trial of the Ceausescus which ended with their being sentenced to death and executed on the spot. 
Film of Stanculescu at the time show that he had dispensed with his plaster cast. 
Stanculescu’s career boomed. 
He was appointed industry minister by the new, revolutionary government. 
A few months later, he supported a group of young officers who called for army reform and the ouster of General Militaru, the then Defense Minister and a suspected KGB agent. 
Militaru was sacked, but when Stanculescu became minister he cashiered the young officers who had helped him. 
Reform of the army was put off. 
One year later Stanculescu gave up politics and government altogether. 
He set up a highly profitable arms trading company. 
Soon he became one of the country's richest tycoons. 
Now, it seems that the tide has turned against him. 
But has it? 
General Stanculescu has appealed to the Supreme Court to quash his conviction. 
A big part of public opinion seems to be behind him, believing his trial politically motivated. 
Of course, many people and especially those who took to the streets against Ceausescu in 1989 feel vindicated his conviction. 
But many politicians defend Stanculescu; among them, the current Defense Minister Victor Babiuc, former President Ion Iliescu, and most top army officers. 
In the wake of the Stanculescu conviction, the Interior Minister reiterated his proposal for a general amnesty for all soldiers involved in the violence of 1989. 
Supporters of this view argue that General Stanculescu, unlike President Pinochet, was carrying out orders he could not refuse. 
Later, they add, he voluntarily joined the "Revolution", fought its enemies and contributed to its victory. 
Many Romanian Army officers are unhappy with the notion of soldiers being tried for crimes committed while defending the dying communist regime. 
Yet, this is what every one of Romania’s post-revolutionary governments have promised at one time or another. 
But these officers (and those who share their views) believe that you cannot assess the deeds of one regime by the standards of another. 
Again as in Chile, they suggest that, while political regimes are transient, the heart and honor of a nation always rests with its Army. 
A soldier has a duty just to carry out the orders of his chiefs, no matter who they are and no matter what orders they give. 
Stanculescu did just that in 1989 at Timisoara, and he did so again, a few days later, at Ceausescu’s trial. 
These officers dismiss and mistrust the requirements of universal justice, as embodied in the Nuremberg rulings. 
Because democratic institutions in Romania have frittered away much of their standing during the almost ten years of postcommunist transition, many politicians tend either to embrace the views of the generals, or, at least, avoid going publicly against them. 
After all, opinion polls reveal that the Army and Orthodox Church – two hierarchical and traditional organizations – are, by far, the most trusted Romanian institutions. 
Time and again, people seek to learn the truth about Romania’s past. 
But, as that past becomes unearthed and its crimes exposed, many recoil from the consequences. 
The "original sin" of the Romanian Revolution always looms: most postcommunist institutions were created and later run by people deeply involved in the crimes of the communist regime. 
Of course, people, at first, love seeing the truth uncovered and powerful wrongdoers punished. 
But many would like to see all this while watching TV rather than experience it in real life. 
Romania will have to decide whether or not it actually wants to have a past before its people can begin to confront and live with theirs. 

A German Conservative Credo 
Few concepts are as elastic as that of ``Conservatism.'' 
At one end of its spectrum of meanings, conservatism has (over the last two decades) come to be viewed as promoting too much of a civic life of greed and grab. 
At the other end, conservatism in many European countries has historically veered too close for comfort to right-wing extremism. 
In Germany today, conservatism was forged in the wake of the Weimar Republic's failures, experiences unknown to Anglo-Saxon conservatives. 
This history accounts for the type of conservatism practiced by the Christian-Democratic Union (CDU) and Christian-Social Union (CSU), who focus on moderation and balance, preservation and innovation, and on commanding Germany's political center. 
With federal elections due in Germany this autumn, much will be said about the nature of German conservatism. 
Some, looking at CDU/CSU candidate for Chancellor Edmund Stoiber's emphasis on Bavaria's economic success, will seek to portray the coalition as shaded dangerously by the ``anything goes'' market conservatism practiced in America. 
Others, pointing to the German conservatives' emphasis on social values, will say that we are as statist as the Social Democrats. 
The truth itself is far more complex than these facile comparisons, which also makes it more durable. 
CDU/CSU policies are, of course, founded on the idea of individual freedom, but we believe in an individualism tempered by Western culture and the Christian tradition. 
We are skeptical about unfettered individualism because of our awareness of man's sins, but also because of our profound awareness of the historical defects and aberrations in Germany's 20th century history. 
Yet, despite this deeply ingrained skepticism about human nature, we embrace humanity's talent for progress and innovation, because we recognize man's ability to correct mistakes and errors. 
These two traits, although they seem to conflict, and are certainly different from the values of American and British conservatives, nonetheless form a sound basis for a realistic pragmatism and the shunning of ideological politics - which is precisely the politics that Germany now requires. 
Far from being willing to coerce people to live in a certain way, German conservatives seek a politics that recognizes limits - the limits of the state, the market, and the individual. 
We conceive of politics as a mechanism to reconcile enduring conflicts, such as those that exist between freedom and security. Each, indeed, is unsustainable without the other. 
Security is useless without freedom, but freedom makes no sense without security - both national security and economic security. 
The social market economy, which we continue to embrace, is based on these principles. 
It sees competition as the most effective means to promote economic growth, but also embraces state interference, when necessary, to secure equality of opportunity, social solidarity, and social balance. 
This interference is also intended to help avoid the ``economization'' of all aspects of civic life. 
The market is merely a tool, not an answer to every human problem. 
It is in recognition of this fact that German conservatives strive, for example, to strike a balance between economy and ecology. 
We feel responsible, on a global level, for the environment, which is why we disagree with unilateral decisions by individual nations when such decisions ignore the needs of the rest of the world. 
For globalization is both a challenge and an opportunity. 
As we open ourselves to the wind's of globalization, we must also strengthen the local institutions that foster social ties and identity, such as the family, local and regional communities, religious communities, and the tradition of voluntary worker solidarity - all which have been neglected in recent years. 
This is the principle of ``subsidiarity'' which supports placing decision-making power, wherever and whenever possible, in governmental bodies nearest to the individual citizen. 
This is of particular importance for our ideas about the European Union, where we seek an effective balance between the nation and Europe. 
For German conservatives, European integration and national identity are not warring concepts, as they seem to be to our opponents and so many others. 
They are, instead, two sides of the same coin. 
The EU was founded in recognition that certain goals could only be achieved through cooperation. 
Decades later, the European Union still needs the binding power and legitimacy of its constituent nations, as well as of historical regional political structures within those nations, because a common European identity is emerging only slowly and cannot yet justify a unitary constitutional structure. 
In essence, the form of government we seek within Germany and across Europe is built on a sense of moral discourse and moral decision-making rather than on the supposedly eternal truth of some abstract political concept. 
Indeed, only an ongoing skepticism of fashionable political nostrums - both of the statist and market fundamentalist variety - can promote pluralism and tolerance, and avoid a ballooning of the bureaucracy that enfeebles our economy. 
In a fast changing world, this skepticism of the center is the only sensible attitude a responsible political party and government can strike. 
Our political approach embraces this humane and realistic pragmatism, for it is only such an approach that offers a chance to secure a prosperous stability within which necessary change can be made without ending up in an extremist euphoria or a fear of the future. 
Moderation, tolerance, and a capacity for reform in equal measure are the watchwords of today's German conservatism. 

A German Glimmer in a Global Boom 
In 2004, the world economy grew at a rate of 5.1%, the fastest pace in the last 28 years. 
While Ifo`s World Economic Climate indicator, generated from quarterly surveys of 1,200 experts in 90 countries, worsened slightly during the first three quarters of 2005, it rose again in the last quarter, indicating a continuation of the boom. 
In 2005, growth is estimated to have been about 4.3%, and a similar rate can be expected in 2006, marking a period of sustained rapid global growth unseen since the 1970’s. 
But the boom is not uniform. 
In the United States, the number of experts giving a favorable assessment of the current situation declined; indeed, a majority believes that the economic situation will worsen during the next six months. 
However, in the Asian countries, including China, the optimism is unbroken. 
The same is true for Eastern Europe, the ex-Soviet states, and Latin America. 
The big surprise is Europe, which, unlike in 2004 and the first half of 2005, now seems to be catching up with the rest of the world. 
Whereas growth was a miserable 1.5% in 2005 in the 15 “old” members of the European Union, Ifo expects EU-15 growth to accelerate to 2.1% in 2006. 
To be sure, economic performance will vary widely among EU countries. 
While Italy will be the laggard, with only 1.1% growth, the Irish rocket will not lose its force, pushing real GDP up by about 4.8%. 
In general, the big EU countries are still performing badly, in contrast to the smaller members – hardly surprising, given that the EU is basically an institution to help the smaller countries overcome the drawback of their size by extending the agglomeration advantages that formerly were reserved to the bigger countries. 
But even Germany, Europe’s biggest economy, is experiencing an upswing. 
The Ifo climate indicator for Germany, based on monthly surveys of 7,000 firms, jumped upwards in the second half of 2005, reaching its highest value since the boom year 2000, with businesses’ assessment of the current situation and expectations improving. 
After five years of stagnation, the economy is finally on the move. 
The driving force is external demand, as Germany, the world’s second-largest exporter, profits from the global boom. 
Exports increased by 6.2% in 2005 and are expected to increase by 7.4% in 2006. 
However, as we saw in 2004 and 2005, exports are not enough to create substantial growth if domestic demand does not follow. 
The good news for Germany is that investment demand is now growing, too. 
While the second half of 2005 was already quite good, Ifo expects investment in equipment to grow by a healthy 6% in 2006. 
After many years of contraction, investment in construction also will rise slightly. 
Total investment growth is expected to reach 2.9% – weak by past standards, but nonetheless a promising salve for the wounded German mood. 
Moreover, any investment growth is vital for Germany, which, according to the latest OECD statistics, currently suffers from the world’s lowest share of net investment in national income. 
Even if Germany remains the world’s laggard, rising investment demand as such will contribute to GDP growth, which Ifo estimates at 1.7% in 2006. 
That number looks small compared to most other countries. 
In fact, all EU countries except Italy and the Netherlands will grow faster. 
But everything is relative: Germany’s trend growth rate is just 1.1%, and the country has been the slowest growing EU country since 1995. 
Measured against a disappointing past, even Germany is currently experiencing an economic boom. 
Indeed, even German unemployment, which has been rising in cycles since 1970, will decline slightly in 2006, from 4.8 to 4.7 million. 
The good economic data will reinforce initial favorable impressions of Angela Merkel’s new government, which got off to an excellent start at the EU Summit, where Merkel helped to broker a compromise between Britain and France on the Union’s 2007-2013 budget (by adding another €2 billion to Germany’s annual contribution). 
In fact, the government may even have contributed a bit to the good economic data by announcing a serious effort to consolidate Germany’s own public finances – a prerequisite for investor confidence. 
According to the government, substantial tax increases will bring the fiscal deficit below the 3%-of-GDP limit set by the Stability and Growth Pact – a target missed for five consecutive years – by 2007. 
The real test for the German government is the labor market. 
Most observers now agree that Germany needs something like the American earned-income tax credit. 
In Germany, it’s called “activating social aid” or “combi wages,” but the principle is the same: the state should reduce the money it pays for doing nothing and pay more for participating in the work force. 
That would widen the wage distribution, create jobs, and maintain the living standard of the poor. 
Merkel announced in her inaugural speech in the Bundestag that her government will introduce such a system in 2006. 
If this is more than lip service, and if she really carries out a serious reform of the German welfare state’s incentive structure, the result could be higher employment and structural economic growth. 
In the long term, that would be more promising for the EU – and for the global economy – than the demand-driven performance that Germany is currently enjoying. 

A Global Agenda for Seven Billion 
NEW YORK – Late next month, a child will be born – the 7th billion citizen of planet Earth. 
We will never know the circumstances into which he or she was born. 
We do know that the baby will enter a world of vast and unpredictable change – environmental, economic, geopolitical, technological, and demographic. 
The world’s population has tripled since the United Nations was created in 1945. 
And our numbers keep growing, with corresponding pressures on land, energy, food, and water. 
The global economy is generating pressures as well: rising joblessness, widening social inequalities, and the emergence of new economic powers. 
These trends link the fate and future of today’s seven billion people as never before. 
No nation alone can solve the great global challenges of the twenty-first century. 
International cooperation is a universal need. 
The 66th session of the UN General Assembly is a renewed opportunity for the countries of the world to set aside narrow, short-term interests and commit to cooperative efforts to address humanity’s long-term imperatives. 
At a time when all nations are experiencing individual challenges, we need to forge a worldwide common agenda that can help to ensure that the seven billionth baby and future generations grow up in a world characterized by sustainable peace, prosperity, freedom, and justice. 
To help create this future, I am focusing my second term as Secretary-General on five global imperatives – five generational opportunities to shape the world of tomorrow by the decisions we make today. 
The first and greatest of these imperatives is sustainable development. 
We all must understand that saving our planet, lifting people out of poverty, and advancing economic growth are one and the same fight. 
We must connect the dots between climate change, water scarcity, energy shortages, global health, food security, and women’s empowerment. 
Solutions to one problem must be solutions for all. 
In the next five years, we need to create a new economic vision for sustainable development and forge global consensus on a binding climate change agreement. 
Fostering economic growth, realizing the Millennium Development Goals, and combating climate change will all depend on creating a new energy system for the twenty-first century and extending it to every person on the planet. 
Prevention as a framework for international cooperation is a second opportunity. 
This year, the UN peacekeeping budget will total $8 billion. 
Think of what we could save by avoiding conflicts – by deploying political mediation missions, for example, rather than troops. 
We know how to do this. 
Our record proves it – in Guinea, Kenya, and Kyrgyzstan. 
A third imperative is building a safer and more secure world. 
In this effort, we must be courageous in standing up for democracy, human rights, and peace. 
This year was one of signature achievements in restoring and securing peace – in Côte d’Ivoire, Darfur, Egypt, and elsewhere. 
But hatred and bloodshed still stand in the way of our vision for peace. 
In the Middle East, we must break the stalemate. 
Palestinians deserve a state. 
Israel needs security. 
Both want peace. 
A negotiated settlement can produce these outcomes, and the UN is a platform for forging such a peace. 
So, too, will we continue our efforts to foster democratic governance in Iraq, Afghanistan, the Democratic Republic of Congo, and Sierra Leone. 
And, in the name of all of humanity, we will continue to push forward on nuclear disarmament and non-proliferation, in service of realizing a world free of nuclear weapons. 
The fourth big opportunity is supporting countries in transition. 
This year’s dramatic events in North Africa and the Middle East inspired people around the globe. 
Let us help make the Arab Spring a true season of hope for all. 
In Libya, we are deploying a new UN support mission to assist the country’s transitional authorities in establishing a new government and legal order, consistent with the aspirations of the Libyan people. 
Syria is a special concern. 
For six months we have seen escalating violence and repression. 


A Global Consensus Against Terrorism 
Mention the United Nations and the first reaction is likely to be the ongoing oil-for-food scandal and what it will mean for Secretary-General Kofi Annan’s ability to lead the organization for the remaining year and a half of his tenure. 
But there is much more going on at the UN than investigations. 
Reform is in the air – in part because of the scandal, but also because of the UN’s inability to deal effectively with challenges ranging from Rwanda and Kosovo to Iraq and, most recently, Sudan. 
Even the UN’s most ardent supporters now recognize that change is called for if the organization is to make a significant contribution to international peace and security. 
Some of the reform talk concerns the UN Security Council’s composition. 
The Security Council represents what the World War II Allies believed the post-war world would look like and how it should be run. 
This helps to explain why a much-weakened France was made a permanent member of the Council – and why Germany and Japan (and a not-yet independent India) were not. 
Defending the Security Council’s current make-up is impossible; the need for change is beyond debate. 
But coming up with an approach that gains broad international support will prove extremely difficult. 
Great Britain and France will resist being replaced by a single EU seat, while making Germany a permanent member would only exacerbate the problem of Europe’s relative over-representation. 
Pakistan would object to adding India to the Security Council; 
Argentina, Chile, and Mexico to adding Brazil; 
Nigeria to South Africa (and vice-versa); and several countries, including China, Indonesia, and South Korea, might resist creating a permanent seat for Japan. 
Clearly, fixing the Security Council will require considerable time and political effort. 
In the meantime, there is important work to be done. 
One productive avenue would be to follow up on one of the recommendations of the High Level Panel that was endorsed by Annan; namely, that all UN members go on record declaring that terrorism has no place in today’s world. 
This will prove more difficult than it first sounds. 
For too long, the international community has tolerated terrorism – the intentional killing of civilians and noncombatants by non-state actors for political purposes – on the grounds that, on occasion, “one man’s terrorist is another man’s freedom fighter.” 
Historians have the luxury of debating whether terrorism may have been justified in certain situations in the past. 
We do not. 
Modern terrorism is too destructive to be tolerated, much less supported. 
Weapons of mass destruction – nuclear, biological, and chemical weapons – are just that, and no cause can excuse their use. 
Moreover, as the terrorist attacks on America of 2001 showed, weapons as basic as box-cutters can become weapons of mass destruction if they are used to exploit the vulnerabilities of modern, global life. 
Terrorism is even less justified given that political avenues exist nowadays for pursuing political aims. 
Palestinians can negotiate their future relationship with Israel and can count on American, Russian, European, and UN assistance. 
Iraqis have elected their own representatives and are poised to write their constitution. 
No one pursuing reasonable goals and who is prepared to compromise can argue that terrorism is his or his group’s only option. 
The world has already taken some important steps against terrorism. 
A dozen international conventions and numerous UN resolutions commit governments to oppose hostage taking, the hijacking of civilian aircraft, and terrorism more broadly. 
Similarly, the mandate of the Financial Action Task Force, created in 1989 to curb money laundering, has grown and become focused mainly on curbing terrorist financing. 
UN Security Council Resolution 1373, passed after the September 11 attacks, calls on states to deny safe haven to terrorists, bring to justice anyone associated with terrorism, suppress recruitment by terrorist groups, block terrorists’ efforts to acquire weapons, and cooperate with other governments and international organizations in tracking suspects and boosting security. 
What is missing is a new, 13th convention that closes the loophole that seems to permit governments to decide what constitutes terrorism and what does not. 
Broad agreement is needed that any intentional killing of civilians and noncombatants is unacceptable, and that its perpetrators and supporters must be punished. 
Of course, such a convention will not prevent all future acts of terrorism. 
But ideas matter. 
Terrorism needs to be de-legitimized in the way that slavery has been. 
Doing so will make governments and individuals think twice before becoming a party to terrorism; it should also make it less difficult to garner support for international action against those who nevertheless carry it out. 
We are taught early on in our lives that the end cannot justify the means. 
It is time to put this principle into effect before many more innocent lives are lost. 

A Global Green New Deal 
NAIROBI – With unemployment soaring, bankruptcies climbing, and stock markets in free-fall, it may at first glance seem sensible to ditch the fight against climate change and put environmental investments on hold. 
But this would be a devastating mistake of immediate, as well as inter-generational, proportions. 
Far from burdening an already over-stressed, over-stretched global economy, environmental investments are exactly what is needed to get people back to work, get order books flowing, and assist in powering economies back to health. 
In the past, concern for the environment was viewed as a luxury; today, it is a necessity – a point grasped by some, but by no means all, economic architects yet. 
A big slice of President Barack Obama’s $825 billion stimulus package for the United States includes a boost to renewable energy, “weatherizing” a million homes, and upgrading the country’s inefficient electricity grid. 
Such investments could generate an estimated five million “green-collar” jobs, provide a shot in the arm for the construction and engineering industries, and get America back into the equally serious business of combating climate change and achieving energy security. 
The Republic of Korea, which is losing jobs for the first time in more than five years, has also spotted the green lining to grim economic times. 
President Lee Myung-Bak’s government plans to invest $38 billion employing people to clean up four major rivers and reduce disaster risks by building embankments and water-treatment facilities. 
Other elements of Lee’s plan include construction of eco-friendly transportation networks, such as high-speed railways and hundreds of kilometers of bicycle tracks, and generating energy using waste methane from landfills. 
The package also counts on investments in hybrid vehicle technologies. 
Similar pro-employment “Green New Deal” packages have been lined up in China, Japan, and the United Kingdom. 
They are equally relevant to developing economies in terms of jobs, fighting poverty, and creating new opportunities at a time of increasingly uncertain commodity prices and exports. 
In South Africa, the government-backed Working for Water initiative – which employs more than 30,000 people, including women, youth, and the disabled – also sees opportunity in crisis. 
The country spends roughly $60 million annually fighting invasive alien plants that threaten native wildlife, water supplies, important tourism destinations, and farmland. 
This work is set to expand as more than 40 million tons of invasive alien plants are harvested for power-station fuel. 
As a result, an estimated 500 megawatts of electricity, equal to 2% of the country’s electricity needs, will be generated, along with more than 5,000 jobs. 
So it is clear that some countries now view environmental investments in infrastructure, energy systems, and ecosystems as among the best bets for recovery. 
Others may be unsure about the potential returns from investing in ecosystem services such as forest carbon storage or in renewable energy for the 80% of Africans who have no access to electricity. 
Still others may simply be unaware of how to precisely follow suit. 
In early February, the United Nations Environment Program will convene some of the world’s leading economists at the UN’s headquarters in New York. A strategy for a Global Green New Deal, tailored to different national challenges, will be fleshed out in order to assist world leaders and ministers craft stimulus packages that work on multiple fronts. 
The Global Green New Deal, which UNEP launched as a concept in October 2008, responds to the current economic malaise. 
Spent wisely, however, these stimulus packages could trigger far-reaching and transformational trends, setting the stage for a more sustainable, urgently needed Green Economy for the twenty-first century. 
The trillions of dollars that have been mobilized to address current woes, together with the trillions of investors’ dollars waiting in the wings, represent an opportunity that was unthinkable only 12 months ago: the chance to steer a more resource-efficient and intelligent course that can address problems ranging from climate change and natural-resource scarcity to water shortages and biodiversity loss. 
Blindly pumping the current bail-out billions into old industries and exhausted economic models will be throwing good money after bad while mortgaging our children’s future. 
Instead, political leaders must use these windfalls to invest in innovation, promote sustainable businesses, and encourage new patterns of decent, long-lasting employment. 


A Global Perfect Storm 
NEW YORK – Dark, lowering financial and economic clouds are, it seems, rolling in from every direction: the eurozone, the United States, China, and elsewhere. 
Indeed, the global economy in 2013 could be a very difficult environment in which to find shelter. 
For starters, the eurozone crisis is worsening, as the euro remains too strong, front-loaded fiscal austerity deepens recession in many member countries, and a credit crunch in the periphery and high oil prices undermine prospects of recovery. 
The eurozone banking system is becoming balkanized, as cross-border and interbank credit lines are cut off, and capital flight could turn into a full run on periphery banks if, as is likely, Greece stages a disorderly euro exit in the next few months. 
Moreover, fiscal and sovereign-debt strains are becoming worse as interest-rate spreads for Spain and Italy have returned to their unsustainable peak levels. 
Indeed, the eurozone may require not just an international bailout of banks (as recently in Spain), but also a full sovereign bailout at a time when eurozone and international firewalls are insufficient to the task of backstopping both Spain and Italy. 
As a result, disorderly breakup of the eurozone remains possible. 
Farther to the west, US economic performance is weakening, with first-quarter growth a miserly 1.9% – well below potential. 
And job creation faltered in April and May, so the US may reach stall speed by year end. 
Worse, the risk of a double-dip recession next year is rising: even if what looks like a looming US fiscal cliff turns out to be only a smaller source of drag, the likely increase in some taxes and reduction of some transfer payments will reduce growth in disposable income and consumption. 
Moreover, political gridlock over fiscal adjustment is likely to persist, regardless of whether Barack Obama or Mitt Romney wins November’s presidential election. 
Thus, new fights on the debt ceiling, risks of a government shutdown, and rating downgrades could further depress consumer and business confidence, reducing spending and accelerating a flight to safety that would exacerbate the fall in stock markets. 
In the east, China, its growth model unsustainable, could be underwater by 2013, as its investment bust continues and reforms intended to boost consumption are too little too late. 
A new Chinese leadership must accelerate structural reforms to reduce national savings and increase consumption’s share of GDP; but divisions within the leadership about the pace of reform, together with the likelihood of a bumpy political transition, suggest that reform will occur at a pace that simply is not fast enough. 
The economic slowdown in the US, the eurozone, and China already implies a massive drag on growth in other emerging markets, owing to their trade and financial links with the US and the European Union (that is, no “decoupling” has occurred). 
At the same time, the lack of structural reforms in emerging markets, together with their move towards greater state capitalism, is hampering growth and will reduce their resiliency. 
Finally, long-simmering tensions in the Middle East between Israel and the US on one side and Iran on the other on the issue of nuclear proliferation could reach a boil by 2013. 
The current negotiations are likely to fail, and even tightened sanctions may not stop Iran from trying to build nuclear weapons. 
With the US and Israel unwilling to accept containment of a nuclear Iran by deterrence, a military confrontation in 2013 would lead to a massive oil price spike and global recession. 
These risks are already exacerbating the economic slowdown: equity markets are falling everywhere, leading to negative wealth effects on consumption and capital spending. 
Borrowing costs are rising for highly indebted sovereigns, credit rationing is undermining small and medium-size companies, and falling commodity prices are reducing exporting countries’ income. 
Increasing risk aversion is leading economic agents to adopt a wait-and-see stance that makes the slowdown partly self-fulfilling. 
Compared to 2008-2009, when policymakers had ample space to act, monetary and fiscal authorities are running out of policy bullets (or, more cynically, policy rabbits to pull out of their hats). 
Monetary policy is constrained by the proximity to zero interest rates and repeated rounds of quantitative easing. 
Indeed, economies and markets no longer face liquidity problems, but rather credit and insolvency crises. 
Meanwhile, unsustainable budget deficits and public debt in most advanced economies have severely limited the scope for further fiscal stimulus. 
Using exchange rates to boost net exports is a zero-sum game at a time when private and public deleveraging is suppressing domestic demand in countries that are running current-account deficits and structural issues are having the same effect in surplus countries. 
After all, a weaker currency and better trade balance in some countries necessarily implies a stronger currency and a weaker trade balance in others. 
Meanwhile, the ability to backstop, ring-fence, and bail out banks and other financial institutions is constrained by politics and near-insolvent sovereigns’ inability to absorb additional losses from their banking systems. 
As a result, sovereign risk is now becoming banking risk. 
Indeed, sovereigns are dumping a larger fraction of their public debt onto banks’ balance sheet, especially in the eurozone. 
To prevent a disorderly outcome in the eurozone, today’s fiscal austerity should be much more gradual, a growth compact should complement the EU’s new fiscal compact, and a fiscal union with debt mutualization (Eurobonds) should be implemented. 
In addition, a full banking union, starting with eurozone-wide deposit insurance, should be initiated, and moves toward greater political integration must be considered, even as Greece leaves the eurozone. 
Unfortunately, Germany resists all of these key policy measures, as it is fixated on the credit risk to which its taxpayers would be exposed with greater economic, fiscal, and banking integration. 
As a result, the probability of a eurozone disaster is rising. 
And, while the cloud over the eurozone may be the largest to burst, it is not the only one threatening the global economy. 

A Golden Opportunity 
CAMBRIDGE: The rich countries meeting in June at the G-7 Economic Summit in Cologne had some interesting things to declare about their relations with the poor countries. 
First, they acknowledged -- without ever quite admitting it -- that their earlier attempts to reduce developing-country debt had failed. 
Therefore they signaled the start of a new program, immediately dubbed the Cologne Initiative, to reduce further the debt burden of the so-called Highly Indebted Poor Countries (HIPCs). 
Second, they instructed the IMF and the World Bank to re-think their development strategies, in order to put more focus on social problems, particularly health and education. 
One could of course be quite cynical about both announcements. 
After all, it has been clear to most objective observers for many years that the rich countries had no realistic strategy for reducing the unpayable debts of the poor countries, yet such critics were told to be patient, that everything was okay. 
Moreover, only the finance ministers of the G-7 could possibly have believed that the IMF and World Bank were doing a good job in the poorest countries. 
In truth, their record is often disastrous, or simply irrelevant. 
The IMF in particular doesn't have a strategy for long-term economic development, even though the United States has assigned the IMF the lead role in economic development in dozens of poor countries. 
Another reason for cynicism is that the G-7 didn't move mainly on their own initiative, but rather in response to a growing cry of international civil society for action on behalf of the world's poorest. 
The credit for the Cologne Initiative goes strongly to the worldwide movement known as Jubilee 2000, a grass-roots movement based on the biblical concept of Jubilee, in which unpayable debts should be forgiven in order to allow a debtor to have a fresh start in life. 
The Jubilee 2000 movement has adherents in all parts of the world, including Pope John Paul II, rock stars such as Bono of the Irish group U2, and non-governmental organizations representing many religions and professions. 
We should move beyond cynicism, however, in embracing the new Cologne Initiative, especially to push the G-7 countries to do all that needs to be done to make the Initiative successful. 
The details of the Initiative announced in Cologne were disappointing, but these details can still be changed under international public pressure. 
At least the Initiative pointed in the right direction. 
The motivation for urgent action on behalf of the poorest nations is clear. 
The 42 countries that are part of the HIPC initiative have a combined population of around 700 million. 
Around three-fourths of these people live in Africa. 
The combined HIPC population has a life expectancy of around 50 years, compared with 78 years in the rich countries. 
Around one-third of the children are malnourished, and will consequently suffer a lifetime of physical and cognitive disabilities. 
Many will never finish even primary school, or be able to play an effective role in modern society. 
Diseases are rampant, including an AIDs epidemic that killed around 2 million people in Africa last year, and malaria, which took more than 1 million lives. 
A successful Cologne Initiative would build on the following concepts. 
First, the debts of the countries suffering from extreme poverty and illness would be forgiven entirely. 
Around 25 countries out of the 42 HIPC countries probably need complete debt cancellation. 
Second, the United Nations Development Program (UNDP) and the World Bank, rather than the International Monetary Fund, should take the lead in helping these countries. Both the UNDP and the World Bank would help to ensure that debt forgiveness opens the way to new and ambitious programs of social improvement -- with the focuses on health and education. 
The UNDP should turn its annual Human Development Reports into concrete guidelines for social action, to help ensure that each impoverished country has the adequate resources to provide effective programs for children's vaccines, AIDS prevention, meals for impoverished children, improved access to clean water, and mother-and-infant medical care. 
The UNDP should also have the task of coordinating the specialized agencies of the United Nations on behalf of the world's poorest, to ensure that key organizations such as United Nations Children's Fund (UNICEF) and the World Health Organization (WHO) have the access and financial resources to fulfill their missions. 
The Cologne Summit announcements so far fall short of these objectives. 
The debt relief proposals are still too small. 
The role of the IMF remains too large. 
Public health goals are still too far down the list of priorities. 
But we should maintain hope and pressure on the international organizations and the rich countries. 
Already, international actions have pushed the G-7 in a new and hopeful direction. 
With a continued worldwide movement on behalf of global justice and economic development, a much more ambitious program for the world's poorest can still be reached. 

A Good Rate Hike for Europe 
Two wrongs don’t make a right. 
Just because European governments have failed to put bread on their constituents’ tables doesn’t mean that the European Central Bank should likewise fail in its job of promoting price stability in the euro zone. 
That may sound obvious, but abandoning price stability is exactly what some European politicians are advocating. 
For example, Italian politicians, who, given Italy’s recent dismal economic performance, would seem the least qualified to offer the ECB advice on monetary policy, are nonetheless advocating interest-rate cuts. 
Echoing comments by Italian Prime Minister Silvio Berlusconi, Deputy Economics Minister Mario Baldassarri said in Il Sole 24 Ore last week that all efforts to boost growth are in vain “if someone is pushing on the brake pedal.” 
Who’s he kidding? 
If anyone is “pushing down on the Italian growth brake” it is Berlusconi himself. 
He has made no efforts at economic reform during his term and now seeks to blame the ECB for Italy’s lame economic performance. 
But it is precisely the lack of economic reform at home that has made Italy one of the least competitive states in the euro-zone economy. 
More than the usual “blame game” is at work here. 
Pressures are mounting on the ECB to raise interest rates – and Berlusconi and Co.’s attacks are as much as an attempt to forestall future rate hikes as to get the ECB to loosen its monetary policy. 
Soaring energy prices, for example, have become a leading inflation risk. 
But higher energy prices, by themselves, will not cause the ECB to pull the interest-rate trigger. 
The key will be so-called “second-round effects” – whether growing crude prices lead to higher wage demands from trade unions. 
So far, the “social partners,” as ECB president Jean-Claude Trichet likes to call the unions, have been quiet. 
Should this change, the ECB will have to raise rates even if Europe’s economic growth remains slack. 
The good news is that economic growth in the euro-zone economy appears to be picking up (even in Italy). 
Though second-quarter GDP growth was weak — the euro-zone average was only 0.3% year on year – third-quarter data are indicating a sustained economic pick-up in the second half of the year. 
Only consumption is lagging. 
How will the ECB react to better economic news? 
Some on the Governing Council have grown uncomfortable that euro-zone interest rates have stayed so low, at 2%, for so long (more than two years). 
True, there is no inflation problem in the short run, but the ECB’s monetary policy focuses on the medium term. 
One particular worry is that euro-zone money supply is well above the ECB’s benchmark level, indicating an excess supply of liquidity. 
It is doubtful that the ECB would raise interest rates to curb excess liquidity so long as economic recovery remains in question. 
Slow growth has silenced the monetarists on the ECB’s Governing Council. 
This will change, however, once the economic pick-up is confirmed. 
Interest-rate hikes may be coming sooner rather than later, which is why Berlusconi and French President Jacques Chirac are talking up interest-rate cuts now. 
Meanwhile, in Germany, the elections this September may have surprising consequences for ECB monetary policy. 
Angela Merkel, the Christian Democrats’ candidate, is a reformer, holding out hope for Germany’s future – and that of Europe. 
Unfortunately, Merkel’s campaign is off to a rocky start, and the recent entry of Oskar Lafontaine’s extreme left-wing party into the fray may necessitate the formation of a grand coalition between the Christian Democrats and the Social Democrats. 
This would be bad news for the German economy, which could delay possible ECB interest rate hikes. 
Because the expected gridlock in parliament would make reforms less likely, companies might hold off on investment, while consumers would be more likely to keep their wallets closed, because official policy would be even less clear than it is now. 
On the other hand, a center-right coalition between the Christian Democrats and the Free Democrats could spark the ECB into action. 
This raises an interesting point. 
The public should be relieved if the ECB raises rates, because this would most likely signal that the long-awaited economic recovery is well under way, and that inflationary repercussions are being addressed. 
A hike, in other words, would indicate that good things are happening. 
But the public often views interest-rate increases as negative events that increase unemployment and stifle growth. 
Blame-game politicians like Berlusconi, who have failed to put bread on the table, their minions in the media, and Keynesian economic professors who don’t understand and misrepresent Keynes sustain this distorted view. 
Europe would be a lot better off if someone told the public the truth. 

A Good Year for God 
LONDON – It’s been a better year for God. 
After withering literary assaults on the Almighty from the Oxford academic Richard Dawkins, the essayist Christopher Hitchens, and others, believers have hit back. 
Best of all has been The Case for God by the brilliant religion writer Karen Armstrong. 
More important still is the news that more people (certainly in Britain) are going to Christian churches of all denominations. 
Moreover, the Pope made a very successful visit to Britain in September. 
We know already about heavy attendance at the country’s mosques. 
At this time of year, of course, many Christians who are not regular churchgoers attend the Nativity services. 
Carols, church bells, and mangers are still at the heart of mid-winter festivities, alongside the consumer binge. 
This year, however, the “big spend” in Europe may have been inhibited by the big winter freeze and the big austerity programs across most of the continent. 
Even in the most Godless households, most children in Western societies probably know the details of the Christmas story. 
The travelers who can find no room at the inn. 
The birth of a baby in the stables. 
The arrival of the wise men bearing gifts of gold, frankincense, and myrrh. 
We learn about all this at the same time as we are told about Father Christmas, his Lapland reindeers, and his sacks full of presents. 
We rapidly lose our belief in that winter myth. 
But we tend to retain into adulthood the same views of God that we formed in childhood. 
An old man with a long beard watches over us, and most of us retain a pretty literal opinion of the stories about his Son told in the Bible’s New Testament. 
It is this God that atheists like Dawkins and Hitchens attack. 
And, with such a target, it is not very difficult to poke holes and pile on the ridicule. 
Leave aside the fact that you can make an even stronger case against Godlessness – remember the atrocities of atheist totalitarians in the twentieth century – and consider the assault on those whose commitment to literal interpretations of religious texts means that they deny science and reason. 
To them the world was made in six days; evolution is a fanciful tale. 
Those of us who think that science and religion dwell in different domains, and who recall that Socrates argued that science did not teach you about morality or meaning, find that our case is undermined by the literalists and fundamentalists in every religion. 
There are Christians who know all about the fire and brimstone of the Book of Revelation, but seem not to have heard the instructions about generosity in the Sermon on the Mount. 
Likewise, there are hard-line Jews, such as the settler groups who drive Palestinians from their homes in East Jerusalem and Hebron, who have forgotten the early teachings of Jewish scholars who argued that strangers should be treated like your own people. 
And there are Muslims who ignore the Koran’s commands of pluralism, tolerance, and peace. 
Where the atheist assault is often correct is in pinpointing the amount of harm frequently done in our world by such fundamentalists. 
Right-wing American attitudes about their country’s place in the world are invigorated by fundamentalist dogma. 
The United Nations is the devil’s own creation. 
President Barack Obama is an un-American Muslim. 
Palestine from the Jordan River to the coast should be handed to Israel so that the world can end with a cataclysmic Christian triumph. 
Jewish fundamentalists obstruct any peace process that is left in the Middle East and build more illegal settlements. 
Islamic fundamentalists define jihad as a war of terror against the West and call for an Islamic caliphate from the Atlantic to the Pacific. 
The strident and damaging dogmatism of fundamentalists of every stripe has a common feature: a truculent sense of grievance, rooted in fear and resentment of modernity. 
Christian fundamentalism in America harks back to nineteenth-century populism and anti-intellectualism. 
Members of evangelical churches associate their beliefs with the rugged individualism of the early pioneers. 
They are contemptuous of the establishment. 
Jewish fundamentalists believe that Israel’s critics are anti-Semitic or, in the case of Jewish opponents of Israel’s harder-line policies, “self-hating Jews.” 
Islamic fundamentalists reckon that what the rest of us regard as the liberalizing influence of technological progress and globalization is a brash re-run of Western colonialism. 
For a happier New Year, we should listen to the core messages of all these great religions, above all the Confucian golden rule that we should never do to others what we would not like to be done to us. 
What religion should teach us is not how to hate, but – to borrow again from Confucius – how to develop societies that look after and welcome the poor, the stranger, and the oppressed. 
That is the most important message for everyone, atheists included, to take from the Christian story of Christmas. 

A Grand Bargain with Iran 
The specter of a nuclear Iran haunts Arabs and Israelis alike, but it is the United States and Israel that are the driving force behind efforts to curtail Iran’s nuclear ambitions. 
The America-Iran-Israel triangle is where the clue to the problem and its possible solution lie. 
Though Ayatollah Khomeini’s Islamic revolution in 1979 disrupted Israel’s old alliance with Iran, the two countries continued to conduct business with America’s blessing. 
The Iran-Contra affair of the 1980’s, through which Israel supplied arms to the Islamic Republic in its war against Iraq is a case in point. 
Israel and Iran, two non-Arab powers in a hostile Arab environment, shared fundamental interests that the Islamic revolution could not change. 
It was during Yitzhak Rabin’s government in the early 1990’s that Israel and Iran entered into open conflict, owing to the changing strategic environment after America’s victory in the first Gulf War and the collapse of the Soviet Union. 
The US-sponsored Arab-Israeli peace process, which produced a series of breathtaking achievements – the Madrid peace conference, the Oslo accords, Israel’s peace agreement with Jordan, a near-rapprochement with Syria, and Israel’s inroads into Arab states from Morocco to Qatar – was an increasingly isolated Iran’s worst nightmare. 
It was at that crossroads that Israel and Iran, two powers vying for mastery in a rapidly changing Middle East, chose to cast their strategic competition in ideological terms. 
The conflict was now between Israel, a beacon of democracy fighting the expansion of a Shiite obscurantist empire, and an Iran that chose to protect its revolution by mobilizing the Arab masses in the name of Islamic values and against treacherous rulers who had betrayed the dispossessed Palestinians. 
More an enemy of Israeli-Arab reconciliation than of Israel as such, the Mullahs’ resort to an incendiary anti-Jewish, pan-Islamic discourse is aimed at ending Iran’s isolation and presenting its regional ambitions in a light palatable to the Sunni masses. 
In an Arab Middle East, Iran is the natural enemy; in an Islamic world, Iran is a potential leader. 
Ironically, Iran has been the main supporter of Arab democracy, for the best way to undermine the incumbent regimes is to promote popularly based Islamist movements such as Hezbollah in Lebanon, the Muslim Brotherhood in Egypt, Hamas in Palestine, and the Shiite majority in Iraq. 
Yitzhak Rabin believed that an Israeli-Arab peace could prevent a nuclear Iran, but now his nightmare seems rapidly approaching. 
As an anti-status quo power, Iran is not pursuing nuclear capabilities in order to destroy Israel, but to gain prestige and influence in a hostile environment and as a shield for its challenge to the regional order. 
But Israel has every reason to be concerned, for a nuclear Iran would undermine the promise of Zionism to secure a Jewish refuge – the core rationale of Israel’s own strategy of “nuclear ambiguity” – and would embolden its enemies throughout the region. 
It would also trigger uncontrolled regional nuclear proliferation, with Saudi Arabia and Egypt leading the way. 
A military attack on Iran’s nuclear facilities is too dangerous, and its results uncertain. 
And, however severe economic sanctions might be, they might not bring Iran to its knees. 
Nor is it clear that the split within the Iranian elite between revolutionary purists and those with a merchant-class mentality would lead to regime change any time soon. 
However, being radical does not necessarily mean being irrational, and revolutionary Iran has given frequent proof of its pragmatism. 
In the American-Iranian equation it was the US, not Iran, that conducted rigid ideological diplomacy. 
Iran backed the US during the first Gulf War, but was left out of the Madrid peace conference. 
Iran also supported America in its war to depose the Taliban in Afghanistan. 
And, when US forces overran Saddam Hussein’s army in the spring of 2003, the encircled Iranians proposed a grand bargain that would put all contentious issues on the table, from the nuclear issue to Israel, from Hezbollah to Hamas. 
The Iranians also pledged to stop obstructing the Israeli-Arab peace process. 
But, neo-conservative haughtiness – “We don’t speak to evil” – ruled out a pragmatic response to Iran’s demarche. 
Iran’s mood changed by the time America’s entire Middle East strategy had gone adrift, but the grand bargain remains the only viable way out of the impasse. 
This would not be achieved, however, through an inevitably imperfect sanctions regime, or by America’s resort to Cold War logic aimed at breaking Iran’s backbone by drawing it into a ruinous arms race. 
Iran’s growing regional influence does not stem from its military expenditures, which are far lower than those of its enemies, but from its challenge to America and Israel through an astute use of soft power. 
There is no better way to undercut Iran’s regional strategy of destabilization than a comprehensive Arab-Israeli peace, accompanied by massive investments in human development, and followed by an internationally sponsored system of peace and security in a verifiably nuclear-free Middle East, including Israel. 

A Gravity Test for the Euro 
CAMBRIDGE – Although I appreciate that exchange rates are never easy to explain or understand, I find today’s relatively robust value for the euro somewhat mysterious. 
Do the gnomes of currency markets seriously believe that the eurozone governments’ latest “comprehensive package” to save the euro will hold up for more than a few months? 
The new plan relies on a questionable mix of dubious financial-engineering gimmicks and vague promises of modest Asian funding. 
Even the best part of the plan, the proposed (but not really agreed) 50% haircut for private-sector holders of Greek sovereign debt, is not sufficient to stabilize that country’s profound debt and growth problems. 
So how is it that the euro is trading at a 40% premium to the US dollar, even as investors continue to view southern European government debt with great skepticism? 
I can think of one very good reason why the euro needs to fall, and six not-so-convincing reasons why it should remain stable or appreciate. 
Let’s begin with why the euro needs to fall. 
Absent a clear path to a much tighter fiscal and political union, which can lead only through constitutional change, the current halfway house of the euro system appears increasingly untenable. 
It seems clear that the European Central Bank will be forced to buy far greater quantities of eurozone sovereign (junk) bonds. 
That may work in the short term, but if sovereign default risks materialize – as my research with Carmen Reinhart suggests is likely – the ECB will in turn have to be recapitalized. 
And, if the stronger northern eurozone countries are unwilling to digest this transfer – and political resistance runs high – the ECB may be forced to recapitalize itself through money creation. 
Either way, the threat of a profound financial crisis is high. 
Given this, what arguments support the current value of the euro, or its further rise? 
First, investors might be telling themselves that in the worst-case scenario, the northern European countries will effectively push out the weaker countries, creating a super-euro. 
But, while this scenario has a certain ring of truth, surely any breakup would be highly traumatic, with the euro diving before its rump form recovered. 
Second, investors may be remembering that even though the dollar was at the epicenter of the 2008 financial panic, the consequences radiated so widely that, paradoxically, the dollar actually rose in value. 
Although it may be difficult to connect the dots, it is perfectly possible that a huge euro crisis could have a snowball effect in the US and elsewhere. 
Perhaps the transmission mechanism would be through US banks, many of which remain vulnerable, owing to thin capitalization and huge portfolios of mortgages booked far above their market value. 
Third, foreign central banks and sovereign wealth funds may be keen to keep buying up euros to hedge against risks to the US and their own economies. 
Government investors are not necessarily driven by the return-maximizing calculus that motivates private investors. 
If foreign official demand is the real reason behind the euro’s strength, the risk is that foreign sovereign euro buyers will eventually flee, just as private investors would, only in a faster and more concentrated way. 
Fourth, investors may believe that, ultimately, US risks are just as large as Europe’s. 
True, the US political system seems stymied in coming up with a plan to stabilize medium-term budget deficits. 
Whereas the US Congress’s “supercommittee,” charged with formulating a fiscal-consolidation package, will likely come up with a proposal, it is far from clear that either Republicans or Democrats will be willing to accept compromise in an election year. 
Moreover, investors might be worried that the US Federal Reserve will weigh in with a third round of “quantitative easing,” which would further drive down the dollar. 
Fifth, the current value of the euro does not seem wildly out of line on a purchasing-power basis. 
An exchange rate of $1.4:€1 is cheap for Germany’s export powerhouse, which could probably operate well even with a far stronger euro. 
For the eurozone’s southern periphery, however, today’s euro rate is very difficult to manage. 
Whereas some German companies persuaded workers to accept wage cuts to help weather the financial crisis, wages across the southern periphery have been marching steadily upwards, even as productivity has remained stagnant. 
But, because the overall value of the euro has to be a balance of the eurozone’s north and south, one can argue that 1.4 is within a reasonable range. 
Finally, investors might just believe that the eurozone leaders’ latest plan will work, even though the last dozen plans have failed. 
Abraham Lincoln is credited with saying “You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time.” 
A comprehensive euro fix will surely arrive for some of the countries at some time, but not for all of the countries anytime soon. 
So, yes, there are plenty of vaguely plausible reasons why the euro, despite its drawn-out crisis, has remained so firm against the dollar so far. 

A Greek Catch-22 
BUENOS AIRES – Desperate times bring desperate measures. 
The latest package to cope with Greece’s insolvency offers a bond buyback to lighten the country’s debt burden. 
In essence, this is a back-door debt restructuring: Europe’s bailout fund, the European Financial Stability Facility (EFSF) would lend the money for Greece to buy back its own debt in the secondary market at deep discounts, thereby imposing a loss on private bondholders without the need to declare a default. 
A recurrent characteristic of Europe’s debt-crisis debate is a Latin American precedent. 
Indeed, many highly indebted countries in Latin America conducted similar debt buybacks in the late 1980’s. 
Bolivia’s 1988 buyback of close to half of its defaulted sovereign debt, an operation funded by international donors, is a classic example. 
But the most relevant Latin American experience with debt buybacks is a more recent and far less studied case: Ecuador in 2008. 
President Rafael Correa had been toying with default since the 2006 presidential campaign (debt repudiation was part of his platform), and quickly earned a CCC rating from Fitch. 
The reasons invoked by Correa (legal concerns about how the bonds were issued in the 2000 debt exchange) were beside the point. 
The default threat was a way to depress bond prices in secondary markets, only to buy them back at a discount through the back door. 
That task was outsourced to Banco del Pacífico, which bought the soon-to-be-defaulted Ecuadorian paper at 20 cents on the dollar and above – a level low enough for a deep haircut but high enough to fend off “vulture” investors. 
To speed things up, after the default was declared in December 2008, Ecuador completed the buyback with an inverse auction for the remaining bondholders, to be settled in cash – rather than a regular exchange in which the legality of undercover purchases was likely to be questioned. 
With the larger part of the outstanding stock in friendly hands, and institutional bondholders pressed to liquidate their positions in the midst of the post-Lehman Brothers selloff, the operation was a success. 
This episode offers a few preliminary lessons on debt buybacks. 
The first concerns the market response. 
Judging from the recent evolution of Ecuadorian bond yields, it appears that markets have not punished Ecuador’s behavior: Ecuador, an oil exporter blessed by the 2009 recovery in oil prices, could have returned to the capital markets shortly after the exchange. 
This is particularly notable, given that Ecuador’s was perhaps the first opportunistic default (triggered by unwillingness, rather than inability, to pay) in recent history. 
The second lesson, and the one most pertinent to Europe now, concerns the crucial role played by the default scenario. 
Indeed, almost two years of default threats by Correa were not enough to elicit a deep discount. 
Ecuador needed to go all the way to a “credit event” in December 2008 to be able to purchase the bonds at bargain prices. 
The premise that only a credible default ensures significant private-sector involvement (that is, that private bondholders take a real hit) is apparent when we compare the market-friendly Uruguayan debt exchange in 2003 with the draconian Argentine restructuring of 2005. 
In Uruguay, what the authorities presented as a voluntary transaction produced no nominal haircuts and only minor debt relief; in Argentina, a four-year debt moratorium was essential to achieving nominal haircuts above 50%. 
So the question arises: how are private bondholders to be convinced to get rid of their Greek bonds at a loss if there is a credible buyer of last resort? 
If Europe credibly volunteered funds to buy back all Greek debt, the Greek risk premium would disappear and private investors would be fully bailed out. 
Only the probability of a default – and the goal of avoiding even deeper haircuts – can induce investors to liquidate their positions at a discount. 
But the buyback can succeed only if the market perceives it as the last chance before a unilateral debt restructuring. 
In other words, a successful buyback is a preamble to default. 
Can Greece, with the EFSF’s help, obtain debt relief while avoiding default? 
Small purchases at current panic prices, vulture-fund style, are always possible, but they do not promise substantial debt relief. 
Large purchases would drive up prices in the secondary market, defeating the point of the whole operation. 
And the opaque Ecuadorian methods are not possible in Europe, both for legal reasons and because a transaction of this size could hardly be disguised or outsourced. 
But what if the EFSF were to mimic Banco del Pacífico in a transparent way, say, by setting a threshold spread level above which it would fund buy-backs of any Greek bond in the market? 
Naturally, the spread would automatically converge to the threshold, but how much would be sold? 
Would the EFSF be retiring Greek debt at bargain prices or would it be providing insurance to current bondholders? 
If the threshold spread is set reasonably high in order to achieve a significant discount, the stock of debt retired by the buyback would be marginal. 
After all, by capping spreads, the buyback facility would limit the downside risk while providing incentives to hold the bonds and wait for the upside – a good reason, perhaps, to make the facility a temporary offer. 
By contrast, if the threshold is set low enough to bring spreads down from panic levels, purchases will be more substantive, but at the expense of reducing considerably the effective haircut on private holders. 
A debt buyback is something of a Catch 22: to succeed in inducing a haircut, it needs to profit from the default fears that it intends to alleviate. 
Without Ecuador’s gimmicks, buybacks do not seem to be the solution to Greece’s debt overhang. 

A History Lesson for Koizumi 
Once again, protests against Japanese Prime Minister Junichiro Koizumi’s annual visit to the Yasukuni shrine are breaking out in China as well as South Korea. 
Koizumi’s insistence on paying homage to the war dead interred at Yasukuni, where convicted war criminals from World War II are among the buried, has been damaging relations with Japan’s neighbors for years. 
Indeed, Chinese President Hu Jintao continually affirms that he will not hold a summit with a Japanese prime minister who goes to Yasukuni, which most Chinese regard as a glorification of past Japanese aggression and colonialism. 
Even some in Japan are becoming critical of Koizumi. 
While the public remains negative about Chinese outbursts against Japan, a recent survey indicates that more than 70% of Japanese view the current state of Japan-China relations as unacceptable. 
More people are not supporting Koizumi’s annual pilgrimage to Yasukuni, with seven former prime ministers jointly demanding that he refrain from the visits. 
Yet Koizumi remains defiant. 
Moreover, Chief Cabinet Secretary Shinzu Abe, the front-runner to succeed him, has openly declared that he will continue to visit the shrine as prime minister. 
Foreign Minister Taro Aso, another possible successor to Koizumi, has called for the Japanese Emperor to pray at Yasukuni. 
So pessimism appears to be settling in, and the deadlock over Yasukuni appears to be deepening. 
But the past can bring us more than just troubles of this kind. 
Even on the issue of Yasukuni, there are positive lessons to be learned. 
Consider Yasuhiro Nakasone, Koizumi’s predecessor in the 1980’s. 
Both are master politicians who remained popular and served long terms in office. 
Both are conservative and nationalistic, advocating the revision of the constitution and an assertive political and military role for Japan abroad. 
Finally, both are pro-American, with Nakasone declaring Japan to be America’s “unsinkable aircraft carrier” in East Asia and Koizumi sending troops to Iraq in support of the United States-led war effort. 
But a crucial difference between Nakasone and Koizumi is often overlooked: their handling of the Yasukuni controversy and relations with China. 
Nakasone broke the taboo by being the first prime minister to worship at the Yasukuni shrine in his official capacity on August 15, 1985, the fortieth anniversary of the end of World War II. 
The decision triggered a severe response from China, where students held demonstrations against his visit. 
Bilateral relations were frozen. 
But, instead of capitalizing on domestic resentment over China’s criticisms, Nakasone decided not to visit Yasukuni again. 
He chose to mend relations with China by focusing on the positive aspects of bilateral ties. 
In 1986, Nakasone went to Beijing at the personal invitation of Chinese Communist Party General Secretary Hu Yaobang and laid the cornerstone for a Sino-Japanese Youth Exchange Center, promising to forge future friendships with China. 
This genuine embrace of reconciliation provided much-needed support to Chinese leaders, who were eager to control anti-Japanese sentiments. 
Hu praised Nakasone’s courage and warned Chinese youth publicly that if they “think merely of the well-being of their own country… they are not sober-minded patriots.” 
Nakasone emerged from the crisis and was recognized as a capable statesman in managing Japan’s diplomacy with China. 
There was no accusation that Nakasone was “selling out” to Beijing. 
Nor were his conservative, nationalist, and pro-American credentials damaged. 
This episode suggests that Koizumi’s hardline position isn’t the only option. 
A Japanese prime minister can be strong without exploiting domestic resentment against the country’s neighbors, and conservative, patriotic, and pro-American while forging a healthy working relationship with China. 
Indeed, the cessation of Yasukuni visits would likely open the door to the long-overdue Sino-Japanese summit, which in turn might strengthen moderate voices in China seeking a future-oriented relationship with Japan. 
Unfortunately, Koizumi and his allies are not prepared to move forward on the Yasukuni issue. 
As Foreign Minister Aso recently put it: “The more China voices [opposition], the more one feels like going there. 
It’s just like when you’re told ‘Don't smoke cigarettes,’ it actually makes you want to smoke.” 
No one expects the current Japanese and Chinese leaders to embrace, as Nakasone and Hu did two decades ago, but it is a sad state of affairs when the leaders of neighboring giants pretend not to see each other at international forums. 
If Nakasone, who now urges Koizumi to stop the Yasukuni pilgrimage, were to respond to Aso, he might simply extend the analogy: it is not in Japan’s national interest to continue to inhale Koizumi’s second-hand smoke. 

A Human Rights Court for Africa 
One crucial insight to be gained from a century of establishing international courts and tribunals is that while momentum is vital, getting things right from the start is equally important. 
With little fanfare, January 25, 2004, marked a milestone in the history of the protection of human rights in Africa: the entry into force of the Protocol for establishing an African Court on Human and Peoples' Rights. 
After Europe and the Americas, Africa will be the third continent with a regional court to redress human rights violations. 
Acceptance of the Protocol in the last year by such influential African countries as Algeria, South Africa, and Libya gave the final and sudden impetus to the Court's establishment, and the critical threshold of fifteen ratifications was reached shortly before the New Year, when the Comoros signed on. 
But it is in countries like Burundi, Côte d'Ivoire, Rwanda, and Uganda, which have all ratified the Protocol, that the Court will likely play a major role in checking human rights abuses. 
It can do so because the Court's judgments will be legally binding and thus enforceable in national courts. 
In states that accepted the Court's jurisdiction, individuals will be able to gain access to the Court directly, even to file cases against their own governments. 
African NGO's will be able to ask the Court for advisory opinions, thus strengthening the effectiveness of the African human rights regime. 
Clearly, the birth of an African human rights court should be celebrated. 
But it risks foundering in the docks, and its launch should therefore be deliberate, not rushed. 
The process is now progressing at a startling - and worrying - pace. 
Nominations for the first judges have been requested by the end of April, with the aim of holding elections at the African Union summit in Addis Ababa on July 5-7. 
Experience elsewhere suggests that once judges have been appointed, rules of procedure drafted and adopted, and the relationship with other international organs shaped, the system will become fixed. 
Whatever faults and shortcomings are built in at the beginning will become locked in. 
But building a sound international judicial body cannot be rushed; it requires time and resources - both human and financial - and a lot of support. 
It took more than four years to physically establish the International Criminal Court, and it took a massive effort by the United Nations, several major countries, and hundreds of experts, NGO's, and think tanks to get this done. 
Admittedly, sometimes time is a luxury. 
The International Criminal Tribunal for the former Yugoslavia (ICTY) and Rwanda (ICTR) opened for work in less than a year in order to begin addressing heinous crimes that were ongoing. 
But the price of that rush job is evident: as cases started flowing in, the courts' governing statute and rules of procedure and evidence had to be patched on the fly. 
The statute of the ICTY has been amended four times and the rules of procedure and evidence no less than twenty-seven times. 
Figures for the ICTR are only slightly better. 
That is a poor record for any court of law, which should afford defendants certainty and procedural fairness. 
All this tinkering could be done because there was an extraordinary consensus in the UN Security Council on the need not to delay the trials. 
But such agreement is extraordinary. 
For courts established by treaty, like the African Court, it will likely prove very hard, if not impossible, to find the majority necessary to support changes. 
Moreover, effective courts must be politically independent. 
But this can be achieved only if the right conditions are in place from the onset. 
The process for nominating judges at the national level is critical. 
Candidates who are adequate - and who are widely seen to be adequate - are the key to the Court's legitimacy. 
In the European human rights system, the nominating process involves civil society and severe scrutiny by the Parliamentary Assembly of the Council of Europe. 
It is only through an open, transparent process that the best candidates - those who give the greatest guarantees of independence - can be identified. 
But that takes time. 
Moreover, the first bench of any international court is critically important, because it is entrusted to prepare and adopt other key documents - such as the rules of procedure, internal regulations, and financial regulations - that will govern the court for years to come. 
When they meet in July in Addis Ababa, African heads of state would be better off discussing where the court will be located, how it will be financed, and, most importantly, agreeing standards for an open, participatory, and transparent process for electing its judges. 
They should not rush into nominating judges for a court that is still largely on the drawing board. 
Africa is poised to establish its own human rights tribunal, fifty years after Europe, 25 years after the Americas, and two years after the International Criminal Court. 
But, above all, Africa needs a human rights court that commands the unreserved and unmitigated respect of the continent's governments and peoples. 
Africa's leaders should take a few more months to do it right. 

A Human Rights Crime In Gaza 
Atlanta -- The world is witnessing a terrible human rights crime in Gaza, where a million and a half human beings are being imprisoned with almost no access to the outside world by sea, air, or land. 
An entire population is being brutally punished. 
This gross mistreatment of the Palestinians in Gaza was escalated dramatically by Israel, with United States backing, after political candidates representing Hamas won a majority of seats in the Palestinian Authority parliament in 2006. 
The election was unanimously judged to be honest and fair by all international observers. 
Israel and the US refused to accept the right of Palestinians to form a unity government with Hamas and Fatah and now, after internal strife, Hamas alone controls Gaza. 
Forty-one of the 43 victorious Hamas candidates who lived in the West Bank are now imprisoned by Israel, plus an additional ten who assumed positions in the short-lived coalition cabinet. 
Regardless of one’s choice in the partisan struggle between Fatah and Hamas within occupied Palestine, we must remember that economic sanctions and restrictions in delivering water, food, electricity, and fuel are causing extreme hardship among the innocent people in Gaza, about one million of whom are refugees. 
Israeli bombs and missiles periodically strike the encapsulated area, causing high casualties among both militants and innocent women and children. 
Prior to the highly publicized killing of a woman and her four little children last week, this pattern was illustrated by a previous report from B’Tselem, the leading Israeli human rights organization: 106 Palestinians were killed between February 27 and March 3. 
Fifty-four of them were civilians who didn't take part in the fighting, and 25 were under 18 years of age. 
On a recent trip through the Middle East, I attempted to gain a better understanding of the crisis. 
One of my visits was to Sderot, a community of about 20,000 in southern Israel that is frequently struck by rudimentary rockets fired from nearby Gaza. 
I condemned these attacks as abominable and an act of terrorism, since most of the thirteen victims during the past seven years have been non-combatants. 
Subsequently, I met with leaders of Hamas, both a delegation from Gaza and the top officials in Damascus, Syria. 
I made the same condemnation to them, and urged that they declare a unilateral ceasefire or orchestrate with Israel a mutual agreement to terminate all military action in and around Gaza for an extended period. 
They responded that such previous action by them had not been reciprocated, and they reminded me that Hamas had previously insisted on a ceasefire throughout Palestine including both Gaza and the West Bank, which Israel had refused. 
Hamas then made a public proposal of a mutual ceasefire restricted to Gaza, which the Israelis considered and also rejected. 
There are fervent arguments heard on both sides concerning blame for a lack of peace in the Holy Land. 
Israel has occupied and colonized the Palestinian West Bank, which is approximately one-fourth (28.5%) the size of the nation of Israel as recognized by the international community. 
Some Israeli religious factions claim a right to the land on both sides of the Jordan River, and others aver that their 205 settlements with some 500,000 people are necessary for “security.” 
All Arab nations have agreed to full recognition of Israel if it will comply with key United Nations resolutions. 
Hamas has agreed to accept any negotiated peace settlement between Palestinian Authority President Mahmoud Abbas and Israeli Prime Minister Ehud Olmert, provided it is approved in a referendum among the Palestinian people. 
This holds promise of progress, but despite the brief fanfare and positive statements at the peace conference last November in Annapolis, Maryland, a retrogression has occurred in the process. 
Nine thousand new Israeli settlement housing units have been announced in Palestine, the number of roadblocks within the West bank has increased, and the stranglehold on Gaza has been tightened. 

A Hundred Weltpolitiks 
NEW DELHI – Mao Zedong once famously called for the Chinese to “let a hundred flowers bloom.” 
Soon, however, he was recoiling from what he saw as a chaos of competing ideas. 
Today, the world seems to be entering a period when, if not a hundred, at least a dozen varieties of Weltpolitik are being pursued by great and emerging powers alike. 
Reconciling these competing strategic visions of the world, in particular of global crisis, will make international diplomacy more complicated than ever. 
The intervention by Turkey and Brazil into the globally divisive issue of Iran’s nuclear program is but the latest, and also the clearest, sign of this new element in global affairs. 
In May, the Iranian, Turkish, and Brazilian leaders met in Tehran to conclude an agreement that would supposedly have Iran deposit 1,200 kilograms of lightly enriched uranium (LEU) in Turkey, which, in exchange, would send 120 kilograms of enriched fuel to be used in Iran’s research reactor. 
Russia proposed this kind of swap earlier, but Iran declined the offer, and the version agreed with Brazil and Turkey was likewise intended to forestall Iran’s ability to produce highly enriched uranium (HEU), which can be used for nuclear warheads. 
But its other intention was probably to stymie American efforts to adopt new United Nations sanctions on Iran. 
It is too soon to tell if Iran’s desire to obtain nuclear weapons has been delayed. 
The International Atomic Energy Agency has not ruled against the agreement, and I am informed that the Brazilian/Turkish brokered deal does not violate the Nuclear Non-Proliferation Treaty, to which Iran, as a signatory, is obliged to adhere. 
Nevertheless, the effort to preempt American strategy clearly failed, as new UN sanctions were implemented earlier this month. 
As the deal was intended to avoid a nuclear standoff with Iran, why was there so much outrage in the US and the West? 
I fear it is because the US found itself denied its primacy in setting global policy on Iran. 
Instead of trying to explore the possibilities presented by the Brazilian/Turkish opening, the US quickly pushed the UN Security Council for more sanctions (the fourth round so far) on Iran. 
This forced Brazil and Turkey, both currently non-permanent members of the Security Council, to vote against the sanctions resolution. 
The result? 
This vital vote was robbed of unanimity (Lebanon also opposed it). 
The UN sanction vote was also heavily influenced by another small country with a Weltpolitik: Israel. 
In February, a high-level Israeli delegation visited Beijing to present the Chinese leadership with “evidence” of Iran’s atomic ambitions. 
The Israelis then explained to their hosts – in considerable detail – the potential economic consequences for China if an Israeli strike on Iran should become necessary in order to stop Iran from fulfilling its “nuclear ambitions.” 
China appears to have taken the message to heart, as it voted in favor of sanctions on Iran for the first time. 
Iran responded by calling China’s vote “two faced.” 
The emerging stew of Weltpolitik thickened even more with Israel’s pre-emptive move in international waters to stop a flotilla supposedly bringing relief aid to blockaded Gaza. 
For it was on a Turkish flagged ship that Israeli forces killed nine people, causing a near-rupture in Israeli-Turkish relations. 
To be sure, this complex web of interconnected events reflects the declining global role of the US. 
But it also demonstrates the robust assertion of national interest by new players on the global scene. 
Brazil, Turkey, and, yes, Iran are all clearly keen to demonstrate their political and foreign-policy independence. 
Brazil wants to prove that it deserves a permanent seat on the Security Council. 
Turkey seeks to re-establish its Islamic identity and “Ottoman” influence over the Middle East, thereby flexing its diplomatic muscles for a European Union that has all but rejected Turkish membership. 
And Iran simply wants to show once again that it will not kowtow to the “Great Satan.” 
All of these motivations critically challenge US global diplomatic primacy. 
But America had better get used to these types of diplomatic cat’s cradles. 
For there are other powers, both emerging and established, with global foreign policies of their own – India, Indonesia, Japan. 
And regional players like South Africa, Nigeria, Saudi Arabia, Egypt, Indonesia, and South Korea among others, will also have to be reckoned with in future regional disputes. 
This increasingly complex web of intersecting national interests is the face of international diplomacy in the twenty-first century. 
Ancient rivalries and atavistic feuds may or may not be part of this; only future crisis will tell. 
But this amalgam of competing strategic visions probably marks the end of America’s post-Cold War power. 
With the entire world affected by turmoil in the Persian Gulf and greater Middle East, perhaps that is all to the good. 
Surely, the national interests of the US and the West are not the only ones that matter. 
Why, then, should the rest of the world leave the resolution of these disputes to America alone? 
The era of US diplomatic hegemony has drawn to a close. 
And it would be a grave mistake to think that a condominium between the US and China will impose global order in the way that the Cold War-era US/USSR superpower rivalry did. 
Too many powerful countries now feel able to flex their diplomatic muscles in defense of their interests. 
Mao’s hundred flowers may have bloomed only briefly, but today’s myriad species of Weltpolitik are certain to bloom perennially. 

A Japanese Metamorphosis? 
OSAKA – Yesterday’s landslide general-election victory by the Democratic Party of Japan (DPJ) terminated the one-party-dominated system that the catch-all Liberal Democratic Party (LDP) has controlled almost without interruption since 1955. 
For most of the last decade, the DPJ was not seen as a viable alternative to the LDP, although they appeared to form a pseudo-two-party system. 
Twenty years after the Cold War’s end, Japan will at last have a post-Cold War system of government. 
The Japanese public, even now, remains uncertain about the DPJ’s ability to govern and is skeptical of its rosy programs of wealth redistribution, which lack solid funding. 
The public is also fully aware that the ideologically fragmented DPJ lacks a pragmatic, coherent foreign and security policy 
Yet the DPJ will form the next government because of public disgust with the LDP. 
For the last four years, the LDP had shown itself to be utterly unresponsive to the key issues of popular concern: pensions, unemployment, and the fraying social safety net. 
Moreover, the LDP was plagued by a string of minor scandals and consistent bungling. 
The LDP’s need for three different prime ministers in the space of little more than a year made plain that the party’s power nucleus had melted down. 
Once in power, the DPJ will immediately confront the massive bureaucracy and entrenched mandarins, which usually sabotage any efforts at administrative reform that threatens their power and vested interests. 
Indeed, immediately after the election, the budget estimates for the next fiscal year are due. 
The figures that will be presented are the result of a lengthy process, in which the bureaucracy closely consulted with LDP. 
So, without breaking the regular budget cycle, the DPJ will be forced to implement not only the supplementary budget drawn up by the LDP, but will also be stuck with next year’s budget, which embodies LDP policies that the DPJ has denounced. 
As a result, the DPJ has announced plans to revoke the LDP’s guidelines for a ceiling on budget requests so as to formulate its own budget from scratch. 
It will also revise the supplementary budget as well. 
But time is short, and few of new DPJ lawmakers possess the legislative experience and budgetary expertise to make that happen. 
To gain control of the mandarins, the DPJ plans to place 100 lawmakers in the ministries’ top leadership, as well as three dozen political appointees to policy staffs in the office of the prime minister. 
Unfortunately, the DPJ scrapped an LDP-sponsored civil-service reform bill, which would have allowed the DPJ to replace mandarins with an army of political appointees. 
The DPJ, despite its manifesto, seems unprepared to tame the mandarins, and so may be forced to rely on them. 
The ascendency of the mandarins is a legacy of Japan’s unique historical development dating back to its early modern period. 
Unlike in Europe, Japan developed its state before building a strong civil society. 
Indeed, full-fledged “society”-building started only after the 1868 Meiji Restoration, which tipped the balance of power definitively in favor of the state. 
As a result, the mandarins survived WWII and the postwar American occupation relatively undamaged, and they will strive to survive the DPJ government as well. 
They will most likely succeed. 
LDP lawmakers and mandarins developed a routine in which mandarins drafted cabinet-sponsored bills, LDP lawmakers checked the bills, and the two together finalized legislative drafts before they were introduced to the Diet (parliament). 
Since the LDP, recently with a coalition partner, controlled the Diet, the legislative process was simply the interaction between LDP lawmakers and mandarins, centered in the LDP’s headquarters. 
The Diet’s role was merely pro forma. 
Indeed, under the LDP-led one-party-dominant system, this extra-constitutional mechanism became an integral part of Japan’s government polity. 
The DPJ government will collide head-on with the mandarins, partly because the party will find it hard to recruit sufficiently qualified policymakers. 
The mandarins have maintained their privileged position in this regard, owing partly to the tax system, which prevents the emergence of non-profit institutions, especially think tanks, where independent policy expertise can be forged. 
Moreover, perhaps in anticipation of a change in power, the mandarins have moved forward the annual personnel changes in the major ministries’ top administrative positions. 
And what of the LDP? 
Having fallen from power, it will lose its control of the redistribution of government funds. 
Unable to pay off its constituencies, disintegration looms, for the LDP has never been a party with entrenched grass-roots support, but instead operates as a machine of power and redistribution through a web of insiders across the country’s industrial sectors, occupational associations, and local communities. 
Only by recruiting new blood and reorganizing itself with a solid ideological platform will an LDP comeback be possible. 
The DPJ has even weaker grass-roots support, so the mandarins will most likely use their standard techniques of divide and rule to cajole the party by teaching it to mimic the LDP in using state money and contracts to underwrite its major constituencies, such as labor unions and other interest groups. 
The birth of the DPJ government can yet be a turning point. 
A major power shift in favor of “society” has taken place. 

A Kick-Off for Peace? 
Yerevan – Armenian President Serzh Sargsyan’s recent invitation to Turkish President Abdullah Gul to visit Yerevan to watch a football match together was historic. 
Given the two countries’ long-strained relations, this visit would have been remarkable at any time. 
But coming as it does only one month after the alarming Russian-Georgian confrontation, it may offer real hope that tensions in the volatile Caucasus region can be eased. 
Of course, ancient and difficult issues divide Armenia and Turkey. 
But now is the moment for both countries to put the past aside in order to address their common security concerns. 
In the new context set by the war in Georgia, the urgency of Turkey becoming a real bridge between the nations of the Caucasus is not lost on anyone. 
This expectation is an inevitable consequence of Turkey’s geography and history. 
Situated figuratively between modernity and tradition, secularism and Islam, and democracy and tyranny, Turkey also is an actual physical bridge between East and West. 
For the peoples of the Caucasus, Turkey marks our path to Europe. 
It is a NATO member, bordering the three Caucasus republics that have NATO Individual Partnership Action Programs. 
It aspires to join the European Union, and would bring the EU to our three borders, even as we, too, aspire to join one day. 
Indeed, Turkey has never missed an opportunity to present itself as a regional broker. 
Immediately after the collapse of the Soviet Union, Turkey proposed the Black Sea Economic Cooperation. 
This year, as the American-led effort to mediate a Middle East peace settlement began to falter, Turkey took up the job of mediator in both the Israeli-Palestinian conflict and the conflict between Syria and Israel. 
Now, in the immediate wake of the Russia-Georgia crisis, Turkey’s leaders have stepped forward once again to take a leadership role in the Caucasus. 
The world must fervently hope that the Turkish proposal for a Caucasus Stability and Cooperation Platform is more serious and sustained than previous similar efforts. 
But, in order to succeed, Turkey must firmly pursue a pledge from all the region’s players to repudiate the use of force in settling their disputes. 
If this pledge is adopted and respected, conflicts in the region will be viewed in a wholly different, more tolerant context, marking a historic breakthrough to peace. 
In fact, why not take the idea of such a pact one step further? 
We in this region can, and I believe should, call for a non-aligned Caucasus, free of security blocs and adversarial alliances. 
After all, security alliances and guarantees only create dividing lines, with their attendant security challenges. 
Our countries and peoples have, throughout history, lived under a common umbrella for far longer than we have been divided. 
Today, we share a common vision of European integration, and it is in this broader context that our conflicts should be resolved. 
French President Nicolas Sarkozy’s and German Chancellor Angela Merkel’s visits to Georgia and Russia proved that there is no substitute for Europe insofar as the Caucasus is concerned. 
Only Europe can play the role of honest broker in the region’s atmosphere of suspicion and intolerance. 
But, at the end of the day, we ourselves must be willing to work toward a region of peace and cooperation. 
The Caucasus is too small a space for closed borders and explosive conflicts. 
Although some of those tensions appear purely bilateral, the Georgian-Russian conflict demonstrates that there is no such thing anymore in this globalized world, and certainly not in this interconnected region. 
In fact, real peace in the Caucasus requires two key strategic transformations. 
One is a lesson from history: Russia’s strategic interests here cannot be ignored. 
To believe and behave otherwise would lead to regional chaos. 
The other lesson is that Turkey and Armenia cannot remain adversaries forever. 
There must be normalization in our relations in order for the Caucasus to coalesce into a functional region. 
Ironically, both Russia and the United States recognize that this is in their interest. 
The Russians view normal relations between Turkey and Armenia as a way to minimize Georgia’s strategic role in the region. 
The US views an opening to Turkey as a way to decrease Armenia’s real and imagined reliance on Russia. 
Beyond the emotional impact of President Gul’s visit to Yerevan, real improvement in Turkish-Armenian relations requires opening the two countries’ closed border – the last in Europe. 
Or, for a start, the existing railroad link between the two countries could be made operational. 
If this does not happen within the coming weeks and months, then Turkey will have demonstrated that all this was just a show. 
President Gul’s visit does mark a watershed – either as a failure to make history, or as the beginning of a new era. 

A Lasting Poison 
NEW YORK – Next year will mark the twentieth anniversary of the collapse of communism in Europe. 
Liberated from the complexity of knowing too much about the cruel past, the young people of Eastern Europe’s post-communist generation seem uninterested in what their parents and grandparents endured. 
Yet the recent revelation of the Czech writer Milan Kundera’s presumed complicity in the face of Stalinism is but the latest of the long half-life of a toxic past. 
Other examples come to mind: the accusations of collaboration with the secret police raised against Lech Walesa, Romania’s public controversies surrounding Mircea Eliade’s fascist past, and the attacks on the alleged “Jewish monopoly of suffering” which equate the Holocaust with the Soviet Gulag. 
Friedrich Nietzsche said that if you look in the eye of the Devil for too long, you risk becoming a devil yourself. 
A Bolshevik anticommunism, similar in its dogmatism to communism itself, has from time to time run riot in parts of Eastern Europe. 
In country after country, that Manichean mindset, with its oversimplifications and manipulations, was merely re-fashioned to serve the new people in power. 
Opportunism has had its share in this, of course. 
In 1945, when the Red Army occupied Romania, the Communist Party had no more than 1,000 members; in 1989, it had almost four million. 
One day after Nicolae Ceausescu’s execution, most of these people suddenly became fierce anticommunists and victims of the system they had served for decades. 
Residual traces of totalitarian thinking can also be found in the hostility to former dissidents like Adam Michnik or Václav Havel, both of whom argued that the new democracies should not exploit resentments or seek revenge, as the totalitarian state did, but instead build a new national consensus to structure and empower a genuine civil society. 
Former generals of the secret police and members of the Communist nomenklatura, untouchable in their comfortable villas and retirements, must derive great pleasure from watching today’s witch hunts and manipulation of old files for immediate political purposes. 
But the case of Kundera appears different – though no less disturbing. 
In 1950, Kundera, then a 20-year-old Communist, reportedly denounced to the criminal police as a Western spy a man he had never met – a friend of his friend’s girlfriend. 
The man was later brutally interrogated in a former Gestapo torture facility and spent 14 years in prison. 
Kundera’s name was contained in the investigating officer’s report, which was authenticated after a respected historian discovered it in a dusty Prague archive. 
The reclusive Kundera, who immigrated to Paris in 1975, has declared that “it never happened.” 
Moreover, Czechoslovakia’s fearsome secret police, who had every interest in silencing or compromising the famous dissident writer, never used the incident to blackmail or expose him. 
Until more information is forthcoming, both from Kundera and from the authorities, the case will not be solved “beyond reasonable doubt.” 
But if it happened, the case calls for a deeper reflection. 
As far as we know, Kundera never was an informer before or after this incident, and we cannot ignore that he later freed himself from the compulsory totalitarian happiness that communism propagated. 
Indeed, his case also serves as a reminder that the early 1950’s was the most brutal period of “proletarian dictatorship” in Eastern Europe – a period of great enthusiasm and terrible fear that poisoned the minds and souls of devoted believers, fierce opponents, and apathetic bystanders alike. 
Moreover, Kundera’s case is hardly unique. 
In 2006, the Nobel Prize-winning German author Günter Grass’s disclosed that, 60 years earlier, he was, as a teenager, a member of the Waffen-SS. 
Similarly, a few years ago, the world was shocked to learn that famous Italian writer Ignazio Silone had, in his youth, collaborated with the fascist police. 
Daily life under totalitarianism, be it communist or fascist, was routinely based on a deep duplicity whose effects are longstanding. 
I don’t agree with those who say we should not be interested in the dark episodes in the life of a great writer. 
Why not? 
We should be interested not for prosecutorial purposes, but in order to gain a more profound understanding of a bloody, demagogical, and tyrannical Utopia – and of human weakness and vulnerability. 
We may even consider it a rewarding testament to an artist’s ability to overcome his past mistakes and still produce priceless work. 
But can we justifiably defend morally compromised artists and intellectuals on the basis of their work’s merit, yet condemn ordinary people for often less grave offenses? 
An egregious example of this was the way followers of Romanian philosopher Constantin Noica defended his support for the fascist Iron Guard and his later collaboration with the Communists, while at the same time condemning even a generic cleaning woman for mopping the floors in the offices of the secret police. 
Shouldn’t that cleaner’s drudgery to support her family, children, and her own survival be taken equally into account? 
Life under totalitarianism was an extreme situation that requires us to apply special, nuanced rules to all the captives of that ordeal. 
In order to understand that epoch, we have to know and carefully judge often ambiguous and overwhelming circumstances, never simplifying a multilayered daily reality for the sake of current political goals. 
If nothing else, in order to forgive, we have to know what we are forgiving. 
In Eastern Europe today, old and young alike stand to benefit from that lesson. 

Leaders for a Leaderless World 
PARIS – The newspaper commentaries that I write often have a dark perspective. 
Sadly, this one will be no different. 
But there are two pieces of good news that break through the gloom. 
First, the global significance of US President Barack Obama’s reelection is clear: the world has escaped a disaster for international cooperation. 
The US was on the verge of sinking into isolationist nationalism, reinforced, perhaps, by xenophobic sentiment. 
Obama’s victory, despite America’s economic travails, clears the way for cooperation based on a sympathetic ear to others and on negotiations in which the US does not deny the legitimacy of a global public interest (as it has done, unfortunately, on the issue of climate change). 
The other piece of good news concerns France, and thus is more “local,” but is crucially important nonetheless. 
Like everywhere else in the developed world, the global crisis has hit the French economy hard, with output stagnating, unemployment rising, job insecurity mounting, government debt soaring, and the stock market at risk of crashing. 
Manufacturing production has plummeted, the trade balance has deteriorated sharply, and corporate bankruptcies are increasingly frequent. 
For six months, France has had new leadership – a new president, government, and parliament. 
But President François Hollande and his government were strangely inactive after the elections, limiting themselves to reducing the impact of unfair budget cuts and taxation reforms implemented by the previous government of Nicolas Sarkozy. 
Many began to wonder whether Hollande was aware of the scope of the crisis that the recent downturn might trigger. 
In recent weeks, however, the government has introduced energetic and courageous measures to boost the competitiveness of French industries, including a huge €20 billion ($26 billion) tax break for businesses, to be financed by a hike in value-added tax, which means that the general public will pay for it. 
The VAT increase will hurt, but there was no other way. 
Awareness, boldness, and comprehensive policymaking have come as a relief to French investors, and have left them better positioned to face the crisis. 
The French government’s new push to confront the country’s economic plight matters not only to France, but to Europe and the world as well. 
After all, France is the eurozone’s second-largest economy, and the fifth-largest economy in the world. 
And yet, despite these bright spots, international cooperation on issues ranging from regional conflicts to the protection of global public goods remains weak. 
Antarctica, the only land in the world that is administered directly by the international community, is a recent case in point. 
The Antarctic Treaty, negotiated in 1959, prohibits any and all military activities in Antarctica and forbids the establishment of any borders. 
Three agreements – the Convention for the Conservation of Antarctic Seals (1972), the Convention on the Conservation of Antarctic Marine Living Resources (CCAMLR, 1980), and the Protocol on Environmental Protection to the Antarctic Treaty (PEP, 1991), which prohibits any activity relating to mineral resources – have since been added to the treaty. 
The Antarctic Treaty System includes three annual meetings: one deals with the supervision and management of the Treaty itself, and the other two concern the CCAMLR and the PEP. 
In recent years, proposals have been considered that would establish marine reserves around the continent and end the risk of growing scarcity, or the outright disappearance, of a variety of species of fish and cetaceans. 
The principle that international cooperation is required to protect fishery resources, which are dwindling everywhere, was adopted at the 2011 CCAMLR meeting. 
At the 2012 CCAMLR meeting, which concluded at the beginning of November in Hobart, Australia, three proposals (from the US, New Zealand, and France/Australia) to establish marine reserves in three different areas were discussed. 
They were compatible and would reinforce one another. 
Yet the discussion foundered, and no decision was taken. 
Russia and Ukraine – and, to a lesser extent, China – blocked efforts to reach an agreement. 
This failure reflects the same dynamic at work in the breakdown of global climate-change conferences in recent years: a few cynical countries, whose cooperation is needed to save the planet, fuel the madness of those bent on destroying it. 
That will not change until a new consciousness emerges worldwide to persuade states to support binding international law. 
The US has now reelected a president who understands this. 
France has a president who understands the need for bold, far-reaching actions as well. 
Their active leadership, and that of others, is needed now more than ever to turn the tide. 

A League of Democracies? 
LONDON – Senator John McCain, the Republican presidential candidate, has been calling for the creation of a “League of Democracies.” 
This new international group would possess a formidable military capacity, based partly on NATO and partly on a “new quadrilateral security partnership” in the Pacific between Australia, India, Japan, and the US. 
Neither Russia nor China, of course, would be invited to join: indeed, McCain wants to exclude Russia from the G8. 
The League is necessary, argues McCain, because in matters vital to the US, such as fighting Islamic terrorism, humanitarian intervention, and spreading liberty, democracy, and free markets, the US and its democratic partners must be able to act without permission from the United Nations (i.e., from Russia and China). 
In other words, the League’s main purpose is to marginalize Russia and China in world affairs. 
The most damning criticism of McCain’s plan is that it would launch a new Cold War between states labeled democracies and autocracies. 
This is not only dangerous, but incoherent. 
Russia and China do not “threaten” the “free world” with a powerful ideology and massive armed forces, as they did during the Cold War. 
Moreover, the world’s democracies are themselves divided on how to deal with Islamic terrorism or genocide in Darfur: it was France, after all, which led the opposition in the UN Security Council to the US invasion of Iraq. 
Moreover, on issues like terrorism, nuclear proliferation, and climate change, the US needs Russian and Chinese help. 
Stigmatizing Russia and China as pariahs will not get them on board. 
(China must learn to behave “responsibly,” McCain declares with breath-taking condescension.) 
In fact, Russia has mostly cooperated with the US in the “war against terrorism.” 
Finally, the idea is impracticable. 
One cannot imagine India or Brazil wanting to be part of any such a combination. 
So we would all spare ourselves an awful lot of trouble if McCain’s brainchild were buried as quickly as possible. 
Yet underlying this idea is a serious proposition, to which Britain’s former prime minister, Tony Blair, often gave eloquent expression: democracies don’t fight each other, so if the whole world were democratic, wars would stop. 
Presumably, McCain’s League of Democracies is designed to bring Immanuel Kant’s dream of perpetual peace closer to realization by putting pressure on non-democracies to change their ways, by force if necessary. 
Leave aside the fact that efforts to make democracy bloom have become bloodily unstuck in Iraq and Afghanistan. 
Is it true that democracies never fight each other? 
The affirmative answer seems to depend on two separate claims. 
The first is that democracies have, as a matter of historical record, never fought each other. 
This is true of a rather small group of rich countries (India is a partial exception), mainly in western Europe and its overseas offshoots, since World War II. 
Moroever, they are “our kind” of democracy – constitutional democracies that contain all the features we take for granted in modern Western systems, not “Islamic democracies” like Iran. 
A reasonable generalization from this rather small sample would be that “prosperous and constitutional democracies tend to live in peace with each other.” 
The second claim is that these countries live in peace because they are democracies. 
But is it democracy that has brought them peace and prosperity, or is it peace and prosperity that have brought democracy? 
Is it democracy that has kept Europe peaceful since 1945, or is it the long period of peace since 1945 that has allowed democracy to become the European norm? 
The world already has a peace-maintaining institution. 
The UN was created under rules designed to enable states of different political colors to live together. 
Members accept the obligation not to use force except in self-defense or unless it is authorized by the Security Council. 
The US is frustrated by not being able to get its way at the UN. 
But the UN exists to protect all states from lawless behavior, including by the US. 
By implicitly bypassing the UN, and dividing the world into two armed camps, the League of Democracies would increase the danger of war. 
The world also already has a prosperity-spreading mechanism. 
It is called trade. 
In 1994, the World Trade Organization was created to liberalize trade under agreed rules. 
It is full of faults, which need to be corrected. 
But we don’t need a League of Democracies to do this. 
By subjecting trade relations to embargoes, sanctions, and tests of democracy, environmental standards, and human rights, the League is likely to retard the growth of trade, and thus the chance for poor non-democracies to catch up. 
The only purpose of the League of Democracies seems to be to legitimize war-making by democracies – in order to spread democracy! 
This is the thrust of McCain’s message. 
As he put it, the US was built for a purpose – to serve “eternal and universal principles.” 
Its God-given task is to build an “enduring global peace on the foundations of freedom, security, prosperity, and hope.” 
Noble rhetoric! 
But if that is the League’s purpose – and I see no other – then it is a danger to peace. 
This is because its advocates believe that no long-term co-existence with non-democracies is possible. 
This is crazy and unhistorical. 
It is up to the chastened nations of Western Europe, which broadly share American values but have learned something about political patience, to rein in the American fantasy of re-making the world in its own image. 
I am all for spreading Western-style democracy, but not at the cost of making the world more warlike. 

A Less-is-More Growth Strategy for Africa 
REYKJAVIK – If African countries were to adopt only one policy to boost economic growth and improve macroeconomic stability, they should reduce the number of currencies in circulation across the continent as quickly as possible. 
Doing so would most likely encourage trade, as happened in Europe with the arrival of the euro, and could help contain inflation – which is always good for growth – by imposing international discipline on monetary policy. 
The African Union is now aiming at pooling all the continent’s currencies into a single currency by 2028. 
In the meantime, several regional monetary unions are on the drawing board, in addition to the two monetary unions that already exist, one de jure and the other de facto. 
The premier and oldest of these unions is composed of the fourteen countries that belong to the Economic and Monetary Community of Central Africa and the West African Economic and Monetary Union, which both use the CFA franc. 
The second of these unions is composed of Lesotho, Namibia, Swaziland, and now Zimbabwe, all of which use the South African rand. 
Disregarding Zimbabwe, a recent and incomplete convert, the 18 countries of the two existing monetary unions have, as intended, benefited from lower inflation than much of the rest of Africa. 
To see why, consider Nigeria. 
Before independence, Nigeria’s legal tender was the British pound. 
With the establishment of the Central Bank of Nigeria in 1959, the Nigerian pound was introduced. 
Back then, one Nigerian pound was equivalent to one British pound. 
This arrangement remained intact until 1973, when Nigeria adopted a new currency, the naira. 
The exchange rate remained unchanged: one naira was equivalent to one British pound. 
The naira was intended to bolster the country‘s independence by making it possible for the central bank to pursue its own monetary policy. 
It was also a matter of national pride. 
The thinking behind the new arrangement was that an independent and flexible monetary policy would serve the nation‘s interest better than a fixed exchange rate that tied the naira to the pound. 
But the naira’s introduction quickly put an end to parity with the British pound. 
Government expenditure exceeded federal revenue, despite rapidly rising foreign-exchange earnings from oil exports after 1970. 
The federal government’s budget deficits were financed through foreign and domestic borrowing, and by printing money, which led to inflation and depreciation of the new currency. 
Today, it costs 220 naira to buy one British pound, which implies 15% annual average depreciation since 1973. 
This depreciation would perhaps be justifiable had Nigeria managed to use easy money to narrow the gap between ordinary Nigerians’ standard of living and that of people living in Britain. 
But that did not happen. 
The purchasing power of national income per person in Nigeria is now 50% lower relative to Britain than in 1980. 
In view of this experience, Nigeria now plans to abolish the naira in favor of joining a monetary union with four or five other West African countries (The Gambia, Ghana, Guinea, Sierra Leone, and perhaps Liberia). 
But that planned monetary union, until recently envisaged to be launched in 2009, has now been put on ice. 
Why? 
The smallest countries show no signs of fear of being swamped by Nigeria, by far the most populous country in the group (accounting for 155 million of the six countries’ 200 million people), especially as the new West African Central Bank is to be located in Accra, the capital of Ghana (24 million). 
Others, though, may fear the dilution of their sovereignty when the new Central Bank of the West African Monetary Zone takes over some of the policymaking responsibilities of national central banks. 
But that, of course, is the chief purpose of a monetary union. 
When the West African Monetary Zone finally is established, the number of currencies in Africa will equal about half the number of countries. 
And when the East African Community with its five members (Burundi, Kenya, Rwanda, Tanzania, and Uganda) re-emerges as scheduled, the number of currencies will be reduced by another four. 
The belief that sovereign national currencies, by enabling independent and flexible monetary policies, are the best way to foster economic and social development – the vision of Nigeria’s post-colonial leaders – is gradually falling by the wayside. 
Efficiency dictates the use of fewer and larger currencies (and foreign investors, understandably wary of weak and volatile currencies, demand it). 
Indeed, the success of the European Union and of the euro since its launch in 1999 has made a strong impression in Africa. 
Currencies, to paraphrase Winston Churchill, are like democracies: the best way to preserve their integrity is to share them. 


A Loan and a Prayer 
NEW YORK – The countries known collectively as the PIIGS – Portugal, Ireland, Italy, Greece, and Spain – are burdened with increasingly unsustainable levels of public and private debt. 
Several of the worst-hit – Portugal, Ireland, and Greece – have seen their borrowing costs soar to record highs in recent weeks, even after their loss of market access led to bailouts financed by the European Union and the International Monetary Fund. 
Spanish borrowing costs are also rising. 
Greece is clearly insolvent. 
Even with a draconian austerity package, totaling 10% of GDP, its public debt would rise to 160% of GDP. 
Portugal – where growth has been stagnant for a decade – is experiencing a slow-motion fiscal train wreck that will lead to public-sector insolvency. 
In Ireland and Spain, transferring the banking system’s huge losses to the government’s balance sheet – on top of already-escalating public debt – will eventually lead to sovereign insolvency. 
The official approach, Plan A, has been to pretend that these economies suffer a liquidity crunch, not a solvency problem, and that the provision of bailout loans – together with fiscal austerity and structural reforms – can restore debt sustainability and market access. 
This “extend and pretend” or “lend and pray” approach is bound to fail, because, unfortunately, most of the options that indebted countries have used in the past to extricate themselves from excessive debt are not feasible. 
For example, the time-honored solution of printing money and escaping debt via inflation is unavailable to the PIIGS, because they are trapped in the eurozone straitjacket. 
The only institution that can crank up the printing press – the European Central Bank – will never resort to monetization of fiscal deficits. 
Nor can we expect rapid GDP growth to save these countries. 
The PIIGS’ debt burden is so high that robust economic performance is next to impossible. 
Moreover, whatever economic growth some of these countries might eventually register is contingent on enacting politically unpopular reforms that will work only in the long run – and at the cost of even more short-term pain. 
To restore growth, these countries must also regain competitiveness by achieving a real depreciation of their currency, thus turning trade deficits into surpluses. 
But a rising euro – pushed higher by excessively early monetary tightening by the ECB – implies more real appreciation, further undermining competitiveness. 
The German solution to this conundrum – keeping wage growth below that of productivity, thereby reducing unit labor costs – took more than a decade to yield results. 
If the PIIGS started that process today, the benefits would be too long in coming to restore competitiveness and growth. 
The last option – deflation of wages and prices – to reduce costs, achieve a real depreciation, and restore competitiveness is associated with ever-deepening recession. 
The real depreciation necessary to restore external balance would drive the real value of euro debts even higher, making them even more unsustainable. 
Lowering private and public consumption in order to boost private savings, and implementing fiscal austerity to reduce private and public debts, aren’t options, either. 
The private sector can spend less and save more, but this would entail an immediate cost known as Keynes’ paradox of thrift: declining economic output and rising debt as a share of GDP. 
Recent studies by the IMF and others suggest that raising taxes, cutting subsidies, and reducing government spending – even inefficient spending – would stifle growth in the short term, exacerbating the underlying debt problem. 
If the PIIGS can’t inflate, grow, devalue, or save their way out of their problems, Plan A is either failing or is bound to fail. 
The only alternative is to shift quickly to Plan B – an orderly restructuring and reduction of the debts of these countries’ governments, households, and banks. 
This can happen in a number of ways. 
One can carry out an orderly rescheduling of the PIIGS’ public debts without actually reducing the principal amount owed. 
This means extending the maturity dates of debts and reducing the interest rate on the new debt to levels much lower than currently unsustainable market rates. 
This solution limits the risk of contagion and the potential losses that financial institutions would bear if the value of debt principal were reduced. 
Policymakers should also consider innovations used to help debt-burdened developing countries in the 1980’s and 1990’s. 
For example, bondholders could be encouraged to exchange existing bonds for GDP-linked bonds, which offer payouts pegged to future economic growth. 
In effect, these instruments turn creditors into shareholders in a country’s economy, entitling them to a portion of its future profits while temporarily reducing its debt burden. 
Reducing the face value of mortgages and providing the upside – in case home prices were to rise in the long run – to the creditor banks is another way to convert mortgage debt partly into shareholder equity. 
Bank bonds could also be reduced and converted into equity, which would both avert a government takeover of banks and prevent socialization of bank losses from causing a sovereign debt crisis. 
Europe cannot afford to continue throwing money at the problem and praying that growth and time will bring salvation. 
No one will descend from the heavens, deus ex machina, to bail out the IMF or the EU. 

A Looming Anti-Depressants Crisis 
The widespread prescription of drugs for troubled minds has always ended badly, right back to the days of opiates and cocaine, up through bromides, barbiturates, and tranquilizers: all proved to be highly addictive drugs, but only after years of denial did doctors admit that this was so. 
Now anti-depressants--global brands with household names--are the problem. 
The past decade has seen a three-fold increase in prescriptions. 
In England, prescriptions of anti-depressants now match Valium at its peak in 1979. 
It is now clear that today's anti-depressants are not the wonder drugs they were touted as being. 
The sometimes intolerable withdrawal symptoms that can make it difficult and hazardous to stop taking anti-depressants also expose many users to severe and depressing side effects: substantial weight gain, loss of libido, and mood changes, to name just the most common complaints. 
Suspicions about such problems--especially about drug-induced suicidal behavior and sensitization to depression--have been rumbling for years, but searching scientific investigations have only just begun. 
An important inquiry set up by the United Kingdom's drug regulators in mid-2003 will soon report its findings. 
They will no doubt be presented mainly as recommendations for small-print changes in the warnings on drug labels and in the instructions for the drug's use. 
This may help, it but won't address the real issue: how could regulators have allowed this problem to recur after so much bitter experience, and why should they now be allowed to investigate themselves? 
On the Richter scale of drug disasters, the looming anti-depressant crisis appears to range between 7 and 11, where thalidomide rates a 10. 
Time will tell, but the key point is this: the thalidomide disaster of the 1950's and 1960's happened because there was no independent control of drug safety, whereas the anti-depressant crisis has grown under the aegis of an elaborate, expensive, and global regulatory system. 
The nub of the anti-depressant crisis is not that these drugs could do so much harm, but that they were allowed to do so when the precedents were so plain. 
If and when this crisis is ever properly investigated, it will not so much open a can of pharmacological worms, as expose questions about what medicine is and should be. 
These underlying issues seem all the more important because the Internet has for several years been groaning with evidence of the crisis to come. 
The explosive growth of the Internet introduced completely new opportunities for gathering, presenting, and communicating evidence. 
It broadened and deepened understanding of the problems associated with anti-depressants, giving patients a collective voice, as never before. 
Previously, drug safety monitoring relied on occasional adverse reports from health professionals about patients' reaction to medicines. 
But this crisis revealed these reports' fundamental inadequacies, such that users' experiences with drugs can never credibly be ignored again. 
United by the Internet, many thousands of patients from all over the world began to describe experiences with anti-depressant drugs and problems brought on by withdrawal that bore little resemblance to the labels' warnings. 
The impact of this user intelligence has been profound: in 2003, one pharmaceutical company revised its 2002 estimate of the incidence of withdrawal reactions from 0.2% to 25% (even as the manufacturer of a similar drug continues to claim that it is "not habit forming" at all). 
The anti-depressant crisis provides, for the first time, dramatic evidence of the collective value of user reports in understanding drug risk. 
To be sure, user reports are not "scientific" and most, individually, might seem naïve, confused, exaggerated, mistaken, and/or just plain self-absorbed. 
Yet in this case they provided, collectively, more reliable evidence than that reported in numerous controlled clinical trials. 
So, now the question is not so much the value of patients' reports, but the integrity of medical research and the state of science. 
"Just how tainted has clinical medicine become," asked an editorial in the British medical journal The Lancet in 2002; the answer was "heavily and damagingly so." 
The duplicity surrounding the marketing of anti-depressant drugs underscores just how corrupt the profession has become. 
The crisis now unfolding raises broad issues concerning democracy and science, the relationship between risk and benefit, and the conflict between imperatives of trade and health. 
But one feature above all others captures the underlying problem: the yawning gap between the words of patients who speak their minds and the terminology of producers, experts, and authorities who mince words. 
The 1990's saw "depression" formally redefined as a serotonin-deficiency disease and the scourge of millions--a convenient and seductive view, but deeply simplistic. 
The term "drug dependence" was also redefined, to propose that loss of personal autonomy could never arise in a therapeutic setting. 
The ubiquitous term "discontinuation symptoms"--Orwellian newspeak for withdrawal--implied that anti-depressants carried no risk of dependence. 
On the contrary, wishful thinking led experts to adduce "discontinuation symptoms" as evidence of the effectiveness of vital remedies. 
Later, suicides became routinely described as "non-accidental overdoses," and the broad-spectrum term "emotional lability" came into vogue, despite its inability to distinguish between a drug-induced suicide attempt and an outburst of tears. 
By contrast, user reports of adverse reactions attempt to describe some human reality, rather than promote images that suit the vested interests involved. 
In the long run, the anti-depressant crisis thus may prove to be a blessing in disguise, but only if it brings about the transparency and intellectual honesty needed to make the medical profession ultimately accountable to the people it claims to serve. 


A Mania for Diagnosing Bipolar Disorder 
PROVIDENCE, RI – During the past few years, many experts have suggested that bipolar disorder – a serious illness resulting in significant psychosocial morbidity and excess mortality – is under-recognized, particularly in patients with major depression. 
Even patients who are diagnosed with bipolar disorder often wait more than 10 years after initially seeking treatment for the correct diagnosis to be made. 
The clinical implications of the failure to recognize bipolar disorder in depressed patients include the under-prescription of mood-stabilizing medications, and an increased risk of rapid “cycling” – swings between manic and depressive phases. 
But, perhaps as a consequence of concerted efforts to improve the recognition of bipolar disorder, during the past few years we have observed the emergence of an opposite phenomenon – over-diagnosis. 
In my own practice, my colleagues and I have encountered patients who reported that they were previously diagnosed with bipolar disorder, despite lacking a history of manic or hypomanic episodes. 
To be sure, we have also seen patients seeking treatment for depression who really did have bipolar disorder. 
However, there seemed to be more over-diagnosis than under-diagnosis. 
We therefore conducted a study to examine empirically how often bipolar disorder might be over- and under-diagnosed. 
Seven hundred psychiatric outpatients were interviewed with the Structured Clinical Interview for DSM-IV (SCID) and completed a self-administered questionnaire that asked whether they had been previously diagnosed by a health-care professional with bipolar or manic-depressive disorder. 
Family history information was obtained from the patient regarding their immediate relatives. 
Slightly more than 20% (145 patients) in our sample reported that they had been previously diagnosed as having bipolar disorder, significantly higher than the 12.9% rate based on the SCID. 
Less than half of those who reported that they had been previously diagnosed with bipolar disorder were diagnosed with bipolar disorder based on the SCID. 
Patients with SCID-diagnosed bipolar disorder had a significantly higher risk of bipolar disorder in their immediate family members than patients who self-reported a previous diagnosis of bipolar disorder that was not confirmed by the SCID. 
Patients who self-reported a previous diagnosis of bipolar disorder that was not confirmed by the SCID did not have a significantly higher risk for bipolar disorder than the patients who were negative for bipolar disorder by self-report and the SCID. 
Our findings, validated by family history, thus suggest that bipolar disorder was over-diagnosed. 
Any study seeking to determine whether a psychiatric disorder is over-diagnosed will find that some patients with the condition do not have it upon re-interview. 
Such is the nature of the imperfect reliability of psychiatric diagnosis. 
The question, then, is not whether some patients previously given a diagnosis do not seem to have it upon re-interview, but rather how many. 
How high the percentage should be before claiming over-diagnosis is a significant problem and a value judgment. 
But we think that an over-diagnosis rate of more than 50% crosses the clinical significance threshold. 
Over-diagnosis of bipolar disorder has costs. 
Mood stabilizers are the treatment of choice, and, depending on the medication, they can produce potentially significant health complications affecting renal, endocrine, hepatic, immunologic, or metabolic function. 
Thus, over-diagnosing bipolar disorder can unnecessarily expose patients to serious side-effects of medication. 
The impact of marketing efforts by pharmaceutical companies and publicity probably plays a role in the emerging tendency to over-diagnose bipolar disorder. 
Direct-to-consumer advertisements that refer individuals to screening questionnaires can result in patients suggesting to their doctors that they have bipolar disorder. 
We have seen evidence of this in our practice. 
This does not necessarily reflect a problem with the performance of a screening questionnaire, but rather how these scales are used. 
Screening questionnaires maximize sensitivity, at a cost of false positives, because it is presumed that they are followed by expert clinical evaluation. 
But insufficient diagnostic rigor can result in over-diagnosis. 
Clinicians are inclined to diagnose disorders that they feel more comfortable treating. 
We believe that the increased availability of medications that have been approved for the treatment of bipolar disorder might be influencing clinicians who are unsure whether or not a patient has bipolar disorder or borderline personality disorder to err on the side of diagnosing the disorder that is responsive to medication. 
This bias is reinforced by the marketing message of pharmaceutical companies to physicians, which has emphasized research on delayed diagnosis and under-recognition of bipolar disorder, possibly sensitizing clinicians accordingly. 
The campaign against under-recognition has probably resulted in some anxious, agitated, and/or irritable depressed patients who complain of insomnia and “racing thoughts” being misdiagnosed with bipolar disorder. 
The results of our study are consistent with prior studies suggesting possible problems with the diagnosis of bipolar disorder. 
With the greater number of medications approved for the treatment of bipolar disorder, along with multiple reports cautioning clinicians against under-diagnosis, it appears that over-diagnosis has become a greater problem than under-diagnosis. 
Both can have negative consequences. 
While there is still some uncertainty as to the best assessment approach, we recommend that clinicians use a standardized, validated method. 

A Marshall Plan for the Arab World 
ROME – US President Barack Obama’s major speech on the consequences of the Arab Spring is also a challenge for Europe. 
Only if the trans-Atlantic partnership proves effective, as it did to meet the demands of the Cold War and the end of Europe’s division, can the West contribute to realizing the hopes engendered by the Arab uprisings. 
The crisis in Europe’s southern neighborhood reflects a deep-seated transformation process that will have long-lasting consequences – for the region, for Europe, and for the world. 
The Mediterranean region is vital to Europe’s peace, stability, and economic growth. 
The continent’s Mediterranean neighbors look to Europe as their natural partner. 
And events there, including the Israeli-Palestinian peace process, have a broader impact that naturally entails the close involvement of global partners – first and foremost the United States. 
Current events, not just in Libya, but also in Tunisia, Egypt, Syria, Yemen, and Bahrain, mirror the political complexity of these countries. 
They also spring from different factors, such as frustration with rising food prices and widespread corruption, coupled with demands for greater democratization, reduction of economic and social inequalities, and job creation. 
Europe’s response to this process must embody the goal of an orderly and rapid transition. 
Proposals for some sort of “partnership for transformation,” based on political reform and full respect of human rights and fundamental freedoms, should bear in mind that the region’s political landscape looks certain to remain volatile and tense in the coming months. 
No surprise, then, that regional stability has emerged as a high priority for Europeans. 
Chaos, a resurgence of terrorism, the rise of radical Islamism, and massive waves of immigration towards Europe are just a few of the potential threats to the European Union that are now being contemplated. 
Given this, the EU should be doing its utmost to prevent any deterioration of the region’s security. 
Just as the post-1945 Marshall Plan consisted of a financial-aid package aimed at reconstructing and re-launching Western Europe’s economies to support democratic transformation and political stability, the countries of the Arab Spring face similar challenges and needs. 
We need to enable countries like Egypt and Tunisia – and possibly a peaceful Libya – to strengthen their political stability through democratization. 
The Marshall Plan was accompanied by partnerships for reconstruction in which the US and European recipient countries were on an equal footing. 
The aim was to strengthen cooperation as a means of creating a lasting peace. 
The situation in the Mediterranean region is at a more advanced stage. 
The broad planks of a partnership are already there, so what is now needed is to enhance Europe’s integration with its southern neighbors. 
This is why Italy has proposed a new EU “Plan for the Mediterranean” aimed at supporting the transition process and building upon existing institutional and financial tools to provide the region with additional resources. 
The Union for the Mediterranean, launched by French President Nicolas Sarkozy in 2008, must be revitalized and re-directed towards development projects ranging from highways and ports to the promotion of small and medium-size enterprises (SMEs). 
But a broader economic initiative is also needed to mobilize a critical mass of European and international financial resources to attract investment to the region and modernize its infrastructures and services. 
Let us, together with the US, tear down the trade and economic barriers that are stifling these economies. 
Let us also grant some Mediterranean countries association status that will allow them to integrate progressively into the EU’s internal market and participate in EU programs. 
To achieve all of this, a clear set of principles is required. 
We Europeans must favor stability, create a real spirit of co-ownership, and promote political responsibility.In this new framework, the EU should avoid excessive conditionality, especially during the transition period. 
Europe’s strong support for the region’s economic development must remain the top priority, as Arab countries introduce necessary reforms. 
Moreover, a dedicated financial institution should be set up to aid in this task. 
One proposal worth considering is to upgrade and strengthen the European Investment Bank’s Facility for Euro-Mediterranean Investment and Partnership (FEMIP), which would become an autonomous institution, perhaps headquartered in the Middle East or North Africa, with shares held by the region’s governments (or other institutions) and other willing parties. 
The London-based European Bank for Reconstruction and Development could join this effort by extending its activities to the region, which could be coupled with the creation of dedicated services to support the growth of job-creating enterprises. 
The EBRD made an important contribution to the economic transition process in Eastern Europe; there’s a good case for drawing on its experience and expertise to help the southern Mediterranean. 
At the same time, the EU must launch a “dialogue among equals” on political and security matters, aimed at confidence-building across the region. 
A Conference on Security and Cooperation in the Mediterranean and the Middle East (CSCM) could quickly become a useful instrument for promoting this comprehensive approach to security and development. 
In short, we need to transform the Mediterranean countries into producers rather than consumers of regional stability. 
We Europeans cannot afford to turn our backs on our Arab friends along the far shores of “mare nostrum.” 
They are part of our collective history, and they deserve the better future that we can help them to build. 

A Middle Eastern Union? 
TOLEDO, SPAIN – This autumn, the Toledo International Centre for Peace convened a meeting devoted to water cooperation in the Middle East. 
One conclusion that emerged was that any effective response to the unequal distribution of natural resources in the region must be regional. 
With this idea in mind, Munther Haddadin, a former Jordanian minister of water resources, proposed for the Middle East a “Water and Energy Union,” a long-term mechanism to integrate a fragmented region. 
The idea is compelling. 
Attending to such basic needs in a way that manages scarcities and surpluses regionally has a powerful logic. 
Indeed, the parallels with the role of coal and steel in forging the European Union are clear enough that, over the past month, Joschka Fischer, Germany’s former foreign minister, has called for such a union. 
So, too, have former Czech president Václav Havel and a group of global luminaries who support the idea of regional integration through water. 
Having convened the meeting in Spain, we are very much in favor of the pursuit of such a worthy goal. 
But the European “coal and steel union” became possible only after Europe’s major political conflicts were resolved. 
A successful process of regional integration in the Middle East will also require a political framework that ensures the stability needed to make regional cooperation work. 
All sides need to know where their borders begin and end. 
And past injustices will need to be put aside, so that the cycle of revenge and the automatic reflex in favor of immediate gain do not scuttle regional solutions to problems. 
Here, the experience of a previous regional exercise is worth acknowledging. 
During the 1990’s, the multilateral track of the Middle East Peace Process pursued regional coordination concerning economic development, the environment, refugees, arms control, and water. 
It failed, because when the bilateral talks collapsed, readiness to engage in regional cooperation withered under the despair of failed politics and the bloody reality of the Second Intifada. 
The necessary political framework also needs to be regional and, fortunately, it exists. 
The Arab Peace Initiative, first tabled at an Arab League Summit in Beirut in 2002 and reconfirmed in Riyadh in 2007, provides all the parties with a framework to resolve their differences, as well as a political basis for moving forward. 
Adopting it is essential to moving forward, especially if additional chapters addressing regional security and economic relations are included. 
Despite today’s chronic pessimism, the pursuit of a Middle East Water and Energy Union, coupled with adoption of the Arab Peace Initiative, would change mindsets. 
Together, they would form a mutually reinforcing process: a political agreement would provide the framework in which the region’s water and energy needs can be met; and meeting these basic needs in an effective and innovative way would make the Arab Peace Initiative more than a paper deal. 
Moreover, the arid triangle formed by Israel, Palestine, and Jordan cannot meet its water needs unless yet another dimension is incorporated into the solution. 
A World Bank report has already stated that, with 19 million people living between the Jordan River and the Mediterranean by 2020, water needs would not be met without making existing technologies of desalinization more economically viable. 
Coincidentally, over the past month, there have been early signals of greater interest in a regional political approach. 
The Bahraini foreign minister recently called for a regional forum that includes Israel to resolve the problems ahead; a former senior Saudi official met with Israelis in the United Kingdom to reiterate the need for a comprehensive peace agreement; and Israeli Labor Party leader Ehud Barak has said that it may be time to pursue an overall peace deal for the region, accompanied by an economic package, since separate negotiations with Syria and the Palestinians may prove fruitless. 
Despite decades of effort, the process of trial and error through bilateral and conflict-management approaches has always ended in frustration. 
Whatever economic projects have been launched has crumbled in the face of the persistence of the occupation. 
The problems are too complex, and the dangers of radicalism too advanced, to permit success through haphazard means. 
The Middle East can end its state of permanent crisis only if it builds a comprehensive foundation for peace. 
The Arab Peace Initiative, combined with the long-term development of a Water and Energy Union, offers the necessary basis to meet the needs of the region’s peoples and mitigate future conflict. 
The Middle East must no longer be a hallmark of intractable violence. 
It can be a herald of innovation on issues of common human concern – water, energy, and politics. 

A Misaligned Euro? 
CAMBRIDGE: Caught by rising inflation from oil prices and a soaring dollar, the European Central Bank (ECB) has raised interest rates yet another notch. 
More is to come. 
Growth is wonderful; inflation is terrible; a central bank cannot avoid choosing: it must restore price stability even if that means sacrificing growth. 
This is what lies ahead, unless there is sudden relief from an upturn in the euro. 
But is it realistic to expect a rally from a currency that has been under siege since its birth? 
At its introduction the euro reached impressive heights, like a high-tech IPO. 
But the IPO soon sunk miserably. 
Since its introduction, the euro has fallen further from its peak then even the Nasdaq in the high-tech sell-off of earlier this year. 
Like the Nasdaq’s high-tech high-flyers, the nagging questions about the euro are these: what is its fundamental value? 
Is there a fundamental misalignment of the euro with other currencies (most notably the dollar) and how long might this last? 
It is commonly assumed (but nobody takes big bets) that the Nasdaq still carries major downside risks while the euro, sooner or later, must return to normality, whatever that means. 
Could the opposite happen? 
A recent study by the IMF reports on “equilibrium” exchange rates derived from models of long run factors in currency valuations. 
The equilibrium rates are reported in the accompanying table and so are today’s actual rates. 
According to these IMF theoretical equilibrium rates, the euro is grossly misaligned: 30% underpriced against the dollar, 18% against the Yen! 
---------------------------------------------------------------------- 
Actual IMF Equilibrium Rate 
Dollar/Euro ($/_) 0.88 1.26 
Yen/Euro (-/_) 93.1 113.3 
---------------------------------------------------------------------- 
In judging whether these theoretical values foreshadow a big euro realignment, lets see what causes them. 
First and most importantly, these equilibrium rates are based on a theoretical model where long run current account balances tend toward zero. 
Under this scenario, any country that runs persistent, large current account balances must look forward to a hard landing and a correction in the value of its currency. 
No country can borrow forever or at least at very high rates. 
But do current account constraints apply to major, financially stable countries? 
Canada has run current account deficits for all but three of the last 50 years; the US has done the same for 30 years. 
So long as a borrowing country is stable and attractive, a major reversal due to the current account balance will not be forced by the market. 
That is America’s story: despite a yawning trade deficit, investment is running high, eagerly financed by the rest of the world; public finance is formidable and inflation insignificant; new economy prospects run unabated and asset markets are revealing that even if there is a US bubble, it is unlikely to burst as violently as in Japan a decade ago. 
In such an environment, long run equilibrium rate models are pretty useless as guides to short or even medium term exchange rate developments. 
The second limitation of long run models is this: they are estimated from history and so make no allowance for dramatic changes in the supply side or financial environment. 
Japan, for example, is in the grip of a growth crisis and public finance disaster - not the usual companions of an appreciating currency. 
On the dollar/euro front, the US has embarked on a high productivity trend unmatched anywhere; never mind the current account, the upswing in American productivity (combined with financial stability) is the dominant feature no matter the current account. 
The counterpart of here, because exchange rates always ride on differential performance, is a continued poor supply side performance in Europe and Japan’s ongoing and pervasive economic distress. 
There is a third reason why estimates of long run equilibrium with current account balance may be of little predictive value. 
Do Europe and Japan really want to see the US achieve an external balance? 
Europe and Japan, indeed the whole emerging economy world, are living off America’s trade deficits. 
They keep the world growing! 
Were there a risk to the continued funding of these deficits by the private sector, the ECB and the Bank of Japan would step in to buy all the dollars that their private sectors had shunned. 
There is precedent for this: whenever the dollar weakens, foreign central banks are eager to help. 
As John Connally, President Nixon’s Treasury Secretary of 30 years ago, said: “the dollar is our money and their problem.” 
The chance of seeing exchange rates near the IMF values any time soon is slim. 
Yes, the euro can tend toward dollar parity. 
But it is also plausible that lack of support for the euro and the ongoing US miracle will see the euro sink to exceptionally low levels of near .80 and even less. 
For the time being, investors will continue to think of the euro as a problem just as the ECB does. 
The euro IPO crashed because it came at a time when the US economy was flying high. 
The European product is going to make it; it will have its day in the sun. 
But right now? 
It has no chance to shine. 

A Modest Proposal for the G-20 
BEIJING – In March, at a meeting in Beijing organized by Columbia University’s Initiative for Policy Dialogue and China’s Central University of Finance and Economics, scholars and policymakers discussed how to reform the international monetary system. 
After all, even if the system did not directly cause the recent imbalances and instability in the global economy, it proved ineffective in addressing them. 
Reform will, of course, require extensive discussion and deliberation. 
But the consensus in Beijing was that the G-20 should adopt a modest proposal this year: a limited expansion of the International Monetary Fund’s current system of Special Drawing Rights (SDRs). 
This proposal, while limited in scope, could play an important role in initiating discussion of deeper reforms while helping to restore the fragile world economy to health and achieve the aim expressed in the G-20’s Pittsburgh declaration: strong, sustainable, and balanced growth. 
We suggest that SDRs’ role be expanded through new issues and by increasing their use in IMF lending. 
Doing so would build on the enlightened suggestion made at the G-20’s London meeting in April 2009 to issue SDRs equivalent to $250 billion, which was then quickly implemented. 
The G-20 could suggest that the IMF issue a significant volume of SDRs over the next three years. 
We would suggest, for example, an issue of SDR150-250 billion annually (approximately $240-390 billion at current exchange rates). 
Such a measure would have several positive effects. 
First, it would reduce the recessionary bias in the world economy, especially during crises and in their aftermath. 
Many countries continue to accumulate high levels of precautionary reserves, especially to avoid future crises stemming from reversals on their capital and trade accounts. 
Recent financial crises have taught countries that those with large reserves are better able to weather the vicissitudes of international financial markets. 
While such reserve accumulations help protect countries, in certain periods they reduce global aggregate demand. 
Given its relatively small scale, the annual issue of SDRs would only partly offset these deficiencies, but it would nonetheless help sustain and accelerate global recovery without causing inflationary pressure. 
Moreover, reducing the need for countries to set aside funds for reserves would also facilitate some reduction of global imbalances. 
Ideally, additional issuance of SDRs would be accompanied by further measures to increase their effectiveness. 
For example, countries’ unused SDRs could be held as “deposits” by the IMF, which the Fund could then use to finance its lending programs. 
This should be understood as the first step toward integrating “general resource” and “SDR” accounts into a single IMF account, and to increase the SDR’s role in IMF transactions so that it eventually becomes the main – or even only – mechanism for IMF financing. 
During a declared crisis, IMF lending should be financed entirely by new SDR issues in unlimited amounts. 
A working group could be established to study other reforms that would enhance global financial stability further and address other global economic and financial objectives. 
For example, alternative systems of SDR allocation, with a greater proportion of SDRs given to countries actually demanding the reserves (mainly developing countries), might contribute to global growth and stability. 
One advantage of this modest proposal is that it would not prejudice the outcomes of the working group on broader reforms, like new distribution formulas for SDRs. 
The issuance of additional SDRs, while contributing to global stability today, would not alter in any fundamental way existing monetary arrangements. 
We suggest that this proposal be discussed at forthcoming meetings of the G20. 
The G-20 showed its effectiveness in responding to the crisis that erupted in 2008. 
The question today is whether, with the moment of crisis passing and countries’ circumstances and perspectives diverging, the G-20 can demonstrate the leadership the world needs in addressing its ongoing critical problems. 
A failure to take concrete action would risk breeding disillusionment. 
Our proposal would reaffirm the G-20’s continued leadership in ensuring greater stability and sustained growth in the world economy. 

China Grows Down 
HONG KONG – For more than three decades, China’s GDP has grown by an average of more than 10% annually. 
But former Premier Wen Jiabao rightly described this impressive growth performance as “unstable, unbalanced, uncoordinated, and unsustainable,” highlighting the many economic, social, and environmental costs and challenges that have accompanied it. 
Now China must choose between the export-based, investment-driven growth model of the past and a new, more viable economic order. 
Cheap credit and perverse incentives – such as promotions for officials who contribute most to GDP growth – have led to massive but redundant investment, which, in turn, has contributed to excess capacity in manufacturing and infrastructure. 
This model is not only inefficient; channeling government resources to support investment also undermines China’s social development. 
Given this, China’s leaders have decided to stop using GDP growth as the primary criterion for evaluating officials’ performance. 
Indeed, the 12th Five-Year Plan, which extends until 2015, aims to shift China’s economy to a new, more sustainable growth model based on quality and innovation, and accepts that annual GDP growth will likely fall to 7% during the transition. 
Most discussion of growth models nowadays is based on work by the Nobel laureate Robert Solow. 
For Solow, GDP growth is determined by the factor inputs of land, labor, and capital, together with the economy’s total factor productivity (TFP, or the change in output not accounted for by changes in the volume of inputs, but by factors like technological innovation and institutional reform). 
Since 1978, China, by implementing major reforms, has achieved three periods of high TFP growth, each lasting 5-7 years. 
First, in the early 1980’s, following the introduction of the rural household-responsibility system, which boosted agricultural productivity and released a large amount of unskilled labor to work in the higher-productivity urban and industrial sectors, annual TFP growth accelerated to 3-4%. 
The second such period followed Deng Xiaoping’s southern tour in 1992, during which he emphasized the need to shift to a market-based – albeit state-controlled – system by opening China’s economy to foreign direct investment and establishing special economic zones to help develop export-oriented industries. 
This time, TFP growth soared to 5-6%, partly owing to the “catching up” process facilitated by China’s adoption of foreign technology and know-how. 
Finally, after major reforms of state-owned enterprises (SOEs) and the tax system, China acceded to the World Trade Organization in 2001. 
With the country fully integrated into global supply chains, TFP growth hit 4%, where it remained until 2007. 
Since then, however, the TFP growth rate has fallen by almost half. 
Indeed, China’s economy has experienced a significant – and ongoing – growth slowdown in the wake of the global economic crisis that erupted five years ago. 
By 2012, human capital’s contribution to China’s GDP growth fell almost to zero, with fixed-capital accumulation accounting for roughly 60% of total growth. 
Large-scale, debt-funded capital investments have raised the country’s credit/GDP ratio to nearly 200%, increasing the financial system’s vulnerability – a development reflected in the recent spike in interbank interest rates. 
In order to achieve more balanced and sustainable GDP growth, China’s leaders must implement a set of deep, comprehensive, and long-lasting institutional reforms aimed at boosting TFP. 
In particular, the reforms should be designed to facilitate China’s transition from its traditional supply-based growth model, which assumes that building hard infrastructure leads automatically to demand growth. 
In fact, GDP growth may be slowing precisely because existing investment in manufacturing and infrastructure, undertaken largely by local governments and SOEs, does not match the pattern of domestic demand. 
As a result, China now faces the problem of short-term excess capacity. 
Improving the quality of GDP growth will depend on Chinese leaders’ willingness to enact market-oriented reforms. 
Rather than directly driving investment, the state must emphasize its regulatory and enforcement functions, including setting and overseeing standards, building an effective property-rights infrastructure, and managing macroeconomic conditions. 
At the same time, the state must improve the quality and delivery of education, health care, and security, while minimizing corruption and administrative abuses. 
In short, China must shift its focus from meeting GDP growth targets to creating an environment that fosters innovation and competition, thereby enabling market forces to set prices and allocate resources more effectively. 
The state would thus become an intermediary agent, facilitating the development of a sustainable economic order in which less is more – that is, a system in which less intervention creates more opportunities for creativity. 
SOEs undoubtedly played an important role in China’s previous growth model, delivering the infrastructure and services that were deemed necessary for the global manufacturing supply chain to function. 
But access to cheap credit from state-controlled banks creates an incentive for SOEs to generate surplus capacity, which increases systemic risk in the economy. 
To correct China’s excess-capacity problem would require the relevant enterprises, whether SOEs or private firms, to exit the market. 
Unless China’s leaders implement major structural reforms aimed at establishing a market-based growth model, they will be unable to avoid the “middle-income trap” that has prevented so many developing economies from attaining advanced-country status. 
The deceleration in GDP growth that such reforms would cause would be more than offset by increased market dynamism and overall economic stability. 

A Movable Financial Feast 
LONDON – There was a time when league tables were to be found only on the sports pages of newspapers. 
Now they are a global obsession. 
There are school and university league tables, rankings of companies on profitability or corporate social responsibility, tables of happiness indicators by country, and tables that attempt to rank consumer brands by value. 
There is even a league table of the world’s funniest jokes (I did not laugh much). 
The financial world is also full of such rankings. 
Investment bankers wait with bated breath for the merger and acquisition league tables, even though the link between a high ranking and profitability is somewhere between loose and non-existent. 
Bank league tables have been with us for a while, and now tend to be based on capital strength, rather than asset volume, which is an improvement of sorts, but still not very meaningful. 
There are also now several different league tables – which are generating considerable angst – that rank financial centers based largely on surveys of firms. 
How badly the financial crisis damaged the reputation and performance of the major Western centers is a question increasingly asked in London, and to a lesser extent in New York. 
(Some Americans tend to think that the world will beat a path to their door, no matter how badly they are received when they arrive!) 
So far, the message from the most recent tables is not too alarming for the incumbents. 
A ranking prepared for the City Corporation in London shows New York and London still neck and neck at the top of the league. 
The Banker magazine produces another, with New York on top and London a close second – though the distance between them and their pursuers is narrowing. 
The scores in both London and New York for the quality and intensity of regulation, and the tax burden, have dropped. 
Firms seem nervous about the future in both areas. 
The most striking change in the rankings is the rise of major Asian financial centers – and not just Hong Kong and Singapore, but also Shanghai, Beijing, and Shenzhen. 
The Chinese have been explicitly promoting their financial centers, and the impact is beginning to be seen. 
The World Economic Forum’s Financial Development Index – yet another league table to consider – shows Hong Kong and Singapore very close indeed to London, with China now ahead of Italy on the overall measure of financial sophistication. 
Noodles are beating spaghetti. 
Some of this is unsurprising. 
As the world’s center of economic gravity shifts east, the balance of financial activity is bound to move with it. 
On the principle that if something is inevitable, it is wise to welcome it, the appropriate response in London and New York is to find ways of collaborating with these new centers. 
But the more important question for the traditional financial centers is whether international activity that can move really is moving. 
That is far harder to judge. 
There are anecdotes about individual hedge-fund managers moving to Geneva. 
Every time a government, or a regulator, announces some new control, or a tightening of existing controls, there are threats from bankers that they will pack up and leave town, taking their Porsches and mistresses with them. 
These threats, which used to have a lot of political impact, are now much less effective. 
Some politicians and commentators quickly say, “Good riddance.” 
Even the Bank of England has asked whether, given the cost of mopping up the mess caused by the latest crisis, it is worth playing host to a global financial market. 
This is risky speculation. 
However badly bankers have behaved – and some clearly deserve a decade or more in the sin bin – financial services are a crucial element of London’s economy. 
If the financial sector declines, what will replace it in employment terms? 
Airy talk about science and manufacturing as ladders out of recession (a favorite image of former British Prime Minister Gordon Brown) is just that – empty words. 
There are few, if any, examples of high-cost post-industrial societies reviving their manufacturing sector on a large scale once it has declined. 
London, in particular, has no inalienable right to be a global financial center. 
The United Kingdom’s domestic market is, after all, much smaller than that of the United States. 
Indeed, the location of financial activity has changed through the centuries. 
If incumbency were a permanent advantage, Goldman Sachs’ global headquarters would be in Babylon. 
There must be a tipping point at which some combination of higher taxation, more burdensome regulation, and a hostile political climate causes financial firms to relocate. 
There is a risk that Britain may now be approaching that point. 
That is why the UK’s Financial Services Authority, and even the Confederation of British Industry, which speaks largely for non-financial firms concerned about access to credit, has begun to call for a truce between the authorities and financial markets. 
The next two or three months will determine whether peace breaks out, and, if it does, whether it will endure. 
As is always the case in peace negotiations, both sides must be willing to compromise. 
Firms will need to show visible restraint when it comes to this year’s bonus round. 
The British government will not tolerate another jamboree. 
And governments on both sides of the Atlantic will need to decide just how far they want to go in punishing banks. 
Continued threats of ever-higher tax burdens could prove dangerously counterproductive. 
If we fail to settle on a new social contract between the state and the markets soon, those markets may indeed move elsewhere. 

A Murder in Moscow 
It is time to end the fiction that Vladimir Putin’s “dictatorship of law” has made postcommunist Russia any less lawless. 
The murder of Anna Politkovskaya, one of Russia’s bravest and best journalists, a woman who dared to expose the brutal murders committed by Russian troops in Chechnya, is final proof that President Putin has delivered nothing more than a run of the mill dictatorship with the usual contempt for law. 
This recognition is a timely one for the world to make, particularly Europe. 
Germany’s Foreign Ministry is preparing a policy on Russian/German relations that will enshrine indifference to Putin’s lawlessness as being in the national interest of the most powerful member of the European Union. 
But indifference becomes appeasement when it encourages Putin to pursue his lawless ways in the international arena, as in his current campaign to strangle Georgia’s economy. 
The killing of Politkovskaya has incited an eerie sense of déjà vu: just as in the KGB’s heyday, people simply disappear in Putin’s Russia. 
Politkovskaya’s is the third politically tinged killing in three weeks. 
Enver Ziganshin, the chief engineer of BP Russia, was shot to death in Irkutsk on September 30. 
Andrei Kozlov, the deputy governor of Russia’s central bank who was leading a campaign against financial fraud, was assassinated on September 14. 
The fact that Russia’s Prosecutor General Yuri Chaika, took over the investigation into Politkovskaya’s killing, as he did with the murder of Kozlov, doesn’t inspire hope, as such senior level involvement would in any real democracy. 
In fact, the involvement of the highest level of Russia’s government is almost a guarantee that the killers will never be found. 
Politkovskaya’s murder is a particularly grim augury when you consider that she was a powerful critic of Russia’s President. 
In her articles for one of the few remaining independent papers in Moscow, Novaya Gazeta, and in her books “Putin's Russia: Life in a Failing Democracy” and “A Dirty War: A Russian Reporter in Chechnya,” Politkovskaya wrote of the vanishing freedoms that are the signature characteristic of Putin’s presidency. 
As shown by the exile of the former media tycoons Boris Berezovsky and Vladimir Gusinky, and the imprisonment of oil magnate Mikhail Khodorkovsky, three fates await Putin’s enemies: exile, imprisonment, or the grave. 
I am not accusing Putin’s government of the contract killing of Politkovskaya. 
After all, as a campaigning investigative journalist she made many people angry besides Putin, not least of which is the current Chechen Prime Minister, Ramzan Kadyrov, whom she accused of a policy of kidnapping for ransom. 
But even if Vladimir Putin’s associates had nothing to do with Politkovskaya being gunned down in an elevator of her apartment building in the center of Moscow, his contempt for law created the climate in which the murder was carried out. 
Like the murder of Archbishop Thomas Beckett in his Canterbury Cathedral many centuries ago, the crime was committed in the clear belief that it would please the king. 
Given what Politkovskaya represented—the responsibility of a democratic press to question the Kremlin and its policies—the government should have made certain that nothing bad happened to her. 
Putin’s Russia has already lost 12 leading journalists to murder in the past six years. 
None of those crimes has been solved, which would not be the case if Putin’s “dictatorship of law” was anything more than a PR strategy. 
The six year period since Vladimir Putin arrived in the Kremlin has been a time of deeply conflicting signals. 
On one hand, the world sees a young, educated leader pledging to modernize Russia, particularly in terms of bringing its law enforcement and judicial practices into line with international norms. 
On the other, the president watches in silence while his ex-colleagues in Russia's FSB security service (the former KGB) provide no security to those murdered, and launch a series of notorious espionage cases against journalists, scientists, and environmental activists. 
These “neo-spies” include journalist Gregory Pasko, arms control expert Igor Sutyagin, diplomat Valentin Moiseyev, physicist Valentin Danilov, and others. 
The supposedly civilizing influence of being a Western partner — chairing a G-8 summit in Saint Petersburg for example — seems to have been lost on Putin’s Kremlin cabal. 
Once again exposure to Western values has delivered another Potemkin Village; 
Russia presents a façade of laws and democratic institutions, but behind that cardboard surface the same arbitrary brutes rule. 
The danger for the world is that Putin’s lawlessness is being exported. 
Across Russia’s near abroad, a form of criminalized diplomacy is taking root. 
Look at Putin’s attempt to rig Ukraine’s previous presidential election, and the on again off again criminal charges brought against the opposition leader Yuliya Tymoshenko. 
Look at the rogue breakaway regions in Moldova and Georgia that exist only because of the Kremlin’s backing. 
Look at how the Kremlin seeks to blackmail its neighbors by threatening their energy supplies. 
Every policeman knows that when you ignore criminal behavior, criminals grow bolder. 
It is past time for the world to recognize Vladimir Putin for what he is: a man who is taking Russia back into the shadows. 
So the world must now ponder that old Latin maxim qui tacet consentere videtur – silence means consent – and ask itself if it is wise to quietly consent to Putin’s construction of a lawless energy superpower. 

A Nation Kidnapped 
The editorial published in the Colombian newspaper Diario del Sur on July 6 (“A Slap in the Face of Violence”) was ecstatic: “Never before, in spite of the violence that has oppressed us during so many years, has Colombia lived a day like yesterday: historic and unforgettable in every aspect.” 
At noon on July 5, Colombians throughout the country poured into the streets to show their outrage at the news that 11 provincial politicians had been killed while being held by leftist rebels. 
A human chain was formed, with participants wearing white tops. 
My colleagues in the capital, Bogotá, and in the south of the country, where we have humanitarian projects, say that everyone was waving white scarves. 
White balloons were launched everywhere. Press agencies estimate that, with more than one million participants, this was the largest public protest since October 1999, which was also – sadly – a demonstration against violence and kidnappings. 
But, while the killing of the 11 congressmen from Cali region – attributed to “crossfire’” during an attack by an “unidentified military group”the leftist rebels – provoked shock and anger, there was no agreement on how to solve the chronic problem of “El Secuestro” (The Kidnapping). 
Some Colombians demand a “humanitarian accord” – an exchange of prisoners for hostages – and reject “blood and fire” rescue attempts. 
Others oppose “ceding the territory” (setting up a demilitarized zone, where any such exchange could take place) and demand of the government “firmeza, siempre firmeza!” (to be “firm” and go after the rebels). 
As is often the case in armed conflicts, civilians suffer the most. 
The July 5 protest reminded us of the 3,000 kidnappings since the start of this four-decade conflict, but Colombians could form human chains and release white balloons for many other reasons. 
Consider, for example, Colombia’s grim ranking as global leader in the number of victims injured by landmines. According to “Landmine Monitor 2006,” Colombia had 1,110 victims last year, followed by Cambodia with 875 and Afghanistan with 848. 
This unnoticed drama is emblematic of the under-reported Colombian conflict. 
Indeed, if there were such a thing as a combined index of despair, Colombia would be an undisputed leader. 
Hostage-taking, and killing and maiming by landmines, are but the side effects of the oldest and longest-running civil war in Latin America, which has resulted in three million internally displaced persons – one of the world’s highest levels, close to that of Sudan, Congo, and Iraq. 
Even if there were, by some miracle, a negotiated end to the fighting, the scars left by this conflict will remain. 
So, besides helping the country find a political solution, there is also a need to focus on long-term reconstruction and reconciliation, so that young lives distorted by the civil war can be righted and children can be rescued from the harmful influence of so much violence and bloodshed. 
In Colombia’s south – where the heavy presence of illegal armed groups makes social peace a distant dream – I went to visit a secondary school, as part of a needs assessment. 
After four hours on a dirt road, I reached a highlands hamlet. 
The smart and friendly teenagers were eager to learn how to surf the Internet, just installed in their school. 
But when I asked five of them what they would like to become, I understood that this conflict has marked them forever. 
Their dream careers were: lawyer, criminal investigator, forensic physician, and soldier. 
The fifth one wanted to become a chemist, so that he could set up a cocaine laboratory. 
The teenagers’ plans simply reflect a sad reality: these pupils are the second generation that has not known anything but war. 
On the day of the march against violence, next to the editorial in Diario del Sur was a simple, one-question opinion poll: “Do you think that the security [in our department’s capital] has improved since the beginning of the year?” 
Over 90% said “no.” 
This is why thousands went into the streets to be counted. 
It is perhaps a beginning. 

A Nation of Vidiots 
NEW YORK – The past half-century has been the age of electronic mass media. 
Television has reshaped society in every corner of the world. 
Now an explosion of new media devices is joining the TV set: DVDs, computers, game boxes, smart phones, and more. 
A growing body of evidence suggests that this media proliferation has countless ill effects. 
The United States led the world into the television age, and the implications can be seen most directly in America’s long love affair with what Harlan Ellison memorably called “the glass teat.” 
In 1950, fewer than 8% of American households owned a TV; by 1960, 90% had one. 
That level of penetration took decades longer to achieve elsewhere, and the poorest countries are still not there. 
True to form, Americans became the greatest TV watchers, which is probably still true today, even though the data are somewhat sketchy and incomplete. 
The best evidence suggests that Americans watch more than five hours per day of television on average – a staggering amount, given that several hours more are spent in front of other video-streaming devices. 
Other countries log far fewer viewing hours. 
In Scandinavia, for example, time spent watching TV is roughly half the US average. 
The consequences for American society are profound, troubling, and a warning to the world – though it probably comes far too late to be heeded. 
First, heavy TV viewing brings little pleasure. 
Many surveys show that it is almost like an addiction, with a short-term benefit leading to long-term unhappiness and remorse. 
Such viewers say that they would prefer to watch less than they do. 
Moreover, heavy TV viewing has contributed to social fragmentation. 
Time that used to be spent together in the community is now spent alone in front of the screen. 
Robert Putnam, the leading scholar of America’s declining sense of community, has found that TV viewing is the central explanation of the decline of “social capital,” the trust that binds communities together. 
Americans simply trust each other less than they did a generation ago. 
Of course, many other factors are at work, but television-driven social atomization should not be understated. 
Certainly, heavy TV viewing is bad for one’s physical and mental health. 
Americans lead the world in obesity, with roughly two-thirds of the US population now overweight. 
Again, many factors underlie this, including a diet of cheap, unhealthy fried foods, but the sedentary time spent in front of the TV is an important influence as well. 
At the same time, what happens mentally is as important as what happens physically. 
Television and related media have been the greatest purveyors and conveyors of corporate and political propaganda in society. 
America’s TV ownership is almost entirely in private hands, and owners make much of their money through relentless advertising. 
Effective advertising campaigns, appealing to unconscious urges – typically related to food, sex, and status – create cravings for products and purchases that have little real value for consumers or society. 
The same, of course, has happened to politics. 
American politicians are now brand names, packaged like breakfast cereal. 
Anybody – and any idea – can be sold with a bright ribbon and a catchy jingle. 
All roads to power in America lead through TV, and all access to TV depends on big money. 
This simple logic has put American politics in the hands of the rich as never before. 
Even war can be rolled out as a new product. 
The Bush administration promoted the premises of the Iraq war – Saddam Hussein’s non-existent weapons of mass destruction –in the familiar colorful, fast-paced, and graphics-heavy style of television advertising. 
Then the war itself began with the so-called “shock and awe” bombing of Baghdad – a made-for-TV live spectacle aimed at ensuring high ratings for the US-led invasion. 
Many neuroscientists believe that the mental-health effects of TV viewing might run even deeper than addiction, consumerism, loss of social trust, and political propaganda. 
Perhaps TV is rewiring heavy viewers’ brains and impairing their cognitive capacities. 
The American Academy of Pediatrics recently warned that TV viewing by young children is dangerous for their brain development, and called on parents to keep children under two away from the TV and similar media. 
A recent survey in the US by the organization Common Sense Media reveals a paradox, but one that is perfectly understandable. 
Children in poor American households today not only watch more TV than children in wealthy households, but are also more likely to have a television in their room. 
When a commodity’s consumption falls as income rises, economists call it an “inferior” good. 
To be sure, the mass media can be useful as a provider of information, education, entertainment, and even political awareness. 
But too much of it is confronting us with dangers that we need to avoid. 
At the very least, we can minimize those dangers. 
Successful approaches around the world include limits on TV advertising, especially to young children; non-commercial, publicly-owned TV networks like the BBC; and free (but limited) TV time for political campaigns. 
Of course, the best defense is our own self-control. 
We can all leave the TV off more hours per day and spend that time reading, talking with each other, and rebuilding the bases of personal health and social trust. 

A Neighborly Option for Iran 
YEREVAN – Once again, the issue of bombing or sanctioning Iran has resurfaced. 
For years, debate about Iran has oscillated between two bad alternatives. 
Some are convinced that a nuclear Iran is the worst of all possible scenarios, worse even than the fall-out from a pre-emptive strike. 
But neither a nuclear-armed Iran nor air strikes against it are wise options, certainly not for this region. 
The repercussions of bombing Iran should be clear: closure of the Straits of Hormuz, skyrocketing oil prices, possible retaliation against Israel (regardless of the origin of the attack), and even greater turmoil in Iraq and Afghanistan. 
Indeed, the only certainty of any pre-emptive strike is irreparable and long-lasting damage to regional security and political and economic stability. 
Of course, the alternative is no safer. 
A nuclear-armed Iran would change the entire region’s security environment, and, given the enmity between Israel and Iran, two such nuclear powers facing off against each other would pose a threat. 
The way out of this dilemma is to understand what Iran wants – and how to accommodate it without jeopardizing anyone’s security. 
Iranian President Mahmoud Ahmadinejad has said that Iran wants to develop uranium enrichment technology for industrial use. 
Everyone agrees that Iran has the right to do so. 
But the world is split over whether to believe that Iran is actually doing what it says. 
If as some argue Iran is being disingenuous, then once it achieves this first phase – uranium enrichment for industrial purposes – it can easily slide into weapons-grade enrichment, leaving the international community out in the cold, with no channels of communication, no observation teams in place, and no monitors ready to sound the whistle. 
That is why the world must not remain focused on the already-lost first phase. 
Iran has more than 3,000 centrifuges despite all the international sanctions and threats. 
Instead, the world must focus on the second phase, because it is weapons potential that is the looming danger, and it is here that internationally mandated mechanisms for oversight and supervision exist. 
The Iranians have always said that they will continue to honor their commitments and open their doors to observation as members of the non-proliferation community. 
But the international community must be more respectful of Iran’s current industrial aims if it wants Iranian cooperation. 
The first step is to assuage Iran’s feeling of being besieged. 
Fortunately, there are voices in America and elsewhere that advocate engaging Iran at the highest level. 
But, to talk with Iran effectively, one must understand Iranian values and thinking. 
Iranians have a sense of seniority, if not superiority, born of a rich and ancient culture that has survived into modern times. 
But they also have a historically ingrained sense of insecurity, owing to frequent conquest and domination, which is being aggravated today by the presence of American troops to their west in Iraq and to their east in Afghanistan. 
Their outlook nowadays is the product of these two worldviews – suspicious of others’ motives and proud of themselves as smart, tough negotiators and not without their own resources. 
In my meetings with the current and past leaders of Syria and Iran, as well as in my meeting with Saddam Hussein, I heard them all say the same thing: the West is out to get them. 
Their explanation was that the West is uncomfortable with the motives and behavior of ideological states – Syria, Iran, and Iraq under Saddam were states with causes – Islam, Arab unity, or anti-Zionism. 
For Iranians, as bearers of faith and national pride, responses that seem to others self-righteous and irrational are, in fact, necessary and acceptable. 
The case of Saddam’s weapons of mass destruction is a historic example of a willingness to go to hell with your head held high. 
Saddam knew that he didn’t have weapons of mass destruction, but he was unwilling to concede the right of inspectors to ask. 
As in North Korea, Iran’s neighbors might provide the right mechanism to create a more transparent relationship between Iran and the world. 
In the so-called “six-party talks,” North Korea’s neighbors offered tangible incentives to Kim Jong-il’s regime to abandon its nuclear program. 
The most prominent of these was an end to North Korea’s economic isolation. 
Iran, too, feels besieged, though it is not isolated: it depends heavily on trade, and not just as a seller of oil. 
Two-thirds of its population is under the age of 30, and unemployment is high; it needs to attract foreign investment for its oil and gas industry, and to finance road construction and other infrastructure projects. 
Comparisons with neighboring Turkey are instructive. 
Before Iran’s Islamic revolution, it led Turkey in foreign direct investment, income per head, and GDP growth. 
Now Turkey has moved ahead, and may even join the European Union. 
Other regional comparisons further reinforce that trend. 
The Qataris have outstripped them in exploiting the huge gas field they share. 
Tiny Dubai draws in far more foreign investment: Iranians go there for banking, trade, and fun. 
Iran’s neighbors need to convince Iran’s rulers that Iranians, too, can participate in the region’s growth, and even become regional leaders. 
Only an open Iran, fully integrated into the regional economy and granted a role commensurate to its size and economic potential, will be able to moderate its siege mentality. 
Here, a vital step would be for the West to begin to envisage Iran as a potential alternative supplier of gas, by offering to link Iran to the proposed White Stream and Nabucco pipelines that are currently under development to bring Central Asian gas to Europe. 
The world’s judgments about Iran’s motives and actions should not be distorted by Iranian pride. 

A New Anti-Semitism 
These are violent times. 
Some believe that we are experiencing a new kind of conflict: “culture wars,” such as those between Sunni and Shiite Muslims or tribal groups in Africa and Asia, or indeed Islamists and Westerners. 
However, the deeper reasons for some of these conflicts may well be more traditional. 
Belonging to a particular cultural group is merely a pretext for battles between the winners and losers of globalization. 
Ruthless leaders mobilize disoriented followers. 
Particularly the losers, often represented by young men with no future to look forward to, can be induced to take even suicidal action against the alleged enemy. 
Perhaps one should not be surprised that at such a time, the oldest of our ugly ­– indeed, deadly – resentments, anti-Semitism, is re-emerging from the shadows. 
Its comeback takes the classical form of attacks on individuals, like the recent killing of a young Jew in France, or of disfiguring symbolic places, like cemeteries and synagogues. 
But there is also a more general sense of hostility to all things Jewish. 
One would have thought that anti-Semitism died forever with the Holocaust; but it did not. 
There are those who deny that the Holocaust ever took place, or that it did in its all-too-well-documented manner. 
The deniers range from second-rate historians like David Irving to apparently popular politicians like Iran’s recently elected president, Mahmoud Ahmadinejad. 
The evidence of what Nazi Germany did is so powerful that those who deny it can probably be dealt with even without putting them in prison and thereby drawing more attention to them than they deserve. 
The more worrisome source of anti-Semitism is different and justifies speaking of a new anti-Semitism. 
It has to do with Israel. 
To be sure, America is the first name in anti-Western resentment. 
But its second name is Israel, the only successful modern country in the Middle East, which is also highly militarized, an occupying power, and ruthless in defense of its interests. 
It is difficult to exaggerate the strange sentiment in the West which one might call Palestine romanticism. 
Intellectuals like the late Edward Said gave voice to it, but it has many followers in the United States and Europe. 
Palestine romanticism glorifies the Palestinians as the victims of Israel’s rule, points to the treatment of Israeli Palestinians as at best second-class citizens, and cites the many incidents of oppression in the occupied territories, including the effects of Israel’s “security fence.” 
Implicitly or explicitly, people take the side of the victims, contribute by sending money to them, declare even suicide bombers legitimate, and move ever further away from support for and defense of Israel. 
Of course, it is true that in theory one can oppose Israel’s policies without being anti-Semitic. 
After all, there are enough critics of Israel’s policies among Israelis. 
Yet the distinction has become more and more difficult to maintain. 
Jews outside Israel feel that they have to defend – right or wrong – the country that, after all, is their ultimate hope of security. 
This makes their friends hesitate to speak up for fear of being painted into not just an anti-Israel, but also an anti-Semitic corner. 
The defensiveness of Jews and the uneasy silence of their friends mean that the stage of public debate is open for those who actually are anti-Semitic, though they confine themselves to anti-Israel language. 
Anti-Semitism is disgusting in whatever form it arises. 
This is true also for other kinds of group hatred, but the Holocaust makes anti-Semitism unique, because it is an emotion complicit in the near annihilation of an entire people. 
The new anti-Semitism, however, cannot be fought successfully by education and argument in the rest of the world alone. 
It is linked to Israel. 
If one belongs to a generation that regarded Israel as one of the great achievements of the twentieth century, and admired the way in which the country provided a proud home for the persecuted and downtrodden, one is particularly concerned that it may now be at risk. 

A New Approach to North Korea 
SEOUL – The long-delayed meeting of North Korea’s ruling Worker’s Party is now underway, and comes at a time of severe tension between North Korea and the international community. 
It is widely expected that Kim Jong-il’s third son, Kim Jong-eun, will be appointed to a key position and be publicly announced as his father’s successor. 
There are also hints that a reshuffling of important positions within the Party will take place, allowing the presumed heir to form a new power base. 
Whatever happens, and whoever turns out to be the new leader, North Korea most likely faces an unstable future. 
The cost of maintaining internal order will continue to rise as the system’s fundamental defects force the new leader to confront stark new challenges. 
Moreover, responsibility for managing that potential instability extends far beyond the leadership in Pyongyang. 
North Korea’s fragility is suggested by the fact that even such an important political event as the Worker’s Party conference, held for the first time in three decades, was abruptly postponed earlier in September. 
One cause for the delay could be a schism within the ruling elite, a group that “Dear Leader” Kim Jong-il himself cannot control as effectively as before. 
Moreover, Kim’s health problems might have worsened much faster than outsiders guess, further complicating matters. 
“Enough is enough,” a mid-level North Korean government official recently uttered in a private conversation with a South Korean visitor to Pyongyang regarding Kim Jong-eun’s likely succession. 
Ordinary North Koreans, too, evidently seem to view this succession differently from that of Kim Jong-il’s inheritance of power from his father, Kim Il-sung. 
Moreover, there is no hope that any new leader, whoever it may be, will get any breathing space to establish unquestioned control, given the economy’s utter state of decay, as last year’s failed bid to reform the currency demonstrated. 
The regime is under growing pressure from those at the bottom of North Korean society, and recognizes its own inability to handle the situation. 
For example, for the first time, North Korea’s prime minister publicly apologized for a policy error – the failure of the currency redenomination. 
For the dynamics of the relationship between North Korea’s people and its rulers seems to be changing fundamentally. 
One troubling aspect of this change is that the new leader may feel the need to resort to brute force more frequently in order to suppress popular resistance. 
And, at a time of domestic hardship and diplomatic isolation, North Korea’s leaders, their confidence boosted by their possession of nuclear weapons, might try to distract their public through audacious, and possibly destructive, acts abroad. 
The attack on the South Korean naval ship Cheonan earlier this year may be a grim sign of things to come. 
Indeed, the North Korean threat nowadays derives more from the regime’s internal weaknesses than from its aggressive external posture – the latter being the authorities’ fearful response to the former. 
Unfortunately, however, most international efforts have sought to ameliorate the symptoms rather than cure the underlying disease. 
Of course, in order to pressure North Korea’s government to give up its nuclear option, the current international economic sanctions, which target WMD-related products and luxury goods, probably should continue. 
But, at the same time, the international community should place greater emphasis on policies aimed at inducing North Korea to launch serious economic reform. 
At a time of increased tension between North Korea, South Korea, and the United States such a policy may seem impossible to undertake. 
Yet a road map for a peaceful transition can be designed. 
If, say, North Korea is willing to respect international standards of economic behavior, it could be invited to join the International Monetary Fund. 
Western governments also could permit charitable foundations to provide North Korean officials or students with scholarships to study abroad and learn how to run a market economy. 
Of course, any assistance to North Korea would have to be monitored closely to prevent it from being diverted for military or other political purposes. 
The international community would lose nothing by trying this approach and testing the regime’s will to reform. 
In fact, following the recent currency fiasco, North Korean leaders may have become more open to economic reform than ever before. 
Such an approach is also compatible with Chinese policy, which has been to pressure North Korea to adopt its model of economic reform. 
To be sure, North Korea’s regime is not the only obstacle to international engagement. 
Conservatives in both the United States and South Korea may argue that North Korea must first move toward denuclearization before any kind of economic assistance is offered. 
But there is no reason why international efforts to ensure North Korea’s denuclearization must preclude policies aimed at bringing about domestic reform. 
We need not assume that these goals cannot be pursued simultaneously. 
On the contrary, it may be impossible to win North Korea’s assent to denuclearization in the absence of far-reaching domestic change. 
The past two decades have shown that “politically correct” decisions do not produce the “right” results, even in the long run. 
As North Korea grooms a new leader, the world needs to groom a new policy for North Korea. 

A New Asian Security Constellation 
NEW DELHI – Leading members of the governments of India and South Korea recently met to begin a new “strategic partnership.” 
They are not alone in doing so, for across Asia, a new security architecture is being constructed, seemingly piecemeal. 
How Asia’s geopolitical landscape will evolve over the coming decades is not easy to foresee. 
But it is apparent that an increasingly assertive China is unwittingly reinforcing America’s role in Asia, restoring US primacy as the implicit guarantor of security and stability in the region. 
There are at least four possible Asian security scenarios for the years and decades ahead. The first is the rise of a Sino-centric Asia. 
China seeks a multipolar world but a unipolar Asia. 
By contrast, the US desires a unipolar world but a multipolar Asia. 
A second scenario is that the US remains Asia’s principal security anchor, with or without a third possibility: the emergence of a constellation of Asian states with common interests working together to ensure that Asia is not unipolar. 
Finally, Asia could come to be characterized by several resurgent powers, including Japan, India, Vietnam, Indonesia, and a reunified Korea. 
Of the four scenarios, the first has caused the greatest unease. 
China’s neighbors are increasingly anxious about its growing power and assertiveness. 
While China’s rulers aspire to shape a Sino-centric Asia, their efforts to intimidate smaller neighbors hardly make China a credible candidate for Asian leadership. 
After all, genuine leadership cannot come from raw power, but only from other states’ consent or tacit acceptance. 
If leadership could be built on brute force, schoolyard bullies would be class presidents. 
In any event, China’s power may be vast and rapidly growing, but it lacks the ability to compel. 
In other words, China does not have the capability to rout any rival militarily, let alone enforce its will on Asia. 
That fact has, however, done little to allay fears in the region. 
With its defense spending having grown almost twice as fast as its GDP, China is now beginning to take the gloves off, confident that it has acquired the necessary muscle. 
For example, China now includes the South China Sea in its “core” national interests, on a par with Taiwan and Tibet, in order to stake a virtually exclusive claim to military operations there. 
China also has increasingly questioned India’s sovereignty over Arunachal Pradesh, the northeastern Indian state that China’s rulers call “Southern Tibet” and claim largely as their own. 
Indian defense officials have reported a rising number of Chinese military incursions across the 4,057-kilometer Himalayan border. 
As China seeks to translate its economic clout into major geopolitical advantages in Asia, a country that once boasted of “having friends everywhere” finds that its growing power may be inspiring awe, but that its actions are spurring new concerns and fears. 
Which states will accept China as Asia’s leader? 
Six decades of ruthless repression has failed to win China acceptance even in Tibet and Xinjiang, as the Tibetan and Uighur revolts of 2008 and 2009 attested. 
Leadership entails more than the possession of enormous economic and military power. 
It demands the power of ideas that can galvanize others. 
Such power also serves as the moral veneer to the assertiveness often involved in the pursuit of any particular cause or interest. 
The US and its allies won the Cold War, for example, not so much by military means as by spreading the ideas of political freedom and market capitalism to other regions. 
In the words of the strategic analyst Stanley A. Weiss, this “helped suck the lifeblood out of communism’s global appeal,” making it incapable of meeting the widespread yearning for a better and more open life. 
China has shown itself adept at assertively promoting its national interests and playing classical balance-of-power geopolitics. 
But, in order to displace the US and assume the mantle of leadership in Asia, China must do more than pursue its own interests or contain potential rivals. 
Most fundamentally, what does China represent in terms of values and ideas? 
In the absence of an answer to that question, China’s overly assertive policies have proven a diplomatic boon for the US in strengthening and expanding American security arrangements in Asia. 
South Korea has tightened its military alliance with the US, Japan has backed away from a move to get the US to move its Marine airbase out of Okinawa, and India, Vietnam, Indonesia, and the Philippines, among others, have drawn closer to the US. 
In terms of power-projection force capabilities or the range of military bases and security allies in Asia, no power or combination of powers is likely to match the US in the next quarter-century. 
But, while America’s continued central role in Asia is safe, the long-term viability of its security arrangements boils down to the credibility of its security assurances to allies and partners. 
America’s readiness to stand by them when the game gets rough will determine the strength and size of its security-alliance system in Asia in the years ahead. 
The third and fourth scenarios can unfold even if the US remains the principal security anchor for Asia. 
A number of Asian countries have already started building mutually beneficial security cooperation on a bilateral basis, thereby laying the groundwork for a potential web of interlocking strategic partnerships. 
A constellation of Asian states linked by strategic cooperation, in fact, has become critical to help institute power stability in the region. 

A New Bargain for UN Reform 
The United Nations is torn apart by internal tensions. 
No sooner was the controversy over the creation of a Human Rights Council satisfactorily resolved than a new battle has erupted. 
The United States is pressing for administrative reforms and threatening to cut off funding if the reforms are not forthcoming. 
The Secretary General has submitted a reasonable reform plan, but a majority of UN member states, acting together as the so-called G-77, are balking, because they regard it as another step in reducing the authority of the General Assembly relative to the Security Council. 
In particular, they object to the plan’s proposal to give increased powers and responsibilities to the Secretary General, whose selection is effectively in the hands of the Security Council’s five permanent members, which wield veto power. 
Many UN members, believing that power within the UN has been shifting from the General Assembly, resist giving up what they regard as its last vestige: control over the budget through the work of the Assembly’s Fifth Committee. 
In practice, the Fifth Committee has exercised the kind of micro-management over personnel and expenditure that ought to be exercised by the Secretary General if the UN is to operate effectively and to have a staff which is up to the challenges facing the organization. 
This is the basis of America’s insistence on administrative reforms. 
There is an urgent need to find a way out of this impasse. 
Failure of the current proposal would mean an effective end to all efforts to reform the UN, with disastrous consequences for people across the world who depend on the aid provided by the UN Development Program, the security provided by the UN’s numerous peacekeeping operations, or the myriad other services rendered by UN agencies. 
For example, failure of management reform would fuel demands by the US Congress to withhold America’s contributions to the UN budget – a policy that would greatly undermine America’s own interests, such as the planned expansion of the mission to stop genocide in Darfur. 
The path to a satisfactory resolution is clear: give the General Assembly a greater role in the selection of the Secretary General so that members would be delegating powers to an authority of their own choosing. 
This solution would not only permit the much-needed administrative reforms to be implemented; it would also bring clarity and transparency to a process that is in great need of improvement. 
After all, the UN Charter provides that “the Secretary-General shall be appointed by the General Assembly upon the recommendation of the Security Council.” 
The original concept was that the two bodies would reach a consensus on a candidate. 
In practice, however, the five permanent members now agree on a candidate, and their decision is rubber-stamped first by the Security Council and then by the General Assembly. 
Real discussions about a new Secretary General are currently being conducted in secrecy among the permanent five, adding to the frustration of other UN members, including large powers that have been seeking without success to enlarge the Security Council. 
To achieve the reforms of the budget process that it wants, the US will need to lead the way in persuading the other permanent members of the Council to give the General Assembly a greater role in the process. 
This might be done in several ways. 
The Security Council might agree to recommend several candidates from which the General Assembly would select one. 
Alternatively, the General Assembly might propose several candidates to the Security Council, from which the Council would choose one to refer back to the Assembly for approval. 
Either way, the selection process would benefit from greater transparency. 
For example, the General Assembly should hold public hearings in which candidates are interviewed, thereby greatly enhancing the stature of the candidate who is eventually selected. 
Such proposals, if accepted, would help resolve the current dispute to everyone’s satisfaction. 
Indeed, they could make the UN stronger than it has ever been. 

A New Bretton Woods? 
PRINCETON – The chaotic and costly international response to the world’s current financial disorder has prompted French President Nicolas Sarkozy, British Prime Minister Gordon Brown, and German President Horst Köhler, a former head of the International Monetary Fund, to call for a new Bretton Woods Conference in order to design a new global financial system. 
But such a demand depends on a clear understanding of what a new agreement might provide. 
It is easy to see the appeal of scrapping today’s global financial architecture, because there is obviously much that is broken. 
The existing institutions were looking increasingly irrelevant in normal times, and ineffective in times of crisis. 
Although the IMF delivered some gloomily accurate figures about the likely cost of the US housing fiasco, it played almost no role in addressing the current crisis. 
This was the first international financial crisis since the Bretton Woods Conference of 1944 in which the Fund stood on the sidelines. 
The major international actor, instead, has been the G-7, a grouping dominated by medium-sized European states in which Asia’s dynamic emerging economies – the current source of global savings – have no representation. 
The Bretton Woods conference succeeded not because it assembled every state, or because the participants engaged in an extensive powwow. 
John Maynard Keynes, an architect of Bretton Woods, believed that the true lesson of the failures of the Depression-era 1930’s lay precisely in the character of the large and chaotic 1933 London World Economic Conference. 
Keynes concluded that a really workable plan could be devised only at the insistence of “a single power or like-minded group of powers.” 
Keynes was basically right, but he should have added that it helps when one power can negotiate with one other power. 
In the past, the most effective financial diplomacy occurred bilaterally, between two powerful states that stood for different approaches to the international economy. 
This was true of the preparations for the Bretton Woods meeting. 
Although there were 44 participating countries, only two really mattered, the United Kingdom and, above all, the United States. 
The agreement was shaped by Anglo-American dialogue, with occasional mediation from France and Canada. 
Bilateral talks subsequently remained the key to every major success of large-scale financial diplomacy. 
In the early 1970’s, when the fixed exchange-rate regime came to an end, the IMF seemed to have outlived its function. 
Its Articles of Agreement were renegotiated by the US, which was looking for more flexibility, and France, which wanted something of the solidity and predictability of the old gold standard. 
Later in the 1970’s, European monetary relations were hopeless when France, Germany, and Britain tried to talk about them, but were straightened out when only France and Germany took part. 
In the mid-1980’s, when wild exchange-rate swings produced calls for new trade protection measures, the US and Japan found a solution that involved exchange-rate stabilization. 
So, what form should such bilateralism take today? 
In terms of countries, the obvious new pair comprises the US, the world’s largest debtor, and China, its greatest saver. 
In terms of themes, the conference would have to solve a new type of problem: how states should deal with the large flows of capital that over the past four decades have been mediated by the private sector. 
Two alternative models seemed to work until 2008. 
On one side was the American model, with a variety of regulated banks, lightly regulated investment banks, and largely unregulated hedge funds managing the capital flows. 
On the other side was the Chinese solution, with increasingly costly reserve management giving way to activist sovereign wealth funds looking for strategic participation in investments abroad. 
Both approaches were flawed – and liable to produce political controversy. 
The American model failed because banks proved to be highly vulnerable to panic once it became clear that sophisticated new financial instruments had formed a haystack spiked with sharp, dangerous, and indigestible losses. 
And, inevitably, today’s big bailouts have been followed by a politically fraught discussion of which banks were rescued, and whose political interests were served. 
Already, there is a ferocious debate about the influence of Goldman Sachs on the US Treasury. 
Likewise, the very large European bailouts (totaling as much as 20% of GDP in Germany) have produced controversies about the distribution of costs. 
Meanwhile, the Chinese solution gave rise to nationalist fears that sovereign wealth funds might be abused to seize strategically vital businesses or whole sectors of an economy. 
The original inspiration behind the creation of the IMF was that a largely automatic and rule-governed body would be a less politicized way of stabilizing markets and expectations. 
That remains true today: managing temporary stakes in banks in need of recapitalization, on behalf of large providers of capital (such as the Asian surplus countries), would put a neutral, depoliticized buffer between states and private-sector institutions. 
The IMF was originally conceived in 1944 in a world without major private capital flows, one in which states undertook almost all international transactions. 
Extending its mission to include some private-sector rescues would recognize the preponderant role that markets now play. 
At the same time, the involvement of a rule-bound international agency would minimize the political poison associated with bank recapitalizations and currency interventions. 

A New Chance for Darfur 
NEW BRUNSWICK, NEW JERSEY – As the crisis in Sudan’s Darfur region worsens and negotiaitions to end it drag on, an international consensus is emerging around a “muscular” policy based on public denunciation, severe economic sanctions, and, increasingly, threats of military force. 
But none of these steps, taken alone or together, can bring about the ends that their often well-intentioned advocates seek. 
On the contrary, they risk reproducing the havoc that such measures have unleashed in Iraq and elsewhere in recent years. 
In the United States, cautionary voices have been notably absent even among staunchly liberal newspapers like The New York Times . 
Foreign policy advisers to the Democratic Party and neo-conservatives alike have called for “action” against Sudan – demands that have been echoed by an international group of intellectuals and celebrities ranging from Umberto Eco, Jürgen Habermas, and Harold Pinter to Bob Geldof, George Clooney, Mia Farrow, Matt Damon, Mick Jagger, and J.K. Rowling. 
Meanwhile, French troops, with the support of other European Union members – notably Austria, Belgium, Ireland, Poland, Romania, and Sweden – are now deployed for putatively humanitarian reasons in the Central African Republic and Chad, where they have already clashed with Sudanese government forces. 
The International Crisis Group, Human Rights Watch, and many other organizations support this deployment, while Save Darfur, despite describing itself as a non-political “alliance of more than 180 faith-based, advocacy, and humanitarian organizations,” has, in fact, been pivotal in setting the policy agenda. 
This agenda’s interventionism is incremental: tougher economic sanctions, demands that China exercise its influence, creation of a “no-fly zone,” and military force against the Sudanese army. 
The assumption is that only real pressure will finally force Sudan’s government to embrace the United Nations-African Union peacekeeping force, negotiate with the West, disband the feared Janjaweed militia, allow refugees from the country’s brutal civil war to return to their villages, and make peace with Southern rebels. 
But realizing these aims requires cooperation from the government in Khartoum, whereas each of the proposed measures would only heighten tensions or prove useless. 
Existing Western sanctions, for example, have merely driven the Sudanese regime into the arms of China, Indonesia, and Malaysia. 
Indeed, investment in Sudan has actually grown $2.8 billion over the last year. 
Efforts to “pressure” the Chinese appear similarly futile. 
Darfur is hardly a high priority for China, which accounts for 20% of African trade, and buys 60% of Sudan’s oil. 
Growing talk – both in Europe and America – about boycotting the Olympics (or the opening ceremony) has proven utterly ineffective in influencing China’s behavior in Tibet. 
Would the threat of a boycott really prove more successful vis-à-vis Darfur? 
Likewise, even proponents of a no-fly zone are doubtful about its potential efficacy. 
After all, Sudan is the size of Western Europe, and Darfur is the size of France, with 158 refugee camps. 
Strategic constraints would almost certainly overwhelm enforcement. 
Finally, there is the “military option,” which would merely justify fears in Sudan of Western “imperialism.” 
Worse, given the splintering of rebel forces in the South, where an estimated 80 tribes and clans control their own militias, a military response could generate a power vacuum in Sudan and destabilize the nine countries – many of them fragile or failed states – on its borders. 
Western analysts and activists should have learned by now that and military threats produce only resistance, and that genuine diplomacy involves using carrots as well as sticks. 
Yet the emerging policy consensus contains no positive incentives to resolve the Darfur crisis. 
Nor is it clear whether its aim is to pressure Sudan into changing its policy or to bring about wholesale regime change. 
I have been to Sudan twice, and, as part of a delegation organized by Conscience International, I also visited the refugee camps in Nyala and El Fasher in Darfur. 
I have met with dozens of Sudanese politicians and diplomats, and I know that the regime in Khartoum is authoritarian, self-interested, and ruthless. 
But it is not monolithic. 
Factions within the regime might prove supportive of new policies aimed at tempering the climate of violence in Sudan, decreasing its trade dependency on China, improving conditions for refugees, and lowering international tensions. 
Such policies might include: 
The emerging policy consensus toward Sudan is predicated on an approach that has already undermined respect for Western values throughout the non-Western world. 
Its interventionist measures won’t work. 
They are unrealistic and, ultimately, counterproductive. 
There is no time to lose in trying something new. 

A New Dawn for Chinese Journalism? 
A remarkable incident has emboldened Chinese journalists. 
Earlier this year, the government suspended publication of the newspaper Bing Dian Weekly, provoking unprecedented open protest, which received extensive media coverage worldwide. 
Even more surprisingly, the government, under the pressure of public opinion, has allowed Bing Dian to resume publication. 
The editor-in-chief and deputy editor-in-chief were sacked, but the open questioning of the legitimacy of the government’s authority to regulate journalism is bound to have a profound impact. 
Foreign observers are prone to associate the Bing Dian incident with other recent crackdowns on China’s mass media, and to conclude that Chinese journalism freedom is hopeless under the present autocratic regulation. 
Undeniably, there has been no significant change in the government’s system of journalism’s regulation since China adopted its “open door” policy almost 30 years ago. 
On the contrary, it has become more rigorous and covert. 
But I still have faith that subtle changes are occurring. 
A prerequisite of effective control of the media is that the controlled accept the controller’s ideology. 
After 1949, the Communist Party cultivated a stable of “theoretical experts” and other ideological servants to write lengthy articles propagating “Marxism and Mao Zedong Thought.” 
But nowadays, such writers are hard to find, and their work is received by readers with mockery and sarcasm. 
In fact, the Central Propaganda Department’s ideological control can be maintained only through internal notices and telephone calls, which are widely scorned. 
More importantly, even the regulators themselves have ceased to believe in obsolete and rigid doctrines. 
I recently met an official working for a provincial Department of Propaganda and was impressed by his bold and straightforward comments on current affairs. 
In private conversation, one might even take him for a liberal – one of a new breed of young and well-educated propaganda officials with an increasingly higher threshold of political sensitivity. 
For their part, producers of news have long since ceased to believe that news is propaganda. 
I started my career with China Youth Daily in 1979 and have experienced the whole process of China’s opening up and reformation. 
Our generation of Chinese journalists broke from traditional Communist ideas about journalism by the mid-1980’s through extensive reading of Western journalism. 
Younger journalists have thus been exposed to Western journalistic ideas from the very beginning. 
Indeed, Western works are taught as “models for writing” to journalism students in China’s universities. 
This is a crucial change, and it is the fundamental reason for an increasing number of genuine news items and commentaries in China’s media today. 
Market pressure has also been important in pushing Chinese media to embrace change. 
Contrary to foreign perceptions, only a handful of Chinese media – for example, People’s Daily, Guang Ming Daily, and the Economic Daily – still live on government funds. China Central Television relies mainly on its advertising income, with only a symbolic fraction of its massive budget covered by the government. 
Whether most media outlet can survive is thus solely dependent on their market success. 
To be sure, political information remains rigorously controlled, which puts a premium on “harmless” recreational, entertainment, and sports information – the reporting of which is basically free. 
This has resulted, in the short run, in an embrace of low journalistic standards. 
But many metropolitan newspapers that once thrived on infotainment have seen their circulation fall in recent years. 
Sooner or later, readers will start to buy newspapers that can truly inform them and give voice to their opinions. 
In fact, it is these tabloids, responding to market pressure, that have started to take on responsibility as public watchdogs. 
On many occasions in recent years, they have been the first to break sensitive news. 
As a result, mainstream media are being marginalized, and the previously marginalized media are becoming mainstream. 
Thus, even without any change in the current system of regulation, extensive coverage of disasters, judicial abuses, and citizens’ pursuit of their statutory rights, along with the questioning of policies from public perspectives, is now common. 
For example, reporting by the South Metropolitan Daily led to the abolition of an outdated housing ordinance issued by the State Council. 
Cai Jing magazine’s continuous reporting on SARS enabled the Chinese public to learn the truth about this epidemic. 
The Bing DianWeekly of China Youth Daily published an article by Taiwanese writer Long Yingtai on Taiwan’s democratic development. 
Such progress is slow and full of frustrations, for it reflects the incremental evolution of the system. 
But it is nonetheless real progress, indicating the growing influence of the Chinese media and pointing to China’s becoming a country of “free expression”. 
According to an old Chinese saying, “a just cause enjoys abundant support, while an unjust cause finds scant support.” 
A “just cause” resides in people’s hearts. 
Without the hearts of news producers – or, increasingly, of censors – the seemingly formidable edifice of journalistic regulation will, sooner or later, collapse like the Berlin Wall. 

De-Risking Revisited 
NEW YORK – Until the recent bout of financial-market turbulence, a variety of risky assets (including equities, government bonds, and commodities) had been rallying since last summer. 
But, while risk aversion and volatility were falling and asset prices were rising, economic growth remained sluggish throughout the world. 
Now the global economy’s chickens may be coming home to roost. 
Japan, struggling against two decades of stagnation and deflation, had to resort to Abenomics to avoid a quintuple-dip recession. 
In the United Kingdom, the debate since last summer has focused on the prospect of a triple-dip recession. 
Most of the eurozone remains mired in a severe recession – now spreading from the periphery to parts of the core. 
Even in the United States, economic performance has remained mediocre, with growth hovering around 1.5% for the last few quarters. 
And now the darlings of the world economy, emerging markets, have proved unable to reverse their own slowdowns. 
According to the IMF, China’s annual GDP growth has slowed to 8%, from 10% in 2010; over the same period, India’s growth rate slowed from 11.2% to 5.7%. 
Russia, Brazil, and South Africa are growing at around 3%, and other emerging markets are slowing as well. 
This gap between Wall Street and Main Street (rising asset prices, despite worse-than-expected economic performance) can be explained by three factors. 
First, the tail risks (low-probability, high-impact events) in the global economy – a eurozone breakup, the US going over its fiscal cliff, a hard economic landing for China, a war between Israel and Iran over nuclear proliferation – are lower now than they were a year ago. 
Second, while growth has been disappointing in both developed and emerging markets, financial markets remain hopeful that better economic data will emerge in the second half of 2013 and 2014, especially in the US and Japan, with the UK and the eurozone bottoming out and most emerging markets returning to form. 
Optimists repeat the refrain that “this year is different”: after a prolonged period of painful deleveraging, the global economy supposedly is on the cusp of stronger growth. 
Third, in response to slower growth and lower inflation (owing partly to lower commodity prices), the world’s major central banks pursued another round of unconventional monetary easing: lower policy rates, forward guidance, quantitative easing (QE), and credit easing. 
Likewise, many emerging-market central banks reacted to slower growth and lower inflation by cutting policy rates as well. 
This massive wave of liquidity searching for yield fueled temporary asset-price reflation around the world. 
But there were two risks to liquidity-driven asset reflation. 
First, if growth did not recover and surprise on the upside (in which case high asset prices would be justified), eventually slow growth would dominate the levitational effects of liquidity and force asset prices lower, in line with weaker economic fundamentals. 
Second, it was possible that some central banks – namely the Fed – could pull the plug (or hose) by exiting from QE and zero policy rates. 
This brings us to the recent financial-market turbulence. 
It was already evident in the first and second quarters of this year that growth in China and other emerging markets was slowing. 
This explains the underperformance of commodities and emerging-market equities even before the recent turmoil. 
But the Fed’s recent signals of an early exit from QE – together with stronger evidence of China’s slowdown and Chinese, Japanese, and European central bankers’ failure to provide the additional monetary easing that investors expected – dealt emerging markets an additional blow. 
These countries have found themselves on the receiving end not only of a correction in commodity prices and equities, but also of a brutal re-pricing of currencies and both local- and foreign-currency fixed-income assets. 
Brazil and other countries that complained about “hot money” inflows and “currency wars,” have now suddenly gotten what they wished for: a likely early end of the Fed’s QE. 
The consequences – sharp capital-flow reversals that are now hitting all risky emerging-market assets – have not been pretty. 
Whether the correction in risky assets is temporary or the start of a bear market will depend on several factors. 
One is whether the Fed will truly exit from QE as quickly as it signaled. 
There is a strong likelihood that weaker US growth and lower inflation will force it to slow the pace of its withdrawal of liquidity support. 
Another variable is how much easier monetary policies in other developed countries will become. 
The Bank of Japan, the European Central Bank, the Bank of England, and the Swiss National Bank are already easing policy as their economies’ growth lags that of the US. 
How much further they go may well be influenced in part by domestic conditions and in part by the extent to which weaker growth in China exacerbates downside risks in Asian economies, commodity exporters, and the US and the eurozone. 
A further slowdown in China and other emerging economies is another risk to financial markets. 
Then there is the question of how emerging-market policymakers respond to the turbulence: Will they raise rates to stem inflationary depreciation and capital outflows, or will they cut rates to boost flagging GDP growth, thus increasing the risk of inflation and of a sudden capital-flow reversal? 
Two final factors include how soon the eurozone economy bottoms out (there have been some recent signs of stabilization, but the monetary union’s chronic problems remain unresolved), and whether Middle East tensions and the threat of nuclear proliferation in the region – and responses to that threat by the US and Israel – escalate or are successfully contained. 
A new period of uncertainty and volatility has begun, and it seems likely to lead to choppy economies and choppy markets. 
Indeed, a broader de-risking cycle for financial markets could be at hand. 

A New Deal for Fragile States 
PARIS – Today, roughly one-quarter of the world’s population lives in conflict-affected and fragile states. 
Despite vast sums of money spent aiding such states over the last 50 years, armed conflict and violence continue to blight the lives of millions of people around the world. 
International and national partners must radically change the way they engage such states. 
I experienced firsthand the need for a new approach in 2004 in Sri Lanka. 
Within the first two months of the devastating tsunami that struck that December, close to 50 heads of state and foreign ministers visited the island. 
Each came with their own programs, their own civil-society organizations, and their own television crews. 
Few came with any deep understanding of the dynamics of the political conflict between militant Tamils and the Sri Lankan state. 
Big mistakes were made, fueling further violence. 
Our major challenge today is to move away from the model of partnership according to which priorities, policies, and funding needs are determined in donor capitals and development partners’ headquarters. 
Conflict-affected states need to be able to determine their own destinies. 
We should establish models of post-conflict transition like the one advocated by the g7+, a group of eighteen fragile states. 
The model is simple: Countries assess their own situation, using tools that they develop and that are appropriate to the context, in order to formulate a vision and a plan to consolidate peace and achieve prosperity. 
This may sound like pie in the sky, but we have already tasted it in Africa, where Sierra Leone’s Agenda for Prosperity 2013-2017 and the Liberia Vision 2030 exemplify the potential of such programs. 
Progress on meeting national priorities such as peace consolidation, expanding access to justice, or increasing security is monitored locally. 
Using local systems and capacities, it turns out, can strengthen them. 
The “New Deal for Engagement in Fragile States,” which builds on a series of international commitments regarding aid and development, and was endorsed at the at the Fourth High-Level Forum on Aid Effectiveness in Busan, South Korea in 2011, proposes just such a model. 
It enshrines what matters most in building peaceful states and societies: commitments – the Peace- and State-building Goals – to improve how national and international partners engage in conflict-affected and fragile contexts. 
The New Deal recognizes what the history of peace-building teaches us: national leadership and ownership of agendas are key to achieving visible and sustainable results. 
As Kosti Manibe Ngai, South Sudan’s finance minister, has put it, “Nothing about us without us.” 
In many conversations with South Sudan’s president, Salva Kiir, we have discussed setting out a short list of clear priorities for the new state. 
But such goals are meaningful only if a fragile state’s partners are ready to accept the lead from a capital like Juba rather than from their own headquarters. 
More than 40 countries and institutions have endorsed the New Deal way of working, committing themselves to building better partnerships – and to investing the required resources and political capital. 
This is why the New Deal model is innovative; it creates political support around issues that need to be addressed if countries are to make the transition from conflict and fragility to peace and stability. 
Supporting inclusive political dialogue and ensuring that conflict is resolved through peaceful means are the highest priorities, as are security, access to justice, and a dynamic private sector that generates sufficient job opportunities. 
Moreover, many fragile states are rich in natural resources, and must establish transparent resource management – aimed at curbing corruption and controlling illicit flows of money and goods – in order to raise the revenues needed to deliver services. 
A focus on these processes would ensure that fragile states take the lead and the responsibility. 
As partners, we must accept this national leadership. 
After Haiti’s catastrophic earthquake in 2010, the country was dubbed “the republic of NGOs.” 
Unable to create conditions in which Haitians themselves could take the lead in rebuilding their country, Haiti’s external partners undermined the establishment of a functioning internal governance system. 
So, how can we translate our commitments and priorities into better lives for people who are affected by conflict and fragility? 
OECD countries need to lead by example and meet the commitments that they have made. 
Our partners, through groupings like the g7+, must continue to demand the changes in policies and practices that have been promised. 
We also must plan to change for the long term. 
As the Millennium Development Goals’ 2015 end date approaches, promotion of peace, security, and non-violent conflict resolution continues to be vitally important, and must be fully integrated into any future development agenda. 
Recently, the members of the International Dialogue on Peacebuilding and Statebuilding, the high-level political forum that produced the New Deal, met in Washington, DC, to assess our progress in changing how we work and in implementing the New Deal commitments. 
They agreed to the Washington Communiqué, which urges development partners, g7+ countries, and civil-society organizations to intensify their efforts to use the New Deal to deliver concrete results on the ground, and calls for a post-2015 development agenda that recognizes the universal importance of peace- and state-building. 
Ultimately, our progress depends on the resolve of everyone to transform the lives of the 1.5 billion people whose lives are marred by violence, conflict, and insecurity. 

A New Deal for Poor Farmers 
NEW YORK – Many poor, food-importing countries around the world have become desperate in recent months, as global prices of rice, wheat, and maize have doubled. 
Hundreds of millions of poor people, who already spend a large share of their daily budget on food, are being pushed to the edge. 
Food riots are mounting. 
But many poor countries can grow more food themselves, because their farmers are producing far below what is technologically possible. 
In some cases, with appropriate government action, they could double or even triple food production in just a few years. 
The idea is basic and well known. 
Traditional farming uses few inputs and gets poor yields. 
Poor peasants use their own seeds from the preceding season, lack fertilizer, depend on rain rather than irrigation, and have little if any mechanization beyond a traditional hoe. 
Their farms are small, perhaps one hectare (2.5 acres) or less. 
Under traditional agricultural conditions, the yields of grain – rice, wheat, maize, sorghum, or millet – are usually around one ton per hectare, for one planting season per year. 
For a farm family of five or six living on one hectare, this means extreme poverty, and for their country, it means reliance on expensive food imports, including food aid. 
The solution is to increase grain yields to at least two tons – and in some places to three or more tons – per hectare. 
If water can be managed through irrigation, this could be combined with multi-cropping (multiple harvests per year) to produce a crop during the dry season. 
Higher and more frequent yields mean less poverty in farm families, and lower food prices for cities. 
The key to increasing yields is to ensure that even the poorest farmers have access to improved seed varieties (usually “hybrid” seeds created by scientific selection of seed varieties), chemical fertilizers, organic matter to replenish soil nutrients, and, where possible, small-scale irrigation methods, such as a pump to lift water from a nearby well. 
There is nothing magic about this combination of high-yield seeds, fertilizer, and small-scale irrigation. 
It is the key to the worldwide increase in food production since the 1960’s. 
The problem is that these improved inputs have bypassed the poorest farmers and the poorest countries. 
When peasants lack their own saving accounts and collateral, they are unable to borrow from banks to buy seeds, fertilizer, and irrigation. 
As a result, they grow food the traditional way, often earning little or nothing from their harvest, because it’s not even enough to keep their families alive. 
History has shown that government action is required to help the poorest farmers escape the low-yield poverty trap. 
If farmers can be helped to obtain simple technologies, income can rise, and they can accumulate bank balances and collateral. 
With a bit of temporary help, perhaps lasting around five years, farmers can build up enough wealth to obtain inputs on a market basis, either through direct purchases from savings or through bank loans. 
Around the world, government-run agricultural banks in poor countries once not only financed inputs, but also provided agricultural advice and spread new seed technologies. 
Of course, there were abuses, such as the allocation of public credits to richer farmers rather than to needy ones, or the prolonged subsidization of inputs even after farmers became creditworthy. 
And in many cases, government agricultural banks went bankrupt. 
Still, the financing of inputs played a huge and positive role in helping the poorest farmers to escape poverty and dependency on food aid. 
During the debt crisis of the 1980’s and 1990’s, the International Monetary Fund and World Bank forced dozens of poor food-importing countries to dismantle these state systems. 
Poor farmers were told to fend for themselves, to let “market forces” provide for inputs. 
This was a profound mistake: there were no such market forces. 
Poor farmers lost access to fertilizers and improved seed varieties. 
They could not obtain bank financing. 
To its credit, the World Bank recognized this mistake in a scathing internal evaluation of its long-standing agricultural policies last year. 
The time has come to reestablish public financing systems that enable small farmers in the poorest countries, notably those farming on two hectares or less, to gain access to needed inputs of high-yield seeds, fertilizer, and small-scale irrigation. 
Malawi has done this for the past three seasons, and has doubled its food production as a result. 
Other low-income countries should follow suit. 
Importantly, the World Bank, under its new president, Robert Zoellick, has now stepped forward to help finance this new approach. 
If the Bank provides grants to poor countries to help small peasant farmers gain access to improved inputs, then it will be possible for those countries to increase their food production in a short period of time. 
Donor governments, including the oil-rich countries of the Middle East, should help finance the World Bank’s new efforts. 
The world should set as a practical goal of doubling grain yields in low-income Africa and similar regions (such as Haiti) during the next five years. 
That’s achievable if the World Bank, donor governments, and poor countries direct their attention to the urgent needs of the world’s poorest farmers. 

A New Deal for the Lisbon Strategy 
Whatever happened to the European Union’s Lisbon Strategy? 
Not only is the public almost entirely ignorant of the EU’s policy agenda for boosting competitiveness, economic growth, and employment, but this ignorance extends to many intellectuals, academics, CEO’s, and even some MP’s. 
For example, in all of the debates on the EU’s constitutional treaty, neither its supporters nor its opponents have so much as mentioned the Lisbon Strategy. 
It is little wonder, then, that Euroskepticism – in France, the Netherlands, and elsewhere – is on the rise. 
Despite the success and popularity of programs like ERASMUS, citizens don’t perceive the EU’s contribution to superior education or training. 
Indeed, the last Eurobarometer survey on the Lisbon Strategy found that the European public sees little relation between EU policies and economic competitiveness. 
Of course, some laboratories receive EU grants, but without recognizing a specific European mission in research policies. 
Europe is generally considered more a constraint than as a plan, more as an instrument than a vision nourished by a clear and credible idea. 
The essential responsibility for this state of affairs lies with Europe’s ruling class and policymakers. 
As a recent assessment by former Dutch prime minister Wim Kok pointed out, the EU’s member states generally have not made the Lisbon Strategy a high priority, and they balk at giving the EU the means to pursue more ambitious policies to offset this neglect. 
It is difficult to ask citizens to be enthusiastic about aims that their leaders ignore. 
At bottom, the problem is one of legitimacy. 
The main targets – jobs, growth, and research – are considered legitimate from the standpoint of fairness when described in general terms. 
But the concrete policies needed to realize this aim are not, since reforming the welfare state and labor markets means more competition, which scares many citizens. 
Legitimacy is even more problematic regarding recognition, which implies a feeling of community and attachment. 
When we are faced with conflicting choices – burden-sharing through taxation, the organization of the public sector, the status of public employees, etc. – the member states are considered to be the only bodies entitled to decide. 
In short, when the EU brings subsidies, it receives congratulations; but when it pushes for unpopular reforms, it becomes the scapegoat for political, social, and economic failures. 
From an economic point of view, the Lisbon Strategy’s aim is to transform Europe into a power able to compete on equal terms with the US today and the great Asian countries. 
But this aim does not appear to be creating a European identity, as the euro has. 
Within many states, “power” isn’t politically correct. 
Above all, there is no linkage between national power and European power. 
If we want Europe to be more legitimate, we must explain how to tie these two dimensions of power. 
Aside from ignorance of the Lisbon Strategy among the public and inaction on long-term reforms among the member states, a second problem concerns the lack of acceptance of the virtues of competition – the most effective way to ensure quality, innovation, and low prices for consumers. 
Competition also puts an end to rent seeking and protection of traditional corporate advantages. 
Of course, we must limit the scope of competition: there is no reason, for example, to extend it to taxation. 
Similarly, while competition will improve the quality of research and education, this does not imply reduced public funding, a lower priority for basic research, or the elimination of scholarships. 
Perhaps most importantly, competition is a powerful means to restore democracy and modernize political institutions by compelling policymakers to ensure transparency and accountability. 
Elites must give up their privileges, and regulations on corporate governance must limit collusion between managers and civil servants or politicians. 
We must explain to citizens Europe’s contribution to public ethics, and the democratic virtues of fair competition in economic, political, and social life. 
Consider one of the main purposes of the Lisbon Strategy: the organization of research and higher education. 
It is impossible to change radically the way scholars and research workers are appointed in most member states, and to revise completely the criteria for funding of faculties and laboratories. 
But the EU can overcome national impediments by developing exemplary universities and research centers that would be properly European, serving as an incentive to quality and reform at the national level. 
Emulation through excellence is the motor of competitiveness. 
A good place to start is an idea supported by French Socialist leader Dominique Strauss-Kahn, who has proposed that 0.25% of Europe’s GDP be dedicated to research and used to create a European Agency for Research. 
Moreover, Europe must build up tools for strategic analysis, assessment, and forecasting to provoke and nourish public debate. 
Such think tanks at the European level must remain free and independent, but leaders must learn to pay attention to and integrate their recommendations into the policy-making process. 
In many matters pertaining to the Lisbon Strategy, the EU cannot avoid member states’ concerns. 
But as the states won’t be able to do everything alone and won’t renounce maintaining political control, we must be able to link the Union’s policies and those of specific states. 
Otherwise, the Lisbon Strategy could merely empower an inefficient bureaucracy, rather than boosting the EU’s democratic legitimacy. 
In short, the Lisbon Strategy could lead Europe to become a real power in the coming decades, or it could fuel further growth of Euroskepticism. 

A New Deal for the New World 
As former members of our countries' congresses we believe that it is time to create a North American Parliamentary Union (NAPU) to address the growing number of big issues that North America's national governments have pushed to the sidelines. 
Both past and present have been burdened by the ad hoc nature of relations among the United States, Mexico, and Canada. 
A fairer, more prosperous future for all three countries demands that we take a bold step forward. 
Despite US Secretary of Defense Donald Rumsfeld's snide reference to ``Old Europe,'' North Americans can learn much from the European Union and European Parliament. 
In the 1950's, most of Europe considered the idea of a Union with a single Parliament a pipe dream. 
Today the EU elects its Parliament, shares a single currency, and controls a budget that emphasizes raising living standards within the less developed member countries. 
Within the near future, the EU is likely to be 450 million people strong. 
The combined population of the US, Mexico, and Canada is about 410 million people. 
Yet North America has failed to match Europe in building the political structures necessary to focus the hemisphere on the problems of immigration, cross border security, labor rights, and environmental degradation; or in facilitating a more united approach to strong economic competition from Europe and Asia. 
On the contrary, in the aftermath of the Iraq War, relations between the US and its neighbors, Canada and Mexico, are at their lowest level in years. 
Clearly, efforts to deepen North American political and economic integration will be an uphill battle. 
In the near future, the US government will be focused on homeland security, Iraq, the slumping domestic economy, and the run-up to the 2004 presidential election. Canada's government has been more willing to approach North American issues on a bilateral basis than in a tri-national context; furthermore, Canadians are preoccupied with the consequences and aftermath of SARS and mad cow disease, as well as anticipating a new government next year. 
Mexico's President Vincente Fox will govern through 2006. But his vision of a North American Free Trade Association (NAFTA) encompassing elements of social and political fusion with his North American counterparts was sidetracked by the terrorist attacks of September 11, 2001, and by his political rivals' recent successes at the polls. 
Notwithstanding this, most Canadians and Mexicans believe that cooperation in North America will proceed regardless of who is in office in Ottawa, Washington, or Mexico City. 
Not only are Canada and Mexico the US's first and second largest trading partners, but the three countries maintain a myriad of relationships--in business, tourism, and culture--that do not pass through their embassies or governments. 
Good feelings abound. 
US citizens register high approval ratings in Canada and Mexico: 90% and 70%, respectively. 
In proposing the creation of NAPU, we envision a specific plan to create a larger market by fostering an alliance between the three economies. 
In just a single decade, the EU managed to bring poorer, peripheral member states--Greece, Portugal, Spain, and Ireland--from 50% to 90% of the EU average in per capita income, creating a bigger market for companies from wealthier northern countries, and stemming migration from poorer southern economies. 
The EU invested upwards of $35 billion a year to assure the success of their Common Market integration. 
North America has largely ignored the significance of ``common,'' preferring to focus on ``market.'' 
This blinded all three countries to the centrality of community. 
We have failed to understand that a North American Free Trade Area (NAFTA) that achieves its full potential cannot be accomplished on the cheap. 
A regional political structure will maintain the focus on vital but difficult issues such as immigration. 
NAFTA was conceived under the assumption that expanded trade would trickle down benefits to all in the three countries. 
Regretfully, this corporate-driven NAFTA exacerbated the disparities and asymmetries between Mexico and its two richer northern neighbors. 
Moreover, throughout NAFTA's lifetime income and wealth have been further concentrated within the elite sectors of US and Canadian society. 
Immigration illustrates the cost of integration without convergence. 
Demand for low-cost Mexican labor by US employers and the 10-1 wage gap between the two countries pushes 350,000 Mexicans to risk their lives every year for better paid jobs north of the border. 
Without Mexican manpower, much of the work in the US simply would not get done. 
The issue must be addressed, not ignored and criminalized. 
NAPU would be the ideal forum in which to address this concern. 
Everywhere nowadays, key decisions are made by a self-selected group of elites, often in non-transparent circumstances. 
NAPU would allow for wider, more consistent participation in the consideration of issues now ignored in all three countries. 
Inter-American issues can no longer be left subject to the whims and convenience of individual leaders. 
The people of the US, Canada, and Mexico deserve better. 

A New Era for Islamic Science? 
For a few hundred years, when science and mathematics were enjoying a period of great invention, one region of the world stood out. 
Masters of these disciplines were revered there, medicine advanced quickly, and the average person was curious about how nature worked. 
Not surprisingly, this region was globally respected. 
In the other half of the known planet, scientists were punished, even killed. 
Mathematics was outlawed as irreligious and alien, and was later made subservient to religion. 
The standard of living was low. 
The prosperous region was the Islamic Middle East, while an ignorant Europe remained poor. 
Both regions were religiously governed (historians differ about the role and natures of the religions in this context), but science flourished only in one of them. 
Now, of course the roles of the Islamic Middle East and the West are reversed. 
Since World War II, the United States has been the world’s undisputed leader in science. 
Throughout this period, the brightest students were drawn away from their native lands, attracted by superior research universities and opportunities. 
Until recently, more than half of all mathematics, science, and engineering graduate students in the US were foreign-born. 
Many of these talents stayed after graduation, and both industry and government took advantage of this. 
Meanwhile, Islamic cultures entered a historical phase in which science was equated with Western influence and eschewed. 
Even in countries where oil revenues could fuel a significant amount of research, Arab rulers did not encourage such investment, with the result that their societies have not prospered as much as they might have. 
Recently, a desire for greater political respect has spurred Islamic nations to invest in technology, which is most visible in Pakistani and Iranian nuclear ambitions. 
But while such weapons carry political weight, the science behind them is mundane and old. 
More meaningful is the respect that comes from incubating insights, rather than the products of past discoveries. 
Imagine the influence that would be generated by a Pakistani institute that was the world leader in cancer research. 
Would the political rhetoric shift if researchers in Oman discovered a key to suppressing AIDS? 
This is one unclaimed opportunity. 
But another exists, and not just for Islamic societies. 
The US has made profound missteps recently. 
“Matters of faith” have been substituted for science across government, from the president down. 
Top researchers have had their reports changed by political operatives when the facts contradicted official belief. 
Encouraged by a religiously influenced administration, school systems are shifting their focus from science to “values.” 
Since the terrorist attacks of September 2001, entry visas are fewer and more difficult to obtain, stanching the flow of young talent into US universities. 
Major scientific organizations have protested, without result. 
At the same time, tax laws have been revised to make investors wealthier in the near term, discouraging long-term investment in research. 
Half a trillion dollars was committed to the war in Iraq, an amount roughly equal to the sponsorship of all basic research for the last thousand years. 
Even if the US avoids a fundamentalist dark age, it clearly risks losing its global research dominance. 
Japan recognized the link between political clout and science in the 1980’s. 
Japan’s chief industrialist, Akio Morita, the chairman of Sony, and the right-wing politician Shintaro Ishihara gave a series of speeches that were collected and published in 1986 as a book called The Japan that Can Say No. 
They outlined a national strategy in which world influence was understood to flow from scientific leadership. 
The key idea was that military power could be made obsolete if the “food chain” of military technologies was controlled by other nations. 
The book’s title refers to Japan’s plan to “say no” to US military influence once Japan controlled key military technologies. 
Building a knowledge-based economy using oil wealth is clearly possible. 
For example, Texas, like most southern US states, was once economically poor and declining. 
Although it had oil revenue, the flow of dollars into an economy, by itself, does not boost prosperity as much as one might think. 
So Texas decided to devote its oil money to an educational endowment. 
Today, that endowment is roughly equal to that of Harvard University and spread over 15 universities. 
The effect has been staggering: aerospace manufacturing has almost disappeared from California, but is booming in Texas. 
Telecom research centers and consortia have flocked to Texas, even from the Canadian telecommunications giant Nortel. 
Although manufacturing in the US is in crisis, Texas has one of the strongest manufacturing economies in the world. 
There is no reason that the same outcome could not be achieved in the Middle East. 
First, however, the Islamic world must rediscover and embrace its proud heritage. 

A New Holy Alliance? 
LONDON -- The recent meeting in the Vatican of the “Custodian of The Holy Places,” King Abdullah of Saudi Arabia, and Pope Benedict XVI was a seminal event, particularly as it comes at a time when radical Muslims are decrying the role of “crusaders” in Middle East politics. 
It was also the clearest sign yet of a rising “Holy Alliance” among the world’s conservative leaders. 
For the key audience for this meeting of Muslim king and Roman Catholic Pontiff was not their followers, but another conservative leader, President George W. Bush. 
The first “Holy Alliance” was a creation of Austria’s Prince Metternich following the Napoleonic wars. 
It was an attempt to preserve the peace (and the security of the relatively weak Austrian Empire) through a coalition of victors upholding shared values. 
Metternich’s “Holy Alliance” was the one original political idea to emerge from Napoleon’s defeat. 
Behind its exalted name lay an innovation of great diplomatic significance: the introduction of an element of calculated moral restraint into international relations. 
The vested interests that the Alliance members – Austria, Prussia, and Russia – had in the survival of their domestic institutions led each to seek to avoid conflicts that, in the past, they would have pursued as a matter of course. 
Metternich’s system worked through much of the nineteenth century, because it protected a genuine balance of power between countries that shared common values. 
But what “common values” do King, Pope, and American President share? 
That such a meeting took place is a sign that both Pope and King believed that there was something to achieve. 
Indeed, Abdullah, who believes himself to be the paramount leader of the Muslim world, is the first Saudi king to initiate a meeting with a leader of the Christian faith. 
The two men met, seemingly as equals, not to express the common values of conservatism, but to confirm and promote their authority to uphold traditional values. 
Both agreed that reform must be slow, cautious and that it must never undermine established institutions, especially religion and the patriarchal family. 
Abdullah sought the meeting because he believes that the world since 2001 has divided the fraternity of conservatives. 
Until then, he and Bush shared a common worldview, emphasizing the importance of religion, the traditional family (as both countries understood it), social discipline, and the state’s role in supporting these institutions. 
But Bush, following the terrorist attacks of 2001, turned his back on conservatism. 
He sought to radically reinvent the Middle East, not only by overthrowing the Taliban regime in Afghanistan and Saddam Hussein’s regime in Iraq, but also through his strident calls for democratization. 
American radicalism, however, resulted in increasing tensions between religious communities in the Middle East, and the rise of radical Iran with its bid for regional hegemony. 
Since 2001, Christian minorities have been targeted throughout the region, including even Lebanon’s Maronite Christian community. 
And in Iraq, Sunni Muslims feel under siege from the country’s majority and now ruling Shia. 
Here is where the Holy Alliance concept of moral restraint comes in. 
Abdullah, perhaps earlier than most others, understood that some code of restraint was needed if the entire region was not to descend into a war of all against all. 
Moreover, Abdullah understands that his wobbly regime will only be able to withstand the radical gales that are now blowing if it can forge the type of stability-seeking alliance that Metternich built. 
The King, like Metternich and the Austrian Kaisers, understands de Tocqueville’s dictum that the most dangerous moment for a regime is when it starts to reform. 
Having begun, ever so carefully, to politically open his country, the King knows that he needs regional peace and a lowering of Islamic holy rage. 
The problem is that Abdullah cannot rely on his domestic conservative allies to give him the time that the Kingdom needs. 
The Wahhabi religious establishment, the Saudi state’s hidden co-rulers, could very well obstruct Abdullah’s attempts at regional religious reconciliation. 
Members of the religious police remain adamant that the country’s Christian guests must continue to live according to strict Wahhabi rules of behavior. 
While the Wahhabis could yet be bribed again with oil money, the sect’s power-hungry judges eagerly await the next beheading, stoning, or lashing in Riyadh’s public square. 
Thus, uniting the forces of status quo conservatism, even if some of those conservatives are Christian, is the only viable diplomatic strategy open to Saudi Arabia. 
For conservative rulers usually fall when they fail to grasp their own vulnerability, especially when the revolutionary challenge is cloaked in conservative garb. 
After all, few political systems can defend against those, like Saudi Arabia’s Islamic radicals, who claim that they can preserve the system and its religious values more effectively than the current rulers. 

A Glimmer of Hope in Iran 
BERLIN – No one could have reckoned with Hassan Rowhani’s victory in Iran’s presidential election. 
Even Supreme Leader Ayatollah Ali Khamenei was probably more than a little surprised by Rowhani’s first-round victory, following a campaign that began with eight candidates. 
As a result, the negotiations with Iran over its nuclear program, as well as the civil war in Syria, may well take on a new dynamic. 
But that is how it is in the Middle East: you never know what lies around the corner. 
This year marks the tenth anniversary of the launch, at the foreign-minister level, of negotiations between Iran and the European triumvirate of Germany, France, and the United Kingdom on Iran’s nuclear program. 
I was there, representing Germany; so was Rowhani, who led the Iranian delegation. 
The talks have continued until today – in an expanded format that includes Germany and the five permanent members of the United Nations Security Council (the P5+1) – without any tangible results. 
Now Rowhani returns to the risky business of Iran’s nuclear program, though this time as President. 
What can we – and he – expect? 
Based on my personal experience, Rowhani is a polite and open character. 
Unlike outgoing President Mahmoud Ahmadinejad, he surrounds himself with very skillful and experienced diplomats. 
But there should be no doubt that he is a man of the regime – a realist and moderate member of the Islamic Republic’s political elite – not a representative of the opposition. 
And, of course, he backs Iran’s nuclear program. 
If Rowhani wants to succeed in office, he will have to keep his promise to improve Iranians’ living conditions without endangering the Islamic Republic in the process. 
That will not be easy; in fact, it could amount to trying to square a circle. 
The economic improvement that voters demanded in electing Rowhani can almost certainly be achieved only if Western and international sanctions are lifted. 
But an end to international sanctions presupposes a breakthrough in the nuclear negotiations. 
It may also presuppose at least a temporary settlement of the main regional conflicts. 
The Middle East has changed dramatically in the last ten years. 
America has reduced its involvement, having withdrawn its troops from Iraq and winding down its engagement in Afghanistan by next year. 
At the same time, we are witnessing the dissolution of the old Middle East created by France and Britain after World War I, when Europe’s two great colonial powers created territorial mandates in Palestine, Syria (including present-day Lebanon), Transjordan, and Iraq. 
A new regional order is not yet discernible, which points to a future fraught with risk and possible chaos. 
As Iran seeks to assert its influence and interests, as well as those of its Shia allies, its dispute with the Security Council over its nuclear program has become closely tied to its regional ambitions. 
After all, the prospect of a nuclear-armed Iran would most likely exacerbate violent conflict and a nuclear arms race in the region. 
As a result, both issues may well have to be addressed successfully prior to any move to lift the sanctions. 
Iran and its international interlocutors should learn from the past and manage expectations accordingly. 
There will not be any quick solutions (if, indeed, there are any solutions at all), given the parties’ diametrically opposed interests, their respective domestic and alliance-related obstacles, and a profound lack of trust on all sides. 
Moreover, aside from negotiating with the P5+1, Iran would be well advised to launch direct negotiations with the United States. 
It will also most likely have to improve its relations with Saudi Arabia and the Gulf states, and change its behavior toward Israel, if a positive result is to be achieved. 
Similarly, the West will have to understand that the Islamic Republic is not a monolithic dictatorship. 
The regime has multiple coexisting power centers, which influence and limit each other’s decisions. 
The office of the president is just one power center. 
The same applies to the Supreme Leader, who, despite his title, is not an absolute ruler. 
Iran has tried two political approaches in the last ten years: a reformist model, under President Mohamed Khatami, and hardline radicalism, under Ahmadinejad. Both approaches failed. 
The reformers could not overcome conservative opposition, while the radicals could not defeat the domestic economic realities wrought by their foreign and nuclear policies. 
Rowhani must seek a path that does not cost him the support of the majority of the regime’s power centers, yet that also allows him to fulfill the mandate he received from voters. 
At home, too, massive distrust will further complicate an inherently difficult task. 
In America and the West, many will probably regard Rowhani as the friendly face of the Islamic Republic, whereas Ahmadinejad was its true – because more radical – embodiment. 
Many Iranians, in turn, regard Obama as the friendly face of a US that still seeks regime change in their country, whereas his predecessor, George W. Bush, was America’s more honest – because more radical – representative. 
Both perceptions distort reality, though both contain a kernel of truth. 
Despite these perceptions – or perhaps precisely because of them – Rowhani’s presidency offers an unexpected opportunity for both the nuclear negotiations and a political solution in Syria. 
Iran’s participation in an international peace conference is an absolute necessity, if only to test Rowhani’s seriousness. 
During the Afghanistan conference in Bonn in 2001, Iran behaved in a pragmatic, results-oriented way – an approach that went completely unrewarded by the US. 
As for the nuclear negotiations, the P5+1 will focus on objective guarantees that leave Iran no path toward military use of its nuclear capabilities. 
For Iran, the focal point of its efforts will be recognition of its right to civilian use of nuclear energy, in keeping with the provisions of the Non-Proliferation Treaty and its protocols. 
Both issues sound simpler than they are: the devil is in the details, and the details leave ample scope for disagreement over the definition, monitoring, and enforcement of terms. 
Again, maintaining realistic expectations must be paramount. 
A successful outcome in the nuclear negotiations and resolution or even containment of the main regional conflicts will be difficult to achieve. 
But it would be the height of irresponsibility not to seize the unexpected opportunity created by Rowhani’s election with all the strength, good faith, and creativity we can muster. 



A New Model of Human Security 
MADRID – It is becoming increasingly clear that globalization progresses not steadily, but through ups and downs. 
Currently, it appears to be in a downswing, hindered by a growing number of irresponsible political leaders who describe it as the root of all evil. 
With the rhetoric of intolerance masquerading as nostalgia, populists such as US President Donald Trump advocate building walls and closing borders to reclaim “sovereignty” and “security.” 
Of course, it was always naive to suppose that the nation-state could easily be divested of its central role in human affairs. 
But it is equally naive to believe that phenomena such as Brexit or Trump’s election augur the return of a world in which the nation-state reigns supreme. 
At this stage, the world is so interconnected that any talk of reversing globalization is chimerical. 
In the realm of security, we need to confront the dark side of this interconnectivity. 
The legal and institutional mechanisms currently in place are inadequate to counter today’s threats, and this was true even before Brexit and Trump made things worse. 
As Christine Chinkin and Mary Kaldor of the London School of Economics and Political Science argue in their book International Law and New Wars, the classic distinction between international and non-international armed conflict has lost currency. 
In this day and age, internal and external security must be understood as a continuum. 
Chinkin and Kaldor show that “new wars” such as the conflict in Syria tend to involve a wide array of players – public and private, domestic and international – and transcend national borders. 
This latter point is illustrated by the former territorial grip of the Islamic State in Iraq, as well as its attacks in many other countries. 
Moreover, new wars usually have a strong ethnic, religious, or tribal component, and last for a long period of time, to the detriment of civilian populations. 
The recent surge of conflicts with an intrastate dimension implies that the old Westphalian model of sovereignty – whereby states monopolize the legitimate use of force within their borders – has become obsolete. 
If we are to build a truly international society, we must think of sovereignty in terms of not just authority, but also responsibility. 
Accordingly, the international community must be willing to intervene in countries where the government poses a danger to its own population. 
That is the logic behind the doctrine of the “responsibility to protect” (R2P), which the United Nations General Assembly unanimously adopted in 2005. 
Unfortunately, when use of force has been justified on humanitarian grounds, interventions have focused narrowly on tactical military considerations. 
On paper, R2P also entails a responsibility to prevent and a responsibility to reconstruct, both of which are usually relegated to the background. 
Even worse, when the UN Security Council has authorized interventions with “all necessary” means on the basis of R2P – in Libya and the Ivory Coast, both in 2011 – the concept has been accused of whitewashing regime change. 
Ever since, R2P has been stigmatized as a prerogative of power – an uncodified right to intervene that is invoked selectively, rather than a collective duty. 
As a result, it was sidelined. 
The failure of the Security Council to muster any real response to the crisis in Syria is the regrettable legacy of previous instances of overstepping in other countries, and shows that humanitarianism still comes second to geopolitics. 
But does this mean that we are condemned to choose between the interventionist excesses of Iraq or Libya and the inaction that permitted mass atrocities to occur in Rwanda and Srebrenica (where UN peacekeepers were not authorized to intercede)? 
The Trump administration’s rhetoric would certainly seem to suggest that these are the only two options. 
After all, the administration is starkly divided between isolationists and neoconservative “hawks” like National Security Adviser John Bolton, who is apparently undeterred by the long history of failure when it comes to regime change. 
But we should neither resign ourselves to accepting a ramshackle framework for humanitarian intervention, nor underestimate the ability of international law to transform itself and, at the same time, transform societies globally. 
Chinkin and Kaldor propose a viable security model in which the protection of the individual – rather than the state – gains primacy, without resorting to paternalism. 
To succeed, this model should approach security holistically, not episodically. 
It should internalize the priorities of affected populations, including those of women and other structurally disadvantaged groups. 
It should give preference to non-military means, placing a special emphasis on disarmament. 
It should be firmly anchored in the ethic of human rights and in a legal toolkit adapted to the logic of “new wars.” 
And it should enshrine the notion of “human security,” whereby the right to be protected would supplant R2P. 
This model is not out of reach. 
In fact, R2P and the human security model were developed simultaneously, with the invaluable support of a leading thinker and global citizen: the late Kofi Annan. 
Many of the core principles of the latter model were laid out in a 2004 paper, “A Human Security Doctrine for Europe,” presented in Barcelona by the Study Group on Europe’s Security Capabilities. 
Three years later, the Human Security Study Group’s “Madrid Report” advanced the idea further. 
Specifically, the Study Group outlined guidelines for expanding the European Union’s external missions. 
These guidelines inspired, for example, the use of human rights monitors and town-hall type consultations. 
Yet, as with R2P, the human security doctrine fell into disuse. 
Or, put another way, it was eclipsed by geopolitics, and by the military focus of various antiterrorism campaigns. 
Nevertheless, we should remember that the greatest reconfigurations of international law throughout history have always followed geopolitical upheavals. 
At a time when civilian populations are increasingly vulnerable to new threats such as cyber warfare, reinventing the concept of human security is not some idealistic project. 
Rather, it is an urgent necessity. 
By thinking in terms of human security, we can develop a comprehensive and collaborative strategy for managing the unconventional conflicts that are multiplying around the world. 
There can be no reversal of globalization. 
If we are going to mitigate its negative consequences, there is only one way forward: strengthening its positive effects. 

A New Model United Nations 
The award of the Nobel Prize for Peace to the United Nations and to its Secretary General, Kofi Annan, is a cause for true celebration everywhere. 
But celebrations should never become an excuse for complacency. 
Yes, the UN has achieved much under Secretary General Annan's leadership. 
But the idea of the United Nations as a uniter of nations remains, in many parts of the world and for many of the world's most complex problems, more an ideal still to be achieved than a living reality. 
Some of the most powerful nations in the world still do not see fully cooperating with or participating in UN affairs as in their interest. 
Beyond states, the world's many NGOs are growing fast and multiplying in their influence, but without formal rules to define their role in the international system. 
Their real power, despite Secretary General Annan's efforts to create a dialogue with them, stands outside the UN framework. 
Indeed, NGOs often assume tasks for which the current structure of the UN is unsuited or remains far too weak. 
To assist them in their tasks, and to assure that the great global issues of the day are addressed in a forum that unites and does not divide, the UN needs to be strengthened in the fields in which NGO's are working so impressively. 
Such strengthening can only be achieved by a fundamental reform of the UN's internal structure. 
When the UN was founded in 1945, the primary objective was to prevent the outbreak of World War III. 
So, at its foundation, only one powerful body was introduced, the Security Council on which the world's great military powers sat. 
The agenda of the Security Council was and remains power, and meeting crises, mostly with military means. 
Today, however, the real threats to the majority of the world's population stems from dangers almost unknown back then: poverty, hunger, population growth, migration, the environment, and the like. 
For the UN to meet these challenges, its very structure must change. 
Two new councils, each with comparable power to the Security Council, are needed: a Social Council and an Economic Council. 
The IMF, World Bank, and WTO should not only report to, but be dependent upon this new UN reformed structure. 
Why are these new bodies needed? 
The world cannot do without rules; it cannot move forward against our age's most pressing problems without defined legal rules and the institutions that regulate international law. 
Because these institutions do not exist, the UN must now invent them. 
Of course some rules, such as rules governing the promulgation of trade sanctions, now exist within, say, the WTO. 
These rules, however, are but steps in the right direction: steps toward socially and ecologically sustainable free trade and against protectionism, especially that often practiced by rich countries. 
Across the board, more global rules are needed so that global efforts to confront poverty, disease, and mass migration can be made consistent, predictable and most of all effective. 
We have the Rome Statute of International Criminal Code; we are heading for an innovative guide to best practice on how civil society organizations can best contribute to the work of the UN; and we now have a large coalition, far beyond NATO, combatting terrorism. 
I am grateful that one of the reactions to September 11th was, if I am not mistaken, a somewhat changed attitude within the USA vis-à-vis the UN. 
But it is of a paramount importance that these kinds of change, namely, to incorporate real power into the structure of the UN, make more progress. 
In dangerous times such as these, the world's peoples need to prove their solidarity. 
The large coalition now fighting terrorism is one way to demonstrate this. 
But solidarity also must be recognized within the real power structures of the UN. 
The Secretary General convocation of a ``Dialogue of Civilizations'' is but a start here. 
Far more needs to be done. 
The institution of Social and Economic Councils at the UN would mark an enormous step in the right direction. 
I have tried to present the ideas outlined here not only to the General Assembly but also to the permanent members of the Security Council. 
I have also been invited to present them to the US Senate. 
So far, none of those discussions have proved to be very fruitful. 
But just as the time is coming when the US will to come see the UN as indispensable, the Security Council and its members will come to see the creation of new bodies within the UN not as rivals, but as the only means for the world's people, in solidarity, to confront the myriad social and economic problems that they face. 

A New Path to a Low-Carbon Economy 
NEW YORK – The solution to manmade climate change depends on the transition to electricity production that, unlike burning oil, natural gas, and coal, emits little or no carbon dioxide – the main greenhouse gas responsible for global warming. 
Low-carbon electricity can be produced by solar, nuclear, and wind energy, or by coal-burning power plants that capture and store their CO2 emissions. 
The policy problem is simple. 
Coal is a cheaper and more easily used energy source than the alternatives. 
It is cheap because it is plentiful. 
It is easier to use than wind or solar power because it can produce electricity around the clock, without reliance on weather conditions. 
To save the planet, we need to induce power suppliers to adopt low-carbon energy sources despite coal’s lower price and greater ease of use. 
The obvious way is to tax coal, or to require power plants to have permits to use coal, and to set the tax or permit price high enough to induce a shift towards the low-carbon alternatives. 
Suppose coal produces electricity at a cost of $0.06 per kilowatt-hour, while solar power costs $0.16/kilowatt-hour. 
The tax on coal-based electricity would have to be $0.10/kilowatt-hour. 
In that case, consumers would pay $0.16/kilowatt-hour for either coal or solar. 
The utilities would then shift to low-carbon solar power. 
The switchover, however, would more than double the electricity bill in this example. 
Politicians are loath to impose such a tax, fearing a political backlash. 
For years , this has stymied progress in the United States towards a low-carbon economy. 
Yet several European countries have successfully introduced the idea of a “feed-in tariff,” which provides the core of a politically acceptable long-term solution. 
A feed-in tariff subsidizes the low-carbon energy source rather than taxing the high-carbon energy source. 
In our example, the government would pay a subsidy of $0.10/kilowatt-hour to the solar-power plant to make up the difference between the consumer price of $0.06 and the production cost of $0.16. 
The consumer price remains unchanged, but the government must somehow pay for the subsidy. 
Here is another way. 
Suppose that we levy a small tax on existing coal power plants in order to pay for the solar subsidy, and then gradually raise consumers’ electricity bills as more and more solar plants are phased in. 
The price charged to consumers would rise gradually from $0.06/kilowatt-hour to the full cost of $0.16/kilowatt-hour, but over a phase-in period of, say, 40 years (the lifespan of the newest of today’s coal plants). 
Assume that as of 2010, the entire electricity system is coal-based, and that the electricity price paid by the consumers is $0.06/kilowatt-hour. 
By 2014, suppose that 10% of the 40-year transition to solar power has been achieved. 
The consumer price is raised 10% of the way from $0.06 to $0.16, thus reaching $0.07/kilowatt-hour. 
The coal tax for 2014 is then set at $0.01/kilowatt-hour, which is just enough to pay the needed solar subsidy of $0.09/kilowatt-hour. 
Solar producers fully cover their costs of $0.16/kilowatt-hour, since they sell power to the consumers at $0.07/kilowatt-hour and receive a subsidy of $0.09/kilowatt-hour. 
A small coal tax can support a large solar subsidy. 
Suppose, further, that by 2030 the transition to a low-carbon economy is halfway completed. 
The consumer price for electricity is now set at $0.11, exactly halfway between $0.06 and $0.16. 
The coal tax is now raised to $0.05/kilowatt-hour, just enough to cover the solar subsidy of $0.05/kilowatt-hour. 
Once again, the solar producers cover their costs exactly, since the subsidy of $0.05/kilowatt-hour closes the gap between the consumer price ($0.11/kilowatt-hour) and the producer cost ($0.16/kilowatt-hour). 
Let us presume, finally, that by 2050, all electricity production has made the transition to low-carbon energy sources. 
The consumer price finally reaches $0.16/kilowatt-hour, enough to cover the full cost of solar power without a further subsidy. 
This approach allows higher consumer electricity prices to be phased in gradually, yet establishes strong, immediate incentives for adopting solar power. 
Moreover, the government budget is balanced every year, since the coal tax pays for the solar subsidy. 
The actual transformation in the coming years will have one major advantage compared to this illustration. 
Today’s solar power plants might cost an extra $0.10/kilowatt-hour compared to coal, but such plants will be much less costly in the future because of improved technology. 
Thus, the magnitude of subsidies needed in a decade or two will be lower than they are today. 
Energy debates in the US, Australia, and other countries have centered so far on introducing a cumbersome cap-and-trade permit system. 
Every major user of fossil fuel would need to buy permits to emit CO2, and those permits would trade in a special marketplace. 
The market price of the permits would be equivalent to paying a tax on CO2 emissions. 
Unfortunately, cap-and-trade systems are difficult to manage and don’t give clear signals about the future price of permits. 
Europe has adopted such a system, but other parts of the world have repeatedly rejected it. 
In fact, Europe’s biggest successes in promoting low-carbon energy have come from its feed-in tariffs, and carbon taxes in some countries, rather than its cap-and-trade system. 
The time has come for the US, China, India, and other major economies to declare how they will foster their own transition to a low-carbon economy. 
A small and gradually rising carbon tax that funds a feed-in tariff system could win political support in the US. 
It could also help to foster consensus among the major coal-based economies, including China and India. 
There really are effective long-term solutions to manmade climate change that are politically acceptable and feasible to implement. 
It is time to embrace them. 

A New Science 
An unusual meeting of scientists took place in Paris this summer, when scientists gathered to brainstorm about the need for a new science, one that could be as revolutionary as Einstein’s insights were a century ago. 
Most scientists assume that the basics of science are known. 
In terms of big challenges, the conventional wisdom is that few things are left to discover. 
The remaining options are said to fall into three groups: “grand scientific quandaries” (such as uniting gravity and electricity into one theory) which require a huge investment and first world infrastructure; “data collection,” which is the field work associated with archeological digs and biological/genetic surveys; and “science-informed problems,” such as combating AIDS or addressing global warming. 
Beyond that, many believe the only hard work will be to use existing laws to benefit humankind in new technological ways. 
Who can argue? 
After all, today’s models work. 
But an emerging group of scientists points to phenomena that current theories do not address well. 
These problems are exceedingly common and artfully avoided because the science that would account for them just doesn’t exist. 
This missing science would describe processes, and how entire systems evolve. 
Individual scientific disciplines are understood fairly well. 
Physics, at least the physics we encounter as ordinary humans, is well mapped. 
Chemistry and biochemistry are similarly solid -- there are some things we don’t understand about the body, but it is believed that the basic machinery of how cells and molecules interact is known. 
Slightly apart from these are the new social sciences, which deal with humans and societies. 
In each of these areas -- physics, biochemistry and social science -- the theories are mature and largely uncontroversial. 
Each discipline has its own language and its own separate machinery. 
Rarely is a scientist an expert in more than one area, because the worlds and languages are so different. 
This means that we can’t answer complex questions that depend on more than one field. 
Consider the brain, for example. 
This complex organ is composed of molecules that interact using the principles of physics. 
That information moves according to the laws of electricity. 
There is also a system of specialized cells, and these interact, exchanging chemicals that also convey information. 
The interaction between two brains adds another level: here, information is exchanged by means of languages, signs and ideas. 
Information is at work on each level and comfortable theories explain how the separate ones operate. 
But information is being exchanged between the levels as well. 
There is no science that explains this, even at the most rudimentary level. 
To cope with this deficiency, some scientists have tried to reinvent the tools of one level in order to apply them to another. 
This leads to such things as a “language” at the level of cells and “energy” behind organized societies. 
Sometimes the transplant works well enough, but it does not address the central problem: What is the nature of the information conveyed between each level, and how is it conveyed? 
As it happens, nearly every system in the world is composed of such layers. 
A similarly embarrassing lack of understanding about how the whole system works exists in every case. 
The group of interdisciplinary scientists that met in Paris is loosely affiliated under the banner “Foundations of Information Science.” 
They have been working in a distributed collaboration for eight years and come from a range of countries and specialties. 
As well as scientists from the relevant disciplines, art theorists, psychiatrists, language experts and philosophers are beginning to participate in the discussion. 
Most of the group is banking on the “transplant” strategy, in which the basic science of one layer is placed in another, tweaked and supplemented in order to be functional. 
Others think that a whole new approach is required. 
They assume that many scientific conventions are accidents of history and new abstractions can be devised. 
If the FIS group is lucky, there will also be some radical input from thinkers that do not presently have access to first world infrastructure. 
Independent thinking is an underestimated factor. 
Nearly all the activities collected under the banner of “science” have developed institutional tendencies that are similar to their economic counterparts. 
It is usually assumed that developing economies need to build resources that emulate those in the developed world, but this could actually stifle the most creative thinking. 
Many scientific disciples are going through a revolution, and a lot of those ideas -- sometimes revolutionary ideas -- are bubbling up from labs and research centers that are unaffiliated with large institutions. 
Twenty years of the most advanced thinking for mathematical algorithms came from a Soviet empire starved of computing power. 
The cleverest, most literally earth-shattering notions of physics for two generations came not from the expected powerhouses of the day, but from Budapest. 
Iran has a tradition of architectural design that has revealed key insights to cognitive scientists. 
Today, some of the most radical new ideas in second generation artificial intelligence (so-called “autonomous agents”) are incubating in Prague. 
The most creative breakthroughs became famous events. 
When Einstein added new abstractions to the language of physics, the identity of space and time changed. 
The FIS meeting in July was the unheralded beginning of an attempt to remodel the universe in such a way. 
The group identified the gaps that need explanation. 
They will expand their pool of thinkers to include scientists from necessarily innovative regions. 
Following this, they will identify which problems might be solved if this new science is developed. 
Or if you wish, discovered. 

A New Sino-American Relationship? 
NEW YORK – The Strategic and Economic Dialogue between the United States and China has now ended with the establishment of a felicitous new atmosphere between the two countries. 
But how can this “love-in” be made concrete? 
The most logical and potentially fruitful area of collaboration is climate change. 
Here, the two US government officials best equipped to lead are Secretary of Energy Steven Chu and Secretary of Commerce Gary Locke. 
Chu is a former Berkeley and Stanford professor of physics and head of the Lawrence Berkeley National Lab, while Locke is a former Washington State governor and a long-time supporter of US-China commercial exchanges. 
Each packs the kind of soft, utilitarian powers of persuasion that Chinese leaders are most willing to embrace: academic degrees from prestigious universities, advanced scientific and technological knowledge, high office, and a Nobel Prize. 
(Chu is one of five ethnic Chinese to have won a Nobel, although no winner has yet come from the PRC, a fact that gnaws at Chinese pride.) 
China’s press was abuzz over Chu and Locke, the first ethnic Chinese men to become US Cabinet Secretaries. 
Most major Chinese papers ran Chu’s photo on the front page, with Beijing Business Today running a cautionary headline: “Don’t Mistake the Visiting American Ministers as Relatives!” 
The paper went on to warn that, “In their own hearts, we are afraid that Chu and Locke put their priorities in exactly the opposite order.” 
When Chu gave speeches on energy and climate change at Tsinghua University, China’s most elite institution for science and engineering (where his parents had been students), and then at Tianjin University (where his grandfather was once President), he was received with enormous enthusiasm, overflow crowds, and standing ovations. 
So, the Chinese ended up embracing Chu and Locke in contradictory ways: as high-ranking representatives of the US government and as compatriots with whom they share the common bond of Chinese-ness. 
Both Chu and Locke are aware that the US and China are now the world’s largest emitters of greenhouse gases, and that, if there is any hope of remedying global climate change, the two countries must quickly find a way to collaborate. 
Chu emphasized this point in his Tsinghua University speech, calling the global climate situation “very disturbing,” and stressing that we were “all in it together.” 
“The developed world did make the problem…I admit that,” he acknowledged to his rapt audience. “But the developing world can make it much worse.” 
In announcing a new Sino-US joint research effort, Chu described clean energy as “one of the great opportunities of our time” for Sino-US cooperation, saying that by “working together, we can accomplish more than [by] acting alone.” 
Still, one is left wonder if this new collaborative bonhomie and ethnic bonding will prove strong enough to cut through not only the long history of distrustful interactions between the US and China, but also the destabilizing effects of China’s sudden economic rise? 
For, although the US has drawn strength from the ideal of a “melting pot” – and President Barack Obama’s cabinet does represent a new high-water mark for diversity – Americans have often shown a xenophobic distrust of immigrants who have drawn too close to power. 
Especially in the case of Chinese, fears of divided national loyalties and “fifth columns” have been strong. 
One need only recall the recent case of Wen Ho Lee, the Los Alamos National Laboratory scientist who was unjustly accused of spying, to be reminded of how yin and yang are America’s feelings about minority members in sensitive positions. 
There is a second obstruction as well: the US Congress refuses to face up realistically to the climate challenge, because China, as a developing country, is not obliged to accept compulsory carbon limits. 
Then, because the US refuses to take responsibility for its cumulative and per capita greenhouse-gas emissions – which are, respectively, roughly four and three times greater than China’s – the Chinese leadership refuses to make concessions. 
A standoff ensues, which is where we are now. 
China recently demanded that the US reduce its emissions by 40% from its 1990 baseline levels and subsidize emission reduction efforts in China and other developing countries to the tune of .05-1% of America’s GDP. 
But the recently House-passed Waxman-Markey bill proposes that the US only cut emissions by 3.6% of 1990 baseline levels. 
So it is still far from clear what will actually work to bring about an understanding between the US and China that produces real results. 
Moreover, with India poking Secretary of State Hillary Clinton in the eye over her climate-change entreaties, the world could easily see an even more unified and unyielding bloc emerge among developing countries. 
The next moment to watch is Obama’s trip to China in November. 
Here, if all the expressions of good feeling cannot be made concrete, an incomparable opportunity to recast Sino-US relations around the issue of climate change will have been lost. 

A New Start for Non-Proliferation 
VIENNA – US President Barack Obama has injected fresh momentum into efforts – stalled for a decade – to bring about nuclear disarmament. 
He has committed himself to the vision of a world free of nuclear weapons and acknowledges the link between nuclear non-proliferation and disarmament by the nuclear-weapon states. 
Obama has pledged to revitalize the 1970 Nuclear Non-Proliferation Treaty (NPT), which aims to prevent the spread of nuclear weapons. 
The non-proliferation regime, of which the NPT is the cornerstone, is in disarray. 
The main problems are easily identified. 
First, the five main nuclear-weapon states have not taken seriously their NPT obligation to work for nuclear disarmament. 
Instead, they have insisted that nuclear weapons are essential for their security and continued to modernize their nuclear arsenals. 
This naturally robs them of the moral authority to persuade others not to acquire nuclear weapons, which continue to be perceived as a source of power and influence, and an insurance policy against attack. 
Second, as we have seen in the case of North Korea, there is nothing to stop countries that sign the Treaty from simply walking out after declaring that “extraordinary events” have jeopardized their supreme interests. 
Third, the International Atomic Energy Agency, which is supposed to police the non-proliferation system, is shamefully underfunded. 
When it comes to determining whether or not a country is conducting a covert nuclear weapons program, IAEA inspectors often have their hands tied, either because they lack the legal authority to gain access to all the locations they consider necessary, or because the IAEA’s analytical laboratories are outdated, or because the Agency does not have adequate access to satellite imagery. 
Fourth, export controls have failed to prevent the spread of sensitive nuclear technology, not least due to the sophisticated efforts of clandestine networks like the one run by Pakistani nuclear scientist A.Q. Khan. 
Nine countries already have nuclear weapons, and it would be naive to presume that others, particularly in regions of conflict, will not try to get hold of them. 
In addition, a number of countries with nuclear energy programs have the capability, if they choose, to manufacture nuclear weapons within a matter of months if their security perceptions change, because they have mastered the critical technology – uranium enrichment and plutonium reprocessing. 
If more countries take this path, it could prove to be the Achilles’ heel of non-proliferation. 
Fifth, the international community, spearheaded by the United Nations Security Council, has more often than not been paralyzed in the face of challenges to international security and ineffectual in responding to suspected cases of nuclear proliferation. 
These issues will not be resolved overnight. 
But there is much that can be done relatively quickly. 
The United States and Russia have started negotiations on deep cuts in their nuclear arsenals, which together account for 95% of the world’s 27,000 warheads. 
Other key steps include bringing into force the Comprehensive Nuclear Test Ban Treaty; negotiating a verifiable treaty to end production of fissile material for use in weapons; radically improving the physical security of nuclear and radioactive materials, which is vital to prevent them from falling into the hands of terrorists; and strengthening the IAEA. 
Last month, I proposed a key measure to strengthen non-proliferation to the IAEA’s Board of Governors – establishing an IAEA bank of low-enriched uranium (LEU) to guarantee supplies to countries that need nuclear fuel for their power reactors. 
LEU cannot be used to make weapons. 
Some such mechanism will be essential in the coming decades as more and more countries introduce nuclear energy. 
My proposal is to create a physical stockpile of LEU at the disposal of the IAEA as a last-resort reserve for countries with nuclear power programs that face a supply disruption for non-commercial reasons. 
This would give countries confidence that they can count on reliable supplies of fuel to run their nuclear power plants, and therefore do not need to develop their own uranium-enrichment or plutonium-reprocessing capability. 
This could help to avoid a repeat of Iran’s experiences after its 1979 revolution, when contracts for fuel and technology for its planned nuclear power program were not honored. 
Thirty years later, some of the consequences are still being felt. 
The LEU would be available to countries in need on the basis of non-political and non-discriminatory criteria. 
It would be accessible at market prices to all states in compliance with their nuclear safeguards obligations. 
No state would be required to give up the right to develop its own fuel cycle. 
The money needed to launch an LEU bank is in place, thanks primarily to a non-governmental organization – the Nuclear Threat Initiative – and initial funding from Warren Buffett. 
But this can only be a first step. 
It should be followed by an agreement that all new enrichment and reprocessing activities will be placed exclusively under multinational control, and that all existing such facilities will be converted from national to multinational control. 
This is a bold idea, but bold ideas are needed now more than ever. 
The opportunity to put the nuclear fuel cycle under multinational control was missed 60 years ago because of the Cold War. 
The spread of nuclear technology and the growing risk of nuclear terrorism make it imperative that we get it right this time. 

A New-State Solution for Israel and Palestine 
PRINCETON – Imagine a two-state solution in Israel and Palestine in which Palestinians would have the right of return; Israelis could settle wherever they could purchase land in the West Bank; and Jerusalem need not be divided. 
This is not a fanciful vision, but a creative and eminently sensible reinvention of twenty-first century statehood. 
And US President Barack Obama’s just-completed visit to Israel provides an opportunity to explore genuinely new thinking. 
Ever since Bill Clinton nearly succeeded in brokering a comprehensive settlement in 2000, the mantra among supporters of the Israeli-Palestinian peace process has been that, while a solution exists, Israeli and Palestinian leaders who are willing to reach it do not. The solution is a version of the deal that Clinton sought: two sovereign states based on the 1967 borders, with negotiated land swaps to reflect existing settlement patterns. 
The agreement would include a land corridor connecting Gaza and the West Bank; a divided Jerusalem with guaranteed access for all to religious sites; 
Palestinians’ renunciation of the right of return; Israel’s willingness to dismantle settlements outside the agreed borders; and recognition of both states across the Middle East. 
But suppose that the reason that no Palestinians and Israelis willing to conclude such a deal have emerged is that the solution itself is domestically unsupportable on both sides. 
Suppose that as long as a version of this deal is the only game in town, the creeping physical expansion of the Israeli state and the demographic expansion of Israeli Arabs will continue to erode its foundation. 
For all the dire warnings that the window for a two-state solution is rapidly closing (or has already closed), it is the solution itself that is the problem. 
In 2008, a Princeton University graduate student in philosophy named Russell Nieli gave a talk at the Princeton Center for Jewish Life that was so well received that he later expanded it into an article for the US-based magazine Tikkun, founded by Rabbi Michael Lerner. 
The article, “Toward a Permanent Palestinian/Israeli Peace – the Case for Two-State Condominialism,” was published with the express aim of stimulating “productive thinking among a younger generation of Jews and Arabs not bound by the restricted vision and failed policies of the past.” 
“Two-state condominialism” is as visionary as the name is clunky. 
The core idea is that Israelis and Palestinians would be citizens of two separate states and thus would identify with two separate political authorities. 
Palestine would be defined as a state of the Palestinian people, and Israel as a Jewish state. 
Under “condominialism,” however, both Palestinians and Jews “would be granted the right to settle anywhere within the territory of either of the two states, the two states thus forming a single, binational settlement community.” 
Think about that for a minute. 
As Nieli describes it, Palestinians “would have the right to settle anywhere within Israel just as Jews would have the right to settle anywhere within the territory of the Palestinian state. 
Regardless of which of the two states they lived in, all Palestinians would be citizens of the Palestinian state, all Jews citizens of Israel.” 
Each state would have the authority and the obligation to provide for the economic, cultural, religious, and welfare needs of its citizens living in the other state’s territory. 
These would be extraterritorial rights and responsibilities, just as the United States, for example, provides for its large numbers of expatriates, such as civilian dependents of US military personnel based abroad. 
To make this work, the borders of each state would first have to be defined – presumably on the basis of the 1967 borders, with mutually agreed territorial swaps. 
Israeli Arabs would then be required to transfer their citizenship, national identity, and national voting rights – but not their residence – to the new Palestinian state. 
They would have a permanent right to live in Israel and would retain the benefits to which they are currently entitled as Israeli citizens, but they would now vote as citizens of Palestine. 
All other Palestinians living in Israel would have rights and benefits only under Palestinian law. 
Condominialism recognizes the reality of the deep interconnectedness of Israeli settlers in the West Bank with the rest of Israel – through roads, water supplies, electricity grids, administrative structures, and economic relationships (just as Israeli and Palestinian parts of Jerusalem are interdependent). 
Instead of trying to separate and recreate all of these structures and relationships, it makes far more sense to build on them in ways that benefit both states’ peoples and economies. 
And, in a world in which many citizens spend an increasing proportion of their time in virtual space, de facto condominialism is already happening. 
In the 1950’s, after four decades of war across Europe, the idea of a European Union in which member states’ citizens could live and work freely across national borders while retaining their political allegiance and cultural identity seemed equally far-fetched. 
(Indeed, the name of the political process by which the EU was to be constructed, “neo-functionalism,” was every bit as abstract and cumbersome as “two-state condominialism.”) 
Yet French and German statesmen summoned the vision and the will to launch a bold experiment, one that has evolved into a single economy of 500 million people. 
Why shouldn’t another site of ancient enmities be the source of a new conception of statehood? 
Interestingly, many young people in the 1950’s, like my Belgian mother, ardently supported the vision of a new Europe. 
Today’s young Israelis and Palestinians pride themselves on their entrepreneurialism, with all the risk and vision that starting something new entails. 
Supporting and contributing to an innovative political start-up would be their generation’s defining act. 

A New Tang Dynasty? 
On August 8, 2008, the world watched with awe the amazing spectacle of the Olympics opening ceremony in Beijing. 
We saw the electronic unrolling of Chinese scrolls replete with great historic symbols and were mesmerized by dancers creating “harmony,” using their bodies as ink brushes. 
2008 martial arts students performed millennia-old moves with mechanical precision, while the flying celestials and the galloping torchbearer created a sense of heavenly abode on earth. 
There was another time when China dazzled the world at its doorstep: the Tang dynasty (618-907), often thought of as China’s golden age, when it was truly the “middle kingdom” at the center of the universe. 
Its capital, Chang Àn (modern day Xìan) was a world-class city; visitors came from all over the world and were dazzled by its wealth, beauty, and power. 
Its emperors used silver from Persia, glass from Europe, precious stones from Central Asia, and gold implements from India. 
Open, confident, and cosmopolitan, China connected with the world with ease, adopting new ideas, and projecting its own indigenous creations. 
It’s no wonder that Chinese scholars sometimes refer to today’s China era as the new Tang Dynasty. 
Indeed, when China was awarded the Olympic Games in 2001, the country’s official news agency, Xinhua called it a “milestone in China’s rising international status and a historical event in the great renaissance of the Chinese nation.” 
For seven years, Chinese officials and artists worked tirelessly to make this dream of a “renaissance” a glittering reality, and they exceeded all expectations. 
But how should we understand the broader implications of the opening ceremony, both for China and the outside world? 
First, the good news. 
In keeping with China’s recent efforts to project its “soft” side, the opening ceremony produced the idea of a historic, but dynamic culture at its best. 
Other than the presence of a few People’s Liberation Army soldiers, you would have been hard pressed to find any visible evidence of the reigning communist regime or its founder, Mao Zedong. 
Equally significant was the projection of China as a nascent leader of the new international cultural order. 
The “Bird’s Nest” stadium was the creation of the multinational design team of Herzog & de Meuron, with suggestions from the visual artist Ai Weiwei. 
Many artists involved in the creation of the spectacle, including the fireworks specialist Cai Guo Qiang, the dance star Shen Wei, and the composer Tan Dun, earned their fame primarily in the West. 
Even Zhang Yimou, the lead impresario for the event, gained fame in the West through his early films chronicling the hard life of a young modern China. 
Chinese officials had clearly decided that these diaspora darlings of the international art scene should be now claimed as China’s own. 
These artists’ ability to the bridge traditions of East and West and to create a new space for creativity that can transcend the cultural specificities of the past in favor of a new blended future could be squarely associated with China’s own global aspirations. 
Like the artists and their art, the country could elevate itself from the dichotomies of old-new, past-present, and traditional-modern to project an image appropriate to our globalizing age. 
Not surprisingly, Chinese leadership was keen to avoid any reference to the last two centuries of struggle and humiliation, or to its problematic political agendas and thorny trade issues. 
At the same time, it could be argued that the spectacle of the opening ceremony was intended to overcome China’s historic humiliation by the West and signal a new chapter. 
The “sleeping dragon,” as Napoleon described China in the early nineteenth century, was now fully awake, ready to charge into the new world. 
As in the Tang Dynasty, arts and culture were at center stage, reflecting the country’s economic prowess and political might. 
But the extravaganza also left lingering doubts. 
Why such a drive to prove to the world that these had to be the very best Olympics ever? 
(Chinese authorities even pressed the International Olympic Committee to make such a declaration at the conclusion of the games.) 
Some have suggested that the effort suggests a hint of insecurity. 
It should also be noted that while Mao was conspicuously absent in the Olympics, his communist legacy was present in subtle ways. 
The relentless emphasis on the “harmonious” presence of large groups of performers left no room for individual voices (even the young singer Lin Miaoke, as we now know, didn’t have her own voice). 
Ironically, while younger Chinese (products of China’s one-child policy) are obsessed with personal stylistic statements, the drama of the opening ceremony consisted in collective expression at the service of the state. 
Chinese intellectuals have always been cognizant of this tension between individual creativity and collective will. 
How will the new China balance these two conflicting needs? 
As we contemplate the potential arrival of the new Tang Dynasty in China, we should remember the message of the old Tang Dynasty poet, Po Chü-i (772-846 AD): 
Sent as a present from Annam, 
A red cockatoo. 
Colored like the peach-tree blossom, 
Speaking with the speech of men. 
And they did to it what is always done 
To the learned and eloquent. 
They took a cage with stout bars 

A New US Agenda for Latin America 
MEXICO CITY – For the next American president, fixing the international mess inherited from the Bush administration will be no simple task. 
While Latin America will not be a priority for either an Obama or McCain administration, continuing the United States’ neglect of the last seven years is no longer viable. 
Two distinct political/diplomatic challenges stand out: Cuba’s imminent transition or succession crisis, and the continuing ascent of the region’s “two lefts,” one represented by Venezuela’s President Hugo Chávez and the other by Brazil’s increasingly influential President Luiz Inácio Lula da Silva. 
The next US administration will only prove successful if it grasps that Latin America is living through a moment that combines the best and worst aspects of its history: the fastest economic growth since the 1970’s, with poverty and inequality diminishing, and more democratic and respectful of human rights than ever before, but becoming more politically polarized. 
In Cuba, Fidel Castro’s eventual passing from the scene represents an immense challenge. 
The US cannot continue with the failed policies of the past half-century. 
Demanding a full-fledged democratic transition as a pre-condition for normalizing US-Cuban relations is both unrealistic and unpalatable to Latin America. 
Yet the US cannot set aside the question of democracy and human rights in Cuba while it awaits the departure of Fidel’s brother, Raúl. 
Realpolitik and fear of another exodus of Cuban refugees across the Florida Straits may tempt the US to pursue a “Chinese” or “Vietnamese” solution to Cuba: normalizing diplomatic relations in exchange for economic reform, while leaving the question of internal political change until later. 
But the US should not succumb to this temptation. 
The US, Canada, Europe, and Latin America have constructed a regional legal framework, which must not be abandoned, to defend democratic rule and human rights in the hemisphere. 
Cuba needs to return to the regional concert of powers, but it must accept this concert’s rules. 
Holding free and fair elections may not be the primary issue, but nor are they issues that should be shelved in the interests of stability and expediency. 
Elections must instead be part of a comprehensive process of normalization: they should neither be a deal-breaker nor a non-issue. 
While the US should lift its trade embargo as soon as Cuba’s transition begins, everything else should be conditional on Cuba initiating a process of resolving all outstanding issues. 
But Cuba is just part of what might be called Latin America’s “left” problem. 
Indeed, much has been written recently about the ascent of the left in Latin America over the past decade. 
In fact, there are two lefts in the region: a modern, democratic, globalized and market-friendly left, found in Chile, Brazil, Uruguay, parts of Central America, and, up to a point, in Peru; and a retrograde, populist, authoritarian, statist, and anti-American left, found in Mexico, El Salvador, Nicaragua, Cuba, Ecuador, Bolivia, Venezuela, and, to a lesser extent, in Argentina, Colombia, and Paraguay. 
Some of these “lefts” are in power; some, as in Mexico in its last, disputed presidential election, barely missed conquering it, but may still do so. 
Over the past two years, it has become increasingly evident that the “modern” or “soft” left is, all in all, governing well. 
The other left has proved to be more extreme and erratic than many anticipated. 
The former feels no urge to “export” its “model,” whereas the latter has a strategy and the means to do so. 
The retrograde left today can realize Che Guevara’s old dream: not “one, two, many Vietnams,” but “one, two, many Venezuelas,” winning power by the ballot and then conserving and concentrating it through constitutional changes and the creation of armed militias and monolithic parties. 
It can finance all of this with the support of Venezuela’s state oil company, implementing social policies that are misguided over the long term but seductive in the short run, especially when carried out by Cuban doctors, teachers, and instructors. 
Herein lies a dilemma for the next US president: how to address the clear rift between the two lefts in a way that improves US-Latin American relations, fortifies the modern left, and weakens the retrograde left without resorting to the failed interventionist policies of the past. 
The best, strictly Latin America-focused steps, are self-evident, if not easily achievable. 
They require strengthening those governments of the modern left, or those of the center or center-right threatened by the old-fashioned left, and simultaneously making it clear to the latter that there is a price to be paid for violating the basic tenets of democracy, respect for human rights, and the rule of law. 
Turning its back in the face of such challenges is no longer a viable American option. 
Aside from areas of particular concern (oil, arms, guerrillas, drugs), the US needs Latin America dearly nowadays because resistance to it is springing up everywhere, and with greater virulence than at any time since World War II’s end. 
The next US president must reinvigorate a relationship that is ready to be substantially transformed for the first time since Franklin Roosevelt’s Good Neighbor Policy of seven decades ago. 

A New Velvet Revolution 
PRAGUE: Rebellion by Czech TV journalists against a new director of the publicly-owned Czech TV marks the climax of a ten year battle between two concepts of democracy. 
The first concept is represented by former prime Minister Vaclav Klaus, the second by President Vaclav Havel. 
Klaus sees political parties as the backbone of any democratic system and sees little place for civil society in politics. 
He deems the proponents of civil society “elitists” who refuse to be tested at the ballot box and who try to influence politics through informal mechanisms. 
President Havel argues that a democracy based only on political parties and basic democratic mechanisms is deformed. 
In his view, political parties, although necessary, must be checked by a robust civil society. 
If civil society is too weak, parties will seek to dominate institutions that should remain independent. 
Over the past ten years President Havel has repeatedly asked the Czechs to be more active and to not let politicians control their lives. 
Klaus’s vision of democracy had the upper hand for most of the past decade. 
Easily understood, it conformed to patterns of behavior most Czechs acquired during the communist era, when public and private spheres of life were rigidly separated. 
True, communism’s fall was brought about by a strong civic movement called “Civic Forum”, but that movement disintegrated once it achieved its goal. 
With its passing, people became passive once more. 
Klaus and his followers spearheaded the creation of well-functioning, standard political parties. 
But in the absence of a strong civil society, those parties monopolized public space, pushing civic activists to the sidelines. 
Havel was the first important Czech politician to criticize this trend, warning against excessive partisanship and arguing that political parties would become internally weak but outwardly authoritarian if they did not draw inspiration from a vibrant civil society. 
Unfortunately, Havel’s vision of democracy appears complicated when compared to that of Klaus. 
In the past, calls for active civic engagement and Havel’s moralistic views left average Czechs cold and alienated political opponents, who accused him of promoting a nonpolitical form of politics. 
Prompted by civic passivity, political parties not only came to dominate every aspect of Czech life but engaged in dubious practices that increased cynicism and public passivity. 
At the end of 1997, the second Klaus government collapsed under the weight of financial scandals. 
Rather than learn from this fiasco, Klaus went on the offensive, claiming that he was a victim of a conspiracy hatched by Havel. 
But his party, the Civic Democrats (ODS), lost the June 1998 elections to the Social Democrats (CSSD), whom Klaus vilified before the elections as a threat to democracy. 
Soon afterwards, however, the Civic Democrats and the Social Democrats signed the so-called “opposition agreement”, under which Klaus’s party gained important posts and other advantages in exchange for allowing the Social Democrats of Prime Minister Zeman to form a minority government. 
Klaus, Zeman and their parties also agreed to work together to limit presidential power and the independence of the Central Bank by changing the Constitution, as well as to change the electoral law in their favor. 
Four smaller parties, who allied themselves in a four-party coalition called “4K” objected. 
Protests against these political arrangements were criticized by the ODS and CSSD as attempts to undermine their efforts to ensure political stability. 
Despite the fact that the opposition agreement boosted the popularity of the unreformed Czech Communists, the determination of the Civic Democrats and Social Democrats to continue dividing the spoils of power remained undiminished. 
In the fall of 2000, Czech voters rebuked both parties during regional and Senate elections, with the Social Democrats losing their joint majority in the Senate. 
Because the Czech Parliament’s upper house has an absolute veto over constitutional amendments, the opportunity to amend the Constitution was lost. 
Loss of control of the Senate also meant that Klaus’s hope to replace Havel as president diminished. 
Defeat prompted Klaus and Zeman to try to and gain control over Czech TV by packing its council of overseers with their sympathizers. 
Shortly before Christmas, Czech TV’s director, who was resisting political pressure, was replaced by Jiri Hodac, a man with close ties to ODS. 
TV journalists rebelled, occupying the station's newsroom. 
The protests by artists, intellectuals and opposition politicians that followed were the biggest political upheavals since 1989. 
Realizing that the game was lost, the Social Democrats joined with Klaus’s opponents in parliament on January 5th to demand Hodac’s resignation. 
Parliament is also working on a new TV law to prevent political parties from politicizing the TV Council. 
But political realignment is not the most important news arising from this turmoil. 
Of far greater importance is the reawakening of civil society which has, for the first time since 1989, stood up to the political parties to reclaim the public space it relinquished ten years ago. 
Equally important is the fact that for the first time since 1989, civil society has found a voice independent of President Havel. 
Unrecognized by almost everyone, Czech society has moved beyond Havel and Klaus. 
It rejects Klaus’s truncated democracy, and, although it supports (to some extent) Havel’s vision, Havel himself is no longer the motor of civil society in action. 

A New World Architecture 
NEW YORK – Twenty years after the fall of the Berlin Wall and the collapse of communism, the world is facing another stark choice between two fundamentally different forms of organization: international capitalism and state capitalism. 
The former, represented by the United States, has broken down, and the latter, represented by China, is on the rise. 
Following the path of least resistance will lead to the gradual disintegration of the international financial system. 
A new multilateral system based on sounder principles must be invented. 
While international cooperation on regulatory reform is difficult to achieve on a piecemeal basis, it may be attainable in a grand bargain that rearranges the entire financial order. 
A new Bretton Woods conference, like the one that established the post-WWII international financial architecture, is needed to establish new international rules, including treatment of financial institutions that are too big to fail and the role of capital controls. 
It would also have to reconstitute the International Monetary Fund to reflect better the prevailing pecking order among states and to revise its methods of operation. 
In addition, a new Bretton Woods would have to reform the currency system. 
The post-war order, which made the US more equal than others, produced dangerous imbalances. 
The dollar no longer enjoys the trust and confidence that it once did, yet no other currency can take its place. 
The US ought not to shy away from wider use of IMF Special Drawing Rights. 
Because SDRs are denominated in several national currencies, no single currency would enjoy an unfair advantage. 
The range of currencies included in the SDRs would have to be widened, and some of the newly added currencies, including the renminbi, may not be fully convertible. 
This would, however, allow the international community to press China to abandon its exchange-rate peg to the dollar and would be the best way to reduce international imbalances. 
And the dollar could still remain the preferred reserve currency, provided it is prudently managed. 
One great advantage of SDRs is that they permit the international creation of money, which is particularly useful at times like the present. 
The money could be directed to where it is most needed, unlike what is happening currently. 
A mechanism that allows rich countries that don’t need additional reserves to transfer their allocations to those that do is readily available, using the IMF’s gold reserves. 
Reorganizing the world order will need to extend beyond the financial system and involve the United Nations, especially membership of the Security Council. 
That process needs to be initiated by the US, but China and other developing countries ought to participate as equals. 
They are reluctant members of the Bretton Woods institutions, which are dominated by countries that are no longer dominant. 
The rising powers must be present at the creation of this new system in order to ensure that they will be active supporters. 
The system cannot survive in its present form, and the US has more to lose by not being in the forefront of reforming it. 
The US is still in a position to lead the world, but, without far-sighted leadership, its relative position is likely to continue to erode. 
It can no longer impose its will on others, as George W. Bush’s administration sought to do, but it could lead a cooperative effort to involve both the developed and the developing world, thereby reestablishing American leadership in an acceptable form. 
The alternative is frightening, because a declining superpower losing both political and economic dominance but still preserving military supremacy is a dangerous mix. 
We used to be reassured by the generalization that democratic countries seek peace. 
After the Bush presidency, that rule no longer holds, if it ever did. 
In fact, democracy is in deep trouble in America. 
The financial crisis has inflicted hardship on a population that does not like to face harsh reality. 
President Barack Obama has deployed the “confidence multiplier” and claims to have contained the recession. 
But if there is a “double dip” recession, Americans will become susceptible to all kinds of fear mongering and populist demagogy. 
If Obama fails, the next administration will be sorely tempted to create some diversion from troubles at home – at great peril to the world. 
Obama has the right vision. 
He believes in international cooperation, rather than the might-is-right philosophy of the Bush-Cheney era. 
The emergence of the G-20 as the primary forum of international cooperation and the peer-review process agreed in Pittsburghare steps in the right direction. 
What is lacking, however, is a general recognition that the system is broken and needs to be reinvented. 
After all, the financial system did not collapse altogether, and the Obama administration made a conscious decision to revive banks with hidden subsidies rather than to recapitalize them on a compulsory basis. 
Those institutions that survived will hold a stronger market position than ever, and they will resist a systematic overhaul. 
Obama is preoccupied by many pressing problems, and reinventing the international financial system is unlikely to receive his full attention. 
China’s leadership needs to be even more far-sighted than Obama is. 
China is replacing the American consumer as the motor of the world economy. 
Since it is a smaller motor, the world economy will grow slower, but China’s influence will rise very fast. 
For the time being, the Chinese public is willing to subordinate its individual freedom to political stability and economic advancement. 

A New Year's Resolution 
It is time for New Year's resolutions, and this year's are obvious. 
When the millennium opened, world leaders pledged to seek peace, the end of poverty, and a cleaner environment. 
Since then, the world has seen countless acts of violence, terrorism, famine, and environmental degradation. 
In 2005, we can begin to change direction. 
Knowledge, scientific advance, travel, and global communications give us many opportunities to find solutions for the world's great problems. 
When a new disease called SARS hit China last year, the World Health Organization coordinated the actions of dozens of governments, and the crisis was quickly brought under control, at least for now. 
When Bill Gates donated $1 billion to bring vaccines to poor children, he made it possible to protect tens of millions of young people from preventable diseases. 
When an agricultural research unit called the World Agroforestry Center discovered that a certain tree could help African farmers grow more food, they introduced a new and valuable approach to overcoming Africa's chronic food crisis. 
Unfortunately, such examples of international cooperation are as rare as they are impressive. 
With our knowledge, science, and technology, the horrendous living conditions of the world's poorest people could be dramatically improved. 
Millions of people could be spared malaria, HIV/AIDS, hunger, and life in slums. 
The problem is not that we lack good solutions. 
The problem is that we fail to cooperate globally to put those solutions into practice. 
United Nations Secretary-General Kofi Annan has honored me by making me his Special Adviser on the Millennium Development Goals and asking me to lead a group of scholars and development experts in identifying practical steps to reach the goals by the target date in 2015. 
This effort, known as the UN Millennium Project, will issue its report to Secretary-General Annan on January 17, 2005. 
Our study, Investing in Development: A Practical Plan to Achieve the Millennium Development Goals , will be available for free around the world at www.unmillenniumproject.org . 
What we learned is easily summarized. 
For every major problem - hunger, illiteracy, malnutrition, malaria, AIDS, drought, and so forth - there are practical solutions that are proven and affordable. 
These investments, in turn, would strengthen the private sector and economic growth. 
Yet they require global partnership between the rich and poor countries of the world. 
Most importantly, the world's richest countries need to do much more to help the poorest countries make use of modern science and technology to solve these great problems. 
The US, for example, currently spends around $450 billion each year on its military, but less than $15 billion to help the world's poorest countries fight disease, educate their children, and protect the environment. 
This is a mistake, because military approaches alone cannot make America safe. 
Only shared prosperity can truly make the planet secure. 
The US should be investing much more in peaceful economic development. 
Germany, Japan, and several other rich countries are also doing much less than they should - and much less than they promised the poor countries that they would do. 
In 2002, all donor countries committed to "make concrete efforts" to reach 0.7% of national income in development aid to poor countries. 
Germany, Japan, and the US, among others, remain far below this commitment. 
The year 2005 will offer many opportunities for citizens around the world to insist that their leaders keep their Millennium promises. 
After our report is issued in January, Secretary-General Kofi Annan will issue a report to the world in the spring, identifying the practical steps that should be taken this year. 
Around the same time, an important commission on Africa will issue a report to United Kingdom Prime Minister Tony Blair. 
Then, in July, the UK will host the annual G-8 Summit of the rich countries. 
Blair has promised that he will make the fight against poverty and long-term climate change the two priorities of the summit. 
In September, the world's leaders will reconvene at the UN to decide on their actions during the coming decade. 
The rich and powerful nations often declare their leadership in the world. 
The US claims that it helps the world fight poverty, but instead spends its money on weapons. 
Germany and Japan say that they want a permanent seat on the UN Security Council, but neither has yet followed through on its own pledges to help the world's poorest people. 
The world's poorest countries will ask themselves why they should vote for Germany and Japan to have permanent seats on the Security Council if they can't keep their promises. 
Nothing would be wiser for the world's rich countries than to fulfill their pledges to the world's poor, hungry and disease-ridden peoples. 
Therein lies the path to sustained peace. 
2005 is the year that words can become reality, and that the world can begin to fulfill its hopes for our new millennium. 
Let us make our leaders aware that we aspire to shared peace and prosperity. 
Let us pledge that the rich and powerful should take real actions to help the poor, the weak, and the suffering. 

A Nice Mess in Nice 
LONDON: A hundred years ago, the humorous English magazine Punch carried a cartoon which depicted a young and nervous curate eating breakfast with his bishop. 
He was eating a boiled egg, and clearly not enjoying it. 
The bishop enquired: “I say - is your egg all right?” And the curate replies: “My Lord, it is excellent in parts.” 
The cartoon caught the English fancy, and created a catch-phrase still in use today, although it is usually misunderstood and misused. 
Someone may say: “It’s a bit of a curate’s egg”, when he means that something is a mixture of good and bad. 
But of course the point of the original joke was that the curate was just being polite: an egg is either good or bad, and his was bad. 
This week’s European Summit at Nice (December 7-9) looks like being a curate’s egg. 
The question is, will it be bad all through and a failure? Or will it be “excellent in parts”? 
The probable answer is: both. 
It will almost certainly fail to achieve its immediate objectives; but it may open the door to serious progress afterwards. 
The ostensible purpose of the summit is to make those changes in the European Union’s decision-making machinery that would enable it to cope with the admission of at least 12 new members, mainly from Central and Eastern Europe. 
Everyone knows that these changes ought to be radical, even semi-federal. 
At the very least, the coming enlargement will call for much more majority voting in the Council of Ministers, if the Union is not be paralyzed by 27 member states and 27 national vetoes. 
But most member states are unwilling to contemplate anything that far-reaching. 
The host French, who currently hold the EU Presidency, have listed 50 policy areas where majority voting might be possible. 
Every country, however, has special sensitivities: the Germans are unwilling to be outvoted on immigration; the French are unwilling to be outvoted on trade in services; the British are unwilling to be outvoted on taxation. 
The cumulative result of all these national objections, is that the Nice summit is likely to see only a modest increase in the potential for majority voting, much smaller than enlargement requires. 
A similar reluctance will dominate the rest of the immediate institutional agenda. 
In principle, the Commission ought to be slimmed down after enlargement, with fewer Commissioners than member states. 
Equally, big member states ought to have more votes in the Council of Ministers, to reflect their greater populations. 
Small member states do not like either proposition, because they would lose Commissioners and votes. 
On both issues, expect a serious tug-of-war, and any decisions are likely to be half-hearted, or in practice postponed. 
Yet, the 15 member states may compensate for their collective failure of nerve by opening up easier options for flexible or multi-speed integration. 
This might be a way round the majority voting dilemma, since it would allow groups of member states to cooperate together in particular areas, without waiting for the unanimous agreement of all partners. 
Whether this would really be a desirable procedure is hotly debated; but the fact is that multi-speed integration already exists in the sense that Britain and Denmark are not now, and may never be, members of the euro. 
If these scraps were to be the sum total of the Nice summit, it will prove unsatisfactory, even a failure. 
But the real significance of the meeting may turn out to be, not the limited decisions which the heads of government are able and willing to take this time round, but the opening up, virtually for the first time, of serious discussion about the future direction of the European Union. 
One thing that will happen at Nice will be the formal adoption of a Charter of Fundamental Rights. 
In its present form, this document recapitulates all kinds of rights which EU citizens already enjoy under existing laws; it is not intended to confer any new rights, and it cannot be enforced in the European Court of Justice. 
In other words, it is a public relations conjuring trick, designed to make the EU seem more attractive, without actually conferring any real benefits. 
Even as a conjuring trick, the Charter could be influential. 
For example, Article 2 reads: “Everyone has the right to life. 
No one shall be condemned to the death penalty, or executed.” 
It seems evident that this principle will be effectively binding on all member states, and all candidates for membership. 
The question at Nice will be whether the Charter should be incorporated into the EU Treaties, and thus given the force of law. 
Another similar question at Nice will be whether the time has come to simplify the EU Treaties, which are now a confusing jumble of general principles and difficult detail. 
Simplification might be intended, at the start, as another conjuring trick: to make the Treaties more comprehensible to voters without changing anything in law. 
But it could also become the first, essential step on the road to the drafting of a European constitution. 

A No-Fly Zone for Libya 
WASHINGTON, DC – Leaders around the world are vigorously debating the advisability of establishing a no-fly zone to stop the violence unfolding in Libya. 
Some cite Bosnia, where NATO took too long to protect civilian populations in the mid-1990’s, as a reason to act. 
Others remember Rwanda, where President Bill Clinton later expressed regret for not acting to save innocent lives. 
But the stakes in Libya today are more appropriately underscored by the tragedy in southern Iraq in the waning days of the Persian Gulf War 20 years ago. 
As coalition forces were routing the Iraqi army in February 1991, President George H.W. Bush encouraged the Iraqi people to “take matters into their hands to force Saddam Hussein the dictator to step aside.” 
When Iraqi Shiites, Kurds, and Marsh Arabs rebelled against Hussein, they believed that American forces would protect them against their brutal dictator’s superior firepower. 
Instead, when Iraqi attack helicopters and elite troops began butchering their own people, coalition forces were ordered to stand down. 
The world watched as thousands of Iraqis were slaughtered. 
The situation in Libya today is not identical. 
Inspired by events in Tunisia and Egypt, the Libyan people rose up spontaneously against four decades of repression by Col. Muammar el-Qaddafi. 
Still, the specter that haunts me is the same – ordinary people facing off against an autocrat’s airpower and well-armed soldiers, counting on the free world to protect them against massacre after we have applauded and bolstered their bravery with our words. 
So far, Qaddafi’s forces have relied on airpower selectively. 
But Qaddafi is shrewd. 
My fear is that he is either choosing to bleed the opposition to death, rather than invite global action with a broad massacre, or waiting for the world to prove itself unwilling to act – at which point he might well begin killing civilians in large numbers. 
We cannot wait for that to happen. 
We need to take concrete steps now so that we are prepared to implement a no-fly zone immediately if Qaddafi starts using his airpower to kill large numbers of civilians. 
Diplomacy is urgently needed to build broad support for a no-fly zone. 
The most important imprimatur should come from the United Nations, where debate should begin immediately over a resolution authorizing a no-fly zone. 
China and Russia have expressed reservations. 
If the Security Council fails to authorize action, those of us determined to protect Libyan civilians will face a more difficult choice should the violence escalate. 
So our diplomatic efforts must extend beyond the UN. 
The support of NATO and the African Union are important. 
To avoid the perception of NATO or the US attacking another Muslim country, the backing of the Arab world is also needed. 
On that front, there are promising signs. 
The six Arab countries of the Gulf Cooperation Council have called for a UN-imposed no-fly zone. 
The Arab League has endorsed a similar proposal. 
Muslim countries in particular should support preparations for intervention if the violence spirals out of control. 
Qaddafi cannot be allowed to think that he can massacre his people with impunity. 
And he cannot be free to make those attacks more lethal by using his airpower. 
If the UN cannot approve a resolution for implementing a no-fly zone, then the US and its allies in NATO and the Arab world must be prepared to prevent a massacre like the one that occurred in Srebrenica in 1995, when more than 8,000 Bosnian men and boys were slaughtered. 
Of course, imposing a no-fly zone would not be a panacea. 
It probably would not tip the balance if the situation in Libya deteriorates into a full-scale civil war. 
But a no-fly zone would eliminate airstrikes and save civilian lives. 
It is a tool that we should be ready to use if the situation warrants it, and it would signal to the opposition that it is not alone. 
Before that decision is reached, the international community needs to provide humanitarian assistance and medical supplies to the rebels in eastern Libya. 
We must not allow them to be starved into submission. 
The one option that should not be on the table is US ground troops; no one wants to see US forces bogged down in another war, especially in another Muslim country. 
And, as President Barack Obama has said, the Libyan people must not be deprived of full ownership of their struggle for freedom, and Qaddafi must not be given a useful foil and scapegoat. 
Perhaps the mere threat of a no-fly zone will keep Qaddafi’s pilots from using their helicopters and fighter jets to kill their own people. 
If it does not, we should make clear that we will lead the free world to avoid the senseless slaughter of any more Libyan citizens by a madman bent on maintaining power. 
The US and the world community should also make clear – as we did in Bosnia and Kosovo – that we are taking a united stand against a thug who is killing Muslims. 

A No-Fly Zone for Syria 
BRUSSELS – There is a saying, too often used in interpreting international relations, that my enemy’s enemy is my friend. 
Sometimes it proves true; often it does not. 
Thirty years ago, the Afghan mujahedin were mistaken for friends of the West when they fought their country’s Soviet invaders. 
But how lazy that assumption seems now, given all that has since happened. 
Syria’s deepening crisis, and the criminal use of chemical weapons there, has created a similar dynamic and dilemma. 
But the West need not risk making the same mistake and accepting the same false choices. 
Begin with first principles. 
A chemical-weapons attack on the scale just seen in Syria must be deemed a game changer. 
Although possessing these weapons of mass destruction is technically not illegal, most states are parties to the 1993 Chemical Weapons Convention, which Syria has refused to sign. 
So the answer to the question “What happens next?” cannot be “Nothing.” 
Principles of international law – in particular, the emerging “responsibility to protect” doctrine and enforcement of the global ban on the use of chemical weapons – dictate that some form of military intervention must occur in order to deter others from using WMDs, particularly against civilians. 
But which measures are appropriate and genuinely useful? 
What is more likely to strengthen the West’s security, and what runs the risk of weakening it? 
I believe that the fairest and simplest proportionate response would be to impose a no-fly zone on Syria. 
The proposal is particularly appropriate in the likely absence of any resolution under United Nations Chapter VII (“Action with Respect to Threats to the Peace”), owing to the (almost certain) cynical use by Russia and China of their veto power in the Security Council. 
Of course, claims and counter-claims have been swirling in the aftermath of the appalling chemical-weapons attack on a rebel-controlled area east of Damascus. 
But, given the brutality of President Bashar al-Assad’s regime, no one can doubt the lengths to which it would go to hide its guilt. 
The five-day delay in allowing UN chemical-weapons experts to verify the attack gave Assad’s government ample time to conceal incriminating evidence, allow it to degrade, or destroy it with further shelling. 
The United States, France, and the United Kingdom are adamant that all the intelligence and eyewitness evidence points to the Assad government as the perpetrator of the attack. 
There also is no doubt about the legitimacy of concerns about elements of the Syrian opposition. 
The Al Qaeda-led and Salafist extremist groups in the rebel forces, such a Al Nusra, have proved to be just as vicious as the government and its allies, the Iranian proxy Hezbollah and Iran’s Revolutionary Guard. 
But the united view of Western intelligence services is that there is no evidence that these rebel groups launched the chemical-weapons attack. 
In these circumstances, a no-fly zone would not only clear the skies of Syrian warplanes and missiles, thereby reducing the scale of the slaughter; it would also show Assad and his supporters that he truly is vulnerable. 
Generals ordered to use chemical weapons would have to reckon with the prospect that the regime could, actually, fall, and that they then might find themselves on trial for war crimes. 
It would be better, of course, if Russia and China would allow the Security Council to do the job for which it was intended – securing peace and preventing war crimes. 
By continuing to support Assad despite his use of chemical weapons, Russia’s standing in the Arab world has gone from patron to pariah. 
What little moral and political standing Russian President Vladimir Putin has retained in the rest of the world is also evaporating, as he will soon discover at the upcoming G-20 Summit in Saint Petersburg. 
But the world cannot hold its breath waiting for a change of heart by Putin and China, which is why a no-fly zone should be examined as a military option. 
In the aftermath of the Gulf War in 1991, a no-fly zone, initially proposed by British Prime Minister John Major, did not topple Saddam Hussein, but it did prevent him from carrying out further attacks from the air on Kurds in the north and Shia in the south. 
Likewise, a no-fly zone in Syria would immediately restrict the Syrian government’s means of delivery of weapons of mass destruction. 
Some military experts may say that Syria’s air-defense systems are too sophisticated to suppress, making a no-fly zone too dangerous to enforce. 
But Israel has managed to attack Syrian territory twice – destroying a North Korean-staffed nuclear reactor in 2007 and, more recently, striking a Hezbollah convoy – with no casualties or loss of planes. 
Mindful of this weakness, Russia has offered Syria its more modern S-300 missiles; but there is no evidence that they have arrived, let alone been deployed. 
And once Syria’s air-defense system is sufficiently degraded, it would be best if Arab countries – Saudi Arabia, Qatar, and other Gulf states – and Turkey used their air forces to police the zone. 
Any malicious wishful thinking on the part of Assad’s regime would be dispelled with every glance at the sky. 

A Papal Success 
LONDON – To the surprise of many in the media – at home and abroad – Pope Benedict XVI’s just completed visit to Britain was an outstanding success. 
As a Roman Catholic and as the person asked by Prime Minister David Cameron to supervise government arrangements for the visit, I was naturally delighted. 
But, I was also pleased from the point of view of a citizen, with a strong dislike of the herd mentality. 
The media tends to move like market sentiment. 
One moment, the public square is full of bulls; the next you’re being clawed by bears. 
We were told before the visit that the British public would be at best indifferent and at worst hostile. 
Even some in the Vatican feared this outcome. 
But, from the moment that the Pope arrived in Scotland, he was overwhelmed by enthusiastic crowds of well-wishers, Catholic and non-Catholic alike. 
I drove in the papal cavalcade along the motorway from Edinburgh, where Benedict met Queen Elizabeth, to Glasgow, where he celebrated an open-air mass. 
All along the road were throngs of people. 
From the first day, the media understood that they had badly misread the public mood. 
The visit went from incipient disaster to huge success overnight. 
The public had poked a sharp stick into the eye of metropolitan cynicism and know-all journalism. 
The message conveyed by the pope and by the religious leaders with whom he met defied the contemporary assumption that the public cannot understand anything longer or more complicated than a sound bite. 
The late American politician Adlai Stevenson once said that the average man (or woman) was a great deal better than average. 
Voters should be treated as equals, and politicians should not talk down to them. 
Mind you, this was not enough to win Stevenson the presidency in the 1950’s. 
“All the intelligent people in the country are supporting you,” he was told. 
“That’s not enough,” he replied. 
“In order to win, I need a majority.” 
Nevertheless, I think we have suffered too much from politics by simplistic slogans. 
Making a coherent, well-argued case is surely the best way in the long-term of trying to mobilize consent for any course of action. 
It dignifies an argument – and those to whom it is addressed – to set it out thoughtfully. 
This is what Benedict does, as does his interlocutor in Britain, the head of the Anglican Communion, Rowan Williams, Archbishop of Canterbury. 
Both are intellectuals and address difficult questions in a quiet, carefully considered way. 
This has led Williams, in particular, into several run-ins with the media. 
For example, he was widely criticized for a lecture in 2008 in which he spoke about the relationship between Islamic Sharia law and the British legal system. 
What he said was both interesting and correct, but it was ripped out of context, and he was unfairly pilloried as a result. 
The pope’s main speech was delivered to an audience of the great and the good in Westminster Hall, a medieval building whose use over the centuries has been intimately tied up with some of the greatest dramas in British history. 
It was here that Thomas More, later canonized, was put on trial for defying his master, King Henry VIII. 
More would not accept the king’s assertion of supremacy over the church. 
His conscience would not allow him to bend to Henry’s will. 
He was executed in the Tower of London, martyred because of his conscience. 
St. Thomas More is regarded as the patron saint of politicians, which is rather flattering to many of those over whose spiritual interests he presumably presides. 
After all, not every politician is widely commended for following his conscience. 
But the story of More, and the fact that the British legal system in its early years evolved under the high wooden beams of Westminster Hall, gave Benedict a good hook on which to hang a sermon about the importance of ethics and religion in public life. 
Many secularists argue that ever since the Enlightenment, reason has been enough to guide governance and policymaking, buttressed by the rule of law if a community is lucky. 
But Benedict asserted the importance of faith alongside reason and law in safeguarding our civilization. 
Europe’s foundations lie not just in Aristotle, reason, and classical Greece, and not just in Rome with its understanding of the importance of the law, but also in Jerusalem and the Abrahamic faith groups – Christian, Jewish, and Muslim. 
Reason devoid of ethics can prove insufficient to support the survival of civilization, a point that the pope’s own homeland, Germany, discovered in the 1930’s. 
To illustrate his argument, Benedict noted that the international financial crash, partly a consequence of insatiable greed, had provoked debate about the need for an ethical basis for economic behavior. 
Have we forgotten so readily the repugnance with which we discovered the dishonesty and extravagance that helped to wreck our prosperity in the West? 
Another example of the relationship between ethics and policy is the response that rich countries have made to global social inequity, a deep moral affront to everyone with even a modicum of conscience and sensibility. 
In the midst of a gloomy crisis for public spending in Britain, the government has committed itself to sticking to its pledge of spending 0.7% of GDP on development assistance in poor countries. 
If only others would do the same, like rich Italy, which spends only 0.15% of its GDP on overseas aid. 
So Benedict set off a serious debate in Britain and beyond. 
Where can and should religion and ethics contribute to our political discourse? 
That is a central issue, and not just for Europe. 



A Peace Agenda for Global Development 
MONROVIA, LIBERIA – This week, the 27 members of the High-level Panel of Eminent Persons on the Post-2015 Development Agenda gather in Monrovia, Liberia, to advise United Nations Secretary-General Ban Ki-moon. 
At the meeting, the Panel will establish a “bold yet practical” vision for joint action on sustainable development. 
While these discussions – hosted by Liberian President and Nobel Peace Prize laureate Ellen Johnson Sirleaf, Indonesian President Susilo Bambang Yudhoyono, and British Prime Minister David Cameron – take place, the nearby Sahel and the Great Lakes region continue to be plagued by violence and conflict. 
Indeed, large-scale displacement of people and unspeakable human suffering are occurring in many African countries (not to mention in Syria and elsewhere), threatening to reverse the continent’s unprecedented economic progress during the last decade. 
The Panel (of which I am a member) must seize the opportunity presented by the Monrovia meeting to contribute to a global development agenda that addresses the vicious cycle of conflict and poverty that hampers economic activity and undermines human well-being. 
For more than a decade, the Millennium Development Goals, which expire in two years, have provided the framework for international development cooperation, with a focus on combating poverty worldwide. 
In developing a new, comprehensive follow-up agenda, global leaders should recognize that, although the MDGs have enabled millions of people worldwide to escape illiteracy, disease, and hunger, their overall impact has been inadequate, particularly in fragile, conflict-ridden countries. 
World Bank statistics show that no conflict-affected low-income country has achieved a single MDG, reflecting the framework’s failure to address problems caused by organized violence and insecurity effectively. 
That is why the post-2015 agenda should be centered on peace, security, and freedom from fear. 
It should aim to make justice and prosperity a reality for everyone. 
And it should reflect the understanding that development is impossible without peace, just as peace is impossible without development – and that lasting peace and sustainable development are impossible without respect for human rights and the rule of law. 
Furthermore, as the Monrovia meeting’s theme, “National Building Blocks for Sustained Prosperity,” suggests, post-2015 global development initiatives should emphasize support for national efforts to achieve strong, stable, long-term prosperity. 
Strategies that would help countries to overcome domestic insecurity and conflict, transform their economies, and, ultimately, meet their potential include strengthening governance institutions and the rule of law, ensuring multi-stakeholder participation, and guaranteeing that all citizens have equal access to justice. 
International support for such efforts would mean giving African leaders and stakeholders the opportunity – and the responsibility – to eliminate underdevelopment and boost prosperity. 
Moreover, while poverty eradication will remain a paramount concern after 2015, the focus must shift from national averages to local disparities. 
Measures must move beyond overall social needs to bolster progress in productive job-creating and income-generating sectors. 
And strong efforts must be made in conflict-affected countries to promote reconciliation and prevent the revival of violence. 
Given Liberia’s recent success in post-conflict reconstruction and human development, following a 14-year civil war, it is a fitting setting for the Panel’s deliberations. 
Since 2003, domestic vision and commitment, together with international support, have enabled Liberia to hold democratic elections, reintroduce some essential public services, reestablish a public-finance management system, and make progress in addressing endemic corruption, rebuilding public institutions, and reconstructing national infrastructure. 
The Panel should view Liberia’s ongoing efforts to secure peace, maintain stability, and initiate economic and social transformation as a blueprint for successful post-conflict transition. 
Other inspiring models can be found in Rwanda, Mozambique, and Sierra Leone. 
The Panel is committed to creating an ambitious, coherent, and practical proposal for a sustainable global development agenda. 
The process will be open, inclusive, and transparent, and will be informed by the opinions and experiences of experts and stakeholders representing young people, women, the elderly, and the disabled, as well as legislative, academic, and inter-governmental actors. 
The Panel will also take advantage of extensive online and offline efforts to engage with people worldwide and gain insight into the future that they envision. 
Their perspectives will enrich efforts to develop an agenda that addresses their priorities. 
In a world roiled by conflict, development efforts will always fall short. 
The post-2015 global development agenda must take a comprehensive approach, combining poverty-reduction measures with peace-building initiatives and strategies for economic transformation. 
In this way, global leaders can begin to lay the foundations for prosperity, justice, and sustainable development worldwide. 
Future generations are counting on it. 

A Peace of Water 
PRAGUE – The global financial crisis may be grabbing all the headlines, but resolving it should not be allowed to crowd out other vital issues. 
In the Middle East, for example, Israelis and Palestinians – as well as many others around the world – are beginning to believe that the permanent status negotiations to determine the future of Palestine are going nowhere. 
The situation may be more promising than it appears, but one cannot deny that hope for real changes on the ground has faded since talks were re-launched two years ago. 
This loss of faith is, sadly, establishing a dynamic that will itself inhibit the concessions that are needed if a permanent agreement is to be found. 
Because an impasse beckons, it is vitally important to work on those areas where intensive negotiations have the potential to produce quick results. 
Fresh water is one such area. 
Across the Middle East, water is a security issue. 
Indeed, people are now recognizing two important facts. 
First, nations faced with conflicting claims to water have historically found ways to collaborate rather than to fight. 
Even during the 60 years of conflict in the Jordan Valley, water has more often been a source of cooperation than of conflict. 
Second, water scarcity is seldom absolute, and even less often an explanation of poverty. 
To quote the United Nations Human Development Report for 2006: “There is more than enough water in the world for domestic purposes, for agriculture and for industry….Scarcity is manufactured through political processes and institutions that disadvantage the poor.” 
But almost every nation in the Middle East is using more water than arrives on a renewable basis. 
There simply is not enough water for everything these nations want to use it for, and the situation will only worsen. 
Yet, even in Palestine, the key water issue is not thirst, but arrested economic development. 
In the short term, Palestine needs more water to provide employment and income from farming; in the longer term, educational, cultural, and political changes are needed in order to develop a capacity to adapt. 
The region’s climate and geography mean that water resources are unavoidably shared. 
But only if water is shared in a rational manner that respects the region’s fragile ecology will human life be sustainable. 
Clearly, no final agreement on water will be possible until there are agreed-upon borders between the State of Israel and the State of Palestine, and some resolution of the Israeli settlements in the West Bank. 
But interim resolution of water issues does not need to wait for final resolution of the major issues. 
Finding rational ways to share and co-manage water may be easier than solving the “big” issues. 
In fact, water could help to create a climate of success that aids progress in other areas. 
The good news is that the quantity of water that is needed for drinking, cooking, other household chores and sanitation is small. 
Most water is used to grow food, so, if a nation’s economy is healthy, there is scope for saving water by importing a greater share of food, although every nation will want to maintain some assured food supply for security reasons. 
The bad news is that water, unlike land, cannot simply be divided. 
Water flows on the surface and underground. 
As it moves, it changes in quantity and quality, and it supports different ecosystems. 
Moreover, demand for water changes over time. 
Only a few percentage points of the Israeli GNP come from agriculture today; as a result, its economy requires less water than it once did. 
Exactly the same transition is likely to occur in Palestine, but it has not happened yet. 
Few Israelis deny that Palestinians need more water. 
Similarly, there is wide agreement that some water currently used by Israelis will have to be allocated to Palestinian use. 
The current negotiations will inevitably deal with rights to water, which do not seem to be very contentious anymore, and the talks can suggest various mechanisms for transfer of management in some cases and for shared management in others. 
These are eminently negotiable issues. 
A flexible and sustainable formula can certainly be found, almost surely including a transitional period that allows both sides to adjust to and account for their different water management systems, as well as for changing conditions and institutions in the future. 
The principle of a just division of water resources to meet the Palestinians’ urgent needs for additional water should be taken as a starting point. 
Everything else can be worked out. 
Shared water calls for flexible, continuous, cooperative water management, based on agreed-upon rights and responsibilities, as well as ongoing monitoring and dispute resolution mechanisms. 
One important point should be added: extensive public participation and transparency, in terms of both process and outcomes, will be key to successful management. 
We believe that progress in the peace process and in finding solutions for water issues between Israel and Palestine would also help to unblock progress in the broader region, between the parties on the Jordan, the Orontes, the Tigris, and the Euphrates rivers. 
Water can be a catalyst for regional cooperation, opening the way to a future comprehensive “Community of Water and Energy” to enhance the human environment. 
In such a forum, water and solar energy in tandem could help to move the Middle East from conflict to collaboration. 
The cost of inaction or merely pretending to act is likely to be high for everyone in the Middle East. 
Future water policy should no longer be seen as an extension of current policy, but rather as a new opportunity. 
Water is the essence of life. 
People in Palestine and in Israel need it; people in the region need it. 
Cooperating to secure it is the only way forward. 

A People’s Economics 
NEW HAVEN – We are in the midst of a boom in popular economics: books, articles, blogs, public lectures, all followed closely by the general public. 
I recently participated in a panel discussion of this phenomenon at the American Economic Association annual meeting in Denver. 
An apparent paradox emerged from the discussion: the boom in popular economics comes at a time when the general public seems to have lost faith in professional economists, because almost all of us failed to predict, or even warn of, the current economic crisis, the biggest since the Great Depression. 
So, why is the public buying more books by professional economists? 
The most interesting explanation I heard was that economics has become more interesting, because it no longer seems to be a finished and closed discipline. 
It is no fun to read a book or article that says that economic forecasting is best left to computer models that you, the general reader, would need a Ph.D. to understand. 
And, in truth, the public is right: while there is a somewhat scientific basis for these models, they can go spectacularly wrong. 
Sometimes we need to turn off autopilot and think for ourselves, and when a crisis occurs, use our best human intellect. 
The panelists all said, in one way or another, that popular economics facilitates an exchange between specialized economists and the broader public – a dialogue that has never been more important. 
After all, most economists did not see this crisis coming in part because they had removed themselves from what real-world people were doing and thinking. 
Successful popular economics involves the reader or listener, in some sense, as a collaborator. 
That, of course, means that economists must be willing to include new and original theories that are not yet received doctrine among professional specialists. 
Until recently, many professional economists would be reluctant to write a popular book. 
Certainly, it would not be viewed favorably in considering a candidate for tenure or a promotion. 
Since it does not include equations or statistical tables, they would argue, it is not serious work that is worthy of scholarly attention. 
Worse than that, at least until recently, a committee evaluating an economist would likely think that writing a popular economics book that does not repeat the received wisdom of the discipline might even be professionally unethical. 
Imagine how the medical profession would view one of its members who recommended to the general public some therapy that had not yet passed scrutiny from the appropriate authorities. 
Medical professionals know how often seemingly promising new therapies turn out, after careful study, not to work, or even to be harmful. 
There is a rigorous process of scholarly review of proposed new therapies, associated with professional journals that uphold high research standards. 
Circumventing that process and promoting new, untested ideas to the general public is unprofessional. 
In the decades prior to the current financial crisis, economists gradually came to view themselves and their profession in the same way, encouraged by research trends. 
For example, after 1960, when the University of Chicago started creating a Univac computer tape that contained systematic information about millions of stock prices, a great deal of scientific research on the properties of stock prices was taken as confirming the “efficient markets hypothesis.” 
The competitive forces that underlie stock exchanges were seen to force all securities prices to their true fundamental values. 
All trading schemes not based on this hypothesis were labeled as either misguided or outright frauds. 
Science had triumphed over stock-market punditry – or so it seemed. 
The financial crisis delivered a fatal blow to that overconfidence in scientific economics. 
It is not just that the profession didn’t forecast the crisis. 
Their models, taken literally, sometimes suggested that a crisis of this magnitude couldn’t happen. 
One way to interpret this is that the economics profession was not fully accounting for the economy’s human element, an element that can’t be reduced to mathematical analysis. 
The relatively few professional economists who warned of the current crisis were people, it seems, who not only read the scholarly economics literature, but also brought into play more personal judgment: intuitive comparisons with past historical episodes; conclusions about speculative trading, price bubbles, and the stability of confidence; evaluations of the moral purposes of economic actors; and impressions that complacency had set in, lulling watchdogs to sleep. 
These were judgments made by economists who were familiar with our business leadership – their inspirations, beliefs, subterfuges, and rationalizations. 
Their views could never be submitted to a scholarly journal and evaluated the way a new medical procedure is. 
There is no established scientific procedure that could prove their validity. 
Of course, economics is in many ways a science, and the work of our scholars and their computer models really does matter. 
But, as the economist Edwin R. A. Seligman put it in 1889, “Economics is a social science, i.e., it is an ethical and therefore an historical science….It is not a natural science, and therefore not an exact or purely abstract science.” 
To me, and no doubt to the other panelists, part of the process of pursuing the inexact aspects of economics is speaking honestly to the broader public, looking them in the eye, learning from them, reading the emails they send, and then searching one’s soul to decide whether one’s favored theory is really close to the truth. 

A Phantom Recovery? 
NEW YORK – Where is the American and global economy headed? 
Last year, there were two sides to the debate. 
One camp argued that the recession in the United States would be V-shaped – short and shallow. 
It would last only eight months, like the two previous recessions of 1990-1991 and 2001, and the world would decouple from the US contraction. 
Others, including me, argued that, given the excesses of private-sector leverage (in households, financial institutions, and corporate firms), this would be a U-shaped recession – long and deep. 
It would last about 24 months, and the world would not decouple from the US contraction. 
Today, 20 months into the US recession – a recession that became global in the summer of 2008 with a massive re-coupling – the V-shaped decoupling view is out the window. 
This is the worst US and global recession in 60 years. 
If the US recession were – as most likely - to be over at the end of the year, as is likely, it will have been three times as long and about fives times as deep – in term of the cumulative decline in output – as the previous two. 
Today’s consensus among economists is that the recession is already over, that the US and global economy will rapidly return to growth, and that there is no risk of a relapse. 
Unfortunately, this new consensus could be as wrong now as the defenders of the V-shaped scenario were for the past three years. 
Data from the US – rising unemployment, falling household consumption, still declining industrial production, and a weak housing market – suggest that America’s recession is not over yet. 
A similar analysis of many other advanced economies suggests that, as in the US, the bottom is quite close but it has not yet been reached. 
Most emerging economies may be returning to growth, but they are performing well below their potential. 
Moreover, for a number of reasons, growth in the advanced economies is likely to remain anemic and well below trend for at least a couple of years. 
The first reason is likely to create a long-term drag on growth: households need to deleverage and save more, which will constrain consumption for years. 
Second, the financial system – both banks and non-bank institutions – is severely damaged. 
Lack of robust credit growth will hamper private consumption and investment spending. 
Third, the corporate sector faces a glut of capacity, and a weak recovery of profitability is likely if growth is anemic and deflationary pressures still persist. 
As a result, businesses are not likely to increase capital spending. 
Fourth, the re-leveraging of the public sector through large fiscal deficits and debt accumulation risks crowding out a recovery in private-sector spending. 
The effects of the policy stimulus, moreover, will fizzle out by early next year, requiring greater private demand to support continued growth. 
Domestic private demand, especially consumption, is now weak or falling in over-spending countries (the US, the United Kingdom, Spain, Ireland, Australia, New Zealand, etc.), while not increasing fast enough in over-saving countries (China, Asia, Germany, Japan, etc.) to compensate for the reduction in these countries’ net exports. 
Thus, there is a global slackening of aggregate demand relative to the glut of supply capacity, which will impede a robust global economic recovery. 
There are also now two reasons to fear a double-dip recession. 
First, the exit strategy from monetary and fiscal easing could be botched, because policymakers are damned if they do and damned if they don’t. 
If they take their fiscal deficits (and a potential monetization of these deficits) seriously and raise taxes, reduce spending, and mop up excess liquidity, they could undermine the already weak recovery. 
But if they maintain large budget deficits and continue to monetize them, at some point – after the current deflationary forces become more subdued – bond markets will revolt. 
At this point, inflationary expectations will increase, long-term government bond yields will rise, and the recovery will be crowded out. 
A second reason to fear a double-dip recession concerns the fact that oil, energy, and food prices may be rising faster than economic fundamentals warrant, and could be driven higher by the wall of liquidity chasing assets, as well as by speculative demand. 
Last year, oil at $145 a barrel was a tipping point for the global economy, as it created a major income shock for the US, Europe, Japan, China, India, and other oil-importing economies. 
The global economy, barely rising from its knees, could not withstand the contractionary shock if similar speculative forces were to drive oil rapidly towards $100 a barrel. 
So the end of this severe global recession will be closer at the end of this year than it is now, the recovery will be anemic rather than robust in advanced economies, and there is a rising risk of a double-dip recession. 
The recent market rallies in stocks, commodities, and credit may have gotten ahead of the improvement in the real economy. 
If so, a correction cannot be too far behind. 

A Pig’s Breakfast 
LONDON – The Greek debt problem has been poorly handled by Europe’s decision-makers. 
European Union heads of government, and the European Central Bank, initially rejected the idea of involving the International Monetary Fund, but without a fall-back plan. 
It is hard to avoid the conclusion that part of the motivation for this was French President Nicolas Sarkozy’s reluctance to see Dominique Strauss-Kahn, the IMF’s managing director, ride in from Washington to the rescue of the eurozone. 
Strauss-Kahn is, of course, likely to be Sarkozy’s Socialist rival in the next French presidential election. 
Is Greece the “canary in the coalmine” – the warning that tells us that Europe’s monetary union is on the verge of dissolution, with the other three of the famous PIGS (Portugal, Italy, and Spain) lining up like dominoes to fall? 
George Soros fears this might be the case, and gives the eurozone only a 50% chance of survival in its present form. 
Certainly, the episode highlighted flaws in the way the euro’s governance – flaws that are no surprise to some of those involved in creating the common currency. 
Helmut Kohl, one of the euro’s principal parents, said in 1991 that “the idea of sustaining an economic and monetary union over time without political union is a fallacy.” 
Margaret Thatcher, from the opposite camp, said in her memoirs: “I believe the European single currency is bound to fail, economically, politically and indeed socially, although the timing, occasion and consequences are all still unclear.” 
There may now be a market for a Greek translation of her book. 
Although they might not agree with either of these two apocalyptic predictions, many of Europe’s leaders are coming round to the view that there is a need for change, and that the Greek case has revealed a flaw at the center of the project. 
Sarkozy, for example, has revived a long-standing French argument for some form of economic government in Europe as a counterweight to the ECB. 
The French usually advance this proposal to get some purchase on the ECB’s monetary decisions, which they sometimes consider hostile to growth and employment, or in order to prevent other countries from maintaining unfair tax policies (“unfair” usually being defined as a tax rate lower than the relevant French one). 
In the past, the Germans brushed these arguments aside, but now they are a little more receptive. 
German Finance Minister Wolfgang Schäuble, however, focuses on the issue of distressed members, and has advanced a proposal for a European Monetary Fund to provide assistance to countries in Greek-style difficulties, roughly on the IMF model. 
This idea has logic behind it. 
The drawback is that it would require a change in the European treaties, which in turn requires a unanimous decision by 27 countries, and positive votes in referendums in some of them, including the United Kingdom if David Cameron’s Conservatives win the upcoming general election there. 
In the aftermath of the negative referendum votes in France, the Netherlands, and Ireland on European constitutional reform, it is close to inconceivable that EU heads of government would agree to set off down that path again. 
Certainly nothing could be achieved on a timetable that would offer any comfort to the other PIGS. 
They would all be bacon and sausages before any agreement was reached. 
So, in the short run, the IMF will have to be used, if that kind of support is needed, and Sarkozy will have to swallow his pride. 
But is an EMF really what is required in the long run? 
I think not. 
Nor do I think that a European economic government is strictly necessary. 
What is needed, though, is a collective agreement on fiscal discipline, and a revival of the Stability and Growth Pact, which was unwisely abandoned – ironically when the French and Germans found its rules too constraining. 
Europe’s leaders should refer to a paper by Otmar Issing, “The Euro – A Currency Without a State,” published in December 2008, before the debt crisis erupted. 
Issing, the ECB’s chief economist in its formative years, knows more about how a monetary union operates in practice than any man alive. 
He maintains that “the Stability and Growth Pact contains all the rules that are necessary for Monetary Union to function. 
There is no need for coordination of macroeconomic policies to go any further than this.” 
Europe does not need the French plan for coordination of tax policies, or another IMF, but there does need to be fiscal discipline to prevent other countries from free riding, as the Greeks seem to have done. 
They apparently assumed that the rest of Europe would overlook continuing high deficits, and that, as eurozone members, the market would consider their debt to be just like German bunds, though issued by friendly and welcoming people in an agreeable climate, and with a glass of ouzo on the side. 
The original Pact envisaged a 3%-of-GDP cap on fiscal deficits, save in exceptional circumstances. 
Investors well understand that we are in such circumstances now, so it will take some time to get back to that level. 
But that should be the clear aim, with IMF assistance along the way to provide interim funding where necessary and political cover for governments obliged to take tough decisions on public spending and taxation. 
Fiscal discipline does not sound as visionary as “economic government.” 
But the EU has suffered from a surfeit of “vision” and a deficit of practical budgetary measures. 
It is time to redress that balance, or Soros’s gloomy prognosis may become reality. 

A Pivot to the People 
PRINCETON – On February 1, the United Nations Security Council met to consider the Arab League’s proposal to end the violence in Syria. 
Secretary of State Hillary Clinton represented the United States. 
Midway through her remarks, she began speaking not to the Syrian ambassador, who was in the room, or even the Syrian government, but directly to the Syrian people. 
She said that change in Syria would require Syrians of every faith and ethnicity to work together, protecting and respecting the rights of minorities. 
Addressing those minorities, she continued: “We do hear your fears, and we do honor your aspirations. 
Do not let the current regime exploit them to extend this crisis.” 
She told Syria’s business, military, and other leaders that they must recognize that their futures lie with the state, not with the regime. “Syria belongs to its 23 million citizens, not to one man or his family.” 
Speaking directly to citizens – seeing a country’s people, as well as its government – is not just a rhetorical device. 
While many foreign-policy pundits have focused on the US “pivot to Asia,” Clinton has also executed a less-publicized, but no less important, pivot to the people. 
She has introduced policies, programs, and institutional reforms designed to support government-to-society and society-to-society diplomacy, alongside traditional government-to-government relations. 
These initiatives do not get headlines, but they will gradually transform much of American foreign policy. 
In January, the State Department unveiled a new “super-office” of Civilian Security, Democracy, and Human Rights, under the leadership of Under-Secretary Maria Otero. 
The office brings together agencies that focus on international law enforcement, counter-terrorism, and reconstruction and stabilization with those charged with advancing democracy, human rights, and humanitarian assistance to refugees and migrants. 
Otero explains the logic behind the initiative in terms of “protecting individuals.” 
That, in turn, requires “not just engaging state to state,” but also working “with players and actors outside of the traditional [channels] we’ve engaged in.” 
Viewed from this perspective, countering terrorism includes rebutting terrorist propaganda with a strategic communications campaign. 
Countering narco-gang violence includes working with Mexican telecommunications mogul Carlos Slim to develop tools that allow ordinary citizens to report violence anonymously by text message and enable police to map the results. 
Strengthening democracy means working with the Kenyan developers of a crisis-mapping platform that allows anyone with a cell phone to text information about election fraud or violence to a central monitoring station. 
On a country-by-country basis, pivoting to the people means engaging with Egypt’s bloggers as well as with the ruling Supreme Council of the Armed Forces; convening young entrepreneurs in Tunisia, Algeria, and Morocco and connecting them to funding and mentoring; and using social media in Russia to rebut government efforts to smear the US ambassador. 
And, working at an official level, it means co-sponsoring with Brazil the Open Government Partnership, which brings together governments committed to increasing transparency, accountability, and citizen participation, and uses mutual peer pressure and open reporting to hold them to their commitments. 
Thinking about countries in these comprehensive terms also provides a different strategic perspective. 
Clinton has created a raft of new positions at the State Department to spur outreach to different social segments. 
The strategies and programs developed by the Ambassador for Global Women’s Issues, the Special Adviser for Global Youth Issues, the Senior Adviser for Civil Society and Emerging Democracies, the Special Representative for Outreach to Muslim Communities, the Special Representative for Global Partnerships, and the Special Representative for Commercial and Business Affairs often present a very different face of the US. 
As a result, Clinton has launched an actual strategic dialogue with civil society. 
For example, Ambassador Melanne Verveer has attended more than 1,000 events around the world focused on empowering women in areas ranging from peace negotiations to farming. 
Similarly, she has launched programs such as mWomen, designed to expand and support mobile technology that increases women’s independence, security, and access to health care and vital knowledge. 
The Office of Global Youth Affairs is building a local youth council at every US embassy around the world, to advise and help to implement embassy programming aimed at local youth. 
Much of the programming aimed at youth, women, entrepreneurs, diasporas, technologists, and other social groups is partly funded and conducted by the private sector. 
Indeed, the Obama administration’s National Security Strategy mentions “public-private partnerships” more than 30 times. 
Clinton created the Global Partnership Initiative to build as many coalitions, networks, and partnerships as possible with corporations, foundations, NGOs, universities, and other civic organizations. 
Here, the pivot to the people includes the American people: the dynamism, creativity, and resources of American business and non-profit organizations already engaged around the world. 
One privately-funded initiative spearheaded by the State Department will send 300 dogwood trees to Japan this spring, to be planted in the tsunami-affected region and in Tokyo to express the American people’s support for the Japanese people; another will send English teachers throughout Southeast Asia. 
After participating in the Friends of Syria conference in Tunis, Clinton convened a town hall meeting with Tunisian youth. 
In her opening remarks, she told her audience that “young people are at the heart of today’s great strategic opportunities and challenges.” 
Speaking about her lifetime efforts to put “women’s empowerment on the international agenda,” she added, “It’s time to put youth empowerment there as well.” 
The implications of all of this activity, which Clinton calls “twenty-first-century statecraft,” are profound. 
From now on, US diplomatic relations with other countries will engage directly with their people and connect them to the American people as much as possible. 
From the perspective of US diplomats, the people of every country stand on the same footing as their government. 
That assumption is the heart of democracy; it is a revolution for diplomacy. 

A Post-Nuclear Euro-Atlantic Security Order 
WASHINGTON, DC – As we enter 2011, the Euro-Atlantic region is a study in strategic contrasts. 
Over the past 20 years, no geo-political space has undergone as dramatic a transformation as that between the Atlantic and the Urals. 
In our lifetimes, we have seen a welcome change from the darkest days of the Cold War, when a devastating conventional and nuclear war in Europe was a real possibility, to a new era in which no state faces this type of existential threat. 
But, despite these positive developments, the two largest powers in the region – the United States and Russia – each still possesses thousands of nuclear weapons, accounting for more than 90% of the world’s nuclear inventory. 
Many of these weapons remain deployed or designed for use within the Euro-Atlantic region. 
Reduction and elimination of this Cold War-era nuclear infrastructure is the largest piece of unfinished business from that bygone time. 
The continuing existence of large strategic nuclear forces deployed on high alert, and of tactical nuclear weapons deployed in certain NATO states and Russia, creates a risk of accidental, unauthorized, or mistaken use, and of terrorist groups acquiring these assets. 
So security vigilance is essential. 
To meet this challenge, the three of us – building on the action plan adopted by consensus at the 2010 Non-Proliferation Treaty (NPT) Review Conference – have endorsed a series of urgent, practical steps towards the long-term goal of a world free of nuclear weapons. 
These include: 
· increasing assured warning and decision times for the launch of nuclear-armed ballistic missiles; 
· developing cooperative missile-defense and early-warning systems; 
· ensuring the highest possible standards of security for nuclear weapons and materials; 
· beginning a dialogue on tactical nuclear weapons involving Russia, the US, and NATO; 
· adopting a process to bring the Comprehensive Test Ban Treaty into effect; 
· developing international and multilateral approaches to manage the risks of fuel production for civilian nuclear power; and 
· further reductions in US and Russian nuclear forces. 
As former US Secretary of State George P. Shultz, former US Secretary of Defense William J. Perry, former US Secretary of State Henry A. Kissinger, and former US Senator Sam Nunn put it in 2007, “Without the bold vision [of a nuclear weapons-free world], the actions will not be perceived as fair or urgent. 
Without the actions, the vision will not be perceived as realistic or possible.” 
Perhaps the most crucial step toward realizing this vision is to redouble our efforts to resolve regional confrontations and conflicts that give rise to new nuclear powers. 
The great swath of states stretching from North America across Europe through Russia has a vital role to play in stabilizing an increasingly fragmented and stressed international order. 
These states can play this role, however, only if first they transform this geographic space into a genuinely inclusive and vibrant security community. 
Failing that (and we are failing today) the Euro-Atlantic states and their organizations will settle for suboptimal – and too often utterly inadequate – responses to the twenty-first century’s security challenges, including the threat of nuclear proliferation. 
Lately, several national leaders, including the Russian and US presidents and NATO secretary-general, have embraced the idea of a Euro-Atlantic security community, and begun stressing the importance of fashioning a stronger and more inclusive European security order. 
The timing could not be better, as the Euro-Atlantic family has entered a critical period. 
On November 19-20, NATO heads of states approved a new “strategic concept” to guide the organization for the next decade At the same time Russian President D. Medvedev and his NATO counterparts issued a joint statement, endorsing the first Joint Review of 21st Century Common Security Challenges and deciding to resume Threat Missile Defence Cooperation. 
Two weeks later, the Organization for Security and Cooperation in Europe (OSCE) heads of state assembled in Astana, Kazakhstan, to help shape the OSCE’s next stage of development. 
Joint action on nuclear-threat reduction must be a critical element in moving the Euro-Atlantic nations toward a level of stability and strength and allow them to exercise badly needed global leadership. 
Achieving a genuinely collaborative approach to missile-defense matters will address a common threat and help remove misgivings that are blocking progress toward a common security space. 
Similarly, the Euro-Atlantic states can mobilize behind efforts to strengthen the International Atomic Energy Agency’s safeguards system, which ensures the non-diversion of peaceful nuclear programs, in order to foster cooperation on countering the threat of nuclear terrorism, and to develop new mechanisms to protect jointly critical infrastructure from cyber attack. 
Such actions are crucial to these states’ national security and global efforts to mitigate threats. 
Pursuing arrangements that increase warning and decision-making time for all countries in the Euro-Atlantic region would introduce stability into the NATO-Russia relationship. 
Adjustments in operational doctrine, as applied to strategic, tactical, and conventional forces, would constitute a giant step toward ending the relationship’s militarized framework. 
This is only a partial list of what must be done if governments are serious about building a stronger, inclusive European security order, one where the roles and risks of nuclear weapons are reduced, and ultimately eliminated. 
The three of us are working with a distinguished group from all corners of the Euro-Atlantic region to develop these and other concrete steps that are essential to creating a genuine security community, including its economic, energy, and environmental dimensions. 
NATO, OSCE, and other key regional institutions must give this concept and process their essential support. 

A President in the Dock 
NEW YORK – In a way, the stir aroused by the decision by the International Criminal Court (ICC) to indict Sudan’s President Omar al-Bashir for war crimes and crimes against humanity in Darfur is a surprise. 
After all, the Court has no means of its own to arrest anyone in Sudan, much less a head of state who commands the country’s armed forces. 
Nor is there any prospect that someone else will intervene in Sudan to make an arrest. 
While the ICC’s chief prosecutor, Luis Moreno-Ocampo, expresses confidence that Bashir will be brought to justice, it is unclear how this will happen. 
But it could. 
Despite the ICC’s seeming powerlessness, many governments’ leaders are engaged in strenuous efforts to block the indictment. 
They do not seem concerned that the charges are unfair; rather, they appear to be demonstrating solidarity with a fellow head of state. 
Those denouncing the attempt to put Bashir on trial include the large blocs of countries that are members of the Organization of the Islamic Conference and the African Union, together with such powerful states as China and Russia. 
One can only guess whether some of those joining this effort are motivated by concern that they themselves may some day face charges like those leveled at Bashir by the ICC judges. 
Though Bashir may be able to avoid arrest simply by limiting his international travel, the commotion provoked by the indictment is not irrational. 
The charges against him have a powerful stigmatizing effect. 
The fact that a panel of judges representing the 108 governments that are parties to the ICC has accused Bashir of principal responsibility for the crimes committed in Darfur during the past six years undermines the legitimacy of his continued rule. 
Those crimes have caused more than 300,000 deaths, and have forcibly displaced at least another 2.7 million people. 
Even if Bashir’s fellow heads of state succeed in their effort to persuade the United Nations Security Council to defer prosecution – which is highly unlikely – the charges will continue to hang over Bashir’s head unless and until he stands trial. 
In 1999, an international criminal tribunal indicted another sitting head of state, Slobodan Milosevic of the Federal Republic of Yugoslavia. 
Though he seemed secure at the time, a year and a half later he was sent to The Hague to stand trial. 
Similarly, in 2003, an international criminal tribunal indicted Liberia’s then president, Charles Taylor. 
He had to flee Liberia a few months later and initially received asylum in Nigeria, but is now on trial in The Hague. 
When those indictments were issued, no one could have predicted how events would unfold; in retrospect, it is evident that the indictments’ delegitimizing effects had important consequences. 
Of course, the ICC’s prosecutor and judges are themselves taking a substantial risk in the indictment of Bashir. 
The Court is still in its infancy, and antagonizing the many government leaders expressing solidarity with him could jeopardize its future. 
Yet it should be recognized that the Court’s personnel are carrying out their duties. 
The treaty establishing the ICC explicitly states that heads of state do not enjoy immunity. 
And the Security Council referred the Darfur case to the Court in 2005. 
This was an investigation that had to be conducted, and those found to have the highest level of responsibility for the crimes had to be indicted. 
Many of those now objecting to the prosecution of Bashir participated in the decisions leading to the indictment. 
If the ICC’s indictment now causes them discomfort, that is only because they did not anticipate that the Court would carry out the responsibilities that they themselves assigned to it. 

A Press Without Principles 
NEW YORK – Julian Assange, the founder of WikiLeaks, is in the news again, this time after former Swiss banker Rudolf Elmer turned over to him confidential records on roughly 2,000 wealthy individuals that Elmer claims contain evidence of money laundering and tax evasion. 
Elmer was quickly convicted of violating Switzerland’s bank-secrecy law, but few journalists have demanded that Assange be prosecuted for his role in the affair. 
That, apparently, happens only in the United States. 
There, in the midst of the debate over WikiLeaks’ ongoing release of classified US State Department cables, and as the government threatens Assange with extradition and prosecution, respected journalists are running for cover. 
One would expect lead editorials by The New York Times, The Wall Street Journal, and USA Today, not to mention all major television outlets, defending WikiLeaks’ right to publish. 
Instead, all we have heard is an awkward, deafening, and breathtakingly hypocritical silence – or worse. 
Most American journalists fully understand that Assange did not illegally obtain classified material; the criminally liable party is whoever released the material to the site. 
He is not the equivalent of Daniel Ellsberg, who in 1971 illegally released the Pentagon Papers, the US military’s secret history of the Vietnam War; rather, he is analogous to The New York Times, which made the brave and correct decision to publish that material. 
Moreover, American journalists know perfectly well that they, too, traffic in classified material constantly – indeed, many prominent US reporters have built lucrative careers doing exactly what Assange is doing. 
Any dinner party in media circles in New York or Washington features journalists jauntily showing prospective employers their goods, or trading favors with each other, by disclosing classified information. 
On CNN recently, a long pause followed when I asked legal analyst Jeffrey Toobin – who was calling for Assange’s arrest – if he had really never handled classified information. 
That is what serious journalists do, after all: their job is to find out what government officials do not want revealed. 
American journalists also know that the government classifies information mostly to spare it embarrassment, or for expediency, rather than because it has genuine national-security concerns. 
Many of the Washington Post reporter Bob Woodward’s bestselling books, which have made him America’s highest-paid print journalist, are based on classified information. 
So where are the calls for Woodward’s arrest? 
Why do all these reporters, who get praise and money for doing what Assange has done, maintain a cowardly silence (at best) while a fellow publisher faces threats of extradition, banning, and espionage charges (which can incur the death penalty), not to mention calls for his assassination? 
One reason might be the sexual-misconduct charges against Assange. 
But any serious journalist knows that the two issues must not be conflated. 
The right to free expression applies to rogues and scoundrels, sleazy personalities, and even criminals. 
Indeed, the most famous free-speech cases – the ones that are supposed to showcase America’s strength and moral power – involve the protection of speech that most decent people hate. 
So, again: why have US journalists and editors turned Assange into a pariah? 
According to Nancy Youssef, a journalist for McClatchy Newspapers, the Freedom of the Press Committee of the Overseas Press Club of America in New York City declared Assange to be “not one of us.” 
The Associated Press refuses to comment on him. 
And even the National Press Club decided not to speak publicly about the possibility that Assange may be charged with a crime. 
Instead, it has fallen to foreign press organizations to defend him. 
The Assange case shows that no coup is needed to close down an open society. 
You need only accomplish a few key critical tasks. 
One is to intimidate journalists, say, by accusing a high-profile reporter of “treason” or endangering national security through his reporting, and then threatening him with torture, a show trial, or indefinite detention. 
No mass arrests or further threats are required, because other reporters immediately start to police and censor themselves – and to attack the “traitor” in their midst. 
There is another sense in which, from the perspective of establishment US journalists, Assange is “not one of us.” 
American journalism’s business model is collapsing; the people who should be defending Assange are facing salary cuts or unemployment, owing in large part to the medium that he represents. 
These journalists’ self-interested prejudice against a medium in which they are not the gatekeepers prevents them from conceding that Assange is a publisher, rather than some sort of hybrid terrorist blogger. 
In this, paradoxically, they have become like the outraged US government officials who are now threatening Assange, and who also are no longer able to control the flow of information. 
In their behavior toward Assange, the US government and major American media are lashing out at the face of a future in which there are no traditional gatekeepers, and all institutions live in glass houses. 
This is why pursuing Assange is futile and absurd. 
Even if he is locked up forever, the world of the future is a WikiLeaks world. 
Trying to convict him is like trying to convict the first person who installed a telephone. 
In five years, every major institution could be held accountable by its own version of WikiLeaks – so that taxpayers, shareholders, members of university communities, and so on, can find out what the traditional gatekeepers prefer to hide. 
When bullied, journalists can protect themselves only by fighting back – as a group. 
And when a technology-led change is inevitable, integrating it into an open society should be one of journalism’s chief tasks. 
But that mission now seems lost in America. 

A Primer for Pandemics 
A few times each year, the world is reminded that a pandemic threat is immanent. 
In 2003, it was SARS. 
Today, it is a potential avian virus similar to the one that killed 30 million people after 1914. 
“Bird flu” has already shown that it can jump from fowl to humans, and now even to cats, which indicates that it might be the next global killer. 
But there are many other potential pandemics, and many are not even viruses. 
Bacteria, prions, parasites, and even environmental factors could suddenly change in a way that slays us. 
It is widely predicted that when this happens, the economic and human losses will exceed that of any previous war. 
Indeed, it is humbling to remember that some of history’s most deadly invasions were carried out by single-cell organisms, such as cholera, bubonic plague, and tuberculosis. 
Countries with the resources to do so are making resistance plans against pandemics – limited strategies that would protect their own citizens. 
Most governments are hoping that early detection will make containment possible. 
Containment depends heavily on vaccines, but vaccines are only part of the answer. 
While they are a good defense against many viruses, each vaccine is highly specific to the threat. 
Viruses are parasites to cells, and each virus attacks a particular type of cell. 
The virus is shaped so that it can drill into a particular feature of that cell and inject parts of itself inside, confusing the cell into making more viruses and destroying itself in the process. 
With their very specific forms, the most effective anti-viral vaccines must be designed for a narrow range of factors. 
Sometimes the tailored nature of viruses works in our favor. 
For example, they usually find it difficult to jump between species, because they would have to change their structure. 
But if large numbers of a host – say, birds – encounter a great number of people, eventually the virus will find a way to prosper in a new type of cell. 
Birds are the greatest concern today only because the spread is easy to see. 
But AIDS jumped from monkeys and several types of flu jumped from swine. 
Deadly mutations of any kind need to be identified urgently, so that an effective vaccine can be designed before the strain becomes comfortable in the human body. 
Unfortunately our present methods of detection are not sensitive enough. 
This is even more worrying when you realize that scientists should also be monitoring bacteria, prions, and parasites. 
There are more bacteria than any other life form. 
Many live harmlessly in our bodies and perform useful functions. 
They evolve and adapt easily, which means that they learn to sidestep our drugs over time. 
Bacteria should be checked for two types of mutation: adaptation by a hostile form that enables it to become super-immune to drugs, or a deadly mutant strain that appears in one of the multitude of “safe” bacteria. 
Prions are a relatively new discovery. 
They are made from proteins similar to those that the body uses during healthy operations, which means that they are able to fool the body’s tools into making more prions. 
They have only recently been recognized as the cause of several infectious diseases, including mad cow disease and Creutzfeldt-Jakob Disease, which kill by crowding out healthy brain cells. 
Many nerve, respiratory and muscle diseases might also be caused by prions. 
Finally, parasites, simple animals that infect us, are already classified as pandemics. 
Malaria afflicts 300 million people and is the world’s biggest killer of children. 
Many parasites are worms: hookworm (800 million people infected), roundworm (1.5 billion), schistosomes (200 million), and the worm that causes Elephantiasis (150 million). 
There are also antagonists that are currently ignored. 
Environmental chemicals and particulates might warrant their own categories. 
Or consider combinations of problems, such as these chemical infectors mixing with airborne pollens, and apparently pushing up incidences of asthma. 
New fungal infections are even scarier and might be harder to treat. 
The bottom line is that we can’t predict where the threat will emerge, so we need a distributed, intelligent detection system. 
In practical terms, how should it be built? 
“Detectors” would have to be expert enough to know when an ordinary-looking symptom is actually an emergency. 
They would be located everywhere, with an emphasis on vulnerable regions. 
Initial warning signs of a pandemic are most likely to appear in the developing world, but detection nodes should be positioned in every country, with the least possible expense. 
This is not as difficult as it sounds. 
The key is to harness existing infrastructure. 
Medical infrastructure exists everywhere, in some form. 
It also tends to be the least corrupt of institutions in regions where that is a problem. 
Medical centers and clinics would be expected to investigate the cause of ailments in a large number of their patients, even in cases where the symptoms seem common. 
A small amount of additional scientific expertise and lab equipment would need to be added to a public health system that serves ordinary needs. 
Enhancing existing resources would be effective for two reasons. 
First, illness is more likely to be reported in a city hospital than at a specialist institute. 
Second, the investment would boost latent public health in that region. 
For poor regions, investment in equipment and training would have to come from wealthier counterparts. 
Rich countries could justify the expense in terms of the savings that would result from early detection of a major threat. 
Tropical climates and urban slums are humanity’s front line against pandemics, and they should be equipped properly. 
Public health is an important asset for any nation. 
With so much at stake, it makes sense to place sentinels near every swamp, city, public market, and farmyard on earth. 


A Private Affair? 
Can a public figure have a private life? 
Recent events in three countries have highlighted the importance of this question. 
In the French presidential election, both candidates tried to keep their domestic life separate from their campaign. 
Ségolène Royal is not married to François Hollande, the father of her four children. 
When asked whether they were a couple, Royal replied, “Our lives belong to us.” 
Similarly, in response to rumors that President-elect Nicholas Sarkozy’s wife had left him, a spokesman for Sarkozy said, “That’s a private matter.” 
The French have a long tradition of respecting the privacy of their politicians’ personal lives, and French public opinion is more broad-minded than in the United States, where an unwed mother of four would have no chance of being nominated for the presidency by a major party. 
Indeed, last month, Randall Tobias, the top foreign aid adviser in the US State Department, resigned after acknowledging that he had used an escort service described as providing “high-end erotic fantasy” – although Tobias said he only had a massage. 
In Britain, Lord John Browne, the chief executive who transformed BP from a second-tier European oil company into a global giant, resigned after admitting he had lied in court about the circumstances in which he had met a gay companion (apparently, he met him through a male escort agency). 
In resigning, he said that he had always regarded his sexuality as a personal matter, and he was disappointed that a newspaper – The Mail on Sunday – had made it public. 
Candidates for public office, and those holding high administrative or corporate positions, should be judged on their policies and performance, not on private acts that are irrelevant to how well they carry out, or will carry out, their public duties. 
Sometimes, of course, the two overlap. 
The Mail on Sunday and its sister paper, The Daily Mail, justified their publication of revelations by Browne’s former companion on the grounds that they include allegations that Browne had allowed him to use corporate resources for the benefit of his own private business. 
The company denied that there was any substance to these allegations. 
As the administrator of the US Agency for International Development, Tobias implemented the Bush administration’s policy that requires organizations working against HIV/AIDS to condemn prostitution if they are to be eligible for US assistance. 
That policy has been criticized for making it more difficult to assist sex workers who are at high risk of contracting and spreading HIV/AIDS. 
Arguably, the public has an interest in knowing if those who implement such policies are themselves paying for sexual services. 
Where there is no suggestion that a matter of personal morality has had an impact on the performance of a business executive or government official, we should respect that person’s privacy. 
But what about candidates for political leadership? 
Since politicians ask us to entrust them with sweeping powers, it can be argued that we should know as much as possible about their morality. 
For example, we might reasonably ask whether they pay their fair share of taxes, or inquire about their charitable donations. 
Such things tell us something about their concern for the public good. 
Similarly, the revelation three years ago that the then-Australian opposition leader and aspiring prime minister, Mark Latham, had assaulted a taxi driver and broken his arm in a dispute about a fare was relevant for those who believe that a nation’s leader should be slow to anger. 
But does the legitimate interest in knowing more about a politician extend to details about personal relations? 
It is hard to draw a line of principle around any area and determine if knowledge of it will provide relevant information about a politician’s moral character. 
The problem is that the media have an interest in publishing information that increases their audience, and personal information, especially of a sexual nature, will often do just that. 
Even so, whether people choose to marry or not, whether they are heterosexual or homosexual, even whether they pay to fulfill their erotic fantasies or have fantasies they can fulfill at no cost, tells us little about whether they are good people who can be trusted with high office – unless, of course, they say one thing while doing another. 
If we can cultivate a wider tolerance of human diversity, politicians, business leaders, and administrators would be less fearful of “exposure,” because they would realize that they have done nothing that they must hide. 
Prostitution is illegal in most of the US, including Washington DC, and this could be one reason why Tobias had to resign. 
But when New Jersey Governor John Corzine was involved in a serious road accident last month, it became known that he violated his own state’s law by not wearing his seat belt. 
By any sensible measure, Corzine’s violation of the law was more serious than that of Tobias. 
Laws requiring the wearing of seatbelts save many lives. 
Laws prohibiting prostitution do no evident good at all, and may well do harm. 
Yet no one suggested that Corzine should resign because of his foolish and illegal act. 
In the US, at least, breaching sexual norms still brings with it a moral opprobrium that is unrelated to any real harm it may do. 

A Putin Boom? 
MOSCOW: Vladimir Putin has more to celebrate than his election as Russia’s president in his own right. 
After a decade of horrific turmoil, Russia’s economy is at last turning around. 
Recently, the Moscow brokers Brunswick Warburg predicted that Russia’s GDP will surge 5% this year. 
That growth should give President Putin - if he is patient and persistent - leeway to tackle the longer term reforms his country needs if it is to become the powerful state he seeks it to be. 
Until now, a broad consensus forecast 1-2% growth in Russia this year. 
The reason behind that uninspiring consensus is simple: people - economists and investors alike - have become so pessimistic about Russia that they no longer can see positive facts. 
The conventional wisdom is that Russian industrial growth is only an effect of high oil prices and import substitution, facilitated by a great devaluation of the ruble. 
Considering that Russia’s growth was 3.2% last year, a staggering 8.8% in the last quarter, this makes little sense. 
Growth, indeed, is accelerating. 
Dynamism like this does not stop without a major shock. 
Industrial growth was 8.1% last year, and has accelerated since, to 14% in February. 
Oil and gas have not led the recovery; indeed, they stagnated last year. 
Major industries with 16-22% growth were chemicals, light manufacturing, pulp and paper, and machine building; that is, intermediary goods and simple manufacturing, exactly the kind of industries economists like to see expanding at this stage of a recovery. 
Within each industry, the best enterprises dash ahead, as should be the case when real restructuring is taking place. 
Another tired argument is that Russia’s growth is superficial and not generated by investment. 
However, recovery in transition economies from Estonia to Poland to Hungary is usually export led. 
Investments tend to follow recovery, as there is so much underutilized capital around. 
Even so, investment actually increased by 6% in 1999 and is rising further. 
But the most over-hyped argument concerns Russia’s feeble tax collection. 
But this obscures the real issue, which is excessive government expenditures. 
Last year the government put its finances in order by cutting wasteful and corrupt expenditures, such as enterprise subsidies. 
The total government budget deficit stopped at 1.7% of GDP. 
This year it will be nearly eliminated. 
Barter and arrears (ie, debts between factories and firms), long major concerns, are also diminishing. 
Since the financial crash of August 1998 all kinds of arrears have fallen by two/thirds in real terms and barter by half. 
One reason was that in 1999 almost 10,000 loss-making Russian enterprises were put into bankruptcy. 
The financial crash introduced hard budget constraints on Russian enterprises; they realized they had to make money, prompting rapid monetization. 
Today, we are seeing the structural changes that we had hoped to see years ago. 
Russia is getting some return from the substantial structural reforms it has actually undertaken. 
The last real worry was the foreign balance. 
Russia has a substantial foreign debt service, but the recent London Club deal reduced Soviet-era debt to commercial banks by half, easing the pressure mightily. 
A similar deal is likely in the Paris Club for the regulation of debts to governments. 
During the last few months Russia’s international reserves have grown sharply, as one would expect of a country with a staggering trade surplus of $33 billion this year and which is likely to surge to over $40 billion this year. 
Of course, Russia is still hemorrhaging money. 
But the cause of Russia’s so-called capital flight is a poor bank system and its dysfunctional tax system. 
Fortunately, Russia now has such liberal currency regulations that Russians can keep their money in good international banks instead. 
All of these changes mark the beginning of the end of the era of the oligarchs, ushered in with the presidential elections of 1996. 
Mr. Putin has no need for the oligarchs to provide him with media support to avert a communist threat or offer a conduit for covert state financing. 
To him, Boris Berezovsky and his cronies are a nuisance; most are already been broken to Putin’s will. 
Instead, a new group of Russian businessmen, mainly manufacturers, are rising. 
Their increasing strength is a reflection of robust economic growth, which promotes production for the market rather than sheer redistribution of resources, implying a new sort of politics. 
Last October, McKinsey Global Institute published a major empirical report of Russian industry. 
Its conclusion was that Russia had real and human capital suitable to sustain a growth rate of 8% a year, and that its problem was primarily the distortions imposed by a poorly functioning tax system and the absence of a land market. 
However, neither the bank system nor the legal system were actually impediments at this stage of development. 
They will become important as Russia moves to the next stage of growth, and so these new businessmen are demanding these reforms. 
Mr. Putin is no great thinker or reformer, but he is astute and genuinely popular. 
He is likely to surf on the current wave of economic growth, using broad consensus about the need for reform to clean up the state administration, and liberalize a tax regime which, though grossly inefficient, is heavy-handed when it goes after a company. 
Land reform remains so controversial he may shrink from addressing the issue. 
My greatest worry is not Putin but that Russia will face an excessive inflow of foreign portfolio investment again, as in 1997. 
Fortunately, the bond markets are dead, and it might take a year to revive them. 
Their absence makes it difficult to invest too large amounts of money in Russian securities. 
Something fundamental has changed in the Russian economy. 
A time comes when all disasters have occurred and all stupidities are recognized. 
For Russia, August 1998 marked that dividing line. 
It was a horrendous shock, imposing great social costs, but it changed Russia’s mentality, not only the exchange rate. 

Immunization on the Front Line 
MAPUTO – Most of the news one hears coming out of Mozambique is bad – poverty, disease, conflict, and floods. 
But there are a lot of good things happening in my country, too. 
In the past two decades, Mozambique has become a functioning democracy; grown its agriculture sector; raised literacy rates; increased water supply and electricity in rural areas; and reduced child mortality dramatically, from 219 per 1,000 live births in 1990, two years before the civil war ended, to 135 per 1,000 in 2010. 
I am particularly proud of the last achievement, because, by working in partnership with my fellow Mozambicans to expand immunization coverage, I believe that I have played a part in bringing it about. 
I grew up in Mozambique when the country was still under Portuguese rule, and the inequality in our colonial society shaped my view that all people have a right to health care. 
I remember working at a pediatric ward as a teenager and watching children die from diseases like polio, measles, and tetanus – all easily prevented by vaccines. 
The impact of that experience led me to spend the next 40 years working to ensure that every child in Mozambique, regardless of her ethnicity or where she lives, gets the vaccines that she needs to help her lead a long and healthy life. 
In a few days, I will join 300 global leaders in Abu Dhabi for the world’s first vaccine summit – a gathering dedicated to ensuring that all children everywhere have access to vaccines. 
People like Bill Gates and Kofi Annan will make the case that immunization programs deserve adequate funding and political support. 
I don’t have an audience like Gates or Annan, but I would like to add my voice to theirs. 
Millions of health workers like my colleagues and I make immunization their daily work. 
We have made tremendous strides in reaching more children with more vaccines, which is why more children are surviving than ever before. 
But there are still even more children to save, and we need help to do our work on the ground. 
Because vaccines are useless if parents refuse to give them to their children, a big part of my job is to collaborate with health workers, community leaders, school teachers, and local political figures to educate parents about vaccines. 
But having the community’s support is not enough. 
It is also vital to ensure that vaccines get to the right place, at the right time, and in the right condition. 
For example, in order to prevent shortages, VillageReach, the organization for which I work, helped to correct the population figures used to forecast the number of vaccines needed in each health center. 
VillageReach also started a company that delivers propane gas to health centers in northern Mozambique, where, like in many of the country’s rural areas, electricity is unreliable or completely unavailable to power the refrigerators that keep vaccines cool. 
Through the use of propane, we can ensure that the vaccines do not spoil during the journey from manufacturer to mother and child. 
And once a month, we make sure that health workers deliver vaccines and other health services “the last mile” to mothers and children in remote rural areas. 
Finally, I have learned that meticulous record-keeping and measuring results is critical to reaching more children. 
That is why we are assessing different methods for gathering data from the field, including the use of mobile applications to digitize paper records. 
Building these routine immunization systems has already helped us to eradicate diseases like polio and all but one type of measles. 
Earlier this month, we used them to vaccinate children against pneumonia for the first time in Mozambique’s history, and we hope that next year we will begin to address rotavirus, which causes diarrhea and is the number one killer for children under five years old. 
Our longer-term goal is to strengthen these systems enough to reach all children in Mozambique with basic vaccines and other forms of health care. 
I believe that we can achieve this goal, because I have witnessed how far we have come already, despite our struggles. 
Big challenges lie ahead, but I am confident that with the support of the global community, I can leave to my own children and community a thriving country where every person has the opportunity to prosper. 

A Recovery Plan for Argentina 
Argentina's president, Eduardo Duhalde, has been making impassioned pleas for international support to rebuild his country. 
Argentina needs and deserves such help, and the foundations for economic success-skills (a literate and well-educated population) and institutions (a federal constitutional democracy)-have been in place for a long time. 
But Mr Duhalde has yet to specify what must be done to take advantage of Argentina' favorable endowments. 
He does at least recognize that only Argentina is responsible for the bad policy choices that led to today's morass. 
No one forced Argentina to adopt the currency board devised by Domingo Cavallo, the former economy minister, which pegged the peso to the dollar at a fixed exchange rate of one to one. 
(The IMF, however, clearly should not have helped finance the currency board's operation without demanding fiscal adjustment when the country liberalized its foreign trade.) 
As a result of the currency peg, Argentina's interest rates were largely determined in the US. 
Lacking access to basic economic tools such as exchange rate and monetary policies, Argentina could not surmount the profound external shocks of the second half of the 1990s, when export prices fell, the US dollar appreciated, and Brazil, the country's main trading partner, devalued its currency. 
The only alternative was severe fiscal austerity, for which the government never mustered the political will. 
Argentina is now in a deep recession, with unemployment above 30%, and a shattered banking and financial system. 
Fiscal austerity and balanced budgets should be priorities in the longer term, but they are inappropriate now. 
The first priority should be boosting employment to enable citizens to put food on the table and recover a basic sense of confidence in the future. 
Otherwise, the country's impoverishment will continue to deplete its middle class and lead many young and capable professionals to emigrate. 
It will also sustain unprecedented levels of violence and criminality-another crucial dimension of today's insecurity. 
To jump-start the economy, the government must promote exports, particularly in the manufacturing and agro-industrial sectors, as well as tourism and infrastructure construction projects. 
After all, there can be no reliance on domestic consumption or private investment to turn the tide. 
Higher exports will also generate the foreign exchange needed to resume external debt payments, now in default. 
But Argentina's exporters will need help in returning to foreign markets, such as removal of tariff and non-tariff trade barriers by rich countries. 
The country has already shown that under favorable conditions its exports can compete and grow rapidly. 
According to World Bank data, 32% of Argentina's exports are manufactured goods, with roughly one-quarter classified as high-technology products. 
From 1991 to 2001, total exports grew from about $12 billion to $27 billion (an average annual growth rate of about 8.5%), despite the overvalued currency. 
President Duhalde has specifically requested the help of the IMF, the World Bank, and the Inter-American Development Bank. 
Such assistance should be forthcoming, and in order to avoid bureaucratic overlap and turf conflicts, the responsibilities and priorities in dispensing it should be spelled out and agreed upon in advance by the government and these organizations. 
Specifically, the IMF should be responsible for advice related to overall macroeconomic policy, as well as for assembling the financial package required to support the government while it implements its program of economic reactivation and reform of the financial sector. 
The IMF should also provide technical and financial assistance to support a long-term program aimed at redefining the fiscal responsibility of the central and provincial governments. 
True fiscal decentralization must take hold if the central government is ever to regain full control of public finances. 
The World Bank should provide technical and financial assistance to support a reorganized judiciary. 
This must include making the appointment of federal and Supreme Court judges free from nepotism and political influence. 
A shameful legacy of President Menem's government in the 1990s was that it prevented the investigation and prosecution of serious improprieties, corruption, illegal arms sales, and major terrorist acts. 
Finally, the Inter-American Development Bank should assist with programs designed to promote and finance industrial exports, as well as underwriting tourism projects. 
These are areas in which the Bank has substantial experience in Latin America. 
Argentina deserves the international support it is requesting. 
At a time of deep recession, such support should not be made contingent on reaching unattainable fiscal objectives. 
Fiscal consolidation should be a condition for the longer-term aid that international organizations will have to provide. 
But the first priority must be putting people back to work. 
Addressing the glaring shortcomings in the country's judicial system should also be made a condition for support, both as an immediate and a long-term objective. 
Under any economic circumstances, denial of justice, and poor implementation of the country's laws, must be remedied as quickly as possible. 
For, at the most fundamental level, what is at stake in Argentina is not merely the health of the economy, but the quality of its civil society. 

A Referendum For Kurdistan? 
The assassination of the President of Iraq's Governing Council makes it crystal clear that the US is failing to create the minimal law-and-order needed for any sort of orderly transfer of power to take place by June 30th. 
Barely two months ago, the signing of a constitutional document by a US-appointed group of un-elected Iraqi officials was heralded as if it were the re-enactment of America's constitutional convention in Philadelphia in 1787. 
But by now it is clear that this is a worthless piece of paper. 
No imposed constitution, however elegant it may be, will be very helpful to Coalition forces when confronted with the type of mayhem seen in towns like Fallujah or Najjaf. 
In the Kurdish region of northern Iraq, however, the situation is completely different: in the last ten years, under the protection of the Allies' no-fly zone, and even more so since the toppling of Saddam, the Kurdish regional government has been able to establish and sustain a relatively orderly administration. 
It has overcome tribal and party differences and created a de facto functioning government, with an impressive record on development issues such as education, irrigation, and construction - and, above all, with no violence. 
Confronted with the debacle in the rest of (Arab) Iraq, the question has to be asked why the US-led coalition should not hold a referendum in the Kurdish region, asking the population how they would like to be ruled. 
After all, the Kurds have, by any internationally accepted standards, a right to self-determination. 
Historically, the Kurds - who are distinct in language, culture, and historical consciousness from Arabs - never had their day in court. 
After World War I and the fall of the Ottoman Empire, the victorious Allies promised them a state of their own - a promise that was cynically betrayed when British and French imperial interests took precedence. 
Since then, the Kurds have suffered under the despotic rule of rival ethnic groups. 
There are obvious obstacles to holding such a referendum, primarily because the US does not have a mandate to dispose of Iraq as it pleases. 
But the same goes for the rest of Iraq: the US is now lamely asking for a UN resolution mandating a transfer of power to a legitimate Iraqi government - but such an authorization is highly unlikely, nor is there anyone in Iraq to whom authority can conceivably be transferred. 
Why should the one region - and people - who run an orderly government, are not involved in murder, attacks on mosques, and suicide bombing of schoolchildren, be penalized? 
Another objection is the opposition of Turkey - and, to a lesser degree, Iran and Syria - to granting the Iraqi Kurds self-determination. 
But if one thinks in terms of universal norms of human rights, what right has Turkey to dictate internal development in another country? 
After all, nobody accepts Israel's claim to oppose as a matter of principle the establishment of a Palestinian state in the West Bank and Gaza. 
The same should apply to Turkey. 
If Turkey grants its own Kurdish minority more cultural and language rights and allows legitimate Kurdish political representation in the Turkish parliament, the willingness of Turkish Kurds to oppose Ankara will be diminished. 
In the nineteenth century, the joint interests of the authoritarian Russian, German, and Austrian Empires prevented the establishment of a free Poland: such unholy alliances have no place in the twenty-first century. 
Recently, under the aegis of the UN, a referendum on the future of Cyprus was held within the island's Greek and Turkish communities. 
The outcome was paradoxical, and not to the liking of those who initiated it: but the right of the communities to determine their future was accepted. 
Why not in Iraqi Kurdistan? 
Perhaps to assuage political fears - and considerations of international law - any plebiscite in the Kurdish region should, initially, have only a consultative status. 
But it will give legitimate expression to the will of a people long oppressed and entitled to their place in the sun. 
Such a referendum may also concentrate minds among the Arab Sunnis and Shia in Iraq, when they come to realize that it is their violence that is dismantling Iraq. 
Perhaps they may decide that violence is counter-productive and carries its own penalties, and may then follow the Kurdish example of curbing violence, which would help put Iraq together again without recourse to permanent repression. 
If not, at the very least, the injustice suffered by the Kurdish people for generations would, at long last, be rectified. 

America’s Hope Against Hope 
NEW YORK – After a hard-fought election campaign, costing well in excess of $2 billion, it seems to many observers that not much has changed in American politics: Barack Obama is still President, the Republicans still control the House of Representatives, and the Democrats still have a majority in the Senate. 
With America facing a “fiscal cliff” – automatic tax increases and spending cuts at the start of 2013 that will most likely drive the economy into recession unless bipartisan agreement on an alternative fiscal path is reached – could there be anything worse than continued political gridlock? 
In fact, the election had several salutary effects – beyond showing that unbridled corporate spending could not buy an election, and that demographic changes in the United States may doom Republican extremism. 
The Republicans’ explicit campaign of disenfranchisement in some states – like Pennsylvania, where they tried to make it more difficult for African-Americans and Latinos to register to vote – backfired: those whose rights were threatened were motivated to turn out and exercise them. 
In Massachusetts, Elizabeth Warren, a Harvard law professor and tireless warrior for reforms to protect ordinary citizens from banks’ abusive practices, won a seat in the Senate. 
Some of Mitt Romney’s advisers seemed taken aback by Obama’s victory: Wasn’t the election supposed to be about economics? 
They were confident that Americans would forget how the Republicans’ deregulatory zeal had brought the economy to the brink of ruin, and that voters had not noticed how their intransigence in Congress had prevented more effective policies from being pursued in the wake of the 2008 crisis. 
Voters, they assumed, would focus only on the current economic malaise. 
The Republicans should not have been caught off-guard by Americans’ interest in issues like disenfranchisement and gender equality. 
While these issues strike at the core of a country’s values – of what we mean by democracy and limits on government intrusion into individuals’ lives – they are also economic issues. 
As I explain in my book The Price of Inequality, much of the rise in US economic inequality is attributable to a government in which the rich have disproportionate influence –& and use that influence to entrench themselves. 
Obviously, issues like reproductive rights and gay marriage have large economic consequences as well. 
In terms of economic policy for the next four years, the main cause for post-election celebration is that the US has avoided measures that would have pushed it closer to recession, increased inequality, imposed further hardship on the elderly, and impeded access to health care for millions of Americans. 
Beyond that, here is what Americans should hope for: a strong “jobs” bill – based on investments in education, health care, technology, and infrastructure – that would stimulate the economy, restore growth, reduce unemployment, and generate tax revenues far in excess of its costs, thus improving the country’s fiscal position. 
They might also hope for a housing program that finally addresses America’s foreclosure crisis. 
A comprehensive program to increase economic opportunity and reduce inequality is also needed – its goal being to remove, within the next decade, America’s distinction as the advanced country with the highest inequality and the least social mobility. 
This implies, among other things, a fair tax system that is more progressive and eliminates the distortions and loopholes that allow speculators to pay taxes at a lower effective rate than those who work for a living, and that enable the rich to use the Cayman Islands to avoid paying their fair share. 
America – and the world – would also benefit from a US energy policy that reduces reliance on imports not just by increasing domestic production, but also by cutting consumption, and that recognizes the risks posed by global warming. 
Moreover, America’s science and technology policy must reflect an understanding that long-term increases in living standards depend upon productivity growth, which reflects technological progress that assumes a solid foundation of basic research. 
Finally, the US needs a financial system that serves all of society, rather than operating as if it were an end in itself. 
That means that the system’s focus must shift from speculative and proprietary trading to lending and job creation, which implies reforms of financial-sector regulation, and of anti-trust and corporate-governance laws, together with adequate enforcement to ensure that markets do not become rigged casinos. 
Globalization has made all countries more interdependent, in turn requiring greater global cooperation. 
We might hopethat America will show more leadership in reforming the global financial system by advocating for stronger international regulation, a global reserve system, and better ways to restructure sovereign debt; in addressing global warming; in democratizing the international economic institutions; and in providing assistance to poorer countries. 
Americans should hope for all of this, though I am not sanguine that they will get much of it.& More likely, America will muddle through – here another little program for struggling students and homeowners, there the end of the Bush tax cuts for millionaires, but no wholesale tax reform, serious cutbacks in defense spending, or significant progress on global warming. 
With the euro crisis likely to continue unabated, America’s continuing malaise does not bode well for global growth. 
Even worse, in the absence of strong American leadership, longstanding global problems – from climate change to urgently needed reforms of the international monetary system – will continue to fester. 
Nonetheless, we should be grateful: it is better to be standing still than it is to be heading in the wrong direction. 

A Relationship Strengthened by Crisis 
NEW YORK – In recent years, emerging-market countries, including those in Asia, have made impressive strides in strengthening their fundamentals, accelerating their economic growth and cushioning themselves against external shocks. 
Nevertheless, as the events of recent months have shown, emerging markets are not immune from the current bout of global financial turmoil. 
In particular, slowing global economic demand poses daunting challenges for many Asian economies, especially those that are more dependent on export-led growth. 
While most Asian countries have had relatively limited direct exposure to mortgage-related assets, deleveraging by foreign investors and slowing external demand have simultaneously created tighter credit conditions and lower expectations for growth. 
This has led to heightened volatility in equity, money, and debt markets. 
These developments put to rest the notion of “decoupling,” the idea that economic growth in emerging markets, whether in Asia or elsewhere, is independent from that of the developed world. 
As the current crisis makes painfully clear, in this era of global trade and investment, our economies − and our prosperity − are inextricably linked. 
In order to maintain strong economic growth in America, we need a strong, growing Asia, just as Asia’s success depends on a thriving US. 
The US-Asia economic partnership can be strengthened if we heed the lessons that we have already learned from the ongoing turmoil. 
Undoubtedly, much of the current situation will be best understood with the benefit of time, but five lessons are already coming into focus, and we should consider their implications for the choices policymakers will make in the future. 
First, openness to international trade and investment has been and will continue to be the linchpin of economic growth for the global economy. 
The US and Asia are more mutually dependent than ever for their economic growth and prosperity. 
In the current climate of anxiety and uncertainty, policymakers must ensure strong communication and coordination, avoid beggar-thy-neighbor policies, and guard against protectionism. 
Fortunately, as the crisis has worsened, global policymakers have responded with coordinated policy action. 
The G-7 action plan aims to restore the flow of credit by securing interbank lending, and coordinated central bank actions have provided unprecedented levels of liquidity to the market. 
Bilaterally, the Strategic Economic Dialogue (SED), which has been an invaluable forum for building US-China economic relations, has been especially important in strengthening our lines of communication and cooperation during the crisis. 
And many policymakers around the world have reaffirmed their commitment to completing a successful Doha trade round and refraining from raising new barriers to trade and investment. 
Second, it is also clear that developed countries must act rapidly and in concert to minimize the impact of the crisis on emerging markets. 
As is always the case, however, resources alone cannot solve problems rooted in weak policies. 
Before we provide financial assistance, whether bilaterally or through the international financial institutions (IFIs), we must determine the underlying cause of economic vulnerability and ensure necessary corrective action. 
Lending large sums before assessing root causes and determining appropriate policy responses can undermine the IFIs’ credibility and reduce the capital available to assist other countries in need. 
When resources are needed, however, the IFIs are a logical place to turn, and they must show flexibility and adaptability to help their member countries. 
Both the International Monetary Fund and the World Bank have taken encouraging steps to develop new programs and approaches and quickly increase their commitments. 
The IMF recently established the Short-Term Liquidity Facility to help strong-performing members facing temporary liquidity problems. 
The World Bank and the multilateral development banks are also developing innovative ways to strengthen country financial sectors and address potential shortfalls in trade finance. 
Third, as the IFIs play an even more crucial role, further delay in reforming them to include major emerging-market economies will only harm their effectiveness and legitimacy. 
But greater representation is not a one-way street: with greater voice and influence, emerging-market countries must assume greater leadership responsibilities and act as constructive partners in these institutions. 
Fourth, governments and the IFIs cannot solve this crisis alone, and they cannot and should not crowd out the private sector. 
In situations where government intervention is necessary, we must consider specific ways in which the private sector can assist in the recovery. 
For example, the US has helped promote financial-sector stability with direct capital injections, but ultimately it is the banks that must resume responsible lending to consumers and businesses. 
Moreover, the US Treasury has structured its Capital Purchase Program with disincentives for long-term government ownership. 
Finally, both Asia and the US must remain focused on addressing the fundamental macroeconomic policy challenges that contributed to the crisis. 
Some of these challenges, such as the buildup of global imbalances, have been discussed for many years. 
The turmoil has led to a gradual rebalancing, with the US current-account deficit beginning to narrow and emerging markets taking steps to boost domestic demand. 
But we must guard against the re-emergence of significant imbalances, which means, in part, assuring the exchange-rate flexibility that must play a critical role in allowing needed economic adjustments to occur. 
Many of the important steps taken to stabilize the global financial system and economy, as well as to address the root causes of this crisis, will be achieved through the G-20. 
It is also clear that the US and Asia will be at the center of any effective multilateral action. 
We must therefore seek to enhance our cooperation and leverage our regional, multilateral, and bilateral dialogues and relationships to ensure the integrity and efficacy of these efforts. 
The road ahead will not be easy, but the US-Asia economic partnership will be at the heart of our recovery. 
And our economic relationship will no doubt emerge even stronger as a consequence of weathering this storm together. 

A Reset in the Caucasus 
YEREVAN – Will Turkey’s current turmoil between Prime Minister Recep Tayyip Erdoğan and the country’s powerful army complicate and delay the country’s boldest initiatives in years – the moves to address decades-old tensions with both Armenians and Kurds? 
Restructuring the role of Turkey’s army is vital, but if Turkey cannot follow through with the Armenian and Kurdish openings, the country’s own domestic situation, its relations with the two peoples, as well as tensions in the Caucasus, will undoubtedly worsen. 
Of the several flashpoints in the region, including that between Georgia and Russia over South Ossetia and Abkhazia, the tension between Armenians and Azerbaijan over Nagorno-Karabakh is among the most challenging. 
As to Georgia and Russia, the disproportionate size, weight, and power on one side are enough to deter any return to violence. 
Moreover, there are no entangling alliances complicating the matter. 
Georgia is not a NATO member, and the United States, it is clear, will not go to war with Russia over Georgia. 
The Armenian-Azerbaijani struggle is more precarious. 
It is no longer a two-way tug-of-war between two small post-Soviet republics, but part of an Armenia-Turkey-Azerbaijan triangle. 
This triangle is the direct consequence of the process of normalization between Armenia and Turkey, which began when both countries’ presidents met at a football game. 
That process now hinges on protocols for establishing diplomatic relations that have been signed by both governments but unratified by either parliament. 
Completing the process depends directly and indirectly on how Armenians and Azerbaijan work to resolve the Nagorno-Karabakh conflict. 
This snarled three-way dispute, if not carefully untangled, holds many dangers. 
Turkey, which for nearly two decades has proclaimed its support for Azerbaijan, publicly conditioned rapprochement with Armenia on Armenian concessions to Azerbaijan. 
Turkey, a NATO member, is thus a party to this conflict now, and any military flare-up between Armenians and Azerbaijanis might draw it in – possibly triggering Russia’s involvement, either through its bilateral commitments to Armenia, or through the Collective Security Treaty Organization, of which Armenia and Russia are members. 
Given energy-security concerns, any Azerbaijani conflict would also seriously affect Europe. 
Iran, too would be affected, since it is a frontline state with interests in the region. 
Armenians and Azerbaijanis have not clashed militarily for more than a decade and a half. 
But this is only because there has been the perception of a military balance and a hope that ongoing negotiations would succeed. 
Today, both factors have changed. 
The perception of military parity has altered. 
With Azerbaijan having spent extravagantly on armaments in recent years it may now have convinced itself that it now holds the upper hand. 
At the same time, there is less hope in negotiations, which appear to be stalled, largely because they have been linked to the Armenia-Turkey process, which also seems to be in limbo. 
The diplomatic protocols awaiting ratification by the two countries’ parliaments have fallen victim to miscalculations on both sides. 
The Armenians came to believe that Turkey would find a way to reconcile Azerbaijan’s interests with the Turkish opening to Armenia, and would open the border with Armenia regardless of progress on resolving the Nagorno-Karabakh issue. 
The problem is that Turkey initially closed the border precisely because of Nagorno-Karabakh, rather than any bilateral issue. 
Turkey believed that by signing protocols with Armenia and clearly indicating its readiness to open the border, the Armenians could somehow be cajoled or pressured into resolving the Nagorno-Karabakh problem more quickly or cede territories surrounding Nagorno-Karabakh. 
But this has always been unlikely in the absence of a comprehensive settlement that addresses Armenians’ greatest fear – security – and fulfils their basic political requirement, namely a definition of Nagorno-Karabakh’s status. 
Both sides seem to be somewhat surprised by the other’s expectations. 
Indeed, there is a growing fear that a settlement of the Nagorno-Karabakh dispute is more distant now, because Turkey’s public backing has raised Azerbaijan’s expectations, while some Armenians fear collusion between neighbors out to railroad them into an unsustainable agreement. 
This is Turkey’s moment of truth. 
The Armenia-Turkey diplomatic process has stalled, and the Turkish government’s effort at reconciliation with the country’s large Kurdish minority has soured. 
Just as a loss of confidence among Kurds and Turks in eastern Turkey will rock the shaky stability that they have recently enjoyed, a loss of hope for a settlement of the Nagorno-Karabakh dispute may end the tentative military calm between Armenians and Azerbaijanis. 
But the situation is not irretrievable. 
Endless public sparring between Turkish and Armenian officials through the media is not helping. 
It is time for both countries’ leaders to speak privately and directly with each other, with an understanding of the instability that could result from any failure to complete the diplomatic opening that the two sides initiated. 
So, even as Turkey tries to deal with the consequences of its history at home, and redefine the army’s role in society, it must reset its tortured relationship with Armenia. 
The recent resolution passed by the Foreign Relations Committee of the US Congress, which calledupon President Obama to ensure that US foreign policy reflects an “appropriate understanding and sensitivity” concerning the Armenian Genocide, should serve as a wake-up call to both Turkish and Armenian governments that Armenians are not about to question the historical veracity of the genocide.After all, if France and Germany can face their tortured history, Turkey should be able to do so as well. 
The two sides must step back, look at the situation dispassionately, acknowledge thedeficiencies in the protocols, address the other side’s minimum requirements, and bear in mind that a single document will not heal all wounds or wipe out all fears. 
The international community must support this effort. 
The problem should not be dismissed as a mere settling of old scores. 
What is at stake is the future of a region critical to Eurasia’s peace. 

A Return to Reason 
COPENHAGEN – Common sense was an early loser in the scorching battle over the reality of man-made global warming. 
For nearly 20 years, one group of activists argued – in the face of ever-mounting evidence – that global warming was a fabrication. 
Their opponents, meanwhile, exaggerated the phenomenon’s likely impact – and, as a consequence, dogmatically fixated on drastic, short-term carbon cuts as the only solution, despite overwhelming evidence that such cuts would be cripplingly expensive and woefully ineffective. 
This scientific pie fight, characterized by juvenile name-calling, ignoble tactics, and intellectual intransigence on both sides, not only left the public confused and scared; it undermined the efforts of the most important organizations working on advancing the science of climate change. 
Almost inevitably, at international summits from Kyoto to Copenhagen, governments failed to take any meaningful action on global warming. 
Fortunately, there finally seems to be a growing number of influential scientists, economists, and politicians who represent a more sensible approach to the issue. 
As I argued in my 2007 book Cool It, the most rational response to global warming is to make alternative energy technologies so cheap that the whole world can afford them. 
In broad strokes, this requires a deliberate and significant boost to research and development spending. 
Based on recent work by Isabel Galiana and Chris Green of McGill University, I advocate expenditure totaling around 0.2% of global GDP – roughly $100 billion a year. 
Of course, no fix to global warming will work overnight. 
So we need to focus more on adapting to the effects of global warming – for example, by stepping up efforts to cope with inland flooding and the urban “heat island” effect. 
At the same time, we should explore the practicality of climate engineering, which we may need to buy more time for a smooth transition away from fossil fuels. 
Acknowledging that man-made climate change is real, but arguing that carbon cuts are not the answer, amounts to staking out a middle ground in the global warming debate – which means being attacked from both sides. 
For so-called “alarmists,” pointing out what’s wrong with drastic carbon cuts is somehow tantamount to denying the reality of climate change, while so-called “deniers” lambast anyone who accepts the scientific evidence supporting this “mythical” problem. 
Nevertheless, there are encouraging signs that the minority of sensible voices in this debate are beginning to get the attention they deserve. 
In mid-2009, as part of a project by the Copenhagen Consensus Center to assess different responses to global warming, Green and Galiana performed a cost-benefit analysis of R&D spending on green technologies. 
Green, a long-time proponent of a technology-led response to global warming, demonstrated the effectiveness of a policy of government investment in R&D aimed at developing new low-carbon technologies, making current technologies cheaper and more effective, and expanding energy-related infrastructure such as smart grids. 
As Green and Galiana bluntly noted, “No approach to climate stabilization will work without an energy technology revolution.” 
Another academic who has advocated a smarter response to global warming is Roger Pielke, Jr. of the University of Colorado, the author of this year’s must-read global-warming book The Climate Fix. 
Along with Green, Pielke was one of 14 noted academics who co-wrote February’s “Hartwell Paper,” commissioned by the London School of Economics and the University of Oxford. 
The paper made the case for developing alternatives to fossil fuels, ensuring that economic development doesn’t wreak environmental havoc, and recognizing the importance of adaptation to climate change. 
In the US, we witnessed an equally promising development in the climate debate just last month, when the conservative American Enterprise Institute, the liberal Brookings Institution, and the centrist Breakthrough Institute teamed up to publish a report that called for revamping America’s energy system with the aim of making clean energy cheap. 
Entitled “Post-Partisan Power,” the report comprehensively and convincingly argues that the US government should invest roughly $25 billion per year (about 0.2% of America’s GDP) in low-carbon military procurement, R&D, and a new network of university-private sector innovation hubs to create an “energy revolution.” 
This sensible proposal predictably drew fire from committed “alarmists” and “deniers.” 
But, promisingly – and surprisingly, given the somewhat toxic state of US politics – it attracted broad support and intelligent commentary from many mainstream pundits. 
Adding to the swell of voices, November will see the documentary film based on my book ‘Cool It’ released in the US. 
It is too early to suggest that politicians might make real progress toward implementing genuinely effective policies on climate change. 
But, given the dearth of common sense in recent years, the mere fact that a growing chorus of reasonable voices can now be heard is nothing short of miraculous. 

Toward an Immunized World 
ABU DHABI/NEW YORK – For a child, receiving a vaccine takes just a moment (and perhaps a few tears). 
But such moments are crucial for getting children off to a healthy start in life, and for advancing progress on global health and development goals. 
Along with Mohamed bin Zayed bin Sultan Al Nahyan, Crown Prince of Abu Dhabi, we attach great importance to the world’s first global summit, being held this week in Abu Dhabi, aimed at ensuring that all children have access to the full benefits of vaccines. 
Vaccines protect people for a lifetime. 
They are one of the most cost-effective investments we can make to improve our world. 
Vaccines have eradicated smallpox, pushed polio to the verge of eradication, and saved millions of children from measles, diphtheria, tetanus, and other deadly and disabling diseases. 
Thanks in large part to the power of vaccines, the number of children dying before the age of five has fallen from 20 million in 1960 to 6.9 million in 2011, despite a large increase in global population. 
Disease saps the greatest asset that any country possesses: the energy and talent of its people. 
This is an especially harsh loss for poor countries seeking to gain a foothold in the global economy. 
But when children are healthy, families are freed from the burden of costly medical care, allowing them to spend more on food and education. 
Healthy children attend school more regularly, are better able to learn, and become more productive adults. 
New research shows that vaccines improve cognitive development in children, raise labor productivity, and contribute to a country’s overall economic growth. 
Yet more than 22 million children lack access to the basic vaccines that people in high-income countries take for granted. 
These children live in the poorest and most remote communities, where the risk of disease is highest. 
A child born in a low-income country is 18 times more likely to die before reaching the age of five than a child in a high-income country. 
Ending this inequity is at the heart of history’s largest and most successful anti-poverty push – the Millennium Development Goals. 
The eight MDGs were adopted in the year 2000, when leaders meeting at the United Nations agreed to cut extreme poverty and hunger by half, fight disease, improve water safety and sanitation, expand education, and empower girls and women. 
There have been remarkable gains, but there is still much to do – and fewer than 1,000 days of action left until the 2015 deadline. 
Raising global immunization coverage will speed progress toward the MDGs and generate momentum toward a successful post-2015 development agenda. 
The World Health Assembly, representing the World Health Organization’s 194 member countries, has endorsed a shared vision – known as the Decade of Vaccines – of a world free from vaccine-preventable diseases, with the full benefits of immunization reaching all people, regardless of who they are or where they live. 
Eradicating polio will be a milestone on our path to realizing this vision. 
With a new, comprehensive plan to be introduced at the Summit, the world will have a clear roadmap for creating a polio-free world by 2018. 
The plan works hand in hand with our overall efforts to raise immunization coverage against other diseases like measles, pneumonia, and rotavirus. 
Indeed, we are seeing how strong immunization systems protect our gains against polio and provide a platform for reaching the world’s most vulnerable mothers and children with new vaccines and primary health care. 
If we are successful, by the end of the decade we will save more than 20 million lives, prevent nearly one billion cases of illness, and save almost $12 billion in treatment costs alone. 
And, in the process of freeing people from the burden of disease, we will unlock immeasurable human potential. 
The MDGs and the Decade of Vaccines prove that focused global development objectives can make a profound difference. 
They show the power of partnerships that bring together the United Nations, governments, development agencies, civil society, foundations, and the private sector. 
Over the next 1,000 days and beyond, our progress will be measured by what we have done to improve the lives of the poorest and most vulnerable members of the human family. 
Let us start by recommitting ourselves to realizing the shared vision of a world in which all children get a fair start in life with the protection of vaccines. 
This generation will thank us – and so will many generations to come. 

A Roadmap to Peace that Can Work 
In the days after the so-called "Roadmap for Peace between Israel and Palestine" was unveiled, a new cycle of violence exploded between the warring parties. 
Palestinian suicide bombings and Israeli attacks against Palestinian leaders came with such speed and ferocity that determining who was striking first and who was counterattacking became impossible. 
Of course, recriminations also began immediately, with Israelis and Palestinians each accusing the other of deliberately destroying the peace process. 
The truth, as usual, is more complicated, and understanding it helps us to comprehend what will be needed if real peace is to be achieved. 
There are at least four sides to this conflict: moderate and extremist Israelis and moderate and extremist Palestinians. 
Complicated strategic interactions exist not only between Israelis and Palestinians, but also within the two sides. 
The extremist positions are clear. 
Extremist Palestinians vow to fight until Israel--viewed as a colonial imposition on the Islamic world--is destroyed. 
Extremist Israelis vow to fight to hold the entire West Bank, pushing out the Palestinians if necessary. 
For them, Israel's pre-1967 borders, the entire city of Jerusalem, and the West Bank of the Jordan River is land given to the Jewish people by God. 
No land-for-peace deal will satisfy either side. 
Large majorities on both sides--perhaps two-thirds or even three-fourths of each population--would accept a return by Israel to something like its pre-1967 borders in exchange for real peace. 
Of course, moderates on both sides would prefer as much land and room to maneuver as possible, but they prefer a negotiated compromise aimed at ending the violence. 
The moderates are understandably wary. 
Compromise on their side if met by extremism on the other would incite disaster. 
If Israel returns to its pre-1967 borders, only to find continuing hostility and terrorism among the Palestinians, Israel will have gravely weakened its security for nothing. 
If Palestinians disarm but still confront Israeli demands to keep West Bank settlements, then Palestine will never have a viable state. 
Compromise is therefore difficult even among moderates: it requires a belief that moderation on one side will be met by moderation on the other. 
The Oslo Peace Process was built on the premise that moderates on both sides would gradually gain each other's trust and move steadily towards compromise. 
But this largely ignored the role of extremists. 
Israeli extremists assassinated Prime Minister Yitzhak Rabin, lest he mobilize broad public support to make peace. 
Arab extremists launched attacks against Israelis civilians, in part to show moderates on both sides that compromise would not stick. 
That dynamic is still at work. 
Palestinian Prime Minister Abu Mazen has called on Palestinian extremists to disarm, or at least to accept a prolonged cease-fire, but they have responded with more terrorist attacks. 
Israel's government, meanwhile, has gone out of its way to attack Palestinian hard-line groups, causing more death, damage, and bitter feelings. 
Extremists on both sides "win" their battle to undermine the peace process. 
But all factions lose, because violence continues and none of them achieves its goals. 
Israelis and Palestinians cannot find the way out alone, because neither side would dare to forcibly disarm its own extremists without absolute proof that the other side will do the same. 
So it is fatuous for Israel's government to insist that the Palestinians disarm completely before the peace process can continue, when Palestinian moderates have no proof that Israel will withdraw to the pre-1967 boundaries. 
In these circumstances, gradual confidence building will not work. 
Extremists simply have enough power to undermine a process based on trust alone. 
Nor will one side's extremists defeat the other side's extremists. 
Israel's military has failed to destroy Palestinian terrorism through hard-line reprisals; Palestinian extremists have not scared Israeli hard-liners into concessions. 
A solution is possible only if the outside world is prepared to police an agreement reached between the moderate majorities. 
A strong international peacekeeping force, agreed by the UN, and perhaps led by the US or NATO, must be placed between the warring sides, and must be prepared to suffer losses to terrorists in the service of peace. 
The roadmap is--so far--silent on this issue. 
When UN Secretary General Kofi Annan made such a proposal, extremists on both sides denounced the plan. 
But moderates raised red flags, too. 
Would a peacekeeping force truly serve the interests of the agreement, rather than one side or the other? 
Would it have the firepower to hold back extremists? 
Would it stick to its long-term mission in the face of inevitable attacks? 
Would peacekeepers withdraw at one side's insistence (as UN peacekeepers have retreated in other circumstances, including just before the 1967 Six Day War), putting the other side in jeopardy? 
The Roadmap to Peace can work only if both sides are pressed to a real compromise, whose outline is clear: Israel's return to something like its pre-1967 borders; financial compensation of Palestinians for losses of land in Israel, rather than a right to return; and Jerusalem as a shared capital. 
But enforcement of this compromise against extremists will require putting credible and well-armed international peacekeepers in place to hold the parties to the deal. 
Designing such an international peacekeeping effort, one with the credibility and staying power, should now be a priority. 

A Roosevelt Moment for America’s Megabanks? 
WASHINGTON, DC – Just over a hundred years ago, the United States led the world in terms of rethinking how big business worked – and when the power of such firms should be constrained. 
In retrospect, the breakthrough legislation – not just for the US, but also internationally – was the Sherman Antitrust Act of 1890. 
The Dodd-Frank Financial Reform Bill, which is about to pass the US Senate, does something similar – and long overdue – for banking. 
Prior to 1890, big business was widely regarded as more efficient and generally more modern than small business. 
Most people saw the consolidation of smaller firms into fewer, large firms as a stabilizing development that rewarded success and allowed for further productive investment. 
The creation of America as a major economic power, after all, was made possible by giant steel mills, integrated railway systems, and the mobilization of enormous energy reserves through such ventures as Standard Oil. 
But ever-bigger business also had a profound social impact, and here the ledger entries were not all in the positive column. 
The people who ran big business were often unscrupulous, and in some cases used their dominant market position to drive out their competitors – enabling the surviving firms subsequently to restrict supply and raise prices. 
There was dominance, to be sure, in the local and regional markets of mid-nineteenth-century America, but nothing like what developed in the 50 years that followed. 
Big business brought major productivity improvements, but it also increased the power of private companies to act in ways that were injurious to the broader marketplace – and to society. 
The Sherman Act itself did not change this situation overnight, but, once President Theodore Roosevelt decided to take up the cause, it became a powerful tool that could be used to break up industrial and transportation monopolies. 
By doing so, Roosevelt and those who followed in his footsteps shifted the consensus. 
Roosevelt’s first case, against Northern Securities in 1902, was immensely controversial. 
But the break-up, a decade later, of Standard Oil – perhaps the most powerful company in the history of the world to that date – was seen by mainstream opinion as completely reasonable. 
And the break-up of Standard Oil took place in great American style: the company was split into more than 30 pieces, the shareholders did very well, and the Rockefeller family went on to rehabilitate itself in the eyes of the American public. 
Why are these antitrust tools not used against today’s megabanks, which have become so powerful that they can sway legislation and regulation massively in their favor, while also receiving generous taxpayer-financed bailouts as needed? 
The answer is that the kind of power that big banks wield today is very different from what was imagined by the Sherman Act’s drafters – or by the people who shaped its application in the early years of the twentieth century. 
The banks do not have monopoly pricing power in the traditional sense, and their market share – at the national level – is lower than what would trigger an antitrust investigation in the non-financial sectors. 
Effective size caps on banks were imposed by the banking reforms of the 1930’s, and there was an effort to maintain such restrictions in the Riegle-Neal Act of 1994. 
But all of these limitations fell by the wayside during the wholesale deregulation of the past 15 years. 
Now, however, a new form of antitrust arrives – in the form of the Kanjorski Amendment, whose language was embedded in the Dodd-Frank bill. 
Once the bill becomes law, federal regulators will have the right and the responsibility to limit the scope of big banks and, as necessary, break them up when they pose a “grave risk” to financial stability. 
This is not a theoretical possibility – such risks manifested themselves quite clearly in late 2008 and into early 2009. 
It remains uncertain, of course, whether the regulators would actually take such steps. 
But, as Representative Paul Kanjorski, the main force behind the provision, recently put it, “The key lesson of the last decade is that financial regulators must use their powers, rather than coddle industry interests.” 
And Kanjorski probably is right that not much would be required. 
“If just one regulator uses these extraordinary powers [to break up too-big-to-fail banks] just once,” he says, “it will send a powerful message,” one that would “significantly reform how all financial services firms behave forever more.” 
Regulators can do a great deal, but they need political direction from the highest level in order to make genuine progress. 
Teddy Roosevelt, of course, preferred to “Speak softly and carry a big stick.” 
The Kanjorski Amendment is a very big stick. 
Who will pick it up? 

A Russian Dreyfus Affair 
No secret file is being used to secure a guilty verdict. 
The proceedings are held in open court, not in camera. 
Yet the trial of Colonel Yuri Budanov in the city of Rostov-on-Don on charges of kidnapping, raping and murdering an 18 year old Chechen girl named Elsa Kungaeva contains echoes of the notorious Dreyfus affair that divided France a century ago. 
At that time, the French army was licking its wounds from the defeat at Sedan and the creation of Bismarck's imperial Germany. 
In the words of one of the French novelist Anatole France's characters in a novel written at the time, esteem for the army "is all that is left of our glorious past. 
It consoles us for the present and gives us hope of the future." 
An exaggerated sense of lost glory helped incite the French Army to fake the evidence that convicted Captain Alfred Dreyfus of spying for the Kaiser. 
Today's Russian army is not the bastion of reactionary monarchism and anti-Semitism that shaped French officers' behavior in the Dreyfus affair. 
But the army's bitter resentiment at the demise of Russia's superpower status, reinforced by the military's own humiliating loss of resources and prestige, is no less evident. 
The army's exalted, tormented, and wounded pride appears to be shaping both its response to Budanov's trial as well as that of President Vladimir Putin's Kremlin. 
To Russia's officer corps, all opponents are ipso facto the army's enemies and, by extension, enemies of Russia. 
Unlike their turn-of-the-19th-century French counterparts, however, Russia's officer corps is essentially apolitical, despite decades of dictatorship. 
Military officers are not overwhelmingly communist in their political leanings, not exclusively ethnic Russians, and not necessarily nationalists. 
Some officers are all of these, and most are some of them. 
But the army as a whole is not anti-democratic. 
It appears to have mostly learned its lesson about keeping out of politics, having been drawn into the coup against Mikhail Gorbachev in August, 1991, only to switch sides when young officers and conscripts balked at carrying out orders. 
Nevertheless, although President Putin is working to make it a more professional body than the Soviet-era mass army, the officer corps retains a Bolshevik mind-set barricaded against the intrusions of civilian criticism. Poorly paid, slowly promoted, and often drearily garrisoned in Siberian towns, the army's sole recompense nowadays is prestige: the honors, immunities and cachet of a caste; in short, the esteem in which it is held because of the victories over Napoleon and Hitler. 
Colonel Budanov's trial challenges this ingrained sense of honor. 
When the proceedings began a year ago, democratic Russia seemed to be catching up at long last with the civilized world in holding military officers accountable to the rule of law. 
Russian liberals initially welcomed the Budanov case as a sign that the country might address accusations that war crimes were committed in Chechnya. 
Last month, however, the military prosecutor accepted Colonel Budanov's argument that he was temporarily insane when he killed the girl, and so acquitted Budanov on the charge of murder. 
(The rape charge, for some unclear reason, had already been dropped.) 
The prosecution then began to speak of the young girl as a Chechen sniper, from a family of snipers. 
Outraged, Defense Minister Sergei Ivanov dismissed the prosecutor, who seemed ready to acquit the patriotic "hero" on all remaining charges. 
A new prosecutor revived the investigation, reinstated the charges, and balked at accepting a plea of not guilty due to insanity. 
Ivanov, however, apparently intervened not because he feared a miscarriage of justice, but because the Kremlin hierarchy recognized that a verdict exonerating Budanov would leave the army itself vulnerable. 
Critics would suggest that it had failed to control its men and might even have encouraged and abetted the savagery in Chechnya-of which the charges against Colonel Budanov are but a small part. 
So only a guilty verdict would suffice, but it still had to be qualified with a finding of insanity. 
After all, no army can be held accountable for the murderous actions of an insane man. 
No ordinary psychiatrist, however, attested to Budanov's alleged insanity. 
Instead, he was evaluated by experts from Moscow's Serbsky Institute of Psychiatry, which became infamous in the Brezhnev era for treating dissent as a form of schizophrenia and subjecting "patients" like Vladimir Bukovsky to psychotropic drugs to help them recognize the glories of Soviet life. 
The Serbsky team claimed that Colonel Budanov was temporarily insane at the time of the murder due to "patriotic fervor." 
As in the Dreyfus affair, Russia's army is increasingly a prisoner of its friends-die hard communists, Great Russian chauvinists, ranting nationalists, and all the other anti-reform and anti-democratic groups who make defense of military honor a rallying cry for their own dark causes. 
Indeed, the army's honor is now so firmly tied to finding Budanov both guilty and insane that Russia finds itself on the brink of issuing a nakedly political verdict. 
Like the Dreyfus affair, so pathetic a distortion of law into propaganda will ultimately leave an even more profound sense of shame, one lasting generations after Budanov's supporters have lost all credibility. 



A Saudi Survival Strategy 
Did the bombings that rocked Riyadh shock the al-Saud royal family from its complacency at long last? 
This rude interruption to their majesties' indolence by their subjects incited rage and fury and something else--fear. 
Of course, alarm bells have rung before in Saudi Arabia, but the ruling family remained in denial--deniability and repression being the political arts at which the al-Saud excel. 
If the regime is to forge a survival strategy, it must now re-examine its foundations. 
As ruling families go, the al-Saud are spectacularly numerous--there are perhaps as many 22,000 of them. 
But vast bloodlines have not prevented hardening of the arteries. 
Indeed, the men now struggling to hold things together are the incapacitated King Fahd (84 years old), his half-brother Crown Prince Abdullah (79 years old), and his full brothers, Defence Minister Sultan (78 years old), and Interior Minister Naif (75 years old). 
Old men, unsurprisingly, find it hard to cope with the breakdown of the assumptions that have governed their entire lives. 
Perhaps the most shattering lost illusion is the fact that the bombings occurred in the heart of the al-Saud's home-base in the Najdi region, which indicates that the enemy within resides nearer to the throne than anyone suspected. 
This recognition is particularly unsettling because the al-Saud have alienated every group except their own. 
If some Najdi may now be mistrusted, where can the al-Saud turn? 
Saudi Arabia's population is divided into distinctive regional, tribal, and sectarian groups. 
To the east, in the oil-rich province, are the Shia. 
Politically emboldened since the fall of Saddam's regime and the resurgence of their brethren in Iraq, the Shia wasted no time in petitioning Crown Prince Abdullah to end both their exclusion from Saudi politics and their demonization as heretics by the Wahhabi religious establishment. 
Their message to the rulers is that it will no longer suffice to identify being Saudi exclusively with being Wahhabi Najdi. 
Meanwhile, the Hijazis, who originate in Mecca and Medina, hold long-repressed resentments due to their humiliating partial inclusion in Saudi politics. 
Although the Hijazis, who are Sunnis but not Wahhabis, are not viewed as heretics, they are marginalized because the Islam they practice has Sufi leanings--and tolerant Sufiism is anathema to the austerely dogmatic Wahhabis. 
Educated Hijazis ask only for modest reforms. 
Yet even moderation is dismissed by the al-Saud. 
The tribes of the Asir region, which have a mixed sense of identity due to their close ties to Yemeni tribes, feel alienated from both the political and the economic center. 
The population of al-Jawf in the north has a similar sense of political and economic alienation. 
Despite long simmering feelings of resentment and dispossession, these `minorities' remain moderate in their demands for reform. 
Their leaders want to rescue the state, not raze it. 
They form the vast majority of people in Saudi Arabia, and have not yet embraced the uncompromising rage of Osama bin Laden's clones. 
The challenge facing the al-Saud is to include at the heart of the political system the peoples they have shunned for decades. 
Unless they begin to do so, these peoples will drift into the camp of the fanatics--if not as active terrorists than as passive supporters, much as the Catholic community in Northern Ireland passively embraced IRA terrorism as a way to end their exclusion from political life in the province. 
The danger in Saudi Arabia is that the IRA are no match for Muslim fundamentalists in their fanaticism. 
For the regime to embrace peoples it has excluded, it must agree on inclusiveness--and the tolerance of non-Wahhabi forms of Islam--as a survival strategy and stick to it. 
This is difficult because the ruling al-Saud are themselves divided. 
Crown Prince Abdullah is far more disposed to reform than Prince Naif, the powerful Interior Minister, who clings to the old narrow system of repression. 
The al-Saud will undoubtedly be ruthless in seeking out the individuals directly implicated in the terrorist bombings. 
Those captured face beheading in the traditional way. 
The problem for the regime is that the springs that nourish fanaticism will not be dammed by such exemplary punishment. 
Some royals recognize this and know that a more thorough housecleaning is needed. 
They realize that the al-Saud must choose: continue on the narrow path of repression and ethnic and religious intolerance, or adopt a more open and inclusive policy. 
Both choices are fraught with danger: open up, and they include people in Saudi public life hitherto considered unworthy for being either heretics (the Shia) or of impure blood (the Hejazis) or too primitive (the border tribes). 
Remain closed, and they will find themselves hostage to the forces of intolerance that threaten the regime. 
The al-Saud religious alliance with the Wahhabis and the latter's control of a rigid religious educational system must change. 
"Moderate" elements among the population will support this change (and the manhunt for terrorist fanatics) if they secure inclusion in Saudi life. 
Alexis de Tocqueville warned that the most dangerous time for any authoritarian regime is when it reforms. 
The al-Saud have procrastinated so long that every choice they now face is risky. 
Inclusion is the less dangerous path. 
It puts at risk only the ethnically narrow and religiously intolerant structure of the regime. 
By contrast, the regime itself will be imperiled if it clings to its narrow base. 

A Scientific Method for the SDGs 
PARIS – In just the latest example of popular support for science, tens of thousands of people around the world recently marched to advocate for a worldview based on facts, not fiction. 
They understand that science could actually save the world, because it can help us solve our greatest health and development problems. 
Those problems are at the heart of the United Nations Sustainable Development Goals, which the international community agreed to in 2015, with the aim of creating a more prosperous, equitable, and healthy planet by 2030. 
The 17 SDGs, which include 169 individual targets, constitute an ambitious agenda to address everything from gender equity to sustainable cities and climate change. 
All told, they provide an inclusive vision of sustainable development for the twenty-first century. 
But comprehensiveness can come at the expense of effective action. 
Few people can actually name all of the SDGs, much less explain how every country can achieve them over the next 13 years. 
Experts around the world – including all of those who have gathered in New York this week for the UN Ocean Conference – are wrestling with individual targets or goals. 
And yet integrating these efforts remains a formidable challenge. 
If our leaders are ever to realize the world envisioned in the SDGs, they will need a roadmap for navigating the complex policymaking terrain. 
Scientists are well positioned to provide this roadmap, because they know how to ask the right questions, design experiments, draw evidenced-based conclusions, and apply new information to existing knowledge. 
Better still, scientists enjoy sharing their findings with others. 
The International Council for Science (ICSU) recently brought together 22 scientists from various fields – including oceanography, epidemiology, agronomy, and energy economics – to come up with SDG-specific insights for world leaders to follow. 
By studying how different goals and targets relate to one another, we developed an independent analytical framework to help leaders prioritize policies within their own countries. 
Some SDGs have reinforcing relationships, whereby achieving one will make it easier to achieve others. 
At the same time, some SDGs may be in conflict, if progress in one area comes at the expense of others. 
While we have long known that the SDGs interact with one another, the ICSU study is the first time that these interactions have been systematically quantified. 
For example, we selected the four SDGs relating to hunger, health, energy, and oceans, and then identified every possible interaction between them and the other goals and targets. 
We then developed a seven-point scale, ranging from +3 when a given goal or target strongly reinforces another, to -3 when achieving one goal makes it essentially impossible to reach another. 
By applying this scale to different SDG relationships, we were able to answer some important questions. 
For example, we could determine if protecting the oceans will stifle economic growth and urban development in a particular country or region. And we could determine if increasing agricultural production would make it harder to manage natural resources; or if expanding renewable-energy sources would deplete the water supply in already-arid regions. 
One exciting discovery we’ve made is that most SDG targets actually do reinforce one another. 
For example, helping the world’s poorest people shift away from traditional fuels such as firewood, charcoal, and animal dung would go a long way toward reducing deaths and illnesses from air pollution, especially among women and children. 
And in cases where different goals do not align, policymakers can make adjustments as needed. 
For example, we found that increased agricultural production can damage the oceans if it adds to nutrient run-off and other forms of pollution; and this, in turn, could undermine health and long-term food security. 
Moreover, our approach had benefits beyond the immediate quantitative findings, because it united scientists from different disciplines around a shared goal. 
This was no easy task: scientists are critical consumers of information, and they do not always agree with one another. 
But, owing to the sheer scale of the SDGs, the participants had to hash out their differences, and develop a common language to devise the best way forward. 
Breaking down disciplinary silos and bringing together different voices is a significant achievement in itself. 
It can serve as an example for leaders in government, business, and civil society to follow. 
So, where do we go from here? 
Our analytical framework can help countries figure out which SDGs benefit others, and which do not. 
With it, policymakers can prioritize goals and investments; map existing resources and identify budget gaps; and establish mechanisms for sharing data and information across sectors. 
More generally, each country will need to monitor its progress toward each SDG, and revise its approach as needed. 
This will require diligence from all policymakers. 
But the potential return on investment, not least a better planet for generations to come, is enormous. 
Whether science really will save the world remains to be seen. 
But one thing we know is that scientists can point us in the right direction. 

A Scramble for Asia? 
NEW DELHI – Asia’s festering Cold War-era territorial and maritime disputes highlight the fact that securing long-term region-wide peace depends on respect for existing borders. 
Attempts to disturb Asia’s territorial status quo are an invitation to endemic conflict – a concern that led Asian states to welcome the US and Russia to their annual East Asian Summit. 
The recent Sino-Japanese diplomatic spat over disputed islands in the East China Sea – followed, almost instantly, by a Sino-Vietnamese row over similar atolls – has put the spotlight on China and its regional policy. 
Governments across Asia are concerned that China’s rapidly accumulating power is emboldening it to assert territorial and maritime claims against neighbors stretching from Japan to India. 
Even against tiny Bhutan, China has stepped up its lands claims through military incursions. 
China’s new stridency underscores Asia’s central diplomatic challenge: coming to terms with existing boundaries by shedding the baggage of history that burdens all of the region’s important inter-state relationships. 
Even as Asia is becoming more interdependent economically, it is becoming more politically divided. 
A number of inter-state wars were fought in Asia since 1950, the year that both the Korean War and the annexation of Tibet started. 
But, whereas the Europe’s bloody wars in the first half of the twentieth century have made war there unthinkable today, the wars in Asia in the second half of the twentieth century, far from settling or ending disputes, only accentuated bitter rivalries. 
China, significantly, has been involved in the largest number of military conflicts in Asia. 
A recent Pentagon report is unsparing: “The history of modern Chinese warfare provides numerous case studies in which China’s leaders have claimed military preemption as a strategically defensive act. 
For example, China refers to its intervention in the Korean War (1950-1953) as the ‘War to Resist the United States and Aid Korea.’ 
Similarly, authoritative texts refer to border conflicts against India (1962), the Soviet Union (1969), and Vietnam (1979) as ‘Self-Defense Counter Attacks.’” 
The seizure of the Paracel Islands from Vietnam in 1974 by Chinese forces was another example of offense as defense. 
All these cases of preemption occurred when China was weak, poor, and internally torn. 
So the growing power of today’s China naturally raises legitimate concerns. 
Having earlier preached the gospel of its “peaceful rise,” China no longer is shy about showcasing its military capabilities and asserting itself on multiple fronts. 
With the Chinese Communist Party increasingly dependent on the military to maintain its monopoly on power and ensure domestic order, senior military officers are overtly influencing foreign policy. 
The result is a growing territorial assertiveness, which has become a source of new friction along China’s land and sea frontiers. 
That, in turn, has put China at the center of Asia’s political divides. 
Several developments this year underscore China’s more muscular foreign policy, from its inclusion of the South China Sea in its “core” national interests – a move that makes its claims to the disputed Spratly Islands non-negotiable – to its reference to the Yellow Sea as a sort of exclusive Chinese military-operations zone. 
The US and South Korea should, according to Chinese officials, discontinue holding joint naval exercises there, apparently out of respect for China’s new power. 
China also has become more insistent in pressing its territorial claims both to India’s northeastern Arunachal Pradesh state and to the Japanese-controlled Senkaku Islands, with Chinese warships making more frequent forays into Japanese waters. 
Indian defense officials have reported a sharp increase in Chinese military incursions across the disputed 4,057-kilometer Himalayan frontier and in aggressive patrolling. 
China also has started questioning Indian sovereignty over the state of Jammu and Kashmir, one-fifth of which it occupied following the Tibet annexation. 
Beijing’s 2004 spat with South Korea over the ancient kingdom of Koguryo – triggered by a revised historical claim posted on the Chinese foreign ministry’s Web site that the empire, founded in the Tongge river basin of northern Korea, was Chinese – was seen as an attempt to hedge China’s options vis-à-vis a potentially unified Korea. 
By signaling that the present China-North Korea border may not be final, Beijing has raised the specter of potential tensions over frontiers in the future. 
Against that background, China’s increasingly assertive territorial and maritime claims threaten Asian peace and stability. 
In fact, the largest real estate China covets is not in the South or East China Seas: India’s Arunachal Pradesh is almost three times larger than Taiwan. 
Respect for boundaries is a prerequisite to peace and stability on any continent. 
Europe has built its peace on that principle, with a number of European states learning to live with boundaries that they don’t like. 
But the Chinese Communist Party still harps on old grievances to reinforce its claim to legitimacy: full restoration of China’s “dignity” after a century of humiliation at the hands of foreign powers. 
Through its overt refusal to accept Asia’s territorial status quo, China only highlights the futility of political negotiations. 
After all, frontiers are never significantly redrawn at the negotiating table, but only on the battlefield, as China has shown in the past. 
Today, whether it is Arunachal Pradesh or Taiwan or the Senkaku Islands or even the Spratlys, China is dangling the threat of force to assert its claims. 
By picking territorial fights with its neighbors, China is not only reinforcing old rivalries, but is also threatening Asia’s continued economic renaissance – showing that it is not a credible candidate to lead Asia. 
It is important for other Asian states and the US – a “resident power” in Asia, in the words of US Defense Secretary Robert Gates – to convey a clear message to China: a peaceful rise and unilateral redrawing of frontiers don’t mix. 

A Security Strategy for the 21st Century 
MADRID – “Time and again in our Nation’s history, Americans have risen to meet –and to shape – moments of transition. 
This must be one of those moments.” 
So begins the National Security Strategy of the United States of America, presented before Congress on May 27. 
As with the politics pursued in the Obama administration’s 16 months of office – dialogue, international commitment, nuclear non-proliferation and disarmament – the document’s strength lies in the position that it takes. 
The Security Strategy is a clear departure from that of its predecessor and offers a wider conception of what national security represents for US President Barack Obama. 
In the face of the major challenges of our times, Obama has taken a stand with a comprehensive doctrine. 
Indeed, the Security Strategy is almost a “National” Strategy. 
Its thinking goes beyond the dominant, unilateral paradigm of its predecessor and includes a defense of international law. 
This is particularly noteworthy, given that none of the great treaties to create an international criminal court and a permanent war-crimes tribunal was signed by the US during George W. Bush’s presidency. 
Obama’s approach to security is broader as well, proposing the “three Ds” – defense, diplomacy, and development – as indivisible parts of a whole. 
The military dimension of intervention abroad loses its privileged role, making way for the prevention of conflict and for peace-keeping and stabilization missions. 
In the fight against terrorism, the Strategy abandons the predominantly military viewpoint underlying the war against terror, and embraces a more significant role for the intelligence services. 
For the first time, precise reference is made to people liable to be a threat to US security. 
The US is not waging a war against terrorism; it is at “war against a specific network, al Qaida, and its affiliates.” 
In this war, information resources are particularly necessary. 
In order to guarantee national security, the Strategy is categorical – without giving in to the temptation of isolationism – in admitting the strategic value of the example and the importance of doing one’s homework first. 
Obama steers clear both of interventions for humanitarian purposes and of attempting to export democracy by force. 
There is no better way of exporting the values of democracy than by strengthening the US internally. 
Thus, an economic policy that tackles America’s debt and deficit makes up the main portion of the Strategy. 
Backing competitive education, innovation, technology, energy, and a more efficient and accessible health-care system complements and reinforces Obama’s leadership approach of setting an example with one’s own policies. 
An important example is removing the US prison at Guantánamo Bay from international limbo – one of his first initiatives as president. 
This approach does not have unanimous support among international experts. 
The two main criticisms – lack of strategic clarity and less emphasis on the classical concepts of power – point to America’s loss of influence, power, and leadership. 
But these criticisms reflect an inability to contemplate the current nature of armed conflict, which no longer follows the classical logic of military victory or defeat. 
The war in Afghanistan and the complex situation in Iraq have highlighted the importance of a comprehensive approach. 
Military action cannot be considered the only variable of success. 
A successful strategy should use civilian means – incidentally a model advocated by the European Union. 
We are faced with forging a new long-term policy that affects both states and societies. 
That task requires patience and strategic perseverance. 
Change will not occur from one day to the next, but the results obtained in the end will be better and more enduring. 
Obama maintains the idea of service to a historical mission for the US: the important job of guaranteeing global security. 
But, unlike his White House predecessors, Obama’s National Security Strategy recognizes the value of partnerships; attaches greater importance to the civilian dimension as opposed to the military; and stresses the value of dialogue and the need to reinforce international institutions. 
This is a good sign for a world with different power centers and interests, with resources and legitimacy remaining tied to the nation-state, but in which challenges (climate change, armed conflicts, pandemics, and transnational crime) are global and, therefore, require cooperation among states. 
We are in a transition period: international interconnection is increasing, as the global economic crisis has shown, but the management tools and mechanisms to guarantee the smooth operation of governments are still not being shared. 
Obama’s new National Security Strategy shows a political willingness to back an international order able to tackle these challenges. 
The road ahead is not free of difficulties, but the Strategy represents a decisive step towards solving the challenges of the twenty-first century and preparing us for the world of tomorrow. 




A Star is Jailed 
BANGKOK – Joseph Estrada, the disgraced former president of the Philippines, faces the prospect of spending his remaining years in prison after a special court in Manila found him guilty of amassing around US$15 million in bribes and kickbacks. 
During the 30 months he ruled his country, from mid-1998 to the start of 2001, Estrada accepted payoffs from gambling lords and orchestrated (with social security funds) sales of stocks, channeling much of the profits into his personal aliased account. 
Estrada literally defined plunder: as a senator in the early 1990’s, he was a member of the congress that crafted the law under which he was convicted. 
For many Filipinos, there is more than enough poetry in this fact, and certainly more irony than Estrada’s action-comedy movies of the 1960’s ever mustered. 
There is no underplaying the significance of the court’s unanimous decision to convict the first Philippine president ever to undergo a criminal trial. 
This is, after all, the Philippines, where Imelda Marcos is still living free and easy. 
Despite massive evidence of the widespread death, poverty, suffering, and dysfunction she and her late husband, the dictator Ferdinand Marcos, inflicted on the Philippines, the only real disappointment she has subsequently endured has been losing the last presidential election she was allowed to contest. 
The Philippines is not a country used to seeing powerful people punished. 
When officials are accused or suspected of corruption, they do not quickly resign, as in Korea or Japan. 
Instead, they often seek immunity by running for public office. 
When a bloody coup against Corazon Aquino’s fledgling democratic government failed, the leader of the putsch escaped from a floating prison – and then successfully ran for senator. 
The wheels of Philippine justice need retooling, so much so that the country’s Chief Justice himself recently called for an emergency summit to discuss a rash of extra-judicial killings that have the claimed the lives of leftists, human rights workers, and journalists under President Gloria Macapagal Arroyo. 
There have been few convictions for these crimes. 
Yet Filipinos themselves simply cannot seem to imagine their leaders behind bars. 
Even before Estrada’s conviction, opinion polls showed that 48% of Filipinos wanted clemency, if not a guaranteed pardon from Arroyo. 
More than 80% said Estrada should be allowed to languish in a lush private family vacation home where he already spent the last six years awaiting his verdict. 
Is this lack of appetite for justice a part of Filipino culture, or learned behavior? 
Has an overly forgiving nature prevented Filipinos from achieving closure in so many painful chapters of their history, or are the ravages of impunity to blame? 
With so few examples of justice clearly dispensed, and overwhelmed by examples of villains so easily forgiven or forgotten, perhaps Filipinos could not bring themselves to demand what they could not imagine. 
Estrada’s conviction gives Filipinos the clearest illustration of what the rule of law may bring to their society. 
Estrada remains adored by the masses, but so far the public’s reaction to the verdict has been nonviolent and almost subdued. 
Notwithstanding the opinion polls, it does seem as though the public not only accepts his conviction, but that they respect it as the outcome of a fair system that has been allowed to work. 
This suggests not only that justice in the Philippines has a chance; equally important, it suggests that Filipinos will give justice a chance. 
If the Estrada saga leads to a firm yet dignified exercise of justice, Filipinos may discover a taste for more of the same. 


Europe’s Lost Keynesians 
CAMBRIDGE – There is no magic Keynesian bullet for the eurozone’s woes. 
But the spectacularly muddle-headed argument nowadays that too much austerity is killing Europe is not surprising. 
Commentators are consumed by politics, flailing away at any available target, while the “anti-austerity” masses apparently believe that there are easy cyclical solutions to tough structural problems. 
The eurozone’s difficulties, I have long argued, stem from European financial and monetary integration having gotten too far ahead of actual political, fiscal, and banking union. 
This is not a problem with which Keynes was familiar, much less one that he sought to address. 
Above all, any realistic strategy for dealing with the eurozone crisis must involve massive write-downs (forgiveness) of peripheral countries’ debt. 
These countries’ massive combined bank and government debt – the distinction everywhere in Europe has become blurred – makes rapid sustained growth a dream. 
This is hardly the first time I have stressed the need for wholesale debt write-downs. 
Two years ago, in a commentary called “The Euro’s Pig-Headed Masters,” I wrote that “Europe is in constitutional crisis. 
No one seems to have the power to impose a sensible resolution of its peripheral countries’ debt crisis. 
Instead of restructuring the manifestly unsustainable debt burdens of Portugal, Ireland, and Greece (the PIGs), politicians and policymakers are pushing for ever-larger bailout packages with ever-less realistic austerity conditions.” 
My sometime co-author Carmen Reinhart makes the same point, perhaps even more clearly. 
In a May 2010 Washington Post editorial (co-authored with Vincent Reinhart), she described “Five Myths About the European Debt Crisis” – among them, “Myth #3: Fiscal austerity will solve Europe’s debt woes.” 
We have repeated the mantra dozens of times in various settings, as any fair observer would confirm. 
In a debt restructuring, the northern eurozone countries (including France) will see hundreds of billions of euros go up in smoke. 
Northern taxpayers will be forced to inject massive amounts of capital into banks, even if the authorities impose significant losses on banks’ large and wholesale creditors, as well they should. 
These hundreds of billions of euros are already lost, and the game of pretending otherwise cannot continue indefinitely. 
A gentler way to achieve some modest reduction in public and private debt burdens would be to commit to a period of sustained but moderate inflation, as I recommended in December 2008 in a commentary entitled “Inflation is Now the Lesser Evil.” 
Sustained moderate inflation would help to bring down the real value of real estate more quickly, and potentially make it easier for German wages to rise faster than those in peripheral countries. 
It would have been a great idea four and a half years ago. 
It remains a good idea today. 
What else needs to happen? 
The other steps involve economic restructuring at the national level and political integration of the eurozone. 
In another commentary, “A Centerless Euro Cannot Hold,” I concluded that “without further profound political and economic integration – which may not end up including all current eurozone members – the euro may not make it even to the end of this decade.” 
Here, all eyes may be on Germany, but today it is really France that will play the central role in deciding the euro’s fate. 
Germany cannot carry the euro on its shoulders alone indefinitely. 
France needs to become a second anchor of growth and stability. 
Temporary Keynesian demand measures may help to sustain short-run internal growth, but they will not solve France’s long-run competitiveness problems. 
At the same time, France and Germany must both come to terms with an approach that leads to far greater political union within a couple of decades. 
Otherwise, the coming banking union and fiscal transfers will lack the necessary political legitimacy. 
As my colleague Jeffrey Frankel has remarked, for more than 20 years, Germany’s elites have insisted that the eurozone will not be a transfer union. 
But, in the end, ordinary Germans have been proved right, and the elites have been proved wrong. 
Indeed, if the eurozone is to survive, the northern countries will have to continue to help the periphery with new loans until access to private markets is restored. 
So, given that Germany will be picking up many more bills (regardless of whether the eurozone survives), how can it best use the strength of its balance sheet to alleviate Europe’s growth problems? 
Certainly, Germany must continue to acquiesce in an ever-larger role for the European Central Bank, despite the obvious implicit fiscal risks. 
There is no safe path forward. 
There are a number of schemes floating around for leveraging Germany’s lower borrowing costs to help its partner countries, beyond simply expanding the ECB’s balance sheet. 
For meaningful burden-sharing to work, however, eurozone leaders must stop dreaming that the single currency can survive another 20 or 30 years without much greater political union. 
Debt write-downs and guarantees will inevitably bloat Germany’s government debt, as the authorities are forced to bail out German banks (and probably some neighboring countries’ banks). 
But the sooner the underlying reality is made transparent and becomes widely recognized, the lower the long-run cost will be. 
To my mind, using Germany’s balance sheet to help its neighbors directly is far more likely to work than is the presumed “trickle-down” effect of a German-led fiscal expansion. 
This, unfortunately, is what has been lost in the debate about Europe of late: However loud and aggressive the anti-austerity movement becomes, there still will be no simple Keynesian cure for the single currency’s debt and growth woes. 

A Survival Strategy for the Eurozone 
NEW YORK – After the Greek and Irish crises and the spread of financial contagion to Portugal, Spain, and possibly even Italy, the eurozone is now in a serious crisis. 
There are three possible scenarios: “muddle through,” based on the current approach of “lend and pray”; “break-up,” with disorderly debt restructurings and possible exit of weaker members; and “greater integration,” implying some form of fiscal union. 
The muddle-through scenario – with financing provided to member states in distress (conditional on fiscal adjustment and structural reforms), in the hope that they are illiquid but solvent – is an unstable disequilibrium. 
Indeed, it could lead to the disorderly breakup scenario if institutional reforms and other policies leading to closer integration and restoration of growth in the eurozone’s periphery are not implemented soon. 
The crisis started with too much private debt and leverage, which became public debt and deficits as crisis and recession triggered fiscal deterioration and private losses were mostly socialized via bailouts of financial systems. 
Then, distressed sovereigns that had already lost market access – Greece and Ireland – were bailed out by the International Monetary Fund and the European Union. 
But no one will bail out these super-sovereigns if the sovereigns prove to be insolvent. 
Thus, the current strategy of kicking the can down the road will soon reach its limits, and a different plan will be needed to save the eurozone. 
The first institutional reform takes the form of a larger envelope of official resources, which would mean a quasi-fiscal union. 
Official resources currently are sufficient to bail out Greece, Ireland, and Portugal, but not to prevent a self-fulfilling run on the short-term sovereign and financial liabilities of Spain and other potentially distressed eurozone members. 
So, even if these countries were to implement the necessary fiscal and structural reforms, an increase of official resources would nonetheless be needed. 
Because nervous investors don’t want to be last in line in case of a run, a disorderly rush to the exits is likely when official resources are insufficient. 
Short of full fiscal unification – or a variant of it in the form of eurozone bonds – this increase in official resources would occur through a much-enlarged European Financial Stability Facility and a much greater commitment by the European Central Bank to long-term bond purchases and liquidity operations to support banks. 
Since quasi-fiscal union implies that the eurozone’s core economies could end up systematically bailing out those on the periphery, only a formal loss of fiscal sovereignty – a credible commitment by the peripheral countries to medium- and long-term fiscal discipline – could overcome the current political resistance of Germany and others. 
But even a larger envelope of official resources is not sufficient to stem the insolvency problems of Greece, Ireland, and, possibly, Portugal and Spain. 
Thus, a second set of policies and institutional reforms requires that all unsecured creditors of banks and other financial institutions need to be “treated” – that is, they must accept losses (or “haircuts”) on their claims. 
This is needed to prevent even more private debt being put on government balance sheets, causing a fiscal blowout. 
If orderly treatment of unsecured senior creditors requires a new cross-border regime to close down insolvent European banks, such a regime should be implemented without delay. 
Similarly, super-sovereigns cannot continue to bail out distressed sovereigns that are insolvent rather than illiquid. 
Thus, in addition to an orderly resolution regime for banks, Europe must also implement early orderly restructurings of distressed sovereigns’ public debt. 
Waiting until 2013 to implement these restructurings, as German Chancellor Angela Merkel proposes, will destroy confidence, as it implies a much larger haircut on residual private claims on sovereign borrowers. 
Thus, orderly market-based restructurings via exchange offers need to occur in 2011. 
Such exchange offers can limit private creditors’ losses if they are done early. 
That way, formal haircuts on the face value of debt can be avoided via new bonds that include only a maturity extension and an interest-rate cap that is set below today’s unsustainable market rates. 
Waiting to restructure unsustainable debts would only lead to disorderly workouts and severe haircuts for some private creditors. 
Finally, Europe needs policies that restore competitiveness and growth to the eurozone’s periphery, where GDP is either still contracting (Greece, Spain, and Ireland) or barely growing (Italy and Portugal). 
Without growth, it will be difficult to stabilize public and private debts and deficits as a share of GDP – the most important indicator of fiscal sustainability. 
Moreover, without growth, the social and political backlash against painful belt-tightening will eventually undermine austerity and reform. 
Unfortunately, fiscal austerity and structural reforms are – at least in the short run – recessionary and deflationary. 
So other policies are needed to restore growth. 
The ECB should pursue a much looser monetary policy to jump-start growth, with a weaker euro to help boost the periphery’s competitiveness. 
In addition, Germany should delay its fiscal consolidation; if anything, it should cut taxes for a couple of years to boost its own growth and – via trade – that of the periphery. 
In the next few months, it will become clear whether European policymakers can compromise and implement reforms that dampen the threat of a eurozone breakup. 
Either the EU moves in the direction of a more stable equilibrium of closer integration, or the risk of an unstable and disorderly breakup scenario will rise significantly. 

A Sustainable Recovery 
NEW YORK – The global recession now underway is the result not only of a financial panic, but also of more basic uncertainty about the future direction of the world economy. 
Consumers are pulling back from home and automobile purchases not only because they have suffered a blow to their wealth with declining stock prices and housing values, but also because they don’t know where to turn. 
Should they risk buying a new car when gasoline prices might soar again? 
Will they be able to put food on the table after this year’s terrifying rise in food prices? 
Decisions about business investment are even starker. 
Businesses are reluctant to invest at a time when consumer demand is plummeting and they face unprecedented risk penalties on their borrowing costs. 
They are also facing huge uncertainties. 
What kinds of power plants will be acceptable in the future? 
Will they be allowed to emit carbon dioxide as in the past? 
Can the United States still afford a suburban lifestyle, with sprawling homes in far-flung communities that require long-distance automobile commutes? 
To a large extent, economic recovery will depend on a much clearer sense of the direction of future economic change. 
That is largely the job of government. 
After the confused and misguided leadership of the Bush administration, which failed to give any clear path to energy, health, climate, and financial policies, President-elect Barack Obama will have to start charting a course that defines the American economy’s future direction. 
The US is not the only economy in this equation. 
We need a global vision of sustainable recovery that includes leadership from China, India, Europe, Latin America, and, yes, even Africa, long marginalized from the world economy, but very much part of it now. 
There are a few clear points amidst the large uncertainties and confusions. 
First, the US cannot continue borrowing from the rest of the world as it has for the past eight years. 
America’s net exports will have to increase, meaning that the net exports of China, Japan, and other surplus countries will consequently decrease. 
The adjustments needed amount to a sizeable deficit-to-balance swing of around $700 billion in the US current account, or nearly 5% of US GNP. 
China’s trade surplus might shrink by half of that amount (with cuts in trade surpluses also spread over other global regions), meaning a shift in Chinese GNP toward internal demand and away from net exports equal to between 5% and 10% of China’s GNP. 
Fortunately, China is promoting a major domestic expansion. 
Second, the decline in US consumption should also be partly offset by a rise in US investment. 
However, private business will not step up investment unless there is a clear policy direction for the economy. 
Obama has emphasized the need for a “green recovery,” that is, one based on sustainable technologies, not merely on consumption spending. 
The US auto industry should be re-tooled for low-carbon-emission automobiles, either plug-in hybrids or pure battery-operated vehicles. 
Either technology will depend on a national electricity grid that uses low-emission forms of power generation, such as wind, solar, nuclear, or coal-fired plants that capture and store the carbon-dioxide emissions. 
All of these technologies will require public funding alongside private investment. 
Third, the US recovery will not be credible unless there is also a strategy for getting the government’s own finances back in order. 
George W. Bush’s idea of economic policy was to cut taxes three times while boosting spending on war. 
The result is a massive budget deficit, which will expand to gargantuan proportions in the coming year (perhaps $1 trillion) under the added weight of recession, bank bailouts, and short-term fiscal stimulus measures. 
Obama will need to put forward a medium-term fiscal plan that restores government finances. 
This will include ending the war in Iraq, raising taxes on the rich, and also gradually phasing in new consumption taxes. 
The US currently collects the lowest ratio of taxes to national income among rich nations. 
This will have to change. 
Fourth, the world’s poor regions need to be seen as investment opportunities, not as threats or places to ignore. 
At a time when the major infrastructure companies of the US, Europe, and Japan will have serious excess capacity, the World Bank, the European Investment Bank, the US Export-Import Bank, the African Development Bank, and other public investment funds should be financing large-scale infrastructure spending in Africa, to build roads, power plants, ports, and telecommunications systems. 
So long as the credits are long term and carry a modest interest rate (say, 25-year dollar loans at 5% per annum), the recipient countries could repay the loans out of the significant boost in incomes that would result over the course of a generation. 
The benefits would be extraordinary, for both Africa and the rich countries, which would be putting their businesses and skilled workers back to work. 
Such loans, of course, would require a major global initiative, at a time when even blue-chip companies cannot borrow overnight, much less for 25 years! 
In typical business cycles, countries are usually left to manage the recovery largely on their own. 
This time we will need global cooperation. 
Recovery will require major shifts in trade imbalances, technologies, and public budgets. 
These large-scale changes will have to be coordinated, at least informally if not tightly, among the major economies. 
Each should understand the basic directions of change that will be required at the national level and globally, and all nations must share in the deployment of new sustainable technologies and in the co-financing of global responsibilities, such as increased investments in African infrastructure. 
We have arrived at a moment in history when cooperative global political leadership is more important than ever. 
Fortunately, the US has taken a huge step forward with Obama’s election. 
Now to action. 

A Tale of Two American Economies 
NEW YORK – While the United States recently reported 3.5% GDP growth in the third quarter, suggesting that the most severe recession since the Great Depression is over, the American economy is actually much weaker than official data suggest. 
But official measures of GDP may grossly overstate growth in the economy as they don't capture the fact that business sentiment among small firms is abysmal and their output is still falling sharply. 
Third quarter GDP - properly corrected for these factors - may have been 2% rather than 3.5%. 
The story of the US is, indeed, one of two economies. 
There is a smaller one that is slowly recovering and a larger one that is still in a deep and persistent downturn. 
Consider the following facts. 
While America’s official unemployment rate is already 10.2%, the figure jumps to a whopping 17.5% when discouraged workers and partially employed workers are included. 
And, while data from firms suggest that job losses in the last three months were about 600,000, household surveys, which include self-employed workers and small entrepreneurs, suggest that those losses were above two million. 
Moreover, the total effect on labor income – the product of jobs times hours worked times average hourly wages – has been more severe than that implied by the job losses alone, because many firms are cutting their workers’ hours, placing them on furlough, or lowering their wages as a way to share the pain. 
Many of the lost jobs – in construction, finance, and outsourced manufacturing and services – are gone forever, and recent studies suggest that a quarter of US jobs can be fully outsourced over time to other countries. 
Thus, a growing proportion of the workforce – often below the radar screen of official statistics – is losing hope of finding gainful employment, while the unemployment rate (especially for poor, unskilled workers) will remain high for a much longer period of time than in previous recessions. 
Consider also the credit markets. 
Prime borrowers with good credit scores and investment-grade firms are not experiencing a credit crunch at this point, as the former have access to mortgages and consumer credit while the latter have access to bond and equity markets. 
But non-prime borrowers – about one-third of US households – do not have much access to mortgages and credit cards. 
They live from paycheck to paycheck – often a shrinking paycheck, owing to the decline in hourly wages and hours worked. 
And the credit crunch for non-investment-grade firms and smaller firms, which rely mostly on access to bank loans rather than capital markets, is still severe. 
Or consider bankruptcies and defaults by households and firms. 
Larger firms – even those with large debt problems – can refinance their excessive liabilities in court or out of court; but an unprecedented number of small businesses are going bankrupt. 
The same holds for households, with millions of weaker and poorer borrowers defaulting on mortgages, credit cards, auto loans, student loans, and other forms of consumer credit. 
Consider also what is happening to private consumption and retail sales. 
Recent monthly figures suggest a pick-up in retail sales. 
But, because the official statistics capture mostly sales by larger retailers and exclude the fall in sales by hundreds of thousands of smaller stores and businesses that have failed, consumption looks better than it really is. 
And, while higher-income and wealthier households have a buffer of savings to smooth consumption and avoid having to increase savings, most lower-income households must save more, as banks and other lenders cut back on home-equity loans and lower limits on credit cards. 
As a result, the household savings rate has risen from zero to 4% of disposable income. 
But it must rise further, to 8%, in order to reduce the high leverage of household sector. 
To be sure, the US government is increasing its budget deficits to put a floor under demand. 
But most state and local governments that have experienced a collapse in tax revenues must sharply retrench spending by firing policemen, teachers, and firefighters while also cutting welfare benefits and social services for the poor. 
Many state and local governments in poorer regions of the country are at risk of bankruptcy unless the federal government undertakes a massive bailout of their finances. 
Moreover, income and wealth inequality is rising again: poorer households are at greater risk of unemployment, falling wages, or reductions in hours worked, all leading to lower labor income, whereas on Wall Street outrageous bonuses have returned with a vengeance. 
With the stock market rising while home prices are still falling, the wealthy are becoming richer, while the middle class and the poor – whose main wealth is a home rather than equities – are becoming poorer and being saddled with an unsustainable debt burden. 
So, while the US may technically be close to the end of a severe recession, most of America is facing a near-depression. 


A Tale of Two Elections 
LONDON – Individual elections do not always enhance democracy – a useful reminder that the ballot box is only one part, albeit a central one, in any free, plural society. 
Of course, there are also magnificent examples of elections that strengthen both the stability and the institutions of a community. 
We have just witnessed an example of the second kind in India, the world’s largest and greatest democracy, where 420 million voters there returned a Congress-led government with a solid majority. 
It was in many respects a personal triumph for Prime Minister Manmohan Singh. 
His victory shows that it is possible to succeed in politics through decency, honesty, and high intelligence. 
Sonia Gandhi and her family should also take credit for putting at the forefront of their campaign a vision of an inclusive society, which rejects divisions on the basis of caste, ethnicity, language, and religion. 
The result should help India to continue – not without occasional turbulence – its journey toward becoming a high-growth economy that raises the standard and quality of life for the poor. 
I wish we could look forward in Europe to a similarly healthy democratic experience next month when voters throughout the European Union elect new members of the European Parliament. 
Since 1979, these MEPs have been elected direct rather than indirectly from national parliaments. 
But turnout for these elections has been falling in several countries. 
There is a danger that the number voting in June will be lower than ever before. 
Moreover, in the current grim economic conditions across Europe, voters who do turn out are all too likely to take the opportunity to punish the major parties and vote for fringe and even extremist politicians. 
There are particular circumstances that may encourage this electoral response. 
First, everywhere there is a sense of disgust at the way the recent boom seemed to privatize gains while the subsequent bust socialized losses. 
A few rich individuals appeared to gain and all taxpayers to lose. 
This has spread a sense of unfairness. 
Second, globalization has been the target for populist criticism. 
It is usually defined to mean everything we dislike – from changes to our traditional way of life to loss of jobs. 
It is a brave politician who points out how much liberalizing trade and opening up markets have increased our overall prosperity. 
Third, in Britain at least, the entire political class has been discredited by a sleazy scandal about the expenses that many parliamentarians have paid themselves. 
Analogies with pigs, snouts, and troughs fill the pages of British newspapers. 
But there is another reason for the lack of interest in the EU elections. 
The European Parliament has power, but it deals with issues that, while important to voters, do not top their list of concerns. 
The EU’s member states retain power over the most sensitive political issues, including taxes, health, education, pensions, the labor market, and foreign policy. 
So the questions that dominate national campaigns have little impact on European elections. 
The European Parliament deals with the important areas where individual countries have pooled their sovereignty, like trade, the creation of a pan-European market, and the biggest environmental issues. 
But these are not often the questions that trigger the most passionate interest. 
In addition, the European Parliament’s detachment from national political debates means that it has less political legitimacy than is desirable. 
Indeed, those who worry about the creation of a European superstate can rest easy. 
There will be no such entity, because there is no European electorate; the electorate remains French, Belgian, Latvian, Greek, and so on. 
They all vote at the same time, for the same institution. 
But what does an Italian know – or care, for that matter – about British politics? 
Look at our television programs. 
We know far more about Europe’s football than we do about Europe’s politics. 
“The beautiful game” brings people together more effectively and reliably than the European Parliament is able to do. 
That is no criticism of those who work – often very hard – in the European Parliament. 
We have created a political body that has power to hold European institutions to account but has no obvious European electorate to which it can itself be held accountable. 
A parliament without a people inevitably increases the sense of frustration that many European voters feel about the process of making Europe-wide policy choices in their name. 
If the Lisbon Treaty is ratified later this year, one of the changes should result in national parliaments becoming more involved in European decision-making. 
But we need to look country-by-country at what else we can do to tie Europe’s own parliament into national politics. 
Unless we do that better, fewer people will vote for MEPs, more of them will be elected simply on a protest vote and represent Europe’s murky extremes, and the whole practice and principle of European democracy will be discredited. 

A Tale of Two Terminals 
BEIJING – Ever since it opened recently, Terminal 5 of London’s Heathrow Airport has been plagued with failures. 
On the other side of the globe, Terminal 3 in Beijing, which opened for full operations just one day before Terminal 5, has been operating almost without a glitch. 
The media, unsurprisingly, have feasted upon the failures of T5 in London, while neglecting the successes of T3 in Beijing. 
By all measures, Beijing’s T3 surpasses London’s T5. 
Whereas T5 can handle only 12,000 bags an hour (when it handles them at all) and 30 million passengers per year, T3 can handle 20,000 bags an hour and 50 million passengers. 
While T5 will mostly service British Airways, T3 will service Air China and two dozen other airlines. 
At one million square meters, T3 in Beijing is the largest terminal in the world, but was much less costly to build than T5 in London. 
Using the most recent exchange rates, T3 cost only $3.86 billion compared with $8.6 billion for London’s T5. 
Furthermore, T3 took less than four years to complete, whereas T5 took almost 20 years. 
But to call T3 a success for socialism and T5 a failure of capitalism would be to miss a fundamental point. 
After all, if China’s political system can still be called socialism, it is at best “socialism with Chinese characteristics,” which embodies an increasing amount of market-oriented economic activity and greater economic openness and transparency. 
It would be similarly misleading to attribute T3’s success to China alone. 
After all, T3 was designed by a Briton, and has incorporated the most recent architectural and operational trends, styles, and standards in the world. 
T3 in Beijing is just one of many projects China has recently built to improve its transportation infrastructure. 
In addition to having become the world’s industrial park, China now has more mobile phone subscribers than the combined populations of the United States, the United Kingdom, Canada, Australia and New Zealand, and the number of Internet users has just surpassed that in the US. 
All of this development raises a fundamental question: how should we make sense of the explosive productivity growth that has become China’s new hallmark? 
Those who cling to old ideological stereotypes face an almost impossible task in reconciling China’s rapid growth with what they condemn as China’s failing system. 
The truth is that ever since the end of the 1970’s, China has become convinced that peace and stability are the most important preconditions for its development. 
Thus, anything that may distract China from its focus on peace, stability, and development has been strongly resisted. 
This may help explain why T3 in Beijing is such a success, and why Chinese are now more united than ever before in condemning attempts to hijack or sully the Olympics for ulterior motives. 
I hope that when millions of overseas passengers pass through T3, including those who do so during the Beijing Olympics, they will pause and reflect upon the distance China has traveled over the past three decades in its reform and opening to the outside world. 
Granted, China still has further to go, and many people may find fault with much in the country. 
But they should not refuse to acknowledge that China’s mission to turn a nation of 1.3 billion poor people into a developed country through peace and free trade is one of the great, honorable, and most difficult sagas in human history. 
Following the disturbances in Tibet and the troubles affecting the Olympic torch’s progress around the world, some voices abroad are showing a greater inclination to dismiss, vilify, humiliate, or even split China. 

A Thai Spring? 
BANGKOK – The thunderous results of Thailand’s general election on July 3 will seem familiar to anyone attuned to the political upheaval in the Middle East and North Africa. 
Entrenched incumbent regimes everywhere are under severe stress from advances in information technology, shifts in demographics, rising expectations, and the obsolescence of Cold War exigencies. 
In the absence of a willingness and ability to use violent repression, regime survival can be achieved only through concessions, accommodation, and periodic reinvention. 
With 47 million voters and turnout at 75%, Thailand’s latest election results pose a decisive challenge to the country’s long-established regime. 
The Pheu Thai party, led by Yingluck Shinawatra, the youngest sister of exiled fugitive former Prime Minister Thaksin Shinawatra, secured a resounding triumph, winning 265 seats in the 500-member assembly, while the ruling Democrat Party mustered just 159. 
The return to power of Pheu Thai is extraordinary – and not only because Yingluck will be Thailand’s first female prime minister. 
The establishment-aligned courts dissolved the party’s two previous governments, and banned scores of its leading politicians from office for five years. 
Pheu Thai’s victory thus suggests that a previously marginalized electorate has been permanently awakened. 
A similar majority of the Thai electorate voted for Thaksin’s parties and their pro-poor populist platforms in January 2001, February 2005, April 2006, and December 2007, defying a military coup, a coup-induced constitution, judicial interventions, and army coercion and repression. 
The recent election marked a profound break from the past. 
In the second half of the twentieth century, Thai elections seemed to alternate with military coups. 
Voters were bought and sold like commodities. 
After elections, voters hardly ever saw or heard from their MPs, who typically went on to engage in corruption and graft in Bangkok – eventually losing legitimacy and paving the way for military coups. 
A new constitution and elections invariably ensued. 
This vicious cycle of coups, constitutions, and elections defined Thai politics for decades. 
That pattern reflected Cold War imperatives. 
The pillars of the Thai state – nation, religion, and the king – struck a unifying, collective chord, and the resulting stability enabled economic development. 
While growth was so concentrated that popular resentment simmered, communism was kept at bay. 
Challenges to the established order, with the military-monarchy-bureaucracy triumvirate as its anchor, were repeatedly put down. 
Back then, Thai schoolchildren sang martial songs each morning, and Thais knew their place in the rigidly elitist pecking order, which was reinforced by socialization and indoctrination in classrooms and living rooms, where only state-controlled media could enter. 
Thais were more like obedient subjects than informed citizens. 
Dissenting views found little traction. 
The rise of Thaksin’s Thai Rak Thai party in 2001 changed all that. 
The party pursued a scientific approach to elections, relied on expensive polling by foreign experts, and offered a clear agenda and strong leadership. 
It was the first post-Cold War party to capture Thais’ collective imagination. 
The voices of neglected swaths of the electorate, particularly in the rural north and northeast of the country, began to count. 
Vote-buying became increasingly insufficient. 
A bond between party and voters – a bond based on policy – took root. 
By 2001, the Cold War was long over. 
Political leaders who dissented from the status quo could no longer easily be jailed on communism-related charges. 
The advent of the Internet had made it harder for the authorities to shape Thai minds, as media sources multiplied and the resulting diffusion of information undermined the effectiveness of state propaganda. 
Moreover, new international norms had come to the fore: external powers that previously turned a blind eye to coups, military dictatorships, and repression now rallied around democracy and human rights. 
Thailand’s demographics also changed. 
The Cold War curriculum of induced unity and stability has no relevance for today’s schoolchildren; indeed, most university students nowadays were born after the Cold War ended. 
These factors fostered a new political environment, and Thaksin, who was a telecommunications tycoon at the time, was well positioned to seize the opportunity. 
He overhauled the bureaucracy, delivered on his promises to the poor, mapped out an industrial strategy, and re-designed an overstretched foreign policy agenda, among other innovative measures. 
Of course, Thaksin’s rule had a dark underside: corruption, legislated conflicts of interest, cronyism, human rights violations, and abuse of power, among other evidence of misrule. 
Such is Thaksin’s mixed legacy. 
The opportunities, hopes, and dreams delivered to the downtrodden and the vision and plans for Thailand’s future were enmeshed with his own venality. 
But, while Thaksin committed many infractions, his gravest “sin” was to have changed the way Thais think and behave. 
Some see this change as usurpation; others view it as Thailand’s deliverance into the twenty-first century. 
Thaksin’s adversaries in Thailand’s entrenched regime were unwilling to accede to his policy innovations and populism. 
For them, doing so would be tantamount to admitting that most people in this hospitable, well-endowed kingdom had been kept poor by design all along. 
For his part, Thaksin has sought to portray the recent election results as being all about him. 
But he is best viewed as a self-serving, unwitting agent of political modernization. 
It is these twenty-first-century dynamics and changes, underpinned by an increasingly assertive citizenry, with which the Thai establishment must come to terms if the country is to move forward. 


A Time for Clarity 
JOHANNESBURG – Terrorism and global warming loom, in many people’s minds, as the greatest threats to the planet. 
In the United States, the Bush administration wants to increase funding for border security and immigration enforcement by nearly 20%. 
More than $150 million is being spent to help transit systems in New York, New Jersey, and Connecticut prevent and respond to terrorist attacks. 
But international terrorism kills about 400 people in total each year. 
How much should we be willing to pay to reduce that death toll by, say, 25% – a billion dollars, a hundred billion? 
Meanwhile, in Hawaii, policymakers gathered to discuss a climate change treaty to replace the Kyoto Protocol. 
The environmental lobby groups want the next treaty to go much further than Kyoto, which is already setting the world back $180 billion a year. 
Indeed, efforts to slow global warming through the Kyoto Protocol or a similar treaty will make a miniscule difference, delaying temperature rises by just seven days by 2100. 
A tenth of the annual cost of the Kyoto Protocol – or a tenth of the US budget this year for the wars in Iraq and Afghanistan – would prevent nearly 30 million new infections of HIV/AIDS. 
The same sum could similarly be used to help the four million people who will die from malnutrition this year, the 2.5 million killed by indoor and outdoor air pollution, the two million who will die because they lack micronutrients (iron, zinc, and vitamin A), or the two million whose deaths will be caused by a lack of clean drinking water. 
We know how to stop people from dying from malnutrition, pollution, HIV/AIDS, and malaria. 
Effective strategies are cheap and simple: it’s mostly a question of getting what’s needed (micronutrients, cleaner forms of fuel, free condoms, mosquito nets) to those in need. 
Death tolls remain high because we have limited resources to solve all the world’s problems, and these problems are not our biggest concerns. 
Governments and NGOs spend billions of dollars each year trying to help the world without explicitly considering whether they are achieving the most they can. 
They set priorities among the well-intentioned projects they finance, merely by deciding to do some things and not others – often based on political realities and media attention rather than rigorous scrutiny. 
Panic about terrorism and climate change doesn’t blind us entirely to other problems facing the planet, but our fear does distort the lens through which we see the big picture. 
I hope that a clearer picture will emerge when a roundtable of international economists convenes in May to assess more than 50 solutions to different global challenges as part of the “Copenhagen Consensus” project. 
The participants will use cost-benefit analysis to weigh up different strategies. 
The result will be a prioritized list of solutions, showing which projects promise the greatest benefits compared to their costs. 
Should the world steam head-on into another Kyoto Protocol-style agreement? 
Should we make air pollution our top priority? 
Some object strongly to the idea of using economic tools to weigh the world’s biggest problems. 
But this is a way to get honest about what works and what doesn’t. 
It’s too easy for politicians to throw more money at problems like terrorism, when some nations may already spend too much on security measures that merely shift attacks around. 
We need to know. 
When we acknowledge that some policies achieve little, we can debate other options. 
Maybe there are smarter ways to combat terrorism than expensive wars and ever more homeland security. 
Maybe we can tackle climate change better through less costly, more effective technology pushes. 
Maybe we will end up helping the world more by focusing on air pollution, education, or the condition of women. 
We know how politicians make their spending decisions today. 
In May, we’ll see how some of the world’s best economists – including five Nobel laureates – would invest the same money to get the biggest benefits possible. 
We will discover what could happen if politicians would rise above the distortion of the media’s intense concentration on terrorism and climate change. 
The result should be a clearer focus on the world’s biggest issues and their best solutions. 

A Time of Tests 
LONDON – This is a tough time to be a decision-maker. 
We live in an era of low predictability. 
The world appears in constant flux. 
The challenges are immense. 
And most of all, there is, in many instances a clash between the correct short term politics and the correct long term policy. 
On the economy, the climate debate and security, the immediate pressures pretty much run one way: increase the role of government in the economy; put the climate deal off to more congenial financial times; and get out of substantial military commitment to fighting global terrorism. 
Yet in each case the right long-term policy almost certainly points to the opposite course. 
What is the way to bridge this gap between short and long term? 
To decide how to do that is to decide fundamentally what we believe in and what we want from our future.In deciding this, only the head can guide us in how to do it; but the heart must tell us what it is we truly believe in doing. 
In the economy, the near universal conventional wisdom after the collapse of the banking system, was that the market had failed and the state had to step in. 
Old copies of John Kenneth Galbraith’s The Great Crash of 1929 and Keynesian tracts were dusted off and avidly re-read. 
And it is true: the market did fail and the state had to step in. 
The fiscal and monetary stimuli were important in themselves, but even more so because they indicated that the strength of government was going to be utilised to prevent contagion and further collapse. 
But if we move to analysing what sort of recovery we can expect and what sort of future economy we are trying to fashion, it is by no means clear that we need a continuing, intrusive state role. 
On the contrary, we need the private sector to regain its sense of enterprise, innovation and vigour; we need to be careful of regulating so as to squeeze the availability of credit; and we should certainly avoid protectionism. 
True, the private sector will have much re-structuring to go through and the big deficits have been accumulated in the crisis must be unwound.This will mean a radical re-structuring of the state and its services. 
But in the end, business not government will power the global economy forward. 
In other words, the claim that “the market failed” is too alarmingly broad.Actually, one part of the market failed, but government and regulators were part of that failure. 
If we believe that this is true, it will ultimately be the creativity (in the best sense) of the private sector that will see us return to prosperity. 
So we need to make decisions in the coming weeks and months which help the private sector and not harm it. 
Likewise, in respect of the environment and energy, whatever the financial pressures, if we think that the earth’s climate is probably changing as a result of human activity, we need to set the global economy on a low carbon path to the future. 
This doesn’t mean that we can come out with unrealistic propositions as we struggle for a new global treaty to succeed the Kyoto Protocol. 
We should not make the best the enemy of the good. 
There are major things we can do on the basis of existing knowledge – on deforestation, energy efficiency and renewables – to make a big difference over the next decade. 
We will then require a long-term framework of incentives to develop the technologies of the future. 
But the point is: now is not the time to put off action. 
The seriousness of China on this issue, and now India, the enthusiasm of Brazil and others in the emerging markets to participate in tackling climate change: all of this offers a huge opportunity that should be grasped. 
And for the West, we should all remind ourselves about $100 a barrel oil. 
There are exemplary reasons of energy security why we need to change the nature of our economies to drive down carbon dependence. 
In security questions, the choices here are perhaps the hardest of all. 
A public, understandably disheartened by the length of the current military campaigns and loss of life in Afghanistan and Iraq, is sympathetic to the idea of disengagement. 
But this is also where, most of all, we need to decide what it is we truly believe in. 
The reason it is hard going in Afghanistan right now, for example, is that the forces we are facing are making it so. 
They are doing this by the use of terrorism and by brutal intimidation of the civilian population and in defiance of the expressed and plain will of the international community. 
Time and again what is clear is that people, given the chance, do want governments that are accountable, proper rule of law and the ability to choose their own destiny. 
Those using terror, whether in Afghanistan, Pakistan, Iraq, Somalia, Yemen and the list could go on and on, do so to de-stabilise nations and to thwart the will of the people to live in peace. 
Disengaging now will not leave people free from our interference; it will put them at the mercy of groups whose extremism threatens the very way of life that we stand for and to which they aspire. 
So no matter how difficult it is, we should remember what it is we believe in and why. 
So now is a moment, even amongst all the uncertainty, for some clarity and that clarity comes best from a worked out strategy based on a strong set of convictions. 

A Time to Build 
Any good international investment banker knows that the end of April is a bad time to come peddling his services, for that is when the world’s finance ministers return home from the IMF meetings in Washington, chastened that risks to the global economy could spill over into their own backyards. 
Ministers are too busy recovering from their trauma to think about paying fat fees for big new international bond issues. 
Who wants to build up debt if there might be a financial crisis around the corner? 
Better to keep socking away US Treasury bills, even if the return is far lower than on most other investments. 
Or is it? 
With today’s global economy in the middle of a sustained and increasingly balanced expansion, has the time come to start considering upside risks? 
In particular, should governments, especially those that are endlessly building up dollar reserves, instead start thinking about how to build up their roads, bridges, ports, electric grids, and other infrastructure? 
Has the time come to start laying the groundwork to sustain future growth, especially in poorer regions that have not yet shared in today’s prosperity? 
Don’t get me wrong, I am not arguing for fiscal profligacy. 
But the balance of risks has shifted over the past few years. 
Yes, within the next three to five years, there will probably be another global recession. 
And, yes, there will probably be another rash of financial crises – perhaps in Central Europe, which now looks like Asia did before its 1997 crisis. 
Recent jitters about Iceland’s gaping trade deficit and Brazil’s new finance minister rippled around the world, reminding global investors that while many emerging markets are gradually moving towards investment-grade status, most are not there yet. 
But the risks are two-sided, and sound economic policy is just as much about capitalizing on good times as avoiding bad ones. 
Economic gurus at places like the World Bank have developed a ridiculously long list of steps that countries should take to raise their growth rates (the so-called “extended Washington Consensus”). 
Like maintaining good health, it is not enough to concentrate on a single component. 
But if there is one area where obvious opportunities exist, and where policy can really make a difference, it would have to be infrastructure investment. 
India’s infrastructure problems are legendary, with airports and railroads that are comically inadequate. 
However, aside from a few countries – including China, of course, but also Spain – low infrastructure spending is epidemic. 
Even the United States has infrastructure that is hobbled by neglect, with collapsing bridges and a dangerously overburdened electrical grid. 
Land-rich Brazil, too, is a case study in the consequences of under-investment. 
Its infrastructure systems might be adequate to support the country’s tepid 3-4% growth rates, but they are hardly adequate to support the 6-7% rates that it ought to be enjoying amidst the current global boom. 
Russia, despite Siberia’s massive oil and gas riches, isn’t even investing enough to support healthy growth in its energy industries, much less human development in the country’s impoverished areas (including hapless Siberia). 
True, government infrastructure spending is often wasted. 
My hometown of Boston recently managed to spend an astounding $15 billion dollars to move a few highways underground. 
And that so-called “Big Dig” looks like a model of efficiency next to many of Japan’s infamous bridges to nowhere. 
But there are ways to waste less. 
Transparency in procurement works wonders. 
So, too, does private sector involvement. 
The Nobel laureate economist William Vickrey argued tirelessly in favor of privately financed toll roads. 
Private oversight can often produce better and more efficient construction, and, in theory, toll roads help alleviate traffic congestion. (Ironically, Vickery died while sitting in a traffic jam.) 
Even China, which has added more than 50,000 kilometers of roads and dozens of airports over the past five years, makes use of private financing. 
True, countries that have not cleaned up their fiscal act, such as India, must not recklessly plunge ahead with big government projects without counterbalancing reforms to ensure sustainability. 
Fiscal prudence and stable inflation rates are cornerstones of today’s relatively healthy global economic environment. 
But for countries that have scope to invest more, particularly those that are holding a surfeit of precious development dollars in idle US Treasury bills, the time may be ripe to reassess the balance of risks. 
The IMF is absolutely right to remind ministers each April of downside risks. 
Countries’ need for better infrastructure is no license to throw prudence out the window. 
But when the world’s finance ministers recover from their April shock therapy, they also need to look at the opportunities. 

A Time to Dare 
NEW YORK – The upcoming G-20 meeting is a make-or-break event. 
Unless it introduces practical measures to support the countries at the periphery of the global financial system, global markets will suffer another round of decline, just as they did after United States Treasury Secretary Timothy Geithner’s failure in February to produce practical measures to recapitalize America’s banking system. 
The current financial crisis is different from all the others we have experienced since World War II. 
On previous occasions, whenever the financial system came to the brink of a breakdown, the authorities got their act together and pulled it back from the brink. 
This time the system actually broke down in the aftermath of Lehman Brothers’ collapse last September, and it had to be put on artificial life support. 
Among other measures, both Europe and the US have effectively guaranteed that no other important financial institution will be allowed to fail. 
This step was necessary, but it produced unintended adverse consequences: many other countries, from Eastern Europe to Latin America, Africa, and Southeast Asia, could not offer similarly convincing guarantees. 
Abetted by the determination of national financial authorities at the center of the world economy to protect their own institutions, capital fled from the periphery. 
Currencies fell, interest rates rose, and credit default swaps soared. 
When the history of this crisis is written, it will be recorded that – in contrast to the Great Depression – protectionism first prevailed in finance rather than trade. 
The International Financial Institutions (IFIs) are now faced with a novel task: to protect the periphery countries from a storm that emanated from the center. 
They are used to dealing with governments; now they must learn to deal with the collapse of the private sector. 
If they fail to do so, the periphery economies will suffer even more than those at the center. 
Countries on the periphery tend to be poorer and more dependent on commodities than the more developed world, and they must repay more than $1.4 trillion in bank loans in 2009 alone. 
These loans cannot be rolled over without international assistance. 
British Prime Minister Gordon Brown recognized the problem and placed it on the G-20’s agenda. 
But, in the course of preparations, profound attitudinal differences have surfaced, particularly between the US and Germany. 
The US has recognized that only using the credit of the state to the fullest extent possible can reverse the collapse of credit in the private sector. 
Germany, traumatized by the memory of hyperinflation in the 1920’s and the consequent rise of Hitler in the 1930’s, is reluctant to sow the seeds of future inflation by incurring too much debt. 
Both positions are firmly held and can be buttressed by arguments that are valid from the point of view of the country concerned. 
But the controversy threatens to disrupt the April 2 meeting. 
It should be possible for each side to respect the other’s position without abandoning its own and to find common ground. 
Instead of setting a universal target of 2% of GDP for stimulus packages, it is enough to agree that the periphery countries need international assistance to protect their financial systems and engage in countercyclical policies. 
That is in the common interest. 
If the periphery economies are allowed to collapse, developed countries will also be hurt. 
As things stand now, the G-20 meeting will produce some concrete results: the resources of the International Monetary Fund are likely to be effectively doubled, mainly by using the mechanism of the New Arrangement to Borrow (NAB), which can be activated without resolving the vexing question of reapportioning voting rights in the IFIs. 
This will be sufficient to enable the IMF to come to the aid of specific countries in trouble, but it will not provide a systemic solution without conditionality. 
Such a solution is readily available in the form of Special Drawing Rights (SDR). 
The mechanism exists and has already been used on a small scale. 
SDRs are highly complicated and difficult to grasp, but they boil down to the international creation of money. 
Countries that are in a position to create their own money do not need them, but the periphery countries do. 
Rich countries should therefore lend their allocations to the countries in need. 
This would not create a budget deficit for rich countries. 
Recipient countries would have to pay the IMF a very low interest rate: the composite average treasury bill rate of all convertible currencies. 
They would have free use of their own allocations, but the IFIs would supervise how the borrowed allocations are used to ensure that the borrowed funds are well spent. 
It is difficult to think of a scheme where the cost/benefit ratio is so favorable. 
In addition to the one-time increase in the IMF’s resources, there ought to be substantial annual SDR issues, say, $250 billion, as long as the global recession lasts. 
To make the scheme counter-cyclical, the SDR issues could be callable in tranches when the global economy overheats. 

A Tribute to Evil 
In May, the world will mark the 60th anniversary of the end of World War II in Europe. 
But instead of happily preparing for that occasion, the Baltic countries of Estonia, Latvia, and Lithuania – which scarcely 15 years ago regained the independence they lost in WWII – are uneasy. 
The heads of state of all three countries have been invited to participate in the parades to be held in Moscow to celebrate the Red Army’s victory over Nazi Germany. 
But the host of the celebration, Russia, in the guise of the Soviet Union, itself caused the war – the bloodiest in European history – whose end is being commemorated. 
Of course, the USSR instigated the war in tandem with Adolf Hitler, but its responsibility is undeniable. 
By holding these celebrations in Red Square, and thus highlighting the Soviet victory, today’s Russia is also celebrating its gains in that war. 
One of those gains was my country, Lithuania, whose incorporation into Stalin’s empire was accompanied by countless tragedies. 
Unlike Germany, Russia has never recognized its responsibility for the war and the mass graves of the innocent. 
Thus, a former captive nation is now being invited to celebrate its captivity. 
This is why almost all Lithuanians – indeed, most residents of the Baltic countries – feel queasy at the prospect of their leaders marking this anniversary in Moscow. 
But Estonians, Latvians, and Lithuanians are not the only Europeans who should feel this way. 
When Stalin offered Hitler his friendship in the spring of 1939 – formally concluded that summer in the Molotov-Ribbentrop Pact – Nazi aggression was assured of not being knifed in the back from the East and so was left with free hands to do as Hitler pleased in the West. 
The Pact came after the pogroms of “Kristallnacht” in Germany, so its Soviet initiators knew pretty well to what destiny they were consigning the Jews of Poland and Lithuania, which, in accord with the first secret Protocol signed by Ribbentrop and Molotov on August 23, 1939, were to go to Hitler. 
A month later, in equal secrecy, Hitler sold Lithuania to Stalin. 
The other countries situated between Germany and the USSR were similarly sentenced to disappear as nations – sooner or later. 
Their peoples were treated practically as though they did not exist; the aggressors’ only concern was territory. 
The death sentences and torturing that were then imposed on almost entire nations and millions of people are, it now appears, to be silently accepted and noisily celebrated on May 9 in Moscow. 
Some Russian officials want to unveil a monument Stalin to crown the festivities. 
When Hitler’s Wehrmacht struck West, the USSR duly supported Germany in its war against Poland, France, Belgium, the Netherlands, Luxembourg, Denmark, Norway, and the United Kingdom. 
As a result, cities in those countries were flattened and people killed not only by the Nazis, but also by their Soviet ally, which invaded Poland and supplied the Wehrmacht with the material it needed for its war against the West. 
In return, Stalin’s USSR was given a free hand to attack Finland and to occupy Estonia, Latvia, and Lithuania, as well as a part of Romania. 
In law, when two criminals seal a contract with the blood of their victims, that act remains a crime, even if the two criminals later have a falling out and spray bullets at one another. 
The same applies to the two greatest European criminals of the twentieth century. 
We must not forget the crimes that Hitler and Stalin committed together as de facto allies only because they later turned on each other. 
The blood of WWII’s victims calls for justice and fairness, but most of all it demands honesty about who and what caused their tragic fate. 
If those who gather in Moscow on May 9 do anything to validate Soviet war crimes, they will show themselves insensitive to the silent cries of WWII’s tens of millions of dead innocents. 
The only real winner would be the spirit of that evil. 

A Tribute to James Wolfensohn 
Over the past decade, the global economy has achieved unprecedented prosperity built on trade, international capital flows, and technological innovation. 
Amidst this undeniable progress, however, remain widespread poverty, disease, and illiteracy. 
In a world made smaller by modern telecommunications, satellite TV, and the Internet, the vast challenges of development that we continue to face confront us everyday. 
Perhaps no individual has done more to raise the alarm – earning deserved credit for many successes and understanding all too clearly the remaining shortcomings – than James Wolfensohn, the outgoing President of the World Bank. 
As Managing Director of the IMF, I have had the privilege of working closely with Jim Wolfensohn, seeing up close a man with an extraordinary mission: the sustainable reduction of global poverty. 
Wolfensohn left a successful business career to lead the global campaign against poverty. 
It is perhaps the ultimate tribute to his commitment and tenacity that his efforts over the past 10 years have attracted criticism as well as praise, for he has stood at the center of every major campaign aimed at alleviating the economic ills of our generation. 
Wolfensohn led the World Bank onto the cutting edge of every important development debate, and was at the forefront of the effort to combat HIV/AIDS, as well as other deadly diseases that threaten so many impoverished countries. 
He has been a forthright spokesman for women’s rights and a champion of environmental concerns, as well as a formidable advocate in arguing for debt reduction for the most heavily indebted nations. 
He also has placed the World Bank at the center of the effort to help rebuild nations emerging from devastating civil conflict, from Bosnia to Sierra Leone to East Timor. 
As World Bank president, Wolfensohn argued consistently that the world cannot be divided into “haves” and “have-nots.” 
Poverty anywhere means poverty everywhere, and equitable growth is needed for the stability and security of all. 
Indeed, that is the true meaning of globalization. 
At the same time, Wolfensohn made a big contribution to development work by arguing that poverty must be treated as a multidimensional problem. 
It is now widely accepted that financial assistance alone will not bring about effective poverty reduction. 
Rather, sustainable, pro-poor growth is the key, requiring political stability – that is, peace and security for individuals – good governance, and ownership of policies by all stakeholders. 
Under Wolfensohn, the World Bank followed through on this comprehensive and coordinated approach in a concrete fashion, making significant inroads into global poverty. 
In the last 10 years, the Bank was the largest external financier of primary education, basic health care, HIV/AIDS programs, and programs aimed at protecting the environment and biodiversity. 
This agenda goes to the heart of improving human dignity and maintaining sustainable development. 
Wolfensohn’s insistence that corruption be confronted as part of the development process was another valuable step forward. 
It used to be that even mentioning corruption in some official circles was considered taboo. 
But corruption poses the single largest obstacle to growth and development in many countries, especially as it diverts resources from the poor. 
The World Bank insisted that corruption be seen as a cancer, and that fighting it be made synonymous with fighting poverty. 
Indeed, outspokenness was a hallmark of Wolfensohn’s tenure. 
Many a government minister, Bank officer and NGO representative has experienced his blunt criticism, as well as his effusive praise. 
The IMF has not been immune to this treatment. 
The strength of the Bretton Woods institutions lies in intellectual diversity, and the Fund benefited from Wolfensohn’s honesty, as well as from his commitment to Bank-Fund cooperation, which progressively deepened during the past decade. 
The work of our two institutions — in areas as diverse as poverty reduction strategies, debt relief, and the unheralded joint program to analyze financial sectors in our member countries — strengthened the global economy. 
Ultimately, development is about people. 
Jim Wolfensohn’s greatest strength has been his genuine caring for the world’s poor. 
His legacy will include a World Bank that is firmly committed to a world free of poverty. 
The poor around the world may feel poorer from losing him as their champion and advocate. 
In fact, their prospects are brighter because of his work over the past decade. 

A Tricky Trade Treaty 
When is a free-trade agreement bad? 
When the treaty's underlying purpose is neither about trade nor freedom. 
Such a pact - calling for a "united economic space" - is now being entered into by Russia, Ukraine, Kazakhstan, and Belarus. 
On the surface, a "united economic space" sounds like something to applaud. 
But, sadly, the treaty will only entrench postcommunism's corrupt and criminal business practices, not increase trade or prosperity. 
A huge benefit for the accession countries in preparing themselves to join the EU was that they were forced to conform to European business, political, and legal norms. 
The proposed "united economic space" will also have its own norms - the ways of the oligarch, the corrupt bureaucrat, the crony capitalist, and the politically motivated prosecutor. 
Does anyone doubt that the jailing of Mikhail Khodorkovsky, chairman of Yukos oil, is politically motivated? 
I myself have endured numerous politically inspired investigations and prosecutions of my former business as a means to drive me out of politics. 
Can anyone imagine such a prosecution occurring in the EU? 
That Mr. Khodorkovsky is spending months in jail before he is formally charged tells us much about the nature of business, politics, and law in the nations of the former Soviet Union. 
In the countries of the "united economic space," the rule of law typically means, "I rule, and I am the law." 
So, instead of promoting growth, the "united economic space" will retard it by discouraging competition and investment. 
Instead of enhancing European stability, it will undermine it by dividing Europe into the EU's single market and an economic trading area ruled by arbitrary fiat and decree. 
But, as a matter of economic principle, practical diplomacy, and visionary politics, aren't regional free-trade areas at least a step in the right direction? 
After all, countries that scrap tariffs among themselves trade more and often raise their economic grow rates as a result. 
Moreover, free-trade agreements are typically seen as politically valuable: countries tied by commerce are supposedly less likely to shoot at each other. 
Unfortunately, the "united economic space" promises no such benefits. 
By definition, it discriminates against countries outside the club, with which trade will not be liberalized. 
Members will specialize in industries in which they lack comparative advantage, undercutting the main reason to support free trade in the first place. 
Worse yet, markets will be carved up for political, not commercial, reasons, locking in inefficiencies. 
The "political" argument - that regional trade bodies promote peaceful foreign relations - is simply wrongheaded in the post-Soviet case. 
After all, Ukraine managed to eliminate its nuclear weapons and reach accommodation over the Black Sea fleet without joining a private economic bloc with Russia. 
On the other hand, not long after the "united economic space" was announced, Russia began to cast covetous eyes on the Ukrainian Black Sea island of Tuszla. 
Economic borders cannot and will not disappear until Russia and Ukraine agree on their territorial borders. 
Because the proposed members of this new "united economic space" share Russian as a lingua franca and a common past within the USSR, outsiders may dismiss too readily subtler differences in culture, outlook, and even vocabulary. 
Because the region shares many outward forms of European culture, it is a short step to assuming that recent moves to free-markets and democracy will be seamless and permanent. 
But the "united economic space" is also a perversion because the presence of Belarus and Kazakstan will ensure that democracy remains low on the agenda. 
Another perversion of democracy is the fact that the supra-national body that is to administer the "united economic space" grants Ukraine and its 49 million people only 9.9% of votes, while it gives Russia and its 140 million people 83%. 
That gross imbalance in representation is a shameful betrayal of Ukraine's sovereignty. 
It is a deal that can only have been agreed to as the price of Russian support for Ukraine's President Leonid Kuchma as he desperately seeks to extend his presidency beyond the two-term limit that he faces this year. 
My opposition to the "united economic space" is not opposition to Russia. 
The more Ukraine trades abroad, the better; if more of that open trade goes Russia's way, so be it. 
But that trade should reflect Ukraine's competing with the world, unconstrained by a private deal that excludes outsiders and their demands for a stable and predictable legal environment and the best business practices. 
I am not one of those people who think Russia is so naturally collectivist that free trade and an open economy cannot work there. 
Nor do I believe that Russia is so inherently autocratic that democracy must invariably fail. 
But I do believe that, for these canards to be discarded, Russia and Ukraine must open themselves to global competition, not isolate themselves with each other. 
Dmitri Likhachev, one of Russia's most respected intellectuals in the communist era, said that there is no such thing as the Russian soul; "we can create whatever future we want." 
Ukraine and Russia, too, can create the future they want, but not by closing themselves off in a "united economic space" that, in reality, is nothing more than another dark corner. 

A Triumph for “Old Europe” 
Italy may have defeated France to win the World Cup, but the real winner was the “Old Europe” that Donald Rumsfeld once derided. 
After all, who would have predicted a World Cup final between France and Italy? 
It looks as if the national teams of the two “sick men of Europe,” felt obliged to change their countries’ images in the world. 
In the Italian case, following the corruption scandals that have nearly sunk Il Calcio, Italy’s premier football league, the national team had to rehabilitate the game in the eyes of their fellow citizens. 
More globally, however, it is as if “Old Europe” had decided that it was time to set the record straight and prove more dynamic than the world’s emerging forces. 
Indeed, in the new global balance, where football has become much more than sport, Europe is back with a vengeance. 
What has been unfolding in front of our eyes in the last four weeks has been a modern and reduced version of the balance-of-power system that dominated Europe and the world in the eighteenth and nineteenth centuries. 
If football and its culminating moment, the World Cup, has become the universal religion of the global age, this is above all because it fulfills, in a non-spiritual way, contradictory instincts in human nature. 
Football magnifies the cult of the individual and the glorification of the hero, but it is also a celebration of the cooperative team spirit. 
More than any other collective activity, it channels the search for identity and identification that dominates our age. 
Thanks to the World Cup, one is a citizen of the world, enjoying a spectacle together with billions of others on “Planet Soccer.” 
Even in Washington, where I arrived at the beginning of the tournament, I was greeted at the airport by television screens showing the game. 
The program was in English, but the advertisements were in Spanish. 
In terms of football at least, the Hispanic community’s influence has brought the United States closer to Europe (though not, of course, in its team’s performance on the pitch). 
At the same time, during the World Cup, fans are not only universal; they are also unique, and they can express their difference with impunity, sometimes in the most assertive, aggressive, and, unfortunately, occasionally racist manner. 
In a world of “multiple identities,” to choose one’s team is in part to decide who one is. 
From this standpoint, this year’s World Cup has not only witnessed the triumph of European nations – all semi-finalists were European for the first time since 1982 – but also the absence of even a glimmer of European emotions. 
In my country, France, most supporters were clearly motivated more by post-colonial references than by European allegiance. 
African teams, except when they were playing against France, were favored over those from the European Union. 
As I watched the Croatia-Australia match early in the tournament, I surprised myself, too, as I realized that my emotions were with the Australian team, whatever that could mean, given that there were so many Croatians playing for Australia. 
This deep search for identification should not be confused with a simple surge of nationalism. 
Reality is more complex. 
And this is not only because many coaches of the national teams are, like in the good old days, “foreign mercenaries,” with this Cup’s Swiss guards including the Brazilian coaches of Japan and Portugal, the Swedish coach of England, and the French coach of Tunisia. 
The Cup’s explosions of proud nationalism hide more tortured realities. 
Nostalgia is not what it used to be. 
In 1998, when France won the Cup for the first time, the three colors of the French flag (blue, white, and red) were celebrated alongside with the three colors (“black, white, and beur, the skin color of North Africans born in France to immigrant parents) of the members of the French team. 
But that innocence has been lost because it is no longer possible to celebrate the triumph of the French model of integration. 
Indeed, after the violent episodes of the last year, France’s immigrant communities have a very different message to deliver: “Without us, you would not have had this World Cup success. 
Do you believe you can continue to ostracize the communities from which your soccer heroes come?” 
From ping-pong diplomacy with China to the united German Olympic team that competed in 1990 before actual reunification, sport has prefigured political developments, and politicians everywhere have seized on the importance of the World Cup. 
Football success has become part of countries’ “soft power.” 
France may not have the military might of the US or the growth rate of China and India, but its team reached the World Cup championship, raising its standing in the eyes of billions of people – and perhaps giving a reprieve to its unpopular government. 
But sport can also become a kind of gigantic, distracting screen behind which nasty regimes do outrageous things – the very opposite of the Olympic and World Cup spirit. 
As the world was watching the football games in Germany, North Korea was testing long-range missiles and Palestinians in the governing Hamas launched attacks on Israel that prompted a bloody invasion of Gaza. 
The World Cup is drama, excitement, a dream, but it is also a form of “global escapism.” 
Football may explain the world, but it does not improve it. 
And now we are back to reality. 


Xi in Russia 
MOSCOW – The atmospherics surrounding Xi Jinping’s coming trip to Russia – his first visit to a foreign country as China’s new president – remind me of a slogan from my early childhood in the late 1950’s: “Russia-China, Friendship Forever.” 
The irony is that, even in that slogan’s heyday, Sino-Russian relations were deteriorating fast, culminating in spasms of combat along the Amur River in Siberia less than a decade later. 
Is that slogan more valid now? 
After China opened up its economy and Russia emerged from the Soviet Union, bilateral relations entered a new stage. 
Goodwill now prevails, but some of the old suspicions linger – and some new ones have emerged. 
Xi’s visit is not expected to usher in any breakthroughs. 
A few deals to export Russian hydrocarbons to China can be expected, but not much more. 
Nonetheless, the visit will highlight several important features of the bilateral relationship. 
For starters, both the Russian and Chinese governments can afford to downplay the significance of their ties with the United States. 
China views Russia as its strategic rear – and perhaps a base – in its escalating rivalry with the US (though not yet as an ally). 
Russia’s leaders view Sino-American competition as a welcome addition to their country’s strategic weight, which, unlike China’s, is not being augmented by robust economic growth. 
The more the US challenges the inevitable expansion of China’s “security perimeter,” the better for Russia, or so the Kremlin’s strategists appear to believe. 
Meanwhile, the Sino-Russian relationship has achieved an unprecedented degree of warmth. 
The Chinese are doing almost everything possible to placate Russian concerns. 
The old border disputes have been silenced. 
The volume of trade is growing rapidly. 
Moreover, there has been no Chinese demographic expansion into Siberia, though many journalists and pundits have been peddling that story. 
The number of Chinese residing in Russia – whether officially or clandestinely – amounts to 300,000. 
Many more Chinese lived in the Russian Empire before the 1917 revolution. 
But, beneath the surface, unease in the bilateral relationship persists, partly for historical reasons. 
Nationalist Chinese remember imperial Russia’s conquests, while many Russians have a morbid fear of the “yellow peril,” even though the Mongols conquered and reigned in China, while they were eventually repelled from Russia (not to mention that the Chinese never invaded Russia). 
The more important reasons for the unease are the negative demographic trends in Russia’s far-eastern Trans-Baikal region, and the fear – shared by all of China’s neighbors – of overweening Chinese power. 
Indeed, the pundits have a point: if the current economic near-stagnation in Siberia persists, the world will witness a second, epic edition of Finlandization, this time in the east. 
That might not be the worst scenario a country could face, but it is not the most pleasant prospect for Russians, given their deeply ingrained sense of their status as a great power. 
This scenario is not inevitable, and it certainly will not be on the minds of Xi and Russian President Vladimir Putin when they meet in Moscow. 
China is in the throes of an identity crisis as it faces an almost inevitable economic slowdown and the need to implement a new growth model. 
Russia, meanwhile, is clearly suffering from an even deeper identity crisis. 
It somehow survived the post-Soviet shock, and has now recovered. 
Yet, for the last six years or so, Russia has been in a kind of limbo, with no strategy, no goals, and no elite consensus on a vision for the future. 
For Sino-Russian relations, such fundamental uncertainties may be a blessing. 
Both leaders can count on the other not to create additional problems, and even to help passively on geopolitical questions. 
On Syria, for example, the two countries have shown that we are indeed living in a multipolar world. 
And those new oil and gas deals will buttress both economies. 
In the long term, Sino-Russian relations will depend largely on whether Russia overcomes its current stagnation and, among other steps, starts to develop the vast water and other resources of the Trans-Baikal region. 
To do so, capital and technology will be needed not only from China, but also from Japan, South Korea, the US, and Southeast Asian countries. 
The Trans-Baikal region could relatively easily expand ties with the resource-hungry Asian economies, to the benefit of all. 
Even the labor problem is solvable, with millions of workers from former Soviet Central Asia – and perhaps from a gradually liberalizing North Korea – able to take part in the ambitious development that will be needed. 
But the first step is to start to create conditions in the region that make living and working there attractive to Russians. 
The Asia-Pacific Economic Cooperation summit in Vladivostok last year created a mere enclave of development. 
A growth strategy for the whole region is yet to come. 
If it does not, the current Sino-Russian entente cordiale is almost certain to sour. 
Russia will start to feel vulnerable, and will be pushed toward either geopolitical brinkmanship or submission to China’s will. 
At this point, however, relations between China and Russia appear to be far better than the mythical friendship of my childhood. 
Putin and Xi will do everything to emphasize that. 

A Two-State Solution for Palestine? 
In 1947 Palestinian Arabs and their allies rejected a UN proposal to partition Palestine into a Jewish state and an Arab state, just as ten years before they rejected a similar partitioning proposed by the Peel Commission. 
More recently, both at Camp David and at Taba in Egypt, Arab negotiators again rejected proposals that would have led to the creation of a Palestinian state alongside Israel. 
Apparently, many Palestinian Arabs, and much of the Arab world, continue to think that they can do better than a two-state solution. 
After decades of conflict, it seems that the Arabs have not given up their goal of making all of Palestine into an Arab state. 
True, Arab leaders differ over tactics. 
From time to time Arab negotiators enter into discussions about the mundane issues that prospective neighboring states would need to resolve, such as political boundaries, security arrangements, and economic relations. 
It is possible that at some point the Arabs will agree among themselves that the creation of a Palestinian state that claims to be committed to peaceful coexistence with Israel will be a useful tactic. 
American and European governments seem willing to use the carrot of economic aid to encourage this development, in the way that the US pays off Egypt and Jordan to acquiesce in the existence of Israel. 
But, unless the Arabs reconcile themselves to the permanent reality of a Jewish state in Palestine, the creation of a Palestinian Arab state will not provide more than the temporary palliative of a tenuous truce between Arabs and Jews. 
The Zionist project of creating a Jewish state in Palestine entails a return of the Jewish people to their ancestral homeland, a land in which Jews lived since biblical times and which the Diaspora never abandoned. 
Whether or not this historical justification for Israel's creation is convincing, the important fact is that the Palestinian Arabs and their allies do not buy it. 
Arabs express their disdain for Zionism by equating the Zionist project to the creation of a colony, to which millions of Jewish settlers have come. 
According to this equation the conflict between Jews and Arabs replicates the conflicts between colonial settlers and indigenous peoples. 
If the Arabs believe their own argument that Zionism is colonialism, with themselves as the victims, then, whether or not anybody else accepts this view, the lessons that the Arabs glean from colonial experiences become relevant to prospects for peace between Arabs and Israelis. 
Over the years Israeli governments encouraged Arabs to participate in Israel's economy. 
This policy, which Israelis view to be benevolent, supposes that economic integration of Arabs and Jews is possible without modifying the Zionist concept of Israel as a Jewish state. 
But, from the Arab perspective this policy reinforces their equating of Zionism to colonialism. 
Arab rhetoric often takes the colonial experiences of Algeria and South Africa as models for their conflict with Zionism. 
These analogies are important because in both Algeria and South Africa, colonialism failed. 
Descendants of the European settlers in Algeria fled back to Europe. 
In South Africa, Blacks achieved political dominance over the descendants of British and Afrikaner settlers, large numbers of whom remain as a tolerated minority. 
A permanent end to the conflict over Palestine will not be possible until the Palestinian Arabs and their allies become convinced that the failure of colonialism in countries like Algeria and South Africa is not a relevant lesson for them. 
In other words Arabs will have to become convinced that they can neither subjugate the Jews nor drive the Jews out of Palestine. 
The negotiating formula of "land for peace" and "breakthroughs" like the Oslo accords failed to dampen the conflict because the Arabs understandably interpret Israeli concessions as signs of weakness. 
Unfortunately, the Israelis can show the Arabs that they cannot destroy Israel only by enduring the violent war of attrition that the Arabs are pursuing. 
Moreover, there seems no obvious way to speed up the process of convincing the Arabs that Israel is here to stay except by making this war of attrition as costly as possible for them. 
But suppose a two-state solution were achieved in the not-too-remote future. 
In thinking about this possibility we are drawn to the example of Ireland, where a two-state solution has worked. 
Having secured an independent Irish state, Catholics in the Republic of Ireland came to accept the existence of a settler enclave in Northern Ireland. 
But, the Irish story has not had a happy ending. 
The Catholic minority in Northern Ireland, whose position seems similar to that of the million Arabs who are Israeli citizens, eventually revolted against the dominant Protestants, with decades of violence resulting. 
Even if a Palestinian state committed to peaceful coexistence were created, down the road Israel may be unable to avoid the fate of Northern Ireland. 

A Universal Revolution 
NEW YORK – The most important contribution of the Universal Declaration of Human Rights, adopted by the United Nations General Assembly 60 years ago, on December 10, 1948, was to assert a powerful idea: rights are universal. 
Rights do not depend on membership of a particular community or citizenship in a certain state. 
They do not derive from a social contract. 
Rather, because rights are universal, they are attributes of all human beings. 
Indeed, they are part of what makes us human. 
Each of us may enjoy rights. 
Those who exercise power may do so only in limited ways. 
The limits are set by rights. 
It is, of course, possible to trace the concept of universal rights at least as far back as seventeenth-century English thinking about natural law. 
The concept was partially embraced in the French Declaration of Rights of 1789 and, to a greater extent, in Thomas Jefferson’s language in the same era about “inalienable rights.” 
It also shaped the thinking of those in England who led the anti-slavery struggle of the second half of the eighteenth century, the first human rights movement. 
Yet the Universal Declaration marked a giant step forward, as the world’s governments – with abstentions from the Soviet bloc states, Saudi Arabia, and apartheid South Africa, but with no votes in opposition – agreed that rights should take precedence over state power. 
One way to think about the six decades that have elapsed since the adoption of the Universal Declaration is as a struggle to implement its promises. 
For a long time, it was a losing struggle, marked especially by the spread of both communist and anti-communist tyrannies. 
Things began to change in the 1980’s with the fall of military dictatorships in Latin America and in such East Asian countries as the Philippines and South Korea, and with the growing number of people engaged in the struggle for human rights in the Soviet empire. 
By the end of the decade, many Soviet bloc regimes had collapsed. 
A factor that contributed to their demise was a shift in thinking that transformed the conflict between East and West away from one that emphasized economic systems. 
Instead, it was the contrast between totalitarianism and respect for rights that completely discredited the oppressive regimes linked to Moscow and helped to bring them down. 
South Africa’s largely peaceful transition to a multi-racial democracy in the early 1990’s was a further advance for rights. 
But the last decade of the twentieth century was also indelibly stained by ethnic cleansing in ex-Yugoslavia and genocide in Rwanda, and during the current decade the tide has seemed to turn against the rights cause. 
Powerful states such as China and Russia are not limiting themselves to authoritarian rule at home, but are also supporting those in other countries engaged in similar practices. 
The same is true of lesser powers such as Iran and Venezuela. 
Moreover, the United States has been squandering much of its capacity to promote human rights internationally. 
In responding to the terrorist attacks on its own soil on September 11, 2001, the US has resorted to such measures as prolonged indefinite detention without charges, trials before military commissions lacking due process safeguards, and cruel, inhuman, and degrading treatment of detainees, including torture. 
Other governments and intergovernmental bodies have not filled the gap left by the US. 
The new UN Human Rights Council has so far disappointed those who hoped that it would be a more principled and effective body than its discredited predecessor, the UN Human Rights Commission. 
The European Union has been a positive force in promoting rights in those countries aspiring to membership, but it has not demonstrated a capacity to exercise influence worldwide. 
Today, the most effective force promoting human rights is global public opinion, informed and mobilized by the large and growing nongovernmental human rights movement, which, as in the recent war between Georgia and Russia, has focused international attention on violations of the laws of armed conflict that protect noncombatants. 
It has also led the way in creating international criminal tribunals that prosecute and punish those who commit war crimes, crimes against humanity, and genocide. 
These achievements are not stopping war, but they are reducing the number of terrible human rights violations that accompany armed conflict. 

Can We Feed the World? 
LONDON – In the 1960’s, the Green Revolution – which included the development of high-yielding crop varieties, the expansion of irrigation infrastructure, and the distribution of modern fertilizers and pesticides to developing-country farmers – bolstered agricultural production worldwide. 
But chronic hunger remains pervasive, particularly in developing countries, which are affected most by crop shortages and food-price volatility. 
By 2050, the global human population is expected to exceed nine billion. 
Achieving food security means ensuring that all people have consistent, affordable access to the right nutrients, despite land and water limitations, climate change, and the growing prevalence of resource-intensive Western-style diets that accompany rising incomes. 
Surmounting these challenges will not be easy. 
But, by taking concerted action to encourage innovation, strengthen market linkages, and support smallholder farmers and women, developing countries can build productive, stable, resilient, and equitable agricultural sectors, achieve sustainable economic growth, and guarantee food security for all. 
First, the public and private sectors must ramp up investment in research and development, as well as in the extension and adoption of effective, accessible, and affordable technologies – whether conventional, intermediate, or new platform – according to each country or region’s individual needs. 
Given that little suitable land remains unused, and that much of what is being farmed is increasingly degraded and eroded, investment in sustainable intensification (systems for increasing crop yields, while using fewer resources and minimizing environmental damage) is crucial. 
For example, conservation agriculture, which aims to reduce or eliminate the need for damaging and labor-intensive interventions like mechanical soil tillage, can increase yields while protecting vulnerable areas from erosion and improving soil fertility. 
In Zambia, research conducted by local governments, in collaboration with the anti-poverty charity Concern Worldwide, found that new hybrid seeds produced roughly four to five tons of maize per hectare, compared to Africa’s average of one ton per hectare. 
Moreover, smallholder farmers – who are essential to productive, stable, resilient, and equitable agricultural development – should be given the needed tools and support to capture more benefits from value chains, while minimizing risk. 
This requires building and maintaining fair and efficient input and output markets that connect them – as well as larger-scale farmers – physically and virtually to opportunities to increase their incomes. 
The Alliance for a Green Revolution in Africa has worked with governments, international organizations, charitable foundations, private industry, and farmers’ groups to train and support more than 5,000 agrodealers in eastern and western Africa as they open stores to sell key inputs in small, affordable quantities. 
As a result, farmers can travel shorter distances to acquire needed supplies. 
In one area of Kenya, farmers who had to travel 17 kilometers to reach an agrodealer in 2004 had to travel only four kilometers three years later. 
At the same time, smallholder farmers need easier access to markets to sell their crops for a fair price, rather than relying on expensive middlemen or inefficient government bodies. 
An alternative would be to establish some form of cooperative or contract-based farm association that can negotiate fair prices. 
Governments must also develop and implement policies aimed at ensuring that those who are typically marginalized from the formal food industry – women, young people, ethnic minorities, and non-landowners – have reliable access to adequate nutrition and opportunities to participate in agricultural production. 
As farmers, mothers, educators, and innovators, women provide a critical link between food production, consumption, and future progress on food security. 
Indeed, giving female farmers access to the same resources as their male counterparts could reduce the number of undernourished people worldwide by 100-150 million. 
Finally, political leaders must consistently pursue this agenda at the international, regional, national, and local levels. 
To that end, they must honor their commitments – made through international institutions, such as the G-8, the G-20, and the African Union – to increasing investment in agricultural development and to combating global hunger. 
Likewise, they must offer sustained support to ongoing national initiatives, thus encouraging further investment and cooperation. 
John Kufuor, Ghana’s president from 2001 to 2009, exemplified such leadership, boosting investment in agricultural research, farmer education, and infrastructure projects, such as roads, warehouses, and cold storage. 
As a result, the proportion of people living in poverty fell from 51% in 1991-92 to 28.5% in 2005-06. Over the last 25 years, Ghana’s agricultural sector has grown at an average annual rate of 5%. 
Such experiences provide grounds for optimism. 
By investing in and spreading innovative technologies, strengthening market linkages, encouraging visionary leadership, and targeting those most in need – and thus with the most potential – we can feed the world. 

A Vital and Enduring Alliance 
In recent years, many experts and commentators have said that the Atlantic Alliance would crumble or become irrelevant. 
As a former ambassador to the North Atlantic Treaty Organization (NATO), I can say from experience that such dire predictions are nothing new. 
As America’s current Secretary of Defense, it is clear to me that the transatlantic partnership is as relevant and essential as ever. 
Consider the historic events that have taken place in the past year and the role played by the United States and Europe. 
NATO added seven new members – nations eager to contribute to the Alliance in powerful ways. 
In Afghanistan, eight million voters, 40% of them women, chose their first democratically elected President in 5,000 years. 
In the Palestinian Authority, a democratically elected president offers the hope of a new chance for peace. 
In Ukraine, ordinary citizens demonstrated the depth of their commitment to free and fair elections. 
In Iraq, Saddam Hussein’s former subjects braved threats and voted for the first time with ballots that offered a choice of 70 political parties, rather than only one. 
Across the country, voters arrived on crutches and in donkey carts, passing by posters that threatened: “You vote, you die.” 
What a damaging blow to the extremists, whose ideology the voters so clearly rejected. 
While there have been differences over Iraq, such issues among longtime friends are not new. 
Consider just a few of the divisions that have come up among NATO allies over the past decades. 
In the 1960’s, France decided to pull out of the NATO integrated command and asked NATO forces to leave its territory. 
In the 1980’s there was profound disagreement and controversy over President Ronald Reagan’s decision to deploy medium-range missiles in Europe. 
In fact, as NATO Ambassador in the 1970’s, I had to fly back to testify against legislation in the US Congress to withdraw America’s forces from Europe in the middle of the Cold War. 
Our Atlantic Alliance has navigated through some choppy seas over the years, but we have always been able to resolve the toughest issues. 
That is because there is so much that unites us: common values, shared histories, and an abiding faith in democracy. 
Today, we also share a common enemy. 
Extremists have targeted all civilized societies across the globe: in New York and Washington; Istanbul; 
Madrid; Beslan; 
Bali; and more. They do not seek an armistice with the civilized world. 
They will not negotiate a separate peace. They would like nothing better than for America and Europe to be at odds, rather than working together. 
The arrests of numerous terrorist suspects last month by French and German authorities made clear that no one nation can do the critical work necessary to win the struggle against extremists. 
Often quietly, America and European nations are sharing intelligence, capturing terrorists, and disrupting their finances. 
As a result, some three-quarters of known al-Qaeda leaders have been killed or captured, and others are on the run. 
Nor can any one nation stop the proliferation of dangerous weapons. 
This is why some 60 nations have joined the Proliferation Security Initiative in an effort to keep deadly weapons from dangerous regimes. 
In 2003, German, Italian, British, and American authorities confiscated nuclear equipment bound for Tripoli, leading to Libya’s decision to open its weapons inventories to inspectors. 
Every NATO nation has personnel serving in the International Security Assistance Force in Afghanistan, which just changed command from a French to a Turkish general. 
One of NATO’s newest members, Lithuania, is taking leadership of a Provincial Reconstruction Team – joining other European nations in contributing to Afghanistan’s stability and progress. 
Indeed, more than half of all NATO nations have had forces in both Afghanistan and Iraq. 
As the Iraqi people take more steps along the challenging road to democracy, more NATO countries have agreed to help train Iraqi security personnel by providing funds or equipment and by establishing a war college and military academies. 
Members of NATO share much more than an alliance; we are united by ties of blood and purpose, a heritage of liberty, and a calling to confront extremists’ violence – and defeat it. 
In the 60 years since World War II came to an end, we have counted on each other in times of peril and challenge. 
I am old enough to remember both the rise and fall of the Berlin Wall, and the ascent and collapse of Nazism, of Fascism, and of Soviet Communism. 
Together the members of NATO have helped to protect Kosovo and recently brought aid to the victims of a devastating tsunami. 
Great achievements are possible when the Atlantic community is united. 
That unity need not mean a uniformity of tactics or views, but rather a union of purpose. 
Those who cherish free political systems and free economic systems share similar hopes. 
Working together, those hopes can become realities for many more people. 

A Vote against Voting in Pakistan 
ISLAMABAD -- As Pakistan gears up for its parliamentary election on February 18, many observers hope that the vote will usher in a period of stability and calm by lending popular legitimacy to the government. 
But sometimes democracy is best served by refusing to participate. 
The upcoming election, to be held under the illegal Provisional Constitutional Order (PCO) implemented following President Pervez Musharraf’s state of emergency on November 3, is such a case, which is why my party and its coalition partners are boycotting the vote. 
To be sure, contesting the election would provide my party with a great opportunity to take issues to the people. 
In fact, my party’s support has been growing, with opinion polls now indicating that it is the second most popular in the frontier province – and gaining ground in every other province. 
But elections by themselves don’t bring democracy. 
Zimbabwe’s president, Robert Mugabe, loves elections. 
Egyptian President Hosni Mubarak has been holding elections for 27 years. 
Uzbekistan’s Islam Karimov has been in power for 30 years, and has just been “elected” to a fresh seven-year presidential term. 
Elections are meaningful only if they are perceived to be free and fair, which requires independent referees. 
When my party started eleven years ago, we called ourselves the Movement For Justice. 
We demanded an independent judiciary, because we believed that democracy and prosperity are impossible without the rule of law, and that the rule of law requires a judiciary that can act as a constraint on the government. 
Having gone to university in western countries, we were inspired by the American system of check and balances. 
So it is a shock to us that the US State Department keeps talking about free and fair elections and abolishing the state of emergency, but without mentioning the reinstatement of the judges – including the Chief Justice of the Supreme Court – that Musharraf illegally dismissed. 
If the judges are not reinstated, how can there be free and fair elections? 
Who decides what is free and fair? 
Musharraf? 
This is where the battle lines are now drawn, and where the future of the country will be decided. 
If the Chief Justice and the judges are reinstated, we can move toward a genuine democratic system. 
But if Musharraf manages to get his own PCO judges established in the country, then we will head toward a period of turmoil. 
After all, how can the party of a man who has less than 5% support win the election now without rigging it? 
Unfortunately, most of the political parties have failed to stand up for the democratic process. 
Major parties like the Pakistan Muslim League (Nawaz) have decided to participate, following the lead of the late Benazir Bhutto’s People’s Party. 
And, of all the major parties that are contesting the election, only the PMLN is demanding the reinstatement of the judges. 
Fortunately, the people of Pakistan – students, opinion makers, and, above all, lawyers – are standing up for the judges, doing the work that should have been done by political parties. 
We see lawyers marching, getting beaten up, filling the jails, and yet remaining resolute. 
They are suffering huge financial losses by boycotting the courts, and yet they are determined that the Chief Justice must be reinstated. 
So the dividing line in Pakistan is not between liberals and extremists, but between those who support the status quo and those who oppose it. 
Parties that call themselves democratic are not only going along with Musharraf in this fraudulent election, but are also helping to restore the status quo. 
The solution to dysfunctional democracy is not military dictatorship, but more democracy. 
Pakistanis understand democracy, because we have a democratic culture. 
Our founder was a great constitutionalist, and Pakistan came into being through the vote. 
The problem has been that because we have lacked an independent judiciary, we have not had an independent election commission. 
So all our elections, except for one in 1970, have been rigged. 
India, with which Pakistan shares a similar background, went through 40 years of dysfunctional democracy with a one-party system. 
But in the last 16 years it has begun to reap the fruits of genuine democratic competition, because an independent judiciary and electoral commission gives people confidence that their vote can make a difference. 
Until we have the same in Pakistan, no election can be free and fair. 
For two and a half years, I supported Musharraf and believed his promises to bring genuine democracy to Pakistan. 
I’ve learned my lesson about Musharraf. 
But, more importantly, no military dictator can succeed where Musharraf has so clearly failed. 
Winston Churchill once said, “War is too serious a business for generals.” 
The same is true of democracy. 

A Wake-Up Call for the ECB 
Federal Reserve Chairman Ben Bernanke has allowed global stock markets to railroad him into a whopping 75-basis-point cut in interest rates just one week before the regularly scheduled meeting of the Fed’s decision-making Open Market Committee. 
European Central Bank President Jean-Claude Trichet would never allow this to happen to the ECB – he manipulates markets; markets don’t manipulate him. 
Indeed, with America’s economy in apparent freefall, Trichet is threatening euro-zone trade unions with pre-emptive interest-rate hikes unless they behave as he sees fit. 
These threats may be proving counter-productive to the achievement of price stability in the euro-zone economy, the central bank’s primary objective. 
For example, to make his threats of an interest-rate hike in the midst of a global slowdown credible, the ECB president is using his press conferences to tell the world how strong European growth is. 
Besides being at odds with reality, the claim of strong growth actually encourages the trade unions to ask for even higher wages. 
And why shouldn’t they if things are as good as Trichet claims? 
Trichet also makes his job more difficult for himself by talking up Europe’s inflationary threat. 
His colleague on the ECB Governing Council, Bundesbank president Axel Weber, seems to have gotten the message that the more ECB officials talk up inflationary fears, the more the trade unions will ask. 
So he recently toned down his rhetoric by warning that euro-zone inflationary pressures should not be “over-dramatized.” 
How true! 
The essential economic reality confronting the ECB today is that the American economy is falling headlong into a serious slump – Bernanke’s surprise cut speaks volumes to this. 
It defies economic logic to think that the global economy – including Europe – will escape its consequences. 
As European growth slows, so will inflationary pressures. 
So Trichet should relax, stop threatening others, and let the economic slowdown do the work for him. 
Even with sticky wages and prices in Europe, the global slowdown will reduce energy, commodity, and food prices on world markets, all of which are important factors behind currently elevated European inflation levels. 
The crude oil price already has dropped substantially from its highs at the beginning of the year. 
But the evolving slowdown is not the only reason the threat of a wage-price spiral in Europe is overblown. 
Germany is facing a key wage negotiation with public-sector unions. 
Even if the unions win large wage increases – which is very likely and entirely justifiable given their past restraint – this will have only a negligible effect on Europe’s price stability. 
Increased public-sector wage costs mean increased government spending on wages. 
If this is financed by cutbacks elsewhere in the budget, the main consequence will be only a re-distribution of government spending, which is not necessarily inflationary. 
Nor is it inflationary if the wage increases are financed by higher taxes. 
Only if the budget surplus diminishes would there be an inflationary impact, and that would not be due to a wage-price spiral, but to an increase in net government demand, which actually might not be a bad thing for an economy facing a potentially severe economic slowdown. 
In the United States, it should be remembered, the need for a fiscal stimulus developed, so it seems, out of the blue. 
The same may happen in Europe, especially given the ECB’s refusal to cut interest rates. 
A decent settlement with public-sector workers could give Germany a “backdoor” fiscal stimulus just at the right moment – when aggregate demand is flagging. 
The real problem with a generous wage settlement with public-sector unions is that private-sector unions could use it to get more than their productivity gains warrant. 
Contracts with the metal and chemical workers also are coming up for negotiation this year in Germany, and union leaders are talking tough. 
Berthold Huber, the head of Germany’s huge IG Metall engineering union, recently promised his rank and file “a mega year” for pay increases. 
But the global slowdown, which takes the fangs out of the strike threat, will keep private-sector workers in line no matter how much their leaders may rant and rave. 
Everyone, including bellicose trade unionists, tends to become more reasonable when the economy turns south. 
Rather than encourage the unions with exaggerated talk of strong European growth and inflationary excess – and disrespect them with threats and interventions – Trichet should speak softly and let nature take its course. 

A War on Tolerance 
AMSTERDAM -- When “tolerance” becomes a term of abuse in a place like the Netherlands, you know that something has gone seriously wrong. 
The Dutch always took pride in being the most tolerant people on earth. 
In less feverish times than these, no one could possibly have taken exception to Queen Beatrix’s speech last Christmas, when she pleaded for tolerance and “respect for minorities.” 
But Geert Wilders, leader of the right-wing, anti-Muslim Freedom Party, was so disgusted by the Dutch queen’s “multi-cultural rubbish” that he wanted her to be stripped of her constitutional role in the government. 
Wilders, a popular rabble-rouser whose party occupies nine seats in the Dutch parliament, compares the Koran to Hitler’s Mein Kampf, wants to stop Muslims from moving to the Netherlands, and thunders that those who are already in the country should tear up half the Koran if they wish to stay. 
Tolerance towards Islam is cowardly appeasement in his eyes. 
He thinks that Europe is in peril of being “Islamized.” 
“There will soon be more mosques than churches,” he says, if true Europeans don’t have the guts to stand up and save Western civilization. 
Notwithstanding his call to ban the Koran, Wilders and his admirers claim to believe in unfettered free speech as a Western birthright. 
Beatrix stated that the right to free speech does not automatically mean the right to offend. 
Wilders disagrees. 
No criticism of Islam, however offensive, should ever be hampered by political correctness. 
Wilders uses every opportunity to test Muslims’ (often very limited) tolerance. 
His latest provocation is a short film denouncing Islam, which is yet to be shown, but has already caused panic all around. 
Remarkably for a Dutch politician – and a minor one, at that – news of Wilders’s antics has reached the world press. 
So Dutch embassies are bracing themselves for violent demonstrations, and the government is considering special security measures. 
Some commentators suggest that Wilders, born and raised as a Catholic in a provincial Dutch town, is, like his Muslim enemies, a true believer, driven by the goal of keeping Europe “Judeo-Christian.” 
Perhaps, but this is probably a red herring. 
His war on Islam is also, and perhaps even mainly, a war on the cultural and political elites, the Dutch intellectual establishment, the Eurocrats of Brussels, and the liberal-minded queen. 
Indeed, his speeches are studded with references to arrogant elites who are out of touch with the feelings of the common man. 
“Tolerance” is seen as weak and elitist, typical of people who live far removed from the harsh realities of the street, where violent and unruly foreigners menace upstanding Dutch folks. 
This notion of the elitist appeaser is not confined to the Netherlands. 
In Israel, the educated Jewish activists who criticize Israeli abuses against Palestinians, the peaceniks who believe that negotiation is better than violence and that even Arabs have rights, are called, with a knowing sneer, “beautiful souls.” 
The common man, rooted in the real world, supposedly knows better: uncompromising toughness, the hard line, is the only way to get results. 
In the United States, the word “liberal,” in the mouths of populist radio hosts and right-wing politicians, has become almost synonymous with “effete East Coast snob” or, worse, “New York intellectual.” 
Liberals, in this view, are not only soft, but are somehow distinctly un-American. 
The association of elites with foreignness, tolerance, and metropolitan cities is nothing new. 
Elites often can speak foreign languages, and big cities are traditionally more tolerant and open to mixed populations. 
Modern populism – American politicians running, or pretending to run, “against Washington,” or French populists speaking for “deep France” – is invariably hostile to capital cities. 
Brussels, the capital of the European Union, stands for everything populists, whether left or right, hate. 
And Muslim immigrants live in Amsterdam, London, or Marseilles, not in the kind of small towns where right-wing populists find most of their support. 
Still, the politics of resentment works best when it can tap into real fears. 
There are reasons for people to feel anxious about economic globalization, pan-European bureaucracy, the huge and not always effectively controlled influx of immigrants, and the aggression of radical political Islam. 
These anxieties have too often been ignored. 
There is a sense among many Europeans, not just in the Netherlands, that they have been abandoned in a fast-changing world, that multi-national corporations are more powerful than nation-states, that the urban rich and highly educated do fine and ordinary folks in the provinces languish, while democratically elected politicians are not only powerless, but have abjectly surrendered to these larger forces that threaten the common man. 
Tolerance is seen as not just weak, but as a betrayal. 
The Muslim threat is, of course, not a fantasy. 
A small number of ideological extremists has inflicted real violence in the name of Islam, and will continue to do so. 
But the popular resentment of Islam goes deeper and wider. 
Wilders, and others like him, are not just attacking Islamic extremists. 
His success is based on that sense of tolerance as betrayal. 
And, as so often happens, the loathing of elites has found an outlet in the loathing of outsiders, who look different and whose ways are strange. 
We must fight Islamic extremism, but not by tapping into the darkest gut feelings of the unthinking mob. 
Nothing good ever came from that. 

A Warrant of Hypocrisy 
LONDON – Earlier this month, the International Criminal Court (ICC) upheld the request of the court’s chief prosecutor to issue an arrest warrant for Omar el-Bashir, the President of Sudan, charging him with war crimes and crimes against humanity. 
Bashir responded by expelling foreign aid agencies looking after the refugee camps in Darfur. 
This is the first time that a sitting head of state has been indicted for war crimes, with reaction around the world mainly divided between those who hailed the move as a great step for international justice and those who condemned it as colonialism. 
Both positions are hopelessly buried in intellectual and moral fog. 
The warrant was no leap forward. 
From the legal point of view, it makes no difference whether the accused is a sitting or former head of state. 
But it makes an enormous practical difference that an incumbent ruler can do a lot more future damage to his people than an ex-ruler, and therefore should be given no incentive to retaliate. 
As a result of Bashir’s policies, 300,000 people are estimated to have died and 2.7 million displaced in Darfur. 
The expulsion of the aid agencies has put over a million Darfuris at risk of epidemics and starvation. 
According to the statute that established the ICC, the prosecutor is required to ensure that any prosecution is in the interests of the victims as well as of justice. 
But, to lawyers like the ICC prosecutor, the abstract claims of justice are more vivid than any concrete duty of protection. 
In this case, justice comes with poisoned arrows. 
Emboldened by the warrant and its elusive suggestion of international support, the Darfuri rebels, the Justice and Equality Movement, have walked out of peace talks with Sudan’s government. 
Meanwhile, Bashir, with little to lose, will no doubt take the opportunity to attack his enemies. 
The counter-argument is that the threat of indictment will deter rulers from wicked behavior. 
But the law will deter only if its sanctions are credible. 
A law that cannot be enforced deters no one. 
In fact, it weakens respect for law. 
Moreover, while the fear of being hauled off to The Hague may have some effect in deterring rulers from committing crimes against humanity, the claim that the Bashir warrant will deter the current crop of human rights’ violators is derisory. 
Indeed, it is likely to prolong wicked regimes. 
Robert Mugabe, for example, refuses to leave office – at great cost to Zimbabwe’s people – for fear of being put on trial. 
Whatever the attractions of giving criminals “nowhere to hide, whatever the consequences,” the consequences cannot be ignored when the criminals are heads of state. 
The policy of never negotiating with terrorists cannot be scaled up to state level when hundreds of thousands of lives are at stake. 
The charge of colonialism, meanwhile, is simply reflex: colonialism no longer exists. 
The charge that international law is just “western law” is also rubbish. 
International law is the conscience of mankind. 
But the perception that the law is selectively applied happens to be true. 
In the Nuremberg trial of 1946, which laid the basis of current international law, the main charge against the Nazi leaders was that of “planning and waging aggressive war.” 
Prohibition of war except for self-defense is embedded in the United Nations Charter. 
But the ICC’s creators deemed the waging of aggressive war – which the International Military Tribunal at Nuremberg called “the supreme international crime” – to be outside the court’s jurisdiction. 
This guaranteed legal immunity for the leaders who carried out the invasion of Iraq. 
The charge of selective application also applies to the Bashir warrant. 
Bashir stands accused of war crimes and crimes against humanity. 
The latter were first defined in the Nuremberg principles of 1950 to include murder, extermination, enslavement, deportation and “other inhumane acts.” 
In 1998, these other acts were clarified to mean false imprisonment, torture, rape, persecution of a group, enforced disappearance of persons, and apartheid. 
It comes as no surprise, then, to read in the Arab News that Bashir’s warrant “reeks of hypocrisy.” 
Where, indeed, are the arrest warrants for Bush and Cheney? 
Does extraordinary rendition not count as “enforced disappearance of persons”? 
Does the waterboarding of Khalid Sheikh Mohammed not count as torture? 
Why is Vladimir Putin not standing trial for war crimes in Chechnya? 
The answer is simple: where the interests of a UN Security Council member or one of their clients are at stake, the court’s jurisdiction ends. 
The ICC is like a cobweb: small flies get stuck, but wasps and hornets get through. 
Until the United States ratifies the ICC treaty, the Court is bound to seem to many to be little more than a politicized kangaroo court. 
Without American support, it has little hope of earning legitimacy, let alone doing its job effectively. 
The Security Council has the power to defer the warrant for Bashir’s arrest for renewable periods of one year. 
It can do this indefinitely, and it seems likely that it will. 
The idea is that deferring the warrant will give the Security Council leverage over Sudan. 
Gareth Evans, a former Australian Foreign Minister, has called it “a powerful diplomatic tool,” while the Washington Post has called for the warrant to be used “as a bargaining chip with Mr. Bashir and his Chinese and Arab allies.” 
They believe that the threat of arrest can be used to force Bashir to mend his ways. 
If this proves true, the ICC and its sponsors have muddled justice with diplomacy. 
If the world can dispense justice only at the expense of the weak and to the advantage of the strong, it should stick to the older tools of crime prevention: force and negotiation, and leave justice out of it. 

A Watershed Doctrine for America 
LOS ANGELES – As the United States stumbles through its economic challenges at home, the pressure of world events will not subside. 
But America’s ability to address them has changed. 
Its fiscal weakness limits its ability to act as global policeman. 
Despite the relatively costless overthrow of the Qaddafi regime, America’s prolonged interventions in Afghanistan and Iraq have severely strained the public’s tolerance for an active foreign policy. 
Nonetheless, the US seems destined to remain the world’s most important actor for the foreseeable future. 
But today it is an actor without a script – it lacks a strategic guide comparable to the Cold War’s containment doctrine to prioritize policy. 
Quite simply, the ad hoc policymaking that directed interventions in the Balkans, Somalia, southwest Asia, and the Middle East in the past two decades will not suffice in this new era of limitations. 
This suggests that the US should seek out an overarching strategy to discipline its impulses to fight wars of choice or engage in nation-building efforts. 
President Barack Obama’s 2010 National Security Strategy nurtures broad policy aspirations – “[n]ow we must position the United States to champion mutual interests among nations and peoples” – but falls short as a practical guide. 
I suggest an alternative strategy, one already embedded in America history, though largely unrecognized. 
But making explicit what lies implicit can sharpen US decision-making. 
I call this strategy the “Watershed Doctrine.” 
A watershed is a tipping point, a turning point, a game changer. 
When the US has confronted a “negative watershed” – a lethal threat to the country – it committed meaningful financial and human resources in order to address the risks. 
Positive watersheds – opportunities to engineer seismic shifts in international or regional political affairs through nation-building, or to use economic and military assistance to prevent plausible negative watersheds – demand an equal level of commitment. 
The Watershed concept provides policymakers with a standard to use – or at the very least to debate. 
It is an organizing tool for policymaking: Is an international challenge a watershed or not? 
If so, get involved. 
If not, stay out. 
We find watersheds throughout American history. 
The War of 1812 and the Civil War are clear examples. 
Had American forces not expelled the British from US territory in the first, and had Abraham Lincoln and the Union not prevailed in the second, the country would have been balkanized and unable to become the dominant power of the twentieth century. 
By contrast, America’s flirtation with colonialism in the Spanish American War, its involvement in Mexico, Central America, and the Caribbean throughout the twentieth century, and, arguably, World War I, were not watersheds for the US. 
But America’s inability after the Great War to overcome Old World politics at Versailles and isolationism at home marked a failed opportunity to promote a positive watershed. 
That failure placed the world on the path to the negative watershed posed by Nazi Germany and Imperial Japan. 
Nothing foreordained that the US and its allies would prevail. 
Had the Axis’s negative watershed succeeded, the US would have become a far different country. 
A positive watershed, under-appreciated today, developed in the years immediately after World War II with the political transformation of Germany and Japan. 
America’s remarkable investment of resources in this outcome made both countries stable, peaceful democracies, thereby eliminating them as adversaries and turning them into vital bulwarks against the next harbinger of a negative watershed, the Soviet Union. 
Unlike the battle against the Axis, the US fought the Cold War in many ways, on many fronts, and over many decades – using politics, economics, and nuclear deterrence, as well as limited armed action, to ensure the USSR’s containment. 
In time, the US had to accept that each political contest or military battle lost was not a watershed as long as its core interests in Europe, the Far East, and Latin America were not threatened. 
Through trial and error – backed by a durable political and economic system – the US prevailed and the Soviet Union disintegrated. 
The rise of Islamic fundamentalism poses another historic challenge, though one that is far more inchoate than any that the US has faced before. 
In other times, the challenge would not even be called a watershed. 
But the risk that weapons of mass destruction could be turned against the US makes it so. 
Then there is the “Arab Spring,” a potential positive watershed that calls upon the US to decide how deep a political, economic, and military commitment it ought to make to nurture positive results. 
Today, the US is a more sober and realistic country than it was in the heyday of the early post-Cold War period. 
But, in the aftermath of setbacks in regions where it intervened, and with heightened economic distress at home, the US finds itself uncertain about how to respond to changing global events. 
Pursuing a “Watershed Doctrine” might provide the right answer. 

A Way out of Tibet’s Morass 
NEW YORK – China has survived the 50th anniversary of the failed uprising by Tibetans against Chinese rule in 1959 without major protests. 
But, to keep Tibetans off the streets, China’s government had to saturate the entire Tibetan plateau with troops and secretly detain in unmarked jails hundreds of people for “legal education.” 
Those moves suggest that Tibet has become an increasingly serious concern for China’s rulers, one that they have not yet found ways to handle without damaging their standing in Tibet and around the world. 
A year ago, Chinese and Western intellectuals competed in dismissing popular interest in Tibet as a childlike confusion with the imaginary Shangri-la of the 1937 film Lost Horizon. 
But after more than 150 protests in Tibet against Chinese rule over the past 12 months, concerns about the area seem anything but fanciful. 
Indeed, Tibet could soon replace Taiwan as a factor in regional stability and an important issue in international relations. 
The areas populated by Tibetans cover a quarter of China; to have such a large part of the country’s territory under military control and cut off from the outside world weakens the Communist Party’s claims to legitimacy and world power status. 
Last year’s protests were the largest and most widespread in Tibet for decades. 
Participants included nomads, farmers, and students, who in theory should have been the most grateful to China for modernizing Tibet’s economy. 
Many carried the forbidden Tibetan national flag, suggesting that they think of Tibet as a separate country in the past, and in about 20 incidents government offices were burned down. 
In one case, there were even attacks on Chinese migrants, leading to 18 deaths. 
It is hard not to see these events as a challenge to China’s rule. 
The government’s reaction was to blame the problem on outside instigation. 
It sent in more troops, hid details of protestors’ deaths, gave a life sentence to an AIDS educator who had copied illegal CDs from India, and for months banned foreigners and journalists from the Tibetan plateau. 
In November, Chinese officials, live on national TV, ridiculed Tibetan exiles’ proposals for negotiation. 
They canceled a European summit because of a meeting between French President Nicolas Sarkozy and the Dalai Lama, and regularly imply that Tibetans are terrorists. 
On March 28, Tibetans in Lhasa had to celebrate “Serf Emancipation Day” to endorse China’s explanation for its take-over 50 years ago. 
But such class-struggle terminology reminds people of the Cultural Revolution and, since such language would be unimaginable in inland China today, only makes Tibet seem more separate. 
Although both sides claim to be ready for dialogue, they are talking at cross-purposes: the exiles say that talks must be based on their autonomy proposals, while China says that it will discuss only the Dalai Lama’s “personal status” – where he would live in Beijing should he return to China. 
Visceral sparring matches are continuing, with the Dalai Lama recently describing Tibetans’ lives under China as a “hell on earth.” 
He was almost certainly referring to life during the Maoist years rather than the present, but his remarks enabled China to issue more media attacks and raise the political temperature further. 
Western governments have been accused of interference, but it is unlikely that any want to derail their relations with China, especially during an economic crisis. 
Last October, British Foreign Minister David Miliband was so anxious to maintain Chinese good will that he came close to denouncing his predecessors’ recognition of Tibet’s autonomy 100 years ago. 
But foreign concerns about the status of China’s mandate in Tibet are understandable: Tibet is the strategic high ground between the two most important nuclear powers in Asia. 
Good governance on the plateau is good for everyone. 
China could help to lessen growing tensions by recognizing these concerns as reasonable. 
The Dalai Lama could cut down on foreign meetings and acknowledge that, despite China’s general emasculation of intellectual and religious life in Tibet, some aspects of Tibetan culture (like modern art, film and literature) are relatively healthy. 
Western observers could accept the exiles’ assurances that their proposals on autonomy are negotiable and not bottom-line demands, rather than damning them before talks start. 
All sides would gain by paying attention to two Tibetan officials in China who dared to speak out last month. 
A retired prefectural governor from Kardze told the Singapore paper Zaobao that “the government should have more trust in its people, particularly the Tibetan monks,” and the current Tibet governor admitted that some protesters last year “weren’t satisfied with our policies,” rather than calling them enemies of the state, the first official concession from within China that some of its policies might be connected to the recent protests. 
The Party has so far been following a more conventional strategy: last week it sent a delegation of officials to the US (the first ever sent, it said, to have been composed solely of Tibetans – a fact that one might expect them to have been embarrassed to admit) and had its leader, Shingtsa Tenzin Choedak, tell journalists that Tibetans enjoy freedom of religion. 
As anyone who has worked in Tibet recently knows well, this was an inexactitude: since at least 1996, all Tibetans who work for the government and all Tibetan students in Tibet have been forbidden any Buddhist practice, even though it is illegal under Chinese law to stop people from practicing an official religion. 
China’s government could improve the situation overnight by sacking the officials responsible for such illegal policies, and by apologizing to Tibetans for having overlooked such abuses for 15 years. 
And it could start reassessing its Tibetan policies instead of increasing controls and allegations. 
Until then, China’s quest for international respect is set to remain elusive and Tibet is likely to stay on the world’s agenda. 

A Weak Start for START 
LOS ANGELES – A strange sense of déjà vu is gripping Washington these days, as the debate over ratification by the United States Senate of the New Strategic Arms Reduction Treaty (New START) with Russia heats up. 
Spats have broken out between the Obama administration, future presidential contenders, senators, and arms control and defense experts. 
There may not be nostalgia for the Cold War in any of this, but much of that era’s mindset can be perceived again in the arguments being knocked about. 
The Senate must decide whether New START enhances American security. 
Unfortunately, whatever the decision -- which has been delayed perhaps until late Fall to allow Obama’s administration more time to muster support for the treaty -- the US and Russian governments will continue to place each other in the nuclear crosshairs for the foreseeable future. 
New START builds on a legacy of strategic nuclear arms limitation that goes back to the 1970’s. 
Former US Secretary of State Henry Kissinger captured the allure in recent testimony: “The subject of nuclear arms control grew out of the seemingly paradoxical effort of those who had created the largest and most destructive arsenals to avoid by negotiation the ultimate consequences of their own decisions.” 
Over the years “avoiding…the ultimate consequences” through limitations butted against the bitter legacy of the surprise attacks suffered by both the US and Russia in World War II. 
After the war, each adopted a “never be surprised again” policy, and so went on to invest trillions of dollars in a multitude of hardened, mobile, and concealed nuclear weapons to deter the other. 
The result produced tens of thousands of nuclear warheads. 
In time, strategic arms control treaties became the measure of the political relationship. 
With the Soviet Union’s collapse, a unique opportunity to end the nuclear competition emerged. 
While elimination did take place in the former Soviet Republics, the Kremlin hung on to its nuclear arsenal – the last vestige of Russia’s former superpower status. 
Likewise, US administrations have remained wedded to the Bomb. 
As a result, the “nuclear hostage” relationship of the Cold War continued, capped in 2002 by the Strategic Offensive Reduction Treaty, which set the upper limit on warheads at 2,200 by 2012. 
In the spring of 2009, speaking in Prague, Obama advanced a bold ambition: a world without nuclear weapons. 
But his audacity confronted a world in which the Bomb remained at the heart of many countries’ deterrence strategies. 
Obama muddled his message further by admitting that he did not expect to see abolition in his lifetime. 
Nonetheless, New START marks a step in the direction of disarmament. 
It would limit each country to 1,550 strategic warheads on 700 deployed delivery vehicles. 
Verification relies on 18 on-site inspections, notification of forces in and out of service, missile-test flight information and other data exchanges, plus a consultative commission to iron out compliance. 
Were the US Senate to fail to ratify New START, the treaty’s proponents argue that the US would lose predictability about Russia’s nuclear activities, resulting in greater distrust and risk of miscalculation, making both sides less secure. 
But arms-control skeptics take issue with this. 
Throughout the Cold War, they viewed restraints on America’s development and fielding of nuclear weapons as compromising national security. 
Fears that the Soviet Union would cheat reinforced their position. 
And cheating did indeed upset the broader superpower relationship. 
Today, similar apprehensions stoke opposition to New START. 
To allay such concerns, the Obama administration committed to a multi-year increase in the budgets of the US military’s nuclear-weapons laboratories. 
And in the April 10 release of the Nuclear Posture Review, Obama’s administration warned nuclear-armed states and others tempted to violate the Nuclear Non-Proliferation Treaty that they would remain nuclear targets. 
Missile defense has become another bone of contention. 
The language in the preamble to New START states that the agreement will not “undermine the viability and effectiveness of the strategic offensive arms of the Parties.” 
Critics contend that the clause, along with the Kremlin’s implied warning that it could withdraw from the treaty unilaterally were America’s defenses to become too robust, provides the Kremlin with leverage to impede deployment of any strategic missile-defense system. 
The Obama administration repeatedly denies such claims, along with others that the treaty’s verification provisions remain insufficient. 
It scoffs at assertions that Russia would cheat by multiplying warheads on bombers or new rail-based missile carriers, arguing that the Kremlin would want to avoid America’s compensatory response. 
But Obama’s team does concede one point: New START fails to curtail Russia’s large numerical advantage in tactical nuclear weapons. 
Arguing that short-range devices pose no risk to the American homeland, US negotiators plan to press for reductions in follow-on talks. 
Despite the claims by both the Bush and Obama administrations that Russia and the US are no longer adversaries, it seems that the rapprochement has not translated into elimination of mutual nuclear targeting. 
The result, even if new START is ratified, should satisfy no one. 

A World of Convergence 
WASHINGTON, DC – For almost two centuries, starting around 1800, the history of the global economy was broadly one of divergence in average incomes. 
In relative terms, rich countries got even richer. 
There was growth in the poorer countries, too, but it was slower than rich-country growth, and the discrepancy in prosperity between rich and poor countries increased. 
This “divergence” was very pronounced in colonial times. 
It slowed after the 1940’s, but it was only around 1990 that an entirely new trend could be observed – convergence between average incomes in the group of rich countries and the rest of the world. 
From 1990 to 2010, average per capita income in the emerging and developing countries grew almost three times as fast as average income in Europe, North America, and Japan, compared to lower or, at most, equal growth rates for almost two centuries. 
This has been a revolutionary change, but will this 20-year-old trend continue? 
Will convergence remain rapid, or will it be a passing phase in world economic history? 
Long-term projections based on short-term trends have often been mistaken. 
In the late 1950’s, after the Soviet Union launched the first spacecraft, eminent Western economists predicted that Soviet income would overtake that of the United States in a few decades. 
After all, the Soviet Union was investing close to 40% of its GDP, twice the ratio in the West. 
Later, in the 1980’s, Japan’s spectacular growth led some to predict that it would overtake the US, not only in per capita terms, but even in terms of some measures of “economic power.” 
These kinds of projections have often been based on simple extrapolations of exponential trends. 
Over two or three decades, substantial differences in compound growth rates quickly generate huge changes in economic size or per capita income. 
Will the recent predictions of rapid ongoing global convergence similarly turn out to be wrong, or will most of the emerging countries sustain a large positive growth differential and get much closer to the advanced economies’ income levels? 
Understanding the phenomenon of “catch-up” growth is key to answering this question. 
Trade and foreign direct investment have made it much easier for emerging countries to absorb and adapt best-practice technology invented in the advanced economies. 
The information revolution, allowing much easier access to and diffusion of knowledge, has accelerated the process. 
Once they developed the basic institutions needed for a market economy and learned how to avoid serious macroeconomic policy mistakes, emerging countries started benefiting from catch-up growth. 
Those with very high investment rates, mostly in East Asia, grew faster than those with lower investment rates; but, overall, catch-up growth probably has been adding 2-4 percentage points to many emerging and developing countries’ annual growth rates. 
At the same time, population growth decreased, adding at least another point to the pace of per capita growth. 
This process will likely continue for another decade or two, depending on where in the process particular countries are. 
It is true that catch-up growth is easier in manufacturing than in other sectors, a point recently emphasized by Dani Rodrik of Harvard University, and it may be that a good portion of it has been exhausted in manufacturing by the best-performing firms in emerging countries. 
But there is still a lot of “internal” room for catch-up growth, as less efficient domestic firms become more competitive with more efficient ones. 
The dispersion of “total factor productivity” – the joint productivity of capital and labor – inside emerging countries has been found to be large. 
Moreover, sectors such as agriculture, energy, transport, and trade also have catch-up-growth potential, through imports of technology, institutional know-how, and organizational models. 
Of course, temporary disturbances, a worsening of global payments imbalances, or macroeconomic policy mistakes, including those made in advanced economies and affecting the entire world economy, could undermine global growth. 
But the underlying “convergence differential,” owing to catch-up growth, is likely to continue to reduce the income gap between the old advanced economies and emerging-market countries. 
The Soviet Union never was able to build the institutions to allow for catch-up economic growth. 
Japan slowed down after it had basically caught up. 
China, India, Brazil, Turkey, and others may have firms operating close to the world’s technological frontier, but they still have a lot of unused catch-up potential. 
The more that these countries can invest while ensuring macroeconomic stability and balance-of-payments sustainability, the faster they can adopt better technology and production processes. 
In that case, they can continue to catch up, at least for the next decade or more. 

A World of Gray 
CANBERRA – Václav Havel, the Czech playwright and dissident turned president, and North Korean despot Kim Jong-il might have lived on different planets, for all their common commitment to human dignity, rights, and democracy. 
When they died just a day apart this month, the contrast was hard for the global commentariat to resist: Prague’s prince of light against Pyongyang’s prince of darkness. 
But it is worth remembering that Manichaean good-versus-evil typecasting, to which former US President George W. Bush and former British Prime Minister Tony Blair were famously prone, and of which we have had something of a resurgence in recent days, carries with it two big risks for international policymakers. 
One risk is that such thinking limits the options for dealing effectively with those who are cast as irredeemably evil. 
The debacle of the United States-led invasion of Iraq in 2003 should have taught us once and for all the peril of talking only through the barrel of a gun to those whose behavior disgusts us. 
Sometimes, threats to a civilian population will be so acute and immediate as to make coercive military intervention the only option, as with Muammar el-Qaddafi’s Libya, at least at the time of the imminent assault on Benghazi in March. 
But more often it will be a matter of relying on less extreme measures, like targeted sanctions and threats of international prosecution – and on diplomatic pressure and persuasion. 
Negotiating with the genocidal butchers of the Khmer Rouge was acutely troubling, personally and politically, for those of us involved, but those talks secured a lasting peace in Cambodia. 
And it is only negotiation – albeit backed by good old-fashioned containment and deterrence – that can possibly deliver sustainable peace with Iran and North Korea. 
The second risk that arises from seeing the world in black-and-white terms is greater public cynicism, thereby making ideals-based policymaking in the future even harder. 
Expectations raised too high are expectations bound to be disappointed: think of former British Foreign Secretary Robin Cook’s “ethical foreign policy” at the start of Blair’s premiership. 
Political leaders who make a big play of “values” are often those most likely to stumble. 
Think of the lamentable response by US President Bill Clinton’s administration to the Rwandan genocide in 1994 or Australia’s shameful rejection of asylum-seeking boat people in the Tampa affair under John Howard’s government a decade ago. 
Then there is many Western governments’ highly selective embrace of democracy when it results in the election of those (like Hamas) whom they find unacceptable; the unwillingness of almost every nuclear-weapons state to match its disarmament rhetoric with credible action; and the almost universal double-talk on climate change. 
But if double talk were an indictable offense, there would be few left to attend international summits. 
The task is neither to pillory nor to sanctify political leaders caught in these traps, but somehow to reconcile what they will often see as hopelessly competing demands of moral values and national interests, and to find ways to get them to do more good and less harm. 
A useful way forward in this respect may be to rethink fundamentally the concept of “national interest.” 
Traditionally seen as having just two dimensions – economic and geostrategic – there is a strong case for adding a third: every country’s interest in being, and being seen to be, a good international citizen. 
Actively helping to solve global public-goods challenges (like climate change, human-rights protection, international piracy, drug trafficking, cross-border population flows, and elimination of weapons of mass destruction), even when there is no direct economic or strategic payoff, is not simply the foreign policy equivalent of Boy Scout good deeds. 
Selfless cooperation on these issues can actually work to a country’s advantage by boosting its reputation and generating reciprocal support: my help in solving your drug-trafficking problem today will increase the chances of you supporting my asylum-seeker problem tomorrow. 
And a story couched in these realist terms is likely to be easier to sell to domestic constituencies than one pitched as disinterested altruism. 
Countries should pursue what the great international-relations scholar Hedley Bull called “purposes beyond ourselves”: our common humanity demands no less. 
But the real world is a place of gray shades, not black and white, and more often than not the cause of human decency and security will be better served by recognizing and working around that constraint rather than challenging it head on. 

A World of Regions 
NEW YORK – In almost every part of the world, long-festering problems can be solved through closer cooperation among neighboring countries. 
The European Union provides the best model for how neighbors that have long fought each other can come together for mutual benefit. 
Ironically, today’s decline in American global power may lead to more effective regional cooperation. 
This may seem an odd time to praise the EU, given the economic crises in Greece, Spain, Portugal, and Ireland. 
Europe has not solved the problem of balancing the interests of strong economies in the North and those of weaker economies in the South. 
Still, the EU’s accomplishments vastly outweigh its current difficulties. 
The EU has created a zone of peace where once there was relentless war. 
It has provided the institutional framework for reuniting Western and Eastern Europe. 
It has fostered regional-scale infrastructure. 
The single market has been crucial to making Europe one of the most prosperous places on the planet. 
And the EU has been a global leader on environmental sustainability. 
For these reasons, the EU provides a unique model for other regions that remain stuck in a mire of conflict, poverty, lack of infrastructure, and environmental crisis. 
New regional organizations, such as the African Union, look to the EU as a role model for regional problem-solving and integration. 
Yet, to this day, most regional groupings remain too weak to solve their members’ pressing problems. 
In most other regions, ongoing political divisions have their roots in the Cold War or the colonial era. 
During the Cold War, neighbors often competed with each other by “choosing sides” – allying themselves with either the United States or the Soviet Union. 
Pakistan tilted towards the Americans; 
India towards the Soviets. 
Countries had little incentive to make peace with their neighbors as long as they enjoyed the financial support of the US or the USSR. 
On the contrary, continued conflict often led directly to more financial aid. 
Indeed, the US and Europe often acted to undermine regional integration, which they believed would limit their roles as power brokers. 
Thus, when Gamal Abdel Nasser launched a call for Arab unity in the 1950’s, the US and Europe viewed him as a threat. 
The US undercut his call for strong Arab cooperation and nationalism, fearing a loss of American influence in the Middle East. 
As a result, Nasser increasingly aligned Egypt with the Soviet Union, and ultimately failed in the quest to unite Arab interests. 
Today’s reality, however, is that great powers can no longer divide and conquer other regions, even if they try. 
The age of colonialism is finished, and we are now moving beyond the age of US global dominance. 
Recent events in the Middle East and Central Asia, for example, clearly reflect the decline of US influence. 
America’s failure to win any lasting geopolitical advantage through the use of military force in Iraq and Afghanistan underscore the limits of its power, while its budget crisis ensures that it will cut its military resources sooner rather than later. 
Similarly, the US played no role in the political revolutions underway in the Arab world, and still has not demonstrated any clear policy response to them. 
President Barack Obama’s recent speech on the Middle East is a further display of America’s declining influence in the region. 
The speech drew the most attention for calling on Israel to return to its 1967 borders, but the effect was undercut when Israel flatly rejected the US position. 
The world could see that there would be little practical follow-up. 
The rest of the speech was even more revealing, though it drew little public notice. 
When Obama discussed the Arab political upheavals, he noted the importance of economic development. 
Yet when it came to US action, the most that the US could offer financially was slight debt relief for Egypt ($1 billion), scant loan guarantees ($1 billion), and some insurance coverage for private investments. 
The real message was that the US government would contribute very little financially to the region’s economic recovery. 
The days when a country could depend on large-scale American financing are over. 
We are, in short, moving to a multi-polar world. 
The Cold War’s end has not led to greater US dominance, but rather to the dissemination of global power to many regions. 
East Asia, South Asia, Latin America, and the Middle East have new geopolitical and economic influence. 
Each region, increasingly, must find its own path to economic development, energy and food security, and effective infrastructure, and must do so in a world threatened by climate change and resource scarcity. 
Each region, therefore, will have to secure its own future. 
Of course, this should occur in a context of cooperation across regions as well as within them. 
The Middle East is in a strong position to help itself. 
There is a high degree of economic complementarity between Egypt and the oil-rich Gulf States. 
Egypt can supply technology, manpower, and considerable expertise for the Arab region, while the Gulf provides energy and finance, as well as some specialists. 
The long-delayed vision of Arab economic unity should be returned to the table. 
Israel, too, should recognize that its long-term security and prosperity will be enhanced as part of an economically stronger region. 
For the sake of its own national interests, Israel must come to terms with its neighbors. 

A World Restored? 
BERLIN: Like old battle horses feeling young as the bugle sounds, Cold War strategists are feeling the adrenalin mount as missile defense becomes front page news. 
True, the defense against missiles which Bill Clinton (reluctantly) and George W. Bush (enthusiastically) are proposing – with massive support from America’s Congress – is different from Ronald Reagan’s Star Wars dream of twenty years ago: NMD is supposed to catch only a modest number of warheads, not provide complete protection against enemy missiles. 
Nevertheless, the issue rekindles old debates over deterrence, mutual assured destruction and nuclear arms control, and revives the rivalry between the nuclear powers just when nuclear weapons had lost much of their relevance. 
Amazingly, debate is heating up even though it is uncertain that NMD will work. 
Even if it does work, it will be ten to fifteen years, possibly longer, before NMD is operational. 
So tempers are rising over something which, if and when it happens in the distant future, may or may not have much impact. 
Normally cautious governments are positioning themselves now as if the future were around the corner. 
What explains this odd behavior? 
Not blind faith in technology. 
After all, the history of missile defense is a tale of technology constantly disappointing its advocates in and out of government. 
No one in his right mind can assume that something never achieved before, namely destroying a small number of warheads in flight, will happen over night. 
Of the three tests so far conducted, one failed almost, two entirely, which is why President Clinton left the matter to his successor. 
If President Bush, as he has hinted, now favors a different design, it will take even more time to develop the architecture and devise a test program. 
Nobody can be sure that it will work either. 
Governments are worried now, not because of capabilities, but because of America’s real or imagined intentions. 
While Americans claim that NMD is not directed against anyone, that all the US wants is to protect its citizens against states like Iraq or North Korea, almost everyone else thinks differently: Russians fear that America wants to cement its military superiority (and Russia's inferiority) forever; the Chinese are concerned that NMD signals American readiness to help Taiwan remain independent; Europeans worry that America's plans invite tensions with Russia and may separate the US from Europe. 
Because political intentions, not technical capabilities matter, NMD creates problems now: it pushes Russia into confrontation, heightens Chinese nervousness, and underpins a European sense of estrangement from the US. 
Damage is done from the word go while the end of the road remains obscured. 
Inflating this political damage is the fact that, thirty years ago, the US and the then Soviet Union renounced effective defense against strategic nuclear missiles. 
Normally, a US defense project in its infancy would not cause the excitement NMD generates. 
But the 1972 ABM Treaty prohibits, for the indefinite future, systems to protect either country against such nuclear attack. 
As the US proceeds with NMD, it will either have to violate the Treaty or give six months notice to quit, something both signatories are entitled to do if they feel their vital security interests demand it. 
In the eyes of many, that would amount to America opting out of the structure of nuclear arms control built in the latter part of the Cold War. 
The Bush Administration argues that, because the Cold War is over, the formal disappearance of the ABM Treaty would not mean a loss of nuclear stability. 
But stability is as much a matter of political perceptions as of technical calculations. 
By limiting strategic missile defense, the old treaty provides a certain predictability of deterrence for all nuclear weapon states. 
Its disappearance would affect all other arms control agreements. 
Russia threatens to scrap all of them once the US leaves the ABM-Treaty. 
While this threat lacks credibility (it would harm Russian interests most) it has a certain logic. 
The main question NMD poses is not how to prepare for a future world of missile defense but how to dampen today’s political concerns. 
Such efforts are getting discretely underway. 
Legal experts in Washington suggest that modest preparations for building missile and radar sites do not violate the ABM-Treaty and so do not yet require a US notice to quit. 
For now, the Bush Administration will await the outcome of tests before deciding. 
Both Moscow and Washington hint at possible deep cuts in their offensive nuclear arsenals. 
Skeptical European allies are being mollified by US assurances of close consultation. 
The most important of confidence-building measures, a modification of the ABM-Treaty to allow for limited missile defense, is being explored. 
Russia’s early "nyet" may not be the last word. 
So political turmoil with Russia and Europe might be calmed. 
But what about China? 
In contrast to Europe and Russia, China is not party to an alliance (as is Europe) or to a network of arms control treaties through which political solutions can evolve (like Russia), factors that contribute to Asian instabilities and Chinese sensitivity. 
Here confidence can only be built through the approach taken by the US to China. 
Regrettably, there are no indications yet that the problem is recognized in Washington as a serious one. 
All this comes as a disappointment to old Cold War strategists. 
While brushing up the vocabulary and abbreviations of the age of superpower deterrence, they discover that such a world has gone. 
Missile defense is not a threat to US-Russian strategic stability; its mishandling is a threat to political predictability. 
By announcing its determination to go ahead with a distant NMD, the US has created political turbulence which it must address now if major damage is to be avoided. 

A Year of Anniversaries and Uncertainties 
ALBERTA – As China enters the “Year of the Ox,” there is much to reflect on from the past 12 months and even more to speculate about regarding the coming year. 
2008 began with devastating snowstorms that paralyzed most of central and southern China’s transport system, interrupting lives and causing severe material damage. 
Then came the riots in Tibet, which caught the government off guard, followed by embarrassing protests over China’s Olympic torch relay in several Western and Asian countries. 
Then, as Chinese were wondering why 2008, a year of supposed good fortune marked by the lucky number eight, had started with so much misfortune, a deadly earthquake struck Sichuan province, killing 80,000 people and leaving millions homeless. 
Emerging more united from this tragedy, the country welcomed the world to the long-anticipated Olympics, which were remarkably successful, but were soon superseded by the tainted-dairy-product scandal in which many babies became ill, and some died. 
In contrast to last year, when the rush home for the lunar New Year celebration was hampered by freak storms, this year millions of migrant workers have already returned to their rural homes. 
Many will be staying there, because the global economic downturn has hit China hard, costing them their jobs. 
Littered with a host of extremely sensitive anniversaries, 2009 could prove even more dramatic and unpredictable than 2008. 
Fast approaching is not only the March anniversary of last year’s disturbances in Tibet, but also the 50th anniversary of the Tibetan unrest in 1959 that led to the exile of the Dalai Lama and his supporters. 
Since the riots last spring, China’s government has taken many pro-active measures, even adopting a “Serf Liberation Day,” to defend its record in Tibet of the past 50 years, while continuing to talk with the Dalai Lama’s representatives. 
But it has also implemented heavy-handed police and military controls. 
Then comes the 20th anniversary of the June 4 crackdown on the Tiananmen Square student demonstrations. 
Calls to re-evaluate the official response began when President Hu Jintao and Premier Wen Jiabao came to power seven years ago. 
But recently the pressure has intensified, especially with the publication of “Charter 08,” a manifesto signed by hundreds of Chinese intellectuals, journalists, lawyers, and ordinary citizens, condemning the government’s human rights record and demanding more democratic reform, press freedom, governmental transparency, and societal openness. 
Although neither Hu nor Wen were directly involved in the crackdown, they nonetheless must tread carefully. 
Doing everything possible to avoid a repeat of the 1989 scenario may well be the Communist Party leadership’s top priority in 2009. 
And, given the economic slowdown, widening income disparity, rising unemployment, and growing popular discontent over corruption, China’s leaders will have their hands full. 
Of course, the inspiration for almost every political reform movement in China is the May 4th Movement of 1919, when Chinese students protested against a weak and corrupt government and called for China to strengthen itself by adopting two key Western ideals: democracy and science. 
As the 90th anniversary approaches, China has made great strides in science, but still has a long way to go in terms of democracy. 
This year also marks the 50th anniversary of the Great Leap Forward, when 20-40 million Chinese died of starvation, as well as the tenth anniversary of the government’s ban on Falun gong, an organization of self-claimed religious and meditation practitioners that has challenged the Communist Party’s legitimacy. 
Though largely discredited inside the country, this militant movement still has a following around the world, and further protests may come at any time and in unpredictable forms. 
While some of the plethora of anniversaries that China’s leaders must confront are potentially very destabilizing, several have, and will, work in their favor. 
For example, the 30th anniversary of China’s reform movement and the establishment of diplomatic relations between China and the United States has been a much-celebrated event this January. 
More importantly, October will mark the 60th anniversary of the founding of the Peoples’ Republic of China, an occasion that the Party will commemorate in grand style. 
After all, the Middle Kingdom has re-emerged as the world’s third-largest economy (having recently replaced Germany), sent astronauts into space, dispatched advanced naval destroyers to the Horn of Africa, and become the largest holder of US foreign debt. 
China will want to flex its muscles and proclaim to the world that the Party has delivered the goods to its people, while making the country strong and prosperous. 
As the worst recession since the1930’s continues, both the American and Chinese economies are bound to suffer further setbacks. 
There is no guarantee that protectionist and xenophobic sentiment in America will not hit China-US relations, or that the economic downturn will not fuel new unrest in China. 
The world should not misjudge the effect of such troubles on China. 
Nor should it forget China’s fierce display of nationalism in response to Western protests of the Olympic touch relay, the extraordinary patriotism that swept the country in response to the Sichuan earthquake, and the national pride evinced by the Olympic Games. 
But, in 2009, it would not hurt if China’s leadership also took note of the need to continue assuring the world of its commitment to a “peaceful rise,” and to do so by boldly addressing some of the unresolved issues that this year’s anniversaries will highlight. 

A Year of US-China Discord? 
NEW YORK – In 2009, Forbes magazine named US President Barack Obama and Chinese President Hu Jintao the “world’s most powerful people.” 
In 2010, we will discover that neither has the power to keep US-Chinese relations on track. 
That is bad news for those who believe that US-China cooperation is essential for reviving the global economy, meeting the challenge of climate change, containing threats of nuclear proliferation, and managing a host of other problems without borders. 
It is also bad news for America and China. 
Ten is the number to watch: America's 10% unemployment and China’s potential 10% GDP growth are set to collide like weather fronts generating a storm. 
American populism will meet Chinese pride. 
And the fevered political climate created by US mid-term elections means that the world’s most important bilateral relationship is headed for real turbulence this year. 
America and China now live with a kind of mutually assured economic destruction, and both presidents know it. 
The US needs China to finance its mounting debt, and China needs Americans to buy its products. 
Indeed, the short, sharp shock that China absorbed from the financial crisis has proven that its economic growth still depends on consumer demand in America, Europe, and Japan – and will for some time to come. 
Chinese leaders would like to shift China’s growth model toward greater reliance on domestic consumption, but that is a long-term project. 
For the foreseeable future, they will depend on local manufacturers to create the jobs that protect both China’s development goals and the Communist Party’s monopoly on domestic political power. 
Fear of shuttered factories and lost wages pushed China’s government last year to launch a massive stimulus program to protect jobs and restore growth. 
It worked. 
China, with much less exposure than the West to toxic banking assets, is off to the races again as America struggles to its feet. 
In a recent Pew Poll, 44% of US respondents named China as “the world’s leading economic power.” 
Just 27% chose America. 
To be sure, an eventual US recovery is inevitable, but job growth usually takes longer to recover. 
As long as voters are worried about their wallets, Democrats and Republicans will compete to defend American workers. 
As November’s elections approach, many US lawmakers will demand that the country with 10% unemployment persuade the country with 10% growth to stop bending trade rules and manipulating the value of its currency. 
China’s leadership, for its part, will want to know why free-market champions in Washington are threatening more protectionism. 
For, as China’s growth accelerates, trade imbalances heighten US frustrations, and elections loom, lawmakers of both US political parties will threaten punitive action against China on a variety of subjects. 
The Obama administration has already moved against Chinese exports of tires and steel pipes, but this year’s confrontation will extend well beyond trade. 
When Congress takes up the debate over climate change, for example, and some lawmakers call for a cap-and-trade system, others will demand to know why America should accept binding commitments to limit emissions while the Chinese refuse. 
China’s leaders, in no mood to play the scapegoat, will use surging national pride to bolster their position and strengthen their hand in negotiations. 
The Chinese government has invested heavily in recent years in state-owned companies and privately-owned “national champions,” mainly to ensure that China profits from the power of markets while the leadership controls as much of the spoils as possible. 
To help these domestic powerhouses increase their market leverage, the government often favors them at the expense of foreign competitors. 
Hostile US rhetoric and trade action will give China’s leaders an excuse to accelerate this trend. 
The Obama administration also wants China to share more of the burdens of international leadership. 
This includes helping the US to apply pressure on countries like Iran, Sudan, and Myanmar that continue to defy the will of the international community – and with which those Chinese state-owned companies have established lucrative commercial relationships that serve the Chinese government’s economic and political interests. 
China’s leaders, unwilling to compromise on any issue that might undermine their domestic goals, continue to resist. 
A full-scale trade war is unlikely. 
Both governments know the stakes are too high for both economies, and Obama and Hu will continue to work hard to try to keep things moving in a constructive direction. 
But neither president can guarantee that recrimination and reproach will not take on a life of its own. 
For example, if another product-safety issue involving Chinese imports makes headlines in the US, things could move quickly from disappointment to real anger. 
Most Americans care little about China's currency policy or its stance on intellectual property rights. 
But if Chinese-made products threaten their health and safety, there are sure to be opportunistic lawmakers ready to fan the flames. 
The 2008 US presidential election was the last in which the overwhelming majority of American voters neither knew nor cared about where the candidates stood on China. 
Officials in Beijing, increasingly sensitive to US criticism, will prove as ready to trade accusations as goods and services or good ideas. 
That is why the “world’s most powerful people” will now have a much harder time working together to meet today’s toughest challenges. 

A Yukos Autopsy 
Yukos, once Russia’s leading oil company and a favorite of international investors, is in its death throes. 
At what many perceived to be a rigged auction, the company’s best assets were sold off to a previously unknown bidder and are now back in the hands of the Russian state. 
The shell of what remains continues to challenge the company’s fate, notably in a Houston, Texas courtroom. 
But these spasms will not revive the corpse. 
What matters now is whether Russia’s economy will share Yukos’s fate. 
The damage to Russia’s economic growth prospects from the Yukos affair may yet prove temporary, barring a repeat performance with other companies. 
But whether the Yukos affair proves to be an isolated case, as the Kremlin insists, depends on a reading of Russian President Vladimir Putin’s motives. 
One possibility is that Putin is not sincere about his aim of doubling Russia’s GDP in a decade. 
Recent opinion polls suggest that this is the view of much of Russia’s cynical public. 
On this view, the privatizations of the 1990’s were a scam serving only the powers that be. 
But any reversal of those privatizations – such as the effective expropriation of Mikhail Khodorkovsky and his Menatep partners in Yukos – signifies not the dawn of social justice but rather a new group of bosses “expropriating the expropriators,” as Lenin used to say. 
A less nihilistic view is that the Yukos affair suggests above all a series of improvisations by Putin rather than a coherent agenda. 
This is somewhat reassuring. 
Much evidence points to the affair originating not in a systematic nationalization project, but rather in the Kremlin’s perception that Khodorkovsky aimed to use his wealth to privatize the Russian state itself. 
Such “state capture” occurred in Russia in the late 1990’s and to an even greater extent under the Kuchma regime in neighboring Ukraine which, ironically, Putin tried to preserve. 
Neutralizing the perceived threat from Khodorkovsky meant depriving him of the means to achieve his ambitions by separating his Menatep Group from Yukos’s future cash flows. 
The massive tax claims against Yukos used for this purpose were precisely that – the means rather than the end. 
Had the goal been mere recovery of tax arrears, there would have been no need to break up the company: Yukos could have settled even these colossal liabilities on a civilized installment schedule. 
To be sure, expropriating Menatep made shares in Yukos – a company that by 2003 attracted more domestic and foreign savings than any other in Russia – virtually worthless. 
But this seems like collateral damage from the pursuit of an overriding political objective. 
Much now depends on whether the same is true of the other major outcome, which is that Yukos’s principal asset – Yuganskneftegaz – is now in state hands, while its remaining units appear doomed to nationalization. 
Is this another incidental by-product of the campaign against Khodorkovsky, or is it part of the core Kremlin agenda? 
Nationalization certainly seems to appeal to the powerful faction comprising Putin’s former KGB colleagues and associates from his native St. Petersburg, one of whom last year became the chairman of Rosneft, the wholly state-owned oil company which acquired Yuganskneftegaz. 
But if the influence of these so-called siloviki was unbridled, similar attacks would have been launched against other major companies by now. 
As it is, even Roman Abramovich’s Sibneft – potentially the most vulnerable company due to its oligarch ownership and its use of the same tax minimization schemes that were the undoing of Yukos – merely faces a preliminary claim for back taxes. 
In contrast to Yukos, the claim does not exceed the company’s cash on hand and so poses no threat to its existence. 
Even the nationalization of Yukos’s assets may reflect little more than the absence of alternative buyers, given the obvious political obstacle passing those assets on to other domestic private-sector players (i.e., oligarchs), and the legal and reputational barriers to foreign investors. 
So the interpretation that best fits the facts so far is that the political aim of separating Khodorkovsky and Menatep from Yukos led in practice to nationalization, but that this was not the underlying goal. 
There is no green light for opportunistic predators in and around the Kremlin who now control Yuganskneftegaz to grab other companies’ assets at will. 
If so, the damage caused by the Yukos affair should be minimal. 
Yet, even on the assumption that Putin has no plans to nationalize key natural resource companies, he clearly desires strong state control over these “commanding heights” of the economy. 
That in itself will result in overall GDP growth falling below potential, owing to the inferior productivity and greater corruption in the major companies that the state controls or heavily influences. 
In a speech marking the state gas monopoly Gazprom’s tenth anniversary in 2003, Putin stated his position explicitly, speaking of the company as one of the few strong geopolitical levers left to Russia after the Soviet collapse. 
Putin’s geopolitical preoccupations could be accommodated by sensibly preserving state ownership of pipeline infrastructure in the hydrocarbons sector, while allowing private companies to extract, process, and sell Russia’s oil and gas. 
Instead, Putin has allowed Gazprom’s management to block proposals from his own government on the long overdue unbundling of the company. 
Putin has sought an economic transformation of Russia similar in kind, if not in degree, to China’s boom. 
The prize is higher living standards for Russia’s long-suffering people and a recovery in the country’s international standing. 
Despite uncertainty about Putin’s intentions, that prize is not out of reach. 
Indeed, at this point the only action more harmful than the Yukos affair would be another Yukos affair. 

Transatlantic Trade for All 
WASHINGTON, DC – The negotiations to create a Transatlantic Trade and Investment Partnership between the European Union and the United States are being widely welcomed. 
British Prime Minister David Cameron has called the TTIP a “once-in-a-generation prize,” citing potential gains of £80 billion ($125.5 billion) each for the EU and the US and £85 billion for the rest of the world. 
For a world weary of waiting for the World Trade Organization’s interminable Doha trade round to conclude, even a bilateral trade initiative may seem like a boon, especially when, as a recent Financial Times editorial pointed out, “bilateral” covers half of the world’s economy. 
But there is a serious downside: The deal could hurt developing-country exporters, unless the EU and the US make a concerted effort to protect these actors’ interests. 
The feature of the proposed pact that elicits the most excitement – its focus on regulatory barriers like mandatory product standards – should actually incite the greatest concern. 
Given low tariffs in the EU and the US – less than 5%, on average – further preferential reductions will not seriously handicap outsiders. 
But, when it comes to standards – such as those governing safety, health, and the environment – the market-access requirements are brutal and binary: either you meet the established standard or you do not sell. 
As a result, third-country firms’ options will depend on how TTIP standards are established: through harmonization (adoption of a common standard) or mutual recognition (acceptance of goods that meet one another’s established standards). 
The first option would enable producers everywhere to take advantage of economies of scale. 
But, in some cases, the harmonized standard could be more stringent than some countries’ original standards. 
Even though new standards would apply to suppliers from all exporting countries, compliance costs usually vary, meaning that those less equipped to meet higher standards could suffer. 
In the late 1990’s, when the EU decided to harmonize standards for aflatoxins (a group of toxic compounds produced by certain molds), eight member states – including Italy, the Netherlands, and Spain – raised their national standards substantially, which is likely to have caused African exports of cereals, dried fruits, and nuts to Europe to decline by as much as $670 million. 
With mutual recognition, the EU and the US would accept each other’s standards or conformity-assessment procedures, allowing firms to adhere to the less stringent requirements in each area. 
If the policy were extended to third-country firms, it would have a powerful liberalizing impact. 
For example, Malaysian television producers could choose to comply with, say, America’s easier-to-meet safety standards, then sell the same product in both markets, reaping the benefits of economies of scale while lowering compliance costs. 
If, however, the TTIP excluded third-country firms from the mutual recognition policy, their competitiveness vis-à-vis European and American companies would diminish substantially. 
Indeed, our research shows that when mutual-recognition agreements include restrictive rules of origin, intra-regional trade increases – at the expense of trade with other countries – and that developing countries tend to suffer most. 
In fact, excessively constraining rules of origin have proved problematic for some of the EU’s previous recognition agreements, such as those governing professional-services standards. 
While a Brazilian orange admitted for sale in Portugal can be sold throughout the EU, a Brazilian engineer or accountant licensed in Portugal must fulfill separate licensing requirements to work elsewhere in the EU, hampering much-needed labor mobility by forcing non-European workers to endure costly and inefficient bureaucratic procedures. 
Furthermore, when it comes to tariffs and standards, WTO rules are not created equal. 
While they protect countries excluded from bilateral or regional tariff agreements, thereby ensuring that integrated markets do not receive additional advantages, few safeguards exist to shield third countries from the fallout of agreements on mandatory standards. 
Even in the absence of international rules, the EU and the US could take two actions to ensure that the TTIP does not have adverse consequences for developing economies. 
First, they could allow all countries to reap the benefits of a bilateral mutual-recognition deal by agreeing not to impose restrictive rules of origin. 
Second, where they do consider harmonization, they could favor the less stringent of the original standards, unless there is credible evidence that it would not support the relevant regulatory objective. 
This is akin to a WTO test for departures from established international standards. 
If the EU and the US made these two commitments, the rest of the world could follow the TTIP negotiations with hope, rather than trepidation. 

Abandoning Asia’s Poor 
NEW YORK -- More than half of Asia’s population -- 1.8 billion people -- live on less than $2 a day; more than 600 million of them try to survive on less than $1 a day. 
With food prices now soaring, most of Asia’s “working poor,” who are already struggling on degraded lands, in sweatshops, on streets and at homes, risk further destitution. 
Yet the Asian Development Bank – an institution whose mission is to reduce poverty – last month approved a new corporate strategy (ADB Long Term Strategic Framework 2008-2020) that is ominously silent on the importance of employment and social protection for the poor. 
A handful of influential ADB bureaucrats with large salaries, secured pensions, comprehensive health insurance, subsidized housing, and education for their children, have apparently decided that financing subsidized housing, health, nutrition, and child protection programs is not a priority. 
Nor do they consider land reform, employment services, or pensions for all Asians a priority. 
Instead, these officials have decided to refocus ADB operations on three areas: inclusive economic growth, environmentally sustainable growth, and regional integration, with a heavy emphasis on private-sector development. 
The ADB is abandoning crucial public support for social development. 
The new strategy is a reversal of the policies of the late 1990’s, when the ADB changed its objective from “economic growth” to “poverty reduction.” 
The ADB’s earlier policies were based on broad-based growth, good governance, and social development. 
Ten years later, only an empty corporate motto of “an Asia and Pacific region free of poverty” is left. 
Social protection, housing, employment, and labor are not on the ADB’s new agenda. 
Health and agriculture will be considered only on a highly selective basis. 
Only education remains as a future investment sector, given its impact on productivity, but the rest of the much-needed social sector interventions have been abandoned in favor of investment in infrastructure, the environment, regional integration, and finance. 
No lesson was learned from the Asian financial crisis, which underscored the importance of social protection. 
Pensions are mentioned only under financial-sector development: the ADB is to promote private-led insurance, despite evidence from the United Nations, International Labor Organization, World Bank and NGOs showing that private pensions do not reach the poor. 
If the ADB were serious about poverty reduction, it would put a significant share of its investments in social development, particularly on non-contributory universal social security schemes that can reduce poverty by 35% to 50%. 
Why is the ADB constricting its agenda? 
Why does it want to deny governments’ access to much-needed funds for social development? 
The ADB argues that other agencies are responsible for social development. 
But that argument is unjustified: while institutions such as the UN and NGOs may work on social development, they are under-funded compared to the ADB. 
Besides, plenty of other public and private institutions undertake the infrastructure and finance projects that the ADB now wants to focus on. 
So, what is the ADB’s added value, and whom does it serve? 
Certainly the ADB’s new strategy will not serve the majority of Asians, 60% of whom still live in poor rural areas. 
Indeed, Asia and the Pacific account for three-quarters of the world's stunted, underweight, and malnourished children. 
Maternal mortality rates remain dismal in several countries. 
As food prices rise, so is hunger and poverty. 
External and internal pressure at the ADB’s Annual Meeting this May forced the bank to respond to the current food crisis through temporary safety-net food security programs. 
It also offered medium-term measures such as infrastructure and rural finance. 
All of these are good, but they are insufficient. 
Other measures are needed to reduce poverty in rural areas, such as land reform and rights, agricultural extension services, expanding access to health and non-contributory social pensions, just to mention some. 
ADB’s major goal, however, seems to be to scale up private-sector support from 15% to 50% of total bank operations. 
Several countries have expressed reservations about this. 
It will include direct financing, credit enhancements, and guarantees – a subsidy to a sector known for its risky non-performing operations at the ADB – as well as business-friendly regulations and removal of market “barriers,” which include social and labor rights. 
Such rights can be tolerated only as minimum social safeguards, which the ADB is trying to neuter through another ongoing review. 
Unless the ADB’s member governments reverse its current policies, they, too, will be blamed for ignoring the urgent needs of the poor. 
Poverty reduction requires both economic and social policies that reach people. 
Growth on its own is not sufficient to guarantee poverty reduction in Asia and the Pacific. 

Abba Eban: The Voice of Israel 
For almost two generations, Abba Eban was Israel's voice - its messenger to the high and mighty among the nations as well as to the Jewish people all over the world. 
Since he first appeared at the side of Dr. Chaim Weizmann in the late 1940's during the struggle for Jewish statehood and sovereignty, few people could articulate the Zionist and later the Israeli case with comparable eloquence and conviction. 
With his Churchillian prose and almost Shakespearean cadences, his mellifluous phrases and sonorous voice carried for decades a message of hope from a people that could have lost all hope and trust in humanity after the horrors of World War II. 
As Ambassador to the United States and the UN, and later as Foreign Minister, he represented an Israel with which the world's liberal imagination could identify. 
Larger and more powerful nations were envious of so a powerful spokesman, and his speeches became textbook models for statesmen and diplomats in distant lands. 
His books - which he found time to write despite the hectic demands of diplomacy - were a unique combination of enormous erudition and crystalline clarity. 
His scholarly training and rhetorical gifts supplemented each other in a rare fashion. 
Rarely has a small country been represented by a statesman of such world stature: only Thomas Masaryk and Jan Smuts come to mind to compare with him. 
He was a true patriot, in the old-fashioned sense of the word: proud of his people, but never ethno-centric; a man of the world, but deeply embedded in Jewish cultural heritage; focused on the plights and tribulations of the Jewish people, but never losing the universal horizon of mankind. 
In short, he was a modern Jew in the best sense of the word. 
It was said of Prime Minister Levi Eshkol that he spoke seven languages, all of them in Yiddish. 
Of Eban it could be said that he spoke ten languages, and all of them with an Oxford/Cambridge accent. 
Yet what appealed to the outside world was not always an asset in the rough and tumble of Israeli politics. 
Perhaps Eban was too urbane, too much of a scholar and gentleman to be able to make it - in Disraeli's phrase - to the top of the greasy pole. 
Together with Golda Meir and Moshe Dayan he had to leave government in 1974 in the wake of the Yom Kippur War. 
He could hardly have been held responsible for the hubris which led to the avalanche of 1973, yet it nonetheless brought him down as well. 
He never found his way back, and when confronted with the New Politics of primaries and populism, he became dispirited when he could not cope with this new style. 
In the international arena, Eban's pen was his sword, and the spoken word his lance. 
He was less adept in political infighting in Israel. 
He could be a fierce turf fighter, yet it is fair to say that he could have fought harder for his moderate and dovish views in the post-1967 government in which he served. 
It is far from clear if he would have prevailed, given his lack of an independent political base, but his international prestige and standing might have given him a chance if he would have chosen to throw the gauntlet. 
He never did. 
Eban's silence in the last years was not only a product of his disenchantment with Israeli politics or his failing health. 
At a time when public debate in Israel is torn between pseudo-religious nationalist fanatics and anti-Zionists masquerading as post-modernists, the moral certitudes of Eban, for all their urbanity, may sound shallow. 
But nation-building requires moral stamina, and Eban provided it to his people and the world in abundance. 
Without having spoken to Eban in the last few years, I have no doubt that he would be extremely unhappy about the turn of events after the failure of Camp David and Taba in 2000-01, and the present course of Israeli policies would fill him with foreboding. 
Yet in all probability he would have been even more deeply disappointed in the inability of the Palestinians to come to terms with the existence of the Jewish state. 
As an Arabist by training, immersed in Arab and Muslim culture, he always hoped that the glorious Arab past could be rejuvenated, that an Arab and Muslim culture of tolerance could triumph over fanaticism and extremism. 
This was the bedrock of his hope for reconciliation between Jew and Arab. 
That this Arab renaissance - to use the phrase of the great Palestinian scholar George Antonius - did not take place may have been Eban's greatest disappointment. 
Despite the high-born image Eban projected, he was an extremely vulnerable person: what some occasionally discerned as traits of vanity may have had their origins in his humble origins. 
While appearing to own the Queen's English, Eban was not to the manor born: he came from the extremely modest fringes of Anglo-Jewry. 
He was, in the true sense of the word, a self-made man, whose pluck, ambition, drive and inner belief in his destiny carried him to the pinnacle of his achievements. 
His was the aristocracy of the spirit. 
In this Abba Eban was a true representative of the people he so gloriously represented. 

Abdullah Out On A Limb 
Crown Prince Abdullah’s peace proposal was born in Saudi Arabia but some allege that it was conceived in the US. 
Revealed to a visiting American journalist during a private dinner with the Crown Prince, the plan centers on a “full normalization” of relations between Israel and all Arab countries, in return for an Israeli withdrawal from all the Palestinian territories it occupied in 1967. 
The proposal may get a boost when Abdullah meet President Bush in Texas later this spring, but its early survival depends first on its reception at the upcoming Arab summit in Beirut. 
The suspicions which surround Abdullah’s peace initiative, and which dismiss it as stillborn, are founded in the belief that it was conceived to appease Saudi Arabia’s American critics and to divert them from focussing on Saudi domestic tensions. 
Since September 11th, Saudi Arabia has felt intense pressure to explain (and explain away) its links to Osama bin Laden’s al-Qaeda terrorist network because fifteen of the nineteen plane hijackers were Saudis (indeed, the majority of prisoners held by the US at Guantanamo Bay in Cuba are said to be Saudi citizens) and Saudis are often viewed as a major source of al-Qaeda’s finances. 
Moreover, it is alleged that the Saudi government has become preoccupied with appeasing America, despite the beginning of the second Palestinian intifada, and Israel’s ongoing occupation of Palestine. 
At the same time, Saudi public opinion has been inflamed, mostly because of their rulers’ apparent apathy toward the plight of the Palestinian people, particularly when contrasted with Osama bin Laden’s lethal propaganda. 
Since the terrorist attacks of September 11th, Saudi leaders have felt pressed to accommodate public revulsion about the mistreatment of the Palestinians, but worry that doing so may even further jeopardize their now brittle relations with America. 
Crown Prince Abdullah’s initiative provoked widespread surprise, not because the idea is so startlingly new, but because of its source and timing. 
A proposal for “full normalization” with Israel coming from an Islamic regime that bases its legitimacy on the austere Islamic doctrines of the Wahhabi seems both peculiar and progressive. 
But Saudi Arabia’s long-cultivated image of stability, benevolence, and mystical communal harmony has given way under the endless glare of the American press. 
Its educational system, too, is increasingly portrayed as a breeding ground for hatred of the West. 
Something had to give. 
America’s seemingly hostile attention gave rise to the speculation that Crown Prince Abdullah’s initiative really denotes a Saudi public relations counteroffensive, hatched in the Saudi embassy in Washington to cover over the rift with the US. 
Indeed, the subsequent, deafening silence by other Saudi leaders to the proposal appears to confirm it as a public relations move for which they need not risk any of their own domestic political capital. 
Although Abdullah is usually referred to in the West as Saudi Arabia’s ruler, the debilitated King Fahd’s six full brothers are the ones who truly represent the real power in the Kingdom. 
Almost nothing, neither in support nor in opposition, has been uttered by the King and these other brothers, collectively known as the “Sudairis.” 

Absent-Minded Killers 
As a species, human beings have a major self-control problem. 
We humans are now so aggressively fishing, hunting, logging, and growing crops in all parts of the world that we are literally chasing other species off the planet. 
Our intense desire to take all that we can from nature leaves precious little for other forms of life. 
In 1992, when the world’s governments first promised to address man-made global warming, they also vowed to head off the human-induced extinction of other species. 
The Convention on Biological Diversity, agreed at the Rio Earth Summit, established that “biological diversity is a common concern of humanity.” 
The signatories agreed to conserve biological diversity, by saving species and their habitats, and to use biological resources (e.g., forests) in a sustainable manner. 
In 2002, the treaty’s signatories went further, committing to “a significant reduction in the current rate of biodiversity loss” by 2010. 
Unfortunately, like so many other international agreements, the Convention on Biological Diversity remains essentially unknown, un-championed, and unfulfilled. 
That neglect is a human tragedy. 
For a very low cash outlay – and perhaps none at all on balance – we could conserve nature and thus protect the basis of our own lives and livelihoods. 
We kill other species not because we must, but because we are too negligent to do otherwise. 
Consider a couple of notorious examples. 
Some rich countries, such as Spain, Portugal, Australia, and New Zealand, have fishing fleets that engage in so-called “bottom trawling.” 
Bottom trawlers drag heavy nets over the ocean bottom, destroying magnificent, unexplored, and endangered marine species in the process. 
Complex and unique ecologies, most notably underground volcanoes known as seamounts, are ripped to shreds, because bottom trawling is the “low cost” way to catch a few deep sea fish species. 
One of these species, orange roughy, has been caught commercially for only around a quarter-century, but already is being fished to the point of collapse. 
Likewise, in many parts of the world, tropical rainforest is being cleared for pasture land and food crops. 
The result is massive loss of habitat and destruction of species, yielding a tiny economic benefit at a huge social cost. 
After cutting down a swath of rainforest, soils are often quickly leached of their nutrients so that they cannot sustain crops or nutritious grasses for livestock. 
As a result, the new pasture land or farmland is soon abandoned, with no prospect for regeneration of the original forest and its unique ecosystems. 
Because these activities’ costs are so high and their benefits so low, stopping them would be easy. 
Bottom trawling should simply be outlawed; it would be simple and inexpensive to compensate the fishing industry during a transition to other activities. 
Forest clearing, on the other hand, is probably best stopped by economic incentives, perhaps combined with regulatory limits. 
Simply restricting the practice of land clearing probably would not work, since farm families and communities would face a strong temptation to evade legal limits. 
On the other hand, financial incentives would probably succeed, because cutting down forest to create pastureland is not profitable enough to induce farmers to forego payments for protecting the land. 
Many rainforest countries have united in recent years to suggest the establishment of a rainforest conservation fund by the rich countries, to pay impoverished small farmers a small amount of money to preserve the forest. 
A well-designed fund would slow or stop deforestation, preserve biodiversity, and reduce emissions of carbon dioxide the burning of cleared forests. 
At the same time, small farmers would receive a steady flow of income, which they could use for micro-investments to improve their household’s wealth, education, and health. 
Aside from banning bottom trawling and establishing a global fund for avoided deforestation, we should designate a global network of protected marine areas, in which fishing, boating, polluting, dredging, drilling, and other damaging activities would be prohibited. 
Such areas not only permit the regeneration of species, but also provide ecological benefits that spill over to neighboring unprotected areas. 
We also need a regular scientific process to present the world with the evidence on species abundance and extinction, just as we now have such a process for climate change. Politicians don’t listen very well to individual scientists, but they are forced to listen when hundreds of scientists speak with a united voice. 
Finally, the world should negotiate a new framework no later than 2010 to slow human-induced climate change. 
There can be little doubt that climate change poses one of the greatest risks to species’ viability. 
As the planet warms, and rain and storm patterns change dramatically, many species will find themselves in climate zones that no longer support their survival. 
Some can migrate, but others (such as polar bears) are likely to be driven to extinction unless we take decisive action to head off climate change. 
These measures are achievable by 2010. 
They are affordable, and in each case would ultimately deliver large net benefits. 
Most importantly, they would allow us to follow through on a global promise. 
It is too painful to believe that humanity would destroy millions of other species – and jeopardize our own future – in a fit of absent-mindedness. 

Making Academia Matter Again 
CAMBRIDGE – Academic freedom is a precious commodity, critical to ensure that discovery of the truth is not encumbered by political or ideological forces. 
But this does not mean that intellectuals should hide in academic bunkers that, by protecting us from criticism by “non-experts,” allow ego to flourish and enable a focus on questions that are not actually relevant to anyone else. 
We experts should have to explain ourselves. 
This means, first and foremost, that researchers should be communicating their results in a way that supports accountability and confirms that public funds and education benefits are being used in ways that are in taxpayers’ interests. 
The duty to communicate findings also ensures that the public is educated, not only about the topic itself, but also about the way research actually works. 
Scholarly books and journals often give the impression that the truth is revealed through a neat, orderly, and logical process. 
But research is far from being a pristine landscape; in fact, it resembles a battlefield, littered with miscalculations, failed experiments, and discarded assumptions. 
The path to truth is often convoluted, and those who travel along it often must navigate fierce competition and professional intrigue. 
Some argue that it is better to hide this reality from the public, in order to maintain credibility. 
For example, in 2014, physicists collaborating on a project known as BICEP2 thought that they had detected gravitational waves from the beginning of the universe. 
It was later realized that the signal they had detected could be entirely attributed to interstellar dust. 
Some of my colleagues worried that this revelation would undermine faith in other scientific predictions, such as those involving climate change. 
But would hiding the truth from the public really do more for scientific and academic credibility than cultivating a culture of transparency? 
Probably not. 
In fact, being honest about the realities of research might enhance trust and create more space for innovation, with an informed public accepting that risk is the unavoidable and worthwhile cost of groundbreaking and broadly beneficial discoveries. 
Another way to ensure that academia continues to innovate in useful and relevant ways is to blur the traditional boundaries among disciplines – the frontiers where invention so often happens. 
To that end, universities should update their organizational structure, moving away from clearly delineated departments in order to create a kind of continuum across the arts, humanities, and sciences. 
Students should be encouraged to take courses in multiple disciplines, so that they can weave those lessons and experiences into new patterns of knowledge. 
To make this process sustainable, universities should ensure that the courses and curricula they offer help students to develop the skills that a fast-changing labor market demands. 
This means not just creating new curricula today, but also updating them every few years, in order to account for new trends and discoveries in areas ranging from artificial intelligence and Big Data to alternative energy sources and genome editing. 
Professors, for their part, should approach their job as mentors of future leaders in science, technology, the arts, and humanities, rather than attempting to mold students in their own intellectual image. 
Of course, the latter approach can be useful if the goal is to advance the popularity of one’s own research program and to ensure that one’s own ideas and perspective endure. 
But that is not the fundamental mission of academia. 
The louder the consensus in the echo chambers of academia become, the greater the ego boost for those who inhabit those chambers. 
But history shows that progress is sometimes advocated by a soft voice in the background, like that of Albert Einstein during his early career. 
Truth and consensus are not always the same. 
Diversity of opinion – which implies diversity of gender, ethnicity, and background – is vital to support creativity, discovery, and progress. 
That is why it is so important for prizes and professional associations to be used not to reinforce mainstream perspectives, but rather to encourage independent thought and reward innovation. 
This does not mean that all opinions should be considered equal, but rather that alternative views should be debated and vetted on merit alone. 
We in academia cannot continue to pat ourselves on the back, celebrating our own privileges and failing to look at the world in new and relevant ways. 
If we are to defend the freedom of our enterprise, we must restore dialogue with the broader public and ensure that the relevance of our work is well understood – including by us. 

The New Brain Drain in Science 
DUBAI – In December 2013, the Nobel laureate physicist Peter Higgs told The Guardian that if he were seeking a job in academia today, “I don’t think I would be regarded as productive enough.” 
Having published fewer than ten papers since his groundbreaking work in 1964, Higgs believes that no university would employ him nowadays. 
Academics are well acquainted with the notion of “publish or perish.” 
They must publish their work in peer-reviewed journals increasingly often to climb the career ladder, protect their jobs, and secure funding for their institutions. 
But what happens to scientists and other scholars, such as those in the Middle East, who have different research concerns from – and scant connections to – the professional journals that can make or break an academic/scientific career? 
Scholars and institutions with high publishing rates in the established journals receive better productivity scores, which translate into bigger rewards, in terms of enhanced careers and greater research funding. 
Whether the work they are publishing has a measurable impact on their field of study is, sadly, too often a secondary concern. 
The incentives they face mean that quantity often comes before quality. 
Academic journals determine the various disciplinary rankings that academic institutions are compelled to climb, which leads institutions to hire and retain only those scholars who can produce at high rates. 
This has given rise to a deeper, twofold problem: academic journals have become disproportionately influential, and they have placed a premium on empirical research. 
With respect to the first problem, journals are gradually replacing institutions as the arbiters of quality within academic communities. 
Scholars in almost any discipline seeking jobs at “A-level” institutions must publish in a select few A-level journals that are seen as gateways. 
These journals’ editorial boards increasingly privilege positivist theoretical work – meaning research that is based on empirical data analysis. 
Qualitative research – such as ethnographies, participatory surveys, and case studies – is often designated as suitable only for B- and C-level journals. 
Academics conducting empirical research have a big advantage over those carrying out qualitative work, because they can use efficient software and powerful computers to test their hypotheses quickly and account for different variables in data sets. 
This kind of work can be cheaper, too, because a single data set can generate multiple journal articles. 
To be sure, there is nothing wrong with scientific practices evolving along with technology, or with academics using richer data sets and better software. 
But adoption of this quantitative approach should not be the single most important criterion for assessing scientific excellence and deciding career trajectories. 
After all, knowledge is acquired in different ways, and empirical positivism is only one method in a larger epistemological inventory. 
The positivist trend in science today is particularly problematic for developing countries, where data sets are scarce and often of poor quality. 
Thus, scientists working in developing countries face a dilemma: either work on rich-world problems for which there is abundant data, or risk career advancement by conducting qualitative work that will not make it into A-level journals. 
Academics who move from data-rich countries in Europe and North America to data-poor countries in the Middle East and elsewhere often face this problem. 
As researchers at my institution in Abu Dhabi know, conducting surveys for qualitative research is feasible; but generating rich data from scratch for theory-building research is extremely difficult. 
At the International Conference on Science and Technology Indicators this year, a French academic researching soil in Africa reported that only 5% of the published work in his field has originated from African researchers. 
When he dug deeper into his own research, he found that 50% of what he had learned about African soil came from African researchers, who have not or could not publish their work in international academic journals. 
Countries where English is not the lingua franca are particularly disadvantaged in science, not because they lack academic excellence, but because English-language journals call the shots. 
Non-English academic journals simply do not command the same attention in the science community. 
As a result, the scope of research topics that many countries can undertake is limited, and they must struggle to retain scientific talent. 
This is particularly true in the Middle East, where governments are struggling to diversify their economies, in order to make them more resilient. 
As English-language empirical-research journals consolidate their hold on the channels that determine whether or not a scientist will have a successful career, developing countries will have to invest heavily in their own data infrastructure to place domestic researchers on a more competitive footing. 
But even – or especially – if developing countries do make such investments, much will be lost to science. 
With (mostly) United States-based academic journals reigning over global science, no one has to move to become part of a new brain drain, whereby scientists’ research priorities, problems, and methods gravitate to the dominant positivist epistemology, at the expense of all alternatives. 

Closing the Financial Services’ Accessibility Gap 
KAMPALA – Last month, the United Kingdom hosted the first-ever Global Disability Summit to help focus the world’s attention on the needs of people with disabilities. 
The agenda was packed with topics like building equitable education, ending discrimination, and bringing technology to disabled communities – especially poor countries in the Global South. 
But one challenge that did not receive the attention it deserved is an often-overlooked component of development policy: access to financial services. 
This was a missed opportunity – not only for the world’s one billion disabled people, but also for the institutions that should be serving them. 
Increasing the accessibility of financial services is good for business and economic growth. 
According to research by Barclays, when customers with disabilities are able to manage their money, economic vulnerability declines and overall economic health improves. 
Moreover, with more than $1 trillion in disposable income, the so-called disability market is among the biggest potential client bases in the world. 
In other words, financial-service providers have every reason to cater to people with disabilities. 
Why, then, are most businesses doing just the opposite? 
One reason is a lack of awareness. 
Because people with disabilities typically have less income than their nondisabled peers, service providers have often lacked an incentive to extend support to them. 
But, with more attention being paid to total market potential, financial institutions are starting to adjust their product lines accordingly. 
As they do, four issues must be addressed to maximize the benefits for customers with accessibility challenges. 
First, financial-services companies must work harder to understand the needs of current and future clients. 
For example, with better data, a bank in a particular market could improve the accessibility of its mobile-banking platforms. 
This is essentially what happened at Standard Chartered Bank in India last year, when employees developed a voice-assisted system to help visually impaired customers access their accounts online. 
Good data are also essential to the effectiveness of advocacy groups as they push providers to improve their services. 
Second, engagement must not stop with innovative products; it must also be extended to the labor market. 
Simply put, the financial-services industry should hire more people with disabilities by investing in assistive technologies like braille readers and alternative and augmentative communication devices. 
The need to diversify the workforce is particularly acute in the United States, where one in five people has a disability. 
Third, people with disabilities must always be included in discussions about how to expand and strengthen financial independence. 
In 2013, when the Lloyds Banking Group convened a focus group to examine the effects of dementia on customer behavior, engagement with clients led to the charter on Dementia-friendly Financial Services. 
This innovative document codified how banks should tailor products to clients with cognitive impairments. 
Future initiatives should follow this collaborative model to ensure that decision-making at all levels is facilitated by human-centered design. 
And, lastly, governments must commit to addressing this issue, by emulating the action of countries like the UK, which has linked services for the disabled to development funding. 
With the right support, progress on these complex challenges can be sweeping; for example, at Financial Sector Deepening Uganda, where I work, we are using British aid money to extend financial services to the disabled in rural communities. 
Our vision is to encourage the emergence of similar programs in many other countries around the world. 
With 91 countries having already ratified the Optional Protocol to the Convention on the Rights of Persons with Disabilities, it is clear that there is plenty of political support for these initiatives. 
The challenge now is to turn pledges into action. 
In the coming decades, the world’s disabled population will grow as medical advances allow people to live longer, healthier, fuller lives. 
Providing the disabled with access to financial services and products is among the best ways to guard against discrimination and nurture long-term empowerment. 
Full financial inclusion will come slowly for a community often referred to as the “fastest-growing minority group in the world.” 
The task for activists, advocates, enlightened business leaders, and policymakers is to highlight the social and economic benefits of success. 

Surgery for All 
BOSTON – On a recent trip to India, I hailed a rickshaw that was pedaled, I soon noticed, by a man with a lame leg. 
It turns out that a few weeks earlier, the driver had been hit by a car while navigating the busy streets of New Delhi. 
Although he had managed to obtain medication from a local pharmacy for the agonizing pain – probably because his leg was broken – he could spare neither the time nor the money to see a surgeon. 
This type of tragic calculus is strikingly common. 
The Lancet Commission on Global Surgery estimates that some five billion people – almost 70% of the world’s population – lack access to safe, affordable surgical and anesthetic care, while 33 million people are saddled with unbearably high health expenses. 
Not surprisingly, the global poor suffer disproportionately: while low-income countries are home to close to 35% of humanity, they account for just 3.5% of all surgical procedures. 
One of the biggest obstacles to achieving universal health coverage – which the United Nations has declared a global goal – is financing. 
And, paradoxical as it may sound, one of the best ways that governments can get the money they need to expand coverage is by making surgery more widely available. 
Time-sensitive health problems – such as injuries from traffic accidents and pregnancy-related complications – are among the leading causes of death and disability in low- and middle-income countries. 
But untreated or undertreated conditions requiring surgery also hurt economic productivity. 
For example, the Lancet study estimated that the failure to improve surgical care in developing countries would translate into $12.3 trillion of lost economic output by 2030. 
Failure to maintain strong surgical capacity could even undercut economic gains made by middle-income countries, reducing total GDP growth by approximately 2% annually. 
For many leaders, the common perception is that provision of surgical care is not sustainable or cost-effective. 
When faced with tough budget choices, governments often favor programs that combat infectious and chronic diseases, leaving people like my rickshaw driver in the lurch. 
But a growing body of evidence suggests that these views are misplaced. 
When researchers at the Harvard Medical School analyzed surgical interventions in low- and middle-income countries, they found a remarkable disconnect between economic assumptions and reality. 
For example, they calculated that money spent on cesarean sections and joint surgeries yields higher returns than spending on the management of HIV or heart disease. 
To be sure, chronic and infectious diseases need our attention, too; we cannot restructure health systems overnight, nor should we turn our backs on those being treated for non-surgical illnesses. 
But reforms that focus more attention on the importance of surgery would boost economic productivity and help create more equitable health care for everyone. 
For starters, health ministries and physician organizations should formally recognize that surgical and anesthetic care are an essential part of universal health coverage. 
To make this case, health-care providers will need to improve their collection and analysis of data on surgical outcomes, which would increase transparency on mortality and morbidity and strengthen overall accountability. 
Decisions about how to expand services could be guided by the Lancet commission’s core indicators on “preparedness,” “delivery,” and “impact” of surgical care. 
Second, to pool risk and guard against cost overruns, countries that are considering universal coverage policies should put surgical care under publicly financed plans. 
While some funding for expanding surgical services could come from taxation, health-care providers should also explore innovative financing options – such as “social justice models,” whereby people pay according to their means. 
Finally, to streamline resources and increase surgical capacity, hospitals should explore task-sharing, whereby non-emergency cases are referred to licensed nurses and physician assistants. 
Longer-term strategies include investing more in medical education to bolster the ranks of doctors and surgeons. 
The tremendous economic progress that many developing countries have made in recent decades has been largely driven by vibrant, young, and ambitious populations. 
One of the most effective ways to maintain this growth and development is to ensure access to safe and affordable healthcare – including surgery. 
While the cost of providing it may be high, the cost of not providing it is even higher. 

Polluters Must Pay 
NEW YORK – When BP and its drilling partners caused the Deepwater Horizon oil spill in the Gulf of Mexico in 2010, the United States government demanded that BP finance the cleanup, compensate those who suffered damages, and pay criminal penalties for the violations that led to the disaster. 
BP has already committed more than $20 billion in remediation and penalties. 
Based on a settlement last week, BP will now pay the largest criminal penalty in US history – $4.5 billion. 
The same standards for environmental cleanup need to be applied to global companies operating in poorer countries, where their power has typically been so great relative to that of governments that many act with impunity, wreaking havoc on the environment with little or no accountability. 
As we enter a new era of sustainable development, impunity must turn to responsibility. 
Polluters must pay, whether in rich or poor countries. 
Major companies need to accept responsibility for their actions. 
Nigeria has been Exhibit A of corporate environmental impunity. 
For decades, major oil companies, including Shell, ExxonMobil, and Chevron, have been producing oil in the Niger Delta, an ecologically fragile environment of freshwater swamp forests, mangroves, lowland rainforests, and coastal barrier islands. 
This rich habitat supports remarkable biodiversity – or did before the oil companies got there – and more than 30 million local inhabitants, who depend on the local ecosystems for their health and livelihoods. 
Twenty years ago, the International Union for Conservation of Nature and Natural Resources classified the Niger Delta as a region of high biodiversity of marine and coastal flora and fauna – tree species, fish, birds, and mammals, among other forms of life – and therefore rated it as a very high priority for conservation. 
Yet it also noted that the region’s biodiversity was under massive threat, with little or no protection. 
The global companies operating in the delta have spilled oil and flared natural gas for decades, without regard for the natural environment and the communities impoverished and poisoned by their actions. 
One estimate puts the cumulative spills over the past 50 years at approximately 10 million barrels – twice the size of the BP spill. 
The data are uncertain: there have been many thousands of spills during this period – often poorly documented and their magnitude hidden or simply unmeasured by either the companies or the government. 
Indeed, just as BP was being hit with new criminal penalties, ExxonMobil announced yet another pipeline leak in the Niger Delta. 
The environmental destruction of the delta is part of a larger saga: corrupt companies operating hand in hand with corrupt government officials. 
The companies routinely bribe officials to gain oil leases, lie about output, evade taxes, and dodge responsibility for the environmental damage that they cause. 
Nigerian officials have become fabulously wealthy, owing to decades of payoffs by international companies that have plundered the delta’s natural wealth. 
Shell, the largest foreign operator in the Niger Delta, has been criticized repeatedly for its egregious practices and its unwillingness to be held to account. 
Meanwhile, the local population has remained impoverished and beset by diseases caused by unsafe air, poisoned drinking water, and pollution in the food chain. 
Local lawlessness has led to gang warfare and persistent illegal tapping into the pipelines to steal oil, leading to further massive oil spills and frequent explosions that kill dozens, including innocent bystanders. 
In the colonial era, it was the official purpose of imperial power to extract wealth from the administered territories. 
In the post-colonial period, the methods are better disguised. 
When oil companies misbehave in Nigeria or elsewhere, they are protected by the power of their home countries. 
Don’t mess with the companies, they are told by the United States and Europe. 
Indeed, one of the largest bribes (a reputed $180 million) paid in recent times in Nigeria was by Halliburton, a company tightly intertwined with US political power. 
(Dick Cheney went from being Halliburton’s CEO to the US vice presidency.) 
Last year, the United Nations Environment Program (UNEP) issued a remarkable report on Ogoniland, a major ethnic homeland in the Niger Delta that has been at the epicenter of conflict between local communities and international oil. 
The report was as scathing as it was scientifically clear. 
Despite many past promises of a cleanup, Ogoniland remains in environmental agony, impoverished and sickened by the oil industry. 
UNEP also offered clear and detailed recommendations, including emergency measures to ensure safe drinking water; cleanup activities targeting the mangroves and soils; public-health studies to identify and counteract the consequences of pollution; and a new regulatory framework. 
The world’s governments have recently agreed to move to a new framework for sustainable development, declaring their intention to adopt Sustainable Development Goals at the Rio+20 Summit in June. 
The SDGs offer a critical opportunity for the world to set clear, compelling standards for government and corporate behavior. 
Many major companies, including in the oil industry, have expressed their readiness to support sustainable development goals. 
Cleaning up the Niger Delta would provide the strongest possible example of a new age of accountability. 
Shell, Chevron, ExxonMobil, and other major oil companies should step forward and help to fund the necessary cleanup, ushering in a new era of responsibility. 
The Nigerian government’s own accountability is on the line as well. 
It is heartening that several Nigerian senators have recently been in the forefront of efforts to strengthen the rule of law in the oil sector. 
The cleanup of the Niger Delta provides an ideal opportunity for Nigeria, the oil industry, and the international community to show convincingly that a new age has dawned. 
From now on, sustainable development must not be a mere slogan, but rather an operational approach to global governance and well-being on a strained and crowded planet. 

Remembering Sri Lanka’s Killing Fields 
NEW YORK – One of the worst atrocity crime stories of recent decades has barely registered in the world’s collective conscience. 
We remember and acknowledge the shame of Cambodia, Rwanda, Bosnia, and Darfur. 
We agonize about the failure to halt the atrocities being committed almost daily in Syria. 
But, at least until now, the world has paid almost no attention to war crimes and crimes against humanity comparable in their savagery to any of these: the killing fields of Sri Lanka in 2009. 
Three years ago, in the bloody endgame of the Sri Lankan government’s war against the separatist Liberation Tigers of Tamil Eelam, some 300,000 civilians became trapped between the advancing army and the last LTTE fighters in what has been called “the cage” – a tiny strip of land, not much larger than New York City’s Central Park, between sea and lagoon in the northeast of the country. 
With both sides showing neither restraint nor compassion, at least 10,000 civilians – possibly as many as 40,000 – died in the carnage that followed, as a result of indiscriminate army shelling, rebel gunfire, and denial of food and medical supplies. 
The lack of outrage mainly reflects the Sri Lankan government’s success in embedding in the minds of policymakers and publics an alternative narrative that had extraordinary worldwide resonance in the aftermath of the terrorist attacks of September 11, 2001. 
What occurred in the cage, according to this narrative, was the long-overdue defeat, by wholly necessary and defensible means, of a murderous terrorist insurrection that had threatened the country’s very existence. 
The other key reason behind the world’s silence is that the Sri Lankan government was relentless in banning independent observers – media, NGOs, or diplomats – from witnessing or reporting on its actions. 
And this problem was compounded by the timidity of in-country United Nations officials in communicating such information as they had. 
President Mahinda Rajapaksa’s government claimed throughout, and still does, that it maintained a “zero civilian casualties” policy. 
Officials argued that no heavy artillery fire was ever directed at civilians or hospitals, that any collateral injury to civilians was minimal, and that they fully respected international law, including the proscription against execution of captured prisoners. 
But that narrative is now being picked apart in a series of recent publications, notably the report last year of a UN Panel of Experts, and in two new books: UN official Gordon Weiss’s relentlessly analytical The Cage: The Fight for Sri Lanka and the Last Days of the Tamil Tigers, and BBC journalist Frances Harrison’s harrowingly anecdotal Still Counting the Dead: Survivors of Sri Lanka’s Hidden War. 
Nobody underplays the LTTE’s contribution to the 2009 savagery; but, with the Tigers’ leaders all dead, international attention should now be focused overwhelmingly on holding the government accountable for its failure to accept its responsibility to protect its own people. 
For far too long, Rajapaska’s government has been evading accountability with an endless stream of diversionary maneuvers (usually involving committees of inquiry intended to lead nowhere, and duly complying), denial of physical access, outright dissimulation, and relentless verbal intimidation of anyone daring to question it. 
Real international pressure is at last being placed on the government to explain its actions, most significantly by the much-maligned UN Human Rights Council in Geneva, which will consider Sri Lanka’s response in March 2013. 
In doing so, it is likely to be armed with a full brief of evidence of war crimes and crimes against humanity now being compiled from eyewitness accounts by the Australian-based International Crimes Evidence Project. 
One of the most tragic aspects of the whole story, just now emerging, is the failure of UN officials on the ground to publicize at the time, when it really mattered, credible information that would have undercut the government’s narrative. 
Specific estimates of casualties in the combat area were compiled by a UN team in Colombo from early 2009, based on regular radiophone contact with a handful of reliable sources – NGO, medical, and local UN Tamil staff – still on the ground. 
The information was incomplete, but it was solid – and alarming. 
But an institutional decision was taken not to use this information on the grounds that it could not be “verified.” 
The real reasons are now emerging. 
In part, the UN team wanted to keep humanitarian assistance lines open. 
The team was also subjected to shameless verbal bullying by Sri Lankan officials (a deeply unpleasant experience to which I, too, have been subjected). 
The team’s members also knew that Sri Lanka’s government had wide support among UN member states, and that the LTTE had none at all. 
But, as the Lakhdar Brahimi Panel concluded a decade ago, after reviewing some of the catastrophic failures of peace processes in the 1990’s, the responsibility of the UN Secretariat must be to tell the UN Security Council what it needs to hear, not what it wants to hear. 
An internal review panel studying what went wrong in the UN system’s response to Sri Lanka, commissioned by Secretary-General Ban Ki-moon and headed by the distinguished diplomat Charles Petrie, is due to report to Ban next month. 
All indications are that it will not be a pretty story. 
It is crucial that its findings be made public and acted upon. 
Selective memory is a defense mechanism with which we are all familiar. 
For governments and international organizations, as with individuals, moral failure is easier to live with if we can pretend that it never happened. 
But mass atrocity crimes did happen in Sri Lanka, there was moral default all around, and if we do not learn from this past, we will indeed be condemned to repeat it. 

Accounting for Gaza 
New York – This week the United Nations Human Rights Council will debate the report of the fact-finding mission led by Judge Richard Goldstone on human rights violations in the Gaza conflict. 
Let us hope it is a full and fair examination based on the report’s findings and recommendations. 
Goldstone and his team concluded that both Israel and Hamas, the Palestinian group controlling Gaza, committed war crimes and possibly crimes against humanity during the period of the conflict which the investigation addressed. 
The report calls for credible investigations of alleged rights violations and recommends that the UN Security Council require both sides to report back within six months on the results, including any prosecutions they will carry out in connection with the violations identified. 
Failure to do so, in the view of Goldstone’s commission, should result in the Security Council referring the matter to the prosecutor for the International Criminal Court in The Hague. 
Unfortunately, rather than debating Goldstone’s detailed findings and the merits of his recommendations on ways to move forward, there are indications that governments may focus instead on the process leading up to the investigation and seek to limit full discussion of the report. 
As someone involved in that process, I feel it is important to put my views on record, as comments I made previously are now being used as part of the effort to undermine Judge Goldstone and his important work. 
I refused to accept the invitation from the president of the Human Rights Council at the time, Ambassador Martin Uhomoibhi of Nigeria, to lead the investigation following the Human Rights Council’s January 12, 2009 resolution. 
As a former UN High Commissioner for Human Rights, I felt strongly that the Council’s resolution was one-sided and did not permit a balanced approach to determining the situation on the ground. 
It referred only to “the grave violations of human rights in the Occupied Palestinian Territory, particularly due to the recent Israeli military attacks,” and called for a mission to investigate “all violations of international human rights law and international humanitarian law by the occupying power, Israel, against the Palestinian people.” 
I was also aware that the UN Human Rights Council had made repeated condemnations of Israel over the past two years but had focused little attention on large-scale violations of human rights in other countries. 
This pattern of action and inaction by the Council has given greater credence to those who believe the UN’s highest human rights body is inherently anti-Israel. 
I decided I could not undertake the mission for these reasons. 
I am aware that Judge Goldstone, a dedicated and unimpeachable human rights lawyer and advocate, shared similar concerns when he was initially approached. 
But he was able to work with the Council’s president to secure an agreement he felt confident would permit the mandate to be interpreted in such a way as to allow his team to address the actions taken by both parties to the conflict. 
Experts can debate whether this was in conformity with UN rules and procedures. 
I have no doubt that those involved were seeking a way forward that would allow for a full investigation and help overcome the political divisiveness currently undermining the Human Rights Council within the UN system. 
The question now is whether governments will give Judge Goldstone’s findings the serious attention they deserve, or instead fall back into an overtly political posture. 
As Goldstone's report makes clear: 
Both the Palestinians and the Israelis are legitimately angered at the lives that they are forced to lead: For the Palestinians, the anger about individual events – the civilian casualties, injuries and destruction in Gaza following from military attacks, the blockade, the continued construction of the Wall outside of the 1967 borders – feed into an underlying anger about the continuing Israeli occupation, its daily humiliations and their as-yet-unfulfilled right to self-determination. 
For the Israelis, the public statements of Palestinian armed groups celebrating rocket and mortar attacks on civilians strengthen a deep-rooted concern that negotiation will yield little and that their nation remains under existential threat from which only it can protect its people. 
In this way, both the Israelis and the Palestinians share a secret fear – for some, a belief – that each has no intention of accepting the other’s right to a country of their own. 
This anger and fear are unfortunately ably represented by many politicians. 
(Para. 

Accounting Tricks Around the Globe 
Accounting chicanery will be high on the agenda of the bankers who will meet at the annual IMF/World Bank gathering in Washington, D.C. The IMF should do more than offer the private sector advice about how to fix its accounting problems; governmental accounting tricks and the IMF's own wheezes should also be addressed, says Nobel laureate Joseph Stiglitz. 
The Arthur Anderson and Enron scandals in America have focused attention on the problems of accounting in private businesses. 
But the scale of this corruption should not blind us to the problem of public sector accounting, where many deceitful things are also being done. 
Accounting rules are designed to provide standardized frameworks within which the financial position of a firm, or government, can be assessed. 
Bad accounting frameworks always lead to bad information, and bad information leads to bad decisions, with serious long term consequences. 
This is true in the public as well as the private sector. 
America's business scandals showed how accounting rules can be bent and abused to provide a misleading picture of what is really happening in a company. 
The Bush Administration, not to be left behind, has shown how public accounting rules can be bent so as to provide a misleading picture of what is really happening in a national economy. 
Indeed, last year saw what may be the largest accounting fraud ever conducted, as a mega-surplus of more than $3trillion for the years 2002 to 2011 was transformed into a $2 trillion deficit. 
Investors in Enron waited years before discovering that something was amiss. Though sudden and vast, the change in America's fiscal stance already provides a clear inkling that something was amiss. 
It will be years before the full magnitude of President Bush's deception is apparent. 
Meanwhile, the Bush Administration will blame the sinking economy, bad luck, and unintentional miscalculations for the vanished surplus. 
But America is not alone in allowing for official accounting shenanigans. 
In Latin America and elsewhere in the developing world, the IMF imposes accounting frameworks that not only make little sense, but result in excessive austerity. 
In some of the poorest countries in the world - ie, those most dependent on aid - the IMF has argued that foreign aid should not be listed as revenue in a government's budget calculations. 
But what else is aid if it is not revenue? 
The IMF's argument seems to be this: a country cannot rely on foreign aid because aid is too unstable. 
The truth, of course, is that aid is more stable than tax revenues in poor countries. 
By the IMF's logic, neither aid nor tax revenues should be included in budgets. 
If that is the case, every country in the world is in deep trouble. 
The absurdity here is the idea that all foreign aid should be added to reserves. 
But donor countries want to see the money they give to finance schools or health clinics spent on schools and health clinics; they don't want to see it added to a nation's reserves. 
Governments in developing countries have the correct answer to the problem of revenue instability: expenditure flexibility. 
Build schools when you have aid; stop building them when you don't. 
For years, World Bank economists have tried to convince the IMF to see this logic, with little progress. 
Other IMF accounting practices, including how the capital expenditures of government-owned enterprises are treated, are also causing outrage. 
If a state owned enterprise in Latin America wants to borrow to make an investment, in Latin America such borrowing is treated as an addition to the deficit. 
Investors, worried about the size of a government deficit, see only the bottom line. 
But if a company can buy a $1 billion asset for $500 million, economic logic says buy the asset. 
The balance sheet is improved by $500 million. 
But by IMF logic, all you see in the accounts is increased expenditure and borrowing, not the value of the acquired asset. 
Because of this rule, investors may only see an apparent worsening of the country's fiscal position, and so may demand higher interest rates. 
Of course, foreign investors like this IMF logic: government corporations are put at a distinct disadvantage: their ability to invest inhibited, these firms cannot compete to make acquisitions. 
A second IMF accounting distortion involves stabilization funds. 
These are national funds that, in boom years, receive revenues from sales of natural resources to be set aside against a rainy day. 
This makes sense. 
But IMF accounting inhibits the use of these funds to help stabilize an economy through counter-cyclical fiscal spending. 
According to Mexican and Chilean officials I have discussed the matter with, spending from a stabilization fund is reportedly treated as if the country is borrowing, thus adding to its deficit. 
It is, of course, in times of economic downturn that countries worry most about their credit rating, so the IMF stance is particularly unhelpful. 
IMF accounting frameworks, rather than providing useful signals to the market, provide distorted information that exacerbates a troubled country's problems. 
Good decisions require accurate information, and this comes only through good accounting frameworks. 
Of course, no perfect accounting framework exists, but some frameworks systematically distort. 
Indeed, a hidden agenda often exists in the choice of an accounting framework. 
Not including stock options inside the accounting framework served US corporate interests, and those of individual bosses, well. 
The IMF's distorted and unfair accounting frameworks may also serve a hidden purpose: to force governments to shrink expenditures. 
But there are high economic and social costs to this agenda, one that goes far beyond the IMF's mandate. 

Achieving a “Europe of Results” 
BRUSSELS – The tsunami that has swept across financial markets is a global catastrophe. 
If handled correctly, however, the crisis may yet raise the esteem of the European Union and its institutions. 
The EU’s legitimacy problem has two different aspects: apathy, leading to a low turnout in the European parliamentary elections, and outright euro-skepticism. 
The voter-turnout problem partly reflects frustration about the present state of the EU, and also people’s impression that they can exert little influence by voting one way or the other. 
Euro-skepticism, on the other hand, and the looming threat of anti-European populism, is directly linked to the idea that the EU is not merely incapable of offering a solution to the crisis, but in fact is part of the problem. 
So, although the EU represents our best hope of ensuring that Europe is internationally competitive in today’s increasingly difficult environment, it is actually being blamed for globalization. 
Many people confuse these two aspects of the EU’s legitimacy problem, and believe that somehow turnout in European elections can be increased by pointing out to people how good and important the EU is. 
But in most cases, this is not possible. 
At first sight, the easiest answer to the problem of low voter turnout is to give more power to the European Parliament. 
But if this was the solution, then we would not have had steadily declining turnouts since the high point of 63%, at the first elections to the European Parliament in 1979. 
After all, since then the EP’s influence and powers of joint decision-making have grown constantly. 
The trouble is that, EP elections must be “about” something if voters are to be interested, which means they must involve a real choice. 
And a real choice requires Europe-wide election campaigns by all parties. 
This would also involve making the choice of the European Commission’s president dependent on the outcome of the EP elections. 
But, in fact, both of these conditions have already been met; in 2004, Portuguese Prime Minister José Manuel Durão Barroso was appointed President of the Commission because he came from the political organization with the strongest election result, the European People’s Party. 
And this year’s elections saw a more intensive presence of party organizations at European level than ever before. 
Instead, I believe that the most important way to reawaken voters’ interest in European elections will be to open up the election of the Commission’s President to them, and create a genuinely Europe-wide political debate during the next election campaign. 
The Euro-skepticism problem can be tackled only if the Union itself starts to perform better, and is seen to be doing so. 
That is why in the aftermath of the failed referenda four years ago in France and the Netherlands on the Constitutional treaty, the Commission tried to emphasize the idea of a “Europe of Results” that would seek to convince citizens of its worth through concrete achievements. 
Given the gravity of the economic crisis, the time has come for the EU to demonstrate its strengths whenever possible. 
The aim must be not only to win back the hearts of Europeans who have become skeptical, but also to convince them that the Union is indispensable to meeting the challenges Europeans face. 
Europe’s citizens understand that the relatively small nation-states that make up the EU are no longer able to face these enormous challenges on their own. 
In Ireland, last autumn’s financial crisis provoked a turnaround in public opinion about the EU, and even in Iceland, although it lies on the periphery of our continent, membership of the EU and the euro have become a priority. 
European countries have become so interconnected that isolated national measures on issues like financial-market regulation are hopeless. 
A changing world in which new powers like China and India play an increasingly important role will not wait for Europe to make up its mind. 
The EU must instead show leadership through its efforts to solve the world’s current problems. 
As for the European People’s Party, for us the economy is not an end in itself but should serve the people. 
The economic crisis was caused by shortsightedness and a lack of control in the global financial system. 
Now we must redefine the role of regulators in financial markets and in the wider economy, for we cannot let the financial sector walk off with the profits and leave taxpayers bearing the losses. 
That doesn’t mean that we are advocating a move to socialism; we want better and smarter regulation, not regulation for its own sake. 
We see five keys to recovery: 
A “Europe of Results” is achievable. 
It can strengthen the EU’s legitimacy, though, only if policy recommendations such as these, and the successes that result from implementing them, are communicated clearly and effectively to the general public. 

The Education Roadmap to 2030 
LONDON – When I visited the Zaatari refugee camp in Jordan earlier this year, I met with children who told me what education means to them. 
For Syrian youths who have been forced from their homes and have lost everything, education is about more than qualifications or test scores; it embodies their hope for the future. 
Children like those in Zaatari, and millions of others around the world, are central to the work of the International Commission on Financing Global Education Opportunity, which I joined last September. 
This commission is committed to the fourth United Nations Sustainable Development Goal, which aims, by 2030, to “ensure inclusive and equitable quality education and promote lifelong learning opportunities for all.” 
This goal is still a distant prospect for far too many children. 
With so many development issues demanding our attention, policymakers should bear in mind that education is not just a good in itself; it is also a catalyst for many other development gains. 
As the old African proverb goes, if you educate a girl, you educate an entire nation. 
Ensuring access to quality education for children, especially girls, will lead to fewer child marriages and less child labor and exploitation. 
And education has long-term societal benefits: aside from increased political engagement, educated children contribute intellectual capital and pursue entrepreneurial opportunities when they grow up, boosting economic growth. 
Tackling the education challenge needs to start from two principles embedded in the goal. 
First, “for all” means that we must focus on the children who have been left behind. 
Millions of children are out of school or are receiving a substandard education because of who they are or where they live. 
According to the UN High Commissioner for Refugees, refugee children are five times more likely to be out of school than other children in the countries to which they’ve been displaced. 
And in all but two African countries, girls remain less likely than boys to complete a primary education. 
Getting these children into school will require new approaches that directly address their exclusion and make schooling genuinely accessible and relevant. 
Second, “quality”: Education must be effective, so that children actually learn. 
For the 61 million children who are out of primary school, formal education is beyond reach. 
But, just as urgently, more than one-third of children of primary-school age – 250 million – are not learning the basics, according to the UNESCO Education for All Global Monitoring Report. 
Half of these children have been in school for at least four years. 
We must address the barriers to learning, both in the classroom and at home, by improving the quality of teaching and classroom conditions and teaching parents how they can support their children’s education. 
Upholding these two principles will require increased investment. 
Last year, UNESCO calculated that governments must double education spending as a share of national income to achieve the 2030 goals. 
This will require increased revenue from taxation and stronger efforts to collect what’s owed. 
Donors also need to live up to their aid commitments and target aid more effectively. 
For example, less than one-third of education aid goes to Africa, even though the region accounts for almost two-thirds of out-of-school children. 
Moreover, at the moment, education budgets are often regressive, with almost half of spending in the poorest countries allocated to the most educated 10% of the population. 
Fixing education investment requires action in two key areas. 
First, we need equitable financing, with more investment in early childhood care and development, where there is the biggest potential for returns. 
Budgets must be focused on the most excluded children, and primary education must be free at the point of use, so that every child can learn. 
We also urgently need more transparency and accountability, so that budgets are visible and communities have a say in school governance. 
Second, we need to strengthen domestic education systems so that governments see themselves as the guarantor of accessible, quality schools for their citizens, rather than abdicating that role to outside development agencies. 
In particular, we should push for partnerships between government and business to boost domestic resources for education, and eliminate illicit capital flows that deprive governments of the means to fund it, such as tax evasion and money laundering across national borders. 
With these priorities in mind, the education commission will deliver its recommendations at the UN General Assembly on September 18, when the Secretary-General will receive and act on them. 
The Education Commission will have succeeded if we are able to leverage the funding and political will to ensure that every child learns, regardless of their income, location, or social status. 
Our work will not be complete until that happens. 

Achieving Growth in a Rebalanced World 
MILAN – Although the financial crisis is winding down, the prospects for growth in the global economy are unlikely to pick up. 
This is, in part, inevitable. 
But it is also the result of poor coordination between governments as the world economy rebalances. 
Prior to the crisis, American consumers, on average, either saved nothing or accumulated debt. 
That has now changed. 
With household wealth seriously damaged by the housing crash and other asset-price declines, pensions and retirement provisions are in disarray. 
Because asset prices will not reach pre-crisis levels anytime soon (that is, without inflating another bubble and risking renewed instability), household saving in the United States has risen to about 5% of disposable income, and probably will rise further. 
This withdrawal of the US consumer is part (perhaps half) of the process of rebalancing the global economy. 
Restoring America’s savings-investment balance implies a reduction in global aggregate demand of around $800 billion. 
To be sure, fiscal deficits and emergency measures in advanced economies and some major developing countries have cushioned the sharp decline, substituting in part for missing consumers. 
But this substitution cannot continue indefinitely. 
In advanced countries, governments will eventually be forced to reduce spending, and central banks will withdraw from emergency credit provisions and guarantees. 
As a result, many believe that a “new normal” of slower advanced-country growth is upon us. 
Despite a recovery in asset prices in many countries and the deceleration of negative growth, unemployment is high and rising. 
Risk spreads have declined from their mid-crisis highs, but credit in many sectors remains tight or barely available, while the financial sector is set to become more conservative – and is likely to be re-regulated with higher capital, reserve, and margin requirements. 
And this is just the baseline scenario. 
Downside risks include fiscal destabilization resulting from a failure to rein in deficits, inflation and withdrawal of central bank autonomy, and loss of confidence in the dollar, which continues to be the reserve currency for the global economy. 
Little wonder, then, that many knowledgeable analysts reasonably expect post-crisis growth in advanced countries to be lower, perhaps by 0.5 to 1%. 
A 1% slowdown in advanced-country growth translates into roughly $350 billion of missing aggregate demand every year, in addition to the shortfall because of rebalancing in the US. 
If the slowdown in advanced countries persists, pre-crisis growth levels will not be achievable in the developing world either, owing to insufficient demand to absorb the implied increase in output. 
Of course, individual developing countries may be spared. 
But it is an unfortunate mathematical fact that not everyone can gain market share. 
If the advanced-country scenario is right, many developing countries will lose out and experience sharply diminished growth. 
Prior to the crisis, many suspected that the mix of aggregate demand that was supporting high growth was unsustainable, though the problem perhaps seemed too hypothetical to compel collective action. 
Not anymore. 
But the collective action problem is no less daunting, and it requires urgent attention if the world’s growth aspirations are to be achieved. 
The problem is all the more pressing because countries can achieve gains in market share not only through higher private-sector competitiveness, but also by means of protectionist measures. 
And, as we have seen in many countries’ efforts to ameliorate the crisis, the non-cooperative protectionist response is much more likely to be adopted – despite wide recognition that it is highly destructive – when aggregate demand is in short supply. 
So what can be done to shore up global aggregate demand and growth prospects, while preserving the economic openness that has benefited major parts of the developing world so greatly in the past 30 years? 
First, countries with current-account surpluses such as Germany, Japan and China must recognize that their own growth (and that of others) depends on reducing the global savings-investment imbalance, which will result in narrowing external deficits elsewhere. 
This needs to be done on a sustained basis following the withdrawal of extraordinary fiscal stimulus. 
Second, everyone must recognize their stake in restoring balanced advanced-country growth as much and as soon as possible in order to counter the ongoing shortfall in aggregate demand. 
After all, advanced countries account for about two-thirds of global GDP, so slow growth in these countries will inevitably impede global growth and truncate the growth potential of much of the developing world. 
This challenge, however, is very complex because deleveraging and rebalancing cannot be completed overnight. 
But key steps can and should be taken: restoration of fiscal balance in well-communicated plans, commitment to central bank autonomy and low inflation, and striking a thoughtful balance between under- and over-regulation of the financial sector. 
Externally, major trading partners and holders of advanced-country assets can support rebalancing by agreeing to avoid sudden and potentially destabilizing shifts in the composition of their balance sheets. 
So, two crucial items must claim priority at the top of the world’s economic agenda in the months ahead. 
The first is re-regulation of advanced countries financial systems with a view to ensuring greater stability without impairing essential functions or unnecessarily elevating the cost of capital. 
The second is a set of understandings and commitments among the major advanced and developing countries to rebalance the global economy in order to restore aggregate demand and growth. 
If that can be accomplished, the world will have taken a major step toward a relatively smooth, effective, and equitable global economic recovery. 

Sustaining Progress in Transition Countries 
NEW YORK – In the World Bank’s most recent “Doing Business” report, half of the Eastern European and Central Asian countries included in the global ranking were among the top 50. 
As a measure of economic maturity, the report confirms what many in the international development community have long known: the region is ascendant. 
Over the last decade, the economies of Eastern Europe and Central Asia have recorded spectacular gains, buttressed by ambitious market and public-sector reforms. 
The question now is how to ensure that this progress – which has tripled the size of the middle class – is sustained. 
Signs of the region’s social and economic prosperity are everywhere. 
In Azerbaijan, incomes have increased dramatically in recent decades, and only 5% of the population now lives below the poverty line – down from nearly 50% in 2002. 
Elsewhere, Estonia is the third country in Europe in startups per person and has one of the fastest Internet speeds anywhere. 
And from Albania to Kyrgyzstan, e-government systems are allowing more people to connect with critical services through online and electronic portals. 
But while it is tempting to assume that the region is destined for prosperity, structural bottlenecks continue to slow progress, especially in the Western Balkans, the southern Caucasus, and parts of Central Asia. 
To maintain momentum in meeting the United Nations Sustainable Development Goals (SDGs) by 2030, leaders must address three key issues. 
First, the region’s economies need to be strengthened to incentivize smarter, more sustainable growth. 
For example, fossil-fuel subsidies should be reconsidered, because they discourage investment in energy-efficiency projects, and impede the development of renewable technologies. 
Similarly, while public financing of pensions and welfare programs is dependent on taxing labor, much of the region currently suffers from high rates of unemployment; in the Western Balkans, there are nearly no jobs, or none at all. 
Job creation is an urgent challenge for every state in the region. 
Second, in many countries, the space for civil society is becoming narrower, posing a threat to pluralism and accountability. 
To prevent conflict and give voice to the region’s marginalized groups, tolerance and respect for human rights must be made essential ingredients of governance. 
Finally, the region must coordinate on strategies to address the changes that automation and artificial intelligence will bring to the labor market. 
Leaders in some countries, particularly Belarus, are shifting economic output from heavy manufacturing to technology startups. 
But authorities everywhere can do more to increase the resilience of their workforces. 
Fortunately, governments, technology companies, civil-society groups, and journalists recognize the salience of these issues and are working together to build more transparent and accountable institutions. 
In many countries, heads of government are using the SDGs to guide their national planning and efforts to legislate reforms. 
The parliaments of several Central Asian countries have even endorsed the SDGs as a development roadmap. 
Changes like these are helping to translate development ambition into action. 
In Armenia, the government recently created the world’s first national SDG innovation laboratory, a collaborative effort designed to “accelerate” SDG implementation. 
Initial research efforts will focus on increasing the country’s tax collection, improving its education system, and boosting its renewable-energy sector. 
Meanwhile, planning officials in Moldova have used crowdfunding to raise millions of dollars from the diaspora to fund sustainable development projects at home. 
Revitalization efforts have included the reconstruction of a public plaza in the capital, Chișinău, and the expansion of infrastructure in rural areas. 
The region’s private sector is also participating actively in sustainable development efforts. 
From Siemens’ green heating and air conditioning systems to Unilever’s “equal pay for equal work” policy, multinational firms operating in Eastern Europe and Central Asia are embracing sustainability and equality as viable business models. 
In only a few decades, the people of Eastern Europe and Central Asia have witnessed profound political and economic changes. 
To capitalize on the development progress already made, countries and organizations must learn from one another, adapting solutions to local conditions. 
That will be the main topic at the Istanbul Development Dialogues, an annual global gathering organized by the UN Development Programme, this week. 
As the new UNDP Strategic Plan for 2018-2021 argues, collaboration is a critical component to any sustainable-development strategy. 
If the measure of a country can be calculated by how easily business is conducted within its borders, the states of Eastern Europe and Central Asia have a bright future. 
With strong leadership that transforms the region’s economies and modernizes its institutions, the region’s recent gains will not be fleeting. 

The Achilles’ Heel of Trumponomics 
NEW HAVEN – Donald Trump’s economic strategy is severely flawed. 
The US president-elect wants to restore growth via deficit spending in a country with a chronic shortfall of saving. 
This points to a further compression in national saving, making a widening of an already outsize trade gap all but inevitable. 
That dynamic unmasks the Achilles’ heel of Trumponomics: a blatant protectionist bias that collides head-on with America’s inescapable reliance on foreign saving and trade deficits to sustain economic growth. 
The Trump administration will not inherit a strong and sound US economy. 
The pace of recovery since the Great Recession has been running at half that of normal cyclical rebounds – all the more disturbing given the massive size of the contraction in 2008-09. 
And savings, the seed corn of future prosperity, remain in woefully short supply. 
The so-called net national saving rate – the depreciation-adjusted sum of business, household, and government saving – stood at just 2.4% of national income in mid-2016. 
While that’s an improvement from the unprecedented negative saving position in 2008-2011, it remains far short of the 6.3% average that prevailed over the final three decades of the twentieth century. 
This is important because it explains the pernicious trade deficits that Trump continues to rail against. 
Lacking in saving and wanting to grow, the United States must import surplus saving from abroad. 
And the only way to attract that foreign capital is by running massive current-account and trade deficits. 
The numbers bear this out: since 2000, when national saving fell well below trend, the current-account deficit has widened to an average of 3.8% of GDP – nearly four times the 1% gap from 1970 to 1999. 
Similarly, the net export deficit – the broadest measure of a country’s trade imbalance – has been 4% of GDP since 2000, versus an average of 1.1% over the final three decades of the twentieth century. 
Trumponomics has the cause and effect behind this development backwards. 
It fixates on country-specific sources of the trade deficit, like China and Mexico, but misses the fundamental point that these bilateral deficits are symptoms of America’s far deeper saving problem. 
Presume for the moment that the US closes down trade with China and Mexico – the first and fourth largest components of the overall trade deficit – through a combination of tariffs and other protectionist measures (including the proposed renegotiation of NAFTA and a Mexican-funded border wall). 
Without addressing America’s chronic saving shortage, the Chinese and Mexican components of the trade deficit would simply be redistributed to other countries – most likely to higher-cost producers. 
The result would be the functional equivalent of a tax hike on beleaguered middle-class US families. 
In short, there is no bilateral fix for a multilateral problem. 
The US had trade deficits with 101 countries in 2015 – a multilateral problem stemming from a saving shortfall that cannot be effectively addressed through country-specific “remedies.” 
That’s not to say that America’s trading partners should be let off the hook for unfair practices. 
But it does mean that there is limited hope for resolving seemingly chronic trade deficits – and the related erosion of domestic hiring traceable to these imbalances – if the US doesn’t start saving again. 
Alas, this plot is about to thicken. 
Trumponomics seems likely to exacerbate America’s saving shortfall in the years ahead. 
Analyses by the Tax Policy Center, the Tax Foundation, and Moody’s Analytics all indicate that federal budget deficits under Trump’s economic plan are headed back toward at least 7% of GDP over the next ten years. 
Trump’s senior economic-policy advisers, Peter Navarro and Wilbur Ross (Trump's pick for commerce secretary), argued in a position paper in September that these estimates are flawed, because they don’t take into account “growth-inducing windfalls” from regulatory and energy reforms, or the added bonanza that should arise from a sharp narrowing of America’s trade deficit. 
Indeed, the Navarro-Ross analysis attributes fully 73% of the growth-inducing revenue windfall of Trumponomics to a massive improvement in the overall trade balance over the next decade. 
Yet, as stressed above, barring a miraculous surge in national saving, this is highly dubious. 
Creative accounting, long a staple of supply-side economics, has never been more imaginative. 
Therein lies one of the most glaring disconnects of Trumponomics. 
Getting tough on trade at a time when national saving is about to come under ever-greater pressure simply doesn’t add up. 
Even the most conservative estimates of the federal budget deficit suggest that the already-depressed net national saving rate could re-enter negative territory at some point in the 2018-2019 period. 
That would put renewed pressure on the current-account and trade deficits, making it extremely difficult to reverse the loss of jobs and income that politicians are quick to blame on America’s trading partners. 
Ironically, in the coming era of negative saving, the US will find itself increasingly dependent on surplus saving from abroad. 
If the Trump administration takes aim at major foreign lenders – namely, China – its strategy could quickly backfire. 
At a minimum, there could be an adverse impact on the terms by which America borrows from abroad; that could mean higher interest rates – hints of which are already evident – and ultimately downward pressure on the dollar. 
And, of course, there is the worst-case scenario of an escalating global trade war. 
Protectionism, anemic saving, and deficit spending make for an especially toxic cocktail. 
Under Trumponomics, it will be exceedingly difficult to make America great again. 

Financing the Next Development Agenda 
WASHINGTON, DC – As the 2015 target date for the Millennium Development Goals approaches, the United Nations is intensifying its efforts to foster debate about what comes next for promotion of development worldwide. 
The outcome of these discussions will shape policies and investment aimed at spurring GDP growth, strengthening human capital, and promoting more inclusive prosperity. 
With the global population expected to reach nine billion people by 2050 – a significant proportion of whom will reside in developing or underdeveloped countries – the international community must improve access to education, health care, and employment opportunities worldwide. 
Meanwhile, the prospect of a rise in global temperature of more than 2°C (3.6°F) over pre-industrial levels by the end of this century (which would trigger global warming’s most damaging effects) calls for higher investment in sustainable urbanization, climate-smart agriculture, and social safety nets. 
Both factors challenge us to define, in the longer term, more sustainable patterns of production and consumption. 
Governments, civil society, and the private sector must rise to the challenge, cooperating to find and implement creative solutions. 
But, first, they must anticipate the associated financing requirements, which will soon surpass the current capacities of governments and international donors, and take action now to activate new, reliable sources of financing. 
To start, governments should design targeted, evidence-based policies and support the development of sound institutions. 
This would make government services more effective, while helping to catalyze additional development aid from traditional donors and mobilize private-sector resources. 
In many countries, there is considerable scope for domestic resource mobilization. 
Broadening the tax base, improving tax administration, and closing gaps in the value-added tax could make a significant difference in lower-income countries, where tax revenues account for only about 10-14% of GDP, compared to 20-30% of GDP in high-income countries. 
More equitable taxation would have a positive impact on governance, another important tool for mobilizing domestic resources. 
With improved corporate and public governance and clear transfer-pricing policies, resource-rich countries could shore up their capacity to negotiate fair contracts with extractive industries, balance revenues and expenditures over time, and manage their natural endowments more transparently. 
Progress in these areas would help governments to channel their spending more effectively toward those who would benefit the most. 
For example, only 8% of the $409 billion spent on fossil-fuel subsidies in 2010 reached the poorest 20% of the population. 
A targeted support program could increase substantially the efficiency of spending, freeing up resources for education, health, and poverty eradication. 
Furthermore, promoting financial deepening and inclusiveness could accelerate private-sector growth, creating more opportunities. 
Indeed, broader access to financial services would help the estimated 400 million micro, small, and medium-size enterprises in developing countries to prosper, while enabling the 2.5 billion people worldwide who currently lack access to such services to build their assets. 
A deeper and more efficient financial sector would also reduce transaction costs and facilitate risk management. 
Local-currency bond markets could help to develop domestic investor bases and mobilize domestic savings to support long-term investments. 
At the same time, the international community should work to improve the availability and effectiveness of official development assistance. 
The ODA target of 0.7% of GDP – agreed in 2002 at the International Conference on Financing for Development in Monterrey, Mexico – should motivate countries to increase their contributions. 
They can also take steps to make ODA more predictable from year to year. 
Donors should structure aid to ensure that it supports sound national development policies and programs, rather than their own narrow interests. 
This is particularly relevant as emerging development partners, especially the BRICS (Brazil, Russia, India, China, and South Africa), offer new kinds of aid packages that incorporate investment and non-financial assistance. 
Private charities, which have been instrumental in promoting innovation in fields such as health care, the environment, and education, could provide valuable insight into channeling aid more effectively. 
More generally, improving coordination among donors would help to maximize the impact of aid on the ground. 
While ODA remains an important source of financing for fragile and very-low-income countries, it represents only 7% of net financial flows to developing countries, where foreign direct investment, remittances, long-term debt, and portfolio investment have a larger impact. 
Donors should leverage aid to “grow the pie” and to diversify financing sources for the world’s poorest countries by providing risk guarantees, innovative investment vehicles, debt syndication, and co-financing arrangements. 
Attracting even a fraction of the assets held by institutional investors, sovereign-wealth funds, and public pension funds could boost development finance substantially. 
Diaspora populations are another major potential source of development financing. 
Reducing transfer costs, which average an estimated 9% of the value of transactions, would put more money into the hands of those who need it most. 
Tailoring financial products for diaspora communities could attract resources for investment, while reinforcing migrants’ ties – economic and otherwise – to their home countries. 
Finally, the international community bears a special responsibility for delivering global public goods. 
The responsibility to preserve the environment, stem the spread of communicable diseases, strengthen the international financial architecture, enhance developing-country participation in the global trading system, and facilitate the exchange of knowledge lies at the intersection of national development priorities and global interests. 
Duty-free, quota-free access to OECD markets, complemented by simpler, more transparent rules of origin, would raise GDP by 1% in the least-developed countries, lifting millions out of poverty. 
Investment in statistical capacity would help governments and businesses worldwide to make better policy decisions, based on a more accurate accounting of the associated costs and benefits. 
The challenge of the post-2015 development agenda lies in finding creative solutions to support prosperity, equality, and sustainability. 
Together, governments, civil society, international organizations, and the private sector can improve the availability and quality of finance for development, and shape a better future for all. 

The Russian Godfather 
WARSAW – Russian President Vladimir Putin is behaving like a Mafia boss. 
In invading, occupying, and finally annexing Crimea, he pointed Russia’s guns at Ukraine and said: your territorial sovereignty or your life. 
So far, extortion has worked – and Putin knows it. 
Indeed, in his speech announcing the annexation of Crimea, Putin spoke his mind: his regime fears no punishment and will do whatever it pleases. 
Crimea is just the first step toward realizing his dream of revived Russian greatness. 
His address in the Kremlin was a tissue of lies and manipulation, though a subtle analysis would be a waste of time. 
The simple fact is that the president of one of the world’s most powerful countries has embarked on a path of confrontation with the entire international community. 
His speech smacked of the fevered, paranoid world of Fyodor Dostoyevsky’s Demons, conjuring as it did a delusional alternative universe – a place that does not exist and has never existed. 
What does Kosovo, where the Albanians suffered persecution and ethnic cleansing, have in common with the situation in Crimea, whose people have never been oppressed by Ukrainians? 
What is the point in displaying open contempt for Ukraine’s government, parliament, and people? 
Why label Ukrainian authorities “fascist and anti-Semitic”? 
Crimean Tatars pay no heed to the fairy tales about fascists ruling Ukraine; they can still remember the brutal and murderous mass deportations of their parents and grandparents, ordered by Stalin and carried out by the NKVD. 
In Putin’s mind, the whole world has discriminated against Russia for the last three centuries. 
Russia’s bloody despots – Catherine II, Nicholas I, or Stalin – apparently never discriminated against anyone. 
Putin also warns that “you and we – the Russians and the Ukrainians – could lose Crimea completely.” 
Yet he fails to specify who – perhaps Poles and Lithuanians again? – are setting their sights on Sevastopol. 
Russia could not, according to Putin, leave the people of Crimea “alone in their predicament.” 
These words prompt a sad smile; Leonid Brezhnev used precisely the same phrase in August 1968 to justify the Red Army’s intervention in Czechoslovakia to help beleaguered Communist hardliners there crush the Prague Spring reform movement. 
“We want Ukraine to be a strong, sovereign, and independent country,” says Putin. 
Stalin said the same thing about Poland in 1945. 
Brave Russian democrats who have not yet been silenced have already remarked on the similarity between Putin’s appeal to ethnic solidarity in annexing Crimea and Hitler’s stance during the Anschluss and the Sudeten crisis in 1938. 
This is the real end of history – the history of dreams about a world governed by democratic values and the market economy. 
Unless the democratic world understands that now is not the time for faith in diplomatic compromise, and that it must respond strongly enough to stop Putin’s imperial designs, events could follow a logic that is too dreadful to contemplate. 
It takes force to stop a thug, not sharp words or cosmetic sanctions. 
I commend and take pride in Poland’s prudent and determined policy and the attitude of its public, which do us great credit. 
But we must recognize that the best quarter-century in the last 400 years of Polish history is about to end before our very eyes. 
A time of tectonic shifts has begun. 
We must appreciate what we have managed to achieve – and learn to protect it. 
Mafia bosses often meet an unhappy fate, and I do not think that Putin will fare much better in the end. 
Unfortunately, many people are likely to be hurt in the meantime, not least those who now support him. 

Living with Climate Change 
ROTTERDAM – For anyone still undecided about the consequences of global warming, the summer of 2018, one of the hottest on record, should have tipped the scales. 
Across far-flung longitudes and latitudes, regions are struggling with the fallout from large-scale climate-related events. 
In the southern United States, cities and towns pummeled by Hurricane Florence in September were still drying out when Hurricane Michael brought more flooding in October. 
In California, firefighters are battling the embers of the largest wildfire in state history. 
And in parts of Latin America, Europe, Africa, and Asia, agricultural output is in freefall following months of stifling heat. 
Cooler weather has done little to ease the suffering. 
According to the National Oceanic and Atmospheric Administration, “moderate” to “exceptional” drought conditions cover 25.1% of the United States. 
But “extreme” and “exceptional” drought – the worst categories – expanded to cover 6.3% of the country, up from 6% in mid-September. 
Regions in Australia also are struggling with the worst drought in a generation. 
In fact, for a growing number of people around the world, floods, landslides, and heatwaves – Japan’s summer in a nutshell – is the new normal. 
A recent study in the journal PLOS Medicine projects a fivefold increase in heat-related deaths in the US by 2080; the outlook for poorer countries is even worse. 
The climate debate is no longer about causes; fossil fuels and human activity are the culprits. 
Rather, the question is how billions of at-risk people and businesses can rapidly adapt and ensure their communities are as resilient as possible. 
Even if the world meets the Paris climate agreement’s target of limiting the increase in global temperature to 2º Celsius relative to pre-industrial levels, adaptation will still be critical, because climate extremes are now the new normal. 
Some communities have already recognized this, and local adaptation is well under way. 
In Melbourne, Australia, for example, planners are working to double the city’s tree canopy by 2040, an approach that will lower temperatures and reduce heat-related deaths. 
Similarly, in Ahmedabad, a city of over seven million people in Western India, authorities have launched a major initiative to cover roofs in reflective paint to lower temperatures on “heat islands,” urban areas that trap the sun’s warmth and make city living unbearable, even at night. 
These are just two of the many infrastructural responses that communities around the world have undertaken. 
But adapting to climate change will also mean managing the long-term economic fallout of extreme weather, and this is a requirement that countries are only beginning to take seriously. 
Consider water scarcity. 
According to a 2016 World Bank analysis, drought-related water crises in Africa and the Middle East could reduce GDP in these regions by as much as 6% by 2050. 
That would be painful anywhere, but it would be devastating in regions already rife with political turmoil and humanitarian crises. 
At the same time, rising sea levels will cause severe damage to coastal areas. 
The decline in property values will have far-reaching implications not only for individual wealth, but also for the tax bases of communities and the industries that serve them. 
A related concern is that homes and businesses around the world will eventually become under-insured or even uninsurable, owing to the frequency of weather-related catastrophes. 
ClimateWise, a global network of insurance industry organizations, has already warned that the world is facing a $100 billion annual climate risk “protection gap”. 
No single international organization or authority has all the answers to the cascade of challenges that climate change has triggered. 
But some are taking key leadership roles and pushing governments and local communities to act with more urgency. 
One of the more promising initiatives to accelerate solutions, launched just this week, is the Global Commission on Adaptation, chaired by former UN Secretary-General Ban Ki-moon, Microsoft co-founder Bill Gates, and World Bank CEO Kristalina Georgieva. 
Over the next 15 years, the world will need to invest some $90 trillion in infrastructure improvements. 
How these projects proceed, and whether they are designed with low-carbon features, could lead the world toward a more-climate resilient future – or they could undermine food, water, and security for decades to come. 

Adapting to Climate Change 
COPENHAGEN – Striking the right balance between preventing global warming and adapting to its effects is one of the most important – and most vexing – policy questions of our age. 
It is also often ignored. 
According to the conventional wisdom of many environmental campaigners, we should first do everything we can to mitigate global warming, and only then focus on adaptation strategies. 
This seems wrong – even immoral – if we could do more for people and the planet through adaptation. 
Moreover, it is inconsistent with the inescapable fact that, whatever we do, we cannot prevent all of global warming’s effects. 
If we are ill-prepared, global warming will cause more deaths and devastation, especially in poor countries and fragile societies. 
Adaptation would also mean saving many lives from catastrophes not related to global warming. 
If we prepare societies for more ferocious hurricanes in the future, for example, we are also helping them to cope better with today’s extreme weather. 
There has been a huge amount of research into the ways that humans cause climate change, and how we can reduce it. 
Much less work has been devoted to adaptation. 
It is important to acknowledge that some adaptation strategies will lead to more greenhouse-gas emissions. 
Responding to water scarcity by re-using and treating wastewater, or through deep-well pumping and desalination, will increase fossil-fuel use. 
Using more air-conditioning to cool our houses in summer will do the same – although this is vital if we want to save lives. 
Adaptation could allow for higher carbon emissions in another way: reducing the damage and harm that we experience from global warming, giving us more time to implement alternatives to reliance on fossil fuels. 
Should any of this stop us from using adaptation strategies? 
To arrive at an informed answer, we need to work out how the planet will look in 2100 if we invest different amounts in adaptation and carbon cuts. 
We need to take into account the increase in emissions that adaptation will cause. 
The most critical issue isn’t any rise or fall in emissions. 
It is how much climate damage we can avoid. 
How much of the planet can we help by dealing with rising sea levels? 
How many lives can we spare from heat, starvation, or malaria? 
These are the real reasons we care about global warming. 
Reaching a proper answer to these questions requires extensive economic modeling, with different variables calculated and regional differences analyzed. 
New research by three Italian economists, Francesco Bosello, Carlo Carraro, and Enrica De Cian does this, and, ultimately, provides a powerful economic case for a much greater focus on adaptation. 
They first look at the different ways that climate change will affect us at mid-century. 
This work is based on standard scenarios, and carries the typical caveats of predictions far into the future. 
Nevertheless, they find that many of our biggest concerns will turn out to be trivial, or even beneficial. 
Sea-level rises will be a very minor concern for every country, with the financial impact adding up to less than 0.1% of GDP. 
Health problems will be negligible for all but a few nations. 
And global warming’s impact would reduce energy consumption for almost all nations. 
The important effects are on agriculture and tourism, where nations will lose, on average, about 0.5% of GDP from each sector. 
But much of this damage will be avoided by people choosing for themselves to adapt to a change in their environment. 
Farmers will choose plants that thrive in heat. 
New houses will be designed to deal with warmer temperatures. 
Simple economic models, often quoted in the media, show that unconstrained global warming would cost a substantial 2% of GDP in the rich world by the end of the century. 
But this fails to acknowledge that people will change their behavior when the environment changes. 
Taking adaptation into account, rich countries will adapt to the negative consequences of global warming and exploit the positive changes, creating a total positive effect of global warming worth about 0.1% of GDP. 
Poor countries will be hit harder, however. 
Adaptation will reduce the climate change-related losses from 5% of GDP to slightly less than 3% – but this is still a significant impact. 
The real challenge of global warming, therefore, lies in tackling its impact on the Third World. 
Here, more needs to be done, above and beyond the adaptation that will happen naturally. 
Importantly, the new research shows that adaptation would achieve a lot more than cuts in carbon emissions. 
Reducing emissions to a level that does not extinguish economic growth could avert $3 trillion worth of damage, whereas adaptation could prevent around $8 trillion worth of damage. 
For every dollar spent on adaptation, we would achieve about $1.70 worth of positive changes for the planet. 
The economic case for focusing more on adaptation is clear. 
The crucial next step is to ensure that economic arguments become a stronger part of our political debate about how to address global warming. 

Crashing the SDR 
SANTA BARBARA – The Chinese government’s campaign to have its currency, the renminbi, included in the International Monetary Fund’s reserve asset appears to be on the brink of success. 
Last week, IMF staff formally recommended adding the renminbi to the basket of currencies that determines the value of its so-called Special Drawing Rights (SDRs). 
The addition of the renminbi to the basket, which currently includes the US dollar, the euro, the British pound, and the Japanese yen, would provide China with a boost to its prestige. 
More important, it would advance the government’s efforts to internationalize the renminbi. 
But it would also be a mistake. 
The decision to recommend the renminbi’s inclusion, far from having been made on sound economic grounds, can only be understood as political. 
As such, the long-term consequences are likely to be regrettable. 
On a purely technical basis, the renminbi’s qualifications for inclusion in the SDR basket are questionable. 
Traditionally, the IMF has insisted on two criteria: a currency’s issuing country must be among the world’s leading exporters, and the currency must be “freely usable” – widely used and traded. 
As the world’s largest exporter, China clearly meets the first condition. 
The second, however, is probably still beyond its reach. 
The renminbi is by no means in the same league as the SDR basket’s four incumbent currencies. 
In 2014, China’s currency ranked seventh in global central-bank reserves, eighth in international bond issuance, and 11th in global currency trading. 
Moreover, the renminbi remains non-convertible for most capital transactions, China’s financial markets are primitive, and trading margins for the exchange rate are still set daily by the monetary authorities. 
Indeed, as recently as August, the IMF was skeptical about adding the renminbi to the SDR basket, saying that “significant work” was still needed, and suggesting that a decision should be put off until 2016 in order to ensure a “smooth” transition. 
So why did the IMF flip? 
The answer is obvious: China mounted a full-court press to change minds. 
In August, the currency’s exchange-rate regime was loosened slightly. 
Renminbi-denominated government bonds were issued in London, and plans were laid to create new trading platforms for the currency in several European financial centers. 
And Chinese policymakers made it abundantly clear how unhappy they would be with a negative decision. 
Their pressure paid off. 
One by one, Western governments fell in line behind the renminbi, despite its practical limitations. 
The Fund got the message, and now the fix is in. 
The recommendation to enlarge the SDR basket has been warmly backed by Christine Lagarde, the IMF’s managing director, and a final decision by the Fund’s executive board is expected at the end of the month. 
Many would argue that this is a positive development. 
Certainly, it mollifies China’s leaders, offering them a stronger incentive to continue to work within the existing international monetary regime. 
Recent Chinese initiatives, especially the creation of the Asian Infrastructure Investment Bank, have given rise to fears that the country intends to build a new set of international institutions to compete with Western-dominated organizations like the IMF. 
The decision to add the renminbi to the SDR basket may have put that danger into remission. 
On the other hand, the move sets a worrying precedent, injecting politics into a policy area that had been governed by objective economic considerations. 
Conceivably, over the longer term, China’s successful campaign could now open the door to lobbying by other governments to include their currencies as well. 
Why not add the Swiss franc or the Canadian dollar? 
Or, for that matter, why not include the Russian ruble or Indian rupee? 
What was once the dignified preserve of obviously elite currencies could become the site of messy political battles for elevated status. 
Of course, it can be argued that China’s recent economic trajectory means that it is only a matter of time before the renminbi does become a match for the SDR’s incumbents. 
After all, international use of the currency has been growing exponentially. 
But that optimistic assessment overestimates the renminbi’s prospects and illustrates the danger of linear extrapolation of the past into the future. 
Likewise, use of the renminbi for the purpose of invoicing and settling trade with China is bound to continue growing. 
But in terms of the all-important roles of a currency as an investment vehicle or reserve asset, the outlook for the renminbi is much less promising, owing to China’s still-tight capital controls and low level of financial development. 
Nor is inclusion of the renminbi in the SDR basket likely to provide as big a boost to the currency’s internationalization as many believe. 
Some central banks may decide to follow suit, adding renminbi-denominated assets to their reserves to match the composition of the basket. 
But the increase will be marginal at best – some $40 billion in the next few years, according to the IMF’s calculations. 
With global reserves now totaling more than $10 trillion, that is a mere drop in the proverbial bucket. 
The political reasons for including the renminbi in the SDR are all too clear. 
Unfortunately, the risks of doing so are no less obvious. 

A Defeat for International Tax Cooperation 
NEW YORK – Most of the world’s governments – eager to mobilize more tax revenues to finance development and curb pervasive tax-avoidance schemes, such as those revealed in the so-called Luxembourg Leaks scandal last year – have an interest in collaborating on taxation matters. 
Yet at the Third International Conference on Financing for Development, held in Addis Ababa last month, the momentum toward strengthening international tax cooperation came to an abrupt halt. 
Developed countries blocked a proposal at the conference to establish an intergovernmental tax body within the United Nations to replace the current UN Committee of Experts. 
These countries insist that tax cooperation should take place exclusively under the leadership of the OECD, a body that they control. 
The rest of the world should hope this will prove to be a pause rather than an end to progress on international tax cooperation, which began 13 years ago, at the first International Conference on Financing for Development in Monterrey, Mexico. 
Two years later, in 2004, the United Nations Economic and Social Council (ECOSOC) upgraded its “ad hoc group” of tax experts to a regular committee. 
This meant that the experts would meet regularly and have an expanded mandate that went beyond merely updating a model double-taxation treaty. 
Four years later, at the Second Conference on Financing for Development, in Doha, Qatar, policymakers acknowledged that more needed to be done in tax matters, and asked ECOSOC to consider strengthening institutional arrangements. 
And then, in the year leading up to the Addis Ababa conference, the UN Secretary-General endorsed the need for “an intergovernmental committee on tax cooperation, under the auspices of the United Nations.” 
His endorsement, along with strong support from nongovernmental organizations and the Independent Commission for the Reform of International Corporate Taxation, gave greater force to the demand by developing countries, organized around the Group of 77 and China, for an equal voice in setting global tax norms. 
Up until the 11th hour of negotiations in Addis Ababa, they stood firm in calling for an intergovernmental body with the mandate and resources to create a coherent global framework for international tax cooperation. 
But to no avail: Developed countries, led by the United States and the United Kingdom –home to many of the multinational corporations implicated in the “Lux Leaks” – succeeded in blocking this much-needed advance in global governance. 
In the end, the Addis Ababa Action Agenda provides that the current Committee of Experts will continue to function according to its 2004 mandate, with three additional meeting days per year, all funded through voluntary contributions. 
That is a profoundly disappointing outcome. 
The developed countries have an argument – but not a convincing one. 
The OECD, whose members are essentially the world’s 34 richest countries, certainly has the capacity to set international standards on taxation. 
Yet the domination of a select group of countries over tax norms has meant that, in reality, the global governance architecture for taxation has not kept pace with globalization. 
The Monterrey Consensus reached in 2002 included a call to enhance “the voice and participation of developing countries in international economic decision-making and norms-setting.” 
But although the OECD invites some developing countries to participate in its discussions to establish norms, it offers them no decision-making power. 
The OECD is thus a weak surrogate for a globally representative intergovernmental forum. 
Such a body must operate under the auspices of the United Nations, which bears the institutional legitimacy necessary to respond effectively to the challenges of globalization with coherent global standards to combat abusive tax practices and ensure fair taxation of corporate profits worldwide. 
Despite the disappointment in Addis Ababa, the call for reform of the international tax system is not likely to be silenced. 
Instead, it will grow louder on all sides, as the developed countries’ counter-productive resistance to any give and take on international cooperation results in a tsunami of unilateral tax measures beyond OECD control. 

The Making of Euro-Jihadism 
MADRID – The Belgian historian Henri Pirenne linked Europe’s birth as a Christian continent in the eighth century to its rupture with Islam. 
Pirenne probably would never have expected a Muslim ghetto in Brussels to emerge, much less become a hub of jihadism, with marginalized and angry young Muslims revolting against Europe from within its own borders. 
Divorce is not an option these days. 
But nor is the kind of marriage that the Islam scholar Tariq Ramadan advocates. 
Ramadan, a grandson of the founder of the Muslim Brotherhood in Egypt, is a Swiss citizen and a resident of the United Kingdom who argues that Islamic ethics and values should be injected into the European system. 
Europe would then not just tolerate Islam, but actually embrace it as an integral part of itself. 
The problem with Ramadan’s vision is that Europe is an overwhelmingly secular continent, with a profoundly forward-thinking approach to ethics. 
Islamic societies, by contrast, are both deeply religious and deeply embedded in the past. 
When Islamists speak of political or social reform, they are typically looking backward, hoping to resurrect a time when core European principles – from gender equality to gay marriage – were repudiated. 
Even Muslims who support the modernization of Islam would typically stop well short of Europe’s ethical vision. 
The flaws in Ramadan’s proposed solution to Euro-jihadism mirror the flaws in his explanation for the phenomenon, which he attributes largely to Europe’s involvement in the wars in the Middle East, its supposed collusion with Israel’s suppression of the Palestinians, and its support of Arab autocrats. 
“We cannot,” he writes, “support dictatorships … be silent when civilians are massacred south of our borders, and hope that we will not receive a response to the injustice and humiliation we have provoked.” 
But it is the United States that launched wars in Iraq and Afghanistan, offers unconditional support to Israel, and has repeatedly propped up Arab autocrats. 
And it is Europe that has consistently criticized these policies – often harshly. 
Yet America is not being subjected to a major surge of jihadist sentiment within its borders. 
It might have helped that US President Barack Obama backed away from some of these policies. 
When the Arab Spring uprisings began, for example, he was quick to cut support for Tunisian President Zine El Abidine Ben Ali and Egyptian President Hosni Mubarak, allowing protesters – inspired by the Western model of democracy – to secure regime change. 
The return to autocracy in Egypt in 2013, via Abdel Fattah el-Sisi’s coup d’état, certainly was not aided by the US or Europe, both of which supported the democratically elected Muslim Brotherhood. 
Europe has offered even more direct help to Arab countries in recent years. 
If it were not for Europe’s military intervention, Libyans would still be living under the tyrannical Muammar el-Qaddafi. 
True, Europe could have done more to prevent the ensuing chaos in Libya. 
But the people of Libya surely must take responsibility for the proliferation of competing militias that refuse to unite to save their state from total collapse. 
More broadly, though the West – especially the US – has made grave policy errors in the Arab world over the last 50 years, external powers cannot be blamed entirely for the region’s meltdown. 
That is the result of a profound civilizational crisis – one that can be redressed only by the people of the Arab world. 
If Europe’s foreign policy is not responsible for the Arab world’s current turmoil, it certainly cannot be the reason for the rise of jihadism within its own borders. 
The real problem lies at home: a disastrous deficit of effective policies related to social justice, education, housing, and employment for young European Muslims. 
Marginalization generates frustration, which is subsequently fed by growing Islamophobia and the rise of raucous right-wing movements throughout the continent. 
This link is apparent in the fact that the majority of European jihadists come from underprivileged backgrounds. 
Not particularly well versed in the true teachings of Islam, and lacking opportunities to improve their lives, they become easy prey for extremists. 
Jihadism, with its absolute certainty and grand mission, offers a sense of purpose, pride, and identity – not to mention adventure – and an outlet for their anger against the “home” that has denied them those things. 
The story of America’s Muslims is the measure of Europe’s failure. 
Like most Americans, Muslims in the US maintain a certain amount of faith in the American dream. 
They are mostly middle class, and, despite all the talk about rising economic inequality, they have not given up on the belief that, in the US, hard work and initiative are rewarded. 
America is a country of immigrants, with a dynamic economy that has enabled newcomers, time and again, to achieve great success. 
In Europe, by contrast, improving one’s social standing has always been very difficult; and, at a time of economic stagnation and staggeringly high unemployment, it is not getting any easier. 
Socially, America also offers something to Muslims that Europe does not. 
Its fundamentally religious culture enables Muslims to retain their identity to a far greater extent than in secular Europe. 
Indeed, America’s core values – personal responsibility and constitutional patriotism – can be easier for Muslims to swallow than Europe’s more aggressively secular brand of liberalism. 
As a result, integration and assimilation tend to be easier for Muslims in America. 
All of this suggests that Europe must look inward to address homegrown jihadism effectively. 
This does not mean that it should temper its secularism, much less its liberal values. 
Rather, Europe must breathe life into its own “European dream,” ensuring that all people have access to real opportunities to improve their lives. 
Otherwise, it will face a lost generation of millions of young Europeans – Muslim and otherwise. 

The New Climate Economics 
NEW YORK – This Friday, in its latest comprehensive assessment of the evidence on global warming, the United Nations Intergovernmental Panel on Climate Change will show that the world’s climate scientists are more certain than ever that human activity – largely combustion of fossil fuels – is causing temperatures and sea levels to rise. 
In recent years, a series of extreme weather events – including Hurricane Sandy in New York and New Jersey, floods in China, and droughts in the American Midwest, Russia, and many developing countries – have caused immense damage. 
Last week, Mexico experienced simultaneous hurricanes in the Pacific and in the Gulf of Mexico that devastated towns and cities in their path. 
Climate change will be a major driver of such events, and we risk much worse. 
This puts a new debate center stage: how to reconcile increased action to reduce greenhouse gas emissions with strong economic growth. 
It is a debate that is already mired in controversy. 
As most countries have started making serious investments in renewable energy, and many are implementing carbon prices and regulations, critics complain that such policies may undermine growth. 
With the global economy still recovering from the 2008 financial crash, higher energy costs – not yet fully offset by greater energy efficiency – are worrying business and political leaders. 
The advent of shale gas has confused the energy debate even more. 
If gas is substituted for coal, it can be a useful bridge to a low-carbon future. 
But astonishingly, it is coal, the dirtiest fuel, that is experiencing the sharpest increase in use. 
Companies and investors are hedging their bets by taking a few resource-efficiency measures and investing in some low-carbon assets, but leaving their high-carbon portfolios and activities largely intact. 
Policy vacillation in some countries has not helped. 
Advocates of stronger action respond that low-carbon investments can generate much stronger, cleaner growth. 
They point to the savings available from energy efficiency, and to the market opportunities generated by clean-energy technologies as the processes of learning and discovery take hold. 
They seek to demonstrate the benefits that a more sustainable pattern of development can bring to the world’s cities, to people’s health (from the reduction in air pollution), to energy security, and to the ability of the world’s poor to access energy. 
And they propose green bonds and public investment banks to finance new infrastructure and jobs at a time when world interest rates are low and demand is depressed in many countries. 
These are serious economic debates, but too often they have become entangled in ideological disputes about the appropriate response to the economic crisis and the value of government intervention in markets. 
That is regrettable. 
Climate change is not a partisan issue, and climate policy is essentially market-based. 
It is about correcting market failures so that markets and entrepreneurship can play their proper role of ensuring innovation and efficient resource allocation. 
In order to escape this impasse, we have helped to launch the Global Commission on the Economy and Climate. 
The Commission’s New Climate Economy project brings together seven leading policy research institutes from six continents, overseen by a panel of former heads of government and finance ministers and prominent business leaders, and advised by a panel of leading economists from across the world. 
Its purpose is to provide authoritative new evidence concerning how governments and businesses can achieve stronger economic growth while simultaneously addressing climate risks. 
Few governments or investors start from the standpoint of climate change. 
They want to promote investment and economic growth, create jobs, stabilize public finances, expand markets, turn profits, ensure reliable energy and food supplies, produce goods and services, reduce poverty, and build cities. 
So the primary question that we need to ask is not whether we can reduce emissions, but how public policy can help to achieve these core goals while reducing emissions and building a more climate-resilient economy. 
There is now a lot of experience around the world in this area. 
When the Stern Review on the economics of climate change was published seven years ago, the subject was largely theoretical. 
Now countries at all stages of development are pursuing new patterns of economic growth that take climate into account. 
Germany, for example, is planning the world’s most ambitious low-carbon energy transition, based on energy conservation and renewables. 
South Korea has made “green growth” a central economic goal. 
Mexico’s 2012 General Law on Climate Change has put it on course for a major increase in clean power. 
China has placed the industrial development of green technologies at the top of its agenda. 
Ethiopia is seeking to move to lower-carbon farming. 
Brazil has significantly reduced the rate of deforestation in the Amazon. 
Some major businesses are providing powerful examples of what is possible. 
Unilever has committed to the sustainable sourcing of agricultural and forest products. 
Coca-Cola is phasing out all use of climate-polluting hydrofluorocarbons. 
The retail giant Wal-Mart is driving emissions reduction throughout its supply chain. 
Meanwhile, the World Bank and the European Investment Bank have stopped lending to high-emission coal plants. 
Yet genuine questions remain about how fast economies should move on to a low-carbon path, and the most effective way to do so. 
Some low-carbon policies have clearly been expensive, while other, apparently cost-effective options, have not been pursued at all. 
Any structural transformation involves costs, trade-offs, and uncertainties, and it is vital that we understand these properly. 
Powerful interests will, of course, oppose any low-carbon transition, dismissing and often drowning out those who stand to benefit. 
That makes it even more important to clarify the choices. 
As science makes clear how imperative the climate question is, it is time for economists and policymakers to explain how it can be answered. 

Only the Poor Die Young 
ROTTERDAM – People who are lower on the socioeconomic ladder (indicated by their level of education, occupation, or income) have shorter and less healthy lives, on average, than those on higher rungs. 
Indeed, life expectancy at birth often varies by 5-10 years, depending on social and economic well-being, with poorer people spending 10-20 more years of life suffering from illness or disability than their wealthier counterparts. 
In the nineteenth century, this situation would not have been surprising, given low average income, widespread poverty, and lack of social security. 
But such data are commonly reported for high-income countries today, including those ranking high on indices of economic prosperity and human development – even Western Europe’s highly developed welfare states. 
Since the end of World War II, Western European countries have tried to reduce socioeconomic inequality, or offset its consequences, through progressive taxation, social security programs, and a wide range of collectively financed provisions, such as public housing, education, health care, and cultural and leisure facilities. 
But, while these policies have reduced inequalities in some social and economic outcomes, including income, housing quality, and health-care access, they have been insufficient to eliminate health inequalities. 
Long-term time-series data indicate that the socioeconomic mortality gap narrowed before the 1950’s, but has grown substantially since then. 
More puzzling is the fact that more generous welfare policies do not translate into smaller health disparities. 
Even the Nordic countries – world leaders when it comes to creating universal and well-designed welfare policies that cover citizens from cradle to grave – face significant health disparities, despite their relatively low income inequality. 
To be sure, modern welfare states have far from abolished social inequality, with disparities in access to material and human resources continuing to generate highly unequal lives among their citizens. 
But the welfare state’s aim has never been radical redistribution of wealth. 
Rather, welfare policies are intended to create a compromise between the interests of employees and employers, laborers and the middle classes. 
As a result, their redistributive effects are modest. 
So, while a partial failure of the welfare state may help to explain the persistence of health inequalities, one must look elsewhere to understand – and reverse – their rise. 
Two possible explanations have emerged from the rapidly growing scientific literature on the subject: selective upward social mobility and delayed diffusion of behavioral change. 
In reality, both factors are at work. 
During the twentieth century, social mobility increased slowly but steadily in all high-income countries, with educational achievement and occupational status depending less on family background and more on cognitive ability and other personal characteristics. 
As a result, the lower socioeconomic groups have not only shrunk in size, but have probably also become more homogeneous in terms of personal characteristics that increase the risk of health problems. 
Moreover, people with a higher socioeconomic position tend to adopt new behaviors first, and to abandon more readily behaviors that are found to damage health, such as smoking and high-fat diets. 
Given this, new behavioral recommendations by health authorities tend to exacerbate health inequalities, at least temporarily. 
Significant disparities in smoking, physical exercise, diet, and alcohol consumption afflict many of Western Europe’s welfare states. 
The welfare system, which was created to combat poverty, has been less effective against “diseases of affluence” like heart disease and lung cancer. 
All of this highlights the need for creative solutions to disparities that unnecessarily and unfairly blight the lives of those who have the least, generate massive health-care costs, and pose a barrier to increased labor-force participation (impeding efforts in some countries to raise the retirement age). 
In the last few decades, social policy in most Western European countries has moved away from redistribution. 
This is a mistake, given that the consequences of this shift – rising income inequality, weaker social safety nets, and reduced health-care access – will aggravate health inequalities in the long run. 
In fact, more, better-targeted redistributive policies, which account for the effects of selective upward social mobility and different rates of diffusion of behavioral change, are crucial to improving health outcomes in lower socioeconomic groups. 
Income support should be complemented by preventive health programs, while health literacy programs could help to diminish the link between low cognitive ability and bad health. 
Equal access to health care is not enough. 
Reducing inequalities in health outcomes requires more intensive health care for patients in lower socioeconomic brackets, tailored to their specific needs and challenges. 
For example, revenues from tobacco taxation, which disproportionately affects lower income groups, should be used to fund cessation-support programs that target disadvantaged smokers. 
Significant and persistent health inequality indicates that, by raising the health levels of those with lower incomes or less education, massive strides could be made in improving populations’ overall health. 
This may require reshaping the welfare system to some extent, but the payoff would be well worth the effort. 

The Mouse Click that Roared 
CAMBRIDGE – Until recently, cyber security has primarily interested computer geeks and cloak-and-dagger types. 
The Internet’s creators, part of a small, enclosed community, were very comfortable with an open system in which security was not a primary concern. 
But, with some three billion or so users on the Web nowadays, that very openness has become a serious vulnerability; indeed, it is endangering the vast economic opportunities that the Internet has opened for the world. 
A “cyber attack” can take any number of forms, including simple probes, defacement of Web sites, denial-of-service attacks, espionage, and destruction of data. 
And the term “cyber war,” though best defined as any hostile action in cyberspace that amplifies or is equivalent to major physical violence, remains equally protean, reflecting definitions of “war” that range from armed conflict to any concerted effort to solve a problem (for example, “war on poverty”). 
Cyber war and cyber espionage are largely associated with states, while cyber crime and cyber terrorism are mostly associated with non-state actors. 
The highest costs currently stem from espionage and crime; but, over the next decade or so, cyber war and cyber terrorism may become greater threats than they are today. 
Moreover, as alliances and tactics evolve, the categories may increasingly overlap. 
Terrorists might buy malware from criminals, and governments might find it useful to hide behind both. 
Some people argue that deterrence does not work in cyberspace, owing to the difficulties of attribution. 
But that is facile: inadequate attribution affects inter-state deterrence as well, yet it still operates. 
Even when the source of an attack can be successfully disguised under a “false flag,” governments may find themselves sufficiently enmeshed in symmetrically interdependent relationships such that a major attack would be counterproductive. 
China, for example, would lose from an attack that severely damaged the American economy, and vice versa. 
An unknown attacker may also be deterred by cyber-security measures. 
If firewalls are strong, or redundancy and resilience allow quick recovery, or the prospect of a self-enforcing response (“an electric fence”) seems possible, an attack becomes less attractive. 
While accurate attribution of the ultimate source of a cyber attack is sometimes difficult, the determination does not have to be airtight. 
To the extent that false flags are imperfect and rumors of the source of an attack are widely deemed credible (though not legally probative), reputational damage to an attacker’s soft power may contribute to deterrence. 
Finally, a reputation for offensive capability and a declared policy that keeps open the means of retaliation can help to reinforce deterrence. 
Of course, non-state actors are harder to deter, so improved defenses such as pre-emption and human intelligence become important in such cases. 
But, among states, even nuclear deterrence was more complex than it first looked, and that is doubly true of deterrence in the cyber domain. 
Given its global nature, the Internet requires a degree of international cooperation to be able to function. 
Some people call for the cyber equivalent of formal arms-control treaties. 
But differences in cultural norms and the difficulty of verification would make such treaties hard to negotiate or implement. 
At the same time, it is important to pursue international efforts to develop rules of the road that can limit conflict. 
The most promising areas for international cooperation today most likely concern problems posed for states by third parties such as criminals and terrorists. 
Russia and China have sought to establish a treaty establishing broad international oversight of the Internet and “information security,” which would prohibit deception and embedding malicious code or circuitry that could be activated in the event of war. 
But the US has argued that arms-control measures banning offensive capabilities could weaken defenses against attacks and would be impossible to verify or enforce. 
Likewise, in terms of political values, the US has resisted agreements that could legitimize authoritarian governments’ censorship of the Internet – for example, by the “great firewall of China.” 
Moreover, cultural differences impede any broad agreements on regulating online content. 
Nonetheless, it may be possible to identify behaviors like cyber crime that are illegal in many domestic jurisdictions. 
Trying to limit all intrusions would be impossible, but one could start with cyber crime and cyber terrorism involving non-state parties. 
Here, major states would have an interest in limiting damage by agreeing to cooperate on forensics and controls. 
The transnational cyber domain poses new questions about the meaning of national security. 
Some of the most important responses must be national and unilateral, focused on hygiene, redundancy, and resilience. 
It is likely, however, that major governments will soon discover that the insecurity created by non-state cyber actors will require closer cooperation among governments. 


The Development Costs of Homophobia 
LONDON – As a gay man living in Nigeria, my biggest challenge was choosing between my sexuality and my job. 
In 2004, I was at the start of my acting career. 
I had just left university, and I was featured in “Roses and Thorns,” a prime-time soap opera on Galaxy Television, one of Nigeria’s most popular TV stations. 
I was playing the role of “Richard,” the only son of a rich family who was having an affair with the house maid. 
Whispers were making the rounds about my private life, and I decided it was time to come out. 
So I agreed to go on Nigeria’s most-watched television talk show to discuss my sexuality. 
Almost immediately, my character was eliminated. 
And when my job disappeared, so did my financial security. 
Like many gay men and lesbians in Africa, my choice was between economic freedom and mental imprisonment. 
This year, Nigeria and Uganda put in place draconian anti-gay laws, sparking a worldwide debate about human rights. 
This debate has also started at the World Bank, whose president, Jim Yong Kim, recently declared that “institutionalized discrimination is bad for people and for societies.” 
Kim’s statement has invited criticism and controversy. 
Often, as in Uganda and Nigeria, we hear the claim that opposition to official discrimination against gay, lesbian, bisexual, and transgender (LGBT) people is simply a way to impose “Western” values on Africa. 
But this assumes that homosexuality is “un-African.” 
And, despite the absence of evidence that any given country or continent does not have LGBT people (and ample evidence to the contrary), it is an assumption that an increasing number of African leaders have embraced. 
In 2006, President Olusegun Obasanjo, then Nigeria’s president, was among the first to do so. 
Uganda’s President Yoweri Museveni followed suit when signing the anti-gay bill into law in 2014. 
Other leaders, from Gambia’s President Yahya Jammeh to Zimbabwe’s Robert Mugabe, have spoken in the same vein. 
These official attitudes have caused significant suffering for Africa’s gays and lesbians. 
Indeed, the price of homophobia for gay people in many African countries is painfully clear: legal penalties, social ostracism, and mob justice. 
But here is what Africa’s anti-gay leaders miss: legal protections are not only a human-rights issue, but also an economic issue. 
Kim is exactly right, and research has started measuring the economic costs of homophobia by exploring links between anti-gay sentiment and poverty in countries where laws and social attitudes proscribe same-sex relationships. 
M.V. Lee Badgett, an economist at the University of Massachusetts-Amherst, presented the initial findings of a study of the economic implications of homophobia in India at a World Bank meeting in March 2014. 
Badgett estimated that the Indian economy may have lost up to $23.1 billion in 2012 in direct health costs alone, owing to depression, suicide, and HIV treatment disparities caused by anti-gay stigma and discrimination. 
In addition to such concrete costs, being gay can bring violence, job loss, family rejection, harassment in schools, and pressure to marry. 
As a result, many gay people have less education, lower productivity, lower earnings, poorer health, and a shorter life expectancy. 
In Nigeria, I started the Independent Project for Equal Rights (TIERs) in 2005 to respond to the increasing number of people who were losing their jobs because of suspicions about their sexuality. 
During our first year, we provided support for dozens of people. 
One young man, “Olumide,” was given temporary housing after his family kicked him out for being gay. 
Another, “Uche,” was fired from his job as a chef after his sexuality was revealed. 
TIERs helped him with accommodation and capital to set up a catering business. 
Though almost 10 years have passed, it is still not safe to use their real names. 
Across Africa, the economic costs of discrimination are increasing, in line with growing pressure on employers, landlords, health-care providers, educational institutions, and others to exclude LGBT people. 
Today, the World Bank and other development agencies are mapping out the global development priorities that will follow the Millennium Development Goals (MDGs), which officially end in 2015 and included specific targets for promoting gender equality and empowering women as a strategy for economic growth. 
Looking ahead, the Bank should take the same approach to LGBT rights and make legal protections for sexual orientation and gender identity a condition for countries receiving loans. 
Building recognition of women’s rights into the MDGs did not corrupt African cultures by imposing “Western” values; in fact, it strengthened many African countries, which now lead the world in the representation of women in government. 
By pursuing similar protections for LGBT people, international investment and aid can improve economic performance and strengthen respect for basic human rights. 
The World Bank, always wary of entangling itself in “political” questions, emphasizes that it is not a global human-rights enforcer. 
But it also increasingly recognizes its own role as a facilitator in helping Bank members realize their human-rights obligations. 
LGBT rights should be a test case. 
Aid to governments that permit specific social groups to be ostracized can carry very real economic costs. 
As new loans are considered, steps should be taken to ensure that the benefits are as inclusive as possible. 
If the Bank – which currently lends Nigeria almost $5.5 billion and expects to commit an additional $2 billion in each of the next four years – moved in this direction, other funders might follow. 
Africa’s LGBT people desperately need such powerful allies in their struggle for human and economic rights. 

Adjust and Reschedule or Delay and Default 
BRUSSELS – As Greece activates its €45 billion rescue package with the International Monetary Fund and the European Union, it is becoming clear that a new, far more comprehensive approach is needed. 
Two problems need to be addressed: the credibility of Greece’s fiscal stabilization program, and how to cover the country’s medium-term financing gap. 
The magnitude of the fiscal adjustment effort being demanded of Greece is now well known. 
The deficit has to be reduced by at least 10 percentage points of GDP (from around 13% of GDP to less than 3% of GDP). 
The key problem, which has not been addressed so far, is that a fiscal adjustment on this scale requires the government to take two steps that can be implemented only with wide social approval: a cut in wages and a cut in social expenditure. 
Both steps are now as unpopular in Greece as they are unavoidable. 
The country’s competitiveness problems are also well known. 
Unit labor costs have increased by 10-20% more than in Germany. 
Assuming that Greece wishes to stay within the eurozone, an “internal devaluation,” i.e., a significant cut in nominal wages, is inevitable. 
The government can (and has) cut wages in the public sector, but this is not sufficient. 
A large cut in private-sector wages also is urgently needed to stimulate exports (which currently amount to less than 20% of GDP, even if one counts both goods and services) to create at least one source of growth. 
Greece thus needs a “National Competitiveness Pact” in which government, opposition, employers, and workers agree on a set of measures that cut unit labor costs by at least 10%. 
Three levers could be used to reach this goal: adjustment in nominal wages, extension of working time, and a reduction in social-security contributions (compensated for by an increase in value-added tax). 
The mix of measures should be left to Greece to decide, but a cut in unit labor costs of this size is an essential first step for a successful adjustment, and should be a pre-condition for the IMF/EU support package. 
Deep cuts in social expenditure are also unavoidable in order to achieve sustainable public finances. 
The growing fiscal deficits in Greece over the last decade were essentially the result of a massive increase in the size of state social benefits, from 20% to close to 30% of GDP, without any significant increase in tax revenues. 
Contrary to popular perception, the public-sector wage bill is only of marginal importance. 
The government has already forced through most of the necessary adjustment in this area. 
Indeed, cuts in public-sector wages can yield at most 1-2% of GDP in fiscal consolidation. 
Given that social expenditure amounts to close to 60% of total public spending, a successful fiscal adjustment will ultimately require that it be cut significantly. 
The alternative, an increase in tax revenues by almost 50% in the span of a few years, simply is not feasible. 
Profound reform of the welfare state and building a modern tax administration system requires time. 
But financial markets are in no mood to give Greece time, which brings us to the second major problem facing the country. 
In order to gain the breathing space necessary for the reform process to be effective, the Greek government could just announce a simple rescheduling: the due date of all existing public debt is extended by five years at an unchanged interest rate. 
In that case, the Greek government would face no redemptions for the next five years and would have to refinance about €30 billion per year from 2015 onwards, which should be manageable by then. 
Official financing needs would then be much more limited, and the IMF/EU package of around €45 billion should be sufficient to cover most of the progressively lower deficits over this grace period. 
Without such a rescheduling, it is unlikely that Greece will be able to roll over the approximately €30 billion maturing annually for the next few years. 
Over time, the eurozone countries would inevitably have to refinance most of Greece’s public debt. 
This is a recipe for continuing political problems, as the Greeks would always consider the interest rate too high, while Germany would consider it too low (at least relative to market rates). 
Moreover, once the eurozone had started refinancing Greece without any contribution from private creditors, it would be politically impossible to stop. 
The type of rescheduling proposed here would signal the Greek government’s readiness to service its debt in full, and thus might be accepted without too much disruption in financial markets. 
Of course, markets would view any rescheduling without a credible adjustment program merely as a prelude to a real default later on, thus leading to an even higher risk premium. 
But even the best adjustment program cannot be financed without some contribution by private creditors, i.e., some form of rescheduling. 
The only way out for Greece is thus to combine both elements: rescheduling its debt plus national agreements on wages and social expenditure. 
The current approach – concentrating only on the financing needs and fiscal adjustment in 2010, and leaving all the hard choices for later – will not work. 

A Global "New Deal"? 
ATHENS – The International Monetary Fund’s belated admission that it significantly underestimated the damage that austerity would do to European Union growth rates highlights the self-defeating character of “orthodox” recipes to address the causes of the debt crisis that followed the financial crash of 2008-2009. 
Conventional theory suggests that a single country (or group of countries) consolidating its finances can expect lower interest rates, a weaker currency, and an improved trade position. 
But, because this cannot happen for all major economies simultaneously – one country’s (or group of countries’) austerity implies less demand for other countries’ products – such policies eventually lead to beggar-thy-neighbor situations. 
Indeed, it was this dynamic – against which John Maynard Keynes fought – that made the Great Depression of the 1930’s so grim. 
Today’s problems are compounded by a lack of sufficient private demand – particularly household consumption – in the advanced economies to compensate for demand losses stemming from austerity. 
During the last two decades, consumption drove these countries’ economic growth, reaching historically high GDP shares. 
Moreover, major advanced economies, such as the United States, Germany, and Japan, face longer-term fiscal problems in the form of aging populations or oversize welfare states, limiting their capacity to contribute to demand management. 
Recent moves to ease monetary policy have been a step in the right direction; but, so far, they have not proved to be a game changer. 
For domestic demand to act as an engine of growth, policies should shift resources from investment to consumption. 
While the magnitudes involved are huge, they must be attained if an extended period of low growth, high unemployment, and declining living standards among the world’s poorest is to be avoided. 
International economic policy coordination should be significantly strengthened in order to deal effectively with changes on such a scale. 
Start with Europe. 
It is by now patently obvious that austerity and domestic reforms are not enough to pull the eurozone’s periphery out of deep recession. 
Growing awareness of the failure of current policies is causing social discontent, civil disorder, and political instability, with the recently concluded Italian elections and the growing popular resistance to Greek reform efforts serving as a bellwether. 
Returning the eurozone’s peripheral economies to the path of growth requires more than structural reforms and fiscal consolidation. 
It also requires a substantial reform of the monetary union’s system of economic governance, aimed at restoring financial stability and lowering borrowing costs, together with a boost in external demand in order to compensate for the effects of austerity. 
Reforming governance implies significant progress toward economic unification: centralizing European debt through Eurobonds, mobilizing sufficient rescue funds, allowing the European Central Bank to intervene in the primary bond markets, and establishing both a fiscal and a banking union. 
This is a tall order, in view of the reluctance of most EU member states to cede competences to European institutions. 
But Europe should move more decisively in this direction. Otherwise, speculation on member states’ national debt will persist, keeping borrowing costs at levels that are inconsistent with the conditions required to sustain economic recovery. 
Concerning external demand, intra-European help in the form of reflationary policies in stronger economies is unlikely to prove sufficient, owing primarily to the fiscal and political conditions prevailing in Germany. 
Implementing a Marshall Plan-type initiative by mobilizing EU budget resources and additional lending by the European Investment Bank to finance investments in weaker countries could be an alternative, but it lacks political support. 
On a global scale, neither the US nor Japan is in a position to provide significant external stimulus. 
Only the emerging and developing economies of Asia could effectively contribute to lifting global demand through a coordinated effort aimed at boosting domestic consumption, which, in turn, would stimulate additional investment. 
Recent IMF experience suggests that, through appropriate coordination, private funds could be mobilized for big private-public partnership projects linking demand expansion with infrastructure investment. 
In other words, a global “New Deal” – combining policies designed to achieve an orderly realignment of consumption and investment worldwide – seems to be required. 
The advanced economies should promote productivity-enhancing structural reforms with renewed vigor. 
The eurozone should solidify its currency union. 
And the emerging and developing economies should support domestic sources of growth. 
For such a deal to become possible, certain preconditions must be met. 
First, international policy coordination by the G-20 must be tightened by creating a permanent secretariat to make policy proposals and recommendations concerning macroeconomic and financial developments. 
The secretariat should actively cooperate with the IMF to benefit from its analysis, notably regarding exchange rates. 
Second, global financial reform must proceed at a faster pace. 
The financial sector requires tougher regulation, strengthened supervision, and internationally consistent resolution mechanisms to address the problems posed by very large, global institutions that are considered too big (or too complex) to fail. 
Such reform is essential if the international financial system is to mediate the sizeable resource transfers that will underpin the required changes in the structure of global demand. 
Finally, a new trade pact – possibly, but not necessarily, within the Doha Round – is needed to ensure the major trading powers’ access to foreign markets. 
This is critically important for inspiring confidence in Asian countries, which might be persuaded to favor domestic, as opposed to external, sources of demand. 
Moreover, trade liberalization will also increase consumer confidence worldwide. 
The time is right for a new global settlement that targets growth, addresses crisis conditions in certain parts of the world, and rebalances the global economy to set it back on a path of strong and steady growth. 

Toxic Politics Versus Better Economics 
NEW YORK – The relationship between politics and economics is changing. 
Advanced-country politicians are locked in bizarre, often toxic, conflicts, instead of acting on a growing economic consensus about how to escape a protracted period of low and unequal growth. 
This trend must be reversed, before it structurally cripples the advanced world and sweeps up the emerging economies, too. 
Obviously, political infighting is nothing new. 
But, until recently, the expectation was that if professional economists achieved a technocratic consensus on a given policy approach, political leaders would listen. 
Even when more radical political parties attempted to push a different agenda, powerful forces – whether moral suasion from G7 governments, private capital markets, or the conditionality attached to International Monetary Fund and World Bank lending – would almost always ensure that the consensus approach eventually won the day. 
In the 1990s and 2000s, for example, the so-called Washington Consensus dominated policymaking in much of the world, with everyone from the United States to a multitude of emerging economies pursuing trade liberalization, privatization, greater use of price mechanisms, financial-sector deregulation, and fiscal and monetary reforms with a heavy supply-side emphasis. 
The embrace of the Washington Consensus by multilateral institutions amplified its transmission, helping to drive forward the broader process of economic and financial globalization. 
Incoming governments – particularly those led by non-traditional movements, which had risen to power on the back of domestic unease and frustration with mainstream parties – sometimes disagreed with the appropriateness and relevance of the Washington Consensus. 
But, as Brazilian President Luiz Inácio Lula da Silva demonstrated with his famous policy pivot in 2002, that consensus tended largely to prevail. 
And it continued to hold sway as recently as almost two years ago, when Greek Prime Minister Alexis Tsipras executed an equally notable U-turn. 
But after years of unusually sluggish and strikingly non-inclusive growth, the consensus is breaking down. 
Advanced-country citizens are frustrated with an “establishment” – including economic “experts,” mainstream political leaders, and dominant multinational companies – which they increasingly blame for their economic travails. 
Anti-establishment movements and figures have been quick to seize on this frustration, using inflammatory and even combative rhetoric to win support. 
They do not even have to win elections to disrupt the transmission mechanism between economics and politics. 
The United Kingdom proved that in June, with its Brexit vote – a decision that directly defied the broad economic consensus that remaining within the European Union was in Britain’s best interest. 
The referendum happened for one reason: in 2013, then-Prime Minister David Cameron feared that he would be unable to secure sufficiently his Conservative Party base in the general election that year. 
So he pandered to Euroskeptic voters with the promise of a referendum. 
The source of Cameron’s fear? 
The political disruption caused by the UK Independence Party – an anti-establishment party that ended up winning only one seat in Parliament and subsequently found itself leaderless and in turmoil. 
Now, it seems, the floodgates have opened. 
At the recent Conservative Party annual conference, speeches by Prime Minister Theresa May and members of her cabinet revealed an intention to pursue a “hard Brexit,” thereby dismantling trading arrangements that have served the economy well. 
They also included attacks on “international elites” and criticism of Bank of England policies that were instrumental in stabilizing the British economy in the referendum’s immediate aftermath – thus giving May’s new government time to formulate a coherent Brexit strategy. 
Several other advanced economies are experiencing analogous political developments. 
In Germany, a surprisingly strong showing by the far-right Alternative für Deutschland in recent state elections already appears to be affecting the government’s behavior. 
In the US, even if Donald Trump’s presidential campaign fails to put a Republican back in the White House (as appears increasingly likely, given that, in the latest twist of this highly unusual campaign, many Republican leaders have now renounced their party’s nominee), his candidacy will likely leave a lasting impact on American politics. 
If not managed well, Italy’s constitutional referendum in December – a risky bid by Prime Minister Matteo Renzi to consolidate support – could backfire, just like Cameron’s referendum did, causing political disruption and undermining effective action to address the country’s economic challenges. 
Make no mistake: solid and credible policy options are available. 
After years of mediocre economic performance, there is widespread agreement that a shift away from excessive dependence on unconventional monetary policy is needed. 
As IMF Managing Director Christine Lagarde put it, “central banks cannot be the only game in town.” 
And yet they have been. 
As I argue in The Only Game in Town, published in January, countries need a more comprehensive policy approach, involving pro-growth structural reforms, more balanced demand management (including higher fiscal spending on infrastructure), and better cross-border policy coordination and architecture. 
There is also a need, highlighted by the protracted Greek crisis, to address pockets of severe over-indebtedness, which can have crushing impact extending well beyond the directly affected. 
The emergence of a new consensus on these points is good news. 
But, in the current political environment, translating that consensus into action is likely to happen too slowly, at best. 
The risk is that, as bad politics crowds out good economics, popular anger and frustration will rise, making politics even more toxic. 
One hopes that enlightened political leadership takes the reins in time to make the needed mid-course corrections voluntarily, before unambiguous signs of economic and financial crisis force policymakers to scramble to minimize the damage. 

Another Lesson from Japan 
NEW HAVEN – Yet another in a long string of negative inflation surprises is at hand. 
In the United States, the so-called core CPI (consumer price index) – which excludes food and energy – has headed down just when it was supposed to be going up. 
Over the three months ending in May, the core CPI was basically unchanged, holding, at just 1.7% above its year-earlier level. 
For a US economy that is widely presumed to be nearing the hallowed ground of full employment, this comes as a rude awakening – particularly for the Federal Reserve, which has pulled out all the stops to get inflation back to its 2% target. 
Halfway around the world, a similar story continues to play out in Japan. 
But, for the deflation-prone Japanese economy, it’s a much tougher story. 
Through April, Japan’s core CPI was basically flat relative to its year-earlier level, with a similar outcome evident in May for the Tokyo metropolitan area. 
For the Bank of Japan (BoJ), which committed an unprecedented arsenal of unconventional policy weapons to arrest a 19-year stretch of 16.5% deflation lasting from 1994 to 2013, this is more than just a rude awakening. 
It is an embarrassment bordering on defeat. 
This story is global in scope. 
Yes, there are a few notable outliers – namely, the United Kingdom, where currency pressures and one-off holiday distortions are temporarily boosting core inflation to 2.4%, and Malaysia, where the removal of fuel subsidies has boosted headline inflation, yet left the core stable at around 2.5%. 
But they are exceptions in an otherwise inflationless world. 
The International Monetary Fund’s latest forecasts bear this out. 
Notwithstanding a modest firming of global economic growth, inflation in the advanced economies is expected to average slightly less than 2% in 2017-2018. 
The first chapter of this tale was written many years ago, in Japan. 
From asset bubbles and excess leverage to currency suppression and productivity impairment, Japan’s experience – with lost decades now stretching to a quarter-century – is testament to all that can go wrong in large and wealthy economies. 
But no lesson is more profound than that of a series of policy blunders made by the BoJ. 
Not only did reckless monetary accommodation set the stage for Japan’s demise; the country’s central bank compounded the problem by taking policy rates to the zero bound (and even lower), embracing quantitative easing, and manipulating long-term interest rates in the hopes of reviving the economy. 
This has created an unhealthy dependency from which there is no easy exit. 
Though Japan’s experience since the early 1990s provides many lessons, the rest of the world has failed miserably at heeding them. 
Volumes have been written, countless symposiums have been held, and famous promises have been made by the likes of former US Fed chairman Ben Bernanke never to repeat Japan’s mistakes. 
Yet time and again, other major central banks – especially the Fed and the European Central Bank – have been quick to follow, with equally dire consequences. 
The inflation surprise of 2017 offers three key insights. 
First, the relationship between inflation and economic slack – the so-called Phillips curve – has broken down. 
Courtesy of what the University of Geneva’s Richard Baldwin calls the “second unbundling” of globalization, the world is awash in the excess supply of increasingly fragmented global supply chains. 
Outsourcing via these supply chains dramatically expands the elasticity of the global supply curve, fundamentally altering the concept of slack in labor and product markets, as well as the pressure such slack might put on inflation. 
Second, today’s globalization is inherently asymmetric. 
For a variety of reasons – hangovers from balance-sheet recessions in Japan and the US, fear-driven precautionary saving in China, and anemic consumption in productivity-constrained Europe – the demand side of most major economies remains severely impaired. 
Juxtaposed against a backdrop of ever-expanding supply, the resulting imbalance is inherently deflationary. 
Third, central banks are all but powerless to cope with the moving target of what can be called a non-stationary liquidity trap. 
First observed by John Maynard Keynes during the Great Depression of the 1930s, the liquidity trap describes a situation in which policy interest rates, having reached the zero bound, are unable to stimulate chronically deficient aggregate demand. 
Sound familiar? 
The novel twist today is the ever-expanding global supply curve. 
That makes today’s central banks even more impotent than they were in the 1930s. 
This is not an incurable disease. 
In a world of hyper-globalization – barring a protectionist relapse led by the America Firsters – treatment needs to be focused on the demand side of the equation. 
The most important lesson from the 1930s, as well as from the modern-day Japanese experience, is that monetary policy provides no answer for a chronic deficiency of aggregate demand. 
Addressing it is a task primarily for fiscal authorities. 
The idea that central banks should consider making a new promise to raise their inflation targets is hardly credible. 
In the meantime, Fed Chair Janet Yellen is right (finally) to push the Fed to normalize policy, putting an end to a failed experiment that has long outlived its usefulness. 
The danger all along has been that open-ended unconventional monetary easing would fail to achieve traction in the real economy, and would inject excess liquidity into US and global financial markets that could lead to asset bubbles, reckless risk taking, and the next crisis. 
Moreover, because unconventional easing was a strategy designed for an emergency that no longer exists, it leaves the Fed with no ammunition to fight the inevitable next downturn and crisis. 
We ignore history at great peril. 
The latest disappointment for inflation-targeting central banks is really not a surprise after all. 
The same is true of the related drop in long-term interest rates. 
There is much to be gained by studying carefully the lessons of Japan. 


Advise and Relent 
WASHINGTON, DC – Dropping bombs as a solution to the world’s trouble spots may be falling out of fashion (with the notable exception of Libya), but finger wagging is definitely back in. 
Hardly a day goes by without a major newspaper somewhere in the West offering sage and specific, but often not-so-friendly, advice to distant struggling democracies on what they “must” do to earn the “international community’s” approbation. 
Of course, such advice, like much of newspapers themselves nowadays, comes free of charge. 
But it is also advice that is free of responsibility, and, as Stanley Baldwin once said, power without responsibility is the prerogative of the harlot. 
There is a considerable gap between offers of advice one cannot refuse and the responsibility to deal with the consequences when that advice proves wrong or extremely difficult to implement. 
The world’s advice givers might try to keep this in mind when offering to help leaders of distant countries that are grappling with problems with which the adviser has little or no first-hand experience. 
Every once in a while, a profession (most frequently, economics) determines that it has reached a consensus on how to solve a problem. 
The so-called “Washington Consensus” that held sway before the recent financial crisis was a good example. 
In the case of nascent democracies, the formula that is now often made compulsory is this: lift all bans on political activities, liberalize the media, hold elections (the sooner, the better), resolve all minority issues in favor of the minorities, abandon trade barriers, and rid the country of corruption, preferably overnight. 
New governments are urged to tackle all of these problems immediately and simultaneously, lest they lose “momentum” and begin backsliding. 
The subtext is clear: be like us now. 
How to do this is left up to the new leaders, who are often credited with goodness and powers of persuasion they never had and never will have. 
In many cases, the cohesiveness of opposition movements that come to power in the wake of a political upheaval may not be what the international media presume it to be. 
Indeed, some components of these so-called “democratic coalitions” may not be democratic at all. 
Some leaders, such as Nelson Mandela, rise to the historic occasion, against all odds. 
Others, such as Kazakhstan’s Nursultan Nazarbayev (popular with Western media when he first came on the scene) plainly has not. 
How can we help ensure these movements’ sustainability in such fluid moments? 
Modesty is a virtue in private life. 
It should also be a guide in dispensing political advice. 
I would start by keeping in mind that some countries’ capacity to absorb advice is limited, so it should be offered in smaller portions. 
Where to start? 
The most important and potentially sustaining feature of a new democracy lies in its effort to commit itself to observing international human-rights standards. 
In fact, there is a large body of literature that indicates that even countries in the aftermath of internal conflict can reach a higher level of compliance with these standards. 
But human rights should not be conflated with democracy. 
While democracy is, no doubt, the form of governance that best preserves human rights, the two are not the same thing. 
Human rights will not co-exist with dictatorship, or with any other non-democracy, for long. 
Setting standards and goals of human rights is a powerful signal that a country is pointing itself in the right direction. 
The country is in effect announcing that it is moving toward democratic institutional arrangements. 
Banning torture, complying with international standards of prisoners’ rights, and enshrining rights of association and public assembly all immediately come to mind. 
The embrace of essential human-rights standards as a cornerstone of a country’s development is one of our era’s seminal innovations. 
The notion that a dictator can claim the sovereign right to abuse his people has become unacceptable. 
A country that makes progress on human rights and commits to the change of behavior required to meet these international standards can also make a decisive turn toward a better future. 
We should therefore focus on meeting international human-rights standards as a goal that a new democracy “must” (to use a favorite word of Western editorial writers) move toward quickly. 
But we should not confuse these values with the other essential elements of progress, such as establishing liberalized trade regimes, creating institutional structures with a separation of powers, and rooting out corruption. 
These are absolute necessities for democratic success, but they require longer-term development of institutional capacity. 
Corruption, for example, may have cultural antecedents and is part and parcel of institutional weakness. 
In most cases, neither can be remedied overnight. 
Above all, we need to show patience with the new governments of the countries we hope to see evolving toward democracy, and avoid the tendency to expect instant gratification. 
A few months of politics will never overcome a few centuries of sociology. 
So, as we watch and wait, we need to be as supportive – but not overbearing – as possible. 


The Fascism of the Affluent 
BERLIN – There is an alarming political shift to the right occurring on both sides of the Atlantic, linked to the growing force of openly chauvinist political parties and figures: Donald Trump in the United States, Marine Le Pen in France. 
Other names could be added to the list: Hungary’s prime minister, Victor Orbán, who advocates “illiberal democracy,” or Jarosław Kaczyński and his quasi-authoritarian Law and Justice party, which now rules Poland. 
Nationalistic, xenophobic political parties had been on the rise in many European Union member states long before Syrian refugees first arrived in appreciable numbers. 
There has been Geert Wilders in the Netherlands, the Vlaams Blok (succeeded by today’s Vlaams Belang) in Belgium, the Freedom Party of Austria, the Sweden Democrats, the Finns Party, and the Danish People’s Party, to name just a few. 
The reasons for such parties’ rise and success vary greatly at the national level. 
But their basic positions are similar. 
All of them are raging against the “system,” the “political establishment,” and the EU. 
Worse, they are not just xenophobic (and, in particular, Islamophobic); they also more or less unashamedly embrace an ethnic definition of the nation. 
The political community is not a product of its citizens’ commitment to a common constitutional and legal order; instead, as in the 1930s, membership in the nation is derived from common descent and religion. 
Like any extreme nationalism, the current one relies heavily on identity politics – the realm of fundamentalism, not reasoned debate. 
As a result, its discourse takes an obsessive turn – usually sooner rather than later – in the direction of ethno-nationalism, racism, and religious war. 
The rise of extreme nationalism and fascism in the 1930s is usually explained in terms of the outcome of World War I, which killed millions of people and filled the heads of millions more with militaristic notions. 
The war also ruined Europe’s economy, leading to a global economic crisis and mass unemployment. 
Destitution, poverty, and misery primed publics for toxic politics. 
But conditions today in the West, in the US and Europe alike, are rather different, to say the least. 
Given these countries’ affluence, what accounts for their citizens’ attraction to the politics of frustration? 
First and foremost, there is fear – and apparently a great deal of it. 
It is a fear based on the instinctive realization that the “White Man’s World” – a lived reality assumed by its beneficiaries as a matter of course – is in terminal decline, both globally and in the societies of the West. 
And migration is the issue that brings that prognosis home (not just metaphorically) to today’s angst-inspired nationalists. 
Until recently, globalization was largely viewed as favoring the West. 
But now – in the aftermath of the 2008 financial crisis and with the rise of China (now turning into this century’s leading power before our eyes) – it has become increasingly clear that globalization is a two-way street, with the West losing much of its power and wealth to the East. 
Likewise, the world’s problems can no longer be suppressed and excluded, at least not in Europe, where they are now quite literally knocking on the door. 
Meanwhile, at home, the White Man’s World is threatened by immigration, globalization of labor markets, gender parity, and the legal and social emancipation of sexual minorities. 
In short, these societies are undergoing a fundamental shock to traditional roles and patterns of behavior. 
From all these profound changes has arisen a yearning for simple solutions – to build fences and walls, for example, whether in the US South or in southern Hungary – and strong leaders. 
It is no accident that Europe’s new nationalists view Russian President Vladimir Putin as a beacon of hope. 
Of course, Putin has no appeal in the US (the world’s greatest power won’t turn away from itself), or in Poland and the Baltic states (where Russia is regarded as a threat to national independence). 
Elsewhere in Europe, however, the new nationalists have made common cause with Putin’s anti-Western posturing and pursuit of Great Russia. 
With the new nationalism threatening the European integration process, France holds the key. 
Without France, Europe is neither conceivable nor practicable, and a President Le Pen would certainly sound the death knell for the EU (as well as bringing disaster for her country and the continent as a whole). 
Europe would then withdraw from twenty-first-century world politics. 
This would lead inexorably to the end of the West in geopolitical terms: The US would have to reorient itself for good (toward the Pacific), while Europe would become Eurasia’s appendix. 
The end of the West is a dim prospect, to be sure, but we aren’t there yet. 
What is clear is that more depends on the future of Europe than even the most vociferous advocates of European unification had previously believed. 




Afghanistan’s Drug-Friendly Environment 
Afghanistan’s President Hamid Karzai has stepped up international fundraising efforts in recent weeks, seeking a fresh package of military and reconstruction aid from the United States, together with stronger strategic guarantees. 
But Karzai’s relationship with his sponsors has begun to sour, in part owing to charges that his government has failed to stop the resurgence of Afghanistan’s huge opium trade. 
Underlying the opium trade issue is a security threat of another kind, one overlooked since the US-led invasion toppled the Taliban regime in 2001, despite the grave risk it poses to Afghanistan’s long-term stability, and that of the region. 
In countries like Afghanistan, where 80% of the population lives on what they grow and many communities live far from any water source, environmental damage can be both economically devastating and politically momentous. 
That lesson should have been absorbed and understood, not least by American strategists, long before the Taliban’s fall. 
After all, desertification and deforestation helped fuel the rise, two decades earlier, of the Maoist guerilla group Sendero Luminoso (Shining Path) in Peru. 
Sendero, which supplemented its income with drug production and timber smuggling, deliberately chose drought-weakened and deforested mountain villages as the stronghold of its insurgency. 
Similarly, the Maoist insurgency in Nepal, which has claimed 10,000 lives, exploits the desperation of mountain villagers hit by flash floods – the result of deforestation higher up. 
No Maoist group could ever gain a toehold in Afghanistan’s parched Pashtun south (these were, after all, people who, bare-knuckled, smashed the Soviets). 
But the Taliban’s rapid rise in the 1990’s was inextricably linked to the failure of irrigation systems. 
Villagers whose crops shriveled and whose livestock died in a prolonged drought saw joining the Taliban as an economic opportunity. Had there been more irrigation, the Taliban’s gains might have been far less impressive. 
The Taliban are now an increasingly spent force, but lack of water reinforced the logic of opium production across its former strongholds in the south. 
Irrigation has failed or is inadequate in Helmand, Uruzgan, and Kandahar – three of the top five opium-producing provinces – where indebted farmers are hooked by the economics: opium brings in eight times as much cash as wheat and uses less water. 
Without serious investment in irrigation, including construction of reservoirs to make use of the snowfall in the Hindu Kush, and in new cash crops such as saffron and rose oil, Afghanistan’s drift toward narco-statehood will continue, with all the instability that this implies. 
Clear-cutting of old growth forests in the mountains bordering Pakistan may prove as problematic. 
Agriculture there has been damaged by the cutting of walnut, apricot, and mulberry trees for winter fuel, and by a failure to replant poplar, willow, and tamarisk – the trees that hold fragile meadows in place. 
These sorts of trees can be restored, given a concerted campaign and investment in nurseries to produce local varieties. 
Loss of the ancient cedar, pine, fir, and oak forests on the slopes above is another matter. This year’s snowmelt caused landslides and flooding – a warning of more soil erosion and destruction of arable land to come; hundreds died and thousands lost their livelihoods. 
Forestry has always been a problem in Afghanistan. 
In 1960, the United Nations Food and Agriculture Organization spoke of wasteful logging practices, such as “head-skidding” (in which a log is rolled downhill, ripping up plants and soil). 
Aerial photographers were called in, and a large budget was set aside. 
But, in 1976, the FAO admitted in a new plan that forest and watershed management activities had “turned out to be quite limited.” 
The 1976 plan called for sustainable logging and basic forest-fire control, but war intervened, costing Afghanistan half its forest cover. 
Up to 60% of the old growth forest in Nangahar, the second largest opium-producing province, may have been cut during the war years. 
Mujahedin factions and later the Taliban exported stands of fine-grained cedar by the truckload from Nangahar and surrounding provinces to Pakistan, often in return for arms. 
Illegal logging continues today, with only ineffectual efforts made to stop it. 
At the current rate, Afghanistan’s old growth forest could vanish within a decade. 
The UN acknowledges the problem but is (rightly) unwilling to risk sending forestry experts into a tribal region where American and allied troops venture only in armored convoys. 
Safety concerns and cost also limit intervention by international conservation organizations. 
A new initiative called the Green Corps includes 300 forest rangers charged with stopping illegal logging, and the ministry hopes to boost their numbers within a year. 
But the initiative is unlikely to have much effect. 
Illegal logging crews number 200 or more. 
They have chain saws and trucks. 
They are armed and work with the backing of drug and emerald smugglers – and often of local officials. 
The price of plank cedar in Lahore is incentive enough to corrupt, or kill, any Green Corps men brave enough to stand in their way. 
Environmental issues are of paramount importance in marginal countries because their impact on human survival is immediate and direct. 
The inadequate response to pressing questions of natural resource management, whether of water or trees, merely strengthens the hands of opium dealers and malcontents in what is already the most disaffected and sensitive part of Afghanistan – the clear-cut mountain slopes where intelligence officers believe Osama bin Laden is most likely holed up. 

Afghanistan’s Dying Mothers 
Roughly 75% of Afghan newborns that die do so because of lack of food, warmth, and care. 
Unloved little girls fare the worst. 
In Afghanistan as a whole, a woman dies of pregnancy-related causes every 27 minutes – and perhaps even more frequently, because many such deaths go unrecorded. 
Many, perhaps most, are under sixteen years of age. 
The Taliban – blamed nowadays for just about all of Afghanistan’s ills – have officially been gone for nearly seven years, so why are conditions still so abysmal? 
In Kabul and Herat, mobile phones abound, a tooth-eroding concoction called “Afghan Cola” is sold, the Internet works (sometimes), there are ATM machines, sophisticated heroin laboratories, four-wheel drive vehicles, five-star hotels, ads for private banks – all the trappings of globalized modernity. 
Yet so many women die like flies, in pools of blood and deep-rooted indifference. 
While billions of dollars in aid have led to improvements in urban areas, where health facilities have been built and midwives trained, the overall maternal death figures have hardly changed. 
As one doctor told me: “A competent midwife or nurse would rather be out of work in Kabul than stuck in a remote village.” 
But most Afghans live in remote villages – those in Badakhshan can be reached only after a day’s bumpy ride on a donkey. 
This miserable situation has been attributed to various causes, mainly lack of infrastructure and local economic conditions. 
But cultural questions must also be addressed, because gender discrimination is the most important cause of maternal mortality. 
In Afghan society, discrimination begins at birth. 
One obvious reason is that a boy is destined to support his parents and much of his family all his life, and therefore represents a long-term investment, whereas a girl will be given over to her husband’s family as soon as possible. 
Feeding a girl is seen as effectively looking after someone else’s property. 
Once, I heard a dreadful story of a breech birth which a traditional midwife did not know how to handle. 
In the end, she wrenched the baby’s body out, severing it from its head, which remained inside the mother’s womb. 
It took six days to get the woman to a hospital in Jalalabad though it was not very far from where she lived. 
She somehow survived, with major health complications, including permanent fistula, which will condemn her to a life of exclusion from her family and unrelieved misery. 
That tragedy can be read on many levels, each more heart-rending than the next. 
But note that it occurred near a health facility. 
As soon as the midwife saw that the baby was coming out feet forward, she must have known that there was little she could do to save either mother or baby. 
Even before that, she would have noticed that the child had not turned properly, and that major problems were on the way. 
This means that someone – a husband or mother-in-law – had taken the decision not to send the young woman to the hospital, instead keeping her in inhuman suffering for nearly a week. 
The solution is not just to build more hospitals, but also to change deep-rooted disdain for women. 
And, sadly, things have become worse in the past 30 years, as Afghanistan’s particular brand of Islam, combined with its legacy of dire poverty and war, compounds an already misogynist pre-Islamic tradition. 
Maternal mortality is a sinister consequence of this complex situation. 
The legal system, schools, and the media could bring change, but no official entity takes the problem seriously enough to initiate effective action. 
The central reason is despairingly simple: women’s lives are not valued, and even women themselves perceive their suffering as being unavoidable. 
What Afghanistan needs is an inquest after each death and laws making it a criminal offense to forbid access to medical aid, when available, to women and children (or, more correctly, to children and their children, given that girls are often married by age 14). 
Prisons, I fear, would be full of abusive husbands and, I regret to say, vengeful mothers-in-law. 
Health education through public media, reaching distant areas of the country, is an urgent priority, but has been utterly ignored in favor of commercial priorities. 
Questioning culture is, of course, a politically incorrect approach. 
But we must refuse to bow before the altar of tolerance when it comes to what is truly unacceptable, wherever it occurs, and this is what the world is witnessing passively in Afghanistan. 
Does diversity authorize such brutal deaths and senseless violence against women simply because some supposedly traditional practice allows them to be married before their bodies are ready and denies them health care when they give birth? 
The fight against maternal mortality in Afghanistan must become a global priority. 
Ultimately, a society that allows women to be brutalized will remain a breeding ground of generalized violence. 

Afghanistan’s Feminist Revolution 
On April 16, more than 300 Afghani women – many of them students – marched together in Kabul in protest of a new law passed by Parliament that would impose a series of Taliban-like restrictions on women. 
The law would permit marital rape, limit women’s movements – say, for work or study – without male permission, and even make it illegal for a woman to refuse to dress as her husband wishes. 
The women, facing a crowd of furious men calling them “whores” and other epithets, marched two miles under a rain of abuse and delivered their petition against the law to legislators. 
Both houses of Parliament had approved the law, and President Hamid Karzai signed it. 
The law now affects only the Shia minority, but threatens to affect pending legislation that could restrict the rights of non-Shia women as well. 
When Western media sought quotes from the women, they frequently heard a Western-style feminist refrain: “These laws would make women into a kind of property.” 
In the West, the counterpoint to the notion of woman as property has been a highly individualistic demand for personal autonomy – decision-making based primarily on a woman’s own wishes, rather than as wife, mother, community member, or worshipper. 
But, while some Western feminist insights may be useful to Afghani women and other women in the developing world as they resist certain forms of male oppression, we should not assume – as Western feminists often have – that our job is to proselytize “our” feminism. 
On the contrary, the feminism expressed by women such as these Afghani heroines should educate us in the West about our own shortcomings. 
The core theory with which emerging feminists in more traditional and religious societies are working is far different from that of Western feminism – and in some ways far more profound and humane. 
In India, for example, feminists articulated to me a vision of women’s equality that was family-centered rather than self-centered, and that valued service to community rather than personal gratification. 
They did not see their struggle as a cultural or ideological clash between men and women, but rather as a very practical effort to live free from violence and sexual assault, forced child marriage and bride-burning, and legal exclusion from parity. 
The emerging consensus in India in support of greater rights and freedoms for women, while certainly causing some upheaval and adjustment (especially within the growing middle classes) has not yet – and might never – poison the basic trust and warmth between men and women. 
Nor does it seem likely to emulate the splintered, individualized, solitary society – and the commodified sexual revolution – that Western, self-based feminism reflects. 
This version of feminism – the notion that women can claim equality and still have a valued role in the home, prize family above all, and view rights in the context of community and spirituality – seems like a much-needed corrective to some of Western feminism’s shortcomings. 
Ideally, men’s drive for progress in the developing world would also evolve, uniting the idea of the autonomous self with support for family, community, and other ties, and Western men would learn from this as well. 
Moreover, intellectually, these women remind us that Western feminism did not have to evolve the way it did, and can still change and grow to embrace a more satisfying and humane definition of equality. 
Simone de Beauvoir, whose seminal book The Second Sex laid the groundwork for post-war Western feminism, was an Existentialist who was neither a wife nor a mother nor a woman of faith. 
So her work naturally posited female freedom in a secular, solitary, and individualistic context, in which “freedom” means pure autonomy rather than integration within a whole – comprising family, community, and even God – on equal terms. 
The good news for all women, East and West, is that President Karzai, under intense international criticism – and not just Western criticism – changed the law less than one week after the march. 
This global uproar is a testament to how three decades of Western feminist challenges to leadership have changed the world for the better. 
But our (Western) moment of feminist leadership is over now – for good reasons. 
We know by now what our problems are as women in the West, and we know the blueprint for solving them. 
What we lack now is not analysis, but the organizational and political will to do so. 
So the leadership role is shifting to women in the developing world. 
Their agenda is more pressing, and their problems, frankly, far more serious than ours, which makes it much more urgent for them to develop theories appropriate to the challenges they face. 
If one of those courageous Afghan women who marched in Kabul wrote – as I hope she or one of her sisters in the developing world is doing right now – the seminal text for the next 50 years on non-Western feminism, it would no doubt be equality-driven and practical. 
And perhaps, in its likely view of the world as being more than the sum of consuming, competing autonomies, or gender warfare, it would be a valuable challenge to truisms that we Western feminists – and the men who love us – have thought we had to take for granted. 

Afghanistan’s Opium War 
When NATO leaders meet for their summit in Riga at the end of this month, there will be a ghost at the feast: Afghanistan’s opium. 
Afghanistan is in danger of falling back into the hands of terrorists, insurgents, and criminals, and the multi-billion-dollar opium trade is at the heart of the country’s malaise. 
Indeed, NATO’s top general, James Jones, has called drugs the “Achilles heel” of Afghanistan. 
This year’s record harvest of 6,100 tons of opium will generate more than $3 billion in illicit revenue – equivalent to almost half of Afghanistan’s GDP. 
Profits for drug traffickers downstream will be almost 20 times that amount. 
Opium money is corrupting Afghan society from top to bottom. 
High-level collusion enables thousands of tons of chemical precursors, needed to produce heroin, to be trucked into the country. 
Armed convoys transport raw opium around the country unhindered. 
Sometimes even army and police vehicles are involved. 
Guns and bribes ensure that the trucks are waved through checkpoints. 
Opiates flow freely across borders into Iran, Pakistan, and other Central Asian countries. 
The opium fields of wealthy landowners are untouched, because local officials are paid off. 
Major traffickers never come to trial because judges are bribed or intimidated. 
Senior government officials take their cut of opium revenues or bribes in return for keeping quiet. 
Perversely, some provincial governors and government officials are themselves major players in the drug trade. 
As a result, the Afghan state is at risk of takeover by a malign coalition of extremists, criminals, and opportunists. 
Opium is choking Afghan society. 
Within Afghanistan, drug addiction is rising. 
Neighbors that used to be transit states for drugs are now major consumers, owing to similar dramatic increases in opium and heroin addiction. 
Intravenous drug use is spreading HIV/AIDS in Iran, Central Asia, and the former Soviet Union. 
In traditional Western European markets, health officials should brace for a rise in the number of deaths from drug overdoses, as this year’s bumper opium crop will lead to higher-purity doses of heroin. 
What can be done? 
First, the veil of corruption in Afghanistan must be lifted. 
Afghans are fed up with arrogant and well-armed tycoons who live in mansions and drive top-of-the range Mercedes limousines – this in a country where barely 13% of the population have electricity and most people must survive on less than $200 a year. 
It is time for the Afghan government to name, shame, and sack corrupt officials, arrest major drug traffickers and opium landlords, and seize their assets. 
Donors have trained police and prosecutors and built courts and detention centers. 
Now it is up to the government to use the judicial system to impose the rule of law. 
It will be difficult, but not impossible, to re-establish confidence in the central government. 
Putting major drug traffickers behind bars at the new maximum-security prison at Pul-i-Charki, near Kabul, would be a good start. 
Of course, Afghanistan does not bear sole responsibility for its plight. 
The heroin trade would not be booming if Western governments were serious about combating drug consumption. 
It is a bitter irony that the countries whose soldiers’ lives are on the line in Afghanistan are also the biggest markets for Afghan heroin. 
Furthermore, Afghanistan’s neighbors must do more to stop insurgents, weapons, money, and chemical precursors from flowing across their borders into the country. 
Coalition forces should take a more robust approach to the drug problem. 
Counter-insurgency and counter-narcotics are two sides of the same coin. 
Improving security and the rule of law must include destroying the opium trade. 
Allowing opium traffickers to operate with impunity gives them a free hand to raise money to pay for the arms and fighters battling the Afghan army and NATO forces. 
The United Nations Security Council has authorized the International Security Assistance Force to take all necessary measures to fulfill its mandate. 
NATO troops should be given the green light to help the Afghan army fight opium – destroy the heroin labs, disband the opium bazaars, attack the opium convoys, and bring the big traders to justice. 
And they should be given the tools and manpower to do the job. 
There is no point in trying to win the hearts and minds of major drug traffickers. 
Farmers are a different story. 
Forced eradication risks pushing farmers into the hands of extremists, and thus will not lead to the sustainable reduction of opium fields. 
Indeed, as we have seen in some Andean countries, it can be counter-productive. 
Therefore, security and development must go hand in hand. 
To achieve this, Afghanistan needs more development assistance. 
International support so far has been generous, but it is still well below per capita equivalents for other post-conflict situations – and the need is much greater. 
Farmers will be weaned off opium over the long term only if they have sustainable livelihoods. 
At the moment, Afghanistan’s drug lords are prospering, and rural communities are suffering. 
That situation needs to be reversed. 
We must punish the traffickers and reward the farmers. 
We cannot afford to fail in Afghanistan. 
Recent history has given us graphic evidence of what would happen if we do. 
But any solution in Afghanistan depends on eliminating its opium. 


How to Help the African Dust Bowl 
SEATTLE – Picture a small farm under a blazing hot sky. 
An intense drought is afflicting the surrounding region, prospects for the next harvest are bleak, and the financial system lacks the capacity to provide the loans farmers need to get by. 
This scenario describes today’s southern Africa, which is in the grips of an epic drought. 
As it happens, it also describes eastern Nebraska in the “Dust Bowl” years of the early 1930s – a period through which my own family lived. 
My father, Ralph Raikes, was the first in his family to graduate from college. 
After working for Standard Oil in California, he stopped by his parents’ farm on his way to Cambridge, Massachusetts, where he planned to pursue graduate studies at MIT. 
He never made it. 
He had to stay in Nebraska and help my grandfather save the family farm from the banks, which had already repossessed one-third of the land. 
The most important change my father made was in his mindset: he came to think of the farm not as a subsistence operation, but as a family business. 
He turned to the University of Nebraska, where he had received his undergraduate degree, and acquired hybrid corn and other improved seeds that the university was developing. 
Then he tracked inputs and weather conditions, which was rarely done at that time. 
My father realized that he couldn’t go it alone, and that he would need better access to financing. 
So he helped guide – first as a customer, and later as an adviser and director – Farm Credit, a national banking cooperative network, in its efforts to help local farmers weather the Dust Bowl years. 
He also helped found the Nebraska Farm Business Association, which aggregated the data that he and his peers collected, so that they could determine best practices. 
And he worked together with my mother, Alice, who ran the family poultry business. 
Farm Credit and the University of Nebraska’s labs and greenhouses emerged out of United States government programs that had been created to improve the agriculture sector’s performance. 
That sector was under water in 1933; with one-quarter of the population living on farms at the time, more investment was needed. 
That year, Congress passed the first “farm bill,” the Agricultural Adjustment Act, which boosted investment in the rural economy and helped lift farm income by 50% within two years. 
Federal farm programs treated farming as a business enterprise, enabling businessmen like my father to prosper. 
Eighty years later, African farmers need to make the same switch, by treating their subsistence operations as family-owned enterprises. 
And, like my father during the Dust Bowl years, they have novel means at their disposal: a wide range of new seeds and other technologies have been developed for African family farms – those with 4-5 acres or less – to use in the field. 
In October, a group of scientists received the World Food Prize for producing and disseminating a sweet potato variety that adds vitamin A to Sub-Saharan Africans’ diets, and other new seed varieties are helping farmers survive the harvest-crushing drought. 
But, as a recent report from the Alliance for a Green Revolution in Africa (AGRA) makes clear, government investment must follow the science. 
Agriculture comprises almost two-thirds of Sub-Saharan Africa’s workforce, and in 2003 the African Union called for countries to increase their investment in the sector to an ambitious 10% of all government spending. 
Only 13 countries answered that call, but their investments – in research and development, services that help farmers take advantage of new research findings, credit and financing initiatives, commodity exchanges, and other marketing efforts – have already paid dividends. 
Those 13 countries have experienced marked improvements in agricultural production, per capita GDP, and nutrition. 
Government investment paves the way for private-sector investment, and it could be a game-changer for African farmers, who have operated at subsistence levels for far too long. 
Only about 6% of rural households in Sub-Saharan Africa receive loans from financial institutions. 
Moreover, almost two-thirds of African farmland soil is missing key nutrients, and many farmers lack the technical knowledge and resources to restore their land’s fertility, leaving them unable to take full advantage of new technologies. 
African farmers growing new crop varieties are increasing their yields by only 28%, compared to 88% for farmers in Asia. 
My parents made certain that all five of their children graduated from college. 
Like them, farmers everywhere want to ensure that their children lead healthy, prosperous lives; and they all recognize the importance of education. 
The farmers I have met around the world often just want to sell enough extra produce to pay their health bills and put their children through school. 
They take advantage of opportunities when they arise, and they position their children to reap larger profits in the future. 
One hopes that an American story of economic progress, like that of my family, will soon be an African story, too. 
With so many new innovations becoming available, Africa’s family farmers need their governments to invest in their future. 
If they do, that future will look much better than today’s dusty and desperate reality. 

Three Humanitarian Challenges for Africa in 2018 
NAIROBI – In mid-2017, when a cholera outbreak in Somalia threatened to overwhelm local hospitals, health experts feared the worst. 
With crippling drought, malnutrition, and poverty already endemic, an outbreak of deadly diarrhea seemed destined to paralyze the fragile state. 
But, despite the dire predictions, institutional paralysis was avoided. 
Although hundreds died and many more became sick, the collective response managed by governments, NGOs, and local communities, including the national Red Crescent Societies supported by the Red Cross movement, contained the disease. 
Somalia’s experience gives me great hope for Africa’s future. 
But it also serves as a reminder that local capacity is easily inundated during times of crisis. 
While some parts of Africa have become self-sufficient in terms of public health, others continue to lean heavily on global aid. 
For these areas, partnership is the best means of minimizing risks. 
In particular, three key challenges this year are likely to pose the severest tests of Africa’s ability to manage humanitarian crises. 
The first challenge is violence in the Democratic Republic of the Congo. 
Last year, conflict in the DRC’s central Kasai region displaced some 1.4 million people, bringing the total displaced population to 4.1 million – the largest concentration of internal refugees anywhere in Africa. 
The violence has exacerbated food insecurity, with more than three million people severely undernourished. 
Unfortunately, the Kasai crisis is expected to worsen in 2018. 
A recent assessment by the Red Cross Society of the DRC warns that the number of people displaced will continue to rise, and with a fast-spreading cholera outbreak threatening the region, a coordinated plan of action is urgently needed. 
The second challenge this year is Somalia’s food insecurity, which, according to the Famine Early Warning Systems Network, is expected to intensify this year. 
Below-average rainfall in 2017 stunted harvests, and most regions have not fully recovered. 
As humanitarian aid is channeled to the country, efforts must be made to target long-term solutions, such as improving agricultural output, educational access, and economic opportunity. 
Historically, most aid to the country has been earmarked for emergency relief; even the collective cholera response was narrowly focused on short-term health. 
But Somalia desperately needs a more holistic, long-term development strategy. 
Finally, the very scourge that Somalia contained last year will continue to rear its head elsewhere in the region. 
Yemen’s cholera outbreak is now the largest in history, having already surpassed one million confirmed cases, and, despite years of international assistance, the threat continues to stalk Africa. 
In the last four decades, African countries reported over three million suspected cholera cases to the World Health Organization and new cases are cropping up this year in Africa’s east-central and southern regions. 
Fortunately, there is hope that Somalia’s containment success in 2017 can be replicated, provided that communities and individuals are well aware of the disease and related risks, and that local actors receive the needed resources. 
The Global Task Force on Cholera Control, which seeks to build local and international support for improved health care and sanitation, has published a global roadmap for ending cholera by 2030. 
Although that is an ambitious target, it is achievable if international organizations and local governments work together. 
Natural and manmade crises will continue to plague Africa, but organizations like mine are working hard to bring about a brighter future through improved capacity building. 
To succeed, however, local and international development partners must reorient their thinking; humanitarian aid alone will not solve Africa’s myriad challenges. 
While money is clearly needed, it must be spent more strategically to improve structural weaknesses that perpetuate instability. 
For example, if more funding were devoted to community-level health care projects, local organizations would be better positioned to lead when outbreaks threaten. 
Put simply, the international development community must do more to invest in grassroots solutions, empowering Africans rather than treating them as subcontractors to their own suffering. 
Not only are local organizations better positioned to navigate complex cultural and linguistic landscapes; they also have more to lose if they fail. 
Last year was devastating for many Africans, as millions suffered from drought, hunger, and violence. 
But in Somalia, a coordinated response to a serious health threat offered new hope for a more secure future. 
When local ingenuity and international support align, the cycle of suffering can be broken. 
For many African countries, the ability to look confidently beyond the next crisis is the first step on the long road to self-reliance. 

Capitalizing on Africa’s Demographic Dividend 
LOMÉ – Africa is home to the world’s youngest and fastest-growing population. 
With as many as 20 million young people poised to join the workforce every year for the next three decades, the continent has an opportunity to shift the balance of local and global growth with a purpose: jobs. 
But it is far from inevitable that it will do so. 
For African countries to capitalize on this demographic dividend, the future workforce must be educated, trained, and have adequate employment opportunities. 
Putting all the pieces in place will not be easy. 
These are uncertain times for the global economy. 
Trade tensions between the United States and China are threatening the integrity of global value chains, and Britain’s looming exit from the European Union has the potential to cause even more disruption. 
The International Monetary Fund’s October forecast warns that as historic economic drivers stall, global growth this year and next could fall to 3.7%, a decline of 0.2 percentage points from previous estimates. 
But as this slowdown gets priced in by stock markets around the world, new drivers of growth will emerge. 
Africa is well positioned to become one of them. 
According to the World Bank, six of the world’s ten fastest-growing economies are in Africa. 
Intra-African trade might be the gateway to future local and global growth, with the continent’s burgeoning population forging new opportunities across borders. 
Most significantly, Africa’s labor force is on the verge of a dramatic expansion. 
Today, 60% of Africans are younger than 25, and 41% are under the age of 15. 
By 2050, Africa’s youth population is expected to reach 840 million. 
But this massive pool of potential talent is a double-edged sword. 
Despite strong GDP growth over the last ten years, the majority of young people in Africa could not capture economic opportunities. 
Furthermore, the African Union/OECD report Africa’s Development Dynamics 2018 highlights that if the underemployment trend continues, Africa’s young people will suffer the most. 
Failing to employ Africa’s young people fully could marginalize an entire generation and lead them down a path of disruption for which we may not be prepared. 
For countries to experience job-led long-term growth, the provision of quality opportunities in agriculture is vital. 
If that does not happen, and quality jobs remain scarce, the economic expansion of which Africa is capable will not happen. 
In other words, African governments are facing a deadline to match job growth with skills training. 
Unfortunately, at the moment, few countries are addressing this challenge effectively. 
According to the African Development Bank, the unemployment rate for young people in Africa is already double the rate for adults. 
In fact, young people are being let down even before they start looking for work. 
Too many primary schools suffer from crippling teacher shortages, for example, and gender discrimination prevents millions of girls from even attending high school. 
To overcome these shortcomings will require significant investments of political and financial capital. 
Some leaders are moving in this direction. 
At the Paris Peace Forum (PPF), held earlier this month, African and global leaders gathered to discuss the powerful idea that international cooperation is the key to tackling global challenges and ensuring durable peace. 
On the sidelines of the PPF, the focus fell on African youth. 
The AU-EU Youth Cooperation Hub, one of 119 projects selected to participate in the Forum, attended the meeting to discuss the AU-EU Youth Agenda. 
Striving to involve young people across Africa and Europe in decisions that impact them, now and in the future, this initiative aims to showcase strategies for bringing Africa and Europe together to address challenges such as the demographic dividend. 
One approach to capitalizing on Africa’s demographic boom is to expand the availability of training initiatives that pair employers’ needs with African talent. 
As a former fellow with the Ibrahim Leadership program, I can attest to the transformative power of top-tier educational schemes and their value as incubators for job-related skills. 
Africa’s success relies on its ability to harness its demographic dividend by equipping its youth with technological and innovative skills, which will be a catalyst for economic growth. 
This includes training and agriculture-focused programs to absorb skills along the value chains that connect raw materials to industries and markets across Africa. 
By 2030, one in every five people on the planet will be African. 
Because of its size alone, Africa’s labor force will have the potential to drive global growth for decades. 
But to do so, Africans must implement the necessary reforms today. 
As our demographic dividend matures, governments, institutions, and organizations must help position young people for success. 
If African countries can meet this challenge, prolonged economic growth – at home and abroad – will be the reward. 

Africa’s Path from Poverty 
BEIJING – All low-income countries have the potential for dynamic economic growth. 
We know this because we have seen it happen repeatedly: a poor, agrarian economy transforms itself into a middle- or even high-income urban economy in one or two generations. 
The key is to capture the window of opportunity for industrialization arising from the relocation of light manufacturing from higher-income countries. 
That was true in the nineteenth and twentieth centuries, and it remains true today. 
Japan seized its opportunity in the years following World War II, using labor-intensive industries, such as textiles and simple electronics, to drive its economy until rising labor costs eroded its comparative advantage in those sectors. 
That shift then allowed other low-income Asian economies – South Korea, Taiwan, Hong Kong, Singapore, and to some extent Malaysia and Thailand – to follow in Japan's footsteps. 
China, of course, is the region's most recent traveler along this well-trodden path. 
After more than three decades of breakneck economic growth, it has transformed itself from one of the poorest countries on earth to the world's largest economy. 
And now that China, too, is beginning to lose its comparative advantage in labor-intensive industries, other developing countries – especially in Africa – are set to take its place. 
Indeed, ever since the Industrial Revolution, the rise of light manufacturing has driven a dramatic rise in national income. 
The United Kingdom's economic transformation started with textiles. 
In Belgium, France, Sweden, Denmark, Italy, and Switzerland, light manufacturing led the way. 
Similarly, in the United States, cities like Boston, Baltimore, and Philadelphia became centers for producing textiles, garments, and shoes. 
Until recently, few believed that Africa, too, could become a center for modern manufacturing. 
But, with the right policies, there is no reason why African countries could not follow a similar trajectory. 
Consider land-locked Ethiopia, which only ten years ago seemed to be an especially bad bet. 
But then the country built an industrial park near Addis Ababa and invited the Chinese shoemaker Huajian to open a factory there. 
Huajian opened its doors in January 2012 with two production lines and some 600 workers. 
By the end of the year, it had employed 2,000 Ethiopians and doubled the country's exports of leather shoes. 
Today, the company has 3,500 workers in Ethiopia producing more than two million shoes a year. 
In 2013, spurred by Huajian's success, the Ethiopian government created a new industrial park, with space for 22 factory units. 
Within three months, all of them had been leased by export-oriented companies from Turkey, Korea, Taiwan, China, and elsewhere. 
The World Bank has provided $250 million to support the continued construction of these industrial parks. 
The Ethiopian success story is just the start. 
As investors learn more about Africa, they will increasingly see what it has to offer. 
Indeed, the cost of labor in Africa is competitive enough that Ethiopia could attract companies from countries as poor as Bangladesh. 
Africa has a surplus of agricultural labor and too few other jobs. 
As foreign firms launch operations in the labor-intensive sectors in which Africa has a comparative advantage, they will train the local workforce. 
Some workers will become managers. 
They will become familiar with the technology and learn how to maintain consistent quality in the production line. 
They will establish contacts with international buyers and investors. 
And, eventually, some of them will be able to raise capital and start firms of their own – export companies owned and operated by Africans. 
Mauritius shows the path ahead. 
In the 1970s, the government set up industrial parks to process textiles and garments for export. 
At the time, most of the owners were from Taiwan or Hong Kong; today, more than 70% of the island's industrial companies are locally owned. 
A carefully focused export strategy is crucial. 
The international development community and many African governments want to work toward regional integration, linking the markets of 55 African countries. 
This might have its advantages, but it should not be a priority. 
Africa today accounts for just 1.9% of global GDP, compared to 21% for the United States and 23% for Europe. 
Developing countries must use their limited resources in the most effective way, and there is no question where the most attractive opportunities in Africa are to be found. 
For example, instead of investing heavily in the infrastructure needed for regional integration, a country like Ethiopia would be better off building industrial parks and linking them by road to ports in Djibouti. 
With the right growth strategy, far-reaching change can come within a person's lifetime – sometimes more than once. 
My native Taiwan is now a high-income economy. 
But when I was born there, in 1952, the island was poorer than almost every country in Africa. 
Then it happened to me again. 
I moved to mainland China in 1979, when the country's per capita income was less than one-third of Sub-Saharan Africa's. 
Today, China has become an upper-middle-income country, and it is on track to become a high-income country by 2020. 
My hope is that I can witness a third economic transformation in my lifetime, this time in Ethiopia and other countries in Africa. 
If they stay on the tried and tested path of those who have gone before, there is every chance that I will. 

The Promise of Digital Health 
BASEL – Africa has changed remarkably, and for the better, since I first worked as a young doctor in Angola some 20 years ago. 
But no change has been more obvious than the way the continent has adopted mobile technology. 
People in Africa – and, indeed, throughout low- and middle-income countries – are seizing the opportunities that technology provides, using mobile phones for everything from making payments to issuing birth certificates, to gaining access to health care. 
The benefit of mobile technologies lies in access. 
Barriers like geographical distance and low resources, which have long prevented billions of people from getting the care they need, are much easier to overcome in the digital age. 
And, indeed, there are countless ways in which technology can be deployed to improve health-care access and delivery. 
Of course, this is not new information, and a growing number of technology-based health initiatives have taken shape in recent years. 
But only a few have reached scale, and achieved long-term sustainability; the majority of projects have not made it past the pilot phase. 
The result is a highly fragmented landscape of digital solutions – one that, in some cases, can add extra strain to existing health systems. 
The first step to addressing this problem is to identify which factors breed success – and which impede it. 
Here, perhaps the most important observation relates to how the solution is linked to the reality on the ground. 
After all, technology is an enabler for the innovation of health-care delivery, not an end in itself. 
Solutions that focus on end-users, whether health practitioners or patients, have the best chance of succeeding. 
Fundamental to this approach is the recognition that what users need are not necessarily the most advanced technologies, but rather solutions that are easy to use and implement. 
In fact, seemingly outdated technologies like voice and text messages can be far more useful tools for the intended users than the latest apps or cutting-edge innovations in, say, nanotechnology. 
Consider the Community-based Hypertension Improvement Project in Ghana, run by the Novartis Foundation, which I lead, and FHI 360. 
The project supports patients in self-managing their condition through regular mobile medication reminders, as well as advice on necessary lifestyle changes. 
This approach is successful because it is patient-centered and leverages information and communication technology (ICT) tools that are readily available and commonly used. 
In a country where mobile penetration exceeds 80% but only a few people have smartphones, such simple solutions can have the greatest impact. 
For health practitioners, digital solutions must be perceived as boosting efficiency, rather than adding to their already-heavy workload. 
Co-creating solutions with people experienced in delivering health care in low-resource settings can help to ensure that the solutions are adopted at scale. 
For example, the telemedicine network that the Novartis Foundation and its partners rolled out with the Ghana Health Service was a direct response to the need, expressed by health-care practitioners on the ground, to expand the reach of medical expertise. 
The network connects frontline health workers with a simple phone call to consultation centers in referral hospitals several hours away, where doctors and specialists are available around-the-clock. 
From the outset, the project was a response to an expressed need to expand the reach of medical expertise, and was fully operated on the ground by Ghana Health Service staff, which made this model sustainable at scale. 
To realize the full potential of digital health, solutions need to be integrated into national health systems. 
Only then can digital technology accelerate progress toward universal health coverage and address countries’ priority health needs. 
Collaboration across the health and ICT sectors, both public and private, is essential. 
Multidisciplinary partnerships driven by the sustained leadership of senior government officials must guide progress, beginning at the planning stage. 
Intra-governmental collaboration, dedicated financing for digital health solutions, and effective governance mechanisms will also be vital to successful strategies. 
Digital technologies offer huge opportunities to improve the way health care is delivered. 
If we are to seize them, we must learn from past experience. 
By remaining focused on the reality of end-users and on priority health needs, rather than being dazzled by the latest technology, we can fulfil the promise of digital health. 

Confronting Africa’s Water Challenge 
ABIDJAN – Water is essential for life, and yet it is scarce in many parts of the world. 
Owing to the effects of climate change, Africa is experiencing its worst drought since 1945, especially in Southern Sudan, Somalia, Ethiopia, and Northern Nigeria. 
These fragile areas now need the global community’s support. 
We need to build resilient systems to ensure access to potable water for all people, and to improve water-delivery and sanitation provisions in Africa’s rapidly growing urban areas. 
We should begin by expanding Africans’ capacity to harness wastewater. 
With investment and proper management, wastewater can become a sustainable source of wealth for many Africans, with added benefits for human health, agricultural productivity, and environmental sustainability. 
Over the past six years, the African Development Bank has invested $3.3 billion in projects to expand access to water and improve sanitation, with around $2.2 billion of that going to urban services that reach at least 17 million people. 
The AfDB supports an integrated urban water-management model (IUWM) that, in keeping with United Nations Sustainable Development Goal 6, enables communities to derive a sustainable income from management of urban liquid and solid waste. 
IUWM efforts require a significant initial investment, and come with steep capital and operational costs. 
Only a few African cities collect and treat any more than 20% of the wastewater generated through centralized wastewater-management systems. 
The remaining 80% constitutes a huge untapped source of potentially valuable liquid and solid waste. 
With the right investment, foresight, and commitment, this underappreciated resource can create jobs and deliver sustainable growth. 
Wastewater management is thus a central feature of the AfDB’s strategic priorities, known as the High 5s, which aim to improve Africans’ quality of life, boost public health, achieve gender equality, create jobs, and increase communities’ resilience to the effects of climate change. 
Water will also play a key role in reaching the High 5s’ industrialization and sustainable-farming objectives. 
In Yaoundé, Cameroon, the AfDB helped to protect some 300,000 people and their property by reducing the frequency of floods from 15 incidents per year to just three. 
And with a $40 million sanitation project, the AfDB helped to lower the proportion of the city’s malaria-afflicted population from 16% to 12%. 
In Abidjan, Côte d’Ivoire, the $23 million AfDB-funded Gourou Basin Integrated Watershed Management Project significantly reduced flooding throughout the Gourou Basin, and improved 2.8 million inhabitants’ livelihoods. 
In Zimbabwe, after 4,300 people died in the 2008-2009 cholera pandemic, the AfDB and other donors supported the $43.6 million Urgent Water Supply and Sanitation Rehabilitation Project, which made emergency repairs to wastewater systems in urban areas, helping 2.5 million people. 
All AfDB-supported wastewater-management systems follow sustainability strategies to ensure that they enhance economic gains, benefit local communities, and remain affordable. 
These projects also help countries to harness and use waste flows, by converting sewage to biogas and fertilizer. 
Meanwhile, the AfDB’s African Water Facility (AWF) complements its project-finance work by attracting downstream investments in water infrastructure. 
In February, flooding and strong winds from Tropical Storm Dineo devastated the coast of Mozambique and had a severe impact on the local population. 
But just a few weeks later, the AWF launched a feasibility study to improve livelihoods and climate-change resilience throughout Mozambique’s Inhambane Province, where the storm struck. 
In collaboration with the Global Water Partnership, the AWF is implementing IUWM systems in five African cities, including Kinshasa in the Democratic Republic of Congo and Marondera in Zimbabwe. 
In the DRC alone, IUWM systems can be expected to improve water delivery and sanitation for 17 million people by 2030. 
The Bill & Melinda Gates Foundation is also tapping into the AfDB’s expertise, by providing an $18 million grant to fund Phase II of the AfDB’s Urban Sanitation Program. 
This effort will help to develop business innovations for affordable and sustainable sanitation services in Africa, which could reach two million urban dwellers directly and another six million people through subsidiary projects. 
Africa’s wastewater-management challenges are substantial and complex. 
But the AfDB is determined to provide opportunities that pay dividends for African communities – in public health, improved sanitation, economic development, and environmental protection. 
Improving the quality of life for all Africans will require political commitment, public-private partnerships, and robust public involvement. 
With the High 5s framework, the AfDB is working to bring these three ingredients together. 
All stakeholders – in Africa and internationally – must redouble our efforts to ensure clean, affordable water for all, and to support African countries suffering through a historic drought. 
We have a moral obligation to do so. 
After all, water means life. 

Africa Still Rising 
JOHANNESBURG – Is the honeymoon over for African economies? 
Less than a decade ago, it seemed that the continent’s economic dreams were beginning to come true, with many countries experiencing impressive GDP growth and development. 
Now, as the harsh reality of the continent’s vulnerability to challenging external conditions has set in, sustaining that growth has proved difficult. 
Encumbered by slowing growth in China, a collapse in commodity prices, and adverse spillover from numerous security crises, Africa’s overall annual GDP growth averaged just 3.3% in 2010-2015, barely keeping up with population growth – and down sharply from the 4.9% recorded from 2000 to 2008. 
But a deeper look suggests that things may not be as bad as they seem, for two key reasons. 
First, though average growth has declined, some African economies have thrived in recent years. 
Indeed, aggregate GDP has been dragged down since 2010 by faltering growth among oil exporters and security-related crises in the Sahel and North Africa; but in the rest of Africa, GDP growth has accelerated, from 4.1% in 2000-2010 to 4.4% in 2010-2015. 
Second, Africa is undergoing a profound long-term transformation, characterized by rapid digitization, urbanization, and growth in the working-age population, which will outnumber the labor force of China and India by 2034. 
That demographic trend could unlock future growth by advancing economic diversification, spurring domestic consumption, and supporting industrialization. 
In fact, today’s high-growth countries – including Côte d’Ivoire, Ethiopia, Kenya, and Tanzania – have made substantial progress in reducing their dependence on commodity exports, in favor of trade, investment, and domestic consumption. 
And many lower-growth countries could head down a similar path. 
New research by the McKinsey Global Institute (MGI) shows that spending by Africa’s consumers and businesses already totals $4 trillion. 
By 2025, private spending could reach $5.6 trillion – $2.1 trillion by households, and $3.5 trillion by businesses. 
This represents a huge opportunity for Africa���s manufacturers. 
We believe that Africa can almost double its manufacturing output, to nearly $1 trillion, by 2025, with about 75% of that growth tied to production for local markets. 
The question is whether manufacturers will manage to exploit the growth potential that lies in front of them. 
African firms have not yet proved capable of meeting existing domestic demand. 
Africa still imports about one-third of the food, beverages, and similar processed goods it consumes, whereas the Association of Southeast Asian Nations imports about 20%, and South America’s Mercosur trade bloc imports just 10%. 
Africa even imports 15% of the cement it uses, despite having abundant raw materials to make it at home. 
To be sure, African business has made great strides in recent years. 
Today, 400 African companies have annual revenue of more than $1 billion, and 700 have annual revenue of more than $500 million. On the whole, these large companies are growing faster – and generating higher profits – than their global peers. 
But there is still a long way to go. 
Large African (excluding South African) firms’ average annual revenue of $2 billion is half that of large firms in Brazil, India, Mexico, and Russia. 
And Africa only has about 60% of the large firms it needs to put it at the same level as the emerging economies. 
One key factor limiting firms’ growth is the fragmented nature of the African market, which currently comprises mostly small economies with only limited economic and political linkages. 
There are eight partly overlapping regional trade zones, none of which includes more than half of Africa’s countries. 
Only Egypt, Morocco, Nigeria, and South Africa rank in the top 100 of MGI’s Global Connectedness Index. 
Beyond excessive trade barriers, Africa suffers from inadequate transport links and limits on the free movement of people. 
Africans need visas to travel to more than half the countries on their own continent. 
The recent launch of the African Union passport is a step in the right direction – but it is only one step. 
A more integrated market would not only enable African companies to create the economies of scale they need to compete; it would also be far more appealing to institutional investors. 
Building such a market must therefore be a top priority for African leaders, as they seek to unleash the continent’s economic potential. 
Equally important, Africa’s leaders must work to improve the business environment. 
Though some progress has been made on this front in the last two decades, non-tariff barriers remain high. 
Indeed, regulatory issues are still cited as a serious deterrent to investment. 
Many African businesses – nearly half of companies in Nigeria, and more than one-third in Angola and Egypt – highlight unreliable electricity supplies as a major challenge. 
And almost 40% of firms surveyed by the World Bank lament the constraints imposed by competition from informal firms. 
Some of these issues could be addressed relatively quickly. 
Consider the strides Rwanda has made since 2007, when it established a development board to improve its business environment. 
In less than a decade, that board has led the creation of a “one-stop center” to facilitate investment, has overseen streamlined issuance of construction permits, and has pressed successfully for a fixed fee for property registration, the extension of customs hours, and risk-based customs inspections. 
As a result, Rwanda’s global ranking for the ease of doing business jumped from 143 in 2008 to 32 in 2014. 
This success can surely be replicated elsewhere in Africa. 
Despite the challenges some African countries face, the continent’s economic potential remains massive, thanks to favorable demographic dynamics, fast-growing cities, burgeoning domestic markets, and a digital revolution. 
With the right policies, a relentless focus on execution, and a great deal of determination, Africa can still rise. 


Africa’s Schooling Without Learning 
ACCRA – As the school year began this September, there was welcome news for Ghana’s nearly half-million students entering high school: President Nana Akufo-Addo had fulfilled his campaign promise of free secondary education for children nationwide. 
He swore not only to do away with admissions fees, but also to provide free textbooks and meals, the cost of which had often remained a barrier for the poorest students. 
Ghana had introduced free compulsory education at the primary and junior high school levels in 1995, but implementation had been painfully slow – and students’ educational dreams were often cut off before high school. 
Even in 2014, only 37% of the nation’s students were enrolled in secondary school, owing to high fees. 
The president’s move is thus an inspiring example that Ghana’s neighbors should follow. 
Unfortunately, despite progressive reforms like these, students across Africa still face other steep barriers to a truly comprehensive education. 
In Ghana, for example, poor and rural children are unlikely to reap the full benefits of their new access to secondary education. 
The situation is arguably worse elsewhere on the continent. 
The issue is not only lack of access to schools, but also lack of good schools. 
The results of a staggering new report from the UNESCO Institute of Statistics show that six out of ten children and adolescents around the world – 600 million in total – are not achieving basic skills in mathematics and reading. 
In Sub-Saharan Africa, it is estimated that 88% of children and teenagers will enter adulthood without basic literacy. 
This constitutes a moral and development crisis that demands immediate action. 
Having served as head of the department of Ga-Dangme education at the University of Education in Winneba, I know from first-hand experience that one of the main problems is lack of education and absenteeism among teachers themselves. 
The World Bank, which similarly raised the issue of “schooling without learning” in a new report, has corroborated my view. 
Addressing this issue requires investing more in teachers’ colleges, promoting teaching as the career of nation-builders, and encouraging the best and brightest students to aspire to a teaching career. 
We cannot expect students to learn from poorly educated, poorly paid teachers. 
We must also invest more in resources for schools and learning across the board, from scholarships for poor students to new libraries and classroom equipment. 
With so many African governments already failing to provide equal, high-quality access to education for their citizens, this is not a challenge that they can take on alone. 
As the continent’s population booms – half of the world’s population growth between 2017 and 2050 is expected to occur here – African heads of state will have to work closely with key allies and multilateral organizations to bring in funding and share know-how. 
Fortunately, with the launch of the UNESCO report, several partners have already stepped up. 
French President Emmanuel Macron is perhaps the most prominent of those who have promised to make investment in education in Africa a high priority. 
As the UN’s main educational and cultural organization, UNESCO itself will play a key role in promoting initiatives to bring free, high-quality schooling to students across the continent. 
And whoever takes over UNESCO, following the election of a new director-general next month, will have a make-or-break opportunity to craft the right agenda to meet this challenge. 
Currently, the organization is mired in a financial crisis and internecine disputes, and it will need a leader who has the vision to solve both internal and external problems. 
Notably, France’s candidate, former Minister of Culture and Communication Audrey Azoulay, has put both UNESCO’s internal crisis and education at the top of her agenda. 
She has singled out the financial crisis as the biggest threat facing UNESCO and has stressed the need for greater dialogue with members in arrears, like the United States. 
In her previous governmental roles, Azoulay helped launch a global plan for cultural diversity through books and introduced plans to protect cultural heritage in conflict zones. 
Azoulay also has called for UNESCO to treat education as a catalyst for development and gender equality, and as the best way to help combat the “radicalization of the mind.” 
If elected, she has promised to put Sustainable Development Goal 4 – universal quality education – at the heart of UNESCO’s mission, with a special focus on Africa. 
The preamble to the Constitution of UNESCO declares, “Since wars begin in the minds of men, it is in the minds of men that the defenses of peace must be constructed.” 
Unfortunately, in Africa, we know all too well what happens when efforts to construct the defenses of peace ultimately fail. 
Islamist insurgents continue to pose a threat to Mali, where in 2013, they set fire to a library holding thousands of priceless historical manuscripts in the ancient cultural center of Timbuktu. 
The incident was not only a devastating blow to world heritage; it was also a reminder of Africa’s history as a center for cultural exchange, literacy, and learning, and a call to action. 
The stakes for Africa are high. 
Our children are threatened not only by lack of access to schools, but also by lack of opportunities to learn, and by the loss of irreplaceable fragments of their rich history. 
We must hope that more governments follow Ghana’s example, that more allies like France increase their support, and that the new director general will place a high priority on UNESCO’s missions in Africa, which are more critical than ever. 

Africa’s Year of Opportunity 
GENEVA – We are still near the start of 2018, and already it feels like tension and disorder will be the year’s defining characteristics. 
From anti-immigration policies in the United States to flaring geopolitical hotspots in the Middle East and East Asia, disruption, upheaval, and uncertainty seem to be the order of the day. 
But at least one metric offers reason for cautious optimism: economic growth. 
The International Monetary Fund estimates that global growth will reach 3.7% this year, up from 3.6% in 2017. 
As Christine Lagarde, the Fund’s managing director, put it in a speech in December, “The sun is shining through the clouds and helping most economies generate the strongest growth since the financial crisis.” 
It was fitting that Lagarde made that observation in Addis Ababa, because it is in Africa where the rays of prosperity are shining brightest. 
In fact, I predict that 2018 will be a breakout year for many – though not all – African economies, owing to gains in eight key areas. 
For starters, Africa is poised for a modest, if fragmented, growth recovery. 
Following three years of weak economic performance, overall growth is expected to accelerate to 3.5% this year, from 2.9% in 2017. 
This year’s projected gains will come amid improved global conditions, increased oil output, and the easing of drought conditions in the east and south. 
To be sure, growth will be uneven. 
While nearly a third of African economies will grow by around 5%, slowdowns are likely in at least a dozen others. 
Sharp increases in public debt, which has reached 50% of GDP in nearly half of Sub-Saharan countries, are particularly worrying. 
But, overall, Africa is positioned for a positive year. 
Second, Africa’s political landscape is liberalizing. 
Some of Africa’s longest-serving presidents – including Zimbabwe’s Robert Mugabe, Angola’s José Eduardo dos Santos, and the Gambia’s Yahya Jammeh – exited in 2017. 
In South Africa, Jacob Zuma’s resignation allowed Cyril Ramaphosa to become president. 
In January, Liberians witnessed their country’s first peaceful transfer of power since 1944, when former soccer star George Weah was sworn into office. 
All of these gains will be tested, however, as voters in 18 countries go to the polls this year. 
Adding to Africa’s story of divergence will be continued political fragility in a number of states, including the Central African Republic, Burundi, Nigeria, South Sudan, and Somalia. 
A third source of optimism is Africa’s agricultural sector, where the potential of smallholder farmers, the majority of whom are women, is finally being realized. 
African agricultural output is forecast to reach $1 trillion by 2030. 
This maturation could not have come at a more opportune time; roughly two-thirds of Africans depend on agriculture to make ends meet. 
Large tracts of uncultivated land, a youthful workforce, and the emergence of tech-savvy “agropreneurs” – agricultural entrepreneurs – are lifting production and transforming entire economies. 
Fourth, Africans are benefiting from technological disruption. 
With more than 995 million mobile subscribers, Africa’s increasing connectivity is being used to power innovation. 
Key sectors like farming, health, education, banking, and insurance are already being transformed, greatly enhancing the region’s business landscape. 
Fifth, African leaders are getting serious about curbing illicit financial outflows from corrupt practices that rob African countries of some $50 billion annually, much of it in the oil and gas sector. 
While US lawmakers are pushing to repeal portions of the 2010 Dodd-Frank financial reform legislation – which contains a provision requiring oil, gas, and mining companies to disclose payments they make to governments – the broader trend is toward greater transparency and accountability. 
For example, the Panama Papers and the Paradise Papers pulled back the curtain on the murky system of tax havens and shell companies that shelter billions of dollars from some of the world’s poorest countries, including many in Africa. 
And with the G20 and the OECD working to stop tax avoidance, Africa may soon benefit from global efforts to end shady accounting. 
Sixth, Africa’s energy sector is set to thrive. 
While 621 million Africans still lack reliable access to electricity, innovations like renewables, mini-grids, and smart metering are bringing power to more people than ever before. 
In South Africa, renewable energy has taken off; the price of wind power is now competitive with coal. 
Ethiopia, Kenya, Morocco, and Rwanda are also attracting large investments in renewable energy. 
A seventh area showing signs of progress is education. 
To be sure, Africa’s educational offerings remain dismal; more than 30 million children in Sub-Saharan Africa are not in school, and those who do attend are not learning as much as they could. 
But many African leaders and publics have recognized these deficiencies; in some countries, such as Ghana, education has even become a deciding issue for voters. 
As the Education Commission highlights, some countries are boosting investments in education. 
This represents an opportunity to align learning outcomes with future employment needs. 
But with over a billion young people living in Africa by 2050, greater investment in education is urgently needed. 
Finally, greater attention is being paid to developing a pan-African identity, and African fashions, films, and foods are expanding to new markets. 
As these cultural connections grow, Africa’s soft power will continue to rise and extend far beyond the continent. 
In many corners of the world, 2018 is shaping up to be yet another disappointing year, as inequality and poverty continue to fuel anger and populism. 
Africa will not be entirely immune from such developments. 
Nonetheless, the continent’s inhabitants have at least eight good reasons – far more than most people elsewhere – to be optimistic. 

Gender Equity for Africa’s Scientists 
KIGALI – A girl in Ethiopia could grow up to engineer a new method for improving agricultural yields, if only she could meet the right mentor. 
A young woman in Malawi has ideas for new cancer treatments, but will never apply them if she is pushed out of school. 
And a girl in Rwanda has all the skills to create a mathematical model to mitigate droughts; all she needs is a research grant to help her pay for college. 
There is a global gender imbalance in science, technology, engineering, and mathematics – the so-called STEM disciplines. 
But in Africa, this imbalance is doing more than threatening individual futures. 
It is also depriving the continent of talents and contributions needed to drive development and progress. 
A 2011 African Development Bank report finds that “getting women into science and technology ultimately promises to benefit society as a whole.” 
Gender equity in STEM is achievable, and many African scholars are showing the world how to do it. 
But they need help, and programs that offer scholarships and support are among the best ways to achieve parity in the sciences. 
The causes of Africa’s STEM gender imbalance are often compared to a leaky pipe: girls start out with interest and aptitude, but drop out of the disciplines at various points in their education. 
Early data from a Mastercard Foundation initiative aimed at reversing these trends show that a comprehensive approach to plugging the leaks can make a difference. 
Success begins with acknowledging that gender equity in STEM matters. 
“Science needs us” is how Armanda Kouassi, an industrial engineer and former Mastercard Foundation scholar, puts it. “With different ideas and perspectives come better solutions and thinking that can move scientific innovations forward and benefit the whole of Africa.” 
Kouassi is right. 
Africa cannot afford to squander its young, female talent. 
Sub-Saharan Africa faces a shortfall of some 2.5 million engineers, technologists, mathematicians, and scientists. 
This dearth of expertise threatens a number of Sustainable Development Goals, such as food security, health care, clean water and sanitation, energy, and infrastructure. 
Removing gender barriers to STEM requires African governments to make equity in the sciences a priority. 
Nowhere is this happening more successfully than in Rwanda, where our collective experience has helped more than 1,250 girls and young women excel in STEM disciplines. 
The African Institute for Mathematical Sciences (AIMS), in Rwanda’s capital, Kigali, is one of these agents of change. 
The school believes that the next Einstein could be an African woman, an educational approach that informs its comprehensive strategy to plug leaks in the STEM development pipeline. 
AIMS’s innovative approach includes helping governments train teachers, ensure that female students are not vastly outnumbered in their classrooms, support students who are mothers, and engage with industry leaders to help graduates succeed in their careers. 
To attract more female students, 30% of the school’s scholarships are reserved for female applicants, and the school aspires to reach 50% in the near future. 
Similarly, Carnegie Mellon University Africa (CMU-Africa), also in Kigali, is championing change by allocating 30% of its scholarships to young women. 
These commitments will have a positive effect on the entire institution, as CMU-Africa seeks to increase dramatically enrollment of female scientists. 
Finally, the Forum for African Women Educationalists (FAWE) in Rwanda has funded the education of 1,200 girls enrolled at the country’s top-performing secondary schools specializing in STEM subjects. 
Of these students, an estimated 70% are expected to study science at the university level. 
Despite these positive developments, quotas alone will not achieve parity. 
To make lasting gains, opportunities outside the classroom are also needed. At FAWE Rwanda, a program called Tuseme (a Swahili word meaning “let’s speak out”) offers girls leadership training through drama, song, and creative arts to teach presentation, negotiation, and decision-making skills. 
FAWE Rwanda also works with teachers to develop gender-responsive pedagogical methods. 
Likewise, at CMU-Africa, scholars are invited to participate in the university’s Meeting of the Minds Symposium, an annual global gathering for undergraduates to showcase their work to a wider audience of faculty, students, government officials, and industry representatives. 
And, the Next Einstein Forum, a select program at AIMS that recognizes Africa’s best young scientists and technologists – of which 40% are women – provides emerging innovators with an opportunity to lead their own research while inspiring the next generation of scientific thinkers. 
Inequalities faced by girls and young women in African education cannot be erased overnight. 
As Rebecca, a Mastercard Foundation scholar from Uganda, remembers, “When I was at my school, the boys used to call us ‘half-men,’ because if you’re a lady and you go for sciences, you’re a half-man.” 
But, Rebecca adds, “It was cool being a science student.” 
Africa needs more women who share Rebecca’s enthusiasm for STEM. 
To ensure that science remains appealing to girls, schools, governments, and industries must cooperate to educate teachers and mentors, and allocate funding to close the gender gap. 
As Miranda, another Mastercard Foundation scholar, recently observed, “As we try to find new innovations and inventions to drive the economy, I believe that math and science is at the forefront of that progress.” 
As professionals working to improve African education, we couldn’t agree more. 

Health Coverage Must Not Ignore Africa’s Elderly 
DAR ES SALAAM – My grandmother is 76, and my grandfather is 83. 
They have lived fruitful lives together, cultivating crops and grazing cattle in a remote village in the hills of southwest Uganda. 
But whenever I think of them, I am more in awe of their good health than their hard work. 
Because of the remoteness of their community, anytime my grandparents need medical care, they must travel 25 miles to the nearest hospital on motorcycles known as boda-bodas, paying about 50,000 Ugandan shillings (about $13) for the round-trip journey. 
Then, because they were recently dropped from their health-insurance plan due to age, they must cough up more money to foot the bill for treatment. 
In other words, for my grandparents – and for many older Africans – a visit to the doctor is onerous, costly, and exceedingly rare. 
Access to health care is an obsession for experts in international development. 
In May, at the World Health Organization’s annual World Health Assembly, officials from dozens of countries discussed how to achieve universal health coverage through the United Nations Sustainable Development Goals. 
And yet, most of the attention centered on mothers, newborns, and children; elderly populations in developing countries were largely ignored. 
Failure to address this omission would leave an increasing share of the population without access to affordable health care. 
According to the World Bank, life expectancy in Sub-Saharan Africa has risen steadily in recent decades, from just 40 years in 1960 to 60 years today. 
If this trend continues, the number of Africans living past their 60th birthday will more than double by 2050. 
This is of course good news; longevity is a key indicator of human development. 
But Africa’s elder boom will be a disaster if living longer means living sicker because of inadequate health care. 
In Uganda, many rural health-care centers lack the personnel, supplies, and infrastructure to meet the needs of older patients. 
Small clinics typically refer their oldest patients to the closest big hospital, which is often many miles away. 
Traveling by motorcycle over rough terrain can worsen health conditions; but with no other options, the frail must choose between a bumpy ride on the back of a bike and no treatment at all. 
It’s hard to blame those who opt for the latter. 
According to a 2010 survey by doctors at the Mulago National Referral Hospital in Kampala, boda-bodas are Uganda’s leading cause of road-related injuries. 
During the survey period, motorcycle passengers accounted for 41% of the hospital’s 1,500 trauma cases, and riders’ injuries consumed 62.5% of the hospital’s surgery budget. 
Given the dangers of travel, it is no wonder that my grandparents are reluctant to seek medical care. 
Of course, the biggest obstacle to health care in Uganda – like everywhere else – is money. 
In 2015, researchers at Makerere University found that household income is the main determinant of elderly people’s access to and use of health-care services. 
The story is similar in the United States, where average annual health-care costs have been increasing for decades. 
But while older patients in the US can turn to Medicare (which accounted for 15% of federal spending in 2017), the elderly in most African countries have less government support. 
Still, a dearth of dedicated resources does not mean that Africa’s leaders must ignore their older constituents. 
By combining elder-care services with existing programs, health benefits can be extended to underserved populations. 
For example, single-sector initiatives, like HIV/AIDS treatment schemes, could include elderly-friendly health-care components. 
Health-care workers who serve expectant and new mothers could also be trained to provide in-home care for the elderly in multigenerational households. 
These types of initiatives would not require vast sums of money; rather, the most important factor in launching them is political support and effective program integration. 
Developing countries have made considerable gains when it comes to improving health care for the young. 
Now, we must do the same for the elderly. 
In Uganda, the government’s national health-care strategy could easily be strengthened by adding seniors to the list of so-called vulnerable groups. 
Integrating elder-care options into existing frameworks – such as the health extension program in Ethiopia, the community-based health program in Tanzania, and village health teams in my country – are other ways to extend coverage. 
Finally, community health-insurance schemes must be overhauled to prevent the exclusion of poor older patients. 
To maintain coverage and protect the elderly from financial ruin, reforms are needed to create plans that are financially sound and drawn from a larger pool of subscribers. 
We all yearn to live long, healthy, productive lives – just as my grandparents have. 
But without lifelong access to quality health care, longevity will be more luck than science. 
The integrity of any society can be judged by how well it treats its youngest and oldest members. 
That calculus applies to governments, too. 

Africa’s Must-Do Decade 
VIENNA – Since 2000, Africa has recorded impressive rates of economic growth, owing largely to development assistance and a prolonged commodity boom. 
While the continent shows great diversity in the socioeconomic trajectories, growth rates have generally masked an underlying lack of structural transformation. 
Many African countries have yet to undergo the kind of transformation that is necessary for socially inclusive and environmentally sustainable development over the long term: namely, industrialization. 
Wherever industrialization has occurred, it has reliably improved economic diversification and helped to nurture, strengthen, and uphold the conditions for competitive growth and development. 
In recent decades, some developing countries – mainly in Asia – have managed to industrialize. 
But, despite repeated attempts, African countries have not. 
In 2014, the Asia and Pacific region’s share of value added in global manufacturing was 44.6%, whereas Africa’s was just 1.6%. 
With South Africa as its only industrialized country, Sub-Saharan Africa is the least industrialized region in the world. 
For African countries to achieve sustainable development, they will have to increase substantially the share of industry – especially manufacturing – in their national investment, output, and trade. 
And, to their credit, most African countries already recognize that such a transformation is necessary to address a wide range of interconnected challenges that they are now confronting. 
One such challenge is population growth. 
More than half of the continent’s 1.2 billion people are under the age of 19, and almost one in five are between the ages of 15 and 24. 
Each year, 12 million new workers join the labor force, and they will need the tools and skills to ensure their future livelihoods. 
Industrialization is the key to helping Africa’s fast-growing population realize a demographic dividend. 
A related challenge is migration. 
Many of Africa’s most ambitious and entrepreneurially minded young people are joining others in migrating north. 
But no country, especially in Africa, can afford to lose so much talent and potential. 
Industrialization alone cannot resolve the migration crisis, but it can address one root cause, by creating jobs in the countries of origin. 
A third challenge is climate change, which weighs heavily on countries where agriculture is still the primary sector for employment. 
To confront the threat, Africa will need to develop and adopt green technologies, while channeling more investment into resource efficiency and clean energy. 
With the right investments, African countries can reduce the cost of delivering power to rural areas, and contribute to global efforts to reduce emissions and mitigate the effects of climate change. 
In short, Africa must industrialize, and it must do so in a socially inclusive and environmentally sustainable manner. 
Given that most previous efforts at sustainable development in Africa have failed, there is a clear need for a new approach: a broad-based, country-owned process that taps financial and non-financial resources, promotes regional integration, and fosters cooperation among Africa’s development partners. 
As it happens, the United Nations General Assembly has declared 2016-2025 to be the Third Industrial Development Decade for Africa. 
During IDDA III, the United Nations Industrial Development Organization, which I lead, will spearhead the new approach to sustainable development sketched above. 
UNIDO has put its full support behind partnerships for mobilizing resources, and is offering a tested model for African countries to follow: the Programme for Country Partnership (PCP). 
UNIDO’s PCP provides countries with technical assistance, policy advice, and investments to help them design and implement industrialization strategies. 
The program was launched in 2014, and is already being successfully implemented in two African countries – Ethiopia and Senegal – and in Peru. 
The PCP provides a multi-stakeholder partnership model that can be adapted to each country’s national development agenda. 
It is designed to work in synergy with governments and their partners’ ongoing development efforts, while funneling additional funds and investments toward sectors that have high growth potential and are important to a particular government’s industrial-development agenda. 
Priority sectors are typically chosen for their job-creation, investment, and export potential, and for their access to necessary raw materials. 
The PCP approach is designed to maximize the impact of all partner programs and projects that are relevant to industrial development. 
To that end, strategic partnerships with financial institutions and the business sector are particularly important. 
With these in place, African countries can marshal additional resources for infrastructure, innovation, expertise, and new technologies. 
UNIDO’s goal is to make the PCP model the mainstream approach for all African countries. 
We stand ready to support Africa on its path to inclusive and sustainable industrial development – during IDDA III and beyond. 

Africa’s Decade of Industrialization 
VIENNA – In today’s interdependent global economy, Africa remains a weak link. 
If the world is to achieve the Sustainable Development Goals, thereby completing the United Nations 2030 Agenda for Sustainable Development, it must help Africa accelerate its development by promoting rapid and responsible industrialization. 
Africa is by no means destined to lag behind the rest of the world economy. 
On the contrary, it could easily become a global economic powerhouse – and within the next decade. 
But, to fulfill its economic potential, Africa must industrialize. 
The importance of this has been stressed repeatedly at recent international forums, including last August’s Sixth Tokyo International Conference on African Development (TICAD VI), and the G20 summit in Hangzhou, China, the following month. 
For the first time, the G20 placed industrialization in Africa – and all of the Least Developed Countries (LDCs) – on its agenda. 
The African Union’s Agenda 2063 also supports this drive. 
The recent UN General Assembly resolution declaring 2016-2025 the Third Industrial Development Decade for Africa is yet another push in this direction. 
The organization that I represent, the UN Industrial Development Organization (UNIDO), has been tasked with operationalizing and leading the implementation of the concomitant program, including mobilizing the needed resources. 
All of these declarations and commitments are an important first step. 
But they will mean little unless they are translated into concrete and effective action that advances African industrialization, creates jobs, and fosters inclusive and sustainable economic growth and development. 
The question is how. 
The short answer is money and action. 
We must challenge the international community and development partners to back their words with real financial commitments. 
And we must build partnerships to operationalize programs that will enable Africa to become the world’s next main engine of economic growth. 
Such programs must recognize and tackle the acute challenges the continent faces. 
The economic growth experienced in recent decades has not been structurally driven, sustainable, or fully inclusive. 
Indeed, growth rates vary widely across the continent, and not all Africans are benefiting. 
Though the middle class in Africa has expanded markedly in recent years, generating a consumer boom and boosting domestic investment, many people still struggle to make a living. 
Unemployment rates are high, especially for young people and women – a reality that drives many Africans to head north. 
To keep them home, Africa’s economies must move beyond producing raw materials to build dynamic and competitive manufacturing sectors with higher value added. 
Here, Africa must draw on the opportunities presented by participation in global and regional value chains. 
New and innovative industrial-development strategies, as well as carefully tailored measures to attract foreign direct investment, must be introduced. 
Of course, to develop such strategies and participate effectively in industrial value chains, Africans need knowledge. 
Investment in education and skills training is imperative to facilitate successful and lasting industrialization. 
By understanding and drawing on proven innovations from around the world, Africa could leapfrog more developed countries technologically, building the capacity to produce more sophisticated, higher-value goods. 
Knowledge of other countries’ experiences will also help Africa to avoid the pitfalls of unbridled industrialization – particularly environmental damage. 
Africa must ensure that its industrial-development strategy includes effective environmental safeguards. 
Africa is well placed to industrialize. 
Beyond its massive natural-resource endowments, the continent has a favorable demographic profile (its rapidly growing population means that it will soon have the world’s largest workforce) and high urbanization rates. 
It also benefits from a highly educated diaspora. 
But industrialization is never automatic. 
Governments must step up to address market failures, while planning, implementing, and enforcing industrial policies that address the shortcomings of previous ineffective versions. 
They must then institutionalize these new policies in national and regional development strategies. 
To succeed, governments will need adequate capacity, competence, and legitimacy to mobilize and interact with all stakeholders, thereby creating an attractive investment climate. 
The necessary reforms will open the way for public-private partnerships, which can provide investment for infrastructure development and maintenance. 
They will also facilitate cooperation with international organizations and development finance institutions, which can provide additional funds, while helping countries to upgrade their productive capacity. 
A recent report, prepared for the Hangzhou G20 Summit, features a number of recommendations for Africa. 
It suggests support for agriculture and agribusiness development and linking them with other sectors, as well as measures to boost resilience to price shocks. 
Furthermore, the report emphasizes the need to deepen, broaden, and update the local knowledge base, invest in energy- and material-resource efficiency, and promote green technologies and industries. 
Other recommendations relate to trade and regional integration, leveraging domestic and external finance, and promoting what it calls the “New Industrial Revolution.” 
My numerous meetings with African leaders and visits to dozens of countries across the continent have convinced me that Africa is committed to industrialization. 
In fact, the process is already underway in many countries, including Ethiopia, Ghana, Rwanda, and Senegal. 
By offering our commitment and support, we can enable these countries to realize inclusive and sustainable development for the benefit of everyone. 

Africa’s Alternative Path to Development 
WASHINGTON, DC – Recent projections indicate that several Sub-Saharan African countries will experience robust economic growth over the next five years. 
By 2023, around one-third of the region’s economies will have grown at an average annual rate of 5% or higher since 2000. 
And yet, as The Economist observed last year, Africa’s development model “puzzles economists.” 
After all, only four of the continent’s high-growth countries are natural-resource dependent. 
Nor is overall performance due primarily to industrialization, as traditional development models would have predicted. 
What, then, explains the strong economic performance? 
New research by the Brookings Institution’s Africa Growth Initiative and the United Nations University World Institute for Development Economics Research (UNU-WIDER) might hold the key to answering that question. 
According to the forthcoming book Industries Without Smokestacks: Industrialization in Africa Reconsidered, there is evidence to suggest that Sub-Saharan Africa is undergoing a more profound structural transformation than we think. 
Africa owes this structural transformation not to traditional industries, but to new developments in tradable services and agro-industries that resemble traditional industrialization. 
Aside from horticulture and agro-business, these new industries include information and communication technology-based services (ICT) and tourism. 
This is a departure from the historical norm. 
Traditionally, as Harvard University economist Dani Rodrik points out, economies that have sustained robust growth rates without relying on natural-resource booms, “typically do so through export-oriented industrialization.” 
But in Africa, manufacturing as a share of total economic activity has stagnated at around 10%, with economic activity moving from agriculture to services. 
And because the rate of productivity growth in services is only about half that of manufacturing, the aggregate productivity gains needed for sustained growth have fallen relatively short. 
This process of premature deindustrialization is not unique to Africa. 
But it is more consequential for the continent, given the scale of its development challenges. 
Owing to its young, rapidly growing labor force, Africa now needs to create more than 11 million jobs in the formal economy every year. 
But as Nobel laureate economist Joseph E. Stiglitz has warned, Africa cannot replicate East Asia’s manufacturing-led model, so the question is whether it can leverage modern services to achieve economic development. 
According to Foresight Africa: Top Priorities for 2018, a Brookings Institution report previewing the results of Industries Without Smokestacks, services exports from Africa grew more than six times faster than merchandise exports between 1998 and 2015. 
In Kenya, Rwanda, Senegal, and South Africa, the ICT sector is flourishing. 
In Rwanda, tourism is now the single largest export activity, accounting for about 30% of total exports. 
Ethiopia, Ghana, Kenya, and Senegal are all integrated into global horticultural value chains, and Ethiopia has become a leading player in global flower exports. 
As these smokestack-less industries have grown, they have generated new patterns of structural change that are distinct from those of East Asia’s manufacturing-led transformation. 
But, if properly stewarded, they could play the same role in Africa’s development as manufacturing did in East Asia. 
Manufacturing-led growth proved to be an effective development model in East Asia for three main reasons. 
First, manufacturing has higher productivity than agriculture, and it can absorb a large number of moderately skilled workers migrating out of the agriculture sector. 
Second, manufacturers benefit from technological transfers from abroad, so their productivity rises in line with global trends. 
And third, the shift to manufacturing in East Asia was oriented toward exports, which allowed production to be scaled up. 
According to John Page, one of the editors of Industries Without Smokestacks, Africa’s growing service sectors share these same characteristics. 
In addition to being tradable, they have higher productivity and can absorb large numbers of moderately skilled workers. 
And like manufacturing, they also benefit from technological change and economies of scale and agglomeration. 
Moreover, Africa’s smokestack-less service sectors have the added advantage of being less vulnerable to automation. 
Notwithstanding automation’s many benefits, it presents challenges for countries where the overriding priority is to create a sufficient number of formal-sector jobs. 
While economists have been increasingly confident that Africa’s development model will be different from that of East Asia, they have been less certain about what shape it will take. 
An industries-without-smokestacks model offers one possible answer. 
From a policy perspective, African leaders should explore more ways to support these industries’ growth, either through targeted reforms or by incorporating them into national industrialization strategies and broader development agendas. 
The development of industries without smokestacks can occur alongside efforts to develop those with smokestacks, thus offering a multifaceted approach for Africa to achieve structural transformation. 

Banking on African Infrastructure 
JOHANNESBURG – As the US Federal Reserve embarks on the “great unwinding” of the stimulus program it began nearly a decade ago, emerging economies are growing anxious that a stronger dollar will adversely affect their ability to service dollar-denominated debt. 
This is a particular concern for Africa, where, since the Seychelles issued its debut Eurobond in 2006, the total value of outstanding Eurobonds has grown to nearly $35 billion. 
But if the Fed’s ongoing withdrawal of stimulus has frayed African nerves, it has also spurred recognition that there are smarter ways to finance development than borrowing in dollars. 
Of the available options, one specific asset class stands out: infrastructure. 
Africa, which by 2050 will be home to an estimated 2.6 billion people, is in dire need of funds to build and maintain roads, ports, power grids, and so on. 
According to the World Bank, Africa must spend a staggering $93 billion annually to upgrade its current infrastructure; the vast majority of these funds – some 87% – are needed for improvements to basic services like energy, water, sanitation, and transportation. 
Yet, if the recent past is any guide, the capital needed will be difficult to secure. 
Between 2004 and 2013, African states closed just 158 financing deals for infrastructure or industrial projects, valued at $59 billion – just 5% of the total needed. 
Given this track record, how will Africa fund even a fraction of the World Bank’s projected requirements? 
The obvious source is institutional and foreign investment. 
But, to date, many factors, including poor profit projections and political uncertainty, have limited such financing for infrastructure projects on the continent. 
Investment in African infrastructure is perceived as simply being too risky. 
Fortunately, with work, this perception can be overcome, as some investors – such as the African Development Bank, the Development Bank of Southern Africa, and the Trade & Development Bank – have already demonstrated. 
Companies from the private sector are also profitably financing projects on the continent. 
For example, Black Rhino, a fund set up by Blackstone, one of the world’s largest multinational private equity firms, focuses on the development and acquisition of energy projects, such as fuel storage, pipelines, and transmission networks. 
But these are the exceptions, not the rule. 
Fully funding Africa’s infrastructure shortfall will require attracting many more investors – and swiftly. 
To succeed, Africa must develop a more coherent and coordinated approach to courting capital, while at the same time working to mitigate investors’ risk exposure. 
Public-private sector collaborations are one possibility. 
For example, in the energy sector, independent power producers are working with governments to provide electricity to 620 million Africans living off the grid. 
Privately funded but government regulated, these producers operate through power purchase agreements, whereby public utilities and regulators agree to purchase electricity at a predetermined price. 
There are approximately 130 such producers in Sub-Saharan Africa, valued at more than $8 billion. In South Africa alone, 47 projects are underway, accounting for 7,000 megawatts of additional power production. 
Similar private-public partnerships are emerging in other sectors, too, such as transportation. 
Among the most promising are toll roads built with private money, a model that began in South Africa. 
Not only are these projects, which are slowly appearing elsewhere on the continent, more profitable than most financial market investments; they are also literally paving the way for future growth. 
Clearly, Africa needs more of these ventures to overcome its infrastructure challenges. 
That is why I, along with other African business leaders and policymakers, have called on Africa’s institutional investors to commit 5% of their funds to local infrastructure. 
We believe that with the right incentives, infrastructure can be an innovative and attractive asset class for those with long-term liabilities. 
One sector that could lead the way on this commitment is the continent’s pension funds, which, together, possess a balance sheet of about $3 trillion. 
The 5% Agenda campaign, launched in New York last month, underscores the belief that only a collaborative public-private approach can redress Africa’s infrastructure shortfall. 
For years, a lack of bankable projects deterred international financing. 
But in 2012, the African Union adopted the Program for Infrastructure Development in Africa, which kick-started more than 400 energy, transportation, water, and communications projects. 
It was a solid start – one that the 5% Agenda seeks to build upon. 
But some key reforms will be needed. 
A high priority of the 5% Agenda is to assist in updating the national and regional regulatory frameworks that guide institutional investment in Africa. 
Similarly, new financial products must be developed to give asset owners the ability to allocate capital directly to infrastructure projects. 
Unlocking new pools of capital will help create jobs, encourage regional integration, and ensure that Africa has the facilities to accommodate the needs of future generations. 
But all of this depends on persuading investors to put their money into African projects. 
As business leaders and policymakers, we must ensure that the conditions for profitability and social impact are not mutually exclusive. 
When development goals and profits align, everyone wins. 

Capturing Africa’s High Returns 
WASHINGTON, DC – Since 2000, at least half of the world’s fastest-growing economies have been in Africa. 
And by 2030, Africa will be home to 1.7 billion people, whose combined consumer and business spending will total $6.7 trillion. 
Seven years ago, the Harvard Business Review pointed out that Africa is also home to many of the world’s biggest opportunities. 
And yet, despite its tremendous business potential, Africa has not risen to the top of Western business leaders’ agendas. 
In fact, between 2014 and 2016, US exports to Africa fell by almost half, from $38 billion to $22 billion. And while the United Kingdom’s investments on the continent more than doubled between 2005 and 2014, reaching £42.5 billion ($57.6 billion), only 2.5% of its total exports are to Africa. 
Western countries are quickly losing ground to China, which increased its exports to Africa more than sevenfold – to $103 billion – from 2005 to 2015. If Western businesses hope to keep up, they will need to tap into the African countries and sectors with the highest potential for growth. 
By 2030, more than half of Africa’s population will reside in seven countries: Nigeria, Ethiopia, the Democratic Republic of Congo, Egypt, Tanzania, Kenya, and South Africa. 
But, more important, 43% of Africans will belong to the middle or upper classes, up from 39.6% in 2013, implying considerably higher demand for goods and services. 
By 2030, household consumption is expected to reach $2.5 trillion, up from $1.1 trillion in 2015. 
Nearly half of that $2.5 trillion will be spent in three countries: Nigeria (20%), Egypt (17%), and South Africa (11%). 
But there will also be lucrative opportunities in Algeria, Angola, Ethiopia, Ghana, Kenya, Morocco, Sudan, and Tunisia. 
Any one of these countries would be a good bet for companies seeking to enter new markets. 
By 2030, the sectors generating the most value in Africa will be food and beverages ($740 billion), education and transportation ($397 billion), and housing ($390 billion). 
But there will also be strong growth in consumer goods ($370 billion), hospitality and recreation ($260 billion), health care ($175 billion), financial services ($85 billion), and telecommunications ($65 billion). 
Of course, much of this growth will depend on the African Union properly implementing its new Continental Free Trade Area, which would create a single market for goods and services, offering corporations many points of entry. 
Moreover, the CFTA will increase the need for connectivity, so there will be new opportunities to invest in infrastructure and sectors ranging from transportation and energy to information and communications technology (ICT) and water supplies. 
For its part, the African Development Bank can help investors find promising projects through its Program for Infrastructure Development in Africa. 
Another major growth area between now and 2030 will be in African business-to-business spending, which will reach $4.2 trillion, up from $1.6 trillion in 2015. 
Here, the largest sectors will be agriculture and agricultural processing ($915 billion), manufacturing ($666 billion), and construction, utilities, and transportation ($784 billion), followed by wholesale and retail ($665 billion), resources ($357 billion), banking and insurance ($249 billion), and telecommunications and ICT ($79.5 billion). 
The expected growth in agriculture and agricultural processing reflects the fact that food and beverages will constitute the largest share of total household spending. 
Moreover, 60% of the world’s unused arable land is in Africa, which still contributes a meager share of worldwide agricultural exports. 
That means there is a lot of room for growth. 
And, because severe hunger still affects many African countries, investors can even contribute to the public good by investing in fertilizers, machinery, water and irrigation systems, and other areas of the agriculture sector. 
As of 2012, the African countries with the highest agricultural value-added in terms of annual growth included Burkina Faso, Ethiopia, Nigeria, Mali, Mozambique, Rwanda, and Tanzania. 
In addition, Angola, Morocco, and South Africa now all have sizable markets, and have committed to expanding their agricultural sectors. 
According to the Harvard Business Review, Africa also has the potential to become “the world’s next great manufacturing center.” 
China is expected to lose from 85-100 million low-cost, labor-intensive manufacturing jobs by 2030, and Africa stands to capture many of them. 
This helps to explain why manufacturing will be the second-largest sector in terms of business-to-business spending. 
Another reason is that many of the manufacturing opportunities in Africa happen to be in globally competitive sectors such as automobiles and transport equipment, refined petroleum, computers, and office and industrial machinery. 
South Africa, Egypt, and Nigeria are already becoming promising places to invest in these areas. 
And investors will also be able to find high returns and favorable business environments in Ethiopia, Morocco, and Rwanda. 
Africa is the world’s last frontier market, and Western businesses need to start taking advantage of its tremendous potential, as Chinese firms already are. 
Doing business in Africa will also create sustainable jobs and advance the United Nations Sustainable Development Goals to eliminate poverty and hunger. 
And that, too, will be good for the bottom line. 
As the Business and Sustainable Development Commission has shown, pursuing the SDGs “could raise trillions in new market opportunities in ways that extend prosperity to all.” 


Strengthening African Science 
URBANA, ILLINOIS – In late March, Africa’s leading scientists, innovators, and policymakers met in Kigali, Rwanda, to brainstorm solutions to an increasingly pressing problem: the low quality of science on the continent. 
Any good leader knows that scientific discovery and innovation fuels progress, facilitates development, and can help tackle issues like food insecurity, water shortages, and climate change. 
And yet most African governments are failing to fund research and development adequately in their countries. 
According to the UNESCO Institute for Statistics, countries in Sub-Saharan Africa spend, on average, just 0.5% of GDP on research and development. 
In the West, the share is closer to 3%. 
This disparity underscores the development challenges that Africans face. 
Africa is home to 15% of the world’s population and 5% of its GDP, but accounts for a paltry 1.3% of total research spending. 
Moreover, African inventors hold just 0.1% of the world’s patents, meaning that even when money is spent on science, innovation, and research, the findings rarely translate into solutions for the continent’s most immediate challenges. 
To be sure, these trends are not universal; some African governments are investing heavily in science-led innovation. 
In South Africa, for example, authorities have pledged to double R&D spending by 2020 – to 1.5% of GDP. 
This follows a 2016 commitment by African heads of state to increase science and technology budgets to at least 1% of GDP by 2025. 
A handful of countries – including Kenya, Rwanda, and Senegal – are working hard to reach this funding threshold. 
Africa also benefits from generous research-related aid and international support. 
One of the top donors, the Bill & Melinda Gates Foundation, has invested more than $450 million in African science initiatives over the last decade. 
Projects include a $306 million program to boost crop yields and a $62.5 million grant to improve health outcomes. 
These and other funding streams have helped African researchers develop drought-resistant crops, produce vaccines for infectious diseases like Ebola, and expand opportunities for science and technology education. 
Unfortunately, many African governments lack the resources to fund programs that could build on these gains. 
Simply put, a new, more collaborative approach to African science is urgently needed. 
Africa’s leaders have pooled their science resources before. 
In 2003, the African Union and the New Partnership for Africa’s Development began implementing a continent-wide strategy “to develop and use science and technology for the socioeconomic transformation of the continent and its integration into the world economy.” 
It was an ambitious goal that yielded early results. 
Between 2005 and 2014, continent-wide spending on R&D increased, while research output more than doubled in many countries. 
Since then, however, progress has stalled. 
The recent meeting in Rwanda, hosted by President Paul Kagame and organized by the Next Einstein Forum, was designed to help get the agenda back on track. 
But summits are only part of the solution; governments must also commit to improving research quality, and they can start by focusing attention on three key areas. 
First, Africa’s leaders must engage with CEOs, philanthropists, and donors who understand the long-term value of investing in science. 
Innovation is expensive, and seed money will be needed to help strengthen the continent’s scientific capacity. 
Second, African universities and institutions should align their research agendas with national and regional goals. 
For example, given that one of Africa’s most pressing challenges is feeding its growing population, schools specializing in agricultural research should ensure that their work contributes to solutions. 
Last but not least, countries should encourage entrepreneurship within research organizations. 
One way to do this is by establishing commercialization offices, which could help scientists bring their research to market. 
Scientists everywhere need help navigating bureaucracy when turning an idea into a commercial venture, and this process is particularly challenging in a region where R&D pipelines are in their infancy. 
Boosting Africa’s scientific capabilities will require the continent’s leaders to do more than ask tough questions at summits; they must also allocate more funding and forge new partnerships. 
To overcome Africa’s human development challenges, African governments must invest in the people who can overcome them. 

The High Cost of Food Monopolies in Africa 
LAGOS – In May, global food prices increased 1.2%, reaching their highest level since October 2017. 
This upward trajectory is having a disproportionate impact in Africa, where the share of household income spent on food is also rising. 
To ensure food security, governments must work quickly to reverse these trends, and one place to start is by policing the producers who are feeding the frenzy. 
According to data compiled by the World Economic Forum, four of the world’s top five countries in terms of food expenditure are in Africa. 
Nigeria leads the list, with a staggering 56.4% of household income in 2015 spent on food, followed by Kenya (46.7%), Cameroon (45.6%), and Algeria (42.5%). 
By comparison, consumers in the United States spend the least globally (6.4%), far less than people in emerging economies like Brazil (16%) and India (30%). 
One reason for the distortion is the price of food relative to income. 
As Africa urbanizes, people are buying more imported semi- or fully processed foods, which cost more than locally produced foods. 
And in most countries, wages have not kept pace with inflation. 
But the primary cause is poor public policy: African governments have failed to curb the power of agribusinesses and large food producers, a lack of oversight that has made local agriculture less competitive. 
In turn, prices for most commodities have risen. 
The absence of antitrust laws, combined with weak consumer protection, means that in many countries, only two or three major companies control markets for items like salt, sugar, flour, milk, oil, and tea . 
The impact is most pronounced in African cities, where prices for white rice, frozen chicken, bread, butter, eggs, and even carbonated soft drinks are at least 24% higher than in other cities around the world. 
These prices hit consumers both directly and indirectly (owing to pass-through of higher input costs by food conglomerates and service providers). 
The Food and Agriculture Organization of the United Nations (FAO) has long argued that food security and fair pricing depends on markets that are free from monopolistic tendencies. 
The OECD concurs, and has frequently called on authorities to address “anti-competitive mergers, abuse of dominance, cartels and price fixing, vertical restraints, and exclusive practices” in the food sector. 
And yet, in many African countries, this advice has rarely been heeded. 
To be sure, this is not a new problem. 
Between 1997 and 2004, for example, the FAO counted 122 allegations of “anti-competitive practices” in 23 countries in Sub-Saharan Africa. 
Violations included a “vertical monopoly” in the Malawi sugar sector, price fixing in Kenya’s fertilizer industry, and a “buyer cartel” in the Zimbabwean cotton industry. 
And, despite the considerable attention such cases have received, the underlying problems persist. 
According to the World Bank, more than 70% of African countries rank in the bottom half globally for efforts to protect “market-based competition.” 
While 27 African countries and five regional blocs do have antitrust laws on the books, enforcement is rare. 
The remaining countries have no regulations at all and have made little progress in drafting them. 
There is one notable exception: South Africa. 
Since 1998, the country’s Competition Act has prohibited any company controlling at least 45% of the market from excluding other firms or seeking to exercise control over pricing. 
Violators face penalties of up to 10% of their earnings, and during the last two decades, some of the biggest companies in the country – including Tiger Brands, Pioneer Foods, and Sime Darby – have been penalized. 
As Tembinkosi Bonakele, head of South Africa’s Competition Commission, noted last year, the government is “determined to root out exploitation of consumers by cartels,” especially in the food industry. 
Other countries should follow South Africa’s lead. 
Companies and special-interest groups will always seek to benefit from the absence of regulation. 
The need for reform is greatest in countries like Nigeria and Ghana, where food expenditures are high and food-industry pressure is most pronounced. 
Fortunately, there is growing recognition of the need to address these challenges. 
Babatunde Irukera, Director General of the Consumer Protection Council in Nigeria, recently asserted that, “In a large vibrant and loyal market such as Nigeria, the absence of broad competition regulation is tragic. 
Unregulated markets in competition context constitute the otherwise ‘legitimate’ vehicle for both financial and social extortion.” 
Reducing the prices of staple food by even a modest 10% (far below the average premium cartels around the world charge) by tackling anticompetitive behavior in these sectors, or by reforming regulations that shield them from competition, could lift 270,000 people in Kenya, 200,000 in South Africa, and 20,000 in Zambia out of poverty. 
Such a policy would save households in these countries over $700 million (2015 US dollars) a year, with poor households gaining disproportionately more than rich ones. 
Ultimately, it is the responsibility of political leaders to protect consumers from collusion and price-fixing. 

A Big Bond for Africa 
LAGOS – The countries of Sub-Saharan Africa have reached a critical juncture. 
Strained by a collapse in commodity prices and China’s economic slowdown, the region’s growth slipped to 3.4% in 2015 – nearly 50% lower than the average rate over the previous 15 years. 
The estimated growth rate for 2016 is lower than the population growth rate of about 2%, implying a per capita contraction in GDP. 
Sustained economic growth is essential to maintain progress on reducing poverty, infant mortality, disease, and malnutrition. 
It is also the only way to create sufficient good jobs for Africa’s burgeoning youth population – the fastest growing in the world. 
As Gerd Müller, Germany’s development minister, noted at a recent press conference, “If the youth of Africa can’t find work or a future in their own countries, it won’t be hundreds of thousands, but millions that make their way to Europe.” 
One way to sustain growth and create jobs would be to collaborate on planning and implementing a massive increase in infrastructure investment across Africa. 
Public infrastructure is particularly important. 
This includes highways, bridges, and railways linking rural producers in landlocked countries to Africa’s urban consumers and external markets; mass transit and Internet infrastructure to accommodate greater commercial activity; and electricity transmission lines integrating privately financed power plants and grids. 
Major regional projects are also needed to knit together Sub-Saharan Africa’s many tiny economies. 
This is the only way to create the economies of scale needed to increase the export potential of African agriculture and industry, as well as to reduce domestic prices of food and manufactured goods. 
While governments in Africa are spending more on public infrastructure themselves, outside finance is still required, especially for regional projects, which are rarely a top priority for national governments. 
Yet aid from Africa’s traditionally generous foreign donors, including the United States and Europe, is now set to shrink, owing to political and economic constraints. 
But there may be a solution that helps Africa recover its growth in a way that Western leaders and their constituents find acceptable. 
We call it the “Big Bond” – a strategy for leveraging foreign aid funds in international capital markets to generate financing for massive infrastructure investment. 
Specifically, donors would borrow against future aid flows in capital markets. 
That way, they could exploit current low interest rates at home, as they generate new resources. 
With 30-year US Treasury rates of about 3%, donors would have to securitize only about $5 billion to raise $100 billion. That money could come from the $35 billion in annual official development assistance (ODA) to Africa (which totals about $50 billion) that takes the form of pure grants. 
Donors would pass on the interest cost to African countries, reducing their own fiscal costs. 
For African countries, the terms would be better than those provided by Eurobonds. 
In fact, as audacious as it may sound, passing on the interest costs to recipient countries could actually bolster their debt sustainability. 
According to a study of eight countries by the African Development Bank’s Policy Innovation Lab, a 3% interest rate in US dollar terms would be lower than the marginal cost of commercial borrowings undertaken by several African countries over the last five years. 
Moreover, far longer maturities and grace periods, compared to market finance, would ease growing pressure on foreign-exchange reserves. 
Frontloading aid in this way is not new. 
Doing so in the early 2000s to finance vaccines saved millions of lives in the developing world. 
Big Bond resources, managed by the African Development Bank, could be used to help guarantee financing for major regional infrastructure projects that have long been stuck on the back burner, such as the East Africa Railway connecting Tanzania, Rwanda, and Burundi, and a highway stretching from Nigeria to Côte d’Ivoire. 
Such projects could also be co-financed by private investors. 
Moreover, the Big Bond could help to reinvigorate the relationship between donors and African countries. 
And, as it supports investments with important country-level benefits, it could serve as an incentive for African countries to pursue reforms that increase their absorptive capacity, in terms of choosing and executing public infrastructure investments. 
The Big Bond approach represents a much-needed update to the ODA framework – one that supports higher and more sustainable growth in recipient countries, while lowering the burden on donor countries. 
At a time when aid is under political pressure, perhaps such a bold approach to maximizing the efficiency of donor resources is exactly what the world needs. 

Powering Africa’s Transformation 
CAPE TOWN/LAGOS – Africa has a bright future ahead of it. 
Productivity and growth will improve as African economies continue to place more emphasis on services and manufacturing, pursue commodity production, and achieve quick gains in agriculture and light industry. 
But African countries’ success presupposes that they generate and manage energy sustainably to keep up with increasing demand. 
In the next 35 years, Africa’s population will continue to rise, with a projected 800 million people across the continent moving to cities. 
And Africans are already disproportionately exposed to the adverse effects of climate change, even though they are collectively responsible for less than 4% of global greenhouse-gas emissions. 
Urban areas will have to reduce environmental stresses by promoting low-carbon energy systems, electric mass transportation, and energy-efficiency initiatives, as well as the use of cleaner cooking fuels. 
And rural areas can create new opportunities that reduce the need for urban migration, by expanding renewable energy systems and energy access. 
But even with these measures, providing enough energy for a modern, inclusive economy will not be easy. 
Africa already experiences frequent power outages, even though more than 600 million people there do not have access to electricity, and current demand is relatively modest. 
To avoid the harmful spillover effects of high-carbon economic growth, Africa will have to undergo a “climate smart” energy revolution. 
African countries will need to build climate-resilient infrastructure and tap into the continent’s abundant renewable-energy resources. 
Doing so will broaden access to energy, create green jobs, reduce environmental pollution, and enhance energy security by diversifying sources. 
At the same time, Africa’s energy revolution will itself be challenged by some of the worst effects of climate change. For example, as rainfall becomes more erratic, hydropower production and revenues may decline. 
This risk can be managed by modifying existing investment plans to account for large climate swings. 
Still, for the region to adapt, the United Nations Environment Programme estimates that it will need annual investments of about $7-15 billion by 2020, and $50 billion by 2050. 
Rather than treating new climate-related risks as hurdles to overcome, we should view them as opportunities for investment and innovation. 
We are standing on the threshold of an exciting new era in which technological progress allows us to use a range of conventional and unconventional energy options (excluding nuclear energy). 
African countries can now combine energy sources to adapt to realities on the ground. 
Unlike in past decades, they no longer need be tied to a single energy source. 
And, because much of Africa’s energy infrastructure remains to be built, governments have a chance to get their energy and infrastructure policies right the first time, thereby maximizing returns on investment. 
Policymakers should take a few key steps to help transform Africa’s energy sector and boost long-term economic growth. 
For starters, making it easier, safer, and more financially attractive for private investors to enter power markets would boost competition, thereby spurring innovation and lowering costs. 
Moreover, African countries should seek opportunities to share infrastructure and create cross-border power pools. 
Another important step is to invest in renewable energy. 
Africa has an exceptionally rich portfolio of clean-energy assets, including almost nine terawatts of solar capacity, more than 350 gigawatts of hydropower capacity, and more than 100 GW of wind-power potential. 
This is more than enough to meet the continent’s future demand. 
At the same time, renewable-energy sources are becoming less expensive, making them increasingly competitive with fossil-fuel alternatives. 
For example, the price of utility-scale photovoltaic solar energy in Africa fell by 50% between 2010 and 2014, and continues to decrease today. 
And South Africa’s Renewable Energy Independent Power Producer Procurement Programme has seen an overall decline in bid prices and oversubscription rates. 
Innovative off-grid and mini-grid electricity-distribution systems, meanwhile, are already transforming Africa’s energy landscape and multiplying the ways to exploit clean-energy sources and expand electricity access for the poor, particularly in areas where consumers are widely dispersed. 
Companies such as M-kopa and Mobisol have made small solar-energy systems available to thousands of African homes, by allowing their customers to pay in installments on their mobile devices. 
Still, to accelerate a market shift on the scale that Africa needs will require increased financing from export credit agencies, development banks, commercial financial institutions, and other cross-border sources. 
Africa has a chance to bring hundreds of millions of people without electricity into the modern economy; and we have an opportunity to pioneer the next investment frontier. 
Getting Africa’s energy transformation right, by pursuing a mix of policies and investments that boost diversity and strengthen resilience, will ensure a brighter future for us all. 

Accelerating Africa’s Energy Transition 
PARIS – For much of Africa, the transition from fossil fuels to cleaner forms of energy is seen as an environmental imperative. 
With fossil fuels comprising a majority – as high as 70% in some cases – of the energy mix, the situation on the continent is indeed ecologically dire. 
But Africa’s energy transition is economically urgent as well. 
Each year, oil subsidies consume 1.5% of the continent’s GDP – roughly $50 billion. 
That is enough money to provide solar power to some 300 million people. 
If the continent could rebalance its energy portfolio, moving away from hydrocarbons slowly, those subsidies could be reallocated in ways that would yield both environmental and economic benefits. 
Today, neither oil exporters nor importers are adequately insulated from price shocks. 
When oil prices declined rapidly in 2015, for example, Africa’s energy importers spent less on oil, while exporting countries suffered financially. 
When prices rebounded, the relationship switched: energy-exporting countries’ revenues inched up, while importing countries struggled to maintain consumption levels. 
This is a needless cycle. 
Integrating cleaner power into national energy systems would not only raise local capacities; it would also free up hydrocarbons for export. 
The resulting revenue could then be invested into new forms of greener power. 
Such a transition, which would require cooperation with the oil sector, promises to boost socioeconomic progress. 
Among the biggest benefits would be the electrification of areas that, under current distribution systems, are literally in the dark. 
Today, just 30% of Africa has access to reliable electricity. 
But, with a total capacity estimated at around ten terawatts, installed solar capacity in Africa could broaden access dramatically. 
In fact, according to some estimates, the increase in solar generation by 2030 could range from 15 to 62 gigawatts. 
Fossil fuels are not destined to be phased out anytime soon, but an energy mix that included a significant increase in solar power would have major economic advantages for Africa, especially in areas where agriculture is the largest economic sector. 
Electrifying agricultural areas would facilitate the storage and transportation of farmed products, improve food security, and increase farmers’ earning capacity. 
In the drive to rebalance Africa’s energy mix, the continent maintains one crucial advantage over developed economies: a clean slate. 
The relative absence of legacy investments is the principal reason why green power is Africa’s best energy option. 
Although every country must balance its own energy needs, reliance on renewable sources, and solar power in particular, is the most cost-efficient strategy for fostering rapid economic development throughout the continent. 
Evidence of this potential can be found in the few photovoltaic power plants that have begun operating in Africa. 
For example, the Senergy 2 solar plant in Senegal sells electricity to the Senegalese power utility at a price that lowers the cost of the energy mix by 50%. 
Similar solar solutions are being implemented by African telecoms to electrify communication towers. 
The best way to accelerate the transition from hydrocarbons to greener forms of energy would be to redirect a portion of national oil subsidies to renewables. 
This would create stronger incentives to reduce fossil-fuel consumption, while encouraging investment and growth in green-energy output. 
For Africa’s rural regions, moreover, such policies would help bring communities out of darkness and lead to the installation of other critical infrastructure that economic growth requires. 
But while renewables hold the key to Africa’s long-term prosperity, the continent’s transition to cleaner power should not lead to an immediate, full-scale repudiation of hydrocarbons. 
The oil sector will still have an important role to play. 
The industry’s experience on the continent will be needed to navigate the energy transformation. 
And, because fossil fuels will remain part of the continent’s energy mix, the oil sector must be encouraged to clean up its own act. 
This may sound like an impossible alliance. 
But as policymakers across the continent seek to secure adequate supplies of clean energy to ensure rapid, inclusive economic growth and environmental sustainability, they are likely to find that there is no alternative. 
Cooperation between old and new energy industries may be the only engine that is capable of powering Africa forward. 

Africa’s Vaccination Test 
BOSTON – In February in Addis Ababa, African health ministers signed a widely celebrated declaration of their commitment to keeping immunization at the forefront of efforts to save the continent’s children from death and disease. 
Fulfilling that commitment will be no easy feat. 
Immunization is not just a health issue; it is also an economic challenge. 
The case for vaccination is strong. 
Globally, an estimated 2-3 million child deaths and 600,000 adult deaths are prevented annually through immunization. 
Moreover, immunization is considered one of the most cost-effective public-health interventions for reducing child morbidity, mortality, and disability. 
A recent study estimates that every dollar spent on vaccination will save $16 in costs of illnesses averted. 
Accounting for the value individuals place on longer and healthier lives, net returns on investments in immunization soar to some 44 times the cost. 
And net returns exceed costs for all vaccines. 
Significant progress has been made. 
In 2014, 86% of children were immunized against diphtheria, tetanus, and pertussis, compared to less than 5% in 1974. 
And there have been extraordinary advances in the number and kinds of vaccines that are available. 
Yet, worldwide, an estimated 18.7 million infants are not being reached by routine immunization services. 
The problem, of course, is access. 
Detailed analysis of immunization reveals significant disparities within and across countries. 
More than 60% of the non-immunized infants live in just ten countries: the Democratic Republic of the Congo (DRC), Ethiopia, India, Indonesia, Iraq, Nigeria, Pakistan, Philippines, Uganda, and South Africa. 
Routine immunization coverage remains particularly low in Africa; indeed, it has stagnated over the last three years, against a backdrop of weak and under-resourced health systems. 
As a result, one in five African children still do not receive lifesaving vaccination. 
In 2014, an estimated 42% of all global deaths from measles were in Africa. 
Most of Africa’s under-immunized children live in Nigeria, Ethiopia, the DRC, South Sudan, and Guinea. 
Poor people, those living in rural areas, and families with lower education levels comprise the majority of those who are not reached. 
Clearly, money is a leading factor shaping immunization outcomes. 
Beyond inadequately financed health systems, which remain weak and inefficient, especially in rural areas, African countries face challenges in affording new, more expensive vaccines. 
New vaccines should be enabling us to save more lives. 
Yet Médecins Sans Frontières estimates that the introduction of new vaccines made it 68 times more expensive to vaccinate a child in 2014 than in 2001 in most African countries. 
Another study showed that in 2001, the total cost of the original set of six World Health Organization-recommended vaccines was less than one dollar. 
In 2014, the number of WHO-recommended vaccines had risen to 11 – and the cost had reached about $21 for boys and $35 for girls. 
The added costs of delivery, currently estimated at about $25 per child, bring the total cost of fully immunizing a child today to $50-60. 
That same study found that, in many low- and middle-income countries, immunization budgets are currently insufficient to sustain vaccination programs, much less incorporate the new costlier vaccines. 
As several health ministers pointed out in Addis Ababa, high vaccine prices force poor countries’ governments to make tough choices about which deadly diseases they can afford to prevent. 
For some countries, the situation is about to get worse, as Gavi, the international group which has helped to finance the dramatic global expansion of new vaccines, phases out support for countries deemed to have “graduated” from assistance. 
Without eligibility for the lower prices obtained by Gavi, many of these countries may not be able to afford newer vaccines. 
In order to cope with this challenge, African political leaders have committed to invest in the continent’s capacity to develop and produce its own vaccines. 
But this is a long-term strategy that will require coordinated regional investment planning, market development, and stronger regulatory capabilities. 
In the short to medium term, African countries would do well to look into the power of collective bargaining to strike better deals for needed vaccines. 
While Africa can and should do more to improve vaccination, the global community also has a responsibility to make a concerted effort to bring down vaccine costs. 
The recently announced reduction in the price of pneumococcal vaccine is a step in the right direction, but it is not enough. 
Without collective action, equitable and sustained access to immunization in Africa will remain a major problem – and children’s lives will continue to be lost. 


Africa’s Bitter Harvest 
Souley Madi is one of the most productive cotton growers in the Badjengo Cameroon, an area where the lush forests of central Africa give way to the semi-arid Sahel. 
Thanks to a combination of intense heat and periodic Sahelian rains, Madi consistently produces clean, high-quality cotton on the gently sloping hills that surround his walled compound. 
But, as the next growing season approaches, Madi, who is 40, faces a difficult decision: how much cotton should he grow this year? 
Prices for cotton were so low last year that Madi cut his acreage. 
He earned less from cotton last year than the year before, and much less than he earned five years ago. 
“I’m angry, but what can I do?” he asks. 
This year Madi may grow even less cotton, even though the crop is the main source of income for himself, his two wives and his five children. 
On some of his land, he now grows corn and peanuts instead of cotton. 
But cotton potentially offers the best payback, because it has cash value on the international market and can be stored for long periods of time. 
Like millions of other African cotton farmers, Madi has advantages over cotton farmers in other parts of the world. 
His land costs are low. So are his labor costs, since he relies on family and friends to weed and pick the crop. 
Nor does he needs expensive machinery to plant his seeds; his plow is drawn by cattle, and he pushes seeds into the ground with his bare hands. 
A state-owned cotton company collects his cotton relatively efficiently, gins it nearby to produce lint and then sells the lint on the international market, generally paying Madi promptly and fairly. 
Madi’s earnings help him keep his children in school, even at the height of the cotton harvest. 
Having attended secondary school himself, he believes that his children will better their lives through education. 
He knows his children’s future depends on better prices for cotton. 
But forces beyond Madi’s control – even beyond his awareness – are restraining cotton prices, creating a global glut that is largely the result of policies followed by the world’s richest governments. 
The United States government pays billions of dollars to cotton growers, mainly in California, Texas, and Mississippi. 
The European Union also contributes to low cotton prices, paying farmers in Greece about $1 billion a year to grow the crop at a loss. 
Such subsidies are a global scandal, yet large payments to largely wealthy American and Greek cotton growers seem likely to persist for many years. 
The best chance to end cotton subsidies soon was lost last December, when African countries, aided by India and Brazil, pressed hard for the elimination of cotton subsidies, at the World Trade Organization’s meeting in Hong Kong. 
The US and Europe offered only a token reduction, scotching a deal. 
The only chance to end cotton subsidies is now somehow to convince US and EU leaders to assist African peasants by curtailing payments to their own cotton farmers. 
A revision to what Americans call “the farm program” is scheduled for next year. 
The powerful US cotton lobby wants no change in the level of payments, however. 
European farmers also want to maintain current subsidy levels, and EU members say that they are unlikely to make any reductions before the end of the decade. 
Take away subsidies and cotton prices will rise, perhaps as much as 15%. 
“There’s real money here for the individual African,” says Daniel Sumner, an economist and cotton expert at the University of California. 
Trade officials in both the US and Europe say that they will no longer encourage farmers to overproduce, and that they will end programs that specifically subsidize exports. 
For Africans, however, these changes are cosmetic, doing little or nothing to lift cotton prices. 
Africans are trying to make the best out of a bad situation. 
In some parts of Africa, cotton growers are expanding production, providing proof that if the US and Europe did somehow curtail their own cotton output, Africans could plug the gap. 
In Uganda, where civil wars in the 1970’s and 1980’s devastated farming, cotton growers are making a major comeback. 
In Zambia, cotton output is soaring. 
In both countries, foreign investors are opening gins and assisting growers. 
In Cameroon, where cotton is the main source of income for nearly five million people, record crops were posted last year and the year before. 
“Our farmers are dedicated and disciplined, committed to quality,” says Ali Batour, a manager with Cameroon’s Sodecoton, the state-owned marketer. “They deserve a fair price.” 
But Souley Madi is resigned to receiving unfair cotton prices, perhaps for a long time. 
During the last harvest, when 100-degree heat forced him, his wives, and his mother to stop picking cotton after a few hours, he returned to his compound to tend to his ducks. 
He recently started raising a flock and last Christmas earned the equivalent of $70 on the sale of 18 birds. 
Tapping his forehead, Madi insists, “We are waiting for the situation to change.” 
For how long, he says, “depends on God.” 


Africa's Debt Dilemma 
The success that US President George W. Bush and his special envoy, former Secretary of State James Baker, had in getting Iraq's foreign debts canceled or rescheduled shows what can be done when a policy is backed by political will. 
The contrast with Africa's debts could hardly be starker. 
Just three years ago, Jubilee 2000 made news when civil society groups, rock stars, and a few finance ministers like Britain's Gordon Brown pushed for African debt cancellation. 
President Bush mostly succeeded in his crusade; Jubilee 2000 succeeded mostly in getting empty promises. 
Of course, the two campaigns confronted different obstacles and had different bases of support. 
Baker's mission possessed the unlimited backing of a US faced with the gargantuan cost of reconstructing Iraq; Jubilee 2000 had only world opinion behind it. 
Lucrative reconstruction contracts in Iraq gave America leverage to coerce its allies into submission; Jubilee 2000 had no such weapon of persuasion. 
Finally, Baker was appealing to America's traditional allies in Europe and the Middle East, who need American friendship in many areas. 
The campaign to forgive Africa's debt was, on the other hand, focused on the crushing debt load owed by African countries to the IMF and the World Bank, who only have money to worry about. 
Still, the Jubilee campaign's street protests began a healthy debate about the lending arrangements of the IMF/World Bank. 
But the time has come to abandon the Jubilee movement's humanitarian approach and focus instead on the legal aspect. 
It is worth remembering that no sub-Saharan African country - with the exceptions of South Africa and Rhodesia (now Zimbabwe), then administered by white minority governments - could tap international capital markets at independence in the early 1960's. 
Domestic capital markets were non-existent. 
As a result, these countries were left with no choice but to subcontract their development to the IMF and World Bank. 
These institutions identified, appraised, approved, and financed projects that ratcheted up African debt. 
They monitored and sanctioned the recruitment of consultants that conducted the studies related to these projects, as well as the expatriate staff involved in their execution. 
During the period of implementation, they carried out regular supervisory missions supplemented by quarterly progress reports and annual audits. 
Still, despite all these costly measures paid for by Africans, all the post-evaluation reports on completed projects indicated that the overwhelming majority of projects were unable to generate the revenues needed to service the debts that financed them. 
But the debtor countries are nonetheless obliged to service these debts by whatever means necessary, including more borrowing and further entanglement, leading to further impoverishment. 
For example, per capita growth between 1965 and 1998was -0.8 in Ivory Coast and Ghana, -0.1 in Guinea Bissau, -2 in Zambia and Mauritania, and zero in Nigeria. 
What went wrong? 
The multilateral lenders advocated a development strategy based on the theory of comparative advantage and unbridled economic liberalization. 
Africa had to open its markets while producing raw materials and basic products to generate revenues for investment in industry, education, health, and food production. 
These assumptions turned out to be wrong, as export prices fell steadily over four decades. 
But it should have been obvious from the outset that the IMF/World Bank strategy was doomed to fail. 
All developed nations protected and subsidized their domestic production in the first phases of their development - and still do whenever it suits them. 
Furthermore the US, the EU member states and the East Asian countries all regulated inward foreign investment and imposed capital controls. 
Partnerships with foreign companies were designed to allow local businesses to benefit from technology transfer and training, while creating the most favorable conditions for local producers to add value to domestic production and exports. 
In the face of these undeniable facts, the path chosen by the IMF and the World Bank was, at best, a mark of their incompetence and, at worst, a deliberate ploy to keep the sub-Saharan countries and their populations in bondage. 
Whatever the case, both institutions certainly have much to answer for - and the loan agreements provide an arbitration clause to bring them to account. 
These clauses have yet to be invoked, but for the sake of unity and to strengthen the solidarity of African countries, it would be advisable for the nascent African Union take the lead. 
The AU should seek legal advice, have the issue included on the agenda of the UN General Assembly, advocate the freezing of international debt payments while arbitration proceedings are taking place and secure the support of the international community, especially NGOs that have a track record in raising awareness about Africa's debts. 
Any compensation retrieved from such legal proceedings should be used to establish an African monetary fund whose objective would be to put Africa on a fast track to comprehensive regional integration, enabling the continent to capitalize on globalization's positive features. 
Litigation can be costly and hazardous. 
However, set against the alternative of relying on handouts punctuated by desperation and frequent episodes of collective self-destruction, Africa should choose the legal option to rally its people and rescue its development process. 

Africa’s Dictator-Diplomat 
BRUSSELS – The recent death in Brussels of Ethiopian Prime Minister Meles Zenawi finally brings to light what lay behind his mysterious two-month disappearance from public life. 
Ethiopia’s government had strenuously denied rumors of serious ill health caused by liver cancer. 
Now that the worst has, indeed, proven true, Ethiopia and all of East Africa will need to learn to live without the stabilizing influence of its great dictator-diplomat. 
Meles was certainly both. 
Ethiopia has undergone a remarkable transformation under his strongman rule since 1991, when his Tigrayan minority group from the country’s north came to power with the overthrow of the odious Communist Derg led by Mengistu Haile Mariam (still enjoying a comfortable retirement in Robert Mugabe’s Zimbabwe). 
Initially serving as the president of the first post-Derg government, and then as Ethiopia’s prime minister from 1995 until his death, Meles (his nom de guerre in the revolution) oversaw 7.7% annual GDP growth in recent years. 
Strong economic performance is somewhat surprising, given his party’s interventionist policy approach, but Meles showed himself to be a consummate pragmatist in attracting investment – particularly from China – to drive growth. 
Meles’s own political provenance as the leader of the Tigrayan People’s Liberation Front was Marxist-Leninist. 
But, when the Cold War ended, so, too, did his dogmatism. 
To his credit, child mortality was reduced by 40% under his government; Ethiopia’s economy became more diversified, with new industries like car manufacturing, beverages, and floriculture; and major infrastructure projects, including Africa’s largest hydroelectric dam, were launched. 
Once a basket-case associated in the world’s eyes only with famine and drought, Ethiopia has become one of Africa’s largest economies – and without the benefit of gold or oil. 
Perhaps more important than Meles’s domestic achievements was his diplomatic record. 
He was an indispensable ally of the West in the fight against Islamist terrorism, culminating in Ethiopia’s military operation in neighboring Somalia in 2006. 
More recently, Meles coordinated efforts with Kenya to stage limited strikes against the al-Shabaab militia, which has waged an unrelenting war to turn Somalia into a fundamentalist Islamic theocracy. 
At the same time, Meles courted China as both an investor and as a hedge against the West’s criticism of his human-rights record. 
And yet he controversially but rightly held out a hand of friendship to the breakaway region of Somaliland, before it became fashionable, and went as far as he could short of formal re-recognition of that ray of democratic hope in the Horn of Africa. 
Meles will be sorely missed in Hargeisa, as he planned to run a Chinese-financed gas pipeline through Somaliland territory from the Ogaden to the coast. 
More important, Meles put Addis Ababa on the map as the home of the African Union, and as a capital where Africa’s worst problems could be discussed in a pragmatic manner, unburdened by colonial grudges. 
Meles himself became a major diplomatic player, particularly over climate-change policy, and most recently was active in mediating border and natural-resource disputes between Sudan and the newly independent (and oil-rich) South Sudan. 
He will be remembered for accepting the painful secession of Eritrea in 1993, rather than prolong the civil war, and for his efforts to reach an agreement with Egypt over the use of the Blue Nile waters. 
The great stain on Meles’s record will always be his intolerance of dissent. 
To be sure, his human-rights record was far better than the Derg’s. 
For example, he allowed a private press to flourish, and in 2000 he became the first Ethiopian leader to hold multi-party parliamentary elections. 
Moreover, compared to neighboring Eritrea under President Isaias Afewerki or Omar al-Bashir’s Sudan, his regime was by no means the worst offender in the region. 
Nor was there much evidence of personal enrichment or widespread corruption. 
Nevertheless, following a violently contested parliamentary election in 2005, in which more than 30 parties participated, Meles demonstrated open contempt for democratic pluralism and press freedom, jailing several journalists in recent years. 
At the same time, he imposed increasingly strict central control on his ethnically and linguistically diverse country. 
Although nominally governed by “ethnic federalism,” where this threatened secession, as in Oromia or the Ogaden, Meles was quick to ignore the constitutional set-up. 
Although he strengthened religious freedom and peaceful coexistence between Muslims and Christians, the human-rights situation in Ethiopia remained poor. 
For example, groups like Freedom House and Human Rights Watch have documented widespread official repression of the Oromo people. 
And yet Meles is irreplaceable – unmatched intellectually as an African leader (he dropped out of medical school, but went on to teach himself impeccable English and obtain European university degrees by correspondence), and unmatched politically at home, with no obvious successor groomed to replace him. 
In the Horn of Africa, there is no leader of his stature who could ensure the stability and strong governance that the region so desperately needs. 
Hailemariam Desalegn, Meles’s foreign minister, will take over Ethiopia’s government. 
But there will be considerable concern in the West about the danger of a power vacuum or struggle in a geopolitically vital but fractious country – and just when neighboring Somalia is supposed to be undergoing a transition to a new parliament and elected government. 
For his admirers and critics alike, Meles leaves behind a potent political legacy. 
He will be remembered as an African leader of major historical significance: visionary, despotic, and indispensable. 

Africa’s Hard Black Gold 
LAGOS - Few infrastructure services in the developed world may be as taken for granted as electric power. 
To consumers in industrialized countries, uninterrupted power supply is a given. 
Not so in much of Africa, which experiences some of the world’s greatest power deficits, and where only two in ten people have access to electricity. 
According to the International Monetary Fund’s most recent Regional Economic Outlook for Sub-Saharan Africa, in 2007 alone, nearly two-thirds of the countries in the region experienced an acute energy crisis marked by frequent and extended electricity outages. 
There is no shortage of hydropower plants for electricity generation in Africa. 
However, many of these plants are unable to keep up with rapid population growth and attendant increases in demand. 
Furthermore, they are prone to frequent drought, which reduces their output significantly, leaving many as little more than decorative infrastructure landmarks. 
Increasingly burgeoning populations in countries like Nigeria and Ghana imply a greater extraction of water resources for power generation. 
Rapid expansion of agricultural activity is requiring more and more water all across the continent. 
Other resources like fuel oil, diesel, light crude, solar, and gas are also available as means of electricity generation, but their costs are all quite prohibitive. 
These factors make a good argument for coal as a cheap alternative source of Africa's power. 
Coal has historically played a crucial role as a source of energy worldwide, and has several important advantages over other fossil fuels. 
First is its relative abundance. 
The current level of proven coal reserves worldwide stands at roughly 850 billion tons. 
Africa has about 50 billion tons. 
Coal is also much more widely distributed geographically than any other fossil fuel. 
Worldwide energy demand has increased by more than 50% since 1980, and is expected to grow annually by 1.6% between now and 2030. 
More than 70% of this new demand will come from developing countries, with fossil fuels projected to account for about 80% of total energy demand by the end of this period. 
Coal is the world’s fastest growing fossil fuel, with annual production increasing by 6.4% since 2004. 
It is already the dominant source of power generation in some very important energy-consuming nations. 
Much of the future increases in coal-fired electricity generation will come from strategically important developing countries like China and India. 
In 2006 alone, China added about 93,000 megawatts of coal- fired electricity generating capacity, and this trend is expected to continue as the country tries to meet its huge energy needs. 
Even in many developed countries, coal still accounts for a large share of power generation. 
Coal plants currently provide more than half of America’s electricity supply. 
Denmark, which houses some of the most efficient coal-fired power plants in the world, equally relies on coal for half of its electricity production. 
The same is true for Germany, which is home to some of the most efficient pulverized coal combustion units in Europe. 
Poland uses coal for 98% of its electricity production, and South Africa uses coal for about 50% of its electricity production. 
Against this picture then, it is hard not to expect developing countries to exploit their abundant coal resources to generate power for their own development, especially given that modern technology can help produce coal cleanly. 
Some argue that gas might be a better alternative to hydro or coal, but for countries that must import much of their gas the benefits of a stable and reliable source of cheap fuel in the form of coal present a very strong counter-argument to the capital costs of a gas plant. 
Unlike prices for coal, which is abundant and dispersed geographically, gas prices are subject to significant volatility, and the long-term trend in the face of fossil fuel depletion is uncertain. 
In contrast, coal prices are more stable, and may remain that way for a long time. 
Apart from electric-power generation, coal also has wide application in a number of industries. 
It is pivotal in both steel and cement production. 
Moreover, the use of wood by Africa’s growing population is causing increasingly rapid deforestation in many countries. 
There is significant potential domestic demand for coal briquettes to replace wood for cooking and domestic and industrial heating. 
The demand outlook thus appears favorable for the coal industry, creating significant investment opportunities. 
Clearly, there are environmental drawbacks from the use of coal as an energy resource, and these concerns are far too important to overlook. 
The massive reserves notwithstanding, coal is still a finite resource. 
It must be mined with greater efficiency and with a view to mitigating the environmental impact. 
Fortunately, much greater attention is paid today to mine safety and the management of the by-products of coal use. 
With acid rain and other public-health hazards linked to coal combustion, more technologies are emerging for reducing harmful emissions from power plants. 
Fueled by research, the past few years have witnessed the development of increasingly cleaner and more energy-efficient coal-fired generation plants and the retirement of older technologies, especially in the developed world. 
Developing countries have lagged behind in this process, but, with the common threat of global warming, there is now growing pressure to adopt conservation policies. 
Africa's mineral-rich countries must exploit their abundant natural resources. 
They must use coal to advance their economic development. 

Africa’s Immunity 
ACCRA – The United States suffers rising job losses. 
Britain nationalizes its banks. 
Once high-flying small economies like Ireland, Hungary, and Iceland break down. 
Even robust China and India are experiencing slower growth, curtailed ambitions, and broken dreams. 
Yet, in sub-Saharan Africa, there are few hints of the global financial crisis that is consuming the capitalist world. 
In fashionable African cities, residential home prices remain stratospheric. 
A typical Western-style house in Kampala or Accra, for example, now costs an astonishing two to three times the price of a comparable home in, say, Cleveland or other cities in the American heartland. 
While home prices are crashing from Madrid to Dublin and Miami to Los Angeles, African prices remain near or at record-high levels. 
African banks, meanwhile, are rock-solid compared to their debt-heavy counterparts in the US and Europe. 
While international bankers went bust by making legions of bad loans, African bankers stuck to earning profits the old-fashioned way: paying very little to depositors, and earning a big “spread” by buying guaranteed government debt, which yielded healthy returns. 
Even government deficit spending – long the bane of Africa – seems positively puny compared to the massive debts that the US and some European countries face. 
The new Obama administration is proposing spending plans that would create a record US deficit of more than one trillion dollars – and this coming on top of the outgoing Bush administration’s record deficit. 
And yet there are good reasons to believe that it is just a matter of time before Africa and its peoples experience the ill effects of the global crisis. 
From Ghana to Kenya, governments are having increased difficulty in raising money for infrastructure projects and selling official debt. 
Foreign investment in sub-Saharan Africa, which reached record levels in recent years, is retreating, which is evidence of investor caution, not any underlying lack of optimism about the region. 
And exports of raw materials to China, India, Europe, and the US – a key factor in Africa’s recent growth surge – may suffer simply because the global slowdown means less consumption everywhere. 
All of these factors suggest that an African financial bust is possible. 
Popular equity investments, such as shares in Safaricom, are already trading at unexpectedly low levels. 
If real estate prices were to fall dramatically, a chain reaction could occur, taking down big and small investors alike, and over time causing wide suffering to ordinary Africans. 
Even assuming stability in real estate prices, the global crisis surely will cause a fall in remittances by Africans working good jobs in Europe, the US, Canada, Australia, and the Middle East. 
Remittances are already believed to be falling, which makes sense: immigrants in rich countries are and will be disproportionately hurt by slowing economic activity. 
Immigration itself may even slow dramatically, depending on the length and depth of the economic slowdown. 
Fewer Africans working in rich countries will automatically translate into less money circulating in African countries. 
The decline in remittances, however, cuts both ways. 
Remittances have long spurred inflation in many parts of Africa. 
A Ugandan doctor working in Norway, for instance, cares little about the cost of a beer in Kampala. 
He is also willing – and able – to pay more than a local doctor for services and, of course, a home in Uganda. 
Fewer remittances flowing into Uganda could mean less economic activity – or simply lower prices. 
The financial meltdown in the US, which incubated the global crisis, is either coming under control or threatening to mutate into a new, more virulent form that could destroy not only America’s paper economy of trading and brokering, but also its real economy of goods and services. 
President Barack Obama, acting as if the latter scenario remains likely, is betting on large-scale government spending to prop up the real economy. 
If his administration succeeds, the chances that Africa will remain relatively unscathed will grow. 
Even if Obama fails, however, Africans should escape the worst of the global crisis, for both good reasons and bad. 
The good reasons have to do with African self-reliance and a growing awareness among scholars and policymakers that trade within the region – especially between urban and rural Africa – will ultimately deliver enormous benefits. 
Another factor working in Africa’s favor is its private companies’ and consumers’ low dependence on borrowed money. 
People tend to pay cash for goods and services, however costly. 
In the US, loans for cars and homes – loans that now aren’t being paid back – are the major factor behind the financial crisis. 
In Africa, very few people borrow money for such purchases. 
Africa’s cash-based economy has in the past constrained development. 
After all, by allowing people to spend more than they have, borrowed money can fuel growth. 
But today, Africa’s pay-as-you-go practices are a powerful defense against financial contagion. 
Another way of looking at Africa’s paradoxical economic position is to admit that the region’s historical marginalization within the international financial system – so costly in times of global plenty – is proving to be an unexpected benefit when the wealthiest of the world are sick unto death. 

Africa’s Integration Imperative 
Karl Marx predicted that states would wither away in anticipation of an idyllic communist society capable of auto-regulating economic imbalances and empowering the masses. 
So he would have been flabbergasted to see his prophecy realized, not by communism, but by the globalization of Anglo-American economic liberalism. 
Opening up markets to the free flow of capital, not the dictatorship of the proletariat, has rendered state power obsolete. 
Today’s capital markets raise money for governments, corporate clients, and individual customers, manage pension funds’ investments, and bet on the level of interest rates or the stock market. 
Trading in derivatives by investment banks, hedge funds, and other market participants, reaps huge profits for traders while depriving the real economy of productive investment and job creation. 
No population in the world is spared from the harsh treatment of such a system. 
Some 40% of the world’s 6.5 billion people live in poverty, and a sixth live in extreme poverty. 
However, the world’s black populations are the prime victims. 
In the United States, one-eighth of all black males between the ages of 25 and 34 are in jail, and three out of five black American households with children are headed by a single mother. 
As for African countries, the politics and economics of globalization have stripped them of their assets and natural resources and left them with an unbearable debt burden. 
As a result, the percentage of Africa’s population living in extreme poverty increased from 41.6% in 1981 to 46.9% in 2001. 
On the other hand, in the era of globalization, regions in which internal trade exceeds external trade have better economic outlooks and stronger social cohesion. 
This is the case for Europe, Asia, and, increasingly, Latin America, particularly among the member states of Mercosur (Argentina, Brazil, Chile, Uruguay, and Paraguay). 
The opposite is true for regional groupings in Africa and in the Middle East where trade with the outside world is more important than intra-regional trade. 
As a result, any country formulating strategies to counter the destructive forces of globalization should give overriding priority to a self-centred economic development strategy, preferably within a regional framework. 
This is a prerequisite to defending against market fundamentalism and avoiding the iniquitous conditions of the international marketplace. 
In this respect, the Association of Southeast Asian Nations (Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam) constitutes an edifying example. 
The ASEAN economies adopted a united front on international economic issues and accorded priority to internal economic integration and expanding linkages with major trading partners. 
Exports have remained the main driver of economic performance for the ASEAN countries, contributing to 5.8% regional GDP growth in 2006. 
ASEAN foreign direct investment (FDI) flows reached US$38 billion in 2005, up by 48% from the previous year. 
The outlook for 2006 was also bullish, with preliminary data for the first quarter indicating that FDI flows had already reached US$14 billion, up from US$7.4 billion in the year-earlier period. 
ASEAN’s drive to establish a fully-fledged economic community has been underlined by implementation of its Priority Integration Sector Roadmaps. 
By contrast, sub-Saharan Africa’s historical legacy of artificial and unmanageable colonial boundaries, ethnic antagonisms, its citizens’ deficit of self-respect, and an appalling record of leadership failures has hampered its quest for economic integration. 
But a sector-by-sector approach could mitigate these handicaps, and, given the pressing need to address demand for energy and climate change, it might be strategically advisable to start with the energy sector. 
Africa is a continent rich in energy, holding two-thirds of the world’s reserves of hydro-electric power – trillions of kilowatt-hours representing about half of total world resources. 
The Congo River alone holds more than 600 billion kilowatt-hours of annual reserves. 
The Sanaga (Cameroon) and the Ogooué (Gabon) hold half as much. 
Technological breakthroughs have made it feasible to transport electricity via high-voltage direct current (HVDC) over long distances without incurring great losses (only about 3% per 1,000 kilometers). 
Carbon-free hydroelectric power is the right choice as sub-Saharan Africa’s principal source of energy. 
Harnessing the hydroelectric power of the Congo Basin alone would be enough to meet all of Africa’s energy needs, or to light the entire continent of South America. 
Moreover, establishing an African grid would enable power from the Democratic Republic of Congo to be delivered to southern European countries such as Spain, Portugal, and Italy. 

Africa's Odious Debts 
One side effect of the American/British occupation of Iraq is that it sparked public debate on a dark secret of international finance: the debts taken on by odious regimes. 
As Iraq's new rulers debate what to do about the billions of dollars in foreign debts inherited from Saddam Hussein's regime, voices ranging from the charity Oxfam-International to US defence guru Richard Perle are calling for debt repudiation on the grounds that the debts Iraq now bears were contracted to sustain a corrupt, oppressive regime. 
Iraq is not the only country burdened by such debts. 
Across sub-Saharan Africa, many of the world's poorest people struggle with the crippling legacy of profligate lending to corrupt, oppressive rulers. 
During his 32-year dictatorship, Congo's former president Joseph Mobutu accumulated a personal fortune estimated at $4 billion, while his government ran up a $12 billion foreign debt. 
More of the same in Angola, where last year an IMF investigation revealed that $4 billion disappeared from Angola's treasury over the past five years. 
It so happens that the Angolan government borrowed a similar sum from private banks in this period, mortgaging future oil revenues as security. 
Much of Africa's ill-gotten wealth is now stashed abroad. 
In a study of 30 sub-Saharan African countries, we estimate that total capital flight for the period 1970-1996 amounted to $187 billion. 
Adding imputed interest earnings, the stock of Africa's capital flight stood at $274 billion - a sum equivalent to 145% of the debts owed by those countries. 
In other words, sub-Saharan Africa is a net creditor to the rest of the world: its external assets exceed its external debts. 
The difference is that the assets are private and the debts public. 
Statistical analysis reveals that roughly 80 cents on every dollar borrowed by African countries flowed back as capital flight in the same year. 
Foreign borrowing and capital flight were connected by a financial revolving door, as funds borrowed in the name of governments were captured by politically connected individuals and channeled overseas as their private wealth. 
Moreover, every dollar added to a country's total debt generated 3 to 4 cents of extra capital flight per year in subsequent years, implying that capital flight was partly a response to the deteriorating economic environment associated with rising debt burdens. 
In the last decade, sub-Saharan Africa recorded a "net transfer" (new borrowing minus debt service on past loans) of negative $11 billion. 
That is, more money flowed out of Africa to creditors than returned as fresh lending. 
The countries of the region spend more on debt service than on health. 
Despite this haemorrhage, the debt burden grows ever larger. 
But there is a remedy at hand. The doctrine of "odious debt" dates from the end of the 19th century, when the US government repudiated Cuba's external debt after seizing the island in the Spanish-American war. 
America's authorities argued that Cuba's debt had not been incurred for the benefit of the Cuban people, nor with their consent, and that foreign loans helped to finance their oppression. 
Similar reasoning can be applied today not only to Iraq, but to Africa as well. 
Properly functioning financial markets require creditors to bear the consequences of imprudent lending. 
The notion that lenders should always be repaid, regardless of how and to whom they lend, is indefensible. 
The logic of sound banking tells us that current and future African governments should accept liability only for those portions of public debts that were incurred to finance bona fide domestic investment or public consumption. 
Invoking the doctrine of odious debt, they could selectively repudiate that portion of the debt for which no such uses can be demonstrated. 
This policy poses two practical problems. 
The first is to determine who should bear the burden of proof in identifying which debts are "odious." 
Given the evidence of widespread capital flight fueled by external borrowing, African governments can rightly insist that creditors have the responsibility of establishing that their loans were used for bona fide purposes. 
If the fate of borrowed money cannot be traced, then they must infer that it was diverted into private pockets. 
The second problem is that creditors may withhold new lending from governments that have the nerve to reject odious debts. 
But today resources flow from Africa to creditors, rather than the reverse. 
In the short run, African countries will save money by staunching this outflow. 
In the long run, selective repudiation of odious debts will benefit both borrowers and creditors by promoting more responsible lending practices. 
If Iraq's occupation gives impetus to legal challenges that free Africans from the burden of odious debts, then the war will have succeeded in dismantling at least one weapon of mass destruction. 

Africa's Oil Rush 
It takes a threat to oil supplies to get world leaders to pay attention to Africa. 
Usually neglected by globetrotting statesmen, the continent recently saw visits from US President George W. Bush, Chinese President Hu Jintao, Brazil's Lula Da Silva, German Chancellor Gerhard Schroeder and many other world leaders. 
Their public comments were typically devoted to development, ending Africa's many wars, and the fight against HIV/AIDS, but all of them had oil on their minds. 
An oil rush is underway in the continent, because all developed countries' national security depends on a steady oil supply, and sub-Saharan Africa owns 8% of the world's known reserves. 
In 2002 production was 2.1 million barrels a day in Nigeria, 900,000 in Angola, 283,000 in Congo Brazzaville, 265,000 in Equatorial Guinea, 247,000 in Gabon, 227,000 in Sudan, 75,000 in Cameroon, 28,000 in South Africa, 25,000 in the Democratic Republic of Congo, and 11,000 in Ivory Coast. 
The US alone imports 1.5 million barrels a day from West Africa, the same amount it imports from Saudi Arabia. 
According to the US Energy Department, within this decade American oil imports from Africa will reach 770 millions barrels annually, as exploration intensifies throughout the Gulf of Guinea, and as the US brokers peace in war-ravaged oil-producing countries, such as Sudan and Angola, and establishes strategic bases to safeguard output. 
As a result, West African oil producers will be earning an estimated $200 billion over the next decade, more than 10 times the sum Western countries allocate each year to the "aid industry" in the region. 
So why aren't Africans celebrating? 
Because they are well aware of the "curse of oil" - corruption, conflict, ecological disaster, and anaesthetized entrepreneurial spirit. 
In Nigeria, an estimated $300 billion in oil revenues entered the government's coffers over the past 25 years, but per capita income remains less than one dollar a day for the simple reason that much of the money ends up in Swiss bank accounts, like the one owned by the late dictator Sani Abacha. 
In Angola, British Petroleum revealed that it had to pay a $111 million "signature bonus" to the government. 
As scandalous as it might be, these sums are mere peanuts compared to the $4.5 billions in oil revenues supposedly siphoned away from African government coffers over the last decade. 
But graft and theft are not the only problems. 
The celebrated pipeline between Chad and Cameroon caused water pollution, devastated pygmies' hunting grounds, destroyed harvests, and spread AIDS - perhaps the inevitable result of ill-educated migrant workers toiling thousands of miles from home, with a horde of prostitutes following them. 
Projected annual revenues from this project for oil companies such as Chevron, Exxon, and Petronas, and lenders like the World Bank and the European Investment Bank, are estimated at $4.7 billion. 
Chad will see a mere $62 million, and Cameroon just $18.6 million. 
So petrodollars exacerbate poverty in sub-Saharan Africa, not cure it. 
Only openness and accountability can reverse this trend. 
This was the objective set by the Extractive Industries Transparency Initiative, which requested that the publication of multinational oil companies' payments to governments be made mandatory. 
Unfortunately, because the companies and African politicians have every reason to avoid transparency, the EITI plans were rendered meaningless when they were not made compulsory. 
What lessons can be learned from this sorry state of affairs? 
One relates to the defenders of those suffering such obvious exploitation. 
The people who rebelled against these injustices were not Africans, but well-wishers from western organizations such as EITI, the US aid agency Catholic Relief Services (CRS), and Global Witness. 
African intellectuals, artists, and civil rights activists did not feel the need to express solidarity with fellow Africans and to defend the rights of the downtrodden. 
African civil society seems trapped in indifference and inertia. 
Another lesson concerns Africa's failed political leadership. 
It is customary to link Africa's failures to slavery and colonization, and no one can deny such claims. 
But this recognition does not exonerate Africa's "kinglets," who handed their subjects over to the slave traders. 
Recently, a congregation of African church leaders convened in the Senegalese island of Gorée and urged their people to assess their share of responsibility for the slave trade. 
The call went unheeded. 
That is a shame, for here was a moment to expose the flaws of most African leaders throughout our tormented history. 
The constant ability of Africa's leaders to betray their people is the root cause of Africa's current misery. 
Their fecklessness and recklessness are what convince much of the world that Africans can do nothing but dance, slaughter each other, and beg. 
Easy access to oil wealth only allows their cynical frivolity to continue. 
If Africa's oil wealth is to be exploited - and it will be exploited ­- it is in the interest of oil importing countries to promote better government in Africa. 
After all, the West is now paying a high price for allowing the ordinary people of the Middle East to live for so long in hopeless squalor while their rulers wallowed in oil wealth. 
No one, least of all impoverished Africans, can afford to repeat that mistake. 

Africa’s Press: Missing in Action 
In much of Africa, the challenge for journalists, editors, and readers goes beyond freedom of the press, and involves its very survival. 
Under Nigeria’s various dictatorships, for example, many journalists underwent a rite of passage that most prefer to forget: routine harassment, beatings, torture, frame-ups on spurious charges, and incongruously long prison sentences. 
Among the numerous victims, perhaps the most bizarre case was that of a young journalist named Bagauda Kaltho. 
His body was found in a hotel toilet in the city of Kaduna with the remains of a parcel bomb after an explosion that no one heard. 
Yet there he lay, and with a copy of my book The Man Died beside him. 
The implication, encouraged by the regime, was that Kaltho was a recruit of mine who blew himself up while preparing his next bomb in a campaign of terror aimed at Sanni Abacha’s dictatorship. 
This unconscionable fabrication was fully exposed only after Abacha’s death and the spate of confessions that followed it by the police agents who actually committed the crime. 
The press fought back tenaciously, despite casualties. 
Journalists adopted tactics of underground publication, in the best tradition of East European samizdat. 
When police raided one place, copies emerged from other secure depots, to be sold in the streets by kamikaze youths who darted in and out of traffic offering the subversive contraband. 
It did not matter that these youthful hawkers, some no more than seven or eight years old, were often arrested, beaten, and locked up for weeks, occasionally months. 
When they emerged from prison, they returned to their dangerous work. 
But Nigeria does not offer the premier example of the awesome power of the press. 
That honor belongs to a different history and region. 
If benchmarks such as focus, mobilization, commitment, organization, and sheer impact are any guide, then the prize goes to the media’s baleful role in preparing the Rwandan massacre of 1994, and in directing, overseeing, and stoking the fervor of the génocidaires once the extermination of Tutsis began. 
It remains a sobering lesson, one that presents the media in the role of aggressor and violator, in contrast to their normal position as victim. 
Those events are too familiar to require re-hashing. 
What matters now is the role that the rest of the African media should have played, and the questions that this raises about their capacity to function as a watchdog. 
Not many Africans, even among those who are knowledgeable in world affairs, had ever heard of Radio Milles Collines, the most blatant instrument of the Rwandan genocide. 
It is chastening that events primarily concerning Africans enter the public domain mainly owing to the intervention of the foreign media. 
It was they who exposed the complicity of certain foreign powers in an ongoing crime against humanity. 
And it was the foreign press that detailed the parallel failure of the United Nations, whose agents were on the ground but whose inability to call genocide by its proper name led to a comatose response. 
Simply put, the African media failed to reach beyond immediate borders and serve as a voice for the continent in its encounters with the world. 
The African media’s response to the massacres and rapes in Darfur has been equally muted. 
Once again, African readers are being shortchanged, remaining dependent on foreign reportage in order to grasp the enormity of what is transpiring. 
African civil society, whose mouthpiece is the press, cannot escape some measure of reproach for its failure to urge leaders to rescue fellow Africans. 
From Liberia to the Congo, the predicament of the African continent today demands that the press act not only as a watchdog, but as a goad. 
It is to the media that the continent must look for an example of solidarity. 
Such solidarity should not be understood as something to be exercised only in times of convulsion. 
The cheap recourse to dismissive invectives such as “outside interference,” “jaundiced reporting,” and “imperial mouthpiece” – so beloved by corrupt and/or repressive regimes – is recognized as self-serving cant even by those who routinely mouth them. 
Africa’s media must respond with its own analyses, explanations, and narratives. 
Unfortunately, in repressive conditions such as those in, say, Zimbabwe, Third-World journalists tend to take their cues from the conduct of their national leaders and close ranks around the continent’s rogue elephants. 
This reflex has left Zimbabwe practically a journalism-free zone, with only the foreign press seeking to hold President Robert Mugabe to account. 
Imitation appears to be a hallmark of tyrants in their exercise of power, so the absence of solidarity among Africa’s journalists and Africa’s peoples has created a dangerous vacuum. 
Today it is Zimbabwe’s press that is under the gun. 
Tomorrow? 
We should all bear this in mind, for territorial ambition often goes hand in hand with the censor’s creed. 

Africa's Quest for Power 
Why does Africa remain poor? 
Civil war, famine, disease, the legacy of colonialism-all have been advanced as plausible reasons for the continent's grinding poverty and economic backwardness. 
But another factor-probably related in some ways to these others-plays a fundamental role in stifling development: a lack of modern energy sources. 
Africa's enormous energy potential remains vastly under exploited. 
This is a key conclusion of the 2003/2004 African Economic Outlook, published recently by the OECD. 
While almost half of Africa's 53 countries could profitably produce hydropower, only 7% of this potential is reached because of poor infrastructure and the high costs of initial investments. 
Furthermore, despite its large geothermal and solar energy potential, Africa accounts for only 1.3% of the world's installed solar facilities, and only four countries have started exploiting underground heat sources. 
Of the fossil energy sources - primarily oil - that African countries do exploit, only a quarter is consumed locally. 
Limited energy development in Africa has resulted in one of the lowest uses of modern energy sources in the world. 
More than three quarters of sub-Saharan Africans have no access to electricity, compared to fewer than 14% of Latin Americans and East Asians. 
As a result, most Africans use biomass (animal and vegetable wastes and firewood) for lighting, cooking, and heating. 
Families in rural and semi-rural areas often have no choice but to exploit what they perceive as a "free" energy source. 
However, as populations grow and the need for energy increases, fragile ecosystems are threatened. 
Replacing biomass sources by less destructive energy supplies has thus become increasingly urgent. 
Clearly, African countries, assisted by their development partners, need to develop the continent's enormous energy potential as an integral part of their efforts to spur economic growth and reduce poverty. 
Improvements in energy supplies have multiple beneficial effects. 
Public and home lighting, refrigeration of food, medicine and vaccines, and heating and proper sanitation help improve people's living conditions and health. 
More and higher-quality energy increases production through modernized communications, improved productivity, and a better business environment. 
A secure energy supply, moreover, greatly extends learning possibilities and improves access to information. 
More informed citizens, in turn, participate at a higher rate and to a greater degree in their country's decision-making processes. 
Thus, institutions are rendered more democratic and governments become more transparent and responsible. 
Some countries have sought to bridge the gap between their energy potential and their populations' lack of access to energy. 
In a few countries, private-sector participation in electricity companies, coupled with new independent regulators, has resulted in greater and more efficient power generation and higher employment, while doubling the number of subscribers. 
Electrification for the rural poor has improved in South Africa and Ghana through the creation of independent agencies in charge of implementing rural electrification plans. 
Similar policies need to be adopted by a greater number of countries to enable them to address their energy challenges in a more effective way. 
More attention should also be given to regional and inter-regional power initiatives, which can help smooth out the uneven distribution of energy resources across countries. 
Such reforms have the potential of benefiting consumers by lowering costs and improving the reliability and quality of services. 
An integrated, continent-wide energy strategy, linked to national policies for growth would, indeed, go a long way toward addressing this important need. 
One vehicle for promoting such an approach is the New Partnership for Africa's Development (NEPAD). 
The NEPAD Heads of States Implementing Committee has asked the African Development Bank to take the lead in regional infrastructure (including transport, energy, water, etc.) and banking and financial standards. 
As part of the work on regional infrastructure, the Bank has developed a short-term action plan. 
Several projects, including some in the energy sector, have been prepared or are under preparation, and four have already been approved for financing by the Bank. 
Projects and programs identified in the short-term action plan are estimated to cost $7 billion. 
In addition, work has also started in preparing a medium to long-term action plan in close collaboration with the regional economic communities and in cooperation with the World Bank and the European Union. 
The African Economic Outlook estimates that Africa's GDP growth in 2003 stood at 3.6%, significantly higher than the 2.8% recorded in 2002. 
Projections for 2004 indicate that faster growth is likely to continue, or even accelerate further, for the next two or three years. 
But this is still not enough: it is generally acknowledged that average growth rates of around 6-8% are required if Africa is to make real headway in curtailing poverty. 
More intensive use of Africa's energy resources will necessarily be a critical component of any realistic development strategy. 
As Africa looks to the future, developing its enormous energy resources - through both national and regional efforts - must be given high priority. 
Indeed, boosting its energy capacity will be critical to unleashing the continent's economic and human potential. 

Africa’s Urban Farmers 
NAIROBI – When I met Eunice Wangari at a Nairobi coffee shop recently, I was surprised to hear her on her mobile phone, insistently asking her mother about the progress of a corn field in her home village, hours away from the big city. 
A nurse, Wangari counts on income from farming to raise money to buy more land – for more farming. 
Even though Wangari lives in Kenya’s capital, she is able to reap hundreds of dollars a year in profit from cash crops grown with the help of relatives. 
Her initial stake – drawn from her nursing wages of about $350 a month – has long since been recovered. 
Wangari is one of thousands of urban workers in Kenya – and one of hundreds of thousands, even millions, across Africa – who are increasing their incomes through absentee agriculture. 
With prices for basic foodstuffs at their highest levels in decades, many urbanites feel well rewarded by farming. 
Absentee agriculture also bolsters national pride – and pride in traditional diets – by specializing in vegetables specific to the region. 
“For too long our country has been flooded with imported food and Westernized foods,” Wangari says. “This is our time to fight back – and grow our own.” 
Across Africa, political leaders, long dismissive of rural concerns, have awakened to the importance of agriculture and the role that educated people, even those living in major cities, can play in farming. 
In Nigeria, former President Olusegun Obasanjo has a huge diversified farm and has pushed for policies to help absentee farmers prosper. 
In Uganda, Vice President Gilbert Bukenya routinely travels the country, promoting higher-value farming, such as dairy production. 
Perhaps the most visible political support for absentee agriculture is in Liberia, a small West African country where civil war destroyed agriculture, rendering the population dependent on food imports, even today. 
President Johnson-Sirleaf, recognizing that educated people could contribute much to an agriculture revival, launched her “Back to the Soil” campaign in June 2008 in large part to encourage urban dwellers to farm. 
To be sure, absentee farming by elites and educated urban workers can’t solve all of Africa’s urgent food needs. 
Moreover, absentee farmers face unexpected problems. 
Because they don’t visit their fields often, they rely heavily on relatives and friends. 
When I decided to farm wheat for the first time this spring on leased land in my childhood village, my mother agreed to supervise plowing, planting, and harvesting. 
Without her help, I might not have farmed at all. 
Even with mother’s help, I have worries. 
Although I grew up around wheat fields, my knowledge of farming is thin. 
Fertilizer and spraying were both more expensive than I thought. 
While my wheat stalks are sprouting on schedule, I now fear that at harvest time – in November – prices will fall and I won’t recoup my costs. 
One key tool is the mobile phone. 
My hopes for success are buoyed by my ability to call my mother inexpensively and discuss the farm. 
We even decided over the phone what kind of pesticide to use and which tractor company to hire. 
Because they know both the tastes of fellow city dwellers and rural conditions, many urban farmers are succeeding. 
In fact, some city dwellers don’t even bother with acquiring land or gaining distant help. 
Certain crops can be grown in their own homes. 
James Memusi, an accountant, grows mushrooms in a spare bedroom, selling them to nearby hotels and supermarkets. 
Nevertheless, most people living in Africa’s cities have access to land in the countryside, which is why Liberia’s government rightly highlights the potential for farm expansion. 
In a new advertising campaign rolled out this summer, the authorities declared, “The soil is a bank; invest in it.” 
In Liberia, the main push is to reduce imports of staples such as rice and tomatoes. 
In more prosperous countries, African elites are motivated by a complex interplay of national pride, dietary concerns, and the pursuit of profit. 
In Zambia, for example, Sylva Banda ignited a craze for authentic traditional meals two decades ago with a chain of popular restaurants. 
Now, ordinary Lusakans want to cook similar meals in their own homes, driving demand for farmers who produce such delicacies as dried pumpkin, “black jack” leaves, and fresh Okra. 
Similarly, in Nairobi, Miringo Kinyanjui, another woman entrepreneur, is supplying unrefined – and more nutritious – maize and wheat flour. 
In another move to distinguish her ingredients from Western versions, Kinyanjui also sells through grocery stores flour flavored with Amarathan, a green vegetable that grows around Kenya. 
The revival of traditional foods has attracted the attention of large multinational corporations. 
Last year, Unilever’s Kenyan branch ran a “taste our culture” campaign in support of its line of traditional East African herbs and spices. 

Ensuring Africa’s Continued Rise 
LAGOS – Africa’s rise is in danger of faltering. 
After years during which the continent’s economy grew at an average annual rate of 5%, global uncertainty, depressed commodity prices, and jittery external conditions are threatening to undermine decades of much-needed progress. 
Ensuring the wealth and wellbeing of the continent’s residents will not be easy; but there is much that policymakers can do to put Africa back on an upward trajectory. 
First and foremost, policymakers must secure the financing needed to pursue sustainable development in an uncertain global environment. 
The World Bank estimates that Africa will require at least $93 billion a year to fund its infrastructure needs alone. 
Climate-friendly, sustainable infrastructure will cost even more. 
And yet, as long as global growth remains weak, Africans cannot count on developed countries to fully honor their commitments to help attain the Sustainable Development Goals. 
Africa must rapidly develop its own resources, beginning by nearly doubling tax revenues. 
Across Sub-Saharan Africa, tax revenues account for less than one-fifth of GDP, compared to more than one-third in OECD countries. 
This means there is plenty of room for improvement. 
From 1990 to 2004, for example, Ghana reformed its tax system and raised revenues from 11% to 22% of GDP. 
Admittedly, such progress is difficult; in Nigeria, we saw an opportunity in raising non-oil tax revenues, but struggled to seize it. 
Another source of domestic resources is the roughly $380 billion in pension assets held by just ten African countries. 
Policymakers should be leveraging these considerable sums. 
At the same time, African countries will have to find a way to diversify their economies. 
Diversification requires investment in the future, in the form of education and well-developed infrastructure, including telecommunications, power, roads, rail, and water. 
There are plenty of models to follow: Dubai, Singapore, Thailand, Malaysia, Mexico, Indonesia, and South Korea are all admired by Africans as economies that managed to transform themselves. 
Dubai, for example, set out more than three decades ago to prepare for a future without oil. 
The government implemented a step-by-step transformation of the country into a service economy, putting in place the infrastructure and incentives necessary to build up financial services, tourism, medical services, real estate, media, arts, and culture. 
South Korea and Singapore, which had few natural resources on which to rely, are no less inspiring. 
The secret behind these countries’ success is relentlessly focused leaders, whether entrenched but benign dictators or democratically elected politicians with a shared vision of a broad-based economy. 
Sub-Saharan Africa has paths for diversified growth that many of the trailblazers did not: value-added agriculture and agro industry, the processing of mineral resources, petrochemical complexes, manufacturing of durable and consumer goods, tourism and entertainment, and an emerging information-technology sector. 
As the necessary measures for diversification are implemented, policymakers must ensure that the economic growth they are pursuing creates jobs. 
Sadly, this has not always been the case. 
Much of the recent growth has benefited only a few, leaving many behind – most notably young people and women. 
From 2006 to 2013, inequality rose in many of the continent’s most important economies, including South Africa, Nigeria, Ghana, Tanzania, and Rwanda. 
These were challenges that we were starting to address in Nigeria when I was finance minister. 
We knew that we needed not just to secure growth, but also to improve the quality of that growth. 
To that end, policymakers must ensure that growth is channeled into sectors that create jobs, such as agriculture, manufacturing, and services. 
They may also have to redistribute income and strengthen social safety nets to protect better those at the bottom of the ladder. 
Matching skills to job opportunities will be crucial. 
Some 70% of Africa’s population is under 30, and the continent is home to half the world’s primary-school-age children who have been deprived of the opportunity to study. 
Offering Africa’s children basic reading, writing, and technology skills, as well as vocational, technical, and entrepreneurial training, must be a top priority. 
Weak health-care systems must also be strengthened in order to tackle the endemic diseases that sap productivity, such as malaria, as well as improving preparedness for outbreaks of deadly epidemics. 
The stakes are high. 
The World Bank estimates the Ebola outbreak shrank the economies of Sierra Leone, Guinea, and Liberia by 16%. 
As the world economy sputters, African countries will have to develop trade with one another. 
In 2013, African goods and services accounted for just 16% of trade within the continent, and just over 3% of world trade. 
One problem is that most African countries produce the same type of commodities and trade them with very little value-added. 
Policymakers must encourage greater specialization; differentiated goods and services will add value and volume to trade. 
Logistics pose another obstacle to intra-African trade. 
Policymakers must make it easier to move goods across borders, by improving connectivity between countries and reducing bureaucratic hurdles and administrative costs. 
For example, road transport tariffs across Africa are estimated at $0.05-$0.13 per ton-kilometer, compared to the average of $0.01-$0.05 for all developing countries. 
The Rift Valley Railway project, which will eventually link Mombasa on the Kenyan coast to Kampala in Uganda, is a good example of the benefits that investments in transportation could provide. 
The African Development Bank estimates that it will double the volume of trade between the two countries, while reducing marginal costs by 30%. 
As they make these investments, policymakers must not forget that much of Africa’s recent growth can be credited to good macroeconomic policies and sound economic management. 
Extending the continent’s rise will require strengthening the continent’s economic fundamentals. 
This means ensuring that prices in the economy are correct, starting with the exchange rate. 
Some countries may need temporary controls to curb damaging capital outflows, but policymakers should aim for a market-based exchange rate and a solid plan for governing inflation, debt, foreign-exchange reserves, current accounts, and fiscal balances. 
Africa’s potential can hardly be overstated. 
The continent is well placed to build diversified economies based on low-carbon, sustainable infrastructure. 
But policymakers cannot simply assume that Africa’s rise will continue. 
They must take the right steps to ensure that it does. 

Building Africa’s Scientific Talent 
TORONTO – Ten years ago, South African physicist Neil Turok made a bold prediction: the world’s next Einstein will be from Africa. 
A decade later, it is worth considering whether the continent is any closer to finding the next global genius. 
Statistically, there is indeed a high probability that it will happen. 
By 2050, 40% of the world’s young people will be African. 
By virtue of demographics alone, it stands to reason that Africa is destined to generate prodigies in science or technology. 
Africans have led the world in science before. 
In fact, some of humanity’s greatest innovations – from vaccines to brain surgery – were pioneered by Africans. 
One of the oldest measuring devices ever used, the Lebombo Bone, was carved by people believed to have lived some 35,000 years ago in modern-day eSwatini (Swaziland). 
In other words, mathematics itself is an African invention. 
For decades, science and policy luminaries like Calestous Juma, a global advocate for science-driven sustainable development, and Wangari Maathai, an environmental activist and Nobel laureate, championed Africa’s science agenda. 
With these visionaries now gone, Africa needs a new brain trust to inspire future generations of ethical and public-spirited researchers. 
But how do we ensure Africa discovers, supports, and develops innovative, game-changing scientists? 
The missing element has been an African education system that supports innovation in research, and that provides the next African revolutionary scientist with the training and support he or she needs – in Africa. 
Across the continent, there is a growing consensus among governments that education and research in science, technology, engineering, and mathematics (STEM) is critical for economic growth and development. 
At the moment, however, too many of Africa’s young researchers see no option but to go abroad for school and work. 
That can change, but only with concrete investments in homegrown talent. 
This means rethinking the entire education system in Africa. 
Three priorities stand out. 
First, African countries need to fix the knowledge pipeline. 
That means investing in teacher training, improved learning outcomes, retention of girls in STEM courses, supporting research earlier in university, helping young researchers through so-called sandwich programs, establishing university-private sector labs on campus, and more. 
Second, Africa needs indigenous knowledge creation. 
This requires facilitating both fundamental and applied research and creating the necessary infrastructure for the dissemination of research outcomes. 
This could include making more funding available to researchers and research institutions, as well as promoting open sources for knowledge sharing. 
The third priority is putting knowledge into practice. 
This could involve making scientific information accessible to the general public and innovators, and supporting public-private partnerships to pilot, demonstrate, and apply research outcomes, thereby creating jobs addressing public problems. 
A good example is Zipline, which deploys drone technology to deliver blood transfusions to remote areas of Rwanda. 
To deploy this technology, which is based on American research but piloted in-country, Zipline signed agreements with the aviation authority and the ministry of health, among others, and a public-private partnership was set up to fund the program. 
After successfully deploying the technology in Rwanda, it is currently being rolled out in Ghana. 
Zipline has saved hundreds of lives and demonstrated the potential of technology transfer with large-scale impact. 
The Next Einstein Forum (NEF), an initiative of the African Institute for Mathematical Sciences (AIMS) and the brainchild of Turok, supported partly by the Mastercard Foundation, is demonstrating that Africa produces strong scientific talent. 
The NEF focuses on convening Africa’s innovators to highlight breakthrough discoveries and catalyze scientific collaboration for human development. 
Since the first cohort of NEF Fellows was selected in 2015, the program has highlighted the contributions of young African researchers who are working to tackle some of the world’s toughest scientific and technological challenges. 
NEF’s current cohort includes Somalia’s Abdigani Diriye, who created a blockchain-enabled lending platform in Kenya and was recently named one of Africa’s top 30 innovators; 
Nigeria’s Peter Ngene, whose work on nanotechnologies is being used to improve renewable energy and who also recently created a hydrogen-based eye sensor that detects lactose intolerance; and Vinet Coetzee of South Africa, whose research in non-invasive measures of health has led to a patent application for a device that could detect malaria. 
With so many complex issues vying for attention today, Africa will need innovative education and research models. 
But as long as the NEF and similar efforts continue to nurture the continent’s brightest young scientists and tackle systemic issues like funding, mobility, and research infrastructure, the odds are good that those leading the search for solutions will be the very people Turok predicted. 

Improving African Women’s Health Through Financial Inclusion 
ACCRA – In late October, the World Health Organization’s Regional Office for Africa signed an agreement with the United Nations International Telecommunication Union (ITU). 
The aim of the unlikely partnership is to encourage the use of digital services “to save lives and improve people’s health.” 
But perhaps the pact’s most innovative feature is the vow to merge financial inclusion strategies with modern health-care delivery. 
Financial inclusion is a proven pathway to improving people’s health, especially the health of women in developing countries. 
Women who can easily access bank accounts or cash payment options tend to invest more in their businesses and families. 
In turn, they live healthier, more satisfying lives. 
Yet, too often, initiatives like the one signed in October focus on one or the other – e-health or financial products like insurance. 
Because Africans’ ability to earn and save money can be the difference between good care and no care at all, this represents a missed opportunity to help patients and build more resilient communities. 
The cost of this choice is disproportionately high for Africa’s women. 
In Nigeria, for example, 400,000 women live with obstetric fistula, a disabling condition often caused by complications in childbirth. 
In Tanzania, some 8,000 women die annually during pregnancy or delivery; most of these deaths could be prevented. 
And, across the continent, women’s life expectancy at birth is just 58 years, compared to more than 80 years in developed countries. 
Progress is being made to connect women’s health solutions and financial inclusion. 
At a recent conference in Dar es Salaam, experts from the technology and financial services sector joined investors, philanthropists, and development specialists to devise ways to make finance work for Africa’s women. 
Through programs like these, development experts can advocate for digital solutions as a means of social and financial empowerment. 
Unfortunately, cooperation like the pact signed in October is the exception, rather than the norm. 
Banks, regulators, finance ministries, and telecommunications companies all frequently gather to consider financial inclusion without the local and global health community. 
This must change if we are to build more inclusive platforms for African patients and clients. 
The first step is to identify missed opportunities. 
A big one stems from the disparate approaches to bringing financial services and digitized health care to rural parts of Africa. 
At the moment, banks and mobile network operators are working to expand their digital banking services to unbanked and under-banked clients. 
At the same time, community health workers (CHWs) are operating in these regions to prevent, treat, and refer patients to clinics. 
Combining these efforts makes sense, because both initiatives rely heavily on trust. 
Through pre-established networks, CHWs could augment their e-health offerings with financial products, like mobile cash payment systems. 
Broadening digital disease management and access to health information to include financial wellbeing would create natural synergies. 
While there are some concerns that adding responsibilities to CHWs could undermine health-care quality, a fragmented approach to prosperity is even more damaging. 
Once opportunities for expansion are identified, other issues will need to be addressed before women’s health and financial inclusion programs can be widened. 
For starters, a lack of sex-disaggregated data makes it difficult to draft policies based on health quality and financial need. 
Although some countries, such as Burundi and Senegal, are working to improve their gender-specific data collection, a broader, more coordinated push is needed. 
Raising the region’s financial literacy will be another challenge. 
The ability to understand and execute matters of personal finance is the weakest link in transforming women’s opportunities through financial inclusion. 
Moreover, financial literacy is a pre-requisite for the rollout of financing initiatives, such as programs that support women-led small and micro-enterprises. 
If financial literacy levels can be raised, women can access resources such as land and credit, tools that hold the keys to business development, social mobility, and personal growth. 
Progress has been made in leveling the playing field, but these gains must be sustained. 
The agreement between the WHO and the ITU will help promote wealth creation in parts of Africa where access to health care and financial services is lacking. 
To maintain this momentum, deeper commitments are needed, especially from the global health community. 
But, however African governments proceed in digitizing their health and financial services offerings, women’s needs must remain at the center of any solution. 

Africa’s Defining Challenge 
ADDIS ABABA – Africa has the youngest population in the world, and it’s growing fast. 
By 2055, the continent’s youth population (aged 15-24), is expected to be more than double the 2015 total of 226 million. 
Yet the continent remains stubbornly inhospitable – politically, economically, and socially – to young people. 
The success of African governments’ efforts to address this will be the single most important factor determining whether the continent prospers or suffers in the coming decades. 
A business-as-usual approach would risk exposing Africa not only to economic underperformance and a brain drain, but also to criminality, political and social unrest, and even armed conflict. 
But Africa can thrive if its governments act now to tap the energy and dynamism of the burgeoning youth population. 
What is needed is a comprehensive policy agenda, comprising demographically informed measures that address political, cultural, and economic exclusion in a synchronized manner. 
This will be no small feat, not least because of the massive age gap between Africa’s young majority and their leaders: the average age of an African president is 62, while the median age of Africa’s population is 19.5. 
That is the world’s largest age gap between governors and the governed, and it raises concerns about how well decision-makers understand the needs and aspirations of young people. 
It does not help that a tradition of gerontocracy prevails in many countries, meaning that young people’s political participation and influence is restricted on cultural grounds. 
To help overcome this barrier, governments should treat generational inequality with the same sense of urgency as other forms of inequality, accelerating efforts to introduce youth quotas for political parties, parliaments, and other decision-making institutions. 
Much work also remains to be done on the economic front. 
According to the African Development Bank, 12 million young people entered Africa’s labor force in 2015, but only 3.1 million jobs were created. 
That means that millions of young people were left without a stake in the economy. 
In the short and medium term, it will be virtually impossible to create enough jobs to meet the needs of the unemployed and vulnerably employed. 
Africa does not have a large labor-intensive manufacturing sector to absorb its mushrooming young population. 
But there are programs that can help. 
For example, YouthConnekt Africa, launched by the United Nations Development Programme and the government of Rwanda, encourages youth-friendly policies, such as access to finance and skills development, that match the needs of the market in particular countries. 
Still, given the dearth of opportunities at home, many young Africans view migration as a chance for social mobility. 
Yet, as the CEO of a major company based in Sub-Saharan Africa recently lamented to me, acquiring work visas for Africans is extremely difficult. 
In fact, it can be easier to get a work visa for a British citizen than for, say, a Ghanaian with the same skills. 
Africa’s vision for economic integration, as set out in the African Union’s Agenda 2063, cannot be realized without labor migration that creates African careers paths for young people. 
It is telling that so many Africans are willing to risk drowning in the Mediterranean Sea, living in appalling detention centers in North Africa, or sleeping in public parks in European cities, rather than remaining in Africa. 
Yet, contrary to popular belief, young people are not migrating from Africa exclusively for economic reasons. 
Rather, they are motivated by the promise of opportunities for genuine self-improvement and the freedom to decide who to be and how to live. 
That is certainly what led me to leave Africa and head to Europe at a young age. 
In fact, the desire for self-improvement through migration is a key element of the human story – one that no desert, sea, or artificial barrier has been able to quell. 
Political and cultural exclusion intensifies it. 
Given this, any strategy that does not address the broader environment of marginalization is a bridge to nowhere. 
So far, Africa seems to be sleepwalking into a future of lost opportunity and, potentially, serious instability. 
And Africa’s international partners have remained preoccupied with containing migration from the continent, rather than addressing its underlying causes. 
But there may be reason for hope. 
The fifth European Union-Africa Summit, to be held later this year, will focus squarely on the continent’s young people. 
Likewise, the African Union’s theme for 2017 is “Harnessing the Demographic Dividend Through Investments in Youth.” 
One hopes that the growing recognition of the need to create opportunities for young people leads to effective, solidarity-based initiatives that address the barriers to youth empowerment on the continent, instead of erecting barriers to prevent young people from leaving. 
To paraphrase Martin Luther King, Africa confronts the fierce urgency of now. 
There is such a thing as being too late. 

Listening to Africa’s Future Farmers 
NAIROBI – Africa is in the midst of a youth employment crisis. 
By 2035, some 350 million new jobs will be needed, and agriculture, the continent’s biggest industry, could provide the bulk of them. 
But at the moment, young Africans are shunning life on the farm for work in the city. 
If Africa’s employment gap is to be closed, agribusinesses must find ways to recruit younger hands. 
This challenge was the focus of my research as part of the Youth Think Tank, a youth-led research initiative in partnership with Restless Development Uganda and the Mastercard Foundation. 
In a recent report, we examined the experiences of young African agriculturalists in seven countries. 
And what we discovered is that the best way to entice young people back to the farm is by improving access to and engagement with emerging technologies. 
Many of the young people with whom we spoke said that their biggest obstacle to a career in farming is learning the digital and technical skills necessary to succeed in today’s agricultural market. 
With technologies like cloud computing, soil sensors, and weather drones changing how food is produced, packaged, and distributed, digital literacy is as important as arable land and high-quality seeds. 
It stands to reason, then, that if more young people could master digital skills, more would find work in the field. 
To understand how important technology is to the young African farmer, consider competition for land. 
Most farmland is acquired through hereditary or communal distribution systems, and when new plots are allocated, they are typically smaller than those provided to previous generations. 
To remain profitable, younger growers must produce larger crops from smaller spaces, which requires innovation. 
Our study found that in many cases, the best solutions for young farmers are already being designed by young people. 
For example, in Kenya, one vegetable grower turned her kitchen garden into a vertical farm to increase its output. 
Today, she runs her own business designing, fabricating, and installing similar structures for a variety of customers. 
Another interviewee created a mobile app to help farmers connect with local seed and fertilizer suppliers. 
Unfortunately, these types of youth-driven innovations rarely receive the necessary political or financial backing to make them viable and scalable. 
Despite having great ideas, most young agricultural innovators do not feel supported in their efforts. 
Young people can help solve Africa’s unemployment challenges, but those closest to the problem have yet to be made part of the solution. 
Our research suggests several strategies to achieve this outcome. 
For starters, young people need places to engage with like-minded innovators. 
Recognizing this, policymakers and the private sector should work together to create incubation centers and ideation hubs to help young people build, discuss, and access farm-related technologies. 
Moreover, those who promote new farm technologies should travel to the places where young people gather, to provide hands-on, audience-specific training. 
If the newest farm gadgets and tools are marketed only on social media, as is often the case, uptake in rural areas will remain weak. 
Next, young people need access to financial products and services to help them turn their ideas into marketable businesses. 
And, finally, countries must find ways to involve their youth in early stages of the technology-development pipeline. 
As the experience of the Kenyan gardener illustrates, young people are often the best judges of what will deliver long-term, practical results. 
Last year, I had the privilege of presenting these findings at the Global Youth Economic Opportunities Summit in Washington, DC. 
I spoke about the role young people play in Africa’s economy, and the importance of soliciting their views on the future of African agriculture. 
It was an important first step in bringing young peoples’ ideas to the table. 
But much work remains to be done. 
According to the Food and Agriculture Organization of the United Nations, the average age of an African farmer today is about 60, while 60% of the population is under the age of 24. 
To breathe new life into Africa’s farms, the entire industry must innovate. 
And, as our research shows, the best way to do that is by working much more closely with those who have the most to gain from progress. 

The Cancer Threat to Africa’s Future 
CHICAGO – One of the most pressing public-health challenges in Africa today is also one of the least reported: cancer, a leading cause of death worldwide. 
Every year, some 650,000 Africans are diagnosed with cancer, and more than a half-million die from the disease. 
Within the next five years, there could be more than one million cancer deaths annually in Africa, a surge in mortality that would make cancer one of the continent’s top killers. 
Throughout Sub-Saharan Africa, tremendous progress has been made in combating deadly infectious diseases. 
In recent decades, international and local cooperation have reduced Africa’s malaria deaths by 60% , pushed polio to the brink of eradication, and extended the lives of millions of Africans infected with HIV/AIDS. 
Unfortunately, similar gains have not been made in the fight against non-communicable diseases (NCDs), including cancer. 
Today, cancer kills more people in developing countries than AIDS, malaria, and tuberculosis combined. 
But, with Africa receiving only 5% of global funding for cancer prevention and control, the disease is outpacing efforts to contain it. 
Just as the world united to help Africa beat infectious disease outbreaks, a similar collaborative approach is needed to halt the cancer crisis. 
Surviving cancer requires many things, but timely access to specialists, laboratories, and second opinions are among the most basic. 
Yet, in much of Africa, a lack of affordable medications, and a dearth of trained doctors and nurses, means that patients rarely receive the care they need. 
On average, African countries have fewer than one trained pathologist for every million people, meaning that most diagnoses come too late for treatment. 
According to University of Chicago oncologist Olufunmilayo Olopade, a diagnosis of cancer in Africa is “nearly always fatal.” 
Building health-care systems that are capable of managing infectious diseases, while also providing quality cancer care, requires a significant investment in time, money, and expertise. 
Fortunately, Africa already has a head start. 
Past initiatives – like the Global Fund to Fight AIDS, Tuberculosis, and Malaria, the US President’s Emergency Plan for AIDS Relief, and the World Bank’s East Africa Public Health Laboratory Networking Project – have greatly expanded the continent’s medical infrastructure. 
National efforts are also strengthening pharmaceutical supply chains, improving medical training, and increasing the quality of diagnostic networks. 
Still, Africans cannot face down this threat alone. 
That is why the American Society for Clinical Pathology, where I work, is cooperating with other global health-care innovators to attack the region’s growing cancer crisis. 
We have teamed up with the American Cancer Society (ACS) and the pharmaceutical company Novartis to support cancer treatment and testing efforts in four countries: Ethiopia, Rwanda, Tanzania, and Uganda. 
Together, we have brought immunohistochemistry, a key diagnostic tool, to seven regional laboratories, an effort we hope lead to more timely cancer diagnoses and greatly improve the quality of care. 
To complement these technical efforts, the ACS is also training African health-care professionals how to carry out biopsies and deliver chemotherapy. 
That initiative, funded by Novartis, is viewed as a pilot program that could expand to other regional countries. 
Finally, our organizations are advocating for enhanced cancer-treatment guidelines in national health-care planning efforts, protocols that we believe are essential to improving health outcomes. 
These initiatives are in conjunction with other undertakings, such as a joint ACS-Clinton Health Access Initiative program to broaden access to cancer medications. 
When the world took notice that infectious diseases like HIV/AIDS, polio, and malaria were ravaging Africa, action plans were drawn up and solutions were delivered. 
Today, a similar global effort is needed to ensure that every African with a cancer diagnosis can get the treatment they need. 
Now, as then, success depends on coordination among African governments, health-service providers, drug makers, and non-governmental organizations. 
There is no place on Earth that is immune from the dread of a cancer diagnosis; wherever the news is delivered, it is often devastating to recipients and their families. 
But geography should never be the deciding factor in patients’ fight to survive the disease. 
Cancer has been Africa’s silent killer for far too long, and the global health community must no longer remain quiet in the face of this crisis. 

Investing in Africa’s Educators 
JOHANNESBURG – Improving education is a slow, arduous, long-term undertaking everywhere, and nowhere more so than in Africa, where tight economic constraints often prevent sustained investment in human capital. 
Those who work in the education sector on the continent have to seek solutions that are faster, cheaper, and can be scaled up. 
Too often, though, expedient approaches prove shortsighted, and fail to engage local leaders who hold the keys to economic and social progress. 
Too often, grassroots-level voices, reflecting firsthand experience addressing their communities’ problems, are ignored. 
When global leaders gather in Hamburg this week for the G20 summit, the new G20-Africa Partnership will take center stage. 
But those committed to helping Africa should focus squarely on the nuts and bolts of aid and development – and that means investing in local leadership. 
Sadly, the best-funded aid organizations in Africa are often run by Westerners, or by Africans who have extensive ties to the West. 
I recently spoke to several entrepreneurs who shared anecdotal evidence that organizations in Africa with a Western co-founder raise more than twice the funds of African-run organizations. 
This financial prejudice is visible elsewhere, too, and it is perpetuating the dearth of local talent. 
The pro-Western bias should worry everyone working to build better communities for our children. 
When it comes to addressing social issues – whether it’s educational inequity, poverty, or discrimination – the most committed advocates are those who have first-hand knowledge of the problem they seek to solve. 
Personal experience is the best way to create agents for change, because it underpins people’s long-term, personal investment in dismantling systems that exacerbate inequity and injustice. 
What would it look like if the leaders overhauling such systems were cultivated from the very communities that needed them most? 
Some organizations are answering that question already. 
More than 12,000 people have applied to join Teach For Nigeria, a national organization that recruits, trains, and places young teachers in high-need schools. 
The program, designed as a fellowship, will choose fewer than 60 of Nigeria’s brightest university graduates and professionals, not only to develop excellent classroom teachers, but also to empower the next generation of social entrepreneurs committed to tackling inequity and deeply connected to local efforts already underway in communities across their country. 
After their two-year teaching commitment, which begins in September, these up-and-coming leaders will join a worldwide movement of over 55,000 people who have completed the fellowship in over 40 countries, including the 30 fellows already hard at work next door at Teach for Ghana. 
We call this powerful grouping of change-agents “collective leadership,” and we believe it is the only way to ensure positive, lasting change. 
Inadequate investment in locally led initiatives is one of the two ways in which we fail to ensure that those who are most affected by inequity have pathways to address it. 
The second is the failure to invest in children. 
In Uganda, 70% of children do not complete primary school. 
Basic education is the foundation for our lifelong ability to analyze information, present ideas and opinions, and challenge the world around us. 
And yet, in too many African communities, we are failing to invest in laying those foundations. 
Across the continent, educational attainment is sharply stratified: while 82% of children from the wealthiest families complete primary school, only 28% of children from the poorest families do. 
If the future of the continent is to be shaped by, or with, those who have most acutely experienced its challenges, programs like Teach for Nigeria and Teach for Ghana are essential. 
Imagine what could be accomplished if efforts to place local recruits in low-income schools were expanded. 
Imagine how many opportunities to address the challenges facing children and families could be created, potentially reaching hundreds of thousands of children who are also inspired and encouraged to think critically and resolve the problems affecting the world around them. 
Some argue that education is meaningless if graduates cannot find work; in fact, job creation in Africa will be a major topic of discussion at the G20 summit. 
But while investment in business development and job creation is crucial for economic vitality and growth, it won’t happen without an educated workforce. 
A robust job market presupposes a sufficient number of skilled workers to fill available jobs. 
But in Sub-Saharan Africa, only 58% of children complete primary school. 
This is why, when G20 leaders discuss new economic development strategies for Africa, they should focus on investment in education. 
But, more important, they should seek to ensure that resources make it to those who rely on local leadership and innovation. 
Sustainable Development Goal 4 – to ensure equitable and inclusive education for all by 2030 – is attainable, but only if solutions come from the ground up, which means from the Africans most committed to them. 


African Misrule on Trial 
THE HAGUE – As the world focuses on the inauguration of America’s first black president and celebrates an important milestone in the ongoing struggle for racial equality, recent developments across the Atlantic represent significant progress in a related global campaign to end impunity for mass crimes. 
In the coming days, judges sitting on the International Criminal Court in The Hague will decide whether to issue a warrant for the arrest of Sudanese President Omar al-Bashir for the crime of genocide. 
And on January 26, the ICC will begin its first trial – that of Thomas Lubanga Dyilo, a former Congolese warlord. 
Neither event is earth shattering, but, taken together, these two steps mean that a new system of international justice is working. 
Government and rebel leaders around the globe have been put on notice that criminal conduct will no longer be given a free pass. 
Although the threatened indictment of al-Bashir has prompted protest in Khartoum, no one expects him to appear in court soon. 
As for Lubanga, he is one of many in the Congo who has used civilians as pawns in a war that has cost more than five million lives in the past decade. 
Though serious, the charges against him – recruiting child soldiers – do not pretend to encompass the range of abuses committed. 
Five years after the world’s first permanent criminal tribunal commenced operations, it has made its mark. 
The ICC has opened four active investigations, issued public charges against twelve people, and to date secured custody of four. 
Nonetheless, the Court has come under fire for three alleged failings. 
First, some argue that by interjecting itself into ongoing conflicts, the ICC has impeded efforts to secure peace. 
But the facts on the ground do not bear this out. 
In northern Uganda, ICC charges against leaders of the rebel Lord’s Resistance Army have helped bring an end to years of brutal fighting, and marginalized the LRA’s chief, Joseph Kony. 
Similarly, in Sudan’s Darfur region, there has been no genuine peace process to disrupt, as attacks on civilians continue to be reported, even after the United Nations Security Council referred the matter to the ICC in 2005. 
Even so, the ICC prosecutor’s application for an arrest warrant for al-Bashir – announced this past July – has yet to provoke a widely-feared crackdown on humanitarian organizations. 
On the contrary, it may have prompted the arrest of a lower-level indictee for crimes in Darfur. 
In short, more law, rather than less, is needed to help stem the violence. 
Second, the ICC is said to have allowed itself to become a tool of national political leaders. 
The fact that national governments referred three of the Court’s four active cases – and that in each of those cases only armed rebels or government opponents have been charged so far – has contributed to this perception. 
Navigating this interplay between law and politics is perhaps the ICC’s greatest challenge. 
On the one hand, the Court’s actions often have political consequences: however well-founded, accusing the leader of a rebel army may be seen as taking sides in a conflict. 
On the other hand, the Court cannot charge – or refrain from charging – a senior political or military official responsible for grave crimes solely to avert negative political repercussions. 
Nor would it be proper, where the gravity and scale of crimes materially differ, to charge all sides in a conflict in order to preserve a false sense of parity. 
Both of these complaints reflect a third: unease with the Court’s overwhelming focus on Africa. 
Some suggest that this is yet another example of Western institutions applying to Africa principles that they don’t apply to themselves. 
The long history of Africa’s exploitation demands that this concern not be dismissed out of hand. 
Nevertheless, Africa is the site of many of the world’s worst conflicts. 
Nor is the ICC a foreign body. 
Thirty African governments have ratified the ICC’s governing statute, and several of the Court’s 18 judges hail from Africa, as does a substantial portion of its staff. 
Still, the Court should not hesitate to act outside Africa when mass atrocities demand redress. 
The experience of other war crimes tribunals suggests that questions about political bias may take years to overcome. 
Only by demonstrating professionalism in its work, and willingness to hold senior government figures accountable where appropriate, can the ICC engender broad and lasting support. 
Over time, the ICC’s example should foster more effective national and regional prosecutions of serious crimes such as genocide, crimes against humanity, and war crimes. 
For now, the Court can best address skeptics by more regularly and transparently explaining itself – its decisions, its mandate, and its constraints – to a global public to whom it ultimately must answer. 

African Muslims In The Islamic World 
Nigeria has been convulsed by religious violence triggered by the cartoons of the Prophet Muhammad published in a Danish newspaper months ago. 
The violence began in the northern Nigerian city of Maiduguri during a protest by Muslims against the cartoons, with the Christian Association of Nigeria reporting at least 50 Christians killed. 
Reprisals were swift, and at least 50 Muslims were killed in three days of violence in the southeastern (predominantly Christian) cities of Onitsha and Enugu. 
The Nigerian protests against the cartoons (so far the most violent in Africa) raise the question: what is the role and position of African Muslims (or more accurately, sub-Saharan African Muslims) in the “Islamic World”? 
When people in the rest of the world use the term “Islamic World” do they include in it sub-Saharan African Muslims, or do they have in mind only the Muslims of the Middle East and Asia? 
Muslims in sub-Saharan Africa do not share many characteristics with Muslims in other parts of the world, especially those of the Arab world. 
Sub-Saharan African Muslims are less assertive, and they face considerably more difficulties in their attempts to articulate their rights and establish their presence in their respective states and regions. 
Part of the difficulty arises from the perpetual African dilemma of identity. 
Africa has been described as a continent having a triple heritage, and the African Muslim, too, has a split personality. 
He must decide whether he is a Muslim first, then a member of his tribe, say, Hausa, and then of his nation, say, Nigeria. 
Even though Muslim practice is strong in Africa, there is widespread incorporation of traditional African rituals in ceremonies like weddings and funerals. 
For example, among the Luhya in Western Kenya, it is not uncommon for Muslims to slaughter animals during funerals, even though, strictly speaking, there is no such provision in Islam. 
Muslims in many sub-Saharan African states are also minorities. 
They do not form a formidable presence, as in Nigeria, where some Muslim-majority states in the north have even implemented Sharia Law, making them more or less Islamic states. 
Nevertheless, the Federal Republic of Nigeria is a secular state, as are almost all sub-Saharan African states. 
The colonial legacy also helps account for the relatively docile nature of Muslims in sub-Saharan Africa. 
The colonial powers’ arbitrary demarcation of borders lumped together in one state diverse ethnic groups which may have been historical antagonists. 
Colonial political economy also concentrated “development” in resource-rich areas, while neglecting resource-poor regions and their populations, which in many cases were Muslim. 
Thus we see a relatively poor Hausa-Muslim majority population in northern Nigeria and a relatively rich Ibo-Christian majority population in oil-rich southeastern Nigeria; a relatively rich Christian majority population in central Kenya and a relatively poor Muslim majority population on the coast and in the northeastern provinces; and so on. 
As political power tends to polarize around economic power, sub-Saharan African Muslims have been under-represented in these mostly centralized political systems. 
Moreover, Muslims in these mostly patron-client states have been forced to identify more with atomistic/parochial ethnic nationalism in order to enjoy the “fruits of independence” and thus acquire whatever political representation they have. 
This has led to a related problem in countries bordering the Indian Ocean: disunity between coastal, more Arabized Muslims and the non-Arabized Muslims of the interior. 
It is no exaggeration to argue that the more Arabized African Muslims along the Kenyan and Tanzanian coasts (including the island of Zanzibar) consider themselves “more Muslim” than the less Arabized Muslims inland. 
Muslim political participation in sub-Saharan Africa has thus been extremely limited. 
Political Islam is an almost unknown phenomenon in this region (the Islamic Party of Kenya was never registered, for example), and Muslim organizations have mostly focused on welfare and rights. 
However, Muslims in sub-Saharan Africa, like most Muslims around the world, exhibit an “us versus them” mentality. 
When Muslims form a minority, they have tended to co-exist peacefully with other religions, but where their populations are substantial (as in Nigeria), they tend to assert themselves. 
Whatever ethnic and other divisions are at stake, the “us versus them” sentiment has played a large role in fomenting religious conflict in Nigeria. 
Nevertheless, Nigeria (and perhaps Zanzibar) remains an exception in Islamic assertiveness in sub-Saharan Africa, which is why the idea of an active “Islamic World” includes only a relatively limited segment of sub-Saharan African Muslims. 
Whether they like it or not, the majority of sub-Saharan African Muslims are represented by states that are mostly secular, Christian, or dominated by other religions. 

African Opportunities, Global Benefits 
NEW YORK – The global economic recession has translated into a development crisis for Africa, which is revealing the continent’s vulnerability not only to economic contraction but also to climate change. 
Changing weather patterns are already affecting the lives of millions of Africans by reducing food security, facilitating the spread of diseases like malaria, and prompting mass migration. 
The livelihoods and lives of millions of people are at risk. 
Paradoxically, this crisis also presents a unique opportunity for Africa. 
The urgency of efforts to address climate change is revealing interesting prospects on the mitigation side, particularly in the areas of renewable energy and low-carbon growth. 
There is a real possibility to steer countries toward a new development model that will benefit not only Africa, but also the world. 
In the meantime, adaptation to climate change is critical. 
For Africa this means “weather proofing” development by increasing food yields, investing in climate-resilient crops and infrastructure, promoting rainwater harvesting, and expanding medical control measures in anticipation of an increase in vector-borne diseases. 
Africa needs additional resources, over and above existing aid commitments, to adapt to climate change. 
Financing adaptation to climate will be a formidable challenge, particularly as it involves additional costs above traditional development assistance – at a time when foreign-aid budgets are under pressure. 
Estimates of the amounts needed by developing countries to help them adapt to these challenges vary between $50 and $100 billion per year. 
This is why British Prime Minister Gordon Brown’s proposal to create a fund for climate change is so welcome. 
Failing to act now will increase costs in the future – both financial and humanitarian. 
We all stand to lose from a reversal of the economic and social progress made across Africa in the past decade. 
Burgeoning markets might disappear and investment opportunities evaporate, while the risk of political instability will increase. 
Every percentage-point fall in growth has direct social consequences, whether on nutrition levels, infant mortality, or school attendance. 
Every person pushed back into poverty is another step away from achieving the Millennium Development Goals. 
For all of these reasons, the continued engagement and support of all of Africa’s partners, including the G-8 countries, is vital. 
As this year’s DATA Report from the Africa advocacy group ONE underscores, many donors are honoring their aid commitments, despite the economic downturn. 
These countries recognize the practical value of investing in Africa’s development, as well as the moral and political imperative of keeping their promises. 
They acknowledge that Africa is bearing the brunt of the economic and climate crises, even though it was least responsible for creating them. 
Regrettably, this is not the case for all G-8 countries. 
Italy, this year’s G-8 host, has fallen behind its peers at a time when it is supposed to lead by example. 
We need solutions that will prevent environmental catastrophe and that are equitable for every human being. 
This will require bold political leadership and unprecedented solidarity between rich and poor countries. 
At this year’s G-8 summit, a breakthrough on supporting agriculture, investing in green technology, and strengthening health systems is possible. 
We hope that the G-8 leaders demonstrate foresight and include Africa in their deliberations. 
Africa’s international partners must not look the other way at this crucial moment. 

Capitalizing on Africa’s Youth Dividend 
TORONTO – When South African university students took to the streets in 2016 as part of the “Fees Must Fall” protest movement, the “decolonization of the curriculum” was among the movement’s chief concerns. 
It was a pivotal moment in South Africa’s history, as young people rose to demand quality and accessible education. 
But a crucial question was missing from the debate over fees and curricular relevance: how can changes to higher education empower Africa’s youth to drive the continent’s economic transformation? 
For Africa, the question is no longer “if” students are taught, but “what.” 
Unfortunately, while access to education has improved significantly in recent decades, school curricula have changed little since the colonial era, when secondary education was an elite privilege designed to advance the careers of a select few. 
Technical and vocational education and training (TVET) programs have also suffered from neglect. 
Today, these initiatives are marked by outdated courses and rote learning methods that fail to prepare young people for the demands of the twenty-first-century job market. 
The trouble goes beyond traditional components of the curriculum, like math, science, and language. 
There is also a deficiency in critical “soft” skills, such as communication, teamwork, and problem solving. 
Though neglected, it is these skills that enable young people to become adaptable, lifelong learners. 
The mastery of soft skills correlates to improved outcomes in school, work, and life. 
Yet, until recently, training in soft skills has not been integrated into formal education systems on the continent. 
Fortunately, that is changing. 
Across the continent, secondary schools and TVET systems are transforming themselves to prepare Africa’s young minds with the skills they need to make the transition from school to employment, and to become more engaged citizens. 
These adjustments are coming at a critical time for Africa, where many countries are experiencing a demographic dividend of declining fertility rates and rising productivity. 
In particular, these changes mean more opportunity for young people as they prepare to enter the job market. 
But to succeed on the job, young people must have the skills and education that a modern economy requires. 
At The MasterCard Foundation, where I manage education and learning programs, we’ve put together a blueprint – called Skills at Scale – to help African educators revitalize their curricula to capitalize more effectively on the economic potential of youth. 
One of the continent’s most successful efforts already underway is the USAID-funded Akazi Kanoze Youth Livelihoods Project, designed by the Education Development Center (EDC) in Boston. 
Akazi Kanoze epitomizes how a small initiative can catalyze wider education-sector reform, by emphasizing links to local employers that provide access to entry-level jobs, internships, and apprenticeships. 
The focus on personal development, interpersonal communication, and leadership training has ensured that students are well equipped to enter the labor market upon graduation. 
Rwanda’s Ministry of Education has already moved to integrate elements of the program in TVETs across the country. 
The government recently integrated Akazi Kanoze’s approach in the national curriculum to equip secondary and TVET students with the soft skills they require to succeed. 
National exams in the 2018-2019 academic year will also reflect the new competency-based curriculum. 
Since 2009, Akazi Kanoze trainings have prepared more than 37,000 youth for work, with more than 65% of participants in the initial round of training employed six months after graduation. 
Based on the success of integrating soft skills into the curriculum in Rwanda, The MasterCard Foundation and EDC will launch a similar program in Senegal later this year. 
Case studies from Skills at Scale highlight six components to a successful skills-training initiative. 
These include an enabling policy environment, in which the government is supportive and sets clear goals for education sector reform; vocal backing for these changes from strong political champions; wide stakeholder engagement, especially in the design and implementation phases of the reform; decentralization of authority for education; flexibility on the part of donors; and the ability to measure the changes’ impact on youth employment and entrepreneurship. 
Change is not without challenge. 
Adapting models of skills training to vastly different education systems across Africa will take time. 
It will also be difficult to ensure that intensive training models reach all young people, including those no longer in school. 
Experience in Rwanda shows that curriculum redesign requires close cooperation with education and workforce development authorities, as well as government officials, teachers, and school administrators. 
New curriculum content also requires developing new teaching and learning materials. 
Achieving scale also requires a markedly different approach to training teachers than is currently on offer in most African school systems. 
Trainings must go beyond traditional, one-off approaches, by providing ongoing teacher support. 
New pedagogies also require continual supervision and practice, especially early on. 
The old “cascade” model of teacher training simply won’t work. 
African governments, with support from the international community, can help students’ transition from school to work by relying on a curriculum that elevates the importance of soft skills. 
If done well, these changes can ensure young people are positioned to drive Africa’s future prosperity. 
Africans deserve a forward-looking education system, not one that remains stuck in the past. 
As students in South Africa demonstrated last year, the continent’s youth will settle for nothing less. 



After Assimilation 
Human migration is as old as history. 
Even migration to distant places and remote cultures is nothing new. 
In the nineteenth century, millions of Europeans sought liberty and prosperity in the Americas, notably in the United States. 
What is new today is the scale of migration, often across huge cultural divides - and often without a definite aim. 
The African boat people in the Mediterranean are often not even sure whether they want to be in Italy, Germany, or Britain. 
Even those who are certain, like North Africans in Spain and France, or Turks in Germany, had as their priority escaping the hopelessness of their home countries, not arriving at a particular destination. 
This modern form of migration raises massive problems for countries on the receiving end. 
In Europe, it is probably the most serious social issue today, because no one has a clear idea about how to manage the resulting clash of cultures. 
Once upon a time, North America, notably the US, seemed to provide the answer. 
It was that of the "melting pot": different peoples made their own contribution to American culture, but, above all, they made every effort to accept what they found and integrate. 
"No," the Russian woman who came to the US in the early twentieth century replied to the grandchild who asked whether her ancestors arrived with the Pilgrims on the Mayflower. 
"Our ship had a different name, but now we are all Americans." 
More recently, this has changed, giving rise to a process described by Arthur Schlesinger, the historian and former aide to President John F. Kennedy, in his book The Disuniting of America. 
No longer are all US citizens Americans. 
They have become hyphenated Americans: Italian-Americans, African-Americans, Hispanic-Americans, and so on. 
The ingredients of the melting pot are separating. 
Even in Israel, the last true immigration country - at least for Jews - assimilation is no longer so easy. 
Recent newcomers from Russia have their own political party, and old Europeans have become a distinct minority. 
Israel and America continue to have mechanisms to integrate new migrants. 
Language is an important underlying factor, and in Israel, there is the army, while in America, the values embodied in the Constitution still represent a shared secular faith. 
But these mechanisms are weakening everywhere, and are virtually non-existent in European countries. 
Modern societies are characterized by acute problems of belonging. 
They don't offer the implicit, unconscious ties of community that citizens felt in the past. 
As a result, people have begun to cling to other, more primordial group identities. 
They resist assimilation, fearing that it will rob them of their identity without offering a new one. 
What then is the alternative to assimilation? 
The "salad bowl" of so-called multiculturalism is no real alternative, because it does not provide the necessary glue that binds communities together. 
All the ingredients remain separate from the outset. 
The only viable alternative for which there are examples is probably that of London or New York. 
The main characteristic of this alternative is the coexistence of a common public sphere shared by all and a considerable degree of cultural separation in the "private" sphere, notably in residential areas. 
The public space is multicultural in terms of people's backgrounds, but is governed by agreed values, even a common language, whereas the people's private lives are - to use an ugly word - ghettoized. 
In theory, this is a distinctly second-best solution to the cultural consequences of migration; in practice it is the best answer we have. 
But it cannot be had for nothing. 
Even the necessary minimum of a common language requires a deliberate effort, to say nothing of certain rules of behavior. 
Living in London, I marvel at the way in which we Londoners have come to terms with Indian family shops and West Indian-run public transport, while not asking many questions about whole districts that are Bangladeshi or Chinese. 
No one has yet found a name for this new version of the "separate but equal" doctrine that some of us fought so hard against in the 1960's: separate private lives in a common public space that is equal for all. 
This is clearly easier in London and New York than it is in smaller towns or even in the capitals of countries where the world language of English is not spoken. 
Berlin's Turkish community and the North African communities around Paris seem increasingly separate, with their own public sphere and often language. 
Where this happens, an explosive condition can arise, a kind of separatism within, not by historically separate groups but by newcomers against natives. 
If we are forced to abandon the hope of assimilation, our efforts should concentrate on creating a public space to which all contribute and that all enjoy. 
Ideally, this should be an expanding public space, for in the end, the element of unity in a modern society is the guarantee of its citizens' liberty. 

After Austerity 
NEW YORK – This year’s annual meeting of the International Monetary Fund made clear that Europe and the international community remain rudderless when it comes to economic policy. 
Financial leaders, from finance ministers to leaders of private financial institutions, reiterated the current mantra: the crisis countries have to get their houses in order, reduce their deficits, bring down their national debts, undertake structural reforms, and promote growth. 
Confidence, it was repeatedly said, needs to be restored. 
It is a little precious to hear such pontifications from those who, at the helm of central banks, finance ministries, and private banks, steered the global financial system to the brink of ruin – and created the ongoing mess. 
Worse, seldom is it explained how to square the circle. 
How can confidence be restored as the crisis economies plunge into recession? 
How can growth be revived when austerity will almost surely mean a further decrease in aggregate demand, sending output and employment even lower? 
This we should know by now: markets on their own are not stable. 
Not only do they repeatedly generate destabilizing asset bubbles, but, when demand weakens, forces that exacerbate the downturn come into play. 
Unemployment, and fear that it will spread, drives down wages, incomes, and consumption – and thus total demand. 
Decreased rates of household formation – young Americans, for example, are increasingly moving back in with their parents – depress housing prices, leading to still more foreclosures. 
States with balanced-budget frameworks are forced to cut spending as tax revenues fall – an automatic destabilizer that Europe seems mindlessly bent on adopting. 
There are alternative strategies. 
Some countries, like Germany, have room for fiscal maneuver. 
Using it for investment would enhance long-term growth, with positive spillovers to the rest of Europe. 
A long-recognized principle is that balanced expansion of taxes and spending stimulates the economy; if the program is well designed (taxes at the top, combined with spending on education), the increase in GDP and employment can be significant. 
Europe as a whole is not in bad fiscal shape; its debt-to-GDP ratio compares favorably with that of the United States. 
If each US state were totally responsible for its own budget, including paying all unemployment benefits, America, too, would be in fiscal crisis. 
The lesson is obvious: the whole is more than the sum of its parts. 
If Europe – particularly the European Central Bank – were to borrow, and re-lend the proceeds, the costs of servicing Europe’s debt would fall, creating room for the kinds of expenditure that would promote growth and employment. 
There are already institutions within Europe, such as the European Investment Bank, that could help finance needed investments in the cash-starved economies. 
The EIB should expand its lending. 
There need to be increased funds available to support small and medium-size enterprises – the main source of job creation in all economies – which is especially important, given that credit contraction by banks hits these enterprises especially hard. 
Europe’s single-minded focus on austerity is a result of a misdiagnosis of its problems. 
Greece overspent, but Spain and Ireland had fiscal surpluses and low debt-to-GDP ratios before the crisis. 
Giving lectures about fiscal prudence is beside the point. 
Taking the lectures seriously – even adopting tight budget frameworks – can be counterproductive. 
Regardless of whether Europe’s problems are temporary or fundamental – the eurozone, for example, is far from an “optimal” currency area, and tax competition in a free-trade and free-migration area can erode a viable state – austerity will make matters worse. 
The consequences of Europe’s rush to austerity will be long-lasting and possibly severe. 
If the euro survives, it will come at the price of high unemployment and enormous suffering, especially in the crisis countries. 
And the crisis itself almost surely will spread. 
Firewalls won’t work, if kerosene is simultaneously thrown on the fire, as Europe seems committed to doing: there is no example of a large economy – and Europe is the world’s largest – recovering as a result of austerity. 
As a result, society’s most valuable asset, its human capital, is being wasted and even destroyed. 
Young people who are long deprived of a decent job – and youth unemployment in some countries is approaching or exceeding 50%, and has been unacceptably high since 2008 – become alienated. 
When they eventually find work, it will be at a much lower wage. 
Normally, youth is a time when skills get built up; now, it is a time when they atrophy. 
So many economies are vulnerable to natural disasters – earthquakes, floods, typhoons, hurricanes, tsunamis – that adding a man-made disaster is all the more tragic. 
But that is what Europe is doing. 
Indeed, its leaders’ willful ignorance of the lessons of the past is criminal. 
The pain that Europe, especially its poor and young, is suffering is unnecessary. 
Fortunately, there is an alternative. 
But delay in grasping it will be very costly, and Europe is running out of time. 

After Chernobyl 
KIEV: Chernobyl, the world’s most notorious nuclear power plant, will be shut down today, fourteen years after it spewed clouds of radioactive dust into the atmosphere. 
Back then, Ukraine became the focus of global attention, but Ukrainians learned of the disaster much later than the rest of the world. 
I recall that fateful Saturday afternoon with utter clarity, strolling through Kiev with my six-year-old daughter, oblivious to the danger. 
Chernobyl changed Ukraine forever, and was a catalyst for the downfall of the Soviet Union. 
Ultimately, Chernobyl changed the world. 
Now that Chernobyl will be permanently shut down, world attention again turns to Ukraine, this time in hope, not fear. 
Shutting down a vital source of electrical energy, which Chernobyl remains, is no an easy task, particularly with winter upon us. 
Ukraine’s energy infrastructure is weak; losing 8-10% of our electricity production and $100 million in revenues will strain the system even more. 
We also bear the responsibilities involved in laying off Chernobyl’s workers and depriving the adjacent city of Slavutych (population 28,000), of its main source of income. 
Moreover, we must continue dealing with the technical and ecological issues surrounding the Chernobyl sarcophagus, as well as maintain nuclear safety in the remaining nuclear plants in operation in Ukraine, including what is left of Chernobyl. 
In recent years, Ukraine alone financed all the costs of dealing with the Chernobyl disaster, consistently spending 5-10% of our state budget revenues to this end. 
Dealing with the aftermath of the disaster will remain a financial burden even with the plant closed. 
Yet closing the plant proves that we keep our promises. 
We committed to shut down Chernobyl this year in an agreement with the G-7 countries and the European Commission. 
Closure of the last remaining reactor at Chernobyl, I believe, must mark the beginning of a new phase of cooperation with the European Union and G-7 countries. 
Closing Chernobyl may be the most dramatic, but it is only a single episode in our reform efforts. 
When we gained independence, the world expected great things from Ukraine. 
Over the course of a decade, the world appeared to forget about us. 
Now we finally have a chance to break out of the downward spiral of economic decline. 
At long last, our society and economy are set on the path to growth and development. 
After pro-reform forces secured victory in last year’s presidential elections, all of the branches of government began cooperating to entrench democracy and the market economy in Ukraine. 
For the first time since independence, Ukraine recorded growth in industrial output of 12.5% in the first 11 months of 2000, and GDP has grown by 5.4% this year. 
Tough decisions were made, not least involving the energy sector. 
Barter payments, -- which stifled the energy market -- were eliminated. 
So too tax breaks and other privileges that skewed the playing field in favor of a select few. 
We are also doing everything possible to make Ukraine attractive to foreign investors. 
In the energy sector, we are privatizing state-owned energy distributors. 
To ensure complete transparency in the tender process, and eliminate problems experienced in the past, Western advisors are assisting us. 
For our intention is to attract large Western energy companies with experience in this field as strategic investors. 
Ten leading international energy companies, indeed, will participate in the privatization of the first group of companies. 
By the end of next year, we will privatize 12 additional energy companies. 
In its sheer scale, this may be the largest single energy privatization ever attempted in Europe. 
Our energy companies service a territory the size of France; they will all be privatized. 
Of course, these reforms are resisted, primarily by the oligarchs who thrive on a lack of transparency and use privileged access to state resources to enhance their business interests. 
By eliminating barter and requiring monetary payment, we curtailed their opportunities to profit at the state’s expense. 
Although we can and will continue the fight against corruption, we cannot do everything alone. 
International support for our efforts is crucial. 
A positive sign here is the recent decision by the European Bank for Reconstruction and Development (EBRD) to provide $215 million to complete the nuclear power stations at Rivne and Khmelnytsky, which will compensate for the loss of Chernobyl’s generating capacity. 
Euroatom is also helping with a loan of $585 million to finance repairs at Ukraine’s functioning nuclear power plants. 
In return, Ukraine will uphold its end of the deal: in addition to closing Chernobyl, we will introduce Western nuclear safety standards and renew cooperation with the IMF via the Extended Fund Facility program. 
We still need other potential creditors to confirm their involvement. 
Closing Chernobyl will not eliminate the Chernobyl threat. 
Our people will be unable to live on thousands of acres of contaminated earth for hundreds of years. 
The concrete sarcophagus built over the destroyed reactor must be renovated. 
We are grateful to all the donor countries who, with contributions from our own state budget, helped raise the $760 million needed to make the sarcophagus safer. 
In the end, Chernobyl’s legacy does not belong solely to Ukraine, for ours is a country located in the heart of Europe. 
We are a European nation. 
We realize that no one will implement reforms for us. 
The West can, however, help speed up and facilitate our efforts, as it did with the closure of Chernobyl. 
Cooperation between Ukraine and the West, without a disaster to concentrate everyone’s minds, will benefit all concerned. 

After China's Party 
BEIJING: China has now finished celebrating the 50th anniversary of Mao's revolution, but the hangover cure that so many people in the West have been urging upon the country -- a healthy dose of devaluation -- is unlikely to be swallowed. 
Instead, the government has put forward a fresh round of fiscal stimulation, including a RMB60 billion new bond issue and the introduction of a new 20% tax on the interest on savings. 
Devaluation, indeed, remains a taboo. 
Why are China's leaders so adamant against devaluing the RMB? 
First, Prime Minister Zhu Rongi and his advisors are very uncertain about the short-run benefits to be gained from any devaluation. 
Any boost to competitiveness, for example, is likely to be small and brief, as over 50% of China's exports are part of re-export industries using a great deal of imported materials or semi-finished goods. 
For these sectors, devaluation means an increase in costs, rather than a gain in competitiveness. 
Secondly, devaluation of the RMB may incite tit-for-tat retaliation by other Asian economies. 
The decline of China's exports have been mainly caused by a 20% decrease in exports to other Asian markets since 1998. 
But as these regional economies are now starting to recover, China's exports to them are starting to grow. 
Although a devaluation of the RMB may not have as much impact on the regional markets as before, it is impossible to calculate what way may deliver higher export growth: devaluation or not disturbing the region's increasing stabilization. 
Doing nothing seems the safer bet. 
Moreover, devaluation will impose heavy burdens on China, for example, it will certainly increase the cost of servicing China's debts and may also worsen the overall balance of payment. 
The only foreseeable benefit to be gained through a devaluation is a reduction in uncertainty as an end will be put to the rampant speculation on when the RMB will be devalued. 
This may help to increase the foreign investment and reduce the capital flights. 
Today, the real issue for China is not devaluation but "de-pegging" – ie, a return to the former "managed float regime" of foreign exchange that prevailed between 1994 and 1997 -- which means giving up the de facto fixed-rate regime which actually pegs the RMB to the US dollar. 
Such a break is the only way to prevent over-speculation in the RMB, although de-pegging may cause some initial devaluation under current market conditions. 
But the question is: when and how? 
The world-wide dilemma over exchange rate management is that when market pressure is not high necessary changes no longer seem so urgent. 
People lack the determination to take the action. 
But when pressure is high, government leaders charged with financial management feel trapped in a corner during any currency crisis. 
For Chinese policy makers, today's market pressures are not high enough to force them to take action, as China still enjoys a decent surplus in its balance of payments, both on current account and capital account. 
In addition, China's foreign reserve are rising at an accelerating path in recent months, up to $150 billion at the end of July, 1999. 
Last but not the least as a reason not to devalue, China is struggling with deflation and a slowdown in the country's growth rate. 
This is mainly caused by domestic problems (the bloated state owned enterprises and the government's failure to reform them, the huge number of non-performing loans on the books of state banks, restrictions to private investment, among many other causes. 
External conditions are playing little part in China's slowdown. 
So devaluation is unlikely to be effective in boosting the overall rate of growth. 
In any case, devaluation of the RMB in real terms or in terms of competitiveness in relationship with major Asian currencies has been already been occurring over recent months: All Asian currencies, including the Japanese yen, are appreciating; and domestic prices continue to deflate. 
If the US dollar weakens in relation with other major currencies, China may not need to adjust RMB's nominal rate for quite a while. 
Sun Tzu and other Chinese military theorists long ago counseled that doing nothing is sometimes the best way to win in the end. 
Today's Chinese leadership has adopted that bit ancient wisdom to currency management. 

After Dictatorship 
The war in Iraq had barely begun when the minds of those who conceived the invasion turned to what should happen after the victory over Saddam Hussein's regime-a victory everyone assumed to be inevitable. 
Politicians and experts have invariably sought to draw comparisons with recent examples like Afghanistan, Sierra Leone, East Timor, but also with more remote and fundamental cases. 
After all, what is expected in Iraq is the fall of a highly ideological dictatorship. 
Is there anything we can learn from the last examples of this kind, from the collapse of communism in Eastern Europe in 1989, or the end of the Third Reich in Germany in 1945 and the process of "de-Nazification" that followed? 
The risks of such comparisons are almost too obvious for words. 
Every case has its own defining features. 
Regarding the demise of communism, the experiences of, say, Poland and Romania are profoundly different. 
As we cross even more profound cultural boundaries, comparisons become still less relevant. 
Yet there are a few issues that are common to the unraveling of most ideological dictatorships. 
One such issue has to do with memory, and dealing with the past. 
This is connected with a practical question: who is in a position to build a new country on the ruins of the old regime? 
It is rare for a counter-elite to emerge quickly, much less for an elite-in-waiting to take over. 
In Germany in the 1950s, there were many complaints about old Nazis reappearing in a democratic guise and occupying important positions. 
Many of us fought against the apparent "restoration" of the old regime. 
In Eastern Europe, the old leaders initially disappeared from the scene, but not for long. 
Ex-communists were often reincarnated politically as social democrats. 
Those who had been in the resistance-like Václav Havel in Prague-found this hard to take. 
Yet these communist apparatchiks were not the same people they had been. 
Circumstances had changed and the people with them. 
This has a great deal to do with methods of dealing with the past. 
Post-1945 Germany and post-1989 Poland are examples of countries that moved forward without much attention to the past. 
Intellectuals complained that too little time and energy was spent on "mastering" the past. 
They had good reasons to complain. 
Indeed, after a decade or so, the need to draw clear lines and tell all, including the painful stories, became overwhelming. 
But the most successful postcommunist countries moved forward first and coped with the past later. 
Those who could not lift their eyes from the horrors of the past made less progress. 
A second general issue has to do with priorities. 
There is a natural tendency-especially in Anglo-Saxon countries-to regard elections as the most effective institutional remedy for countries emerging from ideological dictatorships. 
To be sure, elections are important; but by themselves they do not solve problems. 
Indeed, if they disappoint, the very principles on which they are based-democracy and civil liberties-will be discredited. 
I am a strong, almost old-fashioned believer in parliamentary democracy, but when it comes to situations like postwar Iraq, two other imperatives are equally pressing. 
One is the need to establish an effective administration to make certain that new policies of tolerance and market economics are actually implemented. 
In East European countries, this was a major problem, and it is only through accession negotiations with the European Union that such administrative reform has been assured. 
The second imperative is the rule of law. 
The law has a different place in different cultures, and it presents special problems in Islamic countries. 
However, it is crucial that every effort be made to educate and install an impartial and incorruptible judiciary. 
Judges must not only be honest, but must be seen to be so and, as such, trusted. 
The process of establishing the rule of law has been difficult and has remained incomplete in most post-dictatorial countries; yet it will be a key to successful recovery in Iraq as well. 
One of the key points that I emphasized in my 1990 book Reflections on the Revolution in Europe is also valid for Iraq. 
The road from the collapse of a dictatorial regime backed by ideology to a more liberal order leads through a valley of tears. 
Things are likely to get worse before they get better. 
This is notably the case in economic terms. 
Even post-War Germany's acclaimed, miracle-working Economics Minister, Ludwig Erhard, was deeply unpopular in the early 1950s, because it appeared as if only a few were getting rich, while most West Germans remained poor or got poorer. 
For a certain period in the process of recovery, it is simply necessary for people to keep their nerve. 
Poland is a recent example of a country that achieved this feat. 
It requires plausible leadership and the reasonable hope that things will get better before long. 
If this time of transition goes wrong, the alternative is renewed turmoil and the victory of fundamentalists of one kind or another. 
The warning "Beware of the valley of tears!" is thus the one that must be taken most seriously by those responsible for rebuilding an Iraq scarred by the terrors of dictatorship and the ravages of war. 

Immunization Independence 
WASHINGTON, DC – The first years of this century have been heady ones for global health. 
International donors – whether national governments, such as the United States, through its PEPFAR program, or new international funding initiatives, such as the Global Fund to Fight AIDS, Tuberculosis, and Malaria and Gavi, the Vaccine Alliance – have invested billions of dollars in national disease-control programs and health systems, saving millions of lives. 
But now some of the countries that have benefited from these programs face a new challenge: sustaining the gains they have made once external support is withdrawn. 
Ultimately, it is on the basis of this transition that donors’ initiatives – and the health aid enterprise as a whole – will be judged. 
Consider Gavi, the Vaccine Alliance. 
Founded in 2000 by a partnership of major donors, international agencies, and vaccine industry leaders, Gavi’s goal is to help the world’s poorest countries introduce new lifesaving vaccines and strengthen their immunization programs. 
When a country’s annual per capita income rises above a certain threshold – currently $1,580 – it becomes ineligible for Gavi support. 
Of course, Gavi doesn’t just cut off funding all at once. 
Support is phased out over a period of several years. 
During this transition period, countries rapidly increase their financial contribution to their immunization programs and prepare to assume full responsibility. 
This approach, which enables Gavi to concentrate its resources on countries with the greatest need, has been in place since 2010. 
But it is now being put to a stern test: one-third of the 73 countries to which Gavi extends support are either in the midst of the transition process or have just completed it. 
The group includes countries as different from one another as Armenia, Bhutan, Honduras, and Vietnam, as well as India and Nigeria, which have the largest birth cohorts. 
The Gavi model is now under the microscope. 
Will countries be able to continue purchasing and delivering the vaccines that were introduced with Gavi support? 
Equally important, will that commitment hold up over time? 
If government budgets are cut, will immunization be protected, along with other essential health services? 
Will countries be able to introduce new lifesaving vaccines as they become available? 
Will they sustain and strengthen disease surveillance, so that outbreaks are detected and addressed quickly? 
Or will fiscal pressures lead, in some countries, to vaccine shortages, to declines in immunization coverage, or even, in the worst case, to vaccines being dropped altogether from national programs, reversing the hard-won gains of recent years? 
The answers to these questions are important not only for the countries themselves, but also for their neighbors, which could be put at risk by backsliding on immunization. 
After all, infectious diseases do not respect national boundaries. 
The recent yellow fever epidemic in Angola, for example, spread to its much poorer neighbor, the Democratic Republic of Congo. 
The experiences of countries that have “graduated” from Gavi assistance will also hold important lessons for other international health programs and their beneficiaries. 
With so much at stake, international agencies must do whatever they can to prepare countries for “life after Gavi.” 
For some of these countries, especially those that have adopted many new vaccines, obtaining adequate and sustainable financing is one of the most daunting challenges posed by the transition. 
Although immunization programs require only a relatively small share of health budgets and yield exceptionally high economic returns, securing the needed financing requires careful planning. 
A new resource can help countries as they wrestle with this challenge. 
Immunization Financing: A Resource Guide for Advocates, Policymakers, and Program Managers provides information on estimating immunization costs, assessing the pros and cons of various sources of financing, shaping purchasing strategies, and navigating policy processes. 
It does not prescribe one way forward, but rather provides relevant information and expert analysis. 
Countries can then evaluate options in light of their own circumstances, and advocates can ask the right questions. 
With Gavi support, close to 580 million children have been immunized since 2000, and more than eight million future deaths have been averted. 
These are impressive gains that are worth celebrating. 
But only if countries successfully negotiate the transition from Gavi support can they be confident that future generations will enjoy the same health protections. 

After Kyoto 
The Kyoto Protocol treaty has now entered into force for the 126 nations who have joined it so far. 
Now is the time to start thinking about how to engage all nations, including large emitters, in conversations about what to do after the treaty’s expiration in 2012. 
This is exactly what the European Commission did recently by providing its first strategy for a post-Kyoto era, which will be discussed by the European Council next March. 
While the Kyoto Protocol represents only a modest reduction of carbon emissions in industrialized countries – 5.2% between 2008-2012 relative to 1990 levels, with varying targets for individual countries – real progress can be made in sustaining development efforts and preserving our planet. 
But first, all countries must integrate climate concerns into policy planning, and improve their governance in key sectors such as energy, infrastructure, and transport. 
In other words, we must act in accordance with the recognition that climate change and its effects on people in both rich and poor countries remains a threat to global security. 
At the end of the day, the long-term approach is likely to include a rules-based system, an incentives system, and investments in technology change. 
Increasingly, adaptation at the national level will be recognized as a major issue that will require appropriate funding. 
Dealing with the impacts of climate change and with emission reductions should not be mutually exclusive, but complementary. 
Looking ahead to the post-Kyoto world offers us the chance to start a new dialogue and to look at new options on climate change. 
Nations could set the more ambitious goal of limiting the long-term change in the earth’s temperature, and then assign emissions rights among countries in such a way that will eventually limit temperature increases to an acceptable level. 
This would require increasing investments in energy research and development for new and improved technologies – a process that needs to be supported by stronger public-private partnerships. 
Up to now, with only 15% of the world’s population, rich countries have been responsible for more than 75% of global carbon dioxide (CO2) emissions, and thus most of the environmental damage. 
However, it is the developing countries – and thus the world’s poor – who are most vulnerable. 
It is unrealistic to ask poor countries, where more than 1.6 billion people do not have access to clean energy and technologies, to bear the costs associated with the much needed technological change. 
Working with partners, the World Bank is supporting financial strategies to assist developing countries in meeting the costs caused by climate change. 
To date, over $1 billion dollars in Global Environment Facility (GEF) grants, together with about $8 billion in co-financing, have been committed to programs related to climate change. 
While the regulatory mechanisms of both Kyoto and the European Trading Scheme have contributed to the establishment of an emerging market for carbon trading, interested parties are now concerned about the immediate future. 
Without a regulatory framework beyond 2012, the window of opportunity for initiating project-based transactions will close by 2006/2007. 
Given the long lead time between project preparation and the first benefits of emissions reductions, project developers have only a few years to act before carbon payments cease to make a meaningful contribution to project finance in the current context. 
Developing infrastructure projects is a long process that requires 3-7 years from identification, through licensing, financing, and construction, and finally to the first certification of carbon emission reductions. 
Therefore, projects need to be operational at the latest by 2007. 
The World Bank has been instrumental in advancing carbon finance as a viable development tool, and in facilitating private-sector participation in the market. 
The Bank is focused on representing the interests of its borrowing countries, helping them to develop assets for carbon trading according to their own priorities. 
But, without a commitment by governments to limit greenhouse gas emissions beyond 2012, the carbon market will remain uncertain, and the private sector – vital to the market’s success – is unlikely to expand its participation in a meaningful and sustained way. 
According to a recent World Bank-supported survey of companies interested in carbon finance, only one in five respondents declared that they were interested in buying post-2012 emissions reductions. 
Now is the chance to look forward and enlist the global community – with no exclusions, although with differentiated responsibilities – in the pursuit of a more secure world, one that avoids the dire risks of environmental degradation and social conflict implied by inaction. 


After Paris 
NEW YORK – The attacks in Paris by individuals associated with the Islamic State, coming on the heels of bombings in Beirut and the downing of a Russian airliner over the Sinai Peninsula, reinforce the reality that the terrorist threat has entered a new and even more dangerous phase. 
Just why the Islamic State decided to stage its attacks now is a matter for conjecture; it may well be that it is going global to compensate for its recent loss of territory in Iraq. 
But whatever the rationale, what is certain is that a clear response is warranted. 
Actually, the challenge posed by the Islamic State calls for several responses, as there is no single policy that promises to be sufficient. 
Multiple efforts are needed in multiple domains. 
One is military. 
More intense attacks from the air against Islamic State military assets, oil and gas facilities, and leaders are critical. 
But no amount of air power on its own will ever get the job done. 
A substantial ground component is needed if territory is to be taken and held. 
Unfortunately, there is no time to build a partner force on the ground from scratch. 
This has been tried and failed, and Arab states are unable or unwilling to constitute one. 
The Iraqi army has also come up short. 
Iran-backed militias only make matters worse. 
The best option is to work more closely with Kurdish troops and select Sunni tribes in both Iraq and Syria. 
This means providing intelligence, arms, and being willing to send more soldiers – more than the 3,500 Americans already there, and possibly on the order of 10,000 – to train, advise, and help direct a military response. 
Such an effort must be collective. 
It can be informal – a “coalition of the willing” that would include the United States, France, the United Kingdom, Arab states, and even Russia under the right circumstances – or carried out under NATO or United Nations auspices. 
The packaging matters less than the results. 
Symbolic declarations of war, though, ought to be considered with caution, lest the Islamic State appear to be winning every day it does not lose. 
A diplomatic component is no less essential to any response. 
Syrian President Bashar al-Assad is a recruiting tool for the Islamic State and must go. 
But any successor government must be able to maintain order and not permit the Islamic State to exploit a power vacuum, as it has done in Libya. 
Moreover, orderly political change can be brought about only with Russian and Iranian support. 
One near-term option worth exploring is a coalition government still headed by a representative of the Alawite minority, a concession that could well be the price of moving Assad out of power. 
In principle, and over time, a more representative national government could come about, although talk of holding elections in 18 months is fanciful under any scenario. 
But reaching a compromise along these lines could well be impossible. 
This is why increased military effort is needed to bring about larger and more secure enclaves that could better protect civilians and take the fight to the Islamic State. 
Syria is not a normal country in any sense, and it will not be for a long time, if ever. 
A Syria of enclaves or cantons is a more realistic model for the foreseeable future. 
Other indispensable elements of any effective strategy include expanded help for or pressure on Turkey to do much more to stem the flow of recruits to the Islamic State. 
And Turkey, along with Jordan and Lebanon, need more financial assistance as they shoulder the bulk of the refugee burden. 
Arab and Muslim leaders can do their part by speaking out to challenge the Islamic State’s vision and delegitimize its behavior. 
There is also a domestic dimension to policy. 
Homeland security and law enforcement – increasing protection both at borders and within them – will have to adjust to the increased threat. 
Retail terrorists – individuals or small groups carrying out armed attacks against soft targets in open societies – are extremely difficult to deal with. 
The threat and the reality of attacks will require greater social resilience and quite possibly a rebalancing of individual privacy and collective security. 
What is also required is a dose of realism. 
The struggle against the Islamic State is not a conventional war. 
We cannot eradicate or destroy it any time soon, as it is as much a network and an idea as it is an organization and a de facto state that controls territory and resources. 
Indeed, terrorism is and will continue to be one of the scourges of this era. 
The good news, though, is that the threat posed by the Islamic State to the Middle East and the rest of the world can be dramatically reduced through sustained, concerted action. 
The main lesson of the attack on Paris is that we must be prepared to act over time and place alike. 


After the Dear Leader 
SEOUL – Korea is a unique country. 
The Cold War ended when the Soviet Union collapsed in 1991, and is now remembered only as history to most people around the world. 
The Korean Peninsula, however, remains divided along ideological lines, and the two Koreas co-exist as living remnants of the Cold War. 
A total of almost 1.5 million young soldiers from both North and South Korea face off against each across the heavily armed Demilitarized Zone. 
Events and structural forces, however, have affected and changed the nature of the North Korean system since 1991. 
The sudden discontinuation of the supply of petroleum and natural resources from Russia in the early 1990’s, the failure of the centrally-planned economy, and the subsequent massive famine in the mid-1990’s left North Korea’s leaders no alternative but to tolerate informal market activities. 
Nowadays, every North Korean seems to like money and know its value. 
The engagement policy pursued by the South Korean government in recent years also contributed to changes in North Koreans’ perceptions of the outside world and of their own abject economic situation. 
In these desperate circumstances, North Korea’s leaders clung to their strategy of developing nuclear weapons as a last resort to defend the security of their regime. 
But, regardless of whether the nuclear issue is resolved, the spread of market forces in North Korea will continue to change every aspect of life there in the coming years. 
Nobody yet knows what the political consequences of these economic changes will be. 
So, even before the recent reports of North Korean leader Kim Jong-il’s health problems, North Korea was already a country marked by growing uncertainty. 
Nevertheless, the reports about Kim’s ill health hit like a rude wake-up call about the precarious nature of conditions in North Korea. 
The “Dear Leader’s” declining health will add even more uncertainty and may cause international instability across East Asia. 
For example, Kim Il Sung groomed his son Kim Jong-il as his successor for about two decades before the younger Kim took power in 1994. 
Kim Jong-il, however, has not yet even chosen his successor. 
Indeed, it is widely expected that a new system of collective leadership will emerge if Kim Jong-il is incapacitated. 
The problem is that North Korea has no experience with collective leadership. 
In the last six decades, all power has been concentrated in the hands of one person. 
One-man rule has been so completely embedded in North Korea’s political culture and system that it is difficult to expect collective leadership to succeed. 
Thus, some type of power struggle, rather like what occurred in the Soviet Union following Stalin’s death, may invariably follow a brief period of collective rule. 
The dilemma for the world is that major decisions will have to be made during this period of instability. 
Will the North’s would-be leaders be able to manage the country’s stock of nuclear weapons responsibly and safely without transferring a few of them abroad, much less respond to international pressure to dismantle them in a reasonable and flexible manner? 
Over the past decade, Kim Jong-il has emphasized the importance of his military-first policy. 
As a result, the army will be dominant in decision making on important issues like nuclear negotiations. 
But the problem with military rule is a tendency toward incomplete understanding of the implications of political decisions – a problem that will be aggravated further by collective leadership. 
Under a North Korean collective leadership dominated by the military, the power of the country’s economic bureaucrats will be marginal, at best. 
This may lead to suppression of pressure from below for economic reform and opening. 
As a result, the economy may worsen and political instability increase. 
In such a difficult domestic situation, North Korea’s leaders may adopt more hostile policies to obtain economic aid from both South Korea and the United States. 
Recently, South Korea’s government made it clear that it would continue to engage North Korea, but in a more principled way than had previous administrations. 
This reflects a hardening of South Korean public opinion, following North Korea’s nuclear test in 2006. 
As a result of this policy shift – and the recent killing of a South Korean tourist in North Korea’s Kumgang Mountains – official dialogue between North and South has stopped for the past several months. 
International relations in northeast Asia will become more subtle and unstable as the Kim Jong-il era ends. 
After six turbulent but somewhat predictable decades, we may be entering into a new era of greater turbulence but less predictability on the Korean Peninsula. 

After the Death of Utopia 
A decade ago, people spoke of the end of history, meaning the ultimate triumph of a liberal capitalist political order. 
Nowadays, many scoff at that notion as too simplistic. 
Nonetheless, we are at both the end and beginning of something remarkable. 
In the wake of the death of the utopian - and often bloody - certainties of the 19th and 20th centuries (Communism's collapse was but the latest spectacular example), and with fading belief in the liberal welfare state, traditional views about work, retirement, education, the Church, solidarity, and other social institutions are changing rapidly. 
The central driver of all this is today's enormous acceleration in the underlying pace of technological and economic change. 
Call it fast-forward modernization. 
Of course, the worldwide crash of high-tech stocks in 2000 chilled the hype about a "new economy" that seemed to be emerging at the "end of history." 
But falling share prices should not blind us to the fact that on top of the ongoing information revolution, three fresh waves of revolutionary technology are poised to hit: bio-technology (including new medical technologies and genetic engineering, such as the creation of human embryos through cloning), nanotechnology, and robotics. 
Each is its own industrial revolution, and will profoundly alter our lives and ways of thinking. 
Indeed, the revolution is already upon us. 
For the first time in history, a global techno-market order is transforming the world of finance, business, politics and, indeed, physiology, beyond recognition. 
This new techno-market system is shaped and characterized by a belief in the increasing importance of knowledge, new ideas, innovations and new technologies, and a higher pace of what the economist Joseph Schumpeter famously called "creative destruction." 
As a result, corporate capitalism is rapidly becoming obsolete, replaced by a creative capitalism in which entrepreneurship, combined with a greater willingness to adopt innovations, transforms the business landscape. 
Innovative start-up firms become huge companies faster than ever before. 
But these infant giants are quickly threatened with eclipse by even newer enterprises. 
Take the example of computers. 
It took 15 years for other countries to compete successfully with America's Silicon Valley in semi-conductors, but less than five years in Internet technology. 
This system provides unprecedented financial incentives to scientists and entrepreneurs to aggressively develop new technologies and thus become rich. 
But the revolution is not only for the elite; it also offers a realistic (non-utopian) promise of dramatically improved lives for many people around the entire globe - not in 100 years, but in the foreseeable future. 
We are notjust witnessing a simple adaptation of social structures and ways of living to suit new technologies. 
The Nobel laureate Robert Fogel argues that a new synergism between technological and physiological improvements has produced a radically new form of human evolution, which he calls technophysio evolution. 
Only this, Fogel believes, can explain recent trends in longevity, body size, the durability of vital organs, and chronic diseases. 
These changes are also triggering changes in human consciousness. 
The result is a litany of "post-utopian" values that include a stronger emphasis on individual freedom and personal responsibility. 
In this world without utopia, individual freedom is the supreme value. 
But, as with any change of such magnitude, there are holdouts. 
Indeed, politics everywhere now seems dominated by the "war of lifestyles" that has emerged from today's emphasis on individual autonomy. 
Not so long ago, issues such as the environment, the balance of work versus leisure in daily life, and the role of marriage, abortion, and other family concerns were secondary political disputes, as politicians fought over who would receive what share of a nation's wealth. 
Now these issues define domestic political agendas. 
Much of the new battle over lifestyles is undoubtedly misunderstood, perhaps because debates about them are conducted in a simplistic way: anti-global movements versus multi-nationals, environmentalists versus corporate polluters, small farmers versus agro-business, and so on. 
But, beyond slogans, there is an underlying fault line between those who have the cultural capacity to embrace change and those who resist it by adhering to traditional ideas about how one's life and, by extension, society, should be organized. 
This conflict exists globally. 
In societies that have been preparing themselves by opening their markets and embracing universal education, the disruptions of this revolution can probably be absorbed and handled. 
Conflict is most acute in closed societies characterized by a politically repressive climate and culturally induced obstacles to growth. 
Such obstacles include the absence of an informed and capable workforce, instinctive mistrust and rejection of new ideas and technologies just because they come from the West, lack of respect for those who acquire new knowledge, and endemic discrimination against women. 
The new battle of lifestyles has given rise to new enemies of open societies, such as the Taliban and Al Qaeda. 
It is no coincidence that terrorism thrives in societies that are intrinsically hostile to today's modernizing values and belief in individual autonomy. 
So long as these ideas clash, violence will lurk. 
To defend post-utopian values in the longer-term, politicians (and generals and spymasters) cannot seek security by drastically curtailing fundamental freedoms, because to do so risks forfeiting public support and a weakening of the pillars of the post-utopian market order. 
In challenging groups like Al Qaeda, they must understand that they are engaged in a war of ideas; winning the hearts - and the lifestyles - of societies is the only way to win that battle. 

After the God that Failed 
Discussing morality and politics, it is said, is like discussing vegetarianism with cannibals. 
Much of the public, it seems, thinks this way--for good reason. 
Moral principles and moral obligations in today's political/economical realm have undoubtedly gone astray, unashamedly displaced by the interests of profit and power. 
The implications are clear. In today's world, "order" reflects a balance of interests that is maintained mainly by force--be it military or financial. 
But something other than this "order of the barracks" is possible. 
Think of it as the order of the church choir, where individual members cooperate on the basis of a shared culture and values. 
One reason for the complete absence of values in "power politics" nowadays is that leaders get away with speaking words whose true meaning they leave out of their policies. 
Moreover, secular spiritual leaders like Gandhi, Schweitzer, and King have vanished, annihilated it seems by our new fetishes--success, expediency, gain, and special interests. 
Of course, the so-called civilized world never managed to create a living utopia. 
Efforts to do so usually ended disastrously. As someone born in the old Soviet Union, I know firsthand the despair and brutality of such attempts. 
This does not mean that all efforts to build a more moral world are doomed. 
Having survived an age of extreme ideologies, such as capitalism, communism, and, recently, market fundamentalism, most people no longer seek answers in ideological clichés and the driving, purifying force of political certainty. 
Forced harmonization is dead, which opens the door to making new voluntary forms of social harmony possible. 
Let me suggest five steps necessary to begin to bring this about. 
The first calls for the world to deem as utterly unacceptable state violence that seeks to impose conformity and discipline. 
Such violence is unjust on its face because it suppresses and intimidates both body and spirit. 
To achieve this end, however, the state must be stripped of its ability to impose divisive dogmas, traditions, and stereotypes. 
That can happen only if a carefully crafted system of "checks and balances" is established, in which powerful organized interests--states, above all--are restrained in their efforts at dominance. 
Not only political forces need to be checked. 
In the rush to concentrate wealth, for example, majority owners of corporations must not be allowed to harm the interests of minority shareholders, who as a rule are honest common citizens. 
This leads me to my second reform priority: a systemic separation of state power and capital. Even in long-established democracies, candidates for elective office are not evaluated according to their wisdom and leadership, but according to the size of their campaign war chests. 
Acquiring government power through possession of capital--and converting it into unjust economic rents--must be curtailed. 
Can such a boundary between power and capital be set? 
Yes. 
I say this as someone who created significant capital and, having done so, changed her occupation in order to cultivate morality in politics. 
Laws can make the separation of capital and political power transparent for all to see. 
But the will to achieve this division is, sadly, absent among most people in power. 
Related to this, it is necessary to separate mass media from both power and the interests of capital. 
In Europe, America, and Japan, media ownership is increasingly concentrated, which rightly worries citizens in these countries, particularly when media owners move from forming opinion to forming governments. 
How much more worrying, then, is such concentrated ownership in new democracies and developing countries, where the check of civil society is mostly absent? 
All these reforms presuppose an independent judiciary. 
The autonomy of judges must be assured, which requires that their character is such that people trust their decisions. 
In states where justice is bought by the rich and powerful, this may impossible, but individual judges can and do stand up to power. 
All citizens should support such judicial stalwarts, for their example can refashion an entire justice system. 
In essence, creating a more moral political order requires the removal of money as the decisive factor in politics. 
Where money rules, some citizens become depressed and apathetic, others become cruel and heartless, and children learn aggressive behavior. 
Money should not divide people into political haves and have-nots, or states into successes and failures. 
Gradually and persistently, the fundamentalism of money must be eliminated. 
Of course my proposed "transformations" may sound too good to be possible. 
In defense I wish to cite the great Harvard philosopher John Rawls, who died recently. Theory, no matter how elegant, Rawls argued, should be dismissed or revised when proven untrue. 
The corollary to this is that institutions and even world orders--no matter how efficient and successful--must be reformed if they are unjust. 
Perhaps only someone who comes from one of the post-Soviet states can conceive of politics in terms of original principles in the manner of Rawls. 
Our newborn states were given the opportunity to create moral political systems on the ruins of a "god that failed." 
The struggle to do so has been mighty, but despite our travails--and our poverty--I believe that my country has the strength to contribute creatively to this endeavour. 

After the Golden Age of Finance 
LONDON – Even after the passage of new financial regulations in the United States, the Dodd-Frank Act, and the publication of the Basel Committee’s new capital requirements, the financial sector’s prospects over the next few years remain highly uncertain. 
There has been some recovery in prices for bank shares from the lows of 2008, of course, but that rally faltered recently. 
Quite apart from their concerns about the robustness of the rebound in the economy, investors are uncertain about many financial firms’ business models, and about the future size, shape, and profitability of the financial sector in general. 
After all, banks remain deeply unpopular in all developed countries. 
Bankers are still social pariahs, as lowly valued by the public as drug dealers or journalists. 
They are reviled if they lose money, and assailed if they make it. 
For banks and their shareholders, it looks a case of heads they win, tails we lose. 
Thus, as banks return to profitability, politicians in North America and Europe have begun to talk again about new taxes that would skim those profits off to the benefit of taxpayers, whose support kept banks in business at the height of the crisis. 
This is a huge contrast with the financial sector’s position in the previous three decades. 
From the late 1970’s until 2007, the financial sector grew far more rapidly than the real economy. 
In 1980, financial assets – stocks, bonds, and bank deposits – totaled around 100% of GDP in the advanced economies. 
By 2007, the figure was over 400% in the US, the United Kingdom, and Japan. 
During this period, credit expanded rapidly as a share of GDP, reaching more than 300% at the peak. 
In the UK, the profits of financial intermediaries, which had averaged around 1.5% of the whole economy’s profits in the 1970’s, reached 15% in 2008. 
In the US, bank profits were an even larger share of the total. 
This was the golden age of finance. 
Bankers’ pay soared alongside profits – indeed, it grew even faster. 
To paraphrase William Wordsworth, bliss was it in that dawn to be alive, and to be a derivatives trader was very heaven. 
But the expansion came to a shuddering halt in 2008, the first year in decades in which aggregate financial assets fell, and there is still little sign of a sustained recovery. 
Is this a short-term phenomenon? 
Will the financial sector return to pre-crisis growth rates when the economic situation has been fully stabilized? 
Will financial “deepening” continue? 
Will bank stocks once again outperform the market? 
A recent study by Andy Haldane and others at the Bank of England casts doubt on the prospect of a return to the status quo ante. 
They note that the Golden Age was in fact an unusual period, if you look at the last two centuries of economic history. 
Haldane bases his analysis on the trend in the Gross Value Added (GVA) of the financial sector. 
Over the last 160 years, the GVA of finance has grown by two percentage points a year faster than that of the economy as a whole. 
But this excess growth has not been evenly spread. 
During the two decades leading up to World War I, the financial sector grew almost four times faster than the economy, in the first wave of financial deepening and globalization, but from 1918 until the 1970’s, finance expanded less rapidly than average economic growth. 
Only when markets were deregulated and liberalized from the early 1970’s onwards did finance once again leap ahead. 
In the US, financial sector GVA was only 2% of the total in the 1950s, but stands at 8% today. 
Haldane believes that this growth spurt is well and truly over. 
He argues that much of the apparent growth in value added has in fact been illusory, based on increased leverage, excess trading, and banks writing deep out-of-the-money options – for example, credit-default swaps (a $60 trillion market in 2007). 
“What all these strategies had in common,” writes Haldane, “was that they involved banks assuming risk in the hunt for yield – risk that was often disguised because it was parked in the tail of the return distribution.” 
From a regulator’s perspective, this is a powerful argument for requiring higher capital to constrain the risk that banks can take on. 
Indeed, the Basel Committee plans to require more capital in the future, though the new requirements will be delayed, owing to concerns about the cost and availability of credit to sustain the recovery. 
Against that background, it is hard to believe that we will quickly return to the heady growth in financial assets, credit, and risk we saw from the 1970’s to 2007. 
Financial-sector returns are likely to be lower. 
Returns of 20% on equity targets are a thing of the past. 
And lower profitability will reduce pay more effectively than any direct regulatory controls. 
For most of us, unless we remain seriously overweight in financial stocks, this may not be a bad prospect. 
We do not want to inflate another asset-price bubble on the scale of the one that burst in 2007-2008. 
But there is a risk for regulators and central banks. 
If they over-constrain the financial sector, risk may migrate outside the regulatory frontier, where it will be harder to measure and monitor. 
That is why it is important to maintain some flexibility, to allow currently unregulated institutions like hedge funds and private-equity funds to be swept into the regulatory net if they become large and systemically important. 
The tighter their controls on risk in banks, the more frontier police the regulators will need. 

After the Guns of August 
The Middle East is a place where the dust hardly ever settles. 
When it occasionally does, even for a short interval – as UN Resolution 1701 for cessation of hostilities in Lebanon seems to be holding – it is time to take stock of events in the hopes that a responsible debate may influence those in power. 
Let’s start with the United States. 
President George W. Bush has been short on neither initiatives nor catchy slogans and acronyms. 
Recent years are littered with them: “Global War on Terror” (GWOT), “Road Map,” “Middle East Partnership Initiative “ (MEPI), “Broader Middle East and North Africa” (BMENA) – originally “Greater Middle East Initiative (GMEI) – Democracy Assisted Dialogue (DAD), and so on. 
His latest reverie, envisioned in the thick of the recent fighting between Israel and Hezbollah, was the New Middle East (NME), with US clients Israel, Egypt, Jordan, and Saudi Arabia serving as the pillars of regional order. 
But like all his previous initiatives since the terrorist attacks on New York and Washington almost five years ago now, the NME ran into trouble from the outset. 
Secretary of State Condoleezza Rice announced its birth while rejecting an immediate ceasefire in Lebanon. 
Her poor timing made the initiative appear heartless, as thousands of civilians were being uprooted, killed, or maimed by Israel’s efficient but ruthless artillery and air force. 
This so embarrassed the three Arab NME partners that each raced to distance itself from the US-sponsored initiative. 
Saudi Arabia, which had remained silent for nearly two weeks, did so with a $500 million contribution to rebuilding devastated areas of Lebanon and another billion to support Lebanon’s threatened currency. 
Egypt’s heir apparent Gamal Mubarak followed suit in the fourth week of the fighting by heading a 70-member delegation on a solidarity visit to Beirut. 
But, rather than earning him the respect of an outraged Egyptian public, revelations in the opposition press that his plane had to obtain a safe passage and authority to land from the Israelis garnered only howls of derision. 
As for America, anything it touches in the Middle East has become radioactive, even for longstanding clients and friends. 
In the course of maneuvering to delay the UN ceasefire, Bush and Rice continually reiterated the need for a Security Council resolution that deals forcefully with “the roots of the problem.” 
Of course, for them and for Israel, this was Hezbollah and the need to eradicate or at a minimum disarm it and force its fighters to a safe distance from settlements and towns in northern Israel. 
While this is a reasonable demand, the rest of the Middle East – and, indeed, much of the world, including Europe – regard the root cause of the conflict as Israeli intransigence and arrogance, together with America’s blind support for it. 
Both America and Israel have cited foot-dragging in implementing UN Resolution 1559, which calls for disarming all non-state actors in Lebanon and the deployment of government forces all the way to the southern border. 
But for years the US and Israel have not uttered a word about the dozens of UN resolutions, going back as far as Resolution 49 on partition in 1947, which called for the establishment of distinct Arab and Jewish states on roughly half of Mandated Palestine. 
This and numerous other resolutions seeking redress for injustices toward Palestinians have been ignored by the US. 
Thus, for 300 million Arabs and more than one billion Muslims the “root cause” of the Middle East conflict is not Hezbollah. 
As its leader, Hassan Nasrallah aptly put it, “We are just a reaction to chronic injustice.” 
It may well be that there is more than one root cause – every party to the conflict has a favorite one. 
There is no point in belaboring whose pain is greater or whose root cause is deeper. 
In fact, arguing over grievances merely drives the sides further apart. 
The long overdue UN Resolution 1701 may, with its adoption, indicate that all parties are fatigued, or could no longer withstand international pressure. 
This is good news for all concerned and provides an opportunity to tackle each party’s “root cause.” 
Seizing the opportunity requires that humility rather than moral supremacy prevails. 
Empathy, not ethnocentrism, should be the order of the day now that the guns are falling silent and we have rediscovered the limits of military force. 
But if we have learned anything at all from the tragic assassinations of the region’s greatest peacemakers, Anwar Sadat and Yitzhak Rabin, it is that the guns do not remain silent for long. 
During any lull, a fanatic from either side could jump to center stage and, through an act of utter madness, kick up the settling dust and dash the hopes of the many on both sides who still long for a lasting peace. 

After the Taliban 
``Failed state'' is a term applied frequently to Afghanistan and is often deemed the cause for why terrorists gained such influence there. 
But a country does not fail of its own volition, nor is it weakened by unknown causes. 
A country fails, when it fails, for definite, identifiable reasons. 
These must be addressed if Afghanistan is to be revived. 
Twenty years of invasion, civil war, and drought have left Afghanistan's institutions in ruin. 
Millions of Afghans huddle in refugee camps or are displaced from their homes. 
Land-mines defile the countryside. 
Millions are sick and poor; many live at starvation levels. 
For these and many other reasons, rebuilding Afghanistan's economy will require not only economic reconstruction but an effort to reinvent the country's political and cultural institutions. 
Such a massive effort will be doomed to failure, however, if Afghanistan's neighbors intervene in ways that promote economic upheaval all over again. 
Afghanistan is no place for quick fixes. 
Rebuilding the country cannot be done cheaply. 
Any thought that the anti-terror coalition will be able to bail out fast (as the West did when it abandoned Afghanistan to its fate after the Soviet withdrawal ten years ago) should be forgotten. 
The West must stick with Afghanistan until its reconstruction is established. 
Otherwise, it runs the risk of renewed chaos and violence, but this time in a more destabilized region, as Pakistan's current problems demonstrate. 
Three problems are of immediate concern, the most important being feeding the Afghan people - both within the country and in refugee camps outside Afghanistan. 
Humanitarian aid is being delivered, but a distribution system safe from the predations of Afghanistan's warlords needs to be built. 
Indeed, the warlords have been given too big a say in distributing aid already, and it may be hard to strip them of this power. 
But stripped they must be. 
The second problem involves relocating Afghan refugees now living in Pakistan and Iran, as well as those displaced within Afghanistan. 
To achieve this goal, the agricultural economy must be revived in order to revive this industry, providing jobs and food for people. 
A massive impediment here is the millions of mines left over from the Soviet invasion that must be removed. 
The West has a big incentive to be generous to Afghanistan's rural poor. 
Starving farmers, if unassisted, may return to cultivating a very reliable cash crop: the opium poppy, long a staple of the warlord economy. 
Eliminating it will not only help farmers and the West as it tries to curtail heroin use, but also Afghanistan's infant government as it struggles to assert its national authority against the warlords. 
A bankrupt warlord, after all, cannot buy weapons or bribe people to maintain their loyalty. 
Major infrastructure investments will also be needed if the economy is to be revived. 
Housing, particularly for returning refugees, will need to be constructed fast. 
Cities such as Kabul, Mazar, Herat and others will need to be rebuilt as centers of economic and cultural life. 
Village housing must be provided at a massive level. 
Roads, airports and communications systems must also be revitalized if trade is to be restored. 
The educational system needs to be rebuilt almost from scratch, and with so many women anxious to return to teaching, a revived educational system will also help Afghanistan's democratic politicians gain a powerful lobby of workers. 
Particular attention should be given to elementary schools and libraries outside of cities. 
Afghanistan poses particular difficulties in reconstruction, as it is not a society with a strong political center. 
Planners should take advantage of the country's decentralized nature and emphasize private sector participation in reconstruction. 
A decentralized system will respond better to local needs and avoid an over-bureaucratic public sector. 
But autonomous economic regions should be avoided as a threat to Afghan national unity because they would play into the hands of the warlords. 
Moreover, poorer regions would do badly in such a system. 
In the long run, Afghanistan has resources that can be exploited. 
There is the potential for oil and gas exploration, and of mining iron ore and precious metals. 
These activities should be explored in a framework of economic development across Central Asia. 
Afghanistan, indeed, must be integrated into the regional pipeline and other development schemes. 
Afghans can contribute in a tangible way here by reopening the North-South route connecting the resource rich economies of Central Asia to densely populated India and Pakistan. 
None of this will be possible unless Afghanistan's young males are disarmed and given productive work. 
Essential here, is to attract expatriate Afghans with skills and professional achievements to help in rebuilding the country by establishing small firms that will suck up the unemployed. 
Expatriate involvement will also likely support the rights of women to participate fully and legally in economic and political life, as was the case before 1978. 
Finally, donor countries must apply the lessons learned in restoring the war-ravaged states of the former Yugoslavia. 
Grants and planning must be coordinated, and the consent of Afghanistan's neighboring countries assured. 
If the latter are ignored, regional interests can incite chaos once again. 
An international conference on Afghanistan should be called by the US and held under UN auspices. 
It must affirm not only Afghanistan's territorial integrity, but insure that donor commitments meet the scale of the job and that these promises are kept. 
A decade ago, the West turned its back on Afghanistan and chaos ensued. 
To abandon the country again would be criminal folly. 

Aftershocks from Japan 
NEW HAVEN – The devastation – both human and physical – from the earthquake and tsunami in Japan is unfathomable. 
It is impossible at this point to gauge the full extent of the damage with any degree of precision. 
But we can nonetheless begin to assess its potential spillover effects on the rest of Asia and other major economies around the world. 
The narrow view of the catastrophe’s economic impact is that Japan doesn’t really matter anymore. 
After all, more than 20 years of unusually sluggish trend growth in Japanese output has sharply reduced its incremental impact on the broader global economy. 
The disaster may produce some disproportionate supply-chain effects in autos and information-technology product lines such as flash drives, but any such disruptions would tend to be transitory. 
On the surface, the world’s two largest economies have little to fear. 
Japan accounts for only 5% of America’s exports and 8% of China’s. 
Under the worst-case outcome of a complete disruption to the Japanese economy, the direct repercussions on the United States and Chinese economies would be small – shaving no more than a few tenths of a percentage point off their annual growth rates. 
Within the so-called G-10 developed economies, Australia has the largest direct exposure to Japan – the destination of about 19% of its total exports. 
The eurozone is at the opposite end of the spectrum, with Japan accounting for less than 2% of its exports. 
Among emerging-markets, the Philippines and Indonesia are the most exposed to Japan, which absorbs about 16% of their total exports. 
South Korea, the third-largest economy in East Asia, is at the other end of the scale, relying on Japanese demand for only about 6% of its exports. 
But the narrow view misses the most critical consideration: this “Japan shock” has not occurred at a time of great economic strength. 
That is true not only of Japan itself, where two lost decades have left a once-vigorous economy on a less-than-1% growth trajectory since the early 1990’s. 
But it is also true of the broader global economy, which was only just beginning to recover from the worst financial crisis and recession since the 1930’s. 
Moreover, the Japan shock is not the only negative factor at work today. 
The impacts of sharply rising oil prices and ongoing sovereign debt problems in Europe are also very worrisome. 
While each of these shocks may not qualify as the proverbial tipping point, the combination and the context are disconcerting, to say the least. 
Context is vital. 
Notwithstanding the euphoric resurgence of global equity markets over the past two years, the world economy remains fragile. 
What markets seem to have forgotten is that post-bubble, post-financial-crisis recoveries tend to be anemic. 
Economies grow at something much closer to their stall speeds, thus lacking the cyclical “escape velocity” required for a self-sustaining recovery. 
As a result, post-crisis economies are far more vulnerable to shocks and prone to relapses than might otherwise be the case. 
Alas, there is an added complication that makes today’s shocks all the more vexing: governments and central banks have exhausted the traditional ammunition upon which they have long relied during times of economic duress. 
That is true of both monetary and fiscal policy – the two mainstays of modern countercyclical stabilization. 
Policy interest rates are close to zero in the major economies in the developed world, and outsize budget deficits are the norm. 
As a result, unconventional – and untested – policies, such as so-called “quantitative easing,” have become the rage among central bankers. 
All along, such unconventional policies were viewed as a temporary fix. 
The hope was that policy settings soon would return to pre-crisis norms. 
But, with one shock following another, the “exit strategy” keeps being deferred. 
Just as it is next to impossible to take a critically ill patient off life-support treatment, it is equally difficult to wean post-bubble economies from their now steady dose of liquidity injections and deficit spending. 
In an era of extraordinarily high unemployment, political pressures only compound the problem. 
This raises perhaps the most troublesome concern of all: with a post-crisis world getting hit by one shock after another, and with central banks having no latitude to cut interest rates, it is not hard to envision a scenario of open-ended monetary expansion that ends in tears. 
The dreaded inflationary endgame suddenly looms as a very real possibility. 
None of this detracts from the resilience factor. 
Yes, Japan will rebuild, which will undoubtedly spur some type of recovery in its disaster-battered economy. 
That happened in the aftermath of the Hanshin (Kobe) earthquake in 1995, and it will happen this time as well. 
But, just as the post-Kobe rebuilding did little to end the first of Japan’s lost decades, a similar outcome can be expected this time. 
The upside of rebuilding – beyond the urgent restoration of normal life for thousands of people – is only a temporary palliative for an impaired economy. 
That’s only one of the lessons that Japan offers the rest of us. 
The Japanese economy has, in fact, been on the leading edge of many of the more serious problems that have afflicted the global economy in recent years. 
From asset bubbles and a dysfunctional financial system to currency suppression and monetary-policy blunders, Japan has been in many respects the laboratory of our future. 
Unfortunately, the world has failed to learn the lessons of Japan. 
And now it risks missing another important clue. 
The significance of the earthquake and tsunami of 2011 is not the relatively low magnitude of Japan’s direct impact on the broader global economy. 
The more meaningful message is how these shocks box the rest of us into an even tighter corner. 

The Age of Hyper-Uncertainty 
BERLIN – The year 2017 will mark the 40th anniversary of the publication of John Kenneth Galbraith’s The Age of Uncertainty. 
Forty years is a long time, but it is worth looking back and reminding ourselves of how much Galbraith and his readers had to be uncertain about. 
In 1977, as Galbraith was writing, the world was still reeling from the effects of the first OPEC oil-price shock and wondering whether another one was in the pipeline (as it were). 
The United States was confronting slowing growth and accelerating inflation, or stagflation, a novel problem that raised questions about policymakers’ competence and the adequacy of their economic models. 
Meanwhile, efforts to rebuild the Bretton Woods international monetary system had collapsed, casting a shadow over prospects for international trade and global economic growth. 
For all these reasons, the golden age of stability and predictability that was the third quarter of the twentieth century seemed to have abruptly drawn to a close, to be succeeded by a period of greatly heightened uncertainty. 
That’s how things looked in 1977, anyway. 
Viewed from the perspective of 2017, however, the uncertainty of 1977 seems almost enviable. 
In 1977, there was no President Donald Trump. 
Jimmy Carter may not go down in history as one of the best US presidents, but he did not threaten actions that placed the entire global system at risk. 
He did not turn his back on America’s international commitments such as NATO and the World Trade Organization. 
Nor did Carter go to war with the Federal Reserve or pack its board with sympathetic appointees willing to sacrifice sound money to his reelection prospects. 
On the contrary, he appointed Paul Volcker, a towering pillar of monetary stability, as chairman of the Board of Governors. 
And although Carter did not succeed in balancing the federal budget, he didn’t blow it up, either. 
Whether Trump slaps a tariff on Chinese goods, repudiates the North American Free Trade Agreement, packs the Federal Reserve Board, or undermines fiscal sustainability remains to be seen. 
Conceivable outcomes range from mildly reassuring to utterly catastrophic. 
Who knows what will happen? 
By today’s standards, Carter was the embodiment of predictability. 
In 1977, moreover, the prospects for European integration were rosy. 
Denmark, Ireland, and, most notably, the United Kingdom had recently joined a rapidly growing European Community. 
The EC was attracting members, not losing them. 
It was a club that countries sought to join precisely in order to achieve faster economic growth. 
Moreover, to buttress its common market, the EC had just established a regional monetary system, the suggestively named “snake in the tunnel.” 
While this was far from a perfect monetary system, it had one very positive attribute: countries could leave in hard economic times, and rejoin if and when the outlook brightened. 
In 2017, in contrast, negotiations over Brexit will continue to cast a dark cloud of uncertainty over the European Union. 
How those negotiations will proceed and how long they will take are anyone’s guess. 
Moreover, the main questions raised by Britain’s decision to leave – whether other countries will follow and, indeed, whether the EU itself has a future – remain far from resolved. 
Meanwhile Europe’s monetary house remains half built. 
The eurozone is neither appealing enough to attract additional members nor flexible enough to grant troubled incumbents a temporary holiday, in the manner of the currency snake. 
The euro will likely survive the year, inertia being what it is. 
Beyond that, it is difficult to say. 
In 1977, uncertainties emanating from emerging markets were not on commentators’ radar screens. 
Developing countries in Latin America and East Asia were growing, although they depended increasingly on a drip feed of foreign loans from money-center banks. 
China, still largely cut off from the world, did not figure in this discussion. 
And even if something went wrong in the Third World, developing countries were simply too small to drag down the global economy. 
The situation today couldn’t be more different. 
What happens in China, Brazil, or Turkey doesn’t stay in China, Brazil, or Turkey. 
On the contrary, developments in these countries have first-order implications for the world economy, given how emerging markets have accounted for the majority of global growth in recent years. 
China has an unmanageable corporate-debt problem and a government whose commitment to restructuring the economy is uncertain. 
Turkey has a massive current-account deficit, an erratic president, and an unstable geopolitical neighborhood. 
And if political scandals were export goods, Brazil would have a clear comparative advantage. 
Although The Age of Uncertainty was about much more than the year 1977, it captured the tenor of the times. 
But if Galbraith were writing the same book in 2017, he probably would call the 1970s The Age of Assurance. 

An Agenda for Resolving the US-China Conflict 
NEW HAVEN – With charges flying back and forth between the United States and China ahead of the eagerly awaited December 1 meeting between President Donald Trump and President Xi Jinping at the upcoming G20 meeting in Buenos Aires, resolving the conflict has taken on great urgency. 
The alternatives pose grave risks for both countries: an ever-escalating trade war, a cold war, or even a hot war. 
These risks can be avoided, but only if both leaders are willing to engage in principled compromise. 
There is no question that a serious conflict has been building for a long time. 
Contrary to the US narrative, the problem is not the outsize bilateral trade deficit between the world’s two largest economies. 
That is largely an outgrowth of macroeconomic imbalances that afflict both sides: China saves too much and the US saves too little. 
These saving disparities give rise to multilateral trade imbalances that cannot be resolved by bilateral efforts. 
The US had merchandise trade deficits with 102 countries in 2017, whereas China had trade surpluses with 169 countries in 2016. 
Squeeze one part of the multilateral imbalance for a deficit country or a surplus saver, and it simply gets allocated to other trading partners. 
For the US, this would lead to higher-cost imports – the functional equivalent of a tax hike on consumers. 
For China, it would spell increased export penetration into other markets. 
Fixation on the blame game of bilateral trade imbalances overlooks the possibility that this is a classic struggle of codependency. 
Yes, China has long relied on the US as the major source of external demand for its export-led economy. 
But the US needs low-cost imports from China to make ends meet for its income-constrained consumers; it also relies on China as the largest foreign buyer of US Treasuries to help fund chronic government budget deficits. 
And, as America’s third largest and most rapidly growing export market, China has become an increasingly important source of demand for US firms. 
The codependency framework is important because it underscores the need for joint resolution and compromise. 
As in interpersonal relationships, economic codependency can be destabilizing and ultimately destructive. 
When one partner changes course, the other, feeling scorned, lashes out in response. 
China, in this case, is the change agent – shifting its growth model from manufacturing to services, from exports to internal consumption, and from imported technology to indigenous innovation. 
At the same time, China is also moving from surplus saving to saving absorption, leaving it less to lend to its deficit partner, the US. 
Uncomfortable in its own skin, the US feels threatened by a partner that is changing the rules of this relationship. 
While Trump has acted on those threats far more aggressively than his predecessors, there can be no mistaking the bipartisan US sentiment now aligned against China. 
According to a September 2018 Axios survey, fully 80% of Republicans – long the party most supportive of free trade – believed that increased tariffs would be good for the US. 
Leading Republicans, such as Vice President Mike Pence and former Treasury Secretary Henry Paulson, have warned of a new cold war with China, while leading Democrats have come to the view that China has abrogated its role as a responsible global stakeholder. 
At a time of ever-escalating threats and counter-threats, the imperative of compromise cannot be understated. 
The upcoming meeting between Trump and Xi provides an opportunity to reframe the conflict as a strategic challenge for the world’s two leading economies. 
Four possible avenues to consider: 
Market access: After ten years of tortuous negotiations, the time for a breakthrough on a US-China bilateral investment treaty (BIT) is at hand. 
Both sides would need to offer concessions. 
A BIT would lift ownership caps on foreign direct investment by multinational corporations in both countries, eliminating the contentious joint-venture structure in China that the US continues to insist – incorrectly, in my view – has become a mechanism for forced technology transfer. 
A BIT would also enable an expansion of Chinese ownership of US-domiciled assets – posing a challenge to the anti-China thrust of recent legislation that broadens the oversight powers of the Committee on Foreign Investment in the United States. 
Saving: Both countries need to commit to responsible macroeconomic adjustments. 
The US needs to save more, reversing the reckless budget-busting trajectory reinforced by last year’s ill-timed, outsize tax cuts. 
Rebuilding saving, rather than tariffs, is the most effective strategy to reduce trade deficits with China or any other trading partner. 
At the same time, China needs to save less, putting its vast pool of capital to work funding the country’s social safety net, which is essential for consumer-led economic rebalancing. 
Cyber security: The digital realm is the battleground of the Information Age, and the September 2015 accord between President Barack Obama and Xi clearly did not go far enough in defusing persistent tensions over online espionage, hacking, and disruption. 
The two countries should take the lead in forging a global cyber accord, complete with pooled metrics of cyber incursions, attack-reduction targets and a robust dispute-resolution mechanism. 
Dialogue: It is terrific that the two presidents are meeting again after their earlier tête-à-têtes in Beijing and at Mar-a-Lago. 
Those gatherings follow more formal engagements such as the Strategic and Economic Dialogue. 
But all of these efforts have been episodic events that are long on glitz and short on substance. 
A permanent secretariat that would engage in full-time collaborative efforts on key policy issues (including data sharing, joint research, and public-private consultation) would be far more productive. 
In light of contentious recent developments between the US and China, it is hard to be optimistic that a meaningful breakthrough is at hand. 
An agenda of substance should be used as a checklist against any accord that may be struck by Trump and Xi. 
The world is watching. 

Is Pensioner Populism Here to Stay? 
MILAN – The right-wing populism that has emerged in many Western democracies in recent years could turn out to be much more than a blip on the political landscape. 
Beyond the Great Recession and the migration crisis, both of which created fertile ground for populist parties, the aging of the West’s population will continue to alter political power dynamics in populists’ favor. 
It turns out that older voters are rather sympathetic to nationalist movements. 
Older Britons voted disproportionately in favor of leaving the European Union, and older Americans delivered the US presidency to Donald Trump. 
Neither the Law and Justice (PiS) party in Poland nor Fidesz in Hungary would be in power without the enthusiastic support of the elderly. 
And in Italy, the League has succeeded in large part by exploiting the discontent of Northern Italy’s seniors. 
Among today’s populists, only Marine Le Pen of France’s National Rally (formerly the National Front) – and possibly Jair Bolsonaro in Brazil – relies on younger voters. 
Next spring, this age-driven voting pattern could drive the outcome of the European Parliament election. 
According to recent studies, older Europeans – especially those with less education – are more suspicious of the European project and less trusting of the European Parliament than younger Europeans are. 
This is surprising, given that memories of World War II and its legacy should be fresher for older generations. 
Nevertheless, their skepticism toward democratic EU institutions may explain their receptiveness to authoritarian leaders. 
Most likely, a growing sense of insecurity is pushing the elderly into the populists’ arms. 
Leaving aside country-specific peculiarities, nationalist parties all promise to stem global forces that will affect older people disproportionately. 
For example, immigration tends to instill more fear in older voters, because they are usually more attached to traditional values and self-contained communities. 
Likewise, globalization and technological progress often disrupt traditional or legacy industries, where older workers are more likely to be employed. 
The rise of the digital economy, dominated by people in their twenties and thirties, is also pushing older workers to the margins. 
But, unlike in the past, crumbling pension systems can no longer absorb such labor-market shocks. 
The result is that older workers who lose their job are condemned to long-term unemployment. 
Moreover, pensioners now have reason to worry about threats to their retirement benefits from their own children. 
Young people, frustrated with socioeconomic systems that are clearly tilted in favor of retirees, are increasingly calling for fairer intergenerational redistribution of scarce resources. 
For example, Italy’s Five Star Movement, which governs in a coalition with the League, recently called for a “citizen’s income” that would be available to all unemployed people regardless of age. 
So, while right-wing populists have attracted older voters, left-wing populist have gained a following among younger generations. 
By backing right-wing populists, older voters hope to return to a time when domestic affairs were insulated from global forces and national borders were less porous. 
At the heart of today’s nationalist politics is a promise to preserve the status quo – or even to restore a mythical past. 
Hence, nationalist politicians often resort to nostalgic rhetoric to mobilize their older supporters. 
For his part, Trump has pledged to bring back jobs in the American Rust Belt, once the center of US manufacturing. 
Likewise, there could be no clearer symbol of resistance to change than his proposed wall on the US-Mexico border. 
And his crackdown on illegal immigration and ban on travelers from predominantly Muslim countries signals his commitment to a “pure” American nation. 
Similarly, in continental Europe, right-wing populists want to return to a time before the adoption of the euro and the Schengen system of passport-free travel within most of the EU. 
And they often appeal directly to older voters by promising to lower the retirement age and expand pension benefits (both are flagship policies of the League). 
In the United Kingdom, the “Leave” campaign promised vindication for those who have been left behind in the age of globalization. 
Never mind that it also touted the idea of a free and independent “Global Britain.” 
The Brexiteers are not known for their consistency. 
At any rate, to the extent that today’s populist wave is driven by demographics, it is not likely to crest anytime soon. 
In graying societies, the political clout of the elderly will steadily grow; and in rapidly changing economies, their ability to adapt will decline. 
As a result, older voters will demand more and more socioeconomic security, and irresponsible populists will be waiting in the wings to accommodate them. 
Can anything be done? 
To stem the nationalist tide, mainstream parties urgently need to devise a new social compact that addresses the mounting sense of insecurity among older voters. 
They will need to strike a better balance between openness and protection, innovation and regulation; and they will need to do so without falling into a regressive populist trap. 
The answer is not to suffocate global forces, but to render them more tolerable. 
Citizens of all ages need to be equipped to face current and future disruptions. 
In this sense, it is better to empower the elderly than simply to protect them. 
Most advanced economies simply cannot afford massive new benefits for an oversized interest group. 
And besides, a policy that makes people reliant on some form of external support is morally questionable, at best. 
Instead, governments should focus on upgrading older workers’ skills, creating more opportunities for older and younger generations to work together, and holding disruptors accountable for the socioeconomic consequences they generate. 
Subsidies to the most vulnerable should remain a last resort. 
In many ways, older voters’ infatuation with populists is a cry for help. 
It is up to enlightened politicians to respond to it constructively. 

The Rise of the Food Barons 
BERLIN – The industrial-agriculture sector has long faced criticism for practices that contribute to climate change, environmental destruction, and rural poverty. 
And yet the sector has taken virtually no steps to improve quality and sustainability, or to promote social justice. 
This is not surprising. 
Although there are more than 570 million farmers and seven billion consumers worldwide, just a handful of companies control the global industrial-agriculture value chain – from field to shop counter. 
Given the high profits and vast political power of these companies, changes to the status quo are not in their interest. 
Moreover, market concentration in the agriculture sector is on the rise, owing to increased demand for the agricultural raw materials needed in food, animal feed, and energy production. 
As the middle class in southern countries has grown, its members’ consumption and nutritional habits have changed, boosting global demand for processed foods – and setting off a scramble for market power among multinational agricultural, chemical, and food corporations. 
The biggest players in these sectors have been buying out their smaller competitors for years. 
But now they are also buying out one another, often with financing provided by investors from completely different sectors. 
Consider the seed and agrochemical sector, where Bayer, the second-largest pesticide producer in the world, is in the process of acquiring Monsanto, the largest seed producer, for €66 billion ($74 billion). 
If the United States and the European Union approve the deal, as seems likely, just three conglomerates – Bayer-Monsanto, Dow-DuPont and ChemChina-Syngenta – will control over 60% of the global seed and agrochemical market. 
“Baysanto” alone would be the proprietor of almost every genetically modified plant on the planet. 
With other large mergers also being announced, the global agriculture market at the end of 2017 could look very different than it did at the beginning. 
Each of the three major conglomerates will be closer to its goal of achieving domination of the seed and pesticide markets – at which point they will be able to dictate food products, prices, and quality worldwide. 
The agrotechnical sector is experiencing some of the same changes as the seed sector. 
The five largest corporations account for 65% of the market, with Deere & Company, the owner of the John Deere brand, in the lead. 
In 2015, Deere & Company reported $29 billion in sales, surpassing the $25 billion that Monsanto and Bayer made selling seeds and pesticides. 
The most promising new opportunity for food corporations today lies in the digitization of agriculture. 
This process is still in its early stages, but it is gathering momentum, and eventually it will cover all areas of production. 
Soon enough, drones will take over the task of spraying pesticides; livestock will be equipped with sensors to track milk quantities, movement patterns, and feed rations; tractors will be controlled by GPS; and app-controlled sowing machines will assess soil quality to determine the optimal distance between rows and plants. 
To maximize the benefits of these new technologies, the companies that already dominate the value chain have begun cooperating with one another. 
The John Deeres and Monsantos have now joined forces. 
The confluence of soil and weather “big data,” new agrotechnologies, genetically modified seeds, and new developments in agrochemistry will help these companies save money, protect natural resources, and maximize crop yields worldwide. 
But while this possible future bodes well for some of the world’s largest companies, it leaves the environmental and social problems associated with industrialized agriculture unsolved. 
Most farmers, particularly in the global South, will never be able to afford expensive digital-age machinery. 
The maxim “grow or go” will be replaced with “digitize or disappear.” 
The ETC Group, an American non-governmental organization, has already outlined a future scenario in which the major agrotechnology corporations move upstream and absorb the seed and pesticide producers. 
At that point, just a few companies will determine everything that we eat. 
Indeed, the same market-concentration problem applies to other links in the value chain, such as agricultural traders and supermarkets. 
And even though food processing is not yet consolidated on a global scale, it is still dominated at the regional level by companies such as Unilever, Danone, Mondelez, and Nestlé. 
These companies make money when fresh or semi-processed food is replaced by highly processed convenience foods such as frozen pizza, canned soup, and ready-made meals. 
While lucrative, this business model is closely linked to obesity, diabetes, and other chronic diseases. 
Worse, food corporations are also profiting from the proliferation of illnesses for which they are partly responsible, by marketing “healthy” processed foods enriched with protein, vitamins, probiotics, and omega-3 fatty acids. 
Meanwhile, corporations are amassing market power at the expense of those at the bottom of the value chain: farmers and workers. 
International Labor Organization standards guarantee all workers the right to organize, and they prohibit forced and child labor and proscribe race and gender discrimination. 
But labor-law violations have become the norm, because efforts to enforce ILO rules are often quashed, while trade union members are routinely threatened, fired, and even murdered. 
In this hostile climate, minimum-wage, overtime-pay, and workplace-safety standards are openly neglected. 
And women, in particular, are at a disadvantage, because they are paid less than their male counterparts and often must settle for seasonal or temporary jobs. 
Today, half of the world’s 800 million starving people are small farmers and workers connected to the agricultural sector. 
Their lot will hardly improve if the few companies already dominating that sector become even more powerful. 

How to Feed the World 
PRAGUE – Hunger has wracked humanity since time immemorial. 
Nearly every major society has been shaped by famine; one estimate suggests that China suffered drought or flood-induced starvation in at least one province almost every year from 108 BC to 1911. 
Yet the struggle against hunger is a battle that humanity could finally win. 
More cereals were produced annually in the last quarter of the twentieth century than in any preceding period, and more grain will be harvested this year than at any time in history. 
Since 1992, the number of hungry people worldwide has plummeted by more than 200 million, even as the human population grew by nearly two billion. 
But enormous challenges remain. 
Affordable, nutritious food is one of people’s top priorities everywhere, and one in nine people still do not get enough food to be healthy. 
With today’s population of 7.3 billion expected to reach 8.5 billion by 2030 and 9.7 billion in 2050, food demand will increase accordingly. 
Along with more mouths to feed, stresses on food supplies will include conflicts, economic volatility, extreme weather events, and climate change. 
Increases in agricultural productivity, owing to improvements in seeds, new fertilizers and pesticides, improved credit access, and technological breakthroughs, have been a key driver in reducing hunger. 
Between 1930 and 2000, agricultural output in the United States quadrupled, with productivity growth outstripping that of manufacturing. 
Developing countries have begun sharing in these gains: responsible for next-to-none of the world’s fertilizer consumption in 1960, by 2000 they used more than industrialized countries. 
The World Bank has found that productivity growth in agriculture can be up to four times more effective in reducing poverty than growth from other sectors. 
So how do we keep up this progress? 
Investment in research and development is vital. 
According to research conducted for Copenhagen Consensus, which I direct, investing an extra $88 billion in agricultural R&D over the next 15 years would increase yields by an additional 0.4 percentage points each year, which could save 79 million people from hunger and prevent five million cases of child malnourishment. 
Achieving these targets would be worth nearly $3 trillion in social good, implying an enormous return of $34 for every dollar spent. 
Scientific breakthroughs also play a key role in fighting specific nutritional challenges such as vitamin A deficiency, the leading cause of preventable childhood blindness. 
Robert Mwanga was awarded this year’s World Food Prize for inspiring work that resulted in the large-scale replacement of white sweet potato (with scant Vitamin A content) by a vitamin A-rich alternative in the diets of Uganda’s rural poor. 
Another way to increase agricultural productivity is through labor. 
When Copenhagen Consensus researchers examined responses to global warming in Bangladesh, they found that increasing agricultural labor productivity “is the only way to increase the resilience of Bangladesh to climate change and to meet long-term development goals.” 
Investing around $9,000 per worker over two decades could boost agricultural productivity by 10%. 
Bangladesh is an instructive case, because it is susceptible to flooding and the effects of climate change, and its agricultural productivity lags behind other developing and middle-income countries. 
Unsurprisingly, the Bangladeshi prime minister’s office is striving to lead in global innovation, sustaining an agriculture innovation lab that shares best practices and ideas. 
Copenhagen Consensus has worked with the world’s largest NGO, BRAC, to find out the policy wishes of people living in rural Bangladesh, including the “ultra-poor” with whom BRAC works closely. 
These laborers, housewives, and others, some of whom live on the equivalent of $0.60-0.70 or less a day, are seldom given a place at the table to discuss policy. 
Across nine rural forums in far-flung parts of the country, the participants overwhelmingly spoke with one voice, calling for the same policy priority: increased agricultural productivity. 
“Everyone knows Rangpur has a Monga problem,” said a local from Chandpara in the Rangpur division, using the Bengali term for the annual cyclical phenomenon of seasonal hunger. 
“We cannot feed our people two times a day – we need to increase our agricultural productivity.” 
A Mukimabad villager had the same vision for Bangladesh: “We need crops and seeds which are not vulnerable to salinity and flood so that we do not have to die from food shortages.” 
Humanity’s fight against hunger can be won. 
Great progress has been made, but the world needs more agricultural R&D and higher productivity. 
As a rural villager from Deukhola, near the Brahmaputra River in remote northern Bangladesh, starkly put it: “Our survival depends on it.” 
We would do well to listen. 


Israel versus America versus Iran 
TEL AVIV – Israel’s concern about the specter of a nuclear Iran has now degenerated into a crisis of confidence concerning the United States. 
Prime Minister Binyamin Netanyahu has embarked on a campaign to force President Barack Obama to set a red line that Iran must not cross, lest it risk unleashing an American military response. 
Implicit threats of a unilateral Israeli attack, together with conspicuous meddling in the US presidential election campaign, have compounded Netanyahu’s effort to twist Obama’s arm. 
The controversy between the two allies partly reflects their divergent timelines: for Israel, the red line is Iran’s imminent burial deep underground of its uranium-enrichment facilities; for the US, it is the start of a dedicated weapons program. 
But, equally important, the dispute underscores their different objectives. 
For Israel, war with Iran is not about neutralizing an existential threat; it is about reasserting its regional status. 
Israel’s leaders see their country’s standing in the region being seriously threatened by the emergence of a hostile Islamist regime in Egypt; the possibility that a similarly hostile regime will eventually emerge in Syria; the fragility of traditionally friendly Jordan; and the dangerous boost that the regional Islamist awakening has given to Israel’s sworn enemies, Hamas and Hezbollah. 
Both Netanyahu and Defense Minister Ehud Barak thus regard an attack on Iran as a major strategic move aimed at the broader Middle East, which implies that they would not discount a military campaign that goes well beyond surgical air strikes. 
Indeed, they probably contemplate land incursions into Iran, and possibly a decisive – and, from their perspective, long overdue – showdown with Hamas in Gaza and Hezbollah in Lebanon. 
Though determined to prevent Iran from acquiring nuclear weapons, even if doing so requires military action, the US weighs the consequences of a military showdown in very different terms. 
A superpower that has earned only frustration in its abortive efforts – whether war or regional diplomacy – in the dysfunctional Middle East, the US faces the Iran crisis in the midst of its epochal strategic shift to Asia and the Pacific. 
The fallout from a war in Iran would pin down the US in the Middle East for years to come, undermining its new strategic priorities. 
As a result, the US, though certainly better equipped than Israel for a war to ensure that Iran forever abandons its nuclear ambitions, could nonetheless conclude that that objective is simply too costly. 
The recent report by The Iran Project, whose signatories include the former US national security advisers Brent Scowcroft and Zbigniew Brzezinski, concluded that an American military attack on Iran could only delay its nuclear program for up to four years. 
To guarantee that Iran never acquires a nuclear bomb, the US would need to maintain military pressure on Iran for several years. 
And, if forced to impose regime change as the ultimate solution to the dilemma, the report assumes that this would require military occupation, which would entail a commitment of resources and personnel greater than what the US invested in the Iraq and Afghanistan wars combined. 
Moreover, the conventional assumption that the region’s Sunni Arab regimes would give tacit approval to a military attack on Iran’s nuclear installations must be revisited in the wake of the Arab Spring – particularly in the aftermath of the recent, sudden upsurge in anti-American violence throughout the Muslim world. 
The pre-Arab Spring paradigm that framed the Middle East as being divided between “moderates” and “extremists” has become obsolete. 
The Islamist governments that have emerged from the downfall of America’s puppet regimes are no friends of an Iranian nuclear empire. 
But, in their struggle to survive, they must channel popular anti-Americanism. 
For Egyptian President Mohamed Morsi, that imperative meant placating the angry mob that recently attacked the US embassy rather than merely condemning the violence. 
An attack on Iran, especially if it develops into a longer war involving regional proxies, is bound to become the trigger for mass anti-Israel and anti-US hysteria, which might draw the Islamist regimes in the region into a dynamic of escalation. 
It would be impossible to rule out a regional war. 
The main problem facing a military operation in Iran is the need to ensure its legitimacy. 
China and Russia would never allow the US to secure a United Nations mandate for an attack. 
Moreover, while Iranian provocations that clearly reveal the regime’s intentions to develop a nuclear-weapons capability might help build support for American military action, it is far from certain that Europeans, or others, would rush to join another US-led “coalition of the willing.” 
The dire legacy of Iraq and Afghanistan weighs heavily on the Western democracies. 
The saddest part of the story is Israel’s utter indifference to the need to build international legitimacy for its drive to stop Iran’s nuclear program. 
Netanyahu thinks in bold military terms, not in terms of geopolitical strategy. 
His careless Palestine policy has left Israel with few friends in the international community, let alone in the Arab Middle East. 
Indeed, many regard Netanyahu’s Iran obsession as nothing more than a successful ploy to divert attention from the Palestinian issue. 
Only a generous, bold peace initiative that would genuinely revive the two-state solution, accompanied by a freeze on construction and enlargement of West Bank settlements, would help to recover the good will of the Palestinians and their brethren throughout the Arab world. 
And only that outcome can secure the international goodwill that both Israel and the US will need for a showdown with Iran. 

Lies, Damned Lies, and AI 
CAMBRIDGE – Algorithms are as biased as the data they feed on. 
And all data are biased. 
Even “official” statistics cannot be assumed to stand for objective, eternal “facts.” 
The figures that governments publish represent society as it is now, through the lens of what those assembling the data consider to be relevant and important. 
The categories and classifications used to make sense of the data are not neutral. 
Just as we measure what we see, so we tend to see only what we measure. 
As algorithmic decision-making spreads to a wider range of policymaking areas, it is shedding a harsh light on the social biases that once lurked in the shadows of the data we collect. 
By taking existing structures and processes to their logical extremes, artificial intelligence (AI) is forcing us to confront the kind of society we have created. 
The problem is not just that computers are designed to think like corporations, as my University of Cambridge colleague Jonnie Penn has argued. 
It is also that computers think like economists. 
An AI, after all, is as infallible a version of homo economicus as one can imagine. 
It is a rationally calculating, logically consistent, ends-oriented agent capable of achieving its desired outcomes with finite computational resources. 
When it comes to “maximizing utility,” they are far more effective than any human. 
“Utility” is to economics what “phlogiston” once was to chemistry. 
Early chemists hypothesized that combustible matter contained a hidden element – phlogiston – that could explain why substances changed form when they burned. 
Yet, try as they might, scientists never could confirm the hypothesis. 
They could not track down phlogiston for the same reason that economists today cannot offer a measure of actual utility. 
Economists use the concept of utility to explain why people make the choices they do – what to buy, where to invest, how hard to work: everyone is trying to maximize utility in accordance with one’s preferences and beliefs about the world, and within the limits posed by scarce income or resources. 
Despite not existing, utility is a powerful construct. 
It seems only natural to suppose that everyone is trying to do as well as they can for themselves. 
Moreover, economists’ notion of utility is born of classical utilitarianism, which aims to secure the greatest amount of good for the greatest number of people. 
Like modern economists following in the footsteps of John Stuart Mill, most of those designing algorithms are utilitarians who believe that if a “good” is known, then it can be maximized. 
But this assumption can produce troubling outcomes. 
For example, consider how algorithms are being used to decide whether prisoners are deserving of parole. 
An important 2017 study finds that algorithms far outperform humans in predicting recidivism rates, and could be used to reduce the “jailing rate” by more than 40% “with no increase in crime rates.” 
In the United States, then, AIs could be used to reduce a prison population that is disproportionately black. 
But what happens when AIs take over the parole process and African-Americans are still being jailed at a higher rate than whites? 
Highly efficient algorithmic decision-making has brought such questions to the fore, forcing us to decide precisely which outcomes should be maximized. 
Do we want merely to reduce the overall prison population, or should we also be concerned about fairness? 
Whereas politics allows for fudges and compromises to disguise such tradeoffs, computer code requires clarity. 
That demand for clarity is making it harder to ignore the structural sources of societal inequities. 
In the age of AI, algorithms will force us to recognize how the outcomes of past social and political conflicts have been perpetuated into the present through our use of data. 
Thanks to groups such as the AI Ethics Initiative and the Partnership on AI, a broader debate about the ethics of AI has begun to emerge. 
But AI algorithms are of course just doing what they are coded to do. 
The real issue extends beyond the use of algorithmic decision-making in corporate and political governance, and strikes at the ethical foundations of our societies. 
While we certainly need to debate the practical and philosophical tradeoffs of maximizing “utility” through AI, we also need to engage in self-reflection. 
Algorithms are posing fundamental questions about how we have organized social, political, and economic relations to date. 
We now must decide if we really want to encode current social arrangements into the decision-making structures of the future. 
Given the political fracturing currently occurring around the world, this seems like a good moment to write a new script. 

A Better Global Framework to End AIDS 
STOCKHOLM, GENEVA – This week, we celebrate the tremendous progress that has been made in the struggle against HIV and AIDS. 
In many countries with strong health systems, HIV is no longer a death sentence, but a chronic condition. 
And Africa has reached a critical milestone: each year, there are now more Africans starting HIV treatment than being infected. 
Still, even as we celebrate, we must also mourn the 1.1 million people who lost their lives to the disease this year. 
HIV still infects 6,000 people every day, and AIDS remains a leading cause of death among children, adolescents, and women in Africa. 
The movement against AIDS has inspired all of us to help the people who continue to be left behind, and to commit to ending AIDS once and for all. 
Fortunately, we already have the know-how, resources, and, crucially, the political momentum to do this; and at the High-Level Meeting on Ending AIDS this year, United Nations member states made ambitious commitments that will put us on the fast track toward our goal. 
What’s more, in September, Canada hosted a successful financing conference for the Global Fund to Fight AIDS, Tuberculosis, and Malaria, which brought in almost $13 billion, replenishing the Global Fund for 2017-2019. Meanwhile, individual countries have increased their domestic investments, and international partners – big and small – have maintained their support, which is how we will reach the $26 billion needed for the global AIDS response in 2020. 
But funding parts of the global health system is not enough. 
The international community must take a more holistic view and reinforce a global-response architecture that features a clear division of labor and seamless cooperation among various stakeholders. 
Ultimately, the goal of such a framework must be to support countries’ own health systems, by marshaling public and private actors at all levels in a given country, so that every facility – from the public hospital in the capital to the village clinic – is properly provisioned. 
Sweden is proud to continue its support for the Global Fund; at the replenishment conference in September, it pledged 2.5 billion krona ($271 million). 
The Global Fund is by far the largest multilateral source of financing for efforts to fight AIDS, tuberculosis, and malaria; but just like the Global Alliance for Vaccines and Immunization (now known as Gavi, the Vaccine Alliance), it is part of a global architecture, and relies on a range of partners to deliver aid effectively. 
So, if country-level support for other global-health organizations – such as UNAIDS, the World Health Organization, and the UN Development Programme – dries up, continued progress in the fight against HIV and AIDS will be at risk. 
Providing the necessary support will require donors to coordinate with one another, so that all parts of the existing architecture for managing global health issues are adequately funded. 
This will then ensure that all countries – and, more importantly, all people – receive the support they need. 
UNAIDS is setting a powerful example for international collaboration, by organizing partners around a common 2016-2021 Strategy to end AIDS. 
This unique and innovative partnership brings together 11 co-sponsoring UN agencies, each with diverse sector-specific expertise, and mobilizes various government stakeholders. 
Partners include business, community, and faith leaders, as well as teachers, judges, members of law enforcement, parliamentarians, and many others outside the health sector whose actions nonetheless affect health outcomes. 
One of UNAIDS’ tasks is to encourage national governments to keep AIDS high on their public-health agendas, and to invest in joint efforts to end the disease. 
It is also the only organization with a mandate to set norms and standards for the global response to AIDS, which means that it plays a key role in the current international framework. 
UNAIDS maintains a close partnership with the Global Fund. 
It has a presence in more than 80 countries, and its regional teams provide technical support and strategic information, which helps the Global Fund direct its grants to the right programs, locations, and populations at sufficient scale. 
Moreover, it helps to create the social, legal, and political conditions for people to use health services, not least by promoting gender equality and ensuring that populations at higher risk of contracting HIV do not face adverse discrimination. 
UNAIDS engages with civil society at all levels, by leveraging the international AIDS response to promote equality, dignity, and human rights around the world. 
As such, UNAIDS works to expand the political space for – and investment in – civil society. 
Yet, despite its broad mandate and many functions, UNAIDS lacks adequate resources, which threatens past achievements and future programs alike, and poses a danger to people and communities that depend on the lifesaving support the organization helps facilitate. 
Sweden and UNAIDS will work together to ensure that the international AIDS response continues to transform – and save – lives. 
We will safeguard and empower women and girls, and make sure that vulnerable populations’ voices are heard. 
But, at the same time, the international community must strengthen the existing framework for managing global-health issues. 
As Swedish Prime Minister Stefan Löfven said in Montreal in September: “Today we are focusing on the Global Fund, but tomorrow let’s not forget to provide sufficient funding for the entire global health architecture.” 
It is time for the international community to meet that challenge, by pledging to support our global health infrastructure, so that no agency – and no country or person – is left out. 

AIDS, NCDs, and the ABCs of Organizing 
GENEVA – Non-communicable diseases (NCDs), like heart disease, stroke, cancer, diabetes, and chronic lung disease, are responsible for 70% of all deaths. 
There is incontrovertible evidence that tobacco use, inactivity, unhealthy diets, and excessive alcohol consumption increase the odds of dying prematurely from an NCD. 
And yet, despite widespread knowledge of the risks, global obesity goes largely unchecked, while tobacco and alcohol use continue to rise. 
It is against this backdrop that networks of NCD alliances met December 9-11 at the second Global NCD Alliance Forum, in the United Arab Emirates. 
As they search for solutions to bring NCDs under control, they should look for inspiration to the movement to fight AIDS. 
People living with and affected by HIV continue to drive response efforts, and their unique form of mobilization has been instrumental to progress. 
While the battle is not over, AIDS activists know that it can be won. 
Similarly, a mobilized NCD movement can turn the tide against that epidemic. 
Yet, in 2015, Richard Horton, the editor of The Lancet, described the NCD community as needing an “electric shock to its semi-comatose soul.” 
He added: “But who has the courage to deliver it?” 
We believe there are lessons to be learned from AIDS activists. 
As global attention focuses on NCD prevention, those seeking to control preventable illnesses should look to the “ABCs” of AIDS organizing for guidance. 
The first letter that the NCD community should consider is “A,” for activism. 
Anyone over 40 will recall images of AIDS activists performing “die-ins” at scientific meetings around the world. 
In the United States, AIDS activists took to the streets, even shutting down the Food and Drug Administration’s headquarters for a day in October 1988. 
Globally, activists lobbied governments and pharmaceutical companies to make medicines more affordable. 
This activism continues, and should serve as a model for action on NCDs. 
Next, the NCD community must adopt a bolder approach to budgets – the “B” of the AIDS movement’s strategy. 
Civic organizing and grassroots activism may fuel early energies, but organizing and sustaining a broad-based coalition takes money. 
The AIDS movement was clear about this from the beginning, and lobbied for resources to support its advocacy and accountability effectively. 
“C” is for coalitions: the AIDS movement was quick to understand that progress would come only with diverse support. 
Activists established links between people living with HIV and those with other concerns, such as women’s rights, intellectual property, nutrition, and housing. 
Issue-specific coalitions and campaigns work best when they bring together government insiders and outsiders, to combine perspectives and expertise. 
The AIDS movement also understood that a holistic response to the epidemic was essential. 
Thus, “D,” the underlying determinants of health, was to draw attention to the interconnectivity of the drivers of challenge. 
For example, lobbying education leaders to keep girls in school longer has contributed to providing young people with the knowledge and agency to make smart decisions about when and with whom to negotiate safe sex. 
Similarly, links were forged between groups working on poverty, gender, and nutrition – factors that played a role in driving the AIDS crisis. 
NCDs are no less isolated in their causality, and similarly require a multi-sector approach to prevention. 
Engagement – “E” – was what helped the AIDS movement become so influential. 
By borrowing from the playbook of the disability rights movement, which championed the mantra “Nothing About Us Without Us,” AIDS advocates demanded representation on the bodies established to address the disease. 
For example, UNAIDS remains the only United Nations agency with seats on its board for representatives from civil society. 
This norm is so powerfully embedded in the AIDS movement that it would be almost unthinkable for an AIDS meeting to take place without representation from the community. 
Disease prevention movements must also develop persuasive narratives, and “F” – framing the issue – was essential to the AIDS community’s effort to gain support from political leaders. 
In particular, access to AIDS treatment was framed as a matter of economic justice. 
Framing the narrative this way led to a dramatic reduction in the price of medicines, so much so that more than half of people living with HIV in low- and middle-income countries are in treatment. 
An equally important framing issue for AIDS, which is highly relevant to the NCDs movement, is that of responsibility. 
The AIDS community worked hard to shift the focus from blaming individuals’ lifestyle choices to putting the onus on the state for providing health care and removing legal discrimination. 
In the AIDS debate, gender – our movement’s “G” – was a significant focal point. 
HIV was initially seen as a “gay disease,” and gender identity was embedded in the DNA of the AIDS movement early on. 
Gender dimensions of NCDs are no less important; one only has to consider how alcohol and tobacco are marketed to understand that. 
Gender, therefore, must become a focus of NCDs prevention efforts. 
Finally, “H” – human rights – was the bedrock of the AIDS response. 
Campaigns were launched against discrimination in workplaces, schools, and health centers. 
Strategic litigation helped ensure equality under the law. 
The AIDS movement refused to hold major conferences in countries with punitive laws against people living with HIV. 
The NCD movement could take a similar tack by, for example, refusing to meet in countries that fail to restrict advertising of junk food to children. 
The list of AIDS lessons could continue throughout the alphabet, but ending with “H” is apt, given that human rights drove the response, and should drive the response to NCDs. 
Poverty, exclusion, and social and economic marginalization put people at higher risk for HIV. 
It is no different for NCDs. 
The early mainstream reaction to the AIDS epidemic was to ask, “Why don’t those people make better choices?” 
The AIDS movement made clear that that was the wrong question. 
Today, with 70% of the planet at risk of premature death from preventable illnesses, “those people” are many of us. 
The NCD and AIDS communities can learn from one another. 
We are a stronger movement when we join forces. 
The views expressed here do not necessarily reflect those of UNAIDS. 

AIPAC in Decline 
MADRID – The American Israel Public Affairs Committee’s lobbying power in the United States is undeniable. 
But AIPAC’s supposed ability to control US policy decisions is a Potemkin village myth, cultivated by friends and rivals alike. 
In fact, thanks to Israeli Prime Minister Binyamin Netanyahu, AIPAC’s influence is under threat – though Netanyahu himself will be just fine. 
Claims about AIPAC’s clout have long shaped analysis of US foreign policy. 
For example, Steve Walt and John Mearsheimer, in their notorious essay “The Israel Lobby,” asserted that AIPAC manufactured the Iraq War. 
But the reality is far less sinister: in that case, AIPAC merely surfed on the pro-invasion wave unleashed by President George W. Bush, with his Messianic urges, and Vice President Dick Cheney, a one-man war lobby. 
The truth about AIPAC – that it is influential, but far from invulnerable – has recently been revealed, both to the public and to the group itself. 
Having been pushed by Netanyahu into an unwinnable fight against US President Barack Obama’s administration over its nuclear deal with Iran, AIPAC is now crumbling under the weight of its own hubris. 
In fact, AIPAC has never overcome resolute opposition from an American president, particularly in a matter of US national security. 
It failed to stop Jimmy Carter from selling F-15 Eagle fighters to Saudi Arabia in 1978, or to prevent Ronald Reagan from supplying AWACS reconnaissance planes to the Saudis three years later. 
And its 1991 battle with President George H.W. Bush over the linkage of US loan guarantees for Israel with Prime Minister Yitzak Shamir’s support of the 1991 Madrid peace conference – one of Bush’s key legacies – ended in defeat. 
Against this background, AIPAC should have known that its attempt, in close cooperation with Obama’s Republican opponents, to block the Iran nuclear deal (one of Obama’s most important achievements) would fail. 
Indeed, Obama even used a tactic similar to that of George H.W. Bush to win the day. 
Just as Bush openly denounced the “thousand lobbyists” working the halls of the US Congress against a vital national interest, Obama said in a conference call that his critics “would be opposed to any deal with Iran,” and called out AIPAC’s $20 million advertising campaign against the agreement. 
He also put AIPAC in the same category as the Republicans who “were responsible” for leading the US into the Iraq war. 
For AIPAC – which has traditionally relied on a broad coalition of social and political forces in the US that view Israel’s security as both a moral cause and a vital national interest – this is not any old defeat. 
The Republican-backed crusade against a key agreement negotiated by a Democratic president, with his party’s overwhelming support, has threatened the bipartisan foundations of Israel’s cause in America. 
Of course, the nuclear deal involved more than just the US and Iran. 
AIPAC was opposing an international agreement that six major world powers – China, France, Germany, Russia, the United Kingdom, and the US – had already signed and that the United Nations had approved. 
Even some of Israel’s staunchest supporters in Congress were unlikely to deal a potentially devastating blow to America’s international credibility, and the idea that the negotiating countries would all agree to reopen the talks to produce a “better deal” was sheer fantasy. 
Yet that is the objective that Netanyahu set for AIPAC. 
The row over the Iran deal is bound to be a watershed moment for American Jews, among whom sharp divisions have formed. 
Indeed, the American Jewish Committee 2015 Survey of American Jewish Opinion reports the emergence of “two diverging Jewish sub-communities,” with a growing number of Jews feeling alienated by the organizations that claim to represent them. 
AIPAC represents a striking anomaly in the life of American Jews. 
It is increasingly identified with the Republican agenda and Israel’s evangelical Christian supporters, even though polls have repeatedly shown that Jews are America’s most liberal ethnic group. 
The truth is that American Jews largely opposed the Iraq war. 
They overwhelmingly vote for the Democratic Party. 
They define their religion as moderate and liberal, with many upholding gay rights and abortion, both anathema to evangelical Christians. 
The majority of American Jews even support the creation of a Palestinian state. 
And, although they are far from united on the Iran deal, the agreement’s supporters outnumber its opponents. 
Much of the blame for the damage that has been done – to AIPAC, American Jewish communities, and even the US political process – falls on Netanyahu. 
But he is unlikely to face retribution for any of it. 
On the contrary, the Obama administration has already begun the discussions it promised on upgrading Israel’s strategic capabilities. 
As Arab countries throughout the Middle East melt down – with increasingly significant spillover effects in the West – Israel continues to represent a stable regional partner for the US. 
More dangerous, Netanyahu could achieve his next goal: preventing a strategic détente between the US and Iran that would enable cooperation in resolving major regional conflicts, from Yemen to Syria. 
After all, Obama’s victory on the nuclear deal may have been inevitable, but it was far from easy. 
An odd coalition of Iranian radicals, AIPAC, the Saudi-led Sunni alliance, the Israeli government, and US politicians from both parties have already compelled Obama to promise additional sanctions on Iran for its sponsorship of terrorism. 
As a result, America’s cold war with Iran is likely to persist. 

Europe’s Airpocalypse 
SINGAPORE – European policymakers like to lecture the rest of the world on air pollution. 
Asia, and China in particular, is a favorite target for criticism. 
Indeed, it sometimes seems as if no major environmental conference is complete without a presentation by European policymakers on their continent’s supposed “best practices,” which the rest of the world should emulate. 
When it comes to air pollution, however, Europe might consider doing less talking and more listening. 
Air pollution is a growing concern across Europe. 
The World Health Organization has called it the continent’s “single largest environmental health risk,” estimating that 90% of Europe’s citizens are exposed to outdoor pollution that exceeds WHO air-quality guidelines. 
In 2010, some 600,000 European citizens died prematurely because of outdoor and indoor air pollution, and the economic costs have been put at $1.6 trillion, roughly 9% of the European Union’s GDP. 
London and Paris suffer from particularly severe air-quality problems. 
Nitrogen dioxide levels in some parts of London regularly reach 2-3 times the recommended limit. 
In the United Kingdom, air pollution kills some 29,000 people a year, putting it second only to smoking as a cause of premature death. 
Paris may be even worse off; in March, after air-pollution levels surpassed Shanghai’s, the city imposed a partial driving ban and introduced free public transportation. 
Sadly, Europe’s policymakers do not seem up to the challenge. 
George Osborne, the UK’s chancellor of the exchequer, has argued against British leadership in the fight against climate change. “We are not going to save the planet by shutting down our steel mills, aluminum smelters, and paper manufacturers,” he declared in 2011. 
Osborne is not alone. 
With European politicians arguing that introducing environmental safeguards will hurt the EU’s already-weakened economy, it comes as little surprise that measures to limit air pollution fall far short of the mark. 
The EU’s proposed standards regulating toxic emissions from coal plants are even less strict than China’s, Greenpeace reports. 
Yet various European politicians have called for watering them down even further, with Hungary suggesting that they be scrapped altogether. 
To be sure, air pollution levels in Asia are truly worrisome. 
The continent is home to nine of the world’s ten most polluted countries, according to Yale University’s 2014 Air Quality Ranking. 
New Delhi is ranked as the most polluted city on earth, with air pollution exceeding safe levels by a factor of 60. 
Owing to Beijing’s unhealthy air, foreign companies pay a “hardship bonus” of up to 30% to employees working there. 
But at least policymakers in Asia have recognized the problem and are taking steps to address it. 
China, for example, has declared a “war on pollution.” 
By 2017, Beijing – once dubbed “Greyjing” by the international media – will spend some CN¥760 billion ($121 billion) to combat air pollution. 
At the heart of China’s measures are improved public transportation, green trade, and a revision of the energy mix. 
The government has decided to install bus stops every 500 meters in city centers, reduce tariffs to 5% or less for a list of 54 environmental goods, and decommission many outdated and inefficient coal plants. 
The share of non-fossil fuels in primary energy consumption is expected to increase to 20% by 2030. 
These targets are likely to be rigorously implemented, given strong political support from the very top. 
Meanwhile, in India, the state governments in Gujarat, Maharashtra, and Tamil Nadu are about to launch the world’s first cap-and-trade schemes for particulates. 
India’s Supreme Court even suggested an extra charge on privately owned diesel vehicles in New Delhi. 
Other parts of Asia are also taking steps to improve air quality. 
Vietnam aims to construct eight urban rail lines in the coming years. 
Bangkok, which has been tackling air pollution since the 1990s, has planted 400,000 trees. 
And Japan is offering subsidies for hydrogen cars and creating new pedestrian-only areas. 
Europe, as one of the world’s wealthiest regions, ought to be at the forefront of the effort to promote environmental sustainability. 
When it comes to air pollution, however, Europe’s policymakers should stop preaching to others and focus on fixing their own problems. 

The Dawn of Climate-Friendly Air Travel 
MONTREAL – As the world becomes increasingly interconnected, demand for air travel is growing, with more than 30,000 new large aircraft expected to take to the skies in the next few years. 
But if we are to sustain growth in air travel without aggravating global warming, we must quickly reduce aviation-related CO2 emissions, which are substantial and not covered by the Paris climate agreement that more than 190 countries agreed to last December. 
Fortunately, now is the perfect time to decouple aviation emissions from air-travel growth. 
Representatives from 191 countries convened in Montreal this week for the 39th Session of the United Nations’ International Civil Aviation Organization; after decades of wrangling, they have agreed to an aviation-specific climate agreement. 
The new ICAO framework aims for “carbon-neutral growth” in international aviation from 2020 onward, and has as its centerpiece a global market-based measure (GMBM) to help airlines affordably cap their net emissions at 2020 levels. 
When implemented, it will be the first carbon-emissions cap on a global industry that does not noticeably increase costs for consumers. 
And airlines will purchase emissions reductions from other economic sectors, thus funneling billions of dollars into low-carbon development around the world. 
For the first six years, the new framework will apply only to flights between countries that have voluntarily adopted it, which means that the ICAO will have to encourage adequate participation for the program to be effective. 
This opt-in approach has some critics, but whether a program is categorized as “voluntary” or “mandatory” is beside the point, because international accords generally apply only to the sovereign countries that have decided to join them. 
Some 64 countries have already signaled their willingness to sign on to the ICAO agreement, and together they account for nearly 80% of expected growth in CO2 emissions above 2020 levels. 
That isn’t 100%, but it’s a great start, and we can expect more countries to join when they see others reaping the benefits of low-carbon development. 
The airlines themselves will welcome a coherent global framework that establishes clear and predictable compliance metrics, rather than a regulatory patchwork that differs from country to country and complicates international operations. 
To minimize compliance costs – and because environmental sustainability is now a key competitive marker for customers and investors alike – airlines will likely encourage the countries where they do business to participate in the ICAO program. 
The new agreement provides an enormous opportunity to prevent the emission of 2.5 billion tons of CO2 in the first 15 years – the equivalent of taking roughly 35 million cars off the road every year the program is in force. 
The agreement will also spur major manufacturers such as Boeing, Airbus, Bombardier, and Embraer – which are already investing in quieter, more fuel-efficient aircraft and efficiency improvements for existing models – to develop cleaner technologies that will allow them to purchase fewer emissions offsets. 
However, the framework decided in Montreal is not complete, and crucial details need to be worked out quickly so that airlines can begin to plan how they will meet the new environmental targets. 
Developed countries have already offered to help implement the GMBM, which, it is hoped, will pave the way for investments in emerging economies that are becoming new aviation powerhouses. 
If the countries can leapfrog over old technologies, they can become new leaders in carbon-smart flying. 
They should seize the opportunity before them and join the ICAO framework so that their manufacturers have a clear and predictable path forward. 
At the Paris climate talks last year, we witnessed the power of global collective action to address climate change. 
No fewer than 187 countries – large and small, developed and developing – announced emissions-reduction targets in the months before the conference, which created the momentum to reach a landmark accord. 
With the Paris climate agreement on track to enter into force in the coming months – more rapidly than anyone ever thought possible – we still have that momentum. 
The ICAO agreement is the next wave in the international battle against climate change. 
Together, the two agreements will boost our chances of delivering environmentally sustainable economic growth. 
By cleaning up our carbon footprint now, future generations of air travelers from all countries will be able to look out their window onto a healthy planet. 

Alan Greenspan on Trial 
The release of Alan Greenspan’s ghostwritten memoirs The Age of Turbulence has elicited charges that he was not such a great central banker after all. 
Stan Collender of National Journal sees the fingerprints of the White House on these attacks: Greenspan is harshly critical of George W. Bush’s administration, after all, and to attack the credibility of Republican ex-policymakers who are critical of Bush is standard counterpunching for it. 
But what is one to make of the criticisms of Greenspan’s tenure at the Federal Reserve? 
The indictment contains four counts: that Greenspan wrongly cheered the growth of non-standard adjustable-rate mortgages, which fueled the housing bubble; that he wrongly endorsed Bush’s tax cuts; that he should have reined in the stock market bubble of the 1990’s; and that he should have done the same with the real estate bubble of the 2000’s. 
To the first two counts, Greenspan now pleads guilty. 
He says that he did not understand how the growth of non-standard mortgages had lured borrowers and investors into bearing dangerous risks. 
He was, he now says, focusing on how fixed-rate mortgages are relatively bad deals for borrowers in times of low inflation, which was a mistake. 
Greenspan also pleads guilty to a mistake in early 2001. 
He thought that he was giving balanced testimony to Congress on government budget issues. 
He testified that it is important to run surpluses to pay down the debt, but that surpluses must not be so large that the government winds up owning American industry. 
He also testified that tax cuts are better than spending increases to keep surpluses from growing too large, but that uncertainty is enormous, so that any tax cuts should be canceled if they threatened to bring us back to an age of deficits. 
Robert Rubin and Kent Conrad warned him that the press would not interpret his testimony as being balanced, and that Congress would interpret it as an excuse to abandon fiscal discipline. 
They were right. 
Greenspan also pleads guilty to misunderstanding the character of the Bush administration. 
He thought that his old reality-based friends from the Ford administration were back in power. 
He thought that he – and Treasury Secretary Paul O’Neill – could win the quiet “inside game” for sensible policy without resorting to an “outside game” that would make his reappointment in 2004 unlikely. 
He was wrong. 
But how serious are these policy-political crimes to which Greenspan now pleads guilty? 
In my view, they are misdemeanors. 
Against them you have to set what former Treasury Secretary Larry Summers calls Greenspan’s “golden glove” performance at avoiding and minimizing recessions during his years at the Fed. 
The “felonies” of which Greenspan stands accused are the other two charges: that he should have done more to stop the stock market bubble of the late 1990’s, and that he should have done more to stop the housing bubble of the early 2000’s. 
Here, Greenspan holds his ground, and pleads not guilty. 
The only way, he says, for the Fed to have kept stock prices in reasonable equilibrium ranges in the late 1990’s would have been to raise interest rates so high that they hit the real economy on the head with a brick. 
Interest rates high enough to curb stock market speculation would also have curbed construction and other forms of investment, raised unemployment, and sent the economy into recession. 
To cause a significant current evil in order to avoid a possible future danger when our knowledge is limited and our judgments uncertain is, Greenspan believes, unwise. 
In this, he is following a tradition of caution that extends from Edmund Burke to John Maynard Keynes. 
Greenspan mounts a similar defense concerning the housing bubble. 
High construction employment has been good for American workers in the past half-decade – a period that has not produced much good for them. 
Higher interest rates to reduce the housing boom seem, even in retrospect, ill advised if the cost is mass unemployment. 
And Greenspan eschews paternalism: he would not assume the role of a regulator telling people that they cannot buy a house even though a lender is willing to finance it. 
But Greenspan would have served the country and the world better if he had been somewhat more paternalist in slowing the growth of non-standard adjustable-rate mortgages. 
He would have served the country and the world better had he been less of a loyal Republican working the inside game of trying to convince Bush’s political advisors that good policy was important, and more of a nonpartisan steward of America’s long-term fiscal stability. 
Of course, such a Greenspan would never have been re-appointed. 
All in all, Greenspan served the United States and the world well through his stewardship of monetary policy, especially by what he did not do: trying to stop stock and housing speculation by halting the economy in its tracks. 

Toward a More Reflective Planet 
CAMBRIDGE – The last time the atmosphere held as much carbon dioxide as it does today was about three million years ago – a time when sea levels were 10-30 meters higher than they are now. 
Climate models have long struggled to duplicate those large fluctuations in sea levels – until now. 
Indeed, for the first time, a high-quality model of Antarctic ice and climate has been able to simulate these large swings. 
That is smart science, but it brings devastating news. 
The new model shows that melting in Antarctica alone could increase global sea levels by as much as one meter (3.2 feet) by the end of this century – well above prior estimates. 
Worse, it suggests that even extraordinary success at cutting emissions would not save the West Antarctic Ice Sheet, locking in eventual sea-level increases of more than five meters. 
As little as one meter could put at risk entire cities, from Miami to Mumbai, and cause enormous economic disruption. 
We need to turn down the heat – and fast. 
To this end, albedo modification – a kind of geoengineering intended to cool the planet by increasing the reflectivity of the earth’s atmosphere – holds tremendous promise. 
Injecting synthetic aerosols that reflect sunlight into the stratosphere, for example, could help counter the warming caused by greenhouse gases. 
The mechanism is similar to wearing a white shirt in the summer: white reflects sunlight and cools what is underneath, whereas darker colors absorb sunlight and heat. 
To be sure, even in the best-case scenario, solar geoengineering alone could not stabilize the world’s climate. 
For that, we must both stop pumping carbon pollution into the atmosphere and learn how to remove what is already there. 
That is why emissions cuts should receive the lion’s share of resources devoted to combating climate change. 
But, as the recent study shows, emissions cuts alone cannot save the West Antarctic Ice Sheet and prevent a drastic sea-level rise. 
If they are pursued in conjunction with moderate albedo modification, however, there is a chance of halting rising temperatures, helping to keep the world under 1.5° Celsius above pre-industrial levels, the more ambitious target agreed at the Paris climate talks last December. 
(It should be noted that, given carbon-cycle feedbacks, such as the thawing of permafrost, there is a chance that the world would face a 1.5°C rise, even if emissions were eliminated today.) 
Most of the world’s state-of-the-art climate models have explored albedo modification, and each of them has found that the process does have the potential to mitigate climate change. 
Beyond limiting total warming, it can help to check the rise in peak temperatures, decreasing the risk of destructive heat waves. 
And it seems to be particularly effective at reducing extreme rainfall, which holds profound implications for minimizing flood damage. 
Albedo modification remains uncertain and risky, owing partly to a dearth of organized research into the subject. 
And, in fact, albedo modification would undoubtedly make some things worse. 
But there is not a single climate model run that shows that a moderate intervention would make any region worse off overall. 
Moreover, the large potential upside, measured in trillions of dollars, contrasts with low direct costs – in the single-digit billions for full-scale deployment. 
In fact, albedo modification is so cheap that direct costs will not be the deciding issue. 
Instead, it is a risk-risk trade-off – one that will require more research to assess. 
Given the lack of knowledge, no sensible person would push for deploying albedo modification today. 
But it would make no sense to ignore its potential. 
After all, no one would argue that we should abandon research on a promising cancer drug because it is unproven. 
The US National Academy of Sciences first called attention to what it then described as “climate modification” in a 1983 report. 
It recommended careful research in 1992 and again in 2015. 
Major environmental groups such as the Environmental Defense Fund and the Natural Resources Defense Council support careful, small-scale research. 
Yet no such program exists. 
One reason for this is concern about the diversion of resources from other approaches. And, of course, there are tradeoffs. 
But the US, for example, has an annual climate science budget of around $3 billion. An exploratory solar geoengineering program, costing only a few tens of millions of dollars per year, is entirely feasible. 
A larger obstacle to progress is fear that more attention to geoengineering solutions would sap motivation to cut emissions. 
Maybe so, but it would be barking mad to take up smoking simply because an experimental cancer treatment showed some promise on a lab rat. 
And, in fact, it is conceivable that a concerted effort to advance research on albedo modification could spur action to cut emissions, much like a graphic look at the side effects of chemotherapy prompts some to stop smoking. 
Whichever reaction prevails, the moral imperative to explore a technology that can protect the poorest and most vulnerable this century would seem to trump amorphous concerns that doing so could weaken the incentive to pursue solutions that would largely benefit future generations. 
China has initiated a limited research program on albedo modification. 
The US has not. 
Given that albedo modification is the kind of technology that necessitates an open, transparent, and international research effort – precisely the kind of effort in which the US excels – this is a serious failing. 
The US government should take the lead now in researching albedo modification. 
Even if the result was that albedo modification does not work, the dividends of such research would be enormous, owing to the added pressure to cut emissions. 
And if it turned out to be successful, the social, environmental, and economic returns would be tremendous. 

India’s Prohibition Hypocrisy 
NEW DELHI – Last month, 18 people in the Gopalganj district of India’s Bihar state died after consuming illicit alcohol, highlighting – once again – the peculiar relationship between morality and tragedy in India. 
The victims were poisoned because this April, in a fit of moralism, Bihar adopted a draconian law prohibiting the sale, possession, and consumption of alcohol. 
It is far from the first such ban that has ended badly. 
In a country where the national hero is the saintly Mahatma Gandhi, who considered alcohol an unmitigated evil, drinking has always carried a whiff of disrepute. 
India’s constitution, in its non-enforceable Directive Principles, urges Indians to work toward prohibition, and the government does not serve alcohol even at state banquets and official receptions. 
Four out of 29 Indian states (Bihar, Gujarat, Manipur, and Nagaland) and one union territory (Lakshadweep or the Laccadive Islands) are currently attempting to enforce total prohibition. 
But maintaining a sweeping prohibition policy has long proved difficult in India. 
In Manipur in 2002, the 1991 ban was lifted in five hill districts, where alcohol consumption is a centuries-old local tradition. 
Lakshadweep makes an exception for an uninhabited island, where a tourist resort is allowed to operate a bar. 
When I was a child, what was then Bombay excused anyone with a doctor’s note confirming alcoholism. 
(Well-heeled executives tripped over themselves to be labeled alcoholics.) 
The state that best illustrates the appeal and the pitfalls of such moralism is Kerala, which announced in 2014 that it was implementing a partial ban on the sale of alcohol, with the goal of achieving total prohibition in ten years. 
It has been backsliding ever since. 
A coastal state, Kerala has long been viewed as a tourist paradise – a reputation no doubt kept afloat on a sea of easily available libations. 
Before the ban, Kerala held a somewhat dubious distinction: India’s highest per capita consumption of spirits. 
But in India, where prohibition is popular among many segments of the electorate, politicians find it particularly difficult to resist the self-righteous urge to improve their fellow citizens. 
So Kerala’s government introduced the ban. 
And, at first, many approved. 
The influential Christian churches applauded the move, as did the Christian-affiliated political parties. 
Kerala’s Muslim leadership, including the then-ruling coalition’s ally, the Indian Union Muslim League, was equally vocal in its support. 
Working-class women, tired of watching their laborer husbands blow their monthly wages on booze, also welcomed the decision, as did traditionalists, Gandhians, and other moralists, of which India has an abundance. 
No public figure of any consequence in Kerala stood up to oppose the decision. 
Any politician who might have been inclined to do so knew that they would be instantly tarred as a votary of evil alcohol, an agent of the “liquor mafia,” a bar-loving enemy of good, wholesome Gandhian values. 
But there were good reasons to oppose the ban – reasons that had nothing to do with religion, morality, or alcoholism. 
Excise duties on liquor account for 22% of the state revenues that sustain generous welfare programs in Kerala, which boasts the best social development indicators in India. 
Another 26% of state revenues come from tourism, which would surely also take a hit. 
Furthermore, much of Kerala’s economic viability depends on dynamic knowledge and services sectors. 
Attracting talent and investment from abroad would become much more difficult if prohibition hampered the state’s quality of life. 
(IT professionals in Bangalore, in the neighboring state Karnataka, flock to that city’s bars and pubs after long hours at work.) 
Kerala’s leaders should have known that their state could not afford to do without widely available, heavily taxed liquor. 
But they began to implement the policy anyway. 
Almost immediately, 20,000 bar workers and distillery employees lost their jobs, in a state that already struggles with high unemployment. 
Tourism operators were stung by cancelations, as would-be visitors decided to visit Sri Lanka or Goa instead; 50% of existing convention bookings were canceled. 
And IT companies contemplating moving to clean, green, tech-friendly Kerala expressed concern about the prohibition policy. 
It was not long before Kerala’s government decided that prohibition would apply only to hard alcohol, and closed bars could reopen as wine and beer parlors. 
But that was not enough to save the government in June’s state election, which produced a new communist administration that, advocating education about the evils of alcohol instead of a ban, has promised to review the prohibition policy. 
So Kerala is no longer hurtling toward disaster in the name of saving people from themselves. 
But it never should have gone as far as it did, given experience with prohibition in other states, where falling revenues and rising crime (including smuggling, tax evasion, and illicit liquor production) forced its revocation. 
Four states – Andhra Pradesh, Haryana, Mizoram, and Tamil Nadu – have repealed prohibition policies. 
To be sure, not everyone loses out from a prohibition policy. 
When Kerala first announced its plans, neighboring Tamil Nadu’s alcoholic beverages corporation, TASMAC, promptly declared its intention to open a string of new outlets along the states’ border, to cater to the demands of Keralite consumers. 
In other words, excise duties from Kerala would now fill Tamil Nadu’s coffers. 
Banning alcohol in India has been economically devastating. 
Yet politicians continue to use the promise of prohibition to win votes. 
When elections were called in Tamil Nadu early this year, its chief minister declared herself in favor of prohibition. 
After the election was won, however, all such talk discreetly subsided. 
My late father liked to say: “India is not only the world’s largest democracy; we are also the world’s largest hypocrisy.” 
I suppose we can drink to that. 

Assured Mutual Dependence 
LONDON – During the Cold War, the certainty of “mutually assured destruction” steered the nuclear arms race away from catastrophe: a would-be attacker would face immediate retaliation, inevitably ending in both sides’ annihilation. 
Today, a very different race is taking place – a race for the earth’s vital resources, and it threatens to undermine stability in key regions of the world. 
The growing dependence of countries on one another’s food, water, and energy requires that the global response to sustainability is taken to the highest political level. 
Unlike the nuclear arms race of the twentieth century, the resource-security agenda is not linear. 
Mutually assured destruction was explicitly acknowledged during the Cold War in statements from both sides. 
In the race for resources that defines the twenty-first century, no actor is directly or indirectly threatening other players to curtail food or energy exports, but all bear the systemic risks. 
Countries have become unavoidably interdependent, and climate change, water stress, and the loss of ecological resilience all increase the volatility of this mutual dependence. 
In a world of limited and scarce resources, countries and companies will be forced to make decisions that affect one another’s security. 
In order to navigate this interdependence, the Earth Security Index 2014, produced by the Earth Security Initiative, shows countries’ combined vulnerabilities that might increase the risk exposure of governments and companies, unless more strategic approaches and sustainable investments are put in place. 
The ESI identifies four areas of mutual dependence that will likely shape global security in the coming decades: 
· Choke points. 
Countries’ growing demand for energy, water, food, and land cannot be satisfied without incurring tradeoffs among limited available resources. 
Choke points are reached when the available resources are insufficient to satisfy demand. 
In China and India, for example, this means that in certain regions there may not be enough water in the short term to run coal-fired thermal power stations and irrigate large fields to grow crops. 
In China, 60% of planned coal-fired power plants will be built in water-stressed regions. 
· Food. 
The growing dependence of many countries on food, water, and energy imports creates new opportunities for trade and investment, but it also exposes countries to critical vulnerabilities. 
Australia, for example, is a large coal exporter but imports most of its refined fuels and holds just three days of fuel stockpiles. 
The challenges of mutual dependence are particularly acute with respect to food. 
As the ESI shows, some countries – including Egypt, Peru, and the United Arab Emirates – are heavily dependent on cereal imports from a small number of suppliers. 
Moreover, grain suppliers’ exposure to extreme weather may compromise their ability to sustain supplies, with knock-on effects for import-dependent countries. 
In 2010, for example, Russia imposed an export ban on wheat, following a severe drought. 
The resulting food-price increases are believed to have played a role in Egypt’s revolution. 
· Teleconnections. 
Anticipating systemic ecological risks will be increasingly important for sectors such as reinsurance and infrastructure investments. 
“Teleconnections” refer to weather events that are related to one another over large geographic distances. 
They are well known to science but not properly discussed by the industries, investors, and governments whose security depends on environmental stability. 
For example, tropical rainforests play a crucial function in maintaining stable weather and rainfall, acting as a “pump” that helps moisture travel between different regions. 
Deforestation can thus have a destabilizing effect on weather patterns, amplifying the frequency and severity of extreme events such as floods and droughts. 
The resulting liabilities to key industries and the financial sector are clear. 
In Brazil, for example, deforestation in Amazonia has slowed significantly over the last five years, but Brazil has already lost more than 11 million hectares of rainforest; its exposure to extreme weather has also steadily risen, with floods causing $4.7 billion in losses in 2011 alone. 
· Land productivity bottlenecks: Agriculture systems are reaching resource limits, and persistent governance gaps compromise their ability to ensure food security, dignified livelihoods, and ecological stewardship. 
Companies, investors, governments, and communities confront a series of critical barriers to increasing the food availability that the world needs: Local populations’ insecure land ownership; receding water tables, owing to unsustainable extraction rates; inefficient use of pollution-causing inputs like fertilizers and pesticides; the loss of vital ecosystems, affecting the resilience of food production; and certain areas’ inability to cope with extreme weather. 
In some regions of India, for example, these issues are playing out in tandem. 
Insecure land tenure acts as a disincentive for smallholder farmers to commit to productivity-enhancing investments; water extraction rates are depleting aquifers as a result of permissive policies; and food security remains out of reach for millions of people, despite rapid economic growth in urban areas. 
Countries and companies will increasingly need to invest in sustainable land in order to hedge their resource risks. 
In 2015, global frameworks are due to be agreed to address climate change, coordinate responses to natural disasters, and guide the world’s development agenda. 
Some of these multilateral processes – in particular, those seeking an ambitious global climate agreement – appear to be moving in slow motion and against the grain of geopolitical interests. 
In the past, the case for high-level nuclear governance was urgent and clear, but required processes for creating a common understanding of risks and opportunities across national borders. 
Successful multilateral responses, like the Nuclear Non-Proliferation Treaty, continue to be supported by more flexible global platforms, such as the Nuclear Threat Initiative, based on relationships and trust established outside the box of formal multilateralism. 
This year, as world leaders discuss the next generation of sustainability, development, and climate frameworks, they will need to put their security and mutual dependence at the heart of the responses. 
Here, too, the world will need to create informal platforms that supplement traditional multilateralism. 
In particular, the outdated divisions between rich and poor countries and their responsibilities must be revised. 
As new powers like China, Brazil, India, and other G-20 economies bid to reform global governance systems, their vulnerability to resource security must invigorate these processes. 
Only then will the world be on track to improve the security of all. 

Living Big Data 
CAMBRIDGE – Big data is made from the digital trail that we leave behind when we use credit cards, mobile phones, or the Web. 
Used carefully and accurately, these data give us unprecedented scope to understand our society, and improve the way we live and work. 
But what works in theory may not translate well in the real world, where complex human interactions cannot always be captured, even by the most sophisticated models. 
Big data requires us to experiment on a big scale. 
My own laboratory, for example, is building a Web site which, based on Google maps, uses society’s digital trail to map poverty, infant mortality, crime rates, changes in GDP, and other social indicators, neighborhood by neighborhood – all of which will be updated daily. 
This new capability allows viewers to see, for example, where government initiatives are working or failing. 
But, while such impressive visualization tools can dramatically enhance transparency and public knowledge, they are surprisingly limited when applied to solving society’s problems. 
One reason is that such rich streams of data encourage spurious correlations. 
Even the use of the normal scientific method no longer works; given so many measurements, and so many more potential connections among what’s being measured, our standard statistical tools generate nonsensical results. 
Without knowing all possible alternatives, we cannot form a limited, testable set of clear hypotheses. 
And if we can no longer rely on laboratory experiments to test causality, we must test it in the real world, using massive volumes of real-time data. 
This involves moving beyond the closed, question-and-answer process typical of the lab, and applying our ideas in society, earlier and more frequently than ever before. 
To see how things work in reality, we must construct living laboratories – that is, communities willing to try new ways of doing things (to be blunt, to act as guinea pigs). 
An example of such a living lab is the “open data city,” which I launched with the city of Trento in Italy, along with Telecom Italia, Telefónica, the research university Fondazione Bruno Kessler, the Institute for Data Driven Design, and local companies. 
Importantly, this living lab has the approval and informed consent of all involved; they understand that they are participating in a gigantic experiment whose goal is to create a better way of living. 
One major challenge for a living lab is to protect individual privacy without diminishing the potential for better government. 
The Trento lab, for example, will pilot my proposed “New Deal on Data,” which gives users greater control over their personal data through trust-network software such as our open PDS (Personal Data Store) system. 
We hope that the ability to share data safely, while protecting privacy, will encourage individuals, companies, and governments to communicate their ideas widely, and so increase productivity and creativity across the entire city. 
But the biggest difficulty in using big data to build a better society is being able to develop a human-scale, intuitive understanding of social physics. 
Although dense, continuous data and modern computation allow us to map many details about society, and to explain how communities might work, such raw mathematical models contain too many variables and complex relationships for most people to understand. 
What is needed is some kind of dialogue between human intuition and the compelling reality of big data – a dialogue that is currently absent from management and government systems. 
If big data is to be deployed effectively, people must be able to understand and interpret the relevant statistics. 
This calls for a new understanding of human behavior and social dynamics that goes beyond traditional economic and political models. 
Only by developing the science and language of social physics will we be able to make a world of big data a world in which we want to live. 

Ukraine and Beyond 
GENEVA – The Ukraine crisis has evolved from acute to chronic. 
The main question – Will Russia dare to invade mainland Ukraine? – has been answered: Not now. 
So, now what? 
Obviously, the Kremlin did not expect the West’s firm and united reaction to its annexation of Crimea. 
President Vladimir Putin’s phone call to US President Barack Obama on March 28 clearly demonstrated Russia’s eagerness to discuss “de-escalation.” 
Putin’s main objectives now are the removal of Ukraine’s blockade of Moldova’s pro-Russian breakaway region of Transnistria and Ukrainian “federalization” (a euphemism for the Kremlin’s back-door strategy to gain control over the country’s eastern and southern regions). 
But there can be no return to business as usual anytime soon. 
Russia’s invasion and annexation of Crimea has triggered unintended tectonic shifts in international politics. 
While the long-term implications are still hazy, the immediate consequences are clear. 
First, the Russian people will pay dearly in terms of their own freedom for their leaders’ reckless decisions. 
After the Soviet invasion of Czechoslovakia in 1968, the Russian poet Alexander Galich wrote: “Compatriots, our homeland is in danger! 
Our tanks are in a foreign land!” 
Confrontation with the West, seemingly unavoidable after the Crimea Anschluss, will give rise to a “mobilization” regime. 
Russia’s new draft budget, with its skyrocketing military outlays, along with paranoid talk of “fifth columns” and “national traitors,” attests to this trend. 
In such circumstances, sanctions that hit ordinary people will only help the regime consolidate its power. 
Second, the crisis has several geopolitical ramifications. 
The Kremlin’s actions have undermined European security; delivered a body blow to international law; weakened the nuclear non-proliferation regime by fatally undermining the role of security guarantees for non-nuclear states; and raised doubts about the predictability of Russia under its current leaders. 
All of this will have far-reaching effects in the years and decades ahead, ranging from the realignment of formal and informal alliances and the militarization of security arrangements to possible – and long-discussed – adjustments in the international governance system. 
Russia’s expulsion from the G-8 and renewed military build-ups are only the first of many such changes. 
Third, the Ukraine crisis will completely transform Russia’s relations with the West. 
During the first two decades after the Cold War, a combination of suspicion and pragmatism prevailed on both sides, with competition in some respects and cooperation in others playing a crucial role in coping with important international challenges. 
The relationship’s transformation into an adversarial one will “contaminate” the international system, undermining potential solutionsto many problems, from nuclear-arms reduction and climate change to stabilizing regional hot spots like Syria. 
In response to Western sanctions, the Kremlin will bring pressure to bear on the United States and its allies by creating problems elsewhere. 
For example, Russia has already offered to build two new, non-military nuclear reactors in Iran. 
Technological support for Iran’s nuclear programs could impede the ongoing international negotiations aimed at preventing Iran from developing nuclear weapons, especially as the Iranians are looking for leverage in the talks. 
Russia could escalate the crisis by putting pressure on the US closer to home as well. 
Consider Venezuela, where – as with Iran’s nuclear program – Russia has demonstrated its willingness to take risks that it would not have taken before. 
On February 26, Russian Defense Minister Sergei Shoigu formally announced his government’s plan to expand its overseas military presence. 
Venezuela is high on its list, having already purchased more than three-quarters of the $14.5 billion in arms sold by Russia in the region from 2001 to 2013. 
Fourth, having annexed Crimea, Russia has lost Ukraine, turning it from friend to foe. 
Ukraine’s industrial and manufacturing infrastructure evolved under the Soviet Union as a compliment to Russia’s resource base. 
After the Soviet Union’s dissolution, the Russian resource economy’s traditional links with Ukraine, including extensive pipeline infrastructure, ensured access to European markets. 
Now, having lost Ukraine’s industrial and manufacturing base, and with Europe more determined than ever to reduce its dependence on Russian energy supplies, the Kremlin will need to turn eastward toward China, which will be happy to see Russia remain a resource economy in thrall to it. 
Given all of these potential dire consequences, it is vital to prevent Cold War II. 
During the coming transition period, the world will need new mechanisms for international dialogue. 
Isolation of Russia would be counterproductive, merely aggravating its highly developed sense of victimization and possibly turning it into a “rogue” state – truly a nightmare scenario, given that Russia has the world’s largest nuclear arsenal. 
Instead, targeted economic sanctions and calibrated military measures should be coupled with intensive and open political dialogue. 
A personal meeting between US, Russian, and German leaders could be helpful in channeling relations toward a non-destructive course. 
To be truly productive, such contact should not be limited to resolving the Ukraine crisis – or to senior officials. 
The Ukraine crisis should not be allowed to obscure the full range of challenges that the world faces. 
In fact, the standoff is more likely to be resolved constructively within a framework that seeks consensus on a broader agenda. 
After all, any crisis creates new opportunities (for example, the Syrian civil war has prompted important action on chemical weapons). 
The opportunity for Russia and the West is to generate the political will needed to address issues – above all, reform of an outmoded system of international relations – that have been ignored for too long. 

The Politics of Machine-Learning Algorithms 
WASHINGTON, DC – Around 1200 BC, the Shang Dynasty in China developed a factory system to build thousands of huge bronze vessels for use in everyday life and ritual ceremonies. 
In this early example of mass production, the process of bronze casting required intricate planning and the coordination of large groups of workers, each performing a separate task in precisely the right order. 
A similarly complex process went into fashioning the famous army of terracotta warriors that Qin Shi Huang, China’s first emperor, unveiled one thousand years later. 
According to the Asian Art Museum in San Francisco, the statues “were created using an assembly production system that paved the way for advances in mass production and commerce.” 
Some scholars have speculated that these early forms of prescriptive-work technologies played a large role in shaping Chinese society. 
Among other things, they seem to have predisposed people to accept bureaucratic structures, a social philosophy emphasizing hierarchy, and a belief that there is a single right way of doing things. 
When industrial factories were introduced in Europe in the nineteenth century, even staunch critics of capitalism such as Friedrich Engels acknowledged that mass production necessitated centralized authority, regardless of whether the economic system was capitalist or socialist. 
In the twentieth century, theorists such as Langdon Winner extended this line of thinking to other technologies. 
He thought that the atom bomb, for example, should be considered an “inherently political artifact,” because its “lethal properties demand that it be controlled by a centralized, rigidly hierarchical chain of command.” 
Today, we can take that thinking even further. 
Consider machine-learning algorithms, the most important general-purpose technology in use today. 
Using real-world examples to mimic human cognitive capacities, these algorithms are already becoming ubiquitous in the workplace. 
But, to capitalize fully on these technologies, organizations must redefine human tasks as prediction tasks, which are more suited to these algorithms’ strengths. 
A key feature of machine-learning algorithms is that their performance improves with more data. 
As a result, the use of these algorithms creates a technological momentum to treat information about people as recordable, accessible data. 
Like the system of mass production, they are “inherently political,” because their core functionality demands certain social practices and discourages others. 
In particular, machine-learning algorithms run directly counter to individuals’ desire for personal privacy. 
A system based on the public availability of information about individual community members might seem amenable to communitarians such as the sociologist Amitai Etzioni, for whom limitations on privacy are a means to enforce social norms. 
But, unlike communitarians, algorithms are indifferent to social norms. 
Their only concern is to make better predictions, by transforming more and more areas of human life into data sets that can be mined. 
Moreover, while the force of a technological imperative turns individualist Westerners into accidental communitarians, it also makes them more beholden to a culture of meritocracy based on algorithmic evaluations. 
Whether it is at work, in school, or even on dating apps, we have already become accustomed to having our eligibility assessed by impersonal tools, which then assign us positions in a hierarchy. 
To be sure, algorithmic assessment is not new. 
A generation ago, scholars such as Oscar H. Gandy warned that we were turning into a scored-and-ranked society, and demanded more accountability and redress for technology-driven mistakes. 
But, unlike modern machine-learning algorithms, older assessment tools were reasonably well understood. 
They made decisions on the basis of relevant normative and empirical factors. 
For example, it was no secret that accumulating a lot of credit card debit could hurt one’s creditworthiness. 
By contrast, new machine-learning technologies plumb the depths of large data sets to find correlations that are predictive but poorly understood. 
In the workplace, algorithms can track employees’ conversations, where they eat lunch, and how much time they spend on the computer, telephone, or in meetings. 
And with that data, the algorithm develops sophisticated models of productivity that far surpass our commonsense intuitions. 
In an algorithmic meritocracy, whatever the models demand becomes the new standard of excellence. 
Still, technology is not destiny. 
We shape it before it shapes us. 
Business leaders and policymakers can develop and deploy the technologies they want, according to their institutional needs. 
It is within our power to cast privacy nets around sensitive areas of human life, to protect people from the harmful uses of data, and to require that algorithms balance predictive accuracy against other values such as fairness, accountability, and transparency. 
But if we follow the natural flow of algorithmic logic, a more meritocratic and communitarian culture will be inevitable. 
And this steady transformation will have far-reaching implications for our democratic institutions and political structures. 
As the China scholars Daniel A. Bell and Zhang Weiwei have noted, the major political alternative to Western liberal-democratic traditions are the communitarian institutions that continue to evolve in China. 
In China, collective decisions are not legitimated by citizens’ explicit consent, and people generally have fewer enforceable rights against the government, particularly when it comes to surveillance. 
An ordinary Chinese citizen’s role in political life is largely limited to participation in local elections. 
The country’s leaders, meanwhile, are selected through a meritocratic process, and consider themselves custodians of the people’s welfare. 
Liberal democracies are not likely to shift entirely to such a political system. 
But if current trends in business and consumer culture continue, we might soon have more in common with Chinese meritocratic and communitarian traditions than with our own history of individualism and liberal democracy. 
If we want to change course, we will have to put our own political imperatives before those of our technologies. 

All for One Tax and One Tax for All? 
CAMBRIDGE – When the next full-scale global financial crisis hits, let it not be said that the International Monetary Fund never took a stab at forestalling it. 
Recently, the IMF proposed a new global tax on financial institutions loosely in proportion to their size, as well as a tax on banks’ profits and bonuses. 
The Fund’s proposal has been greeted with predictable disdain and derision by the financial industry. 
More interesting and significant are the mixed reviews from G-20 presidents and finance ministers. 
Governments at the epicenter of the recent financial crisis, especially the United States and the United Kingdom, are downright enthusiastic, particularly about the tax on size. 
After all, they want to do that anyway. 
Countries that did not experience recent bank meltdowns, such as Canada, Australia, China, Brazil, and India, are unenthusiastic. 
Why should they change systems that proved so resilient? 
It is all too easy to criticize the specifics of the IMF plan. 
But the IMF’s big-picture diagnosis of the problem gets a lot right. 
Financial systems are bloated by implicit taxpayer guarantees, which allow banks, particularly large ones, to borrow money at interest rates that do not fully reflect the risks they take in search of outsized profits. 
Since that risk is then passed on to taxpayers, imposing taxes on financial firms in proportion to their borrowing is a simple way to ensure fairness. 
“What risks?” the financial firms demand to know. 
The average cost of the bailouts was “only” a few percentage points of GNP. 
And the crisis was a once-in-a-half-century event. 
The IMF rightly points out that these claims are nonsense. 
During the crisis, taxpayers were on the hook for almost a quarter of national income. 
Perhaps the next crisis will not turn out so “well,” and the losses borne by the public will be staggering. 
Even with the “success” of the bailouts, countries suffered massive output losses due to recessions and sustained subpar growth. 
But, while regulation must address the oversized bank balance sheets that were at the root of the crisis, the IMF is right not to focus excessively on fixing the “too big to fail” problem. 
A surprising number of pundits seem to think that if one could only break up the big banks, governments would be far more resilient to bailouts, and the whole “moral hazard” problem would be muted. 
That logic is dubious, given how many similar crises have hit widely differing systems over the centuries. 
A systemic crisis that simultaneously hits a large number of medium-sized banks would put just as much pressure on governments to bail out the system as would a crisis that hits a couple of large banks. 
There are altogether too many complex ideas floating around that look good on paper, but might well prove deeply flawed in a big-time crisis. 
Any robust solution must be reasonably simple to understand and implement. 
The IMF proposal seems to pass these tests. 
By contrast, some finance specialists favor forcing banks to rely much more on “contingent” debt that can be forcibly converted to (possibly worthless) stock in the event of a system-wide meltdown. 
But how this form of “pre-packaged bankruptcy” could be implemented in a world of widely different legal, political, and banking systems is unclear. 
Financial history is littered with untested safety-net devices that failed in a crisis. 
Better to rein in the growth of the system. 
The IMF is on much weaker ground, however, in thinking that its one-size-fits-all global tax system will somehow level the playing field internationally. 
It won’t. 
Countries that now have solid financial regulatory systems in place are already effectively “taxing” their financial firms more than, say, the US and the UK, where financial regulation is more minimal. 
The US and the UK don’t want to weaken their competitive advantage by taxing banks while some other countries do not. 
But it is their systems that are in the greatest and most urgent need of stronger checks and balances. 
Let’s not go too far in defending the “holdout” countries that are resisting the IMF proposal. 
These countries need to recognize that if the US and the UK do implement even modest reforms, a lot of capital will flow elsewhere, potentially overwhelming regulatory systems that seemed to work well until now. 
And what about the second tax proposed by the IMF, on banks’ profits and bonuses? 
Such a tax is politically appealing, but ultimately it makes little sense – except, perhaps, in a crisis year when bank subsidies are glaringly transparent. 
It would be better to improve financial-market regulation directly and let national tax systems handle banks’ income like that of any other industry. 
The IMF’s first effort at prescribing a cure may be flawed, but its diagnosis of a financial sector bloated by moral hazard is manifestly correct. 
Let’s hope that when the G-20 leaders meet later this year, they decide to take the problem seriously instead of tabling discussion for a decade or two until the next crisis is upon us. 


All Stimulus Roads Lead to China 
BEIJING – Now that the “green shoots” of recovery have withered, the debate over fiscal stimulus is back with a vengeance. 
In the United States, those who argue for another stimulus package observe that it was always wishful thinking to believe that a $787 billion package could offset a $3 trillion fall in private spending. 
But unemployment has risen even faster and further than expected. 
Combine this with the continued fall in housing prices, and it is understandable that consumer spending remains depressed. 
The banks, having been recapitalized only to the extent necessary to keep them afloat, still have weak balance sheets. 
Their consequent reluctance to lend constrains investment. 
Meanwhile, state governments, seeing revenues fall as a result of lower taxable incomes last year, are cutting back like mad. 
If there was a case for additional stimulus back in February, that case is even stronger now. 
But the case against additional stimulus is also strong. 
The US federal deficit is an alarming 12% of GDP, and public debt as a share of national income is already projected to double, to 80% of GDP. 
The idea that the US can grow out of its debt burden, as did Finland and Sweden following their financial crises in the 1990’s, seems unrealistic. 
Given all this, more deficit spending will only stoke fears of higher future taxes and inflation. 
It will encourage the reemergence of global imbalances. 
And it will not reassure consumers or investors. 
It is possible to argue the economics both ways, but the politics all point in one direction. 
The US Congress lacks the stomach for another stimulus package. 
It has already faced intense criticism for its failure to get the country’s fiscal house in order. The slowness with which the first stimulus has been rolled out, and the fact that it will take even more time for its full effects to be felt, provides more fodder for the chattering classes. 
Disappointment over the effects of the TARP has already destroyed popular – and Congressional – support for more public money to recapitalize the banks. 
So, even those who find the economic logic of arguments for fiscal activism compelling must acknowledge that the politics are not supportive. A second stimulus simply is not in the cards. 
If there is going to be more aggregate demand, it can come from only one place. 
That place is not Europe or Japan, where debts are even higher than in the US – and the demographic preconditions for servicing them less favorable. 
Rather, it is emerging markets like China. 
The problem is that China has already done a lot to stimulate domestic demand, both through government spending and by directing its banks to lend. 
As a result, its stock market is frothy, and it is experiencing an alarming property boom. 
Through May, property prices were up 18% year on year. 
Understandably, Chinese officials worry about bubble trouble. 
The obvious way to square this circle is to spend more on imports. 
China can purchase more industrial machinery, transport equipment, and steelmaking material, which are among its leading imports from the US. Directing spending toward imports of capital equipment would avoid overheating China’s own markets, boost the economy’s productive capacity (and thus its ability to grow in the future), and support demand for US, European, and Japanese products just when such support is needed most. 
This strategy is not without risks. 
Allowing the renminbi to appreciate as a way of encouraging imports may also discourage exports, the traditional motor of Chinese growth. 
And lowering administrative barriers to imports might redirect more spending toward foreign goods than the authorities intend. 
But these are risks worth taking if China is serious about assuming a global leadership role. 
The question is what China will get in return. 
And the answer brings us back, full circle, to where we started, namely to US fiscal policy. 
China is worried that its more than $1 trillion investment in US Treasury securities will not hold its value. 
It wants reassurance that the US will stand behind its debts. 
It therefore wants to see a credible program for balancing the US budget once the recession ends. 
And, tough talk notwithstanding, the Obama administration has yet to offer a credible roadmap for fiscal consolidation. 
Doing so would reassure American taxpayers worried about current deficits. 
Just as importantly, it would reassure Chinese policymakers. 
We live in a multipolar world where neither the US nor China is large enough to exercise global economic leadership on its own. 
For China, leadership means assuming additional risks. 
But for this to be tolerable, the US needs to relieve China of existing risks. 
Only by working together can the two countries lead the world economy out of its current doldrums. 

All the Queen’s Children 
NEW YORK – Does monarchy – constitutional monarchy, that is, not the despotic kind – have any redeeming features left? 
The arguments against maintaining kings and queens are mostly quite rational. 
It is unreasonable in this democratic age to pay special deference to people solely on the basis of their birth. Are we really supposed to admire and love modern monarchies, such as the British House of Windsor, even more so today, just because some new princess has been plucked from the middle class? 
Monarchy has an infantilizing effect. 
Witness how otherwise sensible adults are reduced to nervously grinning sycophants when they are granted the privilege of touching an extended royal hand. 
At great monarchical displays, such as the royal wedding in London, millions become enthralled by child-like dreams of a “fairy-tale” marriage. 
The mystique of immense wealth, noble birth, and great exclusivity is further sustained by the global mass media that promote these rituals. 
Now, one might argue that the dignified pomp of Queen Elizabeth II is preferable to the tawdry grandiosity of Silvio Berlusconi, Madonna, or Cristiano Ronaldo. 
In fact, the British monarchy, especially, has been reinventing itself by adopting many of the most vulgar features of modern showbiz or sports celebrity. 
And the worlds of royalty and popular fame often overlap. 
For example, David Beckham and his ex-pop-star wife Victoria, live out their own dream of royalty, aping some of its gaudiest aspects. 
They also happened to be among the favored guests at the latest royal wedding. 
Similarly, while Britain has many outstanding musicians, the favorite of the royal court is Elton John. 
Infantile or not, there is a common human craving for taking vicarious pleasure in the lives of kings, queens, and other shining stars. 
To call these people’s ostentatious displays of extravagance wasteful is to miss the point: a world of glittering dreams that must remain entirely beyond our grasp is precisely what many people want to see. 
But there is another, darker side to this craving, which is the wish to see idols dragged through the mud in vicious gossip magazines, divorce courts, and so on. 
This is the vengeful side of our fawning, as though the humiliation of worshipping idols must be balanced by our delight in their downfall. 
Indeed, to subject people who are born into royal families, or people who marry into them, to lives in a fishbowl, where they are on constant display, like actors and actresses in a continuous soap opera, where human relations are distorted and stunted by absurd rules of protocol, is a terrible form of cruelty. 
The current Japanese empress and her daughter-in-law, both from non-aristocratic families, have had nervous breakdowns as a result. 
Likewise, movie stars often fall victim to alcohol, drugs, and breakdowns, but at least they have chosen the lives they live. 
Kings and queens, on the whole, have not. 
Prince Charles might have been far happier as a gardener, but this was never an option. 
One thing to be said for monarchs is that they provide people with a sense of continuity, which can be useful in times of crisis or radical change. 
The King of Spain provided stability and continuity after the end of Franco’s dictatorship. 
During World War II, European monarchs kept a sense of hope and unity alive among their subjects under Nazi occupation. 
But there is something else, too. 
Monarchies are often popular with minorities. 
Jews were among the most loyal subjects of the Austro-Hungarian Emperor. 
Franz Joseph I stood up for his Jewish subjects when they were threatened by German anti-Semites. 
To him, Jews, Germans, Czechs, or Hungarians were all his subjects, wherever they lived, from the smallest Galician shtetl to the grand capitals of Budapest or Vienna. 
This offered some protection to minorities at a time of rising ethnic nationalism. 
In this sense, monarchy is a little like Islam, or the Catholic Church: all believers are supposed to be equal in the eyes of God, or the Pope, or the Emperor – hence the appeal to the poor and the marginalized. 
This might explain some right-wing populists’ animus against monarchy. 
The Dutch populist leader Geert Wilders, for example, has denounced Queen Beatrix on several occasions as a leftist, elitist, and multiculturalist. 
Like the new wave of populists worldwide, Wilders promises to take his country back for his followers, to stop immigration (especially of Muslims), and to make the Netherlands Dutch again, whatever that means. 
Beatrix, like Franz Joseph, refuses to make ethnic or religious distinctions between her subjects. 
That is what she means when she preaches tolerance and mutual understanding. 
To Wilders and his supporters, this is a sign of her molly-coddling of aliens, of appeasing Muslims. 
To them, the queen seems almost anti-Dutch. 
To be sure, like all European royal families, the origins of the Dutch royal family are decidedly mixed. 
The emergence of kings and queens as specifically national figureheads is a relatively recent historical development. 
Empires contained many nations, after all. 
Queen Victoria, mostly of German blood, did not regard herself as a monarch of Britons alone, but of Indians, Malays, and many other peoples, too. 
This aristocratic tradition of standing above the narrow strains of ethnic nationalism may be the best argument to hang on to royalty a little longer. 
Now that many European nations have become increasingly mixed in terms of ethnicity and culture, the only way forward is to learn to live together. 
If monarchs can teach their subjects to do so, then let us give at least one cheer for the remaining kings and queens. 

Alpine Schadenfreude 
Not surprisingly, the atmosphere at this year’s World Economic Forum was grim. 
Those who think that globalization, technology, and the market economy will solve the world’s problems seemed subdued. 
Most chastened of all were the bankers. 
Against the backdrop of the sub-prime crisis, the disasters at many financial institutions, and the weakening of the stock market, these “masters of the universe” seemed less omniscient than they did a short while ago. 
And it was not just the bankers who were in the Davos doghouse this year, but also their regulators – the central bankers. 
Anyone who goes to international conferences is used to hearing Americans lecture everyone else about transparency. 
There was still some of that at Davos. 
I heard the usual suspects – including a former treasury secretary who had been particularly vociferous in such admonishments during the East Asia crisis – bang on about the need for transparency at sovereign wealth funds (though not at American or European hedge funds). 
But this time, developing countries could not resist commenting on the hypocrisy of it all. 
There was even a touch of schadenfreude in the air about the problems the United States is having right now – though it was moderated, of course, by worries about the downturn’s impact on their own economies. 
Had America really told others to bring in American banks to teach them about how to run their business? 
Had America really boasted about its superior risk management systems, going so far as to develop a new regulatory system (called Basle II)? 
Basle II is dead – at least until memories of the current disaster fade. 
Bankers – and the rating agencies – believed in financial alchemy. 
They thought that financial innovations could somehow turn bad mortgages into good securities, meriting AAA ratings. 
But one lesson of modern finance theory is that, in well functioning financial markets, repackaging risks should not make much difference. 
If we know the price of cream and the price of skim milk, we can figure out the price of milk with 1% cream, 2% cream, or 4% cream. 
There might be some money in repackaging, but not the billions that banks made by slicing and dicing sub-prime mortgages into packages whose value was much greater than their contents. 
It seemed too good to be true – and it was. 
Worse, banks failed to understand the first principle of risk management: diversification only works when risks are not correlated, and macro-shocks (such as those that affect housing prices or borrowers’ ability to repay) affect the probability of default for all mortgages. 
I argued at Davos that central bankers also got it wrong by misjudging the threat of a downturn and failing to provide sufficient regulation. 
They waited too long to take action. 
Because it normally takes a year or more for the full effects of monetary policy to be felt, central banks need to act preemptively, not reactively. 
Worse, the US Federal Reserve and its previous chairman, Alan Greenspan, may have helped create the problem, encouraging households to take on risky variable-rate mortgages by reassuring those who worried about a housing bubble that there was at most a little “froth” in the market. 
Normally, a Davos audience would rally to the support of the central bankers. 
This time, a vote at the end of the session supported my view by a margin of three to one. 
Even the plea of one of central banker that “no one could have predicted the problems” moved few in the audience – perhaps because several people sitting there had, like me, explicitly warned about the impending problem in previous years. 
The only thing we got wrong was how bad banks’ lending practices were, how non-transparent banks really were, and how inadequate their risk management systems were. 
It was interesting to see the different cultural attitudes to the crisis on display. 
In Japan, the CEO of a major bank would have apologized to his employees and his country, and would have refused his pension and bonus so that those who suffered as a result of corporate failures could share the money. 
He would have resigned. 
In America, the only questions are whether a board will force a CEO to leave and, if so, how big his severance package will be. 
When I asked one CEO whether there was any discussion of returning their bonuses, the response was not just no, but an aggressive defense of the bonus system. This is the third US crisis in the past 20 years, after the Savings & Loan crisis of 1989 and the Enron/WorldCom crisis in 2002. 
Deregulation has not worked. 
Unfettered markets may produce big bonuses for CEO’s, but they do not lead, as if by an invisible hand, to societal well-being. 

Alternatives to Austerity 
NEW YORK – In the aftermath of the Great Recession, countries have been left with unprecedented peacetime deficits and increasing anxieties about their growing national debts. 
In many countries, this is leading to a new round of austerity – policies that will almost surely lead to weaker national and global economies and a marked slowdown in the pace of recovery. 
Those hoping for large deficit reductions will be sorely disappointed, as the economic slowdown will push down tax revenues and increase demands for unemployment insurance and other social benefits. 
The attempt to restrain the growth of debt does serve to concentrate the mind – it forces countries to focus on priorities and assess values. 
The United States is unlikely in the short term to embrace massive budget cuts, à la the United Kingdom. 
But the long-term prognosis – made especially dire by health-care reform’s inability to make much of a dent in rising medical costs – is sufficiently bleak that there is increasing bipartisan momentum to do something. 
President Barack Obama has appointed a bipartisan deficit-reduction commission, whose chairmen recently provided a glimpse of what their report might look like. 
Technically, reducing a deficit is a straightforward matter: one must either cut expenditures or raise taxes. 
It is already clear, however, that the deficit-reduction agenda, at least in the US, goes further: it is an attempt to weaken social protections, reduce the progressivity of the tax system, and shrink the role and size of government – all while leaving established interests, like the military-industrial complex, as little affected as possible. 
In the US (and some other advanced industrial countries), any deficit-reduction agenda has to be set in the context of what happened over the last decade: 
· a massive increase in defense expenditures, fueled by two fruitless wars, but going well beyond that; 
· growth in inequality, with the top 1% garnering more than 20% of the country’s income, accompanied by a weakening of the middle class – median US household income has fallen by more than 5% over the past decade, and was in decline even before the recession; 
· underinvestment in the public sector, including in infrastructure, evidenced so dramatically by the collapse of New Orleans’ levies; and 
· growth in corporate welfare, from bank bailouts to ethanol subsidies to a continuation of agricultural subsidies, even when those subsidies have been ruled illegal by the World Trade Organization. 
As a result, it is relatively easy to formulate a deficit-reduction package that boosts efficiency, bolsters growth, and reduces inequality. 
Five core ingredients are required. 
First, spending on high-return public investments should be increased. 
Even if this widens the deficit in the short run, it will reduce the national debt in the long run. 
What business wouldn’t jump at investment opportunities yielding returns in excess of 10% if it could borrow capital – as the US government can – for less than 3% interest? 
Second, military expenditures must be cut – not just funding for the fruitless wars, but also for the weapons that don’t work against enemies that don’t exist. 
We’ve continued as if the Cold War never came to an end, spending as much on defense as the rest of the world combined. 
Following this is the need to eliminate corporate welfare. 
Even as America has stripped away its safety net for people, it has strengthened the safety net for firms, evidenced so clearly in the Great Recession with the bailouts of AIG, Goldman Sachs, and other banks. 
Corporate welfare accounts for nearly one-half of total income in some parts of US agro-business, with billions of dollars in cotton subsidies, for example, going to a few rich farmers – while lowering prices and increasing poverty among competitors in the developing world. 
An especially egregious form of corporate special treatment is that afforded to the drug companies. 
Even though the government is the largest buyer of their products, it is not allowed to negotiate prices, thereby fueling an estimated increase in corporate revenues – and costs to the government – approaching $1 trillion dollars over a decade. 
Another example is the smorgasbord of special benefits provided to the energy sector, especially oil and gas, thereby simultaneously robbing the treasury, distorting resource allocation, and destroying the environment. 
Then there are the seemingly endless giveaways of national resources – from the free spectrum provided to broadcasters to the low royalties levied on mining companies to the subsidies to lumber companies. 
Creating a fairer and more efficient tax system, by eliminating the special treatment of capital gains and dividends, is also needed. 
Why should those who work for a living be subject to higher tax rates than those who reap their livelihood from speculation (often at the expense of others)? 
Finally, with more than 20% of all income going to the top 1%, a slight increase, say 5%, in taxes actually paid would bring in more than $1 trillion over the course of a decade. 
A deficit-reduction package crafted along these lines would more than meet even the most ardent deficit hawk’s demands. 
It would increase efficiency, promote growth, improve the environment, and benefit workers and the middle class. 
There’s only one problem: it wouldn’t benefit those at the top, or the corporate and other special interests that have come to dominate America’s policymaking. 
Its compelling logic is precisely why there is little chance that such a reasonable proposal would ever be adopted. 

Africa’s Necessary Data Revolution 
WASHINGTON, DC – Since the term “data revolution” was introduced, there has been a flurry of activity to define, develop, and implement an agenda to transform the collection, use, and distribution of development statistics. 
That makes sense. 
Assessing the international community’s next development agenda, regardless of its details, will be impossible without accurate data. 
Yet, in Sub-Saharan Africa – the region with the most potential for progress under the forthcoming Sustainable Development Goals – accurate data are severely lacking. 
From 1990 to 2009, only one Sub-Saharan country had data on all 12 indicators established in 2000 by the Millennium Development Goals. 
Indeed, of the 60 countries with complete vital statistics, not one is in Africa. 
While most African countries have likely experienced economic growth during the last decade, the accuracy of the data on which growth estimates are based – not to mention data on inflation, food production, education, and vaccination rates – remains far from adequate. 
Inaccurate data can have serious consequences. 
Consider Nigeria’s experience earlier this year, when GDP rebasing showed that the economy was nearly 90% larger than previously thought. 
The distorted picture of Nigeria’s economy provided by the previous statistics likely led to misguided decisions regarding private investment, credit ratings, and taxation. 
Moreover, it meant that Nigeria was allocated more international aid than it merited – aid that could have gone to needier countries. 
Contrary to popular belief, the constraints on the production and use of basic data stem not from a shortage of technical capacity and knowhow, but from underlying political and systemic challenges. 
For starters, national statistical offices often lack the institutional autonomy needed to protect the integrity of data, production of which thus tends to be influenced by political forces and special interest groups. 
Poorly designed policies also undermine the accuracy of data. 
For example, governments and donors sometimes tie funding to self-reported measures, which creates incentives for recipients to over-report key data like vaccination or school-enrollment rates. 
Without effective oversight, these well-intentioned efforts to reward progress can go awry. 
Despite these failings, national governments and international donors continue to devote far too few resources to ensuring the collection of adequate data. 
Only 2% of official development aid is earmarked for improving the quality of statistics – an amount wholly insufficient to assess accurately the impact of the other 98% of aid. 
And governments’ dependency on donors to fund and gather their core statistics is unsustainable. 
In fact, stronger national statistical systems are the first step toward improving the accuracy, timeliness, and availability of the data that are essential to calculating almost any major economic or social-welfare indicator. These include statistics on births and deaths; growth and poverty; tax and trade; health, education, and safety; and land and the environment. 
Developing such systems is an ambitious but achievable goal. 
All that is needed is a willingness to experiment with new approaches to collecting, using, and sharing data. 
This is where the public comes in. 
If private firms, media, and civil-society organizations identify specific problems and call publicly for change, their governments will feel pressure to take the steps needed to produce accurate, unbiased data – for example, by enhancing the autonomy of national statistical offices or providing sufficient funds to hire more qualified personnel. 
While it may be tempting to bypass government and hope for an easy technology-based solution, sustainable, credible progress will be difficult without public-sector involvement. 
The recognition by governments and external donors of the need for more – and more efficient – funding, particularly to national statistical systems, will be integral to such a shift. 
Establishing stronger incentives for agencies to produce good data – that is, data that are accurate, timely, relevant, and readily available – would also help, with clearly delineated metrics defining what qualifies as “good.” 
In fact, tying progress on those metrics to funding via pay-for-performance agreements could improve development outcomes considerably. 
One concrete strategy to achieve these goals would be to create a country-donor compact for better data. 
Such a compact would enable governments and donors to express their shared intention to build a national statistics system over a period of several years, with clear and verifiable milestones. 
It would also provide a country-specific framework for innovation on funding mechanisms and the engagement of civil society and the private sector, while mobilizing new technologies for data collection and dissemination. 
In short, a data compact would help to mobilize and focus domestic and donor funding to achieve national statistical priorities. 
Data are the currency of performance, accountability, and credibility in the global economy, and improvements in data have been linked to better governance and higher levels of private investment. 
That is just what Africa needs to support a new decade of growth and development. 

The Experts’ Advantage 
LONDON – Nearly everyone who sits on Google’s board of directors has at least one computer science or engineering degree or doctorate. 
There are two university presidents and eminent scholars – Stanford University’s John Hennessy and former Princeton University President Shirley Tilghman – and several members of the National Academy of Engineering and other illustrious organizations. 
For Google, it pays to have technical expertise at the top. 
But Google is an unusual corporate giant in promoting those with scientific prowess to the top of the management ladder. 
Beyond Silicon Valley, few senior corporate executives boast technical expertise in the products that their companies produce. 
American boardrooms are filled with MBAs, especially from Harvard, while firms in the rest of the developed world (with the possible exception of Germany) seem to prefer professional managers over technical or scientific talent. 
Nowadays, it seems as anomalous to have knowledge workers serve as professional leaders as it once did to have scientists in the boardroom. 
It was previously thought that leadership is less necessary in knowledge-intensive organizations, where experts were assumed to be superior because they were motivated by intellectual pleasure rather than such extrinsic motivations as profit growth and cost targets. 
This difference in attitude is evident in many areas of society, not least in hospitals in the United States and the United Kingdom, where knowledge-intensive medical practitioners operate separately from managers. 
Hospitals used to be run by doctors; today, only 5% of US hospitals’ CEOs are medical doctors, and even fewer doctors run UK hospitals. 
“Medicine should be left to the doctors,” according to a common refrain, “and organizational leadership should be left to professional managers.” 
But this is a mistake. 
Research shows that higher-performing US hospitals are likely to be led by doctors with outstanding research reputations, not by management professionals. 
The evidence also suggests that hospitals perform better, and have lower death rates, when more of their managers up to board level are clinically trained. 
We see similar findings in other fields. 
My research shows that the world’s best universities, for example, are likely to be led by exceptional scholars whose performance continues to improve over time. 
Departmental-level analysis supports this. 
A university economics department, for example, tends to perform better the more widely its head’s own research is cited. 
With experts in charge, it may not always look like there is an effective reporting structure in place. 
But, as the academic saying goes: just because you cannot herd cats, does not mean there is not a feline hierarchy. 
As with cats, academics operate a “relative hierarchy” in which the person in charge changes, depending on the setting. 
Even in the world of sports, where success is not an obvious preparation for management, we see interesting linkages between experience and organizational performance. 
The very best NBA basketball players often make top coaches, while former Formula 1 champion drivers are associated with great team performance. 
Of the 92 soccer clubs in the English football league, club managers played an average of 16 years in senior clubs. 
Alex Ferguson, arguably Britain’s best manager, scored an average of one goal every two games in his professional career. 
But where the pattern does occur, especially in the business world, we should take note. 
The senior partner of any professional services firm is likely to have been a top performer during a long career with the firm. 
This might be because experts and professionals in knowledge-intensive organizations prefer a boss who has excelled in their field. 
The leader’s credibility is vital: if she sets high standards, it seems only right that she should have matched or exceeded them herself. 
In short, she must lead by example. 
This sort of leadership arrangement creates a virtuous circle. 
A leader with prior experience knows how her subordinates feel, how to motivate them, and how to create the right working environment. 
She probably makes better hiring decisions, too – after all, the best scientist or physician is more likely than a professional manager to know which researchers or doctors have the greatest potential. 
The problem, however, is not simply that today’s leaders lack technical knowledge; it is that experts are often reluctant to lead. 
But that can change. 
By communicating the importance of management and leadership early in a specialist’s career, and by offering tailored, digestible, and jargon-free training, we could bridge the gap. 
Many medical schools are already considering including management education as part of the curriculum. 
The trick is to get experts, who are trained to go ever deeper into their specialization, to step back and view the big picture. 
With the right preparation, there is no reason why a leader cannot specialize and manage. 
The results could be remarkable. 
Think of how governments run by scientists with management skills might respond to climate change. 
Top minds should be put to top use. 

Ambivalent Arabia 
A democratic tide seems to be sweeping across the Arab world. 
Even the traditional Arab monarchies and Emirates are changing in its wake. 
Kuwait now allows women to vote, Qatar has embraced an ambitious reform program, Bahrain has shown great tolerance of mass demonstrations, and the U.A.E. is allowing something like a free press. 
But Saudi Arabia continues to be deeply wary of any sort of change, and thus remains a huge and seemingly immovable obstacle to region-wide reform. 
Although the Saudi ruling family, the al-Saud, is under enormous pressure to follow the example of its neighbors, internal resistance to doing so remains very strong. 
So the al-Saud have become Janus-faced: looking in one direction, the royal family encourages democratic reformers to speak out; looking in the opposite direction, it jails them when they do. 
On May 15, in a closed trial without legal representation for the accused, three leading reformers – Ali Al Dumaini, a well-known journalist and poet, and university professors Abdullah Al Hamid and Matruk al Falih – were condemned and sentenced to prison terms ranging from six to nine years. 
Their crime was to call for a constitutional monarchy. 
The official verdict states that they threatened national unity, challenged those in authority, and incited public opinion against the state while using “foreign,” that is, Western, terminology. 
Not long after the September 2001 terrorist attacks in the United States, these liberal reformers joined with 160 other professionals to write and sign a petition to Crown Prince Abdullah asking for reforms. 
The petition called for the monarchy to work within constitutionally prescribed limits, and for an independent judiciary. 
The reformers believe that such reforms are the only way for Saudi Arabia to survive the threat of violence, instability, and national fragmentation that is looming on its horizon. 
Only a constitution, they argue, can restore much needed legitimacy to a political system that is widely perceived as deeply corrupt and inept. 
Crown Prince Abdullah, Saudi Arabia’s de facto ruler in place of his incapacitated half-brother King Fahd, is keen to be seen as a champion of reform. 
He received these proposals with a warm welcome in January 2003. 
But his half-brother and more powerful rival, Prince Naif, the Minister of Interior, ordered the arrests, trial, and imprisonment of 13 reformers in March 2004. 
Crown Prince Abdullah offered not a peep of opposition, leaving the reform agenda that he initiated in a political netherworld. 
In order to maintain absolutist power and to minimize public anger, the Saudi princes, led by Prince Naif, asked the reformers to sign an agreement that they would never again ask for reform. 
Prince Naif bans the very word “reform” from public discourse, because it suggests that there is something wrong with the system; his preferred term is “development.” 
Of the thirteen reformers who were arrested, ten submitted to this demand, but the other three refused and have paid the price. 
They remained in jail in Riyadh without legal representation until the final verdict. 
Those who submitted had their passports withdrawn, lost their jobs, and were forbidden to speak to the press. 
Under regional and international pressure, the Saudi ruling family has constructed a Potemkin village of reform while retaining absolute control over all political developments. 
Earlier this year, they staged partial, and tightly regulated municipal elections, with no independent opinion permitted to influence when and how the ballots were held. 
These entire female population was excluded, and only one-quarter of the male population was eligible to vote. 
Inevitably, Wahhabi Islamists did best. 
The al-Saud face two threats: one from violent Islamists, and the other from liberal reformers. 
There is every indication that they fear the reformers far more. 
Perhaps the princes believe that it is easier to kill “terrorist” criminals than to crush demands for social justice. 
Indeed, killing violent Islamists and al-Qaeda affiliates is applauded by the international community, especially the United States, as success in the “war on terrorism.” 
But as they hunt down and kill violent domestic extremists, they are quietly tightening the noose around all those who want moderate reform. 
This repression of liberal reformers passes unnoticed in the wider world, with America’s silence particularly noticeable. 
This silence is vital to the princes, for what the al-Saud care about most is US support. 
As things stand in Saudi Arabia, the US administration has no credible ally for change outside of the existing regime. 
So, unlike in Ukraine, Georgia, Kyrgizstan, and Lebanon, it does nothing to encourage popular opposition. 
As long as the Saudi regime meets America’s oil needs and fights Islamist radicals, it will continue to receive US support and silence – and hence its tacit consent. 
But turning a blind eye is shortsighted, for America and for the Saudis. 
Those who make peaceful revolutions impossible make violent revolutions inevitable. 
The liberal reformers who have been jailed could have paved the way for a peaceful transition to a reformed Saudi Arabia. 
By jailing them, the regime has made it clear that violence is the only avenue open to those seeking change. 

America After the Election 
NEW YORK – The ongoing presidential campaign in the United States stands out for its lack of civility and the vast differences between the candidates: the anti-establishment businessman Donald Trump on the Republican side and the polished politician Hillary Clinton representing the Democrats. 
The contest has exposed deep fault lines within American society and damaged the country’s global reputation. 
No surprise, then, that one of the few things Americans seem to agree on is that the campaign has gone on for too long. 
But soon it will be over. 
The question is: what comes next? 
Polls suggest that Clinton, a former senator and secretary of state, will defeat the controversial Trump. 
But polls are not to be confused with reality. 
After all, going into June’s Brexit referendum, most observers believed that a victory for “Remain” was a sure thing. 
More recently, Colombian voters rejected a peace accord that was widely expected to receive popular approval. 
All of this is to say that, while a Clinton victory may be likely, it is no certainty. 
The only poll that counts is the one on November 8. 
Until then, all we can do is speculate. 
Yet some predictions can be made with greater confidence. 
There is little doubt that the US will emerge from this election a divided country with a divided government, regardless of who is president or which party has a majority in either chamber of Congress. 
Neither Democrats nor Republicans will be able to realize their objectives without at least some support from the other. 
But no one should think that the only divide in American politics is between Republicans and Democrats. 
In fact, splits within the two major parties are just as deep, with large and highly motivated factions pulling each to their respective extremes – Democrats to the left and Republicans to the right. 
This makes compromise on centrist positions all the more difficult to achieve. 
The rapid resumption of presidential politics will undermine compromise further. 
If Clinton wins, many Republicans will assume that it was only because of Trump’s flaws, and they will judge her likely to be a one-term president. 
A country favoring change, they will conclude, is unlikely to keep a Democrat in the Oval Office for a fourth term. 
Many Republicans (especially those who deny the legitimacy of a Clinton victory) will thus seek to frustrate her administration, lest she be able to run again in 2020 as a successful incumbent. 
Similarly, if Trump manages to win, most Democrats (and even some Republicans) will – after recovering from their surprise and dismay – make it their highest priority to ensure that he does not have an opportunity for a second term. 
Given how much of Trump’s agenda his fellow policymakers would likely find objectionable, governing would be very difficult during his administration. 
In either scenario, it may still be possible to make progress in a few key areas. 
The next US government might manage to enact legislation to fund the modernization of America’s aging infrastructure, a policy that both candidates and many in Congress favor. 
It might also be able to cobble together a majority to reform the US tax code – in particular, lowering the high rate for corporations and raising taxes on the wealthy. 
There could even be some reform of health care, President Barack Obama’s signature achievement, owing to serious implementation problems with the current system. 
But other issues requiring cooperation between Congress and the president are unlikely to be addressed any time soon. 
One is immigration reform, which is as controversial in the US as it is in Europe. 
Another is trade: because the domestic political environment makes policymakers wary of supporting positions with dedicated opponents, both Trump and Clinton oppose the Trans-Pacific Partnership, even though its ratification would benefit America’s economy and strategic standing. 
Meanwhile, America’s deficit and debt are certain to rise, as there seems to be little or no will to reduce entitlement spending. 
The foreign-policy implications of the election are somewhat different, because, under the US Constitution, the president enjoys considerable latitude. 
While only Congress can officially declare war or ratify treaties, presidents may use (or refuse to use) military force without explicit congressional approval. 
They can also enter into international agreements other than treaties, appoint powerful White House staff, and change US foreign policy by executive action, as Obama recently did regarding Cuba. 
Under Clinton, this discretion could translate into establishing one or more safe areas in Syria, providing more defensive arms to Ukraine, and taking a tougher line toward North Korea as it continues its nuclear and missile buildup. 
It is more difficult to guess what Trump would do. 
He is, after all, a political outsider, so no one knows how much of his campaign rhetoric would be translated into policy. 
Still, one could anticipate a Trump administration distancing itself from some traditional allies in Europe and Asia and standing mostly aloof from the Middle East. 
What exactly will happen to America after the presidential election remains an open question. 
Though some outcomes can reasonably be expected, the only genuine certainty is that the 96% of the world’s population that does not vote in US elections will feel the effects no less than Americans will. 

America and Europe Divided Over Saddam 
Talk is growing of a change in US defense doctrine to allow for pre-emptive strikes on states that harbor weapons of mass destruction. 
That talk is sending shudders across Europe, where many people connect it with America's oft-stated desire to remove Saddam Hussein from power in Iraq. 
Ever since the Gulf war, Iraq has been a source of friction among the western permanent members of the UN Security Council. 
By the end of 1999, divergence was complete: the United States and Britain were employing their air power to enforce the no-fly zones while France joined Russia and China in abstaining on resolution 1284. 
As this UK-sponsored resolution was meant to bring the Iraq issue back to the Security Council after the withdrawal of the UN weapons inspectors and subsequent American air strikes of December 1998, hope for progress on Iraq within the Security Council was scant. 
This rapidly changed after last September 11th. 
On May 14, 2002, the Security Council gave the tottering sanctions regime a new lease on life by unanimously adopting a simplified screening procedure. 
Even Iraq showed signs of being prepared to consider a possible return of the UN weapons inspectors. 
At first sight this seems to bode well for the transatlantic relationship. 
In reality, the current relaxation is more likely a lull before the storm. 
Most Europeans take it for granted that the US will attack Iraq, and that this act of unilateralism, coming in the wake of all the other irritants such as the ABM Treaty, the Kyoto Agreement, the steel tariffs and the International Criminal Court, will have a devastating effect on transatlantic relations. 
Europe would be ill-advised to become mesmerized by this approaching disaster. 
Everyone understands that the Iraqi government's improved attitude is caused by the Bush administration's sabre-rattling, but no one can tell whether this is a prelude to an inevitable war or a stratagem to make Iraq cooperate with UN weapons inspectors. 
Obviously, the US cannot remove this uncertainty without robbing the sabre-rattling of its beneficial effect. 
Given this ambiguity, there remains time for Europe to engage the US in a serious discussion of the options for dealing with Saddam. 
The common aim should be to remove the threat posed by a dictator with so well-documented a predilection for weapons of mass destruction. 
The options vary from resumed inspections to `regime change'. 
There are arguments which make the choice far less clear-cut than it may seem. 
Several of these are also being advanced within the Bush administration. 
Europe can constructively participate in such discussion provided it first clears the way by: 
1. ridding itself of its constant indignation about the conduct of the Bush administration. 
That indignation seems strongest among those who have not even bothered to read the American arguments. 
Europe does not increase its influence by berating the US for acting in its national interest; 
2. showing some understanding for the view of some in the Bush administration that the US should not be bogged down by a continent that is soft, decadent and moralizing. 
This is not a pleasant way of putting it, but many Americans remember how on two occasions in the former Yugoslavia - a pre-eminently European theatre - Europe was helpless until American warplanes showed up; 
3. making clear that Europe and the US are on the same side, not only in the war on terror generally but also in dealing with Saddam. 
The demonstrations that will rock European cities the day Iraq is attacked must be counteracted in advance by unequivocal European statements to that effect. 
This debate about how to deal with Saddam might go as follows. 
It is not difficult to overthrow Saddam, but it is impossible to predict who or what will take his place. 
Iraq may even disintegrate, leaving us with a much stronger Iran, also a member of the axis of evil but one with a more dangerous mix, namely nuclear ambitions plus fundamentalism. 
Moreover, Saddam may already possess a weapon of mass destruction but has been deterred from using it. 
Once he is attacked by the US, he may use it against Israel, which will retaliate. 
So it may well be wiser to induce Iraq to readmit the UN weapons inspectors and make sure they can do their job. 
This will not entirely remove the Iraqi threat but will make it controllable. 
Should this be the outcome, European governments would breathe a sigh of relief. 
But the debate may also go the other way. 
Saddam will cooperate with UN inspectors only as long as the American threat remains, and the US may conclude that it cannot afford that. 
If President Bush then opts for regime change, Europe should not opt out. 
This is easier said than done. 
Many Europeans will argue that they cannot condone military action without a Security Council mandate. 
But they already did, twice. 
They condoned or even supported American air strikes against Baghdad in December 1998, and they supported or even participated in NATO's air strikes against the Federal Republic of Yugoslavia in March 1999. 
True, some will say, but that was under the Clinton administration. 
If Europe conveys the impression that its friendship with America depends on who wins the US presidential elections, it is likely to freeze the transatlantic relationship for years. 
That hardly seems a rational policy for a continent in profound transition. 

America and Europe 
Deeply frustrated by the Bush administration’s policies, many people and governments in Europe hope for a fundamental change in American foreign policy after the upcoming presidential election. 
But it would take a medium-sized political miracle for these hopes not to be disappointed, and such a miracle will not happen – whoever is elected. 
The Bush administration made numerous foreign-policy blunders with far-reaching consequences. 
But Bush neither invented American unilateralism nor triggered the transatlantic rift between the United States and Europe. 
To be sure, Bush reinforced both trends, but their real causes lie in objective historical factors, namely America’s being the sole world power since 1989 and Europe’s self-inflicted weakness. 
As long as America remains the sole world power, the next US President will be neither able nor willing to change the basic framework of America’s foreign policy. 
It will, of course, be important who wins the presidency: a candidate expected to continue Bush’s foreign policy or someone ready for a new beginning. 
In the former case, the transatlantic rift will deepen dramatically. 
Four, or even eight, more years of US policy à la Bush would inflict such damage on the substance of the transatlantic alliance as to threaten its very existence. 
But if America’s next president is committed to a new direction, US foreign policy might again become more multilateral, more focused on international institutions and alliances, and willing to bring the relationship between military force and diplomacy back to within its historical proportions. 
That is the good news. 
The bad news is that, even under such auspicious conditions, the US, as a world power, will not relinquish its “free-hand” policy or forget its strength and its claim to preeminence among nations. 
Another piece of bad (or good?) news is that a more multilateral American policy will increase the pressure on Europeans to take on more responsibility for international crisis management and conflict resolution – in Afghanistan, Iran, Iraq, the Middle East, Transcaucasia, and Russia, and with respect to Turkey’s future. 
To this common agenda, the Europeans should add Africa, climate change, and reform of the United Nations and the world trading system. 
For a long time, Europe has underestimated its weight and importance. 
Europe’s geopolitical, economic, and social weight is quite obvious. 
But Europe’s integration of sovereign states’ interests by means of common institutions could also be an example for much of the world. 
In particular, the way Europe, in the process of its enlargement, has projected its power to achieve lasting peace across the whole continent, and fostered development by integrating entire economies, states, and societies within its institutional framework, could become a model for shaping a cooperative world order in the twenty-first century. 
This modern, progressive, and peaceful model is unique and superior to all other currently available approaches to the fundamental questions of political order. 
But could doesn’t mean will. 
Europe’s global influence is feeble because of its internal quarrels and lack of unity, which render the European Union weak and limit its ability to act. 
Objectively strong, subjectively infirm – that is how the EU’s present condition can be described. 
The current moment of American weakness coincides with a substantially changed international political environment, defined largely by the limits of US power, Europe’s ineffectiveness, and the emergence of new global giants like China and India. 
In light of these developments, does it still make sense to speak of “the West”? 
I believe it does, more than ever, because the rift between Europe and America leaves both sides substantially weaker in global terms. 
The unilateral overstretching of American power offers a chance for a new beginning in US-European relations. 
America, more than in the past, will depend on strong partners and will seek such partnerships. 
So what are the Europeans waiting for? 
Why not start now to overcome the traditional tension between NATO and the EU – especially as French policy toward NATO under President Nicolas Sarkozy has been moving in the right direction? 
A regular mutual presence of the Secretary General of NATO and of the head of EU foreign policy in the councils of both organizations doesn’t require much time and effort. 
Why not initiate EU-US consultations at a high political level (with the Secretary-General of NATO participating in security matters) – for instance, by inviting the US Secretary of State and other members of the administration, such as the Treasury Secretary or the Administrator of the Environmental Protection Agency, to sit several times a year on the appropriate EU Council meetings? 
Why not have routine annual meetings between the European Council and the US President? 
Periodic meetings between the appropriate committees of the US Congress and the European Parliament would also be of great importance, as ultimately both bodies will have to ratify any international treaties. 
The fate of the Kyoto Protocol should be a lesson to all parties involved. 
No such US-EU consultations would require any new agreements, so they could start without any further preliminaries. 
There is one certainty that Europeans can take home from the US election campaign even today: with a more multilaterally oriented US foreign policy, Europe won’t be riding comfortably in the US world-political slipstream much longer. 
And that is a good thing. 
The new transatlantic formula must be greater say in decision-making in exchange for a greater share of responsibility. 

America and Global Public Goods 
America is currently transfixed with the problem it has created for itself in Iraq, but the presidential candidates are also beginning to ask what principles should guide United States foreign policy after Iraq. 
In my view, a focus on global public goods – things everyone can consume without diminishing their availability to others – could help America reconcile its preponderant power with others’ interests. 
Of course, pure public goods are rare. 
Most only partially approach the ideal case of clean air, where none can be excluded and all can benefit simultaneously. 
Combating global climate change is probably the most dramatic current case. 
If the largest beneficiary of a public good (like the US) does not take the lead in devoting disproportionate resources toward its provision, smaller beneficiaries are unlikely to be able to produce it because of the difficulties of organizing collective action when large numbers are involved. 
While this responsibility often lets others become “free riders,” the alternative is no ride for anyone. 
The US could gain doubly, both from the public goods themselves, and from the way they legitimize its preponderant power in the eyes of others. 
America can learn from the lesson the nineteenth century, when Great Britain was a preponderant power and took the lead in maintaining the balance of power between Europe’s major states, promoting an open international economic system, and maintaining freedom of the seas. 
These issues remain relevant today, and the establishment of rules that preserve access for all remains as much a public good now as it was then, even though some of the issues are more complex. 
Maintaining regional balances of power and dampening local incentives to use force to change borders provides a public good for many (but not all) countries. 
Similarly, maintaining open global markets is a necessary (though not sufficient) condition for alleviating poverty in poor countries even as it benefits the US. 
Today, however, global public goods include new issues – not only climate change, but also preservation of endangered species, outer space, and the “virtual commons” of cyberspace. 
A reasonable consensus in American public opinion supports ensuring both these and the “classic” global public goods, even if the US has failed to lead on some issues, notably global climate. 
There are also three new dimensions of global public goods in today’s world. 
First, the US should take the lead in helping to develop and maintain international laws and institutions to organize collective action to deal with not only trade and the environment, but also weapons proliferation, peacekeeping, human rights, and other concerns. 
Others benefit from the order that such efforts provide, but so does the US. 
Likewise, while unilateralists complain that the US is constrained by international regimes, so are others. 
Second, the US should make international development a higher priority. 
Much of the poor majority of the world is mired in a vicious circle of disease, poverty, and political instability. 
Financial and scientific help from rich countries is important not only for humanitarian reasons, but also to prevent failed states from becoming sources of disorder for the rest of the world. 
Here, too, America’s record is less than impressive. 
Protectionist trade measures often hurt poor countries most, and foreign assistance is generally unpopular with the American public. 
Development will take a long time, and the international community needs to explore better ways to make sure that help actually reaches the poor, but both prudence and a concern for soft power suggest that the US should take the lead. 
Finally, as a preponderant power, the US can provide an important public good by acting as a mediator and convener. 
By using its good offices to mediate conflicts in places like Northern Ireland, Morocco, and the Aegean Sea, the US has helped in shaping international order in ways that are beneficial to other nations. 
The Middle East is the crucial current case. 
It is sometimes tempting to let intractable conflicts fester, and there are some situations where other countries can play the mediator’s role more effectively. 
Even when the US does not want to take the lead, it can share leadership with others, such as with Europe in the Balkans. 
But often the US is the only country that can bring parties together. 
When successful, such leadership increases American soft power while reducing sources of instability. 
The US can also encourage other countries to share in production of such public goods. 
Welcoming the rise of Chinese power in terms of that country’s becoming a “responsible stakeholder” is an invitation to begin such a dialogue. 
Nevertheless, the US is likely to remain the world’s preponderant power even after it extricates itself from Iraq. 
But it will have to learn to work with other countries to share leadership. 
That will require combining the soft power of attraction with the hard power of military might to produce a “smart power” strategy for providing global public goods. 

America at Stall Speed? 
NEWPORT BEACH – Judging from the skittishness of both markets and “consensus expectations,” the United States’ economic prospects are confusing. 
One day, the country is on the brink of a double-dip recession; the next, it is on the verge of a turbo-charged recovery, powered by resilient consumers and US multinationals starting to deploy, at long last, their massive cash reserves. 
In the process, markets take investors on a wild rollercoaster ride, with the European crisis (riddled with even more confusion and volatility) serving to aggravate their queasiness. 
This situation is both understandable and increasingly unsettling for America’s well-being and that of the global economy. 
It reflects the impact of fundamental (and historic) economic and financial re-alignments, insufficient policy responses, and system-wide rigidities that frustrate structural change. 
As a result, there are now legitimate questions about the underlying functioning of the US economy and, therefore, its evolution in the months and years ahead. 
One way to understand current conditions – and what is needed to improve them – is to consider two events that recently attracted considerable worldwide attention: the launch of Boeing’s Dreamliner passenger jet and the tragic death of Apple’s Steve Jobs. 
Let us start with some simple aeronautic dynamics, using an analogy that my PIMCO colleague, Bill Gross, came up with to describe the economic risks facing the American economy. 
For the Dreamliner to take off, ascend, and maintain a steady altitude, it must do more than move forward. 
It has to move forward fast enough to exceed critical physical thresholds, which are significantly higher than those for most of Boeing’s other (smaller) planes. 
Failure would mean succumbing to a mid-air stall, with tepid forward motion giving way to a sudden loss of altitude. 
Unless we are convinced of the Dreamliner’s ability to avoid stall speed, it makes no sense to talk about all the ways in which it will enhance the travel experience for millions of people around the world. 
America’s economy today risks stall speed. 
Specifically, the question is not whether it can grow, but whether it can grow fast enough to propel a large economy that, according to the US Federal Reserve, faces “balance-sheet deleveraging, credit constraints, and household and business uncertainty about the economic outlook.” 
And, remember, it is just over a year since certain US officials were proclaiming the economy’s “summer of recovery” – a view underpinned by the erroneous belief that America was reaching “escape velocity.” 
Stall speed is a terrifying risk for an economy like that of the US, which desperately needs to grow robustly. 
Without rapid growth, there is no way to reverse persistently high and increasingly structural (and therefore protracted) unemployment; safely de-leverage over-indebted balance sheets; and prevent already-disturbing income and wealth inequalities from growing worse. 
The private sector alone cannot and will not counter the risk of stall speed. 
What is desperately needed is better policymaking. 
Specifically, policymakers must be open and willing to understand the unusual challenges facing the US economy, react accordingly, and possess sufficiently potent policy instruments. 
Unfortunately, this has been far from the case in America (and in Europe, where the situation is worse). 
Moreover, US policymakers in the last few weeks have been more interested in pointing fingers at Europe and China than in recognizing and responding to the paradigm shifts that are at the root of the country’s economic problems and mounting social challenges. 
This is where the insights of Steve Jobs, one of the world’s best innovators and entrepreneurs, come in. 
Jobs did more than navigate paradigm shifts; he essentially created them. 
He was a master at converting the complicated into the simple; and, rather than being paralyzed by complexity, he found new ways to deconstruct and overcome it. 
Teamwork was an obligation, not a choice. 
And he eschewed the search for the single “big bang” in favor of aiming for multiple breakthroughs. 
Underlying it all was a willingness to evolve – a drive for perfection through experimentation. 
Moreover, he excelled at selling to audiences worldwide both his vision and his strategy for realizing it. 
So far, America’s economic policymakers have fallen short on all of these fronts. 
Rather than committing to a comprehensive set of urgently-needed reinforcing measures, they seem obsessed with the futile search for the one “killer app” that will solve all of the country's economic problems. 
No surprise that they have yet to find it. 
Teamwork has repeatedly fallen hostage to turf wars and political bickering. 
Little has been done to deconstruct structural complexity, let alone win sufficient public support for a medium-term vision, a credible implementation strategy, and a set of measures that is adequate to the task at hand. 
The longer the policymaking impasse persists, the greater the stall-speed risk for an economy that already has an unemployment crisis, a large budget deficit, many underwater mortgages, and policy interest rates floored at zero. 
This is an atmosphere in which unhealthy balance sheets come under even greater pressure, and healthy investors refuse to engage. 
In the process, the risk of recession remains uncomfortably high, the unemployment crisis deepens, and inequities rise as already-stretched social safety nets prove even more porous. 

The US and China Are the Closest of Enemies 
BERLIN – There has long been talk that the strategic rivalry emerging between the United States and China in recent years could one day give way to confrontation. 
That moment has arrived. 
Welcome to the Cold War 2.0. 
The standard narrative about the Sino-American conflict is that it pits two distinct systems against each other. 
To the US, China is a big-data dictatorship that has detained one million Uighurs in concentration camps, cracked down on Christians, curtailed civil rights, and destroyed the environment – all while building up its military and threatening America’s regional allies. 
In the view of many Chinese, the US is an exponent of interventionism and imperialism, and the Trump administration’s trade war is merely the opening shot in a larger economic, military, and ideological contest for supremacy. 
Yet this framing gets things backward. 
The new Sino-American confrontation is rooted not in the two countries’ differences, but in their growing similarity. 
China and America used to be the yin and yang of the global economy, with America playing the role of consumer, and China that of manufacturer. 
For years, China funneled its surpluses back into the purchase of US Treasury bills, thus underwriting American profligacy and forging a symbiotic arrangement that the historian Niall Ferguson has called “Chimerica.” 
But Chimerica is now a thing of the past. 
With his “Made in China 2025” policy, Chinese President Xi Jinping is moving his country up the global value chain, in the hope of becoming a world leader in artificial intelligence (AI) and other cutting-edge technologies. 
To that end, China has curtailed Western companies’ access to its markets, making it conditional on their transfer of technology and intellectual property to domestic “partners.” 
At the same time that China has been reorienting its economic-development model, the US has replaced its traditional laissez-faire approach with an industrial strategy of its own. 
Behind Trump’s trade war is a desire to rebalance the economic playing field and “decouple” the US from China. 
And with both countries now locked in a zero-sum competition, Team GAFAM (Google, Apple, Facebook, Amazon, Microsoft) and Team BATX (Baidu, Alibaba, Tencent, Xiaomi) are waging a war of technical know-how and data access on a global scale. 
Yet by trying to outcompete each other in the same areas, the US and Chinese strategies are becoming more alike. 
In response to former US President Barack Obama’s efforts to create a Pacific-rim trade bloc to contain China, Xi launched his Belt and Road Initiative (BRI), which is now being met by an American-led Indo-Pacific initiative under Trump. 
The two countries are also on similar paths militarily. 
Though China still has a lot of catching up to do, its total defense spending is already second only to the US. 
It has built and launched its first aircraft carrier, and has plans to launch more. 
It is developing and deploying anti-access/area-denial (A2/AD) defense systems. 
And by establishing its first overseas military base in Djibouti, it has signaled that it has global – not merely regional – ambitions. 
China and the US also increasingly share a predilection for interventionism. 
For China, this represents a stark break from decades of treating non-intervention as a quasi-religious doctrine. 
But China’s changing attitude makes sense. 
As Yan Xuetong of Tsinghua University explained to me shortly after the US invasion of Iraq, a country’s support for intervention reflects a recognition of its own power. 
He predicted that as China built up its military forces, it would become more open to exerting its influence abroad. 
Chinese citizens and many others around the world now expect precisely that. 
After evacuating hundreds of its citizens from Libya in 2014, China increased its participation in United Nations peace-keeping missions. 
And, following a series of attacks in Pakistan, it created a special security force (mostly of private contractors) to protect Chinese interests along the “new silk road” of BRI projects. 
Another area of Sino-American convergence concerns the multilateral system. 
In his 2005 “responsible stakeholder” speech, then-US Deputy Secretary of State Robert Zoellick told the West that global-governance institutions must include China or risk being overturned. 
But to the Chinese, international engagement was never a binary choice. 
So, rather than becoming a responsible stakeholder in the US-led order, China is now developing what might be described as internationalism with Chinese characteristics. 
Accordingly, China has taken advantage of membership in Western-dominated institutions while simultaneously defanging them and building a parallel system of its own. 
But, as the structure of the BRI shows, the world order China envisions is based not on multilateralism, but on bilateral relations between countries. 
By dealing with other governments one on one, China can negotiate from a position of strength and impose its own terms. 
Trump’s “America First” doctrine embodies the same vision for the US. 
Both he and Xi have embraced a message of national rejuvenation. 
This has led Xi to replace China’s longstanding foreign-policy of moderation and tactical cooperation with one based on the pursuit of national greatness. 
And both leaders have increasingly taken foreign-policy decisions into their own hands, while undercutting their respective countries’ systems of checks and balances. 
Although “Cold War 2.0” does not feature the same clash of utopian ideologies as the original, the metaphor is fitting nonetheless. 
Like its predecessor, this one will feature two superpowers that disagree on how the world should be organized, but agree that there can be only one winner. 

A Bilateral Foil for America’s Multilateral Dilemma 
NEW HAVEN – The good news is that the United States and China appear to have backed away from the precipice of a trade war. 
While vague in detail, a May 19 agreement defuses tension and commits to further negotiation. 
The bad news is that the framework of negotiations is flawed: A deal with any one country will do little to resolve America’s fundamental economic imbalances that have arisen in an interconnected world. 
There is a longstanding disconnect between bilateral and multilateral approaches to international economic problems. 
In May 1930, some 1,028 of America’s leading academic economists wrote a public letter to US President Herbert Hoover urging him to veto the pending Smoot-Hawley tariff bill. 
Hoover ignored the advice, and the global trade war that followed made a garden-variety depression “great.” 
President Donald Trump has put a comparable spin on what it takes to “make America great again.” 
Politicians have long favored the bilateral perspective, because it simplifies blame: you “solve” problems by targeting a specific country. 
By contrast, the multilateral approach appeals to most economists, because it stresses the balance-of-payments distortions that arise from mismatches between saving and investment. 
This contrast between the simple and the complex is an obvious and important reason why economists often lose public debates. 
The dismal science has never been known for clarity. 
Such is the case with the US-China debate. 
China is an easy political target. 
After all, it accounted for 46% of America’s colossal $800 billion merchandise trade gap in 2017. 
Moreover, China has been charged with egregious violations of international rules, ranging from allegations of currency manipulation and state-subsidized dumping of excess capacity to cyber-hacking and forced technology transfer. 
Equally significant, China has lost the battle in the arena of public opinion – chastised by Western policymakers, a few high-profile academics, and others for having failed to live up to the grand bargain struck in 2001, when the country was admitted to the World Trade Organization. 
A recent article in Foreign Affairs by two senior officials in the Obama administration says it all: “(T)he liberal international order has failed to lure or bind China as powerfully as expected.” 
As is the case with North Korea, Syria, and Iran, strategic patience has given way to impatience, with the nationalistic Trump administration leading the charge against China. 
The counter-argument from multilateral-focused economists like me rings hollow in this climate. 
Tracing outsize current-account and trade deficits to an extraordinary shortfall of US domestic saving – just 1.3% of national income in the fourth quarter of 2017 – counts for little in the arena of popular opinion. 
Likewise, it doesn’t help when we emphasize that China is merely a large piece of a much bigger multilateral problem: the US had bilateral merchandise trade deficits with 102 countries in 2017. 
Nor does it matter when we point out that correcting for supply-chain distortions – caused by inputs from other countries that enter into Chinese assembly platforms – would reduce the bilateral US-China trade imbalance by 35-40%. 
Flawed as it may be, the bilateral political case resonates in a US where there is enormous pressure to ease the angst of the country’s beleaguered middle class. 
Trade deficits, goes the argument, lead to job losses and wage compression. 
And, with the merchandise trade gap hitting 4.2% of GDP in 2017, these pressures have only intensified in the current economic recovery. 
As a result, targeting China has enormous political appeal. 
So, what can be made of the May 19 deal? 
Beyond a ceasefire in tit-for-tat tariffs, there are few real benefits. 
US negotiators are fixated on targeted reductions of around $200 billion in the bilateral trade imbalance over a two-year time frame. 
Given the extent of America’s multilateral problem, this is largely a meaningless objective, especially in light of the massive and ill-timed tax cuts and federal expenditure increases that the US has enacted in the last six months. 
Indeed, with budget deficits likely to widen, America’s saving shortfall will only deepen in the years ahead. 
That points to rising balance-of-payments and multilateral trade deficits, which are impossible to resolve through targeted bilateral actions against a single country. 
Chinese negotiators are more circumspect, resisting numerical deficit targets but committing to the joint objective of “effective measures to substantially reduce” the bilateral imbalance with the US. 
China’s vague promise to purchase more American-made agricultural and energy products borrows a page from the “shopping list” approach of its earlier trade missions to the US. 
Unfortunately, the big-wallet mindset of a deal-hungry China reinforces the US narrative that China is guilty as charged. 
Even if the stars were in perfect alignment and the US was not facing a saving constraint, it stretches credibility to seek a formulaic bilateral solution to America’s multilateral problem. 
Since 2000, the largest annual reduction in the US-China merchandise trade imbalance amounted to $41 billion, and that occurred in 2009, during the depths of the Great Recession. 
The goal of achieving back-to-back annual reductions totaling more than double that magnitude is sheer fantasy. 
In the end, any effort to impose a bilateral solution on a multilateral problem will backfire, with ominous consequences for American consumers. 
Without addressing the shortfall in domestic saving, the bilateral fix simply moves the deficit from one economy to others. 
Therein lies the cruelest twist of all. 
China is America’s low-cost provider of imported consumer goods. 
The Trump deal would shift the Chinese piece of America’s multilateral imbalance to higher-cost imports from elsewhere – the functional equivalent of a tax hike on American families. 
As Hoover’s ghost might ask, what’s so great about that? 

America Confronts Old and New Europe 
US Secretary of Defense Donald Rumsfeld's petulant remark of last year about "old and new Europe" was right for the wrong reasons. 
He meant it to refer to Europe's divisions, but in May, ten additional states joined the European Union. 
The expanded Europe truly forms a new Europe. 
Should America be nervous? 
Fifty-four years after the announcement of the Schuman Plan that began to knit together the economies of France and Germany, the EU now has 25 countries and a population larger than that of the United States. 
Eight of the new members are former Communist countries that were locked behind the Iron Curtain for nearly half a century. 
Their attraction to the Union is a sign of the appeal - the "soft power" - of the idea of European unification. 
Of course, this new Europe faces many problems. 
The per capita income of the new countries is less than half of that of the fifteen members they are joining. 
Concerns have been raised about the influx of cheap labor. 
But average GDP growth rates in the new members are twice as high as in the original members, and this can provide a welcome stimulus to stagnant labor markets and sluggish economies. 
Political arrangements are somewhat more problematic. 
Negotiations are underway to revise a draft EU constitution. 
Some Europeans worry that the constitution will enable courts to carry the integration process further and faster than public opinion in member states will tolerate. 
Lack of grassroots support might lead to rejection of the constitution in countries like Britain, where referenda have been promised before the new arrangements come into force. 
Across the Atlantic, most Americans (to the extent they pay attention) regard these changes with general approval. 
But some express concern that the new Europe will be defined in opposition to the US. 
Not only do the remarks of French leaders about recreating a multi-polar world arouse alarm, but recent public opinion polls show a decline in the popularity of the US among Europeans and a desire for more independent policies. 
The Iraq War proved costly to American soft power, with the US losing about 30 percentage points of attractiveness on average in Europe, including in countries like Britain, Spain, and Italy, whose governments supported the war. 
The recent photographs of detainees being abused and sexually degraded in Baghdad's Abu Ghraib prison added fuel to the fire. 
Now some American neo-conservatives argue that the US should drop its longstanding support for European integration. 
Such a policy change would be a serious mistake. 
Not only would it add to anti-American attitudes and fail to accomplish its objectives, but it over-estimates the extent to which the new Europe is being formed in opposition to the US. 
Whatever the rhetoric in France, for example, the policies and attitudes in countries such as Britain or Poland demonstrate that good trans-Atlantic relations can be maintained. 
If anything, the risks of a US-Europe split will be reduced rather than increased by the EU's recent enlargement. 
Moreover, there are several objective reasons why the current friction between Europe and the US is unlikely to lead to divorce. 
For one thing, the divisive war in Iraq may turn out to be the last act of the twentieth century rather than a harbinger of the twenty-first. 
American unilateralism is much less in evidence in the world's other hot spots, such as North Korea and Iran, both because of the costs of the war in Iraq and the realities of the situation in those other regions. 
Moreover, while the common security threat from the Soviet Union has disappeared, both the US and Europe face a new common threat from radical jihadist terrorism. 
Neither side of the Atlantic is immune to the threat, despite the efforts of Osama bin Laden to drive a wedge between Europe and America. 
Transnational terrorism can only be confronted by close civilian cooperation such as intelligence sharing, police work across borders, and tracing financial flows. 
These forms of cooperation survived the divisions over Iraq. 
Europe and America also share a common structure of economic interests and values. 
While trade produces frictions in democracies, it also enhances wealth. 
If one looks at foreign direct investment, it is clear that the two sides of the Atlantic are closely integrated. 
In terms of values, while some differences exist between Europe and America, at the fundamental level of democracy and human rights, no other two parts of the globe share more. 
As the writer Robert Kagan concluded in the revision of his book in which he declared Europeans to be from Venus and Americans from Mars, it turns out that Americans seeking democratic legitimization of their policies and self-images cannot escape Europe. 
In short, it is good for Americans - and for the world - that old and new Europe are becoming one. 
We can all benefit from the soft power of an enlarged Europe. 

America Embraces Trade Discrimination 
NEW YORK – Economists generally agree on the advantages of openness in trade. 
But the case for non-discrimination in trade is also a compelling one. 
So good trade policy should push for multilateral trade liberalization such as at the Doha Round, rather than preferential trade agreements (PTAs) such as free-trade areas (FTAs), and also ensure that any retreat into protectionism does not degenerate into discriminatory trade practices. 
The last G-20 meeting in Canada was a disappointment on the first front. 
At the insistence of the United States, an earlier reference by the G-20 to a definite date for completing the Doha Round was dropped. 
Instead, unwittingly rubbing salt into the wound, President Barack Obama announced his administration’s willingness to see the US-South Korea FTA through. 
On the second front, there are distressing recent reports that the US Commerce Department is exploring ways to strengthen the bite of anti-dumping actions, which are now generally agreed to be a form of discriminatory protectionism aimed selectively at successful exporting nations and firms. 
Equally distressing is Obama’s decision in August 13 to sign a bill, approved in a rare special session of the Senate, that raises visa fees on H1(b) and L-1 temporary work visas in order to pay for higher border-enforcement expenditures. 
This proposal gained its legs from long-standing worries about the H1(b) and L-1 programs on the part of Republican Senator Chuck Grassley and Democratic Senator Richard Durbin, and had recently attracted the sponsorship of the influential Democratic Senator Charles Schumer of New York. 
Schumer had long agitated against “outsourcing” as inimical to American economic interests, even allying himself with the supply-side economist Paul Craig Roberts. 
But he gained clout with the onset of the current crisis, and concern over intractable unemployment numbers is enabling politicians to justify all sorts of superficially attractive remedies. 
Thus, it was asserted that a tax on foreign workers would reduce the numbers coming in and “taking jobs away” from American citizens. 
Many supporters of the proposal claimed, incoherently, that it would simultaneously discourage foreign workers from entering the US and increase revenues. 
Obama’s surrender exemplified the doctrine that one retreat often leads to another, with new lobbyists following in others’ footsteps. 
Perhaps the chief mistake, as with recent “Buy American” provisions in US legislation, was to allow the Employ American Workers Act (EAWA) to be folded into the stimulus bill. 
This makes it harder for companies to get governmental support to hire skilled immigrants with H1(b) visas: they must first show that they have not laid off or plan to lay off American workers in similar occupations. 
Whatever the shortcomings of such measures in economic-policy terms, the visa-fee-enhancement provision is de facto discriminatory, and thus violates WTO rules against discrimination between domestic and foreign firms, or between foreign firms from different WTO countries. 
While the visa-fee legislation is what lawyers call “facially” non-discriminatory, its design confers an advantage on US firms vis-à-vis foreign firms. 
The fee applies to both foreign and US firms that employ at least 50 workers, of which 50% or more are H1(b) workers. 
But US firms have additional access to foreign workers under the immigration laws. 
India would be the chief loser relative to US firms, and, with several sizeable firms, such as Infosys and Wipro, adversely affected by the measure, it would also be the chief loser vis-à-vis smaller outsourcing firms from other countries. 
The Indian government has lost no time in raising these objections – as well as the prospect of a formal WTO Dispute Settlement Mechanism complaint. 
Such acts of discrimination in trade policies find succor in the media and in some of America’s prominent think tanks. 
For example, in the wake of the vast misery brought by flooding to the people of Pakistan, the US and other governments have risen to the occasion with emergency aid. 
But there have also been proposals to grant duty-free access to Pakistan’s exports. 
But this would be discriminatory toward developing countries that do not have duty-free access, helping Pakistan at their expense. 
Astonishingly, Nancy Birdsall of the Center for Global Development, who favors such discrimination, even wrote cynically and approvingly that such a policy “would have little impact on US textile producers.” 
Unfortunately, major US media, including The New York Times and The Wall Street Journal, have endorsed this deplorable assault on whatever non-discrimination remains in the world trading system. 
Is it too unrealistic to hope that the Obama administration, which has so far been far too responsive to weak economics and strong politics, will stand up to these demands? 

The US Is Exporting Obesity 
CAMBRIDGE – As US President Donald Trump’s administration throws sharp elbows in trade negotiations and systematically rescinds regulations introduced by President Barack Obama, one casualty is likely to be efforts to fight the global obesity epidemic. 
Left unchecked, rapidly rising obesity rates could slow or even reverse the dramatic gains in health and life expectancy that much of the world has enjoyed over the past few decades. 
And by forcing its food culture on countries like Mexico and Canada, the United States is making the problem worse. 
One of the paradoxes of modern global capitalism is that whereas more than 800 million people in the world do not have enough to eat, an estimated 700 million people (including 100 million children) are obese. 
Of course, the two are not necessarily directly related. 
A considerable proportion of world hunger occurs in countries suffering from domestic strife or severe government dysfunction. 
The obesity epidemic, however, has a much broader footprint, affecting advanced economies and most emerging markets. 
Although there is some connection between obesity and poverty within countries, it is notable that obesity rates in rich countries such as the United States, the United Kingdom, and Canada are among the world’s highest. 
Recently, the US Centers for Disease Control estimated that a stunning 40% of all Americans are obese (defined as having a body mass index of 30 or higher), a figure that includes 20.6% of adolescents (12-19 years old). 
According to the CDC, the average weight of an American woman today is greater than the average weight of an American man in 1960 (166 pounds, or 75 kilos). 
Back in 1960, the average weight of an American woman was 140 pounds, while the average weight of an American man today is 195 pounds. 
(Over the same period, the average height of Americans increased by only one inch, or 2.5 centimeters.) 
This same dynamic is playing out worldwide, with obesity rates soaring in Europe, Latin America, and even in China. 
Although it is difficult to gauge the long-run health consequences, there is abundant evidence that obesity contributes significantly to higher rates of type II diabetes, heart attacks, and certain types of cancer. 
The health costs are staggering, estimated to be close to $200 billion per year in the US alone. 
And with rising childhood obesity rates worldwide portending significantly greater health problems in the future adult population, the costs are likely to rise considerably. 
The causes of obesity are manifold and complex. 
Nevertheless, a growing body of evidence suggests that a culture emphasizing processed food and a generally sedentary lifestyle lies at the center of the problem. 
In emerging markets, rapid urbanization is another important factor, as well as a desire to emulate Western lifestyles. 
Many governments have launched initiatives to improve nutrition education. 
Unfortunately, industry advertising typically dwarfs these efforts, as do US trade lobbyists’ own efforts to push processed and fast food on the rest of the world. 
It is hard to ignore the fact that Mexico’s adult obesity rate has soared since the adoption in 1993 of the North American Free Trade Agreement. 
While there are many causes, post-NAFTA direct foreign investment in the processed food industry and a surge in advertising are important contributors. 
Mexican consumption of sugary beverages nearly tripled between 1993 and 2014, and a new tax on sugary drinks has muted demand only slightly since then. 
The other NAFTA partner, Canada, has similarly experienced a rise in obesity, partly because US imports have led to a sharp decline in the price of fructose. 
It is unfortunate that government regulators have been so slow to try to reverse these trends by, for example, helping to educate the public on the science of nutrition. 
And, for too long, most government anti-obesity education has focused on mechanically regulating calorie intake, without taking into account that different foods have dramatically different effects on appetite (as David Ludwig, a professor at Harvard Medical School, emphasizes in his excellent new book Always Hungry). 
Skeptics may point out that nutrition guidelines always seem to be morphing, with last year’s sin food becoming this year’s superfood, and vice versa. 
Though there is some truth to this, the fact is that nutrition research has made significant progress in recent decades. 
The government has other tools at its disposal, besides education, for affecting people’s eating habits. 
They can and should place greater restrictions on advertising to children, as the UK, France, and several other countries have done; obesity in early years can lead to lifelong problems. 
Beyond that, Ludwig, Tufts University’s Dariush Mozaffarian, and I have proposed instituting a tax on processed food, much the same way that tobacco is taxed. 
Proceeds from the tax could be used to subsidize healthier alternatives. 
It is perhaps fantasy to expect the current US administration to consider any kind of anti-obesity strategy while it is still busy dismantling Obama-era policies. 
But that is all the more reason why countries entering new trade agreements with the US (for example, the post-Brexit UK, or post-NAFTA Canada) must be wary of any provisions that tie their hands in the war against obesity. 

“America First” Financial Regulation? 
LONDON – As US President Trump struggles to staff his administration with sympathizers who will help transpose tweets into policy, the exodus of Obama appointees from the federal government and other agencies continues. 
For the financial world, one of the most significant departures was that of Daniel Tarullo, the Federal Reserve governor who has led its work on financial regulation for the last seven years. 
It would be a stretch to say that Tarullo has been universally popular in the banking community. 
He led the charge in arguing for much higher capital ratios, in the United States and elsewhere. 
He was a tough negotiator, with a well-tuned instinct for spotting special pleading by financial firms. 
But crocodile tears will be shed in Europe to mark his resignation. 
European banks, and even their regulators, were concerned by his enthusiastic advocacy of even tougher standards in Basel 3.5 (or Basel 4, as bankers like to call it), which would, if implemented in the form favored by the US, require further substantial capital increases for Europe’s banks in particular. 
In his absence, these proposals’ fate is uncertain. 
But Tarullo has also been an enthusiastic promoter of international regulatory cooperation, with the frequent flyer miles to prove it. 
For some years, he has chaired the Financial Stability Board’s little-known but important Standing Committee on Supervisory and Regulatory Cooperation. 
His commitment to working with colleagues in international bodies like the FSB and the Basel Committee on Banking Supervision, to reach global regulatory agreements enabling banks to compete on a level playing field, has never been in doubt. 
Already, some of those who criticized him most vocally in the past are anxious about his departure. 
Who will succeed him? 
The 2010 Dodd-Frank Act created a vice-chair position on the Federal Reserve Board – which has never been filled – to lead the Fed’s work on regulation. 
Will that appointee, whom Trump now needs to select, be as committed as Tarullo to an international approach? 
Or will his principal task be to build a regulatory wall, protecting US banks from global rules? 
We do not yet know the answers to these questions, but Fed watchers were alarmed by a January 31 letter to Fed Chair Janet Yellen from Representative Patrick McHenry, the vice chairman of the House Committee on Financial Services. 
McHenry did not pull his punches. 
“Despite the clear message delivered by President Donald Trump in prioritizing America’s interest in international negotiations,” McHenry wrote, “it appears that the Federal Reserve continues negotiating international regulatory standards for financial institutions among global bureaucrats in foreign lands without transparency, accountability, or the authority to do so. 
This is unacceptable.” 
In her reply of February10, Yellen firmly rebutted McHenry’s arguments. 
She pointed out that the Fed does indeed have the authority it needs, that the Basel agreements are not binding, and that, in any event, “strong regulatory standards enhance the stability of the US financial system” and promote the competitiveness of financial firms. 
But that will not be the end of the story. 
The battle lines are now drawn, and McHenry’s letter shows the arguments that will be deployed in Congress by some Republicans close to the president. 
There has always been a strand of thinking in Washington that dislikes foreign entanglements, in this and other areas. 
While Yellen’s arguments are correct, the Fed’s entitlement to participate in international negotiations does not oblige it to do so, and a new appointee might argue that it should not. 
Such a reversal would generate tensions within the Fed, and where it would leave the FSB, or indeed the Basel Committee, is unclear. 
In the early days of the Bank for International Settlements (where the Basel Committee’s secretariat is located) in the 1930s, the US government declined to take a board seat, and the US was represented by JP Morgan. 
It is a little hard to see that arrangement working well today. 
These questions are of more than passing interest in Europe. 
European capital adequacy directives typically transpose Basel Accords into EU law. 
If the Basel process stalls, transatlantic deals, which are the crucial underpinning of Western capital markets, will be far harder to reach. 
There is a further complication arising from Brexit. 
Absent any special deal between the EU27 and the United Kingdom, British and EU regulators will come together in Basel, not in the European Banking Authority. 
If Basel becomes a talking shop, without the ability to set firm standards, another key link in the chain will be broken, and it will be harder for the UK to argue that if London’s banks meet international standards, they should be granted equal treatment in the EU. 
As central bankers bid farewell to the devil they know, financial regulation has entered a period of high uncertainty – and high anxiety for policymakers as they await an announcement from Mar-a-Lago. 
No likely Federal Reserve Board candidates have been spotted at poolside, or being interviewed on the golf course, but a decision cannot be far off. 
Nothing can be taken for granted. 
The financial world is holding its collective breath. 

Navigating America’s Economic-Policy Shocks 
NEW YORK – With a series of tax and trade moves being considered in the United States this year, emerging-market economies are likely to face devaluation pressure and volatility. 
Three sources of US-fueled economic uncertainty, in particular, will rattle emerging markets in 2017. 
The first is a border adjustment tax that would give tax breaks to US exporters, but impose a levy – or, equivalently, disallow deductions – on imports to the US. 
Both President Donald Trump and the Republican-controlled US Congress have said they favor the scheme, which has a fair chance of being enacted. 
Such a tax, or even the anticipation of its adoption, could drive up the US dollar’s exchange rate (which, ironically, would offset, at least partly, the improvement in the US trade imbalance for which the Trump administration may be hoping). 
The second source of uncertainty is the possibility of more aggressive action on Chinese exports to the US. 
The Trump administration has said many times that it will confront China over what it considers unfair trade practices. 
Trump has openly mused about imposing a 45% tariff on Chinese imports. 
The introduction of anything close to that would generate downward pressure on the renminbi, given the resulting reduction in demand for Chinese exports. 
But such a move would serve to weaken many other currencies as well. 
My research with Zhi Wang and Kunfu Zhu reveals that about half of Chinese exports to the US are value-added products manufactured with components from South Korea, Japan, Taiwan, Singapore, and other countries. 
Because products from China are often part of integrated global or regional value chains, a US restriction on its imports from China would indirectly, but very quickly, translate into reduced exports of value-added items by other countries in Asia. 
This slippage would likely offset any direct increase in these countries’ exports to the US, at least in the short and medium term, because re-organizing production chains is not a trivial matter. 
A third US move that could unsettle emerging markets is faster-than-expected monetary tightening by the Federal Reserve. 
A large interest-rate hike would translate into US dollar appreciation, and depreciation of developing-economy currencies. 
One exception may be the currencies of commodity exporters. 
Higher commodity prices, triggered in part by anticipation of increased demand as a result of a boost in US infrastructure spending, could cause these countries’ currencies to strengthen. 
Even on that front, though, some commodity exporters – such as Brazil and Russia – may not see much improvement in their exchange rates, given the drag of other forces on their weak economies. 
The challenges that US policy changes pose for emerging-market currencies include not only downward pressure, but also greater volatility. 
What, then, should emerging-market countries do to enhance their resilience in anticipation of the shockwaves? 
One option is to optimize the structure of capital inflows. 
A second is to boost the flexibility of exchange rates. 
On the former, as my research with Hui Tong shows, countries that rely heavily on borrowing from foreign banks or international capital markets are more vulnerable to capital flight than countries that depend mainly on foreign direct investment. 
Therefore, to guard against exchange-rate volatility or US interest-rate changes, emerging markets should work to improve their business environments to attract FDI, which would reduce their reliance on short-term infusions of “hot money” – and thus lower their vulnerability to abrupt capital-flow reversals. 
As for the second option, allowing nominal exchange-rate flexibility would enable currency values to align with underlying economic fundamentals more quickly. 
Such adjustment is especially important for countries with rigid labor markets. 
One danger of fixed exchange rates is the risk of an overvalued or undervalued currency, neither of which is good for economic stability. 
The chance of either scenario is elevated when the forces influencing the equilibrium exchange rate become more volatile. 
While the shape and timing of future US policies are uncertain, it seems clear that capital-flow management and nominal exchange-rate flexibility amount to good preparation. 
To paraphrase Benjamin Franklin, if developing countries fail to prepare, they will have to prepare to fail. 

Why Millennials Will Reject Trump 
NEW YORK – The key political divide in the United States is not between parties or states; it is between generations. 
The millennial generation (those aged 18-35) voted heavily against Donald Trump and will form the backbone of resistance to his policies. 
Older Americans are divided, but Trump’s base lies among those above the age of 45. 
On issue after issue, younger voters will reject Trump, viewing him as a politician of the past, not the future. 
Of course, these are averages, not absolutes. 
Yet the numbers confirm the generational divide. 
According to exit polls, Trump received 53% of the votes of those 45 and older, 42% of those 30-44, and just 37% of voters 18-29. 
In a 2014 survey, 31% of millennials identified as liberals, compared with 21% of baby boomers (aged 50-68 in the survey) and only 18% of the silent generation (69 and above). 
The point is not that today’s young liberals will become tomorrow’s older conservatives. 
The millennial generation is far more liberal than the baby boomers and silent generation were in their younger years. 
They are also decidedly less partisan, and will support politicians who address their values and needs, including third-party aspirants. 
There are at least three big differences in the politics of the young and old. 
First, the young are more socially liberal than the older generations. 
For them, America’s growing racial, religious, and sexual plurality is no big deal. 
A diverse society of whites, African-Americans, Hispanics, and Asians, and of the native-born and immigrants, is the country they’ve always known, not some dramatic change from the past. 
They accept sexual and gender categories – lesbian, gay, trans, bi, inter, pan, and others – that were essentially taboo for – or unknown to – their grandparents’ (Trump’s) generation. 
Second, the young are facing the unprecedented economic challenges of the information revolution. 
They are entering the labor market at a time when market returns are rapidly shifting toward capital (robots, artificial intelligence, and smart machines generally) and away from labor. 
The elderly rich, by contrast, are enjoying a stock market boom caused by the same technological revolution. 
Trump is peddling cuts in corporate taxes and estate taxes that would further benefit the elderly rich (who are amply represented in Trump’s cabinet), at the expense of larger budget deficits that further burden the young. 
Indeed, the young need the opposite policy: higher taxes on the wealth of the older generation in order to finance post-secondary education, job training, renewable-energy infrastructure, and other investments in America’s future. 
Third, compared to their parents and grandparents, the young are much more aware of climate change and its threats. 
While Trump is enticing the older generation with one last fling with fossil fuels, the young will have none of it. 
They want clean energy and will fight against the destruction of the Earth that they and their own children will inherit. 
Part of the generational divide over global warming is due to the sheer ignorance of many older Americans, including Trump, about climate change and its causes. 
Older Americans didn’t learn about climate change in school. 
They were never introduced to the basic science of greenhouse gases. 
That is why they are ready to put their own short-term financial interests ahead of the dire threats to their grandchildren’s generation. 
In a June 2015 survey, 60% of 18-29 year-olds said that human activity was causing global warming, compared with just 31% of those 65 and older. 
A survey released in January found that 38% of American survey respondents 65 and older favored fossil-fuel expansion over renewable energy, compared with only 19% of those 18-29. 
Trump’s economic policies are geared to this older, whiter, native-born America. 
He favors tax cuts for the older rich, which would burden the young with higher debt. 
He is indifferent to the $1 trillion overhang of student debt. 
He is reprising the 1990s NAFTA debate over free trade, rather than facing the far more important twenty-first-century jobs challenge posed by robotics and artificial intelligence. 
And he is obsessed with squeezing a few more years of profit out of America’s coal, oil, and gas reserves at the cost of a future environmental catastrophe. 
One might attribute Trump’s backward-looking mindset to his age. 
At 70, Trump is the oldest person ever to become president (Ronald Reagan was slightly younger when he took office in 1981). 
Yet age is hardly the sole or even the main factor here. 
Bernie Sanders, certainly the freshest mind of all the 2016 presidential candidates and the hero of millennial voters, is 75. 
The young are enchanted with Pope Francis, 80, because he puts their concerns – whether about poverty, employment difficulties, or vulnerability to global warming – within a moral framework, rather than dismissing them with the crass cynicism of Trump and his ilk. 
The main issue here is mindset and political orientation, not chronological age. 
Trump has the shortest time horizon (and attention span) of any president in historical memory. 
And he is utterly out of touch with the real challenges facing the young generation as they grapple with new technologies, shifting labor markets, and crushing student debt. 
A trade war with Mexico and China, or a tragically misconceived ban on Muslim migrants, will hardly meet their real needs. 
Trump’s political success is a blip, not a turning point. 
Today’s millennials, with their future-oriented perspective, will soon dominate American politics. 
America will be multiethnic, socially liberal, climate conscious, and much fairer in sharing the economic benefits of new technology. 
Too many observers remain fixated on the traditional party divides in the US Congress, not on the deeper demographic changes that will soon be decisive. 
Sanders nearly captured the Democratic nomination (and would likely have triumphed in the general election) with a platform appealing powerfully to the millennials. 
Their time is coming, most likely with a president they support in 2020. 

America Goes from Teacher to Student 
Cambridge -- As the United States’ epic financial crisis continues to unfold, one can only wish that US policymakers were half as good at listening to advice from developing countries as they are at giving it. 
Americans don’t seem to realize that their “sub-prime” mortgage meltdown has all too much in common with many previous post-1945 banking crises throughout the world. 
The silver lining is that there are many highly distinguished current and former policymakers out there, particularly from emerging market countries, who have seen this movie before. 
If US policymakers would only listen, they might get an idea or two about how to deal with financial crises from experts who have lived through them and come out safely on the other side. 
Unfortunately, the parallel between today’s US crisis and previous financial crises is not mere hyperbole. 
The qualitative parallels are obvious: banks using off-balance loans to finance highly risky ventures, exotic new financial instruments, and excessive exuberance over the promise of new markets. 
But there are strong quantitative parallels as well. 
Professor Carmen Reinhart of the University of Maryland and I systematically compared the run-up to the US sub-prime crisis with the run-up to the 19 worst financial crises in the industrialized world over the past 60 years. 
These include epic crises in the Scandinavian countries, Spain, and Japan, along with lesser events such as the US savings and loan crises of the 1980’s. 
Across virtually all the major indicators – including equity and housing price runs-ups, trade balance deficits, surges in government and household indebtedness, and pre-crisis growth trajectories – red lights are blinking for the US. 
Simply put, surging capital flows into the US artificially held down interest rates and inflated asset prices, leading to laxity in banking and regulatory standards and, ultimately, to a meltdown. 
When Asia and Latin America had their financial meltdowns in the 1990’s and early 2000’s, they took advice not only from the IMF, but also from a number of small panels composed of eminent people representing diverse backgrounds and experiences. 
The US should do the same. 
The head of the IMF, Frenchman Dominique Strauss-Kahn, could easily select a superb panel from any range of former crisis countries, including Mexico, Brazil, Korea, Turkey, Japan, and Sweden, not to mention Argentina, Russia, Chile, and many others. 
Admittedly, the IMF’s panel would have to look past America’s current hypocrisy. 
The US Treasury strongly encouraged Asia to tighten fiscal policy during its 1990’s crisis. 
But today the US Congress and President are tripping over themselves to adopt an ill-advised giant fiscal stimulus package, whose main effects will be to tie the hands of the next president in simplifying the US tax code and closing the budget deficit. 
Americans firmly told Japan that the only way to clean up its economy was to purge insolvent banks and regenerate the financial system through Schumpeterian “creative destruction.” 
Today, US authorities appear willing to contemplate any measure, no matter how inflationary, to insure that none of its major banks and investment houses fails. 
For years, foreign governments complained about American hedge funds, arguing that their non-transparent behavior posed unacceptable risks to stability. 
Now, many US politicians are complaining about the transparency of sovereign wealth funds (big government investors mainly from Asia and the Middle East), which are taking shares in trophy American assets such as Citibank and Merrill Lynch. 
In fact, having countries like Russia and China more vested in the well-being of the US economy would not be a bad thing. 
Yes, the IMF ought to develop a voluntary code of conduct for SWF’s, but it should not be used as a weapon to enforce financial protectionism. 
For years, I, along with many others, have complained that emerging markets need greater representation in global financial governance. 
Today, the issue goes far beyond symbolism. 
The US economy is in trouble, and the problems it spins off are unlikely to stop at the US border. 
Experts from emerging markets and elsewhere have much to say about dealing with financial crises. 
America should start to listen before it is too late. 

America’s Hidden Debt 
WASHINGTON, DC – Former US Secretary of the Treasury Lawrence H. Summers recently quipped that, “Fiscal stimulus is like a drug with tolerance effects; to keep growth constant, deficits have to keep getting larger.” 
People like Summers worry about deficits because they doubt that the money the government is borrowing is being spent in ways that will push the long-term growth of GDP above that of the debt. 
Unless the mix of spending changes, the debt-to-GDP ratio will continue to grow, foretelling disaster. 
Others do not share such concerns. 
On the political left, Nobel laureate Paul Krugman, for example, argues that for “a country that looks like the United States, a debt crisis is fundamentally not possible.” 
On the right, John Tamny, Forbes’ political economy editor, says, “Ignore the endless talk of doom, budget deficits really don’t matter.” 
But while judgments differ about the sustainability of US government debt, they both accept the standard measure of it as accurate. 
This is a mistake, and possibly a catastrophic one. 
The Congressional Budget Office (CBO) recently reported that the federal budget deficit in the first ten months of this fiscal year was $116 billion higher than it was at the same time last year. 
The CBO is now projecting that the annual deficit will reach $1 trillion by 2020. 
This is worrying, but it does not reflect the harsh truth. 
The annual deficit almost certainly surpassed $1 trillion last year. 
To understand why, think of America as a home with a leaky roof. 
If you wanted to sell that home to a buyer who is financing the purchase with a mortgage, federal real-estate law would require you to get an appraisal, which would show that the roof needs repairs. 
In this scenario, your maintenance delays cannot be ignored. 
The law requires that you disclose and pay for the hidden costs of repairing the roof. 
Otherwise, you are stealing from the buyer. 
True, unlike the mortgage on your balance sheet, you may not regard roof maintenance as a current liability. 
But putting it off doesn’t make it disappear. 
It is still a real debt – just one that has gone unaccounted for. 
The federal government also has debt that has not been accounted for, and which one doesn’t often hear about. 
The debt that has been accounted for is the $15.6 trillion held by the public in the form of US Treasury bonds. 
The debts that have not been accounted for include the deferred costs of maintenance on roads, water systems, and 54,560 structurally deficient bridges, as well as the yet-to-be-built low-carbon energy systems necessary to mitigate the catastrophic effects of climate change. 
And these are just two broad examples. 
So, just how much hidden US debt is there? 
At this point, we must rely on rough estimates. 
For example, according to a 2016 report from the American Society of Civil Engineers (ASCE), upgrading the country’s crumbling infrastructure would cost $5.2 trillion. 
And, according to a 2014 International Energy Agency (IEA) report and our own calculations based on the US share of global CO2 emissions, transitioning to a clean-energy system will cost an additional $6.6 trillion. 
All told, that is $11.8 trillion in unaccounted-for non-inflation-adjusted liabilities. 
To be sure, these debts are not solely federal liabilities. 
In the past, state and local governments were responsible for most infrastructure and climate costs. 
However, already burdened with more than $3 trillion of municipal debt, state governments are overwhelmed by the scale of their deferred-maintenance liabilities and the only recently documented costs of climate change abatement. 
However, because climate change and infrastructure security are national issues, rather than local, the federal government is ultimately responsible for that $11.8 trillion in infrastructure- and environment-related debts. 
They are America’s national “leaky roof.” 
That figure increases every year, because as bridges continue to weaken, it costs even more to fix them; and as sea levels and temperatures continue to rise, and as forest fires become more severe, it costs more to mitigate the damage. 
In fact, between 2012 and 2016, the ASCE increased its estimate of America’s annual infrastructure-investment gap by $221 billion – about $55 billion per year. 
And between 2012 and 2014, the IEA increased its estimated cost of moving to a clean-energy system by roughly $270 billion per year. Together, the unaccounted-for inflation-adjusted deficit amounted to $345 billion – just from delaying needed infrastructure and climate abatement spending. 
The 2017 US federal deficit was $665 billion, reflecting the amount by which debt that is actually accounted for increased. 
If infrastructure and climate debt that is not accounted for were to be included, the all-in deficit in 2017 would have been over $1 trillion. 
Yes, these are back-of-the-envelope calculations, but they point to an urgent question: Why isn’t the US counting its hidden debts? 
The short answer is that the law doesn’t require it. 
The federal “debt limit” was never a firm construct, and under pressure it became a squishy “ceiling suspension” that allows the government to borrow as much as it wants. 
Meanwhile, a congressional rule that was intended to ensure fiscal responsibility by prohibiting deficit increases above $1.5 trillion within a ten-year window has become an accounting trick to escape responsibility for the 11th year and beyond. 
But just as we are stealing from the homebuyer if we do not disclose and pay for our leaky roof, we are stealing from future generations of Americans when we ignore the full extent of government liabilities. 
Until all debt is counted, we cannot even begin to know whether fiscal policies are having positive or negative effects on future growth. 

America’s Second Chance with India 
NEW YORK – Indian Prime Minister Narendra Modi’s visit to Washington, DC, in June garnered little public attention outside of India. 
Yet diplomats and military professionals in Asia and beyond were certainly watching closely. 
For good reason: the rapprochement between the world’s two most populous democracies could shape the world’s future. 
It is worth noting that in his address to the US Congress, Modi invoked the word “partner” or “partnership” no fewer than 15 times. 
The official joint statement released by the two governments described India as a “Major Defense Partner” of the United States, eligible for advanced technologies with military applications. 
The relationship between India and the US has evolved from one of cool distance to strategic proximity in a generation – lightning fast for geopolitics. 
The factors underlying this shift merit attention, for many of them are likely to bring the two countries even closer. 
The Cold War’s end was a significant part of the bilateral rapprochement, because it eliminated the possibility of India’s continued association with the Soviet Union, as well as its rationale for embracing non-alignment. 
A second factor is Pakistan. 
For a long time, the US pursued an even-handed policy toward South Asia’s two most strategically important countries. 
Nonetheless, during most of the Cold War, Pakistan was seen as a friendly country, whereas its great rival, India, was viewed as difficult. 
This view was reinforced when Pakistan became the essential conduit of weapons to Afghans fighting the Soviet occupation of their country. 
But the bond between the US and Pakistan weakened when Soviet forces withdrew from Afghanistan in 1989. 
Relations suffered further from Pakistan’s development of nuclear weapons, its provision of sanctuary and support to the Taliban, and its willingness to extend hospitality to some of the world’s most dangerous terrorists, including Osama bin Laden. 
As a result, US ties to India were no longer constrained by fear of complications in Pakistan. 
China is also animating the improvement in India-US ties. 
The motivation is far more fundamental than the fact that India and China still have an unresolved border. 
China’s rise has created a strong incentive for countries with a stake in Asia to increase their cooperation with the US, as well as with one another, to ensure that they can stand up to China’s political, military, and economic might. 
Domestic politics also loom large in the relationship’s development – on both sides. 
The decline of India’s Congress party reduced the influence of the political force most associated with maintaining distance from the US. 
Meanwhile, there are now more than three million Indian-Americans, and, as with many other immigrant populations, they have become ever more prominent and powerful. 
Supporting closer ties with India has become a rare example of bipartisan US foreign policy, and it can be expected to continue regardless of which party controls the White House or Congress after this November’s elections. 
The breakthrough in bilateral ties came a decade ago, when the US lifted sanctions introduced in response to India’s nuclear weapons program and then signed an accord paving the way for US involvement in India’s civil nuclear energy program. 
India, unlike both Pakistan and North Korea, is seen as a responsible nuclear power, a country the US now supports for membership in various groups designed to stem the further spread of nuclear materials and weapons. 
Economic ties are also growing, along with India’s economy. 
Bilateral trade has increased to more than $100 billion a year. 
High-level visits have become commonplace. 
Closer economic ties and large-scale collaboration on clean energy are a high priority. 
One can also predict increased cooperation between the two countries’ military and intelligence establishments. 
Indeed, joint efforts to keep the Indian Ocean open and safe are already a reality. 
The US and India need not be formal allies for their relationship to have the desired effect on Chinese strategic calculations. 
Challenges remain, of course. 
Bureaucracy, corruption, and poor infrastructure continue to hold back India’s economy. 
Indian leaders must also be careful not to do or say things that could alienate the country’s large Muslim minority. 
And they must still ensure that close ties with the US are not simply the policy of one prime minister or party. 
This means getting the Congress party fully on board and overcoming the resistance of career officials to new ways of thinking and acting. 
It is difficult to overlook the irony in much of this. 
More than a half-century ago, in the early years of the Cold War, many in Washington saw India as a potential model of non-Communist political and economic development. 
For many reasons, things did not work out that way, as India became economically statist, for a time politically authoritarian, and geopolitically closer to the USSR than US officials liked. 
Now, however, India is emerging as a successful example of a market-oriented democracy with close ties to the US. 
Second chances are rare in life, but both India and the US may be getting just that. 


The Myth of Sound Fundamentals 
NEW HAVEN – The spin is all too predictable. 
With the US stock market clawing its way back from the sharp correction of early February, the mindless mantra of the great bull market has returned. 
The recent correction is now being characterized as a fleeting aberration – a volatility shock – in what is still deemed to be a very accommodating investment climate. 
After all, the argument goes, economic fundamentals – not just in the United States, but worldwide – haven’t been this good in a long, long time. 
But are the fundamentals really that sound? 
For a US economy that has a razor-thin cushion of saving, nothing could be further from the truth. 
America’s net national saving rate – the sum of saving by businesses, households, and the government sector – stood at just 2.1% of national income in the third quarter of 2017. 
That is only one-third the 6.3% average that prevailed in the final three decades of the twentieth century. 
It is important to think about saving in “net” terms, which excludes the depreciation of obsolete or worn-out capacity in order to assess how much the economy is putting aside to fund the expansion of productive capacity. 
Net saving represents today’s investment in the future, and the bottom line for America is that it is saving next to nothing. 
Alas, the story doesn’t end there. 
To finance consumption and growth, the US borrows surplus saving from abroad to compensate for the domestic shortfall. 
All that borrowing implies a large balance-of-payments deficit with the rest of the world, which spawns an equally large trade deficit. 
While President Donald Trump’s administration is hardly responsible for this sad state of affairs, its policies are about to make a tough situation far worse. 
Under the guise of tax reform, late last year Trump signed legislation that will increase the federal budget deficit by $1.5 trillion over the next decade. 
And now the US Congress, in its infinite wisdom, has upped the ante by another $300 billion in the latest deal to avert a government shutdown. 
Never mind that deficit spending makes no sense when the economy is nearing full employment: this sharp widening of the federal deficit is enough, by itself, to push the already-low net national saving rate toward zero. 
And it’s not just the government’s red ink that is so troublesome. 
The personal saving rate fell to 2.4% of disposable (after-tax) income in December 2017, the lowest in 12 years and only about a quarter of the 9.3% average that prevailed over the final three decades of the twentieth century. 
As domestic saving plunges, the US has two options – a reduction in investment and the economic growth it supports, or increased borrowing of surplus saving from abroad. 
Over the past 35 years, America has consistently opted for the latter, running balance-of-payments deficits every year since 1982 (with a minor exception in 1991, reflecting foreign contributions for US military expenses in the Gulf War). 
With these deficits, of course, come equally chronic trade deficits with a broad cross-section of America’s foreign partners. 
Astonishingly, in 2017, the US ran trade deficits with 102 countries. 
The multilateral foreign-trade deficits of a saving-short US economy set the stage for perhaps the most egregious policy blunder being committed by the Trump administration: a shift toward protectionism. 
Further compression of an already-weak domestic saving position spells growing current-account and trade deficits – a fundamental axiom of macroeconomics that the US never seems to appreciate. 
Attempting to solve a multilateral imbalance with bilateral tariffs directed mainly at China, such as those just imposed on solar panels and washing machines in January, doesn’t add up. 
And, given the growing likelihood of additional trade barriers – as suggested by the US Commerce Department’s recent recommendations of high tariffs on aluminum and steel – the combination of protectionism and ever-widening trade imbalances becomes all the more problematic for a US economy set to become even more dependent on foreign capital. 
Far from sound, the fundamentals of a saving-short US economy look shakier than ever. 
Lacking a cushion of solid support from income generation, the lack of saving also leaves the US far more beholden to fickle asset markets than might otherwise be the case. 
That’s especially true of American consumers who have relied on appreciation of equity holdings and home values to support over-extended lifestyles. 
It is also the case for the US Federal Reserve, which has turned to unconventional monetary policies to support the real economy via so-called wealth effects. 
And, of course, foreign investors are acutely sensitive to relative returns on assets – the US versus other markets – as well as the translation of those returns into their home currencies. 
Driven by the momentum of trends in employment, industrial production, consumer sentiment, and corporate earnings, the case for sound fundamentals plays like a broken record during periods of financial market volatility. 
But momentum and fundamentals are two very different things. 
Momentum can be fleeting, especially for a saving-short US economy that is consuming the seed corn of future prosperity. 
With dysfunctional policies pointing to a further compression of saving in the years ahead, the myth of sound US fundamentals has never rung more hollow. 

America’s Midterm Elections Turn Menacing 
WASHINGTON, DC – With the approach of this year’s midterm elections in the United States, domestic terrorism is starting to dominate the political landscape. 
First, barely two weeks before Election Day, an angry supporter of US President Donald Trump began sending 14 bombs to prominent Democrats and others whom Trump has frequently attacked. 
(None of the bombs exploded.) 
Then things became much worse, with the murder, on a Saturday, of 11 Jews in a Pittsburgh synagogue. 
Today, a polarized and anxious American public finds itself with a president totally unsuited to, and not very interested in, comforting the nation, much less trying to lead it away from the hate and deadly partisanship that he has stoked. 
Had the 14 crude bombs, which the FBI called “potentially destructive devices,” worked as intended, the bombmaker could have killed or gravely injured a who’s who of Trump adversaries. 
The list included two former presidents (Bill Clinton and Barack Obama), Hillary Clinton, former Attorney General Eric Holder; a former CIA director; a former director of National Intelligence; two likely Democratic presidential candidates in 2020; a black congresswoman whom Trump frequently describes as “low IQ” (a common racist charge); two prominent Jewish billionaire philanthropists, one of whom, George Soros, is a frequent target of Trump and the subject of various right-wing conspiracy fantasies; and the actor Robert De Niro (who began his speech at this year’s Tony Awards ceremony by declaring, “Fuck Trump”). 
Though Trump had frequently singled out many of the bomber’s targets at his rallies – still attacking Hillary Clinton, his election opponent in 2016, for example, and then smiling as his audience chanted “Lock her up” – Trump’s defenders tried to throw the spotlight elsewhere. 
The mail bombs, they claimed, were a “false flag” operation by the left, with some of the Democrats even sending the bombs to themselves in order to blame Trump. 
So it was highly inconvenient for true believers when the would-be bomber turned out to be a fanatical Trump supporter who lives in Florida and drives a white van covered in hate-filled depictions of his targets. 
US law enforcement agencies – another frequent target of Trump – are extremely good at tracking down miscreants: the suspect was arrested four days after the first bomb was discovered in Soros’s mailbox. 
The most disheartening aspect of the entire episode was Trump’s utter incapacity as a national leader. 
But that should surprise no one. 
How could a president who has thrived politically on dividing the American people, who has been spewing hate, sowing resentment, and at times even encouraging violence at his rallies, suddenly be – or even pretend to be – a healer? 
In fact, Trump’s pattern of incitement and routine denunciations of the media as “the enemy of the people” had convinced many that some of his followers might resort to violence against members of the press. 
The day after the discovery of the bombs sent to the Clintons and the Obamas, among others, a subdued Trump read a prepared statement at a prescheduled White House ceremony, condemning “acts or threats of political violence” and saying that the nation must unify. 
It didn’t last. 
By that evening, at a rally in Wisconsin, he was making fun of his “trying to be nice” act and blamed the media for the violence. 
And soon he was back to whipping up fear of a caravan of refugees from Honduras. 
Though still roughly 1,000 miles from the US border, Trump portrayed the refugees as an imminent national security threat, warning, without evidence, that “Middle Easterners” were among them. 
Trump’s rallies are now almost a daily event, and his lies are even more frequent than before. 
With the entire House of Representatives and one-third of the Senate to be chosen on November 6, the upcoming midterm election is widely regarded as the most consequential in memory, perhaps ever. 
The Republicans’ two-year lock on the entire US government – the House, the Senate, the presidency, and, with the recent addition of Justice Brett Kavanaugh, the Supreme Court – could be broken. 
The midterm election following the election of a new president is often considered a verdict on the incumbent, and his party usually loses strength, particularly in the House. 
But Trump has made the midterms about himself to an unprecedented degree. 
He tells audiences that though he’s not on the ballot, they should vote as if he were (though his approval ratings are in the low forties). 
It has long been believed that the Democrats are more likely to win the House than the Senate, because several of the Senate seats in play are held by Democrats in traditionally conservative states. 
Trump’s determination, or anxiety, that Republicans maintain control of both chambers is understandable. 
Should the Democrats take over the House, newly empowered committee chairmen, armed with subpoenas, will launch investigations of a broad range of administration actions and agencies, where extensive corruption is suspected. 
But the real, almost palpable, fear on Trump’s part is that a Democratic-controlled House will focus all manner of investigations on him personally: his acceptance of Constitutionally forbidden “emoluments” from foreign countries; his failure to separate himself sufficiently from the family business; his tax returns; his unauthorized foreign wars in Yemen and Syria; and of course his official and private dealings with Russia. 
At least the House is likely to have the conclusions of Special Counsel Robert Mueller to consider. 
In other words, no more lapdog Congress. 
But if the Republicans maintain control of the Senate, there will be limits on what the Democrats can achieve. 
Even if the House were to impeach Trump – no sure thing – convicting him in the Senate would be extremely difficult. 
Whether a Democratic House would even proceed in that direction has been the subject of intra-party debate. 
The nightmare election possibility for the Democrats is continued Republican control of both chambers. 
In that case, Trump will feel vindicated and more liberated than ever. 
He might then fire a raft of officials, treat immigrants still more harshly, and try to shut down Mueller’s investigation of his campaign’s possible collusion with the Kremlin and Trump’s probable obstruction of justice. 
The conventional wisdom may prevail, with the Democrats winning the House but not the Senate. 
But the polls have been fluctuating. 
And since Trump’s stunning election victory in 2016, most observers have become more cautious about predicting outcomes. 

America’s Ongoing Civil War 
NEW YORK –America continues be in a state of civil war. 
Not just a civil war, but the civil war. 
In the first round, back in the 1860s, the Confederacy lost. 
Yet now the Confederacy is temporarily on top. 
The United States remains one country divided by two cultures. 
From the start, the US has been a battleground of two competing visions. 
America’s founding credo was that “all men are created equal.” 
Yet the founding reality was that white males were far more equal than everyone else. 
White men owned slaves, denied the vote to women, and took the lands and lives of native Americans. 
During the 1861-1865 Civil War, the slaveholding Confederacy, formed by 13 secessionist states, was defeated by 19 northern states and then occupied by the federal government for a dozen years. 
Yet after “Reconstruction” ended in 1877, the South vigorously practiced systemic racism for almost a century, until the US Congress enacted the 1964 Civil Rights Act and the 1965 Voting Rights Act, mainly with the support of northern Democrats. 
From that moment, Southern white voters deserted the Democratic Party en masse. 
The Republicans embraced the so-called Southern strategy, based on resisting the rise of African-Americans and other minority groups and opposing legislation that would transfer any funds, status, or power to them. 
The Republicans thereby became the party of the South, and the Democrats the party of the Northeast and Pacific West, with the Midwest and western mountain states the swing regions. 
The industrial Great Lakes region tended toward the Democrats while the Midwestern farm states and mountain states leaned Republican. 
The Midwestern and mountain states also carried the frontier culture of white settlers suppressing native Americans and Asian and Hispanic immigrants. 
Gun ownership marks another divide between Democrats and Republicans. 
The Republican Party’s gun culture reflects the same cultural forces that shape its anti-minority views. 
In a brilliant book, Loaded, historian Roxanne Dunbar-Ortiz reminds us that the “well-regulated militias” mentioned in the US Constitution’s Second Amendment, which enshrines the right to bear arms, were groups of white men that raided native American villages and hunted down escaped slaves. 
As Avidit Acharya, Matthew Blackwell, and Maya Sen powerfully argue in their recent book Deep Roots: How Slavery Still Shapes Southern Politics, it is the legacy of slavery and post-Civil War segregation that gave rise to the South’s current political culture. 
“It is within formerly high-slave areas,” they show, “that whites are the most likely to oppose the Democratic Party, oppose affirmative action, and express sentiments that could be construed as racially resentful.” 
Both before and after the Civil War, poor Southern whites accepted their lowly status because they prized their superiority over even more desperate African-Americans. 
Racial politics thus blocked the emergence of class politics, which would have brought poor whites and poor blacks together to demand more public services paid for by higher taxes on elite whites. 
Of the 26 senators representing the 13 former Confederate states today, 21 are Republicans and five are Democrats. 
Of the 38 senators now representing the 19 northern states of 1861, 27 are Democrats and nine are Republicans (two Independents, Bernie Sanders and Angus King, caucus with the Democrats). 
President Donald Trump is a geographical anomaly, a pro-southern racist from liberal New York. 
Trump, a champion of the white male southern culture, is shunned by his home state (59% disapproval as of September 2018). 
He is more Mississippi than Manhattan. 
The cultural divide was on full display in the Senate proceedings that recently confirmed Judge Brett Kavanaugh to the US Supreme Court. 
Kavanaugh’s Senate defenders were mainly white men of the South and Midwest who deflected the questioning of Kavanaugh’s white male prerogative to drink and carouse as a young man by instead attacking the nominee’s accusers. 
Mitch McConnell of Kentucky, a former slave state, successfully orchestrated Kavanaugh’s confirmation. 
Lindsey Graham of South Carolina, the first slave state to secede in 1860, was Kavanaugh’s most aggressive promoter on the Senate Judiciary Committee, describing sexual assault allegations against Kavanaugh as “the most unethical sham since I’ve been in politics.” 
John Kennedy of Louisiana, another former Confederate state, called the hearings “an intergalactic freak show.” 
The Democrats and Republicans are parties not just of different cultures and regions, but also of different economies. 
The Northeast and Pacific states lead the US in high technology, innovation, higher education, well-paying jobs, and per capita income. 
The South lags far behind. 
Not only are the working-class white men of the South and Midwest defending their status and racial privileges; they are also fighting for their jobs in industries where automation and foreign trade have steadily eroded employment. 
Working-class southern whites would have much to gain from abandoning the Republicans’ race-based politics in favor of class-based politics. 
It is, after all, white corporate elites, not poor African-Americans, Hispanics, and other minorities, who deprive working-class whites of quality public schools, affordable health care, and environmental safety. 
Southern white male senators play up the culture war in part to shield the Republicans’ mega-rich donors, who feast on corporate tax cuts and environmental deregulation while the party scapegoats African-Americans and Hispanics. 
The declining predominance of non-Hispanic whites in the total population has probably widened America’s cultural divide during the past 20 years. 
And with non-Hispanic whites expected to become a minority of the total population by around 2045, America’s ongoing civil war could worsen. 
It will not end until working-class Americans of all regions, races, and ethnicities join forces to demand higher taxes and greater accountability of the rich corporate elite. 

America’s Anti-Environmentalists 
As an American, I am appalled, ashamed, and embarrassed by my country’s lack of leadership in dealing with global warming. 
Scientific evidence on the risks mounts by the day, as most recently documented in England’s magisterial Stern Report. 
Yet, despite the fact that the United States accounts for roughly 25% of all man-made global carbon emissions, Americans show little will or inclination to temper their manic consumption. 
The first George W. Bush administration was probably right to refuse to sign the so-called “Kyoto Protocol,” albeit for the wrong reasons. 
Among other problems, the Kyoto Protocol does not go far enough towards redistributing carbon emission rights towards developing countries. 
But why can’t the US bring itself to raise taxes on gasoline and other sources of carbon emission like coal burning power plants? 
It is not like the US government, running a huge deficit despite an economic boom, does not need the money. 
Many people seem to think that the Bush administration is the problem. 
Put a Texas oilman and his buddies in charge and what do you expect, conservation? 
Unfortunately, that is a facile excuse. 
American citizens’ resistance to moderating energy consumption for the sake of the global environment is much more deeply embedded. 
Consider former US Vice President Al Gore, for example, whose documentary film on global warming, An Inconvenient Truth, is celebrated for its unflinching look at how fossil fuel consumption is leading mankind to the brink of catastrophe. 
The evidence on global warming is considerably more muddled than Gore’s film suggests, but the basic problem is real. 
Unfortunately, however, Gore was not successful in carrying the torch on global warming when he was a politician. 
One cannot commend the 1990’s Clinton-Gore administration for taking any brave steps aimed at radically reducing carbon emissions. 
Small wonder: the American public is fiercely resistant to anything that seriously forces them to compromise on their energy-burning, gas-guzzling lifestyle. 
It is not just politicians who have failed to provide leadership here. 
The venerable New York Times editorial page was apparently opposed to an energy tax until only recently, when the newspaper finally endorsed the idea. 
Like many liberals, the Times’ editors worried that higher energy taxes would fall disproportionately on the poor. 
The typical argument one hears is, “What about the poor guy with the gas-guzzling 1980 Chevy car, who has no other way to get to work?” 
It is a legitimate point, but if ocean levels start rising, as the Stern Report predicts, a lot of our children will be swimming to work some day. 
The need for corrective measures to alleviate inequality is no excuse for inaction on global warming. 
The change of position by the Times, unfortunately, does not herald an about-face in the American electorate. 
Mention the idea of an energy tax to any potential 2008 US Presidential candidate, and their faces will pale. 
It is fine to say that you care about the environment or to claim, as Bush seems to do, that miracle technologies will solve the problem without too much pain. 
But any 2008 Presidential candidate that dares to talk about making sacrifices now for a safer environment later will really be sticking his neck out. 
Until Americans suck it up and start fixing global environmental problems that they, more than anyone, have caused, it will be difficult to get the wholehearted support of the rest of the world. 
Developing countries ask why they should pay attention to global warming if rich countries are not prepared to curtail their own emissions sharply? 
Why should poor countries worry about how deforestation contributes to global warming when rich countries remain so profligate? 
The scientific evidence suggests that carbon emissions from anywhere in the world have about the same impact on global warming. 
For this reason, a wide range of economists favor a uniform (“harmonized”) global tax that would tax carbon emissions equally everywhere in the world, and from whatever source – whether coal, oil, or gas, and whether consumers or businesses. 
Such a tax is the most flexible and market-friendly approach, and would have the least impact on economic growth. 
Instead, the complex system of quotas favored by the Europeans and embodied in the Kyoto Protocol is likely to lead to much larger inefficiencies and costs. 
For this reason, England’s Stern Report is probably far too optimistic when it calculates that an eclectic approach to reducing carbon emissions will cost the world only 1% per year of income. 
But the Stern Report is still right to argue that the potential risks of continued inaction are far greater. 
America’s unwillingness to take the lead on environmental issues may some day be regarded as one of the country’s most profound political failures. 
One hopes that it changes course soon, before we all are forced to wear swimsuits to work. 

America’s Anti-Immigrant Road Rage 
Because Latin American countries enjoy the billions of dollars that their countrymen in the United States send home, they should take note of how many of their benefactors are being treated by American officials. 
Despite their numbers – the Urban Institute estimates that more than nine million undocumented immigrants live in the US, a number that exceeds the entire populations of countries like Costa Rica and Nicaragua – the undocumented worker has long been North America’s favorite punching bag. 
Damned on Sunday, they are hired for work on Monday. 
Attacks on immigrants went into high gear in February, when the US Congress passed a bill that will make it illegal for any state to issue driver’s licenses to undocumented workers. 
No one in America is even writing about this or taking much notice because few care about those who are in the US illegally. 
Undocumented workers pick America’s crops, clean Americans’ houses, and serve Americans their food, but their fate simply does not matter to many US citizens. 
Most groups with nine million members who represent billions of dollars would be raising hell in Congress if they were targeted for ill treatment. 
But the money undocumented workers earn goes abroad to build homes, start businesses, and take care of elderly parents throughout Latin America. 
So the countries that benefit from this largesse have a responsibility to speak up for the constituents who help keep their economies afloat. 
US Congresswoman Linda Sanchez says that if foreign presidents don’t speak up for their constituents in America, few others will. 
If California is any indicator, a ban on driver’s licenses won’t be effective in keeping undocumented workers off the road. 
It will merely make life riskier and more expensive for them, pushing them even further to the margins of society. 
Gil Cedillo, a California state senator who has been trying to reverse earlier legislation that in 1994 made it illegal for undocumented workers in California to drive, wrote in a recent policy paper, “While the number of immigrant drivers may be minimally reduced, most simply drive without being trained, tested, licensed, and insured.” 
Unlicensed drivers, he found, are nearly five times more likely to be in a fatal crash. 
In addition to all the deaths, the net result of this, Cedillo found, was that unlicensed drivers cost Californians some $831 million a year in uninsured motorist coverage. 
In some neighborhoods of Los Angeles where undocumented immigrants are concentrated, roughly 90% of drivers are uninsured. 
Immigrants need to get to work and so they buy, sell, drive, and abandon cars in a parallel market. 
When I talked to immigrants in Oakland, they called their license “tu licencia con dios,” or “your license with God.” 
A benevolent God keeps the immigrant from being stopped by the police. 
Undocumented workers thus enter the cycle of those who live and drive with nearly throwaway cars that cost between $200 and $700. 
When it breaks down, the car of an unlicensed driver is towed to a lot, where it is rarely claimed. 
It is then put up for auction and repurchased by agents who in turn sell it to another unlicensed immigrant. 
The trick for an immigrant is to always buy cheap, because he never knows how long it will be before a car breaks down. 
It is time for Latin America’s leaders to stand up for citizens who mean so much for their countries’ economies. 
For example, fighting the Congress’s proposed nationwide ban on driver’s licenses for undocumented immigrants could be a high priority while negotiating new trade agreements with the US. 
In any case, the time to act is now: once the ban is passed by Congress and signed by the president, it is unlikely to be lifted any time soon. 
The California experience is a case in point. 
Probably no other state governor has the political clout to win against the tide of activists who regard offering an undocumented immigrant a driver’s license as tantamount to offering them work, which they already have, and legitimacy, which they apparently don’t need to work. 
While repealing one law to satisfy his voters – and get elected – Governor Arnold Schwarzenegger promised new legislation that would restore undocumented workers’ ability to obtain a driver’s license. 
But the anti-immigrant vitriol of the 1990’s, which pushed California’s legislature to impose the ban, remains strong, and not even the immigrant Terminator can muster the courage to fight it. 
Instead, Schwarzenegger, like other Americans, makes laws in the belief that nine million undocumented workers do not matter. 

America’s Arab Comeback 
AMMAN – Without much fanfare, the past few months have seen no anti-American demonstrations and no burning of American flags across the Arab world. 
Arabs seem increasingly willing to accept – and even applaud – the Obama administration’s policy toward the region. 
Of course, Arabs are still unhappy with the United States’ continued bias towards Israel. 
Its inability to end the 44-year military occupation of Palestinian lands has not gone unnoticed. 
But many Arabs nowadays prefer to give the US a break. 
With the exception of the Obama administration’s lack of resolve in denouncing the treatment of protesters by the US-allied regimes in Bahrain and Yemen, America’s position on the Arab revolts has been welcomed. 
Arabs, especially young Arabs, who comprise the majority of the region’s population, look up to America for its global power when it upholds democratic morals and values. 
There is high respect for the concept of rule of, by, and for the people, as well as for the US Constitution’s guarantee of freedom of expression. 
It is precisely the failure to apply these values in areas such as Palestine or Iraq that has made – and can still make – countless Arabs vehemently anti-American. 
President Barack Obama’s election two years ago positively shocked Arabs and empowered Arab democrats, who saw it as proof of America’s true democratic nature. 
Obama’s Cairo speech, delivered on one of his first foreign trips, promised a new US-Arab beginning, and certainly invigorated Arab democrats. 
But the first test of Obama’s foreign leadership disappointed many Arabs. 
A US veto of a Security Council resolution – supported by the Council’s 14 other members – to oppose Israeli settlements seemed to signal that Obama had crumbled under pressure from America’s pro-Israel lobby. 
The US had not revised its policy, even with an African immigrant’s son living in the White House. 
A more positive view of Obama emerged when the Arab revolts began in Tunisia and Egypt –countries with pro-US regimes. 
While the US initially demonstrated prudence in word and deed, it quickly understood that the revolts truly reflected the will of the people and acted to align itself with the democratic cause. 
The same people that Obama had called on in his Cairo speech to seek democracy had now formed the most important nonviolent movement the world had seen in decades. 
Arab youth had finally moved, and Obama and his team made the right statements to encourage them, while also making it clear to the Egyptian and Tunisian regimes that they could no longer hide behind the claim that they were fighting America’s war in north Africa. 
Pulling away from dictators without trying to take credit for or hijack the revolt was exactly what was required. 
Arab youth had to fight and win democracy for themselves. 
All that what was wanted from America, most of the young people thought, was withdrawal of its support for allies like Hosni Mubarak and other Arab dictators. 
In Libya, however, the need was different. 
The same energy on display in Cairo and Tunis was evident among Libyan youth, but this time, America was able to do little diplomatically because it had no relationship with Col. Muammar el-Qaddafi. 
So, no surprise, the energy of Libyan youth ran head-on into Qaddafi’s inclination toward brutality and, more importantly, into his paid mercenaries. 
America had a moral responsibility to protect the young people whom Obama had encouraged. 
Another type of help was needed, but deciding what form it should take was complicated. 
Arab countries, especially Egypt, had hundreds of thousands of their nationals working in Libya. 
Their governments saw themselves as Qaddafi’s hostages. 
But what the Arab countries couldn’t do with military support, they were able to do by providing political cover for the military intervention led by the US, Britain, and France. 
The Gulf countries, which have no citizens working in Libya, were the first to denounce Qaddafi. 
Then the Arab League met to follow the Gulf states’ lead. 
With angry young Arabs from different countries demonstrating outside its Cairo offices and demanding support for their Libyan brethren, the Arab League took an uncharacteristic position: it agreed to denounce a fellow Arab leader. 
Clearly, the Arab world was changing, and the US was suddenly no longer an enemy, but a friend. 
After gaining Security Council support, the US, Europe, and some Arab countries began doing exactly what should be expected of the international community when a government is preparing to butcher its own citizens: prevent the slaughter. 
Of course, America’s problems with Arabs and its challenges in the Middle East are far from over. 
Obama must still fulfill his promises to celebrate with Palestinians their full membership of the UN this fall and to draw down its forces in Afghanistan. 
But, for the moment, Arabs are not demonstrating against America. 
Instead, with America’s help, they are enjoying the first blush of freedom. 

America’s Coming Social Democracy? 
Almost all of the world’s developed countries consider themselves, and are, social democracies: mixed economies with very large governments performing a wide array of welfare and social insurance functions, and removing large chunks of wealth and commodity distribution from the market. 
The United States is something different. 
Or is it? 
Whatever it has been in the past, the US in the future will have to choose whether, and how much, it will be a social democracy. 
Once upon a time, according to mythology at least, America had little downward mobility. 
On the contrary, before the Civil War you could start out splitting rails, light out for the Western Territory, make a success of yourself on the frontier, and wind up as President – if you were named Abraham Lincoln. 
In the generation after World War II, you could secure a blue-collar unionized manufacturing job or climb to the top of a white collar bureaucracy that offered job security, relatively high salaries, and long, stable career ladders. 
This was always half myth. 
Setting out for the Western Territory was expensive. 
Covered wagons were not cheap. 
Even in the first post-WWII generation, only a minority of Americans – a largely white, male minority – found well-paying stable jobs at large, unionized, capital-intensive manufacturing companies like GM, GE, or AT&T. 
But if this story was half myth, it was also half true, particularly in the years after WWII. 
Largely independent of education or family, those Americans who did value stability and security could grasp it in the form of jobs with “a future.” 
Even for those not so lucky, economic risks were usually fairly low: the unemployment rate for married men during the 1960’s averaged 2.7%, and finding a new job was a relatively simple matter. 
It was during this era – roughly from 1948 to 1973 – that sociologists found that a majority of Americans had come to define themselves not as working class, but as middle class. 
The post-WWII period stands as a reference point in America’s collective memory, but it was in all likelihood an aberration. 
In the early postwar decades, foreign competition exerted virtually no pressure on the economy, owing to the isolation of America’s continental market from the devastation of WWII. 
At the same time, the war left enormous pent-up demand for the products of mass production: cars, washing machines, refrigerators, lawn mowers, television sets, and more. 
Government policy back then began with a permanent military program of spending and R&D and continued through massive public works program and suburbanization, underpinned by the Federal Highway Program and subsidized home ownership loans from the Federal Housing Administration. 
The regulatory institutions and behavioral norms that originated in the New Deal and developed during WWII came into full force: social security, a system of unionized labor relations, market regulation. 
Favorable macroeconomic circumstances, the absence of foreign competition, a system of government support and regulation, and large-scale private provision of what in Europe would have been public social insurance all combined to give post-WWII America many of social democracy’s benefits without the costs. 
The economy did not stagger under the weight of ample benefits or high taxes. 
Americans – at least white, male Americans – did not have to worry about tradeoffs between security and opportunity, because the US offered the advantages of both. 
Corporate welfare capitalism substituted for what in Europe would have been government provided social democracy. 
America was thus a special place. 
It had its cake and ate it, too: a combination of security with opportunity and entrepreneurship. 
It seemed that this was the natural order of things. 
Hence there was little pressure for government-sponsored social democracy: Why bother? 
What would it add? 
Now things are very different. 
The typical American employer is no longer General Motors. 
It is Wal-Mart. 
Private businesses are providing their workers with less and less in the form of defined-benefit pensions, health insurance, and other forms of insurance against life’s economic risks. 
Sharply rising income inequality has raised the stakes of the economic game. 
A government that cannot balance its own finances cannot be relied on to provide macroeconomic stability. 
Indeed, former Chairman of the US Federal Reserve Paul Volcker sees the US as so macroeconomically vulnerable as to be running a 75% chance of a full-fledged dollar crisis over the next several years. 
The coming generation will be one of massive downward mobility for many Americans. 
The political struggles that this generates will determine whether America will move more closely to the social democratic norm for developed countries, or find some way to accept and rationalize its existence as a country of high economic risk and deep divisions of income and wealth. 

America's Crisis Election 
CAMBRIDGE – On November 4, Americans will elect their 44th president amidst the worst financial turmoil the country has known since the onset of the Great Depression in 1929. 
Both candidates are United States senators with little experience as executives, so their ability to manage the crisis has become a central issue in the election. 
At the beginning of the campaign, many observers predicted that Iraq would be the major issue in 2008. 
Instead, it is the financial crisis. 
In principle, this should help Barack Obama and the Democrats, because polls show them stronger on economic issues, whereas Republicans and John McCain do better on security issues. 
After the Republican convention, polls showed McCain ahead in early September, but after the financial meltdown, Obama took the lead. 
Although both men have warily embraced the $700 billion bailout of the financial sector, the contrasts between the two men are sharp. 
Obama is not only the first African-American nominee of a major party, but also one of the youngest candidates ever. 
McCain has experience as a naval aviator and more than two decades in the Senate. 
If elected, he would be the oldest incoming president. 
The two men differ in temperament as well as experience. 
McCain is a man of strong traditional values who prides himself on his willingness to act quickly and decisively, which he sought to do during the negotiations on the bailout by suspending his campaign to return to Washington. 
That effort appears to have backfired, because the Republicans that he leads initially balked at passing the legislation. 
But McCain has shown himself to be resilient. 
In 2007, many people wrote off his campaign, but he had the skills to resurrect it and capture the Republican nomination. 
His choice of Alaska’s Governor Sarah Palin as his running mate shook up the presidential campaign. 
Obama, while an inspirational orator, has shown a cool and calm demeanor in responding to both the financial crisis and the turbulence of political campaigning. 
When embarrassed by comments made by the pastor of his church, he delivered an exceptional speech about race in America. 
If anything, some of Obama’s Democratic supporters wish he would show more emotion in responding to criticism. 
One should be careful, however, about reading too much into national opinion polls measuring the candidates’ popular support. 
American presidents are elected by an Electoral College in which each state votes in proportion to the number of members it has in Congress. 
Since even the smallest states have two senators, this leads to overrepresentation of lightly populated Western states that tend to vote Republican. 
In 2000, Al Gore won the popular vote, but George W. Bush prevailed in the electoral college. 
Thus, the two candidates’ campaigns are focusing heavily on a dozen or so states in which voters are closely divided and could sway the electoral college outcome. 
Each campaign is now desperately trying to gauge the impact of the financial crisis on these battleground states. 
Not only does the Electoral College confuse predictions based on national opinion polls, but there is also the possibility of surprises which can lead to last-minute reversals. 
A mistake in a presidential debate can turn the tide of public opinion overnight, as happened to President Gerald Ford in his debate with Jimmy Carter in 1976. 
Conversely, Ronald Reagan’s performance in his debate with Carter in 1980 is often credited with his victory. 
Another event that could turn the tables would be an “October surprise” associated with terrorism, which could switch the agenda from the financial crisis back to security, the Republicans’ stronger suit. 
In 2004, shortly before the election, Osama bin Laden released a video tape that may have helped President Bush defeat Senator John Kerry. 
From bin Laden’s point of view, Bush’s policies were more useful for his efforts to recruit supporters than Kerry’s might have been. 
One would assume that Obama would prove even more unsettling to bin Laden. 
A recent BBC poll of 22 countries found that if the world could vote, Obama would win in a landslide. 
The pro-Obama margin varied from 82% in Kenya (where Obama’s father was born) to 9% in India. 
But Americans do not like outside interference in their elections. 
When Obama attracted a crowd of 200,000 to a speech in Berlin last summer, Republicans criticized him as an elitist who appeals to crowds overseas but not to blue-collar workers at home. 
On the other hand, in a September poll that asked Americans to rate a series of foreign-policy goals for the next president, 83% ranked “improving America’s standing in the world” as most important. 
And certainly the election of the first African-American as president would do wonders to restore the soft power that the Bush administration squandered over the past eight years. 
Some people worry that Obama might be good for American soft power, but not for its hard power. 
Machiavelli famously said that it is more important for a prince to be feared than to be loved. 
Machiavelli may be correct, but we sometimes forget that the opposite of love is not fear, but hatred. 
And Machiavelli made it clear that hatred is something a prince should carefully avoid. 
When the exercise of hard power undercuts soft power, it makes leadership more difficult – as Bush found out after the invasion of Iraq. 
Both McCain and Obama possess impressive hard-power political and organizational skills; otherwise, they would not be where they are today. 
But when it comes to the soft power skills of emotional intelligence, vision, and communication, Obama outranks McCain. 

America’s Crony Capitalism 
Buenos Aires – For 20 years, Americans have denounced the “crony capitalism” of Third World countries, especially in Asia. 
But, just as those regions have been improving their public and corporate governance – Hong Kong just witnessed a breakthrough court decision against a telecom tycoon who is the son of the province’s richest and most powerful man – crony capitalism is taking root in the United States, a country that the world long considered the gold standard of a level playing field in business. 
The recently completed “stress tests” of US banks are but the latest indication that crony capitalists have now captured Washington, DC. 
It is no surprise that stock markets liked the results of the stress tests that US Treasury Secretary Timothy Geithner administered to America’s big banks, for the general outcome had been leaked weeks before. 
Indeed, most professional investors trashed the tests as dishonest even as their holdings benefited from a rising market. 
Even The Wall Street Journal, usually financial markets’ loudest cheerleader, openly disparaged the tests’ integrity. 
The government had allowed bankers to “negotiate” the results, like a student taking a final examination and then negotiating her grade. 
The tests were supposed to reveal the true conditions of banks saddled with unaudited toxic assets in housing loans and financial derivatives. 
The reasoning behind the tests seemed unimpeachable. 
But was it? 
As any seasoned banker knows, a well-managed bank should undertake internal “stress tests” regularly as a matter of good housekeeping. 
The financial crisis should have mandated a running stress test to keep senior management up to date daily. 
Why, then, did the US need the government to conduct a financial exercise that bankers themselves could and should have done far better and faster? 
The truth is that the tests were not designed to find answers. 
Both Wall Street’s chieftains and the Obama administration already knew the truth. 
They knew that if the true conditions at many big banks were publicly revealed, many would have been immediately declared bankrupt, necessitating government receivership to stop a tsunami of bank runs. 
But the Obama administration did not want to be tagged as “socialist” for nationalizing banks, however temporarily, even though experts such as former US Federal Reserve Chairman Paul Volcker had recommended just that. 
Moreover, nationalizing banks would have required dismissing Wall Street captains and their boards for grossly mismanaging their firms. 
Wall Street’s titans, however, had convinced Obama and his team that their continued stewardship was essential to getting the world out of its crisis. 
They successfully portrayed themselves as victims of a firestorm, rather than as accessories to arson. 
Geithner and Larry Summers, Obama’s chief economic advisor, share Wall Street’s culture as protégés of Robert Rubin, the former treasury secretary who went on to serve as a director and senior counselor at Citigroup. 
Neither man found it difficult to accept the bankers’ absurd logic. 
The stress tests were meant to signal to the public that there was no immediate threat of bank failures. 
This message, it was hoped, would stabilize the market so that prices for “toxic” assets could rise to a level at which bankers might feel comfortable selling them. 
After all, senior bankers had been claiming that these assets were “mispriced,” and that pricing them at market levels would penalize the banks unnecessarily. 
So far, Geithner seems to have succeeded in his “tests,” as the stock market has indeed more than stabilized, with prices of bank shares such as Citigroup and Bank of America quadrupling from their lows. 
The feared implosion of Wall Street seems to have been avoided. 
But no one ever seriously thought that the US would allow Citigroup and Bank of America, to name just two, to fail. 
In fact, the stock market bottomed out last winter. 
Markets had factored into share prices the belief that the US government would not allow any more banks to collapse. 
What the world wanted was an accurate picture of what the banks were worth and “mark-to-market” valuations to guide investors as to how much new capital they needed. 
The world also wanted to see the US retaking the high road in reinforcing business ethics and integrity – so lacking under the last administration. 
As taxpayers had already put huge sums into rescuing failing banks, with the prospect of more to come, a transparent process to reveal how the money was being used was imperative. 
Substantial public rescue funds have reportedly been siphoned off to foreign banks, Goldman Sachs, and staff bonuses for purposes unrelated to protecting public interests. 
None of this was either revealed or debunked by Geithner’s tests. 
Instead, public servants now appear to be in cahoots with Wall Street to engineer an artificial aura of profitability. 
Moreover, the value of toxic assets remains as murky as ever. 
Once sacrosanct accounting principles have been amended at Wall Street’s behest in order to allow banks to report essentially whatever they want. 
And now negotiated stress test results have been released to “prove” that the banks are a lot healthier. Calling this a Ponzi scheme might be too harsh. 
But few financial professionals have been fooled. 
Meanwhile, Wall Street chieftains and their boards of directors have nothing to fear from government. 
On the contrary, they are now the government’s partners in a joint venture to manage this dishonest scheme. 
Like swine flu, crony capitalism has migrated from corrupt Third World countries to America, once the citadel of sound public and private governance. 

America’s Dangerous Debt Ceiling Debate 
NEWPORT BEACH – It has been raised more than 70 times in the last 50 years, mostly without commotion. 
It must be raised again this summer if the United States government is to continue paying its bills on time. 
But now America’s debt ceiling has become the subject of intense political posturing and touch-and-go negotiations behind closed doors. 
And, obviously, the outcome has implications that go well beyond the US. 
As part of America’s system of checks and balances, Congress gets to do more than just approve the annual federal budget. 
It also sets a limit on how much debt the US Treasury is allowed to issue. 
Beyond this ceiling, the government can spend only from current revenues. 
US Treasury Secretary Timothy Geithner recently informed members of Congress that the government will be in this situation on or around August 2. 
Having already officially hit the ceiling, the Treasury is moving money around and tapping various pots of unused funds to pay its bills. 
In a few weeks, this “flexibility” will be used up. 
With the US government now borrowing around 40% of every dollar it spends, a truly binding debt ceiling would immediately force the government to reduce spending radically and in a disorderly fashion. 
Politicians across the political spectrum know that such a situation would unsettle an already fragile US economy, severely weaken the dollar, and raise serious concerns about the country's ability to meet its debt-service obligations, including to the many foreign creditors that the US will need in the future. 
Yet, in today’s polarized environment in Washington, Republicans and Democrats are unwilling to compromise – or at least to compromise “too early.” 
By holding out, Republicans wish to force President Barack Obama’s administration into massive spending cuts. 
Democrats respond that such a one-sided approach would be economically harmful and socially unjust. 
In the meantime, both sides risk disrupting transfer payments (including to the elderly) and the provision of public services, as well as eroding further America’s global credit standing. 
The overwhelming – and sensible – expectation is that the two parties will compromise and raise the debt ceiling before inflicting serious economic and financial dislocations. 
The most recent precedent was the bipartisan agreement reached earlier this year on another fiscal issue that threatened to disrupt the normal functioning of government: the absence of a formally approved budget for this year. 
A compromise would allow both parties to declare partial victory, for it would likely entail commitments to cut spending and some steps to make taxation more socially just. 
But, like many last-minute agreements, it would have little durable impact. 
In effect, the political system would again be kicking the can down the road, with real progress on necessary fiscal reforms expected only after the November 2012 presidential election. 
Two scenarios for the timing of an interim compromise are possible, depending on whether it is a one- or two-step process. 
Most observers expect a one-step process for bipartisan agreement before August 2. 
But politicians may need two steps: an initial failure to agree, and then a quick deal in response to the resulting financial-market convulsions. 
In the meantime, the Treasury would temporarily re-prioritize and slow outgoing payments. 
This two-step process would be similar to what happened in 2008, when Congress was confronted with another cliffhanger: the Bush administration’s request for $700 billion to prevent a financial-market collapse and an economic depression. 
Congress initially rejected the measure, but a dramatic 770-point drop in the stock market focused politicians’ minds, bringing them back to the table – and to agreement. 
But the two-step scenario involves incremental risks to the US economy, and to its standing in the global system. 
And the longer America’s politicians take to resolve the debt-ceiling issue, the greater the risk of an inadvertent accident. 
This brings us to a third, and even more unsettling possibility: a longer and more protracted negotiation, resulting in greater disruptions to government entitlement payments, other contractual obligations, and public services. 
Creditors would then ask many more questions before adding to their already-considerable holdings of US government debt, generating still more headwinds in a US economy that already faces an unemployment crisis and uneven growth. 
The next few weeks will provide plenty of political drama. 
The baseline expectation, albeit subject to risk, is that Democrats and Republicans will find a way to avoid disruptions that would damage the fragile US economy, but that the compromise will not meaningfully address the need for sensible medium-term fiscal reforms. 
Such political paralysis on key economic issues is increasingly unsettling for the US private sector, and for other countries that rely on a strong US at the core of the global economy. 
This helps to explain why so many companies continue to hoard cash, rather than investing domestically, and why a growing number of countries want to diversify gradually away from dependence on the dollar as the reserve currency and on US financial markets for intermediation of their hard-earned savings. 
The world economy is hard-wired to the assumption of a strong America, and Americans benefit from this. 
But the more their politicians argue over the debt ceiling, the greater the risk that the wiring will become irreparably frayed. 

America’s Day of Reckoning 
The pessimists who have long forecasted that America’s economy was in for trouble finally seem to be coming into their own. 
Of course, there is no glee in seeing stock prices tumble as a result of soaring mortgage defaults. 
But it was largely predictable, as are the likely consequences for both the millions of Americans who will be facing financial distress and the global economy. 
The story goes back to the recession of 2001. 
With the support of Federal Reserve Chairman Alan Greenspan, President George W. Bush pushed through a tax cut designed to benefit the richest Americans but not to lift the economy out of the recession that followed the collapse of the Internet bubble. 
Given that mistake, the Fed had little choice if it was to fulfill its mandate to maintain growth and employment: it had to lower interest rates, which it did in an unprecedented way – all the way down to 1%. 
It worked, but in a way fundamentally different from how monetary policy normally works. 
Usually, low interest rates lead firms to borrow more to invest more, and greater indebtedness is matched by more productive assets. 
But, given that overinvestment in the 1990’s was part of the problem underpinning the recession, lower interest rates did not stimulate much investment. 
The economy grew, but mainly because American families were persuaded to take on more debt, refinancing their mortgages and spending some of the proceeds. 
And, as long as housing prices rose as a result of lower interest rates, Americans could ignore their growing indebtedness. 
In fact, even this did not stimulate the economy enough. 
To get more people to borrow more money, credit standards were lowered, fueling growth in so-called “subprime” mortgages. 
Moreover, new products were invented, which lowered upfront payments, making it easier for individuals to take bigger mortgages. 
Some mortgages even had negative amortization: payments did not cover the interest due, so every month the debt grew more. 
Fixed mortgages, with interest rates at 6%, were replaced with variable-rate mortgages, whose interest payments were tied to the lower short-term T-bill rates. 
What were called “teaser rates” allowed even lower payments for the first few years: they were teasers, because they played off the fact that many borrowers were not financially sophisticated, and didn’t really understand what they were getting into. 
And Alan Greenspan egged them to pile on the risk by encouraging these variable-rate mortgages. 
On February 23, 2004, he pointed out that “many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade.” 
But did Greenspan really expect interest rates to remain permanently at 1% – a negative real interest rate? 
Did he not think about what would happen to poor Americans with variable-rate mortgages if interest rates rose, as they almost surely would? 
Of course, Greenspan’s behavior meant that under his watch, the economy performed better than it otherwise would have. 
But it was only a matter of time before that performance became unsustainable. 
Fortunately, most Americans did not follow Greenspan’s advice to switch to variable-rate mortgages. 
But even as short-term interest rates began to rise, the day of reckoning was postponed, as new borrowers could obtain fixed-rate mortgages at interest rates that were not increasing. 
Remarkably, as short-term interest rates rose, medium- and long-term interest rates did not, something that was referred to as a “conundrum.” 
One hypothesis is that foreign central banks that were accumulating trillions of dollars finally figured out that they were likely to be holding these reserves for years to come, and could afford to put at least some of the money into medium-term US treasury notes yielding (initially) far higher returns than T-bills. 
The housing price bubble eventually broke, and, with prices declining, some have discovered that their mortgages are larger than the value of their house. 
Others found that as interest rates rose, they simply could not make their payments. 
Too many Americans built no cushion into their budgets, and mortgage companies, focusing on the fees generated by new mortgages, did not encourage them to do so. 
Just as the collapse of the real estate bubble was predictable, so are its consequences: housing starts and sales of existing homes are down and housing inventories are up. 
By some reckonings, more than two-thirds of the increase in output and employment over the past six years has been real estate-related, reflecting both new housing and households borrowing against their homes to support a consumption binge. 
The housing bubble induced Americans to live beyond their means – net savings has been negative for the past couple of years. 
With this engine of growth turned off, it is hard to see how the American economy will not suffer from a slowdown. 
A return to fiscal sanity will be good in the long run, but it will reduce aggregate demand in the short run. 
There is an old adage about how people’s mistakes continue to live long after they are gone. 
That is certainly true of Greenspan. 
In Bush’s case, we are beginning to bear the consequences even before he has departed. 

America’s Deepening Moral Crisis 
NEW YORK – America’s political and economic crisis is set to worsen following the upcoming November elections. 
President Barack Obama will lose any hope for passing progressive legislation aimed at helping the poor or the environment. 
Indeed, all major legislation and reforms are likely to be stalemated until 2013, following a new presidential election. 
An already bad situation marked by deadlock and vitriol is likely to worsen, and the world should not expect much leadership from a bitterly divided United States. 
Much of America is in a nasty mood, and the language of compassion has more or less been abandoned. 
Both political parties serve their rich campaign contributors, while proclaiming that they defend the middle class. 
Neither party even mentions the poor, who now officially make up 15% of the population but in fact are even more numerous, when we count all those households struggling with health care, housing, jobs, and other needs. 
The Republican Party recently issued a “Pledge to America” to explain its beliefs and campaign promises. 
The document is filled with nonsense, such as the fatuous claim that high taxes and over-regulation explain America’s high unemployment. 
It is also filled with propaganda. 
A quotation by President John F. Kennedy states that high tax rates can strangle the economy, but Kennedy’s was speaking a half-century ago, when the top marginal tax rates were twice what they are today. 
Most of all, the Republican platform is devoid of compassion. 
America today presents the paradox of a rich country falling apart because of the collapse of its core values. 
American productivity is among the highest in the world. 
Average national income per person is about $46,000 – enough not only to live on, but to prosper. 
Yet the country is in the throes of an ugly moral crisis. 
Income inequality is at historic highs, but the rich claim that they have no responsibility to the rest of society. 
They refuse to come to the aid of the destitute, and defend tax cuts at every opportunity. 
Almost everybody complains, almost everybody aggressively defends their own narrow and short-term interests, and almost everybody abandons any pretense of looking ahead or addressing the needs of others. 
What passes for American political debate is a contest between the parties to give bigger promises to the middle class, mainly in the form of budget-busting tax cuts at a time when the fiscal deficit is already more than 10% of GDP. 
Americans seem to believe that they have a natural right to government services without paying taxes. 
In the American political lexicon, taxes are defined as a denial of liberty. 
There was a time, not long ago, when Americans talked of ending poverty at home and abroad. 
Lyndon Johnson’s War on Poverty in the mid-1960’s reflected an era of national optimism and the belief that society should make collective efforts to solve common problems, such as poverty, pollution, and health care. 
America in the 1960’s enacted programs to rebuild poor communities, to fight air and water pollution, and to ensure health care for the elderly. 
Then the deep divisions over Vietnam and civil rights, combined with a surge of consumerism and advertising, seemed to end an era of shared sacrifice for the common good. 
For 40 years, compassion in politics receded. 
Ronald Reagan gained popularity by cutting social benefits for the poor (claiming that the poor cheated to receive extra payments). 
Bill Clinton continued those cuts in the 1990’s. Today, no politician even dares to mention help for poor people. 
The big campaign contributors to both parties pay to ensure that their vested interests dominate political debates. 
That means that both parties increasingly defend the interests of the rich, though Republicans do so slightly more than Democrats. 
Even a modest tax increase on the rich is unlikely to find support in American politics. 
The result of all of this is likely to be a long-term decline of US power and prosperity, because Americans no longer invest collectively in their common future. 
America will remain a rich society for a long time to come, but one that is increasingly divided and unstable. 
Fear and propaganda may lead to more US-led international wars, as in the past decade. 
And what is happening in America is likely to be repeated elsewhere. 
America is vulnerable to social breakdown because it is a highly diverse society. 
Racism and anti-immigrant sentiments are an important part of the attack on the poor, or at least the reason why so many are willing to heed the propaganda against helping the poor. 
As other societies grapple with their own increasing diversity, they may follow the US into crisis. 
Swedes recently gave enough votes to a right-wing, anti-immigrant party to give it representation in parliament, reflecting a growing backlash against the rising number of immigrants in Swedish society. 
In France, Nicolas Sarkozy’s government has tried to regain popularity with the working class by deporting Roma migrants, a target of widespread hatred and ethnic attacks. 
Both examples show that Europe, like the US, is vulnerable to the politics of division, as our societies become more ethnically diverse. 
The lesson from America is that economic growth is no guarantee of wellbeing or political stability. 
American society has become increasingly harsh, where the richest Americans buy their way to political power, and the poor are abandoned to their fate. 
In their private lives, Americans have become addicted to consumerism, which drains their time, savings, attention, and inclination to engage in acts of collective compassion. 
The world should beware. Unless we break the ugly trends of big money in politics and rampant consumerism, we risk winning economic productivity at the price of our humanity. 

America’s Employment and Growth Challenges 
NEW YORK – For many, if not most, Americans, the crisis that befell them in 2008 – leading to slow growth, rising unemployment, and high anxiety among voters – appeared to spring from nowhere. 
Certainly, the vast majority of economists, investment analysts, financial firms, and regulators failed to see the growing risk. 
In fact, it had deep roots. 
While the precise timing of any crisis is impossible to predict, ample signs of rising risk, distortions, structural problems, and imbalances could be seen by anyone who took the time to interpret a decade’s worth of mounting debt, low savings, surging asset prices, and excess consumption. 
The United States was on an unsustainable growth path for at least a decade – probably longer – before the crisis. 
Restoring balance and eliminating the distortions will require time, investment, and structural change, and should be the central focus of America’s economic policy. 
The household sector is especially important. 
If the main problem had been confined to excess leverage and risk-taking within the financial sector, the economic shock would have been large, but the recovery quicker. 
It was the huge loss of households’ net worth that brought down the real economy (with an assist from the credit squeeze on smaller businesses). 
Let’s be clear: elevated savings and reduced consumption relative to pre-crisis levels are likely to be permanent even after households reduce leverage and restore retirement savings – a process that in the US has removed roughly $1 trillion from the demand side of the economy. 
To make up the difference, Americans need to compete effectively for a portion of global demand. 
Does this mean that the US is headed for a “new normal,” rather than a reversion to pre-crisis conditions? 
It does. 
Put bluntly, Americans were living beyond their means for too long. 
With foreign borrowing financing a yawning trade deficit, the US economy as a whole spent more than it earned, which both caused and hid structural problems. 
So the main post-crisis challenge is not to return to the old normal, which was not sustainable, nor is it to recover from a deep balance-sheet recession, but rather to make a structural transition from the old abnormal to a new normal that is sustainable. 
This does not mean that recovery of households’ balance sheets can be ignored in the post-crisis period. 
The US Federal Reserve has had to carry out a difficult balancing act: with no sign of inflation on the horizon – and at least some risk of deflation – it has maintained low interest rates even as credit conditions have eased. 
Contrary to most commentary, this is not a growth strategy, but rather an attempt to limit the considerable risk of another major downturn, induced by further balance-sheet damage in the housing sector. 
True, low interest rates, together with a second round of quantitative easing, are causing considerable global distortions, as funds flow into fast-growing emerging markets, fueling inflationary pressure and asset bubbles. 
But, given the US housing market’s fragility, raising interest rates could cause prices to plummet, sinking the economy again. 
Despite their complaints, it is not clear that emerging economies would prefer another deep US downturn to the current flood of inbound capital that that they must manage. 
As it is, deficient consumption and stubbornly high unemployment are likely to be with Americans for some time. 
But this is not how the future was sold to the public, and, until recently, financial markets were acting as if recovery was at hand and would be relatively quick. 
The proverbial dead-cat bounce – when freefall stops and inventories run out, causing output to pick up a bit – was misinterpreted as evidence of a V-shaped recovery: sharply down and sharply back up. 
Despite the impression created, particularly in the US, by media commentary and political debate, fiscal stimulus clearly helped in the crisis, though its impact is diminishing rapidly. 
Recent studies by the International Monetary Fund indicate that in most advanced countries, including the US, the growth in budget deficits was largely automatic, owing far more to declining tax revenues and rising expenditures on unemployment benefits than to stimulus spending. 
The appropriate timing of fiscal retrenchment is, in fact, difficult to decide. 
On one side is concern about another downturn and deflation. 
On the other side is the risk of excessive debt, currency instability, and – where unemployment is structural – doubts about the benefits of additional stimulus. 
Indeed, advanced countries, including the US, have dug themselves into a deep hole. 
It is not yet a hole of the type one finds in Greece, where restoring fiscal balance and reviving economic growth are probably impossible without a restructuring of public debt. 
But climbing out will be difficult and painful. 
At this stage, the best course would be to adopt a credible multi-year plan, based on reasonable but conservative growth assumptions, to reduce deficits to sustainable levels and limit the accumulation of public debt. 
With a new, more hostile Congress, and with members of a new economic team coming on board, Obama’s challenge is to build a consensus around a medium- and long-term recovery strategy, with a focus on restoring growth and employment. 
The limited fiscal resources that are available should be targeted on areas that affect competitiveness in the tradable sector. 
That means forgoing some government services. 
The truth is that all the net employment growth in the US economy over the last 20 years has been in the non-tradable sector, where Americans don’t have to compete. 
Leading drivers of employment growth have been government, health care, and, until the crisis, construction. 
While this is just one part of a much more complex story, it seems unlikely that these and other non-tradable sectors can sustain employment growth in the future. 
With the tradable sector neutralized and the non-tradable sectors maxed out, the economy lacks sufficiently powerful growth engines. 


America’s Fiscal Isolationism 
DENVER – Patience might be a virtue, but not necessarily when it comes to American foreign policy. 
Consider “the long war,” a bold concept embraced a few years ago to describe the continuing struggle against terrorism, the grudging progress that could realistically be achieved, and the enormous financial burden that it would impose for years to come. 
It was also a realpolitik acknowledgement of the setbacks to be expected along the way (the “slog,” as then Defense Secretary Donald Rumsfeld put it). 
Above all, the term was an effort to communicate to Americans, accustomed to waging war with speed and decisiveness (and insistent on it since Vietnam), the long-term sacrifice and commitment needed to win a war of survival. 
Its proponents also understood that the war would not be limited to weapons, but would need to be a sustained effort, involving, as they put it, the “whole of government,” with civilian agencies marshaled behind military – or paramilitary – objectives. 
Daunting as the effort would be, its advocates assumed a sustainable political consensus to support it. 
After all, the United States had been attacked. 
Today, that consensus is unraveling as America’s politicians wrestle with a federal budget that is itself turning into a long war – one with its own casualties. 
The battle lines in this struggle suggest that there is little accord among political elites for any spending, let alone for a long war with far-flung commitments. 
As a result, basic assumptions are being questioned at every turn. 
Indeed, the current budget war seems to be reopening old divisions about America’s view of itself and the world. 
The outcome is far from certain, but even isolationism, a perennial American malady, seems to be making a comeback. 
Isolationism is a familiar refrain in US foreign policy among those elements of the right that consider the US too good for the world, as well as among those on the left who consider America a destructive global force. 
But this time, as perhaps never before, a bipartisan isolationist impulse is being driven by the budget. 
America’s fiscal crisis is profound, and it is not just about numbers. 
As the emotions in Washington today suggest, the aversion to tax increases runs far deeper than concern about their effect on current economic performance and job growth. 
In part, it represents a fundamental – some would say fundamentalist – view that taxes are to government what a bottle of whisky is to an alcoholic. 
Government, as Ronald Reagan told us, is the problem, not the solution. 
That message is bad news for American diplomacy. 
The linkage between politicians’ unwillingness to fund domestic programs and the imperiled commitment to “the long war” might elude those in US foreign-policy circles, but it is not lost on the rest of the country. 
Opinion surveys suggest that Americans want to maintain many of the “discretionary” domestic programs – schools, hospitals, transportation infrastructure, recreational parks, etc. – that are now on the chopping block in budget negotiations. 
In places like rural El Paso County, on the eastern plains of Colorado, far from the federal budget debate’s epicenter, spending cuts are the order of the day. 
School districts are increasing class sizes as they shed teachers, as well as deferring maintenance projects and curtailing the school-bus service. 
These cuts are having a very real and immediate impact on El Paso County’s residents. 
Can they, and other Americans who are losing vital services, really be expected to rise above it all and support funding to build new schools in Afghanistan? 
Not only are America’s public schools starting to look second-rate, but so is its infrastructure, which had long been a source of national pride. 
How many travelers nowadays can fail to note the difference between Asia’s new, efficient airports and the aging, clogged antiques in some major US cities? 
The budget war is not producing any consensus on fixing America’s infrastructure, but it is beginning to produce a view that Afghanistan and Pakistan are far from being core US national interests. 
Why, people ask, are schools and roads in Afghanistan and Iraq more important than those in Colorado or California? 
At one point in 2008, the US military picked up the cost of transporting a tiger for the Baghdad zoo. 
When was the last time the US government did that for a US zoo (outside of Washington, of course)? 
How this debate sorts itself out will have profound consequences for how America conducts itself in the world. 
But it might also take a toll on how the world reacts to America’s fastest-growing export: unsolicited advice. 
Countries take others’ advice for many reasons. 
Sometimes they respect the adviser’s wisdom and insights (fairly rare in diplomacy). 
Or they might fear the consequences of not taking the advice (an offer one cannot refuse, so to speak). 
Or, as is true of many of America’s diplomatic transactions, accepting advice could open the way to a better relationship and to additional assistance. 
In short, diplomacy – and US diplomacy, in particular – often involves money. 
But what if there is no money to offer? 
What if Americans, tired of the budget cuts in their neighborhoods, refuse to support funds even for “the long war”? 
At that point, senior US officials might well arrive in a country, offer advice, and find that nobody is bothering to listen. 

America’s G-Zero Moment 
NEW YORK – The 2008 financial crisis marked the end of the global order as we knew it. 
In advance of the upcoming G-8 summit, it is impossible to overlook the fact that, for the first time in seven decades, the United States cannot drive the international agenda or provide global leadership on all of today’s most pressing problems. 
Indeed, the US has trimmed its presence abroad by refusing to contribute to a eurozone bailout, intervene in Syria, or use force to contain Iran’s nuclear breakout (despite strong Israeli support). 
President Barack Obama officially ended the war in Iraq, and is withdrawing US troops from Afghanistan at a pace constrained only by the need to save face. 
America is handing off the leadership baton – even if no other country or group of countries is willing or able to grasp it. 
In short, US foreign policy may be as active as ever, but it is downsizing and becoming more exacting about its priorities. 
As a result, many global challenges – climate change, trade, resource scarcity, international security, cyber-warfare, and nuclear proliferation, to name a few – are bound to loom larger. 
Welcome to the G-Zero world, a more turbulent, uncertain environment in which coordination on global policy issues falls by the wayside. 
Paradoxically, this new environment, though daunting, is less troublesome for the US; in fact, it provides fresh opportunities for the US to capitalize on its unique position. 
The G-Zero world is not all bad for the US – if it plays its cards right. 
Many residual strengths take on greater importance in such a world, and America remains the world’s only true superpower and its largest economy – still more than twice the size of China’s. 
Its defense expenditures represent nearly half the world total, and exceed those of the next 17 countries combined. 
The dollar remains the world’s reserve currency, and investors’ scramble into US government debt at every peak in the crisis since 2008 has underscored America’s safe-haven status (even in crises that America caused). 
Likewise, the US continues to lead in entrepreneurship, research and development, higher education, and technological innovation. 
Moreover, it is now the world’s largest natural-gas producer and calorie exporter, which has reduced its vulnerability to price shocks or food shortages. 
No country rivals America’s promotion of the rule of law, liberal democracy, transparency, and free enterprise. 
While other countries certainly support these values, only the US has been willing, healthy, and big enough to ensure that they prevail. 
So, as America curtails its global leadership, it will find itself in more demand. 
Consider Asia, for example. 
As China’s economic importance and regional influence grows, its neighbors are seeking to deepen ties with the US. 
Japan, Australia, Indonesia, and Taiwan have all recently closed trade and security-related deals with the US. 
Even Burma has gotten on board, resuming diplomatic engagement with the US while trying to work its way out of China’s shadow. 
In other words, in a G-Zero world, an increasingly aggressive global environment makes the US all the more appealing to countries seeking to hedge their bets. 
As a result, the US has an opportunity to act more precisely in its own interests. 
Supplying less leadership allows the US to weigh opportunity costs before taking action, and to select the issues and circumstances that suit it the best. 
In this environment, military intervention in Libya does not necessitate the same in Syria. 
The extent to which the US will capitalize on these opportunities remains to be seen. 
In fact, America’s short-term advantages pose the biggest obstacle to its long-term outlook. 
Call this the “safe-haven curse”: as long as the US remains the safest port in any storm, it faces no immediate pressure to address its weaknesses. 
For example, for all of the hand-wringing about America’s national debt, investors will continue to loan the US money. 
Over the long term, however, US policymakers must make steady progress in restoring confidence in the nation’s fiscal health by cutting politically sacred programs like social security, Medicare, and defense. 
Officials will have to put aside short-term motives and party orthodoxy to bolster America’s aging infrastructure, reform its education and immigration systems, and pursue long-term fiscal consolidation. 
America’s advantages in the G-Zero world afford it the chance to invest in the future. 
But, by cushioning against sufficiently calamitous risks, the same advantages allow the US to procrastinate. 

Obama’s Underachieving Foreign Policy 
PARIS – To evaluate an American president’s foreign-policy performance after one term is challenging, given the complex diplomatic and strategic environment and significant domestic constraints that confront every US president. 
Nevertheless, in advance of November’s presidential election, it is important to distinguish the forces that have shaped Barack Obama’s foreign policy, and to assess his handling of them. 
Obama kept his promise to withdraw American forces from Iraq during his first term. 
But the move proved to be a strategic defeat, given that it significantly diminished the United States’ political influence in Iraq. 
Indeed, Prime Minister Nouri al-Maliki’s government is becoming increasingly allied with Iran. 
Obama, who opposed the Iraq war, should not be blamed for current circumstances there. 
But he was unable to improve the situation or help Iraq’s Shias and Sunnis reach a political compromise. 
In contrast, Obama expanded the war in Afghanistan – which he considered to be a war of necessity – and put the Taliban on the defensive. 
But the US will begin to withdraw troops after 2014, without having defined a political solution in line with its interests. 
Meanwhile, America’s strategic partnership with Pakistan, where Obama won a significant symbolic victory by eliminating Osama bin Laden, is in tatters. 
US-Pakistan relations have regressed to their level before September 11, 2001, with mutual distrust minimizing cooperation. 
In fact, in all of the strategic challenges to US security that Obama inherited – Iran, North Korea, Iraq, Afghanistan, Pakistan, and the Israeli-Palestinian conflict – he has made virtually no significant political gains. 
Notwithstanding Obama’s skillful response to the Arab Spring – the only strategic surprise that he has faced as president – his credibility in the Muslim world has steadily declined. 
He has failed to deliver on the key promise of his Cairo speech in 2009: “to seek a new beginning between the United States and Muslims around the world.” 
Moreover, Obama’s efforts to improve relations with Russia – embodied in the Strategic Arms Reduction Treaty (START) – did not lead to a genuine “reset” in bilateral ties, largely because an increasingly Soviet-style Russian leadership distrusts a US establishment that still regards Russia as a foe. 
And the US-China relationship has deteriorated, with America seeking to manage China’s rise strategically – for example, through regional trade agreements and an enhanced military presence in Asia. 
On multilateral issues, Obama’s performance is equally unimpressive. 
After committing to a 17% reduction of greenhouse-gas emissions by 2020 – and despite his declaration that he would not tolerate inaction in this area – he simply stopped raising the issue after the Republicans’ sweeping victory in the November 2010 mid-term elections. 
Likewise, domestic pressure has caused Obama to neglect trade issues. 
The US is largely responsible for the failure of the Doha Round of global trade talks. 
Obama’s one significant foreign-policy breakthrough has been to release the US from the grip of the “global war on terror.” 
Jettisoning the Manichean rhetoric of that “war” allowed the US to regain the political legitimacy that former President George W. Bush had lost, without diminishing its strategic credibility. 
After the Vietnam War, Jimmy Carter hoped to make a break with established US policy. 
But his administration’s actions – including serious blunders in Iran and Afghanistan – made the US appear weak and indecisive. 
While Obama’s policies have not weakened America’s international standing, they also have not led to achievements comparable to Richard Nixon’s rapprochement with China, largely owing to what might be described as the dogmatic pragmatism that underlies them – an emphasis on avoiding the worst, rather than on striving for the best. 
Moreover, Obama has been confronted with significant constraints, including the global economic crisis, domestic political polarization, a hostile Congress, and the rise of emerging powers that need the US but are unwilling to accept its dominance. 
As a result, he has failed to change strategic realities by, for example, reconciling America’s broader interests with those of Iran (a declared enemy), Pakistan (a “frenemy”), and Israel (a key ally). 
To be sure, Obama faces a more complex diplomatic and strategic environment than Nixon faced in the 1970’s. 
Unstable coalitions in Iran prevent any substantive negotiations between the two countries, while political fragmentation in Pakistan significantly hinders US policy there. 
And the fragility of Israel’s ruling coalition, combined with strong congressional support for Prime Minister Binyamin Netanyahu, makes it difficult to influence the country’s policies, despite Israel’s significant impact on US strategy in the Arab world. 
But Obama has also struggled to define the terms of a possible grand bargain. 
Any agreement with Iran would require consent from Israel and the Gulf countries, which do not share the same objectives. 
And the US cannot reach an accord with Pakistan without India’s consent, which America would be unable to force, especially given that it relies on India to counterbalance China’s growing clout in Asia. 
With Israel, the terms are ostensibly simpler: in exchange for a stronger US security guarantee, Israel would accept the establishment of a Palestinian state based on the 1967 borders. 
But Israel is also a crucial domestic political topic in the US; indeed, any distancing from Israel is unacceptable to most Americans. 
While Obama’s first term could not be called a foreign-policy disappointment, his achievements – although not trivial – have been limited. 
If he wins a second term, he is likely to find it increasingly difficult to win by playing not to lose. 

America’s Groucho Marxists 
LONDON – Groucho Marx has always been my favorite Marxist. 
One of his jokes goes to the heart of the failure of the ideology – the dogmatic religion – inflicted on our poor world by his namesake, Karl. 
“Who are you going to believe,” Groucho once asked, “me, or your own eyes?” 
For hundreds of millions of citizens in Communist-run countries in the twentieth century, the “me” in the question was a dictator or oligarchy ruling with totalitarian or authoritarian powers. 
It didn’t matter what you could see with your own eyes. 
You had to accept what you were told the world was like. 
Reality was whatever the ruling party said it was. 
The designated successor to Mao Zedong in China, Hua Guofeng, raised this attitude to an art form. 
He was known as a “whateverist.” 
The Party and people should faithfully follow whatever Mao instructed them to do. 
Groucho posed two insuperable problems for the “whateverists” of communism. 
First, your own eyes and your reason would surely tell you before long that the communist idyll – the withering away of the state and the triumph over need – would never come. 
Communism, like the horizon, was always just beyond reach. 
It would be interesting to know how many of those at Beijing’s Central Party School – the party’s main educational institute – believe that the Chinese state is about to wither away, or ever will. 
The second application of Groucho’s question was that citizens of most Communist countries soon learned that the loss of freedom that they suffered was not compensated by greater prosperity or a higher quality of life. 
The more that Russians, Poles, Czechs, and others saw of the life-style in the Western democracies, the more they questioned their own system. 
In his magisterial book The Rise and Fall of Communism, Archie Brown notes how travel abroad opened Mikhail Gorbachev’s eyes to the failure of the system that he had lived under all his life. 
So, in the political sphere, reason has trumped both faith in an unattainable goal and self-delusion about the consequences of its pursuit. 
Authoritarian party-states, such as China and Vietnam, survive, but not through commitment to communism. 
Their legitimacy depends on their ability to deliver economic growth through state-managed capitalism. 
Democracies, of course, allow people to use their reason to make choices based on the evidence of their own eyes. 
When you don’t like a government, you can turn the rascals out without overthrowing the whole system. 
Change can be made in an evolutionary, rather than a revolutionary, way. 
But no one should think that debate in democracies is always based on reason, or that democracy necessarily makes people more rational. 
Sometimes reason does prevail. 
This is what appeared to happen in the last Indian election, and the election in the United States of President Barack Obama was also plainly a supremely rational moment. 
But reason does not seem to be getting much of a hearing during the current health-care debate in the US. 
Outsiders, even admirers, have often wondered how the most globalized country in the world – a continent inhabited by people from every land – can be so irrationally insular on some issues. 
We scratch our heads about America’s gun laws. 
We were astonished during President George W. Bush’s first term at the administration’s hostility to science, reflected in its stance on climate change and Charles Darwin’s theory of evolution. 
The opposition to health-care reform is a similar cause of bemusement. 
We know that despite its great wealth – and its groundbreaking medical research – America’s health-care system is awful. 
It is hugely expensive. 
Its costs overwhelm workplace health-insurance schemes. 
The poor go unprotected. 
Too many of the sick are untreated. 
Overall health statistics are worse than those in comparable countries. 
Yet Obama’s attempts to reform health care have run into hysterical opposition. 
His proposals would lead, it is said, to the state murdering the elderly. 
They would introduce Soviet communism into the US – just like what apparently exists in Canada and Britain, with their state-sponsored health systems. 
Communism in Toronto and London? 
Or just better, cheaper, more reliable health care for all? 
Reason seems to be having a hard time of it in the US just now. 
Maybe it’s no coincidence that Groucho Marx was an American citizen. 
But surely the way a society cares for its sick and needy and elderly is sufficiently important to deserve serious and thoughtful argument based on what we really can see with our own eyes rather than on uninformed partisan prejudice. 


Gun Control After Newtown 
NEW YORK – The brutal murder of 20 children and seven adults in Newtown, Connecticut, shakes us to the core as individuals and requires a response as citizens. 
The United States seems to reel from one mass gun killing to another – roughly one a month this year alone. 
Easy access to guns in the US leads to horrific murder rates relative to other highly educated and wealthy societies. 
America needs to find a better way. 
Other countries have done so. 
Between the mid-1970’s and the mid-1990’s, Australia had several mass shootings. 
After a particularly horrible massacre in 1996, a new prime minister, John Howard, declared that enough was enough. 
He instituted a severe crackdown on gun ownership, and forced would-be gun owners to submit to a rigorous application process, and to document why they would need a gun. 
Conditions for gun ownership in Australia are now very strict, and the registration and approval process can take a year or more. 
Howard’s government also implemented a rigorous “buyback” policy, to enable the government to purchase guns already owned by the public. 
The policy worked. 
While violent crime has not ended in Australia, murders are down, and, even more dramatically, there has not been a single mass shooting since 1996 in which three or more people died (the definition used in many studies of mass shootings). 
Before the crackdown, there had been 13 such massacres in 18 years. 
Yet the US still refuses to act, even after this year’s string of shocking incidents: the massacre in a movie theatre in Colorado, an attack on a Sikh community in Milwaukee, another on a shopping mall in Oregon, and many more before the ruthless slaughter of first graders and school staff in Newtown. 
The gun lobby in the US remains powerful, and politicians are afraid to counter it. 
Given the shooting of then-Congresswoman Gabrielle Giffords in 2011, perhaps they even fear that they, too, might be targeted. 
There can be little doubt that some societies are more steeped in violence than others, even controlling for obvious factors like income levels and education. 
The US homicide rate is roughly four times that of comparable societies in Western Europe, and Latin America’s homicide rates are even higher than in the US (and dramatically higher than Asian countries at roughly the same income level). 
What accounts for staggeringly high rates in the US and Latin America? 
American violence is rooted in history. 
The US and Latin American countries are all “conquest” societies, in which Europeans ruled over multi-racial societies. 
In many of these countries, including the US, the European conquerors and their descendants nearly wiped out the indigenous populations, partly through disease, but also through war, starvation, death marches, and forced labor. 
In the US and many Latin American countries, slaveholding fueled mass violence as well. 
The slaves – and generations of their descendants – were routinely murdered. 
The US also developed a particular populist belief that gun ownership constitutes a vital protection against government tyranny. 
The US was born in a citizens’ revolt against British imperial power. 
The right of citizens to organize militias to fight government tyranny was therefore a founding idea of the new country, enshrined in the Second Amendment to the US Constitution, which declares that, because a country needs a well-regulated militia, the people have the right to bear arms. 
Since citizens’ militias are anachronistic, gun owners now use the second amendment merely to defend individual gun ownership, as if that somehow offers protection against tyranny. 
A reckless, right-wing Supreme Court has agreed with them. 
As a result, gun ownership has become perversely linked to freedom in the vast gun-owning American sub-culture. 
But, instead of protection of freedom, Americans nowadays are getting massive bloodshed and fear. 
The claim that gun ownership ensures freedom is especially absurd, given that most of the world’s vibrant democracies have long since cracked down on private gun ownership. 
No tyrant has risen in Australia since Howard’s gun-control reforms. 
Simply put, freedom in the twenty-first century does not depend on unregulated gun ownership. 
Indeed, America’s gun culture is a threat to freedom, after the murder of a president, senator, and other public leaders, and countless assassination attempts against public officials over recent decades. 
Yet US gun culture remains as pervasive as it is unrecorded. 
America reels from one shooting disaster to the next, and on nearly every occasion, politicians dutifully declare their continued devotion to unregulated gun ownership. 
Indeed, no one even knows how many guns Americans hold. 
The number is estimated to be around 270 million, or almost one per person on average. 
According to one recent poll, 47% of households have a gun at home. 
The shooting in Newtown was not only especially horrific and heartbreaking, but is also part of an increasingly common pattern – a specific kind of murder-suicide that has been carefully studied by psychologists and psychiatrists. 
Loners, often with paranoid tendencies, commit these heinous acts as part of their own suicide. 
They use carefully planned and staged mass murders of innocents in order to take revenge on society and to glorify themselves as they take their own lives. 
The perpetrators are not hardened criminals; many have no previous criminal record. 
They are pathetic, deranged, and often have struggled with mental instability for much of their lives. 
They need help – and society needs to keep guns out of their reach. 
America has now suffered around 30 shooting massacres over the past 30 years, including this year’s deadly dozen; each is a gut-wrenching tragedy for many families. 
And yet, each time, gun owners scream that freedom will be eliminated if they are unable to buy assault weapons and 100-round clips. 
The bloodbath in Newtown is the time to stop feeding this gun frenzy. 
Australia and other countries provide models of how to do it: regulate and limit gun ownership to approved uses. 
America’s real freedoms depend on sane public policy. 

America’s Houses of Cards 
There are times when being proven right brings no pleasure. 
For several years, I argued that America’s economy was being supported by a housing bubble that had replaced the stock market bubble of the 1990’s. 
But no bubble can expand forever. 
With middle-class incomes in the United States stagnating, Americans could not afford ever more expensive homes. 
As one of my predecessors as Chairman of the US President’s Council of Economic Advisers famously put it, “that which is not sustainable will not be sustained.” 
Economists, as opposed to those who make their living gambling on stocks, make no claim to being able to predict when the day of reckoning will come, much less identifying the event that will bring down the house of cards. 
But the patterns are systematic, with consequences that unfold gradually, and painfully, over time. 
There is a macro-story and a micro-story here. 
The macro-story is simple, but dramatic. 
Some, observing the crash of the sub-prime mortgage market, say, “Don’t worry, it is only a problem in the real estate sector.” 
But this overlooks the key role that the housing sector has played in the US economy recently, with direct investment in real estate and money taken out of houses through refinancing mortgages accounting for two-thirds to three-quarters of growth over the last six years. 
Booming home prices gave Americans the confidence, and the financial wherewithal, to spend more than their income. 
America’s household savings rate was at levels not seen since the Great Depression, either negative or zero. 
With higher interest rates depressing housing prices, the game is over. 
As America moves to, say, a 4% savings rate (still small by normal standards), aggregate demand will weaken, and with it, the economy. 
The micro-story is more dramatic. 
Record-low interest rates in 2001, 2002 and 2003 did not lead Americans to invest more – there was already excess capacity. 
Instead, easy money stimulated the economy by inducing households to refinance their mortgages, and to spend some of their capital. 
It is one thing to borrow to make an investment, which strengthens balance sheets; it is another thing to borrow to finance a vacation or a consumption binge. 
But this is what Alan Greenspan encouraged Americans to do. 
When normal mortgages did not prime the pump enough, he encouraged them to take out variable-rate mortgages – at a time when interest rates had nowhere to go but up. 
Predatory lenders went further, offering negative amortization loans, so the amount owed went up year after year. 
Sometime in the future, payments would rise, but borrowers were told, again, not to worry: house prices would rise faster, making it easy to refinance with another negative amortization loan. 
The only way (in this view) not to win was to sit on the sidelines. 
All of this amounted to a human and economic disaster in the making. 
Now reality has hit: newspapers report cases of borrowers whose mortgage payments exceed their entire income. 
Globalization implies that America’s mortgage problem has worldwide repercussions. 
The first run on a bank occurred against the British mortgage lender Northern Rock. 
America managed to pass off bad mortgages worth hundreds of billions of dollars to investors (including banks) around the world. 
They buried the bad mortgages in complicated instruments, buried them so deep that no one knew exactly how badly they were impaired, and no one could calculate how to re-price them quickly. 
In the face of such uncertainty, markets froze. 
Those in financial markets who believe in free markets have temporarily abandoned their faith. 
For the greater good of all (of course, it is never for their own selfish interests), they argued a bailout was necessary. 
While the US Treasury and the IMF warned East Asian countries facing financial crises ten years ago against the risks of bail-outs and told them not to raise their interest rates, the US ignored its own lectures about moral hazard effects, bought up billions in mortgages, and lowered interest rates. 
But lower short-term interest rates have led to higher medium-term interest rates, which are more relevant for the mortgage market, perhaps because of increasing worries about inflationary pressures. 
It may make sense for central banks (or Fannie Mae, America’s major government-sponsored mortgage company) to buy mortgage-backed securities in order to help provide market liquidity. 
But those from whom they buy them should provide a guarantee, so the public does not have to pay the price for their bad investment decisions. 
Equity owners in banks should not get a free ride. 
Securitization, with all of its advantages in sharing risk, has three problems that were not adequately anticipated. 
While it meant that American banks were not hit as hard as they would otherwise, America’s bad lending practices have had global effects. 
Moreover, securitization contributed to bad lending: in the old days, banks that originated bad loans bore the consequences; in the new world of securitization, the originators could pass the loans onto others. 
(As economists would say, problems of asymmetric information have increased.) 
In the old days, when borrowers found it impossible to make their payments, mortgages would be restructured; foreclosures were bad for both the borrower and the lender. 
Securitization made debt restructuring difficult, if not impossible. 
It is the victims of predatory lenders who need government help. 
With mortgages amounting to 95% or more of the value of the house, debt restructuring will not be easy. 
What is required is to give individuals with excessive indebtedness an expedited way to a fresh start – for example, a special bankruptcy provision allowing them to recover, say, 75% of the equity they originally put into the house, with the lenders bearing the cost. 
There are many lessons for America, and the rest of the world; but among them is the need for greater financial sector regulation, especially better protection against predatory lending, and more transparency. 

America’s Interest-Rate Puzzle 
A great puzzle in today’s world economy is the continued low level of long-term real interest rates in the United States. 
Conventional macroeconomists like me look at America’s current-account deficit, now running at 7% of GDP, and know that such vast deficits are inevitably followed by large currency depreciations. 
So we expect a substantial depreciation premium on US interest rates. 
If the dollar falls 20% more against the euro sometime in the next ten years, US long-term interest rates should be two percentage points higher than euro rates. 
If it falls 40% against the yen sometime in the next ten years, US long-term interest rates should be four percentage points higher than Japanese rates. 
If it falls 60% against China’s currency, the yuan, sometime in the next ten years, US long-term interest rates should be six percentage points higher than Chinese rates. 
But we are not seeing signs of anything like this. 
The puzzle is not only that long-term rates are too low when viewed in the international context, but also that they are too low when viewed in America’s domestic context. 
The Bush administration continues to have no plans to sew up the veins it has opened with its medieval economic policy, which holds that bleeding revenue from the government cures all economic problems. 
This means that unless America’s domestic savings rate rises mightily – which it shows no signs of doing – and unless investment expenditure remains abnormally low for the rest of this decade, the supply of loanable funds to finance investment will soon be much less than demand when the current-account deficit narrows to sustainable levels. 
But when supply is less than demand, prices rise sharply. 
In this case, the price of loanable funds is the real interest rate. 
An expectation that interest rates will be high sometime in the next decade should mean high interest rates on long-term bonds today. 
Yet financial markets are not pricing dollar depreciation and a rise in long-term US interest rates accordingly. 
When we macroeconomists talk to our friends on Wall Street, we find that they don’t view this as a puzzle at all. 
On the contrary, they are puzzled about why we view the current low level of US long-term interest rates as worrisome. 
From their perspective, today’s high demand for long-term dollar-denominated securities is easily explained: Asian central banks are buying in order to hold down their currencies, the US Treasury is borrowing short (and thus not issuing that many long-term securities), and US companies are not undertaking the kinds of investments that would lead them to issue many long-term bonds. 
But for every market mispricing there is a profit opportunity: if long-term interest rates are, indeed, too low and long-term bond prices too high, investors will short long-term US bonds, park the money elsewhere, wait for bond prices to return to fundamentals, and then cover their short positions. 
By doing so, they will push prices close to fundamentals today. 
Wall Streeters, however, offer a counterargument: for any financial institution to, say, bet on the decline of the dollar against the yuan over the next five years in a serious, leveraged way is to put its survival at risk should the trades go wrong. 
And trades do go wrong: remember the collapse of Long-Term Capital Management. 
The existence of large financial-market actors that do not care about maximizing their profits magnifies the riskiness of the bets. 
If, say, the Bank of China and the Federal Reserve decided to teach speculators a lesson by pushing the dollar’s value relative to the yuan up by 20% for a month, they could do so, bankrupting many financial institutions with short positions. 
Similarly, any financial institution that bets on a sharp rise in long-term interest rates over the next five years in a serious, leveraged way also puts its survival at risk. 
For where should they park their money? 
Real estate rental yields and stock-market payouts are low, and real estate and stock prices may well fall as much as or more than bond prices if interest rates spike. 
Only businesses that can borrow long-term now, lock in a low real interest rate, and invest in expanding their capacity can make the domestic bet that interest rates will rise. 
But America’s businesses see enough risk in the future to be wary of getting stuck with unutilized capacity. 
Economists believe that market forces drive prices to fundamentals. 
But we are not careful enough to distinguish situations in which equilibrium-restoring forces are strong from those in which such forces are weak. 
The dollar will fall and US long-term interest rates will rise, but only when traders on Wall Street and elsewhere decide that holding dollars and long-term US bonds is more risky in the short run. 
When that happens, the long-run future will be now. 

America’s Islamist Allies of Convenience 
NEW DELHI – In just one decade, the United States has intervened militarily in three Muslim-majority countries and overthrown their governments. 
Now the same coalition of American liberal interventionists and neoconservatives that promoted those wars is pushing for punitive airstrikes in Syria without reflecting on how US policy has ended up strengthening Islamists and fostering anti-Americanism. 
Indeed, the last “humanitarian intervention” has clearly backfired, turning Libya into a breeding ground for transnational militants. 
As the intense US debate about President Barack Obama’s proposed use of military force highlights, the attack-Syria push is not about upholding America’s national interest. 
Rather, the desire to protect US “credibility” has become the last refuge of those seeking yet another war in the wider Middle East. 
If “credibility” were purged from the debate and the focus placed squarely on advancing long-term US interests, it would become apparent that an attack on Syria might not yield even temporary geopolitical gains. 
Beyond the short term, it would unleash major unintended consequences, potentially including an Iraq-style “soft” partition of Syria and the creation of a haven for extremists stretching across much of Islamist-controlled northern Syria and into the Sunni areas of Iraq. 
Indeed, an attack would most likely increase America’s reliance on unsavory Islamist rulers in countries ranging from Saudi Arabia and Qatar to Turkey and the United Arab Emirates. 
Some Arab monarchs have pledged to bankroll the US attack – an investment that they would easily recover, given that the war talk has already increased oil prices. 
Al Qaeda-type groups already have gained ground in the Middle East and North Africa as an unintended byproduct of US policies, creating fertile conditions for stepped-up international terrorism in the coming years. 
The US invasion and occupation of Iraq, for example, created a major opening for Al Qaeda, whose affiliates now represent the Sunni struggle against the Shia-dominated government. 
Likewise, regime change in Libya aided the rise of Al Qaeda-linked militants, leading to the killing in Benghazi of the US ambassador. 
A system based on sharia (Islamic law) has been imposed, human-rights abuses are legion, and cross-border movement of weapons and militants has undermined the security of Libya’s neighbors. 
Meanwhile, America’s support for the regimes in Yemen and Saudi Arabia has contributed to the rise of Al Qaeda in the Arabian Peninsula. 
In parts of southern Yemen, an Al Qaeda affiliate, Ansar al-Sharia, functions as a de facto government. 
In Syria, where sizable chunks of territory are already under Islamist control and the pro-Al Qaeda Al Nusra Front overshadows the US-backed Free Syrian Army, the Obama administration is staring at the bitter harvest of its previous policy choices. 
Airstrikes now would merely make matters worse by undercutting the FSA’s grassroots legitimacy and aiding Islamist forces. 
Farther east, the US wants an “honorable” exit from Afghanistan – the longest war in its history – through a peace deal with the Taliban, its main battlefield opponent. 
In seeking to co-opt the Taliban – an effort that has resulted in the Taliban establishing what amounts to a diplomatic mission in Doha, Qatar – the US is bestowing legitimacy on a thuggish militia that enforces medieval practices in the areas under its control. 
America’s dalliances with Islamist-leaning political forces – and governments – have been guided by the notion that the cloak of Islam helps to protect the credibility of leaders who might otherwise be seen as foreign puppets. 
That simply will not work, even in the short term. 
On the contrary, until the Egyptian army removed him from the presidency, the Muslim Brotherhood’s Mohamed Morsi was coming to be seen by many as America’s man in Cairo. 
In the long term, the US will gain nothing – and risk much – by continuing to back oil sheikhdoms that fund Muslim extremist groups and madrasas from the Philippines and India to South Africa and Venezuela. 
By supporting Islamist rulers, the US is contributing to a trend evident from the Maghreb to the badlands of Afghanistan and Pakistan – Muslims killing Muslims. 
American policy has also contributed to a growing conflict between Islamist and secular forces in Muslim countries. 
This is best illustrated by Turkey, where Obama has ignored Prime Minister Recep Tayyip Erdoğan’s heavy-handed efforts to annul free speech and turn himself into a twenty-first-century Sultan. 
There and elsewhere, the US, motivated by the larger geopolitical goal of containing Shia Iran and its regional allies, has embraced Sunni rulers steeped in religious and political bigotry, even though they pose a transnational threat to the values of freedom and secularism. 
Moreover, the clash within Islam is likely to be destabilizing regionally and counterproductive to the interests of the free world. 
Against this background, Obama should heed the doctrine proposed in 1991 by General Colin Powell. 
The Powell doctrine stipulates that the US should use military force only when a vital national-security interest is at stake; the strategic objective is clear and attainable; the benefits are likely to outweigh the costs; adverse consequences can be limited; broad international and domestic support has been obtained; and a plausible exit strategy is in place. 
Given the US record since the doctrine was formulated, another criterion should be added: the main beneficiaries of military intervention are not America’s mortal enemies. 

America’s Misguided Immigration Debate 
A debate on immigration is beginning in the United States Senate, which will take up several proposals. 
These include a hateful bill – which the House of Representatives has already approved – that provides for the construction of a wall along the US-Mexican border and makes unauthorized entry into the US a felony. 
The US Senate will also consider a bill co-authored by Senator Edward Kennedy and Senator John McCain, which proposes stronger border enforcement, a temporary workers program with a path to residency and citizenship, and legalization for people already in the US without papers. 
Another idea is to require anyone in the US wanting to regularize their immigration status to go home and wait in line there. 
This last component is largely rhetoric; it is hard to imagine any Mexican already in the US voluntarily returning to, say, Zacatecas to wait patiently in line for a new visa. 
President George W. Bush has been skirting the question ever since he committed himself to an immigration agreement with Mexico when he visited President Vicente Fox in Guanajuato almost exactly five years ago. 
Finally, and perhaps most importantly, there is Senate Judiciary Committee Chairman Arlen Specter’s compromise proposal. 
Specter’s proposal also provides for reinforced security at the border, as well as a six-year non-renewable Temporary Workers Program without a path to residency, although it would allow unauthorized immigrants to remain in the US with a new, non-immigrant status. 
The latter status may or may not include a path to residency and citizenship; fudging the issue may be a negotiating tactic to avoid debate over whether this is a form of disguised amnesty (which, fortunately, to a certain extent, it is). 
What’s missing in the debate is the Latin American context. 
There was a time when north-south migratory flows in the western hemisphere were limited to Mexico and the Caribbean. 
That changed in the 1980’s, when Central America’s civil wars sent hundreds of thousands of migrants thru Mexico to the US, and then in the 1990’s, when people fleeing violence in Colombia, Venezuela, Peru, and Ecuador also began searching for opportunity. 
Today, even Brazil, traditionally a country of immigration, has become one of emigration. 
Moreover, these migrants are no longer exclusively of rural origin, nor do they travel only to traditional areas in the US; they are, literally, everywhere. 
Their remittances contribute immensely to the economic welfare of their families, communities, and home countries’ economies. 
Thus, whatever immigration policy emerges in the US will have an enormous impact south of the Rio Grande well beyond Mexico. 
This will occur precisely at a time when Latin America is swerving left, with country after country drifting back to anti-American, populist stances: Venezuela in 1999, Bolivia last year, perhaps Mexico, Peru, and Nicaragua later this year. 
If the perception of further US hostility toward Latin America persists, the tilt toward an irresponsible, demagogic left will harden. 
The responsible left in Chile, Brazil, and Uruguay are an exception to the emerging rule set by Venezuela’s President Hugo Chávez. 
The best way to accentuate the region’s growing anti-American sentiment is to try to close the US-Mexican border (which will be futile). 
Instead, the US should establish humane, secure, and legal mechanisms of temporary or permanent entry for people the American economy needs and wants, and it should work with, not against, governments in Latin America. 
Five years ago, Mexico’s President Vicente Fox tried to convince Bush that something had to be done before a nativist backlash in the US complicated its relations with Latin America and made goals such as a Free Trade Agreement of the Americas (FTAA) impossible. 
But matters have gotten worse: border tensions between the US and Mexico have grown, the proposed wall has rightly provoked indignation, more unauthorized immigrants than ever are entering the US, and the FTAA has collapsed. 
Bush must begin to use what political capital he has left to support enlightened immigration reform, along the lines of the Kennedy-McCain bill. 
He will never get a guest-worker program without Democratic support, which in turn is unlikely unless the White House supports access to a program for unauthorized immigrants already in the US that includes some type of path to residence and citizenship. 
Mexico and the US must be sensitive to domestic political concerns in both countries. 
No immigration deal is feasible north of the border without addressing security matters; south of the border, there is no conceivable Mexican cooperation on border security or on a Temporary Workers Program if immigration reform ignores the nearly five million Mexican citizens without papers currently living in the US. 
Mexico must act on what Fox has called “shared responsibility.” 
The best imaginable deal between the US and Mexico, or the best imaginable US immigration reform, will not eliminate the flow of undocumented migrants from Mexico and South America overnight. 
Mexico has to assume responsibility for regulating this traffic, which means more than sealing off its southern border. 
The government could, for example, double welfare payments to households whose male heads stay home, threaten to revoke land reform rights after years of absence in rural communities, and establish choke points on highways at the Tehuantepec Isthmus. 
Fox has said that he is willing to break with old Mexican taboos, but the Bush administration has never taken him up on it. 
That is unfortunate, because Fox will not be around forever. 
Immigration has always been an immensely complex and delicate issue inside the US, and now for Latin America as well. 
A window of opportunity opened at the beginning of Bush’s first term, and closed shut after the terrorist attacks of September 2001. 
It is opening again and should be taken advantage of before it is too late. 

Why Iran Won’t Budge 
TEL AVIV – No one really believed that the latest round of international negotiations with Iran over its nuclear program would produce a breakthrough. 
So it was no surprise that itdid not, despite the concessions that were made at the meeting in Kazakhstan by the P5+1 (China, France, Russia, the United Kingdom, and the United States, plus Germany). 
America’s belief that a harsh sanctions regime could coax Iran into a deal has proved – at least so far – to be unrealistic. 
Despite being isolated and ostracized, Iran has managed to gain some strategic breathing room with the help of countries like China, Russia, India, Syria, and Venezuela, allowing it to resist Western pressure. 
More important, even though the severe sanctions regime led by the United States is bound to be imperfect – it only hardens further Iran’s resistance to “America’s designs.” 
To be sure, Iran’s alliances are vulnerable to erosion and, in the case of two staunch allies, Syria and Venezuela, to outright collapse. 
The end of Chavismo would threaten Iran’s vast interests in Venezuela and its considerable presence in the Andes, while the fall of the Assad dynasty would be a devastating blow to Iran’s regional strategy. 
Even so, Russia and China continue to take a much more lenient approach to Iran than Europe and the US have since the International Atomic Energy Agency’s report in November 2011 described in detail Iran’s activities in pursuing the capability to produce nuclear weapons. 
While the Western powers have embraced ever-harsher sanctions, Russia and China view Iran as a tool in their global competition with the US. 
China’s Iranian interests boil down to economics. 
Bilateral trade stands at about $40 billion a year, and China is not only Iran’s largest customer for crude oil, but also a colossal investor – somewhere between $40 billion and $100 billion – in Iran’s energy and transport sectors. 
True, China cannot entirely overlook US pressure and the staunch opposition of its top oil supplier, Saudi Arabia, to Iran’s nuclear program. 
But, while China has supported the mandatory sanctions set by the United Nations Security Council, it has rejected the West’s unilateral measures. 
With bilateral trade worth only about $5 billion annually, Russia’s economic interests in Iran are fairly modest. 
But it fears Iran’s ability to cause trouble, particularly by stirring up unrest among Russia’s Muslim citizens. 
Moreover, America has refused to pay the Kremlin’s high price – curtailment of congressional human-rights legislation, repeal of Cold-War-era restrictions on Russian-US trade, and abandonment of plans for ballistic missile defense in Europe – for Russian support on Iran (or, for that matter, on any other trouble spot, such as Syria). 
The problem with the US drive to have key stakeholders join its anti-Iran crusade is that some of them live in neighborhoods where Iran is an important factor. India is a case in point. 
India is certainly alarmed at the possibility of Iran developing nuclear weapons, not to mention its concern at the possible effects of Iran’s Islamist fundamentalism on Kashmiri Muslims. 
But its $14 billion in annual bilateral trade, and dependence on Iranian oil – many of India’s refineries have been built to run solely on Iranian crude – are key strategic considerations. 
Moreover, India needs Iran as an alternative trade and energy conduit to Central Asia, bypassing rival Pakistan, and also as a hedge against an uncertain future in Afghanistan after America’s withdrawal in 2014. 
As a result, India’s policy mirrors China’s: it has aligned itself with mandatory international sanctions, but has abjured voluntary Western financial restrictions. 
The best one can expect is that India continues to act at the margin – for example, by reducing dependence on Iranian oil while increasing imports from Saudi Arabia, already its largest supplier of crude. 
The equivocal nature of Iran’s alliances, however, can be a mixed blessing. 
Yes, a harsh sanctions regime might still gain additional supporters, but an Iran with its back against the wall would probably be even more obstinate in its nuclear drive. 
After all, Iraq was an easy target in the first Gulf War precisely because it had abandoned its nuclear program, and possessed no weapons of mass destruction. 
Similarly, Libya’s Muammar el-Qaddafi exposed himself to a NATO onslaught by relinquishing his WMDs. 
By contrast, North Korea shows that defiance, rather than accommodation, is a strategy that works. 
That is why Syria, with North Korean assistance, tried to develop a nuclear program (presumably destroyed by Israel’s officially unacknowledged “Operation Orchard” in 2007).Iran will not consider abandoning its nuclear insurance policy unless a broad agenda is agreed upon that addresses Iran’s concerns as a regional power and secures the immunity of its Islamist regime from American actions. 
Albert Einstein’s definition of insanity as “doing the same thing over and over again and expecting different results” could be applied to America’s Iran policy. 
The diplomacy of sanctions, ostracism, and brinkmanship has failed resoundingly. 
As Iran’s uranium-enrichment and other weapons-development activities continue unabated, the US needs to make a break with the old rules of engagement. 

America’s New Progressive Era? 
NEW YORK – In 1981, US President Ronald Reagan came to office famously declaring that, “Government is not the solution to our problem. 
Government is the problem.” 
Thirty-two years and four presidents later, Barack Obama’s recent inaugural address, with its ringing endorsement of a larger role for government in addressing America’s – and the world’s – most urgent challenges, looks like it may bring down the curtain on that era. 
Reagan’s statement in 1981 was extraordinary. 
It signaled that America’s new president was less interested in using government to solve society’s problems than he was in cutting taxes, mainly for the benefit of the wealthy. 
More important, his presidency began a “revolution” from the political right – against the poor, the environment, and science and technology – that lasted for three decades, its tenets upheld, more or less, by all who followed him: George H. W. Bush, Bill Clinton, George W. Bush, and, in some respects, by Obama in his first term. 
The “Reagan Revolution” had four main components: tax cuts for the rich; spending cuts on education, infrastructure, energy, climate change, and job training; massive growth in the defense budget; and economic deregulation, including privatization of core government functions, like operating military bases and prisons. 
Billed as a “free-market” revolution, because it promised to reduce the role of government, in practice it was the beginning of an assault on the middle class and the poor by wealthy special interests. 
These special interests included Wall Street, Big Oil, the big health insurers, and arms manufacturers. 
They demanded tax cuts, and got them; they demanded a rollback of environmental protection, and got it; they demanded, and received, the right to attack unions; and they demanded lucrative government contracts, even for paramilitary operations, and got those, too. 
For more than three decades, no one really challenged the consequences of turning political power over to the highest bidders. 
In the meantime, America went from being a middle-class society to one increasingly divided between rich and poor. 
CEOs who were once paid around 30 times what their average workers earned now make around 230 times that amount. 
Once a world leader in the fight against environmental degradation, America was the last major economy to acknowledge the reality of climate change. 
Financial deregulation enriched Wall Street, but ended up creating a global economic crisis through fraud, excessive risk-taking, incompetence, and insider dealing. 
Maybe, just maybe, Obama’s recent address marks not only the end of this destructive agenda, but also the start of a new era. 
Indeed, he devoted almost the entire speech to the positive role of government in providing education, fighting climate change, rebuilding infrastructure, taking care of the poor and disabled, and generally investing in the future. 
It was the first inaugural address of its kind since Reagan turned America away from government in 1981. 
If Obama’s speech turns out to mark the start of a new era of progressive politics in America, it would fit a pattern explored by one of America’s great historians, Arthur Schlesinger, Jr., who documented roughly 30-year intervals between periods of what he called “private interest” and “public purpose.” 
In the late 1800’s, America had its Gilded Age, with the creation of large new industries by the era’s “robber barons” accompanied by massive inequality and corruption. 
The subsequent Progressive Era was followed by a temporary return to plutocracy in the 1920’s. 
Then came the Great Depression, Franklin Roosevelt’s New Deal, and another 30 years of progressive politics, from the 1930’s to the 1960’s. 
The 1970’s were a transition period to the Age of Reagan – 30 years of conservative politics led by powerful corporate interests. 
It is certainly time for a rebirth of public purpose and government leadership in the US to fight climate change, help the poor, promote sustainable technologies, and modernize America’s infrastructure. 
If America realizes these bold steps through purposeful public policies, as Obama outlined, the innovative science, new technology, and powerful demonstration effects that result will benefit countries around the world. 
It is certainly too early to declare a new Progressive Era in America. 
Vested interests remain powerful, certainly in Congress – and even within the White House. 
These wealthy groups and individuals gave billions of dollars to the candidates in the recent election campaign, and they expect their contributions to yield benefits. 
Moreover, 30 years of tax cutting has left the US government without the financial resources needed to carry out effective programs in key areas such as the transition to low-carbon energy. 
Still, Obama has wisely thrown down the gauntlet, calling for a new era of government activism. 
He is right to do so, because many of today’s crucial challenges – saving the planet from our own excesses; ensuring that technological advances benefit all members of society; and building the new infrastructure that we need nationally and globally for a sustainable future – demand collective solutions. 
Implementation of public policy is just as important to good governance as the vision that underlies it. 
So the next task is to design wise, innovative, and cost-effective programs to address these challenges. 
Unfortunately, when it comes to bold and innovative programs to meet critical human needs, America is out of practice. 
It is time to begin anew, and Obama’s full-throated defense of a progressive vision points the US in the right direction. 

America’s New Trade Hypocrisy 
As the current “development round” of trade talks moves into its final stages, it is becoming increasingly clear that the goal of promoting development will not be served, and that the multilateral trade system will be undermined. 
Nowhere is this clearer than in a provision that is supposed to give the least developed countries almost duty-free access to developed countries’ markets. 
A year ago, the leaders of the world’s richest countries committed themselves to alleviating the plight of the poorest. 
At Doha in November 2001, they pledged to give something more valuable than money: the opportunity for poor countries to sell their goods and earn their way out of poverty. 
With great fanfare, developed countries seemed for a while to be making good on their promise, as Europe extended the “Everything but Arms” initiative (EBA), under which it was unilaterally to open its markets to the poorest countries of the world. 
The opening was less than it seemed. 
The devil is in the details, as many less developed countries discovered that EBA’s complicated rules of origin, together with supply-side constraints, meant that there was little chance for poor countries to export their newly liberalized products. 
But the coup de grace was delivered by the world’s richest country, the United States, which once again decided to demonstrate its hypocrisy. 
The US ostensibly agreed to a 97% opening of its markets to the poorest countries. 
The developing countries were disappointed with the results of Europe’s EBA initiative, and Europe has responded by committing itself to dealing with at least part of the problem that arises from the rules of origin tests. 
America’s intention was, to the contrary, to seem to be opening up its markets, while doing nothing of the sort, for it appears to allow the US to select a different 3% for each country. 
The result is what is mockingly coming to be called the EBP initiative: developing countries will be allowed freely to export everything but what they produce. 
They can export jet engines, supercomputers, airplanes, computer chips of all kinds—just not textiles, agricultural products, or processed foods, the goods they can and do produce. 
Consider Bangladesh. 
If we go by the most widely used six-digit tariff lines, Bangladesh exported 409 tariff lines to the US in 2004, from which it earned about $2.3 billion. 
But its top 12 tariff lines – 3% of all tariff lines – accounted for 59.7% of the total value of its exports to the US. 
This means that the US could erect barriers to almost three-fifths of Bangladeshi exports. 
For Cambodia, the figure would be about 62%. 
The situation is no better if the 3% rule applies to the tariff lines that the US imports from the rest of the world (rather than to the lines individual poor countries export to the US), for then the US can exclude roughly 300 tariff lines from duty-free and quota-free treatment. 
For Bangladesh, this implies that 75% of the tariff lines, accounting for more than 90% of the value of its exports to the US, could be excluded from duty-free treatment. 
Exclusion from duty-free treatment could reach 100% for Cambodia, which exported only 277 tariff lines to the US in 2004. 
The official argument for the 3% exclusion is that it affects “sensitive products.” 
In other words, while the US lectures developing countries on the need to face the pain of rapid adjustment to liberalization, it refuses to do the same. (Indeed, it has already had more than 11 years to adjust to liberalization of textiles.) 
But the real problem is far worse because the 3% exclusion raises the specter of an odious policy of divide and conquer, as developing countries are invited to vie with each other to make sure that America does not exclude their vital products under the 3%. 
The whole exclusion simply undermines the multilateral trading system. 
Indeed, there may be a further hidden agenda behind the 97% proposal. 
At the World Trade Organization’s meeting Cancun in 2003, the developing countries stood together and blocked efforts to forge a trade agreement that was almost as unfair as the previous Uruguay round, under which the poorest countries actually became worse off. 
It was imperative that such unity be destroyed. 
America’s strategy of bilateral trade agreements was aimed at precisely that, but it enlisted only a few countries, representing a fraction of global trade. 
The 97% formula holds open the possibility of extending that fragmentation into the WTO itself. 
The US has already had some success in pitting the poor against each other. 
Preferential access for African countries, under the African Growth and Opportunity Act (AGOA) and more recent initiatives, seems to be largely a matter of trade diversion – taking trade from some poor countries and giving it to others. 
For example, Bangladesh’s share in US clothing markets declined from 4.6% in 2001 to 3.9% in 2004. 
During the same period, AGOA countries’ market share in the US clothing sector increased from 1.6% to 2.6%, and it is likely to increase further when AGOA countries start to take full advantage of duty-free access. 
AGOA had a sunset clause, but if the duty-free access becomes permanent for less developed countries in Africa – as stipulated in Hong Kong – then poor countries in Asia will continue to lose US market share. 
The WTO is supposed to prevent these trade-diversionary agreements, but so far no case has been successfully brought. 
Even if America succeeds in dividing the developing countries, however, it may inspire a degree of unity elsewhere. 
Both those committed to trade liberalization within a multilateral system and those committed to helping developing countries will look at America’s new strategy with abhorrence. 

America’s Oil-Spill Nationalism 
LONDON – American exceptionalism, when it runs rampant, is a tsunami to be avoided. 
The oil company BP is discovering that right now. 
The environmental disaster destroying seaside communities around the Gulf of Mexico and killing off marine life is a globally important tragedy. 
BP has to take its sizeable share of the blame. 
So, presumably, should the American companies like Transocean and Halliburton, which were part of this doomed enterprise. 
But their nationality seems to have let them off the hook. 
BP’s corporate responsibility is huge. 
So, too, was that of the American companies that caused the chemical disaster at Union Carbide’s plant in Bhopal, India (which killed 3,000 initially and perhaps another 15,000 in later years), and of those that caused the Piper Alpha oil-rig accident, which killed 167 people in the North Sea in 1988. 
Corporate sin is not unknown in the US. 
Before attacking the allegedly foreign BP, American politicians might also pause for a moment to reflect on the intimate links between politics and the oil industry in the United States. 
This is surely one of the biggest reasons for the lax regulation of deep-sea oil drilling. 
None of this excuses BP’s engineering mistakes and woeful public diplomacy. 
Nor would I seek to downplay the full horror of what has happened. 
But it does remind us that, while the US is in many respects the most globalized society in the world, it can also be surprisingly insular and nationalistic. 
Americans’ knowledge of what happens abroad is limited, and often reduced to a cartoon-strip view of the rest of the world. 
Americans identify BP as a British firm, and they know that Britain is in Europe. 
They also seem to think that Europe has gone down the tubes. 
Its currency crumbles like its ancient buildings. 
It is a historic relic, bust but still bragging. 
Europe, like BP, has its share of problems. 
But we shouldn’t allow American politicians who do not even possess passports to write us off with the same patronizing sneer that some Europeans used to reserve for President George W. Bush’s administration and policies. 
The European Union, for all the woes of the euro, remains the largest economy in the world. 
It is bigger than America’s, almost twice the size of China’s, and between four and five times the size of India’s. 
The EU is the largest trading block in the world, and it has coped with the rise of China in the global marketplace far better than America or Japan has. 
In the decade after 1999, China’s share of total global exports rose from 5.1% to 12.4%. 
Japan’s share fell by four percentage points, and America’s fell by almost seven, from 18% to 11.2%, while Europe’s share fell by only 2.4 percentage points, from 19% to 16.6%. 
Europe has the best environmental record of all the big powers, is the largest provider of development assistance to poor countries, and is politically stable. 
Europe’s problem is part of what it believes to be its greatest achievement. 
Europeans think that we enjoy the highest quality of life in the world, combining freedom with social solidarity. 
Welfare democracy goes hand in hand with pluralism, the rule of law, and a deep-rooted civilization. 
Smug self-satisfaction makes us resistant to embracing the changes necessary to maintain our standard and quality of living. 
Our sense of entitlement has run far ahead of our ability to pay for it. 
That is why so many European countries today face such huge public-sector deficits and, with a falling birth rate and an aging population, we are likely to find that European growth rates will lag still farther behind those of Europe’s competitors in the next few years. 
The introduction of the euro was supposed to spur the less dynamic and competitive European economies, mostly in the south of the continent, to drive down their costs and increase their competitiveness. 
Then they could converge with the more efficient and prudently managed economies, like Germany. 
That didn’t happen. 
Spain, Greece, Portugal, and Ireland, in particular, allowed the low interest rates that accompanied the euro’s introduction to fuel domestic booms. 
Far from pushing through structural reforms, they let domestic wages and costs rip, reducing their competitiveness relative to Europe’s better-run economies. 
For example, the gap between Spain and Germany in terms of cost efficiency is probably more than 20%. 
This is the crisis that Europe now faces. 
How can we push through the reforms that will cut public spending to levels that we can afford and raise our ability to compete internationally? 
We have to extend our single market to services and energy, change unaffordably generous pension arrangements, invest more in research and development, reform our universities, and channel more money to the job-creating industries of the future, like environmental technology. 
European exceptionalism – the idea that we are the best at delivering values and prosperity – is as much a problem as the American kind. 
We won’t thrive and prosper in the future by resting on past achievements. 
Welcome to the twenty-first century. 
Europeans have to adjust to it, rise to its challenges, and confront competition from the emerging powers. 
We can’t live forever in the past, magnificent as its relics may be. 

America’s Opposing Futures 
I recently learned something interesting: American international finance economists and American domestically oriented macroeconomists have very different – indeed, opposing – views of the likely consequences of America’s huge current-account deficit. 
International finance economists see a financial crisis as likely, followed by a painful and perhaps prolonged recession in the United States. 
Domestically oriented macroeconomists, by contrast, see a forthcoming fall in the value of the dollar not as a crisis, but as an opportunity to accelerate growth. 
Domestically oriented macroeconomists look at the situation roughly like this: at some point in the future, foreign central banks will become less willing to continue buying massive amounts of dollar-denominated securities in order to prop up the greenback. 
When they cease their large-scale dollar-purchase programs, the value of the dollar will fall – and it will fall hard. 
But, according to this view, as the dollar’s value declines, US exports will become more attractive to foreigners and American employment will rise, with labor re-allocated to the newly-vibrant export sector. 
It will be like what happened in Britain after it abandoned its exchange-rate peg and allowed the pound to depreciate relative to the Deutschmark , or what happened in the US in the late 1980’s, when the dollar depreciated against the pound, the Deutschmark , and – most importantly – the Japanese yen. 
International finance economists see a far bleaker future. 
They see the end of large-scale dollar-purchase programs by central banks leading not only to a decline in the dollar, but also to a spike in US long-term interest rates, which will curb consumption spending immediately and throttle investment spending after only a short lag. 
To be sure, international finance economists also see US exports benefiting as the value of the dollar declines, but the lags in demand are such that the export boost will come a year or two after the decline in consumption and investment spending. 
Eight to ten million people will have to shift employment from services and construction into exports and import-competing goods, implying that structural unemployment will rise. 
Moreover, there may be a financial panic: large financial institutions with short-term liabilities and long-term assets will have a difficult time weathering a large rise in long-term dollar-denominated interest rates. 
This mismatch can cause financial stress and bankruptcy just as easily as banks’ local-currency assets and dollar liabilities caused stress and bankruptcy in the Mexican and East Asian crises of the 1990’s and in the Argentinean crisis of this decade. 
When international finance economists sketch this scenario, domestically oriented macroeconomists respond that it sounds like a case of incompetent monetary policy. 
Why should the Federal Reserve allow long-term interest rates to spike just because other central banks have ceased their dollar-purchase programs? 
Should not the Fed step in and replace them with its own purchases of long-term US Treasury bonds, thereby keeping long-term interest rates at a level conducive to full employment? 
To this, international finance economists respond that the Fed does not have the power to do so. 
When forced to choose between full employment and price stability, the international finance economists say that the Fed will choose price stability, because its institutional memory of the 1970’s, when inflation ran rampant, remains very strong. 
Therefore, since a fall in the value of the dollar raises import prices, and thus functions as a negative shock to the supply side of the economy, the Fed will have to raise, not lower, interest rates, and sell, not buy, bonds. 
Serious economists whom I respect enormously find themselves taking strong positions on opposite sides of this debate. 
I’m not wise enough to say which side is right, but I certainly know which side I hope is wrong. 

Bye-Bye, Middle East? 
PARIS – For some time now, a certain strategic vision has been gaining traction: the United States is becoming energy-independent, paving the way for its political retreat from the Middle East and justifying its strategic “pivot” toward Asia. 
This view seems intuitively correct, but is it? 
Energy-hungry America has long depended on the global market to meet domestic demand. 
In 2005, the US imported 60% of the energy that it consumed. 
Since then, however, the share of imports has decreased, and it should continue to do so. 
The US is expected to become energy self-sufficient in 2020, and to become an oil exporter by 2030. 
This scenario would grant the US three enormous advantages. 
It would enhance US economic competitiveness, especially relative to Europe, given the lower costs involved in the extraction of shale gas. 
It would also reduce America’s exposure to growing unrest in the Arab world. 
Finally, it would increase the relative vulnerability of America’s main strategic rival, China, which is becoming increasingly dependent on Middle East energy supplies. 
These facts obviously need to be taken seriously, but their implications for US foreign policy in the Middle East should not be too hastily drawn. 
Above all, though energy dependence is a key element of US policy in the region, it is far from being the only factor. 
Israel’s security and the desire to contain Iran are equally important. 
Moreover, the Middle East’s role in the global geopolitics of energy will grow in the coming decades, making it difficult to see how a superpower like the US could simply walk away from the region. 
Within the next 15 years, OPEC countries will account for 50% of global oil production, compared to only 42% today. 
Furthermore, the country on which this increase will most likely hinge is Iraq. 
Could the US ignore a country that in roughly ten years will become the world’s second-largest oil exporter, generating more than $200 billion annually in revenue, while increasingly being dominated by an authoritarian Shia regime that is close to Iran? 
Would it withdraw in the face of the consequent strategic threat to its three allies – Saudi Arabia, Turkey, and Israel – in the region? 
Such a possibility seems even more far-fetched as long as the Iranian nuclear crisis remains unresolved and the Syrian crisis continues to widen the region’s Shia-Sunni divide (reflected in increased tension between Turkey and Iran). 
Even as US President Barack Obama was visiting Asia in November – a trip meant to underscore America’s “pivot” – he was forced to devote considerable time and attention to mediating a cease-fire between Israel and Hamas in Gaza. 
Indeed, if oil were truly America’s only or paramount interest in the Middle East, its special relationship with Israel would be mystifying, given the harm that it implies for US interests among Arab oil exporters. 
Even when its energy dependence on the Middle East was at its peak, the US rarely altered its policy of support for Israel. 
It is also important to bear in mind that in 1973, the US suffered less from the OPEC oil embargo than Europe did, even though America, which had resupplied Israel in its war with Egypt and Syria in October of that year, was the primary target. 
In the end, America’s position in the region strengthened after Egypt became a US ally and made peace with Israel. 
China’s growing interest in the Middle East also decreases the likelihood of an American withdrawal. 
The US will remain concerned about ensuring the security of energy supplies for its Asian allies, which, like China, are increasingly dependent on the region’s oil exporters. 
Nevertheless, while an American withdrawal from the Middle East seems highly unlikely, US exposure to the region will indeed decline; as that happens, America’s role there will probably become more subdued – and perhaps more cynical. 
Its involvement in the Israeli-Palestinian conflict will likely be limited to maintaining the status quo rather than seeking a comprehensive settlement. 
This stance – suggested by America’s opposition to granting Palestine observer-state status at the United Nations – would amount to an admission by the US that it has given up on the creation of two states in the Middle East. 
That would certainly satisfy Israeli Prime Minister Binyamin Netanyahu and the Palestinian fringe seeking to weaken the Palestinian Authority. 
But it would fully vindicate those who believe that Obama is more a man of good will than a visionary. 

America’s Perpetual Christmas 
Has the United States transcended the laws of economics? 
As the New Year begins, the US continues to race ahead of its rich-country counterparts. 
The gargantuan US trade deficit? 
No problem. 
In 2005, it widened further, and the dollar only strengthened. 
Low investment and a deteriorating primary education system? 
Not to worry. 
The super-flexible US economy keeps managing to produce more with less. 
Nor are there any signs of America’s economic hegemony starting to fold under the weight of maintaining its unilateral military dominance. 
Instead of feeling the pinch of wartime privations, like in any ordinary country, American consumers are binging as if it were Christmas all year round. 
There are those who truly believe in the idea that America is exceptional. 
Those true believers argue that America’s consumers can long pursue their spendthrift ways because their country’s economy is better than everyone else’s. 
The US labor market is more flexible than Europe’s, enabling it to react more nimbly to the ever shifting sands of globalization. 
And, unlike most countries, especially in Latin America and Asia, the US system ruthlessly prunes weak corporate leadership. 
Moreover, the true believers cite America’s better-funded and hyper-competitive university system, which sucks in a disproportionate share of the world’s top students and researchers. 
Many ultimately choose to immigrate to America permanently, and it is relatively easy for them to do so, thanks to a society that still welcomes outsiders with open arms (even if things have become more difficult since 2001). 
On top of all this, the US military, rather than being a burden, feeds the country’s technological superiority by subsidizing basic research. 
By contrast, skeptics hold that the US economy already contains the seeds of its own socio-economic decline. 
They point to worsening income inequality, as images beamed worldwide from post-hurricane New Orleans illustrated all too clearly. 
Poor children do not have reasonable access to health care. 
Nor are the non-poor faring particularly well, as wage growth has remained virtually flat for a very long time, even as corporate profits are booming. 
Indeed, this disconnect may explain why polls do not give President Bush the credit for economic management that his strong record would seem to merit. 
Nor does it help Americans’ mood that they spend far more of their lives working than do citizens in Europe or, these days, even Japan. 
All of these factors place deep stresses on the social fabric which, so the skeptics argue, will ultimately play out in the political arena. 
Interestingly, both sides cite America’s gaping trade deficit – believe it or not, the US is soaking up two-thirds of global excess saving – to support their arguments. 
The true believers view the deficits as evidence that the world recognizes how special the US is and wants to buy in. 
Skeptics see an empire living on borrowed money and borrowed time. 
So which is it? 
In my view, those who think that America is about to collapse are likely to be disappointed. 
Nevertheless, I suspect that the age of American exceptionalism is near an end, and soon per capita income in Europe and Japan will approach that of the US, rather than falling farther behind. 
Though the next few years are likely to underscore some of the weaknesses that the skeptics highlight, the end will come mainly because other countries will find creative ways to mimic the most effective US institutions, albeit within their own legal, political, and social frameworks. 
We would do well to recall how, at the beginning of the 1990’s, book after book was still being written urging US and European corporations to imitate Japan or face certain doom. 
The last 15 years have of course revealed deep flaws in Japan’s financial system. 
But another major factor contributing to Japan’s decline was that firms elsewhere began adopting Japanese methods, such as just-in-time supply chains. 
Surely, imitation will someday impinge on superior US growth performance as well. 
Perhaps the biggest weakness in the true believers’ argument is the trade deficit. 
For the moment, America’s ability to borrow vast sums at low interest rates acts like a huge dose of steroids on the economy. 
It artificially props up consumption growth and allows the government to defer hard choices between taxes and military expenditures. 
At some point, the party is going to end. 
The unwinding of the US economy might even begin in 2006, particularly if Japan continues to grow out of its doldrums, the US housing market softens dramatically, and Europe’s economic recovery accelerates. 
Individually, these are each highly plausible scenarios, and collectively they would hit the US trade deficit like a perfect storm. 
Perhaps the end will come in a different way, but it is difficult to imagine the age of US exceptionalism lasting indefinitely. 
Can the end come abruptly in 2006? 
This is not the most likely scenario, but it is not unthinkable. 

America’s Political Class Struggle 
NEW YORK – America is on a collision course with itself. 
This month’s deal between President Barack Obama and the Republicans in Congress to extend the tax cuts initiated a decade ago by President George W. Bush is being hailed as the start of a new bipartisan consensus. 
I believe, instead, that it is a false truce in what will become a pitched battle for the soul of American politics. 
As in many countries, conflicts over public morality and national strategy come down to questions of money. 
In the United States, this is truer than ever. 
The US is running an annual budget deficit of around $1 trillion, which may widen further as a result of the new tax agreement. 
This level of annual borrowing is far too high for comfort. 
It must be cut, but how? 
The problem is America’s corrupted politics and loss of civic morality. 
One political party, the Republicans, stands for little except tax cuts, which they place above any other goal. 
The Democrats have a bit wider set of interests, including support for health care, education, training, and infrastructure. 
But, like the Republicans, the Democrats, too, are keen to shower tax cuts on their major campaign contributors, predominantly rich Americans. 
The result is a dangerous paradox. 
The US budget deficit is enormous and unsustainable. 
The poor are squeezed by cuts in social programs and a weak job market. 
One in eight Americans depends on Food Stamps to eat. 
Yet, despite these circumstances, one political party wants to gut tax revenues altogether, and the other is easily dragged along, against its better instincts, out of concern for keeping its rich contributors happy. 
This tax-cutting frenzy comes, incredibly, after three decades of elite fiscal rule in the US that has favored the rich and powerful. 
Since Ronald Reagan became President in 1981, America’s budget system has been geared to supporting the accumulation of vast wealth at the top of the income distribution. 
Amazingly, the richest 1% of American households now has a higher net worth than the bottom 90%. 
The annual income of the richest 12,000 households is greater than that of the poorest 24 million households. 
The Republican Party’s real game is to try to lock that income and wealth advantage into place. 
They fear, rightly, that sooner or later everyone else will begin demanding that the budget deficit be closed in part by raising taxes on the rich. 
After all, the rich are living better than ever, while the rest of American society is suffering. 
It makes sense to tax them more. 
The Republicans are out to prevent that by any means. 
This month, they succeeded, at least for now. 
But they want to follow up their tactical victory – which postpones the restoration of pre-Bush tax rates for a couple of years – with a longer-term victory next spring. 
Their leaders in Congress are already declaring that they will slash public spending in order to begin reducing the deficit. 
Ironically, there is one area in which large budget cuts are certainly warranted: the military. 
But that is the one item most Republicans won’t touch. 
They want to slash the budget not by ending the useless war in Afghanistan, and by eliminating unnecessary weapons systems, but by cutting education, health, and other benefits for the poor and working class. 
In the end, I don’t think they will succeed. 
For the moment, most Americans seem to be going along with Republican arguments that it is better to close the budget deficit through spending cuts rather than tax increases. 
Yet when the actual budget proposals are made, there will be a growing backlash. 
With their backs against the wall, I predict, poor and working-class Americans will begin to agitate for social justice. 
This may take time. 
The level of political corruption in America is staggering. 
Everything now is about money to run electoral campaigns, which have become incredibly expensive. 
The mid-term elections cost an estimated $4.5 billion, with most of the contributions coming from big corporations and rich contributors. 
These powerful forces, many of which operate anonymously under US law, are working relentlessly to defend those at the top of the income distribution. 
But make no mistake: both parties are implicated. 
There is already talk that Obama will raise $1 billion or more for his re-election campaign. 
That sum will not come from the poor. 
The problem for the rich is that, other than military spending, there is no place to cut the budget other than in areas of core support for the poor and working class. 
Is America really going to cut health benefits and retirement income? 
Will it really balance the budget by slashing education spending at a time when US students already are being out-performed by their Asian counterparts? 
Will America really let its public infrastructure continue to deteriorate? 
The rich will try to push such an agenda, but ultimately they will fail. 
Obama swept to power on the promise of change. 
So far there has been none. 
His administration is filled with Wall Street bankers. 
His top officials leave to join the banks, as his budget director Peter Orszag recently did. 
He is always ready to serve the interests of the rich and powerful, with no line in the sand, no limit to “compromise.” 
If this continues, a third party will emerge, committed to cleaning up American politics and restoring a measure of decency and fairness. 
This, too, will take time. 
The political system is deeply skewed against challenges to the two incumbent parties. 
Yet the time for change will come. 
The Republicans believe that they have the upper hand and can pervert the system further in favor of the rich. 

America's Problems Run Deeper than Wall Street 
CAMBRIDGE – With less than two months remaining before America’s presidential election, much attention is focused on the state of the American economy and the challenges that it will present to the next president. 
We are in the midst of a financial crisis caused by the serious mispricing of all kinds of risks and by the collapse of the housing bubble that developed in the first half of this decade. 
What started as a problem with sub-prime mortgages has now spread to houses more generally, as well as to other asset classes. 
The housing problem is contributing to the financial crisis, which in turn is reducing the supply of credit needed to sustain economic activity. 
Indeed, the financial crisis has worsened in recent weeks, reflected in the US Federal Reserve’s takeover of quasi-government mortgage lenders Fannie Mae and Freddie Mac – which may cost American taxpayers hundreds of billions of dollars – as well as the bankruptcy of Lehman Brothers and the sale of Merrill Lynch. 
Ultimately, these financial failures reflect the downward spiral of house prices and the increasing number of homes with negative equity, i.e., with substantial mortgage debt in excess of market values. 
Negative equity is significant because mortgages in the United States are generally “no recourse” loans. 
If a homeowner defaults, creditors can take the house, but they cannot take other property or income to make up any unpaid balance. 
Even in those states where mortgages are not “no recourse” loans, creditors generally do not pursue the assets or income of individuals who default. 
We cannot be sure about how much further house prices will fall. 
Experts say another 15% decline is required just to return to the pre-bubble price path. 
But there is nothing to stop the decline from continuing once it reaches that point. 
The growing gap between mortgage debts and house prices will continue to increase the rate of defaults. 
Many homeowners who can afford to make their mortgage payments will choose to default, move to rental housing, and wait to purchase until house prices have declined further. 
As homeowners with large negative equity default, the foreclosed homes contribute to the excess supply that drives prices down further. 
And the lower prices lead to more negative equity and therefore to more defaults and foreclosures. 
It is not clear what will stop this self-reinforcing process. 
Declining house prices are key to the financial crisis and the outlook for the economy, because mortgage-backed securities, and the derivatives based on them, are the primary assets that are weakening financial institutions. 
Until house prices stabilize, these securities cannot be valued with any confidence. 
And that means that the financial institutions that own them cannot have confidence in the liquidity or solvency of potential counterparties – or even in the value of their own capital. 
Without this confidence, credit will not flow and economic activity will be constrained. 
Moreover, because financial institutions’ assets were bought mainly with borrowed money, the shortage of credit is exacerbated by their need to deleverage. 
Since raising capital is difficult and costly, they deleverage by lending less. 
But the macroeconomic weakness in the US now goes beyond the decreased supply of credit. 
Falling house prices reduce household wealth and therefore consumer spending. Falling employment lowers wage and salary incomes. 
The higher prices of food and energy depress real incomes further. 
And declining economic activity in the rest of the world is lowering demand for US exports. 
The US Federal Reserve has, in my judgment, responded appropriately by reducing the federal funds interest rate sharply and creating a variety of new credit facilities. 
The low interest rate helped by making the dollar more competitive, but otherwise monetary policy appears to have lost traction because of the condition of the housing sector and the dysfunctional state of the credit markets. 
The US Congress and the Bush administration enacted a $100 billion tax rebate in an attempt to stimulate consumer spending. 
Those of us who supported this policy generally knew that history and economic theory implied that such one-time fiscal transfers have little effect, but we thought that this time might be different. 
Our support was, in the words of Samuel Johnson, a triumph of hope over experience. 
In the end, our hopes were frustrated. 
The official national income accounting data for the second quarter are now available, and they show that the rebates did very little to stimulate spending. 
More than 80% of the rebate dollars were saved or used to pay down debt. 
Very little was added to current spending. 
So that is where the US is now: in the middle of a financial crisis, with the economy sliding into recession, monetary policy already at maximum easing, and fiscal transfers impotent. 

America’s Reactionary Feminists 
NEW YORK – It is obvious that the left and the media establishment in the United States cannot fully understand the popular appeal of the two Republican tigresses in the news – first Sarah Palin, and now, as she consolidates her status as a Republican presidential front-runner, Michele Bachmann. 
What do they have that other candidates don’t – and that so many Americans seem to want? 
Both Bachmann and Palin are regularly derided in the mainstream press. 
In Palin’s case, the dominant perception is that she is an intellectual lightweight: a clip of her unable to mention a single newspaper or news magazine that she reads regularly got millions of hits on YouTube during the last presidential election. 
Bachmann, on the other hand, is portrayed as being slightly unhinged. 
Indeed, I can attest from personal experience that to debate her is to encounter someone who is absolutely certain of facts that must exist somewhere in a parallel universe. 
But it would be a mistake simply to dismiss their appeal with no effort to comprehend its source. 
This is especially true of Bachmann. 
Palin has not managed to secure the support and mentorship of the Republican Party establishment, and will continue to showcase her odd appeal as a media personality. 
But Bachman, weirdly, might become President of the United States. 
The nature of their attraction has to do with two strains in American thought to which the US left and media establishment are truly blind. 
One is the American tradition of populist demagoguery – a tradition that, in the twentieth century, included the racist Father Charles Coughlin in the 1930’s, the anti-Communist witch-hunter Joe McCarthy in the 1950’s, and the radical Malcolm X in the 1960’s. Populist leaders inspire passionate devotion, usually in people who feel (and often are) economically, politically, and culturally marginalized. 
These populist movements’ energy can be directed for good or ill, but demagogues in America embrace similar tactics to fuel their rise to visibility and power. 
They use emotive rhetoric. 
They often invent shadowy networks of “elite” forces ranged against the ordinary, decent American. 
They create an “us versus them” scenario. 
And they ask their listeners to believe that they alone will restore American dignity and articulate the wishes of the unheard. 
Palin and Bachmann speak this highly personal or emotional language, which even the most rock-ribbed male Republican finds difficult to emulate. 
In the last three decades, America’s male-dominated politics has become increasingly wonky, abstract, and professionalized. 
This is bad for demagoguery, but it does not inhibit the tigresses on the right, who did not come up through the “old boy’s club.” 
As a result, Palin is free to talk about “death panels” – a wholly invented threat of President Barack Obama’s health-care reform – and Bachmann can summon the spirit of McCarthy to raise the equally bizarre specter of socialism’s tentacles infiltrating the highest levels of government. 
Both can issue homespun appeals as “hockey moms” or “soccer moms” – precisely the type of emotionalism that more cut-and-dried professional male politicians, even (or especially) at the top of the party, cannot manage to deliver. 
The second reason that Bachmann and Palin appeal to so many Americans – and this should not be underestimated, either – has to do with a serious historical misreading of feminism. 
Because feminism in the 1960’s and 1970’s was articulated via the institutions of the left – in Britain, it was often allied with the labor movement, and in America, it was reborn in conjunction with the emergence of the New Left – there is an assumption that feminism itself must be leftist. 
In fact, feminism is philosophically as much in harmony with conservative, and especially libertarian, values – and in some ways even more so. 
The core of feminism is individual choice and freedom, and it is these strains that are being sounded now more by the Tea Party movement than by the left. 
But, apart from these sound bites, there is a powerful constituency of right-wing women in Britain and Western Europe, as well as in America, who do not see their values reflected in collectivist social-policy prescriptions or gender quotas. 
They prefer what they see as the rugged individualism of free-market forces, a level capitalist playing field, and a weak state that does not impinge on their personal choices. 
Many of these women are socially conservative, strongly supportive of the armed forces, and religious – and yet they crave equality as strongly as any leftist vegetarian in Birkenstocks. 
It is blindness to this perfectly legitimate approach to feminism that keeps tripping up commentators who wish to dismiss women like Margaret Thatcher, or Muslim women, or now right-wing US women leaders, as somehow not being the “real thing.” 
But these women are real feminists – even if they do not share policy preferences with the already recognized “sisterhood,” and even if they themselves would reject the feminist label. 
In the case of Palin – and especially that of Bachmann – we ignore the wide appeal of right-wing feminism at our peril. 

America's Retreat from Asia 
The United States' planned withdrawal of troops from Asia, which President George W. Bush announced on August 16, need not harm peace and stability in the region and particularly in Korea. 
But a key condition for a smooth redeployment of US troops is close consultations by America with its allies, something it has not done well up to now. 
South Korea and Japan need to have their views taken into serious account if this now inevitable withdrawal is to succeed. 
By contrast, unilaterally announcing the withdrawal - and then unilaterally implementing it - may harm the very purpose that the remaining US troops in Asia are intended to serve: assuring deterrence, stability, and nonproliferation in Korea and Asia. 
The withdrawal plan is causing countless worries. 
In Japan, there are concerns that it will make the country America's frontline command post in Asia, possibly beyond the scope of its bilateral security treaty with the US. 
One result is that China feels nervous about the implications of any expansion of the American-Japanese military partnership. 
But the impact of America's planned troop withdrawals is felt most keenly in South Korea. 
In June, the Bush administration revealed its plan to withdraw some 12,500 of the 37,000 US soldiers stationed in South Korea by the end of 2005. 
These include 3,600 troops from the 2nd Brigade of the 2nd Infantry Division, who are already earmarked for redeployment in Iraq. 
The US Defense Department justifies this change as part of the so-called "Global Posture Review" that it has been carrying out to provide more flexibility and mobility in deploying troops to more urgently needed places around the world. 
But the unilateral nature of the announcement, and the abrupt timing of the plan, has incited alarm in South Korea, and perhaps in Japan, that withdrawal could pose serious risks to the vital role that US forces have performed in deterring another war in Korea. 
South Koreans genuinely fear that the plan may weaken deterrence by sending North Korea - which is demanding a US military withdrawal while refusing to abandon its nuclear weapons ambitions - the message that intransigence pays. 
Indeed, it should not be forgotten that North Korea maintains an army of 1.1 million troops. 
Moreover, the manner in which the Bush administration unveiled its withdrawal plan has weakened the credibility of the US-Korean alliance. 
America's unilateral announcement has fuelled rumors to the effect that withdrawal must have something to do with the rising tide of anti-Americanism in South Korea, and especially with the country's reluctance and delay in dispatching an additional 3,600 of its own soldiers to Iraq. 
The Bush administration tries to rebut these charges by saying that the plan will not weaken the deterrence capabilities of American forces, for America's far more powerful air and naval presence in the area will be maintained. 
Moreover, the US plans to strengthen South Korea's own forces by supplying some $11 billion worth of high-technology equipment over the next five years. 
Militarily, this argument does make sense. 
Politically and psychologically, however, the method, let alone the timing and implementation of the withdrawals, raises many questions about the ongoing viability of the US-Korean security alliance, for the alliance now seems adrift, without a common purpose and with little direction from either side. 
Yet the Bush administration insists: "The US views South Korea as a strong and steadfast ally. 
We are committed to South Korea's security and to our alliance and partnership with Seoul." 
If Washington is serious about these words, it should transform this commitment into a long-term and comprehensive alliance that can survive the current estrangement - and continue even after Korean unification - by making a joint declaration with South Korea's government at the highest level. 
In order to allay misgivings and restore trust in the alliance, it is necessary for the US and South Korea to reaffirm their common interests and values in pursuing deterrence, nonproliferation, stability, and democracy on the Korean peninsula and across Asia. 
Once they resolve to continue their alliance with these purposes in mind, it should be possible for responsible officials to work out guiding principles for concrete security cooperation. 
Specific negotiations on withdrawing American troops from Korea or on redeploying them from the DMZ to south of Seoul must be carried out according to these principles. 
In so doing, America must treat South Korea as a full partner with its own voice in making decisions that affect its security interests. 
As an American ally for 51 years, and as East Asia's third-largest economy, South Korea is entitled to be fully consulted on such decisions. 
Despite anti-American sentiments among some South Koreans, a majority of the country's people wants American forces to remain as a stabilizing force. 
Securing a peaceful and nuclear-free Korean peninsula, a place where the interests of China, Japan, Russia, and America directly intersect, is one of the most important security goals anywhere on the planet. 
For this reason, America and South Korea must restore a strategic vision for the future. 

America’s Saving Rate and the Dollar’s Future 
CAMBRIDGE – The saving rate of American households has risen sharply since the beginning of the year, reaching 6.9% of after-tax personal income in May, the highest rate since 1992. 
In today’s economy, that is equivalent to annual savings of $750 billion. 
While a 6.9% saving rate is not high in comparison to that of many other countries, it is a dramatic shift from the household-saving rate of less than 1% that the United States experienced in 2005, 2006, and 2007. 
Before it began rising last year, the US household saving rate had been declining for more than 20 years in response to the increasing level of household wealth. 
The rising stock market and the higher value of homes induced individuals to consume more of their incomes and to save less. 
As a result, most working individuals reduced the amount that they saved for their retirement, and retirees were able to increase their spending. 
The net saving rate fell to near zero. 
The sharp drop in household wealth over the past two years, however, put an end to that. 
Dramatically lower share prices and a 35% fall in home prices reduced household wealth by $14 trillion, a loss equal to 140% of annual disposable income. 
Individuals now have to save more to prepare for retirement, and retirees have less wealth to spend. 
Looking ahead, the saving rate may rise even further, and will, in any case, remain high for many years. 
The increase in the household saving rate reduces America’s need for foreign funds to finance its business investment and residential construction. 
Taken by itself, today’s $750 billion annual rate of household saving could replace that amount in capital inflows from the rest of the world. 
Since the peak annual rate of capital inflow was $803 billion (in 2006), the increased household saving has the potential to eliminate almost all of America’s dependence on foreign capital. 
The annual capital inflow is equal each year to the US current-account deficit – the sum of the trade deficit plus the net interest and dividends that America’s government and businesses owe to the rest of the world. 
The fall in the capital inflow would therefore bring with it a fall in the trade deficit. 
Since reducing the trade deficit requires increasing exports and shrinking imports, the international value of the dollar must decline to make US products more attractive to foreign buyers and US goods and services more attractive to American consumers. 
Without a fall in the dollar and the resulting rise in net exports, a higher saving rate and reduced consumer spending could push the US economy into a deep recession. 
By contrast, the lower dollar makes reduced consumption consistent with full employment by shifting consumer spending from imports to domestic goods and services, and by supplementing this rise in domestic demand with increased exports. 
But this direct link between higher household saving and a lower dollar will only be forged if higher household saving is not outweighed by a rise in government dis-saving, i.e., by a larger government deficit. 
A large fiscal deficit increases the need for foreign funds to avoid crowding out private investment. 
Put differently, the value of the dollar reflects total national saving, not just savings in the household sector. 
Unfortunately, the US fiscal deficit is projected to remain high for many years. 
The Congressional Budget Office projects that the US government’s budget deficit will average 5.2% of GDP over the next decade, and be 5.5% of GDP a decade from now. 
If that high level of government borrowing occurs, it will absorb all of the available household savings even at the current elevated level. 
That would mean that the US would continue to need substantial inflows of foreign capital to fund business investment and housing construction. 
So the dollar would have to stay at its current level to continue to create the large trade deficit and resulting capital inflow. 
It is, of course, possible – I would say likely – that China and other foreign lenders will not be willing to continue to provide the current volume of lending to the US. 
Their reduced demand for dollars will cause the dollar to decline and the trade deficit to shrink. 
That reduced trade deficit and the resulting decline in capital inflows will lead to higher real interest rates in the US. 
The higher interest rate will reduce the level of business investment and residential construction until they can be financed with the smaller volume of national saving plus the reduced capital inflows. 

America's Schizophrenic Economy 
The news about America's economy that dribbled out over the first half of March painted - once again - a picture that only a schizophrenic could create. 
Real investment (investment adjusted for the declining prices of high-tech and information-related capital goods) continued to roar ahead. 
Production and sales were consistent with the consensus forecast of real GDP growth at an annual rate of 4% or more. 
Yet, despite all this, employment remained stagnant: net job creation in the United States continues to stall. 
This does not mean that employment in America cannot grow. 
Roughly 300,000 more Americans are employed in education and health care than a year ago - an annual rate of employment growth of 1.7%. 
A quarter of a million more Americans are employed in business and professional services than a year ago - a 1.6% annual rate of employment growth. 
The logic of stagnant employment is not that adding jobs to the American economy is impossible, but that demand growth is insufficient to create more jobs than are lost. 
This is easy to demonstrate. 
Total nominal spending in America grows at 5.5% per year. 
Inflation is 1.5% per year. 
And overall productivity growth is 3.5% per year. 
So the equation is simple: 5.5%-1.5%-3.5% = 0.5%. 
That 0.5% is all that is left for job growth, because that's all the job growth required to meet demand given the remarkably strong rate of growth of productivity. 
Where America's productivity growth is coming from is clear. 
A relatively small part of it is coming from simple speed-up: in an economy where the amount of time it takes for the unemployed to find new jobs is close to a post-WWII record high, demands for speeding-up the pace of work will be met with a "Yes, boss!" rather than a "Take this job and shove it!" 
A bigger part of this increased productivity comes from the extraordinary technological revolutions in computers and communications that have led to dramatic increases in the usefulness - and decreases in the cost - of high-tech capital. 
The boost to wealth provided by the "new economy" is exceeding even its most avid boosters' wildest dreams. 
What is unexpected is that the new wealth is flowing not to the shareholders of dot-com companies, but to purchasers and users of high-tech capital and the consumers they serve. 
But why does this seem so surprising? 
At the end of the nineteenth century the huge amount of investment and technological progress in America's railroads appeared to benefit everyone but the stockholders and bondholders of railroad companies, as bust followed boom and ramming worthless securities down the throats of investors became Wall Street's favorite sport. 
Yet another part of US productivity growth due to the fact that high-tech capital gives America's firms enormous incentives to make massive but hard to see - and even harder to measure - investments in organization and business processes that are complementary to computerization and networking. 
For the US to have a rate of productivity growth of 3.5% per annum rather than the pre-1995 rate of 1.2% is amazing. 
That means an annual increment to world income of $250 billion from this source alone. 
That's the equivalent of adding productive power equal to a quarter of the economy of India - and adding it every year. 
This persistent acceleration in American productivity growth has, however, created a massive political problem for President George W. Bush. 
Demand growth at a pace that in any previous decade would have been seen as highly satisfactory is suddenly desperately insufficient, and Bush is being blamed (with some justice) for the slack labor market that has resulted. 
But for everyone except Bush - and those left unemployed by the lag in demand - it is an extraordinary opportunity. 
The remarkable boosts to productivity that have been within America's grasp will ultimately lead to accelerating growth of real profits and real wages, if only US policy makers resist the temptation to pursue politically expedient, but economically damaging, measures to "protect" output and employment. 
As the world's leading-edge economy, America faces the hardest work in ensuring growth, for it must create - not only copy and adapt - new technologies, better forms of capital, and more productive business organizations. 
If America can grow as fast as it is now, that is very good news for other, less-developed economies, especially since one powerful effect of ongoing technological revolutions in computers and communications is to make it much easier to participate in the global division of labor now centered in the US. 
So the schizophrenic American economy is a sign that the world is entering an economic era of truly wonderful things - if only we properly, and patiently, grasp them. 

America’s Scorched Earth Management 
Signs of the American economy’s perilous condition are everywhere – from yawning fiscal and current-account deficits to plummeting home prices and a feeble dollar. 
But something that shows up in none of the economic indicators may be driving many of them: the deterioration of American management, which is undermining not only many of America’s great enterprises, but also its legendary spirit of enterprise. 
Paradoxically, one indicator that has been improving steadily in the US – productivity – may be the clearest sign of the problem. 
When it comes to productivity, managers either invest in employee training, more efficient manufacturing processes, and the like, or they take steps that appear to boost productivity in the short run but that erode it in the long run. 
Productivity is a measure of output per hour worked. 
So a company that fires all its workers and then ships from stock can look very productive – until it runs outs of stock. 
Of course, no company can do that, but many US companies have been shedding workers and middle managers in great numbers – the figures for January 2008 were up 19% from a year earlier. 
Meanwhile, those employees left behind must work that much harder, often without increased compensation. 
Workers’ wages, adjusted for inflation, fell in 2007, continuing a trend throughout this decade. 
That, too, is “productive” – until these overworked people quit or burn out. 
A sustainable company is not a collection of “human resources.” 
It is a community of human beings. 
Its strength resides in its people, its culture, and the goodwill it has built up among its customers and suppliers. 
So, as workers and middle managers have been departing these companies, they have taken with them not only much critical information, but often also the hearts and souls of their enterprises, with profound effects on American competitiveness. 
Consider high technology, where America is supposed to excel. 
According to a November 2006 report by The Task Force on the Future of American Innovation, made up of prominent universities, think tanks, industry trade associations, and corporations, the high-tech trade deficit widened in 2005, for the third consecutive year. 
This is not clothing or cars, but America’s largest, and most renowned, export sector. 
This deficit reflects an underlying research deficit. 
Of the 25 companies granted the most US patents in 2006, only eight were American; 12 were Japanese. 
Perhaps this helps to explain why, in a survey of more than 60,000 people in 29 countries conducted in 2007 by the New York-based Reputation Institute to rank the “world’s most respected companies,” the first US company on the list appeared in 15th place; the second was in 25th place. 
No one can determine how much of America’s productivity gains in recent years have resulted from squeezing human capital, because such things are not measured. 
But there has clearly been a great deal of reliance on this strategy, with companies shedding employees not only because they must, but often because they have not met Wall Street analysts’ financial expectations. 
Managers’ increased focus on maximizing shareholder value won many adherents when the idea was introduced in the 1980’s: the impersonal discipline of financial markets would force companies to become more productive and innovative. 
And, in fact, much of the US productivity increase in the 1980’s and 1990’s can likely be attributed to large-scale investment in information and communications technology. 
But, as the marginal productivity gains from such investment began to fall, senior managers’ survival and compensation continued to be tied to stock-market performance. 
As a result, many simply learned to manage their companies’ short-term share price at the expense of attention to their products and customers. 
Moreover, because maximizing shareholder value is a poor incentive for workers and middle managers, companies’ boards have increasingly centralized power around chief executives, thereby encouraging a “heroic” form of leadership that is detached from the rest of the enterprise. 
Indeed, in many cases, the CEO – frequently a Wall Street-endorsed “superstar” parachuted in to “shake things up” – now is the company, despite having little knowledge of its products, customers, and competitors. 
This shift to “heroic” leadership can be seen in ballooning CEO compensation. 
According to a January 2008 report by the Hay Group, the CEO’s of the 50 largest US companies are now paid almost three times what their European counterparts receive ­– which is many hundreds of times more than their own workers. 
Until recently, the US asset-price bubble ­– first in the stock market, then in real estate – masked the underlying depreciation of American enterprises. 
But the bubble itself resulted from the same management pathologies as those afflicting the real economy. 
After all, managing for the short run encouraged mortgage lenders to offer artificially low “teaser” interest rates to lure potential homeowners. 
And then those who bought these mortgages never bothered to investigate their underlying value – a spectacular abdication of managerial responsibility. 
Now that the bubble has burst, America’s current economic downturn is likely to be far worse than previous ones, because US enterprises will have to be rebuilt, slowly and carefully. 
The dramatic weakening of the US dollar may help America to narrow its massive trade deficit, but we should not expect any sustained improvement without drastic changes in American management. 
Fortunately, it may be possible to minimize the fallout for the rest of the world. 
While American economists, politicians, and business leaders have for years sought to sell their model of management abroad, many companies elsewhere have not been buying it. 
As a result, other key economies remain healthier than America’s. 
Make no mistake: this problem was made in America, and that is where it will have to be solved. 

America's Second Gilded Age 
The richest Congressional district in the US is the so-called "silk-stocking" district of New York City's Upper East Side, with a per-capita income of $41,151 per year. 
The poorest Congressional district is a largely Hispanic-immigrant district in Los Angeles, with a per-capita income of $6,997 a year. 
In 1973 the poorest fifth of America's families had incomes that averaged $13,240 a year (in today's dollars); in 2000 the average incomes of the poorest fifth were the same: $13,320. 
By contrast, the richest 5% of America's families in 1973 had an average income of $149,150, and in 2000 the richest 5% had an average income of $254,840. 
The increase in inequality was large enough to give a 2/3 income boost to the well-off over a time when incomes in the middle grew by only 10% and incomes at the bottom not at all. 
To outsiders, the most peculiar thing about America's rising inequality is that so few Americans object. 
Surely a society with a skewed income distribution is worse off than one in which incomes are more equal. 
An extra $10,000 a year does little to raise the well-being of a multi-millionaire, while a deficiency of $10,000 a year makes a huge impact on how a middle-class family lives. 
If you follow Nobel Prize-winner James Buchanan's utilitarian principle that you should evaluate a society's social welfare by imagining that you have an equal chance of being poor and rich, it is easy to judge that the more equal society has a better set of social and economic arrangements. 
From there it is easy to make the leap to the position that - so long as redistributive taxes don't slow economic growth - when inequality rises, it is the government's duty to tax the rich and transfer money to the poor to offset the rise. 
Yet there are no calls in mainstream politics to sharply increase the progressiveness of the income tax. 
Indeed, even at the left end of mainstream discourse, the boldest call is for the well-off merely to contribute their "fair share" to paying for the costs of government. 
One candidate for the Senate in the recent US elections, Erskine Bowles of North Carolina (a former chief of staff to President Clinton) was judged bold and foolhardy not for proposing redistributive tax increases, but simply for placing a higher priority on the federal government paying for prescription medicines than on a further cut in the highest marginal tax rate. 
What happened? 
Bowles lost. 
Virtually no mainstream American politician seems opposed to eliminating the estate tax - a policy move that will further concentrate wealth for no countervailing supply-side gain. 
As Clinton's Assistant to the President for Economic Policy Gene Sperling once wrote, staff aides who tell Congressmen that estate tax repeal "...costing tens of billions of dollars... will benefit only a few thousand families" are answered "maybe so, but I think I met every one of them at my last fundraiser." 
It's not the case that the striking increase in income inequality was necessary to deliver rapid economic growth. 
Most of the increase took place, after all, between 1973 and 1995 - a period during which American economic growth was slower than in any other period since the Great Depression. 
It's not the case that income gains in the middle have been large enough to make mainstream voters feel generous about what is happening among their merchant princes: save for the past half-decade, income gains away from the top have been so meager that it's hard to argue that people are living much better than their parents did. 
So why don't Americans feel more alarm at their country's rising income inequality? 
Part of the reason that they don't is that most Americans do not recognize what is going on. 
One poll found that 19% of Americans think their incomes put them in the top 1% of income distribution - and that 20% more hope to reach the top 1% someday. 
Deep in the core of American ideology and culture is a constellation of beliefs and attitudes: belief that the future will be brighter than the present; that what you accomplish you make with your own hands; that individuals should rely on themselves, not the state; that people can cross oceans and mountains to make for themselves a better life; and that those who succeed do so not through luck and corruption but through preparation and industry. 
These are not beliefs conducive to social democracy. 
For two generations starting in 1933 America did look a lot like a west European-style social democracy. 
The shock of the Great Depression and the response of Roosevelt's New Deal probably accounts for the shockingly "un-American" attitude toward redistribution of that era. 
But somebody ten years old when Franklin Roosevelt was elected is now eighty. 
Memories of the Great Depression are dying out. 
So what now seems likely is that the older and more enduring - call it the Gilded Age - pattern of American ideology, culture, and political economy is reasserting itself. 
Inequality, it seems, is as American as apple pie. 

America’s Self-Defeating Hegemony 
When I wrote about the “end of history” almost twenty years ago, one thing that I did not anticipate was the degree to which American behavior and misjudgments would make anti-Americanism one of the chief fault-lines of global politics. 
And yet, particularly since the terrorist attacks of September 11, 2001, that is precisely what has happened, owing to four key mistakes made by the Bush administration. 
First, the doctrine of “preemption,” which was devised in response to the 2001 attacks, was inappropriately broadened to include Iraq and other so-called “rogue states” that threatened to develop weapons of mass destruction. 
To be sure, preemption is fully justified vis-à-vis stateless terrorists wielding such weapons. 
But it cannot be the core of a general non-proliferation policy, whereby the United States intervenes militarily everywhere to prevent the development of nuclear weapons. 
The cost of executing such a policy simply would be too high (several hundred billion dollars and tens of thousands of casualties in Iraq and still counting). 
This is why the Bush administration has shied away from military confrontations with North Korea and Iran, despite its veneration of Israel’s air strike on Iraq’s Osirak reactor in 1981, which set back Saddam Hussein’s nuclear program by several years. 
After all, the very success of that attack meant that such limited intervention could never be repeated, because would-be proliferators learned to bury, hide, or duplicate their nascent weapons programs. 
The second important miscalculation concerned the likely global reaction to America’s exercise of its hegemonic power. 
Many people within the Bush administration believed that even without approval by the UN Security Council or NATO, American power would be legitimized by its successful use. 
This had been the pattern for many US initiatives during the Cold War, and in the Balkans during the 1990’s; back then, it was known as “leadership” rather than “unilateralism.” 
But, by the time of the Iraq war, conditions had changed: the US had grown so powerful relative to the rest of the world that the lack of reciprocity became an intense source of irritation even to America’s closest allies. 
The structural anti-Americanism arising from the global distribution of power was evident well before the Iraq war, in the opposition to American-led globalization during the Clinton years. 
But it was exacerbated by the Bush administration’s “in-your-face” disregard for a variety of international institutions as soon it came into office – a pattern that continued through the onset of the Iraq war. 
America’s third mistake was to overestimate how effective conventional military power would be in dealing with the weak states and networked transnational organizations that characterize international politics, at least in the broader Middle East. 
It is worth pondering why a country with more military power than any other in human history, and that spends as much on its military as virtually the rest of the world combined, cannot bring security to a small country of 24 million people after more than three years of occupation. 
At least part of the problem is that it is dealing with complex social forces that are not organized into centralized hierarchies that can enforce rules, and thus be deterred, coerced, or otherwise manipulated through conventional power. 
Israel made a similar mistake in thinking that it could use its enormous margin of conventional military power to destroy Hezbollah in last summer’s Lebanon War. 
Both Israel and the US are nostalgic for a twentieth-century world of nation-states, which is understandable, since that is the world to which the kind of conventional power they possess is best suited. 
But nostalgia has led both states to misinterpret the challenges they now face, whether by linking al-Qaeda to Saddam Hussein’s Iraq, or Hezbollah to Iran and Syria. 
This linkage does exist in the case of Hezbollah, but the networked actors have their own social roots and are not simply pawns used by regional powers. 
This is why the exercise of conventional power has become frustrating. 
Finally, the Bush administration’s use of power has lacked not only a compelling strategy or doctrine, but also simple competence. 
In Iraq alone, the administration misestimated the threat of WMD, failed to plan adequately for the occupation, and then proved unable to adjust quickly when things went wrong. 
To this day, it has dropped the ball on very straightforward operational issues in Iraq, such as funding democracy promotion efforts. 
Incompetence in implementation has strategic consequences. 
Many of the voices that called for, and then bungled, military intervention in Iraq are now calling for war with Iran. 
Why should the rest of the world think that conflict with a larger and more resolute enemy would be handled any more capably? 
But the fundamental problem remains the lopsided distribution of power in the international system. 
Any country in the same position as the US, even a democracy, would be tempted to exercise its hegemonic power with less and less restraint. 
America’s founding fathers were motivated by a similar belief that unchecked power, even when democratically legitimated, could be dangerous, which is why they created a constitutional system of internally separated powers to limit the executive. 
Such a system does not exist on a global scale today, which may explain how America got into such trouble. 
A smoother international distribution of power, even in a global system that is less than fully democratic, would pose fewer temptations to abandon the prudent exercise of power. 

America’s Self-Inflicted Decline 
MELBOURNE – If the broad post-World War II prosperity that has endured for six decades comes to an end, both the United States and Europe will be responsible. 
With rare exceptions, politics has become a discredited profession throughout the West. 
Tomorrow is always treated as more important than next week, and next week prevails over next year, with no one seeking to secure the long-term future. 
Now the West is paying the price. 
President Barack Obama’s instincts may be an exception here, but he is fighting powerful hidebound forces in the United States, as well as a demagogic populism, in the form of the Tea Party, that is far worse – and that might defeat him in 2012, seriously damaging America in the process. 
America’s friends around the world watched with dismay the recent brawl in over raising the federal government’s debt ceiling, and the US Congress’s inability to come to anything like a balanced and forward-looking compromise. 
On the contrary, the outcome represents a significant victory for the Tea Party’s minions, whose purpose seems to be to reduce government obligations and expenditures to a bare minimum (some object even to having a central bank), and to maintain President George W. Bush’s outrageous tax breaks for the wealthy. 
America’s current fiscal problems are rooted in a long period of unfunded spending. 
Bush’s wars in Afghanistan and Iraq, and the manner in which he conducted the “global war on terror” made matters much worse, contributing to a totally unsustainable situation. 
Indeed, Obama inherited an almost impossible legacy. 
In the weeks since the debt ceiling agreement, it has become increasingly clear that good government might be impossible in the US. 
The coming months of campaigning for the US presidency will be spent in petty brawling over what should be cut. 
The example of recent weeks gives us no cause for optimism that US legislators will rise above partisan politics and ask themselves what is best for America. 
In these circumstances, it is not surprising that financial markets have returned to extreme volatility. 
The expenditure cuts mandated by the outcome of the debt-ceiling debate will reduce economic activity, thereby undermining growth and making debt reduction even more difficult. 
Providing further fiscal stimulus to boost economic growth would carry its own risks, owing to the debt ceiling and another, more ominous factor: America is already overly indebted, and there are signs that major holders of US government securities are finally tired of being repaid in depreciated currency. 
Most importantly, China’s call for the introduction of a new reserve currency stems from its frustration with the failure of major governments – whether in the US or Europe – to govern their economic affairs with realism and good sense. 
China recognizes that America is in great difficulty (indeed, it recognizes this more clearly than the US itself), and that, given the poisonous political atmosphere prevailing in Washington, there will be no easy return to good government, economic stability, and strong growth. 
America’s leadership in world affairs began to weaken with the unilateralism of Bush, and today’s economic problems are reinforcing this tendency. 
To reverse America’s decline, Obama needs bipartisan support for his (quite mainstream) policies, but so far the US Congress has shown no stomach for a principled approach to its legislative duties. 
If Germany’s half-hearted efforts to stabilize Europe somehow turn out to be successful, America’s position will be further eroded, and central banks around the world will begin to regard the euro once again as a reliable alternative to the dollar as a reserve currency. 
The alternative, as China has suggested, would be to develop a new reserve currency. 
These realities represent a power shift of a kind that we have not experienced in our lifetimes. 
China’s economic power over the US is now substantial, and will limit not only America’s influence in the financial markets, but also its capacity to use military power. 
If this forces America back towards what the international-relations scholar Joseph Nye calls “soft power and multilateral diplomacy,” it may well be a good thing. 
But such approaches are anathema to the US Republican Party, and to its Tea Party faction in particular, and they might unnerve the many Asians who are nervous at China’s growing military might. 
The counter-argument – that any sell-off or failure by China to continue to buy US government securities would hurt China as much as America – is not valid. 
As each year passes, China’s markets expand worldwide, and its domestic market comes to represent a greater percentage of its own GDP. 
As a result, China will not need a strong dollar in the long term. 
Americans need to get their economic house in order before China loses its incentive to support the dollar. 
On several occasions in the post-WWII period, the US has learned with great pain that there are limits to the effective use of military power. 
American objectives could not be achieved in Vietnam. 
The outcome in Iraq will not be determined until the last American troops have been withdrawn. 
In Afghanistan, where withdrawal dates have already been set, it is difficult to believe that a cohesive unified state can be established. 
As the efficacy of military power is reduced, so the importance of economic power grows. 
Recognition of these central realities – and bipartisanship in addressing them – is critical for America’s future, and that of the West. 


America’s Sleeping Watch Dog 
I want to deviate from my usual economic theme this month and focus instead on the system by which the press – mostly the American press – covers government nowadays. 
But perhaps this is not too great a deviation, for the behavior of the press affects not only politics, but economics as well. 
Consider an editorial written in March by the Washington Post’s editorial director, Fred Hiatt, in which he makes a very small and limited apology for the newspaper’s coverage and evaluation of the Bush administration. 
According to Hiatt, “We raised such issues” as whether the Bush administration had properly thought its proposed adventure in Iraq through, “but with insufficient force.” 
In other words, Hiatt finds fault with himself and his organization for saying the right thing, but not loudly enough. 
Next, consider a comment by the former editor of the New York Times, Max Frankel, about how the Washington ecology of media leaks is healthy, because “most reporters do not just lazily regurgitate...leaks.” Instead, “they use them as wedges to pry out other secrets” and so oversee the government. 
The system may be “sloppy and breed confusion,” but “tolerating abusive leaks by government [that misinform] is the price that society has to pay for the benefit of receiving essential leaks about government.” 
So, where Hiatt sees a press corps that was a little too cowardly about overseeing the Bush administration, Frankel sees a press corps where a sloppy and confusing process is nevertheless doing a reasonable job. 
I see a very different picture. 
It was the summer of 2000 when I began asking Republicans I know – generally people who might be natural candidates for various sub-cabinet policy positions in a Republican administration – how worried they were that the Republican presidential candidate, George W. Bush, was clearly not up to the job. 
They were not worried, they told me, that Bush was inadequately briefed and strangely incurious for a man who sought the most powerful office in the world. 
One of President Clinton’s problems, they said, was that the ceremonial portions of the job bored him – and thus he got himself into big trouble. 
Look at how Bush had operated as president of the Texas Rangers baseball club, they said. 
Bush let the managers manage the team and the financial guys run the business. 
He spent his time making sure the political coalition to support the Texas Rangers in the style to which it wanted to be accustomed remained stable. 
Bush knows his strengths and weaknesses, they told me. 
He will focus on being America’s Queen Elizabeth II, and will let people like Colin Powell and Paul O’Neill be America’s Tony Blair and Gordon Brown. 
By the summer of 2001, it had become clear that something had gone very wrong. 
By that point, Bush had rejected O’Neill’s and Christine Todd Whitman’s advice on environmental policy, just as he had rejected Alan Greenspan’s and O’Neill’s advice on fiscal policy, Powell’s and Condoleezza Rice’s advice on the importance of pushing forward on negotiations between Israel and Palestine, and – as we learned later – George Tenet’s and Richard Clarke’s advice about the importance of counterterrorism. 
A strange picture of Bush emerged from conversations with sub-cabinet administration appointees, their friends, and their friends of friends. 
He was not just under-briefed, but also lazy: he insisted on remaining under-briefed. 
He was not just incurious, but also arrogant: he insisted on making uninformed decisions, and hence made decisions that were essentially random. 
And he was stubborn: once he had made a decision – even, or rather especially, if it was glaringly wrong and stupid – he would never revisit it. 
So, by the summer of 2001, a pattern was set that would lead British observer Daniel Davies to ask if there was a Bush administration policy on anything of even moderate importance that had not been completely bollixed up. 
But if you relied on either the Washington Post or the New York Times, you would have had a very hard time seeing it. 
Today, it is an accepted fact that the kindest thing you can say about the Bush administration is that it is completely incompetent, which is the line now taken by hard-line Bush supporters like the National Review and the commentator Robert Novak. 
Why didn’t the American press corps cover the Bush administration properly for its first five years? 
I really do not know. 
I do know that the world cannot afford to rely again on America’s press for its information: fool me once, shame on you; fool me twice, shame on me. 
So I appeal to all of you working for newspapers, radio, and television stations outside the United States: it is to you that we – including those of us in America – must look to discover what our own government is doing. 

America’s Socialism for the Rich 
With all the talk of “green shoots” of economic recovery, America’s banks are pushing back on efforts to regulate them. 
While politicians talk about their commitment to regulatory reform to prevent a recurrence of the crisis, this is one area where the devil really is in the details – and the banks will muster what muscle they have left to ensure that they have ample room to continue as they have in the past. 
The old system worked well for the bankers (if not for their shareholders), so why should they embrace change? 
Indeed, the efforts to rescue them devoted so little thought to the kind of post-crisis financial system we want that we will end up with a banking system that is less competitive, with the large banks that were too big too fail even larger. 
It has long been recognized that those America’s banks that are too big to fail are also too big to be managed. 
That is one reason that the performance of several of them has been so dismal. 
Because government provides deposit insurance, it plays a large role in restructuring (unlike other sectors). 
Normally, when a bank fails, the government engineers a financial restructuring; if it has to put in money, it, of course, gains a stake in the future. 
Officials know that if they wait too long, zombie or near zombie banks – with little or no net worth, but treated as if they were viable institutions – are likely to “gamble on resurrection.” 
If they take big bets and win, they walk away with the proceeds; if they fail, the government picks up the tab. 
This is not just theory; it is a lesson we learned, at great expense, during the Savings & Loan crisis of the 1980’s. 
When the ATM machine says, “insufficient funds,” the government doesn’t want this to mean that the bank, rather than your account, is out of money, so it intervenes before the till is empty. 
In a financial restructuring, shareholders typically get wiped out, and bondholders become the new shareholders. 
Sometimes, the government must provide additional funds; sometimes it looks for a new investor to take over the failed bank. 
The Obama administration has, however, introduced a new concept: too big to be financially restructured. 
The administration argues that all hell would break loose if we tried to play by the usual rules with these big banks. 
Markets would panic. 
So, not only can’t we touch the bondholders, we can’t even touch the shareholders – even if most of the shares’ existing value merely reflects a bet on a government bailout. 
I think this judgment is wrong. 
I think the Obama administration has succumbed to political pressure and scare-mongering by the big banks. 
As a result, the administration has confused bailing out the bankers and their shareholders with bailing out the banks. 
Restructuring gives banks a chance for a new start: new potential investors (whether in equity or debt instruments) will have more confidence, other banks will be more willing to lend to them, and they will be more willing to lend to others. 
The bondholders will gain from an orderly restructuring, and if the value of the assets is truly greater than the market (and outside analysts) believe, they will eventually reap the gains. 
But what is clear is that the Obama strategy’s current and future costs are very high – and so far, it has not achieved its limited objective of restarting lending. 
The taxpayer has had to pony up billions, and has provided billions more in guarantees – bills that are likely to come due in the future. 
Rewriting the rules of the market economy – in a way that has benefited those that have caused so much pain to the entire global economy – is worse than financially costly. 
Most Americans view it as grossly unjust, especially after they saw the banks divert the billions intended to enable them to revive lending to payments of outsized bonuses and dividends. 
Tearing up the social contract is something that should not be done lightly. 
But this new form of ersatz capitalism, in which losses are socialized and profits privatized, is doomed to failure. 
Incentives are distorted. 
There is no market discipline. 
The too-big-to-be-restructured banks know that they can gamble with impunity – and, with the Federal Reserve making funds available at near-zero interest rates, there are ample funds to do so. 
Some have called this new economic regime “socialism with American characteristics.” 
But socialism is concerned about ordinary individuals. 
By contrast, the United States has provided little help for the millions of Americans who are losing their homes. 
Workers who lose their jobs receive only 39 weeks of limited unemployment benefits, and are then left on their own. 
And, when they lose their jobs, most lose their health insurance, too. 
America has expanded its corporate safety net in unprecedented ways, from commercial banks to investment banks, then to insurance, and now to automobiles, with no end in sight. 
In truth, this is not socialism, but an extension of long standing corporate welfarism. 
The rich and powerful turn to the government to help them whenever they can, while needy individuals get little social protection. 
We need to break up the too-big-to-fail banks; there is no evidence that these behemoths deliver societal benefits that are commensurate with the costs they have imposed on others. 
And, if we don’t break them up, then we have to severely limit what they do. 
They can’t be allowed to do what they did in the past – gamble at others’ expenses. 
This raises another problem with America’s too-big-to-fail, too-big-to-be-restructured banks: they are too politically powerful. 
Their lobbying efforts worked well, first to deregulate, and then to have taxpayers pay for the cleanup. 
Their hope is that it will work once again to keep them free to do as they please, regardless of the risks for taxpayers and the economy. 

America’s Sputnik Moment in Beijing 
NEW YORK – August 8, 2008, may someday be remembered as the first day of the post-American era. 
Or it could be remembered as another “Sputnik moment,” when, as with the Soviet foray into outer space in 1957, the American people realized that the country had lost its footing and decided it was time for the United States to get its act together. 
There was no mistaking the power and symbolism of the opening ceremonies for the Beijing Olympic Games on August 8. 
That multimedia spectacular did far more than trace China’s 5,000-year history; it was a statement that China is a major civilization that demands and deserves its rightful place in the global hierarchy. 
There was also no mistaking the symbolism of seeing President Bush, waving cheerfully from his spot in the bleachers while Chinese President Hu Jintao sat behind what looked more like a throne. 
It is hard to imagine that China’s government, which obsesses over every minute issue of diplomatic protocol, had not orchestrated this stark image of America’s decline relative to the country to which it owes $1.4 trillion. 
It would be hard to imagine Franklin Roosevelt or Ronald Reagan accepting a similar relative position. 
At the very same time that Bush was waving from the stands, Russia was invading Georgia, America’s closest partner in the Caucasus. 
Russia’s message to other West-leaning countries in the former Soviet world was clear: America cannot protect you. 
Frighteningly, the Russians were likely correct. 
While the Iraq quagmire has made it difficult for America to project force around the world, America’s growing debt, conflicts with friends and enemies alike, absence of any perceivable strategy for changing times, and its political system’s seeming inability to take action to address these challenges have combined to turn America into a struggling giant. 
Today, from Iran to Darfur to Zimbabwe to Georgia, the world is witnessing the effects of a budding post-American world, and the picture does not look pretty. 
As much as we all value the rise of new powers like China and India, it remains to be seen whether these countries will become as benevolent a power as America, however flawed, has been over the past half-century. 
Neo-colonialism is returning to Africa, the global project of human rights is in retreat, and the world trade system is becoming far less open. 
Brutal dictators go unpunished because their interests are protected by large powers with stakes in their natural resources. 
Reversing this trend is not only in America’s interest, but also in the world’s interest. 
To do so, Americans must identify and address the great challenges the United States faces, starting from the ground up. 
Fixing America’s campaign finance structure, which leads to massive misallocations of government funds, resuscitating America’s wildly uneven and often moribund education system, building an immigration system that actively recruits the most talented people from around the world via a fast track to US citizenship, and developing a national energy policy that moves the US far more quickly toward energy independence would all be important steps in this direction. 
Working to rebuild the traditional bipartisan foreign-policy consensus would also make the US a far more predictable partner to friends and allies around the world. 
And America must be a respectful partner in order to encourage rising powers like India and China to play more constructive roles in international affairs. 
The world is not ready for the post-American era, and countries like China and India must play a far greater role in strengthening the existing institutions of world peace and, where appropriate, building new ones that can promote a positive agenda of security, dignity, rights, and prosperity across the globe. 
The world community is not there yet, and until it is, the world needs a new kind of American leader – a leader able to inspire Americans to fix their problems at home and work with partners across the globe in promoting a common agenda as bold and progressive as the order built from the ashes of World War II 60 years ago. 
The Beijing Olympics could be remembered as a new “Sputnik moment” for the US, inspiring the country to meaningfully face the music of a changing world. 
But America can make it so only by recognizing the great challenges it faces and taking bold steps towards addressing them, at home and with allies abroad. 

America’s Suicidal Statecraft 
Since its victory in the Cold War, America’s global hegemony has rested on three pillars: economic power, military might, and a vast capacity to export its popular culture. 
The recent emergence of additional powers – the European Union, China, India, and a Russia driven to recover its lost status – has eroded America’s capacity to shape events unilaterally. 
Even so, America remains by far the world’s most powerful country; its decline has more to do with its incompetent use of power than with the emergence of competitors. 
It is American leaders’ “suicidal statecraft,” to use Arnold Toynbee’s pithy phrase for what he considered the ultimate cause of imperial collapse, that is to blame for America’s plight. 
Consider the Middle East. 
Nothing reveals the decline of the United States in the region better than the contrast between America’s sober use of power in the first Gulf War in 1991 and the hubris and deceit of today’s Iraq war. 
In 1991, America forged the most formidable international coalition since World War II, and led it in a fully legitimate war aimed at restoring regional balance after Saddam Hussein’s invasion of Kuwait. 
In 2003, America went to war without its trans-Atlantic allies after manipulating false assertions. 
In doing so, the US embarked on a preposterous grand strategy that aimed no less at simultaneously dismantling Iraq’s tyrannical regime, restructuring the entire Middle East, destroying al-Qaeda, and helping democracy to take root throughout the Arab world. 
The result has been utter failure: military defeat and a severe degradation of America’s moral standing. 
Rather than undermining radical Islam, the US has legitimized it, in Iraq and beyond. 
Indeed, what will now shape the future of the region is not democracy, but the violent divide between Shiites and Sunnis that the Iraq war precipitated. 
It is this Muslim civil war that is allowing al-Qaeda to gain a larger pool of recruits. 
With Iraq probably becoming the first Arab country to be ruled by Shiites, and hence integrated into an expanding Shiite Iranian empire, America’s Sunni allies in the region now view the US as unreliable. 
Indeed, the US is seen as practically complicit in inciting a monumental reversal of Islam’s fortunes, the Shia revival. 
Nor is the gospel of democracy especially dear to America’s Arab allies, for the call to democratize has only emboldened the Islamists to challenge the incumbent elites for power. 
Admittedly, violent Islamic fundamentalism has deeper roots in the fading promise of Arab nationalism. 
But America’s misbegotten democratic message has ended up alienating both its conservative regional allies, as it gave a new lease on life to political Islam, which can use the ballot box as a route to power, and the Islamists, whose electoral gains are then rejected by the US. 
America’s biggest strategic blunder in the Middle East arguably concerns the emergence of Iranian power. 
By destroying Iraq as a counterbalancing regional force, the US dealt a major blow to its traditional Gulf allies, for whom Iraq served as a barrier against Iran’s ambitions. 
America offered Iran on a silver platter strategic assets that Khomeini’s revolution failed to acquire either in eight years of war against Saddam or in its abortive attempts to export the Islamic revolution throughout the region. 
Likewise, Iran’s nuclear program gained momentum thanks to its sense of impunity following the colossal failure in Iraq of America’s concept of “preventive war.” 
The calamitous US military experience in Iraq has left it strategically diminished. 
Iraq has now become God’s playground, and America can hope to achieve a modicum of stability there only with the help of other regional powers. 
Nevertheless, the US will remain the most influential external actor in the Middle East, for its failure is one of leadership, not of actual power. 
Humbled by military defeat, America can recover its regional relevance only by avoiding the sin of hubris, and learning to lead without attempting to dominate. 
This requires engaging revolutionary forces like Iran and Syria; respecting, rather than ostracizing, those Islamist movements that have opted out from jihadism in favor of political participation; and leading an international alliance for an Arab-Israeli peace based on the Arab League initiative. 
Indeed, the paradox of America’s pernicious policies in Iraq is that they have created favorable conditions for an Arab-Israeli peace, as the emergence of Iran and the threat of a fundamentalist tsunami have focused Arab minds on the urgency of a settlement with Israel. 
The Palestinian issue is not the source of all the Middle East’s ills, but its resolution would dramatically improve America’s standing among Arabs. 
More importantly, it would deny Iran the ability to link popular Islamic and Arab causes with its own hegemonic ambitions. 

America’s Three Deficits 
BERKELEY – This year began with a series of reports providing tantalizing evidence that economic recovery in the United States is strengthening. 
The pace of job creation has increased, indicators for manufacturing and services have improved, and consumption spending has been stronger than anticipated. 
But it is too early to celebrate. 
Output growth in the US remains anemic, and the economy continues to face three significant deficits: a jobs deficit, an investment deficit, and a long-run fiscal deficit, none of which is likely to be addressed in an election year. 
Although output is now higher than it was in the fourth quarter of 2007, it remains far below what could be produced if labor and capacity were fully utilized. 
That gap – between actual and potential output – is estimated at more than 7% of GDP (more than $1 trillion). 
The output gap reflects a deficit of more than 12 million jobs – the number of jobs needed to return to the economy’s peak 2007 employment level and absorb the 125,000 people who enter the labor force each month. 
Even if the economy grows at 2.5% in 2012, as most forecasts anticipate, the jobs deficit will remain – and will not be closed until 2024. 
America’s jobs deficit is primarily the result of inadequate aggregate demand. 
Consumption, which accounts for about 70% of total spending, is constrained by high unemployment, weak wage gains, and a steep decline in home values and consumer wealth. 
The uptick in consumption in the last months of 2011 was financed by a decline in the household saving rate and a large increase in consumer credit. 
Neither of these trends is healthy or sustainable. 
With an unemployment rate of 8.5%, a labor-force participation rate of only 64%, and stagnant real wages, labor income has fallen to an historic low of 44% of national income. 
And labor income is the most important component of household earnings, the major driver of consumption spending. 
Even before the Great Recession, American workers and households were in trouble. 
The rate of job growth between 2000 and 2007 slowed to only half its level in the three preceding decades. 
Productivity growth was strong, but far outpaced wage growth, and workers’ real hourly compensation declined, on average, even for those with a university education. 
Indeed, the 2002-2007 period was the only recovery on record during which the median family’s real income declined. 
Moreover, job opportunities continued to polarize, with employment growing in high-wage professional, technical, and managerial occupations, as well as in low-wage food-service, personal-care, and protective-service occupations. 
By contrast, employment in middle-skill, white-collar, and blue-collar occupations fell, particularly in manufacturing. 
Hard-pressed American households slashed their savings rates, borrowed against their home equity, and increased their debt to maintain consumption, contributing to the housing and credit bubbles that burst in 2008, requiring painful deleveraging ever since. 
Three forces have driven the US labor market’s adverse structural changes: 
· Skill-biased technological change, which has automated routine work while boosting demand for highly educated workers with at least a college degree. 
· Global competition and the integration of labor markets through trade and outsourcing, which have eliminated jobs and depressed wages. 
· America’s declining competitiveness as an attractive place to locate production and employment. 
Technological change and globalization have created similar labor-market challenges in other developed countries. 
But US policy choices are responsible for the erosion of America’s competitiveness. 
In particular, the US is underinvesting in three major areas that help countries to create and retain high-wage jobs: skills and training, infrastructure, and research and development. 
Spending in these areas accounts for less than 10% of US government spending, and this share has been declining over time. 
The federal government can currently borrow at record-low interest rates, and there are many projects in education, infrastructure, and research that would earn a higher return, create jobs now, and bolster US competitiveness in attracting high-wage jobs. 
President Barack Obama has offered numerous proposals to invest in the foundations of national competitiveness, but Congressional Republicans have rebuffed them, claiming that the US faces an impending fiscal crisis. 
In fact, the federal deficit as a share of GDP will shrink significantly over the next several years, even without further deficit-reduction measures, before rising to unsustainable levels by 2030. 
The US does indeed face a long-run fiscal deficit, largely the result of rising health-care costs and an aging population. 
But the current fiscal deficit mainly reflects weak tax revenues, owing to slow growth and high unemployment, and temporary stimulus measures that are fading away at a time when aggregate demand remains weak and additional fiscal stimulus is warranted. 
At the very least, to keep the economy on course for 2.5% growth this year, the payroll tax cut and unemployment benefits proposed by Obama should be extended through the end of the year. 
These measures would provide insurance to the fragile recovery and add nothing to the long-run fiscal gap. 
So, how should the US economy’s jobs deficit, investment deficit, and long-run fiscal deficit be addressed? 
Policymakers should pair fiscal measures to ameliorate the jobs and investment deficits now with a multi-year plan to reduce the long-run fiscal deficit gradually. 
This long-run plan should increase spending on education, infrastructure, and research, while curbing future growth in health-care spending through the cost-containment mechanisms contained in Obama’s health-reform legislation. 
Approving a long-run deficit-reduction plan now but deferring its starting date until the economy is near full employment would prevent premature fiscal contraction from tipping the economy back into recession. 
Indeed, enactment of such a package could bolster output and employment growth by easing investor concerns about future deficits and strengthening consumer and business confidence. 
Painful choices about how to close the long-run fiscal gap should be decided now and implemented promptly once the economy has recovered. 
But, for the next few years, the priorities of fiscal policy should be jobs, investment, and growth. 

America’s Ungovernable Budget 
NEW YORK – The heart of any government is found in its budget. 
Politicians can make endless promises, but if the budget doesn’t add up, politics is little more than mere words. 
The United States is now caught in such a bind. 
In his recent State of the Union address, President Barack Obama painted a convincing picture of modern, twenty-first-century government. 
His Republican Party opponents complained that Obama’s proposals would bust the budget. 
But the truth is that both parties are hiding from the reality: without more taxes, a modern, competitive US economy is not possible. 
Obama rightly emphasized that competitiveness in the world today depends on an educated workforce and modern infrastructure. 
That is true for any country, but it is especially relevant for rich countries. 
The US and Europe are in direct competition with Brazil, China, India, and other emerging economies, where wage levels are sometimes one-quarter those in high-income countries (if not even lower). 
America and Europe will keep their high living standards only by basing their competitiveness on advanced skills, cutting-edge technologies, and modern infrastructure. 
That is why Obama called for an increase in US public investment in three areas: education, science and technology, and infrastructure (including broadband Internet, fast rail, and clean energy). 
He spelled out a vision of future growth in which public and private investment would be complementary, mutually supportive pillars. 
Obama emphasized these themes for good reason. 
Unemployment in the US now stands at nearly 10% of the labor force, in part because more new jobs are being created in the emerging economies, and many of the jobs now being created in the US pay less than in the past, owing to greater global competition. 
Unless the US steps up its investment in education, science, technology, and infrastructure, these adverse trends will continue. 
But Obama’s message lost touch with reality when he turned his attention to the budget deficit. 
Acknowledging that recent fiscal policies had put the US on an unsustainable trajectory of rising public debt, Obama said that moving towards budget balance was now essential for fiscal stability. 
So he called for a five-year freeze on what the US government calls “discretionary” civilian spending. 
The problem is that more than half of such spending is on education, science and technology, and infrastructure – the areas that Obama had just argued should be strengthened. 
After telling Americans how important government investment is for modern growth, he promised to freeze that spending for the next five years! 
Politicians often change their message from one speech to the next, but rarely contradict it so glaringly in the same speech. 
That contradiction highlights the sad and self-defeating nature of US budget policies over the past 25 years, and most likely in the years to come. 
On the one hand, the US government must invest more to promote economic competitiveness. 
On the other hand, US taxes are chronically too low to support the level of government investment that is needed. 
America’s fiscal reality was made painfully clear two days after Obama’s speech, in a new study from the Congressional Budget Office, which revealed that the budget deficit this year will reach nearly $1.5 trillion – a sum almost unimaginable even for an economy the size of the US. 
At nearly 10% of GDP, the deficit is resulting in a mountain of debt that threatens America’s future. 
The CBO study also made clear that December’s tax-cut agreement between Obama and the Republican opposition willfully and deliberately increased the budget deficit sharply. 
Various tax cuts initiated by George W. Bush were set to expire at the end of 2010. 
Obama and the Republicans agreed to continue those tax cuts for at least two years (they will now probably continue beyond that), thereby lowering tax revenue by $350 billion this year and again in 2012. 
Tax cuts for the richest Americans were part of the package. 
The truth of US politics today is simple. 
The key policy for the leaders of both political parties is tax cuts, especially for the rich. 
Both political parties, and the White House, would rather cut taxes than spend more on education, science and technology, and infrastructure. 
And the explanation is straightforward: the richest households fund political campaigns. 
Both parties therefore cater to their wishes. 
As a result, America’s total tax revenues as a share of national income are among the lowest of all high-income countries, roughly 30%, compared to around 40% in Europe. 
But 30% of GDP is not enough to cover the needs of health, education, science and technology, social security, infrastructure, and other vital government responsibilities. 
One budget area can and should be cut: military spending. 
But even if America’s wildly excessive military budget is cut sharply (and politicians in both parties are resisting that), there will still be a need for new taxes. 
The economic and social consequences of a generation of tax cutting are clear. 
America is losing its international competitiveness, neglecting its poor – one in five American children is trapped in poverty – and leaving a mountain of debt to its young. 
For all of the Obama administration’s lofty rhetoric, his fiscal-policy proposals make no serious attempt to address these problems. 

America’s Unhinged “Pivot” 
NEW DELHI – President Barack Obama’s first foreign trip since winning a second term highlights Asia’s new centrality to America’s economy and security. 
But Obama’s Asian tour also underscores the main question about American policy in the region: Will the United States’ “pivot” to Asia acquire concrete strategic content, or will it remain largely a rhetorical repackaging of old policies? 
The United States, quick to capitalize on regional concerns triggered by China’s increasingly muscular self-assertion, has strengthened its military ties with its existing Asian allies and forged security relationships with new friends. 
But the heady glow of America’s return to center stage in Asia has obscured key challenges in remaining the region’s principal security anchor in the face of China’s strategic ambitions. 
One challenge is the need to arrest the erosion of America’s relative power, which in turn requires comprehensive domestic renewal, including fiscal consolidation. 
But the need for spending cuts also raises the prospect that the US might be unable to finance a military shift toward the Asia-Pacific region – or, worse, that it will be forced to retrench there. 
The US under Obama has increasingly ceded ground to China, a trend that admittedly began when the Bush administration became preoccupied with the wars in Afghanistan and Iraq. 
This has spurred doubts about America’s ability to provide strategic heft to its “pivot” by sustaining a higher level of commitment in the Asia-Pacific region, where it already maintains 320,000 troops. 
The proposed deployment of an additional 2,500 Marines in Australia is largely symbolic. 
In fact, after raising Asians’ expectations of a more robust US response to China’s growing assertiveness, the Obama administration has started to tamp down the military aspects of its “pivot,” emphasizing instead greater US economic engagement. 
That change has come as a relief to those in the region who fear being forced to choose between the US and China. 
But, for the countries bearing the brunt of China’s recalcitrant approach to territorial and maritime disputes, this emphasis raises new doubts about America’s commitment. 
In fact, the economic reorientation of the US “pivot” corrects a policy that had overemphasized the military component and put the US on a path toward conflict with China. 
It was Secretary of State Hillary Clinton who signaled a more hawkish US stance on China with her tough talk at the 2010 Association of Southeast Asian Nations (ASEAN) Regional Forum in Hanoi; now she is moderating that position by promoting trade and investment during her visits to Asian countries. 
Obama, too, is highlighting the economic aspects of the US “pivot,” portraying his Asia tour as an effort to generate more domestic manufacturing jobs through higher exports to “the most rapidly growing and dynamic region in the world.” 
Even his historic visit to Myanmar – the first ever by a US president – is as much about trade as it is about weaning a strategically located, resource-rich country from Chinese influence. 
The refocus on trade and economic issues has also prompted Washington to promote the Trans-Pacific Partnership, which aims to create a new Asia-Pacific free-trade group that excludes China. 
Moreover, the US is emphasizing the importance of the East Asia Summit and ASEAN, whose summit overlaps with the EAS meeting in Phnom Penh that Obama will be attending. 
The US course correction is being dictated by another consideration as well: America has nothing to gain from taking sides in China’s disputes with its neighbors – unless, of course, US interests are directly at stake, as in the South China Sea, where Chinese maritime claims threaten freedom of navigation in some of the world’s most heavily trafficked shipping lanes. 
Concern for its own national interest explains why America has charted a course of tacit neutrality regarding the revival of Sino-Indian territorial disputes, including China’s sudden resurrection of a claim to the large Himalayan Indian state of Arunachal Pradesh. 
Similarly, the US has urged both China and Japan to resolve peacefully their dispute over the Japanese-controlled Senkaku Islands. 
America’s main goal is to prevent the standoff from escalating to the point that it would be forced – against its own interests – to take Japan’s side. 
When US Defense Secretary Leon Panetta met Chinese leader Xi Jinping in China in September, he got “an earful” that the US should stay out of the Sino-Japanese dispute. 
Indeed, amid the orchestrated anti-Japanese protests in China in September, Panetta – instead of advising China to rein in the often-violent demonstrations – publicly reiterated America’s neutrality in the struggle over control of the islands. 
The correction in US policy actually extends even to terminology. 
American diplomats have now abandoned the term “pivot” altogether, owing to its military connotation, in favor of “rebalancing.” 
Whatever one calls it, the new policy approach is all about China, with America bolstering alliances and friendships with countries around China’s periphery, including India, Japan, the Philippines, Vietnam, Indonesia, and South Korea. 
Yet the Obama administration continues to deny that China is at the center of its strategy. 
In fact, it is reluctant to say or do anything publicly that might raise China’s hackles. 
The Asia-Pacific region will loom larger in Obama’s second-term agenda, especially as the ongoing US troop withdrawal ends the Afghanistan war by 2014. 
But Obama will have to define a clearer US policy, addressing China’s rapid rise under an authoritarian regime that aggressively pursues border claims and whips up nationalism at home. 
The US and the rest of Asia must not merely adjust to China; they must seek to shape a China that plays by the rules. 

America’s War-Torn Economy 
NEW YORK – Some say there are two issues in the coming American elections: the Iraq war and the economy. 
On days when the war seems to be going better than expected, and the economy worse, the economy eclipses the war; but neither is faring well. 
In some sense, there is only one issue, and that is the war, which has exacerbated America’s economic problems. 
And when the world’s largest economy is sick – and it is now very sick – the entire world suffers. 
It used to be thought that wars were good for the economy. 
After all, World War II is widely thought to have helped lift the global economy out of the Great Depression. 
But, at least since Keynes, we know how to stimulate the economy more effectively, and in ways that increase long-term productivity and enhance living standards. 
This war, in particular, has not been good for the economy, for three reasons. 
First, it has contributed to rising oil prices. 
When the United States went to war, oil cost less than $25 a barrel, and futures markets expected it to remain there for a decade. 
Futures traders knew about the growth of China and other emerging markets; but they expected supply – mainly from low-cost Middle East providers – to increase in tandem with demand. 
The war changed that equation. 
Higher oil prices mean that Americans (and Europeans and Japanese) are paying hundreds of millions of dollars to Middle East oil dictators and oil exporters elsewhere in the world rather than spending it at home. 
Moreover, money spent on the Iraq war does not stimulate the economy today as much as money spent at home on roads, hospitals, or schools, and it doesn’t contribute as much to long-term growth. 
Economists talk about “bang for the buck” – how much economic stimulus is provided by each dollar of spending. 
It’s hard to imagine less bang than from bucks spent on a Nepalese contractor working in Iraq. 
With so many dollars going abroad, the American economy should have been in a much weaker shape than it appeared. 
But, much as the Bush administration tried to hide the true costs of the war by incomplete and misleading accounting, the economy’s flaws were covered up by a flood of liquidity from the Federal Reserve and by lax financial regulation. 
So much money was pumped into the economy and so lax were regulators that one leading American bank advertised its loans with the slogan “qualified at birth” – a clear indication that there were, in effect, no credit standards. 
In a sense, the strategy worked: a housing bubble fed a consumption boom, as savings rates plummeted to zero. 
The economic weaknesses were simply being postponed to some future date; the Bush administration hoped that the day of reckoning would come after November 2008. 
Instead, things began to unravel in August 2007. 
Now it has responded, with a stimulus package that is too little, too late, and badly designed. 
To see the inadequacy of that package, compare it with the more than $1.5 trillion that was borrowed in home equity loans in recent years, most of it spent on consumption. 
That game – based on a belief in ever-spiraling home prices – is over. 
With home prices falling (and set to continue to fall), and with banks uncertain of their financial position, lenders will not lend and households will not borrow. 
So, while the additional liquidity injected into the financial system by the Fed may have prevented a meltdown, it won’t stimulate much consumption or investment. 
Instead, much of it will find its way abroad. 
China, for example, is worried that the Fed’s stimulus will increase its domestic inflation. 
There is a third reason that this war is economically bad for America. 
Not only has America already spent a great deal on this war – $12 billion a month, and counting – but much of the bill remains to be paid, such as compensation and health care for the 40% of veterans who are returning with disabilities, many of which are very serious. 
Moreover, this war has been funded differently from any other war in America’s history –perhaps in any country’s recent history. 
Normally, countries ask for shared sacrifice, as they ask their young men and women to risk their lives. 
Taxes are raised. 
There is a discussion of how much of the burden to pass on to future generations. 
In this war, there was no such discussion. 
When America went to war, there was a deficit. 
Yet remarkably, Bush asked for, and got, a reckless tax cut for the rich. 
That means that every dollar of war spending has in effect been borrowed. 
For the first time since the Revolutionary War, two centuries ago, America has had to turn to foreigners for financing, because US households have been saving nothing . 
The numbers are hard to believe. 


Obama’s Year of Iran 
PRINCETON – As US President Barack Obama begins his second term, he will have to devote much of his attention to figuring out how to get America’s domestic finances in order. 
But foreign-policy issues loom large as well, and, notwithstanding the ongoing conflict in Syria and the possible spread of war across Africa’s Sahel region, the consensus in Washington is that 2013 will be the “year of decision” on Iran. 
Obama began his first administration with an offer to engage with the Islamic Republic; as he memorably put it in his first inaugural address in 2009, “We will extend a hand if you are willing to unclench your fist.” 
He repeated that commitment, although much more obliquely, in his second inaugural address: “We will show the courage to try and resolve our differences with other nations peacefully – not because we are naive about the dangers we face, but because engagement can more durably lift suspicion and fear.” 
As the American scholar and activist Hussein Ibish recently argued, Obama has appointed a cabinet designed to give him maximum room to negotiate a deal with Iran. 
In particular, naming military veterans as Secretary of State and Secretary of Defense will provide him with valuable domestic political cover for an agreement that would inevitably require lifting sanctions on Iran and almost certainly recognizing its right to enrich uranium at a low level of concentration. 
That should signal to Iran’s rulers not only that the US is serious about a deal, but also that whatever the US offers is likely to be the best deal that they can get. 
The Obama administration has assembled an extraordinary coalition of countries to impose economic sanctions that are having a demonstrable effect on the price and availability of goods in Iran and on the ability of even powerful institutions, such as the Revolutionary Guard, to do business. 
But coalitions do not hold together forever, and the pain of sanctions often cuts both ways, affecting buyers as well as sellers. 
Countries like South Korea and Japan, for example, have curtailed their imports of Iranian oil only reluctantly; countries like China and Russia rarely play straight on sanctions in the first place. 
Moreover, Obama can threaten that “all options are on the table” only so many times without losing credibility with the Iranians and other countries in the Middle East. 
As Brookings Institution foreign-policy expert Suzanne Maloney points out, countries in the region and beyond are already dismayed at the lack of US leadership concerning Syria. 
If the US gives negotiations one more serious try (a credible offer and a genuine willingness to engage), gets rebuffed, and then does nothing, it will effectively declare itself a paper tiger. 
At that point, the sanctions coalition will most likely disintegrate amid a much broader loss of confidence in US leadership. 
The US has thus painted itself into a corner. 
Former US National Security Adviser Zbigniew Brzezinski recently argued strongly against military action, proposing, instead, a strategy that would continue sanctions and extend deterrence. 
Like US policy toward the Soviet bloc during the Cold War, “An Iranian military threat aimed at Israel or any other US friend in the Middle East would be treated as if directed at the United States itself and would precipitate a commensurate US response.” 
I can certainly see the wisdom in Brzezinski’s approach. 
But Obama has marched the US and its allies too far down the current path. 
Moreover, and crucially, Brzezinski forgets that Obama’s determination to stop Iran from acquiring a nuclear weapon does not stem only from his concern for Israel’s security or the stability of the wider Middle East. 
Obama has repeatedly committed himself to the goal of turning the world in the direction of “global zero” – a world without nuclear weapons. 
He believes (as do former Secretaries of State Henry Kissinger and George Shultz, former Secretary of Defense William Perry, and former Senator Sam Nunn) that unless the world finds a way to live without nuclear weapons, we will find ourselves in an international system in which 30-50 states possess them, raising the danger of accidental or deliberate launch to an unacceptably high level. 
Convincing great powers to eliminate their nuclear arsenals might seem as politically fanciful as pushing gun-control legislation through the US Congress, but on that issue, too, Obama has made clear that he is willing to try. 
However logical or attractive a containment policy might be, and however disastrous the consequences of bombing are likely to be, Obama’s commitment to realizing global denuclearization as part of his legacy implies that he will not allow another country to acquire a nuclear weapon on his watch, as his predecessors allowed India, Israel, North Korea, and Pakistan to do. 
Thus, the stakes for both the US and Iran are very high. 
Other countries would do well not to underestimate Obama’s resolve; governments that have relations with Iran should emphasize that the time to make a deal is now. 
And countries like Turkey and Brazil (and perhaps India and Egypt) could play a useful role by devising face-saving ways for the Iranians to meet the international community’s demands, together with longer-term alternatives for fuel enrichment that would be consistent with reducing the global nuclear threat. 
America’s allies, in turn, must be prepared to close ranks with it on both the outlines of a deal and the willingness to strike militarily. 
The art of statecraft is not to choose between war and diplomacy as if they were mutually exclusive alternatives, but to understand how they fit together. 
In the case of Syria, the West has repeatedly called for diplomacy while ruling out any military action, with predictably bad results. 
The US will not make that mistake with Iran. 

America Shoots Itself 
One of the casualties of the war against terrorism--or, rather, of the way the United States is conducting the war--is the US influence in promoting human rights worldwide. 
For the international human rights movement, this is a severe setback. 
For more than a quarter of a century, ever since advancing human rights internationally became an explicit and avowed goal of US foreign policy under President Jimmy Carter, American influence played a leading role in mitigating abuses. 
The consequences were most profound in what were the countries of the Soviet empire, but they extended to other regions as well. 
Even where the US supported regimes that committed grave violations of rights--or served as an apologist for them because other national interests took precedence--it was often possible for the human rights movement to embarrass Washington by making it the surrogate villain for its clients' abuses. 
In the 1980's, this approach focused attention on abuses in conflict-ridden Central America and in Saddam Hussein's Iraq, which the Reagan Administration favored in its struggle with America's enemy, Ayatollah Khomeini's Iran. 
It thus sometimes achieved indirectly what could not be done directly: the leveraging of American influence to promote human rights. 
But America's capacity to promote human rights in other countries has never been weaker than now. 
One reason is the tremendous increase in anti-Americanism since the terrorist attacks of September 11, 2001. This is largely due to a widespread perception of American arrogance. 
Despite (or because of) its insistence that all who are not with America are against it, the Bush administration alienated many who previously counted themselves either as friends of the US or did not take sides. 
At the same time, rising anti-Americanism preceded the US response to the terrorist attacks. 
The Bush team was outspoken in its hostility to a range of international agreements, from the Kyoto Treaty to reduce global warming to the establishment of the International Criminal Court. 
Whatever goodwill towards the US prevailed after September 11 was quickly squandered. 
The Bush administration proclaimed a national security policy that insists that America provides the only sustainable model for national success, and asserted its right to engage in unilateral, preemptive military strikes. 
It treated the UN Security Council with disdain in its rush to war in Iraq, invoking justifications that have not stood up to scrutiny. 
Since then, it has continued to insist that its arguments for invading Iraq are beyond criticism, while making a mess of the postwar administration by refusing to share authority. 
The other major reason that America is losing its effectiveness as a promoter of human rights is a widespread perception of hypocrisy. 
Even before the terrorist attacks on New York and Washington, America's image as a rights proponent had been tarnished, particularly in Europe, by its continued practice of capital punishment and, to a lesser degree, by its high incarceration rate--approximately seven times the average in the European Union's fifteen member countries. 
Since September 2001, the cause for concern has grown dramatically. 
Much international attention has focused on the USA Patriot Act's sanctioning of grave violations of civil liberties, and on the subsequent treatment of thousands of immigrants--particularly south Asian Muslims--who have faced secret detention and deportation. 
Above all, the rest of the world has looked on with alarm as the US holds more than 600 men at Guantanamo Bay in Cuba without access to family or counsel, and without prospect of an impartial hearing or trial. 
In some instances, reports of rights violations in the US are exaggerated. 
But this is an inevitable consequence of the Bush administration's own haughty manner, with leading spokespersons, such as Attorney General John Ashcroft, proclaiming their own righteousness in leading the effort to abrogate rights. 
Ashcroft is much less known internationally than Secretary of Defense Donald Rumsfeld, but he is an even match in arousing dislike for the US among those who do know him. 
Unfortunately, there is no ready substitute for the US as a force for advancing human rights internationally. 
The UN has been useful as a forum for adopting standards, but its machinery for seeking compliance with those standards is weak and has been badly compromised over the years by its failure to address grotesque abuses. 
The choice of Libya to chair the UN Human Rights Commission adds insult to injury. 
Some European governments have evolved strong human rights polices but, for a variety of reasons, they have been unable, individually or collectively, to exert the influence of the US. 
Fortunately, while this is likely to remain true for the foreseeable future, the international human rights movement is not completely without resources. 
Its own prestige is high: groups such as Amnesty International and Human Rights Watch are respected voices, to whom many governments feel obliged to pay attention. 
There is also the promise of new institutions. 
In cases of extreme rights abuses, the chance that an international criminal tribunal will ultimately sit in judgment of those principally responsible is growing, thereby becoming a deterrent to would-be tyrants elsewhere. 
America should take note. 


America the Hypocritical 
In commemorating the 230th anniversary of America’s independence last July, President George W. Bush noted that the patriots of the Revolutionary War believed that all men are created equal, and with inalienable rights. 
Because of these ideals, he proclaimed, the United States “remains a beacon of hope for all who dream of liberty and a shining example to the world of what a free people can achieve.” 
But, at the same time, his administration was holding approximately 400 prisoners at the US Naval Base at Guantánamo Bay in Cuba. Some of them have now been there for more than five years. 
None of them has ever been put on trial. 
Last month, a highly reputable source confirmed that the Guantánamo prisoners are suffering from more than indefinite detention. 
The US Federal Bureau of Investigation released documents showing that an FBI agent witnessed “on several occasions” detainees who were “chained hand and foot in [a] fetal position to [the] floor,” without a chair, or food or water. 
In these conditions, “most urinated or defecated on [them]selves.” 
They were left there for 18 or 24 hours, or more. 
On one of these occasions, the agent reported, “the air conditioning was turned up so low that the barefooted detainee was shaking with cold.” 
On another occasion the room was unventilated, the temperature over 100 degrees Fahrenheit, and the detainee was almost unconscious on the floor with a pile of hair next to him – “he had apparently been pulling it out throughout the night.” 
Another FBI agent was laughingly told by a civilian contractor, “[Y]ou have to see this.” 
He was then taken to an interrogation room where he saw a longhaired man with a full beard who was gagged with duct tape that “covered much of his head.” 
When the agent asked how the tape would be removed, he was not given any answer. 
Other FBI agents reported seeing prisoners left in shackles for 12 hours or more, again in cold conditions, being subjected to strobe lights and loud rap music for many hours, or being forced to wrap themselves in an Israeli flag. 
The FBI report noted these incidents with the comment: “doesn’t seem excessive given Department of Defense policy.” 
Several of the detainees told the FBI agents that they had no connection with terrorism and had no idea why they had been abducted and taken to Guantánamo. 
Many prisoners were not captured fighting in Afghanistan. 
Some were picked up in Bosnia, Indonesia, Thailand, Mauritania, and Pakistan. 
The Bush administration says that the detainees are “enemy combatants” in the global war against terror – a war that is being waged around the world, and that could last for decades. 
The commander of the Guantánamo task force, Rear Admiral Harry B. Harris, Jr., recently defended harsh treatment of his prisoners, claiming, “They’re all terrorists; they’re all enemy combatants.” 
But the CIA has made mistakes before. 
For example, Murat Kurnaz, a German-born Turkish man, was held in Guantánamo for four years before being released last August. 
The case of Khaled el-Masri, a German citizen of Lebanese descent, appears to be another of these errors. 
Seized by the CIA in Macedonia, he was taken to Afghanistan and interrogated for five months before being released without charge. 
A German court has now issued arrest warrants for those involved in his abduction. 
If there are any human rights at all, the right not to be locked up indefinitely without trial is surely one of them. 
The US Constitution’s Bill of Rights puts considerable emphasis on that right, specifying in the Sixth Amendment that in all criminal prosecutions, “the accused shall enjoy the right to a speedy and public trial, by an impartial jury” and “to be informed of the nature and cause of the accusation; to be confronted with the witnesses against him.” 
None of the Guantánamo inmates has been granted these rights. 
So it has never been proved, by the standards laid down in the US Constitution that any of them really are terrorists. 
But the Sixth Amendment does not apply to the Guantánamo prisoners, because they are not US citizens and are in a facility that, technically, is not part of US territory, although it is under the full control of the US government. 
Whatever US courts say about it, abducting people all over the world, locking them up for years without establishing that they are guilty of anything, and subjecting them to harsh and abusive treatment is a flagrant violation of international law. 
By any standard of justice, it is also just plain wrong. 
Tom Paine, the great American revolutionary and author of The Rights of Man, wrote: “He that would make his own liberty secure must guard even his enemy from oppression; for if he violates this duty he establishes a precedent that will reach himself.” 
If America would only follow that advice, it might really be a beacon of hope and a shining example. 
But as long as it continues to hold and abuse prisoners without giving them a fair trial, America’s professed ideals will continue to sound to the rest of the world like the deepest hypocrisy. 

 

The State of the United States 
NEW YORK – The US presidential election is still more than half a year away, and it is impossible to know with any certainty who will be nominated to represent the major parties, much less who will be the 45th occupant of the White House. 
But it is not too soon to assess the mood of the country's more than 320 million inhabitants and what it will mean for the man or woman who ultimately prevails in what must seem to most people around the world to be an endless political soap opera. 
The dominant mood in the United States today is one of considerable anxiety, if not outright anger. 
The Washington Post recently published a four-part series of articles revealing popular fury aimed at Wall Street, Muslims, trade deals, Washington, police shootings, President Barack Obama, Republicans, immigrants, and other targets. 
One of the worst descriptions to be applied to a person nowadays is “professional politician.” 
The beneficiaries of this state of mind are anti-establishment candidates who espouse policies in opposition to free trade and immigration reform and who call for a radical overhaul of current tax and spending policies. 
The details of what they advocate may well differ, but their platforms share a promise of radical departure from the status quo. 
The basis of this mood is hardly self-evident, as the country is better off economically than it was a half-dozen years ago, in the immediate aftermath of the 2007-2008 economic crisis. 
Over nine million jobs have been created since then, interest rates are low (making loans for homes and cars more affordable), and the fall in the price of gasoline is the equivalent of a $700 tax cut for the average American family. 
Moreover, the stock market has risen some 200% since its low of seven years ago, and millions of people who were without health insurance are now covered. 
Yet this good economic news is offset in many cases by weak growth in household incomes, which have stagnated in real (inflation-adjusted) terms for some 15 years. 
The percentage of Americans working full time has still not reached the level it was at seven years ago. 
And many fear that their jobs will disappear because of foreign competition, new technologies, or outsourcing. 
A large number of Americans are living longer, but are anxious, as they have failed to set aside the funds needed to ensure that their retirement will allow them to live comfortably into old age. 
Some are paying health-insurance premiums that they previously had avoided because of mandates in the reform enacted under Obama. 
There is also the issue of inequality. 
This causes real anger, but the problem is not so much inequality (which, though worse, is nothing inherently new) as it is the decline in opportunity. 
The American Dream is giving way to class consciousness – a profound change for a country founded on the ideal that anyone can improve his or her lot through hard work. 
But the reasons for anxiety and anger transcend economic realities and worries. 
There is also physical insecurity, whether because of crime or the fear of terrorism. 
In many communities, there is concern, too, about where the culture and the society are heading. 
Modern media tend to make things worse. 
Ours is an age of “narrowcasting,” not broadcasting. 
People increasingly tune in to cable channels or websites that reinforce their views and ideologies. 
Little of this is reassuring. 
The national mood transcends the election campaign and will pose a real challenge to the new president and Congress. 
The divisions within and between the Democratic and Republican parties will make compromise and the formation of coalitions that are essential for governing all but impossible. 
Concerns over retirement and health-care affordability will make it that much more difficult to reform entitlements, even though their expansion will drive up the national debt to record levels. 
Free trade is blamed for job losses and is losing support, even though it has also been a source of new jobs and greater consumer choice – and has strengthened America’s strategic position around the world. 
Immigration, long part of the country’s heritage and a source of valuable talent, is now the object of so much controversy that prospects for reform are dim. 
The mood of the US may also intensify officials’ domestic focus. 
Already turned off by foreign involvement in the wake of the Iraq and Afghanistan interventions, which cost much more than they achieved, many Americans are skeptical of what the US can accomplish abroad. 
They are frustrated with allies seen as not carrying their fair share of common burdens, and they are increasingly convinced that the government needs to focus less on the world and more on fixing what is wrong with the US. 
Some in other countries will no doubt read all of this with satisfaction; but, overall, it is bad news for much of the world. 
An America that is distracted and divided is less likely to be willing and able to take the lead in promoting stability in the Middle East, Europe, or Asia, or in meeting global challenges. 
And, without US leadership, these challenges are likely to go unmet, turning into problems or, worse, crises. 

America Wakes Up to Climate Change 
After years of debate in the United States, and opposition to action by the Bush administration, America is finally waking up to the reality of global climate change. 
Leadership is still not coming from the president, but the private sector has begun to act. 
Leaders of major US companies have decided that global man-made climate change is real, must be controlled, and that business must play a constructive part in the process. 
Thus, even as the Bush administration and some scientific contrarians pretend that there is no problem, US corporate leaders are seeking practical solutions. 
The basic situation has been clear for years. 
Global use of fossil fuels is contributing to a sharp rise in atmospheric carbon dioxide, which is causing the Earth to warm. 
Rainfall patterns are changing. 
Deserts and dry regions are becoming drier. 
Extreme weather events such as hurricanes and typhoons are likely to increase. 
Flooding in Europe is likely to intensify, a process that may already have begun. 
Sea levels are rising, and could climb sharply if global warming leads to a destabilization of the Greenland and Antarctic ice sheets. 
In short, the scientific evidence is strong and growing that the planet is at grave risk, with many ill effects already being felt and more to come. 
The proper responses are also increasingly understood. 
We must move to a sustainable energy system, one that does not mean a huge increase of carbon in the atmosphere. 
This will require a shift to renewable energy sources such as solar power, and perhaps nuclear power, as well as new technologies to capture carbon dioxide at power plants and then to dispose of the carbon dioxide in safe underground deposits. 
Society will have to pay a price for these investments in new energy technologies, but the benefits will be vastly greater than the price. 
The US is the world’s major emitter of carbon dioxide from energy use, but it has done the least among all major economies to confront the global challenge. 
The Bush administration claims that more research is needed before any action is taken. 
Yet real action in the US is starting, thanks to leadership in other parts of the world, and thanks to the enlightened understanding of some major American businesses. 
First, the rest of the world ratified the Kyoto Protocol to control emissions of carbon dioxide. 
At the beginning of this year, Europe introduced a new Greenhouse Gas Emissions Trading Scheme that uses market-based incentives to control carbon emissions. 
American companies operating in Europe are part of that system for their European-based emissions, so that US companies are being pulled into climate control even if their own government avoids the issue. 
Second, major US investors, such as pension fund managers, are realizing that US companies that fail to control their emissions may be vulnerable to financial losses in the future. 
They know that, sooner or later, the US will have to join the rest of the world in controlling climate change. 
At that point, power companies that use antiquated technologies that emit massive amounts of greenhouse gases may face serious financial losses. 
So investors are telling companies to report their carbon emissions today in order to assess future liabilities. 
Similarly, many company bosses know that pretending that climate problems do not exist is bad for shareholders, because reality will one day strike. 
They know that investing today in clean technologies can give them a long-term competitive advantage. 
As a result, many companies are taking steps now to limit their emissions to avoid future financial liabilities and a lack of investor confidence. 
The most dramatic breakthrough of this kind occurred when General Electric, one of the world’s most important, innovative, and respected companies, announced that it was going “green” with a major new corporate focus on environmentally sound technologies and a commitment to limit its own greenhouse gas emissions. 
With GE’s leadership, which it termed “ecomagination” (combining ecology with imagination), many US businesses are sure to follow. 
It is too early to count on success in engaging the US on climate change. 
The Bush administration continues to delay and to avoid sound science. 
Yet it is reasonably clear that a tipping point has been reached. 
Reality is catching up with the US, as it already has elsewhere in the world. 
As US citizens and businesses continue to suffer the results of climate change – heat waves, droughts, hurricanes, and floods – more and more Americans, including an increasing number of business leaders, will press America’s political leaders for real action. 
The solutions will not be easy, and the effort must last over many decades in all parts of the world. 
But the effort needs to start now. 
As with Europe’s new carbon trading, all producers and consumers around the globe will need to face market incentives to adopt technologies and consumption patterns that slow (and eventually stop) the increase of greenhouse gases in the atmosphere. 
We will all need to pay a “market price” when we contribute to global climate change, so that we give true economic incentives to sustainable energy systems and new public investments – for example, mass transit – that reduce greenhouse gas emissions and thereby head off future climatic disasters. 

Inequality and the American Child 
NEW YORK – Children, it has long been recognized, are a special group. 
They do not choose their parents, let alone the broader conditions into which they are born. 
They do not have the same abilities as adults to protect or care for themselves. 
That is why the League of Nations approved the Geneva Declaration on the Rights of the Child in 1924, and why the international community adopted the Convention on the Rights of the Child in 1989. 
Sadly, the United States is not living up to its obligations. 
In fact, it has not even ratified the Convention on the Rights of the Child. 
The US, with its cherished image as a land of opportunity, should be an inspiring example of just and enlightened treatment of children. 
Instead, it is a beacon of failure – one that contributes to global sluggishness on children’s rights in the international arena. 
Though an average American childhood may not be the worst in the world, the disparity between the country’s wealth and the condition of its children is unparalleled. 
About 14.5% of the American population as a whole is poor, but 19.9% of children – some 15 million individuals – live in poverty. 
Among developed countries, only Romania has a higher rate of child poverty. 
The US rate is two-thirds higher than that in the United Kingdom, and up to four times the rate in the Nordic countries. 
For some groups, the situation is much worse: more than 38% of black children, and 30% of Hispanic children, are poor. 
None of this is because Americans do not care about their children. 
It is because America has embraced a policy agenda in recent decades that has caused its economy to become wildly unequal, leaving the most vulnerable segments of society further and further behind. 
The growing concentration of wealth – and a significant reduction in taxes on it – has meant less money to spend on investments for the public good, like education and the protection of children. 
As a result, America’s children have become worse off. 
Their fate is a painful example of how inequality not only undermines economic growth and stability – as economists and organizations like the International Monetary Fund are finally acknowledging – but also violates our most cherished notions of what a fair society should look like. 
Income inequality is correlated with inequalities in health, access to education, and exposure to environmental hazards, all of which burden children more than other segments of the population. 
Indeed, nearly one in five poor American children are diagnosed with asthma, a rate 60% higher than non-poor children. 
Learning disabilities occur almost twice as frequently among children in households earning less than $35,000 a year than they do in households earning more than $100,000. 
And some in the US Congress want to cut food stamps – on which some 23 million American households depend, threatening the poorest children with hunger. 
These inequalities in outcomes are closely tied to inequalities in opportunities. 
Inevitably, in countries where children have inadequate nutrition, insufficient access to health care and education, and higher exposure to environmental hazards, the children of the poor will have far different life prospects from those of the rich. 
And, partly because an American child’s lifetime prospects are more dependent on his or her parents’ income and education than in other advanced countries, the US now has the least equality of opportunity of any advanced country. 
At America’s most elite universities, for example, only around 9% of students come from the bottom half of the population, while 74% come from the top quarter. 
Most societies recognize a moral obligation to help ensure that young people can live up to their potential. 
Some countries even impose a constitutional mandate for equality of educational opportunities. 
But in America, more is spent on the education of rich students than on the education of the poor. 
As a result, the US is wasting some of its most valuable assets, with some young people – bereft of skills – turning to dysfunctional activities. 
American states like California spend about as much on prisons as on higher education – and sometimes more. 
Without compensatory measures – including pre-school education, ideally beginning at a very young age – unequal opportunities translate into unequal lifelong outcomes by the time children reach the age of five. 
That should be a spur to policy action. 
Indeed, while inequality’s harmful effects are wide-reaching, and impose huge costs on our economies and societies, they are largely avoidable. 
The extremes of inequality observed in some countries are not the inexorable result of economic forces and laws. 
The right policies – stronger social safety nets, progressive taxation, and better regulation (especially of the financial sector), to name a few – can reverse these devastating trends. 
To generate the political will that such reforms require, we must confront policymakers’ inertia and inaction with the grim facts of inequality and its devastating effects on our children. 
We can reduce childhood deprivation and increase equality of opportunity, thereby laying the groundwork for a more just and prosperous future – one that reflects our own avowed values. 
So why don’t we? 
Of the harm that inequality inflicts on our economies, politics, and societies, the damage done to children demands special concern. 
Whatever responsibility poor adults may bear for their lot in life – they may not have worked hard enough, saved enough, or made good decisions – children’s circumstances are thrust upon them without any sort of choice. 
Children, perhaps more than anyone, need the protection that rights afford – and the US should be providing the world with a shining example of what that means. 

American Crony Capitalists Go to War 
When financial crisis hit Asia in 1997, America's leaders charged Asian governments with practicing crony capitalism. 
In retrospect, the charge seems like rank hypocrisy. America has shown itself to be second to none in practicing cronyism, first with its rotten corporate scandals of recent years, and now in Iraq. 
Asian capitalists may have stolen some borrowed loot, but at least they didn't mix finance with war. 
Whatever other goals lay behind the Iraq war, the Bush Administration seems keen to line the pockets of its cronies and to capture increased control over Middle East oil and pipeline routes. 
Only a few pesky obstacles--the UN, and the Iraqi people--stand in their way. 
The Iraq war was ostensibly launched because of Saddam's weapons of mass destruction, yet each passing day suggests that the threat was exaggerated. 
Another goal also loomed large: control over 11% (or more) of the world's oil reserves and, in the longer term, control over pipeline routes between the Mediterranean, the Caspian Sea, and the Indian Ocean. 
The failure to locate Saddam's WMD's is putting America's grab for Iraqi oil into sharp focus. 
The Cheney-Rumsfeld team is so arrogant that it acts as if it can flaunt the takeover of Middle East oil while brushing aside questions. 
In Afghanistan last year, the US installed Hamid Karzai, a former consultant for oil giant Unocal, as interim leader. It also appointed Kalmay Khalilzad, another former Unocal consultant --indeed, Karzai's boss--as special US envoy. 
Khalilzad and Karzai spent considerable efforts in the late 1990s to get an American-built pipeline to carry gas from Turkeminstan through Afghanistan to Pakistan and the Indian Ocean. 
Even before the bombs stopped falling on Baghdad, Khalilzad's writ as Special Envoy was extended to Iraq. 
Among his likely jobs in Iraq will be to secure a pipeline carrying Iraqi oil from Mosul, Iraq to Haifa, Israel via Syria. To stop Syria from objecting, the US is now threatening it as well. 
Khalilzad will have plenty of support in the Bush Administration, which is heavily loaded with oil industry executives. 
National Security Advisor Condeleeza Rice was a Director of Chevron-Texaco before coming to the National Security Council. She even had an oil tanker named after her. 
Commerce Secretary Don Evans is also an oil-company CEO. 
Vice President Richard Cheney was in effect lead conductor of the group when he served as Chairman of Halliburton, the world's largest oil services company. 
Halliburton is now at the front of the line for Iraqi reconstruction projects, for which contracts are being handed out without any transparent and competitive process whatsoever. 
But what is happening here is more than "guilt by association" with the oil industry. 
The Bush Administration is flouting every rule to give its cronies the inside track. 
Before joining the Pentagon, Donald Rumsfeld was a key player as well. 
A longstanding sidekick of Cheney, Rumsfeld traveled to Baghdad in 1983 and 1984 at the behest of former Bechtel Corporation President George Shultz, then passing a bit of non-corporate time as US Secretary of State. 
Rumsfeld's hidden mission was to win Saddam's support of a Bechtel-built oil pipeline to run from Iraq via Jordan to the Gulf of Aqaba. 
This is the same Bechtel which built Saddam's "dual use" chemical industry; now it has been awarded a non-competitive $600 million mega-contract to rebuild Iraqi infrastructure. 
American newspapers now report that former Shell Oil CEO Philip Carroll will be appointed as the US czar of Iraqi oil. 
Carroll's most recent job was as Chief Executive of Fluor, the giant construction conglomerate, another company that, together with Bechtel and Halliburton, is in line for the big bucks that will soon be paid (using Iraq's oil earnings) for US-led reconstruction. 
The United Kingdom can't match the US in cronyism, but Britain's support for America in the war also has a commercial logic. 
While Saddam gave oil contracts to French, Russian, and Chinese oil firms, UK firms such as BP were frozen out. 
UK firms are no doubt counting on returning to Iraq on America's coattails. 
Only a few hurdles remain before the US can consummate its crony takeover of Iraq's oil. 
America will soon try to appoint an Iraqi regime that will aim to cancel many of Saddam's oil contracts with France, Russia, and China, in order to make room for US and UK firms. 
But this will be harder to accomplish than simply sending in the US army. 
The US can not legally market Iraqi oil, much less invest in new fields, until the old UN sanctions against Iraq are lifted. 
But the rest of the world believes that lifting the sanctions is tantamount to handing Iraq's oil future over to the US and UK occupying forces and their corporate cronies. 
More telling, and significant in the long term, is the remarkable anti-US and anti-UK sentiment now sweeping Iraq. 
Rather than being welcomed as liberators, the US and UK are seen as new colonial occupiers, and the Iraqis are mobilizing to push the occupiers out. 
The US may have done something few could have expected: united the Shi'ites and the Sunnis in a common cause. 
Democracy may come to Iraq, and the will of the people will be to stop the plunder of their country's natural resources by US crony capitalists. 

An Unhinged Democracy in America 
NEW YORK – Alexis de Tocqueville, a liberal French aristocrat, visited the United States in 1831 ostensibly to write a study of its “enlightened” prison system (locking people up in solitary confinement like penitent monks was the latest modern idea). 
Out of this trip came de Tocqueville’s masterpiece, Democracy in America, in which he expressed admiration for American civil liberties and compared the world’s first genuine liberal democracy favorably with Old World institutions. 
But de Tocqueville had serious reservations, too. 
The biggest danger to US democracy, he believed, was the tyranny of the majority, the suffocating intellectual conformity of American life, the stifling of minority opinion and dissent. 
He was convinced that any exercise of unlimited power, be it by an individual despot or a political majority, is bound to end in disaster. 
Democracy, in the sense of majority rule, needs restraints, just like any other system of government. 
That is why the British have mixed the authority of elected politicians with that of aristocratic privilege. 
And it is why Americans still cherish their Constitution’s separation of governmental powers. 
By contrast, in the French republican system, the state represents the so-called will of the people. 
As a result, its authority is less constrained, which may explain the greater frequency in France of street demonstrations and even of mob violence. 
Indeed, these upheavals may act as informal checks on official power. 
De Tocqueville identified another source of restraint in the US system: the power of religion. 
Human greed, as well as the temptation of going to extremes, was tempered by the moderating influence of a shared Christian faith. 
Liberty, in the US, was inextricably entwined with religious belief. 
The spectacle of American politics today would seem to cast doubt on de Tocqueville’s observation. 
Or, rather, the rhetoric of many Republicans aspiring to be President sounds like a perversion of what he saw in 1831. 
Religion and liberty are still mentioned in one breath, but often to promote extreme views. 
Religious minorities are denounced. 
Apocalyptic fears are stoked. 
Intolerance is promoted. 
All in the name of God. 
Of course, the US is not the only country where fringe demagogues are now poisoning mainstream politics. 
Religious language is less often heard in Western Europe, but all the more in parts of Eastern Europe, Turkey, and Israel. 
And the message of populism is similar everywhere in the democratic world: Liberal elites are to be blamed for all our ills and anxieties, from Europe’s refugee crisis to the inequities of the global economy, from “multiculturalism” to the rise of radical Islam. 
Populism is causing considerable alarm, not least because mainstream politicians seem less and less capable of finding a convincing way to stop its rise. 
Those who are rightly worried about the politics of fear like to assume that populism is a threat to democracy itself. 
Distrust of the elites fosters distrust of the system, and the longing for great leaders who will deliver us from the selfishness of professional politicians will lead to new forms of tyranny. 
That may turn out to be true. 
But, in fact, it is not really democracy that is presently under siege. 
In some ways, many societies are more democratic than they were before. 
If nothing else, the Donald Trump phenomenon shows that old party establishments can be skirted by popular outsiders. 
Social media also make it possible to bypass the traditional filters of authority, such as serious newspapers or broadcasters, and publish any point of view directly. 
The power of private fortunes to sway public opinion, especially in the US, also upsets the traditional order. 
Anti-elitism can be fanned by vast individual wealth, because elitism is defined less by financial clout than by education. 
Angry people swayed by the populist message are angrier at liberal professors, clever bankers, or skeptical journalists than they are at multi-billionaires. 
(It is both President Barack Obama’s elite education and the color of his skin – or, rather, the combination of the two – that has attracted so much rage.) 
At the same time, people have more power to elect power-hungry crooks than they did before. 
Like the wild and woolly views swirling around the Internet, such figures are no longer kept at bay by traditional party elites. 
What is steadily falling away is not democracy, but the restraints that de Tocqueville thought were essential to make liberal politics work. 
More and more, populist leaders regard their election by the majority of voters as a license to crush all political and cultural dissent. 
De Tocqueville’s nightmare is not yet the reality in the US, but it is close to what we see in Russia, Turkey, Hungary, and perhaps Poland. 
Even Israel, which, despite its many obvious problems, has always had a robust democracy, is moving in this direction, with government ministers demanding proof of “state loyalty” from writers, artists, and journalists. 
It is hard to see how traditional elites are going to regain any authority. 
And yet I think de Tocqueville was right. 
Without editors, there can be no serious journalism. 
Without parties led by experienced politicians, the borders between show business and politics will disappear. 
Without limits placed on the appetites and prejudices of the majority, intolerance will rule. 
This is not a question of nostalgia or snobbery. 
Nor is it a plea to trust anyone with a plausible air of authority. 
Anger at the elites is not always unjust. 
Globalization, immigration, and cosmopolitanism have served the interests of a highly educated minority, but sometimes at the expense of less privileged people. 
And yet, the problem identified by de Tocqueville in the 1830s is more relevant now than ever. 
Liberal democracy cannot be reduced to a popularity contest. 
Constraints on majority rule are necessary to protect the rights of minorities, be they ethnic, religious, or intellectual. 
When that protection disappears, we will all end up losing the freedoms that democracy was supposed to defend. 


American Foreign Policy after Iraq 
What comes after Iraq? 
If President George W. Bush’s current troop “surge” fails to produce an outcome that can be called “victory,” what lessons will the United States draw for its future foreign policy? 
Will it turn inward, as it did after its defeat in Vietnam three decades ago? 
Will it turn from promoting democracy to a narrow realist view of its interests? 
Even while discussion in Washington is fixated on Iraq, a number of thoughtful foreign observers are asking these longer-term questions. 
Analysts and pundits have often been mistaken about America’s position in the world. 
For example, two decades ago, the conventional wisdom was that the US was in decline. 
A decade later, with the Cold War’s end, the new conventional wisdom was that the world was a unipolar American hegemony. 
Some neo-conservative pundits drew the conclusion that the US was so powerful that it could decide what it thought was right, and others would have to follow. 
Charles Krauthammer celebrated this view as “the new unilateralism,” and it heavily influenced the Bush administration even before the attacks on September 11, 2001. 
But the new unilateralism was based on a profound misunderstanding of the nature of power in world politics. 
Power is the ability to get the outcomes one wants. 
Whether the possession of resources will produce such outcomes depends upon the context. 
For example, a large, modern tank army is a powerful resource if a war is fought in a desert, but not if it is fought in a swamp – as America discovered in Vietnam. 
In the past, it was assumed that military power dominated most issues, but in today’s world, the contexts of power differ greatly. 
I have likened the distribution of power in politics today as analogous to a three-dimensional chess game. 
On the top board – military relations among states – the world is, indeed, unipolar, and likely to remain that way for decades. 
But on the middle board of economic relations, the world is already multipolar, and the US cannot obtain the outcomes it wants without the cooperation of Europe, Japan, China, and others. 
And, on the bottom board of transnational issues outside the control of governments – including everything from climate change to pandemics to transnational terrorism – power is chaotically distributed, and it makes no sense at all to claim American hegemony. 
Yet it is on this bottom board that we find most of the greatest challenges we face today. 
The only way to grapple with these problems is through cooperation with others, and that requires the “soft” power of attraction as well as the hard power of coercion. 
There is no simple military solution that will produce the outcomes we want. 
The new unilateralists who dominated Bush’s first administration made the mistake of thinking that the unipolar distribution of power in the military context was sufficient to guide foreign policy. 
They were like a young boy with a hammer who thinks that every problem resembles a nail. 
The danger of their approach is now obvious. 
Whoever plays a three-dimensional game by focusing on only one board is bound to lose in the long run. 
Fortunately, the pendulum has begun to swing back toward cooperation. 
In Bush’s second term, some of the most extreme unilateralists have departed from the government, and the president has approached difficult problems like North Korea or Iran with a more multilateral approach than during his first term. 
Likewise, for all the complaints about the United Nations, the US and others turned to UN peacekeepers to sort out the mess after the Lebanon War last summer. 
The Iraq War, in particular, increased public awareness of the mistakes in Bush’s first term, but other issues are changing as well. 
Americans now view cooperative action on global climate change more favorably. 
Similarly, the threat of pandemics means that Americans may come to recognize the importance of a stronger World Health Organization, just as the problem of nuclear proliferation is increasing awareness of the importance of the International Atomic Energy Agency. 
The nature of these problems means that the US does not have the luxury of turning inward no matter what the outcome in Iraq. 
These are not problems you can leave overseas. 
They follow you home. 
It also is unlikely that American foreign policy will return to a narrow realism and drop all emphasis on democracy and human rights. 
While the Iraq War discredited the idea of coercive democratization, both Republicans and Democrats have a strong strand of idealism in their foreign policy orientations. 
The problem for whoever is elected president in 2008 will be to find appropriate realistic means to advance democratic values and adjust official rhetoric accordingly. 
When rhetoric greatly outstrips reality, others view it as hypocrisy. 
Americans will need to find ways to assert their narrative of democracy, freedom, and rights in a manner that respects diversity and the views of others. 
What Iraq has taught is the importance of developing civil society and the rule of law before trying to hold broad-based elections. 
Democracy is more than voting, for it requires large investments in education, institutions, and promotion of non-governmental organizations. 
It must be rooted in the indigenous society and bear its characteristics, not be imposed from abroad. 
It is highly unlikely that the US will react after Iraq as it did after Vietnam. 
The paradox of American power is that the world’s only military superpower cannot protect its citizens by acting alone. 

US Foreign Policy After the Midterm Election 
WASHINGTON, DC – One thing missing from the recent US midterm election campaigns was a focus on foreign policy. 
While much was made of the migrant caravan making its way from Central America through Mexico, issues such as trade with China, Iran, North Korea, and even Russia and cyber subterfuge didn’t get much traction. 
With the Democratic Party having regained control of the US House of Representatives, that will change. 
A cornered President Donald Trump is likely to turn to a favorite tactic of autocrats everywhere: manufacturing foreign-policy crises to distract the public’s attention from problems at home. 
Trump’s determination to control media headlines makes him all the more likely, when it suits him, to call attention to the troubles in the Middle East, rediscover the North Korean nuclear threat, and force the Democrats to make a tough choice between being hard on Russia or getting into an arms race. 
Trump may also decide to use Congress as a foreign-policy foil, tossing international challenges back into the lap of lawmakers, who will be hard-pressed to come up with good answers. 
After all, in Trump’s zero-sum “I win, you lose” view of the world, congressional failures that he can blame on the Democrats are almost as good as White House successes. 
With the US House of Representatives under “new management,” including a record number of Democratic women, Trump has a tempting target. 
He has every incentive to show the newcomers up by passing the ball and watching them fail. 
In this new contest to pass the blame, Syria is ripe for the picking. 
Eliot Engel, the incoming chairman of the House Foreign Affairs Committee, has already said that the Democrats may seek congressional authorization for the use of military force in Syria. 
But no one, Democrat or Republican, has a plausible plan either for ending the war in Syria or even for helping Syrian civilians in significant numbers, other than making it risky for Syria’s ruler, Bashar al-Assad, to use chemical weapons too blatantly. 
Any move the Democrats make will be unpopular with their own voters and will simply shift attention from Trump’s inability to solve the problem to their own lack of a plan. 
Iran presents Trump with another opportunity to inflict political damage on the Democrats. 
Trump followed through on his threat in January to withdraw the United States from the 2015 Iran nuclear deal – formally known as the Joint Comprehensive Plan of Action (JCPOA) – if Congress didn’t “fix” it. 
Specifically, he wanted the ability to reimpose sanctions on Iran, which he did earlier this month. 
Sanctions, Trump has long maintained, would force Iran to negotiate. 
That has not happened and is unlikely to happen. 
To push Iran toward the negotiating table, and, more importantly, assert his authority and save face, Trump might be tempted to heighten tensions, if not provoke Iran into a confrontation. 
And here, Engel might be forced to play along. 
Engel has said that Iran is the “most dangerous player” in the Middle East, and he was a vocal opponent of the JCPOA. 
Though he supported the deal after it was signed and opposed withdrawing from it, Trump could use Engel’s own position on Iran to push him to adopt a more aggressive posture or risk appearing “weak” on national security. 
But the payoff is likely to be a foreign-policy crisis that produces no meaningful progress toward a new nuclear deal and plenty of blame to go around. 
The Democrats also provide Trump an out on North Korea. 
Back in June, Engel introduced the North Korea Nuclear Baseline Act, which would require the White House to report on the status of North Korea’s nuclear program and provide a “baseline” of progress for continued talks. 
Engel has already said he will call a hearing on the talks. 
Whatever is said in that hearing could provide North Korean leader Kim Jong-un with a ready excuse to renege on his already-vague denuclearization agreement with Trump. 
The US president, Kim could argue, can no longer be trusted with a hostile Congress at his back. 
Perhaps in anticipation of a Democratic-led House and a subsequent Democratic pile-on regarding Russia, Trump withdrew the US from the Intermediate-Range Nuclear Forces Treaty (INF) in October, citing Russian violations. 
Signed in 1987 by Ronald Reagan and Soviet premier Mikhail Gorbachev, the INF required both the US and Russia to eliminate ground-launched ballistic and cruise missiles. 
The US withdrawal from it signals the start of a new arms race. 
Trump has already called for an increase in defense spending and the launch of a “space force”. 
As Democrats focus on Russian interference in the 2016 US elections, Trump’s ties to Russia, and the details of Trump’s closed-door conversation with Russian president Vladimir Putin in Helsinki in July, they will be faced with the prospect of signing off on increased defense spending or else appearing dithering and hypocritical on Russia. 
Much of the world breathed a sigh of relief at the Democrats’ recapture of the House, because it signaled a vulnerability in Trump’s aggressively anti-liberal “America First” approach to the world order. 
But Democrats should resist the urge to try correcting Trump’s perceived wrongs. 
The House has just enough power to get into foreign-policy trouble and not enough to get out of it or to adopt and implement a coherent strategy. 
The Democrats’ best bet is to let Trump take the lead on global affairs, however unsavory, and actively work to check and balance his actions. 
Oversight and the power of the purse will be their most powerful tools. 
In the end, Trump will need House Democrats for money, sanctions, or approval of trade agreements. 
If they play their cards right, he will have to deal them in. 
If they don’t, they will find that Trump still holds a much stronger hand. 

American Foreign Policy After the Mid-Term Elections 
NEW YORK – Few Americans cast their ballot in the recent mid-term elections on the basis of foreign policy. 
While it may be difficult for people around the world to comprehend this, given the global reach of the United States, it is an undeniable fact. 
Most Americans are, after all, preoccupied with the US economy’s sluggish growth and persistent high unemployment. 
The world’s challenges seem far removed from their day-to-day lives. 
The Cold War ended a generation ago; the terror attacks of September 11, 2001, are nearly a decade in the past. 
Most Americans do not feel the sacrifices associated with the large troop presence and ongoing conflicts in Afghanistan and Iraq. 
But the fact that foreign policy did not materially affect the November elections does not mean that the results will not affect US foreign policy. 
They will, but in ways that are inconsistent and even surprising. 
One relationship sure to be influenced by Republican gains will be that between the US and Russia. 
Quick or easy Senate approval of the New START arms-control treaty is highly unlikely, given stated concerns about verification and the protection of US missile-defense programs; instead, we can expect delays and, possibly, attempts to amend what the two governments already agreed upon. 
Congress may also prove less willing to remove hurdles to Russia’s admission to the World Trade Organization, given what is widely judged to be its leaders’ anti-democratic behavior. 
China, too, will feel the results of the new balance in Congress. 
Pressure was already growing to introduce trade sanctions in response to China’s refusal to allow its currency to rise to a natural level against the dollar. 
Such pressure will likely grow, given concerns over Chinese behavior both at home and abroad. 
Moreover, Congress will resist rolling back any of the long-standing economic sanctions against Cuba. 
President Barack Obama has the authority to take some small steps on his own to normalize ties, but substantial change to US policy requires Congress to act – and Congress wants to see fundamental change in Cuba before it does so. 
There will be other consequences stemming from the election. 
What little chance there was of the US backing any global plan to limit or tax carbon emissions has disappeared. 
Improvement in US performance on climate change will have to come from innovation and increased energy efficiency. 
One can anticipate the Republicans, now in control of the House of Representatives, exploiting their ability to convene hearings to question and review foreign policy. 
Depending on how this power is used (or abused), it can be beneficial (exercising needed oversight and increasing the transparency of policy and policy-making) or destructive (if, for example, hearings degenerate into politically motivated attacks on administration officials and policies). 
In many other areas, continuity can be expected to trump change. 
This comes as little surprise, as America’s Constitution and political system delegate most of the initiative on foreign policy and defense to the president. 
Yes, Congress must declare war, approve spending, agree to most senior appointments, and (in the case of the Senate) ratify treaties, but the president has enormous latitude when it comes to carrying out diplomacy and using military force in situations other than war, which tend to be most situations. 
One area of probable continuity is the Middle East, where Obama will continue to try to broker a deal between Israelis and Palestinians and press Iran not to develop nuclear weapons. 
(Republicans, however will argue for putting less pressure on Israel to compromise and more pressure on Iran.) 
But he can expect considerable backing from Republicans if he wants to maintain a sizeable US military presence in Afghanistan beyond this July, or a modest military presence in Iraq beyond the end of 2011. 
Questions abound when it comes to foreign economic policy, however. 
Three completed trade agreements (with South Korea, Panama, and Colombia) have been languishing for years, mostly because of deep opposition to free trade from labor unions and the Democratic Party. 
Republicans have historically been more supportive of such bilateral free-trade agreements. 
But will the new generation of Republicans continue this tradition? 
There is a fair chance that one or more of these bilateral accords will be approved (in part because the Obama administration seems finally to have recognized that trade can generate good jobs), but it is far less certain that the president will gain the authority needed to negotiate a new global trade deal. 
An even bigger question mark hovers over what might be the greatest national security concern of all: the federal budget deficit. 
Failure to address the deficit (and the mounting debt) will create pressures to reduce what the US spends on foreign aid, intelligence, and defense – although Republicans are more likely than Democrats to protect such spending (except for foreign aid). 
Mounting debt also leaves the US vulnerable to the decisions of those who lend it money – or to the vagaries of the market. 
A dollar crisis could weaken the foundations of American power. 
But averting such a crisis requires that the White House and Congress, Democrats and Republicans, agree on a plan for moving the US budget toward balance. 

American Funk 
NEW YORK – The eccentric Bengali intellectual Nirad C. Chaudhuri once explained the end of the British Raj in India as a case of “funk,” or loss of nerve. 
The British had stopped believing in their own empire. 
They simply lost the will, in Rudyard Kipling’s famous words, to fight “the savage wars of peace.” 
In fact, Kipling’s poem, “The White Man’s Burden,” which exhorted the white race to spread its values to the “new-caught sullen peoples, half devil and half child,” was not about the British Empire at all, but about the United States. 
Subtitled “The United States and the Philippine Islands,” it was published in 1899, just as the US was waging a “savage war of peace” of its own. 
Chaudhuri had a point. 
It is difficult to sustain an empire without the will to use force when necessary. 
Much political rhetoric, and a spate of new books, would have us believe that the US is now in a dangerous state of funk. 
For example, Republican presidential candidate Mitt Romney likes to castigate President Barack Obama for “apologizing for America’s international power,” for daring to suggest that the US is not “the greatest country on earth,” and for being “pessimistic.” 
By contrast, Romney promises to “restore” America’s greatness and international power, which he proposes to do by boosting American military force. 
Romney’s Kipling is the neo-conservative intellectual Robert Kagan, whose new book, The World America Made, argues against “the myth of American decline.” 
Yes, he admits, China is growing in strength, but US dominance is still overwhelming; 
American military might can still “make right” against any challenger. 
The only real danger to US power is “declinism”: the loss of self-belief, the temptation to “escape from the moral and material burdens that have weighed on [Americans] since World War II.” 
In a word, funk. 
Like Chaudhuri, Kagan is an engaging writer. 
His arguments sound reasonable. 
And his assessment of US firepower is no doubt correct. 
True, he has little time for domestic problems like antiquated infrastructure, failing public schools, an appalling health care system, and grotesque disparities in income and wealth. 
But he is surely right to observe that no other power is threatening to usurp America’s role as the world’s military policeman. 
Less certain, however, is the premise that the world order would collapse without “American leadership.” 
France’s King Louis XV allegedly declared on his deathbed: “Après moi, le déluge” (After me, the flood). 
This is the conceit of all great powers. 
Even as the British were dismantling their empire after World War II, the French and Dutch still believed that parting with their Asian possessions would result in chaos. 
And it is still common to hear autocratic leaders who inherited parts of the Western empires claim that democracy is all well and good, but the people are not yet ready for it. 
Those who monopolize power cannot imagine a world released from their grip as anything but a catastrophe. 
In Europe after World War II, Pax Americana, guaranteed by US military power, was designed “to keep the Russians out and Germany down.” 
In Asia, it was meant to contain communism, while allowing allies, from Japan to Indonesia, to build up economic strength. 
Spreading democracy was not the main concern; stopping communism – in Asia, Europe, Africa, the Middle East, and the Americas – was. 
In this respect, it succeeded, though at great human cost. 
But, now that the specter of global communist domination has joined other fears – real and imagined – in the dustbin of history, it is surely time for countries to start handling their own affairs. 
Japan, in alliance with other Asian democracies, should be able to counterbalance China’s growing power. 
Similarly, Europeans are rich enough to manage their own security. 
But neither Japan nor the European Union seems ready to pull its own weight, owing in part to decades of dependency on US security. 
As long as Uncle Sam continues to police the world, his children won’t grow up. 
In any case, as we have seen in Iraq and Afghanistan, “savage wars of peace” are not always the most effective way to conduct foreign policy. 
Old-fashioned military dominance is no longer adequate to promote American interests. 
The Chinese are steadily gaining influence in Africa, not with bombers, but with money. 
Meanwhile, propping up secular dictators in the Middle East with US arms has helped to create Islamist extremism, which cannot be defeated by simplysending more drones. 
The notion promoted by Romney and his boosters that only US military power can preserve world order is deeply reactionary. 
It is a form of Cold War nostalgia – a dream of returning to a time when much of the globe was recovering from a ruinous world war and living in fear of communism. 
Obama’s recognition of America’s limitations is not a sign of cowardly pessimism, but of realistic wisdom. 
His relative discretion in the Middle East has allowed people there to act for themselves. 
We do not yet know what the outcome there will be, but “the greatest country on earth” cannot impose a solution. 
Nor should it. 

American Gulag 
Recently, the United States achieved the dubious honor of boasting the largest prison and jail population on earth. 
It reached this zenith by surpassing cash-strapped Russia - long its only rival as a mass imprisonment society - after Russia released thousands of inmates so as to save money. 
A few years earlier, as America rushed to lock up ever more of its population for ever-pettier offenses, the absolute size of its incarcerated population surpassed that of China - despite China's population being more than four times that of America. 
According to research conducted by the British Home Office, America now incarcerates over one fifth of the world's total prisoners. 
There is something bitterly ironic in this. 
For America really is a land of liberty, a place where lives, often scarred by injustice elsewhere, can be remade. 
How tragic, therefore, that over the past twenty years, the country's political leaders have so often decided to deal with many of the most noxious side-effects of poverty - from chronic drug use and the establishment of street drug markets, to hustling, to gang membership and the spraying of graffiti on public buildings - through a vast over-reliance on incarceration. 
How doubly tragic that this has occurred in tandem with a political assault on the Great Society anti-poverty programs put in place during the 1960s; that the investments in infrastructure, public education, public healthcare and job training which might curtail crime more effectively are, instead, being replaced by massive public expenditures on building new prisons to incarcerate hundreds of thousands of low-level offenders. 
With such vicious cycles of crime, punishment and dis-investment in poor communities it is no surprise that the prison population has expanded to such an extent. 
The numbers buttressing this sprawling prison system are extraordinary. 
Approximately two million Americans are now serving either prison or jail time, over one million of them for non-violent offenses (a preponderance of these either for drug use or low-level drug sales). 
Per hundred thousand residents, the US has an incarceration rate over five times that of England, six times that of Canada, and seven times that of Germany. 
Somewhere in the region of 10% of African American men in their twenties live behind bars. 
In some states, where a single felony conviction is enough to bar the offender from ever being able to vote again, over one quarter of African American males are disenfranchised. 
High levels of disenfranchisement in Florida likely played a critical role in the much-disputed electoral victory of President Bush. 
Since 1980, a virtual ``prison industrial complex'' has arisen, with phenomenal rates of new-prison construction abetted by lucrative construction and prison-guard union lobbies. 
Several states, including California, now spend more on prisons than they do on higher education. 
Despite dramatically falling crime rates over the last ten years (which most criminologists attribute more to demography - there have simply been fewer young men of late - than incarceration), prison populations have continued to soar. 
Much of that increase has more to do with public perceptions about supposed crime waves and ham-handed public and political responses to occasional headline-capturing murders, than any actual underlying crime rate. 
As the actual number of truly heinous crimes has in fact fallen, increasingly it is small-time hoodlums, drug users, and mentally ill people who have been drawing long spells behind bars. 
America today has five times as many prisoners as it did in 1980. 
One of the most dismaying developments is the spread of so-called ``three-strikes-and-you're out'' laws. 
California's version, passed by citizen referendum in 1993 and ratcheted into place by state legislators in 1994, provides for the life imprisonment of any criminal with two previous serious convictions who is found guilty of any third felony. 
By the end of last year there were about 7,000 people serving life sentences in California under this law. 
Many thousands of them are serving life for small-time ``Third Strikes'': minor drug crimes, car theft, petty fraud, burglary, and drunk driving (even graffiti spraying, to the tune of $400 damage, which has now been reclassified as a felony). 
One such man is fifty-eight year old heroin addict Billy Ochoa, who is serving a staggering 326 years in a supermax (super maximum security) prison for $2,100 of welfare fraud. 
Because he had been convicted of several burglaries over the previous decades, when Ochoa was caught making fraudulent applications for food stamps and emergency housing vouchers in Los Angeles, he was tried under the Three Strikes law and given sentences on thirteen separate counts to be served in one of the toughest, most secure prisons in America. 
Ochoa's sentence, apart from its extravagant cruelty, may ultimately cost taxpayers as much as a million dollars. 
In many high security American prisons, inmates are routinely kept in virtual isolation, fed in their cells, allowed out for only half an hour of exercise a day, sometimes denied a TV, a radio, or even decorations for their concrete walls - conditions which have been documented to drive many of them into states of serious psychosis. 
How can things have come to this America? 
Now is the time - with the world watching America fight to defend its values - for the worst excesses of its criminal justice system to be addressed. 
It is a tragedy that a great democracy should have so ugly and vast a prison system corroding both its reputation and its polity. 

American Hegemony or American Primacy? 
CAMBRIDGE – No country in modern history has possessed as much global military power as the United States. 
Yet some analysts now argue that the US is following in the footsteps of the United Kingdom, the last global hegemon to decline. 
This historical analogy, though increasingly popular, is misleading. 
Britain was never as dominant as the US is today. 
To be sure, it maintained a navy equal in size to the next two fleets combined, and its empire, on which the sun never set, ruled over a quarter of humankind. 
But there were major differences in the relative power resources of imperial Britain and contemporary America. 
By the outbreak of World War I, Britain ranked only fourth among the great powers in terms of military personnel, fourth in terms of GDP, and third in military spending. 
The British Empire was ruled in large part through reliance on local troops. 
Of the 8.6 million British forces in WWI, nearly a third came from the overseas empire. 
That made it increasingly difficult for the government in London to declare war on behalf of the empire when nationalist sentiments began to intensify. 
By World War II, protecting the empire had become more of a burden than an asset. 
The fact that the UK was situated so close to powers like Germany and Russia made matters even more challenging. 
For all the loose talk of an “American empire,” the fact is that the US does not have colonies that it must administer, and thus has more freedom to maneuver than the UK did. 
And, surrounded by unthreatening countries and two oceans, it finds it far easier to protect itself. 
That brings us to another problem with the global hegemon analogy: the confusion over what “hegemony” actually means. 
Some observers conflate the concept with imperialism; but the US is clear evidence that a hegemon does not have to have a formal empire. 
Others define hegemony as the ability to set the rules of the international system; but precisely how much influence over this process a hegemon must have, relative to other powers, remains unclear. 
Still others consider hegemony to be synonymous with control of the most power resources. 
But, by this definition, nineteenth-century Britain – which at the height of its power in 1870 ranked third (behind the US and Russia) in GDP and third (behind Russia and France) in military expenditures – could not be considered hegemonic, despite its naval dominance. 
Similarly, those who speak of American hegemony after 1945 fail to note that the Soviet Union balanced US military power for more than four decades. 
Though the US had disproportionate economic clout, its room for political and military maneuver was constrained by Soviet power. 
Some analysts describe the post-1945 period as a US-led hierarchical order with liberal characteristics, in which the US provided public goods while operating within a loose system of multilateral rules and institutions that gave weaker states a say. 
They point out that it may be rational for many countries to preserve this institutional framework, even if American power resources decline. 
In this sense, the US-led international order could outlive America’s primacy in power resources, though many others argue that the emergence of new powers portends this order’s demise. 
But, when it comes to the era of supposed US hegemony, there has always been a lot of fiction mixed in with the facts. 
It was less a global order than a group of like-minded countries, largely in the Americas and Western Europe, which comprised less than half of the world. 
And its effects on non-members – including significant powers like China, India, Indonesia, and the Soviet bloc – were not always benign. 
Given this, the US position in the world could more accurately be called a “half-hegemony.” 
Of course, America did maintain economic dominance after 1945: the devastation of WWII in so many countries meant that the US produced nearly half of global GDP. 
That position lasted until 1970, when the US share of global GDP fell to its pre-war level of one-quarter. 
But, from a political or military standpoint, the world was bipolar, with the Soviet Union balancing America’s power. 
Indeed, during this period, the US often could not defend its interests: the Soviet Union acquired nuclear weapons; communist takeovers occurred in China, Cuba, and half of Vietnam; the Korean War ended in a stalemate; and revolts in Hungary and Czechoslovakia were repressed. 
Against this background, “primacy” seems like a more accurate description of a country’s disproportionate (and measurable) share of all three kinds of power resources: military, economic, and soft. 
The question now is whether the era of US primacy is coming to an end. 
Given the unpredictability of global developments, it is, of course, impossible to answer this question definitively. 
The rise of transnational forces and non-state actors, not to mention emerging powers like China, suggests that there are big changes on the horizon. 
But there is still reason to believe that, at least in the first half of this century, the US will retain its primacy in power resources and continue to play the central role in the global balance of power. 
In short, while the era of US primacy is not over, it is set to change in important ways. 
Whether or not these changes will bolster global security and prosperity remains to be seen. 

What I Tell My Non-American Friends 
CAMBRIDGE – I frequently travel overseas, and invariably my foreign friends ask, with varying degrees of bewilderment: What in the world is going on in your country? 
Here is what I say. 
First, do not misinterpret the 2016 election. 
Contrary to some commentary, the American political system has not been swept away by a wave of populism. 
True, we have a long history of rebelling against elites. 
Donald Trump tapped into a tradition associated with leaders like Andrew Jackson and William Jennings Bryan in the nineteenth century and Huey Long and George Wallace in the twentieth century. 
And yet Trump lost the popular vote by nearly three million. 
He won the election by appealing to populist resentment in three Rust Belt states – Michigan, Pennsylvania, and Wisconsin – that had previously voted Democratic. 
If a hundred thousand votes had been cast differently in those states, Trump would have lost the Electoral College and the presidency. 
That said, Trump’s victory points to a real problem of growing social and regional inequality in the United States. 
J.D. Vance’s recent best-selling book Hillbilly Elegy compellingly describes the vast difference between California and Appalachia. 
Research by the Princeton economists Anne Case and Angus Deaton shows that the demographic trends among lower-income whites without a college degree are worse than those for African-Americans, who historically anchored the lower extremes of inequality. 
In 1999, mortality rates among whites with no college were around 30% lower than those of African-Americans; by 2015, they were 30% higher. 
Moreover, manufacturing employment, once a prime source of high-paying jobs for working-class whites, has fallen sharply over the last generation, to just 12% of the workforce. 
These previously Democratic voters were attracted by Trump’s promises to shake things up and bring back manufacturing jobs. 
Ironically, Trump’s efforts to repeal President Barack Obama’s health-care legislation would make their lives worse. 
The second thing I tell my foreign friends is not to underestimate Trump’s communications skills. 
Many are offended by his tweet storms and outrageous disregard for facts. 
But Trump is a veteran of reality television, where he learned that the key to success is to monopolize viewers’ attention, and that the way to do that is with extreme statements, not careful regard for the truth. 
Twitter helps him to set the agenda and distract his critics. 
What offends commentators in the media and academia does not bother his supporters. 
But as he turns from his permanent self-centered campaigning to trying to govern, Twitter becomes a two-edged sword that deters needed allies. 
Third, I tell my friends not to expect normal behavior. 
Normally, a president who loses the popular vote moves to the political center to attract additional support. 
This is what George W. Bush did successfully in 2001. 
Trump, by contrasts, proclaims that he won the popular vote and, acting as though he really did, appeals to his base voters. 
While Trump has made solid centrist appointments to the Departments of Defense, State, and Homeland Security, his picks for the Environmental Protection Agency and the Department of Health and Human Services are from the extremes of the Republican Party. 
His White House staff is divided between pragmatists and ideologues, and he caters to both. 
Fourth, no one should underestimate US institutions. 
Sometimes my friends talk as though the sky is falling and ask if Trump is as dangerous a narcissist as Mussolini. 
I tell them not to panic. 
The US, for all its problems, is not Italy in 1922. 
Our national political elites are often polarized; but so were America’s founders. 
In designing the US Constitution, the founders’ goal was not to ensure harmonious government, but to constrain political power with a system of checks and balances that made it difficult to exercise. 
The joke goes that the founders created a political system that made it impossible for King George to rule over us – or for anyone to ever do so. 
Inefficiency was placed in the service of liberty. 
It is still early in the Trump presidency, and we cannot be sure what might happen after, say, a major terrorist attack. 
So far, however, the courts, the Congress, and the states have checked and balanced the administration, as Madison intended. 
And the permanent civil servants in the executive departments add ballast. 
Finally, my friends ask what all of this means for American foreign policy and the liberal international order led by the US since 1945. 
Frankly, I don’t know, but I worry less about the rise of China than the rise of Trump. 
While American leaders, including Obama, have complained about free riders, the US has long taken the lead in providing key global public goods: security, a stable international reserve currency, relatively open markets, and stewardship of the Earth’s commons. 
Despite the US-led international order’s problems, the world has prospered and poverty has been reduced under it. 
But one cannot be sure it will continue. 
The US will need to cooperate with China, Europe, Japan, and others to manage transnational problems. 
During the 2016 campaign, Trump was the first major party candidate in 70 years to call the American alliance system into question. 
Since taking office in January, statements by Trump and his appointees suggest that it is likely to persist. 
American hard and soft power, after all, stems largely from the fact that the US has 60 allies (while China has only a few). 
But the stability of the multilateral institutions that help manage the world economy and global commons is more uncertain. 
Trump’s budget director speaks of a hard-power budget, with funds cut from the State Department and the United Nations system. 
Other officials advocate replacing multilateral trade deals with “fair and balanced” bilateral arrangements. 
And Trump is repudiating Obama’s efforts to address climate change. 
I tell my friends I wish I could reassure them on these issues. 
But I cannot. 

American Pie in the Sky 
NEW YORK – While the risk of a disorderly crisis in the eurozone is well recognized, a more sanguine view of the United States has prevailed. 
For the last three years, the consensus has been that the US economy was on the verge of a robust and self-sustaining recovery that would restore above-potential growth. 
That turned out to be wrong, as a painful process of balance-sheet deleveraging – reflecting excessive private-sector debt, and then its carryover to the public sector – implies that the recovery will remain, at best, below-trend for many years to come. 
Even this year, the consensus got it wrong, expecting a recovery to above-trend annual GDP growth – faster than 3%. 
But the first-half growth rate looks set to come in closer to 1.5% at best, even below 2011’s dismal 1.7%. 
And now, after getting the first half of 2012 wrong, many are repeating the fairy tale that a combination of lower oil prices, rising auto sales, recovering house prices, and a resurgence of US manufacturing will boost growth in the second half of the year and fuel above-potential growth by 2013. 
The reality is the opposite: for several reasons, growth will slow further in the second half of 2012 and be even lower in 2013 – close to stall speed. 
First, growth in the second quarter has decelerated from a mediocre 1.8% in January-March, as job creation – averaging 70,000 a month – fell sharply. 
Second, expectations of the “fiscal cliff” – automatic tax increases and spending cuts set for the end of this year – will keep spending and growth lower through the second half of 2012. So will uncertainty about who will be President in 2013; about tax rates and spending levels; about the threat of another government shutdown over the debt ceiling; and about the risk of another sovereign rating downgrade should political gridlock continue to block a plan for medium-term fiscal consolidation. 
In such conditions, most firms and consumers will be cautious about spending – an option value of waiting – thus further weakening the economy. 
Third, the fiscal cliff would amount to a 4.5%-of-GDP drag on growth in 2013 if all tax cuts and transfer payments were allowed to expire and draconian spending cuts were triggered. 
Of course, the drag will be much smaller, as tax increases and spending cuts will be much milder. 
But, even if the fiscal cliff turns out to be a mild growth bump – a mere 0.5% of GDP – and annual growth at the end of the year is just 1.5%, as seems likely, the fiscal drag will suffice to slow the economy to stall speed: a growth rate of barely 1%. 
Fourth, private consumption growth in the last few quarters does not reflect growth in real wages (which are actually falling). 
Rather, growth in disposable income (and thus in consumption) has been sustained since last year by another $1.4 trillion in tax cuts and extended transfer payments, implying another $1.4 trillion of public debt. 
Unlike the eurozone and the United Kingdom, where a double-dip recession is already under way, owing to front-loaded fiscal austerity, the US has prevented some household deleveraging through even more public-sector releveraging – that is, by stealing some growth from the future. 
In 2013, as transfer payments are phased out, however gradually, and as some tax cuts are allowed to expire, disposable income growth and consumption growth will slow. 
The US will then face not only the direct effects of a fiscal drag, but also its indirect effect on private spending. 
Fifth, four external forces will further impede US growth: a worsening eurozone crisis; an increasingly hard landing for China; a generalized slowdown of emerging-market economies, owing to cyclical factors (weak advanced-country growth) and structural causes (a state-capitalist model that reduces potential growth); and the risk of higher oil prices in 2013 as negotiations and sanctions fail to convince Iran to abandon its nuclear program. 
Policy responses will have very limited effect in stemming the US economy’s deceleration toward stall speed: even with only a mild fiscal drag on growth, the US dollar is likely to strengthen as the eurozone crisis weakens the euro and as global risk aversion returns. 
The US Federal Reserve will carry out more quantitative easing this year, but it will be ineffective: long-term interest rates are already very low, and lowering them further would not boost spending. 
Indeed, the credit channel is frozen and velocity has collapsed, with banks hoarding increases in base money in the form of excess reserves. 
Moreover, the dollar is unlikely to weaken as other countries also carry out quantitative easing. 
Similarly, the gravity of weaker growth will most likely overcome the levitational effect on equity prices from more quantitative easing, particularly given that equity valuations today are not as depressed as they were in 2009 or 2010. 
Indeed, growth in earnings and profits is now running out of steam, as the effect of weak demand on top-line revenues takes a toll on bottom-line margins and profitability. 
A significant equity-price correction could, in fact, be the force that in 2013 tips the US economy into outright contraction. 
And if the US (still the world’s largest economy) starts to sneeze again, the rest of the world – its immunity already weakened by Europe’s malaise and emerging countries’ slowdown – will catch pneumonia. 

An American Political Tragedy 
BERLIN – US President Donald Trump’s nearly eight months in office have been characterized by a series of disturbing political developments. 
But Trump is not entirely to blame. 
His presidency is just the latest act in a long-running political tragedy. 
From a foreign-policy perspective, the problem began in the 1990s, when the United States squandered the post-Cold War peace dividend. 
With regard to domestic policy, the failures began even earlier: from Reaganomics in the 1980s to Obamacare in the 2010s, major policies have often overpromised and underperformed, while failing to address underlying problems. 
Of course, US politicians are rarely short on lofty rhetoric – from Ronald Reagan’s “Morning in America” campaign to Barack Obama’s “Yes, we can” slogan to Donald Trump’s “America First” refrain. 
And, beginning with John F. Kennedy, presidents have likened the US to a “city upon a hill” – an example to the rest of the world. 
Yet it is hard to remember the last time the US produced a policy that could serve as a model for others to emulate. 
The country has not had a pro-active, forward-looking government since the 1960s. 
Since the 1990s, it has not invested sufficiently in human capital to meet the fast-changing economy’s shifting skill requirements; undertaken no effective education, environmental, or labor-market reforms; and launched no new urban initiatives or future-proofing infrastructure policies. 
The list goes on. 
The reason is simple: Americans’ longstanding suspicion of “big government” morphed into a kind of political self-hatred, with policymakers and citizens alike led to believe that government is at its best when it does not govern. 
And, as the US government has retreated from society, the US has retreated from the rest of the world. 
These trends have culminated in Trump, whose most popular policies focus on destruction, rather than creation. 
Deregulation will supposedly slay the “deep state” chimera, while enabling the US to achieve energy independence. 
A US-centered foreign policy focused not on reshaping America’s role in the world, but on reducing it. 
From the Affordable Care Act (Obamacare) to the Deferred Action for Childhood Arrivals (DACA) policy, Trump likes to reverse past policies, without devising anything to replace them. 
American conservatives have so far failed to read Trump’s intentions accurately. 
In July, Robert W. Merry wrote that Trump had “yet to score anything approaching a serious legislative victory – or to demonstrate any serious political momentum.” 
But the truth is that Trump’s agenda has plenty of momentum; it is just focused on demolishing Obama’s legacy. 
As the international law expert Richard Falk has argued, it is Trump’s “demagoguery” that enables this approach, as it “blinds adherents to their true material self-interests and misidentifies their real social enemies.” 
Trump’s rejection of “reasoned discourse, including commitments to truth and evidence,” has been accompanied by an unlimited “capacity to manipulate mass opinion and play on such repressed emotions as racism and class envy.” 
The result of Trump’s approach is that America’s existing problems are worsening and huge opportunities are being missed. 
But what can stop demons already unleashed? 
And, even if they are stopped, can the damage they have already wrought be reversed? 
There was some backlash against Trump when he failed to condemn clearly the white supremacist demonstrators in Charlottesville, Virginia, whose “Unite the Right” rally in August ended with the murder of a counter-protester. 
But it has done little to weaken Trump’s destructive momentum: just a few weeks later, Trump announced his plan to end DACA, a policy that protected from deportation some 800,000 young immigrants who were brought to the US as children. 
Beyond lamenting the astonishing depths to which a great political culture and system can fall, what can be done? 
One obvious option, which Democrats largely seem to be taking, is to reject Trump and everything his administration stands for. 
But that risks ensuring the persistence of the dysfunctional dynamics that brought the US to this point. 
Another option, however unappealing at first glance, is to accept the Trump administration. 
The result of such a choice may well be the worsening of domestic problems and the weakening of checks and balances. 
But it is also possible that checks and balances will hold until the next election, enabling America’s existing political parties to rebuild and new parties to emerge. 
The result, one hopes, would be a much-needed political realignment – indeed, a political renaissance. 
To be sure, such a shift would take time – time that, depending on how long Trump remains in office, parties may not have. 
Republicans may be politically handicapped for years, as they are forced to reckon with the Faustian bargain they struck for the sake of political power. 
Democrats, for their part, face a broad leadership vacuum and a lack of political vision, owing to their now-internalized fear of being labeled “big spenders.” 
And, as it stands, no third parties or candidates provide reasonable alternatives. 
Nonetheless, there are encouraging signs that some Republicans and Democrats are thinking outside the party box. 
More must follow suit, recognizing that realigning the existing party system may be the only way to break the stalemate of US politics and, potentially, reverse decades of dangerous democratic underperformance. 
The next act in America’s political drama, following the 2018 congressional midterm election, could be marked by a kind of reckoning, with the 2020 presidential campaign accompanied by civic breakdown and the escalation of violent confrontation that has lingered beneath the surface for years. 
To rewrite the plot before that scenario plays out requires reshuffling and revitalizing US politics, so that, in the words of the poet Seamus Heaney, “hope and history rhyme” once again in America. 

American Power after Bin Laden 
OXFORD – When one state is preponderant in power resources, observers often refer to the situation as hegemonic. 
Today, many pundits argue that other countries’ rising power and the loss of American influence in a revolutionary Middle East point to the decline of “American hegemony.” 
But the term is confusing. 
For one thing, possession of power resources does not always imply that one can get the outcomes one prefers. 
Even the recent death of Osama bin Laden at the hands of United States special forces does not indicate anything about American power one way or the other. 
To see why, consider the situation after World War II. 
The US accounted for more than one-third of global product and had an overwhelming preponderance in nuclear weapons. 
Many considered it a global hegemon. Nonetheless, the US was unable to prevent the “loss” of China, “roll back” communism in Eastern Europe, prevent stalemate in the Korean War, defeat Vietnam’s National Liberation Front, or dislodge the Castro regime in Cuba. 
Even in the era of alleged American hegemony, studies show that only one-fifth of America’s efforts to compel change in other countries through military threats were successful, while economic sanctions worked in only half of all cases. 
Yet many believe that America’s current preponderance in power resources is hegemonic, and that it will decline, like that of Britain before it. 
Some Americans react emotionally to that prospect, though it would be ahistorical to believe that the US will have a preponderant share of power resources forever. 
But the term “decline” conflates two different dimensions of power: absolute decline, in the sense of decay or loss of ability to use one’s resources effectively, and relative decline, in which the other states’ power resources become greater or are used more effectively. 
For example, in the seventeenth century, the Netherlands flourished domestically but declined in relative power as other states grew in strength. 
Conversely, the Western Roman Empire did not succumb to another state, but instead to internal decay and swarms of barbarians. 
Rome was an agrarian society with low economic productivity and a high level of internecine strife. 
While the US has problems, it hardly fits the description of absolute decline in ancient Rome, and the analogy to British decline, however popular, is similarly misleading. 
Britain had an empire on which the sun never set, ruled more than a quarter of humankind, and enjoyed naval supremacy. 
But there are major differences in the relative power resources of imperial Britain and contemporary America. 
By World War I, Britain ranked only fourth among the great powers in terms of military personnel, fourth in GDP, and third in military spending. 
The costs of defense averaged 2.5-3.4% of GDP, and the empire was ruled in large part with local troops. 
In 1914, Britain’s net export of capital gave it an important financial kitty to draw upon (though some historians consider that it would have been better to have invested the money in domestic industry). 
Of the 8.6 million British forces in WWI, nearly one-third were provided by the overseas empire. 
With the rise of nationalism, however, it became increasingly difficult for London to declare war on behalf of the empire, the defense of which became a heavier burden. 
By contrast, America has had a continental-scale economy immune from nationalist disintegration since 1865. 
For all the loose talk of American empire, the US is less tethered and has more degrees of freedom than Britain ever had. 
Indeed, America’s geopolitical position differs profoundly from that of imperial Britain: while Britain faced rising neighbors in Germany and Russia, America benefits from two oceans and weaker neighbors. 
Despite these differences, Americans are prone to cycles of belief in decline. 
The Founding Fathers worried about comparisons to the decline of the Roman republic. 
Moreover, cultural pessimism is very American, extending back to the country’s Puritan roots. 
As Charles Dickens observed a century and a half ago, “if its individual citizens, to a man, are to be believed, [America] always is depressed, and always is stagnated, and always is in an alarming crisis, and never was otherwise.” 
More recently, polls showed widespread belief in decline after the Soviet Union launched Sputnik in 1957, then again during the Nixon-era economic shocks in the 1970’s, and after Ronald Reagan’s budget deficits in the 1980’s. 
At the end of that decade, American’s believed the country was in decline; yet, within a decade, they believed that the US was the sole superpower. 
Now many have gone back to believing in decline. 
Cycles of declinism tell us more about American psychology than about underlying shifts in power resources. 
Some observers, such as the Harvard historian Niall Ferguson, believe that “debating the stages of decline may be a waste of time – it is a precipitous and unexpected fall that should most concern policy makers and citizens.” 
Ferguson believes that a doubling of public debt in the coming decade cannot erode US strength on its own, but that it could weaken a long-assumed faith in America’s ability to weather any crisis. 
Ferguson is correct that the US will have to come to terms with its budget deficit to maintain international confidence, but, as I show in my book The Future of Power, doing so is within the range of possible outcomes. 
America enjoyed a budget surplus only a decade ago, before George W. Bush’s tax cuts, two wars, and recession created fiscal instability. 
The US economy is still ranked near the top in competitiveness by the World Economic Forum, and the political system, in its own messy way, has slowly begun to wrestle with the necessary changes. 
Some believe a political compromise between Republicans and Democrats can be reached before the 2012 election; others suggest an agreement is more likely after the election. 
Either way, fuzzy statements about hegemonic decline would again prove misleading. 


American Power in the Twenty-First Century 
CAMBRIDGE – The United States government’s National Intelligence Council projects that American dominance will be “much diminished” by 2025, and that the one key area of continued American superiority – military power – will be less significant in the increasingly competitive world of the future. 
Russian President Dmitri Medvedev has called the 2008 financial crisis a sign that America’s global leadership is coming to an end. 
The leader of Canada’s opposition Liberal Party, Michael Ignatieff, suggests that US power has passed its mid-day. 
How can we know if these predictions are correct? 
One should beware of misleading metaphors of organic decline. 
Countries are not like humans with predictable life spans. 
For example, after Britain lost its American colonies at the end of the eighteenth century, Horace Walpole lamented Britain’s reduction to “as insignificant a country as Denmark or Sardinia.” 
He failed to foresee that the industrial revolution would give Britain a second century of even greater ascendency. 
Rome remained dominant for more than three centuries after the apogee of Roman power. 
Even then, Rome did not succumb to another state, but suffered a death of a thousand cuts inflicted by various barbarian tribes. 
Indeed, for all the fashionable predictions of China, India, or Brazil surpassing the US in the coming decades, the classical transition of power among great states may be less of a problem than the rise of modern barbarians – non-state actors. 
In an information-based world of cyber-insecurity, power diffusion may be a greater threat than power transition. 
So, what will it mean to wield power in the global information age of the twenty-first century? 
What resources will produce power? 
In the sixteenth century, control of colonies and gold bullion gave Spain the edge; seventeenth-century Holland profited from trade and finance; eighteenth-century France gained from its larger population and armies; and nineteenth-century British power rested on its industrial primacy and its navy. 
Conventional wisdom has always held that the state with the largest military prevails, but in an information age it may be the state (or non-state) with the best story that wins. 
Today, it is far from clear how the balance of power is measured, much less how to develop successful survival strategies. 
In his inaugural address in 2009, President Barack Obama stated that “our power grows through its prudent use; our security emanates from the justness of our cause, the force of our example, the tempering qualities of humility and restraint.” 
Shortly thereafter, Secretary of State Hillary Clinton said, “America cannot solve the most pressing problems on our own, and the world cannot solve them without America. 
We must use what has been called ‘smart power,’ the full range of tools at our disposal.” 
Smart power means the combination of the hard power of command and the soft power of attraction. 
Power always depends on context. 
The child who dominates on the playground may become a laggard when the context changes to a disciplined classroom. 
In the middle of the twentieth century, Josef Stalin scornfully asked how many divisions the Pope had, but four decades later, the Papacy was still intact while Stalin’s empire had collapsed. 
In today’s world, the distribution of power varies with the context. 
It is distributed in a pattern that resembles a three-dimensional chess game. 
On the top chessboard, military power is largely unipolar, and the US is likely to remain the only superpower for some time. 
But on the middle chessboard, economic power has already been multi-polar for more than a decade, with the US, Europe, Japan, and China as the major players, and others gaining in importance. 
The bottom chessboard is the realm of cross-border transactions that occur outside of government control. 
It includes diverse non-state actors, such as bankers electronically transferring sums larger than most national budgets, and, at the other extreme, terrorists transferring weapons or hackers threatening cyber-security. 
It also includes new challenges like pandemics and climate change. 
On this bottom board, power is widely dispersed, and it makes no sense to speak of unipolarity, multipolarity, hegemony, or any other cliché. 
Even in the aftermath of the financial crisis, the giddy pace of technological change is likely to continue to drive globalization and transnational challenges. 
The problem for American power in the twenty-first century is that there are more and more things outside the control of even the most powerful state. 
Although the US does well on military measures, there is much going on that those measures fail to capture. 
Under the influence of the information revolution and globalization, world politics is changing in a way that prevents America from achieving all its international goals acting alone. 
For example, international financial stability is vital to Americans’ prosperity, but the US needs the cooperation of others to ensure it. 
Global climate change, too, will affect Americans’ quality of life, but the US cannot manage the problem alone. 
In a world where borders are more porous than ever to everything from drugs to infectious diseases to terrorism, America must help build international coalitions and institutions to address shared threats and challenges. 
In this sense, power becomes a positive sum game. 
It is not enough to think in terms of power over others. 
One must also think in terms of power to accomplish goals. 
On many transnational issues, empowering others can help to accomplish one’s own goals. 
In this world, networks and connectedness become an important source of relevant power. 
The problem of American power in the twenty-first century is not one of decline, but of recognizing that even the most powerful country cannot achieve its aims without the help of others. 

Abusing Churchill 
NEW YORK – A bronze bust of Winston Churchill, displayed in the White House since the 1960s, has been the object of a continuing right-wing canard in Washington. 
The story goes that when President Barack Obama moved in, he returned the bust to the British Embassy, supposedly signifying his hatred of Britain. 
In fact, Obama did no such thing. 
The bust still stands in the White House Residence, where it always did, except for a short time under President George W. Bush when it was being repaired. 
But Obama might have done well to remove the bust. 
The cult of Churchill has not been an altogether beneficial one for the United States. 
Too many US presidents fancy themselves Churchill’s true heirs. 
Bush had a copy of Churchill’s bust, lent to him by Tony Blair, in the Oval Office. 
He liked to portray himself as a “war president,” a “decider,” and a “great leader,” like Churchill. 
He had a taste for battle dress. 
And he got his country into a very foolish war. 
Donald Trump’s British crony, Nigel Farage, the former leader of the UK Independence Party, suggested that Trump should put the bronze bust back in the Oval Office. 
Trump thought this was a splendid idea. 
Trump is the least appropriate figure to cast himself in Churchill’s mold. 
Insofar as he has a coherent position on anything, he is hostile to most of the things that Churchill stood for. 
His “America first” posture, standing aloof from Western allies, is exactly the kind of attitude against which Churchill and Franklin D. Roosevelt struggled in order to successfully resist Hitler’s Third Reich. 
The summer before the Japanese attack on Pearl Harbor, 75 years ago this month, Churchill and Roosevelt met in Placentia Bay, Newfoundland, to set out their ideals for a postwar world. 
The resulting Atlantic Charter included everything Trump seems to be against: lower trade barriers, economic cooperation, and the advancement of social welfare. 
Once Hitler was defeated, Churchill was also a proponent of European unification, even if he remained ambivalent about Britain’s role in the future union. 
Farage’s campaign for Brexit, often pilfering Churchill’s own wartime rhetoric about Britain’s finest hour in defending freedom against tyranny, was aimed at dismantling the very project Churchill favored. 
The “special relationship” between the US and Britain, established during WWII, was never as substantial as Churchill and others liked to believe. 
The US, as the dominant postwar power, pursued its own interests, whether the British liked it or not. 
And British pride in standing alone against Nazi Germany, and the self-aggrandizing notion of being America’s special partner, has prevented the United Kingdom from playing to its full strength as a major power inside the EU. 
American leaders sometimes pay lip service to the special relationship, to flatter visiting British prime ministers or get the UK onside in dubious military adventures. 
There is talk of giving the relationship a new lease of life in the age of Trump and Brexit. 
Whereas Obama warned that Britain outside the EU would be at the back of the queue for special trade deals, House Speaker Paul D. Ryan recently stated that the US should quickly make a new deal with Britain to show “solidarity” with an “indispensable ally.” 
A special US tenderness for Brexit Britain – Trump oddly referred to himself as “Mr. Brexit” – rather suggests the solidarity of two countries embarking on their own forms of economic nationalism. 
Again, this is precisely the route that Churchill and Roosevelt sought to avoid; after all, economic nationalism was one of the reasons why Europeans almost succeeded in destroying their continent. 
Of course, Trump’s love of Brexit may be just a question of words, like so much else about the great showman. 
It is hard to imagine the US jeopardizing its economic interests by favoring Britain at the expense of far bigger stakes in the rest of Europe. 
But words do matter, as Churchill knew well. 
Again, the rhetoric of Trump and his supporters, and of the Brexiteers, could not be further removed from the spirit of the Atlantic Charter. 
Talk of sinister international bankers and other “citizens of nowhere” (British Prime Minister Theresa May’s phrase) undermining, in league with rootless liberal elites, “ordinary,” “real,” and “decent” people (Farage) smacks of the anti-Semitic propaganda that swirled around Europe in the 1930s. 
And Churchill’s response to the flirtations of Trump and the European far right with Vladimir Putin’s Russia can easily be imagined. 
None of this means that Churchill was always right, let alone a figure to emulate. 
He was the right man in 1940 to raise British morale, when morale was about the only thing the British had going for them. 
But he is not a good model for politicians in less perilous times. 
His views of colonial rule were already out of date before the war, and became a racist anachronism after it. 
His romantic ideas about the moral superiority of the English-speaking peoples were old-fashioned during his lifetime, and are an arrogant absurdity now. 
But Churchill was neither petty nor provincial. 
His vision, at least as far as the Western world is concerned, may have been romantic, but it had a certain nobility. 
The same cannot be said of the next occupant of the White House. 
The idea of Trump, advised by Farage, using Churchill’s bronze head as a totem would have filled the old man with horror. 

American Retreats 
Los Angeles – As Barack Obama’s incoming administration debates the pace and consequences of withdrawal from Iraq, it would do well to examine the strategic impact of other American exits in the final decades of the twentieth century. 
Although American commitments to Lebanon, Somalia, Vietnam, and Cambodia differed mightily, history reveals that despite immediate costs to America’s reputation, disengagement ultimately redounded to America’s advantage. 
In all of these cases, regional stability of sorts emerged after an American military withdrawal, albeit at the cost of a significant loss of life. 
America’s former adversaries either became preoccupied with consolidating or sharing power, suffered domestic defeat, or confronted neighboring states. 
Ultimately, America’s vital interests prevailed. 
The evidence today suggests that this pattern can be repeated when the United States departs Mesopotamia and leaves Iraqis to define their own fate. 
Of the four withdrawals, arguably the 1982-1984 American intervention in Lebanon marks the closest parallel to Iraq today. 
A country torn by sectarian violence beginning in 1975, Lebanon pitted an even more complex array of contestants against each other than Iraq does today. 
Into this fray stepped the US and its Western allies. 
Their objective was to create a military buffer between the PLO and Israeli forces that were then fighting in Beirut in order to promote the departure of both. 
The massacres in Palestinian refugee camps prompted a new commitment to “restore a strong and central government” to Lebanon, to quote President Ronald Reagan. 
But the result of intervention was that US forces became just one more target, culminating in the 1983 bombing of a US Marine barracks that killed 241 American soldiers. 
A similar suicide bombing two days later claimed the lives of 58 French soldiers. 
In February 1984, facing a quagmire, Reagan acceded to Vice President George H.W. Bush’s recommendation to get out of Lebanon. 
But the withdrawal of Western forces did not stop the fighting. 
The civil war continued for another six years, followed by a bumpy political aftermath: Syrian intervention and expulsion (two decades later), as the Lebanese defined their own fate with the US exercising only background influence. 
In 1992, the sirens of Somalia’s political collapse lured the US into another civil war to save a country from itself. 
The US humanitarian mission to that benighted country sought to salvage a failed United Nations enterprise to secure and feed Somalia’s ravaged population. 
The US committed 28,000 troops, which for a time imposed a modicum of security. 
But ill-equipped and poorly led UN replacement forces for the American presence put the remaining US troops in the bull’s eye as they attempted to bring to justice the Somali warlord responsible for the death of Pakistani peacekeepers. 
The ensuing bloodbath of US soldiers generated images that the American public could not stomach, prompting the exit of American and then UN forces. 
As unrest mounted with these military retreats, offshore US forces monitored and intercepted jihadists who sought to enter Somalia, while Kenya and Ethiopia blocked the unrest from metastasizing across the region. 
In 2006, the capture of Somalia’s capital, Mogadishu, by the Islamic Courts raised the specter of a jihadist state. 
But Somalia soon demonstrated that quagmires can be a two-way street. 
Following Ethiopia’s intervention, the Islamists found themselves out of power. 
Today, Somalia remains a dysfunctional state, as rival clans, jihadists, and an interim government with Ethiopian support compete for power. 
The US, now out of the quagmire, exercises limited influence from afar. 
While Lebanon and Somalia remain damaged and failed states, respectively, regional and domestic factors have cauterized the consequences of America’s retreat from Vietnam and Southeast Asia. 
The result is the stable region that the world sees today. 
But the US saw things very differently in the 1960’s, when the ghosts of Munich hovered over Vietnam’s jungles. 
As President George W. Bush argued about the war in Iraq, US President Lyndon Johnson predicted that defeat in Vietnam “would be renewed in one country and then another.” 
What Johnson failed to foresee were the domestic and regional constraints that would prevent the dominos from falling in the way he predicted. 
Although the US bombed northeastern Cambodia intensely throughout the Vietnam War years, it had no stomach for a ground commitment there. 
Still within congressional restraints, the Nixon administration attempted to bolster Cambodia’s military government. 
But, despite modest material support, the US could not sustain a government that could not sustain itself. 
Rather than the dominos falling following America’s retreat from Saigon in 1975, a Vietnam-Cambodian War ensued. 
This in turn stimulated China’s unsuccessful intervention in North Vietnam. 
The withdrawal by all of these invading armies to the recognized international boundaries demonstrated that nationalist forces were dominant in the region, not communist solidarity. 
None of these American exits was without consequence. 
But, while the US suffered costs to its reputation around the world, the supposed advantages from this for America’s opponents proved illusory. 
America’s departure from Mesopotamia will likewise put the burden of problem solving onto Iraqis and other regional players, leaving the US offshore to assist when and where it deems appropriate. 
History suggests that, in fits and starts, Iraq, like Vietnam and Lebanon, will find itself able to sort out its own affairs. 

Gun Nation 
NEW YORK – Defending the right of United States citizens to buy semi-automatic rifles or carry concealed weapons is akin to denying any human responsibility for climate change. 
Rational arguments are not the point. 
No matter how many schoolchildren are gunned down or what the scientific evidence may be for the effects of carbon dioxide emissions, people will not change beliefs that define their identity. 
It follows, then, that the more liberals from New York or San Francisco, or indeed Houston, agitate for ways to control the sale of guns to civilians, the harder proponents of the right to own lethal weapons will fight back. 
They will often do so with the zeal of religious believers who feel that their God has been offended. 
Collective identities have a history, of course. 
The US Constitution’s Second Amendment, which guarantees the right to keep and bear arms, was adopted in 1791, when citizens who had rebelled against the British monarchy thought they needed to protect themselves, if called upon, against an oppressive state. 
Interpretation of this amendment has been contested terrain, but the original idea was that citizen militias should be armed. 
For many Americans, especially in rural areas and in the southern states, this collective entitlement became akin to a God-given individual right. 
Demagogues have had great success pitting such people against coastal and urban elites who supposedly want to strip them of this right. 
The fear that demagogues exploit is rooted in more than a shared taste for hunting, or a notion of self-defense. 
It is about who people think they are. 
Take away their gun rights, and they would feel culturally and socially annihilated. 
But if this is the core of many Americans’ identity, it points to an odd contradiction in their national self-image. 
The Second Amendment is of course a legal concept. 
In a way, that is true of the US itself. 
As a country of immigrants, the US is not based on shared ancestry or culture. 
It is based on laws – the only way a people from so many different cultural backgrounds could be bound together in a common enterprise. 
No wonder, then, that there are so many lawyers in the US, and why Americans are more litigious than, say, the Japanese, who rely more on customs and traditions. 
If the US can be said to have a civic religion, the Constitution is its holy writ. 
And that is precisely how conservatives treat the foundational laws, including the Second Amendment. 
At the same time, however, many Americans cherish national myths, no less foundational in their way, which are in direct opposition to the idea of a nation of laws. 
In classical Westerns, the true American hero is the rugged gunslinger, the outlaw who knows right from wrong in his gut, the freedom-loving rambler who rides into the sunset on his trusted horse, a rifle slung across his shoulders. 
John Wayne arrives to save the citizens from the bad guys in black suits whose nefarious deeds undermine the liberty of the American frontier. 
But who are those villains dressed in black? 
They are bankers, lawyers, businessmen, and railroad builders, often representing the interests of powerful figures in the big cities on the East Coast. 
They employ fighting men of their own, to be sure, but the black-suited men come from a world of contracts, treaties, and big government. 
The story of most Westerns is of a wide-open rural idyll, where man has found perfect autonomy, threatened by a state ruled by man-made laws. 
The only laws the Western hero respects are those laid down by God and his own conscience. 
And he badly needs his gun to defend them. 
The problem with the American myth is that this rural idyll of perfect individual liberty, this state of nature, as it were, cannot possibly be maintained in a highly organized state of banks, courts, business corporations, and legislatures. 
The Second Amendment is a sop to the myth, disguised by the fact that it is also encoded as law. 
Ronald Reagan understood the mythical yearning of many Americans better than most presidents, perhaps because he had acted in a number of Westerns himself. 
When he famously proclaimed that “government is not the solution to our problem, government is our problem,” he was talking like a gunslinger, even though he was officially speaking as the newly installed US president. 
In a far coarser and more belligerent way, Donald Trump has followed Reagan’s example. 
In fact, he really is a kind of outlaw, with no use for norms of civility in government. 
In many ways, Trump has managed to combine the habits of a desperado with the interests of the men dressed in black suits, the corporate leaders, the bankers, and their political representatives in Washington. 
Trump is a New York hustler who can tap into the fears of Bible Belt gun-lovers. 
If the US is riven by an escalating culture war over its national identity, Trump has the uncanny ability of personifying the worst aspects of both sides of the divide: the lawlessness of the gunslinger and the rapaciousness of the city slicker. 
To overcome the dangerous fissures that are tearing its society apart, the US must find a president who can bridge the cultural divide. 
Alas, it could not have chosen a man less suited to the task. 

The Double Standard of America’s China Trade Policy 
CAMBRIDGE – A high-profile United States trade delegation appears to have returned empty-handed from its mission in China. 
The result is hardly a surprise, given the scale and one-sided nature of the US demands. 
The Americans pushed for a wholesale remaking of China’s industrial policies and intellectual property rules, while asking China’s government to refrain from any action against Trump’s proposed unilateral tariffs against Chinese exports. 
This is not the first trade spat with China, and it will not be the last. 
The global trading order of the last generation – since the creation of the World Trade Organization in 1995 – has been predicated on the assumption that regulatory regimes around the world would converge. 
China, in particular, would become more “Western” in the way that it manages its economy. 
Instead, the continued divergence of economic systems has been a fertile source of trade friction. 
There are good reasons for China – and other economies – to resist the pressure to conform to a mold imposed on them by US export lobbies. 
After all, China’s phenomenal globalization success is due as much to the regime’s unorthodox and creative industrial policies as it is to economic liberalization. 
Selective protection, credit subsidies, state-owned enterprises, domestic-content rules, and technology-transfer requirements have all played a role in making China the manufacturing powerhouse that it is. 
China’s current strategy, the “Made in China 2025” initiative, aims to build on these achievements to catapult the country to advanced-economy status. 
The fact that many of China’s policies violate WTO rules is plain enough. 
But those who derisively call China a “trade cheat” should ponder whether China would have been able to diversify its economy and grow as rapidly if it had become a member of the WTO before 2001, or if it had slavishly applied WTO rules since then. 
The irony is that many of these same commentators do not hesitate to point to China as the poster boy of globalization’s upside – conveniently forgetting on those occasions the degree to which China has flouted the global economy’s contemporary rules. 
China plays the globalization game by what we might call Bretton Woods rules, after the much more permissive regime that governed the world economy in the early postwar period. 
As a Chinese official once explained to me, the strategy is to open the window but place a screen on it. 
They get the fresh air (foreign investment and technology) while keeping out the harmful elements (volatile capital flows and disruptive imports). 
In fact, China’s practices are not much different from what all advanced countries have done historically when they were catching up with others. 
One of the main US complaints against China is that the Chinese systematically violate intellectual property rights in order to steal technological secrets. 
But in the nineteenth century, the US was in the same position in relation to the technological leader of the time, Britain, as China is today vis-à-vis the US. 
And the US had as much regard for British industrialists’ trade secrets as China has today for American intellectual property rights. 
The fledgling textile mills of New England were desperate for technology and did their best to steal British designs and smuggle in skilled British craftsmen. 
The US did have patent laws, but they protected only US citizens. 
As one historian of US business has put it, the Americans “were pirates, too.” 
Any sensible international trade regime must start from the recognition that it is neither feasible nor desirable to restrict the policy space countries have to design their own economic and social models. 
Levels of development, values, and historical trajectories differ too much for countries to be shoehorned into a specific model of capitalism. 
Sometimes domestic policies will backfire and keep foreign investors out and the domestic economy impoverished. 
At other times, they will propel economic transformation and poverty reduction, as they have done on a massive scale in China, generating gains not just for the home economy but also for consumers worldwide. 
International trade rules, which are the result of painstaking negotiations among diverse interests – including, most notably, corporations and their lobbies, cannot be expected to discriminate reliably between these two sets of circumstances. 
Countries pursuing harmful policies that blunt their development prospects are doing the greatest damage to themselves. 
When domestic strategies go wrong, other countries may be hurt; but it is the home economy that pays the steepest price – which is incentive enough for governments not to pursue the wrong kind of policies. 
Governments that worry about the transfer of critical technological know-how to foreigners are, in turn, free to enact rules prohibiting their firms from investing abroad or restricting foreign takeovers at home. 
Many liberal commentators in the US think Trump is right to go after China. 
Their objection is to his aggressive, unilateralist methods. 
Yet the fact is that Trump’s trade agenda is driven by a narrow mercantilism that privileges the interests of US corporations over other stakeholders. 
It shows little interest in policies that would improve global trade for all. 
Such policies should start from the trade regime’s Golden Rule: do not impose on other countries constraints that you would not accept if faced with their circumstances. 

Americans are from Italy, Europeans are from Japan 
MUNICH – The American business model has collapsed. 
During recent years, the United States borrowed gigantic sums of money from the rest of the word. 
Net capital imports exceeded $800 billion in 2008 alone. 
The money came largely from selling mortgage-backed securities and collateralized debt obligations, claims against claims against American homeowners (or to be precise, only against the homes themselves, as the owners were protected by the non-recourse nature of loans). 
The market for such securities has now vanished. 
While the volume of new issues in 2006 was $1.9 trillion, the likely volume in 2009 will be just $50 billion, according to the most recent IMF estimates. 
The market declined by 97%. 
No number reveals the true catastrophe of the American financial system more than this one. 
As the flow of funds from the world to US homeowners was disrupted, house prices collapsed by 30%, and construction of new homes by more than 70%. 
The recession was inevitable. 
Laid-off construction workers tightened their belts, as did homeowners. 
Some did so because they felt poorer. 
Others did so because the banks, shocked by the collapse of the securitization business, stopped giving them home-equity loans for consumption purposes. 
In the last years before the crisis, the flow of new mortgages had been 60% higher than the value of residential construction. 
Now it is 150% lower. 
The first eleven months of the recession that followed were as severe as the first eleven months of the Great Depression that started in 1929. 
But gigantic Keynesian recovery packages worth more than $1.4 trillion worldwide, together with bank rescue packages worth about $8 trillion, have had their effect. 
They stopped the decline in the spring and early summer of this year, bringing the recession to what one hopes is more than a temporary halt. 
Underutilization of capacity, however, remains huge. 
It will take years for the world economy to return to trend, in particular as the growth outlook is not very promising and unemployment continues to rise in the US and Europe. 
The medicine that has helped, and that remains necessary for the time being, is government debt. 
Governments absorb the excess of private savings over private investment and re-inject it into the global economy, thereby stabilizing aggregate demand and the financial system. 
As a result, public deficits are shooting up everywhere. 
Nearly all European Union countries will violate the Stability and Growth Pact’s 3%-of-GDP cap on fiscal deficits in 2009, and some of them will have deficits at or above 10% of GDP, notably Spain (10%), the United Kingdom (14%), and Ireland (16%). 
The US, the epicenter of the crisis, is in particular trouble. 
By the end of this year, America’s debt-to-GDP ratio will have climbed to 87% from 73% in 2008, and, with next year’s deficit set to reach 11% of GDP, it is certain that the ratio will surpass 100% during 2011. 
The country that used to be the symbol of capitalist stability and strength now shows frightening similarities to the developing countries that suffered from the world debt crisis in the early 1980’s. 
Although countries can become insolvent, they have many ways to reduce their sovereign debt before this happens. 
The US is considering the possibility of imposing a bequest tax on foreign holdings of US securities, and many people believe that it will try to play “the Italian card”: inflating away its public debt and devaluing the currency in order to maintain international competitiveness. 
To be sure, inflation is difficult to bring about when short-term interest rates are near zero – and thus cannot be reduced any further without inducing massive hoarding of cash. 
Nevertheless, investors around the world currently fear such a scenario, and this may create a self-fulfilling prophesy, because it helps to drive down the dollar, boost export demand, and make US imports more expensive. 
Ironically, flexible exchange rates help the very country that caused the crisis. 
There is no justice in economic mechanisms. 
The opposite is true in Europe. 
There the European Central Bank has also used up its gunpowder and cannot create inflation even if it wished to do so (which it cannot, because the Maastricht Treaty defines preservation of price stability as the ECB’s only goal.) 
But the strengthening euro reduces both import prices and export demand, which, in itself, causes prices to fall . 
In all likelihood, therefore, Europe will not be playing the Italian card; instead, it will face substantial difficulties in freeing itself from its current stagnation. 
The risk for Europe is that it goes down the Japanese, rather than the Italian, path. 
After its banking crisis of 1987-1989, Japan experienced two decades of stagnation and deflation with skyrocketing government debt. 
Preventing a repetition of this scenario is the main challenge for European policymakers in the coming years. 

Trump’s Deplorables 
NEW YORK – Hillary Clinton, the Democratic US presidential nominee, recently described supporters of her opponent, Donald Trump, as a “basket of deplorables.” 
It was neither a tactful nor an elegant phrase, and she later apologized for her remark. 
But she was more right than wrong. 
Trump has attracted many supporters whose views on race, for example, are indeed deplorable. 
The problem is that many of these deplorable voters are also relatively uneducated, which makes Clinton’s remark look snobbish. 
Alas, the United States has too many relatively uneducated people. 
Among developed countries, the US ranks low in terms of literacy, general knowledge, and science. 
Japanese, South Koreans, Dutch, Canadians, and Russians score consistently higher. 
This is at least partly the result of leaving education too much to the market: those with money are highly educated, and those with insufficient means are not educated enough. 
So far, it seems clear that Clinton appeals to better-educated urban voters, while Trump attracts mainly less-educated white men, many of whom in earlier generations would have been Democrat-voting coal miners or industrial workers. 
Does this mean that there is a link between education – or the lack of it – and the appeal of a dangerous demagogue? 
One of the most remarkable things about Trump is the extent of his own ignorance, despite his high educational attainment, and the fact that he seems to benefit from flaunting it. 
Perhaps it is easier for a loud-mouthed ignoramus to convince large numbers of people whose knowledge of the world is as slight as his own. 
But this is to assume that factual truth matters in the rhetoric of a populist agitator. 
Many of his supporters don’t seem to care much about reasoned argument – that is for the liberal snobs. 
Emotions count more, and the prime emotions that demagogues manipulate, in the US and elsewhere, are fear, resentment, and distrust. 
This was also true in Germany when Hitler came to power. 
But the Nazi Party in its early days did not find the bulk of its support among the least educated. 
Germany was more highly educated than other countries, on average, and the most enthusiastic Nazis included schoolteachers, engineers, and doctors, as well as provincial small businessmen, white-collar workers, and farmers. 
Urban factory workers and conservative Catholics were, on the whole, less susceptible to Hitler’s blandishments than many more highly educated Protestants. 
Low educational standards do not explain Hitler’s rise. 
Fear, resentment, and distrust ran very high in Weimar Germany, after the humiliation of wartime defeat and amid a devastating economic depression. 
But the racial prejudices whipped up by Nazi propagandists were not the same as the ones we see among many Trump supporters today. 
The Jews were seen as a sinister force that was dominating the elite professions: bankers, professors, lawyers, news media, or entertainment. 
They were the so-called back-stabbers who prevented Germany from being great again. 
The Trump supporters are showing a similar animus against symbols of the elite, such as Wall Street bankers, “mainstream” media, and Washington insiders. 
But their xenophobia is directed against poor Mexican immigrants, blacks, or Middle Eastern refugees, who are perceived as freeloaders depriving honest (read white) Americans of their rightful place in the social pecking order. 
It is a question of relatively underprivileged people in a globalizing, increasingly multi-cultural world, resenting those who are even less privileged. 
In the US today, as in the Weimar Republic, the resentful and the fearful have so little trust in prevailing political and economic institutions that they follow a leader who promises maximum disruption. 
By cleaning out the stables, it is hoped, greatness will return. 
In Hitler’s Germany, this hope existed among all classes, whether elite or plebeian. 
In Trump’s America, it thrives mostly among the latter. 
In the US and Europe, today’s world looks less scary to more affluent and better educated voters, who benefit from open borders, cheap migrant labor, information technology, and a rich mixture of cultural influences. 
Likewise, immigrants and ethnic minorities who seek to improve their lot have no interest in joining a populist rebellion directed mainly against them, which is why they will vote for Clinton. 
Trump must thus rely on disaffected white Americans who feel that they are being left behind. 
The fact that enough people feel that way to sustain such an unsuitable presidential candidate is an indictment of US society. 
This does have something to do with education – not because well-educated people are immune to demagogy, but because a broken education system leaves too many people at a disadvantage. 
In the past, there were enough industrial jobs for less-educated voters to make a decent living. 
Now that those jobs are vanishing in post-industrial societies, too many people feel that they have nothing more to lose. 
This is true in many countries, but it matters more in the US, where putting a bigoted demagogue in charge would do great damage not only to that country, but also to all countries trying to hold onto their freedoms in an increasingly perilous world. 

Learning from America’s Forgotten Default 
LOS ANGELES – One of the most pervasive myths about the United States is that the federal government has never defaulted on its debts. 
Every time the debt ceiling is debated in Congress, politicians and journalists dust off a common trope: the US doesn’t stiff its creditors. 
There’s just one problem: it’s not true. 
There was a time, decades ago, when the US behaved more like a “banana republic” than an advanced economy, restructuring debts unilaterally and retroactively. 
And, while few people remember this critical period in economic history, it holds valuable lessons for leaders today. 
In April 1933, in an effort to help the US escape the Great Depression, President Franklin Roosevelt announced plans to take the US off the gold standard and devalue the dollar. 
But this would not be as easy as FDR calculated. 
Most debt contracts at the time included a “gold clause,” which stated that the debtor must pay in “gold coin” or “gold equivalent.” 
These clauses were introduced during the Civil War as a way to protect investors against a possible inflationary surge. 
For FDR, however, the gold clause was an obstacle to devaluation. 
If the currency were devalued without addressing the contractual issue, the dollar value of debts would automatically increase to offset the weaker exchange rate, resulting in massive bankruptcies and huge increases in public debt. 
To solve this problem, Congress passed a joint resolution on June 5, 1933, annulling all gold clauses in past and future contracts. 
The door was opened for devaluation – and for a political fight. 
Republicans were dismayed that the country’s reputation was being put at risk, while the Roosevelt administration argued that the resolution didn’t amount to “a repudiation of contracts.” 
On January 30, 1934, the dollar was officially devalued. 
The price of gold went from $20.67 an ounce – a price in effect since 1834 – to $35 an ounce. 
Not surprisingly, those holding securities protected by the gold clause claimed that the abrogation was unconstitutional. 
Lawsuits were filed, and four of them eventually reached the Supreme Court; in January 1935, justices heard two cases that referred to private debts, and two concerning government obligations. 
The underlying question in each case was essentially the same: did Congress have the authority to alter contracts retroactively? 
On February 18, 1935, the Supreme Court announced its decisions. 
In each case, justices ruled 5-4 in favor of the government – and against investors seeking compensation. 
According to the majority opinion, the Roosevelt administration could invoke “necessity” as a justification for annulling contracts if it would help free the economy from the Great Depression. 
Justice James Clark McReynolds, a southern lawyer who was US Attorney General during President Woodrow Wilson’s first term, wrote the dissenting opinion – one for all four cases. 
In a brief speech, he talked about the sanctity of contracts, government obligations, and repudiation under the guise of law. 
He ended his presentation with strong words: “Shame and humiliation are upon us now. 
Moral and financial chaos may be confidently expected.” 
Most Americans have forgotten this episode, as collective amnesia has papered over an event that contradicts the image of a country where the rule of law prevails and contracts are sacred. 
But good lawyers still remember it; today, the 1935 ruling is invoked when attorneys are defending countries in default (like Venezuela). 
And, as more governments face down new debt-related dangers – such as unfunded liabilities associated with pension and health-care obligations – we may see the argument surface even more frequently. 
According to recent estimates, the US government’s unfunded liabilities are a staggering 260% of GDP – and that does not include conventional federal debt and unfunded state and local government liabilities. 
Nor is this a problem only for America; in many countries, pension and health-related liabilities are increasing, while the ability to cover them is diminishing. 
A key question, then, is whether governments seeking to adjust contracts retroactively may once again invoke the legal argument of “necessity.” 
The 1933 abrogation of the gold clause provides abundant legal and economic reasons to consider this possibility. 
The US Supreme Court agreed with the “necessity” argument once before. 
It is not far-fetched to think that it may happen again. 

Amnesty for Saddam? 
Senior US officials, including Secretary of Defense Donald Rumsfeld, have recently suggested that Saddam Hussein and his top henchmen might be given an amnesty for their past crimes in exchange for leaving Iraq and averting war. 
Is such an amnesty a good idea? 
How should it be judged by those attempting to end the practice of exempting from punishment government officials guilty of monstrous crimes? 
These are weighty questions. 
In trying to answer them, two considerations seem fundamental. 
First, one should consider the severity of the crimes committed by those who would escape punishment. 
Second, we should consider how much death and suffering would be avoided by letting such a ruler and his henchmen go free. 
A third factor that should also be taken into account is what damage would be done to the emerging international legal system for ending the impunity long enjoyed by state officials who use their power to commit atrocities. 
As for the severity of Saddam Hussein's criminal behavior, there is probably no official now in power anywhere in the world with as much blood on his hands. 
An incomplete list of his crimes includes: 
using chemical weapons against Iranian troops during the eight-year Iran-Iraq war that he started in 1980; 
murdering about 5,000 residents of the predominantly Kurdish town of Halabja in March 1988 through the use of chemical weapons, after using these weapons in previous months against Kurdish villages in the vicinity; 
murdering about 100,000 Kurds during the "Anfal" campaign between February and September 1988, mainly by transporting the victims to a desert area where they were forced into trenches, machine-gunned, and then covered with sand by bulldozers; 
destroying the ancient civilization of the Marsh Arabs in southeastern Iraq, followed by the forced resettlement and murder of the region's former residents; 
his actions in Kuwait when Iraq invaded in 1990, including the disappearance--still unresolved--of hundreds of Kuwaiti citizens; 
savage reprisals against the Shiites in southern Iraq in the aftermath of the 1991 Gulf War; 
and persecution of any and all Iraqis suspected of dissent or disloyalty. 
Each of these constitutes a war crime, a crime against humanity and, in the case of the Anfal campaign and its mass slaughter, and perhaps also in the case of the Marsh Arabs, the gravest crime of all, genocide. 
Although we cannot know how many lives would be lost and how much misery would be inflicted in an invasion of Iraq to oust Saddam's regime, the cost would unquestionably be great. 
No matter how compelling the case for punishing Saddam Hussein and such partners in crime as Ali Hassan al-Majid ("Ali Chemical" to the Kurds), Saddam's cousin and the principal organizer of the Anfal campaign, it is equaled by our duty to try to minimize harm to the living. 
The apparent conflict between doing justice and preserving peace may be resolved through international law. 
As matters currently stand, there is no mechanism for bringing Saddam Hussein to trial. 
The International Criminal Court, which is now taking shape in The Hague with the selection of its first justices, does not have retroactive jurisdiction. 
It cannot consider crimes committed prior to July 1, 2002. 
So Saddam could be tried only before a new ad hoc tribunal established for that purpose, such as those previously created for ex-Yugoslavia and Rwanda. 
He could also be tried before a national court in a country that accepts the idea of universal jurisdiction, as happened in Spain as well as in the United Kingdom in the case of Chile's former dictator, General Augusto Pinochet. 
If Saddam were granted sanctuary in a country such as Belarus or Libya, he would probably remain safe from prosecution, but only as long as he never leaves. 
For example, Uganda's Idi Amin and Ethiopia's Haile Mariam Mengistu--deposed tyrants who rival Saddam in the scale of their criminality--have taken care not to stray from their shelters in Saudi Arabia and Zimbabwe, respectively. 
If Saddam is ready to abdicate to preserve his life, he should get that much security, no more. 
Without amnesty from a body such as the UN Security Council, the theoretical possibility that he could be prosecuted would be preserved. 
He could not move freely. 
His crimes would neither be forgiven nor forgotten. 
Amnesty for Saddam Hussein is simply intolerable. 
But condemning thousands to death in order to be able to punish him is intolerable as well. 
Let him go where we can't get at him, but with no guarantee of impunity if his actions or fate bring him to a place where justice can be done. 

Tracking Big Pharma’s Progress on AMR 
LONDON – This week, at the World Economic Forum’s annual meeting in Davos, the Access to Medicine Foundation (AMF) is launching an antimicrobial resistance (AMR) benchmark to “track how pharmaceutical companies are responding to the increase in drug-resistance.” 
The benchmark builds on recommendations made in the May 2016 final report of the British government’s Review on Antimicrobial Resistance, which I chaired, and on the important work being done by Chatham House, Drive-AB, the Global Union for Antibiotic Research and Development, the Pew Trusts, and the World Health Organization. 
For the past ten years, the AMF, which is independent of the pharmaceutical industry, has published a highly regarded Access to Medicine Index, making it uniquely suited to quantify how various companies measure up in the fight against AMR. 
In my view, the new benchmark will have many benefits, not least for equity analysts who might consider adjusting their stock recommendations on the basis of the AMF’s findings. 
During our Review, I learned that many in the investment community were not interested in pharmaceutical companies’ behavior on this issue, because there were no readily available data by which to make comparisons. 
Well, now there are. 
As I have written previously, the Review issued Ten Commandments for confronting the AMR threat. 
While the AMF’s benchmark isn’t designed to address all ten, it does touch on the areas that are most relevant to the health-care industry. 
Two areas that would benefit from their own quantifiable benchmarks are diagnostics, to prevent antibiotics from being prescribed unnecessarily, and agriculture, where antibiotics are used excessively to promote livestock growth. 
Ultimately, microbes will build a resistance to any new drugs that we create, so we also need to seek ways to reduce overall demand for antibiotics. 
For its part, the AFM will calculate its benchmark separately for the eight major pharmaceutical companies that currently appear to be working on replacement drugs, generic producers, and firms focused solely on research and development. 
The fact that only eight “Big Pharma” firms are even attempting to develop new antibiotics and vaccines is a cause for serious concern. 
As the Review concluded, failure to create effective new drugs could result in ten million people dying from AMR-related diseases every year by 2050, at a cost of some $100 trillion. 
One of the more radical ideas we discussed during the Review concerned financial “pull” incentives to reward firms that successfully develop new drugs. 
We determined that an effective market-entry reward could be funded by small levies on the sales of the other top-50 pharmaceutical firms that are not carrying their weight. 
The new benchmark’s overall score for a firm can be broken down into three separate categories: its commitment to research and development for new drugs; its manufacturing, production, and environmental standards; and its marketing and distribution practices, which should focus on ensuring access rather than excess. 
Of the eight Big Pharma firms that are included, the British company GlaxoSmithKline currently scores the highest. 
For those of us who conducted the Review, this is no surprise. 
Frankly, we would not classify all eight firms as being truly committed to the cause, but at least with the benchmark, they can now see clearly how they can improve. 
Moreover, one hopes the benchmark will prod into action all of the firms that have not even bothered to join the fight against AMR. 
It is worth remembering that at the World Economic Forum’s annual meeting in January 2016, more than 80 companies signed a declaration promising to work toward solutions. 
And yet more than 70 of those firms do not appear on the AMF’s new index. 
Talk is cheap; these companies need to put their money where their mouth is. 
As for generic producers, the AMF’s scoring of pollution could prove most important, given that many of these companies operate in developing countries where environmental degradation is a major concern. 
Policymakers and business leaders in these countries will want to pay attention to how their generic drug producers score, so that they can make improvements. 
The benchmark’s third category concerns biotech firms, which conduct research into drugs that can combat the “priority pathogens” identified by the WHO. 
This category will be particularly helpful for financial analysts, or even for venture capitalists, given that specific advances could earn a future market-entry reward or have vast commercial potential. 
And, of course, the new scoring will also be important to the companies themselves, and for policymakers who are trying to strike a balance between “pull” incentives and current priority-drug needs. 
It would be great to see similar benchmarks for the major food producers and makers of diagnostics. 
Indeed, I have long believed that diagnostics could be the single biggest game changer in the fight against AMR. 
But for now, let us hope the pharmaceutical benchmark gets the attention it deserves. 

How to Fight Antimicrobial Resistance 
ZURICH – Two weeks ago, G20 leaders committed to working together to address one of the world’s most pressing and perplexing security threats: antimicrobial resistance (AMR) – a fierce and evolving adversary against which conventional therapeutic weapons are of no use. 
The threat is straightforward: bacteria and other microbes are becoming resistant to available medicines faster than new medicines are being developed. 
Every year, drug-resistant microbes kill about 700,000 people worldwide – more than three times the annual death toll from armed conflicts. 
In 2016, a special panel commissioned by the British government predicted that, by 2050, as many as ten million more people will die from drug-resistant microbes every year. 
AMR now poses a clear and present danger to every person on the planet. 
Unless we confront it head-on, we could return to a world in which it is common for people to die from basic infections. 
Beyond the cost in human lives, AMR could devastate the world’s economies. 
In Europe alone, the annual health-care costs and productivity losses associated with AMR already total an estimated €1.5 billion ($1.7 billion). 
The G20, for its part, has taken an important step forward. 
Each G20 country has promised to start implementing national plans to fight AMR in earnest, and to do more to promote new treatments against resistant microbes. 
To that end, G20 leaders are calling for an international “R&D Collaboration Hub” to “maximize the impact of existing and new anti-microbial basic and clinical research initiatives.” 
And they have promised to explore how market incentives can be used to encourage new research. 
Beyond the G20, innovative public-private partnerships are emerging to deliver new treatments against drug-resistant killers such as tuberculosis. 
And some governments have already started filling critical roles in the global response to AMR, by collecting data on the spread of resistant strains of E. coli, salmonella, and other common pathogens. 
Now it is up to political leaders to follow through on their commitments. 
Because new treatments for multidrug-resistant microbes aren’t expected to generate much return on investment, it is incumbent upon governments to make research and development in this field more attractive to private companies, and, in order to stem the development of resistance, to ensure that new drugs are not overused. 
When traditional market mechanisms fail, instruments such as “transferable market exclusivities” can help, by allowing drug makers to transfer an antimicrobial medicine’s intellectual-property benefits to another drug. 
In addition to policy innovations, more well-funded collaborations between governments and private institutions are needed. 
When private institutions enter into such collaborative efforts, they must be prepared to work outside of traditional boundaries, accept the challenges associated with complex public projects, and be willing to bring their skills, ideas, and experience to the table. 
In responding to AMR, we can learn some valuable lessons from other global public-health efforts. 
Malaria, which is caused by a parasite transmitted by more than 100 species of Anopheles mosquito, is a leading cause of death in many parts of the world. 
But now that many governments and private institutions have made fighting the disease a high priority, its death toll has been halved over the last 15 years. 
Still, the parasite that causes malaria is developing resistance to artemisinin, which forms the basis for the most effective treatment: artemisinin-based combination therapies. 
Artemisinin resistance first emerged in Cambodia just over a decade ago, and has since spread through Thailand, Laos, Vietnam, Myanmar, and China. 
It is now approaching India, and experts are sure that it will eventually reach Africa. 
According to one recent study, if artemisinin resistance is allowed to spread, malaria will kill at least 116,000 more people every year. 
Unless new treatments become available, the tremendous progress that the world has made against malaria will have been tragically short-lived. 
Fortunately, those engaged in the global response to malaria recognize that just as parasites are adapting, so must we. 
New efforts are underway to identify and minimize the spread of resistant malaria, while simultaneously developing new artemisinin-free treatments. 
For example, the Regional Artemisinin-Resistance Initiative is working to halt the spread of resistant malaria in the Mekong Delta region, by monitoring and sharing drug-resistance data and promoting proper use of antimalarial treatments. 
So far, the initiative has secured €110 million through the Global Fund to Fight AIDS, Tuberculosis, and Malaria, which is financed primarily by governments. 
Moreover, Novartis and the Medicines for Malaria Venture (with support from the Bill & Melinda Gates Foundation) are starting a new clinical trial next month to test KAF156, a molecule that could form the basis of a new treatment against artemisinin-resistant malaria strains. 
At the 2016 World Economic Forum in Davos, Switzerland, 100 companies (including Novartis) and industry associations signed the Davos Declaration on AMR. 
Under that commitment, we promised to work together with governments to slow the development of resistance, by increasing our investments in R&D and making high-quality antibiotics available to patients who need them. 
The G20’s national action plans will, we hope, help us to meet these commitments. 
But political leaders, too, must marshal the will to turn words into action. 
We urgently need more resources to monitor resistance, stronger incentives for R&D, and innovative financing mechanisms to ensure widespread access to accurate diagnoses and quality medicines. 
The world cannot afford to lose the fight against AMR. 
Winning it will require large-scale public-private cooperation, underpinned by political leadership that makes global public health a top priority. 

An Accidental Cure for Iraq 
Doctors use the word “crisis” to describe the point at which a patient either starts to recover or dies. 
President George W. Bush’s Iraqi patient now seems to have reached that point. 
Most commentators appear to think that Bush’s latest prescription – a surge of 20,000 additional troops to suppress the militias in Baghdad – will, at best, merely postpone the inevitable death of his dream of a democratic Iraq. 
Yet as “Battle of Baghdad” begins, factors beyond Bush’s control and not of his making (at least not intentionally) may just save Iraq from its doom. 
One key factor is that, for the first time since the United States and Britain invaded Iraq, Arab Sunni leaders are backing a US military plan for that country. 
These Sunni leaders live in abject fear of the geopolitical earthquake that any disintegration of political authority in Baghdad would bring, believing that all-out civil war would invariably follow – a war that would not respect international borders. 
Of course, America has been encouraging Sunni leaders in this belief. 
Secretary of State Condoleezza Rice’s recent tour of Middle East capitals helped spread the word to Egypt, Jordan, Saudi Arabia, and the Gulf states that any US failure and sudden withdrawal would be certain to destabilize them. 
Given the fragile grip that these leaders have over their societies, America’s warnings have been taken to heart. 
But the truly curious factor that might bring success to Bush is that those who have opposed or resented America’s presence in Iraq, such as the Iranian-backed Shi’a parties now also appear to want Bush’s new strategy to succeed. 
They are for it because they believe it will defang Moqtada al-Sadr, the rogue Shi’a cleric whose power has mushroomed over the past three years – to the point that he now dominates much of Baghdad and holds the allegiance of countless angry young Shi’a men. 
Of course, attacking Moqtada al-Sadr’s Mahdi Army in the name of fighting militia death squads has the potential to draw American military forces into a level of urban warfare unseen since the Falluja assaults of 2004 and 2005. Al-Sadr is seen as the protector of the Shi’a of Iraq and has are an estimated 60,000 fighters in his militia. 
But he is deeply mistrusted by other Shi’a leaders, who fear that they may one day have to take him on by themselves. 
Better to let the Americans do it, though of course these Shi’a leaders prefer a slow strangulation of al-Sadr to a direct and bloody assault. 
But make no mistake: how al-Sadr is handled is the big test of Bush’s new strategy. 
Should the US choose to face al-Sadr and his forces head on, they risk alienating Iraq’s largest sectarian community, the Shi’a, adding fuel to the anti-occupation resistance and thus probably dooming Bush to failure. 
Iran and Syria, which have played a spoiler role in Iraq up to now, may also now be anxious to find a way to pull the country back from the brink. 
Bush still refuses to talk to either of them, and has lately been having US troops arrest Iranian agents in Iraq. 
Yet Iran may already see itself as victorious, with the current Iraqi government friendlier than any the Iranians have ever known. 
So maintaining that government in office has now become a strategic priority for Iran, particularly as it is now clear that any US hopes of using Iraq as a permanent military base are dead. 
The “surge” also opens, perhaps for the first time, a serious possibility of pouring water on the insurgent fires in Anbar province, the heartland of the Sunni insurgency. 
The US has achieved relative successes in the province through alliances with Sunni tribes. 
The hope is that such realistic and pragmatic accommodations will be extended to Iraqis who are fighting under the banner of a nationalist and anti-occupation agenda. 
So some of the stars have come into alignment for Bush. 
But to keep them there in the long term, the Iraqi government will need to amend the constitution in a way that appeases the Sunni community. 
Reassuring Iraq’s Sunnis that they have a place in the new Iraq will also reassure neighboring Sunni governments, which have mostly turned a blind eye to the support for the insurgency that has come from their lands. 
Of course, should the US see failure ahead, it could seek to broaden the war beyond Iraq’s borders by attacking Iran, a policy reminiscent of “Operation Sideshow,” when US failure in Vietnam in the late 1960’s enticed President Nixon into attacking Cambodia and Laos. 
But Iran has resources that Cambodia and Laos could never muster; indeed, its ability to retaliate could set the entire region ablaze. 
Whereas America’s war in Indochina was a tragic mistake, the cost of a wider war precipitated by the crisis in Iraq would be incomparably greater – for both the patient and the doctor. 




An Age of Diminished Expectations? 
CAMBRIDGE – As the United States and European economies continue to struggle, there is rising concern that they face a Japanese-style “lost decade.” 
Unfortunately, far too much discussion has centered on what governments can do to stimulate demand through budget deficits and monetary policy. 
These are key issues in the short term, but, as every economist knows, long-run economic growth is determined mainly by improving productivity. 
There is no doubt that Japan’s massive 1992 financial crisis was a hammer blow, from which it has yet to recover, and the parallels with the US and Europe today are worrisome. 
Both seem set for a long period of slow credit growth, owing both to necessary stricter financial regulation and to the fact that their economies remain significantly over-leveraged. 
There are no simple shortcuts in the healing process. 
Yet, in assessing the Japanese experience and its relevance today, it is important to recognize that Japan’s fall to earth was due not only to its financial crisis. 
Japan also suffered a number of severe productivity shocks, which had much to do with its longer-term problems. 
Even if Japan had never experienced a real-estate and stock-market bubble, the meteoric rise of its giant neighbor China would have been a huge challenge. 
At the dawn of the 1990’s, Japan’s dominance in export markets worldwide had already been dented somewhat by the rise of its smaller Asian neighbors, including Malaysia, Korea, Thailand, and Singapore. 
But China presents an entirely different challenge, one for which adjustment will take much longer. 
Moreover, even if it never had a financial crisis, Japan would have been plagued by adverse demographics, as its population is both aging and shrinking. 
Last but not least, Japan’s hyper-growth years were built on a phenomenal rate of investment. 
But, because productivity ultimately must be built on innovation, not just on ever more buildings and equipment, it was inevitable that returns on investment would turn south at some point. 
In principle, with a healthier financial system, Japan’s economy would have had more flexibility to meet these challenges to its productivity growth. 
But, one way or another, Japan’s once sky-high growth rates probably would have fallen sharply. 
As is usually the case, financial crisis amplified other causes of economic meltdown, rather than igniting it directly. 
The US Great Depression of the 1930’s is another case in point. 
Again, a great deal of attention has been lavished on the ebbs and flow of fiscal and monetary policy. 
But New Deal economic policies, by expanding the role of the state in an often chaotic and unpredictable fashion, probably also played a role in at least temporarily impeding productivity growth. 
The US today seems to be moving towards a gentler and more European-style state, with higher taxes and possibly greater regulation. 
Supporters of the US administration might fairly argue that it is undertaking long-deferred maintenance on issues such as income inequality. 
But if the US does experience slow growth over the next decade, can it all be blamed on the financial crisis? 
Likewise, Europe’s latest existential identity crisis is again creating a great deal of policy uncertainty and unpredictability. 
In Europe, too, if there are adverse growth effects over the next decade, they cannot all be blamed on the financial crisis. 
In the short term, it is important that monetary policy in the US and Europe vigilantly fight Japanese-style deflation, which would only exacerbate debt problems by lowering incomes relative to debts. 
In fact, as I argued at the outset of the crisis, it would be far better to have two or three years of mildly elevated inflation, deflating debts across the board, especially if the political, legal, and regulatory systems remain somewhat paralyzed in achieving the necessary write-downs. 
With credit markets impaired, further quantitative easing may still be needed. 
As for fiscal policy, it is already in high gear and needs gradual tightening over several years, lest already troubling government-debt levels deteriorate even faster. 
Those who believe – often with quasi-religious conviction – that we need even more Keynesian fiscal stimulus, and should ignore government debt, seem to me to be panicking. 
Last but not least, however, it is important to try to preserve dynamism in the US and European economies through productivity-enhancing measures – for example, by being vigilant about anti-trust policy, and by streamlining and simplifying tax systems. 
For better or for worse, productivity trends are very difficult to extrapolate, depending as they do on hugely complex interactions of social, economic, and political forces. 
Nobel Prize winners Robert Solow and Paul Krugman famously once questioned whether the proliferation of computers and technology would lead to bottom-line growth. 
(This theme underlies the title of Krugman’s classic 1990 book “The Age of Diminished Expectations.”) 
In the end, policymakers must remember that whether or not the US and Europe avoid a lost decade depends on their ability to retain productive vitality in their economies, not simply on short-term demand-stimulation measures. 

An Agenda for Growth in Europe 
A recent OECD study reminds us, once again, that per capita income levels are roughly 30% lower in the euro area, as well as in the three largest Continental countries – France, Germany, and Italy – that dominate its performance, than in the United States. 
That gap is likely to widen as Europe’s demographic profile darkens, and if productivity continues to grow more slowly than elsewhere in the industrial economies. 
Why have the large European economies failed to catch up with US income levels? 
The bulk of the shortfall is due to less intensive use of labor: employment rates for women and for the oldest and youngest age groups are lower in the euro area than in the US, working hours are far fewer, and, least significantly, unemployment rates are higher. 
Some take consolation from this, viewing it as positive that Europeans prefer leisure to work. 
But low levels of labor utilization are largely due to heavier income taxes and social security contributions, as well as high social benefit levels introduced at a time when the labor force was growing rapidly and the need to replace involuntary with voluntary unemployment seemed more urgent than today. 
These measures will need to be revisited both to increase the supply of labor and to make public finances more sustainable. 
This process is already underway, particularly in Italy and France, through cuts in social security contributions for lower-paid workers, tighter conditions for drawing unemployment benefits, and tax credits for “the working poor.” 
Since the mid-1990’s, the relative decline in employment in these countries has, indeed, been slightly reversed. 
But factors beyond taxes and benefits also contribute to low employment rates in all the three major euro-zone economies: high minimum wages and some features of employment protection legislation slow down the flow of workers through the job market. 
Although a long agenda of reforms is beginning to be tackled, first in Germany and, more recently and cautiously, in France, the results are slow in coming and public understanding of the need for change remains limited. 
Much can be learned from each country’s experience and from that of smaller EU member states, but labor market reforms inevitably have a strong national flavor. 
Employment objectives have been formulated for all EU member states since 1997 in the so-called European Employment Strategy (EES), now part of the “Lisbon Agenda,” the set of goals established to boost EU productivity. 
But, with the policy instruments for achieving these goals largely national and the arguments for applying them simultaneously in several member states weak, the EES has created unrealistic public expectations and triggered only limited action by governments. 
Nor is the employment gap with the US the only problem for Europe. 
Beginning in the mid-1990’s, the rate of growth in output per hour worked – a key factor behind the rise in per capita income – slowed in most European countries while it rose in the US, reversing a decades-long pattern. 
Between 2000 and 2004, hourly labor productivity rose more than twice as fast in the US than in the large euro zone economies – 2.8% per year versus little more than 1%. 
So why have the Europeans been unable to sustain improvements in both foundations of growth – employment and productivity – at the same time? 
This proved possible not only in the US, but also in other advanced economies outside Europe – Australia, Canada, and New Zealand – and, unsurprisingly, in the new EU member states. 
The explanation is not capital spending, which is normally linked to productivity growth. 
There have been no major differences between the US and the large euro zone economies here. 
This leaves the “explanation” to what economists call Total Factor Productivity (TFP), a mix of several important elements, including innovation activity, a well-functioning financial system ready and willing to take risks, and organizational flexibility that facilitates rapid diffusion of new technologies. 
The main lapse in TFP growth in Europe over the past decade has been in services (excluding information and communications technologies). 
So deregulation and integration of services will be essential if the Euro area’s TFP is to improve, as more than two-thirds of total income in most EU economies is generated in this sector. 
While product markets have held center stage in the creation of the single European market, services continue to be fragmented by national regulatory, anti-competitive practices. 
Much of the explanation lies in the very heterogeneity of services and the greater difficulties that mutual recognition, or the “country-of-origin principle” – essential in the integration of product markets – implies for services. 
Unfortunately, reform was derailed in 2005. 
During the referendum campaign in France preceding the vote on the draft EU Constitutional Treaty, the proposed directive was vilified as undermining the rights of labor, symbolized by that dreaded bogeyman, the “Polish plumber.” 
These attacks overlooked the fact that the directive makes employment conditions of workers from other EU-member states subject in most respects to host-country rules. 
A revised version of the directive that reduces its sectoral scope and makes a number of compromises with the country-of-origin principle is now before the European Parliament. 
Even this limited version would constitute progress; most of the gains arise from removing the red tape that complicates cross-border establishment of small and medium-size service enterprises and limits competition in broad sectors of the economy. 
It is a sad reflection on the state of the EU that it seems unable to agree on the one clear productivity-advancing piece of legislation when improving productivity is held out as a shared goal. 
The failure to mobilize consumer interests in favor of European integration is particularly disappointing for the new member states, which had expected to reap some of the benefits. 

An Agenda for Latin America 
During the last three years, Latin America has experienced an economic boom without precedent. 
Growth has been strong, inflation is under control, and international reserves have increased steadily. 
The 2004-2006 period has been the best three years for Latin America’s economies since the early 1960’s. 
This bonanza has largely been the result of an extraordinarily positive international environment. 
Commodity export prices are at record levels, global liquidity has been ample, and international interest rates have been low. 
Yet, despite this good news, the continent’s politics have turned upside down, calling into question whether economic success can be sustained. 
An increasing number of Latin American countries have elected left-wing presidents who criticize market reforms and globalization. 
Colombia recently bucked this trend, and it now appears that the leftist candidate in Mexico’s presidential election, Andrés Manuel López Obrador, was narrowly defeated. 
But voters have catapulted left-wing politicians to power in Argentina, Bolivia, Brazil, Chile, Costa Rica, Ecuador, Peru, Venezuela, and Uruguay, while López retains the ability – and perhaps the will – to mobilize his supporters. 
The main concern is that left-wing politicians will implement populist policies that will generate large fiscal deficits, high inflation, and, eventually, currency collapses. 
External crises have a long history in the region. 
Since the 1970’s, Latin American countries have experienced, on average, 1.6 balance of payments crises per decade; some of the better known include the Mexican crisis of 1994-95, the Brazilian crisis of 1999, and the Argentine crisis of 2001-2002. 
The economic consequences of these crises have been gigantic. 
On average, each of them cost the Latin American countries 12% of GDP. 
However, concern about populist policies is not fully justified. 
The current crop of left-wing political leaders is different from the populist “caudillos” of the past. 
They understand that macroeconomic imbalances – and, in particular, inflation – are costly and lead to frustration. 
Even Venezuela’s Hugo Chávez – the most vociferous of them – understands the importance of maintaining macroeconomic stability. 
Moreover, in recent years, Latin American economies have gone through important economic transformations that have increased their resilience. 
Chief among these changes has been the adoption, in most countries, of flexible exchange rates and reduction of external debt, particularly government debt. 
These structural changes have put most Latin American economies on a sound footing, reducing their vulnerability to external shocks, such as deceleration in world economic growth, higher international interest rates, and lower commodity prices. 
But greater macroeconomic stability does not mean that everything is fine. 
The main weakness of Latin America’s economies is that they will be unable to generate the type of rapid and sustained growth required to create jobs and reduce inequality and poverty. 
Generating the rapid long-term economic growth that Latin American countries need requires that they fulfill three conditions. 
First, they must accumulate capital, which implies a high savings rate that will help pay for new machines, equipment, and infrastructure. 
Second, they need to use their workforces efficiently, which requires modern labor legislation that encourages employment of women, the young, and senior citizens. 
Finally, they need to attain a rapid rate of productivity growth, which can be achieved only by ensuring a high-quality, broadly accessible educational system. 
The vast majority of Latin America countries do not fulfill any of these requirements. 
At 19% of GDP, national savings rates are very low – indeed, much lower than in Asia – and labor legislation is antiquated, discouraging efficient use of human capital, while productivity growth is meager. 
Indeed, students from Latin American countries consistently score at the very bottom of international achievement tests such as the Program for International Student Assessment (PISA) and the Third International Math and Science Survey (TIMSS). 
The main challenge for Latin America’s new leaders, whether of the left or the right, is to implement reforms that will accelerate growth. 
The continent needs measures that are designed to encourage savings and investment, improve labor utilization, and upgrade failed educational systems. 
Only if growth is significantly faster over the long run will living standards for the vast majority of the region’s voters begin to rise. 

 

An Alliance of Civilizations? 
MADRID – The first International Forum of the Alliance of Civilizations, conceived as an antidote to the idea that the world is doomed to a “clash of civilizations,” recently met in Madrid and revealed that there is more than a grain of truth in Robert Kagan’s idea that Americans are from Mars and Europeans from Venus. 
Ever since September 11, 2001, the United States has been engaged in a crusade against the forces of evil in the Muslim world. 
By contrast, the March 11, 2004, terrorist attack on Spain, which left 200 dead, triggered an “anti-crusade” that seeks to disarm extremism by building bridges of understanding and reconciliation with Islam. 
Co-sponsored by Spain and Turkey, the Alliance of Civilizations initiative is not devoid of political calculation. 
To the Spaniards, it helps to justify their abrupt withdrawal from Iraq in 2004; for the Turks, it is yet another vehicle in their struggle, as the vital bridge between Islam and the West, for admission into the European Union. 
A loose and somewhat confused project, the Alliance of Civilizations aims to heal the wounds of conflict between Islam and the West through education, viable integration policies, and a better-informed dialogue with the media. 
But it suffers from the major global players’ profound skepticism, with the US, Russia, and, for that matter, the EU shown no real enthusiasm for it. 
However vague, the alliance of civilizations idea certainly cannot do more harm than war against Islamic extremism. 
After all, none of the Muslim world’s problems and conflicts with the West are susceptible to a military solution. 
Moreover, the Alliance is not an entirely incoherent proposal if the objective is that the West disengage from the politics of hubris and establish a genuine sphere of cooperation with the Muslim world in economics, culture, and science. 
Of course, the idea is held back by the inner workings of both parts of the proposed alliance. 
Many in the West question whether Islam is compatible with human rights and Western concepts of liberty. 
Many Muslims who have been fighting for years for their countries’ modernization have so far failed to find a lucid response to the progressive wave of radical Islam. 
To claim that Islam is incompatible with human rights is to consider it a civilization too hidebound to change. 
This is a historic fallacy. 
Nor is the claim that Islam is intrinsically inimical to innovation viable, because Muslim civilization has contributed mightily to science and art throughout history. 
Today, Western universities are replete with distinguished Arab scholars in almost every field – the result of a brain drain that itself reflects the Islamic world’s centuries of decline. 
In 2005, the 17 countries of the Arab world together produced 13,444 scientific publications, fewer than the 15,455 achieved by Harvard University alone. 
Enemies of reason, however, are also to be found in the West. 
We live in an age in which many people are disillusioned with secular politics, and are turning to religion instead, not only throughout the Muslim world, but in the core of Western civilization, Christian Europe and Evangelist America. 
Nor is the Jewish state of Israel, where Messianic fanatics and religious nationalists have embraced a political theology that questions the very legitimacy of the democratic institutions, immune from this phenomenon. 
The current crisis of Islam might not be congenital, but Islam’s predicament is acute. 
The question is this: are Muslims ready to accept that Khomeini’s dictum that “Islam is politics or it is nothing” is wrong, that Islam is a religion and not a form of government, and that, as in the Christian world, there is a sphere for Caesar and a sphere for God? 
Those in the Muslim world who want to embrace reform must be driven by the conviction that theocracy has never served as a vehicle for human progress. 
Of course, the Alliance of Civilizations should not attempt to bridge differences by defending moral relativism. 
If it is driven by a Western guilt complex that assumes that the solution simply lies in greater empathy for the Muslim predicament, then the skeptics are bound to be vindicated. 
For the Alliance of Civilizations to have any chance of success, the emphasis must be on reciprocity. 
Tolerance and religious freedom must be mutual. 
Islam’s part in the deal must include a guarantee of human rights and civil liberties, improvement in women’s status, and realistic policies to stem the Islamic world’s demographic explosion. 
Some, as usual, will claim that the Arab-Israeli conflict lies at the root of the problems that exist between Islam and the West, and that resolving the Palestinians’ plight will contribute immensely to smoother relations. 
But Arabs and Muslims must stop deluding themselves that the Israel-Palestine dispute is what is holding them back. 
Ending the American occupation in Iraq and imposing an Arab-Israeli peace would help, but they are no panacea. 
The fight to eradicate misery, illiteracy, and corruption, and Islam’s embrace of science, do not depend on the results of the Middle East peace process. 

An Alliance of Equals 
PARIS – During NATO’s recent 60th anniversary ceremony in Strasbourg, the Alliance welcomed two new members, Albania and Croatia, bringing its total membership to 28. 
This expansion is a good thing, for history has tormented these two countries. 
Being welcomed within the great international family of the West will reassure them, stabilize them, and contribute to their political, cultural, and economic development. 
But the good news was limited, because NATO addressed only a routine agenda. 
No core problem was really tackled. 
The controversy that arose in France over the country’s return to NATO’s unified military command makes this abundantly clear. 
Was France losing its autonomy, perhaps even its sovereignty? Was it capitulating to American hegemony? 
These are real questions, yet at the NATO summit people spoke of them more in terms of symbols than as realities. 
But what is the reality here? 
NATO is a military alliance composed of 28 countries. 
One of them, the United States, has a military budget that is more than three times that of all the other members combined. 
Hence, the US runs most NATO civilian and military commands with the consent of the others. 
Of course, there is a collective consultation and deliberative process that enables any member to be heard. 
But in reality a member’s actual power is what affects common decisions. 
This structure harks back to the conditions of NATO’s birth, when it was forged to thwart the Soviet threat to Western civilization. 
At the time, no one ever doubted that American power – already endowed with nuclear weapons – was the only counterpart. 
For this reason, the US came to preside over the alliance. 
During the 41 years of the Cold War, 14 of NATO’s 16 members strictly obeyed and complied with American decisions and policies. 
French President Charles de Gaulle was the only one to question whether an American president would actually ever be ready to launch a nuclear attack on the USSR in order to protect one or several Alliance members if vital US interests were not directly at stake. 
Based on that doubt, France – a nuclear power since 1960 – withdrew in 1966 from the Alliance’s permanent centralized military command in order to assert its own deterrent capability. 
This decision was mainly grounded on the American doctrine, adopted in 1962, of “flexible response,” which said to the Soviets: “As long as you do not use nuclear weapons, we will not use them, either.” 
This very doctrine left Europe exposed. 
Indeed, while it is a much disputed question, de Gaulle was probably right about America’s lack of commitment to the nuclear defense of Europe. 
Both Henry Kissinger and Robert McNamara left office admitting that de Gaulle had been correct. 
Nevertheless, de Gaulle’s insights left a legacy that still causes some mistrust and dissent within NATO. 
France was right on this key strategic point, but it was never able to explain its position to its allies. 
This inability to discuss, clearly and forthrightly, this strategic doctrine continues to hamper the Alliance. 
At the Strasbourg summit, confidence in the future could have been strengthened if a couple of troubling issues had been discussed. 
Instead, once again, there was an extended focus on the past. 
The key questions are whether NATO’s doctrine of common defense is currently directed at one country in particular, and whether nuclear force remains the Alliance’s major defensive tool. 
In the current global situation, no predictable conflict will require the use of a nuclear weapon. 
At the moment, there is no global threat and the Alliance only intervenes in regional conflicts, so why not have NATO admit this? 
But the most important matter that went unmentioned in Strasbourg is the relationship with Russia. 
NATO was founded to confront the threat that the USSR represented 60 years ago. 
But the Warsaw Pact, the Soviet Union’s “anti-NATO” alliance of socialist countries, was dissolved in 1991; communism imploded the same year, with Russia caught ever since in a struggle to build a market economy and define a new global position for itself. 
At a time when Russia was taking a more pacific course, NATO – unlike the Warsaw Pact – was not dismantled. 
On the contrary, the Allies chose to maintain the pact and to extend it to numerous Russian neighbors. 
NATO’s members essentially said: “We Western nations do not trust you. 
Even if you become a democracy, we will always be suspicious.” 
George Kennan, one of the greatest American diplomats of the post-war years, once wrote that the Western world was committing its biggest mistake in 50 years time by expanding NATO after Soviet communism collapsed. 
The resulting humiliation and blatant mistrust that Russia’s elite has felt ever since has led them to their current policy of rearmament. 
The only way to resolve this problem is for NATO to assert its pacific intentions before the world. 
The most convincing way to do that is to moderate America’s excessive taste for power, which it demonstrated in Iraq. 
NATO needs to shift its focus from organizing and administering a unified military command to building real confidence that every member’s voice will be heard. 
To that end, all members must stand on an equal footing. 
France’s decision to return to full and equal Alliance membership was a good one, and France must now work from within to advance the principles in which it believes. 

An Alternative to Deposit Insurance 
Argentina's financial panic and the run on its banks that ensued, as well as Asia's financial crisis of 1997, have forced a number of countries to consider adopting deposit insurance schemes to protect their citizens' savings. 
But is deposit insurance the best defense against bank panics? 
Deposit insurance was a response to banking crises of the type that plagued the United States until the 1930's. 
The first explicit scheme was introduced in America after the Great Depression and initially seemed an unmitigated success. 
Panics no longer occurred, which stabilized the financial system and contributed to sustained post-war economic growth. 
Deposit insurance did away with financial panics because bank runs are typically driven by a self-fulfilling prophecy. 
They occur when a bank's clients fear that most of their fellow depositors will withdraw their funds. 
Because banks service their depositors on a first-come-first-served basis, those who wait risk being left empty-handed, because the bank may be forced to liquidate its long term-assets at a loss and run out of resources. 
So fear of a panic can create a panic. 
This is highly inefficient, because while it is individually rational for depositors to want their money immediately, the bank might have been able to service all of them had they been collectively patient. 
Economists call such situations "coordination failures," if depositors could talk to each other and coordinate their actions, they would be able to avoid a self-defeating run on the bank. 
By guaranteeing that there will be enough resources available for patient clients when they want to withdraw their funds, deposit insurance eliminates the coordination failure. 
Patient depositors no longer need to worry about others withdrawing their funds because it has no effect on them. 
But deposit insurance leads to other problems, which first appeared with the Savings and Loan crisis in the US during the 1980's. 
Deposit insurance creates what economists call "moral hazard," people who are insured against an unpleasant event are not as careful as they would otherwise be in trying to avoid that event. 
If my bicycle is insured against theft, I might buy a cheaper lock for it, making it more likely that it will be stolen. 
With deposit insurance, clients who no longer risk losing their money have no incentive to monitor their bank, while banks, with no one watching, have incentives to invest in excessively risky projects. 
Although many factors contributed to the Savings and Loan crisis, it is generally agreed that moral hazard was a major one. 
Following that crisis, deposit insurance in the US was reformed with the objective of mitigating the moral hazard problem. 
But did the reforms go far enough? 
There are ways to improve the existing system, but is something altogether different and better possible? 
As far back as 1873, in his classic book on central banking, Lombard Street, Walter Bagehot noted that central banks should be able to prevent financial panics by injecting liquidity into the economy. 
I have studied policies of the type proposed by Bagehot in a way that allows me to compare them with deposit insurance schemes. 
The main conclusion of my work is that policies aimed at ensuring liquidity can not only prevent bank panics, but also avoid the excess risk-taking that deposit insurance encourages. 
In case of panic, a good policy should help banks that have enough assets to cover their deposits but that can't pay all depositors at the same time because some assets are tied up in real estate or other long-term investments. 
These banks are illiquid but not insolvent. 
The central bank can help with familiar tools. 
Under a repurchase agreement, for example, monetary authorities buy assets from an illiquid bank under the promise that the bank will then buy the assets back on a specified date and for a specified price. 
In this way, the bank temporarily exchanges its illiquid assets for cash, pays off its depositors, and avoids doing so at a loss. 
As with deposit insurance, repurchase agreements solve the coordination failure problem because depositors know that, even if they wait, the bank will be able to accommodate their withdrawals. 
In contrast to deposit insurance, however, liquidity provision can avoid moral hazard by helping only those banks that are solvent. Depositors still have a strong incentive to monitor their banks. 
Consider a bank that has invested in risky projects and finds itself in trouble. 
It can ask the central bank for help and sell some of its assets for cash. 
However, under the agreement with the central bank, it must buy its assets back. 
If the assets are worthless, it will ultimately be forced out of business. 
If it declares bankruptcy and refuses to buy back its assets, bankruptcy laws should give the central bank the first claim on the bank's assets. 
This creates a powerful incentive for depositors and investors to monitor their bank's performance. 
Implementing liquidity provision policies like those advocated by Bagehot would prevent bank panics without the incentive for undue risk-taking associated with deposit insurance. 
Depositors deserve strong, effective protection for their funds--and the banking system requires it in order to maintain confidence. 
But neither depositors nor their banks should be given a free ride. 

An Alternative To Invading Iraq? 
Now that the UN inspection teams are in Iraq, and as the December 8 deadline approaches for Iraq to declare all its weapons of mass destruction and the facilities for producing them, the world must reckon with a hard question: what is to be done if Saddam Hussein does not obey the Security Council resolution on his weapons of mass destruction? 
There is a chance that the Iraqi president will comply, but the Council promised "serious consequences" if he does not. 
What should these be? 
We know from experience that neither political pressures nor economic sanctions hurt Saddam enough. 
Only military action will do. 
But the only military option so far put before us is invasion to change the regime - that is, full-scale war. 
Starting a war is always a grave step, and the effects are never neatly calculable. 
In this instance five key areas of uncertainty and risk exist. 
First, the fighting itself may not be the cakewalk that some assert. 
Churchill once wrote: "Never, never, never assume that any war will be smooth and easy." 
Brainwashed Iraqi forces, and a regime complicit at every level in Saddam's crimes, would be fighting not to hang on to a conquest (as in the Gulf War of 1991) but to defend their homeland. 
This raises the spectre of street fighting through Baghdad, desperate use of biological or chemical weapons, an attack to draw in Israel, numerous military and civilian deaths and the further destruction of a ravaged society. 
Second, Iraq is a diverse country, distorted by over thirty years of Saddam's tyranny, and with no plausible and coherent alternative government in sight. 
How would it be run? 
WWII's victors had to rule Germany for four years and Japan for longer. 
According to the New York Times, Pentagon officials have said, "thousands of military specialists in civil affairs familiar with the linguistic and cultural differences within Iraq would probably be deployed throughout the country". 
Where is this remarkable cohort to come from? 
Next, no government in the region loves Saddam, but all fear popular reaction to a third Western onslaught on an Islamic state, this time with much less clear justification than over Kuwait and in Afghanistan. 
Some hawks might welcome the destabilisation of Saudi Arabia. 
Should anyone else? 
Indeed, the fourth dimension of risk is that an invasion could weaken the support of key governments for action against terrorists, and provoke further outrages. 
Fifth, the world economy is scarcely thriving. 
Would unrest in the main oil-producing region help or hinder prosperity? 
What would the whole enterprise cost? 
Explicit UN support for invasion might ease some of these risks, but it would not remove them. 
Necessity sometimes dictates that risks be accepted, as Britain did in 1939. 
But does necessity really drive us so hard now? 
Three main reasons for acting against Saddam have been offered. 
We need no longer address the first - that he was behind the attacks of September 2001 on the US. The Bush Administration makes no claim to have adequate evidence of this. 
The second reason adduced is that Saddam poses a grave security threat to the US and to his region. 
But his two aggressive adventures - the more recent over twelve years ago - ended in humiliating failure. 
He is weaker militarily now than then, he cannot hit the US directly, and he must know that fresh aggression would bring the house down upon him. 
Saddam's only option would be to provide weapons of mass destruction to terrorists. 
But that would be so uncontrollable and dangerous for him as to be deeply implausible - unless we drive him to desperation. 
Saddam Hussein heads a state, not a shadowy terrorist outfit. 
Deterrence - which works by basic human nature, not through some arcane construct peculiar to the Cold War - can be brought to bear here. 
The third reason for acting against Saddam is cogent: that his defiance of the Security Council since 1991 cannot be allowed to stand. 
The Council has now made that plain. 
Yet we must still ask whether a full-scale invasion is the only way, a necessary and proportionate way, to fulfil that aim. 
We should not forswear that option, but we ought to consider others, not least because the Security Council - whose backing will be politically if not legally crucial - may never support invasion. 
It would be odd to uphold the Council's authority by means that failed to get its approval. 
The Council is more likely to accept an option of mounting a punitive program of air strikes - going well beyond what was done in 1998 - on suspected WMD sites, presidential compounds, the Republican Guard and other armed-force targets. 
This would hurt and weaken Saddam, and establish unmistakably the message that defiance of the UN carries severe penalties. 
The Council could also declare that any fresh aggression, or any use, threat or transfer of WMD, would trigger Saddam's removal and his pursuit as an international criminal like Slobodan Milosevic. 
Such a course would not please those whose underlying desire is regime change, not disarmament or punishment. 
The US has skilfully carried the international community along with it so far. 
To throw away that achievement would impose costs not confined to the present episode. 
The sledgehammer of invasion could easily cause far more harm than the ills it seeks to stamp out. 
Dealing with Saddam does not need, and is not worth, a full-scale war. 

An Answer to the Russian Challenge 
BERLIN – For 19 years, the West (America and Europe) has been putting off answering a critical strategic question: what role should post-Soviet Russia actually play globally and in the European order? 
Should it be treated as a difficult partner or a strategic adversary? 
Even when this choice became critically acute during the crisis of Russia’s short war against Georgia last summer, the West didn’t provide a conclusive answer to this question. 
If you follow most East Europeans, the United Kingdom and the Bush administration, the answer is “strategic adversary.” 
But most West Europeans prefer “difficult partner.” 
These seemingly mutually exclusive alternatives have one thing in common: neither of them has been thought through to the end. 
If you see Russia as a strategic adversary – and the restoration of Great Russian power politics under Vladimir Putin, to the detriment of the rule of law in domestic and foreign policy, does indeed speak for it – then the West should fundamentally change its agenda. 
While Russia is no longer the superpower it was in the Soviet era, militarily it is still a great power, at least in Europe and Asia. 
To address the numerous regional conflicts (Iran, Middle East, Afghanistan/Pakistan, Central Asia, North Korea) and global challenges (climate protection, disarmament, arms control, nuclear anti-proliferation, energy security) that have high priority on the Western agenda, cooperation with Russia is necessary. 
A strategic confrontation with Moscow, i.e., a new kind of “mini-Cold War,” would undermine this agenda, or at least complicate its implementation significantly. 
So the question is simply whether the threat emanating from Russia is so grave that this kind of strategic reorientation on the part of the West is required? 
I believe it is not. 
Putin’s claim to great-power status and his great-power policies are structurally very vulnerable. 
This is especially true at times where the price of oil has fallen below $40 per barrel. 
And he knows that. 
Demographically, Russia is in a dramatic nose-dive; it remains economically and socially backward; its infrastructure is underdeveloped, as are its investments in education and vocational training. 
Economically, it mainly relies on energy and commodity exports, and in its modernization efforts, it is largely dependent on the West, particularly Europe. 
Due to its geopolitical position and its potential, however, Russia will remain a permanent strategic factor in Europe and Asia that cannot be ignored. 
To integrate the country into a strategic partnership is therefore in the West’s interest. 
But this would require a Western policy based on long-term thinking and a self-confident and strong power position, because the Kremlin will perceive any sign of division and weakness as encouragement to return to Great Russian power politics. 
A few months ago, the Russian government came up with a proposal to negotiate a new European order within the framework of the Organization for Security and Cooperation in Europe. 
Russia considers the agreements from the 1990’s unjust, based as they were on its weakness at the time, and it wants to revise them. 
Moscow’s main strategic objective is the weakening or even roll-back of NATO as an Ant-Russian military alliance and the re-establishment of its East European and Central Asian zones of influence. 
But Putin is making a big mistake here, because all these aims are unacceptable for the West, and the Kremlin still doesn’t seem to understand that the best and most effective guarantee of NATO’s existence was, is, and will continue to be an aggressive Russian foreign policy. 
In the former mother country of Marxism-Leninism, the leaders still don’t seem to understand dialectics. 
After all, if Russia’s government really wanted to achieve a change in the post-Soviet status quo, it should, first and foremost, pursue a policy vis-à-vis its neighbors that reduces rather than increases fears. 
But this applies similarly, if in reverse, to the West: on the one hand, the principles of a new Europe as defined by the OSCE after 1989/1990 don’t allow decisions about alliances to be subject to the veto of a large neighbor. 
The same is true for free and secret elections and the inviolability of borders. 
On the other hand, the missile defense systems in Poland and the Czech Republic, and the prospect of NATO accession for Georgia and Ukraine, assume confrontation where this was not at all necessary. 
The West should not reject Russia’s wish for new negotiations on a European security system. 
Instead, it should be viewed as an opportunity finally to answer the key question of Russia’s place within Europe. 
NATO must play the central role here, because it is indispensable for the vast majority of Europeans and for America. 
The possible trade-off could be that the existing principles and institutions of the post-Soviet European order, including NATO, remain unchanged and are accepted and implemented by Russia, which would get a significantly enhanced role within NATO, including the perspective of full membership. 
The peripheral nature of the NATO-Russia Council was clearly not enough and did not work. 
But why not think about transforming NATO into a real European security system, including Russia? 
The rules of the game would be changed and a whole variety of strategic goals could be achieved – European security, neighborhood conflicts, energy security, arms reduction, anti-proliferation, etc. 
Yes, such a bold step would transform NATO. 
But it would transform Russia even more. 
If the West approaches these discussions with Russia without illusions, with a clear understanding of its own strategic interests, and with new ideas for partnership and cooperation, the worst to be feared is failure. 
Of course, this approach presupposes two things that don’t exist at the moment: a common transatlantic approach to dealing with Russia, and a European Union that acts in much greater unison and is therefore stronger. 
Nonetheless, the challenge posed by Russia does not allow any further procrastination. 
There is simply too much at stake. 


An Asia Strategy for Iran 
SINGAPORE − When the ongoing turmoil surrounding the Iranian elections finally ends, the West is likely to walk away with a simple black and white judgment: the bad guys won. 
Of course, the West did the right thing by supporting the good guys, the street demonstrators. 
Hence, the West need not bear any responsibility for the outcome. 
The tragedy of such thinking is that it does not allow for any moral and political complexity or nuance, yet that is exactly what will be needed if the many problems surrounding Iran are to be resolved. 
Moreover, with Mahmoud Ahmadinejad remaining as Iran’s president, the West will once again resort to its usual method of dealing with unfriendly regimes: impose more sanctions. 
But this would lead to an even greater tragedy. 
The only clear lesson to emerge from Iran’s disputed presidential election is that the country has a vibrant and indeed dynamic civil society. 
Many brave Iranians were prepared to risk their lives to defend their beliefs. 
Their ability to do so confirms that Iran is not a closed totalitarian state like North Korea. 
Despite many years of rule by a theocratic establishment (or perhaps because of it), Iranian minds remain open and engaged. 
So there is real hope that Iran can change, modernize, and open up as the rest of Asia has. 
Indeed, the only viable long-term strategy to adopt, therefore, is to stop trying to isolate Iran and instead nudge Iranians into engaging more with modern Asia. 
In the Iranian worldview, there are three great ancient Asian civilizations: Chinese, Indian, and Persian (with Persia being the greatest). 
Iranians expect to perform on par with China and India. 
So, while Western hectoring of Iran will not work, when Iranians see their society falling far behind China and India as those countries open up to the world, they may become motivated to reconsider their path. 
The more Iranians visit China and India, the more likely that Iran will change. 
Similarly, the West should find ways to re-engage with Iranian society, a major obstacle to which is the absence of diplomatic relations between the United States and Iran. 
American foreign policy assumes that diplomatic relations with Iran are somehow an act of approval. 
In fact, the exact opposite is true. 
Diplomacy was invented precisely in order to enable relations between adversaries, not friends. 
No one needs diplomatic immunity to talk to their friends. 
They need it to talk to their adversaries. 
Unfortunately, no US politician appears willing to explain this bit of common sense to the American public. 
The US might also learn from other examples. 
Many Americans applauded Egyptian President Anwar el - Sadat for his political courage in visiting Jerusalem three decades ago – a decision for which he ultimately paid with his life − even though the vast majority of Egyptians strongly disapproved. 
It is useful to recall President Richard Nixon’s words when, prior to restoring diplomatic relations China, he visited Beijing: “We have at times in the past been enemies. 
We have great differences today. 
What brings us together is that we have common interests which transcend those differences. 
As we discuss our differences, neither of us will compromise our principles. 
But while we cannot close the gulf between us, we can try to bridge it so that we may be able to talk across it.” 
In engaging Iran, the West should ignore the nature of its regime. 
It is almost impossible for any outsider to understand Iran’s real internal political dynamics. 
Just when the world reached a consensus that Ahmadinejad was merely an instrument of the Supreme Leader, Ayatollah Khamenei, Ahmadinejad appointed a Vice-President against Khamenei’s wishes (though he later retracted the appointment). 
What we do know with certainty is that the regime is divided. 
These divisions will allow new forces to emerge in Iranian society. 
So all means should be found to reach out to Iranian society at all levels. 
Iranian students should be encouraged to visit and study in Asian universities, where they would discover how confident young Chinese and Indian students are about the future − which might well cause them to reflect on why young Iranians do not share that optimism. 
A final reason for the West to change course is that Western sanctions are proving increasingly useless. 
Only 12% of the world’s population lives in the West, and power is slipping steadily away from it. 
The July 2009 decision by the Non-Aligned Movement (comprising 118 member states) to hold its next meeting in Tehran provides a powerful demonstration of non-Western perceptions about Iran. 
If the West persists with its sanctions, it will not do any good. 
It will only make Western leaders feel good. 
But what is ultimately more important: doing good or feeling good? 

An Assassination in Belgrade 
Not since Archduke Franz Ferdinand's assassination has a murder shaken Belgrade as much as the killing of Serbian Premier Zoran Djindjic. 
The bullets that killed Djindjic may also have slain Serbian hopes for normalcy at the very moment that we were emerging from the nightmare of Slobodan Milosevic's long misrule. 
With the bloody wars of the Yugoslav succession still etched deeply in everyone's minds, does Djindjic's assassination herald the end of an era of political violence or the dawn of a new one? 
Milosevic's ouster two years ago was turbulent, but no one was killed. 
Serbs were justly proud: a dictatorship was ended in a democratic, peaceful way. 
Milosevic's extradition to face charges of war crimes before the Hague Tribunal--a trial that has proceeded without incident in Serbia--was also peaceful. 
With relations in the region and with the West approaching something like normalcy, Serbs were beginning to feel, at long last, that they were finding peace with themselves and the world. 
Of course, assassinations are nothing new in Serbia. 
"Arkan," the leader of the most murderous paramilitary group in the wars in Bosnia and Kosovo, and a political power even after Milosevic's fall, was murdered in Belgrade last year. 
Djindjic himself narrowly escaped a highway assassination attempt only last month. 
But most Serbs were beginning to believe that the ballot and not the gun was becoming the dominant tool of politics. 
Djindjic's effective leadership brought about this change. 
Although the most popular politician of the uprising against Milosevic was Vojislav Kostunica, who replaced him as president, it was Djindjic who skillfully coordinated the volatile coalition that opposed the regime. 
His boundless energy and quick thinking delivered success from behind the scenes. 
As Serbia's prime minister after Milosevic, he resembled a corporate CEO more than the Heidelberg-educated philosophy professor that he was. 
Djindjic remained pragmatic, never doctrinaire. 
As a result of Serbia's predicament, he accumulated more power than prime ministers typically wield. 
Milosevic's regime left behind crippled institutions, with large sections of the police and judiciary and many state-owned companies remaining under the control of Milosevic's clique. 
With little trust in existing institutions to implement reforms, Djindjic often took shortcuts, using extra-legal means and improvised parliamentary majorities to push through legislation. 
Only prosperity and a "European Serbia" mattered. 
Did these short cuts help incite his death? 
Who can say? 
They certainly did little to build respect for the rule of law. 
Yet the immediate consequences of Djindjic's death will be tragic. 
He was seen in the West as a reformer, and reform may not proceed without him. 
If it does not, urgently needed Western investment won't materialize. 
Serbia will again seem a benighted and lawless land. 
Although Djindjic was not popular, only extreme nationalists and die-hard Milosevic supporters are cheering. 
They regard his murder as just punishment for the "traitor" Djindjic's decision to extradite Milosevic--and other Serbian "heroes"--to The Hague. 
The more dangerous outcome is that the assassination may reinforce the belief in Serbia that only authoritarian rule is possible. 
Given the prevalence of this belief, Djindjic's death creates a serious power vacuum precisely because his vast personal power was moving Serbia in some of the right directions. 
Now, it is feared, organized crime will intimidate his less talented successors. 
For now, Serbia's government has imposed a state of emergency. 
But effective or quick suppression of the organized criminals who were almost certainly behind Djindjic's murder is unlikely. 
The reason for this also explains why Djindjic could not rely on the Serb state to carry out his policies. 
Many policemen and intelligence officers are on the crime bosses' payrolls. 
The fact that a former president of Serbia, Ivan Stambolic, could disappear without a trace in 1999 is grim testimony to the power of Serbia's criminal underworld. 
Indeed, Djindjic may well be a victim of his recent moves to root out organized crime. 
He was initially slow in fighting organized crime, because he did not want to alienate the bulk of Milosevic's mafia-infested establishment at once. 
He preferred to confront corrupt institutions one at a time as he consolidated his rule. 
Sadly, he may also have needed the support of some crime bosses at the outset. 
Djindjic's murder will make the fight against crime the country's main political goal. 
In this, politicians will at last have something like united public support. 
But crime would not be as powerful as it is, and the police and judiciary would not be as corrupt, if Serbia's economy were in better shape. 
Serbia is poor and Western aid is desperately needed. 
Djindjic's murder shows that the situation is so dire that aid should no longer be strictly conditional on harsh reforms. 
For the moment, extreme nationalists and Milosevic supporters may feel triumphant. 
But the one certain success of Djindjic's era is that they will never return to power. 
Their vision of a chauvinistic, inward-looking Serbia has been discredited, while Djindjic's stance may become more popular due to his martyrdom. 
Moments of defeat have always been history's turning points in Serbia. 
Once again, Serbs face such a moment. 
This time, however, we must resolve to remember Zoran Djindjic's cause--political and economic liberty--more than his blood sacrifice. 

An Autumn Abyss? 
BERLIN – In the coming months, several serious regional economic and political crises could combine into one mega-watershed, fueling an intense global upheaval. 
In the course of the summer, the prospect of a perilous fall has become only more likely. 
The drums of war are being banged ever more loudly in the Middle East. 
No one can predict the direction in which Egypt’s Sunni Islamist president and parliamentary majority will lead the country. 
But one thing is clear: the Sunni Islamists are decisively altering the region’s politics. 
This regional re-alignment need not be necessarily anti-Western, but it surely will be if Israel and/or the United States attack Iran militarily. 
Meanwhile, civil war is raging in Syria, accompanied by a humanitarian catastrophe. 
To be sure, President Bashar al-Assad’s regime will not survive, but it is determined to fight until the end. 
Syria’s balkanization among the country’s diverse ethnic and religious groups is a clearly predictable result. 
Indeed, a Bosnia-type scenario can no longer be excluded, while the prospect of the Syrian government’s loss of control over its chemical weapons poses an immediate threat of military intervention by Turkey, Israel, or the US. 
Moreover, the Syrian civil war has become a proxy in an openly declared battle for regional hegemony between Iran on one side and Saudi Arabia, Qatar, Turkey, and the US on the other. 
Staying on the sidelines of this Arab-Western coalition, Israel is playing its cards close to its chest. 
Iran, for its part, has proclaimed Syria an indispensable ally, and is determined to prevent regime change there by all available means. 
Does that mean that Hezbollah’s militias in neighboring Lebanon will now become directly involved in Syria’s civil war? 
Would such intervention revive Lebanon’s own long civil war of the 1970’s and 1980’s? 
Is there a threat of a new Arab-Israeli war hanging over the Middle East? 
And, as Kurds inside and outside of Syria grow more assertive, Turkey, with its large and long-restive Kurdish population, is also growing restive. 
At the same time, the regional struggle currently playing out in Syria is becoming increasingly entangled with the other major source of war sounds: Iran’s nuclear program. 
Indeed, parallel to the Syrian drama, the rhetoric in the confrontation between Israel and Iran over the program has become dramatically harsher. 
Both sides have maneuvered themselves into a dead-end. 
If Iran gives in and agrees to a sustainable diplomatic solution, the regime will lose face on a critical domestic issue, jeopardizing its legitimacy and survival. 
From the regime’s point of view, the legacy of the 1979 Islamic revolution is at stake. 
But the international sanctions are hurting, and Iran risks losing Syria. 
Everything points to the regime’s need for success – now more than ever – concerning its nuclear program. 
Similarly, Israel’s government has backed itself into a domestic policy trap of its own. 
Prime Minister Binyamin Netanyahu and Defense Minister Ehud Barak cannot accept a nuclear-armed Iran. 
They do not fear a nuclear attack against Israel, but rather a nuclear arms race in the region and a dramatic shift in power to Israel’s disadvantage. 
From their point of view, Israel must either convince the US to attack Iran and its nuclear plants or take on the maximum risk of using its own military forces to do so. 
Both sides have substantially reduced their options, thereby limiting the possibility of a diplomatic compromise. 
And that means that both sides have stopped thinking through the consequences of their actions. 
Everywhere there is talk of a “military option,” which means air strikes. 
But, while advocates speak of a limited “surgical operation,” what they are really talking about is the start of two wars: an aerial war, led by the US and Israel, and an asymmetric war, led by Iran and its allies. 
And what if this “military option” fails? 
What if Iran becomes a nuclear power, the region’s democratic movements are swept away by a wave of anti-Western Islamic solidarity, and the Iranian regime emerges even stronger? 
Iran, too, evidently has not thought its position through to its logical conclusion. 
What does it stand to gain from nuclear status if it comes at the cost of regional isolation and harsh United Nations sanctions for the foreseeable future? 
And what if it triggers a regional nuclear arms race? 
A war in the Persian Gulf – still the world’s gas station – would affect oil exports for some time, and energy prices would skyrocket, dealing a severe blow to a global economy that is teetering on the brink of recession. 
China, already in economic trouble, would be hit hardest, along with the whole of East Asia. 
With the US also economically weakened and facing a presidential election, America’s leadership ability would be seriously constricted. 
And could a weakened Europe cope with an oil shock at all? 
A regional and global security shock caused by asymmetric warfare could add still further to the world economy’s troubles, causing exports to slump even more. 
Respice finem! 
(“Consider the end”), the Romans used to say. 
World leaders need to take this timeless wisdom to heart. 
And that applies doubly to Europeans. 

An Earthquake in Chinese Politics? 
BEIJING – Now that the aftershocks from the great Sichuan earthquake appear to have dissipated, it is time to ask what shocks, if any, the earthquake delivered to China’s political system. 
Has the quake given birth to some new, positive political force that will accelerate reform? 
It has happened before. 
After all, dramatic political changes – the fall of the “Gang of Four” and Deng Xiaoping’s consolidation as China’s supreme leader – did follow shortly after the devastating Tangshan earthquake in 1976. 
Given the sharp contrast between Premier Wen Jiabao’s caring attitude during the earthquake and President Hu Jintao’s mediocre political performance, some people could not help but imagine that the earthquake may have tipped the balance at the Communist Party’s highest levels, pushing the liberal forces represented by Wen to the center of power. 
But this is naive. 
Unlike 30 years ago, no strong force for political reform now exists in China’s vast bureaucratic system. 
Back then, Mao’s Cultural Revolution had forced large numbers of his revolutionary comrades onto a reformist path. 
In today’s China, the overwhelming majority of bureaucrats like the status quo and have enough resources to protect themselves. 
Although Wen has won popular support through his tireless efforts for earthquake victims, he remains isolated in official circles. 
And, although Hu can barely hide his mediocrity, the bureaucrats are unconcerned. 
After all, they don’t want someone controlling them who is both able and serious. 
But the Sichuan earthquake was not completely irrelevant to China’s political progress. 
Wen, who had been bogged down by the bureaucracy, had been seeking to counter it by expanding the media’s openness and transparency. 
He had sought to take advantage of the Beijing Olympics to give the foreign media unprecedented freedom, but the bureaucrats succeeded in reversing his decision. 
The earthquake gave Wen an unexpected second opportunity. 
He used television and his outstanding performance to prove that modern media and information tools can curb China’s bureaucracy. 
This precedent will not be easy to roll back, and will have a far-reaching positive influence on China’s political progress. 
The earthquake, together with the media transparency that accompanied it, has made the bureaucrats more accountable. 
Thousands of people, including nearly 10,000 school children, whose parents will not be easily placated, lost their lives. 
Millions of dispossessed people must be re-housed in a process that will last for several years. 
Bureaucrats must not be allowed to spend the huge donations collected and state relief funds allotted in an arbitrary manner. 
As a result, a new political culture conducive to accountability may have a realistic opportunity to grow. 
But this does not mean that someone will emerge from the Party with the courage and ability to assume bold political leadership. 
In fact, I believe that China’s future leaders, are more likely to come from China’s burgeoning, but still limited, civil society than from the bureaucracy. 
One source of China’s future political leadership could well be its growing NGO sector. 
Although the Party uses various means to suppress their development, the Sichuan earthquake demonstrated that it has failed to eliminate NGOs as a social force. 
The quake gave them an opportunity to be seen, and an unprecedented number of people had a chance to perceive this nascent civil society as a positive force that serves their own interests. 
There is an even greater silent force which may produce a new generation of political leaders: the rapidly growing army of Christian believers, now estimated at 20 million. 
With a population of 1.3 billion, China has no lack of people with leadership potential, and I believe that more and more of this talent is situated outside the Party bureaucracy in NGOs, startup enterprises, philanthropy, and even missionary work. 
In today’s mostly closed environment, they mostly lack awareness of their political skills and vision. 
A more open and transparent public environment will help awaken their sense of political mission. 
Yet we are left to ask: when will the time for major political change come? 
Wen Jiabao wrote recently in Sichuan that “more hardship will arouse the country,” evidently believing that the Chinese may still need to suffer further in order to realize political progress. 
That may be true, but I also believe that a new generation of political leaders can grow up in a more open information environment. 
And, in any coming showdown, we must hope that all leaders will refuse to use innocent people’s lives as bargaining chips. 

An Economic Agenda for Italy 
MILAN – At the end of this month, Italian voters will choose their next government, from which they expect jobs and a more level economic playing field – and from which Italy’s European partners expect structural reforms and fiscal probity. 
What should the new government’s economic-policy agenda be? 
To reduce public debt, which stands above 120% of GDP, while minimizing painful adjustments, Italy needs economic growth – something that has eluded policymakers in recent years. 
Indeed, Italy’s average annual GDP growth rate since joining Europe’s economic and monetary union in 1999 has been an anemic 0.5%, well below the eurozone average of nearly 1.5%. 
In the four years since the global financial crisis struck, the growth rate fell to -1.2%, compared to the eurozone average of -0.2%, and it is expected to remain negative this year. 
The new government’s biggest challenge will be to implement reforms that enable Italy’s economic performance to catch up to that of its neighbors after years of bad policies and neglect. 
This requires increased investment in innovation and human capital. 
From 1992 to 2011, labor productivity grew at an average annual rate of 0.9%, the lowest in the OECD. 
Since 2001, unit labor costs have been growing faster than real GDP and employment, undermining the economy’s competitiveness vis-à-vis developing countries. 
In the last decade, Italy’s share of global exports dropped from 3.9% to 2.9%. 
Persistently weak labor-productivity growth has created a situation in which unit labor costs do not fall, even if real wages remain stagnant or decline. 
Indeed, despite a 1.3% drop in real wages in 2011, unit labor costs remained unchanged. 
Italy’s new leaders must address this situation by decoupling labor’s contribution to productivity growth from that of capital and total factor productivity. 
According to the OECD, lower regulatory costs and more efficient public administration (building upon measures introduced by the previous government, led by Mario Monti) could add 0.3-0.4% to average annual GDP growth by 2020. 
Likewise, labor-market reform, improved education, and enhanced human capital could contribute an additional 4% to GDP growth in the next decade. 
Moreover, Italian policymakers should strive to boost the female labor-force participation rate, which, at 49%, is one of the lowest in the OECD. 
Doing so would raise per capita income by 1% annually through 2030. 
At the same time, fiscal adjustment remains essential to Italy’s short- and long-term stability. 
According to the International Monetary Fund, the budget deficit is declining, and the primary surplus (net revenues minus interest payments) is growing. 
Italy’s new leadership must sustain this progress. 
Despite positive developments, the road ahead is bumpy. 
Navigating it will require Italy to retain its credibility with other European Union member states and international investors. 
The new prime minister will need to persuade Germany, financial markets, and the European Council that Italy is a reliable partner. 
The ability to refinance government debt and keep costs down is essential to strengthening public finances and boosting GDP growth. 
Furthermore, attracting more direct investment is crucial, given that capital inflows, while recovering, remain 30% below their pre-crisis level; with outflows exceeding inflows, Italy has become a net capital exporter. 
“Selling” Italy in Europe should entail more than photo opportunities with other leaders in Brussels and the occasional road show to financial institutions in London. 
Italy’s leaders should engage actively in commercial diplomacy, using the country’s embassies and trade agencies to promote Italy globally, while working to build strong bilateral relations with other EU members, particularly southern countries like Spain. 
At the same time, the new leaders need to “sell” Europe in Italy, where Euro-skepticism is rampant. 
According to the Pew Research Global Attitudes Project, only 30% of Italians view the euro positively. 
In the country’s wealthier north, where average per capita income, at €30,000 ($40,500), approaches that of Germany, people are questioning the rationale of EU membership. 
The costs are evident, they argue, but what are the benefits? 
Meanwhile, fears of structural decline pervade the country. 
The crisis has lasted for a long time, and people are tired. 
Unemployment has risen to a record 11.2%, with 35% of young people jobless. 
And the tax burden, which has exceeded 40% of GDP since 1990, now stands at almost 43% of GDP. 
A Scandinavian level of taxes would be bearable if public services did not remain inferior to those offered in Scandinavia. 
For example, per capita health-care spending in Sweden, Denmark, and Finland exceeds $3,000, compared to only $2,300 in Italy, where households must contribute roughly 20% of total health-care spending. 
Moreover, Italy spends around 4.5% of GDP on education, while the Scandinavian countries spend more than 6% of GDP. 
As a result, Italian students’ scores in the Program for International Student Assessment are significantly lower than those of their counterparts in many other OECD countries. 
Italy’s new government will have to display leadership and vision to guide the economy toward stable growth, avert a race to the bottom, and stem growing social tension. 
Most important, economic renewal depends on the next government’s willingness and ability to address the institutional weaknesses that have made concerted action increasingly urgent. 

An Egyptian Sakharov 
Saad Eddin Ibrahim is Egypt's most prominent social scientist--and the most independent-minded in a conformist society ruled by President Hosni Mubarak's authoritarian regime. 
For years, Prof. Ibrahim headed the Cairo-based Ibn-Khaldun Institute, which undertook, with the European Union's encouragement, pioneering studies on women and minority rights, as well as electoral practices, in Egypt. 
In a country where the President has been consistently re-elected with 97% of the vote since 1980, Ibrahim's institute is the only academic research organization that dares to ask troubling questions about the way Egypt is run. 
Two years ago, Prof. Ibrahim, together with practically all of the Ibn-Khaldun Institute staff, were arrested and put on trial before a State Security Court on trumped up charges. The allegations included financial irregularities, receiving EU funds without the proper ministerial authorization, and "tarnishing Egypt's image." 
Prof. Ibrahim was sentenced to seven years imprisonment. 
After diplomatic pressure was applied by the United States (through his American-born wife, Prof. Ibrahim holds US citizenship) and the EU, he was granted a re-trial. 
This ended days ago with the old verdict reaffirmed: seven years in prison. 
Twenty-seven of the Institute's staff members also received jail sentences, and the Institute is now practically destroyed. 
Any dictator, from Saddam Hussein to Robert Mugabe, could take pride in this abuse of power. 
But because Mubarak regime's is considered moderate, pro-Western, and helpful in the context of Israeli-Palestinian relations, the West's response to this and other abuses remains muted. 
Indeed, the US Charge d'Affaires in Cairo expressed mere "disappointment" at the verdict--a response that gives understatement a bad name. 
Since the terrorist attacks on New York and Washington last year, America and the EU recognize (or say that they do) that the lack of legitimate channels of opposition in Arab countries pushes people who might otherwise be mere critics of governments into the arms of extreme Islamic fundamentalists. 
Saad Eddin Ibrahim is a liberal: he is also a staunch Egyptian and Arab nationalist. 
He has vehemently condemned Israeli policies vis-à-vis the Palestinians, and is a critic of many aspects of US foreign policy. 
But his has always been the voice of a responsible opposition. 
Indeed, his is the type of voice that Egyptian civil society needs if there is ever to be a chance that the country's Pharaonic authoritarian regime--symbolized by President Mubarak's high-handedness--is to be reformed. 
Just because Mubarak's government persecutes Islamic terrorists, and is an ally in the war against fundamentalist extremism, is no reason to give him carte blanche to repress every attempt to open up Egyptian society. 
Western intellectuals, who were instrumental in pressuring the Soviet Union in support of Andrei Sakharov, have been singularly quiet when it comes to Ibrahim. 
An Arab intellectual persecuted by an Arab regime, it seems, is nowhere near the top of their agenda. 
But it is the EU that is proving most complicit. 
After all, it was the EU's effort to stimulate Egyptian civil society with its grant of funds to the Ibn-Khaldun Institute that incited Ibrahim's persecution. 
The EU's silence in the face of his arrest and imprisonment is shameful. For not just Ibrahim, but the values that the EU professes to uphold, have been on trial in Egypt, and they have been mocked by the Mubarak's regime idea of justice. 
Europe must work--promptly--to overturn Ibrahim's conviction. 
The EU should consider blocking all its educational and cultural programs in Egypt if the verdict on Ibrahim and his associates is not overturned and the Ibn Khaldun Institute not re-opened and restored to full vigor. 
Just as the fight for Andrei Sakharov was also a fight for an open society in Russia and thus helped dismantle Communist tyranny, so the fight for Ibrahim's freedom is a fight to put an end to Egypt's oppressive authoritarian regime. 

An Energy Tax for Europe 
George W. Bush’s disastrous war in Iraq has put Europe in a bind. 
The United States long has been Europe’s protector. 
Now, because of a war it wanted no part of, Europe finds its security undermined. 
Chaos in Iraq has empowered Iran – a much more dangerous country for Europe than Iraq ever was. 
And, with America bogged down in Iraq, Russian President Vladimir Putin has resurrected Soviet-style bullying tactics. 
Would Russia otherwise have dared to threaten to re-direct its nuclear missiles at European cities? 
Not only has Bush destroyed Iran’s most formidable enemy and bogged down US troops in a hopeless cause; he also has enriched energy-abundant Iran and Russia by pursuing a war that has dramatically raised energy prices. 
High crude oil prices make it easier for Iran to build nuclear weapons and for Russia to use energy blackmail to threaten Europe. 
But Europe can fight back. 
By imposing a stiff tax on energy consumption, Europeans would reduce both consumption of energy and its price in world markets, in turn cutting the flow of funds to Russia and Iran. 
Because crude oil is priced in US dollars, and the dollar has depreciated against the euro, European consumers have gotten off relatively easy from rising energy prices. 
So an energy tax roughly equal to the euro’s 33% appreciation in recent years would be about right. 
Europeans might be forgiven for thinking that the Americans, who pumped up oil prices in the first place with their military misadventure in Iraq, should be the ones who “pump it down” with an energy tax. 
But, with a “Texas oil man” in the White House, it won’t happen. 
Perhaps after 2008, the politics in America will change in favor of an energy tax, but such a tax is needed now. 
Besides, given the strength of environmentalism in Europe, the issue is tailor-made for Europeans to take the lead. 
Moreover, Europeans do not narrowly equate national security with military spending. 
They know that confiscating the checkbooks of Russia and Iran would probably make the world a lot safer than building another submarine or aircraft carrier. 
Indeed, an energy tax would not only effectively counter the argument that Europeans are “free riders” when it comes to defense; it would be tantamount to defense leadership. 
Still, with the amount of real resources transferred to their governments already high, Europeans might balk at a further increase. 
That is why the energy tax must be imposed as a tax substitution, with income or payroll taxes simultaneously reduced to keep real resource transfers to government at a constant level. 
This would increase economic growth as well as strengthen national security. 
Critics who worry about the cost of the energy tax have not thought about tax substitutions. 
They also do not seem to realize that an energy tax is a much cheaper way for Europe to protect itself from Iran and Russia than alternative means, such as a defense buildup. 
Europe currently lacks military muscle because it made a decision a half-century ago to be protected by the US and devote the saved resources to building up its welfare state. 
This strategy – which worked well for decades – always carried the risk that at some point America’s resources might be tied up elsewhere, leaving Europe under-protected. 
That risk materialized with the Iraq war. 
But Europeans are showing little taste for increased defense spending, Iraq or no Iraq. 
Even France’s new president, Nicolas Sarkozy – thought by many to be a pro-American foreign policy hawk – is backing away from his campaign promise to maintain defense spending at 2% of GDP. 
In a recent speech to the French defense industry, Sarkozy conspicuously failed to repeat the pledge, instead warning that he soon might cut France’s defense budget. 
According to a respected defense industry publication, Sarkozy changed his mind after his party’s smaller-than-anticipated victory in June’s parliamentary election. 
The reason Europeans are reluctant to increase defense spending is expense. 
Cutting welfare spending – where the big money is – would be painful. 
Solemn promises made over the years would have to be broken (people would not get the social services that they paid for with a lifetime of high taxes), lives would be shortened (less money for hospitals and nursing homes), and overall hardship increased. 
Even economic growth will not prevent a tradeoff between defense and welfare spending for Europeans. 
Fifty years of defense dependence on the US has created a powerful “peace industry” in Europe whose primary business is to fight defense spending tooth and nail. 
They will want to protect all social spending, regardless of the consequences for foreign policy. 
A counterweight to the “peace crowd” may be new migrants from Eastern Europe, for whom cuts in social services would break no promises, and for whom job availability and wage levels are more important. 
But it will take some time before the new migrants gain decisive political influence, and the problems of Iran and Russia for Europe require immediate attention. 
In short, Europeans will not allow Bush’s Iraq war to become a war on their welfare state. 
What makes the energy imposed as a tax substitution tax particularly attractive as a defense measure is that it leaves the welfare state intact while making Europe safer, greener, and richer. 
Why wait? 

An Epidemic of Politics 
Americans, like citizens in countries throughout the world, have come to accept that politics plays an important role in the appointment of certain kinds of public officials. Few of us are surprised (though some may be disappointed) when a federal judgeship is awarded or a senior diplomat appointed because the candidate passes a litmus test of loyalty to some principle that is important to the President's or Prime Minister's party. 
But science, almost everyone agrees, is different, and here the United States is beginning to stand as a cautionary example to the rest of the world. 
Scientific appointments should rest on objective criteria of training, ability, and performance. 
Clearly, it is legitimate to interrogate a future Secretary of Health and Human Services (HHS) about his views on abortion. 
But it is entirely out of place when appointees to scientific advisory committees are subjected to tests of political loyalty. 
Similarly, membership of bodies that conduct peer review of scientific proposals - a process that is fundamental to scientific progress - surely ought to be free of all barriers to entry that are unrelated to professional qualifications. 
Unfortunately, scientists in the US are running up against such barriers more and more often. 
During the past fall, the journal Science published several news stories related to the issue. 
One involved the wholesale replacement of members of the advisory committee to the National Center for Environmental Health, a part of the Centers for Disease Control and Prevention (CDC), without consulting the center's director. 
Similar cases involved the CDC's Advisory Committee on Lead Poisoning and Prevention, the Advisory Committee on National Human Research Protections, and the Advisory Committee on Genetic Testing. 
The current epidemic of ideology, in which advisory committees are shut down and reassembled with new members, and candidates are subjected to loyalty tests, seems old hat to some observers. 
Officials at the HHS call it "fairly standard practice." 
Well, it isn't standard practice in America - or at least it wasn't. 
In any case, what's really worrisome is not that the Bush administration examines candidates for compatibility with its "values." 
The most alarming development is how deep the ideological vetting now cuts, invading areas that once were immune to this kind of manipulation. 
Indeed, perhaps the most telling case in the widening political epidemic was a membership re-shuffle of the study section at the National Institute of Occupational Safety and Health that evaluates grants for studying workplace injuries. 
Advisory committees might have been vulnerable to occasional stacking of this kind in the past. After all, they recommend the policies that politicians may or may not want to consider. 
But study sections? 
In October 2002, Science published an editorial by David Michaels and a group of colleagues. 
Several were distinguished former public servants who had been involved with some of the committees in question, and they brought a valuable perspective to the issue, one based on their personal experience. 
Their piece was a story in itself, but what followed was even more interesting. 
It set off a volley of letters in which scientists told of similar experiences. 
A nominee for the National Institutes of Health's Muscular Dystrophy Research Coordinating Committee told of being vetted by a White House staff member. 
After being asked about her views on various Bush administration policies, none of them related to the work of the committee, she was asked whether she supports the president's policy on embryonic stem cells. 
Another letter writer, a distinguished professor of psychiatry and psychology, reported receiving a call from the White House about his nomination to serve on the National Council on Drug Abuse. 
The caller declared that he must vet him to "determine whether he held any views that might be embarrassing to the president." 
According to the professor, a series of questions followed, with the White House official keeping a running score. 
One example: "You're two for three; the president opposes needle exchange [for intravenous drug users] on moral grounds, regardless of the outcome." 
Then the exchange took an even more chilling turn. 
The official asked the nominee whether he had voted for Bush, and, on being informed that he had not, asked: "Why didn't you support the president?" 
This is the stuff of dictatorship, not democracy. 
The purpose of scientific advisory committees is to provide balanced, thoughtful advice to the policy process. 
Nothing is gained - and much is lost - when a desired policy outcome is put first. 
This is why deciding which research projects to support has always been a matter for objective peer review, not politicians. 
In fact, the applicable statute for all this - the Federal Advisory Committee Act - specifically requires that committees be balanced and "not inappropriately influenced by the appointing authority." 
US Health and Human Services Secretary Tommy Thompson and the White House Personnel Office ought to set an example to the rest of the world. 
They can do so very easily: by following the law. 

An External Stability Pact for Europe 
BERLIN – The current economic crisis has exposed two fundamental problems in the design of the European Monetary Union. 
The first concerns the sustainability of public finances in a number of euro-zone member states. 
Second, inadequate macroeconomic policy coordination has resulted in divergences in the international competitiveness of euro-zone members, threatening the very existence of the euro. 
Countries whose public finances seemed fundamentally sound as late as last year have come under severe fiscal pressure. 
Ireland’s government debt is expected to rise to almost 80% of GDP by 2010, whereas just a year ago the European Commission projected that Ireland’s government debt would be below 30% of GDP. 
Likewise, whereas Spain was expected to decrease its debt ratio, its debt-to-GDP ratio is now likely to double between 2007 and 2010, to more than 60%. 
The EU’s fiscal surveillance mechanisms failed to predict these developments because they neglect a crucial variable: the dynamics of private-sector debt. 
Given the high economic costs of a banking crisis, governments are likely to take on the liabilities of their financial sector when a crisis hits – as recently occurred in the United Kingdom and Ireland, and in financial crises in Latin America and Asia in the 1990’s. The same is probably true when key business sectors near insolvency. 
A country with sound public finances can thus become a fiscal basket case practically overnight. 
Given the increasingly close financial and economic linkages between euro-zone members, rising government debt in even one EMU country can have serious consequences for all members, because no member state will allow another to default. 
Thus, EMU members indirectly share the liability for fellow countries’ private-sector debt, which for this reason should be monitored within the EMU’s surveillance framework. 
Another apparent problem is that EMU member states – at least until now – do not coordinate their economic policies effectively. 
Even before the crisis, this resulted in divergences in competitiveness and in the business cycle. 
The persistent loss in competitiveness over the past decade is one reason why the crisis is hitting some southern European EMU countries such as Spain and Italy so hard. 
The inefficiency of fiscal-policy control and the lack of economic convergence are a matter of increasing concern to both the European Central Bank and euro-zone finance ministers. 
While no initiative for coping with these problems has been tabled so far, the issue is certain to become a matter of debate within the EMU. 
One way to tackle the problems associated with government debt, as well as to improve economic policy coordination, is through a simple extension of existing rules: an “External Stability Pact” could be introduced to complement current EMU regulations. 
This pact would monitor current-account imbalances and penalize excessive deficits or surpluses in the external account. 
Monitoring external balances can be an effective tool to measure future default risks, since sustained current-account deficits lead to a growth in net foreign debt. 
Moreover, there is a direct relationship between the EMU countries’ private-sector debt dynamics and their current-account imbalances within the euro zone. 
So long as a national government is not running more than a modest deficit, a current-account deficit reflects the private sector’s borrowing from abroad (or the sale of previously accumulated foreign assets). 
If the current-account balance is assessed together with the fiscal position, it becomes possible to draw conclusions about risky debt trends within the private sector. 
The mathematics of debt dynamics suggest that no euro-zone country should have a current-account imbalance, whether a deficit or a surplus, of more than 3% of GDP. 
Exceptions could be granted for countries with large inflows of foreign direct investment in greenfield projects. 
The rule should apply both to debtor and creditor countries. 
After all, payment imbalances always have two sides, and the burden of adjustment should not be borne only by deficit countries. 
Such a pact would oblige governments to use fiscal and wage policies as well as overall economic policy to achieve external balance. 
It would also lead to broader economic-policy coordination, particularly with respect to wage-setting, because governments would be compelled to use national legislation and public-sector wage settlements to influence wage policy in such a way that imbalances among euro-zone countries are reduced. 
Furthermore, an External Stability Pact would oblige governments to take into account the consequences for other member states when designing national economic reforms. 
If a “surplus country” such as Germany wanted to lower non-wage labor costs and increase value-added tax in order to boost its competitiveness, it would simultaneously have to adopt an expansive fiscal policy to compensate for the negative effects on its partners’ foreign trade. 
Within the framework of these rules, individual countries would retain the authority to design their policies. 
The Spanish government, for example, could have met Spain’s building boom and foreign-trade deficit with tax increases or by urging domestic wage restraint. 
Alternatively, it could have intervened by instituting planning regulations or imposing limits on mortgage loans. 
An External Stability Pact would not only detect risks to fiscal stability early on; it would also help make a reality of a fundamental principle of EU law, namely that member states finally treat economic policy as a “common interest.” 

An Honest Man? 
In his gushing account of President George W. Bush, the former presidential speechwriter David Frum tells us that his boss "scorned the petty untruths of the politician." 
We learn, for example, that when asked to prepare a radio broadcast for the following day, he would begin reading, "Today I am in California" and quickly break off, saying with exasperation, "But I'm not in California." 
Frum thought this a bit pedantic, but concluded that it was emblematic of the President's character and that "the country could trust the Bush administration not to cheat and not to lie." 
How wrong Frum now seems. 
Bush may naively consider it lying, and therefore wrong, to say that he is in California when he is recording a speech in Washington. 
But he fails to see anything gravely wrong about misleading his country and the world concerning Iraq's weapons of mass destruction. 
As we have seen, the White House built its case for war on a highly selective dossier of evidence, and Bush made statements about Iraq's attempt to purchase uranium from Africa that he and his staff knew to be highly doubtful, if not false. 
When questions were raised about how the statement about uranium was allowed to remain in Bush's State of the Union address, both National Security Advisor Condoleeza Rice and Secretary of Defense Donald Rumsfeld argued that it was not a lie. 
Their reasoning indicates that they, like the President, have a childishly literal notion of what it is to lie. 
Bush's actual words were these: "The British government has learned that Saddam Hussein recently sought significant quantities of uranium from Africa." 
Bush's statement took this form because the CIA objected to the original version, which flatly stated that Saddam Hussein had sought to buy uranium from Africa. 
The White House staff member who discussed it with the CIA then suggested changing the sentence so that it stated that the British reported that Saddam Hussein had sought to buy uranium from Africa. 
This was literally true, because the British had reported that. 
It was nevertheless misleading, for the CIA had informed the British that their information was not reliable. 
The fact that Bush only referred to a British statement is the basis for Rice and Rumsfeld's defense of it. 
Rice said that "the statement that [Bush] made was indeed accurate. 
The British government did say that." 
Rumsfeld said that Bush's statement was "technically accurate." 
In fact, even on the most literal interpretation, Bush's statement was not accurate. 
Bush did not say merely that the British had "reported" that Iraq had sought to buy uranium from Africa, but that the British had ``learned'' this. 
To say that someone has learned something is to endorse what they say they have learned as true. 
Imagine that the British had said that Saddam Hussein was a peace-loving man about to bring democracy to his country. 
Would Bush have said that the British had learned that? 
Quite apart from these weak attempts to justify Bush's statement as "technically accurate," the more serious charge is that even if what Bush said really were technically accurate, it still would have been designed to mislead the world into thinking that Iraq had been trying to buy uranium in Africa. 
Bush and his staff had good reason to believe that this was not true. 
Bush's response to the issue after it became public shows him to be focused on the trivial and morally reckless about the essential. 
A person who is morally sensitive to the seriousness of starting a war on the basis of misleading information would take appropriate steps. 
He would ensure that the American public knew how the error occurred, and that whoever was responsible for it suffered the usual consequences that befall senior officials who make what was--to put the best possible interpretation on it--a grave error of judgment. 
But Bush did nothing of the sort. 
When the issue became public, Bush's response was to condemn his critics as "revisionist historians" and to evade questions about the credibility of the information he had provided by asserting that the removal of Saddam was a good outcome. 
Then he said that the CIA had cleared his speech, as if that absolved him of all responsibility. 
After CIA Director George Tenet took responsibility for the inclusion of the misleading material, Bush said that he "absolutely" had confidence in Tenet and the CIA, and that he considered the matter closed. 
Belief in Bush's honesty led many voters to prefer him to Albert Gore in the 2000 presidential election. 
Among voters who rated "honesty" as an important factor influencing their choice of candidate, 80% said that they voted for Bush. 
These voters were disgusted with Clinton, not only for his sexual relationship with White House intern Monica Lewinsky, but for lying about it. 
That Clinton did lie about his sexual activities is clear, and he was wrong to do so. 
But his lies did not lead his country into a war that has cost thousands of lives. 
Bush's excessively literal interpretation of the requirements of honesty conceals a deeper dishonesty whose consequences have been far more morally serious. 

An IMF We Can Love? 
CAMBRIDGE – What a difference the crisis has made for the International Monetary Fund. 
It was just a few months ago that this important but unloved institution, a landmark of post-war global economic arrangements, seemed destined to irrelevance. 
The IMF has long been a whipping boy for both left and right – the former because of the Fund’s emphasis on fiscal rectitude and economic orthodoxy, and the latter because of its role in bailing out indebted nations. 
Developing nations grudgingly took its advice, while advanced nations, not needing the money, ignored it. 
In a world where private capital flows dwarf the resources at its disposal, the IMF had come to seem an anachronism. 
And, when some of the IMF’s largest debtors (Brazil and Argentina) began to prepay their debts a few years ago with no new borrowers in sight, it looked like the final nail in the coffin had been struck. 
The IMF seemed condemned to run out of income, in addition to losing its raison d’être. 
It shrank its budgets and began to downsize, and, while it was handed some new responsibilities in the meantime – surveillance over “currency manipulation,” in particular – its deliberations proved largely irrelevant. 
But the crisis has invigorated the IMF. 
Under its capable managing director, Dominique Strauss-Kahn, the Fund has been one of the few official agencies ahead of – instead of behind – the curve. 
It moved quickly to establish a fast-disbursing emergency line of credit for countries with “reasonable” policies. 
It ardently championed global fiscal stimulus on the order of 2% of world GNP – a position that is all the more remarkable in view of its traditional conservatism on all fiscal matters. 
And, in the run-up to the G-20 summit in London, it thoroughly overhauled its lending policies, de-emphasizing traditional conditionality and making it easier for countries to qualify for loans. 
Even more significantly, the IMF has emerged from the London meeting with substantially greater resources, as well as new responsibilities. 
The G-20 promised to triple the Fund’s lending capacity (from $250 billion to $750 billion), issue $250 billion of new Special Drawing Rights (a reserve asset made up of a basket of major currencies), and permit the Fund to borrow in capital markets (which it has never done) if necessary. 
The IMF was also designated as one of two lead agencies – along with an expanded Financial Stability Forum (now renamed the Financial Stability Board) – charged with providing early warning of macroeconomic and financial risks and issuing the requisite policy recommendations. 
Another piece of good news is that the Europeans have now given up their claim on naming the IMF’s managing director (as have the Americans their corresponding claim on the World Bank presidency). 
These senior officials are henceforth to be selected “through an open, transparent, and merit-based selection process.” 
This will provide for better governance (although Strauss-Kahn’s leadership has been exemplary), and will enhance both institutions’ legitimacy in the eyes of developing nations. 
So the IMF now finds itself at the center of the economic universe once again. 
How will it choose to deploy its newfound power? 
The greatest risk is that it will once again over-reach and over-play its hand. 
That is what happened in the second half of the 1990’s, as the IMF began to preach capital-account liberalization, applied over-stringent fiscal remedies during the Asian financial crisis, and single-handedly tried to reshape Asian economies. 
The institution has since acknowledged its errors in all these areas. 
But it remains to be seen if the lessons have been fully internalized, and whether we will have a kinder, gentler IMF in lieu of a rigid, doctrinaire one. 
One encouraging fact is that developing countries will almost certainly get a larger say in how the Fund is run. 
This will ensure that poorer nations’ views receive a more sympathetic hearing in the future. 
But simply giving developing nations greater voting power will make little difference if the IMF’s organizational culture is not changed as well. 
The Fund is staffed by a large number of smart economists, who lack much connection to (and appreciation for) the institutional realities of the countries on which they work. 
Their professional expertise is validated by the quality of their advanced degrees, rather than by their achievements in practical policymaking. 
This breeds arrogance and a sense of smug superiority over their counterparts – policymakers who must balance multiple, complicated agendas. 
Countering this will require proactive efforts by the IMF’s top leadership in recruitment, staffing, and promotion. 
One option would be to increase substantially the number of mid-career recruits with actual practical experience in developing countries. 
This would make the IMF staff more cognizant of the value of local knowledge relative to theoretical expertise. 
Another strategy would be to relocate some of the staff, including those in functional departments, to “regional offices” in the field. 
This move would likely face considerable resistance from staff who have gotten used to the perks of Washington, DC. 
But there is no better way to appreciate the role of context than to live in it. 
The World Bank, which engaged in a similar decentralization a while back, has become better at serving its clients as a result (without facing difficulties in recruiting top talent). 
This is an important moment for the IMF. 
The international community is putting great store in the Fund’s judgment and performance. 
The Fund will require internal reforms to earn that trust fully. 

Leveling the Afghan Playing Field 
NEW YORK – Afghanistan’s security and political situation remains plagued by uncertainty, stemming from the withdrawal of United States and NATO combat troops, the upcoming presidential election, and the stalled peace negotiations with the Taliban. 
Recognizing that continued economic insecurity will exacerbate this perilous situation, the government has announced a new package of economic incentives aimed at attracting foreign direct investment. 
The package includes the provision of land to industrialists at dramatically reduced prices, tax exemptions of up to seven years for factory owners, and low-interest loans of up to ten years for farmers. 
Such incentives are targeted at foreign investors and the local elite, with the aim of stopping or even reversing capital flight. 
But the new measures ultimately amount to more of the same: a fragmented policy approach that will prove inadequate to solve Afghanistan’s fundamental economic problems. 
In the early stages of the post-war transition, FDI increased rapidly, rising from 1.2% of GDP in 2002 to a peak of 4.3% of GDP in 2005. 
Most of these inflows were directed toward the construction and services sectors – the main drivers of GDP growth – and aimed to satisfy international demand, both civilian and military. 
But, in 2006-2007, FDI levels began to fall, owing to a sharply deteriorating security situation, a continued lack of electricity and adequate infrastructure, a shortage of skilled labor, inadequate legal and regulatory systems, inefficient bureaucratic procedures, and the need to renew companies’ licenses annually. 
Land grabs, chronic corruption, impunity, the inability to enforce contracts, and the fragmentation and ineffectiveness of aid deterred foreign and domestic investment further. 
As a result, FDI collapsed to less than 0.5% of GDP annually in 2011-2012. 
Moreover, in the effort to develop two of the world’s largest mines, investors’ greed prevailed over their security and business-climate concerns. 
In 2007, the Metallurgical Corporation of China won the concession for the Aynak copper deposit in Logar Province. 
In 2011, a group of Indian state and private companies won the concession for the Hajigak iron-ore deposit in Bamyan Province. 
But, despite these projects’ reported billion-dollar price tags and high expectations, the investments have catalyzed little progress, owing partly to security issues. 
Worse, the mines’ displacement of residents, underpayment of workers, and environmental damage have generated resentment in local communities, which is likely to grow in the future. 
After all, the granting of mineral resources to foreigners reduces – and could even eliminate – their benefits for local people. 
As it stands, Afghanistan’s economy is a house of cards. 
Aid levels are comparable to GDP, with donors covering roughly two-thirds of government expenditure and the entire current-account deficit, which amounts to 40% of GDP. 
But aid is falling and expected to drop sharply after 2014. 
Rather than continuing to pursue piecemeal measures like those that it has just approved, the government needs to implement an integrated and targeted strategy for the reactivation of investment, employment, and trade. 
Indeed, a drastic shift in policy is essential to avoid economic collapse. 
In order to reduce the risks associated with investing in Afghanistan, the government must create a system that benefits local communities and foreign investors alike. 
This can be achieved with a strategy based on two distinct but mutually beneficial “reconstruction zones”: an export-oriented zone (ERZ) and a local-production zone (LRZ). 
The ERZ, focused exclusively on producing goods for export, would provide tax incentives, basic infrastructure and services, security, and a stable legal framework to investors. 
In exchange, investors would commit to train local workers, create employment by purchasing local inputs and services, improve corporate practices and local providers’ standards, facilitate technology transfers, and establish links with local technical schools and universities. 
The LRZ would enable local people to improve their livelihoods though the production of agricultural goods, the efficient delivery of services, and light manufacturing. 
Such a scheme would also help to bolster gender equality by providing a level playing field for all Afghans in terms of security, social services, infrastructure, credit, and inputs (such as seeds, fertilizers, and agricultural machinery). 
Moreover, it would boost food supplies and reduce Afghanistan’s exorbitant dependence on imports. 
By focusing exclusively on foreigners and domestic elites for investment, Afghanistan is missing out on the vast potential of micro-entrepreneurs and small businesses to contribute to steady GDP growth. 
Achieving long-overdue peace and stability will be impossible without them. 

An Inconvenient Peace Prize 
This year’s Nobel Peace Prize justly rewards the thousands of scientists of the United Nations Climate Change Panel (the IPCC). 
These scientists are engaged in excellent, painstaking work that establishes exactly what the world should expect from climate change. 
The other award winner, former US Vice President Al Gore, has spent much more time telling us what to fear. 
While the IPCC’s estimates and conclusions are grounded in careful study, Gore doesn’t seem to be similarly restrained. 
Gore told the world in his Academy Award-winning movie (recently labeled “one-sided” and containing “scientific errors” by a British judge) to expect 20-foot sea-level rises over this century. 
He ignores the findings of his Nobel co-winners, the IPCC, who conclude that sea levels will rise between only a half-foot and two feet over this century, with their best expectation being about one foot. 
That’s similar to what the world experienced over the past 150 years. 
Likewise, Gore agonizes over the accelerated melting of ice in Greenland and what it means for the planet, but overlooks the IPCC’s conclusion that, if sustained, the current rate of melting would add just three inches to the sea level rise by the end of the century. 
Gore also takes no notice of research showing that Greenland’s temperatures were higher in 1941 than they are today. 
Gore also frets about the future of polar bears. 
He claims they are drowning as their icy habitat disappears. 
However, the only scientific study showing any such thing indicates that four polar bears drowned because of a storm. 
The politician-turned-movie maker loses sleep over a predicted rise in heat-related deaths. 
There’s another side of the story that’s inconvenient to mention: rising temperatures will reduce the number of cold spells, which are a much bigger killer than heat. 
The best study shows that by 2050, heat will claim 400,000 more lives, but 1.8 million fewer will die because of cold. 
Indeed, according to the first complete survey of the economic effects of climate change for the world, global warming will actually save lives. 
The IPCC has magnanimously declared that it would have been happy if Gore had received the Nobel Peace prize alone. 
I am glad that he did not, and that the IPCC’s work has rightfully been acknowledged. 
Gore has helped the world to worry. 
Unfortunately, our attention is diverted from where it matters. 
Climate change is not the only problem facing the globe. 
Our blinkered focus on it – to the detriment of other planetary challenges – will only be heightened by the attention generated by Gore’s Nobel Peace Prize. 
Gore concentrates above all else on his call for world leaders to cut CO2 emissions, yet there are other policies that would do much more for the planet. 
Over the coming century, developing nations will be increasingly dependent on food imports from developed countries. 
This is not primarily a result of global warming, but a consequence of more people and less arable land in the developing world. 
The number of hungry people depends much less on climate than on demographics and income. 
Extremely expensive cuts in carbon emissions could mean more malnourished people. 
If our goal is to fight malnutrition, policies like getting nutrients to those who need them are 5,000 times more effective at saving lives than spending billions of dollars cutting carbon emissions. 
Likewise, global warming will probably slightly increase malaria, but CO2 reductions will be far less effective at fighting this disease than mosquito nets and medication, which can cheaply save 850,000 lives every year. 
By contrast, the expensive Kyoto Protocol will prevent just 1,400 deaths from malaria each year. 
While we worry about the far-off effects of climate change, we do nothing to deal with issues facing the planet today. 
This year, malnutrition will kill almost four million people. 
Three million lives will be lost to HIV/AIDS. 
Two and a half million people will die because of indoor and outdoor air pollution. 
A lack of micronutrients and clean drinking water will claim two million lives each. 
With attention and money in scarce supply, what matters is that we first tackle the problems with the best solutions, doing the most good throughout the century. 
If we focus on solving today’s problems, we will leave communities strengthened, economies more vibrant, and infrastructures more robust. 
This will enable these societies to deal much better with future problems – including global warming. 
Committing to massive cuts in carbon emissions will leave future generations poorer and less able to adapt to challenges. 
Gore has an unshakable faith that climate change is the biggest challenge facing the world. 
To be fair, he deserves some form of recognition for his resolute passion. 
However, the contrast between this year’s Nobel winners could not be sharper. 
The IPCC engages in meticulous research where facts rule over everything else. 
Gore has a very different approach. 

An India-China Axis? 
Is a new alignment between India and China rising to balance America’s global power? 
Chinese Premier Wen Jiabao just completed a four-day visit to India during which 11 agreements were signed, including a comprehensive five-year strategic cooperation pact. 
In addition, Wen announced that China would support India’s bid for a permanent seat on an expanded UN Security Council, and opposed the inclusion of Japan, which the United States supports for a Council seat. 
With over a third of the world’s population and two of the globe’s highest economic growth rates, an alliance between China and India could be a serious factor in world politics. 
While both are developing countries – many of whose people remain impoverished – they also boast impressive capabilities in information age technologies both for civilian and military purposes. 
As Indian Prime Minister Manmohan Singh put it during Wen’s visit, “India and China can together reshape the world order.” 
The two countries’ recent rapprochement marks a huge change from the hostility that bedeviled their relations following their 1962 war over a disputed border in the Himalayas. 
When I first visited India as an American government official in the late 1970’s, I was struck by my Indian hosts’ fixation on gaining equal status with China. 
In 1998, when India tested its nuclear weapons, the defense minister referred to China, and then Prime Minister Atal Bihari Vajpayee spoke of China as India’s number one enemy. 
By contrast, on more recent visits to India, I have found my hosts referring to the need to learn from China. 
Trade between the two giants has grown from $100 million in 1994 to nearly $14 billion last year, and India’s minister of commerce and industry has predicted that it will double by this decade’s end. 
One agreement signed during Wen’s visit was a new set of guiding principles on how to settle boundary disputes between the two countries. 
While improved relations and diminished prospects for conflict are welcome, relations between India and China are more complex than they appear at first. 
Not long before the visit of the Chinese premier, India hosted US Secretary of State Condoleezza Rice. 
Ever since President Bill Clinton’s visit to India, but especially under President George W. Bush, the US has moved from relative indifference to India to the development of a strong strategic relationship. 
This new approach might have seemed threatened by Al Qaeda’s attacks on America, which led to a strengthening of US relations with Pakistan’s General Parvez Musharaff. 
But the US reassured India that they faced a common threat from transnational terrorism, and that the old Cold War pairings of India and Pakistan were outdated. 
Secretary Rice made this plain during her March visit, stressing the importance of a strategic relationship, including a willingness to consider trade in high technology, nuclear energy, and co-production of fighter aircraft such as F-16’s and F-18’s. 
Shortly after Rice’s visit, the US announced that it would honor a long-standing promise to sell F-16’s to Pakistan. 
While the announcement incited Indian protests, they were relatively muted compared to the past. 
One reason is that the State Department also issued a statement that America would help India to become a major world power in the twenty-first century, involving both a strategic and economic dialogue. 
Several factors underpin this new American attitude toward India. 
Rhetoric about “the world’s two largest democracies” is not new, but it fits with the Bush administration’s new emphasis on promoting democracy. 
The increasing role of the Indian diaspora in the US, particularly in the information industries, also had an influence, as has the rise in bilateral trade accompanying India’s surging economic growth. 
Equally important are strategic concerns about transnational terrorism and the rise of Chinese power. 
The rise of China is a major factor in the politics of the twenty-first century. 
China has tripled the size of its economy in the past two decades, and has been increasing its military strength. 
While both India and the US seek trade and good relations with China, both are aware – and wary – of China’s growing strength. 
Thus, both seek to hedge their bets, and what better way to do so than by improving their strategic relationship? 
Neither country aims to restrain China in the way the “containment” strategy aimed at an aggressive Soviet Union during the Cold War, but both want to create an international structure that does not tempt China to throw its weight around. 
India has a 3,000-kilometer border with China, a 2,000-kilometer border with Pakistan (which has been the beneficiary of Chinese military and nuclear assistance), and growing concerns about the security of sea routes in the Indian Ocean over which oil and other trade move. 
As one Indian strategist put it to me during a recent visit, “By 2030, we envisage the US, China, and India as the three largest powers in world politics. 
We don’t want a China- or a US-dominated world, but if we had to choose, it would be easier for us to live with the latter.” 
So, while improvement in India-China relations is welcome, it is unlikely to herald the beginning of an India-China alliance against the US. 
Rather, it more likely represents another move in India’s age-old tradition of managing regional balances of power. 

An India-Pakistan Diplomatic Test Match 
LAHORE – In 2005, during a visit to Islamabad, I met Pakistani President Pervez Musharraf and told him of a conversation I had had with Prime Minister Manmohan Singh of India. 
The Indian leader, whom I have known for years, had said that he wanted better relations with Pakistan as one his legacies. 
Musharraf’s response was interesting. 
He said he had the same aspiration, but that it would need effort from both sides to move things along. 
“I have invited Manmohan a half-dozen times to visit Pakistan. 
I have also offered to take him to his village near Chakwal, a few miles south of Islamabad, where he was born. 
But he continues to demur,” he told me. 
I repeated the conversation to Singh, who explained that in a democracy such as India, a great deal of work needs to be done with the members of the coalition and the senior bureaucracy before the prime minister can travel to Pakistan. 
“Musharraf is a military leader; he needs only to pack his bags and head this way.” 
Musharraf did head that way a few months later, when he forced an invitation out of Singh to watch a cricket match between the two sides in New Delhi in 2005. 
It took the Indian government some time to formulate an answer to Musharraf’s request for a visit. 
When it came, it carried Singh’s characteristic warmth. 
At the end of a speech in the Lok Sabah, the lower house of India’s parliament, Singh issued his formal invitation. 
“How nice it would be to conduct our affairs in this august House with the same spirit of sportsmanship that our cricketers exhibit on the playing fields of the sub-continent,” he said. “I am happy to inform the honorable members of this House that I have decided to invite President Musharraf to come to India to watch the cricket match between our two teams. 
It is my earnest desire that the people in our neighborly countries and their leaders should feel free to visit each other whenever they wish to do so. 
Be it to watch a cricket match; be it do some shopping; be it to meet friends and families – India is proud to be an open society, an open economy. 
I do hope that President Musharraf and his family will enjoy their visit to our country.” 
The prime minister’s statement was received with cheers, not the jeers that some of his aides had feared. 
Musharraf went to Ferozeshah Kotala cricket ground in Delhi and saw his team win the match. 
He and Singh also found time during the game to talk about bilateral relations, and agreed to launch what came to be called the “composite dialogue,” covering eight contentious issues that had soured ties for so long. 
Three years later, a Pakistan-based terrorist group killed more than 160 people in Mumbai, India’s financial capital – and, with them, the diplomatic opening initiated by cricket. 
Once again, however, cricket has revived dialogue between the sub-continent’s two nuclear-armed rivals. 
This time, the initiative came from Singh, who invited his Pakistani counterpart, Prime Minister Yousuf Raza Gilani, to visit Mohali, near New Delhi, to watch the two countries play the semi-final in the Cricket World Cup. 
The match was played on March 30, with Pakistan losing narrowly. 
On the political side, however, the two countries were not evenly matched. 
Of the troika that currently governs Pakistan – the president, the prime minister, and the chief of staff of the army – it is the prime minister who carries the least amount of authority. 
It was Gilani who sat next to Singh to watch the game; but, ultimately, process, rather than protocol, will determine how bilateral relations move forward. 
After the match, Singh said that “India and Pakistan should be working together to find cooperative solutions and need permanent reconciliation to live together in dignity and honor. 
We should put our ancient animosities behind us to attend to the problems our two nations face.” 
Gilani expressed the same sentiment: “We need to focus on dealing with our common enemies – inflation, poverty, hunger, disease, and unemployment – for the prosperity of the two countries.” 
There have been indications of a gradual thaw. 
Senior officials from the ministries of commerce, defense, and foreign affairs will meet in the next two months followed by a meeting of the foreign ministers. 
Gilani invited Singh to visit Pakistan, an invitation that “will be considered carefully,” according to Indian Foreign Secretary Nirupama Rao. 
And she spoke of a new environment: “Today, it is the Mohali spirit that pervades our relationship. 
This was an extremely positive and encouraging spirit that has been generated as a result of today’s meetings.” 
We have been here before, of course, only to see prospects for improved India-Pakistan relations snuffed out. 
There are no guarantees that this time will be different. 
But, for both countries, hope dies last. 

An Indirect Route to a Palestinian State? 
RAMALLAH – Palestinians and Israelis have different and possibly contradictory expectations from the indirect negotiations that the United States has pushed both sides into beginning. 
Israel was among the first parties to welcome the Arab League’s reluctant decision to back Palestinian President Mahmoud Abbas’s call for Arabs to give their blessing to the talks. 
It is clear that for Israeli Prime Minister Binyamin Netanyahu’s right-wing government, the start of indirect talks without freezing settlement activities in the West Bank and Jerusalem is a sort of victory. 
Just to remind the world of this, as the indirect talks were preparing to get off the ground, Israel’s government approved a decision to break ground on 112 housing units in a settlement south of Bethlehem, and 1600 new settlement units in East Jerusalem. 
For Palestinians, the return to talks, albeit indirect, is focused on one strategic issue: borders. 
The idea, a new one, aims at getting the Israelis and Palestinians to agree to the borders of the Palestinian state that both sides and the rest of the world have said is the way out of the decades-old conflict. 
Palestinians want the areas occupied by Israel following the June 1967 War to be the territory of the Palestinian state. 
This fits with United Nations Security Council resolutions, among them Number 242, which stated the "inadmissibility of the acquisition of territory by war." 
But a return to the 1967 borders would mean that large settlement blocks – as well as smaller settlements and East Jerusalem – would be part of the Palestinians state. 
Few expect that to happen. 
Previous talks have included an allowance for land exchanges, which would permit Israel to keep many large settlement blocks by giving land inside Israel to the Palestinians. 
The most likely swap would probably involve territory to create a West Bank-Gaza land corridor. 
Jerusalem will be much more difficult to demarcate. 
Palestinians and Israelis have publicly said that they do not want a wall separating West and East Jerusalem. 
Among the various ideas in circulation, most incorporate former US President Bill Clinton’s call for Jerusalem’s Jewish communities to be part of Israel and the Arab communities to be part of Palestine. 
But this plan has been put to the test lately by right-wing Israelis’ forcible takeover of Palestinian properties in the heart of East Jerusalem’s Sheikh Jarah neighborhood. 
Hundreds of Israeli peace supporters, along with some international activists, have joined evicted Palestinians to protest the actions of these radical settlers, which have been supported by municipal and government officials. 
Unfortunately, therefore, the indirect negotiations now being launched are unlikely to produce any tangible result on the borders of the Palestinian state. 
Indeed, to expect such results by the proposed four-month deadline is highly implausible. 
Nevertheless, for both sides, the process can be as important as the results. 
For Israelis, these talks will relieve US and other international pressure, while at the same time providing some legitimacy to Netanyahu’s position of talking peace without giving up on settlements and Jerusalem. 
Many will say that this appearance of supporting peace without surrendering land has been Israel’s successful position for decades. 
For Palestinians however, this process is different from negotiations in the past. 
Stubbornly refusing to talk face to face while settlement activities are not completely frozen has focused attention on what many believe is the crux of Israel’s colonial occupation regime. 
For many Palestinians and Israelis, as well as for the international community, the shape and details of what would be a settlement acceptable to majorities on both sides is well known. 
By focusing on the need to reach agreements on borders within a short time period, Palestinians are saying that they do not see any need to negotiate gradual steps, preferring to agree on the final settlement first and then work back on issues of implementation. 
Perhaps the most interesting new aspect in the upcoming indirect talks is what has been happening on the ground in the occupied territories. 
Palestinian Prime Minister Salam Fayyad has been active in executing a strategic plan that is expected to lead to a de facto Palestinian state within a year and a half. 
Non-violent protest has also been on the rise, whereas violent acts and suicide bombings have been drastically decreased. 
The American negotiators who are planning to play an active role in the indirect talks, and will for the first time sit at the negotiating table if face-to-face talks do take place, have apparently promised the Palestinians that the US will point its finger at the party that dares to derail the negotiations. 
Such a US declaration (if it declares Israel at fault) would give Palestinians the opportunity to declare the talks a failure and thus move toward a unilateral declaration of statehood in the hope that the world community will recognize such a state. 
Europe has already said that it would recognize such a unilateral declaration. 
In that case, the Americans would have a hard time refusing to recognize a Palestinian state that fits what the international community has said is the only acceptable solution to this intractable conflict. 

An Inequality Tax 
The economic booms in China and India have helped to reduce global inequality. 
Over the two last decades, masses of Indians and Chinese have closed the gap (in relative terms) with the rich world. 
But, at the same time, many of the world’s truly poor countries have fallen further behind (particularly in Africa, where developments are often described as catastrophic), and inequality within most countries has risen. 
Widening inequality has been recorded in the United States (starting with Ronald Reagan’s administration), the United Kingdom (starting with Margaret Thatcher), Russia during its privatization, and more recently in China and India. 
These developments seem to add to global inequality. 
So, on balance, it seems that global inequality has been relatively stable during the last two decades. 
Should anything be done about this? 
Many think that no global action to fight economic inequality is necessary. 
They argue that only poverty reduction matters. 
In the words of Anne Krueger, the Deputy Managing Director of the IMF, “Poor people are desperate to improve their material conditions…rather than to march up the income distribution [ladder].” 
Thus, even if the absolute income gap between an average American and an average African increases, why worry? 
After all, such people argue, the average African would be a bit less poor. 
But this assumes that our income relative to the income of others does not matter. 
On the contrary, psychological studies invariably show that people care not only about their absolute income, but also about where they stand in the social pyramid and whether their position is fair. 
In the past, a poor African might have looked at his compatriots and resented their wealth; now, both he and his better-off compatriots look at the rich world and resent the huge income gaps they see. 
The gaps are most obvious where people from different countries work together, as in many multinational companies. 
An “expatriate” may be paid ten times more than local staff for the same job. 
A wage premium based solely on citizenship is grating. 
But even when people do not work together, globalization, by bringing the world to everyone’s living room (or hut), enables them to make much wider comparisons of their living standards. 
It erodes the relative security in which the rich world could shelter itself, as in a cocoon. 
Now, all can see these income differences. 
This is why international action to address both global poverty and global inequality is needed. 
Global redistribution through taxes that would be levied by an international body may seem far-fetched today, but the logic of development that we are witnessing – particularly the move away from nation-states as the locus of sovereignty – suggests that it may eventually come to pass. 
One such opportunity was missed in the early 1990’s. When Russia faced its worst crisis, aid was given to the corrupt Yeltsin regime. 
But it should have been disbursed directly in cash to the most needy Russians: pensioners whose earnings plummeted due to inflation and economic contraction. 
An international organization could have simply used the existing infrastructure of the Russian state to distribute cash grants to some 20 million pensioners – money that would have been much better targeted and spent than by giving the same amount to the government. 
If this had been done, Russians would have fondly remembered receiving cash aid from the international community rather than blaming it for transferring funds to corrupt leaders. 
But the same or a similar approach could be taken in many countries today, from Angola to Zimbabwe. 
The approach is simple and powerful. 
It involves three steps: raise money from the globally rich, do not deal with governments, and transfers funds in cash to the poor. 
Those who advocate leaving globalization exclusively in the hands of the private sector may resent the idea of vesting tax-raising authority in a global agency. 
But they cannot fail to notice that the processes they support undercut their own position by rendering the wealth gap more obvious and the fairness of the actual global distribution more questionable. 
They will ultimately realize that their self-interest lies in supporting some form of global action to deal with both poverty and inequality. 

An Inflation Reality Check 
CAMBRIDGE – As inflation continues to soar everywhere, maybe the world’s central bankers need a jolt to awaken them from complacency. 
How about holding one of their bi-monthly meetings in hyperinflationary Zimbabwe? 
It might not be comfortable, but it would be educational. 
According to Zimbabwe’s official statistical agency, inflation topped 66,000% in 2007, which looks more like Weimar Germany than modern-day Africa. 
While no one is quite certain how the government managed to estimate prices, given that there is virtually nothing for sale in the shops, most indicators suggest that Zimbabwe does have a good shot at breaking world records for inflation. 
Of course, curious as they might be, central bankers could decide that meeting in Harare would be too inconvenient and politically unpalatable. 
Fortunately, there are lots of other nice – albeit less spectacular – inflation destinations. 
Inflation in Russia, Vietnam, Argentina, and Venezuela is solidly in double digits, to name just a few possibilities. 
Indeed, except for deflation-ridden Japan, central bankers could meet just about anywhere and see high and rising inflation. 
Chinese authorities are so worried by their country’s 7% inflation they are copying India and imposing price controls on food. 
Even the United States had inflation at 4% last year, though the Federal Reserve is somehow convinced that most people won’t notice. 
Many central bankers and economists argue that today’s rising global inflation is just a temporary aberration, driven by soaring prices for food, fuel, and other commodities. 
True, prices for many key commodities are up 25% to 50% since the start of the year. 
But if central bankers think that today’s inflation is simply the product of short-term resource scarcities as opposed to lax monetary policy, they are mistaken. 
The fact is that around most of the world, inflation – and eventually inflation expectations – will keep climbing unless central banks start tightening their monetary policies. 
The US is now ground zero for global inflation. 
Faced with a vicious combination of collapsing housing prices and imploding credit markets, the Fed has been aggressively cutting interest rates to try to stave off a recession. 
But even if the Fed does not admit it in its forecasts, the price of this “insurance policy” will almost certainly be higher inflation down the road, and perhaps for several years. 
America’s inflation would be contained but for the fact that so many countries, from the Middle East to Asia, effectively tie their currencies to the dollar. 
Others, such as Russia and Argentina, do not literally peg to the dollar but nevertheless try to smooth movements. 
As a result, whenever the Fed cuts interest rates, it puts pressure on the whole “dollar bloc” to follow suit, lest their currencies appreciate as investors seek higher yields. 
Looser US monetary policy has thus set the tempo for inflation in a significant chunk – perhaps as much as 60% – of the global economy. 
But, with most economies in the Middle East and Asia in much stronger shape than the US and inflation already climbing sharply in most emerging-market countries, aggressive monetary stimulus is the last thing they need right now. 
The European Central Bank is staying calm for the moment, but it, too, is probably holding back on interest-rate hikes partly out of fear of driving the euro, already at record levels, even higher. 
And the ECB worries that if the US recession proves contagious, it may have to turn around and start slashing rates anyway. 
So what happens next? 
If the US tips from mild recession into deep recession, the global deflationary implications will cancel out some of the inflationary pressures the world is facing. 
Global commodity prices will collapse, and prices for many goods and services will stop rising so quickly as unemployment and excess capacity grow. 
Of course, a US recession will also bring further Fed interest-rate cuts, which will exacerbate problems later. 
But inflation pressures will be even worse if the US recession remains mild and global growth remains solid. 
In that case, inflation could easily rise to 1980’s (if not quite 1970’s) levels throughout much of the world. 
Until now, most investors have thought that they would rather risk high inflation for a couple of years than accept even a short and shallow recession. 
But they too easily forget the costs of high inflation, and how difficult it is to squeeze it out of the system. 
Maybe they, too, should try holding a few conferences in Zimbabwe, and get a reality check of their own. 

An Intelligent War on Terror 
Terrorism is an existential threat. 
In our European Security Strategy, it was deemed one of the key strategic threats facing the European Union, and to fight it we are using all instruments at our disposal, particularly in the intelligence area. 
The first objective of intelligence is to find terrorists, prevent them from acting, and track them after they do attack. 
This is the kind of operational intelligence that is best done at the national level. 
Many arrests and disruptions of terrorist operations in Europe result from cooperation between EU members' intelligence services. 
I was recently asked by journalists whether inter-agency cooperation is sufficient and whether European mechanisms for sharing operational intelligence should be created. 
Later that very day, a joint operation resulted in simultaneous arrests in five European countries. 
The operation's success was no accident. 
Last year, the Union concluded two Europol agreements, as well as an Extradition and Mutual Legal Assistance Agreement. 
Europe's security services are working closely together within the Counter-Terrorist Group, and Europol's Counter-Terrorist Task Force has been re-established. 
A high-level group on border and transport security is at work, and links between member states' police chiefs are strengthening. 
But widespread sharing is not always needed or appropriate. 
Member states also need intelligence derived from ongoing casework, not to inform policy, at least not directly, but to disrupt and dismantle networks and prevent attacks. 
This information is in many ways more sensitive, and services share it on a "need to know" basis, not for the sake of promoting cooperation. 
I see another role for intelligence: to inform political action. 
Intelligence services can educate the public, explaining the origins of the alienation that underpins terrorism, how radicalization and recruitment occur, and highlight terrorists' goals, methods, and targeting strategies. 
Only when we understand this can we develop appropriate and concrete policies. 
For this we need good strategic assessments of intelligence. 
The EU's members have structures to provide this, and with their support and input we are building structures at a Europe-wide level, to bring this information to EU policymakers. 
Europol is performing a similar function with material derived from police work, and we are working to ensure synergy between these two efforts. 
This is a different level of intelligence, more analytical, where close collaboration adds significant value. 
In the aftermath of the Madrid bombings, the EU focused on internal aspects of the fight against terrorism. 
But this does not mean that the Union has become introverted. 
On the contrary, the EU regards international cooperation as fundamental in the fight against terrorism. 
Generally, counter-terrorism is very high on our international agenda and is becoming better integrated into the Union's political dialogue with other countries. 
We are better targeting our external assistance and capacity building programs, and we are ready to use our trade and economic muscle, when necessary, by demanding counter-terrorism clauses in bilateral treaties. 
There has also been a sea change in transatlantic cooperation between the EU and the US. 
Deeds speak louder than words, and deeds on the transatlantic level have been swift and decisive - for example, joint efforts aimed at choking off terrorist financing - even when we had strong divergences over Iraq. 
Still, I am not complacent. 
To facilitate the extremely complex task of counter-terrorism policymaking in the EU, we now have a Plan of Action, approved by the European Council, which clearly specifies who does what, and by when. 
This will also help national parliaments understand EU objectives and facilitate their legislative planning. 
I have recently appointed a counter-terrorism coordinator to assist me in following through on the Plan of Action. 
We also have a considerable number of new instruments in the area of justice and home affairs. 
The European Arrest Warrant is already producing concrete results, and we are moving towards the "free movement of judicial decisions" in the EU, through which judicial decisions - such as arrest and surrender of suspects, confiscation, and freezing of assets - will be mutually recognized. 
Furthermore, the European Border Agency will become operational in 2005. 
As requested by the European Council, I am developing, in cooperation with the European Commission, a strategy to shut down terrorist financing. 
This is where the real test of cooperation lies, for our success will rely on securing the appropriate interaction and flow of intelligence between the relevant services and the financial and banking communities. 
I firmly believe that the military option alone cannot defeat terror. 
Judicial, police, and intelligence cooperation should be the focal point for action. 
This does not mean that we are not working on how European Security and Defense Policy (ESDP) can offer a meaningful contribution. 
But ESDP is not at the core of our efforts. 
Aside from security and intelligence efforts, we must also work to deny "oxygen" to the terrorists. 
This means addressing the factors that contribute to support for and recruitment by terrorist groups. 
Regional conflicts cause anger and resentment. 
The unresolved Arab-Israeli problem leads to the rise of radicalism and extremism. 
There is entirely too much fuel for terrorist propaganda. 
The EU will be tough on terrorism. 
But it must also be tough on the causes of terrorism. 
These are not two fights, but one. 

An Obama Moment for India’s Untouchables 
NEW DELHI – Among the many international consequences of Barack Obama’s stunning victory in the United States is worldwide introspection about whether such a breakthrough could happen elsewhere. 
Could a person of color win power in other white-majority countries? 
Could a member of a beleaguered minority transcend the circumstances of his birth to lead his or her country? 
While many analysts in a wide variety of nations, especially in Europe, have concluded that such an event could not occur there in the foreseeable future, India is an exception. 
Minority politicians have long wielded authority, if not power, in its various high offices. 
Indeed, India’s last general election, in 2004, was won by a woman of Italian heritage and Roman Catholic faith (Sonia Gandhi) who made way for a Sikh (Manmohan Singh) to be sworn in as Prime Minister by a Muslim (President Abdul Kalam) in a country that is 81% Hindu. 
Not only could it happen here, Indians say, it already has. 
Such complacency is premature. 
The closest Indian analogy to the position of black Americans is that of the Dalits – formerly called “Untouchables,” the outcastes who for millennia suffered humiliating discrimination and oppression. 
Like blacks in the US, Dalits account for about 15% of the population; they are found disproportionately in low-status, low-income jobs; their levels of educational attainment are lower than the upper castes; and they still face daily incidents of discrimination for no reason other than their identity at birth. 
Only when a Dalit rules India can the country truly be said to have attained its own “Obama moment.” 
In theory, this already has happened: K. R. Narayanan, born into a poor Dalit family, served as India’s president, the highest office in the land, from 1997 to 2002. 
But the Indian Presidency is a largely ceremonial position: real power is vested in the office of prime minister, and no Dalit has come close to holding that post. 
Since independence in 1947, a majority of India’s prime ministers have been Brahmins, the highest Hindu caste. 
Yet the next national elections, due before May 2009, may produce a plausible Dalit contender for the job of prime minister – Kumari Mayawati, the female chief minister of India’s largest state, Uttar Pradesh. 
Since 1991, no Indian governing party has enjoyed a secure parliamentary majority on its own, necessitating multi-party coalition governments. 
The current Congress Party-led government of Manmohan Singh comprises 20 parties; it succeeded a 23-party coalition headed by the Bharatiya Janata Party’s Atal Bihari Vajpayee. 
When the election results are declared next year, no one doubts that the first challenge will be to cobble together another coalition. 
Both the Congress and the BJP will seek to make alliances with the dozens of smaller parties likely to be represented in parliament. 
But this time they are likely to face a third alternative: Mayawati, whose Bahujan Samaj Party (BSP) may command a bloc of at least 50 seats. 
She has publicly expressed her disdain for both large national parties; she would much rather lead a coalition than join one. 
And if the electoral numbers break down right, she could conceivably assemble a collection of regional and left-wing parties and stake a claim to rule India. 
This is a remarkable development: the idea that a Dalit woman could lead India has been inconceivable for 3,000 years. 
But India’s democracy has opened new pathways to empowerment for its underclasses. 
The poor and the oppressed may not have much, but they do have the numbers, which is what matters at the ballot box. 
Dalits and India’s aboriginals (listed in the Constitution as “Scheduled Castes and Tribes”) are entitled to 85 seats in India’s 543-member parliament that are “reserved” for candidates from their communities. 
Mayawati’s shrewd alliances, including with some members of the upper castes, which propelled her to power in Uttar Pradesh, give her party a fighting chance to win a number of other seats as well. 
In a coalition-dependent parliamentary system, that could be all she needs to become prime minister. 
The daughter of a government clerk, Mayawati studied law and worked as a teacher before being spotted by the BSP’s founder, the late Kanshi Ram, and groomed for political leadership. 
Her ascent has been marked by a heavy emphasis on symbolism – her rule in Uttar Pradesh has featured the construction of numerous statues of Dalit leaders, notably herself – and a taste for lavish celebrations. 
Mayawati’s weakness for “bling” has been demonstrated at her extravagant birthday parties, which she presides over laden with diamonds, saying (rather like Evita Peron) that her luster brings glamour and dignity to her people. 
She takes pride in being the Indian politician who pays the highest income taxes – about $6 million last year – though the sources of her income are shrouded in controversy. 
She has been accused, but not convicted, of corruption several times, with one notable case involving the construction of an elaborate shopping complex near the Taj Mahal, in violation of zoning laws. 
Critics argue that Mayawati’s promotion of Dalit welfare seems to start with herself. 
But there is no denying that her rise to power in India’s largest state, which sends 80 members to parliament, has given her a vital platform to bid for India’s most powerful job. 
With her diamonds and her statues, and a reputation for dealing imperiously with her subordinates, she’s clearly no Obama. 
But if she succeeds, she will have overcome a far longer legacy of discrimination. 

An Old Problem on China’s New Frontier 
WARSAW – Had the August 1991 putsch against Mikhail Gorbachev not failed, the riots and death recently seen in Xinjiang could have been taking place in Russia. 
Instead of hearing about a crackdown in Urumqi, Xinjiang’s capital, we might be reading about hundreds killed on the streets of Almaty, and columnists would be making comparisons to the bloody crushing of Ukrainian independence demonstrations in Lvov the previous year. 
As with China today, there would have been some feeble international condemnation, and some speculation about possible links between Kazakh militants and exile groups, or Islamic fundamentalists. 
Experts would remind us that Kazakhstan had never been a country, and that Ukrainian claims to independence are historically dubious. 
Substitute Xinjiang for Kazakhstan and Tibet for Ukraine and you get the picture. 
But that putsch, thankfully, ended as a farce. 
The decaying Soviet regime was unable to crush Russia’s growing democratic movement – it would take Vladimir Putin to do that a decade later. 
By opting for the Tiananmen Square massacre in 1989, the Chinese Communist leadership set their country on a road starkly different from the one on which Russia subsequently embarked. 
Though China’s policies have brought about Pinochet-style economic growth, if on the scale of a country that is almost a continent unto itself, they have also ensured that there is in no freedom for anyone, including the Han majority. 
This, in turn, means that, while Kazakhstan and Ukraine are independent, Tibet and Xinjiang alternate between phases of violent agitation and bloody repression. 
Though Russia today is autocratically governed, the introduction of a Chinese-style dictatorship seems hardly plausible, while GDP per capita was $15,800 last year, or almost three times that of China. 
Yet a majority of the Chinese population seems to support its’ government’s policies, including its brutal suppression of minorities and denial of democratic freedoms. 
In fact, the latter seems to be the price paid for the success of the former. 
This is not a novel phenomenon. 
In 1863, the Russian democratic émigré thinker Alexander Herzen, commenting on the brutal crushing of the Polish uprising by the Tsarist army, wrote in his publication Kolokol that acceptance of violence on the streets of Warsaw meant the acceptance of violence on the streets of St. Petersburg. 
Oppression is a package deal. 
His comments cost him his Russian readership, and Kolokol had to close down. 
When Herzen was writing his words, Moscow was not only busy successfully putting down the Poles, reasserting its rule there for another half-century, but also, together with China, carving up Central Asia, known then as Turkestan. 
The eastern part of the region fell under Chinese rule, and was renamed Xinjiang, or New Frontier. 
Each time Chinese rule weakened, as in the 1930’s and 1940’s, short-lived East Turkestan Republics were established, with Russian support, only to flounder when Russia and China struck new deals. 
The leadership of the second East Turkestan Republic was presumably murdered on Stalin’s orders, when the plane carrying it to Beijing for talks allegedly crashed in Soviet airspace. 
Since then, East Turkestan has existed solely on paper, as a member of the Unrepresented Nations and Peoples Organization (UNPO), a would-be competitor of the United Nations set up in 1991. 
In Xinjiang itself, the current agitation is more social than nationalist in character, and targets cultural oppression (Han Chinese by now make up half of the region’s population) rather than expressing aspirations for independence. 
Yet the recent bloodbath there is almost sure to change that, as violence unavoidably breeds radicalization. 
In the short and medium term, China’s rule in Xinjiang and Tibet seems secure: the international community will not challenge a Security Council member state. 
Only its own citizens could do that, but Herzen’s package deal seems to prevent that: just like the Tibetans, the Uighurs elicit not Han solidarity, but a braying for their blood – somewhat understandable, given that ordinary Han in Lhasa and Urumqi were made to pay with their own for China’s misdeeds. 
In the longer term, however, the Chinese authorities have every reason to be worried: Xinjiang will grow to be a problem like Tibet. 
Indeed, though the UNPO, to which both belong – alongside Assyria and the Buffalo River Dene Nation – has a vaguely Marx Brothers’ air to it (one expects Freedonia, the mythical country of which Groucho Marx was prime minister, to be on the roster), six member states already have left it to join the UN, and Kosovo, now independent if lacking UN recognition, will eventually follow. 
Political maps are never carved in stone. 
It is therefore safe to assume that not only obscure academics and correspondents, but officials in Beijing as well, are now busy studying the history of the Ghulja uprising and of Osman Batur’s guerillas. 
Come to think of it: whatever happened to the Poles, whom Russia so successfully put down in 1863? 

An OPEC for Migrant Labor? 
DUBAI – In September 1960, delegates from Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela met in Baghdad to form the Organization of Petroleum Exporting Countries. 
As the world’s dependence on oil increased, so did OPEC’s power. 
Today, with many developing countries, including a majority of the countries in the Middle East, serving as some of the world’s main labor exporters, might it be time to consider the formation of an OPEC-like cartel for migrant workers? 
OPEC succeeded in protecting its members’ shared interests that they could not protect individually. 
When a market has structural distortions, political tools and collective action of the sort that OPEC embodied can be more effective than public policy. 
Labor-exporting countries today are not so different from OPEC’s founding members in 1960. 
They, too, are vulnerable in a market where their customers call the shots. 
Rich labor-importing countries and poor labor-exporting countries have a mutually dependent relationship; but labor importers can unilaterally tighten or loosen immigration or labor-market regulations, leaving exporters in a constant state of uncertainty. 
This imbalance can have serious costs for labor exporters. 
Remittances by expatriate workers are an essential lifeline for many developing countries – more so than any other financial inflows, including foreign direct investment and aid – and often help to balance a country’s books. 
Indeed, according to the World Bank, in 2013 remittances amounted to 20-24% of GDP in the Philippines and Indonesia, 42% in Tajikistan, 32% in Kyrgyzstan, 17% in Lebanon, 10.8% in Jordan, 9.9% in Yemen, and 6.6% in Egypt and Morocco. 
For many developing countries, labor is a strategic production factor, just as commodities are for resource-rich economies. 
When we think about migrant labor, we think of low-skill work in agriculture, construction, services, and domestic work. 
But countries such as Jordan and Lebanon (among others) are now educating workers to compete as high-skilled expatriates, too. 
Labor exporters now need to protect their investments in human capital, and a cartel-like political body is the most effective way to do this. 
If the countries listed above were to join with China, Mexico, India, and other major labor exporters, they would be holding most of the chips in a collective negotiation about wages, visa terms, and other conditions – some of which would also benefit non-members as global norms changed. 
Labor importers would have to vie for access to a collective market, rather than individual national markets, and countries that gained access would have a significant comparative advantage over those that did not. 
A cartel would prevent labor-exporting countries from cannibalizing their own interests, as currently happens with bilateral arrangements. 
For example, if they were to conclude separate agreements with Gulf Cooperation Council countries, individual Southeast Asian countries would undercut one another, with the result that they might end up with worse deals. 
With a cartel, governments would instead set minimum-wage rates for different professions and trades, as well as for different skill levels. 
As exporters trained their migrant workforces, demand for their labor would grow and spark competition among venders rather than suppliers, thus fueling a virtuous cycle of higher wages and even more skills training. 
And, because this would all happen on global markets, the prices of certain skills would become more transparent to training institutions, students, employees, and employers alike. 
In this new system, importing countries would collect taxes – on the basis of the newly set minimum wage – and remittances would remain untaxed. 
In this sense, the cartel would double as an international workers’ union, lending bargaining power to employees in countries where unions are weak or not permitted at all. 
A labor-exporting cartel would have far-reaching effects on the current system. 
Cartel members would be empowered to reward and penalize third parties acting in bad faith. 
And, most important, the workers themselves would be empowered to reclaim their dignity in a system that has long stripped them of it. 
Indeed, we could expect xenophobia to wane worldwide as access to foreign workers became more privileged. 
A cartel could advance the cause of comprehensive immigration and expat labor reform in many countries, including the United States, Japan, and the Gulf states. 
Under a newly negotiated arrangement, labor-exporting countries would likely have an incentive to curb free riders and illegal emigration, and labor-importing countries would likely have an incentive to legalize and manage the status of illegal immigrants already within their borders. 
One likely objection to this proposal is that low-skilled labor will cost more, which could accelerate automation. 
But the jobs automation displaced from the production sector would simply move to the leisure sector, because demand for domestic workers, waiters, gardeners, and the like would increase. 
Because a cartel would make these market changes more discernible, labor exporters would be able to respond and adjust their worker-training systems accordingly, increasing labor importers’ ability to recruit migrant workers better suited to the available jobs. 
All told, a labor-exporting cartel would bring order to an industry that has long been mired in controversy, damaging the reputations of more than a few labor-importing countries. 
It would change the dynamics of labor supply and demand to the benefit of both workers – who would have new protections – and importing countries, which would have access to trained laborers to respond to rapid changes – often driven by technology – in economic conditions. 


An Open Letter to Ehud Olmert 
Dear Mr. Olmert, 
I am writing you in the hope that you will take time from your busy schedule as Israel’s acting Prime Minister to hear one Palestinian’s hopes. 
Even though your ascension to the position of Prime Minister came in an awkward way because of Ariel Sharon’s stroke, I believe that you have an opportunity to be part of a historic reconciliation. 
While I am sure you will insist that you are going to follow in the political legacy of Sharon, you have some important advantages with Palestinians that Sharon did not have. 
The first advantage is that you’re not burdened with Ariel Sharon’s negative image among Palestinians and Arabs. 
Having been the mayor of Jerusalem for 10 years, you know the situation of Palestinians close up. 
I believe that the chances for a political breakthrough in our region have never been better. 
On the Israeli side, your faith in the political process was demonstrated recently when you and Sharon decided unilaterally to go against your own ideology and take on the powerful settler movement. 
The two of you also went against conventional Israeli thinking by breaking away from your Likud party, greatly weakening the ideological stranglehold that Likud’s far-right central committee held on Israeli politics. 
The realization that withdrawal from populated areas, and thus an end to holding another people under permanent occupation, was necessary to preserve the Jewish nature of Israel clearly brought the two of you to the center of Israeli thinking. 
On a much smaller scale, significant change has been taking place on the Palestinian side as well. 
While I believe that the occupation, rather than the reaction to it, is the main cause of our conflict, the unilateral tahdia (“declared calm”) decision by Palestinian militant groups has reduced anti-Israeli attacks mightily, which shows that Palestinians also realize the limits of their military actions. 
The decision by Hamas to join the political process by participating in the upcoming legislative elections shows that even this hardline Islamic movement has concluded that our conflict needs to be addressed by political rather than military means. 
While I understand that you are an Israeli patriot, I believe that much can be done to reduce the tensions between our two peoples, eventually leading to genuine reconciliation and peace. 
As a start, priority must be given to face-to-face negotiations. 
Sharon and you might have felt that unilateral action was needed in Gaza, but the withdrawal from Gaza could have produced many more benefits for both sides had it been done bilaterally. 
Direct talks should concentrate on two parallel tracks. They should attempt to produce an immediate cessation of violence from both sides while simultaneously focusing on a permanent settlement of our conflict. 
Contrary to territorial withdrawal, cessation of violence can be achieved only bilaterally. 
Both sides should commit to an end to assassinations, shelling, bombings, and any other form of attacks on the other side’s military targets and citizens. 
To be effective, such a cease-fire must contain a monitoring mechanism. 
Neutral foreign observers should be asked to be deployed in major hot spots and be asked to identify anyone on either side who violates any of the agreement’s clauses. 
Alongside this effort, vigorous negotiations on a permanent settlement should start immediately. 
Historically, cease-fires have survived only when they are backed by talks that both parties believe are genuine and serious. 
At the same time, the atmosphere among Palestinians and their attitude towards Israel must be improved, so that we can have a political environment that supports negotiations. 
Improving the daily conditions of life, particularly increasing Palestinians’ freedom of travel both between Gaza and the West Bank and within the West Bank, will also go a long way in helping to create a positive atmosphere. 
I truly wish you success in your responsibilities as acting Prime Minister and acting head of Kadima. Your efforts to move forward towards resolving the Palestinian-Israeli conflict will generate significant improvement in the political atmosphere in the entire Middle East. 
But, whatever you do in the next few months to win the forthcoming parliamentary elections, please remember that the support that Kadima has received from the Israeli public derives precisely from the fact that it has taken a moderate centrist position. 
So please don’t allow yourself to be drawn into pandering to Israel’s radicals and hawks. 
The support that you and your colleagues will get from Israelis and Arabs will depend on the resolve that you show in making serious progress in the peace process. 
That process, now as before, must culminate in an independent and democratic Palestine alongside a safe and secure Israel. 


Anatomy of a Crash 
Why did high_tech stock market values fall so far in the last year-and-a-half? 
What does the crash of the NASDAQ (and of smaller IT exchanges around the world) tell us about the future of the "new economy"? 
As we move away from those events, a clearer assessment is possible. 
Conventional wisdom holds that the NASDAQ crash exposed the "new economy" as a conjuring trick of smoke and mirrors. 
It incarnated the irrational exuberance that often breaks out as a boom peaks and did not deliver deeper permanent changes in the economy. 
A more likely explanation, however, is that the NASDAQ crashed because it became clear that dominant market positions in high tech_based businesses were not sources of profits unless accompanied by substantial barriers to entry for new potential competitors--and that such barriers to entry were becoming remarkably hard to create. 
Over a wide range of activities, the dominant effect of the "new economy" has been to make competition more effective, not to create new advantages based upon economies of scale. 
The high-tech crash was thus the result of a realization by investors that the "new economy" was, in most sectors and for most firms, unlikely to lead to large quasi_rent type profits from established market positions, but rather to heightened competition and reduced margins. 
The exuberance that pushed the NASDAQ so high in 1999 and early 2000 rested on the belief that a technological leap forward in data processing and data communications technologies had created a host of "winner_take_all" markets in which increasing returns to scale were the dominant feature. 
An information good--a computer program, a piece of online entertainment, or a source of information--needs to be produced only once and can then be distributed to a potentially unlimited number of consumers at very little (if any) additional cost. 
The larger the market, the larger the cost advantage. 
Moreover, information goods produced at larger scale are also more valuable to consumers. 
The version with the largest market share becomes the standard; it is the easiest to figure out how to use, the easiest to find support for, and the one that works best with other products (which are, of course, designed to work best with it). 
In the section of the "new economy" dominated by producers' economies of scale and consumers' economies of scope, a firm that establishes a lead in market share gains a nearly overwhelming advantage. 
Unless its competitors take extraordinary and extraordinarily costly steps--like those taken by Microsoft against Netscape, its rival in the Internet browser market, by pouring a fortune into creating its Internet Explorer and then distributing it for free--the first firm to establish a dominant market position will reap high profits as long as its sector of the industry lasts. 
But increasing returns to scale and winner_take_all markets are not the only, or even the primary, consequence of the IT revolution. 
It is at least as likely that innovations in computer and communications technologies are competition's friends because they eliminate the frictions that in the past gave nearly every producer a little bit of monopoly power. 
In the past you could comparison_shop only by trudging from store to store. 
Today you can use the World Wide Web to conduct instant searches that can reveal the prices and qualities of every single producer. 
Firms must adjust instantaneously or perish in the process. 
Thus the "new economy" makes most markets more, not less, contestable. 
A competitive edge based on past reputation, brand loyalty, or advertising footprints will fade away. 
As they do, profit margins will fall: competition will become swifter, stronger, more pervasive, and more nearly perfect. 
Consumers will gain and shareholders will lose. 
Those products that can be competitively supplied will be supplied at very low margins. 
The future of technology is bright; the future of the profit margins of businesses--save for those few that truly are able to use economies of scale to create mammoth cost advantages--is dim. 
Is it really possible to acquire significant economies of scale by writing a single suite of software that will cover the heterogeneous purchasing requirements of millions of businesses seeking to streamline their operations by using the Internet? 
Is it really possible to obtain significant economies of scale by using the Internet to distribute information about groceries? 
The NASDAQ crash was the result of realization by marginal investors that the odds were heavily against this. 
But the NASDAQ crash tells us next to nothing about the future of the underlying technologies, or about their true value. 
Perhaps the best analogy is an old puzzle posed by the classical economists three centuries ago: why is there such a difference between the price of water and the price of diamonds? 
Water is absolutely essential to sustain life, and thus immensely valuable to every consumer. 
Yet water is cheap. 
Diamonds, by contrast, have been and remain expensive. 
The gap in price does not tell us that diamonds are useful and valuable and water is not, but that it has so far proved easier to maintain market power and high margins in the diamond business than in the water business. 
The analogy to the Internet, the "new economy," and the crash of the NASDAQ is straightforward. 
Even Internet Explorer, which today has as dominant a position in the browser market as anyone could wish to have, is not (or is not yet) a source of profits, and will not be, barring the creation of some essential function that Internet Explorer can serve and competing browsers cannot. Our modern computer and communications technologies simply make it too cheap and too easy to distribute a competing product. 
So, what NASDAQ's crash tells us is that the new economy is more likely to be a source of downward pressure on profit margins than of large, durable quasi_rents. 

Anatomy of a Crisis 
BERKELEY – Getting out of our current financial mess requires understanding how we got into it in the first place. 
The fundamental cause, according to the likes of John McCain, was greed and corruption on Wall Street. 
Though not one to deny the existence of such base motives, I would insist that the crisis has its roots in key policy decisions stretching back over decades. 
In the United States, there were two key decisions. 
The first, in the 1970’s, deregulated commissions paid to stockbrokers. 
The second, in the 1990’s, removed the Glass-Steagall Act’s restrictions on mixing commercial and investment banking. 
In the days of fixed commissions, investment banks could make a comfortable living booking stock trades. 
Deregulation meant competition and thinner margins. 
Elimination of Glass-Steagall then allowed commercial banks to encroach on the investment banks’ other traditional preserves. 
In response, investment banks branched into new businesses like originating and distributing complex derivative securities. 
They borrowed money and put it to work to sustain their profitability. 
This gave rise to the first causes of the crisis: the originate-and-distribute model of securitization and the extensive use of leverage. 
It is important to note that these were unintended consequences of basically sensible policy decisions. 
Other things being equal, deregulation allowed small investors to trade stocks more cheaply, which made them better off. 
But other things were not equal. 
In particular, the fact that investment banks, which were propelled into riskier activities by these policy changes, were entirely outside the regulatory net was a recipe for disaster. 
Similarly, eliminating Glass-Steagall was fundamentally sensible. 
Conglomerates allow financial institutions to diversify their business, and combining with commercial banks allows investment banks to fund their operations using relatively stable deposits instead of fickle money markets. 
This model has proven its viability in Europe over a period of centuries, and its advantages are evident in the US even now with Bank of America’s purchase of Merrill Lynch. 
But conglomeratization takes time. 
In the short run, Merrill, like the other investment banks, was allowed to double up its bets. It remained entirely outside the purview of the regulators. 
As a stand-alone entity, it was then vulnerable to market swings. 
A crisis sufficient to threaten the entire financial system was required to precipitate the inevitable conglomeratization. 
The other element in the crisis was the set of policies that gave rise to global imbalances. 
The Bush administration cut taxes. 
The Fed cut interest rates in response to the 2001 recession. 
Financial innovation, meanwhile, worked to make credit even cheaper and more widely available. 
This, of course, is just the story of subprime mortgages in another guise. 
The result was increased US spending and the descent of measured household savings into negative territory. 
Of equal importance were the rise of China and the decline of investment in Asia following the 1997-1998 financial crisis. 
With China saving nearly 50% of its GNP, all that money had to go somewhere. Much of it went into US treasuries and the obligations of Fannie Mae and Freddie Mac. 
This propped up the dollar and reduced the cost of borrowing for US households, encouraging them to live beyond their means. 
It also created a more buoyant market for the securities of Freddie and Fannie, feeding the originate-and-distribute machine. 
Again, these were not outright policy mistakes. 
Lifting a billion Chinese out of poverty is arguably the single most important event in our lifetimes. 
The fact that the Fed responded quickly prevented the 2001 recession from worsening. 
But there were unintended consequences. 
The failure of US regulators to tighten capital and lending standards when abundant capital inflows combined with loose Fed policies ignited a furious credit boom. 
The failure of China to move more quickly to encourage higher domestic spending commensurate with its higher incomes added fuel to the fire. 
Now, a bloated financial sector is being forced to retrench. 
Some outcomes, like the marriage of Bank of America and Merrill Lynch, are happier than others, like the bankruptcy of Lehman Brothers. 
But, either way, there will be downsizing. 
Foreign central banks are suffering capital losses on their unthinking investments. 
As they absorb their losses on US treasury and agency securities, capital flows toward the US will diminish. 
The US current-account deficit and the Asian surplus will shrink. 
US households will have to start saving again. 
The one anomaly is that the dollar has strengthened in recent weeks. 
With the US no longer viewed as a supplier of high-quality financial assets, one would expect the dollar to have weakened. 
The dollar’s strength reflects the knee-jerk reaction of investors rushing into US treasuries as a safe haven. 
It is worth remembering that the same thing happened in August 2007, when the sub-prime crisis erupted. 
But once investors realized the extent of US financial problems, the rush into treasuries subsided, and the dollar resumed its decline. 
Now, as investors recall the extent of US financial problems, we will again see the dollar resume its decline. 
Emphasizing greed and corruption as causes of the crisis leads to a bleak prognosis. 
We are not going to change human nature. 
We cannot make investors less greedy. 
But an emphasis on policy decisions suggests a more optimistic outlook. 
Unintended consequences cannot always be prevented. 
Policy mistakes may not always be avoidable. 

Anatomy of a Financial Meltdown 
NEW YORK – A vicious circle is currently underway in the United States, and its reach could broaden to the global economy. 
America’s financial crisis has triggered a severe credit crunch that is making the US recession worse, while the deepening recession is leading to larger losses in financial markets – thus undermining the wider economy. 
There is now a serious risk of a systemic meltdown in US financial markets as huge credit and asset bubbles collapse. 
The problem is no longer merely sub-prime mortgages, but rather a “sub-prime” financial system. 
The housing recession – the worst in US history and worsening every day – will eventually see house prices fall by more than 20%, with millions of Americans losing their homes. 
Delinquencies, defaults, and foreclosures are now spreading from sub-prime to near-prime and prime mortgages. 
Thus, total losses on mortgage-related instruments – include exotic credit derivatives such as collateralized debt obligations (CDOs) – will add up to more than $400 billion. 
Moreover, commercial real estate is beginning to follow the downward trend in residential real estate. 
After all, who wants to build offices, stores, and shopping centers in the empty ghost towns that litter the American West? 
In addition to the downturn in real estate, a broader bubble in consumer credit is now collapsing: as the US economy slips into recession, defaults on credit cards, auto loans, and student loans will increase sharply. 
US consumers are shopped-out, savings-less, and debt-burdened. 
With private consumption representing more than 70% of aggregate US demand, cutbacks in household spending will deepen the recession. 
We can also add to these financial risks the massive problems of bond insurers that guaranteed many of the risky securitization products such as CDOs. 
A very likely downgrade of these insurers’ credit ratings will force banks and financial institutions that hold these risky assets to write them down, adding another $150 billion to the financial system’s mounting losses. 
Then there is the exposure of banks and other financial institutions to rising losses on loans that financed reckless leveraged buy-outs (LBOs). 
With a worsening recession, many LBOs that were loaded with too much debt and not enough equity will fail as firms with lower profits or higher losses become unable to service their loans. 
Given all this, the recession will lead to a sharp increase in corporate defaults, which had been very low over the last two years, averaging 0.6% per year, compared to an historic average of 3.8%. 
During a typical recession, the default rate among corporations may rise to 10-15%, threatening massive losses for those holding risky corporate bonds. 
As a result, the market for credit default swaps (CDS) ­– where protection against corporate defaults is bought and sold – may also experience massive losses. 
In that case, there will also be a serious risk that some firms that sold protection will go bankrupt, triggering further losses for buyers of protection when their counterparties cannot pay. 
On top of all this, there is a shadow financial system of non-bank financial institutions that, like banks, borrow short and liquid and lend to or invest in longer-term and illiquid assets. 
This shadow system includes structured investment vehicles (SIVs), conduits, money market funds, hedge funds, and investment banks. 
Like banks, all these financial institutions are subject to liquidity or rollover risk – the risk of going belly up if their creditors do not rollover their short-term credit lines. 
But, unlike banks, they do not have the safety net implied by central banks’ role as lender of last resort. 
Now that a recession is underway, US and global stock markets are beginning to fall: in a typical US recession, the S&P 500 index falls by an average of 28% as corporate revenues and profits sink. 
Losses in stock markets have a double effect: they reduce households’ wealth and lead them to spend less; and they cause massive losses to investors who borrowed to invest in stock, thus triggering margin calls and asset fire sales. 
There is thus a broader risk that many leveraged investors in both equity and credit markets will be forced to sell illiquid assets in illiquid markets, leading to a cascading fall in asset prices to below their fundamental values. 
The ensuing losses will aggravate the financial turmoil and economic contraction. 
Indeed, adding up all these losses in financial markets, the sum will hit a staggering $1 trillion. 
Tighter credit rationing will then further hamper the ability of households and firms to borrow, spend, invest, and sustain economic growth. 
The risk that a systemic financial crisis will drive a more pronounced US and global recession has quickly gone from being a theoretical possibility to becoming an increasingly plausible scenario. 

Anatomy of a Revolution Delayed 
The ongoing conflict between Iran’s rulers and the Iranian public is the result of a head-on collision between two contradictory forces. 
In recent years, public attitudes in Iran have become more liberal. 
At the same time, power has shifted from conservative pragmatism toward a much more militant fundamentalism. 
The call by the most important group of Iran’s clerics for the election results to be thrown out is but the latest sign of the fight back of both the reformist and pragmatic conservative factions. 
Thirty years after the Islamic revolution, Iranians are growing demonstrably less religious and more liberal. 
Two face-to-face surveys of more than 2,500 Iranian adults, conducted in 2000 and 2005, clearly show the trend. 
The percentage of those who “strongly agree” that democracy is the best form of government increased from 20% to 31%. 
Similarly, on a number of questions concerning gender equality – including political leadership, equal access to higher education, and wifely obedience – the numbers continued a downward trend. 
Those who considered love as the basis for marriage increased from 49% to 69%, while those who depended on parental approval fell from 41% to 24%. 
In 2005, a much higher percentage than in 2000 defined themselves as “Iranian, above all” rather than “Muslim, above all.” 
This trend is not hard to understand. 
The imposition of a monolithic religious discourse on society has made liberal values attractive to Iranians. 
But, while this was reflected in reformist trends in the country’s wider political life, a movement toward militant fundamentalism took shape within the regime’s power structure. 
Reform-minded politicians were partly to blame for this change. 
Far from opposing absolutist power as an impediment to religious democracy, they tried to persuade the Supreme Leader, Ayatollah Ali Khamenei, of the value of reform. 
But Khamenei had no interest in reform, as he made plain in dismantling the reform movement. 
The presidency of Mohammad Khatami, an avowed reformer, who served eight years, beginning in 1997, convinced the Supreme Leader that his authority would be assured only if the presidency was held by a subservient fundamentalist such as the current president, Mahmoud Ahmadinejad. 
In this, Khamenei was following the lead of the late Shah, who kept Amir Abbas Hoveyda, a loyal retainer, as prime minister from 1965 until the Shah was overthrown in 1979. 
The problem with the Supreme Leader’s calculation, however, is that Ahmadinejad is a loose cannon. 
His populist rhetoric and religious fundamentalism have alienated a large section of conservative-pragmatist clerics and their supporters. 
Many members of this group honor the institution of private property, and Ahmadinejad’s talk of redistributing wealth is not to their liking. 
More disturbing to them is his apocalyptic conviction regarding the imminent advent of the Hidden Imam, the Mahdi, whose appearance is believed to lead to the destruction of the world and the end of time. 
Generally, Ahmadinejad begins his public speeches with prayers for the Mahdi’s immediate return. 
For the Shia religious hierarchy, long accustomed to relegating the advent of the Mahdi to a distant future, Ahmadinejad’s insistent millenarianism is troublesome. 
They have often dismissed as unorthodox, if not heretical, any claim of personal contact with the Imam or speculation about his arrival. 
Several ayatollahs opined that such talk about the Mahdi is unbecoming of a president or, worse, indicative of an unstable leader. 
These concerns were reflected in the fact that the Society of Combatant Clergy, a conservative body, was unable to endorse Ahmadinejad’s candidacy. 
Defiance of the Supreme Leader by millions of Iranians just a day after he firmly endorsed Ahmadinejad threw the country into a political crisis. 
Worldwide broadcasts of the beating and killing of protesters have undermined the regime’s religious credentials. 
Seeking a way out of this difficult situation, the Supreme Leader declared that the electoral disputes must be settled in through legal channels, not on the street. 
Given his role in justifying electoral fraud, this argument seems like an effort to buy time to clear the streets of demonstrators, put opposition leaders under severe physical and psychological stress, and isolate Mir Hossein Mousavi, the presumed winner of the real vote. 
Nonetheless, Khamenei’s invocation of the law echoes the demands of many conservative-pragmatists who lean toward Mousavi, who is not in a position to challenge Khamenei’s authority directly. 
Mousavi must carefully continue his legal campaign, without compromising the trust he has gained from the majority of Iranians. 
He must stand by his two principal demands: nullification of the election and establishment of an impartial committee to rule on the government’s violations of the electoral law. 
Should Mousavi persuade Khamenei to reconsider his position, the Supreme Leader’s hold on power will be shaken. 
If Khamenei holds fast, Mousavi cannot gain the presidency, but he will continue to represent the hopes of the majority of Iranians who differ dramatically with their government. 

Anatomy of Chavez 
Hugo Chavez's almost 8 years in power in Venezuela – which he will seek to extend in presidential elections next month -- seems to defy economic analysis. 
Indeed, any and all economic examination of Chavez’s Venezuela confirms Edgar R. Fiedler’s quip that if you "ask five economists something, you will get five answers...or six if one of them is a Harvard graduate." 
Some people see in Chavez an innovative statesman who has seized an almost magical moment – the windfall Venezuela has received from today’s sky high oil prices -- to change the rules of the game in his country. 
A few key indicators appear to support this. 
Foreign investment has grown recently from $1.5 billion (2004) to $2.5 billion (2005). 
In that two year period, Chavez stepped on the gas for his social reforms – education, health care, etc. – and also in regard to breaking down the country’s excessive concentrations of wealth. 
Although over 70% of national income remains in the hands of just 20% of the population, Chavez has forced big foreign oil companies to pay much higher royalties and has started expropriating unproductive land and industrial facilities. 
With oil prices now six times higher than they were when he came to power, Chavez presided over economic growth of 9% in 2005 and as much again in the first quarter of 2006. 
Above all, however, he has achieved a 6.3% effective reduction of poverty, after taking over a country whose vast majority - 80% - was perched between poverty and squalor. 
Seen in this angle, Chavez appears to have real achievements. 
But there is another, darker, angle from which to view his presidency. 
It is possible to see in Chavez but another Latin American populist sorcerer's apprentice, one whose political shelf life will expire whenever oil prices begin their inevitable shift backward. 
To those who think that this is the case, Chavez is not an innovator but someone who is merely squandering Venezuela’s oil wealth in the same way that governments did following the oil shocks of the 1970's. 
The notion of specific "Chavist" growth can also be challenged. 
The highest growth achieved in the Chavez years is lower than Venezuela’s average during the second half of the 1990's, when oil was the exclusive domain of the private sector. 
Moreover, growth under Chavez seems to reflect an increase in domestic consumption resulting from the flow of petrodollars and nothing more fundamental, as oil remains the economy’s only real engine. 
So nothing Chavez has done translates into a fundamental improvement in, or diversification of, Venezuela’s economy. 
Private investors appear to understand this, as such investment in Venezuela grew by a mere 3% between 2000 and 2004. Suspiciously, the country’s central bank refuses to publish that figure for 2005. 
Only one out of every ten Venezuelan companies polled states any intention of making middle or long term investments such as renovating existing industrial plants or building new ones. 
True, businessmen have tempered their criticisms of Chavez and seem eager to participate in the profit feast brought about by increased consumption. 
But they may also be waiting for the first external shock to puncture the Chavez balloon before they pounce. 
These two versions of the Chavez years are both distorted -- to a certain degree -- by nostalgia. 
Those who see him as successful have the 1960's and 1970's as their dream fantasy. 
Their main arguments are reminiscent the arguments put forward by those who backed the Cuban Revolution. 
Those who revile Chavez often do so in the name of the ‘Washington Consensus,’ that mix of capitalism and democracy that was almost hegemonic across the continent in the 1980's and 1990's. 
Thus, Chavez is portrayed as a return to the Latin American populist heresy, a heresy that must be resisted because it affects not only the country with the largest oil reserves outside the Middle East, but also because it may tempt the rest of Latin America down that road. 
But history never truly repeats itself. 
The years of the biggest transformation demands in Latin America or those of its docility to economic orthodoxy will not come back because we can remember them. 
Especially, the view of the Washington Consensus seems irretrievable; its "grand tale" is now beyond the pale in the region's societies after it did not deliver the promised prosperity. 
Yet one thing is clear: Chavez was the first ruler of his generation to recognize the region’s fatigue and disillusion with neo-liberalism, and to propose new rules of the game. 
In the end these may not be the rules he envisions today, but neither are they a spent force. 
To believe that one can accurately foresee what will become of Chavez and Venezuela brings to mind another warning by Fiedler: "He who lives by the crystal ball must sooner or later learn to chew glass." 

Anatomy of Fear 
How does your brain form its most significant memories? 
Studies of fear in rats have helped us learn much here. 
Although people and rats fear different things, the manner in which the rat and human brain and body respond to danger is similar. 
Because fear is at the core of many human pathologies, from panic attacks to posttraumatic stress disorder, breakthroughs in understanding the brain's fear system may lead to new ways to treat these disorders. 
The core of the brain's fear system is found in a region called the "amygdala". 
This region receives information from all the senses and in turn controls the various networks that inspire the speeding heart, sweaty palms, wrenching stomach, muscle tension and hormonal floods that characterize being afraid. 
A rat's amygdala responds to natural dangers (rats fear cats without having to learn to do so) and learns about new dangers (sounds, sights and smells that occur in anticipation of cats and other threats). 
It is through studies of the way the brain learns about stimuli, such as the sounds that precede danger, that our systems for learning about fear, and memory as a whole, have been elucidated through rat studies. 
There is also evidence that amygdala of reptiles and birds have similar functions. 
Studies of humans with damage to the amygdala, due to neurological disease or as a consequence of surgery to control epilepsy, show that our brains also work in this same basic way. 
The implication of these findings is that early on (perhaps since dinosaurs ruled the earth, or even before) evolution hit upon a way of wiring the brain to produce responses likely to keep an organism alive in dangerous situations. 
The solution was so effective that it has not changed much over the ages. 
Obviously, this is not the whole story. 
Once the fear system detects and starts responding to danger, a brain such as the human brain, with its enormous capacity for thinking, reasoning, and musing, begins to assess what is going on and tries to determine what to do. 
This is when feelings of fear arise. 
But in order to be consciously fearful you have to have a sufficiently complex kind of brain, one aware of its own activities. 
While this is undoubtedly true of the human brain, it is not at all clear which (if any) other animals have this capacity. 
So, in evolutionary terms, the fear system of the brain is very old. 
It is likely that it was designed before the brain was capable of experiencing what we humans refer to as "fear" in our own lives. 
If true, then the best way to understand how the fear system works is not to chase the elusive brain mechanisms of feelings of fear, but to study the underlying neural systems that evolved as behavioral solutions to problems of survival. 
In order to understand feelings, we need to step back from their superficial expression in our conscious experiences and dig deeper into how the brain works when we have these experiences. 
A fundamental discovery has been that the brain has multiple memory systems, each devoted to different kinds of memory functions. 
For memories of fear arousing experiences, two systems are particularly important. 
Take this example: if you return to the scene of a recent accident, you are likely to have a physical reaction that reflects activation of memories stored in the amygdala. 
At the same time, you will be reminded of the accident, will remember where you were going, who you were with, and other details. 
These are explicit (conscious) memories mediated by another system, the "hippocampus". 
In contrast, memories mediated by the amygdala are unconscious. 
These are memories in the sense that they cause your body to respond in a particular way as a result of past experiences. 
The conscious memory of the past experience and the physiological responses elicited thus reflect the operation of two separate memory systems that operate in parallel. 
Only by taking these systems apart in the brain have neuro-scientists been able to figure out that these are different kinds of memory, rather than one memory with multiple forms of expression. 
Many of the most common psychiatric disorders that afflict humans are emotional disorders; many of these are related to the brain's fear system. 
According to America's Public Health Service, about 50% of mental problems reported in the US (other than those related to substance abuse) are accounted for by anxiety disorders, including phobias, panic attacks, post-traumatic stress disorder, obsessive compulsive disorder, and generalized anxiety. 
Research into the brain mechanisms of fear helps us to understand why these emotional conditions are so hard to control. 
Neuro-anatomists have shown that the pathways that connect the amygdala with the thinking brain, the neocortex, are not symmetrical - the connections from the cortex to the amygdala are considerably weaker than those from the amygdala to the cortex. 
This may explain why, once an emotion is aroused, it is so hard for us to turn it off at will. 
The asymmetry of these connections may also help us understand why psychotherapy is often such a difficult and prolonged process, for it relies on imperfect channels of communication between brain systems involved in cognition and emotion. 
Studies of the basic biology of the fear system are likely to continue to reveal important information both about where our emotions come from and what goes wrong in emotional disorders. 
As we learn more, we may begin to figure out how to better treat - and even prevent - these conditions. 

Anatomy of Thatcherism 
London – Thirty years ago this month, Margaret Thatcher came to power. 
Although precipitated by local conditions, the Thatcher (or more broadly the Thatcher-Reagan) revolution became an instantly recognizable global brand for a set of ideas that inspired policies to free markets from government interference. 
Three decades later, the world is in a slump, and many people attribute the global crisis to these very ideas. 
Indeed, even beyond the political left, the Anglo-American model of capitalism is deemed to have failed. 
It is held culpable for the near financial meltdown. 
But 30 years of hindsight enable us to judge which elements of the Thatcher revolution should be preserved, and which should be amended in the light of today’s global economic downturn. 
Most obviously in need of amendment is the view that minimally managed and regulated markets are both more stable and more dynamic than those subject to extensive government intervention. 
The Thatcherite assumption, in other words, was that government failure is far more menacing to prosperity than market failure. 
This was always bad history. 
The record shows that the period 1950-1973, when government intervention in market economies was at its peacetime height, was uniquely successful economically, with no global recessions and faster rates of GDP growth – and growth of GDP per capita – than in any comparable period before or since. 
One can argue that economic performance would have been even better with less government intervention. 
But perfect markets are no more available than perfect governments. 
All we have are comparisons between what happened at different times. 
What these comparisons show is that markets plus government have done better than markets minus government. 
Nevertheless, by the 1970’s the pre-Thatcher political economy was in crisis. 
The most notorious symptom of this was the emergence of “stagflation” – simultaneously rising inflation and unemployment. 
Something had gone wrong with the system of economic management bequeathed by John Maynard Keynes. 
In addition, government spending was on the rise, labor unions were becoming more militant, policies to control pay kept breaking down, and profit expectations were falling. 
It seemed to many as though government’s reach had come to exceed its grasp, and that either its grasp had to be strengthened or its reach had to be reduced. 
Thatcherism emerged as the most plausible alternative to state socialism. 
Nigel Lawson was Thatcher’s second Chancellor of the Exchequer, or finance minister. 
Out of the government’s anti-inflationary efforts emerged the “Lawson doctrine,” first stated in 1984 and broadly accepted by governments and central banks ever since. 
“The conquest of inflation,” Lawson said, “should...be the objective of macroeconomic policy. 
And the creation of conditions conducive to growth and employment should be...the objective of microeconomic policy.” 
This proposition overturned the previous Keynesian orthodoxy that macroeconomic policy should aim at full employment, with the control of inflation left to wage policy. 
Yet, despite all the “supply side” reforms introduced by Thatcherite governments, unemployment has been much higher since 1980 than in the 1950’s and 1960’s – 7.4% on average in the United Kingdom, compared to 1.6% in the earlier decades. 
What about inflation targeting? 
Here, too, the record since 1980 has been patchy, despite the huge deflationary pressure exerted by low-wage competition from Asia. 
Inflation in 1950-1973 and 1980-2007 was about the same – just over 3% – while inflation targeting has failed to prevent a succession of asset bubbles that have brought recessions in their wake. 
Nor has Thatcherite policy succeeded in one of its chief aims – to reduce the share of government spending in national income. 
The most one can say is that it halted the rise for a time. 
Now public spending is on the increase again, and record peacetime deficits of 10% or more of GDP stretch ahead for years. 
In de-regulating financial markets worldwide, the Thatcher-Reagan revolution brought about the corruption of money, without improving on the previous growth of wealth – except for the very wealthy. 
The average world citizen would have been 20% richer had world GDP per capita grown at the same rate between 1980 and 2007 as it did between 1950 and 1973 – and this despite China’s high growth rates in the past 20 years. 
Furthermore, in unleashing the power of money, the Thatcherites, for all their moralizing, contributed to the moral decay of the West. 
Against these formidable minuses are three pluses. 
The first is privatization. 
By returning most state-owned industries to private ownership, the Thatcher revolution killed off state socialism. 
The British privatization program’s greatest influence was in the former communist states, to which it gave the ideas and techniques needed to dismantle grossly inefficient command economies. 
This gain must be preserved in the face of the current clamor to “nationalize” banks. 
Thatcherism’s second success was to weaken trade unions. 
Set up to protect the weak against the strong, labor unions had become, by the 1970’s, enemies of economic progress, a massive force of social conservatism. 
It was right to encourage a new economy to grow outside these congealed structures. 
Finally, Thatcherism put paid to the policy of fixing prices and wages by central diktat or by tripartite “bargains” between governments, employers, and trade unions. 
These were the methods of fascism and communism, and they would, in the end, have destroyed not just economic, but political, liberty. 
Political pendulums often swing too far. 
In rebuilding the shattered post-Thatcherite economy, we should be careful not to revive the failed policies of the past. 
I still find fruitful Keynes’s distinction between the agenda and the non-agenda of politics. 
As long as central government takes responsibility for maintaining a high and stable level of employment, Keynes thought, most of the rest of economic life can be left free of official interference. 
Building a proper division of responsibility between state and market from this insight is today’s main task. 

Anatomy of the Party of Power 
More than anything else, Vladimir Putin understands power: how to get it; how to consolidate it. 
His predecessor, Boris Yeltsin, knew how to seize power but not how to consolidate it, which partly explains why power seeped away throughout his presidency. 
President Putin's success, however, has bred its own problem: he consolidated power at the center so well that opposition is brewing in Russia's regions. 
Yeltsin's biggest failing was in not creating a viable, non-ideological party - a "party of power" - to buttress his regime. 
He tried to do so in 1995, but the Chechen War drove Russia's democrats away from him. 
Moreover, his efforts here were amazingly clumsy. 
Yeltsin once spoke about his scheme to link two centrists. 
With "Ivan Rybkin (then Duma's speaker)," Yelstin said on TV, "leading the left flank, and Viktor Chernomyrdin (then prime minister) leading the right, we will encircle everyone." 
But by linking both parties to his very unpopular self, Yeltsin damaged both. 
Perhaps if both wings had united, that single party would have appeared as an unbeatable juggernaut. 
Such unity, however, was impossible, for an obvious Russian reason: the faction leaders hated each other too much to get together, even for their own good. 
Indeed, Rybkin was told to pretend to be opposed to Yeltsin's policies, but when he did object, Chernomyrdin summoned Rybkin to his office for "clarifications." 
When businessmen learned about this "dressing down," they became afraid to finance Rybkin's party. 
In the end, Rybkin went unelected and Chernomyrdin's `Our Home Is Russia' (NDR) came third. 
Yeltsin failed to consolidate political support for other reasons as well, the most important being his unwillingness (or inability) to forcefully manipulate the media. 
Of course, transformation of the presidential administration into a public relations machine began under Yeltsin when Anatoli Chubais directed the 1996 election campaign. 
Before that, the Kremlin had little idea about how to manipulate the new media outlets that Russia's infant democracy had produced. 
Today's Kremlin, however, is full of clever ideas about how to control and intimidate newspapers, radio, and television. 
In the 1995 election, Yeltsin would have been happy if the NDR secured 25% to 30% of the vote. 
Putin is far more ambitious. 
He will be displeased if `United Russia' - the "party of power" he has built - wins less than 50% of the seats in the next Duma. 
But are the results of the parliamentary elections due this coming January truly a foregone conclusion? 
Or are surprises in store for Putin? 
Surprises seem likely because Russia's political dividing line has shifted, but the President's political strategy hasn't recognized that fact. 
Indeed, he appears set to be waging battles against the communists that are already won. 
Putin's re-consolidation of power within the Kremlin, after much of it escaped to the regions during the Yeltsin years, dramatically shifted Russia's political dividing line. 
In the past, that dividing line separated right and left, but the line at the forthcoming elections will run between the federal center and the regions. 
The loss of political power in the regions (regional governors, for example, were evicted from the Duma's upper house) has incited serious discontent that is spilling over into the public sphere. 
That discontent will likely gather momentum as elections near, which may be enough to stop the federal authorities from meeting their strategic goal of winning an unchallengeable majority of seats in the new Duma. 
Vast administrative resources are being used to secure the desired result. 
But Russia's bureaucracy is no disciplined machine, and the lower reaches of the state's `vertical' power structure may well ally themselves - quietly - with regional authorities to prevent the center from gaining too many votes. 
Regional administrations also possess their own instruments of obstruction, including propaganda outlets in the regional media, as well as the ability to manipulate ballot papers. 
Indeed, President Putin's failure to "reconquer" his home city of St. Petersburg, now controlled by a bitter political opponent of the President, Vladimir Yakovlev, demonstrates the bureaucratic powers that local leaders retain. 
So the real issue in the forthcoming Duma elections will be how powerfully regional elites confront Putin. 
Their ability to defy the president may be aided by the fact that the Kremlin is failing to recognize the potential of their challenge. 
So far, the main target of its campaign is the communists, whom Kremlin political operatives hope to destroy in the way they destroyed Moscow Mayor Yuri Luzhkov and former Prime Minister Yevgeny Primakov, head of the Fatherland party, who were the leading non-communist challengers during Putin's first presidential campaign. 
That focus on the battle with the communists may allow other forces to sneak into the Duma by the back door. 
The Boris Nemtsov/Sergei Kiriyenko `Union of Right Forces' (SPS) is one party that seems certain to benefit in this way. 
Indeed, the SPS electorate is growing faster than that of other parties. 
In principle, all of Russia's political elites appear to have - or pretend to have - resigned themselves to a political landscape with Putin alone on the mountaintop and everyone else consigned to the valley below. 
The upcoming elections won't knock the president off that mountain, but his `party of power' is not omnipotent enough to silence the dissenting echoes rising from below. 

And Free Flows the Nile 
NEW DELHI – For 18 days, during the ebb and flow of protest, it did not seem possible that the end of the Egyptian Revolution would come so suddenly, in a terse announcement that lasted no more than a half-minute: “President Hosni Mubarak has relinquished office….” 
With that, amidst roars of victory, an era was ended, reaffirming the old saying that “the graveyards of the world are full of those who considered themselves indispensable to their nations.” 
In the days and weeks ahead, there could arise occasions when the news from Cairo is not uplifting, but let us never forget that Egypt has taken a giant step, which in reality is a giant step for all Arabs. 
After all, Egypt is the heart, brain, and nerve center of the Arab world. 
True, it once spawned the radical Muslim Brotherhood, but it also gave birth to Islamic socialism and anti-colonialism, Arab unity, and now a democratic affirmation of the people’s will. 
Pernicious talk that Arabs do not want democracy has been exposed as the big lie it is. 
Egypt, in the great Bengali poet Rabindranath Tagore’s memorable words, is the land “where the head is (now) held high and the mind is (now) without fear…” The consequences will be vast. 
Ancient Arab lands are bestirred. 
Decades-old, apparently immovable autocracies are finding their hold on power unhinged; change is invading their static environs. 
Yesterday’s treaties, particularly those with the United States and Israel, will no longer inspire the same type of confidence they have long had as instruments of state policy. 
Memory of these 18 days is so crowded that it is difficult to separate one event from another, one phase from the next: the dramatic, the moving, the bizarre, and the unreal from the bathetic. 
But the thread that united all, the theme that remained unerringly constant, was the yearning for “change” – immediate, real, and tangible, not a promise or a tantalizing, unreachable mirage. 
Will this yearning travel beyond the Nile, as it did from Tunis to Cairo? 
This question haunts other Arab portals of power. 
And not just Arab; globally, foreign policies are being hurriedly – and somewhat confusedly – revised and rewritten. 
This is why US policy oscillated so disconcertingly from Secretary of State Hillary Clinton’s “Do not rush the pace or else the pro-democracy movement could well be hijacked” to President Barack Obama’s emphatic call for “change now.” 
Of course, a grave question arises about the now-ruling Supreme Council of the Military High Command in Egypt: How can the enforcers of the status quo become the agents of change? 
But, then, military rule is only a temporary measure, or so we reason. 
The great Tunisian poet Abul-Qasim Al Shabi has captured poignantly the spirit of Egypt’s saga: “If one day the people want life, then fate will arise…night fade away, chains broken…” That, in essence, is what the young in Egypt have done. 
Their idiom is current; their instruments of change are today’s electronic media. 
They – and we – are very far from the world that Mubarak, or the great Gamal Abdel Nasser, knew and understood. 
The Egyptian revolution now faces the exacting task that confronts all successful revolutions: how to define the future. 
Like the Ottoman Empire’s fragmentation in 1922 or Nasser’s overthrow of King Farouk’s regime in 1952, the current transformation, too, must be shaped. 
And how that future is shaped will determine whether or not Mubarak’s end marks the beginning of political transformation throughout the Middle East. 
That is the possibility that is shaking governments from Washington to Beijing. 
It is not just the reliability of the Suez Canal and oil exports that are now in doubt; decades of fixed strategic certainties must now be reexamined. 
Consider Israel, which has watched the events in Cairo with a degree of worry unfelt since January 1979, when Ayatollah Ruhollah Khomeini unseated the Shah of Iran. 
That strategic nightmare cost Israel and the US their closest ally in the region, one that was soon transformed into an implacable enemy. 
Israel’s two most recent wars – against Hezbollah in Lebanon in 2006, and against Hamas in Gaza in 2009 – were fought against groups sponsored, supplied, and trained by Iran. 
Clearly, Israeli-Palestinian negotiations will also now lie unattended as Israel concentrates on developments in Egypt. 
Above all, Israel must wonder if the peace treaty with Egypt will hold, and, if not, how to carry out the massive restructuring of its defense posture that will be required. 
But it is not only the fate of Israel that has now shocked US policy, in particular, to its core. 
Egypt, after all, has been the cornerstone of America’s balancing act in the Middle East – and the Islamic world – for three decades. 
The Egypt-Israel peace treaty has kept Egypt comfortably neutralized, freeing the US to commit its strategic resources elsewhere. 
In turn, Egypt, propped up by massive US aid, has secured the region from a larger conflagration, even though the Israel-Palestine conflict has continued to smolder. 
Herein lies the core of the dilemma for the US: it wants Egypt’s basic state apparatus to survive, so that the levers of power do not fall into the wrong hands. 
This requires the US to be seen as siding with the public’s demand for change, yet to avoid being identified with political immobility. 
There is reason to feel reassured by Obama’s reactions. 
He termed Mubarak’s departure a display of “the power of human dignity,” adding that “the people of Egypt have spoken, their voices have been heard, and Egypt will never be the same.” 
But nothing that Obama, or anyone else, says can answer the question now occupying the attention of senior US officials: Will the coming of popular sovereignty to Egypt inevitably lead to anti-Americanism? 

Reviving Ukraine’s Economy 
WASHINGTON, DC – Ukraine has suddenly arrived at a democratic breakthrough. 
After former President Viktor Yanukovych incited major bloodshed, many of his MPs defected to the opposition, creating a large majority. 
In order to consolidate its authority, whatever new government emerges will need to act fast and resolutely – and receive considerable international support – to overhaul the country’s crisis-ridden economy. 
Ukraine suffers from three large economic problems. 
First, its foreign payments are unsustainable. 
Its current-account deficit last year was an estimated 8.3% of GDP, and its foreign-currency reserves are quickly being depleted, covering just over two months of imports. 
Second, public finances are also unsustainable, with the budget deficit reaching almost 8% of GDP and government-bond yields skyrocketing. 
Third, the economy has been in recession for five quarters since mid-2012. 
These problems reflect Yanukovych’s economic policy, which had one aim: enriching him, his family, and a few of his cronies. 
During the last four years, Ukraine has experienced unprecedented embezzlement by its rulers, with estimates putting the Yanukovych family’s wealth at $12 billion. 
Here, too, the new government will need international assistance if it is to recover at least some of this loot. 
With Yanukovych out of the way, official extortion of Ukrainian business should end, enabling the economy to recover. 
In fact, Ukraine’s GDP actually grew by 3.3% in the last quarter of 2013, because his cronyism was stifled by the protests. 
Yet much can and must be done very quickly, because Ukraine is running out of money. 
For starters, the new parliamentary majority needs to appoint a new government, so that a fresh economic-policy agenda can be launched. 
A new central bank governor also should be named, with the first order of business being to float the exchange rate. 
This would lead to a substantial devaluation of perhaps 10%, thereby ending the current run on the hryvnia, eliminating the current-account deficit, and enabling a reduction in Ukraine’s extremely high interest rates, which would stimulate investment. 
As soon as a government has been appointed, the International Monetary Fund should send a mission to Ukraine. 
Within two weeks, the IMF mission could conclude a new financial stabilization program with the new administration. 
The IMF works fast and could make a first large disbursement in late March. 
The IMF could lend Ukraine $10-12 billion for a one-year stabilization program, with the European Union using $3-5 billion from its balance-of-payments facility to co-finance an IMF standby program. 
These two sources alone could cover much of the $35 billion in external financing that Yuriy Kolobov, Ukraine’s acting finance minister, has said the country could need over the next two years. 
Moreover, IMF loans carry a lower interest rate and a longer maturity than the Russian loans on which the Yanukovych government relied (and which are unlikely to continue). 
The conditions that the IMF places on its loans can help Ukraine undo Yanukovych’s venal policies. 
First and foremost, Ukraine will have to reduce its budget deficit sharply, which, given large tax revenues, should be accomplished through expenditure cuts and freezes. 
Large industrial subsidies – for example, to the coal industry – amount to nothing but giveaways to Yanukovych’s supporters and should be eliminated immediately. 
Likewise, gas prices should be liberalized to stop corrupt enrichment from regulatory arbitrage. 
Needy consumers, not wealthy producers, should receive assistance. 
Similarly, the IMF will insist on the reintroduction of competitive tenders. 
Since 2010, orderly public procurement has ceased, with Yanukovych simply doling out state contracts to friends and acolytes at twice the market price. 
Naturally, sales of state enterprises to loyalists – typically at rock-bottom prices – must end as well. 
Another source of corruption has been refunds of value-added tax for exporters, for which top tax officials charge a commission. 
Putting a stop to this would stimulate exports. 
In addition, Ukraine should reintroduce the simplified tax code for small businesses that Yanukovych abolished. 
Two million small enterprises were wiped out by that change; many of them could be revived if tax procedures were no longer prohibitive. 
Ukraine also needs to work with the EU. 
Within a week, the new government can fulfill the EU’s conditions for signing the long-concluded Association Agreement, and doing so should be on the agenda at the EU-Ukraine summit in March. 
Parliament has already scheduled new elections, and former Prime Minister Yuliya Tymoshenko has been released from prison. 
The only remaining EU condition – legislation reforming the prosecutor’s office – can be adopted quickly. 
The EU-Ukraine Association Agreement will greatly benefit Ukraine. 
It amounts to a comprehensive reform program for the Ukrainian state apparatus, including its law-enforcement bodies. 
Sixty state agencies in various EU countries have already concluded agreements with their Ukrainian counterparts concerning the necessary reforms. 
The agreement also contains a Deep and Comprehensive Free Trade Area, which will open the vast European market to Ukrainian exporters – and thus attract more foreign direct investment to Ukraine. 
This will also help to safeguard the country against possible Russian trade sanctions. 
Here, diplomacy will play an important role as well. 
The United States and the EU need to persuade Russian President Vladimir Putin to reach an understanding with Ukraine’s new leaders, rather than follow through on his threat to impose sanctions. 
Peaceful co-existence, not mounting bilateral tension, is in both countries’ best interest. 

Ukraine’s Prisoner’s Dilemma 
WASHINGTON – The European Union’s most important decision this fall will be whether to sign an Association Agreement with Ukraine at the EU summit in Vilnius on November 28-29. 
The issue will turn on whether Ukraine’s President, Viktor Yanukovych, fulfills one vital condition: a full pardon for political prisoner and former Prime Minister Yulia Tymoshenko. 
The Association Agreement, which runs to some 1,200 pages, would remove almost all EU tariffs on Ukrainian goods, boosting the country’s long-term GDP by an estimated 12%. 
It would also establish a political, economic, and legal reform plan for the country, supported by roughly 60 state agencies in EU member countries. 
Although the Association Agreement does not lead automatically to EU membership, it is an important step in that direction. 
Under the Treaty of Rome, Ukraine, as a European country, qualifies as a potential EU member. 
But it would have to fulfill the EU’s “Copenhagen criteria,” established in 1993, which sets out the basic entry standards. 
The Copenhagen criteria are met when the candidate country has achieved “stability of institutions guaranteeing democracy, the rule of law, human rights, and respect for, and protection of, minorities”; can ensure the existence of “a functioning market economy and the capacity to cope with competition and market forces”; and has sufficient “administrative and institutional capacity” to adopt and enforce EU law and “take on the obligations of membership.” 
Ukraine is a long way from achieving this, but signing an Association Agreement would pave the way toward entry talks, while also creating tremendous economic opportunities. 
Ukraine’s alternative would be to join a Russian-dominated Customs Union that includes Belarus and Kazakhstan. 
Membership would require Ukraine to double import tariffs on EU goods, at an annual cost equivalent to 4% of GDP; and it would not even guarantee free trade among its members (Russia already applies trade sanctions against Belarus and Kazakhstan). The Customs Union thus appears to be little more than a Russian neo-imperialist venture. 
Unsurprisingly, Yanukovych has consistently stated his preference for an Association Agreement. 
His political future may depend on it. 
His advisers, and recent opinion polls, suggest that if he fails to sign a deal, he will lose the March 2015 presidential election. 
The electoral math is stark. 
While 40% of Ukrainians, based mainly in Yanukovych’s electoral heartland in the east and south of the country, would prefer to join the Customs Union, 60% of voters see their future with or in the EU. 
Even allowing for widespread electoral fraud (which would hardly endear him to Brussels), Yanukovych would still struggle to win a majority. 
It is not just the swing vote that Yanukovych needs to attract. 
Ukraine’s powerful oligarchs are also looking West rather than East for business. 
Many are fed up with the arbitrary imposition of trade barriers – affecting goods ranging from chocolate to steel pipes – in their former Soviet markets. 
EU markets, by contrast, are viewed as being not only bigger, but safer as well. 
Meddling from Moscow has certainly focused minds in Kiev. 
Russia’s brief trade war in August frightened Yanukovych into pledging to fulfill all 11 of the EU’s legal and political conditions. 
These require Ukraine to overhaul its judiciary and law enforcement, and ensure greater adherence to democratic norms. 
The parliament currently is considering 15 bills along these lines, all of which have the full support of the main opposition parties. 
But the EU’s demand that Yanukovych pardon Tymoshenko, who narrowly lost the 2010 presidential election, may prove harder to satisfy. 
Tymoshenko was arrested in August 2011 and, after what was widely seen as a show trial, received a seven-year prison sentence for “abuse of power” (though she was not accused of benefiting personally) over a 2009 natural-gas deal with Russia. 
An EU-appointed mediation commission that includes former Polish President Alexander Kwasniewski and former European Parliament President Pat Cox has proposed a solution. 
At the commission’s request, Yanukovych would pardon Tymoshenko, who would be allowed to travel to Germany for medical reasons. 
Tymoshenko has accepted the deal; Yanukovych has not. 
Rather than a pardon, he wants parliament to pass a law allowing Tymoshenko to go to Germany for treatment, but on the condition that she would resume her prison sentence should she return to Ukraine. 
The EU says that those terms are unacceptable. 
Acquiescing in Tymoshenko’s political imprisonment would negate the very foundations of the legal and democratic standards that the EU purports to represent. 
Any subsequent legal reform in Ukraine would appear hollow. 
Some argue that the EU should ease its conditions: the case of a single, albeit important, individual should not stand in the way of Ukraine’s future. 
But, far from this being a one-off case, the Tymoshenko affair exposes a deeper malaise. 
Even now, Yanukovych is attempting to amend tax rules in order to disqualify the popular Vitali Klitschko, a champion boxer and former German resident, from standing for President. 
The corruption and lawlessness that characterizes Yanukovych’s Ukraine should spur the EU to hold fast both to the letter and the spirit of its conditions. 
Time is not on Yanukovych’s side. 
The European Council of Ministers will make its final decision on November 18. 
If Yanukovych has not amnestied Tymoshenko by then, the EU can, as the Polish MEP Jacek Saryusz-Wolski suggests, wait for a Ukrainian president that will uphold EU values. 
Yanukovych will be the one blocking Ukraine’s path to the future. 

NATO’s New Frontier 
BRUSSELS – Last week, an American ship sailed into a Spanish naval base, making history. 
The arrival of the USS Donald Cook from Norfolk, Virginia, to its new home port in Rota, on Spain’s Atlantic coast, marks the first time that a US Navy ship equipped with the high-tech Aegis ballistic missile-defense system will be permanently based in Europe. 
The USS Donald Cook is the first of four US Navy destroyers that, with around 1,200 sailors and personnel, will play a central role in NATO’s missile-defense capability. 
But the ships will carry out many other tasks as well, such as maritime security operations, bilateral and multilateral training exercises, and participation in NATO operations and deployments, including the Standing NATO Maritime Groups. 
The arrival of the USS Donald Cook marks a step forward for NATO, for European security, and for transatlantic cooperation. 
It clearly demonstrates the strength of the bond between America and Europe in dealing with the complex and unpredictable security challenges of our age. 
Steady progress has been made since November 2010, when, at its Lisbon summit, NATO decided to develop a missile-defense capability to protect all NATO European populations, territory, and forces. 
In April 2012, at its summit in Chicago, NATO announced an interim capability as an operationally significant first step. 
Full capability is expected to be attained in the years ahead. 
The purpose of NATO’s missile-defense system is to defend Europe against a real threat. 
At least 30 countries around the world either have ballistic missiles or are trying to acquire them. 
The know-how needed to build them is spreading, and their range is increasing, with some from outside the Euro-Atlantic region already capable of targeting European cities. 
The USS Donald Cook and the three other US destroyers have advanced sensor capabilities and interceptors that can detect and shoot down ballistic missiles directed at Europe. 
In the future, other important components of the missile-defense system will include additional radars, sensors, and interceptors – and more ships. 
Already, thanks to the US European Phased Adaptive Approach to missile defense, NATO can rely on a powerful radar based in Turkey. 
Work has already begun on construction of a land-based interceptor and radar site in Romania. 
Poland has announced plans to build up its air and missile-defense capabilities. 
The Netherlands is upgrading four radar frigates to make them capable of missile defense, and has offered its Patriot anti-missile systems. 
So has Germany. 
The Netherlands, Germany, and the US have already deployed Patriot missiles on NATO’s southeastern border to help defend and protect Turkey from possible missile attacks from Syria. 
And, by hosting the four US Navy destroyers, Spain is making a vital contribution not just to NATO’s missile defense, but also to security throughout the Mediterranean region. 
To link all of these national assets together, NATO has developed, and is expanding, a technologically advanced command-and-control system, based at Ramstein Air Base in Germany. 
The system already can connect satellites, radars, and interceptors to defend against missile attacks, and that capability will grow more complex and agile in the years ahead. 
This makes NATO unique: it is the only multilateral organization that can combine the most complex systems from the world’s most capable countries to create an effective whole. 
Above all, this deployment is a step forward for transatlantic cooperation, because the US ships represent more than a military capability. 
Each one is an eight-thousand-ton reminder of America’s commitment to security in Europe. 
At the same time, NATO’s missile defense demonstrates European allies’ commitment to security as they develop their capabilities in this area. 
I encourage all allies to consider how they can contribute further to a system that will defend all of us in Europe. 
Missile defense heralds a new form of cooperation, with new capabilities against new threats. 
Where once we lined up tanks along borders, we are now building a complex system that requires a range of high-tech contributions from many allies – on land, at sea, and in the air. 
NATO’s missile-defense system is what transatlantic teamwork looks like in the twenty-first century. 

Antarctica’s Point of No Return 
POTSDAM – Recent satellite observations have confirmed the accuracy of two independent computer simulations that show that the West Antarctic ice sheet has now entered a state of unstoppable collapse. 
The planet has entered a new era of irreversible consequences from climate change. 
The only question now is whether we will do enough to prevent similar developments elsewhere. 
What the latest findings demonstrate is that crucial parts of the world’s climate system, though massive in size, are so fragile that they can be irremediably disrupted by human activity. 
It is inevitable that the warmer the world gets, the greater the risk that other parts of the Antarctic will reach a similar tipping point; in fact, we now know that the Wilkes Basin in East Antarctica, as big or even bigger than the ice sheet in the West, could be similarly vulnerable. 
There are not many human activities whose impact can reasonably be predicted decades, centuries, or even millennia in advance. 
The fallout from nuclear waste is one; humans’ contribution to global warming through greenhouse-gas emissions from burning fossil fuels, and its impact on rising sea levels, is another. 
Indeed, the latest Intergovernmental Panel on Climate Change (IPCC) report stated, in uncharacteristically strong terms, that the sea level is “virtually certain” to continue to rise in the coming centuries or millennia. 
Moreover, the greater our emissions, the higher the seas will rise. 
But the recent revelations about Antarctica are different. 
Rather than reacting to global warming with gradual and predictable patterns of change, the West Antarctic ice sheet has suddenly “tipped” into a new state. 
A relatively small amount of melting beneath the Amundsen Sea’s ice shelf has pushed its grounding line to the top of a sub-glacial hill, from which it is now “rolling down.” 
Simply put, one thermal kick was enough to initiate an internal dynamic that will now continue under its own momentum, regardless of any action that humans might take to prevent it. 
It is not completely clear whether humans have caused this tipping – though nothing like it has ever occurred during the 11,500-year Holocene period before humans started interfering with the planet’s energy balance. 
But that is not the point. 
What is important is that we recognize the existence of gigantic parts of the earth’s climate system – such as West Antarctica’s three-quadrillion-ton ice sheet – that can be tipped when a fractional temperature rise occurs in key locations. 
This risk is no longer merely theoretical. 
For the first time, findings based on observations and computer simulations all point to the same conclusion: the huge Amundsen Sea sector of West Antarctica has begun an irreversible ice discharge, and nothing can now halt the subsequent drainage of the entire basin. 
It has passed the point of no return. 
That is why we must now focus on similar topographic conditions elsewhere. 
If an “ice plug” near the coast of Wilkes Basin melts or breaks off into icebergs, the basin’s huge quantities of water will drain into the ocean. 
Although no one knows precisely what might destabilize the Wilkes Basin, we can be fairly certain that further global warming, caused by greenhouse-gas emissions, will increase the risk. 
The fact that sea levels will continue to rise is now clear. 
But we can still determine how high and how fast levels rise by controlling the degree of global warming that we cause. 
Climate change is caused by mankind, so the good news is that mankind can stop it by cutting greenhouse-gas emissions. 
Although West Antarctica’s fate is sealed, we may still be able to prevent the collapse of East Antarctica’s marine ice sheet. 
That means deciding – sooner rather than later – which path to follow. 
The current path risks further destabilization in Antarctica; choosing the alternative path of a new energy system for the planet is our last best hope. 

Putin’s Brave New World 
MOSCOW – Three months after protesters toppled Ukrainian President Viktor F. Yanukovych and his government, unleashing a wave of unrest and chaos, the country has elected a new president. 
But Russian President Vladimir Putin, who deployed troops to annex Crimea at his earliest opportunity, remains the key figure shaping Ukraine’s future – and he is continuing to propel Ukraine toward something far more dangerous than a new Cold War. 
By placing himself firmly in the driver’s seat of Russia’s future, Putin has simplified the task of those who seek to understand the country. 
In fact, his actions are guided by a single goal, and it is not the imperial ambition that is usually thought to determine Putin’s actions. 
Instead, every policy is subordinate to Putin’s goal of ruling Russia for as long as he lives. 
Putin’s ambition is not the result of a pathological lust for power. 
Instead, it is based on entirely realistic concerns for his personal safety. 
He understands the laws of the autocratic system that he has helped to rebuild in Russia – a system in which leaders may, like Libya’s Colonel Muammar el-Qaddafi or Iraq’s Saddam Hussein, ultimately find themselves being hauled out of sewers or rat holes to face execution if their power fails them. 
Viewed from this perspective, Putin’s strategy in Ukraine has been consistent and logical at every stage. 
In the protests in Kyiv’s Maidan (Independence) Square, he saw the prospect of Ukraine transcending the corrupt post-communist authoritarianism that his own regime embodies. 
Ukraine’s move toward a European model of economic and political competition, Putin feared, would spur similar demands in Russia. 
In order to prevent such an outcome, Ukraine’s revolution against Yanukovych, the monumentally corrupt Kremlin puppet, had to be strangled in its cradle and discredited in the eyes of the Russian people. 
These goals were evident in the speech that Putin delivered to Russia’s political elites in March, following the annexation of Crimea. 
But Putin’s actions in Ukraine have done more than humble Russia’s democrats. 
By focusing on the ethnic Russian majority in Crimea and declaring his right to “protect” ethnic Russians abroad, his legitimating myth now includes the role of national savior, which could enable him to retain power indefinitely. 
Of course, Putin’s rise to power was buttressed by another myth – that of a vigorous young KGB officer capable of stopping the Russian Federation’s disintegration by “drowning” the Chechens in “an outhouse,” stabilizing the economy, and using the country’s vast natural-resource wealth to enhance prosperity. 
But that myth has now worn thin. 
Putin has seen firsthand what happens when a ruling myth collapses. 
The Soviet Union was sustained by the population’s belief in communism as the route to a just society. 
When the myth disintegrated, so did the union. 
From the outset of his rule in 2000, Putin has been determined not to make the same mistake. 
With the help of Russia’s media, he hopes to recast himself as the Russian messiah, compelling ethnic kin everywhere to support his leadership in perpetuity. 
And, so far, it seems to be working. 
The annexation of Crimea was met with widespread support in Russia. 
But Putin’s strategy carries serious risks – not least because it bears a disturbing resemblance to Hitler’s call to unite all ethnic Germans. 
By valuing ethnicity over citizenship, he is challenging the very basis of the international system and fueling rapid deterioration in Russia’s relationship with the West. 
During the Cold War, both sides’ acceptance of “mutual assured destruction” ensured that nuclear weapons served as a deterrent and thus supported strategic stability. 
For Putin, by contrast, the threat to use such weapons is a perfectly logical tactic. 
Given his relatively weak conventional army, he can assert international authority only by claiming a free hand in the entire post-Soviet space and menacing the West with a limited nuclear war (which he is certain he can win) if it interferes with his imperial ambitions. 
This has proved to be a winning strategy. 
The immediate response of the United States and the European Union to Russia’s annexation of Crimea was to declare that military intervention was “absolutely excluded,” given that Ukraine is not a member of NATO. 
International relations today are at their most volatile since Joseph Stalin’s final months in power, when he created a three-part strategy to restore his authority: preparation for a third world war, liquidation of the Communist Party hierarchy, and exterminationist anti-Semitism. 
It was only his death in 1953 that saved Russia – indeed, the world – from this outcome. 
Who will save the world from Putin? 

The Humanities Crisis 
NEW YORK – A striking symmetry is emerging in debates about the future of higher education around the world. 
On the one hand, there is growing concern that the United States and many European countries are failing to prepare enough university graduates in the fields driving the twenty-first century “knowledge economy,” such as engineering and information technology. 
This fear has led to the narrowing of the concept of education to mean the acquisition of practical skills. 
On the other hand, the worry in some parts of Asia is that young people entering the work force with strong technical training lack sufficient experience “thinking outside the box.” 
This fear is manifesting itself in an incipient effort to expand education to include the cultivation of feeling and imagination. 
Both movements are rooted in economic concerns. 
In the US, where most undergraduates bear at least part of the cost of their university education, political pressure is mounting to provide incentives like tuition discounts or loan forgiveness to students of science, technology, engineering, or mathematics (the so-called STEM fields). 
Cost-cutting measures, such as compressing traditional four-year degree programs into three years – thereby reducing or eliminating elective courses in “impractical” subjects like literature, philosophy, and fine arts – are also being discussed. 
Meanwhile, in Hong Kong, Singapore, and China, there are calls for extending university programs so that students can obtain a broad, liberal education, in the hope that graduates will be more inclined to experiment and innovate. 
Hong Kong University, for example, has extended its undergraduate programs from three years to four. 
But such a narrow, economics-based view fails to account for the larger questions of value that societies worldwide are facing. 
To be sure, progress in any field, from commerce and communications to health and environmental science, will become increasingly dependent on technological innovation, and thus on the high-order skills – acquired through intensive technical training – that drive it. 
It is also true, however, that such training does not provide an adequate foundation for addressing the more abstract, but profoundly important, questions that ultimately must guide global policy and decision-making. 
For example: 
· How can the imperative of economic development be reconciled with the need to limit climate change? 
· What does national sovereignty mean in a world where diseases, pollutants, and terrorists cross national borders at will? 
· Are there universal human rights that transcend conflicting claims of particular cultural traditions? 
· How should limited resources be distributed in order to provide opportunity and hope to young people, while treating the elderly with dignity and respect? 
· What are a country’s obligations to refugees fleeing from persecution, poverty, or strife elsewhere? 
· How should we balance individual liberty and collective security? 
In answering such questions, advances in science and technology (for example, new methods of energy production, surveillance, or online learning) will have a key role to play. 
But moral and ethical questions never yield fully to technical solutions; they also require an understanding of humanity’s social and cultural heritage. 
Science can help us to attain the life we want, but it cannot teach us what kind of life is worth wanting. 
In short, each side in the current education debate is half right. 
As human affairs become increasingly complex and morally exigent, future generations will need both scientific and humanistic learning – and they will need them more than ever. 
Fortunately, promising new models for making education more coherent and capacious are emerging. 
Yale University and the National University of Singapore have worked together to establish Yale-NUS, Singapore’s first liberal arts college. 
Led by a literary scholar and an astronomer, this new residential college aims to break down interdisciplinary boundaries and enable students to learn from one another. 
Likewise, Quest University in Canada encourages students to bring both scientific and humanistic knowledge to bear on today’s most pressing problems. 
Similar efforts have been underway for years in the US. 
For example, North Carolina State University’s Benjamin Franklin Scholars program – a collaboration between the College of Engineering and the College of Humanities and Social Sciences – aims “to produce well-rounded professionals who are analytical problem-solvers, ethical decision-makers, and effective communicators.” 
Unfortunately, such programs largely lack the visibility and influence needed to shape educational reform. 
It is time to abandon the “either/or” discourse that pits science against humanities – which the British chemist and novelist C.P. Snow identified more than a half-century ago as an obstacle to human progress. 
It is time to seek out best practices that bridge this putative divide, and scale them up. 
In the important work of adapting educational institutions for the future, we must not lose sight of their core mission as articulated in the past. 
No one has expressed that mission better than Benjamin Franklin, a man of letters and a scientific innovator, who defined education as the quest for “true merit.” 
“True merit,” Franklin wrote, consists in “an inclination joined with an ability to serve mankind, one’s country, friends, and family; which ability is…to be acquired or greatly increased by true learning; and should, indeed, be the great aim and end of all learning.” 
This is an aspiration that should be renewed for every generation. 


The Zero-Emissions Imperative 
DAVOS – Our planet is warming dangerously. 
And, as the 2013 report by the Intergovernmental Panel on Climate Change makes clear, our carbon-dioxide emissions over the past half-century are extremely likely to be to blame. 
A more robust approach to global warming is needed if we are to avoid catastrophe. 
Unlike the recent financial crisis, there is no bailout option for the earth’s climate. 
Three years ago, at the United Nations COP 16 climate-change meeting in Cancún, countries agreed to reduce their emissions by 2020 to a point that would prevent the average global temperature from rising more than 2°C above pre-industrial levels. 
However, UN estimates show that current trends would bring the world only 25-50% of the way to this target. 
This is why I am calling on all governments to be more ambitious – to aim for zero net emissions from fossil fuels by the second half of this century. 
Nothing short of a wholesale transformation of the energy economy will suffice. 
Just this week, the European Commission unveiled new energy and climate targets for 2030 – calling for a 40% reduction in the bloc’s greenhouse-gas emissions from 1990 levels, with 27% of energy to come from renewable sources. 
This is an extremely important step, and more countries should follow suit. 
To be sure, we will encounter huge obstacles. 
Two-thirds of electricity generation, and nearly 95% of the energy consumed by the world’s transport systems, comes from fossil fuels. 
Our energy security is increasingly tied to the exploitation of unconventional fossil-fuel deposits like shale gas, especially in the United States. 
Carbon-intensive technologies remain more profitable than low-carbon alternatives in many cases. 
And cash-strapped governments continue to encourage oil and gas exploration, in part because the rents received by some account for a large part of their revenues. 
But change is possible. 
There is a yawning gap between what governments promise to do about climate change and their often-inconsistent (if not incoherent) policies. 
Even when appearing to support greener technologies, governments are prone to sudden policy changes, sometimes retroactively, leaving businesses reluctant to commit to significant investments, or even take official statements seriously at all. 
I believe we can make substantial and rapid progress by setting a clear direction on three issues: 
Put a price on carbon. 
By pricing the cost of carbon, we can manage its use (or disuse). 
More than 40 countries have already implemented some form of carbon tax or emissions-trading scheme. 
Trading schemes are often politically more attractive, because they can be flexible (although their design and implementation could be improved in many cases). 
But we can be bolder. 
Several governments have successfully introduced carbon taxes without adversely affecting growth, and we should encourage more countries to follow their example. 
Cut fossil-fuel subsidies. 
The OECD estimates that fossil-fuel subsidies in member countries amounted to $55-90 billion annually from 2005 to 2011. 
And the International Energy Agency estimates that in 2012 fossil-fuel subsidies worldwide grew to $544 billion. Most of these subsidies should be scrapped; the energy industry does not need more state aid to burn fossil fuels (and, in developing and emerging economies, subsidies are a grossly inefficient and probably unnecessary way to help the poor). 
Clarify policies. 
Governments must address inconsistencies in their energy strategies, consider the links with broader economic policies, and stop sending mixed signals to consumers, producers, and investors. 
In particular, they must assess whether the right regulatory arrangements are in place to allow clean-energy investments to compete on a risk-return basis. 
This will be essential if investors are to redirect investment toward climate-friendly alternatives. 
The OECD will play its part. 
In order to understand and compare countries’ performances more accurately, OECD Economic Surveys will now include data and analysis of climate policies. 
By mid-2015, we expect to have a clear picture of the progress being made and the challenges that remain in OECD countries and all major emerging economies – and to have advised these countries how they can realistically increase the ambition and cost-effectiveness of their policies. 
These steps will signal that the price of emissions must rise substantially if we are to reach our goal of zero net emissions. 
The transformation will not be costless, and governments must be frank with their electorates about its social and economic impact. 
But a low-carbon, climate-resilient world will also offer new economic opportunities. 
More important, the alternative – inaction, or too little action – would be far more expensive in the long run. 
Hurricane Sandy, for example, cost the US the equivalent of 0.5% of its GDP. 
The annual bill for flood protection in coastal cities worldwide is likely to rise above $50 billion by 2050. 
The consequences for developing countries are more dire: Typhoon Haiyan, which hit the Philippines in 2013, was a stark reminder of how vulnerable poor countries can be to climate change. 
If the world is to avoid a collision with nature – one that humanity surely cannot win – we must act boldly on every front, particularly with respect to carbon pricing and the coherence of our economic and energy policies. 
And we must do so now. 

Angela Bismarck Thatcher 
BERLIN – The European Union’s recent summit has brought about a typically European compromise on the Greek financial crisis, one that avoids the term “solution” and hides behind the idea of a “mechanism.” 
Whether it works will be seen in April, when Greece will have to refinance its debt once more. 
German Chancellor Angela Merkel prevailed with her demand that the International Monetary Fund participate in a Greek bailout, should one be necessary. 
Moreover, the final decision on such a bailout will require, as before, unanimity in European bodies, meaning it will remain under German control. 
French President Nicolas Sarkozy, meanwhile, secured eurozone participation in a bailout for Greece. 
For Germany, this would entail a payment of up to €4 billion and – anathema! – the de facto end of the bailout ban in Article 125 of the EU’s Maastricht Treaty, despite a lot of verbal juggling intended to “prove” that the agreement on Greece conforms with the ban. 
Sarkozy also wanted, and received, increased economic coordination within the European Council. 
The exclusion of members who violate the Maastricht Treaty is off the table. 
In fact, aside from some additional minor points, the European Council’s resolution differs from the previous compromise in only one respect: IMF participation. 
If Germany needed the Fund’s involvement to save face domestically and because of a decision by its Constitutional Court, was it really necessary to wreak such unparalleled havoc in Europe just to bring that about? 
Everyone involved could have lived with this compromise; it was the political confrontation that preceded it that made agreement difficult. 
Indeed, the European confrontation Merkel initiated (shame on you if you see a connection with the upcoming German elections) has changed the EU forever. 
In the German media, references to Margaret Thatcher and Otto von Bismarck abound, with Merkel hailed as an Iron Lady, even an Iron Chancellor. 
You can only shake your head at the decline in Germans’ historical awareness, given that neither Thatcher nor Bismarck has ever been a role model for Germany’s European policy, and for good reason! 
Neither of them thought much, if anything, of European integration. 
Why even think of Bismarck if you want European amity? 
Injecting Bismarck’s name into the debate will undoubtedly trouble Franco-German cooperation. 
You could disregard all this as typical exaggeration if German domestic reaction did not demonstrate a clearly identifiable trend, namely Germany’s withdrawal as a motor of European integration as it increasingly pursues its more narrowly defined national interests. 
“But that’s what the others do, too,” is the answer you hear more and more often in Germany nowadays. 
That is true, except that Germany is not like the “others.” 
Because of its size, location, and history, Germany has a specific role to play within that unique structure – sandwiched between national and European interests – that is the EU. 
If Germany no longer acts as the driving force of European integration, then European integration is a thing of the past. 
If Germany no longer Europeanizes its more narrowly defined national interests, but pursues them as others do, the result will be a re-nationalization within the EU. 
To what extent the EU can take this strain, only time will tell. 
So far, Germany has always been the motor of European integration, in accordance with its political and economic interests. 
The consequences of Germany’s renunciation of that role are predictable: the EU will regress from a union of states moving towards ever closer integration to a weak confederation dominated by conflicting national interests. 
This is the British idea of Europe, and the German Constitutional Court, too, would probably be happy about such a development. 
But to call this U-turn a stroke of political genius that saved the euro and Helmut Kohl’s European legacy is simply delusional. 
It is best not to think about what this trend towards a weak EU will mean for Europe’s future in an international environment challenged by new players and dimensions. 
But why, in light of these developments, the EU bothered to enact the Lisbon Treaty is increasingly hard to understand. 
After all, this treaty is about the last thing a mere confederation needs. 

Auf Wiedersehen, and Good Riddance 
LONDON – She has been dubbed the Queen of Europe and, since US President Donald Trump’s election, the leader of the free world. 
As the European Union has lurched from crisis to crisis over the past decade, German Chancellor Angela Merkel’s steady hand has helped hold the bloc together. 
According to the conventional wisdom, when she hands over the chancellorship after Germany’s next federal election in 2021 – and perhaps much sooner if her grand coalition collapses – she will be sorely missed. 
However, this will hardly be the case. 
Merkel’s 13 years in office have involved domestic drift and European decay. 
She has complacently coasted along, failing to address Germany’s mounting economic and security challenges, and allowing Europe’s many crises to fester. 
Her lethargic managerialism would be tolerable for a small country in quiet times; it is catastrophic for Europe’s dominant power in an era of upheaval. 
Unlike many European countries, Germany has enjoyed solid economic growth over the past decade. 
But Merkel can scarcely take credit for that. 
Her four governments have enacted no significant growth-enhancing reforms. 
And in their obsession with running a budget surplus, they have failed to invest in the country’s crumbling infrastructure and education system. 
Merkel has done nothing to prepare Germany for the digital disruption that threatens to do to its manufacturing heartland – notably its car industry – what Apple’s iPhone did to Nokia. 
Germany will regret not fixing its roof while the sun was still shining. 
The eurozone crisis greatly enhanced Germany’s financial clout within the currency union. 
That gave Merkel massive political power, which she could have put to good use. 
Instead she put Germany’s narrow near-term interests as a creditor first, leading her to make decisions that exacerbated the eurozone crisis, shifted its costs to others, and prevented any long-term resolution. 
Merkel is ultimately responsible for the EU’s refusal to restructure Greece’s debts in 2010. 
She was behind the lending of European taxpayers’ money to stricken governments to bail out German banks. 
And her governments responded to financial panic by demanding extreme austerity and painful adjustments in debtor countries, even as Germany’s current-account surplus swelled. 
By eventually green-lighting European Central Bank President Mario Draghi’s pledge to do “whatever it takes” to hold the euro together, Merkel did just enough to save the single currency, while leaving in place all of the flaws of a dysfunctional, incomplete monetary union. 
To be sure, with Trump demolishing the liberal international order and swivel-eyed nationalists running amok in Britain, Hungary, Poland, Italy, and elsewhere, Merkel deserves credit for offering a calm, reassuring voice of moderation. 
Her decision to welcome more than one million refugees was an uncharacteristically bold humanitarian gesture. 
And whereas British Prime Minister Theresa May has humiliated herself by kowtowing to Trump, Merkel has spoken up for liberal, internationalist values. 
Likewise, unlike many senior politicians in Germany, she has stood up to Russian President Vladimir Putin’s bullying and aggressive behavior. 
Still, Merkel’s tepid leadership has left Germany exceptionally vulnerable to today’s nationalist backlash. 
The country’s economic, political, and geopolitical security rest on precisely the three things that nationalists want to destroy: dynamic open markets for German exports; an integrated EU that anchors Germany’s position in Europe and the world; and the US nuclear umbrella that ensures its defense. 
Germany is not a trade cheat, as the Trump administration has claimed. 
And yet, under Merkel, it certainly has pursued a beggar-thy-neighbor mercantilist growth strategy that suppresses wages and boosts exports at all costs. 
Yes, protectionism is misguided; but mercantilism encourages it. 
German, European, and global interests would all be served if Germany were to do more to stimulate domestic demand. 
Similarly, Merkel cannot be blamed for Brexit or for many of Italy’s travails, which are of its own making. 
And yet her eurozone policies are a big reason why Italy now has a populist government vowing to block future EU trade deals, inflaming the refugee crisis, and threatening another eurozone panic. 
The eurozone will not be secure until Germany and Italy can both happily share a monetary union. 
This may ultimately prove to be impossible. 
But if there is a workable arrangement, it will require significant reforms, as French President Emmanuel Macron proposed last year. 
Merkel’s spurning of Macron’s reform effort thus represents a tragic missed opportunity. 
With respect to security, even as Merkel has acknowledged that Germany can no longer rely wholly on the US for its defense, she has done little to bolster German or European military capabilities. 
German defense spending remains inadequate, giving Trump a pretext to undermine NATO. 
The country’s ramshackle military has tanks that don’t drive, submarines that don’t dive, and planes that don’t fly. 
And there has scarcely been any debate about the need for a nuclear deterrent, whether German or European. 
Far from a tragedy, then, Merkel’s departure represents an opportunity for European reformers. 
Macron and his European allies are right to focus their campaign for the European Parliament election next May on the threat posed by far-right populism. 
But in his desire not to upset a powerful partner, Macron has so far failed to challenge Merkel’s flawed European leadership. 
With Merkel on the way out, he and other reformers have a fresh chance to campaign for a different Europe that works for everyone. 
If they don’t take advantage of her exit, the charlatans of the far right certainly will. 

In Defense of Angela Merkel 
PARIS – The recent cover of Der Spiegel showing German Chancellor Angela Merkel in front of the Acropolis surrounded by Nazi officers serves an important purpose: it finally poses, in a way that cannot be evaded, the question of Germanophobia in Europe. 
The abuse of Germany has dragged on for quite some time. 
Demonstrations in Cyprus in March 2013 included banners bearing caricatures of Merkel done up as Adolf Hitler. 
In Valencia at around the same time, on the occasion of the annual Fallas celebration, there was Merkel as an evil headmistress delivering to the head of the Spanish government and his ministers “The Ten Commandments of Angela the Exterminator.” 
She ended up being burned in effigy in the flames of the bonfires of St. Joseph. 
Two months later, in Portugal, similar parades featured the same Hitlerized Merkel caricatures, borne by howling demonstrators dressed in mourning clothes and decrying the German leader’s “policy of massacring the poor.” 
And, naturally, there was Greece, where the phenomenon reached its apogee during the near-riots of October 2012, in which the world was treated to the spectacle of Nazi and German flags flown together – and then burned – together before the Acropolis in scenes that presaged the Der Spiegel cover. 
In Italy, the right-wing daily newspaper Il Giornale had no scruples about devoting its headline for August 3, 2012, to the emergence of the “Fourth Reich.” 
Likewise, conspiracy websites in the countries of northern Europe claim that Germany’s eagerness to support Ukrainian President Petro Poroshenko against Russian President Vladimir Putin is a reenactment of Hitler’s subjugation of Ukraine. 
Then there is France, where the game seems to be to see who can come out on top in populist denunciations of the new and detestable “German empire.” 
From the extreme right, National Front leader Marine Le Pen chides Merkel for the “suffering” that she is imposing on the peoples of Europe. 
From the opposite extreme, we have the Left Party’s Jean-Luc Mélenchon thundering against Merkel’s “austerity” policy and inviting her to “shut up.” 
The problem with this Germanophobia is not simply that it is stupid, or that it is yet another symptom of the decomposition, before our eyes, of the noble European project of integration and ever-closer union. 
No, the problem with today’s Germanophobia is that, contrary to what the sorcerer’s apprentices who stoke it would have us believe, their behavior is not a sign of their opposition to the true fascism that lies on the horizon, but rather of their allegiance – and even contribution – to it. 
Why? 
There are several reasons. 
For starters, to oppose Germany’s social, economic, and foreign policies by equating Merkel with Hitler is to banalize Hitler. 
However legitimate disagreement with those policies may be, Germany is one of the continent’s most scrupulous and exemplary democracies. 
To say that it resembles in any way the Nazi regime – which in Europe still stands for the destruction of democracy (indeed, civilization itself) – is to exonerate that regime, and to reassure and encourage today’s neo-fascists, allowing them, whether intentionally or not, to reenter the public debate. 
What is more (and this is key), those keenest to discredit Merkel just happen to be the same people who do not hesitate to waltz with Viennese neo-Nazis or to form an alliance, as in Athens, with the leaders of a genuinely extremist party. 
All of the clamor raised around a Germany that has supposedly “reunited with its demons” masks the voice of fascistic parties – from Greece’s Golden Dawn to Hungary’s Jobbik, Slovakia’s SNS, Belgium’s Vlaams Belang, and Bulgaria’s Ataka – that are in the process of establishing themselves in Europe. 
It should also be noted that Merkel is a woman, and that hatred for women – the disdain in which they, right alongside the Jews, were regarded by the racist theoreticians of the 1920s and 1930s – has been an essential dimension of every expression of fascism. 
Likewise, the slogans slung about in Valencia in October 2012 – with demonstrators urged to chant at the chancellor’s effigy, “You will love money above all else” and “You will honor the banks and the Bank” – had the unmistakably foul odor of the old mantras about “the golden calf” and the “cosmopolitan plutocracy.” 
People have finally come to understand that anti-Americanism, born on the extreme right and fed, in Germany, for example, by the philosophy of Martin Heidegger and his acolytes, is a fixture of fascism. 
It is now time for us to understand that the same is true of Germanophobia. 
In France, it appeared with the French anti-Semitic novelist and activist Maurice Barrès, who saw in the philosophy of Immanuel Kant a vehicle for the “Jewification” of European minds. 
It triumphed with Charles Maurras’ Action Française and its protracted war with “Jewish and Germanic abstractions.” 
And it culminated with the red-brown cells that, even today, on sites that I prefer not to mention, offer “grub” and a “hideout” for persons willing to “bump off” the “bosses” on the chancellor’s “payroll.” 
The history of ideas has its logic, reason, and folly, its unconscious and its trajectory. 
It is both futile and dangerous to deny any of them. 
That is why, today, it is critically important, in the face of a dark force that is rising, swelling, and unfurling in Europe, to defend Angela Merkel. 

Angela Merkel’s Long Goodbye 
BERLIN – With Angela Merkel having announced that she will step down as leader of the Christian Democratic Union (CDU) and not seek reelection as chancellor when her current term ends in 2021, Germany is approaching a watershed moment. 
Since 1949, the country has had only eight chancellors, which means that Merkel’s departure will be anything but an everyday occurrence. 
Moreover, a change at the top in Germany is usually accompanied by broader political and social change. 
Merkel’s decision was not entirely unexpected. 
Having elected her for the fourth time in September 2017, German voters were unlikely to give her a fifth term. 
People tire of leaders over time. 
Even without her recent announcement, it thus could have been assumed that Merkel’s current term would be her last. 
But the ongoing transformation of Germany’s domestic and foreign-policy position is more important than a change in leadership. 
International ruptures are shaking the very foundations of Germany’s post-war democracy. 
Under President Donald Trump, the United States has repudiated the West and everything it stands for. 
On March 29, 2019, the United Kingdom will leave the European Union. 
And to the east, China has emerged as a new global power. 
More broadly, the world’s economic center of gravity is quickly shifting from the North Atlantic to East Asia. 
The digital revolution, big data, and artificial intelligence are changing the way we work and live. 
And the EU’s internal crises have not just continued but intensified, while chronic turmoil in the Middle East and Africa represents a persistent external risk to Europe’s stability. 
These and other developments have shaken Germany’s once-firm foreign-policy footing. 
For years, the country’s economic model and security strategy have both centered around integration with the West and Germany’s role within the EU. 
But today’s challenges require a new strategic outlook. 
The question for the next chancellor will be: “Quo vadis, Germany?” 
Wherever Germany is heading, one thing is already clear: the transition from Merkel to her successor will bring about a far-reaching reorganization of the country’s party system. 
For decades, the center-right CDU (in alliance with the Bavaria-based Christian Social Union) and the center-left Social Democratic Party have served as the two great guarantors of political continuity and stability. 
But, like mainstream parties across Europe, the CDU/CSU and the SPD are now in crisis. 
The SPD has lost so much support that it may not survive; and while the CDU/CSU is still the strongest single force in German politics, it is facing a deep structural challenge. 
Since 1949, the CDU/CSU’s “sister-party” structure has routinely allowed it to secure the chancellorship as the largest party bloc in majority coalitions. 
But in an enlarged, reunified Germany with seven separate parties holding seats in the Bundestag, this arrangement no longer works as well as it once did. 
In the years preceding Merkel’s first election as chancellor in 2005, Germany had been governed by a coalition comprising the SPD and the Greens (in which I served as vice chancellor and foreign minister). 
During that period, Germany underwent a painful adjustment as the welfare state was brought into line with the post-reunification realities of high unemployment and a new economic geography. 
At the same time, German foreign policy had to be adjusted to account for the country’s new role in the context of the 1990s post-Yugoslav wars, and to address the threat of international terrorism after the attacks of September 11, 2001. 
After the fall of the Berlin Wall, reunification, and a period of high unemployment and seemingly endless reforms, Germans had experienced quite enough excitement. 
Merkel’s chancellorship was meant to put an end to all of that. 
Cool pragmatism became the order of the day. 
With the economy booming, it seemed as though the sun was always shining and the skies were always blue. 
Hovering above it all was “Mutti” (Mommy), simply letting things take their course. 
German voters saw little reason not to elect her three more times. 
Now, the sunny days are gone. 
The emergence of a new global order presents policymakers and politicians with weighty strategic questions that cannot be ignored or deferred. 
Chief among them is what role Germany – and Europe – should carve out for itself in the years to come. 
A decade hence, where will we as Europeans stand, and what will we stand for? 
Merkel does not offer satisfactory answers to such questions. 
With her consummate pragmatism, she has become her own worst enemy. 
Even when she has made great – indeed, historic – decisions, they have been based on narrow, short-term political considerations. 
Merkel’s phasing out of Germany’s nuclear power plants, suspension of compulsory military service, and responses to the 2008 financial crisis were merely tactical moves. 
The one exception came in 2015, when she took a moral stand and opened Germany’s doors to one million refugees. 
Merkel’s approach to the financial crisis would turn out to be her biggest mistake. 
At the time, she opposed a joint European response, instead advocating national-level measures and mere coordination among eurozone governments. 
The entire European project has been off track ever since. 
Of course, Merkel will be remembered as the chancellor of the “peace dividend” and, possibly, as the last chancellor of the post-war (West) German party system. 
But Europe’s persistent crisis will now form part of her legacy as well, and it will pose a difficult challenge to her successors. 
What comes next is anyone’s guess. 
Much will depend on whether Germany, together with France, continues to pursue its European mission. 

Angela Merkel Meets the World 
At long last, Angela Merkel is Germany’s new – and first woman – Chancellor. 
Although continuity will remain the hallmark of foreign policy, Germany’s international engagement under Merkel will sound and feel different from that under Gerhard Schroeder’s leadership. 
Schroeder came to power seven years ago representing a new generation whose formative experience was not the Cold War, European integration, and transatlantic friendship, but German unification and the restoration of national sovereignty. 
For him and the team that took over after Helmut Kohl’s 16-year reign, Germany had become a normal country, no different from other European heavyweights like France or Britain. 
Indeed, one of Schroeder’s first major foreign-policy experiences was the EU summit of 1999, where the leaders of France and Britain played rough with the newcomer from Berlin. 
The lesson that Schroeder drew was to insist that Germany could no longer be taken for granted and would demand a role commensurate to its size and weight. 
Self-assertion became the watchword of German foreign policy. 
Thus, when Schroeder claimed special circumstances for Germany’s failure to meet the budgetary ceilings of the European Union’s Stability and Growth Pact, he seemed to be arguing that the restrictions should apply only to smaller countries, not to the big players. 
When he rightly opposed America’s war against Iraq, the pride of standing up to the world's only superpower was palpable. 
When he established a close personal and political relationship with Russian President Vladimir Putin, he signaled to the world – and to the EU’s sensitive new Eastern European members – that Germany’s foreign policy would no longer be constrained by the past. 
In fairness, it should be acknowledged that it was under Schroeder that Germany shed hesitations to deploy soldiers abroad. 
His support for international crisis missions in Kosovo, Bosnia, or Afghanistan required considerable political courage and made Germany one of the major contributors to international stability efforts. 
To have removed the issue from domestic ideological controversy ranks as a major achievement of Schroeder’s tenure. 
But it was also meant to convey that Germany had grown up into a proper international power. 
With Merkel, the substance of Germany’s foreign policy will change little, but the assertive style will be muted. 
American leaders will welcome her election as proof that the estrangement in bilateral relations is over. 
But that alienation already largely ended earlier this year, when the Bush administration realized that allies are good to have and that Germany is an important one. 
Merkel will reintroduce the warmth that has been missing under Schroeder, but she will not become America’s yes-woman. 
Nor will she abandon special relations with Russia, to which every German chancellor since Adenauer has attached major importance. 
But she has already made clear that Germany’s neighbors to the East will have no reason not feel bypassed. 
She may even want to confirm that message by making her first official trip abroad not to Paris but to Warsaw or Vilnius. 
On the European project, she is as committed to integration as her predecessors have been. 
She will continue to emphasize close relations with France because there is no alternative; 
Britain, absent from the euro zone and the Schengen border regime, remains the odd man-in of the EU. 
But there will be no new initiatives on integration until leaders in the countries that rejected the Constitutional Treaty are ready for a new try. 
Then Merkel will be in a key position to add weight to a new effort for moving the EU forward. 
She will continue to favor the eventual admission of the Balkan states, but she has left no doubt of her opposition to full membership for Turkey, which is the major substantive change from the Schroeder era (although her government will not block the start of negotiations in early October). 
In fact, there is very little Merkel has to do after her election to make her mark on foreign policy; the visible change of style will suffice, at least at first. 
In any case, she will have her hands full pushing through the economic reforms for which she will be elected and which are her top priority. 
There are indications that Germany is finally emerging from years of economic stagnation, not least thanks to the reforms started under Schroeder. 
At home, Merkel can hope to reap the rewards. 
Abroad, Merkel has no need to demonstrate that Germany is a big country in Europe; her partners are fully aware of this. 
But it is also more than just a normal country: Germany remains central to holding together the two international institutions that will continue to assure its well-being, the European Union and the Atlantic alliance. 
There are some indications that Merkel is more aware of this then Schroeder was. 
One can only hope that this recognition will serve as her guidepost when tough decisions must be made and changes in style alone will not be enough. 

Angela Merkel’s New Momentum 
MADRID – Upon Albert Einstein’s death in 1955, the New York Times published a letter to the editor with a marvelous anecdote. 
Shortly after the atomic bombs had fallen on Hiroshima and Nagasaki, Einstein was asked, “Why is it that when the mind of man has stretched so far as to discover the structure of the atom we have been unable to devise the political means to keep the atom from destroying us?” 
His answer was timeless: “That is simple, my friend. 
It is because politics is more difficult than physics.” 
As a former student of physics in East Germany, German Chancellor Angela Merkel was able to confirm the truth of Einstein’s quip firsthand when she went into politics. 
I humbly believe that I can attest to the same, as my own life has followed a somewhat similar path. 
Just as I had done in Spain a few years before, Merkel reacted to the collapse of the dictatorship she lived in by leaving physics to embrace public service. 
Eventually, she got caught up in the whirlwind of European politics. 
In her various public roles, and throughout 13 years as chancellor, Merkel has always maintained a methodical and reflective style that suits her scientific background. 
But world politics seems to be diverging from that style, and increasing agitation in Germany has taken a toll on her standing. 
Last month, Merkel announced that she would not be seeking another term as chancellor, and that at the end of this year, she would step down as leader of the Christian Democratic Union (CDU). 
The race to replace her has already begun. 
Merkel’s successors may well be worthy of filling her shoes, but there is no doubt that Germany and the rest of Europe will sorely miss her composure and steadiness. 
Much has been said about Merkel’s achievements and failures. 
The greatest blot on her record may be the austerity policies that her government promoted in the European Union after the global financial crisis. 
Those policies increased inequality, deepened the divide between northern and southern member states, and slowed economic recovery. 
Since then, populists – particularly the governing Five Star Movement/League coalition in Italy – have seized on the painful legacy of austerity for their own political gain. 
Similarly, some blame Merkel for the rise of far-right parties, including the Alternative für Deutschland (AfD) within Germany itself. 
After welcoming over one million refugees in 2015, Merkel became the bête noire of nationalist anti-immigrant forces across Europe. 
Needless to say, however, there is a stark contrast between her advocacy of austerity and her decisions at the height of the refugee crisis. 
In the latter case, Merkel put her own political future on the line to defend European solidarity at a time when other countries no longer seemed willing to do so. 
In a recent address to the European Parliament, Merkel once again stood up for the EU’s foundational values. 
She joined French President Emmanuel Macron – with whom she showed great rapport at the commemoration of the Armistice Day centennial in Paris – in his call to form a European army. 
As both Macron and Merkel have made clear, such a force would not only be compatible with NATO; it would actually strengthen the organization. 
Predictably, however, Merkel’s ambitious speech elicited scorn from Euroskeptics, who would much rather see the EU succumb to despair and political opportunism. 
In light of her announced departure, some already regard Merkel as a “lame duck” whose legacy will now be debated in political obituaries. 
Yet these eulogies are premature: there is good reason to believe that she is not yet done forging her European legacy. 
To be sure, Merkel’s successor at the head of the CDU may not be closely aligned with her positions, and could inject more instability into the coalition government with the Christian Social Union (the CDU’s Bavaria-based sister party) and the Social Democrats (SPD). 
But even under those circumstances, Merkel would have a few cards up her sleeve. 
For starters, a no-confidence vote in Germany cannot succeed unless an alternative candidate wins the backing of an absolute majority in the Bundestag. 
That has happened only once – when Helmut Kohl of the CDU replaced Helmut Schmidt of the SPD as chancellor in 1982 – and it would be extremely unlikely in a parliament that is as fragmented as the current Bundestag. 
A scenario in which Merkel finishes out her term, staying on for another three years, should therefore not be ruled out. 
She remains very popular on the international scene. 
And, liberated from electoral pressures, at least of a kind focusing on her directly, she may feel freer to pursue a more proactive foreign policy. 
Recall that it was during his final years in office that US President Barack Obama achieved some of his biggest milestones in foreign policy. 
In addition to restoring diplomatic relations with Cuba, the Obama administration concluded the nuclear deal with Iran and signed the Paris climate agreement. 
Though President Donald Trump has sought to reverse these accomplishments, he has not been able to consign them to history. 
For the EU, it would be healthy if Merkel were to continue revitalizing the Franco-German axis, thereby opening the door to EU-level reform. 
Nevertheless, there are significant obstacles ahead. 
In this day and age, it is abundantly clear that politics is more difficult than physics. 
However, we would do well not to underestimate Merkel, and to heed another timeless Einstein quote: “In the middle of difficulty lies opportunity.” 

Angela Merkel’s Fear of Europe 
BERLIN – Ever since the global financial crisis erupted in September 2008, the European Union has been in turmoil. 
On the one hand, the euro protected the eurozone, particularly Germany’s export economy, from speculative attacks and the chaos of currency volatility. 
On the other hand, the second phase of the crisis mercilessly exposed the euro’s Achilles heel: the absence of economic or financial unification within the eurozone. 
Rising tensions within the EU have been the inevitable result. 
Germany’s actions throughout the crisis have been plainly contradictory. 
Rather than moving forward in the direction of an economic union, it reverted to a policy favoring national solutions. 
But that position is difficult to reconcile with Germany’s inability to call into question the euro or European structures and treaties. 
The contradictory stance of Chancellor Angela Merkel’s government was exacerbated by the transition from the grand coalition during her first term to the current conservative/liberal coalition. 
At that point, self-inflicted domestic political weakness collided with the fiscal constraints of the euro rescue. 
At first, Merkel had a hard time getting the Bundestag – and even the parties in her government – to approve the initial “small” rescue package for the euro, promising that Germany would not have to pay any more than that. 
By nightfall on the same day, however, she had to assent to the much larger €750 billion rescue package in order to prevent an EU-wide disaster. 
That created a multi-layered credibility problem for Merkel that continues to haunt her. 
Merkel still hasn’t figured out how to explain the consequences of the financial and euro crises to the German people. 
That is not only because she is a poor public speaker, but also because she herself does not seem to know how to resolve the contradictions between national solutions and European constraints. 
Her style of leadership, which has mostly consisted of taking a wait-and-see approach to issues, fits this uncertainty well. 
Only at the last moment, when it is clear where the majority lies, does she embrace a solution. 
Even when times were better, Merkel’s passive political style allowed vacuums to form, which were filled by other political forces within her party. 
As a result, while Merkel may appear to be in charge of things in the EU these days, in reality she is no longer driving events, but rather being driven by them. 
Without regard for the political consequences, Merkel is trying to escape the specifically German contradiction between national solutions and European constraints by advocating a rigorous fiscal-consolidation program, severe punishment for non-compliance (including loss of EU voting rights), and a trigger mechanism for member states that lag in meeting their obligations. 
In Berlin, the term for this is “a Europe of stability and solidity.” 
It is a credo for which Germany will have to pay dearly in the future. 
Merkel’s proposals do not reflect a German strategy aimed at leading the EU through this crisis. 
Instead, they are largely a response to domestic political imperatives. 
Berlin is consumed not with the question of what Europe might need in this historical situation, and what Germany’s role should be, but with fear – of the conservative and tabloid press, of further losses in state elections, and of the possibility that the German constitutional court will intervene and overturn the existing programs to contain the euro crisis. 
Merkel now feels the fatal consequences of her “leadership without leading” approach. 
One cannot shake the impression that the European soul of this government is devoured by angst. 
As for Germany’s ability to assert itself, there is not much evidence of it, despite the vigorous rhetoric. 
At the latest meeting of the European Council of Ministers, Germany’s “Iron Chancellor” hobbled home. 
It was French President Nicolas Sarkozy who, in the run-up to the last EU summit, called a halt to Merkel’s attempt to introduce an automatic response to member states that violate the stability criteria. 
Her second sweeping proposal, the withdrawal of voting rights in the Council, was abandoned at the Council’s recent meeting in Brussels. 
In fact, Merkel’s “triumph” consisted of nothing more than a Council promise to “review” a change to the Lisbon Treaty – albeit a change below the level that might make referendums necessary. 
In simple language: forget about any punishment or automatic trigger mechanisms that might affect a country’s sovereignty. 
What remains of the effort to prevent a repeat of the crisis are tightened EU controls on national budgets and, regarding the treaty change to be considered, the continuation of the rescue package (which previously was due to expire in 2013), probably under a different name. 
That is not much of a victory for Merkel. 
So, as Germans once again see their “Iron Chancellor” deliver butter-soft results, they are increasingly likely to trust those who warn that the government is being tricked into a “transfer union” that uses German money to finance handouts for fiscally lax EU members. 
Disagreement with this criticism is difficult, because the German federal system itself relies on transfers. 
The more the EU is forced by Germany to become a union rooted in “stability,” the more pressing it will become for eurozone countries that cannot conform to the new, stricter rules to receive some sort of financial compensation. 
It is, after all, unrealistic to assume that all members can profit to the same extent from this hard-line approach; that is not achievable even among the 16 federal German states. 
With Merkel’s active help, the eurozone is (in effect) moving towards becoming a transfer union: the stricter the new rules and the larger the interest-rate spreads among eurozone countries, the faster that will happen. 
At home, though, Merkel fears this debate like no other – a debate that the financial markets and the crisis in many European countries will ensure cannot be avoided. 
Faintheartedness comes at a price. 

Angela Merkel’s Vision Thing 
CAMBRIDGE – As Europe struggles to save the euro, the chorus of complaints about weak leadership in the world’s major economies grows louder. 
Many have singled out German Chancellor Angela Merkel for failing to promote a vision of Europe similar to that of her predecessor and mentor, Helmut Kohl. 
Are the critics right? 
Part of what effective leaders do is communicate a vision that gives meaning to policies and inspires others to support these policies (and those who propose them). 
It is one of the ways in which leaders help to create shared objectives and energize common action. 
Usually, such a vision provides a scenario for the future that is meant to encourage change, though it may also portray the status quo – or the past – as attractive, thereby encouraging resistance to change. 
Either way, without a vision, it is difficult to lead others anywhere. 
Frederick Smith, CEO of Federal Express, has argued that “the primary task of leadership is to communicate the vision and values of an organization.” 
But one must be cautious about visions. 
Sometimes leaders think that vision can solve most of their problems, but the wrong vision – or an overly ambitious vision – can do damage. 
George H.W. Bush was faulted (and faulted himself) for not having what he called “the vision thing.” 
When pressed by his staff to speak more boldly and expansively, he replied, “It’s just not me.” 
After the shock of the September 2001 terrorist attacks, his son, George W. Bush, developed a far more ambitious vision. 
As one former adviser put it, he was “irresistibly drawn to Big Ideas like bringing democracy to the Middle East, Big Ideas that stood in sharp contrast to the prudent small ball played by his father.” 
Yet the elder Bush turned out to have had the better foreign policy. 
Some aspiring leaders think that they must proclaim a vision that overawes their followers. 
In practice, however, a successful vision often arises from the needs of the group, which are then formulated and articulated by the leader. 
The vision that Martin Luther King, Jr., expressed in his “I Have a Dream” speech, for example, was deeply rooted not only in America’s professed values of equality and inclusion, but also in African-Americans�� experience of subordination and exclusion. 
At the same time, the pressure to articulate a vision can get a leader into difficulty. 
As one university president put it: “Everyone asks, ‘What’s your vision?’ 
But you offend many people and get into trouble by answering too quickly. 
The smart response at the beginning is, ‘What do you think?’ and then listen before you articulate your vision.” 
A successful vision has to be attractive to various circles of followers and stakeholders. What plays well with one group may not sit well with another. 
And, to be sustainable, a successful vision must also be an effective diagnosis of the situation that a group faces. 
Leaders must get the question right before proposing answers. 
To choose goals and articulate them in a vision, they need not only to solicit input from their followers, but also to understand the context of their choices. 
They must be able to assess reality accurately. 
The boldness of a vision varies with the type of leadership involved. 
Leaders of social movements can call forth larger visions than public officials can. 
A movement leader can promote a vision that is miles ahead of his followers, while a prime minister with multiple objectives and responsibilities must maintain a continuous dialogue with the public, which keeps him or her from moving too far ahead of citizens. 
After former US Vice President Al Gore lost his bid for the presidency in 2000, he became a leader of the social movement to combat global climate change, and his style changed from pragmatic to inspirational and prophetic. 
Analysts judge a government leader’s vision in terms of whether it creates a sensible balance between realism and risk, and whether it balances objectives with capabilities. 
Anyone can produce a wish list, but effective visions combine inspiration with feasibility. 
Critics of former British Prime Minister Tony Blair, for example, acknowledged that his ability to articulate a vision was one of his great strengths as a leader, but complained about his lack of attention to detail. 
Similarly, two twentieth-century US presidents, Woodrow Wilson and George W. Bush, were good at articulating an ambitious foreign-policy vision, but were poor at refining and reshaping their vision when they encountered implementation challenges. 
Both promoted democracy, but both did so in a manner that generated a backlash against democracy promotion. 
Of course, prudence is not enough. 
Sometimes leaders need to stretch the boundaries of realism to inspire their followers and call forth extra effort, as Winston Churchill did in Great Britain in 1940. But, without a degree of prudence based upon comprehension of the context, visions turn from grand to grandiose and undercut the values that they seek to promote. 
Like Franklin Roosevelt, who acted very cautiously in trying to persuade American opinion to abandon isolationism in the 1930’s, Merkel has proceeded cautiously on saving the euro. 
She faced public skepticism about using German funds to bail out the Greek economy. 
Her coalition was divided on the issue, and her party lost state elections. 
If she had acted more boldly, she might have lost even more support, but the steps that she agreed to remained insufficient to reassure markets. 
At the end of October, however, she finally articulated a vision of the future of Europe that persuaded the German Bundestag to agree to a package of measures to save the euro. 
Whether she waited too long – and whether her vision will prove convincing – will be determined in the coming months. 

Angela Merkel’s Challenge to Europe 
BERLIN – German Chancellor Angela Merkel has never been regarded as an especially inspiring orator. 
In fact, she has a reputation for gently talking her audiences to sleep. 
But that all changed a few days ago. 
While campaigning in the Munich suburb of Trudering, Merkel, speaking from a beer tent, delivered a powerful speech that dominated headlines on both sides of the Atlantic. 
With Whitsunday fast approaching, many wondered if Merkel had been inspired by the Holy Spirit. 
If not that, she may have been spurred to action after having spent many hours in the company of US President Donald Trump during the recent NATO and G7 summits. 
And Germany’s upcoming federal election undoubtedly loomed large in her mind. 
But Merkel’s speech was no mere “beer tent Goslar.” 
She was not emulating former Chancellor Gerhard Schröder, who, campaigning in the town of Goslar in January 2003, declared that Germany would not participate in the Iraq War, regardless of whether it had the United Nations Security Council’s backing. 
There was far more to Merkel’s Trudering speech than mere electioneering. 
“The times when we could completely rely on others are, to an extent, over,” Merkel said, “and therefore I can only say that we Europeans must really take our fate into our own hands.” 
Some might take this to mean that Germany is turning away from the transatlantic alliance, pursuing a strategic realignment, or entering a new era of insecurity. 
But Merkel’s statement meant nothing of the sort. 
Anyone who has been paying attention has known for some time that the historic changes taking place today did not originate in Germany. 
Rather, they are emanating from the geopolitical West’s two founding members: the United States and the United Kingdom. 
Prior to Trump’s election and the UK’s Brexit referendum, Germans saw no reason to make fundamental changes to the existing geopolitical order. 
But those two events have shaken the foundation upon which Europe’s peace and prosperity have rested since World War II. 
Britain’s decision to withdraw from the European Union could inspire other countries to follow suit. 
And Trump’s isolationist, “America first” agenda implies that the US will abdicate its leadership role in the world, and possibly abandon its security guarantee for Europe. 
Europeans avoided a disaster of historic proportions in last month’s French presidential election. 
If Marine Le Pen of the far-right National Front had been elected, she would likely have brought an end to the euro, the EU, and the common market. 
Continental Europe would now be mired in a deep economic and political crisis. 
Those who still support a unified Europe need to take a lesson from the near-miss in France, lest history repeat itself. 
Europe must expand its capacity to act, and to respond to crises and changing circumstances. 
That was the message at the heart of Merkel’s remarks. 
At the same time, Merkel was addressing ongoing debates among pundits and press commentators about what Brexit and Trump’s presidency might mean for the future of transatlantic and European cooperation. 
When Merkel observed that “we Europeans must really take our fate into our own hands,” she was stating a plain fact. 
Still, only those who have hopelessly underestimated Merkel could think that she would turn away from transatlanticism. 
Merkel knows that the US is indispensable to Europe’s security. 
But she also knows that Trump’s presidency has cast doubt on both the American security guarantee and the shared values that, until now, firmly linked the two sides. 
A careful analysis of Merkel’s words shows that she was not questioning the future of the transatlantic alliance. 
Rather, she was calling for a stronger Europe. 
Merkel knows that if the US sacrifices its place at the top of the international order for domestic political reasons, it will not be replaced by a new leading power, nor will a new world order emerge. 
What we will have is a power vacuum, marked by chaos. 
And as the world becomes less stable, we Europeans will have no choice but to come together to defend our interests. 
No one else will do it for us. 
So, Merkel’s speech was first and foremost about strengthening Europe. 
And, fortunately, she has found a partner in French President Emmanuel Macron. 
Both leaders want to stabilize the eurozone, restore economic growth, and strengthen Europe’s security with a joint border force and a new refugee policy. 
Merkel surely meant what she said in Trudering. 
Given the tumultuous international environment and the EU’s own recent close call, there is no alternative but to take action, and her remarks could have far-reaching consequences for Germany’s place in the EU, and for its relationship with France. 
Germany’s current role as the eurozone’s penny-pinching know-it-all is at odds with the new approach that it must take. 
To demonstrate real leadership within the French-German partnership, Germany will have to make political concessions. 
Moreover, just because Trump says something does not automatically mean that it is wrong. 
Germany, and Europe generally, will have to do far more to ensure its own security, and to reinforce the transatlantic bridge that sustains European peace and prosperity. 
And as we pursue that project, we must stick firmly to the liberal values that make us the envy of aspiring democrats, and the bête noire of authoritarians, around the world. 

No More Resets 
WASHINGTON, DC – With Ukraine in turmoil and the United States and Russia warily eyeing each other’s every move, the world seems to be on the brink of a prolonged confrontation similar to the Cold War. 
But is it? 
Russia, accusing the West of supporting a coup d’état by “fascists” and “terrorists” in Kyiv, has annexed Crimea, tested an inter-continental ballistic missile, and reserved the right to intervene militarily in eastern Ukraine to protect the Russian population there. 
The US has sanctioned Russia and called Crimea’s annexation illegal. 
But it has also called for cooperation to resolve the situation peacefully and declared that Ukraine should pursue productive ties with both Russia and the West. 
So far, the Russians have dismissed those sentiments. 
Yet this is not the start of Cold War II, and Russia is not America’s antagonist. But nor is it an ally. 
The two sides disagree on a wide range of questions. 
Yet there are critical international issues – such as Iran and Syria – on which progress is not likely without some cooperation. 
The challenge is not to try again to “reset” bilateral relations, but rather to find – once the Ukrainian crisis abates – a basis on which the two sides can collaborate where their interests overlap. 
But we have to be realistic. 
Every US President since 1992 has sought to refashion the US-Russian relationship and move it beyond the ideological and military competition of the Cold War. 
But each attempt, while producing some results, ended in disappointment. 
A key reason is that the US and Russia have fundamentally different understandings of what an improved relationship would look like. 
In reviewing these efforts, one constant stands out: the US has made the most progress on issues where Russia has felt that America respected its interests. 
The first diplomatic reset, at the end of George H.W. Bush’s presidency, took major steps toward defusing the nuclear dangers resulting from the collapse of the Soviet Union. 
As a result, Russia remained the only nuclear state in the post-Soviet space, while legislation pioneered by then-US Senators Sam Nunn and Richard Lugar helped to secure nuclear sites, scientists, and materials. 
The second reset, under President Bill Clinton, was more ambitious: a full-fledged effort to create a partnership that promoted substantial US involvement in Russia’s economy and evolving political system. 
It also involved persuading a reluctant Russia to support two NATO interventions in the Balkans. 
But the second war over Kosovo in 1999 led to the collapse of that reset. 
The third reset came at Russian President Vladimir Putin’s initiative, when he offered Russian assistance in the campaign in Afghanistan after the terror attacks of September 11, 2001. 
But the expectations of George W. Bush’s administration were very different from Putin’s. 
Russia sought an “equal partnership of unequals,” especially US recognition of Russia’s sphere of influence in its neighborhood. 
Instead, Russia had to deal with the Iraq war, NATO enlargement to the Baltic states, pro-Western revolutions in Ukraine and Georgia, and the Bush administration’s “Freedom Agenda” aimed at global democratization. 
The Kremlin viewed with great apprehension the specter of regime change, especially in its neighborhood. 
By the time this reset ended in the rubble of the 2008 Russia-Georgia war, the US had come to view Russia as a global spoiler. 
The Obama administration’s reset – the fourth since the Soviet collapse – was the most successful, at least during the president’s first term in office. 
With more realistic expectations, it achieved results: the New START arms control treaty, tougher sanctions on Iran, cooperation on transportation to and from Afghanistan, and Russia’s accession to the World Trade Organization. 
But this reset was largely facilitated by the personal ties between Obama and Dmitri Medvedev, who served as President for four years before Putin returned in 2012 for a third term. 
When Putin blamed the US for the opposition demonstrations that accompanied his return, the relationship began to deteriorate. 
With the Kremlin’s decision last August to grant temporary asylum to the former US intelligence contractor Edward J. Snowden, the reset ended. 
The ideological antagonism of the Cold War may be gone, but Russia now defines itself as an alternative civilizational and social model. 
Pointedly, Russia claims that it is a status quo power, contrasting itself with the US, which it calls a “revisionist” power seeking to destabilize the world by promoting regime change, especially in the Arab world. 
The Kremlin also views the US as a source of instability in the former Soviet space and blames the West for the Ukrainian unrest. 
Nonetheless, the US-Russia relationship has always been compartmentalized, and there are pressing multilateral issues on which the US must work with Russia, particularly Syria, Iran, and Afghanistan (where the US will withdraw its troops this year). 
Whereas the US and Russia disagree about how to end the Syrian civil war, they have cooperated in disarming Syria of its chemical weapons. 
Similarly, neither side wants to see Iran develop a nuclear-weapons capability. 
The past two decades of bilateral great expectations, followed by serial disappointments, suggest that, once the Ukraine crisis is resolved, more modest and realistic US goals toward Russia are in order. 
Unless and until both countries move beyond the legacies of the Cold War, the 1990’s, and today’s crisis, any reset – regardless of whether it originates in the White House or the Kremlin – can at best manage more effectively what will remain a limited and trying relationship. 
For the US, this means recognizing Russia for what it is: a large, still-important country with a hybrid political system and serious domestic economic, demographic, and political challenges. 
Russia’s post-Soviet evolution is a matter of many decades and will not occur in a linear fashion. 
Its worldview is sharply at odds with that of the US and will remain so for the foreseeable future. 
But a cold peace is preferable to a cold war. 

Anger in America 
HONG KONG – Many blame today’s populist rebellion in the West on the far right, which has won votes by claiming to be responding to working-class grievances, while stoking fear and promoting polarization. 
But, in blaming leaders who have seized on popular anger, many overlook the power of that anger itself, which is aimed at elites whose wealth has skyrocketed in the last 30 years, while that of the middle and working classes has remained stagnant. 
Two recent analyses get to the heart of the issues at play, particularly in the United States, but also in the rest of the world. 
In his new book Tailspin, the journalist Steven Brill argues that US institutions are no longer fit for purpose, because they protect only the few and leave the rest vulnerable to predatory behavior in the name of the free market. 
According to Brill, this is an upshot of America’s meritocracy: the best and brightest had the chance to climb to the top, but then essentially pulled the ladder up behind them, as they captured democratic institutions and used them to entrench special privileges for themselves. 
The author Matthew Stewart agrees, arguing that, “the meritocratic class has mastered the old trick of consolidating wealth and passing privilege along at the expense of other people’s children.” 
Stewart shows that in the mid-1980s, the share of US wealth held by the bottom 90% of the population peaked at 35%; three decades later, they owned just 20%, with almost all of what they lost going to the top 0.1%. 
The 9.9% between these two groups – what Stewart calls the “new American aristocracy” – comprises what used to be called the middle class. 
In 1963, the 90% would have had to increase their wealth sixfold to reach the level of the 9.9%; by the 2010s, they would need 25 times their wealth to reach that level. 
Much of the US population is working harder than ever, yet has suffered a decline in living standards, compounded by high levels of household debt and, in many cases, lack of health insurance. 
The top 10% have easy access to higher education that will enable their children to have the same privileges as them; the bottom 90% must work much harder to cover sky-high tuition fees, and typically graduate with a heavy debt burden. 
The top 10% receive first-rate medical care; the bottom 90% often do not, or must pay an exceptionally high price for it. 
Taxation is supposed to level the playing field. 
But US Republicans have long pushed to lower taxes on the rich, arguing that lowering marginal tax rates will promote investment, employment, and economic growth, which will cause the wealth to “trickle down” to the rest of society. 
In fact, tax cuts for the rich merely further entrench their advantages, exacerbating inequality. 
Making matters worse, the poor pay more indirect taxes (on land, real estate, and consumer goods), and the bottom 20% of the US population pays more than twice what the top 1% pays in state taxes. 
Add to that the challenges posed by automation and robotization, not to mention increasingly frequent and intense natural disasters, and it is not hard to see why so many people are so furious. 
According to Stewart, the 9.9% is “the staff that runs the machine that funnels resources from the 90% to the 0.1%,” happily taking its “cut of the spoils.” 
But the inequality that this machine generates can have serious consequences, as it spurs social discontent and, as we are seeing in the US today, erratic policymaking. 
As the Austrian historian Walter Scheidel argues, inequality has historically been countered through war, revolution, state collapse, or natural disaster. 
Avoiding such a dramatic event would require the 10% to do a much better job of advancing the interests of the 90%, in terms of income, wealth, welfare, and opportunities. 
Yet a combination of economic myopia and political polarization has led many instead to try to divert popular anger toward immigrants, China, and trade (including with close allies). 
As a result, the entire world is now caught in an escalating protectionist war that nobody will win. 
It is true that, historically, internal contradictions and imbalances have often led to interstate conflict. 
But that is not inevitable. 
Rather, the outcome depends on the quality of leadership. 
In the US, for example, George Washington, Abraham Lincoln, and Franklin D. Roosevelt succeeded in strengthening their country because they recognized the need to address internal divisions in the light of America’s core values, global position, and long-term goals. 
US President Donald Trump has exploited popular anger to advance his own interests. 
But he did not create that anger; 
America’s elites have spent decades doing that, creating the conditions for a figure like Trump to emerge. 
Now that Trump is in charge, the conditions of the 90% are set to deteriorate further. 
His approach to trade, in particular, will not only fail to help the people he purports to represent; it will also destroy the sense of fairness and stewardship that has historically bound the masses to their leaders. 
Blaming outsiders is politically expedient. 
But the only way to “make America great again” is by addressing its internal injustices. 
No import tariff or border wall can do that. 

Rethinking Animal Agriculture 
TASMANIA – In mid-July, as a brutal drought decimated crops, some European dairy and meat farmers were forced to cull their herds early to reduce the number of animals they needed to feed. 
Such desperate decisions will become routine in a world where heat waves will be longer, hotter, drier, and more frequent. 
That is why now is the right time to start a serious conversation about animal agriculture. 
The animal agriculture industry is not only vulnerable to the observed and predicted effects of climate change; it is also a key contributor to the problem. 
In fact, the farming of animals for meat and dairy products accounts for 16.5% of global greenhouse-gas emissions. 
Moreover, if we treated climate change as the emergency it is and were serious about slowing the pace of warming over the next 20 years, the proportional influence of livestock farming would be even greater. 
This is because the animal sector is responsible for a third of all anthropogenic methane and two-thirds of nitrous oxide emissions – both potent greenhouse gases that trap more heat than carbon dioxide. 
Beyond climate pollution, a staggering 60% of all biodiversity loss is attributable to land-use changes from animal cultivation, and as much as 80% of all land in farming is devoted either to raising animals or to growing their feed. 
There is also the stubborn reality that eating so many animals is making us less healthy. 
We can do better without great sacrifice. 
According to recent research by Chatham House, for example, people in developed countries would accept reducing their meat intake if convenient and tasty alternatives were available for about the same price. 
To be clear, I am not suggesting that everyone should become vegetarian or vegan (though it is indisputable that these diets are better for the environment, contribute less to climate change, and are healthier). 
Nor do I think that governments should mandate limits on meat consumption. 
But for policymakers who accept that there is little downside and significant upside for most people in developed countries to reduce their meat intake, there are plenty of cost-effective solutions to nudge us in that direction. 
For starters, governments can – and should – stop subsidizing factory farming and the crops that fatten up factory-farmed animals for slaughter. 
By supporting polluting and inhumane practices, countries are literally paying companies to undermine the emissions targets set by the 2015 Paris climate agreement. 
Instead, governments can – and should – shift subsidies to encourage the production of more climate-neutral, protein-rich crops, like pulses and other legumes. 
By planting more beans, peas, and lentils, farmers would help combat climate change by lowering greenhouse-gas emissions, and would benefit from crops that are more resilient to drier, warmer weather. 
Government support can also be diverted from factory meat farms toward development of plant-based “meats” and other meat alternatives. 
The market for “clean meat” is nascent but burgeoning, and the public response has been overwhelmingly positive to some of the more advanced products on the market. 
Still, just like the fossil-fuel industry, meat industry advocates have pushed policymakers to block the mainstreaming of alternatives. 
In many countries, lobbyists have even successfully championed the prohibition of meat-based names for plant-based products. 
For example, France recently banned terms like vegan “burger” and “steak” on the grounds that only animal meat could be either. 
Such policies are a clear barrier to reducing meat consumption, and they contradict countries’ commitment to meet their Paris-agreement targets. 
The meat sector’s support for them puts it in the same role as the fossil-fuel industry, focused on nothing more than its own bottom line. 
Or can producers engage as a positive force in the transition away from meat? 
When it comes to climate policy, food and agriculture should be treated more like energy and transportation, both of which have clear guidance on how to address climate change and reduce emissions. 
Policies to limit the planet-warming effects of agriculture and food production are long overdue. 
We are two years away from the first major report to gauge progress under the Paris agreement. 
Countries will have to show what they have done and what they are doing to cut their emissions. 
But they will leave a huge part of the problem untouched if they fail to address the production and consumption of meat and dairy. 
Meanwhile, European farmers will suffer through more droughts like the one they endured this summer, as will other food producers around the world. 
It will become harder and harder to farm meat and dairy products, and early culls will become the new normal. 
As with fossil fuels, our only choice is to overcome the industry’s defensive resistance and transform our food system so that it enables diets that are healthier, cleaner, and every bit as delicious. 

Argentina’s Sovereign Bondage 
WASHINGTON, DC – Sovereign debt has been back in the news recently, this time because of a United States Supreme Court ruling concerning Argentine debt. 
As a result of the ruling, a complicated issue is likely to become even more so. 
Sovereign debt has been a major feature of the international financial system for centuries. 
Kings borrowed, often internationally, to finance wars and other expenditures. 
When they couldn’t pay, as sometimes happened, sovereigns defaulted. 
Today, sovereigns are more often democratically elected governments, but they still borrow. 
And they still occasionally find themselves in situations in which their debt has become unsustainable and they need outside help to continue to meet their debt-service obligations. 
When private firms (or subnational governments) become insolvent, there are normally legal bankruptcy procedures to determine what to do. 
Without such procedures, a market economy would be unable to function. 
In part, this is because creditors would otherwise stop extending credit and demand repayment at the first sign of trouble. 
This is because the first creditors to be paid would receive the full amount owed to them, leaving less for later creditors – and thus creating an incentive for all creditors to rush for the exits even before debt servicing had become impossible. 
Moreover, in many cases, the value of the troubled entity’s assets as a going concern is greater than it would be if the assets were sold separately. 
In such cases, all creditors would be better off with a debt write-down than with dissolution. 
Bankruptcy law thus protects creditors from each other by preventing an outcome that would needlessly harm all of them. 
In the case of sovereign debt, however, there is no binding international law that permits bankruptcy. 
Though some routine practices have emerged as international capital markets have grown, they remain ad hoc. 
Given the uncertainty involved, and that sovereign debtors can repay domestic-currency debt simply by printing money, creditors have typically demanded significantly higher interest rates if bonds are not issued under the law and in the currency of an advanced country – often the United States or the United Kingdom. 
When a sovereign decides that its foreign debt is unsustainable, the government and its creditors have had to negotiate among themselves about what to do. 
For sovereign bonds held by other sovereigns, the Paris Club of creditor countries has developed procedures for handling the debt. 
But when private creditors hold sovereign debt, organizing them creates a new challenge with each episode. 
When debt is unsustainable, there are several possible negotiating outcomes. 
Sometimes, debt-service payments are rescheduled and perhaps stretched out over a longer period, thus giving the debtor country time to regain its ability to pay. 
Sometimes, creditors agree to exchange the old bonds for new ones, which have either a lower face value or lower interest payments. 
Few governments refuse to pay at all in any form. 
Argentina defaulted on its debt in 2001. 
After several difficult years, the country managed to negotiate an exchange of outstanding bonds for bonds with a considerably lower face value. 
About 93% of creditors accepted the exchange and received new bonds with a face value that was about one-quarter of that of the old bonds. 
After 2005, Argentina maintained debt service on the new bonds. 
But some creditors held out, and sued Argentina in New York (as the bonds were issued under New York law). 
Argentine bonds (like most others) had a so-called pari passu clause that committed the government to treat all bondholders alike. 
The holdouts claimed that, if the new bonds were being serviced in full (as they were), equal treatment required that the holdouts should receive the full amount owed to them (including not only interest but also principal). 
The US Second Circuit Court of Appeals ruled that Argentina was bound to honor its obligations to the holdout bondholders in the same proportion (namely 100%) as the holders of the exchange bonds. 
It was that ruling that the Supreme Court recently upheld. 
Under the court order, Argentina may not pay the holders of the new bonds unless it also pays the holdouts, and no US financial institution can serve as an intermediary to make payments for Argentina. 
As a result, Argentina must either pay the holdouts in full or default on the new bonds. 
Regardless of how the current impasse is resolved, the ruling raises many questions for issuers and holders of sovereign debt. 
If creditors now believe that holding out makes it more likely that they will receive full value at a later date, restructuring sovereign debt and restoring a debtor economy’s normal functioning will be more difficult. 
Since the Argentine crisis, most new bonds have been issued with collective action clauses (CACs), under which bondholders are obliged to accept restructuring if a specified share (usually around 70%) agree to it. 
As time passes, there are fewer and fewer outstanding bonds that do not contain CACs. 
But CACs may not resolve the problem entirely, because a vote would be required for each separate bond issue, and a holdout position could be achieved by buying up the blocking percentage of a small issue. 
It is also possible that language will be found in future bond issues that replaces the pari passu clause but provides sufficient assurance to bondholders to let the market function much as it did until the current ruling. 
Until the euro crisis, it was generally believed that problems servicing sovereign debt occurred only in emerging markets and the least developed countries. 
The US Supreme Court’s decision on Argentina adds a new wrinkle, and may well further increase the risk attached to holding sovereign debt – and this to the cost of issuing it. 

Post-Shutdown America 
WASHINGTON, DC – After 16 days of closed museums, half-empty federal buildings, unnaturally quiet streets, and tens of thousands of workers left in existential limbo, the lights are back on in Washington. 
But, while the shutdown of the United States government, initiated by radical congressional Republicans seeking to block implementation of President Barack Obama’s health-care legislation, is over – at least for now – three enduring lessons have emerged. 
First, the next time the eurozone crisis flares up, the US will simply have to bite its tongue; after all, the shutdown spectacle revealed pathologies no less severe than those that have characterized the European Union’s economic and political negotiations over the past five years. 
Irresponsible behavior threatening the health of the global economy? 
Check. 
Political posturing and outlandish claims foreclosing any possibility of compromise? 
Check. 
Breathtaking brinkmanship and 11th-hour decision-making leaving all bystanders wondering whether this time the cart might in fact go over the cliff? 
Check. 
Few countries in recent years have been spared the pain of their domestic political spectacles being broadcast around the world. 
The United Kingdom had mass riots in London just two summers ago; strikes and demonstrations have paralyzed Paris on a regular basis; 
Greece has a rising fascist party; 
Mexico City has been practically shut down by teachers occupying the central square; and Turkish Prime Minister Recep Tayyip Erdoğan resorted to violence in June to quell weeks of protests against his increasingly autocratic ways. 
Among non-democracies, China had the Bo Xilai scandal, which was worthy of a spy novel, with illicit affairs, rampant corruption, murder, and a senior police official’s dramatic quest for asylum in a US consulate. 
Against this backdrop, the US government shutdown looks a little different. 
Yes, it was a clear symptom of deep political dysfunction, stemming from the politicized demarcation of electoral districts and the distorting effects of America’s campaign-finance system. 
Nonetheless, it is noteworthy that the entire crisis played out according to constitutional rules. 
Indeed, as the deadline for raising the debt ceiling neared, Henry Aaron, a distinguished senior fellow at the Brookings Institution, pointed out that the US Constitution requires the president “to spend what Congress has instructed him to spend, to raise only those taxes Congress has authorized him to impose, and to borrow no more than Congress authorizes.” 
Honoring all three of those legal obligations simultaneously is impossible if Congress refuses to raise the debt ceiling, but raising the debt ceiling without Congressional approval, though illegal and an impeachable offense, was the least-bad choice. 
Even in the face of deeper political polarization than the US has seen in many decades (and, in many places, a visceral hatred of the country’s first African-American president), Americans and their politicians understand that breaking the rules means dissolving the constitutional glue that holds the polity together. 
This understanding means that the cure for the current dysfunction will be found at the ballot box rather than in the streets. 
And it is this collective commitment to the law governing how political power can be exercised that is the essence of liberal democracy. 
But Americans are in no mood to celebrate. 
Indeed, the second conclusion to be drawn from the US government shutdown is the virtual disappearance of American triumphalism. 
Chest-thumping exceptionalism has given way to a more sober patriotism, in which ordinary citizens recognize the long-term trends eroding the promise of equal opportunity, particularly the shortcomings that beset the country’s health-care, education, and infrastructure systems. 
The anger of Tea Party Republicans (like the anger of Occupy Wall Street protesters) reflects a sense that nothing but dramatic, even revolutionary, measures can change the system. 
In response, however, more pragmatic voters are increasingly irate about political paralysis and their governing institutions’ inability to respond to the preferences of a clear majority of the population. 
In the midst of the shutdown, the Republican Party’s popular approval rating sank to barely a quarter of the national electorate, a historic low, while the approval rating for Congress as a whole stood at just 5%. 
The final lesson of the shutdown is that political systems of every kind benefit from the addition of women. 
Many commented on the critical role played by six women senators – Republicans and Democrats – in reaching the compromises needed to end the crisis. 
These women have maintained relationships with one another across the partisan divide, while those among their male colleagues have steadily deteriorated, giving way to competitive grandstanding and vituperation. 
Equally important, these women felt – and acted upon – the moral necessity of actually governing. 
In the words of Senator Susan Collins, a Republican from Maine who first put together the outlines of a deal and took it to the Senate floor, the shutdown “hurt all the small businesses” around Acadia National Park in her home state, “and that is plain wrong.” 
The world should note. 
Women are not necessarily better than men at governing, but they often have different perspectives and habits of engagement that can be essential for cutting through the standoffs created by the need to defend male egos. 
They are also often more focused on the plight of actual people than on the promotion of grand principles, preferring concrete progress to abstract victory. 
From parliaments to peace negotiations, adding women improves outcomes. 
The US government is back at work, for now. 
Negotiations for a real budget that all sides can live with are beginning. 
And assessments of how the shutdown will affect the Republican Party’s fortunes in the 2014 midterm elections are rife. 
But the country’s social and economic divisions will ultimately find political solutions, through elections and the efforts of millions of Americans to achieve fundamental reforms. 
As frustrating and embarrassing as the last several weeks have been, it could have been much worse. 

Another Argentine History 
On top of Argentina’s bestseller list is The Myths of Argentine History, Volume Two. 
In second place is The Myths of Argentine History, Volume One. 
Both, of course, are by the same author: Felipe Pigna, a 45-year-old historian. 
It is a rare event when two volumes of the same book top the Argentine bestseller list. 
Nevertheless, the same thing occurred with the first and second volumes of The Argentines, another look at our history by Jorge Lanata, one of Argentina’s best known journalists. 
Argentina has been on the front pages of the world’s newspapers, with stories describing an economic and social crisis born of debt default and devaluation, unemployment and widespread poverty. 
The subplot is inevitably how a Latin American country that once seemed more like Europe developed all the maladies of its Southern neighbors: a state unable to guarantee public health and education; a growing gap between rich and poor; the disappearance of the middle class; and the decline of industrial capacity in favor of producing raw materials. 
All of this is undeniable, and yet the most important change in Argentina – one that occurred a few years earlier – went unnoticed. 
Argentina had been, since the end of the nineteenth century, the country of the future. 
Millions of immigrants arrived with great expectations of making a country – and making it their country. 
The new land offered them the promise of a magnificent tomorrow. 
Argentina was always at the point of taking off, always at the door of greatness. 
In the collective imagination, this idea was expressed in the phrase, “The country that we all deserve.” 
The immigrants would raise a new generation of doctors, lawyers, and engineers. 
For the individual, Argentina embodied the dream that one’s children would live better – and their children even better. 
This idea of promise and progress was central to Argentines. 
It was the basis for Argentina, the paradigm for our lives and our way of living. 
It lasted for nearly a century, until the early 1980’s. 
Since then, not even campaigning politicians have dared to promise a prosperous future. 
Slowly, many parents began to accept the fact that their children would be worse off. 
The notion of Argentina as a country with infinite promise became a desaparecido, the name given to those who disappeared in the dirty war of the 1970’s. 
We lost our organizing principle and no other idea has replaced it. 
We no longer have a guide, an idea of how to think about our country, how to understand it and how to imagine who we are and who we can become. 
Argentina has become a country without direction. 
It hasn’t been easy living without knowing who we are, and it became even more difficult to live this way as we watched our world crumble. 
This absence of animating purpose, of faith in the future, has made us hungry for our past. 
Faced with the loss of the nation’s central idea and desperately in search of a new one, millions of Argentines have become interested in their history. 
These books tell our history in an odd way. 
To begin with, they reject all academic conventions, such as footnotes, graphics, or judicious explanations in favor of agreeable journalistic narratives pitched to a mass audience. 
They appeal, above all, to the logic of popular suspicion that perhaps becomes inevitable when a proud nation is suddenly laid low: Pigna, like Lanata, presents a history full of conspiracy, lies, treason, and corruption. 
Both books apply to the past the lens that Argentines are accustomed to using when they look at the present: the lens of the press. 
If these books can be read as developing a new idea of Argentina, it is the idea that there is little to trust, that everything is fraudulent, and that leeriness must be our worldview. 
This is an interesting view – and perhaps a necessary one – but it is also dangerous. 
The process of developing and coming to terms with a new national idea cannot begin and end with a rejection of the very concept. 
Argentina’s ongoing search is an untold, fascinating story of how we Argentines imagine and define who we want to be in the next decades. 
In an uncertain age, whoever defines us first, whether a politician, an artist, or an intellectual, will merit a prominent place in our history. 

Another Balkan High Noon 
With the world focused on Iraq, North Korea, and a possible clash with Iran over nuclear weapons, Kosovo has fallen off the radar screen. 
That inattention will end soon; a decision about the province’s fate is looming. 
The United States and its European friends have repeatedly stated their intent to make the difficult decision before the end of the year on whether to separate Kosovo from Serbia. 
This decision – crucial to the future of an unstable region – will test Western determination and unity. 
Negotiations this year in Vienna, brokered by the United Nations, showed that an agreed settlement between Serbia and Kosovo on “final status” will not happen. 
Talks continue, but, as UN negotiator and former Finnish President Martti Ahtisaari diplomatically told the Security Council, they are effectively dead. 
No Serbian leader will agree to Kosovo’s independence, because nationalism remains the dominant political force in the country. 
Indeed, Prime Minister Vojislav Kostunica, the apostle of Serbian nationalism, has been trying in every way to undermine Kosovo’s interim government. 
He is rushing to hold a national referendum this month on a new constitution without serious parliamentary debate or the usual public education. 
The main purpose of his new constitution is its preamble, which enshrines Kosovo as an inalienable part of Serbia. 
Kosovo’s ethnic Albanians have proclaimed that they will not accept any tie to Serbia, no matter how tenuous. 
Throughout the 1990’s, they virtually opted out of Serbian-run Kosovo by creating parallel institutions. 
Their forced mass exodus in 1999 and NATO’s subsequent intervention, which ended Serbia’s rule and established a quasi-state under UN administration, has made anything other than independence intolerable. 
Some time over the next month or two, the Balkan Contact Group — the US, UK, France, Germany, Italy, and Russia – will consider Ahtisaari’s recommendations on Kosovo’s final status and possibly propose a solution to the Security Council, which must make the final decision. 
In public, all Contact Group members have tried to leave the question of Kosovo’s final status open, but informally the US and some of its allies have told the two parties that they will propose independence this year. 
Some members of the Security Council – particularly Russia and China – are opposed to or skeptical of an imposed settlement, and few governments favor dividing up another country’s territory, however compelling the circumstances. 
Whether the Security Council will approve independence largely depends on averting a Russian veto, which will require considerable diplomatic effort. 
The nature of the independence bestowed is also important. 
An independent Kosovo must be secured and its minorities protected. 
Northern Kosovo, now largely under Belgrade’s control, must not be partitioned off in all but name. 
In the interest of reducing the blow to Serbia, the Security Council must avoid granting independence in ways that are so contorted that the new state cannot effectively function. 
If the Security Council fails to reach a decision on final status, it will produce a GRAVE situation: Kosovo would declare independence unilaterally, and all nations would have to make up their mind whether or not to recognize the new state. 
If that happens, it is likely that the Serbs of North Kosovo would declare their own independence. 
At a minimum, Serbia would campaign strongly against recognition. 
In fact, Serbia’s government is already trying to persuade the West to postpone a decision until mid-2007. 
It claims that if Kosovo is granted independence, the ultranationalist Radical Party will come to power in the next elections, and believes that holding elections as early as this year will cause the Contact Group to delay a proposal to the Security Council. 
Moreover, the government has encouraged the leaders of Bosnia’s Republika Srpska to threaten to hold their own referendum on separation from a still fragile Bosnia. 
And they continue to push -- unsuccessfully -- for Ahtisaari’s removal in order to prolong the Vienna talks. 
The timing of the constitutional referendum appears to be a part of this delaying strategy. 
Some hope that postponement will stimulate violence in Kosovo and further encourage Western reconsideration of independence. 
That tactic may be working. 
Many European Union countries are worried about the implications of taking away a country’s territory, as well as the impact of Kosovo’s independence on Serbian democracy. 
Given Serbia’s political instability, they question the harm of a short-term postponement – albeit mostly self-inflicted. 
But delay only offers more room for Kostunica to find ways to make a Security Council decision more difficult. 
The West must ignore Belgrade’s siren song. 
Serbian politics will be chaotic and unstable for the foreseeable future, and Serbian politicians will attempt to present this as an excuse to avoid facing the loss of Kosovo. 
Likewise, there will be problems establishing ties between Serbia and Kosovo under any circumstances. 
But failure to proceed definitively now on Kosovo’s final status will produce a worse Balkan situation, one that blocks Serbia’s move toward the West and ultimate membership in the EU, condemns Kosovo’s ethnic minorities to dangerous ambiguity, and imperils fragile states like Bosnia and Macedonia. 
No realistic solution exists for Kosovo but independence. 
If Serbia wants to join the West, it must not forsake that opportunity by trapping itself in its nationalist past. 


Another Buddha Destroyed 
NEW YORK -- The world watched in horror when Taliban forces destroyed the monumental Buddha statues in Bamiyan, Afghanistan in 2001. 
Political and cultural leaders from around the globe condemned the attacks. 
Offers of help poured in. 
Everyone asked: will the world be ready next time? 
Alas, the answer is a resounding “no.” 
In northwest Pakistan’s Swat valley armed Islamist militants recently attacked one of the oldest and most important sculptures of Buddhist art. 
Dating from around the beginning of the Christian era, and carved into a 130-foot-high rock, the seated image of the Buddha was second in importance in South Asia only to the Bamiyan Buddhas. 
This, moreover, was the second attack in less than a month. 
Murtaza Razvi of Pakistan’s Dawn newspaper has pointed out that the image that was attacked was not in a remote area. In fact, it was next to the central road that runs through the valley. 
Despite repeated requests by Pakistani archeologists to the local authorities to protect the seated Buddha and other sites, especially after the first attack, no action was taken. 
In fact, militants were able to carry out their work – drilling holes in the rock, filling them with explosives, and detonating them – in broad daylight. 
They did this not once, but twice. 
The first time, the image escaped heavy damage because of the militants’ incompetence. 
The second time, they were more successful, destroying not only the sculpture’s face, but also its shoulders and feet. 
As if that were not enough, there are now reports of a third attack. 
In 1995, I traveled through the Swat valley to study the area’s Buddhist treasures. 
Carved in the cliff side or protected in small beautiful museums, these remarkable objects were the pride and joy of local Muslims, followers of the faith for more than a millennium. 
As a non-Muslim, Indian woman, I was able to travel through the region without any fear and received warm support from local residents. 
People of all stripes welcomed me, and were often willing to take me to important Buddhist sites. 
Today, little over a decade later, the atmosphere is so poisoned that neither local community leaders nor the local police came forward to protect these monuments or claim them as their own. 
Even sadder is that while Pakistani newspapers widely condemned these attacks and criticized local officials’ indifference, there has been almost no coverage in the international press. 
Can it be that after the Iraq war, and the dismaying images of looting at the National Museum in Baghdad, we have lost our capacity to be outraged? 
Or is it that we have become so inured to bad news surrounding the war on terror that we have no desire to know more? 
There is a vast number of important Buddhist sites in Swat and other areas of northwest Pakistan. 
At this point, all of them are under threat of destruction, thanks to the influential voice of the Islamist leader Mullah Fazlullah, whose father-in-law, Sufi Mohammad, founded one of the extremist orders. 
This order was responsible for bringing more than 10,000 jihadi fighters to Afghanistan to fight alongside Taliban soldiers against the United States in 2001. 
While Mohammad is believed to be languishing in a regional jail, Mullah Fazlullah operates with impunity, using the radio to spread a message of hatred and intolerance. 
It is time that the world community not only registers its outrage against such destruction of cultural treasures, but also joins those Pakistanis who are desperately trying to pressure their government to preserve – for their sake and ours – their pre-Islamic cultural heritage. 
If the world does not act this time, we risk losing one of the most precious legacies of early Buddhist history. 

Another Fine Italian Mess 
ROME – A game of smoke and mirrors: this is how Italy’s current electoral campaign appears – both to Italians and the wider world. 
Of course, there is nothing new in this: Italy’s political dynamics have always baffled participants and observers alike. 
That a small centrist party may now get the courts to postpone the election merely adds to the usual confusion. 
But one thing that seems certain this time is the likely result. 
Silvio Berlusconi, the leader of the right-wing alliance, will win his third election (he has also lost twice), while the vote for the Senate is expected to produce a draw. 
In this case, Berlusconi’s forces could ally themselves with Pier Ferdinando Casini’s centrist Catholic party, or work to form a coalition with their center-left adversary, the Democratic Party, led by Walter Veltroni. 
The latter option, once unthinkable, is possible because Berlusconi is not running the type of inflammatory electoral campaign that he has in the past. 
The sharp tone and fierce partisanship of the past 13 years have been cast aside. 
Berlusconi seems to be fully aware of the difficulty of governing Italy. 
He needs to be. 
With public debt expected to stand at 102% of GDP in 2009, rising inflation, and growth of just 0.2%, it will be difficult to keep electoral promises. 
Sagging public infrastructure and an inability to attract foreign capital have made the economic outlook even worse. 
In addition, while the state-owned companies Telecom, Autostrade, and Alitalia were subject to an extremely interventionist policy by Romano Prodi’s outgoing government, they have little to show for it. 
Plans to build a high-speed train connecting Italy with northern Europe continue to experience delays. 
The garbage crisis in Naples remains unresolved putting the international reputation of one of Italy’s most famous products, mozzarella, at risk. 
With global financial markets in crisis and Europe’s economy softening, the challenges for the new Italian government will only become greater. 
Foreign policy, too, may prove difficult to manage. 
New activism on the part of France and the United Kingdom, along with Germany’s emergence as a central player in EU affairs, risk marginalizing Italy’s influence even more. 
If Berlusconi returns to office, he will again seek strong cooperation with the United States, the path now being followed by French President Nicolas Sarkozy and British Prime Minister Gordon Brown. 
If he succeeds, something like a six-nation “contact group” (France, the UK, Germany, Spain, Poland, and Italy) will have formed to determine EU relations with the US. 
This leadership will be needed, because, regardless of who wins the US presidential election, the next American administration is bound to ask for greater EU participation in addressing international conflicts. 
But Italy, unlike France, is in no position to substitute the beauty of Carla Bruni, Sarkozy’s new wife, for real prestige. 
To achieve that, the country must promote itself as a motor of serious European reform, without neglecting the debate on the member states’ role in the EU’s economic choices. 
Here Italy could join the more nationally minded economic policies now being pursued by France and the UK, to the detriment of EU technocrats in Brussels. 
The one thing that seems certain from the upcoming vote is that – barring any last-minute surprises – the billionaire Berlusconi will re-assert his hold over Italian politics. 
In fact, he has been Italy’s true ruler for the past 13 years. 
Born as a “plastic party” to unite a gamut of political forces following the implosion of the Christian Democrats in 1994, Berlusconi’s Forza Italia showed itself to be a very cunningly structured movement, with a strong and stable consensus among its members on core doctrine. 
In this election, Berlusconi decided to open the door to Gianfranco Fini’s right-wing National Alliance, with which he founded a new group, People of Freedom – the only party allied with Umberto Bossi’s Northern League – in an effort to ensure that the government is backed by an even stronger and more cohesive core party. 
The Catholics of the Union of Christian and Center Democrats and the post-fascist right of Francesco Storace have left the coalition. 
A similar choice was made on the left by Veltroni, whose Democratic Party is now allied with Antonio Di Pietro’s Italy of Values Party. 
The Communist Party and the Socialists have left the coalition that Prodi forged to gain his parliamentary majority. 
The purpose of this realignment was to create more stable large parties, but further changes are likely. 
Strong pan-European center-right and center-left political parties are likely to contest the European Parliament elections in the spring of 2009. As Europe presses ahead with reform, the question for Italy is whether smoke and mirrors is all its politics have to offer. 

Another Oil Shock? 
The Middle East conflict - Palestine versus Israel now, Iraq to come - creates serious risks for growth and financial stability. 
To understand the severity of these risks, let's work backwards from what is unlikely to happen. 
All grandstanding notwithstanding, neither Iraq nor Iran will mount an effective oil embargo on the US. 
First, their commitment to oppose America does not include a pre-emptive sacrificing of essential oil sales that keep their run-down economies churning. 
Both countries recognize that if they refuse to sell America oil, other countries (Russia and Mexico) will take up the slack. 
So an Iran/Iraq oil embargo is bound to be ineffective. 
All that will happen is that they will lose money. 
Even Saddam is smart enough to avoid this trap, so he and Iran's ayatollahs will posture and grandstand and thus move oil prices up a bit. 
Nothing more serious than that. 
To their Arab spectators, grandstanding is almost as good a proof of leadership as actually doing something. 
But the real risk to oil is open hostilities or sabotage of oil installations. 
What matters here are not oilfields, but pipelines, refineries, and oil ports - they influence spot price because they govern the immediate availability of oil. 
As we saw in the Gulf War, the risk of damage to oil refineries raised spot prices dramatically: $40 back then. 
This time around the price would certainly go higher because the risks including sabotage are much more widespread. 
This would almost certainly happen if and when the US takes on Iraq. 
In principle Saudi Arabia could offset a price rise by hiking its production. 
But it is one thing for Saudi Arabia not to join an embargo, and it is another to undercut oil politics by flooding the market in a pro-US move. 
Saudi Arabia is unstable, so it will keep trying to straddle both sides. 
Use of America's vast strategic oil reserve will dampen world oil prices for a time, but when all is said and done, once hostilities with Iraq start, oil prices will shoot up. 
When may any of this happen? 
America demands that Iraq meet three criteria - promoting regional stability, ending its pursuit of weapons of mass destruction, and ending suppression of its own people - to which Saddam will never assent. 
Saddam is, thus, doomed and it does not matter whether Europe cooperates with the US or not. 
The problem, as in 1991, is the absence of a suitable government to fill the vacuum, one acceptable to the region and to the US. 
That issue and the unresolved Palestine-Israel debacle are holding off immediate action. 
This means that oil prices will remain high (possibly higher) for some time to come. 
Consumers in the US, but also in Europe and Asia, will be hit by an oil shock. 
They will have less spending power, demand will fall and growth will slow, as during the Gulf War. 
A slowdown of the US and world economy, in turn, is bad news for asset markets and will put central banks in the awkward position to having to decide between fighting recession through easier money or fighting the inflation caused by rising oil prices by raising interest rates. 
If tightening is the rule, say sayonara to a rising stock market. 
True, oil is far less important to the industrial economies nowadays than in the past, but an extra $10 dollars per barrel in costs is a huge shock that will hit hard. 
Suppose all this happens, what will happen to the dollar? 
So far, the dollar remains strong relative to Europe--not very strong, a rate of $1.10 for the Euro was never an equilibrium rate--but it was sustained by US relative growth performance and by the image of a US as the world's economic superstar. 
The superstar role is enforced by military prowess but it becomes seriously damaged when it gets bogged down in worldwide disapproval, from greens, anti-globalizers and peaceniks, European cynicism, and the angry "Arab Street". 
With an economy that will not better Europe in such adverse circumstances, and with a tarnished US image, the dollar will be at risk of a serious fall. 
The only thing that might hold the dollar at near to present levels is a bad economic performance in Europe. 
After all, blaming the US is predominantly a way of shifting light from Europe's failed leadership to another country's struggles for a safer world (including the continued existence of Israel) and a stronger world economy. 
After all, the problems that beset Mr. Schroeder, or Mr. Berlusconi, and Messieurs Chirac and Jospin, aren't the stuff that shapes the world. 

Another Roller Coaster Ride for Exchange Rates in 2009? 
CAMBRIDGE – 2008 has been an exceptionally tumultuous year for exchange rates. The American dollar soared, the Japanese yen went into orbit, the euro fell to earth, and the British pound crashed, leaving a giant crater. 
Emerging-market currencies were hammered, as were “commodity currencies” such as the Canadian, Australian, and New Zealand dollars, and the South African rand. 
Indeed, the currency of any country that is significantly dependent on commodity exports has suffered. 
So, what will the New Year bring for exchange rates? 
While the only safe bet is continuing high volatility, we are at an unusual juncture where the short- and long-term trends appear to be very different. 
In the short run, the yen and the dollar continue to benefit from a flight to safety, as panicked investors seek a place to hide. 
The yen and dollar are also being bolstered as central banks elsewhere continue to cut interest rates towards zero, territory that the yen and dollar policy rates already occupy. 
Thus, even though the United States and Japan will not be raising interest rates anytime soon, lower foreign rates still make the dollar and yen relatively more attractive. 
Commodity prices will continue to be soft, pulling down commodity currencies, and bolstering the yen especially, since resource-poor Japan is so reliant on commodity imports. 
Normally, short-run and long-run exchange-rate trends point in the same direction. 
Indeed, a huge body of research shows that for most major currencies, the best forecast of next week’s exchange rate, next month’s exchange rate, or even next year’s exchange rate is simply today’s exchange rate. 
But times are hardly normal. 
The continuing financial crisis is putting steady upward pressure on the dollar thanks to its safe haven status. 
Commodity prices are plumbing new depths. 
Yet the financial crisis will eventually end, as will the global recession. 
Neither will end soon, mind you, perhaps not for another seven or eight months, if not longer. 
But, when more normal growth does resume, the recent trends underpinning dollar and yen appreciation will disappear. 
Perhaps international investors will be grateful to the US for its aggressive monetary and fiscal stimulus, which will accelerate sharply when President-elect Barack Obama takes office on January 20. 
But investors will still worry about what happens when the bills come due. 
Many emerging markets will also want to engage in countercyclical macroeconomic policy, but they are hemmed in by concerns of fiscal sustainability and fear of rampant inflation. 
European fiscal policy is constrained by the Maastricht Treaty, while European monetary policy is rather single-mindedly devoted to price stability.ampnbsp; 
True, China, with its vast foreign exchange reserves, has the wherewithal to spend as much on countercyclical macroeconomic policy as anyone. 
But China’s rulers know that their highly repressed banking system is vulnerable as the country continues to pursue gradual financial liberalization, and that foreign currency reserves may be needed for recapitalization. 
Thus perhaps no region will be as expansionary as the US. 
For the moment, global investors cannot get enough of US treasury bills, as collapsing interest rates for short-term US securities demonstrates. 
But a lot of this demand is driven by short-term, crisis-fueled fear. 
As markets normalize, surely investors will look around and realize that the US has vastly increased its debt in fighting the downturn, possibly by several trillion dollars. 
At the same time, today’s falling prices (or “deflation”) will eventually morph into inflation as aggressive monetary easing takes its toll on price stability. 
Admittedly, some of the major currency’s movements during the past year can be regarded as normalizing. 
On a purchasing power basis (a crude measure of what different currencies can buy in terms of real goods), the euro was absurdly overvalued at $1.60, just as the yen was absurdly undervalued at over ¥120 to the dollar. 
Commodity currencies had to come off their meteoric highs. 
Thus, the past year’s currency alignments have, to some extent, simply brought relative domestic price levels and exchange rates into better balance. 
But by now, emerging-market countries’ exchange rates, and even more so commodity currencies, have probably overshot on the downside.ampnbsp; 
Over the long run, globalization and economic convergence will resume, and emerging market and commodity currencies will have to strengthen. 
At the same time, the prospect of higher US inflation and massively higher US public debt levels must eventually weigh on the dollar, as does the still worrisome US trade deficit. 
As for the yen, it, too, will suffer from the continuing rise in Japan’s public debt levels, which are already among the highest in the world. 
Continuing weakness in the Japanese economy will eventually hit the yen. 
If today’s constellation of exchange rates represents some excessive dollar and yen appreciation, especially against emerging-market currencies, when it will unwind? 
That depends on when you think the financial crisis will abate, and the timing of that is as hard to predict as exchange rates. 
But come it will. 
Then watch for the dollar and yen to boomerang. 

Another Year of Panic? 
PARIS: Brazil's currency devaluation earlier this year, and its difficulties since in stabilizing the real as well as its stock market, have demonstrated the importance, if any new proof was needed, of financial markets and their volatile mood swings. 
There can no longer be any doubt that investor panic can provoke economic meltdown, as it did in Asia and Russia last year, still threatens to do in Brazil and across Latin America, and may yet stage an encore in Asia over worries about a devaluation in China and the spiral of competitive devaluations that could follow. 
Now in its eighth year, the almost obscene economic growth in the United States could be used to illustrate the inverse proposition. 
On at least two occasions in 1998, bad news could have set off a crash in American stock prices and an economic recession. 
After all, the majority of observers (analysts, too) had concluded that Wall Street was overvalued, even before the onset of the Asian crisis. 
Stock prices did, of course, decrease as a result of the Asian panic and its financial ramifications, but America's stock markets have since then recouped all of their initial losses and even moved on to new record highs. 
The impeachment trial in the US Senate of President Clinton and the political crisis that could have amplified both political and economic uncertainty, leading to another sharp fall in prices on Wall Street, also had absolutely no effect on Americans and how they spend and save their money. 
Investors and consumers did not lose their optimism. 
Nothing seems able to shake them. 
Could the American public's faith in Alan Greenspan, chairman of the Federal Reserve Board, America's central bank, be a satisfactory explanation? 
He's done a solid job, but I doubt that this can be the only cause of American buoyancy. 
So what factors get economies going and keep them humming? 
In Europe, the advent of the Euro has certainly not invigorated economic growth, and does not look likely to do so anytime soon. 
The best news of the year is that, at long last, the Continent's consumers seem to be emerging from their long depression. 
In contrast to the United States, however, the boost in consumer demand has not become an engine of growth. 
Why not? 
Probably because the macroeconomic policies of Europe's governments were, and remain, overly cautious and have not dared provide the necessary kick-start. 
Having satisfied the Maastricht criteria, fiscal policies have been geared to putting on brakes. 
Across "euroland" monetary policy was focused on the harmonization of interest rates, not on their level. 
So there is little reason to be terribly optimistic for the near future, neither for growth nor job creation. 
Still, there is an upside here. Europe's relatively newfound fiscal discipline probably was a blessing in maintaining market confidence, and thus in immunizing the Continent, during the Asian, Russian, and Brazilian financial panics. 
In Japan, sad to say, that sort of fiscal austerity remains something of a curse. 
Sad to say, Japan continues to teach us that some of history's most painful episodes do repeat themselves. 
A series of vicious cycles that one had hoped had vanished with the end of the Great Depression have shown themselves to be relevant today. 
Deflation increased real interest rates and curbed economic activity, thereby setting off another round of deflation, and so on. 
With interest rates reaching almost zero, this liquidity trap has paralyzed Japan's monetary policy. 
Keynesian remedies (now being tardily applied) and an expansionary fiscal policy have not been able to jump-start the Japanese economy and bring about a return of optimism. 
Is it because the Japanese government delayed action for too long before accepting budget deficits? 
No one really knows. 
Is it possible to discern a common thread to all of these developments? 
I see two of them. 
The first one is the importance of what Keynes called "animal spirits." 
In all cases, they have been at the center of today's economic successes and failures. 
The second one is that it is quite difficult to tame those animal spirits. 
Why did international investors panic in South East Asia? 
Why has, say, Poland been relatively immune to the panic caused by Russia while the rest of Eastern Europe caught cold? 
Why do American consumers seem to be immunized against pessimism? 
Is there a macroeconomic policy that could boost the still shaky optimism of consumers? 
How can Japan restore optimism and jump-start its economic engine with no macroeconomic tools left to use? 
These are the questions on which governments must now focus. 
On the answers will depend the health of the global economy. 

Answering Iran 
NEW YORK – We know quite a bit about Iran’s nuclear program, and what we know is not encouraging. 
Iran is reported to be enriching uranium at two sites – some of it to levels of 20%, far beyond what is required for civilian purposes. 
The International Atomic Energy Agency also reports that Iran is carrying out research to develop designs for nuclear warheads. 
In short, Iranian officials’ claims that their nuclear program is aimed solely at power generation or medical research lacks all plausibility. 
Yet there is still much that the world does not know. 
For example, we do not know whether Iran is conducting secret activities at undisclosed sites, or when Iran could develop a crude nuclear weapon, with estimates ranging from several months to several years. 
We also do not know whether Iran’s divided leadership has decided to develop nuclear weapons, or to stop just short, calculating that the country could derive many of the benefits of possessing nuclear weapons without running the risks or incurring the costs of actually doing so. 
Either way, Iran’s activities confront the world with difficult choices. 
None is costless or risk-free. 
Moreover, neither the costs nor the risks are possible to calculate with precision. 
One option would be to accept and live with a nuclear or near-nuclear Iran. 
This assumes that Iran could be deterred from using its weapons, much as the Soviet Union was during the Cold War. 
Missile defenses could be expanded; the United States could extend security guarantees so that Iran would understand that the threat or use of nuclear weapons would be met with a decisive American response. 
But there are significant drawbacks to acquiescing to a nuclear-armed Iran. 
Given its use of subversion and terrorism against its adversaries, a nuclear-armed Iran might be even more assertive. 
It might also transfer nuclear-related material, technology, or weapons to allies (Hugo Chávez’s Venezuela, for example) or radical organizations such as Hezbollah and Hamas. 
And, rather than promoting caution and stability in the region, Iran or Israel could be tempted to strike first in a crisis. 
Nor can it be assumed that Iran’s divided and radical leadership would always act rationally, or that proliferation would stop with the Islamic Republic. 
If Iran develops its nuclear weapons, countries such as Saudi Arabia, Turkey, and Egypt would be tempted to purchase or develop nuclear weapons of their own. 
A Middle East with multiple fingers on multiple triggers is as good a definition of a nightmare as there is. 
At the opposite end of the spectrum of policy choices is a preventive attack: a military strike (most likely by Israel, the US, or both) against sites in Iran associated with its nuclear program. 
The core objective would be to interrupt the emergence of a threat that is still gathering. 
Here, again, there are considerable drawbacks. 
Even a successful preventive attack would at most set back Iran’s nuclear program a few years. 
It would almost certainly be rebuilt, presumably in underground, fortified sites that would make future attacks far more difficult to carry out. 
Moreover, Iran could well retaliate immediately against targets that could include Saudi Arabia, Iraq, Afghanistan, and other US interests worldwide – as well as sites on American territory. 
Hezbollah could attack Israel. 
If all of this happened, the price of oil would skyrocket owing to shortages and fears, possibly driving much of the world economy, already in a precarious position, into recession. 
An armed attack could also cause the Iranian public to rally around the government, reducing the chances that a more responsible leadership might emerge. 
It thus comes as little surprise that the US and much of the world have explored alternatives, including regime change in Iran. 
But, however desirable that might be, no policy can assuredly bring it about. 
As a result, the principal policy toward Iran centers on the imposition of increasingly painful economic sanctions. 
The rationale underlying this policy is that Iran’s leaders, fearful of losing political control as popular discontent increases over the sanctions’ effects, will recalculate the costs and benefits of their nuclear activities and become receptive to negotiated constraints in exchange for removal of sanctions. 
That could happen. 
International support for sanctions is considerable and increasing. 
It is becoming more difficult for Iran (whose economy depends to a large extent on oil exports of more than two million barrels a day) to find customers – and especially customers willing to pay full price. 
Meanwhile, Iran’s currency is weakening, pricing imported goods out of many Iranians’ reach. 
Additional elements of current policy that seem to be having an effect are clandestine efforts aimed at impeding Iran’s ability to import sensitive technologies. 
Viruses have infiltrated computers in Iran, reducing the efficiency of the centrifuges central to enriching uranium. 
It is also possible that the assassination of selected individuals has slowed the advance of Iranian nuclear efforts. 
But slowing Iran’s efforts is not the same as stopping them. 
So one question is whether existing sanctions can be extended and tightened; here, China and Russia must determine their priorities. 
Another question is whether any sanctions will be enough to persuade Iran’s leaders to accept verifiable limits on their nuclear program. 
And a third unsettled issue is how long Israel or the US will tolerate Iranian efforts before striking militarily. 
Indeed, the only certainty may be that Iran’s nuclear program will be a major international issue in 2012 – quite possibly the most important one. 

The New Natural World 
YORK – Sixty-six million years ago, a celestial body crashed into the Earth and wiped out the dinosaurs. 
With that, there was space for the rise of mammals and, eventually, the evolution of a tool-wielding, linguistically capable, bipedal ape with the power, some argue, to have almost as transformative an impact on the planet as that celestial body. 
As we enter the so-called Anthropocene epoch, in which human activity is a dominant influence on the climate and environment, we must take a hard – and nuanced – look at how we are using that power. 
Many believe the world is becoming increasingly “unnatural” – tainted by humanity. 
But, given that humans evolved within the world’s biological system, everything we do – killing off species, razing forests, polluting the atmosphere – can be regarded as a natural product of the evolutionary process. 
By this logic, the world does not become any less natural as we change it. 
It could be argued that environmentalists and conservationists, in their efforts to return the environment to a past version of itself, are fighting against nature. 
The reality of today’s world is that it is impossible to separate completely the human from the non-human influences on biological communities. 
Throughout the history of life on Earth, ecological and evolutionary processes have been the means by which the biological world survives environmental change. 
Instead of automatically resisting such change, therefore, environmentalists and conservationists should distinguish between “good change” and “bad change.” 
The challenge is to define good and bad. 
Most people would agree that the complete extinction of a species is a bad thing. 
Yet, when it comes to the decline of some species (say, disease-susceptible island birds), we may choose not to intervene, not least because, realistically, it would be hard to resist their replacement by evolutionarily “superior” models (such as pathogen-resistant birds). 
I personally would favor the extinction of the most virulent human pathogens. 
Nonetheless, conserving as many species as possible makes sense. 
Since the descendants of today’s living species will go on to comprise all future ecosystems – formed when humans or planetary processes generate novel conditions – there is a clear advantage to having more kinds of them. 
Indeed, more species function as “spare parts” for the environment, and conservation amounts to a kind of long-term environmental insurance policy. 
More contentious is the transportation of species to new ecosystems. 
Gardeners may love to plant exotic species in their backyards, but communities often treat the “foreign” plants that begin to grow in the countryside as invasive – a dangerous departure from the past. 
Sometimes, those plants are doused in herbicides, usually to no avail. 
So strong is the resistance to such changes that the United Kingdom waits about 1,000 years before it regards a species, like the rabbit, as native. 
In Australia, there is a debate over whether the dingo – introduced thousands of years ago – should be counted as indigenous. 
Yet, so far, the roughly 2,000 non-native plant and animal species in the UK have not directly caused any native species to become extinct, with most causing little or no harm at all. 
In fact, the importation and spread of immigrant species has increased biological diversity in most regions of the world in the last few centuries. 
These regional increases – including a 20% rise in the number of plant species growing wild in European countries and the United States, and a doubling of plant species in the Hawaiian Archipelago and other Pacific islands – could be interpreted as a positive development. 
Given this – and the impracticality of trying to repatriate most foreign species – newcomers should be accepted more or less immediately. 
That certainly makes more sense than engaging in millennia-long debates about them, in the name of some idealized past version of the natural world. 
There is no going back, because entirely new species continually come into existence, particularly through the hybridization of transported species. 
More new hybrid plants – such as cord grass and monkey flowers – have evolved in the UK in the last three centuries than have gone extinct throughout Europe over the same period (according to existing records). 
The situation is similar in North America. 
This evolution of new human-associated species means that, in the Anthropocene, we are effectively creators of new biological diversity as well as destroyers of the old. 
We no longer merely depend on the planet; we are now also shaping it. 
Recognizing that, we should certainly resist changes that are unequivocally “bad.” 
But when it comes to biological changes that will enable species to adjust to environmental changes – the process by which species have always survived – we should take a more accepting and even pro-active approach. 
As I argue in my recent book Inheritors of the Earth: How Nature is Thriving in an Age of Extinction, we are living in a “new natural world.” 
It is still driven by the same ecological and evolutionary dynamism as always. 
The difference is that that dynamism is now fueled largely by the activities of a human population of 7.6 billion (and rising). 
Species will move into new human-created environments and evolve alongside us. 
We should let them. 
Maybe we should even help them. 

Anti-Americanism and Europe's Identity 
The question of how the international community should deal with Saddam Hussein, Iraq's ruthless dictator, is rightly the year's dominant theme. 
In one sense it has been answered: the United Nations is and will continue to be involved, and the United States has and will continue to play the leading role. Containment of Iraq by intervention is the method that now seems most likely. 
In the process of reaching this decision, however, several long simmering issues have come to the fore. 
One, of course, concerns the supposed "clash of civilisations": how do we keep a focused and limited conflict between the UN and Iraq distinct from the need to maintain a relationship of dialogue between world religions? 
Another question may seem more parochial to some but is of equal significance globally: what are we to make of the differences between Europe and America that have become so manifest in the Iraq debate? 
Is this its own form of "clashing civilizations." 
No doubt, the differences that now exist between America and Europe are profound, and are not confined to a temporary cooling of German-American relations or to a half-serious exchange of invectives about "gun-slinging America" and "old Europe." 
Indeed, even intellectuals are caught up in the emotional undertones. 
When the British historian Timothy Garton Ash, writing in the New York Review of Books, distinguished the US and Europe by paraphrasing the title of a bestselling book, saying that "Americans are from Mars, Europeans are from Venus," some American readers objected to the sexual portrayal of an effiminate Europe and a macho America. 
Yet Garton Ash is among the most pro-American Europeans, whose views of a united Europe are closer to those of his many friends in the "new", postcommunist Europe than to those of France or Germany. 
But views about what Europe is and should be are actually at the heart of today's anti-Americanism. 
The countries of Europe are moving inexorably towards the "ever closer union" that the founding Treaty of Rome demands. 
There is a single market, crowned--at least for most EU members--by a single currency; there is a constitutional convention that will propose a new basic treaty, perhaps by mid-June; there are ambitious plans for a common foreign and security policy and other common policies. 
So what is the problem? 
One problem--probably the most fundamental--is that European integration no longer fires the imagination of Europeans. 
There are still Euro-enthusiasts, but among the peoples of Europe indifference and, in some places, mild hostility, prevails. 
Even the common currency has so far not really caught on; it is useful, but somehow "foreign." 
Underneath all this is the niggling question: why are we doing all this? 
What is the compelling reason that provides the driving force behind "ever closer union"? 
In the 1950s, the answer was simple: Europeans should never go to war against each other again. On the contrary, they need to stand together against the Communist threat. 
Fifty years later, these goals are no longer relevant. 
Economic union has benefited many; but it is not the type of driving force that inspires. 
More recently, the idea of a "European identity" has been in vogue. 
The EU supposedly expresses it. 
But how is this identity to be defined? 
This is the point at which many begin to use language that defines Europe by distinction, indeed by contrast, to the US--Europe as the anti-America. 
Throughout the Cold War, what was then the Soviet Union provided a raison d'être for European union; in the era of globalization, it is the US. 
Comparing and contrasting the two sides of the Atlantic has a long pedigree, of course. 
European culture and American commerce, European profundity and American materialism--these are ancient and tired themes. 
Most would today use more subtle language. 
They point to what they regard as America's unfettered capitalism and hold up Europe's social market economies against it. 
Internationally, Europe likes multilateral arrangements, whereas America prefers to go it alone. 
From the other stereotypical point-of-view, Europe wallows in the complexity of issues whereas America likes simple lines of conflict--you are either for us or against us. 
It is easy to see how the belief in such differences affects the Iraq debate. 
The result is that many leading Europeans begin to define their intentions for the Union by contrasting it to the USA. 
The euro must hold its own against the dollar--and hurrah!--it is now above parity. 
European foreign policy must provide a counterweight to that of the hyperpower across the Atlantic. 
On closer scrutiny, such facile phrases are deeply disturbing. 
The eight (and now nine or more) governments that signed the Aznar/Berlusconi/Blair statement supporting the US realized this. 
They insisted on undivided Western values, the values of enlightenment and liberty. 
These values are shared between Europe and America--and some others--and they are worth defending in an alliance. 
When it comes to values, any attempt to divide the American and the European traditions is misguided. 
It may be that these shared values make it more difficult to find the much-desired European identity. 
But feeding anti-American sentiment, however unintentionally, into the European construction would be intellectually dishonest, morally suspect, and politically dangerous for all freedom-loving Europeans. 

Europe’s Crisis Starts at Home 
LONDON – Deep divisions within Europe are increasingly threatening the values upon which the European project of “ever closer union” is based. 
In 2015, during the refugee crisis, many commentators saw a divide between German Chancellor Angela Merkel’s Willkommenskultur (welcoming culture) and Hungarian Prime Minister Victor Orbán’s vision of ethnic purity: a Western Europe of bridges versus an Eastern Europe of walls. 
But another threat to European unity comes from within individual countries. 
In Germany, talks to form a center-left, center-right coalition have broken down. 
In the Netherlands, it took Prime Minister Mark Rutte 208 days to form a new government after elections in March. 
In the United Kingdom, the political establishment is in disarray over Brexit. 
And in Poland, white nationalists and neo-Nazis recently staged a massive march through the streets of Warsaw. 
Which gulfs are wider – those between member states or those within them? 
The answer to that question matters a great deal. 
If Europe’s biggest problem is that it is divided along national borders, then liberal-leaning countries like France and Germany could try to change the balance of power within increasingly illiberal countries. 
Every EU country agreed to a set of liberal-democratic standards (part of the so-called Copenhagen Criteria) when it joined the club. 
But, over time, the governments of Hungary and Poland have decided that they no longer want to abide by the rules. 
One solution could be to create a smaller club with better benefits. 
Countries that wish to join this privileged inner circle would have to agree to a new – or rather, the original – set of rules; and countries that break the rules would be left out. 
There would finally be a cost to breaching EU standards. 
But this solution could work only if the biggest problem is the divide between member states. 
As for the divisions within member states, consider Germany. 
After the federal election in September, Merkel embarked on a fascinating experiment, in which she tried to unite her center-right Christian Democratic Union (CDU), its more nativist sister party, the Christian Social Union (CSU), the pro-business Free Democrats (FDP), and the left-wing Greens. 
Merkel is a talented negotiator, and far better suited to write about “the art of the deal” than others we won’t bother mentioning. 
But it remains to be seen if she can heal the divisions in her own country. 
While the Greens would like to uphold the Willkommenskultur, the CSU’s position on migration is closer to that of the Visegrád Group (the Czech Republic, Hungary, Poland, and Slovakia). 
In fact, at the height of the refugee crisis in 2015, the CSU hosted Orbán at one of its party conferences. 
Moreover, while the Greens are European federalists who support greater economic solidarity with Greece and Italy, the FDP channels the fiscal discipline of the Finns, the Dutch, and German Swabians. 
They are staunchly opposed to deeper European economic integration. 
Many hoped that Merkel would succeed in forging a “Jamaica” coalition (named after the colors of that country’s flag). 
But, in the end, the experiment failed. 
The FDP abandoned the talks out of frustration that, as its leader Christian Lindner put it, “The four discussion partners have no common vision for modernization of the country or common basis of trust.” 
Even without a Jamaica coalition, Germany still has a stable liberal majority in the Bundestag. 
The same cannot be said for the rest of the EU, where almost every other member state is now a “50-50 society”: half cosmopolitan, half communitarian. 
In these countries, the government at any given time represents whichever side won the latest round in an ongoing culture war. 
In the UK, for example, 52% of voters opted to leave the EU. 
The country is now hurtling toward an isolated state of provincialism and xenophobia, but its leaders keep telling the public that Britain will be better off on its own. 
For those who believe it, the fact that the UK will lose a say in EU decisions affecting its economic environment doesn’t seem to matter. 
France, on the other hand, has an energetic new pro-European president, Emmanuel Macron, who is committed to preparing his country for the years ahead. 
And yet France is not much more cosmopolitan than Britain. 
In the first round of the presidential election this spring, the nativist campaigns of Marine Le Pen, Jean-Luc Mélenchon, and Nicolas Dupont-Aignan collectively won 46% of the vote – almost as much as the UK’s “Leave” campaign. 
Clearly, the EU is both a society of states and of citizens. 
That means intra-national divides are as important as the diplomatic spats between countries. 
Earlier this year, a Brookings Institution report tried to determine if Europe is an “optimal political area,” a concept borrowed from economist Robert Mundell’s theory of “optimal currency areas.” 
The report concluded that cultural and institutional differences between EU countries have not changed much over the past three decades of European integration. 
But it also found that the divisions between countries are far smaller than the differences within countries. 
Or in other words, on the issue of freedom of movement, there is greater polarization between London and the British Midlands than between the UK and Poland. 
Creating a flexible or multi-tiered Europe could solve some short-term problems, by bringing together coalitions of the willing to address specific issues. 
But it could also introduce new dangers. 
After all, most European countries, regardless of what tier they are on, will still be 50-50 societies that could opt in or out of deeper integration with a single election or referendum. 
In the future, one cannot rule out the possibility that Le Pen will be elected president of France, or that the anti-EU Five Star Movement will come to power in Italy. 
By the same token, the more moderate Civic Platform might return to power in Poland. 
Confronting the intra-societal challenge to the European project will not be easy. 
It is a deep, generational problem that goes to the heart of national identity, history, and geography. 
No quick institutional fix can solve a problem like that. 

Immigration and the New Class Divide 
SINGAPORE – The British shadow minister for Europe, Pat McFadden, recently warned members of his Labour Party that they should try to make the most of the global economy and not treat immigration like a disease. 
As he put it, “You can feed on people’s grievances or you can give people a chance. 
And I think our policies should be around giving people a chance.” 
In a world increasingly dominated by grievances – against immigrants, bankers, Muslims, “liberal elites,” “Eurocrats,” cosmopolitans, or anything else that seems vaguely alien – such wise words are rare. 
Leaders worldwide should take note. 
In the United States, Republicans – backed by their Tea Party activists – are threatening to close the government down just because President Barack Obama has offered undocumented immigrants who have lived and worked in the US for many years a chance to gain citizenship. 
The United Kingdom Independence Party (UKIP) wants to introduce a five-year ban on immigration for permanent settlement. 
Russia’s deputy prime minister, Dmitry Rogozin, once released a video promising to “clean the rubbish” – meaning migrant workers, mostly from former Soviet republics – “away from Moscow.” 
Even the once famously tolerant Dutch and Danes are increasingly voting for parties that fulminate against the scourge of immigration. 
Always keen to assert the freedom to insult Muslims, the Dutch Freedom Party wants to ban all mosques. 
And the tiny and much-harassed opposition parties in Singapore – a country where almost everyone is descended from immigrants – are gaining traction by appealing to popular gripes about immigrants (mostly from India and China) who are supposedly taking jobs from “natives.” 
What can American Tea Party enthusiasts, Russian chauvinists, fearful Dutch and Danes, and Singaporean leftists possibly have in common that is driving this anti-immigrant sentiment? 
Retaining one’s job in a tightening economy is undoubtedly a serious concern. 
But the livelihoods of most of the middle-aged rural white Americans who support the Tea Party are hardly threatened by poor Mexican migrants. 
UKIP is popular in some parts of England where immigrants are rarely seen. 
And many of the Dutch Freedom Party’s voters live nowhere near a mosque. 
Anti-immigrant sentiment cuts across the old left-right divide. 
One thing Tea Party or UKIP supporters share with working-class voters who genuinely fear losing their jobs to low-paid foreigners is anxiety about being left behind in a world of easy mobility, supranational organizations, and global networking. 
On the right, support for conservative parties is split between business interests that benefit from immigration or supranational institutions, and groups that feel threatened by them. 
That is why the British Tories are so afraid of UKIP. 
Nigel Farage, UKIP’s leader, is less concerned with economic growth than with pursuing his extreme conception of national independence. 
On the left, opinion is split between those who oppose racism and intolerance above all and those who want to protect employment and preserve “solidarity” for what is left of the native-born working class. 
It would be a mistake to dismiss anxiety about immigration as mere bigotry or apprehension about the globalized economy as simply reactionary. 
National, religious, and cultural identities (for lack of a better word) are being transformed, though less by immigration than by the development of globalized capitalism. 
In the new global economy, there are clear winners and losers. 
Educated men and women who can communicate effectively in varied international contexts are benefiting. 
People who lack the needed education or experience – and there are many of them – are struggling. 
In other words, the new class divisions run less between the rich and the poor than between educated metropolitan elites and less sophisticated, less flexible, and, in every sense, less connected provincials. 
It is irrelevant that the provincials’ political leaders (and their backers) are sometimes wealthier than the resented metropolitan elites. 
They still feel looked down upon. 
And so they share the bitterness of those who feel alienated in a world they find bewildering and hateful. 
Populist rabble-rousers like to stir up such resentments by ranting about foreigners who work for a pittance or not at all. 
But it is the relative success of ethnic minorities and immigrants that is more upsetting to indigenous populations. 
This explains the popular hostility toward Obama. 
Americans know that, before too long, whites will be just another minority, and people of color will increasingly be in positions of power. 
At this point, all Tea Partiers and others like them can do is declare, “We want our country back!” 
Of course, this is an impossible demand. 
Short of unleashing massive and bloody ethnic cleansing – Bosnia, on a continental scale – Americans and others have no choice but to get used to living in increasingly diverse societies. 
Likewise, economic globalization cannot be undone. 
But regulation can and should be improved. 
After all, some things are still worth protecting. 
There are good reasons not to leave culture, education, lifestyles, or jobs completely exposed to the creative destruction of market forces. 
McFadden has pinpointed the central solution to globalization’s challenges: giving people “the tools to reap the benefits” of the globalized world, thereby making the “connected world work better for people.” 
The problem is that this call is more likely to appeal to the highly educated, already privileged classes than to those who feel disenfranchised in today’s global economy. 
This is a serious problem for political parties on the left, which increasingly seem to be speaking for the metropolitan elites, while provincial populists are pushing traditional conservatives further to the right by fishing in the dark waters of popular resentment. 

The Anti-Science Seed Treaty 
STANFORD – In September, the United States ratified the International Treaty on Plant Genetic Resources for Food and Agriculture, known as the International Seed Treaty. 
Like so many international agreements crafted under the auspices of the United Nations, it is severely flawed. 
Indeed, the Seed Treaty is a politically correct, anti-technology fiasco. 
To be sure, the treaty, which entered into force in 2004, emanates from some laudable intentions. 
But it is ultimately a jumble of pie-in-the-sky aspirations, translated into draconian legal constraints on the exchange of genetic resources (mainly seeds) among countries. 
The unreality of the treaty’s goals comes through in the official statement of its objectives: “the conservation and sustainable use of all plant genetic resources for food and agriculture and the fair and equitable sharing of the benefits arising out of their use, in harmony with the Convention on Biological Diversity, for sustainable agriculture and food security.” 
The guiding principle of the Seed Treaty is that genetic resources fall within the “sovereign right” of member states (that is, governments). 
This amounts to an explicit rejection of the long-standing understanding that genetic resources in plants and animals are the “common heritage of humanity.” 
It defies the notion that certain global resources, regarded as beneficial to all, should not be unilaterally exploited and monopolized by individuals, states, corporations, or other entities, but rather should be managed in ways that benefit all of humanity. 
The Seed Treaty was motivated by fear of “biopiracy” – the pilfering of the world’s genetic resources by agricultural seed companies, which could then claim patents on them and wield monopoly control. 
But, though accusations of biopiracy may have emotional appeal, impartial analyses have shown that they have little factual basis. 
In fact, biopiracy is rare – so rare that it can be dealt with directly. 
Instead, the world created a baroque, bureaucratic, politicized system that systematically inhibits scientific research, plant breeding, and the creation of intellectual property. 
The Seed Treaty achieves this by establishing a multilateral system for access to a negotiated list of agricultural genetic resources. 
The Seed Treaty also brought under the control of its parties and secretariat the 15 research institutions that comprise the Consultative Group of International Agricultural Research (CGIAR), an influential global research partnership. 
When a country ratifies the Seed Treaty, it agrees that its own seed banks – in the US, the repository at Fort Collins, Colorado – will adhere to the same rules as the CGIAR centers. 
But common rules are little help. 
Unfortunately, as a result of the Seed Treaty, countries increasingly treat their genetic resources like a dog treats a bone: no sharing allowed, even among their own scientists and plant breeders, while most international exchanges of genetic resources have been shut down over the last 12 years. 
The CGIAR centers have been able to continue exchanges of genetic resources, but the process is now much more complicated and demanding that it was before the Seed Treaty came into force. 
For the US, the precise impact of the Seed Treaty’s implementation is difficult to determine, not least because the treaty contains wishy-washy, ambiguous phrasing that obscures its meaning and requirements. 
What is clear is that the experience of countries that have implemented the treaty has not been particularly positive, unless those countries have a high tolerance for bureaucratic regulatory regimes that stifle innovation and development in the name of lofty aspirations. 
The Seed Treaty is cut from the same anti-capitalist, anti-science, anti-innovation cloth as the Convention on Biological Diversity (CBD). 
It also mirrors the flagrantly unscientific, anti-genetic-engineering Cartagena Protocol on Biosafety to the CBD. 
And it has much in common with the Nagoya-Kuala Lumpur Supplementary Protocol on Liability and Redress to the Cartagena Protocol – yet another anti-genetic-engineering screed, which accomplishes little except to frighten potential entrepreneurs away from agricultural biotechnology. 
It is overwrought, confusing, and complex – in short, inimical to innovations that could benefit the world’s poor. 
The Seed Treaty runs counter to science, agricultural development, and intellectual property rights. 
That, in the policymaking game, is three strikes – and should be an out. 
The US Senate, which ratified the Seed Treaty, should reconsider, as Article 32 of the treaty allows. 
Thereafter, the US State Department would notify the treaty’s secretariat, with official withdrawal taking effect a year later. 
President-elect Donald Trump, author of The Art of the Deal, has promised Americans that he will put an end to bad ones. 
Withdrawal from the Seed Treaty would be an auspicious start to making good on that pledge. 

Confronting a New Era of Anti-Semitism 
LONDON – Ambassador Ronald Lauder, the President of the World Jewish Congress, had much on his mind when we met in London on a rainy day in early March. 
The tall, distinguished 73-year-old art collector, homme d’affaires, and philanthropist was clear-minded about a number of issues, even on five hours of sleep. 
At the top of his list of concerns is a worrying upsurge of anti-Semitic incidents, not least in his native United States. 
These include threats to, or actual attacks on, synagogues and other Jewish institutions, and the desecration of graves in St. Louis, Missouri, and other cities. 
“Even in the US, the country with the strongest Jewish community in the diaspora,” Lauder laments, “anti-Semitism is alive and kicking.” 
Anti-Semitism comes in waves, and each historical epoch provides its motives. 
Christian anti-Semitism blamed Jews for the crucifixion of Jesus. 
This anti-Semitism, which systematically marginalized Jews in the medieval and early modern periods, was supplanted by a pseudo-scientific race-based discourse that culminated in Auschwitz. 
When the sheer enormity of the Jewish Holocaust was revealed, these ideas slithered back into the shadowy world of the extreme right. 
But the anti-Semitism rearing its head again in Europe now sometimes comes from the far left as well. 
Lauder, for his part, is particularly concerned about developments in Hungary, France, and the United Kingdom. 
In Hungary, dubious historical figures such as the Regent Admiral Miklós Horthy have been rehabilitated – and even commemorated – in domestic political discourse. 
Horthy persecuted Jews for decades before Nazi Germany invaded Hungary. 
Today’s far-right Jobbik party is his direct political heir. 
In France, the National Front’s Marine Le Pen has distanced herself from the morbid anti-Semitic obsessions of her father, Jean-Marie Le Pen, in favor of opportunistically attacking French Muslims. 
But she has still called for a ban on yarmulkes and kosher slaughter as part of a promise to crack down on public displays of religion. 
Should Le Pen win the presidency and make such discrimination a reality, Lauder hopes that all French men will take to wearing small skullcaps in a show of solidarity. 
Last but not least, in Britain, the Labour Party under Jeremy Corbyn has become a catchall protest party, and is now the political home for Palestinian Solidarity Campaign (PSC) activists, even though there are only 20,000 Palestinians in Britain. 
The PSC is the driving force behind the Boycott, Divestment, and Sanctions (BDS) movement, which often conflates opposition to Israel with hatred of Jews. 
BDS activists have picketed Jewish-owned businesses – from single shops in Glasgow to the retail giant Marks & Spencer – while making many university campuses increasingly uncomfortable for Jewish students. 
The movement’s frequent likening of Israel to apartheid South Africa is especially nasty, given that many South African Jews fought against apartheid, sometimes from within the ranks of the African National Congress. 
Lauder may be a worldly diplomat, but he is also ready to fight. 
He reports that, in the United Kingdom, there are ongoing efforts to contest local councils’ right to introduce “gestural” BDS motions aimed at banning procurement from Israeli businesses. 
And at the “street level,” the advocacy group Jewish Human Rights Watch maintains an excellent website that monitors PSC and BDS acts of intimidation. 
Lauder, during his time at the WJC, has personally enlisted world leaders of all stripes, from the late Venezuelan president, Hugo Chávez, to Russian President Vladimir Putin, to join the battle against anti-Semitism. 
Among Putin’s few redeeming qualities is a revulsion to anti-Semitism. 
And, as it happens, Russia’s Jewish community is thriving. 
Jewish kindergartens and other schools are full, and five new Jewish universities have opened. 
Moreover, according to a survey conducted by the Russian Jewish Congress, anti-Semitic attitudes in Russia are among the lowest in the world, at 8% of those polled. 
The WJC was founded in Geneva in 1936, beneath the dark clouds of an earlier period of anti-Semitism. 
But it would be wrong to assume that fighting anti-Semitism is the organization’s sole focus. 
It played a leading role in helping Jews escape from the former Soviet Union, and in defending the religious freedoms of those who remained there. 
The WJC is also a major player in Holocaust-remembrance efforts. 
And it works to return Jewish families’ stolen assets, by confronting museums that do not closely trace the provenance of art works. 
In addition, the WJC is active in fostering Jewish communities around the world. 
Ironically, Germany is the only European country with a growing Jewish community, now 125,000-strong. 
A renaissance of Jewish culture is now occurring: many new synagogues have opened; and a majority of the faculty and students in Judaic studies courses are Gentiles. 
Still, this cultural rejuvenation has not been trouble-free. 
Leaders of the far-right Alternative for Germany (AfD) party routinely question the need for Holocaust monuments, including the particularly moving “Memorial to the Murdered Jews of Europe” near Berlin’s Brandenburg Gate. 
In Lithuania, the WJC sponsors a center that is working to revive Yiddish, the language that Eastern European Jews spoke for 800 years. 
And it is helping to promote broader inter-religious dialogue, notably with the Roman Catholic Church, by encouraging more student-exchange programs. 
These efforts are geared toward removing one of the primary sources of anti-Semitism: mutual ignorance and incomprehension. 
When talking to Lauder, one quickly gets the impression that his combination of urbanity and insight makes him exactly the right person to speak for the world Jewish community in these troubled times. 
With headstones being smashed in Philadelphia, of all places, my encounter with Lauder could have left me filled with gloom; instead, it left me feeling optimistic. 

In Defense of the Jews, Again 
MADRID – Despite the impression given by massive unity rallies throughout France, the recent attack on the satirical magazine Charlie Hebdo does not mean that freedom of expression is under any serious threat in Western Europe. 
Nor does it indicate that Islamic radicalism is somehow about to engulf or transform Western societies. 
The threat that it does highlight is a less publicized one: the resurgence of discrimination and violence against Europe’s Jews. 
Charlie Hebdo – the last vestige of a bawdy and somewhat savage nineteenth-century French tradition of outrageous caricature of religious and political figures – may well be an ideal icon of free expression. 
Europeans rose to defend a vital principle; free speech, however vicious, retains a place in any democracy. 
Likewise, “Eurabia,” Bat Ye’Or’s prophecy of Islamic doom for the West, simply is not emerging. 
No Islamic parties hold seats in European parliaments; few leading Muslim figures feature in Europe’s major centers of cultural and political power; and European Union institutions are practically bereft of Arabs and Muslims. 
Efforts by radicals to recruit and indoctrinate young European Muslims do not reflect the inexorable rise of Islamist – or even Islamic – influence in Europe. 
Rather, they highlight the radicals’ desperation to influence a region where the overwhelming majority of Muslims aspire to integrate into, rather than challenge, the established order. 
What is truly under threat in Europe is its Jewish community. 
In 2006, the French Jew Ilan Halimi was kidnapped and brutally tortured in a cellar for three weeks, resulting in his death. 
In 2012, three Jewish schoolchildren and a rabbi were gunned down in Toulouse. 
And last April, a Jewish couple in a Parisian suburb were robbed, because, as the attackers put it, “Jews must have money” (though that did not explain why they then raped the woman). 
A month later, a French jihadist attacked the Jewish museum in Brussels, leaving three dead and one critically wounded. 
A few months after that, a mob assaulted a synagogue in Paris. 
None of these events sparked anything remotely resembling the public outrage of recent weeks. 
Had the murder of four Jews at a kosher supermarket in Paris, carried out by a confederate of the Charlie Hebdo attackers prior to their capture, occurred in other circumstances, one can assume that it would not have fueled a widespread movement to defend the values of the French Republic. 
Some argue that the surge in anti-Semitic violence in Europe is motivated primarily by the plight of the Palestinians. 
But, according to a 2012 poll, more Europeans believe that violence against Jews is fueled by long-standing anti-Semitic attitudes, rather than anti-Israel sentiment. 
Radical Islam propagated hatred for Jews long before Zionism, and it will continue to do so after the creation of a Palestinian state. 
Given this, it is not surprising that the increasing visibility of Islamist extremism has, by capturing the attention of frustrated young Muslim men in Europe and elsewhere, spurred increased violence against Jews. 
But the problem runs deeper, giving Jews the impression that they have no future in Europe. 
A recent YouGov poll found that a substantial share of the French and British populations hold anti-Semitic views. 
Another poll, conducted by the Center for Research on Prejudice at Warsaw University, showed that, in 2013, some 63% of Poles believed Jews conspire to control the banking system and the world media. 
This has serious implications not just for Jews, but for Europe as a whole. 
As Hannah Arendt pointed out six decades ago, the rise of anti-Semitism fueled Europe’s descent into totalitarianism. 
With right-wing extremist and populist movements gaining traction in many countries, Europe’s political system – and the values that underpin it – is at risk. 
French Prime Minister Manuel Valls recognizes this danger. 
In a recent speech at the National Assembly that recalled Emile Zola’s attack on the “blind stupidity” of Jew-hatred almost 120 years ago, he asked: “How can we accept that in France…shouts of “Death to the Jews!” can be heard in our streets?...How can we accept that French people can be murdered because they are Jewish?” 
He then warned that the revival of anti-Semitism in France – apparent, for example, in the anxiety over the Holocaust’s inclusion in the French school curriculum – indicates a crisis of democracy. 
But Valls remains the only European politician to have highlighted the danger with the sense of urgency that it merits. 
It is time for his counterparts to step up, and doing so should not rule out bold policies, free of any complexes, aimed at influencing Israel’s policy toward Palestine. 
At the same time, it is a dangerous fallacy to seek redemption for a problem that is so deeply ingrained in Europe’s history – and in Islam’s – by blaming it on the Israel-Palestine conflict or on young, alienated Muslims. 
Europeans must take a good hard look at themselves if they are to avoid falling back into the clutches of fear, hatred, and appalling politics. 

Agriculture’s Bad Medicine 
SAN DIEGO – Most of us are oblivious to the threats caused by our actions when those threats are invisible. 
Our use of antibiotics is a case in point. 
When used judiciously, antibiotics save lives and prevent the transmission of deadly diseases. 
But the therapeutic power of antibiotics is being squandered by their imprudent use in agriculture. 
Today, more than half of the antibiotics administered around the world are used in the production of food. 
Farmers use antimicrobials to treat infections in their livestock. 
The problem is that they commonly misuse antibiotics either to compensate for poor agricultural practices – such as overcrowding on factory farms, which encourages the spread of disease – or to accelerate growth and reduce production costs. 
These practices may appear harmless in isolation, but their aggregate effect is dangerous. 
As antibiotics enter the environment through the food people eat or the waste animals produce, antimicrobial resistance intensifies. 
And this affects human health in troubling ways. 
Every day, at hospitals and clinics around the world, patients are given antibiotics for bacterial infections like tuberculosis, gonorrhea, or pneumonia. 
Others receive antibiotics prophylactically, to prevent bacterial infections during surgery, or when underlying conditions or treatments (such as chemotherapy) compromise their immunity. 
Unfortunately, many widely used antibiotics are losing their ability to protect patients and treat disease; routine misuse of antibiotics in farming is a key reason why. 
Not long after the Scottish microbiologist Alexander Fleming discovered a fungus that could kill bacteria, he recognized that overuse of antibiotics would encourage resistance. 
As he warned in 1945, “the thoughtless person playing with penicillin is morally responsible for the death of the man who finally succumbs to infection with the penicillin-resistant organism.” 
Widespread misuse of antibiotics in agriculture is one of the most egregious forms of “playing with penicillin.” 
In 2015, a new antibiotic-resistant bacterium was discovered in Chinese pigs, and then in Chinese patients. 
Since then, two more variants of the bacterium have been discovered, and the genes that enable these bacteria to resist antibiotics and jump between species – so-called “mobile genetic elements” – have been found on farms and in hospitals around the world. 
If the reckless use of antibiotics in agriculture continues, the impact on people will be severe. 
Fortunately, there is a solution. 
More than a decade ago, the European Union banned antibiotics in agriculture for any purpose other than treating infections. 
And, although the rule is not perfect, it has helped lower antibiotic use. 
In Denmark, for example, total antibiotic use by pig farmers has decreased, despite a slight increase in antibiotics administered for treating porcine diseases. 
These gains, however modest, are encouraging – and should encourage further – coordinated action. 
Because of the global nature of the threat, only multilateral cooperation – in the form of a new treaty or trade agreements – can ensure that farmers everywhere abide by minimal standards for raising livestock without the unnecessary use of antibiotics. 
In December 2015, a study commissioned by the British government and chaired by the economist Jim O’Neill found that the most effective means of changing behaviors would be to cap the use of antibiotics, but allow individual countries to experiment with taxes or restrictions to meet the cap. 
Moreover, as I have argued elsewhere, farmers should be required to obtain a prescription before administering medicine to livestock. 
Although the EU’s ban includes such a provision, waivers and exemptions have watered down the rule. 
If a global consensus were reached – for example, through the G20 or the United Nations General Assembly – countries choosing to tax agricultural antibiotics could use the revenue to help ease the transition to alternative farming practices. 
Money could also go to fund research on in vitro meat, which would dramatically reduce animal suffering and lower the burden of infectious diseases. 
Most important, any new treaty must provide signatories with flexibility to meet the diverse needs of their farmers. 
The goal of global action should be to incentivize farmers to reduce their antibiotic use, not to mete out punishment. 
It is possible to create conditions under which antibiotics are used only to treat sick patients, not healthy animals. 
Although the world is a long way from that goal, consumer-driven practices in the United States and regulations in Europe have demonstrated that farmers will change their approach if encouraged or required to do so. 
Still, most of us remain blind to the unintended consequences of our decisions. 
Unless people voluntarily refrain from consuming factory-farmed meat, we will need governments and multilateral organizations to keep us on the right path. 


Antibiotics That Work 
MEXICO CITY – From the discovery of penicillin in 1928 to the introduction of the last of the main groups of antibiotics in the 1960s, humanity’s capacity to fight pathogenic bacteria has been transformative. 
But, over time, the number of antibiotics to which bacteria are susceptible has been dwindling, and some pathogens have become resistant to most or all existing drugs. 
As a result, once-treatable infections are becoming deadly again. 
Already, antibiotic resistance is leading to an estimated 700,000 deaths per year, with financial costs reaching tens of billions of dollars. 
As antibiotic resistance continues to undermine our ability to treat cancers, transplant organs, and implant prosthesis, these figures will only rise. 
Many factors have contributed to rising antibiotic resistance. 
Bacteria can reproduce and mutate rapidly, and they can establish something of a “genetic Internet” that enables certain pathogenic bacteria to “download” antibiotic-resistant genes. 
Moreover, most antibiotics are natural products of soil bacteria, in which antibiotic resistance can occur naturally. 
When human-made antibiotics were introduced on a massive scale, the bacteria with resistance became the most prevalent. 
Today, humans release about 100,000 tons of antibiotics per year. 
If those antibiotics were being used properly and saving lives, a reasonable cost-benefit analysis might be possible. 
But about 70% of them are used to make farm animals to grow a bit faster. 
The other 30%, while used to treat people, are often prescribed incorrectly or needlessly. 
And, because a substantial share of the used drugs are released into the environment with wastewater and manure, bacterial communities in soils, waters, and wildlife are also exposed. 
If this abuse of antibiotics does not end, we will soon find ourselves without drugs to treat bacterial infections effectively. 
But while some steps are being taken – a high-level United Nations meeting last September produced proposals for some international measures – they are far from adequate. 
What is really needed is an immediate worldwide ban on the agricultural use of antibiotics. 
Moreover, guidelines for the clinical use of antibiotics, which the medical community now follows as closely as those concerning how to pick a necktie, must be reviewed and strongly enforced. 
These two measures alone – both of which could be enacted by governmental regulatory agencies – would reduce the use of antibiotics by nearly 80%, slowing the rise of antibiotic resistance substantially. 
Of course, getting governments to implement such measures will not be easy, because they run counter to powerful economic interests, the most obvious being the pharmaceutical industry, which sells $40 billion worth of antibiotics each year. While Big Pharma has a strong interest in continued antibiotic abuse, it has little interest in developing new antibiotics to tackle drug-resistant bacteria. 
Drugs for chronic illnesses and cancer are better for their bottom line. 
So Big Pharma is seeking “incentives” to pursue research and development of new antibiotics, such as extended patents or tax breaks; the alternative would be to charge astronomical prices for new drugs. 
But the benefits of such incentives for pharmaceutical companies would far exceed the cost of the actual R&D pursued; they would be instruments to funnel public funds into private hands – the very hands that caused the problem. 
Beyond all of these carrots, however, societies should consider using some sticks. I propose an initiative that rates pharmaceutical companies according to their contribution to solving the antibiotic-resistance problem; those that do not contribute should be punished with fewer sales. 
I call it NANBU (No Antibiotics, No Business). 
NANBU would grant points to companies with vigorous research programs or with new antibiotics in the development pipeline. 
Companies that do not manufacture or sell antibiotics for agricultural purposes, or that refuse to promote the use of antibiotics for diseases that do not require such drugs, would gain points as well. 
Those that engaged in the opposite behaviors – selling antibiotics as livestock “growth promoters” or actively encouraging physicians to prescribe the drugs – would lose points. 
At first, virtually all drug companies would have negative scores. 
But, over time, the ratings could be adjusted, always according to scientifically sound advice from an independent group of experts. 
The ratings could then be used to guide drug-purchasing decisions. 
For many kinds of relevant drugs, there are several options with similar efficacy and safety, produced by different companies. 
So clinicians could prescribe drugs mostly from highly rated companies, and avoid drugs from companies with low ratings. 
Patients could encourage such decision-making, and follow suit when purchasing over-the-counter drugs. 
Over time, antibiotics could become more profitable again, as engaged companies sell more of their other drugs and the need for costly incentives diminishes. 
The key to NANBU’s success will be to ensure widespread understanding of the antibiotic-resistance threat and what is needed to combat it. 
This would give patients and doctors the impetus to regard NANBU ratings in making drug decisions, as well as to pressure their governments to take even stronger action. 
The use of a public awareness campaign to intensify pressure on governments to pursue necessary but difficult measures has worked before – for example, in advancing forest and fishery sustainability. 
Public awareness was among the priorities highlighted at the UN meeting. 
To carry out that global effort, however, we need a new global institution that really is up to the task. 
NANBU, as an international NGO, would be able to cope with the transnational nature of most drug companies, while being protected from national-level lobbying or political pressure. 
Antibiotic-resistant bacteria represent a global threat, and therefore cannot be addressed with national measures alone. 
The world must think and act together to preserve the huge gains to human health and wellbeing that antibiotics have enabled. 

A Fair Fight Against Antimicrobial Resistance 
BRIGHTON – Existing anti-microbial drugs are becoming ineffective. 
If current trends continue, we could end up reliving conditions before the discovery of antibiotics, when infectious diseases were major killers. 
Meeting the challenge of drug-resistant microbes will be difficult. 
It will require not only major investments in research and development of new anti-microbial drugs, but also a system to control and restrict new treatments, in order to preserve their efficacy. 
As with the response to climate change, an effective strategy will require international coordination. 
In particular, the needs of pharmaceutical companies must be reconciled with those of government payers and the global poor. 
Indeed, engaging the poor will be crucial to any effort. 
Low- and middle-income countries are an important source of drug-resistant organisms. 
Crowded housing, poor sanitation, and compromised immune systems, whether owing to malnutrition or chronic infections such as HIV, provide fertile ground for contagion. 
Antibiotics are often misused or low-quality, providing bacteria the opportunity to develop resistance. 
Large volumes of antibiotics are also used in animal husbandry. 
Meanwhile, greatly improved transportation infrastructure – between rural and urban areas and between countries – means that resistant genes quickly become part of a global pool. 
In many vulnerable countries, the government health-care system cannot meet demand, and a variety of providers are attempting to bridge the gap. 
These range from medical specialists to informal providers, who work largely outside the regulatory framework. 
These patchwork systems do have benefits. 
A recent study in Bangladesh, for example, concluded that antibiotics provided by so-called “village doctors,” often operating from market stalls, contributed to declines in mortality from post-natal sepsis and childhood pneumonia. 
But there is also considerable evidence that the drugs being provided are of varying quality and are frequently taken unnecessarily. 
Too often, patients do not purchase a full course of treatment. 
One response could be to enact and enforce laws that make antibiotics available only on a doctor’s prescription. 
However, this could end up severely limiting poor people’s access to antibiotics, leading to higher death rates from infections, making it politically unacceptable and thus difficult to enforce. 
A better alternative would be to develop new strategies to improve antibiotic treatments that are provided through informal channels. 
For starters, investment is needed to generate reliable surveillance data on the drugs that are effective against common infections. 
Treatment guidelines must incorporate this information and be given to all providers of antibiotics. 
Meanwhile, high-quality antibiotics must be made available at affordable prices. 
Counterfeit products must be identified and removed from the marketplace, and a regulatory partnership between governments, the pharmaceutical sector, and citizens’ groups must be developed to control for quality. 
Prices must be kept low through bulk procurement; in some cases, public subsidies may be necessary. 
Measures to reduce prices will need to be complemented by efforts to discourage overuse. 
Innovations in packaging, perhaps providing full courses of appropriate combinations of drugs, could simplify treatment decisions. 
Likewise, development of low-cost diagnostic technologies could help diminish the need to provide treatment on the basis of symptoms alone. 
The biggest challenge will be to encourage providers of antibiotics to change their behavior. 
This will require measures such as accreditation, modification of payment mechanisms, and the involvement of intermediary organizations to give technical support and monitor performance. 
These organizations could include NGOs, religious organizations, social entrepreneurs, and companies that distribute drugs. 
These activities are unlikely to be commercially sustainable, and thus will require support from governments, philanthropies, and perhaps drug producers. 
In the meantime, the public must receive reliable information and advice on the proper use of antibiotics. 
This is particularly important where citizens rely largely on their own resources to cope with health problems. 
Implementing a system-wide change in the use of antibiotics will require the creation of national and global coalitions. 
One core aim must be to establish basic standards of conduct for health workers and drug companies that reflect the needs of patients and communities. 
Governments will need to build their capacity to play an effective role in this process, and companies that develop, produce, and distribute drugs and diagnostic technologies will have to contribute actively to the search for collaborative solutions. 
Only if we manage antiobiotics in a fair and sustainable way will we be able to benefit from them at all. 


Global Cooperation as a Life-and-Death Issue 
LONDON – The uncertainty generated by the United Kingdom’s recent vote to leave the European Union – which has sent shockwaves through global markets – has been dominating headlines. 
But, as we prepare to face new political trials, we must not lose sight of the challenges we already face, especially global health challenges like the rise of antimicrobial resistance (AMR), which has no regard for economic performance or political stability. 
As it stands, an estimated 700,000 people are losing their lives to drug-resistant infections each year. 
By 2050, this figure could skyrocket to ten million per year, at a cumulative cost to world GDP of $100 trillion.. 
To avoid that outcome, in May the Review on AMR that I lead published its strategy for tackling such infections, laying out proposals to ensure the development of the necessary new antibiotics, and to use existing antibiotics more efficiently in humans and agriculture. 
Of the ten major interventions we proposed, four are particularly important: 
· Launch a global campaign, tailored for different regions, to improve public awareness of AMR. 
· Address the market failure in the development of new antibiotics by introducing lump-sum market-entry rewards to developers of successful new drugs, while ensuring global access. 
· Advance innovation and improve use of diagnostic technology to support more efficient use of antibiotics. 
· Implement country-level targets focused on reducing unnecessary use of antibiotics in agriculture and humans. 
With our final report complete, the Review will now continue to make the international case for action directly to political leaders. 
For example, in my capacity as the Review’s Chairman, I recently discussed our recommendations at the World Health Assembly in Geneva, and with United Nations and United States policymakers in New York and Washington, DC. 
In these discussions, policymakers’ growing awareness of the danger posed by AMR stood out. 
Just two years ago, the topic of drug-resistant infections would usually be met with questions like “What is AMR?” or, “Why would a finance minister take charge of a health crisis?” Few understood the scale and multifaceted nature of the challenge, and thus the need for a comprehensive approach. 
I asked myself similar questions when British Prime Minister David Cameron first asked me to lead the Review on AMR. 
The situation has changed considerably since then. 
Policymakers from countries with a wide variety of economic and political systems are engaging on the AMR problem, with some countries already taking steps to tackle it. 
All of this provides grounds for hope that 2016 may be the year when real change gets underway. 
But hope is one thing; action is another. 
While high-level meetings and speeches about AMR send the right message, they will mean nothing if we do not manage to translate the current momentum into concrete action, beginning at the G20 and UN meetings this September. 
And while my most recent discussions suggest that agreements are likely to be reached at both of these meetings, it is far from certain that they will match the scale of the problem. 
At the G20, the needed agreement should focus on developing a global mechanism to re-invigorate the market for new antibiotics that are globally affordable, accessible, and used as efficiently as possible. 
At the UN, the goal should be to turn the mantra of “access, not excess” into a reality, with an agreement to reduce the unnecessary use of antibiotics in agriculture, and to spearhead a global awareness campaign. 
Increased funding for research and development of new antibiotics and diagnostics to fight AMR is also vital. 
Crucially, the agreements must have teeth. 
Countries should set their own objectives to fit their particular circumstances and needs, but there must be some provisions to ensure that all are pulling their weight. 
For starters, efforts to fight AMR should be incorporated into broader economic-development strategies, including the implementation of the UN Sustainable Development Goals. 
Moreover, progress should be measured, not only so that policymakers, companies, and health systems can be held accountable, but also so that others can emulate their successes. 
To this end, we may need new metrics for calculating the impact of AMR. 
While this sounds technical (and it is), the reality is that top AMR scientists think that agreeing on common measurements could change the way individual countries set their own targets and improve our capacity to measure progress in the coming years. 
Finally, to account for changing political priorities and personalities, we need a constant champion in the fight against AMR. 
For example, a UN envoy on AMR could be appointed, to continue making the international case for addressing the issue and to challenge countries to meet their targets. 
Without such a consistent reminder of the need to tackle AMR, not to mention transparency about progress, the world could become sidetracked and miss the rapidly closing window of opportunity to deliver the changes needed to stop the rise of drug-resistant infections. 
Over the last couple of years, governments, industry, and international organizations have made important strides in meeting the AMR threat. 
But the really hard decisions must be taken now. 
If we are to prevent the slow-motion car crash of rising AMR, our leaders must take evasive action now. 
We know what we have to do; now we must get on with doing it. 

Tackling AMR With the IMF 
LONDON – This month is the first anniversary of the United Nations High-Level Meeting on Antimicrobial Resistance, which the United Kingdom’s independent Review on AMR helped to bring about. 
That moment last year was very gratifying for me, as the chairman of the Review, as well as for my team and the UK’s Chief Medical Officer, Sally Davies. 
Last year’s High-Level Meeting resolved that member-state delegates are to reconvene for a progress assessment after two years – so, in September 2018. 
The meeting also called for the establishment of an Interagency Coordination Group to guide efforts in the fight against AMR during that two-year period. 
From what I have gathered, the group is being led by deeply committed individuals. 
And, more broadly, policymakers at the national and international levels have begun to pay more attention to the threat of AMR. 
In fact, since the UN High-Level Meeting, the G20 has also made notable commitments in the battle against AMR. 
At the G20 summit in Hamburg, Germany, in July, governments agreed to establish an “R&D Collaboration Hub,” and to begin to phase out antibiotics in agriculture, where producers use them to promote animal growth. 
The UK Review recommended that an additional $2 billion be earmarked for early-stage research into AMR, so the creation of an R&D hub is very welcome. 
But the agreement to limit the use of antibiotics in agriculture was even more significant. 
In the past, key G20 member states have resisted such commitments. 
And in the texts that served as a foundation for the UN High-Level Meeting, agriculture wasn’t even mentioned, owing to fear that it would render any eventual agreement dead on arrival. 
The steps that the UN and the G20 have taken are encouraging. 
But the fight against AMR is hardly over, and has probably only just begun. 
Looking forward, one of the biggest challenges will be holding to account individual countries and multilateral organizations, such as the UN itself. 
How will we confirm that governments and institutions have followed through on their lofty declarations? 
For starters, we can look at the intersection of economics and public health. 
There are many ways that international institutions can use economic-policy levers to reduce significantly the probability of infectious-disease outbreaks, and to increase vulnerable countries’ resilience to such risks. 
To my mind, the International Monetary Fund should take the lead. 
As Peter Sands and his colleagues show in a May 2016 study in The Lancet, infectious-disease outbreaks have far-reaching economic costs, and yet they are rarely, if ever, factored into assessments of macroeconomic risk. 
The IMF already conducts regular reviews of countries’ economic health, and financial markets give significant weight to its analyses. 
For the sake of economic as well as public health, the Fund would do well to start tracking countries’ progress in the fight against AMR as well. 
The European Union declared more than ten years ago that it would fully phase out the use of antibiotics for animal growth promotion. 
But who, other than the occasional investigative journalist, has ever actually delved into EU member states’ progress toward that goal? 
In the UK, my Review colleagues and I were quite impressed by the government’s formal policy response to our recommendations, especially with respect to reducing antibiotic prescriptions, preventing hospital-acquired infections, and limiting the use of antibiotics in farming to 50 milligrams per kilogram of livestock. 
Over the past year, I have given public talks at some of the British universities that are actively working on the AMR threat. 
I have been encouraged to see more academic researchers pursuing this topic than in the past. 
But when I have quizzed my audiences, I have come to realize that hardly anyone knows about the government’s policy response. 
This could mean that my audiences are simply uninformed; but I doubt that. 
What is more likely is that the government has not yet followed through on its commitments. 
The IMF is ideally suited to get to the bottom of this question as a part of its routine economic assessments. 
And its analyses would be even more valuable to less wealthy countries, where preventing outbreaks of infectious diseases could directly boost long-term economic growth. 
One last concern that I have on this first anniversary of the UN High-Level Meeting is that policymakers still need to agree on a source of funding for the market-entry rewards intended to encourage the development of new drugs and diagnostics. 
Such innovations will be crucial for preventing and detecting AMR, and an incentive mechanism to stimulate them is increasingly regarded as the right way to go. 
That, too, is a topic on which the IMF could provide invaluable advice. 

The Social Science of Medicine 
DAVOS – When I was a medical student in the mid-1980s, I contracted malaria in Papua New Guinea. 
It was a miserable experience. 
My head ached. 
My temperature soared. 
I became anemic. 
But I took my medicine, and I got better. 
The experience wasn’t pleasant, but thanks to cheap, effective malaria drugs I was never in very much danger. 
The pills that cured me, chloroquine tablets, do not work anymore. 
Even at the time I was taking them, the parasite that causes malaria had already become resistant to chloroquine in many parts of the world; 
Papua New Guinea was one of the last places where the pills continued to be effective, and even there they were losing their potency. 
Today, chloroquine has basically disappeared from our medical arsenal. 
The growing capacity of pathogens to resist antibiotics and other antimicrobial drugs is turning into the greatest emerging crisis in contemporary health care – and it is a crisis that cannot be solved by science alone. 
Other pharmaceuticals are following in chloroquine’s wake. 
Multi-drug-resistant strains of tuberculosis, E. coli, and salmonella are now commonplace. 
Most gonorrhea infections are untreatable. 
Superbugs, like methicillin-resistant Staphylococcus aureus (MRSA) and Clostridium difficile, are proliferating. 
In India, antibiotic-resistant infections killed more than 58,000 newborns in 2013. 
Today, malaria is often treated with a combination of artemisinin – a drug derived from a Chinese herb – and other antimalarial drugs. 
But these revolutionary medicines are now in danger of following chloroquine into obsolescence; resistant strains of malaria have been documented in Southeast Asia. 
This is more than a medical problem; it is a potential economic disaster. 
Research commissioned by the Review on Antimicrobial Resistance, headed by the economist Jim O’Neill, has calculated that if current trends continue, drug-resistant infections will kill ten million people a year by 2050 and cost the global economy some $100 trillion over the next 35 years. 
Even that dramatic prediction may be a substantial underestimate, as it includes only the direct costs in terms of lives and wellbeing lost to infections. 
Many other aspects of modern medicine also rely on antibiotics. 
Cancer patients receiving chemotherapy take them to suppress bacteria that would otherwise overwhelm their weakened immune systems. 
Many surgical operations now considered routine, including joint replacements and Caesarean sections, can be performed safely only when antibiotics prevent opportunistic infections. 
The origins of drug resistance are a well-understood matter of evolution. 
If pathogens are exposed to the selective pressure of toxic drugs, eventually they will adapt. 
The Wellcome Trust, which I lead, has invested hundreds of millions of dollars into researching these mechanisms, improving diagnoses, and creating new drugs. 
In order to address the problem effectively, this effort must be extended beyond the realm of biological science to areas not traditionally associated with medicine. 
In rich and poor countries alike, we have become systematic abusers of antibiotics. 
The key to combating resistance is to delay the rate at which the pathogens can adapt. 
But, by overprescribing antibiotics and failing to complete the required courses of treatment, we are exposing germs to just enough medicine to encourage resistance. 
In effect, we are vaccinating germs against the drugs we want to use against them. 
That is because we have come to regard antibiotics almost as consumer goods – ours to demand from doctors, and ours to take or stop taking as we see fit. 
Even the most informed patients misuse these wonder drugs. 
Research in the United Kingdom has found that even people who understand how resistance develops often contribute to the problem by taking antibiotics without a prescription or giving their drugs to members of their family. 
Changing such destructive behavior will require that we better understand the social and cultural factors that drive it. 
Disciplines like history, psychology, sociology, anthropology, economics, market research, and social marketing can help. 
This is true not only for antimicrobial resistance. It also applies to outbreaks like the Ebola epidemic. 
Combating the virus requires knowledge about its biology, the epidemiology of its transmission, and the drugs and vaccines that could potentially be deployed against it. 
But it also requires an understanding of the behaviors that have allowed infection to spread in Liberia, Sierra Leone, and Guinea. 
Explaining what made these societies so vulnerable requires learning about the region’s recent history and understanding why people there are deeply distrustful of public authorities. 
Isolation of patients and safe burial of the dead are crucial to containing Ebola, but both need to be introduced with cultural sensitivity – not just explanations of the science behind them. 
Today’s great public-health threats have profound economic consequences. 
Minimizing the risks they pose requires recognizing that they are intertwined with the social, behavioral, and cultural landscape. 
Science provides powerful tools. 
But we need more than science to use these tools effectively. 

Where Are We in the Fight Against AMR? 
LONDON – To mark the second anniversary of the British government’s Review on Antimicrobial Resistance (AMR), which I had the honor of chairing, two members of the Review team – Anthony McDonnell and Will Hall – and I have published a new book: Superbugs: An Arms Race Against Bacteria. 
In it, we discuss the Review’s ten recommended interventions – what I call the Ten Commandments – while considering the progress made so far, and the work that still needs to be done. 
The first part of the book provides a detailed history of our understanding of bacteria and drug resistance, and points to evidence that drug resistance may now be rising faster than we had assumed. 
For example, colistin, which is generally regarded as one of the last usable antibiotics in humans after others have failed, is losing its effectiveness, owing to overuse in animal farming, notably in China. 
And, equally disturbing, reports of drug-resistant strains of gonorrhea are becoming more frequent. 
In the Review, we predicted that if current trends continue, ten million people could die every year by 2050, at a loss of some $100 trillion in global economic output since 2015. 
But now there is reason to fear that the situation could turn out even worse. 
To ensure that it does not, the second part of the book focuses on solutions, and compiles expert viewpoints from many of those we interviewed for the Review. 
On a positive note, there has been progress on two of the three “supply” interventions that we recommended. 
First, financing for early-stage research and development is growing. 
Just recently, new joint funding initiatives were launched by the British and Chinese governments, the Wellcome Trust, the United States’ Biomedical Advanced Research and Development Authority (BARDA), and the Danish pharmaceutical company Novo. 
If this support is sustained, the Review’s recommendation of $2 billion in additional R&D funding over the next five years will be within reach. 
Second, the number of researchers working on AMR seems to be growing. 
In fact, I like to joke that in Northern England, AMR research centers probably now outnumber the cities that have agreed to devolution deals under the government’s northern powerhouse plan. 
The progress made in these two areas gives me hope that similar advances can be made elsewhere. 
But further progress will require less talk and more action from government and industry leaders. 
That is especially true of the pharmaceutical industry – the target of the third “supply” intervention we proposed. 
Rather than focusing solely on short-term profit margins, the industry must invest more in R&D and the production of new treatments. 
Representatives of the 25 largest pharmaceutical firms, I am told, met on the fringes of the World Economic Forum’s annual meeting in Davos this year to discuss AMR, agreeing to remain engaged on the issue. 
In other words, they agreed to keep doing nothing. 
The industry’s failure to back earnest rhetoric with concrete actions is becoming increasingly frustrating. 
The largest 25 firms could easily persuade key governments to act on the Review’s recommendation for a market-entry reward. 
With a prize of $1 billion or more for the development of new treatments to combat AMR, far more firms would start to pursue their own R&D. 
That points to the need for governments to do more as well. 
Following the Review, AMR was finally put on the G20’s agenda, both at the 2016 summit in Hangzhou, China, and at last year’s summit in Hamburg, Germany. 
This year, the G20 summit will take place in Buenos Aires, Argentina, and one can only hope that world leaders will start to act on the statements of the past few years, not least by piloting a market-entry reward. 
A market-entry reward is crucial because it would also help to advance two of the Review’s six “demand-reducing” interventions: the development of new vaccines and improved diagnostics. 
Two years ago, we pressed Western countries to start requiring rapid diagnostic tests as a prerequisite for all antibiotic prescriptions by 2020. 
Not surprisingly, no government welcomed this idea. 
But, unless effective diagnostics become more embedded in health-care systems, we will not be able to reduce unnecessary antibiotic usage and ensure effective treatments for patients with a genuine need. 
So, market-entry rewards should be extended to innovations in diagnostics, too. 
There has been some progress on the remaining four Commandments – greater public awareness, improved sanitation, improved surveillance, and dramatically reduced usage of antibiotics in agriculture – but not enough. 
The World Bank, the World Health Organization, and the International Monetary Fund need to shine a brighter spotlight on countries that are not investing in their health systems. 
And the United Nations needs to follow through on commitments made at the high-level meeting on AMR in September 2016. 
That means taking steps to improve surveillance and compliance, and pressing the UN’s 193 member states to implement the “One Health” national action plans agreed to in 2015. 
With respect to agriculture, some major Western food producers and distributors have indicated that they may develop their own AMR action plans. 
To that end, they should all agree to start labeling their meat and fish products with color codes denoting the amount of antibiotics that went into their production; and they should refuse to buy or sell any products that have used colistin. 
Overcoming the AMR threat is entirely feasible. 
But confronting it will require us to turn words into action. 
By getting out of our comfort zones now, we can avoid far worse discomfort down the road. 


Trust in Markets and Antitrust in Media 
LONDON – This year’s World Economic Forum Annual Meeting in Davos came at a moment of puzzlement for the world’s economic and financial elites. 
Although the global economy has lately been doing rather well, voters have been rebelling against them. 
Despite much-publicized challenges and weak points, there has been plenty of good economic news in recent years. 
Globalization and technological progress have supported annual global per capita GDP growth of 2.5% since 2009 – lower than before the Great Recession, but still very high by historical standards. 
In the last 35 years, the share of the world’s population living in poverty has fallen from 40% to just 10%. 
Perhaps the biggest grievance of the past year has been inequality. 
But, at the global level, inequality is falling. 
And while inequality has risen within some advanced economies, the increase has not been particularly dramatic, and it remains at reasonable levels. 
But that is not what the average citizen sees. 
According to the European Bank for Reconstruction and Development’s new Transition Report, based on the 2015-2016 Life in Transition Survey produced by the World Bank and the EBRD (where I am Chief Economist), the perceived increase in inequality far exceeds the reality described by official data, typically based on household surveys. 
In all but one of the 34 countries where households were surveyed, a majority of respondents reported that inequality has risen in just the last few years. 
Yet the official data show very small changes in the Gini coefficient (a standard measure of inequality) over this period, with most countries having experienced a decrease in inequality. 
One might assume that, in a clash between data and perception, data always win. 
But, in this case, it may be the data that are wrong – or, more accurately, we may be using the wrong data. 
Unlike ordinary citizens, who see the homeless in the street and the billionaires in the news, the household surveys that underpin inequality measurements may be under-sampling those at the very top and the very bottom of the income distribution. 
Another kind of data, gathered by the French economist Thomas Piketty, may provide a more accurate picture of inequality today: tax records. 
Those data indicate that income growth among the super-rich has lately far exceeded that of the rest of the population. 
Philippe Aghion of Harvard and the College de France and his co-authors have reinforced this finding, showing that, while inequality has not increased among the bottom 99% of rich-country populations, the top 1% has pulled away from the pack. 
The concentration of wealth at the very top, point out Piketty and others, may be dangerous. 
If political institutions are weak, wealthy tycoons can use their money to “capture” government officials and tilt economic regulations in their own favor. 
With their newly acquired competitive advantages, they can accrue undue profits, reinvesting part of their haul in acquiring even more unfair rents. 
The concentration of wealth would become difficult to limit, and, over time, smaller entrepreneurs would be crowded out. 
Of course, if a country’s political institutions are strong enough, not even the super-rich can distort the rules of the game. 
In that case, those who accrue the most wealth are the most talented and luckiest entrepreneurs, who reap their rewards for driving innovation and growth that benefit the entire economy. 
Unfortunately, in many of the EBRD’s 36 member countries, political institutions are not all that strong. 
This is reflected in the fact that commodities and natural resources account for a majority of billionaires’ wealth in the EBRD countries, suggesting not just that resource rents are available, but also that those rents are being inadequately taxed. 
There is a clear need to tackle the unfair political influence of the super-rich. 
Most directly, this means making political financing more transparent, with stricter and more effective regulations. 
But it also means addressing the use of media by oligarchs to manipulate politics to their own benefit. 
As Luigi Zingales pointed out in 2012, oligarchs can use media ownership to solidify their political positions, which they can then exploit to secure rents from which they can fund media. 
Former Italian Prime Minister Silvio Berlusconi, Zingales argues, was masterful in this regard. 
But many oligarchs in the post-communist countries have done likewise. 
Some oligarchs would argue that it is better that they own the media than that the government does; at least they can compete with other oligarchs. 
That is a red herring. 
Yes, ownership of media by a kleptocratic or authoritarian government is dangerous. 
But so is ownership of media by oligarchs who can collude with one another to protect their collective interests – interests that may differ sharply from those of the rest of society. 
Media lie at the foundation of modern democratic societies. 
That is why ownership should be transparent, with, ideally, media owners prohibited from owning other assets. 
In short, media should be subject to the same kind of antitrust policy as, say, infrastructure industries. 
Of course, such an antitrust policy would face fierce political resistance. 
And even if such a policy were implemented, tycoons would continue to work to influence the media through, say, mispriced advertising contracts. 
And, to some extent, some media might welcome oligarchic subsidies as a way to manage new challenges to traditional business models. 
To address these problems requires, first and foremost, a strong independent regulator. 
At the same time, transparent and de-politicized public subsidies can help to support the social good of honest news media. 
Implementing an effective media antitrust framework will not be easy. 
But it will still be easier than contending with an increasingly dissatisfied public losing faith in democracy and open markets. 

APEC at the Apex 
BRISBANE – The significance of the upcoming Asia-Pacific Economic Cooperation Summit in Beijing consists not so much in what is on APEC’s agenda as in what transpires on the sidelines. 
Meetings between Chinese President Xi Jinping and US President Barack Obama; as well as Xi’s meetings with Japanese Prime Minister Shinzo Abe loom especially large. 
These bilateral relationships constitute much of the strategic undercurrent of East Asian security at a time when the region’s long-term geostrategic stability has come into question. 
The core reality is that the Asia-Pacific region comprises a group of rapidly globalizing twenty-first-century economies sitting on top of a set of nineteenth-century national tensions. 
That contradiction matters for the entire world, because the region accounts for some 60% of global output. 
Economically speaking, where Asia goes in the future, the world will follow. 
But Asia is home to a multiplicity of unresolved territorial disputes. 
It is the epicenter of underlying tensions stemming from China’s rise and its impact on the United States, the region’s established power since World War II’s end. 
Indeed, many of the region’s territorial disputes pit China against US allies. 
More broadly, the region’s rifts are endemic: a divided Korean Peninsula; territorial disputes between Russia and Japan, China and Korea, and China and Japan; the unique circumstances of Taiwan; and conflicting maritime claims in the South China Sea involving China, the Philippines, Indonesia, Brunei, Malaysia, Vietnam, and Taiwan. 
There are also long-standing border disputes between China and India, and between India and China’s ally, Pakistan. 
As if that were not worrying enough, Asia has become the next global arms bazaar, with military outlays in the region now higher than in Europe. 
Moreover, six Asian states have nuclear weapons. 
Both the tone and the content of the China-US relationship are a cause for concern. 
China argues that it is subject to a US policy of isolation and containment. 
It points to America’s “rebalancing” strategy, to military and/or diplomatic support for those countries with which China has bilateral territorial disputes, and US support for Japan’s revision of its post-WWII “peace constitution” as a precursor for what China views as significant Japanese rearmament. 
The Chinese also see the commercial equivalent of containment in the US-proposed Trans-Pacific Partnership, which includes Japan but excludes China. 
Furthermore, Chinese leaders point to what they regards as intrusive US human-rights diplomacy aimed at fomenting political protest within China (including Hong Kong) and undermining the regime’s domestic legitimacy. 
The US, no surprise, disputes these claims. 
For starters, the US argues that it is the various states of East Asia that have actively sought American support for their security, owing to their collective concerns about China. 
Moreover, the US insists that it is not containing China (as it did the Soviet Union); on the contrary, China’s economic rise has been facilitated by access to US markets, as well as to global markets through American support for Chinese accession to the World Trade Organization. 
On human rights, the US argues that there are indeed fundamental differences between the two countries’ political traditions and current systems. 
But, in the American view, this is vastly different from an organized national strategy of undermining the Chinese state and its institutions. 
For these reasons, the bilateral strategic-trust deficit is growing. 
Xi, to his credit, has advanced what he describes as a concept for “a new type of great power relationship,” one that seeks to avoid what others have concluded is the near-inevitability of long-term conflict between a rising power (China) and the established power (America). 
It is imperative that both parties try to close the trust deficit. 
Doing so calls for a framework of what I call “constructive realism.” 
Such a framework embraces realism about areas of contention defined by significant conflicting national interests and values. 
These issues should simply be peacefully managed over time, until sufficient political capital has been created in the rest of the relationship to address them directly. 
At the same time, it is “constructive” in the sense of identifying areas of sufficient commonality to create new public goods, such as bilateral investment treaties, a non-nuclear Korean Peninsula, and a global agreement on climate change. 
A constructive realist approach should also begin to sketch the broad outlines of a long-term “common security” concept for East Asia. 
The outlook for the China-Japan relationship appears somewhat better. 
Just a few months ago, the bilateral relationship had sunk to an all-time post-war low, owing to a toxic cocktail of territorial disputes over the Diaoyu/Senkaku Islands, Japan’s handling of its wartime history (particularly prime ministerial visits to the controversial Yasukuni Shrine), and Chinese fears about Japanese rearmament. 
But now both governments appear to have recognized the growing risk of unintended conflict in the seas and airspace around the disputed territories, given the sheer concentration of naval and air assets in a limited space and the absence of effective protocols to manage incidents and prevent them from escalating. 
Both sides have concluded that even limited armed conflict would be disastrous. 
Moreover, with Japan and China facing increasing economic uncertainty, they have recognized that it makes sense for the world’s second and third largest economies to remove major political impediments to expanded bilateral trade and investment. 
For these reasons, barring any last-minute diplomatic indelicacies, the APEC Summit is likely to represent the start of a formal thaw in Sino-Japanese relations. 
APEC, an Australian diplomatic initiative launched 25 years ago, was originally conceived as an exclusively economic forum. 
Fortunately, it has also become an annual forum for US, Chinese, Japanese, and other leaders to engage with one another on critical questions of long-term strategic stability. 
The future of the region’s economy and the global economy – and the stability upon which they are predicated – will be powerfully shaped by the outcome of these deliberations. 

The Asian Paradox 
SEOUL – Given that the 21 members of the Asia-Pacific Economic Cooperation forum account for some 54% of global GDP and about 44% of world trade, the agenda for this month’s APEC summit should be drawing much global attention. 
Yet the only issue in which anyone seems interested is whether or not Chinese President Xi Jinping and Japanese Prime Minister Shinzo Abe will meet on the sidelines, and, if they do, whether a substantive discussion to ease bilateral tensions will take place. 
Of course, this is not altogether unreasonable, given the two countries’ importance in shaping East Asia’s future. 
Indeed, the uncertainty about whether two of APEC’s key leaders will even speak to each other highlights the grim reality of Asian international relations today. 
The supposed “Asian century” is being thwarted by a paradox: deep economic interdependence has done nothing to alleviate strategic mistrust. 
Given the recent deterioration of Sino-Japanese relations – a decline that accelerated in 2012, when Japan purchased the disputed Senkaku Islands (Diaoyu Islands in Chinese) from their private owner to prevent Japanese nationalists from taking control of them – the mere fact that Abe will attend the summit is a major step. 
A meeting between Abe and Xi – their first since either came to power – would offer concrete grounds for hope. 
The Japanese government has made significant diplomatic efforts to orchestrate a meeting, with former Prime Minister Yasuo Fukuda visiting Beijing in July to try to ease tensions. 
According to some media reports, in order to secure China’s agreement to participate in a meeting during the APEC summit, Abe even agreed to acknowledge that Japan’s claim to the Senkaku Islands is disputed. 
Given that such a move would imply that China’s claim to the islands may have some legitimacy, Abe’s possible concession on this point is no trivial matter; it could even mean that he will agree with China to restore the status quo ante. 
In that case, one hopes that Xi will follow Deng Xiaoping’s counsel and allow the issue to be “shelved for some time” so that the “wiser” next generation can “find a solution acceptable to all.” 
That now seems to be a realistic possibility. 
Indeed, lately Xi seems to have softened his tone, if not necessarily his diplomatic line. 
For example, he allowed Li Xiaolin, the daughter of a former Chinese president, to meet with Abe, with whom she watched a performance by a visiting Chinese dance troupe in Tokyo. 
And Chinese Prime Minister Li Keqiang shook hands with Abe at the recent Asia-Europe Meeting in Milan. 
One reason for Abe and Xi’s newfound flexibility may be domestic political shifts in both countries, which have created a more equal balance between conservative, nationalist groups and more internationally-oriented business interests. 
With both leaders having spent the last two years overcoming domestic opponents and consolidating their power, they may have gained confidence in their ability to compromise. 
In Japan, Abe has satisfied his conservative supporters with cabinet resolutions to allow for expanded self-defense. 
Despite domestic opposition to Japan’s new security doctrine, no politically influential group was able to organize an effective challenge to Abe’s approach. 
Now, as Japan’s economic recovery stalls, the country’s business sector seems to be pressuring Abe’s government to work harder to mitigate the impact of its deteriorating relationship with China. 
According to a Chinese government report, in the first half of 2014, Japanese direct investment in China was almost 50% lower than during the same period last year – a clear sign that Japanese business leaders fear for the future in Japan’s second largest market. 
Meanwhile, in China, Xi has gained considerable confidence through his massive anti-corruption campaign, with the punishment of top military officers indicating that he has solidified his control over the People’s Liberation Army (PLA). 
As a result, Xi may believe that he now has more space to address the country’s economic slowdown, including by lessening the damage wrought by weakening ties with Japan. 
If this assessment is accurate, the obvious next question is how much further Abe and Xi can move toward détente, thereby appeasing their business sectors, without losing the backing of nationalists, who tend to view the bilateral relationship as a zero-sum game. 
For Abe, the choice is whether to tone down his nationalist rhetoric and moderate his position on contentious historical issues. 
This would include halting visits to the controversial Yasukuni shrine (which honors, among others, 14 Class A war criminals who were executed after World War II) and abandoning revisionism regarding the Korean “comfort women” who were forced to provide sexual services to the Japanese Imperial Army. 
How Abe decides is likely to depend on his confidence in his political position. 
Similarly, if Xi remains confident enough in his control of the PLA and truly follows China’s official policy of “peaceful development,” he will be able to take the kind of prudent approach that Deng advocated. 
This would entail recognizing and trying to assuage the fears that China’s rise is causing among its neighbors, as Otto von Bismarck did after German unification in 1871. 
Observers might then read his recent efforts to improve relations with Japan, not to mention Vietnam, as a genuine strategic shift, rather than a temporary tactical adjustment. 
In this uncertain context, the APEC summit could shed much-needed light on the intentions of Abe and Xi, thereby providing crucial insight into the trajectory of Sino-Japanese relations – and thus the future of East Asia. 

Appeal for freedom of speech and respect for minority rights in Russia 
We were taken aback and dismayed by reports of actions directed against ethnic Georgians in Russia. These include accounts in the international media that Moscow police have asked schools to draw up lists of pupils with Georgian surnames as part of their search for illegal immigrants, and verifiable cases where Georgian businesses in Russia have been closed. 
Knowing the importance to poor families of remittance to Georgia, we are also concerned at reports of measures to block bank transfers. 
We feel obliged to emphasize that disputes between governments are not grounds for actions against the civilian population. 
We would hope that the leadership of the Russian Federation will affirm the rights of ethnic minorities; refrain from hostile rhetoric and actions against Georgians; and ensure that our common democratic values and respectful relations between neighbours are upheld. 
André Glucksmann 
Vartan Gregorian 
Frederik Willem de Klerk 
Václav Havel 
Mike Moore 
Michael Novak 
Yohei Sasakawa 
Karel Schwarzenberg 

On the Bombing of Aleppo 
NEW YORK – The world is witnessing in Syria a humanitarian catastrophe of historic proportions. 
It is being perpetrated by Russian President Vladimir Putin in support of his protégé, Syrian President Bashar al-Assad. 
Russian warplanes are bombing the civilian population of Aleppo, the country’s most populous city, to assist Syrian government forces attempting to take control of rebel-held areas. 
The combined assault has, among other things, killed hundreds of people and wounded more than a thousand, put the city’s remaining hospitals out of commission, and deprived the population of drinking water. 
Putin is moving aggressively to exploit the three months between now and the January 20 inauguration of the next US president, based on the callous calculus that the United States will be mostly immobilized by the political transition. 
As The New York Times puts it: “Putin calculates that the departing President Obama will be unlikely to intervene in the escalating Syrian conflict and a new American president who might consider a tougher policy will not yet be in office.” 
The Times then quotes Russian political scientist Nikolai V. Petrov: “The next American president will face a new reality and will be forced to accept it.” 
Other reports in the Times and elsewhere have vividly depicted the suffering of Aleppo’s people and the heroic efforts of the doctors and civilians, like the White Helmets, who are risking their lives to help them. 
When the facts are fully established, Putin’s bombing of Aleppo will be viewed as among the modern world’s most egregious war crimes. 
I appeal to the people of Russia, the US, Europe, and the rest of the world not to stand idly by, but to spread the word and voice their outrage. 
An outpouring of public opinion could induce Putin to call a halt to his heinous crime against humanity. 

Appeasement Revisited 
I vividly remember the slightly ludicrous, slightly risqué, and somewhat distressing predicament in which Western diplomats in Prague found themselves during the Cold War. 
They regularly needed to resolve the delicate issue of whether to invite to their embassy celebrations various Charter 77 signatories, human rights activists, critics of the communist regime, displaced politicians, or even banned writers, scholars, and journalists – people with whom the diplomats were generally friends. 
Sometimes we dissidents were not invited, but received an apology, and sometimes we were invited, but did not accept the invitation so as not to complicate the lives of our courageous diplomat friends. 
Or we were invited to come at an earlier hour in the hope that we would leave before the official representatives arrived, which sometimes worked and sometimes didn’t. 
When it didn’t, either the official representatives left in protest at our presence, or we left hurriedly, or we all pretended not to notice each other, or – albeit on rare occasions – we started to converse with each other, which frequently were the only moments of dialogue between the regime and the opposition (not counting our courthouse encounters). 
This all happened when the Iron Curtain divided Europe – and the world – into opposing camps. 
Western diplomats had their countries’ economic interests to consider, but, unlike the Soviet side, they took seriously the idea of “dissidents or trade.” 
I cannot recall any occasion at that time when the West or any of its organizations (NATO, the European Community, etc.) issued some public appeal, recommendation, or edict stating that some specific group of independently-minded people – however defined – were not to be invited to diplomatic parties, celebrations, or receptions. 
But today this is happening. 
One of the strongest and most powerful democratic institutions in the world – the European Union – has no qualms in making a public promise to the Cuban dictatorship that it will re-institute diplomatic Apartheid. 
The EU’s embassies in Havana will now craft their guest lists in accordance with the Cuban government’s wishes. 
The shortsightedness of socialist Prime Minister José Zapatero of Spain has prevailed. 
Try to imagine what will happen: at each European embassy, someone will be appointed to screen the list, name by name, and assess whether and to what extent the persons in question behave freely or speak out freely in public, to what extent they criticize the regime, or even whether they are former political prisoners. 
Lists will be shortened and deletions made, and this will frequently entail eliminating even good personal friends of the diplomats in charge of the screening, people whom they have given various forms of intellectual, political, or material assistance. 
It will be even worse if the EU countries try to mask their screening activities by inviting only diplomats to embassy celebrations in Cuba. 
I can hardly think of a better way for the EU to dishonor the noble ideals of freedom, equality, and human rights that the Union espouses – indeed, principles that it reiterates in its constitutional agreement. 
To protect European corporations’ profits from their Havana hotels, the Union will cease inviting open-minded people to EU embassies, and we will deduce who they are from the expression on the face of the dictator and his associates. 
It is hard to imagine a more shameful deal. 
Cuba’s dissidents will, of course, happily do without Western cocktail parties and polite conversation at receptions. 
This persecution will admittedly aggravate their difficult struggle, but they will naturally survive it. 
The question is whether the EU will survive it. 
Today, the EU is dancing to Fidel’s tune. 
That means that tomorrow it could bid for contracts to build missile bases on the coast of the People’s Republic of China. The following day it could allow its decisions on Chechnya to be dictated by Russian President Vladimir Putin’s advisers. 
Then, for some unknown reason, it could make its assistance to Africa conditional on fraternal ties with the worst African dictators. 
Where will it end? 
The release of Milosevic? 
Denying a visa to Russian human rights activist Sergey Kovalyov? 
An apology to Saddam Hussein? 
The opening of peace talks with Al Qaida? 
It is suicidal for the EU to draw on Europe’s worst political traditions, the common denominator of which is the idea that evil must be appeased and that the best way to achieve peace is through indifference to the freedom of others. 
Just the opposite is true: such policies expose an indifference to one’s own freedom and pave the way for war. 
After all, Europe is uniting in order to defend its freedom and values, not to sacrifice them to the ideal of harmonious coexistence with dictators and thus risk gradual infiltration of its soul by the anti-democratic mindset. 
I firmly believe that the new members of the EU will not forget their experience of totalitarianism and non-violent opposition to evil, and that that experience will be reflected in how they behave in EU bodies. 
Indeed, this could be the best contribution they can make to the common spiritual, moral, and political foundations of a united Europe. 

Appeasing Serbia 
This month has been a bad one for the cause of human rights in Europe, as Serbia was allowed to begin its six-month presidency of the Council of Europe, the Continent’s oldest political body. 
With Serbia at the helm, the Council, which aims to promote human rights and the rule of law, is now overseen by a state that thumbs its nose at the Genocide Convention and harbors an indicted war crimes suspect, former Bosnian Serb army chief Ratko Mladic. 
Moreover, the European Commission has indicated that it is ready to resume talks aimed at bringing Serbia closer to the European Union as soon as a reform-oriented government is formed in Belgrade. 
Earlier this year, the International Court of Justice (ICJ) found Serbia guilty of failing to prevent the massacre of more than 7,000 Bosnian Muslim men in Srebrenica. 
The Court also declared that Serbia will remain in violation of the Genocide Convention until it transfers Mladic—who is believed responsible for some of the worst crimes in Europe since the Second World War—to the International Criminal Tribunal for Former Yugoslavia (ICTY) in The Hague. 
But the EU seems ready to ignore Serbia’s disdain for international law. 
The EU is understandably eager to support a pro-European government in Serbia, for this might pave the way for Serbia to swallow the prospect of Kosovo’s independence. 
That explains why some EU member states are keen to resume the negotiations on a Stabilization and Association Agreement, which were suspended a year ago due to Serbia’s failure to cooperate fully with the ICTY. 
The proposed u-turn by the EU means that Mladic’s arrest and transfer to The Hague is no longer a condition for restarting talks. 
Of course, Europe needs to sweeten the Kosovo deal for Serbia. 
But an immediate resumption of negotiations amounts to an approach that is all carrot and no stick, damaging the EU’s own credibility. 
Indeed, the West has already tried this approach before, with paltry results. 
In December 2006, NATO allowed Serbia to join its Partnership for Peace, even though there were still war criminals at large in the country. 
This softer approach will prove counterproductive, as it will not strengthen democratic forces in Serbia. 
Just last week, caretaker Prime Minister Vojislav Kostunica, once hailed by Europe as a great democrat, showed his true colors. 
He went so far as to support the election of an extreme nationalist, Tomislav Nikolic, who was an old ally of Milosevic’s, as the Speaker of the Serbian Parliament. 
The head of Nikolic’s party, Vojislav Seselj, is in the dock in The Hague facing trial for war crimes. 
Although Nikolic soon resigned after a new Serbian government was formed, the cabinet’s composition suggests that the EU might be foolish to expect greater cooperation with the ICTY. 
By effectively abandoning conditionality, the EU will be rewarding the most intransigent hard-liners in Serbia – that is, the very people who have opposed the arrest of Mladic for years. 
With the ICTY’s closure just one year away, there is a risk that Mladic will never be held accountable. 
The effect that the resumption of talks might have on the system of international law is no less chilling. 
Serbia’s leadership of the Council of Europe is a done deal. But the EU must insist on Serbia’s compliance with the ICTY, the ICJ decision, and its own Copenhagen political criteria. 
Mladic must be arrested before talks start, not after. 
As a signal of their seriousness, European governments should think twice before they accept Serbia’s invitation to attend the Council of Europe’s festive 1,000th meeting in June. 
A minute of silence for the victims of unarrested war criminals might be a more appropriate way to pay tribute to the Council’s core values of human rights and justice than attending the party now being planned in Belgrade. 

Apple Versus the G-Men 
VIRGINIA BEACH – Apple’s refusal to unlock the iPhone linked to the extremist attack in San Bernardino, California, in December has triggered a public battle with the US Justice Department and the FBI – a dispute with far-reaching implications for data privacy worldwide. 
But the case is not as straightforward as it seems. 
Speaking as someone with a long presence in the US intelligence community, I believe that the FBI has already gained access to Syed Rizwan Farook’s iPhone. 
It is an older Apple model using technology that, in other contexts, has already been compromised. 
Here’s another strange thing about the FBI’s demand of Apple: Why would the United States government stoop to a public debate on this issue? 
The FBI is the country’s most powerful law-enforcement organization, and Apple will ultimately be forced to comply with its request. 
(Full disclosure: I own Apple stock.) 
The FBI has already said that this is not about just one phone. 
But few understand that this is not a simple matter of opposing interests: public safety versus an individual’s right to privacy. 
For a better understanding of the FBI’s demand, we need to look at Apple’s latest line of phones, which differ from Farook’s in a fundamental respect: They contain a new chip that was designed using a technique developed by the US National Security Agency and then shared with the Israelis. 
That technology is now finding its way into Apple products via the company’s Israeli chip-design division. 
Each of the new chips has a unique signature used for encryption, which is coupled with its user’s fingerprint. 
Without that signature, it is impossible to decrypt an Apple phone without physical access to the internals of its chip – which is itself impenetrable. 
That encryption also applies to any information sent by the phone to a paired service, like Apple’s Messages system. 
In the past, immediate access to telephony devices has been irrelevant to the FBI, because the authorities had unfettered access to communications as they traveled to and from a phone. 
But, with its new security improvements, Apple is now closing that door. 
The company is not simply denying new access; it will soon take away existing access. 
This bothers the FBI, because its job is to collect evidence. 
Interestingly, the NSA has taken a different stance. 
Backdoors have been acknowledged as dangerous by NSA Director Admiral Mike Rogers, who says that “encryption is foundational to the future.” 
When access to private communications is possible, anyone can use it for any purpose. 
This complicates the FBI’s argument about public safety. 
For example, do we really want a terrorist group to be capable of accessing a president’s or prime minister’s private information? 
If a phone has a backdoor, it can be opened by anyone with enough motivation – criminals, extremists, and governments alike. 
The Chinese authorities, for example, would be delighted if Apple complied with the FBI’s request. 
They have been asking Apple for a backdoor for years. 
Apple’s current stand could cause it to suffer in the massive Chinese market – or profit immensely if it complies. 
The FBI’s request signals a new attempt at control. 
This is an organization that usually delivers its requests under seal, meaning they remain secret. 
In this case, the FBI took the unusual step of making its demand public, so as to push the issue into the press by hitting the hot button of “terrorism.” 
The FBI’s intent, it seems, is to prompt lawmakers to respond to public outrage. 
Most legal arguments against “unlocking” this particular phone cite the constitutionally protected right to free speech. 
But a better parallel is the right to gun ownership in the US and the constitutional provisions that support it. 
In the past, technology in the US was primarily developed in a military context and justified in the service of war, but also to maintain civil order. 
At the end of the eighteenth century, the apotheosis of that technology was the firearm. 
No other technology was as apt, so the US Constitution specified that it would not be used to curtail speech (First Amendment) or be denied to the citizenry (Second Amendment), and that government holders of firearms could not be placed in citizens’ homes (Third Amendment). 
The Ninth and Tenth Amendments proscribe the use of firearms to compromise other implicit rights as they may become apparent. 
Today’s most powerful technologies relate to information concerning our thoughts, associations, and bodies. 
If the framers of the US Constitution were alive today and as well educated as they were then, the Bill of Rights would likely be focused on balancing access to information to ensure that the government remains within bounds. 
With this public request from the FBI, the balance between people and policing is being called into question. 
As the debate unfolds, we need to consider whether it makes sense, legally or as a matter of policy, for everyone – law enforcement, hackers, and terrorists – to be able to possess or access information. 
The Apple case will affect the balance of informational power, and the scales currently are weighted against the citizen. 
Resolving the case requires a more considered response from US politicians than hysterical tweeting. 
In view of the modern power of information, they must think carefully about the legal ramifications of the FBI’s demand. 

Realism on North Korea 
BERLIN – The world’s task in addressing North Korea’s saber rattling is made no easier by the fact that it confronts an impoverished and effectively defeated country. 
On the contrary, it is in such circumstances that calm foresight is most necessary. 
The genius of the Habsburg Empire’s Prince Klemens von Metternich in framing a new international order after the Napoleonic Wars was that he did not push a defeated France into a corner. 
Although Metternich sought to deter any possible French resurgence, he restored France’s prewar frontiers. 
By contrast, as Henry Kissinger has argued, the victors in World War I could neither deter a defeated Germany nor provide it with incentives to accept the Versailles Treaty. 
Instead, they imposed harsh terms, hoping to weaken Germany permanently. 
We know how that plan ended. 
John F. Kennedy was in the Metternich mold. 
During the Cuban missile crisis, he did not try to humiliate or win a total victory over the Soviet Union. 
Rather, he put himself in Nikita Khrushchev’s shoes and agreed to dismantle, secretly, American missiles in Turkey and Italy in exchange for withdrawal of Soviet missiles from Cuba. 
Kennedy’s pragmatism prevented World War III. 
Sadly, North Korea has not received such far-sighted statesmanship. 
Faced with the North’s dangerous nuclear game, we should ask what would have happened if, over the last 20 some years, the North Korea problem had been approached with the sagacity of Metternich and Kennedy. 
Of course, North Korea is not early-nineteenth century France or the USSR of 1962. 
In the eyes of Western (including Japanese) political leaders, it has never amounted to more than a small, fringe country whose economic failings made it appear to be poised perpetually on the edge of self-destruction. 
For the most part, world leaders preferred not to be bothered with North Korea, and so reacted in an ad hoc way whenever it created a security problem. 
But now, following the North’s recent nuclear tests, and given its improving ballistic-missile capabilities, that approach is no longer tenable. 
Perhaps the best chance to address the problem at an earlier stage was immediately after the Soviet Union’s collapse in 1991. 
Back then, Kim Il-sung – the North’s founder – faced economic collapse, diminution of his conventional military forces, and diplomatic isolation. 
In interviews with Asahi Shimbun and The Washington Times in March and April 1992, Kim clearly expressed a wish to establish diplomatic relations with the US. 
But US and South Korean leaders were not ready to accommodate Kim’s overture. 
Their received ideas about North Korea prevented them from recognizing a fast-changing political reality. 
Another opportunity was missed later in the decade. 
If North Korea had reciprocated in a timely manner following US envoy William Perry’s visit to Pyongyang in May 1999, President Bill Clinton’s policy of engagement with the North might have been upgraded to a push for normalization of diplomatic relations. 
Instead, the North procrastinated, sending Vice Marshall Jo Myong-rok to the US only in October 2000, near the end of Clinton’s presidency. 
A few months later, newly elected President George W. Bush reversed Clinton’s North Korea policy. 
I still recall the difficulty that I faced, as South Korea’s foreign minister, in convincing Bush administration policymakers to negotiate with North Korea instead of merely applying pressure and waiting for the North to capitulate. 
Back then, North Korea was restarting its Yongbyon nuclear facility and producing plutonium, thus strengthening its bargaining position vis-à-vis the US. 
Precious time was squandered before North Korea’s first nuclear test in 2006. 
Though Bush shifted his policy toward bilateral negotiations with the North a few months later, the Kim regime had become much more obstinate. 
Indeed, North Korea’s behavior has since become even more volatile. 
Its sinking of the South Korean corvette Cheonan and the shelling of Yeonpyeong Island in 2010 were unprecedented, and raised inter-Korean tensions to their highest level in decades. 
Today, following the North’s third nuclear test, we seem to have entered the most precarious stage yet, with the regime declaring that it will never surrender its nuclear option. 
So, what should be done? 
The first option should be deterrence of further aggression through diplomacy. 
But achieving diplomatic deterrence will depend on China’s cooperation, and this requires that China’s vital national-security interests be recognized. 
China fears not only the social and economic consequences of a North Korean implosion, but also the strategic consequences of reunification – in particular, that the US military, through its alliance with South Korea, would gain access to territory on its border. 
A mere statement by the US that it has no intention to press this military advantage will not assuage China’s fears. 
Chinese leaders recall that the US promised Soviet President Mikhail Gorbachev that German reunification and democratic transition in Eastern Europe would not mean eastward expansion of NATO. 
So a more concrete undertaking, one that preserves South Korea’s bedrock security concerns, is needed. 
Only after its security is assured will China free itself from complicity in North Korean brinkmanship and be better able to control the North’s behavior. 
But Chinese cooperation, though necessary, will not resolve the North Korea problem on its own. 
A comprehensive approach must recognize the speed of internal change, especially in the minds of ordinary North Koreans. 
Simply put, North Koreans are not as isolated as they once were, and have a growing appreciation of their impoverishment, owing primarily to greater trade and closer connections with booming China. 
This internal change needs to be encouraged, because it will prove more effective than external pressure in influencing the regime’s behavior. 
But such encouragement must be undertaken in ways that do not incite the North’s fears of being destroyed by indirect means. 
South Korean President Park Geun-hye’s recent proposal to provide humanitarian assistance despite the recent spike in tension, is a start in the right direction. 
The lives of ordinary North Koreans matter as much as the security of North Korea’s neighbors. 
A comprehensive approach is required – one that focuses as much on the human dimension as on the security dimension. 

Where Has All the Water Gone? 
MANILA – We live on a parched planet. 
Farmers till arid pastureland, and policymakers fret over empty reservoirs, dry rivers, and thirsty cities. 
And that only scratches the surface – literally – of the world’s water problem. 
Subterranean aquifers, which amount to the world’s reserve water tank, are also running dry. 
If this continues, the consequences could be dire, especially for water-stressed and fast-growing Asia. 
Subterranean aquifers are repositories of water located deep underground, in permeable rock, soil, or sand. 
And they contain about 100 times the amount of water found on the earth’s surface, in streams, lakes, rivers, and wetlands. 
If you’re in central Africa, South America, or some parts of Europe, you’re probably standing just a few hundred feet above one. 
Surface water resources, such as desalinated seawater or recycled wastewater, will not close the global gap – predicted to reach 40% by 2030 – between water supply and demand. 
So subterranean aquifers are increasingly being exploited for agriculture, power generation, and daily use in fast-growing cities (urban Asia is growing at a rate of 120,000 people per day). 
Today, about 30% of the world’s liquid freshwater comes from subterranean aquifers. 
And one-third of the 37 largest aquifers studied by the University of California between 2003 and 2013 were severely depleted, receiving little or no replenishment from rainfall. 
Some of the most stressed aquifers are in the driest regions, including Asia, up to 88% of which is water-stressed. 
Asia contains around one-third of the world’s land irrigated by groundwater, with India, China, and Pakistan being the biggest consumers. 
South Asia alone accounts for half the groundwater used globally. 
But Asia’s aquifers – many of which were formed millennia ago, when areas like northern China had a more humid climate – are no longer being replenished regularly by rainfall. 
Instead, boreholes are getting deeper and water tables are falling. 
In Pakistan’s Punjab Province, over-pumping is lowering the water table by up to a half-meter (20 inches) per year, threatening future food and water security and making thirsty crops like sugarcane and rice tougher to grow. 
Asia’s surging population – which could jump by 25%, topping five billion, by 2050 – will put even more stress on food, energy, and water supplies. 
Globally, 60% more food will be needed by then, with agriculture soaking up increasingly scarce freshwater. 
Climate change will exacerbate conditions further. 
But the problem extends beyond water depletion. 
Over-pumping of groundwater is already leading to soil subsidence, causing some Asian cities to sink. 
By 2030, as much as 80% of North Jakarta could be below sea level. 
Parts of Beijing are sinking by several centimeters per year, according to some estimates. 
Moreover, depleted aquifers near coastlines are prone to contamination from saltwater, rendering land barren. 
Some aquifers are contaminated by arsenic, which can occur naturally deep underground. 
Nature Geoscience estimates that more than 60% of groundwater in the Indo-Gangetic aquifer is contaminated by arsenic or salt. 
In Bangladesh, water tainted by arsenic is blamed for more than 40,000 deaths each year. 
The first step toward remedying this situation is to establish precisely how much groundwater is left and how it is being used – not easy, but not impossible either. 
NASA’s Gravity Recovery and Climate Experiment satellite provides information on changes in the earth’s gravity due to fluctuating water volumes. 
And by applying remote sensing technology to river basins, we can determine how much surface water is available and who is consuming what. 
Another important step is to improve the pricing of groundwater. 
China has run a pilot program in which farmers had to pay extra if they pumped more than their allocation. 
Similar approaches have worked well in Australia and Mexico. 
But such measures can be politically difficult to implement. 
The key to success will be to help countries not only to design the right policies, but also to create the legal frameworks needed to establish and enforce them. 
Even more politically difficult would be the elimination of electricity and gas subsidies, which encourage farmers to pump groundwater all day. 
If such subsidies can’t be withdrawn, there are innovative alternatives that could curb over-pumping. 
For example, in Gujarat, India, the government has reduced groundwater pumping by offering power for just eight hours per day. 
Farmers have the power they need, but can’t pump all day long. 
Another approach could be to buy back surplus power from farmers to feed into the grid. 
That would not just reduce over-pumping, but also help to supplement rural incomes. 
Efforts to replenish aquifers could also be pursued. 
A pilot program in India’s Uttar Pradesh state collects excess floodwater in storage ponds, from which water seeps into the water table. 
The final step would be to improve management of surface water, thereby reducing the temptation to turn to groundwater in the first place. 
Around 80% of wastewater is returned untreated to rivers, often contaminating them. 
Taking stronger action to stop this would be far simpler – including logistically and politically – than conserving groundwater. 
Subterranean aquifers should be the reservoir of last resort. 
If we don’t protect them today, future generations will pay a steep – or even an existential – price. 

Bringing Arab Education Online 
DUBAI – Education has long been a challenge in the Arab world, with inadequate access to high-quality schooling contributing to a widening skills gap that is leaving many young people, even graduates, unemployed and hopeless. 
In a region plagued by conflict and disorder, addressing these problems will not be easy. 
But, with a bold and innovative approach, it can be done. 
Of course, no single strategy is guaranteed to resolve the Arab world’s educational challenges. 
At the newly created Abdulla Al Ghurair Foundation for Education, which has $1.1 billion and a mandate to broaden opportunities for young Arabs by providing them with scholarships, we have given a lot of thought to the effectiveness – and cost-effectiveness – of the various possible approaches. 
And one option stands out: online learning. 
Already, Arab countries are making rapid progress in expanding Internet connectivity. 
By 2018, there are expected to be some 226 million Internet users in the Arab world, amounting to more than 55% of the population – almost 7% higher than the global average. 
But the vast majority of young people use the Internet for social media, rather than for economic or educational purposes. 
In this sense, they are missing out on a major opportunity, especially given the strides that have been made in improving the effectiveness and appeal of online learning. 
Nowadays, the world’s top universities teach computer science and engineering classes online. 
And, contrary to popular belief, these are not two-hour-long online lectures with no practical component. 
Rather, they comprise short video tutorials, interactive activities to practice concepts in realistic scenarios, and quizzes and peer assessments that provide valuable feedback to students. 
Thanks to this fast-evolving model, online learning is now a better alternative to traditional education than ever. 
This is great news. After all, delivering education via Internet technologies resolves some core challenges facing Arab countries’ education systems today. 
For starters, there is the sheer number of young people who need affordable access to education. 
Once a community has Internet access, as the Arab world increasingly does, scaling up online learning to reach the millions of young people who are currently out of school or do not have access to high-quality institutions can be done at relatively low cost. 
The Arab world’s few strong institutions of higher education certainly could not accommodate that many students. 
And even if they could, they might choose not to. 
We have seen firsthand how universities in the region and around the world have shut their doors in the faces of refugees from Syria and elsewhere, forcing them to overcome huge bureaucratic and financial hurdles. 
The second challenge is the low quality of education currently being delivered. 
For far too long, the region’s post-secondary institutions have operated without having to prove that the education they provide aligns with global quality standards and expectations. 
Through online learning, it would be far easier to measure progress and ensure that students are acquiring knowledge and skills they can actually use. 
Meanwhile, online learning can facilitate the introduction of new and innovative teaching and learning methods. 
For example, a reduction in traditional lecturing and rote learning could create space for the kinds of self-paced and personalized learning and assessment tools being used by professors delivering Massive Open Online Courses on EdX and other online educational platforms. 
Third, the Arab world faces the challenge of delivering continuous learning. 
In order to thrive in today’s fast-changing economic environment, where technology is making many jobs redundant and rewarding greater specialization, workers everywhere must consistently upgrade or expand their skill sets. 
As it stands, only wealthy young people in the Arab world, without personal commitments such as families and jobs, can pursue continuous learning, in the form of graduate degrees from top universities. 
Open online courses can level the playing field by offering professionally recognized credentials that boost a person’s career prospects. 
Taking all of this into consideration, we have created the Al Ghurair Open Learning Scholars Program, aimed at making some of the best education in the world available to Arab youth through online degree programs. 
We are setting the bar high, by establishing our first collaboration with MIT, a leader in open online learning. 
Together, MIT and the Open Learning Scholars Program will create two new “MicroMasters” programs consisting of five 12-week courses in so-called STEM subjects (science, technology, engineering, and mathematics) that are not currently taught in the Arab world. 
We expect these programs – accessible to young people in Arab countries and beyond – will attract significant interest from students and strong support from employers. 
But, in order to maximize the impact of our investment, perceptions of online learning must change, which will require a joint effort by educational institutions, government, and the private sector. 
Indeed, Arab educational institutions must begin to explore the development of high-quality online programs. 
For their part, governments should reconsider their position on recognizing online learning delivered by credible and internationally accredited institutions. 
As for private-sector actors, the key will be to reward employees with degrees and certifications received through online programs. 
In the meantime, the Abdulla Al Ghurair Foundation for Education will embark on a concerted effort to make innovative STEM degrees offered online by the world’s best universities available to Arab youth. 
Not to do so would risk allowing the majority of Arab young people to be left behind. 

Arab Fathers and Sons 
The deaths of Yasir Arafat and of Sheikh Zayd, the long-standing ruler of the United Arab Emirates, continues the generational change that began in 1999-2000, when the leaders of Jordan, Morocco, Bahrain, and Syria died in quick succession. 
Across the Middle East people are younger, and their political leaders older, than the world average. 
The gradual replacement of one generation of elites by another may be one of the key factors in determining whether or not effective reform takes place in the Arab world. 
At present, four political generations co-exist on the region’s socio-political map. 
The outgoing leadership generation – that of Arafat, King Hussein or Hafiz al-Assad, King Fahd and President Mubarak – was born before 1935 and has determined events in the Middle East since the 1970’s. 
These leaders came of age and began their careers during the era of decolonization. 
They were weaned on Gamal Abdel-Nasser’s pan-Arab nationalism, and the crucial political event for them was the Arab defeat in the 1967 Arab-Israeli war. Members of this generation sought a strong Arab leadership that would create a balance of power with Israel. 
They also believed in – or at least toyed with – forms of socialism and étatism, and did not consider democracy or civil rights to be priorities. 
The next generation was born between 1935 and 1955, and in many respects represents a generation “in between.” 
Most benefited from the economic growth and expanded educational opportunities associated with the oil boom of the 1970’s. At the same time, political participation remained blocked by the previous generation, which never intended to give up power voluntarily. 
Unsurprisingly, many in this generation grew dissatisfied, and not a few began to look for Islamic alternatives to the prevailing political systems. 
Rather than determining events in the coming two or three decades, this generation is likely to be sidelined by the next cohort, born between 1955 and 1975. This is the generation of Syria’s President Bashar al-Assad, Jordan’s King Abdullah and Morocco’s King Muhammad VI. 
Some call this the “generation of sons” – sons of leaders who led their states for decades. 
This age cohort was not much influenced by the Arab-Israeli wars or the East-West conflict. 
Instead, their political education included the Gulf War of 1991 and the Arab-Israeli peace process of the 1990’s, with its crises and breakdown. 
Jailed West Bank Fatah leader Marwan Barghouti is as representative of this group as the leaders of Syria and Jordan. 
Members of this generation are better acquainted with notions of globalization and economic reform than with socialism and revolution. 
Except for the Palestinians, they have never known their countries other than as independent and comparatively stable states. 
In the Palestinian territories, the jil al-intifada , the generation of the (first and second) Palestinian uprising, will likely become the founding generation. 
But it is the fourth group that underscores the relevance of generational issues in the Arab world. 
Even when combined, the first three generations make up barely one-third of the entire Arab population. 
Almost 60% of all Arabs are younger than 20, with roughly 70% below the age of 30. 
This raises a key question: what happens to these Arab “baby boomers” if the generation now coming to power clings to it as tenaciously as the generation of Mubarak, Assad, and Hussein? 
The political generation of Bashar al-Assad, King Abdullah, and Gamal Mubarak – son of Egypt’s ailing president – forms a less coherent picture than that of the outgoing leadership. 
In that elder generation, many had pursued military careers, and many of their aides and collaborators were engineers and civil servants. 
The socio-professional profile of the new elite is broader. 
Economists, bankers, and entrepreneurs as well as of technology or communication experts are common. 
There are also more traditional politicians: personalities who see themselves as representatives of particular social or economic interests, not as apolitical technocrats. 
This new leadership elite is in many ways more cosmopolitan than its predecessors; their average level of education is higher; a few have foreign degrees. 
Women also play a somewhat greater role. 
Developments in Morocco, Bahrain, and Jordan certainly seem to suggest that this changing of the guard can help soften rigid political structures and allow for broader participation. 
But generational change need not be accompanied by economic reform and steps towards political liberalization – witness North Korea under Kim Il Sung’s son, Kim Jong Il. 
Indeed, experience gives little reason to presume that a modern way of speaking, willingness to liberalize the economy, and an urge for technological development automatically translates into a democratic opening. 
It is more realistic to expect that the new Arab elites will make use of their states’ authoritarian institutions, both to overcome resistance to their economic agendas and to consolidate their newly acquired power. 
This is anything but a risk-free path. 
Without a significant increase in opportunities for political participation, including genuinely competitive elections, the chasm between a predominantly young population and a ruling elite with a narrow generational base will widen. 
Such continuing political inertia leaves an increasingly young Arab population prey to the appeal of extremist ideologies, while driving the best and brightest to seek their fortune elsewhere. 

Arab Fathers and Sons 
The problem of succession in the Arab secular republics highlights their predicament in the transition to a post-revolutionary phase, for succession in regimes that fail to build strong institutions always risks triggering a systemic crisis. 
While the decision by some in favor of dynastic succession may be lacking in democracy, it is not entirely devoid of merit. 
Arguably, it is a choice for economic modernization, for an end to the politics of conflict, and for positive political change further down the road. 
Years of Western-backed repressive authoritarianism nipped in the bud any potential growth of a liberal alternative to the incumbent Arab regimes, and turned any abrupt move to free elections into a dangerous exercise in Islamic democracy. 
A democracy that produces governments led by Hamas, Hezbollah, or the Muslim Brotherhood is inevitably bound to be anti-Western and opposed to an American-inspired “peace process” with Israel. 
Syria has already sought to assure regime continuity through quasi-monarchic hereditary succession with the move from Hafez al-Assad to his son Bashar. 
There are indications that Egypt might follow suit, with Hosni Mubarak’s son, Gamal, taking over. 
Likewise, Libya’s Muammar Khaddafi may be succeeded by his son, Seif el Islam. 
As products of revolutionary military takeovers, these secular nationalist regimes failed to produce genuine popular legitimacy and have had to fall back on the dynastic succession practiced by the regimes they toppled. 
The centrality of hereditary succession in the quest for peace and stability was shown by Hafez al-Assad when he agreed to unprecedented good will gestures aimed at drawing Ehud Barak’s Israeli government into a peace deal. 
An old and sick man who was to die a few months later, he acted with a sense of urgency to reach a deal that would relieve his inexperienced son of the burden of struggling for the recovery of the Golan Heights. 
Bashar Assad remains essentially loyal to his father’s legacy. 
Not unlike North Korea’s and Iran’s defiant nuclear policies, Bashar’s membership in the region’s “axis of evil” is a call for dialogue with America, not an invitation to an invasion, and for a settlement with Israel, not a drive to wage war on it. 
In Egypt, Mubarak turned his back on the lofty rhetoric of Gamal Abdel-Nasser’s revolution and its grand strategic designs. 
Stability is at the heart of his thinking. 
Hence, he could not accept America’s awkward pro-democracy agenda. 
But he was more than willing to occupy center stage in Arab diplomacy’s support of the Annapolis peace conference. 
After all, the passion that the Palestinians’ plight evokes among ordinary Egyptians is a dangerous source of instability. 
Mubarak’s succession is being conducted in an especially sophisticated manner. 
His son’s ascension, unlike that of Bashar on the eve of his father’s death, is anything but settled. 
But, by being allowed to acquire popular legitimacy and a high degree of acceptance within the political establishment as the driving force behind the ruling party’s preparations for the post-Mubarak era, Gamal is being positioned strategically to compete effectively for the presidency. 
He is widely credited for setting the country’s agenda, and for being the motor behind the liberal economic reforms that since 2004 have meant a qualitative leap in the Egyptian economy. 
It may be, as President Mubarak’s critics argue, that the faltering progress of democratization reflects the attempt to block all potential challengers to Gamal. 
But, with the decline of secular nationalism and Islamism’s rise, the hidden electoral power of the Muslim Brotherhood poses a mortal threat to the regime and its strategic alliance with the West. 
As a result, the regime refuses to take any chances. 
Nor was Muammar Khaddafi’s decision to stop being an international pariah entirely unrelated to his concern to bequeath to his son a state that lives in peace with the world. 
His abysmal human rights record remains, but the flamboyant “Guide of the Revolution” ceased flirting with weapons of mass destruction and global terrorism in exchange for the end of sanctions and international rehabilitation. 
A sick man whose rule at home is being challenged by Islamist opponents, he decided that international ostracism and domestic troubles is too explosive a combination for his son, a spoiled playboy, to handle. 
Algeria is an especially difficult case. 
The last of the revolutionary generation, President Abdulaziz Buteflika must still conceive a succession that ends his country’s civil war. 
Fully-fledged democracy might lead to victory for Islamists, as it did in 1991. 
A transition to democracy in the old revolutionary Arab regimes will not correspond to a Western model, nor can it be imposed by American F-16’s. 
But, as countries like Egypt, Syria, and Lybia might be indicating, hereditary succession is not an inherently reactionary move. 
Rather, it means opting for a controlled transition to a post-revolutionary phase in which economic modernization and international integration might usher in greater political change in the future. 

The Silent Arab Majority Must Speak Up 
ALGIERS – Since the United Nations Development Program began work on the Arab Human Development Reports (AHDR) in 2001, the situation in many Arab countries has gone from bad to worse. 
In fact, today the region cannot even come together to publish a new report. 
This is unfortunate, because finding a new shared vision for Arab people, especially Arab youth, is a prerequisite for ever achieving peace and prosperity in the Middle East and North Africa. 
The first AHDR, published in 2002, identified three major “development deficits” holding the region back: knowledge, women’s empowerment, and freedom. 
The report, described as “written by Arabs for Arabs,” had a clear influence on the regional development narrative and the way national elites talked about the problems facing their societies. 
Around the time of the first AHDR, the Arab world had reasons for optimism. 
Israel, having withdrawn from Lebanon in 2000, withdrew from Gaza in 2005. 
New Arab leaders – such as Abdullah II in Jordan, Mohammed VI in Morocco, and Bashar al-Assad in Syria – were coming to power and generating hope for change. 
Saudi Arabia announced its first municipal elections in 2003, and held them in 2005. 
Egypt and Iraq also both held (mostly) democratic elections in 2005. 
And Algeria’s attempt to quell longstanding civil strife was largely successful, thanks in part to high oil prices throughout this period. 
After the Arab Spring, which began in December 2010 and gained momentum through 2011, the UNDP began the 2015 AHDR, which focused specifically on the plight of Arab youth. 
I was a member of the 2015 AHDR team, along with around 30 intellectuals and activists from the Arab world. 
The 2015 AHDR shared similar themes with its 2002 precursor, but this time we engaged more directly with influential Arab youth to compile the best data possible, and to put a spotlight on the effects of the wars engulfing the region. 
The 2015 report was finalized in May 2015. 
But it has lain in the drawers of the UNDP Arab Bureau in New York ever since, probably in no small part due to its harsh judgment of the Arab power elite. 
One finding from the 2015 report that I can speak to directly is the emergence in the Arab world of a “silent majority” with a more liberal mindset, especially among the young. 
This promising trend reveals itself in generational comparisons of global opinion polls. 
Arab youth have more access to information from the outside world than ever before, and they are embracing values shared by other young people globally, rather than the values of their parents’ generation. 
Specifically, Arab youth yearn for greater participation in civil society, emancipation from patriarchal hierarchies, and more space for individual creativity. 
While education did not emancipate as much as in the rest of the world, owing to the conservative curriculum, youth did. 
Given these findings, the 2015 report advises national, regional, and international progressive groups to support the forces of emancipation, which hold the key to finding homegrown solutions to the challenges of ensuring better governance, more productive economies, and more resilient societies. 
The only route to large-scale change in the Arab world is to unleash innovation and creativity – and that demands an unbounded civil society. 
Fundamental civil rights must be established, supported by deep changes in the education system, reforms of family law, and a more open space for media and culture. 
The 2015 report, which I hope will be published soon, should encourage a reasoned and constructive regional conversation. 
It begins with this warning: “The youth of the region are becoming continually more disenchanted with the ossified political power structures that marginalize them. 
Unless governments wake up to this blinding reality, they are going to have to deal with far more than a few extremists.” 
The new silent majority is the best defense against the radical and suicidal undercurrents that have filled the political vacuum created by the collapse of the old order. 
Reform-minded Arabs must aim to widen the center, rather than trying to bring together the fringes. 
And the silent majority needs to break its silence. 
Otherwise, revolts against an unacceptable status quo will continue to be led by extremists, who have only grievances, not aspirations. 
The early 2000s held promise for the Arab world, and in today’s youth we can see it renewed. 
Arab civil-society reformers must be encouraged to speak up now, or risk losing that promise for another generation. 

Arab Myths and Realities 
WASHINGTON, DC – With Hosni Mubarak’s ouster in Egypt – widely considered to have one of the region’s most stable regimes until only recently – and Colonel Muammar Qaddafi clinging to power in Libya, there is no clear end in sight to the turmoil sweeping across the Arab world. 
Protests have already toppled governments in Tunisia and Egypt, leaving other Arab countries faced with widespread discontent. 
The unrest caught most people by surprise – both inside and outside the region – and has fundamentally upended at least five conventional beliefs about the Arab world. 
Arabs don’t go into the street. 
Before the protests began in Egypt and Tunisia, many people argued that there was no real urgency to political reform, and that those who were calling for change did not understand the public mood – things weren’t as bad as the dissidents made them out to be. 
This line of thinking led governments to believe that Arabs would not demonstrate in large numbers and demand change. 
In each country, rapid reform was seen as detrimental to national interests. 
This argument clearly is no longer tenable. 
No one predicted what happened in Egypt and Tunisia, which means that no Arab country is immune. 
Governments don’t have the luxury of waiting forever, and they can no longer use the myth of popular quiescence to avoid initiating the necessary reforms that will address the public’s underlying grievances. 
Economic liberalization should precede political reform. 
Arab governments – and many Westerners – claimed that privatization and other economic reforms should be given priority over political change. 
But, while it is easy to argue that citizens want bread before freedom, economic liberalization came without a system of checks and balances, and thus largely resulted in neither bread nor freedom. 
Instead, the benefits of privatization and other initiatives went largely to political and business elites. 
As a result, Arabs have come to view liberalization and globalization negatively. 
It is clear by now that economic reform must be coupled with political reform, so that institutional mechanisms of accountability are developed to monitor any excesses and ensure that benefits are made available to all. 
Governments have been quick to believe that the protests are fundamentally about high prices and unemployment, but the issue that unites Arab discontent is inadequate governance. 
Closed systems are necessary to prevent Islamists from taking power. 
The West is often afraid that democracy will give Islamists the opening they need to gain control – a fear that Arab regimes exploit to justify maintaining closed political systems. 
But Islamists did not play a big role in Egypt or Tunisia, and they are not expected to lead any of the new governments that are formed – though they are an important part of Arab societies and should play a role in their emerging regimes. 
So it is untrue that the only viable alternative to unrelenting absolutist rule must be Islamist. 
The protests are clearly the result of ordinary citizens becoming fed up with corruption, the lack of any semblance of rule of law, and arbitrary treatment. 
There is an opportunity here to start developing pluralistic systems where not only Islamists, but also other parties and discourses can play a role. 
Elections equal democracy. 
No one is fooled by this claim anymore. 
In order to maintain their dominance, Arab governments have relied on flawed laws and elections that don’t produce strong parliaments or lead to real change. 
Indeed, in countries like Egypt and Tunisia, government and parliament alike were unpopular. 
Throughout the region, elections have been used to create a façade of democracy aimed at impressing citizens and the outside world while insulating the regimes from pressure for genuine reform. 
The Arab public, however, will no longer accept the status quo. 
People will not be satisfied with economic handouts or cosmetic changes in governance; they are demanding real change that puts their country on a clear path toward democracy. 
The international community has no role to play. 
While the reform process should certainly be homegrown, the United States and the rest of the international community can encourage democratic development without imposing it from afar. 
President Barack Obama rejected many of the policies of the George W. Bush administration that were seen as trying to force democracy on Arab countries. 
But the subsequent silence on democratization aggravated – though it certainly did not cause – the unraveling of the Arab reform process in the last few years. 
The US and the West can discuss with Arab countries how political reform should be carried out in a way that would contribute to greater openness and opportunities for power-sharing. 
The West should not sacrifice these objectives for others; if allies ultimately lose power in popular revolts, such a tradeoff would not have furthered the West’s interests, to say the least. 
The unfolding events grabbing headlines around the world have shattered key myths about the Arab world. 
These countries’ people need to start gradual, sustained, and serious political reform now. 
At the dawn of a new Arab era, it is up to them to build new, open political systems that can head off the looming threat of escalating crises. 

Arab Spring, Western Fall 
TEL AVIV – The old vocation of what Rudyard Kipling called the “White Man’s Burden” – the driving idea behind the West’s quest for global hegemony from the days of imperial expansion in the nineteenth century to the current, pathetically inconclusive, Libyan intervention – has clearly run out of steam. 
Politically and economically exhausted, and attentive to electorates clamoring for a shift of priorities to urgent domestic concerns, Europe and America are no longer very capable of imposing their values and interests through costly military interventions in faraway lands. 
US Secretary of Defense Robert Gates was stating the obvious when he recently lambasted NATO’s European members for their lukewarm response to the alliance’s missions, and for their poor military capabilities. (Ten weeks into the fighting in Libya, the Europeans were already running out of munitions.) 
He warned that if Europe’s attitude to NATO did not change, the Alliance would degenerate into “collective military irrelevance.” 
Europe’s reluctance to participate in military endeavors should not come as a revelation. 
The Old Continent has been immersed since World War II in a “post-historical” discourse that rules out the use of force as a way to resolve conflicts, let alone to bring about regime change. 
And now it is engaged in a fateful struggle to secure the very existence and viability of the European Union. 
As a result, Europe is retreating into a narrow regional outlook – and assuming that America will carry the burden of major global issues. 
But America itself is reconsidering its priorities. 
These are trying economic times for the US, largely owing to imperial overstretch financed by Chinese credit. 
Admiral Mike Mullen, the US Chairman of the Joint Chiefs of Staff, recently defined America’s colossal fiscal deficits as the biggest threat to its national security. 
Indeed, at a time of painful budget cuts – the US is facing a $52 trillion shortfall on public pensions and health care in the coming decades – the US can no longer be expected to maintain its current level of global military engagement. 
But the fiscal crisis is not the whole story. 
The dire lessons of the wars in Iraq and Afghanistan will shape future debate about America’s international role in the twenty-first century. 
At an address in February to cadets at the US Military Academy at West Point, Gates said that “any future defense secretary who advises the president to send a big American land army into Asia or into the Middle East or Africa should have his head examined.” 
Gates’s recent statements are by no means those of a lonely isolationist in an otherwise interventionist America. 
He expressed a widely perceived imperative for strategic reassessment. 
In 1947, in a landmark article, “The Sources of Soviet Conduct,” which he signed as “X,” George Kennan defined America’s foreign-policy strategy for the Cold War as one of containment and deterrence. 
It is difficult to imagine a more marked departure from Kennan’s concepts than a report recently released by the Pentagon – A National Strategic Narrative – authored by two active-duty military officers who signed as “Y.” 
The report can be dismissed as just the musings of two senior members of the Joint Chiefs of Staff writing in their “personal capacity.” 
But its real power stems from the degree to which it reflects America’s mood in an era of declining global influence and diminishing expectations regarding the relevance of military power to sustaining US global hegemony. 
Just as Kennan’s “X” article was fully reflective of the mood in America at the time, so the Narrative expresses the current American Zeitgeist. 
Thus, the idea that “Y” might turn out to be a latter-day “X” – defining the nature of America’s international role in the twenty-first century – may not be far-fetched. 
Conspicuously, there is much in the Narrative that coincides with Europe’s emphasis on soft power. 
The authors call for a shift from outdated Cold War strategies of “power and control” to one of civic engagement and sustainable prosperity. 
Security, they maintain, means more than defense. 
It means engagement whereby America should not seek “to bully, intimidate, cajole, or persuade others to accept our unique values or to share our national objectives.” 
America, “Y” argues, must first put its own house in order if it is to recover credible global influence as a beacon of prosperity and justice. 
This would require improving America’s diplomatic capabilities, as well as regaining international competitiveness through greater investment in education and infrastructure at home. 
The message emanating now from the US is not one of non-interventionism, but a strategy of restraint that assumes that there are limits to American power and seeks to minimize the risk of entanglement in foreign conflicts. 
As Gates put it in his West Point address, the US Army would no longer be “a Victorian nation-building constabulary designed to chase guerrillas, build schools, or sip tea.” 
The bad news is that Europe’s feebleness and America’s fatigue might also signal the limits of noble ideas such as the obligation to interfere in order to protect populations being brutalized by their own rulers. 
America’s reluctance to be drawn into the Libyan quagmire, and the West’s failure to intervene in order to stop the Syrian army from massacring civilians, now looks like a sad, and fairly accurate, guide to the future. 

Economic Growth After the Arab Spring 
CAMBRIDGE – Five years after the Arab Spring uprisings began, Egypt, Jordan, Morocco, and Tunisia have achieved reasonable levels of political stability. 
Yet economic growth remains tepid, and the International Monetary Fund does not expect the pace of expansion to exceed 1.5% per capita this year. 
Given the region’s large catch-up potential and young workforces, one must ask why this is so. 
One obvious explanation is that, despite significant progress in building stable governments, these countries remain subject to political risks that scare private investors. 
But private investment was modest before the uprisings of 2011, when such risks were already high. 
There must be more to the story. 
A look at these countries’ recent economic history offers insight into the problem. 
Market economies are relatively new to the Middle East and North Africa, having arisen only after the 1980s, when the model of state-directed economic growth collapsed under the weight of its inefficiencies (and resulting debt). 
Unlike Latin America or Eastern Europe, however, Arab countries liberalized their economies without liberalizing their politics. 
Autocrats, supported by Western powers, remained firmly in place. 
As a result, even as the reforms of the 1990s rolled back the state’s economic role – in Egypt, state spending fell from 60% of GDP in 1980 to 30% of GDP in the 1990s – politics continued to shape markets. 
With economic privileges doled out in a way that blocked the emergence of independent entrepreneurs that might eventually challenge the autocrats’ control, favored firms were able to acquire virtual monopolies over entire liberalized economic sectors. 
In Egypt, for example, the firms of 32 businessmen closely connected with then-President Hosni Mubarak received in 2010 more than 80% of the credit that went to the formal private sector and earned 60% of the sector’s overall profits, while employing only 11% of the country’s labor force. 
In Tunisia, former President Zine El Abidine Ben Ali’s cronies received 21% of all private-sector profits in 2010, though their firms employed only 1% of Tunisia’s labor force. 
Unsurprisingly, this system generated only modest growth. 
Political loyalty does not translate into economic efficiency, and autocratic leaders’ loyalists consistently failed to build competitive world-class corporations. 
With talented potential competitors at such a distinct disadvantage, nobody was motivated to innovate or invest adequately. 
And it was not only traditional rent-filled sectors, such as real estate or natural resources, that failed to reach their growth potential. 
In tradable sectors, such as manufacturing and utilities, rents were created through non-tariff protection and subsidies, leading to anemic export growth. 
The result was a dearth of jobs in the formal sector, which rarely employed more than 20% of the labor force. 
With the few good jobs reserved for favored groups, a growing pool of educated young workers faced lower-quality jobs in the informal sector. 
Add to that poor-quality services, and social mobility ground to a halt. 
Intensifying social dissatisfaction was met with rising levels of repression. 
As political risks rose, the autocrats’ cronies demanded higher returns. 
Ultimately, the regimes’ inability to control both the street and the private sector culminated in popular protests and political revolutions. 
The governments that emerged from the Arab Spring’s wreckage inherited a broken system of closed deals. 
Inadequate property-rights protection is impeding investment, but moving to fair and well-enforced rules is not a realistic prospect in the current environment, given the petty corruption of an underpaid bureaucracy and the polarized political environment. 
These countries could try to replicate Turkey’s economic success in 2000-2010, when a political alliance between the ruling party and a broad group of dynamic small and medium-size enterprises (SMEs) contributed to a tripling of exports. 
The challenge here would be to find the right investors, who can spur growth and create jobs, not just provide political support. 
Here, Morocco and Jordan have had some success, with their monarchies proving capable of managing elites who offer both political acquiescence and economic sustenance. 
But, while these countries’ governments are having some success in broadening their business coalitions, traditional rent-seeking cronies are constraining progress. 
By undermining investment in tradable sectors, appeasing them means hampering export growth considerably. 
Tunisia could take a page out of Morocco’s playbook, expanding its export sector by attracting foreign direct investment, while opening up its domestic services sector to local SMEs. 
But it would still have to face the challenge of liberalizing its economy, in the face of rising pressure from labor unions to protect inefficient incumbent firms from increased competition. 
For its part, Egypt is relying on public and private firms close to its army, together with finance from the Gulf Cooperation Council, to support its economy. 
But, given the fall in GCC oil revenues – not to mention disappointment with the arrangement’s inefficiency – this route seems increasingly limited. 
In all four countries, employment growth will remain constrained for some time to come. 
Improving economic inclusion without threatening political leaders will be no easy feat, as it demands the creation of more inclusive governance arrangements. 
For Morocco and Tunisia, the convergence of interests between moderate Islamists and liberals offers a ray of hope. 
But such hope seems to be lacking for the moment in Egypt and elsewhere in the region. 

Why Economists Missed the Arab Spring 
LONDON – The sixth anniversary of the Arab Spring uprisings this year came and went largely unnoticed. 
Unlike in previous years, there was no torrent of commentary about the tumultuous events that shook the Arab world and seemed to promise a transformation of its politics. 
Of course, novelty wears off over time. 
But waning interest in the Arab uprisings reflects a deeper shift: hope for new, more representative political systems has given way to despair, as expectant revolutions have morphed into counter-revolution, civil war, failed states, and intensifying religious extremism. 
And yet, as disagreeable as the outcomes may have been so far, we must continue to focus on the Arab Spring uprisings, in order to uncover their root causes. 
Like any landmark event, they have posed new and difficult questions. 
And one of the most important is why economists failed to anticipate the unrest. 
Forecasting political upheaval is no easy feat. 
Economists have a less-than-impressive record when it comes to predicting even economic crises. 
But this particular forecasting failure may reflect a deeper problem with economic assumptions and frameworks. 
On the eve of their downfall, a few Arab autocrats were actually being lauded by the World Bank and International Monetary Fund for their supposed success in adopting the “right” economic policies. 
The World Bank’s subsequent mea culpa is a clear indication that there may have been a problem with the policies they had prescribed for the Arab ancien régimes. 
This raises a raft of other questions. 
Were economists focused on the wrong indicators? 
Were they misled by false inferences? 
Or were they not paying enough attention to potential pitfalls? 
In short, was it a problem of data or analysis? 
A failure to anticipate political revolutions reflects, at least partly, conceptual inadequacies. 
Mainstream economics tends to focus on the equilibrium-seeking behavior of homo economicus, guided by rational choice, when marginal benefits equal marginal costs. 
That conceptual framework is demonstrably ill equipped to deal with social and political upheavals, which can hardly be described as marginal changes. 
There are also empirical dimensions to this forecasting failure. 
Many of the data painted quite a favorable picture of the economic situation in the Middle East and North Africa (MENA). 
During the decade before the uprisings erupted, the region’s economies attained respectable real annual GDP growth rates of around 4-5%. 
These gains were somewhat diluted by the population growth that accompanied them, with real per capita GDP-growth rates hovering around 2-2.5%. 
Nonetheless, this represented a significant improvement from the 1980s and 1990s, when the MENA economies lagged far behind other regions. 
There were also appreciable improvements in human-development indicators in the MENA countries and, judged by conventional criteria, inequality was declining in some of them. 
For example, the Gini coefficient was declining in Egypt. 
Moreover, despite the paucity of data, poverty ratios, already among the lowest in the developing world, were falling in some of the countries swept up by the Arab Spring – most notably, in Tunisia. 
MENA countries had benefited, directly or indirectly, from years of favorable international oil prices – especially from 2002 to 2008, when prices reached a historic peak of about $147 per barrel – and benefited from a recent upswing in the business cycle. 
But it was not all good news, of course. 
When the revolutions erupted, there were plenty of reasons for ordinary people, especially the young and the educated middle classes, to feel politically alienated. 
Unemployment rates – particularly youth unemployment rates – were very high. 
And autocrats are not exactly known for placing a high priority on social justice. 
Even so, the fact remains that the MENA countries were experiencing improvements in relative prosperity, not economic downturns or stagnation. 
This flies in the face of much conventional thinking, which links mass revolts to economic hardship and assumes that periods of relative prosperity are correlated with mass political quiescence. 
Aristotle’s Politics offers a radically different interpretation of the relationship between economic performance and political stability: “In order to secure his power, a tyrant must keep the population in poverty, so that the preoccupation with daily bread leaves them no leisure to conspire against the tyrant.” 
This is not to say that revolutions are the privilege of the rich, but rather that growing relative prosperity might enable greater awareness of missing freedoms and stoke resistance against poor governance. 
To some extent, history bears this reading out. 
Iran’s 1979 Revolution, like the Arab Spring uprisings, followed unparalleled economic growth, driven by highly favorable international oil prices (which had quadrupled in 1973-1974). 
Even in cases when revolutions have been preceded by economic downturns, prior improvements in prosperity may have played a role. 
According to the American sociologist James C. Davies’s so-called J-curve theory, revolutions – such as the Russian Revolution of 1917 and Egypt’s revolution of 1952 – occur when periods of prolonged economic and social development are sharply and suddenly reversed. 
In other words, it is not straightforward economic hardship, but rather frustration with the disparity between expectation and reality that awakens the masses. 
The Arab Spring suggests that improved economic performance cannot be viewed as an insurance policy against political instability. 
Learning that lesson may help us avoid being blindsided by future political upheaval. 
It might even enable us to avoid the kind of disappointment and despair that the Arab Spring has brought. 

The Arab Spring and the Western Winter 
BEIRUT – There are many striking parallels between the “Arab Spring” that began in 2010 and the United Kingdom’s Brexit referendum, the election of US President Donald Trump, and the far-right resurgence across Europe. 
In each case, an old order fell, and progressive parties have been too weak to counter the emergence of authoritarian and xenophobic forms of governance. 
The growing discontent with the status quo that underlay the Arab uprisings of 2010-11 had many causes, and the opposition took both progressive and conservative forms. 
Members of the middle class resented their loss of dignity at the hands of an unaccountable elite. 
Young people decried a future that looked especially bleak when compared to the expectations of their parents’ generation. 
And Islamists stoked moral opposition to the loss of ethical values in society. 
These are all recurring themes in ongoing debates across the West, with its growing population of disaffected whites, displaced workers, and frustrated young people. 
Over time, as economic liberalism has crowded out longstanding principles of equality and social solidarity, vast wealth disparities have emerged, corrupting many Western countries’ politics. 
Meanwhile, globalization and technological innovation have had profoundly negative effects on certain social cohorts, and public policies have failed to mitigate the damage. 
Far-reaching policy adjustments are now urgently needed, not least because of the deadly threat that climate change poses to the entire globe. 
But what adjustments will be made, and who will carry out them out? 
Popular revolts – in the streets and at the ballot box – have so far failed to deliver an alternative governing framework that offers credible solutions to the political, social, and economic problems that have engulfed Western and Middle Eastern societies. 
In the Arab world, the explosion of popular anger dislodged long-entrenched regimes. 
But the old autocrats had worked hard to prevent a credible opposition from ever being conceived. 
The 2010-11 revolutions were leaderless, and thus could not fill the resulting political void. 
Instead, armies, tribes, sectarian groups, and religious parties quickly came to the fore. 
Egypt has now experienced an autocratic restoration. 
Yemen, Syria, and Libya are mired in civil war. 
Lebanon and Iraq are fragmented. 
And the oil producers that tried to extinguish the regional fire by pouring money on it are now running massive fiscal deficits. 
Turkey, too, has moved toward strongman rule; and progressive forces in Iran have been weakened. 
Only Tunisia is still pursuing a messy transition toward democracy; even there, however, economic reforms have fallen short of addressing the challenges facing the country. 
The Middle East’s new autocrats are consolidating power with divide-and-rule tactics that have polarized citizens along sectarian and identity lines. 
Owing to widespread feelings of personal insecurity, many citizens have opted for sect over society, and for security over civil rights. 
In the West today, populist politicians with no realistic plans for actually building a better future are emulating Middle Eastern autocrats. 
They win power by stoking fear of the “other” – refugees, Muslims, or foreign terrorists – and promising to establish security through force. 
Once in power, they begin to consolidate their rule accordingly. 
Democratic institutions may be resilient to populist governance; but, as we are already witnessing in the US, these institutions will soon be tested, and undoubtedly weakened before all is said and done. 
The same parallel holds for international relations. 
The geopolitical map of the Middle East is being redrawn by the transnational Shia-Sunni split – which is being stoked by rivals such as Iran and Saudi Arabia – and by outside intervention into regional conflicts. 
Similarly, Western populist leaders are disrupting their countries’ interests with respect to China, Russia, India, and Northern Europe, and challenging the post-1945 international order, without offering anything remotely resembling a viable alternative. 
Then there is the failure of progressive political forces to provide such an alternative. 
The dominant narrative has already shifted worldwide. 
Most people no longer believe in a future defined by progress: economic dynamism, global integration, and social democracy. 
A more pessimistic view has taken hold, in which the future is corrupted by globalization, untamed markets, labor-saving technological innovations, and global warming. 
Restoring optimism, in both the Middle East and the West, will depend on whether intellectuals, unions, progressive parties, and civil-society groups can build a common political base and offer a shared vision for the future. 
This will require not only novel solutions to emerging problems, but also a credible means to implement change democratically. 
At the very least, this new age of resistance and revolution has brought out into the open problems that were once left to fester in the dark. 
As a result, we now know that economic policies should be geared toward inclusion; material consumption will have to be curtailed; and democracy must be protected from the malign influence of concentrated wealth and entrenched interests. 
These are immense challenges, to be sure; but if we can identify them clearly, we can begin to take action. 
And an achievement in one place can be a model everywhere else. 
The next time millions of people march peacefully in Cairo to demand that their voices be heard, the trigger may not be a self-immolation in Sidi Bouzid, but a riot in Istanbul, the impeachment of a US president, or electoral victories for progressive parties in Europe. 


Rethinking the State’s Role in Arab Economies 
WASHINGTON, DC – The Arab world has a long tradition of commerce and enterprise. 
Yet, since achieving independence, many Arab countries have adopted state-led development models that have left their economies overly reliant on the government. 
This is unsustainable. 
The Arab world’s economic model has endured, despite major setbacks in the 1990s, largely because the state employs a large share of workers and provides universal subsidies. 
This eliminates risk from citizens’ economic lives, entrenching their dependence on the government and stifling entrepreneurship and innovation. 
It also undermines the delivery of public services, stoking mistrust of the very government on which populations depend so heavily. 
Now, the Arab world’s state-led development model may be set to reach a breaking point, as hundreds of millions of young people prepare to enter labor markets in the coming decades. 
With the public sector unlikely to be able to absorb these new workers, there is an urgent need to create a dynamic private sector that not only adopts, but also generates technological innovations that empower workers and deliver durable and inclusive growth. 
This approach is in line with the demands of the Sustainable Development Goals, which were approved by all United Nations member states – including all Arab countries – in 2015. 
Achieving the SDGs – which range from eliminating hunger and poverty to protecting the environment – will require the involvement of dynamic private sectors that are capable of producing technological solutions and willing to provide critical financing. 
Private-sector financing – say, of the infrastructure projects demanded by SDG9 – is particularly important in the Arab world, where many governments are already burdened by debt. 
To help mobilize that financing, the World Bank Group has launched the Maximizing Finance for Development program. 
Of course, governments must also maximize their own resources. 
In the past, abundant investment and energy revenues limited the incentive to mobilize tax revenues. 
But, as government coffers are depleted, Arab countries – among the least efficient tax collectors in the world – are under growing pressure to pursue meaningful reform. 
Arab governments must also boost the efficiency of their spending. 
As it stands, while most Arab countries spend a fair amount relative to their income levels, they achieve relatively poor outcomes, especially in health and education. 
To improve the state’s functioning and regain citizens’ trust – developments that could facilitate tax collection – Arab governments should apply the concept of “value for money” to public administration. 
Such a framework for assessing cost-effectiveness of public-sector activities requires that data about those activities be collected, assessed, and disclosed in a transparent way. 
Mechanisms such as information-feedback loops would then enable authorities to identify quality issues and make improvements quickly. 
Here, too, the World Bank Group is taking steps to help. 
Because investing in human capital is the most important long-term action a government can take, the Human Capital Project focuses on identifying the factors that are undermining the efficiency of investments in this area. 
Even before comprehensive data are available, however, some approaches for improving the efficiency of public spending and administration stand out. 
In particular, Arab countries can emphasize the localization of development. 
By improving the capacity of local governments to plan, finance, and deliver key services, including health and education, countries could boost value for money, build confidence among citizens, and make significant strides toward achieving the SDGs. 
A final area where reform is imperative is regulation. 
In many Arab countries, incumbent public and private firms – especially in critical sectors like financial services, telecommunications, and energy – enjoy significant advantages, including outright protection, onerous regulations that deter market entry by new players, and inadequate limits on natural monopolies. 
This impedes competition and contestability, undermines the diffusion of general-purpose technology, and blocks the type of adaptation and evolution that a dynamic private sector requires. 
Rather than control the economy outright, Arab governments should foster the emergence of independent yet accountable regulators that can help ensure improved economic outcomes. 
Of course, if history is any indication, the shift from a dirigiste state to a regulatory one will not be easy. 
But past experience offers useful lessons to guide this process. 
In any case, the regulatory status quo – which will condemn Arab youth to unemployment and disenfranchisement – is not an option. 
This is all the more true at a time when tech giants like Facebook, Amazon, Tencent, and Alibaba – with matchmaking-based business models turbo-boosted by digital technology – are propelling a shift toward “ultra-concentration.” 
In this context, building a dynamic private sector capable of providing opportunities to the Arab world’s young workers will require even more vigilant and effective regulators, operating within a smart regulatory framework that addresses issues relating to the collection and use of data. 
It is often said that private sector-led innovation is the key to enabling developing countries to leapfrog their way into the future. 
But this narrative should not be allowed to obscure the paramount importance of smart and innovative regulations to support such progress. 
The state’s role in Arab economies must improve, not diminish. 

The Lonely Arab Crowd 
PARIS – In The Hubris of the Zero Point, the Colombian philosopher Santiago Castro-Gomez describes René Descartes’s 1637 declaration “I think, therefore I am” as the moment white Europeans installed themselves above God as the sole arbiters of knowledge and truth. 
With this turning point, they began to think of themselves as observers whose scientific methods, morals, and ethics overrode those of other cultures. 
Cultural “zero points” are important because they serve as a dividing line – a clear demarcation of “before” and “after” that holds fundamental implications for the development of private and public life. 
So it is instructive to consider the implications of Castro-Gomez’s concept for the Arab world. 
Indeed, it could be argued that much of the region’s troubles are attributable to the absence of an indigenous “zero point” onto which a modern culture could be sturdily pinned. 
In The Lonely Crowd, the American sociologist David Riesman identified three broad cultural types: tradition-directed cultures that look to inherited rituals, morals, and values for guidance; inner-directed cultures, in which people behave according to self-nourished values; and other-directed cultures that react predominantly to external norms and peer influences. 
Riesman’s framework has particular resonance in the Arab world today, where rising literacy rates and rapid advances in communication technology have stirred a maelstrom of competing cultural narratives, with his three types competing to define the region’s future. 
Ironically, it is the combination of increased literacy and modern technology that is fanning the flames of conflict between the two types of “reformers” – religious revivalists and Western-oriented modernizers. 
Taking advantage of their ability to mass-produce and instantly disseminate ancient religious texts and Western-originating literature, the two camps battle for the hearts and minds of otherwise traditional societies. 
According to the Lebanese publisher Samar Abou-Zeid, however, religious books are among the most downloaded works of literature in the Arab world. 
The trouble is that most religious texts consumed today in the Arab world address an audience of specialists that no longer exists and – as Riesman warned – they are often misconstrued. 
The people and the times for which these texts were written are completely different from the people reading them today. 
Devout Muslims, of course, have their own zero point: the year 610, when the Angel Gabriel revealed the Koran’s first verse to the Prophet Muhammad. 
From then on, many Muslims have regarded themselves as the bearers of a righteous truth and moral vision that takes precedence over all others. 
This has inevitably put religious revivalists in opposition to the second cultural type vying for preeminence in the Arab world: Western-educated, inner-directed modernists who hold Descartes’s declaration as their reference point. 
These Arabs – often the economic elite – read, admire, and consume products of a culture that, despite its proclaimed commitment to “universal values,” continues to be stingily Eurocentric and dominated by Christian intellectual tradition. 
As a result, they are increasingly likely to feel like exiles both at home and abroad. 
The final, other-directed strand of Arab culture is arguably the most dominant: those whom Riesman would have called the “lonely Arab crowd.” 
Free of roots or tradition, they take refuge in superficiality from the conflicts that surround them, seeking fulfillment in consumerism, careers, and lifestyles. 
Their zero point is the latest fad or fashion. 
This cultural turbulence is due – at least in part – to the absence of a contemporary homegrown intellectual tradition capable of providing Arab societies with an inner compass based on local values and modern perspectives. 
This cultural vacuum is most evident in the mismatch between the region’s reading habits and the response of its publishing industry. 
Egyptians, for example, read for an average of 7.5 hours per week, compared to five hours and 42 minutes in the United States. 
And yet in 2012, according to Abou-Zeid, the entire Arab world and its 362 million inhabitants produced just over 15,000 titles, putting it in the same league as Romania (with a population of 21.3 million), Ukraine (45.6 million), or the American publisher Penguin Random House. 
To maintain a similar proportion to population, the Arab world should be publishing 10-20 times more titles than it does today. 
The dominance of old religious texts and Western-produced works has left modern Arab readers polarized, without a zero point of their own. 
It is ironic that increased literacy and adoption of modern technology have contributed not to intellectual growth, but to regional strife. 
It may be no coincidence that Lebanon, one of the first countries in the region to boost literacy rates, was also the first to tumble into civil war. 
Unless Arab and Muslim societies rediscover, revitalize, and in some respects create their homegrown contemporary intellectual tradition, the result will be cultural drift or, far worse, the continuation of bloody civil strife. 

Arafat's Ghost 
History gave Yasir Arafat far more time than most leaders to achieve his mission. 
After all, at the time of his death he had been leader of the Palestinians for 35 years. 
Yet he left his people in a terrible situation, with no state, in the midst of a losing war, and with a bankrupt economy. 
Whether his successors can revive and complete the Palestinians' historic mission depends on how they define their goal. 
Looking back at his career, Arafat never really veered from the belief that his life's mission was to destroy Israel by any means necessary and replace it with a Palestinian Arab state. 
An independent Palestinian state that did not include all of Israel held no appeal to him. 
He was equally indifferent to his people's material welfare and anything particular about the design of a viable political and economic system. 
Now, in the post-Arafat era, Palestinians must choose one of several strategies. Unfortunately, most of the alternatives call for the continued use of violence and terrorism. 
The moderate strategy seeks an independent Palestine state as quickly as possible, on the assumption that once there is no more Israeli presence or violence, the Palestinians can concentrate on constructive pursuits, including resettling refugees and improving living standards. 
But this is the view of only a small minority of leaders, notably former Prime Minister Abu Mazin and Muhammad Dahlan, who heads his own militia in the Gaza Strip. 
If Arafat had taken this road - accepting Israel's existence, ending terrorism, and confronting Palestinian extremists - the conflict would have ended long ago. 
But, with no single all-powerful leader, it will be hard for any successor to force through the difficult decisions required by such an orientation. 
The hard-line strategy is the traditional ideological approach championed by many Fatah and PLO veterans who returned from exile to the West Bank and Gaza Strip, including Arafat. 
Their current leaders include men like Palestine National Council head Salim al-Zanun and Fatah ideological chief Sakr Habash, who favor continuing to battle Israel until it is destroyed, at which point they will rule Palestine with a relatively secular nationalist regime. 
They look down at younger challengers and view the Islamists as a threat. 
The younger generation of indigenous West Bank Palestinians, whose leaders began political activity in the uprising of the late 1970's, embraces a militant strategy that views the hardliners as burned-out old fogies, enervated by corruption. 
Unlike the hard-line secularists, the militants, whose best-known leader is Marwan Barghuti, the head of the Tanzim grassroots grouping in Fatah, are willing to work with the Islamists. 
The militants argue that a two-stage strategy is needed to defeat Israel. 
First, long-term continuation of violence will force Israel to withdraw from the occupied territories. 
Then, with Palestinians gaining the upper hand, they can advance to a second stage in which all of Israel is conquered, implying armed struggle - which often takes the form of anti-civilian terrorism - for many more years. 
Finally, there is the revolutionary Islamist vision espoused by Hamas, which seeks to continue fighting and using terrorism, regardless of how much time it takes and lives it costs, until it defeats both Israel and Palestinian secular nationalists. 
Palestine will then be an Islamist state in which moderates would be shot and the old nationalist leadership forcibly retired or jailed for corruption. 
In the meantime, however, Hamas is willing to form alliances with the nationalists, particularly the militant faction of Fatah. 
The problem for Palestinian moderates is clear: any leader willing to agree a peace treaty with Israel would be opposed - passionately and even violently - by roughly 80% of the movement. 
A key question is whether the Palestinian masses, fed up with their leadership's bickering, corruption, and incompetence, could make their wishes known to find an end to a conflict that has cost them so much. 
But none of the main leadership factions are proposing that the masses be consulted very much. 
Nor did Arafat leave in place any institutional mechanisms for doing so. 
Moreover, the popular appeal of radical religion, ideology, and misinformation should not be underestimated. 
Few Palestinians are even aware that four years ago Arafat turned down an independent state equal in size to the entire West Bank and Gaza Strip, in addition to more than $20 billion in refugee compensation. 
The main problem left by Arafat is the lack of any leadership at all. 
Rarely in history has a political movement been so deliberately set by its founder on a course toward chaos. 
Arafat not only left no successor, but no order. 
Over the decades, the movement has developed a political culture of indiscipline. 
Arafat presided over a sort of anarchy, encouraging rivalries, undermining other potential leaders, and ensuring that all authority (and money) ran through his hands. 
Only if the post-Arafat movement decides that it really wants a Palestinian state in exchange for ending the conflict with Israel in every respect will there be a real chance of peace. 
Arafat's death may well mark the beginning of that process, but the transition to a new Palestinian leadership could take years, and there is no assurance that it will be a moderate one. 

Arafat’s Last Hurrrah 
In his protracted moment of death, Yasir Arafat performed his last act of duty to the Palestinian cause to which he devoted his entire life. 
Everything about the man was, indeed, protracted. 
He carried out a protracted war of national liberation. 
He withstood a series of protracted sieges – in Amman (1970), Beirut (1982), and in Ramallah (2002-2004). 
Arafat’s leadership was the most protracted among his counterparts in the Arab World, as he outlived three Egyptian Presidents (Naguib, Nasser, Sadat and spanned all of Mubarak’s quarter of a century), five Lebanese Presidents, three Iraqis, five Algerians, three Syrians, three Saudi Monarchs, and two in Morocco, not to mention other world leaders, from Eisenhower to Bush in the US, from de Gaulle to Chirac in France, and from Maó to three successors in China. 
Probably no other political figure alive today met and endured as many world leaders as Arafat. 
But there is much more to Arafat’s legacy than endurance. 
It has been correctly said over and again that Arafat was a mixed blessing for his people. 
Their fate and destiny have been inextricably linked, to the near demise of both at times. 
For several decades after the usurpation of their homeland, Palestinians were reduced to aggregates of refugees, some remaining in the newly-created state of Israel as second-class citizens, with others scattered over the Arab World and far beyond. 
It was Yasir Arafat, through the Palestinian Liberation Organization (PLO) he founded, that gave them a sense of identity as a people. 
Regardless of its effectiveness, the armed struggle waged by the PLO did empower the Palestinians and internalize a sense of collective dignity and self respect within them. 
Their cause could no longer be ignored. 
No other modern issue has appropriated as many UN resolutions or as much international diplomacy. 
If politics is defined as the art of compromise, Arafat was a master of it at the Palestinian and Arab levels. 
He managed to stay at the helm for over forty years with no serious challengers. 
Internationally, however, he was out of step with the post Cold War era. 
Whether or not he was solely to blame, a true opportunity for historical compromise was missed at Camp David in August 2000, and he himself acknowledged it a year later. 
By that time it was too late, as the leadership in both the US and Israel had changed and there was no interest to engage him. 
During the last four years of his life, Arafat’s public space was literally and metaphorically diminishing. 
He was unable to re-engage his Israeli adversaries or control his suicide-bound Palestinian militants. 
Nor was he able to contain let alone combat rampant corruption in the Palestinian Authority. 
Nor was Arafat helped by world events that shifted the spotlight to Bush’s wars on terrorism in Afghanistan and Iraq. 
If anything, they had adverse effects for him and his life-long cause. 
Like his own body, Arafat’s familiar world was steadily fading away with irreversible loss of control. 
Ironically however, as he was dying, world leaders and the media were rediscovering the importance of Arafat’s leadership if not his persona. 
The sustained focus of the media on him, to the point of near saturation, focused world attention on the Palestinian Question once again. 
Statements by Tony Blair, Jacques Chirac, Kofi Annan and others on the occasion of Arafat’s death have been forceful in demanding a speedy and long overdue resolution of the conflict. 
It is as if in death, Arafat has given his people a chance to achieve what he could not achieve in life –the dream of an independent democratic Palestinian state. 
It is Arafat’s last hurrah. 

Are Bad Banks a Good Idea? 
STOCKHOLM – The idea of a “bad bank” appears to grow more popular by the day in countries where toxic assets have paralyzed lending. 
The Swedish bank cleanup in the early 1990’s is often cited as an example of how successful this idea can be. 
But the lessons that are sometimes derived from Sweden’s experience are based on misunderstandings of what we actually did, and of how our system worked. 
The initiative to set up a “bad bank” in Sweden was taken not by politicians, but by the management of Nordbanken. 
Following years of mismanagement and reckless lending, the bank was the first big victim of the commercial property market’s decline in 1990. 
Nordbanken had become fully state-owned and a new management was put in place to restore the bank to viability. 
But it soon turned out that the managers had little time to spend on Nordbanken’s core banking business, because they had to focus disproportionately on handling an enormous variety of assets. 
And every quarter brought new write-offs that ruined efforts to rebuild the bank’s reputation and its employees’ morale. 
The radical solution was to separate all the assets that were alien to the bank’s core business, mainly real estate companies, but also firms in the manufacturing, construction, and service industries. 
The “bad bank” that was established for this purpose, Securum, needed an enormous injection of capital from the owner, the Swedish government. 
But Securum was then able to recruit skilled staff members who could maximize the assets’ value when markets recovered, and to be in a financial position to await that recovery. 
The rest of Nordbanken, now known as Nordea, proceeded to become the largest bank in Scandinavia. 
In contrast to today’s situation, the bad assets were usually entire companies, not complex securities. 
But, as with today’s toxic assets, there was no market, and rapid disinvestment would have triggered fire-sale prices, depressing all asset values in the economy and resulting in more bank failures. 
Furthermore, the point was not to help private banks get rid of their troubled assets. 
When most other Swedish banks followed Nordbanken’s example and established their own bad banks, they did so without state participation. 
But this was possible only because the Swedish government already owned all the assets, thereby circumventing the hopelessly difficult issue of pricing them. 
With a private owner, huge public subsidies would have been politically unacceptable. 
The assets either would have to be priced at far above their market value, with taxpayers thereby subsidizing the previous, failed owners, or the private bank would not have been helped at all. 
A government-sponsored bad bank for private assets is thus a very bad idea. 
In 1994, when I became State Secretary for Financial Affairs in Sweden’s Ministry of Finance, recovery appeared to be on the horizon, following the abolition of the fixed exchange rate, the ensuing sharp depreciation of the Krona, and lower interest rates. 
The new government implemented an effective and very big program to close a budget deficit of roughly 12% of GDP. 
Gradually, confidence grew, and financial markets began to function again. 
As opportunities appeared, we began to re-privatize assets, and within a few years Securum was closed. 
With hindsight, I believe we sold its assets too quickly. 
Taxpayers could have recovered more of their losses if we had been more patient, as prices continued to rise for a long time. 
But the stigma of socialism was stronger than the instinct to make a profit. 
The following lessons of Sweden’s experience seem relevant today: 
· A bad bank can be an effective instrument in the recovery of losses and the revival of banks. 
· Although Sweden’s experience concerned shares in companies used as collateral for credit, rather than bonds or similar financial instruments, this situation will likely arise in many countries today as the crisis continues, more companies go bankrupt, and banks recall their collateral and take possession of shares in indebted companies. 
· Government subsidies for private bad banks, or public bad banks to clean up private banks’ toxic assets, are a bad way for taxpayers to transfer money to troubled banks compared to normal capital injections. 
All subsidies should be transparent, and public/private bad banks are not. 
· It is vital to staff bad banks with professional and experienced managers who are untainted by previous scandals. 
Here, Sweden’s experience is encouraging. 
It was easier than we expected to recruit good people for Securum, because working in the public interest for this pioneering state-owned bad bank was perceived as a unique challenge. 
· Maximizing taxpayers’ economic interests, not ideology or political considerations, must be the guiding principle. 
The public should be in no doubt about this, for their trust is essential. 



Springtime for Fascism? 
NEW YORK – Are we seeing a new dawn of fascism? 
Many people are beginning to think so. 
Donald Trump has been compared to a fascist, as has Vladimir Putin and a variety of demagogues and right-wing loudmouths in Europe. 
The recent tide of authoritarian bluster has reached as far as the Philippines, whose president-elect, Rodrigo (“The Punisher”) Duterte, has vowed to toss suspected criminals into Manila Bay. 
The problem with terms like “fascism” or “Nazi” is that so many ignorant people have used them so often, in so many situations, that they have long ago lost any real significance. 
Few still know firsthand what fascism actually meant. 
It has become a catch-all phrase for people or ideas we don't like. 
Loose rhetoric has coarsened not only political debate, but historical memory, too. 
When a Republican politician compares US property taxes with the Holocaust, as one Senate candidate did in 2014, the mass murder of Jews is trivialized to the extent of becoming meaningless. 
The same is roughly true when Trump is compared to Hitler or Mussolini. 
As a result, we are too easily distracted from the real dangers of modern demagoguery. 
After all, it is not hard for Trump – or the Netherlands’ Geert Wilders, or Putin, or Duterte – to refute accusations of being fascists or Nazis. 
They may be repulsive, but they are not organizing uniformed storm troopers, building concentration camps, or calling for the corporate state. 
Putin comes closest, but even he is not Hitler. 
Of course, forgetfulness or ignorance about the past goes both ways. 
When a young Dutch writer, sympathetic to the new populist wave, expressed antipathy to his country’s “cultural elite,” for promoting “atonal music” and other arrogant forms of ugliness, instead of the wholesome beauty embraced by the common man, I wondered whether he knew about the Nazis’ attack on “degenerate art”? 
Atonal music, hardly the cutting edge today, was precisely the kind of thing that Hitler’s minions loathed – and ultimately banned. 
There are other echoes of our darkest history in contemporary political bombast, which a few decades ago would still have cast any politician who used it to the margins. 
Stoking hatred of minorities, fulminating against the press, stirring up the mob against intellectuals, financiers, or anyone who speaks more than one language, were not part of mainstream politics, because enough people still understood the dangers of such talk. 
It is clear that today's demagogues don’t much care about what they derisively call “political correctness.” 
It is less clear whether they have enough historical sense to know that they are poking a monster that post-World War II generations hoped was dead but that we now know only lay dormant, until obliviousness to the past could enable it to be reawakened. 
This is not to say that everything the populists say is untrue. 
Hitler, too, was right to grasp that mass unemployment was a problem in Germany. 
Many of the agitators’ bugbears are indeed worthy of criticism: the European Union’s opacity, the duplicitousness and greed of Wall Street bankers, the reluctance to tackle problems caused by mass immigration, the lack of concern for those hurt by economic globalization. 
These are all problems that mainstream political parties have been unwilling or unable to solve. 
But when today’s populists start blaming “the elites,” whoever they may be, and unpopular ethnic or religious minorities, for these difficulties, they sound uncomfortably close to the enemies of liberal democracy in the 1930s. 
The true mark of the illiberal demagogue is talk of “betrayal.” 
The cosmopolitan elites have stabbed “us” in the back; we are facing an abyss; our culture is being undermined by aliens; our nation can become great again once we eliminate the traitors, shut down their voices in the media, and unite the “silent majority” to revive the healthy national organism. 
Politicians and their boosters who express themselves in this manner may not be fascists; but they certainly talk like them. 
The fascists and Nazis of the 1930s did not come from nowhere. 
Their ideas were hardly original. 
For many years, intellectuals, activists, journalists, and clerics had articulated hateful ideas that laid the groundwork for Mussolini, Hitler, and their imitators in other countries. 
Some were Catholic reactionaries who detested secularism and individual rights. 
Some were obsessed with the supposed global domination of Jews. 
Some were romantics in search of an essential racial or national spirit. 
Most modern demagogues may be only vaguely aware of these precedents, if they know of them at all. 
In Central European countries like Hungary, or indeed in France, they may actually understand the links quite well, and some of today’s far-right politicians are not shy about being openly anti-Semitic. 
In most West European countries, however, such agitators use their professed admiration for Israel as a kind of alibi, and direct their racism at Muslims. 
Words and ideas have consequences. 
Today’s populist leaders should not yet be compared to murderous dictators of the fairly recent past. 
But, by exploiting the same popular sentiments, they are contributing to a poisonous climate, which could bring political violence into the mainstream once again. 

What Good Are Economists? 
NEW HAVEN – Since the global financial crisis and recession of 2007-2009, criticism of the economics profession has intensified. 
The failure of all but a few professional economists to forecast the episode – the aftereffects of which still linger – has led many to question whether the economics profession contributes anything significant to society. 
If they were unable to foresee something so important to people’s wellbeing, what good are they? 
Indeed, economists failed to forecast most of the major crises in the last century, including the severe 1920-21 slump, the 1980-82 back-to-back recessions, and the worst of them all, the Great Depression after the 1929 stock-market crash. 
In searching news archives for the year before the start of these recessions, I found virtually no warning from economists of a severe crisis ahead. 
Instead, newspapers emphasized the views of business executives or politicians, who tended to be very optimistic. 
The closest thing to a real warning came before the 1980-82 downturn. In 1979, Federal Reserve Chair Paul A. Volcker told the Joint Economic Committee of the US Congress that the United States faced “unpleasant economic circumstances,” and had a “need for hard decisions, for restraint, and even for sacrifice.” 
The likelihood that the Fed would have to take drastic steps to curb galloping inflation, together with the effects of the 1979 oil crisis, made a serious recession quite likely. 
Nonetheless, whenever a crisis loomed in the last century, the broad consensus among economists was that it did not. 
As far as I can find, almost no one in the profession – not even luminaries like John Maynard Keynes, Friedrich Hayek, or Irving Fisher – made public statements anticipating the Great Depression. 
As the historian Douglas Irwin has documented, a major exception was the Swedish economist Gustav Cassel. 
In a series of lectures at Columbia University in 1928, Cassel warned of “a prolonged and worldwide depression.” 
But his rather technical discussion (which focused on monetary economics and the gold standard) forged no new consensus among economists, and the news media reported no clear sense of alarm. 
Interestingly, contemporary news accounts reveal little evidence of public anger at economists after disaster struck in 1929. 
So why has the failure to foresee the latest crisis turned out so differently for the profession? 
Why has it – unlike previous forecasting failures – stoked so much mistrust of economists? 
One reason may be the perception that many economists were smugly promoting the “efficient markets hypothesis” – a view that seemed to rule out a collapse in asset prices. 
Believing that markets always know best, they dismissed warnings by a few mere mortals (including me) about overpricing of equities and housing. 
After both markets crashed spectacularly, the profession’s credibility took a direct hit. 
But this criticism is unfair. 
We do not blame physicians for failing to predict all of our illnesses. 
Our maladies are largely random, and even if our doctors cannot tell us which ones we will have in the next year, or eliminate all of our suffering when we have them, we are happy for the help that they can provide. 
Likewise, most economists devote their efforts to issues far removed from establishing a consensus outlook for the stock market or the unemployment rate. 
And we should be grateful that they do. 
In his new book Trillion Dollar Economists, Robert Litan of the Brookings Institution argues that the economics profession has “created trillions of dollars of income and wealth for the United States and the rest of the world.” 
That sounds like a nice contribution for a relatively small profession, especially if we do some simple arithmetic. 
There are, for example, only 20,000 members of the American Economic Association (of which I am President-Elect); if they have created, say, $2 trillion of income and wealth, that is about $100 million per economist. 
A cynic might ask, “If economists are so smart, why aren’t they the richest people around?” 
The answer is simple: Most economic ideas are public goods that cannot be patented or otherwise owned by their inventors. 
Just because most economists are not rich does not mean that they have not made many people richer. 
The fun thing about Litan’s book is that he details many clever little ideas about how to run businesses or to manage the economy better. 
They lie in the realm of optimal pricing and marketing mechanisms, regulation of monopolies, natural-resource management, public-goods provision, and finance. 
None of them is worth even a trillion dollars, but, taken together, Litan’s conclusion is plausible indeed. 
The 2010 book Better Living through Economics, edited by John Siegfried, emphasizes the real-world impact of such innovations: emissions trading, the earned-income tax credit, low trade tariffs, welfare-to-work programs, more effective monetary policy, auctions of spectrum licenses, transport-sector deregulation, deferred-acceptance algorithms, enlightened antitrust policy, an all-volunteer military, and clever use of default options to promote saving for retirement. 
The innovations described in Litan’s and Siegfried’s books show that the economics profession has produced an enormous amount of extremely valuable work, characterized by a serious effort to provide genuine evidence. 
Yes, most economists fail to predict financial crises – just as doctors fail to predict disease. 
But, like doctors, they have made life manifestly better for everyone. 

Are Foreign Investors Still Welcome? 
World flows of foreign direct investment (FDI) have soared over the past two decades, from $40 billion in the early 1980’s to $900 billion last year. 
The cumulative stock of FDI has reached close to $10 trillion, making it the most important mechanism for delivery of goods and services to foreign markets: sales by foreign affiliates total roughly $19 trillion, compared to world exports of $11 trillion. 
At the same time, the liberalization of FDI regimes by virtually all countries has been a driving force of intra-firm trade – the lifeblood of the emerging system of integrated international production and already around one-third of world trade. 
But are the good times coming to an end? 
FDI can bring a range of benefits, but it also can have costs. 
During the 1970’s, when the transnational corporations (TNC’s) undertaking such investment caught the public eye, many governments believed that the costs of FDI outweighed its benefits, so they controlled it. 
Led by the developed countries, the pendulum began to swing in the 1980’s. 
Once viewed as part of the problem, FDI became part of the solution to economic growth and development. 
Nothing exemplifies this more than changes in national FDI regimes. 
As the United Nations Conference on Trade and Development reports, of the 2,156 changes that took place between 1991 and 2004, 93% were in the direction of creating a more hospitable environment for TNC’s. 
But there is a real danger that the pendulum is beginning to swing back, leading to a reversal of that liberalization process. 
FDI in developed countries (and increasingly in emerging markets) often takes the form of cross-border mergers and acquisitions (M&A’s). 
Resistance to such M&A’s is becoming more frequent when they involve domestic firms that are regarded by politicians as “national champions” or important for national security, economic development, or cultural identity. 
The growing involvement of private equity groups in M&A activity implies additional controversy, as such transactions are typically regarded as being purely speculative. 
In the name of “economic patriotism,” security, and other considerations, resistance to M&A’s is being codified in an increasing number of countries. 
For example, a United States Senate committee recently sought to block the planned liberalization of foreign takeover rules for airlines, while Europe has enacted more restrictive takeover laws. 
Moreover, governments are applying more strictly existing regulatory provisions concerning the vetting of takeovers by foreign firms. 
This response is intertwined with a defensive reaction to the growing role of TNC’s from emerging markets, the “new kids on the block.” 
Established TNC’s, and their home countries, will need to adjust to this new constellation of forces and its implications for the world market. 
As we know from other contexts, adjustment to newcomers is not easy: compare, say, the reaction to the tie-up between France’s Alcatel and America’s Lucent to the bids by the China National Offshore Oil Corporation for Chevron or Mittal for Acelor. 
Another type of defensive reaction – this time to outward FDI – may well arise once the offshoring of services gathers more speed. 
All indications are that offshoring has reached the tipping point, and more of it will take place through FDI. 
If home countries do not put in place the adjustment mechanisms to deal with the rapidly unfolding revolution in making service industry jobs tradable, a backlash against such outward FDI will become inevitable. 
The growing unease with FDI is so far largely confined to developed countries. 
But there are signs that it is spreading to emerging markets. 
In the case of large-scale projects, some host countries are raising questions about the contracts that define their relationship with TNC’s, and governments are reviewing such contracts because they believe (rightly or wrongly) that they did not get a fair deal. 
Of the 219 known international arbitration cases concerning investment projects, some two-thirds were initiated during the past three years. 
Approaches to FDI have changed in the past, and they can change again in the future, depending on how governments view the balance of costs and benefits. 
This balance involves not only economic factors, but also such considerations as security and the desire to control one’s own economic development. 
The concept of “twenty-first-century nationalization,” introduced by Peruvian presidential candidate Ollanta Humala, mirrors in this respect the “economic patriotism” of French Prime Minister Dominique de Villepin. 
Reservations against FDI (as against anything foreign) can be found in all groups of countries, and politicians can bring them to the surface, resulting in protectionism. 
It would be ironic, though, if developed countries – which led the FDI liberalization wave of the past two decades – now led a backlash against FDI. 
Let us hope that the de-liberalization seen in developed countries can be checked before it spreads to other parts of the world and ultimately brings undesirable consequences for all. 


Are Human Rights Universal? 
Even in our globalizing world, the question as to whether "human rights" is an essentially Western concept, which ignores the very different cultural, economic, and political realities of the South, persists. 
Can the values of a consumer society be applied to societies with nothing to consume? 
At the risk of sounding frivolous: When you stop a man in traditional dress from beating his wife, are you upholding her human rights or violating his? 
The fact is that a number of serious objections exist to the concept of universal human rights, which its defenders need to acknowledge - honestly - if only to refute them. 
The first objection argues that all rights and values are defined and limited by cultural perceptions; there is no universal culture, therefore there are no universal human rights. 
Some philosophers object that the concept of human rights is founded on an individualistic view of man as an autonomous being whose greatest need is to be free from interference by the state, imbued, as it were, with the right to be left alone. 
Non-Western societies often espouse a communitarian ethic that sees society as more than the sum of its individual members, and considers duties to be more important than rights. 
Then there is the usual North/South argument, with "human rights" cast as a cover for Western intervention in the developing world. 
Developing countries, some also argue, cannot afford human rights, since the tasks of nation-building and economic development remain unfinished; suspending or limiting human rights thus sacrifices the few to benefit the many. 
Others object to specific rights which they say reflect Western cultural bias, the most troublesome here being women's rights. 
How can women's rights be universal when, in some societies, marriage is seen not as a contract between two individuals but as an alliance between lineages, and when the permissible behavior of women is central to a society's perception of familial honor? 
In addition, some religious leaders argue that human rights can be acceptable only if they are founded on the transcendent values of faith and are thus sanctioned by God. 
There is a built-in conflict between the universality of human rights and the particularity of religious perspectives. 
How to respond to these objections? 
Concepts of justice and law, legitimacy and dignity, protection from oppressive rule, and participation in community affairs are found in every society; the challenge facing human rights advocates is to identify the common denominators, and not throw up their hands at the impossibility of universalism. 
These objections reflect a false opposition between the primacy of the individual and the paramountcy of society. 
Culture is too often cited as a defence against human rights by authoritarians who crush culture whenever it suits them. 
Besides, which country can claim to be following its pure "traditional culture"? 
You cannot follow the model of a "modern" nation-state cutting across tribal boundaries and conventions, and then argue that tribal traditions should be applied to judge the state's human-rights conduct. 
There is nothing sacrosanct about culture anyway. 
Culture constantly evolves in any living society, responding to both internal and external stimuli, and societies outgrow and reject much in every culture. 
Let us concede that child marriage, female circumcision, and the like are not found reprehensible by many societies; but let us also ask the victims of these practices how they feel. 
Where coercion exists, rights are violated, and these violations must be condemned whatever the traditional justification. 
Coercion, not culture, is the test. 
As for religion, every religion embodies certain verities that are applicable to all mankind - justice, truth, mercy, compassion - and men often allow God to be blamed for their own sins. 
As UN Secretary-General Kofi Annan put it, the problem is not with the faith, but with the faithful. 
As for suspending human rights in the interests of development, authoritarianism promotes repression, not development. 
Development is about change, but repression prevents change. 
Though there may be cases where authoritarian societies had success in achieving economic growth, Botswana, an exemplar of African democracy, has grown faster than most authoritarian states. 
A number of developing countries – notably India, China, Chile, Cuba, Lebanon, and Panama – played an active and influential part in drafting the Universal Declaration of Human Rights. 
The principles of human rights have been widely adopted, imitated, and ratified by developing countries, so it is hardly fair to suggest that they have been imposed on them. 
When one hears of the unsuitability or ethnocentricism of human rights, what are these human rights that someone in a developing country can do without? 
The right to life? 
Freedom from torture? 
The right not to be enslaved, not to be physically assaulted, not to be arbitrarily arrested, imprisoned, or executed? 
No one actually advocates the abridgement of any of these rights. 
Objections to the applicability of human-rights standards are all too frequently voiced by authoritarian rulers and power elites to rationalize violations that keep them in power. 
Just as the Devil can quote scripture for his purpose, Third World communitarianism can be the slogan of a deracinated tyrant trained, as in the case of Pol Pot, at the Sorbonne. 
The authentic voices of the South know how to cry out in pain. 
Those are the voices that must be heeded. 

Are Humans to Blame for Global Warming? 
Global warming is an environmental, economic, scientific, and political problem of the first order, and one doubly difficult to address because its dangers lie decades in the future. 
So if we are to act now to head it off, we must first scrutinize what is known about the nature of the threat. 
Should we place our faith in the Kyoto Treaty, which sets firm limits on human emissions of so-called greenhouse gases? 
Or is the US administration right to reject the Kyoto Treaty, because targeting emissions is based on "bad science"? 
Circumstantial evidence does indeed point to our profligate burning of fossil fuels and perhaps also to its impact on global warming. 
Since 1900 the global temperature of the Earth's atmosphere and ocean surface waters has risen by 0.5-1 degree Celsius, and the prime suspect is atmospheric carbon dioxide, CO2, which is second only to water vapor in its greenhouse effect. 
Since 1860, when the industrial revolution and soaring population growth led to widespread consumption of fossil fuels, the volume of atmospheric CO2 has increased by about 28%. 
The increase began slowly, rising from 290 parts per million in 1860 to 295 ppm in 1900. 
But it then accelerated rapidly, reaching 310 ppm in 1950 and 370 ppm in 2000, with half of the total gain of 80 ppm occurring just since 1975. 
Numerical global climate models suggest that a doubling of the current atmospheric accumulation of CO2 will produce further warming of 3-5 degrees Celsius, perhaps as soon as 2050. 
The consequences of this would be devastating: inland areas desiccated, low-lying coastal regions battered and flooded as polar ice melts and sea levels rise, and possibly further warming and a runaway greenhouse effect due to an increase in atmospheric water vapor. 
The only rational course of action would seem to be to curtail global consumption of fossil fuels, as the Kyoto Treaty's proponents contend, and invest in alternative energy sources. 
But while researchers created impressive global climate models in recent years, they are the first to admit that such models can include only a fraction of the many physical forces that together determine the climate and global mean temperature. 
For example, studies during the past 20 years have shown that changes in solar magnetic activity cause the Sun's brightness to vary by 0.1%, and that the average annual temperature in the northern Temperate Zone has tracked the level of solar activity over the last 1,000 years. 
Indeed, monitoring of other solar-type stars has revealed one whose brightness decreased by 0.5% in a period of 5 years, during which its magnetic activity declined sharply, suggesting that the Sun behaves similarly. 
Core samples from the Greenland ice cap, for example, show occasional sudden drops in temperature. 
Contrary to what climate models focusing on greenhouse gas emissions would predict, the samples show that a decline in atmospheric CO2 followed, rather than preceded, these frigid intervals. 
What, then, is responsible for global warming so far? 
A safe bet is that from 1900 until 1950, global warming was driven mainly by the solar brightening, as solar magnetic activity increased by a factor of two or three during this period. 
Atmospheric CO2 could not have been a major contributor, because it had increased by only about 7% before 1950, when the warming leveled off for a couple of decades. 
After 1950, however, solar activity showed no significant rise, while atmospheric CO2 increased by 20%, accounting for the warming from 1970 to 2000. 
Atmospheric CO2 is therefore presumably the controlling factor for the coming century as well. 
But this does not mean that human emissions are responsible for the growing accumulation of atmospheric CO2. 
The atmosphere contains about 750 gigatons of CO2, while total annual human emission is approximately 5.5 Gt, thus adding annually roughly 0.7% of the total. 
However, there is also an estimated exchange of 90 Gt per year between the atmosphere and the oceans. 
This means that Human CO2 emissions do not simply linger and accumulate in the atmosphere. 
They are rapidly distributed to the ocean surface, so that atmospheric CO2 remains at an equilibrium level. 
This equilibrium is, in turn, determined by the temperature of ocean surface water. 
So it is plausible that the solar-driven ocean warming between 1900 and 1950 started things off by shifting the equilibrium toward higher concentrations of CO2 in the atmosphere, accelerating global warming since then. 
So, while our own contribution of CO2 is not helping matters, it hardly seems to be the determining factor. 
On the available evidence, then, skeptics of the Kyoto Treaty appear to have a powerful case. 
Yet the threat posed by global warming is nonetheless real, and focusing on human CO2 emissions is not necessarily "bad science," just incomplete science. 
For example, aside from solar magnetic activity, the Sun affects the Earth's climate in several other ways, including ultraviolet warming of the upper stratosphere, the nucleation of aerosols, and cloud formation. 
The climate is also subject to the rate of water vapor exchange between the atmosphere and Earth's surface, which requires taking into account ocean currents, wind, and geography. 
All of these contributing effects must be understood quantitatively in order to produce an accurate model of global climate change and we remain far from that point. 
So the only rational response is to research aggressively into the many unknown factors: the physics of cloud formation, the dynamic coupling of the upper stratosphere to the lower atmosphere, the accumulation of atmospheric water vapor. 
If effective solutions are to be found, they must await a fuller definition of the problem. 

Are Humans Worse than Chernobyl? 
PORTSMOUTH – Nearly 30 years have passed since the nuclear accident at Chernobyl, and the scientific community is still arguing about the impact radiation is having on the ecosystem surrounding the reactor. 
Recently, together with other scientists, I studied the animals in the human exclusion zone around the plant. 
The results were shocking: whatever the impact of radiation on animals may be, the effects of human habitation seem to have been a lot worse. 
The site offers a stark reminder that humans’ simple, physical presence in a habitat is more damaging than one of the twentieth century’s worst environmental catastrophes. 
We studied animals in the nearly 2,200-square-kilometer (850 square miles) sector of the exclusion zone in Belarus called the “Polessye State Radioecological Reserve.” 
Before the disaster, this area was home to 22,000 people in 92 villages, and the land was farmed and exploited for its forest resources. 
In the days after the accident, the area’s human residents were evacuated with their farm animals to protect them from high levels of radiation. 
Even though radiation levels dropped by a factor of nearly 100 in the months after the accident, the area is still judged unfit for human habitation. 
There are few reports on the effects of the accident on wild animals, but we know that in some radiation hot spots trees and wildlife died. 
Some might expect that, nearly 30 years later, the area around the reactor remains a wasteland, sparsely populated by genetically damaged animals exposed to chronic radiation across multiple generations. 
The reality is very different. 
Indeed, as early as a few years after the accident, data collected by Belarusan scientists flying helicopter surveys over the abandoned area showed rising numbers of wild boar, elk, and roe deer. 
And, with the passage of time, the region’s wildlife population continued to grow, as animals made use of what people had left behind. 
Crops, gardens, and orchards provided abundant food supplies. 
Abandoned houses and farm buildings offered ready-made nests and dens. 
By 1993, the number of wild boar had increased sixfold, before halving due to a disease outbreak and predation from the rapidly growing wolf population. 
Our research shows that the number of large mammals at Chernobyl is similar to that in uncontaminated nature reserves in Belarus – except for wolves, which are far more numerous in the area around the reactor. 
The area is also home to lynx and even a few brown bears. 
Nor do the population data show any link between radiation levels and mammal densities; the number of mammals in the most contaminated parts of the zone is similar to that in the least contaminated parts. 
To be sure, the fact that animals are thriving at Chernobyl does not mean that radiation is good for wildlife. 
Radiation does cause DNA damage, and at current levels we cannot rule out some effects on the reproduction of individual animals. 
But a comparison with what happened outside the affected area is instructive. 
Whatever damage radiation has wrought, human habitation has caused far greater destruction. 
Indeed, in areas outside the zone or nature reserves, populations of elk and wild boar underwent steep declines, as major socioeconomic changes after the fall of the Soviet Union worsened rural poverty and crippled wildlife management. 
The lesson from Chernobyl is that if nature is to thrive, it must be given space – from us. 
The primary causes behind declining global biodiversity include habitat loss and fragmentation as a result of human activity. 
Even some of our most well-meaning environmental efforts, such as the fight against climate change, have led to the expansion of the human presence into previously untouched wilderness. 
Demand for biofuels, for example, has been linked to deforestation. 
It may also be time we consider embracing high-tech – even genetically modified – agriculture to provide the food we need on smaller areas of land, leaving more space for wildlife. 
There are no easy solutions, of course, and all efforts to address the problem will be complicated by continuing rapid growth of the world’s human population. 
But one thing is clear: we, as a species, need to think more carefully about our impact on the nonhuman animal population and begin to take better account of these effects in our economic and environmental policies. 

Are Islam's Values Really Different? 
In the year since the terrorist attacks of September 11th, questions about Islam - its nature, its distinctive identity, its potential threat to the West - have seized center stage in intellectual and political debates. 
While the 20th century's major conflicts - with fascism, communism, and other "isms" - were primarily ideological, the terrorism of last September 11th posed anew the specter of "culture wars" and "clashes of civilizations." 
It is often claimed in the Islamic world that, because one of the five fundamental duties of a Muslim is Zakat (charity to the poor), Islamic society is less atomistic, which limits inequality and social exclusion. 
At the same time, Western observers often see in Islam a faith that disdains personal freedom, especially for women. 
Oriana Fallaci published a long rant along this line shortly after the attacks. 
Facts on the ground do seem to support these perceptions. 
Muslim countries do tend to be characterized by lower levels of inequality and crime (a good proxy for social exclusion) than other countries at similar stages of economic development, such as those in Catholic Latin America. 
But do cold statistics about average income really tell us anything significant? 
Not according to the political scientist Francis Fukuyama, who suggests that particular social outcomes (including income levels) result from the fact that countries are at different stages in a modernization process within which everyone and every society is converging towards a set of universal values. 
Harvard University's Samuel Huntington also thinks such comparisons wrong-headed, but disagrees with Fukuyama on the diagnosis. 
Huntington sees something sinister at work within Islam - that Islam's social outcomes reflect, not its level of modernity, but the tenets of its faith. 
Because of Islam's messianic fusion of the political, religious and cultural dimensions, says Huntington, the West and Islam are destined to "clash" because the two systems are fundamentally irreconcilable. 
But if we want to discover the role that a religion like Islam plays in determining a society's fundamental shape, we can indeed be led astray by making comparisons between different countries or global regions. 
We need to look at individuals within an individual country to understand the true power of "Islamic values" in shaping a society. 
To do so, we need a country with deep religious cleavages between Islam and Christianity and, unlike America's "melting pot," limited mixing among social groups. 
Two studies that I conducted with colleagues at the University of Beirut use Lebanon to examine the relationship between religion and such social and cultural characteristics as inequality, preference for sons, and the degree of female labor market participation. 
Lebanon is an ideal social laboratory because it has a large number of geographically segregated religious groups and strongly enforced communal boundaries. 
Indeed, more than religion divides the population. 
Some Lebanese see themselves as Phoenicians rather than as Arabs, and claim closer cultural affinity to France than to the Arab world. 
We examined Christian Maronites (who hold beliefs akin to those of Roman Catholicism), Muslim Sunnis (the official religion of most Arab countries), and Muslim Shiites (the official religion of Iran and of Lebanon's Hizbullah movement), and found no evidence of lower inequality among Muslims or less discrimination against women among Christians. 
Were Islamic values as fateful as Huntington suggests, there should have been sharp differences in inequality and the treatment of women between these communities. 
There were not. 
Our study of religion and social inequality in Lebanon examined social mobility rather than overall inequality. 
This is because societies in which opportunities and inequality are inherited are considered to be less fair than societies in which family background is less important. 
Social mobility in Lebanon, it seems, is extremely low and family background is a key factor in determining social outcomes. 
This may explain why Lebanese college graduates of all faiths often include the name and profession of their parents in their resumes, or why one of the first Arabic words that a foreigner learns after settling in Lebanon is wasta (connections). 
Moreover, the Christian Maronite and the Muslim Shiite upper and middle classes tend to have similar levels of social mobility. 
In both groups social mobility is higher than among Sunni Muslims. 
Another mark against the notion of Islam's overwhelming power to determine a society's prevailing conditions. 
The position of women also does not seem to be primarily determined by adherence to Islam. 
Indeed, we found that all Lebanese families strongly prefer sons over daughters. 
Families that have two daughters are 9% more likely to have a third child than families that have two sons. 
Statistically, this is a huge difference - nine times larger than in the US. 
Indeed, just as our initial research uncovered no evidence of relative Muslim egalitarianism, we discovered no major difference between preference for sons among Christians and Muslims. 
If anything, bias toward males is stronger in Christian families. 
The same holds true for female labor market participation, which in Lebanon is low but uniform across religious groups. 
While this does not guarantee that no relationship exists between religion and discrimination against women, it suggests that if such a tie does exist, it is unrelated to female labor market participation or preference for sons. 
Of course, disproving the idea that different countries have different values is impossible. 
After all, Lebanon does have low social mobility, low female labor market participation, and a strong preference for sons, while other countries do not. 
Our work, however, strongly supports Fukuyama's theory that cultures and values take a back seat to the level of a country's modernity in determining its social conditions. 
So if the Islamic world is different from the West, it is so because it is backward, not because it is Muslim. 

Are Israel and Syria Ready for Peace? 
JERUSALEM – The resumption of peace talks between Israel and Syria after eight years of saber-rattling is not a diversion from the political troubles of Israel’s lame-duck prime minister. 
Nor are the talks a Syrian ploy to avoid facing an international tribunal on the assassination of Lebanon’s former prime minister, Rafik Hariri. 
An Israeli-Syrian peace deal is strategically vital for both sides, and both sides know it. 
The two major formative experiences of Syria’s Ba’ath regime have been Hafez al-Assad’s loss of the Golan Heights in the 1967 war with Israel, and the loss of Lebanon by his son, Bashar, who was forced to withdraw his army under irresistible American-led international pressure. 
Recovering the Golan Heights and protecting Syria’s vital interests in Lebanon are not only major strategic concerns for Syria’s president; they are also crucial to the regime’s drive for national legitimacy, and to Bashar’s assertion of his own leadership. 
Peace with Israel is not Assad’s priority. 
Rather, it is the prerequisite without which superior goals – rapprochement with the United States, legitimization of Syria’s special status in Lebanon, and avoidance of a potentially devastating war with Israel if the Golan Heights are not recovered by peaceful means – cannot be attained. 
Indeed, the regime has hinted that it may be willing to compromise on the issue – the delineation of the 1967 border along a tiny piece of land on the Eastern shore of the Sea of Galilee – that wrecked the negotiations eight years ago. 
An Israeli-Syrian peace is a weighty strategic necessity for Israel, too. 
The complexities of the threats to Israel are such that a possible confrontation with Hamas in Gaza might trigger a flare-up with Hezbollah in Lebanon. 
Such a war could be won only by the total destruction of Lebanon by Israel’s air force. 
In that case, Syria would likely seize the opportunity to break the deadlock over the Golan Heights through a military move that could develop into a massive war of missiles targeting Israel’s vulnerable home front. 
And Iran, in its drive to protect its nuclear program from an Israeli-American attack, might be very active in supporting this ominous scenario. 
Admittedly, the strategic conditions in the region are far more complex today than they were eight years ago, when Israel’s requirements for a deal with Syria focused mainly on security arrangements on the Golan Heights, and on Syria using its leverage in Lebanon to permit an Israeli settlement with that country. 
Syria’s alliance with Iran was not a major issue. 
Syria’s subsequent forced withdrawal from Lebanon was not good news for Israel. 
In the last round of Israeli-Palestinian peace talks eight years ago, it was clear that a deal with Syria would automatically pave the way to a settlement with Lebanon, and an end to Hezbollah’s threat to Israel’s northern border. 
Today, peace with Syria might facilitate an Israeli peace with Lebanon down the road, but that will not be an automatic outcome. 
Indeed, while Hezbollah prospered under Syrian occupation, it never reached the extraordinary political power that it has today. 
Nevertheless, peace with Syria could be a major building block in a wider Israeli-Arab settlement, and consequently of a more stable Middle East, though it is unrealistic to expect that Syria would automatically sever its special relationship with Iran in exchange for the Golan Heights. 
These are peace talks, not a defense treaty, and Syria would not abruptly disengage from its Iranian friends. 
But good relations between an Arab state at peace with Israel and Iran are not necessarily a bad thing. 
Syria’s stance might limit, rather than extend, the reach of Iran’s strategy of regional destabilization. 
As always, much will depend on America’s readiness to move away from military solutions and rigid ideological imperatives and instead embrace the pragmatic culture of conflict resolution. 
A US-backed Israeli-Syrian peace could transform the strategic environment, potentially drawing other Middle East spoilers into a system of regional cooperation and security. 

Violence and Innovation 
ABU DHABI – In the 1949 British film The Third Man, the character Harry Lime observes that, during the Borgia family’s rule in Renaissance Italy, the country “had warfare, terror, murder, and bloodshed. 
But [it] produced Michelangelo, Leonardo da Vinci, and the Renaissance.” 
By contrast, he contends, Switzerland’s 500 years of democracy and peace produced little more than the cuckoo clock. 
While the implication that innovation and creativity are born only of conflict is extreme – in fact, Switzerland is a world leader in innovation – Lime makes a crucial point. 
Although peace, order, and political stability are widely perceived as essential prerequisites for invention, entrepreneurship, and economic development, there have been many exceptions to this rule – especially when it comes to creativity and innovation. 
The United States is consistently ranked among the world’s top ten countries for innovation, including by INSEAD’s Global Innovation Index. 
But, on the Global Peace Index, it is ranked 88th of 153 countries. 
Likewise, the United Kingdom and the Netherlands rank, respectively, fifth and sixth on the Innovation Index, but only 28th and 29th on the Peace Index. 
Conversely, Bhutan is among the top 20 most peaceful nations, but does not even make it onto innovation indices. 
Of course, crime, terrorism, conflict, and political instability severe enough to cause a total breakdown of law and order significantly impede creativity and innovation. 
But some countries show strong resilience in the face of pervasive violence and volatility. 
For example, despite widespread violent crime, Mexico and South Africa have high levels of innovation (measured by patent filing and trademark registration). 
When terrorism indicators are taken into account, Lebanon, Turkey, Jordan, and Israel emerge as resilient innovators. 
Just as peace and stability do not always lead to creativity and innovation, fighting and uncertainty do not necessarily deter it. 
Although peace, political stability, and civil order are important factors to consider when selecting a location for a large-scale foreign production or service operation, they are far less important when it comes to sourcing creativity and making the related investments. 
In particular, creative industries, such as animation, arts, design, and software – which are mostly based on individual skills and talent – tend to be more resilient to conflict than others. 
Given this, officials, investors, and business leaders in search of revolutionary ideas, cutting-edge solutions, and untapped talent should not allow turbulence in some societies, or tranquility in others, to influence their decisions excessively. 
In fact, stepping out of one’s comfort zone may offer significant benefits. 
Some evidence suggests that the prevalence of uncertainty may boost competition, thereby sparking innovation. 
Furthermore, social environments that are characterized by lower levels of consensus and higher levels of violence may be more likely than their more harmonious counterparts to catalyze radical innovation. 
Lebanon’s experience supports this assessment. 
Despite its long history of political violence, its creative industries are expanding. 
According to a 2007 study of Lebanon’s copyright-based industries, conducted by the World Intellectual Property Organization, the main challenges facing the country’s software sector – an important part of its economy – include restricted markets, intense competition, a brain drain (loss of human capital), inadequate technology policy, a lack of government incentives, and rampant piracy. 
Violence is conspicuously absent from the list. 
To be sure, violence is always a problem. 
But countries like Lebanon have become resistant to its effects – for example, by developing creative industries – diminishing its negative impact on economic, social, and intellectual development. 
In 2005, 10% of all new businesses in Lebanon were in the creative sector, and the copyright-based industries contributed 4.75% of GDP. 
Similarly, despite high levels of political violence, Nigeria produces more than 1,000 films annually. 
Indeed, Nigeria’s film industry is the world’s third largest, after the US and India, and is second only to oil production in terms of its economic significance to the country. 
According to a 2010 United Nations report on the creative economy, global trade in creative goods grew at an annual rate of 14% from 2002 to 2008. 
Meanwhile, exports of such goods from developing countries, which tend to experience more violence, grew at a rate of 13.5%, reaching $176 billion (43% of total world trade in creative industries) in 2008. 
Although overall global trade declined by 12% that year, trade in creative goods and services continued to expand. 
This has significant implications for political and business leaders – especially in turbulent regions like the Middle East. 
In order to bolster economic growth and innovation amid conflict and volatility, policymakers and investors should focus on building the creative industries. 
The resilience and adaptability that they provide are crucial to supporting long-term economic growth and job creation – no matter what the future brings. 


Are the Barbarians at the EU Gates? 
BRUSSELS – The euro area confronts a fundamental crisis that attacks on financial speculators will do nothing to resolve. 
The European Council of Ministers had to promise hundreds of billions of euros to its financially imperiled member countries, even though the European economy as a whole is not really in crisis. 
On the contrary, most surveys and hard economic indicators point to a strong upswing, with the one country that is in really serious trouble, Greece, representing only 3% of the area’s GDP. 
Nevertheless, the crisis poses an almost existential challenge to the European Union – and has required such huge sums – because it directly implicates the key underlying principle of European governance: the nature of the state. 
The case of Greece has raised the simple but profound question: can a member state of the EU be allowed to fail? 
One view is that the state is sacrosanct: the EU has to intervene and help any errant member to get back on its feet. 
But this view assumes that all member states adhere to the Union’s underlying economic values of fiscal prudence and market reform. 
Problems could arise only because of unanticipated shocks, temporary local political difficulties, and – the favorite culprit – irrational markets. 
Applied to Greece, this view implies that the country’s fiscal crisis resulted from an overreaction by world financial markets to local political difficulties (excessive spending by the Greek government before last year’s elections). 
Moreover, it implies that the crisis is fully under European control, and that the European authorities have elaborated a comprehensive plan that will resolve all of Greece’s fiscal and structural problems. 
Hence the official – let’s say “Southern” – refrain: “The IMF/EU plan will succeed. 
Failure is not an option.” 
The alternative view is more pragmatic and rules-based. 
This “Northern” view starts from the premise that member states remain sovereign units, and that it is possible that a member country does not implement a necessary economic-adjustment program. 
This view is embodied in the “no bailout” clause in the euro’s founding document, which stipulates that each country is responsible for its own public debt. 
Failure then becomes an option if the country concerned violates the single currency’s basic rules. 
Financial markets do not participate directly in this debate. 
But they have much skin in this game. 
Any holder of Greek debt, especially long-term debt, must calculate the likelihood that Greece’s political system will prove strong enough to push through the reforms needed to enable the country to service its debt fully (and on time). 
The collective judgment of financial markets on any government’s economic and fiscal policy is expressed in the risk premium that the government must pay on its external debt. 
Doubts in financial markets lead to higher risk premia, which make it even more difficult to finance a government that is already facing financial problems. 
Financial markets are often wrong in their judgments. 
But they are a fact of life that cannot just be wished or regulated away. 
One might object that the distinction between Southern and Northern views is academic nowadays, because failure really isn’t an option, given that it would trigger a disastrous reaction in global financial markets. 
But the European Council also created a Task Force under President Herman Van Rompuy to elaborate concrete proposals for reforming the monetary union. 
The key choice for this group is simple: should they direct their efforts solely at preventing failure (including open-ended fiscal support), or should they also prepare for the failure of a member state in order to mitigate the consequences if that should happen? 
The first choice is bound to imply elaborate measures designed to deliver “more of the same” – a strengthening of the Stability and Growth Pact, for example, with more provisions for economic policy surveillance and cooperation. 
But this approach has no answer to the fundamental question: What if the framework does not work? 
So long as EU leaders cannot answer that question, financial markets will continue to harbor doubts about the euro’s long-term stability. 
The eurozone cannot stabilize in political and economic terms without a solid framework for crisis resolution and an ability to deal with sovereign default by a member state. 
The view that member states cannot be allowed to fail logically implies that a political or at least a fiscal union must underpin the euro. 
This is the choice that European leaders now confront: a radical step forward toward political or policy integration, or a clear framework to deal with the consequences of a member country’s failure to abide by the fundamental rules of the monetary union. 
No amount of money will allow European leaders to fudge this issue. 

Are the Dollar's Days Numbered? 
A year ago, the dollar bestrode the world like a colossus. 
Now it is humbled and the euro looks triumphant. 
Is the dollar on the way out as the world's unchallenged reserve and trade currency? 
Or is "euro triumphalism" premature? 
That question preoccupies not only speculators tracking the dollar's decline, but ordinary businessmen who wonder what currency to use when invoicing imports or exports. 
Indeed, the part that currencies play in world trade through their role in invoicing receives too little attention. 
Currently, the US dollar remains dominant. 
Most US exports and imports are denominated in dollars, and the dollar is extensively used in trade that does not involve America. 
Since 1980, however, the dollar has lost ground. 
Estimates from the European Commission indicate that the dollar's share in world trade fell from 56% in 1980 to 52% in 1995 (the latest year for which statistics are available). 
The Deutsche Mark's share remained relatively unchanged between 1980 and 1995. The yen lags behind, but had the highest relative growth, with its share of world trade more than doubling from 2% in 1980 to almost 5% in 1995. 
Among the reasons for the dollar's longtime dominance as the premier international currency are lower transactions costs in foreign exchange markets, the historical role of the dollar in world trade since 1945, and the sheer size of America's economy. 
But the role of size is more complex than it seems. 
The second biggest economy in the world is Japan's, but the fraction of its trade denominated in yen remains low, even when compared to the smallest European countries. 
One factor that explains this is the large share of US firms in markets where Americans sell their goods. 
To understand the reasons behind all this, consider what factors are in play when a firm chooses the currency it uses to invoice for goods. 
Here an exporter faces two types of risk: price risk and competitiveness risk. 
Consider a Japanese firm seeking to make the highest yen profits on goods sold in Switzerland. 
If the Japanese firm sets the price in Swiss francs, it is exposed to price risk as the yen price will fluctuate with the yen-Swiss franc exchange rate. 
This tends to make Japanese exporters prefer to price in yen. 
But firms also care about what their competitors do. 
If the Japanese firm sells its goods to a particular Swiss market dominated by Swiss firms (which invoice in Swiss francs), it would prefer to price in Swiss francs too. 
If it priced in yen, it would risk losing its market share if the yen appreciated. 
If Japanese firms are dominant in a particular Swiss market, they prefer to price in yen: a Japanese firm then would not have to worry about losing market share when the yen appreciated, because its competitors would face the same pressures. 
These arguments explain the big role played by the dollar in trade. 
The fact that the US is large makes it more likely that US firms are dominant in a particular market, either as an exporter or as import-competitors when foreign goods are sold in America. 
This implies that US firms price in dollars, whether they sell at home or abroad, and foreign firms for competitive reasons will also price in dollars when they export to the US. 
Because Japan has the second largest economy in the world, the yen should be a more important currency. 
Competitiveness is a key reason for why it is not. 
First, the US is Japan's largest trading partner: more than half of Japanese trade with industrialized countries is with the US. 
Over 80% of Japanese exports to the US are priced in dollars, in markets where US firms tend to dominate. 
Second, even when selling to countries other than the US, Japanese exporters often face stiff American competition. 
Take Japanese exports to South East Asia, which are almost 50% denominated in dollars due to competition from US exporters. 
These factors are unlikely to change soon and lead us to predict that the yen will keep a low profile in world trade. 
They also explain why, over time, the euro should gain weight in international trade. 
Euro-zone countries can be considered a single country when dealing with the currency denomination of trade. 
This `country' has more market power than the individual countries that form the European Monetary Union. 
So the euro should play a larger role in international trade in the future than the sum of the currencies it replaced. 
Yet these changes will only occur gradually. 
So the "euro triumphalism" that has greeted the dollar's decline is, indeed, premature. 
Despite its current distress, the dollar should retain its predominance for some time to come. 

Are the Saudis Fanatics? 
Terrorist attacks in Saudi Arabia have led many to question not only the ruling House of Saud's prospects for survival, but also whether the kingdom is fundamentally dysfunctional and destructive. 
Somehow, it seems, Saudi society has produced a stream of violent fanaticism that draws its inspiration from extreme religious orthodoxy. 
The fact that 15 of the 19 hijackers in the September 11, 2001, attacks on the United States were Saudis crystallized a long-held view of the kingdom as a bastion of authoritarianism and intolerance. 
In some respects, this perception is accurate, but it cannot be applied to the broad Saudi public. 
On the contrary, it would be a grave mistake to assume that fanatical Islamism fully defines Saudi attitudes toward religion. 
Between 2001 and 2003, I was part of a team that undertook an extensive survey of values in Saudi Arabia, Egypt, Iran, and Jordan. 
Our results provide a surprisingly nuanced picture of Saudi attitudes. 
Compared to respondents in the other Middle Eastern countries, Saudis were less religious overall, and their attitudes toward democracy and arranged marriage also indicate a moderate undercurrent. 
To be sure, in all four countries, religiosity is widespread, with more than 90% of respondents collectively reporting that they believe in God, in life after death, and in heaven and hell. 
But the Saudis appear to be less religious than their fellow Muslims. 
Sixty-two percent of Saudis described themselves as religious, compared with 82% of Iranians, 85% of Jordanians, and 98% of Egyptians. 
Americans also appear to be far more religious than Saudis, with 81% describing themselves that way. 
Some of this variation may be explained by cross-national differences regarding what it means to be religious. 
For example, Americans may define religiosity differently than Middle Easterners, with perhaps a weaker attachment to religious beliefs than is true in Islamic countries. 
This might also account in part for the differences between Muslim countries. 
But the gap in self-defined religiosity between Saudis, on the one hand, and Iranians, Jordanians, and Egyptians, on the other, is so great that it challenges the prevalent perception of Saudi Arabia as a highly conservative and religious society. 
Indeed, actions speak louder than words: only 28% of Saudis said that they participate in weekly religious services, compared to 27% of Iranians, 44% of Jordanians, 42% of Egyptians, and 45% of Americans. 
These findings, while running contrary to popular perceptions of Saudi culture, are less startling than they appear. 
Sociologists of religion have long argued that in a monolithic religious environment, or when religious institutions are closely tied to the state, the overall religiosity of the public declines. 
It makes sense to think that when state authorities enforce strict codes of behavior, people tend to rebel and move away from officially sanctioned religious institutions. 
Little wonder, then, that Egyptians and Jordanians, who live in countries where the state does not enforce piety, are more religious than Iranians or Saudis, who must cope with local "virtue" police backed by the state. 
Even on marriage, many Saudis expressed surprisingly liberal views. 
Respondents were nearly evenly split on the question of arranged marriages, with half supporting the idea that marriage should be based on parental consent, while 48% preferred love as the basis of matrimony. 
Given entrenched gender segregation and paternal dominance, this finding appears to reveal a strong desire for greater individual choice in what has traditionally been a family-driven decision. 
Finally, the Saudis turn out to be strong supporters of democracy, once again contradicting a popular image of Saudi conservatism. 
Of the Saudis polled, 58% considered democracy the best form of government, 23% disagreed, and 18% did not express an opinion. 
Majority support for democracy in a country with no prior secular and nationalist history seems counter-intuitive. 
In fact, support for democracy corresponds with a number of other liberal attitudes that we found in Saudi Arabia. 
Supporters of democracy tend to be less religious, more secular, more tolerant of others, more critical of public-sector performance, and more concerned with Western cultural invasion. 
Beyond the survey data, history has shown that liberal ideas become more popular when a despotic monarch governs people in alliance with a religious establishment. 
A strong current of liberalism appeared in the late nineteenth century in Ottoman Syria in response to the religious despotism of Sultan Abdulhamid. 
At the same time, an anti-clerical, secular movement on behalf of constitutionalism appeared in Iran - a reaction to the absolutist alliance between the Quajar Shahs and the religious establishment. 
In view of the similarities between those historical precedents and current conditions in Saudi Arabia, we ought not to rule out the possibility of reform. 
Now survey data, too, suggest that Saudis may well begin demanding a more transparent politics and a less interventionist religion. 



Are We Five Years Wiser? 
As the fifth anniversary of the September 11, 2001, attacks on the United States by al-Qaeda approaches, we should take the opportunity to assess the results of the response by the US and the international community. 
The attacks and the response to them have obviously brought about a sea change in international relations, but it would be difficult to argue that further atrocities have become less likely as a result. 
Why are we no more secure than we were five years ago? 
Within a week of the attacks, President George W. Bush declared a “war on terrorism.” 
The metaphor of war has the singular advantage that it clearly and strongly evokes the intensity of the counterattack that was called for. 
Moreover, the metaphor of war constitutes an implicit appeal to intense mobilization, not only by a country that comes under attack, but also by its friends and allies. 
Naturally, no one questions America’s right to defend itself. 
The legitimacy of a violent counterattack has never been in doubt. 
But the war metaphor also carries inevitable connotations that, when applied to terrorism, are misleading and counterproductive. 
Whenever war is invoked, it implies a fight against nations, peoples, or states. 
It implies that whole territories and the populations living there are to be considered hostile. 
War implies armies and command structures that can be recognized, if not clearly known; in any case, war entails a military confrontation with an identifiable adversary . 
On all of these points, the concept of war, to paraphrase US Defense Secretary Donald Rumsfeld, is not helpful. 
Even if the scale of the September 11 attack was of such a dimension that only the American army seemed able to face the challenge, in technical terms dealing with a threat that is extra-national rather than international is a matter of police techniques, not military tactics. 
The negative consequences of this mistaken vision very quickly became apparent. 
It is now widely known that the US government, perhaps partly unconsciously, embraced a deeply distorted image of al-Qaeda that portrayed it as a hierarchical organization with a seamless command structure – the prototype of a foe that the American army could attack and destroy. 
But al-Qaeda – the word means “the base” or “the camp,” that is, nothing more or less than a point of gathering and training – is more like a blurred sphere of influence, comprising individuals and small local cells that act on their own initiative and cooperate very rarely, and only for large-scale operations. 
It has not been proved that the attacks in London, Madrid, or Bali in the years since the September 11 plot, or the attack on America’s warship the USS Cole in 2000, reflected the existence of a “center” that coordinated the operations or gave orders to carry them out. 
It is also wrong to conflate Islamic terrorism with that of the Basque ETA, Sri Lanka’s Tamil Tigers, or the Irish Republican Army. 
Whereas these groups have a territorial base and are preoccupied with national aims, Islamic terrorism appears to be the work of a very small number of individuals who seek to avenge the centuries-long “humiliation” of the Muslim world, brought about by colonization, absence of economic development, and political weakness. 
The goal of Islamic terrorists is nothing less than the destruction of the “hegemonic” Western world, despite most Muslim nations’ desire to live in peace within the international community and to cooperate in crafting effective development strategies. 
The only viable strategy for confronting the threat of Islamic terrorism was, and continues to be, a search for agreement among Muslims, and among the leaders of Muslim nations, on the forms of mutual cooperation, including police cooperation, that are needed to isolate, weaken, or destroy the militants in their midst. 
This is a long and difficult enterprise, but there remains no alternative. 
Instead, the war metaphor continues to define the US response and that of several of America’s allies. 
The attraction of this metaphor may be attributable to the excessive trust that Americans place not only in their army, which is understandable, but in force in general, which is much less understandable in the case of an intelligent people. 
Whatever the case, casting the fight against terrorism as a war has led American policymakers to multiply violent military operations that have absolutely no chance of winning hearts and minds in the Muslim world. 
Quite the contrary. 
Afghanistan was the only case where a military response was understandable: its government had, after all, given al-Qaeda a temporary territorial home. 
But to implicate Iraq, which had nothing to do with al-Qaeda or the September 11 attacks, was a huge mistake, one that has strengthened Islamic extremists and has probably helped them recruit terrorists. 
Moreover, the US response has strengthened Israel’s belief in the effectiveness of military methods, leading to the recent war in Lebanon and the ongoing invasion of Gaza. 
Powerless, the international community does nothing. 
The rigidity and brutality of America’s behavior – resulting in many times more civilian deaths than occurred on September 11 – have blocked any useful intervention by countries such as Algeria, Morocco, Jordan, Saudi Arabia, or the United Arab Emirates. 
Likewise, the appeal of war has ruled out the prospect of serious negotiations between Israel, Syria, and Lebanon. 
By attacking one Muslim country after another, the US and its allies have created the impression that Islam itself is the enemy, leading inexorably to the “clash of civilizations” that America says it wants to avoid. 
But America’s strategy has failed. 
Force cannot accomplish everything. 
The international community must say clearly that Islam is not our enemy and that terrorism must be fought in other ways. 
Muslim political leaders, for their part, should declare just as openly that terrorism is not their choice. 
If both sides can stifle their murderous deviances, the hope of cultural and political reconciliation will be reborn. 

Are We Prepared for a Multipolar World Economy? 
WASHINGTON, DC – At a time when the global economy is suffering from a crisis of confidence, structural imbalances, and subdued growth prospects, looking ahead ten years to predict the course of development requires careful modeling and something beyond sagacity. 
What is needed is a multifaceted approach that combines a sense of history with careful analysis of current forces such as the shift in the balance of global growth toward the emerging world. 
Such forecasting also requires an understanding of how advanced economies are coming to grips with that shift, and how the international monetary system will adjust as a result. 
Having studied these factors, we believe that the world economy is on the verge of a transformative change – the transition to a multipolar world economic order. 
Throughout history, paradigms of economic power have been drawn and redrawn according to the rise and fall of those countries best equipped to drive global growth and provide stimulus to the global economy. 
Multipolarity, meaning more than two dominant growth poles, has at times been a key feature of the world economy. 
But at no time in modern history have developing countries been at the forefront of a multipolar economic system. 
This pattern is set to change. 
By 2025, six emerging economies – Brazil, China, India, Indonesia, South Korea, and Russia – will collectively account for about one-half of global growth. 
The international monetary system is likely to cease being dominated by a single currency over the same years. 
As they pursue growth opportunities abroad and are encouraged by improved polices at home, emerging-market corporations will play an increasingly prominent role in global business and cross-border investment, while large pools of capital within their borders will allow emerging economies to become key players in financial markets. 
As dynamic emerging economies evolve to take their place at the helm of the world economy, a rethink of the conventional approach to global economic governance is needed. 
The current approach rests on three premises: the link between concentrated economic power and stability; the North-South axis of capital flows; and the centrality of the US dollar. 
Since the end of World War II, the US-centered global economic order has been built on a complementary set of tacit economic and security arrangements between the United States and its core partners, with emerging economies playing a peripheral role. 
In exchange for the US assuming the responsibilities of system maintenance, serving as market of last resort, and accepting the international role of the dollar, its key economic partners, Western Europe and Japan, acquiesced in the special privileges enjoyed by the US – seigniorage gains, domestic macroeconomic-policy autonomy, and balance-of-payments flexibility. 
Broadly, this arrangement still holds today, though hints of its erosion became evident some time ago. 
The benefits that emerging economies have reaped from expanding their presence in international trade and finance are but one example of this. 
An increasingly multipolar global economy is likely to change the way the world conducts international business. 
A number of dynamic emerging-market firms are on a path toward dominating their industrial sectors globally in the coming years – much in the same way that companies based in advanced economies have done for the past half-century. 
In the years ahead, such firms are likely to press for economic reforms at home, serving as a force for increased integration of their home countries into global trade and finance. 
So the time may be ripe to move forward with the sort of multilateral framework for regulating cross-border investment that has been derailed several times since the 1920’s. In contrast to international trade and monetary relations, no multilateral regime exists to promote and govern cross-border investment. 
For now, the US dollar remains the most important international currency. 
But this dominance is waning, as evidenced by its declining use as an official reserve currency, as well as for invoicing goods and services, denominating international claims, and anchoring exchange rates. 
The euro represents the dollar’s strongest competitor, so long as the eurozone successfully addresses its current sovereign-debt crisis through bailouts and longer-term institutional reforms that safeguard the gains from a long-running single-market project. 
But developing countries’ currencies will undoubtedly become more prominent in the longer term. 
The size and dynamism of China’s economy, and the rapid globalization of its corporations and banks, makes the renminbi especially likely to take on a more important international role. 
In Global Development Horizons 2011, the World Bank presents what it believes to be the most probable global currency scenario in 2025 – a multicurrency arrangement centered on the dollar, euro, and renminbi. 
This scenario is buttressed by the likelihood that the US, the eurozone, and China will constitute the three major growth poles at that time. 
Finally, the international financial community must live up to its responsibility to ensure that the development agenda remains a priority. 
Countries with global economic clout have a special responsibility to accept that their policy actions have important spillover effects on other countries. 
Monetary-policy initiatives that emphasize increased collaboration among central banks to achieve financial stability and sustainable growth in global liquidity thus would be particularly welcome. 
Despite the considerable progress that developing countries have made in integrating themselves into international trade and finance channels, there is still much work to be done to ensure that they share the burden of maintaining the global system in which they have a rapidly growing stake. 
At the same time, it is critical that major developed countries craft policies that take into account their growing interdependency with developing countries. 
More and more, global governance will depend on leveraging that interdependency to strengthen international cooperation and boost worldwide prosperity. 

Are We Really Secessionists Now? 
LONDON – The World Court’s recent ruling on Kosovo’s unilateral declaration of independence is being widely touted as giving a green light to secessionist movements to gain statehood. 
According to Kosovo President Fatmir Sejdiu, “The decision finally removes all doubts that countries which still do not recognize the Republic of Kosovo could have.” 
But this reading is largely wishful thinking by those who support secession. 
The Court's non-binding advisory opinion responded to a narrow question posed by the United Nations General Assembly: whether declaring independence is legal under international law. 
The judges rightly held that there is no international rule preventing a group from stating its intention or wish to form a state. 
But they said nothing about the terms and conditions that apply to following through on this intention – i.e., the act of secession itself. 
Indeed, the Court sought to leave no doubt about this: “The question is narrow and specific... it does not ask whether or not Kosovo has achieved statehood.” 
The judges contrasted their opinion with that handed down by the Supreme Court of Canada when it was asked to rule on Quebec’s right to secede unilaterally. 
In that case, the question went far beyond a declaration of independence; the court was asked whether and under what conditions Quebec had a right to break away from Canada, under either the Canadian constitution or international law. 
The Canadian judges held that international law granted no such unilateral right (and nor did the country's own constitution). 
As the World Court pointed out, its judgment last week did not refute that crucial point: “The Court is not required by the question it has been asked to take a position…on whether international law generally confers an entitlement on entities within a State to break away from this [State].” 
Moreover, the Court noted the radically different views expressed before it on whether self-determination in international law implies a unilateral right to secede. 
By acknowledging the range and intensity of disagreement among states on a right to secede, the Court seems to have hinted that the necessary consent of the world community does not exist to establish firmly the existence of any such right. 
Before concluding that there is now a “clear path” to Kosovo's independence, it is worth pondering the important questions that the Court did not answer (and was not asked by the General Assembly). 
The Court was not asked, and thus did not rule on, whether international law requires that the final status of Kosovo protect the group and individual rights of minorities, whether Kosovar Serbs or Roma. 
Likewise, the Court was not asked and did not rule on whether Serbia or, indeed, any other state in the world community is required to recognize Kosovo as an independent state. 
Nor did the Court’s decision address the borders of an independent Kosovo, or whether and under what circumstances force could legally be used either to impose independence or to resist it. 
If the fate of Kosovo – and the entire Balkan region – is to be guided by the global rule of law, these questions need to be answered, not swept under the table. 
Under existing procedures, framing questions to the World Court is entirely a prerogative of states, either as contending parties or, as with the Kosovo opinion, operating through the UN. 
But the rights of persons and peoples, not just interests of states, are at stake in controversies such as this one. 
To fulfill international justice today, we need a new kind of World Court, open to other voices. 

Are We Running Out of Oil (Again)? 
Oil prices are now running well above $50 a barrel, partly owing to short-run supply shocks, such as the Iraq conflict, Nigerian labor disputes, the conflict between Yukos Oil and the Russian government, and Florida's recent hurricanes. 
Oil prices may fall once these shocks dissipate, but speculative effects could keep them relatively high, weakening the world economy and depressing stock markets. 
Even a temporary spike in oil prices can have long-term effects because of the social reactions they provoke. 
High oil prices fuel public discussion about the future of oil prices. 
The outcome of any public discussion can never be known with certainty, but chances are that it will amplify stories that imply risks of higher oil prices. 
Experts may say that short-run supply factors caused the recent price increases, but the price increases will nonetheless lend credibility to scarier long-term stories. 
The scary story that is being amplified now concerns the developing world, notably China and India, where rapid economic growth - and no restrictions on emissions under the Kyoto Protocol - are seen as creating insatiable demands for oil. 
The story's premise is that the world will run out of oil faster than we thought, as these billions of people chase their dreams of big houses and sport utility vehicles. 
Is this plausible? 
Certainly, China, India, and some other emerging countries are developing fast. 
But experts find it difficult to specify the long-run implications of this for the energy market. 
Too many factors remain fuzzy: the rate of growth of these countries' energy demand, discoveries of new oil reserves, developments in oil-saving technology, and the ultimate replacement of oil by other energy sources. 
But what matters for oil prices now and in the foreseeable future is the perception of the story, not the ambiguities behind it. 
If there is a perception that prices will be higher in the future, then prices will tend to be higher today. 
That is how markets work. 
If it is generally thought that oil prices will be higher in the future, owners of oil reserves will tend to postpone costly investments in exploration and expansion of production capacity, and they may pump oil at below capacity. 
They would rather sell their oil and invest later, when prices are higher, so they restrain increases in supply. 
Expectations become self-fulfilling, oil prices rise, a speculative bubble is born. 
But if owners of oil reserves think that prices will fall in the long run, they gain an incentive to explore for oil and expand production now in order to sell as much oil as possible before the fall. 
The resulting supply surge drives down prices, reinforces expectations of further declines, and produces the inverse of a speculative bubble: a collapse in prices. 
All of this may seem obvious, but we tend not to think of oil prices as being determined by expectations of future prices. 
For example, in January 1974, when the first world oil crisis began, oil prices doubled in just days. 
The immediate cause was believed to have been Israel's stunning success in the Yom Kippur War, which led Arab oil producers to retaliate by choking off output. 
The second crisis, in 1979, is usually attributed to supply disruptions from the Persian Gulf following the Islamic revolution in Iran and the subsequent start of the Iran-Iraq war. 
Why, then, did real inflation-corrected oil prices remain at or above their 1974 levels until 1986? 
Speculative pressures are likely to have been at work, influencing the decisions of OPEC and many others. 
Although changes in market psychology are difficult to understand, the broad concerns that underlie such episodes of irrational exuberance are almost always clear. 
For example, in 1972, scientists at the Massachusetts Institute of Technology, including computer pioneer Jay Forrester, published The Limits to Growth . 
The book launched an international debate on whether the world would soon face immense economic problems due to shortages of oil and other natural resources - problems that seemed to be presaged by OPEC's production cuts eighteen months later. 
The second crisis was immediately preceded by the accident at the Three-Mile Island nuclear reactor in Pennsylvania in March 1979, which reinvigorated the anti-nuclear movement. 
With nuclear power - regarded as the main technological bulwark against depletion of the world's oil supplies - suddenly suspect, oil prices doubled again by the year's end. 
After 1979, fears about limits to growth and nuclear power ebbed. 
Oil prices gradually fell, and the stock market began its long climb towards its peak in 2000. 
But the current rise in oil prices shows that people are still eager to embrace "running out of oil" stories - this time focused on China and India - even when short-run factors are to blame. 
Indeed, the International Energy Agency noted in September that the usual relationship between oil prices and inventory levels has broken down, with prices much higher than the usual relationship would suggest. 
The IEA's report calls this breakdown evidence of a "structural shift in the market." 
But the same pattern followed the 1973-4 and 1979-80 oil crises, when prices dropped from their highest peaks, but stayed quite high for years, representing a drag on the stock market, the housing market, and the world economy. 
Let's hope that the effects of the present spike will be more short-lived. But don't hold your breath. 

Are We Still Evolving? 
NEW HAVEN – Many public-policy decisions are based on implicit assumptions about “human nature,” and it is currently popular to speculate about how evolution might have shaped human behavior and psychology. 
But this raises some important questions: are humans continuing to evolve – and, if so, is our basic biological nature changing – or has modern culture stopped evolution? 
For some traits, we do not have to speculate – we can measure and compare on the basis of studies covering thousands of individuals over several generations. 
Such studies have not yet been done on most of the traits where speculation is popular, but they have been done on some traits of medical interest. 
What have we learned? 
Scientists are taking two approaches. 
In one, they sequence the DNA of particular genes in many individuals with or without some determined health condition and look for differences between the two groups. 
This genetic approach measures effects that have accumulated over hundreds to thousands of generations, and the message is clear: humans have evolved in these respects fairly recently, some in one direction, some in another, depending on their environment and other conditions encountered. 
From this approach, we have learned, for example, that the ability to digest milk as adults evolved within the last 10,000 years – and several times – in cultures that domesticated sheep, goats, or cattle. 
Similar studies have taught us that sensitivity to alcohol consumption and resistance to diseases like malaria and leprosy also evolved within the last several thousand years. 
Some scientists, myself included, have taken a different approach. 
Instead of looking for changes in genes that take many generations to accumulate until they can be detected, we have measured natural selection directly. 
This method can reveal selection in action, working over periods of time as short as one generation – so that it can answer the question of whether modern culture has stopped evolution. 
The message of this approach is also clear: natural selection continues to operate in modern cultures. 
Whether it will operate consistently enough for a long enough time to produce significant genetic change can be answered only by future generations. 
Nevertheless, it is interesting to see in what direction natural selection is starting to shape us. 
Some of the answers are surprising. 
We measured natural selection operating on women in Framingham, Massachusetts, where a long-term medical study on heart disease produced the data that we used. 
The women were born between 1892 and 1956. We found significant selection and projected that if it continued for ten generations, the women would evolve to be about two centimeters shorter and have their first child about five months earlier. 
This is a surprising result, because women in developed countries have become taller thanks to better nutrition, and are having children later in life for many reasons, some of them cultural. 
So what is going on here? 
Three things: 
First, we know that giving birth for the first time when younger carries a cost in increased infant mortality, but modern medicine and hygiene have strikingly reduced infant mortality, reducing the cost of younger age at first birth. 
We therefore expect a shift toward earlier reproduction, because the costs previously associated with doing so have disappeared – exactly what we found in Framingham. 
And we expect those younger women to be shorter simply because they have had less time to grow. 
In five other cases, scientists found women in developed countries maturing earlier, in two of them at smaller size (in the other three cases, size was not measured). 
It is too early to say that this is a general trend, but right now, all signs point that way. 
Second, we measured the effects of natural selection by noting that women who were shorter and first gave birth when younger had more children. 
But genes are only one of many factors that influence height and age at first birth. 
Personal decisions, nutrition, income level, education, and religious affiliation all enter the mix. 
When we estimated how much of the variation among individuals could be attributed to biology, the answer was less than 5%. 
That left 95% of the variation to be explained by the effects of culture and individual decisions. 
But, while the effects of biology on the traits that we measured are relatively small for humans living in complex modern cultures, even small effects, when repeated consistently, will accumulate. 
Third, traits like these are always the result of interactions between genes and environment. 
A woman could have genes that would tend to make her taller than average but end up shorter than average if she had been poorly nourished as a child. 
If evolution took its steady course and changed the genetic basis of height and age at first birth, we might not see women ten generations later who were shorter and matured earlier, for the effects of nutrition and culture could more than compensate for the genetic change. 
As a colleague of mine likes to put it, one good school-lunch program could be enough to obscure the biological effects. 
Even when we focus on a simple physical trait like height, natural selection in humans turns out to be a multifaceted and nuanced process. 
Similar studies on human behavior and psychology, where causation is more complex, remain beyond our grasp. 
In such cases, silence may be wiser than speculation. 

Are We Working Ourselves to Death? 
Work can give structure and meaning to life. 
But working conditions can also trigger or accelerate the symptoms of ill health - physical and mental - that feed back into our productivity and earning capacity, as well as into our social and family relationships. 
In fact, an alarmingly large number of people appear to be at risk. 
Of the EU's 160 million-strong labour force, 56% report working at very high speeds, and 60% to tight deadlines. 
More than a third have no influence on task order, and 40% perform monotonous tasks. 
This probably contributes to a host of health-related problems: 15% of the workforce complain of headaches, 33% of backache, 23% of fatigue, and 23% of neck and shoulder pains, plus a host of other illnesses, including life-threatening ones. 
Sustained work-related stress is also an important determinant of depressive disorders - the fourth-largest cause of disease world-wide. 
They are expected to rank second by 2020, behind only heart disease. 
In the EU, the cost of these and related mental health problems is estimated to average 3-4% of GNP, amounting to approximately 265 billion euros annually. 
Moreover, sustained work-related stress is likely to contribute to `metabolic syndrome,' a cluster of pathogenic mechanisms characterised by an accumulation of abdominal fat, a decrease in sensitivity to insulin, increased levels of cholesterol, and heightened blood pressure, all related to the onset of heart disease and diabetes. 
Of course, working conditions may be experienced as threatening even when objectively they are not, or trivial symptoms may be interpreted as manifestations of serious illness. 
But stress is worrisome precisely because even misinterpretations can add to, or result in, a wide variety of health problems, including heart disease, stroke, cancer, musculoskeletal and gastrointestinal diseases, anxiety and depression, accidents, and suicides. 
Briefly stress consists of a pattern of built-in processes preparing the human organism for physical activity in response to demands and influences that tax its capacity to adapt. 
Activation of our "fight or flight" mechanism is an appropriate adaptive response when facing a wolf pack, but not so when struggling to adjust to rotating shifts, monotonous and fragmented tasks, or over-demanding customers. 
If sustained, stress is often maladaptive and eventually disease provoking. 
Stress-related paths to pathologies take a wide variety of forms. 
They can be emotional (anxiety, depression, hypochondria, and alienation), cognitive (loss of concentration or recall, inability to learn new things, be creative, make decisions), behavioural (abuse of drugs, alcohol, and tobacco, refusal to seek or accept treatment), or physiological (neuroendocrine and immunological dysfunction). 
To identify, prevent, and counteract the causes and consequences of work-related stress, we need to monitor job content, working conditions, terms of employment, social relations at work, health, well-being and productivity. 
The first step is to identify the incidence, prevalence, severity, and trends of work-related stress and its causes and health consequences. 
Are they likely to contribute to stress-related ill health? 
Can they be changed? 
Are such changes acceptable to workers and employers? 
Wherever the answers are affirmative, an integrated package of organisational changes should be considered. 
Such changes are likely to include the following areas: 
Work schedule. 
Design labor time to avoid conflict with demands and responsibilities unrelated to the job; 
Participation/control. 
Allow workers to take part in decisions or actions affecting their jobs; 
Workload. 
Ensure that workers have enough time to complete assigned tasks, and allow for recovery from especially demanding physical or mental tasks; 
Content. 
Design tasks to provide meaning, stimulation, a sense of completeness, and an opportunity to use skills; 
Roles. 
Define work roles and responsibilities clearly; 
Social environment. 
Ensure a working atmosphere free of all forms of invidious discrimination and harassment; 
Future. 
Avoid ambiguity in matters of job security and career development; promote life-long learning and employability. 
Although it is likely, the short- and long-term outcomes of such changes may not always suffice in the fight against work-related stress. 
They need therefore to be evaluated in terms of exposures and reactions to stress, the incidence and prevalence of ill health, and the quality and quantity of goods or services. 
Many companies world-wide recognize that success requires satisfying the three elements of sustainable development: financial, environmental, and social. 
Failure to do so leads, over time, to terminal organizational weakness, owing to lost credibility amongst employees, shareholders, customers, and communities. 
This has numerous implications for relations with employees. 
Ensuring long-term economic growth and social cohesion requires a commitment to health and safety, a better balance between work, family and leisure, lifelong learning, greater workforce diversity, gender-blind pay and career prospects, and profit-sharing and equity-ownership schemes. 
These practices can have a positive impact on profits through increased productivity, lower staff turnover, greater amenability to change, more innovation, and better, more reliable output. 
Indeed, companies often have an interest in going beyond minimum legal requirements: peer respect and a good reputation as an employer are marketable assets. 
The challenge for science is to find out what to do, for whom, and how. 
The challenge to workers, employers, governments, and communities is to translate what we now know into coordinated and sustainable programs. 



 

The Roots of Argentina’s Surprise Crisis 
NEW YORK – The currency scare that Argentina suffered last month caught many by surprise. 
In fact, a set of risky bets that Argentina’s government undertook starting in December 2015 increased the country’s vulnerability. 
What was not clear was when Argentina’s economy would be put to the test. 
When the test came, Argentina failed. 
Argentina had to address a number of macroeconomic imbalances when President Mauricio Macri took office at the end of 2015. 
Early measures included the removal of exchange-rate and capital controls and the reduction of taxes on commodity exports. 
Argentina also recovered access to international credit markets following a settlement with so-called vulture funds over a debt dispute that had lasted more than a decade. 
The government undertook a new macroeconomic approach based on two pillars: gradual reduction of the primary fiscal deficit, and an ambitious inflation-targeting regime that was supposed to bring annual price growth down to a single-digit rate in just three years. 
Markets cheered. 
The prevailing view, eagerly promoted by Argentina’s government, was that the country had done what was necessary to achieve sustainably faster economic growth. 
Presumably, foreign direct investment would flow in. 
But it did not. 
Instead, Argentina suffered stagflation in 2016, followed by a debt-based recovery in 2017. 
That led to a surge in imports that was not accompanied by a proportional increase in exports, widening the current-account deficit to 4.6% of GDP and sowing doubt about the virtues of the new approach. 
Then, a few weeks ago, markets stopped cheering, expectations soured, and capital fled. 
The peso depreciated 19% against the US dollar in just the first three weeks of May. 
Contrary to Macri’s hopes, his reforms attracted mainly short-term portfolio capital and financing in the form of bonds, both in foreign and domestic currency, rather than foreign direct investment. 
Argentina’s central bank bears a significant share of the responsibility; while its approach proved largely ineffective in reducing inflation to the target level (the annual rate is still at about 25%), high interest rates encouraged inflows of speculative capital, which worsened the external imbalances and heightened Argentina’s vulnerability to external shocks. 
As part of their inflation-targeting approach, the central bank has been sterilizing a large share of the increases in the monetary base through the sale of central banks bonds (LEBACS). 
This means that the public sector has been effectively financing through short-run central bank debt issuance the largest part of the sizable primary fiscal deficit (4.2% and 3.83% of GDP in 2016 and 2017, respectively). 
The issuance of LEBACS has been massive, soaring by 345% since December 2015. 
This might have been sustainable had early expectations of Argentina’s prospects been validated. 
There were obviously trade-offs. 
Less aggressive sterilization would have contained the growth in central bank debt that has now proven to be so risky, and it would have prevented upward pressure on the exchange rate; but it would have led to higher inflation. 
Nonetheless, attempting to reduce inflation and the fiscal deficit at similar speeds would have been a more prudent approach. 
After all, macroeconomic policy decisions should not be made on the basis of the most optimistic scenario when the cost of missed expectations is large. 
The currency crisis finally revealed Argentina’s vulnerabilities. 
Looking ahead, the country will be exposed to several different sources of risk. 
First, there is still a large stock of LEBACS. 
And every time a significant portion of that debt falls due, Argentina will be a hostage of financial markets’ mood. 
This will increase the expected exchange-rate volatility, which may create opportunities for speculative financial investments, but will discourage investments in the real economy. 
Second, because the public sector’s foreign-currency-denominated debt is much higher than it was two years ago, the increase in exchange-rate risk will also call into question the sustainability of public-sector debt. 
To assess where Argentina is heading after the crisis requires highlighting several salient elements of how the episode was managed. 
First, the central bank lost 10% of its total stock of foreign-exchange reserves in just a month. 
Second, the annual nominal interest rate on the LEBACS was raised to 40% – the highest in the world, and a move that risks creating a snowball of central-bank debt. 
Third, and most shocking for Argentines, Macri announced that the country would seek a stand-by agreement with the International Monetary Fund. 
Thus, if Argentina’s public sector falls into a state of debt distress in the coming years, it will have to submit to the tutelage of the IMF – a creditor in itself, but also an institution that is dominated by international creditors. 
At that point, the conditionality that the IMF typically imposes in exchange for financing could cause severe damage. 
Most worrisome is that the inflation-targeting approach that has exacerbated Argentina’s external imbalances has been reaffirmed. 
It would thus not be surprising if a new cycle of real exchange-rate appreciation starts in 2019. 
With a presidential election next year, that would be good news for Macri; but it would not bode well for Argentina’s future. 
Ultimately, because Macri’s approach to putting Argentina’s economy on a sustained growth path has so far failed, and has increased the country’s dependence on international creditors, his administration still faces the challenge of avoiding a debt crisis. 
To protect economic activity and redress vulnerabilities, the strategy of gradually reducing the primary fiscal deficit should be maintained. 
But, to save Argentina from an increase in external imbalances affecting the sustainability of external public debt, monetary policy must change. 
That means finally recognizing that attempting to reduce inflation at a much faster rate than the fiscal deficit entails costly risks. 
The prudent path also requires a gradual reduction in the stock of LEBACS, recognizing that greater inflationary pressure in the short term is the price of minimizing the risk of higher external imbalances and larger exchange-rate depreciations down the road. 
And it would certainly be a mistake to continue reducing the tax on soybean exports, as Macri’s administration has announced it will do. 
Further tax cuts would increase the deficit, while benefiting a sector that already enjoys rents. 
A change in macroeconomic policies is not sufficient to set Argentina on a path of inclusive and sustained economic development; but it is necessary. 
At the outset of Macri’s administration, there were warnings that he had chosen a high-risk approach. 
Unfortunately, those warnings were ignored. 
The strategy we are recommending is not without its own risks. 
But we are convinced that it offers a viable and sounder path forward. 

The Destructive Power of Inflation 
CAMBRIDGE – When I was in Argentina last week, I was reminded of the devastating power of high inflation. 
Argentina’s annual inflation rate is now about 20%, down from an estimated rate of about 40% last year. 
The central bank is struggling to keep the economy on a disinflationary path, with a goal of achieving a 5% rate three years from now. 
Inflation in Argentina has been much higher in the past. 
For the 15 years from 1975 to 1990, the annual rate averaged a remarkable 300%, meaning that the price level doubled every few months, on average. 
Prices rose at an explosive annual rate of more than 1,000% in 1989, before inflation was finally brought under control. 
In fact, inflation was all but extinguished. 
I remember being in Argentina in the mid-1990s, when there was virtually no inflation. 
Back then, the Argentine peso was pegged to the US dollar, and both currencies were used equally for day-to-day transactions on the streets of Buenos Aires. 
But the subsequent collapse of the peso’s dollar peg, and the forced conversion of dollar contracts into peso contracts at a non-market exchange rate, caused inflation to soar. 
By 2003, the annual rate had increased to 40%. 
It then fell to 10% for a few years. 
But it rose again during the presidencies of Néstor Kirchner and his wife and successor, Cristina Fernández de Kirchner, to 25%. 
It finally jumped back up to 40% in 2016, propelled by the removal of distortionary price subsidies that had previously been used to disguise the true inflation rate. 
The recent high rates of inflation, and the public’s memory of even higher rates in the past, have severely harmed Argentina’s economy. 
Because market interest rates rise to compensate for high inflation, even the government must now pay an interest rate of about 25% to borrow in pesos for short periods. 
Lenders are unwilling to provide long-term credit at fixed interest rates, because a jump in inflation would destroy the value of their bonds and loans. 
Households and businesses are reluctant to finance long-term investments with short-term loans or with variable-interest-rate loans, because a jump in inflation would cause their interest payments to rise sharply. 
Indeed, Argentina’s history of high and variable inflation has destroyed the domestic mortgage market, making it impossible for a household to use a mortgage to buy a home. 
Businesses are also reluctant to borrow, because they recall how previous increases in inflation – and thus in interest rates – pushed otherwise healthy companies into bankruptcy. 
The life insurance industry has been destroyed by high and uncertain inflation as well. 
Given that no one knows what the peso will be worth when future claims are paid, why would anyone buy insurance with today’s pesos? 
Economists might respond by suggesting that mortgages, insurance contracts, and other agreements could be indexed to the price level, adjusting payments to the contemporary rate of inflation. 
But when the inflation rate is changing rapidly, it is hard to know what the contemporary rate even is. 
The previous government tried to deceive the public by publishing inflation estimates that experts agreed were far lower than the true rate of price growth. 
As one Argentine friend explained, the government fired the statisticians who had tried to provide accurate measures of inflation and replaced them with political allies who would produce artificially low numbers. 
As he put it, they “changed government statistics from a technical problem to a creative art.” 
In the years when the government allowed Argentinians to convert their pesos into dollars and take them out of the country, people who had financial wealth moved their money into investments in the United States. 
I am told that there is much more Argentinian investment wealth in the US than in Argentina. 
As a result of this outflow of funds, investment in Argentina is low, holding down productivity and growth. 
Gross capital formation represents only 17% of GDP in Argentina, compared to 23% in Chile and Mexico. 
Although President Mauricio Macri’s new government is determined to reduce inflation and achieve price stability, it is politically costly to do so. 
Tight money and high interest rates depress demand and have caused real GDP to decline. 
At the same time, the public cannot perceive a reduction of inflation from 20% to 15%. 
So the government must pay a short-term political price to achieve a long-term economic gain. 
Argentina’s experience holds two crucial lessons for other countries. 
First, price stability is fragile, and the inflation rate can rise rapidly. 
And, second, high rates of inflation remain in the public’s memory and have long-lasting adverse effects. 
It is important to achieve price stability; but it is just as important to maintain it, by continually managing monetary policy to target a low rate of inflation. 

Promise and Peril for Argentina’s G20 Presidency 
WASHINGTON, DC – It is June 2016, and things seem to be looking up for Argentine President Mauricio Macri. 
Argentina has just been approved to fill the G20 presidency in 2018. 
The US presidential race is heating up, but it seems all but certain that Hillary Clinton will win the Democratic nomination and sail to victory in November. 
Macri is feeling optimistic about advancing his international agenda with a like-minded ally. 
Fast-forward to today. 
Macri must be wringing his hands over an international environment that is far more challenging than he probably anticipated. 
Still, all is not lost for Argentina’s upcoming G20 presidency. 
To be sure, confronting US President Donald Trump and his “America First” agenda will not be easy. 
At the G20 Summit in Hamburg last month, Trump already managed to isolate himself from the 19 other leaders, including Macri, by standing behind his decision to withdraw from the Paris climate agreement – a deal that virtually the entire international community considers irreversible. 
Similarly, Trump has demanded renegotiation of the North American Free Trade Agreement (NAFTA). 
That process, which begins this month, is unlikely to be resolved quickly and, if handled clumsily, could disrupt US relations with G20 members Mexico and Canada. 
Moreover, Trump isn’t the only factor outside Macri’s control that may affect his ability to manage the G20 presidency. 
There is a strong chance that the Brexit negotiations will not be completed by the deadline, leading to a “no deal” scenario that generates a serious economic shock to Britain and possibly continental Europe. 
Likewise, the many conflicts in the Middle East, unfolding humanitarian disasters in Africa, and the deteriorating situation in Venezuela are having destabilizing consequences far beyond national borders. 
Upcoming elections in Latin America’s G20 members are another source of uncertainty. 
Argentina is set to hold legislative elections this October, and Mexico and Brazil will hold presidential elections next year, with populist candidates expected to perform well. 
So what can Macri do to maximize Argentina’s chances of a successful G20 presidency? 
When it comes to Trump, he may seek to capitalize on their friendship, which precedes their political careers. 
Yet this relationship carries some risks, owing to questions about Trump’s business relationships in Argentina. 
More promising, Macri can and should work closely with civil-society groups and activists to ensure sufficient space for participation. 
In Hamburg, violent clashes with protesters left nearly 200 police injured and German insurance companies with a €12 million ($14.2 million) bill. 
The Argentinian G20 Unit must recognize the possibility of disruption, especially given the unpopularity of some of the government’s austerity measures, which have already led to mass protests. 
More broadly, Argentina’s G20 presidency remains an important opportunity to advance Macri’s foreign-policy agenda, which stresses international cooperation. 
With Mexico’s President Enrique Peña Nieto in his final year in office and Brazilian President Michel Temer hamstrung by scandals, Macri may wish to try to position Argentina as a regional leader in bringing Latin American perspectives to the G20. 
Such leadership might enable Macri to rejuvenate the troubled Mercosur bloc, which includes several Latin American countries and could support national efforts to reduce poverty through increased trade and investment. 
This effort – and Argentina’s broader G20 agenda – would receive an added boost if negotiations on a European Union-Mercosur trade agreement are successfully concluded this December. 
Argentina is also well placed to use its G20 presidency to build on the climate and energy plan agreed by the G19 (without the US). 
Macri has declared 2017 to be the “year of renewable energy,” and committed Argentina to meeting 20% of its electricity demand with renewable energy by 2025. 
Furthermore, the Argentine government now participates in the High Ambition Coalition, which was instrumental in securing the 2015 Paris climate accord. 
This informal group, comprising countries ranging from Germany and Brazil to the Marshall Islands, declared its “unshakeable” commitment to the accord. 
And Argentina was the first country to submit a more ambitious national climate change plan as part of the Paris accord. 
Macri should take advantage of the credibility established by these moves – which must, of course, be reinforced by progress toward Argentina’s renewable-energy targets and reducing deforestation – to encourage other countries to revise their pledges. 
The timing could not be better. 
Because the current set of pledges is inadequate to limit the rise in global temperature to the Paris accord’s target of “well below two degrees Celsius,” the United Nations will hold a special dialogue in 2018 to encourage countries to submit more ambitious pledges before 2020. 
Argentina can also link its G20 goals on jobs and technology with the objective of building a low-carbon economy. 
An important component of any effort to combine these agendas is the completion of Argentina’s long-term low-emission development strategy before the 2018 G20 summit. 
After all, progress on such strategies – part of the Paris agreement – sends a strong signal to investors seeking to mitigate climate-related risks and take advantage of new opportunities in renewables, electric vehicles, and batteries. 
Global volatility will undoubtedly affect Argentina’s G20 presidency. 
But so will Argentina’s own actions. 
To maximize the chances of a successful presidency, Macri should focus on working closely with Argentina’s European and Latin American allies, while reinforcing his government’s credibility on issues that are critical to all. 


Argentina Is Recovering 
The first glimpses of Argentina's recovery can be seen. 
To many, what happened, and what is happening there seems a mystery. 
Abandoning "convertibility," i.e. a fixed exchange rate system, was supposed to be a disaster - and it was. 
Output fell and unemployment increased dramatically. 
Fear of these costs, combined with IMF bailouts, kept Argentina from abandoning its currency board long after it was clear that the system could not be sustained. 
This stubbornness made matters worse when things finally fell apart. 
But what primarily kept Argentines wedded to a system that could not work was fear of hyperinflation. 
When I asked people, during my visits to Buenos Aires, why Argentina persisted in this economic folly, a single answer came back: "Yes, when Brazil went off its peg, its inflation remained moderate; but Brazil is Brazil, and we are Argentina." 
There was almost pride in the lack of confidence Argentina's people had in their institutions and their ability to manage without the shackles of convertibility. 
The feared hyperinflation, so far, has not materialized. 
To be sure, there has been the normal inflation associated with large increases in import prices that always follow large devaluations, but rather than setting off a spiral of price increases, inflation rates appear to be dampening. 
Argentina seems set to join the long list of countries - Brazil, Korea, Russia, Thailand, and Indonesia - that managed devaluations without runaway inflation. 
To an economist, Argentina's recovery is no surprise. 
Devaluation incites several restorative forces. 
Exports are cheaper, and revenues from exports (measured in pesos) are up dramatically. 
Tourism and related industries are booming. 
Import substitution takes place before your eyes: a clothing store that last year sold only imported apparel, now sells only domestically produced goods. 
As in East Asia after its crisis of 1998, what inhibits these restorative forces is a lack of credit. 
Foreign ownership of banks was supposed to ensure their stability; it was expected that foreign banks would come to the rescue of their Argentine subsidiaries if they needed money. 
Deposits in the branches of American banks in Buenos Aires were to be as safe as deposits in Miami. 
Unfortunately, depositors learned otherwise. 
On the other hand, foreign banks were always falling short in assuring an adequate supply of credit to small and medium sized Argentine firms. 
This lack of credit stifled growth, which contributed to the country's economic woes; and now credit has virtually dried up. 
To be sure, some domestic banks continue to provide credit. 
But if the recovery is to be sustained credit must be expanded, either by creating new financial institutions or by expanding existing ones. 
Here credit cooperatives may be particularly important, given the seeming lack of confidence in the more traditional banking sector. 
Revival of trade credit is also urgent - its importance was recognized early on during East Asia's crisis, where Japan, in a good neighborly gesture, provided $30 billion dollars through the Miyazawa initiative, much of which went to finance trade credit and help restart the economy. 
The point is simple: Argentina's real resources, its people, with their enormous talents and skills, its fertile land, its capital goods remain. 
What the economy needs is reactivation , and government policies must focus on this task. 
If the private sector cannot improve the availability of credit on its own, and no good neighbor steps forward to help, as Japan did in East Asia, government must take a more active role in restructuring the existing credit institutions as well as creating new ones. 
Would government involvement in providing credit create dangerous levels of inflation? 
Directing credit in order to increase supply of goods need not be inflationary; on the contrary, the increased supply of domestically produced goods may be an effective instrument for combating inflation. 
Appropriate accounting, separating expenditures for recapitalizing banks from ordinary expenditures, such as those needed to run hospitals and schools, would make clear that these expenditures are not by themselves inflationary. 
It is only the credit expansion that such expenditures allow which might be inflationary. 
In an economy with vast problems, underutilization of resources, and a massive lack of credit, a modest credit expansion would not in fact lead to high inflation. 
Centering attention on reactivation makes clear why the focus on IMF credits is misguided. 
IMF credits will go to repay the IMF, not to reactivate the economy. 
Supposedly, the IMF credit will "restore confidence" in the economy, but whether it does so depends on the conditions that are imposed. 
If the IMF imposes fiscal contraction or a misguided strategy for restructuring the financial sector (as it did in Indonesia), then the economy will be weakened and this will lead to a further erosion of confidence. 
If, on the other hand, IMF credit is obtained on reasonable terms, it will make a positive contribution. 
But it will be no panacea. 
Indeed, IMF credit will do little to address the key economic issues, except to the extent that it frees up money from other international sources and those funds are used to reactivate the economy. 
Where the international community can help Argentina is by opening its doors to Argentine goods, taking the rhetoric of free trade seriously and recognizing that trade can be an important instrument not only for long-term growth, but also for economic recovery. 
Exports will help reactivate the Argentine economy, while consumers in Europe and America will benefit from high quality goods at lower prices. 
This is one way of making globalization work to benefit those in need. 

Macri’s Disappointing First Year in Argentina 
NEW YORK – Argentina’s economy is struggling. 
Last year, the country suffered stagflation, with GDP dropping by 2.3% and inflation reaching nearly 40%. 
Poverty and inequality increased; unemployment rose; and foreign debt grew – and continues to grow – at an alarming rate. 
For President Mauricio Macri, it was a disheartening first year in office, to say the least. 
To be sure, Macri faced a daunting challenge when he took office in December 2015. 
The economy was already on an unsustainable path, owing to the inconsistent macroeconomic policies that his predecessor, Cristina Fernández de Kirchner, had pursued. 
Those policies led to imbalances that eroded the economy’s competitiveness and foreign reserves, pushing the country toward a balance-of-payments crisis. 
But Macri also pursued a flawed macroeconomic policy approach. 
His administration needed to address the fiscal and external imbalances, without undoing the progress in social inclusion that had been made over the previous decade. 
His approach, based on four key pillars, has not achieved that. 
First, Macri’s government abolished exchange-rate controls and moved Argentina to a floating currency regime, with the Argentine peso allowed to depreciate by 60% against the US dollar in 2016. 
Second, Macri’s government reduced taxes on commodity exports, which had been important to Kirchner’s administration, and removed a number of import controls. 
Third, the Central Bank of Argentina announced that it would follow an inflation-targeting regime, instead of continuing to rely mainly on seigniorage to finance the fiscal deficit. 
Finally, Macri’s government reached a deal with the so-called vulture funds and other holdout creditors that for more than a decade had blocked the country from accessing international credit markets. 
Once the deal was concluded, Argentina pursued massive new external borrowing, with the emerging world’s largest-ever debt issue, to help address its sizable fiscal deficit. 
In the interest of lowering its borrowing costs, the authorities issued the new debt under New York law, despite the expensive battle that the country had just lost precisely because it had borrowed under that legal framework. 
Macri’s macroeconomic policy approach – which also included increasing prices for public services that had been frozen by the previous government and implementing a tax amnesty program that provided the government with more fiscal revenues – rested on several controversial assumptions. 
Above all, the radical change in policy course was supposed to establish the conditions for dynamic growth. 
The currency depreciation, it was assumed, would address external imbalances, by encouraging, with the help of lower export taxes, increased production of tradable goods. 
The deal with the vulture funds was supposed to reduce the cost of financing and boost investor confidence, thereby attracting inflows of foreign direct investment (FDI). 
Investment-led growth would help the entire economy. 
These assumptions haven’t been borne out. 
Contrary to the government’s expectations, the peso’s depreciation had a large impact on consumer prices – as critics had warned. 
This reduced households’ purchasing power and weakened aggregate demand, while diminishing the devaluation’s overall impact on the country’s external competitiveness. 
The central bank’s new focus on inflation is unlikely to help matters, either, because it will undermine economic activity and exacerbate the pain experienced by the most vulnerable, for whom unemployment may be worse than rising prices. 
Moreover, Argentina’s fiscal deficit has increased, owing to the drop in revenues brought about by the recession. 
And there were no significant FDI inflows, because, as Macri’s critics had cautioned, the uncertainty surrounding his policies deterred investment. 
The government has done one thing right: it rebooted the National Institute of Statistics and Census, which had lost credibility after interventions by the previous administration. 
But the overall situation remains bleak. 
At the end of Macri’s first year in office, Argentina faced the same macroeconomic imbalances that it did when he took office, but with significantly higher external indebtedness. 
Furthermore, public anger is reaching fever pitch, owing to the effective redistribution of wealth away from workers brought about by Macri’s policies. 
Demonstrations abound, even causing the first day of school to be delayed. 
On April 6, the government faced its first nationwide general strike. 
As it stands, Argentina’s prospects are uncertain. 
External borrowing is becoming a serious problem – one that is likely to intensify, as continued interest-rate hikes by the US Federal Reserve raise the costs of rolling over debts. 
Unstable macroeconomic dynamics are reproducing the same imbalances as they did before. 
For example, the capital inflows associated with external borrowing are putting upward pressure on the peso, threatening sectors that are important for job creation. 
In the run-up to this year’s legislative elections, Macri’s government could try to stimulate economic activity by taking on more debt. 
But a debt-based recovery would be short-lived, and would sow the seeds of more acute debt troubles in the future. 
To escape its perverse debt dynamics, Argentina must reduce its fiscal deficit. 
But it can do so only in the context of a sustainable and inclusive recovery of economic activity – and that requires a more competitive economy. 
Under current conditions, attempting to resolve the problem through a fiscal contraction would merely aggravate the recession. 
Macri’s government should be working to develop a long-term macroeconomic strategy based on credible, not controversial, assumptions. 
Without a substantial mid-course correction, Argentina will settle onto a destabilizing debt path that leads nowhere good. 

A Fair Hearing for Sovereign Debt 
NEW YORK – Last July, when United States federal judge Thomas Griesa ruled that Argentina had to repay in full the so-called vulture funds that had bought its sovereign debt at rock-bottom prices, the country was forced into default, or “Griesafault." 
The decision reverberated far and wide, affecting bonds issued in a variety of jurisdictions, suggesting that US courts held sway over contracts executed in other countries. 
Ever since, lawyers and economists have tried to untangle the befuddling implications of Griesa's decision. 
Does the authority of US courts really extend beyond America's borders? 
Now, a court in the United Kingdom has finally brought some clarity to the issue, ruling that Argentina's interest payments on bonds issued under UK law are covered by UK law, not US judicial rulings. 
The decision – a welcome break from a series of decisions by American judges who do not seem to understand the complexities of global financial markets – conveys some important messages. 
First and foremost, the fact that the Argentine debt negotiations were preempted by an American court – which was then contradicted by a British court – is a stark reminder that market-based solutions to sovereign-debt crises have a high potential for chaos. 
Before the Griesafault, it was often mistakenly assumed that solutions to sovereign-debt repayment problems could be achieved through decentralized negotiations, without a strong legal framework. 
Even afterwards, the financial community and the International Monetary Fund hoped to establish some order in sovereign-bond markets simply by tweaking debt contracts, particularly the terms of so-called collective-action clauses (which bind all creditors to a restructuring proposal approved by a supermajority). 
But simple modifications like contract amendments will not overcome the system's deficiencies. 
With multiple debts subject to a slew of sometimes-contradictory laws in different jurisdictions, a basic formula for adding the votes of creditors – which supporters of a market-based approach have promoted – would do little to resolve complicated bargaining problems. 
Nor would it establish the exchange rates to be used to value debt issued in different currencies. 
If these problems are left to markets to address, sheer bargaining power, not considerations of efficiency or equity, will determine the solutions. 
The consequences of these deficiencies are not mere inconveniences. 
Delays in concluding debt restructurings can make economic recessions deeper and more persistent, as the case of Greece illustrates. 
This brings us to the second lesson of the British ruling. 
With the stakes so high and the system so broken, debt markets have little reason to remain in the US. 
America has always prided itself on the strength of its “rule of law," a selling point that has made Wall Street host to the largest sovereign-debt market. 
But Griesa's ruling, based on a peculiar – and in our view, indefensible – interpretation of certain terms in Argentina's contract, showed that US commercial interests can dominate its courts' decisions. 
The vaunted American rule of law no longer looks so robust. 
Perversely, it protects the strong against the weak. 
The Griesafault is only the latest of many decisions and legal changes that have revealed what one might call a symptom of “corruption, American-style," in which lobbying and campaign contributions compromise the entire system, even when no individual official is on the take. 
The US would be wise to react before the sovereign-debt market migrates from New York. 
China should stand ready to pick up the slack. 
Its savings now far outstrip those of the US, and it is striving to make Shanghai a global financial center. 
That ambition has become more attainable in view of the damage to the US system's credibility in the aftermath of the 2008 financial crisis. 
But, if Shanghai is to emerge as a leader in sovereign lending markets, China should be aware of the shortcomings of legal frameworks elsewhere, and design a more efficient and equitable alternative. 
The final, overarching message of the British court's decision is one that all countries should heed. 
There is an urgent need to renew the United Nations' efforts to create a multinational legal framework for sovereign-debt restructuring. 
Though the US is striving to undermine these efforts, the UK ruling reminds us that America's judges are not the world's judges. 
That last revelation may not make Wall Street happy; but, for the many countries around the world that rely on sovereign debt, it is very good news indeed. 

Argentina’s Bumpy Ride 
SANTIAGO – “Fasten your seat belts, because it should be a bumpy ride,” the captain warned from the cockpit. 
We were about to enter Argentine airspace. 
Investors looking to do business in Argentina have long been issued similar warnings. 
This is the country that scholars study when they want to understand financial crises. 
The country’s largest such crisis, in 2001, brought down the local banking system and caused the Argentine government to default on its debts. 
The economy contracted by a whopping 18%, and the unemployment rate peaked above 22%. 
After a period of calm that has now lasted a decade, dire economic warnings are back. 
Forecasts for the world economy are turning pessimistic, and economists in export-dependent Argentina are finding much to worry about. 
Itau, Latin America’s largest bank, is predicting GDP growth in Argentina of only 3.2% next year, down sharply from 6% in 2011. 
Inflation is another concern. 
With official figures widely discredited, private analysts estimate that consumer prices are rising at an annual rate of 25% or more. 
Those are careful estimates by serious economists. 
But, then again, one should take all economic forecasts about Argentina with a grain of salt. 
In the decade since the last crisis, Argentine policymakers have broken almost every rule in the economic-policy playbook. 
Again and again, local and international economists have issued dire warnings about what would happen if it persisted in its heterodoxy. 
And yet Argentina has managed to grow fast, doubling per capita income since 2002. 
Energy policy is a perfect example of a wrongheaded strategy. 
The Argentine government fixed gas prices, despite ongoing inflation. 
Gas became artificially cheap, consumers seldom bothered to turn the thermostat down, and producers stopped investing. 
As a result Argentina, once a thriving gas exporter, had to seek imports to overcome domestic shortages. 
What saved Argentina over the last decade were highly favorable external conditions: sky-high global commodity prices and technological innovations that greatly increased farm yields. 
Neighboring Brazil helped by undergoing a boom of its own, which pumped up demand for a wide range of Argentine products. 
With rising tax revenues and the burden of debt gone after the default a decade ago, the government went on a spending spree: real public expenditure grew at double-digit rates most years since 2002. 
At the same time, the central bank kept interest rates low, so that the inflation-adjusted cost of loans is zero or negative. 
In this environment, Argentine consumers naturally also went on a spending spree, and corporate profits rose accordingly. 
Not long ago, I met with a group of foreign investors in Argentina. 
They owned everything from paper mills to department stores and supermarket chains. 
After they finished trading stories of endless red tape and arbitrary government decisions, I asked why they kept investing in Argentina. 
“Because we make a lot of money,” was the unanimous answer. 
The question making the rounds in Argentina nowadays is whether this period of plenty is coming to an end. 
You would not feel any such anxiety in Buenos Aires shopping malls, which are as crowded as ever. 
Nor could you infer it from the behavior of voters, who seem poised to re-elect President Cristina Kirchner in October. 
But the signs of economic deterioration are surely there. 
With imports still growing strongly and commodity prices beginning to fall as a result of the world slowdown, Argentina’s large trade surplus is disappearing quickly. 
Fearing a weaker peso, spooked investors demand dollars. 
Capital is flowing out of the country, and official reserves are slowly being depleted. 
To stem the outflow of dollars, the central bank may well be forced to raise interest rates. 
That, plus the gloomy international outlook and a fiscal policy that will have to become less expansionary after the election, will slow the economy down. 
A bumpy ride is acceptable as long as the landing is smooth. 
Ensuring that outcome will be the number one job for a newly re-elected President Cristina Kirchner. 

The Vultures’ Victory 
NEW YORK – A recent decision by a United States appeals court threatens to upend global sovereign-debt markets. 
It may even lead to the US no longer being viewed as a good place to issue sovereign debt. 
At the very least, it renders non-viable all debt restructurings under the standard debt contracts. 
In the process, a basic principle of modern capitalism – that when debtors cannot pay back creditors, a fresh start is needed – has been overturned. 
The trouble began a dozen years ago, when Argentina had no choice but to devalue its currency and default on its debt. 
Under the existing regime, the country had been on a rapid downward spiral of the kind that has now become familiar in Greece and elsewhere in Europe. 
Unemployment was soaring, and austerity, rather than restoring fiscal balance, simply exacerbated the economic downturn. 
Devaluation and debt restructuring worked. 
In subsequent years, until the global financial crisis erupted in 2008, Argentina’s annual GDP growth was 8% or higher, one of the fastest rates in the world. 
Even former creditors benefited from this rebound. 
In a highly innovative move, Argentina exchanged old debt for new debt – at about 30 cents on the dollar or a little more – plus a GDP-indexed bond. 
The more Argentina grew, the more it paid to its former creditors. 
Argentina’s interests and those of its creditors were thus aligned: both wanted growth. 
It was the equivalent of a “Chapter 11” restructuring of American corporate debt, in which debt is swapped for equity, with bondholders becoming new shareholders. 
Debt restructurings often entail conflicts among different claimants. 
That is why, for domestic debt disputes, countries have bankruptcy laws and courts. 
But there is no such mechanism to adjudicate international debt disputes. 
Once upon a time, such contracts were enforced by armed intervention, as Mexico, Venezuela, Egypt, and a host of other countries learned at great cost in the nineteenth and early twentieth centuries. 
After the Argentine crisis, President George W. Bush’s administration vetoed proposals to create a mechanism for sovereign-debt restructuring. 
As a result, there is not even the pretense of attempting fair and efficient restructurings. 
Poor countries are typically at a huge disadvantage in bargaining with big multinational lenders, which are usually backed by powerful home-country governments. 
Often, debtor countries are squeezed so hard for payment that they are bankrupt again after a few years. 
Economists applauded Argentina’s attempt to avoid this outcome through a deep restructuring accompanied by the GDP-linked bonds. 
But a few “vulture” funds – most notoriously the hedge fund Elliott Management, headed by the billionaire Paul E. Singer – saw Argentina’s travails as an opportunity to make huge profits at the expense of the Argentine people. 
They bought the old bonds at a fraction of their face value, and then used litigation to try to force Argentina to pay 100 cents on the dollar. 
Americans have seen how financial firms put their own interests ahead of those of the country – and the world. 
The vulture funds have raised greed to a new level. 
Their litigation strategy took advantage of a standard contractual clause (called pari passu) intended to ensure that all claimants are treated equally. 
Incredibly, the US Court of Appeals for the Second Circuit in New York decided that this meant that if Argentina paid in full what it owed those who had accepted debt restructuring, it had to pay in full what it owed to the vultures. 
If this principle prevails, no one would ever accept debt restructuring. 
There would never be a fresh start – with all of the unpleasant consequences that this implies. 
In debt crises, blame tends to fall on the debtors. 
They borrowed too much. 
But the creditors are equally to blame – they lent too much and imprudently. 
Indeed, lenders are supposed to be experts on risk management and assessment, and in that sense, the onus should be on them. 
The risk of default or debt restructuring induces creditors to be more careful in their lending decisions. 
The repercussions of this miscarriage of justice may be felt for a long time. 
After all, what developing country with its citizens’ long-term interests in mind will be prepared to issue bonds through the US financial system, when America’s courts – as so many other parts of its political system – seem to allow financial interests to trump the public interest? 
Countries would be well advised not to include pari passu clauses in future debt contracts, at least without specifying more fully what is intended. 
Such contracts should also include collective-action clauses, which make it impossible for vulture funds to hold up debt restructuring. 
When a sufficient proportion of creditors agree to a restructuring plan (in the case of Argentina, the holders of more than 90% of the country’s debt did), the others can be forced to go along. 
The fact that the International Monetary Fund, the US Department of Justice, and anti-poverty NGOs all joined in opposing the vulture funds is revealing. 
But so, too, is the court’s decision, which evidently assigned little weight to their arguments. 
For those in developing and emerging-market countries who harbor grievances against the advanced countries, there is now one more reason for discontent with a brand of globalization that has been managed to serve rich countries’ interests (especially their financial sectors’ interests). 
In the aftermath of the global financial crisis, the United Nations Commission of Experts on Reforms of the International Monetary and Financial System urged that we design an efficient and fair system for the restructuring of sovereign debt. 
The US court’s tendentious, economically dangerous ruling shows why we need such a system now. 

Argentina’s Energy Dilemma 
BUENOS AIRES – The expropriation of nearly all of the Spanish company Repsol’s stake in Argentina’s energy producer YPF, announced in a vehement speech by President Cristina Fernández de Kirchner, has raised legal alarms worldwide. 
In fact, the move will not resolve the country’s energy problems in the absence of enormous inflows of investment to the sector. 
Repsol acquired complete control of YPF in 1999; in February 2008, it transferred part of its shares to the Petersen Group, which today holds 25%. 
Repsol currently holds 57%, with the rest owned by stock-market investors. 
The Argentine government intends to expropriate 51%, leaving Repsol with a 6% stake. 
In the 2008 sale of shares, the two majority stockholders agreed to distribute at least 90% of future profits in cash. 
That decision was intended to allow the Petersen Group to service the debts to banks, and to Repsol itself, that it incurred with its share purchase, for which it made no initial payment. 
This is an extraordinarily high dividend in the world oil industry. 
In the past decade, YPF’s reserves diminished significantly, along with those of most oil companies operating in Argentina, because investment in exploration was greatly reduced. 
At the same time, natural gas accounts for 51% of energy consumption, compared to 32% for oil and barely 17% for coal, renewables, and hydroelectric and nuclear power. 
Worldwide, gas accounts for barely a quarter of total energy consumption – for example, 27% in the United States and just 9% in neighboring Brazil. 
Argentina has the world’s largest fleet of vehicles running on compressed natural gas; families use gas intensively; most electricity is generated with gas; and the petrochemical industry is based on it. 
Of course, in a few other countries (Qatar, Algeria, the United Arab Emirates, Iran, and Russia), gas also accounts for more than half – or even more than 60% – of energy consumption. 
But there is an enormous difference: all of these countries have reserves that will last another 70-100 years. 
Argentina, by contrast, is a highly gas-dependent country with diminishing reserves – equivalent to less than eight years of production. 
Covering this drop in reserves – more than half of gas reserves and a fifth of oil reserves have been consumed – with imports implies an annual cost of more than $300 billion. 
Indeed, after two decades of cheap, abundant energy and exports of surplus output, a new cycle of expensive, scarce, and imported energy has begun, as oil production has fallen by one-third since 1998, and gas production by 15% since 2004. 
Argentina’s greatest challenge today is to try to regain energy self-sufficiency through significant investment in exploration on land, as well as in the Atlantic Ocean. 
At the same time, the country must modify its consumption model through greater reliance on hydroelectric, nuclear, and wind energy. 
While there is great potential for new non-conventional resources, all of this is expensive, requiring annual investment of about 3% of GDP over the next five years. 
It is very likely that, in the short term, growing imports of expensive liquid natural gas and other fuels will continue to exert pressure for change. 
Last year, the external energy deficit was more than $3 billion, and this year it is expected to double. 
The important question is whether the Argentine government’s decision to nationalize 51% of YPF’s shares is the best way to recover self-sufficiency in oil and gas production, and to attract the capital needed for exploration and development of conventional reserves. 
Argentina has particularly high potential for production of non-conventional gas resources as well, given that it holds the world’s third-highest level of such reserves, after China and the United States. 
But, as with the country’s conventional resources, these reserves will not produce themselves. 

Argentina's Lessons 
Argentina's collapse incited the largest default in history. 
Pundits agree this is merely the latest in a string of IMF-led bailouts that squandered billions of dollars and failed to save the economies they were meant to help. 
The nature of that failure, however, is disputed. 
Some claim that the IMF was too lenient; others that it was too tough. 
Those who blame the IMF see the problem as self-inflicted through profligate and corrupt spending by Argentina. 
Such attempts at blame-shifting are misguided: one can understand the default as the consequence of economic mistakes made over a decade. 
Understanding what went wrong provides important lessons for the future. 
The problems began with the hyperinflation of the 1980s. 
To slash inflation, expectations needed to be changed; ``anchoring'' the currency to the dollar was supposed to do this. 
This was a return to a variant of the old gold standard argument. 
If inflation continued, the country's real exchange rate would appreciate, the demand for its exports would fall, unemployment would increase, and that would dampen wage and price pressures. 
Market participants, knowing this, would realize that inflation would not be sustained. 
So long as the commitment to the exchange rate system remained credible, so was the commitment to halt inflation. 
If inflationary expectations were changed, then disinflation could occur without the costly unemployment. 
This prescription worked for a time in a few countries, but was risky, as Argentina was to show. 
The IMF encouraged this exchange rate system. 
Now they are less enthusiastic, though Argentina, not the IMF, is paying the price. 
The peg did lower inflation; but it did not promote sustained growth. 
Argentina should have been encouraged to fix a more flexible exchange rate system, or at least an exchange rate more reflective of the country's trading patterns. 
Other mistakes in Argentina's ``reform'' program also occurred. 
Argentina was praised for allowing large foreign ownership of banks. 
For a while this created a seemingly more stable banking system, but that system failed to lend to small and medium sized firms. 
After the burst of growth that arrived with hyperinflation's end, growth slowed, partly because firms in the country couldn't get adequate finance. 
Argentina's government recognized the problem, but was hit by numerous shocks beyond its control before it could act. 
East Asia's crisis of 1997 provided the first hit. 
Partly because of IMF mismanagement, this became a global financial crisis, raising interest rates for all emerging markets including Argentina. 
Argentina's exchange rate system survived, but at a heavy price - the onset of double-digit unemployment. 
Soon, high interest rates strained the country's budget. 
Yet Argentina's debt to GDP ratio - even as it began to collapse - remained moderate, at around 45%, lower than Japan's. 
But with 20% interest rates, 9% of the country's GDP would be spent annually on financing its debt. 
The government pursued fiscal austerity, but not enough to make up for the vagaries of the market. 
The global financial crisis that followed East Asia's crisis set off a series of big exchange rate adjustments. 
The dollar, to which Argentina's peso was tied, increased sharply in value. 
Meanwhile, Argentina's neighbor and Mercosur trading partner, Brazil, saw its currency depreciate - some say that it became significantly undervalued. 
Wages and prices fell, but not enough to allow Argentina to compete effectively, especially since many of the agricultural goods which constitute Argentina's natural comparative advantages face high hurdles in entering the markets of rich countries. 
Hardly had the world recovered from the 1997-1998 financial crisis when it slid into the 2000/2001 global slowdown, worsening Argentina's situation. 
Here the IMF made its fatal mistake. 
It encouraged a contractionary fiscal policy, the same mistake it had made in East Asia, and with the same disastrous consequence. 
Fiscal austerity was supposed to restore confidence. 
But the numbers in the IMF program were fiction; any economist would have predicted that contractionary policies incite slowdown, and that budget targets would not be met. 
Needless to say, the IMF program did not fulfill its commitments. 
Confidence is seldom restored as an economy goes into a deep recession and double-digit unemployment. 
Perhaps a military dictator, like Chile's Pinochet, could suppress the social and political unrest that arises in such conditions. 
But in Argentina's democracy, this was impossible. 
In repeated visits to Argentina, I marveled at how long suffering the Argentineans were; to me, it is more a surprise that unrest took so long to manifest itself, not that street turmoil unseated Argentina's president. 
Seven lessons must now be drawn: 
1. 
In a world of volatile exchange rates, pegging a currency to one like the dollar is highly risky. 
Argentina should have been encouraged to move off its exchange rate system years ago. 
2. 
Globalization exposes a country to enormous shocks. 
Countries must cope with those shocks - adjustments in exchange rates are part of the coping mechanism. 
3. 
You ignore social and political contexts at your peril. 
Any government that follows policies which leave large fractions of the population unemployed or underemployed is failing in its primary mission. 
4. 
A single-minded focus on inflation - without a concern for unemployment or growth - is risky. 
5. 
Growth requires financial institutions that lend to domestic firms. 
Selling banks to foreign owners, without creating appropriate safeguards, may impede growth and stability. 
6. 
One seldom restores economic strength - or confidence - with policies that force an economy into a deep recession. 
For insisting on contractionary policies, the IMF bears its great culpability. 
1. 
7. 
Better ways are needed to deal with situations akin to Argentina. 
I argued for this during East Asia's crisis; the IMF argued against me, preferring its big-bail-out strategy. 
Now the IMF belatedly recognizes that it should explore alternatives. 
The IMF will work hard to shift blame - there will be allegations of corruption, and it will be said that Argentina did not pursue needed measures. 
Of course, the country needed to undertake other reforms - but following the IMF's advice regarding contractionary fiscal policies made matters worse. 
Argentina's crisis should remind us of the pressing need to reform the global financial system - and thorough reform of the IMF is where we must begin. 

Argentina’s Monetary Mess 
CAMBRIDGE: Efforts to make the world safe for investment bankers are underway once again. 
The IMF is preparing a bailout estimated at $20 billion to keep Argentina from defaulting on loans to foreign investors. 
As usual, investors will get repaid, while Argentina sinks deeper into crisis. 
The story goes back decades. 
Argentina was seriously mismanaged from the 1940s to the early 1990s. 
Military and civilian governments alternated in irresponsible monetary and fiscal policies, and in trade protectionism that cut Argentina off from world markets. 
That combination produced massive foreign debt, a low level of exports relative to the size of the economy, and high inflation. 
In the early 1990s, President Carlos Menem and Finance Minister Domingo Cavallo took drastic actions, reducing budget deficits and ending protectionism. 
To battle inflation, however, they resorted to a trick. 
They fixed the exchange rate of the Argentina Peso at a value of one Peso per US dollar, and promised that the exchange rate would never change. 
This system is known as a “currency board” arrangement. 
Irrevocably fixing the exchange rate was at best a gamble, at worst a blunder. 
The exchange rate is a safety valve: when an economy becomes uncompetitive – say, if international demand for its products declines, or domestic costs rise above other countries – a decline in the currency’s value can restore demand for the nation’s output, and so help preserve employment. 
If the exchange rate is irrevocably fixed, that safety valve disappears. 
The economy can remain uncompetitive for years, causing chronically high unemployment and slow growth. 
At the start, Argentina’s gamble seemed to pay off. 
Foreign investors, who understand little about macroeconomics and long-term growth, were delighted with Argentina’s new-found stability. 
They poured money in; Argentina seemed to boom. 
But it is easy to boom when money pours in. 
Investors did not understand that Argentina was at risk of longer-term stagnation as a result of its currency board gamble. 
Argentine wages and prices rose significantly from 1991 through 1993. 
As a result, Argentina priced itself out of world markets for many exports. 
Luckily, Brazil was also becoming a very expensive economy as a result of fixing the Brazilian Real to the US dollar in 1994. 
Argentine producers could sell goods to Brazil even when they could not sell them elsewhere. 
Argentina experienced a deep financial crisis in 1995, but recovered fast when exports to Brazil increased. 
Pleased with its success, Argentina began telling other countries to set up currency boards. 
I argued with them, saying that Argentina was in more trouble than appeared, and that Argentina should not encourage others to take the same gamble. 
Few listened. 
Argentine officials repeatedly told me that I was wrong, that Argentina was in great shape. 
The IMF also championed Argentina’s gamble, urging Bulgaria, for example, to follow the same approach. 
Predictably, Argentina’s gamble turned sour. 
In early 1999 Brazil decided to devalue its currency. 
Suddenly, Brazilian goods were cheaper than Argentine goods, so Brazilian consumers and businesses reduced their purchases. 
Automobile manufacturers with divided production between Argentina and Brazil shifted production to Brazilian factories. 
Unemployment rose in Argentina, and GNP fell by 3.1% in 1999, while Brazil’s GNP rose by 1%. 
Argentina was not the only South American economy to suffer in 1999, but the others adjusted their exchange rates to restore international competitiveness. 
Argentina was stuck with its currency board and overvalued currency. 
Once investors understood Argentina’s predicament, they started dumping its government bonds, and the risk premium on loans to Argentina rose several percent. 
Early in the year, investors required a risk premium of almost 6 points in order to buy Argentine debts. 
Bond rating agencies downgraded Argentina’s government debt, which contributed to a further rise in the risk premium. 
Recently, holders of Argentina’s debts have been receiving a rate of return of 15% per year or even higher. 
High interest rate compensate for the risk that Argentina might stop paying the debts or devalue the currency or both. 
Holders of Argentine debt now scream that the world will come to an end if Argentina devalues its currency or suspends payments on its debts. 
Dutifully, the IMF is going to the rescue of bond holders. 
The IMF, World Bank, and the Inter-American Development Bank are gearing up to lend Argentina $20 billion so that it can continue to pay its debts without changing the exchange rate. 
(If it devalued the exchange rate, creditors holding Argentine debt denominated in pesos would receive a smaller amount in terms of US dollars). 
This “bailout” will not bail out Argentina. 
The IMF’s advice - to cut government spending and raise taxes - will deepen the crisis. 
This bailout money will encourage investment bankers to continue ignoring their risks. 
Yes, Argentina’s debts will probably be paid in full, but Argentina’s taxpayers and workers will bear a heavy burden for years to come. 
What should be done? 
First, Argentina should end its currency board and devalue its currency. 
Argentina is uncompetitive, and will have several years of slow growth if it doesn’t move the exchange rate. 
In a bold stroke, it could devalue the currency and then join a monetary union with Brazil. 
(The other hope for Argentina is that the US dollar collapses in value compared to the Euro, so that the Argentine peso becomes more competitive vis-a-vis the Euro). 
Second, the IMF should let Argentina and its creditors work out a refinancing or rescheduling agreement. 
A bailout just enriches creditors and lets them continue irresponsible gambling and ignore macroeconomic realities. 
Third, the World Bank and the Inter-American Development Bank, both development institutions, should not be misused for short-term bailouts. 
Fourth, the IMF and others should stop peddling monetary mischief such as currency boards and fixed exchange rates. 
Such arrangements make sense in rare circumstances (perhaps in a very small and open economy such as Estonia). 
Even if the system made sense in Argentina in 1991 to end hyperinflation, it came at a high cost that need not be paid by other countries. 

Argentina’s Two-for-One Presidency 
Cristina Fernández de Kirchner’s victory in Argentina’s presidential election ushers in a political experiment that goes beyond national boundaries: that of “ruling couples.” 
It’s not that the Kirchners have much global influence. 
But they precede by a year the power duo that the Clintons may form in the United States, which gives them an aura of importance that extends far beyond Latin America. 
Néstor Kirchner, Cristina’s husband and Argentina’s current president, did not want to run for office again, despite being legally permitted to do so and voters’ preference for him over her. 
According to Kirchner’s inner circle, he wanted to avoid becoming a “lame duck” and losing power at the end of a second term in office. 
Here lies a possible inspiration for the early handover to his wife. 
In Argentina, unlike in the US, re-election is unlimited, as long as the president does not exceed two consecutive periods in office. 
So, in four years, Cristina, may feel the same way, and pass the baton back to Néstor, who in turn will retire in four years to avoid becoming a “lame duck,” and so on. 
“Buy two for the price of one,” Bill Clinton joked about ruling couples when he first ran for president in 1992. 
Néstor Kirchner doesn’t joke. 
Instead, he busies himself with organizing a political movement that will structure his project. 
No one believes that such an edifice can be detached from the government, or that he will abstain from taking part in his wife’s decisions as president. 
So Argentineans have, indeed, bought “two for the price of one.” 
They have voted for continuity – the core of Cristina’s campaign – because their situation is much improved since 2001, when the country was in the midst of economic and political crisis. 
Maybe the most important point – and a key difference with the Clintons – is that this experiment begins in an Argentina that suffers from great institutional vulnerability. 
Néstor and Cristina will be dealing with a parliament that is much weakened: laws passed by legislators close to the government allow the president to “correct” the budget and issue “necessary and urgent” decrees that substitute for laws. 
The Kirchners will practice a form of hyper-presidentialism. 
Since 2001, the Kirchners have ruled with a siege mentality. 
They have built up an image of authority and moral inflexibility, and have helped themselves by picking enemies who are damned by all and lacking any kind of power to move against them (the weakened military, for example, or civilian members of the 1976-1983 dictatorship). 
This has been accompanied by cascades of populist rhetoric: loud voices and defiant words, and promises to fight to the death against ill-defined but malignant economic special interests. 
Meanwhile, the types of structural changes that Argentina needs have not been made. 
Corruption remains. 
The economic boom brought on by soaring global demand for commodities – Argentina is a leading exporter of soy beans, corn, wheat, honey, and limes, for example – resulted from a shift in Argentine farming that pre-dates the Kirchners: the old landholders have given way to operators with managerial skills. 
What the Kirchners have done well is to use the wealth gained from exports to strengthen the economy and improve conditions for the middle and lower classes. 
It is a significant achievement. 
But Argentina remains overly dependent on commodities, and has failed to encourage economic activity based on its peoples’ culture and ingenuity. 
Moreover, manipulation of official statistics highlights the problems of an economic model based on peso depreciation and the accumulation of reserves. 
The main concern is inflation, which the government has covered up and contained by precarious price agreements that will not last very long once Cristina takes over. 
Some officials claim that Cristina will bring in a new era of higher institutional quality. 
But the problem with “ruling couples” – in Argentina and, perhaps, throughout the world – is that no law or democratic constitution could envisage them. 
This is why the Kirchners will rely on secrecy. 
Néstor will not publicly express any attitude that hints at shared government, but nobody believes that he will be far from the scene. 
Institutional quality and lack of transparency are not compatible. 
Usually, decision-making is confined to ever smaller circles, with ever greater secrecy. 
And, as with humans who mix only with their close relatives, the political gene pool weakens. 
Yet this seems to be the distinctive operating style of Kirchnerism, torn between an elite born and raised in Patagonia, a few close allies, and everybody else. 
Their relationship with the press is similar. 
They talk only to state-controlled media and never hold press conferences. 
Hyper-presidentialism, inbred politics, and a plan to keep power indefinitely through a legal technicality: all this could put the Kirchners on the same level with the “caudillos for life” that Venezuelan President Hugo Chávez has brought back to the Latin American scene. 
If Cristina wants to improve institutional quality and the problems that the economy is already showing, she will need more than strength. 
Above all, she will need fresh sources of ideas. 

Armageddon Can Wait 
CAMBRIDGE – Where are global currencies headed in 2011? 
After three years of huge, crisis-driven exchange-rate swings, it is useful to take stock both of currency values and of the exchange-rate system as a whole. 
And my best guess is that we will see a mix of currency wars, currency collapses, and currency chaos in the year ahead – but that this won’t spell the end of the economic recovery, much less the end of the world. 
Let’s start by acknowledging that the modern system of floating exchange rates has, on the whole, acquitted itself remarkably well. 
True, given complex risk factors and idiosyncratic policy preferences, it has been particularly challenging of late to divine the logic underlying big exchange-rate swings. 
For example, even though the United States was at the heart of the financial crisis, the dollar initially soared. 
But, even if exchange rates work in mysterious ways, their cushioning effect is undeniable. 
The sharp depreciation of the euro after the crisis helped sustain German exports, thereby keeping the eurozone afloat. 
Emerging markets’ currencies also collapsed, even in economies with huge foreign-exchange reserves and relatively little debt. 
Since then, most emerging-market currencies have rebounded sharply. 
In hindsight, these exchange-rate swings mirrored the initial collapse and subsequent rebound in global trade, helping to mitigate the recession. 
By contrast, the financial crisis was hardly an advertisement for expanding the scope of fixed exchange rates. 
The eurozone’s peripheral countries, including Greece, Portugal, Ireland, and Spain, found themselves pinned to the mast of the common currency, unable to gain competitiveness through exchange-rate depreciation. 
The intellectual father of the euro, Columbia University’s Robert Mundell, once famously opined that the optimal number of currencies in the world is an odd number, preferably less than three. 
It is hard to see why right now. 
Perhaps when we have one world government, it will make sense to have one world currency. 
But, even setting aside the equilibrating benefits of flexible currencies, the prospect of a single, omnipotent central bank is not particularly appealing. 
Witness the vitriol and hysteria that accompanied the US Federal Reserve’s policy of so-called “quantitative easing.” 
Imagine the panic that would have ensued in a world where gold, storable commodities, and art were the only ways for investors to flee from the dollar. 
But the continuing success of the floating exchange-rate system does not imply a smooth ride in 2011. 
For starters, we can certainly expect a continuation of the so-called currency wars, in which countries strive to keep their exchange rates from appreciating too rapidly and choking off exports. 
Asian governments will probably gradually “lose” their battle in this war in 2011, allowing their currencies to appreciate in the face of inflationary pressures and threats of trade retaliation. 
As for currency collapse, the most prominent candidate has to be the euro. 
In an ideal world, Europe would deal with its excessive debt burdens through a restructuring of Greek, Irish, and Portuguese liabilities, as well as municipal and bank debt in Spain. 
At the same time, these countries would regain export competiveness through massive wage reductions. 
For now, however, European policymakers seem to prefer to keep escalating the size of bridge loans to the periphery, not wanting to acknowledge that private markets will ultimately require a more durable and sustainable solution. 
No risk factor is more dangerous for a currency than policymakers’ refusal to face fiscal realities; until European officials do, the euro remains vulnerable. 
The dollar, on the other hand, looks like a safer bet in 2011. 
For one thing, its purchasing power is already scraping along at a fairly low level globally – indeed, near an all-time low, according to the Fed’s broad dollar exchange-rate index. 
Thus, normal re-equilibration to “purchasing power parity” should give the dollar slight upward momentum. 
Of course, some believe that the Fed’s mass purchases of US debt poses an even bigger risk than Europe’s sovereign debt crisis. 
Perhaps, but most students of monetary policy view quantitative easing as the textbook policy for pulling an economy out of a zero-interest-rate “liquidity trap,” thereby preventing the onset of a sustained deflation, which would exacerbate debt burdens. 
As for China’s renminbi, it is still supported by a highly political exchange-rate regime. 
Eventually, China’s rapid growth will have to be reflected in a significant rise in its currency, its domestic price level, or in both. 
But, in 2011, most of the equilibration will likely take place through inflation. 
Finally, currency chaos is the safest bet of all, with sharp and unpredictable swings in floating exchange rates around the world. 
During the mid-2000’s, there was a brief window when some argued that currencies had become more stable as a corollary of the “Great Moderation” in macroeconomic activity. 
Nobody is saying that now. 

Arming the Asylum 
NEW YORK – The horror has become almost routine. 
This time, the massacre site was a movie theater in Aurora, Colorado, where accused shooter James Holmes murdered and injured dozens of moviegoers. 
In 1999, the scene was nearby Columbine High School. 
By some estimates, there are more than 20 mass shootings per year in the United States. 
And always the same question: Why? 
When the US is compared to the rest of the world, one reason becomes obvious: while America may not have more homicidally insane people than other countries do, homicidally insane people can get their hands on guns more easily in America than they can virtually anywhere else. 
According to a 2007 survey, the United States is far ahead of the rest of the world in terms of gun ownership, with 90 guns for every 100 citizens. 
With 5% of the global population, America has between one-third and one-half of the world’s civilian-owned guns – around 270 million weapons. 
And many studies show that the US far surpasses other developed countries in deaths from gun violence – 30,000 per year, most of them suicides, but more than 12,000 of them homicides – while guns injure 200,000 Americans annually. 
With these casualty figures, one would think that gun-control laws would be a much higher national priority in America than the far more loudly hyped fight against terrorism. 
After all, ever since the terrorist attacks of September 11, 2001 left roughly 3,000 people dead, gun violence has killed almost 140,000 and injured more than two million. 
But, when one looks more closely at why the US is so addicted to this unique kind of violence, the obvious is not so obvious. 
Why are gun-control laws so hard to pass? 
One big reason is the gun lobby, which is one of the most heavily funded in America. 
Few legislators – Democrats and Republicans alike – care to take on the National Rifle Association. 
And many Americans believe that the US Constitution’s Second Amendment (“A well regulated militia, being necessary to the security of a free state, the right of the people to keep and bear arms, shall not be infringed”) permits individuals virtually unrestricted access to guns. 
Indeed, many argue that the risk of gun-related deaths and injuries is the price that Americans must pay for the right to bear arms, which they regard as a powerful defense against tyranny. 
And, given how many ascendant tyrants have systematically disarmed the population they seek to control, it is difficult to dismiss this argument entirely. 
But surely there can be a balance between Second Amendment rights and rational constraints on the ability of mentally unstable people to accumulate arsenals. 
For example, Colorado and many other states have sought to require more stringent background checks, aimed at preventing those with criminal records or obvious mental-health problems from arming themselves. 
But few such restrictions have been legislated – or have been left unchallenged by the gun lobby when they are. 
Finally, opposition to reasonable gun-control laws in America is cultural, which is reflected in the many news reports following mass shootings that, refusing to admit that America could be wrong, downplay the striking contrast between US gun laws and those elsewhere. 
So, for example, journalists stress the rather pathetic high note of a grim reality: at least there are not more massacres and murders, and the numbers are stable. 
Such coverage also tends to individualize and psychologize social pathologies – another deep-seated American trait, and one reinforced by the lone-cowboy frontier ethos that is central to US mythology (and to gun mythology). 
As a result, the media tend to focus on the need for better parenting and mental-health treatment. 
But little US coverage following a gun massacre assesses the impact of America’s health-care system, which is unaffordable to many, especially for those with mental-health problems. 
That is why, in many US cities, it is common to see people with serious mental illnesses speaking to themselves and otherwise acting out, sometimes violently, on the street. 
This is a far less common sight in countries with functioning mental-health systems. 
Many mental illnesses, such as schizophrenia and bipolar disorder, can cause auditory hallucinations that “command” the patient to commit acts of violence. 
Medication manages such psychotic symptoms. 
But proper diagnosis and treatment requires money, and funding is being cut. 
Indeed, according to a report in February, US states have had to cut mental-health services by almost 10% in three years, threatening to “swamp emergency rooms and raise health-care costs for all patients.” 
But, if patients cannot get low-cost outpatient psychiatric care for chronic illnesses such as schizophrenia and bipolar disorder – which require continual management to adjust medication – there will also be more lethal violence, especially if guns are readily available. 
Inpatient care, too, has been slashed. 
In recent decades, mental institutions and halfway houses have been closed in a wholesale way, often in the name of reforming care. 
But nothing has replaced these facilities, leaving many patients homeless and their severe psychotic symptoms untreated. 
Despite the well-documented shortcomings of America’s mental-health services, few US policymakers are prepared to address the issue. 
Until they do, the easy availability of guns all but ensures that massacres like the one in Aurora remain a bitter American refrain. 

Artificial Intelligence and Globalization 
Today’s conventional wisdom is that the rise of India and China will be the single biggest factor driving global jobs and wages over the twenty-first century. 
High-wage workers in rich countries can expect to see their competitive advantage steadily eroded by competition from capable and fiercely hard-working competitors in Asia, Latin America, and maybe even some day Africa. 
This is a good story, full of human drama and power politics. 
But I wonder whether, even within the next few decades, another factor will influence our work lives even more: the exponential rise of applications of artificial intelligence. 
My portal to the world of artificial intelligence is a narrow one: the more than 500-year-old game of chess. 
You may not care a whit about chess, long regarded as the ultimate intellectual sport. 
But the stunning developments coming out of the chess world during the past decade should still command your attention. 
Chess has long been the centerpiece of research in artificial intelligence. 
While in principle, chess is solvable, the game’s computational complexity is almost incomprehensible. 
It is only a slight exaggeration to say there are more possible moves in a chess game than atoms in a universe. 
For most of the twentieth century, programmers were patently unsuccessful in designing chess computers that could compete with the best humans. 
A human chess master’s ability to intuit, visualize, and prioritize easily prevailed over the brute force approach of computers. 
The computers gradually improved, but they still seemed far inferior to the top humans. 
Or so we thought. 
Then, in 1997, in what will surely long be remembered as a historical milestone for modern man, IBM’s “Deep Blue” computer stunned the world by defeating the world champion Garry Kasparov. 
Proud Kasparov, who was perhaps more stunned than anyone, was sure that the IBM team must have cheated. 
He sarcastically told reporters that he sensed the “the hand of God” guiding his silicon opponent. 
But the IBM team had not cheated. 
Rather, through a combination of ingenious software and massive parallel computing power, they had produced a silicon-based entity capable of such finesse and subtlety, that international chess grandmasters worldwide (including me) were simply amazed. 
Since 1997, the computers have only gotten better, to the point where computer programmers no longer find beating humans a great challenge. 
Only a game, you say? 
Perhaps, but let me tell you this: when I played professional chess 30 years ago (I once represented the United States in the World Chess Championship cycle), I felt I could tell a lot about someone’s personality by seeing a sampling of their games, even those of an amateur. 
Until a short while ago, I could certainly distinguish a computer from a human opponent. 
Now everything changed like lightning. 
The machines can now even be set to imitate famous human players – including their flaws – so well that only an expert eye (and sometimes only another computer!) can tell the difference. 
More than half a century ago, the godfather of artificial intelligence, Alan Turing, argued that the brain’s function could all be reduced to mathematics and that, someday, a computer would rival human intelligence. 
He claimed that the ultimate proof of artificial intelligence would be met if a human interrogator were unable to figure out that he was conversing with a computer. 
The “Turing test” is the holy grail of artificial intelligence research. 
Well, for me, a chess game is a conversation of sorts. 
From my perspective, today’s off-the-shelf computer programs come awfully close to meeting Turing’s test. 
Over the course of a small number of games on the Internet, I could not easily tell the difference. 
True, today’s computers have not evolved to the level of the deranged chess-playing HAL in the filmmaker Stanley Kubrick’s masterpiece “2001: A Space Odyssey,” much less Arnold Schwarzenegger-like droids from the Terminator movies. 
But the level that computers have reached already is scary enough. 
What’s next? 
I certainly don’t feel safe as an economics professor! 
I have no doubt that sometime later this century, one will be able to buy pocket professors – perhaps with holographic images – as easily as one can buy a pocket Kasparov chess computer today. 
So let’s go back to India and China. 
Globalization proceeded at a rapid pace through much of the last century, and at a particularly accelerated rate during its last two decades. 
Yet the vast body of evidence suggests that technological changes were a much bigger driver in global wage patterns than trade. 
That is, technology, not trade, was the big story of the twentieth-century economy (of course, the two interact, with trade helping to diffuse and stimulate technology, but this is a matter of semantics.) 
Are we so sure that it will be different in this century? 
Or will artificial intelligence replace the mantra of outsourcing and manufacturing migration? 
Chess players already know the answer. 

The Promise and Pitfalls of AI 
BRUSSELS – Like any transformative trend, the rise of artificial intelligence (AI) poses both major opportunities and significant challenges. 
But the gravest risks may not be the ones most often discussed. 
According to new research from the McKinsey Global Institute (MGI), AI has the potential to boost overall economic productivity significantly. 
Even accounting for transition costs and competition effects, it could add some $13 trillion to total output by 2030 and boost global GDP by about 1.2% per year. 
This is comparable to – or even larger than – the economic impact of past general-purpose technologies, such as steam power during the 1800s, industrial manufacturing in the 1900s, and information technology during the 2000s. 
Perhaps the most discussed concern about AI is the prospect that intelligent machines will replace more jobs than they create. 
But MGI’s research found that the adoption of AI may not have a significant effect on net employment in the long term. 
Extra investment in the sector could contribute 5% to employment by 2030, and the additional wealth created could drive up labor demand, boosting employment by another 12%. 
But while the overall picture is positive, the news is not all good. 
For one thing, it is possible that it will take time for AI’s benefits – particularly with regard to productivity – to be felt. 
Indeed, MGI’s research suggests that AI’s contribution to growth may be three or more times higher by 2030 than it is over the next five years. 
This is in line with the so-called Solow computer paradox: productivity gains lag behind technological advances – a notable phenomenon during the digital revolution. 
This is partly because, initially, economies face high implementation and transition costs, which estimates of AI’s economic impact tend to ignore. 
MGI’s simulation suggests that these costs will amount to 80% of gross potential gains in five years, but will decline to one-third of those gains by 2030. 
The more troubling potential feature of the AI revolution is that its benefits are not likely to be shared equitably. 
The resulting “AI divides” will reinforce the digital divides that are already fueling economic inequality and undermining competition. 
These divides could emerge in three areas. 
The first divide would emerge at the company level. 
Innovative, leading-edge companies that fully adopt AI technologies could double their cash flow between now and 2030 – an outcome that would likely entail hiring many more workers. 
These companies would leave in the dust those that are unwilling or unable to implement AI technologies at the same rate. 
In fact, firms that do not adopt AI at all could experience a 20% decline in their cash flow as they lose market share, putting them under pressure to shed workers. 
The second divide concerns skills. 
The proliferation of AI technologies will shift labor demand away from repetitive tasks that can more easily be automated or outsourced to platforms, toward socially or cognitively driven tasks. 
MGI’s models indicate that job profiles characterized by repetitive tasks and little digital knowhow could fall from some 40% of total employment to near 30% by 2030. 
Meanwhile, the share of jobs entailing non-repetitive activities or requiring high-level digital skills is likely to rise from some 40% to more than 50%. 
This shift could contribute to an increase in wage differentials, with around 13% of the total wage bill potentially shifting to non-repetitive jobs requiring high-level digital skills, as incomes in those fields rise. 
Workers in the repetitive and low-digital-skills categories may experience wage stagnation or even reduction, contributing to a decline in their share of the total wage bill from 33% to 20%. 
The third AI divide – among countries – is already apparent, and seems set to widen further. 
Those countries, mostly in the developed world, that establish themselves as AI leaders could capture an additional 20-25% in economic benefits compared with today, while emerging economies may accrue only an extra 5-15%. 
The advanced economies have a clear advantage in adopting AI, because they are further along in the implementation of previous digital technologies. 
They also have powerful incentives to adopt AI: low productivity growth, aging populations, and relatively high labor costs. 
By contrast, many developing economies have insufficient digital infrastructure, weak innovation and investment capacity, and thin skills base. 
Add to that the motivation-dampening effects of low wages and ample space for productivity catch-up, and it seems unlikely that these economies will keep pace with their advanced counterparts in AI adoption. 
The emergence or expansion of these AI divides is not inevitable. 
In particular, developing economies can choose to take a forward-thinking approach that includes strengthening their digital foundations and actively encouraging AI adoption. 
And, to ensure that their changing workplace needs are met, firms can take a more active role in supporting educational upgrading and continuous learning for lower-skill people. 
Moreover, these divides are not necessarily a negative development. 
The reallocation of resources toward higher-performing companies makes economies healthier, potentially providing them with new competitive advantages vis-à-vis other countries. 
But the risks posed by these divides should not be underestimated. 
Vision and perseverance are essential to make the AI revolution work, because it will bring short-term pain before long-term gains. 
If that pain occurs against a backdrop of frustration with the unequal distribution of AI’s benefits, it may trigger a backlash against technologies that could otherwise produce a virtuous cycle of higher productivity, income growth, and employment-boosting demand. 

The Promise of AI in the Developing World 
LONDON – A common misperception among observers of digital trends is that consumers in developing countries do not benefit from advances in technology. 
Whether it is owning the latest smartphone or “employing” robot cleaners, the ability to access innovation is one of the most visible differences between rich and poor countries. 
This gap has become even more pronounced since the advent of artificial intelligence (AI). 
For example, the vast majority of home “smart speaker” personal assistants, like Amazon’s Alexa, are shipped to wealthy countries. 
In 2017, over 80% of global smart speaker shipments were to North America. 
But while technology can deepen global inequality, it also has the potential to mitigate it. 
This is because AI can do much more than power appliances; it can also revolutionize the way health care, disaster relief, finance, logistics, education, and business services are delivered in the Global South. 
Around the world, AI is already transforming developing countries. 
In Nepal, machine learning is mapping and analyzing post-earthquake reconstruction needs. 
Across Africa, AI tutors are helping young students catch up on coursework. 
Humanitarian aid agencies are using big data analytics to optimize the delivery of supplies for refugees fleeing conflict and other hardships. 
And in my country, India, rural farmers use AI applications to improve crop yields and boost profits. 
Innovations like these bring us closer to achieving the United Nations Sustainable Development Goals on issues like eradicating poverty, ending health-care inequality, increasing access to schooling, and combating global warming. 
And yet the world is just scratching the surface of what AI can do for human progress. 
To harness AI’s full power to advance development, we must find new ways to apply it. 
For example, with the right support, the skies above developing countries could be filled with drones delivering medical supplies to remote hospitals. 
This is already happening in rural Rwanda, where a unique partnership between the health ministry and Zipline, a Silicon Valley-based tech startup, is giving doctors in hard-to-reach clinics the ability to order blood by text message, and then have it arrive by parachute in a matter of minutes. 
Since the program launched in October 2016, delivery times have been cut by a factor of five, and hundreds of lives have been saved. 
Still, while AI innovations like this one are impressive, we cannot take them for granted. 
Unless we counter the misplaced but well-publicized fears that AI disruptions will be worse than the rewards, the incredible progress that technology companies are making in the Global South will be slowed. 
There are a number of steps that can be taken to avoid this outcome. 
For starters, programs like the UN’s “AI for Good” campaign, which is aimed at fostering dialogue on the beneficial use of technology for humanitarian work, must receive the full support of policymakers. 
Those of us involved in technology development must also continue to identify the projects, initiatives, think tanks, and organizations that would benefit from cooperation with AI firms – like Zipline in Rwanda. 
But, most important, conversations about developing AI for humanitarian purposes cannot be conducted in isolation by aid organizations, charities, and governments. 
Technology investors must also have a seat at the table. 
For too long, technology entrepreneurs have focused on solving problems in the Global North, while ignoring issues traditionally associated with developing countries. 
But mobile technology is opening new doors of opportunity, and it now makes humanitarian and business sense to target AI solutions far beyond Western countries. 
That is why I established Rewired, a $100 million investment vehicle that supports embryonic AI and robotics firms engaged in addressing important social issues. 
Rewired works with firms at the vanguard of machine perception – the ability of robots to understand and interpret the physical world. 
We have invested in companies that are working to replicate human smell, to develop affordable and dexterous prosthetics, and to create portable machines designed to improve manufacturing processes. 
Our goal is to fund technologies with the potential to enhance quality of life in every country around the world. 
And that, I believe, will be AI’s unifying characteristic. 
The machines we create today will not only be profitable; they will also bring us closer to solving some of the world’s biggest challenges. 

Economists vs. Scientists on Long-Term Growth 
CAMBRIDGE – Most economic forecasters have largely shrugged off recent advances in artificial intelligence (for example, the quantum leap demonstrated by DeepMind’s self-learning chess program last December), seeing little impact on longer-term trend growth. 
Such pessimism is surely one of the reasons why real (inflation-adjusted) interest rates remain extremely low, even if the bellwether US ten-year bond rate has ticked up half a percentage point in the last few months. 
If supply-side pessimism is appropriate, the recent massive tax and spending packages in the United States will likely do much more to raise inflation than to boost investment. 
There are plenty of reasons to object to recent US fiscal policy, even if lowering the corporate-tax rate made sense (albeit not by the amount enacted). 
Above all, we live in an era of rising inequality and falling income shares for labor relative to capital. 
Governments need to do more, not less, to redistribute income and wealth. 
It is hard to know what US President Donald Trump is thinking when he boasts that his policies will deliver up to 6% growth (unless he is talking about prices, not output!). 
But if inflationary pressures do indeed materialize, current growth might last significantly longer than forecasters and markets believe. 
In any case, the focus of economists’ pessimism is long-term growth. 
Their stance is underpinned by the belief that advanced economies cannot hope to repeat the dynamism that the US enjoyed from 1995-2005 (and other advanced economies a bit later), much less the salad days of the 1950s and 1960s. 
But the doubters ought to consider the fact that many scientists, across many disciplines, see things differently. 
Young researchers, in particular, believe that advances in basic knowledge are coming as fast as ever, even if practical applications are taking a long time to develop. 
Indeed, a small but influential cult touts the Hungarian-American mathematician John von Neumann’s “singularity” theory. 
Someday, thinking machines will become so sophisticated that they will be able to invent other machines without any human intervention, and suddenly technology will advance exponentially. 
If so, perhaps we should be far more worried about the ethical and social implications of material growth that is faster than humans can spiritually absorb. 
The angst over AI mostly focuses on inequality and the future of work. 
But as science fiction writers have long warned us, the potential threats arising from the birth of silicon-based “life” forms are truly frightening. 
It is hard to know who is right: neither economists nor scientists have a great track record when it comes to making long-term predictions. 
But right now, and leaving aside the possibility of an existential battle between man and machine, it seems quite plausible to expect a significant pickup in productivity growth over the next five years. 
Consider that the main components of economic growth are increases in the labor force, increases in investment (both public and private), and “productivity,” namely the output than can be produced with a given amount of inputs, thanks to new ideas. 
Over the past 10-15 years, all three have been dismally low in the advanced economies. 
Labor force growth has slowed sharply, owing to declining birth rates, with immigration failing to compensate even in pre-Trump America. 
The influx of women into the labor force played a major role in boosting growth in the latter part of the twentieth century. 
But now that has largely played out, although governments could do more to support female labor force participation and pay equity. 
Similarly, global investment has collapsed since the 2008 financial crisis (though not in China), lowering potential growth. 
And measured productivity growth has declined everywhere, falling roughly by half in the US since the tech boom of the mid-1990s. 
No wonder global real interest rates are so low, with high post-crisis savings chasing a smaller supply of investment opportunities. 
Still, the best bet is that AI and other new technologies will eventually come to have a much larger impact on growth than they have up to now. 
It is well known that it can take a very long time for businesses to reimagine productive processes to exploit new technologies: railroads and electricity are two leading examples. 
The pickup in global growth is likely to be a catalyst for change, creating incentives for firms to invest and introduce new technologies, some of which will substitute for labor, offsetting the slowdown in the growth of the workforce. 
With the after-effects of the financial crisis fading, and AI perhaps starting to gain traction, trend US output growth can easily stay strong for the next several years (though, of course, a recession is also possible). 
The likely corresponding rise in real global interest rates will be tricky for central bankers to navigate. 
In the best case, they will be able to “ride the wave,” as Alan Greenspan famously did in the 1990s, though more inflation is likely this time. 
The bottom line is that neither policymakers nor markets should be betting on the slow growth of the past decade carrying over to the next. 
But that might not be entirely welcome news. 
If the scientists are right, we may come to regret the growth we get. 


An AI Wake-Up Call From Ancient Greece 
STANFORD – In discussions about the implications of artificial intelligence (AI), someone almost always evokes the ancient Greek myth of Pandora’s box. 
In the modern fairytale version of the story, Pandora is depicted as a tragically curious young woman who opens a sealed urn and inadvertently releases eternal misery on humankind. 
Like the genie that has escaped the bottle, the horse that has fled the barn, and the train that has left the station, the myth has become a cliché. 
And yet the actual story of Pandora is far more apropos to debates about AI and machine learning than many realize. 
What it shows is that it is better to listen to “Prometheans” who are concerned about humanity’s future than “Epimetheans” who are easily dazzled by the prospect of short-term gains. 
One of the oldest Greek myths, the story of Pandora was first recorded more than 2,500 years ago, in the time of Homer. 
In the original telling, Pandora was not some innocent girl who succumbed to the temptation to open a forbidden jar. 
Rather, as the poet Hesiod tells us, Pandora was “made, not born.” 
Having been commissioned by all-powerful Zeus and designed to his cruel specifications by Hephaestus, the god of invention, Pandora was a lifelike android created to look like a bewitching maiden. 
Her purpose was to entrap mortals as a manifestation of kalon kakon: “evil hidden in beauty.” 
Pandora’s name means “all gifts,” and reflects the fact that all of the gods contributed to her composition. 
After her creation in Hephaestus’s forge, Hermes escorted the ravishing young “woman” down to earth and presented her as a bride to Epimetheus. 
Her dowry was the fateful sealed jar containing more “gifts.” 
Epimetheus was brother to Prometheus, the rebel titan who championed – and, by some accounts, created – humankind. 
Prometheus was concerned with humans’ obvious vulnerability, so he taught men and women how to use fire and other tools responsibly. 
But this enraged Zeus, a merciless tyrant who jealously guarded his exclusive access to awesome technologies. 
As punishment, Zeus bound Prometheus to a rock and sent his drone-like eagle – also forged by Hephaestus – to feed on his liver. 
For her part, Pandora was deliberately devised to punish humankind for accepting the gift of fire from Prometheus. 
Essentially a seductive AI fembot, she had no parents, childhood memories, or emotions of any kind, nor would she ever age or die. 
She was programmed to carry out one malevolent mission: to insinuate herself in an earthly setting and then unseal the jar. 
But that is still not the whole story. 
As Plato tells us, Prometheus’s name means “foresight,” because he was always looking ahead, unlike his carefree brother, Epimetheus, whose name means “hindsight.” 
As the more rational and justifiably paranoid of the two, Prometheus tried to warn his brother not to accept Zeus’s dangerous gift. 
But Epimetheus was charmed by Pandora and heedlessly welcomed her into his life. 
Only later did he come to realize his terrible error. 
The popular image of Pandora reeling back in horror as a cloud of evil swarms out of the jar is thus a modern invention. 
So, too, is the cloying image of Hope emerging from the vessel last to soothe men’s souls. 
In classical Greek renditions, Pandora is depicted as a cunning automaton: the most famous vase painting of her shows a young woman standing stiffly with an uncanny smile. 
Moreover, in antiquity, Hope was personified as a young woman named Elpis, and usually stood for a lack of foresight. 
Rather than a boon, Hope signified an inability to look ahead or choose sensibly among possible outcomes; she represented wishful thinking, not life-sustaining optimism. 
And for the Greeks, she was just another manifestation of kalos kakon: a beautiful evil that had been unleashed upon humans. 
Hence, at least one ancient artist depicted Elpis/Hope, much like Pandora, with a smirking grin. 
With AI/machine learning quickly evolving into a “black box” technology, the symbol of Pandora’s sealed jar has taken on new meaning. 
Soon, the operational logic of AI decision-making systems will be inscrutable not just to their users, but also to their creators. 
Among other threats, the possibility that AI systems will be hacked by malign actors, or deployed by terrorists and tyrants, now looms large. 
When Facebook founder Mark Zuckerberg, MIT’s Andrew McAfee, Lili Cheng of Microsoft, and other AI optimists assure us that AI will bring great benefits, one cannot help but think of Epimetheus and Elpis. 
Should we really trust humanity to adjust and troubleshoot the problems posed by AI as they arise? 
It seems wiser to heed modern-day Promethean thinkers such as the late Stephen Hawking, Microsoft founder Bill Gates, and the 115 other tech leaders who in 2017 spoke out about the threat of weaponized AI and robotics. 
“We do not have long to act,” they warned. “Once this Pandora’s box is opened, it will be hard to close.” 
Moreover, these Prometheans’ concerns have been echoed by Google co-founder Sergey Brin and AI ethicists such as Joanna Bryson and Patrick Lin, who caution against recklessly accepting AI’s “gifts” before figuring out how to control them. 
Recent polls suggest that optimism about the potential benefits of AI has dropped significantly among those who are actually developing AI systems. 
An understanding of how AI works would seem to correlate with more realistic expectations. 
Rather than blind hope, foresight based on knowledge and experience should govern how we manage the future of this technology and our relationship with it. 

On the Cusp of an AI Revolution 
SAN FRANCISCO – Over the last 30 years, consumers have reaped the benefits of dramatic technological advances. 
In many countries, most people now have in their pockets a personal computer more powerful than the mainframes of the 1980s. 
The Atari 800XL computer that I developed games on when I was in high school was powered by a microprocessor with 3,500 transistors; the computer running on my iPhone today has two billion transistors. 
Back then, a gigabyte of storage cost $100,000 and was the size of a refrigerator; today it’s basically free and is measured in millimeters. 
Even with these massive gains, we can expect still faster progress as the entire planet – people and things – becomes connected. 
Already, five billion people have access to a mobile device, and more than three billion people can access the Internet. 
In the coming years, 50 billion things – from light bulbs to refrigerators, roads, clothing, and more – will be connected to the Internet as well. 
Every generation or so, emerging technologies converge, and something revolutionary occurs. 
For example, a maturing Internet, affordable bandwidth and file-compression, and Apple’s iconic iPhone enabled companies such as Uber, Airbnb, YouTube, Facebook, and Twitter to redefine the mobile-customer experience. 
Now we are on the cusp of another major convergence: big data, machine learning, and increased computing power will soon make artificial intelligence, or AI, ubiquitous. 
AI follows Albert Einstein’s dictum that genius renders simplicity from complexity. 
So, as the world itself becomes more complex, AI will become the defining technology of the twenty-first century, just as the microprocessor was in the twentieth century. 
Consumers already encounter AI on a daily basis. 
Google uses machine learning to autocomplete search queries and often accurately predicts what someone is looking for. 
Facebook and Amazon use predictive algorithms to make recommendations based on a user’s reading or purchasing history. 
AI is the central component in self-driving cars – which can now avoid collisions and traffic congestion – and in game-playing systems like Google DeepMind’s AlphaGo, a computer that beat South Korean Go master Lee Sedol in a five-game match earlier this year. 
Given AI’s wide applications, all companies today face an imperative to integrate it into their products and services; otherwise, they will not be able to compete with companies that are using data-collection networks to improve customer experiences and inform business decisions. 
The next generation of consumers will have grown up with digital technologies and will expect companies to anticipate their needs and provide instant, personalized responses to any query. 
So far, AI has been too costly or complex for many businesses to make optimal use of it. 
It can be difficult to integrate into a business’s existing operations, and historically it has required highly skilled data scientists. 
As a result, many businesses still make important decisions based on instinct instead of information. 
This will change in the next few years, as AI becomes more pervasive, potentially making every company and every employee smarter, faster, and more productive. 
Machine learning algorithms can analyze billions of signals to route customer service calls automatically to the most appropriate agent or determine which customers are most likely to purchase a particular product. 
And AI’s applications extend beyond online retail: Brick-and-mortar stores still account for 90% of retail sales, according to the consultancy A.T. Kearney. 
Soon, when customers enter a physical store, they will be greeted by interactive chat-bots that can recommend products based on shopping history, offer special discounts, and handle customer-service issues. 
Advances in so-called “deep learning,” a branch of AI modeled after the brain’s neural network, could enable intelligent digital assistants to help plan vacations with the acumen of a human assistant, or determine consumer sentiments toward a particular brand, based on millions of signals from social networks and other data sources. 
In health care, deep-learning algorithms could help doctors identify cancer-cell types or intracranial abnormalities from anywhere in the world in real time. 
To deploy AI effectively, companies will need to keep privacy and security in mind. 
Because AI is fueled by data, the more data the machine gains about an individual, the better it can predict their needs and act on their behalf. 
But, of course, that massive flow of personal data could be appropriated in ways that breach trust. 
Companies will have to be transparent about how they use people’s personal data. 
AI can also detect and defend against digital security breaches, and will play a critical role in protecting user privacy and building trust. 
As in past periods of economic transformation, AI will unleash new levels of productivity, augment our personal and professional lives, and pose existential questions about the age-old relationship between man and machine. 
It will disrupt industries and dislocate workers as it automates more tasks. 
But just as the Internet did 20 years ago, AI will also improve existing jobs and spawn new ones. 
We should expect this and adapt accordingly by providing training for the jobs of tomorrow, as well as safety nets for those who fall behind. 
AI is still a long way from surpassing human intelligence. 
It has been 60 years since John McCarthy, a computer scientist and nominal father of AI, first introduced the term during a conference at Dartmouth College, and computers have only recently been able to detect cats in YouTube videos or determine the best route to the airport. 
We can count on technological innovation to continue at an even more rapid pace than in previous generations. 
AI will become like electrical current – invisible and augmenting almost every part of our lives. 
Thirty years from now, we will wonder how we ever got along without our seemingly telepathic digital assistants, just as today it’s already hard to imagine going more than a few minutes without checking the 1980s mainframe in one’s pocket. 

Laughing in the Dark 
LONDON – As a former Soviet citizen, I can tell you: it’s never a good sign for a political system when artists start speaking out against it. 
And when their statements visibly strike a nerve, chances are that the system is sick. 
In a democracy, art can simply be ignored. 
Of course, one can appreciate culture, but that is a matter of choice, not necessity. 
Indifference is a luxury afforded to those whose freedoms are well protected. 
When those freedoms are threatened, however, art becomes a critical line of defense. 
The United States is learning that lesson today. 
In just over a month, President Donald Trump has changed the rules of US politics – and not for the better. 
If the facts contradict his administration’s line – or, worse, suggest that he isn’t popular – he denounces the journalists who report them as purveyors of “fake news” and an “enemy” of the American people. 
The judiciary and the intelligence community have not escaped Trump’s feverish attacks. 
Any opposition to his orders, such as court rulings against his partial ban on Muslims entering the country, or exposés of potential wrongdoing, such as his former national security adviser’s secret conversations with the Russian ambassador, is met with quick condemnation. 
With America’s pillars of democracy under assault, artists are stepping in. 
Even before Trump was inaugurated, the writers’ union PEN America held a #LouderTogether protest, on the steps of the New York Public Library, to “send a message” to an administration “that has laid bare its hostility toward the press and other free expression norms.” 
When then-Vice President-elect Mike Pence attended the Broadway show Hamilton, the actors appealed to him to uphold American values and work on behalf of all Americans (drawing a Twitter rebuke from Trump). 
Just down the street, the show Party People, which examines the legacy of the Black Panthers and the Young Lords Party, delivered a more confrontational message, as part of a modified script that addressed Trump’s victory. 
When Trump signed his order to ban anyone from seven Muslim-majority countries from entering the US, the Museum of Modern Art hung works by artists from those countries. 
In the plaques beside the paintings, MoMA referred to Trump’s order explicitly, and asserted that it had hung the paintings to “affirm the ideals of welcome and freedom” that are vital to the US. 
MoMA has also scheduled four screenings of films by directors subject to the travel ban. 
In April, almost 100 independent US and Canadian movie theaters will offer free screenings of George Orwell’s 1984 as a response to the Trump administration’s embrace of “alternative facts.” 
Hollywood actors have taken advantage of this year’s award season to make their own political statements. 
Meryl Streep drew Trump’s ire with her speech at the Golden Globe Awards, in which she condemned Trump for mocking a disabled reporter and highlighted the importance of defending press freedom. 
David Harbour, accepting a Screen Actors Guild award, declared that great acting “is a call to arms from our fellow craftsmen and women to go deeper, and through our art to battle against fear, self-centeredness, and exclusivity of our predominantly narcissistic culture.” 
In the fashion world, some major designers have pledged never to dress First Lady Melania Trump. 
At the recent New York Fashion Week, designers from Mara Hoffman to Prabal Gurung used the runway to make political statements, and some of fashion’s biggest names participated in a W Magazine video, stating defiantly, “I am an immigrant.” 
Trump’s supporters may prefer to dismiss such statements, telling actors and artists to “stick to their day jobs.” 
But the truth is that what such figures say has an impact – and not just on Trump, a longtime Hollywood hanger-on. 
There is a reason why Russia’s autocratic leaders have always tried to keep artists on a short leash. 
When artists bow to power, the state gains a new level of authority and even legitimacy. 
That’s why Joseph Stalin needed the celebrated anti-Kremlin poet Osip Mandelstam to write him an ode. 
Mandelstam succumbed to the pressure, but he was not broken. 
He continued to insult the Kremlin, most famously, with his poem, “We live not feeling the ground under our feet.” 
While he ended up perishing in a gulag, his protest poems, and those by other brave poets, contributed to the regime’s demise. 
Alexander Solzhenitsyn’s 1970s anti-communist masterpiece The Gulag Archipelago ultimately did as much as the sclerotic economy to expose the communist charade. 
Putin must have been delighted when Solzhenitsyn, a Nobel laureate who seemed to become increasingly nationalistic with age, expressed support for him. 
Recognizing the power of the arts, Putin established himself early on as a fan of Russian culture. 
He has also courted foreigners, including French movie icons Brigitte Bardot and Gérard Depardieu and even the Hollywood has-been Steven Seagal. 
At the same time, Putin has been quick to eliminate those whose message he does not like. 
The 1990s satirical television show Puppets was canceled almost immediately after Putin entered the Kremlin, after likening the president to Little Zaches, the ugly, evil, and self-important dwarf from E.T.A. Hoffmann’s grotesque fairy tale. 
A novice autocrat whose attempts to silence his critics have been clumsy, at best, Trump may attempt to emulate his Russian role model. 
But he has not amassed sufficient power to quash every cultural work and institution that criticizes him. 
If he had, he probably would have already canceled the comedy show Saturday Night Live, which he condemns regularly. 
It is often the arts, serious or satirical, that expose the tragic absurdity of repressive leadership. 
And the worse Trump behaves, the more demand there will be for artists who oppose him. 
Saturday Night Live’s ratings are at a six-year high. 

Ben Bernanke’s Global Legacy 
WASHINGTON, DC – The world is still struggling to digest Alan Greenspan’s mixed legacy as Chairman of the US Federal Reserve Board from 1987 to 2006. 
So it is too soon to assess whether his departing successor, Ben Bernanke, is headed for history’s chopping block or its pedestal. 
But the crucial international role that Bernanke and the Fed played during his tenure – a time when domestic economic weakness translated into relatively ineffective American global leadership – should not be overlooked. 
In these last five crisis-ridden years, the Fed has affected the world economy in two ways: through its hyperactive policy of purchasing long-term assets – so-called quantitative easing (QE) – and through its largely overlooked role in providing international liquidity. 
Let us consider each. 
Whatever the impact of QE on the US economy, its impact on the rest of the world has been, on balance, generally benign. 
The first round of QE was unambiguously beneficial, because it minimized, or even eliminated, the tail risk of a global depression after the collapse of Lehman Brothers in September 2008. 
To be sure, subsequent action by the Fed received a mixed reception in the rest of the world. 
In 2010 and 2011, when QE pushed capital to emerging markets, there were complaints that the US was practicing a form of currency manipulation. 
Since May 2013, when Bernanke signaled the possibility of unwinding QE, emerging economies have faced the opposite type of pressure: capital outflows and sharp currency adjustments. 
But in both cases, the problems for which blame was heaped on the Fed largely reflected macroeconomic mismanagement in the affected countries. 
For example, Brazil complained most vocally about capital inflows, because its currency had over-appreciated in a short period of time; but the main culprits were domestic wage increases and overheating, not the Fed’s policies. 
Likewise, India was severely affected by Bernanke’s suggestion that the Fed would “taper” QE, but only because its economy was characterized by high inflation and large budget and external deficits. 
It was as if the emerging markets had forgotten that exposure to Fed policies was part of the bargain they willingly made when they signed on to financial globalization. 
Meanwhile, the Fed has been mindful of its international responsibilities, playing a constructive role by increasing dollar liquidity in times of extreme financial stress. 
It provideddollar liquidity (via swap lines) to the central banks of Brazil, Mexico, Singapore, and South Korea in the aftermath of the Lehman failure. 
And it has provided nearly unlimited amounts of similar liquidity to central banks in Europe and the Bank of Japan. 
These actions contributed to easing extremely tight financial conditions and corresponding market volatility. 
The Fed’s support to emerging-market central banks was remarkable, because most of these countries chose not to borrow from the International Monetary Fund, which, in the aftermath of the Asian financial crisis in the 1990’s, had come to be considered an instrument of US hegemony. 
They preferred to deal directly with the United States via the Fed, to which the IMF stigma evidently did not extend. 
In fact, the speed, timeliness, and effectiveness of Fed support have now led to efforts to institute similar mechanisms at the IMF. 
The Fed’s support for Europe was similarly remarkable, because the rest of the US government was an ineffective bystander at the time – able to offer cheap counsel but little hard cash to the eurozone’s distressed economies. 
Even efforts to augment the IMF’s resources floundered on the reef of American political dysfunction. 
All other major economies, including key US allies, have enacted the legislation needed to strengthen the IMF; in the US, however, there has been no comparable action since 2010, owing to Congressional resistance. 
The explanation for the Fed’s exceptional role in the context of otherwise anemic American international leadership is simple: though the US economy is weak, and American politics is polarized to the point of paralysis, the dollar is still in demand. 
In these circumstances, Bernanke effectively leveraged his role as controller of the mighty dollar-printing machine known as the US Federal Reserve. 
Dollar supremacy will not last forever, and it is increasingly being challenged by the Chinese renminbi, as I describe in my book Eclipse: Living in the Shadow of China’s Economic Dominance. 
But that vestigial source of American supremacy made Bernanke a constructive and effective international leader. 
As he departs from office, the assessment of his performance as “Helicopter Ben,” who dropped piles of cash on the US economy, will begin in earnest. 
But history should not neglect “Ambassador Ben’s” crucial global role. 

As China Gains, Will Southern Africa? 
China and southern Africa have received growing international attention in recent years, but for very different reasons. 
As a rising, rapidly modernizing power, China – already a permanent member of the UN Security Council – is now on the verge of coveted G8 membership and a powerful role in the World Trade Organization. 
By contrast, southern Africa is beset with problems. 
Its position in the world economy is marginal – tenuously plugged into global investment flows and dependent on northern markets for its commodity exports, tariff preferences, and financial aid. 
South Africa is a notable exception, offering the best prospect for driving regional economic integration, but it, too, has chronic social problems and, compared to East Asia, anemic economic growth. 
What implications does China’s emergence onto the global stage hold for southern Africa? 
Can China help lift the world’s poorest region out of its deep economic and political malaise? 
In theory, at least, China’s rapid growth, if it continues, offers southern Africa a highly promising economic opportunity, not least by underpinning commodity prices and thus boosting southern Africa’s terms of trade. 
This, in turn, would support fragile balance-of-payments positions throughout the region, potentially assisting with pervasive debt-repayment problems. 
Although in South Africa, for example, imports of cheap Chinese manufactures have produced a large and widening bilateral trade deficit over the last decade, southern Africa as a whole stands to gain from the “minerals nexus.” 
China’s manufacturing boom is fuelled by imported minerals, such as iron ore and chromium, which southern Africa possesses in abundance. 
This implies increasing minerals exports to China, together with growing Chinese investment in the region to secure sources of supply. 
China’s agricultural imports should also continue to rise, as land is taken out of agricultural production and its urban population expands. 
Southern Africa has the potential to export such goods to China. 
Although much depends on greater regional investment in increasing export capacity, further Chinese investment in the region would most likely follow. 
Finally, South Africa, with its world-class banking sector and internationally competitive construction companies, can supply services to the Chinese market. 
Moreover, these services are set to benefit from the broader trade expansion with China, potentially establishing a virtuous circle of investment and exports. 
But China’s rise also holds risks for southern Africa. 
Imports of cheap Chinese goods threaten to displace regional production, particularly in labor-intensive manufacturing sectors that are finding it difficult to compete. 
In a region of pervasive unemployment, the key question will be how to ensure future employment growth. 
This raises troubling questions about the region’s industrial trajectory. 
Indeed, fears are growing that southern Africa will be condemned to the role of exporter of raw materials. 
The composition of South Africa’s exports to China supports these concerns. 
In 1993, advanced manufactured goods accounted for 50% of total exports to China, while raw materials and intermediate goods comprised the remainder. 
By 2003, advanced manufactures accounted for a mere 8% of the total, with resource and intermediate products accounting for the rest. 
This turnaround comes despite South Africa’s protection of its labor-intensive sectors, such as clothing and textiles, through high tariffs. 
With WTO negotiations underway and an expanding free-trade agenda taking hold, those tariffs are under pressure. 
Their future is further clouded by the fact that the United States and the European Union will phase out their apparel quotas next year, potentially reducing quota-hopping investment in South Africa and the broader region. 
If the economic impact of China’s growing global importance on southern Africa is promising, but uncertain, what about the geopolitical implications? 
Will China’s rise open up greater opportunities for multilateral cooperation? 
Throughout southern Africa, lingering resentments associated with colonization fuel distrust of the major Western powers, which continue to control the key institutions so determinative of the region’s future, notably the IMF and the World Bank. 
While China is not about to dominate these institutions, in southern Africa it is regarded as a potential counterweight to the US and the EU. 
Given China’s growing interest in securing African votes in the UN Security Council, there is scope for collaboration. 
On the other hand, the Darfur crisis, in which China has lent its support to Khartoum, has provided a reality check for both sides, revealing the limits to collaboration. 
It also exposes the dark side of China’s growing involvement in Africa, namely that its thirst for oil outweighs humanitarian considerations. 
Furthermore, trade tensions could weaken political ties. 
In particular, China’s G20 membership and its strong interest in securing greater access to developing markets confronts southern Africa’s association with the G90 coalition, which seeks to block progress in the WTO. 
On balance, then southern Africa clearly stands to benefit economically from China’s emergence as a global power. 
But both sides’ stated commitment to fraternal ties will not be enough to sustain their political relationship into the future. 

ASEAN at 50 
SINGAPORE – We live in troubled times, with pessimism clouding even the most prosperous parts of the planet. 
Many are convinced that the international order is falling apart. 
Some fear that a clash of civilizations is imminent, if it has not already begun. 
Yet, amid the gloom, Southeast Asia offers an unexpected glimmer of hope. 
The region has made extraordinary progress in recent decades, achieving a level of peace and prosperity that was previously unimaginable. 
And it owes much of this success to the Association of Southeast Asian Nations (ASEAN), which marks its 50th anniversary this month. 
Southeast Asia is one of the world’s most diverse regions. 
Its 640 million people include 240 million Muslims, 120 million Christians, 150 million Buddhists, and millions of Hindus, Taoists, Confucianists, and Communists. 
Its most populous country, Indonesia, is home to 261 million people, while Brunei has just 450,000. 
Singapore’s per capita income of $52,960 per annum is 22.5 times that of Laos ($2,353). 
This diversity puts Southeast Asia at a distinct disadvantage in terms of fostering regional cooperation. 
When ASEAN was founded in 1967, most experts expected it to die within a few years. 
At the time, Southeast Asia was a poor and deeply troubled region, which the British historian C.A. Fisher had described as the Balkans of Asia. 
The Vietnam War was underway, and the Sino-Vietnamese War was yet to be fought. 
Many viewed the five non-Communist states that founded ASEAN – Indonesia, Malaysia, the Philippines, Singapore, and Thailand – as dominoes, set to be tipped over by a neighbor’s fall to communism or descent into civil strife. 
But ASEAN defied expectations, becoming the world’s second most successful regional organization, after the European Union. 
Some 1,000 ASEAN meetings are held each year to deepen cooperation in areas such as education, health, and diplomacy. 
ASEAN has signed free-trade agreements (FTAs) with China, Japan, India, South Korea, Australia, and New Zealand, and established an ASEAN economic community. 
Today, ASEAN comprises the world’s seventh-largest economy, on track to become the fourth largest by 2050. 
As I explain in my book The ASEAN Miracle, several factors have underpinned the bloc’s success. 
At first, anti-communism provided a powerful incentive to collaborate. 
Strong leaders, like Indonesia’s Suharto, former Malaysian Prime Minister Mahathir Mohammed, and Singapore’s founding father Lee Kuan Yew, held the group together. 
It helped that as ASEAN was getting off the ground in the late 1960s and early 1970s, the strategic interests of America, China, and the bloc’s members converged. 
But even when the Cold War ended, the region did not erupt into conflict, as the real Balkans did. 
ASEAN countries maintained the cooperative habits that had become established in Southeast Asia in the 1970s and 1980s. 
In fact, ASEAN’s erstwhile communist enemies – Cambodia, Laos, and Vietnam – decided to join the bloc. 
So, too, did Myanmar, ending decades of isolation. 
ASEAN’s policy of engaging Myanmar attracted criticism from the West, but it helped lay the groundwork for a peaceful transition from military rule. 
(Compare this to the West’s policy of isolation toward, say, Syria, which certainly won’t lead to a similar outcome.) 
To be sure, ASEAN is far from perfect. 
Over the short term, it seems to move like a crab – two steps forward, one step back, and one step sideways. 
Yet ASEAN’s long-term progress is undeniable. 
Its combined GDP has grown from $95 billion in 1970 to $2.5 trillion in 2014. 
And it is the only reliable platform for geopolitical engagement in the Asia-Pacific region, unique in its ability to convene meetings attended by all of the world’s great powers, from the United States and the European Union to China and Russia. 
ASEAN continues to face serious challenges. 
Territorial disputes in the South China Sea have created deep divisions, and the intensifying geopolitical rivalry between the US and China poses a further threat to cohesion. 
And domestic politics in several member states, including Malaysia and Thailand, is becoming increasingly chaotic. 
But ASEAN’s history suggests that the bloc can weather these storms. 
Its impressive resilience is rooted in the culture of musyawarah and mufakat (consultation and consensus) championed by Indonesia. 
Imagine how other regional organizations, such as the Gulf Cooperation Council or the South Asian Association of Regional Cooperation, could benefit from adherence to such norms. 
The EU once amounted to the gold standard for regional cooperation. 
But it continues to struggle with a seemingly never-ending series of crises and weak economic growth. 
Add to that the impending departure of the United Kingdom, and it seems only prudent to seek other models of cooperation. 
ASEAN, however imperfect, provides an attractive one. 
The EU was awarded the Nobel Peace Prize in 2012. 
But ASEAN’s approach may turn out to be the way of the future, enabling other fractious regions to develop sturdy bonds of cooperation, too. 

Unshackling ASEAN 
SINGAPORE – As the Association of Southeast Asian Nations approaches its 50th anniversary next year, its failure to reach a consensus regarding Chinese territorial claims in the South China Sea has raised concerns throughout the region. 
Although the requirement that all decisions be made by consensus enables disparate member states to unite while protecting their national interests, it also limits ASEAN’s effectiveness in dealing with emerging security threats. 
The consensus rule explains why ASEAN failed to present a united front after the September 11, 2001, terrorist attacks in the United States, and in the subsequent US-led war on terror. 
Similarly, ASEAN’s response to North Korea’s provocations – such as ongoing nuclear tests and the 2010 attack that sunk the South Korean corvette Cheonan, killing 46 seamen – has been muted, owing to some ASEAN member states’ sympathy for the North Korean regime. 
The territorial disputes in the South China Sea are the strongest indicator yet that ASEAN’s consensus principle is limiting the organization’s effectiveness. 
The question of how to respond to growing Chinese assertiveness in the region has divided ASEAN member states more deeply than any previous issue has. 
At the ASEAN Ministerial Meeting in 2012, the organization failed to issue a joint statement for the first time in its history, because Cambodia refused to allow any mention of incidents caused by China in the South China Sea. 
In July 2016, ASEAN foreign ministers failed to mention in their joint communiqué the landmark ruling against China that had been issued just two weeks before by an international arbitral tribunal on the disputes. 
ASEAN’s failure to act on the South China Sea issue is leading member-state governments and citizens to question the organization’s ability “to maintain and enhance peace” – the first purpose listed in its Charter. 
What’s more, the current stalemate will likely force certain member states to address the issue through other means, which will ultimately jeopardize ASEAN’s regional and international relevance. 
ASEAN must solve its consensus dilemma, through either procedural reforms or institutional innovations. 
For starters, it should follow a previous suggestion, made by the ASEAN Eminent Persons Group in 2006, to introduce majority decision-making. 
With ASEAN’s range of activities broadening, the EPG observed, it should “consider alternative and flexible decision-making mechanisms,” including voting. 
The European Union embraced this governance mechanism long ago, and even within ASEAN there is precedent for majority-vote decision-making, particularly on geopolitical and security issues. 
For example, the 1995 Treaty on the Southeast Asia Nuclear Weapon-Free Zone established a commission that, “failing consensus,” can make decisions by a two-thirds majority. 
When ASEAN member states cannot reach a consensus, they should distinguish between two types of issues to determine the path forward: those that have obvious implications for the sovereignty, territorial integrity, and domestic autonomy of a member state; and those that have obvious implications for regional security. 
ASEAN member states should seek consensus in the former case, unless the country in question decides otherwise. 
But in the latter case, they should have the option to conduct a majority vote. 
Accordingly, if an issue has significant regional-security implications and does not concern a given member state’s sovereignty, territorial integrity, or political autonomy, that state should not be allowed to sideline all other member states’ interests at the expense of regional peace. 
Another way out of the consensus dilemma is to create new institutional frameworks. 
For example, an ASEAN Commission for the Management of South China Sea Disputes, operating through majority voting, could establish ASEAN’s position on the issue and liaise with China to resolve disagreements when they arise. 
Alternatively, ASEAN member states with territorial claims in the South China Sea could align and include non-claimant ASEAN member states. 
A South China Sea caucus within ASEAN could shape a common position among its own members ahead of ASEAN-related meetings, and make an ASEAN-wide consensus on the issue more likely. 
If these options fail, all like-minded countries in the region, regardless of their South China Sea claims or ASEAN membership, should form a larger caucus to address the issue, by formulating a shared position in region-wide platforms such as the ASEAN Regional Forum and the East Asia Summit. 
In the future, this regional caucus could, if circumstances allowed, evolve into a more comprehensive regional security arrangement that supplements ASEAN-led mechanisms. 
Including non-member countries could undermine ASEAN’s unity; but that is a tradeoff ASEAN member states will have to accept if they decide to adhere strictly to consensus decision-making. 
That said, the consensus principle should not be abandoned. 
It is in ASEAN’s best interest to reach a consensus on important issues whenever possible – including on the South China Sea dispute if it proves not to be a serious threat to regional peace. 
To this end, ASEAN member states should foster more trust, cooperation, and dialogue among themselves, and with China. 
All ASEAN member states must strike a balance between their respective national interests and broader regional interests. 
For its part, China should be more sensitive to ASEAN member states’ security concerns, and act to turn the South China Sea into a haven for peace and prosperity, rather than an arena for tensions and rivalry. 

ASEAN’s New Approach to Myanmar 
NEW YORK – The recent decision by Myanmar’s government to sentence pro-democracy leader Aung San Suu Kyi to a further 18 months’ house arrest shows how difficult it is to deal with that country’s ruling generals. 
Yet the first steps toward a new approach may already have been taken. 
The clearest sign comes from the Association of Southeast Asian Nations (ASEAN), of which Myanmar is a member. 
At first, most of ASEAN’s member governments responded mildly to the verdict, expressing their “disappointment” – a stance that reflects the group’s principle of noninterference in fellow members’ internal politics. 
But Thai Foreign Minister Kasit Piromya then consulted his counterparts in Cambodia, Indonesia, Singapore, and Vietnam. 
As current ASEAN chair, he floated the idea of concertedly requesting a pardon for Aung San Suu Kyi. 
ASEAN government officials have since met to draft a text. 
Approval by the association’s foreign ministers may come in September, with ASEAN leaders tackling the issue in October. 
Of course, amendments and objections to the draft should be expected. 
But the pardon request is already significant. 
It seeks to be finely balanced, respecting the regime’s sovereignty while subtly pressing home the point in unison, as neighboring states. 
The request would be politely worded, but it would also be an official and public mode of communication, instead of the usual behind-the-scenes quiet diplomacy. 
What ASEAN says or does not say will not change things immediately. 
Cynics might add that even if Aung San Suu Kyi is pardoned, she may yet still be detained on political grounds or face other barriers aimed at preventing her from competing in the elections promised in Myanmar for 2010. 
But Western sanctions have not worked, either. 
Since the 1990’s crackdown, human rights violations have continued, most recently with the suppression of the protests led by Buddhist monks in 2007. 
The average citizen has grown poorer, even as those close to the junta become ostentatiously rich. 
Western sanctions instead paved the way for investments in Myanmar by those with less concern about human rights violations – first by ASEAN neighbors in hotels and other sectors, and more recently by China and India, which are vying for projects and influence in the strategic energy sector. 
As a result, Myanmar’s generals have been able to play one side off against another. 
The game, however, may now be changing. 
ASEAN’s initiative is a new step forward for the group. 
While ASEAN rejected previous calls to impose sanctions, or even to expel Myanmar, this step shows that it will not remain inert regardless of what the generals do. 
Moreover, some ASEAN member countries, like Singapore, have explicitly called for Aung San Suu Kyi to be allowed to participate in the 2010 elections. 
The ASEAN effort coincides with two other developments. 
One is the decision by the United States to reconsider its policy of sanctions, becoming more flexible while remaining true to its values and interests. 
Some activists have criticized US Senator Jim Webb’s journey to Yangon to obtain the release of John Yettaw, the American whose actions triggered the charges against Aung San Suu Kyi. 
But this is consistent with the Obama administration’s policy of seeking a dialogue even with those who are not America’s friends. 
Such dialogue is vital if Myanmar is to be prevented from possibly pursuing nuclear weapons and rigging elections, à la Iran. 
The other development is less obvious. 
After the court delivered its verdict, the regime halved the sentence and agreed to keep Aung San Suu Kyi under house arrest, rather than moving her to one of its worst jails. 
This may not seem like much of a concession. But the junta seems to be trying to cause less offense. 
Consider, too, the junta’s gesture in handing over Yettaw to Senator Webb, and its interaction with the international community on humanitarian assistance after Cyclone Nargis. 
Might it be possible that the generals in Myanmar recognize that they are in a cul de sac? 
Could the regime be seeking ways out of its isolation in the run-up to the 2010 elections? 
Could it welcome dialogue and engagement? 
How the generals respond to the ASEAN request will be an important signal of the regime’s intentions. 
Even if the regime does want to begin talking, sustaining a dialogue will be no easier than has been the case with North Korea. 
ASEAN, as the organization of neighboring states, is important to achieving that goal, but US involvement is key, as is inclusion of China and India. 
They must be pressed to see more than the opportunity for strategic access to energy and other natural resources. 
Japan, too – still the largest Asian economy and a traditional donor to the region – must also play a role. 
A moral but pragmatic community needs to be constructed, with all in agreement on how to deal with Myanmar. 
Even if, like an orchestra, different countries use different instruments and play different notes, the main theme must be consistent. 
If this can be done, the chances of progress in the run-up to the 2010 elections will be strengthened. 
Success may still prove elusive, but a new game with a greater possibility for success will have begun. 

The Dark Heart of ASEAN 
WASHINGTON, DC – Next week, at a summit in California, US President Barack Obama will meet with the leaders of the ten countries of Asia’s most important regional grouping: the Association of Southeast Asian Nations. 
The event, the first-ever US-ASEAN summit on American soil, is being touted as a sign of America’s growing interest in Southeast Asia. 
The question is whether the US, by inviting all members of ASEAN, has allowed its interests to overwhelm its principles. 
The upcoming summit is the latest manifestation of the Obama administration’s strategic “pivot” toward Asia – a national security strategy that entails a shift of American military, economic, and diplomatic resources toward the Pacific Rim countries. 
In many ways, this move toward closer relations makes a lot of sense. 
For starters, tensions between several Southeast Asian countries and China are on the rise, owing partly to the fact that China, under President Xi Jinping (its most autocratic leader since Deng Xiaoping), has been acting increasingly assertively in staking its contested territorial claims in the region’s waters. 
Most recently, China decided to move an oil rig into waters claimed by Vietnam. 
A similar decision two years ago led to deadly anti-China riots in Vietnam. 
And it is not just Vietnam that’s worried. 
Malaysia, Singapore, and the Philippines are also trying to upgrade their navies and coast guards. 
Indeed, two decades after essentially tossing US forces out of local bases, the Philippines has welcomed back American troops as part of a new military cooperation deal. 
Even countries whose economies rely on China are worried. 
China is Laos’s biggest aid donor and largest trading partner; yet Laos’s ruling communist party last month elected a new leadership reportedly devoid of any pro-China politicians. 
In Myanmar, which also depends heavily on Chinese aid and trade, the fear of becoming a Chinese satellite was a key reason why the military junta ceded power to a civilian government in the early 2010s. 
Beyond security challenges, the US has a growing economic interest in Southeast Asia. 
Together, the ASEAN countries comprise America’s fourth-largest trading partner. 
Some evidence also suggests that the new ASEAN Economic Community, a framework for a regional free-trade agreement, is helping Southeast Asian countries weather an increasingly turbulent global economic environment. 
But there is one very serious problem with the upcoming US-ASEAN summit. 
Since the US pivot to Asia was launched in 2011, Southeast Asia’s political systems have, on the whole, regressed significantly. 
Over the last few years, Thailand has gone from flawed democracy to military rule, which could persist through 2018, or beyond. 
Similarly, Malaysia appeared to be headed for a two-party democracy in 2011. 
Today, opposition leader Anwar Ibrahim is in jail on dubious sodomy charges; the government has passed legislation that essentially authorizes it to detain critics indefinitely; and Prime Minister Najib Razak remains embroiled in multiple economic and political scandals. 
Cambodia, too, seemed like it had reached a political breakthrough after the opposition coalition nearly won the 2013 general election. 
But in the last two years, Cambodian Prime Minister Hun Sen has reasserted his political dominance. 
Opposition leader Sam Rainsy, fearing arrest, has fled into exile. 
Then there is Myanmar. 
Although the Obama administration has touted the country as a shining example of democratic change, genuine democracy remains over the horizon. 
True, the longtime opposition party, the National League for Democracy, won last November’s general election. 
But the military still controls many ministries and a quarter of the seats in parliament. 
Moreover, civil wars are erupting along Myanmar’s borders, and gangs and other radical groups are slaughtering Muslims in the country’s west. 
Laos, Vietnam, and Brunei remain among the most repressive states in the world, with no evidence of political opening at all. 
And though democracy has advanced in Indonesia, the Philippines, and Singapore, progress has been slow; in Singapore, the ruling party continues to dominate the political system. 
Many factors account for the weakening of democracy in Southeast Asia. 
The region’s first generation of elected leaders, like former Thai Prime Minister Thaksin Shinawatra, often proved to be no more than elected autocrats who used their majorities to crush their opponents and suppress technologies that could be used as tools for change. 
Indeed, Thailand, whose online repression has increased under the junta, now blocks more than 100,000 websites from its citizens. 
Weak institutions mean many countries, such as Malaysia, struggle to resolve political crises; in Thailand, army takeovers have become the modus vivendi. 
Add to that the influence of China – hardly a force for democratic change – and Southeast Asia’s democratic regression is not particularly shocking. 
What is troublesome is that the Obama administration has been reinforcing this damaging trend by bolstering ties with Southeast Asian autocrats. 
Obama has maintained close relations with Malaysia’s Najib (the two are reportedly golfing buddies). 
When Obama visited Malaysia last year, he barely mentioned Anwar’s imprisonment. 
The Obama administration also has been conspicuously quiet about abuses in Brunei, Laos, and Vietnam, inviting the head of Vietnam’s Communist Party to Washington, DC, last July for a showy and warm visit. 
In recent months, the Obama administration has begun to restore links with Thailand that were put on ice after the May 2014 coup, including by resuming a high-level strategic dialogue. 
Yet according to Human Rights Watch, “Thailand’s military junta tightened its grip on power and severely repressed fundamental rights” last year. 
And, so far this year, it has shown no signs of changing that approach. 
The upcoming US-ASEAN summit will include leaders – like Hun Sen, who has ruled Cambodia for 25 years – who were previously considered too ruthless and repressive to be received by the US president on American soil. 
It seems that security and economic considerations have now usurped democracy as leading determinants of US foreign policy in the region. 
For the people of Southeast Asia, this approach may ultimately create more risks than benefits. 

Can ASEAN Turn Geostrategic and Technological Disruption into Opportunity? 
GENEVA – Is the Association of Southeast Asian Nations resilient enough to thrive amid the regional and global transformations taking place today? 
While the global economy continues its broad-based expansion, disruptive economic, geostrategic, and technological forces may threaten ASEAN’s gains of recent years. 
To survive, ASEAN members must make important decisions about the role of their community in regional affairs. 
With the right choices, the region can convert disruption into an opportunity for a resilient future. 
ASEAN has undergone an impressive turnaround in the past five decades. 
A region of turbulence, disharmony, and underdevelopment in the 1960s is today one of relative peace and economic success. 
Much of the credit belongs to the community-building efforts of the countries under the ASEAN umbrella. 
But the region also benefited strongly from the post-World War II global architecture and institutions that promoted inward flows of investment and outward flows of exports. 
Today, this global backdrop is in a state of profound transformation. 
The benefits of free and open trade are being questioned, international institutions are being challenged, new geopolitical powers are rising, and – despite ups and downs – the global economy continues to tilt further toward emerging markets. 
All of this creates an opportunity for new and competing visions of how the world should be organized and run. 
Alongside rising geopolitical uncertainty, ASEAN countries must grapple with the Fourth Industrial Revolution. 
The exponential development of technologies such as artificial intelligence, advanced robotics, precision medicine, and autonomous vehicles is transforming economies, businesses, and societies. 
ASEAN members will feel the effects of the Fourth Industrial Revolution acutely. 
Consider the future of jobs. 
The working-age population in the bloc is increasing by 11,000 people daily and will continue to grow at this rate for the next 15 years. 
This demographic expansion is happening just as many existing jobs will be substituted by intelligent automation and AI. 
Systems of taxation that rely on labor income will come under pressure. 
National budgets will be challenged at exactly the moment when ASEAN members must increase their investment in reskilling labor forces and developing infrastructure for this new age. 
Or consider the future of manufacturing. 
Technologies such as 3D printing and cheap industrial robots are enabling products to be made in small, highly-customized forms rather than large batches of uniform goods. 
For ASEAN, the shift from centralized global supply chains to localized production systems could have a serious impact on export revenues and the investment by which it is driven. 
Faced with these disruptive shifts, ASEAN must strengthen its community. 
Economically, regional resilience can be bolstered by building a genuine single market: ASEAN has 630 million citizens with rapidly rising spending power. 
Fully implementing the ASEAN Economic Community will be key. 
With a strong regional market, ASEAN can drive its own economic destiny, rather than relying on demand from external markets, and will be better insulated against potential protectionist shocks. 
Creating a single market for services will be critical. 
Here, especially, ASEAN members must respond to the Fourth Industrial Revolution, tackling issues such as harmonization of rules governing the use of data. 
New technologies – including digital platforms, big-data analytics, and cloud-based services – do not recognize national borders and function best when they operate at scale. 
With a single digital market, ASEAN can develop truly pan-regional services in finance, health care, education, and e-commerce. 
Of course, ASEAN should not build a fortress that keeps out the world. 
Indeed, the bloc has long been praised for its “open regionalism,” whereby it pursues economic integration among member states without discriminating against non-ASEAN economies. 
This approach has been integral to ASEAN’s economic strategy from the beginning, and continues with the soon-to-be concluded Regional Comprehensive Economic Partnership joining ASEAN with China, Japan, South Korea, India, Australia, and New Zealand. 
Strengthening the political-security community is equally essential. 
With the architecture of global governance being challenged, ASEAN members must make their voices heard if they want a world that supports their interests. 
Individually, Southeast Asia’s countries carry little weight; collectively, however, they represent almost a tenth of the world’s population and nearly 5% of its GDP. 
Historically, ASEAN has played a pivotal role in facilitating regional relationships, giving rise to the notion of “ASEAN centrality” in Asia. 
In 1993, the bloc established the ASEAN Regional Forum – now with 27 members – to foster dialogue on political and security concerns. 
It established the East Asia Summit, currently with 18 member states, in 2005. 
Today, however, the geopolitical context is evolving. 
As other powers rise, ASEAN is at risk of losing its collective commitment to a shared vision for the region and a common stance on geopolitical issues. 
Many observers believe that other countries are undermining ASEAN unanimity by developing dependencies with individual countries, built on investment, trade, and assistance. 
Unless ASEAN remains united as a bloc, it will lose its ability to convene regional actors, mediate disputes, and shape principles of international behavior and interaction. 
The so-called ASEAN way, characterized by consensus-based decision-making and non-interference, has served ASEAN well, and the bloc would be unwise to jettison it. 
But a reassessment is needed if ASEAN is to speak with a strong voice on regional matters, rather than allowing dissenting voices within the group to prevent the adoption of collective positions. 
Given that existing global institutions are being challenged, and given the rise of Asia in global affairs, ASEAN must reinforce its ability to influence the debate. 
The World Economic Forum on ASEAN will be held in Hanoi, Vietnam, on September 11-13 and will provide an opportunity for such a reassessment. 
In an increasingly uncertain world, the need for the countries of ASEAN to deepen their community and their commitment to integration and collaboration is stronger than ever. 

The Looming Lost Decade 
PRINCETON – As 2013 comes to an end, it looks like the world economy will remain stuck in low gear. 
For those reading the tea leaves of global recovery, the third-quarter GDP numbers offered no solace. 
While the United States is ahead of the pack, some of its gains could soon be lost, as accumulating inventories begin eroding profits. 
Despite glimmers of hope, the eurozone and Japan are struggling to cross the 1% threshold for annual economic growth. 
And the major emerging economies are all slowing, with Russia practically at a standstill. 
Not surprisingly, a catchphrase in economic-policy debates nowadays is “secular stagnation,” the idea that excess savings chronically dampen demand. 
The economist Robert Gordon has also argued that the world is low on economically productive ideas. 
But before we despair, there is work to be done. 
The coordinated fiscal stimulus that saved the world from economic collapse in 2009 disappeared too quickly, with governments shifting their focus to domestic politics and priorities. 
As domestic policy options have been exhausted, economic prospects have dimmed. 
A renewed emphasis on stimulus must be augmented by global coordination on the timing and content of stimulus measures. 
The crisis was and remains global. 
Trade data tell the story: after increasing by about 7% annually in the decade before 2008, world trade fell faster than global GDP in 2009 (and more sharply than during the Great Depression). 
Once the brief stimulus-fueled recovery faded, growth in world trade again slowed quickly, falling to 2% year on year over the past 18 months. 
Disappointing export performance is largely responsible for the recent weakening of economic-growth prospects. 
At the end of 2008, when the scale of the impending economic destruction was not yet apparent, Olivier Blanchard, the International Monetary Fund’s chief economist, boldly called for a global fiscal stimulus, stating that, in these “not normal times,” the IMF’s usual advice – fiscal retrenchment and public-debt reduction – did not apply. 
He warned that if the international community did not come together, “vicious cycles” of deflation, liquidity traps, and increasingly pessimistic expectations could take hold. 
Fortunately, world leaders listened, agreeing in April 2009 at the G-20 Summit in London to provide a total of $5 trillion in fiscal stimulus. 
The US and Germany added stimulus amounting to about 2% of GDP. 
And China’s banks pumped massive amounts of credit into the country’s economy, enabling it to sustain import demand, which was critical to the global recovery. 
But hubris rapidly set in, and parochial interests took over. 
Before the wounds had fully healed, the treatment was terminated. 
The worst offenders were the US and Germany, which shirked the responsibility to protect the global common good that accompanies their status as economic hegemons. 
The United Kingdom, with its contrived rationale for fiscal austerity, was not much better. 
Fiscal stimulus by these three countries – together with smaller contributions from France and China – could have continued the necessary healing. 
Countries now seem to think that monetary-policy measures are their only option. 
But, whereas fiscal stimulus boosts growth at home and abroad, enabling mutual reinforcement through world trade, monetary policy is guided primarily by domestic goals, and, in the short term, one country’s gain can be another’s loss. 
America leads the world in monetary-policy ambition. 
The researchers Cynthia Wu and Fan Dora Xia estimate that the US Federal Reserve’s open-ended asset purchases (so-called quantitative easing, or QE) have led to an effective US policy rate of -1.6%. 
QE helped American exports by weakening the dollar relative to other currencies. 
Once the Japanese engineered their own QE, the yen promptly depreciated. 
That has kept the euro strong. 
The weakest of the “big three” developed economies – the eurozone – has thus been left with the strongest currency. 
In the third quarter of 2013, Germany’s export growth slowed and French exports fell. 
After a spike earlier in the year, Japan’s exports have also contracted. 
Only US exports have maintained some traction, thanks to the weaker dollar. 
In the 1930’s, after the gold standard broke down, world leaders could not agree on coordinated reflation of the global economy. 
In his book Golden Fetters, the economist Barry Eichengreen argued that the lack of coordinated action dragged out the global recovery process. 
Such delays are costly, and risk allowing pathologies to fester, prolonging the healing process further. 
Now, despite unfavorable political circumstances, Blanchard should make an even bolder call. 
These are still not “normal” times, and the “vicious cycles” persist. 
Another global fiscal stimulus – focused on public investment in infrastructure and education – would deliver the adrenaline shot needed for a robust recovery. 
More public investment is twice blessed. 
It can shake the world out of its stupor; and it can safeguard against “secular stagnation.” 
The US, Germany, the United Kingdom, France, and China should act together to provide that boost. 
Otherwise, a sustainable global recovery may remain elusive, in which case 2014 could end in low gear as well. 

The IMF’s False Confession 
PRINCETON – “Do I have to go on my knees?” the International Monetary Fund’s managing director, Christine Lagarde, asked the BBC’s Andrew Marr. 
Lagarde was apologizing for the IMF’s poor forecasting of the United Kingdom’s recent economic performance, and, more seriously, for the Fund’s longer-standing criticism of the fiscal austerity pursued by Prime Minister David Cameron’s government. 
Now endorsing British austerity, Lagarde said that it had increased confidence in the UK’s economic prospects, thereby spurring the recent recovery. 
Lagarde’s apology was unprecedented, courageous, and wrong. 
By issuing it, the IMF compromised on an economic principle that enjoys overwhelming academic support: The confidence “fairy” does not exist. 
And, by bowing to the UK’s pressure, the Fund undermined its only real asset – its independence. 
The IMF has dodged responsibility for far more serious forecasting errors, including its failure to anticipate every major crisis of the last generation, from Mexico in 1994-1995 to the near-collapse of the global financial system in 2008. 
Indeed, in the 6-12 months prior to every crisis, the IMF’s forecasts implied business as usual. 
Some claim that the Fund counsels countries in private, lest public warnings trigger the very crisis that is to be avoided. 
But, with the possible exception of Thailand in 1997, the IMF’s long-time resident historian, James Boughton, finds little evidence for that view in internal documents. 
The IMF’s Internal Evaluation Office is more directly scathing in its assessment of the Fund’s obliviousness to the US subprime crisis as it emerged. 
Given that the IMF is the world’s anointed guardian of financial stability, its failure to warn and preempt constitutes a far more grievous lapse than its position on British austerity, with huge costs borne by many, especially the most vulnerable. 
For these failures, the Fund has never offered any apology, certainly not in the abject manner of Lagarde’s recent statement. 
The Fund does well to reflect on its errors. 
In a September 2003 speech in Kuala Lumpur, then-Managing Director Horst Köhler conceded that temporary capital controls can provide relief against volatile inflows from the rest of the world. 
He was presumably acknowledging that the Fund had it wrong when it criticized Malaysia for imposing such controls at the height of the Asian crisis. 
Among the countries hurt by that crisis, Malaysia chose not to ask for the Fund’s help and emerged at least as well as others that did seek IMF assistance. 
Malaysia’s imposition of capital controls was a controversial policy decision. 
And even as the Fund opposed them, prominent economists – among them Paul Krugman – endorsed their use. 
In his speech, Köhler reported that the Fund had taken the evidence on board and would incorporate it in its future advice. 
But in the current crisis, the academic evidence has overwhelmingly shown that fiscal austerity does what textbook economics says it will do: the more severe the austerity, the greater the drag on growth. 
A variety of studies confirming this proposition, including one by the IMF’s chief economist, Olivier Blanchard, have withstood considerable scrutiny and leave little room for ambiguity. 
The two public voices arguing for the magical properties of austerity are official agencies based in Europe: the OECD and the European Commission. 
The Commission’s stance, in particular, is animated by an institutional commitment to a fiscal viewpoint that leaves no room for evidence. 
Among the G-7 economies, only Italy has done worse than the UK since the Great Recession began. 
Indeed, the UK’s GDP has only just regained its 2008 level, lagging behind even France. 
This is all the more remarkable given that the crisis in the UK was comparatively mild. 
The fall in property prices was modest relative to Ireland and Spain, and, because there was no construction boom, there was no construction bust. 
Having missed the warning signs about the bank Northern Rock, which needed to be bailed out by the UK government after a run on its deposits in September 2007, the British authorities, unlike their eurozone counterparts, quickly dealt with the economy’s distressed banks. 
For these reasons, the UK should have had a quick recovery; instead, the Cameron government’s gratuitous austerity stifled it. 
The IMF’s apology was a mistake for two reasons. 
Thumbing one’s nose at scholarly evidence is always a bad idea, but it is especially damaging to an institution that relies so heavily on the credibility of its technical competence and neutrality. 
If the Fund embraces muddled economics, on what basis will it defend its policy advice? 
Moreover, in choosing to flatter the UK’s misguided policy, the Fund has confirmed its deference to its major shareholders. 
For years, the view has been that the IMF is a foreign-policy instrument of the United States. 
The softness in its annual surveillance of UK economic policy has also been well known. 
But in taking this latest step, the Fund has undermined – perhaps fatally – its ability to speak “truth to power.” 
If so, a fundamental question may well become unavoidable: Why does the IMF exist, and for whom? 


Asia After Obama 
NEW DELHI – US President Barack Obama’s 10-day Asian tour and the consecutive summit meetings of the East Asian Summit (EAS), the G-20, and the Asia-Pacific Economic Cooperation (APEC) have helped shine a spotlight on Asia’s challenges at a time when tensions between an increasingly ambitious China and its neighbors permeate the region’s geopolitical landscape. 
Significantly, Obama restricted his tour to Asia’s leading democracies – India, Indonesia, Japan, and South Korea – which surround China and are central to managing its rise. 
Yet he spent all of last year assiduously courting the government in Beijing in the hope that he could make China a global partner on issues ranging from climate change to trade and financial regulation. 
The catchphrase coined by US Deputy Secretary of State James Steinberg in relation to China, “strategic reassurance,” actually signaled America’s intent to be more accommodating toward China’s ambitions. 
Now, with his China strategy falling apart, Obama is seeking to do exactly what his predecessor attempted – to line up partners as an insurance policy in case China’s rising power slides into arrogance. 
Other players on the grand chessboard of Asian geopolitics also are seeking to formulate new equations, as they concurrently pursue strategies of hedging, balancing, and bandwagoning. 
A fast-rising Asia has, moreover, become the fulcrum of global geopolitical change. 
Asian policies and challenges now help shape the international economy and security environment. 
But major power shifts within Asia are challenging the continent’s own peace and stability. 
With the specter of strategic disequilibrium looming large in Asia, investments to help build geopolitical stability have become imperative. 
China’s lengthening shadow has prompted a number of Asian countries to start building security cooperation on a bilateral basis, thereby laying the groundwork for a potential web of interlocking strategic partnerships. 
Such cooperation reflects a quiet desire to influence China’s behavior positively, so that it does not cross well-defined red lines or go against the self-touted gospel of its “peaceful rise.” 
But building genuine partnerships is a slow process, because it demands major accommodation and adjustment on both sides. 
The US, for example, has worked hard in recent years to co-opt India in a “soft alliance” shorn of treaty obligations. 
Yet, despite a rapidly warming bilateral rapport and Obama’s recent statement calling India the “cornerstone of America's engagement in Asia,” conflicting expectations and interests often surface. 
The US is now courting Vietnam as well, and the two countries are even negotiating a civilian nuclear deal. 
The Cold War legacy, however, continues to weigh down thinking in Hanoi and Washington to some extent. 
Within Vietnam’s ruling Communist Party, there are deep divisions over the country’s relations with the US. 
Even as Vietnam moves closer to the US as a hedge against China’s muscular strategy, some Vietnamese leaders fear that the Americans remain committed to regime change. 
After all, despite Burma’s strategic importance vis-à-vis China and Aung San Suu Kyi’s release from house detention, the US continues to enforce stringent sanctions against that country, with the aim of toppling its government. 
In the process, Burma has become more dependent than ever on China. 
The US-China relationship itself is likely to remain uneasy, but overt competition or confrontation suits neither side. 
For the US, China’s rising power actually helps validate American forward military deployments in the Asian theater. 
The China factor also helps the US to retain existing allies and attract new ones, thereby enlarging its strategic footprint in Asia. 
While the US is thus likely to remain a key factor in influencing Asia’s strategic landscape, the role of the major Asian powers will be no less important. 
If China, India, and Japan constitute a scalene strategic triangle in Asia, with China representing the longest side, side A, the sum of side B (India) and side C (Japan) will always be greater than A. Not surprisingly, the fastest-growing relationship in Asia today is probably between Japan and India. 
If this triangle turned into a quadrangle with the addition of Russia, China would be boxed in from virtually all sides. 
Japan plus Russia plus India, with the US lending a helpful hand, would not only extinguish any prospect of a Sino-centric Asia, but would create the ultimate strategic nightmare for China. 
As recent developments show, however, a Russian-Japanese rapprochement remains far off. 
Against this geopolitical background, Asia’s power dynamics are likely to remain fluid, with new or shifting alliances and strengthened military capabilities continuing to challenge the prevailing order. 
That befits the year of the tiger in Chinese astrology – a year in which China roared by ratcheting up tensions with neighbors from Japan to India by escalating territorial feuds. 
In fact, 2010 will be remembered as the year that Chinese leaders undercut their country’s own interests by kindling fears of an expansionist China, thereby facilitating America’s return to center stage in Asia. 

Asia After the Afghan War 
TOKYO – July will mark two milestones in America’s sometimes-tortured relations with Asia. 
One is the beginning of the end of the nearly decade-long struggle in Afghanistan – the longest war in United States history – with President Barack Obama announcing the withdrawal of 30,000 US troops from the country by next summer. 
The other is the 40th anniversary of Henry Kissinger’s secret mission to Beijing, a turning point in the Cold War and the first step on China’s road to modernization – but at the time a huge shock to Asia, particularly Japan. 
The looming Afghan withdrawal recalls, at least for some Asians, a third, even more traumatic event: America’s chaotic exit from Saigon in April 1975. 
Back then, that debacle seemed to presage a broader US withdrawal from Asia, with a war-weary American public seeking the supposed comforts of isolationism. 
Today’s Asian nervousness exists not only because isolationism appears to be gaining ground once more in America, but also because Afghanistan’s stability remains in doubt, while China’s power is rising in the absence of any pan-Asian consensus or institutional structure. 
America did, indeed, turn inward following the fall of Saigon, and its neglect of Afghanistan following the Soviet withdrawal in 1989 led to chaos and Al Qaeda’s near-takeover of the country. 
So it is not surprising that many Asian leaders are asking themselves what commitments the US will maintain once its troops leave Afghanistan. 
Perhaps equally important, many people in Asia are also debating whether the region would be able to rebalance itself should the US scale back its military presence. 
Fortunately, US Secretary of Defense Robert Gates has reassured America’s Asian friends and allies that regional disengagement is not being contemplated. 
At the recent Shangri La Dialogue in Singapore – indeed, in the presence of Chinese Minister of Defense General Liang Guanglie – Gates outlined his ideas for continuing US cooperation in and with Asia. 
Gates promised to increase the number of US warships deployed to Singapore as part of the US-Singapore Strategic Framework Agreement; increase the number of US Navy calls in Asian ports; hold more joint naval exercises; and improve multilateral military cooperation. 
Even more reassuring were the principles that will, according to Gates, guide America’s future Asian strategy: free and open commerce; support for the rule of law and the rights, responsibilities, and sovereignty of Asia’s states; open access to Asian and global sea lanes, airspace, and cyberspace; and peaceful resolution of all conflicts. 
These principles matter, because Australia, Japan, South Korea, Thailand, the Philippines, India, Indonesia, Singapore, Malaysia, New Zealand, Vietnam, and even Mongolia all regard America’s military presence in the region as essential to counterbalancing China’s increasing might. 
Gates, however, is due to step down from his post shortly, which is unfortunate, because the Obama administration’s apparent lack of any explicit Asia strategy means that Gates’s reassurances might not reassure for very long. 
Nowadays, US policy on Asia needs the type of strategic vision and insight that guided Kissinger’s discussions with Mao Zedong and Zhou En-lai four decades ago. 
Without a clear and convincing doctrine, at least some Asian leaders are likely to remain dubious of America’s ability to remain Asia’s dominant military force, particularly given its economic woes, projected fiscal retrenchment, and other overseas commitments. 
This lack of clarity may become particularly troublesome should China’s leaders underestimate the enduring quality of America’s Asian commitments. 
Securing a structure of peace in Asia, however, is not solely America’s responsibility. 
America’s friends and allies need to think hard about what sort of regional order they want, and they must begin to collaborate in order to breathe life into a structure of peace within which all of Asia can prosper and feel secure. 
Japan’s government in particular needs to identify a coherent Asia strategy and stick to it, instead of leaning towards China one minute, and America the next. 
In constructing a viable strategy, deepening Japan’s partnerships with Asia’s great democracies – India, Indonesia, and South Korea – must be a priority. 
But the biggest question concerns China’s place in a consensual Asian order, and its willingness to collaborate with its neighbors, as well as with the US, in creating it. 
The doubts that many Asians now hold about China’s intentions are well grounded, given the secretive nature of China’s military build-up, and its leaders’ increasingly aggressive tone in territorial disputes with India, Japan, the Philippines, and Vietnam. 
China’s unconditional support for North Korea’s wayward regime, despite its repeated crimes against peace, is also a cause for concern about whether China will treat its neighbors’ security concerns with respect. 
Today’s Asia-Pacific region has now become the focus of the global economy. 
According to the World Bank, three of the top five economic powers (China, Japan, and India) will be Asian powers within this decade. 
The boom that has brought this shift occurred because America’s military presence in the region provided stability and predictability. 
America’s withdrawal from Afghanistan must not be allowed to call this stability into question. 
What happens in Afghanistan as America begins to draw down its troops will test the willingness of all of Asia’s powers to work together to build a secure regional order. 
In Afghanistan, their long-term interests are essentially in harmony, as none – including China – wants to see Afghanistan become a haven for terrorism once again. 
But only a strong regional consensus on Afghanistan’s future can avert the prospect of a renewed struggle for mastery there. 
If such a consensus can be forged, however, it will provide a foundation for further collaboration in building a pan-Asian order based on consent, not military might. 

Asia After Trump 
SINGAPORE – When the Trilateral Commission – a group of political and business leaders, journalists, and academics – met here recently, many expressed concern about the decline of American leadership in Asia. 
Every Asian country now trades more with China than with the United States, often by a margin of two to one. 
That concern has been exacerbated by President Donald Trump’s recent imposition of tariffs and expressions of contempt for multilateral institutions. 
A frequently heard question in Singapore: Will US leadership in Asia survive the Trump years? 
History provides some perspective. 
In 1972, President Richard Nixon unilaterally imposed tariffs on America’s allies without warning, violated the framework of the International Monetary Fund, and pursued an unpopular war in Vietnam. 
Fear of terrorism was widespread, and experts expressed concern about the future of democracy. 
The following year, David Rockefeller and Zbigniew Brzezinski created the Trilateral Commission, which meets once a year to discuss such problems. 
Contrary to conspiracy theories, the Commission has little power; but, like other informal channels of “track two” diplomacy, it allows private citizens to explore ways to manage thorny issues. 
The results can be found in its publications and on its website. 
In Singapore, there was no consensus about Asia after Trump. 
For example, Indian and Chinese members held different positions about the role of China’s “Belt and Road” infrastructure projects. 
Some Asians and Americans differed over the prospects for a successful resolution of the Korean nuclear crisis, as well as the larger question of whether a China-US war is inevitable. 
And some Europeans wondered whether the current global uncertainty reflects the rise of China or the rise of Trump. 
My own guess, which I warned the group might be wrong, is that the US can recover its leadership after the Trump years if it relearns the lessons of using power with others as well as over others. 
In other words, the US will have to use its soft power to create networks and institutions that will allow it to cooperate with China, India, Japan, Europe, and others to deal with transnational problems – for example, monetary stability, climate change, terrorism, and cyber-crime – that no country can solve unilaterally. 
That will require overcoming the unilateral policies and attitudes associated with the rise of Trump. 
As for the rise of China, contrary to current pessimism, the US will retain important power advantages that will last longer than even an eight-year presidency, should Trump be reelected. 
The first is demography. 
According to United Nations data, the US is the only developed country expected to contribute to global population growth by 2050. 
China, the most populous country now, is projected to lose the top spot to India. 
The second advantage is energy. 
A decade ago, the US seemed hopelessly dependent on imported energy. 
Now the shale revolution has transformed it from an energy importer to an exporter, and North America may be self-sufficient in the coming decade at the same time that China is becoming more dependent on energy imports. 
Technology is a third advantage for the US. 
Among the technologies that will convey power in this century are biotechnology, nanotechnology, and the next generation of information technology, such as artificial intelligence and big data. 
According to most experts, while China’s capacity is improving, the US remains the world leader in research, development, and commercialization of these technologies. 
Moreover, in terms of the research base, America has a fourth advantage in its system of higher education. 
According to a ranking by Shanghai Jiao Tong University, of the top 20 universities in the world, 16 are in the US, while none are in China. 
A fifth American advantage that is likely to outlast the Trump era is the role of the dollar. 
Of the foreign reserves held by the world’s governments, just 1.1% are in renminbi, compared with 64% for the dollar. 
When the International Monetary Fund included the renminbi in the currency basket underpinning its unit of account, Special Drawing Rights, many believed the dollar’s days were numbered. 
But the renminbi’s share of international payments has slipped since then. 
A credible reserve currency depends on deep capital markets, honest government, and the rule of law. 
None is likely in China in the near future. 
Sixth, the US has geographical advantages that China lacks. 
The US is surrounded by oceans, and Canada and Mexico remain friendly, despite Trump’s mistaken policy of undercutting the North American Free Trade Agreement. 
China, on the other hand, has borders with 14 countries and territorial disputes with some of the most important, such as India, Japan, and Vietnam. 
This limits China’s soft power. 
And while geography gives China land-based power projection over the South China Sea, the US has no territorial claims there and enjoys naval supremacy over the remaining 95% of the world’s oceans. 
But, most important, the US and China are not destined for war. 
Neither poses an existential threat to the other. 
When World War I began, Germany had surpassed Britain in 1900, and British fear of German intentions contributed to the disaster. 
By contrast, the US and China have time to manage their many conflicts and need not succumb to hysteria or fear. 
The US retains not only the power advantages described above, but also its alliances with Japan and South Korea. 
In any upcoming talks with North Korea’s leader, Kim Jong-un, Trump will have to take care to prevent the Kim regime from achieving its long-standing objective of weakening those alliances. 
In Singapore, I quoted Lee Kuan Yew’s response to a question I once asked him about whether China would surpass the US. 
He said “no,” because while China had the talents of 1.4 billion people to draw upon, the openness of the US allowed it to tap and combine the talents of 7.5 billion people with greater creativity than China could. 
If that openness survives, American leadership in Asia, and elsewhere, will most likely survive as well. 

East Asia’s New Year Resolutions 
SEOUL – If World War III ever breaks out, its origins will not lie in the Middle East, South Asia, or Eastern Europe. 
It is in East Asia – where the strategic interests of China, the United States, and their respective partners intersect – that the geopolitical stakes, diplomatic tensions, and potential for a global explosion are highest. 
Because it is so obviously in every player’s interest to avoid outright conflict, we have stony handshakes like that between Chinese President Xi Jinping and Japanese Prime Minister Shinzo Abe in Beijing last month. 
But if there is to be a genuinely durable peace, the region’s leaders need to work harder and more courageously to achieve it. 
Each of them could pursue game-changing initiatives if only they could summon the necessary statesmanship. 
So, here – in a spirit of supreme, but perhaps not totally naive, optimism – are the 2015 New Year’s resolutions that I would most like each of East Asia’s leaders to make. 
Xi Jinping: “I will make it clear that any territorial claims we have in the South China Sea are based only on reasonable assertions of sovereignty over particular land features and the rights that accompany them under the Convention on the Law of the Sea. 
I will stop talking about our ‘historical waters,’ and order the removal of the ‘nine-dashed’ line from the map in Chinese passports. 
“Having made our authority in Hong Kong clear, I will find a way to let the people there have the local leader they want. 
A little flexibility here should also be a helpful message to those getting restless in Taiwan that China really can accommodate difference. 
“Also in that spirit, I will welcome the Dalai Lama to Beijing and negotiate with his leadership team a package of cultural autonomy and limited self-government, satisfying once and for all the reasonable aspirations of the Tibetan people.” 
Shinzo Abe: “I will invite to Hiroshima or Nagasaki on the August A-bomb anniversary all six-party talks leaders to kick-start serious negotiations on a Northeast Asia Nuclear-Weapon-Free Zone, which will embrace Japan and both Koreas and be guaranteed by the US, China, and Russia. 
“And I will make 2015 the year that the historical grievances between us and our neighbors are buried for good. 
Remembering the impact of Willy Brandt’s Kniefall at the Jewish ghetto site in Warsaw in 1970, I will commemorate the 70th anniversary of the end of World War II by visiting Nanjing and accepting Japanese responsibility for the terrible massacre of 1937-1938. 
“I will also do everything I can to remove from the Yushukan Museum, on the grounds of the Yasukuni Shrine, all exhibits which deny, question, or are insensitive to Japan’s responsibility for waging aggressive war and committing atrocity crimes in the 1930s and 1940s. 
I will start by removing from its pedestal the steam locomotive that ran on the Thailand-Burma “Death Railway,” the display of which dishonors the more than 100,000 prisoners of war and forced laborers who perished from disease, malnutrition, or maltreatment in its construction.” 
South Korean President Park Geun-hye: “I will remove the ‘May 24’ sanctions we placed on North Korea after their military provocations in 2010, because they are making impossible nearly all of the measures to build trust and confidence that I keep saying are necessary. 
“Of course the North should continue to be named and shamed in the United Nations for its human-rights abuses and nuclear misbehavior. 
But pariah states never behave responsibly, and no state has a bigger role than we do in coaxing Kim Jong-un’s regime into normality. 
Serious re-engagement will be politically hard for me to deliver. 
But if I do not, I will be on the wrong side of history.” 
North Korea’s Kim Jong-un: “I will surprise everyone by freezing our efforts to develop nuclear weapons and missiles, and I will prove my seriousness by opening our uranium enrichment plants to inspection. 
That will leave no one with any credible reason to delay resumption of the six-party talks. 
“We have known since the 1990s that a denuclearization settlement is the best guarantee of our regime’s security. 
I may have image problems, but I am not crazy. 
China has fallen out of love with us; my people know too much about the wider world; and everyone knows that to use our handful of nuclear weapons would be suicidal. 
It is time to reach an agreement.” 
US President Barack Obama: “I will say publicly what Bill Clinton was saying privately a decade ago. 
It may be painful for many Americans to hear, and it will not impress my opponents. 
But if I can make it believable, it will do more to win the US friendship, respect, and ultimate security in East Asia and around the world than our trillion-dollar nuclear-weapons modernization program or all the unworkable and counter-productive missile-defense systems at which we keep hurling money. 
“It is simply this: The US should not use its immense military and economic power to try to stay top dog on the global block in perpetuity. 
Rather, we should be using that power to create a world in which we will be comfortable living when we are no longer top dog on the global block.” 
Perhaps the idea that any of these resolutions will actually be made is fanciful. 
And we all know that it is in the nature of New Year’s resolutions that, even when they are made, they are rarely kept. 
But should any one of the resolutions on my list come to pass, the result would be momentous. 
Cumulatively, they would be transformative. 
The rest of us should hope that they are made, and kept, and we should continue nagging until they are. 

Asia’s Strongmen and Their Weak Economies 
NEW DELHI – US President Donald Trump grabs the most headlines, but the cult of the strongman leader is most developed in Asia. 
The continent abounds with rulers – including Indian Prime Minister Narendra Modi, Philippine President Rodrigo Duterte, Turkish President Recep Tayyip Erdoğan, and the strongest of them all, Chinese President Xi Jinping – who make a virtue of centralizing power. 
Obviously, leadership styles vary. 
But all of Asia’s strongmen share a key characteristic: they secure public support by preying on economic ignorance. 
In particular, they trade on the popular belief that leaders who concentrate political power are freer to guide economic growth. 
For the most part, people accept this claim, expecting that financial gain and “development” will be their reward. 
Curiously, markets have also accepted this flawed reasoning. 
Global investors tend to overlook human rights, and to prefer stability and autocratic resolve to the unpredictability of democracy. 
Equity and currency markets regularly punish countries for even a hint of political upheaval, whereas rulers with more power and fewer checks and balances are assumed to be more capable of ensuring meaningful “reforms.” 
And yet, with the possible exception of Xi, the perception that strong autocratic rulers deliver better economic results is wrong. 
The truth is that Asia’s strongmen are presiding over increasingly vulnerable states and even more fragile economies. 
Until recently, these vulnerabilities went unnoticed. 
The world’s emerging markets recovered quickly from the 2008 financial crisis, and Asian economies were among the most dynamic. 
Only a few observers dared to point out that this rapid reversal was the result of credit bubbles fueled by carry-trade operations hatched in overly liquid centers of global capitalism. 
Put another way, Asia’s post-crisis party (which was, to be honest, never that raucous) had to end sometime. 
Since the start of 2018, the same emerging markets have been under intense pressure from a combination of factors, beginning with the US Federal Reserve’s tightening of monetary policy, which pulled capital back to the United States. 
These stresses have been exacerbated by the ongoing trade war between the US and China. 
The resulting slowdown has exposed cracks in Asian economies that were once well hidden. 
Most of the Asian leaders long feted by financial markets, it turns out, are really bad economic managers, and investors are beginning to recoil from them. 
But what is most striking is that it took markets so long to reach this conclusion. 
After all, the writing has been on the wall for years. 
For example, in India, Modi’s disastrous banknote demonetization in November 2016 should have been enough to alert observers. 
The move was politically successful for the ruling party but economically devastating, causing massive disruptions to the Indian economy and upending the informal sector, which employs some 81% of the country’s workforce. 
As if that were not enough, the poorly planned and hastily implemented Goods and Services Tax should have impugned Modi’s economic stewardship. 
There have been other serious problems, too, like over-reliance on speculative short-term capital inflows to finance a growing current-account deficit, and inadequate attention to boosting productive employment and promoting wage-led growth possibilities. 
Even today, most of these shortcomings are barely being discussed. 
What explains weak economic performances by Asia’s strongmen? 
Maybe untrammeled political power enables large-scale economic mistakes. 
Furthermore, while most autocrats show strength to their own public, they become meek in the face of global capital. 
Even when rulers rant against policies that will hurt their populist agendas – like high interest rates – they typically succumb to pressure from financial markets. 
This is because the policies they have pursued have integrated their economies so completely into global trade and finance, on unequal terms. 
Despite their nationalist rhetoric, when the economic winds blow against them, it can be hard to change direction. 
The exception is China, where heterodox policies and significant state intervention have made the economy far less vulnerable to external shocks. 
But while Xi has thus far managed to deal with an increasingly complex and hostile external economic environment, many serious internal concerns could easily erupt into bigger problems. 
Whatever the reason for Asia’s profusion of strongmen, people and markets have gotten it wrong for too long. 
Strongman rulers are bad for democracy, and they are really bad for the economy. 

To Resist the Robots, Invest in People 
MANILA – A knitting factory in Bangladesh brings together the past, present, and future. 
On one floor, workers knit by hand. 
On another, people and machines do the work together. 
And on a third floor, there are only robots. 
This building might seem like an anachronism, given the accepted wisdom that robots will replace humans in textiles and many other industries. 
But it is actually a savvy response to how the Fourth Industrial Revolution will likely play out in Asia. 
As is the case elsewhere, technological advances are rapidly transforming industries and economies, by blurring the boundaries between the physical, digital, and biological worlds. 
And yet much of Asia isn’t ready for robots, for reasons that go beyond fears of mass unemployment. 
In 2014, China had just 11 robots per 10,000 employees in non-automotive industries, and just 213 per 10,000 employees on automotive assembly lines. 
That is hundreds fewer than in Japan, the United States, or Germany. 
Although China is closing the gap by increasing its spending on robots, poorer countries face significant barriers to adopting new technologies. 
Moreover, the region’s lower wages give firms an incentive to retain human workers. 
At the factory in Bangladesh, human workers can step in if power outages or equipment failures knock the machines offline. 
At the same time, having a fully automated section allows production to continue if workers go on strike. 
Conventional wisdom decrees that this dual-track approach isn’t sustainable, and that low- to middle-skilled workers will eventually make way for robots. 
A landmark 2013 study by Carl Frey and Michael Osborne of Oxford University suggests that, in the coming decades, 47% of total US employment will be at risk of automation. 
Similarly, the International Labour Organization (ILO) has warned that 56% of total employment in Cambodia, Indonesia, the Philippines, Thailand, and Vietnam is “at high risk of displacement due to technology over the next decade or two.” 
But these grim predictions ignore the fact that most jobs comprise a bundle of tasks, some of which cannot be automated. 
According to a 2016 OECD study that breaks down occupations by task, only 9% of jobs on average across 21 OECD countries are really at risk. 
The same logic applies to Asia. 
In Vietnam, for example, the share of jobs at risk falls from the ILO’s predicted 70% to just 15% when the country’s large informal economy is taken into account. 
Street sweepers in developing countries are arguably less threatened by automation than their counterparts in developed countries, because their jobs are less mechanized and lower paid. 
Still, robots are gaining a foothold in the region, particularly in economies such as China and South Korea. 
In 2015, robot sales in Asia increased by 19% – the fourth record-breaking year in a row. 
When less-developed Asian countries eventually join the technology bandwagon, layoffs will inevitably ensue. 
To soften the blow, governments urgently need to pursue labor-market reforms and overhaul their education systems, starting with technical and vocational education and training (TVET). 
Although TVET is becoming increasingly popular in Asia’s developing economies, its quality is often poor. 
Governments should ensure that TVET courses focus on more relevant skills, while remaining flexible so that students can study without sacrificing income. 
One option is to expand the availability of modular short courses, which take less time, train for specific tasks rather than entire jobs, and are more manageable for entrants who need, first and foremost, to earn money. 
In Myanmar, for example, the government has launched a pilot program to target the country’s “missing million” students who drop out of school each year. 
The program offers short courses on welding and other skills needed to repair rural machinery. 
Competency-based assessment systems could also be particularly useful, given Asia’s large informal workforce. 
Programs offering skilled workers a chance to earn certifications based on their work experience would allow for, say, uncertified electricians to find formal employment in robotics. 
The private sector can also help produce more graduates with job-ready skills. 
Asian countries should take a cue from India’s National Skill Development Corporation, which works with private training firms to match skills curricula with industry needs. 
So far, India’s program has helped train more than 63,000 people. 
Furthermore, governments should offer subsidies or tax incentives to companies that invest in the skills that humans master better than machines, such as communication and negotiation. 
They will also have to adopt more flexible labor regulations, because firms won’t hire skilled workers who cost too much. 
At the end of the day, Asia’s developing countries need policies that support workers, rather than jobs. 
All parties can benefit from flexible contracts and lifelong learning and retraining opportunities. 
Retraining is particularly important, because automation will create entirely new industries and occupations. 
The McKinsey Global Institute estimates that automation could boost global productivity growth by 0.8-1.4% annually, generating large savings and performance gains for businesses. 
Improving access to training and certification would help countries capitalize on these advances and ensure more equitable growth, by giving workers the skills needed to handle the new jobs. 
That outcome would be good for workers and for Asian economies. 
It would mean that businesses like the factory in Bangladesh could operate solely with robots, while its former workers would be gainfully employed elsewhere, most likely in jobs that don’t even exist yet. 

Asian Cities’ Endless Summer 
POTSDAM/MANILA – It’s monsoon season in Asia – marking an end to months of scorching temperatures. 
But the extreme heat will return, with cities facing particularly brutal conditions. 
Already, Asia’s urban areas experience twice as many hot days as its rural areas do – and could experience ten times as many by 2100. 
At that point, there will be no reversing the trend. 
The first detailed assessment of climate risk for Asia, carried out by the Asian Development Bank (ADB) and the Potsdam Institute for Climate Impact Research (PIK), makes clear that Asia’s cities stand at the frontline of the fight against climate change. 
Indeed, many consequences of a hotter planet – such as more extreme weather events, sea-level rise, environmental migration, and mounting social tensions – intersect in urban areas. 
This is particularly true in Asia, where cities house more than half of the population and produce almost 80% of economic output. 
By 2050, Asia’s urban population could nearly double, to three billion people. 
Without new climate initiatives, the region’s cities could contribute more than half of the increase in global greenhouse-gas emissions over the next 20 years. 
Such a scenario is often called “business as usual.” 
Yet, in reality, it is business as usual that would be disrupted by the consequences of climate change, with unfettered warming impeding or even reversing Asia’s recent economic progress. 
The longer we wait to address the climate challenge, the more devastating the disruption will be. 
And we may not get much warning, because climate effects generally do not evolve in a linear fashion, but rather emerge suddenly and powerfully, once certain tipping points have been reached. 
So far, not nearly enough has been done to assess Asia’s exposure to climate impacts, much less to strengthen protections for vulnerable areas or reduce greenhouse-gas emissions. 
The region needs low-carbon green growth strategies that use less land, water, and energy. 
These strategies will help to slow rapid urbanization, which entails dense construction, sealed roads, and private cars – all of which contribute to the “urban heat island” effect. 
If we continue on our current path, the mean temperature over the Asian landmass could soar by more than 6°C (10.8°F), relative to pre-industrial levels, by 2100. 
People may fall ill and even die from respiratory and other ailments caused by heat stress or pollution. 
Beyond the human costs, higher temperatures would undermine agricultural and industrial productivity. 
Climate-driven migration flows will exacerbate the challenges Asian cities face. 
Unless a sufficient number of decent jobs are created, climate migrants could become a permanent underclass. 
Even if jobs are available, the environmental pressure created by ever-more populated cities will pose a grave threat. 
Yet projections of the impact of climate change on migration in Asia remain indefensibly limited in number, scope, and predictive power. 
In order to improve city planning and health-care services, we need a simple and accurate way to assess current and future heat-tolerance levels among urban populations. 
We also need strategies to decrease urban heat stress, including a shift toward polycentric urban configurations, with economies and societies built around multiple regional hubs, rather than concentrated around a single city, and natural assets maintained through eco-corridors and connected green spaces. 
But rising temperatures are far from the only threat posed by climate change. 
Extreme weather events, from droughts to floods, will intensify and become more frequent. 
In Asia, increased rainfall and worsening tropical cyclones will wreak havoc on food production, driving down rural incomes. 
In Sri Lanka, for example, rice yields could drop by up to 20% by 2050; in Fiji, cassava output could plummet by 36%. 
All of this would be exacerbated by rising sea levels, which could be 1.4 meters (4.6 feet) higher by the end of the century, potentially causing many countries to lose more than 10% of their land area. 
If countries meet their commitments under the Paris climate agreement, the total sea-level rise could be halved, with more ambitious schemes promising even greater reductions. 
If, however, we continue on our current path for just a couple more decades, we could trigger centuries of rising sea levels, even if we subsequently ended all greenhouse-gas emissions. 
The effects would be gradual but merciless. 
The risks are arguably highest on Asia’s crowded coastlines, where millions of people are exposed to flooding. 
And those risks continue to mount: in countries such as Bangladesh, India, the Philippines, and Vietnam, coastal populations are expected to double by 2060. 
Asia is home to 13 of the 20 global cities expected to experience the sharpest increases in annual economic loss due to floods between now and 2050. 
As it stands, the risks of sea-level rise for Asia’s coastal urban centers are still not sufficiently understood, nor have they been adequately integrated into planning processes. 
This must change. 
In flood-prone countries, city-planning schemes should blend gray infrastructure, such as drainage systems, dikes, and sea walls, with green measures, like conservation of wetlands and forests. 
Improved meteorological observations and early-warning systems would also help substantially. 
But here, again, there is a lack of adequate knowledge and preparation. 
There is no systematic analysis of the economic costs and benefits of coastal fortification relative to other approaches. 
“Softer” interventions, like better land-use planning and ecosystem-based approaches, are widely supported, but their effectiveness has been assessed in only a few small-scale studies. 
Flood risks could complicate energy-infrastructure development in coastal cities in countries like Bangladesh and India. 
Here, at least, the way forward is clearer: closer regional cooperation would help to offset power shortages, while off-grid energy from renewables and climate-resilient supply networks would help countries to enhance their energy security. 
Given Asia’s massive size, population, and economic importance, it must be at the center of global efforts to mitigate climate change. 
In many ways, Asia’s cities hold Earth’s future in their hands. 
They must do their utmost to protect it. 

Asia’s Future Farms 
MANILA – Food shortages are a distant memory for many people in Asia. 
But as the region struggles to feed and nourish a booming population, they could become a painful fact of life again. 
Asia is already the world’s largest food market, and by 2050 its population is expected to grow to five billion – an increase of 900 million people. 
Owing to its expanding middle class, the region will likely account for half of the global increase in annual beef and poultry consumption and over three quarters of the rise in fish consumption between now and 2030. 
And by then, more than 60% of total cereal demand in the developing world will come from South and East Asia. 
To keep up with this growing demand, food production will have to increase by 60-70% compared to a decade ago. 
Ideally, Asia’s farms could simply expand their production. 
But they are woefully ill-equipped to do so. 
To produce a sufficient amount of food, Asia’s farms will need to undergo a twenty-first-century transformation. 
Helping Asia’s farmers cope with climate change should be a central part of this effort. 
Although a warming planet could boost agricultural output in a few areas, it will severely limit production, and possibly trigger prolonged food crises, throughout the rest of the region. 
As water becomes increasingly scarce in traditionally fertile zones such as the Indo-Gangetic Plain, rising seas will ruin vast swathes of farmland. 
If sea levels were to rise by one meter, the resulting saltwater intrusion would threaten 70% of Vietnam’s coastal farmlands. 
And as waters warm and tidal flows change, yields from the Mekong Delta’s vast fishing grounds could plummet. 
According to Asian Development Bank research, by 2050, irrigated rice and wheat yields could fall by as much as 20% and 44%, respectively. 
This would drive up the price for cereals, soybeans, and wheat by 70%, causing the number of malnourished children in the region to rise by 11 million. 
But this doesn’t have to be Asia’s future, if its farmers can adapt. 
Most farmers today oversee family-run subsistence plots, and lack the money and know-how to improve productivity and crop quality. 
In Myanmar, for example, only 16% of farm households even use tillers or tractors to prepare the land for planting. 
Moreover, environmental degradation has left huge swaths of land barren. 
According to the United Nations Convention to Combat Desertification, various forms of desertification affect nearly 40% of Asia’s total land area. 
While governments cannot create new arable land, they can – and must – pursue policies to support, consolidate, and intensify farming operations on the land that is still available. 
For starters, the region’s governments can promote farm cooperatives. 
Not to be confused with old-style collectivized farming, today’s cooperatives are thoroughly commercial, prioritizing efficiency and profits. 
They comprise agricultural enterprises as well as farmers, all of whom pool their resources to create economies of scale, reduce costs, and lift incomes. 
When bought in bulk by a cooperative, inputs such as fertilizer and equipment are less expensive, as is the harvesting process. 
By coming together to coordinate planting, cooperatives in India and Nepal have made it possible for every member’s crops to be sown and harvested together by a machine, rather than individually by hand. 
Cooperatives can also add value after the harvest, by streamlining crop cleaning, grading, packaging, storage, and transportation. 
This increases the supply of food and boosts farmers’ incomes, especially in places such as Bangladesh, where more than one-third of perishables spoil before ever reaching the consumer. 
China is already modernizing farms through cooperatives, and by using digital e-commerce platforms to tap into high-value markets. 
In Vietnam, a cooperative program has improved the quality of produce for urban consumers, and boosted tea, fruit, and vegetable revenues by nearly one third. 
Although cooperatives are gradually catching on in Asia, they will need more support. 
Most of the region’s cooperatives are fragile, informal arrangements. 
But with the right legal framework in place, they could become far more efficient and durable. 
China’s 2007 Farmers’ Cooperative Law serves as a good model. 
By offering incentives such as value-added-tax exemptions, the law has encouraged cooperatives and other agricultural organizations to collaborate and create economies of scale. 
Within three years of the law’s enactment, the number of cooperatives in China had increased ninefold, to nearly 400,000. 
Cooperatives also help farmers manage the effects of climate change, by creating networks through which members can share knowledge about tricky adaptive strategies like switching from crops to fish or shrimp in saline-affected areas. 
And with the extra income that cooperatives provide, farmers can buy greenhouses to prolong their production season, and shield against erratic weather. 
Cooperatives also allow farmers to benefit from previously unavailable techniques such as fertigation – using irrigation to deliver liquid fertilizers. 
Finally, cooperatives make climate-smart technologies more affordable. 
With new digital technologies, farmers can better manage their land, water, and energy use, and prepare for bad weather. 
For example, the Philippines has experimented with apps that give farmers news about plant and animal diseases, the best places to buy and sell farm supplies, and upcoming weather events. 
By using less labor, and more capital and technology, Asia’s future farms can grow enough food to feed everyone in the region. 
Cooperatives are one way to make this vision a reality. 
Only then will food shortages truly be a thing of the past. 

Asia’s Unhappy Anniversary 
AIX EN PROVENCE – This month marks the 20th anniversary of the Asian financial crisis – or, more precisely, of the event that triggered the crisis: the devaluation of Thailand’s baht. 
While such anniversaries are not exactly cause for celebration, they at least afford an opportunity to look back and examine what has changed – and, no less important, what hasn’t. 
The causes of the crisis were contested at the time, and they remain contested to this day. 
Western observers placed the blame on Asian countries’ lack of transparency and on overly close relations between firms and governments – what they described as “crony capitalism.” 
Asian commentators, for their part, blamed hedge funds for destabilizing regional financial markets and the International Monetary Fund for prescribing a course of treatment that nearly killed the patient. 
There is some validity to both viewpoints. 
The Bank of Thailand’s published balance sheet wildly exaggerated its available foreign-exchange reserves – hardly a shining example of financial transparency. 
Foreign speculators actively bet against the baht, and the short sellers included not just hedge funds but also investment banks, including one that was simultaneously advising the Thai government on how to defend its currency. 
And when counseling Asian countries on how to manage the crisis, the IMF erred – not for the last time, it should be noted – in the direction of too much fiscal austerity. 
At a more fundamental level, the crisis reflected the mismatch between Asia’s historic growth model and its current circumstances. 
That model emphasized stable exchange rates, which were seen as necessary for the expansion of exports. 
It stressed investment – however much was required for double-digit growth. 
And it encouraged foreign borrowing as needed to finance the requisite level of capital formation. 
But by 1997 the Southeast Asian economies had reached a stage of development at which brute-force investment alone was no longer enough to sustain high growth rates. 
In relying on foreign borrowing, their growth model neglected the risks. 
External forces, meanwhile, compounded the problem. 
South Korea’s admission to the OECD required its government to dismantle capital controls, exposing the economy to inflows of short-term “hot money.” 
More generally, countries felt pressure from the IMF and the US Treasury to remove capital-flow restrictions, which magnified the risks and made maintaining pegged exchange rates still more problematic. 
This sketch of the crisis highlights how much has changed over the subsequent 20 years. 
For starters, the crisis countries have ratcheted down their investment rates and growth expectations to sustainable levels. 
Asian governments still emphasize growth, but not at any cost. 
Second, Southeast Asian countries now have more flexible exchange rates. 
None is perfectly flexible, to be sure, but the region’s governments have at least abandoned the rigid dollar pegs that were the source of such vulnerability in 1997. 
Third, countries like Thailand that were running large external deficits, heightening their dependence on foreign finance, are now running surpluses. 
Running surpluses has helped them accumulate foreign-exchange reserves, which serve as a form of insurance. 
Fourth, Asian countries are now working together to ring-fence the region. 
In 2000, in the wake of the crisis, they created the Chiang Mai Initiative, a regional network of financial credits and swaps. 
And now they have the Asian Infrastructure Investment Bank to regionalize the provision of development finance as well. 
These initiatives can be understood as a reaction to Asia’s unhappy experience with the IMF. 
More fundamentally, they reflect the emergence of China. 
In 1997, a China still uncertain of its regional role was not a vocal supporter of the Japanese plan for an Asian Monetary Fund. 
Its lack of support ultimately sealed the fate of that proposal. 
Subsequently, China’s growing self-confidence and leadership helped to spearhead regional institution building and cooperation. 
This change, occurring against the backdrop of 20 years of robust Chinese growth, is the most consequential change affecting Asia since the crisis. 
But if the emergence of China signifies how much has changed, it is also a reminder of how much remains the same. 
China is still wedded to a model that prioritizes a target rate of growth, and it still relies on high investment to hit that target. 
The government maintains liquidity provision at whatever levels are needed to keep the economic engine humming, in a manner dangerously reminiscent of what Thailand was doing before its crisis. 
Because China’s government relaxed restrictions on offshore borrowing faster than was prudent, Chinese enterprises with links to the government have high levels of foreign debt. 
And there is still a reluctance to let the currency float, something that would discourage Chinese firms from accumulating such large foreign-currency-denominated obligations. 
China is now at the same point as its Southeast Asian neighbors 20 years ago: like them, it has outgrown its inherited growth model. 
We have to hope that Chinese leaders have studied the Asian crisis. 
Otherwise they are doomed to repeat it. 

Asian Growth in Turbulent Times 
NEW DELHI – A new reality is emerging in Asia. 
In recent decades, many of Asia’s economies have boomed. 
The region today accounts for about 40% of the world’s GDP – up from 25% in 1990 – and contributes about two-thirds of global economic growth. 
There’s more. 
Asia has made unprecedented strides in reducing poverty and improving broad development indicators. 
The poverty rate fell from 55% in 1990 to 21% in 2010, while education and health outcomes have improved significantly. 
Hundreds of millions of lives have been improved in the process. 
And, looking ahead, Asia is expected to continue to grow at an average annual rate of 5%, leading global economic expansion. 
But today, the region is facing challenging new economic conditions. 
With growth in advanced economies tepid, risk aversion increasing in global financial markets, and the commodity super-cycle coming to an end, the world economy is providing little impetus to Asian growth. 
At the same time, China is moving toward a more sustainable growth model that implies slower expansion. 
Given the growing links between China and the rest of the world, particularly Asia, the spillover effects are significant. 
Indeed, China is now the top trading partner of most major regional economies, particularly in East Asia and ASEAN. 
New research by the International Monetary Fund, to be published in next month’s Regional Economic Outlook for Asia and the Pacific, suggests that the median Asian country’s economic sensitivity to China’s GDP has doubled in the last couple of decades. 
So China’s slowdown means a slower pace of growth across Asia. 
Asia’s achievements in recent decades attest to the hard work of the region’s people, as well as to the soundness of the policies that many Asian governments have adopted since the late 1990s, including improved monetary-policy and exchange-rate frameworks, increased international reserve buffers, and stronger financial sector regulation and supervision. 
Against this backdrop, the region attracted vast amounts of foreign direct investment. 
As trade links expanded, a sophisticated network of integrated supply chains emerged, creating the conditions for Asia to become a manufacturing powerhouse and, increasingly, an exporter of services as well. 
More recently, thanks to strong policies and ample reserves, the region quickly recovered from the global financial crisis. 
Asia also benefited during these years from strong global tailwinds, including favorable external financing conditions and the rapid expansion of the Chinese economy. 
Amid this new testing reality now dawning in Asia, we must not lose sight of the deep, and long term, structural challenges facing the region. 
Populations are rapidly aging and even declining in countries like Japan, Korea, Singapore, and Thailand, dragging down potential growth and putting pressure on fiscal balances. 
Income inequality is a further challenge. 
While inequality has remained stable or declined in Malaysia, Thailand, and the Philippines, it is rising in many parts of the region, most notably in India and China (as well as other parts of East Asia). 
In many emerging markets and developing countries, widespread infrastructure gaps persist, notably in power and transport. 
And, elsewhere in the region – the small Pacific islands in particular – vulnerability to the effects of climate change is increasing. 
This shifting landscape calls for bold action on several fronts. 
While the response will certainly need to be tailored to each country’s specific circumstances, some recommendations could be helpful for most countries: 
· Because inflation remains low across most of the region, monetary policy should remain supportive of growth in case downside risks materialize. 
· Exchange-rate flexibility and targeted macroprudential policies should be part of the risk-management toolkit. 
· Countries need to deepen their financial systems to channel the large pool of domestic and regional savings toward financing their development needs; closing the region’s infrastructure gaps, for example, remains critical. 
· Structural reforms, aided by fiscal policy, should support the economic transitions and rebalancing, while boosting potential growth and alleviating poverty. 
The good news is that Asia, as demonstrated by its strong performance in recent years, can meet these challenges and continue to build upon the significant achievements of the past two decades. 
It has the resources and the people; it has the buffers and resilience; and it has ample opportunities for further trade and financial integration. 
To discuss these challenges, the government of India and the IMF are organizing the Advancing Asia conference in New Delhi on March 11-13, bringing together regional policymakers and thinkers. 
India, a bright spot among emerging markets in these difficult times – indeed, the world’s fastest growing major economy – is an auspicious place to hold this gathering. 
Our mutual aim in convening with Asian policymakers is clear and critical, for Asia and for the global economy: to ensure that growth in Asia continues to be robust, sustainable, and inclusive, so that the region remains a powerful locomotive for global growth. 

China’s Asia? 
CLAREMONT – Distinguishing diplomatic rhetoric from official policy is never easy. 
But it is especially difficult in China, where the government’s actions so often fail to match its statements. 
Given this, it is worth asking whether the latest slogan adopted by Chinese officials – “Asia for Asians” – is merely nationalist posturing for domestic consumption or a signal of a genuine policy shift. 
The most authoritative reference to an “Asia for Asians” occurred in May, during Chinese President Xi Jinping’s keynote speech at the Conference on Interaction and Confidence-Building Measures in Asia. 
In a carefully crafted statement, Xi laid out China’s vision for a new regional security order – one in which, as the slogan suggests, Asians are in charge. 
According to Xi, at the fundamental level, “it is for the people of Asia to run the affairs of Asia, solve the problems of Asia, and uphold the security of Asia.” 
Fortunately, he declared, they have the “capability and wisdom” to build peace and security in the region through cooperation. 
This vision, of course, entails an overhaul of the Asian security structure, with a drastically reduced role for the United States. 
Indeed, Xi implicitly criticized the existing US-dominated security architecture in Asia as stuck in the Cold War, and characterized “military alliance targeted at a third party” as “not conducive to maintaining common security.” 
Since the speech, lower-level officials and the Chinese media have reiterated similar lines. 
At first glance, this vision seems entirely reasonable; after all, most countries prefer to manage domestic and regional affairs without the meddling of outside powers. 
But Xi’s statement marked a significant departure from China’s long-standing position on America’s presence in the Asia-Pacific region. 
Since the US-China rapprochement four decades ago, China has maintained a studied ambiguity regarding America’s role as the guarantor of Asia’s security. 
China’s pragmatic leaders knew that the US presence helped to contain the Soviet Union (and subsequently Russia), prevented Japan from re-arming, and kept sea-lanes open. 
They also recognized that they lacked the power to challenge the US-led security order or offer a feasible alternative. 
This may be changing. 
Though some analysts remain convinced that Xi’s “Asia for Asians” line is an empty attempt to bolster his nationalist credentials, an equally strong case can be made that it signifies a genuine policy shift. 
While the argument is not overwhelming, it should not be dismissed out of hand. 
The most conclusive evidence of Xi’s readiness to challenge the established order lies in the economic sphere. 
Most notably, China has established new development institutions, the Asian Infrastructure Investment Bank and the new Silk Road Fund, to which it will channel tens of billions of dollars – clear challenges to the established Western-dominated multilateral institutions. 
On the security front, however, China has made much less headway in turning its “Asia for Asians” vision into reality. 
To be sure, it has acquired some military capabilities to deter the US from intervening in the Taiwan Strait or the South China Sea, and it has improved its security cooperation with Russia and Central Asian countries through the Shanghai Cooperation Organization. 
But such modest gains are more than offset by the security setbacks that China has suffered as a result of its assertiveness in regional territorial disputes. 
Indeed, after many months of increasingly forceful military moves – most notably, the unilateral declaration of an air-defense identification zone covering a large swath of the South China Sea, including disputed territories – China’s ties with Japan reached an all-time low. 
And concerned Southeast Asian countries have been entreating the US to remain in the region as a counterweight to China. 
Underlying the “Asia for Asians” trope may be China’s belief that the US, not its own behavior, is to blame for its neighbors’ defiance. 
Some Chinese strategists believe that the US is using Asian states, particularly Japan, Vietnam, and the Philippines, as pawns to contain China. 
If this perspective has prevailed in the internal policy debate, Chinese leaders, including Xi, could have reached the fateful conclusion that, on balance, America’s security presence in Asia directly threatens Chinese interests and must be eliminated. 
That would be a grave strategic error, based on a fundamental misreading of Asian security dynamics. 
Most of China’s neighbors, even North Korea, fear an unconstrained Chinese hegemon – and, if the US security presence were eliminated, that is precisely what they would face. 
“Asia for Asians” would be “Asia for the Chinese.” 
It is difficult to imagine that Chinese policymakers, known for their sophistication and realism, could be pursuing a strategy that is not only unlikely to gain support from fellow Asians, but also is guaranteed to spark conflict with the US. 
Given this, it is likely – indeed, desirable – that “Asia for Asians” will remain a mere slogan. 
In fact, Xi has lately toned down his description of China’s aims, recently telling Communist Party leaders that, “We should increase China’s soft power, give a good Chinese narrative, and better communicate China’s message to the world.” 
But, even as rhetoric, the phrase “Asia for Asians” is problematic for historical reasons. 
In the 1930s, Japanese militarists used the idea of an “East Asia Co-Prosperity Sphere” as a cover for their imperial ambitions and conquests. 
The slogan was widely ridiculed, particularly in China, for its transparent absurdity. 
This may help to explain the lukewarm reception that the concept of “Asia for Asians” has received this time around. 
The smartest thing for Chinese leaders to do would be to drop it, once and for all. 

Asia’s Hierarchies of Humiliation 
PHILADELPHIA – Indian and Chinese troops have been locked in a standoff in Doka La – where the borders of Bhutan, China and India meet – for almost a month now, the longest such impasse between the two armies since 1962. 
In a not-so-subtle reference to that last conflict, in which India suffered a disastrous defeat, the Ministry of National Defense spokesperson Colonel Wu Qian has warned India to “learn from historical lessons.” 
But the lessons of history have a peculiar tendency to adapt to the perspective of those citing them. 
The current Chinese leadership sees in the 1962 conflict the price an uppity neighbor had to pay for not acceding to its territorial demands. 
But, for India, that conflict was a humiliation that has rankled the country for more than a half-century. 
The reminder of it is therefore likely to have the opposite effect than Wu anticipated. 
In international relations, to be humiliated means more than to be embarrassed. 
It amounts to the public degradation of another actor, a denial of its bid for status, and the establishment of a clear hierarchy. 
Wars provide the opportunity for humiliation in very stark ways, because defeat on the battlefield tends to bring not just ridicule and derision, but also clear losses, particularly of territory. 
If any country should understand the impact that such humiliations can have, it is China. 
In fact, as Wu was relaying his message to India, Chinese President Xi Jinping was asserting, at the commemoration of the 20th anniversary of Hong Kong’s handover to China, that the move had ended the “humiliation and sorrow” inflicted by Britain when it took over the city in 1842. 
This reflects the Chinese Communist Party’s broader use of China’s “century of humiliation,” which allegedly ended only when the CCP established the People’s Republic in 1949, to fuel a resurgent nationalism. 
During that period, China’s self-image as East Asia’s preeminent power was shattered by a series of defeats, which were particularly painful when inflicted by the upstart Japan. 
Despite this acute awareness of the enduring impact of its own humiliations, China often fails to recognize how its own past actions might have spurred similar feelings in others. 
Its 1962 defeat of India was the culmination of a decade-long competition for leadership of the newly independent countries that had emerged from decolonization. 
It therefore amounted to a devastating blow to India’s aspirations to be the undisputed leader of the Non-Aligned Movement. 
India is far from the only country that has been humiliated at the hands of China. 
In Vietnam, the phrase “1,000 Years of Chinese Domination” has as much resonance as “100 Years of Foreign Humiliation” has in China. 
But China is not the only country to have been humiliated and humiliated others in turn. 
While India was humiliated by China in 1962, it also inflicted what its neighbor Pakistan remembers as a humiliating defeat nine years later. 
Since independence in 1947, Pakistan had vied to establish itself as India’s equal in South Asia, joining alliances led by the United States or cozying up to China to demonstrate its strategic relevance. 
The 1971 Indo-Pakistani War, which led to the independence of East Pakistan (now Bangladesh), crushed those hopes. 
Yet Pakistan, too, remains oblivious to the humiliating impact of its own actions: its nearly four-decade-long history of interference in Afghanistan to secure “strategic depth” will leave Afghanistan traumatized for years to come, in a way that Russia-inflicted losses did not. 
The same is true of all the aforementioned humiliations: they are particularly painful because an Asian neighbor, not a distant power, inflicted them. 
Such humiliations, as we have seen with China, have a long-lasting impact. 
Indeed, they can create an all-consuming desire for vengeance that overwhelms more sober foreign-policy motivations. 
That is why, for example, Pakistan’s army is prepared to undermine all other institutions in the country it is sworn to defend, in the name of wounding India. 
With nationalism on the rise across Asia, leaders have strong incentives to craft a version of history that advances their cause, and few historical memories are as effective for this purpose as those of traumatic humiliation. 
China has mastered this art, but it can be seen elsewhere, too, including in India. 
The key is to create a hierarchy of humiliations, according to which those inflicted on one’s own country are regarded as vitally important, and those inflicted on others are diminished, remembered only to reaffirm the status hierarchy. 
Yet, as the ongoing dispute in Doka La makes clear, such an approach can create serious risks. 
After World War I, when Europe failed to address adequately its legacy of humiliation, the results were catastrophic. 
After World War II, however, Europe rose to the challenge, setting the stage for unprecedented regional cooperation. 
One hopes that Asia takes a similar tack – before simmering anger over historical humiliations boils over. 

Asia in the Balance 
CAMBRIDGE – Last year, the leaders of all five permanent members of the United Nations Security Council visited India, accompanied by delegations of business leaders. 
The Indian economy has been growing at more than 8% annually, making it increasingly attractive for trade and investment. 
When US President Barack Obama visited in November, he supported permanent membership of the UN Security Council for India. 
So did British Prime Minister David Cameron, French President Nicolas Sarkozy, and Russian President Dmitri Medvedev. 
But the last to visit, Chinese Prime Minister Wen Jiabao, said nothing at all about it. 
Official pronouncements stress friendly relations between India and China, and some trade analysts argue that the two giant, rapidly growing markets will become an economic “Chindia.” 
When Premier Wen visited several years ago, he signed a comprehensive five-year strategic cooperation pact. 
As Indian Prime Minister Manmohan Singh put it at the time, “India and China can together reshape the world order.” 
Such statements reflect a considerable change from the hostility that bedeviled Indian-Chinese relations following the two countries’ 1962 war over a disputed border in the Himalayas. 
Nevertheless, strategic anxiety lurks below the surface, particularly in India. 
China’s GDP is three times that of India’s, its growth rate is higher, and its defense budget has been increasing. 
The border dispute remains unsettled, and both countries vie for influence in neighboring states such as Myanmar. 
And, in recent years, China has worked behind the scenes to prevent permanent Security Council membership from conveying great-power status on India. 
But talk of India as a future great power is unavoidable, and some Indians predict a tri-polar world, anchored by the US, China, and India, by mid-century. 
India’s population of 1.2 billion is four times that of the US, and likely to surpass China’s by 2025. 
Vijay Joshi of St John’s College, Oxford, argues that, “if we extrapolate present trends, India will have the world’s third largest national income (after the US and China) within 25 years.” 
For decades, India suffered from what some called the “Hindu rate of economic growth” of a little over 1% per year. 
After independence in 1947, India followed an inward-looking policy that focused on heavy industry. 
But it turned out that the rate of economic growth owed less to Hindu culture than to imported British Fabian (and other) socialist economic planning. 
After market-oriented reforms in the early 1990’s, growth rates soared, with projections of double-digit growth in the future. 
Martin Wolf of the Financial Times calls India a “premature superpower” – a country with low living standards but a huge economy. 
He thinks that the Indian economy will be bigger than Britain’s in a decade and bigger than Japan’s in two. 
India has an emerging middle class of several hundred million, and English is an official language, spoken by 50-100 million people. 
Building on that base, Indian information industries are able to play a major global role. 
India has significant hard-power resources as well, with an estimated 60-70 nuclear weapons, intermediate-range missiles, a space program, 1.3 million military personnel, and annual military expenditure of nearly $30 billion, or 2% of the world total. 
In terms of soft power, India has an established democracy, and a vibrant popular culture with transnational influence. 
India has an influential diaspora, and its motion picture industry, “Bollywood,” is the largest in the world in terms of the number of films produced yearly, out-competing Hollywood in parts of Asia and the Middle East. 
At the same time, India remains very much an underdeveloped country, with hundreds of millions of illiterate, destitute citizens. 
Around one-third of Indians live in conditions of acute poverty, and India accounts for roughly one-third of the world’s poor. 
India’s GDP of $3.3 trillion compares to China’s $5 trillion, and is 20% that of the United States. 
As a result, India’s per capita income of $2,900 (in purchasing-power-parity terms) is one-half of China’s and one-fifteenth that of the US. 
Even more striking, while 91% of the Chinese population is literate and 43% is urban, the numbers for India are only 61% and 29%, respectively. 
Each year, India produces about twice as many engineering and computing graduates as America, but The Economist reports that “only 4.2% are fit to work in a software product firm, and just 17.8% are employable by an IT services company, even with six months training.” 
A symptom of this is India’s poor performance in international comparisons of universities: the 2009 Asian University Rankings, prepared by the higher education consultancy QS, shows the top Indian institution to be the Indian Institute of Technology in Bombay, at number 30. 
Ten universities in China and Hong Kong are ranked higher. 
High-tech exports are only 5% of India’s total exports, compared to 30% for China. 
India is thus unlikely to develop the power resources to become an equal to China in the next decade or two. 
And, while the two countries signed agreements in 1993 and 1996 that promised a peaceful settlement of the border dispute that led them to war in l962, it is worth noting that, just prior to India’s nuclear tests in March l998, India’s defense minister described China as India’s “potential enemy number one.” 
More recently, in 2009, the border issue flared again. 
Indian officials are generally discrete in public about relations with China, but in private their concerns remain intense. 
Rather than becoming an ally, India is more likely to become one of the Asian countries that will tend to balance China’s strategic rise. 

Asia in the World 
NEW YORK – Before I became the UN’s Secretary-General, I was an Asian diplomat. 
While I was foreign minister of the Republic of Korea, my Government and I strongly advocated détente with the North. 
When some in the world called for sanctions and punitive action, South Korea pushed for dialogue. 
That requires listening as well as speaking. 
It means sticking to principles, but also attempting to understand the other side, however irrational or intransigent it may sometimes appear. 
This remains my style at the United Nations. 
I believe in the power of diplomacy and engagement. 
I prioritize dialogue over debate or declaration. 
Above all, I seek results. 
We are doing that now in Myanmar. 
My Special Adviser, Ibrahim Gambari, has been back in Yangon. 
His brief is to be the honest broker, the facilitator of a dialogue between government and opposition leaders, particularly Aung San Suu Kyi. 
The goal is for Myanmar’s Government to release all detained students and demonstrators, engage with the opposition, move toward a more democratic society, and rejoin the international community. 
This brand of diplomacy is not quick or easy. 
There is seldom applause, and often no outward evidence of movement. 
It is a quiet, painstaking slog behind the scenes. 
You have to work the phones, cajole world leaders to do this or that. 
It is a symphony – often not a very harmonious one – of small steps that you hope will lead to something greater. 
You expect nothing. 
You can only keep trying, keep pushing. 
Maybe it works, maybe not. 
Then you try some more, in a different way, aiming all the while for some small progress that makes the next step possible. 
We are at this point in Darfur. 
I have spent hundreds of hours working behind closed doors with various parties to the conflict – Sudan’s Government, rebel leaders, neighbouring countries, and African Union partners. 
Meanwhile, we are pushing ahead with one of the most complex peacekeeping operations in our history, feeding and protecting hundreds of thousands of displaced people, and sponsoring difficult peace negotiations in Libya. 
But even as I push my brand of “Asian” diplomacy, it can sometimes feel a bit lonely to be an Asian at the international community’s diplomatic roundtable. 
We Asians inhabit the world’s largest continent, with the world’s largest population and its fastest-growing economies. 
We have a rich history and ancient cultures. 
Yet our role in international affairs is far less than it could, or should be. 
Asia’s contribution to the UN, though significant, could be greater. 
Its humanitarian assistance, to put it politely, is less than generous. 
We are the only continent where regional integration and common markets have not taken hold. 
Latin Americans and North Americans dream of creating a free-trade zone. 
Europeans speak of building a United States of Europe. 
The African Union aspires to become a United States of Africa. 
Why no United States of Asia? 
There are many reasons why Asia is different: history, cultural diversity, unresolved territorial and political disputes, a lack of multilateral experience, and the predominance of one or two centers of power. 
But the main reason is that we have not tried. 
Asia does not do itself justice. 
As an Asian Secretary-General, I hope to see this change. 
I hope to see an Asia that is both better integrated and more internationally engaged. 
I expect particularly great things of my fellow Koreans, a remarkable people who have come into their own. 
I hope to see Korea assume more responsibility in the world, commensurate with its growing economic clout – especially in the area of development, one of the three pillars of the UN Charter. 
Koreans need to step up, speak out, and do more, and that should start with more generous official development assistance. 
Koreans have already shown their penchant for multi-lateral diplomacy and trouble shooting through the six-party talks. 
Now, they, and Asians at large, need to bring both their skills and their success to bear on the most pressing global issues of the day. 
This is not just my hope, it is also Asia’s obligation. 

Asia’s Central Banks Should Prepare to Raise Interest Rates 
SEOUL – Financial markets around Asia are preparing for a Goldilocks economy in 2018 – not too hot, not too cold, with strong growth and stable prices. 
The region’s export-oriented emerging economies are benefiting from the recovery in global trade, while its largest players – China, Japan, and India – remain dynamic. 
Throughout the region, accelerating economic growth, together with positive corporate earnings expectations and persistent capital inflows, are driving up stock prices. 
And inflation will remain in check, owing largely to the slow rise in wages and import prices. 
Yet there remains plenty of cause for concern. 
For one thing, Asian markets will undoubtedly face capital-flow volatility, driven by the major advanced economies’ monetary policies. 
For another, large debts could increase financial risk in some Asian economies, damaging growth prospects. 
The region’s central banks will be integral to managing these risks. 
In the wake of the global economic crisis, Asia’s central banks, like their counterparts in the advanced economies, assumed a leading role in supporting domestic growth. 
But, as the global economic recovery gains momentum, the time has come to begin tightening monetary policy. 
The major advanced economies’ central banks are already on that path. 
The European Central Bank, the Bank of England, and the Bank of Japan are moving to rein in their swelling balance sheets and raise interest rates. 
But it is the US Federal Reserve that is leading the way. 
With low growth in wages and consumer prices keeping inflation subdued, the Fed is likely to continue pursuing gradual interest-rate hikes. 
But if, as is likely, the tax cuts recently enacted by President Donald Trump and congressional Republicans accelerate economic and price growth enough to raise the risk of economic overheating, the Fed will need to act more assertively. 
This broad monetary tightening will have a profound impact on Asia’s emerging economies, which are highly integrated into global markets and thus open to foreign capital flows. 
In particular, changes in global liquidity conditions are likely to send Asia’s financial and foreign-exchange markets on a roller-coaster ride, fueling pressure to keep up with interest-rate hikes in the advanced economies. 
To be sure, some economists still argue that Asia’s central banks should maintain low interest rates, owing to persistently subdued inflation. 
They worry that, at a time when many households and businesses remain laden with debt, a sharp rate hike would undermine consumption and investment, potentially impeding economic growth. 
But the truth is that large debts and overvalued risky assets are the result of sustained monetary expansion. 
If central banks continue to postpone interest-rate increases for much longer, asset bubbles might develop – not just in the stock and housing markets, but also in, say, virtual currencies – leading to another financial crisis. 
The best way to avoid such an outcome is for emerging Asian economies to increase rates gradually and predictably. 
This does not mean that Asia’s central banks should simply bow to external pressure. 
Rather, each central bank should pursue monetary-policy normalization at a rate appropriate to safeguarding macroeconomic stability without damaging domestic economic activity. 
The good news is that Asia’s central banks seem to recognize this, and are already moving toward tightening, with the Bank of Korea in the lead. 
On November 30, against a backdrop of rapidly accumulated household debt and distortions in capital allocation, the BOK raised rates by 25 basis points, from a record low of 1.25%. 
Monetary authorities in countries like Malaysia, Taiwan, Thailand, and the Philippines are expected to follow suit, timing their interest-rate hikes according to economic conditions. 
In China, too, monetary tightening will be needed to mop up excess liquidity and reduce leverage. 
Otherwise, according to Zhou Xiaochuan, the governor of the People’s Bank of China, the country might face a “Minsky moment,” in which excessive optimism and debt-financed investment culminate in financial crisis. 
The main potential hitch in this process is political: because ultra-low interest rates amount to an easy form of economic stimulus – much easier than, say, labor, tax, or regulatory reforms – politicians might put pressure on central banks to delay rate hikes. 
But central banks, leaning on their hard-won independence, must not succumb. 
Though the active monetary policy used since the global economic crisis has caused some to question central-bank independence, compromising it for the sake of political accountability would, as Barry Eichengreen has put it, be tantamount to “throwing the baby out with the bathwater.” 
Standing up to politicians may not be easy for central bankers, not least because, in many countries (including China, Indonesia, Japan, South Korea, and Taiwan), the central bank’s governor is due to be replaced or reappointed in the coming months. 
The new leaders will need to enter their positions with confidence, and remain steadfast in their decision-making in the face of large-scale uncertainty. 
That said, central bankers should not be solely responsible for supporting low and stable inflation and maintaining financial stability. 
They certainly cannot be expected to drive job creation and output growth in the long term. 
That is why they must cooperate with policymakers, including fiscal authorities and financial regulators, to ensure the right mix of monetary and fiscal policy, as well as structural reform. 
A decade after the global economic crisis began, the world economy is on the path toward normalcy – a path that demands the gradual tightening of monetary policy in Asia and the West alike. 
It is now up to central banks to meet that demand, without derailing the recovery. 

The Asia-Pacific Gender-Parity Imperative 
SINGAPORE/MUMBAI – Gender equality offers a sizeable economic opportunity for any country. 
A government that hopes to achieve strong growth without tapping into women’s full potential is essentially fighting with one hand tied behind its back. 
In fact, new research from the McKinsey Global Institute (MGI) finds that Asia-Pacific economies could boost their collective GDP by $4.5 trillion per year by 2025, just by accelerating progress toward gender equality. 
That would be the equivalent of adding an economy the combined size of Germany and Austria every year. 
The opportunity is especially large for India, where GDP would grow by as much as 18%. 
Gender equality contributes to growth in three ways. 
According to MGI, 58% of the gains in the Asia-Pacific region would come from raising the female-to-male ratio of labor-force participation, 17% from increasing women’s work hours, and the remaining 25% from having more women working in higher-productivity sectors. 
But equality at work goes hand in hand with gender equality in society. 
While there have been notable advances in girls’ education and health, women across the region remain subject to traditional attitudes that define their primary role as being in the home. 
As a result, women often lack access to the financing needed to start or expand a business, and to the training needed for the modern labor market. 
To be sure, tackling gender inequality is a complex, long-term challenge that requires broad social engagement. 
But there are five areas in the Asia-Pacific region where governments, companies, and non-governmental organizations could start to make meaningful progress. 
The first is women’s participation in higher-quality jobs. 
While women currently account for half of the region’s population, they contribute just 36% of its GDP. 
But GDP does not account for the unpaid work that they do in the home, which could conservatively be valued at an additional $3.7 trillion of economic output. 
Globally, the value of women’s unpaid work performed is three times higher than that of men, whereas in the Asia-Pacific region, it is four times higher. 
In some cases, the time that women spend on such tasks may be a personal choice. 
But true equality of opportunity eludes too many women who want to earn money outside the home. 
This problem can be addressed in a number of ways, starting with more flexible workplace policies, affordable childcare, and expanded skills training, particularly in STEM fields (science, technology, engineering, and mathematics). 
Moreover, in countries such as India and Indonesia, investment in infrastructure and transportation can reap dividends by connecting more women to productive work opportunities. 
A second priority is to address women’s underrepresentation in business leadership circles. 
Globally, there are fewer than 40 women for every 100 men in leadership positions (including in politics), and in the Asia-Pacific region, that figure falls to around 25. 
Though the share of women sitting on company boards across the region did double between 2011 and 2016, from 6% to 13%, it remains far too small. 
Breaking the Asia-Pacific region’s glass ceiling will require dismantling several barriers, including cultural expectations that women should prioritize childcare over their careers, a lack of suitable or affordable childcare, unconscious bias in the workplace, and a scarcity of role models and sponsors. 
But, most critically, too few companies in the region offer flexible working options. 
A third priority is to improve women’s access to digital technology, which can open countless economic (and social) doors – including into finance. 
In fact, women have already begun to thrive in some of the region’s burgeoning digital industries. 
In Indonesia’s largest online marketplace, women-owned businesses account for 35% of total revenues. 
And in China, women found 55% of new Internet businesses. 
Building on these successes will require more training for women in the use of digital technologies. 
In Asia’s booming Internet market, digital technologies could be a double-edged sword: If the gender gap is not closed, women will be left on the sidelines of the technology-driven revolution sweeping the region. 
A fourth priority is to change social attitudes about gender roles. 
The traditional view that women belong in the home is arguably the largest barrier to women’s advancement in both society and the workplace. 
The World Values Survey’s findings on this issue between 2010 and 2014 are revealing. 
Across the Asia-Pacific region, 44% of respondents said that men make better leaders than women. 
And 70% of Indian respondents – compared to just 21% of Australian respondents – agreed with the statement: “When a mother works for pay, the children suffer.” 
Leaders in government, business, the media, and individual communities need to work together to change such views. 
The final priority is to pursue more regional collaboration to achieve gender equality. 
Public and private initiatives tend to work best when they are tailored to specific communities and countries. 
But regional partnerships that are established around shared goals could give national and local efforts more momentum. 
For example, Asia-Pacific countries could come together to provide more financing for gender-equality initiatives, and to encourage more gender-based investment and budgeting. 
And, more broadly, governments could do more to share knowledge about which approaches work best. 
The Asia-Pacific region is home to some of the world’s fastest-growing and most innovative economies. 
It is forging an exciting new future, and assuming an ever-greater global role. 
Yet women are not playing an equal part in this drama, as many leaders have come to realize. 
Now is the time to accelerate progress toward gender parity, and to women’s power to deliver growth and improve social wellbeing. 

Making the Most of Asia’s Aging Populations 
SEOUL – Asia is aging fast: by 2040, 16% of the region’s population will be older than 65, more than double the 7.8% share in 2015. 
While the rise in healthy life expectancy is a positive development, this demographic shift poses a serious threat to many economies, which are already losing vitality. 
A consistent supply of young, skilled workers was an essential ingredient of Asia’s rapid economic catch-up process over the last three decades. 
But that process is not over, and middle-income countries like China and Vietnam are now facing accelerating population aging. 
In South Korea, the working-age population (15-64 years) will shrink by 10% from 2017 to 2030. 
Against this background, the only way to sustain the labor supply – aside from immigration – is to keep people in employment beyond the traditional retirement age. 
The good news is that a growing number of seniors in Asia are already working. 
According to the OECD, the share of working South Koreans aged 65-69 was as high as 45% in 2016; for 70-74-year-olds, the figure stands at 33%. 
Unfortunately, many of the jobs performed by elderly workers are low-paid. 
And, as South Korea’s rising youth unemployment rate suggests, seniors may be displacing their younger counterparts, instead of working alongside them – effectively defeating the purpose of including more elderly Koreans in the labor force. 
One problem is that younger workers tend to be more productive than their senior counterparts. 
Firm-level studies indicate that workers everywhere are most productive between the ages of 30 and 45. 
A higher share of seniors in the workforce has thus resulted in lower overall productivity in US states and across countries. 
This makes sense: while older workers have plenty to offer, including critical job skills such as communication and problem-solving, owing to their extensive experience, their physical and cognitive capacities tend to decline. 
Together with a lack of technical capabilities such as ICT skills, this undermines their ability to adapt to the fast-changing technologies that are the lifeblood of today’s economies. 
Against this background, it is vital not only to ensure that there are enough quality jobs for all workers, old and young, but also to boost productivity among older workers – an objective that new technologies can help to achieve. 
For example, advances in medical science and biotechnology are helping to stem workers’ physical and cognitive decline. 
Meanwhile, technologies like robots are displacing a growing share of manual labor, leaving less physically demanding jobs for humans. 
The potential of these technologies is not lost on countries such as Germany, Japan, and South Korea, where the workforce is aging the fastest, and where automation is being adopted particularly quickly. 
But if seniors are to occupy high-quality jobs in the new economy, they need access to more effective lifelong learning programs that enable them to upgrade their skills continuously in response to technological change. 
Such training can be made available through various channels – including private firms and trade unions – with government support. 
Seniors need to be encouraged to seize these opportunities, even if it requires them to take a break from full-time employment, though on-the-job training is also a desirable option. 
In fact, participation in on-the-job training by middle-aged and elderly workers in Japan and Korea is currently lower than in other advanced economies, such as the United States and Finland, meaning that there should be space for improvement. 
To that end, governments might consider providing vouchers that workers can use to pay for training that will support progress in multiple jobs, rather than focusing on specific job- or company-related skills. 
It is not only seniors who need access to upgraded education and training programs. 
Young people, too, need to be better prepared for a fast-changing work environment. 
Poor-quality basic education prevents students from reaping the benefits of subsequent education and skills training. 
In many Asian countries, formal education systems often fail to produce graduates with adequate cognitive abilities and technical competencies to fill the labor market’s needs. 
To meet those needs, all levels of education and training will have to provide students with the “skills of tomorrow.” 
In an era of artificial intelligence, that must include the non-routine cognitive and interpersonal skills – problem solving, critical thinking, collaboration, and communication – that many older, more experienced workers already possess. 
Rapid population aging no doubt poses a serious threat to Asia’s long-term economic prospects. 
But it also represents an important opportunity to expand the labor pool and capitalize on older workers’ existing skills. 
With the right policies, Asian countries can mitigate the risks of population aging and harness their “silver dividend” to become more productive, resilient, and dynamic than ever. 

Asia’s New Entente 
PERTH – US President Donald Trump is arriving in Asia at a moment when the region’s security situation is practically white-hot. 
US Secretary of State Rex Tillerson, recognizing that the world’s “center of gravity is shifting to the heart of the Indo-Pacific,” called on the region’s democratic powers to pursue “greater engagement and cooperation.” 
They – including Trump’s US – should heed that call. 
In fact, only an alliance of democracies can ensure the emergence of a strong rules-based order and a stable balance of power in the world’s most economically dynamic region. 
In recent years, as Tillerson acknowledged, China has taken “provocative actions,” such as in the South China Sea, that challenge international law and norms. 
And this behavior is set to continue, if not escalate. 
Last month’s 19th National Congress of the Communist Party of China effectively crowned President Xi Jinping – who has spearheaded a more muscular foreign policy, in service of his goal of establishing China as a global superpower – as the country’s emperor. 
Just as Germany’s rapid ascent prior to World War I spurred a “triple entente” among France, Russia, and the United Kingdom, China’s increasingly assertive behavior is creating strong impetus for the Asia-Pacific democracies to build a more powerful coalition. 
After all, as recent experience in the South China Sea has made clear, no single power can impose sufficient costs on China for its maritime and territorial revisionism, much less compel Chinese leaders to change course. 
This is not to say that no country has been able to challenge China. 
Just this summer, India stood up to its muscle-flexing neighbor in a ten-week border standoff. 
China has been using construction projects to change the status quo on the remote Himalayan plateau of Doklam, just as it has so often done in the South China Sea. 
India intervened, stalling China’s building activity. 
Had US President Barack Obama’s administration shown similar resolve in the South China Sea, perhaps China would not now be in possession of seven militarized artificial islands there. 
In any case, securing a broader shift in China’s foreign policy and stabilizing the Asia-Pacific region’s power dynamics will require more than one country holding the line on any one issue. 
A US that is willing to employ new tools, a more confident Japan and India, and an Australia vexed by China’s meddling in its domestic affairs must work together to constrain Chinese behavior. 
The good news is that an entente has already begun to emerge among the region’s key democracies. 
America’s relationship with India, in particular, has been undergoing what Tillerson called a “profound transformation,” as the two countries become “increasingly global partners with growing strategic convergence.” 
The US now holds more joint defense exercises with India than with any other country. 
Such cooperation puts the two countries in a strong position to fulfill Tillerson’s vision of serving “as the eastern and western beacons of the Indo-Pacific.” 
Engagement with Japan, too, has deepened. 
This year’s Malabar exercise – an annual naval exercise in the Indian Ocean involving the US, India, and Japan – was the largest and most complex since it began a quarter-century ago. 
Focused on destroying enemy submarines, it involved more than 7,000 personnel from the US alone, and featured for the first time aircraft carriers from all three navies: America’s nuclear-powered USS Nimitz, Japan’s Izumo helicopter carrier, and India’s aircraft carrier INS Vikramaditya. 
As Tillerson pointed out, this trilateral engagement among the US, India, and Japan is already bringing important benefits. 
But “there is room to invite others, including Australia, to build on the shared objectives and initiatives.” 
So far, Australia has sought to avoid having to choose between its security ally, the US, and its main economic partner, China. 
Despite Defense Minister Marise Payne’s recent declaration that “Australia is very interested in a quadrilateral engagement with India, Japan, and the United States,” the government seems to be hedging its bets. 
For example, while it sought this year to rejoin the Malabar exercise – from which it withdrew a decade ago to appease China – it sought to do so only as an “observer.” 
This approach is untenable. 
If Australia is to free itself of Chinese meddling, it will need to go beyond implementing new domestic safeguards to take a more active role in defending rules and norms beyond its borders, both on land and at sea. 
In the coming years, the Indo-Pacific power balance will be determined, first and foremost, by events in the Indian Ocean and East Asia. 
Containing China will therefore require, first, efforts to restrict the country’s maritime activities – such as measures to safeguard vital sea lines and build maritime domain awareness – and, second, geo-economic initiatives to counter China’s coercive leverage over smaller countries. 
All of Asia’s democratic powers must be on board. 
Calls by the US for closer cooperation bode well for this process, though the US still needs to focus more on the globally ascendant and aggressive China than on a declining Russia. 
The overwhelming victory of Japanese Prime Minister Shinzo Abe – who has touted the idea of establishing a “democratic security diamond” in the Asia-Pacific – in his country’s recent general election is also likely to help to drive cooperation forward. 
To be sure, any entente among Asian democracies is unlikely to take the shape of a formal alliance. 
Rather, the objective should be for democratic powers to reach a broad strategic understanding, based on shared values. 
It is those values, after all, that set them apart: as Tillerson recognized, while Trump’s upcoming visit to Beijing will undoubtedly draw much global attention, the US cannot have the kind of relationship with non-democratic China that it can have with a major democracy. 
By pursuing cooperation, the Indo-Pacific’s democratic powers can shore up an inclusive, rules-based order that underpins peace, prosperity, stability, and freedom of navigation in the region. 
That is the only way to thwart China’s effort to establish itself as the hegemon of an illiberal regional order. 

Maintaining Growth in a Fast-Aging Asia 
SINGAPORE – Asia has been the world champion of economic growth for decades, and this year will be no exception. 
According to the latest International Monetary Fund Regional Economic Outlook (REO), the Asia-Pacific region’s GDP is projected to increase by 5.5% in 2017 and 5.4% in 2018. 
Despite escalating geopolitical tensions, most countries in the region have maintained their economic momentum. 
They have benefited from policies supporting strong domestic demand in China and Japan, and from favorable global conditions. 
Growth is picking up across many advanced and emerging market economies, and financial markets have, for the most part, proven to be resilient. 
Nonetheless, Asia will still have to confront fundamental medium- and long-term challenges, not least the aging of its population – a problem that is well known to most policymakers. 
In past decades, the region reaped a demographic dividend from its young, expanding workforce and strong growth policies. 
But this dividend has already run out for “old” countries such as Japan and China. 
With fertility rates declining and people living longer, the workforce is shrinking and getting older at the same time. 
To be sure, not all Asian countries are aging at the same rate. 
In China, Japan, Korea, and Thailand, these demographic trends could subtract anywhere from 0.5 to a full percentage point from annual growth over the next three decades. 
But in “young” countries such as India, Indonesia, and the Philippines, the working-age population will actually increase, adding from 1-1.5 percentage points to average annual growth over the same period. 
And yet, even these young countries will not be spared from the effects of an aging population. 
In this year’s Asia-Pacific REO, we point out a little known fact: almost all of Asia is at risk of growing old before ever becoming rich. 
Why is this occurring? 
For starters, although Asia is not the most aged region in the world today, it is aging remarkably fast. 
One indicator of this is the old-age dependency ratio: the share of the population that is 65 and older. 
In Europe, it took 26 years, on average, for this ratio to increase from 15% to 20%; in the United States, it took more than 50 years. 
Among Asian countries, only Australia and New Zealand aged at similar speeds. 
In most other countries in the region, this transition took – or will take – less than 15 years. 
So, being the world growth champion simply isn’t enough. 
To see why, consider each country’s per capita income (in terms of purchasing power parity) when its old-age dependency ratio, benchmarked against the US experience, peaked or will peak. 
As the chart above shows, with the exception of already-rich Asian economies such as Australia, Hong Kong, Japan, and Singapore, per capita income in Asian economies falls, or will fall, far short of other advanced economies at similar stages of the aging cycle. 
For example, when China reached its old-age-population peak in 2011, its per capita income was still only at 20% of the US level; and when Vietnam reached it in 2014, that figure was just 10%. 
And despite its young population and strong growth, India’s per capita income will only have reached 45% of the US level when its old-age population peaks in or around 2040; and that assumes, optimistically, that India will maintain very strong growth over the next few decades. 
This demographic trend has far-reaching implications for the region. 
Asian countries will have significantly less time than advanced economies have had to prepare for the transition to an aged society. 
Worse, they will have to manage the high fiscal costs of aging while they are still relatively poor, which will create new social pressures, which are already apparent in the “old” Asian countries. 
Moreover, slowing productivity growth could compound Asia’s demographic problem. 
Since the 2008 financial crisis, productivity growth has decelerated in Asia’s advanced economies and, to a lesser extent, in its emerging economies, too. 
Thus, the region’s push to catch up with countries at the global technology frontier has stalled over the past decade. 
To boost productivity in the future, Asian governments will have to implement well-targeted structural reforms today. 
Considering Asia’s rapidly aging population, it is crucial that such reforms include policies to protect the elderly, enhance social safety nets, and drive long-term growth. 
Governments will also need to make it easier for women and older workers to participate in the labor force, by expanding child-care facilities and creating incentives for firms to relax their retirement-age requirements. 
As Australia, Hong Kong, New Zealand, and Singapore have shown, immigration can soften the blow from rapid aging. 
And by strengthening pension systems, including through minimum guaranteed benefits, governments can provide a safety net for the vulnerable elderly and reduce incentives for precautionary savings. 
These policies should be supplemented by productivity-enhancing reforms. 
Different countries will have different priorities, but all will need to make larger investments in education and life-long training, while pressing ahead with labor- and product-market reforms. 
Finally, advanced Asian economies should focus on improving innovation, by allocating research and development spending more effectively, and by raising productivity in the services sector. 
Emerging and developing countries, for their part, will need to attract more foreign direct investment, boost domestic investment, and expand their capacity to adopt new technologies. 

Asia’s Age of Thaksin? 
The retirements from frontline politics of Singapore’s Lee Kuan Yew and Malaysia’s Mahathir Mohamed have deprived Southeast Asia of its senior leaders. 
Can Thailand’s Prime Minister Thaksin Shinawatra fill the regional leadership vacuum? 
A series of bold foreign-policy strokes – the Asia Cooperation Dialogue, the Economic Cooperation Strategy for the development of mainland Southeast Asia, and America’s designation of Thailand as a “major non-NATO ally” – turned the international spotlight on Thaksin during his first term. 
Violence in Thailand’s predominantly Muslim south seemed to dent his ambitions last year, but his Thai Rak Thai (TRT) party’s landslide victory last February gave his bid for regional leadership a new lease on life. 
With the TRT capturing over 75% of the seats in the lower house of parliament, Thaksin is now politically invincible at home. 
Indeed, he has become the first elected Thai leader to finish a four-year term, be re-elected, and preside over a one-party government. 
Thaksin’s dominance of Thai politics is unprecedented, and his resilient popularity in the face of a fickle electorate is unparalleled. 
Apart from his complete control of domestic politics, Thaksin commands other prerequisites of regional leadership. 
Already eyeing a third term, he can count on political longevity on the order of Mahathir’s 22-year rule. 
Notwithstanding the one-party system that the TRT is cultivating, Thaksin is armed with democratic legitimacy in a global arena bent on democracy promotion, and he speaks English decently enough to articulate his views and vision to a global audience. 
He even has his own development strategy, dubbed “Thaksinomics,” a self-styled approach that blends neo-liberal export-led growth with grassroots-based domestic demand. 
The Thai economy emerged out of its post-1997 crisis doldrums under Thaksin’s watch, and is now firmly positioned on a 6% annual growth trajectory. 
While it relies on profligate subsidies and cash handouts, Thaksinomics also banks on structural reforms to propel economic growth. 
The strategy’s most promising prospects include the promotion of industrial upgrading, niche industries, and competitiveness-boosting cluster projects that aim to make Thailand a global and regional hub for food, fashion, tourism, automobiles, and healthcare. 
A vibrant economy – GDP growth is second only to China’s in Asia – is indispensable for regional leadership. 
Of the policies that will determine his future role in the region, the Asia Cooperation Dialogue and Economic Cooperation Strategy stand out. 
Based on the concept of “Asia for Asians,” the nascent ACD’s membership straddles the Asian landmass from the Korean Peninsula to the Middle East, with Thailand at the geographic center. 
Although its future directions are uncertain, this 26-member forum trumps Asia-Pacific Economic Cooperation, the Association of Southeast Asian Nations (ASEAN), and ASEAN Plus Three, which includes China, Japan, and South Korea. 
The region-wide crisis in 1997, weak progress on free trade, and the region’s security vulnerabilities have made Thaksin aware of ASEAN’s limitations. 
As Indonesia’s size makes it a natural leader of ASEAN, the ACD lends Thaksin a broader platform that stresses Thailand’s geographical advantages. 
It allows him to trumpet Thailand’s strategic objectives and the region’s major issues, sometimes in confrontation with the interests and the demands of the West. 
Within the ACD framework, Thaksin launched the $1 billion “Asia Bond” last year in an effort to match Asia’s financial capital with its financing requirements. 
In a smaller sphere of operations, the ECS envisages economic development in Cambodia, Laos, Myanmar, and Vietnam. 
Under Thaksin, Thailand graduated from aid recipient and became a donor country for the first time, having turned away development assistance from countries like Japan. 
A Thai fund of 10 billion baht was established to provide outright aid and soft loans to the ECS members. 
Like the ACD, the ECS shifts Thai foreign policy priorities to the Southeast Asian mainland, highlighting Thailand’s role and Thaksin’s canny leadership. 
Two major obstacles stand in Thaksin’s way. 
The raging violence in southern Thailand over the past 15 months has made him look bad, as his myriad strategies and tactics have failed repeatedly. 
Nor have his bluster and ill temper improved matters. 
Thaksin initially dismissed the violent attacks as the work of bandits. 
Only late last year did he admit that southern Muslim separatism was the cause. 
Signs of a symbiotic relationship between local separatists and regional terrorists have emerged. 
If the attacks widen beyond the three southernmost provinces of Yala, Pattani, and Narathiwat, Thaksin’s regional leadership chances will be dimmed. 
Thaksin knows this. 
Since his sweeping re-election, he has been surprisingly modest and magnanimous. 
He has appointed Anand Panyarachun, a former Thai prime minister who recently headed a United Nations reform panel, to select and direct a blue-ribbon national commission to seek reconciliation with the southern separatists. 
In addition, Thaksin will have to do something about Myanmar if the international community is to accept his wider role. 
To many, Thai-Myanmar relations are too cozy. 
Critics accuse Thaksin of conflicts of interest, as his family-owned telecommunications conglomerate holds sizeable investments in Myanmar. 
It is now largely up to Thaksin himself. 
If he is enlightened enough to make amends with disaffected southerners and move beyond his vested interests in Myanmar, he retains a good shot at becoming Asia’s next spokesman. 

Asia’s Changing Power Dynamics 
NEW DELHI – At a time when Asia is in transition, with the specter of a power imbalance looming large, it has become imperative to invest in institutionalized cooperation to reinforce the region’s strategic stability. 
After all, not only is Asia becoming the pivot of global geopolitical change, but Asian challenges are also playing into international strategic challenges. 
Asia’s changing power dynamics are reflected in China’s increasingly assertive foreign policy, the new Japanese government’s demand for an “equal” relationship with the United States, and the sharpening Sino-Indian rivalry, which has led to renewed Himalayan border tensions. 
All of this is highlighting America’s own challenges, which are being exacerbated by its eroding global economic preeminence and involvement in two overseas wars. 
Such challenges dictate greater US-China cooperation to ensure continued large capital inflows from China, as well as Chinese political support on difficult issues ranging from North Korea and Burma to Pakistan and Iran. 
But, just when America’s Sino-centric Asia policy became noticeable, Japan put the US on notice that it cannot indefinitely remain a faithful servant of American policies. 
Prime Minister Yukio Hatoyama’s government is seeking to realign foreign policy and rework a 2006 deal for the basing of US military personnel on Okinawa. 
It also announced an end to its eight-year-old Indian Ocean refueling mission in support of the US-led war in Afghanistan. 
Meanwhile, China’s resurrection of its long-dormant claim to the northeastern Indian state of Arunachal Pradesh, and its needling of India over Kashmir (one-fifth of which is under Chinese control), is testing the new US-India global strategic partnership. 
The US has chartered a course of tacit neutrality on the Arunachal Pradesh issue — to the delight of China, which aims to leave an international question mark hanging over the legitimacy of India’s control of the Himalayan territory, which is almost three times as large as Taiwan. 
Indeed, the Obama administration has signaled its intent to abandon elements in its ties with India that could rile China, including a joint military exercise in Arunachal and any further joint naval maneuvers involving Japan or other parties, like Australia. 
Yet, the recent Australia-India security agreement, signed during Prime Minister Kevin Rudd’s visit to New Delhi, symbolizes the role of common political values in helping to forge an expanding strategic constellation of Asian-Pacific countries. 
The Indo-Australian agreement received little attention, but such is its significance that it mirrors key elements of Australia’s security accord with Japan – and that between India and Japan. 
All three of these accords, plus the 2005 US-India defense framework agreement, recognize a common commitment to democracy, freedom, human rights, and the rule of law, and obligate their signatories to work together to build security in Asia. 
An Asian geopolitical divide centered on political values would, of course, carry significant implications. 
And, while Asia – with the world’s fastest-growing markets, fastest-rising military expenditures, and most-volatile hot spots – holds the key to the future global order, its major powers remain at loggerheads. 
Central to Asia’s future is the strategic triangle made up of China, India, and Japan. 
Not since Japan rose to world-power status during the Meiji emperor’s reign in the second half of the nineteenth century has another non-Western power emerged with such potential to alter the world order as China today. 
Indeed, as the US intelligence community’s 2009 assessment predicted, China stands to affect global geopolitics more profoundly than any other country. 
China’s ascent, however, is dividing Asia, and its future trajectory will depend on how its neighbors and other players, like the US, manage its rapidly accumulating power. 
At present, China’s rising power helps validate American forward military deployments in East Asia. 
The China factor also is coming handy in America’s efforts to win new allies in Asia. 
But, as the US-China relationship deepens in the coming years, the strains in some of America’s existing partnerships could become pronounced. 
For example, building a stronger cooperative relationship with China is now taking precedence in US policy over the sale of advanced weaponry to Asian allies, lest the transfer of offensive arms provoke Chinese retaliation in another area. 
While the European community was built among democracies, the political systems in Asia are so varied – and some so opaque – that building inter-state trust is not easy. 
In Europe, the bloody wars of the past century have made armed conflict unthinkable today. 
But in Asia, the wars since 1950 failed to resolve disputes. 
And, while Europe has built institutions to underpin peace, Asia has yet to begin such a process in earnest. 
Never before have China, Japan, and India all been strong at the same time. 
Today, they need to find ways to reconcile their interests in Asia so that they can coexist peacefully and prosper. 
But there can be no denying that these three leading Asian powers and the US have different playbooks: America wants a uni-polar world but a multi-polar Asia; 
China seeks a multi-polar world but a uni-polar Asia; and Japan and India desire a multi-polar Asia and a multi-polar world. 

Dynastic Asia 
SINGAPORE – To the extent that culture matters in politics, the recent spate of leadership changes in Northeast Asia suggests that Asian societies are more tolerant – if not supportive – of dynastic succession. 
South Korea’s recently elected president, Park Geun-hye, is the daughter of Park Chung Hee, who ruled the country from 1961 to 1979. 
China’s incoming president, Xi Jinping, is the son of Xi Zhongxun, a former vice premier. 
Japan’s new prime minister, Shinzo Abe, is the grandson and grandnephew of two former Japanese prime ministers, and the son of a former foreign minister. 
Kim Jong-un is the son and grandson of his two predecessors in North Korea. 
This pattern is not confined to Northeast Asia. 
President Benigno Aquino III of the Philippines is the son of former President Corazon Aquino. 
Prime Ministers Najib Abdul Razak and Lee Hsien Loong of Malaysia and Singapore, respectively, are also sons of former prime ministers. 
In India, Rahul Gandhi is waiting in the wings, preparing to step into the shoes of his great-grandfather (Jawaharlal Nehru), grandmother (Indira Gandhi), and father (Rajiv Gandhi). 
In Pakistan, Bilawal Bhutto Zardari – son of President Asif Ali Zardari and the assassinated former prime minister, Benazir Bhutto, and grandson of former Prime Minister Zulfikar Ali Bhutto – recently made his political debut. 
Is dynastic succession becoming the norm throughout Asia? 
There is no denying that a distinguished lineage gives political candidates an advantage over rivals. 
But it is also clear that having distinguished relatives is no guarantee of success. 
Consider the checkered record of former Philippine President Gloria Macapagal-Arroyo. 
Her father was a respected president; yet she could well be remembered as one of the country’s most corrupt. 
The key issue is leaders’ attitude when they assume office. 
If they do so with a sense of entitlement from their lineage, they are likely to fail, as Arroyo did. 
Fortunately for East Asia, most seem to approach power with a keen sense of duty and a commitment to strengthening their countries. 
The term “princeling” is probably an unfair description of China’s Xi. 
After all, he hardly can be said to have led a charmed life. 
After his father was purged by Mao Zedong, he went to work in the countryside, even before the 1966-1976 Cultural Revolution, experiencing firsthand all of the hardships that many of his generation endured. 
Having risen to the top, he feels no sense of entitlement. 
From all accounts, he feels an even greater sense of responsibility to prove that he gained his position on the basis of merit, not privilege. 
Xi must also be aware that the children of the People’s Republic’s second generation of leaders face considerable public resentment, owing to their rapid accumulation of wealth. 
That explains his focus on combating corruption. 
If he fails to do so, he will be deemed a failure, and the Chinese Communist Party’s political monopoly may end sooner than anyone anticipates. 
Xi carries a huge burden on his shoulders. 
So does Park Geun-hye. 
Like Xi, she had to struggle to reach the top. 
Her father lifted South Korea out of poverty and turned it into an economic tiger. 
But his rule was also brutally repressive. 
To make matters worse for Park, many of her predecessors are perceived as failures. 
Two former presidents, Roh Tae-woo and Chun Doo-hwan, were prosecuted; another, Roh Moo-hyun, committed suicide. 
There are also unkind rumors swirling around outgoing President Lee Myung-bak. 
South Korea is clearly a successful country that is struggling to define itself. 
In theory, it should be celebrating its economic and cultural achievements. 
In practice, as a small country in a troubled neighborhood – and with North Korea a constant source of tension – it lives in existential anxiety. 
And Park, whose victory has not diminished her people’s ambivalent attitude toward her father, must know that healing the obvious divisions in South Korean society will not be easy. 
The most difficult job is the one that awaits Rahul Gandhi. 
No single party can dominate Indian politics as the Congress Party has done since independence, implying a future of difficult and quarrelsome coalitions. 
In these circumstances, India needs, above all, decisive leadership. 
Yet, like Hamlet, Rahul seems uncertain. 
He could have taken the job several years ago, if he had chosen to do so. 
His hesitation must reflect a deep anxiety. 
Yet his reluctance is understandable. 
Again, dynastic succession does not ensure success. 
Malaysia’s Razak, for example, has made an enormous effort to reunify his country with his “1Malaysia” message. 
Yet all the indications are that he will face an extremely hard-fought election in 2013. 
Though unlikely, his Barisan Nasional coalition could fall apart. 
No such prospect faced his predecessors. 
In Japan, Abe is universally regarded to have performed badly in his first stint as Prime Minister in 2006-2007, despite his distinguished lineage. 
Now he takes over an even more troubled country with huge domestic and external challenges. 
Few are betting on his succeeding. 
In short, Asia’s pattern of dynastic leadership does not render it immune from the challenges that the rest of the world faces. 
As Asia creates the world’s largest middle class – projected to grow more than three-fold, from 500 million to 1.75 billion, by 2020 – it will also have to cope with demands for more competent and more accountable governments. 
In Asia today, uneasy lies the head that wears the crown. 

Asia’s Dueling Duopoly 
TOKYO – In today’s Asia, there are two economic powers of global standing, Japan and China. 
But the balance of economic power between the two is changing, and fast. 
Sometime this year, China’s GDP will exceed that of Japan (if it has not already done so). 
China’s economic footprint, moreover, is spreading rapidly across Asia and the rest of the world. 
Most Asian countries are recovering strongly from the global recession that set in following the collapse of Lehman Brothers in 2008. 
China’s growth rate last year was 8.7%, and more than 10% in the past two quarters. 
Neighboring countries, like South Korea and Singapore, also are recording very high rates of growth. 
The only exception is Japan, where a lack of political leadership and a limited knowledge of basic economics among government ministers undermines mid-term growth prospects. 
While China’s ability to maintain high growth through the “Lehman Shock” was a remarkable feat of economic management, three important changes in China hold geo-political implications for the region and the world. 
The first change concerns China’s pattern of economic growth, which so far has been achieved mostly by rapidly increasing factor inputs – labor, capital, and energy. 
According to recent research, however, about one-third of growth in China now comes from technological progress, or an increase in total factor productivity. 
In other words, China’s growth pattern is coming to resemble that of industrialized economies. 
Second, the renminbi is expected to appreciate substantially in the coming years, owing not only to pressure over China’s huge trade surplus, but also to the Chinese government’s understanding that a stronger renminbi, despite its negative impact on exporters, is needed to fight inflation. 
The question is how rapidly will China’s authorities allow the renminbi to appreciate. 
In 1989, before the Tiananmen Square incident, the renminbi’s exchange rate was 45% higher than it is now – a level that could be re-attained relatively soon. 
Between 2003 and 2005, the renminbi appreciated by 20%. 
Given rapid economic growth and continuous renminbi appreciation, Chinese GDP could exceed that of the US as soon as 2015. 
But around 2015, China will face a third dramatic change – a demographic shift reflecting the effects of its long-standing one-child policy. 
China’s total fertility rate is estimated at around 1.5, implying that the working-age population will begin to decline by the mid-2010’s. 
As a result, economic growth will slow, and China’s domestic problems – such as income inequality – will worsen, even as political institutions that can channel popular grievances remain underdeveloped. 
Under such circumstances, the role of political leadership will become much more important. 
President Hu Jintao will step down in 2013, but will continue to hold his post on the all-important Central Military Commission until a complete succession is completed, also around 2015. 
So, all things considered, China’s looming leadership transition is shaping up to be a very challenging period for China and the world. 
While China’s economy is growing very rapidly, Japan is still struggling. 
Indeed, the country desperately requires strong political leadership to prevent a Greek scenario – political leadership that it is unlikely to find. 
On the contrary, the recent resignation from the premiership of Yukio Hatoyama created more uncertainty than his own government did. 
Hatoyama’s cabinet, led by his Democratic Party of Japan (DPJ), ignored macroeconomic management after taking office in September 2009. 
Instead, as the DPJ had promised its voters, the government focused on increasing spending, including huge new grants to households and farmers. 
As a result, the share of tax revenue in total spending is less than 50% for the first time in Japan’s post-war history. 
And the government debt-to-GDP ratio is around 190%, compared to 120% in Greece. 
Nevertheless, the market for Japanese Government Bonds (JGBs) has so far remained stable. 
Because JGBs are purchased mainly by domestic organizations and households, there is little risk of capital flight, despite the seriousness of the budget situation. 
In other words, the government’s negative saving is being financed by the private and household sectors’ positive saving. 
This situation, however, is changing. 
First, the volume of JGBs has soared relative to Japanese household assets. 
Japanese households hold about ¥1,100 trillion in net monetary assets, an amount that will be exceeded in about 3-5 years by the value of JGBs. 
At that point, government debt will no longer be backed up by taxpayers’ assets. 
And, reflecting the aging of Japanese society, the household savings rate itself will decline dramatically, making it difficult for the private sector to finance annual budget deficits. 
At the same time, Japan’s demographic trends will boost demand for fiscal expenditure, as pension and health-care costs rise. 
So, sooner or later, a tax hike will be necessary. 
Without comprehensive reform under strong political leadership, a tax hike alone cannot solve Japan’s problems. 
And the impact on Asia and the global economy of a fiscal crisis in Japan would make Greece’s troubles look like a walk in the park. 
Greece’s GDP share in the European Union is about 3%. 
Japan’s GDP share is about one-third of Asia and 8% of the world. 
So the future in Asia now appears to belong to China, whose economic growth supports that of neighboring countries – and whose mercantilism is prevailing in the region. 
In order to compete with China’s export-boosting public-private schemes, other Asian countries are now pursuing similar policies. 
In some cases, this will harm free trade, and governments should be careful to avoid measures that distort resource allocation. 
This matters for every country, because Asia is now an important center of global economic growth. 
The world’s expectations for responsible economic management by the governments of both China and Japan – and thus the need for it – are growing by the day. 

Asia's Dysfunctional Democracies. 
Asia has been gripped by election fever all year. 
The Philippines and Taiwan have chosen new presidents; India and Malaysia have ushered in new parliaments and prime ministers. 
September brings two more vital polls: a legislative election in Hong Kong and a presidential election in Indonesia. 
Voters there may also extend a disturbing paradox that has emerged in the region: the more "vigorous" Asian democracy becomes, the more dysfunctional it is. 
There is no shortage of examples. The attempt by opposition parties to impeach South Korea's President Roh Moo Hyun on the flimsiest of excuses; 
Taiwan President Chen Shui-bian's inability to pass legislation through a parliament controlled by the opposition Kuomintang; Philippine President Gloria Macapagal Arroyo's stalemated first term and the logjam over the fiscal reforms needed to prevent a predicted Argentine-style meltdown early in her second: each bears testimony to democratic paralysis in Asia. 
If deadlock and confusion were the only results, such political impasses might be tolerable. 
But chronic stalemate has confronted many Asian democracies with the threat of being discredited, a potential for violence, and the prospect of economic decline. 
Indeed, the precedents of democratic immobility in Asia are hardly encouraging. 
For example, since Pakistan's creation in 1947, partisan divisions have ensured that no elected government has been able to serve its full term. 
So Pakistanis have grimly accepted military rule as their destiny. 
The problem in Asia often arises from something the French call "cohabitation" - an awkward arrangement by which a directly elected president must co-exist with a parliament controlled by a rival party or parties. 
The United States and Europe's mature democracies may function well enough with the "checks and balances" of divided government (though the Republicans' bid to impeach President Clinton a few years ago might suggest otherwise), but in Asia the failure to bestow executive and legislative powers on a single institution is usually a terrible drawback. 
This seems especially true when a government tries to enact radical economic or political reforms. 
The elected president wants to act, but the assembly refuses to approve the necessary laws. 
Or vice versa. 
The pattern begins in parliamentary deadlock. 
Incompetent leaders blame legislatures for their failures; legislators blame presidents from rival parties. 
Finger pointing replaces responsibility, fueling popular demand for a strongman (or woman) who can override political divisions. 
Indira Gandhi's brief "emergency rule" in the 1970's was partly the result of such institutional dysfunction. 
Divided government also plays into the hands of Asia's separatists. 
At a critical moment for Sri Lanka's peace process, President Kumaratunga was so incensed by the policies of her political rival, Prime Minister Wickremessinghe, that she sacked three of his ministers and called elections almost four years early. 
The only people who seem to have benefited from this democratic division are the murderous Tamil Tigers. 
Similarly, in Nepal, a Maoist insurgency has taken advantage of divisions between the King and parliament to gain control of much of the countryside. 
True, Asian democracies, however unstable, are preferable to autocracies, whether military, as in Pakistan and Burma, or communist, as in China and Vietnam. 
But the danger in a weakened democracy is not merely blocked legislation and ineffective government. 
Ambitious but thwarted presidents are easily tempted to take unconstitutional measures; after all, they reason, the people elected them directly. 
The same is true of some prime ministers, like Thailand's authoritarian Thaksin Shinawatra, who now stands accused of weakening his country's democratic traditions in favor of personal rule. 
Given these precedents and the widespread instability exposed by this year's elections, perhaps Asian policymakers should consider the merits of doing away with "cohabitation" and adopting systems where electoral victory translates into real power. 
Of course, parliamentary political systems are far from perfect. 
Neither Singapore nor Malaysia, where ruling parties have long dominated the parliaments, has a political culture as healthy as in Taiwan or South Korea. 
But in parliamentary democracies such as Japan and India, an elected leader runs the country until the day his or her party or coalition loses its legislative majority. 
This means that governments are judged not by their ability to outmaneuver legislatures, but by the quality of their policies. 
This seems to be a more efficient - and politically more stable - form of democracy than the unhappy cohabitation that produces such ugly confrontations in Taiwan, South Korea, and the Philippines. 
By contrast, the threats posed by divided government could be greater than mere parliamentary rumbles. 
Cohabitation could very soon become a problem even in the quasi-democracy of Hong Kong, if voters there on September 12 elect a legislature hostile to Tung Chee-hwa, the territory's Beijing-anointed chief executive, later this month. 
Indonesia also risks deadlock if, as seems likely, the election on September 20 produces a president from a different party than the one that controls parliament. 
Abraham Lincoln was right: a house divided against itself cannot stand. 
In many Asian democracies, only institutional reconstruction will prevent a collapse. 

Asia’s Dysfunctional Democracies 
The abrupt resignation of Thailand’s Prime Minister Thaksin Shinawatra is but another sign of a disturbing paradox: the more “vigorous” Asian democracy becomes, the more dysfunctional it is. 
There is no shortage of examples. The attempt by opposition parties last year to impeach South Korea’s President Roh Moo Hyun on the flimsiest of excuses; 
Taiwan President Chen Shui-bian’s inability to pass legislation through a parliament controlled by the opposition Kuomintang; Philippine President Gloria Macapagal Arroyo’s stalemated first term and the repeated rumors of looming coup attempts against her: each bears testimony to a form of democratic paralysis in Asia. 
If deadlock and confusion were the only results, such political impasses might be tolerable. 
But chronic stalemate has confronted many Asian democracies with the threat of being discredited, a potential for violence, and the prospect of economic decline. 
Indeed, the precedents of democratic immobility in Asia are hardly encouraging. 
For example, since Pakistan’s creation in 1947, partisan divisions ensured that no elected government has been able to serve its full term. 
So Pakistanis grimly learned to accept military rule as their destiny. 
The problem in Asia often arises from something the French call “cohabitation” – an awkward arrangement by which a directly elected president must co-exist with a parliament controlled by a rival party or parties. 
The United States and Europe’s mature democracies may function well enough with the “checks and balances” of divided government (though the Republicans’ bid to impeach President Clinton eight years ago might suggest otherwise), but in Asia the failure to bestow executive and legislative powers on a single institution is usually a terrible drawback. 
This seems especially true when a government tries to enact radical economic or political reforms. 
The elected president wants to act, but the assembly refuses to approve the necessary laws. 
Or vice versa. 
The pattern begins in parliamentary deadlock. 
Incompetent leaders blame legislatures for their failures; legislators blame presidents from rival parties. 
Finger pointing replaces responsibility, fueling popular demand for a strongman (or woman) who can override political divisions. 
Indira Gandhi’s brief “emergency rule” in the 1970’s was partly the result of such institutional dysfunction. 
Divided government also plays into the hands of Asia’s separatists. 
At a critical moment for Sri Lanka’s peace process, President Kumaratunga was so incensed by the policies of her political rival, Prime Minister Wickremessinghe, that she sacked three of his ministers and called elections almost four years early. 
The only people who seem to have benefited from this democratic division are the murderous Tamil Tigers. 
Similarly, in Nepal, a Maoist insurgency has taken advantage of divisions between the King and parliament to gain control of much of the countryside. 
True, Asian democracies, however unstable, are preferable to autocracies, whether military, as in Pakistan and Burma, or communist, as in China and Vietnam. 
But the danger in a weakened democracy is not merely blocked legislation and ineffective government. 
Ambitious but thwarted presidents are easily tempted to take unconstitutional measures; after all, they reason, the people elected them directly. 
The same is true of some prime ministers. 
Indeed, one of the causes of the protests that led to the resignation of Thailand’s Thaksin was the accusation that he was weakening his country’s democratic traditions in favor of personal rule. 
Given these precedents, perhaps Asian policymakers should consider the merits of doing away with “cohabitation” and adopting systems where electoral victory translates into real power. 
Of course, parliamentary political systems are far from perfect. 
Neither Singapore nor Malaysia, where ruling parties have long dominated the parliaments, has a political culture as healthy as in Taiwan or South Korea. 
But in parliamentary democracies such as Japan and India, an elected leader runs the country until the day his or her party or coalition loses its legislative majority. 
This means that governments are judged not by their ability to outmaneuver legislatures, but by the quality of their policies. 
This seems to be a more efficient – and politically more stable – form of democracy than the unhappy cohabitation that produces such ugly confrontations of the type seen across the region. 
For Abraham Lincoln was right: a house divided against itself cannot stand. 
In many Asian democracies, only institutional reconstruction will prevent collapse. 

Asia’s Fragile Special Relationship 
NEW DELHI – “Tzu-Ch’in asked Tzu-Kung a few questions; 
Tzu-Kung answered: …Our Master gets things (done) by being cordial, frank, courteous, temperate, deferential. 
That is our…way.” 
But will Chinese Premier Wen Jiabao live up to that standard, as conveyed in the Analects of Confucius, on his current visit to India? 
The world has a variety of “special relationships.” 
The United States’ partnership with the United Kingdom is one forged in war – and a pillar of the West for more than a half-century. 
The US-Soviet rivalry of the Cold War era was special in that relations between those two countries shaped the fate of the world until the USSR imploded. 
The US and China are said to be forging a new special relationship. 
But, in looking toward the future of Asia – and, indeed, the future of world diplomacy – it is the relationship between the world’s two most populous countries and largest emerging economies, India and China, which will increasingly set the global agenda. 
Japan’s change of military doctrine for the first time since the start of the Cold War – a shift that implicitly makes China the greatest threat – suggests that the Chinese leadership needs to take a hard look at its regional grand strategy. 
Wen’s priorities for his trip to India are clear: trade, security, and, far behind, the territorial disputes between the two countries. 
Such an approach might make tactical diplomatic sense, as long as there is no background clatter. 
But it lacks a sense of strategic urgency, which, given rising international tensions across Asia, amounts to a serious strategic blunder. 
The sources of those tensions are clear: North Korea’s shelling of South Korea’s Yeonpyeong Island and its flaunting of a modern, previously unknown, nuclear plant; the US-led armada now cruising through the South China and Yellow Sea; and China’s claim that the South China Sea is an area of vital national interest akin to Tibet. 
In its bilateral relations with India, China’s shift in focus from its claims on the Northeastern Indian state of Arunachal Pradesh to Jammu and Kashmir is enormously worrisome. 
Indeed, around Gilgit in Kashmir, China’s People’s Liberation Army has greatly enhanced its troop presence. 
Small wonder that, on the eve of Wen’s visit, China’s ambassador in New Delhi finds relations between the two countries to be “very fragile, easily damaged, and difficult to repair.” 
But, despite all this diplomatic friction, Wen’s entourage for his visit is dominated by a large business delegation. 
Currently, both countries’ economies are thrusting confidently forward; both are thirsty for more and bigger markets. 
India is growing at an annual rate of around 9%; 
China at around 10%. 
So the opportunities for trade between the two are certainly enormous. 
But, for both countries, economic growth is not hurdle-free. 
India’s economy is continuing to grow, but faces rising inflation, fiscal and current-account deficits, a slowdown in agricultural growth, and infrastructure bottlenecks. 
China’s problems arise mainly from widening income disparities, which are inciting hitherto unheard of levels of labor unrest – though this should not be viewed as a precursor to change of the sort that marked the rise of the Solidarity trade union and the end of communism in Poland. 
But labor unrest and the desire to maintain 10% growth suggest that China should be taking the lead in ensuring peace on the Korean peninsula and preventing other political developments from derailing its economy. 
After all, as the Chinese leadership knows, only continued strong growth will provide the government with the wriggle room it needs to begin to revalue the renminbi. 
Revaluation of its currency is necessary in part because the undervalued renminbi has become yet another a source of friction in Asia, as many in the region now believe the Chinese are using their currency as a “policy weapon.” 
To untangle the complex policy web surrounding the renminbi’s value will demand greater regional stability, not less. 
Yet China’s international grand strategy does not appear to reflect this. 
Instead, it remains focused on Northeast Asia, Tibet, Taiwan, and on its aspirations to move into the Indian Ocean, that great global highway of trade in the twenty-first century. 
China’s leaders recognize that their country needs time, space, and peace for economic development. 
Yet their pursuit of a dominant position on the strategic chokepoints in the Indian Ocean undermines these goals by raising tensions not only with India, but with Asia’s other powers and the US. 
Their focus on inhibiting India seems particularly misguided, given that China’s core interests (Tibet, Taiwan, and the heartland of the Chinese mainland) are far beyond the reach of most of India’s military capabilities. 
By contrast, India’s most important national security concerns – the unsettled border between the two countries, and Beijing’s ties with Pakistan, which often operates as a Chinese surrogate – are closely connected to China: Both factors are directly linked to China’s perceived threat to India’s Himalayan territory and its rapid development of strategic infrastructure in that region. 
India’s concerns also focus on China’s ongoing supply of arms, including missiles and nuclear weapons technology, to Pakistan. 
No amount of discussion over trade can obscure the true issues of vital concern between China and India. 
China may take comfort in remaining focused on non-core issues, because such an approach suggests tactical cooperation with India. 
That is a convenient international ploy, but it leaves the sources of bilateral discord unattended. 
The idea of collaboration only in areas of interest to China while neglecting issues of substance to India is untenable, even in the short term. 
Indeed, neglect of the core disputes is what has resulted in the relationship’s “extreme fragility.” 
India cannot and will not abandon its territorial sovereignty, or its pursuit of secure land borders or a greater balance in trade. 
These are challenges that cry out for clarity, not diplomatic fudges. 
But surely two great and ancient civilizations can find their way to the type of “cordial, frank, courteous, temperate, deferential…” relations that would have pleased Confucius. 


Asia’s Hour? 
NEW YORK – As Asia emerges from the global economic crisis faster than the rest of the world, it is increasingly clear that the world’s center of gravity is shifting from the Atlantic to the Pacific. 
It is equally clear that Asian states are not yet ready to assume the more meaningful leadership in global affairs that will be necessary to ensure that this tectonic shift can make the world more stable and secure than it has been. 
Asian states have a tremendous opportunity to rise to this challenge. 
The signs of Asia’s rise are unmistakable. 
Over the past five years, China’s contribution to world GDP growth has steadily increased from one-fifth to one-third, and India’s from approximately 6% to 16%. 
Given their growing footprints on global economics, politics, and the environment, it is now impossible to imagine any major international agreement without China, Japan, and India on board. 
China, in particular, has emerged as the key counterpart to the United States in almost all major global forums, as well as international platforms for discussing critical transnational issues, from the Six-Party Talks with North Korea and the G-20 to talks about climate change. 
Some even call for establishing a US-China G-2. 
Asia’s new clout holds tremendous promise. 
If Asian domestic consumption increases, for example, global economic growth will depend far less on over-consumption by debt-laden Americans. 
This would help all economies. 
If Asian countries other than Japan commit to binding caps on greenhouse gas emissions, a global deal on climate change will be possible at this December’s Copenhagen Summit, even if developing Asia’s caps are implemented more gradually than those for the developed world. 
Moreover, if China, India, and the ASEAN states take the lead in promoting a just resolution for the people of Burma/Myanmar, or if China proves more willing to press North Korea on nuclear weapons, these states will demonstrate that a world with multiple leading stakeholders can be safer than a world led by a single superpower. 
Critics of America’s record as a global hegemony make a strong case against a uni-polar world. 
America’s interventions in Vietnam and Iraq, its opposition to the Kyoto Protocol and insatiable consumption of natural resources, its role in creating the current financial crisis, the abuses at Abu Ghraib, and much else highlight America’s flawed record. 
Yet America’s legacy of global leadership over the past six decades, warts and all, is unprecedented in its relative benevolence and positive impact. 
America played the lead in creating the United Nations, the International Monetary Fund and World Bank, and international humanitarian and human rights law. 
It resuscitated its World War II enemies and fostered economic development in countries around the world, and established a security umbrella that helped Europe and Asia focus more on diplomacy and economic growth than on military competition. 
It opened its markets and laid the foundations for globalization and the information revolution, kept sea-lanes open for international trade, and catalyzed the Green Revolution… The list goes on. 
But weakened by the financial crisis, deeply indebted to foreign countries, bogged down in Iraq, facing major challenges in Afghanistan and Pakistan, and feeling psychologically humbled, the US may no longer be in the same unrivalled position to lead the international community, even under the inspiring leadership of Barack Obama. 
Despite the growing promise of a multi-polar world with Asian powers playing a greater role in addressing global challenges and sharing leadership with a weary US, that world does not yet exist. 
America may be recognizing its limits, but no new system has emerged to take up the slack. 
If Asian states are to play this role, they must do far more to address their own regional challenges and to promote a positive, universal set of norms. 
Asian states could do far more, for example, to address the dangerous nationalism that persists in Asia. 
Unlike Europe, which largely put its historical ghosts to bed after 1945, Asian countries remain mired in nineteenth-century-style nationalisms that weakens collaboration and makes the region more dangerous than it needs to be. 
China and Japan, Japan and Korea, India and Pakistan, Singapore and Malaysia, and many other pairings of states connect on some levels, but remain dangerously divided on others. 
Furthermore, Asian states could be far more assertive in addressing humanitarian issues in their own backyard – especially for places like Burma and North Korea – and in taking a lead in international climate change negotiations. 
The US, for example, provides 50% of UN food aid and pays 20% of the UN’s overall costs. 
China, soon to be the world’s second largest economy, pays 0.7% of food aid and a mere two percent of overall UN costs. 
Japan has shown leadership in all these areas, but few others in the region have demonstrated a similar sense of global responsibility. 
Asian states should also strengthen Asia-Pacific regional structures like APEC and the ASEAN Regional Forum in order to ensure stronger collaboration on issues of regional and global concern. 
Although states in the Asia-Pacific region have come a long way in this regard, regional structures are nowhere near as strong as Euro-Atlantic structures. 
If the twenty-first century is to be the Asia-Pacific century, they must be. 
Until such changes occur, many challenges will fall through the cracks that exist between a strained Pax Americana and a rebalancing world. 
Issues such as Burma, North Korea, Darfur, Zimbabwe, climate change, and nuclear proliferation all appear to be falling, because they are being insufficiently addressed, into this crack. 
All nations must work together to revise our models for international cooperation in a way that incorporates the global shift in economic power. 
Until this structure emerges, let us hope that America can lead wisely and that other countries, particularly Asia’s new powers, will assume more meaningful responsibilities in managing global crises. 

Asia’s Inflation Trap 
NEW HAVEN – Asia has an inflation problem. 
The sooner it comes to grips with its problem, the better. 
Unfortunately, the appropriate sense of urgency is missing. 
Willingness to tackle inflation is impeded by Asia’s heavy reliance on exports and external demand. 
Fearful of a relapse of end-market demand in a still-shaky post-crisis world, Asian policymakers have been reluctant to take an aggressive stand for price stability. 
That needs to change – before it’s too late. 
Excluding Japan, which remains mired in seemingly chronic deflation, Asian inflation rose to 5.3% in the 12 months ending in November 2010, up markedly from the 3.5% rate a year earlier. 
Trends in the region’s two giants are especially worrisome, with inflation having pierced the 5% threshold in China and running in excess of 8% in India. 
Price growth is worrisome in Indonesia (7%), Singapore (3.8%), Korea (3.5%), and Thailand (3%) as well. 
Yes, sharply rising food prices are an important factor in boosting headline inflation in Asia. 
But this is hardly a trivial development for low-income families in the developing world, where the share of foodstuffs in household budgets – 46% in India and 33% in China – is 2-3 times the ratio in developed countries. 
At the same time, there has been a notable deterioration in underlying “core” inflation, which strips out food and energy prices. 
Annual core inflation for Asia (excluding Japan) was running at a 4% rate in late 2010 – up about one percentage point from late 2009. 
A key lesson from the Great Inflation of the 1970’s is that central banks can’t afford a false sense of comfort from any dichotomy between headline and core inflation. 
Spillover effects are inevitable, and once a corrosive increase in inflationary expectations sets in, it becomes all the more painful to unwind. 
The good news for Asia is that most of the region’s monetary authorities are, in fact, tightening policy. 
The bad news is that they have been generally slow to act. 
Financial markets appear to be expecting a good deal more Asian monetary tightening – at least that’s the message that can be drawn from sharply appreciating Asian currencies, which seem to be responding to prospective moves in policy interest rates. 
Relative to the US dollar, an equal-weighted basket of 10 major Asian currencies (excluding Japan) has retraced the crisis-related distortions of 2008-2009 and has now returned to pre-crisis highs. 
Export-led economies, of course, can’t take currency appreciation lightly – it undermines competitiveness and risks eroding the country’s share of the global market. 
It also invites destabilizing hot-money capital inflows. 
Given the tenuous post-crisis climate, with uncertain demand prospects in the major markets of the developed world, Asia finds itself in a classic policy trap, dragging its feet on monetary tightening while risking the negative impact of stronger currencies. 
There is only one way out for Asia: a significant increase in real, or inflation-adjusted, policy interest rates. 
Benchmark policy rates are currently below headline inflation in India, South Korea, Hong Kong, Singapore, Thailand, and Indonesia. 
They are only slightly positive in China, Taiwan, and Malaysia. 
The lessons of earlier battles against inflation are clear on one fundamental point: inflationary pressures cannot be contained by negative, or slightly positive, real short-term interest rates. 
The only effective anti-inflation strategy entails aggressive monetary tightening that takes policy rates into the restrictive zone. 
The longer this is deferred, the more wrenching the ultimate policy adjustment – and its consequences for growth and employment – will be. 
With inflation – both headline and core – now on an accelerating path, Asian central banks can’t afford to slip further behind the curve. 
Asia has far too many important items on its strategic agenda to remain caught in a policy trap. 
This is especially true of China, whose government is focused on the pro-consumption rebalancing imperatives of its soon-to-be-enacted 12th Five-Year Plan. 
So far, the Chinese leadership has adopted a measured approach to inflation. 
Its efforts focus mainly on increasing banks’ mandatory reserve ratios while introducing administrative measures to deal with food price pressures, approving a couple of token interest-rate hikes, and managing a modest upward adjustment in the currency. 
The mix of Chinese policy tightening, however, needs to shift much more decisively toward higher interest rates. 
With the Chinese economy still growing at close to 10% per year, the government can afford to take more short-term policy risk in order to clear the way for its structural agenda. 
Indeed, China’s dilemma is emblematic of one of developing Asia’s greatest challenges: the need to tilt the growth model away from external toward internal demand. 
That can’t happen without increased wages and purchasing power for workers. 
But, in an increasingly inflationary environment, any such efforts could fuel an outbreak of the dreaded wage-price spiral – the same lethal interplay that wreaked such havoc in the United States in the 1970’s. 
Asia can avoid this problem and get on with the heavy lifting of pro-consumption rebalancing only by nipping inflation in the bud. 
Much is made of Asia’s Teflon-like resilience in an otherwise tough post-crisis climate. 
Led by China, the high-flying economies of developing Asia are increasingly viewed as the new and powerful engines of a multi-speed world. 
While the jury is out on whether there has really been such a seamless transition of global economic leadership, Asia must face up to the critical challenges that may come with this new role. 
Inflation, if not addressed now, could seriously compromise the region’s ability to meet those challenges. 

Asia’s Leadership Gap 
SINGAPORE – This week, ten foreign ministers from the Association of South East Asian Nations (ASEAN) are meeting in Hanoi. 
When their initial gathering ends, they will host their counterparts from across the region, including US Secretary of State Hillary Clinton. 
ASEAN meetings are sometimes criticized as “talking shops,” but this time dialogue and strategic leadership are needed immensely. 
Ironically, the two leaders who most emphasized the need for leadership in Asia and across the Pacific recently left office. 
Japan’s former Prime Minister, Yukio Hatoyama, and Australia’s former premier, Kevin Rudd, both championed regionalism from early in their short time in office. 
But, though they are gone, the issue of regional leadership remains. 
Indeed, it is growing more important by the day. 
The security issues facing the region, from the Korean peninsula to the outcome of the upcoming elections in Myanmar (Burma) this autumn, have grown more pressing – perhaps all the more so in view of reports that North Korea is assisting Myanmar’s ruling generals to develop nuclear capabilities. 
Moreover, the role and attitude of a rising China must be assessed on a regional basis, particularly given that the long-standing dispute over islets in the South China Sea may be entering a new phase. 
Recent Chinese statements declare the islands a “core interest,” terms usually reserved for Taiwan and Tibet. 
All of these issues test the region’s ability to manage peace and mitigate tensions between its main powers – and thus underscore the concern that Hatoyama and Rudd raised. 
Hatoyama called for an East Asian Community, emphasizing ties with China and South Korea while questioning the continuing presence of US military bases on the island of Okinawa, the issue that eventually triggered his resignation. 
Rudd, by contrast, raised the idea of an Asia/Pacific Community with strong ties to the US. 
These leaders’ departure from office reflected their countries’ internal politics, and their successors will focus more on declining support at home than on regional ambitions. 
But the questions that Hatoyama and Rudd raised – who is in Asia, and who gets to lead regional cooperation – await a satisfying answer. 
As Australian and Japanese initiatives fade, attention now turns to ASEAN, which has put in place norms for peace that all major powers affirm. 
The ASEAN Regional Forum (ARF) is a long-standing forum that brings together foreign ministers, and that is benefiting from renewed attention on the part of Clinton, who is making her second appearance – a perfect attendance record since coming into office, and a marked improvement on the record of her predecessor, Condoleezza Rice. 
But more may be needed. 
Asia’s major economies continue to grow and integrate, whereas the US economy remains soft, and its leaders’ attention is increasingly focused on its domestic challenges. 
A shift of relative strategic influence and strength is discernible, especially given the rise of India and China. 
But old and unresolved rivalries within Asia are finding new expression as political ambitions and military budgets expand. 
A new forum will soon emerge. 
Building on the ASEAN defense ministers’ meeting, a formal dialogue between the defense ministers of eight key countries – China, Japan, South Korea, India, Australia, New Zealand, Russia, and the US – will run in parallel with the ARF. 
There is also talk about establishing a new strategic dialogue among leaders. 
Asian leaders already hold such talks annually at the East Asia Summit, an important initiative that brings together India and China, with ASEAN as host. 
ASEAN is likely to host a still-wider grouping that includes Russia and the US, though the precise framework is still being debated. 
Some favor a permanent expansion of the East Asian Summit. 
Others suggest that leaders follow an ASEAN+8 formula, similar to the defense ministers’ meeting. 
An ASEAN+8 meeting of leaders could then evolve its own modalities to suit the wider geographical group, and would not need to be held each year. 
The US has shown interest in a multilateral path to engagement with Asia on strategic issues. 
But President Barack Obama’s administration has yet to decide which format it thinks best. 
There is a need for substantive engagement, so that a leaders’ meeting makes sense. 
After all, there is already APEC for economic issues, as well as the US-ASEAN Summit, inaugurated last year. 
Moreover, the ongoing economic crisis and urgent domestic matters will command much of Obama’s attention. 
Indeed, he has scheduled and then postponed visits to Indonesia three times already. 
To be sure, each time there were extenuating circumstances – a jobs summit, the final vote on the US health-care bill, and the environmental disaster in the Gulf of Mexico. 
But, taken together, these cancellations make clear that even a US administration that wants to engage more with Asia may still find itself preoccupied with domestic priorities, especially this year, as mid-term elections approach. 
Two leaders who pushed for regionalism in Asia have departed because of domestic politics. 
Those who remain obviously would be well served not to overlook exigencies at home. 
But they also must acknowledge and attend to the post-crisis challenges facing the region as a whole. 


Asia’s Next Axis 
SEOUL – Last month, the leaders of China, Japan, and South Korea agreed to begin negotiations later this year on a trilateral free-trade agreement. 
If the talks succeed, the global trade map will need to be redrawn. 
An FTA that encompasses, respectively, the world’s second, third, and 12th biggest economies (in purchasing power parity terms in 2011), with a population of 1.5 billion, would dwarf the European Union and the North American Free Trade Agreement, comprising the United States, Canada, and Mexico. 
Indeed, Northeast Asia would become the third major axis of regional economic integration, following the EU and NAFTA. 
Until now, the region has been unable to institutionalize economic cooperation as vigorously as Europe and North America have. 
But if the proposals discussed in Beijing last month are realized, the resulting FTA could surpass NAFTA in its degree of integration and importance to the world economy. 
In addition, the formation of a China-Japan-South Korea FTA would most likely trigger a chain-reaction. 
For example, the momentum could expand southward and stimulate ASEAN, which has bilateral FTAs with all three countries, to join the group. 
Such a turn of events would be equivalent to establishing the East Asia Free Trade Area, which the ASEAN+3 envisioned about a decade ago. 
If that happened, other countries – Australia, New Zealand, and, most importantly, India – might seek to jump on the bandwagon. 
The US would, of course, need to respond to the conclusion of any trilateral Northeast Asian FTA in order to preserve its own role in global trade – and in the supply chains that dominate the Asian economies. 
It would likely seek to expand and deepen the infant Trans-Pacific Partnership, the trade agreement that President Barack Obama committed the US to last year. 
In particular, the US would strongly encourage Japan to join the TPP, because the US might want a united Asia-Pacific economic community, rather than a division between Asia and the Pacific. 
Because Japan would not want to be disconnected from the US for strategic reasons, it might indeed accept America’s invitation. 
In this scenario, both Japan and South Korea would have to find some means to bridge a Sino-centric Asia and a US-centered Pacific. 
Despite its smaller economy, South Korea seems to be better prepared than Japan to play this critical role. 
South Korea has already concluded an FTA with the US, after years of difficult negotiations, and plans to negotiate a bilateral FTA with China this year. 
Thus, the key question is whether and how much Japan will be willing to take on a similar bridging role. 
Robust Japanese participation would mitigate Asia-Pacific polarization and contribute to building momentum for regional integration. 
But the magnitude of domestic challenges that Japan faces nowadays seems too great for its political leaders to play a proactive international role. 
Japan’s governments have been fragile and short-lived for close to a decade, and the current debate over raising the value-added tax could cause another change of administration. 
Moreover, Japan’s powerful agricultural interest groups, especially the Central Union of Agricultural Cooperatives, may strengthen their opposition to both a trilateral FTA with China and South Korea and the TPP with the US. 
But Japan’s leaders are being squeezed from both directions. 
If they do nothing while South Korea continues to conclude FTAs, Japan will lose markets in the US and China. 
But if they act, domestic political opposition would likely be so severe as to drive them from power. 
This is the main reason why it will be difficult for Japan to conclude the proposed trilateral FTA, despite Prime Minister Yoshihiko Noda’s recent endorsement of it. 
Indeed, only a looser FTA that would exclude each country’s sensitive economic sectors appears to be viable. 
For China, political considerations seem to be the strongest motivation for pursuing a Northeast Asian FTA. 
But using the trilateral FTA to expand its economic and political influence would require China to increase transparency, open its service sector, and remove non-tariff barriers. 
In essence, it would have to accept a rules-based system for its relations with its two neighbors, something of which China’s government has been wary. 
One advantage for China, however, in pursuing an FTA strategy is that it is still an authoritarian state, and thus could overrule domestic opposition far more easily than could governments in Japan or South Korea. 
Finally, South Korea, which has concluded FTAs with almost every important economic actor in the world – the US, the EU, ASEAN, India, and others – may be better prepared to conclude a trilateral FTA than Japan. 
But it, too, will have to face strong opposition from domestic agricultural interest groups and manufacturing sectors, which might mobilize even more strongly than they did in opposing the FTA with the US. 
If a trilateral Northeast Asian FTA can be concluded, the three countries would be able to generate more market demand domestically at a time of weak demand from the West, and would gain greater influence in the global political economy. 
A trilateral FTA would also most likely contribute to stabilizing the three countries’ troublesome political relations with each other, and could provide a better environment for North Korea’s eventual economic reconstruction. 
The myriad benefits of a Northeast Asian FTA are clear. 
The question is whether it is an ambition too far. 

Asia’s Overlooked Great Power 
Mention Asia, and most people think of the region’s fascinating, rising giants, China or India – or both. 
Or people think about North Korea’s nuclear program, some terrorist incident, or the humanitarian consequences of the latest earthquake or tsunami. 
But often overlooked – or at least underestimated – is Japan. 
This is odd, given that Japan is still the world’s second largest economy, with a GDP of $5 trillion – more than China and India combined. 
Despite Japan’s relatively modest rate of economic growth, its GDP per capita is roughly $38,000, more than ten times that of either China or India. 
Moreover, there are important stirrings in Japan that suggest change on both the economic and security fronts. 
The 1990’s may have been a lost decade, but Japan’s economy has begun to recover, now growing at more than 2% a year and boasting several firms that are truly global and hugely successful. 
Changes in foreign and defense policy are more considerable. 
Japan’s self-defense agency was upgraded in January to a full ministry. 
Japan now spends more than $40 billion a year on defense and maintains one of the world’s most diverse and modern militaries. 
Approximately 1,000 Japanese forces serve in and around Iraq. 
Intellectuals, journalists, and politicians are now saying and writing things about Japan’s role in the world that were unthinkable a decade ago. 
It is a question of when, not if, the Japanese amend Article IX of their constitution, which limits the role of Japan’s armed forces to self-defense. 
Not everyone will welcome these changes. 
Japan’s neighbors, who continue to harbor concerns stemming from World War II and Japan’s failure to deal adequately with its history, will worry about Japanese nationalism. 
Nevertheless, a more active and more capable Japan, with a robust democracy and a thriving economy, is in its neighbors’ best interests. 
The danger is not renewed Japanese militarism, but rather a Japan that is unable and unwilling to do its share to meet the regional and global challenges facing Asia. 
Japan, for its part, needs to continue to open and reform its economy, improve its military, and make its forces available for the sort of low-intensity but manpower-intensive missions, ranging from genocide prevention to nation-building to peacekeeping, that are increasingly required in the greater Middle East and Africa. 
Japanese leaders also need to act with sensitivity. 
Prime Minister Shinzo Abe is off to an uneven start. 
On one hand, he is wise not to have visited the Yasukuni shrine, which honors millions of Japan’s war dead, including 14 Class A war criminals. On the other hand, Abe’s public statements denying Japan���s coercion of “comfort women” in China and Korea have been clumsy at best, insensitive at worst. 
It is essential that Japan and China forge a modern relationship. 
The increasing frequency of high-level visits – Prime Minister Abe went to China in October, and Chinese Premier Wen Jiabao was just in Japan – is a welcome development. 
But more is needed. 
Trade and investment flows can and should be expanded, which is likely only if political relations improve. 
Both countries should commit themselves to a diplomatic resolution of competing claims to offshore resources. 
Exchanges of every kind – military, educational, touristic – should be facilitated. 
The world also needs to take into account Japan’s importance. 
Japan should no longer be denied fair treatment because of events more than 60 years ago. 
There is no reason Japan should not hold a permanent seat in the United Nations Security Council. 
Japan should also be a full participant in Asian regional arrangements. 
Asia is rich in dynamism, but relatively thin in influential political, economic, and security-related institutions, in contrast to Europe, which often lacks dynamism but is institution-heavy. 
The Franco-German relationship, central to much twentieth-century conflict, now forms the core of modern Europe. 
The goal should be the same for China and Japan. 
The agenda is virtually limitless, including trade and investment, energy and climate change, and confidence-building in the security sphere. 
A new regional institution could be based on an existing one (such as the six-party arrangement used to manage North Korea’s nuclear challenge) or start afresh. 
Moreover, just as the United States continues to play a major role in Europe, so, too, should it act as a guarantor of Asia’s stability and a source of regional prosperity. 
The US-Japan alliance is central to America’s position in Asia. 
The goal is not to enlist Japan in any anti-Chinese coalition, but rather to increase the depth and breadth of US-Japanese cooperation. 
Both countries have many reasons to pursue this goal, considering North Korea’s missile and nuclear programs, terrorism, and the numerous challenges to stability around the world. 
Abe’s visit to Washington in late April is an opportunity to continue to modernize a relationship conceived in an earlier geopolitical era. 
It is to be hoped that it will not be overshadowed by calls in Congress for Japan to apologize more formally than it already has for the comfort women. 
Rather, the focus should be on the future and on welcoming the emergence of a Japan that is increasingly able and willing to act as a partner of the US in addressing regional and global challenges. 

Asia’s Post-Tsunami Future 
There can be no underestimating the scale of the human devastation wrought by Asia’s horrific tsunamis. 
Family members have been lost, homes destroyed, and livelihoods ruined. 
As is often the case in natural disasters, the poor are suffering the most. 
And yet, even with damage to infrastructure such as road and rail links, the tsunamis’ overall economic impact is expected to be minor. 
In the worst hit parts of India, Indonesia, Sri Lanka, and Thailand, the immediate interior was unaffected, while the tourism and fishing industries – the lifeblood of wrecked coastal areas – account for only a tiny share of these countries’ GDP, as liberalizing reforms have fueled economic diversification and rapid growth. 
It was not always this way. 
Historically, it has been difficult to convince Asians that international trade is not a zero-sum-game, with Asia invariably the losers. 
This is one reason why, after Mao Zedong’s communists triumphed in China in 1949 and other Asian nations gained independence, most Asian countries adopted protectionist inward-looking economic policies aimed at building domestic strength, keeping the “imperialists” out, and achieving self-reliance. 
Historical experience incites this suspicion. 
In 1820, Asia’s share of global GDP was 60%, with China accounting for slightly more than half. 
That was two decades before the first Opium War. 
With the emergence of truly global world trade over the ensuing century and a half, Asia’s economic dominance withered. 
By 1950, China’s share of world GDP had fallen to under 5%, while all of Asia accounted for just 18%, the biggest chunk of which was attributable to Japan, despite its defeat in WWII. 
The winds of global change began sweeping through Asia roughly two decades ago, first in East Asia, then engulfing China, and in the course of the 1990’s blowing on to South Asia, most importantly India. 
What we are witnessing is thus not “emerging” Asia, but the “re-emergence” of a continent that comprises 60% of humanity. 
Its two giants, India and China, are especially determined, as Indian author Ashutosh Sheshabalaya recently put it, “to return to their nineteenth-century status, when they accounted for well over half of world economic output.” 
One result of this is that China and India are seeking to make a bigger impact on global economic policy. 
Both countries were signatories of the General Agreement on Tariffs and Trade (GATT, the precursor to today’s World Trade Organization) in 1948, but China under Mao subsequently left. 
Although India remained a member, it was often a recalcitrant one. 
Asia’s current share of global GDP (about 38%) is still far from what it was in 1820, but both countries feel that they can – and must – participate in calling the global shots. 
It took China’s government a protracted sixteen years to negotiate its re-entry into the GATT/WTO, but it soon showed its mettle by assuming joint leadership (along with Brazil, India, and South Africa) of the G-20, a group of primarily dynamic developing countries that threw down the gauntlet to the industrialized powers at the Cancún WTO ministerial meeting in September 2003. 
So the Asians are coming: as markets, as states, as consumers, as financiers (Asian central banks, for example, are responsible for financing America’s whopping budget deficits), as scientists and engineers, and as corporations. 
Is the West ready? 
In an article in the Financial Times in July 2004, Standard Chartered CEO Mervyn Davies wrote, “westerners are realizing how big Asia’s corporate ambitions are.” 
There is, however, a large difference between recognizing that change may be coming and making the necessary adjustments. 
In contrast to the emergence of the West in the nineteenth century, which proved such an economic disaster for most of Asia, the continent’s re-emergence can have an immensely positive effect on the twenty-first century’s global economy, including, needless to say, the West. 
But this requires careful preparation, adjustment and management. 
This is of vital importance, especially in light of the fact that Asia’s populations are still booming: India, Pakistan, and Bangladesh will see an increase in the next fifteen years from 1.4 billion to 1.73 billion inhabitants, while China’s population will grow from 1.3 billion to 1.42 billion. 
Little wonder, then that these countries accept the imperative of a dynamic, open, growth-oriented, and job-creating global environment. 
Yet despite these gales of change, institutional atavism prevails. 
Global economic policy-making remains very much a Western game. 
It beggars belief that China and India are not members of the G-7. 
The Bretton Woods organizations – the IMF, the World Bank and the WTO – remain heavily Western in structure, leadership, and mentality. 
This is especially true of the WTO, where Washington and Brussels seem more concerned at settling old scores and protecting their respective turfs than in engaging with the new players. 
China will soon be the world’s biggest trading power. 
Yet euroatlantic introversion still permeates the WTO. 
This mindset is also pervasive in Western governments, industry, business schools, and the media. 
None of these institutions in the West is ready for Asia’s re-emergence. 
History is not particularly encouraging when it comes to adjusting to profound changes – new actors and shifting balances of power – as the twentieth century tragically and repeatedly demonstrated. 
The tsunami that so devastated much of Asia has provided an opportunity for all key players – in government, industry, academia, the media, and civil society – to look at Asia anew, at both the challenges and the opportunities that have arisen from Asia’s resurgence. 
These opportunities need to be seized with as much alacrity as the world has responded to Asia’s sorrow. 

Asia’s Questions for America’s Next President 
NEW YORK – In one of the longest American Presidential campaigns in history, neither party has addressed one of the most critical issues of the day: how can the United States successfully integrate its domestic concerns with an increasingly competitive global marketplace? 
At home and abroad, it is impossible to miss the breadth and depth of change sweeping the globe, particularly in Asia. 
While the US economy is in the final stages of a seismic shift from manufacturing to service-oriented industries, China and India are ascendant, and Muslims throughout Asia are clamoring for a greater role in global affairs. 
And yet the Democratic presidential candidates, Hillary Clinton and Barack Obama, and the Republican nominee, John McCain, continue to tiptoe around such issues. 
Instead, their campaigns’ treatment of US foreign policy has been reduced to endless debates about the wars in Iraq and Afghanistan, and about the wisdom of the North America Free Trade Agreement (NAFTA). 
Surely this is unacceptable to every American committed to a safe and prosperous future. 
The next US president needs to provide a clearer understanding of how he or she will prepare America for a twenty-first century in which local issues are tied to global developments, global trends can have local implications, and America’s international authority will confront Asia’s newfound clout. 
With this in mind, here are five questions that should be posed to America’s presidential candidates: 
1. 
Big construction firms and technology companies such as Microsoft, IBM, and Cisco Systems already have huge campuses in India. 
But now we see Asian companies beginning to acquire valuable US-owned economic assets – witness India’s Tata Group’s proposed acquisition of Jaguar and Land Rover from Ford. 
Do you see foreign investment and acquisitions in America as a positive development or a potential peril? 
2. 
America once defined free trade for the new global economy, but many Americans are now using demands for “fair trade” to impose reactionary and protectionist trade policies. 
As Democrats suggest renegotiating NAFTA, Asian countries are watching with increasing trepidation. 
South Korea, in particular, is left to wonder whether or not the US is serious about pursuing similar trade agreements with one of Asia’s strongest economies and one of America’s oldest regional allies. 
Will you back – or back away from – free trade pacts with Asia? 
3. 
The American invasions of Iraq and Afghanistan, regardless of their relative merits, have unquestionably poisoned America’s standing among Asia’s 900 million Muslims, from Pakistan to the Philippines and all points in between. 
A 2006 Pew poll found that support for the US in Indonesia, the world’s most populous Muslim country, has plunged to around 30%. 
How will you engage Muslims in Asia, and how will you garner support at home for stronger ties with Muslims around the world? 
4. 
The Asia Society recently co-presented a new education study that showed American 15-year-olds’ science proficiency ranked 25th out of 30 countries tested, and lagged far behind their peers in Japan, South Korea, and Hong Kong. 
Meanwhile, US colleges and universities are struggling to attract the best and brightest minds from abroad, because those students – and their professors – are increasingly being denied US visas or subjected to harrowing entry delays when they arrive. 
Business leaders, such as Microsoft’s Bill Gates, have also complained about shortages of skilled workers, and have called for large increases in “H1-B” visas, which allow professionals to work in the US for short periods of time. 
How will you help American students compete globally, while ensuring a level playing field at home for talented foreign students and workers? 
5. 
Both China and India are demanding concessions from the US before they will even consider caps on greenhouse-gas emissions. 
Are you willing to sacrifice some economic growth domestically – or, conversely, are you willing to jeopardize relations with China and India – for the sake of the environment? 
America’s next president must re-engage with Asia not as an afterthought, and not as a corollary to the “war on terror,” but as a central component of a roadmap to a safe, secure, and prosperous future. 
He or she should start now by answering Asia’s questions. 

Asia’s Stifled Services 
MANILA – The eurozone crisis has dominated discussion among policymakers over the last few years, but the economic slowdown in Asia’s two giants – the People’s Republic of China (PRC) and India – has become a source of growing public concern as well. 
How worried should we be about an additional drag on the global economy? 
After years of double-digit GDP growth, the PRC’s economy is decelerating. 
At the Asian Development Bank, we predict that its growth will slow to 7.7% this year, from 9.3% in 2011. 
The PRC’s population is aging, real wages are rising, and growth is moderating toward more sustainable rates. 
India, too, has massive potential to grow fast and reap a demographic dividend, but it has been struggling with structural reform. 
We expect that India’s expansion will slow to 5.6% in 2012, from 6.5% last year. 
Weak external demand is partly responsible for the falloff in growth, but internal factors – namely, slowing investment and stagnating consumption – are also holding back economic expansion. 
Maintaining growth in the face of a global slowdown is a daunting task, and it requires rethinking the future of “factory Asia.” 
Asia’s boom was driven largely by intraregional manufacturing linkages: intermediate goods and parts were sourced from within Asia for assembly into final goods exported to advanced economies. 
But, with budget-tightening around the world, demand for Asia’s exports is expected to continue to falter. 
Where, then, should Asia look for another source of growth? 
Upgrading the service sector – for example, business processing, tourism, and health care – could play a critical role in the region’s future growth. 
Asia’s service sector is already large, contributing significantly to growth and employment. 
Services accounted for nearly half of developing Asia’s GDP in 2010, two-thirds of India’s growth from 2000 to 2010, and 43% of growth in the manufacturing-oriented PRC in the same period. 
In addition, service workers comprise more than one-third of total employment in developing Asia. 
If these countries follow the same path traveled by the advanced economies, agriculture’s dominance will give way to industry, which in turn will be supplanted by services, further broadening their role. 
There is certainly room to grow: the share of industry in developing Asia’s output surpassed the OECD average in 2010 (41% vs. 24%), but the share of services still lags by a wide margin (48% vs. 75%). 
Making Asia’s service sector more dynamic is essential to future growth. 
But the sector is still dominated by traditional services, such as restaurants, taxis, and barbers. 
Modern services – such as Internet connectivity technology, or financial, legal, and other professional business services – account for less than 10% of Asia’s service economy, well below the 20-25% in advanced economies. 
While traditional service industries are able to provide jobs, they do not generate much income. 
Labor productivity is also quite low: For most economies in the region, service-sector productivity is less than 20% of the OECD average. 
Even in South Korea, labor productivity in industry is 118% of the OECD figure, but only 43% of the average for services. 
A vibrant service sector could have broad economic benefits. 
Synergies between services and industry could improve overall productivity. 
For example, industrial design, marketing, and legal services could facilitate investment and development of new manufactured products. 
The service sector also tends to be more effective in job creation, particularly for women, thus supporting inclusive growth. 
Developing the service sector could also diversify the production base, thereby enhancing economic resilience and boosting growth momentum. 
Modern services are becoming increasingly tradable, providing new export opportunities. 
India and the Philippines, for example, have established themselves as world leaders in the export of outsourced business processes. 
Skills gaps and a lack of infrastructure are frequently cited as factors that hinder service-sector dynamism in Asia. 
But burdensome regulations are the biggest barrier. 
Excessive regulation that protects incumbent firms and other vested interests undermines market competitiveness and limits prospects for improved productivity and efficiency. 
For example, legal markets are dominated by rich lawyers, schools are controlled by teachers’ unions, and the medical sector is influenced by powerful doctors, resulting in high business costs that also hamper industrial development. 
Many service firms in Asia are owned by the public sector, so governments have less incentive to deregulate services. 
But the same authorities have already opened their economies’ manufacturing and agriculture sectors for the common good, even at the expense of minority groups like farmers and factory workers. 
Why, then, are they maintaining policies that protect the special-interest groups that dominate the service sector? 
Many argue that regulations protect small domestic firms against undue competition from large foreign firms. 
But the truth is that regulations are stifling even for domestic competition. 
In India, for example, there is fear that small mom-and-pop retailers will be crushed when Wal-Mart enters the market in the next few months. 
But policymakers must recognize that there are ways to protect small retailers without stifling competition. 
The government can, say, impose zoning regulations, help small retailers find specialized niches in the market, or provide skills training to displaced workers. 
The survival of artisanal retailers should not be used as an excuse to introduce or uphold business regulations that ultimately protect the incumbent rich. 
Asian policymakers must remember how they successfully developed their manufacturing sector – through competition. 
The same logic should be applied to services. 
Upgrading the service sector is low-hanging fruit for Asia, because tremendous investments are not required. 
And yet service-sector reform remains just out of reach for the region, owing to the absence of the political will needed to dismantle the vested interests that keep it there. 

Asia’s Threesome Turns Four 
SEOUL – Like many regions of the world, Northeast Asia faces severe political challenges in creating a viable structure of peace. 
But, given China’s rising power, such a regional structure is becoming all the more necessary if today’s lack of trust is not to devolve into military antagonism. 
Relations among the region’s three major powers, China, South Korea, and Japan, are burdened both by territorial disputes and by the bitter historical legacies of Japanese colonialism. 
Of course, economic interdependence has deepened over the past three decades, but nationalism remains a convenient tool for political mobilization – and of manipulation for domestic and diplomatic purposes. 
Moreover, although the Cold War is two decades in the past, South Korea and China remain divided nations. 
Furthermore, North Korea’s development of nuclear weapons, its economic fragility, and uncertainty about its very future as a state, are causes of deep anxiety among its neighbors. 
Yet, despite all of these obstacles, there are signs that momentum is building for greater regional cooperation in overcoming them. 
The recent trilateral summit of China, South Korea, and Japan is the fourth such meeting to be held, in addition to meetings that take place at international gatherings such as the ASEAN summits. 
Unfortunately, however, the leaders of China, South Korea, and Japan have not yet made any major breakthrough on the most sensitive security issues that divide them. 
But this lack of quick success does not mean that these efforts are futile. 
Indeed, any breakthrough to the sort of trust needed to resolve these festering security disputes will require that the three countries establish their annual gatherings as a meaningful multilateral body in its own right – one that can address major issues in dispute and plan for a better regional future. 
For example, at the first trilateral summit, held in May 2008, as the global economic crisis was gathering pace, currency-swap arrangements were agreed upon among the three powers. 
At the second summit, in May 2009, the three heads of state agreed to start a feasibility study on a trilateral free-trade agreement (FTA). 
If such a trilateral FTA can be realized, its political and economic significance has the potential to equal that of the creation of European Coal and Steel Community in 1952, the first step in Europe’s integration process. 
At last year’s third trilateral summit, the leaders went further still, agreeing to establish a Trilateral Cooperation Secretariat in Seoul for institutionalizing cooperation among the three governments. 
They also adopted a blue print for cooperation over the next 10 years. 
Among the issues discussed at this year’s summit in Tokyo, a few stand out. 
First, Japanese Prime Minister Naoto Kan, President Lee Myung-bak of South Korea, and Chinese Premier Wen Jiabao agreed to strengthen mutual cooperation on nuclear safety and disaster-relief activities, reflecting the three states’ concerns about how effectively they can cooperate in preventing and confronting a nuclear crisis like the Fukushima disaster. 
They also promised to cooperate on development of renewable energy, improvement of energy efficiency, and denuclearization of North Korea. 
In addition, they agreed to speed up the feasibility study for an FTA. 
South Korea and China have already finished a feasibility study for a bilateral FTA, and probably will enter into formal negotiations soon. 
In the summit’s joint declaration and the three leaders’ remarks at the concluding press conference, one can see China’s clear intention to improve bilateral relations with Japan by promising cooperation on the issue of Japanese imports that might be contaminated by radiation from Fukushima. 
Such political goodwill is essential for regional stability, particularly given the deterioration in Sino-Japanese relations following last year’s confrontation over the arrest of a Chinese fisherman by Japan’s coast guard. 
China’s cooperative approach on Japanese imports was a response to Kan’s ongoing effort to calm international concern about the safety of Japan’s agricultural products. 
Kan undoubtedly hopes that success in convincing trade partners to lift their bans on such products will boost his exceptionally weak domestic political support. 
Lee, meanwhile, sought to bring to the fore the issue of North Korea’s drive for nuclear weapons. 
Thus, he solicited commitments from China and Japan on denuclearization and realization of the 2005 agreement on North Korea reached by the six-party talks (involving the United States, China, Russia, Japan, North Korea, and South Korea). 
Though the history of the trilateral dialogue between China, Japan, and South Korea is short, it marks a new and constructive effort toward regional cooperation. 
This kind of pragmatic and functional approach, if strengthened, promises to generate momentum for cooperation on more sensitive security issues. 
At least so far, security relations between South Korea and Japan, both US allies, and China have been more or less confrontational. 
Strengthening these two countries’ relations with China would increase the possibility of building a new, peaceful order for Northeast Asia. 

Putting Asia’s Savings to Work in Asia 
HONG KONG – For more than three decades, Asia has experienced faster economic growth than any other region. 
As it has developed, Asia has been exporting its savings, through a trade surplus with the United States, and re-importing them, in the form of direct and portfolio investment via New York and London – a process that has created severe, though largely overlooked, financial tensions. 
At the end of 2015, the combined net asset position of China, Hong Kong, Japan, Korea, Singapore, and Taiwan amounted to $7.3 trillion – almost exactly equivalent to the net international investment liability of the US. 
And this imbalance is not likely to go away any time soon. 
In fact, the US’s net liabilities have grown lately – to $7.8 trillion at the end of September 2016 – owing largely to its continuing current-account deficit and stronger exchange-rate effects. 
Why don’t Asian countries invest their savings within their own region? 
An obvious reason is that the US dominates global finance, particularly in the capital and currency markets. 
In a 2005 paper, Pierre-Olivier Gourinchas and Hélène Rey argued that the US, once the world’s banker, had become its venture capitalist, investing internationally, especially in Asia, instead of just borrowing and lending. 
But that doesn’t mean that Asian countries are better off investing in the West – not least because of the carry trade that took root after the 2008 financial crisis. 
As Hyun Shin and other economists at the Bank for International Settlements have argued, low developed-country interest rates and a weak dollar drove financial markets, led by the New York and London hubs, to borrow money in low-interest-rate currencies and invest in higher-interest-rate currencies. 
This financial game has had a far-reaching impact. 
While the conventional view is that trade imbalances drive exchange rates and capital flows, financial accounting in Japan, for example, tells a different story. 
From 2010 to 2015, the cumulative external surplus accounted for just 44% of the net change in Japan’s investment position. 
Financial-account transactions caused 32% of that change, while valuation changes relating to exchange and interest rates accounted for the rest. 
Japan’s persistent current-account surpluses should have strengthened its net international asset positions. 
But, thanks to the appreciation of foreign holdings of Japanese equities, the country’s net international asset position actually deteriorated, from a peak of $3.8 trillion at the end of 2012 to $2.8 trillion at the end of 2015. 
As Bank of Japan economists point out, Japanese holdings of foreign assets are less profitable than foreign holdings of Japanese assets. 
What Japan should be doing is investing more in high-growth Asia. 
At the end of 2015, only 10.1% of ¥574.8 trillion ($4.8 trillion) in gross outward investment remained in Asia, with 70% going to North America, Europe, and Oceania. 
The composition of Japan’s portfolio investments, which comprised 73.6% of the country’s total outward investment at the end of 2015, is even more uneven, with only 3.5% invested in Asia and 72.4% invested in North America, Europe, and Oceania. 
Even Central and Latin America received one-third more Japanese portfolio investment than Asia. 
This preference for investing outside Asia is shared by the region’s other major savers – namely, China, Hong Kong, South Korea, Taiwan, and Singapore – even though returns within Asia are generally higher than elsewhere. 
As a result, the region has been made hostage to volatility in capital flows, exchange rates, and interest rates. 
The problem is that, two decades after the Asian financial crisis, there has been little progress in institutionalizing Asian financial intermediaries that will channel savings to high-return projects within the region. 
In India, for example, the top ten investment banks are from the US and Europe. 
The situation is not much different in Hong Kong and Singapore. 
Even in China, where local investment institutions are growing rapidly, the ability to channel funds to the high-return real sector remains limited. 
Now that US and European banks – driven by capital and regulatory constraints, as well as the prospects of higher US interest rates and a strengthening dollar – are beginning to move away from Asia, the pressure to remedy the situation is stronger than ever. 
But, instead of supporting Asian financial institutions’ capacity to take over the intermediation of the region’s savings, Asian financial regulators are focused on adopting the new global financial regulatory standards being pushed by their American and European counterparts – standards that American and European politicians are threatening to unwind. 
The imperative to change this approach is magnified by US President Donald Trump’s “America first” credo, which is almost certain to translate into protectionist policies. 
Such policies will push Asian investment further into the dollar trap, because Asian savings will be used to chase speculative dollar-denominated assets outside the region, instead of to meet Asia’s own needs. 
To be sure, in the longer term, China’s “one belt, one road” initiative, together with the internationalization of the renminbi, will help to weaken the dollar’s grip on Asia. 
But that remains a distant prospect. 
In the meantime, the central banks of leading Asian surplus economies (particularly China and Japan) need to work with other major central banks (especially the European Central Bank and the Bank of England) to change how excess savings in high-growth regions are used. 
The goal should be to ensure that savings in surplus countries – including, say, Germany, which has a larger current-account surplus than China and Japan – are used wisely, to help sustain growth throughout the world economy. 
Trump’s plan to put America first may sound straightforward. 
But it fails to recognize that, if the emerging economies falter, everyone will lose. 
With Trump seemingly unwilling to rethink his approach, it is up to Asia and its international partners to gird themselves – and the entire global economy. 

Asia’s American Menace 
NEW DELHI – US President Donald Trump’s approach to foreign policy – based on tactics and transactions, rather than strategic vision – has produced a series of dazzling flip-flops. 
Lacking any guiding convictions, much less clear priorities, Trump has confounded America’s allies and strategic partners, particularly in Asia – jeopardizing regional security in the process. 
To be sure, some of Trump’s reversals have brought him closer to traditional US positions. 
In particular, he has declared that NATO is “no longer obsolete,” as it supposedly was during his campaign. 
That change has eased some of the strain on the US relationship with Europe. 
But in Asia – which faces serious security, political, and economic challenges – Trump’s reversals have only exacerbated regional volatility. 
With so many political flashpoints threatening to trigger violent conflict, the last thing Asia’s leaders need is another strategic wild card. 
Yet, in Trump, that is precisely what they have. 
The US president has shown himself to be more mercurial than the foul-mouthed Philippine President Rodrigo Duterte or the autocratic Chinese President Xi Jinping. 
Even the famously impulsive North Korean dictator Kim Jong-un seems almost predictable, by comparison. 
Perhaps the most consistent feature of Trump’s foreign policy is his obsession with gaining short-term advantage. 
In one recent tweet, he asked why he should label China a currency manipulator, when the Chinese are working with the US to rein in North Korea. 
Just days earlier, Trump had called the Chinese the “world champions” of currency manipulation. 
That tweet may offer additional insight into Trump’s Asia policy. 
For starters, it highlights North Korea’s sudden emergence as Trump’s main foreign-policy challenge, suggesting that the strategic patience pursued by former President Barack Obama could well be replaced by a more accident-prone policy of strategic tetchiness. 
This reading is reinforced by Vice President Mike Pence’s claims that the recent low-risk, low-reward US military strikes in Syria and Afghanistan demonstrate American “strength” and “resolve” against North Korea. 
Such claims reflect a lack of understanding that, when it comes to North Korea, the US has no credible military option, because any US attack would result in the immediate devastation of South Korea’s main population centers. 
The Trump administration’s current strategy – counting on China to address the North Korea challenge – won’t work, either. 
After all, North Korea has lately been seeking to escape China’s clutches and pursue direct engagement with the US. 
Given the bad blood between Xi and Kim, it seems that Trump’s best bet might be some version of what he proposed during the campaign: meeting with Kim over a hamburger. 
With the North Korean nuclear genie already out of the bottle, denuclearization may no longer be a plausible option. 
But a nuclear freeze could still be negotiated. 
Trump’s reliance on China to manage North Korea won’t just be ineffective; it could actually prove even more destabilizing for Asia. 
Trump, who initially seemed eager to challenge China’s hegemonic ambitions, now seems poised to cede more ground to the country, compounding a major foreign-policy mistake on the part of the Obama administration. 
Of all of Trump’s reversals, this one has the greatest geostrategic significance, because China will undoubtedly take full advantage of it to advance its own objectives. 
From its growing repression of political dissidents and ethnic minorities to its efforts to upend the territorial status quo in Asia, China constantly tests how far it can go. 
Under Obama, it got away with a lot. 
Under Trump, it could get away with even more. 
Trump now calls China a friend and partner of his administration – and seems to have developed a fondness for Xi himself. 
“We have a great chemistry together,” he says. “We like each other. 
I like him a lot.” 
That fondness extends beyond words: Trump’s actions have already strengthened Xi’s position – and undercut his own – though Trump probably didn’t realize it. 
First, Trump backed down from his threat not to honor the “one China” policy. 
More recently, Trump hosted Xi at his Florida resort, without requiring that China dismantle any of the unfair trade and investment practices that he railed against during the campaign. 
The summit with Trump boosted Xi’s image at home ahead of the Chinese Communist Party’s 19th National Congress later this year, where Xi may manage to break free from institutionalized collective rule to wield power more autocratically than any Chinese leader since Mao Zedong. 
It also indicated the Trump administration’s tacit acceptance of China’s territorial grabs in the South China Sea. 
This will embolden China not just to militarize fully its seven manmade islands there, but also to pursue territorial revisionism in other regions, from the East China Sea to the western Himalayas. 
Trump believes that “lots of very potentially bad problems will be going away,” owing to his relationship with the “terrific” Xi. 
In fact, his promise to “Make America Great Again” is antithetical to Xi’s “Chinese dream” of “rejuvenating the Chinese nation.” 
Xi’s idea, which Trump is unwittingly endorsing, is that their countries should band together in a “new model of great power relations.” 
But it is hard to imagine how two countries with such opposing worldviews – not to mention what Harvard University’s Graham Allison has called “extreme superiority complexes” – can oversee world affairs effectively. 
It is conceivable that Trump could flip again on China (or North Korea). 
Indeed, Trump’s policy reversals may well turn out to be more dangerous than his actual policies. 
The need for constant adjustment will only stoke greater anxiety among America’s allies and partners, who now run the risk that their core interests will be used as bargaining chips. 
If those anxieties prompt some countries to build up their militaries, Asia’s strategic landscape will be fundamentally altered. 


Uniting for an Asian Century 
SEOUL – There is no question that Asia’s standing in the global economy is stronger than ever. 
The region now produces about 40% of the world’s GDP, measured according to purchasing power parity. 
During the recent economic crisis, Asia accounted for more than half of global GDP growth. 
Add to that a massive population and growing political influence, and Asia finally appears ready to lead on a world stage long dominated by the West. 
But it is too early to open the champagne. 
The United States and Europe maintain an advantage, in terms of global strategic influence, while Asian countries are facing major political, economic, and security challenges. 
In fact, Asia’s growth momentum is declining. 
China is working overtime to achieve an economic soft landing, following decades of breakneck expansion. 
Japan is preoccupied with escaping slow growth and coping with population aging. 
Asia’s other economic powerhouses – India, Indonesia, and South Korea – each face their own set of economic and political problems. 
Across the region, rising income inequality, financial instability, and environmental degradation are hampering development. 
More problematic, despite being deeply interdependent, the region’s countries struggle to act collectively. 
The persistence of power rivalries, historical resentments, and territorial disputes, together with pronounced disparities in economic and military might, create substantial obstacles to unity. 
A recent surge in coercive behavior by China, a nationalist revival in India, and a shift toward conservatism in Japan have exacerbated these challenges. 
But, at a time when Western countries are moving toward isolationism – exemplified by the Brexit vote in the United Kingdom and the election of Donald Trump as US president – intra-regional trade and investment are more important than ever. 
Beyond the economic benefits, integration would yield important political benefits, with an integrated Asia enjoying more influence on the international stage. 
To reap those benefits, Asia must mitigate regional military and political conflicts and develop a long-term vision for regional integration. 
Asia is home to some of the world’s most dangerous flashpoints. 
There is a risk of armed clashes in the East and South China Seas, and North Korea continues to develop nuclear weapons and ballistic missiles, despite tougher sanctions pushed by the United States and the United Nations. 
Stronger cooperation among Asian countries, together with the international community, could ease regional tensions and lead North Korea to abandon its nuclear weapons programs. 
Some regional institutions have already been established, including the Association of Southeast Asian Nations (ASEAN), ASEAN+3 (the ten members of the ASEAN plus China, Japan, and South Korea) and the East Asia Summit (EAS). 
Such institutions will be critical to resolving conflicts and establishing a framework for peace that can support regional prosperity and global leadership. 
But that is only the first step. 
And whether Asian leaders share a common vision for regional integration remains unclear. 
Judging by Europe’s experience – from the creation of the European Coal and Steel Community in 1951 to the establishment of the European Union in 1993 – there is no need to rush the integration process. 
But it will take a lot of time and effort. 
Perhaps the best way to kick-start this process is to identify areas where the region can gain the most from integration, and take steps that will bring quick returns. 
For example, Asian countries can move toward a single market with common rules governing trade and free movement of workers, especially skilled ones. 
Launching the Regional Comprehensive Economic Partnership, a free-trade agreement currently being negotiated by ASEAN and six partners (Australia, China, India, Japan, South Korea, and New Zealand), would be an important step in this direction. 
Given the vulnerability of cross-border capital flows, Asia must also pursue joint action on financial supervision, surveillance, and regulatory issues to prevent and manage crises. 
One specific goal should be to improve the Chiang Mai Initiative Multilateralization, a $240 billion currency-swap arrangement, and its surveillance unit, the ASEAN+3 Macroeconomic Research Office. 
Another should be to establish a de facto Asian Monetary Fund with a broader membership. 
It should be noted that none of these efforts would aim to supplant existing sub-regional, regional, and global institutions. 
Rather, by making Asia a more effective and united actor, new regional trade and financial measures would complement and strengthen current arrangements. 
For any of this to work, bureaucracies and the private sector, including business leaders and academics, must actively support high-level political commitments to integration. 
Such support should not be too difficult to muster. 
After all, integration would facilitate the exchange of valuable knowledge, from effective economic and social policies to technological and scientific insight. 
Forums and dialogues on regional public goods could also prove valuable by promoting cooperation on cross-border challenges, including epidemics, natural disasters, and environmental degradation. 
Person-to-person connections would help to highlight for Asian societies their cultural commonalities and shared values, fostering progress in areas where particular countries might lag. 
At a time when the global order is increasingly uncertain, Asia should take its fate into its own hands, by pursuing closer economic and political regional cooperation. 
If Asian countries can develop a shared vision for an economic community and a political association, this century could be theirs. 

Asian Footsteps in Africa 
CAMBRIDGE – Don’t look now, but capitalism – maligned in these bailout-ridden recessionary days – is reshaping Africa inexorably. 
What is different today is that it is emanating from China and India, rather than from the conventional bastions of capitalist prowess. 
Devi Shetty, a celebrated cardiac surgeon in Bangalore, brings health relief to India’s masses through his Narayana group of hospitals. 
Some years ago, I witnessed his early experiments with rural telemedicine, especially in the Indian states of Karnataka and West Bengal. 
In my visit last month, the wall was adorned by a large map of Karnataka festooned with colored pins, to indicate that he now served most district capitals in the remotest parts of the state. 
Moreover, a world map showed outreach to rural areas of East Africa and Southeast Asia, and the room has been upgraded to reflect a still-expanding global reach. 
All this comes from carefully acquired experience – technical and sociological – with delivering expert medical advice through teleconference facilities, aided by satellite links. 
Shetty’s team has successfully participated in telemedicine consultations – multi-specialty, non-stop availability, and supplemented by continuing education – with hospitals in 14 African countries. 
This effort is part of then Indian President A. P. J. Abdul Kalam’s ambitious pan-African e-Network project to link all 53 African capitals to tertiary care facilities across India. 
Shetty is a healer, first and foremost. 
But he is also an entrepreneur, and this is the latest in his many efforts to create successful, low-cost, but cutting-edge medical ecosystems in tough locations worldwide. 
He aspires audaciously to what he calls the universal Walmartization of healthcare – a reshaping of medical care that the world’s indigent need, and in Africa more than most other locations. 
Cynics say that India’s e-Network is currying favor with Africa in exchange for natural resources. 
Perhaps. 
But in that effort, India must contend with its neighbor, China, which speaks with a louder voice and carries a larger stick. 
Chinese Communist Party President Hu Jintao’s peripatetic diplomacy across Africa has ensured that the Chinese are omnipresent there. 
China has traded much investment in physical infrastructure in places otherwise shunned – Angola, Sudan, and Zimbabwe – for access to natural resources. 
Witness also an unprecedented convening of 48 African heads of state and senior officials in Beijing in 2006 to signal unequivocally that China would speak with the loudest voice. 
India tried to mimic the event, with an India-Africa summit in New Delhi in 2008. 
Fourteen countries attended to discuss food price inflation, energy needs, etc. 
Alas, India’s voice was drowned out, not by China’s attempts to provide medicine and education to Africa, but by the sheer magnitude of Chinese state-owned enterprises’ investments in physical infrastructure. 
But loud voices need not be the most effective. 
Indian influence will no doubt exploit assets less available to others, particularly the Indian diaspora in countries like South Africa, Kenya, Tanzania, and Nigeria. 
India and Africa have been linked over the centuries by trade, religion, and post-imperial political consciousness. 
Gandhi and the Non-Aligned Movement remain important symbols. 
Indians are more part of Africa’s social tapestry than are the Chinese, a fabric that has been strengthened through opportunity and adversity through the ages. 
Consider Olam, a Singapore-headquartered but Africa-centric global agribusiness company. 
From the soybean farms of Brazil’s Matto Grosso to the granaries of Ukraine, Olam is prized for its ability to add value in disparate conditions. 
Olam was started by Indians in Nigeria and remains a world-beating trader in cotton, coffee, cashews and the like. 
To succeed, Olam has had to work “up-country” ­– a euphemism for difficult conditions far from comfortable port cities – requiring it to rely on Indians’ familiarity with, and willingness to work in, Africa’s interior. 
Indeed, so competent is Olam that when Wilmar, a Southeast Asian firm run by overseas Chinese and a force in its own right in China and across Asia, sought to expand in Africa, it sought out Olam in a joint venture. 
The connection between Nigerian cashew farmers and Devi Shetty’s pediatric cardiac surgery is that they both represent decentralized private activity, undertaken through the market, unlike the operations of the China National Petroleum Corporation, Sinopec, and others in Darfur and elsewhere.��They all add value, but decentralized market-based activity appears likelier to engender additional goodwill. 
But there is more reshaping to come, again fostered by mutual self-interest, rather than by fiat. 
The Olam and Wilmar joint venture is, in a sense, symptomatic of the combination of assets from across Asia that can catalyze productive change in Africa. 
It is fitting that Olam, in Hebrew, means “transcending boundaries.” 
Such symbiosis requires a healthy disregard for convention. 
Failures will result, surely. 

Asian Nationalism at Sea 
CAMBRIDGE – Will war break out in the seas of East Asia? 
After Chinese and Japanese nationalists staged competing occupations of the barren landmasses that China refers to as the Diaoyu Islands and Japan calls the Senkaku Islands, angry demonstrators in the southwestern Chinese city of Chengdu chanted, “We must kill all Japanese.” 
Likewise, a standoff between Chinese and Philippine vessels in the Scarborough Shoal in the South China Sea led to protests in Manila. 
And a long planned step forward in cooperation between South Korea and Japan was torpedoed when the South Korean president visited the barren island that Korea calls Dokdo, Japan calls Takeshima, and the United States calls the Liancourt Rocks. 
One should not be too alarmist. 
The US has declared that the Senkaku Islands (administered by the Okinawa Prefecture when it was returned to Japan in 1972) are covered by the US-Japan security treaty. 
Meanwhile, the standoff over the Scarborough Shoal has calmed down, and, while Japan recalled its ambassador from South Korea over the Dokdo incident, it is unlikely the two countries would come to blows. 
But it is worth recalling that China used lethal force to expel Vietnamese from the Paracel Islands in 1974 and 1988. 
And China prevailed upon the Cambodian host of this year’s ASEAN summit to block a final communiqué that would have called for a code of conduct in the South China Sea – the first time in the ten-member association’s four-decade history that it failed to issue a communiqué. 
The revival of extreme nationalism in East Asia is both worrisome and understandable. 
In Europe, while Greeks may grumble about the terms of German backing for emergency financing, the period since World War II has seen enormous progress in knitting countries together. 
Nothing similar has happened in Asia, and issues dating back to the 1930’s and 1940’s remain raw, a problem exacerbated by biased textbooks and government policies. 
The Chinese Communist Party is not very communist any more. 
Instead, it bases its legitimacy on rapid economic growth and ethnic Han nationalism. 
Memories of the Sino-Japanese War of 1894-1895 and Japanese aggression in the 1930’s are politically useful and fit within a larger theme of Chinese victimization by imperialist forces. 
Some American defense analysts view China’s maritime strategy as being clearly aggressive. 
They point to increasing defense expenditures and the development of missile and submarine technology designed to cordon off the seas extending from China’s coast to “the first island chain” of Taiwan and Japan. 
Others, however, see a Chinese strategy that is confused, contradictory, and paralyzed by competing bureaucratic interests. 
They point to the negative results of China’s more assertive policies since the economic crisis of 2008. 
Indeed, China’s policies have damaged its relations with nearly all of its neighbors. 
Consider the Senkaku incident in 2010, when, after Japan arrested the crew of a Chinese trawler that had rammed a Japanese coast guard vessel, China escalated its economic reprisals. 
The result, as one Japanese analyst put it, was that “China scored an own goal,” immediately reversing what had been a favorable trend in bilateral relations under the ruling Democratic Party of Japan. 
More generally, while China spends billions of renminbi in efforts to increase its soft power in Asia, its behavior in the South China Sea contradicts its own message. 
I have asked Chinese friends and officials why China follows such a counterproductive strategy. 
The first and formal answer is that China inherited historical territorial claims, including a map from the Nationalist period that sketches a “nine-dotted line” encompassing virtually the entire South China Sea. 
Today, with technology making underwater as well as fisheries resources more exploitable in the area, it is impossible to abandon this patrimony. 
In 2009-2010, some mid-ranking officials and commentators even referred to the South China Sea as a sovereign “core interest” like Taiwan or Tibet. 
But China’s leaders have never been clear about the exact location of the “nine-dotted line,” or about whether their claims refer only to certain land features, or also to more extensive continental shelves and seas. 
When asked why they do not clarify their claims, my Chinese interlocutors sometimes say that to do so would require difficult political and bureaucratic compromises that would provoke domestic nationalists. 
Moreover, sometimes they say that they do not want to give away a bargaining chip prematurely. 
In 1995, and again in 2010, the US declared that the waters of the South China Sea should be governed by the 1982 United Nations Law of the Seas Treaty (which, ironically, the US has not yet ratified), but that the US takes no position on the territorial claims. 
Instead, the US urged that competing claims be resolved through negotiation. 
In 2002, China and ASEAN agreed on a legally non-binding code of conduct for managing such disputes, but, as a large power, China believes that it will gain more in bilateral rather than multilateral negotiations with small countries. 
That belief was behind China’s pressure on Cambodia to block ASEAN’s final communiqué this summer. 
But this is a mistaken strategy. 
As a large power, China will have great weight in any circumstance, and it can reduce its self-inflicted damage by agreeing to a code of conduct. 
As for the Senkaku/Diaoyu Islands, the best proposal comes from The Economist. 
China should refrain from sending official vessels into Japanese waters, and use a hotline with Japan to manage crises generated by nationalist “cowboys.” 
At the same time, the two countries should revive a 2008 framework for joint development of disputed gas fields in the East China Sea, and Japan’s central government should purchase the barren islands from their private owner and declare them an international maritime protected area. 
It is time for all countries in East Asia to remember Winston Churchill’s famous advice: “To jaw-jaw is always better than to war-war.” 

Asian Values RIP 
NEW YORK – Few politicians have garnered as many effusive public tributes after their death as Lee Kuan Yew, Singapore’s founder and long-serving former prime minister. 
A man who was treated as a sage by Henry Kissinger, regarded as a political role model by Russian President Vladimir Putin, and described as “a true giant of history” by President Barack Obama must have done something right. 
One thing is indisputable: Lee’s influence was many times greater than his actual political authority, which, to his evident chagrin when Singapore and Malaysia split in 1965, never stretched beyond the narrow borders of a small city-state in Southeast Asia. 
Lee’s most profound influence has been in post-Mao China, where booming economic enterprise coexists with an authoritarian Leninist one-party state. 
Lee was the pioneer of capitalism with an iron fist. 
His People’s Action Party, though far less brutal than the Chinese Communist Party, has ruled over a de facto one-party state. 
Like many authoritarian leaders (Mussolini, for one), Lee was once a socialist. 
But his thinking was influenced just as much by oddly nostalgic memories of British colonial discipline and a somewhat self-serving take on Confucianism, stressing obedience to authority, while disregarding the equally Confucian right to dissent. 
Singapore’s humming economy, material comfort, and smooth efficiency seem to confirm the view of many that authoritarianism works better than democracy, at least in some parts of the world. 
No wonder, then, that Lee was so much admired by autocrats everywhere who dream of combining their monopoly on power with the creation of great wealth. 
Yet there is something extraordinary about the adulation of Lee. 
Other leaders who held similar views were not treated as great sages, let alone as giants of history. 
The Chilean military strongman Augusto Pinochet, for example, imposed his own version of capitalism with an iron fist, and, though Margaret Thatcher and Friedrich von Hayek admired him, hardly anyone reveres him today. 
Why Lee, and not Pinochet? 
For starters, Lee did not come to power in a military coup, and his opponents were not massacred in football stadiums. 
Dissidents in Singapore were often locked up and maltreated, but no one was tortured to death. 
Lee’s government, while still allowing elections as a token of democratic rule, preferred to crush opposition through intimidation and financial punishment: brave men and women who stood up to him were bankrupted in ruinously expensive lawsuits; 
Lee could generally rely on a compliant judiciary. 
But Lee’s stellar reputation has to do with culture, too. 
He was very good at playing to that ancient Western stereotype of the Wise Man from the East. 
Even though “Harry” Lee, as he was known when he was a student at Cambridge, imbibed much from Western civilization, including a peculiar admiration for the hierarchy of the Catholic Church, he was always careful to stress the Asian provenance of his political ideas. 
Lee never claimed that liberal democracy in the West was a mistake. 
All he said was that it was not suitable for “Asians.” 
His argument was that Asians were used to putting the collective good above individual interests. 
Asians were naturally obedient to higher authority. 
These traits were rooted in Asian history: they were deep “Asian values.” 
There are good reasons to doubt this thesis. 
First of all, who are these “Asians”? 
Most Indians would surely disagree that they are culturally unsuited to democracy – as would modern Japanese, Taiwanese, or South Koreans. 
It makes a certain sense to speak of Asian values in Singapore, because it would be disrespectful to the Malay and Indian minorities to justify their subservience by invoking Chinese values. 
But there are plenty of Chinese as well, not just in Taiwan and Hong Kong, who would take issue with Lee’s cultural defense of authoritarianism. 
Even Singaporeans are beginning to get a little restless. 
Is it true at least to say that more democracy would have made Singapore a less efficient, prosperous, and peaceful society? 
Many Singaporeans might believe so. 
But whether they are right is by no means certain, because the question was never put to the test. 
South Korea and Taiwan went through democratic transformations in the 1980s, following the end of their versions of authoritarian capitalism, and are thriving more than ever. 
Democracy certainly did the Japanese economy no harm. 
Lee’s premise, from which he never departed, was that, especially in a multi-ethnic society like Singapore, a meritocratic elite must impose social harmony from above. 
In this sense, he was indeed rather Chinese. 
By richly awarding the elite, Lee minimized the scope for corruption. 
It is to his credit that he made this work in Singapore, though at some cost. 
Singapore may be efficient, and relatively free of corruption; but it is also a rather sterile place, with little room for intellectual or artistic achievement. 
What might work for a time in a small city-state can hardly be a useful model for larger, more complex societies. 
China’s attempt at capitalism with an iron fist has created a system of gross corruption, with huge disparities in wealth. 
And Putin has to resort to ever more belligerent nationalism to cover up the social and economic deficiencies of his rule. 
So, by all means, let us admire the smooth highways, towering office blocks, and spotless shopping malls of Singapore. 
But, when assessing Lee’s legacy, we should also heed the words of Kim Dae-jung, who was jailed and almost killed for opposing South Korea’s dictatorship, before becoming the country’s democratically elected president in 1998. 
“Asia should lose no time in firmly establishing democracy and strengthening human rights,” he wrote in response to Lee. “The biggest obstacle is not its cultural heritage, but the resistance of authoritarian rulers and their apologists.” 


What Water’s Worth 
SINGAPORE/ATLANTA – In the early nineteenth century, Lord Byron wrote in Don Juan that “Till taught by pain, men really know not what good water’s worth.” 
Nearly 200 years later, humanity still does not seem to understand water’s value, exemplified in decades of poor water management and governance practically everywhere. 
But the impending water crisis is becoming increasingly difficult to ignore – especially for those who are already feeling its effects. 
To be sure, some improvements in water management have been made in recent years. 
But they have come incrementally, at far too slow a pace to address the problem effectively. 
To help kick-start progress, major multinational companies like Nestlé, Coca-Cola, SABMiller, and Unilever – which have long emphasized to their investors the challenge that water scarcity poses for their businesses, not to mention the communities in which they operate – are working to improve water availability, quality, and sustainability. 
Their success will require an innovative strategy that upends entrenched assumptions about – and approaches to – water-related problems. 
For example, the prevailing view that the world needs good water management, though accurate, is too narrow. 
Water management should not be regarded as an end in itself – a single-variant solution for a single-variant problem – but as a means to several ends, including environmental conservation and social and economic development. 
Viewed in this broader context, many of the paradigms, practices, and processes that are currently being used to manage communities’ water resources must change. 
Given that competition for water resources cannot be disentangled from competition for, say, food and energy, it cannot be addressed independently. 
Multivariant problems demand multivariant solutions. 
Complicating matters further, these problems’ backdrop is likely to change considerably over the next few decades, owing to demographic shifts, population growth, urbanization, migration within and among countries, globalization, trade liberalization, and rapid expansion of middle classes in the developing world. 
These shifts will accompany rapid industrialization and advances in science and technology (especially information and communications technology), and will transform dietary habits and consumption patterns. 
As a result, water-consumption patterns will change considerably, including indirectly, through shifts in agriculture, energy, and land use. 
Indeed, these linkages are already evident in many parts of the world. 
For example, in many Asian countries – including India, China, and Pakistan – groundwater levels are declining at an alarming rate, owing to over-extraction and energy subsidies. 
For India, the problem began in the 1970s, when major donors encouraged the government to provide farmers with free electricity for irrigation. 
The subsidies were manageable at first, and achieved their goal of boosting food production in states like Punjab, Haryana, Rajasthan, Gujarat, and Maharashtra. 
But the policy removed the incentive for farmers to limit the amount of water they pumped. 
They had to invest only in installing the actual pumps – and they did so willingly, resulting in a total of 23 million water pumps today. 
This profligacy has taken a serious toll on groundwater levels, forcing the tube-wells from which the water is pumped to be installed ever more deeply. 
According to the Third World Center for Water Management, the amount of electricity required to pump water in India has doubled – and, in some cases, even tripled – in the last decade alone, as tube-wells have moved from 10-15 meters (32-50 feet) to 200-400 meters (650-1300 feet) deep. 
The increasing depth requires 3-4 times more horsepower for each pump. 
Under these conditions, state water ministries have few options for making groundwater irrigation sustainable. 
With the relentless increase in electricity subsidies, which are squeezing the energy sector, it is difficult to devise effective policies to stem over-pumping. 
The water sector will have to react to developments in the energy and other sectors, over which, despite close ties, it has very limited control. 
Coordinating the various sectors’ policies effectively will be difficult, to say the least. 
It may sound daunting, but the reality is that these challenges are surmountable – if, that is, our leaders commit to tackling them. 
We already have the needed technology, know-how, experience, and even financing. 
With strong political will, sustained pressure from an informed public, and a “can do” attitude from water professionals and institutions pursuing intersectoral cooperation, the world’s water-management problems can be addressed effectively. 
But we must act now. 
Time – and water – is running out. 

India’s Homemade Food Crisis 
SINGAPORE – According to current estimates, India’s total population will reach 1.45 billion by 2028, similar to China’s, and 1.7 billion by 2050, equivalent to nearly the combined population of China and the United States today. 
Given that India is already struggling to feed its population, its current food crisis could worsen significantly in the coming decades. 
According to the 2013 Global Hunger Index (GHI), India ranks 63rd, out of the 78 hungriest countries, significantly worse than neighboring Sri Lanka (43rd), Nepal (49th), Pakistan (57th), and Bangladesh (58th). 
Despite India’s considerable improvement over the past quarter-century – its GHI rating has risen from 32.6 in 1990 to 21.3 in 2013 – the United Nations Food and Agricultural Organization believes that 17% of Indians are still too undernourished to lead a productive life. 
In fact, one-quarter of the world’s undernourished people live in India, more than in all of Sub-Saharan Africa. 
More distressing, one-third of the world’s malnourished children live in India. 
According to UNICEF, 47% of Indian children are underweight and 46% of those under three years old are too small for their age. 
Indeed, almost half of all childhood deaths can be attributed to malnutrition – a state of affairs that former Prime Minister Manmohan Singh called a “national shame.” 
What accounts for India’s chronic food insecurity? 
Farm output has been setting new records in recent years, having increased output from 208 million tons in 2005-2006 to an estimated 263 million tons in 2013-2014. 
India needs 225-230 million tons of food per year; so, even accounting for recent population growth, food production is clearly not the main issue. 
The most significant factor – one that policymakers have long ignored – is that a high proportion of the food that India produces never reaches consumers. 
Sharad Pawar, a former agriculture minister, has noted that food worth $8.3 billion, or nearly 40% of the total value of annual production, is wasted. 
This does not capture the full picture: for example, meat accounts for about 4% of food wastage but 20% of the costs, while 70% of fruit and vegetable output is wasted, accounting for 40% of the total cost. 
India may be the world’s largest milk producer and grow the second largest quantity of fruits and vegetables (after China), but it is also the world’s biggest waster of food. 
As a result, fruit and vegetable prices are twice what they would be otherwise, and milk costs 50% more than it should. 
It is not only perishable food that is squandered. 
An estimated 21 million tons of wheat – equivalent to Australia’s entire annual crop – rots or is eaten by insects, owing to inadequate storage and poor management at the government-run Food Corporation of India (FCI). 
Food-price inflation since 2008-2009 has been consistently above 10%, (except for 2010-2011, when it was “only” 6.2%); the poor, whose grocery bills typically account for 31% of the household budget, have suffered the most. 
There are several reasons why so much perishable food is lost, including the absence of modern food distribution chains, too few cold-storage centers and refrigerated trucks, poor transportation facilities, erratic electricity supply, and the lack of incentives to invest in the sector. 
The Indian Institute of Management in Kolkata estimates that cold-storage facilities are available for only 10% of perishable food products, leaving around 370 million tons of perishable products at risk. 
The FCI was established in 1964 primarily to implement price-support systems, facilitate nationwide distribution, and maintain buffer stocks of staples like wheat and rice. 
But mismanagement, poor oversight, and rampant corruption means that the FCI, which gobbles up 1% of GDP, is now part of the problem. 
Former Food Minister K. V. Thomas called it a “white elephant” that needs to be revamped “from top to bottom.” 
But the government has instead tried to end shortages by increasing production, without considering that up to half of the food will be lost. 
India will not have enough arable land, irrigation, or energy to provide enough nutritious food to India’s future 1.7 billion people if 35-40% of food output is left to rot. 
The new Modi government should therefore consider alternative ways to solve India’s food crisis. 

The Third World’s Drinking Problem 
SINGAPORE – During its recent gathering in Davos, the World Economic Forum released its ninth annual Global Risks report, which relies on a survey of more than 700 business leaders, government officials, and non-profit actors to identify the world’s most serious risks in the next decade. 
Perhaps most remarkable, four of the ten threats listed this year are water-related. 
These risks include water crises stemming from droughts and floods, the deterioration of water quality, and poor water management; failure to mitigate and adapt to climate change; higher incidence of extreme weather events; and food crises, driven at least partly by water shortages. 
But the report fails to highlight the most pressing water-related concern: ensuring enough potable water. 
Moreover, while international organizations recognize the problem, their approach to addressing it is entirely wrong. 
In 2012, the United Nations announced that the Millennium Development Goals’ target of halving the number of people without sustainable access to safe drinking water had been achieved well ahead of schedule, with only 783 million people still lacking access to clean water. 
But the Third World Center for Water Management estimates that at least three billion people worldwide still drink water of dubious quality. 
AquaFed, which represents private water companies, puts this figure at 3.4 billion – nearly half the world’s population. 
This suggests that the UN’s declaration of victory was premature, to say the least. 
There is no shortage of evidence. 
In 2011, more than half of China’s largest lakes and rivers were deemed unfit for human consumption. 
Last year, China’s Ministry of Environmental Protection admitted that “toxic and hazardous chemical pollution has caused many environmental disasters, cutting off drinking-water supplies and even leading to severe health and social problems, such as ‘cancer villages.’” 
India’s situation is not much better, with the state-run Central Pollution Control Board reporting last year that nearly half of the country’s 445 rivers are too polluted in terms of biochemical oxygen demand (an indicator of the organic quality of water) and coliform bacteria to be safely consumed. 
If other pollutants – such as nitrates, fluorides, pesticides, and heavy metals – were considered, the figure would be significantly higher. 
Likewise, Pakistan’s National Assembly was informed last year that 72% of samples collected from the country’s water-delivery systems were unfit for human consumption, with 77% of groundwater in urban areas and 86% in rural areas deemed hazardous. 
In Nepal, the Department of Water Supply and Sewerage has concluded that 85% of its traditional water-supply systems are seriously contaminated with bacteria, iron, manganese, and ammonia. 
Meanwhile, in Mexico, 90% of the country’s nearly 25,000 water utilities were operating in a state of bankruptcy in 2013. 
The problem with international organizations’ approach is that they conflate the vague notion of “improved water sources” with genuinely clean, safe drinking water. 
In the same way, they have diluted the goal of “improved sanitation” – the process of collecting, treating, and safely discharging wastewater – by applying it to indoor toilets in people’s homes. 
This glosses over a major discrepancy between sanitation and adequate wastewater management. 
While nearly 90% of the households in the Indian region of Delhi are said to have adequate sanitation, because they have indoor toilets, nearly all of the untreated wastewater is discharged to the Yamuna River – a source of drinking water for cities downstream. 
Likewise, Mexico City is considered to have a high level of sanitation, even though it transports untreated wastewater, loaded with pathogens and toxic chemicals, to the Mezquital Valley, where it is used to irrigate crops. 
In fact, the Third World Center for Water Management estimates that only about 10-12% of domestic and industrial wastewater produced in Latin America is properly managed. 
The situation is probably very similar in developing countries in Asia, and likely worse in Africa. 
In 2011, a survey by the Central Pollution Control Board of India indicated that only 160 of 8,000 towns had both a sewerage system and a sewage-treatment plant. 
Furthermore, most government-owned sewage plants are non-functional or closed most of the time, owing to bad management, poor maintenance, faulty design, lack of regular electricity supply, and absent, untrained, or uncaring employees. 
Similarly, China’s Ministry of Housing and Urban-Rural Development reported in 2012 that while 640 of 647 cities and roughly 73% of counties had wastewater-treatment facilities, 377 plants built in the course of one year did not meet national requirements, and that the average operating efficiency was less than 60%. 
The ministry also found that only 12% of the plants met Grade 1A standards. 
This does not reflect a dearth of knowledge, technology, or expertise. 
Nor can it be blamed on a lack of investment. 
China spent $112.4 billion on water infrastructure in the 2006-2011 period, and India has channeled massive amounts of public funds toward cleaning up the Yamuna River. 
Yet both countries’ water supplies remain highly polluted. 
The world’s water and sanitation challenges are by no means insurmountable. 
Resolving them will require sustained political will, with governments building strong water institutions and ensuring that public funds are used as effectively as possible. 
At the same time, the public must recognize that they can have better water services, if they are willing to contribute through taxes, tariffs, and transfers. 
For their part, the media must stress the benefits of functional water-delivery and wastewater-management systems – and hold politicians and bureaucrats accountable if they fail to do their part. 
Finally, water professionals need to shift their focus from providing more water to providing better water more sustainably. 
Given that failing to address the water challenge would, within a generation, bring about a global crisis of unprecedented proportions, such efforts could not be more urgent. 

Assault on the OAS 
MEXICO CITY – These last few weeks have been unfortunate for Latin America. 
In addition to the massive earthquakes that struck Haiti and Chile, the region has also been shaken by a hunger-strike death in Cuba and a growing crackdown on human rights and opposition in Venezuela. 
Making matters worse, the region also witnessed a superficially silly but actually dangerous attempt by the ALBA countries – Cuba, Venezuela, Nicaragua, Ecuador, Bolivia, and Paraguay – to create, with the acquiescence of Mexico, Brazil, and Argentina, a regional organization excluding the United States and Canada. 
The hope is that this new grouping will eventually supplant the Organization of American States. 
The OAS will have to decide on March 24 whether to re-elect Chilean diplomat and politician José Miguel Insulza as its Secretary General. 
It should, because Insulza is probably the only figure who can both learn from and correct the OAS’s mistakes of the past five years, and thus save it from oblivion. 
The crackdown on freedom of the press, the rule of law, and electoral processes in Venezuela – as reported by Amnesty International, Human Rights Watch, and, most recently, in a damning, 300-page report by the Inter-American Human Rights Commission – has been steadily worsening. 
The OAS can involve itself in domestic electoral, political, or human rights issues only if a majority of its members mandates it to do so, and countries like Mexico and Brazil are fearful of picking fights with Venezuela. 
Nevertheless, Hugo Chávez is right to be nervous. 
Legislative elections next September will be more challenging for Chávez than on previous occasions. 
Electric power blackouts, a prolonged drought, inflation, and shortages are making life increasingly difficult for ordinary Venezuelans, and Chávez’s standing in opinion polls is dropping. 
So is his international stature and popularity, especially after a Spanish judge accused him of conspiring to assassinate former Colombian president Andrés Pastrana in Madrid back in 2002. 
Moreover, Chávez has suffered several regional setbacks recently, and all have domestic repercussions. 
The death of Cuban hunger striker and dissident Orlando Zapata, while Latin leaders were pow-wowing in Cancún and creating their new organization, unleashed a wave of indignation against the Castro brothers in the US, Europe, and Latin America (though not among its governments, which all remained silent). 
Chávez knows that his personal security depends on the permanent protection of the Cuban intelligence services. 
Any change in government in Havana would leave him in a tight spot. 
But, just as Chávez is worried about rumblings and dissidents in Cuba, the island’s leaders are concerned about the news from Caracas; they know they cannot survive without Chávez’s oil and subsidies. 
That is why the Castro brothers dispatched the regime’s number three boss, Ramiro Valdez, who has been involved in Cuban security since 1959, to keep watch on matters in Venezuela. 
Venezuela ’s circle of friends in the region is shrinking. 
The new Honduran and Chilean presidents are not allies, unlike their predecessors. 
The end of President Alvaro Uribe’s re-election bid in Colombia will complicate life for the Caracas caudillo , removing a pretext for his own perpetuation in power. 
It may also give way to a president in Bogota who advocates a tougher line with Chávez than Uribe did. 
Given all of this, as well as Chávez’s penchant for spectacular antics and the Cubans’ skill in taking the diplomatic offensive, the ALBA countries may be preparing some major Latin American mischief. 
Honduras was suspended from the OAS last year, after the June coup that overthrew elected president Manuel Zelaya. 
Subsequently, the interim government was able to resist pressure from abroad to restore him, held a previously scheduled election, and handed power over to a new, democratically-elected president, Porfirio Lobo, who has now been recognized by the US, the EU, and several, though not all, of the region’s governments. 
Chávez, the Cubans and their allies, however, want no part of Lobo, and vetoed his attending the Cancún summit where the new Latin American organization was conceived. 
That it might appear absurd to invite Cuba, which has not had an elected president since the 1950’s, and not Lobo, who was cleanly elected just months ago, did not seem to worry either Mexican host Felipe Calderón or his colleagues. 
But the problem is that the OAS will be holding its annual assembly in June this year in Peru, and several countries -– Canada, Costa Rica, the US, Colombia, Panama, Peru itself, and probably Chile – will push to have Honduras re-admitted. 
Venezuela, Nicaragua, Bolivia, Ecuador, Paraguay, and possibly Argentina will refuse. 
The outcome may well be that these countries leave the OAS, and seek refuge in the new organization that they just established. 
Mexico and Brazil will not follow, but would not oppose the move, either. 
The fact that the Cancún meeting provided no funds, location, charter, or staff for the new organization will not matter: Latin American leaders are used to building castles in the air. 
But even a purely rhetorical structure would probably sound the death knell of the OAS, and weaken its human rights instruments, which have proved increasingly valuable and effective. 
The main challenge facing the OAS – if it survives the departure of the radical left – is to close the loopholes in its basic documents regarding the collective defense of democracy and human rights. 
These loopholes consist in not defining precisely what an interruption to constitutional rule signifies – just the overthrow of an elected president, or also shutting down a legislature or TV station? – and giving the OAS teeth beyond suspension of members for violating its precepts. 
This review should be the main task of the re-elected Secretary-General, together with keeping the OAS united and defending Latin American democracy against the ALBA onslaught. 

Navigating the Trumpscape 
WASHINGTON, DC – To say that US President Donald Trump’s administration made waves in its initial weeks would be an understatement. 
Large protests across the United States and around the world attended his inauguration, and have continued since. 
Meanwhile, Trump has already declared war on the adversarial American press, and held acrimonious telephone conversations with friendly countries’ leaders. 
But to make sense of the new administration’s overall performance, worried and perplexed observers inside the US and around the world should follow five general guidelines, rather than focus too much on discrete events. 
First, all new US administrations are messy at the beginning: they stumble, create confusion, and say and do things that they later retract, or at least regret. 
Some officials will not be up to the job, and will leave the government after a few months. 
Many of the missteps that occur early in a presidency stem from a flaw in the US political system. 
New presidents take office without a full team in place, and must wait for their cabinet nominees and other officials – the people who actually run the government – to be confirmed. 
During Trump’s first two weeks, his administration consisted of just a few aides rattling around in the White House. 
Like its predecessors, the Trump administration will settle down and settle in – unless it doesn’t. 
A second guideline is to keep a close eye on foreign policy. 
Owing to the checks and balances built into the American constitutional order, presidents have much wider latitude in how they engage with other countries than they do in steering domestic affairs. 
To be sure, Trump’s first weeks portend disturbing changes to US foreign policy. 
For 70 years, the US has maintained global security through its network of alliances, and kept the international economy humming through free trade. 
During the campaign, Trump attacked both of these crucial roles. 
Should his administration abandon them entirely, the world will become a poorer, more dangerous place. 
And yet most of the new president’s principal foreign-policy appointees inspire confidence. 
Secretary of Defense James Mattis is a sober, experienced, and widely respected former general with an internationalist outlook. 
Secretary of State Rex Tillerson, while never having served in government, gained extensive experience working with other countries when he was CEO of ExxonMobil, a large multinational energy company. 
In fact, the new administration’s ability to maintain continuity and international stability will depend on it not following the example set by its predecessor. 
During Barack Obama’s presidency, senior officials were marginalized, and foreign policy was generally determined by an inexperienced president and his even less experienced young White House acolytes. 
A third fact to keep in mind is that Trump’s most serious opposition will not come from his noisiest opponents. 
Public demonstrations will not throw the Trump administration off course, and they could even steel its resolve to pursue the policies that have raised the most objections. 
It is worth remembering that the protest movement against the Vietnam War was even more unpopular than the war itself. 
Like President Richard Nixon, Trump may try to exploit the public’s distaste for disruptive and occasionally violent protests to bolster support for his policies. 
Another loud source of opposition is the mainstream press, which has attacked the Trump administration earlier and more forcefully than any new presidency in memory. 
Still, the press’s capacity to stymie Trump is limited, because it lacks credibility outside of the coastal states and large metropolitan areas where people already oppose him. 
Meanwhile, Trump’s formal opposition – the Democratic Party – is weak, demoralized, and divided. 
But his administration could face formidable opposition from different quarters. 
For starters, he cannot govern without Congressional Republicans, many of whom will frustrate any effort he makes to abandon America’s long-standing alliances. 
Trump may also have to deal with opposition from business leaders, who have remained largely silent, but could grow tired of his wrathful tweets. 
Ultimately, business leaders have a duty to their companies’ health, and they will try to block any policies that threaten it. 
Multinational corporations with expansive international operations will resist initiatives that could spark trade wars. 
At the end of the day, no Republican president – not even Trump – can afford to ignore the captains of American industry and finance. 
A fourth lesson to take to heart is that American democracy will survive. 
Fearful pronouncements about the rise of incipient (or actual) fascism are misplaced. 
The basic institutions of American governance have survived greater challenges than any that Trump may pose. 
Although America in 2017 is deeply divided, Americans remain committed to the central tenets of democracy: free, fair, and regular elections and the protection of political, religious, and economic liberty. 
It is unlikely that Trump will attempt to overturn any of them; and even if he does try, he will fail. 
When he leaves office, the US will essentially be what it was when he entered it: the world’s most powerful democracy. 
Finally, a key question to consider is whether the Trump administration will be “normal.” 
A normal president pursues predictable policies that are generally supported by those who voted for him, and opposed by those who did not. 
Trump’s cabinet and Supreme Court nominations fit this description. 
An administration operating outside the bounds of normality will pursue policies that even its supporters and well-wishers oppose, and which could do serious damage to the country, and the world generally. 
Will Trump’s presidency be normal? 
At this point, we must defer to the twentieth-century Chinese communist leader Zhou Enlai's purported response to André Malraux’s question about what he thought of the French Revolution: it’s “too early to say.” 

What Could Go Wrong in America? 
CAMBRIDGE – Although the United States economy is in good shape – with essentially full employment and an inflation rate close to 2% – a world of uncertainty makes it worthwhile to consider what could go wrong in the year ahead. 
After all, if the US economy runs into serious trouble, there will be adverse consequences for Europe, Japan, and many other countries. 
Economic problems could of course originate from international political events. 
Russia has been acting dangerously in Eastern and Central Europe. 
China’s pursuit of territorial claims in the East and South China Seas, and its policies in East Asia more generally, is fueling regional uncertainty. 
Events in Italy could precipitate a crisis in the eurozone. 
But within the US, the greatest risk is a sharp decline in asset prices, which would squeeze households and firms, leading to a collapse of aggregate demand. 
I am not predicting that this will happen. 
But conditions are becoming more dangerous as asset prices rise further and further from historic norms. 
Equity prices, as measured by the price-earnings ratio of the S&P 500 stocks, are now nearly 60% above their historical average. 
The price of the 30-year Treasury bond is so high that it implies a yield of about 2.3%; given current inflation expectations, the yield should be about twice as high. 
Commercial real-estate prices have been rising at a 10% annual pace for the past five years. 
These inflated asset prices reflect the exceptionally easy monetary policy that has prevailed for almost a decade. 
In that ultra-low-interest environment, investors have been reaching for yield by bidding up the prices of equities and other investment assets. 
The resulting increase in household wealth helped to bring about economic recovery; but overpriced assets are fostering an increasingly risky environment. 
To grasp how risky, consider this: US households now own $21 trillion of equities, so a 35% decline in equity prices to their historic average would involve a loss of more than $7.5 trillion. 
Pension funds and other equity investors would incur further losses. 
A return of real long-term bond yields to their historic level would involve a loss of about 30% for investors in 30-year bonds and proportionately smaller losses for investors in shorter-duration bonds. 
Because commercial real-estate investments are generally highly leveraged, even relatively small declines in prices could cause large losses for investors. 
The fall in household wealth would reduce spending and cause a decline in GDP. 
A rough rule of thumb implies that every $100 decline in wealth leads to a $4 decline in household spending. 
The return of asset prices to historic levels could therefore imply a decline of $400 billion in consumer spending, equal to about 2.5% of GDP, which would start a process of mutually reinforcing declines in incomes and spending leading to an even greater cumulative impact on GDP. 
Because institutional investors respond to international differences in asset prices and asset yields, the large declines in US asset prices would be mirrored by similar declines in asset prices in other developed countries. 
Those price declines would reduce incomes and spending in other countries, with the impact spread globally through reduced imports and exports. 
I must emphasize that this process of asset-price declines and the resulting contraction of economic activity is a risk, not a prediction. 
It is possible that asset prices will come down gradually, implying a slowdown rather than a collapse of spending and economic activity. 
But the fear of triggering a rapid decline in asset prices is one of the key reasons why the US Federal Reserve is reluctant to raise short-term interest rates more rapidly. 
The Fed increased the overnight rate by just 0.25% in December 2015 and is likely to add just another 25 basis points in December 2016. 
But that will still leave the federal funds rate at less than 1%. 
With the inflation rate close to 2%, the real federal funds rate would still be negative. 
Market participants are watching the Fed to judge if and when the process of interest-rate normalization will begin. 
Historical experience implies that normalization would raise long-term interest rates by about two percentage points, precipitating substantial corrections in the prices of bonds, stocks, and commercial real estate. 
The Fed is therefore trying to tamp down expectations concerning future interest-rate levels, by suggesting that changes in demography and productivity trends imply lower real rates in the future. 
If the Fed succeeds, the decline in asset prices may be diminished. 
But the danger of sharp asset-price declines that precipitate an economic downturn should not be ignored. 

Assisted dying – from ‘Should we do it?’ to ‘Who should do it?’ 
In the past, intentionally hastening the death of any person was always a crime, no matter the circumstances. 
But public attitudes have been changing. 
Assisting a person who has explicitly asked to die is increasingly being seen as a justifiable action, especially in the context of a terminal illness. 
This is a consistent finding of opinion polls in westernized countries. 
Still, legislative bodies are cautious when considering possible changes to the law. 
So far only the Netherlands, Belgium, and the state of Oregon in the US have put explicit legislation into practice. 
But serious political discussions on similar legal changes are taking place in many other countries, including the UK, South Africa and Australia. 
As adamant opposition to the legal regulation of assisted dying weakens, so the issues of practical applicability become more important. 
Of course there is the question of who qualifies for an assisted death. 
Should it be only the terminally ill? 
Should, for instance, the early stages of Alzheimer’s disease qualify? 
Or even any serious and incurable illness or disability? 
And what about people whose reason for wanting to die is not related to their medical condition at all? 
There is also another central question that has not yet been granted the attention it merits: who should actually take responsibility for the assistance? 
In public discussions there is often a presumption that it is the task of the medical profession. 
There are sometimes specific references to the Dutch practice that allows doctors to end their patients’ lives if they explicitly ask for it, as long as certain preconditions of due practice are met. 
Assistance in dying provided by a non-physician remains illegal. 
In such a medicalized framework it is morally and legally almost irrelevant who finally administers the lethal drug: if physicians are closely involved, there is no reason why they should not administer the lethal drug themselves. 
Although Belgium recently followed the Dutch way of regulating voluntary active euthanasia in a strictly medicalized framework, it is precisely this sort of regulation that is increasingly challenged. 
Doctors have pointed out that, whilst recognizing that an increasing majority of the population wants such a service to be available, to hasten death intentionally is still inherently incompatible with the basic objectives of medicine. 
In this respect, the Death with Dignity Act in Oregon is an interesting law. 
Of course, any regulation in this field requires at least some involvement by a doctor but the Oregon Act recognizes the fundamental dilemma faced by doctors confronted with a patient’s request to die and strives to keep that involvement to a minimum. 
Oregon physicians may write a prescription for a lethal substance on the explicit request of a terminally ill patient, provided they can confirm the fatal prognosis, the patient’s decision-making capacity, and have informed the patient about any feasible alternative such as hospice care or pain-control options. 
Physicians are not required to be present at the suicide, and they are not allowed to administer the lethal drug. 
In Oregon, the patient decides independently of the physician where and when he or she wants to die, or even at all. 
Compassion in Dying, a right-to-die society and non-medical NGO, participates in a consultative way in most of these cases. 
Interestingly, research on the rationales of people who have legally hastened their death under the Oregon Death with Dignity Act reveals that the fear of pain and other distressing symptoms was not a major concern in most cases. 
Instead, issues of personal independence, retaining control and not becoming a burden to family, friends, or caregivers turned out to be the main reasons. 
Recent developments in the Netherlands have also shown that euthanasia is discussed more in the context of autonomy, control, and rational choice rather than of uncontrollable medical symptoms. 
The decision in such cases is based mostly on personal and social considerations rather than medical ones. 
Given that this framework extends far beyond any medical expertise, it is not surprising that no medical association anywhere in the world has so far embraced the Dutch regulation. 
Whilst the Dutch Medical Association does not oppose the profession’s role in the practice of euthanasia, current evidence suggests a continuing unwillingness on the part of Dutch doctors to report cases of assistance in dying to the authorities, and a return to practices that are closer to a medical context, such as terminal sedation. 
So there is great tension everywhere between how the public, and how doctors regard a possible contract in the field of assisted dying. 
What is happening at the moment could be described as a power struggle over who should be responsible for a service that more and more people wish to be available but where no amount of professional expertise can fully safeguard the right decision. 
At the same time, any wrong decision has far-reaching and irreversible consequences. 
It has been said that assisted dying is pivotal to the discussion about what constitutes a good death; it is also a focal point in the relationship between the medical profession and society as a whole. 

Asymmetries of Information and Economic Policy 
This year's Nobel Prize in Economic Sciences went to George Akerlof of the University of California at Berkeley, Michael Spence of Stanford University, and myself for our work on ``asymmetry of information.'' 
What is that work about and why did we undertake it? 
For two hundred years, economists used simple economic models that assumed that information was perfect - i.e. that all participants have equal and transparent knowledge of the relevant factors. 
They knew that information wasn't perfect, but hoped that a world with moderate imperfections of information would be akin to a world with perfect information. 
We showed that this notion was ill-founded: even small imperfections of information could have profound effects on how the economy behaved. 
The Nobel committee cited our work on ``asymmetries of information,'' an aspect of imperfections of information caused by the fact that different people in a market know different things. 
For example: the seller of a car may know more about his car than the buyer; the buyer of insurance may know more about his prospects of having an accident (such as how he drives) than the seller; a worker may know more about his ability than a prospective employer; a borrower may know more about his prospects for repaying a loan than the lender. 
But asymmetries of information are only one facet of information imperfections, and all of them - even when small - can have large consequences. 
George Akerlof and I were classmates at MIT in the early 1960s. 
We were taught the standard models of the day, but they made little sense to us. 
These models rather simplistically said that demand equaled supply. 
The joke was that you could teach a parrot to be an economist simply by repeating ``demand and supply.'' 
This produced rather curious results. If the demand for labor equaled the supply, for example, there couldn't be any unemployment. 
I grew up in an industrial town on the south shore of Lake Michigan - Gary, Indiana - and saw poverty, unemployment, and discrimination. 
I entered economics because I wanted to understand and do something about these phenomena. 
To be taught models that began by assuming that unemployment didn't exist seemed a peculiar place to begin. 
Our models helped explain why markets didn't work in the way the standard theory said they should: why markets might not exist, why there might be unemployment, why there might be credit rationing. 
They also explained why shocks to the economy might be amplified, and their effects persist, well after the original disturbance disappeared. 
One of the most profound results of our work concerned Adam Smith's notion that competitive markets led, ``as if by an invisible hand,'' to efficient outcomes. 
Our analysis suggested that the invisible hand not only couldn't be seen - it wasn't there, or was at best decrepit. 
In work with Bruce Greenwald of Columbia University, we demonstrated that within a market economy there exist interventions in the market on the part of government that can make everyone better off - even when government is faced with the same information imperfections as the private sector. 
Economists have long recognized that in the face of ``externalities'' to economic activity, such as air and water pollution, market solutions are often inefficient. 
There can be too much production of some commodities - say, pollution generating steel - and too little production of others - like research that advances knowledge. 
What we showed is that, as soon as one recognizes that information is imperfect - as it obviously is - then these externalities can be shown to be pervasive, and that market failures are similarly pervasive. 
It is an irony of history that just as a host of researchers around the world were developing these ideas and enhancing our understanding of the limitations of markets, international economic institutions were pushing the Washington consensus - based on market fundamentalism - which ignored market failures. 
Today, although these lessons on the limits of the markets have become commonplace in academia, they have still not been brought on board by many international economic institutions. 
This contributes to frictions between these institutions and countries they advise: many bright, young economists working for developing country governments base their analyses on a deeper understanding of the market economy than that provided by the old ideology and the simplistic models guiding some of the international bureaucrats. 
Some people have suggested that the theoretical work on information imperfections recognized by the Nobel committee is unrelated to the policy positions I took at the World Bank on East Asia, on Russia, or development. 
Not true. 
The stances I took on financial market liberalization were based on a theory of regulation that was based on asymmetries of information. 
Concerns about bankruptcy - that the high interest rates pushed by the IMF in East Asia would force firms into distress, even adversely effect the exchange rates while destroying economies and making countries less attractive to investors - derived from a theory of corporate finance, itself derived from theories of asymmetric information. 
At the most simplistic level: in a world with perfect information, bankruptcy would not exist - why, indeed, would anyone lend to someone who they knew would not repay them? 
In the real world, failures in privatization were related in part to problems of corporate governance, problems related to asymmetries of information between managers and owners. 
Ideas can sometimes be as powerful as interests. 
When old ideologies and interests work together as they have in the past, some interests get served and others get left behind. 
Asymmetries of information are related to asymmetries of economic (market) power. 
There is a role for government, not only in correcting market failures, but in redressing these asymmetries of power. 
Our work, which the Nobel Prize Committee has helped to bring to the attention of a wider public, provides a part of the intellectual foundation of the Third Way, which is increasingly recognized as the only means by which we can achieve economic progress with social justice. 

At Home in Guantánamo Bay 
GUANTÁNAMO BAY – I write this from the United States Detention Center at Guantánamo Bay, where I have been held without charge for almost seven years. 
My detention here is the result of being in the wrong place at the wrong time. 
More than two years ago, I was notified that I was cleared for release. 
I would have been happy about this news if I did not come from Uzbekistan, a country with one of the worst human rights records in the world. 
It is not safe for me to go home. 
My journey to Guantánamo began in December 1998, after I finished my mandatory service in the Uzbek army. 
Uzbekistan, a former Soviet Republic, is a poor country without many employment opportunities. 
After several months of job hunting, I joined my brother in a business venture buying and selling apples, honey, and other goods in neighboring Tajikistan. 
I lived in a community of Uzbeks, and met my wife, Fatima, another Uzbek, while living there. 
We had a child, and my mother came from Uzbekistan to join us. 
Unfortunately, there were some in Tajikistan who didn’t like having a bunch of Uzbeks living in their country. 
So, one day, in November 1999, the Tajik authorities rounded up 200-300 Uzbeks and said they were taking us back to Uzbekistan. 
Instead, they dumped us in Afghanistan. 
There, we met a group of Afghan Uzbeks who helped us to settle in Mazar-i-Sharif. 
I began working as a traveling salesman, selling goat’s milk, hens, roosters, and sheep. 
In the fall of 2001, when fighting broke out between the Taliban and the Northern Alliance, I could not travel and was stranded at a roadside teahouse for several weeks. 
One day, Northern Alliance soldiers came to the teahouse and offered to give me a ride to Mazar-i-Sharif. 
Instead, they drove me to Bagram Air Base and handed me over to the Americans stationed there. 
I found out later that the Americans were offering bounties of several thousand dollars for Taliban and “foreign fighters.” 
At first, I was happy to be in American hands. 
I held the US in high regard and figured that it would be only a matter of time before they realized that I was innocent and let me go. 
But they didn’t. 
They held me in Bagram, then Khandahar, and eventually Guantánamo Bay. 
The Americans now realize that I ended up here by mistake and have told me that they want to let me go. 
But where can I go? 
Members of the Uzbek security service visited me here at Guantánamo and accused me of being a member of the Islamic Movement of Uzbekistan. 
When I told them that I didn’t know anything about this group, they warned that once I was back in their custody, they would make me cooperate. 
It is not hard to imagine what those ways are. 
Torture, beating, and other mistreatment of Uzbek detainees are widespread. 
Sometimes people who are taken into Uzbek custody are never heard from again. 
I am not alone. 
I am one of several dozen of the Guantánamo who cannot return to our native countries because we would likely be tortured and abused. 
Our only hope of getting out of this prison is that another country decides to provide safe haven to men like us – men who did nothing wrong and never should have been detained here in the first place. 

Athens, China 
BEIJING – While parts of the world are dealing with the aftermath of the financial crisis or an emerging sovereign-debt crisis, China is coping with the risk of overheating and/or an asset bubble. 
Many factors may be pushing China’s economy in this direction. 
One of the most worrying is the same which fueled the current crisis in the eurozone: mushrooming public debt. 
In the eurozone, the problem is member countries’ sovereign debt; in China, the problem is borrowing linked to local governments. 
In the eurozone, a bloated social-welfare system, particularly for the rapidly growing population of retirees, and the economic slowdown caused by the financial crisis are key components of the structural debt problem. 
In China, local officials increased borrowing in order to ensure that their regions’ economic growth rates remain at double-digit levels. 
There are, no surprise, commonalities between China and the eurozone. 
Obviously, debt accumulates wherever people want to spend more than they have saved. 
But a more specific similarity is that highly indebted eurozone countries and Chinese provinces and counties have been spending too much of a common currency. 
Because these funds are not issued or controlled by any member country or local government, eurozone members and Chinese local governments cannot relieve their debt problems through devaluation. 
So, in both cases, when a debt is defaulted upon or loans become non-performing, the negative consequences are felt by the entire financial and monetary “zone” – the entire EU and all of China. 
To avoid such an internal “sovereign debt crisis,” China’s Budget Law, adopted in 1994, forbade local governments from borrowing autonomously, either by issuing bonds to the public or by getting credits from banks. 
In theory, this means that local governments cannot finance their deficits by increasing their debt levels, because they can borrow only from the central government or other central authorities. 
But the Budget Law did not end the problem. 
While local governments have been unable to borrow, locally controlled state-investment companies can. 
So it is no surprise that a huge volume of bank loans has passed through the local branches of state-owned banks to finance local public-investment projects. 
These borrowings caused a surge in non-performing bank loans in the early and mid-1990’s, when total non-performing loans hit 40% of GDP. 
This caused a credit crunch and prolonged deflation in the late 1990’s, as the central government tried to clean up the mess. 
Due to privatization of state-owned enterprises and improved financial regulation, including bank supervision and risk control, since 2000 both central and local budgets have basically been in good order. 
The ratio of total public debt to GDP was less than 22% in 2007-2008, before the global financial crisis. 
There was still some borrowing by local governments, of course, but on a limited scale (totaling 3-4% of GDP), owing to institutionalized surveillance of lending. 
Then came the financial crisis, with the central government adopting fiscal stimulus and relaxing monetary policy. 
Local governments were encouraged to increase their spending on public infrastructure projects in order to maintain growth. 
As a result, the volume of bank credits financing local investments increased six-fold in 2009 alone. 
Indeed, total borrowing by local government now amounts to roughly $900 billion, up from $150 billion year on year and the equivalent of almost 20% of GDP. 
This level of borrowing poses a new type of financial risk for China. 
But how big and dangerous is that risk? 
I believe that it remains manageable. 
Some local borrowing can be justified by the central budgetary allocation to local projects. 
Moreover, some local spending took place in regions that will continue to enjoy high growth in tax revenues for the foreseeable future, thus ensuring that the debts will be serviced. 
Perhaps only one-third of the total volume of loans is problematic; the rest may or will continue to perform. 
The most important change that may keep the problem manageable is that China’s monetary authorities have been putting the brake on the growth of these debts since late last year. 
In general, local borrowing windows are closed, and inspections are underway to gain an accurate picture of the situation. 
With economic growth continuing, the potential risk posed by this debt will diminish. 
Chinese officials are drawing lessons from this heavy debt burden, as they fear the prospect of local governments creating an internal “Greek crisis” for the rest of China. 
The authorities recognize the need for strict fiscal discipline and financial regulation. 
The leverage of any public entity must be monitored, supervised, and restricted. 
Of course, Chinese local governments have never had total financial or fiscal autonomy. 
Indeed, ever since the Qin Dynasty united the country and established a centralized regime some 2,000 years ago, accountability for debt has been treated as a central government problem. 
Those who advocate fiscal decentralization and deregulation in China should think about establishing real local fiscal accountability first. 
China’s current legal framework contributed to fiscal balance and financial stability in the past, and it continues to play a positive role. 
Otherwise, China might already have experienced its own localized “sovereign debt” crisis and, perhaps, hyper-inflation. 
But when local governments are barred from debt finance, they look for other means. 
For example, they try to squeeze as much as possible out of land sales, thereby pushing up housing prices and helping to inflate asset bubbles. 
Given the negative consequences of this approach, it might be wise for the central government to consider establishing, for the short-run, quotas or ceilings for total local government borrowing. 
But, in the long run, China’s fiscal and financial stability will be ensured only by systematic institutional reform of central-local government relationships. 

Atlas Slumps 
If the world is to have a decent economic recovery, an upturn will depend on America getting off its back and continuing to fulfill its role as global importer of last resort. 
No other country is capable of picking up the slack if America's economy remains soft. There is some optimism about Japan getting on its feet again, but over the past, vastly disappointing, decade, too many pseudo-recoveries have been glimpsed in Japan to justify such hopes. 
Europe also seems likely to disappoint. 
Projections of European growth continue to decline, yet the outlook for government policy is for reduced spending and increased taxes as the fiscal stability and growth pact bites. 
Moreover, the European Central Bank appears helpless because it is bound by the self-imposed fetters of its inflation target. 
Nor are emerging markets yet large enough to play a meaningful role in the balance of total global demand. 
So America remains the world economy's last best hope. 
But this is worrisome for two reasons. 
First, America cannot run enormous (and growing!) current-account deficits forever: at some point the desire of foreign investors to hold ever-increasing shares of their wealth in America must wane and then reverse. 
When that happens, the dollar will fall and the stimulus provided to the world by America's demand for imports will come to an end. 
Second, there are no signs that the US government either understands or has the will to stimulate the American economy sufficiently to produce rapid economic growth. 
Consider US monetary policy. 
America's Federal Reserve has pushed the short-term safe interest rates it controls down to remarkably low levels: 1.25% per year. 
Short-term interest rates cannot be pushed much lower. 
More importantly, would the limited amount that interest rates can yet be cut do much to boost demand? 
Not likely. 
Long-term interest rates could be pushed significantly lower if the Federal Reserve were to undertake the unprecedented step of mammoth purchases of long-term government bonds. 
But would the Fed take that unprecedented step without a severe domestic crisis? 
A situation in which the US muddles through with growth that is positive but slower than the growth rate of potential output--today's conditions--is unlikely to prompt drastic action from the Fed. 
However, US growth that is positive but slow is of little help to the rest of the world. 
Now consider fiscal policy. The baroque structure of US government has always been hostile to the effective exercise of fiscal policy. 
Attempts to use fiscal policy to stabilize the economy usually show up too late to help, no matter the situation. 
Fortunately, such efforts have usually been too small in magnitude to do significant economic destruction. 
Until now. 
Whatever tax-law changes the US Congress approves this summer are unlikely to have big effects on the flow of purchasing power to households until April, 2004. 
Similarly, whatever spending increases the US Congress approves this fall will not have significant effects on government spending until the summer and fall of 2004. 
But this time, slow stimulus is amplified by failures in the design of the Bush economic program. 
Even the conservative-minded " Economist" observes that the Bush Administration's proposals are not a short-term economic stimulus: they simply do "not provide the short, sharp boost for which many political leaders, including Mr Bush himself, have been calling." 
If and when the proposed tax cuts are fully phased in, they will not provide the $1,000 a year boost to the income of 90 million households that the Bush Administration implies they will. 
Instead, they will likely provide something like an additional $250 a year to the incomes of typical households--and much larger windfalls for households with annual incomes exceeding $200,000. 
But these are the people least likely to take their tax cuts and spend them to boost aggregate demand. 
Looking further out, US fiscal policy's long-run problems will become increasingly visible and urgent: there is not even a hint of a plan for reconciling the long-term costs of the social insurance state with American taxpayers' limited patience with high taxes. 
For most of the 1990s, the world economy did remarkably well, despite large-scale financial crises, the spread of AIDS in stagnating Africa, and the problems of transition economies. 
This was due to sound economic policy in the US (starting with the Bush-Mitchell-Foley tax increase of 1990), as well as some extraordinarily good luck in America. 
There are no signs that wise economic policy in the US will continue in the first decade of the new century. 
If global prosperity is to return, America's economic luck will have to be even better than it was in the 1990s. 
The rest of the world economy would do well to play it safe and start making its own luck. 

A Nuclear South Korea? 
SEOUL – South Korean officials have recently realized that the United States is likely to try to forbid them from enriching uranium and expanding their country’s missile range, rather than leave these issues on the diplomatic back burner. 
Indeed, recent discreet talks, in which the US has disregarded South Korean efforts to supplement the controversial US-South Korea Nuclear Cooperation Agreement, which expires in March 2014, suggest that there are reasons to be deeply worried about the alliance’s future. 
American negotiators – the reluctant midwives of South Korea’s increasing responsibility in the field of atomic energy – remain steadfast in their opposition to South Korea’s drive for improved defensive capabilities and a more advanced energy policy, despite the potential strategic benefits. 
But American nonproliferation experts do not anticipate progress on South Korea’s efforts to win support for its preferred policies until the US gains more leverage. 
Such a stalemate is not new. 
Nuclear talks between the two countries have often been characterized by poor communication and a lack of understanding. 
While South Korean officials rarely say in public what they really think, it is widely believed that US policymakers have little motivation to reconcile with South Korea’s government right now – they would prefer to stifle South Korea’s increasingly loud demands. 
In the US-South Korea relationship’s heyday, American politicians considered the country an “extended arm of America.” 
Such condescension may have been defensible when South Korea’s military dictatorship needed America’s political protection and security guarantee, but now the country is a beacon of democracy in East Asia. 
So, while South Koreans understand the need for compromise and cooperation, they believe that the time is right for a more balanced partnership. 
This belief does not imply South Korean cynicism about nonproliferation. 
Rather, it reflects concern about a nuclear North Korea, compounded by anxiety over the recent US-Japan missile-defense accord. 
Given that the US and South Korea have the same assessment of the intelligence regarding North Korea’s nuclear progress, not to mention South Korea’s vulnerability, their failure to reach a practical agreement is troubling. 
Former Deputy Foreign Minister Chun Yung-woo warned an American official in 2010 that revising the Nuclear Cooperation Agreement could soon become a “defining issue” in South Korea-US relations, and that it was already attracting “significant amounts of negative press attention.” 
Given South Korea’s status as one of the world’s top five nuclear-power producers, Chun argued, the South Korean public would not tolerate the perception that Japan was receiving preferential treatment. 
Indeed, right-wing leaders like Representative Chung Mong-joon of the governing Saenuri Party have been vocal in expressing their doubts about South Korea’s current denuclearization policy, suggesting that a nuclear weapons program could prevent a second war on the peninsula. 
The conservatives seem to believe that American nuclear protection for South Korea is a thing of the past. 
Despite their hawkish approach to North Korea’s nuclear threats, South Korean officials know that uranium enrichment and spent-fuel reprocessing remains only a distant possibility. 
As a result, they are approaching negotiations skeptically, rather than emphasizing the sense of mutual obligation that should characterize the alliance. 
But their pessimism is hardly groundless, given that the United Arab Emirates has already signed a similar agreement with the US declaring that it would not produce nuclear fuel. 
Indeed, South Korean negotiators appear convinced that they will not be able to make any headway with the US on the issue. 
(To be sure, this failure may not matter much, given South Korean scientists’ past declaration that they will not contribute to any nuclear program that could be used for military purposes.) 
The US-South Korea debate over nuclear weapons should show both sides that their 59-year-old alliance urgently needs to be updated. 
Together, the allies can improve global prospects for nuclear nonproliferation, but only if they hammer out a grand bargain that accounts for South Korea’s current – and future – security concerns. 

Attacking French Hopelessness 
As French cities have burned, other countries have been very severe in judging France. 
Embassies have issued warnings to tourists and their citizens living in France; television news programs have shown hours of footage of burning cars. 
Other countries’ governments, it seems, have been trying to distance themselves from the problem, fearing a contagion that they know is likely to spread. 
Mayors across Europe, however, have responded more moderately, feeling and showing solidarity with the plight of their French colleagues. 
They know that their cities are also vulnerable to urban violence, in so far as they have pockets of social inequality, including marginalized and excluded young people. 
The specificity of the French situation is that the revolt is targeted against the state, and more precisely against the police forces. 
Unlike recent riots in the United Kingdom, which were inter-ethnic, the confrontations in France put their participants face to face with the police. 
Indeed, there is no specific religious or ethnic character to these riots, in so far as youth from various ethnic backgrounds have taken part. 
Minority youth are, to be sure, over-represented among those involved. 
This is easily explained by their geographic segregation, higher levels of unemployment, higher school dropout rates, and disproportionately frequent interactions with the criminal justice system. 
But, in view of the diversity of the young people convicted so far, it would be a mistake to say that these riots are the result of Muslim radicalization. There is absolutely no indication so far that organized networks or religious groups are manipulating these youth. 
The rioting may not be organized - no clear leaders or political demands have emerged. 
Yet these violent acts can be viewed as a political conflict in the sense that young people are directly challenging the state by attacking its representatives. 
The violence seems to be proportional to these disenfranchised young people’s sense of perceived injustice and the lack of opportunities for them to express themselves. 
In this sense, France is paying the price for the lack of continuity, coherence, and appropriate funding given to social development policies over the past 30 years. 
Although these policies have undoubtedly helped residents of disadvantaged neighborhoods, they have not been sufficiently ambitious to dampen resentment. 
One example of overly timid policies involves policing. 
In the last few years, France has distinguished itself from other European nations by gradually abandoning community-based policing, which the government considers too “social” and prevention-oriented. 
While European police forces place prevention at the top of their agendas, France has chosen to treat it as a marginal goal. 
As a result, tensions between the police, who are increasingly perceived as “outsiders,” and residents have grown to all-time highs. 
In the absence of a community-based approach, interactions with law-enforcement authorities are now limited to tense, conflict-ridden situations, reinforcing the confrontational atmosphere between rebellious youth and the police. 
At the same time, the fact that police agents must intervene in places with which they are not familiar severely impedes their effectiveness. 
In the current violence, the police have unfortunately been placed in the position of sole representative of the state. 
But all public actors, not just the police, must respond to urban problems. 
First and foremost, mayors should be mobilized as mediators, because they are on the front line in implementing urban policy. 
When these policies fail, citizens hold mayors responsible. 
But mayors are also the most knowledgeable about communication links within their communities, and are thus the most capable of organizing effective partnerships to address and resolve local issues. 
The events in France also point to the need, at the European level, to reinforce policies against discrimination and that promote social equality. 
Although these policies must be implemented at a local level, they should be catalyzed and supported by European institutions. 
Efforts in this area already exist, but it has become increasingly urgent that these efforts be strengthened. 
Equality and social cohesion form the backbone of liberty, justice, and security for European cities. 
This is why Europe’s mayors call upon European institutions to focus on social cohesion with the same commitment that has been invested until now in asylum and border controls. 

A New Approach to Infrastructure Finance 
BEIJING – Lawmakers in the United States have introduced legislation that, if enacted, would create a new development finance institution (DFI) to replace the Overseas Private Investment Corporation. 
Unlike its predecessor, the new agency would be able to make equity investments, a reform that reflects growing global recognition that ownership stakes are an essential component of sustainable-development financing. 
But, however important, this shift in development finance, in the US and elsewhere, will not solve one of the major challenges facing the Global South: a dearth of infrastructure investment. 
To address that shortcoming, an entirely new approach may be needed. 
To achieve the United Nations Sustainable Development Goals (SDGs), the world’s multilateral development banks (MDBs) and their private-sector branches, the DFIs, have committed to increasing private-sector finance by as much as 35% over the next three years. 
To support infrastructure investment, MDBs have expanded their offers of risk-mitigation instruments for private investors, along with other important measures. 
Yet they have made only limited investments in infrastructure equity, focusing such investment, instead, on small- and medium-size enterprises in emerging markets. 
Why shouldn’t infrastructure equity be left to the private sector? 
Although infrastructure assets have the advantage of providing steady, long-term income streams, the early stages of most big projects carry higher levels of risk. 
When projects are over budget, fall behind schedule, or fail to generate projected returns, investors pay the price. 
So, rather than investing in new projects, private investors tend to prefer to channel their money toward operational infrastructure that is already generating stable revenue. 
Reflecting this aversion to risk, the total number of shovel-ready projects worldwide has held steady in recent years, even though investor interest in infrastructure investment has soared, causing deal values to increase. 
Moreover, in recent decades more than 70% of private-sector investment in infrastructure has been channeled to advanced economies, according to McKinsey. 
To increase their impact, MDBs and DFIs need to direct far more capital toward infrastructure projects in the preparation and construction stages, when the private sector invests less. 
While loans and risk-mitigation instruments are necessary to support this effort, they are not sufficient, because they are generally provided after a project is fully documented and confirmed as “bankable.” 
Equity investors, by contrast, frequently play a central role in the early stages of a project: the initial technical and financial structuring phase. 
If equity investment is lacking, potentially profitable projects may never reach the “bankable” stage at which debt financing and risk mitigation can be confirmed. 
Yet, because equity investors are the last to be repaid in case of project failure, they carry the most risk. 
To increase emerging markets’ share of infrastructure investment, the world needs more “patient capital” from equity investors willing to take those early risks and wait longer for their investments to mature. 
If the private sector won’t fill this void, then the onus is on MDBs and DFIs, which, by definition, exist for this purpose. 
Although some MDB and DFI financing is available for early-stage infrastructure investment – including from China’s Silk Road Fund, the World Bank, and the International Finance Corporation – the supply of such financing is dwarfed by demand. 
MDBs and DFIs could rapidly increase their contribution by channeling part of their capital through public financial institutions that already undertake this type of investment. 
Strategic investment funds may hold the answer. 
These funds, which are wholly or partly owned by governments or other public institutions, invest according to a “double bottom line,” which measures performance by financial success and by social and environmental impact. 
In the last decade, nearly three dozen strategic investment funds have been established around the world in economies as diverse as India, Ireland, the Philippines, and Senegal. 
These investment funds are equity investors that operate as intermediaries between the private and public sectors, often independently, but adhering to a government-defined mandate. 
Staffed primarily by private-sector professionals, many have achieved high levels of private-sector co-investment, thereby expanding the pool of capital available for infrastructure investment. 
For example, in October 2017, India’s National Investment and Infrastructure Fund announced a $1 billion deal with a unit of the Abu Dhabi Investment Authority, one of the world’s largest sovereign wealth funds. 
The agreement will help India finance critical infrastructure upgrades. 
As holders of public capital, MDBs and DFIs can convert assets into “patient equity” by deploying capital through well-performing strategic investment funds. 
They can provide loans to help governments capitalize their strategic investment funds, capitalize the funds directly, or co-invest at the project level. 
By directing capital to the strongest performers, each entity could promote integrity and encourage competition. 
Although some DFIs, including the Asian Development Bank and the European Investment Bank, are already engaging with strategic investment funds, there remains considerable room for growth. 
MDBs and DFIs have rightly increased their efforts to mobilize private capital. 
A shift toward early-stage equity investment in infrastructure, and engagement with strategic investment funds, could significantly strengthen their capacity on this front, and increase the likelihood of the world achieving the SDGs. 

Austere Growth? 
WASHINGTON, DC – The German government’s reaction to newly elected French President François Hollande’s call for more growth-oriented policies was to say that there should be no change in the eurozone’s austerity programs. 
Rather, growth-supporting measures, such as more lending by the European Investment Bank or issuance of jointly guaranteed project bonds to finance specific investments, could be “added” to these programs. 
Many inside and outside of Germany declare that both austerity and more growth are needed, and that more emphasis on growth does not mean any decrease in austerity. 
The drama of the ongoing eurozone crisis has focused attention on Europe, but how the austerity-growth debate plays out there is more broadly relevant, including for the United States. 
Three essential points need to be established. 
First, in a situation of widespread unemployment and excess capacity, short-run output is determined primarily by demand, not supply. 
In the eurozone’s member countries, only fiscal policy is possible at the national level, because the European Central Bank controls monetary policy. 
So, yes, more immediate growth does require slower reduction in fiscal deficits. 
The only counterargument is that slower fiscal adjustment would further reduce confidence and thereby defeat the purpose by resulting in lower private spending. 
This might be true if a country were to declare that it was basically giving up on fiscal consolidation plans and the international support associated with it, but it is highly unlikely if a country decides to lengthen the period of fiscal adjustment in consultation with supporting institutions such as the International Monetary Fund. 
Indeed, the IMF explicitly recommended slower fiscal consolidation for Spain in its 2012 World Economic Outlook. 
Without greater short-term support for effective demand, many countries in crisis could face a downward spiral of spending cuts, reduced output, higher unemployment, and even greater deficits, owing to an increase in safety-net expenditures and a decline in tax revenues associated with falling output and employment. 
Second, it is possible, though not easy, to choose fiscal-consolidation packages that are more growth-friendly than others. 
There is the obvious distinction between investment spending and current expenditure, which Italian Prime Minister Mario Monti has emphasized. 
The former, if well designed, can lay the foundations for longer-term growth. 
There is also the distinction between government spending with high multiplier effects, such as support to lower-income groups with a high propensity to spend, and tax reductions for the rich, a substantial portion of which would likely be saved. 
Last but not least, there are longer-term structural reforms, such as labor-market reforms that increase flexibility without leading to large-scale lay-offs (a model rather successfully implemented by Germany). 
Similarly, retirement and pension reforms can increase long-term fiscal sustainability without generating social conflict. 
A healthy older person may well appreciate part-time work if it comes with flexibility. 
The task is to integrate such work into the overall functioning of the labor market with the help of appropriate regulation and incentives. 
Finally, particularly in Europe, where countries are closely linked by trade, a coordinated strategy that allows more time for fiscal consolidation and formulates growth-friendly policies would yield substantial benefits compared to individual countries’ strategies, owing to positive spillovers (and avoidance of stigmatization of particular countries). 
There should be a European growth strategy, rather than Spanish, Italian, or Irish strategies. 
Countries like Germany that are running a current-account surplus would also help themselves by helping to stimulate the European economy as a whole. 
Slower fiscal retrenchment, space for investment in government budgets, growth-friendly fiscal packages, and coordination of national policies with critical contributions from surplus countries can go a long way in helping Europe to overcome its crisis in the medium term. 
Unfortunately, Greece has become a special case, one that requires focused and specific treatment, most probably involving another round of public-debt forgiveness. 
But insufficient and sometimes counterproductive actions, coupled with panic and overreaction in financial markets, have brought some countries, such as Spain, which is a fundamentally solvent and strong economy, to the edge of the precipice, and with it the whole eurozone. 
In the immediate short run, nothing makes sense, not even a perfectly good public-investment project, or recapitalization of a bank, if the government has to borrow at interest rates of 6% or more to finance it. 
These interest rates must be brought down through ECB purchases of government bonds on the secondary market until low-enough announced target levels for borrowing costs are reached, and/or by the use of European Stability Mechanism resources. 
The best solution would be to reinforce the effectiveness of both channels by using both – and by doing so immediately. 
Such an approach would provide the breathing space needed to restore confidence and implement reforms in an atmosphere of moderate optimism rather than despair. 
The risk of inaction or inappropriate action has reached enormous proportions. 
No catastrophic earthquake or tsunami has destroyed southern Europe’s productive capacity. 
What we are witnessing – and what is now affecting the whole world – is a man-made disaster that can be stopped and reversed by a coordinated policy response. 

Austerity and Debt Realism 
CAMBRIDGE – Many, if not all, of the world’s most pressing macroeconomic problems relate to the massive overhang of all forms of debt. 
In Europe, a toxic combination of public, bank, and external debt in the periphery threatens to unhinge the eurozone. 
Across the Atlantic, a standoff between the Democrats, the Tea Party, and old-school Republicans has produced extraordinary uncertainty about how the United States will close its 8%-of-GDP government deficit over the long term. 
Japan, meanwhile is running a 10%-of-GDP budget deficit, even as growing cohorts of new retirees turn from buying Japanese bonds to selling them. 
Aside from wringing their hands, what should governments be doing? 
One extreme is the simplistic Keynesian remedy that assumes that government deficits don’t matter when the economy is in deep recession; indeed, the bigger the better. 
At the opposite extreme are the debt-ceiling absolutists who want governments to start balancing their budgets tomorrow (if not yesterday). 
Both are dangerously facile. 
The debt-ceiling absolutists grossly underestimate the massive adjustment costs of a self-imposed “sudden stop” in debt finance. 
Such costs are precisely why impecunious countries such as Greece face massive social and economic displacement when financial markets lose confidence and capital flows suddenly dry up. 
Of course, there is an appealing logic to saying that governments should have to balance their budgets just like the rest of us; unfortunately, it is not so simple. 
Governments typically have myriad ongoing expenditure commitments related to basic services such as national defense, infrastructure projects, education, and health care, not to mention to retirees. 
No government can just walk away from these responsibilities overnight. 
When US President Ronald Reagan took office on January 20, 1981, he retroactively rescinded all civil-service job offers extended by the government during the two and a half months between his election and the inauguration. 
The signal that he intended to slow down government spending was a powerful one, but the immediate effect on the budget was negligible. 
Of course, a government can also close a budget gap by raising taxes, but any sudden shift can significantly magnify the distortions that taxes cause. 
If the debt-ceiling absolutists are naïve, so, too, are simplistic Keynesians. 
They see lingering post-financial-crisis unemployment as a compelling justification for much more aggressive fiscal expansion, even in countries already running massive deficits, such as the US and the United Kingdom. 
People who disagree with them are said to favor “austerity” at a time when hyper-low interest rates mean that governments can borrow for almost nothing. 
But who is being naïve? 
It is quite right to argue that governments should aim only to balance their budgets over the business cycle, running surpluses during booms and deficits when economic activity is weak. 
But it is wrong to think that massive accumulation of debt is a free lunch. 
In a series of academic papers with Carmen Reinhart – including, most recently, joint work with Vincent Reinhart (“Debt Overhangs: Past and Present”) – we find that very high debt levels of 90% of GDP are a long-term secular drag on economic growth that often lasts for two decades or more. 
The cumulative costs can be stunning. 
The average high-debt episodes since 1800 last 23 years and are associated with a growth rate more than one percentage point below the rate typical for periods of lower debt levels. 
That is, after a quarter-century of high debt, income can be 25% lower than it would have been at normal growth rates. 
Of course, there is two-way feedback between debt and growth, but normal recessions last only a year and cannot explain a two-decade period of malaise. 
The drag on growth is more likely to come from the eventual need for the government to raise taxes, as well as from lower investment spending. 
So, yes, government spending provides a short-term boost, but there is a trade-off with long-run secular decline. 
It is sobering to note that almost half of high-debt episodes since 1800 are associated with low or normal real (inflation-adjusted) interest rates. 
Japan’s slow growth and low interest rates over the past two decades are emblematic. 
Moreover, carrying a huge debt burden runs the risk that global interest rates will rise in the future, even absent a Greek-style meltdown. 
This is particularly the case today, when, after sustained massive “quantitative easing” by major central banks, many governments have exceptionally short maturity structures for their debt. 
Thus, they run the risk that a spike in interest rates would feed back relatively quickly into higher borrowing costs. 
With many of today’s advanced economies near or approaching the 90%-of-GDP level that loosely marks high-debt periods, expanding today’s already large deficits is a risky proposition, not the cost-free strategy that simplistic Keynesians advocate. 
I will focus in the coming months on the related problems of high private debt and external debts, and I will also return to the theme of why this is a time when elevated inflation is not so naïve. 
Above all, voters and politicians must beware of seductively simple approaches to today’s debt problems. 

Back to the Brink for the Eurozone? 
ISTANBUL – When European Central Bank President Mario Draghi announced in late July that the ECB would “do whatever it takes” to prevent so-called “re-denomination risk” (the threat that some countries might be forced to give up the euro and reintroduce their own currencies), Spanish and Italian sovereign-bond yields fell immediately. 
Then, in early September, the ECB’s Council of Governors endorsed Draghi’s vow, further calming markets. 
The tide of crisis, it seemed, had begun to turn, particularly after the German Constitutional Court upheld the European Stability Mechanism, Europe’s bailout fund. 
Despite the ECB’s imposition of conditionality on beneficiaries of its “potentially unlimited” bond purchases, financial markets across Europe and the United States staged a major rally. 
It seems, however, that the euphoria was short-lived. 
Yields on Spanish and Italian government bonds have been inching up again, and equity investors’ mood is souring. 
So, what went wrong? 
When I welcomed Mario Draghi’s strong statement in August, I argued that the ECB’s new “outright monetary transactions” program needed to be complemented by progress toward a more integrated eurozone, with a fiscal authority, a banking union, and some form of debt mutualization. 
The OMT program’s success, I argued, presupposed a decisive change in the macroeconomic policy mix throughout the eurozone. 
There has been some progress, albeit slow, toward agreement on the institutional architecture of a more integrated eurozone. 
The necessity of a banking union is now more generally accepted, and there is a move to augment the European budget with funds that could be deployed with policy or project conditionality, in addition to ESM resources. 
(Germany and its northern European allies, however, insist that this be an alternative to some form of debt mutualization, rather than a complement to it.) 
The ESM, supported by the ECB, could become a European version of the International Monetary Fund, and the new funds in the European budget could become, with support from the European Investment Bank, Europe’s World Bank. 
All of this will take time, but there is some movement in the right direction. 
Where there has been virtually no progress at all is in the recalibration of the macroeconomic policy mix. 
The prevailing strategy in Europe remains simply to force internal devaluation on the southern countries, with excessive austerity aimed at causing severe wage and price deflation. 
While some internal devaluation is being achieved, it is producing so much economic and social dislocation – and, increasingly, political upheaval – that there is no supply response, despite the accompanying structural reforms. 
Indeed, the deflationary spiral, particularly in Greece and Spain, is causing output to contract so rapidly that further spending cuts and tax increases are not reducing budget deficits and public debt relative to GDP. 
And Europe’s preferred solution – more austerity – is merely causing fiscal targets to recede faster. 
As a result, markets have again started to measure GDP to include some probability of currency re-denomination, causing debt ratios to look much worse than those based on the certainty of continued euro membership. 
While all of this is happening in Europe’s south, most of the northern countries are running current-account surpluses. 
Germany’s surplus, at $216 billion, is now larger than China’s – and the world’s largest in absolute terms. 
Together with the surpluses of Austria, the Netherlands, and most non-eurozone northern countries – namely, Switzerland, Sweden, Denmark, and Norway – northern Europe has run a current-account surplus of $511 billion over the last 12 months. 
That is larger than the Chinese surplus has ever been – and scary because it subtracts net demand from the rest of Europe and the world economy. 
Inflicting excessive austerity on the southern European countries while limiting their exports by restricting effective demand in the north is like administering an overdose to a patient while withholding oxygen. 
The political and economic success of southern Europe’s much-needed structural reforms requires the proper dose and timing of budgetary medicine and buoyant demand in the north. 
The northern countries argue that permitting wage growth and boosting domestic demand would reduce their competitiveness and trade surplus. 
But that misses the entire point: surplus countries must contribute no less than deficit countries to global and regional rebalancing, because the world economy cannot export to outer space. 
This argument was always emphasized when the Chinese surplus was deemed excessive, but it is virtually ignored when it comes to northern Europe. 
If conservative politicians and economists in Europe’s north continue to insist on the wrong overall macroeconomic policy mix in Europe, they could yet bring about the end of the eurozone, and, with it, the end of the European project of peace and integration as we have known it for decades. 
This is not to argue against the need for vigorous structural and competitiveness-enhancing reforms in the south; it is to give those reforms a chance to succeed. 

The Austerity Pandemic 
NEW YORK – At this year’s International Monetary Fund/World Bank spring meetings in Washington, DC, the IMF urged European countries to ease their austerity policies and focus on investment, marking a shift from past rhetoric. 
But, in the corridors of those two multilateral institutions, there was talk of double standards. 
In fact, most countries are cutting public expenditures – with the IMF’s support. 
So, even as some northern countries begin to question the austerity prescription, their southern counterparts (including southern European countries) are increasingly adopting fiscal-adjustment measures. 
According to IMF projections, of the 119 governments that are shrinking their 2013 budgets (relative to GDP), three-quarters are in developing countries (including 21 low-income and 68 middle-income countries). 
Fiscal consolidation affects an estimated 80% of developing-country citizens, and its impact is expected to intensify steadily through 2015. 
During this time, the magnitude of contraction will be significant, with roughly one-quarter of all developing countries expected to cut expenditures below pre-crisis levels. 
A review of policy discussions from 314 IMF country reports published since 2010 – part of a comprehensive update on the global shift toward austerity – shows that many adjustment measures are most prevalent in developing countries, where citizens are especially vulnerable to austerity’s economic and social consequences. 
The most common adjustment measure, which governments in 78 developing countries are considering, is subsidy reduction. 
Deliberations on the subject are often – indeed, in 55 developing countries – accompanied by discussion of the need for a targeted social safety net to offset higher food, energy, or transport costs for the poorest citizens. 
But developing and implementing a social-protection floor takes time, and governments do not seem to be willing to wait. 
At a time when the need for food assistance is particularly high, some governments have withdrawn food subsidies and others have scaled back subsidies for agricultural inputs like seeds, fertilizer, and pesticides, hindering local food production. 
Similarly, public-sector wage cuts and caps – currently being pursued by 75 developing countries – threaten to undermine service delivery to citizens, particularly at the local level in poor rural areas, where a single teacher or nurse can determine whether a child receives an education or health care. 
This danger is heightened as policymakers in 22 developing countries consider health-care reforms and those in 47 developing countries discuss pension reforms. 
On the revenue side, as many as 63 developing countries are considering raising consumption taxes, such as the value-added tax. 
But taxing basic foods and household items can have a disproportionate impact on lower-income families, whose limited disposable incomes are already stretched thin, and thus can exacerbate existing inequalities. 
Instead of slashing expenditures, developing-country leaders should focus on providing decent job opportunities and improved living standards for their citizens. 
They must recognize that austerity will not help them to achieve their development goals. 
On the contrary, spending cuts will hurt their most vulnerable citizens, widen the gap between rich and poor, and contribute to social and political instability. 
Indeed, civil unrest is already on the rise across the developing world. 
From the Arab Spring to the violent food riots that have erupted in recent years across Asia, Africa, and the Middle East, populations are reacting to the cumulative effects of pervasive unemployment, high food prices, and deteriorating living conditions. 
Ours does not have to be an age of austerity; governments, even in the poorest countries, have options to foster a socially responsive economic recovery. 
These include, among other measures, debt restructuring, increasing the progressivity of taxation (on personal income, property, and corporations, including the financial sector), and curbing tax evasion, the use of tax havens, and illicit financial flows. 
Ultimately, reducing wages, public services, and household income impedes human development, threatens political stability, lowers demand, and delays recovery. 
Rather than continuing to adhere to policies that do more harm than good, policymakers should consider a new approach – one that actually contributes to their countries’ social and economic progress. 

No Agnostics in the Climate Foxhole 
SYDNEY – On a recent 14.5-hour flight from Los Angeles to Sydney, I had time to read the columnist Charles Krauthammer’s collection of essays, Things that Matter. 
It made for a disturbing flight. 
I have enjoyed Krauthammer’s writing over the years, but there was something in his book that I found deeply troubling: his description of himself as an “agnostic” on climate change. 
He “believes instinctively that it can’t be very good to pump lots of carbon dioxide into the atmosphere,” and yet he “is equally convinced that those who presume to know exactly where that leads are talking through their hats.” 
The word that I found most galling was “agnostic” – not only because Krauthammer is a trained scientist, but also because the word was used repeatedly by former Australian Prime Minister John Howard when he addressed a group of climate-change deniers in London in late 2013. 
“Part of the problem with this debate,” Howard told the assembled skeptics, “is that to some of the zealots involved their cause has become a substitute religion.” 
As Howard and Krauthammer should know, the subject of climate change is not a matter of religion, but of science. 
According to a 2013 survey of peer-reviewed publications on the subject, some 97% of scientists endorse the position that humans are causing global warming. 
Anyone familiar with the scientific process is aware that researchers are trained to disagree, to contest one another’s hypotheses and conclusions. 
A consensus of such magnitude is as close as we ever get to a recognized scientific fact. 
Given that even Krauthammer concedes that pumping the atmosphere full of carbon dioxide “can’t be very good,” the next logical step in the debate is to determine the best way to address the problem. 
As an economist, I favor an auction-based cap-and-trade system to put a price on carbon. 
But I also understand the potential usefulness of regulatory measures like targets for renewable energy, bans on incandescent light bulbs, and mandates for the use of biofuels. 
What I cannot accept is for somebody who offers no solutions to claim that those of us who do are “talking through our hats.” 
Fortunately, voices like Krauthammer’s are becoming increasingly rare. 
To be sure, there are still holdouts, like Australian Prime Minister Tony Abbott, who replaced a carbon tax with a plan to tax the country’s citizens in order to pay polluters to cut emissions. 
As a policy, this is inequitable, inefficient, and unlikely to lower emissions at a pace that is sufficient to meet the conditions of the global climate-change agreement expected to be reached in Paris in December. 
A sure sign of a shift in mentality is the growing recognition by financial institutions that loans and investments may be overexposed to the risks of climate change. 
These risks include natural disasters, more extreme weather, efforts by governments to reduce greenhouse-gas emissions, and the knock-on effect of a technological revolution in renewables, energy efficiency, and alternative technologies. 
According to the Asset Owners Disclosure Project, which I chair, the top 500 global asset owners are alarmingly exposed to the dangers of climate change. 
More than half of their investments are in industries exposed to the dangers of climate change; less than 2% are in low-carbon intensive industries. 
As a result, there is a risk that their investments and holdings will become “stranded,” as changes in policy or market conditions cut the value of infrastructure, other property, and fossil-fuel reserves. 
As Hank Paulson, Secretary of the US Treasury when the global financial crisis erupted in 2008, once warned, the risks of a climate-induced financial crisis would dwarf those of the sub-prime crisis. 
The price of coal, for example, has plunged to around half of its peak level, with plenty of room remaining on the downside. 
Consequently, shares in coal companies have fallen by as much as 90%, leaving asset owners scrambling to divest. 
By contrast, investing in a company like Tesla Motors – which has now developed a rechargeable battery for home use, which could lead to a sharp increase in the number of households switching to solar power – looks far more attractive. 
As this realization percolates through the market, asset owners are hedging their bets by increasing their investments in low-carbon industries and companies like Tesla. 
Over time, this will have a significant effect on the allocation of global investment funds. 
Krauthammer may think that I am talking through my hat, but I am confident that soon enough he – and those who listen to him – will be eating theirs. 

Playing by the Rules in Asia 
CANBERRA – China’s adventurism in the South China Sea has prompted a change in Australian policymaking that merits wide international attention. 
In making maintenance of a “rules-based global order” a core strategic priority, Australia’s new Defense White Paper adopts language not often found at the heart of national defense charters. 
It is all the more surprising coming from a conservative government that is usually keen to follow the United States down any path it takes. 
Australia wanted a readily defensible basis for contesting China’s claims that could not be portrayed as just another reflexive embrace of the American position. 
For a country trying – as are others in the region – to avoid zero-sum choices between our strategic partner, the US, and our economic partner, China, the White Paper’s words were astutely chosen and deserve emulation. 
Part of the attraction of a “rules-based global order” is that it would constrain all relevant players. 
US policymakers, unlike those in most of the rest of the world, don’t find the concept inherently attractive. 
Although they – like everyone else – do pay lip service to it, willingness to be bound by international rules is not part of US officials’ DNA. 
The invasion of Iraq in 2003 remains Exhibit A. But there are others, including the overreach (alongside the United Kingdom and France) of the UN Security Council’s mandate in Libya in 2011, and what Jessica Mathews has described as the “wasteland for multilateral commitments” in the US approach to binding treaties, including the Convention on Biodiversity, the Comprehensive Nuclear Test Ban Treaty, the Protocol on Torture, and, most relevant to the South China Sea, the UN Convention on the Law of the Sea (UNCLOS). 
The more immediate sting in the Australian White Paper is for China. 
Whatever else is going on in the South China Sea, it is not respect for a rules-based global order. 
Playing by the rules would imply a number of changes to Chinese behavior. 
First, it would mean clearly articulating specific sovereignty claims, based on long use or occupancy of particular habitable islands, in the Paracel or Spratly groups or elsewhere. 
When those claims overlap with claims by other states, as most of them do, China must be prepared to resolve them, preferably by international adjudication or arbitration, which it has so far strongly resisted, or at the very least by genuine give-and-take negotiation. 
Second, China would have to abandon its “nine-dash line” as a basis not only for sovereignty claims relating to land features bounded by it, but also for claims to ill-defined “historical waters” or “traditional Chinese fishing grounds.” 
With Chinese fishing vessels constantly intruding into what have hitherto been others’ undisputed 200-nautical-mile exclusive economic zones (EEZs) under UNCLOS, these claims are now causing real friction with countries like Indonesia. 
UNCLOS – now generally accepted as customary international law even by countries that have not joined it, like the US – is the only acceptable framework for resolving these issues. 
Even if every one of China’s current sovereignty claims to particular habitable islands were to be accepted, the 12 nautical miles of territorial waters, and the 200 nautical miles of EEZ associated with each of them, would not begin to add up to the 80% of the South China Sea now encompassed by China’s nine-dash line. 
Third, China would need to limit severely its actions relating to reefs and shoals, never previously habitable, where it has been reclaiming land and building airstrips and other installations capable of military use, and seeking to deny others’ the use of adjacent waters and airspace. 
International law tolerates some such building – as the Philippines, Vietnam, and Malaysia have been doing for years, though on a much smaller scale. 
But it does not tolerate any military use, or support more than a 500-meter “safety zone” around such installations – not a territorial sea, EEZ, “air defense identification zone,” or anything else. 
Fourth, China should moderate its position that no foreign ship or aircraft may engage in surveillance or intelligence collection not only within its territorial waters, about which international law is clear, but within its entire EEZ, about which China’s argument is not at all strong. 
Adherence to this position sustains a constant risk of inflammatory incidents. 
So long as China refuses to play by accepted international rules, others are entitled to push back, including with the fly-by or “freedom of navigation” sail-by exercises in which the US has been engaging, and which Australia and others should separately emulate. 
China’s insistence that it has no intention to disrupt commercial shipping or flight lanes should be believed; to do otherwise would be to cut off its nose to spite its face. 
But its behavior is testing the limits of regional and global understanding and patience. 
The remaining attraction of making a “rules-based global order” central to Australia’s policy is the discipline this imposes on Australia itself – as it would on any state that adopts this language. 
To be taken seriously, we have to put our money where our mouths are, by accepting international duties and responsibilities – like helping to stop atrocity crimes in faraway places – that are consistent with our claims to good international citizenship but serve no immediate traditional national security or economic interest. 
In Australia’s case, this means thinking again about some of our efforts to limit our exposure to the International Court of Justice and certain dispute-resolution mechanisms under UNCLOS. 
In this imperfect world, there is considerable tolerance for all sorts of imperfect behavior. 
But hypocrisy always catches up with you. 
Preaching the virtues of a rule-based order to others, but being coy about some of those rules oneself, is not a good look. 

Austria: Values and Responsibilities 
VIENNA: The formation of a new government coalition in Austria has given rise to international criticism. 
As Federal Chancellor of the Republic of Austria I take those concerns very seriously. 
However, in studying international media reports, I cannot but notice that Austria has repeatedly been described in a rather undifferentiated and unbalanced way; a way that stands in sharp contradiction to the realities in our country. 
Over the last fifty years, Austria has always been a responsible and reliable partner in Europe and the entire international community. 
It will continue to live up to her traditional values and responsibilities, based on democracy, the rule of law, respect for human rights, openness, tolerance, humanitarian solidarity, a sense of duty and reliability. 
These principles are reiterated in the Preamble to the Government Program. 
It was signed, on 3 February 2000, in the presence of Federal President Thomas Klestil, by myself and the chairman of the Austrian Freedom Party, Jörg Haider - who remains Governor of Carinthia and did not join the Federal Government. 
This document is binding on both of us as signatories, on our respective political parties, and on their democratically elected representatives. 
It will guide the future work of the Coalition Government. 
Austria is strongly committed to the principles of liberty, democracy, respect for human rights, and the rule of law that are common to all EU member states. 
Significantly, two thirds of the Austrian electorate cast their votes in favor of membership in the European Union in 1994. 
This support was considerably higher than in any of the other fourteen member states when they were joining the European Union. 
In Austria's view, the Transatlantic Partnership, which has always been characterized by mutual respect and trust, will also have a special significance in ensuring future peace, stability, and prosperity. 
Austria takes pride in its international solidarity with the victims of political repression, war, and expulsion. 
We opened our doors in 1956 and 1968 during the crises in Hungary and Czechoslovakia, and again in the 1990s when more than 100 000 refugees from the Balkans found a new home in our country. 
As a proportion of Austria=s population of about 8 million, the number of Balkan refugees alone would be equivalent to over 1 million refugees in Germany and over 3 million in the United States. 
Thus, over the last decades, Austria - more than most other countries - has demonstrated her profound social and humanitarian responsibility. 
Austria's past calls for an intensely critical and sensitive approach to injustice, murder, and terror under the Nazi regime. 
We have taken important steps to deal with this past, and the new Federal Government will continue on this path without hesitation. 
Based on the findings of the interim report of the Austrian Historians' Commission, we will seek prompt compensation for former forced laborers, and we expect the companies concerned also to recognize their responsibilities. 
To expedite matters, I have appointed a special representative for the question of forced and slave labor under the Nazi regime. 
Mrs. Maria Schaumayer, the former head of the Austrian central bank, will head a new office to handle the issue of compensating the victims. 
Among my government=s other commitments, compensation of aging victims of the Holocaust, who live in difficult financial circumstances, will be among our highest priorities in the next few months. 
The Austrian Government will also support open access to archives in federal agencies and advocate a similar policy for non-governmental entities. 
We will encourage Austrian insurance companies to participate in the work of the International Commission on Holocaust Era Insurance Claims. 
We will seek to improve the practical application of the Art Restitution Law of 1998 and encourage similar restitution steps among local and regional governmental bodies. 
My Government is deeply committed to the protection of human rights and to combating racism and discrimination. 
We have a highly developed national human rights legislation and practice, as well as a strong and independent judiciary. 
Austria is party to practically all major international human rights treaties and has traditionally played an active part in their drafting. 
We have not only ratified the European Human Rights Convention, we also made it a part of our own Constitution. 
This means that anyone residing in Austria can file a complaint to the European Court for Human Rights, whose judgements are binding on the government. 
Austria is also constitutionally bound by the International Convention on the Elimination of All Forms of Racial Discrimination. 
As Federal Chancellor of the Republic of Austria I will do my utmost do ensure the strict implementation of the Preamble and the Government Program (which can be found on the website of the Austrian Federal Government http://www.austria.gv.at.) 
I myself and the other members of the Austrian Federal Government expect to be judged according to our performance rather than on the basis of prejudice. 

What’s the Matter With Austria? 
MUNICH – Last month, Austria avoided the election of a president from the xenophobic Freedom Party by the skin of its teeth. 
Indeed, the Freedom Party is now challenging the result. 
Given the worrying nature of the populist challenge, and its implications for European politics and the handling of the refugee crisis, it is important to diagnose what ails Austria, so that the cure doesn’t end up being worse than the disease. 
Austria was once lauded as Germany’s more successful neighbor, one of Europe’s fastest-growing countries. 
But its economy has been sputtering since 2012, with GDP up last year by a meager 0.7%; only Greece and Finland performed more poorly. 
And Austria’s unemployment rate has soared, from 5% in 2010 to 10% today. 
These developments have their origins in how Austria engaged with Central and Eastern Europe after the fall of communism. 
At first, Austria benefited from the European Union’s eastern enlargement. 
International trade soared, Austrian firms invested heavily in the region, and Austrian banks opened subsidiaries there, financing these countries’ modernization. 
All of this was good for business, and the Austrian economy grew rapidly. 
But a hidden dynamic ultimately turned the tables on this success. 
Central and Eastern European countries had low per capita income, but were rich in skills. 
Austria, far wealthier, was not. 
In 1998, 16% of Central and Eastern Europeans (including Russia and Ukraine) had academic degrees, compared to just 7% of Austrians. 
So, when Austrian firms invested in Eastern Europe, they did not just relocate low-skilled manufacturing jobs; they also offshored the parts of the value chain that required specialized skills and produced valuable research. 
According to my research, from 1990 to 2001, Austrian subsidiaries in Eastern Europe employed five times as many people with academic degrees, as a percentage of staff, as their parent firms did. 
They also engaged 25% more research personnel in their labs. 
This relocation of research activity lowered growth in Austria and boosted growth in Eastern Europe. 
Research spills over to the rest of the economy, as new knowledge diffuses into commercial activities. 
Tapping the knowledge produced by Austrian subsidiaries was one of the ways Eastern European economies were able to grow so quickly. 
Today, Bratislava, Prague, and Warsaw – the location of most Austrian subsidiaries – have higher per capita incomes than Vienna. 
Indeed, according to the Hungarian economist Zsolt Darvas, in terms of purchasing power parity, all three cities surpassed Vienna in 2008. 
This is a remarkable development, given that Vienna has served as a reference point for these capitals for centuries. 
Germany’s growth was not similarly affected, for three reasons. 
To begin with, after the fall of Communism, Austria reoriented its foreign direct investment almost exclusively to Eastern Europe, which accounted for nearly 90% of its FDI outflows. 
In Germany, just 4% of FDI moved to Eastern Europe in the 1990s, reaching 30% at the turn of the century. 
As a result, Austria became much more integrated with Eastern Europe. 
Second, Germany was richer in skills than Austria. 
In 1998, the share of the German population with academic degrees was 15%, more than double the Austrian level. 
German firms did relocate high-skilled work to the east, but not to the extent that Austria did. 
As a proportion of the workforce, German affiliates in Eastern Europe employed three times as many people with academic degrees as their parent firms did. 
And German subsidiaries employed 11% more researchers than their parent companies. 
Finally, many of the Austrian parent companies were themselves subsidiaries of foreign firms, while German firms were German multinationals, which transplanted their corporate culture to their Central and Eastern European subsidiaries. 
They employed more German managers relative to local managers, which gave them more control over innovation. 
Furthermore, most German investments were based on the transfer of an established technology; only 8% of the country’s FDI in the region involved cutting-edge research. 
By contrast, Austrian firms adapted their business to the region’s environment and employed more local managers than Austrians. 
As a result, their subsidiaries were more autonomous in their innovation decisions. 
There was no mechanism that guaranteed that the knowledge created in a subsidiary also benefited the parent company. 
If Austria is to return to its previous growth path, it will have to become more attractive as a location for innovation. 
And to do this, Austrian firms must employ highly qualified people in their research labs. 
Educating a highly skilled workforce takes time, of course. 
But fortunately, Austria has another option: immigrants. 
Austrian policymakers could choose to follow Canada’s example and introduce a selective immigration policy that welcomes highly skilled migrants and refugees. 
Austrians nearly closed the door on that option. 
Now they must recognize that what populists call a weakness could be Austria’s best hope for reviving growth. 

Russia and China: The Movie 
NEW YORK – The times we live in are often most clearly reflected in the mirror of art. 
Much has been written about post-communism in Russia and China. 
But two recent films, Jia Zhangke’s A Touch of Sin, made in China in 2013, and Andrey Zvyagintsev’s Leviathan, made in Russia in 2014, reveal the social and political landscapes of these countries more precisely than anything I have seen in print. 
Jia’s movie is episodic; four loosely linked stories about lone acts of extreme violence, mostly culled from contemporary newspaper stories. 
Leviathan is about a decent man whose life is ruined by the mayor of his town in collusion with the Russian Orthodox Church and a corrupt judiciary. 
Both films are visually stunning, despite their stories’ bleakness. 
The dark skies over the northern Russian coast in Leviathan look ravishing, and Jia even manages to make the concrete and glass jungle of Shenzhen, the monster city between Guangzhou and Hong Kong, look gorgeous. 
The other thing both films share is a fascination with mythical stories, the Book of Job in Leviathan, and martial-arts fiction in A Touch of Sin. 
Real estate plays a major part in both movies. 
In the first episode of A Touch of Sin, the local boss has become a private-plane-owning billionaire by stripping and selling all of his region’s collective assets. 
Everything in this new China – where the Chinese Communist Party (CCP) still rules, but the ideas of Karl Marx are as dead as they are in Russia – is for sale, even the trappings of its Maoist past. 
In one scene, we see prostitutes in a nightclub titillating overseas Chinese businessmen by parading up and down in sexy People’s Liberation Army uniforms. 
The story of Leviathan focuses on the house built by a simple mechanic named Nikolay. 
He is robbed of his property by the corrupt mayor, who is paid by the Orthodox Church for the right to build a new church on Nikolay’s land. 
Nikolay is disposed of by having him framed for his wife’s murder and tried by a crooked court. 
The importance of real estate in both films is no coincidence. 
Property, construction, and land are the common currencies of power in mafia societies – in China and Russia no less than in Sicily. 
One reason China has been transformed into a gigantic building site, with huge new cities emerging almost overnight, is that this drives a red-hot and highly corrupt economy, ruled by a Leninist party that has monetized political power by asset-stripping and construction. 
It is irrelevant that President Vladimir Putin’s United Russia Party, unlike the CCP, makes no claim to any form of Marxist ideology. 
The way both governments operate is quite similar: party bosses, tycoons, and corrupt bureaucrats divide the spoils, while promoting chauvinism and “traditional values” – whether those of the Orthodox Church or Confucianism. 
Judges are bought or intimidated to ensure that bosses remain above the law. 
Putin’s party was elected in Russia, as was President Recep Tayyip Erdoğan’s Justice and Development Party in Turkey, Prime Minister Viktor Orbán’s Fidesz in Hungary, and President Abdel Fattah el-Sisi’s military regime in Egypt. 
The CCP was not. 
But this, too, is largely irrelevant. 
What these governments share is the fusion of capitalist enterprise and political authoritarianism. 
This political model is now seen as a serious rival to American-style liberal democracy, and perhaps it is. 
But during the Cold War, authoritarian capitalism, usually under military regimes, was anti-Communist and very much on America’s side. 
South Korea’s strongman, Park Chung-hee, current President Park Geun-hye’s father, was in many ways a pioneer of the type of society that we now see in China and Russia. 
So was Chile’s General Augusto Pinochet. 
Because the dictatorships in America’s client states ended more or less when the Cold War did, and were replaced by liberal democracies, many were lulled into the comforting belief that liberal democracy and capitalism would naturally – even inevitably – come together everywhere. 
Political freedom is good for business, and vice versa. 
This great twentieth century myth has now been shattered. 
Orbán claimed earlier this year that liberal democracy was no longer a viable model. 
He cited China and Russia as more successful countries, not for ideological reasons, but because he thinks that they are more competitive in today’s world. 
There are reasons to doubt this, of course. 
The Russian economy is far too dependent on oil and other natural resources, and the legitimacy of China’s one-party system could collapse quickly in an economic crisis. 
The way that illiberal regimes use the law for their own ends will not inspire the confidence of investors, either – at least not in the long run. 
And yet, for now, the societies depicted so acidly in Leviathan and A Touch of Sin continue to look good in the eyes of many people who are disillusioned with Europe’s economic stagnation and America’s political dysfunction. 
Western businessmen, artists, architects, and others who need large amounts of money for expensive projects enjoy working with authoritarian regimes that “get things done.” 
Illiberal thinkers on the far right and left admire strongmen who stand up to America. 
A Touch of Sin has been shown to great acclaim all over the world, but not in China. 
Leviathan, by contrast, has been submitted as the official Russian entry for the Oscars. 
Perhaps China’s rulers are less sure of themselves than Putin. 
Or perhaps Putin is just a bit cannier. 
His followers in Russia are unlikely to see, let alone be influenced by, an art film, and this sliver of Russian free expression might just persuade foreigners that there is still some liberalism left in Putin’s authoritarian democracy – at least until that, too, ends up as a shattered illusion. 

Tough Times for the Tough Guys 
TARN, FRANCE – Shares in strongman leaders seem to be falling. 
The market has not yet turned bearish, but autocrats have little reason to feel bullish. 
Consider China. 
The internal power games of the Communist Party of China (CPC) are notoriously opaque, and rarely does political infighting reach the level at which it cannot be covered up. 
And yet rumbles of disquiet can clearly be heard. 
This month, as President Xi Jinping and his senior advisers retreated to the seaside resort of Beidaihe, rumors were circulating about growing criticism of Xi’s personality cult among the CPC rank and file. 
Judging by the rumors, Xi should be asking himself if it was wise to roll back Deng Xiaoping’s reforms, and to ignore the precedents set by former CPC leaders such as Jiang Zemin and Hu Jintao. 
He might also want to reconsider his triumphalist rhetoric, given US President Donald Trump’s nationalist sensitivities and protectionist bullying. 
Lastly, he may want to reassess his signature policy, the Belt and Road Initiative, which is increasingly being criticized as a mechanism for China to export its debt to other indebted countries, often through investments in white elephants and other dubious projects. 
Meanwhile, Xi’s new best friend, Russian President Vladimir Putin, remains politically impregnable. 
But, as one Fox News reporter suggested, that might be because so many of his critics “end up dead.” 
Russia’s government still depends on oil and gas for 40% of its revenue, and the economy, deprived of both entrepreneurial dynamism and foreign investment, remains moribund. 
Look around your home and see if you can find anything that came from Russia, aside from vodka, energy, or the works of Tolstoy. 
But Putin and Xi’s strongman troubles pale in comparison to those of Turkish President Recep Tayyip Erdoğan and Trump, who has now been implicated by his longtime lawyer and “fixer” in the commission of a federal felony. 
Fifteen years after coming to power on the back of a foreign-exchange crisis, Erdoğan now seems intent on manufacturing a new crisis of his own. 
The Turkish lira has lost 38% of its value against the dollar this year, owing almost entirely to Erdoğan’s economic illiteracy, cronyism, and deafness to alternative viewpoints. 
Unlike his predecessor as president, Abdullah Gül, Erdoğan has never made much of an effort to be a leader for the whole country. 
His overbearing manner and self-serving policies have deepened the divisions between affluent secularists and the poorer, rural Muslims who form his base. 
Turkey’s latest crisis is all the more tragic for being unnecessary. 
The country is an important regional hub, home to 81 million people, and a bridge between the West, the Middle East, and Central Asia. 
It has the potential to be an economic dynamo. 
But Erdoğan’s policies are dragging Turkey’s economy into a hole. 
Though the lira is in freefall and inflation is soaring, Erdoğan has pressured the central bank not to raise interest rates, for fear that a growth slowdown will hurt his party’s prospects in next year’s local elections, especially in Turkey’s cities. 
But over the next 12 months, he will have to deal with a widening current-account deficit and a mountain of dollar-denominated debt. 
Making matters worse, Erdoğan recently appointed his unqualified son-in-law, Berat Albayrak – the Jared Kushner of Ankara – as Minister of Finance and Treasury, further unsettling the markets. 
And he has engaged in an escalating diplomatic and trade dispute with the US over the arrest of an American pastor accused of complicity in the 2016 coup attempt against Erdoğan. 
Trump, for his part, has made freeing the pastor a personal crusade, most likely as a sop to his evangelical base in the run-up to the US midterm elections this November. 
To that end, he recently announced that he will double US levies on Turkish aluminum and steel. 
Trump’s desperation to prove that he cannot be pushed around by anyone (except Putin) is well known. 
In the dispute with Turkey, he did not hesitate to throw tariffs around like confetti, regardless of the potential blowback on US businesses and consumers. 
Never mind that Turkey is an important NATO ally. 
Trump seems intent on pushing it out of the alliance and into the arms of Russia and China. 
Despite his mounting legal problems and increasingly dubious legitimacy, Trump has continued to wreck the post-war international order that America helped to create. 
Worse still, his brand of selfish nativism is spreading through Asia and Europe, upending politics in Italy, Hungary, Poland, and even the United Kingdom. 
In Britain, the new foreign secretary, Jeremy Hunt, has argued that the movement behind the Brexit campaign is different from the populist nationalism in other countries. 
It isn’t. 
Beleaguered Brexit hardliners are clearly animated by hostility toward immigrants and foreigners. 
If Hunt has any doubt about that, he need look no further than his predecessor, Boris Johnson, who recently wrote a commentary mocking Muslim women who wear burqas. 
Unlike today’s aspiring strongmen, a truly tough leader would stand up for international cooperation, and seek to persuade voters why it matters. 
One hopes that French President Emmanuel Macron, German Chancellor Angela Merkel, and Japanese Prime Minister Shinzo Abe will do precisely that in the coming months. 
In the meantime, we must pray that wannabe tough guys like Trump and Erdoğan do not do too much damage to their respective countries, and to the rest of us. 
It is time to make cooperation great again. 

Authoritarians at the Gate 
Last Thursday, judges at Indonesia's Central Jakarta Court sentenced me to one year in prison. 
As the editor-in-chief of Tempo Weekly Newsmagazine , I am guilty, according to the court, of defaming a business tycoon named Tomy Winata by implying his possible involvement in a fire at Jakarta's South-East Asia textile market, and of fomenting riots by disseminating lies. 
Does my case, and others like it, portend the end of yet another short-lived experiment with democracy in Indonesia? 
The "riot" that I allegedly fomented occurred in March last year, when almost two hundred thugs claiming to be Winata's followers attacked Tempo's office, threatened to burn down the building, harassed staff, and injured one reporter. 
Trying to help resolve the situation peacefully, I was persuaded to negotiate at the Central Jakarta Police Station, but found to my horror that the mob leaders controlled the station. 
I was punched and kicked as the police looked the other way. 
Fortunately, many journalists came to our rescue with tape recorders and cameras rolling. 
Their broadcasts caused a public outcry, which forced our parliament to organize a public hearing. 
The National and Jakarta police chiefs were called and, under massive public pressure, the leaders of the mob were criminally charged. 
But Winata himself eluded police investigation, merely by claiming publicly that his followers acted without his prior knowledge and consent. 
He then filed criminal charges of his own, against Ahmad Taufik, who wrote the article, Teuku Iskandar Ali, who edited it, and me. 
The yearlong court proceedings were marked by a series of suspicious developments, all favoring Winata. 
First, the case built by the police and state prosecutor contained documents that were so blatantly falsified that the police indicted two officers. 
But the court rejected our request that proceedings be delayed until the legality of the state's case could be clarified. 
The case against the officers involved appears to be going nowhere. 
On the contrary, one of them has been promoted to command the newly formed (and US-funded) Jakarta Anti-Terror Unit. 
The other has reportedly been sent to the police staff school for advanced training. 
Then, in the sixth month of the case, the Head Judge in the three-judge panel was suddenly promoted to become the head of a city court an hour from Jakarta. One of my lawyers noted that in his 35 years experience at the court, he had never seen a Head Judge replaced in an ongoing case. 
In fact, despite her promotion, the judge continued to preside over another case in the same building. 
A judge who had previously ruled against Tempo in Winata's civil suit filled her vacancy. 
Finally, when Winata testified, he perjured himself by denying that Tempo had interviewed him. 
A recording of the telephone interview was played in court; sworn testimony was heard from the reporter who conducted the interview and from two editors who witnessed it; the official record from the telephone company was submitted as evidence of the call; and an expert witness concluded that the voice on the recording belonged to Tomy Winata. 
But the judges denied Tempo's request that Winata be arrested and tried for perjury, telling us to report it to the police, which we did. 
The judges then denied our request for a postponement of the court decision until Mr. Winata's perjury case was resolved. 
Given such flawed proceedings, my conviction and prison sentence come as no surprise. 
But I remain hopeful that we will prevail in the end, when higher courts hear Tempo's appeal. 
Indonesia's courts are cleaner at the top, and the Head of the Supreme Court is a staunch advocate of democracy and press freedom. 
Tempo's case could become a landmark victory for our democracy, like the US Supreme Court's famous decision in The New York Times v. Sullivan . 
By raising the bar for defamation charges, that decision ensures that American journalists can hold public officials accountable. 
No country knows better than Indonesia that free speech and a free press are proven indicators of democratic development, and that criminalizing journalists is an early symptom of authoritarianism. 
Indonesia was a liberal democracy in the 1950's, before President Sukarno, supported by the military, began a crackdown on the press in 1956. 
With critical voices silenced, consolidating unchecked power became easier and, in July 1959, Sukarno decreed the beginning of "Guided Democracy." 
For the first few years after Sukarno's fall in 1966, all the benefits of genuine democracy, including freedom of the press, were restored (except for the communists). 
But President Suharto's regime began another press crackdown in the early 1970's, ultimately banning various media and jailing many journalists. 
With the press under control, other political rights were quickly curtailed and Indonesian democracy failed again. 
Since Suharto's fall in 1998, Indonesia has become the third largest democratic country in the world and the largest democratic Muslim community in history. 
Two parliamentary elections and two direct presidential elections - including the latest presidential run-off - have been free, fair, and peaceful, proving that Islam and democracy can coexist. 
Democracy's enemies, however, never rest. 
Radical Islamic groups have engaged in indiscriminate bombings, while groups with strong authoritarian tendencies have made inroads into President Megawati's inner circle. 
But Mrs Megawati has just been defeated in her bid for reelection. 
Will newly elected President Susilo continue to prosecute journalists? 
Will my conviction, and the trials and convictions of other journalists, mark the beginning of the end of Indonesia's hard-won third democracy? 
The answer lies in the support that Indonesian pro-democracy activists can generate domestically and internationally. 
To lose Indonesia - a potential beacon of hope to all pro-democracy activists in the world Muslim community - would be a terrible defeat. 

Automatic Savers 
People are fascinated by wealth. 
They enjoy watching the wealthy, savoring the thought of their fine homes, luxurious vacations, fancy cars, and gourmet dining. 
But if you infer from this that people spend a lot of time planning the lifetime accumulation of their own wealth, you would be wrong. 
Most people do not seem to think very hard about how much to save from their income, or about how big the differences in their wealth could be in their later years if they just adjusted their saving rate today. 
Most people just pay off their mortgage, make the mandatory contributions to their state or private pension (if they have one), and keep some money for short-run contingencies. 
That’s about it. 
The economist Frank Ramsey, in a famous article published in 1928, said that people have a “weakness of the imagination” about how their actions today affect their own future. 
He said that if people thought about it correctly, they might well conclude that they should save half their income. 
That way, the accumulated wealth might make them very happy in their later years. 
But, mostly, they don’t even think about that possibility. 
Richard Thaler, a contemporary economist, spoke in 1980 of an “endowment effect.” 
Even though people may admire other things, they act as if they are mostly happy enough with whatever they already have, and lack the will to consider real change. 
One of the biggest challenges governments face is humans’ apathy about future saving. 
Thoughtful leaders recognize that the problem is there and tangible, not to be ignored. 
Yet it is hard to fit solutions into either a traditional liberal or traditional conservative political philosophy. 
Since 1955, Singapore has taken a direct approach: a compulsory national saving plan, which generates very high saving rates. 
The contribution rate for the Central Provident Fund is now 34.5% for people with higher incomes. 
The United States has no compulsory saving plan, and it has an abysmally low – in fact, negative – personal saving rate. 
But the government is loath to consider a mandatory saving plan. 
Instead, it is taking steps to overcome the individual inertia that inhibits saving. 
The US Pension Protection Act of 2006 encourages employers to enroll employees automatically in a personal saving plan for old age. 
This differs fundamentally from Singapore’s scheme, since employers are not required to do so, and, while enrolled employees’ paychecks are deducted without their consent, they can drop out of the plan at their own request. 
New Zealand’s recent “KiwiSaver” plan and the United Kingdom’s Pensions Act of 2007 are similarly based on automatic enrollment for employees with free opt-out provisions. 
Nevertheless, according to Brigitte Madrian of Harvard University, automatic enrollment in savings plans is critically important, even if the employee is completely free to drop out. 
If employers tell their new employees that a pension saving plan is available, and even promise to match employees’ contributions, a significant fraction of employees still will not participate. 
But if employers actually enroll their employees automatically in the plan, telling them that they can drop out at any time simply by notifying the employer, a large majority of employees will just accept the plan. 
Moreover, it appears that whatever contribution rate the employer chooses tends to be accepted passively by the employee, as does whatever investment allocation (between stocks and bonds, for example) is established. 
The research of Madrian and her colleagues suggests that the new pension plans will improve saving in the countries that adopt them. 
Maybe these countries could do even better by adopting a compulsory saving plan, but they are not about to do so. 
So, although they won’t succeed in raising saving on the scale that Singapore has, they can make real progress. 
The best reason not to make savings plans compulsory is that different people face very different circumstances that only they know about. 
Some people love their work, and never want to retire; for them, saving is less important. 
Some people want to spend a lot now on education, or psychotherapy, or whatever else is important to them now, and so want to postpone saving until later. 
The fundamental problem is that while some people postpone saving for sensible reasons, and will resume saving later, many others fail to save for no good reason, and are unlikely to make up for it later. 
A government saving plan that is based on automatic, though not compulsory, enrollment has the ability to deal with this problem, if only imperfectly. 
Automatic enrollment creates a saving plan that is sensible for the typical person. 
People who are not paying attention and are just not active will simply remain in the plan, while those who want badly enough to opt out can do so by writing a letter. 
These saving plans show that there are methods other than outright compulsion to overcome human inertia. 
One hopes that, in the future, such plans will be adopted on a large enough scale that we can devise a variety of new programs that serve both inertial and active individuals well. 

Embracing the New Age of Automation 
LONDON – Ever since early-nineteenth-century textile workers destroyed the mechanical looms that threatened their livelihoods, debates over automation have conjured gloom-and-doom scenarios about the future of work. 
With another era of automation upon us, how nervous about the future of our own livelihoods should we be? 
A recent report by the McKinsey Global Institute estimates that, depending on a country’s level of development, advances in automation will require 3-14% of workers worldwide to change occupations or upgrade their skills by the year 2030. 
Already, about 10% of all jobs in Europe have disappeared since 1990 during the first wave of routine-based technological change. 
And with advances in artificial intelligence (AI), which affects a broader range of tasks, that share could double in the coming years. 
Historically, job displacement has occurred in waves, first with the structural shift from agriculture to manufacturing, and then with the move from manufacturing to services. 
But throughout that process, productivity gains have been reinvested to create new innovations, jobs, and industries, driving economic growth as older, less productive jobs are replaced with more advanced occupations. 
The internal combustion engine, for example, wiped out horse-drawn carriages, but gave rise to many new industries, from car dealerships to motels. 
In the 1980s, computers killed typewriters, but created a host of new occupations, from call-center service representatives to software developers. 
Because the far-reaching economic and social benefits of new technologies tend to receive less attention than job losses, it is worth noting that automation technologies are already demonstrating a capacity to improve lives. 
This past November, Stanford University researchers showed that an AI system outperforms expert radiologists in detecting pneumonia from lung X-rays. 
In an era of stalled productivity growth and declining working-age populations in China, Germany, and elsewhere, automation could provide a badly needed economic boost. 
Higher productivity implies faster economic growth, more consumer spending, increased labor demand, and thus greater job creation. 
Nonetheless, any discussion about AI-based automation must also take public anxieties into account. 
Even though new occupations will likely replace those lost to automation, wages may take time to catch up to the reality of higher labor productivity. 
In the early nineteenth century, wages stagnated for almost 50 years before picking up again. 
That may have been an extreme situation. 
But for lower-skilled workers, the transition underway today could prove just as wrenching. 
With fears of increased inequality already growing, governments will need to rethink policies for providing income and job-transition support to displaced workers. 
Looking ahead, policymakers and businesses should keep five imperatives in mind. 
The first is to embrace AI and automation without hesitation. 
Even if it were possible to slow the pace of change, succumbing to that temptation would be a mistake. 
Owing to the effects of global competition, hampering technological diffusion in one domain would simply dampen overall prosperity. 
In fact, we recently estimated that northern European economies could lose 0.5 percentage points of annual GDP growth if they do not keep pace with their neighbors in adopting AI. 
The second imperative is to equip workers with the right skills. 
Future-of-work debates often overlook the question of how the labor market will evolve and either improve or exacerbate the skills mismatch that is already acute in developed countries. 
According to recent OECD research as much as one-third of workers in advanced economies are either underutilized or unable to handle their current duties. 
The jobs of the future will require not just more cognitive skills, but also more creativity and social skills, such as coaching. 
We estimate that, unless workers’ skill sets are upgraded, today’s mismatch could double in severity within ten years, resulting in major productivity losses and higher levels of inequality. 
Upgrading skills on a large scale will require coordination among parents, educators, governments, employers, and employees, with a focus on lower-skilled individuals. 
Unfortunately, in the past two decades, public spending on labor markets, relative to GDP, has declined by 0.5 percentage points in the United States, and by more than three percentage points in Canada, Germany, and Scandinavia. 
The third imperative is to focus on augmented-labor opportunities. 
Unlike older industrial robots, newer technologies can interact safely and efficiently with humans, who sometimes need to train them and will increasingly have to work seamlessly with algorithms and machines. 
For example, a doctor’s practice will be greatly enhanced by diagnostic algorithms. 
Policymakers and businesses should seek to maximize this kind of complementarity across all sectors. 
Fourth, businesses will need to innovate and capitalize on new market opportunities at the same pace that human tasks are being replaced. 
For example, in the first wave of robotics, countries such as Germany and Sweden displaced auto-sector jobs by adopting CAD (computer-aided design) robots; but they simultaneously brought other jobs back from Asia, and even created new downstream jobs in electronics. 
Similarly, AI offers countless opportunities for innovation and tapping into global value chains. 
By seizing these opportunities quickly, we can ensure a smoother transition from old to new jobs. 
Finally, it is imperative that we reinvest AI-driven productivity gains in as many economic sectors as possible. 
Such reinvestment is the primary reason why technological change has benefited employment in the past. 
But without a strong local AI ecosystem, today’s productivity gains may not be reinvested in a way that fuels spending and boosts demand for labor. 
Policymakers urgently need to ensure that strong incentives for reinvestment are in place. 
Automation has been given a bad rap as a job killer. 
Nevertheless, to ensure that its benefits outweigh its potential disruptions, private- and public-sector actors must exercise strong joint leadership – and keep the five imperatives for the new age of automation at the top of the agenda. 

Avanti Dilettanti! 
BERLIN – Returning to Europe lately after a six-day trip to the United States, I wondered for the first time while reading the press on the recent Irish crisis whether the euro – and thus the European Union – might possibly fail. 
This could happen because, in the long run, the EU won’t be able to withstand its conflicts of interest and the resulting process of “renationalization” in all member states without suffering grave damage. 
At the height of the Irish crisis – mainly a crisis of confidence in banks’ stability and the strength and competence of Europe’s political leadership – European leaders were publicly at each other’s throats. 
While their stated aim was to save the euro, the government leaders involved did exactly the opposite, producing increased nervousness and volatility in financial markets, which in turn exacerbated Ireland’s problems. 
Germany made its own contribution to aggravating the crisis by launching a public debate about involving the banks in shouldering losses from 2013 on. 
Why this discussion had to take place now, in the middle of the Irish crisis, remains Chancellor Angela Merkel’s secret. 
It was most likely prompted solely by domestic political considerations. 
Indeed, the demand for bank participation is popular in Germany – and justifiably so – unlike the Irish rescue package. 
But it would be more productive to implement such a policy than to announce it two years in advance. 
Wherever you look, the price tag put on Europe these days is calculated in euros and cents and no longer in political and historical currency. 
Germany, in particular – Europe’s largest country, and its strongest in economic terms – seems to have fallen victim to historical amnesia. 
The idea that Germany’s own national interest dictates avoiding anything that isolates the country within Europe, and that the task is therefore to create a “European Germany” rather than a “German Europe,” seems to have been abandoned. 
To be sure, Germany’s leaders still consider themselves to be pro-European and reject such criticism with indignation. 
But the fundamental change of strategy within Germany’s European policy can no longer be overlooked. 
Objectively, the trend is indeed towards a “German Europe,” which will never work. 
The failure of the euro – and thus of the EU and its Common Market – would be the biggest pan-European disaster since 1945. 
That this outcome is possible – despite protestations to the contrary by all involved – reflects the willful ignorance and lack of imagination of Europe’s heads of state and government. 
Otherwise, they would recognize that the financial crisis has long become a political crisis threatening the EU’s very existence, and thus that a permanent crisis-resolution mechanism for debt-distressed members, while clearly needed, requires a permanent political crisis-resolution mechanism in order to succeed. 
With the status quo it will be hard for the euro to survive. 
This permanent political crisis mechanism is, however, nothing less than a well-functioning economic union. 
The alternatives are therefore either forging ahead with realeconomic union and further EU integration, or regressing to a mere free-trade area and the renationalization of Europe. 
The belief that stability can be achieved with technocratic rules, regulations, and sanctioning mechanisms alone in a eurozone whose economies are diverging will prove to be misguided. 
Genuine eurozone stability presupposes macroeconomic alignment, which in turn requires the political integration of a well-functioning economic union. 
Staggered alignment of economic and social policies (such as the legal retirement age), new balancing schemes (euro bonds as a transfer instrument), and an effective stability mechanism are all needed to preserve the common currency. 
How can these far-reaching aims be achieved within the eurozone (together with non-eurozone EU members that want to join in)? 
We should probably forget about any treaty changes at the moment. 
But the Schengen agreement offers an alternative, namely arrangements between individual states. 
The abolition of border controls was anything but a minor detail, and yet it was achieved on the basis of intergovernmental agreements. 
Why not economic union, too? 
What the eurozone needs now isn’t a repetition of Maastricht, but a kind of Schmidt/Giscard 2.0.This kind of initiative requires the support of Germany and France, because the crisis cannot be resolved without them. 
Given their economic and political clout, Germany and France are the respective leaders of the eurozone’s northern and southern parts. 
Both could therefore sponsor the indispensable compromise between the eurozone’s stronger and weaker countries. 
France’s role would be to ensure that the weaker countries don’t fall victim to enduring deflation. 
And Germany would have to be the guarantor of stability. 
Both countries together, however, must inaugurate the step towards economic union, which requires that both governments actually want that. 
Merkel will have to explain the inconvenient truth to Germans that the price of having the euro is inevitably a transfer and economic union, and French President Nicolas Sarkozy will have to make clear to the French the price of a real economic and stability union. 
The political risk for both of them will be anything but small, but the alternative – the failure of the euro – is unacceptable for both countries. 
Any eurozone political leader whose primary consideration now is re-election will face certain failure by meeting this historical challenge. 
But European priorities have to be the primary concern in this crisis – even at the price of losing office. 
On the other hand, taking this historic initiative would, relative to fainthearted tactical maneuvering, substantially increase politicians’ chances of re-election later. 
But Europe has no shortage of politicians. 
What is urgently required now are genuine statesmen and stateswomen. 

Avatar and Empire 
NEW YORK – Do nations have psychological processes – even Freudian processes, such as collective egos that can be injured, and repressed guilt feelings that can well up from the collective unconscious – just as individuals do? 
I believe that they do. 
I also believe that just as an individual’s dreams and slips of the tongue reveal his or her repressed knowledge, so a culture’s “dreamwork” – its films, pop music, visual arts, and even in the resonant jokes, cartoons and advertising images – reveal the signs of this collective unconscious. 
Moreover, a nation’s “irrational dreamwork” often reflects its actual condition more truthfully than its “ego” – its official pronouncements, diplomatic statements, and propaganda. 
So take this theory with you when you see James Cameron’s Avatar , and watch for two revealing themes: the raw, guilty template of the American unconscious in the context of the “war on terror” and late-stage corporate imperialism, and a critical portrayal of America – for the first time ever in a Hollywood blockbuster – from the point of view of the rest of the world. 
In the Hollywood tradition, of course, the American hero fighting an indigenous enemy is innocent and moral, a reluctant warrior bringing democracy, or at least justice, to feral savages. 
In Avatar , the core themes highlight everything that has gone wrong with Americans’ view of themselves in relation to their country’s foreign policy. 
The hero, Jake Sully, is crippled from combat in a previous American conflict, but is not well cared for by his own country; if he does his job of genocide properly, “the corporation” will reward him with proper medical treatment. 
He signs on, essentially, as a corporate contractor – shades of Blackwater’s massacre of civilians in Baghdad’s Nisour Square. 
The enterprise is a “mission” in which the soldiers fight not “for freedom” but “for a paycheck.” 
They take their direction from corporate bureaucrats in waging war against the indigenous people, whose sacred land is sited on vast reserves of “unobtainium,” which the corporation wishes to secure at all costs. 
The soldiers are portrayed as being manipulated by their leaders – through vicious racism and religious derision – into brutal action against the non-aggressive “hostiles.” 
When the villain, the American military leader of the attack, plans to bomb flat the indigenous people’s sacred tree, he boasts that he will blow such a massive hole in their “racial memory” that they won’t come “within a thousand clicks” of the place again. 
Even the machinery of US military combat is portrayed non-heroically. 
Instead of the classic images of the US Cavalry courageously sweeping down on the savages, or of decent American doughboys bravely clearing out nests of Nazis, bored technocrats, insulated by immense layers of technology, firebomb green valleys, slaughtering enemy warriors and defenseless women and babies while sipping coffee and casually fiddling with touch screens. 
The characters’ lines (all quotes are approximate) are those that never pierce the bubble of American self-regard with respect to Iraq and Afghanistan. 
“You should not be here!” exclaims the indigenous heroine, and eventual love interest, Neytiri, as if she is speaking of the entire US enterprise overseas. 
“You are like a baby.” Gesturing at the mayhem caused by the destructive but self-regarding hero, before he “goes native,” she says, “This is your fault. 
They should never have had to die.” 
Later, as Sully starts to become sympathetic towards those whom he has been sent to betray, he tells the bureaucrats: “If people are sitting on something you want, you call them the enemy.” 
When he has fully identified himself with their cause, he joins a movement that is essentially a counterinsurgency, even a jihad (“Let’s show the Sky People [the US] whose land this is!”). 
He and his small band of Americans are even locked in a small Guantánamo-style cell and called “traitors.” 
The indigenous people are an amalgam of echoes from all the great wars of empire that have troubled the recent American conscience. 
Although they are physically a fantasy sci-fi mix of blue skin and cat-like movement, they are culturally a mix of Native Americans and Vietnamese, with Arabic accents thrown in. 
They have qualities that Americans would do well to emulate. 
They respect their environment, whereas the Americans must “return to a dying planet,” because, as the indigenous people put it, “they have killed their own mother.” 
Sully’s journey is not one of conquest but of awakening to his and his people’s true relationship to others: “What am I, the bad guy?” he laughs at first, as if that were impossible. 
In the end, however, he tries to warn his own imperialist team of the futility of their brutal approach: “What do we have to offer them? 
Light beer? 
Blue Jeans? 
They will never leave the Hometree [their sacred land]. 
We have nothing that they want.” 
Ironically, Avatar will probably do more to exhume Americans’ suppressed knowledge about the shallowness of their national mythology in the face of their oppressive presence in the rest of the world than any amount of editorializing, college courses, or even protest from outside America’s borders. 
But I am not complaining about this. 
Hollywood is that powerful. 
But, in the case of Avatar , the power of American filmmaking has for once been directed toward American self-knowledge rather than American escapism. 

 

Awakening from the Trump Nightmare 
PARIS – The American people can escape from the ordeal of Donald Trump’s presidency in one of three ways. 
But if and when they do is an irreducibly political question, not one that hinges on legal possibilities. 
First, there’s the Nixonian method, in which the president, worn down by the fight, simply resigns, scared and unwilling to submit to the proceedings that he sees mounting around him. 
But could that really be the exit taken by Trump? 
Does he share with his distant Republican predecessor a strong enough predisposition to melancholy? 
Can one picture a childish man, compulsive and narcissistic, surrendering without a fight the larger-than-life toy that is the top job in the most powerful country on the planet? 
I doubt it. 
Second, there is Article 4 of the 25th Amendment to the Constitution, ratified in 1967, which spells out a process by which the vice president and cabinet can act to replace a president who has died or is prevented by reasons of health from governing. 
Such might have been the case, four years earlier, following the assassination of John F. Kennedy, had Kennedy not died from his wounds. 
The possibility briefly resurfaced when President Ronald Reagan began to show the first signs of Alzheimer’s disease. 
But the current situation does not resemble those cases. 
Trump may be unstable and unfit to govern, as his detractors claim. 
But is he any more so now than he was when the American people elected him? 
Probably not. 
Finally, there remains the remedy of impeachment, which is being discussed more and more openly in Washington these days, accompanied (in a sign of the times) by a book, The Case for Impeachment, by Allan J. Lichtman. 
(A political historian, Lichtman is famous for having devised a model that has enabled him to predict the election of every American president from Ronald Reagan to Donald Trump.) 
Impeachment, set out in Article 2 of the Constitution, is a procedure for the removal from office of a president, vice president, or other top executive official (or judge) suspected of “treason, bribery, or other high crimes and misdemeanors.” 
It is a complex process that unfolds in two phases: first, the House of Representatives must decide, by a simple majority, that the charges are serious enough to be tried; second, a full-fledged trial is conducted in the Senate, which must reach a two-thirds majority to convict the official and trigger immediate removal from office. 
There are two main reasons to doubt that impeachment would rid the world of Trump. 
First, there is the balance of power in the Senate. 
At least 19 Republican senators would have to join the Democrats to convict Trump. 
At the moment, at most five can be counted on to do so. 
The only two presidential precedents (Andrew Johnson, impeached in 1868 for abuse of power, and Bill Clinton, impeached in 1998 for perjury and obstruction of justice) are hardly encouraging: both ended in acquittal by the Senate. 
Second, there is the reluctance of Democratic Party bosses to see ultraconservative Vice President Mike Pence assume the place vacated by a fallen Trump. 
Wouldn’t he enjoy the same state of grace enjoyed by recent vice presidents who entered the Oval Office under exceptional circumstances (Lyndon Johnson after Kennedy; Gerald Ford after Nixon)? 
And what if he remained in office, not only for the remainder of Trump’s term, but for two four-year terms of his own? 
All of this is logical enough. 
But times have changed since Johnson, Ford, and even Clinton. 
In post-modern democracies, there is one and only one boss: public opinion. 
And public opinion operates according to its own logic. 
How long will the American public tolerate the almost-daily doses of new evidence of conflicts of interest, starting with the licensing to Chinese investors, at the height of the presidential primary, of the Trump brand for use on spas, luxury hotels, and other real-estate projects? 
What about Trump’s financial ties with Russia, and those of his associates, including his former national security adviser, Michael Flynn, and his former campaign manager, Paul Manafort? 
What leverage can be wielded by the Russian oligarchs who, in 2004, when Trump was mired in one of his bankruptcies, stepped in for the American banks that had blacklisted him to recapitalize his companies and bought – sight unseen and at premium prices – luxury apartments in Trump World Tower? 
Won’t all of this eventually take its toll? 
And, finally, there is the gross obstruction of justice represented by the firing of FBI director James Comey, whose main offense seems to have been his refusal to exclude Trump from his investigation of the Kremlin’s criminal interference in the 2016 campaign. 
What will voters make of the damning revelations that are sure to come to light, now that Comey’s predecessor, Robert Mueller, has been appointed as special counsel to investigate the ties between Russia and Trump’s election campaign? 
The signs of public disgust are mounting. 
A petition drive to impeach Trump, organized by Massachusetts lawyer John Bonifaz, has gathered more than a million signatures. 
Polls indicate that a majority of the electorate would favor Trump’s resignation if it were proved that his campaign colluded with Russia to sway the election. 
And growing numbers of voters are now saying as much to their representatives, who, sooner or later, will have to start listening if they want to avoid imperiling their own electoral chances. 
For Trump, the real danger will come as the crowd he captivated and captured during the campaign begins to turn on him. 
That crowd, as astute political observers from Plato to de Tocqueville amply demonstrated, becomes harder to evade the more you make it master. 
The worst case is never inevitable. 
May the mob of the populist tide become once again the great American people, a people of citizens. 
When that happens, Trump will be history. 

Disciplining the Sharing Economy 
SINGAPORE – The increasing ability of people to exchange goods, services, and labor directly, via online platforms, is transforming how modern economies operate. 
But to ensure that the rise of the “sharing economy” works efficiently and improves conditions for all parties, some regulation is needed. 
People can now circumvent many traditional service businesses. 
They can share transport, using Uber, Lyft, or RelayRides; provide accommodation through Airbnb; tender household chores via TaskRabbit, Fiverr, or Mechanical Turk; and arrange their grocery deliveries using Favor and Instacart. 
Similarly, crowdfunding platforms, such as Kickstarter and Lending Club, allow start-ups to raise grants, loans, or investment from the general population, rather than relying on a financial intermediary. 
By cutting out the middleman, these online platforms empower individuals, reduce transaction costs, and create a more inclusive economy. 
But their evolution is far from straightforward, and many such services will require careful regulation if they are to flourish – as protests and court rulings in Europe against Uber demonstrate. 
One reason why Uber and other sharing-economy pioneers are so disruptive is that they represent a highly efficient form of peer-to-peer capitalism. 
Buyers and sellers can agree directly on the price of every transaction, and business reputations depend on transparent customer feedback, generating continuous pressure to improve performance. 
The sharing economy also boosts entrepreneurship, as people see new ways to fill gaps in the market. 
What began as a simple way for households to boost incomes – by renting out one’s apartment or car – has become a formidable disruptive force. 
Forbes magazine estimates that the sharing economy’s 2013 revenues topped $3.5 billion. During the 2014 soccer World Cup in Brazil, a country with a chronic shortage of hotel rooms, more than 100,000 people used home-sharing Web sites to find accommodation. 
The opportunity to buy or sell has also become much more inclusive: half of Airbnb hosts in the United States have low to moderate incomes, and 90% of hosts globally rent their primary residence. 
Several cities have recognized the benefits to be gained from promoting a sharing economy. 
Seattle, for example, has deregulated its transportation and hospitality sectors, challenging the city’s taxi and hotel monopolies. 
But economic change of this magnitude inevitably has its opponents, some with legitimate concerns. 
Do peer-to-peer businesses undercut incumbents by not paying similar taxes? 
Are such businesses – flush with venture capital – running their operations at a loss in order to capture market share? 
And should these firms be allowed to access telecoms data to learn about customers’ habits and movements, thus giving them an unfair advantage? 
Some firms have set their own operating standards. 
TaskRabbit, which subcontracts household jobs like assembling Ikea furniture, requires participants to pay a minimum wage, and has launched an insurance scheme to protect its US workers. 
On the other hand, technology platforms that use “algorithmic scheduling” to align workers’ shifts and hours with business cycles automatically, continue to disrupt family life and cause unnecessary stress. 
Policymakers need to stay ahead of these sharing-economy trends. 
As services and software converge, public officials must enhance their technical skills and work with the private sector to ensure market fairness and efficiency. 
For example, they must prevent the manipulation of reviews and other practices that mislead consumers trying to assess the quality of a company’s service. 
Airbnb and the online travel agent Expedia allow reviews only by customers who have actually used their services; that could become a regulatory norm throughout the sharing economy. 
Governments also have a broader role to play. 
As more people adopt “portfolio careers” – relying on several sources of income, rather than a single job – it becomes harder to collect and analyze labor-market data. 
Governments will need new accounting and reporting standards to calculate wages, forecast incomes, and categorize workers within the growing ranks of the self-employed. 
Such standards, coupled with data-sharing guidelines, will help determine when, and how much, to tax sharing-economy transactions. 
None of this will be easy. 
Though self-employment and part-time labor are hardly new, the sharing economy is different, because it allows freelancers to become “nano-workers,” shifting among employers not just monthly or even weekly, but several times a day. 
As US and European unemployment rates remain high and wages stagnate, people increasingly rely on such diverse income streams. 
Today, almost 27 million Americans survive on part-time and project-based incomes. 
With nearly half of all services jobs in the OECD at risk of automation, the sharing economy can smooth the disruption caused to displaced workers as they upgrade their skills. 
Indeed, sharing-economy data can help governments identify those workers at greatest risk and support their retraining. 
The sharing economy reflects the convergence of entrepreneurialism and technological connectivity. 
Taxi drivers and hotel owners may feel threatened, but the sharing economy has the potential to increase and redistribute earnings in cities that are already struggling with poverty and inequality. 
Those who are displaced will have far better prospects in the more prosperous and inclusive environment that the sharing economy promises to create. 


Back to Afghanistan 
While the unremitting violence in Iraq grabs the world’s headlines, Afghanistan still struggles for peace. 
The country’s parliament is packed with warlords, the drug trade is thriving, and violence is on the rise. 
This week, world leaders have an opportunity to steer developments onto a new and more hopeful path when they meet in London to forge a new compact with Afghanistan. 
The compact builds on the 2001 Bonn Agreement, which laid the framework for a democratic Afghanistan but left much to be done to overcome that war-torn country’s tragic legacy. 
The need for renewed attention to Afghanistan could hardly be greater. 
Decades of neglect coupled with foreign intervention left the country in ruins, with reverberations across the world. 
It is now in everyone’s interest to help Afghanistan rebuild. 
The drug trade exemplifies the far-reaching impact of domestic instability. 
Last year, the value of drugs produced in Afghanistan – the world’s largest supplier of opiates – is estimated to have reached up to 25% of GDP. 
Security, too, remains a serious concern. 
In 2005, more than 125 Coalition troops were killed, while suicide bombing emerged as a new and increasingly common tactic of the insurgency. 
Corruption is rampant, with government officials accused of cronyism and drug trafficking. 
Several members of the newly elected parliament are known warlords with bloody records. 
With international aid poorly coordinated and the United States reducing its troop strength, many Afghans believe that the outside world is abandoning them. 
But the massive scale of the challenges facing Afghanistan should not overshadow the opportunities for positive change. 
The Bonn process established the principle of democratic accountability, gave Afghanistan its first directly elected president, and provided a new constitution that – approved after genuine debate and compromise – created a legitimate central government. 
It also paved the way for a parliament in which over a quarter of the members are women – this in a country where, just five years ago, women were not even allowed to leave the house without a male relative. 
Moreover, most of the 20,000 village councils were elected through secret ballot. 
In a nod to the importance of the councils to realizing change at the most local level, the World Bank and its partners have adopted a highly innovative program that channels rural development aid through the councils, which have been empowered to decide how the funds will be spent. 
At the national level, the government recently approved a new development strategy that goes far to advance a vision for Afghanistan’s future stability and growth. 
Public opinion reflects widespread support for the latest changes. 
A recent poll shows that Afghans overwhelmingly favor their country’s new direction – backing the participation of women in public life and international intervention against al Qaeda, the Taliban, and the drug economy. 
But Afghanistan’s potential for progress must be bolstered by concerted international action. 
At the London Conference, world leaders should support the counter-narcotics strategy recently approved by the Afghan government, which would reduce economic dependence on opium production, punish traffickers and dealers, and provide sustainable economic alternatives for poppy farmers. 
Afghanistan is grappling with the world’s biggest narcotics problem and donors must commit to a long-term drug control strategy. 
The conference should follow up on a resolution by the European Parliament to consider whether Afghanistan should become one of the countries licensed to produce opium for medical purposes. 
Furthermore, instead of pouring hundreds of millions of dollars into technical assistance and short-term capacity-building programs, the London conference should strive to help meet the Afghan government’s benchmark for equipping young people with the skills and education necessary to lead their nation to a future of peace and prosperity. 
International support could help educate 40,000 Afghans each year in urgently needed fields, such as engineering, management, agriculture, law, and economics. 
Judicial reform is another pressing issue. 
Currently, the judiciary is incapable of trying a case of petty theft much less of ensuring human rights. 
A Supreme Court dominated by conservative factions has selected judges and prosecutors, and Afghans have little legal redress in a system that allows local commanders, who hold sway over the judiciary, to act with impunity. 
Without a viable legal system, foreign investment will remain elusive. 
Even Afghan expatriates in the Gulf states, who have invested roughly $5 billion in regional and global trading networks, are reluctant to invest in their homeland. 
Reform is nonetheless clearly possible. 
Last month, the Afghan leadership finally adopted – albeit half-heartedly – a transitional justice plan that could remove from power the biggest war criminals who have consolidated their grip on the country over the past five years. 
Implementation of this plan would not only give a boost to the rule of law, but also would enhance security and lead to better governance. 
Failure to act would mean a betrayal of the Afghan people, who in 2001 welcomed the US army and NATO forces as liberators. 
For their sake, and ours, we must not let them down. 

Back to the Brink in Ukraine 
The campaign for Ukraine’s parliamentary election of September 30th is scarcely underway and yet Prime Minister Viktor Yanukovych is already trying to steal it. 
Yanukovych was the man who sought to falsify the result of the presidential election of 2004, inciting the Orange Revolution. 
Back then, a peaceful and honest result was reached in the end because Ukraine’s President Leonid Kuchma refused to heed Yanukovych’s call to use violence to defend his rigged election. 
This time it appears that Yanukovych is prepared to do anything to remain in power. 
The dirty tricks began in the midnight hours of August 11th, when Ukraine’s Central Election Commission (which is packed with Yanukovych placemen) refused to certify the largest opposition party, the bloc of former Prime Minister Yuliya Tymoshenko, to participate in the election. 
The technicality the commission cited would be absurdly funny if its potential results were not so incendiary: the CEC objected to the fact that the Tymoshenko bloc candidates listed only their home towns on the party list, not their precise street address. 
But Tymoshenko’s party successfully submitted its list in the very same format at the March 2006 election, which demonstrates the glaringly partisan nature of the election commission’s ruling. 
By seeking to cling to power by hook or by crook, Yanukovych is likely to bring on the deluge. 
In Ukraine that means not only violent unrest, but economic decline and renewed repression. 
At the end of the day it could lead to the sort of huge street protests that marked the Orange Revolution, and their attempted violent suppression. 
Recent history is replete with alarming examples of dictators and would be dictators who refuse to recognize when their time has run out. 
But for the past twenty years their blatant political chicanery has been met with a potent new force: the massed voices of ordinary people who refuse to be cowed. 
From the “People Power” revolution that toppled Ferdinand Marcos in the Philippines in 1986 to Boris Yeltsin’s defiance of the attempted coup against Mikhail Gorbachev of August 1991, to the Rose, Orange, and Cedar Revolutions of recent years, dictators have been forced to admit defeat when enough people stand up to them. 
Will it really be necessary for Ukrainians to repeat the Orange Revolution by again gathering in their millions to shame Yanukovych (a twice convicted violent felon before he entered politics) to change course? 
There is a person who might compel Yanukovych to retreat to democratic norms and thus hold off such protests -- Russia’s President Vladimir Putin. 
It is certainly in Russia’s national interest to prevent chaos in the country’s big next door neighbor. 
But Putin’s idea of what constitutes Russia’s national interest makes that type of intervention unlikely. 
Weak neighbors are states that the Kremlin can control, so why not expand Russian power by letting Ukraine slide into protest and anarchy if by doing so it brings that country back under Putin’s thumb? 
Moreover, Putin himself is in the business of sterilizing Russia’s democratic processes by handpicking his successor and having his courts and electoral commissions block his opponents from political participation, often tarring them as traitors. 
Someone with such contempt for the democratic rights of his own people is unlikely to champion them abroad. 
As is usual with this ex-KGB man, Putin is being cunning about Ukraine, but he is deluding himself if he thinks that siding with Yanukovych will bring back effective Russian overlordship of Ukraine. 
The days of empire are over, no matter how much wealth oil and gas is bringing to Russia. 
Only if Ukraine maintains its independence will the imperial nostalgia of Russia’s elites be shattered. 
So other pressure will need to be applied, primarily by the European Union and the United States. 
In 2004, both the EU and US were tardy in speaking in defense of Ukraine’s democrats. 
Only when the courage of millions of ordinary Ukrainians gathered in central Kyiv galvanized world opinion did the US and EU marshal the courage to stand up for an honest election result. 
And the one state that did stand with Ukraine from the start back then, Poland, has now antagonized much of EU opinion, particularly in Germany, because of the paranoid behavior of its current leaders. 
So Polish influence in Union councils is at rock bottom. 
Luckily, the leaders of Europe’s three biggest states are different people than in 2004. 
Angela Merkel, Nicolas Sarkozy, and Gordon Brown appear to have a clearer appreciation of the Union’s security problems to its east, and so may find the will to act decisively now, rather than dither as their predecessors did when Ukraine moved into crisis in 2004. 
Unless Ukraine’s democratic opposition is allowed to take part in the election, a new crisis is certain. 
Tymoshenko, who has survived three assassination attempts, is not the type of woman to surrender her campaign on a technicality. 
While the Orange Revolution made ordinary Ukrainians more conscious of their rights than ever before, this alone cannot guarantee that they are certain to see those rights vindicated in the coming weeks. 
However, it will make the job of repressing them much harder. 
And isn’t that what the battle for democracy is all about? 

Back to the Future, Courtesy of Argentina 
President Nestor Kirchner of Argentina is often portrayed as an anti-capitalist radical for proposing a "haircut" of over 90% on the value of Argentina's defaulted external debt. 
But, whatever his motives, the anxiety that led up to Argentina's last minute deal with the IMF to repay $3.1 billion owed the global lender may serve to help to rescue what capitalism is really about: the appropriate judgment of risk. 
Economic development involves financial flows and the buildup of debt. 
In a domestic setting, bankruptcy and default are common. 
Indeed, one characteristic sign of economic vitality is the frequency of bankruptcy, for business failures indicate a willingness to gamble and take risks on innovation. 
Today, there is a higher level of bankruptcy in the United States than in the European Union, and it is easier for bankrupt Americans to embark on new ventures. 
As a result, Americans are more prepared to be innovative. 
But in the history of international finance over the past sixty years, bankruptcy and default are almost unheard of. 
One consequence is that international markets are not as dynamic as they might be, and prosperity not as widespread. 
In the 19th century, and in the interwar and depression years of the 20th century, international default came in buckets. 
Borrowing countries such as Argentina or the Ottoman Empire regularly defaulted. 
They were then punished for a few years by not having access to international capital markets. 
Lenders to defaulting countries were also punished, as their instruments (mostly bonds) became worthless. 
The market thus punished bad risks. 
In some cases, as in the Ottoman Empire or Egypt, creditors restructured finances by force or the threat of it. 
But gunboat diplomacy was not necessarily a part of the resolution of debt problems. 
Argentina, for example, reached a voluntarily negotiated agreement in 1893. 
Such a system worked as long as events in one country did not have a negative impact on other borrowers and there was no systemic risk or systemic contagion. 
When Argentina defaulted in the 1890's, European investors simply discovered a new fashion: investment in Russia. 
After Russia's crisis of 1901, investors turned to the US and Australia. 
The Great Depression of the late 1920's and early 1930's put an end to such behavior, which was suitable for a moderately crisis-prone world. 
Crises were no longer moderate. 
The defaults of that time were not confined to one country, but swept across the globe in a contagious panic that destroyed financial systems in lending as well as borrowing countries. 
Politicians reacted by devising an international financial system after WWII in which default and bankruptcy were more or less impossible. 
Since there were no substantial capital flows for a long time, this did not matter at first. 
Then, in the 1970's, capital flows started up again, and there were again threats to the stability of the system. 
Latin America had a big debt crisis that broke out in 1982, but in fact there were almost no defaults (with the exception of Peru and, for a few months in late 1987, Brazil). 
Instead of defaulting, countries arranged rescue packages with the IMF. 
Money from the international financial institutions was complemented by new money that creditor banks were supposed to put up as part of the price of being "rescued" by the IMF. 
The IMF was given a privileged legal position, and only devastated and wrecked "failed states" such as Sudan would default on loans from the Fund. 
The notion of "concerted lending" was applied in the big Mexican crisis of 1994-95 and in the East Asian crisis of 1997-8. 
The whole point of crisis management was to avoid risks to the system and thus bankruptcy. 
But in the second half of the 1990's, this system began to unravel. 
The sums required from the international financial institutions were so large that it began to be possible for currency speculators to envisage circumstances in which there would be no help. 
Private-sector lending became hard to mobilize, because there were many more creditors than in the bank-dominated world of the 1980's, when negotiations could be conducted by just a few big players. 
The first major shock came with Russia's default and devaluation of August 1998. 
After that, the IMF began to encourage some countries to renegotiate debt rather than seek new money, at least if they were relatively small scale borrowers such as Ukraine or Pakistan and thus could not endanger the whole system. 
The second major shock came with Argentina's currency collapse of 2002-3, after which Argentina's government demanded an extremely large debt write-off. 
Argentina's other threat, not to repay the IMF, challenged the old system just as profoundly and seemed for some to be a justified response to years of bad policy advice from the IMF and the G-7 countries. 
In the 21st century, we are returning to the ways of the 19th century. 
Our aim should be to invent financial mechanisms for segmenting and spreading risk, so that one bad case no longer has the potential to destroy the whole system. 
By being less concerned with preventing default, we can make risk and reward more congruent with each other. 
Creditors in cases like that of Argentina need to be made to pay a penalty. 
Argentina's current actions may drive us back to the 19th century more quickly than some investors would like. 
But that lost world was a world of unquestioned dynamism and growth. 

Back to the Great Game in Kazakhstan 
BRUSSELS – Those who oppose Western rapprochement with Kazakhstan cite the country’s lack of political and human rights. 
But, while Kazakhstan has not gone down the “color revolution” route to democracy that other post-Soviet republics like Ukraine and Georgia have followed, its timidity about reform does not justify isolation. 
After all, the West is not deterred in the slightest from dealing with authoritarian Russia and communist China. 
Moreover, Kazakhstan, though a Muslim majority country, has established the type of secular, multi-ethnic, and multi religious polity that the West is seeking to encourage throughout the Muslim world. 
But the principal reasons for the West not to isolate Kazakhstan are geostrategic. 
The Kazakhs are keen to sell their oil and gas to the West at the very moment that the European Union is anxious to shed its dependence on Russian supplies. 
Yet the window of opportunity for an EU-Kazakh partnership may be closing. 
Kazakhstan’s historical ties to Russia and its geographical proximity to China have caused a keen competition between those two countries for influence. 
It is vital that Europe join in this “great game” for influence and draw Kazakhstan’s political orientation westwards. 
There are signs that Europe is finally waking up to the possibilities that Kazakhstan offers. 
Indeed, two recent developments may help anchor Kazakhstan as a Western ally. 
The first is the country’s election to the annual rotating chairmanship of the Organization for Security and Cooperation in Europe (OSCE) in 2010. 
Kazakhstan had lobbied for years for this opportunity in the face of fierce opposition from Britain and other EU countries. 
Its selection to lead the OSCE is seen as a reward for President Nursultan Nazarbayev’s policy of engagement with the West. 
Russia is deeply suspicious of the OSCE – the Kremlin recently restricted the number of OSCE observers for Russian elections – so Kazakhstan’s future stewardship hints that the Kazahks are anxious to move closer to the West, and unafraid to challenge their former masters in the Kremlin. 
In the long term, the European Neighborhood Policy (ENP), the EU’s blueprint for relations with states on its periphery, offers the best chance for nurturing this relationship. 
The ENP is designed to forge a “circle of friends” around the EU based on shared interests in security, economic development, the rule of law, and respect for human rights. 
The European Parliament has, for now, rejected the idea that Kazakhstan could one day become an ENP member. 
But this narrowness of vision will have to be overcome if Kazakhstan is not to be lured into either the Chinese or Russian orbits. 
Kazakhstan is a suitable partner for the ENP in every respect. 
The country’s southwest edge is on the same longitude as the countries of the south Caucasus and Turkey, all of which are already ENP countries or in the case of Turkey an EU candidate. 
This alone makes a strong geographical case for Kazakhstan’s ENP status. 
There are of course concerns about freedom of speech and a lack of media diversity, but conditions in Kazakhstan are no worse than in, say, Azerbaijan, its ethnic Turkic cousin, which is fully in the ENP. 
Moreover, Kazakhstan is already in formal talks with the EU about human rights issues. 
But it is Kazakhstan’s strong secular tradition, inherited from its Soviet past, and a very large European Christian minority (approximately 40% of its 15.2 million people) that make it a society that the West needs to encourage, given the Islamic arc of instability upon which it sits. 
Drawing Kazakhstan westward would help embed this secular tradition. 
The challenge is clear. 
Russia and China will not wait for the EU to make up its mind about whether Kazakhstan is a worthy partner. 
Kazakhstan already plays a key role in the Shanghai Cooperation Organization (SCO), a group that comprises Central Asian countries, along with Russia and China. 
The SCO focuses on regional security, economic ties, and cultural cohesion in much the same way as the OSCE and EU do. 
There is little doubt that the SCO is an instrument for Russia and China to make the case for a multi-polar world based on regional security blocs that counterbalance American strategic hegemony. 
It would therefore be tragic if the EU missed the opportunity to tie Kazakhstan firmly to the West. 
There may not be many more chances. 

Back to the Politics of Cultural Despair 
Some years ago the historian Fritz Stern wrote a book about Germany entitled The Politics of Cultural Despair. 
He used the example of three (now forgotten) bestselling authors of the late nineteenth and early twentieth centuries to show the deep aversion of many Germans to the modern world, notably to market economics and democratic politics. 
For Stern, this was part of the cultural soil in which National Socialism flourished. 
Much has changed since the Nazi era. 
The murderous triumph and bloody defeat of the politics of cultural despair was followed by an economic miracle that made Germany one of the world’s most prosperous countries, with nearly six decades of increasingly stable democracy. 
Yet there are still traces within Germany of an attitude that finds modern economics distasteful and the opening of all frontiers to a globalized world frightening. 
“Pure capitalism” and “globalization” evoke horrific images. 
Swarms of capitalist “locusts” threaten to descend on defenseless, hardworking people, to quote the unfortunate metaphor used in a recent speech by Franz Müntefering, the chairman of the governing Social Democrats. 
Of course, revulsion for liberal economies and global markets is not confined to Germany. 
A similar sentiment formed one of the motives for the French and perhaps even the Dutch to reject the European Union’s Constitutional Treaty, which some regarded as too “Anglo-Saxon” in its economic liberalism. 
For many, the alternative to capitalism and globalization is an idyllic image of a “European social model,” which no one has yet defined. 
Indeed, it would be difficult to do so. 
Social policies in Europe – like everything else – vary widely, and popular attitudes cover a spectrum, from tired protectionism and longing for subsidies in some of “old Europe” to the free-market enthusiasm of more recent EU members in the West (Ireland and Portugal) and the East (Poland and Slovakia). 
In fact, Europe’s much-vaunted social model is more a dream than a reality, the dream of a cozy world in which a benevolent state looks after us. 
This world has ceased to be viable in large part for reasons of demography, as ever more claimants for assistance make costs unaffordable. 
Some people – and even a few politicians – are drawing the right conclusions from this. 
They know that ultimately we all must rely on our own initiative and effort, and they make use of the opportunities of open markets. 
But others in Europe treat such attitudes like a cartoon whose caption could be in French or German: “Self-reliance is absolutely important, we depend on politics for it”. 
Behind such differences lie deep political and cultural traditions concerning the role of the state in everyday life. 
This is where the United States really is different from France and Germany, while Britain has a similar tradition of distrusting the state rather than relying on it. 
In a different way, this is true of Italy as well. 
Italy has long had a large Communist Party, and the left may be in power again; but there is no gut antagonism to the freedoms that capitalism encourages. 
Poland is another country in which individual initiative flourishes – to the point that the apocryphal “Polish plumber” came to epitomize the threats posed by globalization in France. 
Needless to say, there are no such hang-ups in many of the high-growth economies of Asia. 
True, in India the inertia of an indigenous version of Fabian socialism had to be overcome; but this has happened. 
In fact, new models to square the circle of economic growth, social cohesion, and political liberty may be emerging in some of the countries that have grasped the mantle of globalization. 
The entrenched anti-capitalist, anti-globalization mood elsewhere is a source of concern. 
After all, Fritz Stern wrote his book to warn of the dangers posed by a romantic abhorrence of modernity. 
High, often long-term unemployment and cuts in social benefits nurture, but do not cause such attitudes; their deep-seated cultural roots matter far more. 
So do their consequences. 
A sense of frustration that results from anti-capitalist, anti-globalization sentiment leads to a lethal combination of Arcadian dreams (“France to the French”) and the reality of ruthless, if seductive, leaders on the right (Jean-Marie Le Pen in France) and the left (Oskar Lafontaine and his new party in Germany). 
Prosperity and liberty will be the victims, unless those who grasp the opportunities of the new world prevail. 

 

The China Backlash 
HONG KONG – On a recent official visit to China, Malaysian Prime Minister Mahathir Mohamad criticized his host country’s use of major infrastructure projects – and difficult-to-repay loans – to assert its influence over smaller countries. 
While Mahathir’s warnings in Beijing against “a new version of colonialism” stood out for their boldness, they reflect a broader pushback against China’s mercantilist trade, investment, and lending practices. 
Since 2013, under the umbrella of its “Belt and Road Initiative,” China has been funding and implementing large infrastructure projects in countries around the world, in order to help align their interests with its own, gain a political foothold in strategic locations, and export its industrial surpluses. 
By keeping bidding on BRI projects closed and opaque, China often massively inflates their value, leaving countries struggling to repay their debts. 
Once countries become ensnared in China’s debt traps, they can end up being forced into even worse deals to compensate their creditor for lack of repayment. 
Most notably, last December, Sri Lanka was compelled to transfer the Chinese-built strategic port of Hambantota to China on a 99-year, colonial-style lease, because it could longer afford its debt payments. 
Sri Lanka’s experience was a wake-up call for other countries with outsize debts to China. 
Fearing that they, too, could lose strategic assets, they are now attempting to scrap, scale back, or renegotiate their deals. 
Mahathir, who previously cleared the way for Chinese investment in Malaysia, ended his trip to Beijing by canceling Chinese projects worth almost $23 billion. 
Countries as diverse as Bangladesh, Hungary, and Tanzania have also canceled or scaled back BRI projects. 
Myanmar, hoping to secure needed infrastructure without becoming caught up in a Chinese debt trap, has used the threat of cancellation to negotiate a reduction in the cost of its planned Kyaukpyu port from $7.3 billion to $1.3 billion. 
Even China’s closest partners are now wary of the BRI. 
In Pakistan, which has long worked with China to contain India and is the largest recipient of BRI financing, the new military-backed government has sought to review or renegotiate projects in response to a worsening debt crisis. 
In Cambodia, another leading recipient of Chinese loans, fears of effectively becoming a Chinese colony are on the rise. 
The backlash against China can be seen elsewhere, too. 
The recent annual Pacific Islands Forum meeting was one of the most contentious in its history. 
Chinese policies in the region, together with the Chinese delegation leader’s behavior at the event itself, drove the president of Nauru – the world’s smallest republic, with just 11,000 inhabitants – to condemn China’s “arrogant” presence in the South Pacific. 
China cannot, he declared, “dictate things to us.” 
When it comes to trade, US President Donald Trump’s escalating trade war with China is grabbing headlines, but Trump is far from alone in criticizing China. 
With policies ranging from export subsidies and nontariff barriers to intellectual-property piracy and tilting the domestic market in favor of Chinese companies, China represents, in the words of Harvard’s Graham Allison, the “most protectionist, mercantilist, and predatory major economy in the world.” 
As the largest merchandise exporter in the world, China is many countries’ biggest trading partner. 
Beijing has leveraged this role by employing trade to punish those that refuse to toe its line, including by imposing import bans on specific products, halting strategic exports (such as rare-earth minerals), cutting off tourism from China, and encouraging domestic consumer boycotts or protests against foreign businesses. 
The fact is that China has grown strong and rich by flouting international trade rules. 
But now its chickens are coming home to roost, with a growing number of countries imposing antidumping or punitive duties on Chinese goods. 
And as countries worry about China bending them to its will by luring them into debt traps, it is no longer smooth sailing for the BRI. 
Beyond Trump’s tariffs, the European Union has filed a complaint with the World Trade Organization about China’s practices of forcing technology transfer as a condition of market access. 
China’s export subsidies and other trade-distorting practices are set to encounter greater international resistance. 
Under WTO rules, countries may impose tariffs on subsidized goods from overseas that harm domestic industries. 
Now, Chinese President Xi Jinping finds himself not only defending the BRI, his signature foreign-policy initiative, but also confronting domestic criticism, however muted, for flaunting China’s global ambitions and thereby inviting a US-led international backlash. 
Xi has discarded one of former Chinese strongman Deng Xiaoping’s most famous dicta: “Hide your strength, bide your time.” 
Instead, Xi has chosen to pursue an unabashedly aggressive strategy that has many asking whether China is emerging as a new kind of imperialist power. 
International trade has afforded China enormous benefits, enabling the country to become the world’s second-largest economy, while lifting hundreds of millions of people out of poverty. 
The country cannot afford to lose those benefits to an international backlash against its unfair trade and investment practices. 
China’s reliance on large trade surpluses and foreign-exchange reserves to fund the expansion of its global footprint makes it all the more vulnerable to the current pushback. 
In fact, even if China shifts its strategy and adheres to international rules, its trade surplus and foreign-currency reserves will be affected. 
In short, whichever path it chooses, China’s free ride could be coming to an end. 

Rewriting the Monetary-Policy Script 
MUNICH – How long will major central banks blindly rely on rigid rules to control inflation and stimulate growth? 
Given the clear benefits of nimble monetary policy, central bankers need to open their eyes to the possibilities that flexibility affords. 
The rule of thumb for monetary policymakers has long been that if inflation is below official target ranges, short-term interest rates should be set at a level that spurs spending and investment. 
This approach has meant that once interest rates reach or approach zero, central banks have little choice but to activate large asset-purchase programs that are supposed to stimulate demand. 
When circumstances call for it, policymakers default to the predetermined scripts of neo-Keynesian economic models. 
But in too many cases, those scripts have led us astray, because they assume that monetary policy has a measurable and foreseeable impact on demand and inflation. 
There is plenty of reason to question this assumption. 
For starters, households have not responded to ultra-low interest rates by saving less and spending more. 
If savings no longer yield a return, people can’t afford big-ticket items or pay for retirement down the road. 
Likewise, companies today are faced with so much uncertainty and so many risks that ever-lower costs of capital have not enticed them to invest more. 
It’s easy to see why, despite the data, predetermined formulas are attractive to monetary policymakers. 
The prevailing wisdom holds that in order to return the inflation rate to a preferred level, any slack in the economy must be eliminated. 
This requires pushing interest rates as low as possible, and when these policies have run their course (such as when rates dip toward the negative), unconventional instruments like “quantitative easing” must be deployed to revive growth and inflation. 
The paradigm has become so universally accepted – and the model simulations underpinning central banks’ decisions have become so complex – that few are willing to question it. 
For individual central banks or economists, to do so would be sacrilege. 
Central banks do not completely deny the economic costs that these policies imply: exuberance in financial markets, financing gaps in funded pension systems, and deeper wealth inequality, to name just a few. 
But these costs are deemed an acceptable price to pay to reach the clearly defined inflation level. 
Yet the policies pursued in recent years have given no room for the intangibles – unstable political environments, geopolitical tremors, or rising risks on financial markets – that can send models off course. 
As the 2008 financial crisis illustrated, the normal distribution of risk was useless for predictions. 
Keynes never tired of arguing that monetary policy becomes ineffective if uncertainty is sufficient to destabilize the expectations of consumers and investors. 
Unfortunately, many central banks have forgotten this. 
The Bank of Japan, the Bank of England, and the European Central Bank all hone to rather rigid policy rules. 
If expansionary policies fail to have the desired effect of lifting inflation to the predefined level of around 2%, they do not question their models; they simply increase the policy dosage – which is just what markets expect. 
For now, the US Federal Reserve has the most flexible toolkit among the major central banks. 
In addition to inflationary pressure, the Fed’s monetary policy must also take into account employment statistics, growth data, and the stability of financial markets. 
But even the Fed’s flexibility is under siege. 
Republican lawmakers are discussing how to bind the Fed to more scripted policy rules to manage inflation (using a formula known as the Taylor rule, which predetermines changes in the federal funds rate in relation to inflation and an output gap). 
Needless to say, such a move would be a mistake. 
Central banks (not to mention lawmakers), with their strong attachment to neo-Keynesian theory, are ignoring a major lesson from decades of monetary-policy experimentation: the impact of monetary policy cannot be predicted with a high degree of certainty or accuracy. 
But the belief that it can is essential to the credibility of the now-standard inflation targets. 
If central banks keep missing these rather narrow marks (“below, but close to 2%”), they end up in an expectations trap, whereby markets expect them to dispense ever higher doses of monetary medicine in a frantic attempt to reach their target. 
Clearly, such monetary policies create soaring costs and risks for the economy. 
And central banks themselves are coming dangerously close to looking like fiscal agents, which could undermine their legitimacy. 
A new and more realistic monetary paradigm would discard overly rigid rules that embody the fallacy that monetary policy is always effective. 
It would give central banks more room to incorporate the risks and costs of monetary policies. 
With such a paradigm, central banks could move away from negative interest rates and large-scale asset purchases. 
They would define their inflation targets more flexibly, to avoid being forced into action whenever “uncertainties” such as declining oil prices or required wage adjustments cause inflation to move above or below 2%. 
Perhaps most important, a new paradigm would acknowledge the limits of central banks’ power and foresight. 
That would remove an alibi that governments too often hide behind to avoid introducing the structural reforms that really matter for long-term growth. 

Bad Money, Good Money 
London – The British comic genius Spike Milligan once observed that he would love to have the opportunity to discover that money wouldn’t make him happy. 
Big lottery winners, it is claimed, end up miserable, though real-life research suggests that they are as happy as you and I would be with a check for a million dollars. 
Money, however, can trigger all sorts of other emotions – like rage, for example. 
That is pretty much how most people reacted to the stories about bankers’ bonuses, when the great crash of 2007-2008 wiped out banks, businesses, shareholders’ savings, growth, and jobs. 
There was, as one banker charmingly conceded, a bit of asymmetry between what bankers were being paid and what their banks had lost. 
The Nobel Laureate Amartya Sen notes in his latest magisterial book The Idea of Justice that most people understand that a process is fair when they can detect a connection between effort and reward. 
The bankers failed this test dismally. 
We gritted our teeth and for the sake of our national economies supported our governments as they bailed out the banks with public money. 
It was a necessary, if infuriating, act of salvation to avoid economic disaster. 
Having socialized banks’ losses after we had seen the privatization of their gains, our rage quotient has shot up once more at the news that the banks we saved are again filling the troughs into which all those snouts are enthusiastically dipped. 
The sheer unseemliness of what is happening raises blood pressure as well as eyebrows. How do they have the nerve? 
We should not, however, allow this sentiment to turn into an all-purpose rant against personal wealth. Sometimes its owners use it in hugely generous amounts for great public gain. 
George Soros, the enormously successful investor, has used much of his own wealth to establish the Open Society Institute, which has helped to underpin the democratic revolution in Central and Eastern Europe and to press for human rights worldwide. 
Mo Ibrahim is one of Africa’s most distinguished entrepreneurs. 
He built a business empire on technology, software, and mobile telecommunications. Ibrahim has established a foundation whose main purpose is to raise standards of governance in Africa. 
The continent certainly needs to pay heed. 
With a billion people living in more than 50 countries, Africa is wracked by poverty and, in too many places, torn apart by war. 
The Oxford development economist Paul Collier reckons that 75% of the poorest people in the world live in countries that have only recently recovered from conflict or are still in conflict. 
Most of them are in Africa. These are countries where it sometimes seems easier to start an uprising than to start a business. 
Guinea, with a nasty military junta in power, is on the brink of disaster. 
In Sudan, the Darfur conflict is unresolved and divisions between the north and the south once again threaten peace, with a promised referendum on southern independence due by 2011. 
Hundreds of thousands of displaced people huddle in camps in Somalia, where warlords rule. The list, alas, goes on. 
It is not as though Africa lacked resources or the ability to govern itself well. Peaceful Botswana is a good example of what can be achieved. 
While climate, geography, and the colonial past share some of the blame for today’s misery, most of the responsibility belongs to those African governments that have behaved so badly. 
Ibrahim wants to stamp out corruption, to see the rule of law applied everywhere, to foster policy environments that encourage businesses to start up and thrive, and to strengthen the role of women. 
He wants to reward those who support pluralist democracy and is a champion of civil society and a free press, and the Ibrahim Foundation is also deeply involved in the fight against global warming. 
He also points out that less than 5% of total trade in Africa is undertaken between African countries. 
There is a powerful argument for regional economic integration on the continent, abolishing trade barriers, sharing infrastructure like power generation, and allowing free movement of people, goods, money, and jobs. 
Some countries in East Africa are now trying to do something about that for themselves. 
We shouldn’t allow our exasperation with bankers to morph into an assault on the creation of wealth. As Spike Mulligan was unable to discover for himself, money really can make people happier, producing a more just world with greater opportunity for the poor and disadvantaged. 
Let’s hope that we move in that direction in 2010. 

Bailout Blues 
NEW YORK – It doesn’t take a genius to figure out that the United States’ financial system – indeed, global finance – is in a mess. 
And now, with the US House of Representatives having rejected the Bush administration’s proposed $700 billion bailout plan, it is also obvious that there is no consensus on how to fix it. 
The problems in the US economy and financial system have been apparent for years. 
But that didn’t prevent America’s leaders from turning to the same people who helped create the mess, who didn’t see the problems until they brought us to the brink of another Great Depression, and who have been veering from one bail-out to another, to rescue us. 
As global markets plummet, some version of the rescue plan will almost certainly be put to another vote in Congress. 
Unless the plan is markedly different from the current one, while it may help Wall Street, what about the economy? 
What about taxpayers, already beleaguered by unprecedented deficits, and with bills still to pay for decaying infrastructure and two wars? 
In such circumstances, is there any bailout plan that can work? 
To be sure, the rescue plan that was just defeated was far better than what the Bush administration originally proposed. 
But its basic approach remained critically flawed. 
First, it relied – once again – on trickle-down economics: somehow, throwing enough money at Wall Street would trickle down to Main Street, helping ordinary workers and homeowners. 
Trickle-down economics almost never works, and it is no more likely to work this time. 
Moreover, the plan assumed that the fundamental problem was one of confidence. 
That is no doubt part of the problem; but the underlying problem is that financial markets made some very bad loans. 
There was a housing bubble, and loans were made on the basis of inflated prices. 
That bubble has burst. 
House prices probably will fall further, so there will be more foreclosures, and no amount of talking up the market is going to change that. 
The bad loans, in turn, have created massive holes in banks’ balance sheets, which have to be repaired. 
Any government bailout that pays fair value for these assets will do nothing to repair that hole. 
On the contrary, it would be like providing massive blood transfusions to a patient suffering from vast internal hemorrhaging. 
Even if a bailout plan were implemented quickly – which appears increasingly unlikely – there would be some credit contraction. 
The US economy has been sustained by a consumption boom fueled by excessive borrowing, and that will be curtailed. 
States and localities are cutting back expenditures. 
Household balance sheets are weaker. 
An economic slowdown will exacerbate all our financial problems. 
We could do more with less money. 
The holes in financial institutions’ balance sheets should be filled in a transparent way. 
The Scandinavian countries showed the way two decades ago. 
Warren Buffet showed another way, in providing equity to Goldman Sachs. 
By issuing preferred shares with warrants (options), one reduces the public’s downside risk and ensures that they participate in some of the upside potential. 
This approach is not only proven, but it also provides both the incentives and wherewithal needed for lending to resume. 
It avoids the hopeless task of trying to value millions of complex mortgages and the even more complex financial products in which they are embedded, and it deals with the “lemons” problem – the government gets stuck with the worst or most overpriced assets. 
Finally, it can be done far more quickly. 
At the same time, several steps can be taken to reduce foreclosures. 
First, housing can be made more affordable for poor and middle-income Americans by converting the mortgage deduction into a cashable tax credit. 
The government effectively pays 50% of the mortgage interest and real estate taxes for upper-income Americans, yet does nothing for the poor. 
Second, bankruptcy reform is needed to allow homeowners to write down the value of their homes and stay in their houses. 
Third, government could assume part of a mortgage, taking advantage of its lower borrowing costs. By contrast, US Treasury Secretary Henry Paulson’s approach is another example of the kind of shell games that got America into its mess. 
Investment banks and credit rating agencies believed in financial alchemy – the notion that significant value could be created by slicing and dicing securities. 
The new view is that real value can be created by un-slicing and un-dicing – pulling these assets out of the financial system and turning them over to the government. 
But turning them over to the government at market value doesn’t improve banks’ balance sheet; to do that requires overpaying for the assets, a transfer of wealth from ordinary taxpayers to the banks.. 
In the end, there is a high likelihood that if such a plan is ultimately adopted, American taxpayers will be left on the hook. 
In environmental economics, there is a basic principle, called “the polluter pays principle.” 
It is a matter of both equity and efficiency. 
Wall Street has polluted the economy with toxic mortgages. 
It should pay for the cleanup. 
There is a growing consensus among economists that any $750 billion bailout based on Paulson’s plan won’t by itself do the trick of resuscitating our economy. 
If so, the huge increase in the national debt and the realization that even $700 billion is not enough to rescue the US economy will erode confidence further and aggravate its weakness. 
But it is impossible for politicians to do nothing in such a crisis. 
So we may have to pray that a agreement crafted with the toxic mix of special interests, misguided economics, and right-wing ideologies that produced the crisis can somehow produce a rescue plan that works – or whose failure doesn’t do too much damage. 

Debt-Friendly Stimulus 
NEW HAVEN – With much of the global economy apparently trapped in a long and painful austerity-induced slump, it is time to admit that the trap is entirely of our own making. 
We have constructed it from unfortunate habits of thought about how to handle spiraling public debt. 
People developed these habits on the basis of the experiences of their families and friends: when in debt trouble, one must cut spending and pass through a period of austerity until the burden (debt relative to income) is reduced. 
That means no meals out for a while, no new cars, and no new clothes. 
It seems like common sense – even moral virtue – to respond this way. 
But, while that approach to debt works well for a single household in trouble, it does not work well for an entire economy, for the spending cuts only worsen the problem. 
This is the paradox of thrift: belt-tightening causes people to lose their jobs, because other people are not buying what they produce, so their debt burden rises rather than falls. 
There is a way out of this trap, but only if we tilt the discussion about how to lower the debt/GDP ratio away from austerity – higher taxes and lower spending – toward debt-friendly stimulus: increasing taxes even more and raising government expenditure in the same proportion. 
That way, the debt/GDP ratio declines because the denominator (economic output) increases, not because the numerator (the total the government has borrowed) declines. 
This kind of enlightened stimulus runs into strong prejudices. 
For starters, people tend to think of taxes as a loathsome infringement on their freedom, as if petty bureaucrats will inevitably squander the increased revenue on useless and ineffective government employees and programs. 
But the additional work done does not necessarily involve only government employees, and citizens can have some voice in how the expenditure is directed. 
People also believe that tax increases cannot realistically be purely temporary expedients in an economic crisis, and that they must be regarded as an opening wedge that should be avoided at all costs. 
History shows, however, that tax increases, if expressly designated as temporary, are indeed reversed later. 
That is what happens after major wars, for example. 
We need to consider such issues in trying to understand why, for example, Italian voters last month rejected the sober economist Mario Monti, who forced austerity on them, notably by raising property taxes. 
Italians are in the habit of thinking that tax increases necessarily go only to paying off rich investors, rather than to paying for government services like better roads and schools. 
Keynesian stimulus policy is habitually described as deficit spending, not tax-financed spending. 
Stimulus by tax cuts might almost seem to be built on deception, for its effect on consumption and investment expenditure seems to require individuals to forget that they will be taxed later for public spending today, when the government repays the debt with interest. 
If individuals were rational and well informed, they might conclude that they should not spend more, despite tax cuts, since the cuts are not real. 
We do not need to rely on such tricks to stimulate the economy and reduce the ratio of debt to income. 
The fundamental economic problem that currently troubles much of the world is insufficient demand. 
Businesses are not investing enough in new plants and equipment, or adding jobs, largely because people are not spending enough – or are not expected to spend enough in the future – to keep the economy going at full tilt. 
Debt-friendly stimulus might be regarded as nothing more than a collective decision by all of us to spend more to jump-start the economy. 
It has nothing to do with taking on debt or tricking people about future taxes. 
If left to individual decisions, people would not spend more on consumption, but maybe we can vote for a government that will compel us all to do that collectively, thereby creating enough demand to put the economy on an even keel in short order. 
Simply put, Keynesian stimulus does not necessarily entail more government debt, as popular discourse seems continually to assume. 
Rather, stimulus is about collective decisions to get aggregate spending back on track. 
Because it is a collective decision, the spending naturally involves different kinds of consumption than we would make individually – say, better highways, rather than more dinners out. 
But that should be okay, especially if we all have jobs. 
Balanced-budget stimulus was first advocated in the early 1940’s by William Salant, an economist in President Franklin Roosevelt’s administration, and by Paul Samuelson, then a young economics professor at the Massachusetts Institute of Technology. 
They argued that, because any government stimulus implies higher taxes sooner or later, the increase might as well come immediately. 
For the average person, the higher taxes do not mean lower after-tax income, because the stimulus will have the immediate effect of raising incomes. 
And no one is deceived. 
Many believe that balanced-budget stimulus – tax increases at a time of economic distress – is politically impossible. 
After all, French President François Hollande retreated under immense political pressure from his campaign promises to implement debt-friendly stimulus. 
But, given the shortage of good alternatives, we must not assume that bad habits of thought can never be broken, and we should keep the possibility of more enlightened policy constantly in mind. 
Some form of debt-friendly stimulus might ultimately appeal to voters if they could be convinced that raising taxes does not necessarily mean hardship or increased centralization of decision-making. 
If and when people understand that it means the same average level of take-home pay after taxes, plus the benefits of more jobs and of the products of additional government expenditure (such as new highways), they may well wonder why they ever tried stimulus any other way. 

Balancing Asia's Rivals 
OXFORD – George W. Bush is approaching the end of his presidency mired in low popularity ratings, which partly reflects his policies in the Middle East. 
But Bush leaves behind a better legacy in Asia. 
American relations with Japan and China remain strong, and he has greatly enhanced the United States’ ties with India, the world’s second most populous country. 
In 2005, Secretary of State Condoleezza Rice prepared a visit to Delhi by Bush the following year in which he announced a major agreement on US-Indian civilian nuclear cooperation, as well as a variety of measures for commercial and defense cooperation. 
The nuclear cooperation agreement was criticized in the US Congress for not being strict enough on non-proliferation issues, but it looked likely to pass. 
In India, the Communist Party, a small (but important) member of Prime Minister Manmohan Singh’s ruling coalition, has blocked the agreement. 
But, as one Indian friend explained to me, this is mainly symbolic politics for India’s Left. 
Even if the nuclear agreement fails, the improvement in US-India relations is likely to continue. 
Some attribute this to the fact that India and the US are the world’s two largest democracies. 
But that was true for much of the Cold War, when they frequently talked past each other. 
More importantly, with the end of the Cold War, the Soviet Union was no longer available as an Indian ally, and the US began to assess India and Pakistan in terms of separate interests, rather than as a pair linked in a South Asia balance of power. 
As Evan Feigenbaum, the top State Department official for South Asia recently said, “the world of 2008 is not the world of 1948. 
And so India really has the capacity, and, we think, the interest, to work with the United States and other partners on a variety of issues of global and regional scope.” 
This change began under the Clinton administration and is likely to continue regardless of who is elected president in 2008. 
Personal contacts between Indians and Americans have increased greatly. 
There are now more than 80,000 Indian students studying in the US, and many have stayed to establish successful companies. 
The Indian diaspora in the US constitutes roughly three million people, many of whom actively participate in politics. 
For example, Louisiana’s governor is of Indian origin, and has been mentioned as a possible running mate for John McCain. 
In addition, India’s economy has begun to grow by 8% annually, making it more attractive for foreign investment. 
Trade between India and American is increasing, and reached $26 billion (11% of India’s total trade) in 2006. 
In addition to these practical reasons for the improvement in bilateral relations, the rise of China poses a strategic consideration. 
As Bill Emmott, the former editor of The Economist argues in his new book The Rivals , “where Nixon had used China to balance the Soviet Union, Bush was using India to balance China. 
Like Nixon’s move, with hindsight Bush’s approach to India made perfect sense.” 
And the concern is reciprocated on the Indian side. 
As a senior foreign ministry official told Emmott in 2007, “the thing you have to understand is that both of us [India and China] think that the future belongs to us. 
We can’t both be right.” 
Official pronouncements stress friendly relations between India and China, and some trade analysts argue that, given their rapid growth, the two giant markets will become an economic “Chindia.” 
When Chinese Premier Wen Jiabao visited India in 2005, he signed eleven agreements, including a comprehensive five-year strategic cooperation pact. 
In addition, Wen announced that China would support India’s inclusion as a permanent member of an expanded United Nations Security Council, and oppose Japan’s inclusion, which the US supports. 
As Singh put it during Wen’s visit, “India and China can together reshape the world order.” 
The two countries’ recent rapprochement marks a considerable change from the hostility that bedeviled their relations following their 1962 war over a disputed border in the Himalayas. 
Nevertheless, strategic anxiety lurks below the surface, particularly in India. 
China’s GDP is three times that of India, its growth rate is higher, and its defense budget increased by nearly 18% last year. 
The border dispute remains unsettled, and both countries vie for influence in neighboring states such as Myanmar. 
China’s rise has also created anxiety in Japan, again despite professions of good relations during Chinese President Hu Jintao’s recent visit to Tokyo. 
Thus, Japan has increased its aid and trade with India. 
Last year, the US suggested quadrilateral defense exercises including US, Japanese, Indian, and Australian naval units, but the newly elected Australian Prime Minister Kevin Rudd has pulled his country out of such arrangements. 
Rudd wisely believes that the right response to China’s rise is to incorporate it into international institutional arrangements. 
Or, as Robert Zoellick, currently the president of the World Bank, put it when he was a State Department official, the US should invite China to become a “responsible stakeholder” in the international system. 
Improved relations between India and the US can structure the international situation in a manner that encourages such an evolution in Chinese policy, whereas trying to isolate China would be a mistake. 

Balancing China’s High Savings 
BEIJING – China’s national savings rate has been very high in recent years, amounting to 52% of GDP in 2008 (the most recent year for which statistics are available), and is often blamed for today’s global imbalances. 
Countries that save too much export too much, according to conventional wisdom, resulting in high trade surpluses and growing foreign-exchange reserves. 
But this is not always true. 
For instance, if I save $100, but at the same time I invest $100 in my factories’ fixed assets, I am “balanced domestically” and not running an export surplus with anyone. 
Such an example captures China’s recent economic situation. 
In late 2009 and in early 2010, China’s savings rate might well have remained at 50% of GDP had its trade surplus not narrowed significantly compared to previous years. 
Indeed, China recorded a trade deficit in part of this period, as high investment in fixed assets (owing to government stimulus policies enacted in the wake of the global financial crisis) fueled domestic demand for goods in the same way that higher consumer spending would. 
Only when a country invests less in fixed assets than the amount that it saves will the “surplus savings” show up in the trade balance. 
The same logic can be applied to the US economy, but in the opposite way: even if the US wants to consume a lot and does not save, it may not run trade deficits if it does not invest much. 
It runs a trade deficit only when it invests a lot while simultaneously not limiting consumption. 
Savings are, of course, no bad thing. 
If Americans and Europeans had saved more, they might not have created the global imbalances that fueled the financial crisis, or the worldwide sovereign-debt problems that have since emerged. 
And savings are particularly good for developing countries. 
One of the most daunting challenges for poor countries is the need to accumulate investment capital under conditions of low savings without incurring too much foreign debt. 
Even for a developing economy with per capita income of $3,000, such as China, building wealth in the middle classes remains a central issue. 
Spurring faster growth of small- and medium-size enterprises through relatively high investment in physical assets and R&D programs, improved infrastructure, and more rapid urbanization, all of which require a lot of savings to invest, is vital. 
In any meaningful international comparison, China’s per capita stock of physical capital is still 8-10 times lower than in advanced countries like the United States and Japan. 
Without relatively high savings, a developing country like China may never catch up. 
If a developing country has high savings (despite efforts to increase current consumption) as a result of structural factors, the best strategy is not to reduce savings through short-run “external shocks,” such as dramatic exchange-rate appreciation, which may kill export industries overnight. 
Rather, savings should be channeled even more – and more efficiently – to domestic investment in order to avoid large external imbalances. 
For example, China should use its current high savings to build up the country’s infrastructure and speed up urbanization, thereby laying a firmer foundation for future development. 
Savings could remain high, even as current consumption grows slowly, while the trade balance would be held in check by higher demand for imported capital goods. 
Moreover, investment in public infrastructure and urban facilities will not create industrial “over-capacity”; instead, it will provide long-term public consumption durables that households and companies will use for years to come. 
If China continues on this path, its external surplus will decrease further, other conditions being equal. 
Of course, a country must deal with a savings rate that is “too high” even if it is not necessarily the main cause of external imbalances. 
That is certainly the challenge for China in the long run. 
A savings rate of 50% of GDP is too high under any circumstances, and household consumption equivalent to 35% of GDP is too low. 
But this can and should be addressed by domestic policies aimed at bringing about structural change, not by external policies like exchange-rate appreciation. 
Without domestic structural change, currency appreciation would not only undermine exports, but might also decrease imports, owing to higher unemployment and lower income. 
China must recognize that high savings will not provide stable growth over the long run. 
High domestic investment may for the time being prevent “surplus savings” from creating too much upward pressure on the external balance, but, given trends in China’s terms of trade, growth without an increase in domestic consumption is unsustainable over the long run. 
High investment may cause economic overheating and increase the price of capital goods in the medium term, eventually triggering inflation. 
So bringing the savings rate down is necessary if domestic and external balances are to be achieved. 
Meanwhile, China’s so-called “export-oriented growth policy” itself may not be wrong for a developing country, because international trade in general creates more jobs and brings more income. 
But if exports continue to grow in the absence of consumption-led import growth, distortions occur and the trade surplus and foreign reserves increase. 
China has adopted some policies to reduce its trade surplus, such as lowering import tariffs, withdrawing tax rebates for exported goods, and gradual exchange-rate appreciation. 
But what China really needs is a greater effort to promote domestic consumption and lower the savings rate. 



Balancing the World’s Imbalances 
Good times – and these are good times for the global economy – are rarely the moment for concrete initiatives to deal with difficult problems. 
It is against this backdrop that I find welcome this weekend’s announcement by a group of major economies acknowledging their shared responsibility for the orderly resolution of global imbalances while sustaining robust growth. 
For the past year, China, the euro zone, Japan, Saudi Arabia, and the United States have been discussing these plans among themselves and with the IMF. 
Behind the somewhat forbidding label of “multilateral consultation” are discussions that are the first of their kind, and that have proved to be a promising tool for dealing with an issue of global importance. 
These five economies are relevant to global imbalances in different ways: either on account of their current account deficits or surpluses, or because they represent a very large share of world output. 
They all agree that resolving these imbalances is in each of their interests. 
But they also recognize that it is a multilateral challenge and a shared responsibility for them all. 
Over the last year, partly reflecting past policies in these countries, the imbalances have shown signs of stabilizing and, indeed, even of improving slightly. 
But these countries must signal that policies will continue to ensure a progressive and orderly reduction in imbalances together with sustained growth. 
Otherwise, the global economy will remain at risk from renewed protectionist pressures and economic or political events that might trigger a disorderly resolution of the imbalances and undermine growth. 
The five economies spelled out their policy plans in considerable detail to the semi-annual meeting of the IMF’s membership, which gave them a warm welcome. 
This is the first time such plans have been presented together. 
As Gordon Brown, the chairman of the Fund’s International Monetary and Financial Committee, noted, these plans are fully in line with the medium-term approach to solving imbalances that the Fund’s membership has consistently supported: 
China has elevated the reduction of external imbalances to a major national objective in 2007. 
It intends to boost domestic demand and is committed to moving gradually toward greater exchange rate flexibility. 
Euro-zone countries reaffirmed their intention to press ahead with structural reforms across a broad front, in product, labor, and financial markets. 
Japan plans to accelerate labor market reforms, strengthen competition, and advance fiscal consolidation to sustain domestic confidence. 
Saudi Arabia is boosting its spending on social and infrastructure investments substantially, as well as expanding oil sector capacity. 
And the US is taking steps to balance its budget, boost private savings, and enhance energy efficiency. 
The US also intends to strengthen capital market competitiveness and ensure that it remains an attractive environment for foreign investment. 
Just as global imbalances were not built up overnight, nor will they be solved quickly. 
The aim of multilateral consultation was not to seek to solve imbalances in one fell swoop, but rather to solidify agreement on a medium-term approach that could reduce imbalances gradually over time. 
The policies outlined by the participants will, when implemented, constitute a step in that direction. 
Publication of their plans sends an additional signal of their commitment and provides a valuable roadmap with which to assess progress, and thus help build confidence that all countries are working to reduce imbalances. 
The IMF, for its part, will monitor these plans regularly as part of our responsibility to provide policy analysis and advice. 
The countries have made it clear that their future policy plans will continue to be consistent with the strategy called for by the IMF’s membership. 
The five participants and the rest of our members, as well as we at the Fund, all agree that this has been a fruitful exercise. 
An indicator of success is that a second multilateral consultation, aimed at fostering dialogue on how financial globalization and innovation influence growth and stability, is under consideration. 
Like the first round of talks, this consultation would occur between a group of economies that have special relevance to the issue. 

Ban Ki-moon and the Age of Sustainable Development 
NEW YORK – The world can breathe easier with the reelection this month of United Nations Secretary-General Ban Ki-moon to a second term in office. 
In a fractious world, global unity is especially vital. 
During the past five years, Ban Ki-moon has embodied that unity, both in his unique personal diplomacy and in his role as head of this indispensable global organization. 
Winning re-election to lead the UN is no straightforward matter. 
As head of an organization of 192 member states, the Secretary-General inevitably feels the powerful crosscurrents of global divisions. 
On almost any issue, the Secretary-General is likely to find himself between contending groups of countries. 
Yet Ban has inspired global confidence in his leadership to the point of securing an uncontested and unanimous second mandate. 
The consensus in favor of Ban’s re-election is all the more striking because it includes the so-called P-5, the five permanent members of the UN Security Council – the United States, the United Kingdom, China, France, and Russia. 
These five powerful countries owe their UN pre-eminence to the post-World War II settlement, when they were allies in victory. 
Under the UN Charter, all five must endorse the election of every Secretary-General. 
Ban Ki-moon has maintained the strong backing of all five permanent members. 
I have the honor to serve as the Secretary-General’s Special Adviser on the Millennium Development Goals. 
In that capacity, I see the Secretary-General in action in all parts of the world. 
It is a rewarding experience, one that gives me great hope for ultimate success in resolving global problems such as poverty, environmental threats, and violent conflict. 
The world’s many problems make their way to the Secretary-General’s office day and night. 
Whether the issues are war and peace; revolutions and coups; natural disasters; epidemics; disputed elections; or the grinding challenges of hunger, poverty, climate change, and mass migration, the crises inevitably demand the Secretary-General’s attention. 
It is a workload that boggles the mind, and demands the round-the-clock commitment of the Secretary-General and his team. 
During a recent trip with Ban to Egypt and Tunisia, I watched in awe as he deftly backed the democratic changes underway in those two countries while simultaneously dealing with many other upheavals in the region. 
Ban generously and inspiringly offered his support to the brave youth leaders in both countries who are at the forefront of the political changes set in motion this year. 
From his first days in office, Ban emphasized that many or most of the world’s greatest challenges come down to a simple yet stark reality: we are now a crowded, interconnected, global society, with seven billion people struggling to find a foothold on a highly vulnerable planet. 
The challenges of feeding the world, keeping it safe from epidemic diseases such as malaria and AIDS, and combining economic progress with local and global environmental safety are the defining challenges of our time. 
War and violence often have as underlying causes hunger, poverty, and environmental degradation, such as human-induced climate change. 
We are, in short, in a new global era, which may be defined as the Age of Sustainable Development, in which our security, even our survival, will depend on the world forging a triple commitment: to end extreme poverty; to ensure human rights for all; and to protect the natural environment from human-induced crises of climate change, destruction of biodiversity, and depletion of fresh-water reserves and other vital resources. 
Ban has tirelessly emphasized the need to put sustainable development at the center of our thinking. 
The challenges of poverty, resource depletion, climate change, and human rights will dominate Ban’s second term, and the work of those who will follow him as Secretary-General. 
In 2012, world governments will reunite in Rio de Janeiro, 20 years after the historic conference at which they signed the first comprehensive treaty to fight human-induced climate change. 
Far too little has been accomplished since, and, behind the scenes, Ban is working relentlessly to clear the bottlenecks and avert climate disaster. 
At the start of the third millennium, Ban’s predecessor, Kofi Annan, brought the world’s leaders together to adopt the Millennium Development Goals, which established ambitious targets to be achieved in the fight against poverty, hunger, and disease by 2015. Ban has been a tireless champion of the MDGs, and has initiated several highly creative campaigns to enlarge worldwide engagement with them. 
This past year, for example, Ban launched a bold new global initiative, “Every Mother, Every Child,” to improve health care for women and children. 
He has championed the fight against HIV/AIDS, tuberculosis, and malaria, bringing many global leaders and public figures to the cause. 
Under Ban’s leadership, remarkable progress is being made, though as he emphasizes, even faster progress is both possible and needed. 
In 2015, the Secretary-General will help guide the world towards even bolder commitments in the fight to end extreme poverty and deprivation in the coming two decades. 
There is a great personal satisfaction in Ban’s own story, one that gives hope for all. 
When Ban travels to Africa’s impoverished regions, he mingles with villagers and recounts his own upbringing amid the poverty and deprivation of Korea in the 1950’s – and how, by committing itself to hard work, education, modern science, and shared values, South Korea became one of the world’s richest and most successful countries. 
Ban’s rise from poverty to global leadership parallels his country’s trajectory. 
It is a story of decency, commitment, and generosity that has won global confidence, and that can help to guide the world at a time of unprecedented risks and unique opportunities. 

New Hope for Haiti 
NEW YORK – During a recent visit to the rural community of Los Palmas, Haiti, I had the opportunity to talk with families directly affected by the cholera epidemic that has been afflicting the country since the 2010 earthquake. 
One man explained that not only had the disease killed his sister, but his mother-in-law had also perished as she undertook the hours-long walk to the nearest hospital. 
He and his wife are now caring for five orphaned nieces and nephews. 
In Haiti today, stories like this are not uncommon. 
Indeed, thousands of people across the country have endured similar trials and tragedies. 
But there are also signs of hope. 
Increased community engagement and changes in hygiene practices have freed the women, men, and children of Los Palmas and the neighboring village of Jacob of cholera – a dramatic reversal from the last few years – and reduced their risk of contracting other water-borne diseases. 
One family I met, for example, proudly showed me a new water filter. 
This community-led approach will be critical to the success of the “total sanitation campaign,” which Haitian Prime Minister Laurent Lamothe and I launched in Los Palmas during my visit. 
By encouraging household investment in durable, hygienic latrines, providing improved sanitation products and services at affordable prices, and ensuring that schools and health centers have adequate water and sanitation infrastructures, the initiative will improve health conditions for three million people in high-risk areas over the next five years. 
Just before leaving the village, we laid the symbolic first stone of a new secure water source. 
The campaign is the latest step in a comprehensive United Nations-supported operation to eliminate cholera from Haiti. 
The UN and the Haitian government recently created a high-level committee tasked with implementing a comprehensive strategy that covers all aspects of cholera prevention and response, including scaled-up assistance for families and communities. 
Moreover, Haiti’s Ministry of Health and the Pan-American Health Organization/World Health Organization are beginning the second phase of a UN-financed vaccination initiative that is targeting 600,000 people in areas where cholera persists; 200,000 people are set to be vaccinated in the next couple of months, with another 300,000 to follow by the end of this year. 
During the first phase last year, 100,000 people were vaccinated. 
These efforts have already reduced the toll of the epidemic significantly. 
During the first few months of this year, the number of cholera cases and deaths declined by some 75% compared to the same period of 2013, reaching the lowest level since the outbreak began. 
To be sure, Haiti still hosts the largest number of suspected cholera cases in the Western hemisphere – unacceptable in a world of such vast knowledge and wealth. 
But the country is on a trajectory toward success. 
Just as cholera has been eliminated from other difficult environments worldwide, it can be eliminated from Haiti. 
Haiti’s prospects are improving in other areas as well, owing partly to the UN’s commitment to the country. 
Since 2004, the UN’s Stabilization Mission in Haiti (MINUSTAH) has been working to improve the security environment, support the political process, strengthen government institutions, and protect human rights. 
It also played a major role in stabilizing and rebuilding the country after the 2010 earthquake. 
As a result of MINUSTAH’s efforts – and those of other UN agencies – the security situation has improved considerably, underpinned by a stronger judiciary and a more effective national police force. 
Meanwhile, primary-school enrollments rates have soared, from 47% in 1993 to nearly 90% today. 
Given enduring political and social fragility, a weak economy, and severely constrained finances, Haiti’s continued progress remains far from certain. 
In order to improve its chances of achieving its development goals, Haiti must follow through on its plans to hold long-overdue legislative and local elections later this year, followed by a presidential election next year. 
Haitian leaders across the political spectrum must rise above their differences to ensure that the electoral process is conducted fairly, thereby advancing the rule of law, safeguarding human rights, and consolidating the country’s democratic foundations. 
The international community’s continued support also will remain essential. 
Most urgent, Haiti needs help funding its $2.2 billion ten-year National Cholera Elimination Plan. 
So far, just 40% of the $448 million that will be needed in the first two years for investments in early warning, rapid response, water, sanitation, and vaccines has been mobilized, and only 10% of the total has been pledged. 
The Haitian people possess all of the compassion and determination needed to overcome the cholera epidemic and achieve inclusive economic development. 
But the international community – in particular, international financial institutions working in the region – must step up and support them. 
I was profoundly moved by the hospitality and compassion that I saw in Los Palmas. 
But I also understand that Haitians expect their government and the UN to deliver on the promises made that day. 
If everyone does their part, we can give Haitians the healthier, more prosperous future that they deserve. 

Ban Ki-moon’s Hushed Power 
NEW YORK – Days after Sri Lanka’s government defeated its long-time foe, the Tamil Tigers, in May, United Nations Secretary-General Ban Ki-moon flew into the country’s capital, Colombo, for a 24-hour visit to urge its president to open up its refugee camps to international aid groups. 
This was another urgent trip by Ban to a war-torn capital, as part of his regular duties as the UN’s chief representative, seeking to uphold peace and restore global comity. 
But who really knew much about this latest foray into a troubled region by the UN chief? 
Not many. 
Ban, who has just marked the half-way point in his five-year term in office, has so far been unable to attract a large worldwide audience for his activities. 
This is due, in part, to stylistic reasons, but also to the vagaries of UN diplomacy. 
Still in his quiet way, Ban is spending more than a third of his time on the road, and has accomplished much over the past 30 months. 
In Darfur, he managed to get African Union peacekeepers into Sudan’s killing zone in his first year in office through intensive behind-the-scenes diplomacy. 
Though the political process has since stalled, he has pushed for more peacekeepers and helicopters. 
In Kosovo, Ban was able to lower the temperature on the boiling issue of the province’s independence. 
He persuaded the European Union and the United States to allow continued UN oversight in Kosovo while gradually permitting self-governance – all without triggering dangerous confrontations with the two states which oppose its breakaway, Serbia and its close ally, Russia. 
In Myanmar, despite bitter resistance from the military regime, Ban pressured the authorities to let in humanitarian aid after Cyclone Nargis devastated the country last year. 
His public and private entreaties, including dozens of phone calls and meetings, saved perhaps a half-million lives. 
Today, he continues his call for the release of the democracy leader, Aung San Suu Kyi. 
In Haiti, which still suffers from underdevelopment, political turmoil, and the effects of destructive hurricanes, Ban appointed former US President Bill Clinton as his Special Representative to help deal with the country’s plight. 
This followed two visits he made to Haiti over the past 18 months and a donor’s conference he sponsored in April that sought to raise $300 million in aid and investment. 
More recently, Ban took an active role in the Gaza crisis. 
He has regularly defended the Palestinians’ rights to a state, but he also condemned Hamas’s rocket attacks on southern Israel. 
During the fighting in Gaza, he publicly demanded a halt to the warfare and requested that Israel open Gaza’s borders to relief aid. 
He also visited the UN compound in the center of Gaza to express the UN’s grave concern over its bombing. 
Ban has taken a leadership position on the problem of global warming. 
He tackled the issue at the Bali Conference of 2007, made it one of his central concerns at the UN, and will attempt to forge a new agreement among all global states at the UN Conference in Copenhagen in December 2009. 
And he has moved forward in the health field. 
He accelerated efforts to eliminate the world’s most dangerous ancient scourge, malaria, by naming a special adviser on the disease, and by forging innovative partnerships within the UN system that have brought together private industry, foundations, and non-governmental organizations. 
His campaign has already helped to reduce the incidence of malaria. 
The problem for Ban is his diffident manner, which stands in stark contrast with that of his predecessor, Kofi Annan, a larger than life secretary-general who dominated the scene through his flair, eloquence, and star power. 
Ban, by contrast, is neither charismatic nor an inspirational speaker – indeed, his English is not as good as Annan’s. 
In his own way, though, he is an engaging, polite man, hip to contemporary cultural icons, and even given to singing at public occasions with wry lyrics and verses. 
Nonetheless Ban is sometimes criticized for not doing more, not listening enough, or deferring too much to the Big Five countries on the Security Council. 
One of the main complaints is that communicating with him can be difficult. 
Ban invariably nods his head in polite agreement without giving clear guidance. 
Others say he has yet to prove he is a good manager and must push harder for internal management reforms at the UN. 
Ban, in turn, has openly chastised member states for not giving him sufficient resources. 
But, wherever the truth may lie, few critics take into account that he, like all former UN chief executives, has to deal with the reality that he possesses only moral power, not economic, military, or political power. 
Still throughout his tenure, Ban has consistently displayed progressive instincts on issues, despite the fact that his candidacy was originally championed by an authoritarian Chinese government and a right-wing, UN-bashing American envoy to the organization, John Bolton. 

Ban the Bomb Tests 
WASHINGTON, DC – The Nuclear Security Summit process, which concluded earlier this month in Washington, DC, shows what can be achieved when political leaders come together to concentrate on a global problem. 
The six-year initiative, focused on preventing nuclear terrorism, produced important outcomes on eliminating, minimizing, and securing dangerous nuclear and radiological materials. 
Unfortunately, however, the nuclear threat is still far from being neutralized. 
The dangers posed by terrorist groups are growing, as are the risks from competition and conflict between nuclear-armed states. 
Strong leadership and global cooperation must also be deployed to address other urgent nuclear dangers, particularly the threat of further testing and proliferation of weapons. 
There are few bright signs on the horizon. 
On the contrary, almost every nuclear-armed state is either expanding or upgrading its nuclear arsenal. 
There are no active negotiations to regulate, cap, or further reduce nuclear stockpiles. 
Russia and the United States have each deployed more than 1,800 strategic warheads on several hundred submarines, bombers, and missiles – far more than is necessary to deter a nuclear attack. 
Many of these weapons can be launched within minutes, increasing the risk of miscalculation. 
Meanwhile, North Korea could soon be able to arm ballistic missiles with nuclear warheads, a development that would pose a significant threat to all of Asia. 
Given the grave dangers, it is in every country’s interest to halt further nuclear competition and eliminate the risks associated with the world’s remaining stockpiles of some 15,000 nuclear weapons. 
As US President Barack Obama and Kazakh President Nursultan Nazarbayev noted in separate statements during the Nuclear Security Summit, a key element of an effective global risk-reduction strategy must be to bring the 1996 Comprehensive Nuclear-Test-Ban Treaty (CTBT) into force. 
If existing nuclear powers cannot conduct tests, they will not be able to try out new, more sophisticated warhead designs. 
Similarly, without test explosions, newer nuclear-armed states will have a far more difficult time developing and fielding smaller, more easily deliverable warheads. 
The CTBT has near-universal support. 
With 183 state signatories and a de facto test ban in place, the treaty is now a key component of the international nuclear nonproliferation system. 
It has established a taboo against testing (violated since 1998 only by North Korea) and slowed the global arms race. 
And yet, nearly 20 years after its adoption by the United Nations General Assembly, the CTBT is not valid international law – largely because the US has not ratified it. 
The US Senate’s rushed and highly partisan 1999 vote against ratification – and its failure to reconsider the treaty since then – has given the seven other states that must ratify the CTBT a reason for delay. 
As a result, the door to further nuclear testing remains open. 
Last fall, US Secretary of Energy Ernest Moniz and US Secretary of State John Kerry suggested that the Senate revisit the issue. 
Unfortunately, President Barack Obama does not have enough time left in office to launch the time-consuming education and outreach campaign needed before bringing the CTBT to the Senate for another vote. 
But his administration could intensify the necessary preparatory work – for presenting new information, answering detailed questions, and dispelling old myths and misconceptions – before he leaves office. 
Even if the next US president and Senate do reconsider ratification of the CTBT, a vote may not happen for several years. 
In the meantime, it is essential that world leaders seek ways to encourage ratification by other CTBT holdout states and to reinforce the de facto global moratorium on testing. 
The G-7 foreign ministers’ declaration on April 11 in Hiroshima – “No state should conduct a nuclear test explosion and all states should sign and ratify the CTBT without delay” – is a good start. 
No one knows that better than Japan and Kazakhstan, which have suffered from the terrible effects of nuclear detonations. 
As their respective foreign ministers, Fumio Kishida and Erlan Idrissov, warned in September, business as usual will not suffice. 
Kishida and Idrissov have invited their counterparts to a ministerial-level meeting in Vienna on June 13 to explore options for bringing the CTBT into force. 
They will encourage key holdout states to reaffirm their support for the global testing taboo and to pledge that they will consider ratification “at the earliest possible time.” 
As we approach the 20th anniversary of the CTBT, members of the UN Security Council and the General Assembly can take further steps to ensure that nuclear testing remains off-limits. 
For example, they could pursue the adoption of a new Security Council resolution and a parallel General Assembly measure calling on all states to refrain from testing and urging quick action on ratification. 
Such an initiative would reinforce the global norm against testing and stimulate movement by holdout states. 
Just as leaders have cooperated at the Nuclear Security Summit to prevent nuclear terrorism, we need renewed cooperation and leadership to end nuclear testing once and for all. 

Ban the Common Bond 
FRANKFURT – With the deepening of the global financial crisis, spreads between the government bonds of different European Monetary Union (EMU) countries for a while widened dramatically. 
Relative to German bonds, the spreads in February of secondary-market yields of government bonds with maturities of close to ten years were 141 basis points for Italy, 257 for Greece, and 252 for Ireland, compared to just 32, 84, and 25 basis points, respectively, in 2000. 
In EMU’s early years, long-term interest rates in euro-zone countries more or less converged to the low levels seen in countries like France, Germany, and the Netherlands before the euro’s introduction. 
Italy and Greece enjoyed huge declines in the cost of servicing their public debt in comparison to pre-EMU days. 
For many people, the introduction of the euro meant not only that currency risk – i.e., the risk of devaluation – had disappeared, but also that all euro-zone members now belonged to an economic area of monetary stability and, thanks to the discipline of the Stability and Growth Pact, of fiscal stability. 
Moreover, before the crisis, differences in long-term interest rates among EMU members were around 25 basis points, despite unfavorable fiscal developments in some EMU countries. 
But today, countries with rising budget deficits, like Ireland, along with countries with high levels of public debt, like Greece and Italy, are at risk to pay substantially higher rates on their government bonds. 
Risk-averse investors may now demand higher risk premia for buying bonds from countries seen as weak debtors. 
On the other hand long-term interest rates in countries with stronger fiscal positions – France, Germany, and Finland – have enjoyed low rates as a consequence of a “flight to quality.” 
This rise in long-term interest rates has hit the countries with sharply deteriorating fiscal positions hardest. 
It is even suggested that some countries might abandon EMU if this process continues – a threat that, if carried out, would amount to economic suicide. 
It comes as no surprise, then, that the idea of a common European bond is becoming popular as a way to counter the risk of rising EMU interest-rate spreads. 
The main idea is to reduce the risk premia paid by debtors with lower fiscal credibility. 
But this can be achieved only by implicit or explicit guarantees from EMU countries with sound public finances. 
A “true” pan-European bond would have to entail a joint guarantee by all countries of the full bond issue, with the “strongest” guaranteeing the “weakest,” which supporters of a bond idea suggest constitutes true European solidarity. 
A common bond would eliminate the interest-rate spread between bonds issued by different euro-zone countries, so the question that must be addressed is what effect its issuance would have on the level of the interest rate, and more importantly on future fiscal policy and the euro itself. 
A common euro-zone bond certainly implies that countries like France and Germany would have to pay higher interest rates, ultimately resulting in higher tax burdens for their citizens. 
Moreover, once the markets expect substantial amounts of the common bond to be issued, interest rates on the huge stock of existing – purely national – bonds of solid countries would be likely to increase substantially. 
No one can possibly know in advance exactly how big this “bill” might be, though that question – important as that is – misses the crucial point: a common bond would be the first step down a slippery slope to bail-outs, and thus to the end of the euro area as a zone of stability. 
To see why, recall that the immediate trigger for rising interest-rate spreads was financial markets’ growing concerns about the solidity of some euro-zone countries, owing to dramatic deterioration in their current and expected fiscal positions. 
A common bond would be no cure for a lack of fiscal discipline; on the contrary, it would be no more than a placebo for a “weak” country, but it would also be harmful because it would foster the illusion that it is possible to get out of fiscal difficulty without undertaking fundamental reform. 
Encouraging weak countries to prolong their reliance on budget deficits by holding out the hope of a de facto bail-out would be very costly for EMU’s more solid countries, while undermining EMU’s hard-won credibility as an area of stability and fiscal soundness. 
And this latter cost would have to be paid by all euro-zone countries. 
A pan-European bond would also have serious political repercussions. 
Any policy that forces countries that opted for fiscal solidity to pay for those with large deficits and high debt levels would strongly undermine public support for the euro zone. 
“Solidarity” in the true sense means that all euro-zone countries should comply with EMU’s fundamental rules by adhering to the Stability and Growth Pact and the “no bail-outs” principle. 
Countries tempted to undermine these principles by failing to fulfill their solemn commitments only demonstrate their own lack of solidarity. 

Bangladesh’s Deadly War on Drugs 
LONDON – The audio quality is poor and the sound of gunshots muffled, but the agony in Ekramul Haque’s voice is unmistakable. 
On May 26, while speaking with his family by phone, Haque, an elected official in southern Bangladesh, was gunned down by police in an apparent extrajudicial killing. 
Bangladeshi authorities insist Haque was a drug dealer who died in an exchange of gunfire, but the audio evidence – captured by his wife as she listened to her husband die – suggests that the officers involved killed him and then planted drugs at the scene. 
The recording casts a disturbing light on Bangladesh’s new drug-control strategy. 
Since May, when Prime Minister Sheikh Hasina revamped her government’s war on drugs, an estimated 25,000 people have been arbitrarily imprisoned, and at least 200 have died in alleged shootouts. 
The parallels to President Rodrigo Duterte’s brutal drug crackdown in the Philippines are chilling. 
There, human rights are routinely violated and more than 20,000 people have been slaughtered since 2016. 
While Duterte’s campaign has drawn international condemnation, Hasina’s purge has been subject to less scrutiny. 
The relative lack of international criticism seems to have emboldened the government to act even more ruthlessly. 
In early October, the authorities doubled down by proposing a draft law, which has now been submitted to Parliament, to expand the use of capital punishment for drug offenses. 
Under the proposal, possession of more than five grams of “yaba” – a methamphetamine-based drug targeted by the government’s crackdown – could be punishable by death. 
While the death penalty for drugs has existed in Bangladesh for decades, it has rarely been used. 
This could change dramatically if Parliament approves the government’s bill. 
The ferocity of the authorities’ anti-drug campaign, together with the extremely low threshold for yaba possession, means that even people who use drugs and low-level dealers could face execution. 
Despite what governments claim, the death penalty for drug offenses does not target kingpins. 
It is the poor and the most vulnerable who suffer. 
This would certainly be the case in Bangladesh, where some Rohingya refugees – who have fled horrific persecution in neighboring Myanmar – rely on the drug trade for economic survival. 
Moreover, there is simply no evidence that the death penalty for drug use lowers rates of consumption or trafficking. 
Almost 4,000 people have been executed for drug offenses in the past decade, and the UN Office on Drugs and Crime admits that the drug market is still booming. 
Death penalty laws are little more than grotesque grandstanding by governments seeking to appear “tough” on drugs while blindly ignoring the facts. 
Bangladesh’s legislation move would move the country to the extreme fringe of the international community and buck the global trend toward abolishing capital punishment. 
According to Harm Reduction International’s research, of the 33 countries that retain the death penalty for drug offenses, only a handful – mainly Saudi Arabia and China – actually carry out executions. 
Most other countries have changed tack. 
For example, drug-related executions in Iran fell dramatically after judicial reforms late last year (although the country still applies the death penalty for other offenses). 
Meanwhile, Malaysia’s cabinet is considering a bill to abolish the death penalty for all crimes. 
If it passes, the measure would commute the sentences of the 1,267 people currently on death row in the country, including 900 convicted of drug-related crimes. 
Unfortunately, Bangladesh is not alone in favoring extreme measures. 
Sri Lankan President Maithripala Sirisena recently said that his country would end a 42-year moratorium on executions and begin killing people convicted of drug crimes. 
While it is unclear if Sirisena will follow through, his threat is part of a worrying trend among populists who view the death penalty as a panacea for the drug trade. 
In a rambling speech earlier this year, US President Donald Trump suggested that he, too, supports such a policy. 
The European Union has urged Sri Lanka and Bangladesh to reconsider their strategies, arguing that “the death penalty doesn’t act as a deterrent to crime, and any error of judgment is impossible to correct.” 
These are wise words, and countries everywhere – especially EU member states – must do more to reinforce this view. 
Bangladesh’s Parliament still has an opportunity to reject the draft law and move the country toward a more effective drug-control policy. 
Enacting the death penalty would only exacerbate an already deteriorating human-rights situation. 
Around the world, countries are recognizing that executions, much less extrajudicial killings, have no effect on the drug trade. 
Bangladesh must recognize this, too. 

Empowering Bangladesh’s Female Garment Workers 
DHAKA – For four decades, the garment industry has powered Bangladesh’s economy and put more people to work than any other sector. 
Women in particular have benefited from this hiring boom, and today, a majority of the industry’s four million employees are female. 
But while the textile trade has put money in women’s purses and challenged a patriarchal society to evolve, economic empowerment has not greatly improved gender equality and female wellbeing. 
On the contrary, women with jobs in Bangladesh’s largest industry are now imperiled on two fronts – at home and at work. 
While much has been written about exploitation in the garment industry, there is a paucity of data on the health and safety implications for women in this sector. 
Our organization, icddr,b (International Centre for Diarrhoeal Disease Research, Bangladesh), is working to change this. 
In a series of recent studies, we explored the health and welfare issues – both physical and emotional – faced by women who produce clothing that they will never be able to afford. 
The women we spoke with shared markedly similar stories. 
Most were or had been married, are poorly educated, and migrated to cities from poverty-stricken households in Bangladesh to work and support their families. 
Most interviewees reported working at least ten hours per day, every day. 
Many work overtime to meet their daily production quota of 100 shirts per hour. 
And, depending on their position, they spend the entirety of their shifts either standing (if they are quality inspectors), sitting (if they are machine operators), or moving (if they are factory-floor helpers). 
But what makes our studies unique is the information we collected about what happens after work. 
And here, the data are even more striking. 
For starters, most married female workers’ workdays don’t end when their shift at the factory does. 
Back at home, they are expected to cook, clean, and perform other household chores – work on top of work that leaves them exhausted and prone to illness. 
Pregnant women in particular suffer significant health problems, such as hypertension, owing to their brutal schedules. 
And yet most women, needing the income, continue working and hide their pregnancies as long as possible, out of fear that supervisors will fire them when they find out. 
This also takes an emotional toll. 
Working mothers from rural villages report experiencing high levels of guilt, anxiety, and stress caused by being away from the children whom they often have to leave in their home village, because they cannot afford – in terms of time or money – to care for them in Dhaka. 
Two out of five workers show suicidal tendencies. 
Yet the factory health-care systems that we have studied do not treat mental illness as a serious problem. 
In fact, most factories do not have any mental-health-care provisions at all for their workers. 
As a result, most women suffer in silence. 
Finally, our research identified a disturbing correlation between employment in the garment industry and violence (physical, emotional, and sexual) against women. 
A staggering 43% of respondents said they had been sexually assaulted by a spouse during the previous year. 
To put this figure in perspective, the national average for this form of violence is 13%. 
While we don’t have the data for a conclusive assessment of why rates of abuse are so high in the garment trade, the data are consistent with the prevailing popular view that women in this field are somehow associated with sex work and sexual promiscuity. 
There is no doubt that women in Bangladesh have earned a degree of autonomy and financial independence from their participation in the garment industry. 
But, as our data illustrate, these gains have come at a cost. 
And, although activists and industry insiders recognize that attitudes and abusive practices toward female workers must change, there is currently no consensus about how to proceed. 
We think it is time to change that, and a good place to start would be by pushing multinational firms to make gender equality a high priority. 
Many of the global brands that rely on Bangladesh’s factories have committed to gender parity in their corporate offices. 
They should do the same on the production side, where managerial positions are occupied almost exclusively by men, a disparity that reinforces the gender imbalance elsewhere in society. 
But perhaps the most important change to be made is to engage men in a dialogue on gender. 
In several African countries, gender-sensitization initiatives have reduced discrimination and violence against women. 
One program in West Africa, for example, brings husbands and wives together for mediated “dialogue sessions” to improve women’s role in financial decision-making. 
To make similar gains in Bangladesh, profound changes in policies and programs are needed. 
The garment industry and men more broadly must commit to the goal of women’s empowerment. 
After nearly 40 years on the job, women are the driving force behind Bangladesh’s most important industry. 
But at the moment, they are paying too high a physical and emotional price. 


Bangladesh Goes Taliban 
Is Bangladesh headed into the black hole that consumed Afghanistan under the Taliban? 
Fears are mounting, as official and fundamentalist religious forces now seem to operate with impunity – and the apparent support of local police, the ruling Bangladeshi National Party, and local authorities. 
For many years Bangladesh was an exception in the Islamic world, pursuing an independent course in a peaceful, secular, and democratic fashion. 
Traditionally, under Bengali Sufi mystical teachings, the majority Muslim population lived peacefully with other religions, and Bangladesh had a good record on education and civil rights for women. 
Until recently, Muslim fundamentalists were discredited, because militias such as “al-Badr” and “Razakar” had supported atrocities against civilians during the civil war of 1971. 
That began to change in 2001, when Prime Minister Begum Khaleda Zia, the widow of the assassinated military strongman General Zia, replaced secularism in the Constitution with the “Sovereignty of Allah.” 
Encouraged by this change the BNP’s junior coalition partner, Jamaat-e-Islami, which has links with the militias and remains close to Pakistan, has been calling for imposition of Sharia (Islamic law). 
The BNP appears to view religious extremism as a tool to break the power of the opposition Awami League, which is largely supported by the secular and urban middle classes. 
Similarly, the massive rise in the number of madrassas (religious schools) financed by Saudi and Gulf money – totalling roughly 64,000 and operating under the same fundamentalist Deobandi Islam that inspired the Taliban – is part of a clear effort to change Bangladesh’s culture of religious tolerance. 
The danger inherent in Bangladesh’s course is very real. 
Indian intelligence officials allege that the leader of a BNP coalition partner, Mufti Fazlul Haque Amini, maintains ties to the banned armed Islamist group Harkat-ul-Jihad-al-Islami, or Huji, which in turn is allegedly linked to Al Qaeda. 
In 1999, Huji members attempted to assassinate the moderate poet Shamshur Rahman with an axe. 
Forty-four Huji members were arrested, two of whom claimed to have been sent from South Africa and Pakistan by Osama Bin Laden to distribute money to the extremist madrassas. 
Bangladeshi migrant workers in the Gulf States who return home imbued with radical Wahhabi and Salafi teachings fan the fires even more. 
Competing for influence among radical Islamist leaders in northwestern Bangladesh is Bangla Bhai, who in 2004 attempted an Islamist revolution in several provinces bordering India. 
Supported by local police and 10,000 followers, the rebellion ended only after a government crackdown. 
The NGO Taskforce against Torture has documented over 500 cases of torture and intimidation by radical Islamists, who also have murdered supporters of the Communist Party, such as Abdul Kayyam Badshah. 
Indeed, Hindus, Christians, and Buddhists have been targeted as well, and religious extremists more recently have attacked Sufi shrines deemed to be idolatrous, and even Bengali cultural events that unite all religions in a common identity. 
For example, during Ramadan prayers last October, a mob of a 1,000 people razed a mosque of the Ahmadiyya Muslim community. 
The 100,000 members of this Muslim sect, which believes that Muhammad was not the last prophet, have been declared infidels, and the government outlawed their publications until the ban was reversed by the Bangladeshi High Court. 
Hindus, Ahmadiyyas, and tribal people in the Chittagong hills, fearful for their safety, have been leaving the country in droves. 
The atmosphere of violence is palpable in other ways. 
Sheikh Hasina, the Awami League’s leader and the daughter of the Bangladesh’s founding father, survived a grenade attack last summer that killed at least 20 people and injured hundreds more. 
The killers have never been apprehended. 
Britain’s High Commissioner in Bangladesh was wounded in a similar bomb attack this May. 
To its credit – albeit under pressure from donor countries – the Bengali authorities seem to sense that their country is drifting toward becoming a failed state and are making greater efforts to arrest Islamist killers, despite some of them being part of the ruling coalition. 
Two radical Islamist groups have also been banned. 
But piecemeal arrests will not be enough to reverse the drift if a culture of intolerance is allowed to fester. 
One encouraging note is that annual economic growth has been a steady 5% for the past few years. 
But now many Bangladeshis fears for their livelihoods, owing to unlimited Chinese textile imports following the end of quotas last year. 
Economic deterioration in Bangladesh would only worsen inter-communal tensions and provide a fertile breeding ground for jihadis, but the reforms needed to head off decline are often blocked by political infighting and opposition boycotts. 
The world cannot afford a second Afghanistan in Bangladesh, where Huji members are believed to have given sanctuary to many Taliban fighters after the fall of their regime. 
Pressure from India will not be enough to force the Bengali government to adhere to the tolerant form of Islam that the country pursued during its first three decades of independence. 
All of Asia’s powers, including China and Japan, will have to play a part in stopping Bangladesh’s drift into fanaticism and chaos. 
The rest of the world should support them before it is too late. 

Don’t Bank on Bankruptcy for Banks 
CAMBRIDGE – In the next month, the US Treasury Department is expected to decide whether to seek to replace the 2010 Dodd-Frank Act’s regulator-led process for resolving failed mega-banks with a solely court-based mechanism. 
Such a change would be a mistake of potentially crisis-size proportions. 
Yes, creating a more streamlined bankruptcy process can reduce the decibel level of a bank’s failure, and bankruptcy judges are experts at important restructuring tasks. 
But there are critical factors that cannot be ignored. 
Restructuring a mega-bank requires pre-planning, familiarity with the bank’s strengths and weaknesses, knowledge of how to time the bankruptcy properly in a volatile economy, and the capacity to coordinate with foreign regulators. 
The courts cannot fulfill these tasks alone, especially in the time the proposal under consideration has allotted – a 48-hour weekend. 
Unable to plan ahead, the courts would enter into the restructuring process unfamiliar with the bank. 
Moreover, the courts cannot manage the kind of economy-wide crisis that would arise if multiple mega-banks sank simultaneously. 
And they cannot coordinate with foreign regulators. 
In short, completing a proper restructuring would require contributions from regulators, including pre-planning, advice, and coordination. 
Yet, far from accepting these contributions, the plan would largely cut regulators out of the process. 
For example, the plan would bar regulators from initiating a mega-bank’s bankruptcy, leaving it to the discretion of the bank’s own managers. 
In the nonfinancial sector, failing companies often wait too long before declaring bankruptcy, so creditors may step in to do some pushing, potentially even forcing a bankruptcy of a failed firm. 
While bank regulators have tools to push banks similarly, their most effective one is the power to initiate a bankruptcy when it is best for the economy. 
Taking this tool away could have severe adverse consequences. 
Bank executives, like sinking industrial firm executives, have reason to “pray and delay,” hoping that some new development will save them. 
But if a failing mega-bank runs out of cash during such a delay, the risk that its bankruptcy will be disorderly – as with Lehman Brothers in 2008 – rises, as does the potential that it will wreak havoc on the real economy. 
The simple fact is that government regulators can do things that courts cannot. 
Courts lack the staff and expertise to come up with a nation-wide recovery plan. 
Moreover, they cannot lend to a cash-poor wobbly bank until it can stand on its own. 
The government can do that – and it can make sure that either the bank will repay the loans (by getting good collateral) or that the financial sector overall will cover the repayment (as Dodd-Frank authorized and required). 
When courts preside over nonfinancial bankruptcies, they depend on private lenders to provide emergency liquidity. 
But in a financial crisis, weakened banks cannot lend, meaning that the government must serve as the lender of last resort. 
And to play that role well, the government must be deeply involved in the bankruptcy process, so that it can jump in if needed. 
The current proposal, which the US House of Representatives has already passed, has other major flaws. 
For starters, American mega-banks operate worldwide, typically with a significant presence in London and other financial centers. 
If creditors and depositors of a failed American mega-bank’s foreign affiliate run off with the cash they held there, or if a foreign regulator shuts down that affiliate, the US bank would be in an untenable position. 
Yet courts cannot negotiate understandings with foreign regulators. 
American regulators can, but only if they can control the timing of the bankruptcy, and otherwise engage in the process. 
To be sure, the bankruptcy bill now in play is useful. 
But it is not robust. 
It would not allow broad-spectrum, full-scale bankruptcies, in which failing operations are closed under the court’s aegis, viable operations are sold, and debts are restructured up and down a company’s balance sheet. 
Rather, the current proposal envisages a limited-scale weekend restructuring, requiring that a precise loan structure be put in place years ahead of time. 
The bank would be closed on Friday evening, unburdened of pre-positioned evaporating debts over the weekend, and reopened on Monday morning, without (in the best-case scenario) needing a government bailout. 
If successful, this kind of rapid-fire bankruptcy process would be valuable. 
But it has never been tried. 
To have any chance of re-opening on Monday morning, a bankrupt bank’s billions of dollars in long-term debt would already have to be structured in such a way that a bankruptcy court could eliminate it over a weekend. 
But bankruptcy judges would have no knowledge in advance of a bank’s debt, and they would need more than a weekend to determine whether that debt could be properly stripped out. 
Government regulators, on the other hand, could do this in advance. 
And yet, under the current proposal, their official means of doing so would be sharply rolled back. 
Bankruptcy, if it works, is a good way for a failing firm to restructure or shrink. 
But if a failing mega-bank cannot open on Monday morning, the financial system will need backup. 
Under the current proposal, the absence of a regulatory safety net could result, if the weekend restructuring fails, in a global chaotic free-for-all, just like the one that followed the 2008 Lehman Brothers bankruptcy. 
Maintaining financial stability in a crisis is too important for us to pin our hopes on a narrow bankruptcy channel. 
The courts can help, especially after they have developed a routinized process for restructuring banks, as they have done with airline restructurings. 
But we should be wary about relying on courts to do things they have never been asked to do before. 
The House already voted, precipitously, to replace the regulator-led restructuring system with a weaker court-led setup. 
Let’s hope that wiser heads at the Treasury Department prevail. 
A letter to Congress with a similar conclusion was signed by 120 academics with expertise in bankruptcy, banking regulation, finance, or all three. 

Economists in Denial 
LONDON – Early last month, Andy Haldane, Chief Economist at the Bank of England, blamed “irrational behavior” for the failure of the BoE’s recent forecasting models. 
The failure to spot this irrationality had led policymakers to forecast that the British economy would slow in the wake of last June’s Brexit referendum. 
Instead, British consumers have been on a heedless spending spree since the vote to leave the European Union; and, no less illogically, construction, manufacturing, and services have recovered. 
Haldane offers no explanation for this burst of irrational behavior. 
Nor can he: to him, irrationality simply means behavior that is inconsistent with the forecasts derived from the BoE’s model. 
It’s not just Haldane or the BoE. 
What mainstream economists mean by rational behavior is not what you or I mean. 
In ordinary language, rational behavior is that which is reasonable under the circumstances. 
But in the rarefied world of neoclassical forecasting models, it means that people, equipped with detailed knowledge of themselves, their surroundings, and the future they face, act optimally to achieve their goals. 
That is, to act rationally is to act in a manner consistent with economists’ models of rational behavior. 
Faced with contrary behavior, the economist reacts like the tailor who blames the customer for not fitting their newly tailored suit. 
Yet the curious fact is that forecasts based on wildly unrealistic premises and assumptions may be perfectly serviceable in many situations. 
The reason is that most people are creatures of habit. 
Because their preferences and circumstances don’t in fact shift from day to day, and because they do try to get the best bargain when they shop around, their behavior will exhibit a high degree of regularity. 
This makes it predictable. You don’t need much economics to know that if the price of your preferred brand of toothpaste goes up, you are more likely to switch to a cheaper brand. 
Central banks’ forecasting models essentially use the same logic. 
For example, the BoE (correctly) predicted a fall in the sterling exchange rate following the Brexit vote. 
This would cause prices to rise – and therefore consumer spending to slow. 
Haldane still believes this will happen; the BoE’s mistake was more a matter of “timing” than of logic. 
This is equivalent to saying that the Brexit vote changed nothing fundamental. 
People would go on behaving exactly as the model assumed, only with a different set of prices. 
But any prediction based on recurring patterns of behavior will fail when something genuinely new happens. 
Non-routine change causes behavior to become non-routine. 
But non-routine does not mean irrational. 
It means, in economics-speak, that the parameters have shifted. 
The assurance that tomorrow will be much like today has vanished. 
Our models of quantifiable risk fail when faced with radical uncertainty. 
The BoE conceded that Brexit would create a period of uncertainty, which would be bad for business. 
But the new situation created by Brexit was actually very different from what policymakers, their ears attuned almost entirely to the City of London, expected. 
Instead of feeling worse off (as “rationally” they should), most “Leave” voters believe they will be better off. 
Justified or not, the important fact about such sentiment is that it exists. 
In 1940, immediately after the fall of France to the Germans, the economist John Maynard Keynes wrote to a correspondent: “Speaking for myself I now feel completely confident for the first time that we will win the war.” 
Likewise, many Brits are now more confident about the future. 
This, then, is the problem – which Haldane glimpsed but could not admit – with the BoE’s forecasting models. 
The important things affecting economies take place outside the self-contained limits of economic models. 
That is why macroeconomic forecasts end up on the rocks when the sea is not completely flat. 
The challenge is to develop macroeconomic models that can work in stormy conditions: models that incorporate radical uncertainty and therefore a high degree of unpredictability in human behavior. 
Keynes’s economics was about the logic of choice under uncertainty. 
He wanted to extend the idea of economic rationality to include behavior in the face of radical uncertainty, when we face not just unknowns, but unknowable unknowns. 
This of course has much severer implications for policy than a world in which we can reasonably expect the future to be much like the past. 
There have been a few scattered attempts to meet the challenge. 
In their 2011 book Beyond Mechanical Markets, the economists Roman Frydman of New York University and Michael Goldberg of the University of New Hampshire argued powerfully that economists’ models should try to “incorporate psychological factors without presuming that market participants behave irrationally.” 
Proposing an alternative approach to economic modeling that they call “imperfect knowledge economics,” they urge their colleagues to refrain from offering “sharp predictions” and argue that policymakers should rely on “guidance ranges,” based on historical benchmarks, to counter “excessive” swings in asset prices. 
The Russian mathematician Vladimir Masch has produced an ingenious scheme of “Risk-Constrained Optimization,” which makes explicit allowance for the existence of a “zone of uncertainty.” 
Economics should offer “very approximate guesstimates,” requiring “only modest amounts of modeling and computational effort.” 
But such efforts to incorporate radical uncertainty into economic models, valiant though they are, suffer from the impossible dream of taming ambiguity with math and (in Masch’s case) with computer science. 
Haldane, too, seems to put his faith in larger data sets. 
Keynes, for his part, didn’t think this way at all. 
He wanted an economics that would give full scope for judgment, enriched not only by mathematics and statistics, but also by ethics, philosophy, politics, and history – subjects dropped from contemporary economists’ training, leaving a mathematical and computational skeleton. 
To offer meaningful descriptions of the world, economists, he often said, must be well educated. 

Central Bank Confidential 
LONDON – In 1993, the economists Alberto Alesina and Larry Summers published a seminal paper that argued that central bank independence keeps inflation in check, with no adverse consequences for economic performance. 
Since then, countries around the world have made their central banks independent. 
None has reversed course, and any hint that governments might reassert political control over interest rates, as happened recently in India, are met with alarm in financial markets and outrage among economists. 
In truth, however, there are many degrees of independence, and not all nominally independent central banks operate in the same way. 
Some monetary authorities, like the European Central Bank, set their own target. 
Others, like the Bank of England (BoE), have full instrument independence – control over short-term interest rates – but must meet an inflation target set by the government. 
There are differences, too, in how central banks are organized to deliver their objectives. 
In New Zealand, the bank’s governor is the sole decision-maker. 
At the US Federal Reserve, decisions are made by the Federal Open Market Committee (FOMC), whose members – seven governors and five presidents of the Fed’s regional reserve banks – enjoy varying degrees of independence. 
The ECB does not publish voting records and seeks consensus at the meetings of its General Council. 
By contrast, the BoE’s Monetary Policy Committee (MPC) has nine members, four of whom are appointed from outside the bank, and all votes are individually recorded; nobody is allowed to hide behind an institutional view. 
The Fed does not keep a voting record, but “dissents” from its major decisions are noted (these were almost unheard of when Alan Greenspan was Chairman, but have since become more common). 
There are differences, too, in the relationship between policymakers and their staff, which also influences a central bank’s independence. 
At the Fed, the staff present their own economic forecasts to the FOMC, without input from the policymakers who set the interest rate. 
At the BoE, the MPC is responsible for official forecasts, which it publishes in its Inflation Reports. 
That is helpful in influencing expectations, because a range of different views from the central bank could confuse the private sector; but it carries the risk of institutional groupthink. 
Groupthink can be particularly dangerous if the central bank is also the banking supervisor, as the 2008 global financial crisis demonstrated. 
In 2006, every central bank that published a financial stability report (in other words, most of them) concluded that their country’s banking system was in fine shape: well-capitalized and endowed with robust governance and strong risk management. 
It seems unlikely that not a single central bank analyst was the least bit worried about the massive growth in credit and leverage at the time. 
Economists at the Bank for International Settlements – an organization of central banks – were laying out the risks very starkly. 
And yet not a dissenting voice was heard from the world’s small army of central bank economists. 
Central banks may have been independent vis-à-vis their countries’ governments, but internally it was very difficult to stray from the party line. 
There is, of course, a balance to be struck between tight institutional discipline and letting a hundred intellectual flowers bloom. 
A central bank is not a university economics department, where diversity is almost invariably a source of strength. 
External observers are bound to try to read policy messages between the lines of any publication, which may not always help the bank to achieve its objectives. 
That said, there is clearly room for allowing more heterodox thinking. 
So it is encouraging that the BoE is experimenting with a platform that enables a wider variety of views to be heard: a blog called Bank Underground (a reference to the Tube station beneath the Bank’s headquarters) that publishes posts by junior staff challenging – or supporting – prevailing policy. 
In a matter of weeks, Bank Underground already has established itself as a fertile source of provocative ideas. 
One post in the middle of August (when the Bank’s top cats were certainly away, allowing free rein to the mice) pointed to some of the weaknesses in banks’ internal capital models, which are at the heart of the Basel 3 capital-requirements regime. 
The author, a BoE employee named Tobias Neumann, argued that incorporating more data into the models could lead them to pick up noise and mistake it for an important signal. 
As a result, he concluded, highly complex models may regularly yield misleading information. 
Another post, published in July, explicitly challenged the BoE’s “official” view that as the economy recovers, we can expect non-financial companies to begin to run down their cash balances to fund investment. 
The authors, Katie Farrant and Magda Rutkowska, suggest that corporate behavior may have changed as a result of the financial crisis, as difficulties in accessing bank financing led them to increase their cash buffers permanently. 
If true, this has important implications for the financial system, and especially for banks. 
In its short life, Bank Underground has already proved its worth. 
The BoE’s governor, Mark Carney, deserves great credit for allowing us to peer through a small crack in the Old Lady of Threadneedle Street’s façade (assuming, of course, that the blog is not a wholly unlicensed initiative!). 
Perhaps we will eventually see the emergence of a rival Fed Subway blog, though I am not optimistic about the prospects for an ECB U-Bahn blog anytime soon. 
In the meantime, I plan to spend more time underground. 
The light seems to be better there. 

Why the Bank of England Should Target Growth 
OXFORD – The Bank of England raised interest rates to 0.75% this month, in the belief that inflation will exceed its mandated 2% target in about two years. 
But raising interest rates tends to dampen economic activity, and growth is hardly rampaging in the United Kingdom. 
Should the BoE consider a change to its mandate to include economic growth? 
In the United States, the Federal Reserve has a dual mandate: price stability and maximum employment. 
Of course, the Fed has also raised interest rates this year; but the US economy is growing at over 4% and GDP is expected to be around 3% higher this year. 
By contrast, the UK economy grew just 0.2% in the first quarter of this year. 
While the BoE expects growth to rebound and end up at around 1.5% for the year, it describes this rate as the “speed limit.” 
Faster growth would fuel inflationary pressures. 
With UK unemployment at 4.2% – a level consistent with full employment in the BoE’s view – hiring workers will mean higher wages. 
And, because price increases are a function of wages plus a mark-up, inflation will rise. 
The BoE’s decision to raise interest rates despite slow economic growth reflected its concern for its 2% inflation target. 
Given that the British economy grew at an average of 2.5% between 1980 and 2007, the BoE’s projection of 1.5% potential growth amounts to a significant downgrade. 
The culprit is poor productivity growth. 
From 1998 until the 2008 global financial crisis, annual productivity growth averaged 2.25%. 
The BoE now believes the rate to be closer to 1-1.25%. 
This productivity slowdown has occurred across advanced economies, for reasons – adverse demographic trends, lower investment demand, or any of a slew of other possible explanations – that remain unclear. 
But Britain is the worst affected. 
And slower economic growth leads to an expectation of lower interest rates. 
For the first time, the BoE has produced an estimate of what the “new normal” interest rate is likely to be, in line with its growth forecasts. 
Rather than the 5% average rate that prevailed in the decades before the banking crisis, the BoE now expects interest rates to be 2-3%, implying a real (inflation-adjusted) interest rate of below 1%. 
That is not out of line with estimates of where interest rates might be for other advanced economies experiencing a productivity slowdown. 
But, because the BoE believes the economy is already growing at its full potential, it has raised interest rates now, even though GDP growth is slow and is estimated to only reach 1.7-1.8% between now and 2021, the end of its forecast period. 
This is why the BoE’s latest move looks curious. 
Won’t the effects of higher rates on borrowing, spending, and investment by households and firms lead to even slower growth? 
Of course, monetary policy affects the business cycle, not the economy’s long-term prospects, which depend on, among other things, technological innovation and the skills of the workforce. 
So the BoE’s actions will not change the British economy’s potential growth rate. 
But would a growth mandate give the BoE greater pause before raising rates when growth is anemic? 
Consider a scenario in which the BoE were given a mandate to maximize economic growth and meet a 2% inflation target. 
If policymakers expected inflation to reach 2%, but economic growth to be less than 2%, in two years, then they would need to balance how much economic dampening a rate rise would bring about. 
In other words, their inflation target may be met, but if growth is tepid, confronting a trade-off between the two targets might stay the BoE’s hand for a while longer – just as the Fed keeps an eye on employment, even though monetary policy doesn’t really affect long-run growth. 
What makes this tricky is that it is hard to estimate an economy’s potential growth rate, which can change. 
If productivity growth picked up, then 2.5% GDP growth could again be the “speed limit.” 
So, a central bank with a growth mandate may tread a bit more carefully in case its actions dampened activity that could increase national output to its new potential rate. 
Another reason for the BoE to consider a mandate that includes economic growth is the weakening relationship between inflation and the rest of the economy. 
In other words, unlike in the past, price growth is not that closely related to unemployment or output. 
For example, inflation was high in the immediate aftermath of the 2008 crisis, suggesting that the UK economy was booming when it wasn’t; unemployment was fairly high then as well. 
Prices were rising because the pound was weak, boosting the cost of imports, and global oil prices were high. 
During this period, the BoE often missed its inflation target, fueling criticism that the target was ineffectual. 
The reason not to raise rates, however, was evident: the economy was coping with the aftermath of the Great Recession. 
With economic growth as an explicit part of its mandate, the BoE could explain itself better in such circumstances – and better maintain the credibility of its commitment to price stability. 
Targeting price stability alone may have worked when inflation was a more reliable proxy of the business cycle. 

The Bank of Japan’s Moment of Truth 
TOKYO – The Japanese economy has enjoyed seven consecutive quarters of positive growth, with the average annual rate reaching 1.9%. 
With aggregate demand exceeding potential output by 1%, the country’s “GDP gap” is now positive. 
Unemployment is down to 2.7%, the lowest level since 1993, and the job-opening-to-application ratio is 1.56, its highest level since 1974, resulting in acute labor shortages in several sectors, including construction, retail, and package delivery. 
And in January this year, the Nikkei Stock Average rose above ¥24,000 ($216), its highest level since 1991. 
But, while these indicators suggest that Japan is finally out of the woods of more than two decades of stagnation, deflation, and economic insecurity, the headline inflation rate, at just 0.6%, remains far below the Bank of Japan’s 2% target. 
And, notably, while the BOJ had been attributing low inflation to falling energy prices, energy is now contributing positively to inflation. 
When fresh food is excluded from the price index, the rate rises to 0.9%, but falls to 0.3% when also excluding energy. 
Considering the current labor shortages, why Japan has not experienced a healthy wage-inflation spiral remains a mystery. 
To be sure, inflation is also missing in the United States and Europe. 
But the Japanese case is particularly striking. 
Japan’s real economy has been supported for years by fiscal deficits as high as 6% of GDP, and by extraordinary quantitative easing (QE), which BOJ Governor Haruhiko Kuroda introduced in April 2013. 
The debt-to-GDP ratio has since risen to 230%, and the BOJ has assumed ownership of more than 40% of outstanding government bonds (JGBs). 
The BOJ has maintained its negative policy rate and 0% ten-year-bond rate by purchasing annually ¥80 trillion in JGBs and ¥6 trillion in equities. 
But, more recently, it has kept the ten-year-bond rate at 0.0-0.1%, while reducing the pace of new purchases of JGBs to around ¥50 trillion, in what some regard as a stealth tapering. 
With Kuroda’s term ending in early April, two camps of critics have become increasingly vocal. 
The first camp, arguing that the real economy is what matters, wants the BOJ to stop providing stimulus and start worrying about its bloated balance sheet. 
When the inflation rate moves closer to the target, the BOJ will have to start raising its policy and long-term rates without adjusting the size of its balance sheet – which is exactly what the US Federal Reserve is already doing. 
Given the low average coupon rate of asset-side long-term bonds, the upward shift of the yield curve will result in a loss for the BOJ (“negative seigniorage”), at least temporarily. 
In the worst-case scenario, the BOJ could exhaust its capital and require a fiscal injection, which could jeopardize its independence. 
Accordingly, the first camp believes the inflation target should be lowered to 1%. 
Inflation would then be on target, and the BOJ could wind down its QE program. 
The major drawback of this approach is that it would cause the yen to appreciate sharply, striking a blow to the real economy. 
The second camp believes that more stimulus is needed, and that increasing the consumption-tax (VAT) rate in April 2014 was a huge mistake, as is stealth tapering. 
Instead, QE and expansionary fiscal policies should remain at full throttle until the 2% inflation target is reached. 
That means more government expenditure through more JGB issues, to be purchased by the BOJ – also known as “helicopter money.” 
The problem is that intentionally blowing up the budget deficit will increase the risk of a fiscal crisis down the road, without helping the real economy. 
When the BOJ held its latest policy-setting meeting on January 22-23, it maintained the approach it has followed for more than a year. 
Kuroda and his deputy governors are probably hoping that the real economy’s strong performance will translate into higher inflation soon. 
But will it? 
Generally, three keys to higher inflation are wage increases, resulting from labor scarcity; expectations of higher future inflation among the public; and a favorable external environment. 
With respect to wages, Japanese Prime Minister Shinzo Abe’s government has been pressuring major corporations to raise wages by 3% or more. 
That should be manageable, considering that many corporations are enjoying record profits. 
And yet unions in Japan remain timid, and workers remain traumatized from 15 years of deflation. 
As a result, many choose job security over pay hikes. 
Demanding higher wages, they fear, would give companies an excuse to move operations abroad or adopt labor-replacing technologies. 
As for the second ingredient, the BOJ has admitted that it underestimated the difficulty of influencing inflation expectations when it introduced its QE program in April 2013. 
In Japan, the expected inflation rate, however it is measured, tends to track the actual inflation rate, albeit with some lag. 
This helps to explain why simply announcing a 2% target has not anchored the public’s expectations, as it has in the US. 
At the same time, the external environment is promising. 
Almost every other advanced economy is experiencing steady, synchronized growth. 
And emerging economies, especially China, have also regained strength. 
At the level of the global economy at least, the stars seem to be aligned for inflation to reach the 2% target rate in Japan, the US, and the eurozone. 
In Japan, the Phillips curve tends to be L-shaped. 
Right now, the economy is very close to the kink in the “L,” the point known as the non-accelerating inflation rate of unemployment (NAIRU). 
Any sign of a vertical move (implying higher inflation with an unemployment rate at NAIRU), rather than a horizontal one (a lower unemployment rate without CPI inflation), will be welcomed by the BOJ, and good for the economy at large. 

Bank Regulation’s Capital Mistake 
MEDFORD, MASSACHUSETTS – Imagine that the arguments triggered by the Hindenberg disaster were about the fire extinguishers and parachutes that airships should carry, rather than about the design flaws that might cause them to ignite. 
Unfortunately, today’s debates about banking reform have just this character. 
Reversing the robotic gigantism of banking ought to be the top priority for reform. 
Bankers were once supposed to know every borrower, and to make case-by-case lending decisions. 
Now, however, banks use models conjured up by faraway financial wizards to mass-produce credit and a range of derivative products. 
Mass-production favors the growth of mega-banks, so, unlike the misjudgments of lending officers, these behemoths’ defective models have had disastrous consequences. 
Radical proposals that would help restore a more resilient system, offered by the likes of Governor of the Bank of England Mervyn King, have been smothered by noisy discussion of measures that do nothing to address modern banking’s fundamental defects. 
Consider the seemingly heated debate over how much capital banks should hold. 
Regulators have proposed steep hikes: a Bank of England study, for example, suggested a more than three-fold increase. 
Bankers, who may really be worried about their own bonuses, warn that higher capital requirements will force them to curtail lending, thus impeding economic growth. 
In fact, this is all a pointless charade. 
Yes, the principle of regulating bank capital seems sensible. 
Borrowing increases risk in any business: you can’t go bankrupt if you have no debt. 
Heavy borrowing also encourages owners and managers to go for broke, because it’s the creditors who bear most of the downside risk. 
Prudent lenders therefore try to limit both how much a business can borrow and the other risks it can take. 
But creditors don’t have an incentive to place tough limits on banks. 
Because runs on banks can trigger widespread distress, governments explicitly guarantee insured deposits and implicitly guarantee all the other debts of mega-banks. 
Governments that guarantee bank liabilities, however, must then also demand that bankers exercise more prudence than they might on their own. 
Yet focusing mainly on how much banks borrow while ignoring other, more serious recklessness is a bad regulatory bet. 
Bank regulation, like lending, was once decentralized and judgment-based. 
Regulators relied mainly on examination of individual loans rather than capital-to-asset ratios. 
A typical bank exam would include scrutiny of every single business loan and a large proportion of consumer loans. 
Capital adequacy was a matter of judgment: examiners would figure out how large a buffer a bank ought to have, taking into account its specific risks. 
Regulators then shifted to edicts requiring banks to maintain a specified capital cushion, thick enough to cover potential losses. 
This approach presupposes that bank assets and exposures can be accurately measured. 
In fact, the financial statements of mega-banks are impenetrable works of fiction or wishful thinking. 
The problem goes beyond deliberate obfuscation. 
J.P. Morgan and Deutsche Bank have paid substantial sums to settle charges ranging from bribery to illegal foreclosures to abetting tax evasion. 
Ruling out the connivance of top executives raises an alarming question: Does Jamie Dimon, J.P. Morgan’s highly regarded CEO, have as little grasp of the exposures embedded in his bank’s nearly $80 billion derivatives book as Tony Hayward, the hapless ex-CEO of BP, had of the hazards of his company’s ill-fated rig in the Gulf of Mexico? 
Indeed, ignorance about what is actually at risk makes debates about the right formula for capital buffers surreal. 
Moreover, the use of mechanistic rules to determine capital adequacy has also inadvertently encouraged systemic imprudence. 
Limits on borrowing that make it difficult to earn an adequate return on equity encourage banks to load up on riskier, high-profit-margin loans – and requiring banks to hold more capital for supposedly riskier categories of assets exacerbates the problem. 
For example, under the internationally-agreed Basel Committee rules that were in place before the 2008 crash, capital requirements for business loans were five times higher than for mortgage-backed securities that had AA or AAA ratings. 
Banks naturally avoided traditional business loans (which would have to be backed by more capital), and instead loaded up on the highest-yielding – and thus riskiest – AA or AAA mortgage- backed securities that they could find. 
The global banking system and economy was thus vulnerable to the mistakes of the three main rating agencies and their flawed risk models. 
Encouraging banks to turn loans kept on their books into securities also helped reduce the overall level of caution in the extension of credit. 
Additionally, strategies to circumvent the Basel rules made banks more complex and difficult to manage and supervise. 
Smarter capital requirements – better Basel rules – aren’t the answer. 
Rigid, top-down uniformity is essential in the specification of weights and measures and the issuance of currency and coin. 
Bank lending and regulation, by contrast, must incorporate local knowledge, because, in a dynamic, unregimented economy, each borrower, loan, and bank is different (though some general guidelines can help). 
The seemingly objective top-down approach ignores the idiosyncratic nature of risk and assumes that one mortgage loan is like the next. 
We can no longer afford to rely on old-fashioned examination for mega-banks loaded with mass-produced risks. 
And because stockholders or raiders can’t force streamlining, governments must require these banks to shed activities that no one can manage or regulate and stick to hands-on case-by-case lending. 
With huge profits and bonuses at stake, mega-banks won’t readily abandon their model-based businesses; but, unless that happens, placing most of our bets on top-down rules would be reckless folly. 

Bankers without Borders 
FRANKFURT – At the height of the financial crisis in 2008-2009, it seemed as if Western banks would pull up their foreign stakes and go home, leaving financial markets much more fragmented along national lines. 
But, as a new report by Deutsche Bank Research shows, banks’ cross-border business – direct or via branches or subsidiaries – has now broadly stabilized. 
During the crisis, the level of banking activity fell particularly strongly in capital-intensive areas such as traditional lending to the private sector. 
The effect was especially pronounced in lending to non-financial companies, whereas lending to households – an area with traditionally lower internationalization – remained more robust. 
In part, the decline was due to increased holdings of foreign public debt relative to private debt. 
Prior to the crisis, banks had often been net sellers of foreign government bonds, but they significantly increased their purchases during 2008-2009. 
With the onset of the European sovereign-debt crisis in 2010, banks’ appetite for public debt fell again. 
In contrast to lending activities, banks’ commitment to foreign markets has remained virtually unaffected with respect to purely intermediary activities such as investment banking and asset management. 
Interbank relationships, as well as investment-banking operations, are already highly international. 
The deep cross-border links between financial institutions and the activity of globally active investment banks only took a brief hit from the crisis. 
By contrast, the importance of foreign markets for asset managers remains very limited and has not changed significantly since 2007. 
Despite the recent setback, banks’ presence in foreign markets today is much greater overall than it was a few years ago. 
One reason is that revenue growth usually goes hand-in-hand with macroeconomic growth, which increasingly is found in emerging-market countries, rather than in many banks’ mature Western home markets. 
Moreover, private and public-sector debt levels tend to be much lower in the emerging economies. 
At the same time, geographically diversified institutions outperformed even during the recent global crisis, because they were less vulnerable to downturns in individual regions. 
And, at least until a certain stage of growth, economies of scale and scope beckon, with expansion abroad often the only way to increase size, given already-saturated domestic markets. 
Of course, integrated financial markets also benefit banks’ clients by enabling institutions to provide broader and higher-quality financial services at lower prices. 
Furthermore, strong international financial partners are indispensable to multinational corporations, which often need global cash management or support for large-scale transactions. 
Given these advantages, the pace of internationalization has been swift. 
As recently as 2001, Europe’s top 20 banks still generated more than half of their revenues at home. 
By 2010, this share had fallen by 10 percentage points, to 42% – a remarkable decline that was interrupted only briefly by the financial crisis. 
Interestingly, most large European banks’ prime investment destination was other European markets, not other parts of the world, raising Europe’s contribution to total revenue to nearly 30%, from less than 20% a decade ago. 
There may be two explanations for this: for one thing, Asia’s share in European banks’ revenues has probably risen. 
But this may have been offset by a decline in the proportion of earnings coming from the US. 
And, while this reflects changes in relative importance, European banks’ business volumes might have increased in absolute terms even in the US, though at a slower pace than elsewhere. 
Overall, the outlook for post-crisis international banking has turned positive. 
But regulation could change that. 
In the current environment, with a renewed focus on regulating markets, institutions, and financial instruments, some international differences in scale, scope, and application of the new rules may be inevitable. 
But, without a broadly consistent approach, the authorities risk creating a legal patchwork that would make cross-border banking less efficient, more expensive, and more difficult to conduct. 
Apart from discouraging banks from investing abroad, outright restrictions on foreign banks’ market access cannot be ruled out, either. 
The rapid growth in intra-European banking relations in the past decade was made possible to a large extent by the abolition of formal and informal barriers to foreign service providers. 
Though this environment may not be fundamentally at risk, the current trend towards increasing capital requirements for international banks – reflected, for example, in calls for the establishment of independent subsidiaries with autonomous capital and liquidity pools – is clearly worrisome. 
Nonetheless, given the relatively favorable outlook for cross-border banking, Western banks’ presence in emerging markets could strengthen further, while banks domiciled in these regions might start looking beyond national borders. 
Traditional lending and deposit-taking still offers much growth potential – and may become more attractive relative to investment banking or asset management as a result of new regulation. 
In that case, banking will become more like other industries that have benefited themselves and their customers by evolving into truly global networks. 

Banking on the IMF 
CHICAGO – The biggest financial nightmare looming over the world economy is the insolvency of a large international bank. 
Be it because of a sovereign default or because of large losses accumulated under complacent accounting rules, the insolvency of a large bank (particularly a European bank) is far from a remote possibility. 
Even if it were a remote possibility, the 2008 financial crisis has taught us that rare events occur. 
What makes this possibility the financial nightmare of choice, worse than the collapse of Lehman Brothers in 2008, is the fear that many sovereign states have already shot all their bullets and would thus be powerless to intervene. 
Credit default swaps (CDS) of major southern European banks trade slightly lower than the CDS of their sovereign states, indicating that the market does not perceive the latter as able to support the former. 
Unfortunately, almost two years after Lehman’s collapse, little has been done to address this risk. 
The United States Congress is about to finalize a bill that will grant resolution authority over major US financial institutions to a newly formed systemic council. 
The procedures to trigger this intervention, however, are complex and the funding is sufficiently opaque that the bill will not eliminate collateral damage from a large bank failure even for US institutions, let alone for international ones, whose unwinding would require coordination by several states, with varying degree of solvency. 
To minimize the risk of an unruly collapse, it is necessary to approve an international resolution mechanism with authority over all major international financial institutions. 
The goal would not be to rescue banks and their creditors, but to minimize the disruption that an uncontrolled default might cause. 
This institution should be an international version of the US Chapter 11 Bankruptcy Code. 
But, while the goal of Chapter 11 is to save the ongoing value of a firm, the goal of the international resolution mechanism should be to preserve the ongoing value of the counterparties of insolvent financial institutions. 
The first problem to resolve in approving this mechanism is who should have this authority. 
The obvious answer is the International Monetary Fund. 
Created after WWII to finance temporary imbalances of the members of a fixed-exchange rate system, the IMF has been in search of a cause since the demise of the dollar exchange-rate system in 1971. 
More importantly, through its numerous rescues of sovereign states, the IMF has acquired expertise in debt restructuring, while developing a reputation for toughness and impartiality, which would be very useful in these situations. 
The IMF also has the unique advantage of being the only depositary of international reserves. 
In the absence of an international fiscal authority, the IMF is the organization that comes closest to being one. 
When a large financial institution is insolvent, the IMF should take it over, guaranteeing its short-term obligations, but wiping out the shareholders and repaying the long-term creditors only after all the other creditors (including the IMF itself) are repaid. 
Some people would scream that this is tantamount to nationalization, but it is no more a nationalization that the US Chapter 11 bankruptcy process is. 
Takeover by an international organization has three advantages over a domestic solution. 
First, it makes certain that the cost (if the losses exceed the combined value of equity and long-term debt) is shared by the international community and not only by the country where the institution is located, making the intervention credible even when the sovereign state is not. 
Second, by removing decision-making power from the national government that hosts an insolvent institution, this solution minimizes the potential distortions created by the lobbying power of the incumbent bankers. 
Would you trust the Greek government to run a Greek bank in a non-corrupt way after a government takeover? 
The IMF would be better. 
Finally, thanks to IMF involvement, even less advanced countries would be able to take advantage of the best international expertise to address the problem. 
If a major oil spill in Haiti were threatening the Gulf of Mexico, wouldn’t we want the best technology (and not just the technology available in Haiti) to try to contain it? 
Why should it be any different in financial markets? 
The last problem to be resolved is the trigger. 
In the case of the US resolution authority, this has been a very controversial issue. 
The fear was that powerful banks would exploit national government help, asking for intervention too soon. 
Two safeguards can avoid this problem in the international context. 
First, rigid rules that wipe out shareholders and penalize long-term creditors are a clear deterrent from bankers’ point of view. 
Second, because IMF intervention would reduce the influence of powerful domestic insiders, early intervention would be less attractive to them. 
The trigger should be the domestic government itself. 
Refusing international help in such instances would mean electoral suicide for any government that faces a major bank collapse. 
There are few areas in which government intervention is known to create value: reducing the devastating effects of a bank run is one. 
Only a government that is sufficiently powerful, in terms of legal authority and solvency, can do so. 
Unfortunately, in the international arena these two conditions are almost never met. 
Empowering the IMF to take over failed international banks would fill this gap – and chase away our worst nightmare. 

Banks, States, and Financial Crises 
PRINCETON – The most recent phase of the financial crisis, since the collapse of Lehman Brothers in September 2008, has been characterized by large bank losses and the continued threat of bank collapses. 
The size of the calamity raises the question of whether small countries can really afford bank bailouts. 
But the definition of “small” keeps changing: a few months ago, small meant Iceland, then it meant Ireland, and now it means the United Kingdom. 
The aftermath of the banking crisis requires thinking about not only the most appropriate form of banking legislation, but also the appropriate size of the state. 
There has always been uncertainty about the best design of a banking system, and there has always been competition between different sorts of banking regulation. 
On the one hand, there is the idea – which defined banking for much of American history – that banks should be close to the risks that they must judge. 
This ideal grew out of Andrew Jackson’s titanic struggle with Nicholas Biddle and the Second Bank of the United States. 
Populism was pitted against the financiers, and populism won. 
As a result, most nineteenth-century US banks did not have branches, and were limited to one state. 
The alternative approach was that of Canada, which, because of its roots in secure British rule, had much less fear of political centralization, and was prepared to tolerate a nation-wide banking system. 
Canada’s large banking system distributed risk more widely, and fared better in episodes of financial panic, whether in 1907 or in 1929-1933. 
The larger-bank principle has two chief attractions. 
First, it promises more effective risk management, because large banks are less exposed to a single sort of customer (in contrast to rural American banks, which suffered when American farmers suffered). 
Second, it lends itself much more effectively to long-term strategic thinking about the overall direction of the national, or even the international, economy. 
But larger banks can get into trouble when these two principles get mixed up. 
The idea of the larger bank reached its high point in continental Europe, and especially in Germany, whose big banking system developed out of trade finance and into industrial finance in the late nineteenth century. 
By that time, countries were looking with eager interest at financial models developed elsewhere. 
After the 1907 panic, the US Congress convened a National Monetary Commission, whose most interesting and attractive potential model for the US was German-style universal banks, which were imitated in Russia, Japan, Italy, and Egypt. 
By 1931, even Britain found it hard to resist the German model. 
It, too, conducted an official inquiry, establishing the Macmillan Committee to hear evidence about how poorly British banks served British industry, and how the German model did a much better job at converting savings into industrial finance. 
The Great Depression ended this imitative surge in which the universal bank appeared to triumph. 
By an unfortunate coincidence, the Macmillan Committee produced its report on July 13, 1931, the day that Germany’s most dynamic universal bank, the Darmstädter Bank, failed. 
By the 1990’s, however, emulation of other banking models was back in fashion. 
Financial empire building drove late twentieth-century globalization. 
There was a competitive race across the Atlantic and – to a lesser extent – the Pacific. 
Indeed, gradual integration of the potentially vast European capital market, and the creation of cross-border European banks as a result of mergers, made it look as if a new European breed of superbanks was emerging. 
Likewise, Japan responded to its banking crisis by creating very large merged institutions, while the US repealed much of the depression-era legislation that restricted banking. 
Finally, after Mexico’s 1994-95 peso crisis and the 1997-1998 Asian financial crisis, the US exported its new banking model to the emerging-market economies. 
Spanish and US banks moved heavily into Latin America. 
The appeal here was the opportunity for strategic vision, most clearly seen and pursued by Robert Rubin, first as Treasury Secretary in the Clinton administration and then as an adviser to the new giant of US banking, Citigroup, which emerged out of a 1998 merger. 
But the new superbanks were inherently vulnerable because of the vast diversity and complexity of their transactions. 
Long before the emergence of the sub-prime mortgage problem, Citigroup was damaged by the behavior of its London traders, who tried to manipulate the European government bond market, and by its Tokyo traders. 
It is much simpler for a transnational manufacturing corporation to implement controls to ensure product quality. 
By contrast, in a company whose business is financial intermediation, millions of judgments are made independently, and their implications may be serious enough to threaten the entire firm. 
When the strategy goes wrong, the recriminations begin. 
Traditional mid-sized European states cannot afford to have a strategic vision for their banks. 
But, even for the US, the notion of a world held together by Citigroup’s business plan is simply too costly. 
There is a danger that in the push to nationalize banks as a consequence of the financial crisis, governments will see it as their duty to implement strategies. 
The strategic vision of a bank shaping the economic fortunes of a country, or the whole world, is as flawed as was the idea of central economic planning. 
In this sense, 2007-2009 is the capitalist equivalent of the communist demise of 1989-1991. 

Barack Obama, Israel’s True Friend 
HAIFA – How do you tell a true friend? 
By the fact that he believes and has confidence in you, cares about your true needs, and honestly tells you your mistakes, which he tries to help you correct. 
That is the kind of friend I want at my side, not one who automatically approves of whatever I do, declares his love for me, and accepts me as I am. 
Ever since its great military victory in the Six-Day War of 1967, when it repelled the combined armies of Egypt, Syria, and Jordan, which had openly proclaimed their desire to destroy the Jewish state, Israel has been in the throes of an ideological and military confusion resulting from the conquests it made during that conflict. 
Following the Six-Day War, Israel did not consider the conquered lands as something to be traded for peace, and thus induce the Arab world and the Palestinians to recognize its legitimacy and ensure the demilitarization of Palestinian territories after their restitution. 
Instead, Israel – either because of its distrust of its enemies and of their commitment to respect any future peace agreement, or because of a desire to annex some of the territories – began to pursue a policy of settlements. 
But, in doing so, it created a reality that is difficult to reverse. 
Israel’s non-military settlements are, and have always been, irrelevant to the country’s security. 
On the contrary, because the settlements are located in the heart of the Palestinian population, they are convenient targets for terrorist attacks and require special defensive measures, including the deployment of large military forces engaged in patrolling and surveillance. 
Even on the Golan Heights, where there is no Syrian presence, the settlements, located only a few kilometers from enormous Syrian troop concentrations, create a heavy burden, because, in the event of war, the Israeli army would be forced to evacuate them quickly, as was the case during the Yom Kippur war of October 1973. 
The settlements intensify Palestinian hatred toward Israel. 
In addition to occupying Palestinians’ land, using their water, and imposing limits on their freedom of movement, the settlements symbolize Israel’s intention to remain, and thus its reluctance to concede independence to the Palestinian people, even if they were to recognize Israel’s legitimacy and show themselves disposed to peaceful coexistence. 
Israel has invested great financial resources in the settlements, often ignoring important needs in Israel proper. 
The settlers, predominantly supporters of religious-nationalist movements and parties, often flaunt an attitude of superiority in their relations with Israeli authorities, pretending to have a special status with respect not only to Palestinians, but also to other Israeli citizens. 
Indeed, a substantial number of them don’t even recognize the Israeli state’s legal authority. 
The greatest problem with the settlements is that if they continue to expand, the two-state solution will be compromised and, sooner or later, lead to a unitary state – one populated by two ethnic groups – between the Jordan River and the Mediterranean Sea. 
Because simple demographic implies that Palestinians would gradually come to constitute a majority, a unitary state is a recipe for the end of Israel. 
The majority of Israelis understand this. 
But, like an incorrigible drug addict, they are unable to say, “Enough. 
We have made a mistake, and we have to remedy it before it’s too late.” 
To be sure, when a peace treaty was signed with Egypt, Jewish settlers were forcibly evacuated from the Sinai. 
Similarly, when Jewish communities in the Gaza Strip became unsupportable, the leader of the right, Ariel Sharon, forced out the 9,000 settlers who lived there among 1.5 million Palestinians – a dramatic event that has left deep scars on both sides. 
But there are 250,000 Israeli settlers in the West Bank. 
Any attempt to evacuate them could escalate into a civil war. 
The world, including the United States, disapproves of the Israeli settlements. 
But, despite past US administrations’ opportunity to make their influence felt, they preferred to permit Israel, an allied, friendly state, to do what it wanted. 
So a moment of truth has arrived. 
Barack Obama, a wise and courageous leader, is – I have no doubt about it – not merely interested in improving America’s image in the eyes of the Muslim world. 
He also seeks Israel’s welfare and security, and says to us, “Enough. 
Stop harming yourselves and your own future. 
Even if you don’t believe in Palestinians’ real desire for peace, their capacity to hold terrorist organizations at bay, or their renunciation of the alleged right of return, you can always protect your security with a military presence in Palestinian territories rather than prejudicing the future peace and the two-state solution by expanding useless settlements.” 
With such a clear and direct appeal to the Israeli government, America’s president not only expresses what a majority of Israelis know. 
He also proves his profound friendship for the Jewish state. 

Barack Obama and American Power 
CAMBRIDGE – One of the first challenges that President Barack Obama will face is the effects of the ongoing financial crisis, which has called into question the future of American power. 
An article in The Far Eastern Economic Review proclaims that “Wall Street’s crack-up presages a global tectonic shift: the beginning of the decline of American power.” 
Russian President Dmitri Medvedev sees the crisis as a sign that America’s global leadership is coming to an end, and Venezuelan President Hugo Chávez has declared that Beijing is now much more relevant than New York. 
Yet the dollar, a symbol of American financial power, has surged rather than declined. 
As Kenneth Rogoff, a Harvard professor and former chief economist of the IMF notes, “It is ironic, given that we just messed up big-time, that the response of foreigners is to pour more money into us. 
They’re not sure where else to go. 
They seem to have more confidence in our ability to solve our problems than we do.” 
It used to be said that when America sneezed, the rest of the world caught a cold. 
More recently, many claimed that with the rise of China and the petro-states, an American slowdown could be decoupled from the rest of the world. 
But when the United States caught the financial flu, others followed. 
Many foreign leaders quickly switched from schadenfreude to fear – and to the security of US treasury bills. 
Crises often refute conventional wisdom, and this one reveals that the underlying strength of the American economy remains impressive. 
The poor performance of Wall Street and America regulators has cost America a good deal in terms of the soft power of its economic model’s attractiveness, but the blow need not be fatal if, in contrast to Japan in the 1990’s, the US manages to absorb the losses and limit the damage. 
The World Economic Forum still rates the American economy as the world’s most competitive, owing to its labor-market flexibility, higher education, political stability, and openness to innovation. 
The larger question concerns the long-term future of American power. 
A new forecast for 2025 being prepared by the US National Intelligence Council projects that American dominance will be “much diminished,” and that the one key area of continued American superiority – military power – will be less significant in the competitive world of the future. 
This is not so much a question of American decline as “the rise of the rest.” 
Power always depends on context, and in today’s world, it is distributed in a pattern that resembles a complex three-dimensional chess game. 
On the top chessboard, military power is largely unipolar and likely to remain so for a while. 
But on the middle chessboard, economic power is already multi-polar, with the US, Europe, Japan and China as the major players, and others gaining in importance. 
The bottom chessboard is the realm of transnational relations that cross borders outside of government control. 
It includes actors as diverse as bankers electronically transferring sums larger than most national budgets, as well as terrorists transferring weapons or hackers disrupting Internet operations. 
It also includes new challenges like pandemics and climate change. 
On this bottom board, power is widely dispersed, and it makes no sense to speak of unipolarity, multipolarity, or hegemony. 
Even in the aftermath of the financial crisis, the giddy pace of technological change is likely to continue to drive globalization, but the political effects will be different for the world of nation-states and the world of non-state actors. 
In inter-state politics, the most important factor will be the continuing “return of Asia.” 
In 1750, Asia had three-fifths of the world population and three-fifths of the world’s economic output. 
By 1900, after the industrial revolution in Europe and America, Asia accounted for just one-fifth of world output. 
By 2040, Asia will be well on its way back to its historical share. 
The rise of China and India may create instability, but it is a problem with precedents, and we can learn from history about how policies can affect the outcome. 
A century ago, Britain managed the rise of American power without conflict, but the world’s failure to manage the rise of German power led to two devastating world wars. 
The rise of non-state actors also must be managed. 
In 2001, a non-state group killed more Americans than the government of Japan killed at Pearl Harbor. 
A pandemic spread by birds or travelers on jet aircraft could kill more people than perished in World Wars I or II. 
The problems of the diffusion of power (away from states) may turn out to be more difficult than shifts in power between states. 
The challenge for Barack Obama is that more and more issues and problems are outside the control of even the most powerful state. 
Although the US does well on the traditional measures of power, those measures increasingly fail to capture much of what defines world politics, which, owing to the information revolution and globalization, is changing in a way that prevents Americans from achieving all their international goals by acting alone. 
For example, international financial stability is vital to American prosperity, but the US needs the cooperation of others to ensure it. 
Global climate change, too, will affect the quality of life, but the US cannot manage the problem alone. 
And, in a world where borders are becoming increasingly porous to everything from drugs to infectious diseases to terrorism, America must mobilize international coalitions to address shared threats and challenges. 
As the world’s largest economy, American leadership will remain crucial. 
The problem of American power in the wake of the financial crisis is not one of decline, but of a realization that even the most powerful country cannot achieve its aims without the help of others. 
Fortunately, Barack Obama understands that. 

Barack Obama’s American Revolution 
For eight years, George W. Bush has managed to incarnate and reinforce all the prejudices and negative stereotypes the world has of the US. 
He has antagonized the world more than any other American president before him, seriously damaging America’s “soft” power by inefficient and excessive use of its “hard” power. 
Reconciling the United States with itself and the world should thus be the twin priorities for America’s next president. 
If there is one candidate who can accomplish this, who can contribute, in a split second, to restoring America’s international reputation, it is Barack Obama. 
Exceptional periods sometimes create exceptional leaders. 
Without the French Revolution, Napoleon Bonaparte would have remained a gifted and frustrated junior military officer. 
Likewise, the current period in America and its relations with the world have been truly exceptional, requiring a leader who can fundamentally challenge a global majority’s view that America has become arrogant, impotent, and selfish. 
Of course, diehard anti-Americans will never be persuaded, but they remain a minority, with the possible exception of the Muslim world. 
The silent majority is ready to be convinced that there is life after Bush. 
Why is Obama so different from the other presidential candidates, and why could he make such a large difference internationally? 
After all, in foreign policy matters, the next president’s room for maneuver will be very small. 
He (or she) will have to stay in Iraq, engage in the Israel-Palestine conflict on the side of Israel, confront a tougher Russia, deal with an ever more ambitious China, and face the challenge of global warming. 
If Obama can make a difference, it is not because of his policy choices, but because of what he is. 
The very moment he appears on the world’s television screens, victorious and smiling, America’s image and soft power would experience something like a Copernican revolution. 
Think of the impression his election would make not only in Africa, but in Asia, the Middle East, and even Europe. 
With its rise to global supremacy, America had become the incarnation of the West, and the West was seen as “white.” 
Power in America shifted first from the East Coast to the West Coast, and then to the South. 
But if a shift across America’s racial divide is not truly revolutionary, then what is? 
Of course, to reduce Obama to the color of his skin is a grave oversimplification, even if he has been keen to emphasize his “black roots.” 
In fact, African-Americans do not fully support him. 
With his white mother and his African father, he does not fit any African-American precedent. 
But that is another reason why Obama is exceptional: the complexity of his identity makes him truly universal, a global candidate for a global age. 
By virtue of his unique personal history, he can bridge Africa, America, and even Asia – where he studied as a young boy in a Muslim school – thereby reviving the universal image and message of America. 
But, above all, what makes Obama unique, given what the US has been through during the Bush years, is the nature of the message he embodies, which is best summed up in the title of his book The Audacity of Hope . 
If America can move from a culture of fear to one of hope – and again incarnate hope for the world – it will require a leader who embodies the American dream: modern and armed with a humanistic religious message, in contrast to the anxious irrationalism of the Christian conservative movement that fueled Bush’s political base. 
Regardless of whether Obama can deliver on his promises, America will not regain the stature it had between 1941 and 2000. With or without Obama, the “American century” will not be repeated. 
But Obama can learn from the early mistakes made by Jimmy Carter in the mid-1970’s. 
Neo-isolationism is not an option, but restraint – based on confidence and wisdom – is. 
The world needs a more modest and confident America. 
For a European who has been deeply troubled and saddened by America’s evolution in the last decade, Obama, of all the declared presidential candidates, seems to come closest to incarnating such an America. 

Barack Obama’s Missing Freedom Agenda 
On his second full day in office, President Barack Obama made a major gesture toward restoring the Constitution and the rule of law by signing two executive orders: one closed the prison at Guantánamo Bay, and the other restored America to the company of civilized nations by closing so-called “black sites” that facilitated state-sanctioned torture. 
Nice start, and the credit goes both to Obama and to the millions of Americans who stood up and took risks to fight against gathering tyranny. 
But it is not enough. 
There is a speech that we still need to hear, detailing five tasks that, in order to repair the damage to liberty caused by the previous administration, he must pursue as quickly as he handled the first two executive orders. 
Its substance should be something like the following: 
“My fellow Americans, the Founders had the wisdom to guarantee our freedoms in many ways. 
They could not guarantee our souls. 
That is up to us and how we act. 
“In every major religion, a version of the following question is asked: what does it profit us to gain wealth and power if we lose our moral values? 
In the past eight years, we have colluded with acts that jeopardized the very soul of our nation. 
The greatest crime we committed or tolerated was the savaging of our cherished Constitution. 
“Without our Constitution, America is just another world power made great by wealth and weapons instead of by values and convictions; so we are at risk of collapse when our wealth and weapons fail us. 
It is our Constitution that is our true wealth and the true guarantee of our nation’s endurance. 
“After closing Guantánamo Bay and forbidding torture, we must repeal the Patriot Act, thereby restoring the Constitution’s restraints against warrantless wiretapping and surveillance. 
“Second, though we have closed the prisons, we must seek the forgiveness of our fellow nations for the horrors that we committed or with which we colluded by engaging in state-sanctioned torture and “extraordinary rendition” of detainees to countries that torture. 
I am appointing a commission to establish a truth and reconciliation process to put the accounting of these horrors before our own consciences and before the world. 
“Third, we must have a special prosecutor to prosecute the culpable. 
Many in the military or the intelligence services now fear criminal liability for actions they took at the behest of those at the top of the chain of command. 
But the proper course of action is that taken in Nuremberg, The Hague, Sierra Leone, and after the Bosnian conflict: prosecute those who designed, approved, and implemented the policy of torture and rendition, however high the chain of commission goes – including the lawyers who justified legal perversions that led to torture and murder – rather than targeting those farther down the chain of command. 
“Fourth, let us once again outlaw the presence of the military on our streets, as the Founders intended. 
On October 7, 2008, more than 3,000 American troops were deployed from Iraq to the United States, in violation of Posse Comitatus, which has protected us from military policing for a century, and in violation of the Insurrection Act, which protected us for the century before that. 
Today, there are 20,000 soldiers – not accountable to the people, but only to the executive – on our streets. 
“The danger of that situation is why the Founders adopted the Second Amendment, which is meant to restrict domestic policing to militia – the National Guard and civilian police – that are answerable to the people. 
America is neither a battlefield nor a police state, so we should send our soldiers to the actual front or else back home to their families. 
“Finally, we must ensure that this darkness never descends again. 
Half of American children grow up with no civic education. 
Half of states no longer teach civics – the study of our Republic and how it works – in middle school. 
So half of incoming American college students don’t know what our democracy is, let alone how to defend it when it is threatened. 
I call on states throughout the land to re-institute the study of US civics so that we will produce citizens who understand our legacy and can defend liberty and the Constitution when it is threatened. 
“Join me in accomplishing these next five tasks, and we can look at ourselves in the mirror again, recognizing ourselves as true Americans.” 

Barak the Healer 
TEL AVIV: The landslide victory of the leader of the Labour Party, General Ehud Barak, in the May 17th elections in Israel means not only a new government and a new foreign policy. 
It also signifies the beginning of a new era in Israeli political culture. 
The three years (1996-9) of Benjamin Netanyahu's government were characterized by the politics of confrontation and animosity in all spheres of political life. 
Former Prime Minister Netanyahu focused not only on a politics of confrontation with the Palestinian leadership under Yassir Arafat, but also cultivated a politics of internal confrontation - between religious and secular Jews, between "old timers" and newcomers from the former Soviet Union, between European and Middle Eastern Jews (Ashkenazi versus Sephardi). 
This divide-to-rule policy was a way of life which characterized Mr. Netanyahu even before he became Prime Minister. 
As leader of the nationalist Likud opposition to the governments of Yitzhak Rabin and Shimon Peres, his tactics in opposing the Oslo agreements between the Labour led government of Israel and the PLO was to characterize both Mr. Rabin and Mr. Peres as traitors, the functional equivalents of such infamous collaborators as Petain and Quisling. 
It was in this atmosphere of confrontation and hatred, nurtured by Mr. Netanyahu, that a right-wing nationalist religious Jewish student assassinated Prime Minister Rabin because he saw him as a traitor who, at Oslo, gave up parts of the historical homeland of the Jewish people to the "terrorist" Palestine Liberation Organization. 
When he became Prime Minister in elections six months after the assassination of General Rabin, Mr. Netanyahu continued in this strategy of exclusion and confrontation. 
The consequences have been a deep crisis in relations with the Palestinians, a cooling of relations between Israel and its great strategic partner, the United States, and an internal climate of deep divisions, ethnic tension and a vulgar coarsening of almost all political discourse. 
Ehud Barak, the Labour leader, is made of different stuff. 
Born on a kibbutz, he served most of his life in the Israeli army, became its Chief-of-Staff and also its most decorated soldier. 
But like many Israeli military leaders - Rabin himself comes to mind - as a military man he is also a pragmatist, knowing the limits of power. 
When he became the leader of the Labor party less than three years ago, he also developed a new style of politics: instead of confrontation, dialogue; instead of exclusion, the politics of inclusion. 
General Barak won the election as head of a broad coalition led by his own Labour Party, but including also the Gesher Party, representing North African working-class Jewish immigrants as well as the Meimad movement, representing Orthodox Jews. 
It was this coalition, based on the politics of inclusion, which gave Barak his impressive victory: while Netanyahu won the 1996 election by a margin of 0.5%, Barak won this time by a margin of about 10%. 
Many Russian immigrants voted for the first time for a Labour candidate. 
As Prime Minister, Mr Barak will have a difficult agenda before him: going back to the Oslo agreements, which signify the historical compromise between Israel and the PLO; negotiating a territorial agreement with the Palestinians which will have to balance between their legitimate rights and Israel's security concerns; not letting extremist terrorism derail a peace process which is supported by a large majority of both peoples; finding a mutually acceptable formula for the difficult problem of Jerusalem. 
Negotiations with Syria have to be restarted. 
Internationally he will have to get the Israeli economy out of its current recession, a downturn that it was thrown into because of the deadlock of the peace process as well as the total mismanagement of the economy under Mr Netanyahu. 
Prime Minister Barak will also have to be a healer: he will have to heal the wounds between Jews and Arabs, and between Jews and Jews. 
It is not an easy task, and there are no quick fixes. 
A lot of patience will be needed but now at least the political will to confront Israel's domestic divide, and its long divide with the Palestinians, is there. 

Barbarians at the Gate? 
Europe's lumpen outsiders are becoming insiders as the Continent's political pendulum swings to the right. 
After the Netherlands and France, Germany may be next (German elections are due in the autumn, and the center-right candidate - Minister/President Stoiber of Bavaria - is now the favorite). 
Spain, Austria, Italy, Denmark, Portugal are already ruled by center-right governments. 
This swing does not simply mark the return of traditional conservative parties and policies - smaller governments, more attention to the interests of capital - to power. 
Something new is at work. 
What's new is the fact that many of today's center-right governments are supported by populist or nationalist parties. 
In Italy, the Netherlands, Austria, and Denmark, the government is either a coalition or a minority government propped up by the pivotal support of populist right-wing parties. 
In France the government is composed of mainstream center-right politicians. 
Yet, President Chirac owes his victory to the success of the far right National Front. 
This is a decisive novelty. 
In the past, Europe's political contests were waged between left wing parties representing the interests of labor, and right wing parties representing the interests of capital. 
Centrist parties that represented the middle classes and moderated the ideological extremes of left and right were pivotal. 
Nowadays, ideological differences between left and right are blurred. 
So a new breed of politicians and a new constituency of voters hold the balance of power. 
The successes of populist/right wing parties can largely be attributed to the failures of left-leaning governments. 
Europe's disappointing economic performance lies at the root of this. 
European unemployment remains high, and productivity growth (and hence living standards) has slowed since the mid-1990s. 
Even non-economically-minded voters perceive the striking difference with the US, where productivity growth has skyrocketed since the mid-1990s and unemployment is far lower. 
Some voters are beginning to think that their cherished European welfare state may be to blame. 
Many European voters also feel threatened and unprotected. 
A common slogan is that Europe's social model trades less economic growth for more social protection and less risk. 
But this idea does not convince everyone. 
Large groups of "outsiders" (young unemployed and first time job seekers, temporary workers, shopkeepers and other self-employed) do not see these supposed benefits because they lack a stable and protected job, or do not qualify for unemployment insurance, or are too young to benefit from public pension systems. 
These voters also complain about crime, and of the deteriorating quality of life in their cities. 
Many "outsiders" supported right-wing populist parties in the latest elections; their votes are critical for the survival of the new center-right governments in many European countries. 
These "outsiders" were often neglected in Europe's traditional political competition, and their demands received little or no attention. 
Across Europe, they have suddenly become political arbiters. 
What these newly influential voters want is clear: less immigration, crackdowns on crime, more economic opportunities, but also more protection against economic risk and international competition. 
Politicians representing these voters lack experience in government, sometimes are technically unprepared for governance, and are suspicious of technocrats and bureaucrats, particularly those in Brussels. 
On many issues, the positions of populist parties conflict with the traditional pro-capital and pro-market platforms of established center-right parties. 
Not all of this is black. 
Some of the demands of these voters are sensible and will improve policymaking. 
Most of Europe, for example, needs better crime prevention and a serious effort at cracking down on illegal immigration. 
But in other important policy choices, populist parties could lead Europe astray. 
Of course, most European countries need to rethink the foundations of their welfare state. 
Working life needs to be lengthened, public pensions are often too generous, labor markets too rigid. 
Traditional pro-capitalist right-wing parties would welcome such reforms. 
Yet, welfare state reform is not a priority of right-wing populists. 
But the biggest risks are to European integration. 
The new populist and nationalist parties are suspicious of Europe in general, and of EU enlargement in particular. 
This hostility comes at the wrong moment in time, with Europe engaged in ambitious and difficult constitutional reforms. 
European enlargement, moreover, although imminent, is not a done deal. 
Negotiations for enlargement are still under way. 
The Convention on the Future of Europe is discussing ways to integrate new policy areas, such as internal security, immigration, elements of a common foreign policy and of external security. 
But the Convention's outcome is unpredictable. The opposition posed by this newly empowered political constituency could be decisive. 
Traditional center-right parties have been pro-Europe. 
European integration has rarely been affected by the left/right divide. 
That holiday from serious politics may be over for good. 

Barbarians or Geniuses at the Gate? 
MUNICH – Europe is currently experiencing a huge wave of migration between its east and west. 
This movement resembles the Great Migrations (Völkerwanderung) that marked Europe between the fourth to sixth centuries. 
Within the first year of Romania’s accession to the EU on January 1, 2007, for example, roughly a million Romanians migrated to Italy and Spain. 
More than 800,000 East Europeans have become workers in the United Kingdom over the past four years, most coming from Poland. 
Indeed, in the last two years alone, 1.5 million Poles emigrated, and overall probably more than two million have done so since Poland’s EU accession in 2004. 
On a smaller scale, the migration of Ukrainians to the Czech Republic, Bulgarians to Turkey, and British citizens to Spain is also noteworthy. 
Because Germany still restricts the immigration of dependent workers from eastern EU countries, most of its immigrants come as self-employed or economically inactive people. 
In Munich, the number of self-employed tilers increased in 2004 and 2005, the first two years after the first eastern enlargement wave, from 119 to 970. 
But despite restrictions, by 2005 Germany had absorbed 37% of all migrants from Eastern Europe that came before and after eastern EU enlargement, whereas Italy had absorbed 22%, Greece 11%, Switzerland 8%, and the UK only 3%. 
In the same year, 13% of the population living in Germany was foreign born, more than in Britain (10%), France (7%), Spain (5%), or Italy (3%). 
The immigration waves of the last two years to Britain, Spain, and Italy will have significantly changed these figures, but the information needed to update the statistics is not yet available. 
Nowadays, people move faster than statistical offices can count them. 
Before the EU’s eastern enlargement, many studies predicted the likely migration waves. 
The forecasts of the proportion of East Europeans who were expected to move west within a 15 years ranged from 2.5% to 6%. 
Given that about 5% of the Polish population has now emigrated within a period of only four years, despite immigration restrictions by important target countries, these estimates were much too cautious. 
Before enlargement, it was politically incorrect to discuss possible waves of migration to the West, as EU politicians saw this as an obstacle to the enlargement process. 
Now that enlargement has taken place, it is easier to discuss migration objectively. 
This immigration is not an invasioni barbariche, as Italians refer to the Völkerwanderung, although the orders of magnitude are comparable. 
As migrants move between markets with well-defined property rights, immigration in principle is beneficial for both the immigrants and the target country. 
The immigrant receives a higher wage than at home, and the target country benefits from cheap labor, which creates more value than it costs. 
But in practice, immigration is often not as beneficial as it could be, because the target country has a rigid wage structure that prevents the additional jobs needed to employ the immigrants from being created. 
If, for example, a target country provides minimum wage guarantees and replacement incomes for the domestic unemployed, immigrants simply force domestic residents into the care of the welfare state. 
This is not a problem of immigration as such, but of poorly designed domestic social and labor market institutions. 
To be on the safe side, host countries often try to limit immigration to skilled workers, because they join segments of the labor market in which sufficient downward wage flexibility provides immigrants with additional jobs. 
But countries have so far had mixed success in attracting skilled immigrants. 
The most successful countries in this regard have been the Anglo-Saxon countries (Canada, Ireland, Australia, the United States, and the UK, in that order), as well as Denmark and Norway. 
More than one-third of immigrants to these countries have tertiary education, with Canada and Ireland at 45%. 
In the more unsuccessful countries – Italy, Austria, Germany, France, Portugal, and the Netherlands – the proportion of immigrants with a tertiary education is below a quarter. 
In Italy, the share is just 11% – the lowest in the available statistics. 
The brain drain to the Anglo-Saxon countries, the US in particular, is astounding. 
The graduating classes of top American universities are packed with foreign students, and 27% of physicians practicing in the US today come from abroad. 
America’s postwar growth and dynamism largely resulted from skilled immigrants. 
Before and after World War II, many skilled people came from Europe, Germany in particular; in recent decades, Asian immigrants dominate, with India, Pakistan, and the Philippines occupying the top ranks. 
Today’s brain drain is not only from emerging and developing countries to richer countries, but also from European countries to the US. 
In most research disciplines, European-born “superstars” work and teach in the US rather than in Europe, and, according to a study by Gilles Saint-Paul, it is the superstars in particular who generate growth and prosperity for a country. 
Of course, people with a decent tertiary education are also important for a country’s economy, and here the loss of some European countries is substantial. 
While only 3% of Spanish and 4% of French people with tertiary education live abroad, 7% of Italians and 9% of Germans do. 
Surprisingly, Ireland and the UK lead in this category, with 34% and 17%, respectively. 
This may reflect the high interchange in both directions between the Anglo-Saxon countries, or replacement migration in which skilled people arrive from elsewhere as the domestic skilled migrate to other Anglo-Saxon countries. 
The European landscape will change as rapidly in the course of this century as it did at the time of the Völkerwanderung. 
History will have many tales to tell about what this really meant for the Continent. 
At the moment, though, the casual observer is still rather clueless. 

Barrels, Bushels, and Bonds 
CAMBRIDGE – The prices of hydrocarbons, minerals, and agricultural commodities have been on a veritable roller coaster. 
While commodity prices are always more variable than those for manufactured goods and services, commodity markets over the last five years have seen extraordinary, almost unprecedented, volatility. 
Countries that specialize in the export of oil, copper, iron ore, wheat, coffee, or other commodities have been booming, but they are highly vulnerable. 
Dollar commodity prices could plunge at any time, as a result of a new recession, an increase in real interest rates in the United States, fluctuations in climate, or random sector-specific factors. 
Countries that have outstanding debt in dollars or other foreign currencies are especially vulnerable. 
If their export revenues were to plunge relative to their debt-service obligations, the result could be crises reminiscent of Latin America’s in 1982 or the Asian and Russian currency crises of 1997-1998. 
Many developing countries have made progress since the 1990’s in shifting from dollar-denominated debt toward foreign direct investment and other types of capital inflows, or in paying down their liabilities altogether. 
But some commodity exporters still seek ways to borrow that won’t expose them to excessive risk. 
Commodity bonds may offer a neat way to circumvent these risks. 
Exporters of any particular commodity should issue debt that is denominated in terms of the price of that commodity, rather than in dollars or any other currency. Jamaica, for example, would issue aluminum bonds; 
Nigeria would issue oil bonds; Sierra Leone would issue iron-ore bonds; and Mongolia would issue copper bonds. 
Investors would be able to buy Guatemala’s coffee bonds, Côte d’Ivoire’s cocoa bonds, Liberia’s rubber bonds, Mali’s cotton bonds, and Ghana’s gold bonds. 
The advantage of such bonds is that in the event of a decline in the world price of the underlying commodity, the debt-to-export ratio need not rise. 
The cost of debt service adjusts automatically, without the severe disruption that results from loss of confidence, crisis, debt restructuring, and so forth. 
The idea is not new. 
So, why has it not been tried before? 
When one asks finance ministers in commodity-exporting debtor countries, they frequently reply that they fear insufficient demand for commodity bonds. 
That is a surprising proposition, given that commodity bonds have an obvious latent market, rooted in real economic fundamentals. 
After all, steel companies have an inherent need to hedge against fluctuations in the price of iron ore, just as airlines and utilities have an inherent need to hedge against fluctuations in the price of oil. 
Each of these commodities is an important input for major corporations. 
Surely there is at least as much natural demand for commodity bonds as there is for credit-default swaps and some of the bizarrely complicated derivatives that are currently traded! 
It takes liquidity to make a market successful, and it can be difficult to get a new one started until it achieves a certain critical mass. 
The problem may be that there are not many investors who want to take a long position on oil and Nigerian credit risk simultaneously. 
A multilateral agency such as the World Bank could play a critical role in launching a market in commodity bonds. 
The fit would be particularly good in those countries where the Bank is already lending money. 
Here is how it would work. Instead of denominating a loan to Nigeria in terms of dollars, the Bank would denominate it in terms of the price of oil and lay off its exposure to the world oil price by issuing that same quantity of bonds denominated in oil. 
If the Bank lends to multiple oil-exporting countries, the market for oil bonds that it creates would be that much larger and more liquid. 
This pooling function would be particularly important in cases where there are different grades or varieties of the product (as with oil or coffee), and where prices can diverge enough to make an important difference to the exporters. 
An alternative for some commodity exporters is to hedge their risk by selling on the futures market. 
But an important disadvantage of derivatives is their short maturity. 
A West African country with newly discovered oil reserves needs to finance exploration, drilling, and pipeline construction, which means that it needs to hedge at a time horizon of 10-20 years, not 90 days. 
Another disadvantage of derivatives is that they require a high degree of sophistication –both technical and political. 
In the event of an increase in a commodity’s price, a finance minister who has done a perfect job of hedging export-price risk on the futures market will suddenly find himself accused of having gambled away the national patrimony. 
This principal-agent problem is much diminished in the case of commodity bonds. 
If the international financial wizards can get together and act on this idea now, commodity exporters might be able to avoid calamity the next time the world price of their product takes a plunge. 
The World Bank should take up the cause. 

Barroso Overboard? 
BRUSSELS – It is time for José Manuel Barroso to start selling himself. 
His chances of being re-appointed as President of the European Commission depend on the case he makes. 
Until the global financial crisis broke, Barroso looked fairly certain to get a second five-year term. 
Now, it is becoming increasingly hard to find diplomats or policymakers who support him. 
French President Nicolas Sarkozy is said to have been disappointed by Barroso’s performance during last autumn's financial meltdown, and German Chancellor Angela Merkel also seems to have fallen silent on the matter of his future. 
No one doubts that Barroso is in an awkward position. 
The European Commission has few powers of its own with which to confront the recession as it spreads throughout the European Union; most powers belong to the European Central Bank. 
But the Commission does have a voice with which to rally people, and it is for their silence that Barroso and his fellow commissioners are being rebuked. 
The perceived lack of leadership from the Commission at this time of deepening economic gloom is just the tip of the iceberg. 
The events of recent months have crystallized more deep-seated concerns. 
When Barroso, the former Portuguese prime minister, was awarded the EU post by his fellow heads of government, he appeared to be a dynamic new broom who would sweep away the cobwebs left by his predecessor, Italy’s Romano Prodi. 
But, with the passage of time, the Barroso-led Commission has also come under fire for being unadventurous and lacklustre. 
Even before the clouds of recession began to gather, Euroskepticism was on the rise, with the Commission blamed, rightly or wrongly, for the EU’s failure “to reach out to the citizen.” 
The job of Commission President is arguably among the most difficult in the world. 
The institution has been in near-imperceptible decline for almost 20 years, thanks to the rise of the European Parliament and the way EU member governments have whittled away its authority while consolidating their own powers as the EU’s true legislators. 
Yet the head of the Commission is called upon to be the dynamic public face of Europe. 
The Commission’s own internal culture of cautiousness and red tape is a constraint that nobody in Brussels much likes to talk about. 
It is not a structure that is conducive to political coups de theâtre , and most of the Commission’s work is the relentless grind of EU regulation and re-regulation. 
But the bottom line is that at a time when everyone is asking, “What is Europe doing?”, the Commission’s responses have seemed inadequate. 
For reasons that are now obscure, there is an unwritten rule that Commission presidents must be drawn from the ranks of past or current prime ministers. 
This has in large part accounted for Barroso’s high hopes of getting a second term. 
There was, it appeared, no other credible candidate to challenge him. 
For his part, Barroso is widely seen as having avoided controversy throughout 2008 in order not to risk offending any governments that might have been inclined to block his reappointment. 
That seeming passivity is now his greatest problem. 
France’s presidency of the EU during the second half of 2008 showed that dynamic leadership is a quality widely appreciated by the European public. 
With his sense of showmanship, Sarkozy almost effortlessly eclipsed Barroso when handling the Russia-Georgia crisis in August, followed by the EU’s responses to the autumn crisis of cascading bank collapses. 
The Commission was left on the sidelines. 
What is to be done? 
France’s successful presidency has intensified doubts about the effectiveness of the Commission and its president, so much so that even in Paris concerns are being voiced that the Brussels executive must somehow be strengthened if it is not to become a mere secretariat. 
EU governments have wanted a pliable Commission, but now the cost could be the death of the “community method” that protects the EU against national frictions. 
Barroso needs to respond to all these doubts. 
If he is to reassure EU national leaders that they should re-appoint him, then he needs to signal that his second term can hold out fresh promise. 
He is good at giving upbeat speeches, but this will not be enough. 
Some sort of plan is needed. 
When he arrived in Brussels in 2004, Barroso was repeatedly asked whether he had a “big idea” for Europe’s future. 
Back then, he did not need one to be appointed. 
This time, he must produce one if he is to save his skin. 

The Universal Right to Capital Income 
ATHENS – The right to laziness has traditionally been only for the propertied rich, whereas the poor have had to struggle for decent wages and working conditions, unemployment and disability insurance, universal health care, and other accoutrements of a dignified life. 
The idea that the poor should be granted an unconditional income sufficient to live on has been anathema not only to the high and mighty, but also to the labor movement, which embraced an ethic revolving around reciprocity, solidarity, and contributing to society. 
When unconditional basic-income schemes were proposed decades ago, they inevitably met outraged reactions from employers’ associations, trade unions, economists, and politicians. 
Recently, however, the idea has resurfaced, gathering impressive support from the radical left, the Green movement, and even from the libertarian right. 
The cause is the rise of machines that, for the first time since the start of industrialization, threaten to destroy more jobs than technological innovation creates – and to pull the rug out from under the feet of white-collar professionals. 
But as the idea of a universal basic income has returned, so has resistance from both the right and the left. 
Rightists point to the impossibility of raising enough revenue to fund such schemes without crushing the private sector, and to a drop in labor supply and productivity, owing to the loss of work incentives. 
Leftists worry that a universal income would weaken the struggle to improve people’s working lives, legitimize the idle rich, erode hard-won collective-bargaining rights (by empowering companies like Uber and Deliveroo), undermine the foundation of the welfare state, encourage passive citizenship, and promote consumerism. 
Cheerleaders for such schemes – on both the left and the right – argue that universal basic income would support those who already contribute priceless value to society, mainly women in the caring sector – or, indeed, artists producing great public works for next to no money. 
The poor would be liberated from vicious welfare-state means testing, and a safety net that can entangle people in permanent poverty would be replaced by a platform on which they could stand before reaching out for something better. 
Young people would gain the freedom to experiment with different careers and to study topics that are not considered lucrative. 
Moreover, in today’s increasingly pervasive gig economy, with unions shrinking along with their capacity to protect workers, the economic stability that most people are losing would be restored. 
The key to moving forward is a fresh perspective on the connection between the source of a universal basic income’s funding, the impact of robots, and our understanding of what it means to be free. 
That implies combining three propositions: taxes cannot be a legitimate source of financing for such schemes; the rise of machines must be embraced; and a universal basic income is liberty’s main prerequisite. 
The idea that you work hard and pay your income taxes, while I live off your enforced kindness, doing nothing by choice, is untenable. 
If a universal basic income is to be legitimate, it cannot be financed by taxing Jill to pay Jack. 
That is why it should be funded not from taxation, but from returns on capital. 
A common myth, promoted by the rich, is that wealth is produced individually before it is collectivized by the state, through taxation. 
In fact, wealth was always produced collectively and privatized by those with the power to do it: the propertied class. 
Farmland and seeds, pre-modern forms of capital, were collectively developed through generations of peasant endeavor that landlords appropriated by stealth. 
Today, every smartphone comprises components developed by some government grant, or through the commons of pooled ideas, for which no dividends have ever been paid to society. 
So how should society be compensated? 
Taxation is the wrong answer. 
Corporations pay taxes in exchange for services the state provides them, not for capital injections that must yield dividends. 
There is thus a strong case that the commons have a right to a share of the capital stock, and associated dividends, reflecting society’s investment in corporations’ capital. 
And, because it is impossible to calculate the size of state and social capital crystalized in any firm, we can decide how much of its capital stock the public should own only by means of a political mechanism. 
A simple policy would be to enact legislation requiring that a percentage of capital stock (shares) from every initial public offering (IPO) be channeled into a Commons Capital Depository, with the associated dividends funding a universal basic dividend (UBD). 
This UBD should, and can be, entirely independent of welfare payments, unemployment insurance, and so forth, thus ameliorating the concern that it would replace the welfare state, which embodies the concept of reciprocity between waged workers and the unemployed. 
Fear of machines that can liberate us from drudgery is a symptom of a timid and divided society. 
The Luddites are among the most misunderstood historical actors. 
Their vandalism of machinery was a protest not against automation, but against social arrangements that deprived them of life prospects in the face of technological innovation. 
Our societies must embrace the rise of the machines, but ensure that they contribute to shared prosperity by granting every citizen property rights over them, yielding a UBD. 
A universal basic income allows for new understandings of liberty and equality that bridge hitherto irreconcilable political blocs, while stabilizing society and reinvigorating the notion of shared prosperity in the face of otherwise destabilizing technological innovation. 
Disagreements of course will continue; but they will be about issues such as the proportion of company shares that should go to the Depository, how much welfare support and unemployment insurance should be layered on top of the UBD, and the content of labor contracts. 
Anyone still not reconciled to the idea of “something for nothing” should ask a few simple questions: Would I not want my children to have a small trust fund that shields them from the fear of destitution and allows them to invest fearlessly in their real talents? 
Would their peace of mind render them lazy layabouts? 
If not, what is the moral basis for denying all children the same advantage? 

Bear Hunting in Romania 
NEW YORK – Nicolae Ceausescu liked to hunt bear. 
With his retinue, he would retreat to a lodge in Transylvania and sally forth, locked and loaded. 
He was accustomed to good fortune, for his huntsmen took precautions. 
They would chain some poor beast to a tree, drug it to keep it still, and conceal themselves around the blind from which the Great Man would shoot. 
One day, they did their job haphazardly. 
Ceausescu took aim, then fell backward when the bear, inadequately sedated, reared on its hind legs as if to attack. 
His shot flew into the treetops, even as three bullets entered the bear’s heart from the snipers who guaranteed the dictator’s marksmanship. 
This day, I was told by a forester who claimed to have witnessed the incident, Ceausescu did not acknowledge the applause of his retainers. 
This could be the story of the Romanian revolution, 20 years ago. 
The bear is the country’s enslaved people. 
They rise up from slumber. 
The emperor, alarmed, fires wildly and misses his mark. The sharpshooters hidden in the forest take aim and fire, only this time their target is not the bear, but Ceausescu himself. 
Just as the glory of the French Revolution ended in the Terror, so Eastern Europe’s miracle year of 1989 ended in blood. 
Elsewhere, communist regimes seemed almost to run from power. 
The people who deposed them celebrated largely painless victories. 
Not so in Romania. 
There, the country’s communist masters ordered the security forces to fire on the people. 
They obeyed. 
A civil war was fought, albeit briefly. 
Revolution transmuted into a crypto-coup d’état. 
It began in mid-December in the gritty industrial town of Timisoara, close to the Hungarian border. 
When Ceausescu ordered the military to stage a show of force against those who dared oppose him, commanders took him literally: they put on a parade, complete with marching band. 
Farce quickly turned to tragedy in the face of the dictator’s rage. 
“I meant tanks, you fool,” he said, in effect, to Gen. Iulian Vlad, threatening to put him in front of a firing squad if he did not comply. 
That night, roughly a hundred Romanian citizens died in the streets, and hundreds more were wounded. 
The rest is well-known history. 
On the morning of December 21, Ceausescu stepped onto the balcony of the Central Committee in the heart of Bucharest to address the people – cadres of state workers assembled, as was customary, to cheer on cue. 
But something went wrong. 
From the rear of the huge crowd came shouts: “Ti-mi-soara! 
Ti-mi-soara!” 
Then came the fateful call, shouted by perhaps one or two people but soon picked up by others: “Down with Ceausescu!” 
Never had Ceausescu heard anything like it. 
His face sagged. 
Flustered, he stopped speaking, waved his arms in timid bewilderment, the weak and ineffectual gestures of an imposter. 
This moment of truth lasted only a few seconds, but it was enough. 
He stood revealed. 
Everyone on the square and everyone watching on national TV saw clearly. The emperor had no clothes. 
By the next day, rebellion had spread to all major cities. 
Ceausescu and his wife, the infamous Elena, fled from the roof of the Central Committee aboard a white helicopter as crowds stormed the building. 
Fighting erupted between the army, siding with the people, and elements of the secret police loyal to Ceausescu. 
Snipers shot from the rooftops, and tanks blasted away in what today is Revolution Square, setting the national library ablaze. 
After a three-day chase, on Christmas Day, the dictator and his wife were captured, tried, and summarily executed by a kangaroo “people’s court.” 
Revolutions are probably never as they seem, but Romania’s was especially ambiguous. 
For, at the moment of Ceausescu’s speech, it became in effect two revolutions – one that played out publicly in the streets, and the other a deep and behind-the-scenes struggle for power among elites. 
I sensed this arriving in Bucharest on December 26. 
Visiting the television station, seized by a new provisional government called the National Salvation Front, I found an odd mélange of revolutionary leaders. 
I could understand the poets, students, dissidents, and allegedly disaffected government officials. 
But Gen. Stefan Gruse, the army chief of staff who commanded the troops in Timisoara? 
The newly appointed president, Ion Iliescu, who was Ceausescu’s former chief propagandist? 
Perhaps the most incongruous presence was Gen. Victor Stanculescu, a favorite of the Ceausescu’s who only days before had reportedly organized their evacuation from the rooftop of the Central Committee. 
Other reports credited him with subsequently organizing both their trial and a firing squad – even before the legal proceedings began. 
The “trial” itself lasted less than an hour. 
Scarcely seven minutes after the sentence was read out, had the executioners done their work. 
The event was videotaped, to be aired to an astonished nation the next day, but in the rush the cameraman’s power cable was yanked from the wall as the convicted couple was dragged out to an open-air courtyard. 
By the time he caught up, soldiers were already shooting. 
Nicolae Ceausescu lay on his back, in the overcoat and suit in which he had fled, his blue-grey eyes staring vacantly at the sky. 
Elena had fainted and was shot where she lay. 

Beating the Oil Barons 
WASHINGTON, DC – Over the past eighteen months, oil prices have more than doubled, inflicting huge costs on the global economy. 
Strong global demand, owing to emerging economies like China, has undoubtedly fueled some of the price increase. 
But the scale of the price spike exceeds normal demand and supply factors, pointing to the role of speculation – and underscoring the need for policy action to clean up the oil market. 
Reflecting their faith in markets, most economists dismiss the idea that speculation is responsible for the price rise. 
If speculation were really the cause, they argue, there should be an increase in oil inventories, because higher prices would reduce consumption, forcing speculators to accumulate oil. 
The fact that inventories have not risen supposedly exonerates oil speculators. 
But the picture is far more complicated, because oil demand is extremely price insensitive. 
In the short run, it is technically difficult to adjust consumption. 
For instance, the fuel efficiency of every automobile and truck is fixed, and most travel is non-discretionary. 
Though higher airline ticket prices may reduce purchases, airlines reduce oil consumption only when they cancel flights. 
This illustrates a fundamental point: in the short run, reduced economic activity is the principle way of lowering oil demand. 
Thus, absent a recession, demand has remained largely unchanged over the past year. 
Moreover, it is relatively easy to postpone lowering oil consumption. 
Consumers can reduce spending on other discretionary items and use the savings to pay higher gasoline prices. 
Credit can also temporarily fill consumer budget gaps. 
Although the housing boom in the United States – which helped in this regard – ended in 2006, consumer debt continues to grow, and America’s Federal Reserve has been doing everything it can to encourage this. 
Consequently, for the time being the US economy has been able to pay the oil tax imposed by speculators. 
Unfortunately, proving that speculation is responsible for rising prices is difficult, because speculation tends to occur during booms, so that price increases easily masquerade as a reflection of economic fundamentals. 
But, contrary to economists’ claims, oil inventories do reveal a footprint of speculation. 
Inventories are actually at historically normal levels and 10% higher than five years ago. 
Furthermore, with oil prices up so much, inventories should have fallen, owing to strong incentives to reduce holdings. 
Meanwhile, The Wall Street Journal has reported that financial firms are increasingly involved in leasing oil storage capacity. 
The root problem is that financial markets can now mobilize tens of billions of dollars for speculative purposes. 
This has enabled traders collectively to hit upon a strategy of buying oil and quickly re-selling it when end users accommodate higher prices – a situation that has been aggravated by the Bush administration, which has persistently added oil supplies to the US strategic reserve, further inflating demand and providing additional storage capacity. 
Absent a change in trader beliefs, the current oil price spike will be broken only by a recession that exhausts consumers’ capacity to buffer higher prices, or when the slow process of substitution away from oil kicks in. 
Thus, economic fundamentals will eventually trump speculation, but in the meantime society will have paid a high price. 
Whereas oil speculators have gained, both the US and global economies have suffered and been pushed closer to recession. 
In the case of the US, heavy dependence on imported oil has worsened the trade deficit and further weakened the dollar. 
This sobering picture calls for new licensing regulations limiting oil-market participation, limits on permissible trading positions, and high margin requirements where feasible. 
Sadly, given the conventional economic wisdom, implementing such measures will be an uphill struggle. 
But some unilateral populist action is possible. 
A major form of gasoline storage is the tanks in cars. 
If people would stop filling up and instead make do with half a tank, they would immediately lower gasoline demand. 
Given lack of storage capacity, this could quickly lower prices and burn speculators. 

Beggar-Thy-Neighbor Exchange Rates? 
GENEVA – When the Swiss National Bank (SNB) recently brought its interest rate down to 0.25%, it announced that it would engage in “quantitative easing,” following in the footsteps of the United States Federal Reserve and the Bank of England. 
More surprising was the simultaneous announcement that it was intervening on the foreign-exchange market with the aim of reversing the appreciation of the franc. 
Will this be the first salvo in a war of competitive devaluations? 
Interest rates are traditionally low in Switzerland. 
Like most other central banks confronted with the recession, the SNB has reduced its policy interest rate all the way to the zero lower bound. 
Once there, traditional monetary policy becomes impotent, as the interest-rate tool is no longer usable. 
This is why central banks are now searching for new instruments. 
Quantitative easing represents one such attempt. 
It remains to be seen whether it can effectively restore some monetary-policy influence. 
However, an important issue is rarely mentioned: in small, open economies – a description that applies to almost every country except the US – the main channel of monetary policy is the exchange rate. 
This channel is ignored for one good reason: exchange-rate policies are fundamentally of the beggar-thy-neighbor variety. 
Unconventional policies that aim at weakening the exchange rate are technically possible even at zero interest rates, and they are quite likely to be effective at the level of individual countries. 
Boosting competitiveness through exchange-rate depreciation may not succeed in raising exports in a situation where world trade is rapidly contracting, but it can cushion the blow by switching demand toward domestically produced goods and services. 
The risk is that those countries that suffer from the switch retaliate and depreciate their own currencies. 
That could easily trigger a return to the much-feared competitive depreciations that contributed to the Great Depression. 
The first casualty would be whatever small scope remains for international policy coordination. 
The second would be the world international monetary system. 
In fact, one key reason for the creation of the International Monetary Fund was to monitor exchange-rate developments with the explicit aim of preventing beggar-thy-neighbor policies. 
This is why the Swiss move comes as a surprise. 
It is true that the franc has appreciated in real terms by 8% since the crisis started in August 2007. 
This is commonly attributed to the currency reputation as a safe haven during troubled times. 
What this really means is that the appreciation is neither a consequence of monetary policy nor the other usual factors. 
In any case, while the Swiss authorities’ discomfort with the situation is understandable, their decision is disquieting. 
The Swiss franc is not the only currency that has appreciated in recent months. 
Other small economies have undergone even sharper real appreciations. 
For example, Poland and the Czech Republic have seen their currencies go up by close to 30% and 15%, respectively. 
Major countries also have undergone currency appreciations – 30% for Japan and 15% for China. 
These countries, too, are facing a recession, and, while the interest rate has not yet reached its zero bound everywhere, incentives to depreciate might grow in the near future. 
In fact, the incentives are already there. 
Some fairly large countries – Korea, Sweden, and the United Kingdom, to name a few – have already undergone some very large depreciations. 
In fact, Poland’s currency recently started to depreciate. 
None of these countries’ central banks has indicated that it was involved in depreciating its currency. 
Of course, statements and intentions may not be identical. 
It may be that the SNB merely acknowledges what other central banks do not. 
In doing so, however, the SNB is violating a taboo: “Thou shall not engage in competitive depreciations.” 
Alternatively, it may be that the SNB mostly wishes to talk the franc down to break the safe-haven effect. 
Having promptly achieved depreciation, it may have succeeded. 
In that case, the franc will not move much more, in any direction, and there will be no need for further interventions. 
Nevertheless, the limited reaction to the SNB move is somewhat surprising. 
The move came one week after the IMF concluded its annual Article IV visit to Switzerland, and the report has yet to be released; it could make for unusually interesting reading. 
Other central banks have not expressed any view, which may suggest that they do not intend to retaliate, at least at this stage. 
They may have been reassured by the SNB’s official statement that the appreciation represented “an inappropriate tightening of monetary conditions,” and that the policy move merely aims “to prevent any further appreciation of the Swiss franc against the euro.” 
It may also be that notice has been taken of the precedent, and that those authorities that intend to use it to justify future moves are loathe to criticize it. 
In that case, the generalized silence could indicate that all other central banks entertain the possibility of using that option, which would be most worrisome. 

Beggaring the World Economy 
CHICAGO – Global capital is on the move. 
As ultra-low interest rates in industrial countries send capital around the world searching for higher yields, a number of emerging-market central banks are intervening heavily, buying the foreign-capital inflows and re-exporting them in order to keep their currencies from appreciating. 
Others have been imposing capital controls of one stripe or another. 
In recent weeks, Japan became the first large industrial economy to intervene directly in currency markets. 
Why does no one want capital inflows? 
Which intervention policies are legitimate, and which are not? 
And where will all this intervention end if it continues unabated? 
The portion of capital inflows that is not re-exported represents net capital inflows. 
This finances domestic spending on foreign goods. 
So, one reason countries do not like capital inflows is that it means more domestic demand “leaks” outside. 
Indeed, because capital inflows often cause the domestic exchange rate to appreciate, they encourage further spending on foreign goods as domestic producers become uncompetitive. 
Another reason that countries do not like foreign capital inflows is that some of it might be “hot” (or dumb) money, eager to come in when foreign interest rates are low and local asset prices are rising, and quick to leave at the first sign of trouble or when opportunities back home beckon. 
Volatile capital flows induce volatility in the recipient economy, making booms and busts more pronounced than they would otherwise be. 
But, as the saying goes, it takes two hands to clap. 
If countries could maintain discipline and limit spending by their households, firms, or governments, foreign capital would not be needed, and could be re-exported easily, without much effect on the recipient economy. 
Problems arise when countries cannot – or will not – spend sensibly. 
Countries can overspend for a variety of reasons. 
The stereotypical Latin American economies of yesteryear used to get into trouble through populist government spending, while the East Asian economies ran into difficulty because of excessive long-term investment. 
In the United States in the run up to the current crisis, easy credit, especially for housing, induced households to spend too much, while in Greece, the government borrowed its way into trouble. 
Unfortunately, though, so long as some countries like China, Germany, Japan, and the oil exporters pump surplus goods into the world economy, not all countries can trim their spending to stay within their means. 
Since the world does not export to Mars, some countries have to absorb these goods, and accept the capital inflows that finance their consumption. 
In the medium term, over-spenders should trim their outlays and habitual exporters should increase theirs. 
In the short run, though, the world is engaged in a gigantic game of passing the parcel, with no country wanting to take the habitual exporters’ goods and their capital surpluses. 
This is what makes today’s beggar-thy-neighbor policies so destructive: though some countries will eventually have to absorb the surpluses and capital, each country is trying to avoid them. 
So which policy interventions are legitimate? 
Any policy of intervening in the exchange rate, or imposing import tariffs or capital controls, tends to force other countries to make greater adjustments. 
China’s exchange-rate intervention probably hurts a number of other emerging-market exporters that do not intervene as much and are less competitive as a result. 
But industrial countries, too, intervene substantially in markets. 
For example, while US monetary-policy intervention (yes, monetary policy is also intervention) has done little to boost domestic demand, it has spurred domestic capital to search for yield around the world. 
The US dollar would fall substantially – encouraging greater exports – were it not for the fact that foreign central banks are pushing much of that capital right back by buying US government securities. 
All this creates distortions that delay adjustment – exchange rates are too low in emerging markets, slowing their move away from exports, while the ease with which the US government is being financed creates little incentive for US politicians to reduce spending over the medium term. 
Rather than intervening to obtain a short-term increase in their share of slow-growing global demand, it makes sense for countries to make their economies more balanced and efficient over the medium term. 
That will allow them to contribute in a sustainable way to increasing global demand. 
China, for example, must move more income to households and away from its firms, so that private consumption can increase. 
The US must improve the education and skills of significant parts of its labor force, so that they can produce more of the high-quality knowledge and service-sector exports in which the US specializes. 
Higher incomes would boost US savings, reducing households’ dependence on debt, even as they maintained consumption levels. 
Unfortunately, all this will take time, and citizens impatient for jobs and growth are pressing their politicians. 
Countries around the world are embracing shortsighted policies that cater to the immediate needs of domestic constituencies. 
There are exceptions. 
India, for example, has eschewed currency intervention thus far, even while opening up to long-term rupee debt inflows, in an attempt to finance much-needed infrastructure projects. 
India’s willingness to spend when everyone else is attempting to sell and save entails risks that need to be carefully managed. 
But India’s example also provides a glimpse of what the world could achieve collectively. 
After all, beggar-thy-neighbor policies will succeed only in making us all beggars. 

Behind the Nuclear Cabinet of Dr. A. Q. Khan 
Most new revelations about Pakistan's nuclear scandal focus on the clandestine supply of uranium enrichment technology to Iran, North Korea, and Libya by the celebrated bomb-maker Dr. A. Q. Khan. 
(Even though Dr. Khan earned his Ph.D in metallurgy, not nuclear physics or nuclear engineering, yet journalistspress reports usually refer to him as a "nuclear scientist"). 
But the documents that Libya turned over to the International Atomic Energy Agency, and subsequently to the US, show that Pakistan supplied more than just equipment for making bomb fuel. 
Dr. Khan allegedly also supplied a detailed nuclear weapon design that US experts say is of a 1964 Chinese vintage passed on to Pakistan two decades ago. 
This disclosure raises interesting new questions because Dr Khan was peripheral to actual weapons-related work. 
Pakistan's nuclear establishment has essentially two divisions. 
One, once headed by Dr. Khan, is responsible for producing bomb-grade uranium gas that, when converted to metal, provides the crucial fuel for a nuclear explosion. 
The other division, which falls under the Pakistan Atomic Energy Commission and the National Development Complex, has a much wider range of responsibilities - conversion of uranium gas to metal, weapons design and manufacture, and nuclear testing. 
Dr. Khan was barely mentioned by the head of the NDC, Dr. Samar Mubarakmand, in his victory speeches after the successful May 1998 nuclear tests. 
Thus the mystery: how could Dr. Khan - who had no need to possess weapons design information - have handed over detailed bomb design documents to Libya? 
Dr. Khan's televised confession and acceptance of sole responsibility for proliferation activities has done nothing to reduced suspicion that there is more here than meets the eye, and of the Pakistani military's complicity in proliferation. 
Dr. Khan's export of centrifuge technology was unknown to successive governments in Pakistan, says the country's leader, General Pervez Musharraf. 
But for over a decade, Dr. Khan had openly advertised his nuclear wares. 
Year after year -(2003 includinged 2003, when the proliferation controversy was already red-hot-) Islamabad was festooned with colorful banners advertising workshops on "Vibrations In Rapidly Rotating Machinery" and "Advanced Materials," sponsored by the Dr. A. Q. Khan Research Laboratories (also known as the Kahuta Research Laboratories). 
These had obvious and immediate utility for centrifuge technology, essential for producing weaponsbomb-grade uranium. 
In earlier years, Dr. Khan and his collaborators published a number of papers detailing critical issues regarding the balancing of centrifuges and magnetic bearings. 
These dealt with technical means for enabling centrifuge rotors to spin close to the speed of sound without disintegrating, -essential for making bomb-grade uranium. 
Dr. Khan's proliferation activitiesIt could scarcely be more blatant. 
But to make it absolutely certain, Kahuta issued glossy brochures aimed at "classified organizations." 
To protect itself, Pakistan's desperate military establishment, fearful of being labelled a proliferator and of ultimately being deprived of its nukes, has chosen to sacrifice Dr. Khan. 
Yet his public confession and apology are unlikely to end the matter. 
The US Intense is certain to apply intense pressureis certain to be applied by the US for on-site inspection and monitoring of Pakistani fissile material production at the enrichment facility at Kahuta, the plutonium production reactor at Khushab, and elsewhere. 
Although Pakistan will publicly resist this demand, it may secretly agree to allow installation of cameras and various sensing devices in these nuclear facilitiesinstallations. 
For the moment, the efforts of some Pakistani bomb-makers to peddle nuclear secrets appear to have been stymied. 
But, having invoked solidarity with Islamists all over the world, these expertsy have created a high demand for their skills. 
While it is inconceivable that any Muslim country will now ask Pakistan for nuclear weapons, non-state actors are clearly more enthusiastic. 
One recalls that two years ago, highly placed members of the Pakistan Atomic Energy Commission wanted to play atheir role in the jihad against America. 
In a fit of Islamic solidarity, they went to Afghanistan and met with Osama bin Laden and the Taliban. 
It is difficult to believe that they were the only ones so inclined. 
As a result, Pakistan's bomb-makers have seriously jeopardized the safety of their country. 
Imagine, for example, the horrific situation consequences ofarising from an atomic explosion in some American city. 
Blinded with grief and rage, the US would exact a terrible revenge. 
Mere suspicion might form the basis of action. 
It is possible that America would bomb Pakistan first - perhaps with nuclear weapons - and look later for justifications later. 
Iraq stands as a reminder of America's furious desire to avenge the terrorist attacks of September, 2001 and hurt punish even those unconnected with the perpetrators. 
The failure to subsequent non-discovereither y of weapons of mass destruction, or connections with Al-Qaeida, have both been shrugged off by George Bush and his neo-conservative cabal. 
It is time to give up the fantasy of an Islamic Bomb, and it is past the time to rein in Pakistan's rogue bomb-makers. Their illegitimate nuclear commerce has created a nightmare for the reputation, safety, and security of their country. 
It is difficult to know what Dr. Khan meant when he said he had acted in "good faith." 
After all, what kind of faith allows putting instruments of mass murder on sale in the black market. 

 

Smokeless China 
BEIJING – In a few weeks, Beijing will implement a city-wide ban on smoking in all indoor public spaces, such as restaurants and offices, as well as on tobacco advertising outdoors, on public transportation, and in most forms of media. 
If the initiative, agreed late last year by the municipal people’s congress, is successful, China may impose a similar ban nationwide. 
A significant decline in smoking would undoubtedly bring enormous public-health benefits to China. 
But is it feasible? 
With an estimated 300 million smokers, China represents one-third of the world’s total and accounts for an average of roughly 2,700 tobacco-related deaths per day. 
The costs of treating smoking-related diseases, not to mention the associated productivity losses, are considerable. 
But China has so far struggled to reduce smoking or enforce bans effectively. 
Indeed, despite ratifying the World Health Organization’s Framework Convention to Tobacco Control in 2005, China failed to fulfill its commitment to ban indoor smoking by 2011. 
Moreover, tobacco output increased 32%. 
Bans have since been implemented in 14 Chinese cities, including Shanghai, Hangzhou, and Guangzhou. 
But they have done little to reduce smoking, owing not only to weak enforcement, but also to the prevailing view, held by 75% of Chinese adults, that smoking does not cause serious harm. 
(Only about 16% of Chinese smokers report an intention to quit.) 
Against this background, the Beijing municipal authorities’ plan to fine smokers up to CN¥200 ($32) for lighting up in public places appears unpromising at best. 
The obvious question is why China’s government, which is not known to be shy about imposing paternalistic policies in other areas, does not simply ban cigarette production and use altogether. 
After all, other countries and localities, from Scandinavia to New York City, have made smoking prohibitively expensive and illegal in most public places. 
The reason why China has not taken this path lies in the jobs and revenue that the industry provides. 
The state-owned China National Tobacco Corporation sells almost all of the cigarettes consumed in the country; indeed, it is the world’s largest cigarette manufacturer, supplying 2.5 trillion annually, which in turn generates CN¥816 billion (7-10% of GDP) in revenue. 
Indeed, tobacco receipts finance as much as half of some provincial governments’ budgets. 
Even in an authoritarian country like China, the loss of so much income, not to mention the ire of 300 million addicts, would make prohibition a huge challenge. 
But there is an alternative that could help appease angry citizens and mitigate the revenue loss from an outright ban on smoking: electronic cigarettes. 
Given that e-cigarettes merely heat a nicotine solution to produce an inhalable vapor, they release none of the carcinogenic tar of cigarette smoke, making them the ideal nicotine-delivery system for smokers seeking – or being forced – to reduce or halt their tobacco intake. 
Aside from being far less damaging than cigarettes, e-cigarettes are a homegrown product, invented in China in 2003. 
But, despite considerable progress in China’s e-cigarette industry – in 2013, Shenzhen province housed 900 manufacturers of the devices, up 200% from 2012, and accounted for over 95% of global e-cigarette production – traditional cigarettes still dominate the Chinese market. 
As Yanzhong Huang of the Council on Foreign Relations recently pointed out, “If only 1% of China’s smoking population turned to e-cigarettes, it would mean a market of about 3.5 million e-cigarette users.” 
The China National Tobacco Corporation could become the world’s largest e-cigarette maker. 
One reason China has not managed to tap the e-cigarette industry’s enormous potential is a lack of adequate regulation. 
Low entry barriers enable intense competition that diminishes producers’ profit margins, and shoddy products are rife, owing to low manufacturing standards. 
If e-cigarettes are to replace traditional cigarettes and offset lost tobacco revenues, the government must regulate the industry more carefully to ensure safety and quality. 
But such efforts will mean little without a shift in people’s attitudes. 
Here, the ban on smoking in public places or during official activities imposed in 2013 on Chinese Communist Party and government officials could be helpful. 
As Huang explains, if more officials turn to e-cigarettes, ordinary people might be inspired to follow suit. 
Already, it seems that the directors of the China National Tobacco Corporation have complied with a government-mandated ban on cigarette smoking. 
Whether they have become e-cigarette “vapers” is not known. 
A smoke-free China – one that benefits from rising productivity and massive health-care savings – may seem like a pipe dream. 
But a country-wide ban on smoking, with a reliable e-cigarette industry providing an alternative (both to smokers and to budgets), offers an intriguing way to turn the dream into reality. 

Beijing Versus the Billionaire 
BANGKOK – China’s government and Hong Kong’s wealthiest man, the much-admired Li Ka-shing, have been waging an acidic spat – one that increasingly looks like a bitter divorce being played out in tabloid newspapers. 
Indeed, Chinese media have lately been directing a relentless stream of vitriol at Li. 
His “crime”? 
Buying low in Europe and selling high in China – that is, acting like an investor. 
The trigger for this wave of scorn was Li’s sell-off of some of his prime Shanghai properties, after relocating his corporate registry from Hong Kong to the Cayman Islands. 
This is a completely mundane and rational business decision, aimed at minimizing tax obligations. 
Indeed, some 70% of all Hong Kong-listed companies have a Caribbean registry, and even a number of major mainland companies, including the Internet giant Alibaba, are registered in offshore tax havens. 
But, in the Chinese media’s puerile narrative, the move exposes Li as “ungrateful” and “unpatriotic.” 
He is “abandoning” China – which, it is claimed, enabled him to rise from extreme poverty to become one of the world’s wealthiest men – when the country needs him most. 
This absurd account neglects the fact that Li was already one of the world’s wealthiest people before he ever invested in China. 
Perhaps more important, it fails to recognize that Li’s Chinese land holdings still amount to more than 20 million square meters (215 million square feet) – nearly a quarter of the size of Manhattan – and that the number of retail outlets he owns in China has increased by 70% in two years. 
But the facts are irrelevant. 
This is a matter of politics. 
As China attempts to tighten its grip on Hong Kong, Li is showing independence, and China’s new rulers – who, true to their communist roots, believe firmly in top-down control – do not like it one bit. 
The ongoing squabble represents a significant shift in Li’s relationship with China’s government. 
A former adviser to Deng Xiaoping and confidante of former President Jiang Zemin (whose political influence is now waning), Li was among the first to invest in China after the Tiananmen Square massacre of 1989. 
He long touted the motto, “I don’t do anything against China’s interest, and I don’t say anything that may hurt China’s reputation.” 
That changed in 2012, when Leung Chun-ying was appointed as Hong Kong’s chief executive. 
China’s first choice for the position, Henry Tang, was forced to withdraw because of private indiscretions and a disgraceful bid to have his wife take the fall for a zoning violation. 
Leung became China’s man in Hong Kong, responsible for doing the Chinese government’s bidding – including taking an uncompromising position against pro-democracy protests by students and intellectuals. 
Indeed, even as China’s agenda in Hong Kong has become increasingly tough – and thus unpopular locally – Leung has proved himself to be absolutely loyal to China’s rulers. 
Li, however, stood by Tang. 
More problematic, he has occasionally dissented publicly from Leung’s various misguided policies. 
As any student of the People’s Republic knows, expressions of political disagreement, however mild, can be lethal. 
There is no “agree to disagree” in China; once the leader has spoken, there is only “obey.” 
In Li’s case, the stakes are particularly high. 
Unlike most of Hong Kong’s tycoons, who are considered excessively focused on political expedience, Li is viewed as a person of strong conscience and thus worthy of considerable respect. 
He even enjoys the affectionate nickname “Superman.” 
But now, China’s rulers, through Leung, are pushing potentially disastrous policies aimed, in Chinese Communist Party parlance, at “de-colonizing” Hong Kong. 
For example, officials recently declared that judicial independence and the separation of powers are “colonial” legacies that should be discarded, with China’s government and Hong Kong’s chief executive, not the local courts, calling all the shots. 
In this moment of transition, dissent from someone of Li’s standing could have precisely the kind of destabilizing impact that China’s leaders fear. 
So Li has to be “de-deified.” 
China’s attacks have pushed Li, after almost three weeks of stony silence, to do something he had never done before: strike back. 
Not only did he point out that all of the accusations about his intentions to abandon China were false; he openly accused China of using tactics from the Cultural Revolution that left him “trembling with fear” and sent “shivers down the spine.” 
Li concluded his statement with the message, delivered via three lines by two canonical Chinese poets from the ancient Tang and Song dynasties, that his home was where he felt safe. 
The subtext to any literate Chinese was clear: “China may be my ancestral country, but I am a free man, free to choose my home.” 
Li, an avid reader of world history and literature, has apparently not taken to heart the lesson that so many Chinese have learned, through great personal tragedies, since 1949. 
The core values of China’s government are not informed by the humane civility of Tang or Song poets, but by the twisted dialectics of Marxism-Leninism and the amoral militaristic tradition of a party that still cherishes its often brutish and violent habits of governance. 
As China’s leaders continue to push for more control over Hong Kong, spinal shivers are likely to become an increasingly common feature of life there. 


The Neglected Menace of Pollution 
NEW YORK – Pollution is one of the great existential challenges of the twenty-first century. 
It threatens the stability of ecosystems, undermines economic development, and compromises the health of billions of people. 
Yet it is often overlooked, whether in countries’ growth strategies or in foreign-aid budgets, like those of the European Commission and the US Agency for International Development. 
As a result, the threat continues to grow. 
The first step toward mobilizing the resources, leadership, and civic engagement needed to minimize the pollution threat is to raise awareness of its true scale. 
That is why we formed the LancetCommission on pollution and health: to marshal comprehensive data on pollution’s health effects, estimate its economic costs, pinpoint its links to poverty, and propose concrete approaches to addressing it. 
Last October, we published a report that does just that. 
We found that pollution is responsible for nine million deaths per year, or 16% of all deaths globally. 
That is three times more than AIDS, tuberculosis, and malaria combined, and 15 times more than all wars, terrorism, and other forms of violence. 
In the most severely affected countries, pollution is responsible for more than one in four deaths. 
The specific causes of such deaths vary, reflecting the changing composition of pollution. 
As countries develop, household air and water pollution – ancient forms of pollution linked to severe poverty – decline. 
But phenomena associated with economic development – namely, urbanization, globalization, and the proliferation of toxic chemicals and petroleum-powered vehicles – cause ambient air, chemical, occupational, and soil pollution to rise, with cities in developing countries hit particularly hard. 
Unsurprisingly, the poor bear the brunt of the burden. 
Nearly 92% of pollution-related deaths occur in low- and middle-income countries. 
In countries at every income level, disease caused by pollution is most prevalent among minorities, members of marginalized groups, and those who are otherwise vulnerable. 
This is environmental injustice on a global scale. 
Beyond the human costs, pollution-related diseases cause productivity losses that reduce developing countries’ GDP by up to 2% per year. 
They account for 1.7% of health-care spending in high-income countries, and up to 7% in low- and middle-income countries. 
Welfare losses due to pollution amount to $4.6 trillion per year – 6.2% of global economic output. 
And that does not take into account the massive costs of climate change, to which the combustion of highly polluting fossil fuels is the leading contributor. 
Despite these losses, the problem is set to worsen. 
Without aggressive intervention, deaths from ambient air pollution alone could increase 50% by 2050. 
Chemical pollution is another growing challenge, with an estimated 140,000 new compounds having been invented since 1950, far too few of which have been tested for safety or toxicity. 
Infants and young children are especially vulnerable. 
Pollution is not some “necessary evil” that inevitably accompanies economic development. 
With leadership, resources, and a well-formulated data-driven approach, pollution can be minimized, and viable strategies have already been developed, field-tested, and proven effective in high- and middle-income countries. 
These strategies balance legal, policy, and technological solutions. 
For example, following the “polluter pays” principle, they include the elimination of tax breaks and subsidies for polluting industries. 
Moreover, such strategies adhere to clear targets and timetables, against which they are continuously evaluated, and are subject to strong enforcement. 
And they can be exported to cities and countries at every income level around the world. 
Careful planning and well-resourced application of pollution-control strategies can enable developing countries to avoid the worst kinds of human and ecological disasters that have accompanied economic growth in the past. 
The old assumption that poor countries must endure a phase of pollution and disease on the path to prosperity can finally be put to rest. 
For rich and poor countries alike, such strategies would lead to more sustainable GDP growth. 
The removal of lead from gasoline has returned billions of dollars to economies around the world, as reduced exposure implies lower cognitive impairment and higher productivity. 
In the United States, air-quality improvements have yielded $30 for every dollar invested, for an aggregate return of $1.5 trillion on a $65 billion investment since 1970. 
Reducing pollution thus creates enormous opportunities to boost economic growth, while – more importantly – protecting the lives and health of people worldwide. 
The Lancet Commission calls on national and municipal governments, international donors, major foundations, civil-society groups, and health professionals to make pollution control a much higher priority than it is now. 
This demands a substantial increase in the funding allocated to pollution prevention in low- and middle-income countries, both from national budgets and donor aid. 
This can be achieved on the international level by expanding existing programs or establishing new stand-alone funds, analogous to the Global Fund to Fight AIDS, Tuberculosis, and Malaria. 
Such programs should kick-start and complement national contributions, while providing technical assistance and supporting research. 
International funding can also be used to back the creation of a “global pollution observatory.” 
Effective pollution control also means embedding strategies for prevention in all future growth and development strategies, recognizing that success is possible only if societies change their patterns of production, consumption, and transportation. 
Key steps here include creating incentives for a broad transition to non-polluting sources of energy; ending subsidies and tax breaks for polluters; rewarding recycling, re-use, and repair; replacing hazardous materials with safer substitutes; and encouraging both public and active transportation. 
The transition to less polluting systems will not be easy, and will meet fierce opposition worldwide from vested interests. 
But, as the Lancet Commission report shows, the low-pollution transition is essential to the health, wellbeing, and prosperity of our societies. 
We cannot afford to neglect this global menace any longer. 

The Chernobyl Factor in the Ukraine Crisis 
LOS ANGELES – Twenty-eight years after its Chernobyl nuclear plant exploded, Ukraine confronts a nuclear specter of a different kind: the possibility that the country’s reactors could become military targets in the event of a Russian invasion. 
Speaking at the Nuclear Security Summit in The Hague in March, Andrii Deshchytsia, Ukraine’s acting foreign minister, cited the “potential threat to many nuclear facilities” should events deteriorate into open warfare. 
Earlier in the month, Ihor Prokopchuk, Ukraine’s ambassador to the International Atomic Energy Agency, circulated a letter to the organization’s board of governors warning that an invasion could bring a “threat of radiation contamination on the territory of Ukraine and the territory of neighboring states.” 
In Kyiv, Ukraine’s parliament responded by calling for international monitors to help protect the plants as the cash-strapped government attempts to boost its own efforts. 
Are Ukraine’s concerns mere hyperbole – a “malicious slander,” as the Kremlin puts it – or should we take them seriously? 
For Ukraine’s government, the angst is real. 
Even Ukrainians born after 1986 understand what a Chernobyl-type disaster brought about by battle could look like. 
History offers little guidance as to whether warring countries would avoid damaging nuclear sites. 
With the exception of the 1990’s Balkan conflict, wars have not been fought against or within countries with nuclear reactors. 
In the case of the Balkans, Serbian military jets overflew Slovenia’s Krško nuclear power plant in a threatening gesture early in the conflict, while radical Serbian nationalists called for attacks to release the radioactive contents. 
Serbia itself later issued a plea to NATO not to bomb its large research reactor in Belgrade. 
Fortunately, the war ended with both reactors untouched. 
While that case provides some assurance that military and political leaders will think twice about attacking nuclear reactors, the sheer scale of Ukraine’s nuclear enterprise calls for far greater global concern. 
Today, 15 aging plants provide 40% of Ukraine’s electricity. 
(Ukraine shut several reactors operating adjacent to the damaged Chernobyl reactor years ago.) 
Concentrated in four locations, Ukraine’s pressurized water reactors differ from the less stable Chernobyl RBMK design, yet still remain capable of releasing radioactive contents should safeguards fail. 
Given that Russia, too, suffered serious consequences from the Chernobyl accident, it is to be hoped that the Kremlin would recoil at the idea of bombing the plants intentionally. 
But warfare is rife with accidents and human error, and such an event involving a nuclear plant could cause a meltdown. 
A loss of off-site power, for example, could be an issue of serious concern. 
Although nuclear plants are copious producers of electricity, they also require electrical power from other sources to operate. 
Without incoming energy, cooling pumps will cease functioning and the flow of water that carries heat away from the reactor core – required even when the reactor is in shutdown mode – will stop. 
To meet that risk, nuclear plants maintain large emergency diesel generators, which can operate for days – until their fuel runs out. 
The reactor meltdowns at Japan’s Fukushima Daiichi power station in 2011 demonstrated what happens when primary and emergency operating power are cut. 
Such vulnerabilities raise troubling questions in the event of a war. 
Fighting could disrupt off-site power plants or transmission lines servicing the reactor, and could also prevent diesel fuel from reaching the plant to replenish standby generators. 
Operators could abandon their posts should violence encroach. 
Moreover, combatants could invade nuclear plants and threaten sabotage to release radioactive elements to intimidate their opponents. 
Others might take refuge there, creating a dangerous standoff. 
A failure of military command and control or the fog of war could bring plants under bombardment. 
Serious radiological contamination could result in each of these scenarios. 
And, though no one stands to gain from a radioactive release, if war breaks out, we must anticipate the unexpected. 
In Ukraine, nuclear emissions could exceed both Chernobyl and Fukushima. 
Wartime conditions would prevent emergency crews from getting to an affected plant to contain radiological releases should reactor containments fail. 
And, with government services shut down in the midst of fighting, civilians attempting to escape radioactive contamination would not know what to do or where to go to protect themselves. 
Such risks might be one reason for Russian President Vladimir Putin to think twice about ordering a military invasion of Ukraine. 
But, should war come, combatants must do all they can to keep conflict away from the nuclear sites and the off-site power sources feeding them. 
Plant operators should stockpile diesel fuel to keep emergency generators operating. 
They should perform review and maintenance of generators to ensure that they are set to go. 
In the event of fighting near reactors, the West should prepare to ferry forces to secure the plants and keep the generators operating; and, in the event of a meltdown, the West should rally both governments to initiate a cease-fire to deal with the disaster. 
Given the stakes, failure to prepare for the worst is not an option. 

The New Loose Nukes 
LOS ANGELES – Nobody would dispute the danger inherent in possessing nuclear assets. 
But that danger becomes far more acute in a combat zone, where nuclear materials and weapons are at risk of theft, and reactors can become bombing targets. 
These risks – most apparent in today’s chaos-ridden Middle East – raise troubling questions about the security of nuclear assets in volatile countries everywhere. 
Two recent events demonstrate what is at stake. 
On July 9, the militant group now known as the Islamic State captured 40 kilograms (88 pounds) of uranium compounds at Mosul University in Iraq. 
The captured uranium was not weapons-grade; international inspectors removed all sensitive material from Iraq following the 1991 Gulf War (which is why it was absent when the United States invaded in 2003). 
But what international response, if any, would have been initiated if the cache had been highly enriched? 
On the same day, Hamas launched three powerful Iranian-designed rockets from Gaza at Israel’s Dimona reactor. 
Luckily, two missed the target, and Israel managed to intercept the third. 
But the episode represented a serious escalation of hostilities and served as an important reminder of the vulnerability of nuclear reactors in warzones. 
In fact, Hamas made similar attempts to attack the Dimona complex in 2012, as did Iraq in 1991, with the aim of releasing the site’s contents to inflict radiological damage on Israel’s population. 
(The perpetrators appeared clueless to the fact that certain weather conditions would have concentrated the radioactive debris in the Palestinian-majority West Bank.) 
Of course, it is possible that these events are an aberration. 
After all, the only conflict so far in which authorities have lost control of sensitive nuclear materials was the Georgia-Abkhazia War in the 1990s, when unknown forces seized a small amount of highly enriched uranium from a research institute. 
Likewise, though there have been numerous attacks on nuclear reactors under construction, the sole threat to an operating plant in a combat zone outside of Israel occurred at the start of the fighting in ex-Yugoslavia, when Serbian nationalists considered attacking Slovenia’s Krško power plant and sent warplanes over the site. 
The plant’s operators temporarily halted electricity generation to curb the risk of a radiation release, but nothing came of the threat. 
Indeed, whenever nuclear assets have been least secure – during the Soviet Union’s collapse, China’s Cultural Revolution, and the Algiers putsch (when a group of mutinous retired generals set their sights on a nuclear device that France was testing in the Algerian desert) – they have not been compromised. 
Even in Ukraine today, despite the escalating civil conflict, the country’s 15 nuclear power plants have remained untouched (though even with new defensive measures taken by Ukrainian officials, this could easily change). 
It is impossible to know whether this benign pattern will hold. 
But recent developments in the Middle East suggest that there are grounds for concern in other volatile countries, namely Pakistan, North Korea, and Iran. 
Pakistan has a large nuclear weapons program and faces an expansive jihadi insurgency, which previously attacked military bases suspected of housing nuclear assets. 
Though Pakistan has not experienced a nuclear breach, and the government insists that safeguards remain robust, the country’s increasingly frequent and severe bouts of instability raise serious questions about the future. 
While North Korea’s nuclear arsenal is much smaller, persistent doubts about the regime’s sustainability make it a matter of grave concern. 
In the event of the regime’s collapse – a distinct possibility – it would be difficult to prevent the diversion of its assets, or even the use of its weapons. 
For its part, Iran seems relatively stable, at least compared to its neighbors. 
But it faces an uncertain political future. 
If a power struggle emerges, the large Bushehr reactor could be used as a bargaining chip. 
To mitigate such risks, the international community could maintain its traditional policy of sitting tight and hoping that governments retain control of their nuclear infrastructure. 
But the United States, for one, is no longer satisfied with this approach. 
According to media reports, it has devised a strategy for deploying Special Forces to neutralize Pakistan’s nuclear arsenal in the event that its authorities lose control. 
And some government-connected think tanks have explored the possibility of deploying US combat forces to address nuclear risks in North Korea if the regime crumbles. 
Such plans, however, are by no means foolproof – not least owing to the difficulties of finding concealed nuclear assets and safeguarding reactors. 
Moreover, the American public’s willingness to become enmeshed in yet another risky military venture, when boosting homeland security could suffice, is dubious, at best. 
Instead of waiting for a major development to force hurried action, the world’s major powers should engage in a full-throated debate to determine the best approach to address nuclear risks in volatile countries, seeking ways to cooperate whenever necessary. 
After all, even rival powers like China and the US or India and Pakistan share an interest in preventing the world’s most dangerous weapons from falling under the control of its most fanatical minds. 

Iran’s Nuclear Quandary 
LOS ANGELES – When the United States and its allies resume talks over Iran’s nuclear program on November 7-8, the vexing task of crafting Iran’s recent proposal into an enduring agreement will begin in earnest. 
There are many obstacles to an agreement, but among the least examined is the legacy of nuclear-disarmament efforts involving Libya and North Korea. 
Both cases raise issues that neither Iran nor the US wants to see repeated – but that both will have difficulty avoiding. 
For the US, North Korea illustrates how a poor but ambitious country developed the bomb by gaming talks and gaining time. 
For Iran, Muammar el-Qaddafi’s 2003 relinquishment of Libya’s weapons of mass destruction demonstrates how a regime, still considered a bête noire by the international community even after normalization of diplomatic relations, arguably forfeited its survival in 2011 by forgoing the chance to build a nuclear deterrent. 
Digging further into each case illuminates the challenges faced by Iran and its international interlocutors. 
What makes the North Korea precedent particularly troubling is how much Iran has mimicked the regime in Pyongyang. 
This naturally prompts questions about whether Iran is using the current round of negotiations as a façade for an ongoing effort to develop nuclear weapons. 
Consider parallels ten years apart. 
In June 1993, following talks with the US and a threat to withdraw from the Nuclear Non-Proliferation Treaty (NPT), North Korea allowed the International Atomic Energy Agency to conduct limited “safeguards activities.” 
Then, in October 1994, the US and North Korea entered into the Agreed Framework to freeze North Korea’s nuclear program. 
Similarly, in December 2003, after hiding construction of the Natanz uranium-enrichment facility and other plants from the IAEA, Iran agreed to sign – but not ratify – the so-called Additional Protocol, allowing broader application of IAEA safeguards. 
Then, in November 2004, in negotiations with European representatives, Iran agreed to suspend nuclear enrichment. 
Neither agreement lasted long. 
In March 1996, the IAEA reported that North Korea was not complying with efforts to verify plutonium held at the Yongbyon nuclear facility. 
On October 9, 2006, North Korea detonated its first nuclear weapon, and the United Nations Security Council adopted Resolution 1718 calling on the country to abandon its program and re-join international denuclearization talks. 
Since then, North Korea has responded to incremental tightening of international sanctions with two more nuclear tests, the latest this year under the new leadership of Kim Jong-un. 
Likewise, in January 2006, following the collapse of negotiations with European emissaries, Iran broke the IAEA seals on the Natanz facility’s equipment and storage areas. 
The following month, the IAEA reported the Islamic Republic to the Security Council for its failure to be forthright about its nuclear program. 
Since then, Iran has responded to incremental tightening of international sanctions by building more centrifuges. 
The question now is whether the North Korea-Iran parallel stops with Iran’s new president, Hassan Rouhani. 
The Libyan legacy confronts Iran with its own conundrum. 
Like Iran, Qaddafi’s Libya suffered economic and political isolation for many years during which it attempted to advance a WMD program. 
By the late 1990’s, however, it had had enough. 
British and American negotiators secretly met with Libyan counterparts to resolve the case of the 1988 bombing of Pan Am Flight 103 over Lockerbie, Scotland, and other terrorism issues. 
In the quid pro quo that followed, Qaddafi agreed to eliminate his nascent nuclear program in exchange for an end to pariah status. 
This was coupled with a critical demand: no deal without America’s commitment to eschew regime change. 
On December 19, 2003, Libya formally renounced all WMD efforts. 
Eight years later, pinned down by a US Predator drone and French airstrikes, Qaddafi met his demise. 
Without a nuclear deterrent, his regime was helpless when the US reneged on the deal – a lesson that has not been lost on North Korea. 
Given this history, Iran has a strong incentive to retain at least a nuclear-breakout option (which would mean completing all but the final steps to weaponization). 
Of course, Iran’s leaders may believe that economic isolation is the greatest danger to the regime. 
But what happened in Libya has made them fear that Qaddafi’s fate could be theirs, too, without an adequate deterrent. 
Indeed, commenting on Qaddafi’s plight in 2011, Supreme Leader Ayatollah Ali Khamenei said, “[T]his gentleman wrapped up all his nuclear facilities, packed them on a ship and delivered them to the West and said, ‘Take them!’ 
Look where we are, and in what position they are now.” 
But today, two years later, Iran must look again at where it is. 
As long as crippling economic sanctions remain in place, the government will be unable to have its yellowcake and eat it, too. 
Allowing Iran to retain some low-grade enrichment capacity would be a plausible concession – and one that would allow the country’s leaders to save face – but only if linked to Iran’s unfettered disclosure of all nuclear activities to the IAEA and confirmed cessation of any capability that contributes to weaponization. 
And, given the stakes, any international agreement with Iran must come with an assured response to cheating, including military action. 
With little leverage, Iran’s leaders would then have two options. 
They could follow North Korea by sacrificing economic prosperity for nuclear breakout, and hope that US and Israeli talk of “all options” being on the table to stop their efforts is a bluff; or they could pursue economic prosperity by forgoing a nuclear-weapons capacity, and hope that a Libya-style revolt does not envelope the country and doom the regime to a fate like that of Qaddafi. 
It is not an easy choice, but it is one that Iran’s leaders cannot postpone for much longer. 

Berlin, Birthplace of Modern Asia 
NEW DELHI – By marking the Cold War’s end and the looming collapse of the Soviet Union, the fall of the Berlin Wall 20 years ago transformed global geopolitics. 
But no continent benefited more than Asia, whose dramatic economic rise since 1989 has occurred at a speed and scale without parallel in world history. 
For Asia, the most important consequence of the fall of the Berlin Wall was that the collapse of communism produced a shift from the primacy of military power to economic power in shaping the international order. 
To be sure, rapid economic growth also occurred during the Industrial Revolution and in the post-WWII period. 
But in the post-Cold War period, economic growth by itself has contributed to altering global power relations. 
Another defining event in 1989 was the Tiananmen Square massacre of pro-democracy protestors in Beijing. 
If not for the Cold War’s end, the West would not have let China off the hook over those killings. 
Instead, the West adopted a pragmatic approach, shunning trade sanctions and helping to integrate China into the global economy and international institutions through the liberalizing influence of foreign investment and trade. 
Had the United States and its allies pursued an approach centered on punitive sanctions, as with Cuba and Burma, the result would have been a less prosperous, less open, and potentially destabilizing China. 
Indeed, China’s phenomenal economic success – illustrated by its world-beating trade surplus, world’s largest foreign-currency reserves, and highest steel production – owes a lot to the West’s decision not to sustain trade sanctions after the Tiananmen Square massacre. 
Having vaulted past Germany to become the world’s biggest exporter, China now is set to displace Japan as the world's second largest economy. 
India’s rise as an economic giant is also linked to the post-1989 events. 
India was heavily involved in barter trade with the Soviet Union and its communist allies in Eastern Europe. 
When the East Bloc unraveled, India had to start paying for imports in hard cash. 
That rapidly depleted its modest foreign-exchange reserves, triggering a severe financial crisis in 1991, which in turn compelled India to embark on radical economic reforms that laid the foundations for its economic rise. 
More broadly, the emblematic defeat of Marxism in 1989 allowed Asian countries, including China and India, to pursue capitalist policies overtly. 
Although China’s economic renaissance had already begun under Deng Xiaoping, the Chinese Communist Party, after 1989, was able publicly to subordinate ideology to wealth creation. 
That example, in turn, had a constructive influence on surviving communist parties in Asia and beyond. 
Geopolitically, the post-1989 gains extended far beyond the West. 
The Soviet Union’s sudden collapse was a strategic boon to Asia, eliminating a menacing empire and opening the way for China rapidly to pursue its interests globally. 
Russia’s decline in the 1990’s became China’s gain. 
For India, the end of the Cold War triggered a foreign-policy crisis by eliminating the country’s most reliable partner, the Soviet Union. 
But, as with its 1991 financial crisis, India was able to emerge with a revamped foreign policy – one that abandoned the country’s quixotic traditions and embraced greater realism and pragmatism. 
Post-Cold War India began pursuing mutually beneficial strategic partnerships with other key players in Asia and the wider world. 
The new “global strategic partnership” with the United States – a defining feature of this decade – was made possible by the post-1989 shifts in Indian policy thinking. 
Of course, not all post-1989 developments were positive. 
For example, the phenomenon of failing states, which has affected Asian security the most, is a direct consequence of the Cold War’s end. 
When the Cold War raged, one bloc or the other propped up weak states. 
But, with the Soviet Union’s disappearance, the US abandoned that game. 
As a result, dysfunctional or failing states suddenly emerged in the 1990’s, constituting a threat to regional and international security by becoming home to transnational pirates (Somalia) or transnational terrorists (Pakistan and Afghanistan), or by their defiance of global norms (North Korea and Iran). 
Asia has suffered more casualties from the rise of international terrorism than any other region. 
Moreover, two decades after the Berlin Wall fell, the spread of democracy has stalled. 
Between 1988 and 1990, as the Cold War was winding down, pro-democracy protests erupted far from Eastern Europe, overturning dictatorships in countries as different as Indonesia, South Korea, Taiwan, and Chile. 
After the Soviet disintegration, even Russia emerged as a credible candidate for democratic reform. 
But, while the overthrow of totalitarian or autocratic regimes shifted the global balance of power in favor of the forces of democracy, not all the pro-democracy movements succeeded. 
And the subsequent “color revolutions” in places like Ukraine only instilled greater caution among the surviving authoritarian regimes, prompting them to implement measures to counter foreign-inspired democratization initiatives. 
Aside from the retreat of democracy in Russia, China – now the world’s oldest autocracy – is demonstrating that when authoritarianism is entrenched, a marketplace of goods and services can stymie the marketplace of political ideas. 
Twenty years after communism’s fall, authoritarian capitalism has emerged as the leading challenger to the spread of democratic values. 


Berlusconi at Bay 
Silvio Berlusconi, who becomes President of the European Union on July 1 st , is a man of vision who once loved risk--and whose business bets paid off big. 
In the 1960's, he was the first to see that Milan, then a traditional Italian city where people walked to work, would become a modern metropolis, surrounded by American-style suburbs. 
So his fortune began in real estate development. 
Fifteen years later, Signor Berlusoni understood that the Italian state's monopoly of television would not survive and jump-started what became Italy's main privately owned media group. 
But you don't win in TV and the real estate business without the right political connections. 
On both occasions, Berlusconi outwitted his competitors by siding with the Socialists, at the time the rising stars of Italian political life. 
His long association with Bettino Craxi, Milan's most influential politician in the 1970's and Italy's prime minister through much of the 1980's, started early. 
On the other hand, political connections do not make a politician. 
Indeed, the jump from business into politics was probably not Berlusconi's own preference. 
By the 1990's, his media group was in trouble, weakened by excessive diversification (the decision to enter the retail-distribution business almost destroyed the group). 
Almost at the same time, ex-premier Craxi fled to Tunisia, chased there by the Italian courts at the height of the mani pulite (clean hands) investigation into the vast network of corruption known as Tangentopoli (Bribesville). 
Craxi's flight and exile left Berlusconi feeling lost--and without the reliable political backing that he needed. 
So he decided that he needed to become his own political sponsor. 
As has happened frequently in Italian history, Berlusconi's decision to form a new political party, Forza Italia , just a few months before the 1994 general election paid off handsomely. 
Berlusconi's lack of experience in politics doomed his first government to collapse after only six months. 
Any other man as rich as Berlusconi would probably have given up. 
But Berlusconi remained and led the opposition for six years. 
In 2001 his determination was rewarded with a clear victory and, more importantly, a seemingly clear mandate for change. 
Once again Berlusconi probably had no choice: by the late 1990's, his association with the disgraced Socialists was haunting him politically and legally. 
His only hope of fending off the magistrates was to control parliament and introduce new laws that would stop the series of corruption trials he faces--a strategy that has now given him immunity from prosecution until he leaves office. 
Unfortunately, while Berlusconi's government is invariably long on speeches, legal provisions designed to stop the clock on his court cases are among the few laws that have passed in his two years of government. 
Berlusconi's performance in government is a combination of good intuition--for instance the early attempt to reform Italian pensions in 1994--and poor implementation, most likely because of a lack of courage, as surprising as that seems. 
In 1994, during his first government, he understood early on that Italy needed to overhaul its pension system, and introduced bold legislation. 
But one general strike was enough to kill his reformist zeal. 
More recently, he courageously sided with the US on the war in Iraq, against the majority of the country and most of his own political coalition. 
But soon he seemed scared of his own boldness and faded into an almost invisible ally. 
Despite Berlusconi's rhetoric, he did not go (or was not invited) to the summit meeting with President Bush in the Azores, where the final decision to go to war was taken. 
On labor reforms, he fought the unions head on, but he chose the wrong fight: Italy's infamous "Article 18," which allows labor courts to return a worker to his job if a judge believes that the worker was unjustly fired. 
But while Article 18 is important in principle, it is almost irrelevant in practice. 
The outcome was a confrontation with the unions that distracted from more important labor reforms. 
Contrary to what happened in 1994, Berlusconi's current government survives, but whoever hoped for a free-market revolution will be disappointed. 
There has been no tax cut of any significance, and pension reform is still waiting. 
Berlusconi's powerful finance minister, Giulio Tremonti, speaks often and fondly of the necessity of renewed government intervention in the economy; nothing is done to prevent strikes in the public transportation sector. 
Moderate right-wing voters, who wanted an Italian (i.e., somewhat watered-down) version of the Reagan/Thatcher era are disillusioned. 
Berlusconi tries to mask his inactivity by scaring his voters, repeating again and again that electing the moderate left would mean signing a pact with the devil, i.e., the "communists." 
Italians seem smarter, as the result of the June administrative elections clearly have shown. 
Why has the courageous visionary of the 1960's and 1970's lost his shine? 
Part of it is precisely that it is no longer the 1960's and 1970's: Berlusconi is 40 years older and for the past ten years has lived in the world of Roman politics. 
There he learned the art of political (and personal) survival, but lost his vision and his love for risk taking. 

Berlusconi Fiddles While Italy Declines 
Italy now looks as unsettled and decrepit as Britain did when Margaret Thatcher assumed power 24 years ago. 
Fiat wallows in crisis; university rectors resign en mass; judges attend the opening session of the judicial year carrying copies of the constitution as a warning to the government. 
When he returned to power, Silvio Berlusconi promised bold Thatcherite reforms to set things right. 
His reforms, however, have been few and insipid, aimed mostly at benefiting himself, says Ferdinando Targetti. 
Italy is in economic decline. 
Its share of exports in world markets is contracting. 
On the list of "most competitive countries" prepared by the World Economic Forum, Italy has fallen in one year from 26 th place to 39 th . 
Unemployment is higher than the EU average (9% against 7.6% ). 
Inflation is nearly twice that of France and Germany, though all three countries use the euro. 
The ratio of debt to GDP (110%) is almost twice the European average and growing. 
Fiat's crisis may see the country lose its last great internationally competitive industrial enterprise. 
In response, Italy's President has asked the entrepreneurial classes to help shore up the country's competitiveness. 
Unions should return to the policy they adopted during the successful struggle against inflation in the 1990s. 
The state must improve public services, strengthen the educational system, and devote greater resources to research and development. 
The government must reform social welfare and pensions. 
The entire political spectrum, indeed, must recognize the country's predicament and find common ground for legislation. 
But this will be impossible so long as Prime Minister Berlusconi dominates Italian politics. 
Berlusconi is a new phenomenon on the European right. 
In recent decades, mainstream right-leaning parties in most Western countries evolved from a defense of tradition (sometimes with a tinge of nationalism) to a more liberal worldview favoring a limited role for the state and greater individual responsibility. 
Coming from the pinnacle of Italian business, Berlusconi might have been expected to conform to this pattern. 
In fact, however, Berlusconi represents political extremism and programmatic ambiguity. 
Berlusconi's extremism manifests itself in several ways. 
First, he thinks of politics as a soccer match. 
On one side are the "good guys," the Azzurri (the Italian national team, in their blue shirts), led by a manager who, because he was successful in business, is convinced he will be successful at managing the state. 
On the other side are the bad guys, the Reds, who, because they are politicians, do not know what it means to work. 
Berlusconi's vision of democracy--more populist than liberal--is that everything is allowed to those who win, even changing laws to favor the prime minister's special interests. 
His government has done so at least three times. It passed a law making it easy for politicians to ignore conflicts of interest, authored tendentious legislation on media ownership (Berlusconi controls much of Italy's media), and effectively got the Prime Minister off the hook on a series of criminal indictments. 
But Berlusconi is also a master of ambiguity, someone who appeals to liberal values while pursuing an anti-liberal, populist, and corporatist agenda. 
Giulio Tremonti, Berlusconi's Economy and Finance Minister and ideologue of the alliance with Umberto Bossi's xenophobic Lega Nord , declared in a recent interview: "Let's be done with the utopia of privatization. 
The right does not remain static and it does not reject the idea of state intervention." 
According to Tremonti, what Italy needs are a "new European protectionism" against unfair competition from developing countries and a rightwing "New Deal" that rejects independent enforcement of antitrust laws in favor of corporatist ideas. 
In reality, Italy's government has done little on the economic front, and what it has done it has gotten wrong. 
The Prime Minister often speaks about pension reform, but has failed to offer any new proposals. 
He has not supported any major privatizations; indeed, he tried to restore to government hands control of energy and banking. 
The only economic policy put into effect took the form of industrial subsidies. 
To finance this, the government passed a series of amnesties, forgiving penalties for past tax evasions, allowing underground business to come above ground without paying its obligations, and allowing Italians to bring capital illicitly stashed abroad back into the country. 
In the last budget, revenue from amnesties amounted to eight billion euros, and the fiscal reductions for businesses were 7.5 billion euros. 
To finance measures that require permanent outlays with one-time revenues presages a new spike of public debt--a policy criticized by the European Commission and the IMF. 
Another of Berlusconi's economic wheezes is decriminalization of accounting fraud, something his government launched just when the world, in particular America, was establishing harsher punishments for dishonest managers and other fiduciaries. 
As to Fiat, Berlusconi's government failed to put forward a Thatcherite scheme aimed at bringing in foreign capital to salvage both it and other declining industrial enterprises. 
Instead, he backs a plan by a group of Italian financiers to pry control of Fiat from the dominance of the Agnelli family. 
Fiat controls one of Italy's great newspapers, Corriere della Sera , which may become more friendly to Berlusconi with an ownership change approved by him. 
Berlusconi's programmatic ambiguity and political extremism are polarizing Italy and radicalizing the opposition. 
Growing numbers of people, even moderates, are moving into active opposition. 
In this climate, Italy's decline will be difficult to arrest. 

America’s Berlusconi 
LONDON – For the past couple of weeks, the world has been guessing at how US President-elect Donald Trump will behave in office and what policies he will pursue, following a long campaign full of contradictory statements. 
America’s previous businessman-presidents – Warren G. Harding and Herbert Hoover – were around too long ago to provide much guidance. 
There is, however, a recent European precedent: Italy’s Silvio Berlusconi. 
What Trump has achieved, Berlusconi pioneered. 
Like Trump, Berlusconi is a businessman who made his first fortune in real estate. 
When he entered politics in 1994, he was an outsider, albeit one who, also like Trump, had long been close to plenty of insiders. 
The similarities don’t end there. 
Both Trump and Berlusconi are intimately familiar with the insides of courtrooms; 
Trump has moved fast since the election to settle fraud lawsuits against Trump University, but has about 70 other suits outstanding against him and his businesses. 
And both have an array of conflicts of interest with their role as head of government, thanks to their large business empires. 
Berlusconi, like Trump, managed to present himself as a rich man and a populist. 
He preferred to communicate directly with the people, bypassing traditional media and party structures. His propensity for glamorous women and glitzy homes somehow enhanced his popular appeal. 
The comparison between Trump and Berlusconi is far from superficial. 
In fact, Italy’s experience with Berlusconi – or Il Cavaliere (the Knight), as he is known in his country – provides six clear lessons for Americans and the world on what to expect from Trump. 
First, no one should underestimate the next US president. 
Already, Trump has defied expectations; few expected him even to win the Republican primary. 
Yet many observers continue to predict his imminent downfall, assuming that he will last only four years in the White House, if he is not impeached before that. 
Berlusconi’s experience tells a different story. 
Berlusconi, too, has been consistently underestimated by his opponents. 
Commentators deemed him too ignorant and inexperienced to last as prime minister, assuming that he would not survive the cut and thrust of politics or the pressures of government. 
Yet Berlusconi remains one of the kingpins of Italian politics. 
In the last 22 years, he has won three general elections and served as prime minister for nine years. 
Every time journalists or intellectuals have tried to take him on in public debate, they have lost. 
Trump’s critics – indeed, all US observers – should keep that in mind. 
The second lesson is that Trump will probably pursue what is essentially a permanent political campaign, injecting himself directly into conversations. 
Berlusconi has often used television, especially his own commercial channels, to that end. 
Instead of giving interviews he cannot control, Berlusconi has often worked with favored acolytes, or simply talked directly to the camera. 
When he was in office, many a political talk show was interrupted by a phone call from the prime minister demanding to have his say. 
From Trump, we should expect not just a continued Twitter barrage, but also the use of TV, including talk shows, and other channels to speak directly to the people. 
Trump’s decision to release a two-and-a-half-minute YouTube video laying out his priorities, in lieu of a press conference, reinforces this reading. 
While the approach may not seem very presidential, it works, at least when carried out by a master marketer who plays fast and loose with the facts. 
The third lesson from Berlusconi’s success is that even a very wealthy and powerful person can wield the victim narrative effectively. 
Indeed, even while in office, Berlusconi consistently claimed that he was being attacked by the judiciary, by rival businessmen, by “communists,” by the political establishment. 
When the chips are down, expect Trump to do the same. 
Never mind that he is a billionaire, born to a wealthy family, or that, in the next election, he will be the incumbent. 
He will consistently portray himself as besieged by self-serving enemies. 
The fourth lesson is that mudslinging is bound to happen. 
Berlusconi’s used his TV stations and newspapers so liberally to smear his opponents that the writer Roberto Saviano called them his macchina del fango or “mud machine.” 
Trump’s attacks on the media, often carried out via Twitter, are a precursor to this, as are his campaign vows to “open up” libel laws. 
His chief mud-slinger is likely to be his newly appointed chief strategist, Stephen Bannon, the former chair of the ultra right-wing Breitbart News. 
The fifth lesson is that Trump will probably continue to prize loyalty above all else in his administration, just as Berlusconi has. 
Already, Trump has made his three oldest children – who are supposed to run his business during his presidency – key players in his campaign and transition. 
Federal law may prohibit Trump from appointing his children to government posts, but they will surely remain at the center of his decision-making. 
Already, his daughter, Ivanka Trump, and her husband, Jared Kushner, attended Trump’s first meeting with a head of government, Japan’s Shinzo Abe. 
Even Trump’s non-family appointments – often controversial or radical figures who would not have a place in any administration except his – reflect an emphasis on personal loyalty. 
The final lesson of Berlusconi is that expressions of admiration for strongmen like Russian President Vladimir Putin should be taken seriously. 
Narcissistic lone rangers like Berlusconi and Trump are accustomed to making personal deals, and prefer other strongmen as their interlocutors. 
Berlusconi’s favorite overseas visits while in office were to Putin’s dacha and former Libyan dictator Colonel Muammar el-Qaddafi’s tent, not to boring European Council meetings or G20 summits. 
In the end, however, there is one key difference between Silvio Berlusconi and Donald Trump. 
Berlusconi had no real agenda while in office, except to further his business and personal interests and nurture his own power by providing resources and favors to his supporters. 
His greatest disservice to Italians was his inaction in the face of economic stagnation, but at least he didn’t make it worse. 
Trump, by contrast, does have an agenda, however hard to read. 
Whether it will make things better or worse remains to be seen. 


 

Italy’s Taxing Election 
MILAN – A winter election is not to Italian tastes. 
But, on February 24-25, up to 50 million voters will go to the polls to elect a new parliament, delivering Italy’s 62nd government in the last 65 years. 
Since November 2011, Italy has been led not by a politician, but by an academic economist and a former European Union commissioner, Mario Monti. 
His emergency technocratic government, supported by the left and right, was a masterstroke of outgoing President Giorgio Napolitano. 
Napolitano’s move was crucial, filling Italy’s need to replace the inefficient and scandal-ridden Silvio Berlusconi, in whom fellow leaders and global markets had lost all confidence, with an internationally respected figure. 
Under Monti’s leadership, reforms were finally initiated and markets were calmed. 
To enhance the credibility of public finances, Monti’s government substantially increased taxes, particularly on real estate, while preserving the already record-high income-tax rate. 
The tax plan highlighted that Italy, like Japan, is a country of public debt and private wealth. 
As the economist Marco Fortis points out, Italian family wealth is still, if not for long, second to none in Europe. 
Beyond growing international credibility, two major changes to the Italian political landscape have shaped the election campaign. 
The first is Monti’s surprise resignation in December, after losing the backing of Berlusconi’s party. 
While he will not run as a candidate (he is already a senator for life), he formed a centrist coalition – affiliated with neither the left nor the right – to contest the election, and has declared his willingness to resume his leadership role if the coalition is victorious. 
The second change is that, after almost two decades of striving for a workable political system dominated by the center-left and center-right parties, Italy is experiencing a remarkable dispersion of forces. 
The ballot will include dozens of competing parties, most of which will not win parliamentary seats, owing to a 2005 electoral law requiring at least 4% of the national vote to enter the Chamber of Deputies (the lower house) and 8% on a regional basis to enter the Senate. 
According to public-opinion polls, the center-left Democratic Party, led by Pier Luigi Bersani, along with some more left-leaning allies, has the support of roughly 33% of the electorate, down since late January, while backing for Berlusconi’s center-right coalition has risen to 28%. 
Meanwhile, Monti’s centrist grouping has only 16% support, while the populist Five Star Movement, founded by the comedian Beppe Grillo in 2009, has 17% backing – a figure that could go higher if those who previously stayed at home decide to cast a protest vote. 
The real battle, therefore, is between the Bersani and Berlusconi coalitions. 
Most observers believe that Bersani will carry the day, thanks to the much-criticized electoral law, which will give him control of the lower chamber if he wins a majority – regardless of how many people vote or how slim the margin. 
The law favored Berlusconi in 2008; it is likely to benefit Bersani now. 
But, in order to govern, Bersani would need both chambers, and he is unlikely to muster 50.1% in the Senate. 
At the same time, with Monti’s coalition failing to gain traction, reflecting the historically limited appeal of classic bourgeois parties in Italy, many observers are wondering what his role in the next government will be. 
For Bersani, creating a coalition with Monti may well be the key to gaining control of the upper house and, in turn, of the government. 
Amid these plans and predictions, a growing banking scandal has reminded Italians that, in politics, luck can sometimes make the difference. 
When Monte dei Paschi di Siena – Italy’s third-largest bank – revealed that it faced losses of up to €720 million ($970 million) from complex derivatives deals carried out in 2006-2009, support for Bersani’s coalition slipped, owing to the PD’s long-standing ties to the bank. 
Given that Italians tend to vote against, rather than for, issues, mistrust of the PD has translated into increased support for Berlusconi’s coalition. 
Another issue with the potential to undermine the PD’s standing is the party’s advocacy of a new wealth tax. 
Italians already shoulder heavy taxes: an individual taxpayer with annual income of €50,000 pays €15,000 in income tax; with two children, that total drops by only €1,000. 
By contrast, a French taxpayer with the same income pays only €9,000; with two children, the tax bill plummets to €3,000, and a €1.5 million fortune would mean an additional wealth tax of only €4,230. 
In other words, with or without children, the French citizen’s annual tax payment would be smaller than that of the Italian taxpayer with no additional wealth. 
In this context, a new wealth tax could be a dangerous proposition for the PD. 
One feature of Italy’s turbulent politics remains consistent: the control exercised by entrenched interests, and the dominance of a bloated and inefficient bureaucracy. 
With less than one-fifth of the population of the United States, Italy’s parliament has twice as many members as the US Congress, and they are among the world’s best-compensated and most privileged MPs. 
Meanwhile, Italy’s top bureaucrats are the highest paid in history, according to OECD data, with several retired officials drawing larger pensions than former US presidents receive. 
The salaries of Italy’s military chiefs of staff and chief of police are almost triple those of their American counterparts. 
But prospects for political reform do not inspire optimism. 
While Grillo’s supporters may ignite fireworks in protest of these gilded giveaways for a few months, a consistent assault leading to genuine reform seems doubtful. 
More broadly, the outcome of Italy’s election will undoubtedly have a far-reaching impact on a still-fragile eurozone, though the nature of that impact remains impossible to predict – unless Berlusconi returns to power, in which case the consequences will be all too clear. 

Bernanke Meets the Press 
CAMBRIDGE – At the United States Federal Reserve’s recent and first-ever public press conference, Chairman Ben Bernanke gave a spirited defense of the Fed’s much-criticized policy of mass purchases of US government bonds, also known as “quantitative easing.” 
But was his justification persuasive? 
Most economists viewed his performance as masterful. 
But the fact that the dollar has continued to slide while gold prices have continued to rise suggests considerable skepticism from markets. 
One of the hardest things in central banking is that investors often hear a very different message from that which the central bank intends to send. 
The Fed, of course, has been forced to turn to “QE,” as traders call it, because its normal tool for fine-tuning inflation and growth, the overnight interest rate, is already zero. 
Yet US economic growth remains sluggish, and is accompanied by stubbornly high unemployment. 
QE has been blamed for everything from asset-price bubbles to food riots to impetigo. 
Everyone from foreign finance ministers to cartoon satirists (check out the video “quantitative easing explained”) to Sarah Palin has ripped into the policy. 
Critics insist that QE is the beginning of the end of the global financial system, if not of civilization itself. 
Their most telling complaint is that too little is known about how quantitative easing works, and that the Fed is therefore taking undue risks with the global financial system to achieve a modest juicing of the US economy. 
Whether or not the critics are right, one thing is clear: with the Fed lagging other global central banks in the monetary-tightening cycle, and with rating agencies contemplating a downgrade of America’s credit score, the US dollar’s purchasing power has sunk to an all-time low against the currencies of America’s trading partners. 
Bernanke’s defense was robust and unequivocal. 
He argued that QE is not nearly as unconventional as its critics claim. 
If one looks at how it has affected financial conditions, including long-term interest rates, volatility, and stock prices, QE looks an awful lot like conventional interest-rate policy, which we think we understand. 
Thus, concerns about QE’s supposed ill effects are wildly overblown, and there is nothing especially challenging about eventually reversing course, either. 
Bernanke dismissed complaints about commodity prices and emerging-market inflation, arguing that these phenomena had far more to do with lax monetary policies and overly rigid exchange rates in fast-growing developing economies. 
The Fed chairman’s comments come at a critical and sensitive moment. 
Over the next year or so, the Fed is likely to enter a tightening cycle, raising interest rates on a steady and sustained basis. 
It does not want to rush, because the US economy is still weak, with first-quarter growth a lackluster 1.8%. 
But it cannot wait too long, lest inflation expectations drift to a dangerously high level, forcing the Fed to move aggressively – and at the cost of considerable economic pain – to wring inflation out of the system. 
In unwinding QE, Bernanke must avoid another landmine, namely an unwelcome collapse in asset prices. 
Many savvy Wall Street traders are convinced that QE is just the old “Greenspan put” on steroids. 
The cult of the “Greenspan put” stemmed from the previous Fed chairman’s avowed belief that the Fed should not try to resist a sharply rising stock market, except to the extent that such a market undermines the long-term stability of prices for ordinary goods. 
But if the stock market collapses too quickly, the Fed should worry about a recession and react aggressively to cushion the fall. 
Are traders right? 
Is QE merely the sequel to the “Greenspan put”? 
It is certainly the case that today’s super-low interest rates encourage investors to pour funds into risky assets. 
The Fed probably would argue that it is the job of regulators to make sure that asset bubbles do not induce too much borrowing and an eventual debt crisis, though of course monetary policy has to be in the mix. 
Given the sluggish recovery, Bernanke could have gone even further and argued that the Fed is the one who has it right. 
Other advanced-economy monetary authorities, such as the European Central Bank, might be over-reacting to short term inflation volatility. 
However, perhaps not wanting to cause problems for his foreign counterparts, Bernanke took a more cautious approach, merely defending the Fed’s policy as the right choice for America. 
In defending the Fed’s policy, Bernanke had to be careful not to say anything that might overly alarm investors. 
Indeed, there is already reason enough for them to be nervous: after all, the Fed’s epic easing of financial conditions must eventually be followed by exceptionally painful tightening. 
Will the economy be ready when the time comes? 
Explaining the inevitable shift to tightening could prove a far greater challenge than explaining the exceptional accommodation of quantitative easing. 
The Fed must always remember that no matter how calm and rational its analysis may be, it is dealing with markets that can be anything but calm and rational. 
Precisely because so much emotion has been invested in QE, the psychological effects of returning to normalcy are going to be perilous and unpredictable. 

Bernanke’s the One 
BERKELEY – William McChesney Martin, a Democrat, was twice reappointed to the job of Chairman of the United States Federal Reserve by Republican President Dwight D. Eisenhower. 
Paul Volcker, a Democrat, was reappointed once by the Reagan administration (but not twice: there are persistent rumors that Reagan’s treasury secretary, James Baker, thought Volcker was too invested in monetary stability and not invested enough in producing strong economies in presidential years to elect Republicans). 
Alan Greenspan, a Republican, was reappointed twice by Bill Clinton. 
And now Barack Obama has announced his intention to re-nominate Republican appointee Ben Bernanke to the post. 
As this history suggests, it is more remarkable for a US president not to reappoint a Fed chairman named by the opposite party than to reappoint one who wishes it. 
Reagan’s failure to reappoint Volcker and Jimmy Carter’s failure to reappoint Arthur Burns are the main exceptions. 
The Fed chairmanship is the only position in the US government for which this is so: it is a mark of its unique status as a non- or not-very-partisan technocratic position of immense power and freedom of action – nearly a fourth branch of government, as David Wessel’s recent book In Fed We Trust puts it. 
The reason, I think, that American presidents are so willing to reappoint Fed chairmen from the opposite party is closely linked to one of the two things that a president seeks: the confidence of financial markets that the Fed will pursue non-inflationary policies. 
If financial markets lose that confidence – if they conclude that the Fed is too much under the president’s thumb to wage the good fight against inflation, or if they conclude that the chairman does not wish to control inflation – then the economic news is almost certain to be bad. 
Capital flight, interest-rate spikes, declining private investment, and a collapse in the value of the dollar – all of these are likely should financial markets lose confidence in a Fed chairman. 
And if they occur, the chances of success for a president seeking re-election – or for a vice president seeking to succeed him – are very low. 
By reappointing a Fed chair chosen by someone else, a president can appear to guarantee financial markets that the Fed is not too much under his thumb. 
And that can be a very valuable asset for an incumbent Fed chair – one that no other candidate could match. 
But US presidents seek more than just a credible commitment to financial markets that the Fed chair will fear and fight inflation. 
They seek intelligence, honor, and a keen sense of the public interest and the public welfare. 
Presidents’ futures – their ability to win re-election, to accomplish other policy goals, and to leave a respectable legacy – hinge on the economy’s strength. 
It may or may not be true, especially these days, that what is good for General Motors is good for America and vice versa, but certainly what is good economically for America is good politically for the president. 
It is here, I think that President Barack Obama has lucked out. 
Ben Bernanke is, I think, a very good choice for Fed chair because he is so intelligent, honest, pragmatic, and clear-sighted in his vision of the economy. 
He has already guided the Fed through two very tumultuous years with only one major mistake – the bankruptcy of Lehman Brothers. 
Bernanke’s deep knowledge of the Great Depression and of financial crises is exactly what America – and the world – needs in a Fed chair now. 
And his commitment not to err on the side of underestimating either the difficulty of the situation or the value of keeping employment high would make him, I believe, one of the best possible choices for the position, even if he were not now the incumbent. 

Reimagining China’s Urban Future 
BEIJING – Around 100 million Chinese live in extreme poverty, and roughly 275 million spend less than $2 a day. 
The overwhelming majority of China’s poor live in rural areas, and, for most, hope for a better life lies in the cities, where better-paying jobs are easier to find. 
Indeed, over the past three and a half decades, a staggering half-billion Chinese have already made the move, raising the urban share of the country’s population from less than 20% in 1980 to one-half today. 
By 2030, 70% of all Chinese are expected to live in cities. 
China’s urbanization has undoubtedly supported the country’s impressive growth and rapid economic transformation. 
Its cities have provided cheap land and abundant labor, while local governments have been eager to attract investment and create jobs. 
But strains are starting to show. 
China’s growth model, driven by investment and exports, is running out of steam. 
Urban sprawl and congestion are spreading, fueling unrest among farmers who feel undercompensated for the loss of their land – a vital source of collateral for local-government debt (which now amounts to 30% of GDP). 
Moreover, the widening urban-rural divide has increased the country’s income and wealth disparities. 
Stark inequalities also exist within cities, mainly between those with a hukou (a record in China’s official household-registration system) and migrants without one. 
Although migrant wages have now caught up, inequality in public services (access to which requires an urban hukou) ensures that this divide persists, risking migrant children’s lifetime prospects and welfare, and deterring future migration. 
Environmental pressures are also worsening. 
Although some measures of urban pollution are improving, urbanization exposes many more people to bad air, increasing the total human and economic cost. 
The authorities are aware of these issues and have announced plans for a new, “people-oriented” urbanization model that would be more efficient, inclusive, and environmentally sustainable. 
A joint report by the World Bank and the Development Research Center of China’s State Council recently outlined how to make this plan a reality. 
Its successful implementation would undoubtedly improve conditions for the poor during China’s next phase of urbanization. 
First, and foremost, the plan would reform land policies. 
Under China’s constitution, urban land is owned by the state, and rural land by collectives. 
Though land reforms over the last three decades have recognized property rights for individuals and enterprises, rural land rights remain weak relative to legal conditions in urban areas. 
By strengthening farmers’ property rights, and restricting local governments’ power to expropriate land for urban growth, cities would become more compact and efficient, especially in terms of energy use. 
Reform would also help to consolidate farmland, facilitating better agricultural techniques. 
Land reform would also help to spread wealth, because stronger property rights boost rural land prices. 
According to one estimate, the total compensation that farmers received for their land over the last 20 years was ¥2 trillion ($322 billion) below market value, equivalent to 4% of China’s 2013 GDP. 
If invested at rates in line with China’s GDP growth, that unpaid compensation would now be worth some ¥5 trillion, or almost 10% of GDP. 
Second, reform of the hukou system could increase labor productivity, reduce income inequality, and accelerate urbanization. 
Despite the high level of rural-urban migration so far, it is still below what could be expected, given China’s size and income level. 
Preventing the one-third of city dwellers who lack an urban hukou from accessing public services ultimately means that too many people who would have left rural areas remain tied to the land. 
This discourages people from seeking higher incomes in the cities, while keeping rural labor productivity and wages low. 
While any rapidly expanding city experiences public-service bottlenecks, these can be overcome. 
Japan and South Korea, for example, extended public services in their fast-growing urban areas without restricting mobility. 
As the World Bank-DRC report points out, China can do the same by linking public services to place of residency rather than to place of origin. 
Moreover, when migrant children are able to join their parents in the cities and get a good education, the next generation will have a better chance to escape poverty, too. 
Making migration easier would not only open up opportunities in the cities; it would also accelerate agricultural transformation, as the fewer remaining agricultural workers would need to acquire new skills to raise productivity and wages. 
However, in order to implement land and hukou reforms, China’s fiscal system must be overhauled. 
Stronger land rights for farmers will deprive city authorities of the land-conversion revenues needed to provide public services to new urban migrants. 
And more migration will mean more demand for those services. 
Cities will therefore have to find new revenue sources. 
A property tax or a local surcharge on personal income taxes would target those who most benefit from urban living. 
Environmental charges and levies – such as higher registration fees for motor vehicles, pollution charges, and improved cost recovery on utilities – might also help, while simultaneously addressing urban environmental problems. 
There are big potential savings to be gained, too. 
China’s cities are forecast to spend around $5.3 trillion on infrastructure over the next 15 years; but denser, more efficient cities would save around $1.4 trillion (15% of 2013 GDP) of these costs. 
This money could then help to finance the additional health care, education, and low-income housing required by new migrants. 
China’s citizens, especially its poor, would benefit from a shift in government policy from the physical expansion of cities and infrastructure to the delivery of better, more fairly distributed public services. 
Achieving this would truly represent the people-oriented urbanization that the authorities seek to achieve. 

Infrastructure Unbound 
WASHINGTON, DC – Consider a simple statistic. 
Every month in the developing world, more than five million people migrate to urban areas, where jobs, schools, and opportunities of all kinds are often easier to find. 
But when people migrate, the need for basic services – water, power, and transport – goes with them, highlighting the boom in infrastructure demand. 
The reality is evident from Kenya to Kiribati – everywhere where rapid urbanization, the need to support trade and entrepreneurship, and efforts to confront the challenges of climate change have exposed a wide infrastructure deficit. 
And it is a deficit that confronts advanced economies as well. 
Simply put, infrastructure construction and modernization worldwide needs to be part of a strategy for long-term global growth. 
That is why G-20 finance ministers, meeting recently for the first time this year in Sydney, Australia, singled out investment in infrastructure as one of the elements vital to ensuring a strong, sustainable, and balanced recovery. 
But, with G-20 finance ministers preparing to meet again in Washington, DC, next month, a note of caution is in order: Simply increasing infrastructure investment is not enough to foster growth and job creation. 
At the start of the financial crisis, both advanced and emerging-market economies pumped money into “shovel-ready” infrastructure projects to boost short-term economic growth and create jobs. 
Now, in the wake of the crisis, the infrastructure challenge has become more difficult to address. 
In emerging and developing economies, government budgets are constrained, while the private sector accounts for less than 15% of total infrastructure investment on average. 
Indeed, a key challenge in financing infrastructure investment in emerging economies is that many of the commercial banks (mainly European) that had a significant presence in the past have withdrawn – and are unlikely to return until they repair their crisis-hit balance sheets and build capital to meet strengthened regulatory standards. 
That leaves huge unmet financing needs. 
In emerging and developing economies, it is estimated that an additional $1-1.5 trillion in annual investment will be required through 2020 to meet growth targets. 
Factoring in additional spending for reducing greenhouse-gas emissions or adapting to climate change could add $170-220 billion each year to the cost of these countries’ infrastructure needs. 
Obviously, the G-20 is right to emphasize how important meeting these needs is to how many people. 
For example, more than 69% of Sub-Saharan Africa’s population lack access to electricity; 65% of people in South Asia lack access to a simple pit latrine; and 40% of rural people in Latin America and the Caribbean lack access to all-weather roads. 
But we also know that promoting infrastructure investment requires more than money. 
Some countries generate massive growth benefits from their infrastructure spending, while others hardly see a return. 
As a background note prepared by the World Bank Group for the G-20 explains, governments should pay more attention to the selection, quality, and management of infrastructure projects, as well as to the quality of the underlying investment climate. 
Prioritizing investments, good planning, and sound project design can significantly boost the impact of new and modernized infrastructure on growth and job creation, as well as raise returns on scarce resources. 
Better investment planning can also help to avoid locking infrastructure into inefficient and less “green” technologies. 
Yes, all of that is easier said than done. 
As I heard in Sydney, many developing countries face real difficulties in identifying, preparing, and implementing projects. 
The price tag for technical, financial, economic, and environmental feasibility studies and long-term plans can be high, running into the millions of dollars. 
The World Bank Group has been helping developing countries build up their capacity in these areas. 
But more must be done to enable countries to develop a robust project pipeline that supports a stronger public-investment program, which is critical to any strategy to attract substantial resources from the private sector. 
And, in today’s economic climate, attracting private financing is essential, because there is simply no way that public funding alone can close the infrastructure gap. 
Doing so will also require ensuring appropriate governance, predictable pricing structures, and a credible regulatory environment. 
Countries have no time to waste. 
The unique role of infrastructure in helping to provide basic services for poor people, creating jobs and opportunity, facilitating access to markets, and ensuring sustainable growth in our ever-growing cities requires policymakers to act quickly and decisively. 

The Best Ways to Fight Extreme Poverty 
COPENHAGEN – In 1950, people in South Korea and Pakistan earned roughly the same amount of money annually. 
Today, the two countries are scarcely comparable. 
South Korean’s per capita income has grown 23-fold since then, while Pakistan has experienced only a three-fold increase. 
How we can help more of the world’s poorest countries emulate South Korea’s success is one of the most important questions facing the world today. 
Better economic outcomes mean empowering entire populations with better health, more education, longer life, and less vulnerability to challenges like natural disasters. 
Many of the United Nations’ proposed 169 development targets for the next 15 years are, at their heart, concerned with poverty reduction. 
But not all targets are equally good. 
The Copenhagen Consensus Center, of which I am director, recently asked 60 teams of economists to evaluate the benefits and costs of these proposed targets, which will come into force to replace the Millennium Development Goals in September. 
One of the least desirable targets seems laudable at first: full employment for all. 
Unfortunately, this is a dream, not a target. 
Economies need some unemployment to allow workers to change jobs, and most governments already focus on job creation. 
Research suggests that politicians and interest groups would use a full-employment target to support expensive, protectionist policies that generate great jobs for some but drive many into the informal economy. 
So it would probably end up doing less good than it would cost, and it is certainly not the way to reduce extreme poverty. 
About 14.5% of the world’s population, or one billion people, live on less than $1.25 a day. 
So why not end extreme poverty by simply transferring enough resources to this billion people to get them to at least $1.26 a day? 
The world’s poorest would be able to feed and educate their children better and become healthier. 
But, in addition to the financial cost, there would be huge administrative challenges, along with corruption and institutional deficiencies. 
When these factors are weighed against the benefits in monetary terms, each dollar spent ending extreme poverty with cash transfers would achieve about $5 worth of social value. 
That is not a bad return at all, but there are many better ways to help. 
One possibility is to triple mobile broadband penetration in developing countries. 
This would provide small-scale businesspeople such as farmers and fishermen with market information, enabling them to sell their goods at the highest price – and to boost productivity, increase efficiency, and generate more jobs. 
Our research shows that the benefits, added up, would be worth $17 for every dollar spent – making it a very good development target. 
An even better intervention addresses migration. 
More than 200 million people today work outside their home countries. 
As rich countries age, they need more workers. 
At the same time, people from developing countries are more productive in a developed country. 
Easing restrictions on migration would allow young people from developing countries to expand industrialized economies’ diminishing workforces – and generate the taxes needed to pay for care for the elderly. 
Such migration would also be good for the developing countries, because migrant workers send home remittances. 
In total, every dollar spent on increased migration would produce more than $45 of social good – possibly more than $300. 
While in today’s political climate, increasing migration might be difficult to achieve, it is worth pointing out how effectively it could help the world’s poorest. 
The single development target that would have the biggest impact on global prosperity would be the completion of the Doha trade round. 
Lowering trade barriers would mean that all countries could focus on doing what they do best, making everyone better off. 
Moreover, freer trade would accelerate economic growth, owing to increased innovation and knowledge exchange. 
Heavy reliance on trading in a global market was one of the main reasons that South Korea has developed so rapidly and essentially eradicated its poverty in the last 65 years. 
Economic models indicate that a successful Doha round would make the global economy $11 trillion richer each year by 2030, with most of the benefits going to developing countries. 
Each person in the developing world would earn $1,000 more per year, on average. 
The number of people living in extreme poverty would fall by 160 million. 
For every dollar spent, mostly to pay off Western farmers blocking the current negotiations, the world would achieve more than $2,000 of benefits, making free trade a phenomenal investment. 
Each of these proposals – full employment, cash transfers, broadband rollout, freer migration, and lower trade barriers – is covered by at least one of the UN’s 169 development targets. 
And herein lies the problem. 
Trying to do 169 different things at once would be foolhardy. 
It would mean spending too much time and resources on lower-return priorities, instead of focusing on the targets that promise the biggest impact on the world’s poorest. 
In fact, our research shows that there are 19 phenomenal targets that – like freer trade – should be prioritized above all of the others. 
The final decision about which targets will become global policy will affect the flow of trillions of dollars over the next 15 years. 
In September, when world leaders gather in New York, they need to focus on the smartest ways to boost global prosperity. 
Doing so would help more countries take South Korea’s path and lift their populations out of poverty. 

Bethlehem’s Message of Hope 
BETHLEHEM – Bethlehem’s rich history can be fully appreciated only by walking its streets. 
Every year, the city enters millions of homes worldwide through the image of the humble manger where Jesus was born. 
But that image does not compare to experiencing the Old City firsthand. 
Coming to Bethlehem is a unique experience that I would encourage everyone to pursue. 
Unfortunately, while visitors to Bethlehem have increased in number during the past year, many are unable to explore the city properly. 
Under Israeli occupation, obstacles hindering the normal development of tourism in Palestine have prevented thousands of people from experiencing what Bethlehem has to offer. 
For example, I often hear from Palestinian priests that, “In this land, we receive many tourists yet very few pilgrims.” 
In other words, there are more visitors interested in seeing the stones than in meeting the living stones. 
This is one consequence of Israel’s monopoly over the tourist industry. 
Israel has little interest in encouraging visitors to interact with Palestinians or to learn about their heritage. 
It is hard to imagine that visitors motivated by faith or a sense of history would not want to meet the stewards of the holy sites they are visiting. 
Pope John Paul II said it best during his pilgrimage in 2000, when he told Palestinians during a visit to the Dheisheh Refugee Camp that, “Probably the pastors and shepherds of Bethlehem were your predecessors, your ancestors.” 
The Church of the Nativity is of seminal importance to all Christians, whatever their denomination. 
And yet we still must go to great lengths to persuade people to visit it. 
Even more shocking, when we sought to list the church as a UNESCO World Heritage Site, some countries, succumbing to Israeli and American pressure, opposed the designation. 
Still, we succeeded, and we are now busy with the important work of preserving this cherished site. 
I am proud to say that this will be the last Christmas before the restoration of the church is complete. 
Soon, visitors will be able to see newly discovered mosaics and the church’s original floor, all of which date back to the fourth century. 
After that, they can visit other landmarks of the Old City, including Star Street, the pilgrimage route taken by Joseph and Mary, which we are transforming into a place full of life. 
Indeed, Bethlehem’s cultural heritage extends well beyond the walls of the Church of the Nativity. 
The richness of the city has long been documented, including by European explorers who visited in the nineteenth century. 
In the Frenchman Victor Guérin’s Description of Palestine, published in 1875, one finds a city full of life, and divided into at least eight quarters. 
Visitors encountered the splendid architecture of the Anatra quarter, and learned about Palestine’s oldest still-functioning school, the Terra Sancta College, which dates back to 1598. 
The same cannot be said for most visitors today. 
Bethlehem’s cuisine is also a treasure. 
From fresh baked goods, falafel, and hummus to a chef’s table stocked with produce from the Battir Gardens, Bethlehem’s richness of fare is rare for a small city. 
Battir Gardens, another World Heritage Site just 15 minutes from the city center, offers breathtaking agricultural terraces, hiking trails, vines, and olives that offset the ugly Israeli settlements and walls encircling the city. 
As a result of those settlements, the Palestinian government’s remit applies to a mere 13% of the district’s total land area. 
Bethlehem is no stranger to the challenges facing all of Palestine. 
The Trump administration’s recognition of Jerusalem as Israel’s capital has encouraged the Israeli government to increase colonization in and around East Jerusalem, which severely affects Bethlehem. 
With racist laws increasingly dividing our families, some have lost all hope for a political solution, and opted for emigration instead. 
But the scars of occupation do not tell the whole story. 
The thousands of Palestinians who have stayed in Bethlehem, despite the constant struggle, comprise a thriving and creative civil society, including artists, human rights organizations and businesspeople who continue to pursue opportunities in the name of hope. 
The reality for Palestinians today is captured perfectly in a passage from the Book of Jeremiah: “‘Peace, peace,’ they say, when there is no peace.” 
To that we might add, “‘Hope, hope’ when there is no hope,” because it is our responsibility to keep hope alive. 
The spirit of hope is what keeps Bethlehem shining brightly, even in the darkness of occupation. 
Though Christian Zionists like US Vice President Mike Pence make cynical use of the Bible to justify oppression of the Palestinians, as if denying our rights is a divine mandate, we are nonetheless determined to stand up for Christ’s message of justice, love, and peace. 
There is nothing divine about the system of apartheid emerging around us. 
The illegal wall that has been built through the heart of our city is antithetical to justice and freedom. 
Its dismantling would be a blessing. 
For the rest of the world, Bethlehem is and must remain a symbol of hope. 
As home to centuries-old cosmopolitan architecture and dozens of churches of various denominations, the city is a bastion of inclusion. 
Shepherds Field in Beit Sahour, Saint Nicholas Church and the Cremisan Valley in Beit Jala, St. George’s Monastery in Al Khader, and Mar Saba all embody faith without fanaticism. 
But, lest we forget, Bethlehem also hosts three refugee camps, which is a reminder of the injustice visited upon Palestinians during the Nakba (catastrophe), when hundreds of thousands of Palestinians, expelled from their homes in 1948, sought refuge here. 
After more than 2,000 years, Bethlehem’s message of hope to the world remains unchanged. 
All are invited to come experience it firsthand. 

Data-Driven Gender Equality 
NEW YORK – A key agenda item at this year’s annual meeting of the United Nations General Assembly, under way this week, will be to assess global progress on the Sustainable Development Goals (SDGs), the UN’s consensus roadmap for solving the world’s biggest challenges by 2030. 
I was part of the UN team that helped create the Millennium Development Goals, which preceded the SDGs. 
By the time the MDGs concluded in 2015, they had fueled some of the fastest and most extensive gains in global health and development the world has ever seen. 
The MDGs paved the way for the SDGs, and I have been encouraged by the commitment the global community has shown to sustaining the post-2015 development agenda. 
But it has also become clear to me and others that without a more deliberate, data-driven focus on the needs of women and girls in particular, progress toward a wide range of objectives will suffer. 
If we fail to achieve universal gender equality, we will fall short of many other goals, from ending poverty to ensuring good health. 
One of my personal frustrations with the MDGs was that gender equality was more a matter of rhetoric than of action. 
Despite their promise of empowerment, the MDGs didn’t adequately target many of the biggest challenges that women and girls face, such as gender-based violence and economic discrimination. 
These gaps have persisted, because in the 1990s, when the MDGs were being formulated, most people, including me, did not adequately understand the scale or complexity of the problem. 
We must avoid a similar fate with the SDGs. 
Achieving gender equality is more than a once-in-a-generation opportunity; it is also the best way to make progress on nearly all of the SDGs, and to build a world where everyone can thrive. 
As Bill and Melinda Gates will discuss at a gathering of world leaders next week in New York, and show in a new report, collective action is needed to address the various dimensions of gender inequality and drive progress. 
One of the biggest impediments is a dearth of good data on issues that disproportionately affect women and girls, such as land rights, access to education, family planning, or health care. 
Data are essential to understanding what is working and how to track progress. 
Yet up-to-date data exist for only a small fraction of the indicators that were developed to assess progress on the 17 SDGs – including the more than 40 that directly relate to gender equality. 
Of the 14 indicators of progress associated with the primary gender equity goal, SDG 5, most countries are measuring just three. 
To help fill these critical gaps, the Bill & Melinda Gates Foundation has created a three-year, $80 million initiative to generate more reliable data that can improve the design and targeting of programs and policy interventions. 
As part of that effort, the foundation recently launched a $10 million partnership with UN Women to help countries improve the quality of the gender-specific data they collect. 
The foundation is also supporting Equal Measures 2030, an initiative to empower advocates and civil-society groups with easy-to-use evidence to assess progress toward targets and keep the SDGs for women and girls on track. 
These and other efforts will provide gender-equality advocates and decision-makers with better information about the nature and scale of the social and economic barriers holding women and girls back, and help identify who is falling through the cracks. 
We know from existing evidence that empowering women and girls can accelerate progress. 
For example, when girls attend secondary school (SDG 4), they are up to six times less likely to be married as a child. 
And higher literacy rates among adolescent girls are associated with lower adolescent birth rates and improved health (SDG 3). 
Likewise, women are much more likely than men to invest surplus income in ways that improve the lives of their children. 
The benefits of gender equity are also apparent when women have access to basic financial services, like credit and savings accounts, which enable them to start businesses and save money for family essentials. 
Closing the gender gap in agriculture, meanwhile, could have an even more profound impact on families and productivity in the developing world. 
Today, for example, women make up nearly half of the agricultural workforce in Sub-Saharan Africa. 
Yet, they typically work smaller, less productive plots of land than men, and often lack access to the best seeds, fertilizer, credit, and training opportunities. 
Studies show that giving women more decision-making power over productive assets has the potential to increase farm yields by more than 20%, which is essential to “end poverty in all its forms everywhere” by 2030 (SDG 1). 
When we remove the barriers confronting the most vulnerable in society, the effects are transformational. 
But to do that, donors, development partners, governments, and the private sector must invest in more and better data that are sorted by age and sex. 
Doing so will allow programs to be tailored to the needs of women and girls everywhere. 
Our challenge – and opportunity – is to overcome the deeply entrenched barriers that impede progress for women and girls. 
The SDGs are a huge step in that direction. 
But goals without actionable strategies are just good intentions. 
The SDGs provide the roadmap to ending poverty and creating a better, healthier, more secure world for everyone. 
Ensuring that we have quality data is the best way to ensure that no one gets lost along the way. 

Better Red than Dead? 
Will the inexorable rise in medical costs around the world someday pose a major challenge to contemporary capitalism? 
I submit that in the not-so-distant future, moral, social, and political support for capitalism will be severely tested as would-be egalitarian health systems face ever-rising costs. 
Rising incomes, population aging, and new technologies for extending and enhancing life, have caused health costs to rise 3.5% faster than overall income for many decades now in the United States. 
Some leading economists project that health expenditures, which already constitute 16% of the US economy, will rise to 30% of GDP by 2030, and perhaps approach 50% later in the century. 
Other rich and middle-income countries, although typically spending only half what the US does today, won’t lag far behind. 
Countries in Europe and elsewhere have shielded their citizens from a part of this rise by piggybacking on US technological advances. 
Ultimately, though, they face the same upward cost pressures. 
Hasn’t the start of the twenty-first century marked the death of all other ideologies, with China’s raw capitalism putting pressure on gentler forms in Europe and elsewhere? 
The problem is that attitudes towards healthcare are fundamentally different. 
Many societies view healthcare as a right, not a luxury. 
When medical expenses constituted only a small percentage of income, as was typically the case 50 years ago, an egalitarian approach to healthcare was a small extravagance. 
The direct and indirect costs were relatively minor and affordable. 
But as health expenses start taking up a third of national income, healthcare socialism starts becoming just plain Marxism: to each according to his needs. 
Even China’s authoritarian capitalism will someday feel the pressure, as its rural populations, who currently have little access to doctors or hospitals, eventually explode with discontent. 
One often hears about rising healthcare costs in the context of future government budget projections, with old-age health costs expected to dominate growth in government expenditures in coming years. 
But a careful look at the projections by, say, the US Congressional Budget Office, show that the aging of our societies is only a part of the problem, and not the larger part. 
The real issue is whether societies are willing to provide elderly people with equal access to ever newer and improved medical techniques. 
A change on the horizon that will exacerbate current frictions is the growing importance of individualized health care. 
For most of modern history, relatively inexpensive public health precautions, such as providing clean drinking water and routine vaccinations, have been the main factor pushing up life expectancy. 
Public health measures have trumped the importance of individual care. 
But today, the balance is shifting. 
Heart operations are already a major factor in extending life in many rich countries. 
Sophisticated X-ray diagnostic techniques such as CT scans make it possible to detect many cancers at a treatable stage. 
Some drug researchers predict that with continuing advances in understanding the human genome, doctors may eventually be able to predict illnesses 15-20 years in advance, and begin prophylactic treatment immediately. 
(With some experts predicting that individuals will routinely live beyond 110-115 years by mid-century, one might wonder what all this will do to other social conventions such as marriage, but I will leave this thought to another day.) 
In addition to reducing mortality, new medical techniques can also have a huge effect on the quality of life. 
Roughly 250,000 hip replacements are performed in the US each year. 
Under-60 patients are becoming more important as newer artificial joints prove their capacity to withstand more active lifestyles. 
At $6,000, the average cost of a hip replacement is only a thousandth the cost of what it supposedly took to implant a bionic arm, eye, and two legs on the fictional “The Six Million Dollar Man” in the popular mid-1970’s TV show. 
Of course, hip replacement patients don’t get super-human speed, strength, and vision – at least not yet. 
If Tour de France officials think they have big problems now with steroids, just wait ten years. 
In principle, greater use of market mechanisms to allocate health care can slow or even temporarily reverse the rise in healthcare costs. 
But improved efficiency has its limits. 
Ultimately, the evidence suggests that societies spend ever-larger fractions of their income on health over time, in contrast to food expenditures, for example, which fall as countries become wealthier. 
Spending pressures, in turn, lead to acceleration of innovation. 
This raises long-term well being all around, but exacerbates short-term inequalities and frictions. 
I am not arguing against healthcare capitalism, but warning that support will become fragile, far more so than for, say, globalization nowadays. 
Most countries rely far too much on command and control, and provide far too few incentives for patients and providers to make efficient choices. 
Nevertheless, it remains to be seen whether healthcare pressures will ultimately cause the current trend towards free (and freer) market capitalism to reverse, with a very large chunk of the economy reverting to a more socialist system. 
Some societies might decide that it is better to be red than dead. 

Better than Basel 
ROME – The Basel Accords – meant to protect depositors and the public in general from bad banking practices – exacerbated the downward economic spiral triggered by the financial crisis of 2008. 
Throughout the crisis, as business confidence evaporated, banks were forced to sell assets and cut lending in order to maintain capital requirements stipulated by the Accords. 
This lending squeeze resulted in a sharp drop in GDP and employment, while the sharp sell-off in assets ensured further declines. 
My recent study with Jacopo Carmassi, Time to Set Banking Regulation Right, shows that by permitting excessive leverage and risk-taking by large international banks – in some cases allowing banks to accumulate total liabilities up to 40, or even 50, times their equity capital – the Basel banking rules not only enabled, but, ironically, intensified the crisis. 
After the crisis, world leaders and central bankers overhauled banking regulations, first and foremost by rectifying the Basel prudential rules. 
Unfortunately, the new Basel III Accord and the ensuing EU Capital Requirements Directive have failed to correct the two main shortcomings of international prudential rules – namely, their reliance on banks’ risk-management models for the calculation of capital requirements, and the lack of supervisory accountability. 
The latest example highlighting this flaw is Dexia, the Belgian-French banking group that failed in 2011 – just after passing the European Banking Authority’s stress test with flying colors. The stunning opacity of solvency ratios encouraged regulators to turn a blind eye to banks’ excessive risk-taking. 
The problem is that the Basel capital rules – whether Basel I, II, or III – are of no help in separating the weak banks from the sound ones. 
Indeed, more often than not, the banks that failed or had to be rescued in the wake of the 2008 financial crisis had solvency ratios higher than those of banks that remained standing without assistance. 
Compounding the problem, the diversity in banks’ capital ratios also indicates a dramatic distortion of the international playing field, as increasingly competitive conditions in financial markets have led to national discretion in applying the rules. 
Meanwhile, the opacity of capital indicators has made market discipline impossible to impose. 
Thus, large banks are likely to continue to hold too little capital and to take excessive risks, raising the prospect of renewed bouts of financial instability. 
In order to overcome these shortcomings in international banking regulations, three remedies are needed. 
First, capital requirements should be set as a straightforward ratio of common equity to total assets, thereby abandoning all reference to banks’ own risk-management models. 
The new capital ratio should be raised to 7-10% of total assets in order to dampen risk-taking by bankers and minimize the real economic impact of large-scale deleveraging following a loss of confidence in the banking system. 
Second, new capital ratios with multiple and decreasing capital thresholds, which trigger increasingly intrusive corrective action, should serve as the basis for a new system of mandated supervisory action. 
Supervisors should be bound by a presumption that they will act. 
They could argue that action is not necessary in a specific case, but they would have to do so publicly, thus becoming accountable for their inaction. 
In order to eradicate moral hazard, the system must have a resolution procedure to close banks when their capital falls below a minimum threshold. 
Finally, solvency rules should be complemented by an obligation that banks issue a substantial amount of non-collateralized debt – on the order of 100% of their capital – that is convertible into equity. 
These debentures should be designed to create a strong incentive for bank managers and shareholders to issue equity rather than suffer conversion. 
These three measures, if applied to all banks, would eliminate the need for special rules governing liquidity or funding (which would remain open to supervisory review, but not to binding constraints). 
There would also be no need for special restrictions on banking activities and operations. 
The most remarkable feature of the policy deliberations on prudential banking rules so far has been their delegation to the Basel Committee of Banking Supervisors and the banks themselves, both of which have a vested interest in preserving the existing system. 
Governments and parliaments have an obligation to launch a thorough review of the Basel rules, and to demand revisions that align them with the public interest. 

Betting the House 
Homeowners around the world effectively gamble on home prices. 
Their risks today are often big due to real estate bubbles in such glamour cities as London, Paris, Madrid, Rome, Istanbul, Moscow, Shanghai, Hangzhou, Sydney, Melbourne, Vancouver, Los Angeles, Las Vegas, Boston, New York, Washington, D.C., and Miami. 
Those bubbles may keep expanding, or may burst, leaving many homeowners mired in debt. 
The risk to home prices in the aftermath of a bubble is real and substantial. 
In the last cycle of real estate busts, real (inflation-corrected) home prices fell 46% in London in 1988-95, 41% in Los Angeles in 1989-1997, 43% in Paris in 1991-98, 67% in Moscow in 1993-97, and 38% in Shanghai in 1995-1999. All of these drops were eventually reversed, and all of these markets have boomed recently. 
But this does not guarantee that future drops will have a similar outcome. 
On the contrary, the future real value of our homes is fundamentally uncertain. 
Most homeowners are not gambling for pleasure. 
They are just buying real estate because they need it. 
But, because they do nothing to protect themselves against their real estate price risks, they are unwitting gamblers. 
In fact, home buyers in most countries do nothing to protect themselves – short of selling their homes – because there is nothing to be done. 
A market for real estate derivatives that can help balance these risks is only just beginning to appear. 
Well-developed markets for real estate derivatives would allow homeowners to kick the gambling habit. 
A liquid, cash-settled futures market that is based on an index of home prices in a city would enable a homeowner living there to sell in a futures market to protect himself. 
If home prices fall sharply in that city, the drop in the value of the home would be offset by an increase in the value of the futures contract. 
That is how advanced risk management works, as financial professionals know. 
But the tools needed to hedge such risks should be made available to everyone. 
Attempts to set up derivatives markets for real estate have -- so far -- all met with only limited success. 
In May 2003, Goldman, Sachs & Co. began offering cash-settled covered warrants on house prices in the United Kingdom, based on the Halifax House Price Index and traded on the London Stock Exchange. 
In October 2004, Hedgestreet.com began offering “hedgelets” on real estate prices in US cities – contracts that pay out if the rate of increase in home prices based on the OFHEO Home Price Index falls within a pre-specified range. 
My former student Allan Weiss and I have been campaigning since 1990 for better risk management institutions for real estate. 
In 1999, we co-founded a firm, Macro Securities Research, LLC, to promote the development of such institutions, working with the American Stock Exchange to create securities that would allow people to manage real estate as well as other risks. 
These will be long-term securities that pay regular dividends, like stocks, whose value is tied – either positively or negatively ­– to a real estate price index. 
Early this month, the Chicago Mercantile Exchange announced that it will also work with us to explore the development of futures markets in US metropolitan-area home prices. 
We hope to facilitate the creation of such markets in other countries as well. 
Because even many financially sophisticated homeowners will find direct participation in derivative markets too daunting, the next stage in the development of real estate risk management will be to create suitable retail products. 
For example, the derivative markets should create an environment that encourages insurers to develop home equity insurance, which insures homeowners not just against a bust but also against drops in the market value of the home. 
Such insurance ­should be attractive to homeowners if it is offered as an add-on to their existing insurance policies. 
Derivatives markets for real estate should also facilitate the creation of mortgage loans that help homeowners manage risks by, say, reducing the amount owed if a home’s value drops. 
Such products should appeal to homebuyers when the mortgage is first issued. 
Insurance companies and mortgage companies ought to be willing to offer such products if they can hedge the home-price risks in liquid derivative markets. 
Creating these retail products will require time, experimentation, and some real innovation. 
Over the next decade, we might expect that a broad spectrum of insurance, lending, and securities companies will become involved. 
As these retail products start to take shape, they will spur increased activity in the derivative markets. 
As the new risk-management industry develops, its components will gradually boost each other. 
These developments offer hope that current and future homeowners will be spared the agony of worrying about the vicissitudes of the real estate market. 
They will be able to leave the game of real estate speculation to professionals and rest assured about the value that they have accumulated in their homes. 
That is good news, because there is a pretty strong chance that we are going to see major price declines in a number of cities around the globe in the next few years, and these price declines will cause real pain to many homeowners. 
But if the momentum toward better risk management continues, it will be the last real estate cycle in which homeowners are unable to protect themselves. 

Betting With the House’s Money 
Many people have been asking why the dollar hasn’t crashed yet. 
Will the United States ever face a bill for the string of massive trade deficits that it has been running for more than a decade? 
Including interest payments on past deficits, the tab for 2006 alone was over $800 billion dollars – roughly 6.5% of US gross national product. 
Even more staggeringly, US borrowing now soaks up more than two-thirds of the combined excess savings of all the surplus countries in the world, including China, Japan, Germany, and the OPEC states. 
Foreigners are hardly reaping great returns on investing in the US. 
On the contrary, they typically get significantly lower returns than Americans get on their investments abroad. 
In an era in which stock and housing prices are soaring, the central banks of Japan and China are holding almost two trillion dollars worth of low-interest bonds. 
A very large share of these are US treasury bonds and mortgages. 
This enormous subsidy to American taxpayers is, in many ways, the world’s largest foreign aid program. 
If America’s competitive position is so weak, what magic is holding up the dollar? 
Most sober analysts have long been projecting a steady trend decline in the dollar against the currencies of America’s trading partners, especially in Asia and emerging markets. 
So why hasn’t more adjustment taken place already? 
The first answer, of course, is that the trade-weighted dollar has fallen – by more than 15% in real terms since its peak in early 2002. 
Yet the US deficits have persisted, and even risen, since then. 
The real driving force has been two-fold. 
First and foremost, America’s government and consumers have been engaged in a never-ending consumption binge. 
On the consumer side, this is quite understandable. 
With over 80% home ownership, the epic boom in housing prices of the last ten years has spread deep into the American middle class. 
Equity holdings are somewhat more concentrated, but many middle class Americans have still benefited indirectly through their pension funds. 
Overall, after almost 25 years of stunning prosperity, punctuated by only two mild recessions, most Americans feel pretty confident about their economic situation. 
Unemployment is at a cyclical low, and the economy appears to be less volatile than at any point in modern history. 
So it is not surprising that private consumption continues to hold up even as US economic growth has shifted into lower gear. 
People have enjoyed such huge capital gains over the past decade that most feel like gamblers on a long winning streak. 
By now, they see themselves as playing with the house’s (or their houses’) money. 
It is less easy to rationalize why the US government is continuing to run budget deficits despite a cyclical boom. 
When a fiscally responsible government launches a war, it typically cuts back on other domestic expenditures and raises taxes. 
The Bush administration did the opposite. 
It may not be good economics, but the strategy proved to be good politics, for a time. 
Unfortunately, it is unlikely the new Democratic majority in Congress will do much about it. 
Of course, it takes two to tango. 
In order for the US economy to run deficits with the world, other countries must be willing to spin off a counterbalancing supply of savings. 
Ben Bernanke, the US Federal Reserve chairman, once famously pinned the whole US current account deficit on a “global savings glut.” 
But it would be more accurate to say that there is global investment shortfall, with investment trending downwards despite the upward trend in global growth. 
This investment shortfall is due to many factors, but perhaps the main one is that there are substantial medium-term institutional roadblocks to investment in many developing countries, where long-term returns now seem to be by far the highest. 
The net result is that money is being parked temporarily in low-yield investments in the US, although this cannot be the long-run trend. 
What then is future of the dollar? 
As long as the status quo persists, with strong global growth and stunning macroeconomic stability, the US can continue to borrow and run trade deficits without immediate consequence. 
Over time, the dollar will still decline, but perhaps by no more than a couple of percent per year. 
Nevertheless, it is not hard to imagine scenarios in which the dollar collapses. 
Nuclear terrorism, a slowdown in China, or a sharp escalation of violence in the Middle East could all blow the lid off the current economic dynamic. 
In principle, one can also think of scenarios in which the dollar shoots up, but overall these seem less likely. 
In sum, the fact that the US trade balance has defied gravity for so many years has made it possible for the dollar to do so, too. 
But some day, the US may well have to pay the bill for its spendthrift ways. 
When that day arrives, Americans had better pray that their creditors will be as happy to accept dollars as they are now. 

Between Pax Americana and Pax Africana 
War and peace exist in Africa for reasons that are not always internal to Africa. 
Conflicts in other parts of the world often have huge repercussions across Africa. 
Four times as many Kenyans as Israelis died in November 2002 in the terrorist attack on the Paradise, an Israeli hotel in my hometown of Mombasa. 
Was this but another moment of blood-stained convergence between the politics of the Middle East and the politics of Islam in Africa? 
Here we must distinguish between national and international terrorism. 
Much of the terrorism in Africa in the second half of the 20 th century targeted the colonial powers and the European minority regimes that were their legacy. 
Kenya, for example, won its independence partly in an anti-colonial war of liberation in which both the British colonial forces and the Mau Mau movement resorted to terrorism. 
In retrospect, "national" terrorism in Africa was a form of warfare that must be judged within its political and moral context, and by its ultimate results. 
Kenya's Mau Mau war delivered independence in 1963; the Algerian revolution liberated that country in 1962; anti-colonial wars in Angola, Mozambique, and Guinea-Bissau destroyed the Portuguese empire in 1974; the anti-UDI struggle in Rhodesia (Zimbabwe) ended white rule; and the anti-apartheid struggle in South Africa finally triumphed against the apartheid racial order. 
Unlike anti-European guerilla war and anti-colonial terrorism in Africa, anti-American and anti-Zionist terrorism in the Middle East has led nowhere. 
Yet its brutality has often caught Africa in the crossfire. 
In order to kill twelve Americans in an attack on the US Embassy in August 1998, Middle Eastern terrorists killed some two hundred Kenyans in Nairobi. 
Far more Tanzanians than Americans were killed and wounded when the US Embassy in Dar es Salaam was targeted at the same time. 
Sudan bore the brunt of US retaliation, when President Bill Clinton ordered the bombing of an apparently harmless pharmaceutical factory near Khartoum as retaliation for an Osama bin Laden sponsored terrorist attack. 
Indeed, violence between Americans and Middle Easterners has been spilling over into Africa for decades. 
Before Clinton, President Ronald Reagan ordered the bombing of Tripoli and Benghazi in Libya in 1986 in retaliation for the bombing of a German disco in which several Americans were killed. 
Similarly, many Africans were killed at the World Trade Center on September 11, 2001--Senegalese hawkers, Nigerian investors, Ethiopian or Eritrean drivers, Ghanaian students, Egyptian and South African tourists, and others. 
Security forces throughout the continent subsequently opened their doors to the US Federal Bureau of Investigation and Central Intelligence Agency. 
At that moment, Pax Americana entered Africa, forging an alliance with the governments and people long struggling to establish a Pax Africana . 
The FBI reportedly arrived in Tanzania with the names of 60 Muslims selected for interrogation. 
The Kenyan authorities, eager to please the US, were tempted to hand over Kenyan citizens on the slightest encouragement. 
The terrorist attacks on New York and Washington of September, 2001 and their aftermath may exacerbate tensions not only between pro-Western and anti-Western schools of thought in Africa, but also between Christians and Muslims. 
A demonstration by Nigerian Muslims in Kano against the US war in Afghanistan provoked stone throwing by Nigerian Christians. 
Churches and mosques were soon being burned in communal riots. 
Moreover, efforts by the US to unite African governments against terrorism may merely bolster authoritarianism. 
The pressure on African governments to enact legislation against terrorism may pose new threats to civil liberties at the very moment when democratization is gathering momentum. 
In the war on terror, it seems, Africa's dictators may find it easier to justify continuing tyranny. 
Because the thousand-year-old city of Mombasa historically had a superb natural harbor, it was fought over many times--by Arabs, the Portuguese, Zanzibaris, the Mazrui, the British, and others. 
There was a time when it was called "Mvita," the Isle of War. 
Even now, the Swahili dialect of Mombasa is called Ki-mvita, and its people coined the proverb "Ndovu wawili wakipigana, ziumiazo na nyasi" [When two elephants fight, it is the grass that suffers]. 
Since the attack on the Paradise hotel, Mombasa has not reverted to its ancient identity of Mvita, the Isle of War, because only a single elephant, the US, with its protégé, Israel, exists. 
But when even a lone elephant does a war dance, the grass still feels the pain. 
Mombasa's anguish, economic as well as in terms of security, may have only just begun. 
Speedy action is needed to restore the sense of dignity of Coastal and Muslim Kenyans before Kenyan Islam is radicalized into a Black Intifada. 
Even speedier action is needed to solve the Israeli-Palestinian conflict, both for its own sake, and because its repercussions destabilize other parts of the world. 
But will American resources help to strengthen Pax Africana , or will American power simply turn it into a handmaiden of Pax Americana ? 
How can we avoid the Americanization of Pax Africana ? 
One solution is for the African states to evolve a common position and shared rules of engagement in the war on terrorism. 
Ideally, the US should deal with a South Atlantic Treaty Organization, consisting of African states that are allied against terrorism, rather than cutting bilateral deals with individual African countries. 
Above all, if Africa is to escape the crossfire of international terrorism, the trend towards establishing US military bases on the continent must be stopped. 

Beware of FDI Protectionism 
NEW YORK – During their most recent meetings, the G-8 took a strong stance against protectionist measures in the area of foreign direct investment (FDI), echoing calls for a moratorium in such measures issued earlier by the G-20. 
Both were right to do so. 
According to the United Nations Conference on Trade and Development, only 6% of all the changes in national FDI regulations around the world between 1992-2002 were in the direction of making the investment climate less welcoming. 
That figure doubled to 12% of all regulatory changes in 2003-2004, and almost doubled again, to 21% of all FDI regulatory changes, in 2005-2007. In Latin America, for example, some 60% of all FDI regulatory changes in 2007 were unfavorable to foreign investors. 
Overall, countries that had implemented at least one regulatory change that made the investment framework less welcoming in 2006-2007 accounted for some 40% of world FDI inflows during that period – an impressive figure that demonstrates that something very dubious is afoot. 
And these data refer to formal changes in laws and regulations; no data are available on the extent to which unchanged laws and regulations are implemented in a more restrictive manner, increasing informal barriers to the entry and operations of foreign firms. 
Of course, not every measure that makes the climate less welcoming for foreign direct investors is protectionist. 
Basically, there are two situations that should qualify. 
In the case of inward FDI, protectionism involves new official measures that are used to prevent or discourage investors from coming to or staying in a host country. 
For outward FDI, protectionism involves measures that require domestic companies to repatriate assets or operations to the home country, or that discourage certain types of new investments abroad. 
But the definition of FDI protectionism can become more complicated, because measures taken in the interest of legitimate public policy objectives – for example, protecting national security or increasing FDI’s contribution to the host economy – are not necessarily instances of it, even if they make the foreign-investment climate less hospitable. 
Nevertheless, even with this caveat, there has been a rise of FDI protectionism that predates the current financial crisis and recession. 
This suggests that a reevaluation of the costs and benefits of FDI was already underway, led, interestingly enough, by developed countries, which in the past had championed liberalization of entry and operational conditions for foreign investors and their protection under international law. 
For some countries, like the United States, this reevaluation is grounded in national security concerns (largely undefined) that arose in the aftermath of the terrorist attacks of September 11, 2001. 
But there also seems to be a bit of a reaction against the “new kids on the block,” namely multinational enterprises from emerging markets, especially when these are state-owned and seek to enter the US market through mergers and acquisitions. 
Hence the strengthening of the active screening mechanism of the Committee on Foreign Investment in the US. 
In the case of some other developed countries (for example, Canada, France, Germany), national security concerns extend to economic considerations and the protection of “national champions.” 
In these countries, too, screening mechanisms have been strengthened, and China and Russia, as well as some other emerging markets, are following suit. 
In some of these cases, legitimate public-policy objectives may well be involved. 
But the boundary line between such objectives and protectionism can be a very fine one. 
The financial crisis and recession may dampen the rise of FDI protectionism, as countries seek capital to shore up local firms and increase investment to help them promote economic recovery. 
But the global downturn may also accentuate protectionism, especially if nationalistic impulses gain the upper hand, perhaps stimulated by fire-sales of domestic assets (as we saw during the Asian financial crisis). 
The bottom line is that the investment climate for foreign direct investors is becoming less welcoming. 
While this is certainly not the dominant approach toward FDI, we need to be vigilant that it does not become so. 
What would be helpful in this respect is an objective FDI Protectionism Observatory that monitors FDI protectionist measures and names and shames countries that adopt them. 


Beware of Symbols 
Argentina's crisis has been heating up for a long time. 
So long has the country been in crisis, indeed, that the question is no longer if it may boil over, but when. 
The origins of Argentina's crisis date back to decisions taken in 1991, in the fight to contain the steep inflation that marked the death throes of the military junta. 
In that year, Domingo Cavallo, who already held the post of Secretary of the Treasury, took the highly symbolic decision to fix the value of the peso to the dollar through a fixed exchange rate. 
Moreover, he executed this decision in another highly symbolic way, by setting the rate of exchange at one peso for one dollar. 
As symbolism, this was fine. 
The new ``hard'' peso marked the end of Argentina's inflationary era, a time when the country showed itself, time and again, as incapable of controlling either its budget, its currency, its inflation or its exchange rate. 
This was to be the beginning of a new era, one in which a responsible, modern Argentina opened itself in a disciplined way to the United States and the world. 
But, as the ancient Greeks taught, the gods destroy by granting us our wishes or fulfilling them too completely. 
Without any doubt, Argentina's currency reform of a decade ago forms the roots of today's crisis. 
The reason is almost obvious: Argentina is not the United States, and the peso is not the dollar. 
Argentina is a little economy of the Southern hemisphere; the US is a large and diversified economy of the Northern hemisphere. 
Argentina exports cows and raw materials; 
America exports high tech and services. 
Argentina trades with Brazil, America with Japan. 
Argentina must struggle to attract capital; 
America sucks in capital from all over the world. 
For the two countries to have the same exchange rate is a crime against logic; it proved itself also a crime against Argentina. 
Until 1999, everything seemed to prove Domingo Cavallo right. 
Argentina's growth was fast, its inflation disappeared fast, too. 
Then, the inevitable boomerang occurred: a bitter combination of shocks shattered Argentina's growth: Brazil devalued its currency, the Real, by around 50%; the cost of raw materials, prime Argentine exports, fell sharply. 
All this, while the dollar was appreciating briskly, reflecting the boom of America's Clinton years. 
That combination was lethal. 
De facto, since 1999, growth has been negligible and Argentina has endured a thorough crisis. 
This current financial crisis, which now dominates everything in Argentina, is more recent and almost tangential. 
Under the influence of the recession, the budget deficit has ballooned and the creditors of Argentina's government have concluded that they would not get their money back. 
In reality, the budgetary situation is not so bad: despite today's recession, Argentina's budget deficit, save for interest payments, is only about 1% of GDP. 
The national debt-GDP ratio is less than 60 %, which is the average within the European Union. 
Signor Cavallo, who returned to the Treasury Department in order to save his baby, is right when he asserts that the budgetary problems are simply not as awful as many people believe. 
But Argentina's creditors, fearful of default, are demanding interest rates so high (around 50 % today) that there is no hope that the government can borrow at such rates. 
So default no longer seems a question of ``If'' but of ``When.'' 
This financial crisis will probably mark the end of the Cavallo experiment, which was promoted around the world. 
But the main crisis still ahead for Argentina is the economic one, which itself has lasted since 1999. 
Finding a route out of it will not be easy, for no escape seems obvious: Argentina's debt is now expressed in dollars and, as in Asia in 1997, a devaluation will increase the weight of the debt. 
Argentina now has just as good a chance to make things worse as to make them better. 
In economics (as in most other fields of human existence), it is better to beware of symbols. 

Beware of Wounded Lions 
CAMBRIDGE – G-20 leaders who scoff at the United States’ proposal for numerical trade-balance limits should know that they are playing with fire. 
The US is not making a demand as much as it is issuing a plea for help. 
According to a recent joint report by the International Monetary Fund and the International Labor Organization, fully 25% of the rise in unemployment since 2007, totaling 30 million people worldwide, has occurred in the US. 
If this situation persists, as I have long warned it might, it will lay the foundations for huge global trade frictions. 
The voter anger expressed in the US mid-term elections could prove to be only the tip of the iceberg. 
Protectionist trade measures, perhaps in the form of a stiff US tariff on Chinese imports, would be profoundly self-destructive, even absent the inevitable retaliatory measures. 
But make no mistake: the ground for populist economics is becoming more fertile by the day. 
The new US Congress is looking for scapegoats for the country’s economic quagmire. 
And, with a president who has sometimes openly questioned rigid ideological adherence to free trade, anything is possible, especially in the run-up to the 2012 presidential election. 
If trade frictions do boil over, policymakers may look back on today’s “currency wars” as a minor skirmish in a much larger battle. 
In light of America’s current difficulties, its new proposal for addressing the perennial problem of global imbalances should be seen as a constructive gesture. 
Rather than harping endlessly on China’s currency peg, which is only a small part of the problem, the US has asked for help where it counts: on the bottom line. 
True, today’s trade imbalances are partly a manifestation of broader long-term economic trends, such as Germany’s aging population, China’s weak social safety net, and legitimate concerns in the Middle East over eventual loss of oil revenues. 
And, to be sure, it would very difficult for countries to cap their trade surpluses in practice: there are simply too many macroeconomic and measurement uncertainties. 
Moreover, it is hard to see how anyone – even the IMF, as the US proposal envisions – could enforce caps on trade surpluses. 
The Fund has little leverage over the big countries that are at the heart of the problem. 
Still, even if other world leaders conclude that they cannot support numerical targets, they must recognize the pain that the US is suffering in the name of free trade. 
Somehow, they must find ways to help the US expand its exports. 
Fortunately, emerging markets have a great deal of scope for action. 
India, Brazil, and China, for example, continue to exploit World Trade Organization rules that allow long phase-in periods for fully opening up their domestic markets to developed-country imports, even as their own exporters enjoy full access to rich-country markets. 
Lackluster enforcement of intellectual property rights exacerbates the problem considerably, hampering US exports of software and entertainment. 
A determined effort by emerging-market countries that have external surpluses to expand imports from the US (and Europe) would do far more to address the global trade imbalances over the long run than changes to their exchange rates or fiscal policies. 
Emerging markets have simply become too big and too important to be allowed to play by their own set of trade rules. 
Their leaders must do more to tackle entrenched domestic interests and encourage foreign competition. 
Germany might rightly argue that it has followed a relatively laissez-faire attitude towards trade, and that it should not be punished, despite its chronic surpluses. 
After all, it has stood by as the euro has soared recently. 
Nevertheless, Germany is a huge winner from global free trade, and it is hardly without tools and means to reduce its surpluses – for example, by pressing to de-regulate its highly rigid product markets. 
Given all its recent economic challenges, it is remarkable how, so far, the US has remained steadfast in its support of free trade. 
Even in cases where its rhetoric has sent mixed messages, US policies have been decidedly liberal. 
Consider the long-suffering US-Colombia free-trade negotiations. 
Although one would never know it from listening to the Congressional debate, the main effect of an agreement would be to lower Colombian barriers on US goods, not vice versa. 
Colombian goods already enjoy virtual free entry to the US market, while Colombian consumers would benefit enormously if their country were to reciprocate by opening its markets to US goods and services. 
This has not happened – one of countless examples of obstacles faced by US companies around the world. 
All should be eliminated. 
American hegemony over the global economy is perhaps in its final decades. 
China, India, Brazil, and other emerging markets are in ascendancy. 
Will the transition will go smoothly and lead to a global economy that is both fairer and more prosperous? 
However much we may hope so, the current rut in which the US finds itself could prove to be a problem for the rest of the world. 
Unemployment in the US is high, while fiscal and monetary policies have been stretched to their limits. 
Exports are the best way out, but the US needs help. 
Otherwise, simmering trade frictions could suddenly throw globalization sharply into reverse. 
It wouldn’t be the first time. 

Beyond Bin Laden 
NEW YORK – The killing of Osama bin Laden by United States special forces constitutes a significant victory over global terrorism. 
But it is a milestone, not a turning point, in what remains an ongoing struggle with no foreseeable end. 
The significance of what was accomplished stems in part from Bin Laden’s symbolic importance. 
He has been an icon, representing the ability to strike with success against the US and the West. 
That icon has now been destroyed. 
Another positive consequence is the demonstrated effect of counter-terrorism operations carried out by US soldiers. 
As a result, some terrorists, one hopes, will decide to become former terrorists – and some young radicals might now think twice before deciding to become terrorists in the first place. 
But any celebration needs to be tempered by certain realities. 
Bin Laden’s demise, as welcome as it is, should in no way be equated with the demise of terrorism. 
Terrorism is a decentralized phenomenon – in its funding, planning, and execution. 
Removing Bin Laden does not end the terrorist threat. 
There are successors, starting with Ayman al-Zawahiri in Al Qaeda, as well as in autonomous groups operating out of Yemen, Somalia, and other countries. 
So terrorism will continue. 
Indeed, it could even grow somewhat worse in the short run, as there are sure to be those who will want to show that they can still strike against the West. 
The best parallel that I can think of when it comes to understanding terrorism and how to deal with it is disease. 
There are steps that can and should be taken to attack or neutralize certain types of viruses or bacteria; to reduce vulnerability to infection; and to reduce the consequences of infection if, despite all of our efforts, we become ill. 
Disease is not something that can be eliminated, but often it can be managed. 
There are obvious parallels with terrorism. 
As we have recently witnessed, terrorists can be attacked and stopped before they can cause harm; individuals and countries can be defended; and societies can take steps to bolster their resilience when they are successfully attacked, as on occasion they inevitably will be. 
These elements of a comprehensive counter-terrorism strategy can reduce the threat to manageable, or at least tolerable, levels. 
But tolerable is not good enough when it comes to protecting innocent life. 
We want to do better. 
The answer is to be found in the realm of prevention. 
More must be done to interrupt the recruitment of terrorists, thereby reducing the threat before it materializes. 
Most terrorists today are young and male. 
And, while the overwhelming majority of the world’s Muslims are not terrorists, many of the world’s terrorists are Muslim. 
It would help enormously in this regard if Arab and Muslim political leaders spoke out against the intentional killing of men, women, and children by anyone or any group for political purposes. 
There is also a pivotal role here for religious leaders, educators, and parents. 
Terrorism must be stripped of any legitimacy that it may be viewed as having. 
One potential positive development here stems from the political changes that we are seeing in many parts of the Middle East. 
There is a greater chance than before that young people will become more integrated in their own societies (and less susceptible to the appeal of extremism) if they enjoy greater political and economic opportunity. 
Pakistan will most likely prove critical in determining the future prevalence of terrorism. 
Unfortunately, while it is home to some of the world’s most dangerous terrorists, it is decidedly less than a full partner in the struggle against it. 
Some parts of the Pakistani government are sympathetic to terrorism and unwilling to act against it; other parts simply lack the capacity to act against it effectively. 
Capacity is much easier to provide than will. 
The outside world can and should continue to provide assistance to help Pakistan acquire the strength and skills required to tackle modern-day terrorists. 
But no amount of external assistance can compensate for a lack of motivation and commitment. 
Pakistani leaders must choose once and for all. 
It is not enough to be a limited partner in the struggle against terror; 
Pakistan needs to become a full partner. 
There will be Pakistanis who protest against the recent American military action, arguing that it violated Pakistan’s sovereignty. 
But sovereignty is not an absolute; it involves obligations as well as rights. 
Pakistanis must understand that they will forfeit some of those rights if they do not meet their obligation to ensure that their territory is not used to shelter terrorists. 
If things do not change, the sort of independent military operation carried out by US soldiers will become less the exception than the rule. 
This is not nearly as desirable an outcome as Pakistan joining what should be a common international effort. 
At stake is not only assistance, but Pakistan’s own future, for, in the absence of genuine commitment to counter-terrorism, it is only a matter of time before the country falls victim to the infection that it refuses to treat. 

Beyond Fukushima 
VIENNA – Nuclear power has become safer since the devastating accident one year ago at Fukushima, Japan. 
It will become safer still in the coming years, provided that governments, plant operators, and regulators do not drop their guard. 
The accident at Fukushima resulted from an earthquake and tsunami of unprecedented severity. 
But, as the Japanese authorities have acknowledged, human and organizational failings played an important part, too. 
For example, Japan’s nuclear regulatory authority was not sufficiently independent, and oversight of the plant operator, TEPCO, was weak. 
At the Fukushima site, the backup power supply, essential for maintaining vital safety functions such as cooling the reactors and spent fuel rods, was not properly protected. 
Training to respond to severe accidents was inadequate. 
There was a lack of integrated emergency-response capability at the site and nationally. 
Human and organizational failings are not unique to Japan. 
Fukushima was a wake-up call for all countries that use nuclear power. 
It prompted serious soul-searching and recognition that safety can never be taken for granted anywhere. 
Key causes of the accident have been identified. 
Indeed, governments, regulators, and plant operators around the world have begun learning the right lessons. 
A robust international nuclear safety action plan is being implemented. 
As a result, the likelihood of another disaster on the scale of Fukushima has been reduced. 
What, exactly, has changed? 
Perhaps most importantly, the worst-case assumptions for safety planning have been radically revised. 
At Fukushima, the reactors withstood a magnitude 9.0 earthquake – far more powerful than they were designed to tolerate. 
But the plant was not designed to withstand the 14-meter-high tsunami waves that swept over its protective sea wall less than an hour later. 
In the aftermath of Fukushima, defenses against multiple severe natural disasters, including earthquakes and tsunamis, are being strengthened at nuclear facilities all over the world. 
Measures are being taken to improve preparedness for prolonged power outages, protect backup power sources, and ensure the availability of water for cooling even under severe accident conditions. 
Global nuclear safety standards are being reviewed. National and international emergency-response capabilities are being upgraded. 
Plant operators and national regulators are being scrutinized more critically. 
Countries are opening their plants to more –amp#160;and more thorough – international safety reviews. 
Despite the accident, global use of nuclear power looks set to grow steadily in the next 20 years, although at a slower rate than previously forecast. 
The reasons for this have not changed: rising demand for energy, alongside concerns about climate change, volatile fossil-fuel prices, and the security of energy supplies. 
It will be difficult for the world to achieve the twin goals of ensuring sustainable energy supplies and curbing greenhouse gases unless nuclear power remains an important part of the global energy mix. 
The International Atomic Energy Agency expects at least 90 additional nuclear-power reactors to join the 437 now in operation globally by 2030. 
Although some countries abandoned or scaled back their nuclear energy plans after Fukushima, major users of nuclear power, such as China, India, and Russia, are going forward with ambitious expansion plans. 
Many other countries, mainly in the developing world, are considering introducing nuclear power. 
Nuclear safety is of the utmost importance to both established users and newcomers. 
It matters to countries that have decided to phase out nuclear power, because their plants will continue to operate for decades and will need to be decommissioned, with nuclear waste stored safely. 
And it matters to countries that are firmly opposed to nuclear power, as many of them have neighbors with nuclear-power plants. 
Countries planning new nuclear-power programs must recognize that achieving their goals is a challenging, long-term undertaking. 
They need to invest considerable time and money in training scientists and engineers, establishing genuinely independent, well-funded regulators, and putting in place the necessary technical infrastructure. 
Some countries still have shortcomings in this regard. 
Nonetheless, contrary to popular perception, nuclear power has a good overall safety record. 
New reactors being built today incorporate significantly enhanced safety features, both active and passive, compared to the Fukushima generation of reactors. 
But, in order to regain and maintain public confidence, governments, regulators, and operators must be transparent about the benefits and risks of nuclear power – and honest when things go wrong. 
The fact that an accident such as Fukushima was possible in Japan, one of the world’s most advanced industrial countries, is a reminder that, when it comes to nuclear safety, nothing can be taken for granted. 
Complacency can be deadly. 
The safety improvements seen in the past 12 months can only be a start. 
We must not slip back into a “business as usual” approach as Fukushima recedes from memory. 

Beyond Pandemics 
NEW YORK – The World Health Organization has now officially declared the H1N1 flu virus to be a global pandemic. 
Governments, international organizations, and people around the world are rightly focused on fighting it. 
The speed with which the H1N1 virus has spread to almost every continent highlights our mutual interdependence. 
Nowadays, the impact of disease in one country is ultimately felt by all. 
Any effective response, therefore, must be grounded in a sense of global solidarity and enlightened self-interest. 
We must recognize, yet again, that we are all in this together. 
When a new disease sweeps the world, access to vaccines and anti-viral medicines cannot be limited to those who can pay for them. 
Wealthy nations cannot hope to remain healthy if poorer nations do not. 
Virus samples and information must be shared openly and quickly. 
Governments and major pharmaceutical companies must be sure that poorer nations receive the medical supplies they need. 
Even as we cope with today’s challenge, however, we must look ahead. 
Beyond this pandemic, there almost certainly lurks another down the road – potentially far more serious. 
The same principles of solidarity must guide us as we mobilize to meet the other health challenges that afflict the world populations, and the poorest in particular. 
Around the world, one woman dies every minute in childbirth. 
More than a billion people continue to suffer from neglected tropical diseases – often easy to prevent and easy to control. 
Just as we once eliminated smallpox, so can we eliminate others. 
It also bears remembering that 60% of the world’s population dies of non-communicable illnesses such as cancer or heart disease. 
That is why, in speaking about development and the stability of nations, we place such emphasis on health, particularly of the most vulnerable, and why, at a time of multiple crises, we will take up the issue of health this week in New York. 
Continuing to invest in global health makes sense both in terms of lives and dollars saved. 
Healthy people are more productive. 
They take fewer days off work. 
They live longer, go further in school, and tend to bear fewer and more prosperous children as they invest more in the children they do have. 
Studies have shown that investments in health care can yield a six-fold economic return. 
To offer but one example: the global impact of maternal and newborn deaths has been estimated at US$15 billion a year in lost productivity. 
And yet, when hard times hit, spending on health is often among the first things to be cut. 
During past recessions, especially in developing economies, the best care has tended to go to the wealthy; the poor, too often, have been left to fend for themselves. 
But the social and economic health of any society depends on the physical health of all its members. 
When governments cut back on primary health care for their poorer citizens, the entire society ultimately pays a high price. 
Today, large parts of Africa, Latin America, and Asia have still not recovered from mistakes made during previous economic downturns. 
Nothing is more important than investing in maternal health. 
In the poorest countries, especially, women make up the fabric of society. 
Disproportionately, they farm the land, carry the water, raise and educate the children, and care for the sick. 
Investing in maternal health should thus be a high priority. 
Yet, of all the Millennium Development Goals, maternal health is the slowest to be achieved. 
As a result, worldwide mortality rates in 2005 were 400 maternal deaths per 100,000 live births – barely changed since 1990. 
In Africa, the ratio is 900 per 100,000. 
The harsh reality behind these figures is this: mothers, very often young, are dying for lack of what most of us take for granted in the twenty-first century – access to affordable health care. 
Maternal health care is also a barometer of how well a health system functions. 
If women have access to hospitals and clinics, they are less likely to die in childbirth. 
These hospitals and clinics in turn reduce the burden of illness and deaths from other causes as well. 
Failure to mobilize the resources and muster the political will to put an end to this senseless tragedy would be unforgivable. 
We have made progress on so many other fronts. 
We are within a few years of ending deaths from malaria. 
Mass immunization has largely eliminated polio. 
Thanks to new programs of oral rehydration and improved water and sanitation, we have seen marked gains in treating dysentery and other parasitic diseases, contributing to a 27% decline between 1990 and 2007 in mortality rates for children under five. 
Yes, the world faces its first influenza pandemic in more than 40 years. 
We must remain on guard against changes in the virus. 
We must also be prepared for potentially different impacts in parts of the world where malnutrition, HIV/AIDS, and other serious health conditions are prevalent. 
In short, we must remain vigilant and continue actively to manage this pandemic. 
At the same time, the pandemic reminds us that we need to think and act beyond it. 
Only by doing so can we truly protect our people, our countries, our economy, and our global society. 

Beyond Revolutionary Disillusion 
PRAGUE - All revolutions, in the end, turn from euphoria to disillusion. 
In a revolutionary atmosphere of solidarity and self-sacrifice, people tend to think that when their victory is complete, paradise on Earth is inevitable. 
Of course, paradise never comes, and – naturally - disappointment follows. 
That seems to be the case in Ukraine today, as its people prepare to vote for a new parliament little more than a year after their successful Orange Revolution. 
Post-revolutionary disillusion, especially after the revolutions against communism - and in Ukraine's case revolution against post-communism - is rooted in psychology. 
New circumstances imposed new challenges for most people. 
Formerly, the state decided everything, and many people, particularly in the middle and older generation, began to see freedom as a burden, because it entailed continuous decision-making. 
I have sometimes compared this psychological ennui to my own post-prison situation: for years I yearned for freedom, but, when finally released, I had to make decisions all the time. 
Confronted suddenly with many options every day, one starts to feel a headache, and sometimes unconsciously wants to return to prison. 
This depression is probably inevitable. 
But, on a societal scale, it is eventually overcome, as new generations grow up. 
Indeed, 15 years after the disintegration of Soviet Union, a new catharsis seems underway, and Ukraine’s Orange Revolution was part of that. 
As Ukraine so clearly shows, the process of self-liberation from communism was, by definition, associated with a gigantic privatization. 
Naturally, members of the old establishment, with their inside knowledge and connections, gained much of the privatized property. 
This "inevitable" process poisoned political life and the media, which led to a strange state of limited freedom and a mafia-like environment. 
The shadings differed from country to country in the post-communist world, but the new generations rising in these societies now seem to be fed up with it. 
Ukraine’s Orange Revolution, as well as Georgia’s Rose Revolution, seems to confirm this. 
While revolutions in the late 1980’s and early 1990’s were directed against totalitarian communist regimes, nowadays they aim to get rid of this mafia-type post-communism. 
But to make the change irreversible, a truly independent and incorruptible judiciary is essential. 
Too often in politically connected cases, suspicions and charges of wrongdoing are not pursued to an unambiguous conclusion. 
This is understandable: the communist justice system was manipulated to serve the regime, and thousands of judges cannot be replaced overnight. 
Although it is clear that a return to the old Soviet Union is not possible, some blame Russian influence for the disillusion in Ukraine. 
Yes, there are some alarming elements in Russian policy, mostly because Russia has never really known where it begins and where it ends. 
It either owned or dominated many other nations, and now it is only with grudging reluctance dealing with the loss of them all. 
Some of Russian President Vladimir Putin’s statements seem to recall the Soviet era with nostalgia. 
Indeed, he recently called the disintegration of the Soviet Union a tragic mistake. 
But Soviet nostalgia has far more to do with Russia’s traditional Great Power ambitions than with communism. 
Russia, I believe, should clearly say – and the international community should clearly say to Russia – that it has defined borders that will not be questioned, because disputed borders lie at the core of most conflicts and wars. 
On the other hand, I don’t want to demonize Putin. 
He may lower oil prices for someone close to him, like Belarus’ dictator Alexander Lukashenko, and insist on a market price for someone else, but that’s basically all he can do. 
I don't envision any serious conflict beyond that. 
The promise of Western integration is one reason that conflict seems impossible, for it is a question of geography as much as shared values and culture. 
Ukraine belongs to a united European political entity; the values that Ukraine endorses and that are embedded in its history are European to the core. 
The Czech experience shows that implementing all of the European Union’s norms so as to be ready to qualify for membership takes some time. 
But in principle, Ukraine can succeed as well. 
Much the same is true for Ukraine and NATO. 
Partnerships based on shared rules, standards, and values are the heartbeat of modern security. 
Moreover, NATO in a way defines the sphere of a civilization, which of course doesn’t mean that NATO’s community is better than any other. 
But it’s a community that is good to belong to – provided that people want it and that it makes historical sense for them. 
NATO membership carries obligations, because situations may arise – and we have already experienced them – when NATO follows a United Nations appeal and conducts an out-of-area military intervention where, for example, genocide is being committed. 
In other words, NATO membership, like EU membership, comes at a price. 
However, I think that the advantages far outweigh any possible disadvantages. 
It is up to Ukrainians to decide this for themselves and thus to overcome post-revolutionary disillusion. 

Beyond the Carbon Crusade 
COPENHAGEN – At its heart, much of the debate over climate change deals with just one divisive and vexing question: How big should cuts in carbon emissions be? 
This narrow focus makes the debate unconstructive. 
Everybody wants to prevent global warming, and the real question is: How can we do that best? 
We should be open to other ways to stop warming – such as cutting carbon emissions in the future instead of now, or focusing on reducing emissions of other greenhouse gases. 
Global warming will create significant problems, so carbon reductions offer significant benefits. 
Cutting carbon emissions, however, requires a reduction in the basic energy use that underpins modern society, so it will also mean significant costs. 
The prominent climate economist Professor Richard Tol of Hamburg University has analyzed the benefits and costs of cutting carbon now versus cutting it in the future. 
Cutting early will cost $17.8 trillion, whereas cutting later will cost just $2 trillion. 
Nonetheless, the reduction in CO2 concentration – and hence temperature – in 2100 will be greater from the future reductions. 
Cutting emissions now is much more expensive, because there are few, expensive alternatives to fossil fuels. 
Our money simply doesn’t buy as much as it will when green energy sources are more cost-efficient. 
Tol strikingly shows that grand promises of drastic, immediate carbon cuts – reminiscent of the call for 80% reductions by mid-century that some politicians and lobbyists make – are an incredibly expensive way of doing very little good. 
All the academic models show that, even if possible, limiting the increase in global temperature to 2oC, as promised by the European Union and the G-8, would cost a phenomenal 12.9% of GDP by the end of the century. 
This would be the equivalent of imposing a cost of more than $4,000 on each inhabitant every year, by the end of the century. 
Yet, the damage avoided would likely amount to only $700 per inhabitant. 
The real cost of ambitious, early, and large carbon-cutting programs would be a reduction in growth – particularly damaging to the world’s poor – to the tune of around $40 trillion a year. 
The costs would also come much sooner than the benefits and persist much longer. 
For every dollar that the world spends on this grand plan, the avoided climate damage would only be worth two cents. 
It would be smarter to act cautiously by implementing a low carbon tax of about $0.5 per ton – about 0.5 US cent per gallon of gas or 0.1 euro-cent per litre of petrol – and increase it gradually through the century. 
This would not cut carbon emissions spectacularly, but nor would it be a spectacular waste of public funds. 
Each dollar would avoid $1.51 of global warming damages – a respectable outcome. 
Taxing fossil fuels to reduce carbon emissions is a sensible part of the solution to climate change, but it is not the only or best way to prevent warming. 
There are other ways to cut carbon from the atmosphere. 
One of these is protecting forests, since deforestation accounts for 17% of emissions. 
If we are actually serious about grand promises to keep global temperature rises below 2ºC, we obviously need to find ways of making this cheaper. 
Professor Brent Sohngen of Ohio State University points out that forests could be important: including forestry in the control of greenhouse gases could somewhat reduce costs. 
Moreover, although politicians focus nearly exclusively on cutting carbon emissions, CO2 is not the only gas causing warming. 
The second-biggest culprit is methane. 
Cutting methane is actually cheaper than cutting carbon. 
And because methane is a much shorter-lived gas than CO2, we can prevent some of the worst of short-term warming through its mitigation. 
Agricultural production accounts for half of anthropogenic methane, but wastewater systems, landfills, and coal mining also create the gas. 
Professor Claudia Kemfert of the German Institute for Economic Research (DIW) argues that spending $14 billion to $30 billion to reduce methane would create benefits – from the reduction in warming – between 1.4 and three times higher. 
We could also put a bigger focus on reducing black carbon, considered responsible for as much as 40% of current net warming and one-third of Arctic melting. 
Black carbon is essentially the soot produced by diesel emissions, and – in developing countries – by the burning of organic matter to cook food and stay warm. 
It can be eliminated with cleaner fuels and new cooking technologies. 
Doing so would yield other benefits as well. 
Sooty pollution from indoor fires claims several million lives each year, so reducing black carbon would be a life-saver. 
A team of economists led by David Montgomery estimates that spending $359 million could realistically slash 19% of black carbon emissions. 
This would have a significant cooling impact on the planet, and would save 200,000 lives from pollution. 
The net annual benefits would run into several billion dollars, which equates to $3.60 worth of avoided climate damage for each dollar spent. 
Costs and benefits matter. 
The best solution to climate change achieves the most good for the lowest cost. 
With this as our starting point, it is clear that a narrow focus on short-term carbon emission cuts is flawed. 
The most pertinent question of all is: Why don’t we choose a solution to global warming that will actually work? 

Beyond the Death Penalty Debate 
China’s decision to execute the head of its drug regulatory agency has rekindled international debate about capital punishment. 
It is an age-old question, one that harks back to Plato, who in his “Laws” saw the need to punish by death those who commit egregious crimes. 
Supporters of capital punishment usually put forward three arguments to justify state-sanctioned killing of those who take the life of another. 
First, there is the old law of “an eye for an eye, a tooth for a tooth.” 
In the words of Immanuel Kant, not some Texas governor, no other “penalty is capable of satisfying justice.” 
Then there is a utilitarian argument: capital punishment deters many criminals from murder. 
Furthermore, killing murderers prevents recidivism: if released from prison, they might kill again. 
The third argument is also utilitarian, although of a lower quality: the state saves money by killing murderers instead of keeping them in prison for life at the expense of the community. 
Abolitionists respond with two ethical arguments. 
First, in a modern democracy, punishment must be not only retributive, but should also try to rehabilitate the criminal in order to enable him to live in society with other human beings. 
But, while this is a compelling argument, those who know modern prisons recognize that many inmates are not susceptible to improvement – a fact that cannot be attributed only to conditions of detention. 
The second ethical argument is based on the commandment “thou shalt not kill” which also enjoins the state from killing. 
But this argument is undermined by the fact that the state can resort to lethal force to prevent serious crimes, or to fight a war or rebellion. 
Opponents of the death penalty also rely on utilitarian arguments. 
The death penalty is irreversible. 
If a convict turns out to be innocent, his execution cannot be undone. 
Moreover, abolitionists assail the deterrent effect of the death penalty. 
Thucydides, in recounting the Athenians’ discussion of what penalty to impose on the rebellious Mytilenians, noted that “the death penalty has been laid down for many offenses, yet people still take risks when they feel sufficiently confident; it is impossible for human nature, once seriously set upon a certain course, to be prevented from following that course by the force of law or by any other means of intimidation whatsoever.” 
Criminologists have shown, statistically, that in US states where convicts are executed, serious crimes have not diminished. 
Other criminologists argue that this finding, if well-founded, should then apply to any criminal law: every day, criminal prohibitions are infringed; yet if we did not have such prohibitions, crimes would be even more rampant. 
In their view, capital punishment serves at least to restrain the homicidal leanings of human beings. 
So the death penalty debate boils down to an exchange of conflicting ethical and utilitarian views. 
But we should not sit idly by and refrain from taking sides. 
I, for one, believe that the death penalty radically negates the doctrine of human rights, which is founded on respect for life and the dignity of human beings. 
But, whether or not you oppose the death penalty, two lessons can be drawn from the debate. 
First, the fight for human dignity and respect for life, as with any struggle for human rights, is set in motion and tenaciously pursued by members of civil society, by individuals more than by states. 
It was a representative of the Age of Reason, Cesare Beccaria, who first advocated in 1764, in a few pages of a seminal booklet, the abolition of capital punishment. 
Indeed, it is thanks to a few thinkers and activists that states have gradually moved away from age-old tenets. 
As Tommaso Campanella, a great philosopher who spent much time in prison and was tortured because of his ideas, wrote a few centuries ago, “history is changed first by the tongue and then by the sword.” 
Nowadays, it is associations such as Amnesty International and Hands Off Cain that push states to abolish capital punishment. 
The second lesson is that the death penalty debate should not absorb all our attention. 
If we intend to abolish the gallows, we should also fight for the prevention of crime and against the inhumanity of many prisons. 
After all, what is the point of suggesting imprisonment as an alternative to electrocution, if inmates are subjected to inhuman and degrading treatment? 
How can we ignore that a high number of inmates commit suicide – self-inflicted capital punishment – to escape the inhumanity of their imprisonment? 
How can we ignore that many states today kill not only through legal punishment, but also by murdering and massacring in international or civil wars, or by allowing starvation? 
In short, opposition to the death penalty cannot be an end in itself, for it is only one element of a more general fight for human dignity. 

Beyond the Gender Gap 
Last Spring, The Economist trumpeted “womanpower” as the driving force for the world economy. 
But if Europe’s economy is to become more competitive and innovative, it is not enough that women enter the labor market in droves. 
To reap the full fruits of women’s talents, they must be in more top jobs, too, both in the public and private sector. 
Women in Western Europe have long since bridged the education gap with their male peers. 
Women not only outnumber men at universities; they also outperform them, most notably in math, physics, and information science. 
But female students’ academic achievements have not increased women’s presence in top jobs. 
In Europe, the percent of women on corporate boards remains in single digits, as is true of the top ranks of government and academia. 
While in the United States almost one out of five corporate officers are women, in mainland Europe the female to male ratio on company boards is one to twenty or worse. 
The situation is only slightly better in science. 
One of every ten professors in Europe is a woman. 
In the US, the ratio is – once again – more favorable to women, with more than 20% of professors at American universities being female. 
Europe cannot afford to waste valuable human capital at a time when China and India are on the rise and its own population is aging. 
The first baby boomers have reached retirement age, and the labor force will soon be shrinking in most parts of Europe. 
To cover the costs of aging and maintain its position as an economic power, Europe must increase overall labor participation considerably. 
Not only can and must fathers assume a greater role in child rearing; a large part of homemaking is perfectly suitable to be met by the market. 
As economists Ronald Schettkat and Richard Freeman have pointed out, career women do not necessarily work more hours per week than women with part-time jobs or stay-at-home moms. 
Instead, they tend to outsource activities like grocery shopping, cooking, and cleaning. 
If women in Europe work more hours in better quality jobs, it will stimulate demand for service jobs like cleaning and child care, thus reducing unemployment among low-skilled workers. 
Moreover, the increased supply of high-quality female labor will not incur additional healthcare and pension costs, unlike labor immigration. 
Women use those benefits anyway, whether they are stay-at-home moms or perform paid work outside the home. 
Because people live longer and procreate less, raising and caring for children requires less of a parent’s life than it used to. 
Women should be able to aspire to top jobs without squandering their fertility, and their success would encourage women in lower-ranking positions, because female managers tend to implement more gender-conscious hiring policies and serve as strong role models. 
Obstacles to the professional advancement of educated women in Europe is rooted in corporate culture, gender biases, and stereotyping, rather than outright discrimination. 
Group dynamics prevent company boards that consist solely of males from including women, even if members individually would support such a decision. 
Moreover, those women who do reach higher-ranking positions are susceptible to a visibility-vulnerability spiral, owing to their minority status. 
As long as women are perceived to be the weaker sex, men and women alike will project their own feelings of vulnerability onto the female candidate. 
Such exclusionary group dynamics can be overcome only by attaining a critical mass of women in high-ranking positions. 
The benefits of doing so would be enormous. 
Studies show that companies with more women in senior management are more profitable than those with few women at the top. 
Diversified management means better management. 
Including more women in top positions, both in the public and private sector, changes decision-making processes fundamentally, because women tend to play down the importance of formalities and communicate directly, thereby overcoming organizational blockages. 
A decisive pro-women strategy would thus create new momentum for Europe, allowing it to compete with the United States and Asia. 
At the start of this year, Norway enacted legislation that requires that both sexes be represented by at least 40% on all corporate boards. 
Companies that do not meet the new gender rules, which also apply to the public sector – risk being dissolved by court order. 
Spain’s prime minister, José Zapatero, recently proposed similar standards for gender balance in business and politics. 
Norway has set an excellent example – one that all of Europe should follow as the best way to transcend the culture of gender bias and stereotyping that is still prevalent in many companies and institutions. 
But women, too, must adjust. 
The reality is that top jobs require more than two workdays a week, and they do not coincide with school hours. 
Assuming the responsibilities that have long belonged to men requires that women let go of the tasks that have prevented them from advancing beyond low-ranking positions. 

Beyond the Sino-Japanese Rivalry 
China's government has sentenced two of its citizens to life in prison for their role in securing prostitutes for hundreds of male Japanese visitors in the southern city of Zhuhai last autumn. 
The Chinese government is also pressuring Tokyo to turn over the Japanese businessmen who allegedly requested the prostitutes. 
This story made headlines around the world, and fits well with how the world press typically covers Sino-Japanese relations. 
Regrettably, such incidents recur with enough regularity to feed the media machine that continues to stir a nationalism rooted in conflicting historical memories. 
Japanese Prime Minister Junichiro Koizumi's annual visits to the Yasukuni Shrine - which is widely viewed as a symbol of Japan's former militarism - is a conspicuous example of this. 
The publicity that the press gives to these visits has helped impede an invitation to Koizumi from China's leaders for a state visit. 
Recently, the discovery of mustard gas canisters left behind by Japanese forces during World War II has also served to keep memories of the Imperial Japanese Army's wartime conduct alive among older Chinese. 
Moreover, rival Sino-Japanese claims to the Senkaku (or Diao Yutai) Islands resurfaced last year when the Japanese government leased three islets in the chain from private parties. The action, purportedly undertaken to reduce the prospect of landings and demonstrations by Japanese right-wingers, set off a brief, though frenzied, reaction in China, as well as in Hong Kong and Taiwan. 
Meanwhile, differences over Taiwan also foster tensions periodically, such as when former Taiwanese President Lee Teng-hui sought to visit Japan for medical treatment. 
But this is not the whole story. 
Although such incidents reveal a troubling level of mistrust between the Chinese and Japanese that is not merely a product of media coverage, it is noteworthy that both governments have worked consistently, diligently, and with considerable success to resolve such problems and contain their political fallout. 
Of course, official relations between the two countries are marked by much political and economic competition - some of it healthy, some of it a possible harbinger of future strategic rivalry. 
The competitive strain in Sino-Japanese relations is especially visible in energy politics. 
Demand for oil in Asia is growing rapidly, and with China and Japan increasingly dependent upon imports, each has naturally sought to improve its energy security by diversifying sources of supply. 
Both countries covet access to Russian reserves, especially those located in the Angarsk fields of Siberia. 
Last spring China appeared to have locked up a Russian commitment to build a pipeline to service the China market at Daqing. 
Japan, however, raised the ante with new offers of financial incentives. 
Its bid for an alternative pipeline to Nakodka to serve Japanese, Korean, and other markets remains alive, creating another point of competitive friction. 
In their rivalry for leadership in promoting Asian regional cooperation, meanwhile, China has taken an early lead. 
Two years ago, China trumped Japan by offering a Free Trade Agreement to the members of the Association of Southeast Asian Nations, while front-loading its own tariff concessions. 
More recently, China, along with India, signed an ASEAN-proposed Treaty of Commerce and Amity, while the Japanese hesitated. 
In addition, China has served as the principal broker in talks between the US and North Korea on nuclear issues, in which Japan has a huge stake. 
But this backdrop of contention and competition masks emerging collaborative aspects of Sino-Japanese relations that are profoundly important, but which, unfortunately, seem to the world's media to be too mundane to "sell." 
For example, trade and investment flows continue to expand rapidly. 
Bilateral trade topped $100 billion in 2003, as Japan's exports to China increased by more than 10%, fuelled by semiconductors, electrical equipment, and automobiles. 
Meanwhile, China replaced the US as Japan's biggest source of imports, and is now one of the few non-members of the Organization of Petroleum Exporting Countries with which Japan runs a trade deficit. 
Similarly, direct investment by Japanese firms is increasing as they relocate production facilities to China to capitalize on lower labor costs and high-quality engineering talent. 
Even the 20% cut in Japan's Official Development Assistance for China scarcely harmed their smooth economic ties. 
Of course, there is no assurance that today's expanded commerce will preclude eventual strategic rivalry, or succeed in erasing lingering wartime animosity. 
But both countries now place a premium on extending their economic interdependence. 
China sees economic ties as a way to hasten its modernization. 
Japan sees them as a way to enhance its international competitiveness, and to provide China with incentives for geopolitical moderation. 
Most importantly, a new generation of leaders in both countries seems less hung up on divisive memories. 
They may also see in Europe's surge toward economic integration a model for themselves and an inducement to intensifying regional cooperation. 
Pragmatic leaders in both countries clearly recognize the benefits of diplomatic collaboration on issues that affect the region, such as North Korea's nuclear ambitions. 
Ultimately, the historical wounds that have long divided China and Japan, and the more current diplomatic flashpoints that the global media inevitably trumpet, only tell part of the Sino-Japanese story. 
There are economic and geopolitical rivalries between China and Japan that dwarf in importance the high-profile insults to national pride that make headlines. 
But there are also compelling economic and political inducements toward cooperation that prevent these rivalries from developing into full-blown crises. 

Beyond the Two-State Solution 
NEW HAVEN – As the turmoil in the Middle East worsens, the fate of the Palestinians seems to have been put on the diplomatic back burner. 
Indeed, the two-state solution has been on life-support since Israel’s 2014 Operation Protective Edge in Gaza, despite US Secretary of State John Kerry’s heroic efforts to revive it. 
Many in the region, and elsewhere, now believe that it is dead. 
But that raises a new problem. 
With statehood seemingly out of reach, it will be only a matter of time before large numbers of Palestinians begin demanding the right to vote in Israeli elections. 
That fight will be intense. 
Israelis embraced the idea of two states for so long partly to keep Palestinian enfranchisement off the table. 
How can the emerging order become more inclusive and legitimate? 
Elements of a constructive way forward are hiding in plain sight. 
Shortly after Israel signed its 1994 peace treaty with Jordan, then-Foreign Minister Shimon Peres proposed a cross-border joint economic zone to solidify the agreement. 
This became the Jordan Gateway Industrial Park (JGIP), a 346-acre special economic zone (SEZ) occupying the Israeli and Jordanian banks of the Jordan River near Haifa. 
Championed by Israeli industrialist Shlomi Fogel, the JGIP has recently experienced marked growth. 
Israel’s government contributed $34 million in 2013. Jordan, which has largely directed the project since 2001, provides ongoing fiscal support. 
As with SEZs elsewhere around the world, the industries in the park are exempt from taxes and tariffs and enjoy other economic benefits. 
This model should be expanded to include special political zones (SPZs) that erode divisions between Israelis and Palestinians. 
SPZs could be created along the borders between Israel and the West Bank and Gaza. 
They should be more fully integrated than the JGIP, which depends on outside labor. 
People in the SPZs would effectively constitute themselves as microcosms of a new order. 
SPZ businesses could be owned by Israelis, Palestinians, or jointly, and workers would come from both sides of the divide. 
But everyone would have to live in the SPZ, in which they would receive ownership shares and governance roles that would grow in proportion to the length of their tenure. 
SPZs should enjoy high degrees of political autonomy from the Israeli government and the Palestinian Authority. 
Residential infrastructure, from schools to municipal services and medical facilities, would be built in the zones, making them substantially self-sufficient. 
Day-to-day governance would be left to residents, who would have an economic interest in the SPZ’s vitality, as well as incentives to sustain integrated binational communities. 
Co-Op City, the largest residential complex in the United States, is a suggestive model. 
Directed by a community-based corporation, Co-Op City contains schools, stores, and private law enforcement. 
Such common-interest housing developments (CIDs) have grown in the US in recent years. 
Part of the attraction is enhanced participation. 
In the Middle East, such arrangements could foster new forms of inter-ethnic cooperation. 
Security would be a major concern. 
Initially, SPZ perimeters would have checkpoints like those for crossing into the West Bank and Gaza. 
But people would not need to come and go on a daily basis, an albatross that has bedeviled cross-border SEZs until now. 
Autonomous forces, similar to those employed by CIDs and university campuses, would maintain internal order. 
This differs from the JGIP, where Israel and Jordan maintain control over their respective spheres on either side of the Jordan River. 
SPZs should be located near transportation on both sides of the border, but away from religious shrines, settlements, and strategically important military installations. 
Possible sites include the once-planned Khaddourie industrial park between Tulkarem in the West Bank and Herzliya, and the Karni Industrial Zone outside Gaza City. 
The idea need not be sold to electorates or extremists to go forward. 
Nor need it uproot people. 
SPZs will be attractive to those who are hungry for constructive alternatives to the prevailing political stagnation and the inexorable, demography-driven drift toward Israeli apartheid. 
Those who move into SPZs would be actively committed to making them work. 
If the early SPZs succeed, there will be pressure to create others. 
Indeed, cross-border SPZs might eventually be replicated within the occupied territories and in Israel proper, including cities like Ramallah and Tel Aviv. 
Much will depend on the communities that the residents create. 
But outsiders can help. 
As with the JGIP, SPZs would provide opportunities for investors from the region and beyond to contribute to, and profit from, peace. 
They would receive local tax breaks, and maybe also support from their own governments. 
The US could take the lead, as it has done with SEZs in Egypt and Jordan. 
Governments and philanthropists could provide seed grants. 
As with the JGIP, the goal should be to model best practices that others will want to imitate. 
There are already serious players poised to become SPZ entrepreneurs. 
Fogel belongs to Breaking the Impasse (BTI), a group of prominent Palestinian and Israeli business leaders committed to advancing peace. 
Established by Palestinian magnate Munib al-Masri and Israeli tech billionaire Yossi Vardi in July 2012, BTI has some 300 members, whose companies account for at least 30% of Israeli and Palestinian GDP. 
In other words, they have the influence and resources to instigate a first wave of SPZs. 
The first SPZs must demonstrate that a marriage of economics and politics can induce collaboration that would not be possible otherwise. 
Israel’s government and the Palestinian Authority must play facilitating roles. 
But they will mostly be in the back seat of a venture driven by entrepreneurs, external friends of regional peace, and – most important – the individual Palestinians and Israelis who make the sweat-equity commitment to become a new kind of pioneer for peace. 
If they succeed, the death of the two-state solution might prove to be a blessing in disguise. 

Big Brother, Tibet, and the Sichuan Earthquake 
Shanghai – Tight media control of the unrest in Tibet has been followed by what, to some, looks like far more open coverage of the devastating earthquake in Sichuan province. 
Is this a change in China’s media strategy, or just a short term change in tactics? 
This question stands out in view of Chinese public opinion in the latter phase of the Tibet crisis. 
Much to the consternation of the Western media, Chinese people worldwide lashed out against its allegedly biased coverage of the Tibetan riot. 
Throngs of Chinese expatriates and students took to the streets, protesting the prejudice they perceived in Western media reports. 
Angry youngsters even founded Web sites such as anti-cnn.com to express their outrage. 
Western reporting, once commended for its veracity, now seems discredited across China, although sympathetic coverage of the loss of life in Sichuan may have redeemed the Western media somewhat. 
Even Chinese liberals admit that Western journalists blundered badly in Tibet, using cropped images and false captions as evidence of China's heavy-handed rule. 
One sarcastic posting on China's popular Web portal Tianya even went so far as to say that “CNN is of the same ilk as CCTV (China Central Television). 
Both talk grandiosely and profusely about impartiality. 
Ironically, both turn out to be hypocrites.” 
One can argue that this trend bodes ill for China. 
But pessimism is misplaced. 
Much of the Chinese wrath is directed at biased reports, not at Western media in general. 
And when one looks more closely at how Chinese responded, both to the unrest in Tibet and the Sichuan earthquake, one sees tangible signs that the Chinese are embracing a greater degree of free speech. 
Despite a news blackout during the riots in Lhasa, for example, Chinese Internet users managed to dodge the country’s censorship. 
Much as they loathed domestic publications for blindly following the guidelines of Xinhua, China’s state news agency, they were similarly contemptuous of Western media that mishandled the story. 
As a result, those Chinese who use the Internet as a source for news awakened to the fact that no account – Chinese or Western – is flawless. 
Such skepticism, which is a fundamental attribute of the democratic mind, may have played a role in pushing the government toward more openness in Sichuan. 
Indeed, the fact that many school buildings were flattened in Sichuan prompted an outcry from ‘netizens,’ who grilled local officials about whether it substandard building codes or even a notorious “toufuzha construction scandal,” namely, jerry-built projects, that had led to the disproportionate number of dead pupils. 
Under mounting public scrutiny, government officials felt compelled to promise that those responsible will be brought to justice. 
Unlike in the past, when Chinese Internet users passively received information, years of exposure to concepts such as human rights and democracy have emboldened them to challenge entrenched yet dubious views, even if it means iconoclasm. 
Chinese audiences are as fed up with the glowing encomiums broadcast by CCTV as they are with the simplistic, context-free reporting of Western media. 
Caught in the middle, Chinese increasingly sift for the truth on their own. 
Many, indeed, tried to present to the outside world their own version of the Tibet story, rebutting the orthodox narrative – be it Chinese or Western – and posting comments and footage on YouTube and the BBC's bulletin board. 
Moreover, due to their repeated queries for explanation, a few Western media outlets eventually owned up to their mistakes. 
After China’s government became aware that independent grassroots movements could convince ordinary Chinese where government propaganda had failed, it lifted its initial ban on reporting on Tibet. 
“Net nannies” – as China’s Internet censors are often dubbed – blocked sensitive articles less frequently. 
China’s government has apparently begun to appreciate the limitations of cover-ups and stonewalling, and perhaps also the merits of allowing some room for free speech. 
This thirst for unbiased information highlights the dramatic change that the Internet has brought to China’s political landscape. 
Nowadays, the government no longer monopolizes information and the right to process it. 
Insightful bloggers attract considerably more clicks than do official mouthpieces. 
A “virtual civil society” is in the making. 
But can Web activism mature into a full-blown campaign for free speech without being manipulated by the government or blindfolded by Western media? 
The answer may prove to be mixed. 
Admittedly, the fierce popular backlash against Western media was partially motivated by nationalist ardor, which played into the government’s hands. 
The Internet can foster more demagoguery than sober analysis. 
But the best way to prevent this is to create an environment in which opposing views can clash freely, enabling truth ultimately to triumph. 
On the government’s part, the more open media in Sichuan may be mere posturing to appease critics after the Tibet upheaval and the scuffle over the Olympic torch. 
The government’s willingness to address squarely questions about shoddy infrastructure will be a key test of the genuineness of its supposed new found tolerance of freeish speech. 
Although free speech is no panacea for China’s woes, only when it is established will the country’s progress be sustainable. 
Despite the watchful eyes of Big Brother in Beijing, the Internet is sowing the seeds of free speech in China. 
That may be the most important lesson of the crisis in Tibet and Sichuan. 

Big Brother Google? 
MOSCOW – “Google violates its ‘don’t be evil’ motto.” 
To Google’s credit, if you Google that sentence, you can find reference to a debate on that claim that I took part in recently. 
As it happens, I have a complex relationship with Google. 
I have fed at its trough many times – as a personal guest; as an advisory board member of Stop Badware, an NGO it sponsors; and as a speaker at its events. 
I also sit on the board of 23andMe, co-founded by the wife of Google co-founder Sergey Brin. 
But I also sit on the boards of Yandex in Russia, one of a small number of companies around the world who beat Google in their local markets, and of WPP, a worldwide advertising/marketing company famous for its rivalry with Google. 
Finally, I’m suspicious of concentrations of power of any kind. 
So I welcomed the chance to clarify my thinking. 
I took the con side of the debate: Google does not violate its motto. 
However, I do think there is a danger that someday it could. 
The danger lies in the concentration of information – arguably a concentration of power – that Google represents. 
Google doesn’t merely point users to existing information on the Web; it also collects information that it doesn’t share about its users’ behavior. 
If you can use patterns in Google searches to track flu outbreaks and predict a movie’s commercial prospects, can you also use it to forecast market movements or even revolutions? 
Even if Google uses personal information only for their benefit (whatever that means), it represents an attractive target for governments. 
In fact, Google generally fights government requests for personal information. 
(It was Yahoo, not Google, that gave personal information to China’s government, which then jailed a blogger.) 
Google has become a de facto gatekeeper of information, to the extent that if your site is not highly ranked by Google, you are like the tree falling in the forest with no one to hear it. 
It doesn’t matter that people seeking information are free to bypass Google and use other tools; they don’t. 
So how does information equal power? 
The active power that information provides is typically the threat of exposure. 
Such information gives you power primarily in a secretive, opaque world where access to information is limited. 
But generally, the free flow of information reduces the concentration of power. 
So, rather than suppressing or regulating the information that Google uncovers, we are better off making it more freely available. 
A Google that is accountable to its users – searchers, advertisers, investors, and governments – is likely to be a better outfit that does more good in today’s relatively open market. 
In short, there is no regulatory system that I trust more than the current messy world of conflicting interests. 
Whatever short-term temptations it faces – to manipulate its search results, use private information, or throw its weight around – Google, it is clear, could lose a lot by succumbing to them in a world where its every move is watched. 
Meanwhile, Google is not merely avoiding evil; it actively fights against it. 
For example, Google fights censorship – by doing, not by shouting. 
Rather than stand on the sidelines and proclaim censorship evil, it is picking its way through the landmines in China – competing with a politically well-connected rival and politely letting its users know that they aren’t always getting the whole picture. 
In short, Google is changing expectations about what people can know – even in the United States, where formal censorship is absent, but government obfuscation, opaque corporations, and the like are not. 
Moreover, in countries where Google is criticized for blocking access to information, it points out the information’s absence when something is blocked – letting people know that it exists but that they can’t have access to it. 
On the other hand, every time someone in China Googles something and gets an answer – a product’s good and bad points, the details about someone the government does not like – he must wonder, “Why can’t I get this kind of information about everything?” 
With Google, people start to expect answers about everything . 
A little transparency inevitably leads to more. 
Rather than demand an end to censorship now – an impossible dream – Google is working to make that happen by eroding government control over information. 
Moreover, from a purely practical point of view, Google makes the world more efficient. 
Buyers and sellers can find one another, schoolchildren can find information needed for their homework, and sick people can find health information. 
The real threat of evil, I think, lies in the temptations of “international governance” – say, a sinister multilateral government body called the World Information Center. 
Nice as it sounds, the reality is likely to be ridden with bureaucracy, susceptible to control by the worst of the world’s governments rather than its best ones, and incapable of innovation. 
Take, for example, ICANN, the body that sets policy for the Domain Name System. 
I was its founding chairman, and I don’t think anyone considers it a success. 
Its saving grace is that it is widely considered illegitimate and therefore has little power. 
By contrast, Google is effective at what it does, and therefore has the legitimacy of results. 
But it has little coercive power, because anyone is free to try an alternative. 
Its only option is to be better than the competition. 
The fact that these issues are being debated is a good sign in itself – keeping Google and its watchers on guard. 
Fortunately, a wary press corps, powerful governments, and nervous competitors watch its every move, hoping the company to fight its many temptations. 
Abuse of power is evil, but power itself is not. 

Big Green Jobs Machine 
NEW YORK – Amid the pressures of the global financial crisis, some ask how we can afford to tackle climate change. 
The better question is: how can we afford not to? 
Put aside the familiar arguments – that the science is clear, that climate change represents an indisputable existential threat to the planet, and that every day we do not act the problem grows worse. 
Instead, let us make the case purely on bread-and-butter economics. 
At a time when the global economy is sputtering, we need growth. 
At a time when unemployment in many nations is rising, we need new jobs. 
At a time when poverty threatens to overtake hundreds of millions of people, especially in the least developed parts of the world, we need the promise of prosperity. 
This possibility is at our fingertips. 
Economists at the United Nations call for a Green New Deal – a deliberate echo of the energizing vision of United States President Franklin Roosevelt during the Great Depression of the 1930’s. 
Thus, this week the UN Environment Program will launch a plan for reviving the global economy while dealing simultaneously with the defining challenge of our era – climate change. 
The plan urges world business and political leaders, including a new US president, to help redirect resources away from the speculative financial engineering at the root of today’s market crisis and into more productive, growth-generating, and job-creating investments for the future. 
This new “Green Economy Initiative,” backed by Germany, Norway, and the European Commission, arises from the insight that the most pressing problems we face are interrelated. 
Rising energy and commodity prices helped create the global food crisis, which fed the financial crisis. 
This, in turn, reflects global economic and population growth, with resulting shortages of critical resources – fuel, food, and clean air and water. 
The commingled problems of climate change, economic growth, and the environment suggest their own solution. 
Only sustainable development – a global embrace of green growth – offers the world, rich countries as well as poor, an enduring prospect of long-term social well-being and prosperity. 
The good news is that we are awakening to this reality. 
We have experienced great economic transformations throughout history: the industrial revolution, the technology revolution, and the era of globalization. 
We are now on the threshold of another – the age of green economics. 
Visiting “Silicon Valley” in California last year, I saw how investment has been pouring into new renewable-energy and fuel-efficiency technologies. 
The venture capital firm that underwrote Google and Amazon, among other archetypal entrepreneurial successes, directed more than $100 million into new alternative energy companies in 2006 alone. 
In China, green capital investment is expected to grow from $170 million in 2005 to more than $720 million in 2008. 
(In just a few short years, China has become a world leader in wind and solar power, employing more than a million people.) 
Globally, the UN Environment Program estimates that investment in low-greenhouse-gas energy will reach $1.9 trillion by 2020. 
The financial crisis may slow this trend. 
But capital will continue to flow into green ventures. 
I think of it as seed money for a wholesale reconfiguration of global industry. 
We can already see its practical expression. 
More than two million people in the advanced industrial nations today find work in renewable energy. 
Brazil’s bio-fuels sector has been creating nearly a million jobs a year. 
Economists say that India, Nigeria, and Venezuela, among many others, could do the same. 
In Germany, environmental technology is expected to quadruple over the coming years, reaching 16% of manufacturing output by 2030 and employing more people than the auto industry. 
Mexico already employs 1.5 million people to plant and manage the country’s forests. 
Governments have a huge role to play. 
With the right policies and a global framework, we can generate economic growth and steer it in a low-carbon direction. 
Handled properly, our efforts to cope with the financial crisis can reinforce our efforts to combat climate change. 
In today’s crisis lies tomorrow’s opportunity – economic opportunity, measured in jobs and growth. 
Most global CEOs know this. 
That is one reason that businesspeople in so many parts of the world are demanding clear and consistent environmental policies. 
It is also the reason that global companies like General Electric and Siemens are betting their future on green. 
But it is important that the global public recognize this fact, perhaps nowhere more so than in the US. 
When the next American president takes office, voters and elected officials alike should be reassured by studies showing that the US can fight climate change by cutting emissions at low or even no cost, using only existing technologies. 
We know that the poorest of the world’s poor are the people most vulnerable to climate change. 
They are also the most vulnerable to the shocks of the financial crisis. 
As world leaders, we are morally bound to ensure that solutions to the global financial crisis protect their interests, not just the citizens of wealthier nations. 
Those left behind by the previous boom – the so-called “bottom billion,” living on less than $1 a day – must be brought into the next economic era. 
Again, a solution to poverty is also a solution for climate change: green growth. 
For the world’s poor, it is a key to development. 
For the rich, it is the way of the future. 

Big Ideas from Small Countries 
CAMBRIDGE – Two decades ago, many people thought that the lesson of the 1980’s was that Japan’s variant of capitalism was the best model, and that other countries around the world should and would follow it. 
The Japanese model quickly lost its luster in the 1990’s. 
A decade ago, many thought that the lesson of the 1990’s was that the United States’ variant of capitalism was the best model, and that other countries should and would follow. 
The American model lost its attractiveness in the 2000’s. 
So, where should countries look now, in 2010, for models of economic success to emulate? 
Perhaps they should look to the periphery of the world economy. 
Many small countries there have experimented with policies and institutions that could usefully be adopted by others. 
Costa Rica in Central America and Mauritius in Africa each pulled ahead of its regional peers some time ago. 
Among many other decisions that have worked out well for them, both countries have foregone a standing army. 
The results in both cases have been a political history devoid of coups, and financial savings that can be used for education, investment, and other good things. 
A panoply of innovations has helped Chile to outperform its South American neighbors. 
Chile’s fiscal institutions insure a countercyclical budget. 
Many governments increase spending excessively in booms, and then are forced to cut back in downturns, thereby exacerbating the cyclical swings. 
There are two key elements to Chile’s fiscal institutions: 
● A structural budget balance rule allows deficits only to the extent that the current price of copper is below its 10-year equilibrium or output is below its long-term trend. 
● Two panels of technical experts are the ones to judge trends in copper prices and output, respectively, insulated from the political processes that can otherwise succumb to wishful thinking. 
These institutions are particularly worthy of imitation by other commodity-exporting countries, in order to defeat the so-called “natural-resource curse.” 
Even advanced countries such as the US and UK could learn something from Chile, given that in the last expansion they evidently forgot how to run countercyclical fiscal policy. 
Singapore achieved rich-country status with a unique development strategy. 
Among its many innovations were a paternalistic approach to saving and use of the price mechanism to defeat urban traffic congestion (an approach later adopted by London). 
Other small advanced countries also have lessons to offer. 
New Zealand led the way for much of the world’s central banks with inflation targeting, along with many liberalizing reforms in the late 1980’s. 
Perhaps its Labor Party should be given credit for pioneering the principle that center-left governments can sometimes achieve economic liberalization better than their center-right opponents. 
Ireland showed the importance of foreign direct investment. 
Estonia led the way in simplifying its tax system by means of a successful flat tax in 1994, followed by Slovakia and other small countries in Central and Eastern Europe and elsewhere (including Mauritius again). 
Mexico pioneered the idea of Conditional Cash Transfers (the OPORTUNIDADES program – originally PROGRESA – which was launched in 1998). 
CCT programs have subsequently been emulated by many countries in Latin America, Asia, and Africa. 
Mexico’s innovation was really two revolutions in one. 
First, there was the specific policy idea of making poverty benefits contingent on children’s school attendance (an idea which has been embraced even in New York City). 
Second, and perhaps more importantly, the Mexicans implemented the methodological idea of conducting controlled experiments to find out which policies work and which don’t work in developing countries (which has fed into the exciting Randomized Control Trials movement in the field of development economics). 
Also in the 1990’s, largely thanks to the leadership of then-President Ernesto Zedillo, Mexico adopted non-partisan federal electoral institutions that in 2006 proved able to resolve successfully a disputed election. 
(By contrast, it turned out in November 2000 that the US had no such mechanism in place, other than the preferences of political appointees.) 
More recently, the current president, Felipe Calderón, has shut down the entrenched electric utility and pursued much-needed tax, pension, and other reforms. 
In highlighting some very specific institutions that could be usefully adopted elsewhere, I do not mean to suggest that they can be effortlessly translated from one national context to another. 
Nor do I mean to suggest that these examples are entirely responsible for the economic success of the countries where they are found. 
(Indeed, a few of these countries have recently been wrestling with severe problems.) 
But a country does not have to be large to serve as a model for others. 
Small countries tend to be open to trade. 

Big Lies about Central Banking 
An independent central bank focused exclusively on price stability has become a central part of the mantra of "economic reform." 
Like so many other policy maxims, it has been repeated often enough that it has come to be believed. 
But bold assertions, even from central bankers, are no substitute for research and analysis. 
Research suggests that if central banks focus on inflation, they do a better job at controlling inflation. 
But controlling inflation is not an end in itself: it is merely a means of achieving faster, more stable growth, with lower unemployment. 
These are the real variables that matter, and there is little evidence that independent central banks focusing exclusively on price stability do better in these crucial respects. 
George Akerlof, who shared the Nobel Prize with me in 2001, and his colleagues have argued forcefully that there is an optimal rate of inflation, greater than zero. 
So ruthless pursuit of price stability actually harms economic growth and well being. 
Recent research even questions whether targeting price stability reduces the tradeoff between inflation and unemployment. 
A focus on inflation may make sense for countries with long histories of inflation, but not for others, like Japan. 
America's central bank, the Federal Reserve, is mandated not only to ensure price stability, but also to promote growth and full employment. 
There is broad consensus in the US against a narrow mandate, such as that of the European Central Bank. 
Today, Europe's growth languishes, because the ECB is constrained by its single-minded focus on inflation from promoting economic recovery. 
Technocrats and financial market players who benefit from this institutional arrangement have done an impressive job of convincing many countries of its virtues, and of the need to treat monetary policy as a technical matter that should be put above politics. 
That might be the case if all that central bankers did was, say, choose computer software for clearing payments. 
But central banks make decisions that affect every aspect of society, including rates of economic growth and unemployment. 
Because there are tradeoffs, these decisions can only be made as part of a political process. 
Some argue that in the long run there are no tradeoffs. 
But, as Keynes said, in the long run, we are all dead. 
Even if it were impossible to lower unemployment below some critical level without fuelling inflation, there is uncertainty about what that critical level is. 
Accordingly, risk is unavoidable: monetary policy that is too loose risks inflation; if it is too tight, it can cause unnecessary unemployment, with all the suffering that follows. 
During America's growth boom in the 1990s, the Clinton Administration believed that it was worth risking pushing the unemployment rate lower, especially when the social gains--declining welfare roles, reduced violence--were added to the direct economic benefits. 
By contrast, the IMF urged tighter monetary policy, because it put far less weight on the cost of unemployment, seemingly no weight on the ancillary social benefits of reducing it, and much greater weight on the costs of potential inflation. 
The economic analysis of Clinton's Council of Economic Advisers turned out to be right; the models of the IMF (and the Fed) were wrong. 
America secured a much lower rate of unemployment without inflation--eventually unemployment fell to below 4%. 
But that is not the point: the point is that no one could be sure. 
A calculated risk is always unavoidable. 
Who bears it varies with different policies, and that is a decision that cannot--or at least should not--be left to central bank technocrats. 
While there is a legitimate debate about the degree of independence accorded to central banks and other decision-making bodies, within a democracy, the perspectives of those whose well-being is affected by the decisions taken should be represented in the process. 
Workers, for instance, who have much to lose if the central bank pursues an excessively tight policy, do not have a seat at the table. 
But financial markets--which do not have much to lose from unemployment, but are affected by inflation--are typically well represented. 
And yet financial markets hardly have a monopoly on technical competency. 
Indeed, many in the financial community have little understanding of the intricate workings of the macroeconomic system--as evidenced by their frequent mistakes in managing it. 
For example, most US recessions since 1945 were caused by the Fed stepping on the brakes too hard. 
Similarly, central banks adopted monetarism with a fervor in the late 1970's and early 1980's, just as empirical evidence discrediting the underlying theories was mounting. 
Whatever the merits of a common currency, those in Europe deliberating about adopting the Euro should consider whether to tie their fortunes to an institutional arrangement whose flaws are increasingly apparent. 
Likewise, developing countries need to consider not only the central bank's independence, but also its mandate and representativeness. They need to balance concerns about economic efficiency with those of democratic accountability. 
In many new democracies, citizens are bewildered. The virtues of the new regime are first praised, but then they are told that the macroeconomic policy decisions about which they care most are too important to be left to democratic processes. 
Citizens are warned against the risks of populism (meaning the will of the people?). 
There are no easy answers. But in too many countries, nor is there democratic debate about the alternatives. 

Big Money Merges with Big Brother 
PARIS – All over the world, Internet users entertain romantic delusions about cyberspace. 
To most of us Web surfers, the Internet provides a false sense of complete freedom, power, and anonymity. 
Every once in a while, of course, unsolicited messages and ads that happen to be mysteriously related to our most intimate habits intrude. 
They remind us that we Internet users are, indeed, under constant virtual surveillance. 
When the watchers have only commercial motives, such “spam” feels like a minor violation. 
But in China or Russia, the Internet is patrolled not by unsolicited peddlers, but by the police. 
So Russian human-rights activists and the environmental organization Baikal Environmental Wave should not have been surprised when, earlier this month, flesh and blood policemen – not Internet bots – confiscated their computers and the files stored within them. 
In the time of the Soviet Union, the KGB would have indicted these anti-Putin dissidents for mental disorders. 
This supposedly being a “new Russia,” cyber-dissidents are accused of violating intellectual property rights. 
You see, they were using Microsoft-equipped computers and could not prove that the software had not been pirated. 
By confiscating the computers, the Russian police could supposedly verify whether or not the Microsoft software that the activists were using had been installed legally. 
On the surface, Microsoft and Prime Minister Vladimir Putin’s police look like strange bedfellows. 
But are they? 
Microsoft’s authorized representatives declared that they could not oppose the Russian police actions, because the Seattle-based company had to abide by Russian law. 
Such an ambiguous declaration can be interpreted either as active support for the Russian police or as passive collaboration. 
Moreover, in previous cases, Microsoft assisted the Russian police in their investigations of non-governmental organizations. 
Clearly, human-right activists in Russia cannot and should not count on Microsoft as an ally in their efforts to build a more open society. 
But Microsoft’s ambiguous – at best – behavior is part of a pattern. 
Indeed, the record of Internet companies in authoritarian countries is both consistent and grim. 
Yahoo set the pace in pioneering the active collaboration of Internet and high-tech firms with political repression. 
In 2005, Yahoo gave the Chinese police the computer identification code for a dissident journalist, Shi Tao. 
Shi Tao had sent a message in praise of democracy, which the censors had detected. 
Following Yahoo’s lead, the police arrested him. 
Shi remains in jail to this day. 
At that time, Yahoo’s managers in the United States, like Microsoft in Russia, declared that they had to follow Chinese law. 
Shi Tao, in his jail cell, was undoubtedly pleased to learn that China is ruled by law, not by the Communist Party. 
After all, the rule of law is what Shi Tao is fighting for. 
Google, at least for a short while, seemed to follow different guidelines in its Chinese business, appearing to adhere to its widely proclaimed ethical principle, “Don’t be evil.” 
To protest against censorship, the Silicon Valley-based company relocated from mainland China in 2009 to the still relatively free Hong Kong. 
On the Hong Kong-based search engine, Chinese internauts could read about Taiwan, the Tiananmen Square massacre of 1989, or the Dalai Lama. 
On Google.cn, these sources, along with the results of searches using many other forbidden terms, simply did not appear. 
Google’s move seemed to reconcile its proclaimed libertarian philosophy with its business ethics. 
But that reconciliation did not last long: Google, after all, had accepted censorship from the beginning of its efforts in China, in 2006, in order to gain entry into the Chinese market. 
After six months of life in Hong Kong, money talked: Google reinstated its mainland China service, and with the same level of censorship as before. 
In the end, Google, not the Chinese Communist Party, lost face. 
Yahoo, Google, and Microsoft have thus followed a strikingly similar road: access to lucrative markets trumped ethical anxiety. 
The tools that they provide are politically neutral. 
Dissidents try to use them to pursue a democratic agenda. 
Police use them to detect and repress dissidents. 
Either way, Microsoft, Yahoo, and Google make money – just like, say, IBM, which in the 1930’s sold its computing machines to the Nazi regime: the Nazis used these machines to make the destruction of their victims routine and bureaucratic. 
Should we be shocked that Internet companies put profits ahead of morals? 
After all, they are ordinary, profit-seeking corporations, just like the IBM of Hitler’s era. 
Internet companies may, more than most, hide their true motives behind ersatz, democratic-sounding slogans, but in the end they are advertising products like any other. 
In advertising or self-promotion, the choice of words is determined by customer expectations, not by managers’ philosophy, as they mostly have none. 
Capitalism is always a trade-off: we must live with unethical behavior by money-making corporations that provide us with useful new tools. 
These tools can be used by Iranians fighting dictatorship, or by Tibetan dissidents trying to save their culture. 
They also can be used to compute the number of exterminated Jews, to arrest a Chinese dissident, or to break a human-rights group in Russia. 
Microsoft in Russia or Google in China teach us that capitalism is not ethical: it is only efficient. 
Entrepreneurs are greedy by definition: if they were not, they would go bankrupt. 
An open society will never be created or sustained by righteous entrepreneurs or be the mere byproduct of political engineering. 
Liberty, as always, remains the endeavor of vigilant, free men and women. 

Putting the Public Back in Public Health 
LONDON – The United Kingdom’s National Health Service marked its 70th birthday this year, so this is a good time to reflect on the NHS’s past and consider its future. 
The NHS has long been a source of inspiration in health-care debates around the world. 
But if it is not put on a more sustainable footing, it could become a cautionary tale. 
When the NHS was founded in 1948, its mission, to provide universal high-quality health care, was daringly radical. 
In time, though, it came to represent a fundamental pillar of the modern welfare state, alongside education and public provision for old age. 
Today, however, the NHS faces mounting challenges, owing to the years of “austerity” after the 2008 financial crisis, as well as to larger changes in the pharmaceutical industry’s business model. 
With corporate governance increasingly oriented around narrow financial indicators such as quarterly earnings, drug companies have hiked up medicine prices, and the NHS is bearing the costs. 
Making matters worse, many drugs would not even exist if not for public investment. 
Last year, the NHS in England spent £1 billion ($1.28 billion) purchasing medicines that have received investments from the UK Medical Research Council and other public bodies. 
In the United States, the National Institutes of Health (NIH) spends more than $37 billion on biomedical research every year, particularly in areas that are too risky for the private sector. 
And, worldwide, the public pays for an estimated two-thirds of all upfront costs for pharmaceutical research and development. 
High drug prices can have ripple effects beyond public health around the whole world. 
It creates a huge barrier to access to medicines for two billion people and pushes 100 million people into extreme poverty every year. 
Beyond the human suffering, this imposes high economic costs. 
The lost human capital includes not only those who are forced out of the taxable workforce by personal illness, but also those who must drop out to care for them. 
Most crucially, it is increasingly difficult to balance the goals of ensuring patient access to effective medicines, managing rising health-care expenditure, and incentivizing innovation. 
Even if access to health care were assured, and pricing well managed, there would still be a problem with the current direction of health innovation. 
Diseases that do not create potential growth markets are largely ignored. 
Between 2000 and 2011, only 4% of newly approved drugs were for neglected diseases that affect predominantly lower- and middle-income countries. 
Meanwhile, in the US, 78% of new medicine patents between 2005 and 2015 were related to drugs that are already on the market. 
And in Europe between 2000 and 2014, 51% of newly approved drugs were modified versions of existing medicines, and thus offered no additional health benefits. 
With health-care systems often failing to provide patients with the treatment they need at a price they can afford, and with health innovation not addressing public health needs, the status quo is not sustainable. 
But to restore public purpose to health-care provision and innovation will require the kind of transformation that the NHS’s founders ushered in 70 years ago. 
To that end, the first step is to acknowledge governments’ vital role in the development of new treatments and drugs. 
Rather than simply funding innovation, governments need to start directing it with the same level of involvement that they bring to defense spending. 
That means aligning upstream research funding with downstream applications and public objectives. 
The pharmaceutical industry will no doubt argue that government engagement stifles innovation. 
But it was a state-led, mission-oriented approach that put a man on the moon, created the Internet, and paved the way for self-driving cars. 
Governments and the societies they serve should be ambitious, while always asking themselves a practical question: What are we trying to achieve? 
Once we know that, legislation and regulatory measures can be brought to bear to advance our collective goals, and to encourage bottom-up experimentation. 
For example, prizes might be better than prices for stimulating private investment. 
And government procurement processes could surely be better aligned to steer the direction of innovation. 
Even more to the point, policymakers need to address the financialization of the pharmaceutical industry, which is focused solely on shareholder value, rather than on all stakeholders. 
Between 2007 and 2016, the 19 pharmaceutical companies in the S&P 500 as of January 2017 spent $297 billion repurchasing their own shares to boost their stock price, and thus the value of their executives’ stock options. 
That is 61% of their combined R&D expenditures over the same period. 
As long as this business model prevails, price gouging will continue. 
As happened recently with one antibiotic, CEOs will say that they are serving shareholders by letting prices rise to whatever the market will bear and abusing intellectual-property rights to extract monopoly rents. 
Patents have become too difficult to license, and they are too often acquired for strategic reasons than for novelty, as was originally intended. 
To bring health care back into line with the public interest, we can still find inspiration in the NHS. 
Its founders’ mission was to create a system that serves everyone, is free at the point of delivery, and caters to patients’ needs, not their ability to pay. 
Today’s policymakers should reaffirm that basic mission. 
Only by aligning innovation with the priorities of a civilized society can we finally take health care to the next frontier. 

Seeing Through Big Tobacco’s Smokescreen 
GENEVA – We all know how bad tobacco is, that it kills millions of people every year, and that it harms many more. 
We also know that tobacco companies have consistently lied about how much damage their products cause. 
But now, even Big Tobacco has been forced to state the facts publicly. 
After losing a string of appeals following a 2006 US federal court ruling, four companies have been forced to reveal the truth behind years of deceptive marketing, by publishing advertisements containing “corrective statements” in US newspapers and on television. 
These public statements acknowledge that the companies – Philip Morris USA, RJ Reynolds Tobacco, Lorillard, and Altria – knew the damage their products cause but kept selling them anyway. 
And it is not just courts that are taking action against the tobacco industry. 
The recent decision by French bank BNP Paribas to stop financing and investing in tobacco companies – including producers, wholesalers, and traders – is just the latest sign that public health is finally being put ahead of commercial interests. 
Still, we must not be lulled into believing that these overdue confessions reflect an industry undergoing altruistic catharsis. 
They resulted from the combined pressure of the US justice system, tobacco-control advocates, and the sheer weight of evidence against the industry’s misleading marketing of “light” and “mild” tobacco products. 
They should be regarded as a warning: The industry couldn’t be trusted in the past, and it shouldn’t be trusted to do the right thing in the future. 
Even today, the same tobacco companies are marketing new products that they claim are less harmful – like “heat-not-burn” devices, which vaporize tobacco to produce a nicotine-containing aerosol – and funding front groups purporting to work for a smoke-free world. 
The world has witnessed similar tactics elsewhere, from Uruguay to Australia, where tobacco companies launch costly legal challenges against legitimate regulation of its deadly products. 
Despite such losses, it will no doubt continue looking for new ways to oppose tobacco restrictions. 
To be sure, the court-ordered airing of “corrective statements” in American media does represent a victory for truth. 
It brings closure to an important US Justice Department lawsuit, filed in 1999 under the Racketeer Influenced and Corrupt Organizations Act, and then left partly unresolved, until October 2017, during a decade of appeals and legal wrangling following the 2006 decision. 
The statements detail the deadly health effects of smoking and second-hand smoke, including the fact that low-tar and “light” cigarettes are no less harmful than regular ones; that smoking and nicotine are highly addictive; and that cigarettes are “intentionally” manipulated to “maximize the ingestion of nicotine.” 
Even cigarette manufacturers admit that their products contribute to 1,200 US deaths each day. 
Around the world, tobacco use kills more than seven million people annually. 
Enough is enough; at this critical moment, we must not let the momentum slip. 
Governments and health organizations like ours are at war with the tobacco industry, and we will continue fighting until we beat Big Tobacco. 
If national leaders, health ministers, and finance chiefs ever wondered how far they should go to regulate tobacco products, Big Tobacco’s admissions, together with investors’ second thoughts, have provided an answer: as far as necessary. 
Governments face a moral and legal imperative to use the strongest possible measures to protect their citizens from tobacco. 
One way forward would be for more governments to implement commitments enshrined in the World Health Organization’s Framework Convention on Tobacco Control. 
The WHO FCTC provides guidelines on topics such as tobacco taxation, public awareness and education, and package warnings. 
These measures have helped save millions of lives in the last decade, not to mention hundreds of billions of dollars in health costs. 
But more can be done, which is why we are calling on governments around the world to strengthen implementation of the WHO FCTC by accelerating action on the “MPOWER” tobacco control policies – measures intended to strengthen country-level implementation of the WHO FCTC. 
Together, these frameworks represent the strongest defense countries have against the tobacco industry. 
Moreover, governments should endorse the Protocol to Eliminate the Illicit Trade in Tobacco Products, which aims to prevent illicit trade, such as smuggling. 
While 33 countries and the European Union have signed the protocol, it needs the support of seven more governments before it can enter into force. 
And, finally, looking ahead to the UN’s High-level Meeting on Non-communicable Diseases in 2018, government leaders must be prepared to demonstrate their commitment to protecting people from heart and lung disease, cancer, and diabetes, by supporting stronger tobacco controls. 
With its recent admissions, Big Tobacco has been forced to reveal its true nature. 
However reluctantly, these companies have called on all of us to reject their products. 
We think it is time to take them up on the offer. 

Smoking Out Big Tobacco 
BOSTON – Recently, the tobacco industry’s lack of respect for people’s lives, international law, and national sovereignty has been placed under a spotlight. 
Investigations carried out by the likes of the World Health Organization (WHO) and the Guardian newspaper have provided damning evidence of what we in the public health community have known for decades: Big Tobacco, in its relentless pursuit of profit, is subverting, blocking, and weakening public health protections in any way it can. 
As the investigations showed, corporations like Philip Morris International (PMI) and British American Tobacco have often used covert tactics, outright bullying, and illicit activities to block progress on the WHO’s Framework Convention on Tobacco Control (FCTC), established in 2003. 
Now, the United Kingdom’s Serious Fraud Office (SFO) has confirmed that it is investigating British American Tobacco for a conspiracy of bribery in Central and East Africa. 
That is a start. 
But, given the fundamental conflict between the tobacco industry’s interests and public-health objectives, health practitioners and governments around the world must do more to prevent Big Tobacco from interfering in official policy. 
Indeed, they must erect an unbreachable firewall between policymaking and the industry at the national and international levels. 
This idea is embedded in Article 5.3 of the FCTC. 
The need for that provision was made apparent by internal tobacco-industry documents released through the Tobacco Master Settlement Agreement, reached between the four largest US tobacco corporations and the attorneys general of 46 US states in 1998. 
Those documents revealed, for example, that Philip Morris Companies (then the parent of PMI) viewed the WHO as a threat and sought “countermeasures” to “contain/neutralize/re-orient” it. 
Recent investigations show that PMI targeted global tobacco treaty meetings, wooing delegates, and stacking delegations with industry-friendly trade ministers. 
BAT, for its part, has taken aim at national lawmakers, reportedly bribing officials in parts of East Africa to block or subvert public policy and force its way into the market, in order to get a new generation in Africa addicted to its product. 
All of this has resulted in delayed progress in implementing lifesaving public-health protections around the world – though it hasn’t stopped them. 
Dozens of governments have already begun to implement measures in line with the global tobacco convention’s conflict-of-interest provisions. 
For example, Norway has divested more than $2 billion from the tobacco industry. The European Union has terminated its controversial agreement with PMI on tackling illicit trade. 
And the Philippines has barred public officials from interacting with the tobacco industry unless absolutely necessary. 
With such measures, governments are prioritizing people’s health over the industry’s profits. 
After all, without Big Tobacco at the table, they are more likely to succeed in implementing measures for reducing smoking rates, whether tried-and-true policies like prohibiting cigarette marketing, or newer measures, such as eliminating branding from cigarette packages. 
Taken together, these actions are saving millions of lives. 
More countries must urgently implement similar policies. 
And to do so, they must ensure that they employ processes and policies that are in line with Article 5.3, thereby preventing the industry from subverting their initiatives to reduce smoking rates and improve public health. 
But Big Tobacco is not the only industry attempting to undermine the public good for the sake of its own interests. 
That is why international legal frameworks like the FCTC must be developed for other industries that are using Big Tobacco’s playbook to weaken public-health legislation and environmental regulations that affect their own lines. 
The good news is that there is increasing awareness of the use of such tactics not just by Big Tobacco, but also by other similarly powerful industries. 
At the most recent meeting of the United Nations Framework Convention on Climate Change, for example, the fossil-fuel industry’s interference in the talks was a central issue. 
Now, calls to prevent powerful industries such as Big Oil, Big Pharma, and Big Food from undermining, diluting, or delaying sound policies that advance the public interest are growing louder. 
The recent SFO investigation and media exposés should reinforce this shift, serving as a powerful incentive for governments to implement stronger conflict-of-interest measures – on tobacco and other issues – at the international and national levels. 
Today, there are powerful corporations – from the tobacco and pharmaceutical industries to those engaged in water privatization and climate change – bent on reaping profit at the expense of people’s lives and the environment. 
They have little regard for democratic processes, and, as we now know, they will stop at nothing to undermine any process that could interfere with business as usual. 
The only way to prevent them from doing so is to kick them out of the room. 
We have the tools to do it. 
We just need to use them. 

Putin’s Government in Donbas 
STANFORD – In March, the German tabloid Bild published an article based on a secret document that reveals how breakaway areas of eastern Ukraine are “being treated as parts of Russia’s sovereign territory.” 
The revelations cast the ongoing Minsk 2 peace negotiations in a new light, one that illuminates the frustration being expressed by the Ukrainian government. 
The document obtained by Bild is a report from an October meeting of Russia’s “Inter-Ministerial Commission for the Provision of Humanitarian Aid for the affected Areas in the Southeast of the Regions of Donetsk and Luhansk.” 
It describes how the meeting’s attendees did not just focus on humanitarian assistance, but rather served as a sort of shadow government. 
Working groups cooperating with Russian authorities were set up to manage the region’s finances, economic policies, energy and transportation infrastructure, and trade. 
Notably, the meeting took place under the watchful eye of four members of the Russian secret police (FSB) and was chaired by the Russian politician Sergey Nazarov. 
The titular heads of the Donetsk and Luhansk Peoples’ Republics were not present. 
Indeed, the only Ukrainian in attendance was a representative of the energy giant DTEK, owned by Rinat Akhmetov, the country’s richest oligarch. 
The Kremlin’s official negotiating stance is that it wants a unitary Ukraine that gives the separatist republics considerable autonomy and the right to veto key national legislation. 
This requires Ukraine to amend its constitution in order to provide special status to the breakaway regions – a change to the fundamental structure of the country, which, after the loss of some 10,000 lives, is unlikely to be politically feasible. 
In exchange, the Kremlin has pledged to support – but only after the constitution is changed – Ukraine’s national government in its reassertion of control over those regions, as well as over its border with Russia. 
In theory, the negotiations are being held between the government in Kyiv and the leaders of the separatist regions. 
The European Union is applying pressure on all sides, including Russia, where it is holding out the possibility that economic sanctions will be lifted as an eventual reward for the Kremlin’s support in the peace effort. 
Russia has offered to use what it calls its “limited influence” to persuade the rebel governments to cooperate. 
If, however, Russia is actually in full control of the separatist regions and is actively integrating them into its economy, as the document obtained by Bild suggests, the Kremlin can no longer be considered an outside party, attempting to influence an uncooperative ally. 
Instead, it would be clear that the leaders of the breakaway regions are, at best, puppets, and that the true parties to the negotiation are Russia and Ukraine. 
None of this will come as a surprise to officials in Kyiv, who have long claimed that the separatist authorities with whom they are expected to reach an agreement are getting their marching orders from Russian superiors. 
But it could have an important influence on the stance taken by the European officials who are attempting to facilitate the process. 
Russia has been highlighting the Kyiv government’s reluctance to implement the terms of Minsk 2, in order to drive a wedge between Ukraine and Europe. 
The Kremlin’s message is that Ukraine is a failed state, unable to implement an agreement to which it agreed. 
In this narrative, the problem is Ukraine’s political dysfunction, whereas Russia is an innocent peacemaker suffering under sanctions it does not deserve. 
The Bild revelations knock a gaping hole in the Russian argument, so the Kremlin can be expected to challenge the authenticity of the document or argue that it has been misinterpreted. 
Providing humanitarian aid to the Donbas, the Kremlin is likely to argue, is a major undertaking that requires the input of numerous ministries and agencies, including the FSB. 
Apologists will also argue that Bild is in the pocket of right-wing, anti-Russian German interests, and that the paper is just a tabloid – not to be taken seriously. 
But Bild has already proven that it can do serious investigative work, such as exposing how Russia propped up the Donbas region’s economy after it broke away, paying salaries and pensions and funding job-creation efforts. 
Journalists at Bild also seem to have done everything in their power to authenticate the notes from the meeting, even if they cannot publish them in full for fear of exposing their source. 
As much as Russia would like to dismiss the newspaper’s findings, the implications of what Bild has uncovered are difficult to deny. 

Turkey’s Hot-Money Problem 
NEW YORK – The ongoing financial volatility in emerging economies is fueling debate about whether the so-called “Fragile Five” – Brazil, India, Indonesia, South Africa, and Turkey – should be viewed as victims of advanced countries’ monetary policies or victims of their own excessive integration into global financial markets. 
To answer that question requires examining their different policy responses to monetary expansion – and the different levels of risk that these responses have created. 
Although all of the Fragile Five – identified based on their twin fiscal and current-account deficits, which make them particularly vulnerable to capital-flow volatility – have adopted some macroprudential measures since the global financial crisis, the mix of such policies, and their outcomes, has varied substantially. 
Whereas Brazil, India, and Indonesia have responded to surging inflows with new capital-account regulations, South Africa and Turkey have allowed capital to flow freely across their borders. 
Consider Turkey’s response, which has been characterized by an unwavering commitment to capital-account openness. 
Though political developments in Turkey have been attracting the most attention lately, the country’s current crisis is rooted in economic weaknesses, reflected in declining investor confidence and the sharp depreciation of the lira’s exchange rate. 
This instability has raised fears of emerging-market contagion, with South Africa especially susceptible, owing to its capital-account openness. 
In lieu of capital-flow restrictions, Turkey’s monetary authorities began to cut overnight borrowing rates in November 2010, in order to reduce the profitability of the carry trade (purchases of foreign-currency assets to take advantage of a higher interest rate). 
The hope was that longer-term capital flows would finance the widening current-account deficit, which exceeded 8% of GDP at the time, mitigating the risk of a sudden stop in external financing. 
While many market observers applauded Turkey’s central bank for its bold, unorthodox policy mix, the International Monetary Fund criticized the Turkish authorities for increasing inflation expectations and fueling further credit growth. 
But the IMF did not explicitly recommend that Turkey employ capital-account regulations, despite the mounting evidence from its own staff that the introduction of such rules was working in many emerging markets’ favor. 
Without capital-account management, Turkey’s central bank expected to achieve financial and price stability by complementing the reduction in overnight rates with domestic macroprudential tools aimed at reducing excessive credit growth. 
The main measures to control credit growth were a gradual increase in reserve requirements, beginning in 2010; some restrictions on consumer loans; and the introduction of credit-growth caps in the second half of 2011. 
Officials argued that such tools are more effective than capital-flow measures, which “are, in general, hard to implement and rather easy to circumvent.” 
But domestic prudential measures could have only a limited effect on the rate of credit growth, because the growth was driven primarily by booming capital inflows. 
Thus, domestic credit growth began to decelerate only in August 2011, when the escalation of the eurozone crisis made global investors more wary of risky emerging markets. 
Paradoxically, while Turkey’s monetary authorities acknowledged this relationship, they continued to attribute the decline in credit growth to the success of their prudential measures. 
Then, last May, the US Federal Reserve announced its intention to begin to “taper” its multi-trillion-dollar asset-purchase program – so-called “quantitative easing” – triggering large-scale capital flight from emerging markets. 
There was no denying it: the emerging-market capital explosion was over, and the credit and asset bubbles that it had fueled were in danger of imploding. 
By contrast, Brazil and India did not shy away from reimposing capital-account restrictions. 
Both economies are now far less fragile than Turkey and South Africa. 
Given this, perhaps the real question is why Turkey refrained from using capital-account regulations, when almost all of its emerging-market counterparts were using them in some form. 
Was the financial sector too powerful for its policymakers? 
Were its central bankers too committed to the IMF’s previous view that inflation-targeting can work only under conditions of capital-account convertibility? 
Or was it because politicians benefited from the economic boost that inflows of short-term “hot money” provide, and thus were willing to ignore the consequences? 
If there is a lesson to be learned from Turkey’s monetary-policy experiment, it is that domestic prudential regulations and monetary-policy tools should be viewed as complements to – not substitutes for – capital-account management. 
As for Turkey, its only hope to avoid an even deeper economic crisis is to take determined action to mitigate the economic risks that have been allowed to accrue over the last few years. 
Given the political instability that the country is currently facing, however, such an outcome is uncertain, at best. 


A Tax on Robots? 
ATHENS – Ken makes a decent living operating a large harvester on behalf of farmer Luke. 
Ken’s salary generates income tax and social security payments that help finance government programs for less fortunate members of his community. 
Alas, Luke is about to replace Ken with Nexus, a robot that can operate the harvester longer, more safely, in any weather, and without lunch breaks, holidays, or sick pay. 
Bill Gates thinks that, to ease the inequality and offset the social costs implied by automation’s displacement effects, either Nexus should pay income tax, or Luke should pay a hefty tax for replacing Ken with a robot. 
And this “robot tax” should be used to finance something like a universal basic income (UBI). 
Gates’s proposal, one of many variants on the UBI theme, allows us to glimpse fascinating aspects of capitalism and human nature that rich societies have neglected for too long. 
The whole point of automation is that, unlike Ken, Nexus will never negotiate a labor contract with Luke. 
Indeed, it will receive no income. 
The only way to simulate an income tax on behalf of Nexus is to use Ken’s last annual income as a reference salary and extract from Luke’s revenues income tax and social security charges equivalent to what Ken paid. 
There are three problems with this approach. 
For starters, whereas Ken’s income would have changed over time had he not been fired, the reference salary cannot change, except arbitrarily and in a manner setting the tax authorities against business. 
The tax office and Luke would end up clashing over impossible estimates of the extent to which Ken’s salary would have risen, or fallen, had he still been employed. 
Second, the advent of robot-operated machines that have never been operated by humans means there will be no prior human income to act as a reference salary for calculating the taxes these robots must pay. 
Finally, it is hard philosophically to justify forcing Luke to pay “income” tax for Nexus but not for the harvester that Nexus operates. 
After all, both are machines, and the harvester has displaced far more human labor than Nexus has. 
The only defensible justification for treating them differently is that Nexus has greater autonomy. 
But to what extent is Nexus genuinely autonomous in a manner that the harvester is not? 
However advanced Nexus might be, it can be thought of as autonomous if and only if it develops consciousness, whether spontaneously or with the help of its makers. 
Only if Nexus (like the Nexus-6 replicants in the 1982 film Blade Runner) achieves that leap will “he” have earned the “right” to be thought of as distinct from the harvester he operates. 
But then humanity will have spawned a new species and a new civil rights movement (which I would gladly join) demanding freedom for Nexus and equal rights with Ken – including a living wage, minimum benefits, and enfranchisement. 
Assuming that robots cannot be made to pay income tax without creating new potential for conflict between the tax authorities and business (accompanied by tax arbitrage and corruption), what about taxing Nexus at the point of sale to Luke? 
That would of course be possible: the state would collect a lump-sum tax from Luke the moment he replaces Ken with Nexus. 
Gates supports this second-best alternative to making robots “pay” income tax. 
He thinks that slowing down automation and creating tax disincentives to counter technology’s displacement effect is, overall, a sensible policy. 
But a lump-sum tax on robots would merely lead robot producers to bundle artificial intelligence within other machinery. 
Nexus will increasingly be incorporated within the harvester, making it impossible to tax the robotic element separately from the dumb parts that do the harvesting. 
Either the robot sales tax should be dropped or it should be generalized into a capital goods sales tax. 
But imagine the uproar against a tax on all capital goods: Woe betide those who would diminish domestic productivity and competitiveness! 
Ever since the emergence of industrial capitalism, we have been terrible at differentiating between property and capital, and thus between wealth, rent, and profits. 
This is why a wealth tax is so difficult to design. 
The conceptual problem of differentiating between Nexus and the harvester “he” operates would make it impossible to agree on how a robot tax should work. 
But why make life under capitalism more complicated than it already is? 
There is an alternative to a robot tax that is easy to implement and simple to justify: a universal basic dividend (UBD), financed from the returns on all capital. 
Imagine that a fixed portion of new equity issues (IPOs) goes into a public trust that, in turn, generates an income stream from which a UBD is paid. 
Effectively, society becomes a shareholder in every corporation, and the dividends are distributed evenly to all citizens. 
To the extent that automation improves productivity and corporate profitability, the whole of society would begin to share the benefits. 
No new tax, no complications in the tax code, and no effect on the existing funding of the welfare state. 
Indeed, as higher profits and their automatic redistribution via the UBD boosted incomes, more funds would become available for the welfare state. 
Coupled with stronger labor rights and a decent living wage, the ideal of shared prosperity would receive a new lease on life. 
The first two industrial revolutions were built on machines produced by great inventors in glorified barns and bought by cunning entrepreneurs who demanded property rights over the income stream “their” machines generated. 
Today’s technological revolution is marked by the increasing socialization of the production of capital. 
A practical response would be to socialize the property rights over the large income streams capital is now generating. 
In short, forget about taxing either Nexus or Luke. 
Instead, place a portion of Luke’s equity in the farm in a public trust, which then provides a universal payment to everyone. 
In addition, we must legislate to improve the wages and conditions of every human still in employment, while our taxes provide Ken unemployment benefits, a guaranteed paid job in his community, or retraining. 

Bin Laden and the Afghan Endgame 
ISLAMABAD – Osama bin Laden’s death in a firefight with United States special forces will profoundly affect Pakistan’s relations with America. 
The death of Al Qaeda’s leader deep in Pakistan, in a city with a heavy military presence, appears to confirm what many have long alleged: Pakistan, not Afghanistan, has become the epicenter of international terrorism. 
How will Bin Laden’s death affect terrorist groups operating not only in Pakistan, but also in other Muslim countries around the world? 
What impact will it have on America’s involvement in Afghanistan? 
Some tentative answers to these questions are now possible. 
The US went into Afghanistan in October 2001 to oust the Taliban regime, which had provided Bin Laden and Al Qaeda with a sanctuary and operational base. 
The US has now stayed on for almost ten years, fighting an insurgency concentrated among Afghanistan’s Pakhtun population. 
The Pakhtuns, who constitute about half of Afghanistan’s population, believe that the US invasion meant a loss of power to their ethnic rivals, the Tajiks and Uzbeks. 
The Pakhtun-led insurgency aims at expelling foreign troops and restoring Pakhtun dominance. 
With Bin Laden’s death, the US could argue that the mission begun almost ten years ago has been accomplished. 
Troops could begin to be brought home, in line with the promise made by President Barack Obama when he announced his Afghan strategy at West Point on December 1, 2009. 
But is the mission really accomplished? 
That question cannot be answered without knowing definitively where Pakistan stands in regard to Islamist terrorism. 
Bin Laden was killed in an operation that did not involve Pakistani forces, but that may (or may not) have involved the country’s intelligence community. 
The fact that Bin Laden had lived in the heart of Abbottabad (where I was schooled as a boy), about 40 miles north of Islamabad, in a mansion built over a period of six years, and had moved in and out of it several times a year, raises troubling questions about the Pakistani military’s possible complicity. 
Did the army, or senior officers, know that Bin Laden was living in their midst? 
If so, what was their purpose in letting him use so conspicuous a hiding place practically next door to a prominent military installation? 
It is extraordinary to even consider that Pakistan’s military high command could have tolerated Bin Laden’s presence, given that he and Ayman al-Zawahiri, his second-in-command, had declared war on Pakistan. 
Indeed, terrorist attacks directed or inspired by Bin Laden have killed thousands of people in a number of large Pakistani cities. 
Some of these attacks targeted military installations, including the military’s headquarters in Rawalpindi, not far from Abbottabad. 
In answering these questions, it would be helpful to know if the Pakistani intelligence community provided any aid at all to the US effort to locate Bin Laden’s hideout. 
Or was Pakistan’s military using Bin Laden as a pawn in its relations with the US? 
Did the Pakistanis allow Bin Laden to hide in the hope of using him as a bargaining chip in the endgame for Afghanistan? 
Had that moment arrived, leading to Bin Laden’s exposure and death? 
There are no immediate answers to such questions – not even in the op-ed written by President Asif Ali Zardari for The Washington Post within hours of Bin Laden’s death. 
But answers will emerge as more details about the operation become known. 
What is known is that Bin Laden’s demise came at a moment when relations between the CIA and Inter-Services Intelligence, Pakistan’s intelligence agency, had sunk to an all-time low. 
Senior leaders from both sides sought to save the relationship from total rupture. 
Lt. Gen. Ahmed Shuja Pasha, the head of the ISI, took a day trip to Washington, DC, and spent four hours meeting with CIA Director Leon Panetta. 
Admiral Mike Mullen, Chairman of the US Joint Chiefs of Staff, then went to Islamabad, where he met the commander of the Pakistani army for several hours. 
Later, on a visit to Afghanistan, Mullen expressed frustration with the ISI, and it is now clear that he already knew when he met the Pakistanis that an attack on Bin Laden’s compound was imminent. 
Pakistanis fear that, with the US planning to exit, Afghanistan will become their problem. 
One way to ensure that a friendly regime holds sway in Kabul after the US withdrawal would be to introduce into the governing structure a group with close ties to Pakistan. 
From Pakistan’s point of view, the group of fighters led by Jalaluddin Haqqani, one of the mujahideen leaders who fought to expel the Soviet Union from Afghanistan, could serve that purpose. 
Two decades ago, Haqqani and several other warlords were funded and trained by Pakistan and the US working together. 
The Haqqani group has maintained good relations with ISI. 
Complicating the situation, however, is the fact that the Haqqanis are operating out of North Waziristan, one of the tribal agencies located in the border area between Afghanistan and Pakistan, and is fiercely opposed to the presence of America and NATO troops in their country. 
There is a chance that, following Bin Laden’s death, the Haqqani group could now be tamed and thus become willing to enter into negotiations with the Afghan government. 
That would satisfy both the US and Pakistan. 

Bin Laden’s Ghost 
LONDON – Osama bin Laden’s death in his Pakistani hiding place is like the removal of a tumor from the Muslim world. 
But aggressive follow-up therapy will be required to prevent the remaining Al Qaeda cells from metastasizing by acquiring more adherents who believe in violence to achieve the 'purification' and empowerment of Islam. 
Fortunately, Bin Laden’s death comes at the very moment when much of the Islamic world is being convulsed by the treatment that Bin Laden’s brand of fanaticism requires: the Arab Spring, with its demands for democratic empowerment (and the absence of demands, at least so far, for the type of Islamic rule that Al Qaeda sought to impose). 
But can the nascent democracies being built in Egypt and Tunisia, and sought in Bahrain, Libya, Syria, Yemen, and elsewhere, see off the threats posed by Islamic extremists? 
In particular, can it defeat the Salafi/Wahhabi thought that has long nurtured Osama bin Laden and his ilk, and which remains the professed and protected ideology of Saudi Arabia? 
The fact is that before the US operation to kill Bin Laden, Al Qaeda’s symbolic head, the emerging democratic Arab revolutions had already, in just a few short months, done as much to marginalize and weaken his terrorist movement in the Islamic world as the war on terror had achieved in a decade. 
Those revolutions, whatever their ultimate outcome, have exposed the philosophy and behavior of Bin Laden and his followers as not only illegitimate and inhumane, but actually inept at achieving better conditions for ordinary Muslims. 
What millions of Arabs were saying as they stood united in peaceful protest was that their way of achieving Arab and Islamic dignity is far less costly in human terms. 
More importantly, their way will ultimately achieve the type of dignity that people really want, as opposed to the unending wars of terror to rebuild the caliphate that Bin Laden promised. 
After all, the protesters of the Arab Spring did not need to use – and abuse – Islam to achieve their ends. 
They did not wait for God to change their condition, but took the initiative by peacefully confronting their oppressors. 
The Arab revolutions mark the emergence of a pluralist, post-Islamist banner for the faithful. 
Indeed, the only people to introduce religion into the protests have been rulers, such as those in Bahrain, Yemen, Libya, and Syria, who have tried to use fear of the Shia or Sunni “other” to continue to divide and misrule their societies. 
Now that the US has eradicated Bin Laden’s physical presence, it needs to stop delaying the rest of the therapeutic process. 
For the US has been selectively – and short-sightedly – irradiating only parts of the cancer that Al Qaeda represents, while leaving the malignant growth of Saudi Wahabism and Salafism untouched. 
Indeed, despite the decade of the West’s war on terror, and Saudi Arabia’s longer-term alliance with the US, the Kingdom’s Wahhabi religious establishment has continued to bankroll Islamic extremist ideologies around the world. 
Bin Laden, born, raised, and educated in Saudi Arabia, is a product of this pervasive ideology. 
He was no religious innovator; he was a product of Wahhabism, and later was exported by the Wahhabi regime as a jihadist. 
During the 1980’s, Saudi Arabia spent $75 billion for the propagation of Wahhabism, funding schools, mosques, and charities throughout the Islamic world, from Pakistan to Afghanistan, Yemen, Algeria, and beyond. 
The Saudis continued such programs after the terror attacks of September 11, 2001, and even after they discovered that “the Call” is uncontrollable, owing to the technologies of globalization. 
Not surprisingly, the creation of a transnational Islamic political movement, boosted by thousands of underground jihadi Web sites, has blown back into the Kingdom. 
Like the hijackers of 9/11, who were also Saudi/Wahhabi ideological exports (15 of the 19 men who carried out those terror attacks were chosen by Bin Laden because they shared the same Saudi descent and education as he), Saudi Arabia’s reserve army of potential terrorists remains, because the Wahhabi factory of fanatical ideas remains intact. 
So the real battle has not been with Bin Laden, but with that Saudi state-supported ideology factory. 
Bin Laden merely reflected the entrenched violence of the Kingdom’s official ideology. 
Bin Laden’s eradication may strip some dictators, from Libya’s Muammar el-Qaddafi to Yemen’s Ali Abdallah Saleh, of the main justification they have used for their decades of repression. 
But the US knows perfectly well that Al Qaeda is an enemy of convenience for Saleh and other American allies in the region, and that in many cases, terrorism has been used as a pretext to repress reform. 
Indeed, now the US is encouraging repression of the Arab Spring in Yemen and Bahrain, where official security forces routinely kill peaceful protesters calling for democracy and human rights. 
Al Qaeda and democracy cannot coexist. 
Indeed, Bin Laden’s death should open the international community’s eyes to the source of his movement: repressive Arab regimes and their extremist ideologies. 
Otherwise, his example will continue to haunt the world. 

The Price of Biodiversity 
DHAKA – We humans do not only share the planet with a range of other species, including plants, animals, and even microbes; we also depend on them for our survival. 
Can we determine the economic value of protecting the natural world? 
Some people will balk at the idea of putting a price tag on biodiversity, viewing its protection as an obvious imperative. 
But they would undoubtedly also agree that preventing human death and suffering, while providing food, water, and an education to all, is vital. 
The reality is that there are simply not enough resources to do everything. 
Hard choices have to be made. 
Fortunately, economics can help us determine how to do the most good with the resources we have. 
This is particularly relevant today, as the world's 193 national governments work to establish the Sustainable Development Goals to guide global development efforts for the next 15 years. 
The SDGs will be modeled on the Millennium Development Goals, which were agreed in 2000 and focused on objectives like lowering maternal and infant mortality, eradicating poverty, and improving access to primary education. 
So far, a huge number of potential SDG targets have been proposed, some of which relate to biodiversity. 
But, though trillions of dollars will be spent on the SDGs, there are simply not enough resources to complete every project. 
That is why world leaders must focus on the targets that will have the greatest impact. 
My think tank, the Copenhagen Consensus, is working with more than 60 top economists and several Nobel laureates to identify which targets promise the highest return on investment. 
Preserving biodiversity, it turns out, is not only desirable; according to three new studies by the economists Anil Markandya, Luke Brander, and Alistair McVittie, it also makes good financial sense, at least for some projects. 
Protecting forests is a good place to start, with every dollar spent bringing benefits worth about $10. 
Some of the resources that forests provide – such as timber, firewood, and tourism – can be valuated relatively easily. 
But the value of others – such as the wide range of animal species they support and their intrinsic worth to people – is more difficult to quantify. 
In attempting to do so, economists have conducted surveys to find out how much people would be prepared to pay to protect forests and the animal species they support. 
Forests also serve as an enormous “carbon sink," storing atmospheric carbon dioxide for many decades or centuries; thus, protecting forests would help to mitigate climate change. 
Moreover, forests absorb intense rainfall, thereby reducing the risk of flooding. 
The 2010 flooding in Pakistan, for example, would have been far less devastating if so many trees from upper slopes had not been felled. 
The conclusion is thus that each dollar spent on conserving forests would yield $5-15 worth of social good, including tangible benefits, such as from logging or carbon capture, and “soft" gains, like preserving forests' intrinsic beauty. 
Conserving the world's wetlands – which also provide valuable services, including protection of coastal areas and river valleys from flooding – is also sensible, providing a tenfold return on each dollar spent. 
But protecting coral reefs would bring the highest returns, amounting to an extraordinary $24 worth of benefits for every dollar spent. 
Like forests, coral reefs provide multiple services – including tourism and fish nurseries, which help to sustain commercial fishing – and have an intrinsic value to people. 
To reduce the loss of coral reefs by half would cost about $3 billion each year – and yield at least $72 billion in benefits. 
Not all projects aimed at protecting biodiversity are a smart use of public resources. 
Creating additional nature reserves, for example, might sound like a great way to protect more species' natural habitats, but the economic benefits would not cover the nearly $1 trillion in costs. 
Doubling the area of protected coastal land and bringing substantial areas of open ocean into reserves is a particularly formidable task. 
Clearly, protecting coral reefs is a much better use of limited resources. 
Though the SDGs will aim largely to improve daily life for the very poor, a cool-headed economic assessment suggests that there are also smart biodiversity targets that should be considered. 
If world leaders take advantage of cost-benefit analysis to separate the wheat from the chaff, the next 15 years could be a boon for global development – including the preservation of biodiversity. 

Britain’s Dangerous Lapse in Medical Ethics 
LONDON – On July 17, the United Kingdom’s influential Nuffield Council on Bioethics implicitly endorsed “heritable genome editing,” declaring the practice of altering the DNA of a human embryo “morally permissible” under certain circumstances. 
The council’s report was the product of 20 months of consultation with many experts in the UK and beyond, and also built on a prior report to which I contributed testimony. 
But I have serious concerns about the new report’s conclusions. 
Simply put, I don’t believe the recommendations adequately consider all the ethical or medical risks of manipulating heritable genes. 
Nor do I think the report gives sufficient weight to the question of whether sufficiently strong safeguards ever could be put in place to prevent the technology’s misuse. 
The Nuffield report focuses on “germline” gene editing, or genetic alterations of human embryos and gametes that are passed on to future generations. 
This type of gene modification is not currently legal in the UK, although “somatic” genome editing – performed on the non-heritable genes of individual patients – is permitted. 
What makes the Nuffield report controversial is its precedent-setting argument. 
Germline gene editing is not approved under international law: both the Council of Europe’s Convention on Human Rights and Biomedicine (although the UK is not a signatory) and UNESCO’s Universal Declaration on the Human Genome and Human Rights prohibit the practice. 
Moreover, the overwhelming majority of countries that have ever considered legalizing it have eventually rejected the idea outright and have no plans to change their position. 
Only the UK has come close. 
In 2015, British lawmakers approved a form of germline modification known as “mitochondrial donation” – commonly referred to as “three-parent” in vitro fertilization (IVF). 
Eliminating genetically caused conditions in future children might seem a welcome goal, particularly to couples with a family history of such diseases. 
However, we already have techniques – such as “preimplantation genetic diagnosis” of embryos – which can prevent affected children from being born. 
That is all germline genetic editing can do: it cannot cure disease or save lives. 
Against these limited benefits, we must weigh major risks such as “off-target edits.” 
Some observers have likened germline genetic editing to hitting “find and replace all” on a computer. 
Yet not only do we lack an understanding of all future risk scenarios; there is no “undo” button. 
We are binding future generations to our own state of incomplete knowledge. 
I am not alone in expressing these views. 
In December 2017, the Royal Society published a survey of public attitudes toward DNA sequencing and genome editing. 
While respondents were generally supportive of procedures for the treatment of life-threatening illnesses, many were adamant that every available option should be exhausted before genome editing was tried. 
People also wondered how genetic technologies might affect social inequality and how countries would guard against the emergence of “corporate-type monopolies.” 
The new CRISPR technique, unlike some previous types of gene editing, is relatively cheap, and if current bans were relaxed, biotechnology firms would likely rush to fill the market. 
Similar “mission creep” and commercialization prompted the US Food and Drug Administration to reprimand the American company Darwin Life for promoting its three-person IVF techniques for the much wider market of age-related infertility. 
In fact, if the UK is not careful, gene editing could follow the trajectory of cosmetic surgery. 
First developed for genuine medical needs – such as reconstructive surgery for wounded soldiers – it has morphed into a largely unregulated business worth billions. 
Although the Nuffield Report does not explicitly recommend relaxing the UK regulatory system, it does not adequately address the pressures toward consumer choice, deregulation, and commercialization. 
Cultural pressure is already pushing people to favor particular traits in their offspring; in the United States, for example, buyers in the market for human eggs can shop for height, hair color, and intelligence. 
We could even see the rise of “gene-rich” and “gene-poor” populations: although CRISPR itself is a low-cost method, it requires women to undergo the complex, expensive, and sometimes risky procedures of IVF. 
To justify its recommendations, the authors of the Nuffield report suggested two overarching principles that should guide the use of genetic editing. 
First, genome editing must be “intended to secure, and [be] consistent with, the welfare of a person who may be born as a consequence.” 
But no one is suggesting that harmful germline genetic interventions should be permitted. 
The second principle – that editing “should not produce or exacerbate social division, or marginalize or disadvantage groups in society” – does, in fairness, move the debate beyond the choice of individual parents. 
But, again, the report offers little in the way of solutions, and it largely rejects the distinction between therapeutic and enhancement applications, which leaves open the possibility that such technologies could be misused for cosmetic purposes. 
For decades, the international community has largely adhered to the UNESCO declaration, adopted in 1997, which was updated in 2015 with the injunction that all countries “should renounce the possibility of going it alone” on germline gene therapy. 
But the Nuffield Report allows the UK to do just that. 
Although the report nods in the direction of international cooperation, it breaches an international consensus in a way that increases the risks of irreversible genetic alterations and new forms of inequality. 

The Ethics of Fighting Drug Resistance 
GOTHENBURG – In 2014, the World Health Organization reported that drug resistance – especially resistance to antibiotics – is a growing threat to human health, food security, and “the achievements of modern medicine.” 
Far from being an “apocalyptic fantasy,” the WHO said, a post-antibiotic era “is instead a very real possibility for the twenty-first century.” 
Drug resistance threatens the effective treatment of a growing list of communicable diseases – from bacterial infections to viral to and fungal diseases. 
When people recklessly use antibiotics to fight a common cold, when farmers use antibiotics to boost livestock productivity, or when pharmacological factories emit antibiotics into the environment to cut production costs, the bacteria that the drugs are designed to kill become immune. 
The more antibiotics consumed and emitted, the faster resistance develops, leading to “superbugs” that jeopardize human health, both by raising the risk of massive deadly epidemics and by compromising medical services, such as surgery and cancer treatment, that rely on effective antibiotics. 
This scary reality continues to frustrate health-care professionals. 
To be sure, there are solutions to the drug resistance crisis: restricted consumption, better diagnostics and disease surveillance, and expanded clinical development of new drugs are three. 
And some initial coordinated action has been taken in the WHO global action plan. 
But every fix has an ethical component, and four years after the WHO’s assessment, the ethical roadmap for addressing this medical emergency remains dangerously ill-defined. 
Health-care policies that pursue long-term goals often have short-term costs for human, animal, and environmental wellbeing. 
For example, restricting antibiotic consumption in certain populations could lead to job losses for those prone to illness. 
Actions taken to prevent infections may also infringe on personal privacy, as epidemiologists seek to identify and track people who carry resistant bacteria. 
Controls may even require curbing individual freedoms, like accessing hospitals or getting on airplanes. 
Moreover, capping antibiotic use could lead to higher drug prices, threatening access for those who need the medication. 
And, while many people might prefer a status quo approach that speeds up the development of new antibiotics while leaving current consumption unchanged, this solution brings its own set of ethical considerations – such as how and when to reduce the length of clinical trials. 
For all of these reasons, ethicists, health-care researchers, and social scientists have begun to examine how best to ensure that strategies for tackling drug resistance are ethically responsible. 
In 2015, the year after the release of the WHO’s report, the journal Public Health Ethics published a special issue devoted entirely to this topic. 
Then, in November 2017, the Centre for Antibiotic Resistance Research (CARe) at my own university held the first-ever major symposium on the topic, bringing together leading scholars in economics, ethics, law, policy, social science, and health care. 
The two-day conference provided a platform for the development of collaborative synergies, and the research output is scheduled to appear in the journal Bioethics. 
These scholarly gatherings have helped to foster academic interest in the ethical considerations of drug resistance, but represent only a tiny fraction of what is needed to help the world safely navigate the looming moral minefield. 
Any effort to restrict antibiotic consumption, regulate the food and pharmaceutical industries, or change human behaviors – all strategies that are currently being discussed – will require complex ethical reflection and analysis. 
The first ethical hurdle is to reach a consensus on how to characterize drug resistance. 
Many ethicists see it as a “collective action problem,” a public-health concern that must be addressed in an organized, holistic manner. 
There is less agreement, however, on what kind of collective action problem is it. 
Is it similar to other global challenges like climate change, poverty, or inequality? 
Or is it more of a national issue, best left to sovereign authorities? 
How we define the problem will determine what trade-offs people and governments are willing to make. 
Several participants at the CARe symposium highlighted this problem, noting that to implement drug-resistance strategies successfully, governments must strike a balance between global medical responsibility and local public good. 
One idea that has been proposed is to tax meat produced with antibiotics, an approach that could move animal agriculture in a more sustainable direction. 
While meat costs might climb, drug resistance in livestock would decline, as would adverse environmental effects. 
The ethical question is whether a solution like this would be fair on a global level, especially if the result is more expensive food. 
As drug resistance-related challenges become more urgent, one might think that ethical debates are an unaffordable luxury. 
But, given the risks implied by deploying ill-considered solutions, careful consideration of the ethical implications of drug resistance strategies is essential. 

Homegrown Energy Security for Europe 
COPENHAGEN – The European Union is highly dependent on foreign oil. 
For every 100 liters consumed within the EU, 90 are imported. 
Meanwhile, domestic oil production is plummeting, down more than 50% over the last decade. 
Unless the EU changes course and increases its production of alternative energy – including biofuels, an option the EU has long neglected – some 95% of its oil will come from foreign sources by 2030, according to the International Energy Agency. 
The current state of affairs remains the EU’s Achilles’ heel, because it implies dependence on imports from unstable, authoritarian regimes. 
In 2014, EU member states spent a staggering €271 billion on foreign crude oil – more than the combined GDP of Bulgaria, Hungary, Slovakia, and Slovenia. 
Roughly half of this money went to Russia, the Middle East, and North Africa. 
Thus, not only is the EU exposed to global supply disruptions; it is also helping to prop up authoritarian governments and empower hostile regimes, which limits its own ability to provide effective, coordinated responses to threats and provocations. 
The EU’s struggle to devise coherent political and economic strategies to confront the challenges posed by Russian aggression in Ukraine and the inferno in the Middle East is a case in point. 
The United Kingdom’s recent decision to boost defense spending highlights the growing recognition that strong military capabilities will be needed to uphold Europe’s security and sovereignty. 
But as long as its dependence on foreign oil persists, the EU will remain far weaker than it needs to be. 
The proposed Nord Stream II pipeline – which would funnel even more gas from Russia to Germany – is only likely to aggravate the situation. 
Europe’s energy security is likely to gain salience in the coming months, as 2016 shapes up to be another turbulent year in international politics. 
This year is also likely to see the completion of the EU’s Energy Union, established to ensure secure supplies of affordable, climate-friendly energy. 
Unfortunately, Europe’s dependence on foreign oil has been left out of the discussion. 
The European Commission must provide clear direction if EU member states are to develop alternative sources of energy. 
Renewable energy from wind and sun can certainly play a role in decreasing the EU’s energy vulnerability. 
Such sources are already helping to reduce dependence on coal and gas for electricity production. 
However, when it comes to energy production from oil – most notably fuel for cars – it is likely to be years before wind or solar energy can provide viable alternatives. 
The EU should follow the example set across the Atlantic, where countries have worked to reduce their reliance on foreign oil. 
The United States, for example, has created incentives for investment in alternative fuels. 
Indeed, the US is the world’s largest producer of bioethanol, which – along with the production of shale gas – has helped reduce foreign oil imports by at least 25%, while lowering carbon dioxide emissions and creating local jobs. 
Brazil, too, provides a compelling example, having worked since the oil crises of the 1970s to reduce its reliance on imported energy. 
Today, Brazil is a net oil exporter and the world’s second-largest producer of bioethanol, which has replaced more than one-quarter of the gasoline once used in the country. 
Unfortunately, much of the policy discussion surrounding biofuels in the EU is dominated by outdated arguments linking them with rising food prices. 
Food should not be used to fuel cars, opponents insist. 
Today, however, advanced biofuels are not based on food, but on waste from industry, agriculture, and private households. 
In the words of José Graziano da Silva, Director-General of the Food and Agriculture Organization of the United Nations, biofuels “can be an effective means to increase food security.” 
Done right, their development would mean “more fuel, more food, and greater prosperity for all.” 
Biofuel technology kills four birds with one stone: It improves energy security, recycles waste, reduces greenhouse-gas emissions, and produces jobs (often in rural areas). 
That is why replacing imported oil with homegrown energy is one of the most important and far-reaching legacies today’s Europeans could leave to the Europe of tomorrow. 

Food in the Age of Biofuels 
ROME – Over the past several years, biofuels have become a bone of contention. 
For some, a renewable energy source produced from organic matter amounts to a magic wand in the fight against climate change. 
But others view biofuels as an existential threat, because the plants used to create them compete for agricultural land and water that would otherwise be used to grow food. 
But this is a false dichotomy. 
The choice cannot be between food and fuel. 
We can make good use of both. 
Given the right conditions, biofuels can be an effective means to increase food security by providing poor farmers with a sustainable and affordable energy source. 
In some land-locked African countries, gasoline costs three times the global average, making fuel prices one of the main barriers to agricultural growth. 
Extending the use of biofuels in these regions could boost productivity and create new employment opportunities, especially in rural areas. 
The effect could be made even stronger if the additional demand for feedstock created by biofuels was met by family farmers and small-scale producers. 
Biofuels have become a fact of life, and their use is expected to continue to increase steadily. 
In 2013, biofuels accounted for 3% of the total transport fuel used around the world, according to a report by the Food and Agricultural Organization and the OECD. 
While this percentage is expected to remain steady, we can nonetheless expect the production of biofuels to grow in absolute terms as the global market for transport fuels also expands. 
Indeed, global biofuel production is projected to be double by 2023 relative to its level in 2007. 
If that prediction is borne out, biofuels will consume 12% of the world’s coarse grain, 28% of its sugar cane, and 14% of its vegetable oil. 
As production of these fuels grows, we will require policies, programs, and capacities that ensure that they are used sustainably, without distorting food markets or compromising food security, which will always be the first priority. 
The pioneers of biofuels would probably be surprised by how little they contribute to the total world fuel supply today. 
Rudolf Diesel’s first engine, designed in the late 1800s, ran on fuel derived from peanut oil. 
Henry Ford once scouted Florida in hopes of buying tracts of land to plant sugar cane, convinced that the United States would not tolerate the pollution from burning fossil fuels or the dependency implicit in importing oil to produce gasoline. 
Only in recent decades have biofuels regained their original appeal, owing to efforts to secure affordable energy, generate income, and mitigate the dependency of which Ford warned. 
More recently, concerns about pollution, climate change, and the finite nature of fossil fuels has driven a spike in demand – one that must now be managed. 
Flexibility is key to efforts to leverage the world’s growing reliance on biofuels to boost agricultural productivity, accelerate rural development, and increase food security. 
For example, policymakers must defuse the competitive pressures between food and fuel by designing schemes to counter price volatility for basic foodstuffs. 
Authorities could require that the percentage of biofuels blended with conventional fuel be increased when food prices drop and cut when they rise. 
This would serve as a sort of automatic stabilizer. 
Poor farmers would continue to enjoy robust demand for their products even when food prices dropped, and consumers would be protected from rapid or excessive price increases. 
National targets could also be made more flexible. 
If mandates for biofuel use were applied over several years, instead of only one, policymakers could influence demand in order to minimize pressure on food prices. 
Finally, at the individual level, greater flexibility could also be built in at the pump, through the promotion of flex-fuel vehicles of the type already in use in Brazil. 
If cars are equipped with engines that can run on conventional fossil fuels or blends with high percentages of biofuels, consumers can adapt to changes in prices by switching between one or the other. 
Finding the right balance will not be easy. 
But if we harness our collective knowledge, include developing countries’ smallholder farmers in this effort, and maintain our focus on reducing poverty and protecting the vulnerable, we can have more fuel, more food, and greater prosperity for all. 

 

Biology's Clash of Civilizations 
Last summer, at a meeting outside Aspen, Colorado, several dozen physicists gathered to celebrate what the journal Nature described as the "growing feeling that their discipline's mindset will be crucial to reaping the harvest of biology's post-genomic era." 
In fact, with genetics set to improve everything from human health to agriculture, physicists and mathematicians worldwide are pouring into the life sciences. 
Biology is where the scientific action--and the money--will be in the coming century. 
But this is not the first time that physicists and mathematicians have looked to biology for new fields to plow, and the history of such efforts has been fairly dismal. 
Biologists and physicists have different goals and traditions, and they look for different kinds of answers, because they ask different kinds of questions. 
My first glimpse of this disciplinary divide came many years ago while teaching a course on mathematical methods in biology. 
After introducing a biological problem with 11 variables, I used a simple method called dimensional analysis to demonstrate that only three needed to be studied empirically; the relations among the rest of the variables could be inferred logically. 
"But you haven't done the experiments," the students complained, "so how can you know?" 
I've been thinking about that question ever since. 
As a theoretical physicist, I had been trained to trust only mathematical and logical arguments and to view experimental evidence as fallible. 
But to many, if not most, biologists, experimental evidence, however fallible, still provided a surer path to truth. 
Where, in a purely deductive argument, was there room for nature's surprises, for mechanisms that look nothing like what we imagine in our initial assumptions? 
Philosophers of science have traditionally approached questions concerning what counts as knowledge, explanation, and theory as if they could be answered universally. 
But the communication gap between experimental and mathematical biologists suggests that the answers depend on specific disciplinary cultures. 
Consider the interdisciplinary efforts--and ultimate failure--of Nicolas Rashevsky, a Russian theoretical physicist who emigrated to the US in 1924. 
Rashevsky wondered whether a similar mechanism might account for the division of biological cells and the onset of instability in liquid droplets. 
Soon, he set out to build "a systematic mathematical biology, similar in its structure and aims to mathematical physics." 
By 1940, he had published his magnum opus, Mathematical Biophysics , established a program by the same name at the University of Chicago, and founded the Bulletin of Mathematical Biophysics . 
But by 1954, Rashevsky had lost his grants and budget, and today little remains of his institutional and scientific efforts. 
The main criticism against him was that he failed to engage with practicing biologists. 
But Rashevsky did make at least one early effort to interest biologists in his work. 
In 1934, he presented a "physico-mathematical" analysis of the forces acting on an idealized spherical cell, a model that he argued was sufficient to explain cell division. 
When the biologists objected that not all cells are spherical, Rashevsky responded that the theory must first be applied to the simplest cases. 
E. B. Wilson, the proverbial giant of cell biology, had the last word, concluding in a brief paper following Rashevsky's presentation that mathematics may be helpful in studying the growth of populations, but not individuals. 
Wilson's colleague, Eric Ponder, was even more pointed, saying that what is required "is more measurement and less theory." 
By the early 1950's, however, biologists still could not explain how an organism reproduces its characteristic form from one generation to another. 
In 1952, Alan Turing--best known for his work on computation and the mind--proposed a mathematical model consisting of a pair of equations describing the reaction and diffusion of two imaginary chemicals. 
His model, which he admitted was "a simplification and an idealization," aimed to highlight the "features of greatest importance" in an embryo's development. 
He emphasized that the reactions he described bore no resemblance to those in nature. They reflected only the desire "that the argument be easy to follow." 
Turing appears here as a caricature of the mathematical physicist. 
Like Rashevsky, he had been steeped in mathematical and physical scientists' belief that an imaginary construction making no pretense to literal truth can nonetheless capture the "features of greatest importance" and hence serve a useful explanatory function. 
But experimental biologists ask a different question: not whether organisms could grow as an imaginary model suggests, but whether they do . 
On this score, Turing's reaction-diffusion model has been greatly disappointing. 
Over the last 20 years, molecular biologists have found that the progressive activation of a hierarchy of genes--which play no role in Turing's model--defines an organism's final structure and form. 
More broadly, the best explanations of how biological systems solve particular problems come from experimental genetics, not mathematics and logic. 
Physicists and mathematicians nonetheless have reason to celebrate. 
Since 1983, the proportion of funding for mathematical and computational research that comes from the Biological Division of the US National Science Foundation has increased about 50-fold. 
To their credit, many new programs in mathematical biology encourage researchers coming from the mathematical sciences to become practicing biologists themselves. 
Meanwhile, "user-friendly" computer programs enable biologists to build their own mathematical/theoretical models. 
The net effect could be a new disciplinary culture that transforms the aims, methods, and epistemological basis of research. 
Theoretical biology's models will be formulated not in a few simple equations, but in a complex of algorithms, statistical analyses, and simulations. 
And, recognizing the ever present possibility of exceptions, they will aspire to "generalities" rather than "laws," leaving room for accidental particularities of biological structure. 
Biology is not physics, and to ignore its evolutionary history is to invite irrelevance. 

Engineering Better Refugee Health Care 
BOSTON – A resurgence of nativism and xenophobia in countries around the world has created a toxic environment for those fleeing from geopolitical crises. 
But among the many challenges that refugees must confront while they await resettlement, finding access to high-quality physical and mental health care tops the list. 
It is a challenge that demands more attention not just from doctors, nurses, non-governmental organizations, and other relevant actors, but also from engineers, who can make indispensable contributions to global public health. 
Those contributions are highly relevant to refugees. 
Beyond building bridges and creating gadgets, engineers can help improve the quality and affordability of health care around the world, by developing faster methods for diagnosing diseases and delivering medical services. 
Scientists and engineers in my own research area have already invented devices to help vulnerable babies breathe easier, detect malaria and HIV in war zones, and keep counterfeit medicines out of rural areas. 
Still, not enough engineering expertise has been brought to bear in refugee settlements, whose populations have swelled in recent years as more people have had to flee from conflicts and natural disasters. 
The UN estimates that there are more than 65 million forcibly displaced people in the world today, and that more refugees live in formal and informal encampments than ever before. 
Although governments and NGOs have made efforts to provide basic health care to refugees, they have struggled to do so reliably. 
Engineers have both an opportunity and a responsibility to close crucial gaps in the current system. 
Tackling this challenge will require greater attention in three key areas. 
The first is the classroom, where we should continue to raise awareness – particularly in the field of biomedical engineering – of the health-care challenges that refugees face. 
Moreover, faculty, students, researchers, and practitioners who have an interest in developing appropriate solutions to global health problems should be afforded the opportunity to do so. 
At the moment, there are too few educational programs that focus specifically on crisis-related biomedical engineering issues. 
Fortunately, however, there are existing models to follow. 
At the London School of Hygiene and Tropical Medicine, for example, the free online course “Health in Humanitarian Crises” is bringing the issue to students in engineering departments globally. 
At the American University of Beirut, summer school students recently introduced engineering strategies for helping displaced people. 
And at my institution, Boston University, we research ways to improve the quality and practice of medicine in the developing world. 
In 2012, my colleagues and I created PharmaChk, a portable device that doctors can use to detect fake or ineffective medications in hard-to-reach places. 
Second, governments and NGOs that work with refugees can do more to include medical engineering professionals in their efforts. 
Private and public entities such as the Bill & Melinda Gates Foundation, USAID, and Grand Challenges Canada have worked with engineers to produce rigorous, ethically sound, and scalable medical solutions in global health, and the same should be done with respect to displaced people. 
Third, and perhaps most important, engineers themselves need to step up their engagement with people and groups working on the front lines of the refugee crisis. 
That means working with local hospitals, clinics, ministries, and health-care providers, which can serve as key conduits for bioengineering expertise. 
Cross-disciplinary learning is important not only for spreading awareness, but also for improving the financial sustainability and scalability of technological innovations. 
A handful of bioengineering startups and aid groups, such as Engineers Without Borders, have begun to tackle health-related problems in refugee communities. 
These efforts have generally focused on methods for improving water sanitation and energy delivery. 
Other initiatives, such as telemedicine, in which clinical medical advice is delivered through mobile phones, have become a lifeline for many communities. 
Beyond these examples, efforts to engineer health-care solutions in refugee communities have been limited. 
To apply biomedical engineering to refugee health challenges, students, experts, and practitioners need to familiarize themselves with conditions in refugee settlements, and deepen their understanding of the complex traumas that afflict refugees. 
Refugee camps need robust point-of-care solutions that are not just effective, but also culturally sensitive and socially responsible. 
Throughout history, engineers have been society’s problem solvers. 
Today, creative thinking is needed to mitigate the plight of those who have been forcibly displaced from their homes. 
The international community has proved incapable of ending the crises that are currently sending refugees in search of safety. 
But biomedical engineers can at least ensure that they receive the care they need. 

Revolution and Reaction in Biopharming 
STANFORD – Obtaining medicines from plants is not new. 
Aspirin was first isolated from the bark of the willow tree in the eighteenth century. 
And many other common pharmaceuticals, including morphine, codeine, and the fiber supplement Metamucil, are purified from the world’s flora. 
More recently, scientists have developed techniques that take this process a step further, using genetic engineering to induce agricultural crops to synthesize high-value pharmaceuticals. 
Known as “biopharming,” the great promise of this technology emerged about 15 years ago, with clinical trials of vaccines and drugs produced in bananas, tomatoes, and tobacco. 
Unfortunately, progress has since stalled, owing to the vehement risk-aversion of regulators. 
One early example of biopharming was the production by the biotech company Ventria Bioscience of rice that contained two human proteins, lactoferrin and lysozyme. 
Once grown and harvested, the rice kernel is processed to extract and purify the proteins for use in oral rehydration solution for treating diarrhea, which is surpassed only by respiratory diseases as the leading infectious killer of children under the age of five in developing countries. 
The proteins have the same structure and functional properties as those found in natural breast milk, and the process for extracting them is analogous to that used routinely for the production of therapeutic proteins from organisms like bacteria and yeast. 
Research in Peru showed that fortifying an oral-rehydration solution with the proteins extracted from Ventria’s rice substantially lessens the duration of diarrhea and reduces the rate of recurrence – a near-miraculous advance for people in the developing world. 
But regulators can undo miracles, and they regularly do. 
When Ventria approached the US Food and Drug Administration in 2010 for recognition that these proteins are “generally recognized as safe” (a regulatory term of art), it received no response. 
Without an endorsement by the FDA, the company was unwilling to market the product, and so it remains unavailable, tragically depriving children in developing countries of a life-saving therapy. 
Even field testing biopharmed plants has proved problematic. 
In 2003, the US Department of Agriculture announced onerous new rules for testing crops engineered to produce pharmaceuticals. 
The ostensible objective of the regulation is to avoid contaminating food supplies with drugs, especially when edible crops are used to produce them. 
But the food industry’s worries that biopharmed plants could contaminate their products are overblown. 
And in any case, the risk can be mitigated in several ways, most obviously by using non-food plants like tobacco. 
In fact, even if biopharmed plants were to contaminate food crops, the likelihood that consumers would end up with harmful amounts of prescription drugs in their corn flakes, pasta, or tofu is very small. 
Gene flow is an age-old process that is well understood by farmers, who grow hundreds of crops, virtually all of which have been genetically improved in some way with a variety of techniques. 
As a result, they have developed meticulous strategies for preventing pollen cross-contamination in the field – when and if it is necessary for commercial reasons. 
Even if some crops were to become contaminated, the chances that active drug substances would be present in the final food product at sufficient levels to have an adverse effect on human health would remain very small. 
The biopharmed plant would be pooled into a large harvest, where its pharmaceuticals would be heavily diluted. 
The active agent would then need to survive milling and other processing, and then cooking, and it would need to be orally active, which protein drugs most often are not, because they are digested in the stomach. 
The chance of all of this occurring is not zero, of course. 
But, with a combination of factors – including natural selection, farmers’ pursuit of their commercial self-interest, and liability concerns – militating against such a possibility, the odds are very long, and the impact would almost certainly be very low. 
When you weigh this against the possibility of the development of the drug industry’s Next Big Thing or, at the very least, a new method to produce high-value compounds at low cost, regulators’ preoccupation with such unlikely events appears to be misplaced. 
Biopharming has much to offer us. 
If we are to reap what we can sow, however, we will need reasonable, science-based policies from regulators worldwide. 
Sadly, to borrow a phrase from the late Nobel laureate economist Milton Friedman, that is like wishing that our cats could bark. 


Barbarians at the Monetary Gate 
HONG KONG – Financial markets today are thriving. 
The Dow Jones industrial average, the S&P 500, and the Nasdaq composite index have all reached record highs lately, with emerging-economy financial markets also performing strongly, as investors search for stability amid widespread uncertainty. 
But, because this performance is not based on market fundamentals, it is unsustainable – and very risky. 
According to Mohamed El-Erian, the lost lesson of the 2007 financial crisis is that current economic-growth models are “overly reliant on liquidity and leverage – from private financial institutions, and then from central banks.” 
And, indeed, a key driver of financial markets’ performance today is the expectation of continued central-bank liquidity. 
After the US Federal Reserved revealed its decision last month to leave interest rates unchanged, the Dow Jones industrial average set intraday and closing records; the Nasdaq, too, reached all-time highs. 
Now, financial markets are waiting for signals from this year’s meeting of the world’s major central bankers in Jackson Hole, Wyoming. 
But there is another factor that could further destabilize an already-tenuous leverage- and liquidity-based system: digital currencies. 
And, on this front, policymakers and regulators have far less control. 
The concept of private cryptocurrencies was born of mistrust of official money. 
In 2008, Satoshi Nakamoto – the mysterious creator of bitcoin, the first decentralized digital currency – described it as a “purely peer-to-peer version of electronic cash,” which “would allow online payments to be sent directly from one party to another without going through a financial institution.” 
A 2016 working paper by the International Monetary Fund distinguished digital currency (legal tender that could be digitized) from virtual currency (non-legal tender). 
Bitcoin is a cryptocurrency, or a kind of virtual currency that uses cryptography and distributed ledgers (the blockchain) to keep transactions both public and fully anonymous. 
However you slice it, the fact is that, nine years after Nakamoto introduced bitcoin, the concept of private electronic money is poised to transform the financial-market landscape. 
This month, the value of bitcoin reached $4,483, with a market cap of $74.5 billion, more than five times larger than at the beginning of 2017. 
Whether this is a bubble, destined to collapse, or a sign of a more radical shift in the concept of money, the implications for central banking and financial stability will be profound. 
At first, central bankers and regulators were rather supportive of the innovation represented by bitcoin and the blockchain that underpins it. 
It is difficult to argue that people should not be allowed to use a privately created asset to settle transactions without the involvement of the state. 
But national authorities were wary of potential illegal uses of such assets, reflected in the bitcoin-enabled, dark-web marketplace called Silk Road, a clearinghouse for, among other things, illicit drugs. 
Silk Road was shut down in 2013, but more such marketplaces have sprung up. 
When the bitcoin exchange Mt. 
Gox failed in 2014, some central banks, such as the People’s Bank of China, started discouraging the use of bitcoin. 
By November 2015, the Bank for International Settlements’ Committee on Payments and Market Infrastructures, made up of ten major central banks, launched an in-depth examination of digital currencies. 
But the danger of cryptocurrencies extends beyond facilitation of illegal activities. 
Like conventional currencies, cryptocurrencies have no intrinsic value. 
But, unlike official money, they also have no corresponding liability, meaning that there is no institution like a central bank with a vested interest in sustaining their value. 
Instead, cryptocurrencies function based on the willingness of people engaged in transactions to treat them as valuable. 
With the value of the proposition depending on attracting more and more users, cryptocurrencies take on the quality of a Ponzi scheme. 
As the scale of cryptocurrency usage expands, so do the potential consequences of a collapse. 
Already, the market capitalization of cryptocurrencies amounts to nearly one tenth the value of the physical stock of official gold, with the capability to handle significantly larger payment operations, owing to low transaction costs. 
That means that cryptocurrencies are already systemic in scale. 
There is no telling how far this trend will go. 
Technically, the supply of cryptocurrencies is infinite: bitcoin is capped at 21 million units, but this can be increased if a majority of “miners” (who add transaction records to the public ledger) agree. 
Demand is related to mistrust of conventional stores of value. 
If people fear that excessive taxation, regulation, or social or financial instability places their assets at risk, they will increasingly turn to cryptocurrencies. 
Last year’s IMF report indicated that cryptocurrencies have already been used to circumvent exchange and capital controls in China, Cyprus, Greece, and Venezuela. 
For countries subject to political uncertainty or social unrest, cryptocurrencies offer an attractive mechanism of capital flight, exacerbating the difficulties of maintaining domestic financial stability. 
Moreover, while the state has no role in managing cryptocurrencies, it will be responsible for cleaning up any mess left by a burst bubble. 
And, depending on where and when a bubble bursts, the mess could be substantial. 
In advanced economies with reserve currencies, central banks may be able to mitigate the damage. 
The same may not be true for emerging economies. 
An invasive new species does not pose an immediate threat to the largest trees in the forest. 
But it doesn’t take long for less-developed systems – the saplings on the forest floor – to feel the effects. 
Cryptocurrencies are not merely new species to watch with interest; central banks must act now to rein in the very real threats they pose. 

Crypto-Fool’s Gold? 
CAMBRIDGE – Is the cryptocurrency Bitcoin the biggest bubble in the world today, or a great investment bet on the cutting edge of new-age financial technology? 
My best guess is that in the long run, the technology will thrive, but that the price of Bitcoin will collapse. 
If you haven’t been following the Bitcoin story, its price is up 600% over the past 12 months, and 1,600% in the past 24 months. 
At over $4,200 (as of October 5), a single unit of the virtual currency is now worth more than three times an ounce of gold. 
Some Bitcoin evangelists see it going far higher in the next few years. 
What happens from here will depend a lot on how governments react. 
Will they tolerate anonymous payment systems that facilitate tax evasion and crime? 
Will they create digital currencies of their own? 
Another key question is how successfully Bitcoin’s numerous “alt-coin” competitors can penetrate the market. 
In principle, it is supremely easy to clone or improve on Bitcoin’s technology. 
What is not so easy is to duplicate Bitcoin’s established lead in credibility and the large ecosystem of applications that have built up around it. 
For now, the regulatory environment remains a free-for-all. 
China’s government, concerned about the use of Bitcoin in capital flight and tax evasion, has recently banned Bitcoin exchanges. 
Japan, on the other hand, has enshrined Bitcoin as legal tender, in an apparent bid to become the global center of fintech. 
The United States is taking tentative steps to follow Japan in regulating fintech, though the endgame is far from clear. 
Importantly, Bitcoin does not need to win every battle to justify a sky-high price. 
Japan, the world’s third largest economy, has an extraordinarily high currency-to-income ratio (roughly 20%), so Bitcoin’s success there is a major triumph. 
In Silicon Valley, drooling executives are both investing in Bitcoin and pouring money into competitors. 
After Bitcoin, the most important is Ethereum. 
The sweeping, Amazon-like ambition of Ethereum is to allow its users to employ the same general technology to negotiate and write “smart contracts” for just about anything. 
As of early October, Ethereum’s market capitalization stood at $28 billion, versus $72 billon for Bitcoin. 
Ripple, a platform championed by the banking sector to slash transaction costs for interbank and overseas transfers, is a distant third at $9 billion. 
Behind the top three are dozens of fledgling competitors. 
Most experts agree that the ingenious technology behind virtual currencies may have broad applications for cyber security, which currently poses one of the biggest challenges to the stability of the global financial system. 
For many developers, the goal of achieving a cheaper, more secure payments mechanism has supplanted Bitcoin’s ambition of replacing dollars. 
But it is folly to think that Bitcoin will ever be allowed to supplant central-bank-issued money. 
It is one thing for governments to allow small anonymous transactions with virtual currencies; indeed, this would be desirable. 
But it is an entirely different matter for governments to allow large-scale anonymous payments, which would make it extremely difficult to collect taxes or counter criminal activity. 
Of course, as I note in my recent book on past, present, and future currencies, governments that issue large-denomination bills also risk aiding tax evasion and crime. 
But cash at least has bulk, unlike virtual currency. 
It will be interesting to see how the Japanese experiment evolves. 
The government has indicated that it will force Bitcoin exchanges to be on the lookout for criminal activity and to collect information on deposit holders. 
Still, one can be sure that global tax evaders will seek ways to acquire Bitcoin anonymously abroad and then launder their money through Japanese accounts. 
Carrying paper currency in and out of a country is a major cost for tax evaders and criminals; by embracing virtual currencies, Japan risks becoming a Switzerland-like tax haven – with the bank secrecy laws baked into the technology. 
Were Bitcoin stripped of its near-anonymity, it would be hard to justify its current price. 
Perhaps Bitcoin speculators are betting that there will always be a consortium of rogue states allowing anonymous Bitcoin usage, or even state actors such as North Korea that will exploit it. 
Would the price of Bitcoin drop to zero if governments could perfectly observe transactions? 
Perhaps not. 
Even though Bitcoin transactions require an exorbitant amount of electricity, with some improvements, Bitcoin might still beat the 2% fees the big banks charge on credit and debit cards. 
Finally, it is hard to see what would stop central banks from creating their own digital currencies and using regulation to tilt the playing field until they win. 
The long history of currency tells us that what the private sector innovates, the state eventually regulates and appropriates. 
I have no idea where Bitcoin’s price will go over the next couple years, but there is no reason to expect virtual currency to avoid a similar fate. 

The Bitcoin Threat 
LONDON – The extraordinary volatility of Bitcoin and other cryptocurrencies has become a threat not just to the international financial system, but also to political order. 
The blockchain technology upon which cryptocurrencies are based promises a better and more secure payment method than anything seen before, and some believe that cryptocurrencies will replace electronic currency in traditional bank accounts, just as electronic transfers replaced paper money, which succeeded gold and silver. 
But others are rightly suspicious that this new technology might be manipulated or abused. 
Money is part of the social fabric. 
For most of the history of human civilization, it has provided a basis for trust between people and governments, and between individuals through exchange. 
It has almost always been an expression of sovereignty as well, and private currencies have been very rare. 
In the case of metallic money, coins typically bore emblems of state identity, one of the earliest examples being the owl symbolizing the city of Athens. 
Usually, however, there was some confusion about whether the emblems on coins represented sovereignty or divinity. 
Whose head is on this coin? 
Is it Philip of Macedon or Alexander the Great, or is it Hercules? 
Later, Roman emperors would exploit this ambiguity, by stamping coins with their own “divine” visage. 
And even today, British coins have embossed words linking the monarchy to God. 
Whatever the case, there is a clear pattern throughout history: bad states produce bad money, and bad money leads to failed states. 
During periods of inflation or hyperinflation, radical currency devaluation would destroy the basis of political order. 
For example, the Thirty Years’ War in Central Europe during the seventeenth century was fueled in large part by social disintegration following a period of monetary instability. 
Similarly, during the French Revolution, speculation in a paper currency pegged to “national” property that had been confiscated from aristocrats and the church undermined the Jacobins’ legitimacy. 
In the twentieth century, periods of inflation during and after the two world wars destroyed Europe’s political institutions and fanned the flames of radicalism. 
In fact, Vladimir Lenin regarded the currency press as the “simplest way to exterminate the very spirit of capitalism” and bourgeois democracy. 
In addition to being one of the main factors behind the disintegration of states, bad money has also been a key feature of interstate conflicts. 
For belligerent states, creating or exploiting monetary turmoil has historically been a cheap way to destroy opponents. 
Even in peacetime, some states have responded to deteriorating relations by planting fake money to sow discord beyond their borders. 
The best-known example of such monetary warfare is Nazi Germany’s scheme to print the banknotes of Allied powers during World War II. 
Counterfeit notes could of course be used to purchase scarce resources or pay spies. 
But Germany also envisioned using long-range bombers to drop forged banknotes over Britain. 
Just imagine the demoralization and chaos that would have followed. 
Anyone with a large amount of money would automatically be suspect, and public trust would quickly erode. 
Dropping money could very well be more devastating than dropping bombs. 
Money is even easier to manipulate when it is internationalized. 
In the modern era, rogue states such as North Korea have regularly forged banknotes, particularly those of the United States. 
And cross-border electronic transfers between banks are often used for malign and criminal purposes. 
So far, though, there have not been any globally devastating monetary attacks outside the realm of cinematic fantasy. 
Of course, there have long been political efforts to undermine or replace the dollar as the dominant global currency. 
The most seductive alternative seems to have been gold. 
Russian theorists of “Eurasia” often tout traditional Russian iconography’s use of the fine metal. 
In 2001, then-Malaysian Prime Minister Mahathir Mohamad tried to introduce a “gold dinar” as an answer to the US-based currency system. 
And in 2005, al-Qaeda’s security chief, Saif al-Adl, suggested using gold to topple the dollar. 
Bitcoin looks like a twenty-first-century version of gold, and its creators have even embraced that analogy. 
It is produced – or “mined” – through effort. 
And just as the price of gold once reflected the human exertion needed to extract it from the ground in remote locations, creating Bitcoins takes an exorbitant amount of computing power, driven by cheap energy in remote areas of Asia or Iceland. 
But the rise of Bitcoin represents a shift in how society perceives fundamental value. 
Whereas pre-modern metallic currencies served as a basis for the labor theory of value – whereby goods and services are worth the amount of human labor put into them – blockchain technology assigns value to a combination of computing power and stored energy, none of it human. 
At the same time, cryptocurrencies like Bitcoin have made it all but impossible to distinguish between state and private-sector criminality. 
North Korea has been suspected of continuing its attempts at monetary manipulation by mining and creating Bitcoin, which has led China and South Korea to start closing down Bitcoin exchanges. 
Major cryptocurrency platforms such as Coincheck in Japan have also put a halt to trading. 
And yet we have already reached the point where a Bitcoin crash could have serious global implications. 
Financial institutions’ current exposure to the cryptocurrency is unclear, and probably would not be fully revealed until after a financial disaster. 
It is eerily reminiscent of 2007 and 2008, when no one really knew where the exposure to subprime-mortgage debt ultimately lay. 
Until the crash, it was anyone’s guess which institutions might be insolvent. 
Just as one cannot instantly tell whether a news report is “fake news,” nor can one immediately discern the validity of new monetary forms. 
Unless a currency has been authenticated by a government, it is unlikely to be fully trusted. 
But that does not mean that it cannot become a plaything for the naïve and gullible, or a weapon of financial mass destruction for political belligerents around the world. 

Black Bears and Television Junkies 
This summer, friends who live a few kilometers from us in rural Montana in the western US had to interrupt their dinner when a black bear suddenly came out of the trees. 
They went indoors to watch as it came up to the picnic table, licked the dishes clean, and then drank two cans of beer. 
Over the following days, the bear turned over the garbage cans of two neighbors and terrorized children and pets. 
Forest Service rangers set up a cage and put some bacon inside, soon catching and transporting the bear 30 kilometers into the wilderness. 
The bear was tagged before it was released, to show that it had been causing trouble. 
“Unfortunately,” said the ranger, “that bear may be back here even before our truck returns. 
Once they develop a taste for bacon and beer, you can't keep them away.” 
If a tagged bear is caught two or more times causing disruption, the rangers have orders to shoot it. 
It is easy to feel sorry for an animal that discovers tasty food and can’t resist getting more the easy way. 
The bear has no idea that its days are numbered unless it remains in the forest and hunts in the traditional way for its meals. 
But that bear was following the wisdom natural selection had programmed in its genes: food that is high in proteins and sugars is good for you, and the less energy you expend getting it, the better. 
That much the bear knows well. 
It had no chance to learn – and probably never will – that picnic tables and garbage cans are defended by forest rangers with orders to kill. 
How much luckier we humans are, knowing what is good and bad for us. 
We cannot be trapped so easily by things that taste good but will cause our downfall. 
But, in reality, most of us are no different from that bear. 
Most people are aware that high-fat diets, too much alcohol, smoking, promiscuous sex, and recreational drugs, while pleasant, can ruin one's health. 
Yet we can’t resist the lure of the garbage can and its delights. 
But at least we have had clear warnings about the dangers of such habits, so people who want to use such knowledge can avoid being trapped. 
There are other potentially harmful pleasures in the environment that are less known, but not less destructive than those that are. 
One of the most seductive of these pleasures – and thus one of the most dangerous – is television. 
Television is attractive to the architecture of the human nervous system: our brains are built to absorb information and follow rapid changes in the sensory field. 
TV provides these in easily digestible, sumptuously prepared morsels. 
Constant change and the appearance of excitement absorb viewers’ attention. 
The Sistine Chapel cannot compare with it – most children will become bored after ten minutes by the frescoes of Michelangelo, but will watch a detergent commercial with riveted interest. 
All of this applies just to the way the medium works, without taking content into consideration. 
The content in turn reinforces the seductive qualities of the medium by offering generous helpings of sex, violence, easy comfort, and other material that we are genetically prepared to respond to, but that in large doses detract from the ability to lead productive and serene lives. 
Indeed, by now the evidence that television watching is a dangerous habit has grown to such proportions that it is a wonder that stronger warnings and effective prevention have not been adopted. 
Among the many findings is that watching too much television induces passivity, both at the level of neural functioning and of behavior and that it interferes with learning and reduces political and civic participation. 
It also encourages aggressive behavior in children and produces negative moods such as sadness and loneliness. 
Nor is there any evidence of benefits to counterbalance these negative effects. 
When television was in its infancy, many thinkers ­ and not surprisingly, television producers – painted the future of the medium in glowing terms: TV would keep us informed, cultured, and entertained; it would strengthen family life and civic virtues. 
None of this happened. 
Even the informational value of television turned out to be a dream: individuals and communities that watch TV often know much less about what is happening in the world than comparable audiences that do not. 
The only clearly positive effect of TV watching is that people feel relaxed while doing it, and many people are willing to exchange that relaxation for the more enjoyable and useful things they might be doing instead. 
Like the bear that learned to fill his stomach comfortably, they feel satisfied to be entertained without having to exert themselves. 
Of course, television can be nice when consumed in small doses and with discernment. 
Like drinking a glass or two of wine, it helps digestion and lightens the mind. 
But those who spend hours watching it each evening, with less and less control over their attention, and deriving progressively less enjoyment from what they watch, risk becoming as besotted as an alcoholic who only feels alive when he blots out reality. 
No bear, if it knew what we do, would fall into that trap. 

Black Swan World 
BERLIN – In today’s global financial crisis, the image of a black swan has become a symbol for the seemingly impossible that somehow occurs, turning the world upside down. 
This year will afford us ample opportunity to examine the black swans that are already among us, and to prepare for the arrival of even more. 
November, for example, marks the 20th anniversary of the fall of the Berlin Wall. 
The night of November 9, 1989, marked the beginning of the end of the Soviet Union and its empire, and thus also of the bipolar world that had, for five decades, divided Germany and Europe. 
A year before, few people considered this world-shaking event even a remote possibility. 
Yet it happened, and the world changed almost overnight. 
After the disappearance of the Soviet Union and the bipolar world order, victorious Western capitalism, under the leadership of the only world power, the United States, reigned supreme in global politics, and even more so in the global economy. 
Nothing and no one, it seemed, could stem the global triumph of the market, with its transcendence of all previous limits on wealth – that is, until September 15, 2008, the fateful date when Lehman Brothers went bust and the meltdown of the global financial system began. 
While a distraught world is still trying to fathom the consequences of this global crash and to mitigate its impact, the call of the next black swan can already be heard: the global climate disaster. 
It seems to be part of human nature willfully to deny the possibility of great crises, or at least to downplay them. 
“Impossible” or “It won’t be all that bad” are the two magic formulae on which we tend to rely. 
And we refuse to learn the lesson of the black swan even when the next one is already visible for all to see! 
Although the generations alive today have witnessed two completely unexpected crises of epic proportions within the last 20 years, we indulge in a shocking collective repression of a climate disaster with far more serious – and foreseeable – consequences. 
But, in fact, by linking the answers to the global climate and economic crises, we can find a way out of both. 
The solutions to the climate crisis are already well known, the money is available, and so are the technologies, or where they aren’t, they could be developed. 
What is lacking is the strategic vision and determined action of the major political players. 
As for the economic crisis, bailouts and stimulus packages on the order of billions of dollars, euros, yen, or yuan have been planned or implemented to stem the further slide of the global economy. 
But, while references to the Great Depression are justified, the lesson of that crisis, and of the New Deal, is that effective programs can at best cushion the fall and bring about stabilization. 
The real economic recovery – and this is the bad news – came only with WWII and the long Cold War that followed. 
Rather than relying on war as an economic mega-project to end today’s recession, the international community should bet on the fight against the climate crisis, because globalization will continue, rapidly increasing the threats to the world’s climate. 
In 1929, there were slightly more than two billion people living on the planet; today, there are 6.7 billion, and in 2050 there will be nine billion. 
All of them, thanks to globalization and new communication technologies, will strive for the same standard of living, give or take, which will necessarily lead to an overstretched global ecosystem. 
The question of whether to use coal or nuclear power is simply no longer apposite: without a breakthrough in renewable energies, global energy demand cannot be met, not to mention the dangers of a new Chernobyl. 
Where this will lead the world can be seen even today: China already has the world’s most ambitious scheme for expanding nuclear energy, and every year it builds coal-fired power plants whose electricity output is roughly equivalent to the capacity of the entire British power grid! 
So the black swan of the climate crisis is already preparing to land. 
To fight the climate crisis effectively demands nothing less than a green revolution of the global economy, the mega-project of the twenty-first century. 
Only the rich industrial nations of Europe, America, and Japan can afford to pay for the necessary investments in emerging countries. 
But this green revolution must be about more than spending money; it must also be about laws and standards, i.e. about political regulation and new technologies, as well as new products and markets, which mean new economic opportunities. 
This year, a new global climate agreement will be negotiated in Copenhagen to replace the Kyoto Protocol. 
This is effectively the last chance to prevent the next black swan from landing. 
But we must understand that Copenhagen is also a big chance to revive the global economy. 
All of the relevant powers of the twenty-first century are represented in the G-20, and they should see the success of Copenhagen as part of their direct responsibility. 
This time, unlike at the London G-20 meeting, they should do the job properly – both to protect our climate and to reboot the global economy. 

Blair’s EU disaster 
When voters in France and the Netherlands turned down the proposal for a Constitution for the European Union, the world knew that the European project was in deep trouble. 
Last week’s bruising battle over the medium-term future of the Union’s budget has confirmed that verdict with a vengeance. 
It also brought to a sorry close the UK’s six-month presidency of the European Council, confirming Britain’s long-standing reputation as the odd-man-out in the European Union. 
The two events are intimately connected. 
French and Dutch voters did not say why they voted against the planned Constitution. 
But many commentators believe that they were protesting against what they perceived as the precipitate admission of ten new member states, mainly much poorer countries from Central and Eastern Europe. 
In particular, voters were afraid that their jobs would be lost to hordes of Eastern immigrants, exemplified in the image widely quoted at the time, of the low-cost Polish plumber. 
The irony, of course, was that most of the 15 old member states had refused to give the new members full and immediate access to the Western job markets. 
But in any event, it was too late to protest: the ten Eastern states had already been granted membership of the Union. 
But now the 25 member states must deal with the financial consequences of that enlargement, not just in the overall size of the European Union budget for the next seven years, but in who pays and who benefits. 
In particular, the central issue is how far the old member states are willing to pay to boost the less developed economies of the new members. 
In the event, it turned into a three-way battle between Britain, France and the new member states. 
Traditionally, a large majority of the budget has gone either on agriculture or on the development of backward regions. 
In practice, this has meant large flows of money either to big agricultural producers, like France, or to poorer member states, like Greece and Portugal. 
On both counts, the new member states expected to benefit substantially from the EU system. 
In the past, the big loser from the EU system, in budgetary terms, was the UK; for while agriculture accounted for two thirds of all EU spending, the UK had a small farm sector, and therefore received small farm payments. 
The British long complained of the unfairness of these rules, especially in view of the fact that the UK was one of the relatively poorer member states; and in 1984, Margaret Thatcher’s Conservative government demanded, and got, a massive rebate on its net contribution to the EU budget. 
Today, the situation has changed in three important respects. 
EU farm policy has started to be reformed, and its share of the EU budget has fallen from over 60% to 40%; Britain has for several years enjoyed significantly faster economic growth than most other member states, so that it is now one of the richer EU countries, even compared with France and Germany; and the new member states are so much poorer than even the poorest of the old members, that they have an unanswerable moral case for a generous share of whatever budget could be negotiated. 
When negotiations started six months ago, it was Britain’s turn to take over the Presidency of the European Council. 
Tony Blair, British Prime Minister, electrified the world of European politics by telling the European Parliament that he was a “passionate pro-European”. 
This was a message for which Britain’s European friends had long been hoping, and for which they had waited in vain since Blair’s election in 1997. 
Certainly, he had never expressed any such sentiment inside the British Isles during the previous eight years. 
Since Britain had been one of the most insistent advocates of enlargement of the EU to the candidates from Central and Eastern Europe, one might have expected that the Blair government would have wished to be correspondingly generous to the new-comers in the conduct of the budgetary negotiations. 
At first, this seemed to be the British government’s chosen tactic. 
Against all expectations, it struck a morally advantageous posture by offering to surrender some part of its budget rebate, but only if the rest of the European Union (i.e. France, in particular) would agree to fundamental reforms of EU farm policy. 
It took some time before the British came to understand that since President Jacques Chirac is a beleaguered lame-duck President, who will remain in office but not in power until 2007, he is in no position to agree to any such bargain. 
So when the British came to terms with this harsh reality, they played out the lamentable end-game of their management of the negotiations with small-minded cheese-paring and logic-chopping offers, all designed primarily to safeguard narrow British interests, mainly at the expense of the new member states. 
It is a sad conclusion to a presidency, launched six-months ago, with Blair’s claim that he was a “passionate pro-European”. 
Yet the full text of his speech tells it all. 
Blair is in favour of Europe; but not this Europe. 
He wants to be a part of a political Europe; but only if the other member states follow Britain’s model of economic and social reform. 
The problem is that economic and social reform are purely national responsibilities, and do not lie within the competence of the Union; if there is to be economic and social reform in France and Germany, that is a matter exclusively for French and German voters and politicians. 
It could only be a European matter, if the EU were a real federation. 
Is Blair a federalist, then? 
Heavens, no! 
He is merely an unthinking nationalist, living in terror of the nationalist yellow tabloid press. 
So why does he say he is a passionate pro-European? 
Because he has not thought about the question for one moment. 

Blair’s European Dilemma 
Tony Blair has achieved a remarkable third successive electoral victory. 
But his sharply reduced majority in the House of Commons, and his damaged personal reputation, mean that his political position is seriously weakened. 
As a result, he will be poorly placed to handle the challenges ahead, the most intractable of which will be the European Union’s new Constitution. 
The Constitution, adopted by the 25 member states last year, is not, in itself, a big deal. 
It introduces some significant improvements for majority voting in the Council of Ministers. It gives some more powers to the European Parliament. 
It includes a Charter of Fundamental Rights. 
It might help harmonize the foreign policies of the member states. 
But it is no revolutionary document. 
According to normal British constitutional practice, the government would be expected to ratify this Constitution by a vote in the House of Commons; and, until the recent general election, the government’s huge majority should have been more than sufficient. 
But Blair, beset by controversy over the unpopular and possibly illegal war in Iraq, thought he could avoid trouble at Westminster by postponing ratification until 2006 (that is, a comfortably long time in the future), and proposing that it be carried out by popular referendum. 
Unfortunately, as things stand, this is a referendum that Blair will not win, because all polls show a large and solid majority against the European Constitution. 
Blair’s government may hope to be rescued by outside events. 
France will hold a referendum on the Constitution for the end of this month, and a French “No,” the British seem to think, might make their problem go away. 
For the general expectation is that if France rejects the Constitution, the Constitution would be dead, and no British referendum would be needed. 
If this is Blair’s calculation, he is mistaken. 
Moreover, it is the kind of mistake that the British have been making in relations with Europe for the past half-century. 
Some recent French polls now show a majority in favor of the Constitution. 
But even if the French do vote “No,” that will not solve the British problem: on the contrary, it will precipitate a major political crisis, in France and across Europe, concerning the future of the EU – the type of crisis that the British have spent fifty years trying to evade. 
For if the Constitution is indeed dead, what happens next? 
None of the leading members of the Union will be interested in Britain’s views on this question. 
When Tony Blair swept to power in 1997, he was widely welcomed throughout Europe as the most pro-European British Prime Minister since Edward Heath a quarter of a century earlier. 
He spoke French and seemed at ease with Britain’s neighbors across the Channel; more importantly, he seemed to sympathize with European integration. 
Eight years on, Europe knows better. 
It is now clear to all that Blair is fundamentally opposed to the idea of a more politically integrated Europe. 
Not only has he kept Britain out of the single European currency over the past four years, he made it clear during the election campaign that he does not expect the UK to join the Euro during the next five years either. 
Occasionally Blair flirts with the idea of more European cooperation on foreign policy and defense. 
But the past three years proved in practice that he prefers subservience to the war policy of President Bush to any sense of community with Europe. 
In short, Blair is as opposed to the European project as all his predecessors. 
One fundamental difference between France and Britain is that most of the mainstream political elite in France has long been broadly pro-European. 
If the French electorate votes “No,” it will be much less a vote against the Constitution than a protest vote against President Jacques Chirac, or an expression of anxiety about the implications of the EU’s enlargement to Central Europe. 
By contrast, Blair cannot win a referendum on the Constitution, not only because it is opposed by virtually all the popular press, but also because neither he nor any major political leader in Britain has ever had a good word to say about European integration. 
The crisis over the Union’s future direction triggered by a French “No” vote could last for some time. 
But if the British imagine that the Constitution will just die, and that that will be the end of the story, they are deceiving themselves. 
On the contrary, they will find themselves embroiled, like the rest of Europe, in a fundamental debate about the objectives of the Union. 
They will then be forced to make public and explicit choices about the sort of Europe that they want, and this will put them at odds with their neighbors. 
In the end, the French and other leading member states are likely to explore alternative ways of working towards a more politically integrated Europe. 
The most plausible institutional mechanism for this alternative way forward will be the existing grouping of those member states that have wanted to belong to a more united Europe by joining, or seeking to join, the euro zone. 
If the Constitution is rejected, the British, having chosen to stay out of that grouping, may find that they have maneuvered themselves into an even more remote outer circle of Europe. 

Blame the Economists, Not Economics 
CAMBRIDGE – As the world economy tumbles off the edge of a precipice, critics of the economics profession are raising questions about its complicity in the current crisis. 
Rightly so: economists have plenty to answer for. 
It was economists who legitimized and popularized the view that unfettered finance was a boon to society. 
They spoke with near unanimity when it came to the “dangers of government over-regulation.” 
Their technical expertise – or what seemed like it at the time –gave them a privileged position as opinion makers, as well as access to the corridors of power. 
Very few among them (notable exceptions including Nouriel Roubini and Robert Shiller) raised alarm bells about the crisis to come. 
Perhaps worse still, the profession has failed to provide helpful guidance in steering the world economy out of its current mess. 
On Keynesian fiscal stimulus, economists’ views range from “absolutely essential” to “ineffective and harmful.” 
On re-regulating finance, there are plenty of good ideas, but little convergence. 
From the near-consensus on the virtues of a finance-centric model of the world, the economics profession has moved to a near-total absence of consensus on what ought to be done. 
So is economics in need of a major shake-up? 
Should we burn our existing textbooks and rewrite them from scratch? 
Actually, no. 
Without recourse to the economist’s toolkit, we cannot even begin to make sense of the current crisis. 
Why, for example, did China’s decision to accumulate foreign reserves result in a mortgage lender in Ohio taking excessive risks? 
If your answer does not use elements from behavioral economics, agency theory, information economics, and international economics, among others, it is likely to remain seriously incomplete. 
The fault lies not with economics, but with economists. 
The problem is that economists (and those who listen to them) became over-confident in their preferred models of the moment: markets are efficient, financial innovation transfers risk to those best able to bear it, self-regulation works best, and government intervention is ineffective and harmful. 
They forgot that there were many other models that led in radically different directions. 
Hubris creates blind spots. 
If anything needs fixing, it is the sociology of the profession. 
The textbooks – at least those used in advanced courses – are fine. 
Non-economists tend to think of economics as a discipline that idolizes markets and a narrow concept of (allocative) efficiency. 
If the only economics course you take is the typical introductory survey, or if you are a journalist asking an economist for a quick opinion on a policy issue, that is indeed what you will encounter. 
But take a few more economics courses, or spend some time in advanced seminar rooms, and you will get a different picture. 
Labor economists focus not only on how trade unions can distort markets, but also how, under certain conditions, they can enhance productivity. 
Trade economists study the implications of globalization on inequality within and across countries. 
Finance theorists have written reams on the consequences of the failure of the “efficient markets” hypothesis. 
Open-economy macroeconomists examine the instabilities of international finance. 
Advanced training in economics requires learning about market failures in detail, and about the myriad ways in which governments can help markets work better. 
Macroeconomics may be the only applied field within economics in which more training puts greater distance between the specialist and the real world, owing to its reliance on highly unrealistic models that sacrifice relevance to technical rigor. 
Sadly, in view of today’s needs, macroeconomists have made little progress on policy since John Maynard Keynes explained how economies could get stuck in unemployment due to deficient aggregate demand. 
Some, like Brad DeLong and Paul Krugman, would say that the field has actually regressed. 
Economics is really a toolkit with multiple models – each a different, stylized representation of some aspect of reality. 
One’s skill as an economist depends on the ability to pick and choose the right model for the situation. 
Economics’ richness has not been reflected in public debate because economists have taken far too much license. 
Instead of presenting menus of options and listing the relevant trade-offs – which is what economics is about – economists have too often conveyed their own social and political preferences. 
Instead of being analysts, they have been ideologues, favoring one set of social arrangements over others. 
Furthermore, economists have been reluctant to share their intellectual doubts with the public, lest they “empower the barbarians.” 
No economist can be entirely sure that his preferred model is correct. 
But when he and others advocate it to the exclusion of alternatives, they end up communicating a vastly exaggerated degree of confidence about what course of action is required. 
Paradoxically, then, the current disarray within the profession is perhaps a better reflection of the profession’s true value added than its previous misleading consensus. 
Economics can at best clarify the choices for policy makers; it cannot make those choices for them. 


Blaming Islam is Too Easy 
The terrorist attacks in America and the war against the Taliban have incited wide speculation about the relationship between culture and economic development. 
Most pointedly, is the Islamic world thwarted from modernizing because its culture is trapped in the Middle Ages? 
Is poor economic development in much of the Middle East and Central Asia the result of cultural practices that are hostile to economic growth? 
The usual charge is that the Islamic world missed the advances of the European Enlightenment, when the state and religion were separated, modern scientific ideas were adopted, and cultural attitudes towards women modernized. 
As a result, it is alleged, the Islamic world cannot cope with the demands of modernization, either in technology or in cultural practices, such as the granting of rights to women, which is necessary for economic success in the modern world. 
As always with crude generalizations, elements of truth are intermixed with a mass of confusion. 
The truth is that certain cultural practices support economic modernization. 
These include a tendency towards greater equality between men and women and their roles in society; a culture that rewards educational attainment with high social status; the secularization of many aspects of modern life, including the preeminence of modern science; and cultural practices that favor social mobility in the choice of occupations. 
The falsehood is to believe that some cultures are static and inimical to change, while others are somehow uniquely modern. 
In all parts of the world, cultures have had to adjust to the changes in economic organization, technology, and scientific knowledge of the past two hundred years. 
In Western Europe and the US, for example, the cultural acceptance of social and economic equality between men and women has involved a long process of political struggle and evolving social norms. 
The pace of change has varied markedly within regions and across cultural sub-groups. 
The Islamic world, which stretches over 15,000 kilometers, dozens of countries, and more than 1 billion followers of the faith, is similarly subject to widespread cultural variation. 
Islamic countries in the Mediterranean region (such as Morocco, Tunisia, Egypt, and Turkey) are culturally and politically distinct from Islamic countries in the Arabian Peninsula (such as Saudi Arabia, Yemen, and Oman), which differ from Islamic countries in Central Asia (such as Afghanistan, Pakistan, Tajikistan), Southeast Asia (such as Indonesia and Malaysia) and Sub-Saharan Africa (such as Mali and Chad). 
Consider one example: the number of children per woman in society, known as the ``total fertility rate.'' 
In societies where women are not allowed to work and are expected to remain home and raise children, the number of children is very high. 
Economic growth tends to suffer: when poor households have many children, the education given to each child also tends to be reduced. 
In some parts of the Islamic world, most notably in the Arabian peninsula, the fertility rate remains very high. 
A woman in Yemen will on average give birth to more than 7 children in her lifetime. 
In Saudi Arabia, the average is over 6 children. 
In other parts of the Islamic world, the fertility rate is far lower and has declined in recent decades, signaling a major shift in cultural norms. 
In Tunisia, the average fertility rate has dropped from 6.2 in the 1970s to 2.3 today, just slightly above the 2.0 average in the US. 
Similarly, in Turkey the fertility rate fell from 5.2 in the early 1970s to 2.7 in the late 1990s. 
In Indonesia, the decline in fertility rates was about the same. 
Women have entered the labor force in these societies in much greater number, delivering economic gains and improvements in their social status. 
We can therefore note that in Islamic societies like Tunisia, Turkey, Indonesia, and Malaysia, economic growth and cultural change has proceeded rapidly in the past generation. 
Some of these countries have been among the world's fastest growing economies in recent decades. 
Islamic culture has neither been a barrier to growth, nor has it been static. 
As in other parts of the world, culture in these countries has shown its vibrancy and also its capacity to adjust to changing conditions. 
In the Arabian peninsula, cultural change has been slower, as has economic development. 
Causation probably runs in both directions here: cultural factors may have impeded economic growth, while poor economic performance (say, bad economic policies and over-dependence on oil) may have slowed the adaptation of cultural practices to the needs of a modern economy. 
In very remote places like Afghanistan or Chad, weak connections with the world economy also delayed the process of social change. 
These examples should warn us away from three current tendencies. 
The first is to give easy labels to complex and diverse societies. 
The idea of a single conservative ``Islamic world'' is as mistaken as a single modern ``Western society.'' 
Diversity is very high; cultural practices vary widely. 
Simplistic labels reflect more prejudice than understanding. 
The second tendency is to believe that culture is somehow static and unchanging. 
Cultures everywhere change in response to technological developments, economic growth, and - of course - globalization. 
The third tendency is to believe that culture is the key to economic development. 
Economic development is determined by many factors, including geography, politics, international relations, and culture. 
Cultural differences across societies are often more the outcome than the cause of differences in economic development. 

Blatant Benevolence 
PRINCETON – Jesus said that we should give alms in private rather than when others are watching. 
That fits with the commonsense idea that if people only do good in public, they may be motivated by a desire to gain a reputation for generosity. 
Perhaps when no one is looking, they are not generous at all. 
That thought may lead us to disdain the kind of philanthropic graffiti that leads to donors’ names being prominently displayed on concert halls, art museums, and college buildings. 
Often, names are stuck not only over the entire building, but also on as many constituent parts of it as fundraisers and architects can manage. 
According to evolutionary psychologists, such displays of blatant benevolence are the human equivalent of the male peacock’s tail. 
Just as the peacock signals his strength and fitness by displaying his enormous tail – a sheer waste of resources from a practical point of view – so costly public acts of benevolence signal to potential mates that one possesses enough resources to give so much away. 
From an ethical perspective, however, should we care so much about the purity of the motive with which the gift was made? 
Surely, what matters is that something was given to a good cause. 
We may well look askance at a lavish new concert hall, but not because the donor’s name is chiseled into the marble façade. 
Rather, we should question whether, in a world in which 25,000 impoverished children die unnecessarily every day, another concert hall is what the world needs. 
A substantial body of current psychological research points against Jesus’s advice. 
One of the most significant factors determining whether people give to charity is their beliefs about what others are doing. 
Those who make it known that they give to charity increase the likelihood that others will do the same. 
Perhaps we will eventually reach a tipping point at which giving a significant amount to help the world’s poorest becomes sufficiently widespread to eliminate the majority of those 25,000 needless daily deaths. 
That is what Chris and Anne Ellinger hope their Web site, www.boldergiving.org , will achieve. 
The Web site tells the story of more than 50 members of the 50% League – people who have given away either 50% of their assets or 50% of their income in each of the last three years. 
Members of the league want to change expectations about what is a “normal” or “reasonable” amount to give. 
They are a diverse group of people. 
Tom White ran a big construction company, and started giving millions to Paul Farmer’s efforts to bring health services to Haiti’s rural poor. 
Tom Hsieh and his wife, Bree, made a commitment to live on less than the national median income, currently $46,000 a year. 
As Hsieh, who is 36, earned more, they gave away more, mostly to organizations helping the poor in developing countries. 
Hal Taussig and his wife have given away about $3 million, amounting to 90% of their assets, and now live happily on their social security checks. 
Most donors see giving as personally rewarding. 
Hsieh says that whether or not his giving has saved the lives of others, it has saved his own: “I could easily have lived a life that was boring and inconsequential. 
Now I am graced with a life of service and meaning.” 
When people praise Hal Taussig for his generosity, he tells them, “Frankly, it’s my way of getting kicks out of life.” 
The 50% League sets the bar high – perhaps too high for most people. 
James Hong started www.hotornot.com , a Web site that allows people to rate how “hot” other people are. 
It made him rich. 
He has pledged to give away 10% of everything he earns over $100,000. 
Hong’s Web site, www.10over100.org , invites others to do likewise. 
So far, more than 3,500 people have. 
Hong sets the bar low. 
If you earn less than $100,000, you don’t have to give away anything at all, and if you earn, say, $110,000, you would be required to give away only $1,000 – less than 1% of your income. 
That is not generous at all. 
Many of those earning less than $100,000 can also afford to give something. 
Still, Hong’s formula is simple, and it starts to bite when earnings get really big. 
If you earn a million dollars a year, you have pledged to give $90,000, or 9% of what you earn, which is more than most rich people give. 
We need to get over our reluctance to speak openly about the good we do. 
Silent giving will not change a culture that deems it sensible to spend all your money on yourself and your family, rather than to help those in greater need – even though helping others is likely to bring more fulfillment in the long run. 

Blind in Gaza and Jerusalem 
LONDON – I spent the New Year in Sydney, watching the fireworks above the iconic bridge welcome in 2009. 
The explosions over Gaza that night were not intended to entertain, but rather to break Hamas and discredit it in the eyes of Palestinians. 
It was the latest resort to terrible violence in order to resolve how to share in peace what Christians still like to call the Holy Land. 
Mahatma Gandhi criticized the biblical justification of retribution, “an eye for an eye, a tooth for a tooth.” 
Followed through to its end, he argued, it would mean that all were blind. 
And so it has proved in Palestine and Israel. 
Blind in Gaza, blind in Jerusalem. 
Much of what has happened was predictable, as well over 1,400 men, women, and children have died and more than 4,000 have been injured. 
First, the United States justified the Israeli assault and blamed everything on Hamas, just as it used to pin all responsibility for whatever went wrong on Yasir Arafat and Fatah. 
Second, despite French President Nicolas Sarkozy’s welcome high-profile diplomacy, Europe has been irrelevant, if not quite invisible. 
As Israeli officials point out, Europeans are always there for the photo opportunity. 
The Quartet’s peacemaker, Tony Blair, is as unctuously nugatory as ever. 
He appears on CNN , but has he actually visited Gaza since his appointment in the summer of 2007? 
No. 
Third, as usual, Israel has accused of anti-Semitism those who have dared to criticize its disproportionate response to Hamas’s indefensible rocket attacks and its collective punishment of Palestinians. 
An Italian cardinal, who admittedly spoke intemperately, was accused of using the language of Holocaust denial. 
By that standard, does my unqualified criticism of Hamas’s rocket attacks make me an Islamophobe? 
Coincidentally, the deadly attack on Gaza came at the same time that a clutch of America’s most distinguished would-be Middle East peacemakers published books about how the task should properly be tackled. 
It all sounded a bit like a series of job applications – the war for President Barack Obama’s ear. 
One thing all these experts could agree on is that President George W. Bush was a disaster. 
American policy might as well have been made in Likud’s headquarters. 
Even at the end, when the United Nations Security Council voted on Gaza, Bush was happy to humiliate Condoleezza Rice at Israeli Prime Minister Ehud Olmert’s bidding. 
These “wise men,” advisers one and all to President Bill Clinton and other presidents, all seem to concede that the failure of the proposed Camp David accord in 2000 could not, after all, be laid solely at Arafat’s door. 
Former Israeli premier Ehud Barak should carry his share of the blame. 
Moreover, they all criticize the Clinton-era practice of routinely clearing America’s policy positions first with Israel, which is hardly likely to win Arab confidence or support. 
The American diplomats’ arguments about process did not on the whole carry over into disagreement about the content of a peace deal. 
All more or less agree on this. 
Two states. 
Security guarantees for Israel. 
A Palestinian state within the 1967 borders, adjusted by agreement through mutual land swaps. 
An end to most West Bank settlements. 
No “right of return” for Palestinian refugees, but financial compensation for them. 
Some system of joint or international sovereignty over Jerusalem’s holy places and the division of the city so that it can become the capital of two states. 
Of course, this is what should happen. 
And I suppose that it is conceivable that it could still happen with the help of welcome new mediators like Qatar and Turkey, whose prime minister called Israel’s attack “a serious crime against humanity.” 
But I have begun to wonder whether it will really be possible to achieve peace on this basis. 
Fatah, and Palestinian moderates like President Mahmoud Abbas, have been totally discredited. 
Palestinians on the whole have been further radicalized. 
Hamas, whose engagement and support is essential for any settlement, has sworn revenge. 
Every day, new Palestinian sorrows strike heaven in the face. 
The widows and the mothers of the dead weep and cry out for bloody justice. 
Should we be surprised? 
Had the British government pursued peace and the destruction of the IRA in Northern Ireland by bombing Catholic Derry, would that have alienated or won over Catholic opinion? 
On the Israeli side, which political leaders really want a Palestinian state and are prepared to take the political risks associated with trying to establish one? 
Which of them are strong enough to deal with the West Bank settlers? 
There will be no peace settlement otherwise. 
Which leaders will teach the facts of life to the more extreme members of the Jewish diaspora in America? 
Who among Israel’s leaders understands that reconciliation is more important that retribution and revenge? 
However tough things looked in the past, I have never felt such a sense of despair about Palestine and Israel. 
Reason has been drowned in blood. 
It seems as though the politics of hope have given way to the politics of the cemetery. 
Poor Palestine. Poor Israel. 
Who is there now who can still light a candle in the dark? 

Block Benefits, Not Immigrants 
As EU enlargement approaches, people across Western Europe fear a flood of job-seeking immigrants from the postcommunist accession countries. 
Indeed, if all eight of the top East European candidates (excluding Bulgaria and Romania) join by the target date of 2004, the EU population's will soar by about 75 million people. 
When Spain and Portugal joined the EU two decades ago, emigration to existing member states was lessened by the fact that many immigrants had arrived from these countries during Europe's go-go 1960s. 
But migration from Eastern Europe in those years was blocked by the Iron Curtain. 
Now the income gap between eastern applicants and the EU is three times as large as the disparity with the Iberian peninsula was. 
Munich's Ifo Institute expects about 2.5--3.3 million migrants to Western Europe during the 15 years following EU enlargement. 
These are big numbers, but there is little or no reason for fear-not if today's EU members prepare. 
Unlike immigration from non-European countries, East European immigrants share a similar cultural background and will assimilate easily. 
In principle, with flexible labor markets, migration creates welfare gains for all countries. 
Emigration countries gain because their nationals can earn an income in Western Europe that, for all but the most marginal migrant, is more than sufficient to compensate for the loss of domestic value added and the subjective and objective costs of migration. 
Immigration countries gain because all but marginal migrants produce more value added than they get back in wages. 
While blue-collar workers incur income losses, their losses will be overcompensated by the gains of landowners, capital owners, entrepreneurs and white collar workers. 
Sadly, today's EU labor markets are too inflexible to achieve this result. 
If immigration countries suffer from chronic unemployment because wages are overly generous and rigid, as seems the case in most West European countries, migrants who find work will simply displace nationals from their jobs. 
Here migration will result in a welfare loss. 
Migrants gain. 
So, too, family members staying home who receive money transfers. 
But migrants produce no additional value added for the countries into which they immigrate, but incur migration costs and their contribution to domestic value added is missing. 
The EU wants to solve this problem by limiting migration for a transition period of up to seven years. 
This is a second-best solution. 
The best solution is to make Western labor markets flexible by opening the system of collective wage bargaining, dismantling labor market regulation, and reforming the welfare state. 
If workfare replaces welfare, wages will become more flexible enabling EU labor markets to absorb immigrants more efficiently. 
But even with these measures, social benefits may artificially increase the incentive to migrate. 
If immigrants gain welfare benefits in addition to wages, more will be lured into coming than necessary, and marginal migrants would create welfare losses for the EU equal to the benefits. 
Given that immigrants usually enter countries that redistribute resources from above-average to below-average incomes, such benefits are likely even if immigrants work and pay taxes and social security contributions. 
Excluding taxes and contributions paid and transfers and public goods received, the Ifo Institute reckons that the average immigrant to Germany receives a net 2,300 euros annually. 
One way to curtail this problem is to delay full integration of immigrants into the welfare system of a host country for a few years-a reform advocated by the Scientific Advisory Committee to Germany's Federal Finance Ministry. 
Immigrants could come and work, pay taxes and social contributions, and gain free access to the public goods of the host country. 
They could also receive the full contribution-financed social transfers that the welfare state provides. 
But they would not be granted tax-financed social benefits. 
Temporary exceptions could include supplemental social assistance, housing benefits or the "export" of family benefits to children living in the home country. 
The exceptions would have to be tailored by each country so that the net cost of all transfers of public resources to and from immigrants is zero. 
Politicians and lawyers may dislike this solution, because it undermines the EU's principle of social inclusion for employment and resembles arrangements that currently apply to EU citizens who live in other member countries without working there. 
Instead, bureaucrats and politicians prefer a quota system, whereby bureaucrats, not the market, select who immigrates. 
Such a system may formally fit better with the idea of social inclusion, but violates the basic right of free migration granted in the Treaty of Rome. 
Only people that bureaucrats deign to select are fully included, while others who want to come but are not allowed to do so face discrimination. 
A policy of partial, delayed integration is preferable to quotas, not only in view of the Treaty of Rome but also on economic grounds. 
It allows for fine-tuning and self-selection of migration flows, yielding far better results than even the most well-meaning bureaucrats could ever achieve. 
Moreover, it would reduce the fiscal burden on taxpayers in immigration countries, thereby preventing a competitive dismantling of West European welfare states driven by the aim of warding off expensive immigration. 
Partially delayed integration rather than transition periods or quotas is a market-oriented solution that can maintain Europe's welfare states and enable it to grow and develop to its true potential. 

Block the Commission's Competition Policy Now 
Last December, the European Commission published a Green Paper that contains proposals to reform the EU's rules on mergers. 
Reactions and comments on these proposals by interested parties are due in Brussels by March 31 st . 
Afterwards, the Commission will draft new merger control rules to replace the current ones which date back to 1990. 
Since the new rules on controlling mergers will come in the form of a regulation, not a directive, they will take effect immediately, most likely before this summer, and will not need to be ratified by national parliaments. 
As of the end of February, barely a handful of comments on the Green Paper had been received: it would be a crime if business and public opinion, both in Europe and in the United States, overlooked the March 31 st deadline and let this opportunity to speak up go by. 
In the absence of strong criticism, the Commission will feel it legitimate to go ahead with a set of proposals that is deeply unsatisfactory. 
If this happens, another ten years may pass before the regulation is modified. 
The new merger control rules go some way toward fixing a number of quirks in the Commission's current procedure for evaluating mergers. 
The possibility of stopping the clock on the proceedings for a couple of weeks gives a company some time to negotiate remedies with the Commission, while preserving certainty in the timetable, which constitutes the main advantage of Europe's competition rules. 
The proposals also clarify Brussels' jurisdiction in relation to national competition authorities: mergers requiring a review by three or more national authorities will go automatically to Brussels. 
This currently only happens if a company meets complex turnover thresholds. 
Here, on the technical side, one important issue remains unresolved: contrary to what happens in the US, the European regulator lacks the authority to impose the break-up of a company as a remedy against its dominant market power. 
For example, when UPS complained to Brussels about Deutsche Post cross-subsidizing its courier services the Commission limited the remedy to imposing an accounting separation between the market and non-market activities of the German Post Office, something very different from a break-up. 
It did so because, in the absence of a change in regulations dating to 1962 (a change that has been proposed by the Commission but not yet approved by the European Council), Brussels lacks the authority to force break-ups. 
Without this authority, it is natural for the European regulator to be unusually suspicious of mergers: if a new company created by a merger were, sometime in the future, to rise to a dominant position, the regulator may lack the power to intervene. 
So it is deemed better to kill a potentially dangerous baby before it is born. 
But all of this is, in the end, small beer. 
The new rules fall short of addressing the main drawback of European competition policy, which is institutional, not technical: the Commission remains simultaneously prosecutor, judge, and jury of all merger cases. ``In-house hearing officers,'' the Commission's internal review process, are a joke, and a company's right to appeal to the European Court of Justice is a mockery in merger cases (though less so in the case of an action for market abuse), given the timing of the Court's rulings. 
In America, an independent judge rules from the first stage of the process, which guarantees that decisions are both timely and fair. 
The Commission claims that the institutional structure for competition rulemaking is enshrined in the EU's core Treaties and could be changed through regulation. 
Fair enough, but we are not idiots. 
Last summer the Commission issued a White Paper on European Governance, a background document for the Constitutional Convention chaired by Valery Giscard d'Estaing now underway in Brussels, a body expected to review the ``governance of Europe,'' that is the powers of the Union and the way it uses them. 
That White Paper, while proposing that some powers be transferred from the Commission to independent authorities, explicitly rules out any change in the governance of mergers: ``Creation of autonomous EU regulatory agencies will improve the way rules are applied and enforced across the Union. 
[Such agencies, however] cannot be given responsibilities for which the Treaty has conferred a direct power of decision on the Commission, for example in the area of competition policy.'' 
But isn't it the Convention's task to draft a new Treaty? 
One is under the impression that the Commission did not choose its timing by chance. 
By moving fast on a few technical improvements of the merger control rules, and introducing them ahead of the Convention, the Commission acted as if it were hoping that the institutional structure of competition policy would not become an item on the agenda of the Convention: we just fixed it, let's wait and see how the new rules work out , it seems to be saying. 
The Commission should not be allowed to get away with this ingenious plan. 
It is offering small beer, certainly not enough to buy the silence of business and public opinion. 
The new regulation should be blocked, at least until the Commission commits to put forward a serious proposal for the overhaul of the institutional setting of European competition policy. 
The fact that competition policy is the only tooth that bites in Brussels should not be an excuse for preserving a system that defies democracy and seriously lacks transparency. 

Block Thinking 
“Multiculturalism” has become a suspect term almost everywhere in the world nowadays, and particularly in Europe. 
People say things like: “I used to be for openness and toleration of difference, but now I see where it’s leading.” 
But where is it leading? 
Almost every reason for toleration’s apparent fall into disrepute concerns Islam. 
Even simple requests, like that of schoolgirls to wear headscarves in class, are suddenly freighted with immense political significance and treated as issues that must be resolved at the highest level of government. 
People – and their elected leaders as well -- often have the feeling that such seemingly innocent proposals are in fact part of an ominous “hidden agenda.” 
That agenda is “Islam,” which many imagine to include all the terrible things that we can read about in the press every day: the stoning of adulterous women under Sharia law in northern Nigeria, the amputation of thieves’ hands in Saudi Arabia, honor killings of women who refuse arranged marriages in Pakistan (or even northern English cities like Bradford and Manchester), the willingness to justify suicide bombings. 
If you reply that the girls who want to wear headscarves to school aren’t living in Nigeria or Saudi Arabia, and almost certainly don’t share the extreme Wahhabi views found in those countries, you will be met with a look of almost indulgent pity, a look of the type reserved for the terminally naïve. 
Or you will be told stories about how Saudi trained imams are twisting the girls’ arms, turning them into unwilling stalking-horses for “Islam.” 
Indeed, it is virtually impossible nowadays to talk about headscarves as an issue in its own right. 
All the sociological evidence about the girls’ motives, which are in fact very varied, is swept aside as irrelevant. 
All that matters is the threat posed by Islam. 
This is a classic example of what I call “block thinking,” which seems to have made huge strides in Europe in recent years. 
John Bowen’s recent book Why the French Don’t Like Headscarves documents this shift. 
Block thinking fuses a varied reality into one indissoluble unity, and in two ways. 
First, different manifestations of Islamic piety or culture are seen as alternative ways of expressing the same core meaning. 
Second, all Muslims are then seen as endorsing these core meanings. 
The possibility that a girl wearing a headscarf might in fact be rebelling against her parents and their kind of Islam, and that others might be deeply pious while being utterly revolted by gender discrimination or violence, is lost from view. 
Block thinking is an age-old phenomenon, and we all do it to some degree. 
But, while in another age we might have been indulgent about its consequences, today it has explosive potential, because people who think in this manner are prime recruits for seeing the world in terms of Samuel Huntington’s theory of the “clash of civilizations.” 
What’s worse, the way such people then act tends to edge us closer to Huntington’s nightmare scenario. 
By treating all the varied segments of Islam as nothing more than parts of a unified threat to the West, they make it harder for Muslims to stand out and criticize their own block thinkers – people like Osama bin Laden, who are building their own unified enemy, composed of “Christians and Jews.” 
Block thinkers on each side give aid and comfort to block thinkers on the other side, and with each exchange they pull us closer toward an abyss. 
So how can we stop this madness? 
Block thought persists in part because its critics on each side are unknown to those on the other side. 
Indeed, how many times does a critic of European block thought meet this kind of response: “But where are the Muslims who are criticizing extremist Islam?” 
Of course, one isn’t likely to meet them in the drawing rooms of Paris journalists or the wider European professional political class. 
But explaining that to block thinkers will never have the impact of a real connection to the multi-faceted discourse that is actually taking place on the other side. 
The real question, then, is this: Where are the crossover figures who can provide that urgently needed connection? 

The Big Blockchain Lie 
NEW YORK – With the value of Bitcoin having fallen by around 70% since its peak late last year, the mother of all bubbles has now gone bust. 
More generally, cryptocurrencies have entered a not-so-cryptic apocalypse. 
The value of leading coins such as Ether, EOS, Litecoin, and XRP have all fallen by over 80%, thousands of other digital currencies have plummeted by 90-99%, and the rest have been exposed as outright frauds. 
No one should be surprised by this: four out of five initial coin offerings (ICOs) were scams to begin with. 
Faced with the public spectacle of a market bloodbath, boosters have fled to the last refuge of the crypto scoundrel: a defense of “blockchain,” the distributed-ledger software underpinning all cryptocurrencies. 
Blockchain has been heralded as a potential panacea for everything from poverty and famine to cancer. 
In fact, it is the most overhyped – and least useful – technology in human history. 
In practice, blockchain is nothing more than a glorified spreadsheet. 
But it has also become the byword for a libertarian ideology that treats all governments, central banks, traditional financial institutions, and real-world currencies as evil concentrations of power that must be destroyed. 
Blockchain fundamentalists’ ideal world is one in which all economic activity and human interactions are subject to anarchist or libertarian decentralization. 
They would like the entirety of social and political life to end up on public ledgers that are supposedly “permissionless” (accessible to everyone) and “trustless” (not reliant on a credible intermediary such as a bank). 
Yet far from ushering in a utopia, blockchain has given rise to a familiar form of economic hell. 
A few self-serving white men (there are hardly any women or minorities in the blockchain universe) pretending to be messiahs for the world’s impoverished, marginalized, and unbanked masses claim to have created billions of dollars of wealth out of nothing. 
But one need only consider the massive centralization of power among cryptocurrency “miners,” exchanges, developers, and wealth holders to see that blockchain is not about decentralization and democracy; it is about greed. 
For example, a small group of companies – mostly located in such bastions of democracy as Russia, Georgia, and China – control between two-thirds and three-quarters of all crypto-mining activity, and all routinely jack up transaction costs to increase their fat profit margins. 
Apparently, blockchain fanatics would have us put our faith in an anonymous cartel subject to no rule of law, rather than trust central banks and regulated financial intermediaries. 
A similar pattern has emerged in cryptocurrency trading. 
Fully 99% of all transactions occur on centralized exchanges that are hacked on a regular basis. 
And, unlike with real money, once your crypto wealth is hacked, it is gone forever. 
Moreover, the centralization of crypto development – for example, fundamentalists have named Ethereum creator Vitalik Buterin a “benevolent dictator for life” – already has given lie to the claim that “code is law,” as if the software underpinning blockchain applications is immutable. 
The truth is that the developers have absolute power to act as judge and jury. 
When something goes wrong in one of their buggy “smart” pseudo-contracts and massive hacking occurs, they simply change the code and “fork” a failing coin into another one by arbitrary fiat, revealing the entire “trustless” enterprise to have been untrustworthy from the start. 
Lastly, wealth in the crypto universe is even more concentrated than it is in North Korea. 
Whereas a Gini coefficient of 1.0 means that a single person controls 100% of a country’s income/wealth, North Korea scores 0.86, the rather unequal United States scores 0.41, and Bitcoin scores an astonishing 0.88. 
As should be clear, the claim of “decentralization” is a myth propagated by the pseudo-billionaires who control this pseudo-industry. 
Now that the retail investors who were suckered into the crypto market have all lost their shirts, the snake-oil salesmen who remain are sitting on piles of fake wealth that will immediately disappear if they try to liquidate their “assets.” 
As for blockchain itself, there is no institution under the sun – bank, corporation, non-governmental organization, or government agency – that would put its balance sheet or register of transactions, trades, and interactions with clients and suppliers on public decentralized peer-to-peer permissionless ledgers. 
There is no good reason why such proprietary and highly valuable information should be recorded publicly. 
Moreover, in cases where distributed-ledger technologies – so-called enterprise DLT – are actually being used, they have nothing to do with blockchain. 
They are private, centralized, and recorded on just a few controlled ledgers. 
They require permission for access, which is granted to qualified individuals. 
And, perhaps most important, they are based on trusted authorities that have established their credibility over time. 
All of which is to say, these are “blockchains” in name only. 
It is telling that all “decentralized” blockchains end up being centralized, permissioned databases when they are actually put into use. 
As such, blockchain has not even improved upon the standard electronic spreadsheet, which was invented in 1979. 
No serious institution would ever allow its transactions to be verified by an anonymous cartel operating from the shadows of the world’s authoritarian kleptocracies. 
So it is no surprise that whenever “blockchain” has been piloted in a traditional setting, it has either been thrown in the trash bin or turned into a private permissioned database that is nothing more than an Excel spreadsheet or a database with a misleading name. 

The Blockchain Pipe Dream 
NEW YORK – Predictions that Bitcoin and other cryptocurrencies will fail typically elicit a broader defense of the underlying blockchain technology. 
Yes, the argument goes, over half of all “initial coin offerings” to date have already failed, and most of the 1,500-plus cryptocurrencies also will fail, but “blockchain” will nonetheless revolutionize finance and human interactions generally. 
In reality, blockchain is one of the most overhyped technologies ever. 
For starters, blockchains are less efficient than existing databases. 
When someone says they are running something “on a blockchain,” what they usually mean is that they are running one instance of a software application that is replicated across many other devices. 
The required storage space and computational power is substantially greater, and the latency higher, than in the case of a centralized application. 
Blockchains that incorporate “proof-of-stake” or “zero-knowledge” technologies require that all transactions be verified cryptographically, which slows them down. 
Blockchains that use “proof-of-work,” as many popular cryptocurrencies do, raise yet another problem: they require a huge amount of raw energy to secure them. 
This explains why Bitcoin “mining” operations in Iceland are on track to consume more energy this year than all Icelandic households combined. 
Blockchains can make sense in cases where the speed/verifiability tradeoff is actually worth it, but this is rarely how the technology is marketed. 
Blockchain investment propositions routinely make wild promises to overthrow entire industries, such as cloud computing, without acknowledging the technology’s obvious limitations. 
Consider the many schemes that rest on the claim that blockchains are a distributed, universal “world computer.” 
That claim assumes that banks, which already use efficient systems to process millions of transactions per day, have reason to migrate to a markedly slower and less efficient single cryptocurrency. 
This contradicts everything we know about the financial industry’s use of software. 
Financial institutions, particularly those engaged in algorithmic trading, need fast and efficient transaction processing. 
For their purposes, a single globally distributed blockchain such as Ethereum would never be useful. 
Another false assumption is that blockchain represents something akin to a new universal protocol, like TCP-IP or HTML were for the Internet. 
Such claims imply that this or that blockchain will serve as the basis for most of the world’s transactions and communications in the future. 
Again, this makes little sense when one considers how blockchains actually work. 
For one thing, blockchains themselves rely on protocols like TCP-IP, so it isn’t clear how they would ever serve as a replacement. 
Furthermore, unlike base-level protocols, blockchains are “stateful,” meaning they store every valid communication that has ever been sent to them. 
As a result, well-designed blockchains need to consider the limitations of their users’ hardware and guard against spamming. 
This explains why Bitcoin Core, the Bitcoin software client, processes only 5-7 transactions per second, compared to Visa, which reliably processes 25,000 transactions per second. 
Just as we cannot record all of the world’s transactions in a single centralized database, nor shall we do so in a single distributed database. 
Indeed, the problem of “blockchain scaling” is still more or less unsolved, and is likely to remain so for a long time. 
Although we can be fairly sure that blockchain will not unseat TCP-IP, a particular blockchain component – such as Tezos or Ethereum’s smart-contract languages – could eventually set a standard for specific applications, just as Enterprise Linux and Windows did for PC operating systems. 
But betting on a particular “coin,” as many investors currently are, is not the same thing as betting on adoption of a larger “protocol.” 
Given what we know about how open-source software is used, there is little reason to think that the value to enterprises of specific blockchain applications will capitalize directly into only one or a few coins. 
A third false claim concerns the “trustless” utopia that blockchain will supposedly create by eliminating the need for financial or other reliable intermediaries. 
This is absurd for a simple reason: every financial contract in existence today can either be modified or deliberately breached by the participating parties. 
Automating away these possibilities with rigid “trustless” terms is commercially non-viable, not least because it would require all financial agreements to be cash collateralized at 100%, which is insane from a cost-of-capital perspective. 
Moreover, it turns out that many likely appropriate applications of blockchain in finance – such as in securitization or supply-chain monitoring – will require intermediaries after all, because there will inevitably be circumstances where unforeseen contingencies arise, demanding the exercise of discretion. 
The most important thing blockchain will do in such a situation is ensure that all parties to a transaction are in agreement with one another about its status and their obligations. 
It is high time to end the hype. 
Bitcoin is a slow, energy-inefficient dinosaur that will never be able to process transactions as quickly or inexpensively as an Excel spreadsheet. 
Ethereum’s plans for an insecure proof-of-stake authentication system will render it vulnerable to manipulation by influential insiders. 
And Ripple’s technology for cross-border interbank financial transfers will soon be left in the dust by SWIFT, a non-blockchain consortium that all of the world’s major financial institutions already use. 
Similarly, centralized e-payment systems with almost no transaction costs – Faster Payments, AliPay, WeChat Pay, Venmo, Paypal, Square – are already being used by billions of people around the world. 
Today’s “coin mania” is not unlike the railway mania at the dawn of the industrial revolution in the mid-nineteenth century. 
On its own, blockchain is hardly revolutionary. 
In conjunction with the secure, remote automation of financial and machine processes, however, it can have potentially far-reaching implications. 
Ultimately, blockchain’s uses will be limited to specific, well-defined, and complex applications that require transparency and tamper-resistance more than they require speed – for example, communication with self-driving cars or drones. 
As for most of the coins, they are little different from railway stocks in the 1840s, which went bust when that bubble – like most bubbles – burst. 

Blood Politics 
LONDON – The race for the leadership of the British Labour Party isn’t normally a world-shaking event. 
But the recent contest between two brothers – David and Ed Miliband – not only provided the material for a riveting family drama; it also illustrated some peculiarities of democratic cultures that often go un-noted – and the strange relationship between the personal and the political that is built into the hierarchy of democratic protocol. 
Politics, or at least the exercise of power, was traditionally a family affair. 
Kings typically hankered after male heirs, because power was vested through filial lineage, and distributed through tribal affiliations. 
Hereditary power did not necessarily make for warm and open family relations. 
Henry VIII was willing to execute two wives and overturn Christendom in pursuit of a son. 
There are examples, in polygamous societies, of royal concubines murdering each other’s children in order to assure the predominance of their genetic line. 
The Ottomans introduced the practice of “judicial royal fratricide,” supposedly to prevent civil war. 
Whether it involved absolute loyalty or murderous rivalry, traditional politics was rarely divorced from personal passion. 
Not so in modern Western democracies, where personal passions are, at least in theory, supposed to be completely separate from the impersonal representation of group interests. 
Democracy, in its Greek origins, began with the creation of a public sphere distinct from the family and its intense emotions. 
But modern democracies – especially those conducted on the Anglo-Saxon model – take this further, by attempting to separate not only the private from the public, but the person from the politician. 
The division is in a sense inscribed in the democratic spectacle. 
After presidential debates in the United States or Britain, the contenders, who may have been accusing each other of the most unforgivable of sins, shake hands vigorously and give each other genial and encouraging smiles. 
No matter how much Barack Obama may have loathed the views of George W. Bush, he had to be initiated into state secrets by the former president, in a confidential – and undoubtedly genial – meeting. 
In parliamentary debates, fierce ideological battles may be the order of the day, but ad hominem attacks are off limits. 
This is undoubtedly to the good, and necessary to the conduct of orderly democratic life; but to those not used to it, the ability to combine enmity with bonhomie can seem counterintuitive. 
Indeed, it may be that the transition from passionate to impersonal politics is one of the most difficult challenges facing democratizers everywhere. 
In pre-1989 Eastern Europe, for example, politicians’ ideological positions were seen as inseparable from their moral, or human, self. 
Those who were on the wrong side of the political divide were not only guilty of erroneous views; they were seen as wrong in their essence, and therefore to be condemned and hated. 
The idea that you could treat political enemies jovially, and perhaps have a drink with them after hours – or enter into a coalition government with them – can seem not only unnatural, but even a bit indecent, in such circumstances. 
Indeed, in some young democracies, or more volatile cultures, the suspension of personal feeling is not always successfully maintained. 
Just last year, one could witness fistfights in parliaments ranging from Iraq to Taiwan, Turkey, and, most spectacularly, Ukraine. 
To us, such behavior looks untoward, or even uncivilized; to the participants, it is probably experienced as a natural overflow of righteous feeling. 
Clearly, parliamentary brawls are not a desirable modus operandi. 
But how far can the separation between person and politician be taken – and to what extent do we really give it credence? 
The Miliband race was an extreme example of what might be called counter-nepotism – the attempt to abstract the politician from all private attachments. 
As the two brothers sat on platforms together, challenging each other’s views, they tried to maintain the double fiction that, on the one hand, there was no special bond between them, and, on the other, that their sometimes fierce disagreements did not taint their fraternal affections. 
For a while, everybody played politely along; but the tricky double-think involved in this was exposed when the younger brother, Ed, won the leadership, by a razor-thin margin, in a last-minute upset. 
Suddenly, this didn’t seem quite right. 
In the media, comparisons to Esau’s theft of Jacob’s birthright and to various Shakespearean tragedies began to abound. 
David Miliband’s decision to retreat from front-line politics made it evident that a symbolic beheading had taken place – and one wonders if Ed Miliband won’t be haunted, and therefore hampered, à la Macbeth, by the psychological violence he committed. 
In judging candidates for high office, we are encouraged to eschew “personality politics,” and to disregard such aspects of politicians’ identities as their spiritual lives, their private behavior (unless obvious transgressions are committed), and their appearance and aesthetic tastes. 
In practice, few of us can manage to compartmentalize our perceptions – and, perhaps, doing so would not be desirable. 
We may not want politicians to be driven by self-interest, but we need to acknowledge that they have selves, which are formed by a multitude of factors – and passions. 
In other words, if we do not want to reduce our vision of politics to policy processing, we need to remember – if only for the sake of fuller and more realistic judgment – that politicians are human, too. 


Blowback in Mexico’s Drug Wars 
MEXICO – Drug trafficking has existed in Mexico for decades. 
But trade in illegal narcotics did not seriously threaten Mexico’s stability or provoke conflict with the United States until the mid-1980’s, when Colombian cocaine began to flood across Mexico to the US. 
By that time, Mexican police institutions were in a state of decomposition, making them fertile ground for the drug traffickers to corrupt. 
And so they have. 
The dismantling of Colombia’s Cali and Medellin cartels in the 1990’s created a vacuum that Mexico’s cartels were able to fill, ultimately consolidating their position in the drug trade. 
Still, the levels of drug-related violence in Mexico remained relatively low. 
This “dealers’ peace” can be explained by the Mexican government’s policy of tolerance, which sought a degree of equilibrium between the drug cartels and the state in terms of trafficking routes and the territories that the cartels infiltrated. 
This secret truce was maintained even after Mexico’s first open democratic presidential election in 2000, when the long-ruling Institutional Revolutionary Party was ousted from power. 
Then former President Vicente Fox ordered a crackdown. 
As drug lords were arrested, the equilibrium between gangs was destroyed, paving the way to a war between the Sinaloa and Gulf cartels – the two largest – which has generated enormous violence, as well as sharp US protests because of the impact of the fighting along the border. 
When President Felipe Calderón took office in 2006, he inherited rising violence, with drug traffickers controlling parts of the country. 
He responded by quickly launching a frontal assault on the cartels, with the support of the army. 
Calderón’s offensive increased his popularity, but it also provoked a new rise in violence, as the drug gangs not only battled government forces, but also settled accounts among themselves. 
The US government complained again, but at the same time the Bush administration delivered a $1.4 billion aid package, the so-called “Merida Initiative,” to fight the traffickers. 
In 2008, Mexico’s government decided to attack the drug cartels’ operational nerve centers. 
But this only accelerated the gangs’ fragmentation, provoking a new and extraordinary increase in violence. 
Indeed, over 5,000 people were killed by organized drug criminals last year, more than double the death toll in 2007. 
The violence has also become crueler. 
Since 2007, many of the cartels’ victims have been decapitated – a tactic clearly aimed at intimidating their enemies. 
And, as the grotesqueness of the violence has grown, so has pressure for a more effective strategy. 
Some critics of Calderón’s government now say that it is time to change strategy, perhaps even returning to the pre-Fox policy of tolerance. 
Nevertheless, public-opinion polls still show broad backing for Calderón’s strategy. 
But the question is how long this support will last. 
The government insists that drug-related violence is concentrated in just three of the country’s 32 states, but the problem has spread to most of the country. 
Of course, most victims are traffickers. 
But the country’s rampant violence has created an environment of insecurity that complicates everyday life for many Mexicans. 
Ultimately, this may turn public opinion against Calderón’s policy – a development that some drug trafficking groups are encouraging with anonymous posters, and by sponsoring popular protests in northern Mexico that demand the army’s return to its barracks. 
But, at least in the short term, there seems to be no alternative to Calderón’s strategy. 
After all, while his policy of confrontation has generated high levels of violence, tolerance of the drug cartels corrupted state institutions, sowing the ground for the problem in the first place. 
So it seems that the government’s only option is to continue the war, hoping that its longer-term effort to strengthen state institutions’ capacity and integrity will eventually prove effective. 
But corruption remains a profound and persistent threat to this effort, and if the government cannot reduce it significantly – especially among its anti-drug forces – a return to tolerance is inevitable. 

Blue Europe, Red Asia 
PARIS – Could Europe be a Democratic “blue state” and Asia a Republican “red state”? 
American presidential elections provide a near perfect test to understand the difference between European and Asian worldviews, even if the two continents are far from united internally. 
If you want America to lead by the power of example, you favor Barack Obama; if you want to be reassured by the continuation of America’s power in a traditional security sense, you probably prefer John McCain. 
Whereas a majority of Europeans – with the exception of those who for historical and geographic reasons are obsessed with the return of the “Russian bear” – support Obama, a majority of Asians, particular among the elite, seem to support McCain. 
This difference stems above all from strategic considerations, but it probably also contains a cultural dimension. 
In Asia, Indonesia may look “European” in its Obama craze, but it essentially constitutes an anomaly, easily explainable by Obama’s brief Indonesian upbringing. 
Otherwise, and for very different reasons, a majority of Asian elites are awaiting the growing possibility of an Obama victory with some bewilderment and even apprehension. 
For example, Japanese elites tend to favor continuity over change. 
In their mind, the hard power of the United States is more important than its soft power, and their vision of an America “bound to lead” is largely unchanged. 
For them, the US is above all the strategic counterweight needed to balance China. 
But the Chinese, too, may very likely be favoring McCain, for the opposite reason. 
The decline of America’s image and influence in the world does not annoy them. 
As Asia’s leading power, China has seized the mantle of “hope” from the US. 
America could regain it under Obama, but not under McCain. 
Why favor change, when continuity works so well for you? 
Indian elites reach the same conclusion for different reasons. 
The Bush years are seen positively, for they coincide with the consolidation of India’s international status and emergence as America’s key diplomatic partner in Asia. 
In Singapore, ideological considerations reinforce strategic interests. 
A very conservative regime naturally tends to prefer a Republican candidate over a Democrat. 
But, beyond strategic considerations, something else must be mentioned (with prudence). 
It is too early to say that the “yellow man’s burden” is about to replace Rudyard Kipling’s “white man’s burden” in world history. 
Asians are slow to acknowledge that power entails international responsibility. 
But Asians who have more than caught up with the West may have difficulty adjusting to the idea that the US would for the first time in history not be headed by a white president. 
How can you define yourself to the West, when the West has so spectacularly and visibly changed its appearance, if not its essence? 
In Europe, the reverse is true. 
The complex essence of Barack Obama is an absolute plus. 
For the former colonial countries, who have no equivalent to Obama, to support him fully is a sort of exorcism, if not redemption. 
America is once more paving the way for what Europeans should be able to achieve one day with their own minorities: a land of dreams made possible. 
In a more classical sense, the depth of anti-Bush sentiment in Europe explains the depth of pro-Obama feeling and Europeans’ relative distancing from McCain’s candidacy. 
Europeans have felt oppressed by America’s excessive demonstration of hard power. 
They would not mind an America that was more modest abroad and more ambitious at home. 
They are in fact secretly wishing that in these tough economic times, at least part of the “culture of hope” incarnated by Obama would reverberate on them and transform them for the better. 
They do not want the US only to protect them, but to transform them. 
The perception that Obama can transform the view that the US and the West have of themselves is an important factor in the emotional gap that may exist between Asia and Europe on the eve of America's presidential election. 
On that count, Asia tends to be a status quo continent, while Europe is a revisionist one. 
For many Europeans, a reinvention of America is Europe’s last hope. 
It is a noble hope, but also a dangerous one, for dreams can easily turn into nightmares. 
That might very well happen if America’s next president fails to redress the financial and economic threats facing his country, and thus the rest of the world. 


BMW's and Chinese Justice 
In most places, the name "BMW" implies luxury and exclusivity. 
But in China, the brand has unwittingly found itself enmeshed in tales that illustrate the powerlessness of ordinary Chinese against the powerful and corrupt. 
The first scandal occurred last year, after a tractor filled with green onions scraped the side of a BMW in Harbin. 
The drivers of both the tractor and the metallic-silver luxury car were 45-year-old women, but any similarity between them ended there: the former was a peasant, the latter the wife of a wealthy businessman. 
After a confrontation between the two, the wealthy wife drove her BMW into the growing crowd of spectators on the roadside, killing the peasant woman and injuring 12 others. 
The case went to the local court, where the judge ruled it an "accidental traffic disturbance" and gave the driver a two-year suspended sentence. 
The judge's ruling spurred rumors that he went easy on her because her husband was related to senior provincial officials. 
It quickly became a story of "rich versus poor," widely cited as an example of high-level corruption. 
Over the next few months, newspapers and television stations ran with the story as it snowballed into a national obsession. 
Alarmed by the public reaction, the Harbin magistrate ordered the case reopened, only to have the suspended sentence confirmed when the case was closed this March. 
The big BMW story of late 2003 resurfaced quietly, before being buried again forever. 
That same month, a lottery scandal threw the BMW brand into the limelight once again. 
Lottery officials in Shaanxi province rejected a winning ticket, calling it a fake and denying its bearer, a 17-year-old security guard named Liu Liang, the grand prize of a $58,000 BMW and 120,000 yuan ($14,510) in cash. 
Liu became so angry about being accused of fraud and denied the car that he climbed atop a high advertising billboard and threatened to jump as a show of innocence. 
But the story didn't end when police officers managed to talk him down. 
News broadcasts covered his continued insistence that he did not forge his ticket, along with the lottery center's claims that their rejection of the ticket was legitimate. 
The police finally stepped in and, after a careful investigation, announced that they had found the true criminal: Yang Yongming, a private businessman whom the local lottery administration had contracted to organize ticket sales. 
Yang had conspired with the government officials directing the lottery, who were arrested for malfeasance, to fraudulently obtain the top prizes. 
In June Liu Liang finally got what he deserved - a BMW-325i sedan and a sincere apology from the lottery center. 
If the first scandal was a tragedy, the second was more like a farce. 
But both offer keys to understanding contemporary Chinese psychology. 
The outcry after the first BMW case was not really about the light sentence given to a rich woman, but about the lack of confidence ordinary people have in China's judicial system. 
In China, power, money, and connections trump the law. 
Even as they are becoming ever more litigious, many Chinese believe that they have no hope of securing justice against the powerful. 
The apathetic response of the dead peasant woman's husband to the $10,000 in compensation he received was telling. 
"I don't care about the verdict and whether it is justice or not," he said. 
The most harmful consequence is the public's loss of trust in the system. 
Social trust is not something you can buy with money. 
If an entire society believes that you cannot depend on legal rights for protection - that one must instead rely on a web of relationships with those who have power and influence - questions about whether such a society is livable or desirable will remain. 
Similarly, in the second BMW case, people didn't blame a corrupt businessman; they ascribed culpability to the lottery center, a government body. 
So instead of mistrusting one person, they grew suspicious of an institution - even of government itself. 
When a stubborn teenager went up against the mighty lottery authority with its army of auditors and inspectors and initial alibis, this individual, not the system, was the clear winner of the public's admiration. 
Liu Liang may have been just a working-class kid, but there was wisdom in his words that there is still a "silent majority" who can affect the workings of China's fragile society. 
He refused to settle privately, because he believed that if he let corrupt government officials off the hook, "they'll keep scamming the public." 
Thanks to his perseverance and the media's investigation, the fraud was laid bare. 
Power corrupts everywhere, but individuals in China such as Liu have come to form a countervailing force. 
Even so, such marginal forces do not yet constitute a system for redressing grievances. 
While pop music fans in China can listen to whatever they like, including Madonna singing "I'm gonna shake up the system," ordinary Chinese need courage to speak such messages aloud. 
As one saying goes, "There is not want of conscience in Chinese, but there is want of courage." 

The Age of Bobby Fischer 
CAMBRIDGE – The brilliant new Hollywood movie “Pawn Sacrifice” portrays the life of tormented chess genius Robert James “Bobby” Fischer from his early days as a prodigy to his historic 1972 match, at age 29, with Russian world champion Boris Spassky. 
Actor Toby Maguire portrays Fischer with remarkable authenticity – indeed, pitch-perfect for those of us who met Fischer in his prime. 
The film depicts a match that became a signature event in the Cold War between Russia and the United States. 
It also makes one wonder whether a creative genius like Fischer, deeply troubled yet supremely functional at the chessboard, would be able to exist in today’s unforgiving online world. 
Fischer certainly got attention back then, but information was filtered very differently than it is today. 
Journalists used to lead the way, rather than slavishly following the flow of superficial Internet traffic. 
The story of an erratic kid from Brooklyn taking on the Soviet empire in its national sport made good copy for journalists, who understood the significance of the event. 
The match garnered front-page headlines in major newspapers around the world on a daily basis for two months, with commentators providing live move-by-move analysis for up to five hours each day. 
Back then, there were only a few television channels. 
There were no DVD players or pay-per-view services. 
Still, that was not the only reason people remained glued to their TV sets to watch the match. 
The surreal environment, the amazing chess turns, and the Cold War backdrop made Fischer one of the most famous people in the world that summer. 
I won’t humor myself that it was the chess analysis that drew attention, although I was a commentator for public television on the pivotal 13th game. 
For the American champion, the match was the consummation of two decades of chasing the title, starting from his days as a child prodigy. 
After a lifetime of living in relative poverty for a superstar (even though he frequently appeared on the cover of major magazines), Fischer finally found himself playing in a match with a $250,000 purse. 
Of course, it was a pittance compared to the $2.5 million that each fighter was guaranteed in the 1971 Ali-Frazier fight. 
But Fischer recognized that US culture marginalizes any pursuit that does not produce big money, so he viewed the six-figure cash prize as the ultimate symbol of advancement in his sport. 
For Russia, the match was not about money; it was about hearts and minds. 
The chess world had long been the perfect battleground on which to prove the superiority of the Communist system. 
Although most Westerners today pretend that we always knew that Russian-style Communism would fail, it was not so obvious back then. 
The leading introductory economic textbook of the time, by Nobel laurate Paul Samuelson, was still predicting that Russia might overtake the US as the world’s largest economy. 
To be fair, Russians valued chess enormously, even if it did not produce a lot of income. 
In many ways, chess was Russia’s national sport. 
No wonder Fischer’s quixotic pursuit of the championship led American policy mastermind Henry Kissinger to call Fischer and urge him not to back out, as he had threatened to do. 
Whatever his status in the US, Fischer was certainly the most beloved American in Russia. 
The majesty of his play transcended propaganda in a country where everyday people could appreciate and understand the innate beauty of the game. 
In the run-up to the championship, Fischer trounced two very good opponents with unheard of 6-0 scores, an astonishing result when so many grandmaster games end in draws. 
Russian fans were so excited by Fischer’s unprecedented achievement that they reportedly jammed Moscow telephone exchanges to get information. 
After a while, operators would simply pick up the line and say “6-0” and hang up. 
In the end, even Spassky paid the ultimate tribute to Fischer’s genius, clapping along with the audience after Fischer’s inspired sixth-game victory, as portrayed in the movie. 
The American might have been the ultimate chess genius, but the Russian was the class act. 
Director Edward Zwick does not shirk from showing the demons that plagued Fischer. 
He was justly concerned that the Russians would go to great lengths to prevent him from being champion, but ultimately rational concerns tipped into paranoia, and Fischer started to turn on his closest friends and confidants. He became anti-Semitic, despite being Jewish himself. 
One suspects that in today’s online world, Fischer’s paranoia and personal flaws would have tripped him up long before he became champion. 
After Fischer became champion and simply stopped playing competitive chess, his mental illness became much worse. 
Though no one can condone Fischer’s virulent rants and dark thoughts in his later years (he died in 2008), it is sad to realize that someone of such towering creativity and genius, who inspired so many people through his chess, might have had his career ended at a much earlier stage today. 
We live in a different world. 
“Pawn Sacrifice” recalls the world in which Fischer’s feats were possible. 

Bolivia Divided 
Bolivia seems to be in danger of falling apart. 
Support for President Evo Morales, who won 53% of the vote in December 2005, represented a demand for democratic coexistence, social change, and national unity. 
Two years later, the country is marked by regional, social, ethnic, and ideological divisions, and its government is confused and disoriented. 
Morales passed a constitutional reform that included changes in the conception and role of the state, private property, and management of natural resources and taxes. 
His opponents have responded by proclaiming their right to self-determination and threatening to boycott the referendum with which he hopes to legalize the reform. 
Morales’ sympathizers threaten to erect roadblocks. 
Only three of Bolivia’s nine departments support the government, while 60% of the population is concentrated in the six other departments, which account for 70% of the country’s territory and two-thirds of its GDP. 
The government’s desire to impose its will on the majority of the country is therefore potentially dangerous. 
Indeed, Bolivia, one of Latin America’s poorest countries, has become increasingly polarized. 
The conflict is not, as the government claims, between the people and a few oligarchs. 
The urban population, already 70% and growing rapidly, has begun withdrawing their support from Morales, except in La Paz, El Alto, and Oruro, and in the most unionized sectors. 
Rural peasants and Indians still support him, as do senior military officials. 
The erosion of support for the government is due to its inefficiency: inflation is triple official forecasts, and basic foodstuffs and fuel are scarce and their supply irregular. 
Investment has been discouraged by the rejection of corporate culture, social and political tension, and uncertainty about the reforms. 
Today, Bolivia is being led by its government toward antagonism between Indians and non-Indians, the eastern and western regions, and city and country, exacerbated by insults and actions that are acquiring an increasingly racist and ethnocentric edge. 
The identity of Bolivia’s indigenous people, who were historically excluded from political, social, and economic life, is beginning to be seen as a synonym for confrontation, violence, and ethnic aggressiveness. 
The government is rapidly isolating itself from the regional, civic, and political opposition that, little by little, has been rising to causes such as autonomy, pluralism, the need for consensus, and freedom of expression. 
The official discourse is entrenched in statism and centralism, with growing disregard for democratic principles and procedures. 
The government accuses the opposition of advocating the secession of hydrocarbon-rich territories, threatening them with repression. 
In turn, the most radical regional opposition groups threaten secession if the central government blocks their demands for greater self-government. 
The first consequence of this process has been a transition from legality to arbitrary power. 
Key institutions, including the Constitutional Court, the Supreme Court, and the Senate of the Republic, are being eroded. 
The Constituent Assembly, which should build national unity and democratic legitimacy, has been turned into a mechanism for division and absolute power. 
The government has had the National Congress surrounded by unionists so that only its ardent supporters can enter for the Senate’s sessions. 
Similarly, the government cut the department governors’ revenue in order to finance an expanded pension plan and weaken them politically and economically. 
The government’s closing of democratic and institutional spaces produces responses of a proportional and equivalent force, which in turn tends to expand the political conflict toward areas where force and violence prevail. 
A presidential order recalling the unionist, police, and army troops is urgently needed to avoid greater tragedy (there have already been 30 deaths in the last two years) and create conditions for dialogue and a democratic covenant with regional, civic, and political opposition forces. 
Otherwise, the referendum to ratify the government’s proposed “MAS (Movement for Socialism) constitution” will only fuel more strife. 
Two-thirds of Bolivians are dissatisfied with the way the Constituent Assembly has carried out its work, and a majority believes that the constitutional text is illegal. 
In this conflict, both sides have raised their bets, and their threats could become a reality. 
But this is not inevitable, above all because Aymaras and non-Aymaras, Indians and non-Indians, will continue to work to preserve unity in democracy as the basis for a more just future. 

Bolivia’s Crisis, Latin America’s Failure 
Bolivia is not a typical Latin American country by any definition. 
But for Haiti, it is the poorest nation in the Western Hemisphere, and it is even less stable, with a history of more than two hundred coups since independence. 
In a region with a strong indigenous past but a scattered and isolated present, Bolivia is, alongside Guatemala, perhaps the only country in Latin America where indigenous peoples make up a majority of the population. 
Its topography and ethnic distribution are generating autonomist and even secessionist forces that threaten national unity in more menacing ways than anywhere else. 
And, of course, it is, with Paraguay, the only land-locked nation on the sub-continent. 
So it would be highly imprudent to extrapolate Bolivia’s current crisis to the rest of Latin America. 
It is far too simple to generalize: institutions elsewhere are much stronger, poverty – and particularly extreme poverty – have been diminishing, and the battle over natural resources has been largely settled. 
Even in places like Venezuela, with both huge oil reserves and a traditional-minded nationalist government, the status quo allowing for foreign investment in energy resources has survived nearly eight years of President Hugo Chavez. 
While the existence of indigenous movements is a reality in many countries, from Chiapas to “Araucania,” from Amazonia to Ayacucho, nowhere in Latin America have they posed a genuine threat to national integrity. 
So Bolivia is not a premonitory crisis; nor does the hoary old “domino theory,” to which both Lyndon Johnson and Che Guevara subscribed in the case of Bolivia, seem valid or even half-way reasonable. 
Yet Bolivia’s current crisis does point to the “democratic deficit” that plagues Latin America today. 
Elected leaders have fallen for one reason or another in Bolivia, Ecuador, and Haiti. 
Democracy is either defective or missing in Cuba, Mexico, and Nicaragua, and it is threatened by one cause or another in Venezuela and Colombia. 
None of these cases are identical to the others; they include varying degrees of danger, harm, or reconciliation. 
The question is what can be done about this state of affairs, which contrasts starkly with the encouraging outlook that prevailed just a few years back. 
At the last Organization of American States assembly in Fort Lauderdale, Florida, the United States delegation took a good idea from others and, by its support, essentially sank it. 
The story began a couple of years ago, when former Argentine Foreign Minister Dante Caputo and the United Nations Development Program were charged with drafting the Latin American Democracy Report. 
They concluded that an early warning system for democratic crises in the region would help generate action before matters got out of control, as in Bolivia today. 
Caputo and the UN team then convinced Chilean President Ricardo Lagos to take up the initiative and to promote it with several of his colleagues. 
He did, but the initiative did not get very far. 
In fact, The UNDP/Latin America Democracy Report, published in 2004, barely mentioned it. 
The US and the new Chilean Secretary General of the OAS, Jose Miguel Insulza, resurrected the plan during the OAS meeting in Florida, but it was shot down by Latin Americans’ reasonable fears that the idea was directed against Venezuela, mingled with Latin Americans’ anachronistic fears of violating the sacrosanct principle of non-intervention. 
Despite the continent’s failure to agree on the principle, the idea of an early-warning system deserves attention. 
Today there may be little that the hemispheric community can do about the situation in Bolivia, and yet it is fraught with danger for everyone. 
Evo Morales, the leader of the opposition and of the coca-leaf growers, may be an honest, if misguided, democratic leader, but are his followers untainted by authoritarian desires? 
Hugo Chavez may not be financing Morales and Bolivia’s other dissidents, but are Venezuela and Cuba really not tempted to meddle in the country where Che Guevara died leading a guerrilla war nearly 40 years ago? 
Bolivia’s Santa Cruz business community may not carry out its threat to secede, but will they prefer to share their region’s oil and gas reserves with the indigenous highland peoples rather than with Brazilian industrialists from São Paulo? 
Before events reached these extremes, it might have been a good idea for the OAS (not the US) to get involved. 
The region continues to need that involvement – on time, on message, and on a proper democratic platform, one that is distinct from both traditional US intervention and Latin America’s traditional indifference. 

Bolivia's Populist Temptation 
In April 2002, violent demonstrations known as the "water war" in Bolivia forced President Hugo Bánzer to cancel the contract with the only international corporation interested in taking on the most ambitious water project ever proposed in the country. 
Recently, another major popular upheaval ended a project to export natural gas to Mexico and the United States through a Chilean seaport. 
This was the "gas war," which its leaders used to overthrow President Sánchez de Lozada and hold back the modernization process of strengthening institutions, opening markets, and integrating Bolivia into the global economy. 
These so-called "wars" are part of the same conflict that prompted the peasant blockades of September 2000, the continuing protests by coca growers against efforts to eradicate their crops because of their role in the cocaine trade, and the withdrawal earlier this year of a progressive tax project. 
In essence, these are all part of an ongoing conflict between democracy and populism, with Bolivia's future caught in the crossfire. 
Neither side trusts the other, so social wars have replaced meaningful political progress. 
As the violence of the social mobilizations and the level of discontent have grown, Bolivia's intellectuals and politicians remain in a state of shock, afraid of contradicting the masses. 
For their part, the populists can rouse the masses but fail to offer alternatives. 
They are nostalgic for the past and fearful of globalization. 
As the two sides collide, the country suffers: the outcome of the water war has meant that the poor still use the same dirty and expensive water, while the result of the gas war could mean that we remain without new export revenues. 
Bolivia needs leaders who can move the country beyond social wars that translate into stagnation. 
To move forward, both sides need to be realistic about Bolivia's past. 
The level of poverty--more visible with Bolivia's urbanization--is enormous, but it was worse before modernization efforts began. 
In fact, almost all indicators point to substantial progress made in the 21-year history of Bolivian democracy. 
Infant mortality has been cut in half, more citizens than ever enjoy educational opportunities, and electric, telephone, and sanitation services have expanded to serve a greater number of people. 
Moreover, the channels leading to higher social and political participation have multiplied. 
These advances are the result of audacious institutional reforms and the government's sustained and increased investment in social programs. 
They are part of the modern democracy. 
None of this progress, however, has been accompanied by the strengthening of our citizens' sense of responsibility to their nation. 
In fact, while Bolivians demand the right to the many benefits of democracy, we fail to take seriously any obligation to contribute to the public good. 
Many evade or reject paying taxes, in part by appealing for compassion towards the poor. 
Leaders of the poor prefer to romanticize the past. 
Thus, while ethnic inequities have been dramatically reduced over the past 50 years, the historical memory remains vivid to new generations of the now urban Aymaras and Quechuas people. 
They rightly contest the degradation of their ancestors, but also idealize their rural, communitarian nature. 
The current state of affairs fails to meet their expectations, especially when contrasted with an idealized version of the past or the new patterns of consumption portrayed in the media. 
So expectations outpace reality, with politicians contributing to this by promising more than they can deliver--and thus losing the trust of their constituents. 
Malaise has grown ever more acute after many Bolivian political leaders and their supporters, worn down by the regional crisis of the 1990's, expressed doubts over the modernization process. 
Institutional reforms meant the government could no longer use public resources with the same discretion as before. 
As a result, political parties and social organizations alike attacked reform efforts. 
Presidents Bánzer, Quiroga, and Sánchez de Lozada found their authority dwindling while movements against them grew ever more robust. 
After the political rebellion and lootings of this past February, Bolivia's Catholic bishops made real and consistent efforts to create a harmonious space for dialogue. 
But the most radical indigenous groups rejected the initiative, and the group organizing the coca growers took advantage of the situation, stirring up nationalist sentiments. 
This was easily accomplished, given Bolivia's memory of its losses: the loss of its seacoast to Chile in the War of the Pacific in 1879, of coca crops to the US eradication program, and the country's mineral wealth to transnational corporations. 
Populists effectively converted these memories into a political force that rejected efforts leading to globalization and an open society. 
This conflict continues. 
In Bolivia, the populist/communitarian movement is in the saddle, but is failing to do much more than shelve reform projects. 
For the underlying conflict to be resolved, Bolivians must become convinced that reform is the right track, the only one, indeed, that leads to progress and authentic development. 

Bolivia’s Same Old Revolution 
Bolivia is at a defining moment in its history. 
It recently found a new source of wealth, natural gas, but may become yet another victim of the so-called “natural resource curse.” 
In their eagerness to embrace development policies that are proven failures, all of the candidates in the presidential election scheduled for December 18 appear unaware of this risk. 
That risk is substantial. 
Ample evidence demonstrates that no country has ever been able to develop a strong and fair economy based on mineral or oil exports. 
Basing an economy on natural resources, the evidence shows, slows economic growth and expands poverty and inequalities. 
It is not necessary to consider countries in Africa or the Middle East to understand the problem. 
Bolivia has enough experience of its own. The mountains of silver in Potosi and tin in Oruro are gone, with no traces of development or well-being left behind. 
Blaming the Spanish conquerors or the economic empires of the twentieth century cannot hide the fact that huge amounts of money financed corrupt governments, inefficient bureaucracies, big and useless “development” projects such as industrial plants or mineral mills, or a wide variety of subsidies to buy off powerful interest groups. 
More than 50 trillion cubic meters of natural gas, and misleading expectations, are about to recreate this pattern of underdevelopment in Bolivia. 
Exports are yet to begin, but the threat of the resource curse is already present. 
The Movement Towards Socialism (MAS), led by the peasant leader Evo Morales, is proposing a state-led industrialization model based on gas revenues, part of which are also supposed to support small farming, petty traders, and artisans of all sorts. 
At the core of this project will sit the government, concentrating and distributing revenues, providing subsidies and “stimulating” the economy. 
Conceived, perhaps, with the best intentions, the Morales model is giving hope to Bolivia’s poorest; but it will only pave the way for frustrated hopes ­– also nothing new in Bolivia. 
Thirty years after the National Revolution of 1952 Bolivia’s per capita income remained basically the same, with poverty steady at over 50% of the population. 
A state-led developmental model in Bolivia is doomed to fail, because it requires strong institutions, universal citizenship, and the rule of law. 
None of them can currently be found in Bolivia, which means that the money concentrated in the state will surely be redistributed by patrimonial and clientelistic means, siphoned off by corruption, and subjected to social pressures of all sorts. 
Whatever remains for public investments are sure to be wasted, as projects tend to pass cost-benefit analysis when the financing comes from easy money, generously provided by mother nature. 
But not only Evo Morales’ movement is trapped by the illusions of dirigisme. 
To a large extent, they are shared by followers of former President Jorge Quiroga and Samuel Doria Medina as well. 
The same basic idea of allowing the state to distribute gas revenues, although with different intended purposes, is found in their programs. 
It is a paradox, indeed, that all candidates in Bolivia promise social and economic change when they all are basically looking at the past for inspiration and are in thrall to the same model of development. 
In a profound way, they are all deeply conservative. 
Recreating a state-led economy based on natural gas will promote rent-seeking and a lethargic form of corporatism. 
The promises to care for the poor and disadvantaged that are being made by all the candidates will turn out to be as empty as all the other rhetoric about justice and equality that Bolivians have heard in their long, sad history. 
The biggest challenge for the next government is to acknowledge the risks and dangers of the resource curse, and design a new, creative model to avoid it. 
The main enemy lies in deep-seated mentalities, habits, and routines. 
These can and must be changed before it will be possible to expand opportunities for everyone in Bolivia to become a dignified citizen, a respected worker, and a satisfied consumer. 

Smart Taxation 
ROME – An effective tax policy that ensures adequate domestic revenue is a crucial determinant of a country’s ability to pursue development policies. 
But tax revenues in most developing countries are low, impeding progress toward more balanced, inclusive, and sustainable economic development that can improve public health and raise standards of living. 
Although non-tax revenue may contribute significantly to some countries’ total GDP, the average tax/GDP ratios in low-income and lower-middle-income countries are roughly 15% and 19%, respectively – significantly lower than the OECD average of more than 35%. 
To finance development projects, poor and lower-middle-income countries must devise and implement tax strategies to increase domestic revenue. 
This entails abandoning the prevailing dogma that taxes should only be increased when absolutely necessary. 
This stance assumes that lower tax rates raise the tax/GDP ratio by ensuring better compliance with tax laws, and favors indirect taxation (such as value-added taxes) in order to broaden the tax base to include those with modest incomes. 
Meanwhile, direct taxation of corporations and individuals has tended to decline – despite the moot claim that lower direct taxation ensures investment and growth. 
As a result, the tax/GDP ratio in most countries in Sub-Saharan Africa and Latin America has stagnated or even fallen. 
In many developing countries, total tax revenue is derived from three main sources: domestic taxes on goods and services (sales and excise taxes), direct taxes (primarily on corporations), and, most important, taxes on foreign trade (import duties). 
But, as trade liberalization has lowered tariffs and duties, the share of trade taxes has declined, while other sources have not compensated for falling trade revenue. 
By contrast, in high-income countries, income taxes (primarily on individuals) comprise the largest proportion of tax revenue (roughly 36%), while domestic taxes on goods and services and social-security contributions each account for slightly more than one-quarter. 
Moreover, the share of trade taxes is typically low. 
Of course, developing countries should not simply mimic developed economies’ tax systems. 
After all, no one-size-fits-all approach exists, even among developing countries. 
And tax policy must evolve with changing economic circumstances. 
Instead, developing-country leaders must draw on the experiences of both developed countries and their peers to design tax policies that meet the basic requirements of operability, buoyancy, and stability. 
This can include broadening the tax base, reducing tax avoidance and evasion, improving tax collection, and developing new, cooperative international taxation strategies. 
In many countries, tax reform has already significantly increased the share of direct taxes in overall revenue. 
Raising tax rates for the wealthiest citizens in developing a more progressive income tax framework would bolster this progress. 
Governments should also work to improve tax compliance and reduce evasion, which requires limiting tax officials’ discretionary authority. 
Computerizing tax administration, for example, could help to limit corruption by making it more difficult to tamper with records. 
In order to increase personal-income taxes’ share of total revenue, developing countries are already improving their tax administrations in innovative ways, particularly to reach hard-to-tax citizens. 
More can be done: Every individual who owns a house or a vehicle, is a member of a club, holds a credit card, passport, driver’s license, or other identity card, or subscribes to a telephone service can be required to file a tax return. 
Moreover, excise taxes are a convenient source of revenue in developing countries, as they are primarily levied on products such as alcohol, tobacco, gas, vehicles, and spare parts, which involve few producers, large sales volumes, relatively inelastic demand, and easy observability. 
Excise taxes may be levied when goods leave a factory or arrive at a port, simplifying measurement, collection, and monitoring, while ensuring coverage and limiting evasion. 
But, despite their robust base and low administrative costs, excise taxes currently amount to less than 2% of low-income countries’ GDP, compared to roughly 3% in high-income countries. 
Developing countries must also aim to offset the consequences of globalization. 
For example, capital mobility increases opportunities for tax evasion, given that tax authorities’ capacity to monitor their citizens’ overseas incomes is limited, and some governments and financial institutions systematically conceal relevant information. 
If dividends, interest, royalties, and management fees are not taxed in the country in which they are paid, they more easily escape notice in the country of residence. 
Indeed, some countries – including the United States – impose no taxes on interest from large bank deposits by non-resident aliens. 
Globalization may also facilitate legal tax avoidance. 
For example, multinational corporations use methods like transfer pricing (book-keeping of goods, services, and resources transferred between a single company’s branches or subsidiaries) to minimize tax liability on their profits from international operations. 
Corporate taxpayers take advantage of discrepancies in rules and rates, choosing to do business in countries with more favorable – or lax – tax regimes. 
Finally, international competition for inward foreign direct investment may lead governments to reduce tax rates and increase concessions for foreign investors. 
With evidence of sudden capital outflows in response to certain tax-policy changes, governments are reluctant to raise income-tax rates – which have fallen sharply since the late 1970’s – or to tax dividend and interest income, for fear of capital flight. 
But, as direct-tax concessions have little or no effect in diverting international investment, let alone in attracting such flows, they constitute an unnecessary loss of revenue. 
Beggar-thy-neighbor policies will lead to revenue losses for all developing countries, while undermining the possibility of balanced, inclusive, and sustainable development. 
Developing-country finance ministries and tax authorities must cooperate with one another and with their OECD counterparts to close existing loopholes and establish effective tax policies that support their shared interests. 
With rising public debt worldwide placing fiscal constraints (real and imagined) on global economic recovery, such cooperation is more urgent than ever. 

Bombing the US Budget 
PARIS – As the United States and the world mark the fifth anniversary of the invasion of Iraq, debates are raging about the consequences – for Iraq, the Middle East, and America’s standing in the world. 
But the Iraq war’s domestic impact – the Pentagon’s ever mushrooming budget and its long-term influence on the US economy – may turn out to be its most lasting consequence. 
The US Defense Department’s request for $515.4 billion in the 2009 fiscal year dwarfs every other military budget in the world. 
And this huge sum – a 5% increase over the 2008 military budget – is to be spent only on the US military’s normal operations, thus excluding the wars in Iraq and Afghanistan. 
Since he took office in 2001, President George W. Bush has increased America’s regular military budget by 30%, again not taking into account the cost of the wars he launched. 
Last year, America’s entire military and counterterrorism expenditures topped $600 billion. 
One can assume that next year’s total spending on military affairs will be even bigger. 
Adjusted for inflation, US military spending has reached its highest level since World War II. 
Is there any limit to this spending boom? 
The US is allocating more money for defense today than it did during the war against Hitler or the Cold War. 
The Bush administration seems to think that today’s military threats are graver. 
Talk about the so-called “peace dividend” that was supposed to come with the fall of the Berlin Wall has been silenced. 
Of course, because the US economy has grown faster than military spending, the share of GDP dedicated to military expenditures has fallen over the years. 
The US spent 14% of its GDP on the military during the Korean War (1950-1953, the Cold War’s peak), 9% during the Vietnam War and only 4 % nowadays. 
Yet, given the sheer scale of military spending today, one can wonder if it is rational. 
The US economy is probably in recession, clouds are gathering over its pension and health-care systems, and its military budget may not make sense even in strategic terms. 
America alone accounts for around 50% of the world’s military expenditures, which is historically unprecedented for a single country. 
Most other countries don’t come anywhere close. 
Indeed, the second-ranked country in terms of total annual military spending, the United Kingdom, lags far behind, at $55 billion, followed by France ($45 billion), Japan ($41 billion), and Germany ($35 billion). 
China and Russia, which can be considered strategic rivals of the US, spend $35 billion and $24 billion, respectively (though these figures probably underestimate expenditure, the true amount is certainly still far below the US –level). 
Iran, depicted by the Bush administration as a major threat, is a military dwarf, spending $6.6 billion on its military. 
Some voices in America are calling for even bigger increases. 
Indeed, the Pentagon wants to enlarge the Marine Corps and Special Operations forces. 
Since it is increasingly difficult to recruit and retain soldiers, to do so will probably require raising their wages and improving their quality of life. 
Disabled soldiers also will cost a lot of money, even if the Pentagon won’t automatically pay everything for them. 
But fulfilling the ostensible rationale for this seemingly interminable spending orgy – success in the so-called “war on terror” – does not seem anywhere within reach. 
Mike McConnell, America’s Director of National Intelligence, recently admitted to a US Senate panel that al-Qaeda is gaining strength and steadily improving its ability to recruit, train, and even attack the US. 
That assessment is stunning, yet few American leaders – Democrats and Republicans alike – appear to be wondering if military power is the best answer to security issues. 
Indeed, by relying mainly on military solutions to political problems, the US seems to be increasing rather than reducing the threats it faces. 
After all, the dangers that America faces today do not come from nation states, but from non-states actors against whom nuclear weapons and aircraft carriers are useless. 
It would be less expensive and more fruitful for America to tackle the Israeli-Palestinian conflict, return to a multilateral approach, and respect the moral principles that it recommends to others. 
Likewise, only by adopting such a strategy can the US start to compress the Pentagon’s inflated budget and begin to address its many domestic woes. 

Bombs, Books, and Bucks 
The $82 billion “emergency supplemental” bill to finance American military operations in Iraq and Afghanistan leaves the United States spending more money on military power than is needed on a yearly basis to permit every child in the world to receive, within one decade, both primary and secondary education. 
Clearly, the question is not whether universal education is affordable, but whether America and the world can afford to neglect the political, economic, social, and health benefits of educating the roughly 380 million children around the globe who currently do not attend school. 
Education, no less than military might, is a security imperative, for it helps the world – both individuals and societies – to escape the consequences of widespread poverty, rapid population growth, environmental problems, and social injustices. 
Education strengthens social and cultural capital, which contributes to strong and stable polities. 
It improves human health, increases life expectancy, and lowers fertility rates. 
Aside from these obvious benefits, education is also a widely accepted humanitarian obligation and an internationally mandated human right. 
But this right is unrealized for the 28% of the world’s school-age children who are not enrolled in school. 
Most are illiterate and live in absolute poverty. 
The majority of these children are female. 
Of those who enter primary school in developing countries, more than one in four drops out before attaining literacy. 
Moreover, enrollment does not necessarily mean attendance, attendance does not necessarily mean education, and education does not necessarily mean good education. 
In 2000, the global community pledged to achieve universal primary education (UPE) by 2015. 
Many poor countries are wildly off track when it comes to meeting this goal. 
At the current rate of educational expansion, an estimated 118 million children will be absent from primary school in 2015. 
Nearly twice that number will not attend secondary school. 
The World Bank, UNICEF, and UNESCO have estimated that achieving UPE by 2015 will entail annual expenditures of between $6.5 billion and $35 billion, on top of the approximately $82 billion that developing countries spend each year on primary education. 
These funds will be needed for schools, teachers, teacher training, materials and equipment, administration, and assessments. 
Based on a five-year project that we led at the American Academy of Arts and Sciences, we believe that the UPE goal is not ambitious enough: the world should aim for, and can achieve, high-quality, universal secondary education, as well as universal primary education. 
Developing countries spend approximately $93 billion per year on secondary education. 
If a gradual approach is taken between now and 2015, the annual additional cost of extending secondary education to every child will likely be between $27 billion and $34 billion. 
Creating the necessary space to accommodate universal enrollment will require significant investment. 
These funds would at best ameliorate – not eliminate – prevailing global disparities in educational access and quality. 
Not included is the cost of other improvements needed to encourage children to attend school, such as meals, tuition subsidies, and more effective, dynamic, and knowledgeable teachers. 
Nor does this include the cost of improving national governments’ capacity to collect data and to implement and oversee educational reforms. 
Though more money is essential, it is not sufficient. 
In some regions, cultural barriers inhibit schooling of girls and of linguistic, religious, and ethnic minorities. 
The political energy required for expanding and reforming education is difficult to muster in the world’s wealthiest nations. 
Ensuring high-quality education for all children requires an open discussion of educational goals, an international commitment to improving its effectiveness and economic efficiency, recognition of the need to extend secondary education to all children, and acknowledgment of educational diversity and the need to adapt aid policies to local contexts. 
None of these tasks is possible without supplementing the funding already provided by developing countries. 
The world, or even the US by itself, has the ability to provide the additional funds needed. 
As the G8 leaders gather in Scotland, it is hard to imagine them coming up with a better investment in our common future. 

Bombs Away 
LONDON – One of the most dispiriting features of today’s international debates is that the threat to humanity posed by the world’s 23,000 nuclear weapons – and by those who would build more of them, or be only too willing to use them – has been consigned to the margin of politics. 
US President Barack Obama did capture global attention with his Prague speech in 2009, which made a compelling case for a nuclear weapon-free world. 
And he did deliver on a major new arms-reduction treaty with Russia, and hosted a summit aimed at reducing the vulnerability of nuclear weapons and materials to theft or diversion. 
But nuclear issues still struggle for public resonance and political traction. 
It would take a brave gambler to bet on ratification of the Comprehensive Test Ban Treaty by the US Senate any time soon. 
The film An Inconvenient Truth won an Academy Award, led to a Nobel Prize for Al Gore, and attracted huge international attention to the disastrous impact of climate change. 
But Countdown to Zero, an equally compelling documentary, made by the same production team and making shockingly clear how close and how often the world has come to nuclear catastrophe, has come and gone almost without trace. 
Complacency trumps anxiety almost everywhere. 
Japan’s Fukushima disaster has generated a massive debate about the safety of nuclear power, but not about nuclear weapons. 
Fear of a nuclear holocaust seems to have ended with the Cold War. 
Indeed, Hiroshima and Nagasaki seem an eternity ago; new nuclear-weapons states have emerged without the world ending; no terrorist nuclear device has threatened a major city; and possession of nuclear weapons, for the states that have them, seems to be a source of comfort and pride rather than concern or embarrassment. 
With only a handful of exceptions, the current generation of political leaders shows little interest in disarmament, and not much more in non-proliferation. 
And their publics are not pressuring them to behave otherwise. 
Few have worked harder to shake the world out of its complacency than four of the hardest-nosed realists ever to hold public office: former US Secretaries of State Henry Kissinger and George Shultz, former US Secretary of Defense William Perry, and former US Senator Sam Nunn. 
In a series of opinion articles over the last five years, they have repeatedly sounded the alarm that the risks of nuclear weapons outweigh any possible usefulness in today’s security environment. 
Moreover, they have called for a complete rethinking of deterrence strategy, in order to minimize, and ultimately eliminate, reliance on the most indiscriminately destructive weapons ever invented. 
Last week in London, the “gang of four” convened a private meeting with leading think-tank researchers and a worldwide cast of some 30 former foreign and defense ministers, generals, and ambassadors who share their concern and commitment. 
But our average age was over 65, and the limits of our effectiveness were neatly described by former British Defence Minister Des Browne: “People who used to be something really want to tackle this issue. 
The trouble is that those who are something don’t.” 
No quick fix will turn all this around. 
Getting the kind of messages that emerged from the London meeting embedded in public and political consciousness is going to be slow boring through hard boards. 
But the messages demand attention, and we simply have to keep drilling. 
The first message is that the threat of a nuclear weapons catastrophe remains alarmingly real. 
Existing global stockpiles have a destructive capacity equal to 150,000 Hiroshima bombs, and in handling them there is an omnipresent potential for human error, system error, or misjudgment under stress. 
Pakistan versus India is a devastating conflict-in-waiting, and North Korea and Iran remain volatile sources of concern. 
We know that terrorist groups have the capacity to engineer nuclear devices and would explode them anywhere they could; we simply cannot be confident that we can forever deny them access to the fissile material they need to fuel them. 
The second message is that Cold War nuclear-deterrence doctrine is irrelevant to today’s world. 
So long as nuclear weapons remain, states can justify maintaining a minimum nuclear-deterrent capability. 
But that can be done without weapons on high alert, and with drastically reduced arsenals in the case of the US and Russia, and, at worst, at current levels for the other nuclear-armed states. 
The third message is that if the existing nuclear powers sincerely want to prevent others from joining their club, they cannot keep justifying the possession of nuclear weapons as a means of protection for themselves or their allies against other weapons of mass destruction, especially biological weapons, or conventional weapons. 
Indeed, the single most difficult issue inhibiting serious movement toward disarmament – certainly in the case of Pakistan versus India, and Russia and China versus the US – are conventional arms imbalances, and ways of addressing them must rise to the top of the policy agenda. 
The final message is that neither piecemeal change nor sloganeering will do the job. 
Nuclear disarmament, non-proliferation, counter-terrorism, and civil nuclear-energy risk reduction are inextricably connected, and they call for sustained commitment around a comprehensive agenda, and detailed argument. 
Sound bites and tweets are an unlikely route to nuclear salvation. 
Kissinger is no idealist icon. 
But he’s always worth listening to, and never more so than with respect to the question that he has been asking for years: When the next nuclear-weapons catastrophe happens, as it surely will, the world will have to respond dramatically. 
Why can’t we start right now? 

How Scary Is the Bond Market? 
NEW HAVEN – The prices of long-term government bonds have been running very high in recent years (that is, their yields have been very low). 
In the United States, the 30-year Treasury bond yield reached a record low (since the Federal Reserve series began in 1972) of 2.25% on January 30. 
The yield on the United Kingdom's 30-year government bond fell to 2.04% on the same day. 
The Japanese 20-year government bond yielded just 0.87% on January 20. 
All of these yields have since moved slightly higher, but they remain exceptionally low. 
It seems puzzling – and unsustainable – that people would tie up their money for 20 or 30 years to earn little or nothing more than these central banks' 2% target rate for annual inflation. 
So, with the bond market appearing ripe for a dramatic correction, many are wondering whether a crash could drag down markets for other long-term assets, such as housing and equities. 
It is a question that I am repeatedly asked at seminars and conferences. 
After all, participants in the housing and equity markets set prices with a view to prices in the bond market, so contagion from one long-term market to another seems like a real possibility. 
I have been thinking about the bond market for a long time. 
In fact, the long-term bond market was the subject of my 1972 PhD dissertation and my first-ever academic publication the following year, co-authored with my academic adviser, Franco Modigliani. 
Our work with data for the years 1952-1971 showed that the long-term bond market back then was pretty easy to describe. 
Long-term interest rates on any given date could be explained quite well as a certain weighted average of the last 18 quarters of inflation and the last 18 quarters of short-term real interest rates. 
When either inflation or short-term real interest rates went up, long-term rates rose. 
When either fell, so did long-term rates. 
We now have more than 40 years of additional data, so I took a look to see if our theory still predicts well. 
It turns out that our estimates then, if applied to subsequent data, predicted long-term rates extremely well for the 20 years after we published; but then, in the mid-1990s, our theory started to overpredict. 
According to our model, long-term rates in the US should be even lower than they are now, because both inflation and short-term real interest rates are practically zero or negative. 
Even taking into account the impact of quantitative easing since 2008, long-term rates are higher than expected. 
But the explanation that we developed so long ago still fits well enough to encourage the belief that we will not see a crash in the bond market unless central banks tighten monetary policy very sharply (by hiking short-term interest rates) or there is a major spike in inflation. 
Bond-market crashes have actually been relatively rare and mild. 
In the US, the biggest one-year drop in the Global Financial Data extension of Moody's monthly total return index for 30-year corporate bonds (going back to 1857) was 12.5% in the 12 months ending in February 1980. 
Compare that to the stock market: According to the GFD monthly S&P 500 total return index, an annual loss of 67.8% occurred in the year ending in May 1932, during the Great Depression, and one-year losses have exceeded 12.5% in 23 separate episodes since 1900. 
It is also worth noting what kind of event is needed to produce a 12.5% crash in the long-term bond market. 
The one-year drop in February 1980 came immediately after Paul Volcker took the helm of the Federal Reserve in 1979. 
A 1979 Gallup Poll had shown that 62% of Americans regarded inflation as the “most important problem facing the nation." 
Volcker took radical steps to deal with it, hiking short-term interest rates so high that he created a major recession. 
He also created enemies (and even faced death threats). 
People wondered whether he would get away with it politically, or be impeached. 
Regarding the stock market and the housing market, there may well be a major downward correction someday. 
But it probably will have little to do with a bond-market crash. 
That was the case with the biggest US stock-market corrections of the last century (after 1907, 1929, 1973, 2000, and 2007) and the biggest US housing-market corrections of all time (after 1979, 1989, and 2006). 
It is true that extraordinarily low long-term bond yields put us outside the range of historical experience. 
But so would a scenario in which a sudden bond-market crash drags down prices of stocks and housing. 
When an event has never occurred, it cannot be predicted with any semblance of confidence. 

Capitalizing on Climate Unity 
BONN – When Donald Trump was elected US president a year ago, some said the end of the Paris climate agreement was nigh. 
Yet, as the latest round of global climate talks in Bonn, Germany, has shown, the world’s political leaders are more committed to the deal than ever. 
This is good news, but the fact remains that countries’ commitments do not yet add up to enough to turn the tide – and our window of opportunity to act effectively on climate change is rapidly closing. 
Trump’s decision to withdraw the United States – the world’s largest historical carbon dioxide emitter – from the Paris agreement dealt the accord a major blow. 
Many of America’s closest allies – including both of our countries, the Marshall Islands and Australia – were deeply disappointed by the move, which was shortsighted, for both America and the world. 
But it is hard not to take heart from the fresh wave of global resolve Trump’s decision has unleashed, both globally and within the US itself. 
Almost every major US state, city, and company has now pledged to do more to ensure that their country can meet its commitments, despite the Trump administration’s opposition. 
The fact that climate action is now the worlds’ biggest economic opportunity has certainly helped. 
According to the Trump administration’s own analysis, more than twice as many Americans are now working in the solar industry than in coal, oil, and gas combined. 
And earlier this year, the OECD indicated that we could boost global growth by 5% per year by 2050, simply by linking the climate and growth agendas. 
There is no time to waste; climate change has already arrived. 
This year’s record-breaking drought in the Marshall Islands, apocalyptic storms in the Caribbean, and devastating floods in Bangladesh and the US demonstrate this. 
As the United Nations Environment Programme recently reminded us, even if every country hits its existing 2030 emissions-reduction targets, we will be unable to limit warming to below 1.5° Celsius above preindustrial levels – the threshold, recognized in the Paris agreement, beyond which the impact of climate change becomes far greater. 
Our chances even of staying within the more conservative – and dangerous – 2° Celsius limit will be slim. 
To ignore this reality is to gamble with the existential future of many island countries, not to mention the prosperity of the global economy. 
Without a sharp rise in global ambition for emissions reductions by 2020, we will be unable to save the world’s most vulnerable countries. 
And if runaway climate change takes hold, no country will be immune to its effects. 
Unfortunately, things will get a lot worse before they get better. 
That is why we must step up our efforts to boost our resilience to the climate effects we won’t be able to avoid, and address the associated security consequences. 
In the meantime, we must urgently increase the ambition of our climate commitments. 
Fortunately, several upcoming events offer an opportunity to do just that. 
We need to seize that opportunity with both hands. 
Next month, French President Emmanuel Macron will host a conference to mark the two-year anniversary of the Paris agreement. 
And next September, California Governor Jerry Brown will host his own summit to galvanize greater action by cities, companies, and other non-state actors. 
The biggest opportunity, however, will come in 2019, when UN Secretary-General António Guterres convenes world leaders in New York for the biggest climate gathering since the Paris talks. 
We need to build an arc of ambition across these events that can, in the words of our friend Tony de Brum, the late Marshallese foreign minister and untiring climate warrior at the Paris conference, deliver a pathway to survival for the most vulnerable. 
Some significant players are already going above and beyond their pledges. 
A number of others, including the Marshall Islands, are set to bring forward new targets by 2020, to augment their current targets, which reach only as far as 2025. 
Still others – including France, India, and New Zealand – have said informally that they are eager to do more. 
The truth is that almost all countries have the capacity to do more, especially if the support is there and the opportunities are identified. 
The imperative now is to create the right political conditions both to motivate and facilitate action. 
As more countries signal their ability to increase the ambition of their commitments, still more will follow. 
At the same time, we must ensure that every sector, as well as every country, does its fair share. 
This includes, for example, international shipping, which, if it were a country, would be the world’s sixth-largest emitter. 
Next year’s “Talanoa Dialogue” – to be convened by Fiji, which last week became the first island state to chair UN climate talks – will help countries identify exactly how they can achieve the goals set in the Paris agreement. 
That dialogue, which countries should approach in good faith, must be a springboard for further action. 
To that end, the recent Intergovernmental Panel on Climate Change report laying out pathways for keeping the temperature rise below the 1.5°C threshold will be crucial. 
The science remains key. 
The Paris talks proved that political success is possible, if leaders are given the right platform, if civil society mobilizes behind them, and if the world acts in unison. 
To get the rest of the way to a sustainable future, we must apply this lesson again. 
The catchphrase at the Bonn conference was “further, faster, and together.” 
Our collective challenge is to translate a nice-sounding slogan into reality. 

Boom, Bust, and Recovery in the World Economy 
NEW YORK – This global economic crisis will go down in history as Greenspan’s Folly. 
This is a crisis made mainly by the United States Federal Reserve Board during the period of easy money and financial deregulation from the mid-1990’s until today. 
This easy-money policy, backed by regulators who failed to regulate, created unprecedented housing and consumer credit bubbles in the US and other countries, notably those that shared America’s policy orientation. 
The bubble has now burst, and these economies are heading into a steep recession. 
At the core of the crisis was the run-up in housing and stock prices, which were way out of line with historical benchmarks. 
Greenspan stoked two bubbles – the Internet bubble of 1998-2001 and the subsequent housing bubble that is now bursting. 
In both cases, increases in asset values led US households to think that they had become vastly wealthier, tempting them into a massive increase in their borrowing and spending – for houses, automobiles, and other consumer durables. 
Financial markets were eager to lend to these households, in part because the credit markets were deregulated, which served as an invitation to reckless lending. 
Because of the boom in housing and stock market prices, US household net wealth increased by around $18 trillion during 1996-2006. The rise in consumption based on this wealth in turn raised house prices further, convincing households and lenders to ratchet up the bubble another notch. 
This has all come crashing down. 
Housing prices peaked in 2006, and equity prices peaked in 2007. 
With the collapse of these bubbles, paper wealth of perhaps $10 trillion, or even as much as $15 trillion, will be wiped out. 
Several complex things are now happening simultaneously. 
First, households are cutting back sharply on consumption, since they feel – and are – vastly poorer than they were a year ago. 
Second, several highly leveraged institutions, such as Bear Stearns and Lehman Brothers, have gone bankrupt, causing further losses of wealth (of these failed institutions’ shareholders and creditors) and a further loss of credit that these firms once supplied. 
Third, commercial banks also lost heavily in these dealings, wiping out much of their capital. 
As their capital declines, so, too, do their future loans. 
Fourth, and finally, the failure of Lehman Brothers and near failure of the insurance giant AIG, incited a financial panic, in which even healthy firms are unable to obtain short-term bank loans or sell short-term commercial paper. 
The challenge for policymakers is to restore enough confidence that companies can once again obtain short-term credit to meet their payrolls and finance their inventories. 
The next challenge will be to push for a restoration of bank capital, so that commercial banks can once again lend for longer-term investments. 
But these steps, urgent as they are, will not prevent a recession in the US and other countries hit by the crisis. 
The stock and housing markets are unlikely to recover any time soon. 
Households are poorer as a result, and will cut back sharply on their spending, making a recession inevitable in the short run. 
The US will be hardest hit, but other countries with recent housing and consumption booms (and now busts) – particularly the United Kingdom, Ireland, Australia, Canada, and Spain – will be hit as well. 
Iceland, which privatized and deregulated its banks a few years ago, now faces national bankruptcy, because its banks will not be able to pay off foreign creditors who lent heavily to them. 
It is no coincidence that, with the exception of Spain, all of these countries explicitly adhered to the US philosophy of “free-market” and under-regulated financial systems. 
But, whatever the pain felt in the deregulated Anglo-Saxon-style economies, none of this must inevitably cause a global calamity. 
I do not see any reason for a global depression, or even a global recession. 
Yes, the US will experience a decline in income and a sharp rise in unemployment, lowering the rest of the world’s exports to the US. 
But many other parts of the world that still grow. 
Many large economies, including China, Germany, Japan, and Saudi Arabia, have very large export surpluses, and so have been lending to the rest of the world (especially to the US) rather than borrowing. 
These countries are flush with cash, and are not burdened by the collapse of a housing bubble. 
Although their households have suffered to some extent from the fall in equity prices, they not only can continue to grow, but they can also increase their internal demand to offset the decline in exports to the US. 
They should now cut taxes, ease domestic credit conditions, and increase government investments in roads, power, and public housing. 
They have enough foreign-exchange reserves to avoid the risk of financial instability from increasing their domestic spending, as long as they do it prudently. 
As for the US, the current undeniable pain for millions of people, which will grow next year as unemployment rises, is an opportunity to rethink the economic model adopted since President Ronald Reagan came to office in 1981. 
Low taxes and deregulation produced a consumer binge that felt good while it lasted, but also produced vast income inequality, a large underclass, heavy foreign borrowing, neglect of the environment and infrastructure, and now a huge financial mess. 
The time has come for a new economic strategy – in essence a new New Deal. 

The Risks to America’s Booming Economy 
CAMBRIDGE – After a long and slow recovery from the recession that began a decade ago, the United States economy is now booming. 
The labor market is at full employment, the inflation rate is rising, and households are optimistic. 
Manufacturing firms and homebuilders are benefiting from increasing activity. 
The economy is poised for stronger growth in the year ahead. 
We no longer hear worries about secular stagnation. 
The overall unemployment rate is just 4.7%, while unemployment among college graduates is only 2.4%. 
Average hourly earnings are 2.8% higher than they were a year ago. 
The tight labor market and rising wages are inducing some individuals who had stopped looking for work to return to the labor force, boosting the participation rate. 
A clear indication that the economy is at full employment is that the rate of inflation is increasing. 
The “core” consumer price index (which omits volatile energy and food prices) has reached an annual rate of 2.2%, substantially higher than the 1.8% average during the previous three years. 
During the most recent three months, core inflation rose at a 2.8% annual rate. 
Household wealth is also increasing. 
The price of homes, the most important asset for US households, rose by 5% during the most recent 12 months. 
The rising stock market has caused the broader measure of net worth to increase even faster. 
Surveys of consumer attitudes point to strong positive feelings. 
The University of Michigan Consumer Sentiment Index recently reached a 17-year high. 
Likewise, the Conference Board Consumer Confidence Index hit a 15-year high in February. 
Manufacturing firms have increased output in each of the last six months. 
Homebuilders are racing to keep up with demand, reflected in an increase of more than 6% in the number of new single-family houses in the past 12 months. 
All of this suggests that real (inflation-adjusted) GDP will rise more quickly in 2017 than it did in the recent past. 
While volatile trade and inventory numbers have depressed the recent GDP figures, the more fundamental measure of final sales to private purchasers has been rising in real terms at an annual rate of about 2.5%. 
Overall GDP is likely to increase at a similar rate for 2017 as a whole. 
But, although the economy currently is healthy, it is also fragile. 
The US has experienced a decade of excessively low interest rates, which have caused investors and lenders to seek higher yields by bidding up the prices of all types of assets and making risky loans. 
The danger is that overpriced assets and high-risk loans could lose value and cause an economic downturn. 
The price-earnings ratio of the Standard & Poor’s 500 Index is now nearly 70% above its historic average. 
A return of the price-earnings ratio to its historic average would cause share prices to decline by 40%, implying a loss of more than $9 trillion, an amount equal to nearly half of total GDP. 
Ten-year Treasury bonds now yield just 2.5%. 
With the current inflation rate of more than 2% and markets anticipating a similar inflation rate over the longer term (as measured by five-year five-year-forward inflation expectations), the yield on ten-year Treasury bonds should be above 4%. 
A rise of the ten-year yield to 4% would reduce the value of those bonds substantially. 
Other long-term bonds – both government bonds and corporate bonds – would suffer similar declines. 
Reaching for yield has also narrowed credit spreads between high-grade bonds and riskier domestic and emerging-market bonds. 
And commercial real-estate prices have been bid up to levels that are probably not sustainable. 
At the same time, banks and other lenders have extended loans bearing interest rates that do not reflect the riskiness of the borrowers. 
And, because these covenant-light loans impose fewer conditions on the borrowers, they are more susceptible to default if economic conditions deteriorate. 
But a bad outcome is not inevitable. 
None of the risks I have described may materialize. 
Interest rates may return to normal levels, and asset prices may gradually correct. 
But there is a clear risk that a decade of excessively low interest rates will cause a collapse of asset prices and an economic downturn. 
This will be a major challenge to the US Federal Reserve and the Trump administration in the year ahead. 

The Great Disconnect 
PARIS – Since the second half of 2012, financial markets have recovered strongly worldwide. 
Indeed, in the United States, the Dow Jones industrial average reached an all-time high in early March, having risen by close to 9% since September. 
In Europe, European Central Bank President Mario Draghi’s “guns of August” turned out to be remarkably effective. 
Draghi reversed the euro’s slide into oblivion by promising potentially unlimited purchases of member governments’ bonds. 
Between September 1 and February 22, the FTSEurofirst index rose by almost 7%. 
In Asia, too, financial markets are up since September, most dramatically in Japan. 
Even the Italian elections in late February seem not to have upset markets too much (at least so far). 
Although interest-rate spreads for Italian and Spanish ten-year bonds relative to German bonds briefly jumped 30-50 basis points after the results were announced, they then eased to 300-350 basis points, compared to 500-600 basis points before the ECB’s decision to establish its “outright monetary transactions” program. 
But this financial market buoyancy is at odds with political events and real economic indicators. 
In the US, economic performance improved only marginally in 2012, with annual GDP rising by 2.3%, up from 1.8% in 2011. 
Unemployment remained high, at 7.8% at the end of 2012, and there has been almost no real wage growth over the last few years. 
Median household income in the US is still below its 2007 level – indeed, close to its level two decades ago – and roughly 90% of all US income gains in the post-crisis period have accrued to the top 1% of households. 
Indicators for the eurozone are even worse. 
The economy contracted in 2012, and wages declined, despite increases in Germany and some northern countries. 
Reliable statistics are not yet available, but poverty in Europe’s south is increasing for the first time in decades. 
On the political front, the US faces a near-complete legislative stalemate, with no sign of a compromise that could lead to the optimal policy mix: short-term support to boost effective demand and long-term structural reforms and fiscal consolidation. 
In Europe, Greece has been able – so far – to maintain a parliamentary majority in support of the coalition government, but there, and elsewhere, hyper-populist parties are gaining ground. 
The Italian election results could be a bellwether for Europe. 
Beppe Grillo’s populist Five Star Movement emerged with 25% of the popular vote – the highest support for any single party. 
Former Prime Minister Silvio Berlusconi, confounding those who had forecast his political demise, re-emerged at the head of a populist-rightist coalition that ended up only 0.3 percentage points away from winning. 
In short, we are witnessing a rapid decoupling between financial markets and inclusive social and economic well-being. 
In the US and many other places, corporate profits as a share of national income are at a decades-long high, in part owing to labor-saving technology in a multitude of sectors. 
Moreover, large corporations are able to take full advantage of globalization (for example, by arbitraging tax regimes to minimize their payments). 
As a result, the income of the global elite is growing both rapidly and independently of what is happening in terms of overall output and employment growth. 
Demand for luxury goods is booming, alongside weak demand for goods and services consumed by lower-income groups. 
All of this is happening in the midst of extremely expansionary monetary policies and near-zero interest rates, except in the countries facing immediate crisis. 
Structural concentration of incomes at the top is combining with easy money and a chase for yield, driving equity prices upward. 
And yet, despite widespread concern and anxiety about poverty, unemployment, inequality, and extreme concentration of incomes and wealth, no alternative growth model has emerged. 
The opposition to the dominant mainstream in Europe is split between what is still too often an “old” left that has trouble adjusting to twenty-first-century realities, and populist, anti-foreigner, and sometimes outright fascist parties on the right. 
In the US, the far right shares many of the characteristics of its populist European counterparts. 
But it is a tribute to the American two-party system’s capacity for political integration that extremist forces remain marginalized, despite the rhetoric of the Tea Party. 
President Barack Obama, in particular, has been able to attract support as a liberal-left idealist and as a centrist-realist at the same time, which enabled him to win re-election in the face of a weak economy and an even weaker labor market. 
Nonetheless, without deep socio-economic reforms, America’s GDP growth is likely to be slow at best, while its political system seems paralyzed. 
Nowhere is there a credible plan to limit the concentration of wealth and power, broaden economic gains through strong real-income growth for the poor, and maintain macroeconomic stability. 
The absence of such a plan in the US (and in Europe) has contributed to the decoupling of financial markets from inclusive economic progress, because it suggests that current trends are politically sustainable. 
But, while this disconnect could continue for some time if no alternative program emerges, the huge gap between financial markets’ performance and most people’s well-being is unlikely to persist in the longer term. 
When asset prices overshoot reality, eventually they have nowhere to go but down. 

Can South Korea Make More Babies? 
SEOUL – South Korea is facing major demographic challenges. 
The total fertility rate (the number of children per woman), at 1.24, is one of the lowest in the world, and well below the level – 2.1 children per woman – needed to sustain a population without immigration. 
As a result, the population is aging fast, and the government, despite its best efforts, seems to have no answer. 
A low birthrate is common in industrialized countries. 
Before South Korea’s economic boom – a time when having more children was viewed as a source of security in old age – the fertility rate was much higher, averaging more than six until 1960. 
But, as South Korea’s economy advanced, child-rearing costs rose, and female labor-force participation increased, the fertility rate declined dramatically, dropping below two in the 1980s. 
At first, falling fertility rates were an economic blessing, as households saved more and invested in children’s development. 
In 2015, the college enrollment rate for women hit 81%, compared to just 6% in 1980. 
But the decline of the prime working-age population has lately been undercutting economic growth, and threatens to place excessive pressure on the public pension system down the road. 
South Korea’s government has attempted to address these challenges with a series of measures aimed at boosting fertility rates. 
A recent package includes more paternity leave, priority enrollment in public childcare facilities for third children, and subsidies for infertility treatment. 
But whether these measures will lead to higher fertility rates is dubious, for a simple reason: they fail to tackle sufficiently the high economic hurdles that are causing South Koreans to delay or forego having children. 
One of those hurdles is the cost of education. 
South Korean parents are willing to invest heavily in giving their few children the best chance of prospering. 
In 2015, they spent almost 7% of their disposable income on private tutoring for their children in primary and secondary education. 
They also pay an absurdly high price for their children’s college education, which no longer guarantees prosperity in life. 
In fact, South Korea’s share of private spending for college education is the highest among OECD countries, even ahead of the United States. 
That limits how many children parents may feel they can afford to raise. 
For many young South Koreans, even marriage is economically unfeasible nowadays, owing to factors like high housing costs and youth unemployment, even among university graduates. 
The number of weddings in South Korea plunged from 435,000 in 1996 to 302,800 in 2015. 
In a country where only 2% of children are born outside marriage, this trend has a powerful impact on fertility rates. 
Women confront the highest barriers to increased fertility. 
Pervasive gender inequality, together with a lack of affordable, high-quality childcare, causes many South Korean women to withdraw from the labor market after marriage or childbirth. 
While men work long, inflexible hours, women assume the lion’s share of the responsibility for family care. 
A 2014 survey indicated that South Korean women spent, on average, three hours and 28 minutes daily on household activities and family care, compared to just 47 minutes for men, who also accounted for only 5.6% of those who took parental leave in 2015. 
Though the new measures aim to boost this share, it will not be enough. 
After all, women are not just struggling to cope with uneven parental leave; many are leaving their jobs altogether after childbirth. 
And many of them do not wish to do so. 
In a recent survey by the Federation of Korean Industries, 38% of the single female respondents said that they do not want children, mostly because they fear that they will struggle to keep up at work or lose their jobs. 
Only one-third responded positively to the government’s program for promoting fertility. 
South Korea’s government must pursue a more comprehensive policy package aimed at lowering some of the barriers to childbirth. 
Women, in particular, need greater support, in order to eliminate the binary choice between career and family. 
The key is to provide more flexible work arrangements, to build a more accepting corporate culture, and to ensure accessible childcare, both public and private. 
To this end, allowing the migration of foreign housekeepers and caregivers could be very helpful. 
South Korea remains conservative about offering permanent residency to foreign nationals. 
But the reality is that, in advanced economies where market services for childcare and households are available, highly educated women tend to have more children, especially at older ages. 
Japan, for its part, has managed to boost its ultra-low fertility rate – which bottomed out in 2005 at 1.26 – to 1.46 in 2015, through consistent efforts to reduce childrearing costs and change the corporate culture. 
To sustain this recovery, it has recently decided to take initiatives to attract more foreign housekeepers. 
These changes reflect Prime Minister Shinzo Abe’s commitment to prevent the population from falling below 100 million. 
Even where foreign household workers do not raise the fertility rate, they enable more women to continue working after having children. 
In Singapore, for example, families often hire live-in maids from neighboring countries, including the Philippines and Indonesia, to take care of the housework and childcare. 
Though Singapore’s fertility rate stands at just 1.3 – one of the lowest in the world – this policy enables the country to attract foreign talents to fill the population gap and sustain the economy. 
To some extent, demographic change is inevitable, as is its transformative economic impact. 
But there are steps that governments can take to shape demographic trends and blunt their negative effects. 
If South Korea creates an environment in which families can live and work happily, those families will grow larger. 

Privatizing Development Aid 
LONDON – Much has changed about official development assistance (ODA) over the last 50 years. 
Since it originated during the Cold War, when members of the OECD’s Development Assistance Committee spent roughly $60 billion annually (an amount that the Soviet Union undoubtedly matched), recipient countries have been called “backward,” “developing,” “southern,” and, lately, “emerging.” 
Indeed, what defines a recipient country has increasingly been called into question in recent years. 
The United Kingdom is debating whether to discontinue aid to India, the third-largest recipient of capital inflows and the home of the UK’s largest manufacturing employer, the Tata Group. 
Likewise, eurozone countries have been looking to long-time aid recipient China, which holds $2.5 trillion of US government debt, to help them overcome their own debt crisis. 
Furthermore, development itself has been redefined, with the policy focus shifting to good governance, transparency, accountability, and human rights. 
As a result, initiatives aimed at improving health, education, and gender equality have replaced large-scale construction projects. 
Now it is time to re-examine the ODA system. 
After all, donor countries are mired in debt and stagnation, while some recipient economies are growing 5-7 times faster than they are. 
In 1969, Canada’s former prime minister, Lester Pearson, recommended that developed countries should spend 0.7% of their GDP on ODA by 1975, and that they should eventually increase the proportion to 1%. 
Although Norway, Sweden, Denmark, the Netherlands, and Luxembourg have achieved the 0.7% target, the global average has actually declined, from 0.5% of GDP in 1960 to 0.3% today. 
The UK has pledged 0.7% of its gross national income, but is debating who will receive it. 
America’s annual contribution of $30 billion, the world’s highest in absolute terms, amounts to less than 0.25% of its GNI. 
But, while international organizations encourage additional ODA spending, donor-country citizens are increasingly resistant. 
Critics argue that the money does not reach those who truly need it; that it creates dependency, and thus harms recipient countries; that it is needed at home; and that it generates income primarily for consultants and source-country vested interests. 
To be sure, it is widely agreed that aid for disaster relief and assistance to conflict-affected countries are effective. 
Moreover, almost 10% of total ODA is allotted for humanitarian relief, which should be similarly uncontroversial. 
But the overall impact of ODA remains dubious. 
In a report released last March, the UK’s House of Lords Select Committee on Economic Affairs cited disagreement among experts on the issue, with estimates ranging from a 0.5% boost to annual GDP growth in recipient countries to no effect on growth at all. 
There are several possible explanations for the fact that development aid has not always translated into GDP growth. 
Recipient governments might misuse the aid, preventing it from trickling down to those who would spend or invest it, or the money may be given on the condition that it is spent on goods or services from the donor country. 
And, even if development aid does spur GDP growth, this does not necessarily lead to better lives for the poorest citizens, especially in the short term. 
While eliminating extreme poverty is undoubtedly an urgent moral imperative, ODA may not be the best way to achieve it. 
In fact, there is a strong case for involving the private sector in development assistance. 
Over the last two decades – a period when globalization opened up the world financial system – private capital flows have contributed more to developing economies’ growth than has ODA. 
Indeed, in 2009, more than $1 trillion in private capital flowed to developing countries – nine times more than total aid. 
Moreover, privately funded organizations like Oxfam or Medecins Sans Frontières (Doctors Without Borders) tend to allocate resources more effectively than governments, delivering genuine gains where they are needed most. 
Following this model, countries’ aid budgets could be opened up for bids from development NGOs, which would assume responsibility for allocating and delivering the funds as efficiently as possible – and would be required to provide a careful accounting of how they spent the money. 
A bolder solution would be direct cash transfers to the poor. 
With global aid totaling roughly $130 billon, each of the 1.3 billion people living in extreme poverty (less than $1 per day) worldwide would receive $100 in cash. 
Some countries have already experimented with such programs, and India is preparing to begin providing cash transfers to its 300 million poor citizens. 
In other words, a global cash-transfer scheme could be very effective, and would be feasible if donor countries pooled their aid budgets. 
The simplest – and most radical – solution would be to stop all official aid payments. 
Instead, the money could be returned to donor-country citizens through tax deductions or income transfers, and they could decide how to help those in need. 
Given the prevalence of poverty and disease, many of these citizens would be motivated to contribute to global poverty-reduction efforts. 
Allowing citizens to choose how to donate may help to tackle corruption in countries where politicians often misappropriate ODA, while discouraging wasteful or impractical projects. 
In addition, people would be far less likely to complain that their money is being wasted or misused if they chose where it went. 
ODA has, at best, a patchy record. 
After 50 years of inefficiency, it is time to try something new. 
In the near term, at least, cash transfers seem to be the best option. 
Only by allowing each recipient to decide how best to use the money can we ensure that development aid actually enables the world’s poorest citizens to improve their lives. 

America’s Bad Border Tax 
NEW YORK – The United States may be about to implement a border adjustment tax. 
The Republican Party, now in control of the legislative and executive branches, views a BAT – which would effectively subsidize US exporters, by giving them tax breaks, while penalizing US companies that import goods – as an important element of corporate-tax reform. 
They claim that it would improve the US trade balance, while boosting domestic production, investment, and employment. 
They are wrong. 
The truth is that the Republicans’ plan is highly problematic. 
Along with other proposed reforms, the BAT would turn the US corporate income tax into a tax on corporate cash flow (with border adjustment), implying far-reaching consequences for US companies’ competitiveness and profitability. 
Some sectors or firms – especially those that rely heavily on imports, such as US retailers – would face sharp increases in their tax liabilities; in some cases, these increases would be even greater than their pre-tax profits. 
Meanwhile, sectors or firms that export, like those in manufacturing, would enjoy significant reductions in their tax burden. 
This divergence seems both unwarranted and unfair. 
The BAT would have other distributional implications, too. 
Studies indicate that it may hit consumers among the bottom 10% of income earners hardest. 
Yet it has been promoted as a way to offset the corporate-tax cuts that Republicans are also pushing – cuts that would ultimately benefit those at the top of the income distribution. 
Making matters worse, the BAT would not actually protect US firms from foreign competition. 
Economic theory suggests that, in principle, a BAT could push up the value of the dollar by as much as the tax, thereby nullifying its effects on the relative competitiveness of imports and exports. 
Moreover, the balance-sheet effects of dollar appreciation would be large. 
Because most foreign assets held by US investors are denominated in a foreign currency, the value of those assets could be reduced by several trillion dollars, in total. 
Meanwhile, the highly indebted emerging economies would face ballooning dollar liabilities, which could cause financial distress and even crises. 
Even if the US dollar appreciated less than the BAT, the pass-through from the tax on imports to domestic prices would imply a temporary but persistent rise in the inflation rate. 
Some studies suggest that, in the BAT’s first year, the new tax could push up US inflation by 1%, or even more. 
The US Federal Reserve may respond to such an increase by hiking its policy rate, a move that would ultimately lead to a rise in long-term interest rates and place further upward pressure on the dollar’s exchange rate. 
Yet another problem with the BAT is that it would create massive disruptions in the global supply chains that the US corporate sector has built over the last few decades. 
By undermining companies’ capacity to maximize the efficiency of labor and capital allocation – the driving motivation behind offshoring – the BAT would produce large welfare costs for the US and the global economy. 
The final major problem with the BAT is that it violates World Trade Organization rules, which allow border adjustment only on indirect taxation, such as value-added tax, not on direct taxes, like those levied on corporate income. 
Given this, the WTO would probably rule the BAT illegal. 
In that case, the US could face retaliatory measures worth up to $400 billion per year if it didn’t repeal the tax. 
That would deal a serious blow to US and global GDP growth. 
So how likely is the US to enact the BAT? 
The proposal has the support of the Republican majority in the House of Representatives, but a number of Senate Republicans are likely to vote against it. 
Democrats in both houses of Congress are likely to vote against the entire proposed corporate-tax reform, including the BAT. 
The executive branch is also split on the issue, with President Donald Trump’s more protectionist advisers supporting it and his more internationalist counselors opposing it. 
Trump himself has sent mixed signals. 
Disagreement over the BAT extends to business as well, with firms that export more than they import supporting it, and vice versa. 
As for the general public, low- and middle-income households should oppose the BAT, which would drive up prices of the now-cheap imported goods that these groups currently consume, though Trump’s blue-collar constituents, particularly those who work in manufacturing, may support the measure. 
Ultimately, the case for the BAT is relatively weak – far weaker than the case against it. 
While this may be enough to ensure that it doesn’t pass, there are strong protectionist forces in the US government pushing hard for it and similar policies. 
Even if the BAT is rejected, the risk of a damaging global trade war triggered by the Trump administration will continue to loom large. 

Boris Johnson the Counter-Revolutionary 
LONDON – If history repeats itself – first tragedy, then farce – what comes next is Boris Johnson, a shape-shifting politician who embodies the contradictions of our age. 
Johnson is a tribune of the people who grew up with the privileges of the 1%; a child of immigrants who campaigned for closed borders; a Conservative who wants to upend the political order; an erudite man who mocks expertise; and a cosmopolitan who casually calls black people “piccaninnies.” 
Johnson did more than anyone to bury Britain’s European future; but his ultra-flexibility may yet prove to be its salvation. 
In his first public appearance after being appointed Foreign Secretary, Johnson compared the Brexit vote to the French Revolution. 
Provoking boos at the French Embassy’s Bastille Day celebration, he hailed the referendum as “a great popular uprising against a stifling bureaucratic ancient regime (sic) whose democratic credentials had become very far from obvious.” 
But the Brexit vote – with its promise to recreate the Britain of yesterday – is less revolution than counter-revolution. 
Boris and his band of Brexiteers have more in common with Louis Napoleon Bonaparte, who overturned the French republic to create a new monarchy, than with Danton or Robespierre. 
If anyone or anything has a claim to embody the progressive ideals of 1789, it is the EU. 
Its politicians and officials have translated the vague trinity of liberty, equality, and fraternity into a concrete form: 80,000 pages of laws that cover rights and regulations from the bedroom to the factory floor. 
And the application of these rules helped waves of countries – from Greece and Spain to Estonia and Poland – move from autocracy to democracy. 
The EU has driven a revolution in how countries live together – advancing individual rights, international law, and the pooling of sovereignty. 
Its transformative power springs from the promise of potential membership, a “neighborhood policy” that exports European values, and its facilitation of global institution-building and copycat regional integration. 
Now, as a result of the counter-revolution, the EU club is shrinking, rather than growing. 
Rather than remaking the world in its image, the EU fears neighbors that export chaos rather than import values. 
Interdependence causes, rather than ends, intra-European conflict. 
And the European idea has become a focus of political opposition across the continent. 
Indeed, the most troubling thing about Europe today is not the United Kingdom’s departure, but the fragility and disunity of the remaining 27 states, where the domestic consensus for Europe has all but evaporated. 
The UK’s “Leave” campaign channeled a widely felt desire to restore past certainties, not to establish new rights. 
And all member states are subject to the economic insecurity, cultural anxiety, and political alienation that new political forces are exploiting by using referenda to recast politics as a fight between the people and self-serving elites. 
Britain’s post-referendum economic and political travails will make other EU member states think twice before holding their own popular votes on membership. 
But make no mistake: the EU is well into an era of disintegration. 
A slow slide into ungovernability can be just as devastating as a breakup. 
Some EU decisions are already being challenged by national referenda, such as Hungarian Prime Minister Viktor Orbán’s planned plebiscite on refugee quotas. 
In France, the so-called Posted Workers Directive (which allows employers to pay seconded workers no more than the minimum rate in the host country) may not be implemented. 
And the European Commission is backtracking on favored projects such as a free-trade deal with Canada. 
Rather than banding together, each new challenge has divided the EU into ever-smaller groups. 
The euro has divided north and south; 
Ukraine and the refugee crisis have divided east and west. 
Pro-Europeans need to engage with the sources of discontent and rethink the forms used to express the European ideal. 
The EU was based on a mechanical idea that interdependence would reduce conflict. 
By linking European means of production together – first through the European coal and steel community, and later through the common market and the euro – the EU hoped to bind Europe’s states together so closely that war between them would no longer be an option. 
True, war in Europe is now mostly unthinkable, with much wealth created. 
But the backlash against interdependence – whether through the euro, free movement, or terrorism – is undeniable. 
To save the EU, European leaders should focus on making people feel safe with interdependence. 
That means redistributing some of the economic benefits of free movement to communities bearing the burden of it; strengthening control of external borders and cooperation against terrorism; ensuring greater flexibility for eurozone integration and migration; and returning to the idea that EU institutions’ highest calling is to defend Europe’s nation-states, not to develop their own power. 
The Brexit crisis gives the remaining EU members a chance to reconceive the European project. 
If they succeed, the UK may even eventually want to rejoin. 
Of course, that is not what the Brexiteers or their allies elsewhere are seeking. 
They may succeed in unraveling the EU, but they are unlikely to deliver on their promise of recreating the world of yesterday, much less a better future. 
In fact, they could inadvertently destroy the benefits of European integration that people most value. 
Voters who supported Brexit may yet echo what Marx said of Louis Napoleon’s counter-revolution: “A whole people, that imagines it has imparted to itself accelerated powers of motion through a revolution, suddenly finds itself transferred back to a dead epoch.” 
They discover that what they overthrew was not the tyranny of the ancien régime, but “the concessions that were wrung from it by centuries of struggle.” 
That is where Johnson’s political cross-dressing may come into its own. 
If the UK enters a deep recession and struggles to deliver on the Leave campaign’s promises, many voters may yet want to remain in the single market, or even the EU itself. 
That sort of volte-face would be impossible for most of the Brexit camp, for whom the dream of sovereignty trumps the threat of economic collapse. 
But Johnson is culturally at ease with Europe and at times seemed ambivalent about the Leave campaign that he led. 
Johnson’s ability to escape the shackles of his previous statements would inspire Houdini. 
If the EU manages to reform and the UK’s economic problems deepen, all that seems solid – particularly Johnson’s Euroskepticism – could melt into air. 

Borlaug and the Bankers 
NEW YORK – The recent death of Norman Borlaug provides an opportune moment to reflect on basic values and on our economic system. 
Borlaug received the Nobel Peace Prize for his work in bringing about the “green revolution,” which saved hundreds of millions from hunger and changed the global economic landscape. 
Before Borlaug, the world faced the threat of a Malthusian nightmare: growing populations in the developing world and insufficient food supplies. 
Consider the trauma a country like India might have suffered if its population of a half-billion had remained barely fed as it doubled. 
Before the green revolution, Nobel Prize-winning economist Gunnar Myrdal predicted a bleak future for an Asia mired in poverty. 
Instead, Asia has become an economic powerhouse. 
Likewise, Africa’s welcome new determination to fight the war on hunger should serve as a living testament to Borlaug. 
The fact that the green revolution never came to the world’s poorest continent, where agricultural productivity is just one-third the level in Asia, suggests that there is ample room for improvement. 
The green revolution may, of course, prove to be only a temporary respite. 
Soaring food prices before the global financial crisis provided a warning, as does the slowing rate of growth of agricultural productivity. 
India’s agriculture sector, for example, has fallen behind the rest of its dynamic economy, living on borrowed time, as levels of ground water, on which much of the country depends, fall precipitously. 
But Borlaug’s death at 95 also is a reminder of how skewed our system of values has become. 
When Borlaug received news of the award, at four in the morning, he was already toiling in the Mexican fields, in his never-ending quest to improve agricultural productivity. 
He did it not for some huge financial compensation, but out of conviction and a passion for his work. 
What a contrast between Borlaug and the Wall Street financial wizards that brought the world to the brink of ruin. 
They argued that they had to be richly compensated in order to be motivated. 
Without any other compass, the incentive structures they adopted did motivate them – not to introduce new products to improve ordinary people’ lives or to help them manage the risks they faced, but to put the global economy at risk by engaging in short-sighted and greedy behavior. 
Their innovations focused on circumventing accounting and financial regulations designed to ensure transparency, efficiency, and stability, and to prevent the exploitation of the less informed. 
There is also a deeper point in this contrast: our societies tolerate inequalities because they are viewed to be socially useful; it is the price we pay for having incentives that motivate people to act in ways that promote societal well-being. 
Neoclassical economic theory, which has dominated in the West for a century, holds that each individual’s compensation reflects his marginal social contribution – what he adds to society. 
By doing well, it is argued, people do good. 
But Borlaug and our bankers refute that theory. 
If neoclassical theory were correct, Borlaug would have been among the wealthiest men in the world, while our bankers would have been lining up at soup kitchens. 
Of course, there is a grain of truth in neoclassical theory; if there weren’t, it probably wouldn’t have survived as long as it has (though bad ideas often survive in economics remarkably well). 
Nevertheless, the simplistic economics of the eighteenth and nineteenth centuries, when neoclassical theories arose, are wholly unsuited to twenty-first-century economies. 
In large corporations, it is often difficult to ascertain the contribution of any individual. 
Such corporations are rife with “agency” problems: while decision-makers (CEO’s) are supposed to act on behalf of their shareholders, they have enormous discretion to advance their own interests – and they often do. 
Bank officers may have walked away with hundreds of millions of dollars, but everyone else in our society – shareholders, bondholders, taxpayers, homeowners, workers – suffered. 
Their investors are too often pension funds, which also face an agency problem, because their executives make decisions on behalf of others. 
In such a world, private and social interests often diverge, as we have seen so dramatically in this crisis. 
Does anyone really believe that America’s bank officers suddenly became so much more productive, relative to everyone else in society, that they deserve the huge compensation increases they have received in recent years? 
Does anyone really believe that America’s CEO’s are that much more productive than those in other countries, where compensation is more modest? 
Worse, in America stock options became a preferred form of compensation – often worth more than an executive’s base pay. 
Stock options reward executives generously even when shares rise because of a price bubble – and even when comparable firms’ shares are performing better. 
Not surprisingly, stock options create strong incentives for short-sighted and excessively risky behavior, as well as for “creative accounting,” which executives throughout the economy perfected with off-balance-sheet shenanigans. 
The skewed incentives distorted our economy and our society. 
We confused means with ends. 
Our bloated financial sector grew to the point that in the United States it accounted for more than 40% of corporate profits. 
But the worst effects were on our human capital, our most precious resource. 
Absurdly generous compensation in the financial sector induced some of our best minds to go into banking. 
Who knows how many Borlaugs there might have been among those enticed by the riches of Wall Street and the City of London? 
If we lost even one, our world was made immeasurably poorer. 

The Creditworthy Poor? 
WASHINGTON, DC – Over the last five years, several low-income countries, such as Rwanda and Honduras, have issued their first-ever bonds to private foreign investors in London and New York. 
Until recently, that might have been unthinkable, so the new borrowers’ initial bond issue should be viewed as a sign of great investor confidence. 
But it should also sound some familiar warning bells. 
Some 20 “debut issues” have raised around $12 billion at interest rates that, on average, are just 4.5 percentage points above what the United States government pays at maturities of five or more years. 
This is small change in the grand scheme of global finance; but, given that many of these borrowers were in distress or default just a decade ago, and needed debt forgiveness, theirs is an especially impressive turnaround. 
But low-income countries’ access to private lenders comes with risks that should be highlighted at the outset, before they grow into imminent threats. 
For starters, there is rollover risk. 
The bonds have to be repaid in a foreign currency, usually US dollars, in a single “bullet” payment. 
These bullets can be big, especially when compared with past debt obligations or future export earnings. 
World Bank data tracking the evolution of developing-country debt since the 1970s show that the probability of a country falling into debt distress increases nine-fold (to a one-in-five chance) if its repayments are equivalent to more than one-tenth of its exports – a situation that one in three of today’s new issuers could face when their bonds come due. 
Whether poor borrowers can avoid such a financial squeeze will depend on several factors. 
One is whether they will be able to issue more bonds to pay off those coming due. 
Another is whether they invest the money prudently, thereby enabling prompt repayment. 
And it will also depend on whether countries with volatile incomes, especially those reliant on natural resources, put money aside when earnings are high. 
A second, medium-term risk involves capital-flow reversals. 
Lenders’ appetite for low-income-country bonds has been fueled in large part by a combination of abundant liquidity and near-zero interest rates in developed economies since the 2008-2009 global financial crisis. 
With only paltry yields on offer at home, investors have looked to riskier, “frontier” markets for higher returns. 
Sooner or later, however, developed economies will revert to tighter monetary policy, which will make developing-country bonds less attractive. 
Those borrowers with sound macroeconomic policies will probably retain some appeal for global financial markets; but less prudent governments might suddenly find themselves cut off. 
Unfortunately, the quality of debt-management practices among the new bond issuers is uneven. 
Sensible debt strategies, a professional and independent debt office, and a clear legal framework for public borrowing have become more important than ever. 
To be sure, there has been significant progress on this front over the past decade, much of it funded by rich-country assistance. 
But more can and should be done before this new borrowing wave becomes too large to manage, or spreads to state and municipal governments that suffer from weaker administrative capacity. 
It is worth noting the strong negative correlation between the quality of a country’s debt-management practices and its risk of debt distress, with 90% of low-risk countries demonstrating good practices. 
A third risk is that future debt workouts will become harder to agree. 
Traditionally, low-income countries’ creditors were rich-world governments and multilateral organizations that found it politically unfeasible to call in debts if this meant that borrowers had to cut vital public services such as education or health. 
In a process that has already taken 15 years – and remains unfinished – the debts of 35 highly indebted poor countries (HIPCs) have been forgiven, at a cost of more than $100 billion. 
Now, however, many former HIPCs are selling bonds in the global market to private investors, which has become significantly riskier in recent months, in the wake of court rulings in the United States that permit bondholders to reject debt workouts and sue for full payment. 
One must hope that the funds raised will be put to good use, and that repayments will not require major sacrifices, as there is currently no agreed mechanism to restructure, let alone cancel, the new debts. 
One might ask why anyone but the private global investors taking the risk should care about roll-overs, reversals, debt management, and workouts. 
The reason is that public-debt distress most harms a country’s poorest citizens, who have little knowledge, and no choice, about issuing bonds. 
When a country defaults, the economic damage swells the number of poor people and worsens their living conditions. 
When Argentina defaulted in 2001, one in five citizens fell under the poverty line. 
Sound debt management is, in effect, sound social policy – a lesson that borrowers and lenders alike should heed as they enter into debts that, if not properly managed, can turn out to be more complicated than first assumed and more troublesome than anyone expected. 

The Paradox of Botswana’s Death Penalty 
LONDON – In Sub-Saharan Africa, a region with no shortage of development challenges, Botswana stands out for its strong economy, stable democracy, and commitment to the rule of law. 
But by one measure – its support for capital punishment – Botswana is frighteningly narrow-minded. 
If the country of my birth is to retain its reputation as one of Africa’s most liberal states, it must confront its affinity for the gallows. 
According to Amnesty International, most of Africa is abandoning the death penalty. 
Today, just ten African countries allow for capital punishment, and only a handful ever use it. 
Botswana – an affluent, landlocked, diamond-exporting state – is among the leading exceptions. 
After a lull in killings in 2017, Botswana has resumed executing convicted murderers; Joseph Tselayarona, 28, was executed in February, while Uyapo Poloko, 37, was put to death in May. 
Botswana’s legal system – and the basis for capital punishment – is rooted in English and Roman-Dutch common law. 
According to the country’s penal code, the preferred punishment for murder is death by hanging. 
And, while the constitution protects a citizen’s “right to life,” it makes an exception when the termination of a life is “in execution of the sentence of a court.” 
But the country’s relationship to the death penalty predates its current legal statutes. 
In the pre-colonial era, tribal chiefs – known as kgosi – imposed the penalty for crimes such as murder, sorcery, incest, and conspiracy. 
To this day, history is often invoked to defend the status quo. 
In a 2012 judgment, the Botswana Court of Appeals wrote that capital punishment has been imposed “since time immemorial,” and “its abolition would be a departure from the accepted norm.” 
After Tselayarona was executed, the government even tweeted a photo of then-President Ian Khama under a caption that read, “Death penalty serves nation well.” 
To be sure, the number of executions in Botswana pales in comparison to the world’s leaders. 
Of the 993 executions recorded by Amnesty International last year, 84% were carried out by just four countries – Iran, Saudi Arabia, Iraq, and Pakistan. 
The total does not include China, believed to be the world’s largest executioner, because death-penalty data there are classified as a state secret. 
By contrast, Botswana has executed roughly 50 people since independence in 1966. 
And yet the very existence of capital punishment will remain a stain on the country until it is abolished. 
According to Amnesty International, 142 countries have abolished the death penalty. 
In its most recent death-penalty survey, the group pointed to Sub-Saharan Africa as a “beacon of hope” in the global effort to eradicate the practice. 
Last year, Kenya took a positive step by ending mandatory imposition of the death penalty for murder. 
And Guinea became the 20th country in the region to abolish capital punishment for all crimes. 
When will Botswana follow suit? 
Botswana has been in the vanguard on human-rights issues before. 
For example, after South Africa’s threat to withdraw from the International Criminal Court in October 2016, Botswana’s leaders defended the ICC and reaffirmed their commitment to international law. 
Then, in February 2018, Khama broke the silence among African leaders and called for Joseph Kabila, the autocratic president of the Democratic Republic of Congo, to “relinquish power.” 
The same month, the Botswana government criticized the UN Security Council for its handling of the crisis in Syria. 
Taking a progressive stance on the death penalty would seem a natural step in the evolution of Botswana’s liberal agenda. 
But the government has only dug in deeper, and contradictory international laws mean that Botswana is under no great pressure to change course. 
While both the African Charter on Human and Peoples’ Rights and the Universal Declaration of Human Rights contain de facto prohibitions on capital punishment, the International Covenant on Civil and Political Rights (ICCPR) recognizes a state’s authority to retain the practice. 
An “optional” auxiliary amendment to the ICCPR, adopted in 1989, sought to close this loophole, but Botswana did not sign it. 
Public opinion also favors preserving the status quo. 
According to an online survey conducted by the national newspaper Mmegi, support for capital punishment remains high among voters, which explains why the issue has never gained traction in Parliament. 
And yet there is simply no evidence to support the authorities’ argument that the death penalty lowers rates of violent crime. 
Convincing the public of this will require visionary leadership, not to mention more legal challenges that force the courts to take up and debate the issue. 
Botswana’s would-be abolitionists need not look far for inspiration. 
When South Africa’s Constitutional Court ended capital punishment in 1995, opponents of the decision argued that the court was not in tune with public opinion; some even called for a referendum. 
But the framers of South Africa’s post-apartheid constitution, which entered into force in 1997, held their ground and the practice was abolished. 
As the South African court wrote in its opinion: “Everyone, including the most abominable of human beings, has the right to life.” 
The goal for leaders in Botswana must be to convince their constituents – and perhaps also themselves – to embrace the universality of that sentiment. 

Bottom Dollar 
As more time passes with neither the value of the dollar declining sharply nor market forces beginning to shrink America’s current-account deficit – which may well reach $1 trillion this year – two diametrically opposed reactions are emerging. 
Most international finance economists are becoming increasingly frightened that a major international financial crisis could erupt. 
Indeed, they fear that the scale of that potential crisis is becoming larger and larger. 
Others – especially managers of financial assets – are becoming increasingly convinced that economists don’t know very much, and that what they do know is of no use to traders like themselves. 
They see little reason to believe that current asset values and trade flows are not sustainable. 
After all, they (or some of them) argue, the real GDP of the United States is growing by $400 billion per year, with about $270 billion going to labor and $130 billion to capital. 
Even after depreciation, that $130 billion of extra annual income is capitalized at about $1.5 trillion of wealth, so the current-account deficit, even at $1 trillion, is not overwhelmingly large. 
We Americans can sell off two-thirds of the increment to our wealth to finance imports and still be $500 billion better off this year than we were last year. 
Moreover, the annual interest charged on the extra $1 trillion per year that Americans borrow from the rest of the world is about $50 billion – just one-eighth of annual economic growth, while the trade deficit is financed out of the growth of the value of capital. 
So what’s unsustainable? 
Why can’t the US current-account deficit remain at its 2006 value indefinitely? 
The counterargument hinges on the difference between the current-account deficit and the trade deficit. 
The current-account deficit is equal to the trade deficit plus the cost of servicing the net international asset position: the net rent, interest, and dividends owed to foreigners who have invested their capital in the US. 
As time passes, deficits accumulate. 
As deficits accumulate, the cost of servicing the net international asset position grows. 
Thus, in order to keep the current-account deficit stable, the trade deficit must shrink. 
And the only way for the trade deficit to shrink substantially is for net imports to fall, which requires either a relatively sharp decline in the value of the dollar, thereby raising import prices, or a depression in the US. 
Both outcomes would weaken demand for foreign goods by making Americans feel that they are too poor to buy them. 
As a result, holders of dollar-denominated assets should be looking forward to two alternative scenarios. 
In one, the value of the dollar will be low; in the other, the US will be in a depression. 
In neither scenario does it make sense to hold huge amounts of dollar-denominated assets today. 
Therefore, foreign speculators should, any day now, dump their dollar-denominated assets onto the market, and so bring about the dollar decline that they so fear. 
But foreign-currency speculators and international investors are not looking forward to either of these scenarios. 
They continue to hold very large positions in dollar-denominated assets, which they would not do if they thought the US faced a choice between a cheap dollar and a deep depression. 
So, what alternative does the market see? 
And why is it so different from the possible scenarios that international financial economists see? 
The answer appears to be that there is nobody in the financial centers of New York, London, Tokyo, Frankfurt, and Hong Kong who thinks it is their business to bet on a future flight from the dollar. 
Especially in times of crisis – and a sharp fall in US imports would imply a much more severe crisis for Asian and European exporters than it would for the US – the dollar is a currency that you run to, not from. 
George Soros can bet on a run on the British pound. 
Thai import-export firms can bet on a run on the baht by accelerating their dollar receipts and delaying their dollar payouts. 
Everyone can bet on a run on the Argentine peso – a favorite sport of international financial speculators for a century and a half. 
But not the dollar. 
Not yet. 
In other words, the market is betting that the dollar will fall gradually in the next five years, and that the US current-account deficit will narrow without a financial crisis. 
That is what happened in the late 1980’s, and in the late 1970’s, too. 
After all, God, it is said, protects children, fools, dogs, and the United States of America. 
But the odds on a soft landing are lengthening with each passing day. 

Cutting-Edge Conservation 
BONN – A small airplane makes its final approach to land. 
But there is no airport, no landing strip, nor even a pilot to guide it down. 
This is an Unmanned Aerial Vehicle returning from its mission: not hunting down terrorists or spying on foreign lands, but monitoring populations of rhinos and scouting for tiger poachers. 
This drone is not fitted with turbo Rolls Royce jet engines or aperture radar; instead, it features a Google Map interface, cameras, and simple infrared sensors. 
And it is no more expensive than an average laptop computer. 
Such cheap new technologies are changing the face of conservation; and, for the United Nations Environment Program (UNEP), which administers the Convention on the Conservation of Migratory Species of Wild Animals, these new conservation tools cannot come soon enough. 
They fill the gaps in our knowledge about long-distance migration by species such as turtles, sharks, elephants, and birds. 
The data gathered are then used to develop tailored conservation strategies for these different species. 
Because species that migrate across oceans and continents tend to be the most endangered, owing to the threats that such long journeys involve, they benefit from any technologies that allow scientists to learn about their behavior. 
For example, an ultra-light band that acts as a geo-locator now allows scientists to track small land birds during their incredible journeys. 
Scientists recently discovered that the red-necked phalarope starts its migration from Scotland’s Shetland Islands, crosses the Atlantic via Iceland and Greenland, flies south along the United States’ eastern seaboard to the Caribbean and Mexico, and ends its journey off the coast of Ecuador or Peru. 
The International Cooperation for Animal Research Using Space (ICARUS) is developing a remote sensing platform that will orbit the earth, allowing scientists worldwide to track small organisms and carry out observations and experiments over large areas. 
As a result, scientists will soon be able to track and better understand extraordinary journeys such as those of loggerhead sea turtles, which are hatched in Australia, where they remain for a few years before migrating across the Pacific Ocean to Chile, Ecuador, or Peru. 
Thirty years later, they return to their birthplace. 
New technologies are also proving invaluable for combating illegal poaching. 
In addition to the use of drones, conservation rangers are now equipped with heat-detecting thermal cameras and military helicopters, and can track elephant and rhino poachers, who reportedly use similar technologies (as well as automatic weapons) in pursuing their prey. 
Rangers are also using heat-seeking motion detectors and night-vision goggles to take on illegal bird trappers, who ensnare small songbirds using mobile phones that emit electronic bird calls, and 4x4 vehicles to check hundreds of kilometers of netting. 
Moreover, Germany’s Federal Ministry of Nature Conservation and the World Wide Fund for Nature (WWF), in collaboration with Johannes Gutenberg University Mainz, have developed a way to measure the isotope in ivory samples to trace their provenance. 
This will allow customs officials and police to ascertain the origins of confiscated ivory so that they can pinpoint trafficking locations. 
Another important use of technology is in reducing the frequency of “human-animal conflict” – inadvertent harm such as the unintended trapping of sharks, manta rays, marine turtles, dolphins, whales, and sea turtles in fishing nets. 
Conservationists have long sought to protect marine life in ways that do not create problems for fishermen. 
Recent tests have shown that shining ultraviolet lights against the submerged nets deters these species without affecting the fishing catch. 
Other forms of human-animal conflict can be avoided with simple, mobile-phone apps. 
The US Fish and Wildlife Service, for example, uses a GPS tracking system to alert boaters on Florida’s inland waterways to potential collisions with manatees. 
In Western Australia, an app now warns swimmers of nearby sharks. 
Similarly, better tracking of migration routes and the use of sensors could teach us more about sharks’ movements and habitats, and thus help us to avoid them. 
Although technology alone may not be able to protect all precious migratory species, it can provide vital knowledge and help to enforce important international laws and regulations, such as the Convention on Migratory Species, and the Convention on International Trade in Endangered Species. 
Moreover, technology can improve our understanding and appreciation of our planet’s fragility, and allow humans and animals to coexist more harmoniously. 

Brady Bonds For the Eurozone 
WASHINGTON, DC – Today’s conventional view of the eurozone is that the crisis is over – the intense, often existential concern earlier this year about the common currency’s future has been assuaged, and everything now is back under control. 
This is completely at odds with the facts. 
European bond markets are again delivering a chilling message to global policymakers. 
With bonds of “peripheral” eurozone nations continuing to fall in value, the risk of Irish, Greek, and Portuguese sovereign defaults is higher than ever. 
This comes despite the combined bailout package that the European Union, International Monetary Fund, and European Central Bank created for Greece in May, and despite the ECB’s continuing program of buying peripheral EU countries’ bonds. 
Heading into its annual meetings in a few weeks (followed by the G-20 summit in Seoul in November), the IMF is bowing to pressure to drop ever-larger sums into the EU with ever-fewer conditions. 
Indeed, official rhetoric has turned once again to trying to persuade markets to ignore reality. 
Patrick Honohan, the governor of Ireland’s central bank, has labeled the interest rates on Irish government bonds “ridiculous” (meaning ridiculously high), and IMF researchers argue that default in Ireland and Greece is “unnecessary, undesirable, and unlikely.” 
This is disconcertingly reminiscent of the spring – when Jean-Claude Trichet, the ECB president, lashed out at a skeptical bond market and declared a Greek default unfathomable. 
But markets today think there is a 50% chance that Greece will default within the next five years – and a 25% chance that Ireland will do so. The reason is simple: both Greece and Ireland are likely insolvent. 
While the Greek fiscal fiasco is now common knowledge, Ireland’s problems are deeper and less widely understood. 
In a nutshell: Ireland’s policymakers failed to supervise their banks, and watched (or cheered) from the sidelines as a debt-fueled spending binge generated the “Celtic miracle,” whereby Ireland grew faster than all other EU members and Dublin real estate became some of the most expensive in the world. 
By the end of 2008, Ireland’s three main banks had lent more than three times the country’s national income. 
The crash came in 2009, as Ireland’s real estate boom turned to bust, leaving the country with large insolvent banks, a collapse in budget revenues, and Europe’s largest budget deficit. 
Ireland’s banks financed their rapid growth by borrowing from other European banks, so the health of Europe’s financial system has become entwined with the survival of these insolvent banks. 
It is no surprise that the ECB is now Ireland’s largest creditor – through buying up its government bonds. 
In the latest data (through the end of August), despite being two-thirds the size, Ireland received more ECB financing than Greece – totaling 75% of Irish GNP and growing rapidly. 
The quid pro quo for this easy ECB money is that the Irish government must protect European creditors who would otherwise face large losses. 
The ensuing massive bank bailout, plus continued budget deficits and declining nominal GNP, means that Ireland’s debt is ballooning, while its capacity to pay has collapsed. 
Investors naturally respond to unsustainable debt by selling bonds until interest rates become “ridiculous.” 
Those high interest rates strangle businesses and households, causing further economic collapse and making debt ever more unsustainable. 
To halt this downward spiral, Ireland’s risk of insolvency needs to be put to rest. 
Either banks need to default on their senior obligations, or the government will need to default alongside the banks. 
In either case, new austerity measures are needed, and Ireland will require substantial bridge financing. 
Irish and EU politicians should take the lead in making these tough decisions, but the current leadership will not. 
Instead, the EU, the ECB, and Ireland have reached a Faustian bargain that keeps Ireland liquid (i.e., it gets euros), but does nothing to halt the growing likelihood of insolvency (i.e., its increasing inability to pay back those euros in the future). 
The IMF, which should be standing up to this dangerous bargain, instead plans to open the spigots (with Chinese, American, and other countries’ funds) even more widely to insolvent nations. 
On August 30, the Fund abolished ceilings on its “Flexible Credit Line” facility, which was introduced in 2009 to provide rapid funds to countries in temporary crisis. 
Moreover, the IMF announced a new financing program called a “Precautionary Credit Line,” which will provide funds more quickly and with even fewer conditions – even to countries without “sound public finance” and “effective financial supervision.” 
The Fund is also hoping to establish a new “Global Stabilization Mechanism” to provide credit lines to regional groupings (like the EU). 
A European politician heads the IMF, its board of directors is far more weighted towards Europe than is justified by Europe’s economic relevance, and it is rushing to ease lending conditions to Europe just as EU members are suffering deep insolvency problems. 
There is a better solution, pioneered after commercial banks in the United States loaned too much to Latin America in the 1970’s. 
Sovereign debt was eventually restructured through the creation of “Brady bonds.” 
The trick was to offer banks the opportunity to swap their claims on (insolvent) Latin American countries into long-maturity, low-coupon bonds that were collateralized with US Treasuries. 
The good collateral meant that banks could hold these debts at par on their balance sheets. 
At the same time, this swap reduced troubled countries’ debt-payment obligations – allowing them to get back on their feet. 
Europe could take this route. 
Rather than continuing to pile new debts onto bad debts, the EU stabilization fund could be used to collateralize such new par bonds. 
Creditors could be offered these par bonds, or a shorter-term bond with a higher coupon – but with debt principal marked down. 
The new bonds could be known as Trichet or Merkel/Sarkozy or Honohan bonds – whatever works to build consensus. 

The Emperor’s New Goal 
NEW DELHI – Japanese Emperor Akihito and Empress Michiko, in a rare overseas trip, are scheduled to begin a tour of the Indian cities of New Delhi and Chennai on November 30. 
The imperial couple’s weeklong visit is likely to mark a defining moment in Indo-Japanese relations, fostering closer economic and security ties between Asia’s two leading democracies as they seek a pluralistic, stable Asian order. 
Traditionally, a visit from the Japanese emperor – except for a coronation or royal anniversary celebration – signified a turning point in a bilateral relationship. 
While the emperor is merely the “symbol of the state” under Japan’s US-imposed postwar constitution, he retains significant influence, owing to Japanese veneration of the imperial dynasty – the world’s oldest continuous hereditary monarchy, the origins of which can be traced to 660 BC. 
Indeed, the emperor’s overseas visits remain deeply political, setting the tone – if not the agenda – for Japan’s foreign policy. 
Consider Akihito’s 1992 visit to China – the first such visit by any Japanese emperor. 
Chinese leader Deng Xiaoping’s government – grateful for Japan’s reluctance to maintain punitive sanctions over the 1989 Tiananmen Square massacre and eager for international recognition, not to mention Japanese capital and commercial technologies – had extended seven invitations over two years. 
Akihito’s trip, which came at the height of Japan’s pro-China foreign policy, was followed by increased Japanese aid, investment, and technology transfer, thereby cementing Japan’s role in China’s economic rise. 
The improved diplomatic relationship lasted until the recent flare-up of territorial and other bilateral disputes. 
Although no Japanese emperor has visited India before, the bilateral relationship runs deep. 
In traditional Japanese culture, India is Tenjiku (the country of heaven). 
Today, Japan is India’s largest source of aid and has secured a key role in supporting infrastructure development, financing projects like the Western Dedicated Freight Corridor, the Delhi-Mumbai Industrial Corridor, and the Bangalore Metro Rail Project. 
With these natural allies seeking to add strategic bulk to their rapidly multiplying ties, Akihito’s tour is the most significant visit to India by any foreign leader in recent years. 
Indeed, it is expected to be one of the last foreign trips for the 79-year-old emperor, who has undergone several major surgeries in the past decade. 
Akihito’s travel schedule contrasts sharply with that of Indian Prime Minister Manmohan Singh. 
Despite having had open-heart surgery during his first term, India’s 81-year-old leader has sought to offset his low domestic political stock by flying more than one million kilometers on overseas trips – including visits to Japan, China, Indonesia, Russia, Thailand, and the United States in the last six months alone. 
The paradox of Akihito’s tour – for which Singh has appointed a special envoy with ministerial rank to oversee preparations – is that Japan is investing substantial political capital to build a strong, long-term partnership with India’s government at a time when India is gripped by policy paralysis. 
Japan’s leaders are perhaps counting on the continuity of India’s strategic policies, which would require the Indian government that emerges from next year’s general election to sustain the momentum of cooperation. 
But, more important, Japan is adjusting to meet the challenges of a rapidly changing regional environment, characterized by rising geopolitical competition with China. 
In a historical reversal, Japan has found itself on the defensive against the increasingly muscular foreign policy of its former colony and old rival. 
This situation is forcing the Japanese government to reconsider its postwar pacifism, revise its defense strategy, and increase its military spending. 
In this context, Japan knows that a deeper strategic collaboration with India – which is also seeking to blunt increasing military pressure from China – is its best move. 
In modern history, Japan has had the distinction of consistently staying ahead of the rest of Asia. 
During the Meiji era, in the second half of the nineteenth century, it became the first Asian country to modernize. 
It was also the first Asian country to emerge as a world power, defeating Manchu-ruled China and Czarist Russia in separate wars. 
And after its defeat in World War II, Japan rose from the ashes to become Asia’s first global economic powerhouse. 
With per capita GDP of more than $37,000, Japan still ranks among the world’s richest countries, specializing in the highest-value links of global supply chains. 
And income inequality in Japan ranks among the lowest in Asia. 
Nonetheless, almost two decades of economic stagnation have eroded Japan’s regional clout. 
This raises the question of whether Japan’s current problems –sluggish growth, high public debt, and rapid population aging – presage a similar trend across East Asia. 
Similar problems are already appearing in South Korea, while China has been driven to loosen its one-child policy and unveil plans for economic reforms aimed at reviving growth. 
For India, Japan is indispensable as both an economic and a security partner. 
It is central to India’s “Look East” policy, which has evolved into more of an “Act East” policy, whereby the original strategy’s economic logic has been amplified by the larger geopolitical objective of ensuring Asian stability and a regional balance of power. 
It is in this light that Akihito’s historic visit should be viewed. 

India’s Shinzo Abe 
NEW DELHI – After a prolonged period of political drift and paralysis, India’s new government will be led by a man known for his decisiveness. 
Just as Japanese Prime Minister Shinzo Abe’s return to power in late 2012, after six years of political instability, reflected Japan’s determination to reinvent itself as a more competitive and confident country, Narendra Modi’s election victory reflects Indians’ desire for a dynamic, assertive leader to help revitalize their country’s economy and security. 
Like Abe, Modi is expected to focus on reviving India’s economic fortunes while simultaneously bolstering its defenses and strengthening its strategic partnerships with likeminded states, thereby promoting regional stability and blocking the rise of a Sino-centric Asia. 
The charismatic Modi – a darling of business leaders at home and abroad – has promised to restore rapid economic growth, saying there should be “no red tape, only red carpet” for investors. 
The 63-year-old Modi mirrors Abe’s soft nationalism, market-oriented economics, and new Asianism, seeking close ties with Asian democracies to create a web of interlocking strategic partnerships. 
In a country where the gap between the average age of political leaders and citizens is one of the world’s widest, Modi will be the first prime minister born after India gained independence in 1947. 
This constitutes another parallel with Abe, who is Japan’s first prime minister born after World War II. 
There is, however, an important difference in terms of the two leaders’ upbringing: While Modi rose from humble beginnings to lead the world’s largest democracy, Abe – the grandson and grandnephew of two former Japanese prime ministers and the son of a former foreign minister – boasts a distinguished political lineage. 
In fact, Modi rode to victory by crushing the dynastic aspirations of Rahul Gandhi, whose failure to articulate clear views or demonstrate leadership ran counter to the Indian electorate’s yearning for an era of decisive government. 
Modi, like Abe, faces major foreign-policy challenges. 
India is home to more than one-sixth of the world’s population, yet it punches far below its weight. 
A 2013 essay in the journal Foreign Affairs, titled “India’s Feeble Foreign Policy,” focused on how the country is resisting its own rise, as if the political miasma in New Delhi had turned the country into its own worst enemy. 
Many Indians want Modi to give a new direction to foreign relations at a time when the gap between India and China in terms of international stature has grown significantly. 
India’s influence in its own backyard – including Nepal, Sri Lanka, and the Maldives – has shrunk. 
Indeed, Bhutan remains India’s sole pocket of strategic clout in South Asia. 
India also confronts the strengthening nexus between its two nuclear-armed regional adversaries, China and Pakistan, both of which have staked claims to substantial swaths of Indian territory and continue to collaborate on weapons of mass destruction. 
In dealing with these countries, Modi will face the same dilemma that has haunted previous Indian governments: the Chinese and Pakistani foreign ministries are weak actors. 
The Communist Party and the military shape Chinese foreign policy, while Pakistan relies on its army and intelligence services, which still use terror groups as proxies. 
The Modi government is unlikely to let another Mumbai-style terrorist attack staged from Pakistan go unpunished, employing at least non-military retaliatory options. 
Restoring momentum to the relationship with the United States – damaged recently by grating diplomatic tensions and trade disputes – is another pressing challenge. 
But Modi’s commitment to pro-market economic policies and defense modernization is likely to yield new opportunities for US businesses and lift the bilateral relationship to a new level of engagement. 
America’s strategic interests will be advanced by likely new defense cooperation and trade that boosts US arms sales and creates avenues for joint military coordination. 
The US already conducts more military exercises with India than with any other country. 
Modi is the sort of leader who can help put US-India ties back on track and boost cooperation. 
Yet there is a risk that his relations with the US, at least initially, could be more businesslike than warm, owing to an American slight that is hard for him to forget. 
In 2005, the US government revoked his visa over unproven allegations that he connived in Hindu-Muslim riots in 2002, when he was Chief Minister of Gujarat. 
Even after India’s Supreme Court found no evidence to link Modi to the violence, the US continued to ostracize him, reaching out to him only on the eve of the recent election. 
With the US having expressed no regret for its revocation of his visa, Modi is unlikely to go out of his way to befriend the US by seeking a White House visit. 
Instead, he is expected to wait for US officials to come calling. 
By contrast, Modi is likely to remember states, such as Japan and Israel, that courted him even as the US targeted him. 
Modi’s 2007 and 2012 visits to Japan opened new avenues for Japanese investment in business-friendly Gujarat. 
Moreover, Modi has forged a special relationship with Japan and built personal rapport with Abe. 
When Abe returned to power, Modi congratulated him with a telephone call. 
Modi’s victory is likely to turn Indo-Japanese ties – Asia’s fastest-developing bilateral relationship – into the main driver of India’s “Look East” strategy, which, with America’s blessing, seeks to strengthen economic and strategic cooperation with US allies and partners in East and Southeast Asia. 
Abe, who has sought to build security options for Japan beyond the current US-centric framework, has argued that his country’s ties with India hold “the greatest potential of any bilateral relationship anywhere in the world.” 
A deeper Japan-India entente under Abe and Modi could potentially reshape the Asian strategic landscape. 
It is no surprise that Abe rooted for a Modi victory. 

China’s Borderline Belligerence 
NEW DELHI – In recent years, the People’s Liberation Army has been taking advantage of its rising political clout to provoke localized skirmishes and standoffs with India by breaching the two countries’ long and disputed Himalayan frontier. 
The PLA’s recent intensification of such border violations holds important implications for President Xi Jinping’s upcoming visit to India – and for the future of the bilateral relationship. 
In fact, such provocations have often preceded visits to India by Chinese leaders. 
Indeed, it was just before President Hu Jintao’s 2006 visit that China resurrected its claim to India’s large northeastern state of Arunachal Pradesh. 
Likewise, prior to Premier Wen Jiabao’s trip to India in 2010, China began issuing visas on loose sheets of paper stapled into the passports of Kashmir residents applying to enter China – an indirect challenge to India’s sovereignty. 
Moreover, China abruptly shortened the length of its border with India by rescinding its recognition of the 1,597-kilometer (992-mile) line separating Indian Kashmir from Chinese-held Kashmir. 
And Premier Li Keqiang’s visit last May followed a deep PLA incursion into India’s Ladakh region, seemingly intended to convey China’s anger over India’s belated efforts to fortify its border defenses. 
Now, China is at it again, including near the convergence point of China, India, and Pakistan – the same place last year’s PLA encroachment triggered a three-week military standoff. 
This pattern suggests that the central objective of Chinese leaders’ visits to India is not to advance cooperation on a shared agenda, but to reinforce China’s own interests, beginning with its territorial claims. 
Even China’s highly lucrative and fast-growing trade with India has not curbed its rising territorial assertiveness. 
By contrast, Indian prime ministers since Jawaharlal Nehru have traveled to China to express goodwill and deliver strategic gifts. 
Unsurprisingly, India has often ended up losing out in bilateral deals. 
Particularly egregious was Prime Minister Atal Bihari Vajpayee’s 2003 surrender of India’s Tibet card. 
Vajpayee went so far as to use, for the first time, the legal term “recognize” to accept what China calls the Tibet Autonomous Region (TAR) as “part of the territory of the People’s Republic of China.” 
That opened the way for China to claim Arunachal Pradesh (three times the size of Taiwan) as “South Tibet” and reinforced China’s view of territorial issues: Whatever area it occupies is Chinese territory, and whatever territorial claims it makes must be settled on the basis of “mutual accommodation and understanding.” 
Vajpayee’s blunder compounded Nehru’s 1954 mistake in implicitly accepting, in the Panchsheel Treaty, China’s annexation of Tibet, without securing (or even seeking) recognition of the then-existing Indo-Tibetan border. 
In fact, under the treaty, India forfeited all of the extraterritorial rights and privileges in Tibet that it had inherited from imperial Britain. 
As agreed in the pact, India withdrew its “military escorts” from Tibet, and conceded to the Chinese government, at a “reasonable” price, the postal, telegraph, and public telephone services operated by the Indian government in the “Tibet region of China.” 
For its part, China repeatedly violated the eight-year pact, ultimately mounting the trans-Himalayan invasion of 1962. 
In short, China used the Panchsheel Treaty to outwit and humiliate India. 
Yet, just this summer, Prime Minister Narendra Modi’s new government sent Vice President Hamid Ansari to Beijing to participate in the treaty’s 60th anniversary celebrations. 
Ansari was accompanied by Commerce Minister Nirmala Sitharaman, who, during her stay, signed an agreement allowing China – without any quid pro quo – to establish industrial parks in India. 
This will exacerbate existing imbalances in the bilateral trade relationship – China currently exports to India three times more than it imports from the country, with most of these imports being raw materials –thereby exposing India to increased strategic pressure and serving China’s interest in preventing India’s rise as a peer competitor. 
The fact that the spotlight is now on China’s Tibet-linked claim to Arunachal Pradesh, rather than on Tibet’s status, underscores China’s dominance in setting the bilateral agenda. 
Given India’s dependence on cross-border water flows from Tibet, it could end up paying a heavy price. 
Embarrassed by China’s relentless border violations – according to Indian Minister of State for Home Affairs Kiren Rijiju, there were 334 in the first 216 days of this year – India has recently drawn a specious distinction between “transgressions” and “intrusions” that enables it to list all of the breaches simply as transgressions. 
But word play will get India nowhere. 
A reminder of that came at July’s BRICS summit of Brazil, Russia, India, China, and South Africa, when, yet again, China emerged ahead of India. 
The BRICS’ New Development Bank, it was announced, will be headquartered in Shanghai, not New Delhi; India’s consolation prize was that an Indian will serve as the Bank’s first president. 
Under pressure from an unyielding and revanchist China, India urgently needs to craft a prudent and carefully calibrated counter-strategy. 
For starters, India could rescind its recognition of Chinese sovereignty over Tibet, while applying economic pressure through trade, as China has done to Japan and the Philippines when they have challenged its territorial claims. 
By hinging China’s market access on progress in resolving political, territorial, and water disputes, India can prevent China from fortifying its leverage. 
Moreover, India must be willing to respond to Chinese incursions by sending troops into strategic Chinese-held territory. 
This would raise the stakes for Chinese border violations, thereby boosting deterrence. 
Finally, India must consider carefully the pretense of partnership with China that it is forming through trade and BRICS agreements – at least until a more balanced bilateral relationship emerges. 
After all, neither booming trade nor membership in the BRICS club offers protection from bullying. 

The International Misrule of Law 
NEW DELHI – On the face of it, China’s recent declaration of an air defense identification zone (ADIZ) extending to territories that it does not control has nothing in common with America’s arrest and strip-search of a New York-based Indian diplomat for allegedly underpaying a housekeeper she had brought with her from India. 
In fact, these episodes epitomize both powers’ unilateralist approach to international law. 
A just, rules-based global order has long been touted by powerful states as essential for international peace and security. 
Yet there is a long history of major powers flouting international law while using it against other states. 
The League of Nations failed because it could not punish or deter such behavior. 
Today, the United States and China serve as prime examples of a unilateralist approach to international relations, even as they aver support for strengthening global rules and institutions. 
Consider the US, which has refused to join key international treaties – for example, the 1982 United Nations Convention on the Law of the Sea (UNCLOS), the 1997 UN Convention on the Law of the Non-Navigational Uses of International Watercourses (which has not yet entered into force), and the 1998 International Criminal Court Statute. Indeed, unilateralism remains the leitmotif of US foreign policy, and this is also reflected in its international interventions, whether cyber warfare and surveillance, drone attacks, or efforts to bring about regime change. 
Meanwhile, China’s growing geopolitical heft has led to muscle-flexing and territorial claims in Asia that disregard international norms. 
China rejects some of the same treaties that the US has declined to join, including the International Criminal Court Statute and the Convention on the Law of the Non-Navigational Uses of International Watercourses (the first law to establish rules on the shared resources of transnational rivers, lakes, and aquifers). 
Indeed, despite their geopolitical dissonance, the world’s most-powerful democracy and its most powerful autocracy have much in common when it comes to how they approach international law. 
For example, the precedent that the US set in a 1984 International Court of Justice (ICJ) case filed by Nicaragua still resonates in China, underscoring that might remains right in international relations. 
The ICJ held that America violated international law both by supporting the contras in their insurrection against the Nicaraguan government and by mining Nicaragua’s harbors. 
But the US prevented Nicaragua from obtaining any compensation by vetoing UN Security Council resolutions that called for enforcement of the ICJ’s judgment. 
China still hews to Mao Zedong’s belief that “power grows out of the barrel of a gun.” 
Indeed, while China ratified UNCLOS, it then reinterpreted the provisions to justify cartographic aggression in the South and East China Seas. 
Worse still, China has refused to accept the UNCLOS dispute-settlement mechanism, thereby remaining unfettered in altering facts on the ground. 
The Philippines has filed a complaint against China with the International Tribunal for the Law of the Sea. 
China, however, has simply refused to participate in the proceedings, as if it were above international law. 
Whatever the tribunal’s decision, China will simply shrug it off. 
Only the Security Council can enforce an international tribunal’s judgment on a noncompliant state. 
But China wields a veto there and will block enforcement of an adverse ruling, just as the US did in the Nicaragua case. 
China’s new ADIZ, while aimed at solidifying its claims to territories held by Japan and South Korea, is similarly provocative, because it extends to areas that China does not control, setting a dangerous precedent in international relations. 
Japan has asked its airlines to ignore China’s demand for advance notification of flights, even if they are merely transiting the new zone and not heading toward Chinese territorial airspace. 
By contrast, the US has advised American carriers to obey China’s prior-notification demand. 
There is a reason for this: Although the prior-notification rule in American policy applies only to aircraft headed for US national airspace, in practice the US demands advance notification of all flights through its ADIZ, regardless of their intended destination. 
If other countries emulated the example set by China and the US by establishing unilateral claims to international airspace, a dangerous situation would result. 
Binding international rules are thus imperative in order to ensure the safety of fast-growing commercial air traffic. 
But who is supposed to take the lead when China and the US have pursued a unilateralist approach on this issue? 
Now consider the case of the Indian diplomat, Devyani Khobragade, whose treatment India’s national security adviser called “despicable and barbaric.” 
True, as a consulate-based diplomat, Khobragade enjoyed only limited diplomatic immunity under the 1963 Vienna Convention on Consular Relations. But this convention guarantees freedom from detention until trial and conviction, except for “grave offenses.” 
Can a wage dispute qualify as a “grave offense” warranting arrest and humiliation? 
Would the US tolerate similar treatment of one of its consular officers? 
The harsh truth is that the US interprets the Vienna Convention restrictively at home but liberally overseas, in order to shield even the military and intelligence contractors that it sends abroad. 
A classic case involved the CIA contractor Raymond Davis, who fatally shot two men in 2011 in Lahore, Pakistan. 
Claiming that Davis was a bona fide diplomat with its Lahore consulate, and thus enjoyed immunity from prosecution, the US accused Pakistan of “illegally detaining” him, with President Barack Obama defending him as “our diplomat in Pakistan.” 
Despite a widely held belief that the current international system is based on rules, the fact is that major powers are rule makers and rule imposers, not rule takers. 
They have a propensity to violate or manipulate international law when it is in their interest to do so. 
If universal conformity to a rules-based international order still seems like a distant prospect, an important reason is that countries that should be leading the charge still so often behave like rogue states. 

Japan’s Obama Problem 
TOKYO – When Japanese Prime Minister Shinzo Abe visited Tokyo’s controversial Yasukuni Shrine last month, Chinese leaders predictably condemned his decision to honor those behind “the war of aggression against China.” 
But Abe was also sending a message to Japan’s main ally and defender, the United States. 
Faced with US President Barack Obama’s reluctance to challenge China’s muscle-flexing and territorial ambitions in Asia – reflected in Japan’s recent split with the US over China’s new Air Defense Identification Zone (ADIZ) – an increasingly desperate Abe was compelled to let both countries know that restraint cannot be one-sided. 
For China and South Korea, the Yasukuni Shrine’s inclusion of 14 Class A war criminals who were executed after World War II has made it a potent symbol of Japan’s prewar militarism, and Abe had long refrained from visiting it – including during his previous stint as prime minister. 
He may well have maintained that stance had China not established the ADIZ, which set an ominous new precedent by usurping international airspace over the East China Sea, including areas that China does not control. 
(Abe does not appear to have considered the possibility that his pilgrimage to Yasukuni might end up helping China by deepening South Korea’s antagonism toward Japan.) 
The Obama administration had been pressing Abe not to aggravate regional tensions by visiting Yasukuni – an entreaty reiterated by Vice President Joe Biden during a recent stopover in Tokyo on his way to Beijing. 
In fact, Biden’s tour deepened Japan’s security concerns, because it highlighted America’s focus on balancing its relationships in East Asia, even if that means tolerating an expansionist China as the strategic equivalent of an allied Japan. 
Instead of postponing Biden’s trip to Beijing to demonstrate disapproval of China’s new ADIZ, the US advised its commercial airlines to respect it, whereas Japan asked its carriers to ignore China’s demand that they file their flight plans through the zone in advance. 
By calling for Japanese restraint, the US stoked Japan’s anxiety, without winning any concessions from China. 
Now, the widening rift between the US and Japan has become starkly apparent. 
Abe feels let down by Obama’s decision not to take a firm stand on the ADIZ – the latest in a series of aggressive moves by China to upend the status quo in the East China Sea. 
For its part, the US government openly – and uncharacteristically – criticized Abe’s Yasukuni visit, with its embassy in Japan releasing a statement saying that the US was “disappointed that Japan’s leadership has taken an action that will exacerbate tensions with Japan’s neighbors.” 
Such recriminations do not mean that the US-Japan alliance – the bedrock of America’s forward military deployment in Asia – is in immediate jeopardy. 
Japan remains a model ally that hosts a large US troop presence, even paying for the upkeep of American forces on its soil. 
Indeed, Abe’s visit to Yasukuni came only a day after he completed a long-elusive, US-backed bilateral deal to relocate America’s airbase in Okinawa to a less populous area of the island. 
And he supports Japan’s entry into the US-led Trans-Pacific Partnership, an emerging regional trading bloc that will exclude China. 
Nonetheless, a psychological schism between the Abe and Obama administrations has gradually developed. 
While the US frets about Abe’s nationalistic stance vis-à-vis China and South Korea, Japanese officials have stopped trying to conceal their uneasiness over Obama’s effort to strike a balance between its alliance commitments and its desire for Sino-American ties. 
Biden spent more than twice as much time in discussions with Chinese President Xi Jinping as he did with Abe. 
The paradox is that while anxiety over China’s growing assertiveness has returned the US to the center of Asian geopolitics and enabled it to strengthen its security arrangements in the region, this has not led to action aimed at quelling China’s expansionary policies. 
As a result, Japan is becoming skeptical about America’s willingness to support it militarily in the event of a Chinese attack on the Japanese-controlled Senkaku Islands (called the Diaoyu Islands in China). 
The Obama administration’s contradictory rhetoric – affirming that the US-Japan security treaty covers the Senkakus, while refusing to take a position on the islands’ sovereignty – has not helped. 
A wake-up call for Japan was Obama’s inaction in 2012, when China captured the Scarborough Shoal, part of the Philippines’ exclusive economic zone. 
In an effort to end a tense standoff, the US brokered a deal in which both countries agreed to withdraw their maritime vessels from the area. 
But, after the Philippines withdrew, China occupied the shoal – and, despite a mutual-defense treaty between the US and the Philippines, the US did little in response. 
This emboldened China effectively to seize a second Philippine-claimed shoal, part of the disputed Spratly Islands. 
Factors like geographical distance and economic interdependence have made the US wary of entanglement in Asia’s territorial feuds. 
And, unlike Asian countries, America would not really suffer from a Chinese “Monroe Doctrine” declaring that China would not accept any outside intervention in Asia. 
But America’s neutrality on sovereignty disputes threatens to undermine its bilateral security alliances (which, by preventing countries like Japan from turning toward militarism, actually serve Chinese interests). 
The Obama administration’s Asian balancing act obfuscates the broader test of power that China’s recent actions represent. 
What is at stake are not merely islands in the East and South China Seas, but a rules-based regional order, freedom of navigation of the seas and skies, access to maritime resources, and balanced power dynamics in Asia. 
By fueling Japanese insecurity, US policy risks bringing about the very outcome – a return to militarism – that it aims to prevent. 

Alarm Bells in Asia 
NEW DELHI – The deteriorating situation in Ukraine and rising tensions between Russia and the United States threaten to bury US President Barack Obama’s floundering “pivot” toward Asia – the world’s most vibrant (but also possibly its most combustible) continent. 
Obama’s tour of Japan, South Korea, Malaysia, and the Philippines will do little to rescue the pivot or put his regional foreign policy on a sound footing. 
In fact, Russia’s aggression in Ukraine is just the latest reason that the pivot – which has been rebranded as a “rebalancing” – has failed to gain traction. 
A slew of other factors – including America’s foreign-policy preoccupation with the Muslim world, Obama’s reluctance to challenge an increasingly assertive China, declining US defense outlays, and diminished US leadership on the world stage – were already working against it. 
The reality is that rising anxiety among Asian countries about China’s increasingly muscular foreign policy has presented the US with an important opportunity to recapture its central role in the region by strengthening old alliances and building new partnerships. 
But the US has largely squandered its chance, allowing China to continue to broaden its territorial claims. 
Indeed, over the last two years, America’s Asian allies and partners have received three jarring wake-up calls, all of which have delivered the same clear message: the US cannot be relied upon to manage China’s rise effectively. 
The first such signal came in the form of Obama’s silence when China seized the disputed Scarborough Shoal from the Philippines in July 2012. 
The move – which established a model for China to annex other disputed territories – occurred despite a US-brokered deal for a mutual withdrawal of Chinese and Philippine vessels from the area. 
Obama’s apparent indifference to America’s commitment to the Philippines under the 1951 mutual-defense treaty, which it reaffirmed in 2011, encouraged China to seize the Second Thomas Shoal, which is also claimed by the Philippines. 
America’s Asian allies received a second wake-up call when China unilaterally established an air defense identification zone (ADIZ) covering territories that it claims (but does not control) in the East China Sea – a dangerous new precedent in international relations. 
China then demanded that all aircraft transiting the zone – whether headed for Chinese airspace or not – submit flight plans in advance. 
Instead of demonstrating its disapproval by postponing Vice President Joe Biden’s trip to Beijing, the US government advised commercial airlines to respect China’s self-declared ADIZ. 
Japan, by contrast, told its carriers to disregard China’s demand – an indication of the growing disconnect in US-Japanese relations. 
The third wake-up call comes from Ukraine. 
The US has responded to Russia’s illegal annexation of Crimea by distancing itself from the “Budapest Memorandum,” the pact that US President Bill Clinton signed in 1994 committing the US to safeguard Ukraine’s territorial integrity in exchange for relinquishing its nuclear arsenal. 
The first two wake-up calls highlighted the Obama administration’s unwillingness to do anything that could disrupt its close engagement with China, a country that is now central to US interests. 
The third was even more ominous: America’s own vital interests must be directly at stake for it to do what is necessary to uphold another country’s territorial integrity – even a country that it has pledged to protect. 
The world is witnessing the triumph of brute power in the twenty-first century. 
Obama was quick to rule out any US military response to Russia’s Crimea takeover. 
Likewise, as China has stepped up efforts to upend the regional status quo – both territorial and riparian – the US has dithered, doing little to reassure its jittery Asian allies. 
Instead, the US has pursued a neutral course, which it hopes will enable it to avoid being dragged into a military confrontation over countries’ conflicting territorial claims. 
To this end, the US has addressed its calls for restraint not only to China, but also to its own allies. 
But America’s own restraint – whether in response to Russia’s forcible absorption of Crimea or to China’s creeping, covert warfare – has brought no benefits to its allies. 
In fact, its efforts to avoid confrontation at all costs could inadvertently spur game-changing – and potentially destabilizing – geopolitical developments. 
Most important, America’s sanctions-driven policy toward Russia is likely to force the Kremlin to initiate its own pivot toward Asia – particularly toward energy-hungry, cash-rich China. 
At the same time, a showdown with Russia will compel the US to court China more actively. 
In a new Cold War scenario, China would thus be the big winner, gaining a wide diplomatic berth to pursue its territorial ambitions. 
While the US propitiates China, countries like Japan, India, the Philippines, and Vietnam are being forced to accept that they will have to contend with Chinese military incursions on their own. 
That is why they are stepping up efforts to build credible military capabilities. 
This trend could lead to the resurgence of militarily independent Asian powers that remain close strategic friends of the US. 
In this sense, they would be following in the footsteps of two of America’s closest allies – the United Kingdom and France – which have built formidable deterrent capacities, rather than entrust their security to the US. 
This would be a game-changing development for Asia, the US, and the entire world. 

Arming the Elephant 
NEW DELHI – The rise in US arms sales to India is being widely cited as evidence of the two countries’ deepening defense relationship. 
But the long-term sustainability of the relationship, in which India is more a client than a partner, remains a deep concern for Indians. 
Does the recently issued Joint Declaration on Defense Cooperation, which establishes intent to move beyond weapons sales to the co-production of military hardware,mark a turning point, or is it merely a contrivance to placate India? 
The factors driving the strategic relationship’s development are obvious. 
Since 2006, bilateral trade has quadrupled, reaching roughly $100 billion this year. 
And, over the last decade, US defense exports to India have skyrocketed from just $100 million to billions of dollars annually. 
With US military spending slowing and other export markets remaining tight, American defense firms are eager to expand sales to India, which is now the world’s largest arms importer. 
And the political environment is amenable to their plans: India now conducts more joint military exercises with the US than with any other country. 
For the US, displacing Russia as India’s leading arms supplier was a major diplomatic triumph, akin to Egypt’s decision during the Cold War to shift its allegiance – and its arms supplier – from the Soviet Union to America. 
The difference is that India can actually pay for the weapons that it acquires. 
And the bills are substantial. 
In recent years, India has ordered American arms worth roughly $9 billion. 
It is now purchasing additional US weapons systems – 22 Apache attack helicopters, six C-130J turbo military transport aircraft, 15 Chinook heavy-lift helicopters, and 145 M-777 ultra-light howitzers – worth $5 billion. 
The value of India’s arms contracts with US firms exceeds that of American military aid to any country except Israel. 
Nirupama Rao, India’s ambassador to the US, has called such defense transactions “the new frontier” in US-India relations and “a very promising one at that.” 
But, while it is certainly a positive development for the US, for India, it represents a new frontier of dependency. 
The problem is that India’s defense sector has virtually nothing that it can sell to the US. 
The country has yet to develop a credible armament-production base like that of, say, Japan, which is co-developing advanced weapons systems with the US. 
In fact, India depends on imports – not only from major suppliers like the US and Russia, but also from Israel, the world’s sixth-largest arms exporter – to meet even basic defense needs. 
Moreover, India’s leaders have not leveraged the bargaining power afforded by its massive arms purchases to advance national interests. 
They could, for example, try to persuade the US to stop selling arms to Pakistan, or secure better access to the American market for India’s highly competitive IT and pharmaceutical sectors, which are facing new US non-tariff barriers. 
Applying the recent declaration on defense cooperation will not be easy. 
For example, efforts to identify specific opportunities for collaborative weapons-related projects are to be pursued in accordance with “national policies and procedures.” 
But the two sides cannot truly “place each other at the same level as their closest partners” unless national policies and procedures – especially in the US – evolve sufficiently. 
Similarly, the declaration merely reiterates America’s position that it supports India’s “full membership” in the four US-led technology-control regimes: the Wassenaar Arrangement, the Nuclear Suppliers Group, the Missile Technology Control Regime, and the Australia Group. 
Given that US policy is to deny sensitive technologies to those outside these regimes, India’s admission would make all the difference in facilitating technology sharing. 
But the declaration does not include any commitment from the US to expedite India’s admission. 
All of this suggests that the US is pandering to India’s desire for a more equal defense relationship. 
It is willing to co-produce with India some smaller defensive systems, such as Javelin anti-tank missiles, in order to pave the way for more multi-billion-dollar deals for US-made systems. 
The Indian media are doing their part to strengthen the illusion of progress, latching onto the phrase “closest partners” in their acclaim for the agreement. 
The irony is that, while America’s pursuit of a stronger defense relationship with India is aimed largely at offsetting an increasingly assertive China, US President Barack Obama has charted a neutral course in Sino-Indian disputes. 
For example, the US has declined to hold joint military exercises in the northeastern Indian state of Arunachal Pradesh, which China has claimed as “South Tibet” since 2006. 
As it stands, the US sells mainly defensive weapons systems to India, while Russia, for example, offers India offensive weapons, including strategic bombers, an aircraft carrier, and a lease on a nuclear submarine. 
Would the US be willing to sell India offensive weapons – including high-precision conventional arms, anti-submarine systems, and long-range air- and sea-launched cruise missiles – that could help to deter Chinese military preemption? 
As US-India defense cooperation broadens, this question will loom ever larger. 

Creeping China 
NEW DELHI – China’s growing geopolitical heft is emboldening its territorial creep in Asia. 
After laying claim to 80% of the South China Sea, it has just established a so-called air defense identification zone in the East China Sea, raising the odds of armed conflict with Japan and threatening the principle of freedom of navigation of the seas and skies. 
Meanwhile, the People’s Republic continues to nibble furtively at territory across the long, disputed Himalayan border with India. 
Few seem to fathom the logic behind China’s readiness to take on several neighbors simultaneously. 
China is seeking to alter the status quo gradually as part of a high-stakes effort to extend its control to strategic areas and resources. 
President Xi Jinping’s promise of national greatness – embodied in the catchphrase “China dream” – is tied as much to achieving regional hegemony as to internal progress. 
China’s approach reflects what the Chinese general Zhang Zhaozhong this year called a “cabbage” strategy: assert a territorial claim and gradually surround the area with multiple layers of security, thus denying access to a rival. 
The strategy relies on a steady progression of steps to outwit opponents and create new facts on the ground. 
This approach severely limits rival states’ options by confounding their deterrence plans and making it difficult for them to devise proportionate or effective counter-measures. 
This is partly because the strategy – while bearing all the hallmarks of modern Chinese brinkmanship, including reliance on stealth, surprise, and a disregard for the risks of military escalation – seeks to ensure that the initiative remains with China. 
The pattern has become familiar: construct a dispute, initiate a jurisdictional claim through periodic incursions, and then increase the frequency and duration of such intrusions, thereby establishing a military presence or pressuring a rival to cut a deal on China’s terms. 
What is ours is ours, the Chinese invariably claim, and what is yours is negotiable. 
For example, China says “no foundation for dialogue” with Japan exists unless the Japanese accept the existence of a territorial dispute over the uninhabited Senkaku Islands. 
Here, as elsewhere, China has painted its rival as the obstructionist party. 
As Chinese Foreign Minister Wang Yi put it, “Japan needs to recognize that there is such a dispute. 
The whole world knows that there is a dispute.” 
But there is a dispute only because China has succeeded in shaking the status quo in recent years by popularizing the islands’ Chinese name (“Diaoyu”) and staging incursions into their territorial waters and airspace. 
After steadily increasing the frequency of those incursions since September 2012, China has recently begun increasing their duration. 
The establishment of a new air defense identification zone extending over the islands is its latest cabbage-style security “layer” – a unilateral power grab that US Defense Secretary Chuck Hagel quickly branded “a destabilizing attempt to alter the status quo in the region.” 
The zone even covers the sky over the Leodo (Suyan) Reef, a submerged rock that both South Korea and China claim. 
As China escalates its campaign of attrition against a resolute Japan, it increases the risk of armed conflict, whether by accident or miscalculation. 
China’s strategy has had more success – without provoking serious risks – against the weaker Philippines. 
This is apparent from China’s effective seizure last year of Scarborough Shoal, located well within the Philippines’ exclusive economic zone, and the controlling presence of Chinese vessels this year around the Second Thomas Shoal, part of the disputed Spratly Islands. 
China has not yet tried to evict the eight Filipino marines still living on the Second Thomas Shoal, but Zhang has included this shoal in the country’s “series of achievements” in the South China Sea. 
China is not aiming for control of just a few shoals or other tiny outcroppings; it seeks to dominate the South and East China Seas strategically and corner maritime resources, including seabed minerals. 
The combined land area of the Senkaku and Spratly Islands amounts to barely 11 square kilometers; but the islands are surrounded by rich hydrocarbon reserves. 
While seeking to enlarge incrementally its military footprint in the more than 80% of the South China Sea that it claims, China’s aim in the East China Sea is to break out of the so-called “first island chain,” a string of archipelagos along the East Asian coast that includes the Senkaku Islands and Taiwan. 
By contrast, vast tracts of disputed land are at stake in the resource-rich Himalayan region. 
Here, too, China’s incursions, after increasing in frequency, are now being staged intermittently for longer periods. 
Make no mistake: China’s territorial creep is contributing to Asian insecurity, fueling political tension, and turning the world’s economically most vibrant continent into a potentially global hot spot. 
To be sure, China is careful to avoid any dramatic action that could become a casus belli by itself. 
Indeed, it has repeatedly shown a knack for disaggregating its strategy into multiple parts and then pursuing each element separately in such a manner as to allow the different pieces to fall into place with minimal resistance. 
This shrewdness not only keeps opponents off balance; it also undercuts the relevance of US security assurances to allies and the value of building countervailing strategic partnerships in Asia. 
In fact, by camouflaging offense as defense, China casts the burden of starting a war on an opponent, while it seeks to lay the foundation – brick by brick – of a hegemonic Middle Kingdom. 
Chinese leaders’ stated desire to resolve territorial disputes peacefully simply means achieving a position strong enough to get their way without having to fire a shot. 

An Afghan Afghanistan 
NEW DELHI – As it braces for its upcoming presidential election, Afghanistan finds itself at another critical juncture, with its unity and territorial integrity at stake after 35 years of relentless war. 
Can Afghanistan finally escape the cycle of militancy and foreign intervention that has plagued it for more than three decades? 
Two key questions are shaping discussions about Afghanistan’s post-2014 trajectory. 
The first concerns the extent to which Pakistan will interfere in Afghan affairs, such as by aiding and abetting the Afghan Taliban and its main allies, including the Haqqani network and Gulbuddin Hekmatyar’s militia. 
This will depend on whether the United States conditions its generous aid to cash-strapped Pakistan on noninterference in Afghanistan. 
The second question is whether US-led NATO forces will continue to play any role in Afghanistan. 
It is no secret that US President Barack Obama wants to maintain an American military presence in the country – a reversal of his declaration in 2009 that the US sought no military bases there. 
Indeed, for several months, the US has been involved in painstaking negotiations with the Afghan government to conclude a bilateral security agreement that would enable the US to maintain bases in Afghanistan virtually indefinitely. 
What was supposed to be an endgame for Afghanistan has turned into a new game over America’s basing strategy. 
But, despite having finalized the terms of the agreement, Obama failed to persuade Afghanistan’s outgoing president, Hamid Karzai, to sign it. 
That means that America’s role in the country can be settled only after the new Afghan president assumes office in May. 
And the election’s outcome is far from certain. 
While all eight Afghan presidential candidates claim to support the security accord, this may offer little comfort to the US, given that most of the candidates have directly opposed US interests in the past – not to mention that several of them are former or current warlords. 
Moreover, there remains the question of how a residual American-led force, even if sizable, could make a difference in Afghanistan, given that a much larger force failed to secure a clear victory over the past 13 years. 
Obama has offered no answer. 
Nonetheless, there is strong bipartisan support in the US for maintaining military bases in Afghanistan, as a means of projecting hard power, and the increasingly charged confrontation between the US and Russia over Ukraine has boosted that support considerably. 
In fact, former Secretary of State Condoleezza Rice explicitly linked Russia’s actions in Ukraine with “talk of withdrawal from Afghanistan, whether the security situation warrants it or not.” 
According to Rice, anything less than a residual force of 10,000 American troops will send the message that the US is not serious about helping to stabilize Afghanistan – a message that would embolden Russian President Vladimir Putin further. 
What she does not seem to recognize is that America’s deteriorating ties with Russia – a key conduit for US military supplies to Afghanistan – could undercut its basing strategy. 
The US is clearly convinced that a continued military presence in Afghanistan is in its interests. 
But what would it mean for Afghanistan, a country that has long suffered at the hands of homegrown militant groups and foreign forces alike? 
Afghanistan has been at war since 1979, when Soviet forces launched a disastrous eight-year military campaign against multinational insurgent groups. 
That intervention – together with the US and Saudi governments’ provision of arms to Afghanistan’s anti-Soviet guerrillas through Pakistan’s Inter-Services Intelligence agency – helped spread militancy and terrorism, which the subsequent US military intervention has kept alive. 
As a result, Afghanistan is now at risk of becoming partitioned along ethnic and tribal lines, with militia- or warlord-controlled enclaves proliferating. 
In short, foreign involvement in Afghanistan has so far failed to produce positive results. 
That is why Afghanistan’s political and security transition would be better served by focusing on three key internal factors: 
· Free and fair elections that are widely viewed as reflecting the will of the Afghan people to chart a peaceful future. 
· The ability of Karzai’s successor to unite disparate ethnic and political groups – a tall order that can be filled only by a credible and widely respected leader. 
· The government’s success in building up Afghanistan’s multi-ethnic security forces. 
How next month’s presidential election plays out is crucial. 
If threats and violence from the Taliban prevent too many Afghans from casting their vote, the legitimacy of the outcome could be questioned, possibly inciting even more turmoil, which Afghanistan’s fledging security forces would struggle to contain. 
To be sure, the security forces have, so far, mostly held their ground, deterring assassinations and keeping Kabul largely secure. 
But they have also failed to make significant gains, and US plans to cut aid will make progress even more difficult. 
Unable to sustain the current force with reduced aid, the Afghan government will have to try to make it “leaner and meaner.” 
Whether it will succeed is far from certain. 
That only increases the pressure to maintain a foreign military presence, even though it is unlikely to bring peace to Afghanistan. 
In fact, the risk of becoming locked in a protracted, low-intensity war against militancy and warlordism is likely to outweigh any geopolitical advantages that the US would gain from military bases in the country. 
After all, the terrorist havens and command-and-control centers for the Afghan insurgency are located in Pakistan – undercutting the US military effort to rout the Afghan Taliban since 2001. 
All of this points to a clear conclusion: Afghanistan’s future must finally be put in the hands of Afghans. 
Outside resources should be devoted to building the governing capacity needed to keep the country united and largely peaceful. 

Brains Drains Are Good for You 
Societies that take in "brain drained" scientists and others benefit enormously. 
Innovative and entrepreneurial French Huguenots contributed mightily to the launch of the Industrial Revolution in Britain. 
American universities benefited mightily from refugee German Jews fleeing Adolf Hitler. 
Today's Silicon Valley would not be what it is without its brilliant Chinese and Indian entrepreneurs. 
The Swiss Federal Institute of Technology in Zurich (ETH) has the highest number of Nobel Prize winners of any institution in the world, no doubt partly due to the fact that 35% of its faculty is foreign. 
From Cordoba 1000 years ago to California today, the most intellectually stimulating places are crossroads for bright people from different cultures. 
Societies that fail to attract foreign brains stagnate. 
Take Japan. 
Japan's homogeneity helped create the economic nationalism that drove the country for several decades, but today most of Japan's universities, research institutes and laboratories, think-tanks and elite publications, suffer from sclerotic inbreeding. 
Japan's current lethargy is due, in part, to the in-bred languor of Japanese intellectual life. 
But aren't countries that export their "brains" impoverished by the process? 
It depends. 
Spain, for example, saw its best minds drained away for five centuries, notably following Fascism's victory in the Spanish Civil War. 
When Franco died in 1975, Spain's future path was not obvious, as evidenced by the attempted coup of February 1981. 
Poor, dictatorial, marginalized from Europe, Spain's experience during the last quarter- century is one of history's most successful transition stories, as it became a prosperous, thriving democracy and ceased being a major exporter of brains. 
Indeed, many of Spain's best minds have returned home. 
More importantly, foreign brains now drain to Spain! 
Historically, a big exporter of people, per inhabitant, has been Ireland. 
Poverty and the rigid social control of a reactionary Roman Catholic Church made the country inhospitable to intellectual life -- to Britain's and America's great advantage, because both received many bright Irish fleeing the stultifying intellectual life of their homeland. 
As generally happens, the less intellectually endowed remained behind. 
Yet, from Third World poverty levels two decades ago, Ireland has surpassed its former colonial master in GDP per capita . 
Becoming a committed European player, fostering foreign direct investment, including venture businesses, promoting financial services and IT resulted in a formidable brain drain reversal for Ireland. 
After Chiang Kai-shek retreated to Taiwan in 1949 to form the Republic of China in opposition to Mao's People's Republic, he sought to maintain his dictatorial regime but was made to recognize the importance of building Taiwan's economy so as to strengthen the island. 
Thanks to generous US aid --Taiwan was for several decades second only to Israel in the amount of American aid received --Taiwan could send its best university students, especially engineers, to study abroad. 
Now Taiwan has the highest proportion of engineers to total population in the world. 
Many Taiwanese engineers studied in prestigious American universities, with the result that in Boston people sometimes refer to M.I.T. as "Made in Taiwan" rather than the Massachusetts Institute of Technology. 
As late as the 1980s, only two out of ten Taiwanese who studied in the US returned home, due to its bleak social, intellectual and political environment. 
Then Taiwan did several things: by establishing science parks, it provided a good environment for R&D; by deregulating, it provided opportunities for entrepreneurs; last, but emphatically not least, by ending the dictatorship and ushering in democracy, it provided the basis for that universal desire of people to pursue their individual freedom and happiness. 
In the 1990s, thanks to its returning brains, Taiwan became a high-tech powerhouse. 
South Korea's story over the last 50 years parallels Taiwan's story. 
The military dictatorship established by Park Chung-hee in 1962 adopted an aggressive economic development policy, partly to contain North Korea. 
The Park government recognized the importance of investing in education, including primary, secondary and tertiary. 
The problem for a dictator in building universities is that students are needed, and students often protest! 
Once Korean students overthrew the dictatorship of Park's successor, Chung Doo-hwan, Korean scientists, engineers, economists, and others, returned home en masse , bringing knowledge acquired in the US with them. 
So a brain drain can be a good thing for recipient countries and also for brain exporting countries. 
Good, that is, if the drain is reversed one day. 
Most people everywhere prefer to stay home, or return home, rather than live in permanent exile. 
Kimchi is simply not as good in Los Angeles as in Pusan, nor is chapathi as good in Manchester as in Hyderabad. 
Brain drains put enormous pressure on brain exporting countries to improve their governance, their institutions, and their economic and their social freedoms. 
Such improvements are the ultimate test of a successful society. 
For this reason especially, but also for many others, the more brains that are drained, the better! 

Brave New Financial World 
CAMBRIDGE – A huge struggle is brewing within the G-20 over the future of the global financial system. 
The outcome could impact the world – and not only the esoteric world of international finance – for decades to come. 
Finance shapes power, ideas, and influence. 
Cynics may say that nothing will happen to the fundamentals of the global financial system, but they are wrong. 
In all likelihood, we will see huge changes in the next few years, quite possibly in the form of an international financial regulator or treaty. 
Indeed, it is virtually impossible to resolve the current mess without some kind of compass pointing to where the future system lies. 
The United States and Britain naturally want a system conducive to extending their hegemony. 
US Treasury Secretary Timothy Geithner has recently advanced the broad outlines of a more conservative financial regulatory regime. 
Even critics of past US profligacy must admit that the Geithner proposal contains some good ideas. 
Above all, regulators would force financiers to hold more cash on hand to cover their own bets, and not rely so much on taxpayers as a backstop. 
Geithner also aims to make financial deals simpler and easier to evaluate, so that boards, regulators, and investors can better assess the risks they face. 
While the rest of the world is sympathetic to Geithner’s ideas, other countries would like to see more fundamental reform. 
Russia and China are questioning the dollar as the pillar of the international system. 
In a thoughtful speech, the head of China’s Central Bank, Zhou Xiaochuan, argued the merits of a global super-currency, perhaps issued by the International Monetary Fund. 
These are the calmer critics. 
The current president of the European Union’s Council of Ministers, Czech Prime Minister Mirek Topolanek, openly voiced the angry mood of many European leaders when he described America’s profligate approach to fiscal policy as “the road to hell.” 
He could just as well have said the same thing about European views on US financial leadership. 
The stakes in the debate over international financial reform are huge. 
The dollar’s role at the center of the global financial system gives the US the ability to raise vast sums of capital without unduly perturbing its economy. 
Indeed, former US President George W. Bush cut taxes at the same time that he invaded Iraq. 
However dubious Bush’s actions may have been on both counts, interest rates on US public debt actually fell. 
More fundamentally, the US role at the center of the global financial system gives tremendous power to US courts, regulators, and politicians over global investment throughout the world. 
That is why ongoing dysfunction in the US financial system has helped to fuel such a deep global recession. 
On the other hand, what is the alternative to Geithner’s vision? 
Is there another paradigm for the global financial system? 
China’s approach represents a huge disguised tax on savers, who are paid only a pittance in interest on their deposits. 
This allows state-controlled banks to lend at subsidized interest rates to favored firms and sectors. 
In India, financial repression is used as a means to marshal captive savings to help finance massive government debts at far lower interest rates than would prevail in a liberalized market. 
A big part of Russia’s current problems stems from its ill-functioning banking system. 
Many borrowers, unable to get funding on reasonable terms domestically, were forced to take hard-currency loans from abroad, creating disastrous burdens when the ruble collapsed. 
Europe wants to preserve its universal banking model, with banks that serve a broad range of functions, ranging from taking deposits to making small commercial loans to high-level investment-banking activities. 
The US proposals, on the other hand, would make universal banking far harder, in part because they aim to ring-fence depository institutions that pose a “systemic risk” to the financial system. 
Such changes put pressure on universal banks to abandon riskier investment-bank activities in order to operate more freely. 
Of course, US behemoths such as Citigroup, Bank of America, and JP Morgan will also be affected. 
But the universal banking model is far less central to the US financial system than it is in Europe and parts of Asia and Latin America. 
Aside from its implications for different national systems, the future shape of banking is critical to the broader financial system, including venture capital, private equity, and hedge funds. 
The Geithner proposal aims to rein in all of them to some degree. 
Fear of crises is understandable, yet without these new, creative approaches to financing, Silicon Valley might never have been born. 
Where does the balance between risk and creativity lie? 
Although much of the G-20 debate has concerned issues such as global fiscal stimulus, the real high-stakes poker involves choosing a new philosophy for the international financial system and its regulation. 
If our leaders cannot find a new approach, there is every chance that financial globalization will shift quickly into reverse, making it all the more difficult to escape the current morass. 

Brave New World Dawning 
Since 1978, reproductive biologists have helped couples overcome infertility by using increasingly sophisticated techniques for generating and manipulating human embryos in the laboratory. 
At the same time, molecular biologists have been working to overcome human disease by deciphering the entire sequence of the human genome and constructing tools to correct genetic and cellular defects. 
While reproductive and molecular biologists focus on unrelated medical problems - infertility and disease - combining their technologies produces reprogenetics , which will allow us to design ourselves. 
Reprogenetics will enable prospective parents to give their children genes that they themselves do not carry, thereby increasing their offspring's chances for health, longevity, happiness, and success - an appalling prospect for many bioethicists. 
But is reprogenetics simply a new and more powerful vehicle to repeat the abhorrent eugenic practices of the past? 
Or are reprogenetics and eugenics fundamentally different from one another in terms of both control and purpose? 
Eugenics embodies the desire and attempts of a society's leaders to control the breeding practices of its citizens, including the forcible sterilization or murder of those deemed as carrying undesirable genes. 
Reprogenetics, by contrast, is concerned with the question of what genes an individual child will receive, not with the vague, unscientific goal of improving a society's gene pool. 
Moreover, it gives control to individual prospective parents. 
While eugenic practices led to a restriction of reproductive freedom and worse, reprogenetics can do the opposite. 
It could help parents have children with a higher likelihood of being healthy, without bringing direct harm to anyone else. 
Reprogenetics can be understood as an extension of parents' fundamental motivation and desire: to protect their children and give them all possible advantages in life. 
Parents in affluent societies already provide environmental advantages to their children after birth; reprogenetics could allow them to pursue the same objectives before birth. 
Of course, neither environmental nor genetic advantages guarantee healthier, happy, successful children. 
But the lack of guarantees does not prevent parents from spending $140,000 to send their children to the elite private university where I teach. 
If democratic societies allow people to spend money to buy environmental advantages for children, how can they prohibit parents from buying genetic advantages? 
If reprogenetics is used to increase chances of health, happiness and success, what could be wrong with it? 
Once issues of technical safety are resolved, a fundamental objection to reprogenetics is its inherent unfairness to families unable to afford it. 
All modern democratic societies must balance individual autonomy and social justice. 
In the US, individual autonomy is of paramount importance. 
In most other Western countries, social solidarity looms much larger. 
Most European countries try to realize it by providing equal healthcare and educational opportunities to all children. 
But the argument that genetic enhancements are immoral because not all children can receive them is flawed. 
Children are not biologically equivalent to begin with. 
Everyone is born with advantages or disadvantages across a whole range of physical characteristics as well as innate abilities. 
Life is not fair. 
So, in the future the critical question will be this: "Who decides how genetic advantages are distributed?" 
Who decides which child will get the HIV resistance gene and who will be born susceptible to AIDS? 
Who will decide which child will have superior protection against cancer and heart disease? 
Should the decision be left to the randomness of nature, as it is now? 
Should it be determined by the parents' affluence? 
Or should it be controlled by a benevolent state that doles out life-enhancing genes to all its newly conceived children? 
Unfortunately, provision and regulation of genetic enhancement technology will not be easy. 
Unlike healthcare, there are almost no limits to genetic enhancements. 
There can always be stronger resistance to disease, greater longevity, more physical prowess, and higher mental capacity. 
Furthermore, the innate desire to provide for one's children is so powerful that affluent citizens may buy reprogenetics elsewhere even if their society bans or limits its use. 
Today, for example, Europeans travel to the US to purchase human eggs from young women chosen on the basis of their presumed genetic characteristics. 
It is, however, possible to envisage an alternative scenario to that of a growing gap between "haves" and "have-nots." 
Although such a gap may emerge initially, the cost of reprogenetics is likely to drop sharply over time. 
Like computers and advanced telecommunications, it could become affordable to the majority in developed countries. 
Ultimately, hyper-human genetic enhancements will become feasible, too, and the economic and social advantages that wealthy countries maintain could be expanded into a genetic advantage. 
The divide between wealthy and poor nations could widen further with each generation until a common humankind no longer exists. 
A severed humanity could be the ultimate legacy of unfettered global capitalism. 
The only alternative to this bleak possibility seems remote today and may never be viable: a single global state in which all children are provided with the same genetic enhancements and the same opportunities for health, happiness, and success. 
While this sounds like political fiction in a world where children still die from starvation, reprogenetics sounded like science fiction only thirty years ago. 
The course of political development is, for good or bad, far more difficult to predict. 


Brazil Breaks Out 
The biggest hidden story in international development these days may be Brazil's economic takeoff. 
Two years ago, Brazil's economy was left for dead, and the election of Worker Party candidate Luiz Inácio "Lula" da Silva as President was widely expected to trigger financial collapse. 
Instead, Lula has governed with remarkable prudence, and Brazil is poised for rapid growth. 
But something more fundamental is at play: Brazil may finally be overcoming some of the deepest obstacles to its economic development, obstacles that held the country back for decades. 
If so, it could mark not only Brazil's economic ascendancy but also the recovery of other parts of South America. 
In January 2002, American right-wingers were terrified of a leftist revolution in Brazil. 
Foreign investors were panicking over the prospect that Brazil would fail to roll over its foreign debts. 
The IMF, for a change, did a good job, providing interim financing and throwing its political backing behind Lula after the elections. 
In turn, Lula adopted orthodox macroeconomic policies and moved to get the budget deficit under control, breaking the panic. 
Market projections for Brazil's growth are around 4% for 2004. 
But something deeper is at play than the usual waves of euphoria and panic in international financial markets. 
Much of the credit for Brazil's turnaround belongs not to Lula but to his predecessor, Fernando Henrique Cardoso, who was Brazil's President from 1992 to 2000. 
I credit FHC, as he is widely known, with making four key contributions. 
· First, under his leadership, Brazil firmly embraced human rights, not only in the sense of democratic elections, but in terms of economic justice for African-Brazilians and indigenous Brazilians, people who had long been discriminated against. 
Like most of Latin America, Brazil was born in the crucible of conquest and slavery. 
Even during the 20 th century, neither the indigenous populations nor the African-Brazilian slave descendants had much chance in the economic and social order. 
That is changing fast. 
Public education is becoming universally available, including for groups that faced harsh discrimination in the past. 
Remarkably, indigenous groups also won a hard-fought struggle for land rights in their traditional Amazon homelands. 
· Second, Brazil is finally embracing the global knowledge economy. 
For most of the 20 th century, Brazilian elites thought that they could get by on natural resources - cattle ranches, coffee plantations, fruit juices, and soybean farms. 
Now they know that universal secondary education and extensive university-level training is also needed. 
Under FHC's reforms, enrolment rates in secondary education soared, from 15% in 1990 to 71% in 2000. 
Equally important, Brazilian universities are seeing an increase in quality and attendance as well. 
Most of Latin America, including Brazil, ignored public investments in R&D for decades, while East Asian countries invested heavily. 
FHC appointed a series of outstanding Ministers of Science and Technology, and the government finally began spending more on research and development. 
Brazil is becoming known not only for orange juice, but for aircraft exports like the Embraer jets that now compete with American and European producers for the regional commuter market. 
· Third, Brazil is coming out of its economic shell, competing in world markets rather than protecting national markets. 
For decades, due to rampant protectionism, the ratio of Brazil's exports to GNP was one of the lowest in the world. 
That is finally changing. 
The export/GNP ratio has risen from 8% in 1990 to 13% in 2001, a sign that Brazil is beginning to seek out world markets. 
Lula is traveling widely to promote Brazilian exports, another sure sign that Brazil's political economic orientation has become far more international. 
· Fourth, Brazil is focusing on the health and productivity of its people. 
Under FHC, Brazil pioneered an effective response to the AIDS epidemic by guaranteeing access to antiretroviral medicines and to widespread counseling and viral testing. 
The hero of this effort, Dr. Paulo Teixera, is now at the World Health Organization helping to lead the global effort against AIDS. 
Brazil has also dramatically improved child health, with mortality rates of young children falling sharply, from 60 per thousand in 1990 to 36 per thousand in 2001. 
Brazil's total fertility rate (average number of births per woman) has come down sharply as well, from 2.7 in 1990 to 2.2 in 2001. 
With more children surviving to adulthood, poor families are choosing to have fewer children, and to invest more in their health and education. 
Population growth pressures are falling, providing a powerful long-term boost to Brazil's economic development. 
Brazil's economic turnaround may have powerfully positive effects on its neighbors, especially the struggling countries of the Andean region. 
This is the most likely scenario, but it is too early to declare victory. 
Brazil still faces huge challenges. 
Lula will have to build on the work of FHC. 
Macroeconomic stability must be consolidated, with budget deficits brought decisively under control. 
The political consensus in favor of universal education, outward-oriented trade, health for all, and a science-and-technology oriented economy must be strengthened. 
Brazil must also pay more attention to environmental management, especially in the fragile yet critical Amazon region, if it wants long-term, sustainable economic development. 
For Brazil to play a bigger role as regional economic leader, greater cooperation with its neighbors in suitable infrastructure projects and expanded markets will be needed. 
Great challenges, indeed, but Brazil seems to be in the mood to meet them. 

Brazil Coldest Election 
Paulo Rabello de Castro, a University of Chicago trained economist and one of Brazil’s wittiest thinkers, has called the country’s October presidential elections a choice between “more of the same” and “the same without more.” 
This is light years away from the strong emotions presidential elections usually incite in developing countries. 
Rabello de Castro’s irony is apt, for it is difficult to say which candidate represents “more of the same”: President Luiz Inácio Lula da Silva, who is running for re-election and is the favorite according to the polls, or former Governor of São Paulo, Geraldo Alckmin, of the PSDB (Brazilian Social Democracy Party, which governed Brazil for eight years before Lula, with Fernando Henrique Cardoso as President). 
Indeed, the distinction is so difficult that in a recent interview, Cardoso himself said that Lula’s Workers’ Party (PT) project is the PSDB’s project. 
He added: “Perhaps there is not another one. 
History does not always produce a new project” 
Cardoso is right. 
Except for barely practical political rhetoric from leaders like Hugo Chávez in Venezuela and Evo Morales in Bolivia, there is nothing new on offer in the world’s electoral marketplace that differs very much from what is usually called neo-liberalism or the Washington Consensus. 
In other words, there is no longer a battle between different projects in any modern country, no left-right confrontation (with their nuances) that might raise voters’ emotions. 
Here, Brazil is no different than the United Kingdom, Spain or Uruguay. 
Indeed, Brazil’s upcoming election this year is like a soccer match between big teams, where supporters of one candidate and the other are solely distinguished by the colors of their shirts, since the strongest teams accept the rules of the game and even tactics are similar. 
According to the socialist sociologist Francisco de Oliveira, the coldness of the electoral landscape is closely related to one reality: the “irrelevance” of politics due to its “ financiarisation .” 
In other words, the boundaries of government action have narrowed tremendously in the face of strong financial markets, with their power to destabilize any government act deemed inconvenient. 
Quite simply, there is no other way of playing the game than by the rules of the financial markets. 
Is this lack of emotion about politics, this absence of confrontation between different projects, good or bad? 
For some analysts, it is good, because it reveals a nation’s political maturity. 
In the case of Brazil, it means that the people are no longer willing to accept or vote for the heterodox political and economic adventures that characterized the 1980’s and early 1990’s. 
The problem is that this assumed maturity, whether real or not, is happening while the basic problems of the country remain unsolved. 
Indeed, for at least 25 years Brazil has not been able to achieve rapid economic growth. 
This is the sine qua non for beginning to face and correct intense and deeply rooted problems, such as redressing the country’s poverty, obscene distribution of income, the vast educational shortages, a precarious health system, a devastated infrastructure caused by long years of insufficient investment, and the rest of a long list of other miseries typical of underdevelopment. 
Rabello de Castro argues that “the country lacks an institutional model or a productive order that comes to terms with fast growth.” 
Concerning the process of de Oliveira “ financiarisation ” of politics, there is an interesting fact to take into account: country risk reached its lowest level, since the creation of the index in 1994, on Wednesday August 9th, precisely in the sequence of what Brazilian media called “the third wave of attacks” by a criminal group, the PCC (First Command of the Capital), which burned buses, destroyed banking agencies, placed bombs in public buildings (even the headquarters of the Sao Paulo’s Public Ministry of State and the police agency in charge of repressing organized crime). 
This means that the financial world measures risk according to its own interests. 
If a country is not slow in paying back its debts and applies those policies considered “healthy” by the markets, bingo, country risk is low. 
For the general population, particularly the middle class and/or low-resource people, the risks posed by going out into the street on that same day may be extremely high, but this does not affect financial estimations. 
So why, under these circumstances, is President Lula close to re-election? 
Simply put: he works on both sides of the counter. 
Between January 2003 (when his administration began) and June 2006 (latest available data), Lula’s administration assigned 530 billion reales (almost $242.7 billion) to repay the holders of government bonds, whereas he devoted 30 billion reales ($13.8 billion) to a program called “Bolsa-Familia” that distributes money directly to poor families. 
This does not seem to be the best way to bring about a true redistribution of income, but has been enough to achieve two objectives: it keeps domestic and foreign investors satisfied. 
(In the electoral campaign of 2002, both domestic and external investors who bet heavily against the Brazilian currency during the electoral campaign in 2002, for fear of Lula, a candidate who seemed to be radical.) 
This strategy also wins the votes of the poorest segments of society, who make up the majority of Brazil’s electorate and receive very little, but see the subsidies as “better than nothing.” 
And the poor make up the majority of Brazil’s electorate. 
Everything indicates that this will be enough for Lula to win re-election. 
But can this political game be replayed indefinitely? 
We will start getting an answer from January 2007 when the new (or, most probably) the old president takes office. 

Brazil’s Argentina Moment 
CAMBRIDGE – Brazil’s economy has been in free fall, a casualty of years of economic mismanagement and the vast corruption scandal that has engulfed the country’s political and business establishment – and which now threatens to bring down the second president in as many years. 
It may seem hard to focus on policy developments amid the political and economic turmoil, but the fact remains that Brazil must overcome fundamental challenges if it is to lay the groundwork for sustainable growth. 
Few loom as large as the country’s fiscal woes. 
There is a strong argument that Brazil’s overstretched government finances have long held back the economy. 
At 36%, the ratio of government spending to GDP is one of the highest among countries at a similar income level. 
Years of fiscal laxity, mounting social security obligations, and low commodity prices have greatly magnified concerns – now compounded by the political crisis – about the government’s debt burden, which now stands at about 70% of GDP. 
The high interest rates required to finance the perilous fiscal position aggravates it further: higher interest payments account for much of the difference in spending between Brazil and peer countries. 
Against this background, Brazil’s National Congress, seeking to regain market confidence, approved an unprecedented constitutional amendment last December that imposes a ceiling on non-interest government expenditures, indexed to the previous year’s inflation rate, for a period of at least ten years. 
As long as it holds, the spending cap ensures that the size of the government (excluding interest payments) will shrink as a share of national income in every year that the economy experiences real growth. 
The International Monetary Fund enthusiastically endorsed it at the time, calling it a potential fiscal “game changer.” 
But is it? 
Taken at face value, the economic justification for a spending cap is surprisingly weak. 
Nothing in economic theory supports keeping real government spending constant over a period as long as a decade. 
As large as the size of Brazil’s government is, there is no magic ratio of spending to GDP that would ensure sustained growth. 
Furthermore, the ceiling does not distinguish between government consumption and investment. 
And, in practice, it is likely to become more of a target than a ceiling, thereby removing room for countercyclical fiscal policy during a future downturn. 
Even as a signal for market confidence, the idea of a cap on future spending has important weaknesses. 
As long as the economy contracts, a spending cap in fact does not impart much discipline; it does not force the government to shrink in step with the economy. 
Fiscal contraction is, in Augustinian fashion, deferred to the future – not exactly a confidence booster. 
Indeed, the IMF, arguing that the spending cap is inadequate, has pushed for additional frontloaded fiscal adjustment. 
Perhaps desperate times call for desperate measures. 
Brazil’s move resembles Argentina’s convertibility plan of 1991, which abolished all currency controls and pegged the Argentine peso to the US dollar. 
Facing hyperinflation and a complete loss of market confidence, the government sought to buy credibility by placing monetary policy on automatic pilot. 
Argentina’s message to markets was, “look, we have no discretion over monetary policy.” 
Similarly, Brazil is telling markets it will shrink the government (as long as the economy is growing). 
In both cases, the promises are backed up by legal or even constitutional changes. 
When credibility becomes the binding constraint on economic recovery, measures such as these may make sense – as long as they have the intended effect on market confidence. 
In fact, long-term interest rates on Brazilian government bonds have come down significantly since the amendment was passed (though it is hard to pinpoint the causal impact of the rule itself), and remain well below pre-amendment levels, despite the short-lived spike that followed the release of a recording of President Michel Temer allegedly authorizing illegal payments to a jailed congressman. 
But as Argentina found out several years down the line, binding fiscal legislation can itself become a powerful constraint on economic recovery. 
By the late 1990s, Argentina’s overwhelming problem had become an overvalued currency. 
Successive governments stuck with the convertibility law for fear of losing credibility, but aggravated the economy’s competitiveness crisis as a result. 
Eventually, amid street riots and political mayhem, Argentina abandoned the currency peg in 2002. 
Viewed with Argentina’s experience in mind, Brazil’s spending cap looks problematic – all the more so against a backdrop of political turmoil that is set to continue for the foreseeable future. 
The cap will likely become even more politically controversial once Brazil recovers, as it will. 
It is not hard to imagine the next administration – whenever it comes about – perceiving the cap as an obstacle to faster economic growth. 
The cap’s defenders will sound unconvincing, because the economic case for it is weak in the absence of extreme credibility problems. 
Indeed, the cap will undermine itself to the extent that it succeeds in addressing the credibility issue. 
Brazil could become a prisoner of the policy’s totemic value as a commitment device, even as it outlives its usefulness as such. 
The irony will not be lost on investors or Argentines: countries that can write a spending cap into the Constitution on short notice are also those where it could be just as easily removed. 
There are good reasons why democracies sometimes tie their hands or delegate decision-making. 
Independent central banks or fiscal commissions, for example, can help governments overcome the temptation of short-term manipulation of the economy at longer-term cost. 
But Brazil’s spending cap does not look like a sustainable solution. 
While born of a real sense of fiscal urgency, the biggest risk is that it will eventually fuel political conflict around the ceiling itself, rather than foster deliberation about the difficult fiscal choices that must be made. 

IMF Therapy for Brazil 
MONTEVIDEO – Brazil’s economy is in intensive care. 
And its intensifying political crisis – impeachment proceedings have now been initiated against President Dilma Rousseff for allegedly using irregular accounting maneuvers to disguise the size of the budget deficit – is raising serious questions about who can provide the much-needed treatment. 
The situation is certainly serious. 
Output is contracting; fiscal revenues are faltering; and the budget deficit exceeds 9% of GDP. 
Inflation has surpassed the double-digit mark, forcing the central bank to raise interest rates – an approach that is unsustainable, given the deepening recession and the ballooning cost of servicing Brazil’s rapidly growing debt. 
Indeed, with Brazil’s creditworthiness deteriorating fast, interest-rate spreads on its sovereign debt are reaching Argentine levels. 
And its international reserve position of $370 billion, which once seemed unassailable, looks increasingly vulnerable. 
When the notional value of foreign-exchange swaps ($115 billion) is netted out, the share of short-term public debt (foreign and domestic) covered by international reserves is below the critical threshold of 100%. 
At the beginning of the year, when Rousseff’s second presidential term officially began, her administration’s priorities were clear: implement a credible fiscal-adjustment program that would take the primary budget balance (which excludes interest payments) comfortably back into surplus and reduce the growth rate of public debt to sustainable levels. 
Rousseff soon appointed an economic team associated with fiscal orthodoxy to lead the effort. 
But the situation has only deteriorated, owing partly to China’s economic slowdown, the end of the commodity boom, tighter international financial conditions, weak global growth, and a years-long legacy of policy mismanagement. 
But domestic politics has made a bad situation much worse; indeed, the biggest obstacle to economic recovery this year came in the form of a massive corruption scandal at the state-owned oil giant Petrobras. 
Although the scandal broke last year, allegations and evidence have more recently been mounting against senior officials of the traditional political parties, as well as prominent businessmen. 
And, like Italy’s mani pulite (“clean hands”) investigations in the 1990s, the Petrobras scandal has thrown Brazilian politics into disarray. 
A sitting senator has, for the first time, been arrested on corruption charges. 
Impeachment proceedings against Rousseff will only complicate the situation further. 
Brazil is now trapped in a vicious circle, or what economists call a “bad equilibrium.” 
Even if there were a government willing and able to carry out the necessary fiscal adjustment, the political fallout of the Petrobras affair has damaged Brazil’s credibility severely. 
That credibility will take time to recover – and time is a luxury that Brazil does not have. 
Without market credibility, interest rates and credit spreads will remain high and hijack the fiscal-adjustment effort, forcing the economy into a downward spiral. 
Moreover, budgetary pressures will make it increasingly difficult for the central bank to raise short-term interest rates to fulfill its mandate of curbing excess inflation. 
In short, Brazil lacks a credible fiscal and monetary anchor. 
If Brazil is to regain its credibility swiftly, it will need the support of the international community. 
Brazil doesn’t have the institutional equivalent of the European Central Bank to do “whatever it takes” to retain access to credit at reasonable interest rates as it pursues fiscal and structural adjustment. 
The closest thing Brazil has is the International Monetary Fund, with which it should negotiate an adjustment program. 
Such a program would include increasing the primary surplus to 2-3% of GDP over the medium term; constraining government expenditures (the tax burden is already sky high); and eliminating indexing rules that make spending overly rigid. 
Moreover, Brazil would have to delink revenues and expenditures – a feature of the country’s budget that renders it difficult to manage properly in times of distress. 
And it would gradually have to phase out treasury subsidies to BNDES – the country’s development bank – and increase the use of market-based references for BNDES’s lending rates, thereby helping to restore fiscal health and eliminate distortions in financial intermediation. 
For its part, the IMF would give the adjustment program its stamp of approval and make its own resources available, so that Brazil does not have to tap international capital markets for a reasonable period. 
This would greatly enhance Brazil’s chances of success. 
To be sure, calling in the IMF carries a considerable stigma. 
But the reality is that helping countries in situations like Brazil’s is an area where global financial institutions like the IMF – which, it should be noted, is more flexible and open today than it was a decade ago – can play a constructive role. 
More to the point, Brazil has run out of good – let alone easy – options. 
The only alternatives to an IMF program are an inflationary spiral to dilute the real value of debt and other nominal liabilities, or a downward economic spiral that may cause a need for debt restructuring. 
Either outcome would threaten the reforms and social gains that the country has made since the Plano Real stabilization program was launched in 1994. 
Given this, and despite the potential political difficulties and the risk of a social backlash, Brazil has little choice but to pursue an IMF-sponsored adjustment program. 
It may taste bitter, but only the IMF can provide the medicine Brazil needs. 

Brazil’s Way Out 
WASHINGTON, DC – Now that impeached Brazilian President Dilma Rousseff is out of office, it is up to the newly empowered administration of President Michel Temer to clean up Brazil’s macroeconomic mess. 
Can Temer’s government save Brazil’s crumbling economy? 
The situation is certainly dire. 
In fact, Brazil has lately been experiencing the most powerful economic contraction in its recent history. 
Its per capita GDP will be more than 10% smaller this year than it was in 2013. 
And unemployment has soared to more than 11%, up four percentage points from January 2015. 
Brazil has no easy route to recovery for a simple reason: the current rout derives from the intensification in recent years of long-standing economic vulnerabilities – in particular, fiscal profligacy and anemic productivity growth. 
Consider Brazil’s fiscal position, which has deteriorated rapidly since 2011, with a 3.1%-of-GDP primary surplus giving way to a deficit of more than 2.7% of GDP, leading to an overall budget deficit of close to 10% of GDP. 
In fact, the groundwork for that deterioration was laid a long time ago. 
Brazil’s primary government expenditures as a proportion of GDP rose from 22% in 1991 to 36% in 2014. 
Much of that spending can be explained by a commitment to tackling endemic poverty – an effort that included the world’s largest conditional cash-transfer program, among other things – without reducing the privileges enjoyed by Brazil’s better-off citizens. 
For some time, Brazil’s government was able to fund higher expenditure with tax revenues, which also rose as a result of levies on rising consumption and labor-market formalization. 
And high global commodity prices helped sustain GDP growth of around 4.5% per year from 2003 to 2010, which also bolstered government revenues. 
But, of course, the formal labor force cannot expand forever, and commodity prices always fall eventually. 
Unfortunately, Brazil failed to take advantage of the good times to reap productivity growth. 
Indeed, only 10% of Brazil’s GDP growth in 2002-2014 can be attributed to total factor productivity gains, while two-thirds was the result of an increase in slightly better-educated workers entering the labor force. 
So when Brazil’s tax-revenue boosters finally collapsed, legally mandated increases in public spending drove Brazil rapidly toward a fiscal cliff. 
Today, counter-cyclical policies are not an option; there simply isn’t enough fiscal or monetary space. 
This leaves Brazil’s government with only one real option for restoring business confidence and reviving economic growth: tackling Brazil’s structural weaknesses. 
The good news is that Temer’s government seems to recognize this imperative. 
Already, it has proposed to Brazil’s Congress a constitutional amendment forbidding for the next 20 years nominal annual increases in public expenditures, including at the subnational level, that exceed the previous year’s inflation rate. 
Provided that inflation stabilizes at some lower level, such a cap would cause public expenditure as a share of GDP to decline as soon as the economy began to grow again. 
If increases in tax revenues accompany GDP growth, fiscal imbalances and the accumulation of public debt would automatically be addressed. 
At a time when Brazil has little flexibility in its budget, such a rule could turn out to be a fiscal game changer. 
Of course, a cap on expenditure growth would not by itself eliminate the need to address existing budget rigidities. 
Temer’s government has declared its intention to present to Congress a pension reform plan for precisely this reason. 
As for productivity, the government is focused on reducing waste caused by insufficient infrastructure construction in recent decades. 
Scaling up infrastructure investment also promises to spur private investment in other sectors. 
The key will be to fine-tune the division of responsibilities between the private and public sectors – including independent regulatory agencies – in the various segments of infrastructure services. 
Temer’s government also hopes to tap investment in human capital as a source of productivity growth. 
As it stands, private companies in Brazil invest less in personnel training than those in other countries with similar per capita incomes, owing largely to disincentives embedded in tax and labor laws – incentives that Temer’s government has proposed to change. 
To maximize the impact of these efforts, Temer’s government should also focus on reducing waste in the private sector caused by other problems with the business environment. 
The more efficient use of human and material resources would make firms more competitive and boost Brazil’s total-factor productivity, especially if Brazil’s human capital were enhanced. 
Add to that efforts to facilitate foreign trade, and Brazil’s “animal spirits” of entrepreneurship could be unleashed, enabling Brazil to escape the current crisis and move toward a more prosperous future. 
The views expressed here are the author’s own and do not necessarily reflect those of the World Bank or any of the governments he represents. 

How to Fix Brazil’s Economy 
SÃO PAULO – Brazil is approaching its most consequential election since the end of military rule more than three decades ago. But while the country’s politics are plagued by dysfunction, the election’s outcome will hinge on the next government’s economic reform agenda. 
One of Brazil’s most serious economic challenges is anemic productivity growth, which has been undermining the country’s growth potential. 
With output per employee increasing by just 0.7% per year, on average, since the mid-1990s, more than half of per capita income growth over the last two decades has resulted from an increase in the share of the economically active population. 
But that engine of income growth will soon stall, owing to rapid population aging. 
Weak productivity growth partly reflects a lack of trade openness, which limits Brazilian firms’ access to foreign inputs and technologies, as well as barriers to effective domestic competition. 
Moreover, weak logistics infrastructure, differentiated state tax regimes, and subsidies to specific firms enable less efficient companies to survive and retain resources, lowering average productivity. 
To address this, policymakers must support the private sector by strengthening the adoption and diffusion of advanced technologies, rather than by offering compensation for high internal costs. 
Moreover, the business environment should be made more favorable for entrepreneurs, including through reform of the complex and imbalanced tax system. 
Increased infrastructure investment is also needed, as is reform of financial intermediation, so that financing terms are better aligned with investment projects. 
And the quality of education and the formation of human capital could benefit from less rigid allocation of public resources and more experience-sharing among states and municipalities, some of which have made progress using measures that could be applied elsewhere. 
Brazil also needs significant fiscal adjustment. 
Even as productivity and economic-growth potential have increased at a snail’s pace, real (inflation-adjusted) public spending has risen sharply. 
Public expenditure increased from less than 30% of GDP in the 1980s to about 40% in 2017, including 68% growth from 2006 to 2017. 
And yet public investment (including in infrastructure) has declined, amounting to less than 0.7% of GDP last year. 
With tax revenues affected by the decline in GDP in 2015-2016 and the subsequent fragile macroeconomic recovery, the primary budget balance, relative to GDP, deteriorated by more than four percentage points. 
This caused public debt to rise from 54% of GDP in 2012 to 74% in 2017. 
To address skyrocketing debt, in 2016, Brazil approved a constitutional amendment imposing a ceiling on public spending for the next 20 years. 
If the authorities manage to adhere to this rule – or combine spending cuts with tax revenues to obtain an improvement of 0.6% of GDP per year in the public-sector primary balance – the trajectory of public debt could become sustainable again within a decade. 
The key to success, of course, will be smart spending cuts. 
The World Bank, where I am an executive director, has already identified areas where such cuts can be made: social security, public-sector payrolls, and subsidies and tax exemptions. 
By easing the strain on the public budget, spending cuts in these areas could even create space for other, more productive types of public expenditure. 
Crucially, such cuts would have only minimal consequences for poorer Brazilians. 
In fact, when it comes to tax reform, there are steps that could not only contribute to improving the business environment, but also help to reduce the social inequities embedded in the current system. 
In the quest to improve productivity and achieve fiscal rebalancing, Brazil’s leaders must also reform public-sector governance. 
As it stands, the provision of public services in a wide range of areas – including health, education, violence, infrastructure, transportation and logistics, and the management of water resources – is highly inefficient. 
The reasons are wide-ranging. 
Brazil suffers from an excess of rules, which contribute to budget rigidity; fragmentation of service delivery; poor planning, monitoring, and evaluation of projects and policies; a lack of positive performance incentives for public-sector workers; the judicialization of policymaking; and an increasingly risk-averse bureaucracy. 
Brazil thus needs to improve policy consistency, from planning through execution of programs and projects, and focus more on monitoring and evaluating results. 
Better coordination between the public and private sectors would also improve the capacity of public expenditure to contribute more to improving socioeconomic outcomes. 
Brazil’s future hinges on the implementation of smart, gradual, and coherent economic reforms that facilitate productivity growth and put the country on the path toward fiscal sustainability. 
Whoever wins the upcoming election has a responsibility to address that imperative. 

Brazil's Baleful Bailout 
The International Monetary Fund (IMF) came through last week with a larger rescue package for Brazil than world financial markets expected. 
This should have eased fears about Brazil's future. 
So far, it hasn't. 
After an initial rally, Brazilian interest rates have settled at levels incompatible with long-term solvency. 
Its benchmark "C bonds" now yield around 22% in dollar terms. 
Brazil's debt equals 60% of GDP, of which 35% falls due within a year. 
The IMF has required that Brazil run a "primary surplus" (i.e. interest on government debt is excluded in the budget calculations) of 3.75% on its budget. 
But this will clearly not be able to prevent a big further deterioration in the country's debt/GDP ratio, especially as high interest rates push Brazil into recession. 
The fact that this package failed to bring relief indicates that something is fundamentally wrong with the international financial system. 
Brazil's problems cannot be blamed on anything Brazil has done wrong; responsibility falls squarely on international financial authorities. 
Admittedly, Brazil may soon elect a president that global financial markets do not like; but if international financial markets take precedence over democratic choice, the system is undoubtedly flawed. 
Under the influence of market fundamentalism, the IMF does not benefit all of its members sufficiently. 
In recent years, the so-called "Washington consensus" as espoused by the IMF and World Bank has put its faith in the self-correcting nature of financial markets. 
That faith was and is misplaced. 
Ever since financial capital began moving freely around the globe, crisis has followed crisis, with the IMF called upon to put together rescue packages of ever larger size. 
Market fundamentalists blame this state of affairs on the moral hazard created by IMF bailouts. 
In the aftermath of Asia's crisis of 1997, the IMF switched from bailouts to "bail-ins" that shifted more of the risk back to international lenders. 
By doing so, the true risks of investing in emerging markets were revealed. 
What is the result? 
Capital flows have reversed. 
Instead of capital flowing to economies on the world's periphery, it is leaving them and flowing to economies at the center. 
If stability is to be preserved, financial markets need regulators and a lender of last resort. 
But there can be no lender of last resort without a modicum of moral hazard. 
Every developed country learned this lesson domestically decades ago, but the world has yet to learn it internationally. 
The system we have in place is lopsided. 
It is designed to preserve international financial markets, not the stability of emerging economies on the periphery. 
That is what rendered the risk/reward ratio of investing in emerging markets so unfavorable. 
Once we recognize the problem, solutions can be found. 
The Washington Consensus starts by asking how big a budget surplus is needed in order to keep indebtedness within bounds; the higher the interest rates, the bigger the required surplus. 
In the case of Brazil, with 22% interest and 4% growth, the primary surplus would have to be 4.8% to keep the debt/GDP ratio from rising - an obvious impossibility. 
The right question to ask is this: what level of interest rates can be reconciled with reasonable growth? 
A primary surplus of 3.75 % then becomes the maximum, not the minimum, that can be exacted, and it can support real interest rates of not more than 10%. 
So the question then becomes: how do you bring interest rates down to that level? 
This may require some international credit enhancements or guarantees. 
The world's task is to find instruments that can minimize the possibility of moral hazard and yet keep the level of real risk within tolerable bounds. 
I suggest that Instead of a traditional IMF package, the central banks of the developed countries should open their discount windows for Brazilian government debt. 
Brazilian bonds would rally and confidence would return at the sight of a lender of last resort. 
The risk would be minimized by not raising the amount the central banks are willing to lend in line with the rise in market prices. 
Commercial banks would soon reinstate their lines of credit for Brazil, which would help ensure a recovery of exports. 
(Lifting of the bulk of US tariffs on Brazilian steel would also help here.) 
The crisis would then dissolve into thin air. 
My proposal would achieve what the recently announced package failed to achieve, and at no higher a price. 
It is not too late to adopt it. 
Once it is in place, Brazil's incoming president (no matter who he is) would have no reason to contemplate interfering with Brazil's normal debt servicing commitments. 
As things now stand, he would be justified in demanding greater international support rather than allow his country to bleed to death as Argentina is now doing. 
In political conditions such as those that now prevail in Brazil, markets are right to take into account the possibility of a debt reorganization or even of a default. 
But once they do, their actions soon become a self-fulfilling prophecy. 
This is why financial markets cannot be left to their own devices. 

Brazil’s Institutional Limbo 
SÃO PAULO – International investors are watching closely as Brazilians prepare to vote in the second round of the presidential election on October 26. 
Their vote will not only decide who will be the country’s next president; it may also determine the future of the Central Bank of Brazil (BCB), and therefore the country’s macroeconomic trajectory. 
While the incumbent president, Dilma Rousseff, supports the BCB’s existing institutional framework, her opponents contend that monetary policy is plagued by political interference, which would best be addressed by giving the BCB greater autonomy. 
But no candidate has yet advanced a proposal for reform that would reduce the scope for political interference while ensuring greater accountability and promoting financial stability. 
If Brazil is to sustain strong and stable economic growth, the central bank will need an overhaul. 
Monetary policy has long played an important role in Brazilian politics. 
During the democratization process of the 1980s and 1990s, successive governments tried to tame hyperinflation, which reached 2,477% in 1993. 
The introduction of the “Real plan,” launched in 1994, managed to suppress annual price growth to an “acceptable” 22% by the following year. Riding on the plan’s success, its architect, Fernando Henrique Cardoso, a former economy minister, was twice elected President (in 1994 and 1998), underscoring voter concern about price stability. 
Today, as central bankers in developed countries fret about the threat of deflation, Brazilian politicians are once again forced to respond to widespread fears about slowing growth and a return to high inflation. 
Unfortunately, the presidential candidates’ plans for the BCB fall short of what is required. 
Historically, Rousseff’s Workers’ Party (PT) has resisted giving the bank formal autonomy, and she has played a distinctly populist card during the campaign, arguing that BCB autonomy would hand too much control to private bankers. 
Marina Silva, the Socialist Party’s candidate, demanded formal bank independence – an argument subsequently adopted by the Social Democratic Party (PSDB) candidate, Aécio Neves, who now faces Rousseff in the election run-off. 
But Neves wants de facto, rather than formal, operational autonomy for the BCB. 
Like Cardoso, Neves is committed to inflation targeting, creating a primary surplus, and maintaining a floating exchange rate. 
While such policies may promote price stability, his proposal neglects the two most important issues for the BCB: legal autonomy and institutional reforms that ensure accountability to citizens. 
A legal commitment to BCB autonomy would contribute to currency confidence in a way that informal autonomy cannot. 
Legal structures have a direct impact on inflation expectations, because law can provide institutional protection to public goods, such as price and financial stability. 
Properly designed and executed, institutional reform could also increase BCB accountability to society at large while guarding against undue political influence and lobbying by the big banks. 
The BCB is ripe for reform. 
It is a 50-year-old technocratic bureaucracy established under a military dictatorship, with few legal instruments for political and social accountability. 
Institutional reform must therefore move beyond the BCB’s inadequate price-stability target, which is set according to a narrow inflation index that fails to reflect the experiences of ordinary Brazilian consumers. 
For example, the reported 2013 inflation rate was 5.9% (compared to a 4.5% target); but prices for food, a major share of most households’ budgets, rose by 8.4%, hitting the poor especially hard. 
The Rousseff administration has kept the reported inflation rate artificially low by suppressing prices for state-run services. 
Price stability should be accompanied by other targets, especially financial stability, but also, possibly, employment. 
Rousseff thwarted Congress’s attempts to introduce such targets in 2011, and they would, of course, need to be carefully designed to avoid past mistakes. 
But, done right, an expanded range of criteria by which to assess BCB policies, by enhancing accountability, would strengthen the legitimacy of granting policymakers legal autonomy. 
There is also scope for institutional reform to promote greater financial stability. 
The 2008 financial crisis and its aftermath highlighted the consequences of the BCB’s outdated institutional design. 
The Bank had insufficient legal backing for action needed to stabilize the financial system. 
This left then-President Luiz Inácio Lula da Silva, to resort to a series of dramatic measures, including the use of the deposit-insurance fund and state-owned banks to bail out failed financial institutions. 
Lula claimed that this ad hoc approach gave Brazil a degree of flexibility lacking in other countries; but it was not cost-free, as he claimed, and the results did not endure. 
Rapid expansion of private debt raises other, larger concerns. 
Other central banks have recognized the need for new instruments to ensure financial stability; so must the BCB. 
Institutional clarity on the BCB’s mandate for financial stability and the instruments at its disposal could help Brazil avoid future crises – or at least weather them more effectively. 
Brazil’s presidential election appears to offer two unsatisfying choices: a continuation of the status quo, with the BCB subject to political influence, under Rousseff; or an informally autonomous BCB with an outdated institutional apparatus, under Neves. 
Only Silva’s initial proposal included calls for institutional reform of monetary policy and financial regulation; and it is far from certain that her endorsement of Neves in the run-off will sway his view should he win. 

Brazil’s Financial Train Wreck 
CAMBRIDGE: The IMF’s record remains perfect -- five big rescues since mid-1997, five big failures. 
Brazil was the latest to go off the rails. 
Last week its currency collapsed and stock market plummeted. 
This wreck is likely to damage not only Brazil but much of Latin America. 
All this was avoidable. The three engineers guiding Brazilian policy - its government, the IMF, and U.S. officials - were negligent. 
Until the IMF in particular is called to task for its failures everyone risks waking up to financial shocks that undermine living standards in developing countries and threaten global stability. 
Bluntly, the IMF has been too solicitous of Wall Street. 
If you are, say, a U.S. bank with Brazilian investments, you want Brazil to maintain its exchange rate until you get repaid (after that, who cares!). 
So, you pressure the IMF and the U.S. Treasury to urge Brazil, or Russia, or any other hapless IMF-loan recipient to defend its currency. 
This gives you time to whisk your money out unscathed before any change in currency values. 
Fortunately, those disastrous policies are being abandoned - too late and at too high a cost. 
Indeed, Brazil’s stock market soared on news that the country’s currency - the Real - was allowed to float and the nightmare of a monetary straitjacket lifted. 
Brazil’s currency, however, had been over-valued for years, whacking Brazil’s exporters and contributing to low economic growth. 
Why? 
In 1994, Brazil suffered hyperinflation, with prices rising 2000% per year. 
The then finance minister (now President) Fernando Henrique Cardoso, imposed a new currency with a stable value to the U.S. dollar, roughly 1 Real per 1 dollar. 
Inflation dropped, but it took some time for it to cease altogether. 
Brazil began to recover, but the relative costs of productions were still going up for some time. 
By late 1995, inflation was gone, but exporters were squeezed. 
Local costs doubled while the prices received for exports remained unchanged, since each $1 of exports translated into approximately 1 Real of local earnings. 
Financial markets understood the impact of this and expected a devaluation. 
For Brazil to defend its currency, it was necessary to maintain punishingly high interest rates at home in order to encourage investors, foreign and domestic, to risk keeping their money in Brazil. 
For foreign creditors, such crushing rates didn’t matter (or so they thought). 
If a defense of the currency succeeds for six months, that’s all the time international banks with 90-day loans on their books need to make their get-away. 
Brazil’s government, the IMF, and the U.S. didn’t need to go this route. 
They were urged to allow the Real to weaken slightly and gradually, according to market forces, in order to restore export profitability. 
By 1996, Cardoso was President, but he had fallen in love with the stable – though unrealistic - exchange rate. 
When Asia’s crisis hit in 1997, the IMF and the U.S. short-sightedly believed that exchange rate stability would help the world, and Brazil. 
They encouraged President Cardoso to defend the overvalued Real through stringent policies. 
Defend he did. 
Interest rates were jacked up to 50% a year to encourage skittish investors to hold Brazilian assets. 
Investors aren’t blind. 
They knew the currency was overvalued. 
But at a 50% annual return, they gambled, and even expected (rightly) that the IMF would give Brazil big bucks to back up its currency if necessary. 
During 1998, Brazil’s economy began a tragic, predictable descent into recession. 
High interest rates sent the budget deficit soaring, because Brazil’s government held large short-term debts, and the financing costs on them were sky-high. The deficit ballooned from 4% of national income in 1997 to 7% in 1998. 
Brazilian investors and U.S. banks began to take money out, forcing the Central Bank to sell scarce dollars in order to keep the hallowed stability of the currency. 
Throughout 1998 it would have been preferable to lower interest rates and let the Real move to a realistic level. 
When Russia defaulted in August 1998, and investors began to bolt emerging markets, the U.S. and IMF decided to loan Brazil the proverbial rope to hang itself. 
To the cheers of the financial establishment, the IMF told Brazil last December, "Don’t worry about your falling foreign exchange reserves, we’ll give you another $41billion of short-term loans to defend your currency." 
This was insidious. 
IMF loans are effectively used to repay foreign investors, either through a fairly direct mechanism (say, Korea in December 1997), or indirectly when the Central Bank sells dollars in the foreign exchange market as part of its currency defense. 
Brazilian taxpayers will now be hit hard, and social and other spending cut, to service the IMF’s $41billion in loans. 
Now, Brazil has abandoned its currency defense, but only after sending the economy toward depression and building up huge debts following a year of astronomical interest rates. 
By floating the currency Brazil got some breathing room to cut interest rates and head off depression. 
Nonetheless, many investors may run in panic from Brazil and the rest of Latin America. 
There’s nothing like a high-profile failure of a Washington-backed policy to stoke a general retreat from the region, leading to cascading bank failures, economic contraction, and widespread hardship. 
The IMF-U.S. strategy of telling countries to defend their exchange rates through high interest rates backed by IMF bailout loans should end and the IMF’s Managing Director, M. Michel Camdessus, shown the door. 
Brazil has seen the light - the hard way. 
Other developing countries should adopt flexible exchange rates and moderate interest rates, and avoid IMF rescue loans like a poisoned chalice. 
Throughout Latin America, it will be necessary for major international banks and national governments to negotiate a responsible path forward, one in which governments behave sensibly and realistically, while large banks recognize their collective interest in avoiding panicked withdrawals. 
If bankers panic and yank their loans, they will bring enormous damage to themselves as well as to Latin American economies. 

Brazil’s Oil Rush 
SÃO PAULO – Brazil is poised to take its place among the world’s petro-powers. 
Estimates of its newfound oil reserves place it in eighth place among oil-producing nations, ahead of Nigeria as well as Brazil’s rival for influence in Latin America,Venezuela. 
Such newfound wealth is normally a source of celebration. 
But Brazil’s President Luiz Inácio Lula da Silva, perhaps fearing the infamous “resource curse” that has blighted the development of so many countries blessed with mineral wealth, is determined that the new oil wealth not be turned into “nonsense.” 
In 2007, huge oil deposits were discovered off Brazil’s coast. 
Modest estimates put these reserves at around 30 billion barrels. 
Crédit Suisse and other investment banks say that 50 billion barrels are available. 
The discovery is the result of a strategic policy maintained through successive Brazilian administrations, something unusual in Latin America. 
In 1989, when the Iraq-Iran war sent shivers among oil-consuming nations, Brazil began to explore for energy both within and beyond its 200-nautical-mile protected zone. 
The size of the oceanic areas involved was enormous, thus earning the term “Blue Amazonia.” 
The discoveries are the largest oil reserves discovered in the ocean in recent years. 
For a while, the US tried to question Brazil’s ownership by trying to force a discussion of the “internationalization” of the oceans and their mineral resources. 
But the UN would have none of it, and Brazil’s ownership was recognized. 
Lula’s government has thought long and hard about how to manage the oil wealth, and has devised a unique program. 
First of all, it wants to spread the wealth by pursuing a new model of regional integration through energy and infrastructure. 
It is planning to create a fund, backed 70% by Brazilian financial resources, that will be dedicated to projects such as rehabilitating roads in Uruguay and Paraguay in order to enhance its neighbors’ capacities and correct economic imbalances. 
Balanced economic development – national and regional – is essential for Brazil. 
Indeed, Lula’s government is planning ways to ensure that the benefits gained from oil and gas are not limited to São Paulo, Rio de Janeiro, Minas Gerais, Parana, and other regions of the developed coast. 
It thinks it is essential to locate refineries, industries, and additional energy-generating units in parts of the country that are both suited for such development and in need of it. 
An additional benefit of dispersing these productive resources will be greater interaction with Brazil’s South American partners. 
Brazil’s new oil reserves will certainly affect regional geo-politics. 
Mexico’s oil fields are diminishing, which means that it may need to look for external supplies. 
Tensions in the Middle East, and growing rivalry between the US and Venezuela, will make Brazil an attractive supplier. 
Brazil is already testing its appeal as an energy power through the actions of its powerful state energy company, Petrobras, which is now as active in Africa as it is in Argentina. 
Indeed, Petrobras is now producing 100,000 barrels a day in both Angola and Nigeria, with the oil marketed locally. 
But the discoveries place Brazil at a crossroads. 
Oil revenues can be controlled by the state to be used, in part, for social programs, as in Venezuela. 
Or private capital can be granted a bigger say, and trust placed in the market to provide for society. 
This ongoing debate has impeded decisions on the future of deep wells in Blue Amazonia. 
Lula’s administration has even thought about creating a new national oil company to deal only with the new fields. 
But this idea has created confusion among Brazil’s trading partners and investors, and does not appear to be making headway. 
There is an even more complex question. 
Brazilian growth will soon to rest on the shoulders of a product that is the main source of global warming. 
Indeed, Brazil’s embrace of an oil-fired future reverses its longstanding policy of reliance on bio-fuels. 
So Brazil is on a collision course with the future. 
The size of the new oil reserves adds even more weight to Brazil’s growing global influence. 
But it will no longer be able to condemn the US for not signing environmental treaties, or point a finger at China for its massive output of pollution. 
Much less will Brazil be able to demand from its neighbors a commitment to sustainable development. 
Oil, it seems, will not only transform Brazil’s economy, but its very role in the world. 

Brazil's Watershed Election 
On October 6th, Brazil will hold its first round presidential elections in a vote that is seen as a referendum on President Fernando H. Cardoso's eight years in power. 
The front-runners -- four-time presidential candidate Luiz Ignacio "Lula" da Silva of the Workers' Party, the leader in the polls all year; and former governor and finance minister Ciro Gomes of the Progressive Socialist Party -- claim that Cardoso's rule made Brazil more vulnerable than ever before to the vagaries of international markets. 
José Serra from the Brazilian Social Democratic Party, Cardoso's favorite, is now running second to Lula after a long summer battle. 
Although aligned with the President, even he avoids saying that his presidency would be a second act to Cardoso's first term. 
That act began in 1994 with the promise of economic stabilization and was extended four years with Cardoso's re-election in 1998. 
During Cardoso's tenure, he privatized telecoms, the national mining company and part of the electric sector. 
Inflation fell, but unemployment, public debt, and urban violence all rose sharply. 
Social inequalities heightened, and last year Brazil suffered blackouts and electricity rationing. 
From the start of the campaign, Lula showed strength, especially after the right's favored candidate, Roseana Sarney, crashed and burned when federal police and prosecutors discovered a load of cash in her husband's office. Mr. and Mrs. Sarney were eventually absolved of all charges, but not soon enough to save her candidacy. 
With Sarney out, Lula reigned supreme in the polls, reaching 43% in mid-May. Then, in early July, Gomes soared to 28%, within striking distance of Lula who had declined to 33%. 
Gomes used the television time available to his three-party Labor Alliance in late June to great effect, but most credit his rise in the polls to the excellent performance of his second wife, popular actress Patricia Pillar, who was recovering from breast cancer. 
Brazil's severe summer market jitters, during which the country's risk index suddenly topped Nigeria's and short term credits for international trade dried up, began to change the face of the election. 
As public debt exceeded 60% of GDP -- inciting the credit rating agencies Standard & Poor's and Moody's to downgrade Brazil's bond rating -- many bankers began to fear a default. 
The Cardoso government adopted an "economic terrorism" strategy to help Serra. The Finance Minister and Central Bank President solemnly declared that "if we do not elect a competent president, in 2003 Brazil will become Argentina." 
Major TV networks depicted upper middle class Argentines facing hard times. But the ploy backfired as Gomes continued to rise in the polls. 
In early August, Brazil speeded up its IMF timetable and began negotiating a new $30 billion agreement. 
To bring the presidential candidates "on board" (as was done in South Korea in 1997), Central Bank President Armínio Fraga invited their representatives to his office for a chat. 
Ten days later, Cardoso did the same with the four leading candidates. 
Although no candidate formally signed off on the agreement, all lent verbal support to it. 
This artifice calmed the markets temporarily, but the candidates became wary about falling into a Brazilian Catch-22. 
If they rejected the IMF agreement, then they would be accused of being anti-market and anti-Brazil. 
If they agreed to it, then they would lose their ability to freely criticize Cardoso's policies. 
"Free" radio and TV time for the candidates began on August 20, and Serra immediately began an intense negative campaign against Gomes. 
Within 10 days the two men were in a dead heat for second place at 17%. 
Lula continued to fall to 37%. 
A runoff now seems inevitable, but who Lula's opponent will be remains unclear. 
In any case, Lula remains the central issue. 
Since 1989, the firebrand labor leader and radical Lula of the 1960s, now in his fourth attempt at the presidency, has mellowed into "Lula lite," offering fewer socialist nostrums and more social-democratic banter. 
Part of this transition reflects Lula's alliance with the center/right Liberal Party and the selection of a wealthy, self-made industrialist, Senator José Alencar, as his running mate. 
Both moves helped Lula begin a dialogue with the private sector and financial institutions. 
Indeed, the Worker Party's national President Deputy, José Dirceu, was favorably received by Wall Street bankers this summer. 
Is this enough? 
Will Lula finally be elected? 
Much depends on his adversary in the second round. 
The government candidate, José Serra, would be a much more difficult opponent than Ciro Gomes. 
Serra will no doubt use television advertisements to show Lula embracing and praising Fidel Castro and Hugo Chavez, a past Lula might wish long forgotten. 
For now, Lula looks strong. 
A recent surge has put Lula within 5 or 6 points of a first-round win. 
Rumors abound that because of the Election Court's blatant bias for Serra and his vicious negative ads, Ciro and/or Garotinho may throw their support to Lula. 
This would avoid a Lula-Serra run-off and strengthen Lula's governing coalition should he assume the presidency. 
But the country's bitter and divisive presidential campaign will leave bad blood, and whoever becomes president will be unable to count on Cardoso's large and cohesive majorities in Congress. 
Moreover, the IMF will still be there, along with its fiscal straight jacket and its rigorous monitoring. 
"Lula lite" may turn out to be even less of a leftist than anyone imagined or feared. 

Bread and Bush-Bashing 
London – I feel a little sorry for President Bush. 
Whatever his other many failings, he has a pretty good record on aid to poor countries, particularly in healthcare. 
True to form, he recently announced a big increase in US food aid – good for the hungry poor and good for American farmers. 
This was a faster response than some other countries have made to the global food crisis. 
After falling for more than 30 years, food prices have recently soared. 
The Economist’s food price index has risen to its highest level since it was started in 1845. 
As has happened throughout history, rocketing prices and shortages have caused riots from Bangladesh to Bolivia. 
The word for bread in Egypt is “aish,” which also means life. 
Threats to life bring crowds on to the streets. 
What made me feel a little sorry for Bush was the reaction to his announcement. 
Bush referred to the reasons for shortages and price hikes. 
He did not dwell on the diversion of American corn from food to heavily subsidized bio-fuels. 
Nor did climate change feature prominently in his argument, although many experts suggest that this may be the cause of the droughts and floods that have ruined wheat harvests in Australia and vegetable oil production in Indonesia and Malaysia. 
Bush pointed his finger primarily elsewhere. 
Food prices had responded to growing demand. 
In Asia, economic growth had stimulated food consumption. 
The Chinese and Indians were eating more and eating better. 
Over a 20-year period, for example, the Chinese had doubled the amount of meat they eat. 
What Bush said is of course true. 
But it is only part of the truth. 
Globalization has benefited India and China, and the rest of us, too. 
One key of the principal reasons for the world’s economic growth from 2000-07, despite wars and terrorist atrocities, was that India and China joined the world economy. 
Hundreds of millions of people were lifted out of poverty. 
But many Indians are still wretchedly poor. 
Too many. 
They have a miserable diet – not least when compared with Bush’s Texan neighbors. 
Grain consumption per head in India has remained static, and is less than one-fifth the figure for the US, where it has been rising. 
I do not imagine you will find too many vegetarians in Crawford, Texas, and the meat consumed by the average American is way ahead of the figure for any other country. 
Think of all those T-bone steaks. 
Bush’s partial explanation of the world food crisis, accurate as far as it went, brought the anger of India’s media and of many politicians down on his head. 
According to India’s Defense Minister, A.K. Anthony, presumably an expert on butter as well as guns, Bush’s statement was “a cruel joke.” 
The parliamentary opposition urged Prime Minister Monmahan Singh, who wisely kept his head down, to join in the populist America-bashing. 
Later in the “cruel joke” week, Bush’s White House compounded the sin. 
According to Bush’s press spokesman, the growth in world demand for oil – in Asia, for example – was one of the causes of the high price of filling the tanks of gas-guzzling Sports Utility Vehicles, as well as more modest family cars, at America’s pumps. 
Meanwhile, the US government papered over the fact that Americans, who make up less than 4% of the world’s population, own and drive 250 million of the world’s 520 million cars. 
More outrage around the world at American double standards. 
Now, all this is more than the knock-about of international politics. 
One day soon, Bush and Cheney will be out of office. 
But we will still be left with the most difficult global issue we have ever faced: as more of us prosper, how do we deal fairly with some of the economic and environmental consequences? 
What do we do about the bottom billion in the world who remain in grinding poverty while the rest of us live better and longer lives? 
How do we deal with equity on a global scale when we cannot even deal with it country by country? 
This conundrum will lie at the heart of the diplomacy next year to find a successor to the Kyoto agreement. 
Can we prevent a calamitous increase in global warming in a way that is fair, that takes account of past and present responsibility, and that does not thwart legitimate hopes for a better life everywhere? 
We have never faced a more difficult political task. 
Meanwhile, there is a food crisis to solve. 
We have already seen many examples of how not to deal with it. 
Stopping food exports is stupid. 
If we restrict market forces, there will be less food and higher prices. 
We should also avoid the cheap political trick of holding down what we pay to poor farmers in order to benefit poor city dwellers. 
Why do governments do this? 
The answer is obvious: city dwellers riot; in the countryside, people just starve. 
The best way to deal with the problem is to subsidize food for the poor; we should not cut the price we pay farmers for growing it. 
Having enjoyed a few days of Bush-bashing, India got on with the job of bowing to pre-election political pressures. 
The government announced that it was suspending trading in futures markets for a number of farm products. 
India has the most economically literate triumvirate of politicians in the world in charge of its economy. 
They must know that this measure will have as much effect on food inflation as rain dancing has on the weather. 

Break to Avoid a Breakup 
The Franco-German axis is proving a nightmare for European unity. 
Within a single month, Gerhard Schroeder's Germany and Jacques Chirac's France first destroyed the EU's Stability Pact and endangered European monetary union by demanding--and receiving--special status for French and German fiscal deficits. 
Now the axis has crushed hopes of passing a new European constitution in Brussels by demanding the so-called "double majority" rule, which would seriously weaken medium-size and smaller countries' voting power by comparison to what was agreed three years ago in Nice. 
European integration can't afford further defeats. 
Trust has been decimated. 
Anger overflows. 
Small and medium-sized EU countries feel tricked. 
Will these countries continue to sacrifice for the common European good when, time after time, the big countries tell them to go to the back of the bus and be grateful for the ride? 
It's time for a pause in European integration efforts if only to avoid a complete, irreparable rupture of relations between nations that are supposed to be uniting. 
The Germans, in particular, need a time out to reflect upon the wisdom of their recent bullyboy tactics. 
Gerhard Schroeder is providing disastrous leadership for Germany. 
The country's "new nationalism" will end in tears for both Germany and Europe. 
Have today's Germans really forgotten that Europeanism is not the best alternative for Germany--it is the only alternative? 
Yet, after last week's Brussels summit ended in failure, the Germans and their French allies are talking up a "two-speed" Europe, with the so-called "pioneer group" of Germany, France, Italy, and the Benelux countries--Belgium, the Netherlands, and Luxembourg--going faster and pursuing deeper integration projects than the others. 
A "two-speed" Europe is, however, a euphemism for abandoning or opting out of European integration by Europe's big three. 
It would decisively split Europe by allowing the big countries and their satellites to go their own way. 
(The Dutch never would go along with this.) 
A "two-speed" Europe means the end of the EU as we know it. 
Of course, if the big countries are not willing to sacrifice any measure of national sovereignty for the overall European good, then a united Europe is doomed. 
That is why the debate over the Stability Pact was so important--and why its demise is so disconcerting: the Germans and the French proved willing to sacrifice little, if anything, for the common European interest. 
Now, after the failure to endorse the draft EU constitution, Schroeder bitterly complains that "some nations are representing their national interests and have left the European idea behind." 
Take a good look in the mirror, Gerhard. 
But, notwithstanding recent defeats, it is far too early to give up on an integrated Europe. 
Chirac and Schroeder--and the current weaknesses in France and Germany that created them--will not last forever. 
Perhaps improved economic growth will give these countries the strength to throw off their present leaders. 
Until France and Germany do change, Europe's game must be a waiting game. 
Time can solve Europe's problem. 
That's why a pause now makes good sense. 
The smaller EU countries also could benefit from a time out. 
Even though the big countries are trying to marginalize them at almost every turn, the small countries cannot unite to fight the common enemy. 
This is because they often see themselves having more in common with the big countries than the other small ones. 
Belgium, for example, is virtually a satellite of France. 
The same is true of Luxembourg. 
Austria is closer to Germany than Finland, and so on. 
Unless the small countries unite on a common front, they will continue to prove easy targets of the big nationalistic players. 
On the issue of big versus small countries, Europe has a lot to learn from the United States. 
Big states comfortably co-exist with small states in the US because America has a bicameral system in which the House of Representatives is based on population, but each state elects two members of the Senate. 
The system is very elastic, and has shown itself able to accommodate an increasing number of states. 
The coming accession of ten new members to the EU would be made much simpler were Europe to find its own equally flexible system. 

Breaking Burma’s Isolation 
NEW YORK – The Obama administration’s decision to seek a new way forward in United States-Burma relations recognizes that decades of trying to isolate Burma (Myanmar) in order to change the behavior of its government have achieved little. 
With Burma’s ruling generals preparing to hold elections later this year – for the first time since 1990 – it is time to try something different. 
Attempting to engage one of the world’s most authoritarian governments will not be easy. 
There is no evidence to indicate that Burma’s leaders will respond positively to the Obama administration’s central message, which calls for releasing the estimated 2,100 political prisoners (including Daw Aung San Suu Kyi), engaging in genuine dialogue with the opposition, and allowing fair and inclusive elections. 
In fact, the recently enacted electoral laws, which have been met with international condemnation, already point to a process that lacks credibility. 
This past fall, we convened a task force under the auspices of the Asia Society to consider how the US can best pursue a path of engagement with Burma. 
We concluded that the US must ensure that its policies do not inadvertently support or encourage authoritarian and corrupt elements in Burmese society. 
At the same time, if the US sets the bar too high at the outset, it will deny itself an effective role in helping to move Burma away from authoritarian rule and into the world community. 
During this period of uncertainty, we recommend framing US policy toward Burma on the basis of changes taking place in the country, using both engagement and sanctions to encourage reform. 
The Obama administration’s decision to maintain trade and investment sanctions on Burma in the absence of meaningful change, particularly with regard to the Burmese government’s intolerance of political opposition, is correct. 
Yet there are other measures that should be pursued now. 
The US should engage not only with Burma’s leaders, but also with a wide range of groups inside the country to encourage the dialogue necessary to bring about national reconciliation of the military, democracy groups, and non-Burmese nationalities. 
The removal by the US of some noneconomic sanctions designed to restrict official bilateral interaction is welcome, and an even greater relaxation in communications, through both official and unofficial channels, should be implemented. 
Expanding such channels, especially during a period of potential political change, will strengthen US leverage. 
To reach the Burmese people directly, the US should continue to develop and scale up assistance programs, while preserving cross-border assistance. 
Assistance to non-governmental organizations should be expanded, and US assistance also should be targeted toward small farmers and small- and medium-sized businesses. 
Educational exchanges under the Fulbright and Humphrey Scholar programs and cultural outreach activities should be increased. 
These programs produce powerful agents for community development in Burma, and can significantly improve the prospects for better governance. 
US policy should shift to a more robust phase if Burmese leaders begin to relax political restrictions, institute economic reforms, and advance human rights. 
If there is no movement on these fronts, there will likely be pressure in the US for tightening sanctions. 
If there is no recourse but to pursue stronger sanctions, the US should coordinate with others, including the European Union and ASEAN, to impose targeted financial and banking measures to ensure that military leaders and their associates cannot evade the impact of what otherwise would be less-effective unilateral sanctions. 
If a different scenario emerges, it should open the way for a much more active US role in assisting with capacity building, governance training, and international efforts to encourage economic reforms. 
One priority should be the development of an appropriate mechanism for ensuring that revenues from the sale of natural gas are properly accounted for, repatriated, and allocated to meet urgent national needs. 
In adjusting its policy toward Burma, the US must face reality with a clear vision of what its foreign policy can achieve. 
US influence in Burma is unlikely to outweigh that of increasingly powerful Asian neighbors. 
Therefore, the US should make collaboration with other key stakeholders, particularly ASEAN, the United Nations, and Burma’s neighbors – including China, India and Japan – the centerpiece of its policy. 
In every respect, conditions in Burma are among the direst of any country in the world, and it will take decades, if not generations, to reverse current downward trends and create a foundation for a sustainable and viable democratic government and a prosperous society. 
The US needs to position itself to respond effectively and flexibly to the twists and turns that a potential transition in Burma may take over time, with an eye toward pressing the Burmese leadership to move in positive directions. 

Breaking Free from Fossil Fuels 
BERN – There has never been a better time to break free from fossil fuels. 
Record-breaking global temperatures, plummeting fossil-fuel prices, historic investments in renewable energy, and global pressure to honor climate pledges are all coming together to create the ideal setting for this world-changing shift. 
The shift could not be more urgent. 
The United Nations climate agreement forged in Paris last December reconfirmed the level of 2°C above pre-industrial levels as a hard upper limit for global warming, beyond which the consequences for the planet become catastrophic. 
But it also included commitments to “pursue efforts” to limit warming to 1.5°C. Judging by the latest data published by NASA, achieving that lower limit should be viewed as an imperative. 
The new data confirm that 2015 was the hottest year on record, and show that the global run of record-breaking temperatures continued through the first two months of this year. 
According to NASA, global temperatures in February were 1.35°C above average, based on a 1951-1980 baseline. 
Fortunately, the privileged position of fossil fuels already seems to be weakening. 
In fact, according to the International Energy Agency (IEA), global greenhouse-gas emissions and economic growth have already decoupled, with global energy-related CO2 (the largest source of human greenhouse-gas emissions) having remained at the same level for the second year in a row. 
This means that fossil fuels are no longer the lifeblood of our economy. 
It seems that the precipitous decline in oil prices – by two-thirds over the last 18 months – has not, as many feared, encouraged increased consumption. 
What it has done is deal a major blow to the profits of fossil-fuel giants like Shell, BP, and Statoil. 
Coal is not faring any better. 
Following China’s announced moratorium on new coal-fired power plants at the end of last year, Peabody, the world’s largest coal company, recently filed for bankruptcy protection in the US, after it could no longer make its debt payments, partly because of waning demand for coal. 
Meanwhile, renewable energy sources are receiving record amounts of investment – some $329.3 billion last year, according to research from Bloomberg New Energy Finance. 
As a result, a cleaner, fairer, and more sustainable future, powered entirely by renewables, is starting to become a real option. 
Yet there is still a long way to go. 
Most governments are still clinging, to varying degrees, to destructive fossil fuels, with their volatile prices and devastating environmental impact, even as this dependence destabilizes their economies. 
Those committed to addressing climate change – from international organizations to local communities to individual citizens – must urgently build on the momentum acquired over the last year, by maintaining strong pressure on governments and companies to pursue the policies and investments needed to complete the break from fossil fuels. 
Just as a warming planet puts us all at risk, scaling up action early benefits everyone. 
And it is up to everyone to hold leaders accountable to their promises, and to science. 
Global movements such as Break Free have been exemplary in this regard. 
By backing campaigns and mass actions aimed at stopping the world’s most dangerous fossil-fuel projects – from coal plants in Turkey and the Philippines, to mines in Germany and Australia, to fracking in Brazil, and oil wells in Nigeria – Break Free hopes to eliminate the power and pollution of the fossil-fuel industry, and propel the world toward a sustainable future. 
Recognizing the scale and urgency of the challenge ahead, Break Free is prepared to intensify its peaceful resistance against new and existing fossil-fuel projects. 
The key will be the strength and bravery of communities demanding that we keep fossil fuels in the ground and instead build a healthier and more just world, in which everyone has access to sustainable energy. 
The world is closing in on a historic shift in our energy system. 
To accelerate progress, we must confront those who are profiting from climate change and defend the interests of ordinary people. 
Next month’s mobilizations against fossil-fuel projects are an important step in the right direction. 
The struggle finally to break free from fossil fuels is a global one. 
Nobody can afford to ignore it. 

Breaking the Climate Deadlock 
LONDON – On July 9, the leaders of the world’s largest economies will meet in L’Aquila, Italy, at the Major Economies Forum (MEF) to discuss progress towards a new global climate agreement. 
In six months, a deal is supposed to be struck in Copenhagen, so the MEF meeting comes at a vital moment. 
When many of the same leaders met in April to address the economic crisis, they rightly pledged to do “whatever is necessary.” 
The same spirit needs to animate the L’Aquila meeting. 
There is enormous good will to do so. 
The new US administration is supporting strong American action. 
China is setting ambitious targets for reducing energy intensity and making massive investments in renewable energy. 
India has put forward its own action plan. 
Europe has set a goal of cutting emissions by 30% below 1990 levels by 2020 if there is an ambitious global agreement. 
Japan has published its proposals for major carbon reductions. 
Across the world, commitments are forthcoming. 
But practical challenges remain. 
What is being asked is that global emissions be less than half their 1990 levels by 2050, having peaked before 2020. 
Since emissions from the developing countries are on the whole lower than those of the developed world – and will need to continue to rise in the short-term as they maintain economic growth and address poverty – it has been proposed that developed countries cut emissions by at least 80% relative to 1990 by 2050, with major steps towards this goal over the next decade. 
Developing countries will also need to play their part, significantly slowing and peaking emissions growth in the coming decades. 
For the US, such commitments would mean cutting emissions to around one-tenth of today’s per capita level, while for China it would mean creating a new low-carbon model of economic development. 
For all countries, this is a major challenge – a revolution that implies a huge shift in policy. 
The good news is that if we focus on clear, practical, and achievable goals, major reductions can be made in order to ensure that, whatever the precise interim target, the world will fashion a radical new approach within a manageable timeframe. 
A new report from the “Breaking the Climate Deadlock” project, a strategic partnership between my office and The Climate Group, shows how major reductions even by 2020 are achievable if we focus action on certain key technologies, deploy policies that have been proven to work, and invest now in developing those future technologies that will take time to mature. 
Perhaps the most interesting fact to emerge is that fully 70% of the reductions needed by 2020 can be achieved by investing in three areas: increasing energy efficiency, reducing deforestation, and use of lower-carbon energy sources, including nuclear and renewables. 
Implementing just seven proven policies – renewable energy standards (e.g., feed-in tariffs or renewable portfolio standards); industry efficiency measures; building codes; vehicle efficiency standards; fuel carbon content standards; appliance standards, and policies for reduced emissions from deforestation and forest degradation (REDD) – can deliver these reductions. 
All seven policies have already been successfully implemented in countries around the world, but they need scaling up. 
While cap-and-trade systems or other means of pricing carbon emissions can help provide incentives for businesses to invest in low-carbon solutions, in the short term at least, these seven policy measures – and direct action and investment by governments – are needed to achieve the targets. 
In the longer term, we also need technologies such as carbon capture and storage (CCS), expanded nuclear power, and new generations of solar energy, together with the development of technologies whose potential or even existence is still unknown. 
The important thing for Copenhagen is that decisions are taken now for investments that will yield benefits later. 
For example, the overwhelming majority of new power stations in China and India – necessary to drive the industrialization that will lift hundreds of millions out of poverty – will be coal-fired. 
That is just a fact. 
So developing CCS or an alternative that allows coal to become clean energy is essential for meeting the 2050 goal. 
But we need to invest now, seriously and through global collaboration, so that by 2020 we are in a position to scale up CCS or be ready to deploy other alternatives. 
Renaissance of nuclear power will require a big expansion of qualified scientists and engineers. 
Electric vehicles will need large adjustments to infrastructure. 
Smart grid systems can enable big savings in emissions, but require a plan for putting them into effect. 
These measures will take time, but require investment now. 
Meanwhile, in the short term, low energy lighting and efficient industrial motors may sound obvious, but we are nowhere near using them as extensively as we could. 
So we know what we need to do, and we have tools available to achieve our goals. 
MEF leaders can therefore have confidence in adopting the interim and long-term targets recommended by the scientific community: keeping warming to below two degrees Celsius; peaking emissions within the next decade; and at least halving global emissions by 2050 versus 1990. 
Developed countries will be able to commit to reducing their emissions by 80% versus 1990 by mid-century, as many have already done, and provide the necessary financial and technology support for developing countries’ adaptation and mitigation efforts. 
With that support, developing countries in turn will need to design and implement “Low-Carbon Growth Plans” that significantly slow and eventually peak their emissions growth. 
By making these commitments, the MEF leaders, whose countries account for more than three-quarters of global emissions, would lay a firm foundation for success in Copenhagen. 
Between L’Aquila and Copenhagen, there will undoubtedly be difficult discussions over interim targets for developed countries. 
While such targets are important, what matters most is agreement on the measures that ultimately will set the world on a new path to a low carbon future. 
For years, the emphasis has rightly been on persuading people that there must be sufficient “will” to tackle climate change. 
But leaders, struggling to cope with this challenge even amidst economic crisis, need to know that there is also “a way.” 
Only by combining the two will we succeed. 
Fortunately, such a way – immensely challenging but nonetheless feasible – exists. 


Breaking the Neoclassical Monopoly in Economics 
For 25 years, the so-called “Washington Consensus” – comprising measures aimed at expanding the role of markets and constraining the role of the state – has dominated economic development policy. 
As John Williamson, who coined the term, put it in 2002, these measures “are motherhood and apple pie, which is why they commanded a consensus.” 
Not anymore. 
Dani Rodrik, a renowned Harvard University economist, is the latest to challenge the intellectual foundations of the Washington Consensus in a powerful new book titled One Economics, Many Recipes: Globalization, Institutions, and Economic Growth . 
Rodrik’s thesis is that though there is only one economics, there are many recipes for development success. 
Rodrik has rendered a major service by stating so openly the claim of “one economics.” 
A critic who made the same claim that economics allows only one theoretical approach would be dismissed as paranoid, whereas Rodrik’s standing creates an opportunity for a debate that would not otherwise be possible. 
The “many recipes” thesis is that countries develop successfully by following eclectic policies tailored to specific local conditions rather than by following generic best-practice formulas designed by economic theorists. 
This challenges the Washington Consensus, with its one-size-fits-all formula of privatization, deregulated labor markets, financial liberalization, international economic integration, and macroeconomic stability based on low inflation. 
But, while the many recipes thesis has strong appeal and empirical support, and suggests a spirit of theoretical pluralism, the claim of “one economics” is misguided, for it implies that mainstream neoclassical economics is the only true economics. 
Part of the difficulty of exposing this narrowness is that there is a family split among neo-classical economists between those who believe that real-world market economies approximate perfect competition and those who don’t. 
Believers are identified with the “Chicago School,” whose leading exponents include Milton Friedman and George Stigler. 
Non-believers are identified with the “MIT School” associated with Paul Samuelson. 
Rodrik is of the MIT School, as are such household names as Paul Krugman, Joseph Stiglitz, and Larry Summers. 
This split obscures the underlying uniformity of thought. 
The Chicago School claims that real-world market economies produce roughly efficient (so-called “Pareto optimal”) outcomes on which public policy cannot improve. 
Thus, any state intervention in the economy must make someone worse off. 
The MIT School, by contrast, argues that real-world economies are afflicted by pervasive market failures, including imperfect competition and monopoly, externalities associated with problems like pollution, and an inability to supply public goods such as street lighting or national defense. 
Consequently, policy interventions that address market failures – as well as widespread information imperfections and the non-existence of many needed markets – can make everyone better off. 
None of this is about fairness, which is a separate issue. 
Indeed, neither the Chicago School nor the MIT School say that market outcomes are fair, because actual market outcomes depend on the initial distribution of resources. 
If that distribution was unfair, current and future outcomes will be unfair, too. 
Chicago economists seem to believe that real-world outcomes are acceptably unfair and, more importantly, that attempts to remedy unfairness are too costly, because tampering with markets causes economic inefficiency. 
They believe that government intervention tends to generate its own costly failures because of bureaucratic incompetence and rent-seeking, whereby private interests try to steer policy to their own advantage. 
MIT economists tend to espouse the opposite: fairness is important, the real world is unacceptably unfair, and government failure can be prevented by good institutional design, including democracy. 
These differences reflect the intellectual richness of neo-classical economics, but they provide no justification for the claim that there is one economics. 
On the contrary, heterodox economists like Thorsten Veblen and Joseph Schumpeter long ago raised many of today’s cutting-edge issues in neoclassical economics, including the role of social norms and the relationship between technological innovation and business cycles. 
Heterodox economics includes core theoretical concepts that are fundamentally incompatible with neoclassical economics in either of its two contemporary forms. 
These concepts result in significantly different explanations of the real world, including income distribution and the determinants of economic activity and growth. 
Moreover, they often result in different policy prescriptions. 
The late Robert Heilbronner – one of Schumpeter’s most renowned students – viewed economics as “worldly philosophy.” 
Just as philosophers are divided on the nature of truth and understanding, economics is divided on the workings of the real world. 
Paradigms should co-exist in economics, just as in other social sciences. 
Yet, in practice, the dominance of the belief in “one economics,” particularly in North America and Europe, has led increasingly to a narrow and exclusionary view of the discipline. 
This reality is difficult to convey. 
One reason is that liberal neo-classical economists like Stiglitz and Krugman share values with heterodox economists, and shared values are easily conflated with shared analysis. 
Another reason is that heterodox and MIT School economists also often agree on policy, even if their reasoning is different. 
Finally, most people are incredulous that economists could be so audacious as to enforce one view of economics. 
The “many recipes” thesis enriches neo-classical economics’ contribution to the development debate, and many of its policy proposals will find support from heterodox economists. 
However, it fails to engage the deep intellectual divisions regarding economic development, trade, and globalization, because it refuses to admit the legitimacy of such disagreements. 
By repeating the claim of “one economics,” Rodrik inadvertently reveals the censorship embedded in contemporary economics. 
The great challenge is not to admit that there are many recipes, but rather to create space for other perspectives on economic analysis and policy. 

Breaking the Windows Barrier 
Kyoto – As 2009 commences, Microsoft is previewing its next-generation operating system, Windows 7, which is remarkable only in that it is almost the same as every previous version. 
Stagnation in computer design is not surprising, considering that familiarity is so comfortable. 
But it can also stifle development. 
Military intelligence depends on ever-improving communication, so it is one area in which system design is constantly changing. 
Some of those innovations will eventually trickle into the mainstream, so a glimpse at current experiments can reveal what the future of ordinary computer interaction could look like, and what would be gained. 
For the lay user, technology is encountered mostly as an interactive interface. 
People rarely consider that the tangible features assumed to be intrinsic to the “computer” were imitations of other objects, with keyboards inherited from typewriters and screens from television. 
Inside the computer screen is a virtual 1950’s office, with paper documents, filing cabinets, and a garbage can. 
This page-window format is known as Window-Icon-Mouse-Pointer, or WIMP, which, due to monopoly forces, has been the universal paradigm since the 1980’s – ancient history in computer years. 
These formats are taken for granted, just as we accept telephone keypads and car dashboards, which are also user interfaces. 
It is easy to forget that, years ago, telephones had no buttons or dial – you had to pick up the handset and ask an operator to make the connection. 
The telephone dial didn’t appear until 1919, when the first group of self-designated “user interface scientists” at Western Electric considered what the most intuitive form should be. 
When improving a computer interface, form is the key. 
We’ve seen hints of a new paradigm in Apple’s iPhone, which allows gestural finger motions, but in the intelligence community, concept visualization can be so radical that most ordinary users might barely recognize what it was. 
Designs are inspired by cognitive science, the arts, even science fiction. 
Ironically, a recent trend reaches far into the past, to a traditional Japanese concept known as katachi , which is emerging as an international movement. 
“Katachi” literally means “form” in Japanese, but the concept has complex connotations that do not exist in other languages. 
The word is a composite of two terms, “kata” (pattern) and “chi” (magical power), so it includes nuances such as “complete assembly” and “shape that tells an attractive story.” 
This richer notion stems from ancient Japanese culture, which perceived the overlap between geometry and meaning. 
The Chinese symbol for “form” carries some of the same reasoning, due to its use of ideograms. 
Four thousand years ago, China developed a writing system that conveyed concepts both as idea and picture. 
Notions such as “wooden structure” and “beauty” were indicated by symbols which, when combined, could create a new concept, such as “form.” 
Governments in countries colonized by China were forced to adopt this pictographic writing system in order to receive political regulations, but the pronunciation of the characters was not controlled. 
The colonized were able to maintain aspects of their local culture through different aural versions of the same written “word” because the common meaning existed only in the shape. 
Modern user interface scientists are interested in katachi because it can reveal how form facilitates human interaction. 
A traditional example is the tea ceremony, which was developed in Japan in the late sixteenth century. 
The format is simple – a host serves tea with some sweets, the guests drink it and then express thanks; that’s all. 
Foreigners are often mystified as to why such a minimalist event can require years of training. 
But the motivation for this art is common to every culture: imagine a talented host from any country whose manner is so easy that guests are wrapped in a mood of quiet happiness. 
In the tea ceremony, this ability has been refined into a skill that combines materials, meaning, and mood. 
Those with high ability know how the guests’ experience can be improved with careful preparations of tools, reflective conversations, and natural yet well-controlled body motions. 
Physical movements embody the intended meaning of the event, so the whole environment becomes a signifier. 
Small innovations are often introduced into the style of hospitality to suggest the personality of the host. 
An operating system based on katachi’s insights would harness this overlap between shape, sense and environment. 
It might allow you to feel the “form” of a concept with your hands. 
Or it could indicate the reliability of data based on whether it was laid out neatly or had a scrambled appearance, so it could be assessed at a glance. 
Perhaps future interfaces will allow us to communicate across language barriers by immersing us in assemblies of pictures – a hybrid between movies, architecture and email. 
Expressive icons represent thought, but can only communicate complex subtleties and situations if they allow multiple levels of understanding. 
Computer scientists might be in a unique position to enable richer communication, and perhaps a more stable future as a consequence. 
For this reason, let us hope that more developers explore this so-called “disruptive” side of technology during the coming year. 

Breathe Easy About Beijing 
Images of the Beijing skyline seemingly bathed in a soup of smog and haze have been a common sight on the world’s TV screens in recent days and weeks. 
Foreign journalists with hand-held air pollution detectors have been popping up on street corners checking levels of soot and dust. 
Everyone seems keen to prove that the city’s air will be a decisive and debilitating factor for one of the world’s most high-profile sporting events. 
Without doubt Beijing is facing a huge challenge. 
There are real and understandable concerns for the health of competitors, especially those in endurance and long-distance events such as cycling and the marathon. 
But the current frenzied focus is marked by considerable amnesia. 
After all, air pollution was a major concern in Los Angeles 24 years ago, though few now seem to recall the dramatic scene at the end of the women’s marathon, when the Swiss competitor was seen staggering and stumbling from exhaustion, the heat, and, perhaps, the effects of air pollution. 
And air quality was also an issue for subsequent Olympic Games in Barcelona, Atlanta, Seoul, and Athens. 
So the debate about the Beijing Games deserves more fair play than it has received. 
Indeed, real and, one hopes, long-lasting achievements have been made by the Beijing Organizing Committee for the Olympic Games, the city as a whole, the government, and the six provinces concerned. 
This is all the more remarkable when set against the city’s double-digit economic growth and the fact that the Games are being staged in a developing country, with all the social, economic, health, and environmental challenges this entails. 
For example, some 200 polluting factories have been closed, switched to new kinds of cleaner production, or moved out of the city over the past seven years. 
Moreover, as a result of a $17 billion investment, more than 90% of the city’s wastewater is now treated, more than 50% of the city is forested, and natural gas accounts for more than 60% of energy generation, up from roughly 45% in 2000. 
Meanwhile, eight new railway lines, covering 200 kilometers and with a daily capacity of close to four million people, have become operational this year, alongside 60 kilometers of bus lines. 
New vehicle emission standards meet the most stringent equivalent European standards, and are higher than in the United States. 
In addition, 50,000 old taxis and 10,000 buses have been replaced, and 4,000 of the new buses are powered by natural gas – now the largest fleet of its kind in the world. 
In recent days, the authorities have also requested businesses to stagger the working day before, during, and after the Games to reduce traffic volumes, alongside a raft of other traffic-cutting measures. 
Then there is the attention to eco-detail at the Olympic venues themselves, including the 400,000-square meter Olympic Village, where water reclaimed from the Qinghe sewage treatment plant is being used for heating and cooling systems, resulting in an estimated 60% savings in electricity consumption. 
Only time will tell if all these measures will bring air pollution down to acceptable levels. 
The United Nations Environment Program will certainly make this a focus of its post-Games report, building on the initial one issued in 2007. 
But it is clear that Beijing is striving to be part of the Green Team, embracing environmental standards that are now central to the modern Olympic movement, and that are increasingly part of other big sporting events, such as the Green Goals for the 2006 and 2010 FIFA World Cups. 
Increased public awareness, the ability to showcase new and more sustainable ways of managing an urban setting, and the legacy of more environmentally friendly energy, transport systems, and other infrastructure should also not be underestimated. 
Humanity is currently engaged in a far-reaching and urgent competition that pits the need to embed a twenty-first century “green economy” against the rapid implosion of our climate and natural life-support systems. 
The catalytic and inspirational possibilities of events like the Olympics thus have a wider role to play, one that might just help prevent us from staggering and collapsing under the weight of our environmental degradation. 

Brecht on Brexit 
LONDON – In the wake of the 1953 workers’ uprising in East Germany, the playwright Bertolt Brecht mordantly suggested that “if the people had forfeited the confidence of the government,” the government might find it easier to “dissolve the people and elect another.” 
It is a sentiment that resonates with many in the United Kingdom today, in the aftermath of June’s Brexit referendum. 
In the heat of the referendum campaign, Michael Gove, then the justice secretary and a leading member of the “Leave” camp, said, “I think the people of this country have had enough of experts from all kinds of organizations with acronyms, who have consistently got it wrong.” 
His targets were the IMF, the OECD, the LSE, and all the other covens of economists who argued that leaving the European Union would damage the British economy. 
Unfortunately, Gove was right – not about what would happen to the economy, but about UK voters’ low regard for economic expertise. 
Despite the near-unanimous view of the economics profession that Brexit would tip the UK into recession and lower its long-term growth rate, voters went with their hearts, not their wallets. 
The “Remain” campaign was accused of using the economists’ warnings to try to frighten voters into submission. 
Some have argued that the blame for the referendum’s outcome lies with economists themselves, because they were unable to speak a language that ordinary people could understand. 
A similar charge is made against bankers and other financiers, who, widely perceived to be arguing from narrow sectoral self-interest, were equally unpersuasive. 
There is undoubtedly some truth in this criticism, but the problem was not simply over-complex language and impenetrable jargon. 
The economists all began from the assumption that the UK was doing fine, with GDP growth well above the European average, and unemployment well below. 
It seemed self-evident that EU membership was good for Britain, especially as we had avoided joining the euro and were thus not tied up in monetary and fiscal knots designed in Brussels and Frankfurt. 
The problem was that this rosy picture did not resonate with voters outside London and the Southeast of England, for reasons set out with great clarity in a recent speech by Andy Haldane, the Bank of England’s chief economist. 
Haldane cites national statistics showing that Britain’s GDP is 7% above its pre-crisis peak, employment is 6% higher, and wealth is 30% greater. 
But, he adds, national income per head is flat. 
Median real (inflation-adjusted) wages have barely risen since 2005. 
The UK population has grown, partly owing to immigration. 
The recorded increase in wealth has come about mainly from increases in property prices in favored areas, especially London, and in the value of occupational pensions. 
If you are not lucky enough to own property in the Southeast of England, and are not in a final-salary pension scheme, your wealth has stagnated or fallen. 
The regional breakdown of GDP figures shows that London and the Southeast are the only areas of the UK where people are better off, on average, than they were in 2009, at the trough of the recession. 
It may well be true that Brexit will exacerbate these inequalities. 
If intra-European trade barriers are imposed, and companies choose to invest elsewhere to access Europe’s single market, lower-paid jobs in disadvantaged regions may disappear altogether, or wages will fall further. 
But that sounds like “expert” talk, and the former Leave campaigners have a response to it: economists are talking down the UK to prove that their gloomy forecasts were correct. 
If the experts couldn’t be trusted before the referendum, they certainly can’t be trusted now. 
That is the inauspicious background against which talks on the UK’s future relationship with the EU will soon begin. 
It is especially unfavorable for the City of London. 
There is clearly a trade-off between access to the single market, which most financial firms greatly desire, and one of its main conditions: freedom of movement for EU citizens, which is seen as having contributed to wage stagnation in the rest of the UK. 
So an outcome that benefits London (which, unsurprisingly, voted overwhelmingly to remain in the EU) must be advocated with subtlety and care, lest it be seen as sacrificing the wellbeing of the many to the interests of a few. 
The strongest argument in favor of remaining in the single market is that putting the City of London at risk jeopardizes the entire UK economy. 
Financial services may account for only 3% of employment, but they generate 11% of tax revenues. 
Killing the goose that lays the golden tax egg would be foolhardy: if the economy slows, which seems the best we can expect, those revenues will be sorely needed. 
And at a time when the UK’s balance-of-payments deficit is over 5% of GDP (the second largest in the OECD), the financial sector’s 3%-of-GDP trade surplus has been essential to prevent an external blowout. 
It is no surprise, therefore, that sterling has dropped sharply since the Brexit vote. 
Some argue that exchange-rate depreciation will narrow the trade deficit by making British exports more competitive, but the experience of 2008, when the pound also fell sharply, is that the impact on the external deficit may not be great. 
The UK has few price-sensitive exports for which there is significant spare capacity available to expand production. 
So these are nervous times in London’s financial markets. 
We need new experts, unadorned with despised acronyms like IMF, to explain the unpleasant facts of economic life to a highly suspicious public. 
No one should take Brecht’s ironic suggestion seriously. 
The British people have spoken, and a way must be found to achieve their desires at the lowest possible economic cost. 

Breivik’s Call to Arms 
NEW YORK – Let us assume, for the sake of argument, that Geert Wilders, the Dutch politician who is convinced that Europe is “in the final stages of Islamization,” is right: Anders Breivik, the Norwegian mass murderer, is mad. 
Wilders tweeted: “That a psychopath has abused the battle against Islamization is disgusting and a slap in the face of the worldwide anti-Islam movement.” 
This assumption is not so far-fetched. 
Murdering more than 60 innocent young people at a summer camp with an assault rifle, after bombing a chunk of central Oslo, is, to put it mildly, morally eccentric – something most sane people would never dream of doing. 
The same is true, naturally, of a group of young men who decide to commit suicide and mass murder by flying commercial airliners into large public buildings in New York and Washington. 
But neither Breivik, nor the terrorists of September 11, 2001, killed without reason, in the way some nihilistic American shooters do. 
Islamists view their acts of random mass murder not as a personal publicity stunt, but as a tactic in a holy war against the decadent, sinful West. 
Breivik is, in his own mind, a warrior for the other side. 
His aim was to protect the West from Islamization. 
His enemies are not just Muslims, but the liberal Western elites, and their children, who were destroying Europe from within through “multiculturalism” and “cultural Marxism.” 
In fact, what Breivik wrote in his rambling manifesto, entitled A European Declaration of Independence, is more or less what populists, such as Geert Wilders, have been saying. 
Of course, there was much else in the manifesto – fantasies about reviving the medieval Knights Templar, for example – that suggests a more bizarre disposition, and Wilders was quick to distance himself from Breivik’s violent methods. 
Indeed, only one right-wing European politician, Francesco Speroni of the Italian Northern League, which is part of Silvio Berlusconi’s government, was prepared to defend Breivik. 
Speroni claimed that Breivik’s “ideas are in defense of western civilization.” 
So, how seriously must we take the ideological reasons that killers like Breivik and the September 11 terrorists invoke to justify their murders? 
A few years ago, the German writer Hans Magnus Enzensberger wrote a fascinating essay about the “radical loser.” 
Radical losers are mostly young men who are so enraged by their own lack of social, economic, and sexual self-esteem and the indifference of the world around them, that they long for a suicidal act of mass destruction. 
Anything can trigger such an act: rejection by a girl, being fired from a job, failing an examination. 
And sometimes the killers reach for ideological justifications: building pure Islam, struggling for communism or fascism, or saving the West. 
The particular ideals might be unimportant – simply those that happen to be available, owing to fashion or other historical circumstances. 
Once a radical loser is in the mood to kill, any reason will do. 
Perhaps. 
But does this mean that there is no link at all between the stated views of radical clerics or politicians and the acts committed in the name of those opinions? 
For all the finger pointing at Wilders, just because Breivik professed to admire him, the acts of a deranged killer, others caution, should not be used to discredit what he stands for. 
After all, there is nothing irrational, or murderous, about claiming that multiculturalism is a flawed ideal, or that Islam conflicts with modern Western European views of gender equality or gay rights, or that mass immigration will cause serious social conflicts. 
These claims began to be made by respectable conservatives, and even some social democrats, in the 1990’s. 
They reacted against a rather smug liberal establishment that tended to dismiss all critical thought about immigration or non-Western faiths and traditions as racism and bigotry. 
But, while there was nothing intrinsically wrong with discussing the social consequences of large-scale immigration from Muslim countries, some populists in Holland, Denmark, France, Germany, Belgium, Britain, and other countries, went much further. 
Wilders, in particular, likes to speak in apocalyptic terms of “the lights going out over Europe,” and “the sheer survival of the West.” 
And the problem is not just a particular strain of violent revolutionary Islam, but Islam itself: “If you want to compare Islam to anything, compare it to communism or national socialism – a totalitarian ideology.” 
This is the language of existential war, the most dangerous kind. 
Indeed, the terminology of World War II is being deliberately revived. 
Those who oppose radical hostility to all forms of Islam are “appeasers” of, or “collaborators” with, “Islamofascism.” 
For some, September 11, 2001, was analogous to 1938, or even 1940. 
The very survival of Western civilization is at stake. 
Is it really so surprising that certain people might mistake this rhetoric for a call to arms? 
To be sure, neither Geert Wilders, nor even rabidly anti-Islamic bloggers in the United States, such as Scott Spencer and Pamela Geller (both of whom were quoted extensively in Breivik’s manifesto), have called for physical violence. 
But their writings and statements have been sufficiently hysterical and hateful to incite a person with an unbalanced mind. 
Indeed, Breivik’s interpretation of their words is, in an odd way, more rational than the idea that a war for our very survival can be fought with words alone. 

The Sum of All Brexit Fears 
LONDON – Day after day, week after week, most British citizens think that the turmoil over their country’s proposed exit from the European Union cannot get any worse. 
But, without fail, it does. 
Turmoil turns into humiliating chaos; a political crisis threatens to become a constitutional crisis. 
Meanwhile, the date of the United Kingdom’s departure from the EU gets closer. 
It is fewer than 100 days until the UK leaves, and at the moment there is no deal in sight that is acceptable to both Parliament in Westminster and the European Commission and European Council in Brussels. 
The problem began with the 2016 referendum vote to leave. 
Unfortunately, despite plotting and planning for this outcome for years, Leavers had no idea what quitting the EU would actually entail. 
Their campaign was rife with delusions and dishonesty. 
Leaving, they said, would mean a financial bonanza, which the UK would inject into its National Health Service. 
Negotiating a trade deal with the EU after departure would be easy. Other countries around the world would queue up to make deals with Britain. 
All lies. 
The Brexit talks themselves, when they finally began, were hampered by the incompetence of the ministers put in charge. 
The UK’s negotiators were long on ideological certainty and short on workable solutions. 
Moreover, the red lines that Prime Minister Theresa May laid down at the very beginning made their work more difficult. 
We must not only leave the EU, she argued, but also the single market and the customs union. 
We could not accept any jurisdiction by the European Court of Justice. 
We must be able to end the freedom of European citizens to come to the UK to staff our hospitals, pick our crops, fill gaps in our professional services, and increase our prosperity. 
One of the central problems to emerge from this mish-mash of nonsense was how to avoid re-establishing a hard border between Northern Ireland and the Republic of Ireland if the UK stayed within May’s red lines. 
Such a border would (as the head of Northern Ireland police noted) jeopardize the 1998 Good Friday Agreement, which brought peace to Northern Ireland after three decades of violence. 
Recent negotiations have stalled on this point, because a successful outcome must square a circle. 
Britain has already accepted that Northern Ireland will have to stay in the customs union until the UK has concluded a long-term trade deal with the EU. 
Until then, there will have to be an insurance policy – a “backstop” – against possible failure. 
But hard-liners within May’s Conservative Party, and Democratic Unionist MPs from Northern Ireland, on whom May depends for her parliamentary majority, will accept only a backstop with a time limit, which is no real “stop” at all. 
At the root of May’s difficulties is a simple truth that she and others are unwilling to accept. 
It is well-nigh impossible to negotiate an exit deal that is both in the national interest and acceptable to the right-wing English nationalists in her party. 
This became crystal clear during a grim week for the government earlier this month. 
After May and her advisers concluded that the exit deal she had negotiated with the EU would be defeated in Parliament by a large majority, they suspended the debate before voting took place. 
May then announced that she was going to talk to other EU presidents and prime ministers to get the sort of reassurances that might satisfy her right-wing critics. 
Those critics have operated increasingly like a party within a party. 
Halfway through May’s frantic diplomatic safari, they announced that they had gathered enough support to trigger a vote of no confidence in her leadership of the Conservative Party. 
She won the vote with about two-thirds support, but with her authority badly dented. 
Capping an awful week, European ministers made clear that they were not prepared to reopen the agreement with Britain to renegotiation. 
They could offer “best endeavours” and “good will,” but no more. 
So what happens next? 
May’s supporters think she is determined; others reckon she is simply obstinate and blind to reason. 
She has continued to put off any debate on her own proposals. 
Critics say she is trying to push any vote as close to the exit date as possible, in order to pressure MPs to support her plan. 
“Back my plan or face the disaster of no deal,” she seems to be saying. “Support me or we’ll jump off the cliff.” 
But pressure is building for Parliament to take control of the process and work through a more acceptable range of options. 
Is there a majority in favor of May’s deal? 
Is Parliament totally opposed to crashing out of Europe with no deal? 
Should we seek a Norway-style relationship with Europe and aim to stay in both the single market and the customs union, at the cost of continuing to accept free movement of workers? 
Should we try to postpone the date of our EU departure until we have sorted out what exactly we want? 
Should there be another referendum, passing the final decision back to the people? 
A fog of political uncertainty hangs over Britain after Christmas. 
Only four things seem clear. 
First, the Conservative Party will have growing difficulty accommodating its fanatical English nationalist wing. 
Second, to save the UK from disaster, Parliament will have to get a grip on the process. 
Third, life outside the EU will, in any case, leave Britain poorer and less influential in the world. 
And, lastly, whatever the outcome, Brexit will be a divisive issue for years to come. 
The Brexiteers lied. 
The costs of leaving the EU were always destined to outweigh the benefits. 
Alas, the responsible, imaginative, and inclusive political leadership needed to minimize the damage is nowhere in sight. 

Brexit and the European Order 
BERLIN – There are only a few months left until the United Kingdom formally exits the European Union. 
So far, the debate about Brexit has been framed mainly in economic terms. 
Should the UK crash out of the bloc without a mutual exit agreement, the damage will likely be significant. 
And, as matters stand, such an agreement is far from assured. 
A “hard Brexit” would mean that at 11:00 P.M. (GMT) on March 29, 2019, the UK’s membership in all EU treaties – such as the customs union and single market – and international trade agreements concluded by the EU would end. 
Great Britain would become merely a third party, with far-reaching consequences for EU trade – not least chaos at the UK border. 
But Brexit will of course have far-reaching political consequences, too. 
In terms of its day-to-day affairs, the EU is largely perceived as a common market and customs union. 
But at its core, it is a political project based on a specific idea about the European system of states. 
This idea – not the economics of the matter – is what Brexit is really about. 
And it is why the UK’s decision to leave the EU – with or without an exit agreement – will have a profound impact on the twenty-first-century European order. 
The slim majority of Britons who voted for “Leave” in the 2016 referendum weren’t concerned with economic wealth, but with reclaiming full political sovereignty. 
They define sovereignty not in terms of objective facts about Britain’s present or future, but in terms of Britain’s past as a global power during the nineteenth century. 
Never mind that the UK is now a medium-size European power with little to no chance of ever becoming a global player again – be it inside or outside the EU. 
If the rest of the continent were to follow the British example and opt for the nineteenth over the twenty-first century, the EU would disintegrate. 
Each country would be forced back into a cumbersome system of sovereign states struggling for supremacy and constantly checking one another’s ambitions. 
Under such conditions, European countries would lack any real power, and thus would be retired from the world stage for good. 
Europe, torn between Transatlanticism and Eurasianism, would become easy prey for the non-European major powers of the twenty-first century. 
In a worst-case scenario, Europe might even become an arena for the larger powers’ fights. 
Europeans would no longer determine their own future; their fate would be decided elsewhere. 
The old, declining European order of the nineteenth century originally emerged out of the Thirty Years’ War (1618-1648). 
The medieval system that preceded it, based on a universal church and empire, perished during the Reformation. 
After a series of religious wars and the establishment of strong territorial powers, it was replaced by the “Westphalian system” of sovereign states. 
During the next few centuries, Europe ruled the world, and Britain itself was the dominant European power. 
Yet the Westphalian system was destroyed by the two world wars of the first half of the twentieth century – both of which were in fact European wars for world domination. 
When the guns fell silent in 1945, the Europeans – even the victorious European allies – had effectively lost their sovereignty. 
The Westphalian system was replaced by the Cold War bipolar order, wherein sovereignty rested with the two non-European nuclear powers: the United States and the Soviet Union. 
The EU was conceived as an attempt to regain European sovereignty peacefully, by pooling the national interests of European states. 
The goal of this effort has always been to prevent a relapse into the old system of power rivalries, reciprocal alliances, and hegemonic head butting. 
And the key to success has been a continental system based on economic, political, and legal integration. 
Brexit has thrown the material implications of this level of integration into sharp relief. 
Over the course of the UK’s negotiations with the EU, an old problem has re-emerged: the Irish question. 
Once the Republic of Ireland and the UK both belonged to the EU, the impetus for Irish reunification disappeared, and the decades-long civil war between Catholics and Protestants in Northern Ireland could be put to rest. 
The practical realities of EU integration meant that it no longer mattered which country Northern Ireland belonged to. 
But with Brexit throwing history into reverse, the specters of the past are threatening to return. 
Europeans should watch the Irish issue closely, because there is even more potential for a return of such conflicts on the continent. 
A new world order is emerging, and it will be centered around the Pacific, not the Atlantic. 
Europe has one – and only one – chance to manage this historic transition. 
The old European nation-states will be no match for the new competition unless they are united. 
And even then, achieving European sovereignty will require a massive and concentrated effort of political will and ingenuity. 
Yearning for a glorious past is the last thing that will help Europeans confront the challenge they face. 
The past, by its very nature, is over. 
With or without the UK, Europe must see to its future. 

Are Britons Really Softening on Immigration? 
LONDON – In the United Kingdom, the new conventional wisdom is that attitudes toward immigration are softening. 
A headline in the Financial Times this July stated that “negativity about immigration falls sharply in Brexit Britain.” 
Likewise, a recent report by the UK Migration Advisory Committee surmises that “the UK may find itself in the position of ending free movement just as public concern falls about the migration flows that result from it.” 
This is notable, considering that it has been only two years since a widespread public backlash against uncontrolled immigration delivered a victory to “Leave” in the Brexit referendum. 
Moreover, there have been no major changes to immigration policy. 
Britain is still in the European Union, and EU citizens are still free to move to the UK. 
And though migration levels have dropped somewhat, they remain extraordinarily high by historic standards, far exceeding the government’s net immigration target of “below tens of thousands.” 
Still, opinion polls have undeniably changed. 
Survey respondents are now more positive about the economic and cultural effects of immigration, and fewer people now name immigration as one of the most important issues facing the UK. 
Moreover, this trend appears across the political and social spectrum, and equally among Remainers and Leavers. 
And while it has actually been observable since the turn of the millennium, it has gained momentum since the Brexit vote. 
The apparent disconnect between the attitudes that fueled Brexit and the attitudes that show up in opinion polls cries out for investigation. 
Until we understand what’s driving these unexpected changes, we need to be mindful of how survey findings are presented, and how they inform policymaking decisions. 
To that end, we at the National Institute of Economic and Social Research (NIESR) recently assessed the available evidence of Britons’ social attitudes toward immigration over time. 
In a new study, we show that there are several possible explanations for the extraordinary shifts in the polls on this issue. 
For starters, the UK is finally having a conversation about migration. 
And while this conversation has often been confrontational and dominated by extreme views, it may have prompted some people to consider the pros, rather than just the cons. After all, there is ample evidence to show that immigration has benefited the UK economically. 
Similarly, since the Brexit vote, the debate over the rights of EU citizens already residing in the UK, along with the recent controversy over the so-called Windrush generation of immigrants from the Caribbean, has attracted public support for migrants. 
These conversations seem to have tapped into people’s sense of fairness. 
Previously, the principle of fairness had been used against migrants, such as when asylum seekers are accused of trying to exploit the British welfare system. 
An alternative explanation is that some Britons have modified their views after witnessing an overwhelmingly negative public debate on immigration in recent years. 
Previously, even slight skepticism toward migration was perceived to be anti-immigrant. 
But the realization that others hold more extreme views may have led people to see themselves as more positively inclined toward immigration. 
They have adjusted their responses to survey questions accordingly, even though their views have remained essentially the same. 
Similarly, some immigration skeptics, or those belonging to the “anxious middle,” may feel misrepresented or misinterpreted in a public debate dominated by extreme views. 
If so, they may have moderated their position on immigration in recent survey responses. 
Alternatively, there may be a “reassurance effect” among immigration skeptics if they feel that their concerns are already being addressed (though this could disappear rapidly if they start to suspect otherwise). 
By the same token, immigration liberals may have been galvanized by the Brexit vote and the rise of the nationalist UK Independence Party in recent years. 
Lastly, the image of immigrants that survey respondents have in mind may have changed in recent years, now that EU migration and the Windrush generation have dominated the media coverage. 
When answering survey questions, the average Briton may be thinking more about these cohorts than, say, asylum seekers and refugees fleeing from conflicts in the Middle East and North Africa. 
In other words, a change in people’s idea of the average immigrant may have made them more supportive of immigration generally. 
Many other factors could explain the shift in the polls on this issue. 
But as some of the possibilities outlined above show, the change in survey responses does not necessarily imply a softening of public attitudes toward immigration. 
Rather, it tells us that our knowledge about public sentiment needs to improve. 
As British Future’s National Conversation on Immigration and NIESR’s own work with focus groups in Kent have shown, people’s views on migration are nuanced and multifaceted. 
As British policymakers set out to design a new post-Brexit immigration policy, it is very important that we continue to develop our understanding of why people hold and express the views that they do. 
Simply assuming that we already know the answer is not an option. 

The Brexit of UK Banking 
LONDON – When I became the head of banking supervision in the United Kingdom in the mid-1990s, my friends did not see it as a glamorous or exciting career move. 
Banking regulation was an obscure task, like cleaning sewers: essential, perhaps, but hardly front-page news. 
Expressions of curiosity about how I spent my working hours were typically a sign of friendly politeness rather than genuine interest. 
Twenty years later, the structure of banking regulation in Europe has risen to the top of the political agenda in London. 
It is one of the key points in Prime Minister David Cameron’s renegotiation of the UK’s terms of membership of the European Union. 
One of Cameron’s four major demands of the EU is a national derogation from elements of the uniform rulebook which the European Central Bank is seeking to introduce in the eurozone’s banking union to ensure a consistent approach across countries. 
The French and others fear that this derogation could permit the UK, in search of competitive advantage, to loosen financial regulation in London, even though recent evidence suggests that bank capital requirements, and other controls on banks’ activities, are in fact now tighter in London than elsewhere in Europe. 
For example, there is no European equivalent of the British requirement to “ring-fence” retail and commercial banking, and the French and German governments’ opposition suggests that there is unlikely to be one. 
Of course, the reason why banking supervision – and financial regulation more generally – has higher political salience now is obvious: The financial crisis of 2008 showed that bank failures could have catastrophic consequences for the economy as a whole. 
That crisis followed a period during which the financial sector grew dramatically, especially in Europe. 
The bank-market ratio – the size of the banking sector relative to the size of equity and bond markets – roughly doubled in the UK and Germany in little more than a decade, while the ratio remained stable in the US, and at a much lower level. 
The difference is particularly marked in the eurozone, where two-thirds of non-financial firms’ external financing comes from bank loans. 
The comparable figure is nearer 20% in the US, where, as in the UK, equity and debt capital markets play a much more important role in financing business investment. 
The short-term consequence was that the credit crunch that began in 2008 had a more serious and longer-term impact on Europe’s heavily bank-based economies, as banks curtailed lending to preserve and rebuild their capital ratios. 
That process is still under way in parts of continental Europe, though business lending by banks has recovered in the UK. 
But a new study by Sam Langfield of the ECB and Marco Pagano of the University of Naples suggests that the longer-term implications are even more damaging than was previously suspected. 
Langfield and Pagano point out that in the eight years since the crisis, the European Union’s GDP has grown by only 2%, compared to more than 9% in the US, and attribute this differential to transatlantic differences in financial structure. 
Analyzing data for a large number of countries, they find that “an increase in the size of a country’s banking sector relative to stock and private bond market capitalization is associated with lower GDP growth in the subsequent five-year period.” 
And the magnitude of the impact they assess is considerable. 
Europe’s bank-market ratio was 3.2 in 1990; by 2011, it had risen to 3.8. 
An increase on that scale is associated in their model with a 0.3-percentage-point reduction in annual growth, and twice that in a housing-market crisis, given the high proportion of mortgage lending on EU banks’ balance sheets. 
Many EU countries, notably Ireland and Spain, did experience a collapse in house prices after 2008. 
So the relative size of EU banks might account for roughly half of the growth gap vis-à-vis the US. 
That explains why the ECB, and some EU governments, are keen on the Capital Markets Union project, which aims to find ways to stimulate the growth of non-bank financing channels across the continent. 
Progress would reduce dangerous over-reliance on banks. 
The UK, as ever, is to be found somewhere in the middle of the Atlantic. 
Cumulative economic growth from 2008 to 2015 was 6%. 
A little closer to the US than to the rest of Europe, though still a relatively weak rebound from a deep recession. 
The UK’s stock market is larger relative to its economy than most others in Europe. 
Its banking system is large and concentrated, though new entrants and new financing channels are changing that. 
Peer-to-peer lending has expanded faster than elsewhere in Europe. 
UK banks are also, on average, more oriented toward non-European markets, which makes the banking sector seem larger. 
And a third of the UK banking sector’s assets are in fact held by non-EU banks. 
Only Luxembourg comes close, at just below 20%, while in France, Germany, and Italy, the overseas share of their domestic markets is negligible. 
These differences may partly explain the UK’s reluctance to participate in the European banking union, while some other non-eurozone countries are keen to join it, fearing that, otherwise, they might be effectively excluded from ECB policymaking. 
In London, even pro-Europeans prefer to address Britain’s remaining financial-sector challenges on a national basis; the differences in structure make that an understandable choice. 

The Brexit Tragicomedy 
PRINCETON – As the rest of the world looks on with a mixture of amusement and pity, British politics in the age of Brexit has come to resemble a soap opera. 
Can the chaos that is descending on the United Kingdom be good for Europe, or even for Britain? 
Perhaps, but only in the sense that train wrecks yield lessons about what to avoid. 
British political actors know they are putting on a performance, and they speak candidly about life imitating art. 
Their model is the backstabbing drama of Game of Thrones or the dark comedy of House of Cards (the British version, not the long-winded American imitation that has been canceled in the wake of sexual-assault allegations against its star, Kevin Spacey). 
Unlike in Hamlet, where everyone ends up dead, and an outsider (Fortinbras) shows up to reestablish normality, modern fictionalized political dramas never have a satisfying resolution. 
The Brexit drama, then, is faithfully imitating art: it cannot have anything but a messy conclusion. 
Brexit is not just a political upheaval; it is a revolution. 
Historically, radical political realignments have been rather rare in British politics. 
One example is the Glorious Revolution of 1688, which produced a two-party system comprising Whigs, who supported the new settlement, and Tories, who resisted it. 
That system lasted for more than a century, until the 1840s, when Whig became synonymous with Liberal, and Tory with Conservative. 
But then, in 1846, the Conservative Party split over curtailing protective tariffs for grain, which was bad for the party’s rural farming base, but good for manufacturing, and for society generally. 
The resulting political balance lasted for almost a century, until the 1920s, when the Labour Party replaced the Liberals as the alternative to Conservatism. 
Arguably, another political realignment may be past due. 
In the 2000s, British Prime Minister Theresa May played a crucial role in cleaning up the Conservative Party’s image as the “nasty party.” 
But her Brexit strategy, in which she has avoided taking any clear positions, has transformed the party into something even worse: a dishonest, divided, weak political cabal whose decisions could prove lethal. 
Brexit transcends the old two-party divide in British politics. 
The Conservative Party’s bloc in Parliament includes a small minority who regard Brexit as a disaster, others who want a well-negotiated compromise, and a substantial group who oppose any compromise and have embraced the idea of a clean break with the European Union. 
Labour is similarly divided. 
The party’s leader, Jeremy Corbyn, is hostile to the EU, because it could prevent him from implementing his utopian socialist program. 
At the same time, many Labour MPs recognize that the EU plays a central role in providing economic opportunities and social mobility for British citizens. 
Because no fundamental issues separate pro-EU Conservatives from pro-EU Labourites, practical cross-party cooperation has started to occur. 
But for any such parliamentary alliance to have democratic legitimacy, it will have to present itself not just as a coalition of likeminded MPs, but as a new political party, with a program to confront realistically the challenges of technological change and globalization. 
Similar shifts have occurred in other European countries when established parties and traditions fell apart. 
In the 1990s, Italy’s largely bipartisan system disintegrated when Christian Democracy was engulfed by corruption scandals and the Communist Party was pulled apart by the collapse of the Soviet Union. 
Italian politics has been plagued by instability ever since. 
In France, President Emmanuel Macron’s new political party, La République en Marche !, has effectively supplanted the old center-right Gaullist party, Les Républicains, as well the center-left Socialists. 
Still, Macron rightly recognizes that his overhaul of French politics will not succeed unless it is matched at the European level. 
If a Europe-wide shift does happen, it will owe much to the cautionary tale playing out in Britain. 
In Germany, the breakdown of coalition negotiations between the Christian Democratic Union, the Christian Social Union, the Free Democrats, and the Greens suggests that a political realignment may be necessary there, too. 
In fact, realignments may have a better chance of succeeding elsewhere in Europe than in the UK. 
After all, Britain’s malaise runs much deeper than party politics. 
Brexit has ushered in a revolution in a country without a revolutionary tradition. 
Withdrawing from the EU will require uprooting a thicket of complex legal and institutional frameworks, around which most political norms and conventions revolve. 
So far, every alternative arrangement that has been proposed has been problematic. 
For example, if Britain liberalizes its trade and regulatory policies, British workers could end up worse off than they were under the EU regime. 
Inevitably, every concrete step out of the EU is bound to lead to deeper factionalism. 
Looking ahead, there are two possible scenarios for British politics. 
The first is the Hamlet scenario, in which the chaos continues until the UK crashes out of the European single market and customs union. 
The stage will be littered with political corpses, and an economic disaster will ensue. 
In the second scenario, common sense prevails: Macron-style pragmatism takes root in Britain, supplanting the Poujade-style populism that fueled the anti-EU “Leave” campaign. 
This assumes that Macronism succeeds at the European level, so that it can serve as a foil to the dysfunctional, distorted politics of the United States, Russia, and Turkey, and to the new instability in Germany. 
That outcome would also be Shakespearian, recalling nothing so much as All’s Well that Ends Well – one of the bleakest “comedies” in Shakespeare’s oeuvre. 

The Business Side of Brexit 
LONDON – Nearly a year ago, the British voted – 52% to 48% – to leave the European Union. 
Many expected the vote to produce severe economic volatility. 
But the economy, so far, has proved resilient, though as we head into this week’s snap general election, there are signs that higher inflation is taking its toll on consumers and some businesses. 
The question is whether the economy can withstand the actual divorce proceedings. 
In the wake of the Brexit vote, swift action by the Bank of England helped to calm financial markets and keep credit flowing. 
Unlike during the global financial crisis of 2008, the cost of credit for most firms and families in the United Kingdom hasn’t risen; if anything, it has fallen. 
All the while, British consumers have done what they do best: spend their money in stores and online. 
Household spending supported overall growth close to 2% last year. 
The big change in financial markets has been the steep decline in the value of the pound. 
The weaker exchange rate has helped UK-based exporters’ competitiveness. 
The April industrial trends survey, conducted by the Confederation of British Industry (of which I am chief economist), showed the strongest rise in manufacturing export orders since 2011. 
But this is a double-edge sword: British manufacturers also face the fastest rise in average unit costs since 2011, owing to the rising prices of imports. 
The decline in the pound’s value may also start to hurt households. 
Consumer price inflation is set to peak at close to 3% this year. 
Yet, given the changing dynamics of the labor market and subdued productivity growth, average wage gains are not likely to be much more than 2.5%. 
In real terms, therefore, average household incomes are likely to remain flat or even shrink, undermining the UK economy’s crucial consumer-spending engine. 
Worse, these impending macroeconomic challenges may well be dwarfed by those arising from the coming Brexit negotiations, though perhaps not for the reason one might expect. 
The key danger for businesses, as the leader of a construction-engineering firm put it to me, is that planning for all of the possible Brexit scenarios can become an all-consuming affair, causing companies to lose sight of their larger strategic goals. 
The good news is that, so far, the business community seems confident. 
Entrepreneurs and CEOs have plenty of experience making decisions in an uncertain world. 
So, despite the Brexit unknowns, they are continuing to invest in future-oriented areas like cloud computing, artificial intelligence, and data analytics. 
The truth is that it is the technological revolution and the surge in consumption in Asia – not the UK’s relationship with the EU – that will transform the way business is done over the next couple of decades. 
As the UK-EU negotiations get underway, it is critical that companies bear this in mind, by ring-fencing Brexit working groups and keeping the rest of the firm’s management focused on broader business strategy. 
This is not to say, of course, that we should shrink from the complexity of the task ahead, much less disregard the challenges that Brexit will bring. 
On the contrary, we must confront those challenges head-on, including by facing some hard truths and demanding that some difficult decisions are made as soon as possible. 
From a business perspective, one of the biggest Brexit-related concerns relates to people. 
As it stands, the UK economy is beset with skills shortages: more than two-thirds of firms are not confident they can fill vacancies for high-skill jobs over the next 3-5 years. 
The long-term solution is better education and skills training throughout the UK. 
But, in the short term, migration must play a role. 
Already, EU migrants – from seasonal workers harvesting fruit and vegetables to academics broadening the minds of the next generation and doctors and nurses protecting our health –make a major contribution to the UK economy. 
In many organizations and firms, EU citizens comprise more than 40% of employees. 
These EU citizens and their families are now facing real uncertainty. 
The business community, by and large, advocates the immediate guarantee that EU citizens currently working in the UK will be able to continue doing so. 
Likewise, UK citizens working across the EU should be granted the right to remain where they are. 
This is not only the right thing to do; it is the smart economic play, as the skills and talents of the workforce will be the engine that propels companies forward in the coming decades. 
But EU citizens already in the UK will not be sufficient, on their own, to power that engine. 
That is why the UK also needs a new, evidence-based immigration system – and fast. 
Businesses, workers, and families need to know by the end of this year what such a system will look like, including the criteria for entry. 
Another critical decision that must be made now is that “no deal” is not an option. 
Far from keeping that possibility open, as Prime Minister Theresa May’s government has done, the UK and the EU must commit to establishing a clear agreement on regulatory issues, thereby ensuring that companies on both sides of the English Channel can continue to do business. 
A “cliff-edge” scenario – in which the end of the two-year negotiating period brings a sudden change to an unclear or even undecided regulatory regime – must be avoided at all costs. 
If the British economy is to cope with Brexit as well as it has coped with the Brexit vote, the government, like businesses, must minimize the impact of uncertainty by managing that uncertainty effectively. 
Whatever the political case for delaying the start of serious Brexit negotiations, it must not be allowed to overshadow the economic case for moving the conversation forward. 

A Post-Referendum Agenda for Britain 
LONDON – The end of the wretched campaign to take the United Kingdom out of the European Union against the advice of our friends around the world is less than a month away. 
The Brexiteers, as they have come to be called, deny all evidence of the economic damage that the UK would do to itself by leaving. 
Their disregard for reason and facts resembles that of Donald Trump, the reality-TV star and Republican presidential candidate, whose political style seems to have crossed the Atlantic on a cheap ticket. 
If voters choose to leave the EU, all bets are off; the UK will be taking a leap in the dark. 
Fortunately, the bookies are increasingly predicting that voters will decide to remain. 
But even if sanity prevails, the effects of Brexitosis – a toxic combination of manic ambition (on the part of former London Mayor Boris Johnson, in particular), self-delusion, and mendacity – will linger long after the result is announced. 
Prime Minister David Cameron will face the unenviable task of trying to pull his Conservative Party together again. 
He will need to balance magnanimity with forceful assertion of leadership. 
One thing that never works is to pay Danegeld to disloyal members of parliament; give them one bun, and they will come back almost immediately for another. 
What will matter most for Cameron’s future is whether he can convince the losers to accept the voters’ verdict, instead of slinking away to plot another insurrection. 
It would be understandable if Cameron were to conclude that Europe was the last thing he wants to spend time on this summer. 
But, for the sake of his country, and of Europe, Cameron should take the lead in trying to put in place a credible policy for dealing with mass migration. 
This is not just a short-term issue, driven by the conflicts in Syria and Afghanistan; it is a challenge that Europe will confront for decades. 
During the nineteenth century, as Europe’s population grew from one-fifth to one-quarter of the world’s total population, millions left their native countries for other continents. 
Between 1815 and 1932, some 60 million Europeans emigrated. 
At the beginning of World War I, almost two out of every five people worldwide had European ancestry. 
Today, the balance has been completely reversed. 
Europe’s population has fallen to well below 10% of the global total, and it will fall much further as populations skyrocket elsewhere. 
Over the last 40 years, for example, Egypt’s population has increased from 39 million to 93 million. 
During a comparable period, Ethiopia’s population more than tripled, to 101 million. Nigeria, now home to more than 186 million people, has followed a similar trajectory; its population is predicted to rise to a half-billion by 2050. 
During the first half of the twenty-first century, the population of Africa as a whole is expected to grow from about one billion to 2.5 billion. 
Failing states, as we have learned, export their problems – and their people. 
The world’s poorest countries are experiencing the fastest population growth. 
They have the youngest populations, and, all too often, are among the most likely to see a breakdown in governance. 
The resulting flows of people will put developed countries under extreme pressure – nowhere more so than in Europe. 
Erecting more razor wire will not come close to being an adequate response. 
The Mediterranean has become, tragically, a cemetery for some – but a barrier only for a few. 
Not even island countries like the UK can meet the migration challenge acting on their own. 
What we require is a long-term program discussed and agreed upon by our neighbors and the United States. 
We need to coordinate our foreign, security, and development policies in order to prevent uncontrollable, unmanageable mass migration – a phenomenon that will lead to many migrant deaths and stoke xenophobia in the countries they try to reach. 
We need to agree on how we deal with failed states and help to put them back on their feet. 
We have to use our development assistance strategically, to help poor countries grow and provide their citizens a reason for staying at home. 
We also need more aggressive policies to tackle people smuggling, supported by United Nations Security Council resolutions where necessary. 
And we have to deploy more naval resources in the Mediterranean and spend more on Europe’s border security. 
Such an effort would be in the interest of everyone, not least the poor in Africa and West Asia. 
As Cameron surveys the broken political crockery at the end of June, taking responsibility for such an effort – at the helm of a country that is an integral part of the EU – would be very much in his interest as well. 

The Rise of Demotic Democracy in Europe 
LONDON – The shock of the British vote to leave the European Union has yet to sink in. 
Yet European leaders must steel themselves for what is to come. 
In fact, Brexit might be the initial tremor that triggers a tsunami of referenda in Europe in the coming years. 
Across Europe, there are 47 insurgent parties turning politics on its head. 
They are gaining control of the political agenda, shaping it according to their interests – and winning power in the process. 
In one-third of EU member states, such parties are members of coalition governments, and their success has driven mainstream parties to adopt some of their positions. 
Though these parties have very different roots, they all have one thing in common: all are trying to upend the foreign-policy consensus that has defined Europe for several decades. 
They are Euroskeptic; they spurn NATO; they want to close their borders and stop free trade. 
They are changing the face of politics, replacing traditional left-right battles with clashes pitting their own angry nativism against the cosmopolitanism of the elites they disdain. 
These parties’ weapon of choice is the referendum, with which they can whip up popular support for their pet issues. 
According to the European Council on Foreign Relations, 32 referenda are being demanded in 18 countries across the EU. 
Some, such as the Danish People’s Party, want to follow the United Kingdom’s lead and hold a vote on EU membership. 
Others want to escape from the eurozone, block the Transatlantic Trade and Investment Partnership (TTIP) with the United States, or restrict labor mobility. 
The EU’s refugee relocation scheme has proved to be particularly divisive. 
Hungarian Prime Minister Viktor Orbán has declared that he will hold a referendum on the proposed quotas. 
And the Polish opposition party Kukiz ’15 has been collecting signatures for its own referendum on the issue. 
Handing power back to the masses through direct democracy may well be these parties’ most revolutionary proposition. 
Indeed, it reflects an understanding of the frustrations that have driven a global wave of popular protests in recent years – protests that, in the Arab world, sparked actual revolutions. 
The same spirit of protest that drove, say, Spaniards, Greeks, and New Yorkers to take to the streets – with different demands, to be sure – is fueling support for these new referenda and the insurgent parties that are bringing them about. 
This is a nightmare not only for established parties, but also for democratic governance. 
As California’s experience with referenda has shown, the public will often vote for contradictory things – for example, lower taxes and more welfare programs, or environmental protection and cheaper gas. 
But for the EU, this dynamic is exponentially more challenging; indeed, it overturns the EU’s foundations. 
The EU is, after all, the ultimate expression of representative democracy. 
It is an enlightened body that places at its core liberal values such as individual rights, the protection of minorities, and a market-based economy. 
But the layers of representation on which the EU relies have created the sense that a kind of “Über-elite” is running things, far removed from ordinary citizens. 
This has given nationalist parties the perfect target for their anti-EU campaigns. 
Add to that fear mongering about issues like immigration and trade, and their ability to attract frustrated or anxious voters is strong. 
Two visions of Europe – the diplomatic and the demotic – are now facing off against each other. 
The diplomatic Europe, incarnated by EU founding father Jean Monnet, took big, sensitive questions out of the sphere of popular politics and reduced them to manageable technical issues that diplomats could address through bureaucratic compromises behind closed doors. 
The demotic Europe, exemplified by the UK Independence Party, which helped spearhead Brexit, is like Monnet in reverse, taking diplomatic compromises like the TTIP or the association agreement with Ukraine, and intentionally politicizing them. 
Whereas diplomatic Europe is about finding reconciliation, demotic Europe is about polarization. 
Diplomacy is win-win; direct democracy is zero-sum. 
Diplomacy tries to lower the temperature; the demotic paradigm raises it. 
Diplomats can work with one another; referenda are binary and fixed, leaving none of the political wiggle room and scope for creative compromise needed to resolve political problems. 
In demotic Europe, solidarity is impossible. 
Europe’s shift away from diplomacy began more than a decade ago, when the Treaty establishing a Constitution for Europe was rejected in popular referenda in France and the Netherlands. 
That outcome may have put the EU out of the treaty-making business altogether, meaning that hopes of future integration may well be dashed. 
But, in the wake of Brexit, future integration is not Europe’s biggest concern. 
Instead, it must contend with the increasingly powerful forces undermining the integration that has been achieved, attempting to push Europe backward. 
Of course, one need only recall what was there before the EU to realize just how dangerous this path may be. 
In this new era of “vetocracy” in Europe, the diplomacy that underpinned the creation of the enlightened and forward-looking European project cannot function, leaving the EU ungovernable. 
Now that the Euroskeptics have gotten their way in the UK, vetocracy will become stronger than ever. 
Direct votes on issues like trade rules or immigration policy will gut Europe’s representative democracy, just as direct votes on membership threaten to gut the EU itself. 
In a popular novel by the Nobel laureate José Saramago, the Iberian Peninsula breaks off from the European mainland and drifts away. 
With a tsunami of plebiscites bearing down on the continent, this may turn out to be a prescient metaphor. 

The Economic Consequences of Brexit 
LONDON – Those campaigning for Britain to exit the European Union claim that doing so would make their country both freer and richer. 
They assert that after “Brexit”, the UK could quickly negotiate a bespoke agreement with the EU that offers all the benefits of free trade without the costs of EU membership; strike better trade deals with other countries; and reap huge benefits from scrapping burdensome EU regulations. 
But this is a delusion. 
In fact, Brexit would entail big economic costs for Britain. 
The uncertainty and disruption of drawn-out and doubtless acrimonious divorce proceedings would depress investment and growth. 
Permanent separation would reduce trade, foreign investment, and migration, hurting competition, productivity growth, and living standards. 
And “independence” would deprive Britain of influence over future EU reforms – notably, the completion of the single market in services – from which it would benefit. 
The London School of Economics’ Centre for Economic Performance calculates that the long-term costs to Britain of lower trade with the EU could be as high as 9.5% of GDP, while the fall in foreign investment could cost 3.4% of GDP or more. 
Those costs alone dwarf the potential gains from Brexit. 
Britain’s net contribution to the EU budget amounted to only 0.35% of GDP last year, and scrapping EU regulation would bring limited benefits, because the UK’s labor and product markets are already among the freest in the world. 
The exit process would generate prolonged uncertainty. 
Officially, it is meant to take two years. 
But it would probably take much longer. 
In the 1980s, it took three years to negotiate the exit of Greenland (population: 50,000), and the only controversial issue was fish. 
Extricating Britain (the EU’s second-largest economy, with a population of 64 million) would be far more complex. 
Moreover, any agreement on a new economic relationship with the UK would require unanimity among the EU’s 27 remaining members. 
And Britain would also have to renegotiate – from scratch – the 50-plus trade deals that the EU has with other countries. 
All of this would take a long time. 
In the meantime, Britain’s trading rules and domestic regulations would be up in the air. 
Investment and employment decisions would be postponed or canceled. 
The pound would plummet. 
The foreign investors financing Britain’s current-account deficit – which hit 7% of GDP in the final quarter of last year – might drive up the risk premium on UK assets or, worse, pull out. 
All of that would weaken economic growth, jeopardizing the government’s fiscal plans. 
Once the agreements were made, Britain would have worse access to both EU and global markets. 
Economically, the least painful option would be to seek membership of the European Economic Area, along with Norway, Iceland, and Liechtenstein. 
That would provide almost full access to the single market (with opt-outs from EU agriculture and fisheries policies), albeit with customs controls and other trade barriers such as rules-of-origin requirements. 
Politically, though, EEA membership would be a raw deal. 
Britain would have to comply with single-market rules and legislation in areas such as consumer protection, the environment, and social policy – rules that it would have no say in creating. 
It would also have to contribute to the EU budget, without receiving any spending in return. 
And it would have to allow EU citizens free entry, a political bugbear for most Brexit supporters. 
Given that the key motivation for Brexit is to restore the country’s supposedly lost sovereignty, a deal that gives the UK no say, but requires that it pay and obey, would be deeply unpalatable. 
Trading with the EU according to World Trade Organization rules, as the United States and China do, would involve the fewest political constraints. 
Britain would be free to keep out hard-working, taxpaying EU migrants. 
But this would entail reciprocal EU controls on UK migrants, harming Britons twice over. 
This approach would also entail import tariffs on British goods – including a 10% duty on its car exports to the EU – as well as non-tariff barriers. 
UK-based financial institutions would lose their passport to export freely to the EU. 
And without full access to the $16 trillion EU single market, with its 500 million consumers, foreign investment would drop. 
Intermediate options, from the Swiss to the Canadian model, are scarcely more appealing. 
Brexit supporters claim that Britain could strike its own special deal, cherry picking the provisions it likes. 
The UK would have the whip hand, they argue, because it buys more from the EU than it sells in return. 
But this, too, is a delusion. 
The US also has a trade deficit with the EU, yet it doesn’t get to dictate terms in the negotiations over the Transatlantic Trade and Investment Partnership. 
Moreover, exports to the EU, at 13% of GDP, matter more to the UK than exports to Britain (just 3% of GDP) do to the EU. 
In short, the EU would call the shots – and doubtless be tough with the UK. 
Many economic actors – from German car manufacturers to French farmers to financial centers around the EU – would want to hamper their British competitors. 
For their part, EU governments would want to punish Britain, not least because they know that a velvet divorce with Britain would bolster anti-EU parties, such as France’s far-right National Front, which has already called for a referendum on EU membership. 
Britain’s new trade deals with non-EU countries would also probably involve worse terms. 
While the UK wouldn’t be hamstrung by protectionist interests in the EU, its smaller economy, largely open markets, and desperation for deals would weaken its clout. 
Indeed, the US has stated that it has no immediate interest in negotiating a trade deal with Britain. 
And the protectionist tone of the current US presidential election campaign suggests that the next few years will not see much trade liberalization. 
Thinking through all the economic implications of Brexit is complicated. 
But the bottom line is simple: Leaving the EU would make Britain much worse off. 

Brexit and the Future of Europe 
NEW YORK – Britain, I believe, had the best of all possible deals with the European Union, being a member of the common market without belonging to the euro and having secured a number of other opt-outs from EU rules. 
And yet that was not enough to stop the United Kingdom’s electorate from voting to leave. 
Why? 
The answer could be seen in opinion polls in the months leading up to the “Brexit” referendum. 
The European migration crisis and the Brexit debate fed on each other. 
The “Leave” campaign exploited the deteriorating refugee situation – symbolized by frightening images of thousands of asylum-seekers concentrating in Calais, desperate to enter Britain by any means necessary – to stoke fear of “uncontrolled” immigration from other EU member states. 
And the European authorities delayed important decisions on refugee policy in order to avoid a negative effect on the British referendum vote, thereby perpetuating scenes of chaos like the one in Calais. 
German Chancellor Angela Merkel’s decision to open her country’s doors wide to refugees was an inspiring gesture, but it was not properly thought out, because it ignored the pull factor. 
A sudden influx of asylum-seekers disrupted people in their everyday lives across the EU. 
The lack of adequate controls, moreover, created panic, affecting everyone: the local population, the authorities in charge of public safety, and the refugees themselves. 
It has also paved the way for the rapid rise of xenophobic anti-European parties – such as the UK Independence Party, which spearheaded the Leave campaign – as national governments and European institutions seem incapable of handling the crisis. 
Now the catastrophic scenario that many feared has materialized, making the disintegration of the EU practically irreversible. 
Britain eventually may or may not be relatively better off than other countries by leaving the EU, but its economy and people stand to suffer significantly in the short to medium term. 
The pound plunged to its lowest level in more than three decades immediately after the vote, and financial markets worldwide are likely to remain in turmoil as the long, complicated process of political and economic divorce from the EU is negotiated. 
The consequences for the real economy will be comparable only to the financial crisis of 2007-2008. 
That process is sure to be fraught with further uncertainty and political risk, because what is at stake was never only some real or imaginary advantage for Britain, but the very survival of the European project. 
Brexit will open the floodgates for other anti-European forces within the Union. 
Indeed, no sooner was the referendum’s outcome announced than France’s National Front issued a call for “Frexit,” while Dutch populist Geert Wilders promoted “Nexit.” 
Moreover, the UK itself may not survive. 
Scotland, which voted overwhelmingly to remain in the EU, can be expected to make another attempt to gain its independence, and some officials in Northern Ireland, where voters also backed Remain, have already called for unification with the Republic of Ireland. 
The EU’s response to Brexit could well prove to be another pitfall. 
European leaders, eager to deter other member states from following suit, may be in no mood to offer the UK terms – particularly concerning access to Europe’s single market – that would soften the pain of leaving. 
With the EU accounting for half of British trade turnover, the impact on exporters could be devastating (despite a more competitive exchange rate). 
And, with financial institutions relocating their operations and staff to eurozone hubs in the coming years, the City of London (and London’s housing market) will not be spared the pain. 
But the implications for Europe could be far worse. 
Tensions among member states have reached a breaking point, not only over refugees, but also as a result of exceptional strains between creditor and debtor countries within the eurozone. 
At the same time, weakened leaders in France and Germany are now squarely focused on domestic problems. 
In Italy, a 10% fall in the stock market following the Brexit vote clearly signals the country’s vulnerability to a full-blown banking crisis – which could well bring the populist Five Star Movement, which has just won the mayoralty in Rome, to power as early as next year. 
None of this bodes well for a serious program of eurozone reform, which would have to include a genuine banking union, a limited fiscal union, and much stronger mechanisms of democratic accountability. 
And time is not on Europe’s side, as external pressures from the likes of Turkey and Russia – both of which are exploiting the discord to their advantage – compound Europe’s internal political strife. 
That is where we are today. 
All of Europe, including Britain, would suffer from the loss of the common market and the loss of common values that the EU was designed to protect. 
Yet the EU truly has broken down and ceased to satisfy its citizens’ needs and aspirations. 
It is heading for a disorderly disintegration that will leave Europe worse off than where it would have been had the EU not been brought into existence. 
But we must not give up. 
Admittedly, the EU is a flawed construction. 
After Brexit, all of us who believe in the values and principles that the EU was designed to uphold must band together to save it by thoroughly reconstructing it. 
I am convinced that as the consequences of Brexit unfold in the weeks and months ahead, more and more people will join us. 

Brexit to Nowhere? 
BERLIN – Politics brings out strong emotions in everyone. 
Even the British, despite their reputation for pursuing their interests in a cool and calm fashion, apparently are not immune. 
Perhaps that reputation is merely a holdover from the long-gone British Empire. 
It surely does not apply to the United Kingdom of 2017. 
Consider the political decisions Britons have made over the past year. 
Last June, they decided – albeit narrowly – to withdraw from the European Union. 
And in last month’s snap general election, they delivered an outcome that only reinforces the impression that British pragmatism is in retreat. 
The election – in which the Conservative Party lost its majority, resulting in a hung parliament – suggests how far removed from the rest of the country the political class in Westminster has become. 
Indeed, the UK appears to be undergoing not just a political and identity crisis, but also a crisis of confidence in its political and economic elites, which began with the 2008 global financial crisis. 
This will not make the ongoing Brexit talks any easier. 
The EU’s counterpart in the negotiation is a severely weakened government in a state of crisis. 
But the EU’s negotiators cannot lose sight of the fact that the UK will still be important to Europe outside of the EU. 
One of the biggest risks now, for the EU as much as for the UK, is that the latter will leave with nothing, and end up in an even worse state than it is already in. 
Future historians will probably look back at 2016 and 2017 with great interest. 
It is unprecedented for a country to abandon a highly advantageous geopolitical and economic position simply because it is experiencing a prolonged identity crisis. 
Before Brexit got underway, the UK had a very strong hand to play within the EU, and thus on the world stage, owing not least to its special relationship with the United States. 
Moreover, the UK has a tradition of liberalism and global engagement, especially with Europe and the eurozone. 
London has long been a financial center for the entire continent. 
And the British economy is – or, at least, was – a gateway for many international corporations seeking access to the EU single market and the eurozone, despite the UK’s refusal to join the single currency. 
Still, it is worth remembering that by the early 1970s, the UK had lost its empire and the political clout that went with it; and that it only managed to reverse its economic decline by joining the European Community (the precursor to the EU) in 1973. 
Regrettably, Britons rarely acknowledge this fact. 
Instead, a vocal segment of Britain’s political class and electorate has long blamed the EU and its institutions – some of which require member states to cede part of their sovereignty – for all the evils of this world. 
But now that the UK is withdrawing from the EU, it is becoming increasingly clear that it stands to lose a great deal, economically and politically. 
And for what? 
The UK’s Brexiteers demand “sovereignty,” but without considering what that could possibly mean in an era of ever-advancing globalization and market integration. 
Given the Trump administration’s protectionist rhetoric, the importance of maintaining access to Europe’s single market would seem to be more acute than ever. 
But the UK will not be the only loser from Brexit. 
The EU will lose its second-largest economy and primary guarantor of security. 
One hope now is that Emmanuel Macron’s election to the French presidency will blunt some of the pain from Brexit. 
Macron’s election, along with positive economic news from the eurozone, represents an unexpected opportunity for a fresh start within the EU, which could begin as soon as Germany holds its general election in September. 
As it happens, the UK might very well be leaving an EU that is quickly moving toward renewed political stability and economic growth – which is, ironically, what the Leave camp imagines that it can achieve with Brexit. 
Fortunately, the UK’s recent election may have provided a starting point for negotiations. 
To many observers, the outcome showed that British voters oppose a “hard Brexit,” whereby the UK would quit the single market and customs union with no deal in place, and revert to World Trade Organization rules. 
Divorce proceedings are rarely pleasant. 
But they are far worse when the parties involved do not behave like adults. 
When emotions run free, former affections can quickly turn into spite and a desire to inflict deep wounds. 
But for countries, as for people, life goes on after divorce. 
The EU and the UK will remain geographically close, and thus geopolitically dependent on one another. 
Ongoing issues relating to security, terrorism, and refugees will force both sides to work together; and trade will continue, even if it faces more hurdles. 
It is thus in both sides’ interest not to inflict deep wounds, instigate confrontations, or embarrass and threaten the other side. 
Above all, issues relating to common UK-EU security should not be part of the negotiations. 
Both sides need to acknowledge their mutual dependence and be prepared to show generosity. 
The EU, for its part, should be generous with respect to the timeframe for withdrawal, new trade regulations, and any transitional arrangements that could soften the impact of the separation. 
And the UK should be mindful of the many EU citizens currently residing in Britain, and honest about its financial commitments to the bloc. 
If there is one thing to keep in mind, it is that people change theirs. 
And, because people’s sentiments change, countries change direction. 
No possible future should be ruled out, including one in which both parties say, “Let’s try again.” 

Three Paths to European Disintegration 
LONDON – For once, Marine Le Pen, the leader of France’s far-right National Front, may be correct. 
She has called the United Kingdom’s vote to leave the European Union the biggest political event in Europe since the fall of the Berlin Wall. 
That may turn out to be true: Brexit has destabilized the UK and could end up destroying the EU. 
Old-fashioned federalists say the answer to Brexit should be further EU integration. 
But that response is both far-fetched and dangerous. 
Germany and France are often at odds, and both have weak leaders facing re-election next year who could scarcely muster support for an “ever-closer union.” 
And anti-EU sentiment is too widespread and too deep to hand more power to unelected EU officials and impose additional constraints on national decision-making without poisoning the pot further. 
True, the immediate post-Brexit turmoil appears to have boosted support for mainstream politicians and the EU; but this is unlikely to last. 
The Brexit fallout is likely to sap eurozone economic performance and further polarize European politics as voters become more insecure. 
German dominance of the EU will increase, and so, too, will the anti-German backlash in many countries. 
With a weak and divided EU unable to resolve Europe’s many crises, and with nationalism resurgent, we can expect further disintegration in different forms. 
The most extreme form would be further exits by member states. 
Leaving the EU once seemed outlandish: no country had ever done it, and only extremists even proposed it. 
Brexit now makes leaving seem feasible and, to some, reasonable. 
Already, Geert Wilders, whose far-right Freedom Party is leading in the polls ahead of the Netherlands’ general election next March, is demanding a referendum on EU membership. 
So, too, is the Danish People’s Party, which is the biggest party in the Danish parliament, but remains out of government. 
In France, where opposition to the EU is even greater than in the UK, Le Pen is campaigning on the promise of a “Frexit” plebiscite. 
She currently leads in polls for the first round of the presidential election next April. 
And while those polls suggest she would be defeated in the second-round runoff by a more moderate conservative challenger, center-left voters who are fed up with austerity, the political establishment, and German dominance may yet rally behind her. 
Moreover, the growing sense of insecurity after the Nice attack on July 14 – the third major terrorist massacre in France in 18 months – plays into Le Pen’s hands. 
Disintegration could also take a less extreme but more insidious form if governments choose to ignore EU rules with impunity. 
In Italy, Prime Minister Matteo Renzi sought to take advantage of post-Brexit instability to use public funds to recapitalize Italy’s zombie banks, without imposing losses on their creditors, thereby bypassing the EU’s new “bail-in” rules for banks. 
In France, Prime Minister Manuel Valls threatened to ignore the EU’s posted-workers directive unless it was modified to prevent employers from hiring workers from other EU countries on worse terms than locals. 
Germany claims that France is also bending the eurozone’s fiscal rules, with no objection from the European Commission. 
And while the Commission threatened Spain and Portugal with fines for their borrowing overruns, it ultimately pulled back. 
It has also rubber-stamped many governments’ unilateral imposition of border controls in the supposedly border-free Schengen Area. 
Worse, the Commission has turned a blind eye to Hungary’s illiberal prime minister, Viktor Orbán, despite his government’s repeated flouting of EU requirements concerning the rule of law and democratic norms. 
The governments of Hungary and other countries also refuse to comply with the EU’s program to relocate refugees across the Union, which in any case has scarcely been implemented; 
Orbán is holding a referendum in October to bolster his position. 
A third threat to EU integration is the further capture of governments by nationalist anti-establishment parties. 
As the European Council on Foreign Relations has pointed out, insurgent parties already play a direct role in the governance of eight of the EU’s 28 countries. 
In Austria, the far-right candidate Norbert Hofer leads polls in a re-run of the country’s presidential election, set for October. 
The same month, Italy will hold a constitutional referendum to reform the Senate, and Renzi has vowed to resign if it doesn’t pass. 
This would open the door for the anti-establishment Five Star Movement, which recently won local elections in Rome and Turin, and has called for a referendum on Italy’s eurozone (but not EU) membership. 
Even when populist parties don’t win, establishment politicians still make concessions to their supporters. 
For example, Alain Juppé, the presidential frontrunner for the Republicans in France, muses about limiting labor mobility in the EU, as does his main rival, former President Nicolas Sarkozy. 
To counter these forces of disintegration, the EU must do less and do it better. 
Economically, plans for new institutions can wait; the eurozone should focus instead on policies to raise living standards for all. 
These should include looser fiscal constraints; more investment; an end to beggar-thy-neighbor wage cuts; and lower taxes on labor. 
Europe’s leaders also need to restore trust. 
For starters, they should use the EU’s new bail-in rules to clean up banks’ balance sheets, imposing losses on creditors and compensating any small investors who were sold a false bill of goods. 
Politically, the EU should emphasize effective cooperation in combating terrorism. 
And, rather than trying to force recalcitrant governments to accept unwanted refugees, EU authorities should pursue an orderly and safe resettlement program with willing governments. 
This is particularly important in view of the uncertain fate of the EU’s deal with Turkey to curb refugee inflows, which is looking increasingly precarious in the wake of last month’s failed coup. 
The EU’s leaders need to wake up. 
With disintegration looming, they urgently need to demonstrate to anxious Europeans that the benefits of the EU outweigh its costs. 

European Integration With or Without Britain 
WASHINGTON, DC – When British Prime Minister David Cameron agreed with the European Union in February on revised terms for the United Kingdom’s membership, he insisted that the EU be recognized officially as a “multi-currency union.” 
With clear limits on European integration in place, on currency and other issues, Cameron believed that he would be able to win a popular majority in favor of the deal – and thus of remaining in the EU – when the UK holds its referendum on June 23. 
Yet, rather than providing such clarity, the pact uses contorted language to avoid such an official declaration – and the explanations that would have to come with it. 
To be sure, the February decision did give Cameron enough to enable him to campaign against Brexit. 
By specifying that the UK and Denmark are under no obligation to adopt the euro, Cameron’s counterparts did effectively confirm the EU’s status as a multi-currency union. 
But the decision also reiterated the goal of creating an EU “whose currency is the euro,” and reaffirmed treaty provisions stipulating that other non-euro states, such as Bulgaria and Poland, must adopt the euro when they meet the pre-determined conditions. 
(Sweden has no permanent opt-out, and does meet the conditions for euro adoption, yet somehow manages to avoid joining the monetary union.) 
That ambiguity was born of an unwillingness – or inability – to provide a clear description of how a multi-currency union will function in the long term. 
It is a tough question – one that will have to be addressed, regardless of the referendum’s outcome. 
After all, if British voters choose to leave the EU, a similar problem would arise in any post-“Brexit” negotiation to keep the UK in the single market. 
There is now a general consensus that, over time, the eurozone will need to build more integrated economic governance systems. 
Indeed, most economists agree that any monetary union needs not only a banking union, which is now being established in the eurozone, but also greater fiscal-policy coordination, to compensate for the lack of independent monetary policies and flexible exchange rates. 
Politicians, too, support the shift toward greater fiscal integration – at least those who represent the moderate mainstream. 
Germany’s conservative finance minister, Wolfgang Schäuble, France’s center-left Economy Minister Emmanuel Macron, and Italy’s centrist Finance Minister Pier Carlo Padoan, have all called for versions of a common eurozone finance minister. 
Where the disagreement lies is in the form integration should take. 
Germany considers fiscal coordination to be critical to enforcing firm rules of conduct, while France and Italy would like to include more mechanisms for common risk management, such as Eurobonds or cost sharing for unemployment insurance. 
Clearly, a balance will need to be struck. 
To satisfy Germany, stronger fiscal rules must form the foundation of greater integration. 
But such rules must entail greater counter-cyclicality and more symmetry, forcing surplus and deficit countries alike to reduce imbalances. 
Moreover, the framework will need to support more effective risk sharing and a distinct eurozone budget, as the southern member states demand. 
Institutional and legal changes, including the establishment of some kind of eurozone parliament and treasury, will also be needed, in order to provide legitimacy to the endeavor. 
Achieving all of this is essential to enable the EU to function as an effective multi-currency union. 
Cameron, like his predecessor Gordon Brown, who was present at the euro’s creation, but kept the UK out, recognizes the need for further eurozone integration, if only because the UK has an interest in better economic performance in its most important export market. 
But engaging effectively with a more deeply integrated eurozone, without joining it, will be no easy feat. 
To be successful, the UK will need to pursue two key objectives. 
First, it must establish strong cooperation with the EU on other key issues, such as security, foreign, and climate policy. 
Second, it must ensure that an increasingly integrated eurozone does not gain the authority to make unilaterally fiscal and regulatory decisions that, by reshaping the single market or the financial sector, have significant implications for the UK. 
The eurozone, for its part, must regard British interests in the integration process, without allowing the UK to slow it down. 
While issues relating to eurozone integration and the multi-currency union have not been central to the Brexit debate, which has tended to focus on immigration, they remain vital to the future of the EU, with or without the UK. 
Though Britain’s continued EU membership is not fundamentally incompatible with a more integrated eurozone, creating institutions that can support a permanent multi-currency union – essentially, as I have argued, two Europes in one – will be politically and legally challenging. 
In its failure to put forward a clear vision, the deal announced in February did not set a strong precedent for overcoming these challenges. 
If Europe is to make genuine progress toward greater stability and prosperity, it will need to ensure transparency and legitimacy every step of the way. 
Only with a clear political vision and institutions that can steer policy during crises and in normal times alike will the EU be able to prosper again. 
If the UK stays, the EU must urgently work out how a legitimate multi-currency union will function, instead of reverting to business as usual. 
If the UK leaves, the same basic problems must be solved, with the difference, however, that the UK will have lost all leverage. 

From Brexit to the Future 
NEW YORK – Digesting the full implications of the United Kingdom’s “Brexit” referendum will take Britain, Europe, and the world a long time. 
The most profound consequences will, of course, depend on the European Union’s response to the UK’s withdrawal. 
Most people initially assumed that the EU would not “cut off its nose to spite its face”: after all, an amicable divorce seems to be in everyone’s interest. 
But the divorce – as many do – could become messy. 
The benefits of trade and economic integration between the UK and EU are mutual, and if the EU took seriously its belief that closer economic integration is better, its leaders would seek to ensure the closest ties possible under the circumstances. 
But Jean-Claude Juncker, the architect of Luxembourg’s massive corporate tax avoidance schemes and now President of the European Commission, is taking a hard line: “Out means out,” he says. 
That kneejerk reaction is perhaps understandable, given that Juncker may be remembered as the person who presided over the EU’s initial stage of dissolution. 
He argues that, to deter other countries from leaving, the EU must be uncompromising, offering the UK little more than what it is guaranteed under World Trade Organization agreements. 
In other words, Europe is not to be held together by its benefits, which far exceed the costs. 
Economic prosperity, the sense of solidarity, and the pride of being a European are not enough, according to Juncker. 
No, Europe is to be held together by threats, intimidation, and fear. 
That position ignores a lesson seen in both the Brexit vote and America’s Republican Party primary: large portions of the population have not been doing well. 
The neoliberal agenda of the last four decades may have been good for the top 1%, but not for the rest. 
I had long predicted that this stagnation would eventually have political consequences. 
That day is now upon us. 
On both sides of the Atlantic, citizens are seizing upon trade agreements as a source of their woes. 
While this is an over-simplification, it is understandable. 
Today’s trade agreements are negotiated in secret, with corporate interests well represented, but ordinary citizens or workers completely shut out. 
Not surprisingly, the results have been one-sided: workers’ bargaining position has been weakened further, compounding the effects of legislation undermining unions and employees’ rights. 
While trade agreements played a role in creating this inequality, much else contributed to tilting the political balance toward capital. 
Intellectual property rules, for example, have increased pharmaceutical companies’ power to raise prices. 
But any increase in corporations’ market power is de facto a lowering of real wages – an increase in the inequality that has become a hallmark of most advanced countries today. 
Across many sectors, industrial concentration is increasing – and so is market power. 
The effects of stagnant and declining real wages have combined with those of austerity, threatening cutbacks in public services upon which so many middle- and low-income workers depend. 
The resulting economic uncertainty for workers, when combined with migration, created a toxic brew. 
Many refugees are victims of war and oppression to which the West contributed. 
Providing help is a moral responsibility of all, but especially of the ex-colonial powers. 
And yet, while many might deny it, an increase in the supply of low-skill labor leads – so long as there are normal downward-sloping demand curves – to lower equilibrium wages. 
And when wages can’t or won’t be lowered, unemployment increases. 
This is of most concern in countries where economic mismanagement has already led to a high level of overall unemployment. 
Europe, especially the eurozone, has been badly mismanaged in recent decades, to the point that its average unemployment is in double digits. 
Free migration within Europe means that countries that have done a better job at reducing unemployment will predictably end up with more than their fair share of refugees. 
Workers in these countries bear the cost in depressed wages and higher unemployment, while employers benefit from cheaper labor. 
The burden of refugees, no surprise, falls on those least able to bear it. 
Of course, there is much talk about the net benefits of inward migration. 
For a country providing a low level of guaranteed benefits – social protection, education, health care, and so forth – to all citizens, that may be the case. 
But for countries that provide a decent social safety net, the opposite is true. 
The result of all this downward pressure on wages and cutbacks in public services has been the evisceration of the middle class, with similar consequences on both sides of the Atlantic. 
Middle- and working-class households haven’t received the benefits of economic growth. 
They understand that banks had caused the 2008 crisis; but then they saw billions going to save the banks, and trivial amounts to save their homes and jobs. 
With median real (inflation-adjusted) income for a full-time male worker in the US lower than it was four decades ago, an angry electorate should come as no surprise. 
Politicians who promised change, moreover, didn’t deliver what was expected. 
Ordinary citizens knew that the system was unfair, but they came to see it as even more rigged than they had imagined, losing what little trust they had left in establishment politicians’ capacity or will to correct it. 
That, too, is understandable: the new politicians shared the outlook of those who had promised that globalization would benefit all. 
But voting in anger does not solve problems, and it may bring about a political and economic situation that is even worse. 
The same is true of responding to a vote in anger. 
Letting bygones be bygones is a basic principle in economics. 
On both sides of the English Channel, politics should now be directed at understanding how, in a democracy, the political establishment could have done so little to address the concerns of so many citizens. 
Every EU government must now regard improving ordinary citizens’ wellbeing as its primary goal. 
More neoliberal ideology won’t help. 
And we should stop confusing ends with means: for example, free trade, if well managed, might bring greater shared prosperity; but if it is not well managed, it will lower the living standards of many – possibly a majority – of citizens. 
There are alternatives to the current neoliberal arrangements that can create shared prosperity, just as there are alternatives – like US President Barack Obama’s proposed Transatlantic Trade and Investment Partnership deal with the EU – that would cause much more harm. 
The challenge today is to learn from the past, in order to embrace the former and avert the latter. 

Brexit and the Future of Europe 
PARIS – No one yet knows when the United Kingdom will present an agenda for negotiating its withdrawal from the European Union. 
But it is already clear that Brexit will reshape the map of Europe. 
And, especially given Britain’s stunning unpreparedness for the consequences of its own decision – its strategy, priorities, and even its timetable remain uncertain – that means that the EU must start figuring out how to make the best of it. 
Here’s how. 
Let’s start with the only certainties: the Brexit negotiations will be long, complex, and acrimonious, and the divorce will have far-reaching geopolitical effects. 
The immediate impact is a halt to 60 years of integration momentum. 
Europe will suffer in the short and medium term as well, as considerable political energy is likely to be devoted to Brexit for the next five years, at a time when the EU needs the strength to confront internal and external dangers. 
Over the longer term, Brexit is likely to accelerate Europe’s exit from the top table of global decision-making. 
Britain will not escape these consequences. 
Whereas it can leave the EU, it cannot relocate away from Europe. 
That is why, though Britain’s European partners did not choose Brexit, they must manage its consequences successfully, which requires balancing two priorities. 
Their tactical goal must be to reach a deal with the UK that maintains the integrity of the EU. 
The strategic goal is to preserve Europe’s prosperity and influence. 
It is with these ideas in mind that I, together with several European colleagues – all of us acting in an individual capacity – recently co-authored a paper proposing a concept for Europe in 10-20 years: a continental partnership that would create a new basis for continued economic, foreign policy, and security cooperation with the UK. 
The basic economic idea is a template for a relationship that is considerably less deep than EU membership, but rather closer than a free-trade agreement. 
If adopted, Britain and the EU could not only preserve their economic ties, but also provide a new model for the future relationship between the EU and neighbors that will not join it anytime soon: Norway, Switzerland, Turkey, Ukraine, and eventually southern Mediterranean countries. 
Any proposal regarding the future of the EU-UK relationship must start from an interpretation of the Brexit referendum’s meaning. 
Ours assumes that UK voters rejected both the legal impossibility of limiting inflows of workers from the EU and the principle of pooled sovereignty. 
These two political constraints should be taken as a given. 
The first implies that a lasting arrangement between Britain and the EU cannot include free movement of labor. 
The second rules out participation in a common polity, and thus implies that any cooperation must be based on intergovernmental agreements. 
The first constraint is a serious stumbling block, because the EU is based on the free movement of goods, services, capital, and workers. 
The UK’s European partners adamantly claim that these four freedoms are indivisible, and that if Britain wants to maintain free access to the continental market for its data processing and financial services, it must accept unlimited access to its labor market for Polish or Irish workers. 
Freedom of movement of workers is undoubtedly integral to the EU. 
Indeed, the fundamental right to settle and earn one’s living in another country without asking for permission does not exist anywhere else in the world. 
For millions, this right most fully embodies what the EU stands for. 
But Britain has made its choice, and the right question to ask now is whether strong economic links can be preserved without free movement of labor. 
From an economic standpoint, the answer is yes: a deeply integrated market for goods, services, and capital does not require full labor mobility. 
What is needed is only enough temporary mobility to accompany the integration of services markets. 
In other words, freedom of movement of workers is politically essential within the EU, but economically dispensable when dealing with third countries. 
An economic agreement with Britain does not need to include it. 
The second constraint is of a different nature. 
Unlike a market for nails or screws, a market for financial or information services must be based on detailed legislation that ensures fair competition and protects customers. 
A large part of the EU’s task is to prepare this legislation. 
So the question here is how British producers can retain access to the EU market (and vice versa) if they are no longer party to the legislation. 
Solving this conundrum would be one of the main purposes of the continental partnership. 
Through it, Britain would participate in a multilateral process of consultation on draft EU legislation and would have the right to raise concerns and propose amendments, so that the outcome of the process would remain as far as possible consensual. 
Both sides would be politically committed to listening to the other. 
The EU, however, would have the final say, so that its laws would apply and be enforced. 
To enjoy full access to the EU market, Britain would need to agree on a package of policies essential to the proper functioning of an integrated market: competition rules, consumer protection, and fundamental social rights, for example, and perhaps also minimum tax rules to avoid distortions of the type recently exemplified by Apple’s practices. 
Britain would also need to contribute to the EU budget, from which development funds (the counterpart to single-market access) are delivered. 
Some object that the deal would be too harsh for Britain to accept. 
But would the UK be better off losing access to the market of its main trading partner? 
Others worry that the EU would surrender its decision-making powers were it to consult with outsiders. 
But how would the few without a vote – Britain and others – dominate the many with a vote? 
Still others claim that such an arrangement would concede too much to Britain, compelling other countries to aim at a similar status and causing the EU to unravel. 
But why would an EU member be better off abiding by rules and paying into the EU budget without having a vote on the design of policies? 
And, far from undermining European integration, a continental partnership could support the consolidation of the EU’s core. 
True, there would be a price to pay for everyone. 
But it would be far lower than the price, in terms of lost prosperity and diminished global influence, of failing to create a continental partnership. 

Brexit and the Balance of Power 
CAMBRIDGE – Britain joined what became the European Union in 1973. 
This year, on June 23, it will hold a referendum on whether to leave. 
Should it? 
Current polls show a closely divided electorate. 
Prime Minister David Cameron claims that the concessions he has won from Britain’s EU partners should lay to rest popular concerns about a loss of sovereignty to Brussels and an influx of foreign workers from Eastern Europe. 
But Cameron’s Conservative Party and his own cabinet are deeply divided, while London’s populist mayor, Boris Johnson, has joined the supporters of British exit. 
The question of the costs and benefits of British membership in the EU divides the British press as well. 
Many mass-circulation publications support “Brexit,” whereas the financial press supports continued membership. 
The Economist, for example, points out that some 45% of British exports go to other EU countries, and that the atmosphere for negotiating a post-Brexit trade deal would likely be frosty. 
Moreover, the EU has made clear to non-members such as Norway and Switzerland that they can have full access to the single market only if they accept most of its rules, including the free movement of people, and contribute to the EU budget. 
In other words, a Britain outside the Union would gain little in terms of “sovereignty”; on the contrary, it would lose its vote and influence over the terms of its participation in the single market. 
Meanwhile, rival financial centers such as Paris and Frankfurt would seize the chance to establish rules that would help them win back business from London. 
Another complication is political: the rise of nationalism in Scotland and the effect of Brexit on the survival of the United Kingdom. 
In 2014, Scotland voted in its own referendum to remain in the UK; but the nationalists won almost all of Scotland’s seats in the general election eight months later. 
With Scottish opinion much more pro-European than in England, many believe that Brexit would lead to another referendum on independence. 
Cameron could be remembered as the prime minister who helped break up the UK (and possibly Europe). 
In the United States, President Barack Obama’s administration has stated clearly its belief that Britain and Europe are both stronger together. 
Illusions of a special relationship with the US replacing the influence of Europe are mistaken. 
But the British people will weigh whether to support Brexit, and an American hand on the scale could be counter-productive. 
At the same time, in the words of Douglas Alexander, the former Labour shadow foreign secretary, “since the end of World War II, America has been the system operator of international order built on a strong, stable Transatlantic Alliance supported by the twin pillars of NATO and the EU. 
If Britain leaves the EU, America’s closest ally would be marginalized….and the whole European project at risk of unraveling at precisely the time new economic and security threats confront the West.” 
It is no wonder that Vladimir Putin’s Kremlin would welcome Brexit and meddles in European countries’ domestic politics to try to weaken the EU. 
The geopolitical consequences of Brexit might not appear immediately. 
The EU might even temporarily pull together. 
But there would be damage to Europe’s sense of mission and its soft power of attraction. 
Ensuring financial stability and managing immigration would be much more difficult as well. 
In addition to a revival of Scottish separatism, Britain’s inward turn in recent years could accelerate. 
And over the longer run, the effects on the global balance of power and the liberal international order – in which Britain has a strong national interest – would be negative. 
When it acts as an entity, Europe is the largest economy in the world, and its population of nearly 500 million is considerably larger than America’s 325 million. 
It has the world’s largest market, represents 17% of world trade, and dispenses half of the world’s foreign assistance. 
It also has 27 universities ranked in the top 100 worldwide, and its creative industries contribute about 7% to its GDP. 
American per capita income is higher, but in terms of human capital, technology, and exports, Europe is very much an economic peer. 
In terms of military expenditure, Europe is second only to the US, accounting for 15% of the world total, compared to 12% for China and 5% for Russia. 
Of course, that number is somewhat misleading, given Europe’s lack of military integration. 
France and Britain are the two major sources of European expeditionary power. 
European and US resources are mutually reinforcing. 
Direct investment in both directions is higher than with Asia, and US-European trade is more balanced than US trade with Asia. 
At the cultural level, Americans and Europeans share the values of democracy and human rights more with each other than with any other world regions. 
Faced with a rising China, a declining but risk-inclined Russia, and the prospect of prolonged turmoil in the Middle East, close transatlantic cooperation will be crucial to maintaining a liberal international order over the long term. 
Recognizing that Brexit, by weakening both Europe and Britain, would make a disorderly international system more likely, should tip the balance in favor of maintaining the status quo. 

Brexit’s Impact on the World Economy 
LONDON – The febrile behavior of financial markets ahead of the United Kingdom’s referendum on June 23 on whether to remain in the European Union shows that the outcome will influence economic and political conditions around the world far more profoundly than Britain’s roughly 2.4% share of global GDP might suggest. 
There are three reasons for this outsize impact. 
First, the “Brexit” referendum is part of a global phenomenon: populist revolts against established political parties, predominantly by older, poorer, or less-educated voters angry enough to tear down existing institutions and defy “establishment” politicians and economic experts. 
Indeed, the demographic profile of potential Brexit voters is strikingly similar to that of American supporters of Donald Trump and French adherents of the National Front. 
Opinion polls indicate that British voters back the “Leave”campaign by a wide margin, 65% to 35%, if they did not complete high school, are over 60, or have “D, E” blue-collar occupations. By contrast, university graduates, voters under 40, and members of the “A, B” professional classes plan to vote “Remain” by similar margins of 60% to 40% and higher. 
In Britain, the United States, and Germany, the populist rebellions are not only fueled by similar perceived grievances and nationalist sentiments, but also are occurring in similar economic conditions. 
All three countries have returned to more or less full employment, with unemployment rates of around 5%. 
But many of the jobs created pay low wages, and immigrants have recently displaced bankers as scapegoats for all social ills. 
The degree of mistrust of business leaders, mainstream politicians, and expert economists is evident in the extent to which voters are ignoring their warnings not to endanger the gradual restoration of prosperity by upending the status quo. 
In Britain, after three months of debate about Brexit, only 37% of voters agree that Britain would be worse off economically if it left the EU – down from 38% a year ago. 
In other words, all the voluminous reports – by the International Monetary Fund, the OECD, the World Bank, and the British government and the Bank of England – unanimously warning of significant losses from Brexit have been disregarded. 
Rather than trying to rebut the experts’ warnings with detailed analyses, Boris Johnson, the leader of the Leave campaign, has responded with bluster and rhetoric identical to Trump’s anti-politics: “Who is remotely apprehensive about leaving? 
Oh believe me, it will be fine.” 
In other words, the so-called experts were wrong in the past, and they are wrong now. 
This kind of frontal attack on political elites has been surprisingly successful in Britain, judging by the latest Brexit polling. 
But only after the votes are counted will we know whether opinions expressed to pollsters predicted actual voting behavior. 
This is the second reason why the Brexit result will echo around the world. 
The referendum will be the first big test of whether it is the experts and markets, or the opinion polls, that have been closer to the truth about the strength of the populist upsurge. 
For now, political pundits and financial markets on both sides of the Atlantic assume, perhaps complacently, that what angry voters tell pollsters does not reflect how they will actually vote. 
Analysts and investors have consistently assigned low odds to insurgent victories: in late May, betting markets and computerized models put the probabilities of Trump’s election and of Brexit at only around 25%, despite the fact that opinion polls showed almost 50% support for both. 
If Brexit wins on June 23, the low odds accorded by experts and financial markets to successful populist revolts in America and Europe will immediately look suspect, while the higher probabilities suggested by opinion polls will gain greater credibility. 
This is not because US voters will be influenced by Britain; of course they will not be. 
But, in addition to all the economic, demographic, and social similarities, opinion polling in the US and Britain now face very similar challenges and uncertainties, owing to the breakdown of traditional political allegiances and dominant two-party systems. 
Statistical theory even allows us to quantify how expectations about the US presidential election should shift if Brexit wins in Britain. 
Suppose, for the sake of simplicity, that we start by giving equal credibility to opinion polls showing Brexit and Trump with almost 50% support and expert opinions, which gave them only a 25% chance. 
Now suppose that Brexit wins. 
A statistical formula called Bayes’ theorem then shows that belief in opinion polls would increase from 50% to 67%, while the credibility of expert opinion would fall from 50% to 33%. 
This leads to the third, and most worrying, implication of the British vote. 
If Brexit wins in a country as stable and politically phlegmatic as Britain, financial markets and businesses around the world will be shaken out of their complacency about populist insurgencies in the rest of Europe and the US. 
These heightened market concerns will, in turn, change economic reality. 
As in 2008, financial markets will amplify economic anxiety, breeding more anti-establishment anger and fueling still-higher expectations of political revolt. 
The threat of such contagion means a Brexit vote could be the catalyst for another global crisis. 
This time, however, the workers who lose their jobs, the pensioners who lose their savings, and the homeowners who are trapped in negative equity will not be able to blame “the bankers.” 
Those who vote for populist upheavals will have no one but themselves to blame when their revolutions go wrong. 

The Trade Costs of Leaving the EU 
BRUSSELS – The “Brexiteers” – those who want Britain to leave the European Union – argue that their goal would be virtually cost-free and have no effect on the United Kingdom’s global trade. 
They are wrong. 
On June 23, when voters in Britain cast their ballots in the referendum on the question, they need to consider what is actually involved in leaving the EU – and how the free-trade benefits they now enjoy (and take for granted) could be maintained after Brexit. 
Start with the basics. 
Leaving the EU means that the UK would exit the EU’s Customs Union, which is the basis for cross-border free trade among the EU’s 28 members (and establishes a common external tariff vis-à-vis third countries). 
It also means exit from the Single Market – the basis for the free movement of goods and services among EU members. 
By definition, non-members of the EU cannot belong to the Single Market. 
So what would happen next? 
During the two-year period before Britain’s withdrawal takes final effect, there would be UK-EU negotiations on many points – sovereignty, the legal order, immigration, finances, and economic matters. 
The assumption is that a crucial goal for Britain would be to negotiate a trading relationship as close as possible to the free-trade relationships that exist today. 
That is easier said than done. 
The best result would be if all players agreed to maintain the free trade already achieved, with the UK setting a new external tariff on a duty-free basis, applicable to all comers. 
This is what happened in the 1970s after Britain and Denmark left the European Free Trade Association: Free-trade agreements were negotiated among EFTA members and between them and the EU (or the EEC as it was then known). 
But Brexiteers should realize that there is no guarantee that this would happen again – and, in any case, there would be complications. 
While this solution would be good for the 45% of British exports that are sold in EU markets, it would reduce protection for British industries to zero. 
Under the rules of the World Trade Organization, the same import duties must be applied to all WTO participants – which means that if Britain’s imports from the EU are duty-free, its imports from the rest of the world must be, too. 
The alternative would be for UK exporters to accept the EU’s common external tariff, and for the UK to create its own import tariff, applied to all imports, including from the EU. 
Because the common tariff is at a relatively low level on industrial and fishery products, this might not be an insuperable barrier for UK exports, and it would allow some flexibility in protecting UK companies from imports. 
The potential pitfall is that any British tariff increase above the EU level would expose the UK to claims for compensation from third countries in the WTO. 
The bigger question that the Brexiteers need to answer is how to secure a high level of access to the EU’s internal market. 
This is vitally important for Britain’s service industries, particularly for the City of London’s exports of financial services. 
There is only one precedent for non-EU members being able to negotiate access to the internal market equivalent to that enjoyed by EU members. 
This is the European Economic Area agreement concluded with the EU by Norway, Iceland, and Liechtenstein in 1992. 
In the view of many observers, including me, access to the Single Market through the EEA is no longer available. 
But what if we’re wrong? 
The point is that such a deal would go against all the instincts (and rhetoric) of the Brexiteers, because it would mean accepting the EU’s “four freedoms”: not just the free movement of goods, services, and capital – but of people, too. 
That would be hard to square with the Brexit objective of “controlling our borders.” 
The Brexiteers would also blanch at Britain’s obligation under an EEA-type agreement to continue contributing to the EU budget. 
Of course, there could be specific arrangements for particular sectors. 
But it seems unlikely that such arrangements would be possible in financial services and the major professional services (including doctors, architects, and lawyers), which are important for Britain’s competitors in Europe. 
Indeed, it is possible that the EU would adopt a tough mercantilist stance: If you want privileged access, you should stay in the club. 
The final consequence of Brexit is that the UK would lose its free-trade arrangements with third countries under the many trade agreements that the EU has signed since 2000. 
Replacing these agreements with bilateral deals would take time. 
There is no guarantee that the EU would agree to an interim continuation of free trade, and it seems certain that UK exports would face higher tariffs than its former EU partners in those third countries (placing British exporters at a competitive disadvantage). 
It’s a big stretch for the Brexiteers to ask us to believe that the world’s most prominent leaders, European or not, have all got the impact of Brexit wrong. 
In the trade debate, we have had the International Monetary Fund, US President Barack Obama, and the OECD – quite apart from the UK Treasury – telling Britons that a vote to leave would be bad for the economy. 
It is not much of a reply to argue that the OECD is “in the pay of the EU” or that Obama is anti-British because he had a Kenyan father in British colonial days. 
Economic forecasting is an uncertain science. 
But when almost all projections point in the same direction – that Brexit would be hugely damaging to the UK – it is time to decide what is credible and what is not. 

Fake Brexit or No Brexit 
LONDON – Since last year’s Brexit referendum, the United Kingdom has been likened to a suicide who jumps off a 100-storey building and, as he falls past the 50th floor, shouts “so far, so good.” 
This comparison is unfair to suicides. 
The real economic and political message today is “so far, so bad.” 
The “deal” to begin negotiations for a post-Brexit relationship, announced at the EU summit on December 15, followed Prime Minister Theresa May’s capitulation on all of the demands made by European leaders: €50 billion ($59 billion) of budget contributions, European court jurisdiction over the rights of EU citizens in Britain, and a permanently open border with Ireland. 
The last concession was a game changer. 
The open border in Ireland has forced May to abandon her promise to “take back control” from the EU and its regulatory framework, as confirmed in the summit communiqué: “In the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation.” 
The result of this crucial concession on Ireland is that both scenarios usually proposed for Britain’s relationship with the EU can now be dismissed. 
With no parliamentary majority to revoke the agreement, a “hard Brexit,” in which Britain breaks free of EU regulations and trades simply on the basis of World Trade Organization rules, is no longer possible. 
And a “soft Brexit,” which attempts to preserve the commercial benefits of EU membership without the political obligations, is equally impossible, because European leaders reject any such “cherry-picking” – and now have the whip hand over Britain. 
If hard and soft Brexit are both excluded, what other options are there? 
The obvious one, apparent after May’s failed election gamble, is some form of associate EU membership, similar to Norway. 
Britain would retain many of its current commercial privileges, in exchange for complying with EU rules and regulations, including free movement of labor, contributing to the EU budget, and accepting the jurisdiction of EU law. 
While May foolishly rejected all three of these conditions early this year, the likely result of the Brexit negotiations will be to blur all her “red lines” out of existence. 
While businesses, investors, and economists would welcome such a Norwegian-style “fake Brexit,” it would carry a huge political cost. 
Britain would have to adhere to EU laws, regulations, and legal judgments in which it would no longer have any say. 
Instead of a rule-maker, the United Kingdom would become a “rule-taker” – or, in the emotive language adopted recently by Brexit hardliners, Britain would be reduced from an imperial power to a “vassal state” or a “colony” of the EU. 
This “rule-taker” status is what the UK has already requested for a two-year “transition period,” beginning in April 2019. 
May claims that this will be a “strictly time-limited” arrangement, while she negotiates a free-trade agreement with the EU. 
But the EU has repeatedly made clear that two years is too short a period to negotiate even a simple FTA, never mind the “imaginative, bespoke” deal that May is seeking. 
In truth, there is almost no chance of Britain ever negotiating the “deep and special partnership” May has promised. 
It is simply inconceivable that European leaders would offer Britain’s service industries access to the EU single market without imposing the legal and budgetary conditions accepted by Norway and Switzerland. 
What, then, will happen at the end of the transition period in April 2021? 
The only plausible answer is a further transition, if only to avoid an economically devastating rupture in trade regulations just before the UK general election due in 2022. 
And, assuming the transition is extended from 2021 to, say, 2023, aren’t further extensions likely, probably evolving into a quasi-permanent arrangement? 
Norway’s EU relationship via the European Economic Area, also designed as a brief transition, has now lasted 24 years. 
This “Hotel California” scenario, in which “you can check out any time you like, but you can never leave,” would ultimately enrage both Brexiteers and Remainers. 
So what are the other options? 
If a hard Brexit is economically unacceptable to British business and Parliament, a soft Brexit is politically unacceptable to EU leaders, and a fake Brexit is unacceptable to almost everyone, that leaves just one alternative: no Brexit. 
It is still entirely possible to abandon Brexit by revoking Britain’s withdrawal notice under Article 50 of the Treaty on European Union. 
This decision would have to be made by Parliament before the treaty deadline of March 29, 2019, and it would probably have to be ratified by another referendum. 
A necessary condition for this sequence of events would be the collapse of May’s government, perhaps caused by a Brexiteer revolt against the “vassal state” conditions imposed by the EU during the transition period. 
Under these circumstances, a general election would almost certainly produce a Labour-led coalition based on a promise to “think again” about Brexit. 
This was exactly the scenario suggested last month by one of May’s few remaining loyalists, Health Secretary Jeremy Hunt, who became the first senior Tory to admit publicly that Brexit might never happen if zealous Euroskeptics ever rebelled against May. 
For the time being, the threat of a Labour government has been sufficient to intimidate Brexit hardliners. 
But the forced quiescence of the Euroskeptics makes it more certain that May will negotiate a “vassal state” transition that evolves into the Euroskeptics’ nightmare of an inescapable “Hotel California,” based on the Norway model. 
As the Brexit hardliners grasp this logical conundrum, they could well decide to bring down May and risk a general election rather than collaborate in Britain’s demotion to “vassal statehood.” 
The suicide jumper is still falling, and, until he passes the first-floor window, we will not know whether he is attached to a bungee cord. 

Brexit In Reverse? 
LONDON – Economic reality is beginning to catch up with the false hopes of many Britons. 
One year ago, when a slim majority voted for the United Kingdom’s withdrawal from the European Union, they believed the promises of the popular press, and of the politicians who backed the Leave campaign, that Brexit would not reduce their living standards. 
Indeed, in the year since, they have managed to maintain those standards by running up household debt. 
This worked for a while, because the increase in household consumption stimulated the economy. 
But the moment of truth for the UK economy is fast approaching. 
As the latest figures published by the Bank of England show, wage growth in Britain is not keeping up with inflation, so real incomes have begun to fall. 
As this trend continues in the coming months, households will soon realize that their living standards are falling, and they will have to adjust their spending habits. 
To make matters worse, they will also realize that they have become over-indebted and will have to deleverage, thus further reducing the household consumption that has sustained the economy. 
Moreover, the BoE has made the same mistake as the average household: it underestimated the impact of inflation and will now be catching up by raising interest rates in a pro-cyclical manner. 
These higher rates will make household debt even harder to pay off. 
The British are fast approaching the tipping point that characterizes all unsustainable economic trends. 
I refer to such a tipping point as “reflexivity” – when both cause and effect shape each other. 
Economic reality is reinforced by political reality. 
The fact is that Brexit is a lose-lose proposition, harmful both to Britain and the EU. 
The Brexit referendum cannot be undone, but people can change their minds. 
Apparently, this is happening. 
Prime Minister Theresa May’s attempt to strengthen her negotiating position by holding a snap election badly misfired: she lost her parliamentary majority and created a hung parliament (no single party has a majority). 
The primary cause of May’s defeat was her fatal misstep in proposing that elderly people pay for a substantial portion of their social care out of their own resources, usually the value of the homes that they have lived in all of their lives. 
This “dementia tax,” as it became widely known, deeply offended the core constituency, the elderly, of May’s Conservative Party. 
Many either did not vote, or supported other parties. 
The increased participation of young people was also an important contributing factor in May’s defeat. 
Many of them voted for Labour in protest, not because they wanted to join a trade union or because they support Labour leader Jeremy Corbyn (although he gave an unexpectedly impressive performance throughout the campaign). 
The attitude of Britain’s young people to the single market is diametrically opposed to that of May and supporters of a “hard” Brexit. 
Young people are eager to find well-paying jobs, whether in Britain or elsewhere in Europe. 
In that respect, their interests correspond with the interests of the City of London, where some of those jobs are to be found. 
If May wants to remain in power, she must change her approach to the Brexit negotiations. 
And there are signs that she is prepared to do so. 
By approaching the negotiations that will start on June 19 in a conciliatory spirit, May could reach an understanding with the EU on the agenda and agree to continue as a member of the single market for a period long enough to carry out all the legal work that will be needed. 
This would be a great relief to the EU, because it would postpone the evil day when Britain’s absence would create an enormous hole in the EU’s budget. 
That would be a win-win arrangement. 
Only by taking this path can May hope to persuade Parliament to pass all the laws that need to be in place once the Brexit talks are completed and Britain withdraws from the Union. 
She may have to abandon her ill-considered alliance with the Democratic Unionist Party in Ulster and side more emphatically with the Tories of Scotland, who are keen on a softer version of Brexit. 
May will also need to atone for the sins of the Tories in the London borough of Kensington with regard to last week’s Grenfell Tower fire, in which at least 30 people, and perhaps many more, lost their lives. 
If May embraces such a platform, she could then carry on leading a minority government, because nobody else would want to take her place. 
Brexit would still take at least five years to complete, during which time new elections would take place. 
If all went well, the two parties might want to remarry even before they have divorced. 

Britain’s Road to Perdition 
LONDON – Full English Brexit is off the menu. 
Before leaving the European Union altogether, the British government now wants an “interim period,” in which the United Kingdom would retain the commercial rights of EU membership, while still contributing to the EU budget, observing EU regulations and legal judgments, and allowing the free movement of people. 
This period would last for at least two years after March 2019 – the official deadline for the Brexit process – meaning that until 2021, Britain would essentially be an EU member state without any voting rights. 
In the meantime, British Prime Minister Theresa May’s government, having promised to maintain a “deep and special” relationship with Europe, would try to negotiate a new “treaty-based arrangement” with the EU. 
But Britain will have a vanishingly small chance of concluding a new treaty in so short a time. 
Indeed, come 2021, the UK will still be hurtling toward a “cliff edge”: a full break from Europe, with no alternative arrangement in place to cushion the blow. 
Politically, that timing would pose even greater risks for May’s government than it faces today, since the next general election must be held by June 2022. 
So the UK may try to extend the transition period beyond 2022. 
And as past experience tells us, once an extension is granted, it may never end. 
The UK seems to be approaching the scenario I outlined three months ago. 
May’s fateful decision to hold an early election in June has allowed her opponents to demand that the UK negotiate a transitional arrangement similar to what Norway has as a member of the European Economic Area. 
The EEA was originally created in 1994 as a temporary framework for various countries preparing to join the EU. 
But because Norwegian voters rejected a referendum on EU membership 11 months later, the EEA has now lasted for 24 years. 
Nobody can predict what will happen in 24 years. 
But the good news for Britain is that the EU may already be moving slowly toward a two-track structure. 
To prosper, the eurozone will need to establish a political union. 
This will leave non-euro countries such as Denmark, Poland, and Sweden forming an outer ring of economic cooperation outside the eurozone. 
These countries would have membership in the single market, but not in the monetary or political union. 
A two-track Europe would be very different from the “two-speed” model that applies to Europe today. 
In the latter, every country is theoretically heading toward “ever-closer union,” just at different rates. 
In a two-track scenario, by contrast, Britain could comfortably re-join the outer track along with Norway and, perhaps, Switzerland. 
Now for the bad news. 
A transition arrangement for the UK may be unacceptable to both EU governments and British voters. 
Committed federalists in the EU want Britain out as quickly as possible, because Britain has long given cover for others – such as Denmark, Poland, and Sweden – to resist deeper integration. 
Federalist zealots hate the idea of a two-track Europe. 
They want to force all EU member states to adopt the euro within the next decade, and to embed themselves permanently into a full-scale political and fiscal union. 
And they rightly believe that achieving this goal will be easier with Britain out of the picture. 
But a transition period is no panacea for the UK either. 
Britons have already started to get a glimpse of the economic costs of Brexit, as international businesses that once used Britain as a hub for their European operations have started to relocate some of their activities. 
As the UK government tries to maintain the fiction of a strictly time-limited transition, this process will accelerate further. 
Moreover, the EU will use the transition period to change its own regulations, so that businesses generating employment and large tax revenues will have to move onto EU territory. 
For example, the European Banking Authority and the European Medicines Agency are already relocating from London, meaning the many legal, managerial, and lobbying jobs connected to highly regulated activities such as finance and pharmaceutical research will have to relocate, too. 
A transition period would thus hit international businesses based in Britain with a regulatory double-whammy: they would be subject to the whims of UK and EU bureaucracies at the same time. 
Making matters worse, the promise of a long transition could delay the shift in public opinion needed to reverse Brexit before it is too late. 
After March 28, 2019, the UK will be officially out of the EU, where economic growth has already started to overtake that of Britain. 
If it ever wants to be readmitted, it will have to settle for far less attractive terms than what it enjoys today. 
Not only would it no longer receive budget rebates or special treatment on social regulations; it might even be forced to join the euro. 
Even the 48% of British voters who voted “Remain” might reject such humiliating terms. 
Britain would thus be stuck in limbo – like Norway, but without the oil wealth or social cohesion. 
As the Labour Party’s trade spokesman has aptly put it, a semi-permanent transition period based on the “Norway model” would turn Britain into a “vassal state.” 
It would still pay large sums into the EU budget and adhere to EU laws, but it would have no say over how that money is spent or how those laws are made. 
In the months ahead, the British public may start to foresee this humiliating endgame. 
The Norway model will satisfy neither Britain’s elderly, provincial Europhobes, nor the young, urban voters who want to preserve the rights of EU citizenship that they have taken for granted all their lives. 
With this depressing prospect setting in, British voters could change their minds about Brexit before their leaders go through with it. 
But for such a Damascene conversion to happen, the country would have to experience a political or economic crisis large enough to shake public opinion out of its fatalistic complacency. 
As things stand, Britons have been emulating that beloved national slogan, “Keep calm and carry on.” 
Before things can get better for Britain, they will probably have to get much worse. 

The Return of the Irish Question 
LONDON – Almost exactly 20 years ago, after months of delicate and difficult negotiation, leaders of Northern Ireland’s two main political camps – Catholic nationalists and republicans on one side; 
Protestant unionists on the other – signed the Good Friday Agreement, ending more than 30 years of violence and bloodshed. 
Now, that agreement – and the mutually respectful and harmonious relationship that it enabled – is under threat. 
The Good Friday Agreement was brokered by the prime ministers of the United Kingdom and the Republic of Ireland – Tony Blair and Bertie Ahern, respectively – with the help of United States Senator George Mitchell. 
(A great deal of spadework had also been done by Blair’s predecessor, John Major.) 
It was based on the proposition that, as long as everyone agreed that changes to Northern Ireland’s constitutional status could come only as a result of free democratic choice, people could assert their loyalty to their preferred identity: British, Irish, or even both. 
To support peace, the agreement created a power-sharing government in Northern Ireland, with representatives from both sides of the conflict. 
It also established the Independent Commission on Policing for Northern Ireland, which I chaired, to reform the police service. 
Our efforts helped to reduce attacks on the police by making them acceptable to all groups, and led to a substantial increase in the recruitment of Catholics, among other things. 
Once the agreement was signed, the status of both Britain and Ireland as European Union members made the transition incomparably easier. 
Just like that, the border between them was little more than a line on the map: there were no barriers, customs posts, or other divisive symbols to show where one country ended and the other began. 
Trade and people could move freely between them. 
In fact, their status as European partners – ever since Ireland became a member of the European Communities in 1973 – has long reinforced the ties binding the UK and Ireland. 
To be sure, their violent history – which has included conquest, colonization, rebellion, and famine – has left deep-seated animosity. 
Yet, as European partners, not to mention neighbors in an archipelago off the west coast of Europe, they are inextricably connected. 
More than five million people in England, Wales, and Scotland have at least one Irish grandparent. 
Go back a generation further, and the number rises higher. 
Over the last two decades, the UK and Ireland have enjoyed the fruits of a mutually respectful and peaceful relationship. 
There is certainly much for us British to admire in Ireland today: its economic growth, its cultural renaissance in literature and music, its appeal to immigrants from around the world, who now comprise 17% of the country’s population. 
With extraordinary maturity, Ireland has left behind narrow clericalism, and become a modern and generous state. 
Yet serious challenges are now emerging. 
In Northern Ireland, the power-sharing government has broken down, and the UK government is not in a strong position to help restore constructive collaboration. 
In order to secure a working majority in the House of Commons after last year’s disastrous snap election, British Prime Minister Theresa May’s Conservatives made a deal with Northern Ireland’s Democratic Unionist Party, which has its roots in the more extreme unionist traditions. 
As a result, the UK government seems unable to act as an even-handed mediator. 
The ongoing Brexit negotiations are complicating matters further, as nobody seems to know how to deal with the consequences for Northern Ireland and the Irish Republic, which will be divided by the UK’s border with the EU. 
While many politicians say they want a frictionless border, May and some of her colleagues have discussed leaving both the single market and the customs union, thereby putting the UK outside the tariff-free zone in which trade is facilitated by shared regulations. 
Northern Ireland, they assert, will have to have the same trade rules as the rest of the UK. 
This leaves two possibilities: either a frictionless trade regime that operates throughout the British Isles, or a hard border across Ireland. 
After all, other EU countries are not going to allow only England, Scotland, and Wales to leave the single market and customs union, while leaving Northern Ireland in. 
That would make it far too easy to avoid regulations, such as rules of origin, with a non-EU country exporting goods to Ireland for onward shipment to the UK, or vice versa. 
Similar problems arise with regard to the free movement of people within the EU – a rule to which the UK does not want to be subject. 
None of these challenges should come as a surprise. 
The warnings were issued a long time ago; the British government simply ignored them. 
Potential solutions remain a mystery, but the authorities will have to confront the question sooner or later. 
There is certainly no easy technological solution. 
Any system of checks will inevitably involve some sort of physical control. 
The customs officers tasked with implementing those checks will inevitably become symbols of division, and potentially even a provocation to violence by republican extremists, as happened in the past. 
All it would take would be one attack to impel the government to boost security, deepening divisions and spurring more violence. 
The reintroduction of a hard border in Ireland would be devastating, as it could undermine the Good Friday Agreement. 
One hopes that Irish leaders can impress this upon politicians in the UK, opening the way for a solution that doesn’t threaten Ireland’s hard-won peace and prosperity. 

Brexit vs. the Irish Question 
LONDON – On Brexit day – March 29, 2019 – the HMS Buccaneer Britannia will set sail in search of the riches of the “Anglosphere.” 
But there is a hitch: Someone has forgotten to raise the anchor, which remains planted firmly in Ireland. 
This isn’t surprising. 
Of all the Euroskeptic Conservative politicians I know, not one has ever mentioned Northern Ireland, let alone the sovereign country to the south of it. 
The only thing on the Brexiteers’ minds is the quest for parliamentary sovereignty and liberation from the supranational “superstate” in Brussels. 
This blinkered view may simply reflect ignorance. 
Even an erstwhile “Remainer” like Karen Bradley, the current Secretary of State for Northern Ireland, recently confessed that, “[…] when I started this job, I didn’t understand some of the deep-seated and deep-rooted issues that there are in Northern Ireland.” 
In other words, until very recently, she has been incurious about one of the central issues of nineteenth- and twentieth-century British history. 
Conservative politicians who find themselves in such a position would do well to know that conflicts over the “Irish question” have resulted in more than 3,600 violent deaths. 
They might also benefit from knowing that successive Conservative prime ministers, from Edward Heath to Margaret Thatcher to John Major, struggled and failed to resolve the issue before it was put to rest by the 1998 Good Friday Agreement. 
In addition to military decommissioning, the Good Friday Agreement brought together antagonistic communities by mandating smooth trade between Northern Ireland and the Republic of Ireland, under the aegis of the EU customs union. 
The fact that 55.8% of Northern Irish voters backed “Remain” in the 2016 referendum partly reflects this astonishing achievement. 
Anyone with an ounce of foresight should have known that the status of Northern Ireland would become a stubborn conundrum at the center of the Brexit negotiations. 
In fact, the problem is so intractable that conspiracy-minded Brexiteers now suspect EU negotiators of using it to delay or stymie Buccaneer Britannia’s glorious departure. 
Ironically, many in the EU also think that a plot is afoot. 
The EU has long insisted that a legally binding divorce settlement must be concluded before there can be any discussion of future UK-EU relations. 
But now Britain is suspected of exploiting the Irish question to insinuate a detailed “political declaration” about future relations into the formal exit agreement. 
The key problem is the so-called Irish backstop, which would prevent the establishment of a hard border between Northern Ireland and the Republic of Ireland in the absence of a wider deal on the future of UK-EU relations. 
In December 2017, all parties concurred that such a backstop was necessary to preserve the peace under the Good Friday Agreement. 
But there has been disagreement over the translation of this into legally binding language. 
Failing an agreement, “the territory of Northern Ireland would be part of the customs territory of the European Union.” 
For its part, the UK government insisted that it can address the border issue by remaining in close alignment with EU customs rules and deploying customs-monitoring technologies that have yet to be invented – which is to say, by magic. 
Yet the Irish government has insisted that every detail of the backstop be nailed down and included in the legally binding withdrawal treaty. 
But this preliminary agreement immediately posed a problem for May, whose majority in the House of Commons depends on ten Democratic Unionist MPs from Northern Ireland. 
And, because her own party and the cabinet are divided on the kind of Brexit they want, the Irish Republic and the rest of the EU are in the position of spectators to a colossal act of national self-harm. 
If the province were to remain in the EU’s customs and regulatory orbit, there would have to be a border in the Irish Sea. 
That would jeopardize not just the workings of the UK’s internal customs union, but also the constitutional integrity of the United Kingdom of Great Britain and Northern Ireland. 
Worse, the fudging language invited a “we, too” riposte from Scottish nationalists, who rightly argued that if special arrangements were going to be made for Northern Ireland’s Remain majority, then the Scots, who also voted to remain, should be offered a similar deal. 
Failing that, they would demand a rerun of the 2014 Scottish independence referendum. 
This time, however, Scottish nationalists would not have to worry about the Unionist argument that independence implies a de facto withdrawal from the EU. 
The EU rejected British offers to remaintemporarily in the customs union after Brexit, because that would allow the UK to enjoy the benefits of tariff-free trade without having to permit the free movement of EU citizens. 
On this occasion, the EU once again suspected the UK of using Northern Ireland as a Trojan horse to gain an unfair advantage, and the Brexiteers accused May of capitulating to the extortionist gangsters in Brussels. 
May’s “Brexit secretary,” David Davis, immediately resigned, and he was soon followed out the door by then-Foreign Secretary Boris Johnson (who needed a moment to consider his own prospects of replacing May). 
Negotiators have since been exploring the surreal idea of a “backstop to the backstop” in the event that the first backstop ends up being “time-limited” instead of “all-weather,” to use their deadly jargon. 
Emphasis has now shifted to how the entire UK can remain in the customs union, with the proviso that “one day” it might be able to escape. 
But the basic point remains: Predominantly English Brexiteers have given no serious thought to the Irish question, nor even to the likelihood that crashing out of the EU might take the UK back to the dark ages. 
Many of them would rather lose Northern Ireland and Scotland than forgo Brexit. 
Instead, they have been busy constructing a fanciful world of limitless possibility, based on a national mythology featuring Sir Francis Drake, Sir Walter Raleigh, the British Raj, and standing “alone” in 1940. 
Psychologically, some of them seem to be reliving an imaginary war with our closest neighbors and trading partners. 
Most sensible people live in the present. 
And wherever one looks, from Trump’s trade wars to Russia and Moldova vowing to block Britain’s post-Brexit accession to the World Trade Organization, reality is ineluctably crushing Brexiteers’ fantasies of English importance. 


How Money Could Unblock the Brexit Talks 
LONDON – Like many divorce proceedings, Britain’s negotiations with the European Union have reached an impasse that can be broken only by compromise. 
The solution is for both sides to admit that a permanent new relationship cannot be agreed in the short time remaining until the Brexit deadline in March 2019. 
So, instead of letting the United Kingdom crash out of the EU then, the talks should now shift to the temporary “transition” that Prime Minister Theresa May officially requested last month – and which a strong consensus among Britain’s business leaders and public now demands. 
Above all, the negotiators should focus immediately on the British budget contributions that will be required to make an orderly transition possible. 
An agreement on a mutually beneficial transition would require some compromises from both sides. 
But neither Britain nor the EU would have to abandon any fundamental principles. 
For Europe, shifting the focus of negotiations to a temporary agreement, probably modeled on the EU’s relationship with Norway, would involve only a small loss of face: EU leaders would have to concede that the sequencing they originally proposed for the Brexit talks had to be rejigged. 
Instead of agreeing on a financial settlement first, and then moving on to trade relations, finance and trade would have to be acknowledged as interdependent – and thus be discussed simultaneously. 
For Britain, a change of focus from permanent arrangements to the conditions for an orderly transition could transform the budgetary issues now preventing progress into a key that could unlock the talks. 
In a speech delivered in Florence last month, May offered to make EU budget contributions of roughly €10 billion ($11.8 billion) annually for a transition period of at least two years after the Brexit deadline, as well as to maintain free movement of labor and enforce all EU rules. 
May hoped that her promise would win over European leaders – especially the biggest contributor, Germany, and the big net recipients, such as Poland and Portugal. 
But her offer failed to impress, probably because EU leaders are less worried about the financial hole created by Brexit in 2019 and 2020 than they are about the next budget cycle, from 2021 to 2026. 
To suggest that Britain should pay budget contributions well into the next decade may seem completely unrealistic, given the vehement opposition to all EU payments from Euroskeptics in May’s Conservative Party. 
But, on closer inspection, making a long-term budget offer could have two big advantages for May. 
First, transitional budget contributions could be presented as commercial payments to support European programs from which Britain benefits, instead of the punitive-sounding “divorce settlement” of €50-60 billion currently demanded by the EU. 
If Britain’s transitional payments continued near the current level of €10 billion for the five or six years realistically required to negotiate a permanent trading relationship, they would add up to the same amount. 
Second, a British budget offer would be a powerful tool to create the “deep and special partnership” with Europe that May claims is her ultimate goal. 
Until last month, May avoided defining this phrase, for fear of antagonizing her party’s hardline Europhobes. 
But in her Florence speech, May promised British businesses something close to the current level of access to EU markets. 
She also recognized that any privileged access to EU markets would require budget contributions, as in the case of Norway and Switzerland. 
The implication was clear: something close to the current level of access to EU markets would demand something close to the current level of budget contributions. 
And if May’s “deep and special partnership” is to be a permanent feature of British-EU relations, the budgetary contributions will have to be permanent, too. 
But what if May is not really serious about that “deep and special partnership”? 
What if her true objective is to satisfy Conservative hardliners by bringing about a “clean break” with the EU? 
Even then, Britain will need to continue paying budget contributions for many years, if it wants an orderly and non-disruptive Brexit. 
Let’s assume that Britain’s ultimate aim is to create completely new global trading relationships, without any special EU trading privileges. 
These new trade deals will take many years to negotiate, and until their completion, British businesses are desperate to avoid two costly disruptions: one when EU membership ends in March 2019, and another at whatever future date the new global trade agreements are finalized and come into effect. 
Avoiding such a double disruption is the whole point of May’s proposal for a “standstill” transition period from 2019 to 2021. 
But achieving that objective will require the standstill in Britain’s EU arrangements to continue until new global agreements are ready to implement. 
This implies that Britain’s budget contributions must also continue until new global agreements are finalized. 
The probability that complex negotiations with dozens of countries can be completed within just two years of Brexit is vanishingly small. 
So, even if British politicians and voters really want a hard Brexit involving total rupture with Europe, UK businesses will need to preserve their special EU trading arrangements, along with the associated budget contributions, for at least several years beyond 2021. 
The upshot is that, regardless of what type of Brexit the UK wants, any orderly withdrawal will require continued post-Brexit budget payments to the EU. 
The only question is whether these payments turn out to be permanent, as they would if May really wants a “deep and special partnership,” or continue only for the 5-7 years required to negotiate new trade agreements after a hard Brexit. 
Either way, May should recognize that EU budget payments will be inevitable for many years after Brexit. 
More than that, she should turn this recognition into an impressive long-term financial offer to unblock the Brexit talks. 

A Brexit Gentlemen’s Agreement 
BRUSSELS – In her latest speech on Brexit, British Prime Minister Theresa May rejected the prospect of the United Kingdom remaining in the European Union’s customs union, on the grounds that the UK wants its own trade policy. 
This is not in the best interest of either the UK or the EU. 
It is true that Norway and Switzerland, both of which are highly integrated into the EU market, have customs borders with the bloc. 
These countries need an independent commercial policy to provide greater protection than the EU offers to their domestic agricultural sectors, which in both cases can never be efficient, owing to mountainous terrain. 
Yet the UK has traditionally been much less protective of its agriculture, and is thus likely after Brexit to pursue a commercial policy that is very similar to that of the EU, anyway. 
It is therefore difficult to see what the UK would gain from pursuing a national trade policy – especially at a time when the United States, under President Donald Trump, is pursuing policies (such as imposing tariffs on imported steel and aluminum) that show little regard for its smaller trade partners. 
The truth is that the main impediment to a post-Brexit customs union is political. 
As Labour leader Jeremy Corbyn, who supports remaining in the customs union, has emphasized, a country with the heft and influence of the UK cannot be viewed as merely following EU decisions, over which it has no influence. 
Yet this problem can be solved – or, rather, finessed. 
The UK’s demand to weigh in on EU decisions can and should be accommodated, with experts from the UK included in the committees that decide trade policy. 
Those experts would have no voting rights, but they would be able to shape decision-making. 
The EU already has similar arrangements with Iceland, Norway, and Switzerland regarding matters relating to the Schengen Area. 
Formal decision-making power is of course another matter. 
The EU’s legal structure cannot allow a non-member state to participate in binding decisions. 
This calls for something of a gentlemen’s agreement, with the EU pledging to take UK interests into account when making trade-policy decisions. 
If the UK remains in the existing EU customs union – as is foreseen for the transition period – rather than negotiating a new customs agreement with the EU, that gentleman’s agreement would also extend to new trade agreements that the EU concludes with third countries. 
After all, such agreements would apply explicitly to the EU’s entire customs territory – a term with a precise meaning under WTO rules. 
So, whatever market-access benefits they include would automatically apply to the UK. 
As a gesture of goodwill, the EU should also support the UK’s efforts to “grandfather” its market access resulting from existing EU free-trade agreements and thereby avoid the need to renegotiate each and every deal. 
The legal argument would be that the EU customs territory has not changed, so existing EU trade agreements must continue to apply to the UK. 
But this argument could be contested, leaving UK exporters suddenly confronting tariffs and other trade barriers. 
European Commission officials could dismiss that as the UK’s problem. 
But such a response would run counter to the spirit of the European Council guidelines of April 2017, which call for “a constructive dialogue” with the UK “on a possible common approach toward third-country partners.” 
Such a constructive approach would include steps – like supporting the grandfathering of trade agreements – that minimize friction during the transition period. 
Remaining in the EU’s customs union would leave the UK in a much stronger position than, say, Turkey, which, despite having concluded an agreement to create a customs union with the EU, is not actually part of the bloc’s customs territory. 
As a result, third parties do not automatically have to grant Turkish exporters EU-level access to their markets. 
Instead, Turkey must try to persuade third countries with which the EU has concluded trade deals to do so. 
Turkey has usually succeeded. 
But it enters such negotiations in a weak and somewhat awkward position, because it is required, per its agreement with the EU, to grant to the third country all of the concessions the EU has made, whereas the third country has no legal or political obligation to reciprocate. 
For the EU, agreeing to take the UK’s interests into account in future trade negotiations should not be viewed as a concession, because it is in the EU’s own long-term interest. 
After all, if the EU can offer de facto access to the EU and UK markets – which, together, are 20% larger than the EU market alone – its negotiating power is significantly strengthened. 
In this sense, keeping the UK in the EU customs union would help to preserve the EU’s global standing in trade. 
And while many in the EU, especially the European Commission, would like to have their cake and eat it – keeping the UK in the customs union, while ignoring its interests – that is simply not an option. 
The alternatives available for the EU is either to see the UK to leave its customs union, or to keep the UK in, by making a political commitment to take British interests into account. 
From a long-term perspective, the latter is preferable. 
Finally, remaining in the EU customs union would make it possible to avoid reestablishing a hard border between the UK and the Republic of Ireland after Brexit. 
Though May has agreed that avoiding a hard border should be part of any deal, she has offered only vague suggestions concerning how that could actually be achieved. 
Brexit is, and will remain, a lose-lose proposition. 
Neither side can claim victory if its point of view prevails. 
But the losses on both sides can be reduced. 
To that end, keeping the UK in the EU customs union – by guaranteeing it an active, albeit informal role – is negotiators’ best bet. 

Why the EU Must Be Generous to Britain 
MUNICH – British Prime Minister Theresa May has confirmed it. The United Kingdom will, without a doubt, leave the European Union and negotiate new trade agreements. 
The question is what kind of agreement the EU will accept. 
Britain, May has made clear, doesn’t want an arrangement like that of Switzerland or Norway, because that would require it to cede some control over its immigration policy. 
Submitting to the jurisdiction of the European Court of Justice, which UK leaders accuse of delivering judgments based on vested interests, is not an option, either. 
But the EU is not ready simply to allow the UK to drop whatever it doesn’t like, at least not without paying a price. 
The EU’s leaders insist that the UK cannot have free trade with the single market without allowing free movement of people. 
This stubbornness arises partly from the fear that, if the UK secured such a lopsided deal, other EU countries would attempt to do the same. 
But the desire to punish the British, if only to deter other member states from bolting, is surely also a contributing factor. 
This approach is all wrong. 
While it is undoubtedly regrettable that the UK is leaving, the truth is that free trade with the EU does not have to be accompanied by free movement of people. 
As pure trade theory shows, the economic effects and welfare gains resulting from free trade are substituted, not enhanced, by those of free movement of labor. 
If migration is not possible, different wage structures are more likely to arise among countries – bringing different price structures with them. 
These differences increase gains from trade; indeed, exploiting such differences is the entire point of trade. 
If the EU refuses to sustain free trade with the UK, its citizens will suffer as much as the British. 
The argument that other EU countries would be likely to follow the UK’s lead is dubious. 
There are two types of political community. 
One fulfills the criterion of Pareto optimality: because the community makes decisions unanimously – or, at least, adhering to rules that protect minorities – it implements measures that provide advantages to some or all members and create disadvantages for none. 
That approach means that countries are not fighting for a bigger piece of the pie at the expense of others. 
Instead, they work together voluntarily to ensure that the pie keeps growing, and that everyone gets a decent slice. 
The other type of community is characterized by, first, the redistribution of resources among countries and, second, by majority decision-making. 
Here, there are winners and losers, because the majority can force through its preferences, even if the gains its members reap are dwarfed by the losses incurred by the minority. 
As a result, the pie often becomes smaller, and some countries end up very unhappy. 
This second type is inherently unstable, because the losers tend to opt out. 
The only way to keep them in is to make leaving even less appealing – say, by punishing them. 
By seeking to make an example of the UK, the EU is sending the message that it is a union in which some members are bound to lose. 
This is the narrative being promoted by America’s new president, Donald Trump, who has declared his support for the British and his expectation that more countries will follow suit. 
To avoid such an outcome, the EU must transform itself from a redistributive union ruled by the majority to an optimal and voluntary union ruled by unanimity – one that conforms to the Pareto principle. 
The first step should be to scrap the plan to install a common EU finance minister at the head of an authority with autonomous taxation powers. 
The next is to offer the UK a mutually beneficial free-trade agreement. 
If the EU does not shift its approach, it risks becoming a non-consensual community in which only some members are happy – and others want out. 
While penalties and other coercive measures may be able to keep wavering member states in for a while, this approach would leave the EU susceptible to instability and its members vulnerable to exploitation. 
Europe could end up suffering the fate of the Soviet Union. 
No relationship can flourish if its members feel trapped. 
A union is no different. 
As counter-intuitive as it may seem, the only way to keep the EU together is to let Britain go, on generous terms. 

Making the Most of the Brexit Deal 
PARIS – On December 8, the United Kingdom and the European Union’s 27 members settled on some key aspects of the Brexit divorce agreement, opening the way for the decision, on December 15, to open a new chapter in negotiations, focused on addressing the future EU-UK relationship and transitional arrangements. 
This is good news, not least because it averts the worst-case scenario: a hard Brexit. 
But what lies ahead is much more challenging. 
It seemed for some time that Europe would sleepwalk into hard Brexit. 
With the UK’s ruling Conservative Party deeply divided, and the EU seemingly unwilling to act strategically, the likelihood of a no-deal cliff-edge scenario appeared high. 
Yet, in the end, the UK made critical concessions that allowed the negotiations to move forward. 
It agreed to pay much more to its EU partners than it had initially announced. 
And it committed to avoid the establishment of a hard border between Northern Ireland (part of the UK) and the Republic of Ireland (part of the EU), even as Northern Ireland retains full access to the British market. 
The deal is a bitter pill to swallow for those who campaigned for Brexit in the name of saving money for the UK’s National Health Service. 
They will find it hard to tell voters that settling existing commitments to the EU will cost each British adult €1,000 ($1,189), if not more. 
And the latter-day Leninists who regarded Brexit as a way to complete the policy agenda initiated by Prime Minister Margaret Thatcher will find it hard to reconcile their vision of a deregulated Britain with the continued alignment of Northern Ireland’s regulatory regime with that of the EU. 
But the fact is that a hard Brexit would have cost both the UK and the EU far more, in terms of jobs and prosperity. 
Even the threat of such an outcome was starting to cause damage, as private companies put investment on hold. 
The political consequences of a hard Brexit would have been dire as well. 
Both the UK and the EU would have lost substantial global influence at a moment when an erratic US administration is seeking to tear down the existing international order and an assertive Chinese leadership is beginning to use that effort to its own advantage. 
Had the UK not acted to avoid such a scenario it would have lost the most, especially if it had ended up relying on a crumbling multilateral trade system to ensure access to foreign markets. 
In any case, because geography matters, the EU will remain Britain’s main market. 
And, because size matters, the UK will continue to depend on EU regulations, especially in services. 
But averting a hard Brexit is just the first step. 
The question now is what sort of future relationship the two sides can agree on. 
And the answer is far from clear. 
On the British side, the absence of a coherent vision for the future UK-EU relationship is astonishing. 
Prime Minister Theresa May’s speech in Florence in September remains the closest approximation on offer, but it left many important questions without a clear answer. 
And, as May’s legislative defeat in the House of Commons on December 13 underscored, the British government remains too divided to agree on a common Brexit agenda. 
There is not much vision on the EU side, either. 
With the recent deal, Michel Barnier, the bloc’s chief negotiator, scored a tactical victory. 
But a template for future partnership is still nowhere to be found. 
The guidelines for Brexit negotiations issued last April by the EU’s heads of state and government certainly did not provide one. 
Instead, they established red lines, emphasizing the “indivisibility” of the “four freedoms” – free movement of goods, services, capital, and labor – that underpin the European single market. 
The December 15 declaration does not go much further. 
For now, the EU’s negotiating stance continues to be shaped largely by the fear that too favorable an agreement would create incentives for other countries to follow the UK’s lead. 
Beyond that defensive attitude, lack of policy consensus has resulted in a preference for the status quo. 
Policy wonks focus on weighing a “Canada option” (a free-trade agreement for goods) against a “Norway option” (a sort of junior membership in the single market). 
But both are unsuited to the UK-EU partnership. 
The Canada option would not address any of the fundamental issues concerning trade in services – a critical omission, given that the UK is a major supplier, and their provision requires a complex regulatory framework. 
And the Norway option would simply assume away the problem by requiring Britain to adopt passively any economic legislation adopted by the EU. 
In a 2016 paper, my colleagues and I argued that the EU should regard Brexit as an opportunity to define a new model for partnership with countries that want strong economic and security links, without political integration. 
We further argued that, at a time when enlargement momentum has been depleted, the EU should work to diversify its relationships with neighbors. 
We proposed building a “continental partnership” involving deep economic integration based on a common regulatory framework, with the EU, the UK, and possibly others accepting the free movement of goods, services, and capital, but not of labor. 
We also argued in favor of a permanent process of policy consultation that would, as a counterpart to the UK’s submission to EU economic rules, give the British a voice – but no vote – in the creation of European economic legislation. 
In official EU circles, the paper was received coldly, to say the least, with critics deriding the breach of the four freedoms. 
But the fact is that, while an integrated market for goods and services requires a degree of labor mobility, it does not imply that all people must have the right to cross borders and look for a job in the country of their choice. 
To pretend that it does is to confuse a citizen’s right (essential, to be sure, in a political and social community like the EU) with an economic necessity. 
This is bad economics and dubious politics. 
Our critics also resisted envisioning a longer-term arrangement before the details of the divorce were settled. 
But this chapter is now being closed, meaning that it is time for the EU to think outside the box, and make an ambitious offer to Britain. 
Any sensible agreement between the EU and the UK is bound to result in the latter losing much of the influence it currently enjoys in European affairs – an outcome that will surely diminish the appeal of following its lead. 
But even if a current EU member does decide it would be better off outside the EU’s “inner circle,” it is not the end of the world. 
It certainly isn’t a reason to cling to the status quo. 

The Appalling Failure of Brexit 
LONDON – It has been nearly two years since the United Kingdom narrowly voted in favor of leaving the European Union. 
As the march toward Brexit – formally set for the end of next March – proceeds, fundamental questions about the nature of the future UK-EU relationship remain unanswered. 
Instead, every time a tough decision must be made in the negotiations in Brussels, British ministers kick the can down the road, or even into the long grass. 
This is somewhat surprising. 
Apparently, none of the politicians and newspaper editors who plotted for years to get the UK out of the EU thought much about what would happen if their machinations succeeded. 
They have been unable to agree even on whether the UK should pursue a “soft” Brexit, with the UK remaining closely connected to European markets, or a “hard” Brexit that severs ties without regard for the economic impact. 
Some ardent Brexiteers claimed that leaving the EU would be as easy as falling off a log. 
Our European partners, they suggested, need us much more than we need them: Germany is desperate to sell us cars, Italy to sell us Prosecco, the French to sell us Camembert. 
They could not have been more wrong. 
In truth, the UK depends far more on selling to Europe, which accounts for about half of British exports, than Europe does on selling to the UK. 
Even with a clear and realistic strategy, the two-year time period allotted for negotiating the UK’s departure – which began in March 2017, when the UK invoked Article 50 of the Treaty of Lisbon – would hardly be sufficient to cover the plethora of issues that demand attention. 
By launching that process without such a strategy, the UK government made the process much more difficult for everyone. 
Beyond forcing British negotiators into a near-impossible timetable, Prime Minister Theresa May has tied their hands by making promises aimed at satisfying her Conservative Party’s hard-right Brexiteers. 
These include a pledge to end the free movement of people from Europe, even though well over half of the immigration that some Britons decry comes from outside the EU. 
It also includes a promise to leave the EU’s single market and customs union. 
The UK ministers mainly responsible for the talks – a group better known for their dogmatism and personal ambition than their competence – have so far managed to secure agreement in one key area: following the March 2019 deadline, a two-year transition period will begin. 
But even that agreement is not set in stone, as it depends on whether negotiators can first agree on what to do about the border between the Republic of Ireland and Northern Ireland once the UK leaves the customs union. 
You can be in a customs union without a border, or outside a customs union with a border. 
There is no example anywhere in the world where this is not true. 
Yet reintroducing a border on the island of Ireland raises serious problems, affecting not just cross-border trade, but also security and the future of the Good Friday Agreement that brought peace to Northern Ireland 20 years ago. 
With furrowed brows, officials burn the midnight oil trying to devise a way to square this circle. 
But the laws of political geometry have torpedoed their efforts. 
The benefits of leaving the customs union do not come close to outweighing the risks. 
Brexiteers claim that the UK would ultimately benefit from being free to make its own trade deals with the rest of the world. 
But to believe that the UK can do better on its own than it can as part of the world’s richest single market is nothing short of delusional. 
As the UK attempts to strike new trade deals, it will be trying essentially to replicate the EU’s agreements, both existing and under negotiation, with countries like Mexico, China, South Korea, Vietnam, Singapore, and Japan. 
Not only will that take a lot of time; the UK is unlikely to secure terms as favorable as the EU has. 
After all, it is well known that, in trade negotiations, the bigger partner tends to do better than the smaller one. 
And the UK’s position will be weakened further by technical issues like rules of origin. 
At present, the country benefits even when parts of a product are manufactured elsewhere in Europe, up to an agreed limit. 
The loss of that flexibility will pose a major problem to car manufacturers, among others. 
So far, the march toward Brexit has brought no obvious gains. 
On the contrary, according to the Bank of England, average real household income in the UK is £900 ($1,200) below pre-referendum forecasts. 
The lofty promises that drove a relatively slim majority of voters to choose Brexit in 2016 are nowhere near being fulfilled; in most cases, they never will be. 
As the stark reality of Brexit sinks in, members of Britain’s cabinet and leading Brexiteers have increasingly turned on one another and attempted to cast blame on everyone but themselves: judges, civil servants, parliamentarians – even those who voted to remain in the EU. 
They declare that Britain must plunge ahead, because that was “the will of the people” (though exactly what voters believed they were voting for remains opaque). 
Meanwhile, they prepare their excuses for the impending debacle. 
As Lenin famously asked, “What is to be done?” 
It is hard to say. 
We may simply have to hope for the best, while preparing for the worst, recognizing that our children may well be the ones who have to pick up the pieces. 
One hopes that, if that does turn out to be the case, they do a better job governing the UK than today’s leaders. 

Britain’s Moment of Truth 
BRUSSELS – Britain’s vote to leave the European Union has put the country’s role in Europe in limbo. 
Every day that passes deepens the impasse between the United Kingdom and the EU and makes the future more uncertain. 
The EU leadership would like to move the process along and has called on the UK to immediately take steps to do so, as outlined in Article 50, the member-withdrawal provision of the Treaty of Lisbon. 
The UK side is in disarray and first must choose a new leader now that Prime Minister David Cameron has announced his resignation. 
But most British politicians have come to accept the outcome of the “Brexit” referendum, and that the will of the voters must now be carried out in a manner that best upholds Britain’s national interests. 
Because the EU’s internal market has always been a key priority for the UK, one widely discussed option, which has cross-party support, is the so-called the “Norway model”: membership in the European Economic Area (EEA). 
Under the EEA arrangement, Norway (along with Iceland) has full, unfettered access to the EU’s single market, including for financial services. 
But access to the internal market also requires EEA members to accept full freedom of movement not only for goods, services, and capital, but also for workers. 
Would the Norway option be better for Britain than full EU membership? 
A simple thought experiment might help: go back four decades and assume that France had vetoed UK membership in the EU, and that the UK had joined the EEA instead. 
Under this scenario, the Brexit referendum would have been on whether the UK should remain in the EEA. 
Would the arguments offered by this hypothetical “Leave” campaign have been any different? 
The real Leave campaign’s arguments focused on three issues: the UK’s contributions to the EU budget, free movement for workers, and national sovereignty. 
Let’s consider them in turn. 
The Leave campaign argued that the money the UK contributes to the EU budget as a member state could be better spent at home. 
This same argument would apply against EEA membership. 
In fact, the UK’s financial contribution to the EU is actually smaller, relative to its national income, than Norway’s under the EEA. 
The Leave campaign also claimed that free movement of labor heightens the supposed dangers of terrorism and higher unemployment for British workers. 
But the provisions governing labor mobility in the EU apply to Norway and all EEA countries as well. 
To the extent that freedom of movement was the key reason for leaving the EU, the Norway model would be equally unacceptable. 
This brings us to the Leave campaign’s third argument and central theme: “getting back control” of the rules and regulations governing Britain’s economy. 
This objective would be an even stronger argument against EEA membership than it was against EU membership. 
Under the EEA, the UK would still have to abide by the rules and regulations set in Brussels, but it would have far less say in their creation than it does as an EU member. 
In fact, within the EU, Britain had considerable influence over financial services, the most important industry in its economy. 
“Getting back control” was also directed against the EU Court of Justice in Luxembourg, whose judgments, by convention, have precedence over judgments by national courts. 
But the EEA also has its own court, whose judgments are binding on EEA member states. 
In short, all the arguments against EU membership also apply, often with even more force, against EEA membership. 
Still, some countries do choose this option. 
The Norwegians have consistently preferred to remain in the EEA, and have voted more than once, by large majorities, against joining the EU. 
Denmark has been a similar case since 1992, when Danish voters rejected eurozone membership under the Maastricht Treaty. 
Now, the Danish krone is so tightly linked to the euro that Denmark’s central bank has effectively lost its independence. 
By joining the euro, Denmark would at least have gained a seat at the table. 
The Swiss rejected even EEA membership in a referendum; however, to do business with the EU on the level it wanted, the Swiss government later had to accept most of the EEA rules anyway, including the free movement of people and contributions to the EU budget. 
As these real-world examples show, no country that wants to benefit from the European project has been able to have its cake and eat it. 
Open borders and economic integration require common rules. 
A “spaghetti bowl” of different à la carte arrangements would not work for a continent of more than 30 small and medium-size countries and more than 500 million people. 
The EU provides this set of common rules, buttressed by common institutions that give every country, even the smallest, a say. 
This is the balancing act of sovereignty in Europe: Each state remains formally sovereign, but if it wants to prosper economically, it must accept the common norms and regulations that enable Europe’s intensive cross-border division of labor. 
Of course, Europe is more than just a free-trade area; it is also a hub of shared social and cultural life. 
This is why freedom of movement is so appealing, not only from an economic point of view. 
Some smaller countries have abdicated their role in influencing Europe’s future. 
But it is surprising to see a country with such a long history of global leadership as Britain suddenly withdrawing into itself. 
Having abandoned its historical role in shaping Europe’s future, will the UK really be content to remain on the sidelines? 

London Bridges to Nowhere 
LONDON – Last week, British Foreign Secretary Boris Johnson resuscitated an age-old proposal for a 22-mile bridge to be built across the English Channel. 
The irony has escaped no one. Johnson is calling for a fantasy bridge at the same time that he is destroying his island country’s only true bridge to the continent: the European Union. 
Johnson’s bridge proposal shows yet again that the Brexiteers’ entire project is based on a permanent suspension of disbelief. 
In December, the European Commission played along, allowing Prime Minister Theresa May to pretend that she can reach three mutually contradictory goals concerning the United Kingdom’s departure from the EU. 
The UK’s first goal is to maintain a soft border and frictionless trade with the Republic of Ireland, which will remain an EU member state, subject to the rules of the European single market and customs union. 
The second is to establish identical regulatory regimes throughout the United Kingdom, including in Northern Ireland. 
And the third is to “take back control,” by leaving the single market, customs union, and the jurisdiction of the European Court of Justice. 
Reaching any two of these goals seems eminently possible. 
But no one has any idea how to achieve all three. 
Nevertheless, EU and UK negotiators are now proceeding to phase two of the Brexit process, raising the distinct possibility that they will continue to muddle through without ever resolving the phase-one trilemma. 
In fact, experts in the European Commission are already predicting that the next round of negotiations will lead to three agreements with the UK before October 2018. 
The first would settle the terms of divorce. 
Despite the uncertainty regarding Northern Ireland, negotiators have started to converge on other key issues, including the size of the UK’s exit bill and the future rights of EU citizens in Britain, and of British citizens in the EU. 
A second agreement would establish a “stand-still transition,” whereby the UK would retain the benefits of EU membership, but also the obligations, such as contributing to the EU budget, allowing for the free movement of people, and adhering to European court rulings. 
The big difference is that the UK will lose its voice at the table. 
For Britons in the “Remain” camp, such a transition will allow the UK to stay in the EU in all but name. 
And for some of those in the “Leave” camp, it is a way to exit without falling off a cliff edge. 
The third agreement in phase two will center around a roadmap for UK-EU relations after 2021. 
This will not be a free-trade agreement, but rather a political declaration about where both sides hope to end up. 
Most likely, the resulting deal will envision a future trade arrangement modeled on the Canada-EU Comprehensive Economic and Trade Agreement (CETA), together with agreements on foreign policy, security, terrorism, and law enforcement. 
But this raises the same concern as in phase one. 
If the UK government is never forced to explain its long-term plan in great detail, then it could continue to fudge its way forward. 
The problem is that once the stand-still transition begins, it will be impossible to avoid a reckoning between the different tribes of Remainers and Leavers in the British Parliament. 
And even if there were a long-term plan that would pass muster with British parliamentarians, it is fanciful to believe that it would also be acceptable to parliamentarians and voters on the other side of the channel. 
At a time when anti-globalization sentiment is running high, the remaining EU member states are unlikely to sign off on any trade deal that could undercut their own social and fiscal wellbeing. 
After all, whereas all previous EU trade deals were designed to achieve convergence between the EU and a third party, an EU-UK deal would be geared toward preventing divergences. 
Michel Barnier, the EU’s lead Brexit negotiator, has been eloquent on this point. 
The big question is not whether Britain leaves the EU, he points out, but whether Britain will “still adhere to the European model” of regulation. 
It was easy enough for politicians and activists in Europe to oppose the Transatlantic Trade and Investment Partnership (TTIP), a monumental deal intended to defend Western trade standards in an increasingly multipolar world. 
But consider how much easier it will be to campaign against a deal with the UK, given that key figures on both sides of the British political spectrum pose a threat to the European model. 
On the left, Labour Party leader Jeremy Corbyn seems to welcome a return to 1970s-style subsidies and state aid. 
And across the aisle, far-right Tories openly dream of establishing a low-tax, low-regulation “Singapore-upon-the-Thames.” 
Unfortunately, given the current Brexit timetable, a failure to agree on a long-term deal could well come after the UK has already passed the point of no return. 
The UK, having formally exited the EU and given up any say in EU decisions, would still be subject to EU laws. 
Its choice, then, would be between the economic calamity of a no-deal Brexit or the political calamity of a never-ending transition that leaves it no say over EU decisions. 
In either case, the UK will hardly have taken back control. 
That brings us back to Johnson’s bridge to nowhere, which is the perfect metaphor for the Brexit movement. 

Brexit and the Special Relationship 
NEW YORK – The decision whether to remain part of the European Union is obviously one for the British people and their elected representatives to make. 
But more than British and European interests will be affected by the outcome, so it is both legitimate and appropriate for other parties to weigh in. 
So let me exercise my right as an outsider with a stake in what happens to express a clear opinion: From my perspective (and that of many other Americans), a decision by the United Kingdom to exit the EU would be undesirable – indeed, highly undesirable. 
I am aware of the irony some are sure to note in this, given that the United States’ own independence came about when the American colonies exited Great Britain. 
But that was then, and this is now, and the UK’s exit from Europe would be greeted with equal parts regret and concern by its closest ally. 
There are several reasons for this. 
One reason why the US values its ties to the UK as much as it does is the UK’s role in Europe. 
Britain is important not just as a bilateral partner, but because more often than not it can be counted on to argue for and support positions in Brussels consistent with, or at least not far from, those of the US. 
The so-called “special relationship” has already become considerably less so in recent years, with Parliament’s refusal until December to support military action in Syria taking a particularly heavy toll in this regard. 
Britain has become – and is widely perceived to be – a less dependable and less capable ally, and reality and perception would intensify if the UK were to take a step that would marginalize its role on the continent. 
It is hard to envision Brexit resulting in anything other than a more parochial and less influential UK. 
In addition, an EU without the UK would be one in which Germany would have even more influence that it does now. 
Such a preponderance of power cannot be healthy in the long run, as it will fuel resentment of Germany and likely leave the EU less willing and able to act together on the world scene. 
The result would be a weaker Europe at a time when the US needs a stronger one. 
Even worse, it is highly probable that Americans advocating for a reduced US role in the world would seize on Brexit as further evidence that traditional allies were not doing their fair share, and that a US facing growing deficits and massive domestic needs should not be expected to make up the difference. 
A simple reality must be kept in mind: The European integration project that began in the wake of World War II has helped to bring unprecedented stability and prosperity to much of the continent for nearly three-quarters of a century. 
A British decision to sue for divorce would add to centrifugal forces already in evidence. 
Nationalism and populism, already on the rise for both economic and social reasons, would gather even more momentum. 
It is difficult to feel confident of the outcome, however uncertain that may be. 
A decision by the British people to leave the EU would also put the question of Scotland’s independence squarely back on the agenda. 
Indeed, many in Scotland would argue for independence in order to remain an EU member – a popular refrain that could well result in a vote to secede from the UK. 
To say the least, Americans would not welcome a difficult, controversial public debate with Scotland’s leaders over the stationing of nuclear weapons and submarines on their territory at a time when Russia is again seen as a threat to Europe. 
Fragmentation would be unlikely to stop there. 
What happened in Scotland could well have ripple effects across what remained of the disunited United Kingdom. 
In particular, Great Britain’s departure from the EU and Scotland’s departure from the UK would add to tensions in Northern Ireland between pro-UK Unionists and Republicans seeking to join Ireland. 
Raising the profile of “final status” issues at a time when the two sides have shown themselves unable to face up to the past, or work together in the present, is not a recipe for progress. 
Finally, Great Britain’s decision about its relationship with the EU will not happen in a vacuum. 
In fact, the timing could hardly be worse. 
Europe is already facing a perfect storm of fiscal strains, anemic economic growth, massive inflows of migrants and refugees, and renewed Russian aggression. 
As if that weren’t enough, there is the unraveling Middle East, advancing climate change, terrorism, and now a new disease – the Zika virus – on the march. 
There will also be a new US president elected this year. 
The last thing he or she will need is to have America’s closest partner distracted and drained by a difficult divorce. 
And that is what will happen if Brexit moves from possibility to reality. 

Is Realism Trumping Populism? 
NEW YORK – With economic conditions returning more or less to normal around the world after a decade of financial crises, nationalist populism is now seen as the biggest threat to global recovery. 
That was certainly true of the finance ministers who gathered in Washington, DC, this month for the IMF’s annual spring meeting. 
But is it possible that this consensus has emerged just as the populist wave has crested? 
Rather than populist politics undermining economic recovery, could economic recovery be undermining populist politics? 
Looking around the world, populist economic policy appears to be in retreat, even though no clear alternative is visible. 
In the United States, President Donald Trump seems to be curbing his protectionist instincts, and economic relations with China are stabilizing. 
In Europe, despite the media focus on the success of xenophobic politicians in Hungary and Poland, the pendulum is swinging away from economic nationalism in the countries that really matter: France, Germany, Spain, and Italy, where the two populist parties that recently achieved electoral breakthroughs are now vying to show their devotion to the euro. 
Even in Britain, where economic nationalism won its most spectacular victory over globalization and multiculturalism in the 2016 Brexit vote, the tide may be turning. 
The British government is gradually realizing that voters do not really want the complete rupture with Europe demanded by hard-core Euroskeptics. 
Neither of the two alternatives to EU membership presented in the Brexit referendum – an inward-looking, protectionist “Little England,” or a post-imperial “Anglosphere” based on the “special relationship” with America and the Commonwealth – is turning out to be economically feasible or politically attractive to voters. 
While only 3-4% of voters admit to changing their minds about Brexit, large majorities want to keep most of the benefits of free trade, easy travel, immigrant labor, and strong environmental, consumer, and health regulation. 
Voters’ aversion to Brexit’s adverse consequences, analogous to the realism that gradually dawned in Greece after its 2015 referendum rejected an EU bailout, helps to explain the otherwise perplexing tactics of Prime Minister Theresa May and her Conservative Party. 
After starting out proclaiming a clear instruction from the people to “take back control” from the EU, May has gradually blurred and erased her red lines: an end to EU budget contributions, limiting European immigration, and an exemption from European rules and court judgments. 
Instead of strident demands for restoration of untrammeled national sovereignty in March 2019, she is now pleading for a transition, in which nothing noticeable to voters will change at all. 
Surprisingly, May’s compromises have all been accepted by nationalist hard-liners who previously threatened her leadership. 
The zealots still hope for a total rupture with Europe eventually, but seem relieved about postponing the day of reckoning until the end of May’s “status quo transition” in December 2020. 
But if a “clean break” from Europe is too dangerous to attempt now, why will it be more acceptable in 2020? 
It won’t be – and presumably that reality will dictate extending the transition until after the 2022 general election, then beyond. 
The upshot is that, as I wrote nearly a year ago, Britain’s belligerent Hard Brexit is turning into a docile Fake Brexit: Norwegian-style associate EU membership. 
Both Leavers and Remainers will be dissatisfied with that outcome, which will turn Britain into what Brexiteers justifiably call a “vassal state”: a country that abides by EU laws but has no voting rights or ability to influence those laws. 
Why would Britain accept such second-class status? 
This is where we come to the relationship between nationalist populism and economics. 
The only remaining justification for the obviously inferior form of EU association that May is now proposing is the populist claim that “the people have spoken.” 
Until recently, wielding this slogan allowed all opponents of government policy to be branded as internationalist elitists, “citizens of nowhere” who despise the “real people.” 
Delegitimizing political opposition made Brexit appear inevitable, which discouraged voters from even thinking about the issues that might change their minds. 
But Britain’s political atmosphere is changing. 
With the Brexit deadline of March 2019 approaching, May’s “transition” extending into the distant future, and all of the tangible promises of Brexit receding like a desert mirage, both parliamentary and public opinion are shifting. 
The Labour Party is slowly coming to the conclusion that, even though many working-class voters supported Brexit, opposing it offers the only chance of bringing down the May government. 
As a result, May has repeatedly been defeated in Parliament and forced to concede a full parliamentary vote on whatever agreement she negotiates with the EU. 
These parliamentary conflicts mean that opposition to Brexit is no longer discredited as anti-democratic and elitist. 
And public opinion is responding, with clear majority support for a “meaningful vote” in Parliament to decide whether May’s final deal with Europe is genuinely better than remaining in the EU. 
When this vote occurs, probably in October, a tactical alliance of all opposition parties with a dozen pro-European Tories could well defeat the government. 
If such a defeat looks imminent, May will probably move to avert it by herself proposing a referendum to make the final decision between her version of Brexit and the EU status quo. 
But would such a referendum, now backed by a recently launched campaign for a “People’s Vote,” simply mark another descent into populism, instead of a genuinely democratic conclusion to the Brexit debate? 
The answer is no, because voters would be offered an honest choice between two well-defined alternatives: to accept whatever agreement for leaving the EU the government negotiates, or to stay in the EU by withdrawing the Brexit notification before the March 29 deadline. 
By contrast, the 2016 referendum offered voters an illusory choice between reality and fantasy: a fair-tale Brexit, onto which they could project whatever hopes or prejudices they cared to imagine. 
The opposite of nationalist populism is not globalist elitism. 
It is honest realism, as Britain is now re-discovering. 

The Referendum Risk 
OXFORD – Now that British Prime Minister Theresa May, facing certain defeat, has postponed Parliament’s vote on the deal she concluded with the European Union last month on the United Kingdom’s departure from the bloc, the case for a “people’s vote” – a second Brexit referendum – is gaining ground. 
But is a referendum really the right mechanism for settling political issues that the people’s elected representatives cannot or will not? 
Referenda give people a voice. 
That is their appeal in an era when people are angry and dissatisfied with the political establishment. 
But without rules, a referendum is little more than an invitation to a collective roar of anger. 
This must be distinguished from a national policy decision. 
The latter takes a careful weighing of everyone’s interests. 
That is not – and cannot be – the job of every citizen. 
On some issues, what is good for one person might be very bad for others, and what is bad for others might end up being even worse for the individual. 
Most people do not have the time, interest, knowledge, access, or desire to gain a strong understanding of such considerations on issue after issue. 
Yet that is exactly what is needed to make decisions on behalf of an entire community. 
This is the raison d’être of representative democracy. 
Voters entrust politicians with becoming informed – making full use of public servants, information, and analysis – and weighing alternatives with a long-term, big-picture perspective. 
Politicians must then take their conclusions to a forum (Parliament) that is designed to represent different interests through competing political parties, constituencies, and representatives. 
They are held accountable for their choices by voters, other elected officials (in the form of parliamentary scrutiny), and independent media. 
The danger is that politicians can use a referendum to avoid responsibility for difficult decisions. 
Even before taking power, Mexico’s newly inaugurated president, Andrés Manuel López Obrador, was using “informal” referenda on issues such as the cancellation of Mexico City’s new airport (which is already 30% built) and support for his ten main social and infrastructure programs. 
So how can countries ensure that putting public policy to a direct vote does not undermine the quality of decision-making in a representative democracy? 
Of course, governments could simply not hold referenda. 
That is the case in Belgium, Malaysia, and Indonesia (where plebiscites were used during the intensification of authoritarian rule in 1985-1999). 
But if countries still want the option of referenda, they should impose formal rules that help to ensure that politicians cannot use them to dodge difficult decisions. 
For starters, countries should limit when they can be called (say, only with regard to constitutional amendments), establish a minimum threshold for turnout, and require a supermajority. 
In Australia, for example, referenda can be used only under certain circumstances and can pass only with majority support in a majority of states (in addition to an overall majority). 
Such limits should be applied in the UK, with referenda requiring not just an overall majority, but also separate majorities within England, Wales, Scotland, and Northern Ireland. 
Another way to avoid the pitfalls of referenda is to make them non-binding. 
Finland and Norway permit referenda only on this basis, while Australian politicians have the option of calling non-binding plebiscites. 
This serves another essential feature of an effective referendum: ensuring that politicians take ownership of the policy response. 
In Switzerland, for example, a referendum might be used to get a sense of the public’s preference, but politicians must take responsibility for crafting the policy that best serves the national interest. 
That was the case in a February 2014 referendum, in which a majority of Swiss voters and cantons expressed their preference for limiting immigration through quotas. 
But simply introducing such quotas would have violated the terms of Switzerland’s participation in the EU’s single market. 
So, in 2016, the government offered its own solution, enacting a law permitting employers to give priority to Swiss job-seekers (without limiting the free movement of EU workers to Switzerland). 
When holding referenda, politicians must also take responsibility for the context in which people decide. 
They must ensure that the question it asks is well crafted and that there is time to deliberate and good-quality information. 
In Switzerland, a long-standing tradition of lengthy local deliberation and consultation creates a slow-moving but highly deliberative form of decision-making. 
Spring a referendum on people without such preparation and you get an instant reaction. 
In ancient Athens, the birthplace of democracy, citizens voted on the first day of debate to put to death the entire male population of Mytilene as punishment for their revolt against Athenian imperial control. 
By the next day, citizens had cooled off, and they voted for leniency. 
In the UK, terms like “Brexit,” “no deal,” and “remain” have become heavily loaded, with campaigners for each priming voters to support their view. 
One way to help counter that priming – supported by past surveys – could be to direct voters, first, to consider what they actually know about the topic, including what they understand by the key terms. 
Politicians who argue for a choice among three options should be aware of the “compromise effect,” whereby people tend to choose the middle option, rather than considering each carefully. 
The UK has held only three country-wide referenda in its history: one on European Economic Community membership in 1975; another on the alternative vote system in 2011; and the Brexit vote in 2016. 
But it now may be set to hold another highly consequential vote. 
As referenda become more frequent, countries need to specify rules to ensure that politicians do not abuse them. 
This means making referenda non-binding, at least in most cases. 
It means providing the time, information, and opportunity for genuine deliberation across the electorate. 
And it should never let politicians (or their advisers) off the hook. 
They were elected to enact policies that will advance the national interest. 
They must be held to account for that. 

The Ghost of Brexit Past 
PRINCETON – The European Union has gained member-state approval for an agreement setting the terms of the United Kingdom’s exit from the bloc. 
But it is still unclear whether a majority of British parliamentarians will approve the deal, given that it appears to leave decision-making power over British affairs in European hands. 
One can reasonably assume that the agreement will be rejected by hardline Brexiteers, who see it as even less satisfactory than the status quo. 
And there are of course plenty of Remainers who oppose Brexit in any form. 
Yet, for all of its flaws, the Brexit that Prime Minister Theresa May has negotiated with the EU is likely to happen. 
A reversal of the exit process is now highly improbable. 
Brexit constitutes a revolution, and that means it is bound to follow a familiar historical pattern. 
As many French learned after 1789, and many Russians after 1917, revolutions can be neither ignored nor stopped. 
To be sure, the Brexit revolution has been unfolding in a country with little revolutionary tradition. 
British legal experts take pride in the fact that their country’s constitutional order evolved gradually over time, rather than through the kind of dramatic political ruptures that have shaped so much continental European history. 
But the June 2016 referendum put an end to that strain of British exceptionalism. 
The vote to leave signaled, ironically, that Britain had finally caught up with the rest of Europe. 
At a time when most Europeans want security and stability, a narrow majority of Britons decided to do something wild and unpredictable. 
Some historians see precursors to Brexit in the UK’s September 1931 departure from the gold standard, or in its September 1992 withdrawal from the European Exchange Rate Mechanism. 
But Brexit is not merely about ending a monetary regime – a relatively easy operation that can even produce beneficial policy outcomes – or escaping some irritating feature of modern European political life. 
Brexit represents a systemic overhaul of everything at the same time. 
After decades of membership in the European regulatory regime, achieving a clean break will require a tedious and complicated rewriting of innumerable rules. 
Even the smallest mistake might lead to devastating unintended consequences. 
For example, overlooked loopholes could open the door for dangerous or predatory practices; and, more broadly, ambiguous language could render the entire framework senseless or self-contradictory. 
Put another way, the whole exercise is analogous to designing a new word-processing program from scratch. 
Any rational person would soon realize that it is better just to stick with the status quo. 
But the logic of revolution makes such reversals impossible. 
Most of the arguments in favor of Brexit assume a traditional conception of sovereignty, and are grounded in English – rather than British – history. 
Brexiteers look back fondly at King John’s defiance of Pope Innocent III in the thirteenth century. 
And they are even more smitten with the Tudor era, when Henry VIII wrested the Church of England from the yoke of papal authority. 
To this day, the Tudors enjoy a near-ubiquitous presence in British textbooks, media, films, and the popular imagination. 
The defining moment of the Henrician Reformation came in April 1533, when the Parliament of England passed the Ecclesiastical Appeals Act, giving Henry the final word on all legal and religious questions. 
The point of the law was to free England from the authority of a papacy that answered to Charles I of Spain – that is, Charles V of the Holy Roman Empire. 
As long as Charles called the shots in Rome, Henry would not be able to divorce Charles’s aunt, Catherine of Aragon. 
Contained in the Appeals Act is the first clear legislative definition of sovereignty. 
“This realm of England,” the law states, “is an Empire, and so hath been accepted in the world, governed by one Supreme Head and King…” But as is always the case, the measures that launched the revolution were incomplete. 
The laws that Parliament adopted in the 1530s did not replace Catholicism with Protestantism. 
But they did pave the way for religious reformers to carry the revolution into its next phase. 
Still, there was much disagreement among Protestants when it came to the shape of reform. 
Would the revolution follow the teachings of Luther, Zwingli, or Calvin, or would it embrace an even more radical vision? 
In the event, different factions pushed for different approaches, and frequent and abrupt reversals were common. 
The man who drafted the original Appeals Act, Thomas Cromwell, was executed in 1540 on orders from the king; the architect of the English Reformation, Archbishop Thomas Cranmer, was burned at the stake in 1556. 
During the 1547-1553 reign of Henry’s son, Edward VI, revolutionary momentum carried England definitively in a Protestant direction. 
But, as the historian Eamon Duffy notes, with the systematic “stripping of the altars” throughout this period, many English subjects experienced dislocation and alienation. 
A great nostalgia for the old order took hold of the body politic, and after Edward’s death, his sister, Mary I, set about reversing the process. 
Counter-revolution, however, requires just as radical an approach as does revolution. 
As the English state resorted to increasingly brutal and barbaric measures, many English subjects concluded that the counter-reformation was itself deeply flawed. 
After Mary’s death, Elizabeth I would eventually institute a compromise. 
But, with many theological issues left unresolved, the Reformation continued to cycle through violent revolutions and reversals for decades. 
It took at least a generation before the conflict subsided. 
For his part, Henry VIII had always wanted to be interred in an enormous celebratory tomb where (Catholic) masses would be said in perpetuity. 
Neither wish was honored. 
The best that Britain could do was simply to forget and move on. 
As May navigates the final stages of Brexit, she should heed the lessons of the Tudor era. 
More often than not, those who start the revolution are eventually devoured by it. 

The Brexit Balance Sheet 
BRUSSELS – Prime Minister David Cameron’s offer to British citizens to hold a referendum on whether to leave the European Union might have seemed like a reasonably safe gamble just a few years ago. 
Most people then probably would have voted to stay. 
That was before the Greek crisis created havoc in the eurozone, and the arrival of hundreds of thousands of refugees caused the EU (although not the United Kingdom) to lose control of some of its borders. 
Cameron might actually get other European leaders to agree to his demands for reform, without which he has said he would not campaign to keep his country in the EU. 
They are not extreme: a guarantee that non-eurozone members gain full access to the single market; less red tape at the EU level; a British exemption from “ever-closer union.” 
His last demand – fewer benefits for EU migrants – will be the hardest for EU leaders to accept. 
Despite this reform push, some British Euroskeptics have criticized Cameron for being too soft. 
The temptation in Britain simply to abandon what appears to be a sinking ship and go it gloriously alone is growing stronger. 
This is understandable. 
The question is whether “Brexit” would be as glorious as its proponents like to imagine. 
Unleashed from the rule of Brussels, the sirens of Brexit promise, Britain would once again be a beacon of freedom in the world, respected by China, tied to the United States in the bilateral “special relationship,” and all the while retaining friendly commercial ties with the European continent. 
Business would boom, the City of London would prosper, and Britons never would be slaves, not of the EU or anyone else. 
In fact, things might not work out so well. 
As Cameron himself stated after a recent visit to Iceland, the Norwegian option of engaging in free trade with the EU as a non-member is far from ideal. 
Norway, like Switzerland, still has to abide by EU single-market rules, without having any say in formulating them. 
Norway also pays large amounts of money to the EU budget, and must accept free movement of people (including refugees) across its borders. 
As far as the US is concerned, President Barack Obama has already said that he would take Britain more seriously inside the EU than outside it. 
Similarly, US Trade Representative Michael Froman recently observed that the US would not be interested in negotiating a separate free-trade deal with Britain. 
All this, by the way, assumes that post-Brexit Britain would still be Britain. 
The Scots would almost certainly want to break away from England and rejoin the EU as an independent member, giving further encouragement (as if that were needed) to separatists in Catalonia and other frustrated European regions. 
England would be left to wave its flag of St. George over Wales and Northern Ireland, a rather sour prospect. 
But there are more potential supporters of Brexit: some keen European Unionists who have found the UK’s often-obstructive membership increasingly annoying. 
Good riddance, they might say, once the divorce finally comes through; now the true Europeans can finally unite in peace. 
This, too, strikes me as misguided. 
A Brexit would most likely be as damaging to the EU as it would be to Britain itself. 
Contrary to popular perception, the EU is not ruled by the European Commission in Brussels. 
National governments still make the most important decisions in the European Council, where leaders wheel and deal to advance their countries’ interests. 
Germany, Britain, and France, as the EU’s three major powers, form a crucial balance. 
Without Britain, the EU becomes a Franco-German enterprise, with Germany very much the dominant partner, and all the smaller member states squeezed between the two. 
This is not really what anybody wants, not even the Germans, who are reluctant hegemons. 
Moreover, Britain and Germany are natural allies in balancing the statist tendencies of France. 
Britain has in fact had a largely positive impact on the EU. 
Europe has benefited from Britain’s democratic traditions, its openness to the rest of the world, its impatience with bureaucratic obstruction, and even its skepticism toward abstract utopian schemes. 
If any city feels like a European capital now, it is not Brussels, Berlin, or even Paris, but London, home to almost a half-million French citizens, as well as millions of other foreigners. 
There is one more reason, however, why Brexit would be a disaster for Europe. 
It is generally agreed that European countries cannot cope alone with the major problems of our time, such as climate change, immigration, the challenges of a globalized economy, and, above all, security. 
Since 1945, Pax Americana has papered over Europe’s incapacity to manage its own security. 
Europeans like to talk about the values of peace and compromise, while US military might takes care of their safety. 
This has created a degree of dependency that should be redressed, if only to relieve the Americans of their burden and give Europe the political influence to match its economic clout. 
For this to be achieved, the EU must establish a common security policy and military force. 
This will be a long and difficult process. 
Germany, for obvious reasons, will not take the lead. 
Only France and Britain have enough military strength to provide a sound basis for European defense. 
Britain could, in this vital matter, be the savior of Europe. 
Without it, there is no hope. 
Alas, Cameron is singularly ill equipped to make such a positive argument. 
He leads a party that is increasingly opposed to any European project apart from trade. 
And he would have to battle a folk memory that has lasted several generations: the last time Britain helped to save Europe, it stood very much, and very proudly, alone. 

Brexit in a Brave New World 
BRUSSELS – When it comes to bilateral trade, gains and losses are distributed asymmetrically between the larger and the smaller economy. 
In the best of times, that would be bad news for the United Kingdom as it seeks new trade deals with the European Union and others. 
And these are not the best of times. 
Economic theory predicts that erecting new trade barriers hurts both sides. 
But economic principles also suggest that the larger of the two economies is likely to lose less. 
In the case of a tariff, for example, lower demand from the larger economy will tend to push down the prices of the goods that it imports. 
The smaller economy is unlikely to have enough of an impact on overall demand for the goods it imports, and thus on their prices. 
The advantage of the larger economy is even greater when it comes to non-tariff barriers, which often result from differences in regulations and standards among trading countries. 
In most cases, the smaller country must simply accept the larger one’s rules. 
Given this, Brexiteers are wrong to claim that the UK, as a net importer, will be in a strong position in trade negotiations with the EU. 
What counts is relative size, not net trade flows. 
Multiple studies confirm this, concluding that the UK will bear the lion’s share of the costs of Brexit. 
If the UK and the EU agree to a new trade relationship based on World Trade Organization (WTO) rules, the studies predict, the UK will lose about €110 billion ($119 billion), whereas the EU will lose only about €50 billion. 
Given that the EU’s economy is about five times larger than that of the UK, this implies that the loss for the UK, as a share of GDP, would be about ten times larger. 
If no deal is reached, the same imbalance will emerge, only the costs to the UK will be even larger – a reality that British Prime Minister Theresa May, declaring that the UK will walk away from negotiations that don’t go its way, refuses to recognize. 
Notwithstanding political rhetoric, a “bad deal” is actually better for the UK than no deal at all. 
But the talks with the EU are only the beginning. 
The UK will also have to negotiate trade deals with other partners, including the world’s two largest economies: the United States and China. 
At first glance, the negotiations with the US may seem like nothing to worry about. 
After all, President Donald Trump has indicated that the UK would be “first in line” for a US trade deal. 
Moreover, he has praised Brexit, even encouraging other EU member states to follow the UK out of the bloc. 
But Trump has also pledged to put “America first” in all deals it makes and actions it takes, particularly regarding trade. 
This raises doubts about whether Trump will be willing to open US markets in the few areas where the UK can still compete, like the aerospace and automotive industries. 
Even if he does, he is not likely to do it for free. 
At the very least, the UK will have to adhere to US standards and regulations. 
May knows that, to get a decent deal out of Trump, she has to play his game. 
So when Trump signed an executive order to bar anyone from seven Muslim-majority countries from entering the US for 90 days, and to close the door to refugees from Syria indefinitely, she avoided any strong statements. 
By contrast, her EU counterparts, confident in the size and strength of the EU as a trading bloc, were uninhibited in condemning the move. 
This highlights a challenge that the Brexiteers did not anticipate. 
They expected Brexit to occur against the backdrop of the rules-based multilateral trading system. 
With global trading frameworks like the WTO in place, it seemed that even the worst-case scenario for Britain wasn’t all that bad, and, therefore, that the consequences of leaving the EU would be minor. 
But the world has changed considerably since then. 
Trump’s rise to power was fueled by promises to throw off the fetters of the WTO – indeed, of all international organizations – and to take unilateral decisions based on America’s own interests. 
Even trade negotiations with the EU seem too multilateral to some of Trump’s cohorts, because they involve 27 member countries. 
Without the US on board, the rules-based international system would be far less secure – not least because others might soon follow Trump’s example, choosing bilateral deal making over multilateral cooperation. 
As the world trading system became less open, everyone would lose, but not equally. 
The US, China, and the EU (provided it survives) would do far better than smaller economies, like the UK. 
It remains to be seen whether the US, with its economic might, can afford Trump’s protectionist approach. 
But it seems clear that the UK will incur some heavy costs during the Brexit process. 
If more countries follow Trump’s lead, and the rules-based global system continues to deteriorate, those costs will only grow. 

Brexit’s Doom Spirals 
LONDON – Financial markets are giving a thumbs-down to Brexit, and they are right to do so. 
But because it is finance, not democratic civil society, that is pushing back against the United Kingdom’s decision to leave the European Union, the Brexit debate will become more bitter, and the fallout more severe. 
The June referendum’s initial economic effects were negligible, and may even have been slightly positive, now that the UK’s post-referendum growth figures are being revised upward. 
But the British pound is sinking, the cost of financing UK government debt is rising, and the process of actually withdrawing from the EU could be highly destructive. 
Having decided to leave the EU, it is in the UK’s interest to manage withdrawal in a way that minimizes short-term adjustment costs and long-term adverse effects. 
Likewise, it is in the EU’s interest to mitigate not only the economic impact, but also the reputational damage implied by the loss of a major member state. 
Ideally, participants in a conflict think coolly and rationally about their long-term interests, and act accordingly; unfortunately, they rarely do. 
Just as a married couple’s divorce often leads to bitterness and pitched battles that benefit only lawyers, the UK’s divorce from the EU will almost certainly descend into acrimony. 
As hostility rises, an amicable settlement will become less likely, and everyone will end up losing more than they have gained. 
There are three potential doom spirals already baked into the UK-EU divorce proceedings. 
First, there are political and structural risks to the EU if more member states leave. 
When the bloc loses a single member state, it looks like a misfortune that can be attributed to the departing country’s domestic peculiarities. 
But if the bloc loses more member states, it starts to look like negligence, mismanagement, or a fundamental design flaw. 
Thus, the EU has a strong incentive to make Brexit as painful as possible for the UK, in order to discourage countries such as the Netherlands, Sweden, or Finland from following the British example. 
Opinion polls show that support for the EU has surged in many member states since the UK’s referendum. 
But this is not because the EU is suddenly functioning better. 
Rather, many Europeans share the view that former British Prime Minister David Cameron blundered by calling for a referendum on EU membership. 
Immediately after the referendum, German Chancellor Angela Merkel beseeched Europeans not to be needlessly “horrid” (garstig) when thinking about the EU’s divorce terms for the UK. 
But, because the UK knows that the EU fears disintegration, it will inevitably read vindictiveness into any position the EU takes. 
UK negotiators will have to assume that their EU counterparts are trying to make the path out of the EU as economically and politically rocky as possible. 
British negotiators will then respond to EU negotiators’ domino-theory logic by trying to make the process as painful as possible for the rest of the EU. 
Indeed, the UK’s “Leave” constituency already firmly believes that the UK would be better off on its own, and that Brexit will hurt Europeans much more than it hurts Britons. 
This means that the Leave camp has a powerful incentive to fulfill its own prophecy. 
The second doom loop applies to the UK’s domestic political economy. 
Britain cannot simply start beating the Europeans at their own game by reviving its automobile industry, or by making its own wine to rival French and Italian producers. 
The principle of comparative advantage demands that the UK emphasize its service industries, and especially financial services. 
The City of London already drives the British economy, and one post-Brexit scenario has London’s role as a global financial center actually increasing. 
To make that happen, the British government would have to establish a regime of low taxes, light regulations, and favorable treatment toward both skilled and unskilled immigrants working in and around financial services. 
But every part of this plan conflicts with the government’s goal of reining in the finance industry and limiting migrant flows. 
Indeed, strengthening fat-cat capitalism is precisely the opposite of what British Prime Minister Theresa May promised to do when she succeeded Cameron. 
In fact, the Leave camp is dominated by people in England and Wales who feel cut off from the gains of globalization, and voted against the privileges and riches of the glittering global megacity of London. 
Thus, one of the UK’s most effective negotiating strategies would deeply divide Britain itself, and especially the governing Conservative Party. 
That points to the third doom loop: migration, which weighed so heavily on the outcome of the Brexit referendum. 
The May government now must demonstrate to voters that it is doing something about migrants and foreign workers in the UK. 
But as long as Britain has a dynamic economy, it will attract immigrants, regardless of whether they are formally admitted. 
The government can guarantee less immigration only by wrecking the economy, which would then be blamed, naturally, on European viciousness. 
Meanwhile, if the UK becomes a low-cost offshore financial center that sheds jobs, it could pose a danger to its neighbors. 
Continental Europe might be tempted to reject financial capitalism altogether, in favor of a growth strategy based on large state-driven investment projects. 
Ultimately, Brexit could come to resemble the dismemberment of a body, with the British financial head separated from the European real economy. 
Britain would appear less attractive, Europe would withdraw into itself, and each side would blame the other. 
That would be a bad outcome for everyone. 
But it also adheres to the bitter logic of divorce – which is why most couples opt for counseling. 

Winter Is Coming to the UK 
PRINCETON – The United Kingdom’s withdrawal from the European Union is rapidly unraveling. 
The “Chequers plan” upon which British Prime Minister Theresa May has based her negotiating strategy is dead on arrival. 
It has been rejected not just by the EU and the opposition Labour Party, but also by enough Conservative MPs to ensure that it would fail a parliamentary vote. 
Accordingly, the May government’s only option has been to delay and hope that something turns up (also known as kicking the can down the road). 
But while the current impasse could simply mean that May’s negotiating strategy was flawed, it also could mean that the underlying logic of Brexit is incoherent. 
For its part, the Chequers plan relies on a series of uneasy compromises. 
The UK would maintain a customs relationship with the EU, but it would not be in the EU customs union. 
Instead, both UK and EU courts would enforce a common “rulebook,” and the UK would be able to diverge from EU trade rules when making agreements with third parties. 
But even if this customs-union fudge were palatable to both sides, there would still be the question of the Irish border. 
Specifically, there would either have to be a border between Northern Ireland and the Republic of Ireland (which will remain in the EU), or between Northern Ireland and Great Britain. 
The first scenario would threaten the Irish peace process; the second would destroy the UK. 
Brexit is based on the belief that national sovereignty is the only rational basis for international order. 
Academics would refer to this as “realism,” which holds that states are driven by clearly defined and articulated interests that perpetually collide with one another at the global level. 
A popular non-academic rendering of this doctrine can be found in the HBO series “Game of Thrones,” which combines Shakespearean elements with fantasy. 
For many viewers, “GOT” has become a lens for understanding contemporary reality. 
At this year’s International Monetary Fund-World Bank Annual Meeting in Bali, Indonesian President Joko Widodo channeled the main theme of the series when he warned that, “Winter is coming.” 
As the “great houses” of the United States and China compete for control of the “iron throne,” a global crisis that will spare no one becomes increasingly likely. 
By portraying a world of treachery and broken alliances, GOT serves as the perfect fable for our current moment of international uncertainty. 
It is also a must-watch among Brexiteers. 
Michael Gove, one of the leaders of the “Leave” campaign, has identified the mastermind underdog Tyrion Lannister as his favorite character on the show. 
According to GOT-style realism, the EU makes no sense institutionally, because it is based on an impossible premise: the transcendence of nationalism and state interests. 
One of the driving forces behind Brexit was the belief that Europe was breaking apart under the weight of insurmountable debt and uncontrolled migration. 
The UK was simply escaping from a burning house before it collapsed. 
The problem with this interpretation is that it ignores all of the ways that EU institutions, regulatory authorities, and legal frameworks hold the house together. 
To be sure, there are always some people in some countries who dislike some rules. 
Northern and southern Europeans had very different perspectives on the euro crisis; eastern and western Europeans have very different views on refugees. 
But the main political divides are within, not between, societies, and the prospect of an exit would most likely intensify them. 
After all, a new order brings new divisions, as is now apparent in the UK. 
The City of London is torn between banks that are worried about losing their European clients and markets, and hedge funds that are looking forward to being free of European regulations. 
Some farmers are worried about losing EU subsidies, while others think that a new framework could allow them to practice more sustainable agriculture. 
And some Brexiteers want more social spending, while others would like to become a deregulated paradise that competes with Singapore. 
Everyone wants a better world, but few can agree on what such a world would look like. 
In continental Europe, the difficulty – if not impossibility – of formulating viable national exit strategies is now widely known. 
When Marine Le Pen of the far-right National Front (now called the National Rally) suggested a referendum on euro membership during the French presidential campaign in early 2017, she lost support. 
The same dynamic is now playing out in Italy, where the two populist parties in power have had to backpedal on past Euroskeptic remarks to make clear that “Italexit” is not on the table. 
As the continental populists are learning, disengagement makes impossible demands of leaders. 
In the realist framework, a government must represent the country’s interests perfectly. 
But national interests in a pluralist democracy are subject to constant debate and disagreement. 
The last time that realism made sense as a mode of interpreting the world was in the 1930s, when democracy was in crisis, and only authoritarians could act as the theory implied. 
During the campaign for the June 2017 general election, May promised that she would lead a “strong and stable” government. 
But because she cannot rule as an autocrat, “strong and stable” is no longer an option, thanks to Brexit. 

Bridging the Infrastructure Gap 
SAINT PETERSBURG, RUSSIA – Every day, millions of people across the developed and developing world inch through gridlock or squeeze into packed subway cars to get to and from work. 
And that is likely to be only one of many frequent – if not daily – confrontations with infrastructure systems that are bursting at the seams. 
In advanced and emerging economies alike, roads and bridges need repair, water systems are aging or inadequate, and power grids are overburdened, leading to blackouts. 
Too many countries have been underinvesting in infrastructure for decades, resulting in everyday inconveniences and, worse, creating roadblocks to economic growth. 
While a major infusion of funding is needed to address infrastructure gaps, finding the money is only part of the solution. 
Governments also need to reform infrastructure planning and oversight. 
The public can no longer afford to accept projects with costs that spiral out of control. 
Infrastructure projects’ unique ability to create jobs in the short term and boost productivity in the long term is well known to policymakers. 
Yet talk has rarely translated into action, despite the record-low interest rates of the past eight years. 
The world needs to increase investment in transportation, power, water, and telecom systems from $2.5 trillion a year to $3.3 trillion every year through 2030 just to support projected economic growth, according to new estimates from the McKinsey Global Institute. 
But despite the obvious need for action, infrastructure investment has actually declined in 11 of the G20 economies since the 2008 global financial crisis. 
The conventional wisdom is that fiscal concerns make it impossible to marshal enough public funding. 
In fact, there is substantial scope to increase public infrastructure investment, particularly while borrowing costs remain historically low. 
In some cases, funding can be found without raising taxes: governments can create revenue streams by instituting user charges, capturing increases in property value, or selling existing assets and recycling the proceeds. 
Public accounting standards also could allow infrastructure assets to be depreciated over their life cycle, rather than immediately adding their costs to fiscal deficits during construction. 
Governments can also do much more to encourage private investment, starting by providing regulatory certainty and the ability to charge prices that produce an acceptable risk-adjusted return. 
Even more broadly, they can take steps to create a market that more efficiently connects institutional investors seeking stable, long-term returns and projects that need financing. 
Given that these investors have some $120 trillion in assets under management, the bottleneck is not a shortage of capital, but rather a dearth of well-prepared, bankable projects. 
One way to clear it would be to develop the regulatory and institutional groundwork needed to enable funding to flow more smoothly from institutional investors in advanced economies to projects in the emerging world, where huge populations still need access to essential infrastructure services. 
Beyond financing, making the infrastructure sector more efficient represents an even bigger opportunity. 
Delays stretching into years, and cost overruns soaring into the billions of dollars, are a sadly familiar story in public works. 
And when bridges turn into boondoggles, the public grows more reluctant to invest. 
Every dollar allocated to infrastructure needs to stretch much further. 
Part of that effort involves demanding better performance from the construction industry, where productivity growth has been flat for decades. 
There are some positive signs of innovation, from accelerated bridge building to pre-fabrication and modular construction techniques. 
But the sector as a whole needs a major push in terms of modernization, technology adoption, and standardization. 
Governments must also transform the institutions and processes under their direct control. 
Our work with governments around the world has demonstrated that stronger governance and oversight of infrastructure projects can lower infrastructure costs by as much as 40%. 
This starts with taking a systematic and data-driven approach to choosing the right projects. 
Top-performing countries such as Singapore and South Korea do not consider projects in isolation; they consider how each supports their policy objectives, and they weigh it against other projects that might yield better returns. 
As projects move down the pipeline toward realization, it is critical to tighten management of the delivery and execution stages. 
Accelerating environmental reviews, approval processes, and land acquisition can minimize the costs and delays that mount before ground is ever broken. 
Meeting best practices could unlock huge value: as it stands, the price tags for similar projects can vary by 50-100% from country to country. 
“Kicking the can down the road” is not a viable strategy for dealing with the world’s infrastructure needs. 
It’s up to us to avoid leaving a legacy of deferred costs and deteriorating fundamentals for the next generation. 
The money is available. 
Let’s put it to use. 

 

Brigitte Bardot and the Wild Dogs of Bucharest 
BUCHAREST: Perhaps only our greatest playwright, Eugene Ionesco, could have gotten this story right. 
Ionesco’s genius was to portray a world in which the absurd is triumphant. 
Imagine the scene: Bucharest, le petit Paris, a city of three million people with wide boulevards and grand bourgeois villas, stands now a city half in ruins. 
Poverty runs rampant, orphanages overflow with abandoned children, countless packs of wild dogs roam the streets. 
All of this excites little or no interest in the West. 
Romania’s politicians appear to be equally indifferent; they have wasted the last ten years in endless fights, while our postcommunist neighbors reinvented their societies and made themselves ready for membership in the EU. 
Then Bucharest’s mayor, Traian Basescu, proposes a plan to control the dogs: the city government will put to sleep any dog without an owner. 
Suddenly, the West’s interest is kindled. 
Not to help us, of course – at least not to help the city that contains armies of feral dogs, making it appear at times like a ghost town in a Sergio Leone cowboy movie. 
No, Brigitte Bardot – we still anticipate the arrival of Gerard Depardieu any day now – and other celebrities, people unable to shed a tear for our unwanted orphans or for the mass poverty left behind by Ceausecu, fly into Bucharest (undoubtedly by first class) to protect the wild dogs and denounce our mayor. 
Our reality, I suspect, would challenge even Ionesco’s sense of the absurd. 
Middle-aged, greying, Bardot arrived in Bucharest not to remind men, high and low, of her charms but to prevent what she called a “canine genocide.” 
Yet, despite the harsh rhetoric, when Miss Bardot and Mayor Basescu met, they parted with a kiss. 
“For 30 years I waited for this,” the Mayor blushed. 
Unwilling to discriminate between parties, Miss Bardot later kissed our president, Ion Iliescu. 
Her celebrity recognized, the public’s adoration bestowed, she then departed, leaving the wild dogs, and our broken society, to their fates. 
The feral dogs of Bucharest are a tawdry legacy of communism, like the many half-built and abandoned blocs of flats dotted across the city and throughout the country. 
Decades ago, Bucharest held many tiny houses, with courtyards and small gardens. 
People kept watchdogs to protect their properties. 
In the 1970s and 1980s, however, most of these homes were forcefully demolished by Ceausescu. 
The dictator wanted all socialist citizens to live in socialist flats. 
As tens of thousands of people were moved into tiny, standard issue apartments, many dogs were abandoned. 
Like Romania’s people, they survived only by daily cunning. 
Since 1990, successive mayors promised to tackle the problem of these hundreds of thousands of feral dogs. 
But even bigger problems – housing and street crime – also existed, so nothing was done about them. 
Besides, many people opposed killing the street dogs. 
Every now and then a few were caught, sterilised and released. 
But the packs multiplied and multiplied. 
Mayor Basescu wants to be the next leader of the Democratic Party (now led by former Prime Minister, Petre Roman) and is said to be preparing to run for president in 2004. 
Success as Mayor of Bucharest will boost his chances, and what better way is there for a politician to promote himself than by “cleaning up” some seemingly intractable problem – particularly one that symbolizes ten years of incompetence and despair. 
So, all street dogs, the mayor promised, would be caught and quarantined. 
The old and sick would be killed by euthanasia; the rest sterilised and vaccinated. 
Meanwhile, people would be asked to adopt as many dogs as possible. 
Those not adopted would share the fate of the sick and old. 
Even before the Bardot visit, demonstrators besieged City Hall in opposition to the plan. 
A human rights defender, Gabriel Andreescu, compared the looming fate of the street dogs with the Holocaust and Gulag. 
A leading journalist, Cristian Tudor Popescu, reproached animal rights defenders for their moral relativism and insensitivity to human suffering. 
Our politicians usually shout at each other, but Basescu cleverly disarmed his critics by talking to representatives from animal rights groups. 
He told them that he rejected cruelty to animals, but insisted that it was his duty to promote the interests of people before dogs. 
He asked them (many of the representatives were well-to-do women) to set a personal example by adopting a street dog. 
Ionesco was no moralist, but even he would not deny one moral to be drawn from this story: when societies avoid taking necessary measures, things only get worse. 
For just as the wild dogs of Bucharest multiplied over the years, so too did Romania’s unsolved problems. 
Vast social problems demand an entire community’s commitment, not just resolution from above. 
Of course, you cannot “adopt” abandoned factories or the unemployed masses in the way that dogs can be adopted. 
Nonetheless, a community must and should assume and share its burdens. 
One day, Romania might actually learn this lesson. 
I doubt, however, that celebrities like Miss Bardot will ever recognize the absurdity of their misplaced priorities – to come to a country where millions live in despair and dire conditions, and show concern for only the wild dogs. 

Bringing Down the Wall 
A quiz for history buffs. Twenty years ago – on June 4, 1989 – three events shaped a fateful year. 
Which do you remember most vividly, and which most changed the world? 
a) The bloody denouement of the protests on Tiananmen Square. 
b) The death of Iran’s revolutionary cleric, Ayatollah Ruhollah Khomeini. 
c) The Polish elections. 
Few would answer c). 
The victory of the famed opposition trade-union movement, Solidarity, in Eastern Europe’s first free election since 1946 was eclipsed by the violent crackdown in Beijing and Khomeini’s tumultuous passing. 
Yet no single event did more to bring down communism in Europe – and thus to re-shape the post-war international order. 
The next few months will bring all sorts of commemorations of communism’s end, particularly of the fall of the Berlin Wall in November 1989. 
To many, it was a glorious moment, emblematic of the West’s victory in the Cold War, and one that seemed to come out of the blue. 
But if you watched the Eastern Bloc’s disintegration from the ground, you would know that the process was far longer and more complex than most people realize. 
The Polish election was a point of no return, the moment when forces for change became irreversible. 
They gathered momentum after a summer of labor strikes, when Poland’s communist chief, General Wojciech Jaruzelski, concluded that the country’s economic troubles were too grim to face alone. 
Why not enlist the help of Poland’s opposition, he reasoned, if not to solve the problems, then at least to share the blame for them? 
And so, after six months of bargaining, a historic deal was struck. 
Poland would hold free and fair parliamentary elections, and Solidarity would compete. 
It never occurred to the ruling communists (or to Solidarity) that they might lose. 
Never in their wildest dreams did they imagine being driven from power altogether. 
Yet that is what happened. 
In retrospect, it is astonishing that there should have been any doubt. 
Solidarity’s campaign was all chutzpah. 
An iconic campaign poster captured the public mood: a picture of a gun-slinging Gary Cooper as the sheriff in the classic western High Noon . 
June 4 was the day of reckoning in Dodge City East. 
On that bright Sunday morning, as spring turned to summer, voters wasted little time in dispatching Poland’s communists to the abattoir. 
On their dying day, Poland’s communists managed one last perversity, a final and unwitting act of utter self-humiliation. 
They devised an electoral system whereby Poles would not vote for candidates of their choice, but would cross out those they did not want – which is to say, each and every communist. 
Everywhere you looked, people were excising hated autocrats. 
Here, at long last, was Poland’s long-awaited popular uprising, revenge for December 1980, when Jaruzelski declared martial law, banned Solidarity, and threw its leaders in jail. 
Revolution by deletion! 
The pen, at last mightier than the sword, became a weapon of glorious retribution, wielded with style. 
Some voters slashed their ballots boldly, decapitating the old regime with flourishing strokes. 
Others savored the moment, perhaps puffing a cigarette as they reveled in this or that deletion. 
“Oh yes, he jailed my cousin.” 
Pfft! 
“Oh, that sponging apparatchik, living high on our penury.” 
Pfft! 
Pfft! 
By contrast, the communists’ campaign was all but invisible. 
In all of Warsaw, only a couple government candidates bothered to put up posters. 
Most counted on the party’s media monopoly to carry their message, such as it was: “Vote Lezek, a good communist.” 
To their credit, the regime accepted its inevitable loss with remarkable grace. 
At three p.m. on the day after the vote, Jaruzelski summoned top party officials. 
“Our defeat is total,” he told them. 
“A political solution will have to be found.” 
By that, he meant no violence and no doctoring the ballot count. 
The communists would have to live with the result. 
Twenty years later, I remain mystified. 
Those of us covering Eastern Europe knew that Solidarity would win. 
We knew, too, that its peaceful victory would be a lesson for the rest of the bloc. 
For anti-communists everywhere, the Polish election was extraordinarily encouraging. 
Thanks to Poland, what only days before had seemed impossible was, suddenly, possible. 
There were other signs. 
In May, Hungarian reformers began tearing down the fence along their border with Austria – a hole in the Iron Curtain. 
In Moscow, Mikhail Gorbachev spoke of a “Common European House” and repudiated the interventionist Brezhnev Doctrine. 
Yet when the Wall tumbled down, experts and world leaders alike were unanimous. 
“We never saw it coming,” they confessed. 
The Cold War had lasted so long that change seemed unimaginable until freedom burst forth. 

Bringing Europe’s Last Dictator in From the Cold 
Strasbourg – The European Union recently embarked on a policy of “constructive engagement” with Belarus. 
None too soon. 
Previously, EU policy was to isolate Belarus, which itself was seeking isolation. 
That policy achieved almost nothing, save for bolstering the country’s authoritarian leader, President Aleksander Lukashenko. 
Belatedly and somewhat reluctantly, EU leaders have now accepted that they need to deal pragmatically with Lukashenko if they want to promote reform in Belarus and shift the country from its tight orbit around Russia. 
This realization does not mean that Europe should turn a blind eye to the nature of Lukashenko’s regime. 
EU members are rightfully concerned about human rights in a place dubbed by some “the Cuba of the east.” 
Political repression and press restrictions remain common in Belarus. 
But the same – and perhaps worse – can be said about China, yet the EU has invested much political capital in a strategic, multifaceted partnership with its rulers. 
Belarus is the missing link in Eastern Europe’s post-Soviet democratization and reintegration. 
European officials have been at pains to prevent the EU’s enlargement from creating new dividing lines between Belarus and its neighbors to the west and north – Poland, Lithuania, and Latvia – that joined the Union in 2004. 
In fact, these countries are the biggest advocates of improving relations with Belarus, because of their shared historical, commercial, and familial links. 
The EU has also suddenly awakened to the need for a common external energy-security policy, not least to diversify away from Russian supplies. 
Given that 20% of Russian gas destined for Europe passes through Belarus, a stable and structured relationship with its government has become a priority. 
In turn, Lukashenko has decided for economic reasons that his country needs EU support and can no longer depend exclusively on Russia without paying a heavy political price. 
But the thaw in EU-Belarus relations needs to be based on reciprocal, permanent steps. 
After all, no EU strategic partnership is unconditional. 
But the EU must be ready to respond to the perceptible momentum in Belarus in favor of domestic reform, greater openness, and respect for fundamental democratic rights. 
For example, the recent release of political prisoners in Belarus removed at a stroke one of the key reasons for the EU’s hostility towards Lukashenko. 
This gesture, together with the free publication of an opposition newspaper, is precisely the kind of move that will entice EU interest in an enhanced relationship. 
Similarly, Belarus must, in turn, respond positively to the EU’s steps to normalize relations, one of which should be rescinding travel restrictions against Lukashenko and other senior officials. 
Of course, releasing political prisoners does not excuse Lukashenko’s past excesses. 
But the political opposition to Lukashenko is hopelessly divided, plagued by infighting, and incapable of mounting any serious challenge to his rule. 
Moreover, Lukashenko appears to be genuinely popular. 
The country’s rural and elderly population – like those in other former Soviet countries – appears to prize economic stability and social order over democratic development. 
Some observers believe that Lukashenko is making cynical overtures to the West in order to elicit more support from Russia, particularly at a time of economic crisis. 
But, although Lukashenko is probably playing a divide-and-rule game, he must eventually make a choice. 
The closer he moves to the EU, the greater the alarm in the Kremlin. 
Russia is hypersensitive about challenges to its influence in what it calls its “near abroad” of former Soviet satellites. 
Last summer’s war in Georgia, and the Kremlin’s habitual efforts to destabilize Ukraine’s pro-Western government, serve as warnings for what Lukashenko can expect if he moves precipitately. 
With Belarus’s economy crumbling and its export markets withering, Russia could exploit Lukashenko’s vulnerability. 
The Kremlin is considering a request from Belarus for $2 billion of credit, but, if this money is forthcoming, Belarus can expect to pay a heavy political price. 
Lukashenko may have to adopt the Russian ruble, at least as a reserve currency. 
Russia could also insist on greater military cooperation, including the deployment of Russian missiles in Belarus in response to America’s planned missile shield in Poland and the Czech Republic. 
Prime Minister Vladimir Putin and President Dmitry Medvedev may also insist on Belarus recognizing the independence, declared following last summer’s war, of Georgia’s Abkhazia and South Ossetia regions, knowing that this would make the EU shrink from further commitments to Belarus. 
Belarus’s reliance on cheap energy supplies from Russia could also be used as leverage. 
But, with Russia’s economy contracting, Belarus is perhaps in a stronger position than it realizes. 
The country needs greater access to global markets and eventual support for admission to the World Trade Organization, which is one of the EU’s greatest selling points and one of Russia’s fundamental weaknesses. 
Now is the time for EU leaders to present Lukashenko with a clear alternative to dependence on Russia. 
The first step in this process was the inclusion of Belarus in the EU's Eastern Partnership, a new framework for relations with six ex-Soviet republics in Eastern Europe and the Caucasus. 
It is premature to invite Lukashenko to the opening summit of this initiative in Prague on May 7. 
But, after years of atrophy, EU-Belarus relations finally offer some promise for the future. 
Much responsibility rests with Lukashenko, but the EU must make every effort to coax Belarus into the family of European nations, where it belongs. 

Bringing It All Back Home 
PARIS – Global policymakers regularly congratulate themselves on having avoided the policy errors of the 1930’s during the financial crisis that began in 2008. 
Led by US Federal Reserve Board Chairman Ben Bernanke, an economic historian of the Great Depression, they remembered the ideas of John Maynard Keynes and loosened monetary and fiscal policy to avoid the worst. 
We are still coping with the budgetary consequences, especially in Europe, but it is true that the world did not end in 2008. 
Monetary tightening was not the only major policy error of the 1930’s; so was a retreat into protectionism, symbolized by the Smoot-Hawley tariff increases at the beginning of that decade. 
Historians continue to debate the centrality of the Smoot-Hawley law itself, but the subsequent tariff war certainly damaged trade and economic growth, making a bad situation worse. 
Today’s statesmen like to say that they have avoided the protectionist error as well, but is that true? 
Certainly I do not expect a tariff war to break out in the near term, but there are dangerous indicators of trade trouble ahead. 
The Doha round of global free-trade talks has been abandoned, and the World Trade Organization is now languishing by the lake in Geneva, uncertain of its future. 
Perhaps Doha was unlikely to achieve much in the current circumstances, but the absence of any continuing dialogue on world trade – at worst, a useful safety valve – adds a new level of risk. 
While people are talking, they are less likely to act precipitately. 
In the financial arena, there are many signs of a revival of nationalistic approaches to regulation and currency policy. 
The crisis challenged the Washington Consensus, which assumed that the world was moving gradually towards free movement of capital and market-determined exchange rates. 
Several countries – including Brazil, South Korea, and Turkey – have now imposed capital controls of various kinds. 
Even the International Monetary Fund, long the embodiment of the Washington Consensus, has acknowledged that “capital controls are a legitimate part of the toolkit to manage capital flows in certain circumstances.” 
American Congressmen view the Chinese as archetypal currency manipulators, but the Swiss have introduced a firm cap on the franc’s appreciation. 
These early signs of deglobalization of financial markets have their parallels in commercial banking, with some of the biggest global institutions retrenching rapidly. 
Citibank and HSBC had gone further than most in developing a global footprint; indeed, one can hardly get on a plane nowadays without being reminded that the latter is “the world’s local bank.” 
But both are closing down in many countries. 
Likewise, many other European banks are cutting back their overseas business sharply. 
The impact is particularly vivid in trade finance, where European banks have been major participants in Asia. 
Now they are in rapid retreat from that market, creating a worrying gap that Asian banks are seeking to fill. 
There is more to come. 
As they struggle to raise new capital, European banks and insurers are likely to be forced to sell overseas assets. 
If this were simply a sign of a new, tighter focus on viable long-term strategies, it might be regarded it as a benign development. 
But there are indications that the process is being driven by regulatory change, and in some cases by regulatory protectionism. 
Banks are overseen by a “home” regulator in their country of incorporation, and by a series of “host” regulators where they operate. 
“Home” regulators and lenders of last resort are increasingly worried about their potential exposure to losses in banks’ overseas operations. 
As Mervyn King, the Governor of the Bank of England, acutely observed, “banks are global in life, but national in death.” 
In other words, home authorities are left to pick up the tab when things go wrong. 
Host regulators are increasingly nervous about banks that operate in their jurisdictions through branches of their corporate parent, without local capital or a local board of directors. 
So they are insisting on subsidiarization. 
From the banks’ perspective, that means that capital is trapped in subsidiaries, and cannot be optimally used across its network. 
So banks may prefer to pull out instead. 
A particular version of this phenomenon is at work in the European Union. 
In the single financial market, banks are allowed to take deposits anywhere, without local approval, if they are authorized to do so in one European country. 
Yet when the Icelandic banks failed, the British and Dutch authorities had to bail out local depositors. 
Now regulators are discouraging such cross-border business, leading to a process with the ugly new name of “de-euroization.” 
We can only hope that it does not catch on. 
Regulators, recognizing the risks of allowing financial deglobalization to accelerate, have been seeking better means of handling the failure of huge global banks. 
If banks can be wound up easily when things go wrong, with losses equitably distributed, regulators can more easily allow them to continue to operate globally and efficiently. 
So a major effort to construct a cross-border resolution framework is under way. 
But it is uphill work, and Daniel Tarullo, a governor of the Federal Reserve, has acknowledged that “a clean and comprehensive solution is not in sight.” 
Does all of this amount to a serious threat to the benefits of globalization? 
The cautious answer would be that it is too early to say. 
Perhaps we are just seeing the beginnings of a changing of the guard, and that HSBC and Citibank will be replaced as global players by China’s ICBC, Brazil’s Itau Unibanco, or Russia’s Sberbank. 
But it may be that we are seeing a revival of a less benign Keynesian doctrine: “ideas, knowledge, science....should of their nature be international. 
But let goods be homespun wherever it is reasonably and conveniently possible and, above all, let finance be national.” 

Bringing the UK to Europe’s Core 
BRUSSELS – The European Union’s core countries these days, besides the original six founders, are the 15 member states that make up the European Monetary Union. 
They have converging economies and coordinated monetary and fiscal policies. 
The big outsider is the United Kingdom. 
British EMU membership remains very desirable. 
If the EU is to progress beyond the limits of a common economic and monetary policy and develop a defense and security policy along with a common foreign policy, the UK must be on board. 
Exchange-rate fluctuations between sterling and the euro disturb market forces among member states, and at times even have a negative impact in London. 
In the long run, the UK risks serious isolation if the euro zone starts to exert even greater power. 
But other European countries must also understand British arguments in favor of the UK maintaining its own currency, given London’s importance as an international financial center as well as its privileged relations with more than 50 Commonwealth countries. 
The euro zone should therefore offer the UK an honorable compromise in which Britain would be allowed to become a full member of the EMU and take a seat in all of its institutions like the European Central Bank and the ministerial Eurogroup, while also being able to keep the pound in its relations with third countries. 
The euro would, however, have to be accepted as legal tender in the UK, alongside the pound, and in the commonwealth countries, and this would demand close cooperation between the Bank of England and the ECB. 
Such a compromise would increase the EMU’s weight both inside and outside Europe. 
A Europe built around such a core corresponds to what I call a “Saturn model,” with a huge planet in the middle, surrounded by rings, converging sooner or later in the center. 
The outer circles are the transition countries, while the rings around the center would be EU countries that still refuse to join the EMU, or do not yet fulfill all the conditions, like Romania and Bulgaria, or eventually the western Balkan countries and Turkey. 
The Saturn model puts the present fierce debate on enlargement and the borders of Europe into a totally different context, because the core countries would no longer find themselves being asked to accept a Europe divided into different classes of member states. 
The positioning of EU countries on the rings around the core would be transitory, with the aim being to facilitate overall convergence. 
Given the impact of globalization and the direct challenge to the EU implied by competition from countries like China and India, the European economy needs to become more innovative. 
Economic and social reform policies throughout Europe would be strengthened if the EU authorities were able to coordinate them, and EU enlargement, together with the further development of its internal market of almost half a billion consumers, could powerfully stimulate economic activity. 
The accession of Spain and Portugal was a vivid example of that in the 1980’s, and it is an argument that should be considered with respect to such a populous country as Turkey. 
Europe has been unifying gradually for 50 years now, and we can reasonably look forward to further inter-continental cooperation and integration, not least because of scientific and technological developments. 
At the same time, we can expect a growing Atlantic community as successive rounds of trade liberalization make it easier to develop a free-trade area between the EU and the United States. 
Europe’s own experience has taught us that a customs union must be the first step, and that sooner or later the more intense economic cooperation that a customs union imposes will compel its members to establish an economic community that has all the characteristics of a unified internal market. 
But, of course, this can only function smoothly if exchange-rate fluctuations between its members’ currencies have been eliminated. 
Although an Atlantic Monetary Union (between the US and the EU) is a long-term prospect, it should be considered as a grand design for the future. 
Europe’s leaders and their voting publics now have a choice between the Europe of the past and of the future. 
The Europe of the past began with the Schuman Plan, which sowed the seeds of today’s EU, and concluded when the Cold War ended. 
It was an era of integration based on the heroic drive to reconcile post-war Germany and France and establish a Pax Europea , as well as the threatened expansion of the Soviet Union. 
But after the implosion of communism, the situation in Europe was more or less reversed: the defensive demarcation of borders has been replaced by the removal of frontiers across the Continent. 
However, while General de Gaulle once spoke of a Europe stretching from the Atlantic to the Urals, defining Europe in purely geographical terms omits other criteria – including the European social model and the scale of values on which it is based – of what it means to “belong” to Europe. 
Instead, the vocation of Europe in the course of the twenty-first century should be to become the lever of step-by-step inter-continental convergence and unification. 
Europe must be reinvented for this purpose, and broadening the EMU’s reach is the right place to start. 

Bringing the World Health Organization Back to Health 
CAMBRIDGE: Many life and death issues facing developing countries can only be addressed by international joint action. 
No lone African country, for example, can overcome the crushing burden of malaria, a disease that claims perhaps 1million lives per year, and which causes around 800 million episodes of illness per year. 
Current scientific knowledge is simply inadequate to face the challenge. 
The world, instead, relies on the World Health Organization (WHO) to address challenges such as this. 
In recent years, however, the United States and other governments have squeezed the budget of the WHO to a point where it can not effectively carry out its global mission. 
It is desperately important that the world's governments now recommit to raise the budget of the WHO, as one of the most important steps available in the cause of global development and justice. 
Start with two points. 
First, many of the crucial barriers to economic development are scientific rather than purely economic. 
All of the IMF-World Bank missions in the world are not going to overcome the problems of malaria, or drug-resistant tuberculosis, or even low agricultural productivity in the arid regions of Africa. 
These problems simply require new scientific and technical approaches. 
Second, the needed science will not emerge from the poorly financed laboratories and universities of developing countries. 
It now takes around $300 - $500 million to develop a new vaccine, for example, a malaria vaccine. 
Only the major pharmaceutical companies, working in conjunction with basic and applied research centers around the world, can mobilize the necessary funding. 
The developing world, alas, contributes only a tiny fraction of worldwide scientific advance, and the major drug companies generally lack the market incentives to invest in diseases afflicting the poor people of the developing world. 
Here enters the critical role of the World Health Organization. 
As the only international body charged with looking after global health, including the health of the world's poorest people, the WHO is uniquely placed to create a framework in which the needed research and development can take place. 
The WHO identifies the areas of highest priority, and then mobilizes the international community to appropriate actions. 
It did this most famously in the case of smallpox, where the WHO led the successful campaign on global eradication of that long-dread disease. 
It's now time that the WHO lead a similar effort on malaria, tuberculosis, AIDs, and other afflictions of the developing and developed world. 
Fortunately, under the dynamic management of the new Director General of the WHO, former Norwegian Prime Minister Gru Brundtland, the WHO is gearing up to meet these new global challenges. 
But it currently lacks the resources to match the WHO's will-power, the urgency of the problems, and the operational capabilities of the organization. 
In a blindly mechanical way, the U.S. had taken the view that all major UN agencies should keep their budgets unchanged in nominal (current-dollar) terms, leading to a drop in real spending because of inflation. 
This tight budget is supposed to force shake-ups in UN management. 
On the contrary, it is starving the ability of key units such as the WHO to carry out their job, and to attract and keep the expertise that they need. 
Such a simple-minded budget policy as an across-the-board freeze in nominal budgets should be ended immediately. 
Of course, in the end, success in malaria control, or AIDs control, will require a partnership between the WHO, the private pharmaceutical companies, academic research establishments, and the world's governments. 
For example, the WHO and the rich-country governments could promise to purchase an effective malaria vaccine in order to distribute it (below cost) in Africa, thereby guaranteeing the drug companies that they will have a market for a new vaccine if these companies spend the time and money to develop one. 
Such creative approaches could spur a tremendous amount of research and development on behalf of the world's poor, and do much more good than yet another IMF-World Bank mission. 
The WHO can lead such valuable efforts, and has already proposed to lead dynamically and creatively if given the chance. 
For the sake of the world, let's give the new WHO team the chance to make good on this commitment. 

The Eclipse of British Reason 
BERLIN – When placed under too much strain, chains tend to break at the weakest link. 
Figuratively speaking, the same applies to the European Union. 
So the entire world quite naturally assumed that any process of EU disintegration would start primarily in the crisis-ridden European south (Greece, first and foremost). 
But, as British Prime Minister David Cameron has now demonstrated, the European chain is most likely to break not at its weakest link, but at its most irrational. 
The United Kingdom – the homeland of pragmatism and realism, a country of unflappable principles and unmatched adaptability that stoically gave up its empire after successfully defending Europe’s freedom against Nazi Germany – has now lost its way. 
More precisely, it has been led astray by the Conservative Party’s ideological fantasy that certain EU powers can and should be returned to British sovereignty. 
The UK’s national interests have not changed, and no fundamental shifts within the EU have worked against those interests. 
What has changed is Britain’s domestic politics: a prime minister too weak to control his roughly 100 anti-European backbenchers (call them the “High Tea Party”) in the House of Commons, and a Conservative establishment wary of the UK Independence Party’s rise, which could cost the Tories enough votes on the right to give Labour an electoral advantage. 
Cameron claims that he does not want the UK to leave the EU. 
But his strategy – “renegotiation” of EU membership, followed by a British referendum on the new agreement – is the product of two illusions: first, that he can ensure a positive outcome, and, second, that the EU is able and willing to give him the concessions that he wants. 
In fact, there is good reason to believe that such a course would take on a dynamic of its own, possibly leading to an unintended British exit from the EU. 
That would be a severe setback for the EU; for the British, blundering through history, it would be a veritable disaster. 
While Britain surely would survive outside the EU, the quality of its existence is another matter. 
By exiting the EU, the UK would severely damage its economic interests, losing both the single market and London’s role as a financial center. 
An exit would also harm Britain’s geopolitical interests, both in Europe (where, ironically, it favors EU enlargement) and, worldwide, in its global standing and special relationship with the United States (which has made clear its preference for a European UK). 
Unfortunately, Cameron’s track record in European politics does not inspire confidence in his ability to manage a different outcome. 
When, in 2009, he ordered the Conservative MEPs to withdraw from the European People’s Party, the Europe-wide grouping of center-right political forces, he merely deprived the Tories – now consigned to sit with the sectarians and obscurantists – of any influence in the European Parliament. 
By weakening the UK’s position within the EU, he ended up strengthening the Euro-skeptics within his party. 
But, while Cameron should know from grim experience what is looming, it seems that he has abandoned rational considerations. 
Indeed, the belief that the EU would renegotiate Britain’s membership terms – which assumes, further, that Germany would not object – borders on magical thinking. 
Such a precedent would be applicable to the other member states, which would mean the end of the EU. 
With all due respect to the UK, dismantling the EU as the price of its continued membership is an absurd idea. 
Cameron should recognize that his strategy cannot be allowed (even if he fears that a few cosmetic corrections to the treaty won’t help him at home). 
In the meantime, the Tories risk losing their way on a crucial issue – reform of the relationship between the eurozone and non-euro EU members – if they try to use it as leverage to renegotiate the various European treaties. 
Britain knows that the euro’s survival requires much closer political integration, and also that London’s role as a financial center – as important for the UK as the nuclear industry is for France and the auto industry is for Germany – would be greatly damaged if the euro should fail. 
Although no one should expect the British to join the euro any time soon, political leadership within the EU requires the acumen to take account of the central interests of one’s own country and those of the other member states without indulging in threats. 
This, however, requires an adequate understanding of those interests and a willingness to cooperate on the basis of mutual trust, which should be a given within the European family. 
Speeches, particularly when delivered by leaders of great nations, can be useful, irrelevant, or dangerous. 
Cameron’s long-planned speech on Europe was postponed time and again. 
Perhaps he should have taken that as a sign that he should rethink his position. 
He still can, before it is too late. 
The best starting point would be a re-reading of Winston Churchill’s famous speech in Zurich in 1946. 
“We must build a kind of United States of Europe,” urged Britain’s greatest twentieth-century statesman. 
That remains our task – and Britain’s – to this day. 

How Britain Could Change Its Mind About Brexit 
LONDON – Will 2018 be the year when the United Kingdom changes its mind about leaving the European Union? 
Conventional wisdom says that stopping Brexit is impossible. 
But what did conventional wisdom say about Donald Trump? 
Or Emmanuel Macron? 
Or, for that matter, the original Brexit referendum? 
In revolutionary times, events can go from impossible to inevitable without ever passing through improbable. 
Brexit was such an event, and its reversal could be another. 
Just ask Nigel Farage, the former UK Independence Party leader, who has suddenly said that the June 2016 Brexit referendum could be overturned. 
“The Remain side are making all the running,” Farage warned his fellow hardline Leavers this weekend. “They have a majority in parliament, and unless we get ourselves organized we could lose the historic victory that was Brexit.” 
The votes for Brexit and Trump are often described today as an ineluctable result of deep socioeconomic factors like inequality or globalization. 
In some ways, this description is right. 
Political upheavals of some kind were to be expected after the 2008 economic crisis, as I have argued for years. 
But there was nothing inevitable about the specific upheavals that happened. 
Brexit, like Trump, was a contingent outcome of small perturbations in voter behavior. 
If just 1.8% of Britons voted differently, Brexit would now be a forgotten joke-word. 
If Hillary Clinton’s popular majority of three million votes was distributed slightly differently among the states, the phrase “President Trump” would be as laughable today as it was in January 2016. 
To stop Brexit in the year ahead, four similarly modest shifts in behavior need to happen. 
Public opinion must shift slightly further against the Brexit decision, which is already viewed as “wrong in hindsight” by a 4% point margin. 
Politicians who privately detest Brexit must speak out publicly. 
Reasoned opposition to government policies must be recognized again as a hallmark of democracy, not an act of treason. 
And the sense that Brexit is inevitable must be dispelled. 
These requirements are interdependent. 
Politicians will speak out only if they sense public opinion shifting; but public opinion will shift only with credible political leadership. 
Politicians are cowed into silence if all opposition is branded as anti-democratic. 
And if Brexit appears inevitable, why should voters bother to think again? 
The sense of inevitability, opinion polls and focus groups show, is the most important obstacle to a reversal. 
About 30% of British voters oppose the EU so passionately that they will always back leaving, regardless of the economic costs, just as Trump’s “base” will always support “their” president regardless of how he behaves. 
But these diehard Euroskeptics would never have won a majority without some 20% of voters who cared little about Europe, but treated the referendum as a protest vote. 
Many of these low-conviction voters are now dismayed that Brexit has distracted attention from their real grievances about health, inequality, low wages, housing, and other issues. 
Yet, for this very reason, they want the inevitable departure from Europe to happen as quickly as possible so that the country can get back to business as usual. 
Now suppose these voters began to believe that Brexit, far from being inevitable, might never happen. 
They would demand that politicians “should stop banging on about Europe” and start dealing with the people’s real concerns. 
The sense of inevitability could be dispelled by recent shifts in the internal politics of both the Conservative government and the Labour opposition. 
Labour has begun to realize that its only possible route back to power is by opposing Brexit. 
Detailed analysis of the 2017 election returns has shown that Labour’s unexpected gains were due almost entirely to affluent young voters whose motivation was the hope of derailing Brexit. 
Had it not been for these anti-Brexit voters, Prime Minister Theresa May would have won the widely predicted landslide. 
If Jeremy Corbyn, the Labour leader, now becomes “the handmaiden of Brexit,” in Tony Blair’s memorable phrase, by shying away from effective opposition, these new voters will feel betrayed, the party will split between the Marxists and centrists, and its hopes of ever winning a general election will be dashed. 
If, on the other hand, Labour decided to fight Brexit, public opinion would rapidly shift. 
Opposition to Brexit would start to be treated as a natural feature of democratic politics. 
Labour would start to benefit from the government’s negotiating blunders. 
And the sense of Brexit’s inevitability would vanish. 
That, in turn, would give courage to pro-European Conservatives. 
Tory MPs are unlikely to vote against their party leadership if the absence of Labour opposition allows the government to win anyway. 
If, however, concerted opposition from Labour created a genuine possibility of stopping Brexit, Tory MPs who put national interest ahead of party loyalty would find themselves praised for their mettle, not ridiculed for folly. 
They might even calculate that their own careers would prosper if their party reconciled itself to Europe. 
This chain of events now seems to be starting. 
In December, May lost her first important Brexit battle, when Labour MPs united with 12 Tory rebels to pass an amendment requiring a specific Act of Parliament to approve whatever deal is negotiated with the EU. 
This means that any Brexit plan that arouses serious opposition, either from hardline nationalists or from pro-European Tories, could be used to trigger a new referendum. 
Following this breakthrough, the first serious cross-party campaign explicitly aiming to stop Brexit, and not merely to mitigate damage by seeking a “softer” divorce deal, will be launched later this month. 
To succeed, this campaign will need to persuade disillusioned Remainers that Brexit is not inevitable. 
It will need to show protest voters that whatever their problems, Brexit is not the answer. 
It will need to convince Labour politicians that collaboration with Brexit is electoral suicide, and persuade pro-EU Tory rebels that a rebellion would not be futile. 
Finally, it will need European leaders to state unequivocally that Britain is legally entitled to change its mind about leaving. 
These requirements are challenging, but not impossible. 
David Davis, the pro-Brexit Tory who is now leading the UK’s Brexit negotiations, once said that, “If a democracy cannot change its mind, it ceases to be a democracy.” 
Britain is still a democracy, and it can still change its mind about Brexit. 

Britain’s Deepening Confusion 
LONDON – “Enough is enough,” proclaimed British Prime Minister Theresa May after the terrorist attack on London Bridge. 
Now, it is clear, almost half of those who voted in the United Kingdom’s general election on June 8 have had enough of May, whose Conservative majority was wiped out at the polls, producing a hung parliament (with no majority for any party). 
Whether it is “enough immigrants” or “enough austerity,” Britain’s voters certainly have had enough of a lot. 
But the election has left Britain confusingly split. 
Last year’s Brexit referendum on European Union membership suggested a Leave-Remain divide, with the Brexiteers narrowly ahead. 
This year’s general election superimposed on this a more traditional left-right split, with a resurgent Labour Party capitalizing on voter discontent with Conservative budget cuts. 
To see the resulting political terrain, imagine a two-by-two table, with the four quadrants occupied by Remainers and Budget Cutters; Remainers and Economic Expansionists; 
Brexiteers and Budget Cutters; and Brexiteers and Economic Expansionists. The four quadrants don’t add up to coherent halves, so it’s not possible to make out what voters thought they were voting for. 
But it is possible to make out what voters were rejecting. 
There are two certain casualties. 
The first is austerity, which even the Conservatives have signaled they will abandon. 
Cutting public spending to balance the budget was based on the wrong theory and has failed in practice. 
The most telling indicator was the inability of George Osborne, Chancellor of the Exchequer from 2010 to 2016, to achieve any of his budget targets. 
The deficit was to have vanished by 2015, then by 2017, then by 2020-2021. 
Now, no government will commit to any date at all. 
The targets were based on the idea that a “credible” deficit-reduction program would create sufficient business confidence to overcome the depressing effects on activity of the cuts themselves. 
Some say the targets were never credible enough. 
The truth is that they never could be: the deficit cannot come down unless the economy grows, and budget cuts, real and anticipated, hinder growth. 
The consensus now is that austerity delayed recovery for almost three years, depressing real earnings and leaving key public services like local government, health care, and education palpably damaged. 
So expect the ridiculous obsession with balancing the budget to be scrapped. 
From now on, the deficit will be left to adjust to the state of the economy. 
The second casualty is unrestricted immigration from the EU. 
The Brexiteers’ demand to “control our borders” was directed against the uncontrolled influx of economic migrants from Eastern Europe. 
This demand will have to be met in some way. 
Migration within Europe was negligible when the EU was mainly West European. 
This changed when the EU began incorporating the low-wage ex-communist countries. 
The ensuing migration eased labor shortages in host countries like the UK and Germany, and increased the earnings of the migrants themselves. 
But such benefits do not apply to unrestricted migration. 
Studies by Harvard University’s George J. Borjas and others suggest that net immigration lowers the wages of competing domestic labor. 
Borjas’s most famous study shows the depressive impact of “Marielitos” – Cubans who immigrated en masse to Miami in 1980 – on domestic working-class wages. 
These fears have long underpinned sovereign states’ insistence on the right to control immigration. 
The case for control is strengthened when host countries have a labor surplus, as has been true of much of Western Europe since the crisis of 2008. 
Support for Brexit is essentially a demand for the restoration of sovereignty over the UK’s borders. 
The crux of the issue is political legitimacy. 
Until modern times, markets were largely local, and heavily protected against outsiders, even from neighboring towns. 
National markets were achieved only with the advent of modern states. 
But the completely unrestricted movement of goods, capital, and labor within sovereign states became possible only when two conditions were met: the growth of national identity and the emergence of national authorities able to provide security in the face of adversity. 
The European Union fulfills neither condition. 
Its peoples are citizens of their nation-states first. 
And the contract between citizens and states on which national economies depend cannot be reproduced at the European level, because there is no European state with which to conclude the deal. 
The EU’s insistence on free movement of labor as a condition of membership of a non-state is premature, at best. 
It will need to be qualified, not just as part of the UK’s Brexit deal, but for the whole of the EU. 
So how will the shambolic results of the British general election play out? 
May will not last long as Prime Minister. 
Osborne has called her a “dead woman walking” (of course without acknowledging that his austerity policies helped to seal her demise). 
The most sensible outcome is currently a political non-starter: a Conservative-Labour coalition government, with (say) Boris Johnson as Prime Minister and Jeremy Corbyn as his deputy. 
The government would adopt a two-year program consisting of only two items: the conclusion of a “soft” Brexit deal with the EU and a big public investment program in housing, infrastructure, and green energy. 
The rationale for the investment program is that a rising tide will lift all boats. 
And an added benefit of a thriving economy will be lower hostility to immigration, making it easier for Britain to negotiate sensible regulation of migrant flows. 
And who knows: if the negotiations force the EU to re-cast its own commitment to free labor movement, Brexit may turn out to be a matter less of British exit than of an overhaul of the terms of European membership. 

Brittle Britain 
LONDON – Which European country faces the greatest risk of political instability and financial turmoil in the year ahead? 
With less than a week to go before the British general election on May 7, the answer is both obvious and surprising. 
Once a haven of political and economic stability amid the turmoil of the euro crisis, the United Kingdom is about to become the European Union’s most politically unpredictable member. 
Indeed, continuity is the one election outcome that can almost certainly be excluded. 
Unless opinion polls are inaccurate to a degree unprecedented in British history, the two parties comprising the government coalition, Prime Minister David Cameron’s Conservatives and the Liberal Democrats, have almost no chance of winning a combined parliamentary majority. 
One possibility – with a probability slightly above 50% according to the polls – is that Britain, the birthplace of Thatcherism and the EU’s standard-bearer of neoliberal economics, will soon have a Labour-led government committed to the biggest tax-raising program since the 1970s. Moreover, because of the peculiarities of the British electoral system and the rise of Scottish and Welsh nationalism, a Labour government’s survival would depend on the support of parties with even more radical economic agendas and dedicated to dismantling the UK. 
Another scenario – almost as probable as a Labour-led coalition – is a weak and unstable Conservative government. 
To judge by the opinion polls, Cameron’s best hope is to win more parliamentary seats than Labour and try to form a minority government, which could survive as long as the other parties failed to unite against it. 
This might be possible, because the Liberal Democrats and Scottish Nationalist Party may see benefits in allowing a weak Conservative government to remain in power, at least for a while. 
But a minority Conservative government would create additional uncertainties and risks. 
Cameron would be more vulnerable than any leader in postwar British history to blackmail by his own party’s dissidents and extremists, who see it as their historic mission to pull Britain out of the EU. 
And a minority government would be unable to pass any controversial legislation that the Scottish Nationalists opposed. 
Moreover, Britain’s political institutions might be unable to cope. 
The UK’s unwritten constitution is based entirely on tradition and precedent. 
That arrangement has always presupposed strong governments with clear mandates. 
The constitution is so poorly adapted to coalitions and minority governments that some legal scholars question whether the Queen should address Parliament on behalf of “her” new government if there is a risk that it will be toppled within a few weeks or months. 
And yet, although the electoral arithmetic makes a stable centrist government – one that could maintain Britain’s current policies on taxes, economic management, and Europe – almost impossible to imagine, continuity is the outcome that most international business leaders and politicians seem to expect. 
The clearest evidence of this can be seen in financial markets. 
Although the pound has declined by about 10% from its peak of $1.70 last September, sterling weakness has simply reflected the dollar’s strength. 
In the same period, sterling has risen almost 10% against the euro, while British share prices have hit all-time highs and government bonds have generated better returns in Britain than in the United States, Germany, or Japan. 
What accounts for this apparent indifference – also evident among European politicians – to the looming political risks in Britain? 
Many international observers believe that politics simply no longer matters much in Britain, because the economy is fundamentally sound and growing at a fairly healthy pace. 
But this is a dangerously complacent argument. 
Yes, Britain recorded the fastest economic growth among the major OECD countries in 2014 and has an unemployment rate of only half the EU average. 
But these favorable indicators obscure a source of enormous risk: one of the world’s largest external deficits, financed last year by foreign-capital inflows totaling $160 billion. 
The current-account gap, at 5.5% of GDP, is by far the highest among the major OECD countries and is at a level long associated – both in the UK and elsewhere – with the onset of financial crises. 
As long as Britain was a haven of political stability and tax policies favorable to foreign investors, it had no problem attracting capital inflows. 
But the impending shifts in Britain’s politics and its EU relations are bound to draw attention to the economy’s extreme dependence on foreign finance. 
A Labour government, wielding tax proposals specifically designed to hit private foreign investors, would certainly discourage inflows. 
But international investors might be equally put off by a weak Conservative government dominated by the party’s Europhobe wing. 
In either case, GDP growth is likely to slow as business confidence, consumption, and house prices suffer – either from new taxes under Labour or from uncertainties about EU membership under the Conservatives. 
Another reason why international observers may be ignoring such obvious risks is that they have been preoccupied with more dramatic events in Greece and Ukraine. 
Politicians, financial analysts, and political commentators have limited time and attention. 
They tend to focus on whatever seems to be the biggest and most urgent story, and British politics has not been it. 
Then again, many apparently sophisticated analysts may simply be in a state of psychological denial. 
Surveys of business and financial opinion in Britain show clear majorities in these groups expecting a sudden swing toward the Conservatives in the closing days of the election campaign, resulting in a stable coalition government and continuity in economic and political conditions. 
Such a last-minute shift in voting intentions is possible, but the time for it is running out. 
In fact, British public opinion has remained uncannily stable, not only during the official election campaign, but throughout the past 12 months. 
There are simply no rational grounds for expecting either the Conservatives or Labour to achieve the decisive victory needed to form a stable government. 
The upcoming election will therefore mark the beginning, not the end, of a period of uncertainty for British politics, economics, and finance. 
No amount of lingering faith in stability will change that. 

Britain’s Norway Solution 
LONDON – Shortly after UK Prime Minister Theresa May’s decision to call an unexpected “Brexit election,” I wrote that pro-Europeans in Britain might yet snatch victory from the jaws of defeat. 
But the timescale I had in mind was five years, not five weeks. 
How long May will survive as prime minister is impossible to predict. 
Her fate will depend on personal vendettas and Byzantine political rivalries, not only in London, but also in Edinburgh and Belfast. 
But in trying to anticipate the outcome of the Brexit negotiations, the questions that matter no longer have much to do with May’s political survival. 
Are Britain’s parliamentary arithmetic and public opinion moving in favor of or against the “hard Brexit” – a drastic clampdown on immigration and withdrawal from the European Union’s customs union, single market, and legal jurisdiction – planned by May before the election? 
And if Britons are turning against May’s agenda, will EU leaders offer them a face-saving compromise similar to that offered to Norway, which remains outside the EU’s institutional structures, but accepts most of the obligations and costs of EU membership in exchange for the commercial benefits of the single market? 
An EU relationship similar to Norway’s is the only model that could attract public and political support in Britain, without threatening EU principles or inflicting serious economic costs on either side. 
The institutional arrangements for this option already exist, in the form of the European Economic Area (EEA), a sort of anteroom to full EU membership, currently occupied by three small but prosperous European countries: Norway, Iceland, and Liechtenstein. 
These countries considered EU membership in the late 1980s, but for various reasons decided not to join. 
All wanted to integrate their economies and labor markets with Europe, and, after the Brexit vote, Britain was widely expected to try to negotiate a Norwegian-style EEA arrangement, rather than the rupture proposed by May. 
It was only last September, three months after becoming prime minister, that May surprised the world by effectively ruling out the EEA option, telling the Conservative Party’s annual conference that those who call themselves “citizens of the world” are really “citizens of nowhere,” and that the free movement of people required by EEA membership was therefore unacceptable. 
In January, she officially announced that Britain would not seek membership of the EU single market, because this would require free movement, a position confirmed in the Tories’ election manifesto. 
But is May’s aversion to immigrants still relevant, now that the election on June 8 has made her a lame duck and unstable parliamentary alignments and the shifting balance of public opinion will drive the Brexit negotiations? 
Public opinion on immigration will be the most important determinant of Britain’s European policy in the months ahead. 
And the unexpected election outcome, backed by strong evidence from polling, suggests that public attitudes concerning the free movement of people are more nuanced and less hostile than May’s rhetoric and the Conservative manifesto had assumed. 
In fact, British voters mostly support free movement, if it is presented not as an anti-democratic imposition by foreign bureaucrats, but rather as a right that British and EU citizens reciprocally enjoy. 
In May, YouGov, the British polling company that came closest to predicting the election result, added to their final pre-election poll of 1,875 voters the following question: “In negotiating Britain’s departure from the European Union, do you think our government should offer EU citizens the right to travel, work, study, or retire in Britain, in exchange for EU countries giving British citizens the same rights?” 
(Full disclosure, this question was suggested by Best for Britain, an organization I helped to establish and chair.) 
The answers defied conventional wisdom. 
Voters in this carefully weighted sample favored free movement by four to one. Sixty-two percent said “yes,” 17% “no,” and 21% answered, “don’t know.” 
Moreover, there were clear majorities in favor of free movement in every sub-group of the sample, whether categorized by age, region, or political-party support, with one exception: the small minority of voters who supported the anti-immigrant UK Independence Party. 
The upshot is that a new relationship based on the EEA model, allowing Britain to keep most of the benefits of the EU customs union and single market alongside free movement of people, would not only be economically less painful than a hard Brexit; it would also be supported by a large majority of voters. 
The combination of single-market membership and free movement would be particularly popular with the large cohort of young people who turned out to vote last week for the first time and who consider the ability to live, work, or study anywhere in Europe a major benefit of EU membership, not a cost. 
From the standpoint of British politics, it is possible that EEA membership will become the lodestar steering Brexit negotiations in the months ahead. 
But how would the EU respond? 
For other EU countries, a Brexit negotiation based on EEA membership should be a perfectly acceptable, even welcome, outcome. 
EEA membership would not amount to British “cherry picking” of EU benefits, which other countries have understandably refused to accept. 
This is because, by almost any standard, EEA membership is clearly inferior to full EU membership. 
In addition to accepting free movement of people, EEA members must follow EU commercial rules and accept decisions by the European Court of Justice, without any formal role in making these rules and decisions. 
For these reasons, when the EEA was established in 1994, it was intended only as a temporary transitional arrangement for countries – such as Austria, Sweden, Finland, and Norway – which planned to become EU members, but were not ready to join. 
For Austria, Sweden, and Finland, full membership came as intended. 
But in Norway, voters rejected EU membership in a referendum and still do. 
Norway’s “temporary” EEA membership has now stretched to 23 years. 
Could this be a precedent for Britain? 


Britain’s New Internationalism 
TOLEDO, SPAIN -- With President George W. Bush’s grand strategy for the Middle East in ruins, his administration has, however hesitantly, begun to put greater emphasis on resolving conflicts by peaceful means. 
The settlement reached with North Korea, whereby it will dismantle its nuclear program, and the Annapolis conference for an Israeli-Palestinian peace – with the participation of Syria, a pivotal member of the region’s “axis of evil” – are two key examples of this trend. 
The United States’ staunchest ally since 2001, Great Britain, has already gone down this path, divorcing itself from its servile alliance with a Bush administration that focused on war and confrontation. 
Though only a miniature version of America’s imperial predicament, Britain’s current policy, as its new prime minister, Gordon Brown, is defining it, may anticipate the direction taken by the next American president. 
Tony Blair’s endorsement of Bush’s Middle East designs showed that an imbalance of power in an alliance always causes the weaker partner to become subservient. 
Britain joined America’s Iraq adventure with the same inflated perceptions of its military capacity and diplomatic clout that trapped Bush. 
But Britain’s military contribution to the war effort was not indispensable, so Bush did not have to heed Blair’s advice. 
As a result, Britain could not serve as a bridge between a doubtful Europe and a belligerent US, as Blair believed, and Britain’s capacity to be a force for good on the world stage was severely damaged. 
Like America, Britain has learned the hard way the limits of what sheer military power can achieve, and also the devastating implications of its misuse for its reputation in the Muslim world and beyond. 
The scope and virulence of anti-British sentiment in the Muslim world are now second only to that facing the US. 
Restoring Britain’s reputation in the region will take years of hard work. 
Blair’s legacy has thrown Brown into a confusing oscillation between Britain’s transatlantic tradition and its European connections. 
No longer an independent global power, yet unhappy with the London-Washington axis that Blair forged, Brown’s government continues to waffle in its commitment to a united Europe. 
Indeed, Brown, for whom America remains “Britain’s most important bilateral relationship,” recently blocked his foreign secretary, David Miliband, from delivering a speech that he considered excessively pro-Europe. 
But such uncertainty, common in times of transition, should not overshadow what the end of the Blair-Bush era in Britain holds in store. 
Unilateralism and pre-emptive wars are to be replaced by what Brown defines as “an agenda for a hard-headed internationalism,” based on cooperation with multilateral agencies and alliances – the United Nations, NATO, the European Union, and the British Commonwealth. 
The new policy seems to shift emphasis to “soft power” strategy aimed at projecting Britain as a global economic and cultural hub. 
The City of London, the British Council, Oxfam, and the BBC are now expected to restore the prominence of Britain’s enduring values. 
Conspicuously, it is no longer the British, but France’s government under President Nicolas Sarkozy, that is carrying the torch of a possible attack on Iran’s nuclear installations. 
But, for Brown’s policy to succeed, it must promote social change and political reform in the Arab world. 
That means abandoning Blair’s strategy of confronting the “arc of extremism” with putative “moderates” who, besides offering lucrative markets for arms sales, are in fact autocrats whose conduct has helped fuel the growth of radical Islam. 
The “extremists” versus “moderates” language has served only to revive colonial memories in the region and divide it even more deeply. 
Post-Blair Britain is becoming a country for which wars that lack international legitimacy can only presage defeat and moral decay. 
Of course, international legitimacy can be a vacuous concept when not backed by the capacity to use effective force. 
Now incapable of intimidating anyone, Britain has opted for developing its potential to inspire. 
Unfortunately, inspiration, too, requires the threat of effective military power to be an effective force for change. 
Notwithstanding its many setbacks in recent years, the US remains the only power capable of leading a global strategy that consists in balancing soft and hard power. 
May the next American president pursue this course. 

Britain’s Path of Denial 
SANTIAGO – Visit London nowadays and you will notice something strange going on: the worse the British economy tanks, the more fervently Prime Minister David Cameron’s ministers and Tory economists insist that draconian spending cuts are good for economic growth. 
Some observers see this as an act of faith (presumably in the virtues of the unfettered market). 
Others, such as the economist Paul Krugman, see it as an act of bad faith: the Tories just want smaller government, regardless of the consequences for growth. 
The question remains whether there is a non-faith-based argument for cutting back spending to stimulate an economy. 
The answer is yes. 
In fact, there are two. 
Academic research has shown them at work in the past – for example, in Ireland and Denmark during the 1980’s. 
Unfortunately for the Tories, neither case for stimulative spending cuts fits Britain’s predicament today. 
One argument emphasizes the links between fiscal and monetary policy. 
In a country with large fiscal deficits, the central bank may have to keep interest rates high to control inflation. 
In this scenario, budget cuts create room for interest rates to fall. 
If the country has a floating exchange-rate regime, the currency depreciates, too. 
Both of these changes are good for demand and growth. 
If their combined impact more than outweighs the initial contractionary effect of expenditure cuts, then the economy may well pick up after a round of fiscal tightening. 
But little effort is needed to see that this not the British story today. 
The Bank of England’s policy interest rate has remained just above zero for more than two and a half years. 
Regardless of the government’s fiscal-policy stance, this interest rate cannot move below zero. 
The second case for expansionary fiscal contraction is subtler. 
In an economy in which public debt is growing quickly, the longer fiscal adjustment is put off, the larger and costlier it will have to be. 
Households and companies understand this and cease to consume or invest in anticipation of the painful spending cuts and tax hikes to come. 
So, the argument goes, a courageous Tory government that cuts spending today spares citizens that future pain. 
Then, feeling richer and brimming with optimism, the private sector goes on a spending spree and the economy booms. 
Put differently: without the budget cuts, Britain would have been Spain – or perhaps even Portugal or Greece. 
With the budget cuts in place and the markets reassured, Britain no longer risks resembling an unruly Mediterranean country. 
Thus, Britons will soon start spending again and economic growth will ensue. 
So far, so good – except that this story, too, does not apply to Britain. 
There is no sign of a crisis narrowly averted. 
Ten-year yields on British government bonds were at historic lows long before Cameron took office. 
If a crisis was imminent, the markets clearly took no notice. 
And if the coalition government’s budget cuts had improved expectations about future output, that greater confidence would have shown up in higher equity prices – but there is no evidence of this, either. 
In short, private demand in Britain is flatlining rather than surging. 
Add to the mix the collapse in public-sector demand that comes from deep budget cuts, and you have all the ingredients necessary for prolonged stagnation. 
And stagnation, if not worse, is precisely what recent British economic reports are showing. 
The longer this goes on, the more serious the problem will become. 
The long-term unemployed will drop out of the labor market. 
Firms that invest little will become uncompetitive. 
In the jargon of economists, low demand will engender low supply, making a non-inflationary recovery even more difficult to achieve. 
What is to be done in Britain? 
With the eurozone tumbling from crisis to crisis, salvation will not come from abroad. 
At home, all that is left is unconventional monetary policy. 
The Bank of England recently injected an additional £75 billion into the economy via so-called quantitative easing. 
Now, that is real cash, not just an act of faith. 

Britain Votes and Reality Waits 
LONDON – I don’t mean to sound as though I am bragging, but the last time the Conservative Party won an election in Britain was 1992, when John Major was Prime Minister. 
The chairman of the party at the time, running the winning campaign, was me. 
We won the election, but I lost my own race for a parliamentary seat and was sent off to Hong Kong as the colony’s last British governor. 
So I wasn’t around when the Conservative Party, losing the will to govern, tore itself apart in the mid-1990’s over Britain’s role in Europe. 
As Winston Churchill said, the problem with committing political suicide is that you live to regret it. 
Despite piloting the economy through a post-recession recovery, Major lost to Tony Blair in 1997, ending 18 years of Conservative government and bringing a 13-year Labour run, which will probably end when Britain votes for a new government on May 6. 
Blair took over a strong economic legacy, and, to be scrupulously fair, he didn’t wreck it. 
He and his finance minister, Gordon Brown, stuck to their predecessors’ public-spending plans, for example. 
In Labour’s first nine years of governing, public expenditure as a proportion of GDP was lower than in the comparable Conservative period. 
Then we fell into the usual British trap. 
Brown, who became prime minister in 2007, let spending and borrowing rip, so that when the global crash hit Britain was already suffering from a structural fiscal deficit and a credit bubble. 
The country was worse prepared for disaster than most others. 
As a result, whoever wins the election will have an awful job cutting the country’s budget deficit – 12% of GDP – and setting the economy back on the road to sustainable recovery. 
The Conservatives should triumph under a young leader, David Cameron, who has hauled them back onto the middle ground of politics where elections are usually won. 
Labour, under Brown, is unpopular, with the economy in deep trouble and a general sense that the party has run out of ideas. 
The Liberal Democrats under Nick Clegg have surged remarkably, and may even push ahead of Labour in the popular vote. 
But the structure of the British election is such that a victory for them is almost a statistical impossibility. 
Indeed, the opinion polls remain tight. 
Much will depend on the outcome of TV debates between the leaders, which are being held for the first time in a British election campaign, and which have thus far contributed mightily to the Liberal Democrat surge. 
Each leader has been carefully groomed to avoid the sort of gaffes that could cost his party the election, and thus far, not one has shot himself in the foot. 
If Clegg’s job is almost impossible, Cameron’s job is also much harder than it should be because the British electoral system is tilted heavily against the Conservatives. 
The more Labour-oriented parts of the United Kingdom – Wales, Scotland, and urban England – are over-represented. 
Electorates in constituencies where Labour is usually dominant are smaller, and district boundaries take insufficient account of population shifts. 
Thus, more votes are needed to elect a Conservative than a Labour MP. 
In the last election, Labour got 3% more of the popular vote than the Conservatives, but gained 150 more seats. 
The situation is a bit fairer today, but Cameron still has a steep hill to climb if he is to win. 
I think he will do so – not least because the most potent electoral argument today is “time for change.” 
Voters tend to get rid of governments once the incumbents have lost their most precious attribute: the benefit of the doubt. 
Labour seems to be in that situation today. 
But, whatever the outcome, a new government will face a daunting challenge – challenges that will be even more daunting in the case of a “hung parliament,” which will require either a coalition government or minority government to be formed after the vote. 
It is not just that tough measures will be required to rein in public spending for years to come. 
More worrying is that many voters seem to be in denial about that fact. 
They are likely to find that economic reality, once all the electioneering is over, is a very cold shower indeed. 
As a tribal Conservative, albeit it with pretty moderate tendencies and a deep suspicion of ideology, I naturally want Cameron to win. 
He is clever, decent, and strong. 
I think he will make a good prime minister. 
But I don’t envy him the job. 
It will require leadership skills of a high order to persuade voters that in order to prevent national decline we must curb our appetite for more and more public spending. 
The old laws of household economics still apply. 
You can’t spend more than you earn – even in the so-called new economy of the twenty-first century. 
I suspect that other countries will have to learn that lesson as well. 
In Europe, it is not just Greece that is in a mess. 
The public finances of Spain and Portugal are somewhat sounder, but those countries face huge problems in increasing their competitiveness within the eurozone. 



Britain’s Silent Election 
LONDON – Other people’s elections are usually baffling and boring, which is certainly true of the United Kingdom’s coming vote on May 7; indeed, many Britons share the sentiment. 
The longest election campaign in UK history has been strikingly short of focus. 
Nonetheless, the campaign contains three important pointers for other Western democracies. 
The first pointer is that Bill Clinton’s famous campaign slogan from 1992 – “It’s the economy, stupid” – is itself stupid, or at least insufficient. 
If it was the economy that would decide Britain’s election, Prime Minister David Cameron would be leading a much more confident campaign. 
For the past 18 months or so, the UK has had Europe’s fastest-growing economy, and at times has even outpaced the United States. 
The unemployment rate, now 5.6%, has fallen to less than half that of the eurozone. 
But favorable economic indicators have made little difference to the standing of Cameron’s Conservatives in opinion polls, and have done nothing to save their coalition partner, the centrist Liberal Democrats, from a severe slump. 
Too many voters, it seems, still do not feel better off, and for good reason: average incomes have barely begun to rise, following seven painful years. 
So the right slogan in this campaign might be, “It’s the living standards, stupid.” 
Or, more accurately (though more cumbersomely): “It’s the perception of future living standards, stupid, and the perception of fairness surrounding those prospects.” 
Either way, the point is straightforward: statistical recovery is not enough. 
This seems to be why, although it has only a small lead of 2-4 percentage points in the polls, the center-left Labour Party has had the best of the campaign. 
Labour’s leader, Ed Miliband, was widely derided last year as weak, unconvincing, and unlikeable; but, perhaps benefiting from low expectations, he has looked steadily more credible and statesmanlike as the campaign has gone on. 
The second pointer is that foreign affairs, though rarely a major factor in any country’s national elections, can contribute to a general sense of unease about political leadership. 
It had been widely assumed that the UK’s continued membership in the European Union would be a leading campaign issue, given the rise of the UK Independence Party and Cameron’s pledge that, if re-elected, he would hold a referendum on the question by 2017. 
Indeed, Cameron’s promise is arguably the most consequential issue at stake in the British election: if he remains Prime Minister, there will be a referendum; if Miliband takes over, there will not be. 
Britain’s strategic future rests on this choice. 
Yet there has been near-silence on this choice. 
Both UKIP and its charismatic leader, Nigel Farage, have slipped in opinion polls and have struggled to get attention. 
More important, Cameron has said almost nothing about either Europe or immigration; and, though Miliband’s clearly stated pro-EU stance has endeared his candidacy to many business leaders, he, too, has played down the issue. 
Perhaps this reflects my own bias, but I suspect that this evasiveness on the part of Britain’s main political parties has weakened support for them, by diminishing their status as valid representatives of the country. 
Voters may not list Europe or foreign affairs among the main issues that concern them. 
But the daily news about migrants dying in the Mediterranean, the war in Ukraine, Greece’s possible default, the turmoil in Syria, Iraq, Yemen, Libya, and Gaza, Iran’s nuclear program, and more heighten voters’ awareness that their country needs to be defended robustly, by a government with a coherent foreign policy. 
And yet Britain’s defense forces are weaker than at any time since the 1930s. 
The general perception is that Britain’s voice in international affairs is less influential than at any time since then, too. 
Whatever voters think Britain’s foreign and defense policy should be, they believe their country should have one. 
The final pointer of the UK election may partly reflect the vacuum in national leadership that such silence epitomizes. 
Whatever the result of the election, the most striking phenomenon will be the rise of regionalism, most notably a surge in support for the pro-independence Scottish National Party (SNP). 
No one can predict whether the SNP might end up in the paradoxical position of joining a coalition with Labour to govern a country that it was campaigning to leave in last September’s independence referendum. 
But the SNP’s likely electoral gain is too large to be explained by secessionist sentiment alone. 
The party appears to be attracting many people who voted against independence but who want more regional autonomy and a stronger voice for Scotland in the Westminster Parliament. 
The absence of a broader “feel good” factor from economic recovery, resentment of economic inequality, mistrust of national political leaders, and greater faith in localism: these are the main features of Britain’s election campaign. 
Whether or not they make Miliband the next prime minister (in a coalition with the Liberal Democrats, the SNP, or both), they are likely to characterize elections elsewhere as well in the years ahead. 

The Bookies and the British Election 
LONDON – I used to be considered a pretty good forecaster of British and other countries’ elections. 
I was, after all, once a party chairman. 
I can now confess my method. 
It was not based on any novel political insight. 
I did not have a magic algorithm relating economic factors to voting intentions – though I do think that there is some correlation between net disposable income and how people normally vote. 
But my own technique, which I still use, has proved more reliable than even poring over the political entrails in every constituency. 
What I do is not very sophisticated: I watch the bookmakers’ odds. 
Doing so proved invaluable as recently as the Scottish independence referendum last September. 
Two days before the count, bookmakers were paying out to gamblers who had bet that Scotland would vote “No” to independence. 
Guess which way Scotland actually voted. 
My method is based largely on the observation that you rarely hear of a poor bookie. 
So I apply the American writer Damon Runyon’s famous adage: “The race is not always to the swift, nor the battle to the strong, but that’s the way to bet.” 
The problem now is that the British general election in May is too close to call. 
So the bookmakers have 2:5 odds on no party gaining an outright majority, and 10:11 on either Labour or the Conservatives winning the largest number of seats. 
So I cannot predict the outcome, and neither can the masters of the universe in the City of London, who always become jittery in the face of political uncertainty. 
What I can do is try to explain why that uncertainty exists. 
First, as in many other democracies, support for the United Kingdom’s two main political parties is declining. 
When I first became interested in politics, nearly 50 years ago, Labour and the Conservatives attracted some 90% of the popular vote. 
In May, their combined share will be about 65% to 70%. 
There are several reasons for this. 
One is the decline of the traditional working class and the growth of a more affluent middle class, underpinned by changes in occupation and housing. 
Trade-union membership and public-sector employment have fallen. 
The number of people joining political parties has dropped sharply as ideological identification with either the left or the right has waned. 
Add to this the rise of populist and nationalist parties in Britain, partly a consequence of the political and economic alienation that have resulted from globalization and economic troubles, and Labour and the Conservatives are fighting over dwindling support. 
The latest polls indicate 34% support for Labour, and 32% for the Conservatives. 
Labour’s popularity has been trending down from the high 30s over the last couple of years; the Conservatives have remained stuck at around 30%. 
Several factors make predicting the outcome even more problematic. 
For starters, the electoral system is tipped sharply in Labour’s favor. 
It takes more votes to elect a Conservative than a Labour MP, owing to the over-representation of urban Britain and some majority-Labour parts of the country. 
As a result, psephologists calculate that the Conservatives have to win at least 4% more of the popular vote than Labour in order to win more seats. 
Second, the anti-immigration, anti-European UK Independence Party (UKIP) takes more votes – perhaps as much as 50% – from the Conservatives than it does from the Labour party. 
It looks as though UKIP’s support may have peaked, and that some of the air is escaping from the party’s tires. 
But no one really knows how much damage UKIP will do to the Conservatives’ chances. 
Third, on the other side of the fence, the Scottish National Party appears to be attracting a large number of former Labour supporters. 
Many working-class voters in western Scotland used to vote for the SNP in Scottish Parliament elections, but would drift back to Labour in UK general elections. 
But some believe that this pattern has been disrupted, owing to a sense that Labour has taken its traditional supporters for granted. 
Ed Miliband, the Labour leader, seems to be just as unpopular in Scotland as his Conservative counterpart, Prime Minister David Cameron. 
Leadership is an area where the Conservatives are already ahead in opinion polls. 
They have a substantial lead on economic issues as well, as the news continues to support the party’s contention that the recovery in growth and employment, along with low inflation, are now benefiting the entire country. 
Conservatives will hammer away on the economy, as they did in 1992, the last time that they won an election outright. 
Labour, for its part, will seek to focus voters’ attention on issues that are thought to be toxic for the government, like the National Health Service. 
With the campaign already underway, no one should expect the main protagonists to depart significantly in the weeks ahead from the themes that they have already espoused. 
What happens if the outcome matches the bookies’ predictions? 
There will presumably be months of attempts to build coalitions out of improbable alliances; then maybe there will be another election (assuming Parliament can change the law mandating its five-year term). 
I hope it does not come to that, and that when the battle smoke clears, Cameron will be left – as he deserves to be – the only man standing. 
But before I place that bet, I will consider what the bookies have to say. 

Lies, Damn Lies, and the British Election 
LONDON – Democratic elections cannot be described as competitions aimed at revealing which candidates tell the unvarnished truth. 
Most politicians try to avoid telling outright lies; they bob and weave like prizefighters when faced with questions that might ensnare them in outright mendacity. 
But they invariably exaggerate what they have to offer, as well as the perils that would result should their opponents win. 
It is understandable that politicians should talk up their own vision of the future and talk down what others have to say. 
All of this is most credible if it does not go too far, and if it bears some resemblance to what the same politicians have achieved when they have been in power. 
Voters normally spot political Pinocchios and the lengthening of politicians’ noses a mile off. 
But they also do not expect their elected representatives to be saints. 
They are prepared to give some the benefit of the doubt (by far the most important attribute any political leader can possess). 
My guess is that on polling day, Prime Minister David Cameron will emerge holding this asset. 
Voters also have a gut instinct – usually, though not always, correct – that parties of the traditional left will tax and spend more, and that those of the right will do the opposite. 
The way voters respond reflects the way they perceive recent history and what they want for themselves and their families in the future. 
I subscribe to the view that they normally get these judgments right. 
This year, however, the British electorate must navigate more than the ordinary amount of election-time dissimulation. 
As voters head to the polls on May 7, their would-be elected officials are asking them to believe three great falsehoods, each of which is dangerous in its own way. 
The first two falsehoods – deceptions as large as I can remember witnessing during an election campaign – are being peddled by the country’s two most successful populist parties: the United Kingdom Independence Party (UKIP) and the Scottish Nationalist Party (SNP). 
UKIP’s rapid rise has been built on the promise of a return to a British past that never was: mostly white, God-fearing, law-abiding, culturally insular, and narrowly focused on its own national interests. 
It is a vision that appeals mainly to those who are suspicious of modernity and hostile toward globalization. 
The danger is that UKIP’s two primary policy prescriptions – an end to immigration and withdrawal from the European Union – are incompatible with economic prosperity. 
In order for Britain to continue to thrive outside the EU, it would have to open its economy even further, not only to worldwide trade and investment, but also to increased immigration flows. 
Following UKIP’s suggestion to close the country off from the world would result only in greater poverty – above all for British workers. 
The SNP, too, has built its campaign around a core of dishonesty that, unfortunately, explains a good part of its success. 
In addition to appealing to an unpleasant undercurrent of Scottish Anglophobia, the SNP promises its electorate the prospect of policies that are far to the left of anything that Labour’s prime ministerial candidate, Ed Miliband, could possibly deliver. 
To make matters worse, the increase in welfare spending that the SNP is promising Scotland’s voters would have to be paid for primarily by taxpayers in England. 
Regardless of which party – Labour or Conservative – wins the largest number of seats in Parliament, its constituents would of course include many English voters, who would never agree to the SNP’s policy priorities. 
As far as falsehoods go, this is a dangerous one; it once again threatens the constitutional integrity of Britain, just eight months after Scotland voted to stay part of the United Kingdom by a margin of 10%. 
But it is the last deception that is the most widespread – and probably the most dangerous of all. 
National politicians’ campaign rhetoric embodies the delusional belief that the UK can exercise the same degree of control over global events that might have been possible 50 years ago. 
For better or worse, that simply is not true. 
The UK no longer wields the international influence it once did; indeed, Britons hardly seem to be bothered by their country’s downgraded importance – or even very much aware of the implications. 
National sovereignty is becoming an ever more elusive concept. 
Britain’s economic prospects increasingly depend on events beyond its shores, whether just across the English Channel or in China or California. 
Environmental hazards blow in on the wind. 
Swelling migration pressures threaten to overwhelm any pretense at border controls. 
Security concerns increasingly implicate foreign and domestic policies simultaneously. 
A recent political cartoon showed British bombers taking off on a mission, with one pilot saying to the others, “It seems a long way to go to bomb a few young men from South London.” 
Addressing the challenges that we Britons face will first require acknowledging our limited control over their root causes. 
The country is in desperate need of leadership with the courage to be candid with voters, by explaining to them clearly and soberly that the UK can no longer solve its problems alone. 
In an increasingly dangerous, ever-more interconnected world, Britain cannot afford to make its most important collective decisions based on delusions. 
The British electorate would be better served if their politicians had the courage to serve up some uncomfortable truths – or at least not to deal in dangerous deceit. 

The Economic Consequences of a Hung Parliament 
MANCHESTER – The United Kingdom’s just-completed election was supposed to provide – as the Conservative Party’s campaign slogan put it – a “strong and stable” government. 
It ended up doing the opposite, producing a hung parliament and the likelihood of another general election later in the year. 
Meanwhile, the clock is ticking for concluding negotiations with the other 27 EU members on the UK’s withdrawal from the European Union. 
To anyone with an inkling of how demanding and complicated the Brexit talks will be, and how ill-prepared British politicians and officials are for them, this is a depressing prospect. 
Although a hung parliament, with the Tories attempting to form a minority government, might tilt UK politics in the direction of a “softer” Brexit, at least in terms of the future trade relationship with the EU, it will probably leave Britain’s political leaders even less able to cope with the negotiations. 
Britons will have to hope that EU leaders are willing to show some compassion: after all, the one clear message from voters was their lack of confidence in the alternatives on offer. 
But the UK economy will be facing significant challenges – all but ignored during the election campaign – even without Brexit. 
One is the chasm between the winners and losers from trade and technology, a gap that goes a long way to explaining last year’s pro-Brexit vote. 
Related to this is the UK’s shockingly low level of productivity. 
Of course, the gap between winners and losers – which broadly corresponds to the electoral map – is not unique to Britain; it has incited populism and other forms of anti-establishment politics across the West. 
Nor is the UK the only country to be experiencing flat or slow productivity growth. 
But the UK’s productivity level is some 16% lower than the G7 average. 
And it is by far the most regionally unequal EU economy. 
To improve UK productivity, the country’s underperforming regions must catch up. 
The Brexit vote makes it doubly necessary to focus on these poorer regions: to address the divisive politics that underpinned the narrow Leave majority, and to minimize the economic damage that the rupture with the UK’s biggest trading partners, especially if badly negotiated, is sure to cause. 
The best hope to tackle the profound structural problems came with the May government’s pre-election announcement of its intention to adopt an industrial strategy. 
Although industrial policy is in line with May’s corporatist instincts, the UK’s policy classes have been allergic to the idea since the late 1970s. 
Officials shudder at the memory of ill-fated interventions designed to prop up failing companies (such as carmakers and steel producers) or invest in ultimately doomed new technologies (Concorde, DeLorean cars). 
It did not take Margaret Thatcher long after her election in 1979 to downgrade the National Economic Development Office (known as Neddy), the body responsible for strategic state interventions, which was finally dismantled under Thatcher’s successor, John Major, in 1992. 
The allergy to industrial policy is particularly acute among those who equate it with subsidies and tax breaks. 
Yet, given that the government constantly intervenes in the economy, it surely makes sense to think about its actions and interactions with the private sector in a far more strategic way. 
Indeed, some below-the-radar – or even accidental – industrial policies have been rather successful. 
Finance is one beneficiary, thanks to benign regulation and huge investment in infrastructure in the City of London and Canary Wharf. 
The pharmaceutical industry has been another, owing to special tax breaks such as the “patent box” and the NHS as a huge customer. 
The creative sector has benefited as well, thanks to the BBC. 
Although under constant political attack, the BBC acts exactly as a public partner should, undertaking research and development, setting technical standards, providing skills training, and adhering to open procurement from small and medium-size suppliers, which are among the UK’s most successful producers and exporters. 
The economic case for industrial policy is compelling, so long as it is understood as a vehicle for strategy coordination, risk pooling, and the provision of public goods. 
The old mistakes – propping up lame-duck industries or betting on specific technologies – can largely be avoided through strong policies on competition and state aid (to ensure that support for the auto sector, say, is not seen as support only for current incumbents) and sunset clauses for specific assistance. 
The case against not having an explicit industrial policy is also compelling. 
The accidental character of government intervention helps explain why the economy is so regionally lopsided. 
For example, cost-benefit analyses of proposed infrastructure projects that rely on market metrics such as wage rates or property prices to assess potential benefits will create ever-increasing investment around London, and a vicious circle of apparently decreasingly attractive investment in the UK’s north. 
A strategic view would recognize the productivity benefits of seeding new clusters elsewhere – like the happenstance measures that put UK automakers in the northeast of England and the country’s second-biggest broadcast-media sector outside London in Salford, Greater Manchester, when the BBC moved part of its operations there. 
There is ample historical evidence of the merits (and demerits) of specific policies. 
As Britain has long been plagued by seesaw policies and a plethora of headline-grabbing (but ineffective) initiatives, the real challenge will be to establish a political and institutional framework to implement viable initiatives, and to shape governmental interaction with the private sector. 
Of course, any pre-election policy ideas might fall victim to political deals or simply the massive uncertainty implied by the recent election result. 
That would be a shame. 
The greater the political instability, the more acute is the need for a framework that will finally start to address the deep divisions and challenges facing the British economy. 

Two Europes in One 
WASHINGTON, DC – Informal discussions on the United Kingdom’s relationship with the European Union are now underway. 
With a referendum on the UK’s continued EU membership set to take place before the end of 2017, the talks are the first step toward negotiating changes which, EU leaders hope, will convince British voters to choose Europe. 
And changes will certainly be needed. 
Indeed, as Prime Minister David Cameron is well aware, given the current dynamic of the UK’s relationship with the EU, British voters would undoubtedly choose to leave the EU. 
But Cameron also knows that he must handle the negotiations with care. 
If he asks for more than the EU can accommodate, he will look as if he caved in. 
If he asks for too little, Britain’s Euroskeptics will have more fuel for their campaign against continued membership. 
Likewise, if EU leaders give Cameron too much – allowing the UK to reap the benefits of membership, without shouldering the same responsibilities as its partners – their populations could turn on them. 
But if they give too little, they could lose the UK as a partner. 
Beyond such tactical matters, the UK and its European partners must address long-term issues relating to the changing shape of the eurozone. 
The euro crisis has given rise to a consensus that, in order to function effectively, the eurozone must pursue further integration. 
Specific proposals include a designated eurozone budget, increased fiscal-policy coordination among members, and a eurozone finance minister. 
For the UK, which opted out of the euro, this is a cause for concern, as it could leave the country on the sidelines of major decision-making processes – especially if the necessary shift toward weighted majority voting removes the need for unanimity in more areas. 
Cameron already has pressed for an “emergency brake” mechanism to slow down decisions on issues that are important to the non-euro countries. 
Clearly, the need for much greater eurozone integration must be balanced against some countries’ strong desire to preserve more national sovereignty than is feasible in the monetary union. 
The best way to do this would be to divide Europe into two groups. 
Inclusion in one or the other would be based not on the potential “speed” of integration, but on a country’s permanent (or at least long-term) decision on adopting the euro. 
Of course, to some extent, this is already the EU’s fundamental structure. 
But establishing this categorical division – beginning with, as the UK has requested, an explicit recognition that the EU is a multi-currency union – would allow for the creation of a decision-making framework that better protects both group’s interests. 
The non-euro group – including Britain, Denmark, Sweden, Poland, and some other Eastern European countries – would continue to elect representatives to the European Parliament and participate fully in EU institutions. 
Meanwhile, the euro group would pursue far greater fiscal integration, in addition to their current cooperation. 
To ensure democratic legitimacy and satisfy national constitutional courts (not least Germany’s), a second European parliament would have to be established to serve as the eurozone’s legislative branch. 
This new eurozone parliament could be formed either by a subset of members of the larger European Parliament, or by some combination of representatives from the European Parliament and national parliaments. 
The proposed finance minister, responsible for overseeing fiscal policy in the monetary union, would be responsible to the eurozone parliament. 
Full realization of this vision would require either a change to the existing European treaties or, more feasible, agreement by eurozone members on a new treaty, like the “fiscal compact” that entered into force in 2013. 
In the meantime, Article 136 of the existing Treaty on the Functioning of the EU would allow for some preliminary steps, such as the designation of votes at the European Council that are reserved for eurozone countries only. 
Establishing “two Europes in one,” rather than a “two-speed Europe,” would allow Europe to organize itself in a lasting way. 
The more federal eurozone would be embedded in a larger union that cooperates on defense, foreign policy, climate-change measures, and migration policy. 
Free movement of European citizens within the EU would be upheld. 
This system would allow those who do not wish to share monetary sovereignty, or engage in the kind of fiscal cooperation that must eventually come with it, to make that choice. 
At the same time, it would avoid the complications of having multiple Europes – an option that may be attractive to veteran Eurocrats from a purely functional perspective, but soon becomes hopelessly complicated. 
A political system’s clarity and comprehensibility, together with its voluntary nature, are essential to democratic legitimacy. 
Of course, this process will be long, and many details remain to be worked out. 
But important progress can be made by the time the UK’s referendum is held – if, that is, EU leaders begin pursuing this goal in earnest now. 
The talks being held now are an opportunity that neither side can afford to miss. 

The Digital Road From Poverty 
COPENHAGEN – Where should the global community focus its attention over the next 15 years? 
Health, nutrition, and education may seem like obvious choices; more surprisingly, there is a strong case for making broadband access a top priority. 
Consider this simple fact: Tripling mobile Internet access over the next 15 years could make the developing world $22 trillion richer. 
Such improvement in the lives and earning potential of poor people could indirectly help with the other challenges; after all, more prosperous people tend to be healthier, better fed, and more highly educated. 
This discussion matters, because the world’s 193 national governments will meet at the United Nations in September to finalize a list of development targets for the world to meet by 2030. 
My think tank, the Copenhagen Consensus, has asked 60 teams of economists, including several Nobel laureates, to investigate which targets would do the most good for every dollar spent, to help this meeting make the best choices. 
In a new analysis, Emmanuelle Auriol and Alexia Lee González Fanfalone of the Toulouse School of Economics suggest that broadband could be one of the best investments for the future. 
Clearly, the rapid rollout of broadband services has transformed the lives of people in the industrialized world; there is every reason to expect that developing countries could benefit at least as much. 
Access to market information, for example, can ensure that farmers selling their surplus crops are not cheated by unscrupulous traders, and that fishermen can land their catch at the port offering the best price. 
A McKinsey report estimates that bringing mobile broadband in the developing world to the levels of the industrial world could add $400 billion annually to global GDP and create more than ten million jobs. 
Similarly, the World Bank has shown that a 10% increase in broadband penetration increased GDP growth by 1.4% in low- to medium-income countries. 
This implies that closing the persistent digital divide between the world’s developed and developing regions could give a big boost to development. 
For example, mobile broadband penetration stands at 83% in the former, but only 21% in the latter. 
While governments in Europe and elsewhere continue to invest in faster and better broadband, the biggest benefits will always come from providing Internet access to people who do not already have it, most of whom live in developing and emerging countries. 
In fact, developing countries can leap-frog the developed world by going straight to mobile broadband, thereby avoiding the need for expensive fiber-optic cables for the “last mile” – or access point – of the network. 
Mobile phone use is already spreading rapidly in developing countries, making old-style fixed infrastructure unnecessary; data services can use the same system. 
In China, three-quarters of Internet users get online via mobile phones already; in Ethiopia and Uganda, four out of five do. 
Thus, given the pervasiveness of mobile telephony and recent technological advances in mobile networks, rolling out mobile broadband seems a cost-effective solution. 
The study by Auriol and Fanfalone shows that increasing mobile broadband about three-fold in developing regions – from 21% to 60% – will cost a substantial $1.3 trillion, as a significant amount of extra infrastructure is needed to establish about three billion more Internet connections. 
But it will also increase GDP growth. 
By 2020, the benefits would be almost $500 billion annually, and would continue to rise each year. 
Over the coming decades, the total benefit would reach about $22 trillion. 
As a result, every dollar spent on mobile broadband in the developing world would yield an estimated gain of $17. 
That looks like a really smart investment. 
Of course, broadband is such an important enabling technology that it is difficult to predict its full economic impact, which will vary with local circumstances. 
What the Auriol-Fanfalone study does show, though, is that rolling out Internet access is money very well spent. 
Jobs are created directly in the organization providing the network and indirectly in the supply chain. 
Once in place, broadband helps create more jobs in the wider economy. 
Companies become more efficient and innovative. 
All of these factors increase the pace of economic growth. 
Apart from the direct effects on economic growth and job creation, broadband can have some other very important benefits for Least Developed Countries. 
Nine hundred million people live in LDCs, and, as Pantelis Koutroumpis of Imperial College London points out, only 6.7% are Internet users. 
On the other hand, almost 60% of these people use a mobile phone. 
They could profit from smartphones with simple adaptations that can be used in a range of health-screening tests (for example, for cardiovascular disease, HIV and other pathogens, or malaria), with the results being sent straight to hospitals for an immediate response. 
The potential benefits of mobile broadband for LDCs extend even further. 
Internet access could provide educational material and improve schooling. 
And it could enable real time, on-demand transport services for remote areas. 
With the Internet now such an important resource in the modern world, broadband has become a vital technology, promising to boost economic growth, lift people out of poverty, and improve their health, nutrition, and education. 
When governments finalize the next set of global development targets, there is now a strong case for broadband access to be among them. 

Europe’s Broadband Battle 
LONDON – Among the many challenges facing the new European Commission is determining how to provide ultra-fast broadband Internet access to all 500 million European Union residents without raising taxes or bankrupting Europe’s telecommunications companies. 
This imperative has led many to demand larger contributions from Internet giants like Google, Netflix, and Facebook, which are frequently criticized for failing to pull their weight – and even lambasted as “free-riders,” intent on pillaging European assets and markets. 
Is this criticism warranted? 
In a word: no. 
The reality is that major Internet companies – most of which are based in the United States – are already contributing billions of dollars to establish and maintain the networks and data centers that are essential to the Internet’s functioning. 
In fact, these companies directly invested more than €75 billion ($100 billion) in Internet infrastructure over the last three years, with spending up by about 10% annually over this period. 
Moreover, they participated in consortia that invested more than €500 million in laying a trans-Pacific submarine fiber optic cable, which has been operational since 2010, and an 8,300-kilometer (5,200-mile) cable from Southeast Asia to Japan that came on-stream last year. 
But it is Europe that has received the lion’s share of global investment in Internet infrastructure – €25 billion, or nearly one-third of the total, in the last three years. 
Google recently announced the construction of a new €600 million data center in the Netherlands, and is already investing heavily in data centers in Hamina, Finland, and St. Ghislain, Belgium. 
And Facebook has already established its own data center in Luleå, Sweden. 
These facilities and networks – along with the broadband networks on which telecommunications companies spend billions – form the foundations of the Internet. 
By investing in them, America’s Internet giants are providing tangible benefits for European consumers and companies. 
Encouraging this investment should be the European Commission’s main concern. 
For example, these companies’ European data centers contribute to the economies of the regions where they operate, providing jobs to local residents. 
At the same time, they facilitate the smooth exchange of content, enabling European consumers to make the most of their Internet connections. 
Likewise, Internet companies’ investments in content-delivery networks and Internet exchange points enable them to carry their own traffic close to consumers, handing it off to EU telecoms in places like London, Paris, and Frankfurt. 
In doing so, they can help Internet service providers to cut costs and enable them to invest in the “last mile” access networks that they own and operate, thereby improving the Internet experience that they offer to consumers. 
In the longer term, as Europe becomes increasingly fertile ground for digital content and applications, this infrastructure will enable Europeans to distribute their creations globally. 
In other words, the structures that companies like Google and Facebook are building today will help to open new markets for European innovators, entrepreneurs, and companies, whose success will directly benefit Europe’s economy. 
Instead of wasting energy and resources fighting one another, Europe’s telecoms and Internet giants from the US and elsewhere, together with the public sector, should recognize their shared interest in delivering fast, affordable broadband Internet to all EU residents. 
The Internet has always been a collaborative endeavor, and it must remain so, with each actor playing its role. 
Throughout the process, creative solutions will be paramount, and Internet companies’ contributions will be invaluable. 
After all, they are seasoned innovators, as exemplified by Google’s collaboration with Vodafone in New Zealand and Telefónica in Chile to deliver broadband to rural areas through atmospheric balloons. 
For its part, the European Commission must not allow pressure from vested interests to drive it toward confrontation. 
Instead, EU leaders should remain focused on the interests of Europe’s millions of Internet users. 
Only by adopting a balanced, fact-based approach and an emphasis on cooperation can they deliver consumer benefits, investment, jobs, and growth in Europe’s Internet sector. 

Broadband Liberation 
NEW DELHI – In July, I was among 30 men and women from around the world – government ministers, bureaucrats, technologists, and strategic thinkers – who gathered at the International Telecommunications Union (ITU) in Geneva to discuss how broadband can transform the world for the better. 
This “Broadband Commission” met under the Chairmanship of Rwanda’s President Paul Kagame and the Mexican communications mogul Carlos Slim. 
The ITU, a United Nations body, established the Commission in partnership with UNESCO, and the joint chairmanship was no accident. 
The UN recognizes that if the information revolution is to advance further, it will take a public-private effort. 
As ITU Secretary-General Hamadoun Touré has put it, “In the twenty-first century, affordable, ubiquitous broadband networks will be as critical to social and economic prosperity as networks like transport, water, and power.” 
The Swiss writer and playwright Max Frisch once dismissed technology as “the art of arranging the world so that we need not experience it.” 
Today, however, technology is essential to effective participation in our world. 
And, although mankind cannot live by technology alone, the information revolution has liberated millions of people. 
Information is liberating in the traditional political sense of the term: the spread of information has had a direct impact on the degree of accountability and transparency that governments must deliver if they are to survive. 
It is also liberating economically. 
Information technologies are a cost-effective form of capital. 
Estonia and Costa Rica are well-known examples of how information-access strategies can help accelerate output growth and raise income levels. 
Some of the least developed countries, such as Mali and Bangladesh, have shown how determined leadership and innovative approaches can, with international support, connect remote and rural areas to the Internet and mobile telephony, thereby helping to liberate subsistence farmers who were previously tied to local knowledge and local markets. 
Likewise, mobile networks are delivering health services to the most remote areas of India. 
One successful UNESCO initiative is the creation of multipurpose community telecenters throughout the developing world, providing communication and information facilities – phone, fax, Internet, computers, audio-visual equipment – for a wide range of community uses. 
India’s Unique Identification Number project, under the capable stewardship of information-technology pioneer Nandan Nilekani, will enable access to government, banking, and insurance services at the grass-roots level. 
There is no doubt that the Internet can be a democratizing tool. 
In some parts of the world – and certainly in most of the West – it already is, since large amounts of information are now accessible to almost anyone. 
But the stark reality of today’s world is that you can tell the rich from the poor by their Internet connections. 
Indeed, economic development nowadays requires more than thinking only of the poverty line; one must also think of the high-speed digital line, the fiber-optic line – indeed, all the lines that exclude those who are not plugged into the possibilities of our world. 
But the digital divide is no immutable gap. 
On the contrary, the technology gap between developed and developing countries, measured by levels of penetration by personal computers and information-technology and communications services, has narrowed markedly over the course of the past decade, with rapid growth in mobile phone and Internet use. 
The average level of Internet and mobile-phone penetration in the rich world in 1997 – 4.1 Internet users and 10.7 mobile phones per 100 inhabitants – was reached in developing countries only five years later. 
By contrast, the average level of fixed-line telecommunication penetration in developing countries is nearly 50 years behind the levels of the West. 
Not surprisingly, it was in Africa – not Europe or America – where the cell phone first overtook the housebound handset. 
More Africans have become telecommunications users in the last four years than in the entire twentieth century. 
The Indian story is even more remarkable. 
When I left India in 1975 for graduate studies in the United States, the country had roughly 600 million residents and just two million land-line telephones. 
Today, India holds the world record for the number of cell phones sold in a month –20 million – and for the most telephone connections made in a single month in any country in the history of telecommunications. 
The growth in mobile-telephone technology demonstrates that the digital divide is shifting, and the focus of development efforts must change with it. 
India, for example, has 525 million mobile phone users and fewer than 150 million people with Internet access, so using mobile-phone technology as a tool of e-governance has become vital. 
This calls for creative means of effecting information transfer and making and receiving official payments by telephone. 
Security is a key area of concern today in e-governance – both physical security, in an age of terrorism, and cyber security. 
Using technology to deliver security will become even more important in areas such as information sharing, disaster management, and data-privacy standards. 
Information and communications technology is a powerful tool to address underdevelopment, isolation, poverty, and the lack of political accountability and political freedom. 
But people need access first and foremost. 
High-speed broadband Internet access can improve everything from transport management, environmental protection, and emergency services to health care, distance education, and agricultural productivity. 
Delivering these benefits to ever more people will require resources, international cooperation, and political will. 

Broken Promises for Syria’s Children 
LONDON – If you ever lose faith in the power of hope, not to mention the importance of never giving up, remind yourself of the story of Mohammed Kosha. 
A 16-year-old Syrian refugee living in Lebanon, Mohammed has overcome obstacles that most of us cannot even imagine, in order to excel in his education. 
World leaders should take note. 
Four years ago, Mohammed and his family fled their home in the town of Darya, a suburb of Damascus, to escape relentless bombardment by Syrian armed forces. 
Having already lost a year of primary education in his hometown, where it was simply too dangerous to attend school, he then spent another year out of the classroom when the family arrived in Lebanon, where they now reside. 
Mohammed’s life changed when Lebanon’s government opened the country’s public schools to refugees. 
Classes were not only crowded; they were also conducted in English, meaning that he would have to learn a new language. 
But Mohammed seized the opportunity to learn, and threw himself into his studies. 
Last month, against all odds, he scored the second-highest marks in Lebanon’s Brevet secondary-school exam. 
And he is not done yet. 
Mohammed knows that education is the key to building a better future. 
In his words, “Learning gives us hope.” 
If only world leaders had even a fraction of his wisdom. 
There have been some encouraging signals. 
At a meeting in London in February, international donors recognized the importance of education for refugees, promising to get all of Syria’s refugee children into school by the end of 2017. 
They even pledged $1.4 billion to achieve that goal. 
It was an ambitious promise to a group of highly vulnerable children. 
Today, about one million Syrian refugee children aged 5-17 – roughly half the total – are out of school. 
And most of those who are in school will drop out before starting their secondary education. 
In the space of a single primary-school generation, Syria has suffered what may be the greatest education reversal in history. 
Enrollment rates for the country’s children are now well below the regional average for sub-Saharan Africa. 
But now, just six months later, the promise of education for all refugees is about to be broken, dashing the hopes of millions of Syrians. 
Just 39% of the $662 million in urgent education aid sought by United Nations humanitarian agencies this year has been funded. 
And as documented in a Theirworld report published today, only a fraction of the $1.4 billion pledged in London has been delivered. 
As the international community shirks its responsibilities, Syria’s neighbors have continued to make extraordinary efforts to address the crisis. 
Lebanon, Jordan, and (to a lesser extent) Turkey have opened up their public schools to Syrian refugees. 
But these countries’ education systems, which were strained even before the crisis, cannot handle the burden that they are being forced to shoulder. 
Syrian refugees now comprise one-third of all Lebanese public-school students. 
This is like the American primary-school system suddenly having to absorb all of Mexico’s children. 
There are simply not enough teachers, classrooms, or textbooks to deliver decent educations to the refugee children. 
The February conference was supposed to produce solutions that would ease the burden on Syria’s neighbors. 
Host-country governments did their part, preparing in advance their plans for delivering universal education to refugee children. 
They then worked with donors to develop comprehensive strategies for reaching all out-of-school children and raising the quality of education. 
Yet, with the international community having failed to hold up its end of the bargain, progress has not just stalled; it could be reversed. 
More than 80,000 Syrian refugees now in school in Lebanon are at risk of losing their places. 
The human consequences of the education crisis among Syrian refugees are impossible to miss. 
They are apparent in the growing army of child laborers picking vegetables in Lebanon’s Bekaa Valley or working at garment factories in Turkey, where a half-million refugees are out of school. 
They are also reflected in the continuing flow of refugee families making the perilous journey to Europe, driven by the hope that their children will have educational opportunities there. 
Yet many European governments continue to invest in razor wire and detention centers, rather than in schools and teachers. 
There is an alternative – but the clock is ticking. 
Next month, the UN and the United States will host another round of refugee summits. 
This time, governments can leave their recycled promises and heady rhetoric at home; instead, they should carry with them concrete plans to deliver the $1.4 billion they have already pledged. 
The international community must also rethink how aid is delivered. 
The Syrian crisis will not end any time soon. 
Instead of delivering aid through unreliable, underfunded annual humanitarian appeals, donors need to provide predictable multi-year funding, as the United Kingdom has done. 
More generally, the European Union and the World Bank should expand and intensify their support for education. 
Of course, more donor finance for education is only part of the equation. 
There is more that host-country governments, however overstretched, can and should be doing. 
For starters, they should be working to remove the language barriers facing Syrian children. 
They could also address chronic teacher shortages through expedient recruitment of Syrian refugee teachers. 
Above all, host governments could help refugees become more secure and self-reliant, notably by upgrading their legal status and expanding the right to work. 
Ultimately, though, a credible response to the refugee education crisis must involve a fairer approach to burden-sharing. 
Before heading for the UN summit treadmill next month, governments should review the promises they made at the London conference. 
And they should recall Nelson Mandela’s dictum: “Promises to children should never be broken.” 

A Better Way from ‘R’ to ‘D’ 
BELLEVUE, WASHINGTON – When business leaders get together to talk about innovating their industries, they typically focus on initiatives like improving government funding for basic research, or building technology hubs and incubators. 
But a crucial element of “innovation” is often absent from these discussions: the final products. 
That’s no oversight. 
On the contrary, the lack of product-focused discussion is symptomatic of a far more serious problem facing businesses of all sizes in nearly every industry. 
Simply put, product development takes a back seat in innovation strategy because the financial link between ideation and commercialization is broken. 
For economies to prosper, good ideas need a nudge getting to market. 
Innovative products are, after all, what makes life healthier, more efficient, and more fun. 
But there’s ample evidence to suggest that development – the “D” in R&D – has not kept pace with the blistering speed of “R” – modern-day research. 
Even the most robust economies have a surplus of ideas that never reach consumers. 
In the US, for example, just 5% of all active patents are ever licensed or commercialized. 
Most companies use less than a quarter of the inventions they own. 
Technology transfers from academia aren’t going so well, either. 
Although more than 75,000 patents have been issued to American universities since 1969, the vast majority of technology transfer offices – administrative units that manage a school’s intellectual-property output – are failing to generate enough revenue even to cover their operating costs. 
If we want to reverse these trends and maximize innovation output, we need more mechanisms for funding the commercialization of smart ideas. 
At the moment, venture capital-backed startups are the standard mechanism for moving from “R” to “D.” 
These companies are formed for the sole purpose of pushing good ideas through the development pipeline. 
And, given the stellar valuations of some startups, it’s easy to assume that a healthy ecosystem of savvy companies and venture capital funding is all that is needed to ensure innovation. 
But most companies are simply unable to take good ideas to market, because they lack access to pools of capital earmarked for innovation. 
Small- and medium-size enterprises (SMEs) often struggle to secure financing to build R&D infrastructure. 
Multinational corporations use retained earnings to finance R&D, but because this approach can adversely affect a company’s stock valuation, even they tend to be conservative in pushing new ideas forward. 
Compare that scenario with the way that multinationals finance infrastructure investments. 
Let’s say, for example, that DuPont wanted to build a new manufacturing facility. 
It could borrow money from a bank and repay it from resulting profits. 
But if DuPont needed capital to produce a new chemical in an existing plant, it couldn’t get a loan, because banks don’t know how to assess the risks of innovative products (in the chemical industry or any other). 
Unless you’re a giant like Alphabet, Apple, or Tesla, you can’t justify the risk and expense of a blue-sky R&D program. 
These days even the biggest companies are more likely to acquire a new, pre-packaged technology than to develop it in-house. 
That’s one reason why mergers and acquisitions are increasingly common (and why some observers see M&As as the new R&D). 
This situation isn’t ideal for investors, either. 
Consider the case of Sony’s PlayStation gaming console. 
Development of the PlayStation attracted considerable attention from investors in the 1990s. 
But the only way to back the project was to buy shares in the parent company—which encompassed music, film, camera, and television businesses as well. 
This sort of misalignment is just as inefficient for companies as it is for investors. 
And it’s not even an option for smaller companies; selling equity is hard when you’re an SME. 
Clearly, current funding models stifle product-specific innovation and investment, and all but freeze out SMEs. 
The government officials with whom I speak are more concerned with maintaining the health of their countries’ SMEs than protecting multinational corporations, for good reason: SMEs everywhere account for an overwhelming share of employment and job creation. 
Yet they aren’t getting the financing opportunities they deserve. 
To turn things around, businesses need financing vehicles tied to product development. 
One idea is debt-based funds offering bonds with more predictable returns based on revenue from new products. 
These funds could be structured to distribute risk among a variety of projects or sectors, which might make them more attractive to investors who avoid high-stakes venture financing. 
This kind of funding would also enable much closer alignment between investors and innovative projects. 
Companies with proven track records, technical skills, experienced management teams, and established sales channels are sources of innovation that no country can afford to squander. 
The limitations of the current financing regime mean that countries are letting opportunity pass them by. 
Despite few ready avenues for product commercialization, the world’s companies, research institutes, and university and government laboratories together spend more than a trillion dollars on R&D annually. 
Without a new approach to product financing, most of what they discover will remain on the shelf. 

Broken Promises 
PRINCETON – In 2000, the world’s leaders met in New York and issued a ringing Millennium Declaration, promising to halve the proportion of people suffering from extreme poverty and hunger by 2015. 
They also pledged to halve the proportion of people without safe drinking water and sanitation; move toward universal and full primary schooling for children everywhere – girls as well as boys; reduce child mortality by two-thirds and maternal mortality by three-quarters; and combat HIV/AIDS, malaria, and other major diseases. 
These pledges, reformulated as specific, measurable targets, became the Millennium Development Goals (MDGs). 
Last month, ten years on from that meeting, world leaders returned to New York for a United Nations summit that adopted a document called Keeping the Promise, which reaffirmed the commitment to meeting the goals by 2015. 
The UN press release called the document a “global action plan” to achieve the MDGs, but it is more an expression of aspirations than a plan. 
What chance do we really have of keeping the promises made in 2000? 
As the Yale philosopher Thomas Pogge has pointed out, the task has been made easier by moving the goal posts. 
Even before 2000, the World Food Summit, held in Rome in 1996, pledged to halve the numberof undernourished people by 2015. 
By contrast, the corresponding MDG was to halve the proportion of the world’s people who are suffering from hunger (as well as of those living in extreme poverty). 
Because the world’s population is rising, halving the proportion of people suffering from hunger (and extreme poverty) means that the number will not be halved. 
But worse was to come. 
When the Millennium Declaration was rewritten as a set of specific goals, the baseline for calculating the proportion to be halved was set not at 2000, but at 1990. 
That meant that progress already made could contribute to the achievement of the goal. 
And the goal became halving “the proportion of people in the developing world,” which makes a big difference, because the developing world’s population is growing faster than the population of the world as a whole. 
The net effect of all these changes, Pogge calculates, is that, whereas world leaders pledged in 1996 that by 2015 they would reduce the number of undernourished people to no more than 828 million, now they are pledging only to reduce the number in extreme poverty to 1.324 billion. 
Since extreme poverty is responsible for about one-third of all human deaths, this difference effectively means that – if the final promise is actually honored – each year about six million more people will die from poverty-related causes than would have died had the original promise made in Rome been kept. 
In any case, according to a recent World Bank/International Monetary Fund report, we are not on track to meet even the scaled-back global target of halving the proportion of hungry people in developing countries. 
Rising food prices – possibly related to climate change – have reversed past progress and last year briefly pushed the number suffering from hunger above the one-billion mark. 
That this should happen while developed nations waste hundreds of millions of tons of grain and soybeans by feeding them to animals, and obesity reaches epidemic proportions, undermines our claims to believe in the equal value of all human life. 
The target of halving the proportion of people in extreme poverty is within reach, but mainly because of economic progress in China and India. 
In Africa, after economic stagnation in the 1990’s, a decade of encouraging economic growth is reducing the proportion of the population living in extreme poverty, but not quickly enough to halve it by 2015. 
There is better news on achieving gender parity in education, a key to reaching other goals, including lower infant mortality, which often comes about because educated women have fewer children. 
We also have a good chance of meeting the target of reducing by half the proportion of people in developing countries without safe drinking water – but to achieve the same with sanitation is proving more difficult. 
On health goals, however, we are not even close. 
Maternal mortality is falling, but not fast enough. 
More people with HIV/AIDS are getting inexpensive anti-retroviral drugs and their life-expectancy has increased, but universal access is still far off, and the disease is still spreading, if more slowly than before. 
Progress has been made in reducing malaria and measles, and the rate of child mortality has fallen partly as a result, but the goal of a two-thirds reduction will not be met. 
For a long time, rich countries have promised to reduce poverty, but have failed to match their words with adequate action. 
Of course, some important progress has been made. 
Millions of lives have been saved, but millions more could be saved. 
To make sustainable progress in reducing extreme poverty will require improvements in both the quantity and quality of aid. 
Just a handful of countries – Denmark, Luxembourg, the Netherlands, Norway, and Sweden – have met or exceeded the UN’s modest target of 0.7% of GDP for foreign development assistance. 
But, without trade reform and action on climate change, more and better aid will not suffice. 
For now, it looks very much as if, come 2015, the world’s leaders will have failed to keep their (watered-down) promises. 
That means that they will be responsible for permitting the needless deaths, every year, of millions of people. 

Browser Wars II 
PRINCETON – Ten years after its birth, Google is threatening to re-open the “Browser Wars” of the 1990’s, when Microsoft’s Internet Explorer eliminated its rival, Netscape’s Navigator. 
This time, however, it is Google’s Chrome that promises to transform the economics underlying the entire software industry, and not only because of its technical innovation in linking very different kinds of software to an Internet browser. 
In doing so it eliminates the need for a program such as Windows, which previously controlled access to every kind of software. 
Google’s new technology is impressive, and will no doubt prove convenient for many consumers once the initial security problems are resolved. 
But the fundamental innovation lies elsewhere. 
Chrome is a breakthrough because it offers a completely novel approach to a dilemma created by the legal and regulatory regime of competition policy in the world’s two major legal jurisdictions, the United States and the European Union. 
Between 1995 and 1997, Explorer almost completely eradicated Navigator, although Navigator had initially opened up the World Wide Web for most users and its dominance appeared unassailable. 
The major advantage of Explorer was not so much a technical one, but rather that Microsoft’s Windows provided the operating software for the overwhelming majority of personal computers. 
As a result, an Internet browser – and, indeed, other media software – could be integrated into the Windows framework as an entire software package. 
The ability to have operating systems and software bundled together made life much easier for the average consumer. 
You simply got everything you wanted (and probably much more) with the purchase of a computer. 
But this also reduced the possibility of choice, of selecting and combining different software. 
Microsoft’s critics have complained endlessly about this, claiming that the browser’s integration into the operating system drove out inherently superior software solutions. 
For instance, many users preferred the word-processing program WordPerfect to Microsoft’s Word, but the ease of having a bundled solution meant that Word had the advantage of being used more widely, and thus drove its rival into extinction. 
Microsoft’s advantage, and its business model, goes back to another protracted legal struggle. 
Computer software was originally not a commodity to be bought, but a service. 
IBM built up a massively dominant position because it leased a carefully custom-designed and individualized package. 
It did not sell anything, computers or software. 
IBM’s leasing model seemed to challenge the entire legal philosophy of US competition policy that was established in the New Deal era. 
President Franklin Roosevelt had originally wanted to control American business by setting price levels, but when the US Supreme Court rejected this approach, his administration started to use competition policy to challenge the positions of market-dominant companies. 
Competition policy, however, faces great difficulty in dealing with industries in which technical breakthroughs can create apparently instant monopolies. 
In line with the philosophy of challenging dominant positions, the US Department of Justice in 1969 started a major investigation of IBM, which had just revolutionized business computing with its 360 line. 
The case dragged on until it was dismissed in 1982 as being “without merit.” 
But so long as the anti-trust case remained a threat, IBM was nervous, and began to back away from its business model. 
Microsoft’s current position is a direct outcome of the old anti-trust case pushed against IBM. 
When IBM launched its personal computer, it could easily have bundled it together with its own operating software, and in this way maintained its dominance. 
But, worried that the US authorities would accuse it of attempting to control a new market, IBM left the Disk Operating System (DOS) for the new PCs to a tiny new company that no one saw as a threat: Microsoft. 
Of course, Microsoft ran into its own legal troubles when it took over IBM’s former dominant position, waging long drawn-out court cases on both sides of the Atlantic. 
The EU, which has looked increasingly to the US model for competition law, began proceedings against Microsoft in 1993. 
The US started only after Microsoft’s victory in the browser wars, with a case beginning in 1998. 
Initially, both cases went decisively against Microsoft, with a US ruling in 2000 that would have required the company’s break-up, although this was subsequently overturned on appeal. 
Google’s position is so interesting and so powerful because the legal philosophy that challenges any ascendant position, even in an industry that seems naturally to produce monopoly, remains in place. 
Leasing software and hardware, as IBM initially did, is problematic. 
But so is selling computer services on a one-time basis, in the manner of Microsoft. 
By contrast, on the face of it, there cannot be anything wrong with offering services or products for free, and then simply using the resulting advertising possibilities. 
Google’s model is a neat example of what might be termed “post-modern economics.” 
The amazing story of technical innovation is that it was, and remains, hard for innovators to benefit from radical technological breakthroughs. 
Industrial Revolution-era cotton makers in England did not make a great deal of money, even though their products revolutionized personal life and hygiene, and even extended life expectancy. 
In our own time, air travel has become much cheaper, but airlines lose money; telephoning is no longer unaffordable, but the telecommunications companies lost fortunes by over-bidding for mobile telephony rights. 
Google has taken the logic of loss-making technology to its ultimate culmination of not charging at all for its product. 

America’s Enduring Leadership 
WASHINGTON, DC – Many observers have cited the crisis in Ukraine as yet another example of American retrenchment and declining global influence. 
Some have also interpreted it as evidence of a Russian-led effort to mobilize the major emerging economies – Brazil, India, and China – against the West. 
While there is a kernel of truth in both narratives, each is a gross exaggeration, as is the notion that America’s capacity to shape a secure and prosperous international system is in decline. 
The US has had a rough few years. 
After two long, draining wars, its withdrawal from Afghanistan is inching along slowly. 
In Syria, Russian and Chinese intransigence have frustrated its efforts to find a diplomatic solution. 
And China’s growing assertiveness in the South and East China Seas is threatening US regional dominance, while raising the risk of a crisis with America’s close ally Japan. 
Meanwhile, many of America’s European allies are mired in economic malaise. 
And, though the US economy is recovering from the global financial crisis, America’s treasury and reputation has been dealt a severe blow. 
Nonetheless, the US remains the most influential global actor – not least because of the strong alliances that it maintains. 
All of the attention given to China’s economic rise – and, to a lesser extent, that of India and Brazil – has overshadowed the success of US allies like South Korea, Turkey, Indonesia, and Germany. 
In fact, the vast majority of the world’s strongest economies are allied with the US. 
Moreover, far from coalescing into a united anti-Western bloc, the emerging powers remain sharply divided. 
There are far more overlapping interests between the established and the emerging powers than the “West versus the rest” narrative suggests; indeed, the rising powers often share as many interests with their Western counterparts as they do with each other. 
Given this, even the economic powerhouses that are not US allies do not want to upend the existing world order, but rather to gain more space within it, such as through increased authority in international institutions. 
After all, they rose precisely by integrating themselves into the global economic system. 
Even China, which arguably seeks to curtail US leadership in some domains, has no choice but to cooperate with the US and its allies on many foreign-policy issues. 
China can challenge American leadership only if others follow it, and so far it has found few takers. 
Only Russia has sought to play a more destabilizing role – during the global financial crisis, in Syria, and now in Ukraine. 
To be sure, the emerging powers do share a strong inclination toward rivalry – or at least toward autonomy – which is rooted in what might be called the “psychology of rise.” 
But they know that an excessively aggressive stance toward the US would undermine their interest in a stable global economy and the safe passage of their goods and energy through international sea and air routes. 
This is particularly true for China, because its domestic stability and international influence depend largely on its ability to maintain rapid economic growth, which demands ever-larger quantities of imported energy and other natural resources. 
To ensure unimpeded access to these critical resources, China needs stability in the countries from which it can extract them, in the markets in which it can invest, and in the routes linking China to its suppliers. 
But China’s capacity to maintain these conditions is extremely limited – and in some cases (as in the Persian Gulf), it is heavily dependent on US military power. 
In short, striking a balance between the impulse toward rivalry and incentives encouraging restraint is the most important dynamic in contemporary international affairs. 
And, for now, the global balance is tipping toward restraint. 
Of course, the US will invariably face new challenges, all of which are on vivid display in Ukraine. 
Countries will be torn between retaining their security ties to the US and building new economic linkages with China. 
The complex global systems in which America’s interests are enmeshed will test US diplomacy. 
Perhaps the most dangerous challenge is the prospect of emerging powers leaning increasingly toward autonomy, instead of alliance. 
China and India may not have been happy about Russia’s actions in Ukraine, but none of the emerging economies could bring itself to vote against Russia in the United Nations General Assembly, even though the vote was ultimately meaningless. (China took the strongest position in the Security Council by abstaining.) 
They are not sticking with Russia; but they are not joining a Western effort to isolate Russia, either. 
Ultimately, however, the world’s relentless evolution plays to America’s most important strength: its unique ability to build broad and disparate coalitions. 
The range of alliances and relationships that the US has created, including with several of the rising powers, far surpasses that of any other global actor – and will continue to do so for the foreseeable future. 
This is perhaps the most enduring feature of American power. 
There is no denying that the US no longer enjoys the unrivaled hyperpower status that it did at the end of the Cold War. 
But, for the time being, the international system remains America’s to lead. 

A Path to Self-Reliance for Afghanistan 
KABUL – The Brussels Conference on Afghanistan this week marks an important opportunity to create a roadmap for the country’s future. 
While Afghanistan’s current path has led to some progress, it is far from the most direct route to prosperity – not least because of deep flaws in aid delivery and domestic governance. 
Since the National Unity Government, with Ashraf Ghani as President and Abdullah Abdullah as Cheif Executive, was established in 2014, the flow of aid to Afghanistan has declined sharply. 
And the aid received has not been delivered in a way that really promotes state-building, with international donors largely bypassing the Afghan government, in order to fund discrete stand-alone projects. 
From 2002 to 2010, 82% of the $56 billion in aid delivered to Afghanistan was spent through non-state institutions. 
There was some justification for this approach. 
Donors believed that the Afghan state was too weak and corrupt to use their money effectively. 
And they were not entirely wrong: patronage and graft remain rampant in Afghanistan. 
This is partly a legacy of former President Hamid Karzai. 
During his term, from 2004 to 2014, Karzai exchanged the most senior positions in the national government, as well as provincial governments, for political support, and often granted impunity to corrupt officials. 
Despite these challenges, aid delivered through the government fostered the domestic economy and the development of state institutions. 
But the focus on aid through non-state institutions has created a private sector for public goods that, in fiscal terms, is larger than the actual government of Afghanistan. 
This has undermined the effectiveness of state institutions, increased costs (by requiring multiple contractual arrangements), and, in some cases, exacerbated corruption. 
Another problem with aid to Afghanistan lies in its allocation. 
From 2002 to 2010, donors channeled more than half of the total aid to the security sector. 
Development aid also tended to go toward military objectives, especially in insecure areas. 
(Nonetheless, since the departure of most international combat troops over the last couple of years, the security situation has deteriorated.) 
Meanwhile, only 3% of total aid was spent on education. 
Unsurprisingly, 40% of children of primary- and lower-secondary-school age are not in school. 
Afghanistan’s total estimated public expenditure for the next five years (2017-2021) is $60 billion. But, on average, there is a 74% financing gap annually. 
The Afghan government expects to fill this gap through foreign aid. 
Putting Afghanistan on the path to self-reliance will require both the Afghan government and its donors to change course. 
For starters, donors should channel a larger proportion of aid through the Afghan government budget and national systems. 
This is not an entirely new idea. 
In 2010, at the International Conference on Afghanistan in Kabul, donors agreed with the Afghan government to channel at least 50% of development aid (excluding military expenditures) through the government budget and to improve the alignment of their off-budget spending with national priorities. 
But the agreement did not go far enough to make the state fiscally larger than the private sector in terms of the delivery of services (and only some donors met or surpassed the target). 
In fact, 75% of total development aid delivered to Afghanistan should be channeled through the government budget and national systems. 
This can and should be achieved by 2018. 
Of course, such an approach can work only if the government improves its own delivery of public services, including by boosting the quality of its civil service and freeing it from political pressures. 
The good news here is that Ghani’s government has already recognized the problems presented by patronage, corruption, and institutional weakness, and has promised to tackle them. 
So far, however, progress has been slow. 
The National Unity Government can accelerate the pace of progress by introducing a much more meritocratic system of civil-service recruitment and promotion. 
A zero-tolerance policy on corruption – especially in the judiciary and the finance, commerce, mining, police, health and education ministries – is essential. 
Furthermore, to improve accountability and increase government revenues, the tax system should be reformed and strengthened. 
Afghan citizens, through civil-society organizations, and international donors can play an important role in spurring the government to follow through in implementing such reforms. 
The final piece of the Afghan puzzle will be put in place when the government and donors channel aid toward investment in programs with long-term objectives. 
While some short-term measures are needed to enhance stability, their impact will quickly fade without long-term programs aimed at building institutions and laying the foundation for a dynamic economy. 
Priority should be given to investment in human capital, particularly education and health, and in job-creating sectors like agriculture. 
The development of the energy and infrastructure sectors is also important, as it can help to underpin the growth of manufacturing and provide much-needed government revenue. 
While the challenges facing Afghanistan are immense, they are not insurmountable. 
The improved delivery and allocation of aid, together with deep governance reforms and smart investments, can put the country on the path to prosperity. 
After decades of war and instability, that is clearly in the entire world’s interest. 

Bubble Spotting 
NEW HAVEN – People frequently ask me, as someone who has written on market speculation, where the next big speculative bubble is likely to be. 
Will it be in housing again? 
Will it be in the stock market? 
I don’t know, though I have some hunches. 
It is impossible for anyone to predict bubbles accurately. 
In my view, bubbles are social epidemics, fostered by a sort of interpersonal contagion. 
A bubble forms when the contagion rate goes up for ideas that support a bubble. 
But contagion rates depend on patterns of thinking, which are difficult to judge. 
Big speculative bubbles are rare events. 
(Little bubbles, in the price of, say, individual stocks, happen all the time, and don’t qualify as an answer to the question.) 
And, because big bubbles last for many years, predicting them means predicting many years in the future, which is a bit like predicting who will be running the government two elections from now. 
But some places appear a little more likely than others to give rise to bubbles. 
The stock market is the first logical place to look, as it is a highly leveraged investment – and has a history of bubbles. 
There have been three colossal stock-market bubbles in the last century: the 1920’s, the 1960’s, and the 1990’s. 
In contrast, there has been only one such bubble in the United States’ housing market in the last hundred years, that of the 2000’s. 
We have had a huge rebound from the bottom of the world’s stock markets in 2009. 
The S&P 500 is up 87% in real terms since March 9 of that year. 
But, while the history of stock-market prediction is littered with too much failure to try to decide whether the bounceback will continue much longer, it doesn’t look like a bubble, but more like the end of a depression scare. 
The rise in equity prices has not come with a contagious “new era” story, but rather a “sigh of relief” story. 
Likewise, home prices have been booming over the past year or two in several places, notably China, Brazil, and Canada, and prices could still be driven up in many other places. 
But another housing bubble is not imminent in countries where one just burst. 
Conservative government policies will probably reduce subsidies to housing, and the current mood in these markets does not seem conducive to a bubble. 
A continuation of today’s commodity-price boom seems more likely, for it has more of a “new era” story attached to it. 
Increasing worries about global warming, and its effects on food prices, or about the cold and snowy winter in the northern hemisphere and its effects on heating fuel prices, are contagious stories. 
They are even connected to the day’s top story, the revolutions in the Middle East, which, according to some accounts, were triggered by popular discontent over high food prices – and which could themselves trigger further increases in oil prices. 
But my favorite dark-horse bubble candidate for the next decade or so is farmland – and not just because there have been stories in recent months of booming farmland prices in the US and the United Kingdom. 
Of course, farmland is much less important than other speculative assets. 
For example, U.S. farmland had a total value of $1.9 trillion in 2010, compared with $16.5 trillion for the US stock market and $16.6 trillion for the US housing market. 
And large-scale farmland bubbles are quite rare: there was only one in the US in the entire twentieth century, during the great population scare of the 1970’s. 
But, farmland, at least in certain places, seems to have the most contagious “new era” story right now. 
It was recently booming, up 74% in real terms in the US in the decade ending with its price peak, in 2008. 
And the highly contagious global-warming story paints a scenario of food shortages and shifts in land values in different parts of the world, which might boost investor interest further. 
Moreover, people nowadays easily imagine that the housing and farmland markets always move together, because prices in both boomed in recent memory, in the early 2000’s. 
But, from 1911 to 2010 in the US, the correlation between annual real growth of prices for homes and farmland was only 5%, and the latest data on farm prices have not shown anything like the decline in home prices. 
By 2010, real farm prices in the US had fallen only 5% from their 2008 peak, compared to the 37% decline in real home prices since their peak in 2006. 
The housing-price boom of the 2000’s was little more than a construction-supply bottleneck, an inability to satisfy investment demand fast enough, and was (or in some places will be) eliminated with massive increases in supply. 
By contrast, there has been no increase in the supply of farmland, and the stories that would support a contagion of enthusiasm for it are in place, just as they were in the 1970’s in the US, when a similar food-price scare generated the century’s only farmland bubble. 
Still, we must always bear in mind the difficulty of forecasting bubbles. 
And, for daring investors, it is not enough to find a bubble to pile into. 
They must also try to determine when to cash out and put their money elsewhere. 

Bubble Trouble 
The future of the housing boom, and the possible financial repercussions of a substantial price decline in coming years, is a matter of mounting concern among governments around the world. 
I learned this first-hand while attending this year’s Jackson Hole Symposium in the remote wilderness of Wyoming, where, ironically, there are almost no homes to buy. 
The howls of coyotes and bugling of elk rang out at night. 
But, by day, everyone was talking about real estate. 
This conference has grown to be a major international event for government monetary policymakers, with governors or deputy governors of 34 central banks attending this year. 
Roughly two-thirds of these countries have had dramatic housing booms since 2000, most of which appear to be continuing, at least for the time being. 
But there was no consensus on the longer-run outlook for home prices. 
Of all these countries, the United States appears to be the most likely to have reached the end of the cycle. 
According to the Standard & Poor’s/Case-Shiller US National Home Price Index, US home prices increased 86% in real, inflation-corrected, terms from 1996 to 2006, but have since fallen 6.5% – and the rate of decrease has been accelerating. 
That looks like the beginning of the end of the boom, though, of course, one can never be sure. 
I presented a bearish long-run view, which many challenged, but no one obviously won the argument. 
Nevertheless, an outside observer might have been struck by the weight given to the possibility that the decade-long boom might well suffer a real reversal, followed by serious declines. 
There seems to be a general recognition of substantial downside risk, as the current credit crisis seems to be related to the decline in US home prices that we have already seen. 
The boom, and the widespread conviction that home prices could only go higher, led to a weakening of lending standards. 
Mortgage lenders seem to have believed that home buyers would not default, because rising prices would make keeping up with their payments very attractive. 
Moreover, the boom resulted in a number of financial innovations, which may have been good ideas intrinsically, but which were sometimes applied too aggressively, given the risk of falling prices. 
Mortgage-backed securities were urged onto investors for whom they were too risky. 
As with homebuyers, all would be well, the reasoning went, on the premise that home prices continue to rise at a healthy pace. 
At the Jackson Hole conference, Paul McCulley of PIMCO, the world’s largest bond fund, argued that in the past month or two we have been witnessing a run on what he calls the “shadow banking system,” which consists of all the levered investment conduits, vehicles and structures that have sprung up along with the housing boom. 
The shadow banking system, which is beyond the reach of bank regulators and deposit insurance, fed the boom in home prices by helping provide more credit to buyers. 
Bank runs occur when people, worried that their deposits will not be honored, hastily withdraw their money, thereby creating the very bankruptcy that they feared. 
It is no coincidence that this new kind of bank run originated in the US, which is the clearest example of falling home prices in the world today. 
When home prices stop rising, recent homebuyers may lose the enthusiasm to continue paying their mortgages – and investors lose faith in mortgage-backed securities. 
The US Federal Reserve is sometimes blamed for the current mortgage crisis, because excessively loose monetary policy allegedly fueled the price boom that preceded it. 
Indeed, the real (inflation-corrected) federal funds rate was negative for 31 months, from October 2002 to April 2005. The only precedent for this since 1950 was the 37-month period from September 1974 to September 1977, which launched the worst inflation the US has seen in the last century. 
What then helped produce a boom in consumer prices now contributed to a boom in home prices. 
But loose monetary policy is not the whole story. 
The unusually low real funds rate came after the US housing boom was already well underway. 
According to the Standard & Poor’s/Case-Shiller US National Home Price Index, home prices were already rising at almost 10% a year in 2000 – a time when the Fed was raising the federal funds rate, which peaked at 6.5%. 
The rapid increase thus appears to be mostly the result of speculative momentum that occurred before the interest-rate cuts. 
Alan Greenspan, the former Fed chairman, recently said that he now believes that speculative bubbles are important driving forces in our economy, but that, at the same time, the world’s monetary authorities cannot control bubbles. 
He is mostly right: the best thing that monetary authorities could have done, given their other priorities and concerns, is to lean against the real estate bubble, not stop it from inflating. 
The current decline in home prices is associated just as clearly with waning speculative enthusiasm among investors, which is likewise largely unrelated to monetary policy. 
The world’s monetary authorities will have trouble stopping this decline, and much of the attendant problems, just as they would have had trouble stopping the ascent that preceded it. 

Bubbles without Markets 
NEW HAVEN - A speculative bubble is a social epidemic whose contagion is mediated by price movements. 
News of price increase enriches the early investors, creating word-of-mouth stories about their successes, which stir envy and interest. 
The excitement then lures more and more people into the market, which causes prices to increase further, attracting yet more people and fueling “new era” stories, and so on, in successive feedback loops as the bubble grows. 
After the bubble bursts, the same contagion fuels a precipitous collapse, as falling prices cause more and more people to exit the market, and to magnify negative stories about the economy. 
But, before we conclude that we should now, after the crisis, pursue policies to rein in the markets, we need to consider the alternative. 
In fact, speculative bubbles are just one example of social epidemics, which can be even worse in the absence of financial markets. 
In a speculative bubble, the contagion is amplified by people’s reaction to price movements, but social epidemics do not need markets or prices to get public attention and spread quickly. 
Some examples of social epidemics unsupported by any speculative markets can be found in Charles MacKay’s 1841 best seller Memoirs of Extraordinary Popular Delusions and the Madness of Crowds.The book made some historical bubbles famous: the Mississippi bubble 1719-20, the South Sea Company Bubble 1711-20, and the tulip mania of the 1630’s. 
But the book contained other, non-market, examples as well. 
MacKay gave examples, over the centuries, of social epidemics involving belief in alchemists, prophets of Judgment Day, fortune tellers, astrologers, physicians employing magnets, witch hunters, and crusaders. 
Some of these epidemics had profound economic consequences. 
The Crusades from the eleventh to the thirteenth century, for example, brought forth what MacKay described as “epidemic frenzy” among would-be crusaders in Europe, accompanied by delusions that God would send armies of saints to fight alongside them. 
Between one and three million people died in the Crusades. 
There was no way, of course, for anyone either to invest in or to bet against the success of any of the activities promoted by the social epidemics – no professional opinion or outlet for analysts’ reports on these activities. 
So there was nothing to stop these social epidemics from attaining ridiculous proportions. 
MacKay’s examples may seem a bit remote to us now. 
Some examples that we might relate to better can be found in the communist, centrally planned economies of much of the twentieth century, which also had no speculative markets. 
To be sure, events in these economies might seem attributable simply to their leaders’ commands. 
But social contagions took hold in these countries even more powerfully than they have in our “bubble” economies. 
China’s Great Leap Forward in 1958-61 was a market-less investment bubble. 
The plan involved both agricultural collectivization and aggressive promotion of industry. 
There were no market prices, no published profit-and-loss statements, and no independent analyses. 
At first, there was a lot of uninformed enthusiasm for the new plan. 
Steel production was promoted by primitive backyard furnaces that industry analysts would consider laughable, but people who understood that had no influence in China then. 
Of course, there was no way to short the Great Leap Forward. 
The result was that agricultural labor and resources were rapidly diverted to industry, resulting in a famine that killed tens of millions. 
The Great Leap Forward had aspects of a Ponzi scheme, an investment fraud which attempts to draw in successive rounds of investors through word-of-mouth tales of outsize returns. 
Ponzi schemes have managed to produce great profits for their promoters, at least for a while, by encouraging a social contagion of enthusiasm. 
Mao Zedong, on visiting and talking to experts at a modern steel plant in Manchuria, is reported to have lost confidence that the backyard furnaces were a good idea after all, but feared the effects of a loss of momentum. 
He appears to have been worried, like the manager of a Ponzi scheme, that any hint of doubt could cause the whole movement to crash. 
The Great Leap Forward, and the Cultural Revolution that followed it, was a calculated effort to create a social contagion of ideas. 
Some might object that these events were not really social epidemics like speculative bubbles, because a totalitarian government ordered them, and the resulting deaths reflect government mismanagement more than investment error. 
Still, they do have aspects of bubbles: collectivization was indeed a plan for prosperity with a contagion of popular excitement, however misguided it looks in retrospect. 
The recent and ongoing world financial crisis pales in comparison with these events. 
And it is important to appreciate why. 
Modern economies have free markets, along with business analysts with their recommendations, ratings agencies with their classifications of securities, and accountants with their balance sheets and income statements. 
And then, too, there are auditors, lawyers and regulators. 
All of these groups have their respective professional associations, which hold regular meetings and establish certification standards that keep the information up-to-date and the practitioners ethical in their work. 
The full development of these institutions renders really serious economic catastrophes – the kind that dwarf the 2008 crisis – virtually impossible. 

Building a Market Democracy in Iraq 
One goal of the recent war in Iraq was to build a lasting market democracy that could serve as an example for the Middle East. 
While progress towards this goal has been stymied by the mundane practicalities of restoring law and order, the coalition must eventually take it up. 
When it does, it will also have to face the fact that the current distribution of economic power in Iraq is not conducive to democracy or markets, and that outside interim administrations tend to make matters worse. 
Start first with the distribution of economic power. 
Years of dictatorship and sanctions decimated Iraq's business and professional classes. 
Estimates suggest that over 60% of Iraqis depend for their income on government, which will obtain the bulk of its revenues from oil for the foreseeable future. 
But when an easily extractable, government-controlled resource accounts for a large share of national output, democracy can suffer. 
Consider Venezuela. 
Hugo Chavez's government faced a widespread opposition strike, whose intent was not only to demonstrate popular opposition, but also to starve the government of revenue. 
Without revenue, such a government cannot pay the army or thugs who keep it in power. 
Although it seemed that Chavez would fall, oil saved him. 
Few people are needed to extract oil. 
With the help of some loyal (and foreign) engineers and enough new workers to replace strikers, the government kept the oil flowing, securing the resources needed to maintain the loyalty of mercenary forces who would otherwise have gone over to the opposition. 
The strike is all but over, and the Chavez government is now taking action against its leaders. 
It was the same with Saddam Hussein. 
Even with Saddam deposed, what is to prevent a successor regime from using oil power to oppress Iraq's people? 
Democracy is stable only when it is accompanied by a wide diffusion of economic power, which gives the citizenry the ability to keep a government from becoming arbitrary and tyrannical. 
The conditions under which democracies flourish are also the conditions under which free markets prosper. 
When people do not fear that a rapacious government will expropriate their wealth, and when an elite that owes its success to the government does not determine market rules, opportunities percolate to everyone. 
So how to build the economic basis for a stable democracy in post-war Iraq? 
Douglas MacArthur's partially successful policies in Japan after the Second World War offer some guidance. 
Japan was perhaps easier to transform because it did not have an abundance of easily extractable natural resources. 
But land holdings were concentrated and a few large combines called "Zaibatsus" held industrial power. 
MacArthur attacked concentrated economic power under the assumption that large landholders and large firms become pawns of government. 
Subsequent reforms expanded and widened the land-owning class, fostering an agricultural revival and making Japanese democracy more stable. 
But MacArthur did not have enough time to finish the job. 
The need for reliable suppliers during the Korean War forced a compromise with the Zaibatsus. 
This partly explains why Japan's domestic market remains uncompetitive despite its vibrant democracy. 
Some suggest that Iraq's oil "problem" be dealt with by distributing shares in the state oil company to the people. 
This is no solution, because the government will still control oil revenues and determine the dividend. 
Without adequate governance, oil revenues will be wasted on grandiose projects, corruption, or rearmament. 
Even if the government-owned oil industry is broken up and privatized, whether to foreigners or not, there is no guarantee that a future government cannot regain control. 
The best hope for an enduring market democracy in countries like Iraq lies in building the countervailing economic power of professionals and entrepreneurs. 
Such people abound in Iraq, however decimated by years of sanctions. 
A priority for any interim administration must be to restore and improve educational and healthcare institutions so that they can recover lost ground. 
Another priority is to wean people from dependence on government. 
Reconstruction could revive the entrepreneurial classes if small contractors and businesses are given opportunities. 
The danger is that the interim administration may hand out contracts to those well connected in Washington or the rich westernized Baghdad elite that gets cozy with whatever government is in power. 
As Russia's recent experience shows, creating a politically sycophantic business oligarchy makes the prospect of a market democracy more remote. 
It is far wiser to distribute contracts widely and ensure that more Iraqi businesses gain access to credit. 
Clearly, many old financing institutions are compromised. 
The easiest fix is to let foreigners in so that they can channel foreign capital into domestic private ventures. 
New domestic financial institutions should also be encouraged. 
Such policies would mirror those followed by Napoleon III in France in the 1850's. Destroying the financial power of the Ancien Regime laid the foundations for the vibrant market democracy France became. 
All this will not happen overnight. 
Economic institutions must be built, repaired and strengthened. 
The interim administration must undertake a delicate balancing act: Iraqis will have to be prevented from choosing how they will be ruled until the economic preconditions are in place for that choice to be genuinely free. 
At the same time, Iraqis need to be convinced that the interim administration has their best interests at heart, rather than the interests of American or British businesses. 
Success in this balancing act requires leadership, transparent policies, and good communication. 
America provided this in postwar Europe and Japan. 
It must rise to the challenge again. 

Building a Progressive International 
ATHENS – Politics in the advanced economies of the West is in the throes of a political shakeup unseen since the 1930s. 
The Great Deflation now gripping both sides of the Atlantic is reviving political forces that had lain dormant since the end of World War II. 
Passion is returning to politics, but not in the manner many of us had hoped it would. 
The right has become animated by an anti-establishment fervor that was, until recently, the preserve of the left. 
In the United States, Donald Trump, the Republican presidential nominee, is taking Hillary Clinton, his Democratic opponent, to task – quite credibly – for her close ties to Wall Street, eagerness to invade foreign lands, and readiness to embrace free-trade agreements that have undermined millions of workers’ living standards. 
In the United Kingdom, Brexit has cast ardent Thatcherites in the role of enthusiastic defenders of the National Health Service. 
This shift is not unprecedented. 
The populist right has traditionally adopted quasi-leftist rhetoric in times of deflation. 
Anyone who can stomach revisiting the speeches of leading fascists and Nazis of the 1920s and 1930s will find appeals – Benito Mussolini’s paeans to social security or Joseph Goebbels’ stinging criticism of the financial sector – that seem, at first glance, indistinguishable from progressive goals. 
What we are experiencing today is the natural repercussion of the implosion of centrist politics, owing to a crisis of global capitalism in which a financial crash led to a Great Recession and then to today’s Great Deflation. 
The right is simply repeating its old trick of drawing upon the righteous anger and frustrated aspirations of the victims to advance its own repugnant agenda. 
It all began with the death of the international monetary system established at Bretton Woods in 1944, which had forged a post-war political consensus based on a “mixed” economy, limits on inequality, and strong financial regulation. 
That “golden era” ended with the so-called Nixon shock in 1971, when America lost the surpluses that, recycled internationally, kept global capitalism stable. 
Remarkably, America’s hegemony grew in this second post-war phase, in parallel with its trade and budget deficits. 
But to keep financing these deficits, bankers had to be unleashed from their New Deal and Bretton Woods restraints. 
Only then would they encourage and manage the inward capital flows needed to finance America’s twin fiscal and current-account deficits. 
Financialization of the economy was the goal, neoliberalism was its ideological cloak, the Paul Volcker-era Federal Reserve’s interest-rate hikes were its trigger, and President Bill Clinton was the ultimate closer of the Faustian bargain. 
And the timing couldn’t have been more congenial: the Soviet empire’s collapse and China’s opening generated a surge of labor supply for global capitalism – a billion additional workers – that boosted profits and stifled wage growth throughout the West. 
The result of extreme financialization was enormous inequality and profound vulnerability. 
But at least the West’s working class had access to cheap loans and inflated house prices to offset the impact of stagnant wages and declining fiscal transfers. 
Then came the crash of 2008, which in the US and Europe produced a massive excess supply of both money and people. 
While many lost jobs, homes, and hopes, trillions of dollars in savings have been sloshing around the world’s financial centers ever since, on top of more trillions pumped out by desperate central banks eager to replace the financiers’ toxic money. 
With companies and institutional players too frightened to invest in the real economy, share prices have boomed, the top 0.1% can’t believe their luck, and the rest are helplessly watching as the grapes of wrath are “…filling and growing heavy, growing heavy for the vintage.” 
And so it was that large chunks of humanity in America and Europe became too indebted and too expensive to be anything other than discarded – and ready to be lured by Trump’s fear-mongering, French National Front leader Marine Le Pen’s xenophobia, or the Brexiteers’ shimmering vision of a Britannia ruling the waves again. 
As their number grows, traditional political parties are fading into irrelevance, supplanted by the emergence of two new political blocs. 
One bloc represents the old troika of liberalization, globalization, and financialization. 
It may still be in power, but its stock is falling fast, as David Cameron, Europe’s social democrats, Hillary Clinton, the European Commission, and even Greece’s post-capitulation Syriza government can attest. 
Trump, Le Pen, Britain’s right-wing Brexiteers, Poland’s and Hungary’s illiberal governments, and Russian President Vladimir Putin are forming the second bloc. 
Theirs is a nationalist international – a classic creature of a deflationary period – united by contempt for liberal democracy and the ability to mobilize those who would crush it. 
The clash between these two blocs is both real and misleading. 
Clinton vs. Trump constitutes a genuine battle, for example, as does the European Union vs. the Brexiteers; but the combatants are accomplices, not foes, in perpetuating an endless loop of mutual reinforcement, with each side defined by – and mobilizing its supporters on the basis of – what it opposes. 
The only way out of this political trap is progressive internationalism, based on solidarity among large majorities around the world who are prepared to rekindle democratic politics on a planetary scale. 
If this sounds Utopian, it is worth emphasizing that the raw materials are already available. 
Bernie Sanders’s “political revolution” in the US, Jeremy Corbyn’s leadership of the UK’s Labour Party, DiEM25 (the Democracy in Europe Movement) on the continent: these are the harbingers of an international progressive movement that can define the intellectual terrain upon which democratic politics must build. 
But we are at an early stage and face a remarkable backlash from the global troika: witness Sanders’ treatment by the Democratic National Committee, the run against Corbyn by a former pharmaceutical lobbyist, and the attempt to have me indicted for daring to oppose the EU’s plan for Greece. 
The Great Deflation poses a great question: can humanity design and implement a new, technologically advanced, “green” Bretton Woods – a system that makes our planet ecologically and economically sustainable – without the mass pain and destruction preceding the original Bretton Woods? 
If we – progressive internationalists – won’t answer that question, who will? 
Neither of the two political blocs now vying for power in the West even wants it to be posed. 


Paths to Sustainable Power 
NEW YORK – The surest bet on the future of energy is the need for low-carbon energy supplies. 
Around 80% of the world’s primary energy today is carbon based: coal, oil, and gas. 
We will need to shift to no- or low-carbon energy by mid-century. 
The big questions are how and when. 
Low-carbon primary energy means three options: renewable energy, including wind, solar, geothermal, hydropower, and biomass; nuclear energy; and carbon capture and sequestration, which means using fossil fuels to create energy, but trapping the CO2 emissions that result and storing the carbon safely underground. 
There are three compelling reasons for the world to make the shift to low-carbon energy. 
First, higher levels of CO2 are making the world’s oceans acidic. 
If we continue with business as usual, we will end up destroying a vast amount of marine life, severely damaging the food chains on which we rely. 
Second, CO2 is dangerously changing the world’s climate, even if many Big Oil interests would have us believe otherwise. 
(So, too, did the tobacco companies spend vast sums on political lobbying and bogus science to deny the links between smoking and lung cancer.) 
Third, we face steeply rising prices for fossil fuels, as developing countries’ growth drives up demand and conventional supplies of coal, oil, and gas are depleted. 
Sure, we can find more fossil fuels, but at much higher cost and at much greater environmental risk from industrial spills, waste products, leaks, and other damage. 
Even the much-heralded shale-gas revolution is a lot of hype – similar to the gold rushes and stock bubbles of the past. 
Shale-gas wells deplete far more rapidly than conventional fields do. 
And they are environmentally dirty to boot. 
The United States has developed many new low-carbon energy technologies, but other countries are currently far more intent, far-sighted, and decisive than the US to put these technologies to large-scale use. 
Politically, America is still the land of Big Oil. 
Americans are bombarded by industry-funded media downplaying climate change, while countries that are much poorer in fossil fuels are already making the necessary transition to a low-carbon future. 
Two neighbors in Europe, Germany and France, are showing the way forward – or, more precisely, the alternative ways forward – to a low-carbon future. 
They are going about it in ways that reflect their different resource endowments, industrial histories, and political pressures. 
Germany is undertaking the Energiewende, or transition to sustainable energy – a remarkable effort (indeed, unprecedented for a large advanced economy) to meet the country’s entire energy demand with renewable energy, especially solar and wind power. 
Meanwhile, France relies heavily on low-carbon nuclear power, and is switching rapidly to electric vehicles, such as the pioneering Renault-Nissan Leaf. 
Of the two approaches, Germany’s is the more unusual bet. 
After Japan’s nuclear disaster at Fukushima, Germany decided to shut down its entire nuclear power industry and shift entirely to a strategy based on greater energy efficiency (lower energy input per unit of national income) and renewables. 
There really is no clear roadmap for such a huge energy transformation, and Germany almost surely will need to rely on a European-wide electricity grid to share clean energy, and eventually on imported solar power from North Africa and the Middle East. 
France’s bet on nuclear power is a more proven option. 
After all, most of France’s electricity has come from nuclear power for many years. 
And, though anti-nuclear sentiment is very strong in Europe – and, increasingly, even in France – nuclear power will remain part of the global energy mix for decades to come, simply because much of Asia (including China, India, South Korea, and Japan) will remain major users of it. 
The key point is that France and Germany, and many other European countries – including the Scandinavian countries, with their considerable wind and hydropower potential – are all recognizing that the world as a whole will have to move away from a fossil-fuel-based energy system. 
That is the right calculation. 
Many will no doubt argue about which alternative – France’s bet on nuclear power or Germany’s solar pathway – is wiser. 
But both strategies are probably correct. 
Most studies show that deep de-carbonization of the world economy from now to mid-century, a time horizon mandated by environmental realities, will require that all low-carbon options – including greater efficiency and renewables – be scaled up massively. 
One of the highest priorities of the new Sustainable Development Solutions Network, which I direct on behalf of United Nations Secretary-General Ban Ki-moon, will be to elaborate alternative pathways to a low-carbon economy, taking into account the specific conditions of countries around the world. 
Different countries will choose different strategies, but we will all need to get to the same place: a new energy system built on low-carbon sources, electrification of vehicles, and smart, energy-efficient buildings and cities. 
Early movers may pay a slightly higher price today for these strategies, but they and the world will reap long-term economic and environmental benefits. 
By embracing truly sustainable technologies, France, Germany, and others are creating the energy system that will increasingly support the world economy throughout this century. 


Building on the Global Recovery 
The world is a study in contrasts nowadays. 
We are haunted by images of terror and warfare. 
Yet every region of the globe has experienced some of the strongest economic growth seen in years, inflation remains subdued despite surging oil prices, and financial markets are doing well. 
Several economies that recently faced financial crises are rebounding strongly. 
At the same time, much more needs to be done to help prevent future crises and reduce poverty. 
What do these contrasts mean for the future? 
The answer depends crucially on how each country and the international community respond to key policy challenges: addressing global imbalances through macroeconomic policies and long-overdue reform; meeting the costs of aging populations; strengthening defenses against economic and financial crises; and delivering on the pressing imperatives of poverty reduction. 
Recently, financial leaders from 184 countries met in Washington at the Annual Meetings of the IMF and World Bank. 
This year marks the sixtieth anniversary of the Bretton Woods Conference that established those two organizations as pillars of international economic cooperation. 
As IMF Managing Director, my message was one of vigilance and action. 
Simply put, the international community must take advantage of the current recovery to broaden efforts to ensure financial and economic stability, and help those countries with limited prospects. 
Periods of strong economic growth allow countries to put in place defenses to reduce the likelihood and severity of future downturns. 
But such opportunities are all too easy to squander. 
In an era of globalized financial markets, when countries can find it hard to cope with rapid cross-border capital flows, there is no time for complacency. 
A lesson of the 1990's is that vulnerabilities must be dealt with before they become crises. 
The world's rapid economic growth in 2004 shows that the efforts to shore up our defenses since the 1990's has paid off. 
But growth has been unbalanced: Europe and Japan - despite some recent gains - are far from reaching their potential, and the United States and China have continued largely to drive the world economy. 
One priority is to reduce global payments imbalances. The US must move to reduce its budget deficit in the medium-term. 
Europe and Japan can increase their growth by stepping up the pace of structural reform. 
Moves toward increased exchange rate flexibility in China and other Asian countries, supported by financial sector reform, will have domestic and global benefits. 
Emerging market countries elsewhere have made considerable reform progress of late, but they must sustain the momentum to guard against potential shocks. 
Other challenges loom. Issues that we once regarded as "medium-term" are becoming more urgent. 
Aging populations are forcing many countries to address pressures on their budgets and social security systems. 
The problem is imminent in North America, the Euro Area, and Japan. 
But, before long, many developing countries will also have to face up to it, and in many cases without a cushion of affluence. 
Then there is the energy issue. 
High oil prices have resurrected an old vulnerability. 
Countries need to reformulate their energy policies - including by boosting production and refining capacity, diversifying energy sources, and giving new impetus to conservation. 
A better balance between production and consumption would avoid large swings in oil prices. 
The IMF focuses on crisis prevention, and in the past decade encouraged greater transparency and stronger financial systems. 
The Fund also actively monitors capital market developments, and is implementing a more systematic assessment of debt sustainability. 
There will always be ways to strengthen our work so that we provide well-articulated advice based on a clear understanding and the best analysis of each country. 
We need to communicate our positions clearly to policymakers and reinforce incentives for countries to take appropriate corrective actions. 
But in the end, the effectiveness of our advice hinges on countries' willingness to act on our recommendations. 
Poverty also threatens economic stability. 
For all the successes of recent decades, the fact remains that 20% of the world's population still lives on less than $1 a day, while HIV/AIDS and other communicable diseases are ravaging many societies. 
Other social indicators offer a bleak picture. 
Indeed, most developing countries are likely to fall short of the international community's target of halving poverty by 2015. 
In 2002, at the Monterrey Conference, the international community agreed on a framework for reaching that goal. 
Developing countries would implement sound economic policies accompanied by good governance. 
Industrial countries would increase aid levels and lower trade barriers. 
The IMF and World Bank would offer advice, expertise, and financing, with the Fund concentrating on the macroeconomic and financial stability that is crucial to fostering durable growth and poverty reduction. 
Some progress has been made on this "Monterrey Consensus." But international support is falling far below promised levels. 
Strong political commitments are needed to provide the aid that is needed to accelerate progress, and to secure success for the Doha trade round that is so crucial for developing countries' longer-term prospects. 
The resilience of the global economy in the face of political and economic shocks demonstrates the central relevance of the reform process - and underlines the importance of continuing along this path. Governments and institutions like the IMF must keep this in mind as they seek to ensure a durable economic recovery that will benefit all of the world's people. 

Resilient Pakistan? 
ISLAMABAD – Since mid-December, Pakistan has experienced political and economic volatility that is extraordinary even by Pakistani standards. 
The fragile political structure that began to be erected following the resumption of civilian government in 2008 is now shaking. 
A key source of this unrest is Tahirul Qadri, a Toronto-based Muslim cleric who arrived in Lahore in early December. 
Ten days later, he addressed a mammoth public meeting at the city’s Minar-e-Pakistan grounds, where, a year earlier, the cricketer-turned-politician Imran Khan had launched what he not very appropriately termed a political tsunami. 
Qadri issued a 20-day ultimatum to the government in Islamabad to purge the political system of rampant corruption, reconstitute the Election Commission, and appoint a caretaker administration to oversee the upcoming vote. 
The caretakers, he said, should include technocrats, retired military officers, and judges – and could remain in office longer than the constitutionally permitted 90 days. 
Unless the government took these steps, he would lead a million-man march on the capital. 
When the government did not oblige, 50,000 people set out on the fabled Grand Trunk Road to Islamabad, taking 36 hours to complete the 300-kilometer trek. 
Qadri addressed the marchers repeatedly; liberally mixing political metaphors, he called himself a latter-day Mao Zedong on a journey to launch a system-cleansing jihad and initiate a Pakistani version of the Arab Spring. 
On January 10, while Qadri was planning his march, two suicide bombers sent by the extremist Lashkar-e-Jhangvi, a banned Sunni group, attacked the Shia Hazara community in Quetta, killing almost a hundred people. 
The Hazaras reacted to the attack by making the coffins of the dead a symbol of protest. 
They lined up the dead on Alamdaar Street, which runs through the city’s Shia community, and refused to bury them until the government dismissed inept and corrupt local officials, led by a local nawab who spent more time abroad or in Islamabad than in the provincial capital. 
The government succumbed and removed the chief minister and his cabinet, placing the troubled province under the care of the provincial governor. 
Five days later, Pakistan’s ever-active Supreme Court ordered the arrest of Prime Minister Raja Pervez Ashraf and 16 other senior government officials for alleged involvement in what was called the “rental power” case. 
The case dates back to 2008-2011, when Ashraf, who was Minister of Water and Power at the time, oversaw large contracts to rent power generators, which were needed to ease an electricity shortage that was costing the economy up to 5% of GDP. 
Several reports in the print and electronic media suggested that the contracts awarded by Ashraf’s ministry were tainted. 
The finance ministry called in the Asian Development Bank, which confirmed that a large amount of money had leaked from the agreements, and that many of the rental units generated much less power than promised. 
The Supreme Court took note of the ADB’s findings and started proceedings against Ashraf and other senior officials, including several from the finance ministry. 
Ashraf resigned from the cabinet, only to be brought back later as Prime Minister. 
In earlier times, crises of much lesser intensity would have brought the military rushing onto the political stage, as happened in 1958, 1969, 1977, and 1999. 
Indeed, the army has ruled Pakistan for a total of 33 years since independence in 1947. 
But this time the soldiers have remained in their barracks, for the simple reason that an awakened populace, an active civil society, and a free and vibrant media would not tolerate another venture into politics by the army. 
After almost five years of democratic rule, Pakistan is on its way to establishing a durable and representative political order. 
While it has not produced clean and efficient government, there seems to be considerable comfort in the popular belief that, by working together, Pakistanis will find a way out of the mess in which the country finds itself. 
A late-evening meeting of most opposition parties in Lahore on January 16 rejected Qadri’s demands, while telling the government to stay the course toward the general election. 
A day later, the government found a face-saving formula to send the preacher-politician – and, more important, his followers – home, promising that the Election Commission will be given the time to determine candidates’ eligibility under the relevant constitutional provisions. 
So, in a way, Qadri’s arrival in Pakistan and his intense political activism have served a purpose: he has reinforced the people’s faith in a system that they are continuing to build. 

Building Palestine From the Bottom Up 
JERUSALEM – As President Barack Obama’s special Middle East envoy, former US Senator George Mitchell, learned during his visit to the region, America’s efforts at Israeli-Palestinian peace-making are running up against three major obstacles. 
They will, no doubt, also arise in Obama’s upcoming meetings with the region’s leaders. 
The first obstacle – indeed, the issue that stands front and center today – is the ongoing Palestinian civil war, with Hamas controlling the Gaza Strip in defiance of Abu Mazen’s Fatah-led Palestinian Authority. 
The Palestinians’ basic failure at nation-building makes any meaningful peace talks with Israel – let alone an agreement – almost impossible at the moment. 
With Palestinians unable to agree among themselves on a minimal national consensus, how can peace be established between them and Israel? 
Second, with Likud’s Benjamin Netanyahu as prime minister, Israel now has a government which is far less likely to be willing – or able – to make major concessions and evacuate hundreds of thousands of Israeli settlers from the West Bank. 
Third, and most significantly, the 1993 Israel-PLO agreement has until now failed to achieve its aim. 
Attempts to revive the Oslo peace process – the “Road Map” and the Annapolis process – have similarly failed to achieve more than vacuous declarations and hollow photo opportunities. 
The causes of these 15 years of failure should be considered, so that Mitchell’s mission does not become another stillborn effort. 
Both the Palestinians and Israel can easily and rightly be blamed for the failure of the Oslo process. 
But there is a more fundamental cause at stake, and it should not be overlooked. 
The Oslo process tried to build a Palestinian state from the top down: create a Palestinian national authority, hand over territory to it, give it increasing power, arm it and finance it, hold elections, and a Palestinian state would emerge. 
Instead, the consequence was a corrupt, militarized Palestinian Authority, with competing security services proved incapable of providing security. 
Nor could it conduct credible negotiations with Israel or deliver necessary services to ordinary Palestinians. 
Two reasons for this failure stand out: the institutional weakness of Palestinian civil society, which lacks the infrastructure necessary for nation-building; and the impossibility of simultaneous nation-building and peace-making. 
There is no precedent anywhere in the world that suggests that such a two-tier process can succeed. 
A fundamental change of paradigm is needed: the effort should shift to building a Palestinian state from the bottom up, for which there are encouraging signs, even in the midst of the failure of the top-down process. 
In the last two years, former British Prime Minister Tony Blair and US General Keith Dayton have succeeded in effective institution-building in three West Bank districts – Jenin, Bethlehem, and Hebron – turning them into the most peaceful areas in the West Bank, with a minimal Israeli military presence. 
Local authorities were supplied with adequate funding and advice; independent chambers of commerce became the backbone of a local commercial middle class, which is interested in keeping the region peaceful, even absent an overall agreement; local police were trained (in Jordan), and now function effectively as police forces, not armed militias; and business relations with adjacent Israeli regions have been renewed. 
This empowerment of an effective local leadership was done with much persistence – and little fanfare. 
But these nuts-and-bolts projects created – for the first time – the building blocks necessary for effective Palestinian nation-building. 
Admittedly, this process will take time and patience. 
But, until now, it has been the only approach proven to succeed, while everything else has failed. 
As Blair recently put it, such a bottom-up process may even go hand-in-hand with Netanyahu’s goal of an “economic peace,” though it would eventually have to go beyond it. 
That such an approach would have to include a total halt to Israeli settlement activities goes without saying. 
If carefully crafted, it may even be implicitly accepted, albeit without much enthusiasm, by the Israeli government. 
The Oslo process has failed; an attempt to revive it – say, by way of the Beirut Arab peace initiative – will merely bring into the open all of the existing disagreements between the two sides, and will not overcome the Palestinian failure at nation-building. 

Building Pax Asia-Pacifica 
MANILA – One of the main sources of tension in Asia nowadays are the Spratly Islands in the South China Sea, where the Philippines, Vietnam, China, and others have conflicting claims. 
In Chinese media reports, the heightened “unfriendliness” in the region has allegedly arisen from “bad rumors and speculations” on the part of Filipino commentators. 
But the reality is starker: the intrusions by Chinese aircraft into Filipino airspace in May; Chinese patrol boats cruising in March in the Recto (Reed) Bank, 85 miles west of the Filipino island of Palawan; and, most serious of all, a Chinese missile frigate firing at Filipino fishing boats in February near Palawan’s Quirino atoll. 
Will armed conflict result from these recurring – and, it seems, escalating – disputes between the Philippines and Vietnam on one side, and China on the other? 
War, of course, is in no one’s interest. 
But the risk posed by these disputes is growing, because China’s relations with both the Philippines and Vietnam are at their lowest point in decades. 
Given these tensions, it is no surprise that the issue of disputed sovereignty in the South China Sea is almost certain to claim center stage at this month’s ASEAN Regional Forum, and at the East Asia summit in Bali that will follow it. 
Last June, I gave the keynote speech at the celebrations marking the 36th anniversary of the establishment of Philippines-China diplomatic relations and the 10th anniversary of Philippines-China “Friendship Day” in the presence of 5,000 of my countrymen and a smattering of Chinese officials. 
Yet on that same day, the headlines in Chinese papers were blasting the Philippines for its historic claim to ownership of the Spratly Islands. 
Of course, the governments of both countries recognize the need to maintain the stability and cooperation that have made East Asia the world’s fastest growing region. 
The same is true of Vietnam’s government and that of the United States. 
But there is no institutionalized means to discuss and resolve the dispute, which is taking on greater significance almost daily, owing to the belief that vast mineral and energy resources lay on the sea bed around the Spratlys. 
Now is the time for China, the Philippines, Vietnam, other claimants, and the US to take action to begin to diminish these tensions. 
What is needed, above all, is a covenant among the leaders of the Asia/Pacific region that will make peaceful dispute resolution binding on all stakeholders, big or small. 
Only such a pledge can provide the type of certainty that investors – any investors – will need if the Spratly resources are to be developed. 
Certainly, China’s leaders talk as if this is their goal. 
In April, at this year’s Boao Forum (the Asian Davos) on Hainan Island, Chinese President Hu Jintao asserted: “Peace and development remain the overriding themes of the times. 
The world needs peace, countries deserve development, and people want cooperation....China will always be a good neighbor, good friend, and good partner of other Asian countries.” 
It is past time to make those sentiments a reality; more than a pledge to resolve disputes peacefully is needed. 
Asia’s governments must also begin to adhere to a far more expansive idea of open regionalism, which means that countries like India should have a voice in Asia/Pacific affairs, and they must respect the Asian interests of countries beyond the region. 
The US, for example, should be made welcome to participate – or continue to participate – in peacekeeping and security cooperation. 
But how is Asia to reach consensus on this point? 
Ever since 1994, when Vietnam’s President Le Duc Anh held the presidency of ASEAN, I have proposed to ASEAN leaders that the Spratlys be demilitarized as a first step toward building trust. 
The UN Convention on the Law of the Sea (UNCLOS) and associated international commitments must become the basis for productive dialogues leading to binding covenants. 
Joint exploration and development of the resources within and beneath the archipelago could then begin. 
More broadly, the urgent task for Asian statesmen over the next 5-10 years will be to replace the region’s Pax Americana, which has guaranteed regional stability for decades, with a more comprehensive Pax Asia-Pacifica that is built on inclusiveness and burden-sharing. 
But such an Asia-Pacific peace will be durable only if it is based on a balance of mutual benefits rather than on the balance of power. 
Clearly, this concept implies burden-sharing by all Asia-Pacific countries to ensure the region’s harmony and security. 
Pax Asia-Pacifica’s institutions will need to be built, as Europe’s peace was built after World War II, on strong, cooperative undertakings among the most powerful countries and regional blocs – the US, China, Japan, India, South Korea, Russia, and the ASEAN 10. 
The region’s continued economic growth and progress require that we Asians contain our rivalries and avoid the arms buildups that, unfortunately, now seem to be underway. 

Engineering a More Responsible Digital Future 
ZURICH – The world is being battered by technological disruption, as innovations such as big data analytics, artificial intelligence (AI), robotics, the Internet of Things, blockchain, 3D printing, and virtual reality change how societies and economies work. 
Individually, each of these technologies has the potential to transform established products, services, and associated support networks. 
Taken together, they will upend old business models and institutions, heralding a new era of economic, social, and political history. 
How will we respond? 
Major economic transformations typically produce far-reaching change. 
During the first Industrial Revolution, in the eighteenth and nineteenth centuries, new manufacturing processes eventually led to huge improvements in human wellbeing. 
As productivity increased, salaries and living standards rose. 
But, early in the process, mechanization brought negative consequences, like unemployment, child labor, and environmental degradation. 
The social and political impact of the digital revolution could be even more dramatic. 
Wars and revolutions may erupt, and values like human rights and civil liberties could be undermined. 
As my colleagues and I noted in a recent article in Scientific American, the more computers know about us, “the less likely our choices are to be free and not predetermined by others” – as long as informational self-determination is impossible. 
Fortunately, the loss of individual autonomy is not inevitable. 
It is possible to engineer a more responsible digital future. 
But we must start doing so immediately. 
Success requires public discourse, digital enlightenment and emancipation, and broader awareness of technology’s risks. 
In other words, the transition we are facing is bigger than any one country or organization can manage alone. 
We all have something at stake: our future. 
There are obvious dangers in letting technological progress alone drive this change. 
In 2008, Wired editor Chris Anderson suggested that big data would eventually reveal all truth, without requiring science or theory. 
Clearly, that hasn’t happened. 
With more data at their disposal, scientists find more patterns to study; it takes science to judge which are meaningful and which are misleading. 
The expectation that AI would overcome human weaknesses such as bias has also fallen short. 
Today, many AI systems discriminate against people, and can even be manipulated. 
Other predictions of the new “digital society” were equally off-base. 
So-called smart cities – in which urban life is automated – have so far failed to live up to expectations. 
That’s because cities are not simply giant supply chains; they are also spaces for experimentation, creativity, innovation, learning, and interaction. 
Finally, while the “platform economy,” and its reliance on the Internet, computation, and data, has given rise to some of the most valuable companies in the world, it has also turned many citizens into passive consumers. 
The irony of hyper-connectivity is that people are less discerning not only about the products they buy, but also with the information they consume. 
It is, after all, this “attention economy” that spawned “fake news.” 
Simply put, our digital utopia will not arrive unaided. 
We need a more ethical approach to engineering technology, one that integrates constitutional, cultural, and moral norms and values into artificial and autonomous systems. 
An “ethically aligned,” “value-sensitive” design approach is needed in every aspect of technological development – from smart devices to the software that supports our governments and markets. 
For example, if democracy is to remain a viable political model, the information systems that democratic governments use must be designed to support human rights, dignity, self-determination, pluralism, division of responsibility, transparency, fairness, and justice. 
To achieve this democratic digital future, the world needs to change how it thinks about technology. 
We need to build open, participatory information ecosystems that empower anyone in the global economy to contribute ideas, talent, and resources. 
In a networked world, where everything we do affects others, we must learn to think beyond ourselves, and pursue cooperation, co-creation, co-evolution, and collective intelligence. 
If we progress accordingly, the Fourth Industrial Revolution can be more inclusive than the first; that is the future that my colleagues and I are working toward. 
For example, at Delft University of Technology in the Netherlands, we are engineering socially responsible communication networks and urban governance systems, while the FuturICT initiative, an international network of researchers, is applying a multidisciplinary approach to technology development. 
The goal of both research efforts is to facilitate a more equitable digital future. 
We have the ability to engineer technology that serves us, rather than enslaves us. 
But building that future demands a new digital zeitgeist, whereby social, cultural, environmental, and ethical values become part of the design process. 
Innovations and revolutions are often upsetting and tumultuous, but in the digital age, they can also be responsible. 


Building the Markets We Need 
VIENNA – The greatest challenge of the current global financial crisis is the seeming impossibility of comprehending and managing its diversity. 
Indeed, the way problems are proliferating appears almost uncontrollable. 
Plans to meet the crisis, in country after country, have been revamped and restructured time and again. 
The old models about how to understand the economy have had their day. 
Across the globe, governments are facing fundamental decisions about the future nature of their economies and societies. 
The sub-prime crisis in the early summer of 2007 developed first into a financial crisis and ultimately into a recession. 
New economic problems soon rushed in to add to the existing ones: energy and food prices rose and then fell like a yo-yo; the dangers of climate change became ever more clear; and the mal-distribution of global political power demanded action. 
The recent social unrest in Greece, Latvia, and Lithuania has shown that political stability is now vulnerable even in the European Union. 
Indeed, around the world, from Mexico to Indonesia and even China, the social fabric is being stretched to the point of fraying. 
This anxiety is reinforced by the general lack of funds among large groups of people who had nothing to do with creating today’s crisis but are bearing the pain of it. 
These social anxieties are not being addressed because financial-sector bailouts, stimulus packages, and help for distressed industries with strong lobbies are testing many governments’ financial limits. 
That the advocates of unconditional privatization are now crying out for state support would be cause for cynical laughter if the danger were not as big as it is. 
For the brutal question governments must now face is this: is there an alternative to the Icelandic crash course? 
In the past, when state economic decision-making reached such an impasse, wars and/or revolutions were the inevitable result. 
As we face the type of turning-point decisions not seen since the darkest days of the 1930’s, can we avoid such an outcome? 
If we are to avoid the worst, fundamental change is not only necessary, but unavoidable. 
So politicians everywhere must do their duty and exercise responsible leadership. 
A combination of steely calm and bold experimentation is the only way that political and social harmony will be preserved. 
To make the European Central Bank a lender of last resort for all of the euro-zone countries, for example, would give distressed European governments some added breathing space. 
But it will require global monetary reform of a fundamental order to right the imbalances between surplus and deficit countries, between happy savers and those who lived beyond their means, and between rich and poor. 
Achieving this will not come without suffering. 
Some of those who brought the world to this perilous point with their toxic financial instruments and unscrupulous speculation may even turn out to profit from these reforms. 
So be it: a moral, and perhaps legal, reckoning must await the return of economic growth. 
As governments move into uncharted territory, they will need to question themselves constantly. 
All assumptions will need to be assessed and reassessed, starting points found and re-found, and new tools developed and perfected. 
The mechanics of the welfare state will need to be strengthened; public policy must stop deferring to the financial sector, regardless of the need for bailout packages. 
As governments embark on their necessary and bold experiments, they must remember to take their citizens with them. 
For, unless these experiments in economic rejuvenation are transparent, they will lead to domestic political fights. 
There is a wide difference between pragmatic and opportunistic politics, and governments had better keep this distinction in mind in the months and years ahead. 
That domestic transparency and pragmatism will need to be carried over into international economic diplomacy. 
For, unless today’s global imbalances are redressed, the next crash will be upon us before we have recovered from this one. 
Today’s globalized markets need rules that take into account the public good in every country and region of the world. 
That much is clear. 
But the decision we are actually faced with is much more fundamental: global monetary and economic reform, or war and revolution. 
Twenty years after the world supposedly reached “the end of history,” we are instead at another historical turning point. 
Either we will write this history ourselves, or we will suffer through a dark era that could have been avoided. 

Rouhani’s Lost Chance 
ISTANBUL – Iranian President Hassan Rouhani’s charm offensive has stalled. 
It worked well in the United Nations General Assembly last September, when he had something solid to offer – a deal on his country’s nuclear program – raising hopes that Iran’s hardline foreign-policy stance would finally soften. 
But UN Secretary-General Ban Ki-moon’s withdrawal of Iran’s invitation to the Geneva II conference on Syria suggests that Rouhani will need more than charm – or even a visit by Turkish Prime Minister Recep Tayyip Erdoğan to Tehran – to end his country’s isolation. 
Rouhani has been largely successful in putting his predecessor Mahmoud Ahmadinejad’s tone-deaf leadership firmly in the past. 
The Iranian establishment has supported his attempts to open the country up to its regional neighbors, court foreign investment, call for moderation in religious and cultural matters, and even pursue the nuclear deal with the West. 
In fact, the nuclear agreement – which seems close to completion – is likely to be Iran’s most important diplomatic achievement since the Islamic Revolution in 1979, providing it with considerable relief both domestically and internationally. 
The fact that Supreme Leader Ayatollah Ali Khamenei personally backed the effort makes it all the more promising. 
Nonetheless, the regime’s possible rapprochement with the United States remains a source of concern in the Middle East, because it would empower Iran at a time when the US is gradually disengaging from the region. 
The question now is whether Rouhani’s moderation toward the West will be accompanied by a change in Iran’s Middle East policy, with all eyes on its policy toward Syria. 
Ban rescinded Iran’s invitation to Geneva II under pressure from the US and the Syrian opposition. 
After all, since the civil war began in 2011, Iran has provided essential financial and military support for Syrian President Bashar al-Assad’s regime, while mobilizing its Lebanese proxy, the powerful Hezbollah militia, to fight against the rebels in Syria. 
Whatever concerns the opposition has about Iran’s allegiances, the country is undoubtedly part of the Syrian equation; indeed, its involvement is critical to reaching any accord. 
But Rouhani’s failure to make a decisive statement on Syria – even after a series of leaked photographs of systematic torture and massacre raised the ire of the international community – has not helped the case for keeping Iran in the fold. 
Rouhani recently had an opportunity to discuss Iran’s stance. 
But, addressing the World Economic Forum in Davos, he squandered it, sticking to platitudes about the need for governments in the region to listen to their citizens and provide young people with “jobs and hope.” 
On the subject of despotic rulers, Rouhani offered only the benign observation that they lack the ability to connect with and understand their people. 
Rouhani’s recent rhetoric, however positive, falls far short of the expectations that his diplomacy has raised since his UN address last September. 
In Davos, the world expected a decisive statement on Syria and other regional problems – not hackneyed nationalist rhetoric about eliminating “biases” against Iran. 
Rouhani must have known that his failure to address the humanitarian disaster in Syria would damage his diplomatic strategy, which suggests that he must have had a strong reason. 
Two possibilities stand out: either there is no consensus within the Iranian elite for a policy change, or the elite remain united in their determination to continue backing Assad. 
Neither alternative is particularly charming, which would explain why he preferred to obscure his country’s position. 
To be sure, Erdoğan’s visit to Tehran this week could help to defuse tensions over Syria – a subject on which Turkey and Iran have diametrically opposing views. 
But it is unlikely to smooth the divisions among Iran’s elite, much less convince hardliners to stop backing Assad, leaving the visit’s significance uncertain, at best. 
In refusing to take a strong position on Syria, Rouhani – like so many other world leaders – is placing his own interests above those of the 2.3 million registered Syrian refugees, the millions more who have been internally displaced, the estimated 130,000 people killed, and the rest of Syria’s long-suffering population. 
Worse, he has refused to acknowledge Iran’s own role in the tragedy. 
When he said in Davos, “we cannot be indifferent to the pain and suffering of our fellow brethren in the region,” he might as well have been referring to the Assad regime and its partners in crime. 
What Syria needs is not rhetoric or charisma; it needs action. 
Iran appears incapable of providing it. 
That is why Rouhani’s charm offensive will not be enough to persuade Iran’s adversaries that the Islamic Republic is ready to come in from the cold. 

Bulgaria’s Betrayal of Europe 
When Bulgaria joined the European Union this past January, I believed that my country had finally left its repressive past behind. 
But the recent arrest and threatened deportation of Annadurdy Hadjiev, a dissident from Turkmenistan who sought refuge here, suggests that some things never change. 
If Bulgaria sends this man back to Turkmenistan – where he faces certain torture and the threat of a brutal death – our claim to be part of a democratic, rights-respecting Europe will ring hollow. 
Moreover, the EU’s image as a defender of human rights around the world will be tarnished by its inability to hold member states to its own standards. 
The case evokes memories of the days when the KGB’s influence was pervasive, and dissidents across Eastern Europe and Soviet lands like Turkmenistan lived in fear. 
Hadjiev and his family fled to Europe in 2001, escaping one of the world’s most repressive regimes: the absolutist dictatorship of the late Saparmurat Niyazov, who fancied himself “Turkmenbashi,” the father of all Turkmen. 
A former deputy chairman of the Central Bank of Turkmenistan and later an outspoken critic of Turkmenbashi’s government, Hadjiev, a senior member of the exiled Watan (Republican) Party, received “humanitarian parole” – a protected category of individuals that falls short of refugee status – when he reached Bulgaria. 
But he has since been subjected to violent and arbitrary reprisals in this supposed “safe haven.” 
And, although Turkmenbashi died in December, his successor, Gurbanguly Berdymukhammedov, has continued to imprison dissidents, stifle freedom of expression, and scoff at democracy, as February’s rigged elections demonstrate. 
Bulgaria’s persecution adds to the anguish and injustice that has befallen Hadjiev and his family. 
Last summer, Hadjiev’s brother and sister were arrested after they collaborated on a documentary about Turkmenistan, and were tried on trumped-up charges of weapons possession. 
After a perfunctory closed trial, they were sentenced to seven and six years in prison, respectively. 
Hadjiev’s sister, the journalist Olgusapar Muradova, died in prison several weeks later, under suspicious circumstances. 
Her grown children, who viewed her body, told relatives that they saw evidence of torture and that she had sustained a severe head wound. 
(A state-controlled autopsy implied that she had committed suicide.) 
Hadjiev’s two other brothers, as well as his brother-in-law and sister-in-law, have been in Turkmenistan’s notorious penal gulag since 2002, when they were sentenced to lengthy prison terms. 
In 2003, his elderly father-in-law was beaten by police agents and forced into internal exile. 
On February 19, the Bulgarian police arrested Hadjiev with the intention of sending him back to face a similar fate. 
This is not the first time he has been arrested in Bulgaria. 
After first arriving, Hadjiev and his wife were arbitrarily detained for several days, leaving their 13-year-old daughter without supervision or access to her parents. 
The police arrested Hadjiev again in 2002, in response to a Turkmen extradition request. 
After the Varna City Court refused to allow the extradition, ruling that the charges were politically motivated, the Bulgarian authorities threatened to deport him. 
In 2005, the Hadjievs’ car was incinerated by a bomb-like device, which they interpreted as a warning to cease their defiant challenges to the Bulgarian – and possibly Turkmen – authorities. 
The authorities that arrested Hadjiev last month made no pretense of due process: they offered no arrest warrant, and have repeatedly refused him access to relatives and legal counsel. 
Moreover, the court has given no explanation of why it is allowing him to be tried on the same embezzlement charge that of which he was acquitted in 2003. 
Fortunately, Hadjiev is a fighter. 
Since the beginning of his travails in Bulgaria, he has battled the system by confronting the government branches responsible for his persecution. 
Indeed, he has sued the very prosecutor in whose hands his current extradition now rests – an act that may be jeopardizing his right to a fair hearing. 
My government has pledged its willingness live up to the legal norms that are the core of European Union membership. 
By releasing Annadurdy Hadjiev from jail and withdrawing the threat of extradition to Turkmenistan, Bulgaria would unequivocally demonstrate its commitment to fulfilling its obligations. 
By granting him political asylum, we can make a resounding statement that authoritarian regimes can no longer count on support within Europe’s borders. 

Burma: India’s Bad Neighbor Policy 
NEW DELHI – As stage-managed elections ratify the consequences of three decades of military rule in Burma, the perspective from its neighbor India may help explain why there is continued international acceptance of the country’s long-ruling junta. 
Burma was ruled as part of Britain’s Indian Empire until 1935, and the links between the two countries remained strong after Burma gained its independence in 1947. 
An Indian business community thrived in Burma’s major cities, and cultural and political affinities were well established. 
India’s nationalist leader and first prime minister, Jawaharlal Nehru, was a close friend of the Burmese nationalist hero Aung San, whose daughter, the Nobel laureate and opposition leader Aung San Suu Kyi, studied in New Delhi. 
For many years, India was unambiguously on the side of democracy, freedom, and human rights in Burma – and in ways more tangible than the rhetoric of the regime’s Western critics. 
When the generals suppressed the popular uprising of 1988, nullified the overwhelming election victory by Aung San Suu Kyi’s National League for Democracy (NLD) in 1990, shot students, and arrested the newly-elected leaders, India’s government initially reacted as most Indians would have wanted. 
India gave asylum to fleeing students and a base for their resistance movement (along with some financial help), and supported a newspaper and a radio station that propagated the democratic voice. 
But then reality intruded. 
India’s strategic rivals, China and Pakistan, began to court the Burmese generals. 
Major economic and geopolitical concessions were offered to both suitors. 
The Chinese even began developing a port on the Burmese coast, far closer to Calcutta than to Canton. 
And the generals began providing safe havens and arms to a motley assortment of anti-Indian rebel movements that would wreak havoc in India’s northeastern states and retreat to sanctuaries in the newly-renamed Myanmar. 
All this was troubling enough to Indian policymakers, who were being painfully reminded of the country’s vulnerability to a determined neighbor. 
The clincher came when large deposits of natural gas were found in Burma, which, it was clear, would not be available to an India deemed hostile to the junta. 
India’s rivals were gaining ground in its own backyard, while Indian businesses were losing out on new economic opportunities. 
The price of pursuing a moral foreign policy simply became too high. 
So India turned 180 degrees. 
When Pakistan’s President, Pervez Musharraf traveled to Myanmar to celebrate his country’s new relationship with his fellow generals, India’s Foreign Minister Jaswant Singh soon followed. 
The increasingly forlorn resistance operations staged from Indian territory were shut down in the hope of reciprocation from the Burmese side. 
And India sweetened the generals’ tea by providing military assistance and intelligence support to their own never-ending counter-insurgencies. 
India’s journey was complete: from standing up for democracy, India had graduated to aiding and abetting the military regime in Rangoon (now Yangon). 
When monks were being mown down on the streets of Yangon in 2006, the Indian government called for negotiations, muttered banalities about national reconciliation, and opposed sanctions. 
India also sent its minister for oil to negotiate an energy deal, making it clear that the country’s real priorities lay with its own national economic interests, ahead of its solidarity with Burmese democrats. 
(At the same time, Indian diplomats intervened discreetly from time to time on behalf of Suu Kyi, though their effectiveness was limited by India’s unwillingness to alienate the junta.) 
All of this was in fact perfectly understandable. 
Officials in New Delhi were justified in reacting acerbically to Western critics of its policy. 
India needed no ethical lessons from a United States and a Britain that have long coddled military dictators in India’s South Asian neighborhood, notably in Pakistan. 
Any Indian government’s primary obligation is to its own people, and there is little doubt that the economic opportunities provided by Burmese oil and gas are of real benefit to Indians. 
There is also the strategic imperative of not ceding ground to India’s enemies on its own borders. 
India confronts an inescapable fact of geopolitics: you can put your ideals on hold, but you cannot change who your neighbors are. 
India’s government cannot be blamed for deciding that its national interests in Burma are more important than standing up for democracy there. 
The member countries of the Association of South East Asian Nations, on Burma’s eastern flank, have made similar calculations. 
But many Indians are asking themselves what such a policy does to India as a civilization. 
If that idealistic democrat Nehru had not been cremated, India’s stance toward Burma might cause him to turn over in his grave. 
It is a policy that is governed by the head rather than the heart, but in the process India is losing a little bit of its soul. 

Burma’s Agony 
As the death toll mounts from the cyclone that struck a densely populated area of Burma stretching from the Irrawaddy Delta to the capital city of Rangoon continues to soar, the country’s military dictatorship is pressing ahead with efforts to consolidate its power. 
The junta leaders have done little to facilitate recovery efforts in the wake of the disaster. 
Indeed, they have announced their intentions to move forward with conducting a national referendum scheduled for Saturday to approve a new constitution, which they hope will entrench their power for decades to come. 
Burma’s rulers have said that the vote will be delayed in the areas hardest hit by the cyclone until May 24, but the referendum will still go ahead as planned in other parts of the country. 
With this move, the military leaders are putting their sham vote aimed at tightening their repressive grip on power ahead of the well being of the Burmese people. 
This should be no surprise. 
For nearly five decades, Burma’s military rulers have systematically undermined the interests of their own citizens. 
In this latest case, the junta-controlled news media failed to announce warnings about the approaching cyclone. 
The entry of United Nations humanitarian personnel, has been delayed due to the government’s refusal to allow aid workers into the country without first applying for visas. 
Moreover, the military leaders are dragging their feet on easing restrictions on the import of humanitarian supplies and allowing a UN assessment team into the country. 
Some have urged focusing attention on bringing relief efforts to Burma instead of criticizing its government. 
But the reality is that the two issues are connected and the magnitude of the disaster has been made worse by the junta’s single-minded objective of preserving its power. 
The military leaders have shown that they can mobilize their forces in short order when they want, as evidenced by their violent crack down on thousands of monks and political activists last year. 
More than seven months on from this brutal suppression, political activists continue to be imprisoned and tortured. 
Human rights groups report that opponents of the junta's proposed constitution have been beaten and intimidated in advance of the vote. 
The current pro-military constitution lacks credibility because Aung San Suu Kyi, the Nobel Peace Prize laureate who has spent 12 of the past 18 years under house arrest or in prison, and other democratic and ethnic minority leaders have not been allowed to participate in the drafting process. 
Additionally, the new constitution would effectively bar Suu Kyi, from running for president because she was married to a foreigner. 
As the only international actor in direct dialogue with both Burma's generals and Suu Kyi, the UN is in a position to press for a genuine process of national reconciliation. 
But it’s current approach is not working. 
To date, UN Secretary-General Ban Ki-moon has been addressing the crisis through the use of his "good offices," with Ibrahim Gambari serving as his representative to Burma’s rulers. 
In his March 2008 briefing to the UN Security Council, Gambari reported that his most recent visit to the country was "frustrating" and acknowledged that no tangible progress was made. 
He was denied meetings with senior government leaders, representatives of ethnic minorities and political opposition groups. 
The outcome was a major step backward. 
This lack of progress is less a reflection of Gambari's capabilities than of the fact that he has not been empowered by the countries that hold the most leverage over Burma’s rulers, including China, India, and Burma's ASEAN neighbors. 
The "good offices" approach is effective when the weight of the world is behind it and, put simply, Gambari has not been given the clout he needs. 
Since the countries that carry the most sway with the junta also have strong commercial interests in Burma, we should not expect any of them to step up and take the lead on their own. 
As Secretary-General, Ban has lived up to his self-styled vision of being the consummate diplomat, and has made some important gains in tackling the UN's bureaucratic bloat as well as dealing with the Middle East. 
But on other issues, Ban has failed to live up to the critically important precedent set by his predecessor as Secretary-General, Kofi Annan, who transformed the position to promote human rights and assumed the role of the "world's conscience" when necessary. 
Burma’s deterioration demands that Ban stop managing and begin to lead. 
He should begin by demanding that Burma's government fulfill its responsibility to protect the country’s citizens and condemn the use of violence and repressive tactics. 
Given the Burmese generals' hard line stance to date, it will likely prove to be necessary for Ban to go to Burma to meet face-to-face with its leaders. 
One idea is to pressure the generals to agree to multiparty talks based on the North Korean model-an, approach that Ban helped to forge from his days as South Korea’s Foreign Minister. 
While the world watches, Burma's generals are consolidating their tyrannical rule as hundreds of thousands of the cyclone’s survivors remain in desperate need of shelter, clean drinking water and medical care. 
The situation demands the Secretary-General’s direct involvement. 
Without it, the junta will continue to have a free hand to act against the human rights of the Burmese people. 

Burma’s Democratic Charade 
PRAGUE – On November 7, when Burma’s first general election for almost two decades is to be held, a well-rehearsed script will play out. 
The country’s ruling generals will twist what is meant to be a democratic process, whereby the people get to express their will, into a mockery of free expression in which people vote in fear and without hope. 
The international community must judge Burma’s generals by their actions, not their words and promises. 
The facts on the ground in Burma speak the truth more loudly than all the proclamations from the generals about a free ballot and a democratic transition. 
More than 2,100 political prisoners remain in jail in Burma. 
Many have been tortured, kept in horrific conditions, and denied medical care. 
Attacks against the country’s ethnic minorities continue, with the deliberate targeting of civilians, including children, by the Burmese military and police. 
The country’s media remains censored, freedom of expression denied, and the most popular political party in the country, the National League for Democracy, which won elections in 1990, has been forced to disband because it decided not to register for the November elections. 
In such conditions, free and fair elections will be impossible. 
This so-called democratic transition, a process designed solely by dictators and with input only from the regime’s loyalists, will result in continued dictatorship. 
Before Burma’s fate is sealed in a new-model dictatorship, the United Nations must immediately and vigorously embark on a fresh process designed to deliver national reconciliation and democracy to that troubled country. 
The international community, East and West, must unite behind a UN-led initiative to start genuine dialogue. 
But, for this dialogue to have any real legitimacy, it must include the Nobel Peace Prize laureate Daw Aung San Suu Kyi, who has endured decades of house arrest, and her party, the NLD. 
Other democratic opposition groups, and genuine ethnic-minority representatives, also need to be given a voice in the process. 
Pressure must be brought to bear to bring Burma’s generals to a negotiating table where real negotiations take place. 
All the tools at the disposal of the international community should be used to bring this about. 
But responsibility for assisting Burma does not lie solely at the door of the UN. 
The pressure on Burma’s generals must also be bilateral and multilateral – and should be reinforced by carefully calibrated economic measures, including targeted financial and banking sanctions. 
Action must also be taken to end the impunity with which the Burmese generals have ruled. 
The dictatorship stands accused of committing war crimes and crimes against humanity, mostly against the country’s minorities, who chafe at decades of oppression, ostracism, and military misrule. 
The UN General Assembly should follow the UN Special Rapporteur‘s recommendation to establish a Commission of Inquiry into war crimes and crimes against humanity in Burma. 
Moreover, the UN Security Council should impose an arms embargo against Burma, as it has in other countries similarly afflicted by conflict and serious human rights abuses. 
Those countries supplying arms to Burma expose themselves to charges of complicity in the war crimes and crimes against humanity committed by the dictatorship. 
Dictatorship and human rights abuses will continue in Burma after November 7. 
We do not need to wait until after the election to know this. 
So there is no excuse for continued inaction. 
Now is the time for the world to unite behind the people of Burma, and to help bring them peace and dignity at last. 

Burma’s Drug Lord Generals 
The news blackout imposed by Burma’s military junta on its decision to forego its turn as chair of the Association of Southeast Asian Nations (ASEAN) next year shows that it has received a severe blow to its prestige. 
Indeed, the decision was far from voluntary. 
Junta leader Senior General Than Shwe “lost face” and promptly disappeared from public view so completely that some Burmese thought he had died. 
The protagonists that pressured the regime into relinquishing the ASEAN chair were not the usual Western human rights campaigners, but Burma’s closest ASEAN neighbors. 
This must have made the retreat doubly painful for the generals, as ASEAN was previously one of the junta’s strongest shields against international pressure. 
For ASEAN, the episode was a lesson in assertiveness. 
It showed that persistent pressure works better than the “constructive engagement” that it had pursued, to no avail, for the eight years since Burma joined the organization. 
This shift has been led by an embryonic grouping of elected regional parliamentarians known as the ASEAN Inter-Parliamentary Caucus on Democracy in Myanmar (AIPMC), of which I am a member. 
Established last November to spur progress on democratization in Burma, parliamentarians from Thailand, Indonesia, Malaysia, the Philippines, Singapore, and Cambodia took the unprecedented step of crossing national and party lines to review critically ASEAN policy on Burma, seek the release of Aung San Suu Kyi, and disqualify Burma from chairing. 
Now, we will move for the suspension of Burma’s membership of ASEAN unless Aung San Suu Kyi and other political prisoners are released and clear progress towards democracy is made through negotiations involving the Aung’s National League for Democracy and representatives of the various ethnic groups. 
As elected legislators in ASEAN’s established and budding democracies, the members of AIPMC feel that our voices have merit and legitimacy. 
We know that Burma’s political destiny is inextricably linked to that of our own countries. 
When Burma joined ASEAN in 1997, there were only 210,000 Burmese refugees and asylum seekers throughout the region. 
Now, nearly one million people have fled Burma’s political and economic chaos for neighboring countries, and another million people remain internally displaced. 
Our youth are at an all-time high risk of drug addiction from the massive flow of narcotics, particularly amphetamine-type stimulants (ATS), from Burma, while the generals there maintain congenial ties with notorious drug lords. 
In mid-September, the UN Office on Drugs and Crime admitted that Burma and China were the world’s top producers of ATS. 
Amphetamine drugs produced in eastern Burma seem to be transported with such ease that significant quantities have been found in northeast India, on Burma’s western border. 
That, together with the heroin that is trafficked from Burma to India, China, Thailand, and other countries in the region, poses a serious threat to our political and economic security. 
It is both tragic and inevitable that the areas of India and China bordering Burma now suffer from those countries’ highest concentration of drug addiction and HIV infection., My own country, Thailand, receives up to 900 million amphetamine pills from Burma every year, and about a third of our regular drug users are below the age of 16. 
If this is the impact on Thailand, what about the young people and children of Burma, who have been restricted from access to education, information, and health care? 
It is scandalous that drug lords enjoy more freedom to operate than aid agencies, while basic access to food, education, and health care suffers many restrictions, with up to 70% of Burma’s children are chronically malnourished in some border areas. 
Indeed, in August, World Food Program Executive Director James Morris revealed that the WFP had delivered only 430 tons of the 5,500 tons of rice earmarked for vulnerable people in Burma’s northern Arakan State because of restrictions imposed by the regime. 
Two weeks later, the Global Fund for HIV/AIDS, Tuberculosis, and Malaria pulled its funding for programs in Burma, citing government restrictions that had created “an impossibly difficult environment.” 
Preventing aid from reaching those in need is bad enough. 
But Burma’s regime actually perpetuates conditions that sustain and worsen the HIV/AIDS epidemic by restricting access to counseling, medication, and other support services. 
In order for HIV/AIDS programs to be effective and sustainable, affected communities must have the freedom to organize and empower themselves. 
Only then can they be assured access to the resources essential for treatment options. 
Aung San Suu Kyi’s eloquent plea, “Please use your liberty to promote ours,” has special resonance for us in AIPMC, who enjoy the benefits of representative democracy. 
This is why we feel obligated to call on the highest levels of the international community – including the UN Security Council – to address the question of Burma, for we must show that we are serious about peace, democracy, and human rights. 
The courageous people of Burma, like people everywhere around the world, deserve what far too many of us take for granted. 

Burma’s Turn 
YANGON – Here in Myanmar (Burma), where political change has been numbingly slow for a half-century, a new leadership is trying to embrace rapid transition from within. 
The government has freed political prisoners, held elections (with more on the way), begun economic reform, and is intensively courting foreign investment. 
Understandably, the international community, which has long punished Myanmar’s authoritarian regime with sanctions, remains cautious. 
Reforms are being introduced so fast that even renowned experts on the country are uncertain about what to make of them. 
But it is clear to me that this moment in Myanmar’s history represents a real opportunity for permanent change – an opportunity that the international community must not miss. 
It is time for the world to move the agenda for Myanmar forward, not just by offering assistance, but by removing the sanctions that have now become an impediment to the country’s transformation. 
So far, that transformation, initiated following legislative elections in November 2010, has been breathtaking. 
With the military, which had held exclusive power from 1962, retaining some 25% of the seats, there were fears that the election would be a façade. 
But the government that emerged has turned out to reflect fundamental concerns of Myanmar’s citizens far better than was anticipated. 
Under the leadership of the new president, Thein Sein, the authorities have responded to calls for a political and economic opening. 
Progress has been made on peace agreements with ethnic-minority insurgents – conflicts rooted in the divide-and-rule strategy of colonialism, which the country’s post-independence rulers maintained for more than six decades. 
The Nobel laureate Daw Aung San Suu Kyi was not only released from house arrest, but is now campaigning hard for a parliamentary seat in April’s by-elections. 
On the economic front, unprecedented transparency has been introduced into the budgetary process. 
Expenditures on health care and education have been doubled, albeit from a low base. 
Licensing restrictions in a number of key areas have been loosened. 
The government has even committed itself to moving towards unifying its complicated exchange-rate system. 
The spirit of hope in the country is palpable, though some older people, who saw earlier moments of apparent relaxation of authoritarian rule come and go, remain cautious. 
Perhaps that is why some in the international community are similarly hesitant about easing Myanmar’s isolation. 
But most Burmese sense that if changes are managed well, the country will have embarked on an irreversible course. 
In February, I participated in seminars in Yangon (Rangoon) and the recently constructed capital, Naypyidaw, organized by one of the country’s leading economists, U Myint. 
The events were momentous, owing both to large and actively engaged audiences (more than a thousand in Yangon), and to the thoughtful and moving presentations by two world-famous Burmese economists who had left the country in the 1960’s and were back for their first visit in more than four decades. 
My Columbia University colleague Ronald Findlay pointed out that one of them, 91-year-old Hla Myint, who had held a professorship at the London School of Economics, was the father of the most successful development strategy ever devised, that of an open economy and export-led growth. 
That blueprint has been used throughout Asia in recent decades, most notably in China. 
Now, perhaps, it has finally come home. 
I delivered a lecture in Myanmar in December 2009. 
At that time, one had to be careful, given the government’s sensitivities, even about how one framed the country’s problems – its poverty, lack of rural productivity, and unskilled workforce. 
Now caution has been replaced by a sense of urgency in dealing with these and other challenges, and by awareness of the need for technical and other forms of assistance. 
(Relative to its population and income, Myanmar is one of the world’s smallest recipients of international assistance.) 
There is much debate about what explains the rapidity of Myanmar’s current pace of change. 
Perhaps its leaders recognized that the country, once the world’s largest rice exporter, was falling far behind its neighbors. 
Perhaps they heard the message of the Arab Spring, or simply understood that, with more than three million Burmese living abroad, it was impossible to isolate the country from the rest of the world or prevent ideas from seeping in from its neighbors. 
Whatever the reason, change is occurring, and the opportunity that it represents is undeniable. 
But many of the international sanctions, whatever their role in the past, now seem counterproductive. 
Financial sanctions, for instance, discourage the development of a modern and transparent financial system, integrated with the rest of the world. 
The resulting cash-based economy is an invitation to corruption. 
Likewise, restrictions that prevent socially responsible companies based in advanced industrial countries from doing business in Myanmar have left the field open to less scrupulous firms. 
We should welcome Myanmar’s desire for guidance and advice from multilateral institutions and the United Nations Development Program; instead, we continue to limit the role that these institutions can play in the country’s transition. 
Whenever we withhold assistance or impose sanctions, we need to think carefully about who bears the burden in bringing about the changes that we seek. 
Opening up trade in agriculture and textiles – and even providing preferences of the kind that are offered to other poor countries – would likely benefit directly the poor farmers who make up 70% of the population, as well as create new jobs. 
The wealthy and powerful can circumvent financial sanctions, though at a cost; ordinary citizens cannot so easily escape the impact of international-pariah status. 
We have seen the Arab Spring blossom haltingly in a few countries; in others, it is still uncertain whether it will bear fruit. 
Myanmar’s transition is in some ways quieter, without the fanfare of Twitter and Facebook, but it is no less real – and no less deserving of support. 

Burying Augusto Pinochet 
At long last, the age of General Augusto Pinochet in Chile is over. 
Thirty-six years after the left took power for the first time with Salvador Allende’s peaceful revolution – one supported by votes rather than armed struggle – Chileans have opted again for real change by i naugurating a socialist and a woman as their president. 
“My commitment will be to travel with you on yet another stretch of this great promenade of freedom we have been opening,” Michelle Bachelet said after being elected in January. 
Her comment was an explicit reference to Allende’s last speech from the besieged La Moneda palace on September 11, 1973, when he declared that some day, much sooner than later, “we will reopen the great promenades down which free men pass.” 
The street euphoria that greeted Bachelet’s victory felt very much like the emotions that gripped Santiago back in 1970, when Allende was elected. 
Even the stage from which Bachelet spoke was located at almost the same place from which Allende delivered his historic victory speech 36 years ago. 
But the balcony of the Students’ Federation of Universidad de Chile no longer exists, having been replaced by the tall buildings and modern subway stations that have marked the intervening years of Chile’s history. 
Indeed, although Michelle Bachelet, like Allende, is a socialist and a physician, today’s Chile is not the country of 1970. 
This is not only because Pinochet’s 17 years in power, from 1973 to 1990, dramatically shattered the country’s democracy, with thousands of people executed, missing, or tortured – among them Bachelet’s own father, an air force general who died under torture because he opposed the coup. 
The changes go much deeper, which explains how a country with a huge Roman Catholic majority has chosen to be led by a woman who is a socialist, an agnostic, and an unmarried mother. 
With Allende’s victory, Chile’s stock exchange and markets were gripped by financial panic. 
But this time, the markets were calm, mostly because economists believe that Chile’s GDP will continue growing in 2006 at a brisk 6.3% annual rate. 
This change in market sentiment is one of the great achievements of President Ricardo Lagos, Bachelet’s predecessor, who was also a socialist. 
So it is small surprise that he left office with more than 75% popular support. 
Bachelet’s margin of victory was far larger than the scant 31,000 votes that brought Lagos to power in January 2000. 
Back then, many predicted that Lagos wouldn’t last the thousand or so days that Allende ruled before Pinochet launched his coup. 
Today, however, nobody is predicting chaos for Bachelet. 
Lagos brought Chile free-trade agreements with the United States, the European Union, and China, an unemployment rate of less than 8%, and a growth rate over 6%. 
Investment this year could reach a record-high 30% of GDP, and changes in education, health, and justice have transformed society. 
Most importantly, Lagos leaves office having erased from the constitution the dictator’s signature. 
The new constitution eliminated the so-called “authoritarian enclaves” by subordinating the armed forces to civilian rule and removing their designated senators from Parliament. 
As for Pinochet himself, ever since July 2004, when the US Senate revealed his vast secret bank accounts, the once-powerful dictator has become a pariah. 
At age 90, he is being prosecuted for his crimes and corruption. 
Thus, the general who yearned to see his picture in Chilean history books next to that of our liberator, Bernardo O’Higgins, must now resign himself to dying abandoned even by those who, until only two years ago, revered and honored him. 
That is hardly surprising. 
After all, one of the reasons Chile’s right hasn’t won an election since 1990, when democracy was restored, has been its silence regarding Pinochet’s crimes and financial misdeeds. 
But, in yet another sign of Chile’s transformation, the right-wing candidate that Bachelet defeated, Sebastián Piñera, is a liberal entrepreneur who has never hidden his rejection of Pinochet and his dictatorship. 
Piñera’s great challenge will be to use his 46.6% of the vote in January to strengthen his leadership and his effort to build a new right-wing coalition with unimpeachable democratic credentials, thereby enabling it one day to defeat the ruling “Concertación” coalition that Bachelet leads. 
Such a reformed right’s opposition to Bachelet will probably focus on her efforts to modify the country’s neo-liberal model as she tackles the country’s persistent knots of poverty and inequality. 
If Bachelet, who has already served as Minister of Health and Minister of Defense, is to succeed as president, she must transform this other Chile, where 18% of the population is poor, and 5% indigent. 
These are the Chileans for whom a lack of hope might make social unrest seem to be the only alternative. From now on, the danger of a military comeback will no longer be present to act as a deterrent. 
In any case, on March 11, when Michelle Bachelet crosses the presidential sash over her chest, a new Chile will set itself in motion. The first truly post-Pinochet-era government will have begun. 

Bush Inherits the Wind 
The most shocking statement in the aftermath of Hurricane Katrina was President George W. Bush’s remark that “I don’t think anybody anticipated the breach of the levees” that protect New Orleans from flooding. 
New Orleans is a city mostly below sea level, and must be protected by levees to keep water out. 
Concern that the levees might break in the midst of a powerful hurricane was widespread among scientists, engineers, and emergency-preparedness experts. 
Yet Bush apparently did not know of these concerns, even days after the hurricane destroyed the levees and flooded the city. 
There is a simple fact on display here, one that goes well beyond this particular hurricane, and even this particular president. 
There is a deep disconnect in American politics between scientific knowledge and political decisions. 
Bush bears much responsibility for this. 
He has proven to be one of America’s least knowledgeable presidents when it comes to science – and one of the most ready to turn science into a political issue. 
In recent months, Bush undermined biological theories of evolution in favor of Christian fundamentalist dogmas. 
He disdains climate science and public health science when it conflicts with the beliefs – and interests – of his core supporters. 
Simply put, Bush’s record on science policy is miserable. 
Climate scientists have warned for years that global warming caused by manmade emissions of greenhouse gases will generate more extreme storms. 
While there is no scientific way to link a particular hurricane such as Katrina to the long-term trend – in the sense that Katrina might have been bad luck rather than a sign of manmade climate change – the energy of hurricanes throughout the world has been rising markedly. 
Bush, alas, led an aggressive effort to discredit climate science rather than to respond to its findings. 
He called for delays in reducing greenhouse gas emissions that cause global warming, which in turn causes the energy of hurricanes to rise. 
According to the underlying science that Bush ignores, hurricanes take their energy from the warmth of seawater. 
That is why hurricanes occur in hot tropical regions, and at the end of the summer months, when the sea surface temperatures are at their annual maximum. 
Manmade global warming raises not only air temperatures, but sea-surface temperatures as well. 
Higher sea-surface temperatures translate into more powerful storms in the world’s oceans. 
Hurricanes are measured according to three dimensions: frequency, intensity, and duration. 
The frequency of hurricanes has not changed much, if at all. The big changes are in hurricanes’ intensity and duration. 
Intensity measures a hurricane’s force, which includes wind speeds, and there has been some recorded increase. The biggest change, however, has been in the duration of hurricanes: how many days each hurricane lasts. 
Duration has risen markedly around the world. The total energy of a hurricane is found by multiplying the intensity of the hurricane by its duration. 
This, too, has risen sharply, and more is in store as temperatures rise. 
Scientists and engineers who work on climate change stress that governments need to adopt two main responses. 
The first, called “mitigation,” means reducing the amount of manmade climate change. 
This can be done by changing the world’s energy system to limit emissions of carbon dioxide into the atmosphere – the main driver of manmade climate change. 
One option is a shift to non-carbon energy sources, such as renewable energy (solar and wind power) and nuclear energy. 
Another option is to combine carbon-based energy (coal, oil, and gas) with new technologies that prevent the emission of airborne carbon. 
The second response to climate change, called “adaptation,” requires that we ready ourselves for the climate change now underway and the increased climate change to come in future years. 
This means preparing for hurricanes that are more powerful in both intensity and duration. 
An attentive national government would surely have realized that the Gulf region of the United States is more vulnerable to high-energy hurricanes. 
Indeed, Hurricane Katrina was the third most intense hurricane ever to make landfall in the US. 
Such a government would have taken more action to strengthen levees. 
The Bush administration’s negligence is especially shocking given the remarkable amount of scientific expertise that exists in the US. 
Somehow, scientists have been pushed aside by political operators. 
But the US government’s failings are matched in many parts of the world, and certainly in the poorest countries, where scientific expertise is scarce, and where many governments do not have scientific advisory councils to turn to for guidance. 
Hurricane Katrina is a wakeup call, not only for the US but for the world. 
We are entering a period when good science is vital for our survival. 
On a crowded planet with threats to our climate, oceans, forests, food production, and water supply, and with global travel and high population densities increasing the risk of worldwide disease epidemics, we must turn to the best of our scientific and engineering knowledge to find a safe passage. 

Bush Loses in the Supreme Court and America Wins 
Two rulings of the United States Supreme Court this week rejected the sweeping wartime powers claimed by President Bush. 
In the case of Yaser Hamdi, the court renounced the Administration's claim that military authorities could indefinitely hold a U.S. citizen as an "enemy combatant" without ever providing him with an opportunity to contest the basis for his detention before a neutral decision maker. 
And in a case brought by fourteen foreign nationals, the court cast aside the government's argument that because the U.S. Naval Base at Guantanamo Bay is nominally under Cuban sovereignty, American courts lack jurisdiction to entertain legal claims brought by persons who had no say in where the U.S. military chose to detain them. 
Although nowhere mentioned in either case, the scandalous treatment of Iraqi prisoners at Abu Ghraib and the revelations that high-level government lawyers prepared confidential memoranda authorizing torture, likely played a part in the Justices' reasoning. 
The Administration essentially said, "trust us to do what's right." 
Clearly, the court thought that such trust had not been earned. 
Another unspoken consideration may have been at work in the Guantanamo Bay case, which has garnered considerable international attention. 
In recent years, a majority of the Justices of the Supreme Court have articulated a multilateralist view of American law that stands in marked contrast to the unilateralism of the Bush Administration. 
For example, in a 2002 Virginia case, the high court ruled that the execution of the mentally retarded is forbidden by the American Constitution as "cruel and unusual punishment." 
While most of the Court's analysis focused on domestic considerations, the Justices also invoked a legal brief filed by the European Union that described the overwhelming disapproval of the practice in the world community. 
Likewise, in last year's ruling striking down a Texas prohibition on same-sex sodomy, the Court cited a 1967 Act of the English Parliament and a 1981 ruling of the European Court of Human Rights. 
Significantly, the six Justices in the majority in the Virginia and Texas cases also constituted the majority in the Guantanamo Bay case: the four dissenters from Bush v. Gore plus Ronald Reagan's two relatively moderate appointees, Sandra Day O'Connor and Anthony Kennedy. 
These Justices regularly travel to colloquia on comparative constitutional law and see themselves as part of an international community of high court judges. 
It cannot have escaped their notice that to uphold indefinite detention of foreign nationals without judicial process would have made them virtual pariahs on the conference circuit. 
I do not mean to suggest that the Justices decided the Guantanamo Bay case as they did so that they would be toasted at their international cocktail parties. 
I contend that their concern for world opinion-if that concern played the role I am suggesting it did-was for their country, not for themselves. 
In less than four years, President Bush and his advisers have cast aside much of the longstanding bipartisan consensus under which the United States works through and with multilateral institutions like the United Nations. 
Alarmed by this dramatic volte-face, the majority Justices in the Guantanamo Bay case may be trying to send assurances to the rest of the world that President Bush does not speak for all Americans, not even the ones who put him in office in the first place. 
Of course, neoconservative critics of the high court will see in this explanation the confirmation of their worst fears. 
Here are judges, they will say, who do not understand that they have no legitimate qualifications to act as agents of American foreign policy, a job committed by the Constitution to the President and (they may grudgingly admit) Congress. 
Yet the high court has considered foreign policy implications before. 
In the most celebrated American case of the twentieth century, Brown v. Board of Education, the Justices were probably influenced by a government brief explaining how racial segregation in the southern United States undermined American efforts to compete with the Soviet Union for the hearts and minds of people in developing countries. 
By holding that American apartheid violated the constitutional command of "equal protection of the laws," the court struck a blow for justice at home and American strategic interests abroad. 
To be sure, the Brown precedent is not entirely analogous, for there the Supreme Court gave weight to foreign policy considerations in just the way that the federal executive had urged. 
In the Guantanamo Bay case, by contrast, the Bush Administration argued that a ruling for the detainees would undermine the war effort by diverting manpower and material from the battlefield to the courtroom. 
But the majority opinion of Justice John Paul Stevens paid little heed to the Administration's parade of horribles. 
A decorated World War II veteran, Justice Stevens may well have thought that he was at least as qualified as the civilians in the Bush Justice Department to forecast the impact of the court's ruling on military efficiency. 
Or perhaps the Justices were simply reacting to the Administration's constant overreaching. 
Yes, the existence of religious fanatics eager to kill large numbers of innocent American civilians warrants strong measures in response. 
But the Supreme Court's rulings affirm the fundamental principle that even grave dangers do not warrant the sort of blanket deference to which the Bush Administration believes it is entitled whenever it utters the words "war" and "terrorism." 

Bush’s Bad-Faith Energy Policy 
One of the more surreal sessions at this year’s World Economic Forum in Davos had oil industry experts explaining how the melting of the polar ice cap – which is occurring faster than anyone anticipated ­– represents not only a problem, but also an opportunity: vast amounts of oil may now be accessible. 
Similarly, these experts concede that the fact that the United States has not signed the Law of the Sea, the international convention determining who has access to offshore oil and other maritime mineral rights, presents a risk of international conflict. 
But they also point to the upside: the oil industry, in its never-ending search for more reserves, need not beg Congress for the right to despoil Alaska. 
President George W. Bush has an uncanny ability not to see the big message. 
For years, it has become increasingly clear that much is amiss with his energy policy. 
Scripted by the oil industry, even members of his own party referred to an earlier energy bill as one that “left no lobbyist behind.” 
While praising the virtues of the free market, Bush has been only too willing to give huge handouts to the energy industry, even as the country faces soaring deficits. 
There is a market failure when it comes to energy, but government intervention should run in precisely the opposite direction from what the Bush administration has proposed. 
The fact that Americans do not pay the full price for the pollution – especially enormous contributions to greenhouse gases – that results from their profligate energy use means that energy is under-priced, in turn sustaining excessive consumption. 
The government needs to encourage conservation, and intervening in the price system ­­– namely, through taxes on energy – is an efficient way to do it. 
But, rather than encouraging conservation, Bush has pursued a policy of “drain America first,” leaving America more dependent on external oil in the future. 
Never mind that high demand drives up oil prices, creating a windfall for many in the Middle East who are not among America’s friends. 
Now, more than four years after the terrorist attacks of September 2001, Bush appears to have finally woken up to the reality of America’s increasing dependence; with soaring oil prices, it was hard for him not to note the consequences. 
But, again, his administration’s faltering moves will almost surely make matters worse in the immediate future. 
Bush still refuses to do anything about conservation, and he has put very little money behind his continuing prayer than technology will save us. 
What, then, to make of Bush’s recent declaration of a commitment to make America 75% free of dependence on Middle East oil within 25 years. 
For investors, the message is clear: do not invest more in developing reserves in the Middle East, which is by far the lowest-cost source of oil in the world. 
But, without new investment in developing Middle East reserves, unbridled growth of energy consumption in the US, China, and elsewhere implies that demand will outpace supply. 
If that were not enough, Bush’s threat of sanctions against Iran poses the risks of interruptions of supplies from one of the world’s largest producers. 
With world oil production close to full capacity and prices already more than double their pre-Iraq War level, this portends still higher prices, and still higher profits for the oil industry – the only clear winner in Bush’s Middle East policy. 
To be sure, one shouldn’t begrudge Bush for having at last recognized that there is a problem. 
But, as always, a closer look at what he is proposing suggests another sleight of hand by his administration. 
Aside from refusing to recognize the importance of global warming, encourage conservation, or devote enough funds to research to make a real difference, Bush’s grandiose promise of a reduction of dependence on Middle East oil means less than it appears. 
With only 20% of US oil coming from the Middle East, his goal could be achieved by a modest shift of sourcing elsewhere. 
But surely, one would think, the Bush administration must realize that oil trades on a global market. 
Even if America were 100% independent of Middle East oil, a reduction in supply of Middle East oil could have devastating effects on the world price – and on the American economy. 
As is too often the case with the Bush administration, there is no flattering explanation of official policy. 
Is Bush playing politics by pandering to anti-Arab and anti-Iranian sentiment in America? 
Or is this just another example of incompetence and muddle? 
From what we have seen over the past five years, the correct answer probably contains more than a little bad faith and sheer ineptitude. 

Bush’s Crash Test Economics 
Fifteen years ago, the United States was in the midst of what you could call its “Age of Diminished Expectations.” 
Productivity gains had stalled, energy prices were high, the backlog of potential technologies that originated in the Great Depression had been exhausted, and waning benefits from economies of scale led nearly every economist to project that economic growth would be slower in the future than it had been in the past. 
With productivity growth stagnating for almost two decades, it made sense back then to argue that the US government’s social-insurance commitments (Social Security, Medicare, and Medicaid) were excessive and so had to be scaled back. 
That was then, this is now. 
The intervening years have seen an explosion of technological innovation that has carried America’s general productivity growth back up to its pre-slowdown levels. 
Indeed, today the US economy is standing on the brink of biotechnological and, perhaps, nanotechnological revolutions of vast scale and scope. 
Yet the same calls to scale back America’s social commitments are heard. 
Social Security’s actuaries may not have fully recognized the impact of today’s technological revolutions, but they have markedly boosted the scale of the system that the US government can afford. 
Fifteen years ago, the consensus was that America's Social Security System was in huge trouble, that it needed the equivalent of an engine rebuild. 
Today its problems look, as the Brookings Institution economist Peter Orszag says, much more like the equivalent of a slow tire leak: you have to fix it eventually, but it isn’t very hard to do and repair it isn’t terribly urgent. 
So why is the Bush administration spending time and energy proposing radical changes to the Social Security System as its signature domestic policy initiative – indeed, as virtually its only policy initiative? 
Everyone who worries about America’s weak fiscal position puts Social Security’s relatively small funding imbalance far down the list of priorities. 
The highest priority problem is the overall budget’s medium-run outlook, as the Bush tax cuts have opened Reagan-size deficits that threaten to cripple US economic growth. 
The second highest priority problem is figuring out what to do in the long term with Medicare and Medicaid. 
America must decide the size of its public health programs and how to finance them. 
In reality, this is more of an opportunity than a problem: if we did not expect that doctors and nurses will be able to do marvelous things in a generation or two that they cannot do now, we would not be projecting serious fiscal deficits arising from the health programs. 
The third most serious problem is to put the US government’s General Fund budget on a sustainable basis, so that the non-Social Security government can finance itself and meet its commitments after the date – around 2020 – when it can no longer borrow from the Social Security Trust Fund. 
The bottom line is that Social Security’s long-term funding difficulty, while real, is projected to be much smaller and much further in the future than any of the nearer, larger, and more significant fiscal problems currently facing the US government. 
If Social Security is a slow tire leak, then the post-2020 General Fund is an urgent brake job, Medicare and Medicaid are a melted transmission, and the budget deficit is the equivalent of having just crashed into a tree. 
What kind of driver, owning a car that has just crashed into a tree, has a burned-out transmission, and needs a brake job, says, “The most important thing is to fix this slow leak in the right rear tire?” 
George W. Bush is that type of driver. 
There are three theories as to why the Bush administration is focusing on Social Security. 
The first is simple incompetence: Bush and his inner circle simply do not understand the magnitude and importance of the federal government’s other fiscal problems. 
The second is ideology. 
For some reason Bush and his people think it is important to undermine the successes of the New Deal institutions established under Franklin Roosevelt. 
The third reason is bureaucratic capture: just as the principal aim of Bush’s Medicare Drug Benefit bill of 2003 was to boost pharmaceutical company profits, so the Bush administration’s Social Security proposal will most likely be tailored to the interests of Wall Street. 
I don’t see any other, more pressing, reforms – such as raising income taxes to pay for national security – gaining any traction in the Bush regime. 
If I had to bet on a cause, I would put my money on sheer incompetence. 
After all, that seems to be the common denominator of every policy controlled by his White House. 

Bush’s Flawed Middle East Peace Plan 
That a summit in Damascus of the Middle East’s “axis of evil” – Iran, Hezbollah, Syria, and Hamas – was convened immediately following President George W. Bush’s call for a conference of “moderates” to promote an Israeli-Palestinian peace demonstrates once again how intertwined the region’s problems are. 
The Damascus meeting reflects Iran’s view of Israeli-Arab peace as a major strategic threat, because it would condemn it to isolation in a hostile Arab environment free of its conflict with Israel. 
The Iranians also sought the meeting to forge an alliance against a possible US attack on their country’s nuclear installations. 
America has always known that the Middle East’s problems are interconnected, but for years it got its priorities wrong, because it failed to see that if there was an Archimedean point to the Middle East problem, it was to be found in the Palestinian issue, not the “War on Terror,” Iraq, or the need for Arab democracy. 
It took Bush six years of wrongheaded policies to finally admit that “Iraq is not the only pivotal matter in the Middle East.” 
Bush’s initiative is a last-ditch effort to salvage America’s position in a region where it is on the defensive on all fronts. 
It is especially ironic that, in stark contrast to his own rhetoric, Bush’s call for a Middle East peace conference is a call to wage war against the party, Hamas, that won a democratic election, and to make peace with the loser, Fatah. 
Nevertheless, Bush’s initiative is not devoid of virtue. 
He has finally acknowledged the failure of the “road map,” and hence the need to skip interim stages and move directly to a final settlement between Israelis and Palestinians. 
Moreover, both he and Secretary of State Condoleezza Rice were unusually blunt in warning Israel that its future does not lie in “continued occupation of the West Bank.” 
Bush also came as close as he could to endorsing former President Bill Clinton’s peace plan by affirming that “the borders of the past, the realities of the present, and agreed changes” will define his two-state solution. 
But Bush’s strategy suffers from serious inconsistencies. 
The conference ground rules exclude radical forces – Syria and Hamas – thus encouraging them to persist in their role as spoilers. 
It is a fantasy to believe that peace can be concluded without the radicals’ participation. 
As long as Hamas and Syria are left out of the United States-led peace process, they are condemned to Iran’s orbit. 
The Saudis certainly have an interest in supporting this last ditch American attempt for an Israeli-Palestinian peace, especially now that, for the first time ever, Israel has refrained from opposing an arms deal between the US and Saudi Arabia. 
The common fear of Iran is a major consideration here. 
However, Saudi Arabia’s willingness to participate in the conference might come with a price too high for Israel to pay: an endorsement of the Saudi peace initiative. 
This is the reason Secretary of State Condoleezza Rice was cautious in her reaction to the Saudis’ ambiguous acceptance of their invitation to attend the conference. 
Bush was right to call on friendly Arab states to contribute to an Israeli-Palestinian peace. 
But how much leverage can he apply when they are so badly needed for his “War on Terror” and for containing Iran? 
Though certainly a welcome new idea, Bush’s call for Egypt and Jordan to replace Israel as the gateway for Palestinian exports is most likely to be resisted. 
For these “moderate” American allies, peace is about Israeli concessions, not about pulling Israel’s chestnuts out of the fire, certainly as long as it refuses to endorse the Arab peace plan. 
The current American initiative sounds reasonable, but it is essentially unrealistic. 
Tony Blair, the new envoy of the Quartet (the US, the European Union, the United Nations, and Russia), has called for a “conference with substance.” 
But Israel will be required to engage in peace talks only if the Palestinians crack down on terrorism – that is, risk another Fatah-Hamas civil war – and eliminate corruption. 
Such a sequence – and a conference whose harmless aim is “to review progress toward building Palestinian institutions, look for ways to support further reforms, and support the effort going on between the parties” – fits perfectly with the Israeli view. 
But Palestinian militias have shown time and again that they will not give up the armed struggle before they see a Palestinian state along the lines of the 1967 borders, with Arab Jerusalem as its capital. 
This is the fundamental pitfall of a strategy based on driving a wedge between Palestinian President Mahmoud Abbas’s “moderates” and Hamas’s “extremists.” 
If Abbas is to prevail, it will not be through “gestures” or a process focusing on “institution building,” however important these may be. 
Nothing less than a full-fledged peace agreement that meets the fundamental aspirations of Palestinian nationalism is likely to give him the popular legitimacy needed to confront the radicals. 

Bush's Four Years of Failure 
Many around the world are surprised at how little attention the economy is receiving in President Bush's re-election campaign. 
But I am not surprised: if I were President Bush, the last thing I would want to talk about is the economy. 
Yet many people look at America's economy, even over these past three and half years, with some envy. 
After all, annual economic growth - at an average rate of 2.5% - may have been markedly slower than during the Clinton years, but it still looks strong compared to Europe's anemic 1% growth. 
But these statistics mask a glaring fact: the average American family is worse off than it was three and half years ago. 
Median real income has fallen by over $1,500 in real terms, with American families being squeezed as wages lag behind inflation and key household expenses soar. 
In short, all that growth benefited only those at the top of the income distribution, the same group that had done so well over the previous thirty years and that benefited most from Bush's tax cut. 
For example, some 45 million Americans today have no health insurance, up by 5.2 million from 2000. 
Families lucky enough to have health insurance face annual premiums that have nearly doubled, to $7,500. 
American families also face increasing job insecurity. This is the first time since the early 1930's that there has been a net loss of jobs over the span of an entire presidential administration. 
Bush supporters rightly ask: is Bush really to blame for this? 
Wasn't the recession already beginning when he took office? 
The resounding answer is that Bush is to blame. Every president inherits a legacy. 
The economy was entering a downturn when Bush took office, but Clinton also left a huge budget surplus - 2% of GDP ­­- a pot of money with which to finance a robust recovery. 
But Bush squandered that surplus, converting it into a deficit of 5% of GDP through tax cuts for the rich. 
The productivity growth that was sustained through the downturn presented both an opportunity and a challenge. 
The opportunity: if the economy was well managed, the incomes of Americans could continue to rise as they had done in the 1990's. 
The challenge: to manage the economy so that growth would be robust enough to create the new jobs required by new entrants to the labor force. 
Bush failed the challenge, and America lost the opportunity because of his wrong choices . 
True, the economy was stimulated a little bit by Bush's tax cuts; it was probably stronger in the short run (though arguably not in the long run) than it would have been had there been no tax cuts. 
But there were other policies that would have provided far more stimulus at far less cost. 
Bush's objective, however, was not to maintain the strength of the economy; it was to push forward a tax agenda that shifted the burden away from those who could best afford to bear it. 
Bush's failed policies have not only cost the economy dearly; they have left the economy in a far weaker position going forward. 
The non-partisan Congressional Budget Office agrees that even without Bush's new expenditure initiatives and tax proposals, costing trillions of dollars, the deficit will not be eliminated in the foreseeable future - or even cut in half, as Bush has promised. 
Expenditures on which America's future economic health depends - on infrastructure, education, health, and technology - will be crowded out, jeopardizing long-term growth. 
Because fiscal policy did not stimulate the economy, a greater burden was placed on monetary policy. 
Lower interest rates worked (a little), but for the most part by encouraging households to refinance their mortgages, not by stimulating investment. 
The increased indebtedness of households is already leading to higher bankruptcy rates, and will likely dampen the recovery. 
National debt, too, has risen sharply. 
The huge trade deficit provides the spectacle of the world's richest country borrowing almost two billion dollars a day from abroad, contributing to the weak dollar and representing a major source of global uncertainty. 
There might be some hope for the future if Bush owned up to his mistakes and changed course. 
But no: Bush refuses to take responsibility for the economy, just as his administration fails to take responsibility for its failures in Iraq. 
In 2003, having seen that its tax cuts for the rich had failed to stimulate the economy as promised, the administration refused to revise its strategies, but instead just prescribed more of the same medicine. 
It now promises to make those tax cuts permanent. 
The real risk is that this is one promise that Bush, if re-elected, will try to keep. 
At the end of August, I joined nine other American Nobel Prize winners in economics in signing an open letter to the American public. 
It is hard to get any two economists - let alone two Nobel Prize winners - to agree on anything. 
But in this case our concerns were so grave as to overcome any disagreements. 
We wrote: "President Bush and his administration have embarked on a reckless and extreme course that endangers the long-term economic health of our nation…. 
The differences between President Bush and John Kerry with respect to leadership on the economy are wider than in any other Presidential election in our experience. 
President Bush believes that tax cuts benefiting the most wealthy Americans are the answer to almost every economic problem." 
Here, as elsewhere, Bush is dead wrong, and too dogmatic to admit it. 

Bush’s Gambling Debts 
George W. Bush’s economic policies have been based on an extraordinarily reckless gamble that reflects a political coalition of two major forces: the super-rich and evangelical Christians. 
As those policies fail, global financial markets are reacting negatively, adding uncertainty to the world economy, and there is little relief in sight, because America is entering a period of prolonged political infighting and stalemate. 
The super-rich had one over-riding objective in joining the Bush coalition: tax cuts that overwhelmingly benefited the wealthiest households. 
Evangelicals were brought in on the basis of so-called “family values,” meaning opposition to abortion and gay marriage, and promises of active government support for religious activities, including direct payments to religious groups for social services that they provide locally and internationally. 
The Bush team believed that they would eventually balance the tax cuts for the rich with reductions in government spending, but they never explained this to the public. 
Instead, for four years they pretended that budget deficits were of little concern. 
Only after being re-elected did they begin to explain that large budget deficits, caused mainly by lower tax revenues, would require sharp cuts in social security, health care spending, and other areas. 
But the majority of Americans, having supported the tax cuts in Bush’s first term because it gave them a little extra cash, do not support the attack on basic government services that has followed. 
This opposition extends to Christian evangelicals voters, who tend to live in working-class and middle-class households that depend on many kinds of government social services. 
Despite the avowedly “free-market” beliefs of many Christian fundamentalists, as voters they support government-financed pensions, health care, and other public services. 
Bush’s tax cutting was irresponsible from the start, but became much more so after September 11, 2001. 
The Bush administration raised military spending sharply as it went to war in Afghanistan and Iraq, and as it increased spending on national security at home, without ever explaining to the American people how this would be financed. 
The military-plus-security budget soared by more than 2% of GNP, while tax revenues fell by much more. 
At the same time, Bush supported expenditure increases for popular items like education and prescription drug benefits, but paid for these services by borrowing the money rather than ensuring sufficient tax revenues. 
No sooner did this strategy pay off with a narrow re-election victory – one that strengthened Republican control of Congress – than the dark realities of Bush’s fiscal recklessness started to be recognized. 
The annual US budget deficit reached 5% of GNP, with an enormous part of the gap financed each year by Asian central banks, which now hold about $2 trillion in claims against America. 
The problem is that Bush’s reckless gamble has now built up considerable political momentum. 
As soon as he was re-elected, Bush started to propose cuts in popular government programs, but his own party is rejecting those cuts. 
With the Republican-controlled Congress seeking to make the tax cuts for the rich permanent, the world is beginning to realize that America’s budget deficits are now entrenched, with no end in sight. 
Because America’s economy is so large, and the dollar so central to global finance, chronic US budget deficits mean huge global repercussions. 
The dollar is weakening, as financial markets understand that the US will need to borrow huge sums from abroad for years to come. 
More ominously, the willingness of foreign central banks to lend to the US also looks likely to end. 
After all, why should the central banks of China, Japan, South Korea, and other Asian countries accumulate vast holdings of US Treasury bills if the dollar is likely to lose value in the years ahead? 
In a bizarre, but not unexpected way, America is lashing out at others for its problems. 
Huge tax cuts and rising military spending have fueled an enormous rise in imports, and therefore a yawning trade deficit now accompanies America’s weak fiscal position. 
But US politicians are blaming China and other countries for “unfair trade,” even threatening them with sanctions. 
This response to homegrown problems plays well with voters, but it is ridiculous and ignorant, especially since the US has been depending on China to help finance the fiscal deficits. 
In essence, the US is lashing out at its own banker, even as it asks the banker for yet more loans! 
When Bush asked for spending cuts at the beginning of the year – including a social security reform that includes cuts in future benefits – world financiers expected that Bush would get his way, or most of it. 
Little did they appreciate that American voters, having never actually supported spending cuts, would resist. 
As that reality sinks in, economic prospects darken. 
Foreigners will become less enthusiastic about continued lending to the US, weakening the dollar further, forcing up US interest rates, and threatening to undermine America’s stock market and consumer spending. 
But as the storm clouds gather in the coming year, the political coalition that put Bush in power will stifle progress in undoing the fiscal mess. 
Bush’s gamble was a loser from the start, generating costly results – mainly for the US, but for the rest of the world, too – for years to come. 

Bush’s Intellectual Torturers 
Paris – The top-secret memoranda released by the Obama administration concerning torture practices in CIA prisons shed new light on a fundamental question: how is it that people acting in the name of the United States government could so easily accept the idea of torturing the detainees in their charge? 
The newly published documents do not disclose the very facts of torture, which were already well known by whomever wanted to know them. 
But they do reveal a great deal of information about how the torture sessions unfolded and how the agents involved perceived them. 
What is most striking is the discovery of niggling little rules, outlined in CIA manuals and co-opted by the government’s legal executives. 
One would have thought that torture was the result of blunders or unintentional excesses committed on the spur of the moment. 
On the contrary, these memos make clear that torture was a tactic formulated in minute detail. 
In the Bush administration’s “guidelines,” torture can be divided into three categories, of varying levels of intensity: “baseline” (nudity, dietary manipulation, sleep deprivation); “corrective” (hitting); and “coercive” (water-dousing, box confinement, water-boarding). 
For a facial slap, the interrogator was supposed to hit with fingers slightly spread, at equal length between the tip of the chin and the bottom of the corresponding earlobe. 
Dousing a naked detainee with water was to last 20 minutes if the water’s temperature measured 5 °C, 40 minutes at 10 °C, and up to 60 minutes at 15 °C. Sleep deprivation could not exceed 180 hours, but could start over again after eight hours rest. 
Water immersion in a tub could last up to 12 seconds, no more than two hours a day, for up to thirty days in a row. 
Waterboarding could last 40 seconds at most, though two prisoners were subjected to this torment a combined total of 286 times in a single month. 
Confinement in a small box could not exceed two hours, but if the prisoner could stand in the box, it could continue up to eight hours at a time, 18 hours a day. 
If an insect was introduced into the box, rules governed that, too. 
How the torturers were trained is also disclosed. 
Most methods were reverse-engineered from the training given to US soldiers preparing to face “long and extreme” situations (which somehow enabled executives to conclude that these ordeals are perfectly bearable). 
In other words, the torturers had been tortured themselves. 
An intense crash course lasting four weeks followed, enough to instruct them in their new jobs. 
The Bush lawyers were the torturers’ necessary partners, whose work was intended to ensure legal impunity. 
This was also a novelty: torture does not appear as a breach of a common standard, unfortunate but justifiable. 
Instead, it has a legal standard. 
Here, lawyers fell back on another series of techniques. 
In order to circumvent the law, interrogation had to be conducted outside the US, even if that place was an overseas American military base. 
The legal definition of torture implies the intentional infliction of severe suffering. 
Torturers are thus advised to deny such an intention. 
As a result, the goal of a facial slap is not to inflict physical pain, but to induce surprise and humiliation. 
The purpose of confinement in a box is not to disorient someone, but to give the detainee a feeling of discomfort. 
The torturer must always emphasize his “good faith,” “honest beliefs,” and the reasonable premise for them. 
So euphemisms were systematically used: “enhanced techniques” for torture, “interrogation expert” for torturer. 
Leaving material imprints is contra-indicated. 
To that end, mental damage is preferable to physical injury. 
Any video recordings of these sessions, not surprisingly, would be destroyed afterwards. 
Various professional groups were involved with torture practices. 
Thus, the contagion went well beyond the torturers’ limited circle. 
Besides the lawyers legitimating the deeds, psychologists, psychiatrists, doctors (whose presence was mandatory at any session), and scholars also regularly provided moral, legal, or philosophical justifications. 
And, while males inflicted torture, degradation in the presence of women enhanced the humiliation. 
Who is to be held legally liable for this perversion of the law and basic moral principles? 
The volunteer who carries out the task of torture is less liable than the high-ranking civil servant who justified and nurtured it. 
And the latter is less liable than the political decision-maker who asked for it. 
Friendly foreign governments, especially in Europe, can also be held responsible: although they knew about the torture, and took advantage of the information thus obtained, at no point have they expressed the slightest protest, or even signal their disapproval. 
Their silence was tantamount to consent. 
Should we therefore prosecute them? 
The best democratic punishment for politicians is not to re-elect them. 
As for unelected collaborators and enablers, we can hope that they will be sanctioned by their peers: who would like to study with a professor who advocated torture? 
Who wants justice done by a judge who authorized brutality? 
Who wants to be treated by a doctor who oversaw it? 
If we are to understand why some Americans accepted administering torture so easily, we need not look for some ancestral hatred or fear of Muslims and Arabs. 
No, the cause is far worse. 
The memos that the Obama administration has disclosed teach us that anyone who complies with seemingly noble principles dictated by a “sense of duty” or by the necessary “defense of the homeland,” or who is urged by a basic fear for his own life and welfare, or the lives and welfare of his kin, can become a torturer. 



Bush’s New Middle East 
President George W. Bush’s declaration of “mission accomplished” in Iraq five years ago was as hubristic as his current assessment that the “surge” has “delivered a major strategic victory in the broader war on terror” is a fantasy. 
The Iraq adventure is not only the longest and most expensive war in America’s history – the Nobel laureate economist Joseph Stiglitz has advanced a staggering estimate of $3 trillion – but is also the least conclusive. 
The war has pulverized Iraqi society, dissolving it into an ethno-sectarian patchwork. 
The “surge” will end sooner or later, and the Iraqis, crippled by violence and corruption, will still be incapable of uniting their polity, and, with their military still unable to take over from the Americans, jihadi and inter-ethnic violence is bound to erupt again. 
As Iraqi Colonel Omar Ali, the Iraqi battalion commander in Mosul, the main focus of the insurgency today, recently put it, “Without the Americans, it would be impossible for us to control Iraq.” 
Wars, as Winston Churchill defined them, are always “a catalogue of blunders.” 
History’s judgment of the Iraq war will therefore certainly dwell more on whether it has accomplished its strategic objectives of “reconstructing” a highly dysfunctional Middle East in America’s democratic image and consolidating America’s hegemonic position in the region than on its price in blood and money. 
Strategically, the war was an utter failure. A clear case of imperial overstretch, the war strained America’s military, undermined the America’s moral standing worldwide and its reputation in the Middle East, severely threatened its economy, and showed to both friends and foes the limits of American power. 
The most serious unintended consequence of the war is the emergence of a powerful Shia challenge to the West’s Sunni allies in the Middle East. 
America’s destruction of Iraq as a regional power handed hegemony in the Persian Gulf – whose centrality to Western interests cannot be overstated – to Iran’s Shia Islamist regime on a silver platter. 
On the rubble of Saddam Hussein’s dictatorship, the Americans helped create in Iraq the first Shia-dominated Arab state, which may well become subservient to Iran’s regional ambitions – a calamity of historic dimensions for America’s Sunni allies. 
President Mahmoud Ahmedinejad’s recent state visit to Iraq conveyed to the Americans an unequivocal message: the prospects of the United States ever reaching a modicum of stability in Iraq have become dependent on Iran-aligned forces. 
America’s difficulties in Iraq and beyond contributed decisively to Iran’s nuclear ambitions. 
The Iranians now see themselves as immune from an American attack on their nuclear installations, for America’s troubles in Iraq and the growing opposition to the war in the US are a signal to them that America’s strategy of pre-emptive wars has failed. 
But, however radical the Iranian regime might be, it is not suicidal. 
Hence, the threat of a nuclear Iran might consist less in its propensity to start a nuclear war with Israel than in its capacity to project its regional power effectively. 
A nuclear Iran might even threaten America’s capacity to project conventional military force in the Gulf in times of crisis. 
Nor should the possibility be ruled out that Iran might be tempted to back its regional ambitions by supplying nuclear material to proxy terrorist groups. 
If anything, America’s debacle in Iraq has only emboldened the challengers of the status quo in the region. 
That has also been the result of Bush’s ill-conceived democracy crusade in the Arab world. 
Bush discovered to his dismay that any exercise in Arab democracy is bound to usher in anti-Western Islamists, be it the Muslim Brotherhood in Egypt, Shia parties in Iraq, or Hamas in Palestine. 
The US eventually had to abandon its fantasies about Western-style Arab democracy, but it ironically left the Iranians carrying the torch of democracy in the region. 
After all, Iran was quick to recognize that free elections are the safest way to undermine the Middle East’s pro-American regimes. 
The Iraq war also meant that America ignored the Israeli-Palestinian peace process. 
The chances that the Bush administration might be able to rally America’s Sunni “moderate” allies in the region to help salvage an Israeli-Palestinian peace are now hostage to an Iranian-led regional axis that includes Hamas, Hezbollah, and Syria. 
All are united in their rejection of a Pax Americana in the Middle East, and all have so far shown remarkable resilience in ignoring America’s pre-conditions for a dialogue. 
America’s inability to inspire the peoples of the Middle East, all ruled by US-backed autocracies, is not exactly stunning news. 
What is news is that American power might also be losing its ability to intimidate them. 

Bush’s Old New Plan for Iraq 
Last November’s Congressional elections dealt President George W. Bush a sharp rebuff over his Iraq policy. 
Shortly after the election, the Iraq Study Group offered a bipartisan formula for the gradual withdrawal of United States troops. 
But Bush rejected this, and persists in speaking of victory in Iraq – though it is unclear what that now means. 
Perhaps because Iraq will define his legacy, he has proven reluctant to let go at a point when his policy appears to be a disaster. 
Now Bush will increase the number of American troops in Baghdad and Anbar Province and try to stabilize both the rising sectarian civil war and the Sunni insurgency. 
He has removed generals John Abizaid and George Casey, who were skeptical of a troop “surge,” and moved Ambassador Zalmay Khalizad, who was supposed to negotiate a political agreement in Iraq. 
A number of the Democratic lawmakers who control the new Congress disagree with this approach. 
Some Democratic activists seek an immediate withdrawal and are pressing for Congress to cut off funding for the war, but that is unlikely. 
Congress is reluctant to be portrayed as failing to support troops in the field; while they will criticize, they will not block Bush’s plan. 
Bush has long claimed that the number of troops in Iraq was a military decision and that he simply followed the advice of his generals, but now this is clearly not the case. 
Ironically, there may once have been a point at which a large increase in troops might have made a difference. 
In April and May 2003, polls showed a majority of Iraqis welcoming the overthrow of Saddam Hussein. 
But the Bush administration failed to control rioting, disbanded the Iraqi army, and allowed the security situation to deteriorate. 
In such chaos, it was difficult to do the reconstruction and development work that could have made Iraqi lives better and attracted support. 
It is not easy for a marine or soldier to construct a school or clinic when he is being fired upon, or for Iraqi moderates to risk their lives by being supportive when they have no protection against insurgents. 
Many military professionals foresaw this problem. 
US Army Chief of Staff Eric Shinseki warned that although it would be possible to win the war with the 160,000 troops that Secretary of Defense Donald Rumsfeld used, it would take double that number to win the peace. 
But because Rumsfeld wanted to prove a point about transforming American military strategy, and his neo-conservative advisors had ideological blinders that distorted their appraisal of Iraqi reality, Shinseki’s advice was rejected. 
Deputy Secretary of Defense Paul Wolfowitz testified to Congress that Shinseki’s estimate of the number of troops required was “wildly off the mark.” 
In fact, it turned out that Rumsfeld and Wolfowitz were the ones wildly off the mark. 
Now both are gone, and Bush is turning to troop increases. 
Too little, too late. 
Is there any reason to believe that an additional five brigades will succeed in stabilizing Baghdad now when similar efforts have failed in the past? 
The new American operational commander in Iraq, Lt. General Raymond Odierno, says that the new efforts will be more evenhanded among Sunni and Shiite neighborhoods, and American troops will stay alongside Iraqi troops in areas that have been cleared. 
He hopes that with a few months, he can then withdraw American troops to the periphery of Baghdad and leave the policing of the capital to Iraqi forces. 
But this assumes that Iraqi forces are up to the task, and that Prime Minister Nouri al-Maliki’s government, which rests upon Shiite militia support, can play a competent and evenhanded role. 
Bush administration officials argue that the new plan is “not an open-ended commitment: we are putting real, specific requirements and expectations on the Iraqi government.” 
Among the political benchmarks are provincial elections, enactment of an oil law that distributes oil wealth in a way that benefits the Sunnis, and reform of the de-Baathifcation policy, which has been so costly to those who worked in the Iraqi government under Saddam. 
But it may be too late for political compromise, and the Maliki government may not be capable of a broad non-sectarian policy. 
If Bush’s new military plan is a temporary step to buy time to move in the direction of the Iraq Study Group’s proposals of training Iraqi forces and gradually withdrawing American forces, there may be something to be said for it as one last chance, but only if it is accompanied by the diplomatic advice that the study group also suggested. 
It is too late to create a democracy in Iraq. 
At best, the overthrow of Saddam removed a threatening dictator, and substituted a tyranny of the majority for the tyranny of a minority. 
But the price has been high in terms of Iraqi lives lost in sectarian fighting. 
The goal now is regional stability. 
Each of Iraq’s neighbors has its own interests, but none will benefit from chaotic violence there, which would increase Iran’s influence, encourage Kurdish separatism to the worry of Turkey, and support Sunni terrorist movements that could spill back into Jordan, Kuwait, Syria, and Saudi Arabia. 
The US cannot leave Iraq precipitously, but neither can it solve the problem on its own. 
Establishing a contact group of Iraq’s neighbors to help set rules of the road for stabilization and containment will be an important step. 
Iraq is not susceptible to a military solution. 
Only more politics and diplomacy can salvage US policy. 

Bush's Pseudo-Conservative Revolution 
President George W. Bush's administration has, on any objective basis, been a frightening thing to behold. 
Strident and self-absorbed by narrow partisanship, administration officials have actually betrayed the conservative ideological cause, dismantling the tried-and-tested institutional foundations of America's economic prosperity and global security. 
Start with economic policy and the deliberate unbalancing of the US government's long-term finances. 
The aim clearly has been to sharpen the financial crisis of the social-welfare state and bring about a permanent reduction in government wealth re-distribution. 
But broken eggs do not necessarily make an omelet: Bush's massive (and still growing) fiscal deficits have stimulated nothing but jitters about a prolonged slowdown in capital formation, household consumption, and economic growth. 
Fiscal policy is, of course, only the tip of the iceberg. 
Korean steelworkers might well ask whatever happened to the Republican Party's historic commitment to free trade. 
African farmers should wonder how it could be Bush--not some left-wing Democrat--who reversed the archconservative Newt Gingrich's proudest achievement: the partial reform of agricultural subsidies. 
The security policy of the Bush administration has been worse than frightening; it has been, to borrow one of the president's most frequent utterances nowadays, terrifying. 
At the moment, administration insiders are trying to convince elite journalists that Bush did not deceive outsiders about Saddam Hussein's nuclear weapons program. 
They are hoping that Americans will forget all the cocksure predictions of a military walkover and cheering crowds lobbing flowers at US and British troops. 
Ignore all the lame excuses about the difficulties of assessing conflicting intelligence. 
No one in this supposedly conservative administration had ever heard of Machiavelli's 500-year-old warning not to trust exiles? 
"Such is their extreme desire to return to their homes," Machiavelli wrote, apropos of Ahmad Chalabi and the Iraqi National Congress, "that they naturally believe many things that are not true, and add many others on purpose; so that, with what they really believe and what they say they believe, they fill you with hopes..." 
The most terrifying aspect of the Bush administration's foreign policy is the motivating theory of the world that underlies it. 
The Bush administration's intellectual allies call the Clinton administration "naïve" for believing that international relations form a positive-sum game in which all sides can win. 
They speak explicitly about America's interest in preserving its relative , not just absolute, economic power. 
As the University of Chicago's Dan Drezner puts it, the logic of Bush's National Security Strategy is to "prevent other great powers from rising, in order to ensure the long-term growth of freedom, democracy, and prosperity." 
But what does it mean to "prevent other great powers from rising"? 
What could it possibly mean other than "try to keep China and India desperately poor for as long as possible"? 
After all, when China and India close even half the income gap separating them from the industrial core of the world economy, the sheer size of their populations alone will guarantee that they become very great powers. 
It is certainly not in the interest of China or India to remain poor. 
But it is not in America's national interest, either. 
The history of the late 19th and 20th centuries teaches us that there is something uniquely dangerous to world peace and political sanity during the two generations in which cultures pass from a poor, rural, and agricultural economy to a rich, urban, and industrial (or post-industrial) way of life. 
The aggressive foreign policy pursued by Wilhelmine Germany, the perverse suffering inflicted on Russia by Lenin and Stalin, the terrors of Mao, the dictatorships of Mussolini and Franco, and the monstrous Nazi regime all occurred during this transition. 
So is it really in the interest of the US to try to "prevent other great powers from rising?" 
Shouldn't America's leaders be trying to shorten the period that other societies are vulnerable to the evils that made the twentieth century the bloodiest in the history of mankind? 
Wouldn't the rest of us rather minimize than maximize the time we might be faced with the problem of containing a Hindu Nationalist India, a Wilhelmine China, or a Weimar Russia? 
It is long past time for a complete change of personnel at all levels of the Bush administration. 
The world cannot afford to have pseudo-conservatives at high levels of the US government who do not work for global peace and prosperity, but instead for a dangerously wrongheaded geopolitical strategy. 
There are many potential replacements for these officials in the Republican Party--sensible, deliberative statesmen who view America's national interest as being the promotion of global economic development, multilateral cooperation, and a world in which the US leads with its principles rather than dominates with its military power. 
Such officials staffed the first Bush administration. 
Where are they now? 

Bush’s Road Map to Failure in the Middle East 
Six long years of failed Middle East policies have finally brought President George W. Bush to recognize that the alliance of moderates in the region that he covets can only be forged through an Arab-Israeli peace. 
Indeed, only by effectively addressing the Israeli-Arab dispute can he possibly salvage America’s standing in the region. 
But the round of peacemaking that America has recently embarked upon not only comes too late in the political life of a lame-duck president who has been defeated at home and abroad; it is also ill-conceived and unconvincing. 
Secretary of State Condoleezza Rice’s adamant resistance to engage the Syrians is not exactly wise policy. 
The stakes for a peaceful regional order are too high for Israel and the United States to persist in refusing to put Syrian President Bashar al-Assad’s current peace offensive to the test. 
The bones of contention that wrecked previous attempts to reach an Israeli-Syrian peace have realistic solutions, as was shown by the back-channel peace talks recently held between an Israeli ex-official and a Syrian with close connections to the regime. 
Nor is Rice’s insistence on sticking to the failed “road map” for an Israeli-Palestinian settlement promising. 
Susceptible to procrastination and evasion by both sides, the road map was stillborn. 
Almost four years after it was first launched, neither of the parties has managed to muster the political will necessary to implement its primary provisions. 
Not even the bizarre idea, reserved for the second stage, of a Palestinian state with “temporary borders” is enticing for the Palestinians. 
This Gordian knot needs to be cut, not untied. 
The concept of interim agreements has now become utterly obsolete, if only because the parties are incapable of paying the political price inherent in an open-ended, piecemeal process. 
Instead, what is called for is a sweeping solution to all the core issues. 
We now stand at the end of the peace process as we have known it. 
From now on, our options will be a violent and unilateral disengagement, such as the one that ushered in the current war in Gaza, and a comprehensive peace plan that will have to be annexed to the road map and validated by an international peace conference. 
Only such “reverse engineering,” starting at the end and working backward – and legitimized and monitored by strict international mechanisms – might yet save the prospects for an Israeli/Palestinian peace from ruin. 
As the launch of the peace process at the 1991 Madrid International Peace Conference demonstrated, the prospects for peace in the Middle East always needed a concerted international push to exploit windows of opportunity. 
Wars in the Middle East, especially those , such as Israel’s recent war against Hezbollah, that ended inconclusively, have almost invariably created the conditions for major political breakthroughs, because they taught the warring parties the limits of power. 
Trapped in a momentous struggle between the forces of peaceful change and those committed to Doomsday, the Middle East is once again calling for a major international effort at peacemaking. 
The initiators of the 2002 Arab peace initiative likewise understood that a strictly bilateral approach might be inadequate, and instead called to regionalize the solution to the conflict. 
Loss of mutual trust between the parties, and their total incapacity to take even the smallest step towards each other, let alone to observe their commitments without prodding by third parties, made (and still makes) an international framework for peace the only way out of the dangerous impasse. 
The end of bilateralism stems also from the dysfunctional political systems of both Palestine and Israel. 
Today, Palestinian President Mahmoud Abbas is gasping for political air under the smothering control of Hamas. 
On her recent trip to Israel, Rice had to listen to four different peace plans from the prime minister, the foreign minister, the minister for strategic threats, and the defense minister. 
For both Israelis and Palestinians, achieving internal peace might prove as formidable a challenge as establishing peace with each other. 
Any reformed peace process is doomed if it is guided by a road map within which, on the core issues, the parties have diametrically opposed views. 
But there is no need to reinvent the wheel, because the solution to the Arab-Israeli conflict is embodied in the main peace plans that are already on the table: the Clinton peace parameters, and the all-Arab peace initiative. 
Fifteen years after the Madrid Conference began a formal peace process between Israelis and Palestinians, the parties are wiser as to what is inevitable if this tortuous process is to lead to a permanent settlement. 
In 1991, they convened on a platform of “land for peace.” 
But the Israelis never believed they would have to give back all the land, while the Arabs did not think they might have to offer “all the peace.” 
Today, at long last, everyone knows what is meant by “land,” and everyone knows what is meant by “peace.” 

Bush’s Second Gulf Disaster 
President Bush has asked that Americans not “play politics” at this moment of terrible national disaster. 
But asking hard questions of our nation’s leaders is exactly what democracy demands when the government’s response to Hurricane Katrina is widely viewed as “a national disgrace.” 
Katrina came with at least two days’ warning, but authorities waited to issue an evacuation order. 
There was no transportation for people without cars or money, facilities to house and care for refugees were insufficient, there were no forces in place to deliver desperately needed supplies or to secure order, and there was nowhere near the number of boats, helicopters, and other craft necessary to rescue the stranded. 
Hampered by a National Guard with 40% of its people in Iraq, the pace of getting military personnel to the hardest hit areas was inordinately slow. 
For four days, there was simply no clear center of command and control. 
As a result, countless people suffered and died. 
Much of this failure is the result of the Bush administration’s policies, which effectively eroded the capacities of the Federal Emergency Management Agency (FEMA), the government agency primarily responsible for dealing with disasters. 
Obsessed with the war on terror as well as an ideology of privatizing the functions of government, the administration systematically sapped FEMA’s long-term ability to prevent disaster or at least cushion the blows when prevention is not possible. 
FEMA was downsized and downgraded from a cabinet position, then placed under the Department of Homeland Security. 
Its mission of disaster planning and preparation was dropped entirely, and its focus was altered to fight terrorists. 
Its leadership had no experience in disaster management. 
The past director was one of Bush’s Texas political cronies, and the current director’s qualifications include a stint as commissioner for judges and stewards with the International Arabian Horse Association, where he was asked to resign for “supervision failures.” 
Since 2001, billions of dollars were shifted from disaster relief to homeland security and the war in Iraq. Key disaster mitigation programs were slashed and federal funding for post-disaster relief was cut in half. 
The Army Corps of Engineers’ budget for levee construction in New Orleans was gutted, including funds specifically aimed at the Southeast Louisiana Urban Flood Control Project. 
Preventive measures to protect people and property were not carried out despite FEMA’s own conclusion in 2001 that a major hurricane hitting New Orleans was one of the three “likeliest, most catastrophic disasters facing this country.” 
Believing FEMA to be an “oversized entitlement program” and that the “business of government is not to provide services,” Bush’s first FEMA director instituted new outsourcing requirements as part of a major privatization effort. 
This provoked a brain drain as experienced FEMA personnel moved into the private sector 
Privatization also left poorer states and poorer communities especially vulnerable. 
As money dried up and federal programs were contracted out to private firms at higher rates, only the richest and politically most important states and communities could compete successfully for the scarce federal grants necessary to pay for services. 
For example, Florida (with 16 more electoral votes than Louisiana and where the president’s brother governs) received its requested funding to protect its wetlands. 
By contrast, a more needy Louisiana (with its staggering 24% poverty rate) was denied its request for flood-mitigation funds in 2004. 
With Louisiana’s ability to protect itself weakened and the center of disaster relief badly undermined, an inadequate government response and unnecessary destruction were almost inevitable – with the poor paying the price. 
But the failure of this administration runs deeper than its chronic and intentional diversion of resources away from the types of policies that keep people safe from disaster. 
Despite scientific evidence demonstrating that the increased intensity and frequency of hurricanes is related to climate change, the Bush administration systematically rejects participation in international climate-protection regimes. 
Rather than continue a ban on wetlands development instituted by previous administrations, the Bush administration overturned it. 
Because development-provoked erosion has brought the Gulf of Mexico 20 miles closer to land than it was in 1965, hurricanes are able to retain more strength, and their winds and waves pack more speed and destructive power. 
Similarly, loss of wetlands threatened New Orleans’ levees, which were built on the assumption that they would have 40 to 50 miles of protective swamp as buffer between the city and the Gulf of Mexico. 
Despite every major study showing that a massive coastal restoration program and higher levees were needed to protect New Orleans, the administration permitted federal agencies to stop protecting 20 million acres of wetlands, allowed developers to drain thousands of acres and in 2004 cut funding for holding back the waters of Lake Pontchartrain by more than 80%. 
New Orleans is America’s canary in the mineshaft. 
Ideologies of privatization that incapacitate effective government, permitting the privileged to save themselves while leaving the poor clinging to roofs, must now be challenged. 
This disaster is a chilling reminder of what happens when government fails to protect its citizens, and it is imperative that Americans demand accountability. 
Officials who did not do their jobs must be dismissed, and elected officials whose policies aggravated the devastation wrought by Katrina must be removed from office. 
We owe this to the dead and to the survivors. 

Bush the Negligent Neighbor 
After ignoring Latin America for years, President George W. Bush is desperately trying to improve hemispheric relations. 
But his just completed trip to Brazil, Uruguay, Colombia, Guatemala, and Mexico came too late. 
Years of neglect could not possibly be erased by a trip long in photo opportunities and short in substance. 
In the capitals of Latin America, Bush’s visit has been interpreted as a reaction to Venezuelan President Hugo Chávez’s increasing influence and popularity in the region. 
Certainly, Chávez seems to have seen it that way, as he consistently heckled Bush from afar. 
Before flying to Brazil, Bush said that his administration doesn’t get enough credit for its Latin American policy. 
But, in 2007, the United States will provide economic assistance to Latin American and the Caribbean worth $1.8 billion, which is $200 million less than in 2006. 
Moreover, almost half of the total comes in the form of military aid, while $716 million will go to one country, Colombia. 
In an effort to increase its low popularity in Latin America, the Bush administration recently announced an additional $75 million for education, and $385 million to help finance mortgages for the poor. 
Also, the US Navy hospital ship USNS Comfort will make port calls in a number of Latin countries. 
But these aid figures are absurdly low from a historical perspective. 
During the 1960’s – the years of President John F. Kennedy’s Alliance for Progress – annual aid to the region exceeded $10 billion in today’s dollars. 
The first sign that the Bush administration didn’t take Latin America seriously came on January 1, 2002, when Luiz Inácio “Lula” Da Silva was sworn in as Brazil’s president. 
The occasion was solemn and charged with symbolism. 
After all, Lula was the first trade union leader ever elected to the presidency of a Latin American country. 
Numerous heads of state and dignitaries from around the world attended the ceremony. 
But Bush was not among them; nor was Vice President Dick Cheney, Secretary of State Colin Powell, or any other prominent member of the US cabinet. 
The US delegation, instead, was headed by Robert Zoellick, the US Trade Representative, who, despite being a member of the cabinet, lacked the political stature for which the occasion called. 
With his traditional sense of humor, Lula dismissed the slight. 
Other Latin American heads of state, however, were not so casual; in fact, they were deeply offended. 
According to them, this was a reminder that, with only a few exceptions – Cuba and possibly Mexico – Latin America was not a political priority for the US. 
During the years that followed, the US administration’s attitude towards Hispanic undocumented immigrants alienated an increasing number of Latin American voters. 
As a result, in country after country they have elected presidents that are openly critical of the US and its policies. 
Six years after Lula’s inauguration, and despite Bush’s trip, Latin American politicians continue to believe that their region is being neglected. 
It is true, they say, that the Bush administration launched the Free Trade Area of the Americas, but hemispheric free trade looks as distant today as ever. 
Moreover, the handful of free-trade agreements signed with individual countries, or groups of countries, are lopsided and overwhelmingly favor US interests. 
In order to regain Latin America’s support – and to dent Chávez’s popularity – the Bush administration will need much more than a short trip. 
Passing a comprehensive Immigration Bill that normalizes the legal status of millions of Latin American workers in the US may help. 
Reducing US agricultural protectionism significantly would be an equally positive measure in drawing the poison out of diplomatic relations. 

Bushwhacking Human Rights 
If you judge a government on the basis of its good intentions, those who support an American foreign policy that emphasizes the promotion of human rights internationally should cheer President George W. Bush’s reelection. 
Indeed, no US president has spoken out more frequently and more forcefully about America’s mission to promote freedom in the world. 
The National Security Strategy of the United States, published by the Bush administration in September 2002, is filled with strongly worded commitments to promote human rights. 
The Country Reports on Human Rights worldwide, published annually by the State Department, maintain the high standard of accuracy and comprehensiveness that they achieved during the Clinton administration. 
Under President Bush, the US has taken robust stands on human rights conditions not only in pariah countries such as Burma, Cuba, and Syria, but also in strategically important countries like Egypt, Uzbekistan, and China. 
Yet those who examine the impact of the Bush administration on human rights practices internationally often argue that Bush’s reelection will do long-lasting – perhaps irreversible – damage to the human rights cause. 
What explains this apparent contradiction? 
There are three principal reasons why the Bush administration’s impact on human rights is so much at odds with its stated intentions. 
Iraq comes first. 
After official US claims about weapons of mass destruction and about a connection to the terrorist attacks of September 11, 2001, became untenable, Bush increasingly emphasized the argument that America’s invasion was justified to remove a tyrant, Saddam Hussein, and thus to free the Iraqi people. 
In essence, this is an argument that the war was justified as a means of promoting human rights. 
To those in the other Arab countries of the Middle East and elsewhere who oppose the war, the impact is to make human rights seem a justification, or a pretext, for a projection of American power. 
The effect is to increase their distrust of those who preach about human rights, making it much more difficult than ever before for the US to rally support for human rights in much of the world. 
The second reason that Bush’s reelection is likely to hurt the human rights cause is that it constitutes an endorsement by the majority of Americans of an administration that is responsible for grave human rights abuses. 
America’s moral authority as an advocate of human rights depends on its own respect for human rights. 
Under President Bush, that authority has largely evaporated. 
The twin symbols are Guantanamo and Abu Ghraib. 
Having practiced long-term detentions without charge, trial, or access to family or counsel; having sexually humiliated and tortured prisoners, some of them to death; and having failed to hold accountable any of the high-level officials responsible for the policies that led to those crimes, the US is now seen as a hypocrite when it calls on other governments not to engage in such abuses. 
While the war in Iraq and abuses at American detention centers have damaged the cause of human rights in the Middle East and Asia, the third factor in the weakening of human rights – unregulated free trade – has been felt mostly in Latin America. 
It is there that the Bush administration has most vigorously asserted its position that the freedom of capital movement is an aspect of human rights. 
In the National Security Strategy of September 2002, the Bush administration calls free trade not only a meritorious policy, but also a “moral principle.” 
Many Latin Americans have lost faith in democracy because it has not benefited them economically. 
They see the US as simultaneously the champion of democracy in the region and as the culprit in their economic woes because of its insistence on the sanctity of capital. 
When protecting capital is elevated to a moral principle, or justified as a component of human rights in a region resentful over its sense of economic subjugation, the effect is to foster disillusion with human rights. 
President Bush and many of his associates may be sincere in their commitment to the human rights cause. 
But perhaps it is such certainty in their good intentions that makes them blind to the damage that they are doing. 

Business as Usual with Russia? 
BERLIN – Despite continuing tensions over Russia’s invasion of Georgia this August, the European Union will reopen talks with Russia on a new Partnership and Cooperation Agreement (PCA). 
A PCA establishes a legal framework for negotiating specific agreements in such areas as trade, justice, and human rights. 
The current talks aim to replace the expired 1997 PCA, which remains in force by mutual consent pending a new accord. 
At an emergency meeting on September 1, EU leaders refused to continue the PCA talks until Russia removed its combat units from the Georgian separatist regions of Abkhazia and South Ossetia. 
The heads of the 27 EU governments also characterized the Kremlin’s decision to recognize the independence of the two breakaway regions as “unacceptable.” 
Since then, EU governments have moderated their conditions, describing a simple Russian military withdrawal from Georgian territories outside the two regions as sufficient to resume a dialogue on the PCA, energy security, and other issues. 
The EU decision comes at a time when NATO has also sought to renew its engagement with Russia after the Georgia conflict led both parties to suspend many joint programs. 
In a speech on September 18 at the Royal United Services Institute in London, NATO Secretary General Jaap de Hoop Scheffer argued that, despite differences over Georgia, Russia and the alliance should cooperate “wherever our interests converge.” 
He specifically cited continued cooperation in Afghanistan, where Russia is providing logistical support for the NATO-led International Security Assistance Force, as “a clear indication that common interests can transcend disagreements in other areas.” 
In order not to appear intimidated by Russia’s forceful dismemberment of Georgia, NATO governments have publicly reaffirmed their support for Georgia’s territorial integrity and the country’s desire to join NATO eventually. 
In private, however, many allied officials have told the media that they are even less inclined than they previously were to deepen NATO’s ties with Georgia, given the risks of becoming entrapped in another Russian-Georgian war. 
At present, it seems most Western governments have decided to concentrate on helping Georgia recover economically from the war rather than on punishing Russia directly. 
At last month’s International Donors’ Conference in Brussels, they pledged billions of dollars of reconstruction aid. 
The EU is also considering negotiating a free-trade area with Georgia and relaxing visa rules for Georgian citizens. 
NATO has established a special NATO-Georgian Commission to help coordinate allied support for Georgia’s post-conflict reconstruction. 
Even so, Russian and Western officials continue to spar over American plans to deploy ballistic missile defense systems in Poland and the Czech Republic. 
In his speech in November to the Russian parliament on the state of nation, President Dmitry Medvedev warned that Russia would deploy short-range Iskander missiles in the Baltic Sea port of Kaliningrad “to neutralize if necessary the anti-ballistic missile system in Europe.” 
Medvedev added that Russian electronic equipment would jam the American systems and that the Russian military was preparing additional countermeasures. 
NATO and EU leaders denounced the threats, which seemed especially gratuitous coming one day after the American people had elected a new President who has expressed interest in improving relations with Russia. 
Russia’s government has also sought to showcase its growing military potential. 
In September and October, the country’s strategic forces engaged in their largest nuclear weapons-related exercises since the Soviet Union’s demise. 
On October 12, the Russian Navy joined with the Strategic Rocket Forces to conduct a well-integrated exercise involving near-simultaneous testing of three long-range ballistic missiles from separate ground and submarine launch platforms. 
Last month, Prime Minister Vladimir Putin also announced yet another increase in Russian defense spending. 
Russian military expenditures have increased by double-digit figures in recent years. 
This year, the Russian military will spend over $40 billion. 
The figure for 2009 could exceed $50 billion. 
Although superficially impressive, this surge obscures several key issues. 
Much of the growth merely compensates for the exceptionally high inflationary pressures in Russia’s defense sector. 
In addition, it will take years for the recent budget increases to translate into new equipment. 
Although Russian designers can still develop first-class weapons, Russia’s defense companies, which have yet to recover from the traumatic disintegration of the Soviet military-industrial complex, remain unable to manufacture large numbers of the most advanced systems. 
Russia’s military also must compete with foreign customers for those few warplanes, tanks, and other sophisticated weapons that are produced. 
The long-term sustainability of Russia’s military revival is also unclear. 
Russia’s government remains dependent on oil and gas exports for revenue, but the prices of these commodities are falling sharply. 
Unlike the Soviet Union, Russia is tightly integrated into the world economy, rendering the country vulnerable to the current global financial crisis. 
Medvedev recently warned that Russia’s “military-industrial complex is starting to be affected by credit problems,” stoking fears of a return to the paralyzing payment crises that plagued the defense sector during the 1990’s. 
Russia’s continuing demographic problems will also make it difficult for the armed forces to become a fully professional military, one that does not depend on poorly motivated conscripts. 
Although Medvedev and Putin have apparently adopted a viable power-sharing arrangement, Russia’s stunted political institutions lack the capacity to root out corruption and other inefficiencies. 
Comprehensive security-sector reform remains off the political agenda. 
Even in the high-priority defense sector, perhaps one-third of government spending is wasted or stolen – a condition that is not conducive to realizing Russia’s great power ambitions. 

The Business of Improving Global Health 
ZURICH – The dramatic success of the Millennium Development Goals (MDGs) in driving advances in human health will be a hard act to follow. 
In just 15 years, child mortality was nearly halved, and malaria deaths declined by 60%. 
Today nearly 15 million people worldwide receive treatment for AIDS, helping them continue to be productive members of society, compared to only about 10,000 people in 2000, when the MDGs were launched. 
Can the new Sustainable Development Goals (SDGs), just adopted by the United Nations to guide global development efforts for the next 15 years, replicate the MDGs’ success? 
The strong track record of the MDGs certainly provides grounds for hope. 
But the new health-related goals are broader and more ambitious than before. And the public-health situation is in many ways more challenging than in 2000. 
The new SDGs set a lofty goal: for the first time, world leaders have vowed to reduce premature deaths caused by chronic illnesses such as cancer, heart disease, and diabetes. 
This is a tall order at a time of rapid population growth and rapid aging. 
Chronic diseases are the main – and growing – cause of death in developed and developing countries alike. And more than two billion people still lack access to essential medicines. 
To achieve the new targets, we must find creative new ways to address the world’s biggest health challenges. 
Above all, we must develop new business models that allow society to better harness the know-how, creativity, and drive of private enterprises to help improve public health. 
Companies share the responsibility for meeting these new goals, but they also need support from governments and other organizations to ensure the greatest positive impact. 
The demographic challenge is daunting. 
A billion people joined the human race in just the last 12 years. 
Another billion or so will join by 2030, bringing the world’s population to 8.5 billion, according to UN estimates. 
The fastest-growing segment of the population is people over 60, a group that is expected to grow by 500 million people, to 1.4 billion, in 2030. 
Older people are more likely to develop chronic illnesses, which now account for 63% of all deaths worldwide. 
The World Health Organization predicts that the proportion will reach 70% in the next ten years, with most of the deaths occurring in developing countries. 
Some 28 million people die from chronic diseases in low- and middle-income countries each year, accounting for roughly three-quarters of all deaths caused by chronic disease globally. 
Developing countries’ health systems are already stretched. 
They often lack medicines, resources, and know-how to treat chronically ill patients, who may require years or decades of treatment. 
For example, there are only four oncologists in Ethiopia, a country of some 97 million people. 
Moreover, many developing countries face a double disease burden and must wage a simultaneous battle against infectious diseases such as malaria, tuberculosis, and HIV/AIDS. 
Clearly, more resources will be needed to tackle these challenges. 
But in the wake of the global financial crisis, development assistance for health from governments and private donors has plateaued at about $35 billion annually, after growing more than 11% per year from 2000-2010. 
And less than 2% of that money was directed at combatting chronic diseases. 
The long-term nature of chronic diseases, and the complexity of providing better treatment for patients in the developing world, calls for innovative solutions. 
Companies possess the capabilities and the global scale to play a stronger future role in addressing public-health challenges and achieving the objectives of the SDGs. 
Some corporations are beginning to explore new “social business” approaches that will allow them to meet the needs of people and society in the developing world, while at the same time covering their costs, or even making a small profit. 
Moneymaking social ventures are self-sustaining and have the potential to grow, bringing benefits to more and more people. 
They are a potentially powerful complement to philanthropy, which has underpinned much recent progress in public health. 
My company, for example, is launching a portfolio of 15 essential medicines to treat diseases including diabetes, respiratory illnesses, and breast cancer. 
The aim is to make these medicines available to people of modest means in developing countries at a cost to local health systems of $1 per treatment per month. 
We will start in Kenya, Vietnam, and Ethiopia. 
It is a small first step, and we will learn as we go, with a goal of expanding to 30 countries in a few years. 
To overcome the many hurdles to success in low- and middle-income countries, these new types of business ventures will likely need to explore innovative forms of collaboration with governments, non-governmental organizations, and other companies. 
Such collaboration has already shown that working across traditional boundaries, making creative use of technology, and developing pragmatic solutions can yield impressive results. 
Bringing health care to everyone on the planet is a great challenge. 
It will take imagination, cooperation, and hard work. 
Greater involvement by business could increase the likelihood of getting there by 2030. 

Safe Driving for Fast Companies 
MONTREAL – In a car, blind spots are the areas of the road that the rearview and side-view mirrors do not show. 
A driver must constantly be aware of them – and of the potentially deadly perils they can conceal. 
Businesses can have blind spots, too – and they can be equally costly, causing companies to overinvest in risky ventures or fail to take advantage of emerging opportunities. 
Successful leaders are careful to identify their company’s blind spots and introduce mechanisms to ensure that no harm will come from them. 
One common source of businesses’ blind spots is judgment bias. 
This arises when executives have overly narrow views of their industry, underestimate their competitors’ capabilities, or fail to see how the competitive landscape is changing. 
A good example of a company that suffered from this kind of blind spot is Nestlé. 
For decades, the Swiss multinational defined itself strictly as one the world’s leading food companies. 
The label created a self-imposed restriction, constraining Nestlé to sell a relatively narrow range of products. 
In 2010, however, the company’s CEO, Paul Bulcke, redefined Nestlé as a “nutrition, health, and wellness” company. 
It was a brilliant strategic decision, allowing the firm to offer dozens of new product lines and services. 
Many executive teams are overconfident about their company’s competitive strength. 
In front of their board, they rattle off exaggerated claims about where the company stands; some 80% of annual reports claim that their company is “the leader in the market.” 
Unfortunately, this kind of arrogance can lead to complacency and competitive failure. 
Many financial institutions, for example, are inadequately prepared to confront the new players entering their markets. 
Google, which is quietly testing the car-insurance waters, holds a banking license. 
Meanwhile, Square, Paypal, and the start-up company Affirm are already processing a large share of online payments. 
In today’s fast-paced world, it takes only a single technological improvement, price advantage, or great viral advertising campaign for a competitor to leap ahead. 
New players can materialize seemingly out of nowhere. 
The taxi company Uber did not exist five years ago; it is now valued at more than $40 billion. 
The rapid expansion of Alibaba threatens Western retailers who never expected to face a Chinese competitor. 
Driverless cars and pilotless planes will soon transform many industries. 
Another frequent cause of companies’ blind spots is historic bias, or what psychologists call an “anchoring bias” – the assumption that something that was true in the past will continue to be true in the future. 
A long track record of success can warp executives’ analysis, distort their decision-making, and leave them blind to incipient paradigm shifts or rapid changes in a market. 
When the American retailer Target opened its first store in Canada in March 2013, its management assumed that the recipe of its success in the United States could be replicated north of the border. 
Instead, just 22 months later, the company announced that it would close all of its 133 Canadian stores and lay off 17,000 people. 
Target’s American experience turned out to be a bad predictor of what it could expect in Canada. 
Overcoming historic biases requires questioning an industry’s taboos. 
For example, if the creators of television series like Game of Thrones, the most pirated show in history, stopped fighting copyright infringement, they could seize an opportunity. 
Advertisements directly embedded in the show would reach five million additional – illegal – viewers, in effect doubling their audience. 
The television industry is not alone in failing to question and revise its traditional models, methods, and operations. 
The postal industry, for example, could learn a lesson from airlines, train companies, travel agencies, and hotels, all of which increase their prices during periods of high demand. 
The assumption that the price of mailing a letter or shipping a package should remain constant throughout the year is ripe to be challenged. 
Guarding against blind spots takes careful thought, but executives and boards can put processes in place to protect against them. 
For starters, companies should diversify their talent pool. 
Managers should ensure that they have access to people who think differently from them. 
Iconoclasts and outside experts should be invited to share their views. 
At least 20% of a company’s board should be composed of individuals from outside the industry. 
Views from other generations and other parts of the world should be sought and solicited. 
Executives should make special efforts to break taboos, examine unchallenged assumptions, and question their businesses’ most sacred rules. 
Even simple methods, like writing down and challenging every assumption on which a company has based its strategy, can yield valuable insights. 
Every company should assign someone to play the role of “dissenter.” 
Sometimes called the “China breaker,” this person should be given time during board meetings to throw the good dishware against the wall and see what can be made of the pieces. 
Industries are becoming increasingly complex and global competition is mounting. 
The companies that will be best placed to survive will be those that took the proper precautions to avoid being run off the road. 

A Business Model for Sustainability 
LONDON – In a recent report, the Intergovernmental Panel on Climate Change (IPCC) warned that without “rapid and far-reaching” changes to how land, energy, industry, buildings, transport, and cities are managed, the damage to our planet could be irreversible. 
The message was clear: we need a cooperative effort on a global scale to change our current trajectory. 
And, given that many of the toughest sustainability challenges the world faces are linked to how it does business, the only prudent way forward is to change how business is done. 
This may sound daunting, but we already have a framework to guide the transition: the United Nations Sustainable Development Goals (SDGs). 
The SDGs, adopted in September 2015 by 193 countries, are designed to achieve a “more sustainable future for all” by 2030, which, by extension, will enable a better business environment. 
The Business and Sustainable Development Commission has estimated that meeting the SDGs could add some $12 trillion and 380 million jobs to the global economy by the end of the next decade. 
With so much to gain – and to lose from inaction – the private sector is beginning to focus on the connection between profits and sustainability. 
According to the Ethical Corporation’s latest Responsible Business Trends report, 69% of business executives surveyed said they are integrating SDGs into their strategies. 
At the same time, the number of companies receiving B Corp Certification – which measures a firm’s social and environmental performance – has increased in recent years. 
Global finance is also inching toward sustainability. 
For example, environmental, social, and governance assets under management are estimated to be as high as $22 trillion dollars; $82 trillion is committed to the UN Principles for Responsible Investment; $32 trillion is pegged to carbon pricing; and even the market for “green bonds” is growing exponentially. 
This momentum matters because financial market support will be essential in achieving the sustainable development agenda. 
And yet, to sustain this progress, businesses must recognize that even in a global value chain, it is impossible to outsource corporate responsibility. 
On the contrary, multinational corporations must use their market power to drive social change. 
Consider my company, Unilever: 2.5 billion times every day, someone somewhere uses one of our products distributed via a supply chain that includes more than 80,000 suppliers and nearly two million farmers, who in turn support communities of millions of people. 
Such scale enables Unilever to contribute to and benefit from the SDGs, which is precisely what we try to do. 
In 2009, we introduced the Unilever Sustainable Living Plan, a blueprint to bolster our social, environmental, and economic performance. 
Goals include strengthening the health and wellbeing of over a billion people; reducing the environmental footprint associated with the production and use of our products; and enhancing the livelihoods of millions of workers. 
This approach has allowed us to be more strategic in identifying the challenges and opportunities that our business faces. 
By using our resources and brands, we have also addressed key development challenges like poor nutrition, sanitation, and hygiene; climate change and deforestation; human rights; skills training; and workplace equality. 
And we have done all of this with nearly a 300% return over ten years and a 19% return on equity, demonstrating that it is possible to employ a development-focused agenda that delivers for shareholders and stakeholders. 
I am not suggesting that success has come easily, or that our job is finished. 
Although I will be retiring from Unilever at the end of 2018, I am confident that the company I have led for more than a decade will continue to improve business processes with an eye toward strengthening sustainability. 
The key to addressing the world’s social and environmental challenges is using the power of markets and building coalitions to improve effectiveness. 
The final SDG, Partnerships for the Goals (SDG 17), recognizes this and urges business leaders to cooperate with governments and civil society to deliver on sustainable-development objectives. 
A good example of SDG 17 in action is the Food and Land Use Coalition, a global network of business executives, scientists, policymakers, investors, and farmers that is working to transform the world’s fragmented and complex food systems. 
One key area of focus for this coalition is the disconnect between production and consumption. 
We need more of this; the future of the global economy is no longer dependent on whether we act, but on how long we take to do so. 
Despite some progress on the SDGs over the past three years, we are not moving fast enough. 
As Winston Churchill once said: “I never worry about action, only inaction.” 
That wisdom should shape our approach to business and the SDGs today. 
The world we want for our children will arrive only when we choose action over indifference, courage over comfort, and solidarity over division. 

Busted Bailout 
CAMBRIDGE – Spend in haste; repent at leisure. 
With minds concentrated by fears of another 1930’s-style Great Depression, America’s political leaders developed, virtually overnight, a $700 billion bailout plan to resuscitate the country’s rapidly deflating financial sector. 
But, just as stunningly, rank-and-file members of the US House of Representatives have rejected it – at least for now. 
Perhaps they were right to be skeptical. 
The plan’s central conceit is that government ingenuity can disentangle the trillion-dollar “sub-prime” mortgage loan market, even though Wall Street’s own rocket scientists have utterly failed to do so. 
To boot, we have been told that government is so clever that it might even make money on the whole affair. 
Perhaps, but let’s not forget that a lot of very smart people in the financial industry thought the same thing until quite recently. 
Just a year ago, the United States had five major freestanding investment banks that stood atop its mighty financial sector. 
Collectively, their employees shared more than $36 billion dollars in bonuses last year, thanks to the huge profits these institutions “earned” on their risky and aggressive business strategies. 
These strategies typically involve far more risk – and sophistication – than the activities of traditional commercial banks. 
In mid-August, I had the temerity to predict that risks had come home to roost, and that a large US investment bank might soon fail or be forced into a highly distressed merger. 
Little did I imagine that today, there would be no freestanding investment bank left on Wall Street. 
Indeed, after years of attracting many of the world’s best and brightest into ultra-high paying jobs, collapsing investment banks are now throwing them out left and right. 
One such victim, a former student, called me the other day and asked, “What am I supposed to do now, get a real job?” 
This brings us back to the US Treasury’s plan to spend hundreds of billions of dollars to unclog the sub-prime mortgage market. 
The idea is that the US government would serve as buyer of last resort for the junk debt that the private sector has not been able to price. 
Who, exactly, would the Treasury employ to figure all this out? 
Why, unemployed investment bankers, of course! 
Let’s ponder this. 
Investment bankers have been losing their cushy jobs because they could not figure out any convincing way to price distressed mortgage debt. 
Otherwise, their firms would have been able to tap the trillions of dollars now sitting on the sidelines, held by sovereign wealth funds, private equity groups, hedge funds, and others. 
Now, working for the taxpayer, these same investment bankers will suddenly come up with the magic pricing formula that has eluded them until now. 
Little wonder that academics across the political spectrum have expressed considerable skepticism. 
True, the Treasury would take equity stakes in some firms, so there would be some upside potential. 
But the main concern centers around the Treasury’s apparent intention to pay more than double the current market price (20-30 cents on the dollar) on the premise that its success in untangling the mortgage market would make any discount seem like a bargain. 
Does such nitpicking fail to recognize the urgency of fixing the financial system? 
Isn’t any plan better than none? 
I, for one, am not convinced. 
Efficient financial systems are supposed to promote growth in the real economy, not impose a huge tax burden. 
And the US financial sector, in greasing the wheels of the real economy, has been soaking up an astounding 30% of corporate profits and 10% of wages. 
Thus, unlike in the 1930’s, the US faces a hypertrophied financial system. 
Isn’t it possible, then, that rather than causing a Great Depression, significant shrinkage of the financial sector, particularly if facilitated by an improved regulatory structure, might actually enhance efficiency and growth? 
I am not suggesting that the government should sit on its hands. 
It needs to provide an expanded form of deposit insurance during this time of turmoil, so that there are no more Northern Rock-style bank runs. 
That was a big lesson of the 1930’s. 
The government may also need to consider injecting funds more directly into the mortgage sector while the private sector reconstitutes itself. 
Certainly, the government must also find better ways to help homeowners and their lenders work out efficient bankruptcy proceedings. 
It makes no sense for banks to foreclose on homes when there are workout options whereby people could stay in their homes and banks could recover far more money. 
Eventually, after further twists, turns, and huge expenditures, the US will emerge from its epic financial crisis. 
The proposal that was defeated was not sufficiently targeted at pruning back insolvent banks, but it will almost certainly not be the last word, regardless of how Congress now proceeds. 

Butlers, Bakers, and Capitalists? 
The communist revolution that spanned the nineteenth and twentieth centuries was about concentrating government ownership of capital. Then, in the closing decades of the twentieth century, a counter-revolution swept the world, pushing for just the opposite: disperse capital as widely as possible by getting everybody involved as owners. 
Now the counter-revolution is being carried to its logical extreme: if everyone can be an owner, then everyone can be a capitalist, down to the barber, the waiter, and the trash collector. 
A specter is haunting us again; this time it is the dream of truly democratizing capitalism. 
But turning everyone into a capitalist may be as impossible as the communist dream of turning everyone into an inspired socialist worker. 
Interest in the arcane principles of finance has always been an inclination particular to people who love to pore over numerical tables and study mathematical formulas. These people sometimes make themselves rich, and it would seem nice if everyone could do that. 
But the varying talents, foibles, and psychological predilections of men and women make this impossible. 
The new spirit of democratic capitalism goes by different names and mobilizes a variety of symbols. 
But, however we describe it, the idea that the masses should be owners is growing everywhere. 
In Britain, for example, Tony Blair articulates a vision of “a nation of savers and asset-holders.” 
His plans have been called “asset-based policies,” a term that has grown in popularity since Michael Sherraden’s 1991 book Assets and the Poor: A New American Welfare Policy . 
In the United States, President George W. Bush calls his dream the “ownership society.” 
In China, the National People’s Congress in 2004 re-defined entrepreneurs and individual proprietors as “builders of the socialist cause,” and included them in the Patriotic United Front. 
Governments around the world are spending money on regulating and monitoring their stock markets so that they are safer for individual investors, and so that investor interest in these markets will grow. 
They are also trying to develop their housing finance in order to expand homeownership. 
Some are talking about letting people own their social security contributions, in the form of personal retirement accounts, their health care through health savings accounts, and their education through educational savings accounts and school vouchers. 
This is an attempt at a real revolution, not a return to an earlier capitalist past. 
It is about experimenting with creative new economic institutions that have never been seen before. 
The general concept of “ownership” is not by itself a roadmap to a successful new economy, and there are myriad interpretations of how to carry out the revolution. 
Revolutions are always experiments, and they are always an adventure. 
Some of the new policies seem exemplary. 
Tony Blair’s Labor government is implementing a plan that, beginning in April, will establish a personal Child Trust Fund of £250 to £500 for every newborn. 
Parents can then make contributions to their child’s trust fund which can grow tax-free, and can choose how to allocate the Fund among investments. 
The purpose of the gifts is to “encourage parents and children to develop the saving habit and engage with financial institutions.” 
This is a well-designed, small-scale plan that will cost the government fairly little: £500, even invested for twenty years, will not be enough to lift someone out of poverty. 
The trust funds’ real promise will consist in educating citizens about investments. 
That’s a good start, particularly if Blair’s policy is copied elsewhere. 
But other proposals carry bigger risks, notably the privatization of retirement pensions, which is talked about in many countries, and that some – including Great Britain, Chile, Sweden, and Mexico – have already put in place, at least partly. 
Bush’s plan to reform Social Security in the US – at least what is known of it – represents the ownership revolution’s cutting edge. 
Young people in the US who opt for it would see most of the traditional pension benefit replaced when they retire decades from now with proceeds from personal accounts that they would be free to allocate among a range of investments, including stocks. 
Whatever traditional benefit remains would not be enough to live on; retirees would be at the mercy of the markets for the bulk of their income. 
The outcome of any such experiment is impossible to foresee, because other countries’ experience can never be a perfect guide to a new system – the situation is never exactly the same in a different environment. A privatized social security system like the one Bush proposes might turn out very well, assuming that people behave sensibly and/or the stock market keeps going up. 
But there is also a higher risk of disaster, owing to a seemingly inborn human tendency to extrapolate past returns. 
Investors could create a stock-market bubble, encouraging even more naïve investors to concentrate their personal retirement accounts in the stock market – and leaving them dangerously exposed when it crashes. 
There is also a related risk that private accounts would cause a further drop in the personal saving rate. 
The saving rate is the lifeblood of any economy, because foreigners cannot be expected to finance capital investment forever. 
But all the talk of wondrous returns could spur what psychologists call “wishful thinking bias,” leading people to believe that their personal accounts will be so valuable in the future that outside saving is unnecessary. 
Encouraging widespread capital ownership could potentially give rise to good policies. 
But do we really want to extend such policies to areas like pensions, health care, and education? 
After all, owning capital – whether it is stocks or real estate – entails risks, and the need to insure against these risks is why capitalist countries built traditional safety nets in the first place. 
Revolutions are exciting, but we must make sure that we still have a home to return to when the barricades come down and the dust settles. 


Korean Unification and Global Peace 
SEOUL – While the United Nations celebrates its 70th anniversary in 2015, Koreans will lament 70 years of national division. 
Considering all of the challenges and opportunities that the divided peninsula faces – and will continue to confront in the coming years – unification remains an important goal that we must continue to pursue. 
Founded formally in 1948 under UN auspices, the then-fledgling Republic of Korea immediately became engulfed in Cold War power politics, which hampered its efforts to join the UN – a goal not achieved until 1991. 
Since then, however, the Republic has more than made up for its late arrival. 
It is playing an active role in the UN – the Security Council, the Economic and Social Council, and the Human Rights Council – and it is participating in numerous initiatives related to peacekeeping, development cooperation, climate change, non-proliferation, and human rights. 
During this time, the international community has also dramatically changed. 
Globalization and technological transformation have deepened interdependence, and yet insecurity, inequality, injustice, and intolerance remain undiminished worldwide. 
Two decades after the Rwandan genocide, we continue to bear witness to human cruelty and horror – in Syria, South Sudan, and the Central African Republic, for example. 
Meanwhile, a billion or so of the world’s poorest people, including women and children, are barely surviving. 
Northeast Asia has its share of trouble. 
A rising China, a resurgent Japan, an assertive Russia, and an anachronistic North Korea have added new complexities and uncertainties to the region. 
The latter’s pursuit of nuclear arms is particularly worrying. 
On its part, the United States is now “rebalancing” toward Asia. 
Growing conflicts over history, territory, and maritime security, combined with an ugly resurgence of nationalism, risk triggering military confrontation, quite possibly through political miscalculation. 
Left unattended by policymakers and peacemakers, Northeast Asia’s tensions could undermine the region’s flourishing economy. 
It is in this challenging environment that the Republic of Korea’s president, Park Geun-hye, took office in 2013. 
Her foreign policy – called “Trustpolitik” – aims to transform this atmosphere of suspicion and conflict into one of confidence and cooperation, and to build “a new Korean Peninsula, a new Northeast Asia, and a new world.” 
The greatest obstacle to achieving this transformation is the North Korean nuclear question. 
Over the last couple of months, North Korea has threatened to carry out yet another nuclear test. 
Today’s most urgent task therefore must be to prevent this from happening, and then to check further advances in the North’s nuclear weapons and delivery capabilities. 
The semblance of peace on the Korean Peninsula remains fragile, and South Korea’s government has engaged in intensive diplomatic efforts to rally friends and partners in the region and worldwide to deter the North. 
The UN Security Council has adopted a series of resolutions to impose extensive sanctions, following the North’s three previous nuclear tests. 
Any further provocation will bring the full force of the organization’s sanctions to bear. 
Under these circumstances – in addition to the dire human rights and humanitarian situation in North Korea – Park laid out her vision for a unified Korea. 
In a recent speech in Dresden, she proposed three concrete and action-oriented proposals to the North that would address its humanitarian problems, build infrastructure for the common welfare and prosperity of the two Koreas, and promote integration of the Korean people. 
The humanitarian component of this strategy could be implemented regardless of political and security considerations. 
For example, it would involve implementing the UN’s 1,000-day project for maternal health and infant nutrition, aimed at ending the North’s chronically high rate of infant malnutrition. 
We can only hope that North Korea will respond positively to our proposal. 
It would be an important first step on a much longer journey. 
Korea’s road to unification will undoubtedly be difficult, and will require the international community’s support. 
In return, the new, unified country that we aspire to build will serve the interests of its neighbors and those of the wider international community in promoting global peace and prosperity. 
There is a recent precedent for this vision, and thus reason to be hopeful. 
Some 23 years ago, the geopolitical context that sustained the division of the two Germanys changed radically. 
Similarly, the day will come when Korea’s two UN nameplates will be replaced with one. 

Peru’s Self-Sabotage 
SAN MARCOS – You may know Peru as the cradle of Incan civilization. 
Or you may have tasted its outstanding cuisine. 
But Peru boasts another impressive characteristic: it is among Latin America’s fastest-growing economies, with GDP up by 4.8% year on year in the first quarter of 2014. 
Peru’s long-term prosperity, however, is far from certain. 
In fact, Peru’s economic growth – which is based largely on exports of raw materials and hydrocarbons – is already slowing, from annual rates of 5.5-6.9% over the last three years. 
And, though the government recognizes the need for growth-enhancing reform, its approach is all wrong. 
Specifically, President Ollanta Humala recently won legislative approval of a set of “realistic” procedures to reduce the red tape perceived to be hampering investment in the extractive industries – the very industries on which the economy should become less dependent. 
The new law seriously weakens Peru’s ability to regulate land use, set environmental quality standards, and rein in corporate misconduct through environmental-impact assessments. 
The Peruvian government now has a serious problem. 
Beyond diminishing Peru’s international credibility as a “climate champion” – an image that some members of the government have been attempting to cultivate – the law jeopardizes Peru’s natural environment and economic-growth prospects. 
Peru’s government has not just failed to do what is needed; it has actively worked against its country’s long-term interests. 
At a time when countries should be regulating land use more strictly, Humala’s “reform” eliminates zoning restrictions. 
Moreover, under the new law, subnational governments will no longer be able to limit investments on environmental grounds – decisions that were guided by strict technical standards and highly trained experts. 
Instead, a national authority – that is, a political body – will call the shots. 
All of this makes Peru more vulnerable to corporate misconduct that results in environmental damage. 
As if that were not enough, the new law, in a reversal of previous legislation, could lead to reduced sentences for offenders, and even allow them to operate with impunity for three years. 
This is good news for mining, oil, and gas companies eyeing rich reserves under the Amazon rain forest and the Pacific shelf. 
But, for indigenous communities, it will open a new chapter of dispossession, poverty, and strife; and, for all Peruvians, it amounts to a massive missed opportunity to put the country on a more sustainable development path. 
The problem is not the government’s efforts to support businesses; measures to bolster business growth and development would be critical to any economic-reform plan. 
But allowing companies with poor environmental records to operate with impunity is no solution. 
A country where legislation is tailor-made to benefit a few, at the expense of the public interest, cannot achieve long-term inclusive prosperity – and is likely to experience social instability. 
The new law is not the only problematic policy that Peru’s government has pursued. 
Last month, the Congress also moved to weaken the government’s environmental oversight, claiming that this would add 1.5-3% to the economy’s growth rate. 
The government pushed the proposal through in a little more than two weeks, with only token public consultation and no time for reasoned public debate. 
Given strong opposition from civil-society groups, political parties, the United Nations, and even some business interests, the government’s behavior was both understandable and inexcusable. 
In fact, more than 100 organizations rejected the package before it was approved, while calling for higher environmental standards and stricter enforcement. 
They recognize that what Peru urgently needs is a new, future-oriented economic vision, focused on reducing its reliance on the extractive industries, whose days are numbered. 
“Green” investment – which, as the World Bank recently proved using robust economic modeling, does not constrain economic growth – is a good place to start. 
In September, Humala will go to New York to outline Peru’s “bold and ambitious” actions to head-off the global climate crisis. 
In December, Peru will host the next round of UN climate negotiations, with governments from around the world gathering in Lima to pursue a comprehensive agreement that supports a transition from environmentally devastating fossil fuels to low-carbon energy solutions. 
Peru’s recent actions have severely undercut its ability to act as a global climate leader, to everyone’s detriment. 
Only with a new strategy based on economic diversification and investment in renewable energy can Peru achieve stable, inclusive, long-term prosperity – and make a real contribution to mitigating climate change. 

Calderon’s Cauldron 
Under dramatically inauspicious circumstances, Mexico has finally got itself a new president last Friday. 
Felipe Calderón has taken the oath of office, braving the wrath of his left-wing opposition, out-smarting the Partido de la Revolución Democrática (PRD) and its leader, Andrés Manuel López Obrador, but nonetheless paying a high price. 
Every TV news show and front-page headline in the world ran the same headline: “New Mexican President inaugurated in chaos and fisticuffs.” 
Mexico’s institutions withstood – just barely – the onslaught of a virtually insurrectional left-wing opposition, bent in vain on stopping Calderón’s inauguration, and of a resentful Partido Revolucionario Institucional (PRI), increasingly dedicated to allowing Calderón to take office, and then fail miserably. 
Calderón impressively overcame apparently insurmountable obstacles on the way to the presidency, yet the struggle to govern and transform Mexico has just begun. 
Most Mexican commentators believe that it should be relatively easy for Calderón to improve on the largely self-inflicted failure of outgoing President Vicente Fox’s term. 
Mexico needs to grow at roughly twice the rate that it did under Fox (a meager 2% per year). 
If Calderón can strengthen law and order, and use his considerable political skills to reach agreement with the PRI on structural economic reforms, he will succeed. 
But this view is simplistic. 
Fox’s term, along with the four last years of former President Ernesto Zedillo’s mandate, were hardly a failure. 
Not since the 1960’s had Mexico undergone ten consecutive years of economic stability, low inflation, low interest rates, a stable currency, and constant, though mediocre growth. 
For the first time ever, mortgages, automobile loans, and consumer credit became available to the lower middle class: this year more homes were built and sold, and more cars were bought, than ever before. 
Likewise, while Fox can be criticized for not clamping down on protesters and a disruptive, extremist opposition, he never resorted to the bloody repression for which most of his predecessors came to be known. 
Moreover, he dragged Mexico out of its archaic foreign policy cocoon, and placed immigration and human rights at the heart of Mexico’s new international agenda. 
Nor is Calderón finding it easy to negotiate with the PRI, failing to build a coalition government, which he has repeatedly proclaimed as the solution to the gridlock that has cursed Mexico since 1997. 
Whatever the advantages of a cabinet comprising solely members of his Partido Acción Nacional (PAN), this is not what Calderón sought. 
Similarly, no deal with the opposition was possible regarding the inauguration ceremony – thus the chaotic, depressing scenes of congressmen fighting it out in their chamber, while Calderón was ushered in through the back door for a rushed ceremony. 
Mexico’s economic problems might be similarly more intractable than many commentators seem to believe. 
Mexico experienced a “cold-turkey” economic opening under former President Carlos Salinas in 1988-1994; a belated but successful political opening under former President Zedillo in 1994-2000; and, at long last, a true rotation in power thanks to Fox. 
But the foundations of the old PRI-corporativist system created in the 1930’s remain untouched, and represent the main and most formidable obstacles to Mexico’s growth and success. 
The first pillar of this system is the public and private economic monopolies that dominate the country. 
The state-owned oil (Pemex) and electric power (Federal Electricity Commission) companies face no competition. 
The private virtual monopolies in telecommunications (Telmex), television (Televisa), cement (Cemex), bread and tortilla manufacturing (Bimbo and Maseca, respectively), banking (Banamex/Citigroup and Bancomer/Banco de Bilbao) may face competition abroad, but not at home. 
These monopolies are stronger than ever, and prices, supply, service, and quality all suffer. 
The second pillar is formed by the unions that have controlled the Mexican labor movement since the 1930’s. 
They enjoy “closed shop” hiring and firing prerogatives, leadership elections by acclamation, mandatory dues without transparency, and immense political power. 
The teachers’ union is the largest in Latin America, the oil workers’ union is the richest in Latin America, and the social security employees union has thwarted any attempt at pension or health reform for years. 
The third pillar of the system is political monopoly. 
For 70 years, the PRI had a complete lock on Mexican politics; now three parties do, and no one else can enter the political arena or gain access to the enormous public subsidies – more than $500 million last year – handed out to these parties without their consent. 
The main parties write their own anti-trust legislation, vote their own subsidies, and choose their own elected officials. 
The absence of consecutive re-election at any level reinforces the party machines’ power: they pick candidates, whom voters merely ratify at the polls. 
So Mexico’s challenges boil down to liberating the labor movement, breaking up the private monopolies and opening the public monopolies to competition, and lowering entry barriers that restrict access to the political arena. 
These may not be sufficient conditions for success, but they are certainly necessary ones. 
Calderón must strengthen his presidency from the outset. 
Taking on the powers that be is perhaps the only way to achieve this, however risky it might appear. 
Elected with only 35% of the vote, lacking a majority in Congress, and taking office on the eve of an economic slowdown in the United States, things would be difficult anyway. 
Given that roughly a third of the electorate does not think he won fairly, and in view of the precariousness of the rule of law in the country, Calderón’s position is even less enviable. 
Caution and patience might not be his best advisors. 

Our Cosmic Context 
NEW YORK – We have always lived on a changing planet, but many of today’s variations in climatic and ecological states are taking place exceptionally fast, and are directly attributable to our behavior. 
Slowing the rate of alteration is the only rational course of action, given the potential outcomes. 
But we also need to examine our responses closely, or risk repeating our shortsighted behavior. 
Unexpectedly, the search for life elsewhere in the universe may provide a critical new perspective. 
Our technologically advanced civilization – replete with remarkable tools and notable headaches – owes everything to a tapestry of cosmic and planetary history. 
Consider, for example, oil, gas, and coal. 
These substances comprise a complex package of carbon chemistry, produced by biology and geophysics operating within a deep rhythm of variation and evolution originating far from our own epoch. 
The minerals and rare-earth elements that we exploit to build ingenious devices – extending our bodies and minds – are also a part of this rhythm, and are accessible only because of a great chain of circumstances, from planetary origins to plate tectonics and asteroid impacts. 
Our trajectory as a species is hardwired to this four-billion-year-old bio-geo-chemical system that has profoundly worked and reworked the planetary environment, all the way from bacteria to city planners, atmospheric oxygen to paper mills. 
In addition to our own genes, each of us carries the genes of tens of trillions of microbial passengers. 
These tiny organisms harbor codes for metabolic processes that have been preserved across eons – the same processes responsible for shaping the world. 
It is a plausible blueprint for successful life anywhere, even if the biochemical details differ. 
Our daily business usually ignores this existential backdrop. 
The struggle to mold our future, to stave off the humanitarian disasters of war, disease, and starvation leaves little room to be philosophical about our place on this crumb of cosmic dust. 
But many scientists, including me, have a sense that the universe might be about to reach in and give us a metaphorical slap in the face. 
For the last few decades, the modern scientific endeavor known as astrobiology has been seeking to determine whether or not all of this – life, death, and evolution – has happened elsewhere in the cosmos. 
Humans have long asked this question, but the evidence – the raw data – was lacking. 
Now, astronomers have discovered a remarkable abundance of planets orbiting other stars. 
The numbers tell us that 15-20 percent of Sun-like stars harbor worlds similar in size to the Earth, orbiting stellar parents at distances implying that their surfaces might be temperate. 
We have not found the nearest such world yet, but statistically it should be within about 15 light years of us – a stone’s throw in cosmic terms. 
There is an excellent chance that we will find it and its brethren within a decade, and search for signs of an alien biosphere in these worlds’ atmospheric compositions or climates. 
In the Solar System, NASA’s Curiosity rover has discovered what may be organic carbon in the fossil mud of an ancient Martian lakebed. 
Europa, Jupiter’s icy moon, has been spotted spewing water into space from a hidden ocean that could hold twice the volume of all of Earth’s oceans. 
Serendipity is providing us with access to an abyssal realm that could conceivably harbor life. 
We just have to go smell the salty spray. 
Even finding nothing in such places is important, because these new data have predictive power, narrowing the field of planets, or moons, that might harbor life. 
Nature has the critical experimental data that we need to finally place Earth in context, within a zoo of worlds emerging from ice ages, worlds descending into greenhouse hells, young worlds, old worlds, barren worlds, and possibly worlds teeming with life. 
And that means that we will have new data to steer decisions about planetary stewardship. 
In other words, the cosmic sprawl can help us disentangle the complex terrestrial systems and histories of which we are a part. 
This is not a frivolous exercise. 
On the contrary, it could be the key to overcoming our scientific ignorance. 
We might guess the general consequences of global warming in the next couple of decades, but the details remain hard to predict, as does the distant future. 
Biological networks change, chemical balances change, species go extinct, ecosystems unravel, and new ones emerge. 
Cosmic context would go a long way in sorting this out. 
For many people, the idea of spending time and resources on such otherworldly pursuits is difficult to swallow. 
But if we are to sustain our species into the distant future, we need to make big decisions correctly. 
It is time to take the long view seriously, because we have tried the short view, and it has not worked. 

California Dying 
Berkeley – While the new Obama administration is commanding global attention, America’s future may be written – as so many times before – in and by its largest state. 
Once the lodestar for American optimism and achievement, California now illustrates the difficulties confronting the United States – and how much more can still go wrong domestically. 
The most populous and wealthiest of America’s 50 states, California has long been a beacon of opportunity for talented and enterprising people from all over the world. 
One in every four California residents was born in a foreign country. 
California’s two most famous industries, Silicon Valley and Hollywood, depend on infusions of talent from abroad. 
Its robust agricultural sector is a massive exporter of food, benefiting from the growing appetites of consumers in developing countries. 
Yet California’s technological and entrepreneurial might – standing alone, the state would be the world’s eighth largest economy – coexists with a dysfunctional political system that has brought it to the edge of fiscal bankruptcy. 
On May 19, the state’s voters, in a special election, rejected an array of tax increases and spending cuts required to balance its budget. 
Now, California faces either an embarrassing federal bailout or a prolonged period of rule by judges, who under California law have the power to vacate labor agreements, abrogate contracts, and generally restructure the state’s financial commitments. 
For President Barack Obama, California’s crisis imperils his own reform agenda. 
Because other American states also face tough fiscal conditions, the political price of bailing out California may be bailing out dozens of other states too. 
A massive state bailout, while adding enormously to pressure on Obama’s government, would expose the weak link in the US system of governance. 
So-called “unitary” nations such as Britain, France, China, or Kenya, essentially have a single set of government obligations: one national police force, one employer for all public school teachers, one overall pension system, etc. 
By contrast, the US has an “asymmetric” form of government, which allows many overlapping government entities – 7,000 in California alone – to incur debts, hire and fire employees, and impose taxes. 
Making sense of these asymmetries is difficult. 
When financial markets concentrate on the fiscal health of the federal government, they miss the extent of government obligations as a whole. 
The complexity of American governance threatens the benefits of Obama’s decision to stimulate the economy through deficit spending. 
While the national government expands, state governments, such as California’s, contract. 
Moreover, California’s crisis is more than an economic one. 
California is the most diverse US state; more than half of its 37 million people are non-white. 
For believers in the benefits of diversity, California represents the largest social experiment in human history, bringing people of different backgrounds together in a way unimaginable in, say, Germany, China, or Brazil. 
California’s governor, Arnold Schwarzenegger, was an immigrant (from Austria) before he was a movie star. 
In his six years in office, he has repeatedly tried to bypass a polarized state legislature – even the annual budget requires a two-thirds majority – by appealing directly to voters. 
Ballot initiatives were created 100 years ago to empower ordinary citizens, but in recent decades the process has been captured by self-serving elites. 
Even as California’s roads fall apart and public institutions decline – the result of too little spending and public workers who are too expensive – the state continues to operate the finest set of public universities in the US. 
But the secret of the University of California’s success is its ability to obtain ever-higher amounts of funding from private sources and the federal government. 
Disengagement from the California polity also is true of the state’s economic engines. 
Intel, the world’s biggest chip maker and a Silicon Valley mainstay, hasn’t built a factory in California for more than 20 years. 
Hollywood shoots an increasing number of films elsewhere. 
Agriculture relies heavily on illegal workers from Mexico, who live temporarily near the fields and take their earnings back home. 
How to forge a single community out of a state so diverse remains an elusive challenge. 
Some influential people, including Schwarzenegger, say the state needs a new constitution that would restrict ballot initiatives and make budgets easier to pass. 
More radical thinkers insist that California is ungovernable and should be broken into two or even three states. 
Creating more Californias would of course require the approval of the federal government in Washington, where elected representatives from California – mainly from Obama’s Democratic Party – have more power today than at perhaps any time in US history. 
Nancy Pelosi, the House majority leader, is from San Francisco. 
Californians run the two most powerful House committees, Energy and Commerce and Education and Labor. 
Two of the most influential senators also come from California. 
Why these Washington politicians are idle while their state slides towards ruin says much about what’s broken in American politics. 
Schwarzenegger is a Republican, so Democrats privately wish him to fail. 
There’s a deeper problem: politicians across the spectrum, beholden to special interests, are habituated to denying serious problems. 
Obama will be forced to help craft a compromise to keep the state financially afloat. 
Yet as a condition, he may insist that Californians, who are already among the most heavily taxed Americans, pay more. 
If Californians refuse, Obama could face a widening revolt – against the idea of expanded government as the chief response to what ails America at home. 

Call In the Reserves 
The People’s Bank of China and the Bank of Japan – as well as other central banks in Asia – are in trouble. They have accumulated vast foreign exchange reserves, estimated at more than $2 trillion. 
The problem is that almost all of it is in US dollars – a currency that is rapidly losing its value. 
All policy options for Asia’s central banks appear equally unattractive. If they do nothing and simply hold onto the dollars, their losses will only increase. 
But if they buy more, in an attempt to prop up the dollar, they will only have a bigger version of the same problem. 
If, on the contrary, they try to diversify into other currencies, they will drive down the dollar faster and create greater losses. 
They are also likely to encounter the same sort of problem with other possible reserve currencies. 
The euro has been touted as the replacement for or alternative to the dollar. 
Some enthusiastic Europeans encouraged Asians to diversify their reserve holdings. 
But the same scenario might well be repeated with the euro in a few years. 
Large fiscal deficits and slow growth might convince foreign exchange markets that there is little future in the euro, fueling a wave of selling – and hence losses for central bank holders. 
There is a historical parallel to today’s concern about the world’s major reserve currency. 
The interwar economy, shattered by the Great Depression of the early 1930’s, offers a whole series of painful, but important, lessons for the present. 
In the 1920’s, the world economy was reconstructed around a fixed exchange rate regime in which many countries held their reserves not in gold (as was the practice before the First World War) but in foreign exchange, especially in British pounds sterling. 
During the course of the 1920’s, some of the official holders of pounds grew nervous about Britain’s weak foreign trade performance, which suggested that, like today’s dollar, the currency was over-valued and would inevitably decline. 
Foreign central banks asked whether the Bank of England was contemplating changing its view of the pound’s exchange rate. 
Of course they were told that there was no intention of abandoning Britain’s link to gold, and that the strong pound represented a deep and long commitment (in the same way that US Treasury Secretary John Snow today affirms the idea of a “strong dollar”). 
Only France ignored British statements and substantially sold off its sterling holdings. 
When the inevitable British devaluation came on September 20-21, 1931, many foreign central banks were badly hit and were blamed for mismanaging their reserves. 
Many were stripped of their responsibilities, and the persons involved were discredited. 
The Dutch central banker Gerard Vissering resigned and eventually killed himself as a result of the destruction wrought on his institution’s balance sheet by the pound’s collapse. 
Some countries that traded a great deal with Britain, or were in the orbit of British imperial rule, continued to hold reserves in pounds after 1931. 
During World War II, Britain took advantage of this, and Argentina, Egypt, and India, in particular, built up huge claims on sterling, although it was an unattractive currency. 
At the war’s end, they thought of a new way of using their reserves: spend them. 
Consequently, these reserves provided the fuel for economic populism. 
Large holders of sterling balances – Nehru’s India, Nasser’s Egypt, and Peron’s Argentina – all embarked on major nationalizations and a public sector spending spree: they built railways, dams, steel works. 
The sterling balances proved to be the starting point of vast and inefficient state planning regimes that did long-term harm to growth prospects in all the countries that took this course. 
Could something similar be in store for today’s holders of large reserves? 
The most explicit call for the use of dollar reserves to finance a major program of infrastructure modernization has come from India, which has a similar problem to the one facing China and Japan. 
It will be similarly tempting elsewhere. 
This temptation needs to be removed before the tempted yield to it. 
Reserve holdings represent an outdated concept, and the world should contemplate some way of making them less central to the operation of the international financial system. 
To be sure, reserves are important to smooth out imbalances in a fixed exchange rate regime. 
But the world has moved since the 1970’s in the direction of greater exchange rate flexibility. 
Reserves are also clearly important for countries that produce only a few goods – especially commodity producers – and thus face big and unpredictable swings in world market prices. 
Dependency on coffee or cocoa exports requires a build-up of precautionary reserves. 
But this does not apply to China, Japan, or India, whose exports are diversified. 
Today’s big surplus countries do not need large reserves. 
They should reduce their holdings as quickly as possible, before they do something really stupid with the accumulated treasure. 

Calming the South China Sea 
CANBERRA – The South China Sea – long regarded, together with the Taiwan Strait and the Korean Peninsula, as one of East Asia’s three major flashpoints – is making waves again. 
China’s announcement of a troop deployment to the Paracel Islands follows a month in which competing territorial claimants heightened their rhetoric, China’s naval presence in disputed areas became more visible, and the Chinese divided the Association of South East Asian Nations (ASEAN), whose foreign ministers could not agree on a communiqué for the first time in 45 years. 
All of this has jangled nerves – as did similar military posturing and diplomatic arm wrestling from 2009 to mid-2011. 
Little wonder: stretching from Singapore to Taiwan, the South China Sea is the world’s second-busiest sea-lane, with one-third of global shipping transiting through it. 
More neighboring states have more claims to more parts of the South China Sea – and tend to push those claims with more strident nationalism – than is the case with any comparable body of water. 
And now it is seen as a major testing ground for Sino-American rivalry, with China stretching its new wings, and the United States trying to clip them enough to maintain its own regional and global primacy. 
The legal and political issues associated with the competing territorial claims – and the marine and energy resources and navigation rights that go with them – are mind-bogglingly complex. 
Future historians may well be tempted to say of the South China Sea question what Lord Palmerston famously did of Schleswig-Holstein in the nineteenth century: “Only three people have ever understood it. 
One is dead, one went mad, and the third is me – and I’ve forgotten.” 
The core territorial issue currently revolves around China’s stated interest ­– imprecisely demarcated on its 2009 “nine-dashed line” map – in almost the entire Sea. 
Such a claim would cover four disputed sets of land features: the Paracel Islands in the northwest, claimed by Vietnam as well; the Macclesfield Bank and Scarborough Reef in the north, also claimed by the Philippines; and the Spratly Islands in the south (variously claimed by Vietnam, the Philippines, Malaysia, and Brunei, in some cases against each other as well as against China.) 
There has been a scramble by the various claimants to occupy as many of these islands – some not much more than rocks – as possible. 
This is partly because, under the United Nations Convention on the Law of the Sea, which all of these countries have ratified, these outcroppings’ sovereign owners can claim a full 200-mile Exclusive Economic Zone (enabling sole exploitation of fisheries and oil resources) if they can sustain an economic life of their own. 
Otherwise, sovereign owners can claim only 12 nautical miles of territorial waters. 
What has heightened ASEAN’s concern about Beijing’s intentions is that even if China could reasonably claim sovereignty over all of the land features in the South China Sea, and all of them were habitable, the Exclusive Economic Zones that went with them would not include anything like all of the waters within the dashed-line of its 2009 map. 
This has provoked fears, not unfounded, that China is not prepared to act within the constraints set by the Law of the Sea Convention, and is determined to make some broader history-based claim. 
A sensible way forward would begin with everyone staying calm about China’s external provocations and internal nationalist drumbeating. 
There does not appear to be any alarmingly maximalist, monolithic position, embraced by the entire government and Communist Party, on which China is determined to steam ahead. 
Rather, according to an excellent report released in April by the International Crisis Group, its activities in the South China Sea over the last three years seem to have emerged from uncoordinated initiatives by various domestic actors, including local governments, law-enforcement agencies, state-owned energy companies, and the People’s Liberation Army. 
China’s ­foreign ministry understands the international-law constraints better than most, without having done anything so far to impose them. 
But, for all the recent PLA and other activity, when the country’s leadership transition (which has made many key central officials nervous) is completed at the end of this year, there is reason to hope that a more restrained Chinese position will be articulated. 
China can and should lower the temperature by re-embracing the modest set of risk-reduction and confidence-building measures that it agreed with ASEAN in 2002 – and building upon them in a new, multilateral code of conduct. 
And, sooner rather than later, it needs to define precisely, and with reference to understood and accepted principles, what its claims actually are. 
Only then can any credence be given to its stated position – not unattractive in principle – in favor of resource-sharing arrangements for disputed territory pending final resolution of competing claims. 
The US, for its part, while justified in joining the ASEAN claimants in pushing back against Chinese overreach in 2010-2011, must be careful about escalating its rhetoric. 
America’s military “pivot” to Asia has left Chinese sensitivities a little raw, and nationalist sentiment is more difficult to contain in a period of leadership transition. 
In any event, America’s stated concern about freedom of navigation in these waters has always seemed a little overdrawn. 
One positive, and universally welcomed, step that the US could take would be finally to ratify the Law of the Sea Convention, whose principles must be the foundation for peaceful resource sharing – in the South China Sea as elsewhere. 

The Trumping of Cambodian Democracy 
WASHINGTON, DC – Over the last year, Cambodia’s ruling party, the Cambodian People’s Party (CPP), has dramatically increased its pressure on its political opponents and civil society. 
Democracy in Cambodia has always been fraught, and elections are not completely free and fair. 
But the current crackdown is much greater in scope, and far more concerning, in part because it is being enabled by American apathy. 
Prime Minister Hun Sen, East Asia’s longest-serving non-royal ruler, has used his power to silence critics and close outspoken media outlets, including one independent newspaper, the Cambodia Daily.The CPP has also expelled the National Democratic Institute, a US-based nonprofit that focuses on rights and democracy, and detained political challengers. 
Kem Sokha, who co-headed the main opposition group, the Cambodia National Rescue Party (CNRP), was arrested in September on dubious treason charges. 
The other main opposition figure, Sam Rainsy, remains in exile in France. 
But in recent weeks, Hun Sen has increased the pressure, essentially ending Cambodia’s shaky attempts at democracy. 
Earlier this month, a court dominated by CPP allies dissolved the CNRP. 
As a result, the party will most likely be unable to contest national elections next year, all but ensuring that Hun Sen will win another term as prime minister. 
The ruling could also help enable Hun Sen eventually hand power to another family member. 
Fearing for their lives, around half of CNRP lawmakers have left Cambodia. 
Hun Sen has hardly been shy about his slide toward what the Cambodia Daily, on its last day of publishing, termed a “descent into outright dictatorship.” 
In fact, Hun Sen, like other Southeast Asian autocrats, now seems to believe that he has political carte blanche, given the low priority that US President Donald Trump has placed on human rights. 
In the past, Western pressure had managed to keep Hun Sen in check. 
Foreign aid, including from the US, accounts for as much as 40% of Cambodia’s national budget. 
And, while President Barack Obama’s administration did expand cooperation with Cambodia, it also repeatedly raised the issue of human-rights abuses with Hun Sen, including during a tense visit by Obama to Phnom Penh in 2012. 
The Trump administration has rolled back this pressure, and then some, by downplaying human rights and democracy promotion. 
In an address to the United Nations General Assembly in September, Trump made clear that his priority would be sovereignty rather than rights. 
Secretary of State Rex Tillerson, meanwhile, has even reportedly considered removing democracy promotion from the State Department’s mission. 
Hun Sen recognized this shift almost immediately. 
In February, he compared his disdain for Cambodia’s media to Trump’s distrust of the mainstream media in the US. 
And although lower-ranking US officials, including the Senior Director for Asia on the National Security Council, have met with their Cambodian counterparts to press them on rights issues, Trump has said nothing negative about Hun Sen’s actions. 
In a speech in early November, Hun Sen essentially praised Trump for his indifference and non-interventionism. 
Other Southeast Asian autocrats, or elected leaders with autocratic tendencies, have also celebrated the arrival of Trump’s “America First” foreign policy. 
Thai Prime Minister Prayuth Chan-ocha, who led a coup against an elected government three years ago, was welcomed at the White House this year. 
So was Malaysian leader Najib Razak, whose wealth may be questioned by the US Justice Department as part of a wide-ranging investigation into fraud at a Malaysian sovereign wealth fund. 
Philippine President Rodrigo Duterte, meanwhile, held a friendly phone call with Trump back in April. 
Trump praised the Philippine leader for his brutal, lawless “war on drugs,” in which, according to Human Rights Watch, more than 12,000 people have died. 
During Trump’s visit to Manila in November, Duterte serenaded him with a song, and then Trump laughed when, in a joint appearance, his counterpart blasted the media, calling them “spies.” 
(The Philippines is one of the most dangerous countries in the world to be a journalist, according to the Committee to Protect Journalists.) 
Trump later claimed he briefly mentioned human rights to Duterte, but a Philippine government spokesperson said the two had not discussed rights issues. 
As Hun Sen, Duterte, and others have shown, the new US approach fosters impunity for autocratic leaders. 
Although other donor countries, such as Canada and France, have at times spoken out against Hun Sen’s abuses, the US government, as the actor wielding the most leverage, has historically led the charge. 
But the Trump administration’s see-no-evil approach hinders other countries’ ability to promote rights and democracy. 
For example, Canadian Prime Minister Justin Trudeau, in his own bilateral meeting with Duterte this month, did raise concerns about the drug war in the Philippines. 
But without US support, Trudeau’s pressure lacked credible measures. 
Trump’s policies are placing America’s long-term interests at risk. 
As in Cambodia, many of Asia’s strongest supporters of democratic change are young men and women. 
Opposition parties in Malaysia, Cambodia, and other Southeast Asian countries attract a high share of young people, as do many of the media organizations and civil-society groups now under pressure. 
And, most important from the standpoint of national interest, the US has built its strongest partnerships in Asia with other democracies. 
Policies that ignore human rights and democracy will not benefit the US or the region. 
An “America First” approach that disregards these issues – in Cambodia or elsewhere – will only leave the US weaker in the end. 

Hamas Rising 
GAZA CITY – Hamas, the militant political movement that has ruled Gaza since 2007, has emerged from the latest round of fighting with Israel with its regional status significantly enhanced. 
At the same time, the movement faces new questions about its ability to take advantage of the diplomatic opportunities that it has gained. 
Hamas’s forceful response to Israel’s military operation in Gaza in November, which included landing rockets near Tel Aviv and Jerusalem, demonstrated its commitment to its core value of steadfastness. 
Moreover, in the wake of the eight-day clash, Hamas’s long-exiled leader, Khaled Meshal, who had never before dared to show himself openly to Israel, entered Gaza from Egypt. 
Parading triumphantly through the streets, he reinforced the idea – at home and abroad – that Hamas had been victorious. 
Beyond Gaza, the rise of political Islam in the Arab Spring countries, particularly Egypt and Tunisia, has created a more Hamas-friendly neighborhood. 
Crucially, the negotiations in Cairo that produced a cease-fire with Israel involved direct, high-level diplomatic contact between Egypt and Hamas – a fundamental shift from former Egyptian President Hosni Mubarak’s avowedly anti-Hamas stance. 
Visits to Gaza by the Emir of Qatar and Turkey’s foreign minister, as well as by other regional leaders, have further buttressed Hamas’s new stature. 
Demonstrating support for Hamas now means building credibility at home, which creates an opportunity to elicit large donations from Arab and Muslim countries to finance Gaza’s reconstruction. 
By contrast, Mahmoud Abbas, the president of the Palestinian Authority (PA), who embraces peace negotiations with Israel and disavows armed struggle, is more isolated than ever, despite his success in upgrading Palestine’s status at the United Nations to that of “non-member observer state” days after the fighting in Gaza ended. 
Hamas initially reacted skeptically to the statehood bid, but supported it after the cease-fire, owing to its expectation that it will be able to exploit Palestine’s upgraded status. 
Nonetheless, recent events, together with the PA’s dwindling resources, have diminished Abbas’s credibility among Palestinians, who increasingly view him as desperate. 
Israel’s announcement after the UN vote of new settlements around Jerusalem weakened his standing further. 
Indeed, Abbas’s time is running out. 
The only question is who will replace him. 
Meanwhile, Hamas is seeking to capitalize on its growing popularity by winning elections. 
In last October’s municipal elections in the West Bank – the first in six years – the largely secular Fatah party technically retained its authority; but voter turnout of only 55%, following Hamas’s call for a boycott, reflected waning support for the party. 
Hamas is now widely seen as the true representative of Palestinian national ambitions, and is set to unite the Palestinians under its flag. 
But can Hamas find a basis for negotiations with Israel? 
To be sure, Hamas has not abandoned its resistance mantra; even so, it has moderated its stance on the Palestinian-Israeli conflict over time. 
Indeed, Hamas’s leaders have expressed support for the establishment of a Palestinian state based on the 1967 borders, with East Jerusalem as its capital. 
This gradual shift, combined with Hamas’s endorsement of Abbas’s diplomatic approach in the UN, suggests that Hamas now believes that a military victory over Israel is not possible. 
Palestinian and Israeli leaders will have to reconcile their differences and reach a diplomatic settlement. 
Signs of Hamas’s shifting perspective are becoming increasingly apparent. 
While Meshal maintained a hardline stance in his speech in Gaza (see below), in private discussions he expressed a readiness to accept a Palestinian state based on the 1967 borders. 
Meshal even stated that, if Israel reconsidered its attitude toward the Arab Peace Initiative of 2002 – which calls upon the Arab world to recognize Israel’s right to exist in exchange for Israel’s return to its 1967 borders – Hamas would do the same. 
But, although Meshal welcomed the idea of future negotiations with Israel, he maintained that the time is not yet right. 
Hamas is convinced that Israel understands only the language of force and power, and it will not negotiate until Israel accepts the permanence of Palestinian demands. 
Israel may be starting to get the message. 
In fact, the recent fighting drove some Israeli politicians, such as Giora Eiland, former Prime Minister Ariel Sharon’s national security adviser, to acknowledge that Hamas is a political reality that can no longer be ignored. 
Eiland even advised Israel’s government to recognize Hamas’s rule in Gaza, lift the siege, and negotiate a prolonged cease-fire directly with the movement. 
But the success of such an approach depends on Israel’s readiness to engage Hamas, which it continues to regard as a terrorist group, and on the viability of Egyptian mediation. 
Here, Israel may come under growing pressure from its principal ally. 
Indeed, America’s acceptance of Islamist parties in the region, from Ennahda in Tunisia to the Muslim Brotherhood in Egypt, suggests that skepticism of Islamist groups may be losing ground. 
It also raises doubts about whether the United States will maintain its strict policy of isolating Hamas. 
Egyptian President Mohamed Morsi’s success in mediating between Israel and Hamas demonstrated that Islamists can be flexible – even when it comes to Israel. 
There is room for moderation in both sides’ positions, but their leaders must be given the right platform on which to make the needed adjustments. 

Can A Wimp Disarm Saddam? 
The UN's weapons inspectorate chief and Iraq have agreed on tentative terms for the conduct of weapons inspections, which in theory could begin as early as two weeks from now. 
But the success of any such deal depends as much on the men who will carry out the inspections as on the details of when, where, and how they are carried out. 
Hans Blix will head the UN arms inspectorate charged with searching for, finding, and destroying Saddam Hussein's weapons of mass destruction. 
I have known Blix for over forty years. 
In 1960 he was my deputy when I was a leader of the Swedish Liberal Youth organization. 
Since then I have followed his career closely. 
He became Sweden's foreign minister for a year and was later a director general of the International Atomic Energy Agency (IAEA) in Vienna. 
Personally, Blix is amiable and has a sense of humor; politically he is weak and easily fooled. 
I can think of few European officials less suitable for a showdown with Saddam Hussein. 
Indeed, it is with utter disbelief that I watch television news about Blix's negotiations with the Iraqi dictator's henchmen. 
The world has been amply warned about Blix's weaknesses because he has a track record of compounded failure. 
When Blix headed the IAEA before the Gulf War of 1991, he blithely assured the world, after several inspections, that nothing alarming was happening in Iraq. 
He delivered the clean bill of health that Saddam had hoped for when he began hiding his atomic factories and ambitions. 
Since then, we have learnt all too unambiguously that Saddam is obsessed with procuring weapons of mass destruction - chemical and biological warheads as well as atomic bombs and the missiles to deliver them. 
Former experts of Iraq's nuclear weapons program, who have fled Baghdad for the West, confirmed this. 
They told us about determined and costly efforts to obtain doomsday devices. 
Indeed, it is now clear that Saddam was but a year away from securing his first atomic bomb when the Gulf War broke out. 
After that war, UN inspectors found and destroyed huge amounts of chemical and biological warheads as well as facilities to produce nuclear weapons. 
Despite his grave failings as IAEA chief before 1991, Blix once again came to lead UN disarmament inspectors, this time in tandem with another Swede, Ambassador Rolf Ekéus. 
Blix, naive and relatively ignorant about technical details -- his field is international law -- is easily mislead. 
Even after the Gulf war, he failed to realize that the Iraqi officials, who were again assuring the UN that they were hiding nothing, were but consummate liars. 
Indeed, Blix believed that Iraq had no program at all for nuclear arms. 
David Kay, perhaps the most effective arms inspector, insisted that he did not trust them. 
But Blix reproached Kay for his attitude. 
You must believe in official information, Blix implied. 
The turning point came when Kay initiated inspections of suspect buildings without notifying the Iraqis about his intentions in advance. 
This new, aggressive inspection strategy had dramatic consequences: Kay discovered material which confirmed that Iraq was only 12 to 18 months away from producing a nuclear device. 
This historic discovery ended up in a confrontation at a parking lot in Baghdad. 
UN cars were surrounded by 200 Iraqi soldiers and a mob, ordered out to the scene by Iraqi officials. 
For four days and nights the siege continued, as Kay and his colleagues used satellite telephones to fax crucial documents to the West. 
Blix had opposed the raid. 
Fortunately, Ambassador Ekéus backed it and supported the inspectors during the siege. 
I have met a number of experts on Iraq's weapons of mass destruction, and they often compare the two Swedes: "Ekéus is brilliant," they say, "Blix is terrible." 
When the current UN inspectorate was being put together in 1999, both Ekéus and Blix were among the candidates being considered to head the new group of inspectors. 
Friends of Iraq in Paris and Moscow consulted Baghdad to see whom Saddam would prefer. 
France and Russia then suggested Blix. 
Surprisingly the Clinton administration accepted that decision. 
Saddam's chemical and biological arms, and his determination to get nuclear weapons, are a threat to the world. 
The dictator could use these arms himself or make them available to terrorist organizations. 
And the issue of war and peace depends on a man repeatedly duped by the Iraqi regime. 
The Bush administration probably understands Blix's weaknesses. 
My guess is that the US will not allow Blix and the inspectors that he oversees to be deceived by Iraq again. 
Regardless of how this crisis develops from this point, the UN has neglected its duties by asking a wimp to lead the inspectors who are supposed to stand up to the brute of Baghdad. 

Can Anything Slow the Dollar’s Fall? 
“Dollar denial,” that state of willful blindness in which bankers and central bankers claim not to be worried about America’s falling currency, seems to be ending. 
Now even European Central Bank Governor Jean Claude Trichet has joined the chorus of concern. 
When the euro was launched, the US dollar-euro ($:€) exchange rate stood at $1.16/€1. 
At that price, the dollar was undervalued by roughly 10% relative to its purchasing power parity (PPP). 
Initially, the dollar’s price rose, but since 2002, it has, for the most part, fallen steadily. 
Every day seems to bring a new low against the euro. 
In the face of the dollar’s ongoing fall, policymakers have seemed paralyzed. 
The reasons for inaction are many, but it is difficult to avoid the impression that they are related to the current state of academic theorizing about exchange rates. 
Simply put, economists believe either that nothing should be done or that nothing can be done. 
Their so-called “rational expectations models” predict that exchange rates should not deviate from parity in any lasting way. 
Believing that they have found a way to model how currency traders think, they see no need for intervention because, save for temporary deviations, markets always get currency values right. 
“Behavioral economists,” by contrast, acknowledge that currencies can depart from parity for a long period. 
But they attribute this to market psychology and irrational trading, not to the attempts of currency traders to interpret changing macroeconomic fundamentals. 
This implies that intervention is not only unnecessary; it is ineffective: Faced with wide swings and trading volumes of $2 trillion per day, central banks are helpless to counteract traders’ irrational zeal. 
But both the “rational expectations” and the “behavioral” models are flawed, because they seek to generate exact predictions of human behavior. 
Both disregard the fact that rationality depends as much on individuals’ imperfect understandings of history and society as on their motivation. 
If we place “imperfect knowledge” at the heart of economic analysis, the implications of our limited ability to predict market outcomes becomes clear. 
When it comes to currency markets, parity levels based on international trade are merely one of many factors that traders consider. 
In attempting to cope with imperfect knowledge, they are not irrational when they pay attention to other macroeconomic fundamentals and thereby bid an exchange rate away from its parity level. 
In the euro’s rise against the dollar, euro bulls supposedly have been reacting to America’s current account deficit, the strong euro-zone economy, and rising euro interest rates. 
What is irrational about factoring in such fundamentals when trading a currency? 
Of course, persistent swings from parity do not last forever. 
While movements in macroeconomic fundamentals may lead bulls to bid the value of a currency further from parity, doing so simultaneously fuels concern about a counter-movement back to parity – and thus capital losses – which moderates the desire to increase long positions. 
Relating the riskiness of holding an open position in a currency market to the exchange rate’s divergence from parity levels suggests a novel way to think about how central banks can influence the market to limit departures from parity. 
Although the exchange rate ultimately reverts back to its PPP benchmark, in a world of imperfect knowledge market participants might ignore this possibility in the near term. 
But if central banks regularly announced their concern about significant departures from PPP, as they do now about inflation prospects, they would heighten traders’ concern that other traders will consider it increasingly risky to hold open positions that imply further movement away from parity levels. 
This should moderate bulls’ willingness to increase their long positions, thereby limiting the magnitude of the swing. 
To implement this “limit-the-swings” proposal, a central bank would announce its estimate of parity values every month, together with a comprehensive explanation of its estimates. 
It would also make known to currency traders its concern about excessive departures from its estimated parity values and its readiness to intervene at unpredictable moments to impede further departures from PPP. 
This policy would be even more effective if it were known that more than one central bank – say, the Fed and the ECB – were prepared to intervene. 
This strategy does not imply a pre-specified target zone for exchange rates. 
Given the size of currency markets, such targets almost always fail. 
Instead, our limit-the-swings strategy implies that, as the exchange rate moves further away from parity, central banks should intervene. 
The possibility of unpredictable interventions would reinforce the effect of the bank’s regular announcements of the parity values on traders’ perception of increased risk. 
While this proposal shares some features with inflation targeting, it may actually achieve its goals more effectively. 
Both involve announcing benchmark levels. 
In both cases, central banks attempt to affect macroeconomic outcomes directly as well as by influencing market participants’ expectations. 
As Milton Friedman emphasized, however, the links between monetary policy and inflation are “long and variable.” 
By contrast, the link between official intervention and exchange rate movements is much more direct and potent. 
Given massive trading volumes, direct intervention can alter supply and demand for currencies only on the margin. 
But the limit-the swings policy may amplify intervention’s effects by diminishing market participants’ desire to push the exchange rate away from PPP. 
Our proposal to reduce ­­– but not eliminate – swings from parity recognizes that price fluctuations may be crucial for markets to ascertain the price of assets with an uncertain payoff. 
But currency swings, if too wide and protracted, can hurt competitiveness and require costly resource allocation. 
These effects often lead to calls for protectionist measures, which may reduce the benefits from international trade and real economic activity. 
Only by acknowledging the limits to knowledge can monetary and exchange rate policies have a better chance of succeeding. 

Can Asia Free Itself from the IMF? 
BERKELEY – There has never been a question about the ultimate purpose of the Chiang Mai Initiative (CMI), the system of Asian financial supports created in 2000 in that Thai city. 
That purpose, of course, is to create an Asian Monetary Fund, i.e., a regional alternative to the International Monetary Fund, whose tender ministrations during the 1997-98 financial crisis have not been forgotten or forgiven. 
So far, however, the CMI has been all horse and no saddle. 
Its credits and swaps have never been activated. 
The distress following the failure of Lehman Brothers would have been an obvious occasion. 
Yet, revealingly, the Bank of Korea, the central bank hit hardest, negotiated a $30 billion foreign-currency swap with the United States Federal Reserve, not with its ASEAN+3 partners. 
Now, we are told, ASEAN+3 has achieved another great breakthrough, the so-called Chiang Mai Initiative Multilateralization (CMIM), aimed at turning its bilateral swaps and credits into a regional reserve pool. 
The goal was set in 2005, and last month ASEAN+3 finance ministers negotiated the details. 
They specified contributions to their $120 billion pool, set down borrowing entitlements, and allocated voting shares. 
The agreement on contributions is significant, it is said, because China and Japan will both contribute 32%. 
In previous regional agreements, like capital subscriptions to the Asian Development Bank, China had always been treated as a second-rate power and asked to contribute less. 
Indeed, China had shunned Japan’s 1997 proposal to create an Asian Monetary Fund precisely because it worried that it would play second fiddle. 
That China is now acknowledged as a co-equal means that it will not stand in the way of further cooperation. 
Also significant, we are told, is the agreement to make decisions by simple majority, with countries’ votes to be roughly in proportion to their contributions. 
This means that no single country can block action, in contrast to the IMF executive board, which makes decisions by consensus, giving large countries like the United States de facto veto power. 
But do these new rules really matter? 
Disbursing more than 20% of the credits available to a country still requires that it first reach an agreement with the IMF, and 20% of a country’s entitlement is actually less than it contributes to the pool. 
This would appear to nullify the very purpose of the arrangement, which is to free Asia from the IMF. 
While there is a plan to raise and then eliminate the 20% threshold, this is left to some future, unspecified date. 
The reason for the contradiction is straightforward. 
Countries putting money on the barrelhead want assurances that their resources will not be used frivolously, and they want to know that they will be repaid. 
But regional neighbors find it hard to criticize one another’s policies and demand course corrections. 
Political sensitivities run especially high in Asia. 
Even in Europe, with its long history of cooperation, surveillance and conditionality are outsourced to the IMF. 
Revealingly, the Fund, not the European Union, has taken the lead in negotiating emergency assistance packages for Hungary and Latvia. 
Delinking the CMIM from the IMF will require Asian countries to undertake hard-hitting reviews of one another’s policies and to demand difficult policy adjustments. 
Here ASEAN+3 talks the talk. 
Its May agreement included a commitment to establish a regional surveillance unit. 
But there is no agreement on where to situate it or how to staff it. 
It could be placed within ASEAN’s Secretariat in Jakarta. 
It could be placed inside the Asian Development Bank in Manila. 
It could be given to the “neutral” Northeast Asian country, Korea. 
The outcome matters – which is why governments are fighting over it. 
Recall how the fateful decision to situate the IMF in Washington, DC enhanced the influence of the US Treasury just down the street. 
These dilemmas can be finessed by giving both surveillance responsibilities and the actual power to disburse funds to an independent board insulated from national politics. 
Its members, with statutory independence and long terms in office, could function like the monetary policy committee of a central bank. 
They could issue a Financial Stability Report that bluntly flags weak policies and financial vulnerabilities. 
And they could demand policy adjustments as a condition for disbursing funds. 
The IMF could then be shown the door. 
This scheme wouldn’t solve all of Asia’s problems. 
But it would at least head off one danger, namely the urge to accumulate even more reserves. 
Recent volatility reinforces this temptation. 
If Asian countries succumb, global imbalances and all their associated problems will return. 
Pooling regional reserves as a way of making them go further is a better alternative. 
But making this vision a reality requires further bold thinking. 

Can Asians Resolve Global Problems? 
DAVOS – Is there an “Asian way” to resolving global challenges? 
The conventional answer is no. 
But elements of an Asian way are gradually emerging. 
Given Asia’s growing influence, the world should pay attention – and may have much to gain. 
The key to understanding Asian approaches is their pragmatism. 
Asians constantly adapt and change. 
In the past, Asians put a premium on protecting their sovereignty and were wary of any multilateral approaches that could dilute it. 
Now, in response to global challenges – for example, pandemics, financial crises, and climate change – the vast majority of Asian countries understand that collective action does not erode but instead protects sovereignty. 
For example, despite losing faith in the International Monetary Fund after the region’s financial crisis in 1997, they agreed to contribute billions to the IMF after the recent global financial meltdown. 
There has also been another significant shift in Asian attitudes. 
Instead of legitimacy , or simply getting more seats at the table to provide input, the discussion in Asia is increasingly about outputs: how to create institutions that are more effective . 
At the same time, reflecting their pragmatism, the Asians remain ready to accept continuing American leadership and domination of global institutions. 
Nor do they challenge the United States-led security umbrella for the Asia-Pacific region. 
At a recent workshop that we co-chaired in Singapore, the inevitable question was raised: Can Asians lead in meeting global challenges? 
The responses from the Chinese and Indian participants were striking. 
They argued that by taking care of more than two billion people – and taking care of them well – both China and India were already making a major contribution to global stability and order. 
That is a reasonable response. 
Indeed, if the vast majority of the four billion Asians continue to improve their livelihoods, the world would become a better place. 
Still, there are both positive and negative aspects of the Asian approach to the challenges of global governance. 
The positive aspects include respect for diversity and an emphasis on consensus-building over conflict, practical solutions over lofty principles, and gradualism over abrupt change. 
On the other hand, the desire to avoid confrontation can prevent meaningful agreements from being reached in a reasonable timeframe, and the appearance of consensus may merely mask the true politics at work. 
Drawing on the positive aspects of the Asian way suggests the possibility of more inclusive decision-making in the institutions of global governance. 
The danger in such an approach is that decisions may not be taken, or that those that are put rhetoric ahead of substance, thereby failing to resolve fundamental political challenges. 
So what might this mean in practice? 
Here are a few areas in which Asia – or, more properly, Asians – can contribute to solving some key global challenges: 
Peace and Security: Asia includes many new naval powers, such as China and India, which could help bolster the security of sea-lanes by creating partnerships with traditional naval powers such as the US. 
Various Asian countries joined efforts to combat piracy off the coast of Somalia. 
China is developing a deployable police capacity that may provide an important new tool in peace operations in fragile states. 
Climate Change: Asia needs to build up innovative markets that enable technology transfer. 
China, Japan, and Korea have become leading producers of green technology. 
Asian governments are in a position to take the lead in developing alternative energy sources. 
Financial Regulation: Asian countries need to take more leadership in regulating financial markets. 
China, questioning the wisdom of putting the fate of the world economy in the US dollar, has proposed the creation of a global currency. 
Progress has been made on the Chiang Mai Initiative – a multilateral currency swap arrangement among the ten ASEAN members, China, Japan, and South Korea – and the possibility of an Asian Monetary Fund remains on (or at least not far off) the table. 
Health: Asia’s experience in dealing with SARS, bird flu, H1N1, and other diseases should be studied carefully – for both positive and negative lessons – with a view to developing a new global consensus on handling pandemics. 
Social Enterprises: Asia has emerged as a leader in social entrepreneurship. 
The successes of social businesses such as Grameen Bank and BRAC in Bangladesh have contributed to renewed thinking about how social objectives can be fused with revenue-generating practices. 
In short, there is no coherent or systematic Asian approach to meeting global challenges. 
In response to each challenge, Asians respond pragmatically. 
But, given that some of the biggest challenges are the result of failed policies, pragmatism may offer a constructive way forward. 

Can Business Be Ethical? 
MELBOURNE – Something new is happening at Harvard Business School. 
As graduation nears for the first class to complete their Master of Business Administration since the onset of the global financial crisis, students are circulating an oath that commits them to pursue their work “in an ethical manner”; “to strive to create sustainable economic, social, and environmental prosperity worldwide”; and to manage their enterprises “in good faith, guarding against decisions and behavior that advance my own narrow ambitions but harm the enterprise and the societies it serves.” 
The wording of the new MBA oath draws on one adopted in 2006 by the Thunderbird School of Global Management, based in Arizona. 
Nevertheless, the fact that it has been taken up by the world’s most famous business school is significant. 
As of this writing, about 20% of the Harvard graduating class have taken the oath. 
That will, of course, prompt cynics to ask: “What about the other 80%?” 
But those who have taken the oath are part of a larger turn toward ethics that has followed the recent flood of revelations of dishonesty and greed in the financial sector. 
Interest in business ethics courses has surged, and student activities at leading business schools are more focused than ever before on making business serve long-term social values. 
Business ethics has always had problems that are distinct from those of other professions, such as medicine, law, engineering, dentistry, or nursing. 
A member of my family recently had an eye problem, and was referred by her general practitioner to an eye surgeon. 
The surgeon examined the eye, said that it didn’t need surgery, and sent her back to the general practitioner. 
That is no more than one would expect from a doctor who is true to the ethics of the profession, my medical friends tell me. 
By contrast, it’s hard to imagine going to a car dealer and being advised that you don’t really need a new car. 
For physicians, the idea of swearing an oath to act ethically goes back to Hippocrates. 
Every profession will have its rogues, of course, no matter what oaths are sworn, but many health care professionals have a real commitment to serving the best interests of their clients. 
Do business managers have a commitment to anything more than the success of their company and to making money? 
It would be hard to say that they do. 
Indeed, many business leaders deny that there is any conflict between self-interest and the interests of all. 
Adam Smith’s “invisible hand,” they believe, ensures that the pursuit of our own interests in the free market will further the interests of all. 
In that tradition, the economist Milton Friedman wrote, in his 1962 book Capitalism and Freedom : “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” 
For the true believers in this creed, the suggestion that the manager of a business should strive for anything except maximizing value for shareholders is heresy. 
But, while the global financial crisis did reveal fraud on a massive scale, the underlying cause of the crisis was not fraud but the failure of the market to knit together the self-interest of those who sold and resold sub-prime mortgages with the interests of the investors in financial institutions that bought them. 
The fact that an even larger catastrophe would have resulted had governments not been willing to draw on taxpayer funds to bail out the banks was an additional blow to those who have told us to trust the unregulated market. 
The MBA oath is an attempt to replace the Friedmanite view of the social responsibility of business with something quite different: a management profession that commits itself to promoting the long-term, sustainable welfare of all. 
The sense of a professional ethic is conveyed by clauses in the oath that require managers to “develop both myself and other managers under my supervision so that the profession continues to grow and contribute to the well-being of society.” 
Another clause stresses accountability to one’s peers, a hallmark of professional self-regulation. 
As for the ultimate objectives of the managerial profession, they are, as we have seen, nothing less than “to create sustainable economic, social, and environmental prosperity worldwide.” 

Can Chinese Industry Be Made Safe? 
After a massive gas well explosion killed 243 people in southwest China last December, China's State Council and National People's Congress have announced new rules for industrial safety. 
The authorities' response follows a now-familiar pattern: high-profile pronouncements in the wake of workplace disaster give way to neglect of basic safety standards. 
But if Western experience is any guide, ad hoc responses to high rates of work accidents won't reduce the risks to Chinese workers. 
Only the development of basic legal institutions will help make Chinese workplaces safer. 
China and other developing Asian economies are experiencing an industrial accident crisis of world-historical proportions. 
Official sources report 14,675 industrial-accident deaths in China in 2003, but statistics on workplace accidents are notoriously unreliable, and some observers suggest that the number may be closer to 120,000. 
China's coalmines are among the most dangerous places to work in the world. 
Chinese garment factories have repeatedly experienced disasters on a par with the infamous Triangle Shirtwaist fire in New York City a century ago, which killed 146 workers, all young women. 
Conditions may well get worse before they get better. 
Even though China instituted new initiatives in industrial safety at the beginning of 2003, official estimates indicate that industrial accident deaths increased by almost 10% last year. 
Yet as the example of the Triangle fire suggests, the China's experience is not unprecedented. 
Until the recent Asian accident crisis, the poorest workplace safety record in world history belonged to the United States in the fifty years following the American Civil War. 
Coalmines in Pennsylvania in the 1860s - where 6% of the workers were killed each year, 6% crippled, and another 6% temporarily disabled - looked very much like the mines now operating in China's Shaanxi Province. 
Industry-wide, one American worker in fifty at the turn of the last century was killed or seriously disabled each year in work-related accidents. 
Accidents were the leading cause of death among workers in dozens of hazardous industries. 
Of course, American industry is still plagued by serious safety problems. 
But seen from a historical perspective, there has been a striking decline in work-related injuries and deaths in the US. 
There were 30,000 annual work-related fatalities a century ago; today, the annual average is around 5,000, even as the population has tripled. 
What explains this huge improvement in occupational safety in the US? 
Increased union membership in the mid-twentieth century clearly helped, as workers bargained and lobbied for improved working conditions. 
In recent decades, some of the most dangerous work has been shipped overseas (ironically, much of it to China). 
And as Americans have grown wealthier, they have been willing to spend more on safety. 
But the deeper historical reasons for improved workplace safety lie in an array of legal institutions developed by workers, employers, lawyers, and lawmakers at the end of the 19th and beginning of the 20th centuries. 
American workers' organizations, for example, developed insurance benefits for their members and sought to exercise collective control to improve workplace safety. 
American lawyers developed modern accident law that created remedies against negligent employers. 
Most importantly, drawing on reforms first implemented in Germany, England, and France, workers' compensation statutes provided compensation for injured workers and created powerful incentives for employers to reduce accident tolls. 
In the 1910's, American workplace injuries began to fall in virtually every industry, except coal mining (where injury rates remained high for several decades). 
Each of these innovations helped create an institutional infrastructure capable of dealing with the problem of work accidents - and, indeed, with the wider social problems of disability, sickness, old age, and unemployment. 
Why? 
Because workplace safety and industrial accident compensation turned out to be critical early tests of western legal systems' administrative capacity to deal with the systemic problems of industrial free-market societies. 
Of course, what worked for the US may not work for China. 
There are many different ways that legal systems can respond to occupational safety problems. 
The US, for example, never developed a powerful body of factory inspectors capable of providing effective enforcement of public safety standards. 
Other western states, such as Germany, have successfully relied on centralized regulation and social insurance systems ever since Bismarck reformed the German law of accidents in the 1880's. 
Unfortunately, China is obstructing all available paths to improved workplace safety. 
National safety standards and inspection regimes reflect the underlying pathologies of the Chinese state, in which lower-ranking officials report only positive information up the bureaucratic food chain. 
At the same time, limits on workers' ability to organize independent unions have inhibited grassroots forms of safety monitoring. 
Even Chinese media have come under fire from officials for uncovering the kinds of workplace hazards that muckraking journalists revealed a century ago in the US. 
Lawsuits are apparently increasingly common, but they are notoriously cumbersome, and judges are not independent from factory bosses. 
Compensation awards to injured workers and their families are pitifully low and fail to give employers incentives to make their workplaces safe. 
The lesson of the US and European experiences is that improving workplace safety depends on the development of basic rule-of-law standards in courts, workplaces, and administrative bureaucracies. 
Edicts and exhortations from the State Council are all well and good. 
But only effective legal institutions, not Party fiat, will reduce Chinese workers' risk of death or injury on the job. 

Can Democracy Defeat Terrorism? 
The Bush administration provided three major rationales for going to war in Iraq. 
Only one remains at all credible: the need to transform the Middle East through democratization and thereby undercut support for terrorists. 
But does this argument really have any more basis in reality than the administration’s previous claims of an “imminent” threat from weapons of mass destruction or Saddam Hussein’s alleged support for al‑Qaeda? 
With post-invasion inspectors concluding that no WMD stockpiles existed, and intelligence agencies now convinced that the Iraq war’s net effect has been to boost al‑Qaeda recruitment throughout the Islamic world, the Bush administration is understandably emphasizing the claim about democratization. 
Indeed, it has become a dominant theme of Bush’s second term. 
As Secretary of State Condoleezza Rice put it in a recent speech in Cairo, “Freedom and democracy are the only ideas powerful enough to overcome hatred, division, and violence.” 
Cynics view this as merely an argument of convenience, one that has gained in prominence only because the other two rationales for the war collapsed. 
More importantly, skeptics also doubt the validity of the administration’s argument linking democracy and reduction of terrorism. 
After all, British citizens in one of the world’s oldest democracies carried out the recent terrorist attacks in London. 
Similarly, an American citizen carried out the worst terrorist attack in the United States before September 11, 2001. 
The skeptics have a point, but they go too far. 
For one thing, it is still too early to judge the merits of the argument. 
A full assessment of the Iraq war and its effects on the Middle East will take a decade or more. 
Clearly, the January 2005 election there was a positive step for the region. 
In the last six months, there have been national elections in Lebanon and local elections in Saudi Arabia. 
Egypt has amended its constitution to allow it presidential election to be contested. 
Further elections are scheduled in Iraq and the Palestinian Authority. 
As Walid Jumblatt, the Lebanese Druze leader said, “It’s strange for me to say it, but this process of change has started because of the American invasion of Iraq.” 
Perhaps that outcome shouldn’t seem so strange. 
After all, as the columnist David Brooks recently observed, “If there is one soft power gift that America does possess, it is the tendency to imagine new worlds.” 
In other words, the invasion of Iraq, and the subsequent increase in the rhetoric of democracy in the Middle East, may have changed frames of reference about the status quo. 
Democracy, however, is more than just elections. 
It also requires tolerance of minorities and respect for individual rights, as well as the development of effective institutions for resolving political conflicts in divided societies. 
If this occurs in Iraq, it may provide some post hoc legitimization for the war. 
But such an outcome remains in doubt. 
In the short run, the invasion of Iraq has created an intensifying insurgency and incipient civil war. 
The presence of foreign troops creates a stimulus for nationalist and jihadist responses. 
The future of Iraq, not to mention democracy there, remains uncertain at best. 
Nevertheless, we can still conclude from the Iraqi experience that while the development of democracy can be aided from outside, it cannot easily be imposed by force. 
While it is true that Germany and Japan became democratic after American occupation, it required their total defeat in a devastating war, and a seven-year occupation. 
Moreover, Germany and Japan were relatively homogeneous societies with some prior experience of democracy. 
It is hard to see such conditions repeated in today’s world. 
The Bush administration may be correct in arguing that the extremely high costs and risks of promoting democracy are less than the costs and risks of allowing the authoritarian status quo in the Middle east to persist indefinitely. 
But democracy is not the only instrument for a transformation that addresses the roots of terrorism. 
The development of civil societies, economic growth, and openness to the world are equally important. 
So is employing young men, educating young women, and addressing values of liberty and justice, which means ameliorating the sense of indignity in the region that stems from issues like the Israel-Palestine conflict. 
Moreover, democracy alone will not convert the current crop of extremist jihadis to peaceful change. 
If anything, too rapid a democratic transition may destabilize governments and enhance the extremists’ opportunities to wreak havoc. 
But, in the longer term, the slow, steady progress of democratization can provide a sense of hope for moderates, creating a plausible vision of a better future – the essence of soft power – that undercuts the message of hate and violence promoted by the extremists. 
Democratization can surely help remove some of the sources of rage that fuel terrorism, but it is only part of the solution. 

Can Democracy Take Hold in Ukraine? 
Certainly, the diversity of forms of governance used over the centuries by Russia, Poland, Lithuania, and Austria-Hungary when they ruled what is now Ukraine make creating a classic "nation state," with one dominant culture, difficult to imagine. 
Consider, for example, the robustness of the Russian language and the strength of the Orthodox Church- Moscow Patriarchate - in Donetsk that is in eastern Ukraine and the robustness of the Ukrainian language and the influence of the Ukrainian Greek Catholic Church in Lviv in the west. 
Yet Spain, India, Belgium, and Switzerland are all consolidated democracies that do not fit the classic model of the nation state. 
Indeed, multiple but complementary identities are the norm in all four countries. 
These multiple identities emerged because the democratic state provided a "roof" of equal rights above all citizens, whatever their religion, language, or culture. 
This helped develop a strong sense of identity with the statewide political community. 
These profoundly pluralistic countries are not classic "nation states," but rather what I call democratic "state nations." 
During the recent presidential election, many suggested that reconciling the "two Ukraines" was impossible. 
But polarization has not been a constant factor in the history of independent Ukraine. 
On the contrary, Ukraine is closer to being a "state nation" than many people think. 
Moreover, its prospects for becoming a consolidated democracy are enhanced by the fact that its political elites - and most ordinary Ukrainians - have eschewed the idea of being a classic "nation state." 
Indeed, more than 80% of Ukraine's Russified eastern districts voted for independence in 1991, and the 1999 parliamentary and presidential elections did not split the country nearly as much as the 2004 presidential elections did. 
A survey in 2001 of the two supposedly most polarized cities, Donetsk and Lviv, showed convergence in their approval of independent Ukraine, with only 1% of respondents in Lviv and 5% in Donetsk preferring that Ukraine be divided into two or more countries. 
As in other "state nations," surveys in Ukraine indicate that common symbols have helped build elements of a common identity. 
Both ethnic Russians and ethnic Ukrainians view the tenth-century feudal state known as "Kyiv Rus" very favorably. 
Moreover, both groups share the seventeenth-century Cossack warrior Bohdan Khmelnytskyi as their most popular historical figure, and both revile Stalin due to the famines caused by his forced collectivization of agriculture in the 1930's (whereas most ethnic Russians in Russia view Stalin as the heroic state savior of WWII). 
These shared attitudes toward Ukrainian symbols and statehood owe much to a recognition that independence will not be well protected by forging a classic nation state, that is, a "Ukrainian Only" state. 
Thus, the country's declaration of independence 13 years ago was made in the name of "The people of Ukraine," and citizenship was offered to everyone who was born on the territory of Ukraine, regardless of nationality. 
I was invited as an adviser to two constitutional committee meetings in Kyiv in the 1990's. 
My impression from the discussions was that both Ukrainians and Russians in Ukraine were acutely aware of the need to avoid ethnic conflict. 
In fact, an informal state-building alliance of convenience emerged between key non-communist Ukrainian nationalists and key pro-sovereignty, ethnic Russian communists. 
The perception of "two Ukraines" emerged in the presidential election of 2004 partly due to the charge that Yushchenko would eliminate the constitutional guarantee that ethnic Russians could use Russian as their primary language of instruction in schools. 
But during his campaign Yushchenko assured Russophones that he would uphold such rights. 
Finally, much of what has been described as "secessionism" in the east is in fact regionalism. 
Greater legally respected decentralization in Ukraine, especially in Crimea, would be a logical and overdue "state nation" policy. 
The other major issue raised during the Orange Revolution concerns presidential powers. 
Many Yushchenko loyalists are unhappy that, in exchange for the government agreeing to fairer election rules, Yushchenko agreed to transfer some presidential powers to the parliament. 
Not withstanding the self-serving intentions of outgoing President Leonid Kuchma, this historic pact may in the long run produce positive results for Ukraine's democracy and prospects for joining the European Union. 
The Ukrainian Constitution of 1996 adopted a model of governance close to the French style semi-presidentialism created by Charles de Gaulle for the Fifth Republic: a directly elected president with significant executive powers and a prime minister responsible to parliament. 
This system works best when the president and the prime minister come from the same political party or coalition. 
But, as in Russia under President Vladimir Putin, Kuchma vastly increased presidential powers in Ukraine. 
Indeed, no real democracy in the world has such unchecked presidential authority. 
A look at the eight postcommunist countries just admitted to the European Union is instructive. 
Four - Hungary, the Czech Republic, Estonia, and Latvia - are parliamentary. 
The other four - Slovenia, Poland, Lithuania, and Slovakia - have directly elected presidents, but none comes constitutionally and politically close to Kuchma's Ukraine. 
Like Portugal in the 1980's, they adopted semi-presidential systems that so reduce presidential authority and increase the parliament's powers that they are most accurately described as "parliamentarized semi-presidential" systems. 
This is the model toward which Ukraine could be moving, however unwittingly. 
If so, the presidency would most likely cease to be a potential source of ethnic polarization, thereby strengthening the common identity that both Ukrainian and Russian citizens are committed to upholding. 

Can Draghi Be Believed? 
LONDON – Mario Draghi, the president of the European Central Bank, has repeatedly claimed that the ECB will do everything necessary to save the euro. 
Nothing has been formally agreed yet, but the ECB is expected to announce a new government bond-buying program following next week’s meeting of its Governing Council. 
Will it work? 
To have a significant impact on Italian and Spanish borrowing costs, the latest effort must be big enough to dispel the convertibility risk that underlies the extreme polarization of government bond yields across the eurozone: investors are loathe to hold Spanish and Italian debt, because they fear that both countries might be forced to leave the currency union. 
Unfortunately, it is highly unlikely that the ECB will do enough to persuade investors that membership is unequivocally forever, not least because Germany’s Bundesbank opposes any open-ended commitment to capping borrowing costs. 
Spain, Italy, and the eurozone periphery face unprecedentedly high real borrowing costs, which are preventing a recovery in investment and hence economic growth. 
Without a return to growth, they cannot quell investors’ doubts about their fiscal sustainability and their banks’ solvency. 
The Italian and Spanish governments argue that their high borrowing costs largely reflect convertibility risks, and that the ECB should do as much as necessary to address them. 
But eurozone members that currently benefit from exceptionally low borrowing costs – Germany, Austria, Finland, the Netherlands, and, to a lesser extent, France – maintain that Italian and Spanish borrowing costs largely reflect these countries’ failure to reform their economies and strengthen their public finances. 
There is merit in both positions – but much more in the Spanish and Italian argument. 
Opponents of open-ended ECB action argue that Italian and Spanish borrowing costs are not actually that high: interest rates have merely returned to levels seen in the run-up to the introduction of the euro, when investors distinguished properly between the countries that now share the euro. 
High borrowing costs are needed to focus minds and instill discipline. 
Were the ECB to take aggressive action to bring them down, moral hazard would result: countries would face no punishment for delaying reforms. 
In nominal terms, Italian and Spanish borrowing costs are indeed comparable to the levels of the late 1990’s. 
But it is the real (inflation-adjusted) cost of capital that is crucial, and for both countries it is much higher now than it was in the run-up to their adoption of the euro. 
Moreover, it is erroneous to compare the present with the late 1990’s. 
Italy and Spain are at very different points in the economic cycle now than they were then. 
In the late 1990’s, both economies were growing (rapidly in the Spanish case), whereas now they face hard times and a mounting risk of deflation. 
And countries facing depressions and rapidly weakening inflation typically face very low borrowing costs: investors purchase government bonds for want of profitable alternatives. 
This is what we see in the United Kingdom and the United States, where borrowing costs remain at all-time lows, despite both countries’ weak public finances and poor growth prospects. 
To be sure, investors must differentiate between eurozone governments, in order to ensure that risk is correctly priced. 
The Italian and Spanish authorities acknowledge as much. 
But the current spread between the yield on German sovereign debt and that of the Italian and Spanish governments far exceeds what is required to ensure that investors differentiate appropriately. 
The polarization of borrowing costs has politically explosive distributional effects: Germany is borrowing and refinancing its existing debt at artificially low interest rates. 
According to the Kiel Institute for the World Economy, investor flight from the government debt markets of the eurozone’s struggling members to Germany has already saved the German government almost €70 billion ($88 billion). 
Other countries, by contrast, face ruinously high borrowing costs, which are simultaneously increasing the scale of their reform challenges and narrowing their political scope to address them. 
The longer Italian and Spanish borrowing costs remain at such elevated levels, the greater the damage to those economies, and the harder it will become to marshal the necessary political support for further reforms. 
The Italians and Spaniards are right: the principal reason for the size of the spread between the periphery and Germany is convertibility risk. 
Investors are demanding a hefty premium to insure against the chance that Italy and Spain are ultimately forced out of the eurozone – thus bringing that day closer by weakening countries’ fiscal positions and raising their private-sector borrowing costs (which are set by government bond yields). 
With private and public consumption in both Italy and Spain set to remain depressed for years to come, economic recovery requires stronger investment and exports. 
But the steep fall in the value of Italian and Spanish banks’ holdings of government debt, combined with mounting bad loans as a result of recessions exacerbated by punitive borrowing costs, is forcing the banks to rein in business lending further. 
The ECB’s latest program of bond purchases will be big enough to ensure that Draghi does not lose face. 
But it will not be big enough to dispel convertibility risk and hence demonstrate the ECB’s credibility as a lender of last resort. 
And it is the ECB’s credibility problem, not that of member states, that is the principal reason for unsustainably high borrowing costs in Italy, Spain, and other distressed eurozone countries. 

Can East Asians Cooperate? 
SEOUL – As China continues its unremitting rise, people throughout East Asia are wondering whether their states will ever be able to achieve the peaceful, stable relations that now characterize Europe. 
Given the regularity of serious diplomatic spats – over everything from tiny atolls in the South China Sea to the legacy of World War II – this may sound like an elusive dream. 
But, with nationalism and military budgets rising sharply, achieving consensual stability has become imperative for the region. 
Can it be done? 
The “liberal” view of international relations recommends three ingredients: political democratization, deeper economic interdependence, and viable institutions through which East Asia’s states can conduct their affairs in a multilateral way. 
Because, as Immanuel Kant noted long ago, states with democratic political systems tend not to fight with each other, democracy should be encouraged in order to secure peace. 
Pursuit of a Pax Democratia has long been embedded in American foreign policymaking. 
And European states have, since 1945, made democracy a core element in their integration. 
But East Asia’s wide variety of political systems makes such a democratic consensus highly unlikely, at least for now. 
On the other hand, economic interdependence among East Asia’s states has been deepening. 
For 30 years, East Asians have received the ample rewards of Adam Smith’s insight that free trade would bring material benefits to participating countries. 
Regional policymakers nowadays are loath to risk this progress through hostile behavior. 
Economic interdependence in East Asia gained momentum following the Asian financial crisis of 1997-1998. 
But confrontations between the United States and China, the US and Japan, and China and Japan over the past year have left many wondering whether economic interdependence alone can bring about stable regional relations. 
The third liberal route to peace – institutionalizing international relations – aims to regularize the behavior of states through a system of norms and rules, thereby creating order (and peace) out of quasi-anarchy. 
Such thinking motivated US President Woodrow Wilson’s desire to establish the League of Nations after World War I, and it also underlay President Franklin Roosevelt’s push to create the United Nations and the Bretton Woods institutions after World War II. 
Likewise, European states accept the common norms and rules of the Organization for Security and Cooperation in Europe, and are almost always prepared to be regulated by them. 
Indeed, the European Union is the fruit of a long, continuous effort to strengthen common norms and rules among European states. 
In contrast to Europe, East Asia is composed of states that are radically different in terms of their size, development, and political-economic systems. 
East Asian policymakers understand that there is little that they can do to alter their neighbors’ political systems. 
Nor can they do much in an official way to deepen economic interdependence in the short term. 
So it is natural for the region’s policymakers to focus more on institutionalization, with lively discussions regularly taking place about the region’s nascent constellation of groupings: ASEAN+3, the East Asian Summit, the East Asian Community, Asia Pacific Economic Cooperation, Asia-Pacific Community, etc. 
But this process has been politicized and ridden by an acute behind-the-scenes competition for influence among the major powers. 
Indeed, East Asia seems to lack the equivalent of major EU architects like Jean Monnet and Robert Schuman – visionaries with the stature and political support needed to begin building a framework for regional peace in a time, like today, of great change. 
So, for now, East Asians should be very pragmatic about institutionalizing regional affairs. 
Rather than spending energy on trying to build large-scale institutions covering the entire region, it would be better to focus more on smaller, issue-oriented institutions. 
For example, the first successful step toward regional economic cooperation in East Asia was the Chiang Mai Initiative for international currency swaps, which followed the 1997-1998 crisis. 
Similarly, the Six-Party Talks on the denuclearization of North Korea, though producing no significant results so far, remain the only useful mechanism for addressing the problem collectively. 
The nuclear disaster in Fukushima, Japan, could give rise to another issue-specific regional institution, this one focused on nuclear safety. 
For Japan’s neighbors, the International Atomic Energy Agency is not enough; their urgent worries are creating pressure to establish a regional mechanism. 
The coming summit between South Korea, China, and Japan on May 21-22 in Tokyo, for example, will focus on nuclear safety and prepare a regime for closer regional cooperation. 
With 88 nuclear power plants currently operating in South Korea, Japan, and China, the initiative is an important one. 
What would happen if any of their reactors develops problems similar to those at Fukushima? 
Moreover, North Korea has been running its Yongbyon nuclear facility without international inspection. 
According to the wife of a North Korean defector who worked for 20 years as a nuclear scientist at Yongbyon, safety standards there are dangerously lax. 
More broadly, only through the establishment of less ambitious, smaller-scale, and functionally oriented institutions can momentum be built for a regional framework for peace. 
After all, Rome wasn’t built in a day, and the EU – rooted in the post-war European Coal and Steel Community – began with similar small steps toward integration. 

Can Egypt Become a True Democracy? 
WASHINGTON, DC – Hosni Mubarak’s resignation as President of Egypt marks the beginning of an important stage in that country’s transition to a new political system. 
But will the political transition ultimately lead to democracy? 
We cannot know with certainty, but, based on the history of democratic government, and the experiences of other countries – the subject of my book, Democracy’s Good Name: The Rise and Risks of the World’s Most Popular Form of Government – we can identify the obstacles that Egypt faces, as well as the advantages it enjoys, in building political democracy. 
Understanding any country’s democratic prospects must begin with a definition of democracy, which is a hybrid form of government, a fusion of two different political traditions. 
The first is popular sovereignty, the rule of the people, which is exercised through elections. 
The second, older and equally important, is liberty – that is, freedom. 
Freedom comes in three varieties: political liberty, which takes the form of individual rights to free speech and association; religious liberty, which implies freedom of worship for all faiths; and economic liberty, which is embodied in the right to own property. 
Elections without liberty do not constitute genuine democracy, and here Egypt faces a serious challenge: its best-organized group, the Muslim Brotherhood, rejects religious liberty and individual rights, especially the rights of women. 
The Brotherhood’s offshoot, the Palestinian movement Hamas, has established in the Gaza Strip a brutal, intolerant dictatorship. 
In conditions of chaos, which Egypt could face, the best-organized and most ruthless group often gets control of the government. 
This was Russia’s fate after its 1917 revolution, which brought Lenin’s Bolsheviks to power and condemned the country to 75 years of totalitarian rule. 
In the same way, the Muslim Brotherhood could seize power in Egypt and impose a far more oppressive regime than Mubarak’s ever was. 
Even if Egypt avoids control by religious extremists, democracy’s two-part anatomy makes swift and smooth progress to a democratic system problematic. 
While elections are relatively easy to stage, liberty is far more difficult to establish and sustain, for it requires institutions – such as a legal system with impartial courts – that Egypt lacks, and that take years to build. 
In other countries that have become democracies, the institutions and practices of liberty have often emerged from the working of a free-market economy. 
Commerce fosters the habits of trust and cooperation on which stable democracy depends. 
It is no accident that a free-market economy preceded democratic politics in many countries in Latin America and Asia in the second half of the twentieth century. 
Here, too, Egypt is at a disadvantage. 
Its economy is a variant of crony capitalism, in which economic success depends on one’s political connections, rather than on the meritocratic free-market competition from which liberty grows. 
Egypt suffers from another political handicap: it is an Arab country, and there are no Arab democracies. 
This matters, because countries, like individuals, tend to emulate others that they resemble and admire. 
After they overthrew communism in 1989, the peoples of Central Europe gravitated to democracy because that was the prevailing form of government in the countries of Western Europe, with which they strongly identified. 
Egypt has no such democratic model. 
Egypt is, however, better placed to embrace democracy than the other Arab countries, because the obstacles to democracy in the Arab world are less formidable in Egypt than elsewhere. 
Other Arab countries – Iraq, Syria, and Lebanon, for example – are sharply divided along tribal, ethnic, and religious lines. 
In divided societies, the most powerful group is often unwilling to share power with the others, resulting in dictatorship. 
Egypt, by contrast, is relatively homogeneous. 
Christians, who make up 10% of the population, are the only sizable minority. 
The oil that the Arab countries of the Persian Gulf have in abundance also works against democracy, for it creates an incentive for the rulers to retain power indefinitely. 
Oil revenues enable them to bribe the population to remain politically passive, while discouraging the creation of the kind of free-market system that breeds democracy. 
Fortunately for its democratic prospects, Egypt has only very modest reserves of natural gas and oil. 
The fact that the large protest movement that suddenly materialized has, until now, been a peaceful one also counts as an advantage for building democracy. 
When a government falls violently, the new regime usually rules by force, not by democratic procedures, if only to keep at bay those it has defeated. 
The cause of democracy in Egypt has one other asset, the most important one of all. 
Democracy requires democrats – citizens convinced of the value of liberty and popular sovereignty and committed to establishing and preserving them. 
The political sentiments of many of the hundreds of thousands of people who gathered in Cairo’s Tahrir Square over the last three weeks leave little doubt that they do want democracy, and are willing to work and even to sacrifice for it. 

Can Emerging Markets Save the World Economy? 
MILAN – Over the past two years, industrial countries have experienced bouts of severe financial instability. 
Currently, they are wrestling with widening sovereign-debt problems and high unemployment. 
Yet emerging economies, once considered much more vulnerable, have been remarkably resilient. 
With growth returning to pre-2008 breakout levels, the performance of China, India, and Brazil is an important engine of expansion for today’s global economy. 
High growth and financial stability in emerging economies are helping to facilitate the massive adjustment facing industrial countries. 
But that growth has significant longer-term implications. 
If the current pattern is sustained, the global economy will be permanently transformed. 
Specifically, not much more than a decade is needed for the share of global GDP generated by developing economies to pass the 50% mark when measured in market prices. 
So it is important to know whether this breakout growth phase is sustainable. 
The answer comes in two parts. 
One depends on emerging economies’ ability to manage their own success; the other relates to the extent to which the global economy can accommodate this success. 
The answer to the first question is reassuring; the answer to the second is not. 
While still able to exploit the scope for catch-up growth, emerging economies must undertake continuous, rapid, and at times difficult structural change, along with a parallel process of reform and institution building. 
In recent years, the systemically important countries have established an impressive track record of adapting pragmatically and flexibly. 
This is likely to continue. 
With government policy remaining on course, we should expect a gradual strengthening of endogenous domestic growth drivers in emerging economies, anchored by an expanding middle class. 
Combined with higher trade among them, the future of emerging economies is one of reduced dependence on industrial-country demand, though not a complete decoupling. 
Distribution as well as growth matter. 
Emerging economies still need to manage better their growing domestic tensions, which reflect rising income inequality and uneven access to basic services. 
A failure on this front would derail their strengthening domestic and regional growth dynamics. 
This is better understood today, with distributional aspects of growth strategy being firmly placed on emerging countries’ policy agendas. 
While emerging economies can deal with the economic slowdown in industrial countries, the financial-sector transmission mechanism is more challenging. 
Today’s low interest-rate environment is causing a flood of financial flows to emerging economies, raising the risk of inflation and asset bubbles. 
The hiccups in Western banks have served to disrupt the availability of trade credits, and, if amplified, could destabilize local banks. 
These risks are real. 
Fortunately, several emerging economies continue to have cushions and shock absorbers. 
Having entered the 2008-2009 crisis with sound initial conditions (including large international reserves, budget and balance-of-payments surpluses, and highly capitalized banks), they are nowhere near exhausting their fiscal and financial flexibility – and hence their capacity to respond to future shocks. 
Overall, emerging economies are well placed to continue to navigate successfully a world rendered unstable by crises in industrial countries. 
Yet, again, the decoupling is not complete. 
A favorable outcome also requires industrial countries’ ability and willingness to accommodate the growing size and prominence of emerging economies. 
The risks here are significant, pointing to a wide range of potential problems. 
The flow of knowledge, finance, and technology that underpins sustained high growth rates in emerging economies is closely linked to an open, rule-based, and globalized economy. 
Yet this global construct comes under pressure in an environment in which advanced countries have stubbornly high unemployment and bouts of financial volatility. 
The location of growth in the global economy comes to be seen as a zero-sum game, leading to suboptimal reactions. 
As a result, the continued openness of industrial-country markets cannot be taken for granted. 
Political and policy narratives are becoming more domestic and narrow, while the international agenda and the pursuit of collective common global interests are having greater difficulty being heard. 
These challenges will grow in the years ahead. 
And then there is the issue of global institutions and governance. 
Managing a growing and increasingly complex set of transnational connections is an even bigger challenge in a multi-speed world that is being turned upside down. 
Such a world requires better global governance, as well as overdue institutional reforms that give emerging economies proper voice and representation in international institutions. 
In the absence of such changes, the global economy may bounce from one crisis to another without a firm hand on the rudder to establish an overall sense of direction. 
The result is what economists call “Nash equilibria,” or a series of suboptimal and only quasi-cooperative outcomes. 
Where does all this leave us? 
Emerging economies will be called on to play an even larger role in a multi-speed global economy characterized by protracted rehabilitation of over-extended balance sheets in industrial countries. 
Left to their own devices, they are up to the task. 
But they do not operate in a vacuum. 
Emerging economies’ ability to provide the growth lubrication that facilitates adjustment in industrial countries is also a function of the latter countries’ willingness to accommodate tectonic shifts in the operation and governance of the global economy. 
Let us hope that these global issues receive the attention they require. 


Can Global Companies Save Africa? 
Multinational companies were a driving force in Eastern Europe’s postcommunist transition, bringing new skills, technology, training, and better working conditions. 
They saved the banking systems, modernized telecommunications networks, rebuilt ailing industries, raised the quality of goods, and undermined the cozy vested interests that had robbed ordinary citizens for decades. 
But is Eastern Europe an exception? 
Can multinational companies bring similar benefits to other needy regions, such as sub-Saharan Africa, where a legacy of colonialism, apartheid, and economic mismanagement create a fundamentally different business environment? 
According to one view, Eastern Europe was uniquely positioned to benefit from multinational companies: its workforce was well educated, especially in engineering and sciences, and was thus able to avoid the classic “low-skills, low-wage” trap. 
What communism failed to provide – modern management, new technologies, and marketing know-how – was what multinationals could offer. 
But in countries like South Africa, Namibia, and Zimbabwe, multinational companies may look very different. 
Western governments were typically indifferent, if not hostile, to African liberation movements. 
Their big corporations helped entrench racist regimes with notorious contract-labor systems that amounted to little more than slavery. 
Moreover, multinational companies that invest in the Czech Republic, Slovakia, Hungary, and Estonia produce cars, high-end electronics, and industrial machinery both for the domestic market and for export. 
Ensuring high-quality output and local consumers’ loyalty requires keeping their workforces happy and maintaining a positive public image. 
By contrast, African countries often see the worst sides of multinationals: energy, mineral, and precious metal companies go where resources are, not where it’s pleasant to work. 
As one former mining manager in the region told me, “The aim was always simple: get the assets out of the ground and out of the country as cheaply and with as little fuss as possible.” 
Because the customer is abroad, and there is little processing to be done in country, why should companies upgrade local skills or otherwise help the host economy? 
But sub-Saharan Africa’s potential relationship with global corporations need not be so limited. 
Sensible macroeconomic policies, coupled with non-violent resolution of political or racial conflicts, as in, say, Namibia, Botswana, or South Africa, can set the groundwork for highly constructive partnerships. 
Namibia’s government, for example, while recognizing that the country will never build a strong industrial base, takes a clear, balanced, and determined approach to attracting, and getting the most out of, multinational corporations. 
The Ministry of Trade and Industry established a sensible incentive scheme for export-oriented investment and a black empowerment program that encourages investors to help the previously neglected workforce. 
It relies on competition, rather than bureaucratic heavy-handedness, to achieve its goals. 
Consider diamond mining, Namibia’s biggest industry and export. 
The NamDeb mining corporation, a joint venture between the government and De Beers, dominates the industry. 
But while the government wants to move beyond low-skilled mining into higher-value processing, De Beers has balked, because it already has well established, cost-effective cutting operations abroad. 
Enter Smicor, a subsidiary of Israel’s Leviev group that currently produces only a small proportion of the country’s diamond output but wants more exploration licenses. 
In 2004, Smicor promised to establish the higher-value diamond-cutting business that the government craves, and has since recruited and trained 400 workers in a new plant in the capital, Windhoek. 
Similarly, at the government’s nudging, the mining conglomerate Anglo-American developed a zinc-processing operation at its new Skorpion mine in the Namib desert, creating more skilled jobs for locals. 
Drawing benefits from global companies doesn’t always require high-level government negotiations. 
Consider Katatura, a shantytown on the outskirts of Windhoek into which the former apartheid regime forced tens of thousands of blacks in the 1950’s and 1960’s. 
The district is poor by any reckoning, with 100,000 people crammed into shabby corrugated iron and tarpaulin-covered huts along miles of dirt pathways and hillsides. 
Yet every year, new brick houses, some quite substantial, emerge among the hovels. 
One young mother, Rosalia, who lives in a small shack with seven children by different fathers, may look destitute to Western eyes, but she has a small business selling dried meat. 
Last year, she managed to get electricity connected to her shack, and she invested her savings in a refrigerator to store food and drinks for resale. 
Next year, she will expand the hut, and will eventually apply for land and begin to build a brick house. 
Her stall is far from ideal; with every gust of wind, sand and dirt blow over the meat. 
Poor traders like Rosalia want real shops, and for some, Namibia Beverages, the local bottling operation of Coca-Cola, is answering the call with sturdy iron cabins that are spacious, portable, and easily secured. 
Coca-Cola supplies the cabins to traders who sell its products, just as it might provide promotional umbrellas to outdoor cafés in Paris. 
Even in the remotest villages on the Angolan border, where Ovambo people live in stick huts, electricity is in short supply, and villagers trek miles each day to fetch firewood and water, a bottle of Coke or Fanta is easy to find. 
With their distribution power and detailed knowledge of the market, multinational companies’ influence could surely be leveraged to address many development problems, regardless of a country’s political or economic legacy. 
Development groups, governments, consumers, and small entrepreneurs need only work out initiatives that embody their common interests with global firms. 

Can Good Emerge From the BP Oil Spill? 
CAMBRIDGE – Perhaps it is a pipe dream, but it is just possible that the ongoing BP oil-spill catastrophe in the Gulf of Mexico will finally catalyze support for an American environmental policy with teeth. 
Yes, the culprits should be punished, both to maintain citizens’ belief that justice prevails, and to make other oil producers think twice about taking outsized risks. 
But if that is all that comes out of the BP calamity, it will be a tragic lost opportunity to restore some sanity to the United States’ national environmental and energy policy, which has increasingly gone off track in recent years. 
Why should there be any reason for hope, especially given that US environmental policy has been predicated on the unrealistic belief that relatively small subsidies to new energy technologies can substitute for tax-induced price incentives for producers and consumers? 
The fact is, the BP oil spill is on the cusp of becoming a political game-changer of historic proportions. 
If summer hurricanes push huge quantities of oil onto Florida’s beaches and up the Eastern seaboard, the resulting political explosion will make the reaction to the financial crisis seem muted. 
Anger is especially rife among young people. 
Already stressed by extraordinarily high rates of unemployment, twenty-somethings are now awakening to the fact that their country’s growth model – the one they are dreaming to be a part of – is, in fact, completely unsustainable, whatever their political leaders tell them. 
For now, it may only be black humor (e.g., the New Orleans waiter who asks diners whether they want their shrimp leaded or unleaded). 
But an explosion is coming. 
Might a reawakening of voter anger be the ticket to rekindling interest in a carbon tax? 
A carbon tax, long advocated by a broad spectrum of economists, is a generalized version of a gas tax that hits all forms of carbon emissions, including from coal and natural gas. 
In principle, one can create a “cap-and-trade” system of quantitative restrictions that accomplishes much the same thing – and this seems to be more palatable to politicians, who will jump through hoops to avoid using the word “tax.” 
But a carbon tax is far more transparent and potentially less prone to the pitfalls seen in international carbon-quota trading. 
A carbon tax can help preserve the atmosphere while also discouraging some of the most exotic and risky energy-exploration activities by making them unprofitable. 
Of course, there must be better (far better) and stricter regulation of offshore and out-of-bounds energy extraction, and severe penalties for mistakes. 
But putting a price on carbon emissions, more than any other approach, provides an integrated framework for discouraging old carbon-era energy technologies and incentivizing new ones by making it easier to compete. 
Advocating a carbon tax in response to the oil spill does not have to be just a way of exploiting tragedy in the Gulf to help finance outsized government spending. 
In principle, one could cut other taxes to offset the effects of a carbon tax, neutralizing the revenue effects. 
Or, to be precise, a carbon tax could substitute for the huge array of taxes that is eventually coming anyway in the wake of massive government budget deficits. 
Why might a carbon tax be viable now, when it never has been before? 
The point is that, when people can visualize a problem, they are far less able to discount or ignore it. 
Gradual global warming is hard enough to notice, much less get worked up about. 
But, as high-definition images of oil spewing from the bottom of the ocean are matched up with those of blackened coastline and devastated wildlife, a very different story could emerge. 
Some say that young people in the rich countries are just too well off to mobilize politically, at least en masse. 
But they might be radicalized by the prospect of inheriting a badly damaged ecosystem. 
Indeed, there is volatility just beneath the surface. 
Modern-day record unemployment and extreme inequality may seem far less tolerable as young people realize that some of the most cherished “free” things in life – palatable weather, clean air, and nice beaches, for example – cannot be taken for granted. 
Of course, I may be far too optimistic in thinking that the tragedy in the Gulf will spur a more sensible energy policy that attempts to moderate consumption rather than constantly seeking new ways to fuel it. 
A great deal of the US political reaction has centered on demonizing BP and its leaders, rather than thinking of better ways to balance regulation and innovation. 
Politicians understandably want to deflect attention from their own misguided policies. 
But it would be far better if they made an effort to fix them. 
A prolonged moratorium on offshore and other out-of-bounds energy exploration makes sense, but the real tragedy of the BP oil spill will be if the changes stop there. 
How many wake-up calls do we need? 

Can Greece Avoid the Lion? 
ATHENS ­­– Even as the European Union and the International Monetary Fund lay the groundwork for a giant first-round bailout, debate is swirling about whether Greece can avoid sovereign default. 
Some view Greece as Argentina revisited, noting the stunning parallels with the country that in 2001 set the record for the world’s largest default (in dollar terms). 
Others, such as Greek Prime Minister George Papandreou, see the country’s problems as difficult but manageable, and complain of interference from ill-intentioned foreign speculators. 
Avoiding default may be possible, but it will not be easy. 
One has only to look at official data, including Greece’s external debt, which amounts to 170% of national income, or its gaping government budget deficit (almost 13% of GDP). 
But the problem is not only the numbers; it is one of credibility. 
Thanks to decades of low investment in statistical capacity, no one trusts the Greek government’s figures. 
Nor does Greece’s default history inspire confidence. 
As demonstrated in my recent book with Carmen Reinhart This Time is Different: Eight Centuries of Financial Folly , Greece has been in default roughly one out of every two years since it first gained independence in the nineteenth century. 
Loss of credibility, if it comes, can bite hard and fast. 
Indeed, the historical evidence slams you over the head with the fact that, whereas government debt can drift upward inexorably for years, the end usually comes quite suddenly. 
And it can happen to any country, although advanced countries can usually tighten fiscal policy with sufficient speed and credibility that the pain comes mainly in slower growth. 
Unfortunately, for emerging markets, adjustment is often impossible without help from the outside. 
That is the precipice on which Greece stands today. 
A debt crisis is not inevitable. 
But the government urgently needs to implement credible fiscal adjustment, concentrating not only higher taxation, but also on rolling back some of the incredible growth in government spending – from 45% of GDP to 52% of GDP – that occurred between 2007 and 2009. 
The government must avoid relying too much on proposals for tax increases, which ultimately feed back on growth and sustainability. 
It would be far preferable to balance tax increases with some reversal of runaway government spending. 
I have Greek friends who say that Greece is not alone. 
And they are right. 
Some countries are almost inevitably going to experience bailouts and defaults. 
One of the more striking regularities that Reinhart and I found is that after a wave of international banking crises, a wave of sovereign defaults and restructurings often follows within a few years. 
This correlation is hardly surprising, given the massive build-up in public debts that countries typically experience after a banking crisis. 
We have certainly seen that this time, with crisis countries’ debt already having risen by more than 75% since 2007. 
But, whereas we are likely to see a wave of defaults and IMF programs this time, too, fiscal meltdown does not have to hit every highly indebted country. 
Indeed, what a country like Greece should be doing is pulling out all the stops to stay clear of the first and second wave of restructurings and IMF programs. 
If it can, then perhaps watching other countries suffer will help convince the local political elite to consent to adjustment. 
If not, Greece will have less control over its adjustment and potentially experience far greater trauma, perhaps eventually outright default. 
There is an old joke about two men who are trapped by a lion in the jungle after a plane crash. 
When the first of them starts putting on his sneakers, the other asks why. 
The first answers: “I am getting ready to make a run for it.” 
But you cannot outrun a lion, says the other man, to which the first replies: “I don’t have to outrun the lion. 
I just have to outrun you.” 
Greece has yet to put on its sneakers, while other troubled countries, such as Ireland, race ahead with massive fiscal adjustments. 
Greece’s new Socialist government is hampered by campaign promises that suggested the money was there to solve the problems, when in fact things turned out to be far worse than anyone imagined. 
Unions and agricultural groups tie up traffic with protests every other day, hinting at possible escalation. 
Most Greeks are taking whatever action they can to avoid the government’s likely insatiable thirst for higher tax revenues, with wealthy individuals shifting money abroad and ordinary people migrating to the underground economy. 
Greece’s underground economy, estimated to be as large as 30% of GDP, is already one of Europe’s biggest, and it is growing by the day. 
In the case of Argentina, a pair of massive IMF loans in 2000 and 2001 ultimately only delayed the inevitable harsh adjustment, and made the country’s ultimate default even more traumatic. 
Like Argentina, Greece has a fixed exchange rate, a long history of fiscal deficits, and an even longer history of sovereign defaults. 
Nevertheless, Greece can avoid an Argentine-style meltdown, but it needs to engage in far more determined adjustment. 
It is time to put on the running shoes. 

Can Green Trade Tariffs Combat Climate Change? 
BERKELEY – In recent months, China has taken center stage in the international debate over global warming. 
It has surpassed the United States as the world’s largest source of greenhouse gases, and it became developing nations’ diplomatic champion at the recent United Nations climate negotiations in Bali. 
Now China may become the target of a full-fledged trade war that could destroy – or perhaps rescue – the chances of bringing rich and poor nations together to fight global warming. 
The focus on China intensified late last year, when new data from the International Energy Agency and other research organizations revealed that China had overtaken the US as the largest source of greenhouse gases – and, more ominously, that its emissions are growing at a rate that exceeds all wealthy nations’ capacity to decrease theirs. 
Even if China met its own targets for energy conservation, its emissions would increase by about 2.3 billion metric tons over the next five years – far larger than the 1.7 billion tons in cutbacks imposed by the Kyoto Protocol on the 37 developed “Annex 1” countries, including the US. 
After the inconclusive end of the UN led Bali talks on the global environment, worry has grown among US and European industries – especially iron, steel, cement, glass, chemicals, and pulp and paper – that any new climate treaty would put them at a big disadvantage against their fast-growing competitors in China. 
In response, the US Congress is moving to create a system of trade sanctions that would levy heavy taxes on imports from other major greenhouse gas emitters. 
Ironically, the American plan is taking shape even before the US takes any action to reduce its own emissions, inviting charges of hypocrisy, violation of international law, and threatening a major trade war. 
The tariff proposal – contained in the central piece of global warming legislation now before Congress – would impose emission controls on domestic industries starting in 2012. 
It would also levy punitive tariffs on greenhouse-gas-intensive products imported from countries that lack “comparable action” to that of the US, starting in 2020. 
Industrial lobbies and labor unions are pushing hard for these sanctions to take effect more quickly. 
European Commission President José Manuel Barroso, French President Nicolas Sarkozy and industrial chambers of commerce strongly advocate a similar tariff system, leading many analysts to predict that the EU will also adopt some sort of green tariff system in the next few years. 
Warning of an “all-out trade war” if the sanctions go forward, US Trade Representative Susan Schwab argues that green trade sanctions would violate World Trade Organization rules. 
In a recent letter to the House Energy and Commerce Committee, she wrote, “We believe this approach could be a blunt and imprecise instrument of fear, rather than one of persuasion, that will take us down a dangerous path and adversely impact US manufacturers, farmers, and consumers.” 
Developing nations’ allies, meanwhile, are warning that the sanctions plan could destroy the chances of a post-Kyoto treaty. 
Chinese diplomats have not responded directly, but they have noticeably hardened their stand on climate talks. 
In February, China’s top climate negotiator, Yu Qingtai, said at the UN that rich nations, which “caused the problem of climate change in the first place,” must be treated as “culprits,” and developing countries as “victims.” 
Despite China’s official hard line, some Chinese environmental officials privately express alarm at run-away carbon emissions, and suggest that foreign green tariffs would actually strengthen their hand in domestic policy struggles over controlling greenhouse gases by helping to win political support for emissions cuts. 
Pan Yue, vice-director of the State Environmental Protection Administration, recently argued in a China Daily article in favor of stronger emissions regulations and a more “green-oriented China,” warning that “China’s image among the international community” was in jeopardy. 
The growing dispute over trade sanctions brings to the fore not only the fundamental ethical question of whether wealthy nations should bear the burden of emissions reduction alone, but also the strategic question of whether sticks as well as carrots should be used to induce green behavior in developing countries. 
Although China may not like it, the international trading system may provide more leverage than any other post-Kyoto mechanism over developing countries’ environmental policies. 
Despite the threat of trade wars, trade sanctions could emerge as the most effective means of forcing international action on global warming. 

Can Hamas Stay in Power? 
With one-third of the Palestinians’ Hamas-led government now under arrest by Israel, the escalation in Israeli-Palestinian relations has moved beyond military confrontation. 
A far more fundamental question has come into view: can a Palestinian government that draws its authority from an agreement with Israel stay in power when it is led by an organization committed to the destruction of Israel? 
The abduction of an Israeli soldier in the Gaza Strip, as well as the abduction and subsequent murder of an 18-year old Israeli civilian in the West Bank, have brought to the fore that question, which has haunted Israeli-Palestinian relations since Hamas won parliamentary elections in January. 
The international community, led by the “Quartet” (the United States, the European Union, the United Nations, and Russia), has put three conditions to the Hamas government if it wishes to achieve international legitimacy and continue to be supported financially. 
Hamas must recognize Israel’s right to exist, stop all terrorist activities, and commit itself to carry out all previous international agreements signed by the Palestinian Authority. 
These look like reasonable conditions to any outside observer. 
To Hamas, however, they appear to undermine its very raison d'etre. 
After all, this is an organization committed to the destruction of Israel – its charter calls for a holy war against all Jews – and the establishment of an Islamic state in all of historical Palestine. 
Indeed, Article 22 of that charter reveals that Hamas views the Jews (together with the Freemasons and other nefarious organizations like Rotary International and the Lions Club), as responsible for the French and Bolshevik Revolutions, World War I, and World War II. 
So it is no great surprise that Hamas rejected the Quartet’s conditions. 
At the same time, Palestinian President Mahmoud Abbas (Abu Mazen), who represents Fatah, which lost the January elections, has tried in vain to find common ground with Hamas through an ambiguous text known as “The Prisoners’ Document.” 
This document was intended to serve as an implicit acceptance of Israel’s right to exist. 
But nothing of the sort appears in the truncated text approved by Hamas. 
On the contrary, the text legitimizes continuing attacks against Israeli civilians in the West Bank, making it unacceptable to Israel – and to the international community. 
But the current crisis cannot be solved by words alone. 
One of the paradoxical results of America’s almost messianic belief in elections as a panacea for all the ills of the Middle East is that Hamas – the winner of democratic elections – has gained a degree of legitimacy that it never had before. 
On the other hand, Hamas’s history and current behavior clearly indicate that it regards elections as merely a political tool, and that it is devoid of any commitment to the norms and values underlying democracy. 
Fascist and communist regimes of the past, which followed a similar instrumentalist approach to democracy, come to mind here. 
Yet, at the same time, the US supports Abu Mazen, trying to undermine the Hamas government, thus casting a shadow on the credibility of its own commitment to democracy. 
The current violence may escalate further, and could bring down the Hamas government. 
On the other hand, diplomatic means may bring about the release of the Israeli soldier and put a stop to the firing of Qassam rockets from Gaza into Israel – a daily occurrence that has challenged the credibility of the new Israeli government under Prime Minister Ehud Olmert. 
But the fundamental problem is that, until now, at every historical juncture, the Palestinians refused to accept a compromise and consequently failed in nation-building. 
In 1947, they refused the UN partition plan, which called for the establishments of two states in British Palestine. 
In 1993, after the Oslo agreements, the Palestinian Authority established under Yasir Arafat became another militarized authoritarian regime, very much like Syria and Egypt, and did nothing to alleviate the suffering of the Palestinian refugees. 
It was this failure that brought Hamas to power. 
The current crisis is obviously the first serious test for Olmert and his plans for further withdrawal from Israeli-occupied territories. 
But it is an even greater test for the Palestinians: will they once again be led by a radical and fanatical leadership into another national catastrophe? 
Or will they finally realize that a future of independence, sovereignty, and dignity is open to them – but only if they grant the Israelis what they rightly claim for themselves? 
The international community can urge the Palestinians toward a decision. 
But that decision, and its moral costs, remains in the hands of the Palestinians alone. 

Can Hezbollah Weather the Arab Spring? 
BEIRUT –Three years ago, regional opinion polls showed that the Middle East’s most popular leaders were Hezbollah leader Sayed Hassan Nasrallah, Syrian President Bashar al-Assad, and Iran’s President Mahmoud Ahmadinejad. 
People at the time appreciated that they were standing up to Israel in Lebanon and Gaza, and pushing back against aggressive American policies in the region. 
With the Arab Spring, regional public opinion has shifted toward prioritizing civil rights and democratic reform over foreign policy. 
Today, Assad is reviled, Ahmadinejad’s government is accused of violently suppressing its own pro-democracy protestors, and both Hezbollah and Iran are condemned for continuing to back Assad as he slaughters his own population. 
As a result, Hezbollah is no longer the widely popular movement that it once was across the Arab and Muslim worlds, but it remains a highly effective and heavily armed force. 
And, in politics, as Machiavelli pointed out long ago, it is more important to be feared than loved. 
To be sure, Hezbollah is still grudgingly respected for its ability to stand up to Israel. 
But it has lost its halo as a voice for the oppressed and downtrodden, and has exposed itself as a partisan and sectarian party that will side with Iran and its allies even at the expense of human rights and human lives in neighboring Syria. 
But Hezbollah’s hard power has, up to now, not been affected by developments in the Arab Spring or Syria. 
Its deployment in Lebanon, its fighting capacity, and its thousands of missiles are all still intact. 
Hezbollah was initially thrilled at the outbreak of popular revolts against rulers closely allied with the US and the West. 
Even Libya’s Colonel Muammar el-Qaddafi was considered a foe for having allegedly ordered the killing of Lebanese Shiite leader Imam Musa Sadr in 1978. 
Hezbollah had been in a virtual cold war with Hosni Mubarak’s Egypt since January 2009, when Nasrallah had effectively accused Mubarak’s government of collusion in Israel’s intervention in Gaza, and had called for the “Egyptian people to take to the streets in their millions.” 
But, as the revolts proceeded, it emerged that people wanted good government and social justice, and were not enamored of Iran or interested in joining an axis of resistance. 
Furthermore, as the Muslim Brotherhood rose in Egypt, Hezbollah’s erstwhile ally, Hamas, drifted away from it and its Syrian and Iranian backers, and found a new footing in Egypt and the Gulf. 
But Hezbollah’s disappointment turned to intense concern when Syrians rebelled against Assad. 
If his regime falls, Hezbollah is at risk of losing its arms-supply bridge to Iran. 
It would be unable to compensate for that loss by relying on Lebanese seaports or Beirut’s airport, because both could easily be blockaded. 
It would still have its full first-strike and retaliatory capacity, but, like a bee, it would be able to sting only once. 
Without the ability to resupply itself, Hezbollah would emerge from any future war a significantly weakened force. 
Within Lebanon itself, Hezbollah is still strong, but its comfort level has declined. 
In May 2008, it demonstrated its domestic dominance by taking over the capital, Beirut. 
In January 2011, it brought down Saad Hariri’s government and installed one more to its liking. 
But, in just the last few weeks, parts of the Sunni north have erupted in armed defiance of Hezbollah and the government that it dominates, and are openly supporting the Syrian rebels. 
In a sense, these Sunni groups are creating an armed enclave in northern Lebanon to counterbalance the armed Shia enclaves in Beirut, the south, and the Bekaa region. 
Hezbollah has also been shaken by the abduction and continued detention of a dozen Lebanese Shiites – some close to Nasrallah – by opposition forces in Syria. 
Hezbollah faces parliamentary elections in the spring of 2013. 
If its Christian ally, Michel Aoun’s Free Patriotic Movement, does poorly, or if the ever-shifting Druze leader Walid Jumblatt returns his Progressive Socialist Party to the anti-Syrian alliance of which it was once a part, Hezbollah would lose its parliamentary majority, and hence its ability to form and topple governments. 
Perhaps anticipating these domestic vulnerabilities, Hezbollah encouraged and joined the resumption of National Dialogue discussions involving all of Lebanon’s main communities. 
Strategically, Hezbollah fears that if Assad falls, and if it loses the ability to resupply itself rapidly and effectively as a result, Israel will take advantage by unleashing another war against it. 
With tensions between Israel and Iran, Hezbollah’s patron, unresolved, this fear cannot be discounted. 
Even if Hezbollah can adjust to the Arab Spring, it fears the winter with Israel that might follow. 

Can High Oil Prices Be Good? 
World oil prices crossed $40 a barrel in mid-summer, and have since climbed to the mid-$50's. 
Today's oil prices are still only two-thirds the real peak reached during the Iranian Revolution of 1979, and future markets expect the oil price to fall back and settle at perhaps $45 a barrel. 
But the current high level of oil prices has led forecasters to start reining in their expectations for economic growth. 
"Higher oil prices are here to stay," says the American economic forecaster Allen Sinai. 
"[T]hat has to subtract growth and could cause core inflation to pick up." 
Indeed, according to Sinai, higher oil prices are "the biggest risk...since the bursting of the stock-market bubble in 2000-2001." 
Sinai is hardly alone. 
If the oil price stays at $40 a barrel, expect it to have next to no effect on short-term world GDP growth. 
But if the oil price remains at or near $60 a barrel, expect everyone's forecasts of GDP growth to be reduced by 1% per year. 
High oil prices also threaten to slow long-term productivity growth. 
With high - and volatile - oil prices, businesses will focus their investments less on boosting productivity and more on maintaining flexible energy usage. 
At $40 a barrel, expect oil prices to slow the long-run growth rate of the world's potential output by 0.1% per year. 
At $60 a barrel, expect the "measured" long-term rate of potential world output growth to slow by roughly 0.3% per year. 
With most shocks to the world economy, we expect central banks to take steps to offset their effects. 
When business investment committees become more cautious, we expect to see the Federal Reserve, the European Central Bank, the Bank of England, and others lower interest rates to make the numbers more attractive. 
If consumers go on a spending binge, we expect the world's central banks to raise interest rates to cool off construction spending and free up the resources needed to prevent shortage-inducing inflation. 
But this economic logic does not apply in the case of increases in oil prices. 
Although high oil prices look like a tax on business activity that depresses aggregate demand, they also raise inflation, both directly and indirectly. 
Central banks respond to lowered demand by reducing interest rates and to higher expected inflation by raising interest rates. 
Because high oil prices both lower demand and raise inflation, central banks respond by doing little or nothing. 
The effects of high oil prices thus flow through to the economy without being moderated by the world's central banks leaning against the wind. 
Yet if we take a very long-term view, it is not so clear that high oil prices are bad for the world as a whole. 
For example, if high oil prices were the result of taxes that were then redistributed to oil users, they would be unambiguously good. 
To be sure, most taxes entail heavy "excess burdens": the cost is significantly greater than the value of the revenue raised because of potential taxpayers' myriad attempts at evasion and avoidance. 
A tax on oil, however, does not entail excess burdens. 
On the contrary, it implies excess benefits . 
Shifts to more energy-efficient means of transportation ease congestion. 
Attempts to shave costs by economizing on energy use reduce pollution. 
Higher prices for oil substitutes spur research into other energy technologies - research that is much needed today if we are to tackle the problems of global climate change tomorrow. 
A well-designed tax on oil would also reduce demand, thereby lowering the potential for windfall profits for those who rule or own the ground over the oil deposits. 
A little more than a decade ago, Lloyd Bentsen, President Bill Clinton's first Treasury Secretary, tried to ensure precisely that, proposing to use a "BTU tax" to close America's fiscal deficit. 
The Republican Party and the American Petroleum Institute sank that proposal. 
A decade later, we have high oil prices, but they are not due to a well-designed tax, either in America or elsewhere. 
As a result, the price boom is boosting windfall profits for the owners of oil deposits rather than improving countries' public finances. 


Time to Test Iran 
NEW YORK – Most of the debate about how to address Iran’s efforts to develop nuclear-weapons capacity focuses on two options. 
The first is to rely on deterrence and live with an Iran that has a small nuclear arsenal or the ability to assemble one with little advance notice. 
The second is to launch a preventive military strike aimed at destroying critical parts of the Iranian program and setting back its progress by an estimated two or more years. 
But now a third option has emerged: negotiating a ceiling on the nuclear program that would not be too low for Iran’s government and not too high for the United States, Israel, and the rest of the world. 
In fact, such an option has been around for years – and in several rounds of negotiations. 
What has changed, however, is the context. 
And changes in context can be critical; indeed, what happens away from the negotiating table almost always determines the outcome of face-to-face talks. 
The single most important change in context is the rapidly deteriorating state of Iran’s economy. 
The many financial and oil-related sanctions that have been implemented in recent months and years are starting to bite. 
They were designed not to impede Iran’s nuclear program directly, but rather to increase the price that Iran’s leaders must pay for pursuing their nuclear ambitions. 
The thinking (or, more accurately, the hope) was that Iran’s leadership, if forced to choose between regime survival and nuclear weapons, would choose the former. 
This hypothesis may soon get a real-world test. 
Iran’s currency, the rial, has fallen roughly 40% in recent weeks, sharply increasing Iran’s inflation rate and what Iranians must pay for imports and many staples. 
The result is the first signs of serious public discontent with the regime since the violent repression of the Green Movement in 2009. 
Iran’s merchant class, one of the pillars of the clerical establishment that has ruled the country since the 1979 revolution, is grumbling as well. 
Other factors also could give negotiations a real chance. 
Upheavals in the Arab world suggest that no regime in the Middle East is entrenched; Iran’s leaders would have to be blind not to have taken note. 
In his speech at the United Nations in late September, Israeli Prime Minister Binyamin Netanyahu signaled a willingness to give sanctions more time, until at least the summer of 2013. 
And there are signs that, regardless of who wins November’s presidential election, the US might well undertake an armed strike, with potential destruction much greater than if Israel were to act alone. 
Again, the Iranians might see compromise as the lesser of the threats that it faces. 
Until now, negotiations have been desultory at best. 
The compromise that Iranian officials are suggesting is nowhere near what they would have to accept to avert military action and gain an easing of sanctions. 
But now is the time to present to Iran a comprehensive package – what it must do and what the reward would be if it agreed. 
It would also be essential to set a deadline for Iran to accept such an accord, lest it use further negotiations to buy time to improve its nuclear capabilities. 
The precise terms would have to be determined, but Iran would have to give up all of the uranium that it has enriched to 20% and stop enriching to that level. 
It would also have to accept a ceiling on how much uranium it could possess or enrich at lower levels. 
Limits on the number of centrifuges and where they could be housed might also be necessary. 
Inspections would need to be frequent and intrusive to reassure the outside world of what Iran is doing – or, perhaps more to the point, what it is not doing. 
In return, Iran would receive substantial relief from the removal of those sanctions imposed in response to its nuclear program. 
Moreover, the offer’s essential elements should be made public. 
That way, if the regime balked, it would have to explain to its own people why it was not prepared to abandon its nuclear-weapons program, despite a reasonable US proposal that was not designed to humiliate Iran, and that, if accepted, promised a major improvement in Iranian living standards. 
It is possible that the new economic and political context will lead Iran’s rulers to accept what they have rebuffed until now. 
If, on the other hand, the regime remains determined to pursue its nuclear goals, regardless of cost, then we will know that there is no alternative to the first two options: attacking Iranian facilities or living with a nuclear-armed Iran. 
Both outcomes are potentially risky and costly, but the US public, in particular, should be made aware that it was Iran that rejected a reasonable alternative to war before one began. 
And, if push came to shove, it would be good for other governments to know that the US and/or Israel decided to attack only after offering Iran a face-saving way out. 
That would make it less difficult to keep economic pressure on Iran in the aftermath of any strike. 
Going public makes sense for another reason: Iran’s people ought to know that any attack on the country was one that it had largely brought on itself. 
This realization might mute any “rally around the flag” reaction and thus not rule out regime change down the road. 
We tend to think of diplomacy as something carried out in secret; sometimes, however, it is better to hide in plain sight. 
This is such a moment. 
But time is of the essence; diplomacy needs to move faster if it is not to be overtaken by Iran’s march to a nuclear weapon – and, with it, the march to conflict. 

Can Iraq Be Won? 
In moving to topple Saddam Hussein's regime, the Bush administration stakes its case on two critical arguments. 
First, President Bush and his senior aides insist that the coming Iraq war is an extension of the military campaign against terrorism. 
It would spare America and the world, in the words of Deputy Defense Secretary Paul Wolfowitz, "the danger that Iraq's weapons of mass terror could fall into the hands of terrorists." 
Second, the Bush team is pledging to bring democracy to Iraq, a transformation that - it is hoped - will spur democratization across the region. 
A peaceful, democratic dawn in Iraq, they assert, would soon break over other authoritarian Arab states as well. 
By transforming the political landscape of the Middle East, American officials hope to strike at the root causes of Islamic extremism. 
Messrs. Bush, Rumsfeld, Cheney and Wolfowitz like to pose as realists, but just how realistic is such thinking? 
Is it based on a sober assessment of the complex realities in Iraq and the region? 
Or is it driven by ideology and wishful thinking? 
Will a war against Iraq help the US in its fight against terrorists, or will it make Americans more vulnerable? 
Despair and alienation have taken hold of the younger generation of Arabs, who represent over 50% of the region's population. 
Political repression and the silence of Arab public opinion should worry America and its Arab allies, not reassure them, because it means that there is no way for the public to channel its interests, demands, and frustrations peacefully. 
A US invasion of Iraq, with large numbers of civilian casualties, would deepen the sense of victimization and defeat felt by Arab youths and make them inclined to join Al Qaeda-style holy war cells. 
Far from undermining militancy and combatting terror, a war will likely play into the hands of Al Qaeda, giving it a new lease on life. 
Indeed, militant Islamists, hoping to recover from the devastating blows they have absorbed since the war on terror began, are already positioning themselves to capitalize on the coming war with Iraq. 
In the last few weeks, Al Qaeda's propaganda messages have pointed increasingly at the Iraqi crisis. 
The organization seeks to reinvent itself as a defender of the Iraqi people. 
In this, Al Qaeda finds a receptive audience. 
The dominant Arab-Muslim narrative stresses that the coming war has nothing to do with fighting terror. 
Rather, it is intended to settle old scores and make Washington the arbiter of Arab destiny and resources, particularly oil. 
By attacking Iraq, the US could win the armed confrontation with Hussein, but probably lose the broader - and more vital - political struggle for the future of the country. 
American officials do not seem to recognize how difficult, costly, and prolonged the task of creating a peaceful order and a viable democracy in Iraq will be. 
There is a lack of appreciation of how deeply entrenched are Iraq's sectarian, tribal, and ethnic loyalties. 
A sense of humility and skepticism is missing. 
The building blocks and institutions necessary for a functioning polity, let alone a democracy, do not exist. 
Since the advent of army rule in 1958, successive regimes have terrorized Iraqis into submission and bled the country white through their military misadventures. 
Monitored and oppressed for 45 years, Iraqis have lost faith in the political system and turned inward, to tribalism and religious/ethnic factionalism. 
Civil society has been crushed and the middle class decimated--thanks in no small part to the UN-led economic sanctions that have been enforced since 1991. 
Of course, reforming and democratizing the Iraqi political system is not impossible. 
On the contrary, the Iraqis have suffered more than most and have learned the hard way the perils of authoritarianism and oppression. 
They recognize their vested interest in overcoming their divisions and rebuilding their political community. 
Iraq also possesses human and material resources that should work in favor of democracy in the long term. 
But democracy cannot be delivered to Iraq by an outside power. 
Only Iraqis, with international assistance, can transform their country. 
This task requires time, patience, hard work, and luck. 
It will likely take one or two decades, not just a year or two, the proposed time frame of American military presence in Iraq after the expected ouster of Hussein. 
Unless America is willing to police the new order for many years and invest vast political and economic resources in assisting, not imposing, the reconstruction of state and society, Iraq will fracture and descend into chaos. 
Its neighbors will be destabilized. 
New jihadi groups will arise. 
Not only will there be no peace and democracy in Iraq, but the West's security interests will be endangered further. 
Sadly, this worst case scenario is hardly entertained by American officials, who now seem to be prisoners of their own rhetoric. 

Can Italy Survive Berlusconi? 
If history seems likely to rank Silvio Berlusconi as an inconsequential Prime Minister of Italy, it will surely remember him as an extraordinary – and extraordinarily bizarre – one. 
Promising one thing and delivering another was not so much a weakness of his government as its organizing principle. 
Given the erratic nature of Berlusconi’s rule, it is no surprise that, ever since the 2001 election that returned him to power, the center-left l’Unione coalition has won all subsequent elections – administrative, regional, and European. 
Yet the left’s prospects in the upcoming parliamentary election are far from certain, and Berlusconi seems far from doomed. 
Given the country’s economic conditions, one would think that Italy is ripe for decisive change. 
For the last four years, average growth in incomes has been a mere 0.3%, compared to 1.5% in the European Union, and in the past two years public debt has again started to rise. 
Moreover, the strategy of Berlusconi’s ruling center-right Casa della Libertà coalition has been to tread water and wait for Europe’s economy to pick up instead of tackling Italy’s structural difficulties. 
As a result, the government is criticized not only by the unions, but also by the employers’ association, Confindustria, which in 2001 gave Prime Minister Berlusconi strong support. 
Then there is the ongoing conflict of interests between Berlusconi-the-Premier and Berlusconi-the-magnate, who holds public licenses that make him a semi-monopolist in media and TV advertising. 
During Berlusconi’s tenure in office, his enormous personal assets have tripled. 
While his parliamentary majority has approved many laws that promote his personal interests and have eased some of his legal difficulties, at the beginning of March, Berlusconi was again accused of corruption and tax fraud. 
Berlusconi’s ministers have scarcely behaved better. 
Two were forced to resign within a month of each other. 
Roberto Calderoli, a prominent official in Lega Nord, the third-largest government party, provoked riots in Libya by wearing a t-shirt printed with the infamous cartoons of the Prophet Mohammad. 
Francesco Storace, the former Minister of Health and a leading member of Alleanza Nazionale, the second-largest government party, is suspected of organizing political espionage, in an Italian-style Watergate. 
But, despite the government’s catastrophic economic and ethical record, opinion polls indicate a lead of only about four percentage points for l’Unione—too small, given the high number of undecided voters, to predict the election’s outcome. 
So what is keeping Berlusconi and his coalition in the race? 
Above all, Berlusconi’s electoral campaign is aimed, in the manner of President Bush’s 2004 re-election campaign, at energizing his hard-core supporters and mobilizing the growing number of voters who have abstained in recent years. 
In doing this he has not hesitated to use his semi-monopoly over television to exalt his government’s alleged accomplishments. 
His campaign rhetoric highlights anti-communism with an emphasis not seen in Italy since 1948, coupled with a defense of the family and values cherished by the Roman Catholic establishment, although the Church has so far resisted being drawn into the campaign. 
The Berlusconi coalition also benefits from the weakness of l’Unione. 
Its leader, Romano Prodi, obtained an extraordinary popular endorsement when more than four million people voted for him in Italy’s first-ever primary elections. 
Yet Prodi continues to be a party-less leader of too many parties. 
To be sure, the cohesiveness of l’Unione has strengthened: the two major parties (Democratici di Sinistra and Democrazia e Libertà - la Margherita) are united under the symbol of the olive tree, the other parties have endorsed a detailed 280-page government program, and the left-wing Partito della Rifondazione Comunista has given clear signs of moderation and loyalty to the coalition. 
For voters, however, a perception of fragility remains. 
Finally, the uncertainty of the outcome reflects not so much voters’ behavior, but a change in the electoral system. 
During the past decade, Italy has used a majority electoral system corrected by a proportional quota. 
Under this system, Casa della Libertà translated a small popular majority in 2001 into a decisive parliamentary majority. 
But, with the same result on the horizon this year for l’Unione, the center-right parliamentary majority changed the electoral law just a few months before the end of its term. 
This is reminiscent of an army that, fearing defeat on the battlefield, poisons the wells as it retreats. 
A proportional system in the absence of individual preferences means that party secretaries, rather than citizens, will choose deputies, and, with no effective electoral threshold, the number of parties will proliferate. 
Although the election ballot will be 40 centimeters long to accommodate all the symbols of the old and new parties, it won’t contain the name of even a single candidate. 
But the worst problem is that the majority system for the Senate could lead to a different majority gaining control there than in the Chamber of Deputies (the lower house), which may well cause legislative paralysis. 
Moreover, President Carlo Azeglio Ciampi’s mandate ends at the same time that parliament dissolves, which means that his successor, elected by the new parliament, would have to nominate a government without a majority in both houses. 
Berlusconi and Prodi have ruled out a German-style grand coalition – an outcome that seems especially unlikely following an election campaign in which both contestants have strongly hinted that their opponent has no legitimate right to govern. 
At the same time, holding another vote would leave the question of the electoral law unresolved. 
The puzzle of Berlusconi’s survival reflects a wider European conundrum. 
Many Europeans, not just Italians, are nervous and unsure of where the continent is going. 
So it is no surprise that an opportunist and charlatan like Berlusconi continues to get a hearing. 
Italians must decide upon the sort of Italy they want if they are to get leaders of the stature they need. 

 

Can One International Financial Architecture Fit All? 
CAMBRIDGE: Leaders from the G8 countries left Cologne without agreeing on institutional reform for the world's financial system. 
Before they begin to tinker they should ponder the following scenario. 
Financial market deregulation in an un-named country sets off a credit boom and an explosion in equity and real estate prices. 
Private sector debt, increasingly short-term, shoots up from 85% of GDP to 135% within five years. 
As the currency appreciates in real terms, exports falter and the current account deficit widens, and the government balks at devaluation. 
Soon, devaluation in a nearby country reveals how vulnerable the economy is to the loss of international confidence. 
Suddenly, foreign creditors curtail short-term credit lines. 
The central bank tries to hold the exchange rate, but eventually is forced to let the currency float. 
The result is a currency collapse and a wave of bankruptcies. 
The economy confronts its most severe economic crisis in many decades. 
Is the country Mexico in 1994-1995? 
Thailand or South Korea in 1997-1998? 
Actually, no. 
The country in question is Sweden in 1992-1993. 
Similarities between Sweden then and major developing economies recently are reminders that in a world of capital mobility financial crises can overwhelm all kinds of countries, regardless of their structural features. 
Crony capitalism, corruption, weak rule of law, lack of transparency, inadequate financial regulation and prudential supervision, poor corporate governance, non-enforcement of bankruptcy procedures, an insufficiently open capital account, overly-ambitious industrial policies -- these were the features of Asian countries that supposedly precipitated the Asian financial crisis. 
Yet they are hardly Swedish characteristics, or for that matter are they dominant in Finland and Norway (two countries that experienced severe financial turbulence in 1992-1993). 
Nonetheless, the view that such structural elements played a key role in the crisis has come to enjoy widespread support in official circles. 
The result is a remarkable development: the international community has now taken on the task of redesigning developing economies in East Asia and elsewhere. 
To cite one example: the memorandum of economic policies submitted by the Korean government to the IMF (March 10th, 1999) contains one-and-a-half pages on macroeconomic policy, and twelve densely-packed pages on privatization, financial sector restructuring, prudential regulation and supervision, corporate restructuring, trade and capital account liberalization, and transparency, monitoring and data reporting. 
An irony here is that conditionality on developing countries is being ratcheted up at precisely the moment when our comprehension of how the world economy works and what small countries need to do to prosper within it has been revealed to be sorely lacking. 
As Alan Greenspan candidly acknowledged recently, "I have learned more about how this new international financial system works in the last twelve months than in the previous 20 years." 
There are serious dangers in throwing at developing countries a Washington-consensus view of economic policy, even if this consensus is now refurbished with new international codes and standards and with "second-generation reforms." 
First, the new set of external disciplines come hand-in-hand with a particular, neo-liberal model of economic development that remains untested, and will foreclose development strategies that worked in the past, and others that could work in the future. 
The narrowing of national autonomy in the formulation of development strategy is a cost for which developing countries are unlikely to receive an adequate reward. 
Second, it is doubtful that the new policy agenda will make the international financial system much safer. 
As long as capital flows remain large relative to the liquid assets held by national governments and are easily reversible, the international economy will be hostage to spectacular boom and bust cycles. 
Indeed, by focusing attention on internal structural reforms in the developing world, the risk is that the current approach will lead to complacency on short-term capital flows, increasing rather then reducing systemic risks. 
Finally, the difficulties of implementing many of the institutional reforms under discussion are severely underestimated. 
Today's developed countries did not acquire their institutions overnight. 
It would be nice if third-world countries could somehow acquire first-world institutions, but the safe bet has to be that this will happen only when they are no longer third-world countries. 
The fact that fashions in economic policy change should make us more humble in prescribing structural programs for developing countries - especially on those (in, say, East Asia) that have developed by rejecting conventional wisdom and espousing heterodox policies. 
The reality is that our prescriptions often go beyond what can be supported by careful theoretical reasoning or empirical demonstration. 
Ignorance calls for humility. 
Back to Sweden in 1992. 
How did the Swedes deal with their financial crisis? 
To begin with, they enacted a general guarantee for the entire banking system to stem panic (providing blanket protection to all but the shareholders). 
This was followed by a recapitalization of the banking sector. 
They also pursued an expansionary monetary policy and let interest rates slide. 
The budget deficit was allowed to increase. 
Real GDP began to recover in 1994 after three years of decline. 
Imagine now that Sweden had been an ordinary developing country and that the IMF had been called in. 
What would the Fund have recommended? 
Presumably bank closures, higher interest rates, and fiscal tightening to restore market confidence. 
No doubt many structural reforms as well. 
It wouldn't have escaped the Fund's attention that the Swedish public sector plays a significant role in the economic life of the country: taxes are high, public employment is large, and government spending is close to half of GDP. 
What better candidate for structural reform than a dismantling of the Swedish welfare state? 
Would the IMF have made its assistance conditional on significant reforms in labor markets and in the social insurance system? 
Probably yes. 
Would Sweden have been better off today as a result? 
Not likely. 
Would it have been a good idea for the IMF to extend its conditionality in this manner? 
Almost certainly not. 

Can Regional Integration Save Africa? 
During the last quarter-century, global economic growth has soared, but Africa continued to lose ground. 
Indeed, the continent’s share of world exports fell from 4.6% in 1980 to 1.8% in 2000, and its share of world imports declined from 3.6% to 1.6% over the same period. 
Africa’s share of global flows of foreign direct investment (FDI) also fell, from 1.8% in 1986-90 to 0.8% in 1999-2000. 
Can regional economic groupings, such as the Common Market for Eastern and Southern Africa (COMESA) and the Southern African Development Community (SADC), help increase trade and bolster growth? 
Overall trade flows in southern Africa fell from $131.1 billion in 2002 to $112.3 billion in 2003, with South Africa – one of only three countries in the region that recorded current-account surpluses – accounting for 65% of the total. 
Whereas South Africa’s foreign trade almost doubled between 1994 and 2002, exports from, say, Malawi to Tanzania or from Mozambique to Zambia remained negligible, despite their geographic proximity. 
The low level of intraregional trade, despite the SADC and COMESA, reflects several factors, including a range of non-tariff barriers – mainly communication and transport problems, customs procedures and charges, and a lack of market information. 
Moreover, in the past, southern African countries put their faith in protectionism and import substitution policies. 
Relying on “infant economy” arguments, major exports were restricted and legal obstacles were erected against foreign participation in the development of natural resources, as well as financial and other services, further impeding regional integration. 
Nowadays southern African countries are committed to reinforcing their regional integration through economic harmonization. 
A regional plan approved in August 2003 in Dar-Es-Salaam, Tanzania’s capital, by the SADC focuses on promoting trade, economic liberalization, and development as a means of facilitating the establishment of an SADC Common Market. 
This requires completing the formation of a free-trade area, with 85% of SADC trade to be liberalized in 2008, and 100% in 2012. 
A common market – including harmonized policies for free movement of factors of production – will enhance competitiveness, industrial development, and productivity. 
However, protocols and political treaties are not sufficient to boost integration. 
The major barrier is the region’s great diversity in economic and institutional development. 
The SADC’s regional plan establishes a timeframe for policy implementation over the next fifteen years that takes these constraints into account, focusing on macroeconomic policies, debt problems, and establishing a stable and secure investment climate. 
Macroeconomic policy harmonization is needed to ensure that changes in one SADC member country do not adversely affect economic activity elsewhere. 
The new initiative calls for all member states to harmonize their economic, fiscal, and monetary policies completely, beginning with currency convertibility and followed by exchange-rate unification and, finally, a common currency. 
Several currencies have attained some measure of regional convertibility, which should encourage monetary harmonization and promote intraregional trade, as countries’ trade flows shift from partners that require payment in foreign currency. 
A form of monetary harmonization in southern Africa already exists between South Africa and Lesotho, Namibia, and Swaziland, whose currencies are traded at par with the South African Rand. 
The Reserve Bank of South Africa implements monetary policy after consultation with the other countries’ central banks. 
Despite tight monetary policy and foreign exchange regulations, the scheme has boosted trade and investment while reducing intraregional indebtedness. 
But debt remains a grave challenge for southern Africa as a whole. 
The region’s total aggregate external debt stood at $75.6 billion in 2003, up from $56.6 billion in 2000, with Angola, Mozambique, and South Africa accounting for 75.9% of the total. 
Angola, Malawi, Mozambique, and Zambia owe an average of 150% of their GDP, and servicing the debt swallows billions of dollars annually. 
Moreover, SADC has faced a sharp decline in FDI inflows, which fell from $9.8 billion in 2001 to $3 billion in 2003. 
This is attributable mainly to Angola, Botswana, and Namibia, owing to cyclical investment behavior in the petroleum and extraction industry, and to South Africa, where privatization and acquisitions activity have slowed. 
Indeed, South Africa and Angola alone accounted for 73% of the region’s inward FDI in 2003. 
For southern Africa – indeed, for the continent as a whole – global competitiveness requires diversification to higher value-added and manufactured exports. 
In order to attract the FDI needed to achieve this, southern African countries have enacted laws aimed at encouraging greater private sector participation, with special emphasis on foreign investment. 
But, despite these efforts, FDI inflows in the region (excluding South Africa) remain too low to have a significant economic impact. 
This reflects the real and perceived risks associated with investment in the region. 
Southern Africa’s leading economies must therefore make every effort to promote regional integration. 
Removing all trade barriers, as called for by SADC’s plan, would enable them to take full advantage of the region’s abundant natural resources and point the way toward deeper global integration for all of Africa. 

Can Russia Be Great? 
CAMBRIDGE – In the 1950’s, many Americans feared that the Soviet Union would surpass the United States as the world’s leading power. 
The Soviet Union had the world’s largest territory, the third largest population, and the second largest economy, and it produced more oil and gas than Saudi Arabia. 
Moreover, the USSR possessed nearly half of the world’s nuclear weapons, had more men under arms than the US, and had the most people employed in research and development. 
It detonated a hydrogen bomb in 1952, only one year after the US, and it was the first to launch a satellite into space, in 1957. 
In terms of soft power, communist ideology was attractive in post-World War II Europe, owing to its anti-fascist credentials, and in the Third World because of its identification with popular national-independence movements. 
Soviet propaganda actively fostered a myth of the inevitability of communism’s triumph. 
Nikita Khrushchev famously boasted in 1959 that the Soviet Union would overtake the US by 1970, and by 1980 at the latest. 
As late as 1976, Leonid Brezhnev told the French president that communism would dominate the world by 1995. 
Such predictions were bolstered by reportedannual economic growth rates of 5-6% and an increase in the USSR’s share of global output, from 11% to 12.3%, between 1950 and 1970. 
After that, however, the Soviet growth rate and share of global output began a long decline. 
In 1986, Mikhail Gorbachev described the Soviet economy as “very disordered. 
We lag in all indices.” 
A year later, Foreign Minister Eduard Shevardnadze told his officials, “You and I represent a great country that in the last 15 years has been more and more losing its position as one of the leading industrially developed nations.” 
What is surprising in retrospect is how wildly inaccurate Western assessments of Soviet power were. 
In the late 1970’s, a “Committee on the Present Danger” argued that Soviet power was surpassing that of the US, and the 1980 American election reflected such fears. 
Yet in 1991, the Soviet Union collapsed. 
The end of the Soviet Union left Russia significantly shrunken territorially (76% of the USSR), demographically (50% of the USSR’s population), economically (45% of the USSR’s output), and in terms of military personnel (33% of the USSR’s armed forces). 
Moreover, the soft power of communist ideology had virtually disappeared. 
Nonetheless, Russia had nearly 5,000 deployed nuclear weapons, and more than one million armed forces, though its total military expenditure was only 4% of the world total (compared to 40% for the US), and its ability to project power globally had greatly diminished. 
In economic resources, Russia’s $2.3 trillion GDP was 14% that of the US at independence, and its $16,000 per capita income (measured in terms of purchasing power parity) was roughly 33% that of the US. 
Its economy was heavily dependent on revenue from oil and gas, with high-tech goods representing only 7% of its manufactured exports (compared to 28% for the US). 
In terms of soft power, despite the attractiveness of traditional Russian culture, Russia has little global presence. 
In the words of Russian analyst Sergei Karaganov, Russia has to use “hard power, including military force, because it lives in a much more dangerous world and has no one to hide behind from it, and because it has little soft power – that is, social, cultural, political, and economic attractiveness.” 
Russia is no longer hampered by communist ideology and a cumbersome central-planning system, and the likelihood of ethnic fragmentation, though still a threat, has waned. 
Whereas ethnic Russians comprised only 50% of the Soviet Union’s population, they now make up 81% of the Russian Federation. 
The political institutions needed for an effective market economy are largely missing, and corruption is rampant. 
Russia’s robber-baron capitalism lacks the kind of effective regulation that creates trust in market relationships. 
The public-health system is in disarray, mortality rates have increased, and birthrates are declining. 
The average Russian male dies at 59 – extraordinarily low for an advanced economy. 
Estimates by United Nations demographers suggest that Russia’s population may decline from 145 million today to 121 million by mid-century. 
Many Russian futures are possible. 
At one extreme, some view Russia as an industrialized banana republic whose corrupt institutions and insurmountable demographic and health problems make decline inevitable. 
Others argue that reform and modernization will enable Russia to surmount its problems, and that its leadership is headed in this direction. 
Late in 2009, President Dmitri Medvedev issued a sweeping call for Russia to modernize its economy, wean itself from a humiliating dependence on natural resources, and do away with Soviet-style attitudes that he said were hindering its effort to remain a world power. 
But, as Katinka Barysch of the Centre for European Reform argues, Russian leaders’ concept of modernization is overly statist, particularly given that public institutions function so badly. 
“An innovative economy needs open markets, venture capital, free thinking entrepreneurs, fast bankruptcy courts and solid protection of intellectual property,” she argues. Instead there are “wide-spread monopolies, ubiquitous corruption, stifling state interferences, weak and contradictory laws.” 
Dysfunctional government and pervasive corruption make modernization difficult. 
Peter Aven, president of Alfa Bank, argues that, “economically, it looks like the Soviet Union more and more. 
There is a huge dependency on oil, a need for capital, a need for serious reforms, while the social burden is very strong. 
Stagnation is the main threat.” 
A Russian economist says flatly that, “there is no consensus in favor of modernization.” 
Whatever the outcome, because of its residual nuclear strength, its great human capital, its skills in cyber-technology, and its location in both Europe and Asia, Russia will have the resources to cause major problems for or to make major contributions to a globalized world. 
We all have an interest in Russian reform. 

Can Russia be Saved? 
MOSCOW – Russia’s economy is collapsing, but the situation could be even worse. 
The global economic crisis has finally forced the government to adopt sensible policies, thereby staving off disaster – at least for now. 
Official forecasts for Russian GDP growth in 2009 remain positive, but most analysts, including government officials, are bracing for a severe recession – which, indeed, appears to have started in the fourth quarter of 2008. 
The stock market’s collapse – its 72% fall is the largest of all major emerging markets – is only the most visible sign of this. 
Even Russia’s oligarchs are pawning their yachts and selling their private jets. 
Signs of political instability are mounting. 
The approval ratings for Russia’s president and prime minister are heading south. 
Mass street protests have started – not led by opposition political parties but by workers and middle-class families facing job losses and declining wages. 
More importantly, protesters are demanding that the government resign –unthinkable just a year ago. 
With oil prices plummeting 70% from their peak (and similar price declines for metals, Russia’s other major export), it is no surprise that Russia is facing severe economic challenges. 
Growth is endangered, the ruble is weak, and the government budget is in deficit. 
Nevertheless, up to now, Russia’s government and private sector have weathered the storm reasonably well. 
Critics of Vladimir Putin’s regime argue that Russia’s political system is too centralized and risks collapse in today’s economic storm. 
The regime’s ideology, after all, places the state and loyalty to the rulers ahead of private property and merit. 
When the crisis hits with full force, the government would nationalize major banks and companies, with the resulting inefficiency then burying the Russian economy, just as it doomed the Soviet Union. 
Russia’s government has, in fact, made serious mistakes in dealing with the crisis. 
Taxpayers’ money was spent to purchase corporate stocks in a failed attempt to support collapsing stock prices. 
The government is unlikely to recover its investment anytime soon. 
The government was also too slow in depreciating the ruble. 
While one can argue that one-off devaluation was risky – as it could have triggered a panic – gradual depreciation should have started earlier than it did. 
In the last two months of 2008, the central bank allowed the ruble to weaken at a rate of 1% per week, then at 2-3% per week. 
It probably still needs to fall another 10%. 
In the meantime, the central bank hemorrhaged reserves defending this slow correction, while commercial banks have been holding on to dollars in anticipation of the ruble’s further decline. 
The third mistake was to raise import duties, especially for imported cars. 
This was not only economically foolish (as with many other import-competing sectors, the automotive industry will certainly be protected by the weakening ruble), but also politically dangerous. 
Car owners are an affluent, socially active, and easily organized group. 
Street protests against the import duties became the first serious popular uprising that Russia has seen in many years. 
Yet these mistakes are relatively minor and reversible. 
Indeed, Russia’s government, unexpectedly, has taken resolute and mostly correct economic decisions. 
First, it prevented the collapse of the banking system. 
Many Russian banks were heavily exposed in foreign markets, and therefore faced severe financial problems once the crisis hit. 
A massive liquidity injection by the government ensured that no major bank collapsed, and minor bank failures were administered in a surprisingly orderly fashion. 
Moreover, the crisis has – so far – not resulted in major nationalizations of private companies. 
The government could have used the crisis to nationalize all banks and companies in financial distress. 
It has not, despite its still awesome foreign reserves, which give it the wherewithal to buy out a significant portion of the economy at fire-sale prices. 
Instead, up to now at least, the government has mostly been providing (high-interest) loans rather than engaging in massive equity buyouts. 
Nor have the oligarchs been bailed out. 
Of $50 billion in external debt owed by Russian banks and firms in 2008, the government refinanced only $10 billion. 
Apparently, the terms offered by the government (LIBOR+5% and collateral) have turned out to be right on target. 
How did reasonable economic policies prevail in this crisis? 
The key factor is that, for the first time since Putin came to power, the Kremlin perceives a genuine threat. 
The years of easy popularity are over. 
All the ugly facts that Russians ignored during the years of fast economic growth are bubbling to the surface. 
The regime knows that its survival depends on preventing economic collapse. 
The crisis energized the system and shifted decision-making power to those who know about and can do something for the economy. 
But did these policy changes come too late? 
The ossified, corrupt, inefficient economy built in the fat years of the oil boom may be impossible to save. 
So the central question that Russia confronts is whether even competent economic policy can prevent economic and political collapse. 

Can Science Save the World? 
CAMBRIDGE – For most people, there has never been a better time to be alive than now. 
The innovations that drive economic advances – information technology, biotech, and nanotech – can boost living standards in both the developing and the developed world. 
We are becoming embedded in a cyberspace that can link anyone, anywhere, to all the world’s information and culture – and to every other person on the planet. 
Twenty-first century technologies will offer environmentally benign lifestyles and the resources to ease the plight and enhance the life chances of the world’s two billion poorest people. 
Moreover, the greatest threat of the 1960’s and 1970’s – nuclear annihilation – has diminished. 
This threat could recur, however, if there is a renewed standoff between new superpowers. 
And there are other risks stemming from humanity’s greater collective impact on the planet, and from the growing empowerment of individuals. 
Soon after World War II, physicists at the University of Chicago started a journal called the Bulletin of Atomic Scientists to promote arms control. 
The logo on the Bulletin’s cover is a clock, the proximity of whose hands to midnight indicates the editors’ judgment of the precariousness of the world situation. 
Every few years, the minute hand shifted, either forwards or backwards. 
It came closest to midnight in 1962 during the Cuban Missile Crisis. 
When the Cold War ended, the Bulletin’s clock was put back to 17 minutes to midnight. 
But the clock has been creeping forward again. 
We are confronted by proliferation of nuclear weapons (by, say, North Korea and Iran). 
Al-Qaeda-style terrorists might willingly detonate a nuclear weapon in a city center, killing tens of thousands. 
Even if the nuclear threat is contained, the twenty-first century could confront us with grave new global perils. 
Climate change looms as this century’s primary long-term environmental challenge. 
Human actions – burning fossil fuels – have already raised the carbon dioxide concentration higher than it has ever been in the last 500,000 years, and it is rising by about 0.5 % a year. 
More disturbingly, coal, oil, and gas are projected to supply most of the world’s growing energy needs for decades to come. 
If that continues, the concentration of CO2 will rise to twice the pre-industrial level by 2050, and three times that level later in the century. 
The world spends nearly $7 trillion a year on energy and its infrastructure; yet our current research and development efforts are not up to meeting the challenge of climate change. 
There is no single solution, but some measures, like better insulation of buildings, would save rather than cost money. 
Efforts to economize on energy, storing it, and generating it by “clean” or low-carbon methods deserve priority and the sort of commitment from governments that were accorded to the Manhattan Project (which created the atomic bomb) or the Apollo moon landing. 
The top priority should be a coordinated effort by Europe, the United States, and the other G-8+5 countries to build demonstration plants to develop carbon capture and storage (CCS) technology. 
This is crucial, because whatever technical advances there may be in solar and other renewable energy sources, we will depend on coal and oil for the next 40 years. 
Yet unless the rising curve of annual emissions can be reversed, the CO2 concentration will irrevocably reach a truly threatening level. 
Mankind must also confront other global “threats without enemies” that are separate from (though linked with) climate change. 
Loss of biological diversity is one of the most severe such threats. 
The extinction rate is 1,000 times higher than normal, and is increasing. 
Biodiversity is a crucial component of human well-being and economic growth. 
We are clearly harmed if fish stocks dwindle to extinction. 
Less evidently, there are plants in the rain forest whose gene pool might be useful to us. 
The pressures on our planet depend, of course, on our lifestyle. 
The world could not sustain its 6.5 billion people if they all lived like present-day Americans. 
But it could if even prosperous people adopted a vegetarian diet, traveled little, and interacted virtually. 
New technology will determine our lifestyle, and the demands that we make on energy and environmental resources. 
Nevertheless, our problems are aggravated by rapid growth in the human population, which is projected to reach eight or even nine billion by 2050. 
If the increase continues beyond 2050, one cannot help but be gloomy about most people’s prospects. 
There are now, however, more than 60 countries where the fertility rate is below replacement level. 
If this were true of all countries, the global population would start to decline after 2050 – a development that would surely be benign. 
All of today’s developments – cyber, bio, or nano – will create new risks of abuse. 
The American National Academy of Sciences has warned that, “Just a few individuals with specialized skills…could inexpensively and easily produce a panoply of lethal biological weapons.…The deciphering of the human genome sequence and the complete elucidation of numerous pathogen genomes…allow science to be misused to create new agents of mass destruction.” 
Not even an organized network would be required; just a fanatic with the mindset of those who now design computer viruses. 
The global village will have its village idiots. 
In our increasingly interconnected world, there are new risks whose consequences could be widespread – and perhaps global. 
Even a tiny probability of global catastrophe is unacceptable. 
If we apply to catastrophic risks the same prudent analysis that leads us to buy insurance – multiplying probability by consequences – we would surely prioritize measures to reduce this kind of extreme risk. 
The decisions that we will make both individually and collectively in the foreseeable future will determine whether twenty-first century science yields benign or devastating outcomes. 

Can Terrorism Be Cured? 
Terrorism is likely to define the year 2006 as much as it has ever year since 2001. 
Years from now, historians will likely label the opening years of the twenty-first century the “Age of Terrorism.” 
As with any new era, we do not yet fully understand what is happening and why. 
While most of the world recognizes the problem, there are very different views on its causes and cures. 
This much we know: terrorism is fueled by anger and frustration. 
Radicals use the inability to attain political objectives peacefully to inspire fanatical action and to justify forms of violence normally considered unacceptable. 
Beyond this basic point, however, there is less agreement on why frustration and anger lead to terrorism in some cases but not in others. 
Moreover, there are two broad schools of thought as to the appropriate response when they do fuel extremist violence. 
One school believes that modern terrorism cannot be eradicated, or that the costs of doing so are unacceptably high. 
For this group, the only logical policy is to “ride out the storm” by ending policies which increase anger and frustration, and improving intelligence and defenses. 
The second school of thought contends that terrorism can be eradicated by addressing its root causes. 
Ironically, its adherents include both George W. Bush and Osama bin Laden. 
For bin Laden and those who share his ideas, anger and frustration in the Islamic world stem from outside repression and exploitation of Muslims. 
If the repression ends, so, too, will terrorism. 
Until then, all means are legitimate when fighting a powerful and wicked enemy. 
Terrorism, for bin Laden and his allies, is the only method available to strike at the West effectively. 
“It is permissible,” according to bin Laden’s ally in Iraq, Abu Musab Zarqawi, “to spill infidel blood.” 
Bush, in contrast, believes that terrorism is rooted in the absence of political and economic opportunity. 
Rather than grappling with this, radicals like bin Laden blame outsiders, particularly the United States and Europe. 
But the ultimate solution, according to Bush, is the creation of fair and open political and economic systems that can eliminate anger and frustration through peaceful means. 
Extremists might still exist, but they would be marginalized, finding few recruits or supporters. 
Unfortunately, every approach has shortcomings. 
The belief that terrorism cannot be eradicated assumes that the ability to tolerate terrorist attacks – to “ride out the storm” – is greater than the willingness of terrorists to persist, or even escalate the attacks. 
By taking an essentially passive position, this approach might merely prolong the Age of Terrorism needlessly. 
Moreover, appeasement is based on the dangerous assumption that the extremists’ objectives are limited – that once they attain their stated goals by using violence, they will become responsible members of the world community. 
Bin Laden’s position – that terrorism will end when the Islamic world expels outside influence – is ethically and analytically flawed. 
On the one hand, it would condemn hundreds of millions to live in repressive Iranian- or Taliban-style theocracies. 
On the other hand, the idea that poverty and repression in the Islamic world are engineered from outside simply does not stand up to scrutiny. 
Finally, the belief that democracy and economic reform will undercut terrorism is based on a series of assumptions that may or may not prove accurate. 
For instance, it assumes that terrorists and their supporters do not understand their own anger. 
But extremists say explicitly that their anger is caused by the injustice of the global system and the repressive policies of powerful states. 
Closed political systems and stagnant economies in the Muslim world, they contend, are symptoms, not causes. 
The Bush position also assumes that fundamental political and economic change is feasible and affordable – that open political and economic systems can be sustained with only modest effort – because the desire for freedom and prosperity is universal. 
While true, it is not clear that a willingness to tolerate the freedom of others, which democracy requires, is equally widespread. 
In some societies, democracy is simply a way for the majority to repress the minority. 
In others, stability or justice is more important than political freedom. 
Finally, this perspective assumes that democracies will be willing or able to control radicalism and crack down on extremists. 
But history suggests that new, fragile democracies are more likely to attempt to placate radicals than to eliminate them, and that terrorists can exploit democratic governments’ respect for civil rights and the rule of law. 
The horrible truth is that failure to eradicate the root causes of terrorism is almost certain to extend the Age of Terrorism, it is not clear that they really can be eradicated. 
To appease the extremists might be easy but may not work. 
To allow them to win would be to accept the supremacy of evil. 
To promote democracy and open government might be the ultimate solution, but it stands on a shaky conceptual foundation of untested assumptions about the nature of the world and diverse cultures. 
Unfortunately, the world is at a point where it can see the danger from terrorism but not the cure. 
Worse still, a cure may not exist. 

Can the Elephant Dance with the Dragon? 
TRIVANDRUM, INDIA – It is fashionable these days, particularly in the West, to speak of India and China in the same breath. 
These are the two big countries said to be taking over the world, the new contenders for global eminence after centuries of Western domination, the Oriental answer to generations of Occidental economic success. 
Indeed, two new books explicitly twin the two countries: Robyn Meredith’s The Elephant and the Dragon: The Rise of India and China and What It Means for All of Us and Harvard business professor Tarun Khanna’s Billions of Entrepreneurs: How China and India are Reshaping their Futures – and Yours . 
Both books view the recent rise of India and China as shifting the world’s economic and political tectonic plates. 
Some even speak of “Chindia,” as if the two were joined at the hip in the international imagination. 
Count me among the skeptics. It is not just that China and India have little in common, save for the fact that they occupy a rather vast landmass called “Asia.” 
It is also that they are already at very different stages of development. 
China started its liberalization a decade and a half before India, hit double-digit growth when India was still hovering around 5%, and, with compound growth, has put itself in a totally different economic league from India, continuing to grow faster from a larger base. 
Moreover, the two countries’ systems are totally dissimilar. 
If China wants to build a new six-lane expressway, it can bulldoze its way through any village in its path. 
In India, if you want to widen a two-lane road, you could be tied up in court for a dozen years over compensation entitlements. 
When China built the Three Gorges dam, it created a 660-kilometer long reservoir that necessitated displacing two million people – all accomplished in 15 years without a fuss in the interest of generating electricity. 
When India began the Narmada Dam project, aiming to bring irrigation, drinking water, and power to millions, it spent 34 years (so far) fighting environmental groups, human rights activists, and advocates for the displaced all the way to the Supreme Court, while still being thwarted in the streets by protesters. 
That is how it should be: India is a fractious democracy, China is not. 
But, as an Indian, I do not wish to pretend that we can compete in the global growth stakes with China. 
But if we can’t compete, can we co-operate? 
The two civilizations had centuries of contact in ancient times. 
Thanks mainly to the export of Buddhism from India to China, Chinese came to Indian universities, visited Indian courts, and wrote memorable accounts of their voyages. 
Nalanda received hundreds of Chinese students in its time, and a few Indians went the other way; a Buddhist monk from India built the famous Lingyin Si temple in Huangzhou in the fifth century. 
Southwest India’s Kerala coastline is dotted with Chinese-style fishing nets, and the favorite cooking pot of the Malayali housewife is the wok, locally called the cheen-chetti (Chinese vessel). 
But it has been a while since Indians and Chinese had much to do with each other. 
The heady days of Hindi-Chini bhai-bhai (“Indians and Chinese are brothers”), the slogan coined by Nehru’s India to welcome Chou En-Lai in 1955, gave way to the humiliation of the 1962 border war, after which it was “Hindi-Chini bye-bye” for decades. 
The border dispute remains unresolved, with periodic incursions by Chinese troops onto Indian soil and new irritants such as the anti-Chinese protests by Tibetan exiles who have been given asylum in India. 
To speak of a bilateral “trust deficit” might be an understatement. 
And yet, there is some good news. 
Trade has doubled in each of the last three years, to an estimated $40 billion this year; 
China has now overtaken the United States as India’s largest single trading partner. 
Tourism, particularly by Indian pilgrims to the major Hindu holy sites in Tibet, Mount Kailash and Lake Mansarovar, is thriving. 
Indian information technology firms have opened offices in Shanghai and Hangzhou, and Infosys recruited nine Chinese this year for its headquarters in Bangalore. 
There are dozens of Chinese engineers working in (and learning from) Indian computer firms and engineering companies, while Indian software engineers support the Chinese telecoms equipment manufacturer Huawei. 
By and large, India is strong in areas in which China needs to improve, notably software, while China excels at hardware and manufacturing, which India sorely lacks. 
So India’s Mahindra and Mahindra company manufactures tractors in Nanchang for export to the US. 
The key operating components of Apple’s iPod were invented by the Hyderabad company PortalPlayer, while the iPod itself are manufactured in China. 
Philips employs nearly 3,000 Indians at its “Innovation Campus” in Bangalore to write more than 20% of the company’s global software, which Philips’ 50,000-strong workforce in China then turns into brand-name goods. 
In other words, the elephant is already dancing with the dragon. 
The only question is whether political tensions could bring the music screeching to a halt. 
There is no doubt that, whatever India’s legitimate differences with China’s Communist regime, cooperation is in the best interests of both peoples. 
After all, one plus one doesn’t only equal two; put together properly, it can add up to 11. 

Can the Euro be Saved? 
NEW YORK – The Greek financial crisis has put the very survival of the euro at stake. 
At the euro’s creation, many worried about its long-run viability. 
When everything went well, these worries were forgotten. 
But the question of how adjustments would be made if part of the eurozone were hit by a strong adverse shock lingered. 
Fixing the exchange rate and delegating monetary policy to the European Central Bank eliminated two primary means by which national governments stimulate their economies to avoid recession. 
What could replace them? 
The Nobel laureate Robert Mundell laid out the conditions under which a single currency could work. 
Europe didn’t meet those conditions at the time; it still doesn’t. 
The removal of legal barriers to the movement of workers created a single labor market, but linguistic and cultural differences make American-style labor mobility unachievable. 
Moreover, Europe has no way of helping those countries facing severe problems. 
Consider Spain, which has an unemployment rate of 20% – and more than 40% among young people. 
It had a fiscal surplus before the crisis; after the crisis, its deficit increased to more than 11% of GDP. 
But, under European Union rules, Spain must now cut its spending, which will likely exacerbate unemployment. 
As its economy slows, the improvement in its fiscal position may be minimal. 
Some hoped that the Greek tragedy would convince policymakers that the euro cannot succeed without greater cooperation (including fiscal assistance). 
But Germany (and its Constitutional Court), partly following popular opinion, has opposed giving Greece the help that it needs. 
To many, both in and outside of Greece, this stance was peculiar: billions had been spent saving big banks, but evidently saving a country of eleven million people was taboo! 
It was not even clear that the help Greece needed should be labeled a bailout: while the funds given to financial institutions like AIG were unlikely to be recouped, a loan to Greece at a reasonable interest rate would likely be repaid. 
A series of half-offers and vague promises, intended to calm the market, failed. 
Just as the United States had cobbled together assistance for Mexico 15 years ago by combining help from the International Monetary Fund and the G-7, so, too, the EU put together an assistance program with the IMF. 
The question was, what conditions would be imposed on Greece? 
How big would be the adverse impact? 
For the EU’s smaller countries, the lesson is clear: if they do not reduce their budget deficits, there is a high risk of a speculative attack, with little hope for adequate assistance from their neighbors, at least not without painful and counterproductive pro-cyclical budgetary restraints. 
As European countries take these measures, their economies are likely to weaken – with unhappy consequences for the global recovery. 
It may be useful to see the euro’s problems from a global perspective. 
The US has complained about China’s current-account (trade) surpluses; but, as a percentage of GDP, Germany’s surplus is even greater. 
Assume that the euro was set so that trade in the eurozone as a whole was roughly in balance. 
In that case, Germany’s surplus means that the rest of Europe is in deficit. 
And the fact that these countries are importing more than they are exporting contributes to their weak economies. 
The US has been complaining about China’s refusal to allow its exchange rate to appreciate relative to the dollar. 
But the euro system means that Germany’s exchange rate cannot increase relative to other eurozone members. 
If the exchange rate did increase, Germany would find it more difficult to export, and its economic model, based on strong exports, would face a challenge. 
At the same time, the rest of Europe would export more, GDP would increase, and unemployment would decrease. 
Germany (like China) views its high savings and export prowess as virtues, not vices. 
But John Maynard Keynes pointed out that surpluses lead to weak global aggregate demand – countries running surpluses exert a “negative externality” on their trading partners. 
Indeed, Keynes believed that it was surplus countries, far more than deficit countries, that posed a threat to global prosperity; he went so far as to recommend a tax on surplus countries. 
The social and economic consequences of the current arrangements should be unacceptable. 
Those countries whose deficits have soared as a result of the global recession should not be forced into a death spiral – as Argentina was a decade ago. 
One proposed solution is for these countries to engineer the equivalent of a devaluation – a uniform decrease in wages. 
This, I believe, is unachievable, and its distributive consequences are unacceptable. 
The social tensions would be enormous. 
It is a fantasy. 
There is a second solution: the exit of Germany from the eurozone or the division of the eurozone into two sub-regions. 
The euro was an interesting experiment, but, like the almost-forgotten exchange-rate mechanism (ERM) that preceded it and fell apart when speculators attacked the British pound in 1992, it lacks the institutional support required to make it work. 
There is a third solution, which Europe may come to realize is the most promising for all: implement the institutional reforms, including the necessary fiscal framework, that should have been made when the euro was launched. 
It is not too late for Europe to implement these reforms and thus live up to the ideals, based on solidarity, that underlay the euro’s creation. 

Can the Euro Zone Survive Economic Recovery? 
CAMBRIDGE – The economic recovery that the euro zone anticipates in 2010 could bring with it new tensions. 
Indeed, in the extreme, some countries could find themselves considering whether to leave the single currency altogether. 
Although the euro simplifies trade, it creates significant problems for monetary policy. 
Even before it was born, some economists (such as myself) asked whether a single currency would be desirable for such a heterogeneous group of countries. 
A single currency means a single monetary policy and a single interest rate, even if economic conditions – particularly cyclical conditions – differ substantially among the member countries of the European Economic and Monetary Union (EMU). 
A single currency also means a common exchange rate relative to other currencies, which, for any country within the euro zone, precludes a natural market response to a chronic trade deficit. 
If that country had its own currency, the exchange rate would decline, benefiting exports and impeding imports. 
Without its own currency, the only cure for a chronic trade deficit is real wage reductions or relative productivity increases. 
The European Central Bank is now pursuing a very easy monetary policy. 
But, as the overall economy of the euro zone improves, the ECB will start to reduce liquidity and raise the short-term interest rate, which will be more appropriate for some countries than for others. 
Those countries whose economies remain relatively weak oppose tighter monetary policy. 
The contrast between conditions in Germany and Spain illustrates the problem. 
The unemployment rate is now about 8% in Germany, but more than twice that – around 19% – in Spain. 
And Germany recorded a trade surplus of $175 billion in the 12 months through August, whereas Spain has run a trade deficit of $84 billion in the past 12 months. 
If Spain and Germany still had the peseta and the D-mark as their respective currencies, the differences in trade balances would cause the mark to appreciate and the peseta to decline. 
The weaker peseta would stimulate demand for Spanish exports and reduce Spain’s imports, which would boost domestic demand and reduce unemployment. 
Since the interest rate set by the ECB is now less than 1%, there is little difference between its current monetary policy and what the Bank of Spain would do if it could set its own interest rate. 
But when the euro zone starts to recover, the ECB might choose to raise the interest rate before a higher rate would be appropriate for Spain, which could exacerbate Spanish unemployment. 
Spain and other high-unemployment euro-zone countries might oppose this policy but face monetary tightening nonetheless, because the ECB deems the overall state of the euro zone to warrant higher interest rates. 
Spain is not the only country that would have an incentive to leave the EMU. 
Greece, Ireland, Portugal, and even Italy are often cited as countries that might benefit from being able to pursue an independent monetary policy and allow their currencies to adjust to more competitive levels. 
The widening spreads between the interest rate on German eurobonds and some of the other countries’ euro bonds show that global bond markets take this risk seriously. 
For example, while the current yield on 10-year German government eurobonds is 3.33%, the corresponding yield on Greek eurobonds is 4.7% and 4.77% for Ireland’s eurobonds. 
These divergent yields reflect the market’s perception of the risk of default or of effective devaluation associated with leaving the euro. 
Leaving the EMU would, of course, involve both technical and political issues. 
A government that wants to replace the euro with, say, the “new franc” (which is not to suggest that France or Belgium would be likely to abandon the euro) would have to reverse the process by which its currency was originally swapped for euros. 
But, having learned to do that once would make it easier to do it again in the opposite direction. 
How would the exchange rate be set for the new currency? 
The obvious choice would be to start by exchanging one “new franc” for one euro and then leave it to the global currency markets to re-price the new currency. 
A country with a large initial trade deficit would expect to see its currency decline relative to the euro, say, to 1.2 “new francs” per euro, which would make its products 20% cheaper than products in other euro countries and would make imports more expensive. 
If that causes a rise in the departing country’s price level, the nominal exchange rate would have to decline further to achieve the same real adjustment. 
Because individuals from the departing country could continue to hold euros, leaving the EMU would not cause a loss of existing wealth. 
But such a country would have to worry about more substantial economic consequences. 
Global capital markets would recognize that a country with high unemployment might choose to pursue an inflationary policy or a policy or exchange-rate depreciation. 
That could lead international investors to withhold funds from a departing country and raise substantially the interest rate on its national debt. 
There would also be political problems. 
Would a country that leaves the EMU be given a diminished role in EcoFin, the European Economic and Financial Affairs Council? 
Would its voice be diminished in European discussions about foreign and defense policy? 
In the extreme, would it be forced out of the European Union altogether, thereby losing its trade advantages? 
These economic and political risks may be enough to deter current EMU members from deciding to leave. 
But remaining in the euro zone could impose significant costs on some of them. 

Can the G-8 Survive St. Petersburg? 
Russia’s gradual inclusion in the G-8 was supposed to nurture the growth of democracy, foster creation of a free-market economy, and encourage constructive behavior in international relations. 
Instead, Russia’s leaders have become more interested in consolidating state power at home and abroad than in promoting democracy, protecting human rights, and cooperating with the West. 
The collapse of the USSR, President Vladimir Putin has proclaimed, was the greatest geopolitical catastrophe of the twentieth century. 
Obviously, the USSR is not about to be resurrected. 
But Putin has moved to reassert state control over strategic sectors of the economy, including oil and gas, communications, pipelines, electricity and banking, as well as limiting political rights, harassing independent groups, and strengthening control over the media. 
Moreover, Russia is coming to the fore, firmly and confidently, to regain its Great Power status. 
Putin continues to pursue a brutal military campaign in Chechnya while intervening politically in Soviet successor states like Ukraine, Georgia, Moldova, and Belarus and rejecting Western tactics aimed at curbing Iran’s and North Korea’s nuclear ambitions. 
Putin’s position is reinforced by strong public support, as well as by the dramatically weakened position of major Western leaders. 
George W. Bush and Tony Blair have lost the popularity they enjoyed before the Iraq war, and Blair, together with French President Jacques Chirac, will soon leave the political scene. 
Angela Merkel in Germany and Romano Prodi in Italy are ruling with weak coalition governments. 
In these circumstances, given Russia’s continuing failure to meet the G-8’s political and economic standards, the upcoming summit in St. Petersburg could produce a backlash, eroding the legitimacy, credibility, and relevance of the world’s most developed countries. 
Indeed, Russia and the world may well see in the summit the G-8’s silent approval of Putin’s domestic and foreign policies. 
Clearly, there are many who would endorse former Soviet President Mikhail Gorbachev’s recent call on Western countries to stop pressuring Putin over human rights. 
According to Gorbachev, Western pressure merely strengthens Putin, “because in essence his position is very close to the aspirations of the people.” 
Bush has echoed that sentiment, telling CNN ahead of his trip to the summit that admonishing the Russian president in public on matters such as democracy and human rights would be counterproductive. 
“No leader likes to be scolded publicly,” he said. 
But can the West afford to remain aloof? 
Russia started off its year as G-8 president with a crisis over gas supplies to Ukraine, and even threatened Europe with rerouting its gas exports to Asia. 
Putin has placed energy security at the top of the summit’s agenda, but that does not mask Russia’s ambition to dominate European markets by controlling the pipelines that carry its oil and gas, the refineries that process it, and the retail outlets that sell it. 
The dilemma facing the West is that it needs Russia’s backing not only on policy toward Iran and North Korea, but also in Afghanistan, Iraq, and the Middle East as a whole. 
Unfortunately, Bush’s strategy of democracy promotion has mainly contributed to unease around the world and alienation from Western goals. 
Especially in view of the Iraq experience, Putin has won substantial public sympathy by arguing that opposition to Western democracy promotion is resistance not to democracy itself, but to Western intervention against Russian “sovereign democracy.” 
Clearly, an ostracized Russia is a dangerous Russia. 
But to hold a G-8 meeting in St. Petersburg in an atmosphere of “business as usual” may be even more dangerous. 
Bush and European leaders issued a statement after their recent meeting in Austria saying that Russia must honor “democratic freedoms, respect for human rights, civil society and transparency, and a responsible approach to energy security.” 
But words alone are not enough. 
Nor should it be the end of the story. 
The G-8’s seven democratic countries should use the St. Petersburg summit as an opportunity to reaffirm their will to develop close and friendly relations with Russia. 
But if their inclusion of Russia is to serve a useful purpose, they must also reaffirm the values that unite them. 

Can the IMF Avert a Global Meltdown? 
When world financial leaders meet in Singapore this month for the joint World Bank/International Monetary Fund meetings, they must confront one singularly important question. 
Is there any way to coax the IMF’s largest members, especially the United States and China, to help diffuse the risks posed by the world’s massive trade imbalances? 
This year, the US will borrow roughly $800 billion to finance its trade deficit. 
Incredibly, the US is now soaking up roughly two-thirds of all global net saving, a situation without historical precedent. 
While this borrowing binge might end smoothly, as US Federal Reserve Chairman Ben Bernanke has speculated, most world financial leaders are rightly worried about a more precipitous realignment that would likely set off a massive dollar depreciation and possibly much worse. 
Indeed, if policymakers continue to sit on their hands, it is not hard to imagine a sharp global slowdown or even a devastating financial crisis. 
Although Bernanke is right to view a soft landing as the most likely outcome, common sense would suggest agreing on some prophylactic measures, even if this means that the US, China, and other large contributors to the global imbalances have to swallow some bitter medicine. 
Unfortunately, getting politicians in the big countries to focus on anything but their own domestic imperatives is far from easy. 
Though the comparison is unfair, it is hard not to recall the old quip about the IMF’s relative, the United Nations: “When there is a dispute between two small nations, the UN steps in and the dispute disappears. 
When there is a dispute between a small nation and a large nation, the UN steps in and the small nation disappears. 
When there is a dispute between two large nations, the UN disappears.” 
Fortunately, the IMF is not yet in hiding, even if some big players really don’t like what it has to say. 
The IMF’s head, the Spaniard Rodrigo Rato, rightly insists that China, the US, Japan, Europe, and the major oil exporters (now the world’s biggest source of new capital) all take concrete steps towards alleviating the risk of a crisis. 
Though the exact details remain to be decided, such steps might include more exchange-rate flexibility in China, and perhaps a promise from the US to show greater commitment to fiscal restraint. 
Oil exporters could, in turn, promise to increase domestic consumption expenditure, which would boost imports. 
Likewise, post-deflation Japan could promise never again to resort to massive intervention to stop its currency from appreciating. 
Europe, for its part, could agree not to shoot its recovery in the foot with ill-timed new taxes such as those that Germany is currently contemplating. 
Will the IMF be successful in brokering a deal? 
The recent catastrophic collapse of global trade talks is not an encouraging harbinger. 
Europe, Japan, and (to a much lesser extent) the US, were simply unwilling to face down their small but influential farm lobbies. 
The tragic result is that some of the world’s poorest countries cannot export their agricultural goods, one of the few areas where they might realistically compete with the likes of China and India. 
Fortunately for Rato, addressing the global imbalances can be a win-win situation. 
The same proposed policies for closing global trade imbalances also, by and large, help address each country’s domestic economic concerns. 
For example, China needs a stronger exchange rate to help curb manic investment in its export sector, and thereby reduce the odds of a 1990’s style collapse. 
As for the US, a sharp hike in energy taxes on gasoline and other fossil fuels would not only help improve the government’s balance sheet, but it would also be a way to start addressing global warming. 
What better way for new US Treasury Secretary Hank Paulson, a card-carrying environmentalist, to make a dramatic entrance onto the world policy stage? 
Similarly, the technocrats at the Bank of Japan surely realize that they could manage the economy far more effectively if they swore off anachronistic exchange-rate intervention techniques and switched whole-heartedly to modern interest-rate targeting rules such as those used by the US Federal Reserve and the European Central Bank. 
With Europe in a cyclical upswing, tax revenues should start rising even without higher tax rates, so why risk strangling the continent’s nascent recovery in the cradle? 
Saudi Arabia, with its burgeoning oil revenues, could use a big deal to reinforce the country’s image as a major anchor of global financial stability. 
If today’s epic US borrowing does end in tears, and if world leaders fail to help the IMF get the job done, history will not treat them kindly. 
Instead, they will be blamed for not seeing an impending catastrophe that was staring them in the face. 
Let’s hope that on this occasion in international diplomacy, the only thing that disappears are the massive global trade imbalances, and not the leaders and institutions that are supposed to deal with them. 

Can the Millennium Development Goals be Saved? 
NEW DELHI – The target date for fulfilling the Millennium Development Goals is 2015, and the world knows it is not on course to meet those goals. 
So world leaders are set to gather at the United Nations to undertake a comprehensive review, with the aim of agreeing on a roadmap and a plan of action to get to the MDG finishing line on schedule. 
I was at the UN in September 2000, when world leaders met at the Millennium Summit and pledged to work together to free humanity from the “abject and dehumanizing conditions of extreme poverty,” and to “make the right to development a reality for everyone.” 
These pledges include commitments to improve access to education, health care, and clean water for the world’s poorest people; abolish slums; reverse environmental degradation; conquer gender inequality; and cure HIV/AIDS. 
It’s an ambitious list, but its capstone is Goal 8, which calls for a “global partnership for development.” 
This includes four specific targets: “an open, rule-based, predictable, non-discriminatory trading and financial system”; special attention to the needs of least-developed countries; help for landlocked developing countries and small island states; and national and international measures to deal with developing countries’ debt problems. 
Basically, it all boiled down to a grand bargain: while developing countries would obviously have primary responsibility for achieving the MDGs, developed countries would be obliged to finance and support their efforts for development. 
This hasn’t really happened. 
At the G-8 summit at Gleneagles and the UN World Summit in 2005, donors committed to increasing their aid by $50 billion at 2004 prices, and to double their aid to Africa from 2004 levels by 2010. 
But official development assistance (ODA) last year amounted to $119.6 billion, or just 0.31% of the developed countries’ GDP – not even half of the UN’s target of 0.7% of GDP. 
In current US dollars, ODA actually fell by more than 2% in 2008. 
The UN admits that progress has been uneven, and that many of the MDGs are likely to be missed in most regions. 
An estimated 1.4 billion people were still living in extreme poverty in 2005, and the number is likely to be higher today, owing to the global economic crisis. 
The number of undernourished people has continued to grow, while progress in reducing the prevalence of hunger stalled – or even reversed – in some regions between 2000-2002 and 2005-2007. 
About one in four children under the age of five are underweight, mainly due to lack of quality food, inadequate water, sanitation, and health services, and poor care and feeding practices. 
Gender equality and women’s empowerment, which are essential to overcoming poverty and disease, have made at best fitful progress, with insufficient improvement in girls’ schooling opportunities or in women’s access to political authority. 
Progress on trade has been similarly disappointing. 
Developed country tariffs on imports of agricultural products, textiles, and clothing – the principal exports of most developing countries – remained between 5% and 8% in 2008, just 2-3 percentage points lower than in 1998. 
The time has come to reinforce Goal 8 in two fundamental ways. 
Developed countries must make commitments to increase both the quantity and effectiveness of aid to developing countries. 
Aid must help developing countries improve the welfare of their poorest populations according to their own development priorities. 
But donors all too often feel obliged to make their contributions “visible” to their constituencies and stakeholders, rather than prioritizing local perspectives and participation. 
There are other problems with development aid. 
Reporting requirements are onerous and often impose huge administrative burdens on developing countries, which must devote the scarce skills of educated, English-speaking personnel to writing reports for donors rather than running programs. 
And donor agencies often recruit the best local talent themselves, usually at salaries that distort the labor market. 
In some countries, doctors find it more remunerative to work as translators for foreign-aid agencies than to treat poor patients. 
Meanwhile, donors’ sheer clout dilutes the accountability of developing countries’ officials and elected representatives to their own people. 
We must change the way the world goes about the business of providing development aid. 
We need a genuine partnership, in which developing countries take the lead, determining what they most acutely need and how best to use it. 
Weak capacity to absorb aid on the part of recipient countries is no excuse for donor-driven and donor-directed assistance. 
The aim should be to help create that capacity. 
Indeed, building human-resource capacity is itself a useful way of fulfilling Goal 8. 
Doing so would serve donors’ interest as well. 
Aligning their assistance with national development strategies and structures, or helping countries devise such strategies and structures, ensures that their aid is usefully spent and guarantees the sustainability of their efforts. 
Donors should support an education policy rather than build a photogenic school; aid a health campaign rather than construct a glittering clinic; or do both – but as part of a policy or a campaign, not as stand-alone projects. 
Trade is the other key area. 
In contrast to aid, greater access to the developed world’s markets creates incentives and fosters institutions in the developing world that are self-sustaining, collectively policed, and more consequential for human welfare. 
Many countries are prevented from trading their way out of poverty by the high tariff barriers, domestic subsidies, and other protections enjoyed by their rich-country competitors. 
The European Union’s agricultural subsidies, for example, are high enough to permit every cow in Europe to fly business class around the world. 
What African farmer, despite his lower initial costs, can compete? 
The onus is not on developed countries alone. 
Developing countries, too, have made serious commitments to their own people, and the primary responsibility for fulfilling those commitments is theirs. 
But Goal 8 assured them that they would not be alone in this effort. 
Unless that changes, the next five years will be a path to failure. 


Can US-Iran Relations Be Revived? 
During World War II, Allied soldiers occupied Iran, using the country as a way station to transport supplies from the Persian Gulf to the Soviet Union. 
This was Iran’s first exposure to Americans. 
“They arrived in our country with a certain innocence,” said the respected Iranian historian Kaveh Bayat, “and without any colonial pretenses.” 
The Americans’ supply train would regularly pass through my father’s ancestral village, Arak, then a scenic oasis of green gardens and fruit orchards. 
“Whenever we heard the train coming,” my father once told me, “all the young boys in the village would run as fast as we could through the apple orchard to greet the passing Americans. 
They would smile and wave and throw us whatever gifts they happened to have – playing cards, chewing gum, lifesaver candies….For us they were like heroes from another world.” 
So much has changed since then. 
Iran’s 1979 revolution did away with the pro-American, undemocratic regime of the Shah, bringing in its place the anti-American, undemocratic regime of the clerics. 
Relations between the United States and Iran have been officially non-existent since a group of radical students stormed the US embassy in Teheran – 25 years ago this week – taking sixty six Americans hostage for 444 days. 
Sixty years ago, Arak was a humble village known to US troops for its grapes; today Pentagon officials hone in on it as an industrial city that is integral to Iran’s worrisome nuclear program. 
And yet few countries have a more paradoxical relationship than the US and Iran. 
While the Iranian regime continues to be belligerently anti-American, the Iranian people are overtly pro-American. 
While the governments in Teheran and Washington appear to be strategic archrivals, in the words of former Secretary of State Henry Kissinger, “there are few nations in the world with which the United States has less reason to quarrel or more compatible interests than Iran.” 
Indeed, Iran has likely benefited more than any other country from US-led regime changes in Afghanistan and Iraq, as both the Taliban and Saddam Hussein were the country’s sworn enemies. 
But neither side seized the opportunity to build on this common ground, and today US-Iran relations are as antagonistic as they have been in years. 
For the US, Iran’s nuclear ambitions, opposition to Israel, and support for extremist groups have become increasingly intolerable in the context of the war on terror. 
Iran’s long-standing opposition to relations with the US is a bit more complex. 
To be sure, many of Iran’s ruling elites came of age politically during the anti-imperialist and anti-colonialist agitations of the 1960’s and 1970’s, and still cling to that worldview. 
Although their revolutionary zeal may have waned over the years, they still tend to share the outlook of the late Ayatollah Khomeini, who likened the relationship between Iran and the US to that “between a sheep and a wolf.” 
Ideological rigidity alone, however, does not explain Iran’s often-gratuitous anti-Americanism. 
For Iran’s political and military elite, any increased liberalization that would likely result from an opening of ties with the US represents a threat to their interests. 
From their perspective, Iran is now a closed party – their party – and the less who join in, the merrier. 
With America bogged down in Iraq and oil prices hitting record highs, regime hardliners see little reason to compromise these days. 
On the other hand, some influential Iranians – led by former president Hashemi Rafsanjani – recognize that relations with the US are inevitable, given Iran’s need to re-integrate into the international community and face its economic deficiencies. 
Moreover, the Iranian people are overwhelmingly in favor of rapprochement. 
As author Afshin Molavi wrote in his incisive travelogue Persian Pilgrimages , Iranian youth today are not revolutionary idealists, like those of three decades ago. 
Instead, they have concrete demands, like jobs and political and social freedom. 
They are desperate to enter the global community and rid themselves of a damaged international reputation. 
Today’s Iranian intellectuals have undergone a similar maturation process, dismissing the “utopianist” and “nativist” political ideals of their predecessors. 
Referring to Jalal Al-e Ahmad’s 1962 book Gharbzadegi (“West-toxication”), which became one of the manifestos of the 1979 revolution, one secular intellectual in Teheran remarked to me that, “Nobody reads Al-e Ahmad anymore. 
On the contrary, we long for interaction with the West. 
If it can bring us more economic opportunities, as well as social and political freedoms, let us be ‘West-toxified.’” 
Still, despite popular demand in Iran, and common strategic interests, it could be years before America and Iran sit down and make amends. 
After 25 years of living without each other, reconciliation will not come immediately. 
When it does, there is good reason to believe that Iranians will greet their long lost friends with the same friendliness and exuberance that they did sixty years ago in Arak. 


Can We Insure against Tsunamis? 
Most of the discussion surrounding how to respond to Asia’s tsunami disaster has focused on government relief programs and official schemes to implement early warning systems. 
Little discussion has focused on the promotion of private risk management institutions, notably insurance. 
This is unfortunate. 
Insurance companies provide professional, finely detailed risk management that respects the complexity of the dangers to be hedged and responds creatively to individual needs. 
Promoting private insurance may seem an indirect response to the tsunami disaster, but it is a rational – and powerful – response. 
Insurance companies have not penetrated many of the regions that suffered the greatest losses. 
According to a study by the Insurance Information Institute, expenditures on non-life insurance in 2003 amounted to only 0.83% of GDP in Indonesia, 1.19% of GDP in Thailand, and 0.62% of GDP in India, compared with 5.23% of GDP in the United States. 
Foreign aid is no substitute for insurance. 
Charity inspires, reassuring us of our humanity, but it is often capricious. 
You wouldn’t want to rely on it. 
Indeed, when deciding how much disaster aid to offer, countries often seem to be influenced mainly by their leaders’ concerns about how others will view them. 
Charity responds to attention-grabbing events, often neglecting less sensational disasters. 
Insurance, on the other hand, is a reliable and venerable institution, its modern form dating back to the seventeenth century. 
But insurance and other risk management institutions have been slow to develop, even in advanced countries. 
In the US, most people still do not have flood or earthquake insurance. 
In California, one of the world’s most unstable geological regions, only one in six homeowners buys earthquake insurance. 
A fundamental problem is that insurance is not a concept that comes naturally to most people. 
In fact, as psychologists Daniel Kahneman and Amos Tversky have shown, there is a systematic human tendency to downgrade the perceived probability of low-probability events, so that people go about their lives as if the probability of these events’ occurrence is zero. 
Similarly, humans tend to accept large downside risks in order to avoid small certain losses, such as insurance premiums. 
Insurance companies have faced a slow and difficult process in weaning the public from these tendencies. 
Moreover, designing new risk-management products is not easy. 
Insurance companies face inherent difficulties in measuring risks, and they must tailor their policies creatively around the human foibles that limit uptake. 
Insurers must also be attentive to a wide array of possible moral hazards – perverse incentives to risky behavior – and to problems of selection bias in attracting clients. 
To deal with disasters more effectively, countries must find the will to create an environment in which a much more developed private insurance industry can flourish. 
In the US, the National Flood Insurance Program of 1968 made it mandatory for those financing construction or improvement of structures within Special Flood Hazard Areas to buy flood insurance. 
If not made mandatory, insurance must at least be promoted effectively. 
Otherwise, people will build on flood plains in the belief that their government, or the governments of the world, will feel obligated to bail them out, thereby insuring, in effect, bad risks that should not be taken. 
Many of the worst outcomes in Asia occurred in tsunami-prone areas, such as the low-lying coastal areas of Sri Lanka. 
Private insurance would discourage construction in the most dangerous locations, owing to prohibitively high premiums, while encouraging the adoption of tsunami-resistant building standards in marginal areas. 
Fortunately, our international risk-management institutions are steadily improving. 
Various catastrophe bonds, covering earthquakes and other disasters, and weather derivatives have begun trading on financial markets in recent years. 
The Kyoto Protocol created a mechanism for trading carbon dioxide emissions, which promises to manage the risks of an even bigger potential disaster: global warming. 
The markets for these products are still small, but they have strong growth potential, and their further development would enhance insurance companies’ ability to cover risks of major international disasters. 
Consider the absence of an early tsunami warning system in the worst affected countries. 
It is easy to blame people for lack of foresight, but none of the nine hardest hit countries had developed one. 
They can’t all be bunglers. 
The problem is not individual error. 
The failure was caused by the absence of appropriate international institutions that would be alert to the broad spectrum of potential disasters. 
Discussion of early warning systems for tsunamis has focused on government programs. 
But early warning means more than ocean sensors and satellites; it also implies directing construction away from disaster-prone areas and prodding private businesses to develop effective safety and evacuation procedures. 
These are normal activities of insurance companies. 
Indeed, one of the more striking features of the tsunami disaster was that it caught some of the most glamorous vacation resorts completely unprepared. 
The lesson is clear: even high-class businesses are only as professional as the existing institutional infrastructure permits them to be. 
The ultimate reason for their lack of preparation is that our insurance industry was not covering their tsunami risks, and hence not offering up-to-date disaster-prevention guidance. 
The insurance industry can, and should, respond to the tsunami disaster by accepting the moral imperative to take concerted action to expand risk coverage. 
To the extent that governments are involved, they can promote better risk management through responsive regulation and even subsidization of experiments with new private insurance products. 

Can We Regulate Systemic Risk? 
MILAN – In the past two years, two dangerous episodes of financial instability and sudden changes in market dynamics have hit the world economy. 
More are likely, because the global economy is out of balance in several respects as it emerges from the crisis, particularly in terms of sovereign debt and the structure of global demand. 
Systemic risks drive most crises, and pose a challenge for several reasons. 
First, they are not easy to detect with confidence, and are even more difficult to prove. 
Second, predicting the exact timing of a break point (when bubbles burst, markets lock up, and credit freezes) is, and will likely remain, beyond our ability. 
Finally, crises are highly non-linear events, which means that they occur without much warning. 
Periodic outbreaks of instability impose high social costs on those who had the least to do with causing them. 
If repeated, this pattern may erode confidence in financial markets and regulators, which could well lead to heavy-handed regulation, the expansion of the state, and retrenchment from globalization. 
But the problem is even more serious. 
The financial and economic crisis is morphing into a sovereign debt crisis in advanced countries. 
Financial and economic imbalance can lead to dangerous fiscal imbalance, as tax revenues plunge and social insurance and bailout expenditures rise. 
The International Monetary Fund suggests that as much as 75% of the “fiscal stimulus” in the advanced countries comprises non-discretionary counter-cyclical measures. 
Undetected imbalances and systemic risk make fiscal policies seem prudent when they are not. 
Spain, for example, was not running a fiscal deficit coming into the crisis. 
But its revenues and expenditures were in part determined by a highly leveraged real-estate bubble. 
Extreme fiscal imbalance can also lead to a growth trap in which fiscal consolidation has such a large negative effect on growth as to be self-defeating. 
Greece is probably a case in point. 
Eventually, the only way out is to reset the value of liabilities via restructuring or inflation. 
If systemic risk can cause this kind of cascading sequential imbalance, then the “sovereign” needs to be alert, competent at identifying rising systemic risk, and able to take corrective action early. 
We are about to get a comprehensive package of re-regulation focused on capital requirements and leverage, transparency, ratings and other sources of information, incentives, conflicts of interest and limits on the scope of financial firms, consumer protection, and resolution mechanisms. 
The hope is that such reforms will reduce the likelihood and severity of systemic risk. 
But that doesn’t deal with global imbalances and other contributors to and signs of instability. 
In addition and as a complement to re-regulation, we need a comprehensive systemic risk monitor. 
Some prominent policymakers and analysts, however, argue that oversight aimed at identifying and stemming systemic risk is futile. 
With incomplete models of risk dynamics and a complex and constantly changing global financial system, detection is, they argue, either impossible or so prone to error that the effort would be counter-productive. 
Asset bubbles are hard to identify with certainty. 
If skeptics are right, then we should accept that we will periodically be out of financial and fiscal balance without knowing it in advance. 
Thus, we should also accept the need for much more conservative fiscal positioning than was thought necessary even three years ago. 
In statistics and the theory of decision-making under uncertainty, errors are inevitable. 
There are two kinds. 
One error is to reject a true proposition; the other is to accept a false one. 
Let’s call them RWT (reject when true) and AWF (accept when false). 
The issue can then be framed as follows: in the context of detecting and responding to systemic risk, which of the two types of errors has the higher expected costs? 
Opponents of prudential oversight of systemic risk take two different positions. 
One is that the AWF error won’t occur, because there are no reliable ex ante signs of rising potential instability. 
Looking for them is a waste of resources. 
Instability just strikes like lightning. 
This seems wrong. 
In the 2008 crisis, for example, some analysts issued warning signs, and some investors noted and responded to them. 
Admittedly, these warnings did not add up to an ironclad case, and they certainly didn’t predict the timing of the break. 
But the signs were there. 
A second position accepts that there are warning signs, but that they are so unreliable that responding to them would do more harm than good. 
This implies that AWF has a higher expected cost than RWT, because there are a lot of false positives and/or the cure is worse than the disease. 
One can accept that there are costs to AWF. 
But RWT is costly, too, as we have seen, so the aggregate negative effect of the policy response to false positives (AWF) would have to be large to be convincing. 
I am not convinced. 
There may be a deeper bias at work. 
In business and investing, choices under conditions of uncertainty are made all the time, and mistakes are routine. 
By contrast, developed country policymakers’ default stance seems to be that proactive or preemptive measures require a high degree of certainty, owing to a deep-seated belief that financial markets are stable and self-regulating. 
If one believes that market instability is rare, then it is reasonable to refuse to act unless there is a compelling case to do so. 
In light of experience, the view that the financial system is only exceptionally unstable or on an unsustainable path seems at least questionable. 
Based on new theory and experience, we may eventually conclude that policy responses to systemic risk are impossible to devise, and that the costs of the AWF errors are higher than the RWT errors. 
But we should at least conduct the experiment, assigning responsibility to a new or existing institution that has access to information, deep analytical talent in both financial and macroeconomic analysis, and is relatively free of conflicts of interest. 

Can We Survive the “Anthropocene” Period? 
For the past three centuries, humans’ effects on the global environment have escalated. 
Most importantly, our emissions of carbon dioxide may cause global climate patterns to depart significantly from their natural course for many millennia to come. 
It seems appropriate to assign the term “Anthropocene” to the current, in many ways human-dominated, geological epoch, supplementing the Holocene – the warm period of the past 10–12 millennia. 
The Anthropocene Period could be said to have started in the latter part of the eighteenth century, when analyses of air trapped in polar ice showed the beginning of growing global concentrations of CO2 and methane. 
This date also happens to coincide with James Watt’s design of the steam engine in 1784. 
Mankind’s growing influence on the environment was recognized as long ago as 1873, when the Italian geologist Antonio Stoppani referred to the “anthropozoic era,” defined by a “new telluric force, which in power and universality may be compared to the greater forces of earth.” 
In 1926, V. I. Vernadsky similarly acknowledged the increasing impact of mankind on “[t]he direction in which the processes of evolution must proceed, namely towards increasing consciousness and thought, and forms having greater and greater influence on their surroundings.” 
Vernadsky and Teilhard de Chardin used the term “noösphere” – the world of thought – to mark the growing role of human brain-power in shaping its own future and environment. 
Humans’ rapid expansion in terms of population and per capita use of Earth’s resources has continued apace. 
During the past three centuries, the human population has increased ten-fold, to more than six billion, and is expected to reach 10 billion in this century. 
As a result, 30–50% of the planet’s land surface is now exploited by humans. 
At the same time, the methane-producing cattle population has risen to 1.4 billion, contributing to the increasing rate of destruction of tropical rainforests, which releases carbon dioxide and contributes to faster species extinction. 
Land conversion for grazing (and construction), together with crop tillage, has also caused soil erosion at 15 times its natural rate. 
Indeed, at its current pace, anthropogenic soil erosion would fill the Grand Canyon in 50 years. 
Similarly, dam building and river diversion have become commonplace, as humans’ water consumption has risen nine-fold over the past century, to the point that mankind now uses more than half of all accessible fresh water – roughly two-thirds of it for agriculture. 
Fisheries remove more than 25% of the primary production in upwelling ocean regions and 35% in the temperate continental shelf. 
Moreover, energy use has grown 16-fold during the twentieth century, causing 160 million tons of atmospheric sulfur-dioxide emissions per year – more than twice the total of natural emissions. 
Likewise, more nitrogen fertilizer is applied in agriculture than is fixed naturally in all terrestrial ecosystems, and nitric-oxide production from the burning of fossil fuels and biomass also surpasses natural emissions. 
At the same time, of course, human consumption of fossil fuels, together with our agricultural activities, have caused substantial increases in concentrations of “greenhouse” gases – CO2 by 30% and methane by more than 100%. 
Indeed, these concentrations are higher than at any point in the past 400 millennia, with more growth to follow, because so far these effects have largely been caused by only 25% of the world population. 
The consequences are numerous and profound: acid precipitation, photochemical “smog” and global warming, among others. 
Hence, according to the latest estimates by the Intergovernmental Panel on Climate Change (IPCC), Earth will warm by 1.4–5.8 °C during this century. 
Many toxic substances are released into the environment, even some that are not toxic but nonetheless are highly damaging – for example, the chlorofluorocarbons that caused the Antarctic ozone hole (and which are now regulated). 
Things could have become much worse: the ozone-destroying properties of halogens have been studied since the mid-1970’s. 
If it had turned out that chlorine behaved chemically like bromine, the ozone hole would by then have been a global, year-round phenomenon, not just an event of the Antarctic spring. 
More by luck than by wisdom, this catastrophic situation did not develop. 
Unless there is a global catastrophe – a meteorite impact, a world war, or a pandemic – mankind will remain a major environmental force for many millennia. 
As a result, scientists and engineers face a daunting task during the Anthropocene era: to guide us towards environmentally sustainable management. 
This will require appropriate human behavior at all levels, and may well involve internationally accepted, large-scale geo-engineering projects to “optimize” climate. 
At this stage, however, we are still largely treading on terra incognita . 

Is Canceling Brexit Now Inevitable? 
LONDON – In times of political turmoil, events can move from impossible to inevitable without even passing through improbable. 
In early 2016, the idea of Britain leaving the European Union seemed almost as absurd as the next American president being the six-time bankrupt and serial sex pest Donald Trump. 
A few months later, Brexit and the Trump presidency were universally acknowledged as the inevitable consequence of an anti-elitist, anti-globalization backlash that was predictable decades ago. 
This sense of inevitability, far more than genuine anti-European conviction, is what has discouraged Britain from changing its mind about a pointless and self-destructive policy that few voters cared about until 2016. 
The message from post-Brexit polling and focus groups has been: “We all know that Brexit has to happen, so why don’t the politicians just get on with it?” 
But with the Brexit process now moving toward its climax, another outcome is moving from impossible to inevitable: Britain could soon change its mind and decide to stay in the EU. 
This reversal of fortune could begin next month, when Prime Minister Theresa May is expected to lose the decisive parliamentary vote on her Brexit deal. 
If and when this defeat happens, May will face two unpalatable options. 
She could preside over a “No Deal” rupture with Europe – tantamount to a declaration of economic war against the EU – and risk a 2008-level economic crisis accompanied by a border upheaval in Ireland that could reignite the “Troubles.” 
Or she could break her extravagant promises to honor the “people’s instruction” from the 2016 referendum and allow a new popular vote that might cancel Brexit. 
To avoid this invidious choice, May could try one last time to push her proposals through Parliament after losing the vote scheduled for the week of January 14. 
But if this last-ditch effort fails, her choices will be reduced to a No Deal rupture with Europe and a new referendum. 
With the options thus narrowed, the risks and sacrifices of the “horror,” as Britain’s main business lobbies now publicly describe No Deal, will quickly come into focus, and a bipartisan parliamentary majority will surely converge to block this outcome. 
Several Conservative MPs have alreadypromised to resign from the party if May shifts to supporting No Deal, and the rebel numbers could certainly swell enough to bring down her government. 
As the impossibility of legislating either No Deal or May’s deal has become apparent, the aura of inevitability that has protected Brexit from serious challenge since 2016 is vanishing, and soon the sense of inevitability may swing in favor of a new referendum. 
This shift has already started in the British media. 
Having spent the past two years denouncing anyone who challenged Brexit as “enemies of the people” and a traitor to democracy, the BBC, TheTimes, and other influential media organs have suddenly remembered that an essential principle of democracy is that voters have the right to change their minds. 
But just as the“principled” objections to a new referendum are disappearing, a much more practical problem has emerged: What question should be asked in a final “People’s Vote”?Should voters choose between remaining in the EU or accepting May’s withdrawal agreement? 
Or should the options be No Brexit versus No Deal? 
Or what about the narrower choice between May’s Deal and No Deal, demanded by Brexit zealots who argue that the possibility of continuing EU membership was eliminated by the 2016 referendum? 
The obvious answer would be to present voters with all three options – No Deal, May’s Deal, or No Brexit. 
But the problem then arises of how the votes should be counted if none of these options commands a clear majority. 
Under the first-past-the-post system used in British and American elections, the option supported by the most votes would win. 
But that would be completely unacceptable to Brexit supporters, who would be guaranteed to lose if their voters were split between May’s Deal and No Deal. 
Thus, to gain democratic legitimacy, the votes would have to be counted either through a preferential system, which asks voters for first and second choices, or with a two-stage process. 
For example, the ballot could first ask voters to state whether they accepted the government’s Brexit proposal, and then to answer a second conditional question: If the government’s deal does not win majority support, would you prefer No Deal or remaining in the EU? 
Alternatively, voters could be asked, first, whether they want to remain in the EU or go ahead with Brexit, and then, in the event that Brexit wins, whether they would prefer May’s Deal or No Deal. 
The strongest objection to a second referendum is that the different counting systems could give very different results, at least in theory, thereby undermining the legitimacy of the entire process. 
But this objection turns out to be theoretically valid only if public opinion is divided fairly evenly between the three possible outcomes. 
In practice, opinion now seems to be shifting to the point where clear answers are likely, regardless of how the questions are asked. 
In the first detailed poll of all three Brexit options, conducted by YouGov in early December, a standard first-past-the-post vote would result in Remain winning a huge 54% absolute majority, against 28% support for No Deal and 18% for May’s Deal. 
In a simple choice against May’s deal, the majority for Remain would be even bigger, at 62%. 
And in a preferential vote count that redistributed the second preferences of May’s supporters, Remain would still win by a decisive margin of 57% to 43%. 
Of course, voters could change their minds in a referendum campaign. 
But as matters stand today, a new referendum would produce a clear majority for Britain remaining an EU member, regardless of how the votes were counted or the questions were asked. 
This suggests that the force of inevitability is starting to move against Brexit. 
“We all know that Brexit has to be canceled,” voters may soon be saying, “so why don’t the politicians just get on with it?” 

Cancer Care for the Developing World 
BOSTON – More than four decades ago, US President Richard Nixon, inspired by early and encouraging results that showed that chemotherapy could cure diseases such as acute lymphoblastic leukemia and Hodgkin’s lymphoma, declared “war on cancer.” 
Since then, steady progress has been made using chemotherapy, surgery, and radiation to treat and cure an increasing number of cancer patients. 
But access to these life-saving advances remains elusive in low- and middle-income countries, where the majority of cancer patients reside today. 
In the United States, more than 80% of patients with breast cancer are long-term survivors, and more than 80% of cancer-stricken children survive. 
In my nearly 40 years as an oncologist at Harvard University, I have cared for thousands of patients who would have had little chance of survival were it not for chemotherapy. 
Many of the patients who received treatment in the 1970s are alive and well today; their children are now productive adults. 
But it was not until I began working in Rwanda in 2011 that I fully grasped the power of the tools at my disposal, by witnessing the impact of their absence. 
Stepping into the pediatric cancer ward at the central public referral hospital in Kigali was like traveling back in time. 
Outcomes among Rwandan children with Wilms’ tumor, a form of kidney cancer that rarely afflicts adults, mirrored those in the US 80 years ago, before the availability of drugs that today enable more than 90% of diagnosed American children to survive. 
According to Rwanda’s health minister, Agnes Binagwaho, the cancer ward in Kigali resembled the HIV/AIDS unit when she was a pediatrician at the hospital, a decade earlier. 
With no antiretroviral therapy, the prescription for HIV/AIDS was food and rest – meaning that infection essentially amounted to a death sentence. 
At the time, some were caught, if only briefly, on the wrong side of history. 
In 2001, a senior US official claimed that it would be impossible to treat HIV/AIDS in Africa, owing to its “complexity” and high cost. 
But he – along with the many others who shared his view – was proved wrong. 
Today, rates of treatment adherence in Africa among HIV-positive patients with access to drugs have long exceeded those in the US. 
Indeed, Rwanda was one of the first countries to achieve universal access to AIDS treatment. 
Despite this experience, the prospect of effective cancer treatment in Africa has been met with similar skepticism. 
True, cancer therapy is complex. 
It requires a broad range of diagnostic and therapeutic capacities – pathology, surgery, radiation, chemotherapy, and targeted medicines – together with the knowledge and skill to safely administer these life-saving treatments. 
But the Butaro Cancer Center of Excellence and others like it have proved that it is possible to treat cancer patients safely and effectively, even in poor, rural settings. 
Thanks to the Rwandan Ministry of Health, Partners In Health, and the Boston-based Dana-Farber Cancer Institute, the Butaro Center has treated more than 3,000 cancer patients, most of whom are referred from outside the region, since its dedication in July 2012 by former President Bill Clinton and Binagwaho. 
Support from the Jeff Gordon Children’s Foundation, the Breast Cancer Research Foundation, LIVESTRONG, and private donors has also been critical to this achievement. 
Fortunately, some major institutions are already stepping up to bolster this effort. 
The World Health Organization, together with the International Union for Cancer Control, is re-examining the WHO Model List of Essential Medicines for Cancer to identify more accurately which cancers are most responsive to treatment, and which place the heaviest burdens on populations. 
The most efficient approach to reducing global cancer mortality rates would be to bring existing therapies to cancer patients in developing countries. 
Add to that international funding for cancer treatment, like that which was mobilized for HIV/AIDS through the US President’s Emergency Plan for AIDS Relief and The Global Fund, and cancer mortality rates in developing countries could decline considerably – and quickly. 
More than a decade ago, the international community decided that it would no longer accept certain death for HIV patients. 
We must make the same commitment today to bring life-saving cancer treatment to patients everywhere. 

Cancer World 
PITTSBURGH – In 1971, President Richard M. Nixon launched a “war” against cancer. 
But, nearly four decades later, the battle remains focused on highly profitable efforts to develop drugs and technologies to treat the disease while virtually ignoring environmental factors that cause it. 
True, cancer deaths have dropped chiefly because of long-delayed – and still poorly supported – efforts to curb smoking. 
Successes with screening and treatment of breast, colo-rectal, and cervical cancer have also helped. 
But blacks and other minorities in the United States – and elsewhere in the world – do not share in these successes, and environmental factors appear to explain the disparity. 
For example, while one in eight Americans is black, one in three is employed in sanitation or other blue-collar jobs. 
Moreover, they have half the level of cancer-protective vitamin D as whites, and they are much more likely to live in polluted neighborhoods. 
Indeed, cases of cancer that are not tied to smoking or aging are increasing. 
Cancer is the leading cause of death in middle-aged persons and children (after accidents), and we can’t explain why, for most forms of cancer, death rates are higher for blacks than they are for whites. 
What we can say is that the disease itself is the wrong enemy. 
Instead, we should be attacking known environmental carcinogens – not just tobacco, but also radiation, sunlight, benzene, solvents, and some drugs and hormones. 
Modern cancer-causing agents like diesel exhaust, pesticides, and other air pollutants are not systematically studied. 
When they are considered at all, they are deemed to be the inevitable price of progress. 
But most cancers are made, not born, arising from damage to our genes that occurs throughout our lives. 
Despite having remarkably similar genes at birth, identical twins do not develop the same cancers. 
By age 50, their chromosomal bands are profoundly different from one another. 
America’s Centers for Disease Control and Prevention confirm that children’s blood today contains dozens of chemicals that did not exist two decades earlier, including many gene-damaging compounds known to cause cancer and a host of other diseases. 
Men and women of child-bearing age now carry enough hormone-disturbing compounds in their bodies to impair their fertility. 
Women exposed to higher levels of the pesticide DDT before the age of fourteen have a five times higher chances of developing breast cancer when they reach middle age. 
Could such compounds play a role in unexplained and growing rates of childhood cancer, testicular cancer, and non-Hodgkin’s Lymphoma throughout the industrial world? 
Should we wait to find out? 
While we are phenomenally successful at keeping young people from dying of cancer today, that success comes as a Faustian bargain. 
One of three young women treated with radiation to the chest to arrest Hodgkin’s disease will develop breast cancer by age 32. 
Of course, many cancers might not have developed in the first place had these patients not been exposed to other cancer-causing agents in the environment. 
Our dependence on many modern conveniences makes us the subject of vast uncontrolled experiments to which none of us is asked to consent. 
For example, the long-term safety of mobile phones remains unproven. 
Widely publicized studies in the early 1990’s touting their safety excluded business users. 
Recent reports from France and Sweden find that those who have used mobile phones for ten or more years have double the risk of brain cancer. 
Also troubling is the fact that the limit for microwave emission from mobile phones is 500 times lower in Switzerland and China than in the US. 
A way of looking is a way of not looking, runs a Chinese proverb. 
The limited nature of evidence on some environmental cancer hazards should not be confused with proof that no harm has occurred: the research is hard to do, and, in the US, very little of it is now funded by the government and private sector. 
Moreover, confusion about environmental cancer risks also results from longstanding, carefully cultivated, and well-financed disinformation campaigns inspired by the machinations of the tobacco industry. 
We cannot afford to ignore the signs of the importance of the environment for our health. 

Cannabis and the Brain 
Across Europe and America, there is a groundswell of debate concerning the legalization of cannibas for personal use. 
Indeed, Britain has, to all intents and purposes, practically decriminalized marijuana usage. 
As a neuro-scientist, I am concerned about this debate. 
One common justification for legalization or decriminalization of cannabis centers around the idea that it does not involve a victim. 
But at least four reports in major medical journals (Ramstrom, 1998; 
Moskowitz, 1985; 
Chesher, 1995; and Ashton, 2001), show the contrary. 
In a study of pilots smoking only a single moderate joint, there was a difference between a placebo control group and those taking cannabis, up to 50 hours after taking the drug. 
Other costs to the community are accidents at work or at home, educational under-attainment, impaired work performance and health budget costs. 
Another argument for relaxing our attitude to cannabis is that it is non-addictive. 
Of course, defining `addiction' is hard, but if one regards it as an inability to give up, then there is strong evidence that cannabis incites dependence. 
Recent papers report many users in the US, UK and New Zealand now seek treatment for dependence. 
Other papers show that 10% of users want to stop or cut down, but have difficulties doing so, whilst a paper in 1998 reported that 10-15% of users become dependants. 
Recently, it was shown that withdrawal symptoms were experienced after only three days of light use. 
Heavy users confront a worse situation: Dr Bryan Wells, a rehabilitation expert, comments, ``for the first time I'm beginning to see something that resembles the withdrawal symptoms produced by hard drugs in heavy cannabis users.'' 
Another argument in favor of relaxed laws on cannabis are its supposed beneficial effects on pain. 
So far, that evidence is anecdotal; it is hard to exclude placebo effects. 
The results from clinical trials are awaited. 
But distinctions should be drawn between recreational drugs and medicines, as they are for opiates. 
If cannabis is a pain-killer, then it must have a huge impact on the physical brain. 
Indeed, widespread reports exist of the impact of cannabis on the brain, in particular areas concerned with memory (hippocampus), emotion (mesolimbic system), and movement (basal ganglia). 
Cannabis affects a variety of chemical systems and it works via its own `receptor,' it's own molecular target. 
The fact that there is a naturally occurring analogue of cannabis in the body, as there is for morphine, provides a basic reason to differentiate it from alcohol. 
For an agent that affects a variety of transmitter systems, is as though it were a transmitter itself. 
Perhaps, not surprisingly, for cannabis has a clear effect on psychology: not only is there euphoria, but often overlooked effects of anxiety, panic and paranoia. 
Disorders in psychological performance, attention impairments, and memory deficits are well known. 
More disturbing - and less acknowledged - is the fact that these effects can be long-term. 
In one recent paper, a comparison of ex-users who used for 9 years and abstained from 3 months to 6 years, were compared with long-term users of 10 years, and short-term users of 3 years. 
In all cases the frequency of use was 10-19 days per month. 
In all cases, all users, irrespective of whether they had given up or not, had attention impairments compared to controls. 
Although those who stopped using cannabis partially improved over those continued using cannabis, they were below the level of controls, and this impairment was related to the duration of use. 
Most disturbing was the fact that no improvement in performance occurred with increasing abstinence. 
No surprise, then, that because these long-term effects seem to be irreversible, there is an effect on brain pathology. 
Because much of this data comes from work with isolated systems, and therefore on all brains, an obvious criticism is that you can't extrapolate from such data. 
Yet, the evidence suggests that the long-term effects must have a physical basis. 
A counter-argument to such thinking is to challenge whoever thinks that there is a `safe' dose of cannabis, with no effect on the brain, to say what that dose might be. 
Even a dose comparable to one joint, and analogous levels of the active THC ingredient to that in plasma, can kill 50% of neurons in the hippocampus (an area related to memory) within 6 days. 
People, moreover, are unaware that the THC in cannabis remains in the body for over 5 days. 
For someone using cannabis routinely, the dose carried in the body is higher than imagined. 
It is also easy to underestimate the dose being taken, because there is a wide variety in the strength of cannabis. 
Individual variations in body fat and, worryingly, disposition to psychosis, means that you cannot predict how much will affect any person at any time. 
Cannabis could well be having a serious effect on the mind, which I define as the personalization of brain circuits that reflect an individual's experiences. 
A transmitter-like substance, with such powerful effects, must affect those circuits. 
So `blowing your mind' might be exactly what marijuana users do. 

Africa’s Manmade Water Crisis 
SINGAPORE – About a decade ago, at a meeting of South African mayors convened by Lindiwe Hendricks, South Africa’s then-minister of water and environmental affairs, we predicted that an unprecedented water crisis would hit one of the country’s main cities within 15 years, unless water-management practices were improved significantly. 
That prediction has now come true, with Cape Town facing a shutdown of its piped water network. 
The question now is whether African leaders will allow our other projection – that, within the next 25-30 years, many more of the continent’s cities will be facing similar crises – to materialize. 
Africa has long struggled with urban water and wastewater management. 
As the continent’s population has swelled, from about 285 million in 1960 to nearly 1.3 billion today, and urbanization has progressed, the challenge has become increasingly acute. 
And these trends are set to intensify: by 2050, the continent’s total population is expected to exceed 2.5 billion, with 55% living in urban environments. 
The challenge African countries face may not be unique, but it is, in some ways, unprecedented. 
After all, in Western countries, urbanization took place over a much longer period, and against a background of steadily improving economic conditions. 
In building effective systems for water and wastewater management, cities had adequate investment funds and the relevant expertise. 
In Africa, cities’ financial and management capacities are already overwhelmed. 
As a result, water and wastewater management has often fallen by the wayside, with policymakers focusing on water-related issues only when droughts and floods occur. 
The Third World Centre for Water Management estimates that only about 10-12% of Africa’s population has access to adequate domestic and industrial wastewater collection, treatment, and disposal. 
Given that the construction of the infrastructure and systems required to meet African cities’ water needs is likely to take some 20-30 years, governments’ sustained commitment is essential. 
A key imperative is the development of more environmentally friendly systems for wastewater disposal, as is cleaning bodies of water within and around urban centers that are already heavily contaminated. 
Such an effort must be based on a comprehensive approach to assessing water quality that covers a wide range of pollutants – far more than the 10-40 that most African utilities now monitor – with the expectation that new pollutants will be added as they emerge. 
Cities like Singapore now regularly monitor 336 water quality parameters to ensure water safety. 
To that end, Africa will need access to the relevant expertise, adequate funding, and well-run laboratories – all of which are currently in short supply. 
Funding such efforts will not be easy. 
For one thing, official corruption has long undermined investment in the planning, design, and construction of water infrastructure, as well as the effective management of existing infrastructure. 
For another, the social value of water – including its central role in many African religions – has long limited governments’ ability to create a viable funding model for water utilities. 
Though countries are often eager to trade resources like oil, gas, minerals, timber, and agricultural products, no country in the world sells its water to other countries. 
Canada approved the North American Free Trade Agreement only after its parliament confirmed that the agreement would not apply to water in its natural state. 
In federal countries like India and Pakistan, even individual provinces refuse to consider giving water to their neighbors. 
Countries don’t make much money from water domestically, either. 
In 2001, South Africa introduced a “Free Basic Water Policy,” according to which all households, regardless of size or income, receive six kiloliters (1,585 gallons) of water per month at no cost. 
One might argue that this is because water is necessary for survival. 
But so is food. 
And while both water and food are guaranteed in South Africa’s constitution, only water is provided for free. 
And South Africa is no anomaly. 
In most urban centers worldwide, water is free or highly subsidized, and politicians are reluctant to change that. 
Singapore’s water price did not rise at all from 2000 to 2016, and Hong Kong’s water prices haven’t changed since 1996, even as the price of everything else has risen. 
While water obviously shouldn’t become an expensive luxury good, governments’ reluctance to charge appropriately for it has undermined their ability to invest in water utilities, including proper wastewater collection and treatment. 
Far from leveling the playing field, this has made urban water management in most cities less equitable, because the state is unable to provide the necessary services in an efficient, sustainable, or comprehensive way. 
When Cape Town’s water network is shut down because reservoirs have become dangerously low – probably on July 9 – residents will have to stand in line at one of 200 water-collection points, in order to collect 25 liters per person per day. 
That task will be particularly hard on poor and otherwise vulnerable people. 
As South Africa’s politicians and media debate the causes of this crisis, they often focus on climate change – a culprit that cannot talk back. 
But the fact is that the dismal state of urban water management – exemplified by the fact that 36% of the water in South African cities is either lost due to leakage or not paid for, compared to 3.7% in Tokyo and 8% in Phnom Penh – remains a leading reason for the shutdown. 
Managing urban water is not rocket science. 
Solutions have been well known for decades, and the needed technology, expertise, and even funds are available. 
What has been missing is political will, sustained public demand, and continuous media scrutiny. 
Cape Town’s crisis should serve as a wake-up call for all of Africa. 
Unfortunately, like Africa’s water resources, it is most likely to be wasted. 

Capital Shrugged 
LOS ANGELES – Capitalism’s greatest strength has been its resiliency – its ability to survive the throes and challenges of crises and business cycles to fuel innovation and economic growth. 
Today, however, more than four years into a credit crisis, a conspicuous enigma calls this legacy into question. 
Despite recent hopes of recovery in the US, including an inventory catch-up in the fourth quarter of 2011, real US GDP growth has remained persistently below trend. 
Moreover, although seasonally adjusted January employment data have brought the unemployment rate down to 8.3% (while total jobs were actually lost in January), the more realistic rate of “underemployment” remains over 15% and the labor-force participation rate is at a record 30-year low. 
And the US is clearly not alone in its malaise, with the eurozone fighting a far more urgent sovereign-debt crisis. 
So, why is this time different? 
The answer lies in Ayn Rand’s rhetorical invocation of despair in her 1957 epic Atlas Shrugged: “Who is John Galt?” 
Simply put, when the state seizes the incentives and drivers of capital investment, owners of capital go on strike. 
Rand portrays innovative industrialists as akin to Atlas in Greek mythology, carrying on his back a dystopian world of growing and overbearing collectivist government. 
The hero, John Galt, calls for them all to shrug, to “stop the motor of the world” by withdrawing from their productive pursuits, rather than promoting a world in which, under the guise of egalitarianism, incentives have been usurped in order to protect the politically connected from economic failure. 
Today, Rand’s fictional world has seemingly become a reality – endless bailouts and economic stimulus for the unproductive at the expense of the most productive, and calls for additional taxation on capital investment. 
The shrug of Rand’s heroic entrepreneurs is to be found today within the tangled ciphers of corporate and government balance sheets. 
The US Federal Reserve has added more than $2 trillion to the base money supply since 2008 – an incredible and unprecedented number that is basically a gift to banks intended to cover their deep losses and spur lending and investment. 
Instead, as banks continue their enormous deleveraging, almost all of their new money remains at the Fed in the form of excess reserves. 
Corporations, moreover, are holding the largest amounts of cash, relative to assets and net worth, ever recorded. 
And yet, despite what pundits claim about strong balance sheets, firms’ debt levels, relative to assets and net worth, also remain near record-high levels. 
Hoarded cash is king. 
The velocity of money (the frequency at which money is spent, or GDP relative to base money) continues to plunge to historic lows. 
No wonder monetary policy has had so little impact. 
Capital, the engine of economic growth, sits idle – shrugging everywhere. 
Rand, perhaps better than any economic observer, underscored the central role of incentives in driving entrepreneurial innovation and risk-taking. 
Whittle away at incentives – and at the market’s ability to communicate them through price signals – and you starve the growth engine of its fuel. 
Alas, central bankers, with their manipulation of interest rates and use of quantitative easing, patently neglect this fact. 
Interest rates are more than a mere economic input that determines levels of saving and investment. 
Rather, as the Austrian economist Ludwig von Mises emphasized, they are a reflection of people’s aggregate time preference – or desire for present versus future satisfaction – not a determinant of it. 
Interest rates thus incentivize and convey to entrepreneurs how to allocate capital through time. 
For example, lower interest rates and cost of capital raise the relative attractiveness of cash flows further in the future, and capital investment increases – the system’s natural homeostatic response to higher savings and lower consumption. 
State manipulation of interest rates, however, does not influence time preference, even though it signals such a change. 
The resulting inconsistency creates distortions: as with any price control, capital receives an incentive to flow to investment that is inconsistent with actual supply and demand. 
The Fed is purposefully and insidiously distorting the incentive system – specifically, signals provided by the price of money – resulting in mal-investment (and, when public debt is monetized, inflation). 
This can continue for a time, rewarding unproductive investments and aspiring oligarch-speculators who presume that the Fed has eliminated risk. 
But, as Rand reminds us, at some point the jig is up. 
Today, after the largest credit expansion in history, that point has clearly been reached. 
Impassive capital now ignores deceptive market signals, and the liquidation of untenable mal-investment percolates through the system as immutable time preferences prevail. 
The state, in the long run, simply cannot direct entrepreneurs to lend, borrow, and invest; investment capital will inevitably shrug when faced with oppressive manipulation of free markets. 
When that happens, we see the true result of loose monetary policy: not the creation of more economic activity, but the destruction of the natural mechanism of economic coordination and adjustment, robbing the system of its resilience. 
In effect, monetary policy has “stopped the motor of the world.” 
At the conclusion of Atlas Shrugged, Galt aims to restore the old system anew as the collectivist regime crumbles. 
Will something like that, too, happen in our own dystopian world (in which all remaining Republican US presidential candidates seem to favor firing Fed Chairman Ben Bernanke)? 
How long must capital wait for the day when, free of distorted incentives, the engine of growth is fueled and humming again? 

Capitalism and Skepticism 
BALTIMORE – As each new day brings word of another Wall Street bailout even more colossal than the last, one question presents itself with ever-increasing force: why does America’s economy perform so badly under Republican presidents? 
The facts are hard to dispute; indeed, the historical record is now so stark that diehard Republicans are probably starting to wonder if there is a curse. 
Over the period for which modern statistics are readily available, Democrats have outperformed Republicans by almost every traditional measure of economic performance (per capita GDP growth, unemployment, inflation, budget deficits). 
Democrats have even managed to beat the Republicans on their own turf. 
Thanks to the profligacy of the current Bush administration (and the prudence of the Clinton administration), average Federal spending as a proportion of GDP under Republican presidents now exceeds that under Democrats during the measured period. 
The pattern of Republican deficiency holds up when the span of historical analysis is extended by using stock returns to measure economic performance. 
On average, since the inception of the Standard and Poor’s composite stock index in 1926, the reward for putting your money in the market has been about 16 percentage points lower per presidential term under Republicans than under Democrats. 
Republican underperformance remains a stubborn fact even when the Great Depression and World War II are left out of the analysis (in the fond hope that they will prove to have been unique experiences). 
With the current presidential term lurching to such a calamitous close that the incumbent is probably worried about being remembered as George Herbert Hoover Walker Bush, the correlation between presidential party and economic outcome demands some kind of explanation. 
The answer can’t be found in the specific policy proposals of Republicans or Democrats, which have evolved so much over the years that they defy meaningful generalization. 
Nor are there clearly identifiable differences in doctrine that should translate into a reasonable expectation of better economic performance under one party than the other. 
Perhaps the best explanation has to do with attitudes, not ideology. 
Maybe capitalism works better when skeptics restrain its excesses than when true believers are writing, interpreting, judging, and executing the rules of the game. 
The Democrats are surely the more skeptical of America’s two parties. 
Some evidence can be found in those features of the American economy that we believe others should emulate. 
There is now an overwhelming consensus that open, transparent, and accountable mechanisms of shareholder control are essential for the efficient functioning of public corporations. 
Virtue is defined by good accounting rules. 
But it is instructive to recall that many of those now-universally-admired rules were fiercely resisted when first proposed. 
The options backdating scandal that recently caught Apple’s chairman, Steve Jobs, is a microcosm of innovation, prosecution, and reform; now that a rule has been written to prohibit backdating, this particular scam will not happen again. 
Thus do accounting rules approach perfection. 
What do we learn from this example? 
It’s hard to say. 
Maybe that capitalism works better when it is being held accountable to some external standard than when left to its own devices. 
As the twentieth century recedes in the rear-view mirror, it increasingly seems that, for better or worse, our era’s defining manifesto has been Milton Friedman’s book Capitalism and Freedom . 
But that book’s potency originally derived from its fierce independence from contemporary orthodoxies. 
Friedman’s voice was a skeptical breath of fresh air at a time when the reigning viewpoint was a kind of smug pseudo-socialism that did not recognize the astounding power of markets to accomplish desirable aims. 
Today, however, the reigning Republican orthodoxy is a kind of smug pseudo-Friedmanism that believes that markets left to themselves can do no wrong. 
Perhaps it is time for another breath of fresh air. 
The book for the new epoch has yet to be written, but I have a proposed title: Capitalism and Skepticism . 
Skepticism might not be as bracing as freedom, but it’s something we could have used a bit more of in the past few years. 

Capitalism's High Noon 
Europe's Enron-induced schadenfreude is kaput. 
Last year's Vivendi and this year's Parmalat scandals have seen to that. 
Europe, like America - indeed, like the entire capitalist world - must now become more hawkish in demanding prosecution and punishment of bosses who loot their companies. 
American prosecutors in the Enron case have made important progress lately, with some important crooks, like Andrew Fastow, offering both guilty pleas and a willingness to testify against their former colleagues. 
Mr. Fastow will go to jail for ten years; those he testifies against will face even longer sentences. 
Italian prosecutors seem zealous to make those who looted Parmalat pay a similar price. 
But these cases go beyond the companies robbed and the shareholders betrayed. 
What is at stake is no less than the perception of the fairness of the market and political support everywhere for market-oriented policies. 
Capitalist economies produce inequality, often large ones. 
Up to a point, and to the extent that income differences are due to differences in ability, effort, investment in education, etc., they are necessary to providing the correct incentives to invest, work, innovate, and grow. 
But the more tainted the market's reputation for fairness, the more average citizens will see income differences merely as the result of corruption, illegal activities, connections with public officials, and so on. 
This will increase demands for more regulation and heavy government involvement in the economy, so as to bring unruly and untrustworthy capitalists under greater control. 
Moreover, the more that wealth accumulation is viewed as "unfair" (i.e., the result of corruption and illegality), the more pressure for stiff taxation of "ill-gotten gains" will mount. 
If any of these populist measures would make markets fairer and better functioning, we would say, "So be it." 
Unfortunately, reacting to corrupt businessmen in this way sets in motion a vicious circle: more regulation may lead to even more corruption in order to avoid it; higher taxes on wealth will bring about even more tax evasion, making the system even more tainted. 
Sadly, nowadays, things as disparate as highly paid executives, the Enron and Parmalat scandals, contested mergers and acquisitions, stock market volatility, "junk bonds," and asset-price bubbles are all lumped together under the snide heading "cowboy capitalism." 
Europeans are particularly prone to see things this way - and to see a powerful government as the sheriff to keep the cowboys from shooting up the town. 
This is especially worrisome because Europe has recently begun moving in the right direction by deregulating its markets. 
With political support for these changes still shaky, the risk is that opponents may use Parmalat, Enron, Vivendi, and other cases as an excuse to reverse the process. 
In many developing countries, weak regulators and a widespread perception of corruption often stand in the way of pro-market reforms; the left (populist or otherwise) can credibly argue that capitalism is "corrupt" and so must be taken under the wing of the government. 
This is a big reason why market capitalism has such a hard time taking root in the developing word. 
If capitalists are corrupt, how can you convince a poor peasant to believe in the market economy? 
He will vote for populist policies. 
The result is even more corruption and less growth in a sort of "corruption-induced" poverty trap. 
The Parmalat scandal may have been a blow to global capitalism, but in Italy it is hoped that it might sound the death knell for an economic system traditionally based much more on "connections" amongst private groups - and between these groups and the public sector - than on competitive markets. 
For Italy, the obvious solution is to strengthen the country's investigative and financial institutions, and improve the design of regulatory agencies, particularly the quality of their personnel. 
This, however, will not happen overnight, and in the meantime the demand for more regulation may result in a structure that is heavy, ineffective, and in the end impedes, rather than corrects, market forces. 
Supervision inside Italian firms should be strengthened by making sure that a sufficient number of non-executive directors sit on the boards of public companies. 
A single independent director would probably have been enough to blow the whistle at Parmalat: there were none on its board. 
Similarly, it might help to have accounting firms be selected by minority shareholders or paid by the stock exchange, rather than by a company itself. 
Here, even the recent changes in the US have not gone far enough: they prevent accounting firms from also serving as advisors to a firm, but they still leave the decision about remunerating the accountants in the hands of the company, thus creating a perverse incentive to play fast and loose with financial reporting. 
It is surprising that while the Italian government is busy redesigning the regulatory and supervisory structure of the country's financial institutions and financial markets, nothing is being said about independent directors and accounting firms. 
After all, good sheriffs need active citizens to be in their posses and to serve on juries. 
Clean capitalism needs the same sort of widespread engagement. 

Capitalism’s Moral Bastards 
Recent revelations that many corporate executives have backdated their stock options, ensuring excessive compensation even when their companies perform poorly, are merely the latest in a stream of examples of bad business behavior. 
In an era of evaporated pensions and benefits for the rank and file, piggish pay packets for CEO’s have led a cynical public to wonder where big business has gone wrong. 
The answer may be quite simple: too many bosses have abandoned basic human values and embraced the credo famously uttered by Gordon Gekko in the movie Wall Street : “Greed is good.” 
But a growing body of research concludes that greed is not always good, and that moral values are a necessary element in the conduct of business. 
The Gordon Gekkos are predators who take the quick payoff. 
Although they do serve a useful purpose by keeping other players on their toes and raising efficiency through competition, market participants for the most part avoid them, preferring to do business with the Warren Buffetts – hard-driving businessmen, but known for fair play and creating long-term value. 
Consider the trip to the mall, where shoppers buy goods produced and shipped from around the world. 
This decentralized delivery of goods relies on employees working for two weeks before receiving a paycheck, companies offering each other lines of credit, and banks offering bridge loans. 
Even though humans have engaged in exchange since before the birth of civilization, the impersonal system of trading is only around 1,000 years old. 
While legal remedies exist should this system break down, impersonal trading cannot occur unless most people share the values of fair play and reciprocal cooperation. 
Even in impersonal market exchange, we cannot help but personalize transactions, say, with the grocery store cashier who smiles and thanks us, or the store greeter whose only purpose is to make us feel cared for. 
This personalization draws upon regions of the brain that evolved when our trading partners were members of small kin-based groups where moral violations were immediately identified and remedied. 
Research by primatologists Sarah Brosnan and Frans de Waal at Emory University has shown that monkeys also have what look like moral values. 
When two monkeys work for food, a fair split is expected. 
If a fair division is not received, it elicits cries of outrage and hurled food by the wronged partner. 
Moral values have powerful physiological representations in humans, too, and we feel them strongly when they are violated. 
The philosopher Josh Greene and his colleagues at Princeton University have shown that personal moral dilemmas (for example, whether you would directly kill one person to save seven others) use our emotions rather than higher cognition – to the chagrin of many philosophers who claimed otherwise. 
The personal aspect of such decisions makes our hearts speed up and our palms sweat. 
In neuroeconomics experiments that my lab has conducted, we have found that when a stranger places trust in another by making a considered monetary investment that can either be returned or stolen, our brains release an ancient mammalian hormone called oxytocin. 
Oxytocin is what bonds mammals to their offspring, and in humans makes spouses care about and love each other. 
We have found that trust causes a spike in oxytocin and begets reciprocation – the sharing of money. 
We are “wired” to cooperate, and we find it rewarding in the same way that our brains identify eating a good meal or sex as rewarding. 
Oxytocin is active in evolutionarily old areas of our brain, outside of our conscious awareness. 
We simply have a sense that sharing with someone who has trusted us is the right thing to do. 
We have also found that about 2% of undergraduates we studied are pure non-cooperators. 
When they have an opportunity to share money with a stranger who has trusted him or her, non-cooperators keep all the money rather than share the largess. 
The technical term in my lab for these people is “bastards.” 
Our evidence suggests that bastards’ brains work differently. 
Their character traits are similar to those of sociopaths. 
They simply do not care about others the way most people do, and the dysfunctional processing of oxytocin in their brains appears to be one reason for this. 
Because bastards are out there, we still need government and personal enforcement of economic exchange. 
Nevertheless, too much government regulation may “crowd out” moral behavior. 
When every offense has an associated penalty, transgressions cease to be moral violations, but are simply a way for wrongdoers to effectively “use the system” while facing some risk of getting caught and paying a fine. 
These external penalties can displace the internal sanctions we feel when we do wrong. 
At Enron, this was accomplished by breaking down tasks into small chunks so that no one person was ultimately responsible for a decision and could claim ignorance when caught. 
Former Enron chief executive Jeffrey K. Skilling excused his behavior at his trial by saying, “I’m not an accountant.” 
Many people have been convinced that market exchange diminishes our humanity. 
Think of Charlie Chaplin’s film Modern Times , in which the little tramp is literally a cog in the capitalist machine. 
That view, a residue of Marxist thinking, is wrong. 
On the contrary, working together, and trading with each other in markets, is morality in action. 

Capitalism’s New Clothes 
MELBOURNE – Is the global financial crisis an opportunity to forge a new form of capitalism based on sound values? 
So French President Nicholas Sarkozy and former British Prime Minister Tony Blair appear to think. 
At a symposium in Paris last month entitled “New World, New Capitalism,” Sarkozy described capitalism based on financial speculation as “an immoral system” that has “perverted the logic of capitalism.” 
He argued that capitalism needs to find new moral values and to accept a stronger role for governments. 
Blair called for a new financial order based on “values other than the maximum short-term profit.” 
It is surprising how readily politicians of all parties – even strong ideological defenders of the unregulated market – accepted the idea that the state should bail out banks and insurance companies when they got into trouble. 
With the exception of a small number of ideologically committed defenders of free enterprise, few were willing to take the risks inherent in letting major banks collapse. 
Who knows what the consequences would have been? 
Many feared mass unemployment, a tidal wave of bankruptcies, millions of families evicted from their homes, the social safety net strained to the breaking point, and perhaps even riots and a resurgence of the political extremism that brought Hitler to power in Germany during the depression of the 1930’s. 
The choice to save the banks from the financial consequences of their own errors indicates a shift in values away from belief in the wisdom of the market. 
Evidently, the market got some things – like the value of certain financial securities – horrendously wrong. 
But will the downturn also produce a deeper shift in the values of consumers? 
It is no accident that the “New World, New Capitalism” symposium was held in France, where some critics have seen the global financial crisis as necessary and desirable precisely because it is producing this change in values. 
In the newspaper Le Figaro, a section on how to scale back one’s expenses predicted a “revolution in values” and claimed that people will put family ahead of work. 
(Americans think the French, with their shorter working hours and longer summer vacations, already put family ahead of work.) 
The French have always been less likely to go into debt – when they pay with plastic, they tend to use debit cards, drawing on funds they already have, rather than credit cards. 
Now they see the current crisis as a vindication of the value of not spending money that you don’t have. 
That means, in many cases, less luxury spending – something that is hard to reconcile with the image of France as the country of fashion, perfume, and champagne. 
But excess is out of style, and there are reports of cutbacks in luxury goods everywhere. 
Richemont, the Swiss luxury goods company that owns the Cartier and Montblanc brands, has said that it is facing “the toughest market conditions since its formation 20 years ago.” 
But does this mark an enduring change in values, or just a temporary reduction, forced upon consumers by investment losses and greater economic uncertainty? 
In his inauguration speech, American President Barack Obama said, “The time has come to set aside childish things” and instead to choose the noble idea that “all are equal, all are free, and all deserve a chance to pursue their full measure of happiness.” 
It would be an excellent thing if the global financial crisis restored a proper sense of what is important. 
Could the crisis remind us that we buy luxury items more because of the status they bring than because of their intrinsic value? 
Could it help us to appreciate that many things are more central to our happiness than our ability to spend money on fashion, expensive watches, and fine dining? 
Could it even, as Obama suggests, make us more aware of the needs of those who are living in real poverty and are far worse off than we will ever be, financial crisis or no financial crisis? 
The danger is that the potential for a real change in values will be co-opted, as has happened so often before, by those who see it as just another opportunity to make money. 
The designer Nathalie Rykiel is reportedly planning to show the new Sonia Rykiel collection in March not in the usual vast rented area, but in the smaller space of her own boutique. 
“It's a desire for intimacy, to go back to values,” she told the International Herald Tribune . “We need to return to a smaller scale, one that touches people. 
We will be saying, ‘Come to my house. 
Look at and feel the clothes.’” 
Ah yes, in a world in which ten million children die every year from avoidable, poverty-related causes, and greenhouse-gas emissions threaten to create hundreds of millions of climate refugees, we should be visiting Paris boutiques and feeling the clothes. 
If people were really concerned about defensible moral values, they wouldn’t be buying designer clothes at all. 
But what are the chances of Nathalie Rykiel – or the affluent elites of France, or Italy, or the United States – adopting those values? 

Capitalism with Chinese Characteristics 
As a final act of his presidency - it will end at the Communist Party meeting beginning November 7 th - China's Jiang Zemin wants businessmen to join the Party leadership. 
Marx and Mao are probably spinning in their graves. 
Who are these businessmen President Jiang wants to court and how do they operate? 
Kenichi Ohmae offers a portrait. 
Officially, China remains Communist. 
Yet companies in China face far fewer regulations than in Taiwan, Korea, Japan, Germany, France, and Sweden. 
Even in comparison with the US, China is a capitalist paradise - so long as you steer clear of the central government. 
For example, tariffs (which are set by the central government, but administered locally) are low or nonexistent for companies that take advantage of China's regional systems of tax-free zones and tax benefits. 
None of this was conceivable as recently as 1992, when Beijing's proclamation of "one country, two systems" - and the decision to peg the mainland's currency, the Renminbi, to the Hong Kong dollar - unleashed the floodgates of foreign investment. 
Money poured into the Shenzhen and Shanghai stock markets, as did direct investment to build factories and offices in tax-free zones. 
The trappings of entrepreneurial culture are everywhere. 
The face of General Electric's longtime boss Jack Welch is in bookstore windows across China, although his latest book is probably a pirated edition because China still has a way to go on copyright protection. 
Many managers attended China's elite foreign language schools (which trained spies during the Cold War era) and then headed to America for an MBA. 
Back home, they practice just-in-time manufacturing, 360-degree performance evaluations (including bosses reviewed by subordinates), and re-engineering - all with unmatched resourcefulness and purposefulness. 
In fact, more students than ever who left for universities in Japan, the US, and Europe are being lured back. 
The Dalian local government constructed an elaborate software development park à la Silicon Valley, where students returning from abroad can rent low-cost office space for startup companies. 
They benefit from broadband network environments, introductions to investors and financial angels, and exposure to each other. Like rival businesses in a single large corporation, other cities are creating their own incubators and lures for talent as well. 
As a result, China's reputation for lackluster innovation is changing. 
Consider the story of Shenyang-based Neusoft Group, China's largest publicly traded software company, with sales of $134 million last year. Neusoft began as a low-cost competitor to the Oracle Corporation. 
After moving on to produce car audio equipment, Liu Jiren, Neusoft's CEO, began hearing complaints from local hospitals about the high cost of specialized X-ray, MRI, ultrasound, and CT-scanning machines (such as those made by GE, Philips, Siemens, and Toshiba). 
Suddenly, a new business was born. Liu realized that Neusoft could link standard Intel chips and its own imaging software to a range of digital sensors. 
Neusoft's equipment looks like little personal computers with sensors attached. But it is inexpensive and adaptable enough that every hospital room can now have its own multipurpose scanner. 
In the US or Japan, facing entrenched industry opposition, such a startup might never have gotten off the ground. 
But by selling to Chinese hospitals first, Neusoft built up a customer base that will allow it to challenge the existing medical electronics industry worldwide, just as Honda and Toyota challenged the worldwide auto industry in the 1970s. 
Nor is Neusoft alone. 
Little Swan sells washing machines in 40 countries, while Legend Group is now the world's largest manufacturer of personal computers (mostly sold under other brand names). 
Hua Wei, based in Shenzhen with 14,000 employees (70% of whom are engineers), makes routers and telecommunications switches at half the price of most global companies. Many leading American and European telephone equipment manufacturers fear Hua Wei more than Fujitsu or NEC. 
The Chinese have grasped the hidden key to Japan's success in the 1970s and 1980s. 
Companies like Toshiba and Sony depended on two regions - Otaku in Tokyo, and Higashi Osaka in Osaka Prefecture -where thousands of manufacturers of precision mechanical and electronic components were clustered. Today, Otaku and Higashi Osaka are anachronisms. 
With modern highways, port facilities, and communications links available, a cellular phone manufacturer in Shenzhen might receive just-in-time deliveries of parts several times a day from suppliers that are only hours away. 
Dalian is becoming a center for software development and Japanese-language back-office work, such as insurance processing and call centers. Japanese companies also prefer Qingdao, on the Shandong Peninsula, which specializes in production of high-quality processed food. 
More than 4,000 Taiwanese manufacturers have set up shop in Xiamen and Dongguan. Zhongguancun, a former military research zone in Beijing that houses half a million scientists and engineers, is popular with American high-tech companies. 
All this clustering resulted in state-of-the-art production and cutting-edge business. 
Consider Japan's Fast Retailing Company, which retails high-quality clothing manufactured in China under the Uniqlo brand in its own Japanese outlets. 
Fast Retailing charges one-third the price that competitors charge and earns nearly five times the margin. 
The verb "to uniqlo-ize" (to cut costs dramatically through Chinese production and eliminating intermediaries) has entered Japan's business vernacular, as in: "Can we uniqlo-ize the housing industry?" 
The US confronted something similar in the late 1980s. 
It responded by internalizing foreign competitors like Sony, Toyota, Bayer, Nestlé, and DaimlerChrysler - in effect turning them into US companies with US investors, loyalties, and even corporate cultures. 
The challenge for the US, Europe, and Japan will now be to internalize Chinese companies and methods in order to galvanize their own to higher levels of productivity and innovation. 

Capitalist Meltdown 
PARIS – There is a strange foreboding in the world economy. 
Newspapers report downward revisions in growth estimates for all the major developed countries: the United States, Germany, France, Japan. 
No one, it seems, is being left out. 
Indeed, these estimates are roughly half a percentage point lower than those issued only last autumn. 
At the same time, newspapers report in bleak terms almost exclusively about banks and financial markets, with little attention to the real economy, as if today’s crisis were purely financial and bound to remain so. 
Indeed, some experts, too, believe that the crisis can be resolved simply by refinancing banks, and that the impact on the real economy will be relatively limited. 
This is clearly the belief of the European Central Bank, which is pumping hundreds of billions of euros into the banking system to ensure liquidity. 
But, unlike the US Federal Reserve, it has not lowered key interest rates, which is what matters most to firms and households. 
Other experts, of course, believe that the real economy is in jeopardy, and that the threat of a recession is genuine. 
But, unfortunately, hardly any experts can speak with confidence about both finance and macroeconomics. 
So what is a non-expert to think? 
It is helpful to review where the world economy now stands. 
The largest number of defaults on sub-prime mortgages will occur this spring. 
So the full impact of the crisis remains ahead of us: 1.3 million American homeowners have already defaulted on their mortgages. 
In 2008, another three million will join them. 
Moreover, the size of the bad debt threatening banks remains unknown, and could amount to several hundred billion dollars. 
The total sum of assets now under threat is even more important, because mortgages have been mixed up with other kinds of securities, and these “packages” have been sold throughout the world. 
A US subsidiary of Deutsche Bank, for example, has been barred by an American court from foreclosing on a house because it could not demonstrate ownership. 
The global economy is overrun with such poisoned packages. 
As a result, banks distrust one another and have mostly stopped lending to each other, which jeopardizes economic activity by severely reducing the availability of credit to businesses. 
As a result, recession seems certain. 
The quantity of liquidity in the world economy is surprising, and monetary expansion by central banks does not explain it completely. 
For more than two decades, shareholders in all the developed countries, unorganized and passive from 1945 until 1975-1980, have recast themselves in the form of pension funds, investment funds, and hedge funds. 
Now they are significant and active players (as majorities or strong minorities) in all the big companies of the developed world. 
To boost the value of their shares, these shareholders backed the drive to reduce the global volume of the payroll and the number of workers that companies employ. 
Indeed, in the last 25 years, the share of direct and indirect wages as a percentage of GDP has fallen by 8% to 11% in all the countries involved. 
As a result, precarious employment and job insecurity, which hardly existed between 1940 and 1970, now affect more than 15% of the developed world’s population. 
The average real wage has been flat in the US for 20 years, with 1% of the population capturing all of the gains brought about by a 50% growth in GDP during this period. 
This “liberated” a lot of liquidity for financial activities, gambling, and speculation. 
In France alone over the past 20 years, roughly 2.5 trillion euros have poured into the financial world, which suggests a total of 30-60 trillion dollars for the world economy as a whole. 
This has been accompanied by a growing immorality of the system. 
Remuneration of company bosses now reaches 300 to 500 times the average salary of rank-and-file employees, up from 40 to one for the century and a half before 1980. 
Throughout the world, the number of companies facing legal problems for various types of fraud is growing dramatically. 
The worst, sadly, is yet to come. 
Because most people’s incomes are stagnant and being eroded as their mortgage payments rise, consumption is bound to fall, yielding lower growth and employment. 
A recession will only increase job precariousness and unemployment, creating social tensions that will not, of course, help to ease the financial crisis. 
All the ingredients seem to be in place for a long and powerful perfect storm of economic decline and social unrest. 
We in the developed world live in democracies. 
Every four or five years, the legitimacy of the system needs to be confirmed by elections. 
But is the system being so delegitimized by the economic and social turmoil that elections will no longer be viable? 
Of course, capitalism remains more compatible with personal freedom than communism ever was. 
But it is now blindingly obvious that capitalism is too unstable to survive without strong public regulation. 
That is why, after years of being neglected as a viable option, it is time for the social-democratic project to return to the political fore. 

Capitals of Capital 
NEW YORK – Recently, China’s government announced that it wants Shanghai to become a global financial capital equal to London and New York by 2020. 
An ambitious goal, which may or may not be achieved. 
But China’s aspirations also underscore a worrisome and increasingly pervasive new reality: political officials are making decisions normally left to markets on a scale not seen in decades. 
Like the financial crisis itself, this trend is now global. 
Political leaders in dozens of countries are making decisions that will drive the performance of local (and global) markets for the foreseeable future. 
In China, exports fell by more than 25% in February. 
Not to worry, said Premier Wen Jiabao: the Chinese government has “adequate ammunition” to add to its $586 billion stimulus package, a plan meant to create millions of jobs via enormous government investment in transportation, energy infrastructure, housing, and other large-scale projects. 
In India, where government is more often considered a drag on commerce than a catalyst of growth, the decisions that move local markets are now more likely to come from bureaucrats in Delhi than from innovators in Mumbai. 
In fact, the Congress Party-led government, anxious to appear responsive to public demand for help during an election-year economic slowdown, has pushed forward three stimulus packages since December. 
The bottom line: to find out how, when, and where assets will be allocated and wealth generated in dozens of countries across the developed and developing worlds these days, we must now look toward political, not financial, capitals. 
This trend will spell trouble for longer-term global economic growth. 
First, it’s tough enough for leaders within the Chinese Communist Party elite to agree on economic-policy priorities. 
The challenges facing US President Barack Obama as he tries to win support for risky and expensive policy options from quarrelsome Democrats and obstinate Republicans will create some tortured legislative compromises. 
That pattern is being repeated elsewhere. 
In Russia, Ukraine, Hungary, Pakistan, Turkey, Malaysia, Mexico, Nigeria, and other states, battles among domestic political factions will yield often-incoherent responses to pressing economic problems. 
Second, if it’s difficult to forge consensus within one country on how best to promote growth, imagine the same argument on a global scale. 
Most politicians craft policy to serve their local constituents and to protect their personal political capital. 
Reinvigorating global growth runs a distant second. 
In Washington, many Democrats will use these policy debates to capitalize on popular fury at Wall Street, while many Republicans look for an opening to capitalize on hoped-for public anger at the Democrats. 
Some within the Chinese Communist Party leadership will support plans to engineer a shift from export-led growth to a model based on domestic consumption. 
Others will try to direct state funding toward their personal investment projects. 
Factions within the Russian, Indian, Mexican, and South African governments have their own competing political priorities. 
With so many political officials crafting crisis responses to solve local problems or to create local opportunities, how likely are they to agree on a unified international approach? 
Our first glimpse of the trouble in coordinating an international response to the financial crisis came last November, during the emergency G-20 summit in Washington. 
To get the G-8 to agree on priorities is a complicated enough; building consensus within the G-20 is exponentially more difficult, not simply because of the larger number of players involved, but because many of them don’t agree on the most basic rules of the global economic game. 
While the April G-20 summit in London produced more economic-policy agreement than expected, this was largely because the most divisive issue – the US and British demand for more global stimulus spending – was removed from the table beforehand. 
As a result, the smiling presidents and prime ministers could afford to be more diplomatic than Czech Prime Minister Mirek Topolanek, who, in his role as acting president of the European Union, had warned that Obama’s economic plan would lead others down a “road to hell.” 
Topolanek wasn’t at the G-20; his country is not a member. 
And, while British Prime Minister Gordon Brown agrees with Obama that the world’s leading industrialized countries must stimulate their domestic economies as much as they can, Bank of England Governor Mervyn King has warned that Britain may already have taken on too much debt for another round of stimulus. 
However frightening the global recession, a coordinated and coherent response to it by the world’s political leaders remains highly uncertain at best. 
And the increasingly heavy influence of political factors on market performance will likely weigh on global growth for years to come. 

Capturing the ECB 
NEW YORK – Nothing illustrates better the political crosscurrents, special interests, and shortsighted economics now at play in Europe than the debate over the restructuring of Greece’s sovereign debt. 
Germany insists on a deep restructuring – at least a 50% “haircut” for bondholders – whereas the European Central Bank insists that any debt restructuring must be voluntary. 
In the old days – think of the 1980’s Latin American debt crisis – one could get creditors, mostly large banks, in a small room, and hammer out a deal, aided by some cajoling, or even arm-twisting, by governments and regulators eager for things to go smoothly. 
But, with the advent of debt securitization, creditors have become far more numerous, and include hedge funds and other investors over whom regulators and governments have little sway. 
Moreover, “innovation” in financial markets has made it possible for securities owners to be insured, meaning that they have a seat at the table, but no “skin in the game.” 
They do have interests: they want to collect on their insurance, and that means that the restructuring must be a “credit event” – tantamount to a default. 
The ECB’s insistence on “voluntary” restructuring – that is, avoidance of a credit event – has placed the two sides at loggerheads. 
The irony is that the regulators have allowed the creation of this dysfunctional system. 
The ECB’s stance is peculiar. 
One would have hoped that the banks might have managed the default risk on the bonds in their portfolios by buying insurance. 
And, if they bought insurance, a regulator concerned with systemic stability would want to be sure that the insurer pays in the event of a loss. 
But the ECB wants the banks to suffer a 50% loss on their bond holdings, without insurance “benefits” having to be paid. 
There are three explanations for the ECB’s position, none of which speaks well for the institution and its regulatory and supervisory conduct. 
The first explanation is that the banks have not, in fact, bought insurance, and some have taken speculative positions. 
The second is that the ECB knows that the financial system lacks transparency – and knows that investors know that they cannot gauge the impact of an involuntary default, which could cause credit markets to freeze, reprising the aftermath of Lehman Brothers’ collapse in September 2008. 
Finally, the ECB may be trying to protect the few banks that have written the insurance. 
None of these explanations is an adequate excuse for the ECB’s opposition to deep involuntary restructuring of Greece’s debt. 
The ECB should have insisted on more transparency – indeed, that should have been one of the main lessons of 2008. 
Regulators should not have allowed the banks to speculate as they did; if anything, they should have required them to buy insurance – and then insisted on restructuring in a way that ensured that the insurance paid off. 
There is, moreover, little evidence that a deep involuntary restructuring would be any more traumatic than a deep voluntary restructuring. 
By insisting on its voluntariness, the ECB may be trying to ensure that the restructuring is not deep; but, in that case, it is putting the banks’ interests before that of Greece, for which a deep restructuring is essential if it is to emerge from the crisis. 
In fact, the ECB may be putting the interests of the few banks that have written credit-default swaps before those of Greece, Europe’s taxpayers, and creditors who acted prudently and bought insurance. 
The final oddity of the ECB’s stance concerns democratic governance. 
Deciding whether a credit event has occurred is left to a secret committee of the International Swaps and Derivatives Association, an industry group that has a vested interest in the outcome. 
If news reports are correct, some members of the committee have been using their position to promote more accommodative negotiating positions. 
But it seems unconscionable that the ECB would delegate to a secret committee of self-interested market participants the right to determine what is an acceptable debt restructuring. 
The one argument that seems – at least superficially – to put the public interest first is that an involuntary restructuring might lead to financial contagion, with large eurozone economies like Italy, Spain, and even France facing a sharp, and perhaps prohibitive, rise in borrowing costs. 
But that begs the question: why should an involuntary restructuring lead to worse contagion than a voluntary restructuring of comparable depth? 
If the banking system were well regulated, with banks holding sovereign debt having purchased insurance, an involuntary restructuring should perturb financial markets less. 
Of course, it might be argued that if Greece gets away with an involuntary restructuring, others would be tempted to try it as well. 
Financial markets, worried about this, would immediately raise interest rates on other at-risk eurozone countries, large and small. 
But the riskiest countries already have been shut out of financial markets, so the possibility of a panic reaction is of limited consequence. 
Of course, others might be tempted to imitate Greece if Greece were indeed better off restructuring than not doing so. 
That is true, but everyone already knows it. 
The ECB’s behavior should not be surprising: as we have seen elsewhere, institutions that are not democratically accountable tend to be captured by special interests. 
That was true before 2008; unfortunately for Europe – and for the global economy – the problem has not been adequately addressed since then. 

A Carbon Price-and-Rebate Plan 
PARIS – So far, international climate talks have failed to find a mechanism that will successfully reduce global greenhouse-gas emissions. 
The 1997 Kyoto Protocol attempted to use a system of tradable quotas to establish a price on carbon-dioxide emissions, but foundered after the United States and several emerging countries refused to join. 
The 2009 Copenhagen Climate Change Conference introduced a pledge-and-review process, in which countries unilaterally decided how much they would cut. 
As a result, the US and several emerging economies made commitments to reduce emissions for the first time. 
But this system, too, is badly flawed. 
What it does not do is resolve the classical free-rider problem or guarantee reductions in developing countries. 
Indeed, some countries may have been encouraged to do less than they otherwise would have in order to maintain a strong negotiating position. 
As world leaders meet in Paris from November 30 to December 11 for the United Nations Conference on Climate Change, they will have a new opportunity to forge an effective agreement. 
To encourage governments to act in concert, it is essential to work toward a system of carbon pricing that is both straightforward and transparent. 
We propose a carbon “price-and-rebate” mechanism, which simultaneously sets a price on emissions above a certain threshold and defines how the revenues raised should be used. 
Studies ahead of the Paris conference suggest that international cooperation could allow for rapid reduction of greenhouse gases. 
They also highlight the knock-on benefits that taking quick action on climate change could have, including reduction of local pollution, greater energy and food security, and faster innovation. 
To accelerate the move toward a low-carbon economy, an international agreement must be applicable to all countries; include a common and consistent system for monitoring, reporting, and verification; and provide strong economic incentives at a global scale. 
Our price-and-rebate mechanism is inspired by the “bonus/malus” scheme in France, in which buyers of new cars are taxed or given a bonus depending on the vehicle’s CO2 emissions. 
In our system, a country exceeding the worldwide average for per capita emissions would pay a specified amount on every ton of CO2 (or its equivalent) above a set threshold. 
Countries with lower-than-average emissions would be compensated for polluting less. 
This system would initially benefit countries with the lowest per capita emissions, meaning that most of the funds would flow towards the least-developed countries. 
Once it is fully operational, the price-and-rebate mechanism would encourage all countries to reduce their per capita emissions, thereby reducing the gap between payments and rebates. 
The ideal carbon price would depend on the objectives of the agreement. 
A price of $1-2 per ton would generate $14-28 billion, enough to fund the deployment of the monitoring, review, and verification process in developing countries. 
The Copenhagen Accord included a commitment by rich countries to spend $100 billion a year after 2020 to help underdeveloped countries mitigate and adapt to climate change. 
A rate of $7-$8 per ton would generate enough revenue to deliver on this promise, with the money flowing to countries with low per capita emissions. 
Of that $100 billion, a little over $60 billion would come from Western countries and Japan, and just under $20 billion would come from hydrocarbon-exporting countries (Russia and Saudi Arabia in particular) and high-growth Asian economies (including China and Korea). 
The introduction of a price-and-rebate system would thus redistribute funds among countries in conformity with the principle of “common but differentiated responsibilities and respective capabilities.” 
A price-and-rebate system would be both efficient and fair. 
Every citizen in the world would have the same right to emit greenhouse gas, and every country would face the same incentives at the margin to reduce emissions. 
The main obstacle to be overcome in establishing such a system will be to convince donor countries’ governments to pay for their carbon emissions. 
This cost will be modest relative to the size of their economies, and any successful climate-change agreement will require similar commitments. 
If rich countries are unable to agree to pay even a modest price for carbon, the talks in Paris will surely be judged a failure. 

The Path to Carbon Pricing 
WASHINGTON, DC – In just six weeks, world leaders will meet in Paris to negotiate a new global climate-change agreement. 
To date, 150 countries have submitted plans detailing how they will move their economies along a more resilient low-carbon trajectory. 
These plans represent the first generation of investments to be made in order to build a competitive future without the dangerous levels of carbon-dioxide emissions that are now driving global warming. 
The transition to a cleaner future will require both government action and the right incentives for the private sector. 
At the center should be a strong public policy that puts a price on carbon pollution. 
Placing a higher price on carbon-based fuels, electricity, and industrial activities will create incentives for the use of cleaner fuels, save energy, and promote a shift to greener investments. 
Measures such as carbon taxes and fees, emissions-trading programs and other pricing mechanisms, and removal of inefficient subsidies can give businesses and households the certainty and predictability they need to make long-term investments in climate-smart development. 
At the International Monetary Fund, the focus is on reforming its member countries’ fiscal systems in order to raise more revenue from taxes on carbon-intensive fuels and less revenue from other taxes that are detrimental to economic performance, such as taxes on labor and capital. 
Pricing carbon can be about smarter, more efficient tax systems, rather than higher taxes. 
Carbon taxes should be applied comprehensively to emissions from fossil fuels. 
The price must be high enough to achieve ambitious environmental goals, in alignment with national circumstances, and it must be stable, in order to encourage businesses and households to invest in clean technologies. 
Administering carbon taxes is straightforward and can build on existing road fuel taxes, which are well established in most countries. 
Carbon pricing will be in many countries’ best interests, owing to the many domestic environmental benefits. 
For example, burning cleaner fuels helps to reduce outdoor air pollution, which, according to the World Health Organization, currently causes about 3.7 million premature deaths a year. 
It is vitally important to address the impact of energy-price reforms on vulnerable groups in every society. 
So these reforms will need to be accompanied by adjustments to fiscal systems and safety nets, among other things, to ensure that the poor are not harmed. 
The World Bank Group is supporting countries and businesses as they develop climate-friendly public policies, invest in carbon markets, and explore financial innovations to ease into low-carbon transitions. 
The Group is leveraging its experience and global reach for learning and knowledge exchange through programs like the Partnership for Market Readiness. 
From that experience, we have developed, alongside the OECD, initial principles to help guide and inspire future carbon-pricing schemes. 
By drawing on these principles, countries, regions, states, and businesses can move faster to tackle the climate challenge confronting us all. 
The principles are based on fairness; alignment of policies and objectives; stability and predictability; transparency; efficiency and cost-effectiveness; and reliability and environmental integrity. 
To help achieve our climate objectives, we need to promote dialogue about the necessary policy measures before and beyond the climate-change conference in Paris. 
That is why we are announcing a “Carbon Pricing Panel,” which will bring together heads of state, city and state leaders, and representatives of top companies to urge countries and businesses around the world to put a price on carbon. 
These leaders have taken steps to price carbon pollution and catalyze greener investment in their own countries and regions. 
They include German Chancellor Angela Merkel, Chilean President Michelle Bachelet, French President François Hollande, Ethiopian Prime Minister Hailemariam Desalegn, Philippines President Benigno Aquino III, Mexican President Enrique Peña Nieto, Governor Jerry Brown of California, and Mayor Eduardo Paes of Rio de Janeiro. 
Carbon pricing policies are already being implemented by some 40 national governments, including that of China, the world’s largest emitter, and 23 cities, states, and regions that are putting a price on carbon. 
Many other governments also are reforming energy prices, and more than 400 companies report using a voluntary, internal carbon price. 
That makes sense. 
Top companies must effectively manage exposure to climate risk in order to generate higher profits and ensure more stable earnings. 
All of these actions are welcome; but we view them as being only initial steps. 
Together with the leaders of the Carbon Pricing Panel, we call on governments to seize the moment – for the sake of the planet and future generations – to put a price on carbon pollution that reflects the environmental damage it causes. 
We stand ready to support governments that act. 
The longer we wait, the costlier and more difficult it will be for us – and our children and grandchildren – to protect the planet. 

Care-Giving and the Moral Impoverishment of Medicine 
CAMBRIDGE – Care-giving is understood by economists as a “burden,” by clinical psychologists as a “coping process,” by health-services researchers in terms of health-care costs, and by physicians as a matter of clinical competency. 
But, for many people, care-giving is a foundational component of moral experience. 
It is a practice of acknowledgement, empathic imagination, witnessing, responsibility, solidarity, and the most concrete forms of assistance. 
It is this moral aspect that makes care-givers, and at times even care-receivers, feel more “present” – and thus more fully human. 
But, aside from skilled nursing, rehabilitation efforts by occupational and physical therapists, and the practical assistance of social workers and home health aides, care-giving, especially for victims of health catastrophes and end-stage conditions, has relatively little to do with the contemporary practice of medicine. 
To illustrate this point, I draw on my personal experience as the care-giver for my wife, who suffers from a severe neurodegenerative disorder that has impaired her memory and motor functions, restricting her independence. 
I wake her up in the morning, assist her in toileting, bathing, and dressing, make us breakfast, and help her feed herself. 
I assist her in walking, placing her in a chair, and getting into our car. 
I am with her nearly all the time to protect her from injuring herself, because she can neither see nor navigate safely on the street or in our own home. 
It is disturbing to witness the deterioration of a once elegant, intellectually lively, and highly independent companion of more than four decades. 
But our emotional reactions, from frustration and anger to sadness, have been cushioned and sublimated by our work, the long rhythm of our days together, and, above all, by the support of family and close friends. 
That concern and responsibility for us is as much a part of care-giving as all the mundane practices I have listed, and amounts to moral solidarity with our struggle. 
I give you this personal sketch because it is the best I can do to illustrate what care-giving entails, and why it is so crucial to everyone’s life – and to the human condition more generally. 
Care-giving, as illustrated by our case, includes what happens when hope and consolation are abandoned, when theodicy ends, and when all there is to do is to be present with the sufferer, sharing his or her suffering by simply – and usually silently – being there. 
In medical schools, however, the curriculum in both the basic science and clinical apprenticeship years places the greatest emphasis on understanding the biology of disease processes and high-technology treatments. 
The illness experience gets less and less pedagogic attention as the student progresses from classroom to inpatient ward and clinic. 
In the broader system of healthcare, students can readily discern that medicine largely leaves the practical and emotional tasks of care-giving to nurses, social workers, and the patient and his or her network of support. 
The structure of service delivery and the funding of health services work to discourage professionals from the art of care-giving, and can, in fact, undermine the practitioner’s efforts. 
The result is moral impoverishment of the practice of medicine. 
For medical anthropologists, people everywhere live in the flow of interpersonal interactions in local worlds – social networks, families, institutions, and communities. 
That is to say, experience, viewed as the flow of words, movements, and emotions between us, is not only local, but also inherently moral, because living our lives is about animating and enacting values. 
For patients and families faced with health catastrophes and serious chronic medical conditions, the experience of suffering is not just a personal one, but is strongly influenced by cultural and historical changes in the processes that contribute to moral life being distinctive in different eras and societies. 
Faced with a threat of pain, disfigurement, loss of function, and serious disability, individuals and families reframe the experience of suffering within their local moral world by remaking meanings, emotions, and values via ethical, religious, and aesthetic activities. 
Doctors are no different from laypersons in drawing on personal and cultural resources –involving imagination, responsibility, sensibility, insight, and communication – to accomplish their care-giving. 
And what they engage in is an amalgam of ethical, aesthetic, religious, and practical action. 
The physician’s art – now so circumscribed by bureaucratic, political, and economic forces – turns on both the professionalization of these inherently human resources and the impact of their routine use on the doctor’s own moral life. 
To prepare for a career of care-giving, medical students and young doctors clearly require something besides scientific and technological training. 
Indeed, current professional education can even be seen as enabling the physician as a technical expert, while disabling him or her as a care-giver. 
To overcome this trend, we must incorporate the humanities into medical training as a means of rekindling and deepening those human experiences of imagination and commitment that are essential for care-giving, and resisting the bureaucratization of values and emotional responses that causes failure in the physician’s art. 
In essence, the practitioner must come to feel that the art of care-giving is as much at stake as the science and technology of diagnosis and treatment. 
In my view, what is needed is reform of the very culture of contemporary biomedicine. 
We must train students and practitioners in critical self-reflection on that which limits their care-giving; in strategies and techniques aimed at opening a space for the moral acts of care-giving; and in the most concrete and practical acts of assistance, so that they never forget what care-giving actually means. 


Caring about Animals in the Era of Foot and Mouth 
On British television recently, a tearful farmer spoke of the fact that his sheep were being shot to prevent the spread of foot and mouth disease: "We’re so sorry to see our lambs die – they should be the symbol of spring, of new life. 
But now they die due to this awful disease.” 
Total hypocrisy. 
Before you start weeping in sympathy with the farmer, ask yourself one question: what would have been the fate of the lambs if there had been no outbreak of foot and mouth disease? 
The farmer would have taken these little symbols of spring away from their mothers, packed them into trucks, and sent them to slaughter. 
The symbol of new life would become dead meat. 
Then the farmer would have happily banked the cheque he was paid for doing this. 
(He'll still get a cheque, since farmers are compensated by government for animals shot to contain the outbreak.) 
The lambs may have lost out on a few weeks of life, but they were also spared the distress of separation from their mothers, the misery of transportation, possibly for hundreds of kilometres, and the crowding and terror of the slaughterhouse. 
When intensively reared pigs are shot as a disease control measure, they lose even less. 
Kept indoors all their lives, on bare concrete without straw for bedding – pigs love straw, but it costs money and makes the floors harder to keep clean – with nothing to do all day except for the short time they are eating, it is hard to see that longer existence brings them any benefits at all. 
It's a matter of judgment, and others might disagree, but in my view the lucky factory farmed pigs are those shot on the farm. 
The unlucky ones have to live longer. 
I've been reading newspaper columns in which writers say how dreadful it is, this mass slaughter of hundreds of thousands of animals. 
They question its necessity, noting that the disease poses zero risk to humans, and even in animals, 95% will recover within a week or two – or would, if they were not shot first. 
There is even a vaccine for it. 
Columnists point out that the real reason for the slaughter is economic. 
The disease causes a temporary loss of production, and once foot and mouth disease is established in a country, other countries will prohibit the importation of its meat and dairy products because they don't want the disease to spread it to their animals. 
Vaccination, however, doesn't solve the export problem, because it produces false positives on blood tests of animals suspected of having the disease, so the importing countries don't know if they have found an animal with the disease, or an animal that has been vaccinated against it. 
To do further tests distinguishing the infected animals from the vaccinated ones is expensive, and not yet proven to be reliable. 
To be on the safe side, countries ban the import of vaccinated animals anyway. 
So, having demonstrated that the slaughter is unnecessary, it is then said that the slaughter should stop, that it shows the wrong attitude to animals, that we must show them more respect, and not just treat them as a means to our ends. 
While they are not vegetarian, some of these columnists say, they are so disgusted with what they have been seeing on television that they have been thinking of giving up meat. 
Oh please! 
Where have the people been all these years? 
You must have known that all these animals were going to get slaughtered anyway? 
If you can read, and didn't deliberately turn away from anything that might disturb your comfort, you should also know that the entire animal industry is unnecessary, that we would be healthier, and do less damage to our environment, without it? 
These animals are just means to our ends, that is their sole reason for existing. 
How can farmers treat them with respect when consumers want cheaper meat and supermarkets are using their immense bargaining power to force producers to use every possible means to cut costs? 
Yes, do give up meat. 
It's the right decision to make, and better late than never. 
But don't give it up because you pity the animals being shot, and don't like the attitude to animals that is conveyed by the fact that all this killing is taking place for mere economic gain. 
Give it up because all of this slaughter has at last brought home to you the real truth about the nature of the animal industry today. 

Creative Destruction at Work 
OXFORD – Throughout history, technological progress has created enormous wealth but also caused great disruption. 
The United States’ steel industry, for example, underwent a major transformation in the 1960s, when large, integrated steel mills were gradually put out of business by mini mills, destroying the existing economic base of cities like Pittsburgh, Pennsylvania, and Youngstown, Ohio. 
The mini mills, however, vastly increased productivity, and created new types of work elsewhere. 
The story of US steel illustrates an important lesson about what the economist Joseph Schumpeter called “creative destruction”: Long-run economic growth involves more than just increasing output in existing factories; it is also implies structural changes in employment. 
We can observe a similar phenomenon in the current information and communications technology (ICT) revolution, which has affected most areas of the modern workplace, even those not directly associated with computer programming or software engineering. 
Computer technologies have created prosperous new businesses (even business clusters) while making certain manufacturing workers redundant and sending older manufacturing cities into decline. 
But the likes of Detroit, Lille, or Leeds have not suffered because of falling manufacturing output; on the contrary, output has been growing in these cities over the past decade. 
Instead, their decline stems directly from their failure to attract different types of jobs. 
To a large extent, this is a failure of policy. 
Rather than trying to preserve the past by propping up old industries, officials should focus on managing the transition to new forms of work. 
This requires a better understanding of emerging technologies, and how they differ from those that they are supplanting. 
An important feature of the Industrial Revolution’s early manufacturing technologies was that they replaced relatively skilled artisans, which in turn increased demand for unskilled factory workers. 
Similarly, Henry Ford’s assembly line for manufacturing cars – introduced in 1913 – was specifically designed for unskilled workers to operate machinery, thereby allowing the company to produce its popular Model T – the first car that middle-class Americans could afford. 
Indeed, much of the story of industrial development over the last century can be seen in terms of competition between an increasingly educated workforce and new technology that would dispense with their skills. 
We have already seen the impact – not least in the car industry – of robots that can carry out the routine jobs that were once performed by thousands of middle-income assembly-line workers. 
Even greater workplace disruption lies ahead. 
Though history counsels caution in predicting how technological progress will play out, we already have a reasonable idea of what computers will be able to do in the near future, because the technologies are already being developed. 
We know, for example, that a wide range of skilled professions can be simplified with the help of “big data” and sophisticated algorithms. 
One frequently cited example of this process is the Symantec Clearwell eDiscovery platform, which uses language analysis to identify general concepts in documents, and boasts of analyzing and sorting more than 570,000 documents in just two days. 
Clearwell is transforming the legal profession by using computers to assist in pre-trial research and perform tasks normally undertaken by paralegals – and even by contract or patent lawyers. 
In the same way, improved sensory technology means that many transportation and logistics jobs will soon be fully automated. 
And it is not far-fetched to imagine the likes of Google’s self-driving cars making bus and taxi drivers redundant one day. 
Even hitherto secure, low-skilled service occupations may not escape automation. 
Demand for personal and household service robots, for example, is already growing by about 20% annually. 
Labor markets may once again be entering a new era of technological turbulence and widening wage inequality. 
And this highlights a larger question: Where will new types of work be created? 
There are already signs of what the future holds. 
Technological progress is generating demand for big data architects and analysts, cloud services specialists, software developers, and digital marketing professionals – occupations that barely existed just five years ago. 
Finland offers valuable lessons in how cities and countries should adapt to these developments. 
Its economy initially suffered from the failure of its biggest company, Nokia, to adapt to smartphone technologies. 
Yet several Finnish start-ups have since built new enterprises on smartphone platforms. 
Indeed, by 2011, former Nokia staff had created 220 such businesses, and Rovio, which has sold more than 12 million copies of its smartphone-based video game, “Angry Birds,” is crowded with former Nokia employees. 
This transformation is no coincidence. 
Finland’s intensive investment in education has created a resilient labor force. 
By investing in transferable skills that are not limited to specific businesses or industries, or susceptible to computerization, Finland has provided a blueprint for how to adapt to technological upheaval. 
Despite the diffusion of big-data-driven technologies, research suggests that labor will continue to have a comparative advantage in social intelligence and creativity. 
Government development strategies should therefore focus on enhancing these skills, so that they complement, rather than compete with, computer technologies. 

Europe’s Crisis in Ukraine 
STOCKHOLM – How Ukraine’s profound crisis will end is impossible to predict. 
We in the European Union and the United States are doing what we can to secure a peaceful transition to a more stable democracy, and the implementation, at long last, of urgently needed reforms. 
And the agreement now concluded between President Viktor Yanukovych and the opposition should create a new possibility for this. 
If the agreement is not honored, Ukraine could well continue its descent into chaos and conflict, which would be in no one’s interest. 
That is why Ukraine’s crisis is a European crisis. 
And, though we cannot know how the crisis will end, we should be very clear about how it started. 
For years, Ukraine sought a closer relationship with the EU. 
Its leaders warmly endorsed the promise of enhanced ties under the EU’s Eastern Partnership, and pushed for an EU Association Agreement, together with a Deep and Comprehensive Free Trade Area. 
When those talks, which began under the previous Ukrainian government, were concluded, the agreement was endorsed by all four presidents and all 14 prime ministers to hold office since Ukraine achieved independence in 1991. 
But, as the EU and Ukraine were addressing remaining issues ahead of the November 2013 Eastern Partnership summit in Vilnius, where Ukraine was to sign its Association Agreement, something suddenly changed. 
From August onward, Russian policymakers embraced the openly declared aim of knocking Ukraine off the course that it had chosen. 
A political campaign against the agreement was launched, and the Kremlin mixed targeted sanctions with threats of harsher measures against the already-weak Ukrainian economy. 
Russian leaders publicly stated that if Ukraine signed a free-trade agreement with the EU, it would lose its free-trade deal with Russia, and high tariffs would be imposed on all goods and services. 
Severe economic pressure, it was made clear, would become open economic warfare. 
Ukrainian President Viktor Yanukovych gave way. 
In explaining to EU leaders that he was not ready to sign the Association Agreement, he was very clear that Russian pressure was responsible for his decision. 
This set in motion the chain of events that has now resulted in carnage and death in the streets of Kyiv. 
For many Ukrainians, Europe was the symbol of hope of a better life; suddenly, they felt betrayed by a political elite that they had long perceived as being incorrigibly corrupt. 
So, to be clear, it was the Kremlin’s pressure, and the Yanukovych administration’s vacillation, that produced the current crisis. 
Had Yanukovych decided to stand up to Russian pressure, there is no doubt that Ukraine would have faced difficulties. 
But, with an EU Association Agreement and the possibility of solid financial aid and reform assistance from the International Monetary Fund, the Russian measures would not have been sustainable. 
Of course, the reforms asked of Ukraine would have been difficult, but no more difficult than what had been asked of other ex-communist countries that saw their future in and with Europe. 
There would have been light at the end of the tunnel, and, as Ukraine embraced the reform process, it would have been seen as a determined and democratic European country. 
Instead, Yanukovych opted for a short-term strategy narrowly focused on his own political survival – a strategy that the protesters increasingly came to view as a game of deceit and betrayal. 
As the regime started to use violence to repress its opponents, violent opposition groups gained credibility. 
Free trade with both Russia and the EU would obviously have been good for Ukraine’s economy, thus providing a boost to the Russian economy as well, notwithstanding the oft-used but fundamentally bogus argument that EU goods would flow into Russia via Ukraine. 
(Has anyone heard Americans complaining that the free-trade agreement between Mexico and the EU is undermining the US economy?) 
Russia is intent on building a new strategic bastion in the form of its proposed Eurasia Union, and it seems determined to force Ukraine to join. 
While publicly grumbling about supposed EU pressure on Ukraine, the reality is that Russia brutally extorted the country into abandoning its EU course. 
That is the source of this crisis; the facts speak for themselves. 
Even under the best of circumstances, the road back for Ukraine will be difficult. 
Russian pressure and destabilization, and the crisis to which they have led, have created new fissures in Ukraine’s society and have caused further damage to its fragile economy. 
And that damage could, one day, spill over into Russia. 
The Kremlin should have an interest in a stable and reforming neighbor that, like other countries, is also seeking a close relationship with the EU. 

The Ratings Revolution 
CAMBRIDGE – “Bonjour Monsieur, comment pourrais-je vous aider?” asks the obsequious concierge at my Paris hotel. 
I immediately wonder what happened to the city’s infamous haughtiness – especially toward American tourists. 
If the French capital is no longer Europe’s rudest city, we can perhaps thank the growth of online rating tools, such as TripAdvisor. 
Travel Web sites have been around since the 1990s, when Expedia, Travelocity, and other holiday booking sites were launched, allowing travelers to compare flight and hotel prices with the click of a mouse. 
With information no longer controlled by travel agents or hidden in business networks, the travel industry was revolutionized, as greater transparency helped slash prices. 
Today, the industry is in the throes of a new revolution – this time transforming service quality. 
Online rating platforms – specializing in hotels (TripAdvisor), restaurants (Zagat), apartments (Airbnb), and taxis (Uber) – allow travelers to exchange reviews and experiences for all to see. 
Hospitality businesses are now ranked, analyzed, and compared not by industry professionals, but by the very people for whom the service is intended – the customer. 
This has forged a new relationship between buyer and seller. 
Customers have always voted with their feet; they can now explain their decision to anyone who is interested. 
As a result, businesses are much more accountable, often in very specific ways, which creates powerful incentives to improve service. 
Although some readers might not care for gossipy reports of brusque bellboys in Berlin or malfunctioning hotel hairdryers in Houston, the true power of online reviews lies not just in the individual stories, but in the Web sites’ capacity to aggregate a large volume of ratings. 
The impact cannot be overstated. 
Businesses that attract top ratings can enjoy exponential growth, as new customers are attracted by good overall reviews and subsequently provide yet more (positive) feedback. 
So great is the influence of online ratings that many companies now hire digital reputation managers to ensure a favorable online identity. 
The system is not always virtuous. 
Nefarious operators are known to pay fake review services to bolster ratings. 
Customers, too, can be disingenuous or worse, engage in blackmail, which occurs, as TripAdvisor explains, “when a guest threatens to write a negative review unless a demand for a refund, upgrade, or other request is met.” 
Fortunately, technology is countering this misuse of ratings. 
Algorithms can already detect fake reviews by identifying consistently positive (or negative) opinions from the same reviewer. 
Geolocation tracking can ensure that only customers who have actually used a service can express an opinion (as is the case with Airbnb). 
Indeed, obstreperous critics are being challenged as a result of another, rather surprising development: while customers may express an opinion about a service, the service provider can also rate its customers, as Uber has demonstrated. 
Indeed, it is not inconceivable that popular hotels might one day choose their guests. 
Traditional relationships between consumers and producers are breaking down in other ways, too. 
The rise of the “sharing economy,” in which assets – such as a car, a parking space, or a spare bedroom – are shared within communities, not only generates reciprocal goodwill, but also blurs the distinction between buyer and seller. 
Not every service, however, has been touched by online ratings. 
The impact of ratings depends on whether the typical consumer actually reads online reviews before making a decision. 
While it is increasingly common to do so when, say, booking a hotel room, it is much less so when deciding among, say, bars on a busy street (the enduring rudeness of Parisian waiters attests to that). 
Yet even service establishments that rely on “curb appeal” to attract customers may soon find their days numbered. 
The proliferation of “augmented reality” – an overlay of digital information (as developed by Google Glass, among others) – promises to transform everyday activities into a digital/physical hybrid experience in which customer feedback is instantly and seamlessly available to shoppers. 
The final holdout against the raters will be services for which customers have no choice, typically monopolies or government agencies, such as airports. 
Singapore’s Changi Airport is a rare exception: it solicits user ratings at every turn, via feedback screens with cheery, touch-enabled smiley-face emoticons that request travelers’ opinions on everything from the efficiency of immigration service to the cleanliness of toilets. 
Needless to say, many developed economies lag behind, at least for now. 
But the writing is, literally, on the wall – or at least on the screen. 
Indeed, if you are reading this online and disagree with me, you can explain why in the comments section accompanying this commentary. 

Life in the Uber City 
LONDON – Mais oui! 
As every French fifth-grade student knows, the Internet was invented in Paris. 
It was called Minitel, short for Médium interactif par numérisation d’information téléphonique, a network of almost nine million terminals that allowed people and organizations to connect to each other and exchange information in real time. 
Minitel boomed during the 1980s and 1990s, as it nurtured a variety of online apps that anticipated the global dot-com frenzy. 
It then fell into slow decline and was finally decommissioned after the “real” Internet rose to global dominance. 
Both Minitel and the Internet were predicated on the creation of digital information networks. 
Their implementation strategies, however, differed enormously. 
Minitel was a top-down system; a major deployment effort launched by the French postal service and the national telecommunication operator. 
It functioned well, but its potential growth and innovation was necessarily limited by its rigid architecture and proprietary protocols. 
The Internet, by contrast, evolved in a bottom-up way, managing to escape the telecommunication giants’ initial appeals for regulation. 
Ultimately, it became the chaotic but revolutionary world-changer that we know today (“a gift from God,” as Pope Francis recently put it). 
Today, another technological revolution is looming. 
Pervasive digital networks are entering physical space, giving rise to the “Internet of Everything” – the networked lifeblood of the “smart city.” 
And, once again, a broad spectrum of implementation models is emerging in different parts of the world. 
In the United States, the general idea of smart urban space has been central to the current generation of successful start-ups. 
One of the latest examples is Uber, a smartphone app that lets anyone call a cab or be a driver. 
The company’s operations are polarizing – Uber has been the subject of protests and strikes around the world (mainly in Europe) – yet it was recently valued at a stratospheric $18 billion. 
Beyond Uber, the learning thermostat Nest, the apartment-sharing website Airbnb, and the just-announced “home operating system” by Apple, to name just a few innovations, attest to the new frontiers of digital information when it inhabits physical space. 
Similar approaches now promise to revolutionize most aspects of urban life – from commuting to energy consumption to personal health – and are receiving eager support from venture capital funds. 
In South America, Asia, and Europe, all levels of government are quickly identifying the potential benefits of building “smart” cities, and are working to unlock significant investment in that area. 
Rio de Janeiro is building capacity at its “Smart Operations” center; 
Singapore is about to embark in an ambitious “Smart Nation” effort; and Amsterdam recently channeled €60 million ($81 million) into a new urban innovation center called Amsterdam Metropolitan Solutions. 
The European Union’s Horizon 2020 program has earmarked €15 billion in 2014-2016 – a significant commitment of resources to the idea of smart cities, especially at a time of severe fiscal constraints. 
But how can such funding be used most effectively? 
Indeed, is allocating huge sums of public money even the right way to stimulate the emergence of smart cities? 
Government certainly has an important role to play in supporting academic research and promoting applications in fields that might be less appealing to venture capital – unglamorous but crucial domains, such as municipal waste or water services. 
The public sector can also promote the use of open platforms and standards in such projects, which would speed up adoption in cities worldwide (Barcelona’s “city protocol” initiative is a step in this direction). 
But, most important, governments should use their funds to develop a bottom-up innovation ecosystem geared toward smart cities, similar to the one that is growing in the US. 
Policymakers must go beyond supporting traditional incubators by producing and nurturing the regulatory frameworks that allow innovations to thrive. 
Considering the legal hurdles that continuously plague applications like Uber or Airbnb, this level of support is sorely needed. 
At the same time, governments should steer away from the temptation to play a more deterministic and top-down role. 
It is not their prerogative to decide what the next smart-city solution should be – or, worse, to use their citizens’ money to bolster the position of the technology multinationals that are now marketing themselves in this field. 
These companies’ ready-made, proprietary, and typically dull offerings represent a route that should be avoided at all costs – lest we wake up to find ourselves in Minitel City. 

The Road to Car Safety 
TOKYO – The automobile – long a symbol of freedom, status, and success – is at a crossroads. 
For more than a century, cars have enabled billions of people to travel farther, faster, and more efficiently than ever before. 
They have helped power the world’s great economies and shaped our modern social and cultural landscape. 
But all of this has come at a price: accidents, congestion, pollution, and an uneasy dependence on oil, among other costs. 
Our challenge, therefore, is to boost the benefits and reduce (and eventually eliminate) the harm done by our cars, so that the future of motor travel is clean, efficient, safe, and accessible to all. 
For our industry to remain an instrument of progress, we must therefore work closely with our peers from other industries and government in three major areas: safety, the environment, and affordability. 
Road safety is a grave concern. 
More than 3,000 people die in auto-related accidents every day. 
Lower-income countries account for only half of all vehicles on the road but suffer more than 90% of the fatalities. 
India has four times fewer cars than France, though it suffers 20 times more road-related deaths – that is, 80 times more accidents per car. 
But safety is improving. 
In Europe, even as the number of vehicles has doubled, the number of road deaths has been halved. 
One reason for this is the introduction of technologies such as anti-lock brakes, airbags, and electronic stability control. 
Technologies now in development could even eliminate auto-related fatalities altogether. 
One such innovation is autonomous driving. 
Renault and Nissan are currently working on complementary technologies that can predict, detect, and prevent collisions. 
By reducing the stresses of driving in heavy traffic and unfamiliar locations, this technology promises greater protection for both drivers and pedestrians. 
It is especially valuable to people with restricted mobility, such as elderly or disabled drivers. 
But such breakthrough technologies are not simply invented and then implemented – they need government support in the form of a coherent set of laws and regulations covering their use. 
Policymakers must therefore be involved at an early development stage if we are to reach the goal of “zero fatality” roads within our lifetimes. 
The auto industry can also make a vital contribution to the environment. 
Fifteen years ago, the Renault-Nissan Alliance evaluated the environmental impact of its vehicles over their life cycle. 
The study examined the effect of our raw-material usage; the impact of car exhaust on public health, especially in congested urban areas; and the contribution to overall greenhouse-gas emissions – 23% of which come from the auto industry worldwide. 
As a result of that evaluation, the Alliance invested more than €4 billion ($5.5 billion) in zero-emission technologies. 
Today, ours is the only auto group that mass-produces a full line of zero-emission cars and light commercial vehicles. 
Renault and Nissan together have sold more than 100,000 such vehicles worldwide – more than all of the other major carmakers combined. 
The broader task is to integrate these vehicles into a more efficient and cleaner power grid – for example, by replacing aging coal-fired power plants with hydroelectric power. 
Moreover, local and national governments should work with the automobile industry to integrate zero-emission vehicles into national transport infrastructure. 
If this is achieved, we believe it will be possible for cars to have zero impact on the environment in the foreseeable future. 
Greater health and safety, however, should not (and need not) come at the expense of developing countries, whose citizens want the fruits of prosperity that developed countries’ citizens have long enjoyed. 
In 1999, Brazil, Russia, India, and China accounted for a mere 8% of vehicle sales worldwide; by 2012, their combined sales had reached a staggering 35% of the global total. 
And this proportion is sure to rise. 
One reason for this extraordinary growth is that carmakers have developed more affordable cars for a new, cost-conscious middle class. 
The Alliance’s CMF-A platform, created and manufactured in India, will pave the way for many more affordable vehicles throughout the developing world. 
These advances are at the forefront of a growing trend toward “frugal innovation” that is increasingly being adopted in developed markets, too. 
It is hard to overestimate the impact that the automobile has had on our political, economic, social, and cultural life over the past century. 
The industry’s global sales are greater than the GDP of all but the five largest economies, and it employs more than 50 million people worldwide. 
Its future is bound up with that of the world economy. 
The challenge now is to reinvent the car so that it remains a proud totem of freedom and safety in the decades ahead. 

Cars, Bombs, and Climate Change 
COPENHAGEN – For the better part of a decade, I have upset many climate activists by pointing out that there are far better ways to stop global warming than trying to persuade governments to force or bribe their citizens into slashing their reliance on fuels that emit carbon dioxide. 
What especially bugs my critics is the idea that cutting carbon is a cure that is worse than the disease – or, to put it in economic terms, that it would cost far more than the problem it is meant to solve. 
“How can that possibly be true?” they ask. “After all, we are talking about the end of the world. 
What could be worse – or more costly – than that?” 
They have a point. 
If we actually face, as Al Gore recently put it, “an unimaginable calamity requiring large-scale, preventative measures to protect human civilization as we know it,” then no price would be too high to pay to stop global warming in its tracks. 
But are the stakes really that high? 
The answer is no. 
Even the worst-case scenarios proposed by mainstream climate scientists – scenarios that go far beyond what the consensus climate models predict – are not as bad as Gore would have us believe. 
For example, a sea-level rise of five meters – more than eight times what the United Nations’ Intergovernmental Panel on Climate Change expects, and more than twice what is probably physically possible – would not deluge all or even most of mankind. 
Of course, such a rise would not be a trivial problem. 
It would affect about 400 million people, force the relocation of 15 million, and imply costly protection of the rest. 
But it would certainly not mean the end of the world. 
Estimates show that the cost in terms of adaptation would be less than 1% of global GDP. 
In other words, the price of unchecked global warming may be high, but it is not infinite. 
According to the best global-warming economic models, every ton of carbon dioxide that we put into the atmosphere now will do about $7 worth of damage to the environment. 
What this means is that we should be prepared to pay an awful lot to stop global warming, but anything more than $7 a ton would be economically indefensible. 
This idea is hard for a lot of people to accept. 
If we have a solution to a serious problem like global warming, they argue, how can we possibly say that it is too expensive to implement? 
Well, we do exactly that all the time. 
There are many potential solutions to serious problems that we do not implement, or that we implement only partially, because the costs associated with them are greater than the benefits. 
For example, traffic accidents claim an estimated 1.2 million lives every year. 
We have the ability to solve this problem completely, eliminating half a trillion dollars in damages, and sparing untold anguish. 
All we have to do is lower the speed limit everywhere to five kilometers per hour. 
Obviously, we will not do this. 
The benefits of driving moderately fast vastly outweigh the costs. 
For a wide variety of social and economic reasons, a world moving at only five kilometers per hour would be utterly unacceptable to most of us – so unacceptable that we are willing to tolerate millions of accidental deaths if that is what it takes to keep us speeding down the highway. 
Consider, too, homeland security. 
On the one hand, the more we spend on anti-terrorism measures (and the more inconvenience we are willing to tolerate), the safer we feel. 
On the other, even though everyone agrees that a successful terrorist attack is unacceptable, there is clearly a limit to how much we are willing to spend (and how much inconvenience we are willing to put up with) to keep ourselves safe. 
Why are we willing to calculate costs and benefits when it comes to traffic safety and terrorism, but not when devising policies to deal with global warming? 
Perhaps it is because we experience the downside of excessive traffic regulation or security measures every day, while the downside of bad climate policy is more of an abstraction. 
It shouldn’t be, for the risks posed by bad climate policy deserve just as much attention as the risks of worse-than-expected climate impacts – maybe more. 
Remember how biofuel requirements were supposed to help reduce carbon emissions? 
In fact, the artificially inflated demand for ethanol – and for the corn to manufacture it – wound up driving up food prices (which pushed roughly 30 million poor people into the ranks of the malnourished). 
It also ate up more arable land, which led directly to the destruction of rain forests and generally created a situation that will result in more CO2 emissions over the next hundred years. 
The biofuel lesson is salutary. 
If we panic and make the wrong choices in response to global warming, we run the risk of leaving the world’s most vulnerable people – those who will overwhelmingly experience the worst effects of warming – even worse off. 
If we are to have a constructive dialogue about the smartest policy responses to global warming, we need to replace our fixation on far-fetched, Armageddon scenarios with realism about the true costs of dealing with this challenge. 

The Case Against Climate Despair 
STOCKHOLM – Heat waves and extreme-weather events across the Northern Hemisphere this summer have brought climate change back to the forefront of public debate. 
Early analyses strongly suggest that natural disasters such as Hurricane Florence – which barreled into the US East Coast this month – have been exacerbated by rising global temperatures. 
Though US President Donald Trump has reneged on the 2015 Paris climate agreement, the rest of the world is becoming increasingly convinced of the need to limit greenhouse-gas (GHG) emissions. 
Last month, a group of climate scientists published a report in the US Proceedings of the National Academy of Sciences warning that the planet could be on a path to becoming a “hothouse” that may not be habitable for humans. 
The Earth has already registered the highest temperatures since the last Ice Age. 
But, as the report notes, what we are experiencing today will be nothing compared to what is in store if average global temperatures surpass 2° Celsius above pre-industrial levels. 
At that point, the authors write, “[global] warming could activate important tipping elements, raising the temperature further to activate other tipping elements in a domino-like cascade that could take the Earth System to even higher temperatures.” 
The scientific debate about climactic tipping points and nightmare scenarios is ongoing. 
But no one can say for certain that the risks outlined in the “Hothouse Earth” report are not real. 
But there is another risk: that warnings such as these will lead to despair. 
Numerous reports have already concluded that it will be exceedingly difficult to meet the targets outlined in the Paris agreement. 
But to conclude that the situation is hopeless is not just dangerous; it is also factually incorrect. 
After all, political and technological developments that are currently underway offer grounds for genuine hope. 
At the Global Climate Action Summit in San Francisco, California, this month, there was plenty of talk about the numerous alarming reports that have come out in recent months and years. 
But the real focus was on the Exponential Climate Action Roadmap, a major new study showing that progress in the use of non-fossil-fuel technologies is advancing not just linearly, but exponentially. 
You may not realize it, but solar- and wind-power usage is doubling every four years. 
If that continues, at least half of global electricity production could come just from these two forms of renewable energy by 2030. 
And there is no good reason to think that progress couldn’t accelerate further. 
Just in the past few years, there have been rapid advances in solar-energy technologies and energy storage. 
The Global Commission on the Economy and Climate estimates that $90 trillion will be invested in new infrastructure around the world over the course of the next 15 years. 
Owing to the new technologies that are now emerging – not just in energy but in the digital domain as well – humanity could have an historic opportunity to leapfrog into far more sustainable, carbon-neutral patterns of habitation. 
Moreover, in addition to the far-reaching advances in technology, there is also growing private- and public-sector awareness of the importance of factoring sustainability into all decisions. 
New approaches to energy, industry, architecture, city planning, transportation, agriculture, and forestry have the potential to halve GHG emissions by 2030. 
But that will happen only if a broad coalition of decision-makers decides to deploy them. 
Fortunately, governments and major corporations have begun to show leadership on these issues. 
As a result, GHG emissions have already peaked in 49 countries that account for 40% of global emissions; and ten countries have even committed to being carbon-neutral by 2050. 
California and Sweden say that they will produce zero net emissions by 2045. 
The Exponential Climate Action Roadmap shows that we do still have a say over our climate future. 
The dangers that await us cannot be denied. 
If GHG emissions and rising temperatures continue on their current trajectories, we could well reach the point at which future generations will have to endure “Hothouse Earth,” assuming that they can survive at all. 
But just as recent scientific work has underscored the dangers of climate change, so, too, has it shown the way forward. 
There is hope in the rapid diffusion of new technologies, and in the growing awareness of the problem within industry, government, and civil society. 
If we can ensure exponential technological progress and marshal the necessary political will, we can tackle the climate crisis. 
A “Stable Earth” is still within our reach. 

The Case Against National AI Strategies 
CAMBRIDGE – Efforts to develop artificial intelligence (AI) are increasingly being framed as a global race, or even a new Great Game. 
In addition to the race between countries to build national competencies and establish a competitive advantage, firms are also in a contest to acquire AI talent, leverage data advantages, and offer unique services. 
In both cases, success will depend on whether AI solutions can be democratized and distributed across sectors. 
The global AI race is unlike any other global competition, because the extent to which innovation is being driven by the state, the corporate sector, or academia differs substantially from country to country. 
On average, though, the majority of innovations so far have emerged from academia, with governments contributing through procurement, rather than internal research and development. 
While the share of commodities in global trade has fallen, the share of digital services has risen, such that digitalization now underwrites more than 60% of all trade. 
By 2025, half of all economic value is expected to be created in the digital sector. 
And as governments have searched for ways to claim a position in the value chain of the future, they have homed in on AI. 
Accordingly, countries ranging from the US, France, Finland, and New Zealand to China and the United Arab Emirates all now have national AI strategies to boost domestic talent and prepare for the future effects of automation on labor markets and social programs. 
Still, the true nature of the AI race remains to be seen. 
It most likely will not be restricted to any single area, and the most important factor determining outcomes will be how governments choose to regulate and monitor AI applications, both domestically and in an international context. 
China, the US, and other participants not only have competing ideas about data, privacy, and national sovereignty, but also divergent visions of what the twenty-first-century international order should look like. 
When drawing these lines, the most important point to remember is that data flows align with geographic boundaries only incidentally, not fundamentally. 
Geopolitically, nation-states are sovereign entities; but in the digital economy, they are sovereign in name only, not necessarily in practice. 
The fact that global data flows are currently organized along the lines of political sovereignty does not mean that they have to be. 
Thus, nationalized AI programs are a hedged bet. 
Until now, governments have assumed that the country that is first to the finish line will be the one that captures the bulk of AI’s potential value. 
This seems accurate. 
And yet the issue is not whether the assumption is true, but whether a nationalized approach is necessary, or even wise. 
After all, to frame the matter in strictly national terms is to ignore how AI is developed. 
Whether data sets are shared internationally could determine whether machine-learning algorithms develop country-specific biases. 
And whether certain kinds of chips are rendered as proprietary technology could determine the extent to which innovation can proceed at the global level. 
In light of these realities, there is reason to worry that a fragmentation of national strategies could hamper growth in the digital economy. 
Moreover, in the current environment, national AI programs are competing for a limited talent pool. 
And though that pool will expand over time, the competencies needed for increasingly AI-driven economies will change. 
For example, there will be a greater demand for cybersecurity expertise. 
So far, AI developers working out of key research centers and universities have found a reliable exit strategy, and a large market of eager buyers. 
With corporations driving up the price for researchers, there is now a widening global talent gap between the top firms and everyone else. 
And because the major technology companies have access to massive, rich data stores that are unavailable to newcomers and smaller players, the market is already heavily concentrated. 
Against this backdrop, it should be obvious that isolationist measures – not least trade and immigration restrictions – will be economically disadvantageous in the long run. 
As the changing composition of global trade suggests, most of the economic value in the future will come not from goods and services, but from the data attached to them. 
Thus, the companies and countries with access to global data flows will reap the largest gains. 
At a fundamental level, the new global competition is for applications that can compile alternate choices and make optimal decisions. 
Eventually, the burden of adjusting to such technologies will fall on citizens. 
But before that moment arrives, it is crucial that key AI developers and governments coordinate to ensure that this technology is deployed safely and responsibly. 
Back when the countries with the best sailing and navigation technologies ruled the world, the mechanical clock was a technology available only to the few. 
This time is different. 
If we are to have super intelligence, then it should be a global public good. 

The Case for Legalizing Sex Work 
PRINCETON – Sex work is, as the saying goes, the world’s oldest profession – except that the saying uses “prostitution” instead of “sex work.” 
The change to a less pejorative term is warranted by a shift in attitudes toward sex workers that contributed to Amnesty International’s decision in May to urge governments to repeal laws criminalizing the exchange of sex for money by consenting adults. 
Amnesty International’s appeal was met by a storm of opposition – some of it from people who were evidently failing to distinguish between the sex industry as a whole and the human trafficking that, in many countries, is a tragic part of it. 
No one wants to legalize coercion, violence, or fraud in the sex industry, or the use of sex workers who are not adults. 
But some organizations campaigning against trafficking understand that when sex work is illegal, it is much riskier for sex workers to complain to the authorities when they are enslaved, beaten, or cheated. 
For that reason, the International Secretariat of the Global Alliance Against Traffic in Women applauded Amnesty International for supporting decriminalization. 
There was also opposition from some feminist organizations, which accused Amnesty of protecting “the rights of pimps and johns.” 
Instead, they argued, we should “end the demand for paid sex” – but without explaining how this is to be done. 
In species that reproduce sexually, sex is, for obvious reasons, one of the strongest and most pervasive desires. 
Humans are no exception in this respect. 
In every modern society, humans exchange money or other valued items for things that they desire and could not otherwise obtain. 
For various reasons, a significant number of people cannot get sex, or sufficient sex, or the kind of sex they want, freely. 
Unless at least one of these conditions changes, demand for paid sex will continue. 
I find it hard to see how any of them will change sufficiently to eliminate that demand. 
If demand for paid sex is likely to continue, what about the supply? 
Another response to proposals to decriminalize sex work is that we should instead change the conditions that lead people to sell their bodies. 
This assumes that only those who lack any other means of supporting themselves would engage in sex for money. 
That assumption is a myth. 
Leaving aside sex workers who want money because they have expensive drug habits, some could get a job in a factory or a fast-food restaurant. 
Faced with the prospect of monotonous, repetitive work for eight hours a day on an assembly line or flipping hamburgers, they prefer the higher pay and shorter hours that the sex industry offers. 
Many may not make that choice, but should we make criminals of those who do? 
It’s not a crazy choice. 
Contrary to stereotypes of paid sex, work in a legal brothel is not especially dangerous or hazardous to one’s health. 
Some sex workers view their profession as involving greater skill and even a more human touch than alternative jobs open to them. 
They take pride in their ability to give not only physical pleasure, but also emotional support, to needy people who cannot get sex any other way. 
If sex work is not going to disappear anytime soon, anyone who cares about the health and safety of sex workers – not to mention their rights – should support moves to make it a fully legal industry. 
That is what most sex workers want as well. 
In the same month that decriminalization became Amnesty’s official policy, the conservative government of New South Wales, Australia’s most populous state, decided not to regulate that state’s previously legalized sex industry. 
Jules Kim, the CEO of Scarlet Alliance, the Australian Sex Workers Association, greeted the news with relief, saying that decriminalization had delivered “outstanding outcomes for sex workers’ health and safety.” 
The Sex Workers Outreach Project agreed that decriminalization led to better health for sex workers, and enabled them to be covered by the standard features of the labor market, including insurance, occupational health and safety programs, and rules of fair trading. 
A majority of Australians now live in states that have legalized or decriminalized sex work. 
This is consistent with the growing recognition in recent years that the state should be extremely reluctant to criminalize activities freely entered into by consenting adults. 
Laws against sodomy have been abolished in most secular countries. 
Physician-assisted dying is legal in an increasing number of jurisdictions. 
In the United States, there is widespread support for the legalization of marijuana. 
The repeal of restrictive legislation has practical benefits, in addition to extending individual liberty. 
In Colorado, the desire to tax the marijuana industry was a major motivation for legalization. 
The original impetus for the legalization of the sex industry in New South Wales was an inquiry into police corruption that showed that the sex industry was a major source of police bribes. 
Legalization ended that in a single stroke. 
Countries that criminalize the sex industry should consider the harms these laws cause, as Amnesty International has done. 
It is time to put aside moralistic prejudices, whether based on religion or an idealistic form of feminism, and do what is in the best interests of sex workers and the public as a whole. 

The Case for UK Import Substitution 
LONDON – The most dramatic economic effect of the United Kingdom’s Brexit vote has been the collapse of sterling. 
Since June, the pound has fallen by 16% against a basket of currencies. 
Mervyn King, the previous governor of the Bank of England, hailed the lower exchange rate as a “welcome change.” 
Indeed, with Britain’s current-account deficit running at over 7% of GDP – by far the largest since data started being collected in 1955 – depreciation could be regarded as a boon. 
But is it? 
Economists would typically argue that the way to balance a country’s external accounts is through a fall in its currency, which would make imports more expensive and exports cheaper, causing the former to fall and the latter to rise. 
Higher import prices – a net loss for the country – would be offset by the higher employment and wages generated by the more competitive position of the country’s exports. 
But in order for currency depreciation to work its magic, more demand for exports must be forthcoming when the exchange rate falls (or, as economists say, the price elasticity of demand for exports must be high). 
But various studies have shown that the price elasticity of demand for UK exports is low. 
For example, a recent paper by Francesco Aiello, Graziella Bonanno, and Alessia Via of the European Trade Study Group finds that “the long-run level of exports appears to be unrelated to the real exchange rate for the UK.” 
This means that British consumers and producers will have to bear the entire brunt of devaluation: their import consumption will be rationed through a sharp rise in price inflation, with no offsetting gain for exports. 
This is by no means merely a theoretical proposition. 
In 2008-09, when the rest of the world was on the verge of deflation, the UK was enduring an inflationary recession, with GDP contracting at a top rate of 6.1% annually, while inflation reached some 5.1%. 
This occurred because sterling fell more than 21%, peak to trough, from 2007 to 2008. 
Moreover, although the current-account deficit narrowed to around 1.7% of GDP in 2011, the improvement was only temporary. 
After 2011, the current account deficit started to widen once more, even though the pound never clawed back its losses. 
In economics jargon, the UK seems to be suffering from an extreme variant of the Houthakker-Magee effect – named after two economists who discovered in 1969 that price elasticities for imports and exports could diverge substantially, giving rise to a permanent tendency toward current-account imbalance. 
The reason appears to be the massive contraction of the UK manufacturing sector – from around 28% of gross value added in 1978 to less than 10% today. 
As the economist Nicholas Kaldor pointed out long ago, because manufacturing has higher returns to scale than services, manufacturing exporters tend to beat service exporters. 
In addition, structural reforms since the mid-1990s have ensured that British exporters are deeply integrated within global supply chains. 
As a result, many of Britain’s exports require imported inputs; so when sterling depreciates and import prices rise, the knock-on effect on export prices renders them less competitive. 
The most recent OECD data show that the import content of UK exports is around 23%, compared to around 15% for US and Japanese exports. 
For now, the UK is relying on capital inflows into the City of London to limit sterling’s fall. 
But, as the exchange-rate collapse of 2008 showed, this source of foreign demand for sterling is highly unstable. 
When the worm inevitably turns and these flows reverse, both sterling and exports will take another hit. 
The worst-case scenario would involve a sharp fall in the value of sterling, followed by sticky inflation that reinforced the rise in British export prices, fueling further currency depreciation. 
This doom loop would stop only when British consumers suffered a fall in real income of a magnitude not typically seen outside developing countries. 
The more likely outcome is a sort of slow rotting effect, with periodic depreciations gradually driving down living standards for all who earn their living in sterling. 
What is to be done? 
Only rapid government action to substitute goods currently imported with domestically produced goods will do the trick. 
The classic solution is import controls. 
But other measures that are less damaging to trade rules and international amity are available. 
The national investment bank which the Labour Party is now advocating could be given a mandate to invest in industries with a high import substitution potential. 
An alternative would be to subsidize such industries directly from the Exchequer, with subsidies tied to the quality-adjusted price of the import being substituted. 
As the domestically produced goods became competitive with the foreign goods, the subsidies would gradually be removed and the industry allowed stand on its own two feet. 
Ideally, the British government should aim to bring down imports as a percentage of GDP from the current high of around 30% to pre-1974 levels of around 20%. 
This may prove too ambitious, and the UK may have to settle for somewhere around 25% of GDP. 
But if something is not done, Britain risks permanent impairment of prosperity. 
A depressed economy can be reflated, and an inflationary economy can be depressed. 
But losing access to crucial foreign markets as a result of currency movements outside the country’s control is largely irreversible. 

Cash Aid for Africa 
STOCKHOLM – Europe has made an ambitious commitment to scale up its aid to Africa, and Africa’s challenges call for that greater engagement. 
But boosting aid to countries that are already aid-dependent requires clearer delivery mechanisms and a degree of budgetary predictability. 
Something new is called for, and cash transfers directly to poor people could be an alternative − but only as a part of a longer-term vision of partner countries’ welfare systems. 
The European Union has committed itself and its member states to increase aid flows to 0.56% of GDP by 2010 and 0.7% by 2015 − with a big focus on Africa. 
The combined aid commitments of OECD Development Assistance Committee member countries would mean a doubling of official development assistance to Africa between 2004 and 2010 – that is, if they are honored. 
It is, after all, fair to question whether donor countries will stick to these commitments and, indeed, whether conditions in partner countries will permit them to. 
But a theoretical doubling of African aid by 2010 − with the possibility of even more after that − offers a huge opportunity to combat poverty. 
So tackling any obstacles that could inhibit the effective application of these additional resources is a priority. 
While Africa’s needs are relatively well known, there are challenges in scaling up aid to tackle them. 
This reflects such problems as macroeconomic management, aid-dependency syndromes, absorption capacity, transaction costs, and − related to all of it − the risk of decreasing returns as aid levels rise. 
Given the current aid-to-GDP ratios in sub-Saharan Africa − with approximately half of countries yielding ratios of above 10% even before future increases in aid are taken into account − these challenges must be taken seriously. 
Donors and their partners agree on a way forward that could, in theory, tackle these challenges. 
The agreement is contained in the so-called Paris Agenda, which defines principles of ownership, alignment, and harmonization. 
It calls for the improved predictability of aid flows, with budget support and program-based aid as the preferred means of delivering support. 
It is an agenda for improved partnerships, reduced transaction costs, and increased efficiency. 
It is when the Paris Agenda leaves theory and confronts reality that problems emerge. 
Budget support suffers from low credibility, not only among donor taxpayers, but also among citizens in recipient countries. 
While it assumes predictable financial flows, such predictability can be spurious. 
After all, neither donor countries nor their partners are exempt from such problems as corruption, political crises, armed conflicts, human rights abuses, vested interests, or international power politics. 
As a result, placing so many eggs in one basket leaves the business of aid provision looking increasingly risky. 
Furthermore, budget support that’s linked to national poverty-reduction strategies also rests on the questionable assumption that the political economy of a partner country works to the benefit of the poorest. 
Politics on the donor side is no less complicated, with growing aid budgets often viewed by taxpayers as excessive at a time when the anti-aid lobby is becoming more vocal. 
When donors finance 50% or more of a country's national budget, they may sometimes find intervention unavoidable − donors certainly have the power to intervene. 
That could mean more conditions being placed on aid, not fewer − even if the rhetoric sometimes appears to suggest the opposite. 
Would dispensing aid by making cash transfers directly to the poorest work better? 
Experimental schemes have been implemented in Latin America in which child allowances are conditional on school attendance and vaccination. 
Cash aid has sometimes replaced food aid in humanitarian crisis situations, and there have been targeted social protection schemes in Zambia, as well as incipient welfare schemes for the elderly in India, South Africa, and Lesotho. 
The results so far are very promising. 
Poor people spend money reasonably effectively on investment as well as on consumption. 
Food and other basic goods are bought – benefiting the local economy – nutrition improves, and kids attend school for longer. 
An unconditional child grant scheme in South Africa − with mothers as recipients − even demonstrated the impact in centimeters, because the height-for-age index among children improved in relation to control groups. 
Affordability does not appear to be a big hurdle. 
Assume, for example, that an annual universal grant of $50 is given to all children below 10 years of age in Mozambique, Malawi, and Zambia − covering roughly 10 million children. 
These are three low-income countries with HIV prevalence rates of roughly 15%. 
Further assuming a relatively generous 20% administration overhead, the total cost of the scheme would be approximately $600 million – equivalent to a fifth of the reported aid flow to these countries in 2004 and to 3.5-4% of their combined GDP. 
It would certainly be costly, but not out of reach if African aid is doubled. 
For cash-transfer schemes to work, they must be regular, predictable, and long term. 
But, while donors and their taxpayers might be willing to make long-term commitments for such a purpose, there is likely to be rather less appetite for making commitments which would seem to be never-ending. 
A formula for burden sharing would be needed that gradually increases domestic financing. 
But under no circumstances should these schemes be established as purely donor-driven mechanisms that bypass local budgets and institutions. 
Partner countries must be ready to invest in their institutions and develop their own vision of how they want to organize their welfare systems. 
Would African partners want this? 
Maybe. 
In any case, the cash-transfer debate is no longer limited to those in northern development circles. 
It has now reached the agenda of some African governments and the African Union. 

Cashews and Nutty Policies in Mozambique 
Why does Africa continue to perform poorly, despite two decades of structural reform? 
Most African governments have liberalized their trade regimes, deregulated their economies, and (by most measures) improved the quality of their policymaking. 
Yet the results are anemic. 
Western economists and aid agencies complain about inadequate implementation and lack of commitment by African governments. 
But shortcomings in the blueprints of reform play a greater role. 
Reforms designed without adequate regard to local realities and domestic politics have often produced unintended consequences or backfired. 
The case of Mozambican cashews clearly illustrates this. 
Historically, the cashew sector constituted a big part of Mozambique's economy, providing income to several million individuals. 
In the 1960s, Mozambique produced half of the world's total. 
The sector went into long decline thereafter, as a combination of adverse policies and civil war from 1982-1992 brought new tree plantings to a halt. 
Following independence in 1975, the government banned the export of raw cashew nuts to stimulate domestic processing. 
Mozambique became the first African country to process cashews on a large scale. 
By 1980, the country had 14 processing factories. 
When the government began to loosen restrictions on raw cashew exports in the late 1980s, workers and employers in these factories took a big hit. 
In the early 1990s, the World Bank prevailed on Mozambique to liberalize the cashew sector and to lift the remaining restrictions on exports of raw cashews. 
The World Bank hoped that resources would be allocated more efficiently and that the incomes of cashew farmers would grow. 
The policy was met with fierce opposition from the domestic cashew-processing industry, which had just been privatized. 
The case soon turned into a cause celebre for the anti-globalization movement. 
While the World Bank points to the rise in prices as evidence of the gains that accrued to farmers, its opponents point to the processing plants in urban areas which have been shutdown and the thousands of workers who remain unemployed. 
Export liberalization did produce many of the consequences expected from it. 
However, even under the most favorable assumptions, the magnitude of the benefits was small--both in economic terms and in proportion to the amount of time and energy that Mozambique's government spent on the issue, at the expense of other pressing problems. 
In research that I carried out with Margaret McMillan and Karen Horn Welch, we estimated that the efficiency gains generated by the removal of the export restrictions could not have amounted to more than $6.6 million annually, or about 0.14% of Mozambique's GDP. 
The additional income accruing to farmers was probably no greater than $5.3 million, or $5.30 per year for the average cashew-growing household. 
These were puny amounts for a policy that was a key plank in the World Bank's reform agenda, and that became a bone of contention between the Bank and Mozambique. 
Moreover, these numbers overstate the benefits. 
The gains from liberalization must be set against the losses that resulted from idling processing plants. 
In theory, these plant workers should have found alternative sources of employment. 
In reality, many remain unemployed, perhaps because they believed that liberalization would be reversed. 
We estimate the annual loss in real income to urban workers to have been around $6.1 million, or 0.12% of Mozambique's GDP, which is roughly equivalent to the direct efficiency gain generated by liberalization. 
What went wrong? 
The reform paid little attention to some key realities. 
First, traders and intermediaries rather than farmers captured most of the benefits. 
Second, since the world market for raw cashews is less competitive than that for processed cashews, Mozambique suffered a loss in its external terms of trade. 
Third, poor political management of the reform undercut the dynamic gains that could have resulted. 
The key to securing dynamic gains was a credible commitment to a new pricing regime--possibly complemented with compensatory programs--that would have made it worthwhile for farmers, entrepreneurs, and workers to undertake costly investments. 
Liberalization could have reinvigorated the rural sector by reversing the collapse in cashew tree planting. 
In the urban sector, it could have heralded a restructuring of production by promoting more rational investment. 
The main failure was that liberalization did not send credible signals about future policies. 
So farmers refused to plant trees, cashew processors refused to take their resources elsewhere, and urban workers refused to look for other jobs. 
Mozambique's cashew story illustrates several themes now dominant in analyzing development. 
First, it highlights the importance of credibility and the need to manage expectations. 
The supply responses that will make reform successful are likely to be forthcoming only when a policy change seems lasting. 
This underscores the need for creative thinking on credibility-enhancing mechanisms as an integral part of reform. 
Second, reform is a "political" problem as well as being a "technical" one. 
Had the opposition of urban groups been anticipated, compensatory mechanisms and side-bargains could have been agreed. 
Finally, policy reforms that are imposed by multilateral lenders are rarely conducive to desirable outcomes. 
The credibility problems that the Mozambique program faced were created in part because liberalization of the cashew sector was viewed as a "World Bank policy"--something the government was doing to qualify for World Bank (and IMF) loans. 
Not having full "ownership" of the reform, the government was in a poor position to sell it to a skeptical public. 

Why Africa Should Go Cashless 
YAMOUSSOUKRO – India has lately been pursuing an ambitious goal: a cashless economy. 
Despite early missteps and frustrations, it will turn out to be a change for the better for the country’s 1.31 billion people. 
Africa should set a similar goal – and take the first step by establishing a monetary union. 
Of course, achieving a cashless society is not an end in itself. 
Rather, it is a means to help advance financial inclusion, security, and prosperity. 
Today, an estimated 326 million Africans – 80% of the continent’s adult population – use no formal or informal financial services. 
But stashing banknotes under the mattress is no way to safeguard families’ savings, much less enable households to accumulate enough capital to escape chronic poverty. 
Similarly, millions of Africans are scratching out a living in the informal economy, which represents about 41% of GDP in most parts of the continent. 
This leaves them unprotected, and without pathways to financial stability and wealth creation. 
Moving toward a cashless society would force citizens, companies, and policymakers to devise mechanisms to bring all Africans into the financial sector, drastically improving the lives of the millions who are now under- and unbanked. 
And it would bring many livelihoods into the formal economy – a major economic opportunity for African countries. 
The goal should be to achieve prosperity through financial inclusion linked to economic activity. 
What small businesses and micro-enterprises need is fresh capital to create employment and expand the economic pie, and bank accounts connected to economic activity ensure that even those selling goods by the roadside can secure a piece of that pie. 
But financial inclusion is not a natural by-product of the shift away from cash. 
On the contrary, as Harvard economist Kenneth Rogoff argues, successful demonetization requires a comprehensive and implementable plan to increase financial inclusion and use of banks. 
Such a plan should focus on building the right ecosystem for economic activity. 
In Africa, that means not just delivering financial services, but also advancing financial literacy. 
Newly established bank accounts have few positive effects if they lie dormant. 
To ensure that financial inclusion actually enables economic transformation, Africans must gain the knowledge and tools to make the most of financial services. 
Of course, none of this will be easy – a point made clear by India’s challenging experience implementing its radical demonetization process. 
Success will require, among other things, a gradual approach. 
Africa must not allow cash scarcity to cripple the informal economy, as it has in India. 
But if Africa succeeds in this transition, the benefits will be profound. 
Demonetization would probably even save countries money. 
MasterCard estimates that countries worldwide spend as much as 1% of their GDP each year to mint, process, and distribute banknotes. 
That is money that could be better spent on meeting the United Nations Sustainable Development Goals, further improving the lives of Africa’s poor. 
There is reason to believe that Africa can succeed in going cashless. 
Already, a large share of Africans uses digital payment systems like M-Pesa and EcoCash – precisely the types of innovative platforms that can play a pivotal role in the shift away from cash. 
While hyperinflation is far from the ideal catalyst for such a shift, Zimbabwe’s experience proves that citizens can and will adapt to challenging circumstances. 
For example, some stores in the country will give credit to mobile money accounts in lieu of change. 
But, to achieve a broader shift to a cashless Africa, progress toward monetary union will be essential for deepening economic integration across the continent. 
That, in turn, would foster a continent-wide digital financial services ecosystem capable of underwriting a massive expansion of intra-African trade – the quickest route to lifting people out of poverty. 
Already, 14 countries in West and Central Africa share the CFA franc, which is pegged to the euro. 
And South Africa shares a monetary policy with Lesotho, Namibia, and Swaziland. 
We cannot stumble where the road is clear. 
Africans are latecomers to the demonetization movement. 
But we can use this to our advantage, by learning from countries that have already made the transition or are on the way. 
These include not just India, but also Denmark, Norway, and Sweden. 
We must view this as a strategic advantage in the much-needed structural transformation of the African economy. 
With a smart strategy, underpinned by patience and commitment, Africa can build a cashless economy, with high levels of financial inclusion supporting economic prosperity and security. 
Before too long, buying a “Kofi broke man” – a roasted plantain with groundnuts – by the roadside in Ghana could be a cashless transaction, one that helps the vendor prosper in the present – and save for the future. 

A Spanish Disquisition 
GOTHENBURG – Within a few days, the Catalan regional parliament may declare Catalonia’s independence, after 500 years of history with Spain. 
A few hours afterwards, the Spanish government may respond by sending thousands of police to detain top Catalan officials, putting an end to 40 years of prosperous self-rule. 
In turn, many Catalans may take to the streets, launching a revolt with scary consequences. 
At first sight, the idea that Spain could descend into chaos is puzzling. 
The country is ranked among the world’s top-performing democracies – ahead of France, Italy, and the US according to some indicators. 
And it is one of the favorite destinations for investors and tourists worldwide. 
Having strolled through the magnificent and charming streets of Barcelona, the possibility of violent clashes there seems as unlikely as a guerrilla in the forests of British Columbia. 
Nonetheless, a physical confrontation between the Spanish authorities and Catalan insurrectional forces is a possible outcome, unless the major actors change their course of action. 
And none of them has incentives to do so. 
Like James Dean and Buzz in “Rebel Without a Cause,” the Spanish and Catalan governments are speeding their cars toward a cliff, with each expecting the other to be the first to jump out. 
The Spanish government assumes that Catalan’s parliament will not dare to declare independence unilaterally, because the move would receive no international recognition. 
And the Catalan government is confident that a repressive response by the Spanish authorities, reviving the images of police beating unarmed old women and teenagers that the world saw during the referendum on October 1, would pave the way for a peaceful rebellion within Catalonia and widespread international acquiescence. 
In addition, both governments enjoy strong popular support. 
The ruling conservative People’s Party (PP) in Madrid can comfortably win a national election without courting voters in Catalonia, where it obtained a meager 11% of the vote in 2015. 
Likewise, the separatist parties can easily secure a majority in the Catalan parliament. 
Besides, thanks to governmental control of public broadcasters and generous public subsidies to private media outlets, both sides can deploy a reliable army of fiercely motivated journalists and intellectuals whose incendiary comments are contributing to the conflict’s escalation. 
The actors in the Spanish drama are facing what political scientists call a social dilemma: either side gains from selfish behavior unless the other side behaves selfishly, too, in which case both sides lose. 
Both unionists and separatists would be better off with a second-best solution. 
For example, the separatists could renounce a unilateral declaration of independence in exchange for talks on constitutional reforms that would move Spain in a federal direction. 
A constitutional amendment that allowed symbolic changes, like an official declaration of Catalonia as a “nation,” or substantive initiatives, like a fiscal pact, would satisfy most Catalans while maintaining Spain’s territorial integrity. 
The problem is that both sides believe that showing willingness to compromise would weaken their future bargaining situation. 
Research in political science, however, indicates that the opposite may be true. 
Following insights by the Nobel laureate Elinor Ostrom, we know that social dilemmas can be solved using the inverse strategy: giving instead of demanding. 
If one party exhibits cooperative behavior, its rival may feel forced to reciprocate, leading to a spiral of cooperation instead of retaliation, and of trust instead of suspicion. 
This is what is required now in Catalonia. 
Both the Spanish government and the Catalan separatists must acknowledge that, if they act with sensible generosity, the other side may respond with further concessions. 
It will not be easy, given the current mental disconnect between the Madrid and Barcelona elites. 
Yet they need to consider how their behavior is endangering the hard-earned welfare of millions of Spaniards, after four decades of successful democracy. 
In sunny Spain, there should always be light at the end of the tunnel. 

Spain’s Crisis is Europe’s Opportunity 
ATHENS – To revive the ailing European project, the ugly conflict between Catalonia’s regional government and the Spanish state may be just what the doctor ordered. 
A constitutional crisis in a major European Union member state creates a golden opportunity to reconfigure the democratic governance of regional, national, and European institutions, thereby delivering a defensible, and thus sustainable, EU. 
The EU’s official reaction to the police violence witnessed during Catalonia’s independence referendum amounts to dereliction of duty. 
To declare, as the President of the European Commission did, that this is an internal Spanish problem in which the EU has no say is hypocrisy on stilts. 
Of course, hypocrisy has long been at the center of the EU’s behavior. 
Its officials had no compunction about meddling in a member state’s internal affairs – say, to demand the removal of elected politicians for refusing to implement cuts in the pensions of their poorest citizens or to sell off public assets at ridiculous prices (something I have personally experienced). 
But when the Hungarian and Polish governments explicitly renounce fundamental EU principles, non-interference suddenly became sacrosanct. 
The Catalan question has deep historical roots, as does nationalism more broadly. 
But would it have erupted the way it recently did had Europe not mishandled the eurozone crisis since 2010, imposing quasi-permanent stagnation on Spain and the rest of the European periphery while setting the stage for xenophobia and moral panic when refugees began crossing Europe’s external borders? 
An example illustrates the connection. 
Barcelona, Catalonia’s exquisite capital, is a rich city running a budget surplus. 
Yet many of its citizens recently faced eviction by Spanish banks that had been bailed out by their taxes. 
The result was the formation of a civic movement that in June 2015 succeeded in electing Ada Colau as Barcelona’s mayor. 
Among Colau’s commitments to the people of Barcelona was a local tax cut for small businesses and households, assistance to the poor, and the construction of housing for 15,000 refugees – a large share of the total number that Spain was meant to absorb from frontline states like Greece and Italy. 
All of this could be achieved while keeping the city’s books in the black, simply by reducing the municipal budget surplus. 
Alas, Colau soon realized that she faced insurmountable obstacles. 
Spain’s central government, citing the state’s obligations to the EU’s austerity directives, had enacted legislation effectively banning any municipality from reducing its surplus. 
At the same time, the central government barred entry to the 15,000 refugees for whom Colau had built excellent housing facilities. 
To this day, the budget surplus prevails, the services and local tax cuts promised have not been delivered, and the social housing for refugees remains empty. 
The path from this sorry state of affairs to the reinvigoration of Catalan separatism could not be clearer. 
In any systemic crisis, the combination of austerity for the many, socialism for bankers, and strangulation of local democracy creates the hopelessness and discontent that are nationalism’s oxygen. 
Progressive, anti-nationalist Catalans, like Colau, find themselves squeezed from both sides: the state’s authoritarian establishment, which uses the EU’s directives as a cover for its behavior, and a renaissance of radical parochialism, isolationism, and atavistic nativism. 
Both reflect the failure to fulfill the promise of shared, pan-European prosperity. 
Catalonia provides an excellent case study of Europe’s broader conundrum. 
Choosing between an authoritarian Spanish state and a “make Catalonia great again” nationalism is equivalent to choosing between Jeroen Dijsselbloem, the President of the Eurogroup of eurozone finance ministers, and Marine Le Pen, the leader of France’s far-right National Front: austerity or disintegration. 
The duty of progressive Europeans is to reject both: the deep establishment at the EU level and the competing nationalisms ravaging solidarity and common sense in member states like Spain. 
The alternative is to Europeanize the solution to a problem caused largely by Europe’s systemic crisis. 
Instead of impeding local and regional democratic governance, the EU should be fostering it. 
The EU treaties could be amended to enshrine the right of regional governments and city councils, like Catalonia’s and Barcelona’s, to fiscal autonomy and even to their own fiscal money. 
They could also be allowed to implement their own policies on refugees and migration. 
If there was still demand for statehood and separation from the internationally recognized state to which they belong, the EU could invoke a code of conduct for secession. 
For example, the EU could stipulate that it will sanction an independence referendum if the regional government requesting it has already won an election on such a platform with an absolute majority of the voters. 
Moreover, the referendum should be held at least one year after the election, to allow for a proper, sober debate. 
As for the new state, it should be obligated to maintain at least the same level of fiscal transfers as before. 
Rich Veneto could secede from Italy, for example, as long as it maintained its fiscal transfers to the South. 
Moreover, the new state should be prohibited from erecting new borders and be compelled to guarantee its residents the right to triple citizenship (new state, old state, and European). 
The Catalonia crisis is a strong hint from history that Europe needs to develop a new type of sovereignty, one that strengthens cities and regions, dissolves national particularism, and upholds democratic norms. 
The immediate beneficiaries would be Catalans, the people of Northern Ireland, and maybe the Scots (who would in this manner snatch an opportunity out of the jaws of Brexit). 
But the longer-term beneficiary of this new type of sovereignty would be Europe as a whole. 
Imagining a pan-European democracy is the prerequisite for imagining a Europe worth saving. 

Europe’s Attackers From Within 
BERLIN – Europe finally appears to have moved past its multi-year economic crisis, but it remains unsettled. 
For every reason for optimism, there always seems to be a new cause for concern. 
In June 2016, a slim majority of British voters chose nostalgia for the nineteenth-century past over whatever promise the twenty-first century might have held. 
So they decided to jump off a cliff in the name of “sovereignty.” 
There is much evidence to suggest that a hard landing awaits the United Kingdom. 
A cynic might point out that it will take a properly functioning “sovereignty” to cushion the impact. 
In Spain, the government of the autonomous region of Catalonia is now demanding sovereignty, too. 
But the current Spanish government is not prosecuting, imprisoning, torturing, and executing the people of Catalonia, as Generalissimo Francisco Franco’s dictatorship once did. 
Spain is a stable democracy and a member of the European Union, the eurozone, and NATO. 
For decades now, it has maintained the rule of law in accordance with a democratic constitution that was negotiated by all parties and regions, including Catalonia. 
On October 1, the Catalan government held an independence referendum in which less than half – some estimates say a third – of the region’s population participated. 
By the standards of the EU and the Organization for Security and Cooperation in Europe, the vote could never be accepted as “free and fair.” 
In addition to being illegal under the Spanish constitution, the referendum did not even have a voting register to determine who was entitled to participate. 
Catalonia’s “alternative” referendum invited a clampdown from Spanish Prime Minister Mariano Rajoy’s government, which intervened to shut down polling stations and prevent people from casting ballots. 
This proved to be a political folly of the highest order, because images of the police swinging truncheons at unarmed Catalan protesters conferred a spurious legitimacy on the secessionists. 
No democracy can win in this kind of conflict. 
And in the case of Spain, the crackdown conjured up images of the country’s 1936-1939 civil war – its deepest historical trauma to this day. 
Were Catalonia actually to achieve independence, it would have to find a way forward without Spain or the EU. 
Spain, with the support of many other member states that worry about their own secessionist movements, would block any Catalan bid for EU or eurozone membership. 
And without membership in the European single market, Catalonia would face the grim prospect of rapid transformation from an economic powerhouse into an isolated and poor country. 
But independence for Catalonia would pose a fundamental problem for Europe, too. 
For starters, no one wants a repeat of the breakup of Yugoslavia, for obvious reasons. 
But, more to the point, the EU cannot countenance the disintegration of member states, because these states comprise the very foundation upon which it rests. 
The EU is an association of nation-states, not regions. 
Although regions can play an important role within the EU, they cannot stand in as an alternative to member states. 
If Catalonia were to set a precedent of secession, encouraging other regions to follow suit, the EU would be thrown into a deep, existential crisis. 
In fact, one could argue that nothing less than the EU’s future is at stake in Catalonia today. 
Moreover, the original purpose of the EU was to overcome nation-states’ deficiencies by means of integration – the opposite of secession. 
It was meant to transcend the state system that had proved so disastrous in the first half of the twentieth century. 
Consider Northern Ireland, which has turned out to be a perfect example of how integration within the EU can overcome national borders, bridge historical divides, and ensure peace and stability. 
Incidentally, the same could be said for Catalonia, which after all owes most of its economic success to Spain’s accession to the EU in 1986. 
It would be historically absurd for the EU’s member states to enter a phase of secession and disintegration in the twenty-first century. 
The sheer size of other global players – not least China, India, and the United States – has only made strong intercommunity relations and deeper European integration even more necessary. 
One can only hope that reason will prevail, particularly in Barcelona, but also in Madrid. 
A democratic, intact Spain is too important to be jeopardized by disputes over the allocation of tax revenues among the country’s regions. 
There is no alternative but for both sides to abandon the trenches they have dug for themselves, come out to negotiate, and find a mutually satisfactory solution that accords with the Spanish constitution, democratic principles, and the rule of law. 
The experiences of Spain’s friends and allies could be helpful here. 
Germany, unlike Spain, is organized as a federation. 
Yet even in Germany, nothing is as cumbersome and difficult as the never-ending negotiations over fiscal transfers between the federal government and individual states – which is to say, between richer and poorer regions. 
But an agreement is always eventually reached, and it holds until another dispute arises, at which points negotiations begin anew. 
To be sure, money is important. 
But it is not as important as Europeans’ shared commitment to liberty, democracy, and the rule of law. 
Europe’s prosperity depends on peace and stability, and peace and stability in Europe depend, first and foremost, on whether Europeans will fight for these values. 

Catalyzing Consumption and Balancing Growth 
WASHINGTON , DC – China has weathered the Great Recession well. 
The world now waits to see if last year’s impressive domestic demand growth can be sustained, and if China can, in the words of Prime Minister Wen Jiabao, “give full play to the leading role of…consumer demand in driving economic growth.” 
The Chinese consumer has been held back for too long, and now must be put front and center in China’s growth model. 
China’s government is already moving ahead on multiple fronts to attain this goal as was clear from announcements at this week’s National People’s Congress. 
Of the many factors that have decreased the share of consumption in China’s economy, declining household disposable income has been central. 
That, in turn, has reflected the fall in labor income as a share of the economy, owing in part to structural changes that have moved workers out of agriculture (where the labor share of income is high) and into manufacturing (where capital commands a larger share of income). 
Concurrent with diminishing labor income, government-imposed ceilings on bank deposits – the primary savings vehicle for most households – have held down household capital income. 
This fall in income has been magnified by rising household savings rates, driven by insufficient insurance for health care and old age, the high cost of education, growing income inequality, and demographic trends. 
So what to do? 
Recently, I attended an IMF-organized workshop in Beijing that brought together Chinese officials, academics, international analysts, and IMF staff to discuss how best to catalyze household consumption in China. 
Participants emphasized that changes would be needed in multiple areas, including improving the system of taxation and social insurance, further developing housing and the service economy, and eliminating a range of relative price distortions. 
One key idea was to lighten the tax burden on labor . 
Taking into account the personal-income tax and various social contributions, taxation of labor income in China is too high . 
To be sure, taxes are needed to finance social spending, but revenue sources other than taxes on labor income could do the job. 
China could usefully explore shifting part of the burden from labor toward property, capital gains, and inheritance taxes. 
Larger dividends paid to the budget from the highly profitable state-enterprise sector could also provide an alternative source of funds. 
Another route to improve consumption could be to offer households greater support . 
The global crisis has prompted China’s government to push ahead with its social-reform program. 
Important improvements have been made over the past year to expand the pension system’s coverage, move toward universal health care, and provide public funding for basic education. 
But more can be done to speed up the existing reform package, find ways to develop full coverage for catastrophic health events, and develop government-backed financing of tertiary education. 
Fixing the housing market could also help spur consumption . 
Distortions in the real-estate market are a powerful motivation for saving, particularly among young people who struggle to meet the high down-payment needed to buy a first home. 
Part of the high cost of housing arises from an underdeveloped financial system, which makes housing one of the few alternatives to bank deposits as a store of value. 
Property or capital-gains taxes could help curb demand for housing as an investment vehicle. 
In addition, a comprehensive nationwide housing policy is urgently needed to ensure that housing remains affordable, particularly for those on limited incomes. 
Related to this is the need for improvements in the overall financial system . 
By developing markets for private pensions, commercial health insurance, and annuities, China could complement expanded government provision of social insurance and weaken the incentives that underlie high precautionary saving. 
Similarly, broadening the range of available savings instruments could raise household disposable income and increase consumption. 
A more developed financial system would provide alternatives to real estate as a store of value, thereby making home ownership more accessible. 
These issues will be examined carefully during the course of this year as the Chinese government and the IMF collaborate on a Financial Sector Assessment Program for China. 
Fostering a dynamic service economy will invariably boost consumption as well . 
In the coming years, a more fully-fledged service economy will be an essential ingredient to increase employment and lessen China’s reliance on manufacturing. 
But spurring faster growth in services is a complex undertaking. 
Entry barriers, particularly in service industries dominated by state-owned oligopolies, need to be lowered. 
Distortions in key prices that favor capital-intensive manufacturing need to be removed by raising the cost of land, energy, water, and capital. 
Changing the tax structure will also help. 
At present, industry is the primary source of tax revenue for the government, particularly at the local level, giving the state too little incentive to foster a service economy. 
Finally, a stronger renminbi ought to be an integral part of the package of reforms to boost consumption. 
A stronger currency would increase household income. 
It would also create a powerful incentive for companies to expand into the service economy, providing more jobs and more choices for Chinese consumers. 
If consumption can be successfully and sustainably boosted, I believe that China’s development will enter a new era, one in which economic growth continues at a rapid pace, generates higher employment, increases social welfare, places less demand on natural resources, and, ultimately, is of a much higher quality thereby underpinning more balanced global growth. 

Two Tasks for Today’s Abolitionists 
VATICAN CITY – The scourge of human trafficking is an issue that leaders of all faiths must take very seriously. 
One of the first things that Pope Francis did when he was elected in March 2013 was to write to me, in my capacity as head of the Pontifical Academy of Sciences (PAS), requesting that we study modern slavery and its solutions. 
Nine months later, Francis convened religious leaders from around the world to declare that trafficking humans and their organs, and forced labor and prostitution, are crimes against humanity. 
In September 2015, world leaders echoed this conclusion when the United Nations General Assembly unanimously adopted the Sustainable Development Goals – which include a target to end these practices. 
For these and many other reasons, it is a moral imperative that the world work together to achieve the vision set by our religious and political leaders. 
With millions of people still victimized by modern forms of involuntary servitude, there is no time to waste. 
Abuse in all of its forms – whether torture, rape, forced marriage, or forced labor – does more than cause physical damage. 
It strikes at a person’s soul, leaving wounds to our self-confidence and ability to trust others that can be even more painful and profound. 
To grasp fully the depravity of this type of “moral violence,” think of friends who love, approve, and affirm one another, and how important those actions are to their individual and collective existence. 
Victims of human trafficking cannot experience this type of friendship easily, because the degradation and humiliation they have suffered can lead them to believe they are unimportant or someone else’s property. 
As a result, they are often unable to offer or receive the support and affirmation that true friendship requires. 
These disabilities extend to victims’ participation in marriage and family. 
Christ’s message of fraternity, coupled with the anti-slavery movement that began at the end of the eighteenth century, eventually led to the abolition of legal human bondage around the world. 
International treaties – like the Slavery Convention of 1926 – made many forms of slavery illegal. 
However, slavery continues under new names, stirring less public outrage or attention than past violations of civil liberties. 
While human rights became a defining feature of the post-World War II era, victims of modern slavery still suffer. 
Negative feelings can be helpful in efforts to prevent social exclusion. 
Indignation might disarm us, but it could also mobilize us to take action. 
When people observe the intolerable contrast between what is expected in terms of human rights and what victims of modern slavery actually endure, it becomes harder to ignore the unfair distribution of dignity in our societies. 
And, once we commit to unified global action – as Francis’s sweeping encyclical, Laudato si’, has urged – ending modern slavery becomes possible. 
To ensure dignity, freedom, and social participation for everyone, global leaders must work to effect change across political, religious, and cultural boundaries. 
The PAS has identified two areas that need special attention. 
First, to support victims more effectively, the world must move away from interfaith dialogue and toward collective action. 
Although the religious cannot always pray at the same altar, the world’s religions can and should act in unison to promote human dignity, defend universal freedoms, and aid those in need. 
Second, leaders across sectors must raise awareness about modern slavery and work hard to implement solutions. 
Legal professionals – including police, prosecutors, and judges – should make human trafficking a criminal-justice priority. 
Local officials, such as mayors, must become more involved in addressing the problem. 
And national and provincial governments should introduce policy changes from the top. 
Most important, all of these efforts must be coordinated to make certain that victims are never treated like criminals. 
When Francis met with leaders at the PAS in April 2014 to discuss human trafficking, he called the issue an “open wound on the body of contemporary society, a scourge upon the body of Christ.” 
That is what many of the early abolitionists thought, too, and it is up to every generation to continue the work they started. 
As the Talmud puts it, “You are not obligated to complete the task, but neither are you free to abandon it.” 

Puerto Rico in Crisis 
WASHINGTON, DC – Puerto Rico ought to be the jewel of the Caribbean. 
It is not. 
Tourism has been stagnant for decades, even as travelers have flocked to other Caribbean destinations. 
European firms doing business in North and South America locate their corporate headquarters in Miami, Panama City, and elsewhere, with almost none choosing Puerto Rico. 
And now the island’s economy, after a decade of torpor, is declining at an accelerating rate as people leave for the US mainland. 
Public debt has soared, and the government says it cannot pay. 
Unlike Greece, Puerto Rico is not a country (which means that it is not eligible for financing from the International Monetary Fund). 
Nor is it a US state. 
Yet it has features of both: Although it has its own constitution, it is a United States territory, Puerto Ricans are US citizens, and the island is subject to US federal law, except as otherwise stipulated. 
The advantages of this hybrid status include the security and predictability of America’s rule of law, eligibility for federal transfer payments, and favorable tax treatment. 
Puerto Ricans who are not US government employees do not pay federal income tax, and the island’s bonds are “triple tax-exempt” (free of federal, state, and local taxes). 
But there are also disadvantages to this arrangement. 
For example, Puerto Rico is subject to the Jones Act, which requires using very costly US-built ships and crews for all sea transport to and from the mainland. 
The island must also comply with the federally mandated minimum wage, despite an income level about half that of the poorest US state. 
And municipalities cannot benefit from Chapter 9 of the US bankruptcy code. 
Puerto Rico’s current troubles trace their origin to the gradual withdrawal, starting in 1996, of earlier exemptions from US corporate taxes for companies located on the island. 
Capital-intensive companies, especially pharmaceutical firms, began leaving. 
Puerto Rico’s economy recorded little growth after 1996, and real (inflation-adjusted) GDP has been falling for the past decade. 
Many Puerto Ricans, unable to find jobs on the island, have migrated to the mainland, with the population and labor force estimated to be shrinking at a rate of 1.5% this year. 
Moreover, Puerto Rico’s labor force participation rate is under 40%, compared to 62% on the mainland. 
There is plenty of blame to go around for these failures. 
Puerto Rico and the US government each bear responsibility. 
Successive Puerto Rican governments thought that the island’s economy was in “recession” and attempted to spur activity by increasing government spending. 
Low interest rates meant that deficits could be financed by floating bonds. 
Debt mounted, and markets are now almost entirely closed to more. 
Despite efforts to cut expenditures and boost tax receipts, current and prospective obligations (including pension liabilities) far exceed any feasible increase in government revenues. 
Given the ease with which Puerto Ricans move to the mainland, raising taxes is unlikely to increase revenues. 
The US government also is culpable. 
The inapplicability of Chapter 9 makes orderly debt restructuring very difficult. 
Moreover, Puerto Rico is covered by the Patient Protection and Affordable Care Act and must pay accordingly, even though the island’s doctors are compensated at a lower rate than those on the mainland (and the Puerto Rican government must bear much of the cost). 
The same is true of some other welfare payments. 
Low labor force participation is a result of the relatively low productivity of Puerto Rico’s unskilled workers. 
Companies cannot compete with firms that pay much lower wage rates on neighboring islands. 
A rule of thumb is that a minimum wage that is above 55% of the median wage will impede job creation (and economic growth); Puerto Rico’s minimum wage is 77% of the median, owing to the federal mandate. 
A family of three with one wage earner at the minimum wage can take home about $1,100 per month, while it could get about $1,700 on welfare. 
No surprise, then, that people either leave the island or go on welfare and work in the informal economy. 
Overcoming Puerto Rico’s crisis will require restoring growth, implementing a sustainable fiscal policy, and debt restructuring. 
Accomplishing the first of these would, together with reduction of excessive government expenditures, help to achieve the second. 
For the Puerto Rican authorities, this means making the island friendlier to business, including by removing onerous labor-market regulations. 
Meanwhile, the US government could exempt Puerto Rico from the Jones Act, extend to it Chapter 9 bankruptcy coverage, and align the island’s welfare and labor requirements with its productivity level. 
Each of these policy actions requires political will. 
Puerto Rico’s governor, Alejandro García Padilla, has appointed a working group to produce a five-year program to restore growth and fiscal sustainability. 
Bills to make Puerto Rico eligible for Chapter 9 are being introduced in Congress. 
These and other measures now under consideration promise to improve Puerto Rico’s economic prospects. 
But they will require concerted and determined action on all fronts. 
Puerto Rico is not Greece; successive governors of the island have introduced budgets they thought were balanced, only to find that inadequate growth led to lower revenues and higher expenditures than had been projected. 
But it is a US territory. 
The US government should do its part to improve the island’s prospects. 

What’s Really at Stake at the CCP Congress? 
LONDON – This month, international media are understandably focused on the Chinese Communist Party’s 19th National Congress, a carefully choreographed event that will reveal who’s “in” and who’s “out” with Chinese President Xi Jinping. 
But while it is important to know who Xi’s favorites are, I do not find the theater and intrigue of the event to be as interesting as it is made out to be. 
Far more important is whether China’s leadership is acting in accordance with what the CCP has promised the country’s 1.3 billion people. 
Just before the last congress, in 2012, Xi’s two-week absence from public view raised concerns. 
In the unlikely event that the same thing happened again this year, alarm bells would have rung. 
Moreover, if the agenda that Xi presents for the next five years suggests that he and the rest of the CCP leadership are losing credibility and struggling to maintain the party’s economic and social contract with the people, the 19th Congress will be very relevant. 
But I doubt we should worry too much. 
More pertinent questions come to mind – two in particular. 
First, will the modest rise of the Chinese consumer continue to fuel 6-7% annual growth? 
And, second, will the somewhat undefined Belt and Road Initiative (BRI) – continue to be a major priority for China’s leadership? 
As for the first question, despite the slower growth trend this year, China will still add around $1 trillion or more to its nominal GDP, giving it a $12 trillion economy by the end of this year – nearly double the economy’s size in 2010. 
To be sure, $12 trillion is just two-thirds the size of the US economy; but the $1 trillion added this year is more than all but the top 15 economies in the world. 
It is larger than the entire GDP of Indonesia or Turkey, and almost as large as the Mexican economy. 
According to official data, private consumption in China accounts for just 39.2% of GDP. 
This is very low by the standards of most high-income economies, but it has increased from 35.5% of GDP in 2010. 
When that increase is translated into hard numbers, it amounts to an additional $2.58 trillion since 2010 – an increment that is larger than the entire Indian economy. 
The growth of Chinese consumption is easily the most important factor in global consumption growth today. 
If Chinese consumption growth were to continue on its modest upward trajectory until 2020, it would account for just over 41.5% of GDP, which is to say, almost another $2 trillion. 
And yet there is some anecdotal evidence to suggest that Chinese consumption growth might actually be accelerating faster. 
So, the real question for China watchers around the world is whether anything that happens at the 19th Congress will affect this trend. 
If the trend continues or accelerates, Chinese consumption could start to approach half that of the United States, which would be an extremely encouraging sign that the world economy is undergoing a badly needed rebalancing. 
As for the second question, I suspect that China will stay the course on the BRI, especially given the growing concerns about trade elsewhere in the world. 
While we don’t yet know the precise dynamics of this grand project, it is safe to assume that linking China, Europe, and everywhere in between through better infrastructure will have a significant positive impact on world trade. 
To be clear, I do not think that the BRI is as important as the Chinese consumer to the world economy. 
But in terms of trade, specifically, its impact could be enormous. 
The BRI stands to have a direct effect on as many as 65 countries, including Russia and India, which along with China constitute three of the four BRIC countries (the other one is Brazil). 
And nine of the 11 most populous emerging countries after China lie within the BRI’s broad geographical scope. 
Most of these countries have not yet matched China’s success in unlocking their economic potential. 
Many of them devote more resources to domestic infighting or conflict with one another than to participating in international trade. 
But with BRI, cross-border trade could increase, and some of the feuds could be laid to rest, benefiting the region’s citizens. 
Indeed, far more interesting than the BRI’s infrastructure projects are its geopolitical implications. 
The BRI could subtly but significantly improve relationships between China and its neighbors, and between the neighbors themselves. 
China’s relationship with India and other countries on the Indian subcontinent is of particular importance. 
When Xi held a regional conference to promote the BRI in May, Indian Prime Minister Narendra Modi did not attend, much to Chinese leaders’ chagrin. 
But then, at a BRICS summit in September, China and India seemed to achieve a significant diplomatic breakthrough over a territorial dispute. 
If this turns out to be the beginning of a limited Sino-Indian rapprochement, and if other rivals in the region follow suit, then the BRI could end up being a landmark policy indeed. 
So, when you are reading your favorite newspaper’s analysis of the CCP’s 19th National Congress, don’t be too distracted by the court intrigue. 
The two questions that really matter are whether China’s consumer-led growth will stall; and whether the BRI will be abandoned. 
Neither would be good for the global economy. 
But, fortunately, neither seems likely. 

Can Minsk 2.0 Save Ukraine? 
KYIV – The new ceasefire agreement for Ukraine was signed in Minsk almost one year to the day after Russian troops – their faces masked, their military insignias removed – invaded Crimea. 
In the interim, thousands of Ukrainians have been killed, and hundreds of thousands more have been turned into refugees in their own country. Russian President Vladimir Putin, determined to restore by force the sphere of influence once held by the Russian/Soviet empire, has shredded the rules that have ensured peace in Europe – indeed, in much of the world – for three generations. 
While Russia was launching its bid to subordinate Ukraine, I was in prison, with scant hope of ever regaining my freedom. 
The regime of former President Viktor Yanukovych was dancing to the Kremlin's tune, and my confinement ended only because of the courage of the millions of Ukrainians who demanded its ouster. 
Yet my freedom has left a bitter aftertaste, because my imprisonment ended only as the war against my country began. 
Now, after a year of savagery, sabotage, and mendacity on a scale unseen since Nazi rule in Europe, the leaders of France, Germany, Russia, and Ukraine have agreed on a new road map to peace for our country. 
I must hope against hope that the agreement reached in Minsk, unlike the accord signed there in September 2014, succeeds. 
The people of Donbas, still bombarded and besieged by Russian troops and their local accomplices, deserve a return to normalcy. 
Equally important, our prisoners of war and hostages deserve to be returned to their families. 
An early test of the extent of the Kremlin's commitment to the Minsk agreement should be whether it frees Nadiya Savchenko, Ukraine's first woman fighter pilot. 
Savchenko has been on a hunger strike in Russia for more than two months to protest her patently illegal incarceration on charges even more ludicrous than those for which I was imprisoned. 
Of course I hope that the new agreement will last, finally bringing peace to Ukraine. 
But such an outcome is unlikely, given that the agreement lacks any enforcement mechanism, such as the automatic eviction of Russia from the SWIFT financial transfer system should it renege on any aspect of the agreement. 
Simply trusting the Kremlin's “goodwill" would be reckless. 
Ukraine and its partners need to develop a clear strategy and action plan, in case the latest Minsk agreement is torpedoed. 
This should include the provision of defensive lethal assistance to Ukrainian forces; after all, strength deters and weakness provokes. 
More broadly, despite the highly charged situation in our country, Ukraine deserves a clear road map out of its current security “grey zone" and toward a Euro-Atlantic future. 
We have already paid a high price for our European ambitions; we should not be turned away now. 
Moreover, if Ukraine's partners are serious about upholding the rule of law, charges should be filed against Kremlin leaders at the International Criminal Court in The Hague for the numerous war crimes and crimes against humanity that its forces have committed in Ukraine. 
Since its invasion of Crimea a year ago, Russia has continuously and gravely violated the United Nations Charter, numerous international treaties, and international humanitarian norms. 
We in Ukraine have learned much about ourselves – and about Russia and Europe – during this year of savagery. 
We have found in our country's suffering a new and unbreakable national unity, as well as a new determination to embrace root-and-branch reform of our economy, government, and society, because our very independence, not just our European future, depends on it. 
If we do not reform, we will be enslaved. 
But the earthquake that Russia triggered in Ukraine has also exposed dangerous fault lines across Europe. 
Putin has found in Ukraine the perfect tool with which to confound and divide the West. 
And his political credo is simple: what he can divide, he can rule. 
Indeed, over the past year, we in Ukraine often have watched in disbelief as Europe struggled to confront so clear an act of aggression. 
Without the downing of Malaysia Airlines Flight 17 over rebel-held territory (an act that killed all 298 people aboard), it seems doubtful that the United States and the European Union would ever have agreed on the current program of economic sanctions imposed on Russia. 
The first fault line that Russia has exposed can be found among Europe's former Soviet bloc countries. 
Some, like Poland and the Baltic states, have consistently denounced Russia's actions and have demanded a firm response. 
But, elsewhere in the region, leaders were quick to excuse Russia's invasion and annexation of Crimea, or to argue that Russia is simply too powerful to confront. 
Appeasement, it seems, is alive and well in countries that should know better. 
And then there has been the creation of something akin to a political fifth column across Europe. 
The continent's Euroskeptic political parties, on both the left and the right, are holding up Putin's authoritarian nationalism as a model for the type of illiberal regime they would seek to establish should the EU dissolve. 
In fact, the Kremlin is financing many of these parties. 
Lenin once said that capitalists would sell the ropes with which they would be hanged. 
Today, European governments appear willing to allow Putin to buy the votes with which he will destroy the EU. 
There are other Kremlin supporters as well, including corporate leaders who want to return to business as usual with Russia, and academic apologists for the Soviet Union who, 25 years after its collapse, see a chance for vindication. 
And, with public opinion polls revealing that a significant minority of Europeans are falling in line with Putin's rhetoric, his strategy of dividing the EU and NATO seems to be making real headway. 
Let us be clear. 
What happens in Ukraine – not the financial standoff with Greece – will be the ultimate test of whether European and transatlantic unity endure. 
The fault lines extending from Ukraine are undermining the fundamental values that have underpinned Europe's postwar peace and prosperity. 
Failure to defend those values in Ukraine will cause them to unravel far beyond our borders. 
A West that is divided in this crisis cannot stand. 

Celebrating the German Model 
Princeton -- If anyone wanted evidence that we are not in the mental and political world of the interwar Great Depression, the German election result and its outcome – a stable government of the center-right - should be a clincher. 
In interwar Germany, the Depression destroyed German democracy and led to the rise to power of Hitler and the National Socialists; in today’s Germany, the most severe economic crisis since the Second World War produced the reelection of Frau Merkel. 
Conventional wisdom claims that incumbent parties and politicians are punished by voters in times of economic distress. 
Throughout the campaign there was never any doubt about the position or tpopularity of Chancellor Angela Merkel. 
The interwar Depression led to the disintegration of liberal economic and political values. 
In Germany in 2009 not only was there was no swing to political extremism of the right: there was no sign of any support for a radical right. 
In the elections for regional parliaments, the small radical right parties (which have never been a feature of national politics) simply disappeared. 
The real victor of the campaign, with a vote that jumped up to 14.5% and a position in parliament that will determine the shape of the new coalition government, was the heir of classic German liberalism, the FDP. 
It campaigned on a promise of tax reduction and of deregulation in order to stimulate the economic growth that Germany needs to get out of the economic crisis. 
The real losers of the election were the Social Democrats, with a drop in support of 11% that is without precedent in the very stable history of German electoral behavior. 
Some on the left claim that the SPD’s catastrophic result was the product of too close an engagement with liberalism and deregulation. 
According to this view, the party is now paying the price for Chancellor Gerhard Schroeder’s successful attempts at economic reform in the early 2000’s. 
It seems more likely that the party was punished for its lackluster electoral campaign, and for the negativity with which it tried to present the outcome of the election (the center-right coalition) as a threat to social peace in Germany. 
In the interwar crisis of democracy, participation in elections surged as voters tried to protest against what the radical parties denounced as “the system”. 
In Germany in 2009, electoral participation fell by 5%, to 72.5%. 
Those voters who were disillusioned by politics simply thought that there was no point in voting. 
The only point in common with the interwar results seems to be that economic crisis then as now strengthened the radical left. 

Celebrating the Irrational 
Three cheers for the new Nobel laureates in economics: Daniel Kahneman of Princeton University, and Vernon Smith of George Mason University in Virginia. 
Like many Nobel prizes, these awards recognize not only the seminal work undertaken by Kahneman and Smith, but also the schools of thought they help to lead. 
Kahneman, a psychologist, has demonstrated how individuals systematically behave in ways less rational than orthodox economists believe they do. 
His research shows not only that individuals sometimes act differently than standard economic theories predict, but that they do so regularly, systematically, and in ways that can be understood and interpreted through alternative hypotheses, competing with those utilized by orthodox economists. 
To most market participants - and indeed, ordinary observers -- this does not seem like big news. 
Wall Street brokers who peddled stocks they knew to be garbage exploited the irrationality that Kahneman and Smith exposed. 
Much of the mania that led to the bubble economy was based on exploiting investor psychology. 
In fact, this irrationality is no news to the economics profession either. 
John Maynard Keynes long ago described the stock market as based not on rational individuals struggling to uncover market fundamentals, but as a beauty contest in which the winner is the one who guesses best what the judges will say. 
This year's Nobel prize celebrates a critique of simplistic market economics, just as last year's award (of which I was one of the three winners) did. 
Last year's laureates emphasized that different market participants have different (and imperfect) information, and these asymmetries in information have profound impact on how an economy functions. 
In particular, last year's laureates implied that markets were not, in general, efficient; that there was an important role for government to play. 
Adam Smith's invisible hand -- the idea that free markets lead to efficiency as if by an invisible hand -- is invisible at least in part because it is not there. 
This, too, is not news to those who work day after day in the market (and make their fortunes by taking advantage of and overcoming asymmetries in information). 
For more than twenty years economists were enthralled to so called "rational expectations" models which assumed that all participants have the same (if not perfect) information and act perfectly rationally, that markets are perfectly efficient, that unemployment never exists (except when caused by greedy unions or government minimum wages), and where there is never any credit rationing. 
That such models prevailed, especially in America's graduate schools, despite evidence to the contrary bears testimony to a triumph of ideology over science. 
Unfortunately, students of these graduate programs now act as policymakers in many countries, and are trying to implement programs based on the ideas that have come to be called market fundamentalism. 
Let me be clear: the rational expectations models made an important contribution to economics; the rigor which its supporters imposed on economic thinking helped expose the weaknesses many underlying hypotheses. 
Good science recognizes its limitations, but the prophets of rational expectations have usually shown no such modesty. 
Vernon Smith is a leader in the development of experimental economics, the idea that one could test many economic propositions in laboratory settings. 
One reason that economics is such a difficult subject, and why there are so many disagreements among economists, is that economists cannot conduct controlled experiments. 
Nature throws up natural experiments, but in most circumstances, so many things change so rapidly that it is often difficult to untangle what caused what. 
In principle, in a laboratory, we can conduct controlled experiments, and therefore make more reliable inferences. 
Critics of experimental economics worry that subjects bring to experimental situations modes of thought determined outside of the experiment, and thus that the experiments are not as clean and the inferences not as clear cut as in the physical sciences. 
Nonetheless, economic experiments provide insights into a number of important issues, such as the improved design of auctions. 
Most importantly, the irrationality of market participants, which was the focus of Kahneman's work, has been verified repeatedly in laboratory contexts. 
Among the more amusing results that have come out of experimental economics are those concerning altruism and selfishness. 
It appears (at least in experimental situations) that experimental subjects are not as selfish as economists have hypothesized--except for one group - the economists themselves. 
Is it because economics as a discipline attracts individuals who are by nature more selfish or is it because economics helps shape individuals, making them more selfish? 
The answer, almost certainly, is a little bit of both. 
Presumably, future experimental research will help resolve the question of the relative importance of these two hypotheses. 
The Nobel Prize signifies how important it is to study people and economies as they are, not as we want them to be. 
Only by understanding better actual human behavior can we hope to design policies that will make our economies work better as well. 

Censor and Sensibility 
Most Western journalists fight back when governments threaten their ability to gather the information they need. 
Some have gone to jail to protect the identities of anonymous sources and whistleblowers, or have sued governments that deny them access to crucial documents. 
Alas, many journalists seem far more willing to fight over their right to gather news than to battle for their right to publish and broadcast the results of their reporting freely. 
Indeed, Western journalists and news organizations seem to accept as a fact of life censorship within countries that routinely control the media. 
Acquiescing to such censorship might have been necessary when printing presses, delivery trucks, news kiosks, or transmission towers were the only way to get printed publications or broadcast programs to news consumers. 
But Internet publishing offers a new – and potentially lucrative – opportunity for the distribution of uncensored information. 
Such freedom is not automatic, because even the Internet’s inherent openness can be largely defeated by assiduous government filtering and surveillance. 
However, in recent years, sustained research into countermeasures against such third-party interference in Internet communications has begun to add a new factor. 
The bulk of this research has not been conducted in university labs or corporate R&D facilities, but spontaneously by teenagers, who use it to share copyrighted music with one another without paying for it. 
Western media outlets have covered this story with great interest, yet apparently without realizing that these peer-to-peer technologies have the potential to de-censor the news for more people in countries like China, where any online content that runs counter to the Chinese Communist Party’s current line risks falling victim to the “Great Firewall” of censorship. 
Peer-to-peer technologies make filtering more difficult, because they put nearly any consumer of information into the process of transmitting it. 
For example, without endangering those in China, news organizations could conclude deals with other companies to ensure that uncensored reports are echoed from one free server to the next, thereby defying China to filter the entire Internet if it wishes to eliminate content. 
Of course, news organizations operate as businesses, and defying powerful governments can be a bad business strategy. 
That is why there has been so little rebellion, or even remonstration, among media companies when authoritarian governments threaten journalists, editors, and publishers. 
It also explains why journalists in those countries have so often bent over backwards to apologize for individual transgressions, rather than stand in defiance. 
But news organizations could reach many more people if they worked to circumvent Internet filtering instead of passively relying on those inside the firewall to figure out how to reach beyond blocked sites on their own. 
Doing so might even make good business sense. 
Building a creative digital distribution system that eludes government censors would help news organizations establish and enlarge their markets. 
Indeed, it is not implausible that when a government’s repressive policies diminish, or end through regime change, media outlets that were present and government-approved will fare poorly vis-à-vis offshore counterparts that stayed away and conveyed the truth. 
If news outlets in physically remote open societies meet consumers in countries like China halfway, the benefits for both the Chinese and the bottom line could be enormous. 
Along with the enterprising teenagers who built Napster, academics like Lorrie Faith Cranor at Carnegie Mellon mapped out the shape of potential new networks with lofty names like “Publius,” through which unpopular views could be circulated outside of easy governmental control. 
A team of computer scientists at Stanford and elsewhere created a project called “LOCKSS,” which retains decentralized mirrored copies of documents, and detects corruption or forgery among them, to preserve the integrity of our written histories forever. 
Those who consider themselves members of the global free press should collectively strive to construct similar networks over which news and reporting can run free and be available to anyone with an Internet connection. 
Building such a network would be far cheaper than constructing even a single new printing plant – and it would be far more effective. 
We should consider the front pages of every free nation’s newspapers as a precious set of documents, to be replicated and shared openly throughout the world, especially in countries where heavy state censorship exists. 
Thanks to the Internet, the risks in realizing these new distribution networks are really only business risks – and thus are quantifiable and manageable. 
They pale in comparison to the risks taken by dissidents in closed societies. 
Putting those front pages on a filtered Web site should be only a beginning. 
It’s time find a way to circulate those front pages everywhere. 
It makes good political sense; it could make good business sense as well. 

Eastern Europe’s 25 Years of Transition 
WASHINGTON, DC – What a difference 25 years can make. 
In 1989, Central and Eastern Europe embarked upon a historic transformation, from authoritarian communism to democratic capitalism. 
With memories of the old system already beginning to fade, it seems fitting to look back at the region’s achievements, review the lessons learned, and examine the challenges ahead. 
It would be a mistake to assume that the success of the region’s transformation was inevitable. 
At the close of the Cold War, Central and Eastern Europe’s economies were burdened by pervasive state ownership and concentrated investments in heavy industry. 
Fiscal and monetary policies had focused on boosting industrial growth, without regard to macroeconomic balance, resulting in chronically excessive demand and widespread shortages. 
To make matters worse, most of the region – Czechoslovakia being a notable exception – was plagued by unsustainable external debt and soaring inflation. 
Meanwhile, few economists or policymakers had the background needed to tackle the complex tasks ahead. 
Such was the scale of the necessary transition that neither modern macroeconomics, nor the International Monetary Fund’s nearly 50 years of experience, offered much guidance. 
The challenges to be overcome were daunting, and many thought it would be impossible. 
Instead, four key ingredients contributed to successful transitions. 
First, courageous politicians and policymakers took on the challenge of designing crucial reforms and explaining their consequences to a public that was understandably wary. 
They understood the historic nature of the task and embraced the challenge. 
Second, the reform strategies focused squarely on the essential: the liberalization of prices to reflect scarcity and facilitate the allocation of resources; stabilization of finances to end shortages and inflation; and privatization of state-owned companies and assets in order to improve corporate governance and performance. 
Countries that implemented these policies generally made the quickest and most complete progress. 
Third, the allure of rejoining Europe after years of isolation, together with the European Union’s commitment to enlargement, provided a gravitational pull – and a legislative template – that helped policymakers justify and implement difficult reforms. 
Unpopular laws sometimes brought down governments, but the ultimate litmus test for any new policy remained: “Will it lead us back to Europe?” 
Finally, external support helped the region’s heavily indebted countries face the twin tasks of implementing structural reforms and coping with financial instability. 
Financing from the IMF, the World Bank, the European Bank for Reconstruction and Development, and bilateral lenders, along with debt relief from official and commercial bank creditors, helped relieve the pressure. 
Technical assistance, capacity building, and support for privatization – of banks, in particular – further smoothed the way. 
Overall, the progress has been impressive. 
Several Central European countries have achieved per capita GDP levels (measured in terms of purchasing power parity) that place them on the lower rungs of the eurozone’s income ladder. 
Standards of living in the region have improved dramatically – even if full convergence with Western Europe is far from achieved. 
Unsurprisingly, however, the picture is far from rosy everywhere. 
Some countries, especially in the Balkans and the Commonwealth of Independent States, are far from completing the transition and have gone through repeated cycles of hope and crisis. 
As elsewhere in the world, growth in the region has slowed sharply since the global financial crisis erupted in 2008. 
The pace of reform has slowed in many countries – and reversed in a few. 
Geopolitical considerations have complicated matters further, as the conflict in Ukraine demonstrates. 
Looking ahead, one can envision two broad scenarios. 
In the first, the region risks a cycle of weak growth, retreat from market-oriented policies, and increasing disillusionment. 
As a result, convergence with Western Europe could slow, with many countries lagging far behind – a far different outcome from that envisioned during the boom of the mid-2000s, when convergence within a generation seemed almost like a birthright. 
In the second, brighter scenario, rapid convergence to advanced-economy income levels continues, supported by a focus on two priorities, detailed in a new IMF report. 
A renewed commitment to macroeconomic and financial stability allows governments to rein in persistent deficits and growing debts and address their economies’ increasing volume of bad loans. 
Meanwhile, deeper structural reforms improve the business and investment climate, strengthen corporate governance, expand access to credit, free up labor markets, control public expenditure, and bolster tax administration – all of which puts their economies on track for sustained rapid growth. 
The IMF, for its part, has been a committed partner to Central and Eastern Europe and its transformation throughout the past 25 years. 
It stands ready to help countries in the region make the next quarter-century just as impressive. 

Central Asia’s Other Turkmenbashis 
A dictator’s sudden death almost always triggers political instability. 
But it is doubly dangerous when it poses a risk of region-wide destabilization and a scramble for influence among the world’s greatest military powers – the United States, Russia, and China. 
The sudden death in late December of Saparmurat Niyazov, Turkmenistan’s authoritarian president-for-life who declared himself “Turkmenbashi” (Leader of all Turkmens), jeopardizes stability in a country that is an increasingly important supplier of energy to Europe. 
Worse, given the absence of a clearly designated successor and the weakness of civil society and other political institutions, his death could have repercussions across Central Asia. 
Indeed, Niyazov’s demise highlights the broader problems of Central Asia’s post-Soviet regimes, which, with the exception of Kyrgyzstan, are run by Soviet-era bosses who, while not nearly as eccentric or egomaniacal as Niyazov, tolerate little dissent or opposition. 
Most of them are old, some of them are unwell. 
So, in the next few years, Central Asia will face leadership change on many fronts, with security apparatuses – which, as in Turkmenistan, have been crucial to buttressing these countries’ regimes – likely to be important players. 
How these transitions turn out will matter for several reasons. 
First, Central Asia is an important source of energy. 
The Caspian region accounts for 2% to 3% of the world’s known oil resources – about equal to that of North Sea oil. 
While far smaller than the deposits in Saudi Arabia or Iran, Caspian oil could prove important if oil production falls or is reduced for political reasons elsewhere. 
Much of this Caspian oil is in Kazakhstan, giving that country a critical role in the regional energy market. 
Moreover, Kazakhstan’s strategic importance has increased as a result of recent revelations that the country’s Kashagan oil field will produce 25% more than initially expected at peak production. 
Kazakhstan and Turkmenistan are also major exporters of natural gas. 
Russia depends heavily on Turkmen gas for domestic consumption and export abroad, which could prove vital as demand rises over the next decade. 
Second, Central Asia’s leadership transitions could tempt outside powers to exploit the resulting instability and spark a struggle for influence. 
Because the region was part of both the Soviet Union and the Russian empire, President Vladimir Putin’s Kremlin regards it as part of Russia’s natural sphere of influence. 
Putin’s efforts to transform Russia into a major energy power and use energy as a tool of Russian foreign policy make the region all the more strategically significant. 
Moreover, China has sought to improve trade and transit ties with Central Asia over the last decade, reflecting its growing interests there. 
Not only is the region important for meeting China’s growing energy needs, but the Chinese authorities also are concerned about separatist pressures among the Uighur population in Xinjiang province and the impact of ties with Uighurs in neighboring Kazakhstan and Kyrgyzstan. 
Like Russia, China wants a reduction of the US military presence in Central Asia. 
Both powers have sought to use the Shanghai Cooperation Organization – a regional grouping that includes Russia, China, Uzbekistan, Kazakhstan, Kyrgyzstan, and Tajikistan – as a vehicle to pressure the US to withdraw its military forces from the region. 
However, this cooperation represents a short-term, tactical marriage of convenience rather than a budding new strategic alliance. 
In the long run, Russia and China are likely to be rivals for power and influence in Central Asia. 
Iran could also view the transitions in Central Asia as an opportunity to expand its regional influence, particularly given its close ethnic and cultural ties with Tajikistan and its long border with Turkmenistan. 
And, like China and Russia, Iran has no desire to see the US fill any security vacuum that could emerge as a result of leadership changes in Central Asia. 
Pakistan and India – especially the latter – will also watch carefully how the transitions play out. 
Both countries have growing strategic interests in the region. 
Like China, India views Central Asia as an important future energy supplier. 
As a result, India has quietly begun to strengthen its military ties to countries in the region, particularly Tajikistan, where it has a small base. 
Finally, the transitions in Central Asia could have a strong impact on US interests. 
As long as the US remains involved militarily in Afghanistan, access to facilities in Central Asia will remain important. 
With the loss of the use of the base at Karshi-Khanabad in Uzbekistan, access to Manas airfield in Kyrgyzstan has become the main means of re-supplying US troops in Afghanistan from Central Asia. 
However, the political situation in Kyrgyzstan is far from stable. 
Discontent with President Kurmanbek Bakiyev’s rule is rising. 
A leadership change or increased Russian and Chinese pressure on Kyrgyz leaders could precipitate calls for a renegotiation of the agreement regarding access to Manas – or even demands for its termination altogether. 
In the nineteenth century, the struggle for mastery in Central Asia between the Russian and British empires was called “The Great Game.” 
Today, there are many more players involved, and the stakes – energy security, above all – are far higher now. 
America, India, Europe, and Japan will face increasing tension between their short-term military needs in the region and their long-term goal of promoting political reform in order to create more stable and reliable partners. 
Indeed, the key challenge in the years ahead will be to find the proper balance between these two objectives. 
Given the prospect of further leadership changes and increasing instability, meeting that challenge has never been more important. 

Central Asia’s Perfect Storm 
FLORENCE – Dean Acheson, US President Harry Truman’s Secretary of State, liked to quote a friend who said that being in government made him scared, but that being out of it made him worried. 
To those of us not privy to the hidden complexities of NATO’s military intervention in Afghanistan, the situation there – and across Central Asia -- is extremely worrisome. 
As Afghan President Hamid Karzai is said by his critics to be on the verge of casting his lot with Pakistan and the Taliban, the Pentagon has signaled its fear that the war may spread beyond the Pashtun heartland to the largely Tajik and Uzbek areas in the north of the country. 
The US is reportedly constructing a $100 million “Special Operations Complex” near Mazar-i-Sharif across the border from Uzbekistan. 
It also planned to build a similar “counter-terrorism training compound” nearby in Osh, Kyrgyzstan, the site last June of the worst outbreak of fighting between ethnic Uzbeks and Kyrgyz in Central Asia's Ferghana valley since the break-up of the Soviet Union. 
Several hundred people were killed, entire neighborhoods were destroyed, and an estimated 400,000 people were made into refugees. 
There is little agreement about who lit the fuse. 
Possible culprits include various Russians, the family of deposed Kyrgyz President Kurmanbek Bakiyev, and criminal gangs in Kyrgyzstan and neighboring countries. 
A favorite candidate for blame is the Islamic Movement of Uzbekistan (IMU), a group that has been allied with the Taliban in the past and has been active across Central Asia, including in Afghanistan. 
The IMU is also reportedly having success in recruitment drives in northern Afghanistan. 
But no matter where they go or what they do, the IMU’s number-one target is Uzbekistan’s ruler, Islam Karimov. 
Karimov, for his part, acted with unusual statesmanship during the recent violence in Kyrgyzstan. 
Unlike his neighbors, he opened the border to desperate refugees, mostly women, children, and the elderly. 
The refugees were Uzbeks, and Karimov had good reason to fear the possibility of a much bigger crisis within Uzbekistan, which is also home to many Tajiks, Kyrgyz, and of course millions of Uzbeks who might have been inflamed by the persecution of their ethnic kin in Kyrgyzstan. 
This is par for the course in the Ferghana valley. 
As in much of Central Asia, including Afghanistan, national boundaries, enclaves, and exclaves separate various groups that, historically, intermingled within a single region. 
Political boundaries have a powerful effect on the region’s economy and culture. 
Differences, real or manufactured, are easy to magnify and exploit. 
The precariousness of the situation throughout the Ferghana valley has attracted the attention of the Organization for Security and Cooperation in Europe (OSCE), which has much experience in defusing difficult border conflicts in the Balkans and elsewhere. 
And it just so happens that neighboring Kazakhstan currently holds the chair of the OSCE and will host an OSCE summit in its capital later this year. 
But the OSCE was almost completely powerless during the Kyrgyzstan crisis, and only recently was it finally able to secure agreement to send a small police advisory group there. 
Of course, the OSCE had very few resources in the region to begin with, but some members, notably Russia, have been unwilling to give the OSCE a larger role. 
Uzbekistan, which ought to welcome all the help it can get and probably doesn’t object to greater OSCE involvement in principle, is nonetheless dragging its feet, supposedly because of jealousy over all the attention Kazakhstan is gaining from its chairmanship. 
(Karimov and Kazakh President Nursultan Nazarbayev are perennial rivals.) 
The keenest proponent of a revitalized OSCE now is the US State Department. 
Not only does it want to use the opportunity to test the “reset” policy with Russia, but it also sees the OSCE as an important component of a longer-term strategy to bring stability and good governance to Eurasia, as the OSCE was in Central Europe. 
For this reason, US diplomats are lobbying hard for the OSCE, and Kazakhstan in particular, to be given a fair chance. 
This is a worthy aim, but it is not clear that the main actors in Central Asia – including China, which reportedly is quietly but firmly backing Karimov – are playing on the same team. 
Uzbekistan, especially, has presented an extremely cautious, even ambivalent, face in public. 
Even if serious dialogue with Uzbekistan is taking place behind closed doors – and the Pentagon’s new initiatives suggest that it is – its low, almost undetectable, profile sends mixed signals that fly in the face of the open, transparent, and collective ethos of America’s big OSCE push. 
Another explosion in the Ferghana valley could be hard to contain if the pieces of declared and actual policy are not brought together, and if the most important regional leaders aren’t brought on board. 
Among its first victims would be the noble aspirations of the OSCE, and NATO’s investment in Afghanistan. 
That is something big to worry about, regardless of whether one is in government. 

Central Asia’s Waking Giant 
THE HAGUE – The Shanghai Cooperation Organization (SCO) brings together almost half the world’s population, several members own nuclear weapons, many are big energy suppliers, and it includes some of the world’s fastest growing economies. 
Yet few outside Central Asia have heard much about it. 
The SCO emerged from the wreckage of the Soviet Union in 1996. 
Today, its members are Russia, China, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan, while Mongolia, Iran, Pakistan and India are observers. 
Russia and China remain the lead actors. 
Since its launch, the SCO’s military exercises have become increasingly ambitious, growing from largely bi-lateral to inclusion of all members. 
The SCO is also beginning to work together in the fight against drug trafficking and organized crime. 
Until recently, the SCO’s members addressed energy issues only bilaterally. But, in order to coordinate energy strategies and strengthen energy security, last year the organization launched a club that unites energy-producing and energy-consuming states, transit countries, and private companies. 
The SCO promotes free trade, too, and aims to build essential infrastructure such as roads and railways to link its members and boost commerce between them while also harmonizing customs systems and tariffs. 
Yet cooperation within the SCO remains focused on national rather than collective objectives, because its members’ interests vary so much. 
China, for example, seeks markets for its products and further energy resources, while Russia aims to use the SCO to promote its anti-Western agenda. 
The group’s other members – led by China and Kazakhstan – want to strengthen their already robust levels of economic cooperation with the West. 
Thus, for example, at the SCO summit in August, Russia did not get the support of other members regarding the Georgia conflict. 
These diverging objectives make it hard to believe that the SCO will ever evolve into an eastern version of NATO. 
True, its members have held joint military exercises and have expressed a desire to build the SCO into a more mature security organization. But the SCO still lacks many essential elements of a full-grown NATO-style security organization. 
The SCO has no integrated military-political structure, and no permanent operational headquarters. 
It has no rapid-reaction force and does not engage in regular political deliberations. 
NATO’s focus is on external security risks, while the SCO’s members target security issues within their own territories. 
It makes sense for the West, particularly the European Union, to seek cooperation with the SCO, as this would also help counter Russia’s attempts to use it as a tool for its anti-Western policies. 
It would also prevent the SCO from turning into a militarized entity. 
These may look like negative reasons for the EU to engage with the SCO, but there are also ample positive reasons for encouraging cooperation. 
Europe needs energy supplies from Central Asia, and Central Asia needs European investment. 
Another sphere of mutual interest is Afghanistan. 
At present, the EU offers financial support to the Afghan government and helps to train its police and judiciary. 
The SCO has established a contact group with Afghanistan. 
Both sides want to do more, and they might be able to make a greater impact by working together rather than separately. 
The EU has money and the SCO organization, most of whose members border Afghanistan, has trained personnel and direct experience in the region. 
Cooperation with NATO also looks strategically wise. 
Given China’s importance in both military and economic matters, growing energy and trade relations between Central Asia and the West, and the reasonable assumption that Central Asia’s security will continue to have great significance for Western security, cooperation between the SCO, the EU, and NATO looks inevitable. 
This is all the more true in view of the common security threats faced by NATO and the SCO in Central Asia, such as Al-Qaeda and Taliban-sponsored terrorism and drug trafficking. 
But both NATO and the SCO have so far hesitated to engage in closer contact. 
It is hard to discern whether NATO has any opinion at all about the SCO. 
At best, NATO seems to regard it as being neither a problem nor an opportunity. 
Reaching out to the SCO would certainly seem to support NATO’s stated objectives. 
After 9/11, the alliance came to the conclusion that threats may need to be dealt with on a worldwide basis, which explains NATO’s presence in Afghanistan. 
As a part of this global strategy, NATO strengthened its relations with partners elsewhere, including in Southeast Asia which is the SCO’s chief area of responsibility. 
Perhaps inevitably, the SCO – and Russia and China as its leading members – regards NATO’s increased presence in the region with some mistrust. 
As long as NATO remains reluctant to enter into a dialogue with the SCO, such a cautious attitude looks set to linger, and may even intensify. 
Consideration also needs to be given, therefore, to the establishment of a NATO-China Council, along the lines of the NATO-Russia Council, and to the creation of arrangements that would facilitate greater cooperation with the SCO as a whole. 
Such cooperation would not bridge the main differences between SCO members and the West over issues like democratization and human rights. 
Cooperation would also need to comprise much more than mere joint policy development, and should involve the practical pursuit of mutually beneficial, smaller-scale ad hoc projects. 
NATO and the SCO could work together on neutralizing anti-personnel mines in Afghanistan, as well as other possible types of confidence-building measures, such as joint police training and counter-narcotics operations. 
If security cooperation is to be a success, politically sensitive issues should be avoided, with the emphasis squarely on practical measures. 
This approach would serve the interests of the EU, NATO, the SCO’s members, and, not least, Afghanistan. 

Central Banks and the Revenge of Politics 
FRANKFURT – The reputation of central banks has always had its ups and downs. 
For years, central banks’ prestige has been almost unprecedentedly high. 
But a correction now seems inevitable, with central-bank independence becoming a key casualty. 
Central banks’ reputation reached a peak before and at the turn of the century, thanks to the so-called Great Moderation. 
Low and stable inflation, sustained growth, and high employment led many to view central banks as a kind of master of the universe, able – and expected – to manage the economy for the benefit of all. 
The depiction of US Federal Reserve Chair Alan Greenspan as “Maestro” exemplified this perception. 
The 2008 global financial crisis initially bolstered central banks’ reputation further. 
With resolute action, monetary authorities made a major contribution to preventing a repeat of the Great Depression. 
They were, yet again, lauded as saviors of the world economy. 
But central banks’ successes fueled excessively high expectations, which encouraged most policymakers to leave their monetary counterparts largely responsible for macroeconomic management. 
Such “expectational” and, in turn, “operational” overburdening has exposed monetary policy’s true limitations. 
In other words, central banks’ good reputation now seems to be backfiring. 
And “personality overburdening” – when trust in the success of monetary policy is concentrated on the person at the helm of the institution – means that individual leaders’ reputations are likely to suffer as well. 
Yet central banks cannot simply abandon their new operational burdens, particularly with regard to financial stability, which, as the 2008 crisis starkly demonstrated, cannot be maintained by price stability alone. 
On the contrary, a period of low and stable interest rates may even foster financial fragility, leading to a “Minsky moment,” when asset values suddenly collapse, bringing down the whole system. 
The limits of inflation targeting are now clear, and the strategy should be discarded. 
Central banks now have to reconcile the need to maintain price stability with the responsibility – regardless of whether it is legally mandated – to reduce financial vulnerability. 
This will not be easy, not least because of another new operational burden that has been placed on many central banks: macro-prudential and micro-prudential supervision. 
Micro-prudential supervision, in particular, implies the risk of political pressure, interference with central banks’ independence, and policy conflicts, all of which could influence the behavior of financial intermediaries, by encouraging them to assume greater risk. 
They know that their supervisor has powerful tools at its disposal – for example, it can lower borrowing costs, thereby protecting banks (at least for a while) – and a strong interest in protecting its reputation. 
But, given the overburdening of central banks, reputational defense may be beyond their capacity. 
While this is a global phenomenon, the European Central Bank is exceptionally weighed down. 
As the central bank of the 19 member states of the European Monetary Union (EMU), the ECB also faces “extra-institutional overburdening.” 
This became apparent in May 2010, when the ECB assumed the responsibility of purchasing the government bonds of countries that otherwise would have experienced substantial increases in long-term interest rates. 
That intervention was a lose-lose proposition for the ECB. 
It was essentially driven by politics: the ECB was picking up the slack for policymakers who were unwilling to fulfill their obligations. 
But if the ECB had refused to intervene, financial markets could have faced substantial turmoil, for which, rightly or wrongly, it would have been blamed. 
From that moment on, however, the ECB took on the political role of guaranteeing not only the survival of the euro, but also the continued inclusion of every EMU member country. 
In 2012, ECB President Mario Draghi cemented this responsibility, pledging to do “whatever it takes” to preserve the euro. 
“And believe me,” he asserted, “it will be enough.” 
This stance led many to accuse the ECB of exceeding its mandate and violating European treaties. 
But the European Court of Justice and the German Constitutional Court have, all in all, rejected that view. 
Nonetheless, further litigation regarding the ECB’s unconventional monetary-policy measures is underway. 
Against this background, it is perhaps unsurprising that central-bank independence – de jure or de facto – is once again up for debate. 
The purpose of central-bank independence has always been to enable monetary policy to focus on maintaining price stability, without being subject to political pressure. 
While this approach has always been controversial, given that it implies handing substantial control over the economy to unelected technocrats, past inflationary episodes have fostered broad acceptance of central-bank independence. 
When central-bank mandates exceed price stability, however, their independence may seem increasingly out of place in a democratic society. 
This is particularly true for the ECB: the stronger the perceived link between the extension of the ECB’s mandate and politics becomes, the more criticism its independent status will confront. 
The failure of elected politicians to act appropriately – particularly in some eurozone countries – has turned central banks into the “only game in town.” 
And this is turning out to be less a boon to their prestige than a threat to their independence. 
The ECB, especially, is set to face growing pushback against its independent status, regardless of whether it manages to “save” the EMU. 
After all, it would have to be quite powerful to succeed – too powerful for any democracy to abide. 

The Central-Bank Song Remains the Same 
LONDON – The changing of the guard that is taking place at the systemically important central banks in 2018-2019 will mark the beginning of a new era of monetary policy. 
Who is likely to lead this transition to a “new normal”? 
More important, just how new will it really be? 
In the decade since the global financial crisis, advanced-country central banks have adopted unprecedentedly active monetary policies. 
The Bank of Japan’s Haruhiko Kuroda and the European Central Bank’s Mario Draghi maintain such policies to this day, in order to stimulate economic activity and counter deflationary pressures. 
By contrast, the US Federal Reserve, beginning under former Chair Janet Yellen, and the Bank of England, under Mark Carney, have been laying the groundwork for policy “normalization.” 
Another systemically important central bank, the People’s Bank of China, has focused not on monetary expansion, but on financial reform. 
Former PBOC Governor Zhou Xiaochuan built a strong reputation domestically and, perhaps more so, internationally during his record-setting 15-year tenure, owing to his gradual, steady, and effective approach. 
Although the PBOC’s lack of official independence means that his authority to set interest rates was constrained by the advice of the 15-member Monetary Policy Committee, this did not affect Zhou’s ability to put in place the foundations of a financial sector befitting the world’s largest economy. 
Yet, even as central banks face important transitions, the choices of their new leaders have reflected a desire for continuity. 
Most obvious, Kuroda has been confirmed for another five-year term at the BOJ, and Zhou was replaced in March by his own deputy governor, Yi Gang. 
Even Yellen’s successor, Jerome Powell, will probably amount to more of the same. 
Of course, Powell was initially presented as a break from the past. 
After all, if President Donald Trump had wanted to remain on the same path, he would have just selected Yellen for a second term (which would have been more in line with tradition). 
But, in Trump’s view, the Democrat Yellen was a vestige of Barack Obama’s administration, and thus had to be replaced with a declared Republican like Powell. 
But both Powell and Yellen are Fed veterans, and seem to be following the same normalization path. 
In Europe, the changes brought by the new governors are likely to be more significant. 
At the BoE, Carney – who announced in November 2016 his intention to cut short his term – will remain in the job until a few months after the United Kingdom’s exit from the European Union in March 2019, in order to minimize any market disruption. 
But Carney’s replacement is likely to represent a significant departure. 
Despite his impeccable track record as the governor of Canada’s central bank, Carney’s appointment was controversial: he has always been perceived as too close to the previous chancellor of the exchequer, George Osborne, and insufficiently sympathetic to Brexiteers. 
Carney’s successor will thus have to be congenial, if not amenable, to Brexit’s champions. 
In a sense, however, Carney’s replacement will amount to the restoration of the status quo. 
After all, when Carney was “imported,” he was disrupting the tradition of in-house appointments – a tradition that will be revitalized if, as seems likely, one of the BoE’s current deputy governors is named as his replacement. 
Perhaps the most profound shift will happen at the ECB, where four top posts will need to be filled by the end of next year. 
The recent nomination of former Spanish economy minister Luis de Guindos to serve as ECB vice president offers some clues regarding what to expect. 
In particular, the choice of a Spanish vice president (which in Guindos’s case represents a break with the tradition – intended to protect central-bank independence – of not appointing politicians) suggests that the next president will come from the northern eurozone. 
Of the eurozone’s three largest economies, only Germany has never held the presidency. 
If the presidency goes to a German, that German will most likely be Bundesbank President Jens Weidmann. 
A monetary hawk, Weidmann will struggle to win southern countries’ support. 
Moreover, his nomination will trigger the resignation of another German, Sabine Lautenschläger, the only woman on the ECB’s executive board. 
The prospect of an exclusively male board – not to mention the fact that no woman was even short-listed for the presidency – will not go down well with the European Parliament. 
The European Parliament’s preference for greater gender parity is surely welcome, though it is probably based more on a desire to avoid criticism than a genuine commitment to diversity. 
And, in fact, with their selections for the top jobs, all central banks are failing in this respect, even though diversity is now viewed, in many institutional contexts, as an indicator of good performance. 
In short, central-bank leadership remains an “old boys’ club.” 
As we enter a new era for monetary policy, we should be seeking to overhaul central-bank leadership in a more fundamental way. 
The lack of diversity among candidates for the top jobs suggests that the selection process is far too narrow and inward-looking. 
Central banks ought to be cultivating younger people, women, and minorities, in order to broaden the range of approaches, skills, perspectives, and expertise that effective monetary policymaking will require in the future. 
Real change eventually will come. 
But for now, in terms of both policy and personnel, it’s mostly old wine in familiar bottles. 

Celebrity Central Bankers 
CAMBRIDGE – Why do the comments of major economies’ central bankers command outsize attention nowadays? 
It is not as if they change interest rates all of the time. 
Nor have they developed new, more robust models for analyzing the economy. 
On the contrary, major central banks’ growth and inflation forecasts in the years since the financial crisis have consistently overestimated both growth and inflation – and by wide margins. 
There are many good reasons for the attention lavished on monetary policymakers, including the rise of central-bank independence, public acceptance of the need to appoint highly competent technocrats to oversee the money supply, and the deepening of financial markets. 
And many central bankers have been rightly lauded for their role in preventing a global meltdown during the financial crisis. 
Even so, given the numerous uncertainties surrounding macroeconomic forecasts and the effects of policy instruments (not least quantitative easing), many academics find it puzzling that central bankers’ speeches and statements generate so much fanfare. 
And for all of their heroics during the financial crisis, many central bankers have been far too inflexible in the aftermath, worrying too much about overshooting inflation targets, and too little about deflationary dynamics. 
Moreover, central bankers bear a share of the blame for the crisis in the first place, mainly owing to lax regulatory policy. 
Many central bankers portray former US Federal Reserve Chairman Alan Greenspan (who served from August 1987 until January 2006) as the culprit, saying that he projected an image of central-bank omnipotence that is not warranted in theory or practice. 
But this critique is overblown: Greenspan is long gone, but the focus on central-bank pronouncements is greater than ever. 
What, then, is going on? 
I would argue that, in addition to all of the factors listed above, three further considerations should be noted. 
For starters, the public perception that central bankers are omniscient makes them an attractive whipping boy for politicians. 
Moreover, the digital revolution in media has elevated the role of business news, one of the few profit centers for print and broadcast journalism in many countries. 
Central bankers’ pronouncements are of interest to businesspeople – especially in the financial sector – and businesspeople are of interest to advertisers. 
Finally, and perhaps least appreciated, is the fact that central-bank policy pronouncements are almost unique in having clear and predictable effects on financial markets, at least in the very short run (which can be a day or less). 
If Fed officials surprise markets by making more “hawkish” statements (suggesting an upward bias to policy interest rates) than investors were expecting, the dollar will usually appreciate; long-term dollar interest rates will usually rise; and the stock market typically will decline. 
True, these effects may be small and transitory. 
But, unlike most of the reams of macroeconomic information with which we are bombarded every day, central bankers’ speeches and opinions have relatively foreseeable effects, especially when the bank’s chair, president, or governor speaks, or other officials speak in concert. 
And, with trillions of dollars swirling around global financial markets, this predictability creates a fat target, with investors willing to make massive bets when they are pretty sure they are right, even if the profit per dollar is small. 
If you think I am exaggerating, consider the coverage of other economic news, say, unemployment, GDP, or the trade balance. 
Virtually every story quickly shifts its focus to what the data mean for monetary policy. 
Some economic indicators, such as unemployment or inflation data, are indeed immediately important for central banks, because they may directly concern their mandates, and therefore have rather predictable effects. 
But much information is simply noise. 
This makes policy opinions that come straight from the horse’s mouth almost uniquely valuable. 
In short, there are many good reasons why central bankers receive so much media focus, including their relative independence and generally solid performance. 
But there are also other reasons having to do with politicians’ need for scapegoats, the media’s struggle to reinvent itself in the Internet age, and central-bank pronouncements’ predictable short-term effects on financial markets. 
These other factors have combined to create a bubble around central-bank pronouncements and decisions that grossly exaggerates their economic significance. 
Is this a bubble that central bankers should worry about? 
The answer is clearly yes. 
The news bubble is of particular concern, because it reinforces the idea that central bankers somehow care disproportionately about financial markets, which is generally not the case. 
Most central bankers really are targeting growth, inflation, and financial stability, if not necessarily in that order. 
The political bubble is an inevitable product of central-bank independence, and preventing monetary policy from becoming a target for elected officials requires constant effort. 
The predictability bubble is perhaps the trickiest to navigate, though my instinct is that less would be more. Exaggerated importance is one kind of bubble that central bankers should always be eager to burst. 

The Trouble With Financial Bubbles 
LONDON – Very soon after the magnitude of the 2008 financial crisis became clear, a lively debate began about whether central banks and regulators could – and should – have done more to head it off. 
The traditional view, notably shared by former US Federal Reserve Chairman Alan Greenspan, is that any attempt to prick financial bubbles in advance is doomed to failure. 
The most central banks can do is to clean up the mess. 
Bubble-pricking may indeed choke off growth unnecessarily – and at high social cost. 
But there is a counter-argument. 
Economists at the Bank for International Settlements (BIS) have maintained that the costs of the crisis were so large, and the cleanup so long, that we should surely now look for ways to act pre-emptively when we again see a dangerous build-up of liquidity and credit. 
Hence the fierce (albeit arcane and polite) dispute between the two sides at the International Monetary Fund’s recent meeting in Lima, Peru. 
For the literary-minded, it was reminiscent of Jonathan Swift’s Gulliver’s Travels. 
Gulliver finds himself caught in a war between two tribes, one of which believes that a boiled egg should always be opened at the narrow end, while the other is fervent in its view that a spoon fits better into the bigger, rounded end. 
It is fair to say that the debate has moved on a little since 2008. 
Most important, macroprudential regulation has been added to policymakers’ toolkit: simply put, it makes sense to vary banks’ capital requirements according to the financial cycle. 
When credit expansion is rapid, it may be appropriate to increase banks’ capital requirements as a hedge against the heightened risk of a subsequent contraction. 
This increase would be above what microprudential supervision – assessing the risks to individual institutions – might dictate. 
In this way, the new Basel rules allow for requiring banks to maintain a so-called countercyclical buffer of extra capital. 
But if the idea of the countercyclical buffer is now generally accepted, what of the “nuclear option” to prick a bubble: Is it justifiable to increase interest rates in response to a credit boom, even though the inflation rate might still be below target? 
And should central banks be given a specific financial-stability objective, separate from an inflation target? 
Jaime Caruana, the General Manager of the BIS, and a former Governor of the Bank of Spain, answers yes to both questions. 
In Lima, he argued that the so-called “separation principle,” whereby monetary and financial stability are addressed differently and tasked to separate agencies, no longer makes sense. 
The two sets of policies are, of course, bound to interact; but Caruana argues that it is wrong to say that we know too little about financial instability to be able to act in a preemptive way. 
We know as much about bubbles as we do about inflation, Caruana argues, and central banks’ need to move interest rates for reasons other than the short-term control of consumer-price trends should be explicitly recognized. 
At the Lima meeting, the traditionalist counterview came from Benoît Cœuré of the European Central Bank. 
A central bank, he argued, needs a very simple mandate that allows it to explain its actions clearly and be held accountable for them. 
So let central banks stick to the separation principle, “which makes our life simple. 
We do not want a complicated set of objectives.” 
For Cœuré, trying to maintain financial stability is in the “too difficult” box. 
Even macroprudential regulation is of dubious value: supervisors should confine themselves to overseeing individual institutions, leaving macro-level policy to the grownups. 
Nemat Shafik, a deputy governor of the Bank of England, tried to position herself between these opposing positions. 
She proposed relying on three lines of defense against financial instability. 
Microprudential regulation, she argued, is the first line of defense: if all banks are lending prudently, the chances of collective excesses are lower. 
But the second line of defense is macroprudential manipulation of capital requirements, to be applied across the board or to selected market segments, such as mortgages. 
And, if all else fails to achieve financial stability, central banks could change interest rates. 
Because British law assigns capital regulation and interest-rate policy to two separate committees – with different members – within the Bank of England, the Shafik strategy would require some clever political and bureaucratic maneuvering. 
Industrial quantities of research, analysis, and debate have been devoted to the causes of the 2008 crisis and its consequences; so it seems odd that senior central bankers are still so sharply divided on the central issue of financial stability. 
All those days spent in secret conclave in Basel, drinking through the BIS’s legendary wine cellar, have apparently led to no consensus. 
My view is that Caruana had the best of the arguments in Lima, and Cœuré the worst. 
Sticking to a simple objective in the interests of a quiet life, even if you know it to be imperfect, is an inelegant posture at best. 
We need our central bankers to make complex decisions and to be able to balance potentially conflicting objectives. 
We accept that they will not always be right. 
However, it is surely incumbent on them to learn from the biggest financial meltdown of the last 80 years, rather than to press on, regardless, with policy approaches that so signally failed. 

Central Bankers Gone Wild? 
PRAGUE – Sweeping criticisms of developed-country central banks have lately become all the rage. 
The main line of attack goes something like this: monetary policymakers have been far too activist since 2008, overstepping their mandates and damaging the economy. 
This narrative – which, bizarrely, is equally popular among otherwise irreconcilable ideological adversaries, such as libertarians and neo-Marxists – is patently wrong. 
What the critics fail to understand is that modern central banks are responsible not just for fighting inflation, but for maintaining long-term price stability. 
Like a person’s body temperature, price levels can go neither too high nor too low without causing serious complications. 
Central banks must be as “activist” when combating deflation caused by weak demand as they are when fighting high inflation driven by excessively strong demand. 
Though the battle is completely symmetric, the public assessment of it is bafflingly lopsided, especially in countries with financially conservative populations. 
This includes my own country, the Czech Republic, a nation of small savers where the loan-to-deposit ratio remains well below 100%. 
Czechs fear inflation, even though it hit a 13-year low last year and the Czech National Bank, of which I am Vice-Governor, has been fighting to avert the risk of deflation since 2013. 
Another common complaint about developed-country central banks’ policies since 2008 is that they have redistributive effects. 
They certainly do, but so what? 
Any and all monetary-policy actions redistribute wealth. 
An interest-rate hike pleases savers, whereas a rate cut is a boon to borrowers. 
Importers prefer a strong exchange rate; exporters prefer a weak one. 
To make any sense at all, monetary policy must have different effects on different groups at different times. 
That is no mistake; it is the essence of monetary policy. 
Some critics add that central banks are failing to hit their inflation targets anyway, so their activism is not only unwarranted, but also ineffective. 
Sometimes they even manage to fit these contradictory criticisms in the same sentence, as though they were accusing someone of firing blanks, but somehow leaving people dead and wounded. 
The reality is that central banks in the developed world have – in a truly fascinating way – succeeded in maintaining price stability and the purchasing power of money during and after the global financial crisis. 
Had they not intervened, their economies would have faced catastrophic deflation, major asset-price slumps, and a complete meltdown of the financial and real sectors. 
Clearly, strong action was the right response to the crisis (the extent to which central banks might have contributed to its outbreak is another matter). 
In a system of elastic money with no intrinsic value, the quantity of money has to change over time if the purchasing power of money is to stay broadly constant. 
So price stability, not the quantity of money, is what matters. 
Central banks’ ballooning balance sheets reflect the depth of the problems that many economies faced after 2008. 
In that context, central banks did what was necessary to maintain purchasing power and price stability. 
There was no “activism” on their part; there was only a permanent mandate to fulfill. 
If that sounds arrogant, let me offer some evidence. 
People vote with their wallets. 
If the purchasing power of their money had been dealt a blow after 2008, they would naturally have sought substitutes for their home currencies (other currencies, precious metals, or alternative forms of saving). 
This rarely happened in the developed world. 
Of course, it is true that central banks in many countries are now undershooting their inflation targets. 
(Central bankers usually define the ideal “temperature” of the economy as annual inflation of about 2%.) 
But while that is unpleasant, it is not disastrous, especially given that the decline in prices is partly a result of a supply – not demand – shock, in the form of very low oil prices. 
That shock is benefiting consumers and poses no threat to price stability, at least in countries that are net oil importers. 
Consider this scenario. 
A firm plans to increase sales by 2%, but manages to achieve only 1% growth for two years in a row. 
Would you consider the firm a failure? 
Hardly. 
After all, the planned and actual profits and turnovers of private companies can easily differ by 10% or more. 
Most firms operate in a simpler environment with fewer variables than central banks. 
So how can one expect central banks always to meet precise inflation targets, regardless of the economic circumstances? 
To be clear, I am not saying that central banks should not be working hard to get closer to their targets. 
They obviously should. 
Moreover, they should certainly not allow inflation expectations to be destabilized. 
But, when judging central banks, people need to maintain a proper sense of proportion. 
And they really need to stop saying things that are untrue – for example, that central banks’ policy arsenal is not just exhaustible, but also nearly exhausted. 
Monetary policymakers have plenty of weapons and an endless supply of ammunition at their disposal. 
Those weapons have various calibers and different degrees of effectiveness at different times. 
Not every weapon is right for every occasion or every economy. 
But central banks’ ability to create and destroy money is theoretically unlimited. 
Central bankers should say “enough” to the ignorant criticism we face. 
None of our critics has been able to explain with any clarity or credibility why price stability is the wrong goal, which key objectives central banks should pursue instead, or what we could have done radically differently after 2008. 
There is a simple reason for that: The approach taken by developed-country central banks since the crisis was the right one. 
Indeed, it brought our economies back from the brink. 
You’re welcome. 

The Dangerous Delusion of Price Stability 
BASEL – The major central banks’ vigilant pursuit of positive but low inflation has become a dangerous delusion. 
It is dangerous because the policies needed to achieve the objective could have unwanted side effects; and it is a delusion because there is currently no good reason to be pursuing the objective in the first place. 
In the 1970s, when inflation in the advanced economies rose sharply, central banks rightly resisted it. 
The lesson central bankers took from that battle was that low inflation is a necessary condition for sustained growth. 
But, subtly and over time, this lesson has morphed into a belief that low inflation is also a sufficient condition for sustained growth. 
That change may have been due to the benign economic conditions that accompanied the period of disinflation from the late 1980s to 2007, commonly referred to as the “Great Moderation.” 
For central bankers, it was comforting to believe that they had reduced inflation by controlling demand, and that their policies had many beneficial side effects for the economy. 
After all, this was the demand-oriented narrative they had used to justify tight money to begin with. 
But then the world changed. 
From the late 1980s onward, low inflation was largely due to positive supply-side shocks – such as the Baby Boomer-fueled expansion of the labor force and the integration of many emerging countries into the global trading system. 
These forces boosted growth while lowering inflation. 
And monetary policy, far from restricting demand, was generally focused on preventing below-target inflation. 
As we now know, that led to a period of easy monetary conditions, which, together with financial deregulation and technological developments, sowed the seeds of the 2007 financial crisis and the ensuing recession. 
The fundamental analytical error then – as it still is today – was a failure to distinguish between alternative sources of disinflation. 
The end of the Great Moderation should have disabused policymakers of their belief that low inflation guarantees future economic stability. 
If anything, the opposite has been true. 
Having doubled down on their inflation targets, central banks have had to rely on an unprecedented array of untested policy instruments to achieve their goals. 
For example, many central bankers are now recommending the use of “macroprudential” instruments to manage systemic risks in the economy – which, in turn, will allow them to keep interest rates “lower for longer.” 
The problem with this approach is that there is little, if any, empirical evidence to suggest that such policies will work as intended. 
Central bankers sometimes rationalize their current policies not by extolling the benefits of low inflation, but by underscoring the heavy costs of even mild deflation. 
Yet while there is ample evidence showing that high inflation is more costly than low inflation, it is hard to find similar evidence that mild deflation is all that costly. 
In fact, the widely held assumption that consumers and corporate investors will extrapolate from past price declines and hold off on making purchases as a result of deflation has essentially no empirical support behind it. 
Recent consumer responses to sectoral price declines in various countries, not least Japan, all suggest the very opposite. 
True, as a matter of arithmetic, deflation increases the real (inflation-adjusted) burden of debt service. 
But if debt levels are at onerous heights as a result of easy-money monetary policies, it is not obvious that the solution to the problem is still more easy money. 
Central banks’ fixation on positive but low inflation under today’s prevailing economic conditions is also increasingly dangerous. 
Global debt ratios have risen sharply since the financial crisis began, while traditional lenders’ margins have been squeezed, raising questions about their overall health. 
And as lending has continued to migrate further into the “shadows,” price discovery in financial markets has become severely compromised, to the point that many assets now seem to be overvalued. 
These developments constitute a threat not just to financial stability, but also to the workings of the real economy. 
Moreover, one could argue that easy money itself has contributed to the unexpectedly strong disinflationary forces seen in recent years. 
Owing to easy financing and regulatory forbearance, aggregate supply has risen as “zombie” companies have proliferated. 
Meanwhile, aggregate demand has been restrained by the debt headwinds – yet another result of easy monetary conditions. 
In view of these conditions, continuing to insist on monetary easing seems particularly ill advised. 
With so many potential dangers on the horizon, central bankers should at least consider rethinking the fundamental assumptions underlying their policies. 
So, what should policymakers do? 
In the immediate future, governments must stop relying so much on central bank policies to restore sustainable growth. 
Rather than obsesses over inflation targets, policymakers should (belatedly) start asking themselves what practical measures they can take to prevent another crisis from erupting. 
Equally important, they need to ensure that they have done everything they can to prepare for such a scenario, in case their preventive measures prove inadequate. 
Looking even further into the future, when some semblance of “normality” has been restored, central banks should focus less on hitting near-term inflation targets, and more on avoiding “boom-bust” credit cycles. 
Unlike slight deviations from inflation targets, or even slight deflation, the latter actually are costly. 

Why Central Bank Digital Currencies Will Destroy Cryptocurrencies 
NEW YORK – The world’s central bankers have begun to discuss the idea of central bank digital currencies (CBDCs), and now even the International Monetary Fund and its managing director, Christine Lagarde, are talking openly about the pros and cons of the idea. 
This conversation is past due. Cash is being used less and less, and has nearly disappeared in countries such as Sweden and China. 
At the same time, digital payment systems – PayPal, Venmo, and others in the West; Alipay and WeChat in China; 
M-Pesa in Kenya; Paytm in India – offer attractive alternatives to services once provided by traditional commercial banks. 
Most of these fintech innovations are still connected to traditional banks, and none of them rely on cryptocurrencies or blockchain. 
Likewise, if CBDCs are ever issued, they will have nothing to do with these over-hyped blockchain technologies. 
Nonetheless, starry-eyed crypto-fanatics have seized on policymakers’ consideration of CBDCs as proof that even central banks need blockchain or crypto to enter the digital-currency game. 
This is nonsense. 
If anything, CBDCs would likely replace all private digital payment systems, regardless of whether they are connected to traditional bank accounts or cryptocurrencies. 
As matters currently stand, only commercial banks have access to central banks’ balance sheets; and central banks’ reserves are already held as digital currencies. 
That is why central banks are so efficient and cost-effective at mediating interbank payments and lending transactions. 
Because individuals, corporations, and non-bank financial institutions do not enjoy the same access, they must rely on licensed commercial banks to process their transactions. 
Bank deposits, then, are a form of private money that is used for transactions among non-bank private agents. 
As a result, not even fully digital systems such as Alipay or Venmo can operate apart from the banking system. 
By allowing any individual to make transactions through the central bank, CBDCs would upend this arrangement, alleviating the need for cash, traditional bank accounts, and even digital payment services. 
Better yet, CBDCs would not have to rely on public “permission-less,” “trustless” distributed ledgers like those underpinning cryptocurrencies. 
After all, central banks already have a centralized permissioned private non-distributed ledger that allows for payments and transactions to be facilitated safely and seamlessly. 
No central banker in his or her right mind would ever swap out that sound system for one based on blockchain. 
If a CBDC were to be issued, it would immediately displace cryptocurrencies, which are not scalable, cheap, secure, or actually decentralized. 
Enthusiasts will argue that cryptocurrencies would remain attractive to those who wish to remain anonymous. 
But, like private bank deposits today, CBDC transactions could also be made anonymous, with access to account-holder information available, when necessary, only to law-enforcement authorities or regulators, as already happens with private banks. 
Besides, cryptocurrencies like Bitcoin are not actually anonymous, given that individuals and organizations using crypto-wallets still leave a digital footprint. 
And authorities that legitimately want to track criminals and terrorists will soon crack down on attempts to create crypto-currencies with complete privacy. 
Insofar as CBDCs would crowd out worthless cryptocurrencies, they should be welcomed. 
Moreover, by transferring payments from private to central banks, a CBDC-based system would be a boon for financial inclusion. 
Millions of unbanked people would have access to a near-free, efficient payment system through their cell phones. 
The main problem with CBDCs is that they would disrupt the current fractional-reserve system through which commercial banks create money by lending out more than they hold in liquid deposits. 
Banks need deposits in order to make loans and investment decisions. 
If all private bank deposits were to be moved into CBDCs, then traditional banks would need to become “loanable funds intermediaries,” borrowing long-term funds to finance long-term loans such as mortgages. 
In other words, the fractional-reserve banking system would be replaced by a narrow-banking system administered mostly by the central bank. 
That would amount to a financial revolution – and one that would yield many benefits. 
Central banks would be in a much better position to control credit bubbles, stop bank runs, prevent maturity mismatches, and regulate risky credit/lending decisions by private banks. 
So far, no country has decided to go this route, perhaps because it would entail a radical disintermediation of the private banking sector. 
One alternative would be for central banks to lend back to private banks the deposits that moved into CBDCs. 
But if the government was effectively banks’ only depositor and provider of funds, the risk of state interference in their lending decisions would be obvious. 
Lagarde, for her part, has advocated a third solution: private-public partnerships between central banks and private banks. 
“Individuals could hold regular deposits with financial firms, but transactions would ultimately get settled in digital currency between firms,” she explained recently at the Singapore Fintech Festival. “Similar to what happens today, but in a split second.” 
The advantage of this arrangement is that payments “would be immediate, safe, cheap, and potentially semi-anonymous.” 
Moreover, “central banks would retain a sure footing in payments.” 
This is a clever compromise, but some purists will argue that it would not solve the problems of the current fractional-reserve banking system. 
There would still be a risk of bank runs, maturity mismatches, and credit bubbles fueled by private-bank-created money. 
And there would still be a need for deposit insurance and lender-of-last-resort support, which itself creates a moral hazard. 
Such issues would need to be managed through regulation and bank supervision, and that wouldn’t necessarily be enough to prevent future banking crises. 
In due time, CBDC-based narrow banking and loanable-funds intermediaries could ensure a better and more stable financial system. 
If the alternatives are a crisis-prone fractional-reserve system and a crypto-dystopia, then we should remain open to the idea. 

Central Europe’s Digital Freedom Struggle 
PRAGUE – A quarter-century ago, when the Berlin Wall fell and the Iron Curtain rose, the people of Central Europe chose capitalism over communism and democracy over dictatorship. 
Today, however, citizens of the Czech Republic, Hungary, Poland, and Slovakia – the region's four ex-communist countries – are turning in a disappointingly mixed performance when it comes to promoting and protecting Internet freedom. 
A recent study in these four countries by our organizations shows that all of them can – and should – play a powerful role in promoting the free flow of information. 
But much needs to be improved. 
The Czech Republic has a strong record of supporting free expression, curbing surveillance, and promoting transparency, but Hungary persecutes bloggers and publishers with heavy fines and other sanctions. 
Poland and Slovakia fall somewhere in between. 
The four countries are poised to benefit greatly from the new digital world. 
Each has the prerequisites for open and lively online communities: decent Internet penetration and democratic, plural political systems. 
The region's “high level of mathematical education, low overheads, and a globalized, westernized young generation makes for a heady and successful mix," the Financial Times recently reported. 
Indeed, the FT's “New Europe 100" list of innovators from Central and Eastern Europe includes many examples of Internet success stories. 
There is “a Hungarian doctor who has created a medical advice website driven by social media, a team of Polish students who have built an award-winning robot that could operate on Mars, and a Slovak inventor of a flying car." 
And yet, despite their own experiences under communism and the outcry within their borders over Edward Snowden's revelations of Internet snooping, the governments of Central Europe have not taken a strong stand to rein in their own authorities. 
The police file thousands of requests each year to monitor Internet use, and local courts almost always grant them. 
Users are rarely notified of such requests, and the basis on which they are made is often unclear. 
Too often, laws ensuring Internet freedom are ignored or bent. 
Debates rage over whether content should be blocked and which copyright protections apply to Internet publications. 
Bureaucrats drag their feet on requirements to make information accessible online, and the courts are over-eager to initiate cases that should be settled with notice-and-takedown procedures specifically devised for online content. 
In all four countries, the legal framework is badly in need of reform to clarify the boundaries of freedom of expression for bloggers and journalists. 
Legislation must to be modernized to reflect developments in the online world and to recognize the enormous shift in personal communication and news delivery. 
In Slovakia, online journalists do not enjoy the same legal protection as print journalists. Court rulings on Internet content have favored politicians over the press. 
In Poland, judges demand quick removal of offensive online content; defamation is subject to criminal prosecution. 
Transparency needs to be increased throughout Central Europe. 
Current legislation is vague enough to allow government agencies to refuse freedom-of-information requests on the basis of claims of commercial confidentiality or privacy concerns. 
Hungary is the region's single worst performer. 
In 2010, its right-wing government adopted media legislation that requires all news organizations to register with the state and stipulates that the stories they report should be “balanced," of “relevance to the citizens of Hungary," and “respect[ful of] human dignity." 
The law also weakened the protection of journalists' sources. 
Penalties for violating the rules include fines, suspension, or shutdowns. 
The European Commission, the Council of Europe, and press watchdog groups were unanimous in criticizing the legislation, but the Hungarian government persists in its media crackdown. 
A new criminal code leaves room for abuse of authority, including the possibility of filtering online content. 
Last fall, the government attempted to introduce an “Internet tax" of €0.50 euros ($0.60) per gigabyte, the moral equivalent of a tax on reading a book or conversing with a friend. 
After more than 100,000 protesters gathered in Budapest, the proposal was withdrawn – at least for now. 
These ex-communist countries have a unique opportunity to become global leaders in Internet freedom. 
At the International Telecommunications Union summit in Dubai in December 2012, Michał Boni, a former Polish minister of administration and digitization, played an important role in blocking efforts to impose government controls on Internet use. 
And yet, in the meantime, Poland's foreign ministry has not made Internet freedom a priority. 
Unlike the Czech Republic, for example, Poland still has not joined the Freedom Online Coalition. 
Two decades ago, the people of Central Europe rose up to bring down secretive, authoritarian governments. 
Today, the region's ex-communist countries have made considerable progress. 
But much hard work remains to be done. 
A good place to start would be to lead the fight for Internet freedom. 

Central Europe's Fractious Right 
Is Eastern Europe's political pendulum about to run down? 
Across Central Europe since 1989, elections have oscillated between right and left. 
Is Hungary's slick young prime minister, Viktor Orban, poised to end all that? 
A ruthless program to absorb his political rivals on the right has helped Orban's FIDESZ party become nearly equal in size to his Socialist rivals on the left. 
Moreover, infighting among the Socialists has dented one of their biggest political advantages: the hard-headed discipline and political professionalism inherited from their Communist days. 
Premier Orban's semi-successful efforts to unify the right under the banner of FIDESZ are unique among Eastern Europe's fractured and fractious rightist parties. 
Since Communism's fall, center right parties in the Czech Republic, Hungary, Poland, and Slovakia have suffered from disunity and a lack of vision. 
Despite the fact the region is still recovering from decades of communist mismanagement, the political right's fragmentation helped the political left, in some cases represented by former Communists, to win democratic elections regularly. 
Some problems faced by Central Europe's right are similar to those the political right faces elsewhere in Europe, where social democratic parties expropriated many formerly liberal ideas to seize a monopoly of the political center. 
In Central Europe this effect has been amplified by the fact that, regardless of ideological leanings, rulings parties have had to privatize the economy and, under pressure from the European Union, introduce reform measures that would, in a classical Western system, usually be undertaken by the political right. 
Leftist parties in various Central European countries, indeed, have often turned out to be more successful in reforming because they, paradoxically, have greater legitimacy in this respect. 
Many people believe that the Socialists would not privatize the economy or slash welfare systems if such measures were not absolutely necessary. 
The most serious problem of Central Europe's political right is a lack of identity. 
Although right-of-center politicians in Central European countries formally embrace traditional ideologies, for example, liberalism or conservatism, their electorates, unfamiliar with Western political philosophies, do not always understand the real meaning of those terms. 
In various surveys, significant segments of Central European electorates describe themselves as ``rightist,'' but years of communist paternalism pushed the region's political center of gravity firmly to the left. 
A person may describe him or herself as, for example, a liberal, yet at same time demand that the government continue subsidizing energy, education, or housing. 
Under the communist regimes, ideologies became totally instrumental. 
As during those years, many people now formally accept ideological labels but identify with them only as long as such an allegiance to a specific political current has tangible short-term benefits for them. 
One consequence of this cynical treatment of political ideologies is the wild swings in voters' preferences seen in various Central European countries. 
The problem of identity is made even worse by the fact that most Central European nations, where nation-building was retarded by Communism, easily succumb to nationalist sentiments that in turn are misused by some politicians. 
Although such politicians often describe themselves as ``rightist,'' their real policies, such as, for, example, those of former Slovak Prime Minister Vladimir Meciar, are in fact demagogic populist or authoritarian. 
The situation of the political right in each Central European country is also influenced by experiences that are rooted in history and tradition. 
Political developments in Czechoslovakia during the last 20 years of communism set the Czech Republic and Slovakia apart from both Poland and Hungary. 
While both the Polish and Hungarian communist parties experienced internal liberalization that allowed relatively large semi-official zones of activity outside communist control, Czechoslovakia after the Soviet-led invasion of 1968 became a rigid neo-Stalinist regime. 
When the communist regimes collapsed in 1989, the communist parties of Poland and Hungary transformed themselves into credible democratic-left parties that became formidable opponents of the newly emerging political right. 
No strong social democratic party in Czechoslovakia could emerge from the rigid Czechoslovak Communist Party. 
In the absence of a credible democratic left party, Czech center-right politicians had the upper hand, and were relatively united, until 1997. 
However, lack of a strong opposition corrupted the political right, which splintered into various groupings that cannot find a common language. 
In Slovakia, where nationalist sentiments were an important political factor after 1989, the political spectrum has not yet coalesced along standard right-left political axis. 
The main political battles occur between nationalist/populist forces, whose outlook have in essence been undemocratic, and forces that struggle for standard democracy. 
The threat of return to power by Meciar forced all democrats, leftist or rightist, into one camp. 
Even in this situation the political right has been quarrelsome, creating space for Meciar's possible return to power. 
Hungary's political right has suffered mainly from differences between conservative and populist forces on the one hand, and traditional, mainly urban, liberals on the other. 
Various rightist parties failed to decide whether the modus operandi on the political right should be traditional Western ideologies or a Hungarian brand of nationalist conservatism and populism. 
Although the current governing coalition, consisting of conservatives and populists, has been successful, the real reckoning for Hungary's right may still be yet to come. 
Poland's right poses the most difficult case. 
Its problems originate in the communist era, when a trade union movement, which under normal circumstances should stand to the political left, became the main anti-communist opposition. 
As a result, various political groups associated with the Solidarity trade union movement have, since Communism's fall, aspired to represent the political right, confusing the terms of political discourse. 
Christian-democratic parties, associated with the Catholic Church, and the liberals have been to some extent marginalized. 
The confusion has been made complete by the existence of relatively strong nationalist and populist parties that use the numerous Polish farmers as their electoral base. 
As in other postcommunist countries, the main beneficiary of such a lack of unity has been the democratic left. 

Central Europe’s Misguided War on Drugs 
WARSAW – It was two decades ago this summer that communist rule began to implode from Tallinn in the Baltic to Tirana in the Adriatic, ushering in free elections, market reforms, and expanded civil liberties. 
Since then, the countries of Central and Eastern Europe have come a long way. 
Many are now members of the European Union. 
My homeland, Poland, has a steady economy and a thriving media. 
Yet Poland, like many of the other new democracies in our region, remains stuck in the past when it comes to the humane treatment of drug users. 
Indeed, throughout the former Soviet bloc, there is a disturbing trend in using outdated, conservative, and heavy-handed policies to address drug abuse. 
For example, Gdansk – the birthplace of the Solidarity movement – does not have a single methadone treatment center. 
People must travel for three hours to get the medicine that is proven to control cravings and reduce the harms of drug use. 
And they are the lucky ones. 
Only 5% of opiate users in Poland have access to methadone at all, compared to 40% in Germany. 
Instead of focusing on treatment that works, the Polish government chooses to give priority to long-term rehabilitation centers located in the depths of the countryside that have little, if anything, to do with evidence-based medicine. 
Poland also chooses to treat possession of even the smallest quantities of drugs as criminal, as evidenced by the fact that 60% of people sentenced for drug possession in Poland are marijuana smokers. 
Addressing drug use through criminalization and rehabilitation centers does nothing to curb demand, however, and usage rates have failed to decline. 
By driving users underground, criminalization contributes to a deepening public-health crisis. 
This pattern persists across Central and Eastern Europe, where governments have also opted to imprison drug users. 
In Hungary, for example, the penal code calls for two years imprisonment for personal possession by a drug-dependent person. 
In neighboring Slovakia, the penalty for personal possession is, as in Poland, up to three years. 
This approach is not only inhumane, but also economically untenable: leaders in these countries should be encouraged to redirect scarce law enforcement, court, and prison resources towards more pressing causes. 
Simply put, governments can no longer afford to drain precious time and money that could be better spent elsewhere by locking up people for drug-related offenses. 
If Poland and its neighbors are to chart a new way forward, at least three things must happen. 
First, these countries should look West for alternative, and more humane, drug policies. 
A report released recently by the United Kingdom’s Drug Policy Commission correctly calls for a “smarter” drug policy that focuses on addressing associated violence rather than simply making arrests. 
Officials in Central and Eastern Europe should pay heed to recent comments by the UK’s Home Office, which said that “harm reduction underpins every element of our approach to tackling this complex issue.” 
Portugal recently went a step further in voting to decriminalize recreational drugs, including heroin and cocaine – a move that has led to a significant decline in drug-related deaths and a fall in new HIV infections. 
Second, law-makers should listen to their constituents: a recent public awareness campaign by Gazeta Wyborcza , a leading Polish daily newspaper, collected more than 23,000 signatures in five days for a petition calling for changes to the current drug law. 
The changes, modeled after Germany’s progressive policies, would stop punishing people for possessing small amounts of drugs for their own use, impose stricter penalties for dealers and provide more effective treatment for drug-dependent people. 
In a step forward, a debate in the Polish parliament on the proposed drug law is set to start in September. 
Young people should not start their working lives with criminal records because of personal possession. 
Finally, at the European level, EU policymakers can help by encouraging member states to decriminalize possession of small amounts of drugs. 

Central Europe’s Unsentimental Education 
BUDAPEST – This month marks the 20th anniversary of the reburial of Imre Nagy, the leader of Hungary’s failed anti-Soviet revolution of 1956. 
The reinternment, organized by Hungary’s anti-communist opposition on the 31st anniversary of his execution, drew more than 100,000 attendees, heralding the beginning of the end of the country’s sclerotic regime. 
We Hungarians, and Central Europe in general, have come far since those heady times, but the past 20 years have also given us much cause to question the path we took. 
Hungary played a special role in the collapse of Communism, accelerating the process by opening its borders for East German refugees. 
But democratic transformation in Hungary required an opposition strategy throughout the 1980’s: revolution wouldn’t work, as the Soviet invasion in 1956 showed. 
Nor would internal reforms work, because the Soviets would intervene to save the system, as they did in 1968 in Czechoslovakia. 
Instead, the new strategy was to sideline the issue of political power. 
Rather than attacking Communist rule directly, we would create small islands of freedom, inter-connected social circles and associations, which, when the moment came, could all be connected in order to change the system. 
In Hungary, several youth organizations existed and were aware of each other, so the political community that took part in the political changes in Hungary in 1989 was organized on this basis. 
History also played a part in the success of the Hungarian transition. 
The 1956 revolution was a real one, with barricades. 
In no other Central European country did Communists experience the possibility of paying with their own lives for the suffering and oppression that they inflicted on others. 
This historical experience was good for reform capability. 
A new generation was also needed. 
It appeared symbolically on June 16, 1989, when I had the opportunity to speak on behalf of the young generation. 
A whole generation felt that the moment had come when Hungarians could at last determine their own future. 
So, what kind of future did they determine? 
The past 20 years can be divided into three phases. 
First, a market economy was created, the rule of law established, and democratic institutions built. 
Next, we applied for admission to NATO and prepared for European Union membership, with all of the institutional reforms that these goals implied. 
The third phase was one of economic catch-up, which, unlike the first two phases, has not really been successful in Hungary, which today may even be falling back. 
But, for Central Europe as a whole, the past 20 years have been the best since the Peace of Westphalia, with Slovakia and Slovenia even joining the euro zone. 
Nevertheless, the 20th anniversary of the collapse of communism is overshadowed by the global financial and economic crisis. 
And it is now clear that the biggest winners of globalization are no longer the Europeans or the Americans, but the Asians. 
The world market is being re-divided – peacefully, because territories and markets are separated, so that no power occupies another power’s territory. 
But Europe must nonetheless recognize the need to distinguish clearly between partners, competitors, and opponents, and to formulate a more sophisticated and articulated policy towards Russia, in particular. 
For example, we Central Europeans are opponents when we do not accept Russia’s policy of renewing “spheres of interest” and “security zones.” 
Moreover, after all that has happened in the past six months, Central Europeans can no longer look up to old countries representing the moral values of Western civilization. 
This crisis was not caused by bad luck or some professional misunderstanding, but by character problems, especially in the United States and later Western Europe. 
Money was stolen, not merely “mismanaged.” 
Investments were not simply bad, but unacceptably risky. 
The moral state of business leaders caused this crisis, and you cannot find Central Europeans among those leaders. 
Central Europe has found itself in a completely new situation. 
Crisis management measures undertaken in the Western world are practically cutting our countries off from the EU market. 
In this situation, Central European countries must cooperate to defend their own interests, as well as their dream of a common Europe. 
The question for the European elite is whether we believe in the work of the past 20 years, whether we believe in an integrated European market and an ever-widening European Community. 
If not, then first the biggest and the strongest countries, and then the Central Europeans, will turn away from the European dream. 
Those of us who believe that the past 20 years made sense, and that we are on the right track, are still the majority in Hungary. 
Everyone in Europe and the world needs a unified, robust Europe. 
If our faith is strong enough, we can survive this crisis without destroying what we have built together by opening our borders, destroying the Wall, unifying Germany, and completing our democratic transitions. 

Stopping Women’s Next Biggest Killer 
GENEVA – For women, the act of bringing life into this world has historically meant risking their own lives, with the real prospect of death during childbirth. 
But, though great strides are being made in reducing maternal deaths in poor countries, those gains could be undone by a growing threat to women’s health. 
For the first time, the number of deaths caused by cervical cancer every year is poised to outstrip the total caused by childbirth. 
The trend partly reflects the success of efforts to reduce maternal deaths. 
Since 1990, the number of women dying as a result of childbirth has been nearly halved, to 289,000 per year. 
Over the same period, however, annual deaths from cervical cancer have increased by almost 40%, to 266,000. 
Even as better standards of care continue to cut maternal mortality, cervical cancer deaths are expected to rise further. 
By 2035, the disease is expected to cause 416,000 women to die slowly and painfully every year – virtually all of them in developing countries (mostly Sub-Saharan Africa and South Asia). 
The tragedy is that these deaths are almost entirely preventable. 
Human papillomavirus (HPV) vaccines, coupled with screening and treatment, could prevent the vast majority of cervical cancer cases. 
But almost 90% of the women who die from cervical cancer are in developing countries, where, for too many of them, screening services are unavailable, and treatment even less so. 
As former Additional Secretary at the Ministry of Health and Family Welfare in India, the country with the largest number of cervical cancer deaths in the world, I have seen the impact of the disease with my own eyes. 
What is particularly devastating is how it also quashes hope. 
Women with HIV, for example, are particularly prone to the disease. 
Yet, with better treatments for HIV becoming available, women are now surviving HIV only to die from cervical cancer. 
In 2010, the total global cost of cervical cancer was estimated to be around $2.7 billion per year. 
By 2030, this is expected to increase to $4.7 billion, unless we do something about it now. 
Vaccines, fortunately, are becoming increasingly available. 
Safe and effective HPV vaccines have been on the market since 2006, protecting against HPV types 16 and 18, which cause 70% of all cervical cancer cases. 
Newly approved vaccines provide even greater protection. 
In wealthy countries, HPV vaccines are often priced at more than $100 per dose. 
But Gavi, the Vaccine Alliance, has worked with manufacturers to reduce prices in developing countries. 
Recently, we secured a record-low price for HPV vaccines of $4.50 a dose, opening the door for millions of the poorest girls to be vaccinated in 27 countries. 
By 2020, we estimate that Gavi will have helped over 30 million girls in more than 40 developing countries receive vaccinations against HPV. 
The economic benefits of vaccines are substantial. 
It takes time and significant investment to set up effective screening and treatment services. 
And, given that even high-income countries struggle to meet the cost of cancer treatments, prevention is clearly a far more efficient option. 
Moreover, cervical cancer strikes women during their most economically productive years, when their contribution to society and the economy is greatest. 
The disease does not just destroy lives; it also impoverishes families and undermines economic growth. 
A recommendation last year by the World Health Organization’s Strategic Advisory Group of Experts on Immunization promises to boost vaccines’ cost-effectiveness further, by calling for just two doses of the HPV vaccine, rather than the three doses previously thought to be required. 
This will not only reduce the overall cost of vaccine procurement and delivery; it will also make it easier for health-care workers and the girls themselves. 
A study published by WHO and the London School of Hygiene and Tropical Medicine in June predicts that vaccinating 58 million girls in 179 countries would prevent 690,000 cases of cervical cancer and 420,000 deaths from the disease. 
Unfortunately, the study also found that of the 33 countries where HPV vaccines are most likely to have the greatest effect in preventing cancer, 26 had not yet introduced the vaccine. 
There is much work to be done. 
We should congratulate ourselves for nearly halving the maternal death rate since 1990. 
But we must keep the threat of cervical cancer firmly in our sights. 
It is imperative to act now to ensure that every girl has access to HPV vaccines and a healthy future free from cervical cancer, no matter where she lives. 

Chávez at Bay 
SÃO PAULO – The recent opposition victories in Venezuela’s municipal and state elections, together with the international financial crisis, have begun to set limits on the powers of President Hugo Chávez for the first time in the decade he has been in power. 
Indeed, the elections demonstrated that Chávez’s control of the country is no longer total. 
There is now a solid opposition in Venezuela and less distance between those who rule and those who want to rule. 
This is important progress, considering that the opposition is still paying a price for its boycott of the 2005 elections that gave Chávez absolute control of Parliament. 
The growing strength and coherence of the opposition is not due to the number of disaffected Chávez supporters alone. 
In fact, those who once hoped for the creation of a “third pole” in Venezuelan politics were pushed aside by the traditional polarization between Chávez’s supporters and opponents. 
Instead, the opposition grew because of a return to its 1998 and 2001 levels of popular support – around 40% – and because it was able to bring back into the fold some of the abstainers and undecided, including important popular factions. 
The opposition is now represented mostly by professional democratic politicians who not only united a wide group of factions, but also displaced the “Salvadores de la Patria” (the Nation’s Saviors) – a group accustomed to leading the opposition from the reception rooms of the capital’s hotels. 
The opposition’s new leadership also displaced those who wanted to supplant “populist” leaders with an anti-political discourse. 
Thus, the opposition achieved its objective: a beachhead in Venezuelan politics with real and significant popular support. 
This political rebalancing – in terms of both votes and institutions – could create higher barriers against any authoritarian deviation, wherever it might come from. 
Chávez and his partisans must now learn what it is like to rule within limits. 
The president had hoped to repeat his role as Great Campaigner in previous elections, and so personally led his own campaign, ignoring criticism that he was unfairly taking advantage of the powers of his office. 
But in the end, that advantage, and his usual verbal threats, mattered less than the desire of voters in some cities and regions to punish his regime because of its mismanagement. 
The paradox of this jolting election is that it will actually stabilize politics in Venezuela, at least for now, and will favor a renewal of democracy. 
This is important for the opposition, because their new influence is arising at a time when the economic downturn and slumping oil revenues will make it difficult for the government to continue to buy support through subsidies and handouts. 
This does not mean that Chávez’s revolutionary and anti-imperialist rhetoric has lost all its appeal. 
But it is no longer enough to guarantee his unchecked power. 
Indeed, the shadows of militarism that have appeared over the Chávez regime may well have unnerved a majority of Venezuelans, who wonder who the next adversary to be pursued will be. 
Nevertheless, it is clear that Chávez will continue with his tropical socialism, proclaiming the value of Venezuela’s participatory democracy and insisting on his anti-imperialist creed. 
The opposition, meanwhile, will try to expand on its victory, which, though partial, was significant in its political symbolism. 
Between these extremes, Venezuela’s people will watch events develop, unwilling to compromise their democracy or lose the economic privileges they have attained. 
Chávez now faces a new electoral reality, one first established in December 2007 when he lost the advisory referendum he had called in order to secure a new Constitution. 
The electoral results of November 2008, and a global financial crisis that has strained Chávez’s ability to pay for his radical policies, may now limit his chances to continue dividing a country whose inhabitants, like most people, want to live in a peaceful and prosperous democracy. 

Chávez at Home and Abroad 
Any observer who reads the world's great international newspapers will probably think that Venezuela is in deep crisis. 
With an oddball president who led a failed coup only to return to impose his brand of Cuban socialism cum Latin American tinhorn dictatorship cum political evangelism, poor Venezuela seems destined for a fall. 
A paradox, indeed, haunts Venezuela: if people abroad have such a poor view of our country, then perhaps we are going to the dogs, regardless of what we see around us. 
Of course, most foreign opinions about a country come from local sources. 
A disproportionate share reflects the narrow group of people who speak English, travel abroad, and belong in the top income group - hardly an unbiased sample. 
The power of the foreign press is worrisome for those with an interest in Venezuela's welfare, because perceptions affect realities, including foreign investment, risk premiums on debt, tourism and capital outflows. 
Few argue that things are all wonderful with President Chávez. 
Dogged by a small, disorganized, yet wily and persistent opposition that follows his every step and publicizes his frequent missteps, the President's popularity ratings have plummeted from above 80% in 1999 to half that today. Any government expects its popularity to erode, especially in a society with as many intractable problems as Venezuela: unemployment, crime, high infant mortality and so on. 
President Fox in Mexico, Cardoso in Brazil, De La Rúa in Argentina and Toledo in Peru aren't doing better in terms of popularity, but they seem better citizens of this globalized world and so are not taking the public beating that President Chávez is absorbing. 
Chávez's popularity has fallen sharply since September 11 th , both because of his public comments and because of private sector shrieks following the publication of 49 laws issued under special executive powers and after limited consultation with parliament. 
Business exasperation with the President's highhandedness led to the announcement of a one-day strike on December 10 th , as well as serious doubts over an international strategy that seemed to favor Osama Bin Laden over George Bush. 
Venezuela's pro-American elites sprouted goose bumps when US Ambassador Hrinak was recalled to Washington for ``consultations'' about President Chávez's seeming Castro-style highjinks. 
Who else would have shown Afghanistan's dead children on prime-time TV, while denouncing the use of terrorism to counter terrorism? 
If the world is either with or against America, Chávez seems to be on the wrong side. 
Intellectuals may be able to say the type of things he has said and get away with it, not chiefs of state. 
Hard facts appear to support the international press depictions of Venezuela. 
Poverty persists after three years of Chávez rule; there is a frightening crime rate and homeless children sniff glue on the streets despite a naive president's oath to house them. 
But is Río any better? 
The distinction lies in expectations and in Chávez's own silliness in thinking he could change things quickly with a big stick of good intentions and an army of inexperienced (and often opportunistic) followers invading an already pathetic state bureaucracy. 
But other facts speak out. 
Surveys show that only 25% of Venezuelans rate the government as poor or very poor, even though an overwhelming majority rejects the President's penchant for monopolizing the airwaves once a week, displacing their favorite soap operas. 
They think he is overly aggressive, creating unwanted conflict, when what Venezuelans want is peace and calm. 
Still, they give him credit - 68% of them - for having the power to resolve the country's principal problems. 
It is rarely reported that, after 20 years of inflation averaging 30-40 % per year and with income-crunching peaks set at over 80%, prices have risen less under Chávez. Indeed, inflation was 13% in 2001. 
Venezuelans know that GDP has been growing modestly for two years, with private sector growth at over 5% in 2001. Automobile sales rose 50%; employment levels improved slightly, especially in the formal sector. 
After decades of exchange and price controls, the economy has enjoyed three years of open trade, free currency exchange and free prices. 
Stores are full of goods. 
Caracas is no Havana. 
For the first time in history, the government has saved excess oil earnings for the next rainy day. 
Foreign debt is among the lowest in Latin America compared to the size of the economy. 
The National Assembly is negotiating a social security law that may turn out to be reasonable; a flap over the education law is giving way to agreements among warring parties. 
So why do international financial markets rate Venezuela as riskier than all its neighbors, save for bankrupt Argentina? 
It is a puzzle here. 
Critics counter that the Chávez government's ``populism'' will cede to crisis when falling oil prices take their toll. 
Unsustainable capital outflows bode poorly for future stability, fueled by doubts about Chávez, democracy and the future of capitalism. 
Yet, with government spending at some 22% of GDP, charges of socialism fall flat. 
These critics say that Chávez's insistence that the State hold the majority of shares in oil production will scare off investors, even though his Hydrocarbons Law is more liberal than the old one, especially where new gas projects and downstream activities are concerned. 
The Land Law, although it is not very different from the forgotten one on the books for 40 years, is still portrayed as creating conditions that will starve investment in agriculture and cattle farming and marks a direct assault on private property. 
What, then, is the truth about Venezuela? 
The truth is that the country is facing difficult changes, zigzagging through complicated negotiations among competing and legitimate interests. 
Without a strong opposition, the Chávez government would certainly veer too far left; without Chávez, it would have no keel at all. 
Equilibrium requires that outsiders not tip the balance of a ship of state already enduring a rough ride. 

The Poverty Line’s Battle Lines 
WASHINGTON, DC – For a long time, as a college professor and then as the chief economic adviser to the Indian government, I was a happy user of the World Bank’s data on global poverty, tracking trends and analyzing cross-country patterns. 
I seldom paused to think about how those numbers were computed. 
Then, three years ago, I joined the World Bank as its Chief Economist. 
It was like a customer, happily ordering dinner in a favorite restaurant, suddenly being asked to go into the kitchen and prepare the meal. 
Being in the business of measuring poverty is a challenge for the World Bank. 
If poverty declines, critics accuse us of trying to showcase our success. 
If it rises, they say we are ensuring that we stay in business. 
And if it stays the same, they accuse us of trying to avoid these two charges. 
Fortunately, there is something liberating in knowing that you will be criticized for any outcome. 
Still, as our team set about defining the global poverty line this year (and thus the incidence of poverty), I was acutely aware of the note of caution from Angus Deaton, this year’s Nobel laureate in economics: “I am not sure it is wise for the World Bank to commit itself so much to this project.” 
I could see his point: This year’s poverty calculation was particularly momentous. 
In 2011, new purchasing power parities (or PPPs, which essentially estimate how much $1 dollar buys in different countries) had been computed, and the data became available in 2014. 
This was one reason to take stock of how we would adjust the global poverty line, estimate new poverty numbers, and publish them in our Global Monitoring Report, which was released in October. 
A second reason is that the UN has included the eradication of chronic poverty in its new Sustainable Development Goals. This means that our decision on where to draw the poverty line probably will influence not just the World Bank’s mission but also the development agenda of the UN and all countries around the world. 
Clearly, as we crunched the numbers, we had a special, and daunting, responsibility to fulfill. 
Our first task was to see how the global poverty line had been determined earlier. 
In 2005, when the previous round of purchasing power parities was estimated, the method used was to take the national poverty lines of the 15 poorest countries, compute their average, and treat that as the global line. 
This led to a global poverty line of $1.25. 
The idea was that a poor person was anyone whose PPP-adjusted daily consumption fell short of $1.25. 
The validity of this method has been questioned – and I have had my own reservations. 
But where the line is drawn in the initial year is in some sense not that important. 
Because there is no unique definition of poverty, what matters is to draw a line at some reasonable place and then hold the line constant in real (inflation-adjusted) terms so that we can track the performance of the world and individual countries over time. 
Some critics argue that the 2005 poverty line of $1.25 was too low. 
But what should alarm them is that in 2011, some 14.5% of the world’s population – one in every seven people – lived below it. 
Given that we are already committed to the goal of ending extreme, chronic poverty by 2030, our first decision was to hold the yardstick for measuring poverty constant. 
Since there had been inflation between the two rounds of the PPP computation, in 2005 and 2011, we would obviously have to raise the nominal poverty line to keep the real line constant. 
However, doing this for the world as a whole is far from easy. 
Which countries’ inflation should we use? 
We ran two experiments: one was to inflate the poverty lines of the 15 countries used in 2005, using their respective inflation rates and then taking an average; the other was to do the same for 101 countries for which we had the necessary data. 
These two methods raised the line to $1.88 and $1.90, respectively. 
However, a third approach was possible: to raise the poverty line with the new PPP indices so that the incidence of global poverty remained unchanged (because PPP arguably tells us about parity across countries and should not change the absolute level of global poverty). 
This exercise – and it was beginning to look like a strange alignment of the stars – resulted in a poverty line just above $1.90. 
In short, by keeping to one decimal place, all three methods led to $1.9. 
And that is the line we adopted. 
We will not always have the good fortune to be able to use different methods and still arrive at virtually the same line. 
Furthermore, poverty can and should be measured by many metrics other than money: life expectancy, educational attainment, health, and various other measures of human “functionings and capabilities” (as Amartya Sen calls them) are all important. 
To tackle these problems in the future and broaden the World Bank’s poverty research, we have established the 24-member Commission on Global Poverty – chaired by Sir Tony Atkinson of the London School of Economics and Nuffield College, Oxford – which will submit its report next spring. 
Measuring poverty attracts attention from both politicians and academic researchers – and we had an ample amount of both. 
We were attentive to the politics of poverty, but we resisted political lobbying. 
We took account of the suggestions of researchers, but we used our judgment. 
One researcher was adamant that the poverty line should be $1.9149. 
I decided that those last three digits were a bit excessive. 

 

The Rowhani Front 
WASHINGTON, DC – On June 17, at his first press conference as Iran’s President-elect, Hassan Rowhani broke little new ground in the Islamic Republic’s relations with the West. 
On nuclear policy, he said that the “era of suspension is over”: Iran will not accept the suspension of uranium enrichment in upcoming negotiations but will seek to make its nuclear activities more transparent in order to build international confidence. 
Moreover, Iran would welcome direct negotiations with the United States if the US stopped attempting to meddle in Iran’s internal affairs and abandoned its “bullying attitude.” 
None of these statements is new. 
Does that mean that the world should not expect meaningful change in Iran’s official behavior following Rowhani’s victory? 
The general impression before the election was that Iran’s Supreme Leader, Ayatollah Ali Hosseini Khamenei, supported either Saeed Jalili or Mohammad Baqer Qalibaf. 
In recent years, Jalili has been the leading Iranian representative in international negotiations over the country’s nuclear program. 
That made him the main target of criticism by Rowhani and another candidate, Ali Akbar Velayati, Khamenei’s adviser on international affairs. 
According to Rowhani and Velayati, while Iran in recent years has increased the number of centrifuges in use in its nuclear research program, the cost has been an economically devastating array of international sanctions. 
Rowhani promised to sustain progress on the nuclear program while adopting stronger and wiser diplomatic measures to prevent the imposition of new sanctions and pave the way for lifting the existing ones. 
Jalili had not been a high-profile figure within the country. 
For the first time, average Iranians saw him at public events and in the media, discussing not only nuclear policy, but also his ultra-conservative policy agenda for women, youth, and cultural issues. 
He ended up appearing even more radical on these topics than outgoing President Mahmoud Ahmadinejad. 
As for Qalibaf, the mayor of Tehran, he proudly confessed that he was directly involved in the violent crackdown on student protesters in 2003. 
Indeed, he described sitting on the back of a motorcycle with a stick to command police forces to suppress the massive demonstrations. 
Rowhani used this against him very effectively. 
Conservatives tried to convince their candidates to unite behind a single figure, but weaker candidates did not drop out in favor of a unity candidate. 
In particular, there is strong evidence that the Islamic Revolutionary Guard Corps (IRGC) split into two major factions, with one supporting Jalili and the other backing Qalibaf. 
For example, Qassem Suleimani, the commander of the Quds Force, a branch of the IRGC, endorsed Qalibaf, who he hoped would receive Khamenei’s full support. 
The infighting among conservatives and within the IRGC increased in the last few days before the election. 
And, with Rowhani’s surprising first-round victory – and Khamenei’s refusal to endorse either candidate – both IRGC factions lost. 
Khamenei was probably wise to step aside and let popular opinion prevail. 
Had either Jalili or Qalibaf been elected, the tension within the IRGC might have worsened, becoming difficult for Khamenei to control. 
And, by remaining on the sidelines, Khamenei may have been seeking to show the IRGC that there are limits to its power. 
Though well connected to the military and security community, Rowhani was clearly considered an outsider. 
Indeed, he was not a political figure until now, serving in the military during the Islamic Republic’s first decade and spending the last two mostly in the Supreme National Security Council. 
When Ahmadinejad came to power, Rowhani lost his position as the Council’s secretary, but became Khamenei’s personal representative to it – a post that he has held until now. 
Whether Khamenei seriously planned for Rowhani’s victory, or simply calculated that the cost of preventing it would be too high, Rowhani can serve Khamenei’s agenda at least as well as any other candidate. 
Rowhani’s victory created the impression of a democratic process and relieved the popular anger that has accumulated during the last eight years, especially since the rigged presidential election in 2009. 
Indeed, his triumph exposed a rift among Iran’s democratic forces, which were divided over whether to participate in the election, and rendered irrelevant the Green Movement born in 2009. 
Rowhani’s efforts to portray Iran’s foreign policy in a democratic light are less convincing. 
For example, his call for Syrian President Bashar al-Assad to remain in power until the scheduled 2014 elections is risible, given that Assad typically “wins” Syria’s presidential elections by Soviet-like margins, with more than 95% of the popular vote. 
More important for the regime, Rowhani’s victory has bought Iran time on the nuclear issue. 
Not only is there less chance of new sanctions, but Rowhani’s electoral legitimacy may well force the P5+1 (the five permanent members of the United Nations Security Council plus Germany) to offer Iran better terms in any nuclear deal. 
But Khamenei will face two main challenges related to nuclear policy in the next four years. 
First, Rowhani’s victory has delegitimized the policy of resistance that Jalili championed. 
Iran’s government can no longer claim that the nuclear program is a national cause with broad support. 
Rowhani’s supporters want a better economy and integration into the international community more than they want nuclear glory. 
Second, even if Khamenei hands the nuclear portfolio to Rowhani (which is not certain, given that he retained it under Ahmadinejad), the new president must come to terms with the IRGC, whose support – at least tacit – is necessary for any nuclear deal. 
To date, Iran’s nuclear program and regional policies have been run by the IRGC and the country’s hard-liners. 

The Coming Heat Age 
BEIJING – In the last 100,000 years or so, our planet has endured an Ice Age and a few mini-ice ages. 
But now, with the earth on track to be four degrees Celsius warmer by 2100, a “Heat Age” is looming over us all. 
This is not fear-mongering. 
According to the Intergovernmental Panel on Climate Change (IPCC), by 2100 we can expect a mean increase in surface temperature of 3.7ºC, with a likely range of 2.6-4.8 degrees. 
A warmer world will lead to mass migration from stricken areas and exacerbate existing wealth gaps between countries. 
In the words of David Victor, of the University of California, San Diego, the coming Heat Age will be “nasty, brutish, and hot.” 
Greenhouse-gas emissions are expected to reach a record high of 36 billion tons this year.That figure is expected to grow dramatically, as the great emerging-market boom of recent decades, which has lifted billions out of poverty and raised living standards around the world, puts increasing strain on the world’s environment and resources. 
Indeed, by 2030, three billion new middle-class consumers – most of them in Asia – will add to the ever-growing burden of emissions. 
We can already get a sense of the far-reaching consequences of climate change. 
In 2010, a major drought in eastern China damaged the wheat crop, forcing the country to rely on imports. 
This, combined with major wildfires in Russia’s wheat-producing areas, helped to double average food prices in global markets. 
In the Arab world, many people must spend around half of their income on food, compared with just 5-10% in Europe or the United States. 
Not surprisingly, the spike in food prices was a contributing factor in the civil unrest that sparked the Arab Spring. 
As the link between global food prices and political instability demonstrates, we live in a globally interconnected world, in which we are failing to produce in the right way or create the right economic incentives to address profound environmental threats. 
As World Bank President Jim Yong Kim has put it, climate change is a big problem with small solutions. 
So what can be done to find big solutions? 
At the World Economic Forum’s recent Summit on the Global Agenda in Abu Dhabi, I made three suggestions to tackle climate change. 
First, we need to create a new “coalition of the willing” – including businesses, NGOs, national policymakers, and local governments – that will unite around basic rules and principles to cap emissions by 2020 and limit global warming by 2100 to 2ºC (the tipping point beyond which dangerous climate change would become unstoppable). 
This coalition should draft a framework that countries can adopt and present it at the United Nations climate summit in the fall of 2014. 
Second, we need to ensure that there are appropriate economic incentives for those countries that sign up – and that there are disincentives for those that do not. 
Measures could include a global financing mechanism for green energy, available only to member countries. 
Finally, instead of relying on the UN as a negotiating forum, countries should cluster around specific initiatives, from renewable power to sustainable agriculture. 
These clusters will, I believe, be more agile and more able to act than one overarching structure. 
Other ideas that were put forward include offering tax breaks to companies that commit to cutting emissions; tapping behavioral sciences and open data to improve public communication regarding climate change; and creating a more positive narrative that highlights the benefits for all countries of multilateral efforts to limit greenhouse-gas emissions. 
With the successor to the UN’s Millennium Development Goals due to be adopted in 2015, there has also been serious discussion about how to make efforts to combat climate change an integral part of global efforts to eradicate poverty and give people a more dignified life. 
The new Sustainable Development Goals should be explicitly linked to environmental issues; after all, hunger cannot be eliminated without taking into account the complex interaction between agriculture, water, and extreme weather. 
Given that China currently is the world’s largest emitter of greenhouse gases, it clearly has an outsize role to play. 
A fundamental shift from heavy reliance on coal to clean energy must be accomplished. 
China must stop subsidizing fossil fuels, embrace the electric car, and tackle the thick clouds of urban pollution that are a blight to local residents and a stain on its international reputation. 
China has already made some great strides in the areas of the environment and clean energy. 
And China’s 12th Five-Year Plan provides a clear national policy direction on energy saving, emissions reduction, and industrial development. 
The task for China’s government now is to translate these plans into a demonstration of real leadership, thereby helping to steer the earth’s trajectory away from disastrous levels of warming. 
The urgency of the problem cannot be doubted. 
Indeed, IPCC scientists are 95% certain that human activity is the cause of climate change. 
If you were told that there was a 95% chance that your house would be robbed, you would not wait; you would take preventive action immediately. 
That is what the world must do. 

Changing Climate Change 
The 10 warmest years on record have all occurred since 1990, and 2005 is likely to be the warmest ever. 
This year, we’ve gotten a taste of the many kinds of dangers that lie ahead: more extreme hurricanes, massive droughts, forest fires, spreading infectious diseases, and floods. 
The climate is changing, and more is yet to come. 
The world’s governments will meet in Montreal at the end of November to plot the next steps, including specific measures that the world could adopt if the Bush administration abandoned its willful neglect of this critical issue. 
Climate change is equated with “global warming,” but much more than warming is involved. 
The rising concentration of carbon dioxide and other greenhouse gases is leading to more extreme storms, higher-intensity hurricanes, rising ocean levels, melting glaciers and ice sheets, droughts, floods and other climate changes. 
Even the chemistry of the land and ocean is changing, with the ocean becoming more acidic – thus threatening coral reefs – as a result of higher carbon dioxide. 
The specific patterns of change are not known precisely, but the risks of continuing on our current global course are widely appreciated. 
Yet the United States has refused to sign the Kyoto Protocol, which does little to change the long-term course of events on the planet, since it calls for only small steps up to the year 2012. 
Under the terms of the UN treaty on climate change, the signatories – virtually the whole world - are to gather each year to discuss the treaty’s implementation. 
The conference in Montreal - the 11th such meeting - should look beyond 2012, so that the world gets onto a safe and sustainable long-term climate path. 
The actions that are needed are difficult to introduce, because they go to the heart of the world’s use of energy, particularly its use of fossil fuels (coal, oil, and gas), which, when burned, release carbon dioxide – the key source of rising greenhouse gases – into the atmosphere. 
Yet the world economy depends on fossil fuels, and developing countries will need to use more, not less, of them as their economies grow. 
Even if the world runs out of oil and gas in the coming years, coal will prove to be plentiful, and solid coal can be converted at relatively low cost to liquid fuels for automobiles and other uses. 
Unfortunately, clean, renewable energy sources that do not emit carbon dioxide, such as wind power and geothermal power, are not yet sufficient. 
Solar power can be produced on the required scale but is too expensive under current technologies. 
Nuclear power is relatively cheap, and could be plentiful, but poses huge dangers for increased proliferation of nuclear-weapons materials. 
So: fossil fuels are plentiful, but harmful; renewable sources like wind are good for the climate but not plentiful. 
Solar power is plentiful but not cheap. Nuclear power is plentiful but not safe. 
Improved technologies can offer a way out of this bind, but only if we think and act ahead. 
There are two main kinds of technologies that look most promising. 
The first is energy conservation through more fuel-efficient vehicles. New hybrid automobiles, pioneered by Toyota, use both gasoline and electric power to boost gasoline efficiency by approximately two-fold. 
A massive changeover to more fuel-efficient vehicles would make a big difference, especially as the numbers of vehicles on the road soars in China, India, and other developing countries. 
The second big technology that could make a major difference is called “carbon capture and storage.” 
The idea is to “capture” the carbon dioxide that is emitted in power plants and other big factories when fossil fuels are burned, thereby preventing it from entering the atmosphere. 
The captured carbon is then pumped into underground storage sites such as empty oil fields and other suitable locations. 
All of the key aspects of the technology – capturing the carbon dioxide, putting it into pipelines for shipment, and then depositing it underground – have already been demonstrated, but they have not yet been tried, and proven, on a large scale. There is strong evidence, however, that it would not cost the world huge amounts to undertake large-scale carbon capture and storage. 
The problem is timing. The changeover of the world’s vehicles to hybrid and other efficient technologies will take decades, not years. 
So will the changeover of power plants to carbon capture and storage. 
If we procrastinate, the dangers posed by climate change will confront us as we talk, debate, and plan. 
The world needs to start acting soon - very soon - if it is to head off the major threats. 
All major regions of the world will need to be involved. 
Today’s developing countries are not yet major emitters of carbon dioxide, but with economic growth they will become so. 
Therefore, all countries, both developed and developing, need to do their part, with rich countries helping poor countries cover the financial costs of adjustment. 
Plenty of carbon dioxide will be emitted into the atmosphere as the world’s climate negotiators fly to and from the Montreal meeting. 
Let’s press our governments to make real progress when they meet; otherwise they will merely be adding to the problem. 

Navigating the Energy Revolution 
RIYADH/LONDON – For decades, the international energy landscape has been relatively stable, with producers like Saudi Arabia, Iran, and Algeria selling oil and gas to consumers in the United States and Europe. 
In a few years, however, the energy terrain is likely to be unrecognizable, as dramatic technological, economic, and geopolitical changes reshape commercial relationships worldwide. 
What is needed is a new governance structure, one that moves beyond traditional bilateral relationships between producers and consumers. 
In a rapidly evolving world, guaranteeing energy security will require the careful management of multiple, interlocking relationships. 
Only an inclusive international forum, in which complex ideas can be shared and debated, is likely to prove adequate to the task of navigating the new era of energy use, production, and consumption. 
The ongoing changes are profound. 
In many energy-exporting countries, domestic consumption is rising steeply. 
Historically, these countries have treated energy as a cheap resource. 
Today, they are increasingly taking steps to remove subsidies, introduce market prices, and increase efficiency – policies that are more typically associated with energy-importing countries. 
BP predicts that in the Middle East, with its extensive fossil-fuel reserves, primary energy consumption will grow 77% by 2035. 
At the same time, some traditional importers are tapping new sources of energy and becoming producers, changing the direction of energy flows. 
The shale-energy revolution in the US is perhaps the best-known example of this shift, but it is not the only one. 
The rapidly growing renewable-energy industry is another factor disrupting traditional relationships between producers and consumers. 
In the first half of 2014, 13% of electricity in Germany came from wind energy alone. 
Denmark, a country that in the 1970s was almost entirely dependent on energy imports, is now the European Union’s only net energy exporter, often generating more than 100% of its electricity needs from wind power. 
Meanwhile, advances in energy efficiency are also reducing demand for traditional producers’ exports. 
Highly efficient buildings often can be easily heated with locally produced renewable electricity and supplied with hot water from solar collectors. 
The introduction of the Near Zero Energy Buildings standard for new buildings in the EU is set to reduce drastically dependence on gas for heating. 
The risk is that these rapid changes will combine with destabilizing geopolitics to trigger a retreat from global energy markets. 
If countries began to define energy security as energy independence and try to supply all their own needs, the result could be expensive overcapacity, massive price distortions, slower technological progress, and weaker economic growth. 
With the need to maintain trust in the competitive, politically charged, and often unpredictable energy sector both greater than ever and more difficult than ever to meet, an international forum dedicated to addressing concerns and easing tensions could be a powerful tool. 
But it must have the right focus. 
For example, it should not aim at producing legally binding decisions. 
Plenty of bodies, such as the World Trade Organization, the Energy Charter, and the Energy Community, already do an excellent job of developing rules or enforcing compliance in the energy sector. 
Moreover, though such a body should be inclusive, it need not have global ambitions; it would be impractical to try to bring everybody to the table. 
And while its founders should take care that it not be led or dominated by a single country or bloc of countries, there is no harm if it starts small, with only a few countries, before beginning to expand. 
Indeed, the European Commission, which is working toward creating an energy union, is well placed to initiate an open dialogue with non-EU countries on long-term energy policies. 
The EU is the largest energy importer in the world, and it would be well served to join the discussion of its energy strategy to a conversation with the world’s main exporters. 
As the EU revises both its energy and foreign affairs policies, it should not miss the chance to integrate an open energy policy dialogue into its planning. 
In this context, one of the commission’s traditional weaknesses – that foreign and energy policies are usually decided by individual member states – could serve as an important advantage. 
The commission will be seen as a facilitator of the discussion, rather than a leader or a dominant player. 
Given a proper forum for ironing out disagreements, the rapidly changing energy landscape could be a source of new prosperity. 
The alternative is a world at risk of tensions and misunderstandings – ones that could easily jump out of the realm of energy policy into international relations and security. 

Changing the Guard at the IMF 
Stanley Fischer’s looming departure as the IMF’s first deputy managing director marks the end of an era. 
Indeed, all those who led that institution during the global crises of 1997-1998 (Fischer, Managing Director Michel Camdessus, director of research Michael Mussa, as well as the two men who directed events behind the scenes from the US Treasury, Robert Rubin and Larry Summers) are all gone or going. 
Failures in Indonesia, Thailand, and Korea of 1997 were followed by failures in Russia and Brazil the next year: in those cases, attempts to maintain exchange rates at overvalued levels left taxpayers in those countries billions of dollars poorer. 
Preserving exchange rates, however, provided vital time for people with money to get out at more favorable terms. 
Only devaluation restored growth to these countries. 
With each failure, the IMF’s credibility decreased. 
Still, it thrashed about for solutions, each little more successful than before. 
Sometimes the solution entailed precautionary lending, as in Brazil; another time it was a “bail-in” strategy that was eventually abandoned, as in Romania. 
The last straws were this year’s crises in Turkey and Argentina. 
Turkey’s panic came on the heels of Fischer saying that everything seemed on track. 
Argentina, long an IMF poster child, was lauded for bringing down inflation and stabilizing its exchange rate. 
In this fog of praise, the IMF ignored the fact that Argentina’s growth rate had stagnated and that double-digit unemployment persisted for half-a-decade. 
Without growth, it would become increasingly difficult for Argentina to repay their huge loans. 
As a result of these failures, a global consensus has emerged that the global financial crisis was mismanaged and that reforms are needed in the global economic architecture. 
What is lacking now is consensus about what should be done. 
The IMF seems to have learned much from its mistakes – at least rhetorically. 
It now recognizes that the capital market liberalization which it pushed around the world incited huge instabilities and was a central factor in the global financial crisis. 
It also recognizes that the way it restructured Indonesia’s banks led to a run on them , that it pursued excessively contractionary policies in East Asia, and that these policies deepened the downturns. 
But the IMF has yet to ask itself why these mistakes occurred? It has yet to translate its new rhetoric into policy. 
The next IMF team should reflect on the following questions and lessons: 
• Economics is not ideology but the practical employment of evidence and theory. 
What evidence, for example, suggested that liberalizing capital markets in poor countries would deliver faster growth? 
Before forcing changes on the international economic system, overwhelming evidence should support it. 
What evidence suggested that high interest rates, in economies burdened by short term debt, would help stabilize exchange rates? 
Before imposing policies with devastating consequences, strong evidence should show that the policies will work. 
Saying that interest rates will eventually come down is not enough. 
After all, you cannot “unbankrupt” a firm ruined by punishing interest rates. 
• Greater intellectual coherence is needed. 
Why shout that government should not intervene in markets, claiming that markets are efficient, yet intervene in currency markets? 
• Economic reforms may entail pain, but the pain the poor must bear should not be minimized. 
Why were billions of dollars available to bail-out banks, but a few million dollars for food and fuel subsidies for Indonesia’s poor could not be spared? 
How was it that a few oligarchs could bleed Russia of billions of dollars through state-give aways of assets under privatization schemes encouraged by the IMF, but there was not enough money to pay miserly pensions to the aged? 
The IMF, like it or not, is a public institution – despite its corporate speak. 
In the IMF world, member countries are referred to as shareholders. 
But IMF policies affect lives and economies in ways no corporation could ever do. 
As a public institution, it should be guided by democratic principles. 
When the World Bank sought private discussions with IMF on the policy implications of East Asia’s crisis, it was largely spurned. 
When I sought public discussion – even after the crisis had settled – it was resisted. 
Even debate about reforming the global financial architecture was stilted: only finance ministers and central bankers, it seems, are allowed a seat at the IMF table. 
In behaving this way, the IMF rode roughshod over basic economic and ethical principles. 
There are always trade-offs between policies. 
Some are more advantageous to some groups; others represent greater risks. 
Decisions about which policy to choose is a matter best left to a country’s political processes; they should not be usurped by international bureaucrats, no matter how competent. 
For economists to misrepresent their policy decisions as mere technical matters violates basic ethical and professional precepts. 
The irony of the IMF’s position over the past eight years is that, while the Clinton Administration advanced Third Way principles at home through an active government role in promoting growth, in the international arena America’s Treasury (directly and through the IMF) advanced views that reflected, with only slight variations, traditional market fundamentalism and trickle down economics, ideas which America itself had rejected. 
Here, the new Bush administration shows greater intellectual coherence. 
The Republicans criticized huge international bail-outs as “corporate welfare” before they took office, and in Turkey they basically stuck to their principles, though not enough to stop an IMF bail-out. 
Whether the Bush team will continue to this line when American and not German banks are at risk is another matter. 
The Bush administration and the new team at the IMF (when it arrives) have an opportunity to move away from the failed strategies for development, transition, and crises of the past. 
The challenge is to craft policies based on economic science, not ideology, in an open and democratic manner, paying particular attention to the consequences for the poor. 
Unfortunately, from what we have seen of domestic US policy of late, we cannot be sanguine. 

Charisma We Can Believe In 
CAMBRIDGE – A leadership transition is scheduled in two major autocracies in 2012. 
Neither is likely to be a surprise. 
Xi Jinping is set to replace Hu Jintao as President in China, and, in Russia, Vladimir Putin has announced that he will reclaim the presidency from Dmitri Medvedev. 
Among the world’s democracies, political outcomes this year are less predictable. 
Nicolas Sarkozy faces a difficult presidential re-election campaign in France, as does Barack Obama in the United States. 
In the 2008 US presidential election, the press told us that Obama won because he had “charisma” – the special power to inspire fascination and loyalty. 
If so, how can his re-election be uncertain just four years later? 
Can a leader lose his or her charisma? 
Does charisma originate in the individual, in that person’s followers, or in the situation? 
Academic research points to all three. 
Charisma proves surprisingly hard to identify in advance. 
A recent survey concluded that “relatively little” is known about who charismatic leaders are. 
Dick Morris, an American political consultant, reports that in his experience, “charisma is the most elusive of political traits, because it doesn’t exist in reality; only in our perception once a candidate has made it by hard work and good issues.” 
Similarly, the business press has described many a CEO as “charismatic” when things are going well, only to withdraw the label when profits fall. 
Political scientists have tried to create charisma scales that would predict votes or presidential ratings, but they have not proven fruitful. 
Among US presidents, John F. Kennedy is often described as charismatic, but obviously not for everyone, given that he failed to capture a majority of the popular vote, and his ratings varied during his presidency. 
Kennedy’s successor, Lyndon Johnson, lamented that he lacked charisma. 
That was true of his relations with the public, but Johnson could be magnetic – even overwhelming – in personal contacts. 
One careful study of presidential rhetoric found that even such famous orators as Franklin Roosevelt and Ronald Reagan could not count on charisma to enact their programs. 
Charisma is more easily identified after the fact. 
In that sense, the concept is circular. 
It is like the old Chinese concept of the “mandate of heaven”: emperors were said to rule because they had it, and when they were overthrown, it was because they had lost it. 
But no one could predict when that would happen. 
Similarly, success is often used to prove – after the fact – that a modern political leader has charisma. 
It is much harder to use charisma to predict who will be a successful leader. 
Followers are more likely to attribute charisma to leaders when they feel a strong need for change, often in the context of a personal, organizational, or social crisis. 
For example, the British public did not regard Winston Churchill as a charismatic leader in 1939, but, a year later, his vision, confidence, and communication skills gave him charisma, given Britons’ anxiety after the fall of France and the Dunkirk evacuation. 
And then, in 1945, after the public’s focus had turned from winning the war to constructing a welfare state, Churchill was voted out of office. 
His charisma did not predict defeat; the change in followers’ needs did. 
In practice, charisma is a vague synonym for “personal magnetism.” 
People vary in their ability to attract others, and their attraction depends partly on inherent traits, partly on learned skills, and partly on social context. 
Some dimensions of personal attraction, such as appearance and non-verbal communication, can be tested. 
Various studies show that people who are rated as attractive are treated more favorably than unattractive people. 
One study finds that a handsome man enjoys an edge over an ugly rival that is worth 6-8% of the vote. 
For women, the advantage is close to ten points. 
Non-verbal signals account for a major part of human communications, and simple experiments have shown that some people communicate non-verbally better than others. 
For example, a Princeton University study found that when people were shown images of two candidates in unfamiliar elections, they could predict the winners seven times out of ten. 
A similar study at Harvard, in which people were shown 10-second silent video clips of 58 elections, found that viewers’ predictions explained 20% of the variation in the two-party vote – a more powerful variable than economic performance. 
Ironically, the predictions became poorer when the sound was turned on. 
In the 2008 election, Americans felt disillusioned by the Bush administration’s war in Iraq, and by the financial crisis that erupted two months before the vote. 
Obama was an attractive young candidate who spoke well and projected a sense of hope for the future. 
Clearly, this is one reason why Obama gained a reputation for charisma. 
But part of his charisma was in the eyes of his followers. 
People sometimes say of charisma that “we know it when we see it,” but we are also looking in a mirror. 
As the economy worsened, unemployment rose, and Obama had to deal with the messy compromises of governing, the mirror became cloudier. 
Charisma tells us something about a candidate, but it tells us even more about ourselves, the mood of our country, and the types of change we desire. 
Hard economic times make it difficult to maintain charisma. 
Obama faces the continuing challenges of unemployment and a recalcitrant Republican opposition, and Sarkozy must contend with similar problems. 
When they are campaigning, however, their rhetoric will be freed from the need to compromise. 
This year’s elections will be the true test of their charisma. 

Charity in Hard Times 
PRINCETON – As I tour the U.S. promoting my new book, The Life You Can Save: Acting Now to End World Poverty , I am often asked if this isn’t the wrong time to call on affluent people to increase their effort to end poverty in other countries. 
I reply emphatically that it is not. 
There is no doubt that the world economy is in trouble. 
But if governments or individuals use this as an excuse to reduce assistance to the world’s poorest people, they would only multiply the seriousness of the problem for the world as a whole. 
The financial crisis has been more damaging for the poor than it has been for the rich. 
Without in any way minimizing the economic and psychological blow that people experience when they lose their jobs, the unemployed in affluent countries still have a safety net, in the form of social security payments, and usually free health care and free education for their children. 
They also have sanitation and safe drinking water. 
The poor in developing countries have none of these benefits, which proves fatal for an estimated 18 million of them each year. 
That’s a higher annual death toll than during World War II, and it’s easier to prevent. 
Of those who die from avoidable, poverty-related causes, nearly ten million, according to UNICEF, are children under five. 
They die from diseases like measles, diarrhea, and malaria that are easy and inexpensive to treat or prevent. 
We may feel the pain of falling back from a level of affluence to which we have grown accustomed, but most people in developed countries are still, by historical standards, extraordinarily well off. 
Have you, in the past week, bought a bottle of water, a beer, or a coffee when tap water was available at no cost? 
If you did, that’s a luxury that the world’s poorest billion people can’t afford, because they have to live for an entire day on what you spent on just one of those drinks. 
One reason that we can afford to increase the amount of aid we give is that the amount we are giving now is insignificant in comparison to what we spend on other things. 
The United States government, for example, spends about $22 billion on foreign aid, while Americans privately donate perhaps another $10 billion. 
Compared to the $787 billion stimulus package signed by President Barack Obama last month, that $32 billion is trivial. 
It’s also less than $0.25 for every $100 that Americans earn. 
Of course, some nations do better: Sweden, Norway, Denmark, The Netherlands, and Luxembourg all exceed the United Nations target of allocating the equivalent of 0.7% of gross national income in foreign aid. 
But even $0.70 for every $100 is still not a lot with which to confront one of the great moral problems of our age. 
If extreme poverty is allowed to increase, it will give rise to new problems, including new diseases that will spread from countries that cannot provide adequate health care to those that can. 
Poverty will lead to more migrants seeking to move, whether legally or not, to rich nations. 
When there is eventually an economic recovery, the global economy will be smaller than it would be if all the world’s people could take part in it. 
Nor is the global financial crisis a justification for the world’s leaders failing to keep their word. 
Nearly nine years ago, at the Millennium Development Summit in New York, the leaders of 180 countries, including all the major affluent nations, promised that by 2015 they would together achieve the Millennium Development Goals. 
These goals include halving the proportion of the world’s people living in poverty and ensuring that children everywhere receive a full primary education. 
Since that meeting in 2000, the commitments made by most nations have fallen short of what is required, and 2015 is now only six years away. 
If we cut back on aid, we will fail to keep our promise, and poorer countries will learn, once again, that rich countries’ actions fall short of their inspiring rhetoric about reducing world poverty. 
That is not a good basis for future cooperation between rich and poor countries on issues such as climate change. 
Finally, if anything good comes out of this global financial crisis, it will be a reassessment of our basic values and priorities. 
We need to recognize that what really matters isn’t buying more and more consumer goods, but family, friends, and knowing that we are doing something worthwhile with our lives. 
Helping to reduce the appalling consequences of world poverty should be part of that reassessment. 

Putin’s Kampf 
BRUSSELS – Russia’s seizure of Crimea is the most naked example of peacetime aggression that Europe has witnessed since Nazi Germany invaded the Sudetenland in 1938. 
It may be fashionable to belittle the “lessons of Munich,” when Neville Chamberlain and Édouard Daladier appeased Hitler, deferring to his claims on Czechoslovakia. 
But if the West acquiesces to Crimea’s annexation – the second time Russian President Vladimir Putin has stolen territory from a sovereign state, following Russia’s seizure of Georgia’s Abkhazia and South Ossetia regions in 2008 – today’s democratic leaders will surely regret their inaction. 
In Western capitals, the response so far has been mixed. 
The punishments being considered – expulsion from the G-8, for example – would be laughable were the threat to Europe’s peace not so grave. 
Putin regards the breakup of the Soviet Union as the greatest catastrophe of modern times, and he has sought relentlessly to refashion Russia’s lost empire. 
If the West intends to be taken seriously, it needs to act as decisively as Putin has. 
Putin’s many successes in his imperial project have come virtually without cost. 
His Eurasian Economic Community has corralled energy-rich states like Kazakhstan, Uzbekistan, and Turkmenistan into Russia’s camp. 
Georgia was dismembered in 2008. 
Armenia’s government was bullied into spurning the European Union’s offer of an Association Agreement. 
Now the greatest geostrategic prize of all – Ukraine – may fall into Putin’s hands. 
Russia without Ukraine, former US National Security Adviser Zbigniew Brzezinski wrote, “ceases to be an empire, but Russia with Ukraine suborned and then subordinated, Russia automatically becomes an empire.” 
And, because the vast majority of Ukrainians have no desire to join Putin’s empire, we can be certain that the state Putin will lead from this point on will be a highly militarized one, rather like the Soviet Union but without the ruling Communist Party. 
Given the scale of Putin’s adventurism, the world’s response must be commensurate. 
Canceled summits, trade deals, or membership in diplomatic talking shops like the G-8 are not enough. 
Only actions that impose tangible economic sanctions that affect Russian citizens – who, after all, have voted Putin into power time and again – offer any hope of steering the Kremlin away from its expansionist course. 
Which sanctions might work? 
First, Turkey should close the Dardanelles to Russian shipping, as it did after the 2008 Russo-Georgian War. 
Back then, Turkey closed access to the Black Sea to prevent the US from intervening, though the US, it is now clear, had no intention of doing so. 
Today, it should close the Turkish straits not only to Russian warships, but to all commercial vessels bound for Russia’s Black Sea ports. 
The impact on Russia’s economy – and on Putin’s military pretensions – would be considerable. 
Turkey is permitted to close the Dardanelles under a 1982 amendment to the 1936 Montreux Convention. 
Indeed, Turkey could turn Putin’s justification for seizing Crimea – that he is protecting ethnic Russians there – against him, by arguing that it is protecting its Turkic Tatar kin, who, given Russia’s ill treatment of them in the past, are anxious to remain under Ukrainian rule. 
Turkish Foreign Minister Ahmet Davutoğlu turned his plane around in mid-air this week to fly to Kyiv to offer support to the new interim government. 
Prime Minister Recep Tayyip Erdoğan, no pushover himself, as Putin well knows, should follow up on that gesture of support by immediately closing the straits to Russian shipping – until Putin recalls all troops in Crimea to their Sevastopol bases or to Russia proper. 
And Turkey should be offered an Article 5 guarantee from NATO should Russia seek to intimidate it. 
Second, US President Barack Obama should impose the type of financial sanctions on Russia that he has imposed on Iran for its nuclear program. 
Those sanctions have crippled Iran’s economy. 
Similarly, denying any bank that does business with a Russian bank or company access to the US financial system would create the kind of economic chaos last seen in Russia immediately after the fall of Communism. 
Ordinary Russians should be made to understand that permitting Putin – whose primary claim to leadership is that he ended the penury of the first post-Soviet years – to continue with his imperialist aggression will cost them dearly. 
Third, Obama should emphasize to the Chinese their stake in Eurasian stability. 
Putin may regard the Soviet Union’s disintegration as a tragedy, but for China it was the greatest geostrategic gift imaginable. 
At a stroke, the empire that stole millions of hectares of Chinese territory over the centuries, and that threatened the People’s Republic with nuclear annihilation, simply vanished. 
Since then, Central Asia’s independent states, and even Ukraine, have become important trading partners for China. 
Russia’s conquests in Georgia greatly displeased China, as was seen at the post-war summit of the Shanghai Cooperation Organization (a regional grouping that includes ex-Soviet countries that share borders with China and Russia). 
Russia pushed the SCO to recognize the independence of Abkhazia and South Ossetia. 
But the SCO balked. 
The group’s Central Asian members – Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan – would not have stood up to the Kremlin without China’s support. 
Today, however, Chinese President Xi Jinping may need to be less cryptic in his response to Putin’s adventurism. 
Indeed, the real test of China’s claim that it is a responsible stakeholder in the world community will come soon at the United Nations. 
Will it back Putin’s clear flouting of international law, or will it back Ukraine’s territorial integrity? 
There are other possible punitive measures. 
Visas can be denied and canceled for all Russian officials. 
Assets can be frozen, particularly those laundered by oligarchs close to Putin. 
Only when the pain becomes intolerable, particularly for the elite, will Putin’s kampf be defeated. 
The cost of inaction is high. 
Countless countries, from Japan to Israel, rely on America’s commitment to act robustly against grave breaches of the peace. 
Moreover, when Ukraine surrendered its nuclear weapons in 1994, it did so with the express understanding that the US (and the United Kingdom, France, and Russia) would guarantee its territorial integrity. 
Should Crimea be annexed, no one should gainsay Ukraine if it rapidly re-nuclearized its defense (which it retains the technological capacity to do). 
When Chamberlain returned from Munich, Winston Churchill said, “You were given the choice between war and dishonor. 
You chose dishonor and you will have war.” 
Obama and other Western leaders face a similar choice. 
And if they choose dishonor, one can be certain that an undeterred Putin will eventually give them more war. 

Free Speech for All 
COPENHAGEN – The attack on the French magazine Charlie Hebdo was an assault on democracy, on freedom, and on the ideals that underpin all free societies. 
As we face the forces of extremism and terror, we must have the courage to speak up for those ideals and to safeguard the right to say what we believe. 
But we must also take care to respect the fact that others have the same right. 
Charlie Hebdo is not the first publication to have suffered for publishing images which some perceived as offensive to Islam. 
In 2005, when I was Prime Minister of Denmark, the Danish newspaper Jyllands-Posten provoked international controversy by publishing twelve sketches of the Prophet Muhammad. 
Some Muslims, in Denmark and abroad, accused Jyllands-Posten of blasphemy for publishing an image of the prophet. 
Others said that the images were an insult to Islam. 
There were calls for reprisals against the newspaper, against my government, and against Danish interests abroad. 
Our response was founded on the principle that freedom of speech is one of the pillars on which democracy stands, and that if you undermine it, you undermine democracy itself. 
In free countries, every citizen has the right to say what he or she wants, believe what he or she wants, and criticize or mock what he or she wants – in writing, drawings, or any other form of peaceful expression. 
Every citizen also has the right to disagree with another’s opinions and to express that disagreement in a peaceful, legal manner. 
In 2005, during the cartoons crisis, some commentators and politicians in the Muslim world claimed that the right to free speech had been abused and called for an apology and a condemnation of the cartoons, first from Jyllands-Posten, then from my government. 
To be sure, freedom of speech is a right that is best used wisely and responsibly. 
But we believed, and I still believe, that it would be neither wise nor responsible to attempt to limit it, and that the correct way to respond to a perceived insult is to present a counterargument, not to mount a terrorist attack. 
And, in democracies, you can always take the matter to court. 
That principle guided us through the 2005 crisis. 
We did not apologize for an independent newspaper’s editorial decisions, despite great pressure from Muslim groups and governments. 
Nor did we seek to justify the publication of the cartoons. 
We simply stood up for freedom of speech. 
Despite the horror and anger we feel at the attacks on Charlie Hebdo, we must all hold fast to that principle, because to limit freedom of expression would be to weaken our own societies. 
The attacks on the journalists of Charlie Hebdo were disgusting and despicable, but if we respond to them by abridging the freedom on which our societies rest, we will be playing into the murderers’ hands. 
Governments must stand up for the freedom of journalists to write what they want and the freedom of every citizen to support or disagree with what they write. 
And journalists must continue to write and draw what they believe. 
Self-censorship would undermine their freedom and encourage further pressure on free speech. 
In the past few days, some editors decided that the right response to the Charlie Hebdo massacre was to republish the magazine’s cartoons. 
Others decided not to. 
Still others criticized Charlie Hebdo’s actions. 
The editors had the right to make those decisions and to express themselves as they saw fit. 
That is the essence of democracy. 
The day such decisions are made for fear of reprisal is the day our freedom ends. 
For citizens, freedom of speech means having the courage to speak out for what they believe, without resorting to violence – against journalists or against the representatives of any religious belief. 
To shoot journalists in cold blood for printing a cartoon is a hideous crime. 
But so is attacking a mosque or assaulting a Muslim because of his or her faith. 
There is a place for debate, even passionate debate, on the deeply moral question of how to balance freedom of speech with respect for religion. 
But the weapons of this debate should be words, not arms – the keyboard, not the Kalashnikov. 
Every one of us has the right to our opinion. 
None of us has the right to kill those with whom we disagree. 
The march of millions in Paris on January 11 was a magnificent expression of solidarity and peace. 
Every leader and legislator should strive to live up to those ideals as he or she responds to the threat of extremism. 
The terrorist attacks in Paris will, one hopes, be a game changer in the defense of press freedom, and freedom in general, because millions of people have realized what is at stake. 
We cannot take freedom of expression for granted. 
We must stand up for it and defend it, even – and perhaps especially – when we disagree with what is being expressed. 

Are Nazis as American as Apple Pie? 
NEW HAVEN – Is the United States threatened by Nazism? 
The short answer is no, notwithstanding the frightening events in Charlottesville, Virginia, this past weekend. 
In Charlottesville, the home of the University of Virginia, founded by Thomas Jefferson, white nationalists, separatists, neo-Nazis, members of the Ku Klux Klan, and other likeminded groups rallied behind Swastika banners and marched in a Nazi-style torchlight procession. 
By the end of the next day, there had also been thuggish violence. One white supremacist went so far as to drive a car into a crowd of counter-protestors, killing one and injuring 19 others. 
The groups responsible for the violence in Charlottesville reveled in US President Donald Trump’s election last November. 
And Trump has often hesitated to disavow them; during the election campaign, when former KKK Grand Wizard David Duke publicly backed him, Trump was scandalously slow to reject Duke and his followers. 
Trump also repeatedly incited violence during the campaign, while evincing a bottomless affection for authoritarian leaders such as Russian President Vladimir Putin. 
After the events in Charlottesville, Trump initially offered a bland statement that condemned hate “on many sides,” thereby drawing a moral equivalence between the racists and those who gathered to oppose them. 
Two days later, under intensifying pressure, Trump issued a more forceful statement, in which he explicitly condemned the KKK, neo-Nazis, and other white supremacists, only to revert the following day to blaming “both sides” for the violence. 
All of this is abhorrent. 
But any sober observer can see that the US is still a long way from the nightmarish atmosphere of Germany in 1933. 
American democratic institutions are holding up, just as they did in the crisis years of the 1930s. 
Opposition parties have not been banned, and the courts have not lost their independent authority. 
Moreover, Trump is not the supreme leader of a political party with a paramilitary arm. 
There are no facilities such as Dachau, Auschwitz, or Treblinka under construction. 
Even Trump’s planned border wall with Mexico remains stuck in the planning stage, with no funding from the US Congress. 
And Congress is not about to pass an Enabling Act conferring dictatorial powers on the president, as the Reichstag did for Hitler in March 1933. 
Last but not least, the American press is more tenacious and energized than it has been in years. 
Trump’s yearning for authoritarian rule is clear for all to see. 
But he will not achieve it. 
There will be no Nazi dictatorship in America. 
But whether America is threatened by such a dictatorship is not the right question. 
American democratic institutions might be holding up, but history has taught us that they are not immune to the machinations of racially virulent political programs. 
In fact, the US produced some of the laws that would later serve as a foundation for the Nazi movement in Germany. 
America, with its vibrant democratic institutions, was the leading racist jurisdiction in the world in the early twentieth century. 
An obvious example is the Jim Crow South, where white legislatures passed laws imposing racial segregation and reversing many of the gains of the post-Civil War Reconstruction period. 
But that is hardly the only example. 
Those on the far right in Europe also admired America’s early-twentieth-century immigration policies, which were designed to exclude “undesirable” races. 
In his manifesto Mein Kampf, Hitler singled out America as “the one state” that was progressing toward the creation of a healthy race-based order. 
Indeed, during this period, 30 US states had anti-miscegenation laws intended to safeguard racial purity. 
America’s democratic institutions did not stand in the way of such policies in the early twentieth century. 
On the contrary, anti-miscegenation laws were the product of America’s democratic system, which gave full voice to many Americans’ racism. 
And US courts upheld these legal innovations, using flexible common-law precedents to decide who would acquire the privileged status of “white.” 
The Nazis paid close attention. 
As they concocted their own racial statutes – the Nuremberg Laws of 1935 – they pored over American race law as a model. 
So today, instead of asking whether American institutions will survive the Trump presidency, we must ask how American institutions can be put in the service of wrongful ends. 
After all, while America’s early-twentieth-century race laws are gone, it still has the same overheated democratic order and common-law flexibility that it had back then. 
These institutions might no longer produce Jim Crow laws; but the American criminal-justice system, for example, remains a poster child for institutionalized racism. 
Americans should be ashamed that their country’s institutions laid the groundwork for Nazi race law. 
But they should not be worrying about the threat of renascent Nazism, despite Trump’s clear ambivalence in condemning white supremacists. 
Rather, Americans should worry about the potential of their institutions to facilitate evils that are, as loath as we are to admit it, as American as apple pie. 


Latin America’s Tale of Two Crises 
MEXICO CITY – If one were an irredeemable optimist, upcoming events in Venezuela and Colombia could be viewed as a harbinger of good things to come. 
In Venezuela, the October 7 presidential election may put an end to Hugo Chávez’s 14 years in power, along with his systematic destruction of the economy, media clampdowns, and endless meddling in other countries’ affairs. 
In Colombia, peace talks scheduled for October 8 in Norway between President Juan Manuel Santos’s government and the FARC guerrillas may bring an end to 40 years of war and bloodshed. 
Unfortunately, neither of these outcomes is likely. 
In both cases, what seems desirable appears highly improbable. 
Chávez has participated directly in four Venezuelan elections: in 1998, when he was elected for the first time; in 2004, when the opposition forced a recall vote; in 2006, when he was re-elected; and now, as he recovers from cancer and the country is in the midst of a huge public-safety crisis that has made Caracas one of the most dangerous cities in the world. 
Chávez won the first three, and, for several reasons, seems poised to win again. 
For starters, Chávez is a formidable campaigner, and he has at his disposal every available lever of state power, from the Electoral Council to PDVSA, the national oil company. 
As skillful as Henrique Capriles Radonski, the opposition candidate, may be, the playing field is so uneven that he appears to stand little chance. 
One example: Venezuela’s overall population has grown 14% over the past 13 years, but electoral rolls have jumped 53%; the new voters can be ghosts, Colombians, or several generations of chavista supporters already registered to vote, even before they are born. 
Most polls give Chávez a significant advantage (of up to 15 percentage points), but nonetheless offer a glimmer of hope to the opposition. 
Many of the more impartial polling firms, such as Luis Christiansen’s Consultores 21, Varianzas, and Keller, all show a surprisingly large proportion of undecided voters – those who do not answer or do not know for whom they will vote. 
In highly polarized and politicized Venezuela, it is unlikely that upward of 20% of voters have yet to decide what they will do. 
Consequently, some analysts suspect a “hidden opposition vote,” such as occurred in Nicaragua in 1990, when Violeta Chamorrro won the presidency, or in Mexico in 2000, when Vicente Fox emerged victorious. 
According to this logic, the “undecided” are actually leaning toward Capriles, and if their number is larger than Chávez’s margin in the polls, the caudillo will lose. 
That is not impossible, but it is unlikely, especially if Chávez can count on several percentage points of tampered votes before and after the polling booths close. 
Despite the president’s illness, the enormous problems facing Venezuela, and fatigue after 13 years of chavismo, it is still Chávez’s election to lose. 
The status quo will also likely persist in Colombia. 
No one knows exactly when Santos decided to seek new negotiations with Latin America’s oldest – and one of its most vicious – guerrilla groups; nor do any but his closest aides know how many meetings have already taken place, where and when, or what happened. 
But much evidence suggests that most of the process began some time ago, and was meant to be kept secret until broad agreement had been reached on most of the outstanding issues. 
Santos probably wanted to have the talks viewed as a relatively unconditional surrender and disarmament by the “narco-guerrillas.” 
He would have wanted to avoid the grandstanding and propaganda generally associated with public negotiations. 
So the talks may have been revealed not because they had advanced sufficiently, but because someone wanted to sabotage them. 
Who could that be? 
The predictable suspect is former Colombian president Álvaro Uribe. 
Although Santos was both Uribe’s defense minister and preferred successor, relations between the two have soured. 
The bottom line is that Uribe thought Santos would do his bidding as president, and Santos is convinced that his (high but declining) popularity is of his own making, not borrowed from Uribe. 
These strains express themselves on policy issues. 
Uribe criticizes Santos – through up to 40 tweets per day to his more than one million followers – for repudiating his “democratic security” stance, for the growth of the “Bacrim” (petty-crime gangs), for appeasing Colombia’s two hostile neighbors, Venezuela and Ecuador, and for prosecuting some of his aides on corruption charges. 
Santos says nothing, but replies in kind: making peace with Chávez and Ecuadorean President Rafael Correa, prosecuting human rights violations under Uribe, and arresting several of his allegedly corrupt officials. 
And now, seemingly out of the blue, he has defied and even offended Uribe by undertaking negotiations with the despised FARC, after having delivered such devastating military blows to them that perhaps, this time around, the peace process will prosper. 
One can see why Uribe would threaten to leak news about the negotiations, as well as why Santos would try to preempt the leaks by going public and having them take place in the open (the talks will begin in Oslo, but will be pursued in Havana). 
The problem is that, although there are good examples of publicized – if not public – peace talks that have succeeded, there are more instances of failure or indefinite stalemate, owing to the pressure of working under the glare of the international spotlight. 
As a fervent supporter of Santos’s human-rights efforts, of his call for a major debate on drug legalization, and of his attempt to end Colombia’s “Forty Years’ War,” I fear that Uribe has fatally wounded the peace process, and will prolong the country’s bloody and fruitless status quo indefinitely. 
That is a great pity. 
So, in this tale of two South American neighbors, unfortunately, little will change – unless, as so often happens, the unexpected suddenly becomes inevitable, in which case all bets are off. 

Cheap Oil and Global Growth 
LONDON – Violent swings in oil prices are destabilizing economies and financial markets worldwide. 
When the oil price halved last year, from $110 to $55 a barrel, the cause was obvious: Saudi Arabia’s decision to increase its share of the global oil market by expanding production. 
But what accounts for the further plunge in oil prices in the last few weeks – to lows last seen in the immediate aftermath of the 2008 global financial crisis – and how will it affect the world economy? 
The standard explanation is weak Chinese demand, with the oil-price collapse widely regarded as a portent of recession, either in China or for the entire global economy. 
But this is almost certainly wrong, even though it seems to be confirmed by the tight correlation between oil and equity markets, which have fallen to their lowest levels since 2009 not only in China, but also in Europe and most emerging economies. 
The predictive significance of oil prices is indeed impressive, but only as a contrary indicator: Falling oil prices have never correctly predicted an economic downturn. 
On all recent occasions when the price of oil was halved – 1982-1983, 1985-1986, 1992-1993, 1997-1998, and 2001-2002 – faster global growth followed. 
Conversely, every global recession in the past 50 years has been preceded by a sharp increase in oil prices. 
Most recently, the price of oil almost tripled, from $50 to $140, in the year leading up to the 2008 crash; it then plunged to $40 in the six months immediately before the economic recovery that started in April 2009. 
An important corollary for commodity-producing developing countries is that industrial metal prices, which really are leading indicators of economic activity, may well increase after an oil-price collapse. 
In 1986-87, for example, metal prices doubled a year after oil prices fell by half. 
A powerful economic mechanism underlies the inverse correlation between oil prices and global growth. 
Because the world burns 34 billion barrels of oil every year, a $10 fall in the price of oil shifts $340 billion from oil producers to consumers. 
Thus, the $60 price decline since last August will redistribute more than $2 trillion annually to oil consumers, providing a bigger income boost than the combined US and Chinese fiscal stimulus in 2009. 
Because oil consumers generally spend extra income fairly quickly, while governments (which collect the bulk of global oil revenues) usually maintain public spending by borrowing or running down reserves, the net effect of lower oil prices has always been positive for global growth. 
According to the International Monetary Fund, the fall in oil prices this year should boost 2016 GDP by 0.5-1% globally, including growth of 0.3-0.4% in Europe, 1-1.2% in the US, and 1-2% in China. 
But if growth is likely to accelerate next year in oil-consuming economies such as China, what explains plunging oil prices? 
The answer lies not in China’s economy and oil demand, but in Middle East geopolitics and oil supply. 
While Saudi production policies were clearly behind last year’s halving of the oil price, the latest plunge began on July 6, within days of the deal to lift international sanctions against Iran. 
The Iran nuclear deal refuted the widespread but naive assumption that geopolitics can drive oil prices in only one direction. 
Traders suddenly recalled that geopolitical events can increase oil supplies, not just reduce them – and that further geopolitics-driven supply boosts are likely in the years ahead. 
Conditions in Libya, Russia, Venezuela, and Nigeria are already so bad that further damage to their oil output is hard to imagine. 
On the contrary, with so many of the world’s most productive oil regions gripped by political chaos, any sign of stabilization can quickly boost supplies. 
That is what happened in Iraq last year, and Iran is now taking this process to a higher level. 
Once sanctions are lifted, Iran promises to double oil exports almost immediately to two million barrels daily, and then to double exports again by the end of the decade. 
To do this, Iran would have to boost its total output (including domestic consumption) to six million barrels per day, roughly equal to its peak production in the 1970s. 
Given the enormous advances in oil-extraction technology since the 1970s and the immense size of Iran’s reserves (the fourth-largest in the world, after Saudi Arabia, Russia, and Venezuela), restoring output to the levels of 40 years ago seems a modest objective. 
To find buyers for all this extra oil, roughly equal to the extra output produced by the US shale revolution, Iran will have to compete fiercely not only with Saudi Arabia, but also with Iraq, Kazakhstan, Russia, and other low-cost producers. 
All of these countries are also determined to restore their output to previous peak levels and should be able to pump more oil than they did in the 1970s and 1980s by exploiting new production technologies pioneered in the US. 
In this newly competitive environment, oil will trade like any normal commodity, with the Saudi monopoly broken and North American production costs setting a long-term price ceiling of around $50 a barrel, for reasons I set out in January. 
So, if you want to understand falling oil prices, forget about Chinese consumption and focus on Middle East production. 
And if you want to understand the world economy, forget about stock markets and focus on the fact that cheap oil always boosts global growth. 

Cheap Talk in Kashmir 
After two years of off-and-on nuclear brinkmanship, India and Pakistan are once again talking about how to settle their differences rather than issuing threats and rattling nuclear sabers. 
But do the talks now underway have any better chance of success than the countless failed negotiations that have marked the past fifty years? 
On November 25, 2003, India and Pakistan agreed to a cease-fire along the Line of Control (LoC), the international border that divides Indian Kashmir from Pakistani Kashmir, as well as the actual ground control (AGPL) in strategic Siachen region. 
The cease-fire thus covers a huge area: the 778-kilometer LoC, the 150-kilometer AGPL and the 198-kilometer international border. 
This should pave the way for a meaningful dialogue at the South Asian Association for Regional Cooperation (SAARC) meeting to be held in Islamabad between January 4-5. 
Moreover, Pakistan has partly conceded its demand--which dates to the creation of India and Pakistan a little more than half a century ago--for an internationally supervised referendum in Kashmir to determine the province's sovereignty. 
A brave concession, no doubt, but India has a more rigorous criterion for believing that Pakistan is truly serious about reaching a peaceful agreement: it wants Pakistan to dismantle the infrastructure of cross-border terrorism--in particular, the training camps for Kashmiri separatists and their international jihadi brethren. 
Reining in the violent militants who keep the Kashmiri pot boiling, however, is difficult on both sides. 
In India and Pakistan, Kashmir is the national question. 
Every Indian and Pakistani government embraces the Kashmiri cause, both as a useful device to divert attention from their failures and because they fear what their publics might do if they were seen as surrendering to the traditional enemy on so vital an issue. 
With Pakistan's economy in a tailspin, and with the jihad culture of so many young Pakistanis undermining the country's international credibility, moderate voices are at long last breaking through. 
The eminent columnist Amin M. Lakhani recently argued in the Dawn , Pakistan's largest-circulation newspaper, that "Pakistan's singular preoccupation with Kashmir...has been self-defeating. 
Domestically, it has thwarted the country's economic, social and political development. 
Internationally, [it] has diminished the country's stature and left its reputation smeared. 
Even its spiritual development has been warped by the proliferation, popularization, and increase in relative power...of religious groups that represent an intolerant, militant, and gender-based interpretation of Islam." 
Lakhani points to the bitter irony that Pakistan's 143 million people have sacrificed much in demanding democratic rights and self-determination for Kashmir's 13 million people, while enjoying precious few of those same rights at home for the past 55 years. 
Can Pakistan demand, with a straight face, rights for another people that it constantly denies to its own? 
That is the sad and awful question Lakhani asks, but alas he offers no answer. 
Undoubtedly, at the forthcoming summit between the leaders of the two countries, India's Prime Minister Atal Behari Vajpayee will not miss any opportunity to ask the same question of his Pakistani counterpart. 
Obviously, Pakistani Prime Minister Mir Zafarulla Khan Jamali will be able to offer no satisfactory answer to this question--not when he has to go home and report to his boss, the General-turned-President Pervez Musharraf. 
But Vajpayee should try to do more than score points off Musharraf. 
That Pakistan may be willing to put aside its demand for an international referendum in Kashmir is the first real sign of compromise to be seen over the issue in decades. 
Vajpayee should test Pakistan's seriousness on this point. 
There is clearly room for doubt: on December 18, President Musharraf declared that, at the Islamabad SAARC summit, he would demand a UN-sponsored plebiscite in Kashmir. 
The very next day, however, Pakistan's Foreign Office spokesman, Masood Khan, claimed that President Musharraf was prepared to drop this demand. 
India needs to know if Musharraf is sincere. 
If so, the foundation for a real dialogue to defuse the struggle over Kashmir may be possible. 
But Musharraf has good reasons to talk out of both sides of his mouth at this stage. 
He recently survived two assassination attempts, and Islamists accuse him of entering into a "bargain" with the infidel enemy, India. 
Such rhetoric makes it hard to be optimistic about the outcome of the summit. 
Musharraf's vulnerable domestic position makes him probably the last man who can resolve with India the core issue of Kashmir. 
Seen as too pro-American because of his support of the recent war in Afghanistan, Musharraf needs to burnish his nationalist credentials. 
Posturing over Kashmir remains the best way of doing that. 
Vajpayee, for his part, has hinted that if Pakistan wants a decent deal, it ought to make one with him, as he might be the last Indian leader for a long time who is willing to compromise even a little on the issue. 
The hard men of his nationalist Bharatiya Janata Party (BJP) look likely to do as they are told. 
But the BJP has never shown any sign of solicitude towards Pakistan's interests. 
So the window of opportunity to talk and compromise may be open only briefly, and, unfortunately, we have probably not seen the end of nuclear brinkmanship. 

Checks and Balances in an EU Constitution 
There is widespread agreement that the EU would benefit from further centralization of internal security, and of elements of foreign and defense policy. 
According to the last Eurobarometer survey of 2001, 73% of EU citizens support a common defense and security policy, and two Europeans out of three believe that the EU should have one common foreign policy. 
This high support for centralization of tasks in these areas contrasts with the still lukewarm overall support for the EU as a whole: only 48% support their country's membership in the EU. 
But does the EU possess the necessary institutions to make these further steps in integration possible? 
This is one of the most difficult but relevant questions to be addressed by the convention that will debate Europe's constitution beginning this March. 
In other policy areas, European integration has meant much more than just policy coordination. 
Transfer of power from EU member states has always been accompanied by institution building, tailoring the institution to the specific policy area over which integration was needed. 
A remarkable feature of this process of integration so far is that it has preserved important dimensions of accountability and control. 
But it is important to appreciate the particular way in which accountability for EU decisions has been preserved, and how it differs from political accountability in a representative democracy. In a representative democracy, elections are the ultimate instrument for holding politicians accountable. 
Citizens delegate decisions to representatives (governments, legislators). 
If citizens are not satisfied with the decisions they take, that delegation is not renewed: the previous majority loses the election and is replaced by a new government or a new parliamentary majority. 
This mechanism cannot work in the EU, at least not under the current European constitution. 
Governments are the key decision makers in the Council. 
But they are accountable to citizens at home, in national elections, and they are primarily judged for their domestic performance, not for EU decisions. 
Other EU policymaking bodies (the European Central Bank or the Commission) are appointed, not elected. 
Accountability in the EU has, instead, been achieved through methods that are typical of bureaucratic control, not of politics. 
Transfer of power to a EU body has generally been accompanied by a clear operational definition of the policy goals. 
EU policymakers (the ECB, the Commission, the majority in the Council) generally have a narrowly defined "mission": price stability, enforcing the single market, holding prices of agricultural commodities stable. 
This has two advantages: it limits discretion by the EU policymakers, and hence insures that transfer of power is not abused; it also facilitates post-transfer accountability and control. 
The European Parliament, the media, the Council, can blame or approve of the way in which EU decision-making power has been used. 
Since EU policymakers have a narrow mandate and their decisions are often inspired by external technical criteria, they can be held accountable for their behavior despite the absence of elections. 
This method of bureaucratic control has (so far) worked well in the EU. 
It can fruitfully be extended to internal security, where it is possible to define a precise mission for EU policymakers, exploiting the Commission and designing appropriate technical guidelines to achieve clearly defined operational goals. 
The method of bureaucratic control cannot, however, work in the new areas where further centralization is urgently needed: foreign policy and defense. 
What mandate can be given in the realm of foreign policy? 
The only feasible mandate is to pursue the common interest of the EU. 
But what does that mean in practice? 
If the mandate is so incomplete that it leaves too much room for discretional judgment, there is only one way to hold policymakers accountable: through democratic elections. 
Only citizens can tell whether policy decisions are really in their interest. 
Unfortunately, this instrument is unavailable at the EU level, or at least it is seriously deficient. 
Naturally, limited forms of cooperation are still possible, in foreign and defense policy, through intergovernmental coordination. 
They should be pursued as far as possible. 
But we should be aware that these forms of cooperation will not take us very far. 
One reason is that both defense and foreign policies rely on well-functioning bureaucracies (a diplomatic corps, the military). 
How can the Council acquire control over such bureaucracies? 
The Commission, not the Council, is traditionally the bureaucratic arm of the EU. 
Developing a EU bureaucracy in foreign policy is a first step towards having an effective European foreign policy. 
Here, however, the Commission competes with national bureaucracies. 
In the realm of foreign policy, it seems difficult to exploit the traditional vertical links between the Commission and national bureaucracies that instead have worked so well in dealing with national policy issues. 
We are thus left with a fundamental dilemma. 
Europe is now in a situation in which big benefits would come from centralizing foreign and defense policies. 
But in these areas, bureaucratic control cannot work. 
To centralize these policies, a drastic redesign of the EU political constitution might be needed. 
Europe would need to have political institutions more typical of a federation than of a confederation of states. 
It is no coincidence that historical episodes of unification of countries coincided with situations in which external threats or a common enemy created large benefits from centralizing defense and foreign policy. 
But is Europe capable of jumping to much closer forms of political integration at a time when it is trying to enlarge to the East? 

Chernobyl’s Myths and Misconceptions 
The twentieth anniversary of the Chernobyl nuclear accident of April 26, 1986 is prompting a new wave of alarmist claims about its impact on human health and the environment. 
As has become a ritual on such commemorative occasions, the death toll is tallied in the hundreds of thousands, and fresh reports are made of elevated rates of cancer, birth defects, and overall mortality. 
This picture is both badly distorted – and harmful to the victims of the Chernobyl accident. 
All reputable scientific studies conducted so far have concluded that the impact of radiation has been less damaging than was feared. 
A few dozen emergency workers who battled the fire at the reactor succumbed to acute radiation sickness. 
Studies are still under way into elevated rates of cancer and cardiovascular disease among the “liquidators” who worked at the reactor site in the months following the accident. 
And some 5,000 cases of thyroid cancer, attributed to radioactive iodine absorbed through consumption of milk in the weeks immediately following the accident, have been detected among those who were children at the time. 
There has been real suffering, particularly among the 330,000 people who were relocated after the accident. 
About that there is no doubt. 
But, for the five million people living in affected regions who are designated as Chernobyl “victims,” radiation has had no discernable impact on physical health. 
This is because these people were exposed to low radiation doses that in most cases were comparable to natural background levels. 
Two decades of natural decay and remediation measures mean that most territories originally deemed “contaminated” no longer merit that label. 
Aside from thyroid cancer, which has been successfully treated in 98.5% of cases, scientists have not been able to document any connection between radiation and any physical condition. 
Where a clear impact has been found is mental health. 
Fear of radiation, it seems, poses a far more potent health threat than does radiation itself. 
Symptoms of stress are rampant, and many residents of affected areas firmly believe themselves to be condemned by radiation to ill health and early death. 
In part, this is because the initial Soviet response was secretive: Mikhail Gorbachev, the Soviet leader at the time, addressed the issue on television only weeks later, on May 14, 1986. 
Myths and misconceptions have taken root, and these have outlasted subsequent efforts to provide reliable information. 
Combined with sweeping government benefit policies that classify millions of people living in Chernobyl-affected areas as invalids, such myths encouraged fatalistic and passive behaviors and created a “culture of dependency” among affected communities. 
The United Nations Chernobyl Forum, a consortium of eight UN agencies and representatives of Belarus, Russia, and Ukraine, reinforced these findings. 
Chernobyl Forum was created to address the prevailing confusion concerning the impact of the accident, both among the public and government officials, by declaring a clear verdict on issues where a scientific consensus could be found. 
The Forum succeeded in this effort, and a fresh and reassuring message on the impact of radiation was made public in September. [An easily digestible summary is available at http://www.iaea.org/Publications/Booklets/Chernobyl/chernobyl.pdf.] 
The Chernobyl Forum findings should have brought relief, for they show that the specter haunting the region is not invincible radiation, but conquerable poverty. 
What the region needs are policies aimed at generating new livelihoods rather than reinforcing dependency; public-health campaigns that address the lifestyle issues (smoking and drinking) that undermine health across the former Soviet Union; and community development initiatives that promote self-reliance and a return to normalcy. 
But the reception given to the Chernobyl Forum’s message has been surprisingly mixed. 
Some officials have reverted to alarmist language on the number of fatalities attributed to Chernobyl. 
Some NGO’s and Chernobyl charities have responded with disbelief, citing as evidence the general population’s admittedly poor health. 
Opponents of nuclear power have suggested that self-interest has compromised the Chernobyl Forum’s integrity. 
Set against the impressive body of science underpinning the Chernobyl Forum, such responses reflect the tenacity not only of myths and misconceptions, but also of vested interests. 
The new view on Chernobyl threatens the existence of charities – such as those offering health “respites” abroad for children – that depend for their fund-raising on graphic footage of deformed babies. 
The new understanding also deprives the region’s officials of a routine way to seek international sympathy, even if the repetition of such appeals after two decades yields little financial aid. 
By misstating the problems, these approaches threaten to divert scarce resources into the wrong remedies. 
The twentieth anniversary of the Chernobyl accident is an ideal occasion for all actors to do some honest soul-searching. 
Governments are right to worry about the fate of Chernobyl-affected territories, but the way forward will require fresh thinking and bold decisions, particularly a shift in priorities from paying paltry benefits to millions to targeted spending that helps to promote jobs and economic growth. 
Similarly, charities are right to worry about the population’s health, but they should focus on promoting healthy lifestyles in affected communities rather than whisking children abroad as if their homes were poisonous. 
All parties are right to worry about the affected populations, but, more than any sophisticated diagnostic equipment, what is needed is credible information, presented in a digestible format, to counter Chernobyl’s destructive legacy of fear. 
The children of Chernobyl are all grown up; their interests, and those of their own children, are best served not by continually evoking the nightmare of radiation, but by giving them the tools and authority they need to rebuild their own communities. 

Revisiting the Iraq War 
NEW YORK – Seven years, 12 volumes of evidence, findings, and conclusions, and one executive summary later, the Report of the Iraq Inquiry, more commonly referred to as the Chilcot Report (after its chairman, Sir John Chilcot), is available for one and all to read. 
Few people will get through all of it; the executive summary alone (well over 100 pages) is so long that it calls for its own executive summary. 
But it would be a shame if the Report were not widely read and, more important, studied, because it contains some useful insights into how diplomacy operates, how policy is made, and how decisions are taken. 
It also reminds us of the centrality of the decision to invade Iraq in 2003, and of the aftermath, for understanding today’s Middle East. 
A central theme of the Report is that the Iraq War did not have to happen, and certainly not when it did. 
The decision to go to war was partly based on faulty intelligence. 
Iraq constituted at most a gathering threat, not an imminent one. 
Alternatives to using military force – above all, strengthening Turkey’s and Jordan’s lackluster enforcement of and support for the UN sanctions designed to pressure Saddam Hussein – were barely explored. 
Diplomacy was rushed. 
Making matters worse was that the war was undertaken without sufficient planning and preparation for what would come after. 
As the Report rightly points out, many in both the US and British governments predicted that chaos could emerge if Saddam’s iron grip were removed. 
The decisions to disband the Iraqi army and to bar all members of Saddam’s Ba’ath Party (rather than just a few of its leaders) from positions in the successor government were huge mistakes. 
Iraq was not just a war of choice; it was an ill-advised and poorly executed policy. 
Much of the Report focuses on British calculations and then-Prime Minister Tony Blair’s support for US policy. 
The decision to associate the UK with the United States was a defensible strategic choice for a smaller country that derived much of its influence from the closeness of the bilateral relationship. 
Where the Blair government got it wrong was in not pressing for more influence over the policy in exchange for its support. 
George W. Bush’s administration might well have rejected such efforts, but the British government could then have exercised the option of distancing itself from a policy that many believed was unlikely to succeed. 
Many lessons should be taken from the Iraq War. 
One is that, because assumptions fundamentally affect what analysts tend to see when they look at intelligence, flawed assumptions can lead to dangerously flawed policies. 
Nearly everyone assumed that Saddam’s non-compliance with United Nations inspectors stemmed from the fact that he was hiding weapons of mass destruction. 
In fact, he was hiding the fact he did not have such weapons. 
Likewise, before they started the war, many policymakers believed that democracy would emerge quickly once Saddam was gone. 
Ensuring that such fundamental and consequential assumptions are tested by “red teams” – those not supporting the associated policy – should be standard operating procedure. 
There is also the reality that removing governments, as difficult as that can be, is not nearly as difficult as creating the security that a new government needs to consolidate its authority and earn legitimacy in the eyes of the public. 
Creating anything like a democracy in a society lacking many of its most basic prerequisites is a task of decades, not months. 
The Report said little about the legacy of the Iraq War, but it is important to consider. 
First and foremost, the war disrupted the regional balance of power. 
No longer in a position to distract and balance Iran, Iraq instead came under Iranian influence. 
Iran was free not just to develop a meaningful nuclear program, but also to intervene directly and via proxies in several countries. 
Sectarian fighting poisoned relations between Sunnis and Shia throughout the region. 
The alienation felt by soldiers and officers of Saddam’s disbanded army fueled Sunni insurgency and, ultimately, led to the rise of the so-called Islamic State. 
The war had a profound effect not just on Iraq and the Middle East, but also on the UK and the US. 
The British parliamentary vote in 2013 against participation in any military effort to penalize Syrian President Bashar al-Assad for defying explicit warnings not to use chemical weapons in his country’s civil war was surely related to the view that military intervention in Iraq had been a mistake. 
It is also possible that some of the mistrust of elites that led a majority of voters to support “Brexit” stemmed from the Iraq War experience. 
The Iraq War and its aftermath similarly affected the thinking of US President Barack Obama’s administration, which had little appetite for new military ventures in the Middle East at a time when many Americans were suffering from “intervention fatigue.” 
The danger, of course, is that lessons can be overlearned. 
The lesson of the Iraq War should not be that all armed interventions in the Middle East or elsewhere are to be avoided, but rather that they must only be undertaken when they are the best available strategy and when the results are likely to justify the costs. 
Libya was a recent intervention that violated this principle; 
Syria has been even more costly, but in its case for what was not done. 
The Iraq War was costly enough without people learning the wrong lessons from it. 
That would be the ultimate irony – and only add to the tragedy. 

Childhood Lost 
The cries of working children can be heard the world over. 
The International Labor Organization (ILO) estimates that 90 million children between eight and fifteen years old work in the labor forces of developing countries; worldwide the figure is higher. 
They often labor under hazardous conditions, handling poisonous chemicals, inhaling noxious fumes, and hauling excessive weights. 
They are usually overworked, underfed, and underpaid--if they are paid at all. 
Though many countries have enacted laws forbidding the use--and abuse--of children in the work force, optimism about the conditions faced by working children is unwarranted. 
That conclusion stems from an inescapable fact: the families of most working children depend on their labors to survive. 
Because child labor means cheap labor, the young are often the most employable in developing and recession-plagued economies. 
The director of a medium-size textile enterprise in Bangladesh admits without hesitation that 70% of his employees are between the ages of 13 and 17. 
"They provide the same productivity as adults," he says, "but for a fraction of the cost." 
Children, of course, are unlikely to organize or complain to authorities when they are overworked and underpaid. They are not aware of their legal rights. 
It verges on slavery when children are locked up without proper lighting, food, and healthcare. 
But they don't question long hours and dire working conditions. Instead, most are grateful to be working at all. 
In Asia and the Pacific, children routinely work endless hours, sleep on factory floors and subsist on scanty rations. 
Young Indian factory workers who fail to follow instructions are sometimes regret branded with red-hot iron rods, and some teenage Thai prostitutes are disciplined by having acid thrown in their faces. 
For thousands of South American, Caribbean, and African children rented out as maids and houseboys, there is no recourse when they are overworked, beaten, and raped. 
As an official of Kenya's Child Welfare Society concedes, "There is little we can do to help when a child is ill-treated unless the case becomes known to us or to the police." 
Even when an employer is reasonable, working conditions may still prove dangerous. 
Children in Central America harvest crops sprayed with pesticides. 
Colombian children squeeze through the narrowest shafts of coalmines. 
Thai children toil in unventilated factories, working with glass heated to 1,500 degrees Celsius. 
Indian children inhale large doses of sulphur and potassium chlorate to fashion flammable powder into matches. Youthful glassmakers in Brazil breathe toxic silicone and arsenic fumes. 
Sometimes the physical damage from such labors is permanent. 
Brazilian, Colombian, and Egyptian youngsters who work in brickyards often suffer irreparable spinal damage from carrying heavy loads. 
More generally, children who spend long hours in factories all over the world often enter their teens with permanently deformed limbs. 
If they live that long. 
Thousands of children don't. 
In India safety conditions are so neglected in many factories that numerous children have died in electrical fires and chemical explosions. 
Laws exist to protect children from hazardous conditions in many occupations, but they are seldom enforced. 
The agricultural sector--the largest employer of children in both developing and industrialized countries--is particularly difficult to oversee. 
There is little that officials can do to monitor or modify the children's workloads on large farms or small family enterprises. 
In fact, parents often appear to be the harshest taskmasters. 
Indian fathers still sometimes repay debts by committing their children to bonded labor. 
Pakistani parents occasionally maim their children to make them beguiling beggars. 
Sadly, families are often the last to protest exploitation of their children. 
The ILO contends that children suffer greatly when they are forced to perform as "small adults." 
"The child's creativeness and ability to transcend reality are blunted," states one ILO report, "and his whole mental world is impoverished." The young worker does not learn how to play, or how to read and write; worse, he smokes and, in the Caribbean, he drinks cane rum to keep going, as he doesn't have enough to eat. 
In 1973, an ILO convention called for a worldwide minimum working age of 15. In ten years, only 27 of the ILO's 150 member nations ratified that convention. 
Several more countries have laws that set the minimum work age between 12 and 16, but the ILO cautions that few countries "have what could be considered a comprehensive prohibition of dangerous work for young children," and that even fewer have "measures to protect young persons from moral degradation." 
Since laws are not the answer to child labor, many experts propose compulsory education as a means to curb it. 
But education laws have proved elusive too. 
In practically all impoverished societies, parents place wages above education. 
As a result, the percentage of dropouts is rising at an alarming rate. 
A recent study by UNESCO shows that in developing countries up to 60% of children do not complete primary school. 
Relief agencies agree that the total abolition of child labor is an unrealistic goal. So, for millions of such children, the future holds little promise or hope. 
Working children are entitled to something better, regardless of whether they know it. 

The Right Food Fight 
DRESDEN – To what extent should governments regulate or tax addictive behavior? 
This question has long framed public debate about alcohol, tobacco, gambling, and other goods and services in many countries worldwide. 
And now, in the United States – arguably the mother of global consumer culture – the debate has turned toward the fight against the epidemic of childhood obesity. 
It is ironic that in a world where childhood malnutrition plagues many developing countries, childhood obesity has become one of the leading health scourges in advanced economies. 
The World Bank estimates that over a third of all children in Indonesia, for example, suffer from stunted growth, confronting them with the risk of lifetime effects on fitness and cognitive development. 
Yet, the plight of malnourished children in the developing world does not make obesity in the advanced countries any less of a problem. 
Indeed, though perhaps not on a par with global warming and looming water shortages, obesity – and especially childhood obesity – nonetheless is on the short list of major public-health challenges facing advanced countries in the twenty-first century, and it is rapidly affecting many emerging-market economies as well. 
Yet solving it poses much more difficult challenges than the kind of successful public-health interventions of the last century, including near-universal vaccination, fluoridation of drinking water, and motor-vehicle safety rules. 
The question is whether it is realistic to hope for success unless the government resorts to far more blunt instruments than it currently seems prepared to wield. 
Given the huge impact of obesity on health-care costs, life expectancy, and quality of life, it is a topic that merits urgent attention. 
The US leads the world in obesity, and is at the cutting edge of the debate. 
Almost everyone agrees that the first line of defense ought to be better consumer education. 
First Lady Michelle Obama’s “Let’s Move” educational campaign aspires to eliminate childhood obesity in a generation, though its impact so far remains unclear. 
Other efforts include appeals by celebrities like the chef Jamie Oliver and attempts to use peer-based learning, such as the Sesame Street-inspired platform Kickin’ Nutrition (full disclosure: the creator is my wife). 
Yet, although education is essential to fight obesity, it is far from clear whether it will be enough in a food environment dominated by large corporations with deep pockets and every incentive to cultivate excessive consumption. 
Commercial television programs aimed at children are replete with advertising for processed foods of dubious value to human health. 
And, for every celebrity who donates time to fighting obesity, there are a dozen who accept large payments to hawk products, such as ultra-sugary drinks, that are arguably the tobacco of our generation. 
It is hard for non-profits to compete with the production values embodied in Beyoncé’s Pepsi commercial or Taylor Swift’s Diet Coke commercial. 
The causes of obesity are complex, and the science of understanding human behavior is embryonic; but it is not hyperbole to call the problem an epidemic. 
According to the Centers for Disease Control and Prevention, roughly 18% of children aged 6-11 in the US are not just overweight, but obese. 
The risks posed by this epidemic are manifold, but the main one is that childhood obesity begets adult obesity, with significantly increased risks of diabetes and heart disease. 
Indeed, experts estimate that more than 18% of all adults in the advanced economies are obese. 
Even more stunning are estimates that roughly 9% of all Americans – and a similar percentage of adults worldwide – have diabetes. 
Yet politicians push back on Big Food at their peril. 
When the popular former mayor of New York City, Michael Bloomberg, attempted to ban large sugary drinks, public opinion – not to mention the New York State Court of Appeals – rejected the effort, despite support from medical experts. 
Many commentators, even those sympathetic to Bloomberg’s goal, argued that it was wrong to try to legislate consumer behavior so bluntly. 
Yet, when one considers other successful efforts to improve public health over the last five decades – for example, smoking bans, seat-belt laws, and speed limits – one finds that legislation typically supplemented education. 
A less intrusive approach to influencing food choices might be to institute a retail tax on all processed foods – not just sugary drinks – and an offsetting subsidy on non-processed foods. 
In the long run, low-income families (which suffer the most from obesity) would be the greatest beneficiaries. 
And, in the short term, any income effects could be offset by increased transfers. 
Together with the medical researchers David Ludwig and Dariush Mozaffarian, I have proposed an outline of such an approach. 
Obviously, some processed foods are far worse than others. 
A more complex breakdown is possible, and other ideas should of course be vetted and discussed. 
But our approach has the important practical advantage of simplicity. 
What must be understood, above all, is that US consumer culture is dominated by a food industry that exploits people’s natural joy in eating, and transforms it (in many cases) into something that is addictive and destructive. 
Any visitor to the US can readily see the pervasiveness of the problem. 
The right place to start to address it is by creating a better balance between education and commercial disinformation. 
But food is so addictive, and the environment so skewed toward unhealthy outcomes, that it is time to think about broader government intervention. 
That should certainly include vastly enhanced expenditures on public education; but I suspect that a long-term solution will have to involve more direct regulation, and it is not too soon to start discussing the modalities. 

Dark Days for Children 
NEW YORK, STOCKHOLM – The year 2016 will probably be remembered for military and political events, but it should also go down in history as one of the worst years for children since World War II. 
Images of dead, injured, and distraught young children filled the media on an almost daily basis: a small boy sitting stunned and bleeding after his home was bombed; small bodies being lifted out of rubble; and small graves on the Mediterranean shoreline that mark the deaths of unknown children. 
These images are powerful and uncomfortable. 
And yet they cannot capture the magnitude of children’s suffering. 
More than 240 million children are living in conflict zones – from the killing fields of Syria, Yemen, Iraq, and northern Nigeria, to less well-documented but horror-stricken areas of Somalia, South Sudan, and Afghanistan. 
And of the 50 million children who live outside their own countries or have been internally displaced, more than half have been forcibly uprooted, and are facing new threats to their lives and well-being. 
Millions of children are undernourished and out of school; millions have witnessed unspeakable brutality; and millions are threatened with exploitation, abuse, and worse. 
This is not rhetoric; it is reality. 
The United Nations – with support from countries such as Sweden, and by working through a coordinated humanitarian-response system that includes UNICEF – is alleviating suffering whenever and wherever it can. 
But the quantity and complexity of cascading crises are testing that system as never before. 
New challenges, such as extremism, are increasing the risks to children, and making it more difficult and dangerous to reach them. 
Meanwhile, armed groups are increasingly targeting schools, hospitals, and homes, and compounding innocent people’s suffering. 
Political solutions to these conflicts are the surest way to stop the suffering and bring an end to such savage violations of human rights. 
But, barring that ideal outcome, we need to strengthen the current humanitarian system’s capacity to reach the children at greatest risk. 
More than 70 years ago, world leaders addressed the unprecedented humanitarian crisis following World War II by creating new institutions to bring immediate assistance to those in need. 
These new global entities laid the foundation for a future based on cooperation, dialogue, and results, rather than conflict, disaster, and ruin. 
That was a turning point in world history; we have now arrived at another one. 
We need to summon the same spirit of solidarity and creativity today that inspired previous generations, not by founding new institutions, but by finding new ways of responding to the hard realities of our own time. 
For starters, we urgently need to harness innovation to expand our capacity to reach children who are cut off from assistance in besieged areas or communities controlled by extremists. 
We should be exploring every option, such as using drones to airdrop food and medical supplies, and developing mobile apps to monitor needs and track supplies on the ground, and to keep aid workers safer. 
While there will never be a substitute for safe, unimpeded humanitarian access, we need to explore every avenue to reach children in danger. 
More broadly, we must do a better job of coordinating among governments and organizations to provide short-term and long-term relief more efficiently, and to make every dollar count. 
With chronic crises proliferating, we should be maximizing synergies between humanitarian and development initiatives, because the two go hand in hand. 
How we respond in emergencies lays a foundation for future growth and stability, and how we invest in development can help build resilience against future emergencies. 
Lastly, we need to change how governments calibrate the critical aid that they provide to meet fluctuating needs. 
In recent years, as appeals for aid have escalated, countries undergoing domestic austerity have increasingly had to justify their foreign-aid outlays. 
Many donors have earmarked their aid funds for specific purposes. 
To be sure, such funds will always be an indispensable tool in both humanitarian and development efforts; but in today’s unpredictable environment, more flexible, long-term funding is critical. 
“Core” funding, as it is known, enables the UN and nongovernmental organizations both to react more quickly in emergencies and to plan more strategically. 
Such funding allows us to provide life-saving help when people need it most, rather than having to wait for countries to respond to specific humanitarian appeals. 
This is especially important for addressing the “forgotten” crises that the media may have missed. 
Sweden has long been a proponent of such flexible support for UN organizations, because it improves results. 
For this reason, Sweden’s government recently decided to double its 2016 contribution to UNICEF’s core funds. 
Now that the world is working together on a new global development agenda, we hope this practice will spread and inspire other governments to move more toward high-quality funding for humanitarian relief and sustainable development. 
We must protect the rights, lives, and futures of the world’s most vulnerable children. 
To the extent that we do that, we will help to determine our common future as well. 

Children of Frenchmen 
One puzzling and often overlooked feature of the France that elected Nicolas Sarkozy as its new president, and that is now poised to give his political allies a powerful parliamentary mandate, is its mix of private optimism and public pessimism. 
Consider this: France has the highest fertility rate in the European Union (just under two children per woman), even ahead of booming Ireland. 
Of course, that rate alone is not enough to sustain France’s current population, but it’s far stronger than its European neighbors and almost equal to that of the US. 
Yet, despite this, Eurobarometer polls repeatedly show that the French are the most pessimistic of all Europeans when it comes to their country’s future. 
How can it be that people who are so negative about their common future as a nation go about confidently building their private futures within their families? 
Indeed, strained by decades of governmental failure to curb massive unemployment, the French are nowadays often perceived as having retired from the political sphere to concentrate on their lives and leisure. 
Museums, gardening, clubs of all sorts are blossoming in today’s France. 
Private associations, it seems, have picked up where political parties and trade unions have left off. 
But if the French have turned their backs on the public sphere, how are we to make sense of the record-high participation in the recent presidential election, when more than 85% of turned out to vote in both rounds? 
How do we explain the passion aroused by the campaign and by Sarkozy himself including the massive affirmation he received in the parliamentary election? 
Political fervor, it seems, has not vanished in the land of Rousseau and Danton. 
So the truth must lie elsewhere: the French are not hopeless about politics; they are simply waiting for a genuine leader. 
As a matter of fact, a case can be made that the French will never come to believe that the state lacks power, globalization or no globalization. 
The French still expect greater things from their government than from an integrated Europe or the boundless world. 
Yes, the French are incorrigible lovers of the welfare state (they are not the only ones). 
And Sarkozy seems to understand this instinctively. 
His agenda appears to aim at domestic liberalization – moving beyond the 35-hour week, ending the special pension regimes accorded to particular professions, increasing incentives to work and gain wealth. 
But it also seeks protection from the dizzying effects of globalization, which probably will mean strong support for the EU’s Common Agricultural Policy, skepticism toward further trade liberalization and the will to improve European Union’s economic government. 
Nevertheless, precisely because they care about the future of their numerous children, the French are much more amenable to some wise reforms than most commentators (and politicians) generally assume. 
Secondary and higher education are rightly near the top of the agenda list of the new government. But so are measures aimed at harnessing the state to efforts to encourage entrepreneurship and boost economic dynamism such as public guaranties for housing and start-ups, and fiscal rebate for investment in small enterprises. 
France is also in desperate need of a reality check on the nature of its current cultural diversity. 
And no one should forget that, despite his campaign rhetoric and his apparent unpopularity with many immigrants, Sarkozy himself is an immigrant’s son who favors bold affirmative action policies. 
Besides, the nomination of a woman with a North-African ascent as minister of Justice made that clear from the start. 
Most French understand that their public spaces – the labor market, the workplace, housing, and educational institutions – are corroded by discrimination. 
France’s impoverished suburbs, the notorious banlieues , make the ideal of “fraternité” sound like an insult on top of an injury. 
There is no greater task for Sarkozy than to open, from the inside, all doors to the offspring of others who, like his father, immigrated to France. 
So make no mistake about it. 
Nicolas Sarkozy has not been elected to adapt France to an elusive globalization. 
His mandate is much more demanding: he must reconcile France’s public interests with its private passions. 

Should Children Have the Right to Die? 
PRINCETON – Since 2002, Belgium has permitted terminally or incurably ill adults to request and receive euthanasia from a doctor. 
In February 2014, the Belgian parliament removed the provision of the country’s law on euthanasia that restricted the law’s use to adults. 
That led to an outcry. 
Predictably, the uproar resumed last month when the first minor requested and received euthanasia. 
Cardinal Elio Sgreccia, speaking on Radio Vatican, said that the Belgian law denies children the right to life. 
But the circumstances of the case, and the fact that it took two and a half years for this to happen, show just the opposite: the Belgian law respects the right to life – and, in carefully defined circumstances, the right to die. 
Although Belgium’s euthanasia law now has no specific age requirement – thus differing from Dutch legislation, which permits doctors to provide euthanasia, on request, to minors who are at least 12 years old – it does require the person requesting euthanasia to have a demonstrable capacity for rational decision-making. 
This effectively excludes very small children from the law’s scope. 
The request must be examined by a team of doctors and a psychiatrist or psychologist, and requires the approval of the minor’s parents. 
The minor has to be “in a hopeless medical situation of constant and unbearable suffering that cannot be eased and which will cause death in the short term.” 
In announcing the first use of the law by a minor, Wim Distelmans, the head of Belgium’s federal euthanasia commission, pointed out that there are very few children for whom the question of euthanasia is raised. 
He added that this is not a reason for refusing a dignified death for those who request it and meet the law’s stringent requirements. 
Although no details about the minor were initially provided, it was subsequently revealed that he or she was 17 years old. 
The patient would therefore also have been eligible for euthanasia in the Netherlands. 
If Cardinal Sgreccia had responded to the teenager’s death by saying that the Belgian law denies that children have a duty to live, he might have begun a useful debate that would have clarified differences between those who believe that there is such a duty and those who do not. 
Thomas Aquinas, still an influential figure in the Catholic tradition, thought that we have a duty not to end our own life because to do so is a sin against God. 
He illustrated this claim by drawing an analogy between ending one’s own life and killing a slave belonging to someone else, which means that one “sins against that slave’s master.” 
Putting aside that grotesquely insensitive analogy, it is obvious that this argument provides no reason against suicide for people who do not believe in the existence of a god. 
Even theists will struggle to understand why a benevolent deity should want someone who is dying to remain alive until the last possible moment, no matter how severe the pain, discomfort, or loss of dignity may be. 
There is a further reason why even Cardinal Sgreccia might hesitate to assert that there is a duty to live. 
The Catholic Church has long accepted that it is not obligatory for a doctor or a patient to continue all means of life support, irrespective of the patient’s condition or prognosis. 
In Catholic hospitals everywhere, respirators and other forms of life support are withdrawn from patients when the burdens of continuing the treatment are judged “disproportionate” to the benefits likely to be achieved. 
That surely indicates that any duty to live is subject to the benefits of continued life outweighing the burdens of treatment. 
Patients requesting euthanasia judge that the benefits of continued life do not outweigh the burdens of treatment, or of continuing to live, with or without treatment. 
A right, however, is different from a duty. 
I have a right to freedom of expression, but I may remain silent. 
I have a right to my body parts, but I may donate a kidney to a relative, a friend, or a complete stranger who is suffering from kidney failure. 
My right gives me a choice. 
I can choose to exercise it or to waive it. 
Age limits are always to some extent arbitrary. 
Chronological age and mental age can diverge. 
For some activities for which a mental age limit may be relevant, the number of people engaging in the activity is very large: voting, obtaining a driving license, and having sex, for example. 
But it would be very costly to scrutinize whether every person interested in those activities has the capacity to understand what is involved in voting, driving responsibly, or giving informed consent to sex. 
That is why we rely on chronological age as a rough indication of the relevant mental capacity. 
This is not true of minors requesting euthanasia. 
If the number of those who meet the requirements of the law is so small that Belgium has had only one case over the past two years, it is not difficult to carry out a thorough examination of these patients’ capacities to make such a request. 
For these reasons, Belgium’s extension of its law on euthanasia to minors with a demonstrable capacity for rational decision-making does not deny anyone’s right to life. 
On the contrary, it grants a right to die to those who may reasonably choose to exercise that right. 

Chile’s Uncertain Future 
CAMBRIDGE – When I was in Chile earlier this month, I was impressed by the contrast between the palpable success of its long-standing free-market policies and the current agenda of its leftist president, Michelle Bachelet. 
How this contrast is resolved will be important not only to the country’s more than 17 million people, but also to everyone who regards Chile as a model of what sound economic policies have been able to achieve. 
Chile’s economic performance has been the strongest in South America. 
Its per capita GDP exceeds $22,000 in purchasing-power-parity terms, making its income higher than that of Argentina, Brazil, and Mexico. 
It’s no surprise that Chile is considered a developed country – the only South American member of the OECD. 
Copper is Chile’s major product and accounts for half of its exports. 
Although the government owns Codelco, the world’s largest copper producer, it is Chile’s only publicly owned company. 
The company’s revenue varies with the global price of copper, yielding higher government revenues in some years and declines – for example, this year – when the global price is down. 
The government follows a wise fiscal strategy that involves budget surpluses in years when copper revenue is high, with the additional funds channeled to a national stabilization fund. 
But even with the currently depressed copper price, Chile’s budget deficit is only 2% of GDP. 
As a result of Chile’s cautious fiscal strategy, the country has a national debt that amounts to only 16% of GDP – and a sovereign debt rating that is the highest in South America. 
Taxes and other government revenues are less than 20% of GDP. 
Half of tax revenue is collected with a value-added tax, which is essentially a tax on consumption. 
Although there is a tax on corporate income, it is integrated with personal taxes in a way that reduces its adverse effect on investment and production. 
Chile is well known for an investment-based pension system. 
Employees are required to contribute 10% of their wages to a private pension company of their choice and can then select one of the investment strategies offered by that company. 
The government mandates the range of investment strategies, which vary in terms of the share of equities and fixed income that companies may offer. 
For those who have worked and contributed during their entire adult life, this produces benefits that are more than 50% of pre-retirement income. 
Meanwhile, sound monetary policy, guided by a series of talented central bankers (whose independence is enshrined in Chile’s constitution), has prevented inflation and kept long-term rates relatively low. 
Chile’s inflation target is 3% with an acceptable range of plus or minus 1%. 
Inflation this year is expected to be 3.9%, and the ten-year bond rate is just 4.4%. 
And, by protecting the floating exchange-rate regime, the central bank ensures that Chile does not confront the kind of foreign-debt crisis that has hit other Latin American countries. 
Chile is also a devoted free trader. 
It has free-trade agreements with more than 20 countries and is a member of the nascent Trans-Pacific Partnership. 
The economy has also benefited from its openness to foreign investment, with the stock of foreign direct investment in Chile topping 80% of GDP. 
There is also universal literacy, with 98% of the adult population able to read and write. 
On average, young people spend an average of 15 years in school from primary through tertiary education. 
Chile’s excellent economic performance has been the result of the free-market policies introduced during the military dictatorship of General Augusto Pinochet but confirmed and strengthened by democratically elected governments over the 25 years since he left office. 
So, given the success and popularity of these policies, it is surprising that Chile’s voters have elected a president and a parliament that many Chileans now fear could put this approach at risk. 
Bachelet’s policy agenda emphasizes three major changes. 
A key element would be universal free university education, modeled on European systems. 
Paying for this educational reform would require higher tax rates. 
And labor laws would be revised to strengthen the role of unions. 
Critics of Bachelet claim that this agenda is already depressing business investment and is responsible for relatively slow economic growth. 
And they worry that foreign and domestic investors will be discouraged by the new labor rules. 
Fortunately, the Chilean public shows no inclination to follow the mistakes of several other South American countries, especially Venezuela, Ecuador, Brazil, and Argentina. 
Even Bachelet’s critics agree that Chile’s basic macroeconomic policies will not change: an independent central bank committed to price stability, a free-trade regime with a floating currency, and a fiscal policy that will keep deficits and public debt low. 
Bachelet’s term in office will end in 2017. 
Under Chile’s constitution, she cannot serve another consecutive term. 
The election that year will therefore be an important one to watch. 

Chile's New President, General Pinochet and the Po 
SANTIAGO: After a hard-fought electoral battle, Chile has a new president. 
On Sunday, Ricardo Lagos, the socialist leader, defeated his conservative challenger Joaquin Lavin, by 190,000 votes, the smallest margin of any presidential election since Chile's return to democracy. 
During the five weeks leading to the second-round vote, Mr. Lagos ran an extraordinarily effective campaign. 
Stunned by Mr. Lavin's success in the first round, Mr. Lagos was forced to rethink his strategy. 
His characteristically intellectual rhetoric was replaced by simple and direct appeals to the electorate. 
By surrounding himself by a group of young technocrats, he injected a badly needed sense of modernity into the campaign. 
The new members of his team were quick to distance themselves from some of the most controversial and confrontational elements of the Socialist's program, including proposed legislation that would greatly increase the power of labor unions, hurting Chile's ability to compete internationally and reducing its economic growth potential. 
What is surprising about the electoral result is not that Mr. Lagos won (after all he was the favorite all along), but that Mr. Lavin was able to mount such an effective challenge. 
For the first time since the 1930s, Chile's right emerged as a serious political option with voter appeal. 
Mr. Lavin obtained a remarkable 48.7% of the vote by campaigning as an efficient, issue-oriented politician that was not influenced by ideology or the petty political quarrels of the past. 
Gradually his campaign captured the imagination of an increasing number of Chileans. He was particularly effective among women and the young. 
If Chile's rightist political parties want to capitalize on Mr. Lavin's popularity, they must show that they have moved away from their bedrock conservative ideology and have become pragmatic, modern, and issue oriented. 
If the right fails to convince voters that it has, in fact, moved in this direction, it is likely to go back to its traditional 30% of the vote. 
If, on the other hand, it demonstrates that it has embraced the new type of politics espoused by Mr. Lavin, it could make considerable gains in upcoming municipal and congressional elections. 
It may even gain the presidency in 2006. 
A first key test on whether Chile's right has really changed may come as soon as next week. 
During the campaign Mr. Lavin repeatedly said that, irrespective of his age and health, General Pinochet should stand trial in Chile for alleged violations of human rights. 
If, as many fear, the United Kingdom releases the General in the next few days, Chile's right-of-center politicians should insist, publicly and forcefully, that Pinochet is brought to justice in his own country. 
The right should in fact go even further, demanding that the General gives up his senator-for-life post and the immunity that goes with it. 
This would not only remove Pinochet from Chile's political life, but would also permit the courts to greatly expedite the trial against him. 
This would allow Chile to address its traumatic past. 
What made Mr. Lavin an unusual right-of-center candidate was that he proposed many initiatives that would modernize Chile's political and social institutions. 
He suggested, among other things, that designated-senators, an anti-democratic legacy of the military regime, should be abolished, and that Chile's obligatory military draft should come to an end. 
Many doubted his sincerity – and that of the political parties that supported him -- and branded the proposals as marketing gimmicks. 
Chile's right can show that the skeptics were wrong, by supporting – better yet, by introducing – legislation along these lines in the next few months. 
Mr. Lavin himself should take the initiative, and work out with Mr. Lagos a series of legislative initiatives – including some that require a constitutional reform – on which both candidates agreed during the campaign and that would enhance Chile's democratic system. 
Mr. Lagos, in turn, should avoid the nostalgic and tired views that dominated the first part of his campaign and pursue, with vigor, the type of modernizing economic reforms that his new and young inner circle support. 
If this happens, Chile will enter into the 21st century with great prospects. 
It could indeed become an exemplary country, where justice, democracy and economic opportunity flourish. 

Chile’s Presidential Minuet 
BUENOS AIRES – Chile has been Latin America’s success story since the 1980’s, boasting rapid economic growth, successful integration into the world economy, solid democratic institutions, an effective state bureaucracy, and low levels of corruption. 
By most standards, the country is far better off than the rest of the region. 
Not surprisingly, Chileans have kept the ruling Christian Democrat-Socialist coalition (the Concertación ) in power for four consecutive terms since 1990, when democracy was restored after 17 years of General Augusto Pinochet’s repressive military rule. 
On December 13, however, voters in Chile’s presidential election are likely to make the Concertación candidate sweat. 
The Concertación is running Christian Democrat Eduardo Frei, the son of a former president who was president himself from 1994 until 2000. 
His opponent is Sebastián Piñera, a tycoon, former senator, and presidential runner-up in 2006 who represents the main opposition forces – Piñera’s moderately conservative Renovación Nacional (RN) and the more rightist Union Democrata Independiente (UDI). 
So far, nothing new: the RN and the UDI – which differ mainly in their attitude towards the military government from which they emerged (the RN being the more self-critical) – have been the main challengers in all the previous elections. 
But change is coming, in the form of a 36-year-old maverick with no traditional-party backing. 
Marco Enríquez-Ominami, with about 20% support in recent polls, is remarkably close to Frei (around 26%), and not terribly far from Piñera (roughly 38%). 
The young candidate’s unexpected popular support is rooted within the ruling coalition: his adoptive father is a prominent Socialist senator (his biological father, a leader of the revolutionary left in the 1970’s, was killed by Pinochet’s political police). 
Marco himself was elected deputy on the Socialist ticket, but he defected when the party denied him the chance to contest Frei’s nomination in a primary. 
With this unique mix of insider knowledge and outsider status, and a freshness that both main candidates lack, Enríquez-Ominami has gone farther than most observers predicted. 
Piñera’s lead and the emergence of Enríquez-Ominami are probably expressions of the same phenomenon: fatigue with – and within – the Concertación . 
Despite its many successes since 1990, and the high popularity of the current president (Socialist Michelle Bachelet, Chile’s first female chief executive), time is taking a toll. 
In recent years, several groups have split from the incumbent parties. 
Many voters are following suit, drawn mainly to Enríquez-Ominami. 
Frei’s lackluster numbers reflect his own weaknesses (he is notoriously uncharismatic and was the least popular of the four Concertación presidents), as well as the inevitable stress that two decades of uninterrupted rule has placed on the ruling coalition. 
As things stand now, the right is likely to win the first round, but with less than 50%. 
Even a comfortable Piñera victory could be reversed on the January 17th run-off, as Frei and Enríquez-Ominami are essentially splitting the center-left vote. 
Enríquez-Ominami has the popularity and momentum to displace Frei from the run-off, but he may have a harder time defeating Piñera. 
The two most likely scenarios, then, are government continuity or predictable change (the right has been expected to capture the presidency for years). 
But a third scenario – less predictable change following a victory by Enríquez-Ominami – should not be ruled out, as campaign advertisements will appear in the media only starting November 13. 
In terms of Chile’s major policies, however, continuity is almost certain to prevail, even if Enríquez-Ominami wins. 
The center-left coalition that defeated Pinochet (in a 1988 plebiscite and his presidential candidate in the 1989 election) has been wise enough to keep, and in some cases deepen, the sound free-market policies inherited from the military government. 
Chile boasts orthodox fiscal and monetary management, a very open economy, and a dynamic private sector. 
It was also the first country in the world to adopt a fully private pension system, a policy experiment carried out by one of Pinochet’s technocrats (who happened to be Piñera’s brother, José) and largely kept in place since then. 
These policies are popular with voters, and they are protected by powerful actors (for example, the strong export-oriented business sector) and by trade agreements with almost all the world’s major economies and regional blocs. 
Unlike many Latin American countries, in which populist backlashes have followed the liberalizing reforms of the 1990’s, the main challenger in Chile is an even more pro-market coalition. 
Beyond the economy, there are, of course, many areas of disagreement. 
The Concertación has dealt prudently with the political legacies of the dictatorship, gradually rescinding the self-serving rules that Pinochet created to protect himself, the military, and the right, and making some progress in prosecuting human rights violators. 
But many are not happy: the far left – not very strong these days but with an important political tradition – wants more and faster progress on prosecutions, while the recalcitrant right insists on treating Pinochet (who died in 2006) as a national hero. 
Moral, ethnic, and environmental issues follow similar ideological lines. 
And yet the range of the policy debate is much narrower, and the tone more amiable, than is the case in Chile’s more polarized neighbors, such as Argentina, Bolivia, and Venezuela. 
In either of the most probable scenarios, continuity or prudent change, or even if the “outsider” candidate wins, Chile will in all likelihood remain a beacon of democratic stability, economic dynamism, and international engagement in a region too often characterized by political and economic turbulence. 

Silver Linings for a Golden Age 
SINGAPORE – Are prospects for global stability and prosperity improving or deteriorating? 
With enlightenment and progress in some parts of the world accompanied by atavism and stagnation elsewhere, this is not an easy question. 
But we can gain greater purchase on it by considering three other questions. 
The first is whether the United States will regain its standing as a source of moral leadership. 
Despite its flaws, America did provide such leadership, beginning at the end of World War II. 
But the terrorist attacks of September 11, 2001, changed everything. 
Americans’ anger following the attacks drove them to support policies that they once would have considered inconceivable. 
In the name of the “global war on terror,” they have tolerated torture; accepted – and even endorsed – the illegal invasion of Iraq; and allowed innocent civilians to become collateral damage of mechanical drone strikes. 
In order to restore America’s moral leadership, President Barack Obama must make good on his early rhetoric – exemplified in his speeches in Istanbul and Cairo early in his presidency – which demonstrated genuine regard for the oppressed. 
In 2007, during his first presidential campaign, he wrote that America “can neither retreat from the world nor try to bully it into submission. 
We must lead the world, by deed and by example.” 
But Obama cannot do it alone – and, so far, neither the American public nor the US Congress seems committed to reconnecting with its moral compass. 
It should be unacceptable, for example, for Congress to block the release of 86 Guantánamo Bay detainees cleared by a committee of national-security officials. 
Not even the revelations by former intelligence contractor Edward Snowden that no one is exempt from the possibility of US surveillance have stirred Americans to demand a new approach. 
The answer to the second major question shaping the world’s future – whether China will regain its economic momentum – also appears to be “no,” at least in the short term, with most experts agreeing that China’s export- and investment-led growth model has all but exhausted its potential. 
Indeed, China cannot continue to rely on manufacturing exports when its major sources of demand – the US and Europe – are struggling and its labor costs are rising. 
Likewise, China’s government cannot continue to waste resources on economic-stimulus packages that have led to industrial overcapacity and skyrocketing local-government debt. 
And China cannot move toward a more market-oriented, efficient, and innovative economy with bloated state-owned enterprises blocking the way. 
Whether China can develop and implement a viable new economic-growth model in post-crisis conditions depends on whether President Xi Jinping and Premier Li Keqiang can revive the legacy of their predecessors, Deng Xiaoping and Zhu Rongji. 
In other words, China’s future – and that of the global economy – depends on how committed its leaders are to overcoming vested interests and pursuing comprehensive structural and policy reform. 
While many in the West contend (and perhaps hope) that China will not succeed in transforming its economy, Xi and Li are acutely aware of the previous growth model’s unsustainability – and the challenges that changing it will entail. 
For example, in March, Li said that implementing the needed market reforms “will be very painful, and even feel like cutting one’s wrist.” 
And both Xi and Li have indicated the government’s willingness to tolerate slower GDP growth in the short term for the sake of building a stronger, more sustainable economy. 
The final question is whether Europe and Japan will recover their “animal spirits.” 
Given Europe’s current malaise and the waning impact of so-called “Abenomics” in Japan, it is difficult to believe that their economies, which fueled global output growth for several decades, will regain their former stature. 
Indeed, Europeans and Japanese have largely given up hope of doing so. 
Although European Union leaders have managed to keep the eurozone intact, they lack a long-term strategy to lift their economies out of the doldrums. 
The seriousness of Europe’s situation is reflected in growing acceptance of the high unemployment – and youth-unemployment rates of over 50% – that some EU countries, including Spain and Greece, now face. 
Meanwhile, the first two “arrows” of Japanese Prime Minister Shinzo Abe’s economic program – radical monetary-policy easing and increased government spending – seem to have given the country’s long-stagnant economy a lift. 
But the third and most important arrow – structural reform – has so far had little impact. 
And, after more than two decades of political turmoil and economic decline, the Japanese public has become skeptical of official promises of economic revival. 
Fortunately, the US and Chinese economies are underpinned by societies that remain dynamic, vibrant, and hopeful. 
Young people in other parts of Asia, especially India and the ten ASEAN countries, are similarly optimistic – as well they should be. 
Asia’s middle-class population is expected to experience explosive growth in the coming years, rising from 500 million people in 2010 to 1.75 billion in 2020. 
Africa, with its population of one billion, is also gaining economic momentum, contributing further to the rapid expansion of the global middle class, which is expected to surge from 1.8 billion in 2010 to 3.2 billion in 2020 and to 4.9 billion people – more than half of the world’s population – in 2030. 
Despite the massive challenges that countries like Syria, Somalia, Egypt, and Afghanistan currently face, and global challenges like food security and climate change, the world has reason to be hopeful about the future. 
Notwithstanding today’s tragic and terrifying headlines, we may be entering a new golden age of human history. 

China, the Olympics, and Global Leadership 
The whole world, it seems, views China as the next great global power. 
A trip to Beijing does little to dispel that impression. 
Out of the welter of dust, noise, welders’ sparks, flotillas of cement mixers and construction cranes, the setting for the 2008 Summer Olympic Games is taking shape. 
A visitor feels inconsequential in the chaotic vastness of this epic undertaking. 
But looking down on the scene from the half-finished Morgan Centre, the luxury apartment complex (where annual rents are $800,000) and seven-star hotel that is arising beside the Olympic site, one is awestruck not only by the project’s grandeur, but by its design daring. 
Below, like some latticed popover, is the Herzog & de Meuron-designed “birds nest” Olympic Stadium. 
Beside it is the stunning “water cube,” or Aquatics Center, of Chinese/Australian design. 
It is hardly surprising that after the Games, the Chinese Communist Party’s leaders plan to vacate their retro pavilions in Zhongnanhai, the cloistered compound beside the Forbidden City, to move to a new “campus” adjacent to the Olympic Green, China’s new power center. 
China’s leaders view the Olympics not only as a national celebration, but also as the greatest national coming-out party in history. 
Feeling the Promethian energy unleashed in Bejing, it is easy to believe in China’s aspirations to restore itself to a position of global wealth and power. 
Indeed, over the past half-century, when the Chinese have put their minds to it, they have always demonstrated extraordinary fortitude and resolution, whether in embracing Mao’s revolution or in the equally unfettered way in which they are realizing the economic counter-revolution unleashed by Deng Xiaoping. 
But, to become a truly “great nation,” China must make two great leaps. 
First, it must become more comfortable playing an active and constructive international role. 
China is now deeply involved in the world, especially the Third World, because of trade. 
But it maintains a nineteenth-century notion of sovereignty – namely, that a country’s national territory, its leaders have an absolute right to do whatever they want without outside “interference.” 
This view is not only out of step with international trends, but it also inhibits China from playing a useful role in world crises. 
China’s leaders fear that if they begin to pronounce on the domestic record of other nations, much less join in sanctions or United Nations peacekeeping missions, they will help establish a precedent that would allow others to intrude on domestic Chinese affairs. 
But the Chinese government has just had a wake-up call in Sudan, from which China imports 50% of its oil. 
After doing little to pressure Sudanese strongman Omar al-Bashir into admitting UN peacekeepers to stem the killing in Darfur, China suddenly found the promise of an unsullied Olympics at risk. 
The actress Mia Farrow, for example, suggested that the 2008 Olympics might be remembered as “the genocide games.” 
This got the Chinese leadership’s attention. 
In a matter of days, an emissary was dispatched and al-Bashir relented. 
It was an important moment in China’s evolution from a defensive to an offensive player on the international scene. 
China’s second challenge concerns its hybrid capitalist/Leninist system of governance, which may not function well enough without democratic feedback and the rule of law. 
Party leaders may not become sufficiently attuned to the needs of China’s people to respond to problems like corruption, environmental degradation, or peasant unrest before crises make them unsolvable. 
Although hardly democrats, President Hu Jintao and Premier Wen Jiabao already are expending large of amounts of time and resources on divisive social problems in the countryside, where Mao’s revolution started, but where income growth has lagged. 
Hu and Wen have cancelled national agricultural taxes, made rural schooling free, launched a new rural medical insurance plan, and guaranteed that, since there is still no title for holding private agricultural land, peasants are entitled to renew their long-term leases. 
So China may be edging towards a whole new way of interacting with the world and dealing with its people; its curious authoritarian capitalism may be inching towards some new, and possibly viable, model for long-term development. 
But, as Mao always noted, theory should not be confused with practice, and the sustainability of such a model remains untested. 
Indeed, no state run by a Communist Party has yet managed to reform itself sufficiently to modernize and develop successfully. 
In this, China is a both pioneer and a developmental curiosity. 
What kind of nation China aspires to be, and where it is ultimately headed, is still something of a conundrum. 
Right now, China’s focus is not on grand political visions for the future, but on grand visions for a Beijing reborn to impress the world. 
Beneath the surface are many threatening cracks. 
But to drive past the Olympic Green in Beijing will help make many Chinese believe that perhaps the center will hold in this unprecedented and unusual experiment of nation building. 

China’s New Emperor 
HONG KONG – An anecdote about US President Richard Nixon’s visit to China in 1972 has long been regarded as confirmation of the long view of history taken by Chinese leaders. 
Zhou Enlai, Mao’s dutiful number two, is said to have responded to a question about the lessons of the French Revolution by saying that it was too soon to tell. 
In fact, according to diplomats who were there, Zhou was discussing not the revolution of 1789, but the 1968 student uprising in Paris, so it probably really was too soon to tell. 
After this false start, lessons from the French Revolution have made a comeback in China. 
Shortly after the 18th National Congress of the Chinese Communist Party in 2012, it was reported that Alexis de Tocqueville’s The Old Regime and the Revolution, written in 1856, had become a “must-read” for senior CCP cadres. 
The book’s merits were most enthusiastically touted by Wang Qishan, the man at the helm of President Xi Jinping’s anti-corruption campaign and perhaps Xi’s closest ally. 
Toqueville argued that growing prosperity in eighteenth-century France had actually made it more difficult to govern the country. 
As people became wealthier, they also became more aware of social and economic inequalities and thus increasingly resentful of the rich and powerful. 
Attempts to reform the system only highlighted its vulnerabilities. 
Revolution followed, sweeping away the monarchy and aristocracy. 
Their heads literally rolled. 
The CCP’s just-completed 19th National Congress showed the extent to which China’s leaders have taken Toqueville’s insights to heart. 
Xi asserted his undisputed authority over his party and country. 
Xi consolidated his position during his first term, by reversing much of Deng Xiaoping’s legacy, including the opening of China’s economy, the separation of the CCP from government, and a low-key approach to foreign and security policy. 
Xi has also swept aside potential rivals, relying primarily on his far-reaching anti-corruption campaign to target officials previously thought to be untouchable. 
He has just overseen the largest-ever purge of the CCP Central Committee. 
He has cracked down on even the most restrained criticism or signs of dissent, and has even banned Internet jokes, including memes comparing him to Winnie the Pooh. 
In another country, such measures might trigger harsh reproach, with critics accusing Xi of turning his country into an old-school Leninist dictatorship. 
In China, however, they have drawn praise from observers who believe that Xi is leading the way to the fulfillment of the “Chinese dream” to rejuvenate the country. 
But, for some, the dream is on the verge of becoming a nightmare. 
Demographic trends are threatening to turn the labor surplus that helped drive China’s rapid growth over the last few decades into a labor shortage at an unprecedented pace. 
Water contamination and scarcity, alongside carbon dioxide emissions and lethal levels of air pollution, are imperiling people’s health and jeopardizing the sustainability of China’s economic performance. 
Moreover, Chinese GDP growth, while welcome, is being fueled largely by a combination of fast-rising debt and widespread property bubbles. 
Even Chinese researchers admit that their country has one of the highest levels of income inequality in the world. 
As the poor get poorer and the rich get richer, many are asking if this is what “socialism with Chinese characteristics” really means. 
Of course, there is always an optimist around to offer a positive spin. 
China owes most of its debt to itself, because political priorities guide lending as much as commercial considerations do. 
China supports international efforts to address environmental degradation and climate change. 
Most people are becoming better off, if unevenly. 
And Xi’s administration is at least doing something to stamp out the endemic corruption in the CCP. 
We should all hope that at least some of what China’s cheerleaders say is true; if Chinese growth collapses, the entire global economy will suffer. 
But, even if the optimists are partly vindicated, Xi’s claim that China has found a better way to run a modern society and economy seems far wide of the mark. 
To be sure, from the stupefying antics of US President Donald Trump to the damaging rise of populist nationalism in Europe, democratic countries are experiencing their share of trials. 
But democratic systems have built-in stabilizing mechanisms that enable them to right themselves without resorting to violence or repression. 
That is not the case in Xi’s China. 
For years, there was a serious debate in China about the state’s proper role in economic affairs. 
One camp maintained that if the CCP relaxed its grip on the economy, it would inevitably lose control of the state. 
Others argued just the opposite: unless the Party ceded more economic control, it would lose political power, as the economy’s contradictions multiplied and development became less sustainable. 
Xi clearly falls into the statist camp. 
But it is not just the Party that Xi is empowering; he is also empowering himself. 
In fact, it is hard to know who is ascending the CCP’s commanding heights and who will be struck down for disagreeing with the paramount leader. 
This hasn’t deterred outsiders from speculating, but there is not much point in playing that guessing game. 
Xi, like any other emperor, will continue to appoint courtiers who follow him wherever he leads. 
But with great power comes great responsibility – and, at this point, Xi’s power is virtually absolute. 
That is a heavy burden for one man. 
Xi may be much smarter than Trump (not a high hurdle to clear), but that is not enough to guarantee a stable and prosperous future for China. 
And, if things go wrong, everyone will know whom to blame. 
There is a reason why dictatorial dynasties tend to end up the same way. 
You don’t have to read Toqueville to know that. 

China’s Vision for the Next 30 Years 
SHANGHAI – Every five years, the Communist Party of China convenes a National Congress, where two key decisions are made: who will lead China for the next five years, and what path to development those leaders will follow. 
The CPC’s recently completed 19th National Congress did all that and more. 
Beyond choosing the next Politburo Standing Committee, the 19th Party Congress reelected President Xi Jinping as the CCP’s leader and added his eponymous ideology – “Xi Jinping Thought” – to the Party’s charter. 
The Congress also produced a blueprint for the country’s future development until 2050, one that reflects the changes that economic reform and opening have brought to China. 
At the CPC’s 13th National Congress, in October 1987, China’s leaders declared that the “major contradictions” facing the country were those between “people’s growing material and cultural needs and the backwardness of social production.” 
In other words, the key challenge was to produce enough food, clothing, and books for all Chinese. 
Thirty years later, the major contradiction China faces is that between “rising demand for higher standards of living and the constraints imposed by insufficient and unbalanced economic development.” 
In his address to the 19th Party Congress, Xi declared that, because China can largely deliver basic necessities to its people, the goal now should be to improve their quality of life. 
With that in mind, the 19th Congress charted a new roadmap, based on the “two centennial goals” inherited from the 18th Congress. 
The first centennial goal is to build a “moderately prosperous society” (xiao-kang) by 2021, the 100th anniversary of the CPC’s founding. 
The key here is to ensure broad prosperity, with poverty all but eliminated. 
The second centennial goal is to transform China into a “fully developed and advanced nation” by 2049, the 100th anniversary of the founding of the People’s Republic. 
The vision, confirmed at the Congress, is for China to be a prosperous, civilized, harmonious, and modern socialist society, boasting strong governance. 
Such a China would be a leading global power, ranking high among the advanced economies. 
The 19th Party Congress went some way toward marking the path between these two goals, asserting that once the first centennial goal is realized, China’s next task will be to modernize Chinese society by 2035. 
Such a modern China would be a world leader in innovation, with a clean environment, a large middle class, and a much narrower gap between rural and urban growth, public services, and living standards. 
Achieving these goals will require, first and foremost, that China’s leadership understands where in the development process China is. 
In this sense, it is promising that China’s leaders admitted at the latest Congress that China is and will remain in the primary phase of socialism. 
China must, therefore, put development first, with the expectation that economic growth will solve the country’s problems. 
Given this, China’s top leaders promised that they would continue implementing structural reforms and advancing economic liberalization. 
This builds on a resolution, adopted at the Third Plenary Session of the 18th CPC Central Committee in 2013, to give the market the “decisive role” in allocating resources. 
As the 19th Party Congress acknowledged, honoring these commitments will require China to protect private property rights and entrepreneurship. 
The importance of this is highlighted by the fact that the private sector contributes more than 60% of China’s GDP, 50% of its taxes, 70% of its technological and product innovations, and 80% of its jobs, despite accounting for less than 40% of inputs. 
As for liberalization, China is committed to implementing policies to open up further its markets to trade and foreign investment, while protecting the legitimate rights and interests of foreign investors. 
As part of this effort, the government is authorizing further free-trade zones, and exploring the possibility of free-trade ports in selected locations. 
It is believed that China is on track to achieve its goal of becoming a high-income economy by 2035. 
But it will have to sustain labor productivity growth of at least 5% annually for the next 15-20 years – an outcome that will depend on rising urbanization and deepening technological progress. 
The key to success will be a Chinese leadership that adapts effectively to changing internal and external conditions and manages the risks that have accumulated in recent decades. 
For example, it must tackle growing income inequality, driven largely by the massive disparity between urban and rural incomes, though the income gap among urban residents is also widening. 
In 2014, per capita income was CN¥53,300 ($8,024) for the top 5% households and just CN¥1,600 for the poorest 5%. 
According to China Household Financial Survey data, China’s Gini coefficient – the most common measure of inequality – climbed from 0.283 in 1983 to 0.491 in 2008, reaching highs of 0.61 in 2010 and 0.60 in 2012 (much higher than the official figures of 0.481 and 0.474, respectively). 
Though the Gini coefficient dropped to 0.465 by 2016, that still exceeds the 0.24-0.36 range for major developed economies. 
China also faces increasing wealth disparity. 
In 1988 and 1995, China’s Gini coefficient of household wealth was just 0.34 and 0.4, respectively. 
But the coefficient has grown, peaking at 0.739 in 2010. 
By 2014, the poorest 25% of households owned less than 2% of the country’s total wealth, while the top 1% owned one third. 
If China fails to contain inequality, its long-term growth could suffer. 
But with a clear development blueprint and a powerful leader whose political clout all but guarantees continued reform, China might be in a strong position to address the challenges it faces and sustain its unprecedented economic success. 
Yet, even if China achieves its goals for 2050, the challenge will not be over, as China’s leaders will then have to contend with an aging population. 
By 2050, 36.5% of China’s population will be over the age of 60, according to the 2017 revision of the United Nations’ World Population Prospects. 
The median age may be as high as 49.6, quite close to Japan’s 53.3 and higher than in the Sweden, the United Kingdom, European Union as a whole, and the United States. 
This makes it all the more crucial for China’s leaders to make the right decisions and put their country on a stable footing by 2050. 

Empowering China’s New Miracle Workers 
MILAN – As the Chinese Communist Party’s 19th National Congress has unfolded, much of the focus has been on who will occupy the key positions in President Xi Jinping’s administration for the next five years. 
But China’s future trajectory depends crucially on another group of leaders, who have received far less attention: the technocrats who will carry out the specific tasks associated with China’s economic reform and transformation. 
Over the last four decades, China’s technocrats have collectively engineered a miraculous transformation. 
The current generation, a gifted group of policymakers, will step down in or around March 2018, passing the baton to a new generation. 
That generation – highly educated, experienced, and, for the most part, successful on their own merits – is prepared to carry China’s economic and social progress forward with great skill and dedication. 
The question is whether they will have an open field on which to run. 
One thing is certain: the next generation of technocrats will face very different conditions from those confronted by their predecessors. 
China has reached a moment of significant uncertainty. 
Beyond the questions inherent in the process of generational turnover, there has been a dramatic shift in China’s dominant policy framework under Xi. 
Under Deng Xiaoping – the leader who initiated China’s radical “reform and opening up” in 1978 – the singular policy goal was domestic economic transformation and growth, to be achieved with a collaborative decision-making model that included vigorous internal debate. 
Deng explicitly ruled out a broader international agenda for China – a dictate that China’s policymakers followed for more than three decades. 
Since taking power in 2012, Xi has changed this policy framework in several key ways. 
For starters, he tackled the endemic corruption that had been undermining the credibility of the CCP (and, by extension, China’s governance model), by launching an unprecedented anti-graft campaign that reached the highest levels of the Party’s leadership. 
Many expected Xi’s anti-corruption campaign to be a temporary initiative, intended to pave the way for implementation of the aggressive economic reforms announced at the Third Plenary Session of the 18th Central Committee in 2013. 
Instead, the campaign has become essentially a permanent feature of Xi’s administration. 
Xi believes that a government’s legitimacy is mainly a function of consistently delivered values, together with economic and social progress, with strict commitment to the public interest taking precedence over the form of governance. 
While few Western observers have fully recognized this perspective, developments in the West over the last ten years – the 2008 financial crisis, widening income and wealth inequality, and intensifying political polarization – have reinforced this mindset. 
As a result, Chinese leaders and citizens are more convinced than ever that government by a strong single party is an essential pillar of stability and growth. 
The focus in the West on the form of governance, as opposed to inclusive economic and social outcomes, is misguided, they believe, because both democratic and autocratic systems can be corrupted. 
Moreover, China’s economic agenda under Xi has expanded beyond its narrow focus on domestic growth and development to include a concerted effort to expand Chinese influence in the global economy, especially in the developing world. 
This broad and expanding external agenda generates claims on resources – you can’t be the dominant external investor in Africa and Central Asia without spending a lot of money – while influencing policy choices. 
For example, state-owned enterprises, including banks, may respond more flexibly than purely private enterprises to a variable mix of public and private incentives and investment returns. 
Finally, in recent years, China’s policy frameworks have increasingly reflected the inherent tension between the long-standing imperative of ensuring social and political stability and the more modern objective of market liberalization. 
China’s leadership remains steadfastly committed to protecting the Party’s interests, which it views as coterminous with those of society. 
For that reason, the CCP continues to focus on upholding order and instilling values in all aspects of Chinese life, maintaining an active presence not only in policy debates, but also in private-sector activities and social affairs. 
At the same time, the government is seeking to give markets a more decisive role in the economy, unleash the power of entrepreneurship and innovation, and respond more effectively to the needs and desires of a young, educated, and fast-growing middle class. 
And for good reason: these are the internal engines that have enabled China to achieve 6-7% annual GDP growth amid a difficult structural shift and middle-income transition, carried out in a relatively weak global economy. 
It is hard to say for sure whether these two objectives are in direct conflict with each other. 
But there is reason for concern. 
The kind of dynamic competition that leads to innovation is, after all, far from a centrally guided process, though public-sector choices in areas like basic research do have a substantial impact. 
Moreover, in both policymaking and academia, active debate is indispensable to sorting good ideas from bad ones. 
Yet while the Chinese system has proved its capacity for high-level internal policy debate among highly trained and experienced participants whose loyalty is not in question, and then act quickly and decisively, China’s leaders remain suspicious of unfettered public debate and commentary. 
But many complex policy choices – for example, about financial-sector reform and opening up – would benefit from the winnowing process that greater openness affords. 
Over the next five years, China’s success will depend largely on how well the government’s complex agenda, and the tensions it entails, are managed. 
To achieve their objectives, China’s leaders will need to strike a delicate balance between a muscular, disciplined, and ubiquitous Party, setting standards and protecting the public interest, and innovative, empowered, and potent markets, driving the economy into the future. 

China’s Irresistible Rise 
LONDON – China’s recently released GDP data for 2017 confirm it: the country’s dramatic rise, with the concomitant increase in its global economic relevance, is not slowing down. 
To be sure, there has been fresh media chatter about the reliability of Chinese data, owing to reports that some provinces have been overestimating their economic performance in recent years. 
But for all we know, other provinces may have been doing the opposite. 
And in any case, the provinces that have admitted to inflating their data are not large enough to have a significant impact on the national picture. 
Moreover, two key points are often lost in the debate about China’s official statistics, which the country first starting releasing in the late 1990s. 
First, the debate is relevant only if China is increasing the degree to which it overestimates its data. 
Second, China’s published data should be considered in the context of its trading partners’ own figures, as well as those of major international companies that do business in China. 
As I have written before, it is telling that China has overtaken both France and the United States to become Germany’s top trading partner. 
As for the annualized 2017 data, most of the media focus has been on China’s reported real (inflation-adjusted) GDP growth, which, at 6.9%, represents the first acceleration in a couple of years and an improvement even on the government’s soft target rate of 6.5%. 
But the more important figure is China’s nominal GDP growth translated into US dollars. 
Owing partly to a strengthening renminbi, China’s total economic output grew to $12.7 trillion in 2017, representing a massive increase of 13% ($1.5 trillion) in just 12 months. 
Clearly, those who have warned that China is following in Japan’s footsteps and heading for a long-term deflationary cycle have been far off the mark. 
To my mind, such simplistic comparisons are never particularly useful. 
Not only has China averted the risk of deflation; it has done so with an appreciating currency. 
When my former Goldman Sachs colleagues and I first started tracking the rise of the BRIC economies (Brazil, Russia, India, and China) in the early 2000s, we figured that it would take until the end of 2015 just for China to catch up to Japan. 
Yet 2018 has barely started, and already China’s economy is two-and-a-half times larger than Japan’s, five times larger than India’s, six times larger than Brazil’s, and eight times larger than Russia’s. 
It is also larger than the entire eurozone. 
China’s staggering $1.5 trillion expansion in 2017 means that, in nominal terms, it essentially created a new economy the size of South Korea, twice the size of Switzerland, and three times the size of Sweden. 
The latest data suggest that China could catch up to the US, in nominal terms, sometime around 2027, if not before. 
Within a decade after that, the BRIC countries collectively could catch up to the G7 economies. 
Of course, such an achievement would be driven largely by China. 
Still, taken together, the remaining BRICs are larger than Japan. 
And now that Brazil and Russia have put their recent recessions behind them, the BRICs will likely make a large contribution to nominal global GDP in 2018. 
One final consideration for the global growth outlook is the Chinese consumer. 
Many commentators still discuss China as if it were solely an industrial power. 
But consumption in China has crept up nearly to 40% of GDP. 
Since 2010, Chinese consumers have added around $2.9 trillion to the world economy. 
That is bigger than the United Kingdom’s entire economy. 
British trade negotiators should take note: after Brexit, the Chinese market will be more important to the UK economy than ever. 
Yet, in addition to its annualized data, China also recently reported its December data, which revealed monthly reported-retail-sales growth of a slightly disappointing 9.4% year on year. 
One hopes that this is a reflection not of a consumption slowdown, but rather of Chinese policymakers tightening financial conditions in the second half of 2017. 
Needless to say, as China becomes increasingly important to the global economy, its upside and downside risks will continue to have far-reaching implications for the rest of the world. 
And, indeed, a consumption slowdown would be bad not just for China, but also for the rest of the world economy, which is now depending on China’s shift from industrial production to domestic consumption. 

China Adjusts 
BAHRAIN – China watchers are waiting to see whether the country has engineered a soft landing, cooling down an overheating economy and achieving a more sustainable rate of growth, or whether Asia’s dragon will crash to earth, as others in the neighborhood have before it. 
But some, particularly American politicians in this presidential election year, focus on only one thing: China’s trade balance. 
True, not long ago the renminbi was substantially undervalued, and China’s trade surpluses were very large. 
That situation is changing. 
Forces of adjustment are at work in the Chinese economy, so foreign perceptions need to adjust as well. 
China’s trade surplus peaked at $300 billion in 2008, and has been declining ever since. 
(Indeed, official data showed a $31 billion deficit in February, the largest since 1998.) 
It is clear what has happened. 
Ever since China rejoined the global economy three decades ago, its trading partners have been snapping up its manufacturing exports, because low Chinese wages made them super-competitive. 
But, in recent years, relative prices have adjusted. 
The change can be measured by real exchange-rate appreciation, which consists partly in nominal renminbi appreciation against the dollar, and partly in Chinese inflation. 
China’s government should have let more of the real appreciation take the form of nominal appreciation (dollars per renminbi). 
But, because it did not, it has shown up as inflation instead. 
The natural price-adjustment process was delayed. 
First, the authorities intervened in 1995-2005, and again in 2008-2010, to keep the dollar exchange rate virtually fixed. 
Second, workers in China’s increasingly productive coastal factories were not paid their full value (the economy has not completed its transition from Mao to market, after all). 
As a result, China continued to undersell the world. 
But then the renminbi was finally allowed to appreciate against the dollar – by about 25% cumulatively during 2005-2008 and 2010-2011. 
Moreover labor shortages began to appear, and Chinese workers began to win rapid wage increases. 
Beijing, Shenzhen, and Shanghai raised their minimum wages sharply in the last three years – by 22% on average in 2010 and 2011. 
Meanwhile another cost of business, land prices, rose even more rapidly. 
As costs rise in China’s coastal provinces, several types of adjustment are taking place. 
Some manufacturing is migrating inland, where wages and land prices are still relatively low, and some export operations are shifting to countries like Vietnam, where they are lower still. 
Moreover, Chinese companies are beginning to automate, substituting capital for labor, and are producing more sophisticated goods, following the path blazed by Japan, Korea, and other Asian countries in the “flying geese” formation. 
Finally, multinational companies that had moved some operations to China from the United States or other high-wage countries are now moving back. 
Productivity is still higher in the US, after all. 
None of this is news to most international observers of China. 
But many Western politicians (and, to be fair, their constituents) are unable to let go of the syllogism that seemed so unassailable just a decade ago: (1) The Chinese have joined the world economy; (2) their wages are $0.50 an hour; (3) there are a billion of them; and (4) Chinese wages will never be bid up in line with the usual textbook laws of economics, so their exports will rise without limit. 
But it turns out that the basic laws of economics eventually apply after all – even in China. 
Like certain other aspects of the US-China economic relationship, China’s adjustment is reminiscent of Japan with a 30-year lag. 
Japan’s trade balance fell into deficit in 2011, for the first time since 1980. 
Special factors have played a role in the last year, including high oil prices and the effects of the March 2011 tsunami. 
But the downward trend in the trade balance is clear. 
Even the current account showed a deficit in January. 
This development has received relatively little attention in the US and other trading partners, which is curious, given that, two decades ago, Japan’s big trade surplus was the subject of intense focus and worry – just like China’s now. 
At the time, some influential commentators warned that the Japanese had discovered a superior economic model, featuring strategic trade policy (among other attractions), and that the rest of us had better emulate them. 
Either that, or the Japanese were “cheating,” in which case we needed to stop them. 
Most economists rejected these “revisionist” views, and argued that Japan’s current-account surplus was large because its national saving rate was high, which reflected demographics, not cultural differences or government policies. 
The Japanese population was relatively young, compared to other advanced economies, but was rapidly aging, owing to a declining birth rate since the 1940’s and rising longevity. 
That view has been vindicated. 
In 1980, 9% of Japan’s population was 65 or older; now the ratio is more than 23%, one of the highest in the world. 
As a consequence, Japanese citizens who 30 years ago were saving for their retirement are now dissaving, precisely as economic theory predicted. 
As the national saving rate has come down, so has the current-account surplus. 
China faces a similar demographic trend, and also a push to unleash household consumption in order to sustain GDP growth. 
As in Japan, the downward trend in China’s saving rate will show up in its current account. 
The laws of international economics still apply. 

Will China’s Infrastructure Bank Work? 
CAMBRIDGE – With China set to lead a new $50 billion international financial institution, the Asian Infrastructure Investment Bank (AIIB), most of the debate has centered on the United States’ futile efforts to discourage other advanced economies from joining. 
Far too little attention has been devoted to understanding why multilateral development lending has so often failed, and what might be done to make it work better. 
Multilateral development institutions have probably had their most consistent success when they serve as “knowledge” banks, helping to share experience, best practices, and technical knowledge across regions. 
By contrast, their greatest failures have come from funding grandiose projects that benefit the current elite, but do not properly balance environmental, social, and development priorities. 
Dam construction is a leading historical example. 
In general, there is a tendency to overestimate the economic benefits of big infrastructure projects in countries riddled by poor governance and corruption, and to underestimate the long-run social costs of having to repay loans whether or not promised revenues materialize. 
Obviously, the AIIB runs this risk. 
That said, there are huge infrastructure needs across developing Asia, and it is high time for China to play a greater role in international lending institutions. 
Moreover, the official US argument – that China should invest its money in existing institutions, such as the World Bank and the Asian Development Bank, because a Chinese-led bank would likely have governance problems – smacks of hypocrisy. 
Good governance? 
Is the US prepared to relinquish its historical prerogative to choose the World Bank president? 
Likewise, the US worries that China may use the AIIB to advance China’s economic and political interests. 
But anyone who is even vaguely familiar with the US approach to multilateral lending knows that no other country has been as adept at exploiting its power and leverage for strategic gain. 
With China’s growing importance in the world order, it needs to be given space to forge its own approach to global economic leadership. 
Frankly, a relatively small infrastructure bank seems as good a place as any to start. 
Besides, China is already pouring money into the developing world, often through highly opaque channels. 
To the extent that the AIIB normalizes a portion of Chinese development assistance, and subjects it to scrutiny from the new bank’s advanced-country members, the new bank’s existence should be all for the better. 
With its penchant for constant experimentation and improvement, one might even hope that China will draw lessons and apply them to all of its developing-country lending. 
Who knows, maybe the existing development banks will learn something. 
While the world should generally welcome China’s initiative, the real question is what kind of aid developing Asia needs. 
Anyone who has worked in developing countries understands that weak institutions and poor governance are often far bigger obstacles to growth than a lack of funds. 
And, however great a project looks on paper, practical implementation is often a sobering experience. 
Costs invariably far exceed initial estimates, and planners often woefully underestimate the skills and funding needed to ensure maintenance and repairs. 
My interpretation of the World Bank’s record is that its role has been most consistently positive when it helps countries with “soft” development infrastructure: technical assistance and serving as a global knowledge bank. 
When its main role has been to provide financial muscle, the results have been less impressive. 
In China itself, for example, World Bank money has not been so important quantitatively, yet the Chinese generally credit the Bank for having helpful blueprints and information. 
Indeed, a strong case can be made that development aid would be more effective if it took the form of outright grants, rather than loans that ultimately need to be repaid. 
Headline aid numbers might seem less impressive, but long-run results would be better. 
Moreover, the world is awash in liquidity right now, and even where a government’s own money is inadequate, it is often possible to establish public-private partnerships to build genuinely high-return projects. 
Competent government is a far scarcer commodity than cash. 
Unfortunately, it is far from clear that the Chinese model of infrastructure development can be exported universally. 
China’s strong central government overwhelms opposition from people displaced by new roads, bridges, and dams, and for many years ran roughshod over environmental concerns and workers’ rights. 
The parallels to the old Soviet Union are striking. 
Some developing countries in Asia work differently. 
In democratic India, for example, it took eight years to rebuild Mumbai’s airport, because courts forced the government to respect the rights of squatters on its outskirts. 
Given the legacy of problematic loans and projects funded by Western-led infrastructure banks, it is reasonable to ask whether another one is needed, as opposed to reforming existing institutions. 
Still, if the AIIB views itself mainly as a knowledge bank, rather than a funding vehicle, it could provide real added value. 
We should evaluate the AIIB by how it chooses and fosters projects, not just by how much financing it provides. 

Asia’s Multilateralism 
NEW YORK – The International Monetary Fund and the World Bank are poised to hold their annual meetings, but the big news in global economic governance will not be made in Washington DC in the coming days. 
Indeed, that news was made last month, when the United Kingdom, Germany, France, and Italy joined more than 30 other countries as founding members of the Asian Infrastructure Investment Bank (AIIB). The $50 billion AIIB, launched by China, will help meet Asia’s enormous infrastructure needs, which are well beyond the capacity of today’s institutional arrangements to finance. 
One would have thought that the AIIB’s launch, and the decision of so many governments to support it, would be a cause for universal celebration. 
And for the IMF, the World Bank, and many others, it was. 
But, puzzlingly, wealthy European countries’ decision to join provoked the ire of American officials. 
Indeed, one unnamed American source accused the UK of “constant accommodation” of China. 
Covertly, the United States put pressure on countries around the world to stay away. 
In fact, America’s opposition to the AIIB is inconsistent with its stated economic priorities in Asia. 
Sadly, it seems to be another case of America’s insecurity about its global influence trumping its idealistic rhetoric – this time possibly undermining an important opportunity to strengthen Asia’s developing economies. 
China itself is a testament to the extent to which infrastructure investment can contribute to development. 
Last month, I visited formerly remote areas of the country that are now prosperous as a result of the connectivity – and thus the freer flow of people, goods, and ideas – that such investments have delivered. 
The AIIB would bring similar benefits to other parts of Asia, which deepens the irony of US opposition. 
President Barack Obama’s administration is championing the virtues of trade; but, in developing countries, lack of infrastructure is a far more serious barrier to trade than tariffs. 
There is a further major global advantage to a fund like the AIIB: right now, the world suffers from insufficient aggregate demand. 
Financial markets have proven unequal to the task of recycling savings from places where incomes exceed consumption to places where investment is needed. 
When he was Chair of the US Federal Reserve, Ben Bernanke mistakenly described the problem as a “global saving glut.” 
But in a world with such huge infrastructure needs, the problem is not a surplus of savings or a deficiency of good investment opportunities. 
The problem is a financial system that has excelled at enabling market manipulation, speculation, and insider trading, but has failed at its core task: intermediating savings and investment on a global scale. 
That is why the AIIB could bring a small but badly needed boost to global aggregate demand. 
So we should welcome China’s initiative to multilateralize the flow of funds. 
Indeed, it replicates American policy in the period following World War II, when the World Bank was founded to multilaterize development funds that were overwhelmingly coming from the US (a move that also helped to create a cadre of first-class international civil servants and development professionals). 
The World Bank’s assistance was sometimes overburdened by prevailing ideology; for example, the free-market Washington Consensus policies foisted on recipients actually led to deindustrialization and declining income in Sub-Saharan Africa. 
Nonetheless, US assistance was, overall, far more effective than it would have been had it not been multilateralized. 
Had these resources been channeled through America’s own aid agency, policymaking would have been subject to the vagaries of development thinking (or the absence of reflection) from one administration to another. 
New attempts to multilateralize flows of assistance (including the BRICS countries’ launch of the New Development Bank last July) are similarly likely to contribute significantly to global development. 
Some years ago, the Asian Development Bank defended the virtues of competitive pluralism. 
The AIIB offers a chance to test that idea in development finance itself. 
Perhaps America’s opposition to the AIIB is an example of an economic phenomenon that I have often observed: firms want greater competition everywhere except in their own industry. 
This position has already exacted a heavy price: had there been a more competitive marketplace of ideas, the flawed Washington Consensus might never have become a consensus at all. 
America’s opposition to the AIIB is not unprecedented; in fact, it is akin to the successful US opposition to Japan’s generous New Miyazawa Initiative of the late 1990s, which offered $80 billion to help countries in the East Asian crisis. 
Then, as now, it was not as if the US were offering an alternative source of funding. 
It simply wanted hegemony. 
In an increasingly multipolar world, it wanted to remain the G-1. 
The lack of money, combined with America’s insistence on flawed ideas about how to respond to the crisis, caused the downturn to be far deeper and longer than it should have been. 
That said, US opposition to the AIIB is harder to fathom, given that infrastructure policy is much less subject to the influence of ideology and special interests than other policymaking areas, such as those dominated by the US at the World Bank. 
Moreover, the need for environmental and social safeguards in infrastructure investment is more likely to be addressed effectively within a multilateral framework. 
The UK, France, Italy, Germany, and the others who have decided to join the AIIB should be congratulated. 
One hopes that other countries, both in Europe and Asia, will join as well, helping to fulfill the ambition that infrastructure improvements can raise living standards in other parts of the region, as they have already done in China. 

What China Can Teach America About Clean Air 
NORTHAMPTON – Every year, more than four million people around the world die prematurely from breathing dirty air. 
In China alone, the number of deaths attributable to air pollution exceeds one million annually. 
That figure may not come as a surprise; after all, we are routinely treated to images in the media of thick, sooty smog enveloping Beijing, Shanghai, and other Chinese cities. 
But America’s air kills, too – and it is getting a lot less attention. 
A 2013 MIT study estimated that poor air quality accounts for 200,000 early deaths in the United States each year, more than the number killed by car crashes and diabetes (other studies have put the number lower, closer to 100,000). 
Yet, while China today is aggressively tackling its air pollution problem, the US is rolling back air-quality protections in the name of economic growth – an ill-conceived strategy that will have a devastating impact on human health. 
Ever since the publication of Harvard’s “Six Cities” study in 1993, scientists and public-health officials have been aware of the links between mortality and fine particulate matter, or PM2.5 (airborne particles with a diameter of less than 2.5 microns). 
When people inhale PM2.5, microscopic solids and liquid droplets of dust, dirt, organic chemicals, and metals can travel deep into the lungs and even enter the bloodstream. 
Research over the past 20 years has tied PM2.5 to a range of adverse health outcomes, including asthma, acute bronchitis, lung cancer, heart attacks, and cardiorespiratory diseases. 
We know, too, where most PM2.5 comes from: power plants, heavy industry, and motor vehicles. 
During fossil-fuel combustion, carbon dioxide, the world’s most prevalent greenhouse gas, is emitted into the air, along with particles of incompletely combusted solids and gases (mainly sulfur dioxide and nitrogen oxides) that react chemically in the atmosphere to form fine particulate matter. 
Knowing the killer pollutant and its sources, the US Environmental Protection Agency, under the 1990 Clean Air Act, issued new standards to reduce PM2.5 levels. 
The EPA estimates that between 1990 and 2015, the national concentration of particulate matter fell by 37%, and that in 2010, some 160,000 premature deaths were averted as a result of the regulations. 
In short, despite a considerable number of deaths still linked to dirty air, the US had, until this year, been heading in the right direction. 
Now, however, US President Donald Trump has promised to create “unbelievable prosperity” by discarding regulations intended to reduce toxic emissions from coal-fired power plants, lowering or eliminating fuel-efficiency standards for automobiles, and dismantling the EPA. 
He has also vowed to repeal limits on fracking, open up more public lands to coal mining, and expand oil and gas production in the Arctic and Atlantic Oceans. 
Let’s assume, for a moment, that such measures would actually produce prosperity for the entire country, and not just for the fossil-fuel industry. 
What price, as a country, is the US willing to pay? 
How many early deaths per year are too many? 
There are alternatives that don’t require a zero-sum tradeoff between economic growth and human health. 
And, ironically, one place to look for inspiration is China. 
Holding up China as a model to emulate might seem absurd. 
After all, its PM2.5 levels are considerably higher than in the US, and consumption of fossil fuels, especially coal, is far greater. 
But Chinese policymakers are taking vigorous steps to reverse course, free the country from its dependence on fossil fuels and create a future-oriented economy powered by clean energy and green technology – one that places China at the forefront of the global economy. 
Today, China is the world’s largest investor in renewable energy, with outlays in 2015 totaling $103 billion, more than double US spending of $44 billion. 
Of the planet’s 8.1 million jobs in renewable energy, 3.5 million are in China, whereas fewer than one million are in the US. 
Persuaded that clean energy is good for the environment and the economy, China has committed $367 billion through 2020 to the development of renewable power sources – a level of investment that is expected to generate 13 million jobs. 
China is also looking beyond its borders, by exporting the expertise it has developed in renewable energy and supporting technologies. 
In 2016, China invested tens of billions in renewable energy projects in Australia, Germany, Brazil, Chile, Egypt, Pakistan, Vietnam, Indonesia, and elsewhere. 
Likewise, to rein in pollutants from motor vehicles, China’s government has made adoption of electric vehicles a high priority, setting a target of five million on the country’s roads by 2020. 
To promote sales, buyers are exempted from sales and excise taxes ($6,000-$10,000 per vehicle). 
And, anticipating the eventual replacement of conventional motor vehicles globally, the authorities are providing generous subsidies for domestic manufacturing. 
Meanwhile, the Trump administration is trying to turn back the clock, by betting on the resuscitation of a dying – and deadly – fossil-fuel industry. 
Describing a transition to electric vehicles as a job killer, Trump has advocated ending federal subsidies that encourage domestic development, manufacture, and purchase, such as the $7,500 federal tax credit for consumers. 
China’s dependence on fossil fuels has left it in a deep environmental hole, but its leaders are determined to climb out. 
The US, on the other hand, is literally digging its own grave. 
With as many as 200,000 Americans dying prematurely every year, economic hubris must not be allowed to trump the search for solutions – wherever they may be found. 

The Cooperative Rivalry of US-China Relations 
CAMBRIDGE – On a visit to Beijing in October, I was often asked whether US Vice President Mike Pence’s recent harsh criticism of China marked the declaration of a new cold war. 
I replied that the United States and China have entered a new phase in their relationship, but that the cold war metaphor is misleading. 
During the Cold War, the US and the Soviet Union targeted tens of thousands of nuclear weapons at each other and had virtually no trade or cultural ties. 
By contrast, China has a more limited nuclear force, annual Sino-American trade totals a half-trillion dollars, and more than 350,000 Chinese students and three million tourists are in the US each year. 
A better description of today’s bilateral relationship is “cooperative rivalry.” 
Since the end of World War II, US-China relations have gone through three phases that lasted roughly two decades each. 
Hostility marked the 20 years after the Korean War, followed by limited cooperation against the Soviet Union during the phase that followed President Richard Nixon’s famous 1972 visit. 
The Cold War’s end ushered in a third phase of economic engagement, with the US helping China’s global economic integration, including its entry into the World Trade Organization in 2001. 
Yet in the first post-Cold War decade, President Bill Clinton’s administration hedged its bets by simultaneously strengthening the US-Japan alliance and improving relations with India. 
Now, since 2017, the US National Security Strategy focuses on great power rivalry, with China and Russia designated as America’s main adversaries. 
While many Chinese analysts blame this fourth phase on US President Donald Trump, Chinese President Xi Jinping is also to blame. 
By rejecting Deng Xiaoping’s prudent policy of maintaining a low international profile; by ending presidential term limits; and by proclaiming his nationalistic “China Dream,” Xi might as well have been wearing a red hat reading, “Make China Great Again.” 
The conventional wisdom on China within the US had already begun to sour before the 2016 presidential election. 
Trump’s rhetoric and tariffs were merely gasoline poured on a smoldering fire. 
The liberal international order helped China sustain rapid economic growth and reduce poverty dramatically. 
But China also tilted the trade field to its advantage by subsidizing state-owned enterprises, engaging in commercial espionage, and requiring foreign firms to transfer their intellectual property to domestic “partners.” 
While most economists argue that Trump is mistaken to focus on the bilateral trade deficit, many support his complaints about China’s efforts to challenge America’s technological advantage. 
Moreover, China’s growing military strength adds a security dimension to the bilateral relationship. 
While this fourth phase of the relationship is not a cold war, owing to the high degree of interdependence, it is much more than a typical trade dispute like, say, America’s recent clash with Canada over access to that country’s dairy market. 
Some analysts believe this fourth phase marks the beginning of a conflict in which an established hegemon goes to war with a rising challenger. 
In his explanation of the Peloponnesian War, Thucydides famously argued that it was caused by Sparta’s fear of a rising Athens. 
These analysts believe that China’s rise will create a similar fear in the US, and use the analogy of World War I, when a rising Germany set hegemonic Britain on edge. 
The causes of World War I, however, were far more complex, and included growing Russian power, which created fear in Germany; rising nationalism in the Balkans and other countries; and the risks deliberately taken by the Habsburg Empire to stave off its decline. 
Even more important, Germany had already surpassed Britain in industrial production by 1900, while China’s GDP (measured in dollars) currently is only three-fifths the size of the US economy. 
The US has more time and assets to manage the rise of Chinese power than Britain had with Germany. 
China is constrained by a natural balance of power in Asia in which Japan (the world’s third-largest economy) and India (about to surpass China in population) have no desire to be dominated by it. 
Succumbing to the fear that Thucydides described would be an unnecessary self-fulfilling prophecy for the US. 
Fortunately, polls show that the American public has not yet succumbed to a hysterical portrayal of China as an enemy as strong as the Soviet Union was during the Cold War. 
Neither China nor the US poses an existential threat to the other the way that Hitler’s Germany or Stalin’s Soviet Union did. 
China is not about to invade the US, and it is unable to expel America from the Western Pacific, where most countries welcome its presence. 
Japan, a major part of the so-called first island chain, pays nearly three-quarters of the host nation costs to keep 50,000 US troops based there. 
My recent visit to Tokyo confirmed for me that the alliance with the US is strong. 
If the Trump administration maintains it, the prospects are slight that China can drive the US from the Western Pacific, much less dominate the world. 
The US holds better strategic cards and need not succumb to Thucydidean fear. 
There is another dimension, however, that makes this fourth phase a “cooperative rivalry” rather than a Cold War. 
China and the US face transnational challenges that are impossible to resolve without the other. 
Climate change and rising sea levels obey the laws of physics, not politics. 
As borders become more porous to everything from illicit drugs to infectious diseases to terrorism, the largest economies will have to cooperate to cope with these threats. 
Some aspects of the relationship will involve a positive-sum game. 
US national security will require power with China, not just over China. 
The key question is whether the US is capable of thinking in terms of a “cooperative rivalry.” 
Can we walk and chew gum at the same time? 
In an age of populist nationalism, it is much easier for politicians to create fear about a new cold war. 

China and a New Balance of Power 
SHANGHAI – The last rival superpower to the United States, the Soviet Union, collapsed in 1991. 
But, apart from its military strength, the USSR was never really powerful enough to counterbalance US influence. 
In the late 1980’s, Japan seemed capable of challenging America’s industrial leadership, but by the 1990’s it lost its competitive edge. 
China might itself wish to be a major force in a multi-polar world, but has been plagued by its lack of overall strength. 
Given these realities, China sees the expanding European Union as a likely counterweight to unchecked US power. 
In terms of economic output, today’s EU is on par with the US. 
But it has yet to build a strong defense system that can respond effectively either to regional contingencies or to global needs. 
What would be the strength of such a system if and when it is developed, and how will it compare with that of the US? 
In assessing America’s strength, China follows US debates on the merits of a uni-polar or a multi-polar world with keen interest. 
Some Americans favor a uni-polar system in which the US dominates. 
Such a Pax Americana would cost the country less to sustain, but the world would worry if America adopts a wrong policy, as has been the case in Iraq. 
The US certainly has a right to curb terrorists like those who staged the attack on September 11, 2001. 
But the “war on terror” did not warrant the decision to attack a sovereign state and topple its government on the flawed presumption that it housed weapons of mass destruction and was linked to the 2001 attacks. 
The US went to war despite strong opposition from France, Germany, Russia, China, and other United Nations Security Council members. 
France and Germany have since sought to restore good relations with the US, but continue to disapprove of the war. 
The Middle East, always a region of concern for Europe, has become even less stable as a result of the war. 
American leadership has been one of the war’s casualties. 
In China, the concept of an independent European defense – embodied in the European Security and Defense Policy (ESDP), as well as the EU’s Rapid Reaction Force (RRF) and various police missions – is thus generally seen as necessary and effective in a multi-polar world system. 
China observes that on most security matters, the ESDP will (for now) mimic American security interests, because the EU and US share fundamental values of human rights and democracy. 
Moreover, many EU members have simultaneously pledged their defense capabilities to NATO, which has been led by the US since its creation. 
But the ESDP, once fully developed, will not necessarily follow America’s lead unconditionally, especially if American policy continues to deviate from the norm of international law, as in Iraq. 
As a result of acquiring a pan-European defense capacity, the Europeans are likely to play a more independent role than at present in managing intra-European security relations and carrying out global missions. 
China welcomes this expanded security role for the EU. 
Although it remains wary of international intervention by the EU, the substance and pattern of ESDP operations are likely to win China’s respect for several reasons. 
First, China’s leaders note that the ESDP gives priority to the legitimacy of its missions. 
So far, all ESDP missions have respected international law and governmental arrangements among disputing parties. 
Most of its military or police missions have been based on UN Security Council resolutions, and ESDP missions outside Europe have been at the invitation of local authorities. 
Of course, ESDP security missions, even those in accordance with Security Council resolutions, may not operate within the UN system – the EU prefers its own independent leadership. 
The ESDP does not necessarily require Security Council authorization as a condition for its missions, and it retains an independent role in executing them. 
However, when compared with the US, the ESDP (in Chinese eyes) cares far more about international legitimacy, backed by the authority of the UN. 
Second, the ESDP is concerned with good governance and institution building. 
The EU is keen to restore or establish human rights, stability, and prosperity. 
Outside Europe, the ESDP acts to enhance governance rather than promote regime change, and the EU has often assisted governments’ efforts to improve security conditions. 
Third, the ESDP is open to international cooperation. 
The EU works with either non-EU states, such as NATO members like Canada, Norway, and Turkey, or applicants for EU membership. 
The ESDP cooperates with the UN and other regional organizations, such as the African Union and ASEAN. 
When the EU reaches out, it tends to play a leading role in these collaborations. 
There are good reasons to expect that China will continue to accept an independent European security mechanism. 
There is little concern, if any, about the ESDP intervening in internal Chinese affairs, such as Taiwan. 
Indeed, China wants a strong and independent Europe, and from that vantage point it is not too early for China to envisage a truly multi-polar global system. 

China and India Exposed 
BERKELEY – Chinese Premier Wen Jiabao’s forthcoming trip to India, following hard on the heels of President Barack Obama’s recent visit, will provide another opportunity for the media to gush about the growing global economic clout of China and India. 
We can be sure that the soft underbellies of both economies will be kept hidden from view. 
After a couple of centuries of relative stagnation, these two countries, containing nearly two-fifths of the world’s population, have experienced remarkably rapid income growth in the last three decades. 
In manufacturing and services (particularly software, business processing, etc.), respectively, China and India have made huge strides internationally, and their acquisition of global companies has attracted considerable attention. 
But some dubious assertions have, through constant repetition in recent, often breathless, accounts about the two economies, become part of conventional wisdom. 
Much of what really goes on inside these two large countries is often left out. 
For example, in terms of value added (the value of output after deducting the cost of materials and components), China, contrary to popular impression, is not yet the manufacturing center of the world. 
The Chinese produce about 15% of value added in world manufacturing, while the United States contributes about 24% and the European Union about 20%. 
Similarly, while India’s information technology-enabled services have gained an international reputation, the total number of people employed in this sector is less than 0.5% of India’s workforce. 
As such, it cannot, by itself, transform the Indian economy. 
Chinese growth is widely regarded as furiously export-driven, but domestic investment has in fact been the major component. 
Even at the height of global trade expansion in 2002-2007, exports (in value-added terms) accounted for only a little more than one-quarter of GDP growth, whereas domestic investment contributed a substantially larger share. 
Moreover, contrary to popular belief, much of the dramatic poverty reduction in China over the last three decades was due not to integration into the global economy, but to domestic factors like growth in the agricultural sector (where mass poverty was concentrated). 
This is attributable largely to public investment in rural infrastructure, and, in the initial period, to institutional changes in agrarian production organization and an egalitarian distribution of land-cultivation rights. 
Expansion of exports of labor-intensive manufactures has nonetheless lifted many Chinese out of poverty. 
That is not true of India, where exports are still mainly skill- and capital-intensive. 
Economic reform clearly has made the Indian corporate sector more vibrant and competitive, but most of the Indian economy is not in the corporate sector (public or private). 
Indeed, 92% of the labor force is employed in the informal sector. 
Indian poverty reduction has been significant, but not substantial. 
However, in terms of non-income indicators of poverty – for example, child mortality, malnutrition, and school dropouts – India’s performance has been dismal (in some respects worse even than in sub-Saharan Africa). 
In the financial media, China and India have become poster children for market reform and globalization, even though in matters of privatization, property rights, deregulation, and lingering bureaucratic rigidities, both countries have in many ways departed from economic orthodoxy. 
According to the US-based Heritage Foundation’s widely cited Index of Economic Freedom, China and India are relegated to the group described as “mostly unfree.” 
Out of a total of 157 countries in 2008, China ranked 126th and India 115th. 
Although socialist economic policies in both countries inhibited initiative and enterprise, a positive legacy of that period cannot be denied. 
It is arguable, for example, that Chinese socialism provided a strong launching pad for growth, particularly in terms of a solid base of education and health, rural electrification, a safety net enabled by equitable distribution of land rights, regional economic decentralization, and high female participation in the labor force. 
Moreover, a major part of the socialist legacy in both countries is the cumulative effect of the state’s active role in technological development. 
Unlike in India, where the private corporate sector is the most dynamic sector, in China state-controlled companies are some of the globally more successful. 
Even in famous private Chinese companies like Lenovo and Huawei Technologies, the ownership structure is highly convoluted, and the boundaries of state and private control rights blurred. 
The recent purchase of Volvo by the private Chinese automaker Geely generated much publicity, but most of the money was put up by municipal governments. 
Powerful political families run many Chinese state-owned enterprises. 
Indeed, there is some evidence that the overwhelming majority of multi-millionaires in China are relatives of high-ranking Communist Party officials. 
And, thanks to the large pool of savings generated by Chinese households and state-owned companies, the Chinese economy can for the time being bear the waste and misallocation implied by such crony capitalism. 
Without political reform, the long-run viability of such a system is in doubt. 
Premier Wen himself indicated as much in a speech in August that was widely noted abroad, but largely blacked out in Chinese media. 
The global media should now go further, and begin to examine the many features of the rise of China and India that depart from the simplistic narrative of the triumph of market reform. 

 

China and Russia in the New World Disorder 
Can Kosovo achieve independence without the tacit consent of Russia, and can there be a humanitarian and political solution to the tragedy in Darfur without the active goodwill of China? 
The two crises have nothing in common, but their resolution will depend in large part on whether these two permanent members of the United Nations Security Council use their veto power. 
Comparing the respective abilities of Russia and China to block key international initiatives makes no sense in itself, but it does constitute a useful tool for understanding the transformation of the international system that is now taking place as a direct consequence of the relative decline of America’s global power. 
From that standpoint, the deepening of chaos in the Middle East poses both opportunities and risks for Russia and China, which may force them to define the roles they want to play and the images they want to project in the world. 
The key question is this: Is Russia taking giant steps in the “wrong direction” while China is taking “minuscule” steps in the “right direction”? 
Superficially, Russia and China may give the impression that they are pursuing the same path when they both proclaim with pride that they are “back” on the world stage. 
But this boast means different things for each country. 
For China, a deeply self-confident country, to be “back” simply means regaining the country’s historical centrality in the world after an absence of more than two centuries. 
After all, at the end of the eighteenth century, China became the world’s first producer of manufactured goods, and it perceives itself as a center of civilization unequalled by any other in Asia, if not the world. 
China’s renewed self-confidence is based on its remarkable economic prowess, which is derived not from natural resources, but from productivity and creativity. 
Whatever the huge political, social, and economic tensions may exist, there is a “feel good” factor in China, a sense of progress, with the 2008 Olympics in Beijing figuring as the symbolic moment that will proclaim to the world the scale of the country’s achievements. 
Above all, with the exception of the Taiwan issue, China is a satisfied status quo power when it comes to the evolution of the international system – a patient actor that finds it perfectly legitimate to behave and to be seen as the world’s number two power. 
By contrast, the Russians remain insecure about their status in the world. 
Russia’s explosive “revisionist” behavior on the eve of the recent G8 summit is an indication of the Kremlin’s “unsatisfied” nature. 
Because they know they are less potent, particularly in demographic and economic terms, Russians feel they have to do “more.” 
For them, to say “Russia is back” means that the humiliating Yeltsin years are over, and that they now must be treated as equals, particularly by the United States. 
Russians are nostalgic not for the Cold War as such, but for the international status they lost when it ended. 
Now that America is no longer a “hyperpower” with no strategic challengers, Russia has reasserted its status as a “superpower,” a claim that is not necessarily supported by reality. 
Unlike the Chinese, the Russians do not create economic wealth, but merely exploit their energy and mineral resources. 
Moreover, unlike the Chinese, they have not always been confident of their position in the world. 
Torn between Europe and Asia in cultural and political terms, victimized by a dark, narcissistic instinct that pervades their reading of their past and their visions of the future, it should surprise no one that Russia is now behaving like a “revisionist” power. 
Unsatisfied with their inner identity, it is only natural that Russians should demand changes that make them feel more secure and proud. 
Less than 20 years ago, the Czech Republic and Poland were part of their sphere of influence, so Russians understandably cannot accept the US unilaterally implanting its security system there. 
Of course, in their respective judgments on Russia and China, the West – and Europeans in particular – may be demonstrating selective emotions. 
“We” tend to be less demanding of China than of Russia, because we tend to see Russia as “European” (at least culturally). 
As a result, the culture of physical violence and verbal provocation that is gaining ground in Putin’s Russia is deeply disturbing, whereas we tend to judge Chinese misdeeds with a greater sense of distance, if not indifference. 
But the differences between Russia and China today may prove to be less significant tomorrow if the deterioration in the Middle East imposes a sense of collective responsibility on all five permanent members of the UN Security Council. 
It is one thing for Russia and China to exploit America’s growing difficulties from Gaza to Kabul; but it is quite another if the situation deteriorates to the point of general destabilization in the region. 
Indeed, the Middle East’s deepening problems may impose a sense of restraint in Russia and China by forcing them to calculate not in terms of their global “nuisance value” vis-à-vis the West, but in terms of their ability to make a positive and stabilizing contribution to the world order. 

The Two Innovation Economies 
HONG KONG – For 250 years, technological innovation has driven economic development. 
But the economics of innovation are very different for those at the frontier versus those who are followers striving to catch up. 
At the frontier, the innovation economy begins with discovery and culminates in speculation. 
From scientific research to identification of commercial applications of new technologies, progress has been achieved through trial and error. 
The strategic technologies that have repeatedly transformed the market economy – from railroads to the Internet – required the construction of networks whose value in use could not be known when they were first deployed. 
Consequently, innovation at the frontier depends on funding sources that are decoupled from concern for economic value; thus, it cannot be reduced to the optimal allocation of resources. 
The conventional production function of neoclassical economics offers a dangerously misleading lens through which to interpret the processes of frontier innovation. 
Financial speculation has been, and remains, one required source of funding. 
Financial bubbles emerge wherever liquid asset markets exist. 
Indeed, the objects of such speculation astound the imagination: tulip bulbs, gold and silver mines, real estate, the debt of new nations, corporate securities. 
Occasionally, the object of speculation has been one of those fundamental technologies – canals, railroads, electrification, radio, automobiles, microelectronics, computing, the Internet – for which financial speculators have mobilized capital on a scale far beyond what “rational” investors would provide. 
From the wreckage that has inevitably followed, a succession of new economies has emerged. 
Complementing the role of speculation, activist states have played several roles in encouraging innovation. 
They have been most effective when pursuing politically legitimate missions that transcend narrow economic calculation: social development, national security, conquering disease. 
In the United States, the government constructed transformational networks (the interstate highway system), massively subsidized their construction (the transcontinental railroads), or played the foundational role in their design and early development (the Internet). 
Activist states around the world have funded basic science and served as early customers for the novel products that result. 
For a quarter-century starting in 1950, the US Department of Defense – to cite one crucial example – combined both roles to build the underpinnings of today’s digital economy. 
For countries following an innovative leader, the path is clear. 
Mercantilist policies of protection and subsidy have been effective instruments of an economically active state. 
In the US, the first profitable textile mills blatantly violated British patents. 
And ferociously entrepreneurial private enterprise was supported by a broad array of state investments, guarantees, and protective tariffs, in accordance with the “American System” inspired by Alexander Hamilton and realized by Henry Clay. 
The great, neglected German economist Friedrich List, a student of Hamilton’s work, laid out an innovation roadmap for his own country in 1841, in his National System of Political Economy. 
It has been used repeatedly: by Japan beginning in the last decades of the nineteenth century; by the Asian Tigers in the second half of the twentieth century; and now by China. 
List noted how Britain’s emergence as “the first industrial nation” at the end of the eighteenth century depended on prior state policies to promote British industry. 
“Had the English left everything to itself,” he wrote, “the Belgians would be still manufacturing cloth for the English, [and] England would still have been the sheepyard for the [Hanseatic League].” 
Coherent programs to promote economic catch-up are relatively straightforward. 
But the transition from follower to leader at the frontier of the innovation economy is more challenging and elusive. 
The US managed the transition roughly between 1880 and 1930, combining the professionalization of management with a speculative taste for new technologies – electrification, automobiles, and radio – and state tolerance of the Second Industrial Revolution’s great industrial monopolies, which invested their super-profits in scientific research. 
The post-World War II invocation of national security as the legitimizing rationale for an economically active state extended America’s leadership. 
It is not yet clear whether East Asia’s economic powerhouses will succeed in making the transition from follower to frontier. 
To begin, the “national champions” of the catch-up phase must be rendered accessible to competitive assault. 
More generally, the state’s role must shift from executing well-defined programs to supporting trial-and-error experimentation and tolerating entrepreneurial failure. 
And the debilitating “corruption tax” that seems inevitably to accompany economic revolutions must be curbed, as it was in Britain during the nineteenth century and America during the twentieth. 
Here is the moment of strategic uncertainty. 
The “made in America” digital economy exhibits ample momentum in the private sector. 
But leadership of the next new economy – the low-carbon economy – is open. 
America is suffering the consequences of a generation-long effort to render the state illegitimate as an economic actor. 
Europe is mired in its oxymoronic commitment to “expansionary fiscal austerity.” 
Can China manage the economic, cultural, and political transitions necessary to assume the leadership role now up for grabs? 
I find it intriguing to go back almost 200 years and consider Britain’s political economy when the First Industrial Revolution was gathering steam. 
England in 1820 was governed by a corrupt oligarchy that exercised power in intimate collaboration with a national religious establishment. 
Political legitimacy was validated by fear of anarchy, the terrifying reality of which had been observable across the Channel within living memory. 
Arbitrary, draconian repression was the rule: under the “Bloody Code” of criminal justice, more than 100 felonies were punishable by death or transportation. 
The patent system was notoriously expensive and inaccessible. 
England’s rulers sought in vain to keep a lid on the greatest explosion of economic energy and financial wealth in human history. 
Over a long generation, England was transformed. 
From the Great Reform Act of 1832 to the repeal of the Corn Laws in 1846 – and on to the civil-service reforms initiated in 1853 and the Representation of the People Act of 1867 – Britain pursued its unique path toward a relatively stable and sustainable democratic capitalism. 
No doubt China’s own path will be as distinctive as the processes by which it has reached its current moment of opportunity. 
Whether or not its path proves to be as progressive as England’s may determine who assumes the mantle of global economic leadership. 

China and the Global Financial Crisis 
GENEVA – Is China an island of stability in the midst of the gathering global financial storm, or will it, too, soon be sucked into the vortex? 
Chinese officials have said that the crisis that began in the United States will not slow down long-planned reforms in China’s financial markets. 
They insist that China will go ahead with plans to introduce margin trading, short selling, and futures contracts on share prices. 
But China slowed capital-account liberalization after the Asian financial crisis ten years ago, so it is possible that America’s troubles could make China more cautious. 
China has played an important role in financing the US budget deficit in recent years, thanks to its effort to manage the renminbi’s exchange rate against the dollar. 
China does not want its large current-account surplus to cause the currency to overshoot on the upside, and it may now want to slow the renminbi’s appreciation because of concern about the global economic slowdown. 
If so, China would have to expand its foreign exchange reserves by another $300-400 billion, which would allow it to finance the large expansion in the US fiscal deficit. 
Recent slight declines in the value of the renminbi suggest that China’s exchange rate policy may be changing following its 20% appreciation of the currency since July 2005. 
Germany’s finance minister, Peer Steinbrück, has said that the crisis will reduce US financial hegemony and create a more multipolar world. 
The September 26 edition of The China Daily carried an article asking, “Is the Sun Setting on US Economic Supremacy?” 
The article reviewed examples of how foreign investors have lost money in the US market and concluded, “The outbreak of the latest crisis shows that the neo-conservative revolution launched in the 1980’s has already come to an end.” 
The article attributed the crisis to policies that “called on market forces to be given full play with the scrapping of government controls, especially on the financial market.” 
Chinese officials have not yet echoed Steinbrück’s comments, but the US experience will naturally make them more suspicious of Western investment bankers and US-style regulation. 
China has so far lost money on two of its major investments in Western financial firms (Morgan Stanley and Blackstone). 
It could have helped to contain the current crisis if it had accepted invitations to invest in Lehman Brothers, but, given its previous losses on Wall Street, it declined. 
As a result of concern about the global economy, the People's Bank reduced interest rates two weeks ago and joined the coordinated global interest rate cut on October 8 – the first time that China ever participated in a global monetary policy move. 
The government also announced plans earlier this month to increase infrastructure spending by $586 billion during 2009 and 2010. 
The projected spending increases are equal to 15% of GDP, and are the largest that any country has undertaken so far in response to the financial crisis. 
They demonstrate clearly that China is prepared to compensate for export weakness by stimulating domestic demand. 
China must now take further action to bolster consumer spending, which slumped to only 36% of GDP in 2007, from over 50% during the 1980’s, owing to the economy’s heavy dependence on exports and capital spending since the late 1990’s. 
The Chinese government’s goal will be to keep annual growth above 8% in order to generate sufficient employment to maintain social stability. 
It is currently also more sensitive to employment risks than usual, because several thousand small factories in the textile and toy sectors have closed this year as a result of the impact of rising labor costs and the appreciating renminbi on profit margins. 
China wants to shift from low value-added, labor-intensive industries such as textiles to higher value-added sectors such as electronics and capital goods. 
But it does not want to generate high levels of unemployment as this transition occurs. 
China has the resources to cope with the current financial crisis. 
Foreign exchange reserves are an immense $1.9 trillion. 
Booming tax receipts have provided the government with a fiscal surplus. 
The critical issue has been policymakers’ willingness to act promptly, before there is clear evidence of an economic downturn. 
The government’s stimulus package demonstrates that it is aware of the risks in the global economy and is prepared to act decisively. 
The current crisis marks an important step in China’s evolution as a great economic power. 
China has been pursuing a policy of extreme Keynesianism at a time when Europe and the US are also undertaking massive interventions in their financial systems to prevent the current crisis from leading to a global financial collapse. 
Thus, there is a growing convergence between Chinese and G-7 economic policy, born of the need to compensate for massive failures in US financial regulation and monetary policy. 
The US has been lobbying China for some time for economic policy changes aimed at stimulating domestic demand and open markets. 

Building a Chinese Rechtsstaat 
HONG KONG – A consensus is rapidly emerging within China that the rule of law is the single most important precondition for inclusive, sustainable, and long-term peace and prosperity. 
So it is worth considering how the rule of law differs from China’s current institutional arrangements. 
The rule of law has been defined in a variety of ways, but most authorities agree on certain key characteristics. 
As Kenneth W. Dam of the University of Chicago formulates it in his book The Law-Growth Nexus, the rule of law excludes secret law and legal impunity, while protecting individuals from legal discrimination and enforcing rules that favor them to their benefit. 
Thomas Bingham, former Lord Chief Justice and Senior Law Lord of the United Kingdom, proposed a somewhat more expansive, though clearly compatible, definition. 
For Bingham, the law must be accessible and – insofar as possible – intelligible, clear, and predictable. 
Everyone should be governed according to law, insulated from the personal discretion of those in power, and legal disputes should be resolved without prohibitive cost or inordinate delay. 
There should be equality before the law, together with adequate protection of fundamental human rights. 
Moreover, state power should be exercised reasonably, in good faith, and for the purposes for which it was conferred, with independent courts and judicial review of legislation ensuring that government does not exceed the limits of its authority. 
The courts and other official adjudicative bodies should provide fair procedures. 
And the state must comply with its obligations in international law. 
The rule of law cannot be built overnight. 
In England, the common-law tradition evolved over hundreds of years through thousands of legal cases in which local lawyers, judges, and juries played key roles. 
In Continental Europe, meanwhile, the rule of law appeared in the form of the civil-law tradition, which originated from Roman and Napoleonic codes that were revised periodically in response to regime change and revolution. 
Under both traditions, the rule of law requires a living body of rules and practices that adapts to changes in values, institutions, practices, expectations, and behaviors in a complex social system. 
This may be why Alexis de Tocqueville’s The Old Regime and the Revolution is widely read today in Beijing. 
Over the last 30 years, China, which adopted the civil-law tradition, has advanced rapidly along the path of rule by law, enacting laws and regulations similar to those in the West. 
It now enforces rules, regulations, and property rights for real estate and other assets, for starting a business, for employment, and for international trade and investment – all of which has made China’s economic rise possible. 
But, as China’s economy and society advance, engagement with global markets and growing awareness of rights have caused expectations to change faster than the law and judicial practices. 
The Chinese people are no longer satisfied with rule by law and are demanding an end to systemic corruption, inadequate land rights, discrimination against migrant workers, state-owned enterprises’ privileged position, and weak protection of intellectual property. 
Will China be able to establish the rule of law as it is understood and practiced in the West and elsewhere in Asia? 
In the absence of an independent judiciary, legal disputes in China are often resolved administratively, which means that discretion and lack of due process are a constant danger: as the Chinese saying goes, it is easy for someone to catch fish in muddied waters. 
This is why a key Confucian principle holds that one cannot rule the state without exercising discipline over oneself. 
Indeed, it is unclear whether a judiciary that is independent of the Chinese Communist Party can be developed, or how the CCP should separate itself from the government machinery. 
As Peking University law professor He Weifang has asked, should the CCP first subject itself to the Chinese constitution? 
China faces a long journey in building the rule of law, and sequencing that journey requires a holistic understanding of the role of the CCP. 
That role partly reflects the CCP’s birth in 1921 out of the violence and chaos that followed the collapse of the Qing Dynasty nine years earlier, as well as the three decades of civil war and Japanese colonization that intervened before the party took power in 1949. 
That legacy has shaped a deep aversion to the chaos arising from war and civil strife, and drove the CCP under Zhou Enlai to seek growth and stability through the “Four Modernizations” of agriculture, industry, national defense, and science and technology. 
Over time, the CCP has demonstrated its willingness to change its institutions, policies, style of operations, and short-term objectives in order to advance its core mission of building a modern China. 
Outside observers often forget that reform in China involves changing the oldest, largest, and most complex bureaucracy in the world. 
Over the last few decades, the CCP has succeeded in building the hard physical infrastructure of a modern state, but the creation of the soft infrastructure – institutions and practices consistent with the rule of law and representative government – is only beginning. 
Given China’s past experience, we are likely to see a period of institutional innovation, characterized by marginal changes leading to a system of checks and balances on the exercise of state power. 
This will require orchestration from the top and experimentation at the bottom. 
Nowadays, the proliferation of social media both facilitates that task and makes it more urgent. 
Successful models and effective policies can be shared and emulated more easily than ever, which will persuade more people than ever that there is no alternative to the rule of law if China’s modernization is to continue. 

China Won’t Wait 
BEIJING – The global balance of power is shifting. 
As the United States retreats from global leadership, China is expanding its international influence. 
Now, many in the West fear a China-led attempt to overhaul the rules and norms that underpin the existing world order. 
Are they right to be afraid? 
The reemergence of China as a major regional and even world power certainly poses profound challenges to the US-led international order that was created after World War II. 
But Chinese leaders’ goal is not explicitly to upend that order, which did, after all, prove flexible enough to enable the impoverished China of the 1970s to become what it is today. 
Instead, the goal is to ensure that the existing order can adequately accommodate the interests and objectives of both China and the US. 
China’s objectives are ambitious, to say the least. 
Deng Xiaoping’s policy of “reform and opening up” enabled an economic miracle that has lifted hundreds of millions of Chinese out of poverty. 
President Xi Jinping’s task is not only to complete what Deng started and eradicate poverty, but also to forge an economy that returns China to its position, held for most of recorded human history, as a major world power. 
It is that vision – what Xi calls the “China dream” – that really seems to unsettle the West, to the point that some advocate a kind of coordinated containment strategy. 
But the fact is that China’s domestic economy, like that of the US, is already strong enough to secure the country’s future influence. 
In that context, a backward-looking strategy of rigid containment is bound to fail. 
Worse, it could drive China to mount a more fundamental challenge to the existing international order. 
The only way to preserve that order is thus to prove that it remains flexible enough to respond to China’s needs and aspirations. 
Of course, this is easier said than done, not least because the West already feels blindsided by the scope and pace of China’s rise. 
But if the West was understandably unprepared for a development that is unprecedented in world history, its own complacency also played a major role. 
After the Soviet Union’s fall, Francis Fukuyama declared that the “end of history” – in the teleological Hegelian sense – had arrived. 
From then on, he argued, building a modern society would demand a market economy and a democratic political system. 
In the ensuing decades – even as China grew and modernized – Western thinkers treated this self-indulgent delusion as an empirical certainty. 
They confirmed their biases – and obscured reality further – by relying on rigid and outdated academic models that were inadequate to explain China’s success. 
Increasingly, however, people are recognizing reality. 
This was confirmed at a recent international conference in Beijing entitled “China and the West: The Role of the State in Economic Growth,” organized by Columbia University’s School of International and Public Affairs. 
Many participants agreed that China’s top-down decision-making structure, by enabling the government to invest in painful but needed reforms, confers a powerful development advantage. 
Some openly questioned the current US economic model, which is increasingly characterized by the monopolization of resources and distortion of political decision-making by vested interests. 
Yet this recognition may be part of the problem: though China continues to reassure the West that it is not nurturing imperial or expansionist ambitions, Western political leaders remain dubious, if not outright suspicious. 
They fear being blindsided yet again and losing control of a system that they have painstakingly built in their own image. 
But China’s rise will continue, whether the West is ready or not. 
It might help if Western thinkers developed new analytical frameworks to help political leaders better comprehend China’s development model. 
They can start by recognizing that China’s economic model – which has proved effective in boosting growth and reducing poverty in a sustained way – is a genuine alternative to the Western approach. 
Refusing to acknowledge reality will only generate more tension – and more risk, because failing to accommodate China will destabilize the rules-based order on which the world has come to rely. 
Instead of clinging to outdated assumptions and rigid ideas, the West should work with China to reform the existing global order in ways that benefit all. 
Otherwise, Western leaders’ worst fears will be realized. 

The Rise of Silicon China 
CAMBRIDGE – In the future, if not already, the Silicon Valleys of artificial intelligence (AI) will be in China. 
The tech firms Xiaomi, Baidu, Didi Chuxing, Meituan, and Toutiao are all headquartered in Beijing. 
Alibaba, China’s e-commerce giant, is based in Hangzhou. 
And Tencent, a multinational conglomerate that is investing heavily in AI, is in Shenzhen. 
Tencent already has a market capitalization higher than General Electric, and Baidu is larger than General Motors. 
China has a chance to lead in AI because it has managed to adopt new technologies very quickly. 
Just as millions of consumers in India went directly from no phones to smartphones – skipping landlines and flip phones altogether – Chinese consumers are now doing the same, and across a wide range of new technologies. 
For example, Chinese shoppers have skipped credit cards and gone straight to using e-payment platforms. 
While Apple Pay is struggling to gain momentum in the United States, Tencent is already facilitating more than 600 million cashless transactions every day. 
Tencent and other Chinese firms’ massive centralized platforms give them an edge in AI research and development, by allowing them to generate and collect huge stores of data with which to train their machine-learning algorithms. 
These platforms also enjoy near-monopolistic power, which will help them monetize AI applications in the future. 
Moreover, Chinese firms are benefiting from Chinese cultural norms concerning privacy. 
In the West, privacy is regarded as a personal right to one’s own space and, by extension, to one’s data. 
This conception of privacy is good for individuals and, arguably, for society; but it is bad for AI developers, who face hurdles accessing the data they need to train their algorithms. 
By contrast, in Chinese culture, privacy is viewed suspiciously, as a form of secrecy. 
It is assumed that an honest person should have nothing to hide from the public domain, so Chinese consumers are often happy to give up their data. 
Unlike in India, whose Supreme Court affirmed the right to privacy as a fundamental right, and the European Union, which has codified a “right to be forgotten,” there has not been any serious discussion about data privacy in China. 
That suits Chinese technology firms just fine. 
The legal framework in China allows tech firms to collect a wide range of user data for a wide range of purposes, such as constructing social-scoring systems, like Alibaba’s Sesame Credit. 
Still, limited financing and investment opportunities – both at home and abroad – could slow China’s momentum in AI and related fields. 
Chinese savers have little incentive to put their money in Chinese banks, because the rate of inflation is higher than the real rate of return on deposits. 
And given China’s high consumer-price volatility, many people are hesitant to lock up their savings for long. 
Moreover, there is little reason to invest in the Shanghai Stock Exchange Composite Index so long as economic growth rates are systematically higher than stock-market performance. 
And investors are wary of a repeat of 2015, when market turbulence led to government intervention, sharply falling prices, and several trading halts. 
The government did manage to stabilize prices, but it did so by creating added incentives for brokers and banning short-sells and the sale of stocks above a certain threshold. 
A third problem is that a steady increase in housing prices has made investment in all risk assets riskier. 
Zhou Xiaochuan, the governor of the People’s Bank of China, is now warning of a “Minsky moment,” whereby China’s growing mortgage-fueled household debt could lead to a sudden asset-price collapse. 
A final problem is that Chinese firms face limitations in investing overseas. 
In addition to the Chinese government’s own capital controls, the US government has been considering tighter restrictions on Chinese investments in strategically important sectors, particularly those relating to AI and machine learning. 
In fact, US regulators recently blocked Alibaba’s attempt to acquire MoneyGram, citing national-security concerns. 
The prospect of a China-led AI revolution poses both opportunities and challenges. 
From the perspective of the West, it could allow for more collaboration with one of the world’s most dynamic economies. 
And it could bring China more deeply into the fold of the rules-based international order. 
Yet, at the same time, China’s lead in AI will likely occasion more clashes between Chinese firms and foreign regulators. 
China’s tech giants are expanding internationally, and their approach to data collection and privacy will present a dilemma for other countries. 
The challenge will be to contain the risks of doing business with an illiberal state, without losing out on Chinese investments and innovations. 

China as a Superpower 
YALTA – Given its rapid and successful development, there can be no doubt that the People’s Republic of China will become one of the dominant global powers of the twenty-first century. 
Indeed, despite the massive problems that the country is confronting, it could even emerge as the global power. 
But it would be a mistake to assume that the reemergence of so-called “XXL powers” like China and India will simply bring a continuation of Western traditions. 
We will have to deal with a different type of superpower. 
Ever since the European powers set sail at the end of the fifteenth century to conquer the world, historiography and international politics have become accustomed to a certain pattern: military, economic, and technological power is translated into the exercise of influence over other countries, conquest, and even global dominance and empire. 
This was particularly true in the twentieth century, when, in the wake of two world wars, the United States and the Soviet Union replaced the European world powers on the global stage. 
The Cold War and the period of US global dominance after 1989/1990 followed this pattern as well. 
But China’s rise to global power, I believe, will not, owing to its massive population of 1.2 billion people, which threatens to overstretch the structures of any kind of government system and its decision makers. 
This is all the more true in times of rapid fundamental change, as is occurring in China now. 
The permanent danger of overstretching the country’s internal political structures is unlikely to permit any imperial foreign-policy role. 
Insofar as this is true, the United States won’t be replaced as the dominant power unless and until it abdicates that role. 
This may sound simple, but it will have far-reaching consequences for the coming century’s international order. 
The vital interests guiding Chinese policy are internal modernization, the ruling regime’s political stability and survival, and the country’s unity (which includes Taiwan). 
These interests are unlikely to change for a long time. 
As a result, China will become a largely inward-looking superpower, which – precisely for that reason – will pursue its foreign-policy interests in a completely unsentimental manner. 
Militarily, China will focus primarily on its regional supremacy, because the country’s unity depends on it. 
Otherwise, though, the transformation of China’s economy and society will be all-important, because the regime’s stability depends on it. 
For the Chinese leadership, this means that a growth rate of about 10% per year will be essential for a long time. 
Otherwise, the rapid and fundamental transformation of the country from a largely agrarian to an ultra-modern industrialized society could not proceed without destabilizing the system. 
But this focus on internal growth will have massive political consequences, both domestically and in foreign-policy terms. 
Domestically, China will be the first country that, due to its sheer size and required GDP growth, is forced to pursue a “green” economy. 
Otherwise, China would quickly reach its “limits to growth,” with disastrous ecological and, as a result, political consequences. 
Since China will be the most important market of the future, it will be decisive in determining not only what we produce and consume, but how. 
Consider the transition from the traditional automobile to electric transport. 
Despite European illusions to the contrary, this will be decided in China, not in the West. 
All that will be decided by the West’s globally dominant automobile industry is whether it will adapt and have a chance to survive or go the way of other old Western industries: to the developing world. 
In foreign-policy terms, China will attempt to protect its domestic transformation by securing resources and access to foreign markets. 
Sooner or later, though, China’s government will come to realize that America’s role as a global regulator is indispensible for China’s vital foreign-policy interests, because China is unable to assume that role, other global players aren’t available, and the only alternative to the US would be a breakdown of order. 
This US-Chinese tandem will run far from smoothly, and will do little but ameliorate crises and periods of serious economic and political confrontation, like that which is currently looming over the bilateral trade imbalance. 
Strategically, however, China and the US will have to rely on one another for a long time. 
This co-dependency will, at some point, also take shape politically, probably to the chagrin of all other international players, particularly the Europeans. 
Europe could change the course of this development only if it presented itself as a serious player and stood up for its interests on the global stage. 
The “G-2” of China and the US would probably be happy about that. 
But Europe is too weak and too divided to be effective globally, with its leaders unwilling to pursue a common policy based on their countries’ own strategic interests. 

The Economic Case for China’s Belt and Road 
NEW YORK – Since 2013, China has been pursuing its “Belt and Road” initiative, which aims to develop physical infrastructure and policy linkages connecting more than 60 countries across Asia, Europe, and Africa. 
Critics worry that China may be so focused on expanding its geopolitical influence, in order to compete with the likes of the United States and Japan, that it may pursue projects that make little economic sense. 
But, if a few conditions are met, the economic case for the initiative is strong. 
As a recent Asian Development Bank report confirms, many Belt and Road countries are in urgent need of large-scale infrastructure investment – precisely the type of investment that China has pledged. 
Some, such as Bangladesh and Kyrgyzstan, lack reliable electricity supplies, which is impeding the development of their manufacturing sectors and stifling their ability to export. 
Others, like Indonesia, do not have enough ports for internal economic integration or international trade. 
The Belt and Road initiative promises to help countries overcome these constraints, by providing external funding for ports, roads, schools, hospitals, and power plants and grids. 
In this sense, the initiative could function much like America’s post-1945 Marshall Plan, which is universally lauded for its contribution to the reconstruction and economic recovery of war-ravaged Europe. 
Of course, external funding alone is not sufficient for success. 
Recipient countries must also undertake key reforms that increase policy transparency and predictability, thereby reducing investment risk. 
Indeed, implementation of complementary reforms will be a key determinant of the economic returns on Belt and Road investments. 
For China, the Belt and Road investments are economically appealing, particularly when private Chinese firms take the lead in carrying them out. 
In 2013, when China first proposed the Belt and Road initiative, the country was sitting on $4 trillion in foreign-exchange reserves, which were earning a very low dollar return (less than 1% a year). 
In terms of China’s own currency, the returns were negative, given the expected appreciation of the renminbi against the US dollar at the time. 
In this sense, Belt and Road investments are not particularly costly for China, particularly when their far-reaching potential benefits are taken into account. 
China’s trade-to-GDP ratio exceeds 40% – substantially higher than that of the US – owing partly to underdeveloped infrastructure and inadequate economic diversification among China’s trading partners. 
By addressing these weaknesses, China’s Belt and Road investments can lead to a substantial increase in participant countries’ and China’s own trade volumes, benefiting firms and workers substantially. 
This is not to suggest that such investments are risk-free for China. 
The economic returns will depend on the quality of firms’ business decisions. 
In particular, because efficiency is not the primary consideration, Chinese state-owned enterprises (SOEs) might purse low-return projects. 
That is why China’s SOE-reform process must be watched carefully. 
Nonetheless, while the Belt and Road initiative is clearly driven partly by strategic objectives, a cost-benefit analysis shows that the economic case is also very strong – so strong, in fact, that one might ask why China didn’t undertake it sooner. 
Even the United States and other countries may reap significant economic returns. 
A decade after the global financial crisis erupted, recovery remains weak and tentative in much of the world. 
Bold, large-scale infrastructure investments can provide much-needed short-run stimulus to global aggregate demand. 
The US, for one, is likely to see a surge in demand for its own exports, including cars, locomotives, planes, and high-end construction equipment, and financial, accounting, educational, and legal services. 
In the longer term, the new infrastructure will ease logistical bottlenecks, reducing the costs of production inputs. 
The result will be higher productivity and faster global growth. 
If Belt and Road projects are held to high environmental and social standards, significant progress can also be made on global challenges such as climate change and inequality. 
The more countries choose to participate in these projects, the better the chance of achieving these standards, and the greater the global social returns will be. 
In an era when some of the world’s most influential countries are turning inward, talking about erecting trade barriers and constructing border walls, the world needs initiatives focused on building bridges and roads, both literal and figurative – initiatives like the Belt and Road strategy. 



China Deserves its Economic Success 
SHANGHAI – In the 1940s, the British historian Arnold J. Toynbee predicted that the United States and the Soviet Union would remain the world’s only two great powers. 
Not even China and India – with their “ancient civilizations” and “vast populations, territories, and resources” – would be able to “exert their latent strength” in the ensuing decades. 
Toynbee was right about the ensuing decades, but wrong about two places: the Soviet Union collapsed, and now China has become the world’s second-largest economy and a leading global player. 
But, at a time of powerful economic headwinds and a new cold war with the US, will China continue its rise, or go the way of the Soviet Union? 
To answer that question, it is first worth noting that China is not an enemy of the US, and the new Sino-American cold war is not rooted in a military standoff, much less ideological conflict. 
Rather, it reflects US President Donald Trump’s rejection of China’s economic rise and, more generally, of open policies. 
But it is not just Trump, with his populist “America First” agenda, who opposes globalization and advocates protectionism, particularly against China. 
Some liberal and highly respected economists, including Larry Summers, also worry about the outcome of globalization, even if they disagree with Trump’s approach. 
This points to rising anxiety about the US economy’s ability to weather the challenges ahead. 
Predictions that China could replace the US as the dominant global economy, like one made by Arvind Subramanian in 2011, have no doubt fueled American angst. 
To be sure, China faces plenty of challenges of its own, owing partly to a growth model that produced significant imbalances. 
But, contrary to the Trump administration’s narrative, those imbalances – particular the trade surplus vis-à-vis the US – were not intentionally created through exchange-rate controls and distortionary policies. 
After all, such tactics would be most damaging to China itself. 
The reality is that, despite its imbalances, China’s economic rise over the last 40 years has been extraordinary, and was achieved by its successful policy of committed structural reform. 
The country’s economy has been much more open than most others during the same period, and its astounding trade success – exports now account for about 60% of GDP growth – therefore deserves respect, not reproach. 
Critics should care about not only China’s exports minus imports, but also about its exports plus imports. 
Moreover, there are serious flaws in comparisons between China today and the Soviet Union during the Cold War. 
Back then, the Soviet Union’s vast natural resources, industrial and military expansion, and state-controlled economy caused many economists to overestimate its leaders’ ability to manage risks. 
In reality, the Soviet Union lacked key sources of dynamism, such as financial incentives for economic risk-taking, market competition, free trade with developed economies, and decentralized governance systems – all features of China’s economy today. 
Similarly, whereas an ever-expanding bureaucracy encumbered the Soviet economy, China’s economy benefits from the decentralization of considerable economic authority to local governments. 
Given these important differences, China seems unlikely to face anything like the Soviet Union’s fate. 
But that is not the only negative comparison that has been made. 
Some also suggest that China’s economy could follow in Japan’s footsteps, facing a “lost decade” (or two) of negligible growth. 
Again, however, the prediction ignores important differences between the two economies in question. 
Before Japan fell into stagnation, it had reached advanced-economy status, with a per capita GDP of $26,000 (in purchasing-power-parity terms) in 1990 – only slightly below the US level of $31,000. 
China, by contrast, still has a long way to go before catching up with the advanced economies. 
There is little reason to believe that, as long as China continues to pursue market opening and structural reforms, its average annual growth rate over the next 15 years will fall below 5%, as some have predicted. 
Subramanian’s own projected average per capita growth rate of 5.5% for the 2010-2030 period is already conservative, as it is more than 40% slower, overall, than growth over the previous 20 years. 
To provide some context, Subramanian looked at how other countries had fared when they had reached China’s level of development today (one-quarter of the standard of living in the US during its post-war economic heyday). 
He found that, while some countries suffered long periods of decline, others were able to sustain rapid growth. 
In Subramanian’s words, “a lot will have to go wrong” for China to find itself in the former category. 
In 1995, the late Yale University economist Gustav Ranis emphasized that the East Asian economies’ success in sustaining long-term growth owed much to the “flexibility of policymakers” who consistently responded to changing demands. 
“Each decade had its challenges,” Ranis wrote, and the government’s policy responses consistently accommodated, rather than obstructed, the needed changes. 
Ranis concluded that, “If there is one key to developmental success, it is avoiding the encrustation of ideas.” 
That is achieved through policymakers’ “ever-increasing reliance on the responsiveness of large numbers of dispersed decision-makers.” 
This description perfectly suits China. 
The response to the global economic crisis is a case in point. 
When advanced economies implemented unprecedented monetary stimulus, Chinese leaders deepened their commitment to shifting from an export-led to a domestic-consumption-driven growth model, even if it meant enduring a difficult period of structural adjustment, which explains the country’s slowing growth over the past five years. 
We should not underestimate China’s capacity to handle both longstanding and new challenges, including the trade war that Trump has initiated. 

Why China’s Capital-Account Liberalization Has Stalled 
BEIJING – In early 2012, the People’s Bank of China (PBOC) took advantage of what it viewed as a “strategic opportunity” to accelerate capital-account liberalization, which has been underway since 2009. 
The renminbi, it was expected, would be “basically” convertible by the end of 2015, and fully convertible by the end of 2020. 
But things haven’t worked out as expected. 
Problems began in 2014, when China’s capital account, which had been in surplus since the 1990s, swung into deficit. 
By the end of the next year, the deficit had grown so large that China’s overall balance of payments (BOP), too, turned negative, even as China’s current-account surplus remained above $300 billion. Last year, China’s capital-account deficit amounted to some $200 billion. 
To protect the renminbi, the PBOC intervened heavily – a process that proved costly. 
In less than two years, China’s foreign-exchange reserves fell from their peak of $4 trillion in mid-2014 to just below $3 trillion. 
At first, many were indifferent to the losses. 
Some even argued that there were no losses at all, but rather a positive shift in resource allocation, with official reserves becoming privately held foreign assets. 
After all, they pointed out, as China’s foreign-exchange reserves fell by $1 trillion from the second quarter of 2014 to the end of 2016, holdings of foreign assets by the private sector increased by $900 billion. 
But this argument failed to recognize that, during the same period, China’s cumulative current-account surplus was $750 billion. By definition, a country’s current-account surplus should be equal to the increase in the country’s net foreign assets. 
So what really happened was that $850 billion of China’s foreign-exchange reserves had gone missing. 
And, in fact, this process had begun much earlier. 
From the first quarter of 2011 to the third quarter of 2016, while China’s cumulative current-account surplus was $1.28 trillion, its net foreign assets fell by $12.4 billion. In other words, since 2011, some $1.3 trillion of China’s foreign assets has disappeared. 
Recognizing this dangerous trend, the PBOC abruptly hit the brakes on capital-account liberalization last year, tightening capital controls to a degree not seen since the Asian financial crisis of the late 1990s. 
The gap between changes in a country’s current account and its net-foreign-asset position partly reflects “net errors and omissions” in the BOP calculations. 
When capital flows out of a country, the transactions are supposed to be reflected in the BOP table. 
But in a country like China, where capital flight is illegal and investors attempt to evade capital controls, transactions might not be recorded at all. 
Instead, they show up in net errors and omissions, which in China have turned strongly negative in recent years, owing, in my view, to accelerating capital flight. 
Some in China have argued that the negative trend for net errors and omissions is simply the result of statistical mistakes. 
But when the shortfall amounts to $1.3 trillion, such claims can hardly be taken seriously. 
Nor can they account for the fact that, over the last six years, China’s net errors and omissions have moved in just one direction, always contributing to the BOP deficit. 
Although China’s net errors and omissions must be linked to capital flight, the figures do not have to line up exactly; net errors and omissions can be either larger or smaller than the actual figure. 
In China’s case, the latter seems to be true, for a simple reason: capital flight may also be recorded as regular capital outflows that do not affect errors and omissions. 
For example, as they pursue overseas mergers and acquisitions, some Chinese corporations have taken large amounts of capital out of China legally. 
But no one knows whether those outflows will translate into net foreign assets owned by Chinese residents. 
That is why, to gauge the scale of capital flight, one must also consider the difference between year-end investment positions, net of “financial transactions” and “other changes in position.” 
Doing so leads to a stark conclusion. 
Since 2012, and especially since 2014, China has experienced massive capital flight. 
If the government had not taken action to slow, if not halt, the process of capital-account liberalization in 2016, the results could have been truly devastating. 
In the past, the key challenge facing China was to stop importing “dark matter”: as one of the world’s largest net creditors, China needed to stop running an investment-income deficit. 
Today’s challenge is to avoid “matter annihilation”: China must prevent its net foreign assets from disappearing. 
In early 2013, when capital-account liberalization was in full swing, I wrote that, “with China’s financial system too fragile to withstand external shocks, and the global economy mired in turmoil, the PBOC would be unwise to gamble on the ability of rapid capital-account liberalization to generate a healthier and more robust financial system.” 
In fact, I continued, “Given China’s extensive reform agenda, further opening of the capital account can wait; and, in view of liberalization’s ambiguous benefits and significant risks, it should.” 
Four years later, this advice is worth reiterating. 

The Art of Capital Flight 
CAMBRIDGE – What impact will China’s slowdown have on the red-hot contemporary art market? 
That might not seem like an obvious question, until one considers that, for emerging-market investors, art has become a critical tool for facilitating capital flight and hiding wealth. 
These investors have become a major factor in the art market’s spectacular price bubble of the last several years. 
So, with emerging market economies from Russia to Brazil mired in recession, will the bubble burst? 
Just five months ago, Larry Fink, Chairman and CEO of BlackRock, the world’s largest asset manager, told an audience in Singapore that contemporary art has become one of the two most important stores of wealth internationally, along with apartments in major cities such as New York, London, and Vancouver. 
Forget gold as an inflation hedge; buy paintings. 
What made Fink’s elevation of art to investment-grade status so surprising is that no one of his stature had been brave enough to say it before. 
I am certainly not celebrating the trend. 
I tend to agree with the philosopher Peter Singer that the obscene sums being spent on premier pieces of modern art are disquieting. 
We can all agree that these sums are staggering. 
In May, Pablo Picasso’s “Women of Algiers” sold for $179 million at a Christie’s auction in New York, up from $32 million in 1997. 
Okay, it’s a Picasso. Yet it is not even the highest sale price paid this year. 
A Swiss collector reportedly paid close to $300 million in a private sale for Paul Gauguin’s 1892 “When Will You Marry?” 
Picasso and Gauguin are deceased. 
The supply of their paintings is known and limited. 
Nevertheless, the recent price frenzy extends to a significant number of living artists, led by the American Jeff Koons and the German Gerhard Richter, and extending well down the food chain. 
For economists, the art bubble raises many fascinating questions, but an especially interesting one is exactly who would pay so much for high-end art. 
The answer is hard to know, because the art world is extremely opaque. 
Indeed, art is the last great unregulated investment opportunity. 
Much has been written about the painting collections of hedge fund managers and private equity art funds (where one essentially buys shares in portfolios of art without actually ever taking possession of anything). 
In fact, emerging-market buyers, including Chinese, have become the swing buyers in many instances, often making purchases anonymously. 
But doesn’t China have a regime of strict capital controls that limits citizens from taking more than $50,000 per year out of the country? 
Yes, but there are many ways of moving money in and out of China, including the time-honored method of “under and over invoicing.” 
For example, to get money out of China, a Chinese seller might report a dollar value far below what she was actually paid by a cooperating Western importer, with the difference being deposited into an overseas bank account. 
It is extremely difficult to estimate capital flight, both because the data are insufficient and because it is tough to distinguish capital flight from normal diversification. 
As the late MIT economist Rüdiger Dornbusch liked to quip, identifying capital flight is akin to the old adage about blind men touching an elephant: It is difficult to describe, but you will recognize it when you see it. 
Many estimates put capital flight from China at about $300 billion annually in recent years, with a marked increase in 2015 as the economy continues to weaken. 
The ever-vigilant Chinese authorities are cracking down on money laundering; but, given the huge incentives on the other side, this is like playing whack-a-mole. 
Presumably, the anonymous Chinese buyers at recent Sotheby’s and Christie’s auctions had spirited their money out of the country before bidding, and the paintings are just an investment vehicle that is particularly easy to hold secretively. 
The art is not necessarily even displayed anywhere: It may well be spirited off to a temperature- and humidity-controlled storage vault in Switzerland or Luxembourg. 
Reportedly, some art sales today result in paintings merely being moved from one section of a storage vault to another, recalling how the New York Federal Reserve registers gold sales between national central banks. 
Clearly, the incentives and motives of art investors who are engaged in capital flight, or who want to hide or launder their money, are quite different from those of ordinary investors. 
The Chinese hardly invented this game. 
It was not so long ago that Latin America was the big driver in the art market, owing to money escaping governance-challenged economies such as Argentina and Venezuela, as well as drug cartels that used paintings to launder their cash. 
So how, then, will the emerging-market slowdown radiating from China affect contemporary art prices? 
In the short run, the answer is ambiguous, because more money is leaking out of the country even as the economy slows. 
In the long run, the outcome is pretty clear, especially if one throws in the coming Fed interest-rate hikes. 
With core buyers pulling back, and the opportunity cost rising, the end of the art bubble will not be a pretty picture. 

China’s $5 Trillion Opportunity 
SHANGHAI – China is facing the difficult task of managing a soft economic landing, after decades of spectacular expansion. 
Naysayers abound, but never mind them. 
China has an advantage that other countries in today’s troubled global economy lack: a clear path forward. 
If China carries out a sustained, comprehensive effort to raise productivity, it can address its growth challenges, reduce the risks of financial crisis, and complete its transition to a consumption-driven, high-income economy with a large and affluent middle class. 
If it does, its annual GDP could be an estimated $5 trillion larger by 2030 than it is likely to be if policymakers continue to pursue investment-led growth. 
And, in fact, China may have little choice. 
The traditional drivers of its economy – a vast pool of surplus labor and massive investments in infrastructure, housing, and industrial capacity – are becoming exhausted. 
The working-age population has peaked, urbanization is slowing, and the steel and cement industries are suffering from overcapacity. 
Returns on capital have declined, so China cannot rely on investment spending to generate sufficient growth. 
Fortunately, however, China has substantial room for gains in labor productivity, which is only 10-30% of the level in advanced economies. 
When the McKinsey Global Institute analyzed more than 2,000 Chinese companies in industries ranging from coal and steel to auto manufacturing and retail, it found opportunities to raise productivity by 20-100% by 2030. 
Consider China’s service sector. 
Though the sector has grown rapidly and now accounts for about 50% of GDP, low-value-added businesses still dominate. 
On average, service businesses in China are just 15-30% as productive as their counterparts in OECD countries. 
In addition to streamlining existing operations (for example, by introducing self-checkout systems in retail businesses), China has opportunities to complement its manufacturing sector with high-value-added business services in areas such as design, accounting, marketing, and logistics. 
In manufacturing itself, China can do more to automate its factories. 
China is the world’s largest purchaser of robots, but it still has only 36 robots per 10,000 workers, compared with 164 in the United States and 478 in Korea. 
Chinese companies have already shown that they can mix automated and manual assembly lines. 
They also can raise productivity by rationalizing operations and improving energy efficiency, bringing their performance closer to that of their global peers. 
Chinese companies are major producers in a broad range of industries, but they have yet to take over the steps that add the most value. 
When it comes to semiconductors, for example, Chinese companies mostly serve as foundries for companies that design and sell chips (and, in doing so, capture the most value). 
Similarly, generics account for 90% of Chinese pharmaceutical sales. 
China can support innovation in many ways, including by developing research-and-development clusters and helping inventors reap rewards through stronger intellectual property protection and reforms to the process of bringing firms to market. 
In the pharmaceutical industry, for example, a crop of innovative companies is developing a distinctively Chinese approach to drug discovery: massive scale and low-cost technical talent. 
These firms may be on their way to cracking the more lucrative business of brand-name drugs. 
Some of China’s biggest productivity opportunities are in sectors suffering from overcapacity. 
Over the past decade, overcapacity has reduced annual returns on capital in the country’s coal and steel industries from 17% to 6%. 
The Chinese auto industry is capable of building 40 million cars per year for a market that currently consumes 26 million. 
Restructuring industries like steel, by letting uncompetitive players fail and encouraging consolidation, could raise productivity dramatically without compromising the ability to meet demand. 
As companies move into higher-value-added activities, millions of better-paying jobs will be created, which should raise household incomes and move more Chinese into the middle class. 
In the first two or three years, however, before the income boost from rising productivity kicks in, the massive reallocation of resources could result in considerable pain and dislocation. 
Millions of low-skill workers will need to be retrained and redeployed, and GDP may grow more slowly than expected, before assuming a moderately rapid, steady pace through 2030. 
The alternative is a continuation of the status quo, with poorly performing companies propped up in the name of job preservation and social stability – even as they raise risks for Chinese banks. 
The country would use its resources unproductively, and its firms would become less globally competitive. 
China’s history provides reason to believe that its leaders will make the right choice. 
In the 1990s, ailing state industries and the Asian financial crisis risked dragging down the country’s economy. 
But, rather than attempting to use fiscal and monetary stimulus to provide a short-term economic boost, the government carried out wrenching reforms and put the country on the path to two decades of awe-inspiring, double-digit growth. 
Today, China faces a similar decision. 
It can settle for temporary fixes that will ultimately make the problem worse. 
Or it can seize the opportunity and press ahead with reforms that will boost productivity and create economic prosperity for years to come. 

The Limits of China’s Charm Offensive 
STOCKHOLM – Over the last decade, China has taken an increasingly muscular approach to relations with East Asian countries. 
But in recent months, it has surprised its neighbors with a charm offensive. 
What changed? 
In terms of China’s behavior in the region, quite a lot. 
In 2013, China unilaterally declared an Air Defense Identification Zone covering the East China Sea’s disputed Senkaku/Diaoyu Islands – a move that exacerbated tensions with Japan. 
A year later, China began to construct large artificial islands in disputed areas of the South China Sea. 
In 2016, China imposed sanctions on South Korea in response to the decision to allow the United States to deploy a missile-defense system there. 
Now, however, such geostrategic bullying seems to be taking a backseat to diplomacy. 
Last month, Chinese President Xi Jinping welcomed Japanese Prime Minister Shinzo Abe to Beijing. 
Abe’s visit to China was the first for a Japanese leader in seven years, and Xi’s scheduled visit to Japan next year will be the first for a Chinese president in more than a decade. 
Last week, Chinese Premier Li Keqiang headed to Singapore, where he signed an upgraded version of the China-Singapore free-trade agreement. 
He also hopes to sign and implement the Regional Comprehensive Economic Partnership, which China initiated several years ago to counter the now-defunct Trans-Pacific Partnership, next year (an overly ambitious target unlikely to be achieved, owing to the complexities of multi-party trade deals). 
China’s new, less antagonistic approach does not reflect a change of heart or objectives on the part of its leaders, but rather a change in the regional geopolitical landscape. 
Over the last six months, the US has abandoned its four-decade-old policy of engagement with China, adopting a containment strategy instead. 
Facing escalating geopolitical competition with the US, China is scrambling to win friends in the region. 
Although China’s charm offensive is very recent, its contours are already clear. 
The most prominent feature is trade. 
As the largest trading partner of numerous Asian countries, China will offer attractive trade terms to its neighbors, much as it has done with Singapore. 
China’s new tactics also include more frequent high-level diplomatic engagement, focused on leading regional players, such as South Korea, Indonesia, and Vietnam, in addition to Japan. 
Xi Jinping, for example, is expected to visit the Philippines on November 20-21. 
Through summits and other opportunities to convene senior officials, China will attempt to cultivate friendlier relations with its neighbors. 
To support these efforts, China’s propaganda machine has probably been instructed to tone down nationalist rhetoric and cut out content that might offend its neighbors. 
Finally, China may temporarily restrain its assertion of territorial claims. 
For example, it is unlikely to turn the Scarborough Shoal, which it seized from the Philippines in 2012, into another artificial island in the foreseeable future. 
Likewise, it will probably avoid sending ships close to the Senkaku/Diaoyu Islands and antagonizing Japan. 
East Asian countries have so far responded positively to China’s new diplomacy, and they would undoubtedly welcome any respite from Chinese belligerence. 
But neither sweet talk nor trade deals will secure reliable allies for China, especially in a contest against the US. 
Few in East Asia want to live in the shadow of a hegemonic China. 
The fear of that prospect has long underpinned America’s East Asian security architecture, which is based on bilateral alliances and forward deployment of the US military. 
And it sustains widespread support in East Asia for the US to act as a strategic counterweight in the region. 
To be sure, most East Asian countries prefer not to choose a side outright. 
But if the US and China were to engage in direct strategic conflict – an increasingly likely prospect – it is the US that would gain the most support, especially from allies like Japan, South Korea, and Vietnam. 
Malaysia and Singapore would probably also back the US. 
If China wants to make reliable friends in its neighborhood, it will have to make far greater concessions on security issues, especially territorial disputes. 
For example, a permanent settlement of claims concerning the Senkaku/Diaoyu Islands would go a long way toward convincing Japan that China does not pose a serious threat. 
Similarly, China’s acceptance of international arbitration of its claims in the South China Sea would assuage the fears of its Southeast Asian neighbors. 
As it stands, there is no indication that Xi, who has pledged to “make China great again,” is so much as considering such concessions. 
But as long as China takes a purely tactical approach, it will reap purely tactical gains. 
When it comes to building friendships that can withstand strategic conflict with the US, those gains will not be nearly enough. 

The Limits of Chinese Soft Power 
CAMBRIDGE – China has been making major efforts to increase its ability to influence other countries without force or coercion. 
In 2007, then-President Hu Jintao told the Communist Party that the country needed to increase its soft power; President Xi Jinping repeated the same message last year. 
They know that, for a country like China, whose growing economic and military power risks scaring its neighbors into forming counter-balancing coalitions, a smart strategy must include efforts to appear less frightening. 
But their soft-power ambitions still face major obstacles. 
To be sure, China’s efforts have had some impact. 
As China enrolls countries as members of its Asian Infrastructure Investment Bank and doles out billions of dollars of aid during state visits abroad, some observers worry that, when it comes to soft power, China could actually be taking the lead over countries like the United States. 
The American sinologist David Shambaugh, for example, estimates that the country spends roughly $10 billion a year in “external propaganda.” 
By comparison, the US spent only $666 million on public diplomacy last year. 
Yet the billions of dollars China is spending on its charm offensive have had only a limited return. 
Polls in North America, Europe, India, and Japan show that opinions about China’s influence are predominantly negative. 
The country is viewed more positively in Latin America and Africa, where it has no territorial disputes and human-rights concerns are not always high on the public agenda. 
But even in many countries in those regions, Chinese practices like importing labor for infrastructure projects are unpopular. 
Combining hard and soft power into a smart strategy, it turns out, is not easy. 
A country derives its soft power primarily from three resources: its culture (in places that find it appealing), its political values (when it lives up to them at home and abroad), and its foreign policies (when they are seen as legitimate and having moral authority). 
China has emphasized its cultural and economic strengths, but it has paid less attention to the political aspects that can undermine its efforts. 
Two major factors limit China’s soft power, as measured by recent international polls. 
The first is nationalism. 
The Communist Party has based its legitimacy not only on a high rate of economic growth, but also on appeals to nationalism. 
Doing so has reduced the universal appeal of Xi’s “Chinese Dream,” while encouraging policies in the South China Sea and elsewhere that antagonize its neighbors. 
With, for example, China bullying the Philippines over possession of disputed islands in the South China Sea, the Confucius Institute that China established in Manila to teach Chinese culture can win only so much goodwill. 
(China has opened some 500 such institutes in more than 100 countries.) 
The consequences of the country’s foreign policy can be seen in last year’s anti-Chinese riots in Vietnam following the positioning of a Chinese oil drilling rig in waters claimed by both countries. 
The other limit is China's reluctance to take full advantage of an uncensored civil society. 
As noted by The Economist, the Chinese Communist Party has not bought into the idea that soft power springs largely from individuals, the private sector, and civil society. 
Instead, it has clung to the view that the government is the main source of soft power, promoting ancient cultural icons that it thinks might have global appeal, often using the tools of propaganda. 
In today’s media landscape, information is abundant. 
What is scarce is attention, which depends on credibility – and government propaganda is rarely credible. 
For all of China’s efforts to position the Xinhua news agency and China Central Television as competitors of CNN and the BBC, the international audience for brittle propaganda is vanishingly small. 
The US, by contrast, derives much of its soft power not from the government, but from civil society – everything from universities and foundations to Hollywood and pop culture. 
China does not yet have global cultural industries on the scale of Hollywood or universities capable of rivaling America’s. 
Even more important, it lacks the many non-governmental organizations that generate much of America’s soft power. 
In addition to generating good will and promoting the country’s image abroad, non-governmental sources of soft power can sometimes compensate for the government’s unpopular policies – like the US invasion of Iraq – through their critical and uncensored reaction. 
China, by contrast, has watched its government policies undermine its soft-power successes. 
Indeed, the domestic crackdown on human-rights activists undercut the soft-power gains of the 2008 Beijing Olympics. 
And the benefits of the 2009 Shanghai Expo were rapidly undermined by the jailing of Nobel Peace Prize laureate Liu Xiaobo and the television screens around the world broadcasting scenes of an empty chair at the Oslo ceremonies. 
Marketing experts call this “stepping on your own message.” 
China’s aid programs are often successful and constructive. 
Its economy is strong, and its traditional culture is widely admired. 
But if the country is to realize its enormous soft-power potential, it will have to rethink its policies at home and abroad, limiting its claims upon its neighbors and learning to accept criticism in order to unleash the full talents of its civil society. 
As long as China fans the flames of nationalism and holds tight the reins of party control, its soft power will always remain limited. 

China is Losing the New Cold War 
HONG KONG – When the Soviet Union imploded in 1991, the Communist Party of China (CPC) became obsessed with understanding why. 
The government think tanks entrusted with this task heaped plenty of blame on Mikhail Gorbachev, the reformist leader who was simply not ruthless enough to hold the Soviet Union together. 
But Chinese leaders also highlighted other important factors, not all of which China’s leaders seem to be heeding today. 
To be sure, the CPC has undoubtedly taken to heart the first key lesson: strong economic performance is essential to political legitimacy. 
And the CPC’s single-minded focus on spurring GDP growth over the last few decades has delivered an “economic miracle,” with nominal per capita income skyrocketing from $333 in 1991 to $7,329 last year. 
This is the single most important reason why the CPC has retained power. 
But overseeing a faltering economy was hardly the only mistake Soviet leaders made. 
They were also drawn into a costly and unwinnable arms race with the United States, and fell victim to imperial overreach, throwing money and resources at regimes with little strategic value and long track records of chronic economic mismanagement. 
As China enters a new “cold war” with the US, the CPC seems to be at risk of repeating the same catastrophic blunders. 
At first glance, it may not seem that China is really engaged in an arms race with the US. 
After all, China’s official defense budget for this year – at roughly $175 billion – amounts to just one-quarter of the $700 billion budget approved by the US Congress. 
But China’s actual military spending is estimated to be much higher than the official budget: according to the Stockholm International Peace Research Institute, China spent some $228 billion on its military last year, roughly 150% of the official figure of $151 billion. 
In any case, the issue is not the amount of money China spends on guns per se, but rather the consistent rise in military expenditure, which implies that the country is prepared to engage in a long-term war of attrition with the US. 
Yet China’s economy is not equipped to generate sufficient resources to support the level of spending that victory on this front would require. 
If China had a sustainable growth model underpinning a highly efficient economy, it might be able to afford a moderate arms race with the US. 
But it has neither. 
On the macro level, China’s growth is likely to continue to decelerate, owing to rapid population aging, high debt levels, maturity mismatches, and the escalating trade war that the US has initiated. 
All of this will drain the CPC’s limited resources. 
For example, as the old-age dependency ratio rises, so will health-care and pension costs. 
Moreover, while the Chinese economy may be far more efficient than the Soviet economy was, it is nowhere near as efficient as that of the US. 
The main reason for this is the enduring clout of China’s state-owned enterprises (SOEs), which consume half of the country’s total bank credit, but contribute only 20% of value-added and employment. 
The problem for the CPC is that SOEs play a vital role in sustaining one-party rule, as they are used both to reward loyalists and to facilitate government intervention on behalf of official macroeconomic targets. 
Dismantling these bloated and inefficient firms would thus amount to political suicide. 
Yet protecting them may merely delay the inevitable, because the longer they are allowed to suck scarce resources out of the economy, the more unaffordable an arms race with the US will become – and the greater the challenge to the CPC’s authority will become. 
The second lesson that China’s leaders have failed to appreciate adequately is the need to avoid imperial overreach. 
About a decade ago, with massive trade surpluses bringing in a surfeit of hard currency, the Chinese government began to take on costly overseas commitments and subsidize deadbeat “allies.” 
Exhibit A is the much-touted Belt and Road Initiative (BRI), a $1 trillion program focused on the debt-financed construction of infrastructure in developing countries. 
Despite early signs of trouble – which, together with the Soviet Union’s experience, should give the CPC pause – China seems to be determined to push ahead with the BRI, which the country’s leaders have established as a pillar of their new “grand strategy.” 
An even more egregious example of imperial overreach is China’s generous aid to countries – from Cambodia to Venezuela to Russia – that offer little in return. 
According to AidData at the College of William and Mary, from 2000 to 2014, Cambodia, Cameroon, Côte d’Ivoire, Cuba, Ethiopia, and Zimbabwe together received $24.4 billion in Chinese grants or heavily subsidized loans. 
Over the same period, Angola, Laos, Pakistan, Russia, Turkmenistan, and Venezuela received $98.2 billion. 
Now, China has pledged to provide $62 billion in loans for the “China-Pakistan Economic Corridor.” 
That program will help Pakistan confront its looming balance-of-payments crisis; but it will also drain the Chinese government’s coffers at a time when trade protectionism threatens their replenishment. 
Like the Soviet Union, China is paying through the nose for a few friends, gaining only limited benefits while becoming increasingly entrenched in an unsustainable arms race. 
The Sino-American Cold War has barely started, yet China is already on track to lose. 

China Confronts the Global Meltdown 
BEIJING – For three decades, China has been growing at an average annual rate of 9.8%. 
For most of this time, world markets were favorable, with no major global economic or financial crisis or slowdown. 
Yes, there were regional crises such as Southeast Asia’s financial turmoil of 1997-1998 or the collapse of Japan’s housing bubble in 1990 and America’s high-tech bubble in 2000. 
But none of these proved a serious obstacle to China’s long boom. 
The past three months, however, have seen a significant slowdown in China’s exports, domestic investment, industrial output, and tax revenues. 
A major slowdown seems to be looming. 
Will China’s rapid growth persist? 
I believe it will. 
Within China, the current slowdown is mostly homemade. 
Since 2004, China’s government has sought to cool an overheating economy by bringing the growth rate down from 12% to a more sustainable 8-9%. 
It even began to tax exports in order to reduce the trade surplus. 
Of course, if Chinese policymakers could have predicted what has now happened in the world economy, they might have been less stringent in trying to rein in growth. 
But one reason that China has been able to maintain growth over the past 30 years is that it started counter-cycle macroeconomic intervention during the boom times, rather than waiting for a collapse. 
China’s government never believed that it should leave what happens in the economy solely to the market. 
When there is no big bubble, there is no need to worry about a big crisis. 
Another reason that China’s strong growth is likely to continue is that its economic fundamentals are sound. 
All the factors that encourage high growth remain in place: low labor costs, education, high savings, improving infrastructure, and rapid urbanization. 
Moreover, China’s fiscal position is one of the best in the world. 
Government deficits rarely exceeded 3% of GDP in past decades, and there were surpluses in recent years. 
Indeed, the government debt-to-GDP ratio is about 20%, compared with more than 80% in the United States, 160% in Japan, and 60-90% in Europe. 
Monetary policy has been prudent, and the threat of inflation has now been lessened by the decline in commodity and oil prices. 
The international balance of payments remains in surplus, and there is still a net capital inflow despite the global credit crunch. 
Official foreign exchange reserves will soon reach US$ 2 trillion. 
Thus, policymakers have ample room to maneuver if anything should go wrong. 
The recent $568 billion fiscal stimulus package, which will be spent on railway expansion, subway construction, low-budget housing programs for the poor, irrigation systems, rural social security, and health care, will add a few percentage points to growth over the next couple years. 
With monetary policy and some of the administrative controls on investment and local spending being relaxed, the slowdown should be brief. 
But it is not all good news in China’s economy, because low consumption remains a big weakness. 
Household consumption only accounted for 34% of GDP and total consumption is less than 50% of GDP in 2007. 
That weakness, however, is institutional and cannot be easily corrected in the short run. 
So, with its domestic economy basically secure, is there anything China can do to help the world economy? 
If China can manage to maintain real growth at 8% per annum over the next two years, emerging markets may be able to grow at 4%. 
That may prevent the world economy from falling into recession. 
Indeed, China now looks like it can play the role of “growth anchor.” 
But China should not be expected to do too much more. 
World financial stabilization, for example, is not something China can do much to help directly. 
China played little part in the global derivatives markets, and does not have much toxic securities to clean up or banks to save in order to unfreeze credit flows. 
Perhaps China should use its $1.9 trillion official reserves to buy more foreign debt, but this huge asset pool is already heavily loaded with foreign sovereign bonds, so any increase can only be incremental. 
China is also probably unsuited at the moment to play a central role in reforming the global financial and monetary system in 2009 because it has not yet fully liberalized its capital accounts and financial system. 
So Chinese negotiators would rather play a supporting role and let others, both developed and developing countries, take the lead in most issues concerning risk control and regulations. 
But China is likely to increase its voice on one issue – the US dollar’s status as global reserve currency. 
China has been criticized in the past for allegedly manipulating its exchange rate, because it did not revalue its currency as much as the US demanded. 
So China might like to see, for example, amendments to the IMF mandate or the addition of a “chapter” to the IMF’s working agenda that discipline America’s money supply and debt accumulation. 
In China’s view, it is not enough merely to require others to accommodate themselves to dollar devaluation. 
As a developing country with US$ 2,500 per capita income and 35% of its labor force still in agriculture, where workers earn only about $600 per year, China’s domestic problems remain enormous. 
Thus, development will continue to be the top priority, including the development of China’s own financial market. 
The good news is that China recognizes how much it has benefited from the marketization and openness of the past 30 years. 
There is no turning back on its path toward full involvement in the global market, despite the current crisis. 

The Making of China’s Consumer Society 
HONG KONG – China’s transformation from a manufacturing-driven and export-led economy to one underpinned by services and domestic consumption is firmly underway. 
And that’s good news not just for China, but also for the future of the global economy. 
The 2016-17 edition of the Blue Book of China’s Commercial Sector by Fung Business Intelligence and the Chinese Academy of Social Sciences maps the change. 
China’s retail markets reached CN¥30 trillion ($4.6 trillion) in 2015, after more than a decade of double-digit growth. 
Household consumption has begun to climb, even as the pace of investment has fallen, and now exceeds 60% of GDP. 
Though the consumption growth rate has slowed to 10.7%, the Blue Book projects that China’s domestic market may reach CN¥50 trillion by 2020. 
A key driver of this transformation has been Internet technology. 
Building on heavy investments in public infrastructure, such as ports, airports, roads, rail, and telecommunications, the Internet is now expanding rapidly the range of choices available to Chinese consumers, while lowering costs and accelerating delivery. 
As a result, China’s online retail sales have surged in recent years, from 6.3% of total retail sales in 2012 to 12.9% by 2015. 
By 2020, 40% of all retail transactions in China may be conducted online. 
Online sales via mobile phones have jumped from only 1.5% in 2011 to 55.5% in 2015, and may reach 73.8% by 2018. 
China has now overtaken the United States to build the world’s largest online retail market. 
With a growth rate of some 33%, it is also the fastest-growing such market. 
And despite growth in Internet use – the number of connected Chinese has risen from 253 million in 2008 to 688 million last year – there is plenty of room for further expansion. 
This progress reflects innovations that enable broad-based consumption without the construction and maintenance of expensive brick-and-mortar outlets. 
In fact, growth in mobile sales has been driven by lower-income consumers, particularly in rural areas, where more than 81% of Internet use occurs via mobile devices. 
One key innovation has been multi-sided platforms like Alibaba, which, by providing access to production, logistics, distribution, and payments, challenge traditional business models – and with considerable success. 
In the second quarter of 2016, Alibaba announced that its revenue from China’s retail market had increased by 49% year on year; another online platform, Tencent, reported a 52% increase. 
By connecting small and medium-size enterprises (which account for 80% of employment in China) with the consumer base, such platforms erode some of the competitive advantage of large state-owned enterprises (SOEs). 
Indeed, while the returns from China’s Internet retailing revolution have been highly concentrated, for once this concentration has not been in the state sector. 
In online retailing via mobile devices, Alibaba held an 84.2% share of the market last year, with the next largest online retailer, JD.com, capturing just 5.7%. 
In the business-to-consumer market, Alibaba’s Tmall claimed a 58% market share in the third quarter of 2015, with JD.com taking just 22.9%. 
In third-party online payment services, Alipay held 47.5% of the market, while Tenpay captured 20%, and UnionPay, the only service developed by the banking community, had 10.9%. 
As a result, SOEs, which have long specialized in single markets or products, have now begun to recognize that they need to re-tool to compete both in China and in global markets. 
Given that SOE reform has long been on China’s agenda, this extra impetus may prove beneficial. 
But the challenge of determining how to create a level playing field for healthy competition and improve capital allocation in the Internet age remains. 
It is not just China’s large companies that need to rethink their business models. 
As China’s e-commerce platforms become increasingly global, they may erode the dominance of giant multinationals in international trade. 
Already in 2015, China’s cross-border e-commerce amounted to an estimated ¥5.2 trillion, or 17.6% of the country’s total trade; it may reach ¥8 trillion, or 23% of total trade, by next year. 
All of this growth is great news for China; indeed, at a time of slowing performance in many traditional sectors, online retailing could be an economic lifesaver. 
But it also represents a major challenge for a government that has long relied on top-down decision-making. 
China’s e-commerce revolution enables the country’s consumers to decide where to put their money. 
They can choose not only what kinds of goods and services they deem worthwhile, but also where to live and receive an education. 
As a result, they have become a key driver behind the transformation of the housing market, supply chains, finance, and even monetary policy. 
The task for China’s leaders is to respond more effectively to their citizens’ needs and desires, including by accelerating progress on economic reform. 
Specifically, they must phase out obsolete supply chains saddled with overcapacity, bad debts, and falling employment, while taxing the winners in the e-commerce game. 
These imperatives are challenging traditional approaches to monetary, fiscal, industrial, environmental, and social policy, while testing the capacity of the bureaucracy and political system. 
China’s transformation into a consumer society will have profound implications for domestic and global suppliers and distributors of goods and services. 
At first, it might hurt some of China’s trading partners, particularly the emerging economies that have long depended on Chinese demand for their commodity exports. 
The decline in Chinese imports has already contributed to a decline in commodity prices. 
Moreover, foreign importers may find that Chinese-manufactured consumer goods now cater more to local tastes and preferences. 
Whatever challenges emerge, the fact is that a prosperous China, underpinned by local consumers, will contribute to – and shape – a prosperous global economy. 
We can thank e-commerce for that. 

Taking North Korea Seriously 
SEOUL – We are living in dangerous and uncertain times. 
The United States is engaged in a bizarre and highly polarized presidential election. 
Its relationship with an increasingly revisionist Russia is undergoing what is essentially a “re-set” in reverse, while Russia’s revisionism is also putting pressure on a Europe already plagued by uncertainty in the wake of the United Kingdom’s vote to leave the European Union. 
Meanwhile, the Middle East is imploding, with wars in Syria and Yemen fueling a large-scale refugee crisis. 
So overwhelmed are world leaders that many have had little time to focus on mounting tensions at the other end of the Eurasian land mass: the divided Korean Peninsula. 
But while the crisis in Syria may be the most urgent conflict the next US president will have to address, developments in North Korea could well turn out to be the most intractable. 
Since North Korea detonated its first nuclear device a decade ago, its activity on this front has been uneven. 
But the regime has lately stepped up its efforts: two nuclear tests have been carried out this year, with the country’s largest-ever device detonated last month. 
Tests of long-range missiles have also increased, suggesting that North Korea is slowly but surely progressing toward a deliverable nuclear weapon. 
As usual, the international community’s response focuses on sanctions. 
Indeed, the United Nations Security Council is currently discussing a new resolution in response to last month’s test. 
Whatever the resolution’s precise contents, it is likely that new sanctions will hurt. 
The question is whether they will hurt enough. 
North Korea’s economy is not exactly in a strong position to withstand much more pressure. 
In the 1950s, the North’s economy was better off than the South’s; today, it is 40-80 times smaller (depending on who is estimating). 
While the North Korean government has loosened its grip on the economy slightly, enabling shadow activities to develop, the country’s prospects remain grim. 
In human terms, the North Korean regime’s failure to provide for its nearly 25 million inhabitants has been as tragic as it is spectacular. 
Even the country’s elite has been feeling the effects of sanctions, reflected in an increase in the number of higher-level defectors over the last year. 
Of course, political strain has also likely contributed to this trend. 
In South Korea, some are even considering the possibility of the North Korean regime’s collapse, though others believe that the persistence of harsh repression will continue to ensure a kind of stability. 
The North Korean regime has one critical source of support: China. 
Though China has agreed to tough sanctions, implementation has been lax, and its leaders have shown a distinct reluctance to tighten the screws on their client further. 
Unlike South Korea, which would welcome a collapse of the regime in Pyongyang (at least in theory), China fears the political and economic consequences. 
The fact remains, however, that North Korea’s regime poses a serious threat to stability in the region and perhaps beyond – one that cannot be mitigated without China. 
While representatives of both US presidential candidates, Hillary Clinton and Donald Trump, have reiterated that the military option must remain on the table – direct US military intervention has always ultimately been rejected. 
China’s relationship with North Korea no doubt has had some influence over that decision. 
So, to mount an effective response to the North Korean nuclear threat, the next US president will need to secure China’s cooperation. 
That is easier said than done, not least because of America’s recent decision to deploy a Terminal High Altitude Area Defense (THAAD) anti-missile system in South Korea. 
Officially, the THAAD system is meant to protect South Korea from the North Korean threat. 
For the US, its primary purpose is to minimize the risk of South Korea deciding to acquire its own nuclear weapons to counter the North. 
For China, however, the system’s advanced X-band radar raises concerns, because it reaches well into Chinese territory. 
China fears that it could be linked with more advanced missile systems either in Japan or on nearby naval ships, potentially posing a threat to China’s strategic missile forces. 
These are valid concerns. 
The US must reach out to China to explain the nature of the system and discuss measures that might address its fears. 
One possible approach, proposed by Yoon Young-kwan, a former South Korean foreign minister, would be to tie the existence of the THAAD system explicitly to North Korea’s nuclear program. 
If the latter is eliminated, the missiles would be removed. 
The ultimate goal of talks should be to secure China’s cooperation in developing a comprehensive peace treaty, signed by all regional powers, that normalizes relations with a North Korea that agrees to give up its nuclear weapons and commit to political reform. 
But the North Korean regime’s past behavior suggests that, even with China on board, the chances of such a Damascene conversion are close to nil. 
That is why discussions must also address what might happen if North Korea’s regime suddenly collapses – a possibility, though not imminent, cannot be excluded. 
In such a scenario, a plan – agreed in advance by the US, China, South Korea, and Japan – that covers border control, refugees, port access, and military operations would need to be in place. 
Without China’s buy-in, efforts to curb North Korea’s nuclear ambitions are likely to falter. 
In that case, the country’s volatile leadership could eventually possess long-range nuclear capabilities – an outcome that must be averted at all costs. 
The last thing a dangerous and uncertain world needs is more danger and uncertainty. 

China’s Corporate-Debt Challenge 
WASHINGTON, DC – The Chinese economy has slowed in recent years, but it is still a strong performer, contributing about one-third of total economic growth worldwide. 
It is also becoming more sustainable, in line with the shift in its growth model away from investment and exports and toward domestic demand and services. 
In the run-up to next month’s G20 summit in Hangzhou, China has been calling loudly for new commitments to structural reforms to stimulate growth in advanced and emerging-market economies. 
But China faces serious risks at home. 
Above all, domestic credit continues to expand at an unsustainable pace, with corporate debt accumulating to dangerous levels. 
According to the International Monetary Fund’s recently published annual report on the Chinese economy, credit is growing about twice as fast as output. 
It is rising rapidly in both the non-financial private sector and in an expanding, interconnected financial sector that remains opaque. 
Moreover, while credit growth is high by international standards – a key indicator of a potential crisis – its ability to spur further growth is diminishing. 
Warning signs are flashing, and the Chinese government has acknowledged the overall problem. 
But, to avoid a crisis, it should immediately implement comprehensive reforms to address the root causes of the corporate debt problem. 
These include soft budget constraints for state-owned enterprises (SOEs) and local governments, implicit and explicit government guarantees of debt, and excessive risk taking in the financial sector – all of which have been perpetuated by unsustainable official growth targets. 
To tackle the problem, the Chinese government must, in the words of Premier Li Keqiang, “ruthlessly bring down the knife [on] zombie enterprises.” 
This culling should be combined with a concrete strategy to restructure salvageable firms; recognize and allocate creditor losses; account for displaced workers and other social costs; and further open private-sector markets. 
More fundamentally, the government must accept the inevitability of lower near-term growth. 
It is especially important to restructure SOEs. 
Many are essentially on life support, contributing only one-fifth of total industrial output but accounting for about half of all corporate debt. 
A serious restructuring effort – including stricter budget constraints and an end to lending to non-viable firms and government guarantees on debt, along with other supply-side reforms already underway – will create space for more dynamic companies to emerge and contribute to growth. 
China is unique in many respects, but it is not the first country to experience corporate-debt difficulties. 
Its leaders should heed three broad lessons from other countries’ experience. 
First, the authorities should act quickly and effectively, lest today’s corporate-debt problem become tomorrow’s systemic debt problem. 
Second, they should deal with both creditors and debtors – some countries’ solutions address only one or the other, sowing the seeds for future problems. 
Finally, the governance structures that permitted the problem to arise must be identified and reformed. 
At a minimum, China needs an effective system to deal with insolvency; strict regulation of risk pricing and assessment; and robust accounting, loan-loss provisioning, and financial disclosure rules. 
Influential voices in China are quick to draw the lesson from international experience that tackling corporate debt can limit short-term growth and impose social costs, such as unemployment. 
These are valid concerns, but the alternatives – half measures or no reform at all – would only make a bad situation worse. 
China should begin by restructuring unviable companies in its fastest-growing regions, where workers will find new jobs more quickly and reforms are not likely to hurt growth. 
Policymakers can then be more selective when it comes to restructuring in slower-growing regions and cities where a single company dominates the local economy. 
Moreover, structural unemployment and worker resettlement costs can be mitigated with a strong social safety net that includes funds for targeted labor redeployment so that workers can get back on their feet. 
This approach would show the government’s commitment to those at risk of displacement. 
To its credit, China has already made some efforts to solve its debt problem and begin deleveraging. 
The current Five-Year Plan aims to reduce excess capacity in the coal and steel sectors, identify and restructure nonviable “zombie” SOEs, and fund programs to support affected workers. 
Now is the time for China to push for far-reaching reforms. 
Banks’ balance sheets still have a relatively low volume of non-performing loans (and high provisioning). 
The costs of potential losses on corporate loans – estimated at 7% of GDP in the IMF’s latest Global Financial Stability Report – are manageable. 
Furthermore, the government maintains high buffers: debt is relatively low, and foreign-exchange reserves are relatively high. 
The question is whether China will manage to deleverage enough before these buffers are exhausted. 
Given its record of economic success and the government’s strong commitment to an ambitious reform agenda, China can rise to the challenge. 
But it must start now. 

The Next Battle in China’s War on Corruption 
HONG KONG – Corruption is a cancer to which no society is immune. 
It raised the death toll of Iran’s recent earthquake, owing to substandard housing construction ten years ago. 
It has afflicted the United States Navy, which is now investigating more than 60 admirals and hundreds more officers for fraud and bribery. 
It has brought down countless governments, from Brazilian President Dilma Rousseff’s administration last year to Chiang Kai-shek’s Nationalist government of the Republic of China. 
Chinese President Xi Jinping, a keen student of history, is well aware of corruption’s destructive potential – and has confronted the phenomenon head-on. 
But, as China’s economy continues to modernize, much work remains to be done. 
Prior to the economic reforms of the 1980s, corruption in China was relatively petty, as the market’s limited size constrained opportunities for administrative abuse. 
But, as the market deepened, inadequate legislation and weak institutional safeguards facilitated increasingly brazen corruption and administrative abuses. 
Meanwhile, as income and education levels rose, citizens became less tolerant of such abuses, increasingly demanding transparent and lawful delivery of basic public goods, from infrastructure to environmental protection, as well as a fair distribution of income and opportunities. 
Recognizing the potential of corruption to undermine the legitimacy of the Communist Party of China and the authority of the Chinese state, Xi has embarked on an anti-graft campaign that is unprecedented in scale, scope, and depth. 
Over the last five years, that campaign has resulted in the dismissal, sanction, or other punishment of no less than 440 provincial officials, 8,900 at the municipal level, 63,000 at the county level, and 278,000 at the village level. 
Some 58,000 individuals have been referred for further criminal investigation. 
All in all, 1.7% of the CPC’s 89 million members – including both “tigers” (Party leaders) and “flies” (petty officials) – have been affected. 
But the initiative is far from over. 
At the CPC’s 19th National Congress last month, the Party endorsed the creation of a National Supervision Commission to consolidate and modernize the anti-graft agency, so that it will expand beyond Party members to cover all officials exercising public power at all levels. 
But building robust and lasting anti-graft institutions will not be easy, owing to the enduring ability of corrupt officials to capture such institutions. 
Consider the kind of corruption in advanced economies exposed by the 2007-2008 global financial crisis, in which vested interests secure the enactment of laws and regulations that entrench their own advantages. 
In the US, the Supreme Court’s infamous Citizens United decision of 2010 actively encourages such outcomes, by allowing corporations and unions to spend unlimited sums anonymously to help secure the election or defeat of individual candidates. 
As a result of the decision, outside spending in the 2016 election cycle reached nearly $1.4 billion in 2016, compared less than $100 million in the 2006 cycle. 
So corruption is not just a failure of the state; it is also closely linked to the failure of market, legal, and ideological systems. 
If the concentrated economic and social power that financial markets and network economies tend to create can be used to capture and control political power, an effective system of checks and balances becomes virtually impossible. 
The London School of Economics anthropologist David Graeber frames the problem in terms of how political actors approach bureaucracy. 
As Graeber points out, those on the political right condemn excessive bureaucracy. 
Yet their solution – to reduce the role of the state and allow market forces to take over – is actually what fuels cumbersome bureaucratic expansion. 
Graeber sums up this argument in what he calls an “iron law of liberalism”: “any market reform, any government initiative intended to reduce red tape and promote market forces, will have the ultimate effect of increasing the total number of regulations, the total amount of paperwork, and the total number of bureaucrats the government employs.” 
In other words, markets can work efficiently only with the guidance of a competent, honest, and fair state, with effective protections against abuses and graft from both the market actors who offer bribes and the officials who accept them. 
What does this mean for China? 
For starters, the country needs to develop modern mechanisms for resolving civil disputes arising from unclear property rights or rules for market transactions. 
Here, China can take inspiration from the Western common law system, in which cases are decided on the basis of existing precedents, or from the use of administrative courts to resolve disputes between individuals and the bureaucracy. 
Hong Kong’ Independent Commission Against Corruption also provides a useful model. 
At the same time, China must reduce the incentive for graft, by raising the pay of public servants at all levels. 
As it stands, officials’ salaries are usually set with reference to the overall level of national income. 
But the resulting pay is not high enough to mitigate the temptation officials face to use their enormous power to profit in key sectors, such as energy, finance, and real estate. 
Similarly, in advanced economies, officials not only receive much higher pay; they are also often subject to limitations on what they can do, and when, after they leave office. 
In China, by contrast, officials can exchange favors while in office for higher-paying jobs or benefits after retirement. 
Maintaining accountability and preventing vested interests from capturing institutions – a process that involves entrenching morality within vulnerable bureaucracies – will be no easy feat. 
It may well be the toughest challenge Xi faces in realizing what he calls the “China Dream.” 
But, for now, China’s anti-corruption agenda seems to be on the right track. 


A Global Environmental Threat Made in China 
NEW DELHI – Asia’s future is inextricably tied to the Himalayas, the world’s tallest mountain range and the source of the water-stressed continent’s major river systems. 
Yet reckless national projects are straining the region’s fragile ecosystems, resulting in a mounting security threat that extends beyond Asia. 
With elevations rising dramatically from less than 500 meters (1,640 feet) to over 8,000 meters, the Himalayas are home to ecosystems ranging from high-altitude alluvial grasslands and subtropical broadleaf forests to conifer forests and alpine meadows. 
Stretching from Myanmar to the Hindu-Kush watershed of Central Asia, the Himalayas play a central role in driving Asia’s hydrological cycle and weather and climate patterns, including triggering the annual summer monsoons. 
Its 18,000 high-altitude glaciers store massive amounts of freshwater and serve in winter as the world’s second-largest heat sink after Antarctica, thus helping to moderate the global climate. 
In summer, however, the Himalayas turn into a heat source that draws the monsoonal currents from the oceans into the Asian hinterland. 
The Himalayas are now subject to accelerated glacial thaw, climatic instability, and biodiversity loss. 
Five rivers originating on the Great Himalayan Massif – the Yangtze, the Indus, the Mekong, the Salween, and the Ganges – rank among the world’s ten most endangered rivers. 
From large-scale dam construction to the unbridled exploitation of natural resources, human activity is clearly to blame for these potentially devastating changes to the Himalayan ecosystems. 
While all the countries in the region are culpable to some extent, none is doing as much harm as China. 
Unconstrained by the kinds of grassroots activism seen in, say, democratic India, China has used massive, but often opaque, construction projects to bend nature to its will and trumpet its rise as a great power. 
This includes a globally unmatched inter-river and inter-basin water-transfer infrastructure with the capacity to move over ten billion cubic meters (13 billion cubic yards) through 16,000 kilometers (9,940 miles) of canals. 
China’s reengineering of natural river flows through damming – one-fifth of the country’s rivers now have less water flowing through them each year than is diverted to reservoirs – has already degraded riparian ecosystems and caused 350 large lakes to disappear. 
With these water-diverting projects increasingly focused on international, rather than internal, rivers – in particular those in the Tibetan Plateau, which covers nearly three-quarters of the Himalayan glacier area – the environmental threat extends far beyond China’s borders. 
And dams are just the beginning. 
The Tibetan Plateau is also the subject of Chinese geo-engineering experiments, which aim to induce rain in its arid north and northwest. 
(Rain in Tibet is concentrated in its Himalayan region.) 
Such activities threaten to suck moisture from other regions, potentially affecting Asia’s monsoons. 
Ominously, such experiments are an extension of the Chinese military’s weather-modification program. 
Moreover, as if to substantiate the Chinese name for Tibet, Xizang (“Western Treasure Land”), China is draining mineral resources from this ecologically fragile but resource-rich plateau, without regard for the consequences. 
Already, copper mine tailings are polluting waters in a Himalayan region sacred to Tibetans, which they call Pemako (“Hidden Lotus Land”), where the world’s highest-altitude major river, the Brahmaputra (Yarlung Tsangpo to Tibetans), curves around the Himalayas before entering India. 
Last fall, the once-pristine Siang – the Brahmaputra’s main artery – suddenly turned blackish gray as it entered India, potentially because of China’s upstream tunneling, mining, or damming activity. 
To be sure, the Chinese government claimed that an earthquake that struck southeastern Tibet in mid-November “might have led to the turbidity” in the river waters. 
But the water had become unfit for human consumption long before the quake. 
In any case, China is not letting up. 
It has, for example, eagerly launched large-scale operations to mine precious minerals like gold and silver in a disputed area of the eastern Himalayas that it seized from India in a 1959 armed clash. 
Meanwhile, China’s bottled-water industry – the world’s largest – is siphoning “premium drinking water” from the Himalayas’ already-stressed glaciers, particularly those in the eastern Himalayas, where accelerated melting of snow and ice fields is already conspicuous. 
Unsurprisingly, this is causing biodiversity loss and impairment of ecosystem services. 
Across the Himalayas, scientists report large-scale deforestation, high rates of loss of genetic variability, and species extinction in the highlands. 
The Tibetan Plateau, for its part, is warming at almost three times the average global rate. 
This holds environmental implications that extend far beyond Asia. 
The towering Himalayan Highlands, particularly Tibet, influence the Northern Hemisphere’s atmospheric-circulation system, which helps to transport warm air from the equator toward the poles, sustaining a variety of climate zones along the way. 
In other words, Himalayan ecosystem impairment will likely affect European and North American climatic patterns. 
Halting rampant environmental degradation in the Himalayas is now urgent, and it is possible only through cooperation among all members of the Himalayan basin community, from the lower Mekong River region and China to the countries of southern Asia. 
To bring about such cooperation, however, the entire international community will have to apply pressure to rein in China’s reckless environmental impairment, which is by far the greatest source of risk. 

The Great Escape from China 
CAMBRIDGE – Since 2016 began, the prospect of a major devaluation of China’s renminbi has been hanging over global markets like the Sword of Damocles. 
No other source of policy uncertainty has been as destabilizing. 
Few observers doubt that China will have to let the renminbi exchange rate float freely sometime over the next decade. 
The question is how much drama will take place in the interim, as political and economic imperatives collide. 
It might seem odd that a country running a $600 billion trade surplus in 2015 should be worried about currency weakness. 
But a combination of factors, including slowing economic growth and a gradual relaxation of restrictions on investing abroad, has unleashed a torrent of capital outflows. 
Private citizens are now allowed to take up to $50,000 per year out of the country. 
If just one of every 20 Chinese citizens exercised this option, China’s foreign-exchange reserves would be wiped out. 
At the same time, China’s cash-rich companies have been employing all sorts of devices to get money out. 
A perfectly legal approach is to lend in renminbi and be repaid in foreign currency. 
A not-so-legal approach is to issue false or inflated trade invoices – essentially a form of money laundering. 
For example, a Chinese exporter might report a lower sale price to an American importer than it actually receives, with the difference secretly deposited in dollars into a US bank account (which might in turn be used to purchase a Picasso). 
Now that Chinese firms have bought up so many US and European companies, money laundering can even be done in-house. 
The Chinese hardly invented this idea. 
After World War II, when a ruined Europe was smothered in foreign-exchange controls, illegal capital flows out of the continent often averaged 10% of the value of trade or more. 
As one of the world’s largest trading countries, it is virtually impossible for China to keep a tight lid on capital outflows when the incentives to leave become large enough. 
Indeed, despite the giant trade surplus, the People’s Bank of China has been forced to intervene heavily to prop up the exchange rate – so much so that foreign-currency reserves actually fell by $500 billion in 2015. With such leaky capital controls, China’s war chest of $3 trillion won’t be enough to hold down the fort indefinitely. 
In fact, the more people worry that the exchange rate is going down, the more they want to get their money out of the country immediately. 
That fear, in turn, has been an important factor driving down the Chinese stock market. 
There is a lot of market speculation that the Chinese will undertake a sizable one-time devaluation, say 10%, to weaken the renminbi enough to ease downward pressure on the exchange rate. 
But, aside from providing fodder for the likes of Donald Trump, who believes that China is an unfair trader, this would be a very dangerous choice of strategy for a government that financial markets do not really trust. 
The main risk is that a big devaluation would be interpreted as indicating that China’s economic slowdown is far more severe than people think, in which case money would continue to flee. 
There is no easy way to improve communication with markets until China learns how to produce credible economic data. 
It was a huge news story when China’s 2015 GDP growth was reported at 6.9%, just short of the official target of 7%. 
This difference ought to be irrelevant, but markets have treated it with the utmost importance, because investors believe that things must be really bad if the government can’t rig the numbers enough to hit its target. 
A good place for the authorities to start would be to establish a commission of economists to produce a more realistic and believable set of historical GNP figures, paving the way for more believable GNP figures going forward. 
Instead, the government’s immediate idea for relieving exchange-rate pressure is to peg the renminbi to a basket of 13 currencies, instead of just to the US dollar. 
This is a good idea in theory; in practice, however, basket pegs tend to have chronic transparency problems. 
Moreover, a basket peg shares most of the problems of a simple dollar peg. 
True, the euro and yen have fallen against the dollar over the past couple of years. 
If the dollar retreats in 2016, however, the basket peg implies a stronger renminbi-dollar rate, which might be unhelpful. 
The government has also indicated that it intends to clamp down more heavily on illegal capital flows; but it will not be easy to put that genie back in the bottle. 
Life would be a lot easier today if China had moved to a much greater degree of exchange-rate flexibility back when the going was good, as some of us had advised for more than a decade. 
Maybe the authorities will be able to hold on in 2016; but it is more likely that the renminbi will continue its rocky ride – taking global markets along with it. 

Why There Is No “Beijing Consensus” 
HONG KONG – Four decades would seem to be plenty of time to identify the underlying logic of China’s development model. 
Yet, 40 years after Deng Xiaoping initiated the country’s “reform and opening up,” a “Beijing Consensus” – that is, a Chinese rival to the Western neoliberal Washington Consensus – has yet to be articulated. 
Over the years, China has worked to transform its closed, planned economy into a more open, market-based system. 
Industry and, increasingly, services have replaced agriculture as the main drivers of growth, and the country has gone from technological copycat to global innovator. 
Meanwhile, China has tackled several difficult challenges, from excessive debt and overcapacity to severe pollution and official corruption. 
This has been a highly complex process. 
According to China Academy of Social Sciences economist Cai Fang, it can be understood only in the context of the country’s unique history, demography, and geography, not to mention broader technological and global trends. 
All of these factors have, after all, helped to shape China’s governance and institutions. 
Yet the veteran China watcher Bill Overholt – one of the first to predict China’s rise – argues in his latest book, China’s Crisis of Success, that the country’s reforms were driven by “fear and simplicity.” 
The same factors, he asserts, drove East Asia’s post-1945 development. 
Other observers – including the World Bank, the OECD, and think tanks like Harvard’s Fairbank Center for China studies – can’t seem to agree on who is right. 
They are not accustomed to assessing an economy whose primary influences – including historical legacies, values and ideologies, and institutional and governance traditions – differ so profoundly from those of the West. 
Consider governance. 
Western economic dogma holds that the state should intervene in markets as little as possible. 
Yet, for China’s leaders, it is not clear whether the state can even be separated, conceptually or operationally, from the market. 
For thousands of years, state control was China’s default governance strategy, with a strong central government overseeing stability and preventing regional and factional rivalries from causing chaos. 
So when China wanted to increase its leaders’ accountability, for example, it focused not on creating a market-based, much less democratic, system, but rather on introducing regulations to curb abuses of power and facilitate the flow of products, capital, people, and information. 
Within the constraints of this paternalistic approach, the experimentation and adaptation that have been so crucial to China’s growth had to be carried out by local governments, which have enjoyed considerable, albeit uncertain, authority to do so. 
The idea was that, by using local-government (and market) expertise, China could generate growth without disturbing social cohesion or compromising national integrity. 
Yet Chinese governance has not exactly been beyond reproach. 
When it comes to the quality of market competition, questions about the state sector’s dominance, as well as the effectiveness of regulations and adherence to international laws, standards, and practices, have persisted. 
And while China’s government has proved adept at providing “hard” infrastructure, such as highways, railroads, and airports, it has far to go in developing soft infrastructure, such as that related to education, health care, energy, the environment, and finance. 
So China continues to grapple with the question of how to balance the state and the market, in order to ensure accountability, market competition, and adequate provision of public goods for one-fifth of the world’s population. 
Compounding the challenge are rapid technological change, globalization (and the backlash against it), and geopolitical considerations. 
But it is not as if the West has proved definitively that its free-market approach works. 
The state’s role – measured according to the public sector’s share of GDP, for example, and the depth and complexity of laws governing private activities – has been expanding in almost every economy since the beginning of the twentieth century. 
The United States, in particular, provides a useful benchmark. 
Like China, it is a continental economy. 
But it also represents the global gold standard in many fields, including technology, defense, and research and development. 
Contrary to China’s statist legacy, America’s historical experience has instilled in citizens and leaders a devotion to liberty, including free markets, and local autonomy. 
The US federal government’s size and power grew only very slowly until the 1930s, when the New Deal – which included federal programs, public works projects, and financial reforms and regulations – was implemented in response to the Great Depression. 
The US federal government expanded again during and after WWII, reflecting the country’s new global hegemony and the prosperity of its middle class (created in no small part by the New Deal’s support for unionization and home ownership). 
The government assumed a larger role in areas ranging from defense and foreign policy to health care and social security. 
But even as the federal government increased regulation in some areas, the US remained highly reliant on the market, resulting in rising inequality, the deterioration of public infrastructure, and an unsustainable fiscal deficit and debt. 
The global recession triggered by the 2008 financial crisis intensified growing doubts about the Washington Consensus. 
So some of America’s most fundamental challenges – such as reducing inequality, supporting stable fiscal and financial conditions, and ensuring environmental sustainability – are the same as China’s, and neither country has a clear and proven “consensus” to guide it. 
Against this background, cooperation to deliver global public goods – including peace – should be possible. 
The key is for the two sides to work toward common goals, while agreeing to disagree on certain ideological tenets. 
Here, the US needs to recognize that global cooperation is not a zero-sum game, and that China’s rise need not be viewed as a threat. 
On the contrary, China – along with other emerging economies, such as India – can contribute to a global rebalancing that actually strengthens economic and geopolitical stability. 

Development Beyond Aid 
BEIJING – Despite the apparent tranquility of this year’s spring meetings of the International Monetary Fund and World Bank, there are reasons to be concerned about the global economy. 
The United Kingdom’s impending “hard” Brexit from the European Union and US President Donald Trump’s anti-globalization agenda are creating economic uncertainty, and will continue to do so for some time. 
In contrast to Trump, Chinese President Xi Jinping has come to the defense of globalization, and made new capital available for creating global pubic goods, enhancing connectivity, and creating jobs in developing countries. 
More than 60 countries have welcomed Xi’s “One Belt, One Road” initiative, and 28 heads of state will attend an OBOR summit in Beijing on May 14. 
So, what is China’s rationale for pursuing this grandiose vision – one that so many countries, especially in the developing world, have embraced? 
In our new book, Going Beyond Aid: Development Cooperation for Structural Transformation, we argue that official development aid (ODA) need not always be concessional, and make the case for going “beyond aid,” toward a broader approach – like that taken by China – that includes trade and investment. 
Right now, the OECD’s definition of ODA does not even include some of the more effective instruments for facilitating structural transformation in recipient countries, such as equity investment and large non-concessional loans for infrastructure. 
By combining aid with trade and investment, donor and recipient countries alike can benefit. 
For example, the South-South development cooperation uses all three activities to capitalize on recipient countries’ economic strengths. 
This allows the SSDC to avoid the bottlenecks in partner countries that one sees under the standard ODA model, which separates aid from trade and private investment – and thus impedes countries from exploiting their comparative advantages. 
In our book, we look at this topic through the lens of New Structural Economics. 
NSE treats modern economic development as a process of continuous structural change in technologies, industries, and hard and soft infrastructure – all of which increases labor productivity, and thus per capita income. 
According to NSE, the most effective and sustainable approach for a low-income country to jumpstart dynamic growth and development is to develop those sectors in which it has latent comparative advantages: where production costs are low, but transaction costs are high due to inadequate hard and soft infrastructure. 
Governments can help to reduce transaction costs by creating special economic zones or industrial parks, improving infrastructure, and making the overall business environment more attractive in those enclaves. 
With this approach, a developing country can grow dynamically, and create a virtuous circle of job creation and poverty reduction, even if its overall infrastructure and business environment are still lacking. 
Moreover, large emerging-market economies such as China, Brazil, and India can use their comparative advantages in infrastructure and light manufacturing to help others. 
For China, this is in keeping with a Confucian dictum: “One who wishes himself to be successful must also help others to be successful; one who wishes to develop himself must also help others to develop.” 
China has a clear comparative advantage in infrastructure construction, owing to its lower labor costs (the cost of a project site foreman in China is one-eighth that of OECD countries) and vast domestic market, which have enabled it to achieve economies of scale that other countries simply cannot. 
Consequently, the overall construction cost for high-speed rail in China is two-thirds of what it is in industrial countries. 
But China’s comparative advantages in 46 of 97 subsectors – particularly in manufacturing – benefit other developing countries, too. 
As labor costs in China rise, labor-intensive industries are relocating to lower-wage developing countries, providing millions of job opportunities. 
For example, the Huajian Shoemaking Company, C&H Garments, and China JD Group (an apparel maker), are now operating in special economic zones in, respectively, Ethiopia, Rwanda, and Tanzania. 
In addition to exporting its comparative advantages, China also deploys “patient capital,” which has a maturity of ten years or more. 
In a recently published paper, we conceptualize patient capital as an investment in a “relationship,” whereby an investor has a long-term stake in a country’s development. 
Patient-capital owners are like equity investors, but they are willing to “sink” money in the real sector for an extended period of time. 
Patient-capital owners are also more willing, and better able, to take risks. 
In the chart below, we show that a country’s net-foreign-asset position correlates strongly with its long-term orientation. 
On the other hand, net-foreign-asset positions of countries with a short-term orientation and a low savings rate tend to deteriorate, while their foreign debts mounts. 
Patient capital plays an important role in infrastructure financing, because it is often accompanied by technological and administrative know-how, which helps to improve global connectivity and accelerate development. 
So far, China’s large reserve of patient capital has been used to finance its own domestic projects. 
But it will increasingly be exported as more Chinese enterprises and banks “go global.” 
In fact, China could soon become the world’s largest net creditor, and a portion of its net foreign assets will take the form of patient capital that is suitable for improving infrastructure, developing manufacturing sectors, and creating jobs around the world. 
Since 2015, development finance has started to come less from traditional aid, and more from development-finance institutions, development banks, and sovereign wealth funds in emerging economies. 
China, for example, has committed $60 billion in development financing to Africa for the 2016-2018 period – much of it patient capital. 
China and other emerging economies are also shifting from bilateralism to multilateralism, by working with partners from the global North and South. 
As new South-led institutions such as the Asian Infrastructure Investment Bank and the New Development Bank work with established multilateral development banks, they are learning to be better partners, and adding momentum to global development efforts. 
China, moreover, is trying to learn from its partners so that it can improve its own governance, labor, and environmental standards. 
And this two-way process is giving rise to new ideas, theories, and concepts – our book being one of them. 
China’s embrace of a global role should be welcomed. 
We are cautiously optimistic that the North and South can work together to ensure peace and prosperity for all. 


China’s New Digital Dividend 
HONG KONG – Over the past four decades, China has gone from being a low-wage supplier to one of the three most important links in the global value chain, alongside the United States and Germany. 
Despite growing concerns about China’s corporate debt – which is now close to 170% of GDP – and its ability to escape the middle-income trap, rapid digitization will allow the Chinese economy to continue moving up the value chain. 
Following its strategic “opening up” almost 40 years ago, China provided an abundant source of cheap land and labor, which enabled it to achieve economies of scale in consumer manufacturing. 
Then, as China moved toward middle-income status, it became a major consumer market in itself. 
In 2012, China’s current leaders recognized that the country’s “demographic dividend” had run its course: the Chinese economy was reaching its “Lewis turning point,” the stage at which its surplus labor supply would be exhausted, and wages would start to rise. 
And, at the same time, the “opening-up dividend” was also reaching maturity, and encountering protectionist barriers around the world. 
China can still tap new markets through efforts such as the “Belt and Road Initiative,” but at a considerable cost. 
Ultimately, sustaining rapid growth requires continuing to move up the global value chain, by implementing further economic reforms and focusing on new technologies. 
The Chinese government’s 13th Five-Year Plan (2016-2020) reflected its commitment to market allocation of resources and lowering the costs of doing business. 
And in 2015, the authorities’ “Made in China 2025” and “Internet Plus” initiatives signaled a determination to take the country’s manufacturing base into the Internet age. 
Together, the two plans aim to integrate artificial intelligence (AI), robotics, and social media into manufacturing processes, and to digitize China’s economy and society. 
Since 2015, China has taken the lead in e-commerce worldwide, with online purchases accounting for 18% of total retail sales, compared to just 8% in the US. 
China’s three leading tech platforms – Baidu, Alibaba, and Tencent – have grown to the point that they are beginning to compete with US-based global tech giants such as Amazon, Apple, Facebook, Google, and Netflix. 
Moreover, according to iResearch, mobile payments in China already amount to $5.5 trillion, roughly 50 times that of the US. 
In most Chinese cities, electronic-wallet apps on mobile phones are replacing cash as the primary method of payment. 
China’s leap into the digital age was facilitated by a combination of physical and digital technologies and new business models. 
According to a recent study by Bruegel, China already spends more on research and development, as a percentage of GDP, than the European Union; and it now produces as many scientific publications as the US and more PhDs in natural sciences and engineering. 
And, by streamlining the exchange of information and facilitating coordination of complex tasks, the Chinese social-media app WeChat – with 938 million users as of the first quarter of 2017 – has contributed to previously unimaginable productivity gains. 
According to the Boston Consulting Group, Chinese e-commerce platforms’ business models have evolved differently from those in the West, as they have responded to Chinese consumers’ rapidly increasing spending power and enthusiasm for innovation. 
Having been encouraged by the government to experiment with Internet-based business models, Chinese firms are upending traditional practices. 
And this is happening so quickly that even the government now feels pressure to catch up, by adopting new technologies such as blockchain and AI. 
E-payments are a key factor in lowering business and transaction costs in China, because they improve efficiency in the retail sector, where prices can still be higher than in the US even when the products are made in China. 
But the emergence of fraud and the failures of some peer-to-peer (P2P) platforms point to the need for tighter regulations to maintain systemic stability. 
As more activities become digitized, China’s integration into the global value chain will increasingly occur in digital spaces. 
Chinese producers can use 3D printing, robotization, and Big Data and AI applications at the local level, while still tapping into global markets and sourcing ideas and skills from abroad. 
There are now endless possibilities for dividing production and consumption into separate stages. 
But this also implies that the new digital economy’s many successes will be accompanied by many failures. 
Indeed, Chinese policymakers will have to confront various “digital dilemmas” in the coming years. 
Many public utilities in China – such as airlines, railways, ports, and telecommunications – are single-product entities administered by state-owned enterprises (SOEs). 
Yet the new tech giants are multi-product, omni-channel platforms that cut across all sectors, including production, distribution, payments, and, increasingly, wealth management. 
As in a game of Go, China’s leaders need to move the country’s pieces – that is to say, effect change in the SOEs’ business models – in the right place, at the right time, and in a coordinated fashion. 
Superficial complaints about the slow pace of SOE reforms ignore the strategic challenge of creating productive competition between SOEs and publicly listed tech giants in the digital space. 
SOE managers can credibly argue that heavy regulations place them at a competitive disadvantage, and that the tech giants are eating their lunch by free-riding on state-administered telecommunication, transportation, and financial channels. 
The tech giants, meanwhile, argue that if they could just move faster into inefficient production and distribution areas, not least mobile payments, productivity growth would accelerate. 
Another dilemma is that digitization is good for consumers, but possibly bad for employment and social stability. 
In a “Digital China,” there will necessarily be winners and losers. 
But the sooner displaced workers can adapt to new realities, the healthier the system will be. 
China’s transformation into a knowledge-based economy occupying a central position in the global value chain will ultimately yield a “reform dividend.” 
But as exciting as that transformation will be, it will also be dangerous. 
Never before has an economy so large undergone such far-reaching change so quickly. 

The Challenges Confronting China’s Digital Economy 
HONG KONG – China’s digital economy is a force to be reckoned with. 
The country now accounts for 42% of global e-commerce, boasts one-third of the world’s most successful tech startups, and conducts 11 times more mobile payments than the United States per year. 
But there are major challenges ahead. 
To be sure, China is on track for continued progress, thanks to its rich ecosystem of innovators, a tech-friendly attitude among regulators and government, and its massive consumer market. 
China’s 731 million Internet users outnumber those in the European Union and the US combined. 
These factors underpin projections of rapid growth in China’s FinTech market. 
From 2016 to 2020, Goldman Sachs expects consumption-related third-party payment value to grow from $1.9 trillion to $4.6 trillion, with lending by non-traditional players soaring from $156 billion to $764 billion and new online-oriented asset management increasing from $8.3 trillion to $11.9 trillion. 
Moreover, China is accelerating investment in artificial intelligence. 
In its report Artificial Intelligence: Implications for China, McKinsey estimates that AI technology in China could add 0.8 to 1.4 percentage points to China’s annual GDP growth, depending on the speed of adoption. 
Early this month, Google AI China was launched in Beijing by the company’s Chinese-born chief scientist for cloud computing, Fei-Fei Li. 
Yet China still has a long way to go. 
As another recent McKinsey study, Digital China: Powering the Economy to Global Competitiveness, points out, the US remains 4.9 times more digitized than China. 
And, within China, there are large variations in various sectors’ level of digitization. 
China will confront serious risks as it closes these gaps. 
As McKinsey notes, digitization promises to shift and create value equivalent to anywhere from 10% to 45% of total industry revenues in four key sectors (consumer and retail, automotive and mobility, health care, and freight and logistics) by 2030. 
This implies significant disruptions to value chains and uncertainty about jobs, consumption, and the socio-political context. 
If China is to ensure the continued development of its digital economy, while containing the risks associated with disruption, its leaders will need to implement smart regulations. 
And that will require careful consideration of the factors that have contributed to – and impeded – its progress so far. 
As recently as a decade ago, few expected China’s remarkable digital breakthrough. 
In fact, both of the country’s key Internet pioneers, Jack Ma of Alibaba and Pony Ma of Tencent, experienced early failures. 
But thanks to the Chinese leadership’s willingness to experiment, allowing access to foreign capital and technology, these pioneers were able to pursue initial public offerings elsewhere – Tencent in Hong Kong and Alibaba in New York. 
As they took advantage of emerging digital technology – not to mention China’s high-quality public infrastructure – to leverage and build services, these pioneers spearheaded rapid progress in China’s digital economy. 
Alibaba’s e-commerce platform expanded market access and reduced transaction costs, crowding out traditional middleman who undermined productivity. 
Tencent’s WeChat reduced the costs of communication, interaction, coordination, and socialization among individuals, stimulating innovation across industries. 
Both broke down barriers among manufacturing, distribution, media, and finance, thereby achieving scale, expanding scope, and increasing speed. 
These achievements – which produced major productivity, income, and wealth gains – are a testament to private-sector ingenuity. 
But they were facilitated by the state, which pursued a policy of flexible non-enforcement of functional rules and regulations that enabled not only the expansion of private markets in China, but also the integration of those markets into the global economy. 
Yet market-based innovations are intrinsically unpredictable, and expectations regarding innovations often overshoot. 
In the case of China’s digital economy, imperfect and lagging regulations and enforcement exacerbated the effects of imbalances in the business environment, which enabled the emergence of severe vulnerabilities, from financial and debt risk to pollution and inequality. 
Under China’s current system, it is up to the government to deal with these problems. 
And, over the last five years, it has attempted to do just that, often using old, imperfect, but already-available administrative tools. 
Over the last year alone, China’s authorities have steadily tightened regulations governing the crypto-currency Bitcoin, B2C financing platforms, shadow banking, cross-border capital flows, and debt and securities markets. 
But such changes do not address the underlying weaknesses that allow risk to proliferate. 
For that, China must build more effective institutions to deal with business failures, absorb losses, and manage risks and uncertainty. 
In particular, China needs improved bankruptcy procedures, multilevel capital markets, an effective social-security system, reliable public housing, and a progressive tax regime that aims to reduce inequality. 
At the same time, to counter market abuses, China should introduce more robust competition laws, anti-corruption mechanisms, and stronger environmental regulations. 
The digital economy is naturally pro-market, pro-productivity, and pro-globalization. 
Yet, without effective management, it can generate significant economic imbalances that foster political and social instability. 
This is all the more true at a time of large-scale disruptions, owing to rapid technological progress, demographic shifts, and climate change. 
The only way to harness the digital economy’s potential while avoiding downside risks is to build fair and inclusive social institutions that protect property rights and ensure efficient markets. 
In other words, it all comes down to delineating clearly, appropriately, and effectively the roles of the state and the market. 

Overhauling China 
LONDON – Pessimism about China has become pervasive in recent months, with fear of a “China meltdown” sending shock waves through stock markets worldwide since the beginning of the year. 
And practically everyone, it seems, is going short on the country. 
There is certainly plenty of reason for concern. 
GDP growth has slowed sharply; corporate-debt ratios are unprecedentedly high; the currency is sliding; equity markets are exceptionally volatile; and capital is flowing out of the country at an alarming pace. 
The question is why this is happening, and whether China’s authorities can fix it, before it is too late. 
The popular – and official – view is that China is undergoing a transition to a “new normal” of slower GDP growth, underpinned by domestic consumption, rather than exports. 
And, as usual, a handful of economic studies have been found to justify the concept. 
But this interpretation, while convenient, can provide only false comfort. 
China’s problem is not that it is “in transition.” 
It is that the state sector is choking the private sector. 
Cheap land, cheap capital, and preferential treatment for state-owned enterprises weakens the competitiveness of private firms, which face high borrowing costs and often must rely on family and friends for financing. 
As a result, many private firms have turned away from their core business to speculate in the equities and property markets. 
Chinese households are also squeezed. 
In just 15 years, household income has fallen from 70% of GDP to 60%. 
Unless Chinese households are able to reap their fair share of the benefits of economic growth, it is difficult to imagine how a consumption boom is supposed to happen. 
Clearly, China must take bold steps to unleash the dynamism of the private sector and boost household demand. 
China has proved its capacity to implement radical reforms that eliminate major distortions, thereby boosting growth and absorbing excess debt. 
In the late 1980s, falling GDP growth (the annual per capita rate reached a low of 2% in 1989) and a rising volume of non-performing loans (NPLs) fueled expectations of an economic implosion. 
It never came. 
Instead, the Chinese government launched a raft of radical reforms, including large-scale privatization of industry and elimination of price controls and protectionist policies and regulations. 
As the state’s share of non-agricultural employment fell – from 30% in the mid-1990s to 13% by 2007 – private-sector productivity rose at an average annual rate of 3.7% from 1998 to 2007. 
State-sector productivity grew even faster, at 5.5% per year. 
This productivity growth contributed about one-third of China’s total GDP growth – which accelerated to double-digit rates – over this period. 
China’s entry into the World Trade Organization in 2001 – another bold step – was a major factor in this success. 
This time around, however, the task facing China’s government is complicated by political and social constraints. 
The economic reforms China needs now presuppose political reform; but those reforms are hampered by fears of the social repercussions. 
If China is to avoid economic decline, it will have to overhaul its governance system – and the philosophy that underpins it – without triggering excessive social instability. 
The good news is that China has a promising track record on this front. 
After all, it was a fundamental ideological shift that enabled China’s 35-year-long economic boom. 
That shift emphasized economic development above all else, with the champions of growth being protected, promoted, and, if necessary, pardoned. 
A similar ideological shift is needed today, only this time the focus must be on institutional development. 
Sustainable long-term growth – based on efficiency improvements, productivity gains, and innovation – is possible only with an effective institutional framework, and that requires fundamental changes to the political and regulatory systems. 
Only by overcoming vested interests and building a more efficient bureaucracy, bound firmly by the rule of law, can the reforms China needs be pushed through. 
Complicating matters further are mounting social conflicts, such as between urban and rural populations, among industries, and between the private and state sectors. 
The potential for mass protests and civil unrest is now hampering the government’s determination to create change. 
But with a concerted effort to create a level playing field that gives more people a bigger piece of the economic pie, not to mention more transparent governance and a stronger social safety net, China’s government could reinforce its legitimacy and credibility. 
That, in turn, would strengthen the authorities’ capacity to ensure stability. 
China’s experience in the 1990s suggests that the country can bounce back from its current struggles. 
With major reforms only half-complete, there are significant opportunities for stable growth based on efficiency and productivity gains, rather than merely on consumption. 
Once key distortions are eliminated and resources – including labor, capital, and talent – are being allocated more efficiently, China will be able to continue its march toward high-income status. 
China’s government may struggle at first; after all, performing surgery on oneself is difficult to initiate and even more difficult to get right. 
But if economic conditions worsen, as seems plausible, action will become unavoidable. 
Good times may breed crises in the West; in China, it is crises that bring better times. 

R.I.P. Chinese Exceptionalism? 
NEW DELHI – From Argentina to Turkey and from South Africa to Indonesia, emerging markets are once again being roiled by financial turbulence. 
But let us not lose sight of the biggest and potentially most problematic of them all: China. 
Over the past few decades, China’s growth has appeared to violate certain fundamental laws of economics. 
For example, Stein’s Law holds that if something cannot go on forever, it will stop. 
Yet China’s debt keeps on rising. 
Indeed, according to the International Monetary Fund, Chinese corporate, government, and household debt has increased by about $23 trillion in the last decade alone, and its debt-to-GDP ratio has risen by around 100 percentage points, to more than 250%. 
That is orders of magnitude above the level at which financial crises normally occur. 
To be sure, some of China’s debt has been used to expand its industrial base and infrastructure. 
But much of it has also gone toward sustaining money-losing public enterprises and endless investments in superfluous public facilities and housing. 
China’s domestic imbalances point to another economic law that it has managed to break. 
For any normal country, the build-up of extensive surplus capacity would lead to sharp declines in investment and GDP growth. 
And that, in turn, would produce financial distress, followed by a crisis if the warning signs were ignored. 
But China has had a different experience. 
Its GDP growth has slowed, but investment remains robust, and there is no strain on its banking system. 
A common explanation for China’s apparent invulnerability is that it has large pools of domestic savings and enormous foreign-exchange reserves (over $3 trillion), which can be spent down to head off financial panics. 
And because the government’s balance sheet is still strong enough to bail out unviable financial firms, it can address any emerging sources of stress in that crucial sector. 
Another common explanation for China’s resilience is political. 
Highly centralized decision-making allows for swift, concerted action, such as official clampdowns on foreign-exchange outflows. 
And in such a uniquely controlled – and controllable – society, the normal social stresses that arise from economic disruptions are eminently manageable. 
Plausible as these arguments are, it is time to revisit them. 
China’s economic exceptionalism is now being threatened by a perfect storm of existing stresses – namely, the domestic debt build-up – and new complications, including US trade barriers, the geopolitical pushback against China’s Belt and Road Initiative (BRI), and tightening monetary conditions, particularly in the United States. 
After the 2008 financial crisis, China shifted its economic model away from exports and toward internal sources of growth. 
But such a rebalancing requires ever more debt and investment, thus creating greater risks of collapse. 
As a result, the government has had to tread carefully, providing only moderate dollops of stimulus to the economy as needed. 
There is no how-to manual for managing this balancing act. 
Policy interventions that seem moderate in the moment could turn out to have been excessive. 
At some point, Stein’s Law will assert itself. 
First among the emerging threats to Chinese growth is US trade policy. 
So far, only about $50 billion worth of Chinese exports have been affected by the Trump administration’s tariffs. But in July, Trump announced a new round of tariffs targeting an additional $200 billion worth of Chinese goods, representing about 15% of total exports to the US. 
Reflecting its growing vulnerability, China’s reactions to Trump’s continued threats have been notably accommodative. 
A second threat to external demand comes from the exhaustion of China’s mercantilist policies. 
In the 1990s and 2000s, China developed an exceptionally large export industry in part by allowing its currency to become undervalued. 
More recently, however, it has perpetuated this approach through other means, namely the BRI, with which it finances other countries’ purchases of Chinese goods and services. 
Call this Chinese Mercantilism 2.0. 
The problem is that Mercantilism 2.0 is now under attack, both politically and economically. 
Politically, recipients of Chinese loans – from Sri Lanka to Malaysia to Myanmar – have been expressing objections to the BRI and its odor of neo-imperialism. 
Economically, the onerous terms of BRI financing have resulted in alarming debt build-ups in at least eight countries, according to the Center for Global Development. 
Malaysia, for example, has already had to cancel $22 billion worth of Chinese-backed projects. Sri Lanka has had to turn to the IMF for help, owing to the impact of excessive Chinese imports on its external accounts. 
And Pakistan may soon be forced to do the same. 
As more countries become wary of the BRI, they will borrow and import less from China. 
Meanwhile, the steady rise in US interest rates is creating a third shock. 
As US rates exceed Chinese rates, capital will flow out of China, as it has from other emerging markets this year. 
China’s leaders will thus be faced with the classic emerging-market dilemma. 
If they allow the renminbi to weaken, they could aggravate capital flight in the short term and invite accusations of currency manipulation from the US. 
But if they want to prop up the currency, they may have to spend down another trillion dollars in reserves, as happened in 2015. 
Alternatively, the government could reimpose draconian capital controls. 
But that would stifle external demand, undermine economic management more broadly, and discredit the country’s claim to global economic leadership (including internationalization of the renminbi). 
Amid this perfect storm of economic challenges, there are also growing questions about whether Chinese President Xi Jinping has as strong a grip on events as he would like everyone to think. 
Xi would do well to remember not just Stein’s Law, but also Rüdiger Dornbusch’s Law, which holds that, “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.” 
Sooner or later, Chinese exceptionalism will give way to the laws of economics. 
The world should prepare itself. 
The consequences could be severe – and unlike anything experienced in recent history. 

China’s Bumpy New Normal 
SHANGHAI – China’s shift from export-driven growth to a model based on domestic services and household consumption has been much bumpier than some anticipated, with stock-market gyrations and exchange-rate volatility inciting fears about the country’s economic stability. 
Yet by historical standards, China’s economy is still performing well – at near 7% annual GDP growth, some might say very well – but success on the scale that China has seen over the past three decades breeds high expectations. 
There is a basic lesson: “Markets with Chinese characteristics” are as volatile and hard to control as markets with American characteristics. 
Markets invariably take on a life of their own; they cannot be easily ordered around. 
To the extent that markets can be controlled, it is through setting the rules of the game in a transparent way. 
All markets need rules and regulations. 
Good rules can help stabilize markets. 
Badly designed rules, no matter how well intentioned, can have the opposite effect. 
For example, since the 1987 stock-market crash in the United States, the importance of having circuit breakers has been recognized; but if improperly designed, such reforms can increase volatility. 
If there are two levels of circuit breaker – a short-term and a long-term suspension of trading – and they are set too close to each other, once the first is triggered, market participants, realizing the second is likely to kick in as well, could stampede out of the market. 
Moreover, what happens in markets may be only loosely coupled with the real economy. 
The recent Great Recession illustrates this. 
While the US stock market has had a robust recovery, the real economy has remained in the doldrums. 
Still, stock-market and exchange-rate volatility can have real effects. 
Uncertainty may lead to lower consumption and investment (which is why governments should aim for rules that buttress stability). 
What matters more, though, are the rules governing the real economy. 
In China today, as in the US 35 years ago, there is a debate about whether supply-side or demand-side measures are most likely to restore growth. 
The US experience and many other cases provide some answers. 
For starters, supply-side measures can best be undertaken when there is full employment. 
In the absence of sufficient demand, improving supply-side efficiency simply leads to more underutilization of resources. 
Moving labor from low-productivity uses to zero-productivity unemployment does not increase output. 
Today, deficient global aggregate demand requires governments to undertake measures that boost spending. 
Such spending can be put to many good uses. 
China’s critical needs today include reducing inequality, stemming environmental degradation, creating livable cities, and investments in public health, education, infrastructure, and technology. 
The authorities also need to strengthen regulatory capacity to ensure the safety of food, buildings, medicines and much else. 
Social returns from such investments far exceed the costs of capital. 
China’s mistake in the past has been to rely too heavily on debt financing. 
But China also has ample room to increase its tax base in ways that would increase overall efficiency and/or equity. 
Environmental taxes could lead to better air and water quality, even as they raise substantial revenues; congestion taxes would improve quality of life in cities; property and capital-gains taxes would encourage higher investment in productive activities, promoting growth. 
In short, if designed correctly, balanced-budget measures – increasing taxes in tandem with expenditures –could provide a large stimulus to the economy. 
Nor should China fall into the trap of emphasizing backward-looking supply-side measures. 
In the US, resources were wasted when shoddy homes were built in the middle of the Nevada desert. 
But the first priority is not to knock down those homes (in an effort to consolidate the housing market); it is to ensure that resources are allocated efficiently in the future. 
Indeed, the basic principle taught in the first weeks of any elementary economics course is to let bygones be bygones – don’t cry over spilt milk. 
Low-cost steel (provided at prices below the long-term average cost of production but at or above the marginal cost) may be a distinct advantage for other industries. 
It would have been a mistake, for example, to destroy America’s excess capacity in fiber optics, from which US firms gained enormously in the 1990s. 
The “option” value associated with potential future uses should always be contrasted with the minimal cost of maintenance. 
The challenge facing China as it confronts the problem of excess capacity is that those who would otherwise lose their jobs will require some form of support; firms will argue for a robust bailout to minimize their losses. 
But if the government accompanied effective demand-side measures with active labor-market policies, at least the employment problem could be effectively addressed, and optimal – or at least reasonable – policies for economic restructuring could be designed. 
There is also a macro-deflationary problem. 
Excess capacity fuels downward pressure on prices, with negative externalities on indebted firms, which experience an increase in their real (inflation-adjusted) leverage. 
But a far better approach than supply-side consolidation is aggressive demand-side expansion, which would counter deflationary pressures. 
The economic principles and political factors are thus well known. 
But too often the debate about China’s economy has been dominated by naive proposals for supply-side reform – accompanied by criticism of the demand-side measures adopted after the 2008 global financial crisis. 
Those measures were far from perfect; they had to be formulated on the fly, in the context of an unexpected emergency. 
But they were far better than nothing. 
That is because using resources in suboptimal ways is always better than not using them at all; in the absence of the post-2008 stimulus, China would have suffered substantial unemployment. 
If the authorities embrace better-designed demand-side reforms, they will have greater scope for more comprehensive supply-side reforms. 
Moreover, the magnitude of some of the necessary supply-side reforms will be markedly diminished, precisely because the demand-side measures will reduce excess supply. 
This is not just an academic debate between Western Keynesian and supply-side economists, now being played out on the other side of the world. 
The policy approach China adopts will strongly influence economic performance and prospects worldwide. 

Deciphering China’s Economic Resilience 
NEW HAVEN – Once again, the Chinese economy has defied the hand wringing of the nattering nabobs of negativism. 
After decelerating for six consecutive years, real GDP growth appears to be inching up in 2017. 
The 6.9% annualized increase just reported for the second quarter exceeds the 6.7% rise in 2016 and is well above the consensus of international forecasters who, just a few months ago, expected growth to be closer to 6.5% this year, and to slow further, to 6%, in 2018. 
I have long argued that the fixation on headline GDP overlooks deeper issues shaping the China growth debate. 
That is because the Chinese economy is in the midst of an extraordinary structural transformation – with a manufacturing-led producer model giving way to an increasingly powerful services-led consumer model. 
To the extent that this implies a shift in the mix of GDP away from exceptionally rapid gains in investment and exports, toward relatively slower-growing internal private consumption, a slowdown in overall GDP growth is both inevitable and desirable. 
Perceptions of China’s vulnerability need to be considered in this context. 
This debate has a long history. 
I first caught a whiff of it back in the late 1990s, during the Asian financial crisis. 
From Thailand and Indonesia to South Korea and Taiwan, China was widely thought to be next. 
An October 1998 cover story in The Economist, vividly illustrated by a Chinese junk getting sucked into a powerful whirlpool, said it all. 
Yet nothing could have been further from the truth. 
When the dust settled on the virulent pan-regional contagion, the Chinese economy had barely skipped a beat. 
Real GDP growth slowed temporarily, to 7.7% in 1998-1999, before reaccelerating to 10.3% in the subsequent decade. 
China’s resilience during the Great Financial Crisis was equally telling. 
In the midst of the worst global contraction since the 1930s, the Chinese economy still expanded at a 9.4% average annual rate in 2008-2009. 
While down from the blistering, unsustainable 12.7% pace recorded during the three years prior to the crisis, this represented only a modest shortfall from the 30-year post-1980 trend of 10%. 
Indeed, were it not for China’s resilience in the depths of the recent crisis, world GDP would not have contracted by 0.1% in 2009, but would have plunged by 1.3% – the sharpest decline in global activity of the post-World War II era. 
The latest bout of pessimism over the Chinese economy has focused on the twin headwinds of deleveraging and a related tightening of the property market – in essence, a Japanese-like stagnation. 
Once more, the Western lens is out of focus. 
Like Japan, China is a high-saving economy that owes its mounting debt largely to itself. 
Yet, if anything, China has more of a cushion than Japan to avoid sustainability problems. 
According to the International Monetary Fund, China’s national savings is likely to hit 45% of GDP in 2017, well above Japan’s 28% saving rate. 
Just as Japan, with its gross government debt at 239% of GDP, has been able to sidestep a sovereign debt crisis, China, with its far larger saving cushion and much smaller sovereign debt burden (49% of GDP), is in much better shape to avoid such an implosion. 
To be sure, there can be no mistaking China’s mounting corporate debt problem – with nonfinancial debt-to-GDP ratios hitting an estimated 157% of GDP in late 2016 (versus 102% in late 2008). 
This makes the imperatives of state-owned enterprise reform, where the bulk of rising indebtedness has been concentrated, all the more essential in the years ahead. 
Moreover, there is always good reason to worry about the Chinese property market. 
After all, a rising middle class needs affordable housing. 
With the urban share of China’s population rising from less than 20% in 1980 to more than 56% in 2016 – and most likely headed to 70% by 2030 – this is no trivial consideration. 
But this means that Chinese property markets – unlike those of other fully urbanized major economies – enjoy ample support from the demand side, with the urban population likely to remain on a 1-2% annualized growth trajectory over the next 10-15 years. 
With Chinese home prices up nearly 50% since 2005 – nearly five times the global norm (according to the Bank for International Settlements and IMF global housing watch) – affordability is obviously a legitimate concern. 
The challenge for China is to manage prudently the growth in housing supply needed to satisfy the demand requirements of urbanization, without fostering excessive speculation and dangerous asset bubbles. 
Meanwhile the Chinese economy is also drawing support from strong sources of cyclical resilience in early 2017. 
The 11.3% year-on-year gain in exports recorded in June stands in sharp contrast with earlier years, which were adversely affected by a weaker post-crisis global recovery. 
Similarly, 10% annualized gains in inflation-adjusted retail sales through mid-2017 – about 45% faster than the 6.9% pace of overall GDP growth – reflect impressive growth in household incomes and the increasingly powerful (and possibly under-reported) impetus of e-commerce. 
Pessimists have long viewed the Chinese economy as they view their own economies – repeating a classic mistake that Yale historian Jonathan Spence’s seminal assessment warned of many years ago. 
The asset bubbles that broke Japan and the United States are widely presumed to pose the same threat in China. 
Likewise, China’s recent binge of debt-intensive economic growth is expected to have the same consequences as such episodes elsewhere. 
Forecasters find it difficult to resist superimposing the outcomes in major crisis-battered developed economies on China. 
That has been the wrong approach in the past; it is wrong again today. 

China’s Vicious Growth Circle 
LONDON – Most economists have a reason to be worried about China’s economy – whether it be low consumption and large external surpluses, industrial overcapacity, environmental degradation, or government interventions like capital controls or financial repression. 
What many fail to recognize is that these are merely the symptoms of a single underlying problem: China’s skewed growth model. 
That model is, to some extent, a policy-induced construct, the result of a deep-rooted bias toward construction and manufacturing as the leading drivers of economic development. 
This predilection harkens back to the Great Leap Forward of the 1950s, when scrap metal was melted to meet wildly optimistic steel-production targets, thereby advancing Mao’s dream of rapid industrialization. 
Today, China’s proclivity for industrial production is manifested in large-scale manufacturing and infrastructure projects, encouraged by direct and indirect government subsidies. 
By boosting investment and generating tax revenue for local governments, this approach has a more immediate positive impact on GDP than efforts to develop the service sector. 
But the model also carries considerable costs. 
Indeed, China is now locked in a vicious economic circle, sustained by seemingly unrelated distortionary policies that are, in fact, deeply interconnected, even symbiotic. 
One of the most glaring features of this pattern is the disparity between China’s GDP growth, which has averaged nearly 10% annually over the last few decades, and its employment growth, which has amounted to just 1-2% annually. 
Clearly, industrialization and export expansion alone cannot absorb China’s massive labor force. 
The problem is that rapid labor-productivity growth in the industrial sector – more than 10% per year over the last two decades – is reducing the need to hire more workers. 
The service sector, by contrast, experienced much slower labor-productivity growth (about 5% annually over the same period), meaning that it could be far more effective in generating employment growth. 
In the United States, about 80% of the total labor force was deployed in the services sector in 2012. 
Another consequence of China’s skewed growth model has been a decline in household income as a share of GDP, from 70% in 1990 to 60% in 2009, whereas in the US, for example, the ratio has remained stable, at around 80% of GDP. 
In other words, Chinese households are missing out on the benefits of economic growth. 
This phenomenon, too, can be blamed largely on distortionary policies. 
In order to cap the rise in labor costs, wages were suppressed, growing by only 5% annually over the last 20 years, even as productivity grew at an annual rate of 8.5%. 
Meanwhile, financial repression lowered the cost of capital. 
In the last decade, the average real (inflation-adjusted) return on deposits has been near zero. 
With about 80% of Chinese household savings deposited in banks, this implicit tax on savings has had a major economic impact, reinforcing Chinese households’ tendency to save and thus undermining consumption growth and exacerbating global imbalances. 
In this way, China’s distortionary policies have helped to perpetuate a dysfunctional growth model. 
Wage suppression, financial repression, and an undervalued exchange rate subsidize exports and production, at the expense of households, which are thus compelled to save, weakening domestic demand. 
In order to achieve growth targets, the government thus must depend on exports and investment – an approach that leads to the accumulation of massive reserves, which subsequently need to be sterilized. 
Low interest rates help to contain the cost of sterilization at the national level and reduce costs at the firm level – again at the expense of households. 
Breaking the cycle will not be easy, but there is no other way to address many of the most pressing problems confronting China’s economy. 
Indeed, the current growth model is also taking a heavy toll on the environment, with pollution threatening the population’s health, especially in urban areas. 
Moreover, the bias toward manufacturing and export industries leads to a severe misallocation of capital. 
Less efficient industrial sectors have accumulated significant excess capacity, destabilizing the entire economy, while more productive, efficient sectors lack access to the resources they need. 
Restructuring the economy is perhaps the most urgent – and most difficult – challenge facing China’s leaders today. 
Given that the current distortions are interlinked, they may need to be addressed simultaneously. 
China’s gradualist approach may no longer work. 

China’s Great City Rivalries 
SHANGHAI – China’s traditional industries are suffering. 
In the last five years, the country’s northeastern region – once a hub of basic industries like oil and steel – has been facing accelerating decline, as have the rich mineral resource centers in places like Hebei and Inner Mongolia. 
Over the last decade, about one-third of China’s 600 cities have contracted. 
The prospects of dispersed rural populations far away from China’s megacities have diminished as well. 
But all this bad news is actually a result of what is widely considered very good news: China’s economic transformation is progressing. 
In recent years, China’s economy has becoming increasingly reliant on new high-tech and modern service industries, including mobile Internet, artificial intelligence, smart cars, drones, robots, virtual reality, wearable device manufacturing, green technology, and more. 
Meanwhile, jobs and growth have become increasingly concentrated in some high-productivity megacities, making them magnets for skilled labor and venture capital – and leaving hubs of traditional industries in the dust. 
The rapid growth in China’s high-tech industries was thrown into sharp relief earlier this month at the annual Consumer Electronics Show (CES) in Las Vegas, Nevada, where Chinese firms accounted for 40% of all exhibitors – a figure that would have been unthinkable just five years ago. 
Many of those firms are from Shenzhen, China’s first special economic zone and now the country’s most innovative city. 
But Shenzhen is not alone. 
Several other Chinese cities – for example, Beijing, Shanghai, Guangzhou, Chengdu, and Xi’an – are also working to foster cutting-edge industries. 
In fact, these cities’ competition to generate stronger growth than their counterparts – a contest sustained by the political incentives the central government has long provided to local officials – has played a driving role in China’s rapid industrialization and ongoing structural transformation. 
In the short term, it is difficult to assess precisely the role of inter-urban competition in promoting the development of China’s high-tech industries, though there are undoubtedly some negative effects. 
But, over the long term, the outcomes of such horizontal competition are generally positive, owing to the incentives it creates for local government officials to think creatively, experiment effectively, and pursue forward-looking policies. 
Indeed, studies carried out by economists, including me, have shown that competition among local governments made a major contribution to the rapid industrialization that China experienced in the 1990s. 
A key reason for this is that land – which plays an important role in early industrialization – is owned and managed largely by local governments in China. 
So Chinese county governments used land as leverage in order to attract foreign-direct investment, particularly in the Pearl River Delta and the Yangtze River Delta in the1980s and 1990s. 
Over the last decade, such regional competition has persisted, but has increasingly been led by major cities. 
Rising wages and sharply declining returns to capital in traditional industrial sectors have underscored the need to accelerate modernization – an imperative that has been reflected consistently in the central government’s reform strategies. 
So China’s major cities have been fostering innovative and high-tech industries and modern services in the new economy. 
One of China’s premier megacities has long been Shanghai. 
But, in recent years, Shenzhen has become a tech hub, and Hangzhou, where Alibaba is based, is a rising star in the digital economy. 
Shenzhen’s GDP reached some CN¥2.2 trillion ($343 billion) in 2017, higher than that of Hong Kong and Guangzhou, and surpassed only by Shanghai and Beijing. 
Now, officials in Shanghai and Guangzhou (the capital of Guangdong province, where Shenzhen is located) have added motivation to pursue new growth- and productivity-enhancing policies, including upgraded initiatives to attract entrepreneurship and human capital.g 
China’s major cities have created and implemented policy packages aimed at supporting innovative start-ups, as well as a series of measures to attract talent, including individual tax incentives, home-purchase subsidies, and attractive health-care and education benefits. 
The leaders of several big cities, including Shanghai, have lately called for a stronger commitment to such policies to be incorporated into broader efforts to improve the local business environment. 
Such comprehensive strategies have enhanced further the role of China’s major cities in advancing structural change, and contributed to major shifts in the sources of economic dynamism of China. 
Of course, such competition carries risks – in particular, short-sighted efforts to boost growth in ways that exacerbate misallocation of resources, overcapacity, and high financial leverage. 
But Beijing’s government, for one, is attempting to mitigate these risks, by shifting its focus from encouraging the highest possible growth rate to ensuring higher-quality growth. 
In most cases, such sustainable growth will arise from major cities’ pursuit of high-tech and modern service industries. 
China’s cities remain vital sources of economic growth for the country. 
While some will undoubtedly struggle, others will serve as critical engines of China’s economic transformation, fueling dynamism across the entire global economy. 

A Window on China’s New Normal 
CAMBRIDGE – Every year at this time, China’s government organizes a major conference – sponsored by the Development Research Center, the official think tank of the State Council – that brings together senior Chinese officials, CEOs from major Chinese and Western firms, and a small group of international officials and academics. 
The China Development Forum (CDF) occurs just after the annual National People’s Congress. 
At the forum, speakers, including the finance minister and the head of the central bank, summarize the Chinese leadership’s current thinking. 
Officials then listen to comments and suggestions from Western business and academic participants, including a question and answer session with Premier Li Keqiang. 
Although I have been attending the CDF’s meetings for more than a decade, I found this year’s conference substantially different from any in the past. 
The key difference was the official Chinese recognition that annual real GDP growth has declined permanently from the past three decades’ average rate of nearly 10%. 
The official estimate is that real GDP grew 7.4% in 2014, and that the rate will probably slow further, to 7%, this year. 
The Development Research Center presented detailed estimates showing that the growth rate will continue to decline, reaching about 6% by the end of the decade. 
Virtually every Chinese official referred to this slowdown as their country’s “new normal.” 
They all seemed reconciled to slower growth, which was initially surprising, because officials previously argued that China needed rapid growth to maintain employment and avoid political unrest. 
They now appear to understand that the declining growth rate will not lead to unemployment, because the slowdown reflects China’s structural shift from export-oriented heavy industrial production to increased production of consumer services, which require more employment to create the same amount of value. 
Stronger growth nevertheless remains necessary, because China is still a relatively low-income country with substantial poverty. 
Although China’s total real GDP is second only to that of the United States (and might be larger when measured in terms of purchasing power), its per capita income is only about $7,000, or roughly 15% of the US level. 
And consumption remains low – only about 50% of GDP when government spending is included, and just 35% when limited to household consumer spending. 
So China has a long way to go to reach its leaders’ goal of achieving a “modern prosperous society.” 
The Chinese see that the “new normal” requires a shift in their growth strategy from factor-driven growth to innovation-driven growth. 
But it is not clear how that increase in innovation will be achieved. 
While officials stress reliance on the market, China does not have the venture capital and “angel financing” that facilitates innovation in the US. 
The authorities may hope that their plan to insure bank deposits will shift deposits from the three largest banks to many smaller banks around the country, facilitating local startups’ access to financing. 
Many other economic problems loom. 
Officials acknowledged at the CDF that the biggest risks lie in the financial sector, particularly owing to local governments�� very large liabilities. 
In the past, the government dealt with the problems that these liabilities caused for the banking system by injecting funds into the banks. 
Environmental problems are another powerful drag on China’s current standard of living. 
But they also represent a potential way to increase GDP should overall demand decline significantly. 
China acknowledges that high levels of air and water pollution create discomfort and harm the public’s health. 
Government spending on remedying environmental damage could absorb substantial funds if demand-side weakness exacerbates the expected supply-side slowdown. 
Moreover, the very weak performance of state-owned enterprises, which continue to play a large role in heavy industry and in some service sectors, represents a powerful brake on growth. 
Although official policy aims to reduce these firms’ role so that “the market can play the decisive role in resource allocation,” shrinking these firms has proved to be difficult, owing to their strong political backing within the Chinese Communist Party. 
At the same time, China maintains restrictions on direct investment by foreigners, limiting both the kinds of firms and the share of joint ventures that they can own. 
The official policy is to reduce the barriers to foreign corporate investment, especially in high tech and the service sector. 
There were, of course, a number of subjects that remained just below the surface and were not discussed at this year’s CDF. 
There was no indication of a slowdown in President Xi Jinping’s anti-corruption campaign, though some private conversations suggested that the campaign has resulted in decision-making delays that are hurting productivity and growth. 
There was also no discussion of Chinese cyber theft of Western technology. 
When that subject was raised in 2014, Li denied that the Chinese do such a thing, but noted that Chinese firms are hacked by domestic sources. 
And, with the CDF’s emphasis on cooperation, there was no discussion of possible military action by the Chinese to stake their disputed territorial claims in the East and South China Seas. 
Meetings like the CDF provide a useful window into a country whose importance for the global economy will continue to grow. 
The current slowdown to a new normal makes such windows even more important. 

Missing the Forest for the Xi 
LONDON – In recent weeks, Western media commentators have focused extensively on the Communist Party of China’s (CPC) decision to abolish presidential term limits, which will allow Xi Jinping to remain in power indefinitely. 
Unsurprisingly, they have generally responded to the news with disappointment and skepticism about the Chinese political model. 
What is surprising, though, is the claim that China is reneging on some implicit promise to become more like the West. 
Many observers assumed that China would inevitably embrace Western-style liberal democracy. 
But even though I, too, was slightly taken aback by the CPC’s latest decision, I never considered that simplistic interpretation of modern-day China to be particularly sensible. 
Now, let me be clear: I am not going to argue that unelected strongman leadership is superior to Western-style democracy. 
If I believed that Xi was preparing to rule China with an iron fist for the next 20-plus years, I would share the doubts of many other commentators. 
But allow me to suggest a more open-minded interpretation. 
For starters, as Yuen Yuen Ang of the University of Michigan reminds us in her excellent book How China Escaped the Poverty Trap, China has lifted hundreds of millions of people out of poverty without adhering to the conventional Western approach to development. 
In fact, a young Beijing-based entrepreneur I met recently estimates that at least 20% of Chinese – over 250 million people – are now making $40,000 per year. 
Besides the United States, no other country in the world has that many people generating that much individual wealth. 
Whether Westerners like to admit it or not, that is a remarkable achievement. 
But even more remarkable is the fact that it has happened under a non-democratic system, and that Chinese citizens appear to be rather content. 
Although small-scale protests are not uncommon, even among those in the top 20%, they tend to be scattered and fleeting. 
Now, think about this. 
If China can sustain 5.5-7% annual economic growth for the next 15 years, the number of Chinese earning $40,000 per year could more than double. 
In that case, they probably will not be particularly concerned that Xi is still their country’s anointed leader. 
This brings me to a second point. 
Contrary to the pessimists who have long been wrong about looming threats to China’s GDP growth, I suspect that China’s ultimate undoing could actually be its hukou (household registration) system. 
This is the arrangement that allows migrants from rural areas to work in cities across China, but does not afford them the same rights as urban-born dwellers. 
My guess is that very few of these Chinese are among the top 20% of earners. 
Although the CPC has experimented with scrapping the hukou system in smaller cities where it wants to promote growth, it has refrained from doing so in the big cities. 
Based on private discussions I have had with Chinese policymakers, I know that they see the current arrangement as a major problem. 
But they do not want to confront it. 
Their reasoning is that abandoning the system altogether would impose an unsustainable burden on megacities such as Beijing and Shanghai. 
Still, my hunch is that something will have to change eventually. 
A two-tier system in which almost half the population enjoys Western levels of wealth while the rest have no right to health care or social security cannot survive another 15 years. 
And if this is obvious to me, then it must be obvious to the Chinese leadership, too. 
There is no telling when an overhaul of the hukou system will come. 
But when it does, as I think it must, it will probably be accompanied by a dramatic shift in political governance. 
Given this, I can see why the CPC’s upper echelons would want to be particularly careful about leadership changes in the years ahead. 
And lest we forget, when Xi came to power in March 2013, some at the top of the party tried to resist the changes he was bringing. 
Ten years may be a long time, but it probably isn’t long enough for fundamental questions about the future of the country and the party to be laid to rest. 
So, my third and final point for consideration is that the CPC elites do not want a permanent Xi presidency so much as they want to avoid a forced change of leadership in 2023. 
My recommendation for Western commentators, then, is to focus on how the Chinese economy evolves in the meantime. 
Commentary examining growth in Chinese private consumption as a share of GDP, or potential changes to the hukou system, will be far more edifying than that devoted to the personality and ambition of Xi Jinping. 

The End of Poverty in China? 
BEIJING – One of the most cited statistics about China may well be the number of Chinese who have been lifted out of poverty over the last 35 years. 
At over 800 million, it is a huge number – and an extraordinary feat. 
Indeed, no other country has achieved such a level of poverty reduction in such a short period. 
But what about the millions of Chinese who have remained behind? 
China’s government is committed to finishing the task, with the aim of reducing rural poverty essentially to zero by 2020. 
The authorities first made the pledge at the United Nations in 2015, and have reiterated it in subsequent official settings. 
But fulfilling that promise – which would now entail improving the wellbeing of about 45 million people, roughly equivalent to Sudan’s entire population – will carry significant costs. 
Poverty reduction, like so many important endeavors, is subject to the law of diminishing returns: the more you do something, the less productive your efforts become. 
Think of winding a watch: the more you wind, the more resistance builds up in the mainspring, and the more energy it takes to move the stem the same distance. 
When it comes to poverty reduction, the people who benefit first are most likely those who were best equipped to do so, owing to, say, their background or geography. 
By the time there are only a few – or even a few million – left, one can expect reaching them to be much harder. 
China’s experience illustrates this phenomenon perfectly. 
During the first seven years of China’s official “reform and opening up,” which began in 1978, it is estimated that around 110 million people annually rose out of poverty. 
For the next 15 years – from 1985 to 2000 – the pace of progress slowed considerably, with around 26 million people moving above the poverty line each year. 
From 2000 to 2015, the figure stood at just over 22 million per year. 
The government’s target now is to lift ten million people out of poverty annually. 
As the pace of poverty-reduction has slowed, its costs have risen – a trend illustrated in a new UN report, together with World Bank data. 
In 2000, lifting a person out of poverty in China cost the central government approximately $48 per year (in nominal terms). 
By 2010, this figure had increased more than three-fold, to $150 per year. 
Now that the government is working to reach the most remote people – those without access to roads, electricity, or clean water – the cost exceeds $200 per year. 
This is not to say that China will not be able to meet its 2020 target. 
On the contrary, the government’s plans and implementation appear as strong as ever. 
In fact, last year, the government exceeded its target, with 12.4 million people escaping rural poverty. 
And the budget for this year is 30% larger, meaning that at least $1,000 has been allocated for each of the ten million people China’s government plans to lift out of poverty in 2017. 
But, as the government attempts to “get to zero” on rural poverty – by moving all people above the national rural poverty line of CN¥2,230 ($324) per year – it should not lose sight of broader poverty-related challenges. 
China continues to experience rapid urbanization – a phenomenon that contributed substantially to past poverty reduction, but that also places a growing number of urban dwellers at risk of destitution. 
According to official figures, the average income of the poorest 5% of households in Chinese cities amounts to about $1,128 (CN¥7,521). 
That is about 3.5 times China’s rural poverty line. 
But, overall, the average income in cities is at least four times higher than that in the countryside, suggesting that living on such a budget may be even tougher than living at the rural poverty line. 
And that does not even account for the many migrant workers who live under the radar in cities and are likely to earn even less than the poorest 5%. 
These forms of poverty may be even harder to address, not least because China has less experience doing so. 
Given this, just as China’s successful efforts to reduce rural poverty can serve as a model for others, other countries’ successes in managing urban poverty can – and should – help to guide China’s efforts. 
China is far from alone in focusing on the fight to end poverty; indeed, the very first Sustainable Development Goal calls for an end to poverty in all of its manifestations by 2030. 
With the process becoming increasingly challenging and costly, looking across borders could prove vital to enabling all Chinese to live decent, dignified lives. 

The Untapped Potential of Sino-European Investment 
BEIJING – Global economic growth, says the International Monetary Fund, has been “too slow for too long.” 
A major reason has been sharply decelerating growth in global trade, which the World Trade Organization expects to grow by 1.7% this year – far below the 6.7% average in the decade preceding the 2008 crisis. 
With trade alone no longer capable of underpinning global cooperation, it is time to add more investment linkages to the mix. 
As it stands, there is no real global-level investment framework. 
But the G20 recently approved the world’s first programmatic document on multilateral investment, entitled the G20 Guiding Principles for Global Investment Policymaking. 
The general framework it provides could be particularly valuable for China and the European Union, as they attempt to negotiate a bilateral investment treaty (BIT). 
So far, there have been several rounds of BIT talks, focusing on increased investment protection and market access. 
Many more rounds are on the way, as some significant issues – including guarantees of regulatory transparency and the creation of an effective dispute-settlement mechanism – have yet to be fully agreed. 
The Sino-European BIT is to be based on 26 existing BITs involving China and 28 individual EU members – treaties that are far from consistent, in terms of requirements for and restrictions on market access. 
This lack of uniformity is a major motivation for China to negotiate a single treaty: it wants to ensure that its enterprises have equal market access in all EU member countries and avoid the costs and complications associated with adhering to different regimes. 
Gaining access to the advanced technologies and management expertise of European firms is another major enticement. 
The EU, for its part, hopes that money flowing in from China will help to boost its struggling economy and pave the way for increased trade. 
Among its main demands is that access to China’s market be governed by a negative list (a list of exceptions to what would otherwise be open market access), rather than by a lengthy government-approval process. 
Here, China has already taken some steps forward. 
Last December, the State Council decided to introduce a negative list for market access that applies to all investment activities in China, by both domestic and foreign investors. 
A pilot version of this list has proved itself in Shanghai, Guangdong, Tianjin, Fujian, and other free-trade trial areas. 
Beyond addressing institutional issues, however, China and the EU need to dismantle cultural and conceptual barriers to investment. 
Both sides must work to increase mutual understanding and trust through various negotiation mechanisms and to encourage “track II diplomacy” (interactions among smaller non-state actors). 
To this end, the European Commission seems prepared to establish a transparent “investment project portal” – open to the European public, as well as to Chinese and other third-party investors – to facilitate the sharing of information, knowledge, and resources for European investments. 
For both sides, there is plenty of work ahead to conclude a BIT. 
But that is no reason to delay the expansion of investment cooperation. 
In parallel with their BIT negotiations, China and the EU should be pursuing three main goals. 
First, China and the EU must follow through on their 2015 agreement that key strategic initiatives for each economy should be better integrated. 
On China’s side, these include the “one belt, one road” initiative, which focuses on strategic investment, and its structural reform plans, which focus on making the economy more market-oriented and bolstering innovation. 
On Europe’s side, such initiatives include the Europe 2020 economic growth strategy and the European Commission’s Investment Plan for Europe, commonly known as the Juncker Plan, both of which aim to help Europe build a more innovative, sustainable, inclusive, and dynamic economy. 
In addition, the “16+1 cooperation” between China and Central and Eastern European countries should become more transparent and integrated with wider Sino-European cooperation. 
A second main objective for China and Europe should be to contribute to protecting and developing global value chains, which foster trade and investment through economic integration. 
The emergence of these value chains has transformed global trade from a zero-sum game to a foundation for mutually beneficial collaboration. 
Yet some political forces in Europe (as well as the United States) are now speaking out against international economic integration, proposing a return to the protectionism of the past. 
As soon as one country blocks another country’s goods or services from entering its market, global value chains will be disrupted, producing spillover effects that hurt everyone – including the country that erected the barriers. 
Given this, European and Chinese leaders must make the case for continued liberalization of trade and investment, despite the political challenges that may arise, particularly in Europe. 
This is especially important with regard to the services sector. 
Europe and China need to open up their services markets to two-way trade, including by dismantling remaining barriers to trade in information technology and promoting technology transfer. 
The third key objective that the EU and China should be pursuing on the way to a BIT is the development of new mechanisms to finance investment. 
Such efforts have been pursued by each separately: China led the establishment of the Asian Infrastructure Investment Bank, while the EU has the European Investment Bank (EIB) and the European Fund for Strategic Investments (which forms a pillar of the Juncker Plan). 
China and the EU should use such platforms to promote integration and cooperation in investment financing. 
As it stands, there is far less direct investment between China and the EU than there is between China and its other large trading partners, including the US and Brazil. 
With trade growth slowing, both sides should seek to tap their huge potential for mutual investment as quickly as possible. 

How To Avoid a Trade War 
CAMBRIDGE – Defying common sense as well as business and financial elites, US President Donald Trump seems to relish the prospect of a trade war. 
On July 6, his latest trade restrictions – 25% tariffs on about $34 billion of Chinese imports – took effect. 
They were promptly met by retaliatory tariffs on an equivalent volume of US exports to the Chinese market. 
Trump has threatened further measures against China, as well as tariffs on automobile imports from Europe. 
And it remains possible that he will withdraw the United States from the North American Free Trade Agreement if Mexico and Canada do not agree to amend it to his liking. 
Trump’s kneejerk protectionism does little to help the working class that helped elect him. 
Disaffected congressional Republicans and unhappy corporations that have supported him on other matters may yet rein him in. 
But those who, like me, thought Trump’s bark would be worse than his bite on trade are having second thoughts about where all of this might lead. 
But before we get too carried away with doomsday scenarios on trade, we need to consider other countries’ incentives as well. 
Trump may well want a trade war, but he cannot have it on his own. 
A trade war requires other economies to retaliate and escalate. 
And there are compelling reasons why they should not do so. 
In the usual scenario, trade retaliation occurs because countries have economic reasons to depart from low tariffs. 
The canonical historical experience unfolded during the early 1930s, when countries were caught in the Great Depression with high unemployment and inadequate policy remedies. 
Counter-cyclical fiscal policy was not yet in vogue – John Maynard Keynes’ General Theory was published only in 1936 – while the Gold Standard rendered monetary policy worse than useless. 
Under the circumstances, trade protectionism made some sense for each country on its own, as it shifted demand away from foreign goods and thus helped support domestic employment. 
(Of course, for all countries taken together, protectionism spelled disaster; one country’s expenditure shift was more than offset by others’ own shifts.) 
Economists also consider another scenario that focuses on the so-called terms-of-trade effects of tariffs. 
By restricting trade volumes, a large country or region can manipulate the prices at which it competes in world markets to its advantage. 
An import tariff, in particular, would tend to depress the world prices of imported commodities, while raising their tariff-inclusive prices – with the home treasury reaping the difference in tariff revenues. 
Neither scenario makes much sense today. 
Europe and China are not particularly interested in depressing world prices of their imports or in the resulting revenue. 
Employment considerations are not a major issue, either. 
While some countries in the eurozone suffer from high levels of unemployment, there is nothing that protectionism can do for these countries that expansionary fiscal or monetary policy (the latter by the European Central Bank) cannot do better. 
If Europe, China, and other trade partners were to retaliate in response to Trump’s tariffs they would simply reduce their own gains from trade without reaping any of the advantages of protectionism. 
And they would be doing Trump a favor by lending surface plausibility to his complaints about the “unfairness” of other countries’ trade policies vis-à-vis the US. 
For the rest of the world, raising trade barriers would be a case of cutting off one’s nose to spite one’s face. 
Besides, if Europe and China want to uphold a rules-based multilateral trade regime, as they say they do, they cannot mirror Trump’s unilateralism and take matters into their own hands. 
They need to go through the World Trade Organization and wait for formal authorization to reciprocate, without expecting a quick resolution or that Trump will have much respect for the eventual ruling. 
In short, both self-interest and principle counsel restraint and no (immediate) retaliation. 
This is the time for Europe and China to stand tall. 
They should refuse to be drawn into a trade war, and say to Trump: you are free to damage your own economy; we will stick by policies that work best for us. 
Provided other countries do not overreact, Trump’s protectionism need not be as costly as many accounts make it sound. 
The value of trade covered by the measures and countermeasures resulting from Trump’s trade policies has already reached $100 billion, and Shawn Donnan of the Financial Times reckons that this figure could soon reach more than $1 trillion, or 6% of global trade. 
This is a large number. 
But it assumes retaliation, which need not occur. 
More important, what matters is incomes and welfare, not trade per se. 
Even if the volume of trade takes a big hit, aggregate economic performance need not suffer much. 
Some European airlines favor Boeing over Airbus, while some US airlines prefer Airbus over Boeing. 
Trade restrictions may result in a total collapse in this large volume of two-way trade in aircraft between the US and Europe. 
But the overall loss in economic welfare would be small, so long as airlines view the two companies’ products as close substitutes. 
This is not to minimize the costs that specific European and Chinese companies may incur as the US market becomes more closed. 
But for every exporter forced to seek alternative markets, there may be another domestic firm presented with a new economic opportunity. 
As US trade shrinks, there will be also fewer American competitors and less US competition. 
Economists typically make the point in reverse, when they argue against focusing excessively on the losers from freer trade, and they decry the tendency to overlook the beneficiaries on the export side. 
They should not be prone to the same fallacy now, by ignoring that US protectionism surely will generate some beneficiaries as well in other countries. 
Trump’s protectionism may yet result in a global trade war, with eventual economic consequences that are far more serious than the self-harm it entails at present. 
But if that happens, it will be as much the result of miscalculation and overreaction on the part of Europe and China as of Trump’s folly. 

Should China Be Ejected from the SDR? 
SANTA BARBARA – Last week, the Chinese government tightened its grip on the renminbi’s exchange rate. 
China has now effectively reneged on a promise it made 18 months ago, when it lobbied its way into the basket of currencies that determines the value of the International Monetary Fund’s synthetic reserve asset, the Special Drawing Right (SDR). 
China’s latest move will hardly strengthen confidence in its currency. 
As some of us warned at the time, the renminbi’s admission to the SDR basket was a highly political decision that could have adverse long-term consequences. 
The basket had previously comprised the US dollar, the euro, the British pound, and the Japanese yen – all world-class currencies that meet the IMF’s two criteria for admission: they are issued by the world’s leading exporters, and they are “freely usable,” meaning that they are widely exchanged worldwide. 
By contrast, the renminbi met only the first criterion when it was included in the SDR. 
Although China was already the world’s largest exporting country, its financial markets were primitive, and its currency plainly fell far short of being freely usable. 
In 2015, the renminbi ranked seventh in global central-bank reserves, eighth in international bond issuance, and 11th in global currency trading; and it remained non-convertible for most capital-account transactions. 
Still, the renminbi was admitted. 
China had made it abundantly clear that it would not be happy with a negative decision, and no one wanted to poke the dragon. 
But rather than upholding its usual standards, the IMF and its principal members settled for China’s vague promise to make the renminbi more usable sometime in the future. 
Historically, the People’s Bank of China (PBOC) had fixed the renminbi’s exchange rate on a daily basis, without regard to underlying market sentiment; and it had allowed for the renminbi to trade only within very narrow limits. 
But even before the IMF decided to include the renminbi in the SDR, the Chinese government announced that it was loosening its control over the currency. 
The PBOC declared that market signals would henceforth be factored into its daily exchange-rate fixing. 
And it promised gradual liberalization of China’s capital controls, which would boost the renminbi’s attractiveness to investors. 
And yet the Chinese authorities’ latest move indicates that they have no intention of playing by the rules. 
Instead of further loosening its grip on the exchange rate, the PBOC is reasserting control and reducing the role of market sentiment in its decision-making. 
The proof is in the pudding: the renminbi is clearly less freely usable than it was 18 months ago. 
Since mid-2016, China has been imposing strict new capital controls to prevent the renminbi from pouring out of the country and being converted into dollars. 
China has also placed new limits on Chinese corporations’ foreign direct investments, and it is scrutinizing other cross-border transactions. 
It is not difficult to understand why China has reneged on its promises. 
Over the past two years, newly affluent Chinese citizens have been seeking ways to move their wealth abroad. 
This has increased downward pressure on the renminbi, and has forced the PBOC to spend more than $1 trillion in foreign-exchange reserves to prop up the exchange rate. 
And yet that still wasn’t enough to prevent Moody’s Investors Service from downgrading China’s credit rating earlier this month, leaving policymakers on the defensive. 
Of course, China’s current problems may amount to a brief detour on the long road to greater openness. 
But they may not. 
If the Chinese government is serious about opening its capital market, it will have to implement reforms that go straight to the heart of the Chinese Communist Party’s model of political and economic management. 
An efficient, open financial sector could seriously erode the CCP’s authority, not least because financial repression is a key component in China’s machinery of political autocracy. 
At best, China’s government acted prematurely when it insisted that the renminbi be included in the SDR. 
At worst, it set an unfortunate precedent that could encourage other big emerging economies, such as India or Russia, to demand the same treatment for their currencies, regardless of whether they meet the IMF’s criteria. 
Indeed, if China can get into such a prestigious, exclusive club despite its arbitrary policy behavior, then why can’t they? 
Never mind that the IMF’s authority would be severely compromised. 
Looking to the future, there is only one solution. 
The renminbi should be removed from the SDR, unless China can make credible commitments to pursue serious and permanent financial liberalization. 
The criterion that a constitutive currency should be freely usable is a guarantee of stability for the global monetary system. 
That guarantee is only as credible as the criterion itself. 

China’s Boldest Experiment 
BEIJING – Forty years ago this month, China’s leaders set the country on a path of reform that has produced the most dramatic economic transformation in history. 
Mao Zedong had died two years earlier, in 1976, and the newly rehabilitated Deng Xiaoping succeeded in stamping his vision of economic development and modernization on the Third Plenary Session of the Eleventh Central Committee held in December 1978. 
In the four decades since, China has transformed itself into an economic powerhouse, portending an equally momentous makeover of the global economy and geopolitics. 
China’s reforms started in agriculture, where the crushing burden of state controls was relaxed. 
Through the dual-track pricing mechanism, farmers were given market incentives. 
The household responsibility system allowed them greater control over the land they worked. 
Farmers responded quickly, increasing their efficiency and output. 
Reforms were subsequently broadened and extended into other areas. 
Non-agricultural production incentives were bolstered through a hybrid form of ownership called Township and Village Enterprises (TVEs). 
As the reforms spread to cities, state enterprises gained more autonomy and were encouraged to become entrepreneurial. 
Incentives were created for provinces and localities to invest and spur economic growth. 
And the growth of Special Economic Zones (SEZs) in the 1990s turned China decisively toward integration with the world economy. 
The general thrust of these reforms was to increase the economy’s market orientation and external openness. 
But while China’s share of international trade and private investment grew and that of the state sector steadily shrank in relative terms, the authorities retained a firm hand in managing the economy. 
Economic restructuring and diversification were promoted through a range of industrial policies. 
Foreign investors were required to enter into joint ventures with domestic firms and to increase the use of local inputs. 
The exchange rate and international financial flows remained controlled for the most part. 
Through it all, China’s leadership did not follow any guidebook and resolutely marched to the beat of its own drummer. 
Reform was guided by neither communist teachings nor free-market dogma. 
If senior policymakers followed one overarching principle, it was what might be called “pragmatic experimentalism.” 
As Deng famously said, what mattered was not the color of the cat, but whether it caught the mice. 
Given the peculiarities of China’s experience, it is not surprising that there remains considerable debate about the lessons to be drawn from it. 
For many in the West, China demonstrates the benefits of reliance on markets and economic liberalization. 
Yet if China were an economic basket case today, I suspect the same voices would be quick to attribute the failure to the continued intrusiveness of the Chinese state. 
For others, China demonstrates the intrinsic superiority of the state-led model. 
Yet many of the same policies, such as dual-track pricing or domestic content requirements, have failed in other settings. 
These opposing perspectives can be reconciled. 
China has not violated the tenets of mainstream economics so much as it has offered a master class in applying them creatively in complicated political and economic terrain. 
Dual-track pricing provided market incentives at the margin without undermining the fiscal revenues. 
TVEs spurred private entrepreneurship, despite weak frameworks for property rights and contract enforcement. 
SEZs spurred exports and foreign investment without undermining employment among protected state enterprises. 
Industrial policies allowed infant industries to internalize learning spillovers. 
In short, China represents the triumph of practical economics – in which second-best strategies, market failures, general equilibrium, and political economy prevail – over the simplistic reasoning of Econ 101. 
The biggest test for the Chinese model may be yet to come. 
Throughout the country’s economic transformation, the political primacy of the Communist Party of China was never in question. 
But outside observers expected that continued economic development would eventually lead to political liberalization. 
Instead, under President Xi Jinping, China has taken a decidedly more authoritarian turn. 
That is bad news for the hundreds of millions of Chinese whose political freedoms are being ever more tightly circumscribed. 
Political repression could be bad news for the economy as well, for at least two reasons. 
First, people’s ability to speak freely provides an advance-warning mechanism for policies that might eventually fail, enabling the authorities to change course before more damage is done. 
Second, political competition provides institutional mechanisms for channeling opposition, which otherwise might spill over to the streets and fuel civil disorder. 
China’s leaders seem to be betting that they can avoid both types of problems. 
They believe they have their ears sufficiently to the ground that they can remain responsive to any brewing discontent. 
And they hope they can exercise social control through facial recognition and other new technologies, which they have taken the lead in deploying. 
The conventional wisdom among social scientists is that the demands of advanced economies and growing middle classes can be met only through greater political freedoms and competition. 
The Chinese political elite are skeptical, and not without reason. 
When they look at the West nowadays, they see populism, demagoguery, and deep divisions, rather than harmonious, inclusive societies. 
Their attempt to combine a high-growth, technologically sophisticated economy with reinforced authoritarianism is perhaps their most ambitious experiment to date. 

China’s Monetary Conundrum 
SHANGHAI – Weak demand is dragging down China’s economic growth. 
The real problem isn’t a shortage of money: the broad money supply (M2) now exceeds CN¥155 trillion ($25 trillion), or 200% of GDP, and continues to grow by 12-13% annually. 
Rather, the current slowdown reflects financial constraints on the real economy – a problem that will be difficult to reverse in the near future. 
Ironically, these financial constraints have tightened against a background of strong financial-sector growth. 
Indeed, it is the financial sector’s prosperity, driven partly by the success of market-oriented innovations, that has fueled growth in China’s M2 and credit assets. 
This trend can be traced back at least to 2004, when a fast-growing trade surplus and massive capital inflows, as well as relentless exchange-rate appreciation, forced the People’s Bank of China (PBOC) to resort to monetary expansion as a hedge against the resultant risks. 
Since then, China’s unremitting investment in infrastructure and real estate has fueled domestic demand, absorbing and reinforcing this credit growth. 
In 2009, China took things a step further, with a massive three-year stimulus plan that expanded bank credit to more than CN¥20 trillion. 
As the money supply and financial sector expanded, so did the shadow banking system, which operates beyond the reach of risk-mitigating regulation. 
According to data from Moody’s Investors Service, by the end of last year, credit from China’s shadow banking system had nearly tripled relative to 2011, to CN¥65 trillion. 
Since 2006, shadow banks’ share of total credit soared from 10% to 33%. 
But the trend toward riskier off-balance-sheet lending is visible within the official financial sector as well, largely owing to the use of innovative and weakly regulated wealth-management products that enable commercial banks to bypass regulation. 
Even interbank loans, traditionally included on balance sheets, have been turned into “interbank investment businesses,” which can exist off balance sheets. 
The PBOC’s 2014 Financial Stability Report showed that from the beginning of 2009 to the end of 2013, banking institutions’ interbank assets surged from CN¥6.21 trillion to CN¥21.47 trillion. 
That 246% growth rate was 1.8 times that of total assets and 1.7 times that of total loans over the same period. 
Interbank liabilities, meanwhile, grew by 236% – 1.7 times faster than total liabilities and 1.9 times faster than deposit liabilities. 
All of this fueled rising risk across China’s financial sector, while intensifying pressure on the real economy. 
Indeed, the proliferation of interbank loans and non-standard assets left a lot of money spinning within the financial system, instead of being put to use in the real economy. 
Making matters worse, such funding accumulated interest with every transfer, adding to the costs of shadow-bank borrowing. 
Of course, banks enjoyed the easy profits from their off-balance-sheet business. 
Indeed, those profits have encouraged them and their shadow-bank counterparts to channel deposits into high-risk, high-return financial and real-estate investments. 
This can fuel huge asset bubbles and market volatility. 
The stock-market crash of 2005 underscores these risks. 
At that time, the large amounts of capital that were suddenly pulled out of the stock market poured into real estate, with the increased leverage triggering a surge in urban housing prices. 
The massive influx of money into the Chinese economy has also been used to invest in technology start-ups. 
But, while China undoubtedly has an interest in supporting innovative enterprises, the risk of a tech bubble is grave. 
Last year, data from China’s Science and Technology Ministry showed that the number of Chinese “unicorns” (companies that are less than ten years old, yet have a valuation of over $1 billion) has soared above 130 – at least 30 more than in the US. 
Given the rather low share of Chinese unicorns that fulfill their promise, there is little doubt that China has a valuation problem. 
The bike-sharing start-ups that have penetrated major cities over the last year, thanks to hundreds of millions of dollars in venture capital funds, amount to another example of China’s monetary conundrum. 
Such companies’ potential long-term profits simply do not justify the valuations they are receiving. 
Enabled by China’s shadow banks, these companies seem to be burning cash, say, by subsidizing customers in the hope of outlasting their competitors. 
The risks generated by these activities are not lost on the Chinese authorities. 
The newly appointed chair of the China Banking Regulatory Commission (CBRC), Guo Shuqing, has pledged to look more closely at banks’ off-balance-sheet activities and conduct a rigorous audit of their risk assets. 
In the meantime, China’s securities and insurance regulators have cracked down on activities like hostile takeovers. 
Such a crackdown will lead to short-term challenges. 
Already, regulatory tightening, combined with the PBOC’s macroprudential tools, has caused stock prices to slide. 
It has also rocked the bond market, causing interest rates to soar, with the default rate hitting unprecedented levels. 
Yet I believe that the Chinese authorities will plow ahead with their efforts to strengthen financial regulation. 
They know all too well that a bank-dominated financial system cannot weather a new and chaotic crisis. 
But the truth is that a regulatory crackdown, while necessary to mitigate financial risk, will not resolve China’s monetary conundrum, much less protect China’s economy from the consequences of a financial crisis in the long run. 
For that, China will need to identify and encourage those financial innovations that can support real economic activity. 
Unfortunately, on that front, not nearly enough progress has been made. 

China Confronts the Mundell-Fleming Trilemma 
BEIJING – After years of intervening to manage the renminbi’s exchange rate, China’s central bank, the People’s Bank of China (PBOC), is under pressure to float the currency. 
But striking the right balance between loosening its grip on the exchange rate and maintaining monetary stability will not be easy. 
All economics students learn the Mundell-Fleming model, according to which an economy cannot maintain a fixed exchange rate, free capital movement, and an independent monetary policy simultaneously. 
If a country with a fixed exchange rate and an open capital account tightens monetary policy, in order to contain inflation, the rise in domestic interest rates will give market participants an incentive to borrow foreign currencies and convert them into the domestic currency for investment in domestic assets. 
The resulting capital inflows, if persistent, would generate upward pressure on the currency, forcing the central bank, in a bid to maintain exchange-rate stability, to intervene by selling domestic currency, especially for US dollars, until interest rates and the money supply have returned to their original levels. 
But China has never been one to adhere to established models. 
The country has run a current-account surplus every year since 1993. 
Because the renminbi was appreciating very slowly, expectations in foreign-exchange markets were persistent. 
But, given China’s porous capital controls, short-term capital, aimed at exchange-rate arbitrage, continued to flow into the country. 
If China had allowed the renminbi to appreciate, its external surplus would have disappeared. 
But, fearing the impact a stronger currency would have on trade, the PBOC has spent more than a decade working actively to impede appreciation, by exchanging renminbi for dollars. 
According to the textbook version of theMundell-Fleming model, the PBOC’s approach should have caused it to lose control of the money supply and the interest rate, resulting in runaway inflation. 
Yet China’s inflation rate remained moderate. 
Overall, the PBOC succeeded in maintaining an independent monetary policy, while preserving exchange-rate stability and partial capital-account openness. 
China’s experience indicates that what the Mundell-Fleming model presents as a stark choice is actually more like a spectrum. 
A country can maintain control over its exchange rate, relatively free capital movement, and effective monetary policy simultaneously, but only to a certain extent. 
The reason for this is that the Mundell-Fleming model fails to consider the role of sterilization policy. 
When a country with a leaky capital-control regime is running an international balance-of-payments surplus, maintaining a fixed exchange rate requires continuous expansion of the money supply. 
But sterilization policy can be used to mop up the excess liquidity created by intervention on the foreign-exchange market. 
And for more than a decade, China has been doing precisely that. 
A key component of China’s sterilization policy has been the sale of central bank bills. 
Normally, a country will sell government bonds to the public to soak up excess liquidity. 
But the PBOC had sold all of its government bonds by 2003. So it sold its own securities to the public instead. 
A less noticed, but perhaps more important, sterilization tool used by the PBOC was to increase reserve requirements. 
In 2010-2011, the PBOC increased the reserve requirement ratio (the percentage of deposits banks must hold at the PBOC) 11 times – from 16% to 21% – in order to curb inflation and prevent overheating. 
But China’s sterilization policy carried high costs. 
Among the most obvious was the heavy burden placed on the Chinese economy from the accumulation of huge volumes of foreign-exchange reserves, which peaked at nearly $4 trillion in June 2014. 
Moreover, while many Chinese economists view the absence of high inflation as evidence that China’s sterilization policies have mopped up all of the excess liquidity, major asset bubbles, including for urban housing, suggest otherwise. 
According to the Ministry of Housing and Construction, from 2004 to 2014, housing prices in a sampling of Chinese cities increased by 150%. 
Given this, China may still face a reckoning with insufficient sterilization. 
It should be noted that China has been able to circumvent the Mundell-Fleming model only when the renminbi is subject to upward pressure. 
From 2015 to 2017, when the renminbi faced accelerating depreciation, the PBOC intervened to prevent a plunge – an effort that depleted China’s foreign-exchange reserves by a massive $1 trillion. 
That intervention – the largest that any central bank has ever undertaken – left the PBOC with little choice but to tighten capital controls substantially. 
If China has to choose, an open capital account and effective monetary policy are more important than a fixed exchange rate – a reality that will become even more pronounced as time passes. 
The good news is that, for the last year or so, the PBOC has stopped intervening daily in the foreign-exchange market. 
Whatever challenges China faces, the PBOC must not lose its nerve. 
For the sake of China’s continued economic stability and progress, it needs to convince markets that it is committed to a floating exchange-rate regime. 

China’s Four Traps 
HONG KONG – On the 40th anniversary of the launch of China’s “reform and opening up,” the country is well on its way to recapturing its former status as the world’s largest economy, having made substantial progress toward modernizing its agricultural sector, industry, defense systems, and scientific capabilities. 
But four major traps lie ahead. 
The first is the middle-income trap. 
With a per capita annual income of around $9,000, China remains significantly below the threshold for high-income status, set at around $12,000-$13,000 by the World Bank. 
Only a few countries in history have managed this leap during the last half-century. 
A major reason is that reaching high-income status demands a strong network of modern institutions that define individuals’ rights and obligations, enable market exchange and non-market interactions, and enforce the rule of law by resolving disputes fairly. 
While China has been working to develop its institutions for four decades, it still has a long way to go. 
Second, China may become ensnared in the so-called Thucydides Trap: when an established power (Sparta in Thucydides’ time; the United States now) fears a rising power (Athens then; China now), war becomes inevitable. 
With US President Donald Trump’s administration targeting China with trade measures that are clearly designed to reduce China’s access to markets and technology, this outcome seems increasingly plausible. 
The third potential trap is what Joseph Nye calls the Kindleberger Trap. 
Charles Kindleberger, an architect of the Marshall Plan, blamed the breakdown of the international order in the 1930s on America’s failure to match its provision of global public goods to its new geopolitical status as the world’s dominant power. 
If China does the same, according to Nye, chaos could erupt again, especially at a time when the US is withdrawing from global leadership. 
Finally, there is the climate-change trap. 
High-income countries in general, and great powers in particular, consume a disproportionately large share of resources. 
But China’s economy and influence are growing at a time when, as dire warnings by bodies like the Intergovernmental Panel on Climate Change demonstrate, that is not really an option. 
China’s leaders thus have an additional imperative to support international cooperation and adopt forward-thinking policies that account for environmental realities. 
Avoiding these four traps will be extremely difficult. 
China’s leaders must navigate complex and conflicting pressures, as they seek to address domestic economic inequalities, manage relations with an insecure and isolationist US, cooperate effectively with the rest of the world, and pursue effective climate action. 
The good news is that China’s governance system – characterized by centralized policymaking and decentralized experimentation and implementation – has proved well-suited to rapid decision-making in times of crisis. 
Over the last four decades, the Chinese model has proved more practical and efficient than democratic systems, which have often been paralyzed by dysfunctional and polarized politics. 
Its success in guiding China to high-income status will be determined largely by four factors – talent, competition, public goods, and accountability – all of which the country has managed to harness effectively in the past. 
Adhering to thousands of years of tradition, China has devoted considerable resources to the identification, selection, and grooming of administrative and technical talent. 
This has been essential to China’s ability to develop the strong state capacity needed to manage large-scale public projects. 
As China confronts the four traps, its ability to develop and retain human talent will be vital to success. 
China has also effectively used competition among individuals, companies, cities, and provincial bureaucracies to ensure that all stakeholders are contributing to productivity and GDP growth. 
But China’s markets have developed faster than its regulatory framework, so that now policymakers must close loopholes and resolve weaknesses that are undermining fair competition. 
At the same time, they need to tackle the consequences of those loopholes and weaknesses, such as corruption, pollution, excessive debt, and overcapacity. 
This is the other side of the public-goods challenge: while China has plenty of experience delivering physical infrastructure, it has been less successful in delivering soft infrastructure, such as competition rules, accounting standards, tax systems, and regulatory norms. 
China will not achieve high-income status unless and until this changes. 
When it comes to accountability, China has an indirect and imperfect system that is poorly understood by outside observers. 
Chinese leaders earn their legitimacy not by winning the most votes, but by delivering results such as economic prosperity and progress on implementing reforms. 
As China’s global influence grows, international pressure will become another mechanism for accountability. 
The challenge China faces in this area relates to some of the tradeoffs Chinese leaders have made in their pursuit of results. 
In particular, monopoly is on the rise, with Internet platforms that provide social benefits in the form of low transaction and communication costs (Alibaba, Tencent, and Baidu) securing massive market share. 
That, together with policy subsidies, has created monopoly rents that are subject to capture by small interest groups. 
This escalating market concentration – which, to be sure, is not limited to China – can lead to worsening inequality of income, wealth, and opportunities. 
China’s leaders will thus have to make significant progress toward addressing it in the coming decades. 
During its 40 years of reform, China has mastered learning by doing, using dynamic markets as a guide for price signaling and problem-solving. 
It has engaged in bold policy experiments, such as the creation of special economic zones. 
And it has become steadily more integrated into the global economy. 
As it attempts to avoid the pitfalls that lie ahead, it will need to bring all of this experience to bear. 

China’s Modernization Ambitions 
BEIJING – Last October, as he opened the 19th National Congress of the Communist Party of China, President Xi Jinping vowed that the country would have a “fully modern” economy by 2035, and would reach high-income status by 2049 – the 100th anniversary of the founding of the People’s Republic. 
One hopes that he is more successful than China’s first premier, Zhou Enlai, who in 1964 promised “four modernizations” by the end of the twentieth century. 
Zhou’s plan focused on reforming four key sectors: agriculture, industry, defense, and science and technology. 
He did not set a specific income goal, but it is safe to say that he probably expected China to do better than it did: by World Bank standards, China at the turn of the century was a lower-middle-income country. 
This time around, reaching China’s income goals might actually be the easy part. 
China’s real per capita GDP currently amounts to about 25% that of the United States. 
To join the high-income club, embodied by the OECD, China will have to raise that figure to at least 45% (depending on how real income is measured) – a level achieved, so far, by 36-40 economies. 
China could join these countries’ ranks by 2049 if its economy grows by at least 1.7 percentage points more than the US economy every year, starting now. 
Assuming that the US economy maintains its long-term growth rate of 2%, China would have to grow by 3.7% annually. 
That’s a lot lower than China’s current 6.5% rate. 
Even if China’s GDP growth decelerated steadily to 2% by 2049, the average rate would amount to at least 4%. 
But modernization is about more than income. 
It is a comprehensive process that would ultimately transform China into a society with the kinds of benefits – opportunities, personal comforts, and public services – found in today’s advanced democracies. 
Completing this process will not be easy. 
For starters, China will have to clean up its environment – something that ordinary Chinese now view not as a luxury, but as an imperative. 
The government has taken some positive steps: the air quality around Beijing, for example, has improved considerably this winter, thanks to efforts to shut down polluting factories and replace coal with natural gas for household heating. 
But this change has come at a high cost, including rising natural gas prices. 
The cost of improving air quality in all Chinese cities, let alone cleaning up all the polluted rivers, lakes, and soil in the country, will be massive. 
A second challenge China faces in pursuing modernization is to narrow the rural-urban divide. 
Notwithstanding the narrowing income gap, rural residents still face inferior access to education, infrastructure, and public services. 
Continued urbanization will help, but even the most optimistic forecast estimates that more than 300 million people will still living in the countryside in 2035. 
No country can be considered modern, regardless of how shiny and dynamic its cities are, if its rural areas are left behind. 
Compounding the modernization challenges China faces, its working-age population is beginning to decline, and could fall by more than 10% by 2040, according to the World Bank. 
While automation may protect China from severe labor shortages, population aging will increase the economic burden of social security. 
Despite the introduction of individual accounts 20 years ago, China’s pension system effectively still functions on a pay-as-you-go basis. 
When China’s “baby boom” generation – born between 1962 and 1976 – begin to retire, the system’s deficits will mount. 
In fact, some rapidly aging and slow-growing provinces already depend on central government subsidies. 
China desperately needs a more unified and comprehensive system to balance social security coverage across the country. 
Of course, China’s rising national income will help the country confront the challenges it faces. 
But wealth, while necessary, is not sufficient. 
For one thing, the rule of law must be strengthened considerably, and not just to rein in official corruption. 
There needs to be a cultural shift, with citizens learning how to function in a society governed by reliable rules and legal structures, not geographical or familial ties. 
The good news is that Xi recognizes the importance of the rule of law. 
In the report he delivered to the National Congress, he mentioned the phrase more than 20 times, emphasizing “the overall goal of comprehensively advancing law-based governance” in order to “build a country of socialist rule of law.” 
Nonetheless, transforming traditional ways of living in China will require more than hortatory rhetoric. 
One key obstacle lies in the Chinese political system. 
It is widely believed that democracy is indispensable for a dynamic civil society. 
Yet the Chinese authorities are determined not to introduce electoral democracy in any way, shape, or form. 
Recent political developments in advanced democracies – in particular, the rise of right-wing populist movements and leaders, including US President Donald Trump – have reinforced their resolve. 
To the extent that it raises living standards, the “China Model” fulfills some requirements of political legitimacy. 
But, once those living standards reach a certain level, the Chinese people will almost certainly demand more personal freedom and political accountability. 
The most fundamental challenge facing China’s leaders, then, is to find a governance model that fulfills these demands while continuing to exclude electoral democracy. 


What China Can Gain from Trump’s Trade War 
BEIJING – The world’s two largest economies – China and the United States – are engaged in a full-blown trade war, and what US President Donald Trump hoped would be a blitzkrieg has turned out more like trench combat. 
Many fear that this is only the beginning of a long conflict that could include weapons – and casualties – far outside the realm of trade. 
Since China joined the World Trade Organization in 2001, the US has taken issue with China’s large current-account surplus and the undervalued renminbi. 
But over the last ten years, that surplus has pretty much disappeared, and the renminbi has largely been appreciating. 
Now, the US has shifted its attention to China’s inadequate protection of intellectual-property rights and its policy of appropriating foreign technology in exchange for market access. 
Yet, in China’s view, what the US is really reacting to is not only the specifics of its trade policy, but also its overall development model and its aspirations to become a major global power – aspirations that are not out of reach. 
In fact, the Chinese believe, Trump’s trade war effectively proves that China has become a real and present threat to American hegemony. 
Whether this is true or not is irrelevant; what matters is Chinese perception. 
Whereas in the past, only a few conservatives warned of US attempts to “contain” China, virtually everyone in China now buys into this narrative, including a growing number of young people. 
Having grown up amid prosperity and confidence, exposed to Western lifestyles and educations, China’s millennial generation – born in the 1980s and 1990s – were supposed to usher in an era of even greater openness and freedom. 
Yet these young people – who have previously reported much warmer feelings toward Western countries and Japan than their parents and grandparents – are having their faith in Western ideas tested by Trump’s actions. 
The real danger is that rising nationalism could embolden a contingent of the Party, known in China as the New Left, that denounces capitalism and its Western proponents, and calls for a return to the Maoist socialist order of 40 years ago. 
On the positive side, it is likely to produce the political cohesion needed to implement structural reforms that shift the economy away from trade and manufacturing and toward domestic consumption. 
As different interest groups and factions unite against a common foe, President Xi Jinping will gain even more political capital, facilitating the shift from export-led economic growth to a trade-neutral model. 
Tax cuts and the redistribution of wealth toward households are also possibilities. 
This is not to say that China is not continuing to pursue its plans to open up further. 
Even as China raises tariffs on US imports, it is lowering tariffs for other countries, in order to fulfill its promise to increase overall imports and bolster domestic consumption. 
And its impending liberalization of its financial-services sector will amount to its biggest step toward openness since its accession to the WTO. 
Areas that will become open to foreign participation include banking, securities, insurance, payments, and ratings services. 
Restrictions on foreign investors’ equity holdings or investments in services are being sequentially eliminated. 
Reflecting Xi’s belief that “sooner is better than later, and faster is better than slower,” at least seven of the 11 measures the central bank announced in April have already been completed. 
Even as China continues its economic opening, however, it is looking increasingly inward, at its citizens to serve as consumers and at its businesses to adopt and advance new technologies. 
Many companies have already redoubled their efforts to increase their value-added and innovation capacity. 
Whether Trump’s trade war is about containing China or just about punishing it for its trade practices, the unintended consequence is that China is now fortifying itself for a new era of political and economic challenges. 
Yes, the country will find it more difficult to pursue the “Belt and Road Initiative,” for example, or to export its excess capacity. 
But in the longer term, reducing its reliance on foreign trade and imported technologies will leave China stronger, more resilient, and possibly less willing to acquiesce to US-designed rules. 
Sometimes the “loser” of a trade war ends up better off than the “winner.” 
In the 1980s, when President Ronald Reagan imposed restrictions on the number of cars Japan could export to the US, Japan suffered. 
But, over time, it developed its auto industry so that it could export more expensive cars. 
Trump thinks that attacking China through trade will help to “Make America Great Again.” 
But it is more likely to make China stronger. 

China and the Future of Commodity Prices 
MANILA – There is no doubt that China’s ongoing growth slowdown has had far-reaching effects on the global economy. 
But its role in the sharp fall in commodity prices that has occurred since 2014 – an outcome that has been devastating for commodity-exporting countries, including once-dynamic emerging economies – is more limited than the conventional wisdom suggests. 
In fact, China’s slowdown is only a part of the commodity-price story. 
To be sure, there is a clear correlation between Chinese GDP growth and commodity prices. 
In the early 2000s, when Chinese growth accelerated, commodity prices rose sharply; since China’s slowdown began in 2011, energy prices have fallen by 70%, metals prices by 50%, and agricultural commodity prices by 35%. 
But the view that China’s slowdown is the main driver of the collapse in commodity prices is incomplete, at best. 
As new research by the Asian Development Bank shows, while China plays a significant role in commodity markets – accounting for about half of global consumption of metals, coal, and pork, for example – it is not nearly as dominant as is widely believed. 
China accounts for less than one-fifth of world consumption of sugar, wheat, poultry, and beef; 12% of world consumption of crude oil; and 5% of natural gas. 
And, in fact, some of the commodities that have experienced the largest price declines – most notably, oil (down 73%) and natural gas (down 55%) – are those in which China is a relatively minor player. 
Moreover, China’s actual commodity consumption is even lower than the figures suggest. 
Conventional measures, instead of taking into account cross-border production chains, simply take the sum of a country’s production and net commodity imports to determine its level of consumption. 
But, for China, a sizeable proportion of the commodities it “consumes” is actually used in the production of goods that will be exported to the rest of the world. 
Indeed, almost one-third of Chinese metals demand is used to satisfy export demand. 
Subtracting the commodities embedded in China’s exported manufactured goods would substantially reduce China’s apparent role in these markets. 
A look at the commodity-price fluctuations themselves reinforces this view. 
Consider copper: From 2001 to 2006, prices gyrated wildly, with price declines of 30% in some years and increases of 150% in others – all while growth in Chinese industrial production and demand for copper remained relatively steady, at 15% and 20%, respectively. 
Clearly, other factors – ranging from supply-side factors and global demand to speculative demand and inventory adjustment – are also playing a major role in driving outcomes in commodity markets. 
So what does China’s continuing slowdown imply for commodity prices? 
Even though China’s growth has moderated since 2011, the country’s commodity-consumption growth still outpaces that of the rest of the world. 
As a result, its share in global commodity consumption has been rising. 
This should not be surprising, given that Chinese GDP growth, though down significantly from its double-digit heyday, remains above 6%. 
While the shift from an investment-led to a consumption-driven growth model will weaken growth in demand for metals and energy, it will also bring an increase in demand for food products and services, and hence for agricultural commodities. 
The conclusion is clear: China’s changing economic situation does not spell disaster for commodity exporters. 
On the contrary, even if, as many fear, China’s economic growth slows further, its impact on commodity prices will be limited. 
Bolstering prospects for commodity prices further is the promise that demand in other emerging giants, such as India and Indonesia, will accelerate in the coming years. 
The rest of developing Asia’s economy is currently about 4% larger than China’s, and twice as large as China was in 2000, when growth in the country’s commodity demand began to accelerate. 
If solid growth in Asia’s other emerging economies continues over the next decade and a half, it will generate commodity demand at least as large as China’s in the boom years. 
The drag on commodity prices from China’s growth moderation is real. 
But the sharp and generalized drop seen in commodity prices should not be laid entirely at China’s feet. 
Perhaps more important, with the country still importing large volumes of commodities and the rest of developing Asia set to generate a new surge in commodity demand, the prospects for a commodity-price rebound look brighter. 

Making Space for China 
LONDON – When the United Kingdom announced earlier this month that it had agreed to become a founding member of the China-led Asian Infrastructure Investment Bank (AIIB), most of the headlines focused not on the news itself, but on the friction the decision had caused between the UK and the United States. 
The White House issued a statement urging the British government to “use its voice to push for adoption of high standards." 
And one senior US administration official was quoted accusing the UK of “constant accommodation of China, which is not the best way to engage a rising power." 
In fact, it is the US that is advocating the wrong approach. 
In the UK, the diplomatic spat served as an occasion for the British press to air criticism from those who believe that the government should adopt a stronger stance on China. 
For example, they say that the government should have spoken out more forcefully in support of last year's pro-democracy protests in Hong Kong, and that it should not have distanced itself from the Dalai Lama (as it seems to have done) during Prime Minister David Cameron's visit to China in 2013. 
The UK does need to stand up for itself, but there is no reason for it to become confrontational about internal Chinese matters – especially in the case of Hong Kong, where it lost its standing when it agreed to return the city to Chinese control in 1997. 
The US, too, would be wise to stop resisting the fact that the world is changing. 
The US Congress has yet to ratify a 2010 agreement providing China and other large emerging economies greater voting power in the World Bank and the International Monetary Fund. 
In the meantime, the agreement has become obsolete; China's economy has nearly doubled in size since the deal was struck. 
America's reluctance – and that of France, Germany, and Italy – to give the emerging powers an appropriate voice in the established international financial institutions is counterproductive. 
It drives the creation of new parallel institutions such as the AIIB and the New Development Bank, founded in 2014 by the BRICS countries (Brazil, Russia, India, China, and South Africa). 
In the coming days, I will be visiting China in my role as Chair of the British government's Review on Antimicrobial Resistance, and also as a participant in the Boao Forum for Asia, an event similar to the annual gathering of the World Economic Forum in Davos. 
I hope to encourage Chinese policymakers to make the fight against antimicrobial resistance a priority when China chairs the G-20 in 2016. 
And though I am not the British ambassador, I will be happy to state my belief that the UK government was wise to join the AIIB, and that the US administration, in voicing its opposition, was not. 
China's $10 trillion economy is bigger than those of France, Germany, and Italy combined. 
Even if its annual output growth slows to 7%, the country will add some $700 billion to global GDP this year. 
Japan would have to grow at something like 14% to have that type of impact on the world. 
For anyone who wants to engage in global trade, it is thus vital to identify what China wants. 
In the case of the UK, this obviously includes finance (as well as sports, music, fashion, and perhaps health care). 
The UK is simply being smart when it promotes its own interests by cooperating with China. 
One of the few positive consequences of the 2008 financial crisis was the elevation of the G-20's global role; in principle, it is a far more representative forum for international leadership than the G-7 ever was. 
There is, however, a downside to the G-20's emergence: the large number of participants can make it difficult to reach agreements and get things done. 
A new G-7 needs to be created within the G-20, thereby providing China with a degree of influence that reflects its economic weight and requires it to assume a commensurate proportion of global responsibility. 
Space at the table for China could be obtained if the eurozone countries, signaling their commitment to the common currency, agreed to surrender their individual seats in exchange for one representing the entire monetary union. 
The US, too, would finally have to accept China's heightened global role. 
Later this year, the IMF will recalibrate the weights in its unit of account, the so-called Special Drawing Rights, which comprises a basket of currencies that currently includes the US dollar, the euro, the British pound, and the Japanese yen. 
According to almost every economic and financial criterion, the SDR basket should now include China's renminbi. 
The US would be wise to not oppose such a move. 
Otherwise, it would risk accelerating the decline of the established international financial institutions. 
Similarly, the US Congress should ratify the agreed changes to the governance of the IMF and the World Bank. 
By founding the AIIB and the New Development Bank, China and other emerging powers have signaled that they will not wait for their voices to be better heard. 
And decisions like that of the UK – and France, Germany, and Italy – show that they are not alone. 

China’s New Global Leadership 
NEW YORK – The biggest economic news of the year came almost without notice: China has overtaken the United States as the world’s largest economy, according to the scorekeepers at the International Monetary Fund. 
And, while China’s geopolitical status is rising rapidly, alongside its economic might, the US continues to squander its global leadership, owing to the unchecked greed of its political and economic elites and the self-made trap of perpetual war in the Middle East. 
According to the IMF, China’s GDP will be $17.6 trillion in 2014, outstripping US output of $17.4 trillion. 
Of course, because China’s population is more than four times larger, its per capita GDP, at $12,900, is still less than a quarter of the $54,700 recorded in the US, which highlights America’s much higher living standards. 
China’s rise is momentous, but it also signifies a return. 
After all, China has been the world’s most populous country since it became a unified state more than 2,000 years ago, so it makes sense that it would also be the world’s largest economy. 
And, indeed, the evidence suggests that China was larger (in terms of purchasing power parity) than any other economy in the world until around 1889, when the US eclipsed it. 
Now, 125 years later, the rankings have reversed again, following decades of rapid economic development in China. 
With rising economic power has come growing geopolitical clout. 
Chinese leaders are feted around the world. 
Many European countries are looking to China as the key to stronger domestic growth. 
African leaders view China as their countries’ new indispensable growth partner, particularly in infrastructure and business development. 
Similarly, economic strategists and business leaders in Latin America now look to China at least as much as they look to the US. 
China and Japan seem to be taking steps toward better relations, after a period of high tensions. 
Even Russia has recently “tilted” toward China, establishing stronger connections on many fronts, including energy and transport. 
Like the US after World War II, China is putting real money on the table – a lot of it – to build strong economic and infrastructure links with countries around the world. 
This will enable other countries to boost their own growth, while cementing China’s global economic and geopolitical leadership. 
The number of Chinese initiatives is staggering. 
In just the past year, China has launched four major projects that promise to give it a greatly expanded role in global trade and finance. 
China joined Russia, Brazil, India, and South Africa in establishing the New Development Bank, to be based in Shanghai. 
A new Asian Infrastructure Investment Bank, to be based in Beijing, will help to fund infrastructure projects (roads, power, and rail, among others) throughout the region. 
The New Silk Road land belt seeks to connect China with the economies of East Asia, South Asia, Central Asia, and Europe through an expanded grid of rail, highways, power, fiber, and other networks. 
And the new 21st Century Maritime Silk Road is aimed at boosting ocean-based trade in East Asia and the Indian Ocean. 
All told, these various initiatives are likely to leverage hundreds of billions of dollars in investment over the coming decade, speeding growth in the counterpart countries while deepening their production, trade, and financial linkages with China. 
There is no guarantee that all of this will succeed or proceed smoothly. 
China faces huge internal challenges, including high and rising income inequality, massive air and water pollution, the need to move to a low-carbon economy, and the same risks of financial-market instabilities that bedevil the US and Europe. 
And if China becomes too aggressive toward its neighbors – for example, by demanding rights to offshore oil or territory in disputed waters – it will generate a serious diplomatic backlash. 
No one should assume smooth sailing for China (or for any other part of the world, for that matter) in the years ahead. 
Still, it is striking that just as China is rising economically and geopolitically, the US seems to be doing everything possible to waste its own economic, technological, and geopolitical advantages. 
The US political system has been captured by the greed of its wealthy elites, whose narrow goals are to cut corporate and personal tax rates, maximize their vast personal fortunes, and curtail constructive US leadership in global economic development. 
They so scorn US foreign assistance that they have thrown open the doors to China’s new global leadership in development financing. 
Even worse, as China flexes its geopolitical muscles, the only foreign policy that the US systematically pursues is unceasing and fruitless war in the Middle East. 
The US endlessly drains its resources and energy in Syria and Iraq in the same way that it once did in Vietnam. 
China, meanwhile, has avoided becoming enmeshed in overseas military debacles, emphasizing win-win economic initiatives instead. 
China’s economic rise can contribute to global wellbeing if its leaders emphasize investment in infrastructure, clean energy, public health, and other international priorities. 
Still, the world would be better off if the US also continued to lead constructively, alongside China. 
The recent announcement by Presidents Barack Obama and Xi Jinping of bilateral agreements on climate change and clean energy show the best of what’s possible. 
America’s perpetual war-making in the Middle East shows the worst. 

China’s Bold Energy Vision 
BEIJING – The boldest plan to achieve the targets set by the 2015 Paris climate agreement comes from China. 
The Paris accord commits the world’s governments to keeping global warming to well below 2º Celsius (3.6º Fahrenheit) relative to the pre-industrial level. 
This can be accomplished mainly by shifting the world’s primary energy sources from carbon-based fossil fuels (coal, oil, and natural gas) to zero-carbon, renewable (wind, solar, hydro, geothermal, ocean, biomass), and nuclear energy by the year 2050. 
China’s Global Energy Interconnection (GEI) offers a breathtaking vision of how to achieve this energy transformation. 
Few governments appreciate the scale of this transformation. 
Climate scientists speak of the “carbon budget” – the total amount of carbon dioxide that humanity can emit in the coming years while still keeping global warming to under 2º. 
Current estimates put the mid-point estimate of the world’s carbon budget at around 600 billion tons. 
Humanity currently emits around 40 billion tons of CO2 per year, implying that the world has only until mid-century or even sooner to phase out fossil fuels and move entirely to zero-emission sources of primary energy. 
Here’s what needs to be done. 
Today’s electricity is largely generated by burning coal and natural gas; these thermal power plants need to be phased out and replaced by electricity generated by solar, wind, hydro, nuclear, and other non-carbon sources. 
Today’s buildings are heated mostly by boilers, radiators, and furnaces fueled by heating oil and natural gas; these need to be replaced by buildings heated by electricity. 
Today’s vehicles run on petroleum products; these need to be replaced by electric vehicles. 
Today’s ships, heavy trucks, and airplanes run on petroleum products as well; in the future, they will need to run on synthetic fuels produced with recycled CO2 and renewable energy, or with hydrogen produced by renewable energy. 
And the fossil fuels that power today’s industrial processes, such as steel production, will have to be replaced by electricity. 
The short answer, therefore, is the massive use of zero-carbon energy, especially renewable energy such as wind and solar power, in the form of electricity. 
The world has enough zero-carbon energy sources to power the entire global economy – indeed to power a global economy much larger than today’s. 
A key step is to bring zero-carbon energy to the population centers that need it. 
This is where China’s grand vision comes in. 
In recent years, China has faced the energy-transformation challenge domestically. 
China’s best supplies of renewable energy (especially wind and solar power) are in Western China, while most of China’s population and energy demand are concentrated on the Pacific (eastern) seaboard. 
China has been solving this problem by building a massive distribution grid based on ultra-high-voltage (UHV) transmission, which minimizes heat loss along the way. 
Long-distance UHV transmission is efficient and economical, and China has made major strides in developing this technology. 
Now China proposes to help connect the entire world with a UHV global grid. 
In most of the world, as in China, the highest concentrations of renewable energy (such as the sunniest and windiest places) are far from where people live. 
Solar power must be carried from deserts to population centers. 
The potential for wind power is often highest in remote places as well, including offshore. 
Tremendous hydroelectric potential can be found on distant rivers flowing through unpopulated mountain regions. 
The logic behind China’s proposal of a globally connected grid is that renewable energy is intermittent. 
The sun shines only during the day, and even then, cloud cover disrupts the solar energy reaching photovoltaic panels. 
Likewise, wind fluctuates in strength. 
By linking these intermittent sources together, the energy fluctuations can be smoothed. 
When clouds diminish solar energy in one region, solar or wind power can be used from elsewhere. 
Thinking big, China has created an impressive organization – the Global Energy Interconnection Development and Cooperation Organization (GEIDCO) – to bring together national governments, grid operators, academic institutions, development banks, and United Nations agencies to launch the global renewable energy grid. 
At its global meeting in March, GEIDCO gathered delegates from countries as far-flung as Argentina and Egypt to work together to realize the vision of globally interconnected clean energy. 
China is taking several further steps. 
GEIDCO is mobilizing research and development on several key technology challenges, such as large-scale energy storage, superconductivity in power transmission, and artificial intelligence to manage large interconnected power systems. 
GEIDCO is also proposing new international technical standards so that countries’ power grids can fit together in a seamless global system. 
And China is investing heavily in R&D on low-cost renewable energy generation, such as advanced photovoltaics, and end-uses, such as high-performance electric vehicles. 
The United States and the European Union should be engaging in the same kind of energy problem-solving, and both should be cooperating with China and others to accelerate the transformation to zero-carbon energy. 
Regrettably, under President Donald Trump, the US government and its regulatory agencies are entirely in the hands of the fossil-fuel lobby, while the EU bickers with its coal-producing member states about how and when to phase out coal. 
China’s proposed global energy interconnection – based on renewables, UHV transmission, and an AI-enabled smart grid – thus represents the boldest and most inspiring global initiative by any government to achieve the goals of the Paris climate agreement. 
It is a strategy fit for the unprecedented scale of the energy transformation facing our generation. 

Managing China’s Global Risks 
HONG KONG – The world economy and international system are now characterized not only by deep interconnectedness, but also by intensifying geopolitical rivalries. 
For China, the situation is complicated further by US President Donald Trump’s evident view of the country as a strategic competitor, rather than a strategic partner, not to mention massive domestic social change and rapid technological disruption. 
The only way to mitigate the risks that China faces is with a tough, continuous, and comprehensive reform strategy. 
A key risk is financial. 
At least four “mismatches” lay at the root of past global financial crises, and three of them plague China today. 
First, with its bank-dominated financial system, China (along with Europe and many emerging economies) suffers from a maturity mismatch, owing to short-term borrowing and long-term lending. 
Yet, unlike many emerging economies, China does not struggle with a currency mismatch, thanks to its large foreign-exchange reserves and persistent current-account surpluses, which make it a net lender to the rest of the world. 
But China has not avoided the third mismatch, between debt and equity: The credit-to-GDP ratio doubled over the last decade, from about 110% in 2008 to 220% in 2017, highlighting China’s under-developed long-term capital and equity markets. 
Nor can policymakers afford to ignore the fourth mismatch – between ultra-low nominal interest rates and the relatively higher risk-adjusted return on equity (ROE) for investors – which has contributed to speculative investment and widening wealth and income inequality. 
These structural risks are largely a result of China’s transformation from an agriculture-led economy to one driven by manufacturing exports. 
As technology continues to progress, with robotization becoming more accessible, companies that once relied on cheap labor and manufacturing exports increasingly need to produce goods and services closer to domestic consumers in open and globally competitive markets. 
In this context, China’s only option is to abandon its low-cost manufacturing export model and move up global supply chains. 
To that end, the government has already introduced industrial strategies – “Made in China 2025” and “Internet Plus” – to support technological development, adoption, and innovation. 
The US, however, has taken these industrial policies as evidence of mercantilist state intervention that justifies punitive trade tariffs and other sanctions. 
Complicating matters further for China, the rush to create an open, market-oriented economy has fueled corruption and rent-seeking. 
And, as recent European post-crisis experience has shown, it is politically very difficult to carry out structural reforms when vested interests have captured the regulatory system. 
That is why Chinese President Xi Jinping has been engaged in a comprehensive anti-corruption campaign – often misrepresented as a power grab – since assuming office in 2012. 
Yet China’s problems extend beyond structural imbalances to two types of cyclical macroeconomic risks. 
The first risk stems from the business cycles in advanced, market-based economies, where interest rates, inflation rates, and growth rates rise and fall together. 
The second type of risk reflects the cycle experienced in underdeveloped, non-market-based economies as they make the transition to a market-oriented economy. 
In this fast-moving cycle, housing and fixed-asset prices (as well as the currency’s value) will increase faster than productivity growth in the tradable sector, owing to supply constraints. 
As households and investors borrow cheaply to invest in rapidly appreciating housing and fixed assets, bubbles form and then burst, spurring crises. 
Yet, because the usual response – socialization of bank losses, with a privileged few keeping the profits and bonuses they accrued while the bubble was growing – creates moral hazard, the cycle is likely to be repeated. 
Abandoning the distorted and imbalanced incentive structure, and ensuring that both creditors and debtors share and manage risks, would help break the cycle. 
China could create a system in which broad equity stakes – held by pension, social security, or sovereign wealth funds – are professionally managed, thereby guaranteeing not only that the long-term risk-adjusted ROE is higher than the real (inflation-adjusted) GDP growth rate and the nominal interest rate, but also that the gains are shared widely among the population. 
A widely shared positive real ROE would mean less financial repression and a fairer income and wealth distribution. 
Meanwhile, with more skin in the game, venture capital would be more accountable to investors and savers. 
In addition to structural and cyclical risks, China must address the “gray rhino” (highly likely, but often ignored) strategic risks arising from the intensifying Sino-American geopolitical rivalry. 
Here, the emerging trade war is just the tip of the iceberg. 
The US and China are set to become immersed in a long-term competition for technological and strategic supremacy. 
To stay ahead, they will use every kind of leverage and instrument at their disposal. 
If this competition is left unchecked, it will surely have far-reaching spillover effects. 
Risks are normally mitigated through avoidance, hedging, insurance, and diversification. 
But the Chinese and US economies are both too big and too interconnected to fail, making avoidance and hedging far too dangerous and costly. 
Insurance would also be impossible, owing to the lack of markets. 
Diversification may work, if both countries pursue a variety of low-cost, high-return, cooperative win-win options. 
These include technological innovation that addresses social problems and promotes inclusive growth; further market opening; tough measures against rent-seeking speculators and interest groups; and tax reforms to improve income and wealth distribution. 
The fact that trade negotiations are being pursued in tandem with talks over North Korea’s nuclear program suggests that China and the US understand that, in today’s interconnected global system, cooperation is necessary for managing multiple global risks. 
But if China is truly to build a balanced, resilient, and anti-fragile real economy and financial system, it will need to go further, developing a comprehensive set of risk-sharing mechanisms. 
It is a task that can no longer be ignored or postponed. 

China’s Governance Tightrope 
SHANGHAI – Five years ago, China’s leaders decided to target modern state governance as a top reform priority. 
The goal of such reform is to improve the state’s capacity to adapt to the sheer size and increasing complexity of the Chinese economy, and to mitigate risk. 
Achieving this objective will not be easy. 
To understand why, and what it will take to succeed, consider how Chinese governance has worked in recent decades. 
Overall, governing the country involves a combination of political centralization and economic decentralization. 
In particular, China’s spectacular income growth has been enabled by a delicate balance between the concentration of political power in the hands of the central leadership and the delegation of economic management to local authorities. 
This balance has often proved difficult to maintain. 
For example, when China still had a fully planned economy, Mao Zedong had to delegate the management of state-owned enterprises (SOEs) to local authorities for some time in order to boost production, as local governments were in a better position than the industrial ministry in Beijing to manage local suppliers. 
But, within a few years, this system had become so disorganized, due to economic chaos in the wake of decentralization, that the central government reasserted its control. 
Nonetheless, in 1978, Deng Xiaoping not only delegated authority to local governments, but also increased their revenue through a system of fiscal contracting, in an effort to maximize their contribution to overall GDP growth. 
Again, the plan worked for a while – until China’s leaders confronted the downside of fiscal decentralization: the central government’s declining revenue share under this system limited its capacity to assert its authority and manage macroeconomic stability. 
As a result, in 1994, the central government had to revise the intergovernmental fiscal relationship. 
It reverted from fiscal contracts to a system in which the central government acquired the majority of tax revenues and the revenue share of local governments was substantially reduced. 
But while this change strengthened the central government’s hand, it undermined local governments’ ability to sustain their spending, which still amounted to some 80% of total government expenditure. 
In other words, revising the intergovernmental fiscal relationship did not calibrate the expenditure responsibility between central and local governments. 
To this day, local governments have to raise extra-budgetary funds to finance the rising deficit between revenues and expenditure. 
Understandably, Chinese local leaders have not negotiated a reduction in their share of total expenditure responsibility, not least because the central government has appointed provincial leaders over whom it maintains substantial control. 
Meanwhile, since 1994, the central government has implemented a performance-based system for assessing and promoting local leaders, thereby fueling competition among local authorities. 
This point is the key to a better understanding of Chinese governance today, which the economist Chenggang Xu aptly describes as a “regionally decentralized authoritarian system.” 
It is not easy to assess this system, because competition among local authorities has always had both good and bad outcomes. 
While this horizontal competition has helped China to reach growth targets, central leaders must be supportive of local leaders’ discretionary powers, authority to raise funds, and capacity to attract investment. 
In most cases, however, local officials would abuse such powers and do more than needed. 
For example, local authorities have long had a perverse incentive to improve their own standing by allocating resources to image-building projects that serve no genuine economic need or purpose. 
This might boost growth in the short term, but unproductive investments can also threaten macroeconomic stability in the longer term. 
Another difficulty in assessing Chinese governance arises from the complicated relationship between politics and business in different regions. 
Decentralization rewards local officials who are competent and devoted to supporting economic growth. 
But it also creates opportunities for these officials to forge surreptitious ties with business owners, and this undermines growth in the long run. 
Because of the strong competition to stand out in terms of growth, especially at the provincial level, many lower-level officials use their authority more to advance their personal interests. 
At the same time, business owners seek illicit relationships with local officials to gain protection, privileges (such as contracts), loans, a blind eye to safety standards, and regulatory exemptions – activities that generate financial risks and undermine competition by raising entry barriers for more efficient enterprises. 
The delegation of discretionary power to the bottom of the system could therefore create a dilemma for the central leadership: exercising more control would hurt growth, but so would the rampant corruption that results from not exercising it. 
Yet the solution is not as simple as cracking down on graft. 
Since President Xi Jinping launched his anti-corruption campaign in 2012, China’s overall economic performance has not improved, partly owing to local officials’ increased reluctance to take bold steps to boost growth. 
The crux of the problem may lie in China’s system of upward accountability in governing its officials. 
While Chinese governance undoubtedly has its advantages – in particular, it enables the central government to mitigate risks, including preventing debt and financial weakness from triggering crises – it can hamper the kind of policy experimentation needed to sustain economic progress. 
Given the system of upward accountability, de-emphasizing GDP growth in assessing the performance of local officials would help reduce these officials’ incentive to abuse decentralized powers and make unproductive investments. 
But if Chinese leaders do not abandon the system of upward accountability, how would they measure and assess local officials’ relative performance? 
A step toward introducing downward accountability into the governance system is perhaps necessary. 
China’s leaders are right in the sense that the country’s governance must be modernized. 
To succeed, however, they may have to revise their approach to managing local governments and introduce greater downward accountability in assessing their performance. 
This shift undoubtedly carries risks, but ultimately they are worth taking in the course of adapting governance for continued economic development. 

The Right Way to Judge Chinese Governance 
HONG KONG – Following China’s “two sessions” – the annual meetings of the national legislature and the top political advisory body – all Western observers, it seems, are discussing the removal of the two-term limit for the president. 
Xi Jinping, the international media insists, is consolidating power, and may even be laying the groundwork for a Mao Zedong-style personality cult. 
But this reading is fundamentally flawed. 
The predominant Western view that Xi’s growing authority represents a dangerous trend partly reflects anxiety over growing challenges to democracy in the United States and across Europe. 
But it makes little sense to view Chinese political developments through a Western lens, especially at a time when the world is shifting from a unipolar to a multipolar system. 
Recent changes in China should instead be regarded as part of a broader process, in which competing systems of governance are emerging to cope with complex, globally connected challenges, such as disruptive technologies, geopolitical rivalries, climate change, and demographic shifts. 
In short, countries are trying to find their governance footing. 
In a fast-changing world, governance systems must support rapid decision-making under conditions of radical uncertainty, while maintaining accountability. 
That – not the Western expectation of what a governance system should look like – is the standard by which we should be assessing political developments in China. 
In fact, Western-style governance no longer looks like the gold standard its advocates long proclaimed it to be. 
Western democracies are facing serious internal threats – most notably, populist forces espousing dangerous policies like trade protectionism – that have risen largely in response to these systems’ failure to manage problems such as income inequality, political polarization, rising debt, and failing infrastructure. 
That failure partly reflects the short-termism that tends to dominate in Western democracies, where short electoral cycles (from about six months to four years) often compel politicians to focus on cyclical issues, rather than on structural impediments to long-term productivity gains and income growth. 
(Similarly, Western companies tend to base their operations on quarterly results, and thus may neglect long-term risks and opportunities.) 
By contrast, when China’s leaders formulate and execute policies, they tend to think in terms of decades. 
This is vital to enable an effective response to the structural problems – such as corruption, environmental pollution, and inequality – that more than two generations of rapid growth and development have brought. 
The current bureaucracy, working within its silos, is already addressing these problems, in order to create a more equitable society that is also innovative and adaptable. 
Only then can China escape the infamous “middle-income trap” before population aging begins to take a higher toll on economic growth. 
More broadly, China’s leaders have set a 30-year target for modernizing the country’s economy and governance – a long-term goal that reflects the kind of vision that few countries have managed to articulate, let alone implement. 
By removing the presidential term limit, China’s leadership is improving its chances of success, by opening the way for Xi and his vice president, Wang Qishan, to go further in realizing this vision. 
Xi and Wang are seasoned politicians with extensive experience dealing with crises and managing complex institutional and social challenges, from the local to the global level. 
Both have a strong grasp of history, as well as the charisma and will needed to confront recalcitrant vested interests. 
Their continued leadership is thus invaluable. 
But this does not mean that accountability will be lost. 
On the contrary, the National People’s Congress has approved a major overhaul of China’s governance structure, creating a new National Supervision Commission to check corruption by all Chinese officials, regardless of their affiliations or status in the Communist Party of China. 
The State Council has also been restructured, with ministries, commissions, and agencies consolidated and streamlined to manage reforms in a more coordinated and efficient way. 
For example, agriculture and rural affairs have been combined under one ministry, as have all environmental issues. 
Likewise, in order to reduce financial-sector risks (including excessive leverage and shadow banking), regulation of banking and insurance have been consolidated under the new China Banking and Insurance Regulatory Commission. 
These sweeping institutional reforms would make China’s governance structure look functionally similar to American and European counterparts. 
Like Xi and Wang, officials at these institutions are dedicated, competent, and experienced reformers. 
Assisting Premier Li Keqiang will be the Harvard-educated vice premier Liu He, who has spent more than 30 years in long-term development planning, and has a deep understanding of how market forces can support efficient resource allocation. 
Financial reforms are in the hands of People’s Bank of China Governor Yi Gang, a US-educated economist, and the chairman of the China Banking and Insurance Regulatory Commission, Guo Shuqing, an Oxford-trained economist with experience in provincial leadership, central banking, and securities regulation. 
Two thousand years ago, the Chinese philosopher Han Fei argued that effective governance required three things: the rule of law, bureaucratic tools, and political will. 
Changing laws or honing the tools of governance is important, but they mean little without sustained and determined efforts by political leaders. 
China’s system has survived because its leaders have been willing to confront market failures and administrative deficiencies in a direct and consistent manner. 
New efforts to boost accountability – vital to reinforce legitimacy – will strengthen the system further. 
China, like the US and Europe, is too big to fail. 
It thus has a responsibility to develop a system of governance that can deliver structural changes to its economy and society, while ensuring effective accountability. 
The test is whether that system adapts to long-term challenges and contributes to national and global wellbeing, not whether it adheres to Western standards. 

China’s Green-Energy Revolution 
SYDNEY – China generates most of its electricity by burning fossil fuels, just as every rising economic power has done since the Industrial Revolution. 
But to focus on this single fact risks overlooking a notable trend. 
The Chinese system of power generation is turning green – far more quickly than any other system of comparable size on the planet. 
This trend is visible in three areas. 
The first is electricity generation. 
According to data released by the China Electricity Council, the amount of power that China generated from fossil fuels in 2014 decreased by 0.7% year on year, the first drop in recent memory. 
Meanwhile, power generation from non-fossil-fuel sources increased by 19%. 
Remarkably, nuclear energy played only a small role in this change. 
Electricity generated by strictly green sources – water, wind, and solar – increased by 20%, with the most dramatic growth occurring in solar power generation, which rose a staggering 175%. 
Solar power also surpassed nuclear in terms of new energy produced, providing an extra 17.43 terawatt-hours last year, compared to 14.70 terawatt-hours from nuclear sources. 
And, for the third consecutive year, China generated more electricity from wind than from nuclear energy. 
Given this, the argument that China will be dependent on nuclear power plants for non-carbon sources of electricity appears to have little merit. 
The second area in which the green trend has become apparent is China’s total electricity-generating capacity. 
The country’s power system is now the world’s largest, capable of producing 1.36 terawatts, compared to the United States’ one terawatt. 
Direct comparisons of different power sources are difficult, because the use of wind, solar, nuclear, and fossil-fuel plants varies according to the time of day. 
But a look at annual data can offer insights into how the entire system is changing. 
Last year was the second in a row in which China added more generating capacity from non-fossil-fuel sources than from fossil-fuel sources. 
China increased its ability to generate electricity from fossil fuels by 45 gigawatts, to reach a total of 916 gigawatts. 
At the same time, it increased its capacity to produce electricity from non-fossil-fuel sources by 56 gigawatts, achieving a total of 444 gigawatts. 
Wind, water, and solar plants added 51 gigawatts of generating capacity. 
As a result, wind, water, and solar power accounts for 31% of China’s total electricity-generation capacity, up from 21% in 2007, while nuclear power accounts for another 2%. 
These results exceed the goal established by China’s 12th Five-Year Plan, which projected that power generating capacity based on non-fossil-fuel sources would account for approximately 30% of the country’s electricity system by 2015. 
Finally, the trend toward green energy can be seen in China’s investment patterns. 
The evidence is plain: The country is putting more money toward green sources of electric power than toward those reliant on fossil fuels. 
Indeed, China is spending more on green energy than any other country. 
Investment in facilities producing energy from fossil fuels has consistently declined, from CN¥167 billion (roughly $24 billion) in 2008 to CN¥95 billion in 2014 ($15.3 billion), while investment in non-fossil-fuel sources has increased, from CN¥118 billion in 2008 to at least CN¥252 billion in 2014. 
The share of energy investment going into renewable electric generation has increased steadily, reaching 50% in 2011, up from 32% just four years before. 
In 2013, renewables’ share of investment reached no less than 59%. 
Much depends on the success of China’s energy reforms, and in particular on its efforts to build the world’s largest renewable power system – an ambition far larger than anything imagined, much less attempted, in the West. 
This makes it all the more important to report accurately on the system as it evolves, in order to comprehend the overall direction of change. 
China’s power system remains heavily based on coal, and much more will be burned before the system can accurately be described as more green than black. 
But the direction of change is clear. 
This needs to be acknowledged – and factored into discussions of global energy and energy policy. 

China’s Myth-Busting Miracle 
PARIS – Forty years ago, on December 29, 1978, the 11th Central Committee of the Communist Party of China released the official communiqué from its third plenary session, launching the greatest economic-growth experiment in human history. 
In newspeak understandable to CPC insiders, the country’s leaders, channeling the wishes of Deng Xiaoping, announced a series of unprecedented “modernizations” that would transform one of the world’s least developed countries into a leading economic power. 
In 2014, China overtook the United States as the world’s largest economy (based on purchasing power parity). 
Its per capita GDP, 40 times lower than that of the United States in 1980, has grown by a factor of 58, and is now just 3.4 times lower (according to IMF data). 
In effect, around 15% of humanity has experienced 10% average income growth every year for four decades. 
But China’s dizzying rise has also dispelled three leading myths about the impact of economic growth. 
The first is that growth reduces inequality and increases happiness. 
In 1955, the economist Simon Kuznets hypothesized that income inequality would increase sharply and then decline – in the pattern of an inverted “U” or a bell – as countries underwent economic development. 
Given the pace of China’s economic growth since 1978, its experience refutes this claim more powerfully than any other case. 
China, after all, is now one of the world’s most unequal countries. 
For the last ten years, its Gini coefficient has hovered around 0.5, up from around 0.3 in 1980 (a coefficient of 1 means a single individual owns everything). 
In fact, the relationship between growth and inequality over time has followed a peculiar pattern: China’s Gini coefficient has increased with growth, and decreased when growth has slowed. 
Moreover, according to data from the World Inequality Database, the share of China’s national income accruing to the richest 10% increased from 27% to 41% between 1978 and 2015, and doubled for the top 1%. 
At the same time, the share of national income going to the poorest 50% fell from 26% to 14%. 
These data are consistent with other sources showing that while per capita GDP grew by a factor of 14 between 1990 and 2010, the top quintile’s share of national income increased at the expense of the bottom four. 
To be sure, these are relative inequalities, and China has undeniably reduced absolute poverty. 
Most Chinese once lived under conditions of high equality and high misery; today, they live in an unequal society where the income of the poorest 10% grew by almost 65% between 1980 and 2015. 
Given such progress, one might think the Chinese have also grown happier. 
But the opposite seems to be true. 
In a chapter for the 2017 World Happiness Report, Richard A. Easterlin, Fei Wang, and Shun Wang make a convincing case that while China’s GDP has skyrocketed, its citizens’ reported subjective wellbeing has declined, especially among poorer and older cohorts. 
Even more surprising, though Chinese subjective wellbeing remains below its 1990 level, it actually ticked up over the past decade, when growth was slower than in the 1990-2005 period. 
The second myth dispelled by China’s rapid growth is that economic liberalism eventually breeds political liberalism.Recall that in 1989, just months before Western liberal democracy appeared to have triumphed over Soviet communism, China crushed a student revolt in Tiananmen Square, killing some 10,000 of its own citizens. 
Since then, the country’s political trajectory has not changed. 
If anything, the Chinese state’s arbitrary and unfair exercise of power has become much more efficient. 
Capitalism with Chinese characteristics implies the presence of a strong state in all areas of national life. 
While the technocracy facilitates economic expansion, the state’s massive security apparatus muzzles civil liberties and political rights. 
Rather than becoming more democratic, China became a pioneer of the kind of authoritarian neoliberalism now seen in Turkey, Brazil, Hungary, India, and elsewhere. 
Lastly, economic growth can no longer be defended as the best environmental policy. 
In 2007, then-Premier Wen Jiabao famously described China’s development model as “unstable, unbalanced, uncoordinated, and unsustainable,” owing not least to its deleterious ecological impact. 
Still, the hope was always that economic growth would follow an “environmental Kuznets curve,” thus preventing or at least mitigating a full-scale disaster. 
It has not. 
Recent data show that China is now the largest extractor of natural resources in a global economy that is becoming ever more resource-intensive. 
In 2010, China represented 14% of global GDP, but consumed 17% of all biomass, 29% of fossil fuels, and 44% of metal ores. 
Its domestic consumption of all natural resources now accounts for one-third of the global total, compared to just one-quarter for all developed countries. 
Moreover, China now contributes 28% of global carbon-dioxide emissions – twice as much as the US, three times more than the European Union, and four times more than India. 
Between 1978 and 2016, China’s annual CO2 emissions grew from 1.5 billion tons to ten billion tons, and from 1.8 tons to 7.2 tons in per capita terms, compared to the world average of 4.2 tons. 
As is well documented, water, groundwater, and air pollution in China has reached a crisis point. 
And that, incidentally, also poses a problem for those who believe that capitalism is the key driver of environmental destruction. 
After all, the most ecologically unsustainable country in history is nominally communist. 
At the CPC’s 19th National Congress in October 2017, Chinese President Xi Jinping spoke of a fundamental “contradiction between unbalanced and inadequate development and the people’s ever-growing needs for a better life.” 
China, he confirmed, was committed to the transition to “ecological civilization” begun by the 13th Five-Year Plan in 2016. 
Apparently, the greatest episode of economic growth in human history has ended. 

China’s Not-So-New Not-So-Normal 
HONG KONG – I just spent a week in China, where I participated in the Boao Asia Forum, a conference similar to the annual gathering of the World Economic Forum in Davos. 
The topic of my panel was what President Xi Jinping has called the Chinese economy’s “new normal”: an era of relatively slower growth, following three decades of double-digit economic expansion. 
But what strikes me most about China’s economy is how remarkable it is. 
Indeed, its performance continues to astound me. 
Though it undoubtedly faces plenty of challenges, the key question is how likely they are to bring down the economy. 
Of the four BRIC countries – Brazil, Russia, India, and China – Xi’s is the only one that has met my expectations for growth so far this decade. 
From 2011 to 2014, the Chinese economy grew at an average annual rate of 8% per year. 
If it continues to grow by around 7% for the rest of the decade, as the authorities and many observers expect, it will achieve an average pace of expansion of 7.5%, in line with my projections. 
The phrase “new normal” is a clever bit of messaging by China’s leaders, who must explain to the country’s 1.4 billion citizens why the economy will no longer be growing by 10% a year. 
But there is nothing normal about an economy that is already twice as large as the next largest, Japan, and will possibly outstrip the European Union within the next five years. 
I was in China primarily in my role as Chair of the British government’s Review on Antimicrobial Resistance; but I also sought opportunities to speak to people about the challenges facing the economy. 
Many international observers have been worried about the country’s oversupply of housing and the related credit boom, making me wonder whether I have been overly sanguine about these risks. 
But my conversations persuaded me that both problems are likely to be manageable. 
To be sure, the housing market is in the doldrums. 
But, as many pointed out to me, this is partly the result of deliberate government measures to deflate it (also comforting is the fact that consumers are in general not overleveraged). 
Some builders will experience problems with credit, and so might some local authorities. 
But spending by the central government is such a small percentage of the country’s total GDP that policymakers have a lot of room for maneuver if intervention becomes necessary in these areas. 
Foreign observers frequently speculate that the Chinese authorities may be deliberately overstating the economy’s strength. 
But it is equally possible that the size of some sectors is being understated. 
After spending a few days in Beijing, it was abundantly clear that China is undergoing a boom in Internet use, including as a consumer platform. 
Online commerce is offsetting some of the other weaker areas of the economy, and its full impact might actually be underreported in official statistics. 
I do worry that the government is not moving fast enough to grant the country’s millions of migrant workers official residency in the cities where they work and live. 
Migrants’ continued lack of access to public services might prevent a large rise in consumption as a share of GDP. 
But, as I was told during my visit, the central government’s reluctance to move more quickly reflects its wariness of imposing immense fiscal pressures on local authorities. 
Another area of serious concern is health care. 
At some stage, the central government will have to address the sector’s deficiencies. 
I learned about one example when discussing antimicrobial resistance, to which the government has responded by attempting to limit the quantity of antibiotics a patient may take. 
The trouble is that many hospitals and doctors rely on drug sales for a large portion of their revenues, which creates a powerful incentive to find ways to circumvent the rules. 
Pollution remains a grave challenge as well. 
But it must also be noted that China’s carbon dioxide emissions declined notably in 2014, offering what is perhaps the first tangible evidence that the country is making some progress on this front. 
Energy efficiency and renewable energy use are both on the rise as well. 
Most important, despite the challenges it faces, the Chinese economy’s singular importance is now widely recognized. 
The country’s recent international achievements – particular its ability to secure the backing of the United Kingdom, France, Germany, and Italy for its Asian Infrastructure Investment Bank in the face of opposition from the United States – imply a high degree of confidence that China will address its problems successfully. 
China’s role within existing international financial institutions could change this year as well. 
In December, the International Monetary Fund will consider adding renminbi to the basket of currencies that comprise the Fund’s unit of account, known as Special Drawing Rights, alongside the US dollar, the euro, the British pound, and the Japanese yen. 
And the world is still waiting for the US to implement a 2010 reform of the IMF that would strengthen the position of China and other large emerging economies in the institution’s governance structure. 
Given the significance of the Chinese economy, continuing to leave this unaddressed is anything but normal. 

China’s Next Agenda 
CAMBRIDGE – I recently returned from Beijing, where I had spent a week talking with Chinese officials and attending the China Development Forum (CDF), the major annual gathering of Chinese and senior foreign officials and top business executives. 
The Chinese government had just released its 13th Five-Year Plan, and officials were eager to explain what it means for China’s future. 
Although the latest plan contains a seemingly endless list of specific projects and goals, the major new theme this year is “supply-side restructuring,” a term that includes a wide range of policies aimed at boosting economic growth and living standards. 
The term “supply side” is intended to distinguish these new policies from the traditional demand-side measures of easy money and a slightly larger fiscal deficit that are already aimed at strengthening economic activity. 
High on the list of supply-side policies is eliminating some of the excess capacity of state-owned firms in the steel and coal industries. 
This means shedding some four million workers, a number equal to about 0.5% of China’s workforce. 
The plan authorizes a special fund to provide assistance to those who remain unemployed. 
Experts believe that much more downsizing is needed; but the authorities are starting small to see how it works and to monitor the public’s response. 
China will also be shifting millions of people from low-productivity agricultural areas to dozens of new cities, accompanied by ambitious plans to build 50 new airports and thousands of miles of new roads and railroads. 
The authorities also tout the One Belt, One Road project, which will use Chinese financial assistance and resources to develop ports, railroads, and highways linking China with other parts of Asia, central Asia, and potentially even Europe. 
The foreign-policy goal is to expand Chinese influence in the region and beyond. 
It will also provide an opportunity to export some of China’s excess industrial capacity. 
Moreover, officials intend to stimulate innovation through research and development, including by lowering tax rates for high-technology firms. 
Tax reform will also extend China’s value-added tax to the service sector. 
And financial reforms will eliminate the limits on interest rates that banks can pay on deposits and charge on loans. 
At the same time, there is substantial confusion about China’s new foreign-exchange regime. 
In recent years, the renminbi’s decline relative to the dollar has prompted complaints from American firms that compete with Chinese products. 
But the renminbi has also strengthened by 25% relative to other advanced-country currencies since 2010. 
The authorities promise to allow the market to determine the exchange rate, and that there is no reason for a sustained decline. 
But officials continue to report the renminbi’s movements relative to the dollar because they fear that emphasizing exchange-rate management relative to a currency basket will suggest further decline relative to the dollar, an expectation that would increase capital outflows. 
Policies to improve the environment are also high on the government’s agenda for the next five years. 
The public is eager for cleaner air, rivers, and land. 
To achieve this, the government will adopt new regulations and create “green bonds” to finance remediation and low-carbon energy sources. 
Chinese auto firms are being encouraged to produce hybrid cars, and the government is warning foreign auto companies that it will take steps to reduce their market share if they don’t conform. 
Improving the quality of life also requires boosting the quality of products that Chinese consumers can buy. 
One government minister at the CDF noted that the one million Chinese tourists who went abroad last year used their credit cards to buy about $1 billion worth of goods that they cannot obtain at home (while noting the irony that some of those European and American branded goods are actually manufactured in China). 
China is still a low-income country, with per capita GDP of just $14,000, about one fourth of that in the United States. 
Although Beijing and Shanghai are relatively prosperous, there is still much poverty. 
It is revealing that to achieve the Five-Year Plan’s goal of eliminating poverty by 2020, which requires reducing the number of poor people by 55 million, the poverty line is defined as just $354 a year, or less than one dollar a day. 
Chinese corporations’ high level of debt could be a source of financial instability, although several officials stressed that they were not worried. 
Government data show that the ratio of bank loans to GDP is about twice that of the United States. 
More worrying, the share of nonperforming loans may be dangerously high. 
But even if that share is higher than official statistics indicate, China’s bad-debt problem is very different from that of the West. 
China’s largest corporate debtors are state-owned firms, and their creditors are state-owned banks. 
So resolving the bad debts would involve transferring the losses from the state-owned banks to the government. 
And, because the government debt is relatively low – about 17% of GDP – it would not be difficult for the government to absorb these losses. 
If necessary, it could also deal with the excess debts that local governments, encouraged by the central authorities, incurred in 2008 and 2009. 
What was not discussed at the CDF is the major crackdown on high-level corruption that President Xi Jinping is pursuing and that many say is impeding economic decision-making and slowing GDP growth. 
Nor was there any discussion of the widespread concern about an ideological shift to the left that could threaten property rights, leading to capital flight as individuals seek to protect their wealth. 
But while China remains a complicated puzzle, the authorities are clearly pursuing pro-market reforms designed to produce real annual growth of 6.5% or more during the next five years, leading to the doubling of real per capita income by 2020 that the Chinese Communist Party called for in 2010. 
If that target is missed, it will not be for a lack of effort on the part of the Chinese government. 

China’s Higher-Education Glut 
MILAN – China has always valued education, reflecting its Confucian tradition, according to which one must excel scholastically to achieve high professional and social status. 
But today, the country is stricken with what some call “education fever,” as middle-class Chinese parents demand more schooling for their children, and as young people seek ways to avoid the drudgery of factory life. 
China’s government, by emphasizing the need for a better-educated workforce to compete with the West, is fueling this trend. 
This year alone, China produced 7.65 million university graduates – a historic high – and around nine million high school students took the gaokao, China’s general university admission exam. 
These are staggering figures, even for a country with a billion people and a tertiary-education enrollment rate that is one-third that of advanced economies. 
To put the trend in perspective, China graduated fewer than two million people from college in 1999, and the pass rate for the gaokao was only 40%, half of what it is today. 
Education is never a bad thing in itself, but the move toward “mass universities” of the type that emerged in the West after World War II is occurring too fast and has arrived too soon for the Chinese economy to accommodate it. 
With China’s transition to a post-industrial economy far from complete, significantly broadening access to university undermines the quality of education and has high collateral costs, socially and economically. 
For example, to meet the Communist Party’s ambitious enrollment goals, institutions have lowered admission standards and matriculated students into fields of study with no market value, just to accommodate them. 
This has severely degraded the quality of education at second- and third-tier universities concentrated in China’s inner provinces, thus widening the development gap between China’s urban coast and rural hinterland. 
Meanwhile, China, with a graduate unemployment rate of 16%, is producing more highly educated workers than the economy can absorb. 
The wage premium for workers with a bachelor’s degree has decreased by roughly 20% in recent years, and new graduates often must accept jobs – such as street cleaning – for which they are vastly overqualified. 
Under these conditions, many recent graduates now join the Communist Party because membership stands out to potential employers. 
But it is difficult to see how the labor market can be efficient if employers are making hiring decisions on the basis of political favoritism rather than merit. 
As more Chinese students attend university, fewer are graduating from vocational schools, which teach the skills that the economy actually needs. 
In fact, the demand for qualified blue-collar employees is so high that in 2015 the country’s 23 million textile workers earned, on average, $645 per month – equal to the average college graduate. 
The Chinese government has partly acknowledged this imbalance and says it will convert around 600 colleges into vocational schools by the end of next year. 
But this supply-side fix doesn’t address the demands of China’s burgeoning middle class. 
With universities having become so accessible, Chinese families will continue to prefer them to what they consider second-class schools. 
The situation is unfortunate for all involved. 
In its push for universal higher education and global status, China is stringing its young people along with the promise of high-paid, meaningful employment after graduation. 
It is a promise that China will not be able to fulfill for a very long time. 
For starters, China confronts global economic conditions that are beyond its control. 
China wants to shift its economic model away from manufacturing and toward services, where its many graduates could be gainfully employed; but it is currently locked into its position at the bottom of most global value chains. 
When global values chains grow and new jobs are created, those jobs are distributed according to a country’s competitive advantage. 
Because China has long specialized in low-skill tasks, this is the kind of work that will be left for Chinese laborers. 
If the smartphone industry expands, for example, Silicon Valley will hire more engineers, and Shenzhen will hire more assemblers to build what those engineers design. 
If China wants to move up the value chain, it needs to expand its technological capacity, which is why innovation is at the heart of its latest Five-Year Plan. 
But most of China’s high-tech investments so far have been abroad – in sectors ranging from electronics and biotechnology to software and nanotechnology – which won’t change its value-chain ranking. 
China could also expand its tech sector through homegrown entrepreneurship, except that the Chinese economy does not provide easy access to credit and is hamstrung by excessive regulations that make it difficult to start a competitive business. 
Restructuring the Chinese economy is a long-term project. 
In the short term, China should make higher education far more exclusive, so that it is true to its purpose. 
Chinese universities should produce higher-quality graduates at a slower rate, and all other students should matriculate through vocational programs, which will lose their current stigma as they become the primary educational option. 
The current system misallocates Chinese talent, prevents graduates from reaching their full potential, and impedes the economy’s capacity to ascend global value chains. 
In this sense, China is moving too fast. 
As an old Confucian proverb says, “It does not matter how slowly you go, so long as you do not stop.” 

One Country, One System 
STOCKHOLM – July 1 marks the 20th anniversary of the United Kingdom’s handover of Hong Kong to China, under a model called “one country, two systems.” 
But an unavoidable question will hang over the official commemorations: Is there really anything to celebrate? 
If you had asked Deng Xiaoping, the architect of the “one country, two systems” model, what the handover’s 20th anniversary would look like, he might have said that Hong Kong’s residents would be toasting to their prosperity and liberty. 
China’s leaders, for their part, would be showcasing their credibility and governing capacity, finally quieting the chorus of naysayers who had doubted the Chinese Communist Party (CCP) and the sincerity of its promises to Hong Kong. 
But the reality is very different. 
Today, scenes that would have been unthinkable in Hong Kong in 1997 – mass anti-China demonstrations, the election of anti-CCP radicals to the city’s legislature, open calls for independence – have become routine. 
To be sure, powerful economic forces – including China’s rise, globalization, high inequality, and soaring property prices – have buffeted Hong Kong since 1997, undermining the city’s competitiveness and contributing to social discontent. 
But, while adverse socioeconomic factors have exacerbated popular frustration, the mass protests that have become a fact of life in the city are quintessentially political protests centered on the rights of Hong Kong’s people. 
Against this background, few would call “one country, two systems” a success. 
In fact, the model was probably doomed from the start, owing to several fatal flaws that are embedded in its structure. 
For starters, the language committing China to respect the democratic rights of the people of Hong Kong was deliberately vague. 
Even the joint declaration signed by the British and Chinese governments in 1984, which set the stage for the 1997 handover, offered the somewhat imprecise promise that the chief executive would be appointed by China “on the basis of the results of elections or consultations to be held locally.” 
Moreover, the only party with the power to enforce the terms of the joint declaration, not to mention Hong Kong’s mini-constitution known as the Basic Law, is the central government in Beijing. 
As a result, China’s leaders could fail to honor the spirit or even the explicit terms of their commitments with impunity. 
The current radicalization of Hong Kong citizens, particularly its young people, reflects a desire to change that, and make China pay a price for reneging on its promise of “self-rule” and responding to dissent with repression. 
There is one more feature of the “one-country, two systems” scheme that has doomed it: China’s deliberate decision to rule Hong Kong through crony capitalists. 
As ironic as it may sound, China’s so-called communists apparently trust Hong Kong’s tycoons more than its masses (perhaps because buying off tycoons costs a lot less). 
But, because their loyalty lies with their backers in Beijing, not the people of the city they administer, Hong Kong’s crony capitalists are bad politicians. 
Under the CCP, they have gained power and privileges that were unattainable under British rule. 
But that has made them unresponsive to their constituency as it becomes increasingly alienated from their patrons. 
As a result, China’s proxies have failed spectacularly at securing popular legitimacy. 
Consider the fate of Hong Kong’s chief executives, hand-picked by China’s rulers to run the city. 
The first, Tung Chee-hwa, faced a half-million protesters in 2003; in 2005, halfway through his second term, his ever-growing unpopularity drove him to resign. 
Tung’s successor, Donald Tsang, completed his two terms, but just barely, and he was jailed for corruption (along with his number two) after leaving office. 
Leung Chun-ying, who came next, was such a disaster that China’s rulers had to cashier him after just one term. 
Of course, the “one country, two systems” approach has not been an unmitigated disaster. 
Given the vast cultural, economic, and institutional gaps between Hong Kong and the mainland, things could have been much worse. 
But that does not make it a sustainable model. 
In fact, it may well already be dead. 
In the back of their minds, China’s leaders have always sought to move toward a “one country, one system” model for Hong Kong. 
Deng thought that such a transition would take 50 years, but it took his successors only 20, and they didn’t even fully realize it was happening. 
Whatever policies Chinese authorities pursue in Hong Kong between now and 2047, the goal will be to make the present – particularly the absence of political rights – look more and more like the future. 

Will China Really Supplant US Economic Hegemony? 
CAMBRIDGE – As China and the United States engage in their latest trade tussle, most economists take it as given that China will achieve global economic supremacy in the long run, no matter what happens now. 
After all, with four times as many people as the US, and a determined program to catch up after centuries of technological stagnation, isn’t it inevitable that China will decisively take over the mantle of economic hegemon? 
I am not so sure. 
Many economists, including many of the same experts who see China’s huge labor force as a decisive advantage, also worry that robots and artificial intelligence will eventually take away most jobs, leaving most humans to while away their time engaged in leisure activities. 
Which is it? 
Over the next 100 years, who takes over, Chinese workers or the robots? 
If robots and AI are the dominant drivers of production in the coming century, perhaps having too large a population to care for – especially one that needs to be controlled through limits on Internet and information access – will turn out to be more of a hindrance for China. 
The rapid aging of China’s population exacerbates the challenge. 
As the rising importance of robotics and AI blunts China’s manufacturing edge, the ability to lead in technology will become more important. 
Here, the current trend toward higher concentration of power and control in the central government, as opposed to the private sector, could hamstring China as the global economy reaches higher stages of development. 
The possibility that China might never supplant the US as the world’s economic hegemon is the flip side of the technology and inequality problem. 
Everyone in the West is worrying about the future of work, but in many ways it is a bigger problem for the Chinese development model than for the American one. 
The US needs to struggle with the problem of how to redistribute income internally, especially given highly concentrated ownership of new ideas and technology. 
But for China, there is the additional problem of how to extend its franchise as export superpower into the machine age. 
True, it is highly unlikely that President Donald Trump’s huffing and puffing and bluffing will bring about a large-scale return of manufacturing jobs to the US. 
But the US has the potential to expand the size of its manufacturing base anyway, in terms of output if not jobs. 
After all, today’s high-tech factory floors produce far more with far fewer workers. 
And the robots and AI are coming not just in manufacturing and driverless cars. 
Robo-doctors, robo-financial advisors, and robo-lawyers are just the tip of the iceberg in machine disruption of service-sector jobs. 
To be sure, China’s rise is hardly a mirage, and its heady success is not built on population size alone. 
India has a similar population (both around 1.3 billion people), but for now, at least, it trails far behind. 
Chinese leadership must be credited with doing a miraculous job of lifting hundreds of millions of people out of poverty and into the middle class. 
But China’s rapid growth has been driven mostly by technology catch-up and investment. 
And while China, unlike the Soviet Union, has shown vastly more competence in homegrown innovation – Chinese companies are already leading the way in the next generation of 5G mobile networks – and its cyber-warfare capacity is fully on par with the US, keeping close to the cutting edge is not the same thing as defining it. 
China’s gains still come largely from adoption of Western technology, and in some cases, appropriation of intellectual property. 
Trump is hardly the first American president to complain on this score, and he is right to do so (though starting a trade war cannot be the solution). 
In the economy of the twenty-first century, other factors, including rule of law, as well as access to energy, arable land, and clean water may also become increasingly important. 
China is following its own path and may yet prove that centralized systems can push development further and faster than anyone had imagined, far beyond simply being a growing middle-income country. 
But China’s global dominance is hardly the predetermined certainty that so many experts seem to assume. 
Yes, the US faces vast challenges as well. 
For example, it must devise a way to retain dynamic technological growth while preventing excessive concentration of wealth and power. 
To be a hegemon, however, does not require being the world’s largest country – otherwise, England would never have ruled much of the world as it did for more than a century. 
China might lead the digital future if the US drops the ball, but it won’t become the dominant global power simply because it has a larger population. 
On the contrary, the coming machine age could be a game changer in the battle for hegemony. 

The China Delusion 
NEW YORK – China’s management of its exchange-rate peg continues to rattle global financial markets. 
Ongoing uncertainty about renminbi devaluation is fueling fears that deflationary forces will sweep through emerging markets and deliver a body blow to developed economies, where interest rates are at or near zero (and thus cannot be lowered to defend against imported deflation). 
Fiscal gridlock in both Europe and the United States is heightening the angst. 
But the current bout of exchange-rate anxiety is really just a symptom of the fact that China’s transition from an export-led growth strategy to one propelled by domestic consumption is proceeding far less smoothly than hoped. 
For some people, visions of the wonders of capitalism with Chinese characteristics remain undiminished. 
They are certain that, after more than three decades of state-directed growth, China’s leaders know what to do to turn their slumping economy around. 
The optimists’ unreality is rivaled by that of supply-siders, who would apply shock therapy to China’s slumping state sector and immediately integrate the country’s underdeveloped capital markets into today’s turbulent global financial system. 
That is a profoundly dangerous prescription. 
The power of the market to transform China will not be unleashed in a stagnant economy, where such measures would aggravate deflationary forces and produce a calamity. 
The persistent downward pressure on the renminbi reflects a growing fear that Chinese policymakers have no coherent solution to the dilemmas they face. 
Floating the renminbi, for example, is a dangerous option. 
After all, with the Chinese economy undergoing wholesale economic transformation, estimating a long-term equilibrium exchange rate that will anchor speculation is virtually impossible, particularly given persistent doubts about data quality, disclosure, and opaque policymaking processes. 
But if the current exchange-rate peg to a basket of currencies fails to anchor the renminbi and prevent sharp depreciation, the deflationary consequences for the world economy will be profound. 
Moreover, they will feed back on the Chinese export sector, thus dampening the stimulative impact of a weakened currency. 
The key to stabilizing the exchange rate lies in creating a credible development policy. 
Only then will the pressure on the renminbi, and on China’s foreign-exchange reserves, subside, because investors both within and outside the country will see a clear way forward. 
Establishing policy credibility will require diminishing the muddled microeconomic incentives of state control and guarantees. 
It will also require reinvigorating aggregate demand by targeting fiscal policy to support the emerging economic sectors that will underpin the new growth model. 
But, as usual with China, such a strategy is riddled with contradictions. 
For example, reducing the size of the state-enterprise sector is necessary, yet would be certain to depress aggregate demand at a time when demand is already soft. 
Likewise, cutting fiscal support (via government-directed bank lending) to zombie firms would free up fiscal capacity and enable resources to be redirected to new sectors that facilitate services and urban employment; but this would exacerbate – at least at first – today’s demand shortfall. 
Slashing the state sector abruptly and expecting to achieve transformation through austerity is not the way forward. 
Economic historians, notably Michael A. Bernstein in his study of the Great Depression in the United States, have convincingly shown that an economy in transition requires strong aggregate demand to pull resources into new sectors. 
If both the old and new sectors of an economy are in a slump, capital formation will sputter, investment in upgrading human capital will decline, and structural adjustment will stall. 
Robust aggregate demand is always essential to successful transformation. 
An equally large obstacle to China’s economic transition – the problem that almost dare not speak its name – is the widespread worship of China’s hybrid market economy. 
Simply put, today’s muddled market incentives impede transformation by favoring state-owned enterprises. 
In early 2012, when the Chinese leadership moved toward stronger private ownership, stocks in the private-sector sub-index outperformed the state-owned sector sub-index on both the Shanghai and Hong Kong stock exchanges. 
But since the spring of 2014, this trend has reversed, and the state-owned sector sub-index has outperformed the private-sector sub-index. 
As the Chinese economy slows and default risk grows, the value of state guarantees rises, directing capital away from private-sector growth. 
This hybrid system clearly impedes credit allocation from catalyzing development, while creating and sustaining vested interests opposed to reform. 
This holding pattern is particularly harmful because profound transformation will surely depend on financing from a sound sovereign bond market, which cannot function properly until uncertainty related to the government’s contingent liabilities – all those implicit guarantees – has been resolved. 
China has it within its power to stabilize its exchange rate via credible reforms, particularly policies that redirect resources to invigorate domestic demand and pull resources toward the newer high-value sectors. 
The reforms China needs cannot be accomplished in a slump, or by a large exchange-rate depreciation that deflates the world in a vain effort to turn back the clock to an era of export-led growth that stagnant demand in the West has rendered nonviable. 

Why Import Promotion Could Increase China’s Trade Surplus 
NEW YORK – Countries often devote public funds to promoting exports of their own goods and services. 
But devoting resources to promote imports – as China is doing with its inaugural International Import Expo, which just opened in Shanghai – is truly rare. 
The annual Import Expo, which will be part of China’s overall import promotion strategy, has attracted thousands of companies worldwide with the promise of large orders from Chinese firms, including the state-owned enterprises that the government has tasked with making the expo a success. 
If the expo succeeds in raising imports, one might expect it to reduce China’s trade surplus. 
But that need not be the case. 
China is a labor-abundant country, not only in terms of the absolute number of people, but also in relation to capital and other resources. 
Though the relative balance has been evolving, China’s average labor cost still stands at about 85% of the world average. 
If China lowers import barriers, capital-intensive goods will comprise a substantial share of the added imports, which will displace domestically produced capital-intensive goods. 
The bank loans, labor, land, and other resources that were previously deployed to produce those goods will need to be redeployed, most likely to sectors where China has a true comparative advantage, including export manufacturing. 
As a result, China’s overall exports would probably increase alongside its imports. 
In other words, policies aimed at promoting imports will likely end up promoting exports as well. 
Research I conducted with Jiandong Ju and Kang Shi suggests something even stronger than this: when a relatively labor-abundant country reduces import barriers, exports actually grow more than imports. 
The additional imports of capital-intensive goods effectively expand the pool of capital in the country, reducing the domestic returns on capital. 
This creates an incentive for firms and households to send more capital abroad, and running a bigger trade surplus is the way to accomplish this. 
This may sound counter-intuitive. 
And, indeed, in a more capital-abundant country like the United States, more imports (of mostly labor-intensive products) would raise the returns on capital, creating an incentive for international capital to flow to the country. 
In this case, more imports are associated with a bigger trade deficit. 
If one is accustomed to thinking about the experience of relatively rich countries, one might not realize that the same rise in imports could lead to opposite movements in trade balances between developing and developed countries. 
China’s past experience is a good illustration. 
Accession to the World Trade Organization in 2001 required China to liberalize its import regime substantially. 
The country cut its average import tariff rate from 15% in the late 1990s to about 5% by 2006, and reduced many non-tariff import barriers, such as restrictions on which firms could legally engage in international trade. 
As a result, China’s imports soared, growing by more than 15% annually in USD terms – faster than GDP from 2001 to 2007. 
But its trade surplus also expanded dramatically during this period. 
While the higher trade surplus is often blamed on an undervalued real exchange rate, our research suggests that China’s import liberalization program could be a significant factor, too. 
Likewise, though the decrease in China’s trade surplus after 2007 is usually regarded as resulting from the global financial crisis, our research suggests that the end of China’s multiple-phase import-liberalization program may also have played a role. 
It is important to note that China can still reduce the bilateral trade surplus against any particular partner, even if its overall surplus rises. 
And even if the Import Expo expands, rather than reduces, the country’s overall trade surplus, it may well have other benefits. 
For starters, lowering the cost of imports will increase Chinese households’ purchasing power and their access to products that can improve their quality of life. 
Chinese firms, too, will benefit from lower costs for foreign-made parts and equipment, which will boost their global competitiveness – another channel through which lower import barriers can end up boosting exports. 
Finally, the International Import Expo will complement China’s other measures to liberalize its market, including lower entry barriers for foreign financial firms. 
China has a massive and growing market to which other countries want access. Whatever the impact of its import-promotion measures on the country’s overall trade surplus, the world has good reason to welcome initiatives like the International Import Expo. 

China in Action on Climate Change 
Beijing – Climate change is a serious challenge to humanity and sustainable development, which requires both proactive responses and concerted effort by the international community. 
China attaches great importance to tackling climate change. 
In 2007, it established the National Leading Group on Climate Change (NLGCC), headed by Premier Wen Jiabao. 
That same year, China issued its National Climate Change Program , the first ever by a developing country. 
In its National Climate Change Program , China set an objective to lower its energy consumption per unit of GDP by 20% or so of 2005 level by 2010 and in its Mid- and Long-Term Plan for the Development of Renewable Energy , China also sets an objective of increasing the proportion of renewable energy in the primary energy mix to 10% by 2010, and to 15% by 2020. 
To achieve such objectives, China has adopted a series of effective policies and measures, achieving remarkable progress. 
Firstly, China succeeded in lowering its energy consumption per unit of GDP by 1.79%, 4.04% and 4.59% respectively for 2006, 2007, and 2008, which strongly suggests the prospect of meeting the 20% objective by 2010. 
Secondly, between 2006 and 2008, China shut down small thermal power-generation units with a total installed capacity of 34.21 GW, phased out 60.59 million tons of backward steel-making capacity, 43.47 million tons of iron-smelting capacity and 140 million tons of cement-production capacity. 
All of these steps reduced pollution markedly. 
Thirdly, between 2000 and 2008, China increased its wind power generating capacity from 340 MW to 10 GW, hydropower from 79.35 GW to 163 GW, and nuclear power from 2.1 GW to 9.1 GW. 
It has also made great efforts to reduce agricultural and rural greenhouse gas emissions. 
Indeed, by the end of 2007, more than 26.5 million rural households were using household biogas digesters, thereby avoiding CO2 emissions by 44 million tons. 
Fourthly, China has increased its carbon sinks by promoting reforestation. 
China’s forest coverage rate increased from 12% in the early 1980’s to 18.21% today. 
For this year, China will complete formulating provincial climate change programs throughout the country, promoting effective implementation of the National Climate Change Program . 
Furthermore, in China’s economy stimulus package, 210 billion yuan is allocated for energy conservation, pollutants reduction, and ecosystem protection projects, 370 billion yuan for economic structural adjustment and technology renovation, and 400 billion yuan for new energy-efficient housing that will use environmentally friendly materials. 
Besides, 370 billion yuan will be used to improve rural living standards in an environmentally sound manner and sustainable way. 
China is making huge efforts to combat climate change despite the fact that it remains a low-income developing country with a per-capita GDP of just about $3,000. 
Indeed, by United Nations standards, China still has 150 million people living in poverty. 
China has no other choice but to pursue sustainable development in order to meet the basic needs of its people and to eradicate poverty. 
In this process, the world is assured that China will make every effort to address climate change. 
The international community has great expectations for reaching a positive outcome in Copenhagen. 
In China’s view, the key to the success in Copenhagen lies in the realization of the full, effective and sustained implementation of the Convention and its Kyoto Protocol (KP). 
Developed country Parties to the KP, collectively, must reduce their greenhouse gas emissions by at least 25-40% below their 1990 level by 2020. 
For Non-KP developed countries, they should undertake comparable commitments with quantified emission reduction targets. 
Developed countries should also fulfill their obligations under the Convention to provide financial support and technology transfer to enable developing countries to effectively tackle climate change. 
In addition, appropriate mechanisms and institutional arrangements should be established for adaptation, financial support and technology transfer. 
Developing countries will, in the context of sustainable development and with measurable, reportable, and verifiable support in terms of financing, technology, and capacity-building, take nationally appropriate mitigation actions. 
The global financial crisis has undoubtedly exacerbated the challenge of climate change. 
But since climate change is a more far-reaching and serious challenge, the world must not waver in its determination and commitment to addressing it. 
Indeed, the international financial crisis, if handled properly, may also be turned into an opportunity to reach a win-win solution for both climate protection and economic development. 
With a deep sense of responsibility for its own people and the entire human race, China will continue to implement proactive policies and measures to address climate change and make unremitting efforts to the protection of earth system. 

The Global Economy’s New Rule-Maker 
MILAN – In a recent commentary for the South China Morning Post, Helen Wong, HSBC’s chief executive for Greater China, shows that China’s rising generation of 400 million young consumers will soon account for more than half of the country’s domestic consumption. 
This generation, Wong notes, is largely transacting online, through innovative, integrated mobile platforms, indicating that it has already “leapt from the pre­web era straight to the mobile Internet, skipping the personal computer altogether.” 
Of course, China’s rising middle class is not news. 
But the extent to which digitally oriented younger consumers are driving rapid growth in China’s service industries has not yet received ample attention. 
Services, after all, will help drive China’s structural transition from a middle- to a high-income economy. 
Not too long ago, many pundits doubted that China could make the shift from an economy dominated by labor-intensive manufacturing, exports, infrastructure investment, and heavy industry to a service economy underpinned by domestic demand. 
But even if China’s economic transition is far from complete, its progress has been impressive. 
In recent years, China has been offloading its labor-intensive export sectors to less-developed countries with lower labor costs. 
And in other sectors, it has shifted to more digital, capital-intensive forms of production, rendering labor-cost disadvantages insignificant. 
These trends imply that supply-side growth has become less dependent on external markets. 
As a result of these changes, China’s economic power is rapidly rising. 
Its domestic market is growing fast, and could soon be the largest in the world. 
And because the Chinese government can control access to that market, it can increasingly exert its influence in Asia and beyond. 
At the same time, China’s declining dependence on export-led growth is reducing its vulnerability to the whims of those who control access to global markets. 
But China does not actually need to limit access to its own markets to sustain its growth, because it can increase its bargaining power by merely threatening to do so. 
This suggests that China’s position in the global economy is starting to resemble that of the United States during the post-war period, when it, along with Europe, was the dominant economic power. 
For decades after World War II, Europe and the US represented well over half (and near 70% at one point) of global output, and they were not heavily dependent on markets elsewhere, other than for natural resources such as oil and minerals. 
Now, China is rapidly approaching a similar configuration. 
It has a very large domestic market – to which it can control access – rising incomes, and high aggregate demand; and its growth model is increasingly based on domestic consumption and investment, and less on exports. 
But how will China wield its increasing economic power? 
In the post-war period, the advanced economies used their position to set the rules for global economic activity. 
They did so in such a way as to benefit themselves, of course; but they also tried to be as inclusive as possible for developing countries. 
The post-war powers certainly did not have to take that approach. 
It was within their power to focus far more narrowly on their own interests. 
But that might not have been wise. 
It is worth remembering that in the twentieth century, following two world wars, peace was the top priority, along with – or even before – prosperity. 
China shows every sign of moving in the same direction. 
It most likely will not pursue a narrowly self-interested approach, mainly because to do so would diminish its global stature and clout. 
China has shown that it wants to be influential in the developing world – and certainly in Asia – by playing the role of a supportive partner, at least in the economic realm. 
Whether China can achieve that goal will depend on what it does in two key policy areas. 
The first is investment, where China has moved aggressively by introducing a variety of multilateral and bilateral initiatives. 
For example, in addition to investing heavily in African countries, it created the Asian Infrastructure Investment Bank in 2015, and, in 2013, announced the “Belt and Road Initiative,” meant to integrate Eurasia through massive investments in highways, ports, and rail transport. 
Second, how China manages access to its vast internal market, in terms of trade and investment, will have far-reaching consequences for all of China’s external economic partners, not just developing countries. 
China’s domestic market is now the source of its power, which means that the choices it makes in this area in the near term will largely determine its global standing for decades to come. 
To be sure, China’s current position on domestic-market access is less clear than its economic ambitions abroad. 
But China will most likely move toward an open, largely rules-based multilateral framework. 
The lesson from the post-war period is that this approach will do the most good externally, and will thus enhance China’s international influence. 
At this stage of China’s development, such an approach will have few if any costs, while most likely conferring many benefits. 
What remains to be seen is how China’s relationship with the US fares. 
The US is suffering from non-inclusive growth patterns and related political and social upheavals. 
And it now seems to be departing from its historical post-war approach to international economic policy. 
But even if the US is isolating itself under President Donald Trump, it is still too big simply to ignore. 
If the Trump administration enacts aggressive policies directed at China, the Chinese will have no choice but to respond. 
Still, in the meantime, China can continue to pursue a rules-based multilateral approach, and it can expect broad support from other advanced and developing countries. 
The key is not to be distracted by America’s descent into nationalism. 
After all, it is anyone’s guess how long that will last. 

China’s Incomplete Contracts 
HONG KONG – This year’s Nobel Prize in Economic Sciences went to Harvard’s Oliver Hart and MIT’s Bengt Holmström for their pioneering work on the economics of property rights and contracts. 
At a time when China is attempting the difficult transition from a system of incomplete contracts to a strong property-rights regime, the real-world importance of these contributions could not be clearer. 
No contract can specify every eventuality. 
So contracts must, instead, spell out the allocation of “control” rights – who can make decisions in which circumstances. 
For a centrally planned economy attempting to allocate more authority to the market, such contracts are invaluable – at least at first. 
This has not been lost on Chinese reformers. 
From the mid-1980s to the early 1990s, they introduced both the “rural household responsibility system” and the “enterprise contract responsibility system” for state-owned enterprises (SOEs). 
Those systems essentially delegated more decision-making rights, as well as certain profits, to farmers and workers, so that they had a stronger incentive to work more efficiently within state-owned communes and firms. 
A similar approach was adopted in China’s 1994 fiscal reform to handle tax-sharing between the central and local governments, with control rights relating to land and local economic development delegated to local officials, particularly at the municipal and county levels. 
This helped to advance development, though it also created space for local officials to take advantage of fringe benefits – a practice that later morphed into outright corruption. 
More recently, the incomplete contract approach has also been used in the area of shadow banking. 
Regulators allowed innovations in incomplete contract-based financial intermediations, such as trust companies and Internet-based platforms, while maintaining tight control over the formal banking sector. 
By defining partial rights to both decision-making and benefits, China’s leaders gave stakeholders incentives to compete efficiently with their peers, without giving up full authority. 
In that sense, these incomplete contracts laid the foundation for market-oriented competition in China, before it was possible – owing to institutional and ideological barriers – to achieve clearly defined private property rights. 
But while the incomplete-contract approach was necessary during the transition to a market economy, it is not a long-term solution. 
More clearly defined and securely protected property rights, underpinned by an effective legal and judicial framework, are still needed. 
In fact, the loopholes in the incomplete contracts are undermining progress. 
One of the lingering issues of the rural household responsibility system, for example, was unclear property rights relating to farm land, which is still legally owned collectively by local farmers, even though land-use rights were contracted to the individual households for 30 years. 
Without privatization, the farmers could not sell their land at market value for urban development, creating space for abuse and corruption, as well as social instability, particularly because urban and rural land values widened substantially during China’s high-growth period. 
Likewise, the enterprise contract system failed to move the SOEs to sustained profitability. 
Unlike farmers, who did not borrow at all, SOEs borrowed heavily from state-owned banks. 
When they generated profits, the proceeds were shared with managers and employees. 
But when they generated losses – for example, in the 1990s – the banks were left with huge amounts of non-performing loans. 
China’s government under Premier Zhu Rongji attempted to resolve the debt problem by putting the SOEs’ bad loans into four state-owned asset-management companies, and most of the small and medium-size loss-making SOEs were privatized. 
The remaining large state-owned banks and enterprises then became profitable, thanks largely to their monopolistic positions, which allowed them to be listed on the Hong Kong, Shanghai, and Shenzhen stock exchanges. 
In the ensuing years, they made critical contributions to China’s massive public infrastructure. 
But the SOEs have also been the source of serious problems. 
They use both financial and human capital far less efficiently than their private-sector counterparts, and they have become key sources of both corruption and distortions in energy and natural-resource prices. 
Moreover, their stock-market dominance has hindered the healthy development of China’s capital market; they not only crowd out scarce resources for equity capital, but also complicate the normal operation of the market for mergers and acquisitions. 
Nowadays, it is very difficult to undertake market-oriented changes in corporate ownership and control for the listed SOEs. 
Yet such changes are critical to improve governance and competitiveness, especially in the service, knowledge, and innovation-driven sectors that will underpin future economic growth. 
To be sure, President Xi Jinping has taken some steps to rein in the state sector. 
Since 2012, his government has engaged in a massive anti-corruption drive, aimed at controlling the inefficiencies and abuses that have arisen from a lack of appropriate checks on delegated authority. 
But it has not been enough to root out corruption fully, and problems with pollution, overcapacity, and debt remain, which can be addressed only through a major supply-side structural-reform program. 
In short, China’s incomplete contracts need to be completed. 
The key is judicial reform and the development of an orderly and institutionalized process for resolving property-rights and contractual disputes. 
Stronger bankruptcy laws, for example, would enable Chinese banks and state authorities to enforce credit discipline, pushing weak or failed borrowers out of the system. 
China’s continued progress toward high-income status requires it to develop a strong and comprehensive property-rights system based on more complete contracts. 
Its leaders should look to the work of Hart and Holmström for guidance. 


The Renewable Energy Revolution 
SYDNEY – In the United States and Europe, the benefits of renewable energy are predominantly seen as environmental. 
Energy from the wind and sun can offset the need to burn fossil fuels, helping to mitigate climate change. 
In China and India, however, renewable energy is viewed in a remarkably different fashion. 
The relatively rapid transition away from fossil fuels in both countries is driven not so much by concerns about climate change as by the economic benefits renewable energy sources are perceived as conveying. 
Indeed, while the economic benefits of renewables can be attractive to advanced economies such as Germany or Japan (both of which are rapidly moving away from fossil fuels), the advantages for emerging industrial giants are overwhelming. 
For India and China, an economic trajectory based on fossil fuels could spell catastrophe, as efforts to secure enough for their immense populations ratchet up geopolitical tensions. 
Aside from increased energy security, a low-carbon economy would promote domestic manufacturing and improve local environmental quality by, for example, reducing urban smog. 
To be sure, fossil fuels conferred enormous benefits on the Western world as it industrialized over the past 200 years. 
The transition to a carbon-based economy liberated economies from age-old Malthusian constraints. 
For a group of select countries representing a small slice of the global population, burning fossil fuels enabled an era of explosive growth, ushering in dramatic improvements in productivity, income, wealth, and standards of living. 
For much of the past 20 years, China and India led the charge in claiming the benefits of fossil fuels for the rest of the world. 
Recently, however, they have begun to moderate their approach. 
As their use of fossil fuels brushes up against geopolitical and environmental limits, they have been forced to invest seriously in alternatives – most notably, renewables. 
In doing so, they have put themselves in the vanguard of a planetary transition that in a few short decades could eliminate the use of fossil fuels altogether. 
The economic arguments advanced against renewable sources of energy – that they can be expensive, intermittent, or not sufficiently concentrated – are easily rebutted. 
And while renewables’ opponents are legion, they are motivated more by interest in preserving the status quo of fossil fuels and nuclear energy than by worries that wind turbines or solar farms will blot the landscape. 
In any case, those wishing to halt the expansion of renewables are unlikely to triumph over simple economics. 
The renewable energy revolution is not being driven by a tax on carbon emissions or subsidies for clean energy; it is the result of reductions in the cost of manufacturing that will soon make it more cost-effective to generate power from water, wind, and the sun than from burning coal. 
Countries can build their way to energy security by investing in the industrial capacity needed to produce wind turbines, solar cells, and other sources of renewable energy at scale. 
As China and India throw their economic weight into the renewables industrial revolution, they are triggering a global chain reaction known as “circular and cumulative causation.” 
Unlike, mining, drilling, or extraction, manufacturers benefit from learning curves that make production increasingly efficient – and cheaper. 
Investments in renewable energy drive down the cost of their production, expanding the market for their adoption and making further investment more attractive. 
From 2009 to 2014, these mechanisms drove down the cost of solar photovoltaic energy by 80% and reduced the cost of land-based wind power by 60%, according to Lazard’s Power, Energy & Infrastructure Group. 
The impact of the rapid uptake in renewable energy could have consequences as profound as those unleashed by the Industrial Revolution. 
In the eighteenth century, the economies of Europe and the United States initiated the transition to an energy system based on fossil fuels without fully understanding what was happening. 
This time, we can see the way things are changing and prepare for the implications. 
For the moment, the outlook appears promising. 
Efforts to reduce carbon dioxide emissions may not be the prime driver of the renewable energy revolution; but it is very possible that without the revolution, efforts to minimize the impact of climate change would never succeed. 
If we are able to avoid the worst dangers of a warming planet, we may have India and China to thank for it. 

A New Order for the Indo-Pacific 
SYDNEY – Security dynamics are changing rapidly in the Indo-Pacific. The region is home not only to the world’s fastest-growing economies, but also to the fastest-increasing military expenditures and naval capabilities, the fiercest competition over natural resources, and the most dangerous strategic hot spots. 
One might even say that it holds the key to global security. 
The increasing use of the term “Indo-Pacific” – which refers to all countries bordering the Indian and Pacific oceans – rather than “Asia-Pacific,” underscores the maritime dimension of today’s tensions. 
Asia’s oceans have increasingly become an arena of competition for resources and influence. 
It now seems likely that future regional crises will be triggered and/or settled at sea. 
The main driver of this shift has been China, which over the last five years has been working to push its borders far out into international waters, by building artificial islands in the South China Sea. 
Having militarized these outposts – presented as a fait accompli to the rest of the world – it has now shifted its focus to the Indian Ocean. 
Already, China has established its first overseas military base in Djibouti, which recently expropriated its main port from a Dubai-based company, possibly to give it to China. 
Moreover, China is planning to open a new naval base next to Pakistan’s China-controlled Gwadar port. 
And it has leased several islands in the crisis-ridden Maldives, where it is set to build a marine observatory that will provide subsurface data supporting the deployment of nuclear-powered attack submarines (SSNs) and nuclear-powered ballistic missile subs (SSBNs) in the Indian Ocean. 
In short, China has transformed the region’s strategic landscape in just five years. 
If other powers do not step in to counter further challenges to the territorial and maritime status quo, the next five years could entrench China’s strategic advantages. 
The result could be the ascendancy of a China-led illiberal hegemonic regional order, at the expense of the liberal rules-based order that most countries in the region support. 
Given the region’s economic weight, this would create significant risks for global markets and international security. 
To mitigate the threat, the countries of the Indo-Pacific must confront three key challenges, beginning with the widening gap between politics and economics. 
Despite a lack of political integration and the absence of a common security framework in the Indo-Pacific, free-trade agreements are proliferating, the latest being the 11-country Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). 
China has emerged as the leading trade partner of most regional economies. 
But booming trade alone cannot reduce political risks. 
That requires a framework of shared and enforceable rules and norms. 
In particular, all countries should agree to state or clarify their territorial or maritime claims on the basis of international law, and to settle any dispute by peaceful means – never through force or coercion. 
Establishing a regional framework that reinforces the rule of law will require progress on overcoming the second challenge: the region’s “history problem.” 
Disputes over territory, natural resources, war memorials, air defense zones, and textbooks are all linked, in one way or another, with rival historical narratives. 
The result is competing and mutually reinforcing nationalisms that imperil the region’s future. 
The past continues to cast a shadow over the relationship between South Korea and Japan – America’s closest allies in East Asia. 
China, for its part, uses history to justify its efforts to upend the territorial and maritime status quo and emulate the pre-1945 colonial depredations of its rival Japan. 
All of China’s border disputes with 11 of its neighbors are based on historical claims, not international law. 
This brings us to the third key challenge facing the Indo-Pacific: changing maritime dynamics. 
Amid surging maritime trade flows, regional powers are fighting for access, influence, and relative advantage. 
Here, the biggest threat lies in China’s unilateral attempts to alter the regional status quo. 
What China achieved in the South China Sea has significantly more far-reaching and longer-term strategic implications than, say, Russia’s annexation of Crimea, as it sends the message that defiant unilateralism does not necessarily carry international costs. 
Add to that new challenges – from climate change, overfishing, and degradation of marine ecosystems to the emergence of maritime non-state actors, such as pirates, terrorists, and criminal syndicates – and the regional security environment is becoming increasingly fraught and uncertain. 
All of this raises the risks of war, whether accidental or intentional. 
As the most recent US National Security Strategy report put it, “A geopolitical competition between free and repressive visions of world order is taking place in the Indo-Pacific region.” 
And yet while the major players in the region all agree that an open, rules-based order is vastly preferable to Chinese hegemony, they have so far done far too little to promote collaboration. 
There is no more time to waste. 
Indo-Pacific powers must take stronger action to strengthen regional stability, reiterating their commitment to shared norms, not to mention international law, and creating robust institutions. 
For starters, Australia, India, Japan, and the US must make progress in institutionalizing their Quadrilateral Security Dialogue, so that they can better coordinate their policies and pursue broader collaboration with other important players like Vietnam, Indonesia, and South Korea, as well as with smaller countries. 
Economically and strategically, the global center of gravity is shifting to the Indo-Pacific. 
If the region’s players don’t act now to fortify an open, rules-based order, the security situation will continue to deteriorate – with consequences that are likely to reverberate worldwide. 

Learning from China’s Industrial Strategy 
GENEVA – While the world watches anxiously for signs of US President Donald Trump’s next move vis-à-vis China, Chinese leaders remain focused on the next stage of their country’s ongoing economic transformation. 
What they do should interest everyone – especially US policymakers. 
China’s industrialization process, like that of other successful East Asian economies, has combined profit-led investment, active industrial policy, and export discipline. 
But that approach has its limits, exemplified in the numerous developing countries that have attempted to climb the same development ladder, only to become stuck on the middle rungs or even to fall back, owing to what Harvard University economist Dani Rodrik has called “premature deindustrialization.” 
China hopes to avoid this fate, with the help of “China Manufacturing 2025” (CM2025), a roadmap released by Premier Li Keqiang in 2015 to guide the country’s industrial modernization. 
The strategy focuses on developing advanced manufacturing sectors, but also considers how producer services, services-oriented manufacturing, and green technologies can complement that process. 
As part of CM2025, policy and financial support will be provided to spur technological breakthroughs in ten key areas, including next-generation information technology; high-end computer-controlled machine tools and robotics; space and aviation equipment; alternative-energy vehicles; and bio-medicine and high-performance medical devices. 
CM2025 has sometimes been portrayed as a return to old-school top-down mercantilist practices and import-substitution policies. 
But that reading overlooks China’s active experimentation with industrial and financial policies. 
In fact, that experimentation may hold valuable lessons for policy evaluation and innovation elsewhere. 
Not only are many developing countries now devising their own strategies for industrial upgrading and diversification; some developed economies, including the United States, are currently seeking to revive their manufacturing bases. 
Start with industrial policy. 
According to China’s strategy, by 2025, the country should have a set of internationally competitive multinational firms that have made progress in upgrading their positions in global value chains. 
Moreover, by that date, key Chinese industries should adopt international efficiency standards related to energy and material consumption and pollution. 
By 2035, China expects its economy to be fully industrialized. 
These broad objectives are underpinned by an array of specific domestic (and international) targets for market share in key areas. 
For example, production of integrated circuits should rise to 75% of domestic demand in 2030, compared to 41% in 2015. 
One of CM2025’s less-noticed components, financial-policy guidance, is also one of its more innovative. 
In order to reduce the cost of capital for manufacturing firms, the strategy calls for the creation of new financing channels, while instructing China’s development-finance institutions to increase their support for particular ends. 
Specifically, the Export-Import Bank of China should strengthen services for manufacturing firms to invest overseas, while the China Development Bank (CDB) should increase loans to manufacturing firms, with a view to “guiding” financing from other institutions, such as venture-capital and private-equity funds. 
This approach, China hopes, can drive progress toward its objectives for upgrading and reform, by creating a set of purpose-built financing vehicles – so-called government guidance funds (GGFs) – that are responsible for allocating public investment funds. 
As a report by McKinsey & Company puts it, this “more market-based investment approach” is a “bold experiment designed to improve the likelihood of success.” 
Exemplifying this approach, China’s state-backed Tsinghua Unigroup recently secured CN¥150 billion ($21.8 billion) in new financing to support upgrading in the country’s semiconductor industry. 
Of that financing, CN¥100 billion came from the CDB and CN¥50 billion came from the National Integrated Circuit Industry Investment Fund. a national-level GGF created in 2014. 
The role of GGFs will only grow. 
In 2015, 297 GGFs were created with slightly more than CN¥1.5 trillion of available capital – a fivefold increase from 2014. 
Municipal-level GGFs were the most numerous; but provincial-level GGFs led the way in terms of funding. 
Last year, two more national-level GGFs were created: a $30 billion state venture capital investment fund and a $50 billion state structural adjustment fund. In both cases, the main shareholder is a holding company owned by the State-owned Assets Supervision and Administration Commission. 
In January, China’s Silk Road Fund – along with other Chinese investors, as well as investors from Singapore and Japan – founded the $800 million Hou’an Innovation Fund, to invest in technology start-ups in areas like the Internet of Things, autonomous vehicles, cloud computing, Big Data, and artificial intelligence. 
Much remains to be seen about CM2025 and the use of these various new investment vehicles. 
But China appears poised to boost investment significantly in a range of new and advanced technologies in strategic sectors, while retaining equity stakes as they are developed and commercialized. 
If it succeeds, it will have laid the institutional foundations for new sources of growth. 
And, as the benefits of innovation are diffused throughout the economy, China will move closer to its goal: becoming a high-income country. 
China’s experiments with industrial and financial policies may end up providing emerging economies with valuable insight into how to avoid the middle-income trap. 
But, for a US concerned with its eroding manufacturing base, the lesson is already apparent. 
As Brad DeLong and Stephen S. Cohen have outlined, the US should act now to revive its pragmatic industrial-policy tradition, put finance back to work for the real economy, and invest in new activities that can reinvigorate a struggling middle class. 

Who’s Afraid of China’s Influence? 
HONG KONG – Since the Cold War ended, the West has invested huge amounts of resources in efforts to induce political liberalization in China, including through programs to promote the rule of law, civil society, transparency, and government accountability. 
The results have been disappointing. 
Far from becoming more democratic, China has lately been backsliding toward hard-line authoritarianism. 
And now it is investing resources in efforts to do some inducing of its own in the world’s democracies. 
China’s influence-peddling in the West has been the subject of media reports and think tank studies, and has elicited the concern of high-profile politicians, from US Vice President Mike Pence to former Australian Prime Minister Malcolm Turnbull. 
China’s “influence operations,” they argue, include cultivating ties with Western politicians, establishing Confucius Institutes around the world to promote Chinese language and culture, expanding the global reach of China’s official propaganda networks, and donations to and exchange programs with academic institutions. 
How should Western liberal democracies confront a China that is taking a page from their own playbook, as it exploits their openness to advance its ideological and geopolitical objectives? 
For starters, Western leaders and institutions should distinguish between state-sponsored activities and legitimate, mutually beneficial cultural, civic, and educational exchanges among private citizens and entities. 
To be sure, the Communist Party of China’s sophisticated “United Front” operation – which focuses on neutralizing opposition to its policies and authority, inside and outside China – often relies on private citizens to achieve its objectives. 
Private actors also have informal incentives to curry favor with China’s rulers by behaving in CPC-friendly ways. 
As a result, even ostensibly independent or private activities can carry political and reputational risks for Western organizations, which may be accused of acting as “agents of influence” for China. 
But that does not mean that Western entities should reject outright any opportunity for cooperation with Chinese entities and individuals. 
Such an approach would not only cause Western organizations and individuals to miss out on valuable opportunities; it also would strengthen the CPC’s capacity to control the flow of information, manipulate public opinion, and shape popular narratives. 
So while the West must exercise vigilance, it should avoid overreaction. 
A donation from a Chinese state-owned enterprise to, say, a Western academic or cultural institution must be handled with extraordinary care, if not rejected outright, because it could compromise the recipient’s reputation or constrain its freedom. 
But a gift from a wealthy Chinese businessperson should be welcomed, as long as it is transparent and includes no conditions that would infringe on the recipient’s mission. 
In fact, transparency is one of the most powerful mechanisms for protecting Western democratic processes from Chinese influence operations. 
For example, public-disclosure requirements regarding the sources and conditions of donations to politicians, political parties, and civic and academic institutions, as well as ownership stakes in media assets, would make it much harder for the Chinese government to exert its influence through ostensibly private actors. A shared code of conduct for dealing with China would also help to ensure that democratic values are upheld in any deal or collaboration. 
Upholding these values also means that Western governments must take care to avoid another kind of overreaction: targeting their societies’ own citizens of Chinese origin. 
Given China’s long record of exploiting its diaspora for economic and political gain, some in the West will be tempted to look upon all ethnic Chinese with suspicion, exposing them to discrimination and potentially even subjecting them to surveillance. 
But allowing ethnic Chinese to be harassed, intimidated, or punished for exercising their civil and political rights – say, by making political donations or speaking out on issues that matter to them, including those related to China – would be a grave injustice. 
It would also be self-defeating strategically: the soft but intense power of the democratic values that the West claims to defend constitutes the most effective defense against Chinese influence operations. 
Western institutions benefit from unparalleled resilience, thanks to the liberal-democratic values that underpin them. 
They cannot be easily subverted by an authoritarian regime, no matter how many cultural exchanges or language institutes it builds. 
In fact, what is most notable about China’s efforts to spread its influence abroad is not their success, but the ease with which they are exposed. 
Portraying them as a genuine threat to the world’s democracies not only betrays the West’s own insecurity, but also gives China more credit than it deserves. 

Will China Out-Innovate the West? 
NEW YORK – From the early nineteenth century to the early twentieth century, Western countries attributed their economic growth to the discoveries of “scientists and navigators.” 
A country needed only the “zeal” to develop “obvious” commercial applications, and build the facilities to meet demand for new products. 
Until recently, the Chinese believed the same thing. 
But now, Chinese businesspeople and entrepreneurs are increasingly showing not only the entrepreneurial drive to adapt to new opportunities, but also the desire and capacity to innovate for themselves, rather than simply copying what’s already out there. 
Indeed, more and more Chinese companies are realizing that they must innovate in order to get – and stay – ahead in the global economy. 
Several companies – notably Alibaba, Baidu, and Tencent – made breakthroughs, by offering digital-age infrastructure that facilitates innovative activity. 
And industrial firms have recently moved into robots and artificial intelligence. 
For its part, China’s government is evidently supportive of Chinese businesses developing a capacity to produce indigenous innovations. 
It no doubt recognizes that such innovations are all the more valuable when innovation remains weak in the West, where growth in total factor productivity (TFP) has continued its long slowdown. 
In recent years, China’s government has introduced initiatives aimed at increasing both entrepreneurship and innovation. 
It has shortened dramatically the process for forming a new company. 
It has built a vast number of schools, where Chinese children learn more about the world they will face. 
And it recently facilitated the entry of foreign experts to work on new projects in the business sector. 
The authorities have also recognized the importance of allowing more competition in the economy. 
Individuals should be freed up to start new companies, and existing companies should be freed up to enter new industries. 
Competition solves a lot of problems – a point that is increasingly lost on the West. 
At the World Economic Forum’s annual meeting in Davos, Switzerland, in January, Chinese officials discussed basic reforms that the government introduced two years ago to increase competition. 
Under the new policy, excess capacity now signals that supply should be allowed to contract and prompt redundant firms to exit the market. 
Of course, excess demand signals that supply should be allowed to increase, leading to the entry of new firms. 
The key insight is that when existing enterprises are protected from new market entrants bearing new ideas, the result will be less innovation and less “adaptation” to a changing world, to use Friedrich Hayek’sterm. 
Another argument can be made. 
In any modern economy, virtually every industry operates in the face of a largely unknowable future. 
The more companies an industry has thinking about a problem, the more likely a solution is to be found. 
A company that has been kept out of an industry might know something that all the companies in the industry do not. 
Or some unique experience may have furnished an individual with “personal knowledge” that is impossible to transmit to others who have not had the same experience. 
Whatever the case, society benefits – through lower prices, more jobs, better products and services, and so forth – when outsiders with something to add are free to do so. 
All of this was known to the great theorists of the 1920s and 1930s: Hayek, Frank Knight, and John Maynard Keynes. 
And now it is known to the Chinese, who understand that a country benefits when companies – each with its own thinking and knowledge – are free to compete. 
The West seems to have forgotten this. 
Since the 1930s, most Western governments have seen it as their duty to protect established enterprises from competition, even when it comes from new firms offering new adaptations or innovations. 
These protections, which come in myriad forms, have almost certainly discouraged many entrepreneurs from coming forward with new and better ideas. 
History is rife with evidence of the value of competition. 
In post-war Britain, into the 1970s, industries were controlled by exclusive clubs within the Confederation of British Industry, which barred new entrants. 
By the time Margaret Thatcher became prime minister in 1979, TFP had stagnated. 
But Thatcher put a stop to the Confederation’s anti-competitive practices, and Britain’s TFP was growing again by the mid-1980s. 
We are now seeing something similar in China. 
By 2016, China’s TFP growth rate had been slowing for a number of years. 
But since the reforms that year, it has been increasing. 
The West must address its great TFP slowdown, which has lasted since the late 1960s. 
Ending protection of incumbents from new entrants possessing ideas for new adaptions and innovations is a good place to start. 

Innovation with Chinese Characteristics 
SHANGHAI – China’s slowing growth has dominated global economic news this year – and for good reason. 
Beyond being the world’s second-largest economy, China is the largest manufacturer and consumer of raw materials; so any sign of weakening there is bad news for the global economy. 
But, while concerns about growth certainly merit attention, they should be viewed in the context of China’s longer-term economic trajectory, especially its emergence as a global hub of innovation. 
China is not given enough credit for how far it has come as an innovator. 
And yet, over the next decade, China could become not only the place where global companies conduct research and launch new products, but also the source of a low-cost and nimble approach to innovation that affects competition everywhere. 
This conclusion is based on an in-depth research project by the McKinsey Global Institute, which aimed to gauge where China stands in terms of innovation, by measuring innovation’s true impact – that is, how commercialized ideas actually fare in markets worldwide. 
Using a database of 20,000 public companies representing about 30% of global GDP, we looked at global revenue in industries that fit four innovative “archetypes”: customer-focused, efficiency-driven, engineering-based, and science-based. 
A Chinese industry was classed as strong in innovation if Chinese players were capturing more than 12% of global revenue, the equivalent of China’s share of global GDP, in that sector. 
The data show that China has built considerable strengths in industries fitting two of these archetypes: customer-focused and efficiency-driven. 
The first category includes industries like appliances, in which China has captured 36% of global revenues, and Internet services and software, where China accounts for 15% of global revenues. 
The second includes the solar-panel industry, where Chinese players have 51% of global revenue, and the textile industry, in which Chinese companies claim 20% of global revenue. 
Chinese companies have prospered in customer-focused industries because they have learned to tailor their goods to the needs of their country’s emerging consumer class. 
Whereas Chinese companies used to focus on designing products that were “good enough” – not quite matching the standard of Western products, but offering huge cost savings – they are now out to create products that are cheaper and better, in order to satisfy wealthier consumers. 
The sheer size of China’s market – comprising more than 100 million mainstream consumer households – also helps, as it enables companies to commercialize new ideas rapidly and on a large scale. 
In efficiency-based industries, China’s prowess is rooted in its role as the “world’s factory.” 
The country’s massive manufacturing ecosystem – 150 million factory workers, five times the supplier base of Japan, and modern infrastructure – enables process innovations that cut costs, raise quality, and shorten time to market. 
Chinese manufacturers are also moving up the value chain, building more “knowledge-intensive” products (for example, communications equipment) and developing flexible approaches to automation that blend labor and machinery to maintain responsiveness, while reducing cost. 
As for the other innovation archetypes, China has some work to do. 
To be sure, in engineering-based industries, Chinese companies have had some success. 
Indeed, while it takes time to build up a base of knowledge and experience strong enough to thrive in this area, some Chinese industries have learned fast, partly owing to the government’s efforts to facilitate technology transfer with global partners. 
Examples include high-speed trains (41% of global revenue), wind turbines (20%), and communications equipment (18%). 
But plenty of industries have not fared so well. 
China’s auto industry, for example, commands just 8% of global revenue, which largely reflects limited learning opportunities. 
China has the most catching up to do in science-based innovation, which includes industries like specialty chemicals, semiconductor design, and branded pharmaceuticals. 
In fact, despite significant investment in technical capabilities – the country spends more than $200 billion annually on research and development (second only to the US) – no Chinese industry in this area has captured more than 12% of global revenues. 
One key problem for China’s science-based industries is the long time horizon for new discoveries to be perfected and commercialized. 
So companies are developing uniquely Chinese approaches to such innovation. 
For example, to speed up the 15-year process of taking a new drug from the lab to market, Chinese pharmaceutical companies are implementing industrial-style approaches. 
Over the next ten years, China has a chance to move beyond merely absorbing and adapting global technologies to become a true innovation leader. 
If it succeeds, fears of a prolonged slowdown that hampers global growth will prove unwarranted. 
We estimate that innovation in China’s service industries, where productivity lags far behind that of developed economies, could create anywhere from $500 billion to $1.4 trillion in economic value per year by 2025. 
In manufacturing, where China can use its vast resources to lead the world in an era of digitized manufacturing, innovation can add $450-$780 billion in value each year. 
This would go a long way toward raising productivity enough to offset challenges like population aging. 
Most important, China’s emergence as a true innovator could turn it into a global R&D hub. 
After all, unlike today’s leading innovators like the US, China offers low costs and proximity to large – and largely untapped – markets, including its own, which enables the rapid deployment of new products. 
Even with rising wages, Chinese researchers – not to mention other kinds of labor – receive only 10-20% of what their advanced-country counterparts earn. 
With a combination of a massive market, low costs, flexibility, and ambition, China offers innovative companies from all over the world the chance to transform their ideas into commercial products more quickly and at lower cost than ever. 
As more of them recognize this, and move their operations to China, all sorts of markets could be disrupted. 
And, eventually, the Chinese model of innovation could become the global standard. 

Trumpism Down Under 
SYDNEY – Thirty years ago, a colleague of mine in the British government who had ministerial responsibilities in Africa and Asia hung the world map in his office upside down. 
Placing what was then called the Third World at the top, he claimed, improved his understanding of those countries’ problems and perspectives. 
But, for the British, the real “down under” – the country you would reach if you turned the world on its head – is Australia. 
Schoolchildren used to be taught that, if you dug a straight tunnel through the planet, Australia is where you would end up. 
Their seasons were the opposite of ours, as were the days – a point that was driven home when, in the early morning hours, we listened to cricket commentaries from Brisbane or Adelaide. 
While Britain slept, the Aussies played in the sunshine. 
Australia is a beautiful and prosperous country, with a grand landscape and fine cities, most notably Sydney and Melbourne. 
It is a rumbustious democracy with a profound appreciation of the rule of law, a free and open society that has provided a haven for immigrants and refugees from all over the world. 
While its past treatment of its indigenous population has undoubtedly been problematic, it has had the courage and maturity to acknowledge unpleasant truths. 
Yet this admirable country now faces an existential challenge. 
As Australia’s relationship with the United States comes under increasing strain, its political dynamics are becoming increasingly complex and perilous. 
For decades, Australia has had a close partnership with the US, not least in security terms. 
But, in his year since taking office, President Donald Trump has not only challenged ties with many of America’s traditional allies; he has also worked actively to undermine the systems of global and regional cooperation that the US itself spearheaded and underwrote. 
He has reversed his predecessors’ hard-won progress in building relationships and striking mutually beneficial deals, including the Iran nuclear agreement, the Trans-Pacific Partnership trade deal, and the Paris climate agreement. 
Contrary to Trump’s claims that his policies will “Make America Great Again,” he is deeply compromising his country’s role in the world. 
Long-standing allies regret that the US, a country they have long admired, is now being steered by a mendacious, untrustworthy diplomatic arsonist. 
This is bad news for Australia, which would clearly like to build a stronger partnership with regional powers that share its democratic values and interests, including India, Japan, and the US. 
Such an alliance would not seek to contain China, but to ensure that it does not abuse its power and stoke regional tensions and instability. 
Without a reliable regional counterweight, that is exactly what China seems eager to do. 
Like Trump, Chinese President Xi Jinping has reversed many of his predecessors’ policies, including some of the market-oriented reforms pushed through by Deng Xiaoping. 
Having cultivated a Mao-style cult of personality, Xi proclaims that the time has come to Make China Great Again. 
So foreign-policy restraint has gone out the window, and Xi has enabled the Communist Party of China to reassert its control over the economy. 
Free enterprise is now once again subordinated to the public sector. 
The “Communist united front” has been let off its leash. 
Every Communist regime since the Russian Revolution of 1917 has sought to use the “united front” to extend the power of the party, both at home and abroad, in ways that may be subtle or overt, but are invariably underhanded. 
Today’s Chinese united front is no exception, and Australia is one of the countries that is being targeted. 
Australia has strong economic ties with China, which buys much of what it mines and grows. 
For its own part, China has exported money and people to Australia, from the business world to academia. 
Most Chinese in Australia, some of whom regard their new home as a haven from repression and corruption, have become enthusiastic Australians with a proud Chinese heritage. 
But a few Chinese in Australia have allowed themselves to become foot soldiers of China’s Leninist (not really communist) dictatorship, manipulated by Chinese diplomats and a few businessmen. 
The effects of their activities can be seen in the conduct of foreign policy and in attempts to mobilize votes against the government. 
Now Australian Prime Minister Malcolm Turnbull’s administration has responded to this activity, introducing legislation that bans foreign donations to political parties and activist groups, including some charities, and requires former politicians, lobbyists, and executives working for foreign interests to register if they are to be involved in Australian politics. 
The move is explicitly intended to prevent foreign – and, specifically, Chinese – interference in Australia’s democratic life. 
Turnbull’s crackdown on foreign interference in domestic politics amounts to a bold attempt to strengthen Australia’s position in the global South. 
The country, Turnbull is making clear, is prepared to be a friend to China, but it will not be bullied or manipulated. 
A united front of democracies would certainly help get that point across. 
But, beyond failing to support Australia, Trump’s antics are actually undermining Turnbull’s effort. 
Australia, like so many other traditional allies, surely yearns for the day when Trump, with his crude and self-defeating nationalism, can no longer harm his own country and others. 

A Chinese Model for Foreign Aid 
SINGAPORE – Last month, the Bill & Melinda Gates Foundation released a status report tracking progress on the United Nations Sustainable Development Goals (SDGs). 
The data, which were meant to highlight efforts to eradicate extreme poverty and reduce premature deaths, was also intended to cajole. 
Countries can, and must, do more to address the global development challenges that the planet collectively faces, the report concluded. 
No country was singled out in the Gates report for its potential to restore the “world’s commitment to development.” 
Rather, “leaders everywhere” bear responsibility for ensuring that the SDGs are met by 2030. 
But we believe there is one country that can do more than others to build the world envisaged by the SDGs: China. 
Two years into the SDG program, international development is at a crossroads. 
The United States, long the torchbearer of foreign aid, is retreating; so is Europe (albeit to a lesser extent). 
But China, with its newly articulated global ambitions, has an opportunity to reinvigorate the conception and delivery of humanitarian assistance. 
Adopted by the UN General Assembly in 2015, the SDGs outline a vision for global development that targets poverty, education, public health, inequality, sustainability, and climate action over the next 15 years. 
It presents a broad vision for development, whereby issues once viewed as country-specific are treated as challenges for the entire world to tackle collectively. 
By contrast, the Millennium Development Goals, which ended in 2015, were more narrowly focused, and primarily targeted at issues affecting poor countries. 
But the Gates’ study suggests that some of the SDG targets are already in jeopardy. 
For example, the health goal (SDG 3), which includes a target for eliminating preventable deaths among newborns and children, is unlikely to be achieved in the allotted timeframe. 
At the current pace, mortality reduction in South Asia and Africa will not be realized until mid-century. 
Clearly, more investment is needed globally in the types of interventions that have proven effective locally. 
Ethiopia’s Health Extension Worker program and Malawi’s Health Surveillance Assistant program have been proven to reduce child mortality. 
Aid dollars should be earmarked to help programs like these expand to other regions. 
Instead, the opposite is happening. 
The growing isolationism associated with the populist backlash around the world is having severe consequences for foreign assistance. 
According to the OECD, bilateral aid to the world’s least-developed countries fell by nearly 4% in 2016. 
This is an alarming drop for these countries, given that official development assistance (ODA) accounts for more than two thirds of the aid they receive. 
The US, which remains the world’s largest donor for nutrition programs and for maternal and child health initiatives, is leading the funding retreat. 
President Donald Trump’s 2017 budget proposal includes a staggering 45% cut to funding by the US Agency for International Development for water and sanitation projects, a 26% cut to global health funding, and the elimination of funds for family planning. 
While it is not clear whether Congress will support Trump’s budget request, which would amount to billions of dollars in lost aid, even a minor reduction in US aid spending would hurt many of the world’s poorest. 
The US is not alone in its foreign aid retrenchment. 
The European Union’s 2018 draft budget proposes a €90 million ($106 million) cut to development spending, while Austria, Germany, and Italy have all diverted development assistance budgets towards migration crises viewed as imminent national security threats. 
These are troubling trends, because private philanthropy cannot replace aid withdrawn by governments. 
The world needs a new champion for international development, and China should assume the role. 
With weakening ODA commitments from traditional donors, China has a chance to lead in human development, poverty alleviation, and public health spending. 
It is true that China’s aid model differs from the West’s. 
Europe and the US have historically focused on funding health care and education initiatives, while encouraging civil-society growth and participation. 
China, on the other hand, grants aid on a bilateral basis, and has typically targeted its funding toward infrastructure projects. 
But Chinese leaders have also recently shown interest in aid to strengthen civil society and improve livelihoods. 
Although Chinese ODA is still a fraction of what OECD countries spend, China has signaled its interest in becoming a development leader, especially in the health sector. 
At the 2015 UN Sustainable Development Summit in New York, China pledged $2 billion to help implement the SDG agenda, and China’s flagship “Belt and Road Initiative” includes health cooperation as part of its proposed strategy. 
In 2014, China also committed $47 million to help contain the Ebola outbreak in West Africa. 
While that was significantly lower than the US pledge of $1.8 billion, China was among the fastest to deliver on its commitment. 
China’s geopolitical and economic influence is growing, and so, too, must its role in promoting international peace and development. 
Skepticism about China’s development intentions will no doubt emerge, given China’s political and ideological differences with the West. 
But the skepticism could yield positive results, especially if it prompts Western powers to reevaluate their foreign aid retreat. 
Even if it does not, China has the tools to become a leader in international development. 
And, having lifted some 470 million of its own citizens out of extreme poverty between 1990 and 2005, it also has the experience. 
But, more than anything, China now has the political opportunity. 
As the US and Europe turn inward, ensuring the SDGs’ success will increasingly depend on encouraging – and becoming accustomed to – Chinese leadership. 


Can China Save the Global Order? 
ANNAPOLIS – At the World Economic Forum’s Annual Meeting in Davos in January, Chinese President Xi Jinping, drawing on China’s own recent experience, spoke in defense of globalization, and offered a vision of inclusive, sustainable development. 
With US President Donald Trump’s administration turning its back on internationalism, China has stepped forward to assume the mantle of global leadership. 
But can China really provide the alternative solutions needed to keep the engines of globalization running? 
The post-war liberal order has been in serious trouble since the 2008 financial crisis, which weakened Western economies and undermined global-governance bodies and regulatory institutions. 
According to International Monetary Fund Managing Director Christine Lagarde, emerging economies accounted for over 80% of global growth in the aftermath of the crisis, and now contribute 60% of global GDP. 
Meanwhile, emerging powers, particularly China and Russia, have further undermined key liberal institutions and values. 
Russia’s 2014 annexation of Crimea and intervention in Syria have challenged principles of humanitarian interventionism such as the “responsibility to protect” (R2P); and a rising China is confronting the West’s supremacy – in hard- and soft-power terms – in the post-war global order. 
The US has responded to these developments by trying to create a liberal order 2.0, and by pursuing a strategic pivot to salvage the status quo in Asia. 
Many observers have focused on America’s goal of preventing Chinese regional dominance. 
But the US also wants to defend and strengthen the principles that made post-war Asia’s success possible – what former US Assistant Secretary of State Kurt Campbell calls Asia’s “operating system.” 
Thus, the Obama administration pursued democracy promotion in Myanmar; enforced rules protecting freedom of navigation at sea; and concluded the Trans-Pacific Partnership agreement between the US and 11 other Pacific Rim countries. 
Meanwhile, in December 2015, the US Congress ratified the IMF’s 2010 Quota and Governance Reforms; and in October 2016, the IMF Executive Board added the Chinese renminbi to the basket of currencies comprising the Fund’s unit of account, Special Drawing Rights. 
If Hillary Clinton had won the 2016 US presidential election, we would now be seeing a continued US-led effort to reinvigorate and preserve the longstanding status quo in Asia and beyond. 
But with Trump in office, many fear that existing international arrangements could soon be upended. 
America’s interest in maintaining the liberal world order stems from its role as what political scientists call a “responsible fiduciary” and “privilege taker” in that system. 
But Trump sees US hegemony as a burden, and seems oblivious to the privileges that it affords, not least the many benefits associated with controlling the world’s main reserve currency. 
But, at the same time, Trump does not want to cede America’s global preeminence, which means that he could show a penchant for trade wars, or even military conflicts. 
In considering China’s role in such a world, it is worth noting a fundamental shift in Chinese thinking since the late 2000s, away from concern with international status and toward a narrower focus on national rejuvenation, or the “Chinese Dream.” 
For example, an analysis of Chinese media by Harvard University’s Alastair Iain Johnston concludes that, “Instead of a focus on anti-foreign ‘hostile forces,’ Xi’s primary ideological message is the ‘great revival of the Chinese nation.’” 
Foreign-policy realists define great-power status in terms of a country’s self-perception or material capacities. 
For China, however, status is conceived in the context of its relationship with the established authority, namely the West. 
Starting in the 1990s, China began to see the US and the West as representing the global mainstream. 
While Chinese leaders might not aspire to join the West, they have certainly sought its recognition. 
They do not want China to be perceived as a hostile revisionist power, and cast into the “outgroup” of the existing order. 
This is why China began to gravitate toward the West and seek further integration into the global economy. 
The government’s reformist ideology dictated that China “connect with the international track.” 
But, after the 2008 financial crisis, the Chinese suddenly discovered that the “international track” was in trouble. 
By necessity, but also by choice, China has since become a self-centered, “post-responsible” power. 
It is now less constrained by the status quo, and more intent on changing it. 
Fortunately, China is not acting like a traditional revisionist power, and it remains deeply committed to economic globalization. 
Chinese leaders see their country as the new engine of that process. 
Since 2013, Xi has been rolling out China’s massive “one belt, one road” program, designed to stimulate growth through global connectivity and infrastructure investment. 
China does not want a divided Asia or fragmented regional blocs built along geopolitical fissures, so it is cultivating international comity through shared interests. 
But China will face a unique set of problems as it tries to carry the torch of economic globalization forward. 
For starters, it is still a developing country, and its domestic landscape is fraught with political perils and economic uncertainties. 
Xi’s government is struggling to maintain domestic stability as it moves China away from labor-intensive, investment-heavy economic growth toward a model based on domestic consumption and services. 
The primacy of this domestic agenda means that China’s attempt to lead global change will lack a clear vision and coherent strategy. 
A second problem stems from China’s incomplete transition on the world stage. 
After prevailing in World War II, the US immediately and undeniably dominated the globe. 
China, in seeking to lead the next stage of economic globalization, enjoys no such geopolitical power and legitimacy. 
Observers in the West and the developing world question whether the solutions China is offering are genuine public goods; many suspect that China’s “one belt, one road” initiative, for example, is a self-serving, unilaterally imposed scheme. 
That uncertainty underscores a central point: while the liberal world order could be in trouble, a Chinese-led alternative is not yet discernible. 

Beyond GDP Growth in China 
SHANGHAI – China owes its economic-growth miracle largely to local governments. 
But, as the country attempts to build a more modern and sustainable economy, in a context of lower overall growth, local governments need to adapt. 
What will happen when they do? 
Despite the occasional inappropriate intervention, local governments have been very successful in preserving the market and fostering the spirit of entrepreneurship over the last three decades or so. 
They have promoted local infrastructure investment, reined in bureaucracy, created an attractive business environment, and enacted preferential short-term supportive policies. 
But it was always GDP growth that was their main – and, in a sense, only – objective. 
This focus on GDP growth is a direct result of the incentives created by the Communist Party of China (CPC), which has long promoted local officials based exclusively on the GDP gains they oversaw. 
According to recent research by Li Xing and his colleagues, this political competition caused the central government’s growth objectives to be significantly amplified at the local level: the lower the level of government, the more ambitious the objectives have been. 
In fact, to boost their chances of promotion, local officials would aim to exceed even the highest established targets, viewing them as a lower limit. 
For example, Li’s research showed that in 2006-2010, the average provincial growth target was 10.15% – which was 2.6 percentage points higher than that of the central government. 
Yet the actual provincial growth rate for that period was, on average, 13.07% – nearly six percentage points higher than the central government’s target. 
Those targets ensured that, whatever GDP growth they realized local governments were always striving for more growth. 
But things have begun to change in recent years, with the gap between growth targets at the national and local levels narrowing progressively. 
According to my estimates, since 2013, the actual growth rates of the eastern coastal provinces have been only slightly higher than their target rates – a far cry from the 3-4% surplus growth recorded in the previous ten years. 
For some of China’s inland provinces, such as Inner Mongolia, even meeting established targets has proved difficult, to the point that failure to do so is considered acceptable. 
This partly reflects weakening prospects for GDP growth, though the actual decline may not be as large as it seems. 
Last year, officials from Liaoning, Tianjin, and Inner Mongolia publicly acknowledged that they had previously overestimated their growth contributions. 
The subsequent announcement that, as of next year, the National Bureau of Statistics in Beijing would take the lead in local GDP accounting – together with the growing acceptance of lower growth rates – impelled provincial governments to reassess their reported statistics. 
The results were stark: reported nominal GDP growth rate for China’s 31 provinces dropped from 13.8% in the third quarter of 2017 to 4.3% in the fourth quarter, even though China’s overall GDP has remained consistent. 
For nine provinces – including Shanghai, Zhejiang, and Shandong – the rate of nominal GDP growth turned negative. 
While this slowdown may be a cause for concern, particularly in the places where it has turned negative, it is not all bad. 
After all, economists have long criticized China’s local governments for their excessive focus on GDP growth, which fails to account for important components of human welfare like physical health and a clean environment. 
To address this failing – while coping with economic conditions that simply cannot deliver double-digit growth indefinitely – China’s central leadership has, in the last five years, begun to change the way it evaluates local officials’ performance. 
Now, beyond GDP growth, local governments must work to transform and upgrade the local economy, foster technological innovation, protect the environment, reduce poverty, and mitigate financial risks. 
The goal, of course, is to harness local governments’ demonstrated ability to bring about change to address some of China’s pressing challenges. 
But the fact remains that GDP growth is a lot easier to measure than many of these new indicators, meaning that China’s much-lauded incentive system is about to become more complicated and less certain. 
At last year’s 19th National Congress of the CPC, Chinese leaders reminded local officials that, when it comes to growth, they should be focused on quality, not quantity. 
This is a positive – and necessary – step. 
But, if local governments are to achieve the same level of success as they did when their focus was GDP growth, China’s leaders will need to find an alternative to the current incentive system and a way to discipline its local officials, who have served the country’s economic development so well in the past. 
And that will be a serious challenge. 

China’s Misguided Exchange-Rate Machinations 
BEIJING – On August 11, 2015, the People’s Bank of China (PBOC) established that the central parity of the renminbi’s exchange rate against the US dollar would be set with reference to the previous trading day’s closing price, within a 2% band. 
It was a bold step toward a more flexible, market-driven exchange rate. 
But the announcement of the reform caused the market to panic, triggering a 3% decline in the renminbi in just four trading days. 
So it was quickly abandoned. 
That policy reversal, while understandable, is regrettable. 
For the rest of 2015, the PBOC struggled to prevent the renminbi from weakening. 
Having spent a huge amount of foreign-exchange reserves, it decided in February 2016 to introduce a new rule for setting the central parity rate. 
According to the replacement rule, the central parity rate would take into account not just the previous trading day’s closing price, but also the “theoretical exchange rate” that would keep the index of the China Foreign Exchange Trade System, a 24-currency basket, unchanged over the previous 24 hours. 
In other words, whenever there was a change in the US dollar index, the PBOC would have to intervene in the foreign-exchange market to align the market-determined renminbi-dollar exchange rate with the theoretical exchange rate that kept the CFETS index stable. 
According to the PBOC, with an uncertain dollar index, the introduction of a basket of currencies into the price-setting process was needed to enable two-way fluctuations of the renminbi-dollar exchange rate. 
The market was allowed to verify whether the PBOC had followed the rate-setting rule, but it didn’t determine the exchange rate; that task was carried out by the PBOC. 
In any case, when the dollar index is rising, the new rule seemed to work just fine. 
Given persistent downward pressure on the exchange rate, if the PBOC allowed the renminbi to fall against the rising dollar index, the CFETS index would stay more or less constant. 
This meant that the PBOC could follow the rate-setting rule without resorting to intervention too often. 
But, all else being equal, if the dollar index was falling, the PBOC would have to set a higher central parity rate for the renminbi. 
This implies that the PBOC could be forced to sell its US dollar reserves, already substantially depleted, to push up artificially the closing price of the renminbi and keep the spot rate within the 2% band. 
In July 2017, the PBOC decided to make an additional change to the rate-setting rule to correct for “big market swings” and “irrational herd behavior.” 
By introducing a so-called “countercyclical factor” to the rate-setting equation, the PBOC attempted to temper the disproportionate impact of depreciation expectations, relative to improvements in the Chinese economy’s fundamentals, on the exchange rate. 
The logic is debatable. 
But the real problem with the change is that no one outside the PBOC knows how the countercyclical factor is quantified, much less how it is weighted against the previous day’s closing price or the theoretical exchange rate. 
As a result, the market does not merely have a substantially reduced role in setting the exchange rate; it can’t even check whether the PBOC is following its rate-setting rule for the central parity. 
This means that the monetary authorities have even more discretion than they had before. 
The August 2015 reforms were rightly aimed at making China’s exchange-rate system more transparent, market-driven, and flexible. 
With the new rule, the PBOC effectively backpedaled. 
And it didn’t have to: with the benefit of hindsight, it seems reasonable to assume that, had the PBOC simply been more patient, it could have stuck with the August 2015 reform. 
Within a few weeks or even days, calm probably would have returned to the market, and the PBOC would have made important progress. 
In recent months, the Chinese economy has shown credible signs of stabilization; capital outflows have ebbed, at least for the time being; and the financial market has remained much calmer than in 2015. 
In this more favorable context, the PBOC, rather than churning out unnecessarily complicated new rate-setting rules, needs to return to reform. 

China’s Solitary Development Model 
BERKELEY – It seems that China’s leaders have now forsaken Deng Xiaoping’s advice to tao guang yang hui (“keep a low profile”). 
In declaring a “new era” for China during October’s 19th National Congress in Beijing, President Xi Jinping presented the Chinese system of governance as a model for other countries to emulate. 
Leaders who “want to speed up their development while preserving their independence,” Xi said, should look to China as “a new option.” 
Developing countries, particularly in Southeast Asia and Sub-Saharan Africa, seem awestruck by this possibility. 
China’s official news agency, Xinhua, has even suggested that as the West’s democracies falter, “enlightened Chinese democracy” could offer a path forward. 
Amid all the lofty rhetoric, it is worth asking: what, precisely, is the Chinese model of economic and political development? 
And, is it actually preferable to the alternatives? 
China’s model comprises a number of key characteristics, including authoritarian governance buttressed by the perception of stability; state-guided industrial policy and finance; massive infrastructure investments; rural industrialization backed by small-scale agriculture; and openness to foreign trade and technology. 
This model has, no doubt, produced rapid economic growth in China over the last three decades, lifting hundreds of millions of people out of poverty. 
But the implication that the first ingredient – authoritarianism – is necessary for rapid development misses the mark. 
In fact, it is this characteristic of the Chinese system that should give other countries the greatest pause. 
Consider China’s East Asian neighbors – in particular, Japan, South Korea, and Taiwan. 
Each has achieved high growth through state-guided industrial policy, rural industrialization, and openness to trade. 
But Japan achieved these objectives within the framework of its postwar democracy, while South Korea and Taiwan have been democracies for three decades. 
Authoritarianism, in other words, served no necessary modernizing role. 
Democracy is, to be sure, exasperatingly slow and often contentious. 
But its deliberative and electoral processes help mitigate conflicts, especially in heterogeneous and conflict-ridden societies. 
Even in a more homogeneous country like China, the absence of open public discourse does the opposite, as evidenced by the state’s mishandling of ethnic unrest among Tibetans and Uighurs. 
Without a strong civil society or an independent judiciary to check government power, Chinese leaders have, on many occasions, made catastrophic errors in judgment. 
Look no further than Mao Zedong’s Great Leap Forward or the Cultural Revolution. 
Xi, too, has blundered. 
For example, his decision to order China’s state-owned enterprises (SOEs) to prop up China’s falling stock market in 2015 was an epic miscalculation. 
Once foreign exchange reserves held by the People’s Bank of China stopped flowing to struggling SOEs, the market fell to the same low levels as before intervention. 
By that point, hundreds of billions of dollars had been wasted. 
The absence of political checks and institutional mechanisms for public scrutiny has also encouraged abuse of power and high levels of corruption, contributing to high inequality, arbitrary land grabs, unsafe working conditions, food safety scares, and toxic pollution, among other problems. 
While Xi’s energetic anti-corruption efforts may stem some injustices, without fundamental political reform, his campaign against dishonest party officials is likely to be a Sisyphean task – when it is not merely a ploy to curb potential political rivals. 
Economic management suffers from similar opacity. 
At the moment, there are few, if any, checks on debt-fueled investment by SOEs or politically connected firms. 
This shortcoming, to the extent that it results in massive misallocation of capital, is and will remain a source of major macroeconomic uncertainty for China. 
As China’s economy becomes more complex, the absence of transparent and accountable governance processes, combined with frequent crackdowns on civil society and efforts to enforce conformity and discipline, will ultimately stifle entrepreneurship and innovation. 
It does not help that, while China’s expenditure on research and development as a share of GDP is now quite high, much of it is in the public sector. 
If the SOEs remain too-big-to-fail, this will create a further drag on innovation. 
As China graduates from the “catch-up” phase of economic development, addressing this constraint will only become more important. 
The lack of openness and transparency could also test political stability. 
In the face of crisis, China’s leaders often overreact by repressing dissent. 
Collective and pragmatic leadership in recent decades has done a reasonable job of managing the problem, but Xi’s consolidation of power, and the cult of personality surrounding him, could exacerbate instability. 
Democratic governments, for all their messiness, are less fragile, as they draw their legitimacy from pluralism and political contestation, rather than from high economic growth or nationalist appeals. 
Judicial decisions overturning President Donald Trump’s arbitrary travel bans in the United States, or similar rebukes of Indian Prime Minister Narendra Modi’s attempts to criminalize dissent, are examples of how institutional autonomy strengthens the resilience of democratic political systems – resilience that China lacks. 
Despite the official narrative, most of the features of the Chinese system of governance that Xi has championed have little to do with him. 
They are vestiges of China’s imperial or early communist governments: a performance-based meritocratic promotion system; an organizational framework that ensures top-down loyalty without compromising the quality of local governance; and a unique system of political centralization combined with economic and administrative decentralization. 
In other words, for all its allure, the Chinese model is deficient in some basic respects, and not easily reproducible in others. 
Any country that takes to heart Xi’s invitation to emulate China but does not have a similar organizational history will likely be unsatisfied. 
Not only is China politically unique, but it also possesses a large and increasingly prosperous domestic market that enables it to lure foreign investment on its own terms. 
So, no matter what the Middle Kingdom’s newest emperor might claim, development with Chinese characteristics is really only for China. 

China Must Do More than Mediate 
Despair is dangerous in diplomacy. 
But North Korea's latest actions are making much of Asia hopeless. 
Only China, long reluctant to flex its diplomatic muscles, now has the power to find a diplomatic solution to the North Korean nuclear problem. 
But the question everyone from Tokyo to Seoul and from Washington to Moscow is asking is this: will China act in time? 
China's influence on North Korea is uniquely powerful. 
China is keeping its increasingly desperate neighbor on life support by providing most of the non-food aid and energy that North Korea receives from abroad. 
But to prevent North Korea from realizing a fait accompli in its pursuit of nuclear weapons, China must do more than mediate between North Korea and the US, the role it has so far played. 
Instead, it must now prompt North Korea to halt its nuclear development activities and return to the six-party talks with America, Japan, China, Russia, and South Korea that broke up weeks ago. 
Recent developments indicate that North Korea's nuclear threat is becoming more serious by the day. 
Two weeks ago, North Korea declared that in June it successfully reprocessed some 8,000 spent nuclear fuel rods and now possesses "nuclear deterrence," suggesting that Kim Jong Il's regime may actually be making atomic bombs. 
Not only does North Korea show little interest in holding another session of the six-party talks that the Bush administration and the other participants are calling for; it now wants to ban the Japanese from participating. 
Kim accuses Japan of introducing unnecessary obstacles and complications into resolution of the nuclear question by raising the sensitive issue of North Korea's abduction of Japanese citizens. 
But this is nothing more than a political diversion. 
It is inconceivable that multilateral negotiations could result in a breakthrough toward a diplomatic solution while North Korea is actively engaged in pursuing its nuclear weapons program. 
It must be clear by now that Pyongyang is determined to keep its nuclear weapons program in order to obtain a credible assurance from the US that its bizarre and repressive regime will be allowed to survive. 
Unless America accommodates North Korea's demands for concluding a nonaggression treaty and ending "hostile" policies, Kim's regime is likely to keep its nuclear weapons program as its most effective deterrent against any preemptive US attack--something that the Bush administration, indeed, refuses to rule out. 
America's military victory in the war in Iraq probably hardened North Korea's resolve to rely on the nuclear option as its primary means of ensuring regime survival. But that should not surprise anyone: the North Korean regime has always been committed to making military power the "first priority" in the state budget. 
This contrasts sharply with policies pursued by China and Vietnam, Asia's two other communist powers. In both countries, the leadership places military power last in their national development strategies. 
It would be difficult for the US to change the highest priority of its own national security strategy--preempting terrorism and fighting the spread of weapons of mass destruction--especially with another nuclear threat looming in Iran. 
Insofar as the goal of preventing the proliferation of nuclear weapons on the Korean peninsula is concerned, the US has thus succeeded by sustaining an ad hoc concert of powers thus far with China, Japan, Russia, and South Korea. 
Indeed, in their first-ever joint declaration, Chinese Prime Minister Wen Jiabao, Japanese Prime Minister Junichiro Koizumi, and South Korean President Roh Moo Hyun issued a plea on the sidelines of the ASEAN summit held in Bali on October 8 for a nuclear-free Korean peninsula. 
All sides realize that failure to achieve this would most likely result in a nuclear chain reaction with Japan, South Korea, and perhaps even Taiwan embarking on their own nuclear weapons development programs. 
That scenario is China's worst nightmare. 
So the question now is what can China do to freeze--and, if possible, to reverse--North Korea's nuclear program. 
China finds itself in a delicate position, pulled in one direction by its desire to avoid a precipitous North Korean collapse, and in the opposite direction by its overriding need to deepen economic relations with the US, Japan, and South Korea. 
This is why at the UN Security Council China opposed any military action or sanctions against North Korea, a country for which it sacrificed almost one million troops during the Korean War in 1950-53. 
It is in China's vital national interest to halt North Korea's quest to become another declared nuclear power. 
China's success here would not only enhance its own international prestige, but would also contribute immensely to promoting regional stability and prosperity throughout East Asia. 

China’s Dam Problem With Myanmar 
BERLIN – China is a big fan of dams. 
Indeed, over the last 50 years, the country has constructed more dams than all other countries combined. 
But there is one dam that China never managed to get built: the Myitsone Dam in Myanmar. 
And Chinese leaders can’t seem to let it go. 
The Myitsone Dam was to stand at the headwaters of the Irrawaddy River, Myanmar’s lifeline. 
It was designed as a hydroelectric power project, which would generate energy for export to China, at a time when Myanmar’s economy depended on its giant neighbor. 
Ruled by a brutal military junta, Myanmar faced crippling United States-led sanctions and broad international isolation. 
Where others saw human-rights violations, China saw an opportunity to advance its own strategic and resource interests. 
When the Myitsone Dam project was introduced, China was also establishing a foothold in Myanmar’s Kyaukpyu port on the Bay of Bengal, from which it would build energy pipelines to southern China. 
A stronger presence in Myanmar’s Irrawaddy, which flows from near the Chinese border to the Andaman Sea, promised to provide China with a shorter, cheaper trade route to Europe. 
As an added benefit, the Myitsone project – and, more broadly, China’s relationship with Myanmar – would advance China’s ambition of challenging India’s advantage around the Indian Ocean. 
Everything seemed to be going according to plan. 
But in 2011, just two years after the $3.6 billion project got underway, Myanmar’s government suddenly suspended the dam’s construction – a slap in the face to China. 
Moving toward democratic reform, President Thein Sein’s government was eager to cast off the view of Myanmar as a Chinese client state. 
Sein got what he wanted. 
Myanmar’s reversal on the Myitsone Dam became a watershed moment for the country’s democratic transition. 
It helped to bring an end to Myanmar’s international isolation, and an easing of the long-standing Western sanctions that made Myanmar so dependent on China in the first place. 
In 2012, Barack Obama became the first US president ever to visit Myanmar. 
Last year, Myanmar elected its first civilian-led government. 
The National League for Democracy, led by the former political prisoner Aung San Suu Kyi, won the election in a landslide. 
Though Suu Kyi was blocked from running for the presidency directly, she is the most powerful figure in Myanmar’s ten-month-old government. 
Alongside all of this democratic progress, however, Myanmar’s relations with China cooled considerably. 
After work on the Myitsone Dam halted, several other dam and energy projects were also put on hold, though Chinese firms did manage to complete multibillion-dollar oil and gas pipelines from Myanmar’s western coast to southern China in 2013-2014. 
But China has not given up on the Myitsone project. 
Indeed, President Xi Jinping seems to be trying to seize the opening created by Suu Kyi’s efforts to defuse bilateral tensions – her first diplomatic trip since the election was to Beijing – to pressure her to reverse Sein’s decision. 
Hong Liang, China’s ambassador to Myanmar, declared three months ago that Myanmar should be paying $50 million in interest alone for each year the project is suspended. But if the project were completed, Hong continued, Myanmar could reap high returns by exporting much of the electricity to China. 
The threats have not fallen on deaf ears. 
Before her visit to Beijing, Suu Kyi tasked a 20-member commission to review proposed and existing hydropower projects along the Irawaddy, including the suspended Myitsone deal. 
But Suu Kyi, who disparaged the dam project when she led the opposition to the junta, remains unlikely to restart the Myitsone project. 
As much as she wants China off her back – an objective that surely drove the decision to launch the commission – actually agreeing to resume work on the deeply unpopular Myitsone Dam would be too politically compromising to consider. 
In fact, within Myanmar, the Myitsone project is widely regarded as a yet another neo-colonial policy, designed to expand China’s influence over smaller countries, while feeding its own resource greed, regardless of local conditions or needs. 
And there is plenty of evidence to support this reading – beginning with China’s demand for most of the electricity, even as much of Myanmar suffers from long daily power outages. 
Moreover, the construction that did take place had serious consequences for the people of Myanmar. 
By flooding a large swath of land, the project displaced many subsistence farmers and fishermen, fueling a popular backlash that contributed to the end of a 17-year ceasefire between the Kachin Independence Army and government forces. 
(Ironically, as part of its effort to get Suu Kyi on their side, the Chinese are now seeking to mediate peace talks between the government and the rebels, who, it has long been believed, receive arms from China.) 
Chinese pressure to restart the Myitsone project is reviving anti-Chinese sentiment in Myanmar. 
Indeed, while Suu Kyi was in Beijing, anti-Chinese protests flared anew back home. 
At a time when Myanmar is being wooed by all major powers and eager international investors, there is no incentive for the government – much less the public – to ignore the environmental and human costs of China’s projects. 
It is time for China to recognize that the decision to end the Myitsone project will not be reversed. 
It can hope that Suu Kyi’s commission makes some face-saving recommendations, such as paying compensation to China or making new deals for smaller, more environmentally friendly power plants. 
But, with Suu Kyi committed to a neutral foreign policy, China’s days of sucking resources from Myanmar, without any regard for the environmental or human costs, are over. 

China’s Latest Five-Year Plan 
CAMBRIDGE – I was in Beijing last month when the Chinese government released a preliminary summary of its 13th Five-Year Plan. 
This is an important document for understanding where China is headed in the 2016-2020 period. And yet China’s five-year plans just aren’t what they used to be. 
The Chinese economy is no longer the state-owned and state-managed system that it was when I first visited more than 30 years ago. 
In those days, there was no private enterprise, and it was illegal for anyone but the government or a state-owned enterprise to hire an employee. 
Today, only 20% of employees in China work for SOEs. 
The rest of the Chinese economy is dynamic, decentralized, and privately owned. 
American multinational companies and other foreign firms are an important part of the economic scene. 
So the five-year plan is no longer a detailed blueprint for industrial expansion; rather, it provides a picture of what the Chinese leadership hopes will be achieved under the government’s general guidance. 
The aim is to improve the overall standard of living – achieving moderately strong growth, raising the share of consumption in GDP, and improving air and water quality – through a combination of Western-style monetary and fiscal policies, state-financed infrastructure development, and changes in environmental and other regulations. 
One of the key goals was set back in 2010: doubling real GDP and real personal incomes by 2020. 
The government now officially estimates that achieving this target will require average annual GDP growth of 6.5% over the next five years. 
Given that China is still a relatively poor country, with per capita GDP only about 25% of the level in the United States, maintaining such a rapid pace of growth certainly is not impossible. 
But many observers are skeptical about China’s official GDP data and dubious of its ability to sustain 6.5% growth. 
That skepticism reflects a variety of recent news indicating weak output in parts of the Chinese economy – for example, headlines about reduced industrial production, declines in manufacturing exports, and shutdowns in particular industries. 
Although I cannot claim to be an expert on Chinese economic statistics, I think these headlines are a natural but misleading consequence of the authorities’ intentional effort to shift China’s economic structure away from industrial expansion and exports toward greater reliance on services and household consumption. 
Chinese economic experts say that the output of the service sector is growing fast enough to offset growth in industrial output of 5% or even less, thereby achieving the current overall growth rate of about 7%. 
But even if annual growth really is now at about 7%, achieving a 6.5% rate for the next five years will be a challenge, for at least four reasons. 
For starters, China’s shift from heavy industry to services implies less output per worker and less control by the central government. 
At the same time, the environmental policies that are urgently needed to improve air and water quality absorb resources and impede growth. 
And President Xi Jinping’s crackdown on corruption has had the side effect of delaying decision-making and inhibiting new projects. 
Finally, and perhaps most important, the population of working-age individuals is no longer growing, a result of the 35-year-long policy of restricting most families to no more than one child. 
Although the government recently replaced the one-child limit with a two-child limit, it will be nearly two decades before that change can increase the size of the working-age population. 
Until then, increasing the growth rate of the effective labor force requires shifting workers from low-productivity employment in agriculture to the urban labor force. 
The Chinese government is therefore considering several policies to increase the pace of urbanization, including the creation of several new large cities to accommodate some of the 600 million individuals who still live in rural China. 
Similarly, the government will phase out the hukou system of residency permits that now prevents migrants to the cities from obtaining full health care and education benefits. 
A third policy change aimed at promoting urbanization will be to allow Chinese farmers to sell their land rights at realistic market prices, thereby increasing their incentive to cash out and move. 
And the introduction of a Western-style rental market will allow families without substantial cash or parental support to move to cities (where families currently must purchase their apartments). 
Not all of these policies have to succeed in order to keep the urban labor force expanding in the next five years. 
If enough of them succeed well enough, 6.5% growth over the next few years might not be out of reach. 
China also has a variety of short-run problems. 
There is excess capacity in some heavy industries and in residential real-estate markets in some second- and third-tier cities. 
Local governments have significant debts that were incurred at the request of the central government in 2007 and 2008 in order to avoid a serious economic downturn. 
And there is a large volume of bad loans in some state-owned banks and in the shadow banking system. 
Fortunately, the authorities recognize these problems and have strategies – and, more important, the resources – to deal with them. 
China’s economy will not grow as strongly over the next five years as it did in past decades. 
But if the goals set out in the 13th Five-Year Plan are realized, the Chinese people can look forward to a period of rising consumer spending and an improving standard of living. 

A New Front in Asia’s Water War 
NEW DELHI – China has long regarded freshwater as a strategic weapon – one that the country’s leaders have no compunction about wielding to advance their foreign-policy goals. 
After years of using its chokehold on almost every major transnational river system in Asia to manipulate water flows themselves, China is now withholding data on upstream flows to put pressure on downstream countries, particularly India. 
For decades, China has been dragging its neighbors into high-stakes games of geopolitical poker over water-related issues. 
Thanks to its forcible annexation of Tibet and other non-Han Chinese ethnic homelands – territories that comprise some 60% of its landmass – China is the world’s unrivaled hydro-hegemon. 
It is the source of cross-border riparian flows to more countries than any other state. 
In recent years, China has worked hard to exploit that status to increase its leverage over its neighbors, relentlessly building upstream dams on international rivers. 
China is now home to more dams than the rest of the world combined, and the construction continues, leaving downstream neighbors – especially the vulnerable lower Mekong basin states, Nepal, and Kazakhstan – essentially at China’s mercy. 
So far, China has refused to enter into a water-sharing treaty with a single country. 
It does, however, share some hydrological and meteorological data – essential to enable downstream countries to foresee and plan for floods, thereby protecting lives and reducing material losses. 
Yet, this year, China decided to withhold such data from India, undermining the efficacy of India’s flood early-warning systems – during Asia’s summer monsoon season, no less. 
As a result, despite below-normal monsoon rains this year in India’s northeast, through which the Brahmaputra River flows after leaving Tibet and before entering Bangladesh, the region faced unprecedented flooding, with devastating consequences, especially in Assam state. 
China’s decision to withhold crucial data is not only cruel; it also breaches the country’s international obligations. 
China is one of just three countries that voted against the 1997 United Nations Watercourse Convention, which called for the regular exchange of hydrological and other data between co-basin states. 
But China did enter into a five-year bilateral accord, which expires next year, requiring it to transfer to India hydrological and meteorological data daily from three Brahmaputra-monitoring stations in Tibet during the risky flood season, from May 15 to October 15. 
A similar agreement, reached in 2015, covers the Sutlej, another flood-prone river. 
Both accords arose after flash floods linked to suspected discharges from Chinese projects in Tibet repeatedly ravaged India’s Arunachal and Himachal states. 
Unlike some other countries, which offer hydrological data to their downstream counterparts for free, China does so only for a price. 
(The Watercourse Convention would have required that no charges be levied, unless the data or information was “not readily available” – a rule that may also have contributed to China’s “no” vote.) 
But it was a price India was willing to pay. 
And this year, as always, India sent the agreed amount. 
Yet it received no data, with the Chinese foreign ministry claiming after almost four months that upstream stations were being “upgraded” or “renovated.” 
That claim was spurious: China did supply data on the Brahmaputra to Bangladesh. 
Three weeks earlier, the state-controlled newspaper Global Times offered a more plausible explanation for China’s failure to deliver the promised data to India: the data transfer had been intentionally halted, owing to India’s supposed infringement on Chinese territorial sovereignty in a dispute over the remote Himalayan region of Doklam. 
For much of the summer, that dispute took the form of a border standoff where Bhutan, Tibet, and the Indian state of Sikkim meet. 
But even before the dispute flared in mid-June, China was seething over India’s boycott of its May 14-15 summit promoting the much-vaunted “Belt and Road” initiative. 
The denial of data apparently began as an attempt to punish India for condemning China’s massive, cross-border infrastructure agenda as an opaque, neocolonial enterprise. 
China’s desire to punish India was then reinforced by the Doklam standoff. 
For China, it seems, international agreements stop being binding when they are no longer politically convenient. 
This reading is reinforced by China’s violations of its 1984 pact with the United Kingdom, under which China gained sovereignty over Hong Kong in 1997. 
China claims that the agreement, based on the formula “one country, two systems,” had lost “practical significance” over the last 20 years. 
Were the roles reversed, a downstream China would have stridently accused an upstream India of exacerbating flood-related death and destruction by breaching its international obligations. 
But just as China has unilaterally and aggressively asserted its territorial and maritime claims in Asia, it is using the reengineering of cross-border riparian flows and denial of hydrological data to deepen its regional power. 
In fact, China’s cutoff of water data, despite the likely impact on vulnerable civilian communities, sets a dangerous precedent of indifference to humanitarian considerations. 
It also highlights how China is fashioning unconventional tools of coercive diplomacy, whose instruments already range from informally boycotting goods from a targeted country to halting strategic exports (such as of rare-earth minerals) and suspending Chinese tourist travel. 
Now, by seizing control over water – a resource vital to millions of lives and livelihoods – China can hold another country hostage without firing a single shot. 
In a water-stressed Asia, taming China’s hegemonic ambition is now the biggest strategic challenge. 

The West Is Wrong About China’s President 
BEIJING – China’s recent constitutional amendment eliminating the term limits for the president and vice president has left much of the West aghast. 
Critics fear the emergence of a new and unaccountable dictatorship, with President Xi Jinping becoming “Chairman Mao 2.0.” 
This response is more than a little inappropriate. 
Long tenures are not exactly unheard of in the West. 
For example, German Chancellor Angela Merkel has just begun her fourth four-year term – a development that the rest of Europe has largely welcomed rather than criticized. 
Of course, a Westerner might argue that Merkel has an electoral mandate, whereas Xi does not. 
But democratic elections are not the only way to achieve accountability. 
And Xi’s approval rating, according to almost all international surveys, seems to exceed the combined approval ratings of US President Donald Trump and UK Prime Minister Theresa May. 
While there may be reason to worry that Chinese politics could change for the worse, the same is true in the United States and the United Kingdom. 
Term limits are little more than an arbitrary constraint, which are not needed to ensure competent and responsive government in China. 
In fact, term limits could do just the opposite, cutting short the tenure of effective leaders, leading to policy disruptions, or even leading to political chaos. 
The US has long recognized this. 
Alexander Hamilton wrote that it is necessary to give leaders “the inclination and the resolution” to do the best possible job. 
They can thus prove their merits to the people, who can choose to “prolong the utility of [their leaders’] talents and virtues, and to secure to the government the advantage of permanency in a wise system of administration.” 
In 1947, however, following President Franklin D. Roosevelt’s election to four terms in office, Congress enacted the Twenty-Second Amendment to the US Constitution; since its ratification in 1951, US presidents have been limited to two four-year terms. 
The idea was to make a virtue of inexperience. 
But most new presidents make significant blunders at the start, and now there are more starts. 
If the US had no term limits, Trump might well not be in office today. 
To be sure, term limits have their value. 
Deng Xiaoping added them to the Chinese constitution after the Cultural Revolution, in order to prevent the recurrence of chaotic and brutal one-man rule. 
But the new generation of Chinese leaders is not just well-educated, but also well aware of international norms and standards. 
Unlike the ideological diehards of the past, they can be expected to behave rationally, intelligently, and responsibly. 
In this context, the removal of term limits will enable Xi to sustain a complex reform process that will take years to complete. 
It will not make him president for life, nor deliver him unbridled and undivided power. 
Western critics emphasize that Xi has done much to concentrate power in his own hands over the last six years. 
And, to some extent, that is true. 
For example, he has taken over some of the economic policy decisions that used to be the prime minister’s domain. 
But a strong leader is not necessarily an autocratic leader. 
And, in a high-stakes environment, a strong leader is needed to neutralize vested interests that resist crucial reforms. 
Xi knows the obstacles that blocked the implementation of his initiatives during his first term, and he is committed to overcoming them. 
In any case, the situation is hardly a “one-man show,” as much foreign commentary suggests. 
Half of the members of the Politburo Standing Committee, China’s supreme government body, are not of Xi’s choosing. 
And compromises were made in the placement of many senior officials, including key cabinet members. 
It would be a mistake to assume that because China has vowed not to copy the Western political model, there are not hidden democratic processes at work. 
While leaders are not elected, either directly or by a representative body, their performance is subject to close scrutiny – for example, by the National People’s Congress (NPC) and local people’s congresses. 
The Chinese government is also unusually responsive to citizens on social media. 
Moreover, checks and balances, though still inadequate, have been strengthened in recent years. 
Policy changes require consensus within the Politburo, especially the Standing Committee. 
On major issues, the NPC must give the green light. 
Nothing stops deputies from casting a dissenting vote, thanks in part to the growing prevalence of secret ballots. 
A small but significant feature of this year’s Congress is the elimination of the electronic voting system; instead, officials will drop paper slips into a ballot box. 
This is not the first time that Western media have adopted a perspective on Chinese political developments that runs completely counter to the prevailing view in China itself. 
Over the last few years, Xi’s anti-corruption drive has raised many eyebrows in the West, where it is often regarded as just a means for Xi to remove would-be political rivals. 
But the almost two million officials who have been indicted surely weren’t all Xi’s opponents. 
Among Chinese, the effort to root out corruption has boosted respect and support for Xi. 
In the West, government accountability is closely identified with democratic elections. 
In China, it is a function of how – and how well – the government responds to and protects the needs and interests of the people. 
Given the sheer complexity of modern China – not to mention the paramount need for the government to continue the country’s progress toward high-income status – success may require leaders to stay in place longer than initially expected. 
But, if recent history is any guide, the recent changes will contribute to making China’s political and economic system increasingly stable – without undermining accountability. 

A ‘China First’ Strategy for North Korea 
LONDON – Most pundits agree that the least bad way to deal with North Korea’s nuclear saber rattling is a continued combination of tight containment and aggressive diplomacy. 
Fewer, however, have recognized that the least bad military option – the one implied by US President Donald Trump’s insistence that China take responsibility for its dangerous neighbor – is a Chinese invasion, or regime change forced through China’s threat to launch one. 
This outcome, which would sharply shift East Asia’s strategic balance in China’s favor, is not as unlikely as most people think. 
In fact, its very plausibility is one reason why it needs to be taken seriously, including by Chinese military planners. 
In Trumpian terms, this is a “China First” option that could help “Make China Great Again.” 
Any military intervention, Chinese or otherwise, would carry huge risks. 
But before dwelling on them, consider what a successful Chinese intervention would achieve. 
For starters, it would put North Korea right where the country’s post-Korean War history suggests it belongs: under a Chinese nuclear umbrella, benefiting from a credible security guarantee. 
Mao Zedong used to say that his country and North Korea were “as close as lips and teeth” – a fitting description, given Chinese troops’ role in averting an American victory in the Korean War. 
But while Japan and South Korea have remained close allies of the United States during the six decades since then, hosting US bases and sheltering under US nuclear protection, China and North Korea have drifted ever further apart. 
As a result, China has little control over its neighbor and purported ally, and probably scant knowledge of what is going on there. 
It could, it is true, tighten the existing siege on North Korea by cutting trade further and blocking energy supplies. 
But this might achieve little beyond pushing Kim Jong-un’s cloistered regime to look for support from its other neighbor, Russia. 
If, as is commonly assumed, North Korea wants some sort of credible security guarantee in exchange for curtailing its nuclear program, the only country capable of providing it is China. 
No American promise would remain credible beyond the term of the president who gave it, if even that long. 
So if China were to combine threats of invasion with a promise of security and nuclear protection, in exchange for cooperation and possible regime change, its chances of winning over large parts of the Korean People’s Army would be high. 
Whereas a nuclear exchange with the US would mean devastation, submission to China would promise survival, and presumably a degree of continued autonomy. 
For all except those closest to Kim, the choice would not be a difficult one. 
China’s strategic gains from a successful military intervention would include not only control of what happens on the Korean Peninsula, where it presumably would be able to establish military bases, but also regional gratitude for having prevented a catastrophic war. 
No other action holds as much potential to make Chinese leadership within Asia seem both credible, and desirable, especially if the alternative is a reckless, poorly planned US-led war. 
What China needs, above all, is legitimacy, and intervention in North Korea would provide it. 
Successful use of hard power would bring China, to borrow the distinction coined by Harvard’s Joseph S. Nye, huge reserves of soft power. 
But now to the 64 billion renminbi question: Could it work? 
We can’t know the answer for sure, and any military intervention carries great risks. 
The Chinese armed forces are now well equipped, but lack comparable battlefield experience. 
Their inferior opponents have leaders who might be prepared to use nuclear weapons or other weapons of mass destruction, if they did not simply accept Chinese terms and surrender. 
What we can say with near certainty is that a Chinese land and sea invasion, rather than an American one, would stand a better chance of avoiding Kim’s likely response: an artillery attack on the South Korean capital, Seoul, which lies just a few dozen miles south of the demilitarized zone. 
Why would North Korea slaughter its southern brothers and sisters in retaliation for a Chinese invasion that came with a promise of continued security, if not autonomy? 
Moreover, while the Kim regime’s nuclear restraint could hardly be taken for granted, China would be a less likely target than the US for North Korean missiles. 
Were a Chinese military option to be contemplated seriously, some intelligence and missile-defense collaboration with the US might be worth exploring. 
Given the risks, it would be hard for the US to refuse. 
This scenario may well never happen. 
But it is so logical that the possibility of it should be taken seriously. 
It is, after all, China’s best opportunity to achieve greater strategic parity with the US in the region, while removing a source of instability that threatens them both. 

Taking the Politics Out of Development 
LONDON – Later this month, Chinese President Xi Jinping will host a summit for many of the leaders of the 65 countries engaged in his “one belt, one road” (OBOR) initiative, a pioneering program that will channel billions of investment dollars toward infrastructure projects across Asia, Africa, and Europe. 
Despite a strong economic case for the project, reactions have been mixed. 
The main impulse driving the OBOR initiative is physical connectivity: efficient infrastructure enhances productivity, fosters investment, and lowers the costs of trade. 
With effective channels for the exchange of goods and well-connected information networks, growth accelerates, economic opportunity increases, and inequality narrows. 
The good news is that such infrastructure can be built in an efficient and cost-effective manner. 
The key is cooperative efforts that exploit each country’s respective comparative advantage, be it capital, technological know-how, logistical or construction capabilities, raw materials, or even industrial goods. 
Such an approach can jumpstart development in low-income countries, and help emerging economies bypass the dreaded middle-income trap. 
But making physical connectivity work requires not only massive amounts of funding; policy coordination and regulatory harmonization are necessary as well. 
In the short term, infrastructure investment can be impeded by significant political, sovereign, and financial risks. 
For starters, there is the risk that political leaders will prioritize short-term interests above a long-term vision. 
For example, they may try to win votes with reductions in road tolls or water tariffs, causing otherwise good infrastructure projects to produce net losses. 
They may also lack motivation to raise funds for big projects, unless those efforts would translate into actual votes. 
It does not help that many countries are also grappling with public debt, which makes it difficult for them to borrow from multilateral development institutions. 
With limited fiscal space, governments might need to resort to levying taxes – a politically difficult solution – to pursue infrastructure investment. 
They might also have to reduce investment in other critical areas, like education, health, or environmental protection. 
Private investors, for their part, may be neither willing nor able to hold illiquid assets for the entire gestation and construction process. 
That process is long in the best of times; in developing countries with weak institutional capabilities, it is often drawn out substantially, creating massive additional costs. 
Many national authorities are attempting to address this by improving governance and providing an enabling environment for infrastructure investment, including by promoting public-private partnerships. 
But successes have been far and few between. 
China sees all of this. 
It recognizes the urgency with which developing countries need investments in roads, railroads, power plants and grids, airports, and seaports, as well as the challenges they face in securing them. 
And it is well aware of the potential benefits of connectivity, particularly if it extends beyond the Asia-Pacific region. 
Since introducing the OBOR initiative, China has often been accused of attempting to wrest greater control over the developing world, and even to replace the United States as the dominant global superpower. 
Some, pointing to the historical record, warn of the “Thucydides Trap”: a rising power will eventually try to challenge an established one. 
But such warnings overlook a crucial lesson of that record: the challenges almost always end badly. 
China is well aware of how the Thucydides Trap has ensnared both the dominant power and the challenger, even after the challenger might seem to have won. 
This has not, however, stopped politicians from stoking fears about China and the OBOR initiative. 
Sri Lanka is a case in point. 
Until recently, it had welcomed – and even sought – infrastructure investment from China. 
When politicians began to attempt to win support by sowing doubts about China’s intentions, however, the prevailing mood vis-à-vis China turned from appreciation to indignation. 
Those politicians then accepted financial support from the US and India, but that money never came. 
Today, Sri Lanka’s government has little choice but to rekindle its relationship with China. 
Fortunately for Sri Lanka – and other OBOR participants – China’s intentions are far from malicious. 
Its real goal is to lead an inclusive and cooperative integration process that benefits all participants. 
And, in fact, China may well be the best-equipped country for the job. 
In the US, a major infrastructure upgrade is long overdue, with politics, among other factors, impeding progress. 
By contrast, China has, in the words of Jeffrey D. Sachs, “proved itself highly effective at building large and complex infrastructure” that “complements industrial capital” and has “attracted foreign private-sector capital and technology.” 
Of course, China may be accused of advancing its own agenda for any action that it takes abroad. 
And, to some extent, such accusations would be true, just as they are whenever a global power intervenes abroad, whatever the motivation. 
The US-led Marshall Plan was aimed not just at supporting the reconstruction of Western Europe after World War II, but also at reviving markets for US exports and containing the Soviet Union. 
This is not to say that China could not have done anything better in pursuing the OBOR initiative. 
On the contrary, it could have been more effective in making the economic case for physical connectivity. 
And Chinese companies could have taken more care to understand and appreciate local customs and cultures, thereby avoiding unnecessary tensions with local people, as well as to ensure environmental sustainability. 
But these lapses are fixable – and are being addressed, both by Xi’s administration and Chinese companies investing overseas. 
The bigger challenge lies in creating a designated institution to coordinate the many OBOR initiatives. 
On this front, success will be possible only if countries avoid allowing politics to cloud their judgment. 
There is no defense for rejecting an economically sensible global initiative just because China is the one leading it. 

Trump Through Chinese Eyes 
IRVINE – When Donald Trump won the United States’ presidential election in November, he had a lot of Chinese fans. 
But Trump’s popularity has since plummeted, owing to his statements – often via Twitter – on contentious issues, such as Taiwan and the South China Sea. 
This isn’t the first time China’s view of a US leader has deteriorated rapidly. 
The abrupt change in Chinese sentiment toward Trump is reminiscent of what happened to US President Woodrow Wilson after his reelection a century ago. 
At the time, many Chinese intellectuals, including the young Mao Zedong, admired Wilson, a political scientist and former president of Princeton University. 
Then, in 1919, Wilson backed the Treaty of Versailles, which transferred control of former German territories in Shandong Province to Japan, rather than return them to China. 
Wilson quickly lost his luster in China. 
The shift was similar – but the reasons are very different. 
A century ago, China was driven to support Wilson, and then to loathe him, by its own weakness. 
Today, it is China’s strength that is guiding its view of the US president. 
In 1916, the year Wilson was elected to his second term, China was in terrible shape. 
While the republic established in 1912 was ostensibly a single entity, it was actually highly fragmented. 
Military strongmen controlled different regions, while foreign powers, through bribes and bullying, seized large swaths of China’s territory. 
For Chinese intellectuals, Wilson offered a bookish contrast to thuggish warlords. 
But Wilson’s appeal in China went beyond image. 
In 1918, Wilson’s popularity soared – and not just in China – following an address to Congress calling for national “self-determination.” 
Overlooking Wilson’s support of Jim Crow in the US and the invasion of Haiti on his watch, intellectuals in imperialism-ravaged countries from Egypt to Korea took his declaration to heart, and began to view him as a savior and champion of the oppressed. 
Chinese patriots, in particular, hoped that, under Wilson’s leadership, the US might deepen its involvement in Asia in ways that would help protect China from the predations of Imperial Japan. 
For them, Wilson’s support of the Treaty of Versailles constituted a profound betrayal. 
The China of 2016 is unimaginably different from the China of 1916. 
It has leap-frogged even advanced countries in the global economic hierarchy. 
It is unified under a strong and focused leadership. 
And it is very big, including nearly all the territories that were part of the Qing Empire at its peak. 
A rare exception is Taiwan, but the “one China” diplomatic fiction sustains the fantasy that someday, somehow, the democratic island and authoritarian mainland will be reintegrated. 
In short, China no longer needs US protection. 
Instead, it wants a US president who is occupied largely with domestic issues, and is not much concerned with constraining China’s rise, as Barack Obama was. 
That way, China could get to work reshuffling power relationships in Asia for its own benefit, without having to worry about American interference. 
Before the election, Trump was already known to level wild accusations at China, typically related to economic issues like trade. 
But his apparent lack of interest in foreign policy was very appealing for Chinese leaders. 
He seemed far more likely than his opponent, former US Secretary of State Hillary Clinton, to leave China alone. 
His suggestion that he would be less committed than his predecessors to supporting traditional US allies in Asia, like South Korea and Japan, was music to Chinese nationalists’ ears, much as his questioning of American commitments to NATO was music to Russian President Vladimir Putin’s. 
Like Wilson, Trump also gained some fans simply by virtue of a personality that is atypical for a politician. 
Of course, Trump is no bookworm. 
But many people liked that he seemed to say (or tweet) whatever he felt, offering “straight talk” that contrasted sharply with the approach of more polished politicians, including President Xi Jinping, who watches his every word. 
A similar desire for “authenticity” has fueled – albeit in a very different way – the popularity of another US official, Gary Locke, who became the US ambassador to China in 2011. 
Photographs of Locke carrying his own daypack and buying coffee at Starbucks – humble acts that high-ranking Chinese officials would have underlings do – spurred a flurry of online posts celebrating him as a virtuous public servant. 
How different America must be, his fans claimed, from China, where corrupt officials and their pampered offspring indulge in luxurious lifestyles reminiscent of the imperial families of dynastic times. 
It is hard to imagine that particular US-China contrast carrying weight now, as photos of Trump’s garish Manhattan penthouse and opulent Mar-a-Lago parties continue to emerge. 
And while Trump’s communication style remains striking, particularly in comparison to Xi’s, it becomes far less appealing when one is the target of his blunt comments on touchy topics. 
Just as a weak China was not able to count on Wilson’s protection, a strong China will not be able to count on Trump to get out of its way – at least not without throwing a few elbows. 

What Does Xi Jinping Want? 
BEIJING – Most Western media have characterized the recent 19th National Congress of the Communist Party of China (CPC) as a pure power play, with President Xi Jinping entrenching his position. 
But the accumulation of political capital in this case is a means to an end. 
For Xi, that end is a smooth transition into modernity that cements the CPC’s long-term authority and ensures his own legacy as modern China’s most significant leader. 
Xi knows that if China is to continue to thrive in a fast-changing world, he will need to manage deftly a major social and economic transformation, while, even more important, improving state governance. 
And, in order to secure the long-term survival of China’s one-party system, he must reform state and Party institutions; indeed, political reform is, for Xi, a prerequisite for economic reform. 
(And yet, he will carefully avoid what he considers the mistakes of the last Soviet president, Mikhail Gorbachev.) 
Xi’s motive in pursuing modernity is not, as many in the West have wrongly inferred, to establish China as a superpower on par with the United States; on the contrary, Xi views his current challenge and mission as being primarily domestic. 
He is motivated by the knowledge that success in this area will define his place in history. 
That, not the amount of authority he wields today, is his primary concern. 
Assuming otherwise sells Xi – and his political ingenuity – short. 
Now firmly established as China’s most powerful leader since Deng Xiaoping, Xi can shape his legacy according to his own vision. 
Because his predecessor Hu Jintao lacked sufficient political capital to do likewise, China followed a largely passive path for a decade, pursuing conciliatory diplomacy (which enraged its citizens) and economically conservative strategies (which included suspending necessary reforms). 
No one, however, should mistake Xi’s enhanced powers for a personal dictatorship. 
His choice of members for the Standing Committee of the Politburo, China’s highest authority, was an accommodation to the reality that there are limits to his power. 
Only half of the men named to the committee were his true confidantes. 
The legacy that Xi seeks comprises three key components. 
The first is alleviation of growing social tensions. 
Beyond improving the provision of public goods, his promotion of the so-called China Dream of national rejuvenation has been aimed, in part, at encouraging people to seek fulfillment beyond material wealth. 
Second, Xi wants to strengthen the CPC, not by force, but by reform. 
Over the last five years, Xi has led an unprecedented anti-corruption campaign, which has brought down one million Party officials, from low-ranking bureaucrats (known as “flies”) to the highest-level officials (“tigers”), throughout the country. 
Such a large-scale campaign, as some observers have portrayed it, was not a political purge in disguise. 
Rather, Xi knew that widespread corruption was undermining the CPC’s legitimacy in the eyes of ordinary Chinese. 
Only by cleaning up the Party’s behavior could Xi reestablish its credibility. 
Now, Xi is ready for Act II of his CPC revival: improving state governance. 
Xi is well aware that a case-by-case approach will not address the root causes of widespread corruption. 
For that, the entire system needs an overhaul. 
As he put it, “The Party needs to govern itself.” 
The first step is to improve the legislative framework. 
For many years, the lack of accountability and transparency, and of clear decision-making processes, has impeded reform. 
Now, China needs institutionalized mechanisms for enforcing the rule of law – one aspect of Western political systems that Xi admires – among CPC officials, though the idea that the judiciary could be independent of the Party remains farfetched. 
But even the best-designed system cannot work if there is a dearth of competent personnel to run it – a limitation highlighted by Xi’s push for economic reforms in his first term as president. 
That is why Xi is placing a strong emphasis on cultivating a new generation of highly educated, loyal, and, most important, incorruptible Party leaders. 
A key challenge here lies in stemming the migration of China’s top talent to the private sector. 
The third component of Xi’s legacy is also the most important – and already effectively secured. 
At the 19th National Congress, CCP delegates agreed to add “Xi Jinping Thought” to the Party’s constitution, alongside “Mao Zedong Thought” and “Deng Xiaoping Theory.” 
Now that Xi’s eponymous political ideology, which proposes an alternative to liberal democracy, is part of the school of thought around which the CPC coalesces, challenging Xi is tantamount to challenging the Party’s very belief system. 
In short, Xi has made himself virtually unassailable – his rare political skill elevating him to the status of secular deity. 
The fact is that, as a leader, Xi has a lot going for him. 
He is well-educated and experienced in international affairs. 
He has weathered serious challenges and experienced firsthand the consequences of political and economic policies gone awry. 
He has a vast political network, thanks not only to his own deftness, but also to his family: he is the son of a comrade of Mao. 
And he now stands alongside Mao, as well as Deng, in modern China’s political pantheon. 
But Xi is not Mao, and he will not govern China as Mao did. 
Instead, he will learn from Mao’s mistakes, so that he can lead China effectively into the next phase of its history – and secure the legacy that he so prizes. 

China Needs a New Grand Strategy 
CLAREMONT, CALIFORNIA – The Cold War ended in December 1991, when the Soviet Union disintegrated. 
The post-Cold War era ended in November 2016, when Donald Trump won the United States presidency. 
It is impossible to predict all of what the Trump era will bring, not least because of Trump’s own capriciousness. 
But some consequences are already apparent. 
In just a couple of weeks, Trump’s presidency has upended the key assumptions underpinning China’s post-Cold War grand strategy. 
The first assumption is ideological. 
The ostensible triumph of Western liberal democracy in 1989 imbued that system with a kind of dominance. 
It was therefore assumed to pose an existential threat to the Chinese Communist Party (CCP). 
In the economic realm, China expected continued Western leadership on economic globalization. 
So China’s government developed close commercial relationships with the West – relationships that supported China’s economic growth and development, strengthening support for the CCP at home and bolstering the country’s influence abroad. 
Regarding national security, China assumed that the US did not pose an imminent threat. 
Though the US and its allies enjoy overwhelming technological advantages – a reality that had long worried Chinese leaders – China took it almost as a given that the US would continue to place a high priority on conflict avoidance. 
All in all, China’s leaders had come to terms with the dual nature of America’s hedging strategy, whereby the US engaged with China economically and diplomatically, while maintaining a robust security posture vis-à-vis China, to deter expansionism. 
And they had developed a strategy of their own that aimed to make the most of this relatively peaceful operating environment to pursue their main objective: rapid economic development. 
Now, however, that operating environment has changed; in fact, the foundations of the post-Cold War order were fraying long before Trump arrived on the scene. 
Among other things, the 2008 global financial crisis and America’s strategic stumbles in the Middle East since the terrorist attacks of September 11, 2001, substantially weakened the West’s capacity to maintain the international rules-based order and provide global public goods. 
None of this is news to China, which has been pursuing incremental adjustments to its grand strategy, in order to seize the opportunities created by the West’s relative decline. 
For example, while the US was distracted by the Middle East’s protracted and fluid conflicts, China tested the country’s resolve by flexing its own muscles, most obviously in the South China Sea. 
But, overall, the changes were marginal; the strategy’s fundamentals stayed the same. 
That is no longer an option. 
With Trump in the White House, China’s grand strategy will have to be completely redrafted according to a new set of assumptions. 
Ideologically, China can breathe a sigh of relief. 
The advent of the Trump era – together with the Brexit vote in the United Kingdom and the rise of right-wing populism in other European countries – seems to herald the precipitous decline of liberal democracy’s ideological attraction. 
On the economic front, however, the new operating environment is likely to be difficult. 
De-globalization now seems to be a given. 
That is profoundly worrying for China, the world’s largest exporter by volume and arguably globalization’s greatest beneficiary. 
Given China’s dependence on exports, even the best-case scenario is likely to lead to some decline in China’s potential growth. 
But what has China really worried are the worst-case scenarios. 
Economic interdependence between China and the US buffers their geopolitical and ideological rivalry. 
Should Trump make good on his threat to tear up trade agreements and unilaterally impose punitive tariffs, the existing global trading regime will unravel, with China as one of the biggest casualties. 
But the most acute danger may lie in the realm of national security. 
Trump’s statements and actions since the election, together with his broader reputation as an impulsive bully and apparent belief that the world is a Hobbesian jungle, have convinced the Chinese leadership that he is itching for a fight. 
Trump has not only threatened to defy the “One China” policy, which has formed the foundation of US-China relations since 1972; he has also vowed to build up US naval capabilities with the explicit goal of opposing China. 
Trump’s courting of Russian President Vladimir Putin has only exacerbated concerns among Chinese leaders that the US is preparing to challenge China. 
These new assumptions provide some indication of the way forward for China, as it develops a new grand strategy. 
And yet plenty of unknowns remain. 
If, for example, Trump decides to take on Iran and subsequently gets sucked even deeper into the Middle East quagmire, China might get some breathing room. 
But if Trump opts to confront China in the South China Sea or abandons the One China policy, US-China relations could be tipped into free fall, raising the frightening prospect of a direct military conflict. 
Barring that, Trump’s ascent to the presidency may usher in a new Cold War pitting the US against China. 
This may seem unthinkable to many. 
But so was Trump’s victory – until it happened. 

Keynes and Hayek in China’s Property Markets 
HONG KONG – Real-estate prices in China’s top cities are spiking, generating contradictory predictions of either bursting bubbles or a coming economic turn-around. 
What’s really going on in China’s hot property markets? 
China’s National Bureau of Statistics (NBS) revealed last week that ten of the 70 large and medium-size Chinese cities surveyed had recorded annual price increases of more than 20% for newly built commercial housing. 
In the first-tier cities of Shanghai and Shenzhen, those gains were even higher: above 37%. 
In the second-tier cities of Xiamen and Hefei, the increases exceeded 40%. 
Chris Watling of Longview Economics compares China’s property market today to the Dutch tulip mania that peaked in 1637. 
He points out that property prices in Shenzhen, in particular, jumped 76% since the start of 2015, bringing a typical home to $800,000, just below the average home price in Silicon Valley. 
This, he suggests, may be the last hurrah before a market meltdown. 
Liu Shijin, former Vice Minister of the Development Reform Center of China’s State Council, disagrees. 
Instead, he posits that after six years of reduced investment in infrastructure and construction, growth in the Chinese property market may be bottoming out, and liquidity and consumer confidence may be shifting back to housing. 
To determine who is right, it is important, first, to recognize that not all Chinese cities’ property markets are surging. 
In 42 of the cities surveyed by the NBS – those with industrial overcapacity and excessive property inventories – price increases amounted to less than 5%, with eight cities recording falling or stagnant property prices. 
This pattern of divergence creates a dilemma for Chinese policymakers and investors, who now must weigh carefully the insights of two economic giants: John Maynard Keynes and Friedrich Hayek. 
At a time of slowing economic growth, some are advocating more Keynesian macro-stabilization measures, much like those China used to sustain growth after the global economic crisis of 2008. 
But in many areas, particularly in the northeast, central, and western parts of the country, the slowdown cannot be resolved through more stimulus. 
In fact, stimulus in those regions would largely flow out, along with the labor and capital that is already being propelled toward coastal areas, which boast more advanced technology, higher rates of innovation, superior infrastructure, and a more market-friendly business environment. 
What slower-growth regions need, therefore, is time to carry out supply-side structural reforms, including cutting inventories, reducing overcapacity, and writing off the bad debts of local governments and state-owned enterprises. 
The regions with surging property prices, meanwhile, tend to be the ones that are drawing labor and capital with high growth and superior job opportunities. 
A study by China Securities International showed that, in 2000-2010, cities in eastern China received 82.4% of total migrant inflows. 
By 2010, the migrant population in Beijing, Shanghai, and Tianjin had more than doubled, to 34.5%, 37.9%, and 21%, respectively. 
In an attempt to manage the growth of these cities, which faced a huge shortage of land, housing inventories, and urban public infrastructure, China’s government imposed restrictions on both demand for and supply of housing. 
But, as the spike in housing prices in these cities shows, their efforts didn’t work. 
Chinese policymakers had forgotten about Hayek. 
Otherwise, they would have expected that labor and capital markets would continue to drift toward growth and innovation in urban centers. 
They would also have recognized that market prices naturally transmit complex, specific, and changing local knowledge, which is distributed among individuals and corporations, not controlled by central planners. 
And they would have appreciated that if supply is to be matched with demand over time, real-estate and infrastructure investments must reflect that knowledge. 
Instead, China’s policymakers inadvertently created bottlenecks in local land supply. 
Residential land transactions in first- and second-tier Chinese cities remain thin and heavily influenced by urban planning policies, despite the depth and sophistication of residential property markets. 
Fortunately, there is scope for China’s urban planners to relax restrictions on the supply of land and on the floor area ratio (the ratio of gross floor area to the size of the lot on which the building stands). 
According to a study by China International Capital Corp, the urban built-up area in Shanghai is only 16%, compared to 44% in Tokyo and 60% in New York City. 
Within that area, only 36% is used for residential functions in Shanghai, compared to 60% in Tokyo and 44% in New York City. 
In other words, the available residential land for sale in Shanghai is considerably smaller than that available in New York City or even Tokyo, which is a major reason for surging property prices in these cities. 
And, in fact, if the supply of land and usable floor area is not increased, more spending on local public infrastructure will cause prices of existing space to rise even higher. 
Liu’s observation that households are becoming increasingly confident in the housing market also seems to be correct. 
The recent increase in demand for housing may reflect households’ desire to hedge their high savings against inflation or, more fundamentally, the sense that they must secure housing urgently, given limited supply. 
Either way, they now seem convinced that investment in housing is a relatively safe bet. 
If that is the case, the risk of a property bubble in China is probably being overstated. 
But that does not mean that all is well in China’s property sector. 
If the government ignores market price signals, mismatches between supply and demand could build up, undermining growth in dynamic regions, while leaving low-growth regions weighed down by excess capacity and bad assets. 
The good news is that there is still considerable room for policy maneuver. 
The question now is whether the Chinese authorities will manage actually to recognize and respond effectively to market signals. 

Righting China’s Property Rights 
NEW YORK – China recently adopted new guidelines to strengthen protection of property rights. 
The guidelines are an important step toward ensuring long-term economic growth. 
But there is more to be done. 
The guidelines aim to advance three key objectives. 
First, they limit the government’s discretionary ability to take private property from entrepreneurs and private citizens. In the past, the law defined the state-owned sector as the “foundation” of a “socialist market economy,” and the private sector as its “supplement.” 
The new guidelines stress the “equal status” of state-owned enterprises (SOEs) and private firms, and the “equal protection” of their property rights. 
Now, private property will no longer be inferior to state property – at least officially. 
China has lately been facing a new wave of capital flight, driven partly by concerns among entrepreneurs that President Xi Jinping’s anti-corruption campaign – so far focused on corrupt government officials – could one day be re-directed at them and their assets. 
After all, given that the laws and regulations governing business in China are highly complex and, at times, even contradictory, it has been difficult for Chinese entrepreneurs not to violate some rule or another. 
The new guidelines address this by calling for forgiveness of “original sins” – irregular or illegal activities or tax evasion by private entrepreneurs in their firms’ early days. 
This amnesty program – together with a broader shift toward equality between SOEs and private firms – could remove a thick cloud of uncertainty for Chinese businesspeople, encouraging them to keep their wealth and talent in the country. 
The second objective of the new guidelines is to eliminate the expropriation of state-owned assets by private parties, including by self-dealing managers of SOEs. 
Such self-dealing takes many forms, including selling state-owned assets at below-market value to connected private parties and insider trading in the stock market. 
One positive effect of the anti-corruption campaign has been the suppression of such behavior. 
Even so, to be responsive to Xi’s call to strengthen and expand existing SOEs, it makes sense for the guidelines’ drafters to propose more measures to minimize risks stemming from poor corporate governance. 
The third objective of the new guidelines is to encourage innovation, by protecting the fruits of creative efforts. 
The engines that have propelled China’s growth over the last few decades – a huge supply of cheap labor, imported technology, and massive physical investment – are petering out. 
Now, productivity increases and local innovation must pick up the slack. 
And that requires adequate protection of intellectual property. 
My own research, carried out with Zhuan Xie and Xiaobo Zhang, shows that Chinese firms – especially in the private sector – have lately accelerated innovation, and are being awarded an increasing number of patents at home and abroad. 
Unsurprisingly, they have joined multinational firms and foreign trade negotiators in demanding better intellectual-property protections. 
As intellectual property rights become more secure, China’s new growth engines can gain substantial steam. 
But the new guidelines are not sufficient to guarantee such an outcome. 
For one thing, the amnesty program for entrepreneurs’ “original sins” still lacks sufficient detail. 
If it allows the officials implementing the program to define which sins are eligible, and what timing makes them “original,” it could create new rent-seeking opportunities, augmenting the burden on entrepreneurs, rather than removing uncertainty. 
Moreover, the guidelines will not eliminate the state-owned sector’s advantages. 
Despite the new, more equal terms established in the guidelines, a financial system that is dominated by state-owned banks will give an edge to SOEs in terms of access to funding and the cost of capital. 
Similarly, local governments, which own a majority of the SOEs, may struggle to adjudicate fairly disputes that arise between their own firms and private companies. 
To ensure genuinely equal status for SOEs and private firms will require reforming the financial system, as well as government divestment from those SOEs lacking a strong national-security dimension – that is, the majority of them. 
China’s new legal framework for protecting property rights holds a lot of promise. 
But its success will depend heavily on how it is implemented, as well as on the extent to which the government pursues complementary reforms. 
For the sake of the entire global economy, one hopes that China gets it right. 


China’s Search for Quality Growth 
HONG KONG – As Chinese President Xi Jinping begins his second five-year term, shifting toward “quality growth” is at the top of the country’s policy agenda. 
Across China’s government, a quiet but resolute commitment to fostering a new growth model that corrects the distortions created by decades of double-digit growth – including corruption, pollution, rising inequality, and other structural imbalances – is taking root. 
Over most of the last 40 years, China focused on rapid land-based development, driven by local initiatives aimed at attracting infrastructure investment, human resources, and tax revenues. 
The creation of special economic zones, industrial parks, and free-trade zones facilitated such development, as they benefited from a large pool of cheap labor migrating from rural areas. 
Throughout this process, China used GDP growth as its main measure of success. 
This enabled the establishment of well-defined goals and incentives for local officials as they competed with one another. 
But it also caused serious problems – such as environmental damage, inequality, excessive debts, overcapacity, and corruption – to flourish. 
Today, China’s authorities are looking at a broader range of measures at the local and national levels that cover not just growth, but also quality of life. 
The vision behind this shift was articulated at the Communist Party of China’s 19th National Congress last October, when Xi stressed 14 policy areas that would be critical to develop “socialism with Chinese characteristics.” 
Among those imperatives was “adopting a new vision for development,” which “ensures and improves living standards.” 
This vision should be underpinned by a commitment to a “people-centered approach” and “harmony between human and nature.” 
Xi also emphasized strong governance, specifically “ensuring Party leadership over all work,” “ensuring every dimension of governance is law-based,” and “exercising full and rigorous governance over the Party.” 
The motivation behind the shift in China’s development focus is no mystery. 
China is now the world’s second-largest economy and accounts for nearly half of global growth. 
It has now largely caught up with the advanced countries in terms of infrastructure, trade, investment, and industrialization. 
Continuing to strengthen its position on the world stage is now a matter of meeting and even exceeding global standards in areas ranging from sustainability to good governance. 
Of course, addressing the challenges China faces will require plenty of trial and error – much like that which enabled its past development – not to mention acceptance of some economic casualties. 
For example, the decline of the industrial areas in northeast China and the rise of modern, globally competitive manufacturing clusters in the Pearl and Yangtze River Deltas in southeast China are two sides of the same coin. 
Market competition in China created both winners and losers, with the winners in the southeast taking entrepreneurs, talent, and other resources from the losers in the northeast. 
Managing the transformation of China’s regional economies while preserving social stability will demand a careful balance between the old growth strategy exemplified by the losers, which relied heavily on state-owned enterprises and public investment, and the new, more human-capital-oriented approach being developed by the winners. 
In the process, China will need to take into account local factors, such as population trends, natural resources, and regions’ appeal to middle-income domestic tourists. 
This rebalancing will require the central government to help relieve the debt burdens resulting from bankrupt projects in the losing regions, much like it did in the 1990s, when it wrote off the losses that SOEs incurred during the Asian financial crisis. 
This does not mean that China should rescue outdated local industries. 
Rather, it means preventing the sunk costs of China’s past growth model from leaving entire regions trapped in low-quality growth and development, by enabling local people to develop innovative start-ups, while investing in projects that create new income opportunities. 
Beyond supply-side structural adjustments, China must ensure that its new growth strategy addresses “last mile” demand-side problems of urban and human development, including traffic jams, infrastructure bottlenecks, housing shortages, underdeveloped waste-management services, and inadequate education and health care. 
As it stands, resolving these micro-level issues – critical to human wellbeing – is among the weakest areas of China’s complex macroeconomic and social reform plans. 
China has all the physical, financial, and social resources it needs to redress these problems, which in fact amount to major investment opportunities for both the public and private sectors. 
But, to succeed, any strategy must not only account for local feedback about what is achievable under local conditions; it must also allow for local ownership of solutions, including design and implementation. 
In any case, China’s leaders have demonstrated a willingness and ability to look at the big picture, accepting lower rates of GDP growth as they rebalance the country’s development model and pursue improvements in quality of life. 
It will not be easy to realize the vision of “people-centered development” that Xi announced last October. 
But China is on the right track. 


Stress Testing China’s System Reform 
HONG KONG – The historian Wang Gungwu recently observed that, whereas the West thinks in terms of ideologies, China has long thought in terms of systems. 
In today’s age of rapid and profound change – characterized, in particular, by a fundamental shift in America’s attitude toward the rest of the world – China’s system reform approach is being put to the test. 
Under President Donald Trump, the United States seems to have abandoned its seven-decade-old commitment to the rules-based multilateral order, embracing bilateral deal-making instead, guided by an “America First” agenda. 
This includes a willingness to make just about any excuse for unilateral action, such as large trade tariffs, against other countries, in order to please domestic constituencies. 
This approach adds a new layer of uncertainty to any negotiation, not least because the Trump administration’s decision to change the global rules of the game is not particularly promising for the US itself. 
After all, US-owned companies, which have long extracted the most value from global supply chains, will be the biggest casualties of a trade conflict. 
Moreover, as the US has discovered during its long history as the world’s biggest market, consumption and soft power go hand in hand. 
Yet, today, the US faces severe constraints when it comes to stimulating domestic consumption, rooted in factors like massive inequality, fiscal and debt constraints, political polarization, and the imperative to normalize monetary policy. 
For China, the situation is also challenging, not least because the West now regards virtually all of its domestic policies as geostrategic machinations. 
But China’s leaders do have the tools to overcome the obstacles ahead. 
The most important tool is precisely the systemic mindset that has shaped decision-making for millennia, protecting the country’s complex economic, social, and political arrangements from internal corrosion and external threats. 
Consider the reforms undertaken since 2012. 
At the Communist Party of China’s 18th National Congress, China’s leaders recognized that the demographic dividend was fading, owing to population aging, and that the “opening up” dividend (arising from increased external trade and investment) was losing value as well. 
Addressing this challenge required giving the market a more decisive role in resource allocation. 
After all, according to neoliberal ideology, all other things being equal, the market would naturally optimize economic processes. 
All the state had to do was ensure that those other things were indeed equal. 
This demanded, first, the eradication of systemic corruption and, second, structural reforms to address social imbalances that threatened stability and growth. 
So President Xi Jinping launched an anti-corruption campaign, and the government invested in areas like infrastructure, research and development, technological education and re-skilling, and the social safety net. 
Such reforms were intended to protect China’s own systemic stability, while contributing to the growth of the entire global system. 
Unfortunately, China’s efforts are now increasingly being characterized as “mercantilist” and “predatory,” providing an excuse for punitive measures, like Trump’s tariffs. 
These new external pressures prompted China to adjust its reform momentum in order to reduce its economy’s vulnerability to disruptions in the supply of critical technology, resources, and finance. 
But China’s adjustment faces a dilemma. 
A slowdown in reforms may negatively influence the economy and escalate the lose-lose trade war. 
To withstand the current stress test, China may instead need to accelerate its reforms to reduce internal imbalances, increase consumption, and contribute to global demand and stability. 
This means eliminating excess capacity, closing down polluting industries, and addressing the large volume of non-performing loans – all while continuing the fight against corruption. 
It also means tapping the massive consumption potential of China’s internal market, which includes the world’s largest and highest-saving middle class. 
Critically, because the external trade challenge affects the coastal areas more than the inland areas, structural adjustment policies need to be tailored to accommodate different local conditions. 
Contrary to the dictates of neoliberal ideology, a one-size-fits-all “best practice” approach cannot bring better results than localized “best fit” policies. 
This is confirmed by history: globally, the best-performing economies, like the US, Hong Kong, Singapore, and many Scandinavian economies, have been those that adapted universal principles to develop policies that reflect national, regional, and local conditions. 
This is also true of China during its reform era, where development has been driven largely by local-level policy innovation and gradual adaptation to global standards and rules. 
Chinese provinces and cities have been empowered to experiment with diverse approaches to development and to adjust bureaucratic structures and government interventions to address local and global market conditions. 
Competition among fast-growing cities tapping their own comparative advantages – for example, those of Hong Kong and the Greater Bay Area, including Shenzhen, Zhuhai, Guangzhou, Foshan, and Dongguan – has generated system-wide resources in capital stock, income flow, know-how and institutional innovation, which were used to address legacy problems in the less dynamic regions. 
In this age of complex and dynamic change, China needs to sustain the systemic but localized approach that has enabled its unprecedented growth and development, and that means continuing to promote constant adaptation at the national, provincial, and municipal levels. 
The one proven systemic response to development challenges has been to allow internal competition across regions and enterprises to boost external competitiveness. 
That will remain true, no matter how unpredictable US policy becomes. 

China’s Renewable-Energy Revolution 
BEIJING – At the start of 2017, China announced that it would invest $360 billion in renewable energy by 2020 and scrap plans to build 85 coal-fired power plants. 
In March, Chinese authorities reported that the country was already exceeding official targets for energy efficiency, carbon intensity, and the share of clean energy sources. 
And just last month, China’s energy regulator, the National Energy Administration, rolled out new measures to reduce the country’s dependence on coal. 
These are just the latest indicators that China is at the center of a global energy transformation, which is being driven by technological change and the falling cost of renewables. 
But China is not just investing in renewables and phasing out coal. 
It also accounts for a growing share of global energy demand, meaning that its economy’s continuing shift toward service- and consumption-led growth will reshape the resource sector worldwide. 
At the same time, various other factors are reducing global resource consumption, including increased energy efficiency in residential, industrial, and commercial buildings, and lower demand for energy in transportation, owing to the proliferation of autonomous vehicles and ride sharing. 
According to Beyond the Supercycle: How Technology Is Reshaping Resources, a new report from the McKinsey Global Institute (MGI), these trends are slowing the growth of primary energy demand. 
If rapid adoption of new technologies continues, that demand could peak in 2025. 
And with less intensive energy use and increased efficiency, energy productivity in the global economy could increase by 40-70% over the next two decades. 
While global growth in energy demand is slowing, China’s share of that demand is increasing. 
By 2035, China may account for 28% of the world’s primary energy demand, up from 23% today, whereas the United States could account for just 12% by 2035, down from 16% today. 
China has already made significant progress in reducing its resource intensity: between 1980 and 2010, its economy grew 18-fold, but its energy consumption grew only fivefold. 
According to World Bank data, that reflects a 70% decline in energy intensity per unit of GDP. 
In its 13th Five-Year Plan, the Chinese government aims to reduce energy intensity by a total of 15% between 2016 and 2020. 
It is already well on its way toward achieving that goal. 
At China's National People’s Congress earlier this year, Chinese Premier Li Keqiang reported that China’s energy intensity fell by 5% last year alone. 
Renewables are one reason for China’s declining resource intensity. 
Hoping to become a world leader in the field, China is already investing more than $100 billion in domestic renewables every year. 
That is twice the level of US investment in domestic renewable energy and more than the combined annual investment of the US and the European Union. 
In addition, China is investing $32 billion – more than any other country – in renewables overseas, with top-tier Chinese companies increasingly taking the lead in global renewable-energy value chains. 
China’s State Grid Corporation has plans to develop an energy grid that draws on wind turbines and solar panels from around the world. 
Chinese solar-panel manufacturers are estimated to have a 20% cost advantage over their US peers, owing to economies of scale and more advanced supply-chain development. 
And Chinese wind-turbine manufacturers, having gradually closed technology gaps, now account for more than 90% of the Chinese domestic market, up from just 25% in 2002. 
These trends suggest that China will be a major source of both energy demand and cutting-edge technology, implying that it will have a unique opportunity to provide global leadership. 
Its experience in reducing energy intensity can serve as a roadmap for developing countries. 
And its investments in renewables at home and abroad can lead to additional technological breakthroughs that drive down costs for consumers everywhere. 
But China will also face challenges as it moves from fossil fuels to renewables within a changing global resource sector. 
Its economy is still highly dependent on coal, implying sizeable costs as it shifts capacity to other resources such as natural gas and renewables. 
Moreover, the construction of solar panels and wind farms in China has outpaced upgrades to its electrical grid, creating a great deal of waste. 
And Chinese producers, like most others, are feeling increasing pressure to reduce costs and improve efficiency to make up for slower demand growth worldwide. 
Despite these hurdles, technological innovation should help Chinese producers realize productivity gains and deliver savings to consumers. 
According to MGI, by 2035, changes in the supply and demand for major commodities could result in total cost savings of $900 billion to $1.6 trillion worldwide. 
The scale of these savings will depend not only on how quickly new technology is adopted, but also on how policymakers and companies adapt to their new environment. 
But, above all, it will depend on China. 

Why is the Renminbi Depreciating? 
BEIJING – China’s currency has started falling again. 
The last major depreciation of the Chinese renminbi began in the second half of 2015, triggered by a surge in capital outflows. 
Despite repeated interventions by the People’s Bank of China (PBOC), markets remained frenzied for more than a year. 
The currency’s value fell to nearly CN¥7 per US dollar, before stabilizing in early 2017. 
The latest decline has been even sharper. 
After more than a year of appreciation, the exchange rate began to weaken in the second quarter of 2018 – a drop that accelerated significantly in June, when the currency suffered its largest-ever monthly decline against the US dollar. 
So far, the renminbi had depreciated by over 8% against the dollar. 
Like in 2015-2016, investors are concerned about China’s economic prospects. 
The country’s GDP growth is slowing, owing to declining infrastructure investment and poor export performance – trends that investors now fear could be reinforced by the tit-for-tat trade war that the United States has initiated. 
Some have even expressed concern that the falling renminbi could exacerbate that trade war, if it is (wrongly) perceived by the US to be a purposeful devaluation aimed at securing a trade advantage. 
With China’s structural reforms lagging, the risks are heightened further. 
A relatively tight monetary policy, strengthened financial supervision, and regulation aimed at supporting a broader deleveraging drive and containing housing prices also stoke concern that real-estate and other asset bubbles will soon burst, though the PBOC adjusted its policy stance toward loosening a bit. 
Add to that rising risks in other emerging economies, and it is unsurprising that investors are becoming increasingly unnerved. 
Yet, in contrast to the last round of renminbi depreciation, investors aren’t panicking. 
The average volume of daily transactions in the foreign-exchange market amounts to only about half of the average in 2015 and 2016. 
With a relatively small volume of transactions, even relatively tepid excess demand for US dollars can have a significant impact on the exchange rate. 
Moreover, according to the State Administration of Foreign Exchange, China’s current-account and non-reserve financial-account surpluses stood at $5.8 billion and $18.2 billion, respectively, in the second quarter of 2018 
With “twin surpluses” in the second quarter and July, and with no detectable large-scale capital outflows, the renminbi’s sharp depreciation becomes more difficult to explain. 
One explanation is that the published balance-of-payments data, now only preliminary, will be revised. 
Another possibility is that the PBOC is managing the renminbi’s exchange rate according to the “central-parity rate-setting rule” that it formulated in early 2016. 
That rule takes into account the previous trading day’s closing price, as well as the “theoretical exchange rate” that would keep the index of the China Foreign Exchange Trade System, a 24-currency basket, unchanged over the previous 24 hours. 
If this is the case, the renminbi exchange rate is not related directly to US dollar supply and demand in the foreign-exchange market. 
But there is a problem with this account: the PBOC stopped its daily interventions in the foreign-exchange market about a year ago. 
If it restarted those interventions, presumably it would be attempting to stem the renminbi’s fall by selling foreign-exchange reserves. 
Yet in the second quarter of July, when the renminbi was declining rapidly, China’s foreign-exchange reserves actually increased. 
That increase may simply reflect the increase in the value of China’s dollar-denominated reserve assets. 
But it is also possible that the PBOC has used China’s foreign-exchange reserves, without updating the published balance of payments accordingly. 
The latter scenario would raise serious concerns, given the experience of 2015-2016. 
At that time, the PBOC’s frenetic interventions drained some $1 trillion from China’s foreign-exchange reserves in less than two years. 
Without that costly intervention, the renminbi may have depreciated more than it did. 
But the fact is that, just when everyone believed that the exchange rate would soon break the CN ¥7 per US dollar threshold, it stabilized, and then began to climb. 
Of course, some argue that this stabilization was an upshot of the PBOC’s efforts. 
But the subsequent decline in the dollar index suggests otherwise. 
In any case, given China’s economic fundamentals, it is difficult to imagine that the renminbi would have fallen so far that it would have triggered a financial crisis. 
This experience holds a clear lesson: don’t panic. 
For market participants, that means refraining from large-scale capital flight. 
For the Chinese monetary authorities, it means sticking to a policy of non-intervention, even if the dollar exchange rate drops below CN ¥7. 
With this forbearance, the long-overdue reform of the exchange-rate regime may finally be completed. 

Trumping the Renminbi 
HONG KONG – At the recently concluded World Economic Forum Annual Meeting in Davos, Switzerland, Chinese President Xi Jinping mounted a robust defense of globalization, reaffirming his country’s “open door” policy and pledging never to seek to start a trade war or to benefit from devaluation of its currency. 
Soon after, US President Donald Trump, in his inaugural address, effectively made the opposite pledge: using the word “protect” seven times, he confirmed that his “America first” doctrine means protectionism. 
Trump speaks of the United States as an economy in decline that must be revitalized. 
But the reality is that the US economy has been performing rather well in the last two years. 
Its recovery has outpaced that of other advanced economies; job creation has been impressive; and the dollar has been strong. 
The dollar’s value has risen particularly high in the last few months, as Trump’s promises to increase government spending, lower business taxes, and cut regulation have inspired a flight to quality by investors. 
By contrast, the Chinese renminbi has weakened significantly – from CN¥6.2 per dollar at the end of 2014 to CN¥6.95 at the end of last year – owing largely to declining investment and exports. 
Trump has accused China of intentionally devaluing the renminbi, in order to boost its export competitiveness. 
But the truth is quite the opposite: in the face of strong downward pressure on the renminbi, China has sought to keep the renminbi-dollar exchange rate relatively stable, – an effort that has contributed to a decline of more than $1 trillion in official foreign-currency reserves. 
China does not want the renminbi to depreciate any more than Trump does. 
But no country has full control over its exchange rate. 
From technological developments to geopolitical rivalries to policy shifts among major trading partners, the causes of the renminbi’s decline – and, thus, the factors influencing China’s exchange-rate policy – are varied and complex. 
One factor affecting exchange rates is a rapidly changing global supply chain. 
Evolving consumption patterns, regulatory regimes, and digital technologies have lately encouraged more domestic production. 
In the US, manufacturing has received a boost from technologies like robotics and 3D printing. 
That has supported economic recovery, without increasing its imports from Asia. 
Meanwhile, China is already shifting from an export-driven growth model to one based on higher domestic consumption, so a stronger renminbi might serve its economy better. 
China’s current-account surplus fell to just 2.1% of GDP in 2016, and the International Monetary Fund projects it to narrow further, as exports continue to fall. 
But the current account is not the only relevant factor. 
Given the role of capital flows in exchange rates, BIS economist Claudio Borio argues for looking at the financial account as well. 
Here, too, a depreciating renminbi doesn’t serve China. 
According to the IMF, by 2021, the US net investment position will probably deteriorate – with net liabilities rising from of 41% of GDP to 63% – while China’s net investment position remains flat. 
This means that other surplus countries like Germany and Japan are likely to be financing the growing US deficit position, from both their current and financial accounts. 
(The expanding interest-rate differentials between the US and its advanced-country counterparts reinforce this expectation.) 
But perhaps the biggest challenge for China today lies in its capital account. 
Since the renminbi began its downward slide in 2015, the incentive to reduce foreign debts and increase overseas assets has intensified. 
China’s total foreign debts (public and private), already very low by international standards, have fallen from 9.4% of GDP ($975.2 billion) at the end of 2014 to 6.4% of GDP ($701.0 billion) by the end of last year. 
And this trend seems set to continue, as Chinese citizens continue to diversify their asset portfolios to suit their increasingly international lifestyles. 
A weaker renminbi will only bolster this trend. 
Of course, Trump, who has repeatedly threatened to impose tariffs on China, could also influence China’s exchange-rate policy. 
But, in a sense, Trump’s irreverence makes him practically irrelevant. 
After all, judging by his past behavior, it seems likely that he will accuse China of currency manipulation, regardless of the policy path it chooses: a completely free float with full convertibility, the current managed float, or a pegged exchange rate. 
So what is China’s best option? 
A free-floating exchange rate can be ruled out right away. 
In the current dollar-driven international monetary regime, such an approach would produce too much volatility. 
But even the current regime is becoming difficult to manage. 
Considering the cost of recent efforts to maintain some semblance of exchange-rate stability, it seems that not even the equivalent of $3 trillion in foreign-exchange reserves is enough to manage a currency float. 
To be sure, China can – and should – broaden and deepen its international investment position, in order to support currency stability. 
At the end of 2015, China’s gross foreign assets were relatively low, at 57.2% of GDP, compared to about 180% for Japan and many European countries and around 130% for the US. 
Meanwhile, China’s net foreign assets amounted to only 14.7% of GDP, compared to 67.5% for Japan and 48.3% for Germany (negative 41% of GDP for the US). 
Reforms in the real and financial sectors would enable this level to rise. 
For now, however, the best option may be for China to peg the renminbi to the dollar, with an adjustment band of 5%, within which the central bank would intervene only lightly, to guide the market back to parity over the long term. 
Investors are, after all, focused almost exclusively on the renminbi-dollar exchange rate. 
Whatever path it chooses, China will pay a heavy price for advocating globalization and pursuing currency stability. 
In a world in which announcing new policies – and thus moving markets –is as easy as sending a tweet, politics will trump rational economic discussion. 

China’s SDR Distraction 
WASHINGTON, DC – At the start of October, China’s currency, the renminbi, was added to the basket of currencies that make up the International Monetary Fund’s Special Drawing Rights, or SDR. 
Previously, the SDR had been defined as a weighted average of the dollar, euro, British pound, and Japanese yen. 
Now that the renminbi has been added, it can claim to be one of just five truly global currencies. 
Should we care? 
The Chinese certainly do. 
In Beijing, where I was late last month, joining the rarefied SDR club was all people wanted to talk about. 
(Okay, truth be told, they also wanted to talk about Donald Trump.) 
Seeing the renminbi added to the SDR basket was a matter of national pride. 
It symbolized China’s emergence as a global power. 
And it vindicated the government’s efforts to encourage use of the renminbi in cross-border transactions, freeing China and the rest of the world from over-dependence on the dollar. 
But the fact of the matter is that adding the renminbi to the SDR basket has little practical significance. 
The SDR is not a currency; it is just the unit in which the IMF reports its financial accounts. 
Only a small handful of international bonds are denominated in SDRs, because banks and firms do not find this option particularly attractive. 
The main issuer of SDR bonds is the IMF’s sister organization, the World Bank (the Fund itself is not authorized to issue bonds). 
The only practical implication of adding the renminbi to the SDR basket is that it now becomes a currency that countries can draw, along with the SDR’s other four constituent currencies, when they borrow from the IMF. 
Only time will tell how many wish to do so. 
The Chinese argue that the renminbi’s addition to the SDR basket should be seen in a broader context. 
It is one of a series of steps to encourage use of the renminbi in international transactions. 
This agenda includes negotiating currency swap agreements, now more than two dozen, between the People’s Bank of China (PBOC) and foreign central banks. 
It also includes designating a Chinese financial institution to provide clearing and settlement services for transactions in renminbi in each leading financial center (in September, for example, the Bank of China was chosen as the official clearing bank for New York). 
And foreign entities are being authorized to issue renminbi-denominated bonds in China itself. 
Toward the end of August, Poland became the first European government to do so. 
But the reality, again, is that these steps are more about symbolism than substance. 
The PBOC’s renminbi swaps are almost entirely unused. 
Designated clearing banks have not exactly been flooded with business. 
Offshore renminbi bank deposits are falling. 
The proportion of China’s merchandise trade settled in renminbi has been declining since mid-2015. 
And there is no sign that where the Polish government has so boldly ventured, other governments will soon follow. 
The fault, to paraphrase Shakespeare, lies not in the stars but in China’s own financial markets. 
Since mid-2015, the country’s stock market has been on a rollercoaster. 
Every international organization worth its salt, from the IMF to the Bank for International Settlements, has been warning of problems in China’s corporate bond market. 
And if defaults on loans to corporations are widespread, as these organizations predict, the implications for the banks could be dire. 
The problem is mistaken tactics by the Chinese government. 
The government and the PBOC believe that relaxing capital controls and allowing financial capital to flow more freely in and out of the country will force financial market participants to up their game. 
Companies will have to upgrade their accounting standards, and banks their risk-management practices, to cope with the faster pace of financial transactions. 
The result will be more liquid and stable financial markets, in turn making the renminbi more attractive as a unit of account, means of payment, and store of value for residents and foreigners alike. 
Unfortunately, assuming a result doesn’t make it so. 
If Chinese banks and firms are slow to adjust, liberalizing international capital flows will lead only to more volatility, fewer offshore deposits, and less reliance on the renminbi for settling merchandise transactions – exactly as has been the case recently. 
Chinese policymakers must now put the horse before the cart. 
The most important steps they can take to foster renminbi internationalization are to strengthen domestic financial markets, modernize regulation, and streamline contract enforcement. 
If China wants to transform the renminbi into a first-class global currency, it should pay less attention to renminbi trading in New York and the currency’s weight in the SDR basket, and more to the development of deep, liquid, and stable financial markets at home. 

Why the Renminbi Won’t Rule 
TOKYO – In the dystopian fantasy Blade Runner 2049, Los Angeles 32 years from now looks a lot like China’s megacities today: grey, polluted, and dominated by tall towers emblazoned with flashing neon advertisements. 
The viewer never learns much about the outside world, much less in what currency the advertised goods are traded. 
Is the US dollar still dominant, has the Chinese renminbi taken over, or has some other currency surged to global preeminence? 
US President Donald Trump seems intent on ensuring that America retreats, at least partly, from its global leadership role. 
But, as was the case with the British pound in the interwar period, a currency can remain globally dominant even after its issuing country loses its economic, financial, and geopolitical hegemony. 
Today, too, the world should expect the US dollar to remain the key reserve currency, used to invoice and settle international trade, for a long time to come. 
But, in terms of international financial diplomacy, the dollar’s position may not be as secure. 
The question is whether the end of “dollar diplomacy,” which the economist Barry Eichengreen predicts, will necessarily mean the rise of renminbi diplomacy. 
Chinese policymakers have been hoping to develop the renminbi’s role in international finance, in order to strengthen China’s geopolitical standing, since the 1990s. 
And, in recent years, the Chinese leadership has led a concerted effort to fulfill that ambition, especially by internationalizing China’s currency. 
Yet renminbi-denominated finance is nowhere near ready to compete with – let alone rival – dollar finance. 
In fact, the renminbi still trails other reserve currencies (the US dollar, the euro, the Japanese yen, and the British pound) in international finance by so much that a renminbi-led international monetary system by mid-century seems about as likely as a Blade Runner 2049-style dystopia. 
One reason for the renminbi’s continued weakness in international finance is that, despite considerable progress since 2010, it remains a half-baked international currency. 
The renminbi is illiquid and unconvertible outside designated offshore markets. 
As a result, its weight in international investors’ portfolios is miniscule. 
Even China itself uses the renminbi in only about a quarter of its international trade, and its international finance remains dollar-denominated. 
China’s blue-chip firms – Alibaba, Baidu, and Tencent – are listed in New York or Hong Kong, where they are priced either in US or Hong Kong dollars. 
And most of China’s fast-expanding loans and overseas investments are in dollars. 
But the most compelling reason why one should not expect a renminbi-dominated international finance system to arise anytime soon is that China’s leaders have never shown any sustained commitment to developing the renminbi as a true alternative to the dollar. 
Instead, they have pursued a cooperative approach to reform of the international monetary system, which they argue should not be dependent on any one currency. 
For the Chinese, the future of the international monetary system should be one in which multiple national currencies provide choice – in terms of invoicing, payments, and asset allocation – thereby reducing the system’s exposure to national politics. 
Moreover, with more central banks creating liquidity, and international financial centers offering pools of it, such a system would entail a lower risk of cash crunches. 
Already, China has been experimenting with the development of offshore renminbi markets in key financial centers, as a way to overcome its currency’s limited liquidity. 
In order to build such a multi-currency system, however, the world would need to undertake far-reaching reforms of the international institutions. 
This was precisely the point that Zhou Xiaochuan, the governor of the People’s Bank of China, made in a 2009 speech challenging the view that only the US, through the dollar, could guarantee the functioning of the international monetary system. 
As Zhou pointed out, the US dollar’s monetary dominance is underpinned by the Bretton Woods institutions, created after World War II. 
Reforming the international monetary system, therefore, means reforming the governance of the multilateral financial institutions – an argument that China emphasized during its G20 presidency last year. 
As the US retreats from the world stage and a multipolar global order emerges, the international monetary system may well be transformed – but probably not into a renminbi-led system. 
Whether because of the intrinsic weakness of China’s international finance or an understanding that a truly international currency must be more market-driven than the government-controlled renminbi could be, not even China expects the age of renminbi diplomacy to arrive anytime soon. 

The Risks of China’s Failure – and Success 
NEW DELHI – As the world’s financial leaders gather in Washington, DC, for the annual spring meeting of the International Monetary Fund, their hopes – and fears – center on China. 
After all, China is the one country that might be able to jump-start the sputtering global economy’s recovery; and yet its own economic growth is based on a foundation that is increasingly showing signs of strain. 
The dilemma is that both Chinese failure and success carry risks for the world economy. 
A failure scenario would be unique in post-World War II history. 
Because China’s economy is so large, the consequences would reverberate worldwide. 
But, unlike in 2008, when the US dollar appreciated, allowing emerging markets to revive quickly, the renminbi would likely depreciate should China’s economy experience a serious downturn, spreading deflation far and wide. 
Other currencies might depreciate as well, some as a result of deliberate policy. 
Consequently, a China failure scenario could resemble the events of the 1930s, characterized by competitive devaluation and plummeting real economic activity. 
But what if China succeeds in its current transition to a consumption-based economic model? 
When the Chinese current-account surplus reached 10% of GDP in 2007, saving exceeded 50% of GDP and investment surpassed 40% of GDP. 
These numbers seemed far too high to be dynamically efficient or welfare enhancing. 
As a result, a consensus rapidly emerged: Saving and investment should be reduced and brought into better balance. 
Investment should be reined in by imposing greater financial discipline on wayward public enterprises, while the social safety net should be strengthened, so that households would not have to save so much to meet the costs of having children and growing old. 
Fast forward a decade, and what do we see? 
The government has built safety nets, and the current-account surplus has receded, exactly as hoped. 
Last year, the surplus amounted to less than 3% of GDP, a fraction of its 2007 level. 
But this hardly validates the theory. 
About half of the reduction in the current-account surplus has occurred because investment has actually increased as a share of GDP. 
Meanwhile, there has been some decline in national saving, by perhaps 3.5 percentage points of GDP compared to 2007 (according to IMF estimates, as official data end in 2013). 
But this reduction is quite modest compared to the 15-percentage-point increase that occurred during 2000-2007. 
Even more striking, all of this modest reduction in saving seems to have come from the corporate sector; household saving is roughly the same, relative to GDP, as it was in 2007. 
In other words, what went up during the boom has failed to come down. 
This is a real puzzle, and resolving it is important not only for China’s future, but for that of the world. 
There are two broad possibilities. 
It could be that the theory is basically correct, but needs more time to show results. 
In that case, as long as China’s rulers continue to strengthen social safety nets, the decline in saving could match the envisaged decline in investment, keeping the current-account surplus low. 
But what happens if the theory is wrong, or incomplete? 
For example, the beneficial effects of safety nets on saving may have been overestimated. 
Or those effects may be offset by the negative effects of population aging. 
Over the next 15 years, the Chinese population aged 60 and above will increase by two-thirds. 
These aging workers might now be saving as much as they possibly can, to build up a financial cushion for impending retirement. 
If some version of this scenario is realized, the household saving rate may continue to decline only gradually. 
In the meantime, the government would be closing unprofitable plants, which might boost corporate saving. 
As a result, overall saving could remain high, even as investment falls sharply, causing the current-account surplus to surge again. 
This would not be a pleasant prospect for the world economy. 
As China slowed, so would global growth, and the remaining demand would be redistributed toward China, aggravating other countries’ already-severe shortfalls. 
This would be very different from the previous episode of global imbalances when large Chinese current-account surpluses were at least offset to some extent by rapid Chinese growth. 
In short, whereas a hard economic landing for China could spur global deflation, avoiding that outcome could mean the return of global imbalances. 
These are the stark possibilities that leaders need to ponder as they gather gloomily at the IMF in Washington. 

China’s “Peaceful” Rise? 
In recent weeks, China announced a 12.6% increase in its defense spending; America’s CIA director, Porter Goss, testified about a worsening military balance in the Taiwan Strait; and President George W. Bush pleaded with Europeans not to lift their embargo on arms sales to China. 
Yet Chinese leaders have spoken of China’s “peaceful rise” or, more recently, its “peaceful development.” 
Analysts such as John Mearsheimer of the University of Chicago have flatly proclaimed that China cannot rise peacefully, and predict that “the United States and China are likely to engage in an intense security competition with considerable potential for war.” 
Optimists point out that China has engaged in good neighbor policies since the 1990’s, settled border disputes, played a greater role in international institutions, and recognized the benefits of using soft power. 
But skeptics reply that China is merely waiting for its economy to lay the basis for future hegemony. 
Who is right? 
We will not know for some time, but the debaters should recall Thucydides’ warning more than two millennia ago that belief in the inevitability of conflict can become one of its main causes. 
Each side, believing it will end up at war with the other, makes reasonable military preparations that are read by the other side as confirmation of its worst fears. 
In fact, the “rise of China” is a misnomer. 
“Re-emergence” would be more accurate, since by size and history the Middle Kingdom has long been a major power in East Asia. 
Technically and economically, China was the world’s leader (though without global reach) from 500 to 1500. 
Only in the last half-millennium was it overtaken by Europe and America. 
The Asian Development Bank has estimated that in 1820, at the beginning of the industrial age, Asia accounted for three-fifths of world output. 
By 1940, this fell to one-fifth, even though Asia was home to three-fifths of the world’s population. 
Rapid economic growth has brought output back to two-fifths of the world total today, and the Bank speculates that Asia could return to its historical levels by 2025. 
Asia, of course, includes Japan, India, Korea, and others, but China will eventually play the largest role. 
Its high annual growth rates of 8-9% led to a tripling of its GNP in the last two decades of the twentieth century. 
Nonetheless, China still has a long way to go and faces many obstacles. 
The US economy is about twice the size of China’s; if it grows by only 2% annually, and China’s economy grows by 6%, they could reach parity sometime after 2025. 
Even so, they would not be equal in composition or sophistication. 
China would still have a vast, underdeveloped countryside, and would not equal the US in per capita income until sometime after 2075 (depending on the measures of comparison.) 
China is a long way from posing the kind of challenge to American preponderance that the Kaiser’s Germany posed when it surpassed Britain in the years leading up to World War I. 
Moreover, simple projections of economic growth trends can mislead. 
Countries tend to pick the low-hanging fruit as they benefit from imported technologies in the early stages of economic take-off, and growth rates generally slow as economies reach higher levels of development. 
In addition, China’s economy suffers from inefficient state-owned enterprises, a shaky financial system, and inadequate infrastructure. 
At the same time, politics has a way of confounding economic projections. 
Creating a rule of law and institutions for political participation has lagged behind economic growth, and growing inequality, massive internal migration, an inadequate social safety net, and corruption could foster political instability. 
Indeed, some observers fear instability caused by a weak , rather than a rising, China. 
As long as China’s economy does grow, its military power will likely increase, thus making China appear more dangerous to its neighbors and complicating America’s commitments in Asia. 
A RAND study projects that by 2015, China’s military expenditure will be more than six times higher than Japan’s, and its accumulated military capital stock will be roughly five times higher (measured at purchasing power parity). 
Whatever the accuracy of such assessments of China’s military growth, the outcome will also depend on what the US and other countries do. 
The key to military power in the information age depends on the ability to collect, process, disseminate, and integrate complex systems of space-based surveillance, high speed computers, and “smart” weapons. 
China and others will develop some of these capabilities, but, according to many military analysts, China is not likely to close the gap with the US soon. 
China’s inability to compete with the US on a global basis does not mean that it could not challenge the US in East Asia, or that war over Taiwan is impossible. 
Weaker countries sometimes attack when they feel backed into a corner, such as Japan did at Pearl Harbor or China did when it entered the Korean War in 1950. 
If, for example, Taiwan were to declare independence, China would likely intervene with armed force, regardless of the perceived economic or military costs. 
But it would be unlikely to win such a war, and prudent policy on both sides can make such a war unlikely. 
There is no need for the US and China to go to war. 
Not every rising power leads to war – witness America’s overtaking of Britain at the end of the nineteenth century. 
If China’s rise remains peaceful, it promises great benefits to its own people and to its neighbors – and to Americans. 
But, remembering Thucydides’ advice, it will be important not to mistake analysts’ theories for reality, and to continue pointing this out to political leaders and publics. 

China’s Aborted Openness 
China’s state-run Xinhua news agency recently reported on a government investigation into a string of forced sterilizations and abortions in the village of Linyi, Shandong province. 
The speed of the investigation – said to have begun days after the kidnapping of Chen Guangcheng, a blind activist who had been a public advocate for the victims – and the candor of the report created the impression of greater government responsiveness and bolder official media. 
Is this impression right? 
The story in Linyi is the kind of news that propaganda officials usually bury in the Communist Party’s secret files. 
According to reports, local authorities in Linyi, seeking to avoid exceeding birth quotas under China’s “one-child” policy, forced several women to undergo abortions and forcibly sterilized many couples with more than one child. 
Villagers who hid to avoid the campaign reportedly saw their family members jailed. 
Some in Linyi alleged degrading treatment, torture, and extortion. 
Why investigate and report this scandal? 
The Xinhua reports, I believe, are best read as damage control. 
China is trying to secure funding from the United Nations to improve reproductive health – an effort that has been set back by reports of forced abortion. 
Central authorities did not investigate the Linyi abuses until news of the harassment of Chen Guangcheng – and his abduction with the help of Beijing police – spread into international media. 
Chen had reported the abuses to officials and asked a non-governmental organization, the Citizens’ Rights Defense Group, to investigate. 
The group went to Linyi in May. 
A month later, the network of Chinese Human Rights Defenders reported the group’s findings and demanded the intervention of the central government’s Family Planning Commission (FPC). 
As a volunteer for the network, I was in touch with Chen and followed events closely. 
In July, having failed to elicit any government response, Chen began seeking legal aid from prominent lawyers to prepare lawsuits on behalf of the victims, causing alarm among local officials. Pursued by police, Chen went into hiding. 
My “personal safety was threatened,” he wrote on August 30 in the last email I received from him. 
Following strenuous international protests over Chen’s kidnapping, the FPC decided to investigate. 
Xinhua announced that local officials responsible for the violence might be prosecuted. 
Central authorities seemed to sense an immediate need to quell criticism of its controversial population-control efforts. 
And Xinhua wasted no time in claiming that the abuses were limited to a few towns. 
However, central government authorities have done little to halt intimidation of Linyi’s villagers. 
Chen was released from detention but remains under house arrest and was dragged back to the police station on September 2 for unknown reasons. 
Police refuse to return Chen’s personal computer and cell phone. 
The village, too, is mysteriously without phone service. 
Meanwhile, through arrests, threats, and bribery, authorities are forcing villagers to withdraw accounts of abuse and back out of their lawsuits, warning of the dire consequences of cooperating with Chen and the lawyers. 
The FPC declines to intervene, citing lack of law-enforcement powers. 
On October 10, the villagers’ lawyers were told that the court hearing scheduled that day was canceled. 
On their way back to Beijing, thugs reportedly assaulted the lawyers. 
Viewed in this context, the belief that the government’s approach to Linyi reflects a new responsiveness to human-rights abuses seems naïve. 
If the government were truly becoming more responsive, why have we not seen similar responses to other disputes over the theft of farmland, compromised investors’ rights, or high-level corruption? 
In all these cases, authorities have responded with repression, including the hiring of plain-clothes militias to kidnap or beat up people who attempt to publicize problems. 
China’s belated bouts of openness about the rural spread of AIDS and the SARS epidemic clearly indicate that the central government regards transparency solely as a matter of expediency. 
Others argue that China’s government is simply losing its grip over local authorities. 
This prospect is hardly encouraging. 
If abuses and repression in the provinces continue no matter how attentive the central government, or how assertive the press might have become, what then? 
More likely, however, the central authorities are following a policy that most Chinese know well: neijin waisong, or “controlled inside, relaxed outside.” 
Applied here, the policy means consolidating power at home while disarming critics abroad. 
I believe that the government’s loss of control in the provinces has been stage-managed. 
Chaos provides a cover for crackdowns. 
It is too convenient when unidentified strongmen beat and harass activists who question Party rule, and it is too easy for officials to blame an out-of-control “criminal society” when international media start asking questions. 
Suspiciously targeted “criminal” assaults have, indeed, occurred in places other than Linyi. 
Thugs thrashed civil rights activist Lu Banglie in the Guangdong town of Taishi in early October. 
Six villagers in the Hebei village of Dingzhou, protesting government seizure of their land, died after bloody clashes with a gang of toughs in July. 
The list goes on. 
State media recently started releasing year-end “mass incident” statistics. 
Last year, the government said, there were 74,000 such incidents. 
Observers marvel that China’s leaders admit to such a staggering number of protests. 
But here, again, the government is hiding in plain sight. 
State-run media organs have been forced to admit that these protests test the Party’s will to maintain power. 
They neglect to tell the real story of how the Party exercises that will, trusting that the admission itself will satisfy us. 
We should not be so quick to play along. 

China’s Afghan Game Plan 
MADRID – In his latest book, On China, Henry Kissinger uses the traditional intellectual games favored by China and the West – weiqi and chess – as a way to reveal their differing attitudes toward international power politics. 
Chess is about total victory, a Clausewitzian battle for the “center of gravity” and the eventual elimination of the enemy, whereas weiqi is a quest for relative advantage through a strategy of encirclement that avoids direct conflict. 
This cultural contrast is a useful guide to the way that China manages its current competition with the West. 
China’s Afghan policy is a case in point, but it also is a formidable challenge to the weiqi way. 
As the United States prepares to withdraw its troops from the country, China must deal with an uncertain post-war scenario. 
Afghanistan is of vital strategic interest to China, yet it never crossed its leaders’ minds to defend those interests through war. 
A vital security zone to China’s west, Afghanistan is also an important corridor through which it can secure its interests in Pakistan (a traditional ally in China’s competition with India), and ensure its access to vital natural resources in the region. 
Moreover, China’s already restless Muslim-majority province of Xinjiang, which borders on Afghanistan, might be dangerously affected by a Taliban takeover there, or by the country’s dismemberment. 
The US fought its longest-ever war in Afghanistan, at a cost (so far) of more than $555 billion, not to mention tens of thousands of Afghan civilian casualties and close to 3,100 US troops killed. 
But China’s strategy in the country was mostly focused on business development, and on satiating its vast appetite for energy and minerals. 
The US Defense Department has valued Afghanistan’s untapped mineral deposits at $1 trillion. 
But it is China that is now poised to exploit much of these resources. 
Indeed, China’s development of the Aynak Copper Mine was the largest single foreign direct investment in Afghanistan’s history. 
China was also engaged in constructing a $500 million electric plant and railway link between Tajikistan and Pakistan. 
Last December, China’s state-owned National Petroleum Corporation signed a deal with the Afghan authorities that would make it the first foreign company to exploit Afghanistan’s oil and natural-gas reserves. 
Once China’s enormous economic and security interests in Afghanistan are left without America’s military shield, the Chinese are bound to play an even larger role there, one that Afghans hope will reach “strategic levels.” 
China would prefer to accomplish this the Chinese way – that is, essentially through a display of soft power – or, as the Chinese government put it on the occasion of Afghan President Hamid Karzai’s official visit to Beijing in early June, through “non-traditional security areas.” 
Judging by China’s behavior in other parts of the world, any military cooperation is likely to be extremely modest and cautious. 
China has already made it clear it will not contribute to the $4.1 billion multilateral fund to sustain Afghan national security forces. 
Rather, the two countries’ recently signed bilateral cooperation agreement is about “safeguarding Afghanistan’s national stability” through social and economic development. 
China is especially keen on combating drug trafficking, as Badakhshan, the Afghan province bordering on Xinjiang, has become the main transit route for Afghan opium. 
But preventing the spillover into Xinjiang of Taliban-inspired religious extremism remains a high priority as well. 
China went to great lengths to present the recent summit in Beijing of the Shanghai Cooperation Organization, which includes China, Russia, and major Central Asian countries, as an attempt to create a fair balance of interests among regional stakeholders. 
Moreover, the SCO sought a consensus on how, in Chinese President Hu Jintao’s words, to guard the region “against shocks from turbulence outside the region.” 
Yet, however focused it is on soft-power projection in Afghanistan, China will likely find it difficult not to be drawn into the role of policeman in an extremely complex and historically conflict-ridden region. 
China’s regional outreach, moreover, clashes with that of other regional powers, such as Russia and India. 
Nor is its own ally, Pakistan, particularly eager to confront terrorist groups that threaten the security of its neighbors, China among them. 
Pakistan might find it extremely difficult to reconcile the security of its Chinese ally with its de facto proxy war with India. 
China might then be forced to bolster its military presence in Pakistan and in tribal areas along the Afghan border in order to counter terrorist groups such as the Pakistan-based East Turkestan Islamic Movement, which the Chinese believe is responsible for attacks in Xinjiang. 
The preferred Chinese way would be that of cooptation and dialogue. 
Indeed, Chinese diplomacy has been busy lately in trilateral talks with Pakistan and Afghanistan aimed at achieving reconciliation with the Taliban. 
Nor is China interested in stirring up the conflict between its Pakistani allies and its Indian rivals. 
On the contrary, China has argued for years that the main problem affecting Afghanistan’s stability is the India-Pakistan proxy fighting, and that peace in Kashmir is therefore the key to peace in Afghanistan. 
The task of defending its interests in Afghanistan after US withdrawal is a truly formidable challenge for Chinese diplomacy. 
It is inconceivable, though, that the Chinese would enter into the kind of massive US-style military intervention to which the world has grown accustomed in recent years. 

China’s AIDS Crisis 
It is rare for a foreign doctor to get to China’s rural areas, where its AIDS epidemic was born and takes a horrible toll. 
But recently, two nurses and I ventured into a poor farming area, Nizui in Hubei Province, as part of a Medecins Sans Frontières(MSF) team to visit the Liu family and evaluate their 7-month-old baby. 
The child was the size of a two month old, but his eyes held the gaze of an 80-year-old man long acquainted with extreme suffering. 
The baby was dying of AIDS. 
His parents, aunts, and uncles were also HIV-positive. 
The Liu family is one of thousands of poor farming families in China’s interior who contracted HIV through contaminated blood donations during the 1990’s, when under-regulated for-profit blood banking companies reused needles and transferred blood from infected donors to clean donors after extracting the plasma. 
The Chinese Health Ministry recently put the total number of HIV/AIDS cases at 840,000, although most experts believe that the true number is much higher. 
Some believe that by 2010, the number of infected Chinese may reach 10 million. 
After years of taking a passive, low-profile approach to the epidemic, health officials have stepped up their anti-HIV campaign. 
Since 80% of HIV/AIDS patients reside in the countryside, greater access to health care in these areas has become a priority. 
This past July, during the highly publicized 15th International AIDS Conference in Bangkok, Premier Wen Jiabao declared all-out war against the burgeoning epidemic. 
Earlier this year, the government promised blood-products screening, free voluntary HIV testing, and free medicine for the poor. 
This new anti-HIV/AIDS campaign, which the international community has lauded, is more open and proactive than before. 
But it must still operate in the context of a closed society, where government control over the media limits the flow of information necessary to deal with any public health epidemic. 
Moreover, it is unclear how care will be delivered to the rural front lines, where the old system of clinics based in Peoples’ Communes collapsed with the de-collectivization of agriculture. 
To be effective, clinics in areas where HIV/AIDS is prevalent must provide patients with the same standard of care that is offered for other health conditions. 
Unfortunately, the door to such access remains largely closed, partly because China was initially reluctant to allow overseas groups into their hinterlands to assist. 
Nonetheless, local and foreign NGO’s are now starting to play a role in filling the gap between government policies and front-line healthcare delivery. 
In May 2003, MSF was authorized to set up an HIV/AIDS clinic in Xiangfan, Hubei Province. 
On my recent visit, I met Mr. Du, a thin-framed, HIV-positive farmer who lost his wife to AIDS last year and was desperate to prevent his infected 7-year-old son from meeting the same fate. 
He had been taking the boy all over China by train, bus, and truck in search of help. 
Last month alone, they visited five large cities without success. 
The chance that Mr. Du, and those like him, will find help in China is slim; at present, most clinics and hospitals are not adequately prepared to treat HIV-infected patients. 
Treatment is extremely limited where it is available. 
For example, Xiangfan’s Infectious Diseases Hospital is the prefecture’s only health facility where HIV/AIDS patients can be admitted. 
On paper, the hospital appears well staffed and adequately equipped, but on my rounds there, I found the halls and wards deserted and barren. 
Few therapeutic and diagnostic options were available. 
Even a basic test like a CAT scan would require transport to another regional hospital. 
But under-equipped hospitals may not be the greatest obstacle to controlling China's AIDS crisis. 
Equally harmful are the government’s sensitivity to its own policy failures and the stigma attached to a disease that is often sexually transmitted. 
Indeed, information is so limited and the stigma so strong that ordinary people – and sometimes medical personnel – often ostracize AIDS patients. 
Patients who do receive care are often treated with substandard, even harmful, medicine. 
According to the International Federation of Pharmaceutical Manufacturers Associations, patients in China can have a 40-50% chance of being sold fake over-the-counter remedies and an even higher chance of being sold fake prescription drugs. 
Some of these counterfeit products contain toxic ingredients. 
Foreign NGOs such as MSF insist on using medications that are up to World Health Organization standards, but the Chinese government insists that such restrictive measures are excessive. 
Although MSF uses its own drug supply, Chinese patients still often buy medicine with unknown ingredients and efficacy on the street. 
Safety regulations must, at a minimum, be applied to the prescription of the anti-retroviral medications that fight HIV, because such drugs are extremely sensitive to dosage changes and interactions with other medicines. 
Improper use of these medicines fosters HIV resistance and provides little therapeutic value for patients. 
There is no quick-fix solution to ending China’s AIDS crisis. 
Officials there must focus not only on developing a pragmatic, realistic healthcare infrastructure in rural areas, but also on bringing about greater openness in China’s media in order to spread life-saving public information. 
Like all epidemics, HIV/AIDS in China is a public health crisis that can only be solved with the mass dissemination of accurate information. 
Transforming promises and policies into patient rights, awareness, and effective health care will undoubtedly take time, especially for a country as massive and lacking in transparency as China. 
For the hundreds of thousands of HIV sufferers, this is likely to be more time than they have left. 

China’s and the WTO: Unfinished Business 
China’s tortuous road toward membership in the World Trade Organization (WTO) is winding toward its end. 
Before China joins, however, the final terms on which it enters the WTO must be negotiated with a group of WTO members acting on behalf of the organization and expressed in a formal agreement, the Protocol of Accession. 
Big legal issues that have been put to the side must now be tackled. 
When China joins the WTO, it will become committed (like all other members) to policies and practices that have been agreed on by the international community of trading nations and are expressed in the General Agreements on Tariffs and Trade (GATT) and other multilateral treaties. 
China’s lengthy negotiations with the US and the European Union over WTO membership largely focused on vexatious economic issues, such as lowering tariffs, ending quotas on exports to China, opening its market to key imports where access has hitherto been excluded or limited, and permitting foreign investment in industries such as telecommunications. 
Those bilateral negotiations will benefit other members of the WTO as well, because membership in the WTO obligates China to treat all other members equally. 
Too little attention has been paid, however, to other matters that will also affect all WTO members, namely the measures that China must take to raise its level of legality to meet standards set down in the GATT. 
A draft of the Protocol of Accession – under negotiation for years but not yet final – contains provisions that could change Chinese law and accelerate the construction of a legal system, a process that only began twenty years ago when Deng Xiaoping launched China’s economic reforms. 
China has already agreed to move toward meeting relevant WTO standards, such as Article X of the GATT, which obligates members to apply trade laws in a “uniform, fair and reasonable manner.” 
In China, however, such uniformity is unattainable today because the actions of local governments frequently diverge from central government policy. 
China’s courts and the salaries of its judges are funded, not by the Beijing, but by local governments, which makes judges and the courts beholden to them. 
Fairness and reasonableness are also distant goals, because there is vast disorder among Chinese law-making institutions, central and local alike. 
The draft Protocol contains language in which China agrees to establish independent “tribunals… and procedures for the prompt review of all disputes relating to the implementation of laws, regulations, judicial decisions and administrative rulings of general application.” 
China cannot meet this standard, either. 
Chinese law limits the types of bureaucratic actions that can be challenged by lawsuit, such as abuses of discretion. 
Also, Chinese law limits the questioning of administrative rules before they are put into practice. 
Although much activity is under way to draft legislation to reform administrative law, these drafts are unlikely to be adopted for years. 
These issues are of enormous practical importance for companies doing business with China. 
For unless these changes are made, how can businessmen know how to ascertain the lawfulness of the actions of Chinese officials, such as imposing fees or penalties, refusing to award contracts, or imposing conditions on contract approvals? 
The draft Protocol does not yet require China to adopt rules to govern administrative procedure or the standards of evidence to be used by administrative agencies. 
Nor does it address deficiencies in existing legislation that prevent challenges to the rules on which agencies base their decisions or to the exercise of discretion by bureaucrats. 
The Protocol’s current draft, indeed, falls well short of the necessary specificity. 
Even if the language of the Protocol is sharpened before China joins the WTO, China’s trading partners should hold realistic expectations about the limited results China can attain even if its reforms are energetic and sincere. 
A legal tradition vastly different from the West, and decades of Maoist rule before the Deng era, make rapid change in Chinese legal institutions impossible. 
The consequences of this may be severe. 
China’s failure to meet GATT standards may catalyze any number of disputes, enough to overload the WTO dispute settlement process, and the processes of obtaining decisions and implementing them could be very time-consuming. 
What is to be done? 
China’s trading partners and foreign NGO’s can provide needed assistance to China by supporting programs that foster improvements in Chinese legality. 
The EU, Canada and the Asian Development Bank are already engaged in such efforts. 
Despite past refusal by America’s Congress to fund programs to further the rule of law in China, recent US legislation authorizes modest efforts to provide assistance to increase China’s capacity to meet its obligations as a WTO member. 
China’s admission to the WTO will mark another stage of its membership in the international community. 
None of this should be greeted with euphoria, for China’s markets will not open magically and China’s governance will not change quickly. 
Successful change will require clear expectations and much effort on all sides. 

China's Anonymous Gulag 
With rare candor, China's government recently released statistics on people arrested and prosecuted for endangering state security, the most serious political offence in the criminal code. 
China's top prosecutor, Han Zhubin, revealed that more than 3,400 people were arrested from 1998 to 2002 for such crimes as subversion, incitement to subversion, espionage, and trafficking in state secrets. 
Arrests and prosecutions for endangering state security have risen sharply since September 11, 2001. 
In the two-year period that ended on December 31, 2002, more than 1,600 people were prosecuted for endangering state security, most after the terror attacks on the US. 
Many of those arrested and prosecuted hail from Xinjiang, an autonomous region in the northwest of the country that is home to a large and restive Muslim population. 
China's government has used the war on terror to crack down on those seeking greater autonomy, including those who do so by peaceful means. 
This includes people like Rebiya Kadeer, a businesswoman imprisoned for sending newspaper articles to her husband in the US, Tohti Tunyaz, a Ph.D. student in Japan accused of publishing "sensitive documents," and Tursunjan Amat, a poet who recited a pro-independence poem at a public gathering in Urumqi. 
Large as the number of such arrests and prosecutions is, the true extent of the government's suppression of independent thought and activity is even greater. 
Most members of the Falun Gong and other unauthorized religions are arrested and tried for "using an evil cult to sabotage implementation of the law"--a crime categorized as "disturbing the social order." 
Thousands of people are imprisoned for such "evil cult" activities. 
Labor leaders are often charged with "organizing an illegal procession" or "disturbing the social order." 
Dissidents who attempt to fund their activities by conducting private business sometimes find themselves jailed for economic crimes like fraud and illegal publishing. 
Fang Jue, a reformer who served a four-year term for economic crimes, and Jiang Surang, an underground Catholic priest sentenced to six years for illegally publishing Bibles, were both punished in this way. 
Dissidents picked up by the police but not formally arrested sometimes wind up in re-education camps or in psychiatric hospitals run by the public security bureau. 
Those sentenced to two- or three-year terms of "re-education through labor" are not included in the statistics on endangering state security released by Procurator General Han. 
The names of only a few of the thousands arrested for political crimes are known. 
An exhaustive search of official and unofficial sources turned up fewer that 150 names of individuals arrested for endangering state security in 1998-2002, a "transparency rate" of less than 5%. 
Indeed, we know more about the arrests made after the Tiananmen protests of 1989 than about those arrested today. 
What we do know about those arrested is as disturbing as the arrests themselves. 
For example, about one-quarter are non-Han Chinese, principally Tibetans and Uyghurs. China is more than 90% Han. 
Sentences for non-Han Chinese are typically longer than those imposed on Han Chinese. 
Moreover, almost everyone arrested for endangering state security is convicted. 
Appeals, when filed, are routinely rejected. 
In the one or two cases of acquittal, another charge is filed and a conviction obtained. 
That happened to Yue Zhengzhong, who sent an intercepted letter to the US Embassy praising the 1999 bombing of China's Embassy in Belgrade. 
Prosecuted for inciting subversion, Yue was ultimately convicted of "making a false accusation." 
He had written that those killed deserved their fate. 
Although some of those convicted of endangering state security are charged with violent crimes--for example, two Tibetans were recent sentenced to death for "inciting separatism" and setting off bombs--the great majority involve non-violent speech and association. 
Dozens of leaders of opposition groups--most unknown to the outside world--were imprisoned in recent years. 
Li Wenshan and Chen Shiqing, leaders of the Chinese Nation's Democratic Party, which has nearly 1,000 members, are serving long sentences in Gansu Province's Linxia Prison. 
"Internet dissidents" make up the fastest-growing group of political prisoners. 
Last month, Huang Qi, an Internet entrepreneur arrested for posting articles criticizing the Communist Party, and four young intellectuals who made up the "New Youth Study Group" to hold online discussions about political reform, were sentenced to long prison terms. 
Scholars, too, feel the heat. 
Xu Zerong, a social scientist trained at Harvard and Oxford, is serving a 13-year sentence in Guangdong Province for photocopying materials on Chinese military tactics during the 1950-53 Korean War. 
Many hope that the SARS crisis will encourage China's leaders to become more transparent and accountable. 
But the way the authorities are handling the epidemic is having the opposite effect. 
Internal travel restrictions are used to keep lawyers from representing dissident clients. 
Prisons are closed to outside visitors. 
Meetings with foreign governments on human rights--during which information is provided on political cases--have been postponed and visits by monitors, including one from the World Psychiatric Association to investigate charges of psychiatric abuse, are on hold. 
No one knows when the long-promised visit by the UN Rapporteur on Torture will take place. 
We may get a better picture of China's public health system as a result of the SARS crisis, but when it comes to the country's political health, there is little to suggest that criticism will be tolerated or opposition allowed. 
Those who attempt to change the way China is governed will be dealt with harshly, their names and fates remaining anonymous. 

China's Anti-Secession Law Boomerangs 
The passage of any law by China’s rubber-stamp National People’s Congress is always a mere formality. 
But the controversial legislation to outlaw Taiwanese secession has proved anything but routine. 
It raised the stakes for the island’s pro-independence camp and increased the risk of a cross-Strait military conflict. 
The anti-secession law’s vague language and attempt at softened wording – perhaps geared toward mollifying foreign critics – paradoxically increases rather than decreases the likelihood that China and the United States could be unwittingly and unwillingly drawn into an avoidable military conflict. 
By failing to clearly delineate presumed or potential “red lines” for Taiwan, the law leaves open the possibility of substantial miscalculation or misinterpretation. 
Despite several weeks of intense US pressure to soften - or even retract - the proposed law, China’s leaders did little more than attempt to reinforce their position that “non-peaceful” (i.e., military) measures would serve strictly as a last resort - which had already been assumed anyway. 
The Bush administration’s reaction was uncharacteristically blunt, with its call for “Beijing to reconsider the passage of the law'” – a rather directly worded intrusion into what China considers to be an internal matter. 
Taiwan’s December 2004 legislative elections had delivered an unexpected defeat for Chen and his ruling Democratic Progressive Party, or DPP, and the pro-independence camp’s failure to secure a legislative majority was seen as a positive development for relations with the mainland. 
Indeed, the start of 2005 saw some movement on improved ties, with the introduction of a hugely successful lunar new year charter-flights program. 
This gave rise to serious discussion about instituting permanent direct air links to aid bilateral trade flow. 
Now, in the aftermath of the anti-secession law, the future of the charter-flights scheme looks bleak. 
Opinion polls in Taiwan reflect public dismay over the Chinese legislation, and this negative sentiment will raise the pressure on President Chen, who recently antagonized some of his more ardent pro-independence supporters by reaching out to the pro-unification opposition People First Party. 
A survey by Taiwan’s China Times found that 56% of those polled resented the anti-secession law, with 47% saying that Taiwan should retaliate by either holding a public referendum on the issue or introducing counter-legislation of its own. 
There are now serious concerns that the so-called dark greens – the harder-line faction in Taiwan’s pro-independence pan-green political camp – will seize this issue as a stick with which to beat President Chen. 
As DPP legislator Hsiao Bi-khim recently said, the anti-secession law “will make it very hard for us to be moderates”. 
One of the more frustrating elements of the anti-secession law is the fact that it is an entirely unnecessary provocation. 
The absence of laws mandating force to block separatist activity has never stopped Chinese authorities from brutally persecuting individuals and groups who have called for an independent Tibet or Xinjiang. 
There is thus little reason to believe that a more explicitly assertive stance is necessary for dealing with the “splittist” government in Taipei. 
Missile tests, PLA military exercises and threatening rhetoric have been sufficient deterrents until now. 
Mainland officials justify the law in terms of clarifying their policy and establishing a legal premise for invading the island. 
In practice, however, the construction of legal foundations could weaken the Chinese government’s operational flexibility when responding to a Taiwanese move toward independence. 
The law of unintended consequences dictates that this effort to deny ambiguity to Taiwanese activists could backfire, and instead leave mainland leaders without room to maneuver if Taiwan does attempt to revise the status quo. 
This means that the Hu Jintao administration could well have its hands tied, and find itself unable to pursue some kind of compromise solution to a situation that is already fraught with nuance and complexity, and which shows no sign of getting easier to manage with the passage of time. 
While outright military conflict is still considered unlikely, the combination of China’s vague “red lines” and non-specific threats will certainly raise the likelihood of miscalculation and misinterpretation on both sides. 
More broadly, the fact that the anti-secession law was introduced at all comes as a major disappointment to those who had been impressed by the apparent sophistication and skillfulness of recent Chinese diplomacy. 
Coming in the same week as China’s poorly handled removal of Tung Chee-hwa as Hong Kong’s Chief Executive, the anti-secession law episode illustrates that the mainland’s PR savvy has its limits and that Taiwan will remain an emotional and divisive thorn in the side of Sino-US relations. 

China’s Antifragile Ambitions 
HONG KONG – China has once again reached a crossroads on its journey toward inclusive, sustainable prosperity. 
At the Chinese Communist Party’s congress in November, the new leadership was tasked with plotting the country’s path for the next ten years, which entails modernizing China’s social, political, and economic systems within the constraints of its history and changing geopolitical context. 
By any standards, the reform agenda is ambitious – especially given a fragile and unaccommodating external environment. 
Within the next decade, China’s leaders must design and implement reforms to combat corruption; support migration to cities (such as liberalizing the house-registration system); promote technological innovation; rebalance sources of economic growth; raise environmental and labor standards; and build the country’s social-welfare system, including health care, education, and social security. 
To ensure a system’s sustainability, its design must account for what Nassim N. Taleb called rare “black swan” events – which, as the global economic crisis demonstrated, do occur, with devastating consequences. 
But measures to make systems more “resilient” or “robust” would be incomplete. 
They should not only be able to withstand volatility; they should be primed to profit from stress and chaos. 
Recently, Taleb coined the term “antifragile” to describe a system that benefits from inherent uncertainty, volatility, and disorder. 
He pointed out that, while rigid systems may seem more stable, they are not equipped to cope with unexpected shocks, making them fragile in the long run. 
By contrast, frequent exposure to localized, temporary volatility forces systems to become more dynamic and flexible, enhancing their capacity to thrive under pressure. 
Given this, rather than allowing demands for maximum efficiency to push structures to their limits, redundancies (equivalent capabilities implemented in multiple ways) should be built into systems. 
These low-cost measures nurture long-term antifragility, while capturing future upside gains that could compensate for black swan events. 
Antifragility is crucial in large economies like China, where administration is largely centralized, but activities are dispersed among families, civil society, markets, and the various levels of government. 
China’s greatest challenge lies in balancing its decentralized, family-based traditions with its centralized governance, thereby developing in its institutions the kind of antifragility that is already present in its culture. 
China has been struggling to balance centralization and fragmentation – that is, control and uncertainty – throughout its long history of rising and falling dynasties, domestic decay, and foreign invasion. 
While the open, meritocratic selection of “scholar-officials” helped to sustain China’s closed dynastic governance structure for more than 2,000 years, it could not offset the system’s growing fragility under the Qing Dynasty, as territorial gains increased the empire’s population from 150 million to 450 million. 
Rampant corruption, rising social unrest, and the inability to resist modern Western powers ultimately caused the dynasty, and the world’s longest-lasting bureaucracy, to crumble in 1912. 
The nationalist government that followed, which established the Republic of China, also failed to address the tension between centralization and fragmentation – what the macro-historian Ray Huang called China’s “mathematical unmanageability.” 
Indeed, it never developed the property-rights infrastructure or the monetary and fiscal policies needed in a family-dominated agrarian economy with an elite-run government. 
By effectively enforcing property rights and implementing national policy, the Chinese Communist Party became the institutional mechanism that bridged the divide between the elites (the Party) and the masses. 
But, in 1958-1961, excessive central planning to support the Great Leap Forward (Mao Zedong’s intensive campaign to industrialize and collectivize China’s economy) generated systemic fragility. 
The situation began to improve in 1978, when Deng Xiaoping began to implement market-oriented reforms and open up the economy, giving China access to new opportunities for economic growth and employment. 
Through the so-called Four Modernizations, the crucial sectors of agriculture, industry, national defense, and science and technology were strengthened. 
At the same time, China was slow to open up its financial system – even as other East Asian economies pursued efficiency by liberalizing their capital accounts in the 1990’s. 
As a result, when the Asian financial crisis struck in 1997, China was insulated from the volatility that ravaged its fragile neighbors. 
In fact, the crisis became an opportunity, prompting China to join the World Trade Organization, implement reforms of its financial system and state-owned enterprises (SOEs), list major banks publicly, and privatize civil-service housing. 
But many of China’s antifragile measures have been piecemeal and incomplete. 
The need to overhaul SOEs, for example, remains on the agenda, owing to the power of vested interests that oppose further privatization and market-based reforms. 
China’s leaders now must identify the specific areas in which to build antifragility, and approach the required reforms prudently. 
While they must ensure that reforms are comprehensive, they also must avoid attempting too much too fast, which could trigger resistance from deeply entrenched players or unintentionally trigger dangerous chain reactions. 
Fortunately, China’s relatively strong fiscal and foreign-exchange positions can cushion the economy against short-term shocks. 
And, notwithstanding corruption-induced fragility, the bureaucracy’s capacity to implement policy is sound. 
A major challenge will be delineating the roles and responsibilities of the Party, the state, the market, and civil society. 
Given the government’s proven capacity to intervene, the default option during a crisis has been to rely on administrative measures rather than on market forces. 
To allow disorderly self-correction by markets would require confidence at all levels of governance, from the central government to village administrations, and among SOEs. 
Moreover, China’s leaders must build sufficient institutional power within the judiciary, civil society, and the media to implement the rule of law and enhance long-term antifragility. 
This entails preventing administrative abuses, establishing a level playing field for SOEs and other companies, and divorcing regulators from regulated entities. 
As they undertake structural reforms across multiple sectors, China’s leaders have the opportunity to bolster their country’s long-term prosperity. 
But success will require striking a balance between maintaining systemic stability and allowing the country’s massive economy to adapt and grow – a challenge with which China has struggled for centuries. 

China's Asia Strategy 
For over a decade, American strategic thinking has focused on China's emergence as a great power in East Asia. 
Such thinking is passé. China already is East Asia's great power. 
While America has struggled in Iraq this year, China has spent it on a diplomatic goodwill offensive in Asia. 
The result? In October, one day after President George W. Bush was booed in Australia's parliament, Chinese President Hu Jintao received a standing ovation from the same parliamentarians. 
China's emergence as Asia's dominant power, and the overall regional balance of power, are now matters that governments across the Pacific must reckon with carefully. 
To be sure, the US remains Asia's power broker, as it has been since the end of WWII. 
But diplomacy regarding the Korean peninsula, in which all roads lead to Beijing, has opened the door to China as the new "go-to" guy. 
Indeed, the six-party meetings in Beijing earlier this year to discuss North Korea's nuclear challenge confirmed China's emerging great power status, which is also reflected in its increasingly active--and effective--Asian diplomacy. 
This includes even Japan, China's traditional rival. 
This past May, Chinese President Hu Jintao met with Japan's Prime Minister Junichiro Koizumi in St. Petersburg, Russia. 
Hu's move lifted bilateral relations out of the deep freeze, where China's previous leadership had consigned them following Koizumi's repeated visits to the Yasukuni Shrine, where the spirits of Japan's war dead, including Class A war criminals, are enshrined. 
Unlike former Chinese president Jiang Zemin, whose history lectures irritated Japan's postwar generations, Hu focused on the future, avoiding the dreaded "Y" word in the meeting with Koizumi. The Japanese media took note. 
In August, Japan's Chief Cabinet Secretary, Yasuo Fukuda, attended ceremonies in Beijing marking the 25th anniversary of the China-Japan Friendship Treaty. 
At the same time, China's Foreign Minister, Li Zhaoxing, traveled to Tokyo. 
In September, Japan's Defense Minister visited China, resuming high-level defense contacts. 
If all goes well, a Koizumi visit to China may be in the offing. 
Koizumi has long sought an official visit, only to be stymied by Chinese opposition to his Yasukuni visits. 
His interest is understandable. 
Last year, Japan's imports from China surpassed those from the US for the first time, while annual exports to China soared by 39.3%. 
Even as the SARS epidemic raged in China, Japanese companies kept their long-term investment bets on the promise of low-cost Chinese labor. 
China has been equally active to its south and west. 
In June, during the ASEAN Summit in Phnom Penh, China announced that it will sign the 1976 Treaty of Amity and Cooperation, ASEAN's founding document. 
China's accession to ASEAN represents a major confidence-building step toward Southeast Asia. 
It follows China's 2001 proposal for a China-ASEAN free trade area and its active financial support for Thailand and Indonesia during the 1997-98 Asian Financial Crisis. 
Talk of a "strategic partnership" is in the air. 
Meanwhile in South Asia, after hosting Indian Prime Minister Vajpayee in Beijing, China and India signed a Declaration on Principles for Relations and Comprehensive Cooperation. 
India acknowledges in the document that Tibet is part of China and proscribes anti-Chinese activities by Tibetans from Indian soil. 
In November, the first ever India-China joint naval exercises were held off the Chinese coast. 
If the US is looking to develop a post-Cold War strategic relationship with India to counter Chinese influence in South and Southeast Asia, the recent China-India agreements suggests that an alternative strategic calculus may exist in both China and India. 
The US must recognize that, while the countries of the region look to the US to balance--or at least leaven--China's growing influence, they are unlikely to be interested in getting caught up in any containment strategy. 
For now, US and Chinese interests coincide on the war on terrorism, on a peaceful resolution of the nuclear question on the Korean peninsula, and on stability in East Asia. 
Over the long-term, however, accommodation will be difficult on issues like Taiwan, Korean reunification, and the future of the US alliance structure in Asia. 
Moreover, on the fundamental issue of freedom--"the non-negotiable demand of human dignity," in the words of the Bush administration's National Security Strategy--American and Chinese visions conflict. 
Clearly, the war on terrorism presented China with opportunities to strengthen both its relations with the US and its ties with nations across the Pacific. 
The big question is whether today's cooperation between China and the US will prove to be no more than a diversion from Asia's enduring strategic reality--China's emergence as the region's dominant power. 
The safest bet is that Asia's realities outlast the war on terrorism, and that after Afghanistan and Iraq, when the US refocuses on Asia, it will find a very different China in a much-changed region. 

China’s Baby Step 
Whatever the ultimate economic effects of China’s first modest step towards floating its currency, one has to admire its strategic brilliance. 
The genius of China’s mini-move (allowing the Yuan to rise 2% against the dollar) is that no one can tell when or what is going to happen next. 
Protectionists in the United States and Europe, itching to slap huge punitive tariffs on Chinese goods, have been caught flat-footed. 
They want to keep bathing in press coverage, but if they push their China-bashing too far and too fast, the protectionists will be seen as hindering delicate behind-the-scenes negotiations. 
But no one knows whether China’s baby step is the start of something much bigger, as China’s authorities hint one day and deny the next. 
By relenting just a little to intense global pressure to revalue its exchange rate, the Chinese leadership has masterfully stifled the growing chorus of demands to rein in its growing trade surplus. 
The key question, however, remains whether China is defying market forces at its own risk. 
On the surface, at least, the mini-revaluation hardly seems to have compromised China’s ability to bend exchange markets to its will. 
Foreign experts had warned that a small Yuan appreciation might be worse than none. 
While hardly denting global trade imbalances, a small move would bring in a flood of foreign capital, overwhelming China’s currency defenses and leading to chaos. 
So far, that has not happened and, China once again seems to have gone its own way and proved the experts wrong. 
But hold the applause. 
Perhaps the speculative-inflow scenario will play out, but in slow motion. 
After all, China is not a country where investors can just take their money in a heartbeat. 
It can hold the fort because it maintains one of the world’s strictest regimes of exchange and capital controls. 
Unlike many Latin American and former Soviet-bloc countries, where similar controls are honored mainly in the breach, violating capital controls in China is virtually a capital offense. 
But, over the past fifty years, when many other countries, including France and Italy, implemented draconian controls, the result was always the same: eventually, the private sector adapted and eroded the controls’ effectiveness. Whether by misreporting imports and exports or exploiting corrupt government officials (which China has in ample supply), private capital eventually starts finding its way around the controls if the incentives are strong enough. 
Thus, even if the Chinese authorities can somehow keep their capital controls from hemorrhaging as the country’s financial system becomes more sophisticated and decentralized, they will not be able to stop the controls from dying a death of a thousand cuts. 
After that, China will be able to keep its exchange rate pegged only by slavishly following US interest-rate policy, which makes no sense for such a large and diverse region. 
Indeed, over the longer term, the biggest concern for China is that some day money will be trying to get out. 
Even China’s vast reserves will not be enough to stave off a painful devaluation. 
It is a lot easier to exit from a fixed exchange rate regime when the pressures on the currency are upwards. 
While it may seem hard to imagine that the speculative tide might ever turn against China, exchange-rate pressures can turn in an instant. 
Today’s darling currency can be tomorrow’s dog. 
Considering China’s huge and growing income inequalities, and its massive disguised rural unemployment, it is easy to imagine a period of political instability that sends investors heading for the exits. 
Mix in China’s shaky financial system and the prospect of trade sanctions after an altercation over, say, Taiwan, and it is clear that the Yuan might not always be a one-way bet. 
Last but not least, the Chinese authorities desperately need to maintain the country’s breakneck economic growth in order to preserve the Communist Party’s legitimacy. 
But, as the economy becomes richer and more complex, there will be no escaping the market imperative in internal credit allocation. 
Every other emerging market, even in Asia, has eventually had to cross this bridge. 
Indeed, the need to pursue financial liberalization to maintain growth is a central reason why middle-income countries are so prone to financial crises. 
That’s why Chinese authorities should move to greater flexibility now, and not wait until it is too late. 
So should we expect to see much bigger currency moves in China anytime soon? 
Should we ever expect to see wild gyrations in China’s exchange rate of the sort one routinely sees in, say, the Australian dollar or the South African rand? 
Neither scenario is very likely. 
Only fire-breathing free-market advocates, seemingly oblivious to the fact that China’s shaky financial system cannot survive liberalization overnight, are calling for an extreme version of floating. 
But there may well be a lot more to come over the next 12-18 months. 
The first round of Yuan revaluation won’t be over until the currency is up against the dollar by at least 10%, and probably more. 
China’s first currency move was brilliant only if it is not the last. 

China’s Bad Bet Against America 
CAMBRIDGE – Chinese-American relations are, once again, in a downswing. 
China objected to President Barack Obama’s receiving the Dalai Lama in the White House, as well as to the administration’s arms sales to Taiwan. 
There was ample precedent for both American decisions, but some Chinese leaders expected Obama to be more sensitive to what China sees as its “core interests” in national unity. 
Things were not supposed to turn out this way. 
A year ago, the Obama administration made major efforts to reach out to China. 
Secretary of State Hillary Clinton referred to “being in the same boat,” and that China and the United States would “rise and fall together.” 
Treasury Secretary Timothy Geithner said he spent more time consulting his Chinese counterparts than those in any other country. 
Some observers even referred to a US-Chinese “G2” that would manage the world economy. 
The G2 idea was always foolish. 
Europe has a larger economy than both the US and China, and Japan’s economy is currently about the same size as China’s. 
Their participation in the solution of global problems will be essential. 
Nonetheless, growing US-Chinese cooperation within the G20 last year was a positive sign of bilateral as well as multilateral cooperation. 
Whatever the concerns regarding the recent events related to the Dalai Lama and Taiwan, it is important to note that the deterioration in US-Chinese relations began beforehand. 
Many American congressmen, for example, complain that American jobs are being destroyed by China’s intervention in currency markets to maintain an artificially low value for the yuan. 
A second issue was China’s decision not to cooperate at the United Nations conference on global climate change in Copenhagen last December. 
Not only did China resist measures that had been under negotiation for the preceding year, but Prime Minister Wen Jiabao’s decision to send a low-level official to meet with and point a finger at Obama was downright insulting. 
China behaved similarly when the five permanent members of the UN Security Council (plus Germany) met to discuss sanctions against Iran for violations of its obligations to the International Atomic Energy Agency. 
Again, China sent a low-ranking official. 
What happened to those promising early signs of cooperation? 
Two reasons for the change in Chinese behavior – seemingly inconsistent at first glance, but in fact perhaps mutually reinforcing – seem possible. 
First, a political transition is expected in 2012, and, in a period of rising nationalism, no Chinese leader wants to look softer than his rivals. 
This helps to explain the recent crackdowns in Tibet and Xingjian, as well as the detention of human rights lawyers. 
In addition, China may be approaching an economic transition. 
Some Chinese argue that anything less than 8% growth would be inadequate to ensure sufficient job creation and fend off social instability. 
But, as America’s savings rate begins to rise, China’s export-led growth model, which has promoted employment in China at the cost of global trade imbalances, may no longer be possible. 
If China responds to entreaties to revalue the yuan, it may need to look tough on other issues to appease nationalist sentiment. 
The second cause of China’s recent behavior could be hubris and overconfidence. 
China is justly proud of its success in emerging from the world recession with a high rate of economic growth. 
It blames the US for producing the recession, and now holds some $2 trillion in foreign-exchange reserves. 
Many Chinese believe that this represents a shift in the global balance of power, and that China should be less deferential to other countries, including the US. 
Certain Chinese scholars are now writing about the decline of the US, with one identifying the year 2000 as the peak of American power. 
This overconfidence in foreign policy, combined with insecurity in domestic affairs, may combine to explain the change in Chinese behavior in the latter part of 2009. 
If so, China is making a serious miscalculation. 
First, the US is not in decline. 
Americans and others have been predicting decline regularly over the years: after the Soviets launched Sputnik in 1957; again when Nixon closed the gold window in 1971; and when the American rust-belt economy seemed to be overtaken by Japanese manufacturers in the 1980’s. 
But when one looks at the underlying strength of the American economy, it is not surprising that the World Economic Forum ranks the US second (just behind Switzerland) among the most competitive, while China ranks some 30 places below. 
Second, the fact that China holds so many dollars is not a true source of power, because the interdependence in the economic relationship is symmetrical. True, if China dumped its dollars on world markets, it could bring the American economy to its knees, but in doing so it would bring itself to its ankles. 
China would not only lose the value of its dollar reserves, but would suffer major unemployment. 
When interdependence is balanced, it does not constitute a source of power. 
Third, despite Chinese complaints, the dollar is likely to remain the major global reserve currency, owing to the depth and breadth of America’s capital markets, which China cannot match without making the yuan fully convertible and reforming its banking system. 
Finally, China has miscalculated by violating the wisdom of Deng Xiaoping, who advised that China should proceed cautiously and “keep its light under a basket.” 
As a senior Asian statesman told me recently, Deng would never have made this mistake. 
If Deng were in charge today, he would lead China back to the cooperative relations with the US that marked early 2009. 

China’s Bad Growth Bet 
LONDON – I recently took two trips to China just as the government launched its 12th Five-Year Plan to rebalance the country’s long-term growth model. 
My visits deepened my view that there is a potentially destabilizing contradiction between China’s short- and medium-term economic performance. 
China’s economy is overheating now, but, over time, its current overinvestment will prove deflationary both domestically and globally. 
Once increasing fixed investment becomes impossible – most likely after 2013 – China is poised for a sharp slowdown. 
Instead of focusing on securing a soft landing today, Chinese policymakers should be worrying about the brick wall that economic growth may hit in the second half of the quinquennium. 
Despite the rhetoric of the new Five-Year Plan – which, like the previous one, aims to increase the share of consumption in GDP – the path of least resistance is the status quo. 
The new plan’s details reveal continued reliance on investment, including public housing, to support growth, rather than faster currency appreciation, substantial fiscal transfers to households, taxation and/or privatization of state-owned enterprises (SOEs), liberalization of the household registration (hukou) system, or an easing of financial repression. 
China has grown for the last few decades on the back of export-led industrialization and a weak currency, which have resulted in high corporate and household savings rates and reliance on net exports and fixed investment (infrastructure, real estate, and industrial capacity for import-competing and export sectors). 
When net exports collapsed in 2008-2009 from 11% of GDP to 5%, China’s leader reacted by further increasing the fixed-investment share of GDP from 42% to 47%. 
Thus, China did not suffer a severe recession – as occurred in Japan, Germany, and elsewhere in emerging Asia in 2009 – only because fixed investment exploded. And the fixed-investment share of GDP has increased further in 2010-2011, to almost 50%. 
The problem, of course, is that no country can be productive enough to reinvest 50% of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem. 
China is rife with overinvestment in physical capital, infrastructure, and property. 
To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging. 
Commercial and high-end residential investment has been excessive, automobile capacity has outstripped even the recent surge in sales, and overcapacity in steel, cement, and other manufacturing sectors is increasing further. 
In the short run, the investment boom will fuel inflation, owing to the highly resource-intensive character of growth. 
But overcapacity will lead inevitably to serious deflationary pressures, starting with the manufacturing and real-estate sectors. 
Eventually, most likely after 2013, China will suffer a hard landing. 
All historical episodes of excessive investment – including East Asia in the 1990’s – have ended with a financial crisis and/or a long period of slow growth. 
To avoid this fate, China needs to save less, reduce fixed investment, cut net exports as a share of GDP, and boost the share of consumption. 
The trouble is that the reasons the Chinese save so much and consume so little are structural. It will take two decades of reforms to change the incentive to overinvest. 
Traditional explanations for the high savings rate (lack of a social safety net, limited public services, aging of the population, underdevelopment of consumer finance, etc.) are only part of the puzzle. 
Chinese consumers do not have a greater propensity to save than Chinese in Hong Kong, Singapore, and Taiwan; they all save about 30% of disposable income. 
The big difference is that the share of China’s GDP going to the household sector is below 50%, leaving little for consumption. 
Several Chinese policies have led to a massive transfer of income from politically weak households to politically powerful companies. 
A weak currency reduces household purchasing power by making imports expensive, thereby protecting import-competing SOEs and boosting exporters’ profits. 
Low interest rates on deposits and low lending rates for firms and developers mean that the household sector’s massive savings receive negative rates of return, while the real cost of borrowing for SOEs is also negative. 
This creates a powerful incentive to overinvest and implies enormous redistribution from households to SOEs, most of which would be losing money if they had to borrow at market-equilibrium interest rates. 
Moreover, labor repression has caused wages to grow much more slowly than productivity. 
To ease the constraints on household income, China needs more rapid exchange-rate appreciation, liberalization of interest rates, and a much sharper increase in wage growth. 
More importantly, China needs either to privatize its SOEs, so that their profits become income for households, or to tax their profits at a far higher rate and transfer the fiscal gains to households. 
Instead, on top of household savings, the savings – or retained earnings – of the corporate sector, mostly SOEs, tie up another 25% of GDP. 
But boosting the share of income that goes to the household sector could be hugely disruptive, as it could bankrupt a large number of SOEs, export-oriented firms, and provincial governments, all of which are politically powerful. 
As a result, China will invest even more under the current Five-Year Plan. 
Continuing down the investment-led growth path will exacerbate the visible glut of capacity in manufacturing, real estate, and infrastructure, and thus will intensify the coming economic slowdown once further fixed-investment growth becomes impossible. 
Until the change of political leadership in 2012-2013, China’s policymakers may be able to maintain high growth rates, but at a very high foreseeable cost. 

China’s Banking Revolution 
One of the greatest challenges China must confront before the WTO treaty enters into force in 2007 is to prepare the country’s banking system for privatization and competition with foreign banks. 
The government has established a new agency, Central Hujin Investment Company, to manage and re-capitalize big state-owned banks before they are sold. 
Hujin has already injected $60 billion of China’s foreign-exchange reserves into the Bank of China, the China Construction Bank, and the Industrial and Commercial Bank. 
The Agricultural Bank will also require new capital, although the government is not yet preparing it for privatization. 
The government’s rescue policies appear to be working. 
During the past two months, Bank of America has announced a $2.5 billion investment in return for a 9% stake in the China Construction Bank, and The Singapore-based holding company Temasek paid $1.4bn for a 5.1% stake in China Construction Bank. 
The Royal Bank of Scotland is leading an investment group that will invest $3.1 billion more in the Bank of China, while Goldman Sachs and Germany’s Allianz are close to an agreement to acquire a 9.9% stake in the Industrial and Commercial Bank for a similar sum. 
The government hopes that these foreign investments will set the stage for the banks to go public on stock exchanges in Hong Kong and elsewhere during 2006, whereas foreign banks are investing with an eye to penetrating the enormous Chinese market. 
The big three state-owned banks have vast branch networks and employ hundreds of thousands of people. 
Foreign banks could never hope to achieve such comprehensive coverage without a local partner. 
They will focus initially on sectors such as credit cards but could develop other joint ventures. 
HSBC also announced a major investment in Ping An Insurance, which could set the stage for experiments with Bancassurance in the future. 
The Bank of Communications listed on the Hong Kong stock market shortly after the HSBC investment, so it has been able to provide the market with more information than have the banks that are still awaiting privatization. 
Goldman Sachs is bullish, believing that the bank can record 17% loan growth this year, a 20-basis-point improvement in margins, and significant growth in fee income. 
The major concern, however, is evidence of a growing volume of non-performing loans. 
The Bank of Communications’ performance suggests that China’s lending boom of 2003 and 2004 could lead to another wave of defaults this year and next. 
In 2004, the investment share of GDP rose to 45%—one of the highest levels in recorded financial history—as banks financed a huge expansion of property development and manufacturing capacity. 
Now, the largest banks are claiming significant increases in non-performing property loans, while the glut of new industrial capacity implies that some firms may not have adequate profits to service their debts. 
Alhough the Bank of China curtailed its lending growth to only 6% last year because of concerns about credit quality, many new local banks have expanded their lending aggressively, and could now suffer huge losses as the economy slows and firms’ solvency weakens. 
In these circumstances, privatization will have profound consequences for China’s economy. 
The recent capital-spending boom produced a burst of speculative lending in 2003 and 2004 because the banking system was still state-owned and responsive to political pressure—until the government itself imposed credit controls in April 2004 to prevent a sharp upsurge in non-performing loans. 
In the next business cycle, China’s banks will be privately owned for the first time since 1949. 
They will make loans on the basis of commercial criteria rather than relations with big state-owned companies. 
They will be less vulnerable to political pressure from local governments to finance development projects. 
They are likely to place much greater emphasis on consumer lending, especially mortgages and credit cards. 
With China’s mortgage lending equal to only 10% of GDP, compared to 60-70% in the Anglo-Saxon countries, there is huge opportunity for growth. 
The transformation in China’s banking system, coupled with the recent decision to revalue China’s currency, will require major changes in the conduct of monetary policy. 
Until recently, an exchange-rate peg dominated China’s monetary policy, with interest rates unchanged for nine years until October 2004, as the government attempted to manage lending through administrative guidance and credit controls. 
In the future, China will have to rely more heavily on interest rates to manage monetary policy, using the price of capital, not political considerations, to influence how firms make investment decisions. 
The transformation in China’s banking system is complex and difficult because it involves a change in its fundamental nature. 
However, barring any major economic bumps, the changes will have a positive impact, as capital allocation becomes more efficient. 
Increased emphasis on household lending should also create a better balance in the economy between capital spending and consumer spending than was possible during the expansion of 2002-2004. 

China’s Blackstone Coup 
When China National Offshore Oil Company tried to buy America’s UNOCAL two years ago, it set off a political firestorm in the United States. 
When Dubai Ports World bought Britain’s P&O Steam Navigation Company, the fact that P&O operated ports inside the US led to more controversy in America. 
One would think that a country like the US, with a current account deficit of roughly $800 billion a year, would realize that such a yawning external gap is inevitably financed only by selling off assets, which means that foreigners with money acquire ownership and control of US-based businesses. 
But the US – or at least Congress and the media – doesn’t get it. 
Americans evidently hope for a world in which they can have feckless deficit-generating fiscal policies, a very low private savings rate, and a moderate rate of investment, all financed by foreign capital whose owners are happy to bear the risks yet have no control over their assets. 
One might think that foreign investors would quake in terror at these terms and shy away from dollar-denominated assets. 
But this has not been the case. 
High oil prices have created huge export revenues for Middle Eastern governments, which still want to park their earnings in American assets. 
The same is true of Russia, whose oligarchs, as well as the huge state investment fund that finance minister Alexi Kudrin has created, also want to invest their oil revenues in the US. 
As for Asia’s governments, with China in the lead, the US remains the importer of last resort. 
The key to their development strategy is to put migrants from the countryside to work making exports destined for the US market. 
They doubt that an alternative development strategy based on boosting domestic demand would succeed. 
Thus, the real values of their currencies must be kept low relative to the dollar, which means that their reserves now invested in the US must continue to grow. 
Someday, of course, this will come to an end. 
Perhaps Asian real currency values will rise sharply as a result of a burst of inflation in Asia. 
Perhaps the dollar will collapse and there will be a burst of inflation in the US as the Federal Reserve Board decides that temporarily abandoning its price-level peg is a lesser evil than the unemployment fallout that will result from a dollar collapse and interest rate spike. 
A government that buys political risk insurance by placing an ever-growing stock of reserve assets in dollar securities guards against some dangers. 
But it is exposed to other risks, especially if it confines its investments to that slice of the asset pool, US Treasury and high-grade corporate bonds, that American politicians are comfortable having foreigners own. 
Nominal bonds are not well hedged against inflation, and, over the long run, assets that are claims to cash without effective control are highly vulnerable to financial vultures. 
Prudent foreign government and private investors would find some way to diversify. 
But how? 
Buying other countries’ bonds would mean abandoning the goal of keeping real currency values low against the dollar. 
Buying up whole enterprises triggers angry speeches in the US Congress. 
What are needed are intermediary organizations that will grant a measure of control to foreigners, allow diversification across a wider range of US-located assets, and yet still appear 100% American to US politicians. 
Enter the Blackstone Group. 
China’s $3 billion investment in Blackstone, while insignificant relative to China’s $1.3 trillion of reserve assets – a sum headed for $1.5 trillion by the end of this year and likely to hit $2 trillion sometime in 2009 – is but a toe dipped in the water, a test run. 
At the start of the process, China will have small and indirect ownership stakes in a great many US enterprises, and the odds are that the usual objections will be absent. 
China will gain a measure of risk diversification, reduce the price pressure that has kept earnings on its foreign exchange reserves low, and avoid running into political trouble. 
Blackstone will gain extra cash to deploy and extra fees. 
Some observers think that the US political backlash against foreigners “buying up America” is what will bring the current configuration of global imbalances to an end. 
Deals like China’s investment in Blackstone postpone that backlash, but not for long: $3 billion is equivalent to what China accumulates in reserve in less than three working days. 
The question following China’s Blackstone investment is this: how far can this process go? 
And how much control will US investors ultimately find that they have given up? 

China’s Burden 
CHENGDU – Last month saw the 50th anniversary of what Tibetan activists like to call Tibetan National Uprising Day, the day in 1959 when Tibetans in Lhasa revolted against Chinese Communist Party rule. 
The rebellion was crushed. 
The Dalai Lama fled to India, and for at least a decade things became a lot worse: many Tibetans – possibly more than a million – starved to death during Chairman Mao’s Great Leap Forward campaign, temples and monasteries were smashed, sometimes by Tibetan Red Guards, during the Cultural Revolution, and a large number of people died in the violence. 
Chinese officials are noticeably jumpy in this year of anniversaries (20 years after Tiananmen). 
This March, I was in Chengdu, in Sichuan province, where many Tibetans live. 
Even foreign tourists who had no clue about the anniversary were stopped in the streets by policemen looking for signs of rebellion. 
The colorful Tibetan district was cordoned off. 
Not only was it forbidden to take pictures there; one couldn’t even walk through. 
The Chinese press, however, marked the anniversary with effusive articles describing Tibetan joy at being liberated from centuries of feudalism and slavery. 
If the China Daily , among other publications, is to be believed, “pre-Liberation” Tibet was a living hell, and Tibetans are now happy and grateful to be citizens of the People’s Republic of China. 
Some probably are. 
Many are not. 
But if Chinese propaganda paints too dark a picture of the Tibetan past, Westerners who sympathize with the Tibetan cause are often too sentimental. 
The personal charm of the Dalai Lama, combined with the Himalayan air of superior spiritual wisdom, has promoted a caricature of a mystical, wise, and peace-loving people being crushed by a brutal empire. 
It was not for nothing, however, that quite a few educated Tibetans actually welcomed the Chinese Communists in 1950. 
The Buddhist clergy was seen, not without reason, as hidebound and oppressive. 
Chinese Communism promised modernization. 
And that is what China’s government delivered in the last few decades. 
Lhasa, a sleepy, rather grubby backwater only 30 years ago, is now a city of huge public squares, shopping centers, and high-rise buildings, connected to the rest of China with a high-speed railway line. 
It is true that Tibetans, sparsely represented in local government, may not have benefited as much as the Han Chinese, whose presence in cities, such as Lhasa, as soldiers, traders, and prostitutes is so overwhelming that people worry about the extinction of Tibetan culture, except as an official tourist attraction. 
Still, there is no question that Tibetan towns are now more modern – in terms of electrification, education, hospitals, and other public facilities – than they were before. 
This is one of the arguments used not only by Chinese officials, but by almost all Chinese, to justify Tibet’s absorption into greater China. 
This argument has a long history. 
Western (and, indeed, Japanese) imperialists used it in the early twentieth century to justify their “missions” to “civilize” or “modernize” the natives. 
Taiwan, under Japanese rule, was in fact more modern than other parts of China. 
And the British brought modern administration, as well as railways, universities, and hospitals, to India. 
Outside a fringe of nostalgic chauvinists, however, most Europeans and Japanese are no longer so convinced that modernization is sufficient validation of imperial rule. 
Modernization should be carried out by self-governing people, not imposed by foreign force. 
Tibetans, in other words, should be allowed to modernize themselves. 
But the Chinese have another argument up their sleeve, which seems more plausible (and more modern). 
They are justly proud of the ethnic diversity of China. 
Why should nationality be defined by language or ethnicity? 
If Tibetans should be allowed to break away from China, why not the Welsh from Britain, the Basques from Spain, the Kurds from Turkey, or the Kashmiris from India? 
In some cases, the answer might be: well, perhaps they should. 
But ethnicity as the main marker of nationality is a vague and dangerous concept, not least because it leaves all minorities out in the cold. 
So are people wrong to support the Tibetan cause? 
Should we dismiss it as sentimental nonsense? 
Not necessarily. 
The issue is not so much Tibetan culture, or spirituality, or even national independence, but political consent. 
In this respect, the Tibetans are no worse off than other citizens of the People’s Republic of China. 
Historic monuments are being bulldozed everywhere in China in the name of development. 
Culture is being sterilized, homogenized, and deprived of independence and spontaneity in all Chinese cities, not just in Tibet. 
No Chinese citizen, regardless of whether he or she is Han, Tibetan, Uighur, or Mongolian, can vote the ruling party out of power. 
The problem, then, is not mainly one of nationality or discrimination, but of politics. 
The Chinese government claims that Tibetans are happy. 
But, without a free press, and the right to vote, there is no way of knowing this. 
Sporadic acts of collective violence, followed by equally violent oppression, suggest that many are not. 
Without democratic reform there will be no end to this cycle, for violence is the typical expression of people without free speech. 
This is true not only for Tibet, but also for the rest of China. 
Tibetans will be free only when all Chinese are free. 
In that sense, if in no other, all citizens of China hang together. 


China's Challenge to Latin America 
Relations between China and Latin America and the Caribbean are paradoxical. 
While bilateral trade has increased and diplomatic relations have strengthened in the past few years, a lack of knowledge persists between the two regions, and in some cases tensions are growing. 
Hardly any major projects between China and Latin America have been initiated by the private, public, or academic sectors, and bilateral institutions do not yet reflect the weight of economic dynamics. 
There are two aspects to this paradox. 
First, many Chinese enterprises – particularly in basic-goods sectors such as soy, meat, iron, steel, copper, and oil – have initiated activities in Latin America, either through direct investment or by buying products and/or businesses. 
To a lesser degree, Latin American enterprises – such as Gruma, Modelo, Embraer, Marco Polo, and Embraco – have successfully introduced themselves in China. 
Even so, Latin America remains a secondary economic and commercial partner for China. 
In 2006, Latin America and the Caribbean accounted for 3.7% of China’s exports and 4.3% of its imports. 
But bilateral trade has been growing at impressive rates, with Chinese exports and imports up by 24.8% and 23.9%, respectively, from 1995 to 2006. 
Indeed, for practically all of Latin America’s countries, China is one of the ten main trade partners – and already in second place in several – with rates of growth well above total trade. 
Even in the Caribbean and Central American countries – several of which do not have diplomatic relations with China – commerce has been prolific. 
Second, China’s large-scale penetration of the United States and European Union markets has, in many cases, displaced Asian and Latin American competitors. 
In the case of the US, for example, Latin America’s share of total imports, at roughly 17%, has not grown since 2000. 
In fact, major producers like Argentina, Brazil, and Mexico have seen their participation in US imports decrease, whereas China’s increased to 16% 2006, from 3% in 1990. 
China represents a strong ideological challenge for the region, particularly for the status quo of economic policy promoted by the majority of multilateral institutions since the 1980’s. 
China would seem to fit the profile of “the worst student who got the best job,” with its GDP per capita growing – under “ideologically erroneous” conditions – 17.3 times faster than in Latin America from 1980 to 2005. 
Contrary to most of Latin America, China’s public sector is omnipresent, exercised through direct ownership or control of incentives in the private sectors. 
Nor has it liberalized labor and product markets, and it maintains strict control over the exchange rate and capital account. 
Likewise, it develops five-year plans –and in many cases, such as in science and technology, plans that exceed 15 years. 
Even so, with its cheaper labor force and faster technological growth, China has attained higher export competitiveness than Latin America, several of which it has displaced in key sectors, such as thread and dry goods manufacturing, electronics, and furniture, since 2000. 
Whereas China exports manufactured products with an increasing level of technological inputs, Latin America continues to export basic goods with a minimum of added value. 
China represents a massive challenge even for countries, such as Brazil, that have achieved a significant trade surplus up to now. 
So dividing Latin American countries into “winners” and “losers” makes no sense. 
Aside from importing basic goods, China exports manufactured goods throughout the region. 
According to the Brazil-China Business Council, Brazil will have its first trade deficit with China in 2007, despite growth exports of minerals and agricultural products. 
Central America and Mexico have been running bilateral deficits for years, with Mexico’s import/export ratio in 2006 at 16:1. 
Latin American countries would thus benefit from an open, non-ideological, and critical analysis of development experiences in the past few decades. 
They also need an effective rapprochement – going beyond diplomacy – that implies greater investment in bilateral institutions. 
Otherwise, relations between China and Latin America will be far from harmonious, even as their significance continues to grow. 

China’s Choice in North Korea 
TOKYO – If the most dangerous moment for any dictatorship is when it starts to reform, North Korea looks ready to turn that truism on its head. 
Its recent shelling of South Korea suggests that the failing Kim dynasty might set East Asia alight rather than undertake any serious reform. 
If peace really is the key component of China’s rise, the Chinese must now rein in their mercurial client. 
Trying to understand the “Hermit Kingdom” can be like staring into a black hole. 
Some view the bombardment of South Korea’s Yeonpyeong Island as a bid to divert North Koreans’ attention from their country’s collapsing economy, or perhaps from the approaching death of their “Dear Leader,” Kim Jong-il, or to create a synthetic reputation as a military leader for Kim’s son and intended heir, the 27-year-old (or so) “Young General,” Kim Jong-un. 
Others view the attack as simply another in a long line of provocations, and thus not to be taken all that seriously. 
Hwang Jang-yop, North Korea’s former chief ideologist and its most senior defector to the South, describes North Korea as a mixture of “socialism, modern feudalism, and militarism.” 
It has proven to be a lethal combination. 
Roughly 1.5 million of North Korea’s 23 million people are estimated to have starved to death over the past decade. 
Hunger remains widespread, if not as dire as two years ago. 
The standard daily ration is 150-300 grams (5-10 ounces) of corn or rice (equivalent to roughly four slices of dry bread), depending on the location. 
Food often remains unavailable in rural areas. 
Atop North Korea’s starvation economy sits a personality cult that dwarfs those of Stalin or Mao. 
Ubiquitous images of Kim Jong-il and his father, Kim Il-sung, are the official symbols of a secular theocracy based on juche (pronounced choocheh), the Kims’ contribution to the world’s patrimony of totalitarian ideologies. 
As with the Church or the divine right of kings, the system cannot be challenged without undermining the infallibility of its perfect leaders. 
The third and seemingly scariest component of Hwang’s formula, militarism, may in fact prove to be the system’s Achilles heel. 
Maintaining the world’s fifth-largest army in a perpetual state of combat readiness is crushingly expensive for one of its poorest countries, with the military budget claiming an estimated one-third of GDP. 
The armed forces operate a parallel economy, with its own mines, farms, and factories, though many soldiers and junior officers still go hungry. 
The permanent war footing is just one manifestation of North Korea’s obsession with rugged self-sufficiency. 
Juche is autarky raised to the level of philosophy. 
The North Koreans consider any reliance on the outside world as a source of weakness, even though their economy would collapse without Chinese handouts. 
Because North Korea does not repay loans, it cannot borrow money; because it reneges on deals, it drives away potential partners; and, because it aims for autarky, it cannot specialize or exploit its comparative advantages. 
As a result, its annual exports – which include film and television animation, reconditioned cars, and, inevitably, an illicit trade in arms – are worth less than $1 billion. 
Not surprisingly, defectors nowadays describe an environment of social breakdown, petty crime, and a Darwinian struggle for survival. 
There is despondency and latent unrest. 
Corruption is rife. 
So what is Kim up to with this latest attack on South Korea? 
Kim’s main target was surely the six-party talks between his regime and the United States, United Nations, China, Russia, South Korea, and Japan. 
Previously, North Korea was offered economic and other inducements to give up its nuclear weapons. 
Like Iran, however, Kim wants to have his cake and eat it: eventual acceptance as a nuclear power and all the economic enticements from the US, Europe, Russia, and China to de-nuclearize. 
That might seem crazy, especially given the likelihood of another round of economically crippling sanctions following the bombardment. 
But Kim’s calculus is different from that of most rulers. 
He has always shown scant regard for his people’s plight, and he still expects to get two-thirds or more of the oil and food he needs from China. 
In the face of the North’s provocations, South Korean President Lee Myung-bak has demonstrated more of the statesmanship he showed in the recent G-20 summit in Seoul, when he successfully crafted a new focus on development for the group. 
President Lee’s allies have rallied, rightly, to his cause, but even we recognize that his restraint cannot be unending. 
Much, then, depends on the Chinese, whose self-defeating regional diplomacy has managed to push a listless and defense-shy Japanese government into closer cooperation with the US on security matters, and has inspired South Korea to seek out strategic partnerships with other Asian powers, including India. 
One hopes that North Korea’s recent behavior – the sinking of the South Korean warship Cheonan in March, and now the shelling of Yeonpyeong island (which followed a supposedly “accidental” shooting incident in the DMZ in October) – will focus minds in Beijing. 
But China, which fears a collapse of the North Korean regime above all, does not want to antagonize Kim. 
And China is keen to draw South Korea closer in the game of regional rivalries. 
The result could be a new round of efforts by China to manipulate regional suspicion – or worse. 
Alternatively, China could shoulder some real responsibility for security in East Asia and close ranks against Kim and his reckless brinksmanship. 
That should start with support for a clear condemnation of North Korea by the UN Security Council. 
That global effort will almost certainly not succeed without a credible Chinese threat to sever Kim’s economic umbilical cord. 

China’s Construction Fetish 
NEW HAVEN – As we digest the implications of China’s $586 billion stimulus plan, it is intriguing to ponder why China chooses infrastructure, buildings, and big projects every time growth needs a boost. 
Should, or can, China achieve long-term growth only by adding physical structures? 
If and when the time comes to pause or change course, will China’s existing political-economic institutions accommodate such a transformation? 
During a recent trip to Brazil, my taxi driver complained about Sao Paulo’s bumpy streets and highways. 
I responded, “I thought the high oil and iron ore prices had made Brazil boom….Why hasn’t Brazil spent more on its infrastructure?” 
He replied, “The Brazilian economy has been doing well. 
But, whenever the government has extra money, President Lula likes to give tax rebates and subsidies to people, instead of using it on the roads. 
Why?” 
“Well,” I said, “Brazil is a democracy. 
Imagine you were Lula and had $18 billion at your disposal. 
Would you rather spend it on highways, or give each Brazilian $100?” 
“Yes, give it to the people, just to win more votes.” 
In China, the government is not elected, so winning more votes is not part of the calculation, and returning money to the people is never the choice. 
The government doesn’t just spend it, but seems always to favor tangible things like skyscrapers, fancy government buildings, highways, and big industrial projects. 
This partly explains not only why democracies such as India and Brazil lag behind China in infrastructure, but also why China is focusing its new stimulus package on transport systems (railroad projects alone will receive more than half of the $586 billion stimulus). 
In a non-democracy, officials are held accountable to their superiors, not to voters. 
And for one’s superiors, tangible projects are the easiest to recognize. 
Indeed, while China’s new stimulus plan overwhelmingly emphasizes infrastructure, it gives short shrift to social programs, such as health care and education, even though they can reduce household saving pressure and increase private consumption. 
This type of spending structure is nothing new to China. 
In 2007, government expenditure on health care, social security, and unemployment welfare programs totaled about $88 billion, or 15% of the fiscal budget and 2.4% of GDP (far below the typical percentage in both developed and developing democracies). 
Brazil’s government spends 4.7% of GDP on health care alone. 
China’s government expenditure on education is approximately 3% of GDP, compared to 5.4% in Brazil. 
Due to the lack of public oversight on government budgeting, China’s political system is especially biased to favor big physical projects, and, through taxation and state ownership, the government maintains almost full control over much national income and wealth, maximizing the impact of this bias. 
The wonderful Olympics sites in Beijing were no accident, but rather a result of the system. 
Taxation power is hardly checked by the National People’s Congress or the media. 
As a result, from 1995 to 2007, inflation-adjusted government fiscal revenue increased 5.7 times. 
In contrast, over the same period, the cumulative increase was 1.6 times for urban residents’ per capita disposable income and 1.2 times for rural peasants’ per capita income. 
So, China’s “socialism with Chinese characteristics” is an economy where an increasing share of national income goes to the state. 
Despite privatization, there are roughly 119,000 state-owned enterprises today, with a book value of about $4 trillion. 
State-owned land is valued at more than $7 trillion. 
Combined, these state-owned assets total almost three-quarters of China’s national productive wealth. 
With the state owning so much, most of the gains in asset values experienced over the past 30 years have gone into the government’s coffers. 
When most households own no productive assets, they cannot share any of the asset appreciation or property income. 
For most citizens, wages are the only source of income. 
But wages have grown at a far slower pace than GDP. 
No wonder domestic consumption cannot grow in a manner commensurate with GDP. 
Transforming China from an export-driven economy to one that relies on domestic consumption requires two fundamental reforms. 
First, ownership rights to the remaining state assets should be distributed equally to China’s 1.3 billion citizens. 
This can be done by putting these assets into national wealth funds and distributing the funds’ shares to citizens at no cost. 
Second, the government budgeting process must be opened up through both public hearings in the national legislature and public participation via the media. 
Such increased accountability will shift government spending toward programs related to people’s needs and away from physical structures. 
Without such structural reforms or returning fiscal surpluses to families through tax cuts and rebates, government investment-based stimulus efforts can provide, at best, a short-term economic boost. 
They cannot transform China’s export- and investment-oriented political-economic system. 
Indeed, even after the new stimulus package, China will still depend on investment and export for growth. 
For 30 years, concentrating resources in the government’s hands through state ownership and taxes has served China well. 
It provided a basis for China’s nation-building policy of “Concentrate Resources and Do Big Things.” 
Today, however, China has decent infrastructure, impressive buildings, and an excessive industrial base. 
What is missing is sufficient private consumption to power endogenous growth. 
To correct this, China needs to boost its people’s sense of future financial security and affect a rise in private income commensurate with GDP growth. 
Building a nation demands more than steel and concrete. 

China’s Consumer Communism 
China has changed dramatically since the mid-1980’s. 
It’s not just the increase in the number of freeways, billboards, and skyscrapers that disorient long-time visitors. 
Even a visit to a bookstore can shock anyone who first came to know China decades ago, when it seemed inconceivable that works by non-Marxist theorists would ever outnumber those by Marxists. 
A theatre company has even been allowed to stage “Animal Farm,” George Orwell’s famous anti-authoritarian allegory, once known to socialist-bloc readers only via underground editions. 
The changes run deeper, of course. 
In the 1980’s, there were no beggars on city streets, and the main social cleavage divided the small number of politically well-connected people, who enjoyed a privileged lifestyle, from everyone else. 
Now, there are both beggars and a burgeoning middle class. 
It used to be difficult to find anything to do on a Saturday night in Shanghai. 
Now, Time magazine calls the city the “most happening” place on earth. 
While preparing for my first trip to China twenty years ago, George Orwell’s dark masterpiece, Nineteen Eighty-Four, seemed a useful lens through which to view this “people’s republic.” 
Control in China was not nearly rigid enough to make it the embodiment of an all-embracing, authoritarian Big Brother state, but there were parallels, from the disparagement of many forms of “bourgeois” enjoyment and entertainment to periodic propaganda campaigns insisting that two plus two equaled five. 
Still, despite all the changes, when foreign commentators nowadays want to spice up a China piece with a literary allusion, Orwell remains the seasoning of choice. 
Big Brother is invoked in stories about Internet censorship. 
When the authorities issue a White Paper on human rights, references are made to Newspeak. 
But is this really the best lens through which to see China now? 
It is worth considering whether Aldous Huxley, who taught Orwell at school and who wrote another great and portentous piece of political fiction, Brave New World, provides a more relevant perspective. 
Huxley’s masterpiece, which had more to say about materialism, mood-control, mass-distraction, and social fragmentation than Orwell’s, offers a new kind of insight into what is really happening in twenty-first-century China. 
With its bliss-inducing drug “soma” and sensuous entertainments known as “feelies,” which provided the sort of engrossing distraction now offered by video games and iPods, Brave New World’s perspective adds a new dimension to understanding the durability of the Chinese Communist Party (CCP) as a protean ruling party. 
Of course, Newspeak is alive and well in many places, and there are certainly Orwellian echoes in the authorities’ pronouncements and actions. 
But Orwell’s critique doesn’t help in explaining the CCP’s surprising ability to retain power long after the demise of most of the socialist bloc, even in the face of widespread protests, including an estimated 74,000 separate incidents across China in 2004 alone. 
After reading Nineteen Eighty-Four in 1949, the year of the founding of the People’s Republic of China, Huxley sent his former pupil a letter praising the novel. 
He noted the emphasis that it put on rule via “boot-on-the-face” techniques and puritanical distaste for pleasure. 
But wasn’t it more likely, Huxley mused, that future ruling elites would strive to keep the governed in line by distracting them with sexual allurement, entertainment, and other forms of pleasure, à la Brave New World? 
In many ways, today’s Chinese consumer culture is precisely the kind of palliative that Huxley described. 
Another of Brave New World’s strategies for control was to maximize divisions among the populace. 
Whereas the main distinction in Nineteen Eighty-Four is between rulers and ruled, in Brave New World, people are divided into different social orders defined by disparate tastes and lifestyles. 
The same could be said of China today, where the gaps between rich and poor, urban and rural populations, and coastal and inland culture are so great that it is much harder than before for people from varied walks of life to feel that they share common plights and goals. 
Of course, no single novel provides a perfect lens through which to view any society. 
Sometimes, such as when violence was recently used to quell South Chinese peasants protesting official land grabs, the CCP still shows its willingness to use “boot-on-the-face” suppression. 
Still, there have been more moments lately that favor Huxley’s vision of political order over that of Orwell. 
During my first post-1989 trip to China, a bartender introduced me to a phrase that perfectly characterized the new official mood: “Meiyou yundong, shenme dou keyi” (As long as there are no political movements, anything goes). 
Orwell’s Big Brother would not have been amused by this remark. 
But a member of Brave New World’s ruling elite would have taken it in stride. 

China’s Cyber-Warriors 
NEW DELHI – The world now accepts that protecting our atmosphere, hydrosphere, lithosphere, and biosphere – the “global commons” – is the responsibility of all countries. 
The same norm must apply to cyberspace, which is critical to our everyday life, economic well-being, and security. 
At a time when cyber attacks are increasing worldwide, US Secretary of State Hillary Clinton was right to declare that an attack on one nation’s computer networks “can be an attack on all.” 
Indeed, the attacks are a reminder that, as a new part of the global commons, cyberspace already has come under threat. 
Cyberspace must be treated, along with outer space, international waters, and international airspace, as property held in common for the good of all. 
And, like ocean piracy and airplane hijacking, cyber-crime cannot be allowed to go unpunished if we are to safeguard our common assets and collective interests. 
Naming China among a handful of countries that have stepped up Internet censorship, Clinton warned that “a new information curtain is descending across much of the world.” 
Her statement, with its allusion to the Cold War-era Iron Curtain, amounted to an implicit admission that the central assumption guiding US policy on China since the 1990’s – that assisting China’s economic rise would usher in greater political openness there – has gone awry. 
The strategy of using market forces and the Internet to open up a closed political system simply is not working. 
Indeed, the more economic power China has accumulated, the more adept it has become in extending censorship to cyberspace. 
If anything, China has proven that a country can blend control, coercion, and patronage to stymie the Internet’s politically liberalizing elements. 
Through discreet but tough controls, Beijing pursues a policy of wai song, nei jin – relaxed on the outside, vigilant internally. 
Google is now crying foul over “ a highly sophisticated and targeted attack on our corporate infrastructure originating from China.” 
But, despite its corporate motto – “Don’t be evil” – Google itself was instrumental in aiding online censorship in China, having custom-built a search engine that purges all references and Web sites that the Chinese government considers inappropriate. 
Now Google itself has become a victim of China’s growing cyber prowess, in the same way that appeasement of Hitler boomeranged onto France and Britain. 
China deploys tens of thousands of “ cyber police” to block Web sites, patrol cyber-cafes, monitor the use of cellular telephones, and track down Internet activists. 
But the threat to the new global commons comes not from what China does domestically. 
Rather, it comes from the way in which the know-how that China has gained in fashioning domestic cyber oversight is proving invaluable to it in its efforts to engage in cyber intrusion across its frontiers. 
Canadian researchers have discovered a vast Chinese surveillance system called “GhostNet,” which can compromise computers in organizations abroad through booby-trapped e-mail messages that automatically scan and transfer documents to a digital storage facility in China. 
This is what happened when computers of the Tibetan government-in-exile in Dharamsala, India, were attacked last year. 
India’s national security adviser recently complained that his office was targeted yet again by hackers. 
“People seem to be fairly sure it was the Chinese,” he said. 
Officials in Germany, Britain, and the US have acknowledged that hackers believed to be from China also have broken into their government and military networks. 
The state-sponsored transnational cyber threat is at two levels. 
The first is national, with the hackers largely interested in two objectives. 
One is to steal secrets and gain an asymmetrical advantage over another country. 
Cyber intrusion in peacetime allows the prowler to read the content and understand the relative importance of different computer networks so that it knows what to disable in a conflict situation. 
The other objective is commercial: to pilfer intellectual property. 
The second level of cyber threat is against chosen individuals. 
The most common type of intrusion is an attempt to hack into e-mail accounts. 
The targets also can face Trojan-horse attacks by e-mail intended to breach their computers and allow the infiltrators to corrupt or transfer files remotely. 
To be sure, if a cyber attack is camouflaged, it is not easy to identify the country from which it originated. 
Through the use of so-called “false-flag espionage” and other methods, attacks can be routed through the computers of a third country. 
Just as some Chinese pharmaceutical firms exported to Africa spurious medicines with “Made in India” labels – a fact admitted by the Chinese government – some Chinese hackers are known to have routed their cyber intrusion through computers in Russia, Iran, Cuba, and other countries. 
But, like their comrades in the pharmaceutical industry, such hackers tend to leave telltale signs. 
Then there are many cases in which the attacks have originated directly from China. 
It seems unlikely that these hackers, especially those engaged in cyber espionage, pilferage, and intimidation, are private individuals with no links to the Chinese government. 
It is more likely that they are tied to the People’s Liberation Army. 
In war, this irregular contingent of hackers would become the vanguard behind which the PLA takes on the enemy. 
Systematic cyber attacks constitute a new frontier of asymmetrical warfare at a time when the world already confronts other unconventional threats, including transnational terrorism. 
With national security and prosperity now dependent on the safekeeping of cyberspace, cybercrime must be effectively countered as an international priority. 
If not, cyberspace will become the new global-commons battlefield. 

China’s Dangerous Nobodies 
Ever since their reinvention by Pierre de Coubertin, the Olympic Games have always been politicized. 
The first took place in 1896 in Athens in order to embarrass the Turks still occupying Northern Greece. 
The Berlin Games in 1936 celebrated the triumph of Nazi ideology. 
The Seoul Games in 1988 opened the door to South Korea’s democratization. 
This summer’s Olympics in Beijing will be no less political, but will it resemble Berlin or Seoul? 
Will it mark the apotheosis of an authoritarian regime or the beginning of its demise? 
Many optimistic observers of China, often mollified by their close relations with the Communist regime, bet on a soft transition from despotism toward an open society, but recent events don’t support such a benign interpretation. 
Since the beginning of this year, repression of human rights activists, lawyers, and bloggers has been harsher than ever. 
The exact number of democratic dissidents who have been incarcerated, or worse, is unknown. 
There is no way to account for ignored victims, or why some are condemned to death and shot. 
We don’t know how many are sent without trial to “re-education centers.” 
In the absence of reliable statistics, let us focus on two iconic figures of China’s pro-democracy movement: Hu Jia and Chen Guancheng. 
Last December 27, 20 armed police officers used extreme physical violence to arrest Hu Jia in front of his wife and their two-month-old baby, acting as if he could offer real resistance. 
But Hu Jia is a diminutive young man of 34 who suffers from a severe liver ailment. 
Moreover, he is a committed believer in non-violence, an admirer of the Dalai Lama, a disciple of the Mahatma Gandhi, and a sincere Buddhist. 
Why is the mighty Chinese Communist Party deploying all of its powers to kidnap – no word better describes what happened – such a tiny enemy? 
The Party accuses him of “subversion,” but he broke no laws, does not head a counter-revolutionary army, and was not on the verge of toppling the Party. 
Hu Jia’s political actions are much more modest than that. 
In 2000, he abandoned his studies at Beijing University when he learned that thousands of Henan peasants were dying from AIDS after having sold their blood to local traffickers. 
Since the beginning of this epidemic, his main activity has been the distribution of medicine and moral comfort in the doomed villages of Henan. 
Hu Jia’s charitable work is not facilitated by the local authorities, who bear some responsibility in this epidemic; moreover, with NGOs being forbidden in China, Hu Jia can act only by himself. 
Indeed, if he were to build any kind of organization to support his charity, he would be violating the law. 
But the eye-opening tragedy of the Henan victims caused Hu Jia to understand that it arose from the absence of human rights in China. 
So he started a Web site that acts as a chat room for Chinese scholars sharing his concern. 
This Web site, now closed by the government, has also reported on the fate of Chen Guangcheng. 
Chen, a blind peasant and self-taught lawyer, had protested in 2005 against the kidnapping of some 3000 women in his hometown of Linyi. 
The women were sterilized or forced into having abortions in order to stabilize the population increase in the region. 
As this extreme violence violates Chinese law, Chen petitioned the central government – the only legally recognized form of protest in China. 
When carrying his petition to Beijing, escorted by a tiny group of lawyers, Chen was accused of disrupting traffic on the city’s clogged roads and condemned to four years in jail. 
Why do such moderate actions, rooted in the Chinese moral tradition, provoke such dramatic repression? 
Hu and Chen clearly respect the law. 
They don’t call for revolution. 
True enough, they talk to foreign journalists who report their actions; however, such contact is not illegal. 
But the Party is haunted by the Soviet precedent. 
No Chinese Sakharov or Solzhenitsyn will be allowed to tarnish the “success” of the Party. 
The incarceration of Hu Jia and Chen Guangcheng is a clear signal that no democratization process will start in China outside of the Party’s control. 
When the Chinese leaders mention democracy in official declarations, they mean “organized” democracy, from the top down. 
Any attempt at democratization by civil society will thus be crushed in its infancy. 
China is clearly not on the path toward a Western-style democracy, and economic growth will not be a prelude to a free society so long as the Party can prevent it. 
The regime’s true ambition is to invent an alternative to Western democracy: an enlightened despotism under the tutelage of a meritocratic Communist Party. 
The Olympic Games are being designed to promote this alternative model. 
How legitimate is this model? The Party’s 60 million members, nearly all males and city dwellers, would probably approve, as might the 200 million Chinese who share the profits of rapid economic growth. 
But what do one billion people living in utter poverty (300 million on less than one dollar a day) and deprived of any rights think of this enlightened despotism? 
No one knows, because they cannot express their wishes. 
Perhaps Hu Jia and Chen Guancheng represent this silent billion more than the Party does. 
That would explain why the Party has crushed them – and why any decent participant in this summer’s Olympics should demand their immediate release. 

China’s Decrepit Population 
China’s government finally appears to be acknowledging the urgent challenges presented by the country’s aging population. 
On December 12, it released a cabinet-level White Paper on the problem – the first of its kind ­– in an effort to grapple with the prospect of rising social-security and healthcare costs, a tightening labor market, and other potential obstacles to continue rapid economic growth. 
Looking back, it is ironic that the Chinese government’s draconian “one-child” policy, imposed in 1979, was implemented at the same time as the “open door” policy, aimed at capturing labor-intensive foreign manufacturing investment. 
While both policies must be regarded as successes, over the years the family planning program has contributed to an aging population that may diminish China’s attractiveness as a low-cost, labor-intensive manufacturing hub. 
During the nearly three decades since the “one-child” policy was introduced, live births have dropped from 22.5 million per year in the early 1980’s to around 16-17 million by the middle of this decade. 
Moreover, with the number of elderly growing as a result of rising life expectancy, this low birth rate has pushed the share of those aged 65 and above from 4.9% of the total population to 7.7%. 
According to the United Nations Population Division’s (UNPD) “medium-variant” projections, without reform of the “one-child” policy, the share of China’s population aged 15 and below would decline from 24.8% in 2000 to 15.7% in 2050, while the share of those aged 65 and above would soar from 6.8% to 23.6%. 
With fewer children to replenish the workforce, the working-age cohort of those 15-64 years old would shrink from 68.4% to 60.7%. 
The elderly would thus account for a far greater share of China’s population than in other large emerging economies, such as Brazil, India, Indonesia, and Mexico. 
China’s demographic trends hold several adverse implications for its economy. 
With a rapidly aging population and a shrinking workforce, tax revenue will contract, while expenditure on pensions and health care will expand, undermining the fiscal position. 
Various estimates by private-sector economists and World Bank officials suggest that the government’s accumulated “net implicit pension debt” could balloon to 75-110% of GDP. 
Furthermore, the decline in the working-age cohort would squeeze labor supply, fueling wage growth and eroding the country’s economic competitiveness. 
Already, in the Yangtze and Pearl River Deltas, where manufacturing activity is the densest, labor shortages have appeared. 
In 2004, for example, Guangdong Province had to raise the mandatory minimum wage by as much as 20% to attract workers from other regions. 
To hire and retain skilled workers, many foreign-invested enterprises routinely pay above the minimum wage. 
But some foreign manufacturers, seeking to cap rising labor costs, are shifting production from China to cheaper destinations such as Vietnam, where average monthly wages for factory workers is $50-60 – half that of China. 
Foreign direct investment (FDI) in Vietnam grew by 40% in 2005, led by investors from Japan, South Korea, and Taiwan. 
China’s inward FDI fell 1.2% in the first seven months of 2006, after a 0.5% decline in 2005, while combined investment from Japan, South Korea, and Taiwan plummeted 31% in the first half of 2006, compared to the 6.5% decline in 2005. 
These figures are only the early warnings of an emerging trend. 
In the long run, as labor shortages become acute, China will need to relinquish some low-end, labor-intensive manufacturing activities, which will translate into decelerating export performance and lower economic growth. 
Aside from abandoning the “one-child” policy, China could avoid this outcome by climbing the value chain in manufacturing and services, as Hong Kong, Singapore, South Korea, and Taiwan have done. 
However, for China to succeed, higher investment in research and development, together with a fundamental overhaul of the educational system, is essential. 
According to OECD estimates, China’s current expenditure on R&D amounts to only 1.3% of GDP, compared to 3.2% in Japan and an average of 2.5-2.6% in South Korea, Taiwan, and the United States. 
Although the government recently announced that it intends to increase R&D spending to 2% of GDP by 2010, this remains below the OECD average of 2.2%. 
As for China’s backward educational system, the large number of university graduates is offset by their overall sub-standard quality. 
According to a recent survey by McKinsey & Company, of the more than three million graduates churned out by China’s universities and colleges every year, less than 10% are suitable for employment with international companies, owing to their deficiencies in practical training and poor English. 
In view of these systemic weaknesses, China’s ability to overcome its labor deficit by shifting to an innovation- and productivity-driven economy remains dubious. 

China’s Democratic Baby Steps 
WASHINGTON, DC – During the state visit to the United States of Chinese President Hu Jintao, President Barack Obama pressed Hu on human rights. 
He probably should have asked more about spreading democracy in China, because he might have been surprised by what he heard. 
In September 2010, Hu gave a speech in Hong Kong in which he called for new thinking about Chinese democracy. 
He said, “There is a need to…hold democratic elections according to the law; have democratic decision-making, democratic management as well as democratic supervision; safeguard people’s right to know, to participate, to express, and to supervise.” 
His remarks elaborated on previous comments by Chinese Premier Wen Jiabao, delivered in Shenzhen, the coastal free-enterprise zone where China’s economic revolution began. 
Wen said that political reform, including opportunities for citizens to criticize and monitor the government, is necessary to sustain China’s breakneck economic growth. 
Otherwise, he argued, the country’s economic gains would be lost. 
Wen’s remarks led to speculation that Shenzhen, which set the pace for China’s economic development, could soon become a “special political zone.” 
China experts noted that a next step could be direct elections for the chiefs of the Special Economic Zone’s six districts. 
Most non-Chinese would be surprised to learn that the country already holds more elections than any other in the world. 
Under the Organic Law of the Village Committees, all of China's approximately one million villages – home to roughly 600 million voters – hold local elections every three years. 
Critics scoff that local Communist Party officials manipulate these elections. 
But, according to research by Robert Benewick, a professor at the University of Sussex in England, village elections have been growing more competitive, with a greater number of independent candidates and increasing use of the secret ballot. 
For those elections that have been genuinely competitive, researchers claim to have found evidence of positive effects. 
For example, in a study that looked at 40 villages over 16 years, the economist Yao Yang found that the introduction of elections had led to increased spending on public services by 20%, while reducing spending on “administrative costs” – bureaucratese for corruption – by 18%. 
And Wen has indicated that village elections might be extended to the next highest government level – township administrations – over the next few years. 
China's modest experiments with local elections have been supplemented by exercises in “deliberative democracy.” 
These take the form of high-tech town hall meetings. 
Chinese officials hired Stanford University professor James Fishkin to draft a representative sample of citizens from Zeguo for an assembly using keypad polling devices and handheld computers to decide how the city should spend a $6 million public-works budget. 
The Zeguo exercise was considered hugely successful, and has been replicated elsewhere in China. 
Professor Yu Keping, an influential Communist official and author of a prominent book called Democracy Is a Good Thing, is said to have the ear of President Hu. 
Professor Yu and others have been nudging democracy forward within the Communist Party itself. 
Competitive elections for lower-level party posts have already been held, with votes for provincial and national party congresses showing electoral slates with 15-30% more candidates than positions. 
Since the Communist Party has a membership of 73 million people, such a "democratic vanguard" holds great potential. 
If internal elections become widespread, the lines of ideological disagreement within elite circles might become more clearly drawn, which could further spur calls for some kind of representative institutional structure. 
Rapid change in China already has resulted in a battle of ideas, pitting the coasts and cities against the countryside and inland provinces, and the rich against the poor. 
Of course, as Chinese democracy develops, it is unlikely to replicate the Western model. 
Confucian-inspired intellectuals like Jiang Qing, for example, have put forward an innovative proposal for a tricameral legislature. 
Legislators in one chamber would be selected on the basis of merit and competency, and in the others on the basis of elections of some kind. 
One elected chamber might be reserved only for Communist Party members, the other for representatives elected by ordinary Chinese. 
Such a tricameral legislature, its proponents believe, would better ensure that political decisions are made by more educated and enlightened representatives, thereby avoiding the rank populism of Western-style elected factions. 
It is intriguing to contemplate China embracing some sort of innovative democratic experiment, combining tricameralism with deliberative democracy methods to mold a new separation of powers – and thus a new type of political accountability. 
Former Chinese leader Deng Xiaoping was quoted in 1987 as saying that there would be national elections in 50 years. 
China’s democratic trajectory generates little fanfare, but it may actually deliver on Deng’s promise ahead of schedule. 

China's Democratic Sham 
China is notoriously secretive; its government mechanics inscrutable. 
The constitution says that power belongs to the people, but in reality the rights of the people belong to the Communist Party and its leaders, from whom workers and peasants receive scant attention. 
The CCP claims to have delivered a democratic revolution, but the country remains one of the world's most undemocratic. 
So irreconcilable are these paradoxes that the 16th Party Congress that will convene next week cannot hope but to show itself as a democratic sham. 
The highest party posts will change hands at the Congress, including the Chairman of the Central Military Commission, the General Secretary of the Party, and several Politburo Standing Committee members. 
According to the CCP Charter, all of those positions (save the leadership of the Military Commission) should be determined by the votes of members of the 16th Central Committee. 
The 16th Party Congress should in turn elect the 16th Central Committee, Party Congress representatives should be elected by each provincial party congress, and so on. 
In fact, these elections will be characterized by opacity and the absence of any real democratic process. 
Indeed, the only elections in China in which truly independent voters choose candidates occur at the village committee level, but this democratic mummery is staged mainly for the benefit of outside observers. 
All other Chinese elections share two main characteristics: candidates are selected to preserve party leaders, and the leaders decide the number of candidates. 
China holds two types of election: "equal quota elections" and "differential quota elections." 
In equal quota elections, the leaders present three candidates, leaving voters the task of picking one. 
This is a sacred rule of Chinese politics, one that is considered entirely legitimate. 
In the past 50 years, all "elected" officials, including Mao Zedong and Deng Xiaoping, were designated in ways that delivered the illusion of choice but without the element of uncertainty. 
After the Cultural Revolution, and despite widespread protest, "differential quota elections" were introduced, albeit in a limited fashion. 
The 13th Party Congress, in tune with the rising democratic sentiments of the time, was the first to use the differential system for electing members of the Central Committee. 
This constituted a breakthrough in party tactics. 
By presenting voters with more candidates than positions, Deng Liqun, a member of the ultra-left Old Guard, was denied a seat. 
Deng Xiaoping, at that time the paramount leader, and Chen Yun, another representative of the powerful Old Guard, were furious at this result. 
Of course, no one, even in China, thinks of differential quota elections as being truly democratic. 
All the candidates remain handpicked by the leadership, even if the least popular figures can be removed. In the event, the differential system was a short-lived experiment. 
Since 1989 the Party has relentlessly consolidated its central leadership, internal party democracy has been suppressed and voting procedures have actually degenerated. 
The Party Congress has its origins in the mass gatherings and propaganda campaigns of the Mao era, and can bring together as many as two thousand delegates. 
The First and Second Party Congresses had only a few dozen representatives, who possessed the power to question the party's highest officials. 
That sort of accountability is long gone. 
During its half-century in power, the CCP has developed a method called da hui xiao kai (big conference held small), which breaks the Congress down into myriad small-group sessions. 
The forthcoming 16th Party Congress will be comprised of these small-group sessions. 
None will have a clear mandate, and any debate will be emasculated. 
Delegates are confused about their roles and powers, and the conditions are perfect for creating a silent majority. 
Each session is like an afternoon tea party where representatives offer random reflections, praise the correctness of the leadership's reports and attempt to show how conscientiously they have studied them and how deeply they comprehend them. 
The suggestions raised by representatives at tea parties are never made a subject for debate by the Congress as a whole. 
Instead they are given to the staff members of the Secretariat to "process." 
Some minor revisions to the final report might be made, but the procedures of a real parliamentary democracy-proposal, debate, and resolution-remain absent. 
The grave realities that confront China-for example, corruption and the ever-widening social gap-will not be raised as matters for debate. 
CCP members will never get the chance to address any concerns that they may hold before a wide audience. 
They will not get to discuss the protection of citizen's rights, relaxation of harsh media controls, the rights of peasants to migrate or take up jobs in the cities, or whether to tolerate workers who organize independent unions. 
So how important will this 16th Party Congress be? 
It certainly will not provide a forum for debating any of the long awaited, urgently needed, and unavoidable political reforms that China must launch. 
By rescheduling it for November (apparently Jiang Zemin had double-booked himself by promising to travel to Texas to stay with President Bush on his Crawford ranch), the 16th Party Congress, at which the next generation of China's leaders will be anointed, may play second fiddle to a diplomatic visit. 

China’s Stealth Wars 
NEW DELHI – China is subverting the status quo in the South and East China Seas, on its border with India, and even concerning international riparian flows – all without firing a single shot. 
Just as it grabbed land across the Himalayas in the 1950’s by launching furtive encroachments, China is waging stealth wars against its Asian neighbors that threaten to destabilize the entire region. 
The more economic power China has amassed, the greater its ambition to alter the territorial status quo has become. 
Throughout China’s recent rise from poverty to relative prosperity and global economic power, the fundamentals of its statecraft and strategic doctrine have remained largely unchanged. 
Since the era of Mao Zedong, China has adhered to the Zhou Dynasty military strategist Sun Tzu’s counsel: “subdue the enemy without any battle” by exploiting its weaknesses and camouflaging offense as defense. 
“All warfare,” Sun famously said, “is based on deception.” 
For more than two decades after Deng Xiaoping consolidated power over the Chinese Communist Party, China pursued a “good neighbor” policy in its relations with other Asian countries, enabling it to concentrate on economic development. 
As China accumulated economic and strategic clout, its neighbors benefited from its rapid GDP growth, which spurred their own economies. 
But, at some point in the last decade, China’s leaders evidently decided that their country’s moment had finally arrived; its “peaceful rise” has since given way to a more assertive approach. 
One of the first signs of this shift was China’s revival in 2006 of its long-dormant claim to Indian territory in Arunachal Pradesh. 
In a bid to broaden its “core interests,” China soon began to provoke territorial disputes with several of its neighbors. 
Last year, China formally staked a claim under the United Nations Convention on the Law of the Sea to more than 80% of the South China Sea. 
From employing its strong trade position to exploiting its near-monopoly on the global production of vital resources like rare-earth minerals, China has staked out a more domineering role in Asia. 
In fact, the more openly China has embraced market capitalism, the more nationalist it has become, encouraged by its leaders’ need for an alternative to Marxist dogma as a source of political legitimacy. 
Thus, territorial assertiveness has become intertwined with national renewal. 
China’s resource-driven stealth wars are becoming a leading cause of geopolitical instability in Asia. 
The instruments that China uses are diverse, including a new class of stealth warriors reared by paramilitary maritime agencies. 
And it has already had some victories. 
Last year, China effectively took control of the Scarborough Shoal, an area of the South China Sea that is also claimed by the Philippines and Taiwan, by deploying ships and erecting entry barriers that prohibit Filipino fishermen from accessing their traditional fishing preserve. 
China and the Philippines have been locked in a standoff ever since. 
Now the Philippines is faced with a strategic Hobson’s choice: accept the new Chinese-dictated reality or risk an open war. 
China has also launched a stealth war in the East China Sea to assert territorial claims over the resource-rich Senkaku Islands (called the Diaoyu Islands in China), which Japan has controlled since 1895 (aside from a period of administration by the United States from 1945 to1972). 
China’s opening gambit – to compel the international community to recognize the existence of a dispute – has been successful, and portends further disturbance of the status quo. 
Likewise, China has been posing new challenges to India, ratcheting up strategic pressure on multiple flanks, including by reviving old territorial claims. 
Given that the countries share the world’s longest disputed land border, India is particularly vulnerable to direct military pressure from China. 
The largest territory that China seeks, Arunachal Pradesh, which it claims is part of Tibet, is almost three times the size of Taiwan. 
In recent years, China has repeatedly attempted to breach the Himalayan frontier stretching from resource-rich Arunachal Pradesh to the Ladakh region of Jammu and Kashmir – often successfully, given that the border is vast, inhospitable, and difficult to patrol. 
China’s aim is to needle India – and possibly to push the Line of Actual Control southward. 
Indeed, on April 15, a platoon of Chinese troops stealthily crossed the LAC at night in the Ladakh region, establishing a camp 19 kilometers (12 miles) inside Indian-held territory. 
China then embarked on coercive diplomacy, withdrawing its troops only after India destroyed a defensive line of fortifications. 
It also handed a lopsided draft agreement that seeks to freeze the belated, bumbling Indian build-up of border defenses while preserving China’s capability to strike without warning. 
India has countered with its own draft accord designed specifically to prevent border flare-ups. 
But territory is not the only objective of China’s stealth wars; China is also seeking to disturb the status quo when it comes to riparian relations. 
Indeed, it has almost furtively initiated dam projects to reengineer cross-border river flows and increase its leverage over its neighbors. 
Asian countries – together with the US – should be working to address Asia’s security deficit and establish regional norms. 
But China’s approach to statecraft, in which dominance and manipulation trump cooperation, is impeding such efforts. 
This presents the US, the region’s other leading actor, with a dilemma: watch as China gradually disrupts the status quo and weakens America’s allies and strategic partners, or respond and risk upsetting its relationship with China, the Asian country most integral to its interests. 
Either choice would have far-reaching consequences. 
Against this background, the only way to ensure peace and stability in Asia is to pursue a third option: inducing China to accept the status quo. 
That will require a new brand of statecraft based on mutually beneficial cooperation – not brinkmanship and deception. 

China’s Dollar Problem 
CAMBRIDGE – When will China finally realize that it cannot accumulate dollars forever? 
It already has more than $2 trillion. 
Do the Chinese really want to be sitting on $4 trillion in another five to 10 years? 
With the United States government staring at the long-term costs of the financial bailout, as well as inexorably rising entitlement costs, shouldn’t the Chinese worry about a repeat of Europe’s experience from the 1970’s? 
During the 1950’s and 1960’s, Europeans amassed a huge stash of US Treasury bills in an effort to maintain fixed exchange-rate pegs, much as China has done today. 
Unfortunately, the purchasing power of Europe’s dollars shriveled during the 1970’s, when the costs of waging the Vietnam War and a surge in oil prices ultimately contributed to a calamitous rise in inflation. 
Perhaps the Chinese should not worry. 
After all, the world leaders who just gathered at the G20 summit in Pittsburgh said that they would take every measure to prevent such a thing from happening again. 
A key pillar of their prevention strategy is to scale back “global imbalances,” a euphemism for the huge US trade deficit and the corresponding trade surpluses elsewhere, not least China. 
The fact that world leaders recognize that global imbalances are a huge problem is welcome news. 
Many economists, including myself, believe that America’s thirst for foreign capital to finance its consumption binge played a critical role in the build-up of the crisis. 
Cheap money from abroad juiced an already fragile financial regulatory and supervisory structure that needed discipline more than cash. 
Unfortunately, we have heard leaders – especially from the US – claim before that they recognized the problem. 
In the run-up to the financial crisis, the US external deficit was soaking up almost 70% of the excess funds saved by China, Japan, Germany, Russia, Saudi Arabia, and all the countries with current-account surpluses combined. 
But, rather than taking significant action, the US continued to grease the wheels of its financial sector. 
Europeans, who were called on to improve productivity and raise domestic demand, reformed their economies at a glacial pace, while China maintained its export-led growth strategy. 
It took the financial crisis to put the brakes on US borrowing train – America’s current-account deficit has now shrunk to just 3% of its annual income, compared to nearly 7% a few years ago. 
But will Americans’ newfound moderation last? 
With the US government currently tapping financial markets for a whopping 12% of national income (roughly $1.5 trillion), foreign borrowing would be off the scale but for a sudden surge in US consumer and corporate savings. 
For the time being, America’s private sector is running a surplus that is sufficient to fund roughly 75% of the government’s voracious appetite. 
But how long will US private sector thrift last? 
As the economy normalizes, consumption and investment will resume. 
When they do – and assuming that the government does not suddenly tighten its belt (it has no credible plan to do so) – there is every likelihood that America’s appetite for foreign cash will surge again. 
Of course, the US government claims to want to rein in borrowing. 
But, assuming the economy must claw its way out of recession for at least another year or two, it is difficult to see how the government can fulfill its Pittsburgh pledge. 
Yes, the Federal Reserve could tighten monetary policy. 
But they will not worry too much about the next financial crisis when the aftermath of the current one still lingers. 
In our new book This Time is Different: Eight Centuries of Financial Folly , Carmen Reinhart and I find that if financial crises hold one lesson, it is that their aftereffects have a very long tail. 
Any real change in the near term must come from China, which increasingly has the most to lose from a dollar debacle. 
So far, China has looked to external markets so that exporters can achieve the economies of scale needed to improve quality and move up the value chain. 
But there is no reason in principle that Chinese planners cannot follow the same model in reorienting the economy to a more domestic-demand-led growth strategy. 
Yes, China needs to strengthen its social safety net and to deepen domestic capital markets before consumption can take off. 
But, with consumption accounting for 35% of national income (compared to 70% in the US!), there is vast room to grow. 
Chinese leaders clearly realize that their hoard of T-Bills is a problem. 
Otherwise, they would not be calling so publicly for the International Monetary Fund to advance an alternative to the dollar as a global currency. 
They are right to worry. 
A dollar crisis is not around the corner, but it is certainly a huge risk over the next five to 10 years. 
China does not want to be left holding a $4 trillion bag when it happens. 
It is up to China to take the lead on the post-Pittsburgh agenda. 

China’s Evolving Economic System 
It is generally agreed that China’s impressive economic achievements during the last three decades are largely the result of the radical reform of its economic system. 
While private ownership of firms hardly existed when these reforms started, private firms today account for about 60% of total production. 
Ownership, however, is only one dimension of an economic system. 
China’s economic system has changed just as drastically in other ways as well. 
Decision-making regarding consumption and production has largely been decentralized to individual households and firms, respectively; economic incentives, markets, competition, and internationalization have to a considerable extent replaced command, administrative processes, monopoly, and autarky. 
Generally speaking, China’s reform period has been a stark contemporary illustration of the historical lesson that unleashing individual initiative tends to boost economic development. 
How, then, should today’s Chinese economy be characterized? 
Some observers describe China’s current economic system as “state capitalism”; others (including China’s rulers) call it “market socialism.” 
Both labels mislead. 
One reason is the domination of private firms on the production side. Another is the fact that “socialism” usually does not rely upon strong economic incentives and competition, which are the dominant economic factors in today’s China. 
In fact, China is a type of mixed economy , with a number of specific features, some of which favor GDP growth, while others have not dragged down the economy to any considerable extent so far. 
But this situation is likely to change. 
So further reforms will be decisive in determining the Chinese economy’s future performance. 
Although internationalization of the economy has served China well, it is unlikely that the current 35% share of GDP claimed by exports and the heavy reliance on foreign technology are sustainable in the long run. 
Tension between widespread private ownership of firms and pervasive public ownership of assets is another specific feature of China’s economic system that looks similarly creaky. 
For example, by disfavoring lending to private firms, state-owned banks distort the allocation of resources. 
Chinese agriculture provides another example of tension between private entrepreneurship and public-sector ownership of assets. 
In particular, public ownership of land harms the investment incentives for family farms and reduces their chance of consolidating land holdings in order to exploit economies of scale. 
Reducing this tension over ownership of firms and assets is imperative, because the entry and expansion of small private companies will be increasingly important when China’s domestic markets and domestic innovation need to play a greater role. 
Thus, for China to gain maximum advantage from private entrepreneurship, it is important to continue shifting the share of financial assets and land holdings out of the public sector. 
This would also help address the endemic corruption that is also a specific feature of the Chinese economic system. 
Corruption is difficult to reduce drastically so long as politicians and bureaucrats have much “to sell” to firms and individuals – including rationed loans from public-sector banks and regulatory permits of various types. 
In rural areas, corruption emanates from frequent expropriation of land-lease contracts held by farmers working on collectively owned land, which local officials then turn over to non-agriculture land developers. 
In both cases, reducing corruption will require not only government pep talks against bad ethics, but also institutional reforms, including further deregulation, stronger property rights, and more privately owned assets. 
Free media would also help. 
No doubt, some types of corruption, including “asset stripping” in connection with the privatization of public-sector firms, has speeded up the emergence of a class of private capitalists and entrepreneurs. 
But if corruption becomes a permanent element of China’s economic system, it is likely to both reduce the efficiency of the allocation of resources and damage the legitimacy of private entrepreneurship. 
China also needs to shift from its highly “extensive” (resource consuming) growth strategy to a more “intensive” development path. 
Although high growth requires large-scale capital formation, the relation between investment in real capital assets and human capital in China seems to be out of proportion. 
This is reflected in the current investment ratio for real capital assets of 43% of GDP, compared to 4.3% investment in human capital in the form of education. 
China’s growth would be more efficient if these proportions changed in favor of education, including vocational training, which is very poorly developed. 
Moreover, eliminating today’s vast wastage of natural resources, which underpins exceptionally high levels of pollution, will require a reformed regulatory framework, including higher user prices for energy, raw materials, and environmental resources. 
By shifting to a less resource-dependent development strategy, more resources would be available for improvements in the country’s much neglected social arrangements, particularly among rural citizens and “urban outsiders” (individuals in informal urban sectors). 
This includes addressing China’s patchy arrangements for income security, as well as its unevenly distributed provision of social services, such as health and education, in particular, in rural areas. 
The case for combining further government withdrawal from the production system with more engagement in the social field is compelling. 
China’s leaders seem to be promising this by voicing their concern for domestic entrepreneurship, social arrangements, rural development and environmental protection. 
Only time can tell to what extent, and how fast, such promises will be fulfilled. 

China’s Evolving Web 
HONG KONG – In a recent article, the economist Axel Leijonhufvud defines the market system as a web of contracts. 
Because contracts are linked with each other, one default can trigger an avalanche of broken promises, “[making] it possible to destroy virtually the entire web of formal and informal contracts which the market system requires for its functioning.” 
The state’s role is to protect, enforce, and regulate these contracts and related property rights, as well as to intervene to prevent systemic failure. 
This web of contracts – often taken for granted in mainstream economics, to the extent that it becomes almost invisible – embodies the formal and informal rules embedded in the market system that shape and constrain individual and social behavior. 
They form the fabric of all human institutions. 
Advanced economic systems have very complex webs of contracts, such as financial derivatives. 
For Europe, Leijonhufvud argues, this implies a three-pronged approach that focuses on “levels of leverage,” “maturity mismatches,” and “the topology of the web,” – that is, “its connectivity and the presence of critical nodes that are ‘too big to fail.’” 
This is because “[t]he web of contracts has developed serious inconsistencies.” 
To insist that all contracts be fulfilled would “cause a collapse of very large portions of the web,” with “serious economic and incalculable social and political consequences.” 
By contrast, emerging markets like China have less sophisticated systems and evolve more complex contractual/institutional links over time, particularly through globalized transactions. 
Under China’s planned economy, most contracts were between individuals and the state, whereas more sophisticated market contracts have emerged or re-emerged only over the last 30 years. 
Indeed, the widespread use of market contracts with publicly-owned companies was a recent and important adaptation in the move toward a “socialist market economy.” 
The web of contracts, however, can also be understood as complex adaptive market systems, which encompass the state and family relations as well. 
To understand China’s socialist market economy, it is essential to examine systematically these different forms of contracts and their institutional structures. 
Family and kinship contracts, which govern marriage, adoption, cohabitation, inheritance, etc., form the basic unit of human society. 
These contracts are the most ancient and remain the foundation of social relationships in China today. 
Corporate contracts place the profit-oriented legal person at the center of the transaction and bind all of its stakeholders. 
Chinese corporate contracts have grown exponentially over the last 30 years, but they have special characteristics that reflect the primary role of Chinese state-owned enterprises. 
Market contracts between producers and consumers – and/or among producers in supply chains – link individuals, families, firms, governments, and public organizations through local or global markets. 
Over the last few decades, China has begun to practice modern contract law and joined the World Trade Organization, committing itself to international rules governing trade and investment. 
Non-governmental and non-profit civil contracts bind people together for communal, religious, social, and political activities. 
These contracts are still relatively new and evolving in China. 
Social contracts created by constitutional and administrative laws define the powers and responsibilities of the state and its constituent bodies vis-à-vis individuals and the private sector. 
They include the authority to impose taxes and restraints on individuals and private entities through criminal, administrative, and civil law, as well as the state’s obligation to provide public goods and services. 
China has strengthened its unitary state with important institutional innovations that have delivered growth and middle-income prosperity, but it still retains the basic five-level administrative structure – central government on top, with provincial, city, town, and village bodies below – that first emerged two millennia ago. 
Deciphering the structure of the web of contracts holds the key to understanding how an economy behaves, including its dynamic non-linear adaptation to internal and external forces. 
Following the physicist Fritjof Capra, one should regard living organisms, social systems, and ecosystems as an interconnected and interdependent, complex adaptive system. 
This means that we should view the economy and society not as rigid hierarchies or mechanical markets, but as networks or webs of life, in which contracts, formal and informal, fulfilled or violated, are the essence of human activity. 
Examining webs of contracts should be similar to a biologist’s examination of cell structure and DNA. 
China has created four functioning global-scale modern supply chains in manufacturing, infrastructure, finance, and government services, thanks to its evolving, expanding, and complex web of contracts. 
But how was China able to build a modern industrial base within a relatively short period of time from its traditional, patrimonial family contracts and archaic constitutional structures? 
Through experimentation, adaptation, and evolution – a process that has been described as “crossing the river by feeling the stones” – China has been able to evolve a higher-order, or fifth, supply chain in political decision-making. 
This “top-level governance architecture,” as it is known in China, has been essential for coordinating and orchestrating the different supply chains and the overall web of contracts to achieve the delicate balance among individual, family, corporate, social, and national objectives. 
This top-level governance architecture is analogous to a computer’s operating system, which orchestrates the other software and hardware components to form a holistic unity. 
Such a structure exists in many economies, but, in the Chinese context, where the state plays a central role in the economy, it is critical to the system’s effectiveness. 
How it is shaped will depend on how China’s history, culture, institutional context, and evolving web of contracts affect the country’s social fabric. 

China’s Exchange-Rate Puzzle 
China’s abrupt decision to raise the value of the renminbi (yuan) by 2.1% and to end its peg to the dollar comes after months of pressure from the US. 
But the revaluation is likely to be a one-time affair and the free floating of the renminbi is probably not real because a stable currency is very much in China’s interest. 
Indeed, the economist Robert Mundell, whose work on optimal monetary zones is credited with laying the theoretical groundwork for the euro, insists that China should maintain its fixed exchange rate as a necessary part of its current phase of economic development. 
But, owing to China’s skewed economic structure, its exchange-rate regime presents much more challenging problems than those encountered by Japan and other East Asian economies. 
Pegged exchange rates clearly have been essential to East Asia’s economic takeoff, for they work well with the region’s export-oriented development model. 
But the effectiveness of a fixed exchange rate is determined by how developments in the export sector influence domestic industries and the national economy as a whole. 
If growth in the trade sector boosts that of domestic non-trade sectors, then a fixed exchange rate will not put pressure on the external balance of payments as demand for imports rises. 
Under these circumstances, revaluation of the exchange rate will not have a severe impact on an economy’s development. 
For example, Japanese economists argue that the Plaza Agreement, which called for “orderly appreciation” of non-dollar currencies against the dollar, was a natural outgrowth of high national income. 
This was one of the major reasons for Japan’s acceptance of the change. 
But China’s current situation is vastly different. 
Pressure for revaluation comes at a stage when per capita national income is merely $1,000, not $10,000 or $15,000, so China still needs a rather long period of rapid economic growth to reach anything like the stage that Japan had achieved when it allowed the yen to be revalued. 
Equally important, unlike other East Asian economies during their early take-off stages, the expansion of China’s export sector in the last decade has not been closely linked to the development of its domestic non-trade sector, because the expansion has been fueled mainly by foreign direct investment (FDI). 
Most of China 460,000 foreign-owned enterprises are concentrated in manufacturing and assembling, increasing the import-intensiveness of exports and de-linking the external-trade sector from domestic industries. 
This helps to widen regional disparities, especially between eastern and western China, with the wealthiest regions being those that have benefited from high concentrations of FDI. 
No one should realistically expect the renminbi’s exchange rate to be determined solely by the income level of the relatively prosperous eastern coastal regions. 
To be sure, China has accumulated an enormous balance-of-payments surplus, which indicates that the renminbi is greatly undervalued. 
But the surplus merely masks the structural problems of China’s domestic economic sectors and poorer regions. 
Indeed, if foreign-owned enterprises exports are deducted from the total trade volume, the surplus vanishes, because both the overall balance of merchandise trade and the balance of trade in services normally run deficits. 
In short, the isolation of the export sector from the rest of China’s economy, caused by the dominance of FDI, accounts for the illusion of an undervalued renminbi. 
Although the expansion of exports has been dramatic, now accounting for 70% of China’s GDP, it has exerted no pull on other economic sectors, because it has been confined to foreign-owned manufacturing and assembling enterprises. 
With its huge domestic economy, China would never have been able to accumulate such an enormous external surplus if its growth had not been confined to such enterprises. 
Pressure for revaluation stems, therefore, not from the real needs of China economy, but from large imbalances in the United States, particularly its long-standing trade deficit, which exceeds 5% of GDP. 
However, dollar supremacy means that the US can sustain a much wider balance-of-payments deficit than other countries. 
As long as Asia holds its foreign reserves in dollars China’s desire to maintain a stable value for the reminbi will continue to offer tremendous advantages for trade and economic development. 

China’s Financial Fetish 
With the drum beating for the development of the costal areas of Tianjin near Beijing, the curtain seems to be rising on yet another “financial center” in China. 
When Shanghai sought a similar role several years ago, bankers and investors around the world wondered whether the aim was really for Shanghai to replace Hong Kong as China’s financial heart. 
In the current pilot project, Tianjin in China’s north and Shanghai in the south are competing against each other, prompting even more second-guessing. 
Once upon a time, no one had any idea about how to create a “financial center.” 
A financial center was simply a great metropolis where enormous financial dealings took place. 
Cities such as London and New York became known as financial centers only after they had proved themselves in the role. 
Policymakers in China seem to be unaware that many major cities have not had the luck to become financial centers. 
There is no economic or other theory that explains why a city called a “financial center” should be more valuable or lovely than others. 
Why, then, should China make developing global financial centers a vital national goal? 
Does China really need its own financial centers of world standing? 
Does the world need China to have them? 
Or is such a goal necessary because a financial center can determine the fate of a great metropolis? 
Nothing in the history of finance, the evolution of cities, or modern economics provides a clear answer. 
It is the Chinese who have endowed the term “financial center” with such weight and meaning by trying to dissect the functions of such cities and quantify every detail. 
As a result, politicians are prepared to pick a city and order it to create the functions of a financial center, as if such a thing can be constructed like a building – a concept that could not be more off the mark. 
Indeed, according to modern development models of finance, whether or not a physical center of finance exists is no longer a meaningful issue. 
Owing to historical factors and opportunities, financial transactions were concentrated in cities that were traditionally closely linked to the rise of European and American capitalism. 
But what counts nowadays is not where financial transactions physically take place, but rather the growing importance and globalization of finance in the operation of the world economy. 
Cities do not become financial centers because they are more “excellent” than other cities, or because they have done something that other cities failed to do. 
Instead, once financial transactions begin to concentrate in a place, it becomes hard to move them to other places. 
A free-market economy and its legal traditions -- both indispensable to the survival of financial centers – certainly helps them to rise, but that initial rise has always been attributable to historical evolution, not government strategy. 
In this sense, China’s effort to deliberately create, through government fiat, global financial centers is both exacting and dogmatic. 
There is no doubt that China needs its financial sector to develop soundly in order to ensure sustained economic growth. 
And there is now a common understanding in China that meeting this objective requires that the government safeguard financial liberalization. 
But progress has been slow, because China’s politicians have put nurturing financial centers – which should be the objective of local governments – at the heart of the country’s financial development. 
Indeed, equating financial liberalization with privileges for cities designated as “financial centers” undermines the very goals of liberalization – namely, to reduce government control and to accelerate the development of financial markets. 
China’s financial system is failing in that respect, owing to frequent administrative and political intervention. 
As a result, Shanghai has been restricted from making the best of its financial functions, and Hong Kong, Asia’s acknowledged financial center, from assisting China’s financial modernization. 
What China needs most is a financial sector capable of harnessing the forces of liberalization and globalization to drive economic growth in the decades ahead. 
The time has come to cast off the burden of building financial centers, and focus instead on advancing the modernization of Chinese finance. 

China’s Flood Of Protests 
Protests in China are nothing new. 
By some accounts, Chinese officials currently negotiate upwards of 50,000 “major incidents” annually. 
Widespread corruption has bred deep discontent: workers protest the Enron-like bilking of their life savings, townspeople fight against illegal land seizures, and villagers battle injustices – small and large – on a daily basis. 
Typically, these protests are local in nature and generally resolved with a combination of payoffs, arrests, and promises of future improvement. 
Occasionally, China’s government takes action against local officials whose crimes are considered egregious. 
As long as protests remain local, however, they can be managed as isolated cases that won’t pose a broader challenge or spark a movement toward systemic change. 
Yet the government’s days of putting out protests like brush fires may be ending. 
Over the past year and a half, China’s environmental non-governmental organizations (NGO’s) have organized protests that reach across provincial boundaries, engage Chinese from all social strata, garner support from China’s media, and directly address the issue of failed governance on a national scale. 
The catalyst for these broad-based protests is the proposed construction of hundreds of dams throughout western China. 
Dam construction in China has never been open to public debate. 
China’s environmental activists, meanwhile, have focused on the “politically safe” issues of protecting biodiversity, recycling, and environmental education. 
Now, however, these activists have become more assertive, launching campaigns against a number of proposed dams along the Nu and Jinsha Rivers in Yunnan and the Min River in Sichuan. 
They still raise traditional issues of biodiversity loss, destruction of sites of natural beauty and cultural importance, and social justice issues surrounding resettlement. 
But now they also challenge the shoddy governance and corruption that allow dam construction to proceed unchecked, without environmental impact assessments, as local officials siphon off resettlement funds and ignore the claims of local villagers. 
The political stakes are high, and China’s hydropower interests are strong. 
Environmental activists who are currently battling to halt damming and flooding in the culturally and scenically renowned region of the Tiger Leaping Gorge in Yunnan are battling hydropower kingpin Li Xiaopeng, son of former Premier Li Peng. 
Dam protests can often be volatile. 
In October, tens of thousands of villagers protesting inadequate resettlement compensation held a local official captive for several hours before ten thousand People’s Armed Police officers rescued him. 
These protests are striking not only for the sensitive nature of the issues they address, but for the broad-based support they have elicited. 
While spearheaded by Beijing-based NGO’s, the dam protests involve Chinese from all parts of the country, employ all means of communication, and engage the support of central government officials. 
Beijing-based NGO’s are allying with local Sichuan NGO’s to launch Internet campaigns, distribute petitions, and mobilize villagers. 
In one case, environmental activists took villagers from a proposed dam site to another town to see firsthand how poorly others had fared in the dam resettlement process. 
University students in the regions of the proposed dams have also become engaged through Internet chat groups. 
Environmental activists have found allies among officials within China’s State Environmental Protection Administration, Meteorological Administration, and Forestry Bureau. 
The dam projects have also become a focal point for a broader political debate within the Chinese media. 
Newspapers such as Southern Weekend , China Youth Daily , and even the traditionally conservative China Daily call directly for greater political openness, increased political participation, and for strengthening the rule of law. 
Similar environmental protests have evolved into demands for broader political change in other countries. 
In the former Soviet Union and its satellite states, environmental activism contributed dramatically to regime change. 
In countries like Thailand, Indonesia, and the Philippines, environmental protest has helped spur political reform. 
The same may happen in China. 
Many of China’s leading environmentalists are former students and intellectual leaders from the Tiananmen protests of 1989 who believe that environmental activism offers an avenue for advancing broader political reform. 
Others began apolitically, but have come to believe that there can be no environmental protection without political change. 
This shared commitment to systemic reform is putting China’s government to the test. 
China’s leaders recognize that their policy options are limited: business as usual, repression, or reform. 
Thus far, the government has demonstrated some flexibility while trying to manage this new challenge with traditional means. 
Premier Wen Jiabao has stayed the construction of a number of dams until environmental and social impact assessments could be undertaken. 
Some have been approved while others have not. 
With hundreds of dams still likely to become targets for protest, pressure will only intensify for a more significant response. 
The government could launch a broad crackdown on such protests, although this would risk damaging China’s prestige internationally and provoking larger, more violent protests. 
The third option is to use environmental protection to justify moving China ahead with real political reform sooner rather than later. 
While this is currently an unlikely outcome, as the anti-dam protests gather strength, China’s leaders may realize that if they do not move quickly, they risk being swept away. 

China’s Gift to Europe 
Europeans are wrong to be angry with China because its currency peg to the US dollar has boosted the euro against most currencies on foreign exchange markets. 
On the contrary, they should view the currency peg as a valuable gift. 
In New York and other American cities, European shoppers are on a spree. They’re enjoying first hand the euro’s enhanced purchasing power abroad. 
The currency peg has also helped make the euro into an important reserve currency, rivaling the dollar. 
Investments from all over the world are flowing into Europe as a result. 
It was predictable that China’s currency peg would have this effect. 
It forced China to accumulate huge amounts of dollars to stabilize its currency and gave the euro an extra boost as the dollar depreciated. 
To protect itself from the declining greenback, China and other countries are converting a portion of their accumulated dollar reserves into euros. 
The International Monetary Fund estimates that the euro’s share of foreign exchange reserves rose to 26.4 percent in third quarter of 2007 from 25.5 percent in the second quarter of 2007, and 24.4 percent in the third quarter of 2006. 
The euro’s becoming a major reserve currency bestows important economic advantages on the euro-zone economy. 
Europeans should thank the Chinese currency peg for the part it is playing in this. 
Of course, with an augmented supply of euros, China can be expected to make substantial investments in Europe, which also is a good thing, especially since, in the United States at least, China has demonstrated a preference for investments in financial institutions rocked by the sub-prime crisis. 
Europe has plenty of those. 
So far, China’s biggest European investment has been in the Belgian financial company, Fortis N.V., where Ping An Insurance recently acquired a 4.2% stake, making it the largest shareholder in the company. 
China Development Bank also made an investment in Barclays to bolster its bid for ABN AMRO which, though it failed, helped the Dutch bank get the full value for its assets. 
This is only a start. 
Merrill Lynch predicts that, as currency reserves climb in countries like China, state-run investment funds will grow to $7.9 trillion, from $1.9 trillion now. 
China’s currency peg has also come in handy for Europe in its fight to keep inflation in check, while its monetary policy remains constrained by the sub-prime crisis. 
Experts estimate that, in terms of guarding against inflation, the euro’s appreciation has been equivalent to about 35 basis points rise in the interest rate. 
The strong euro has helped insulate Europe from skyrocketing oil and commodity prices, which are priced in dollars on the world markets. 
The big downside of the currency peg for Europe is supposed to be exports. 
That’s what sent French President Nicolas Sarkozy and other high-level European officials scurrying off to China last November—and why many ordinary Europeans continue to think of the Chinese as not playing by the rules. 
This is protectionist thinking par excellence. 
What makes exports so special? 
Why are they more important than cheap imports or the bargains that European shoppers get in New York? 
Should Europe give up all the advantages of the currency peg just because it makes European exports more expensive? 
Of course not! 
Note that it was French President Sarkozy who went to China to protest the currency peg, not German Chancellor Angela Merkel. 
German exports are not being substantially damaged by the strong euro—indeed, German costs are so competitive that exporters are confident they can cope with the euro at 1.50 dollars and even higher. 
This is not true for France-- but the answer is obvious: reduce costs and France too will be able to cope with the strong euro. 
In the final analysis, cutting costs is all the Europeans can do if they want to preserve the competitiveness of their exports. 
The Chinese are not going to change their exchange rate regime, which has strategic as well as economic motivations, just because the Europeans are unhappy with the currency peg. 
China has given the Europeans a gift. 
They should be grateful, rather than foolishly insist that China take it back. 

China’s Grand Africa Strategy 
Ever since the Berlin conference of 1883, which Belgium’s King Leopold II called “the sharing of Africa’s cake,” the West has assumed exclusive rights over sub-Saharan Africa. 
But, while centuries of struggle to end colonial rule and apartheid have not changed this much, now Western influence is being challenged by China, which likewise covets Africa’s rich reserves of minerals and resources. 
China is winning goodwill across the continent by tapping into shared anti-colonial resentments – and by treating the continent seriously. 
The next meeting, later this year, of the China-Africa Cooperation Forum (CACF), established to promote trade and investment, will include 46 African heads of state, along with China’s leaders. 
In any case, Chinese President Hu Jintao, Vice President Zeng Quinghong, and Prime Minister Wen Jiabao visit the continent regularly. 
China’s moves to strengthen its African ties have three objectives: to consolidate secure energy and mineral supplies, to curtail Taiwan’s influence on the continent (which harbours six of the 26 countries with which it maintains full diplomatic relations), and to augment China’s burgeoning global authority. 
China has invested billions of dollars in African oil production, mining, transportation, electricity production and transmission, telecommunications, and other infrastructure. 
In 2004 alone, China’s foreign direct investment in Africa represented $900 million of the continent’s $15 billion total. 
For example, Chinese representatives disbursed almost $2.3 billion to acquire a 45% stake in one of Nigeria’s offshore oil fields and promised to invest an additional $2.25 billion in develop the reserves. 
Angola, which currently exports 25% of its oil production to China, was granted a $2 billion loan in exchange for a contract to supply China 10,000 barrels of oil per day. 
Sudan, which supplies 7% of China’s total oil imports, has benefited from the largest Chinese investments. 
The China National Petroleum Corporation holds a 40% stake in the Greater Nile Petroleum Company and has invested $3 billion in refinery and pipeline construction. 
Moreover, 4,000 Chinese People Liberation Army troops are deployed in southern Sudan guarding an oil pipeline. 
Trade figures tell a similar story of growing influence. 
Sino-African trade grew by 700% during the 1990’s, doubled from 2000 to 2003, to $18.5 billion, and then jumped to $32.2 billion in the first 10 months of 2005. While trade and investment ties with China helped boost the continent’s overall economic growth to a record-high 5.2% in 2005, China also cancelled $10 billion in bilateral debts from African countries. 
Yet closer relations have brought controversy. 
African countries have become large buyers of Chinese weapons and military equipment. 
In so unstable a continent, one saturated with weaponry, pouring in more guns is hardly welcome. 
Yet, as Chinese Deputy Foreign Minister Zhou Wenzhong put it, “Business is business, and China separates business from politics.” 
Of perhaps greater long-term worry is the support that China providesor Africa’s authoritarian rulers. 
Economic growth without social justice merely prolongs the denial of decent living conditions to the majority of Africa’s people for the benefit of a tiny rich minority. 
The fact that China, within a decade, has overhauled Africa’s balance of power, relegating the US and the UK to third and fourth place and challenging France for first place as the continent’s main economic and commercial partner, has irked these competitors. 
France has stepped up its monitoring of China’s African activities. 
To tie Europe closer to Africa, British Prime Minister Tony Blair even proposed eliminating the European Union’s agricultural subsidies under the Common Agricultural Policy. 
Africa is the world’s only remaining “soft target” where outside powers can battle it out for access to mineral resources. 
But the last thing Africa needs is to be a battleground in an economic and political war. 
As Africans know from past experience, countries have no friends, but only interests. 
The ongoing Darfur conflict illustrates the problem. 
Despite its declared commitment to non-interference, China’s interests in Sudanese oil imply otherwise. Thus, China threatens to veto any resolution of the United Nations Security Council that might impose sanctions against the Arab ruling class in the Sudanese government, whose troops and government-allied militias are perpetrating genocide against Sudan’s black citizens, using Chinese-made helicopter gunships based at airstrips maintained by Chinese oil companies. 
Until China sees its economic interests in Africa as tied to the continent’s political development, such horrors will continue. 
Africa’s economy may grow, but Africans will continue to suffer. 

China's Great Internet Firewall 
Contrary to popular wisdom, Chinese efforts to control the Internet and other new media are not doomed to fail. 
China's government has lost much control over the information and images that now circulate through Chinese society, but it still is capable of preventing any serious challenger from using the media to attack it. 
How can this be? 
The government demands that Web sites, television programs, and other media meet three general criteria: 
They must support, or at least not hinder, China's efforts to sustain economic growth, maintain social order, unify with Taiwan, and secure international respect; 
They must support, or at least not question, the Chinese Communist Party's monopoly on political power; and 
They must oppose such "negative" social phenomena as "spiritual pollution" (for example, pornography and drug abuse), "bourgeois liberalization" (Western-style democratization), "feudal superstition" (the Falun Gong and other proscribed religions), and "worship of things foreign" (especially American popular culture). 
The government's tools for enforcing these criteria are far more effective than most observers realize. 
First, it can imprison those who violate its media policy. 
For example, in 1998 it sentenced a Shanghai engineer to two years in prison for selling 30,000 Chinese e-mail addresses to an overseas-based dissident newsletter. 
In March 2001, it launched a general crackdown on Internet dissent that resulted in numerous people being imprisoned and harassed. 
Second, the government can use technical means to deny people access to undesired content. 
It has jammed Voice of America broadcasts since June 1989 and in the spring of 2001 began jamming Tibetan-, Uighur-, and Kazakh-language broadcasts from India and Central Asia. 
It blocks Chinese Internet surfers from visiting a list of banned Web sites and late last summer it blocked access to the Google and AltaVista search engines. 
More recently, it developed a new system that allows surfers to access some sections of formerly banned sites, but deploys packet-sniffing technology to deny access to other sections. 
Third, the government enlists cooperation from foreign businesses in exchange for exclusive access to China's gigantic market. 
Just as the government persuaded Rupert Murdoch to remove BBC News from STAR-TV in 1994, it convinced Yahoo this year to design a special search engine for China that screens out Web sites dealing with unacceptable subjects. 
Companies such as Cisco have been accused of providing the government with advanced technologies designed to make the "Great Internet Firewall" leak-proof. 
Fourth, the government distracts attention by supporting "healthy" Chinese Web sites, as well as glitzy but vacuous entertainment-oriented TV programs. 
Such circuses--combined with the bread of economic growth--crowds out subversive messages from abroad, especially when combined with nationalistic propaganda designed to inoculate people against whatever subversive media content that might slip through. 
So far, China's government has succeeded famously in meeting technological advances that strengthen society with technological advances that strengthen the state. 
Nor do Chinese and foreign business people clamor for change. 
They don't need to read or hear about the Falun Gong and human rights to make sound investment or purchasing decisions. 
All of this suggests that China might evolve into the kind of society whose members spend so much time and money on conspicuous consumption and diversionary entertainment that they lack the psychic energy to reflect upon the issues of freedom, equality, religion, and human rights. 
Problems fester in such a society, but don't necessarily explode. 
As long as the middle class supports state repression, order can be upheld. 
The hope for more liberal democratic change in China seems to lie in a conflict between the rising middle class, rallying on both its own behalf and that of the poor, and the authoritarian state. 
Journalists, intellectuals, and entrepreneurs reportedly chafe at government efforts to block access to overseas search engines; one day they might demand freedom of speech more generally. 
But nowadays most members of the middle class seem content to exchange complacency for economic growth. 
If they become unhappy, they can always console themselves with a pirated DVD. 
Some groups, nonetheless, are fighting for the global freedom of the Internet. 
One Chinese Internet hacker group, called "Hacktivismo," is researching the development of a technology called "Six-Four" (named after the date of the 1989 Tiananmen massacre) that would allow Chinese netizen s to use the Internet to communicate free from government observation and thus visit banned Web sites safely. 
But even in a best-case scenario, these technologies won't be available for many months, if not years, and few people in China are likely to have the desire or ability to use them. 
Sadly, China's government has demonstrated amazing adeptness at controlling the Internet in the face of daunting technological challenges--at least to the point of preventing a hard core of sensitive subjects from being discussed openly. 
This situation will not change inevitably. 
Those who assert that China is on the wrong side of history in its communication policies--and that the Internet means eventual democratization--ought to temper their optimism. 
In China, history often takes a very long time. 


China’s Green Debt 
For a decade, the world has wondered when China’s leaders will recognize the staggering environmental crisis confronting their country. 
This year, we got an answer: a new Five-Year Plan that makes environmental protection a priority. 
A storm of green propaganda has followed, and the government now talks about using “Green GDP” to measure development. 
But will all this talk amount to real progress? 
While the central government admits to some of the environmental degradation caused by rapid economic growth, the picture it paints is incomplete. 
Consider “Green GDP.” 
This spring, the State Environmental Protection Administration produced the country’s first official estimate of GDP adjusted downward for environmental losses. 
According to these calculations, it would cost $84 billion to clean up the pollution produced in 2004, or 3% of GDP for that year. 
But more realistic estimates put environmental damage at 8-13% of China’s GDP growth each year, which means that China has lost almost everything it has gained since the late 1970’s due to pollution. 
China’s environmental problems, complex as the causes may be, can ultimately be attributed to our understanding of Marxism. 
For most of our recent history, we saw in Marxism only a philosophy of class struggle. 
We believed that economic development would solve all our problems. 
In the reform period, this misreading of Marx morphed into an unrestrained pursuit of material gain devoid of morality. 
Traditional Chinese culture, with its emphasis on harmony between human beings and nature, was thrown aside. 
As a result, China’s economy is dominated by resource-hungry and inefficient polluters, such as coal and mineral mines, textile and paper mills, iron and steel makers, petrochemical factories, and building material producers. 
Our cities are exploding in size, depleting water resources and creating horrific traffic congestion. 
One-quarter of China’s people drink substandard water; one-third of urbanites breathe badly polluted air. 
Moreover, the country recently witnessed a spate of environmental accidents. 
Indeed, on average, China suffers a major water pollution accident every other day. 
Although China has signed the Kyoto Protocol and some 50 other international environmental accords, we do little to honor them. 
If we are not serious about upgrading our industrial structure, we will fail when it comes time to fulfill our commitments to cut emissions. 
And while the new Five-Year Plan sets fine goals, many provinces have failed even to meet the major environment protection targets of the last Five-Year Plan. 
True, China has made the kind of economic advances in three decades that required 100 years in Western countries. 
But China also has suffered a century’s worth of environmental damage in 30 years. 
Unfortunately, unlike Western countries, we cannot afford to wait until our per capita annual GDP reaches $10,000 before tackling our environmental problems. 
Our experts predict that the environmental crisis will intensify to a critical stage by the time China’s per capita annual GDP reaches just $3,000. 
Making matters worse, while we discarded the finer elements of our traditional culture, we failed to absorb the better aspects of modern civilization. 
The concept of a “social contract” based on rights and obligations – the essential values that constitute the most important precondition for effective environmental protection – goes largely ignored. 
As a result, environmental protection projects often fail to be included in calculating production costs. 
Scarcely anyone bothers to consider the environmental costs to – or rights of – the country’s poor and powerless. 
It is imperative that environmental factors figure in China’s macroeconomic planning in a real way. 
This requires that a more rational strategy be mapped out in the planning of major industrial projects and energy-hungry enterprises. 
Careful studies need to be done to determine available energy, land, mineral, and biological resources before projects proceed. 
Land planning must be overhauled, with industrial monopolies broken up and development goals set according to population, resource volume, and the capacity to absorb pollution. 
Finally, China needs a new energy strategy. 
Industrialized nations have developed and made great use of nuclear, solar, wind, and bio-gas, and other renewable energy resources. 
China’s technological capacities in this sector lag behind even other developing nations such as India and Pakistan, and its reliance on coal is one of the greatest threats to the global climate. 
For now, there is simply no alternative. 
But in the long run, clean energy will be the only way to bring economic growth without doing irreparable environmental damage. 
Government cannot solve these problems on its own. 
China’s people have the biggest stake in environmental protection, and so must become the driving force. 
Local communities, non-governmental organizations, and businesses all must do their part. 
They cannot limit themselves simply to “supervision” and appeals to the authorities. 
They must expand into other avenues of appeal: public hearings, welfare lawsuits, enhanced media coverage, and other voluntary activities. 
But ultimate power does rest with the government. 
China’s leaders need to make several concrete moves in order to move beyond rhetoric. 
They must give real power to environmental officials to implement existing laws and close gaping legal loopholes. 
This can only be done by introducing legal mechanisms to reward those who protect the environment, while making polluters pay, and by helping to unify the environmental watchdogs scattered across different sectors. 
Above all, a system needs to be established to monitor officials’ performance in environmental as well as in economic terms. 
China is dangerously near a crisis point. 
The country’s enormous environmental debt will have to be paid, one way or another. 
China must exercise the foresight needed to begin paying this debt now, when it is manageable, rather than allowing it to accumulate and, ultimately, threaten to bankrupt us all. 

The Global Implications of Falling Commodity Prices 
NEW YORK – The decade-long commodity-price boom has come to an end, with serious implications for global GDP growth. 
And, although economic patterns do not reproduce themselves exactly, the end of the upward phase of the commodity super-cycle that the world has experienced since the early 2000’s dims developing countries’ prospects for continued rapid catch-up to advanced-country income levels. 
Over the year ending in July, The Economist’s commodity-price index fell by 16.5% in dollar terms (22.4% in euros) with metal prices falling for more than two years since peaking in early 2011. 
While food prices initially showed greater resilience, they have fallen more sharply than those of other commodities over the past year. 
Only oil prices remain high (though volatile), no doubt influenced by the complex political events in the Middle East. 
In historical terms, this is not surprising, as our research into commodity super-cycles shows. 
Since the late nineteenth century, commodity prices have undergone three long-term cycles and the upward phase of a fourth, driven primarily by changes in global demand. 
The first two cycles were relatively long (almost four decades), but the third was shorter (28 years). 
The upward phases of all four super-cycles were led by major increases in demand, each from a different source. 
During the current cycle, China’s rapid economic growth provided this impetus, exemplified by the country’s rising share of global metals consumption. 
While these cycles reached similar peaks, the downswings’ intensity has varied according to global economic growth. 
The downswings following World War I and in the 1980’s and 1990’s were strong; in contrast, the dip after the Korean War, when the world economy was booming, was relatively weak. 
After World War II, the super-cycles of different commodity groups became more closely synchronized (including oil, which had previously shown a different pattern). 
Just as China’s economic boom drove commodity-price growth in the current cycle, so the recent weakening of prices has largely been a result of its decelerating GDP growth, from double-digit annual rates in 2003-2007, and again in 2010, to roughly 7.5% this year. 
While projections of China’s future growth vary, all predict weaker economic performance in the short term – and even lower growth rates in the long term. 
The fundamental short-term issue is the limited policy space to repeat the massive economic stimulus adopted after the collapse of Lehman Brothers in 2008. 
China’s investment-led strategy to counter the crisis left a legacy of debt, and the continued deterioration of the demand structure – now characterized by an extremely high share of investment (close to half of GDP) and a low share of private consumption (about 35%) – further constrains policymakers’ options. 
There is a consensus that these abnormal demand patterns must change in the long term, as China moves to a consumption-led growth model. 
But, to accomplish this transition, China’s leaders must implement deep and comprehensive structural reforms that reverse a policy approach that continues to encourage investment and exports while explicitly and implicitly taxing consumption. 
The uncertainty surrounding China’s impending economic transformation muddies the growth outlook somewhat. 
Some forecasters predict a soft landing, but differ on the growth rate. 
Official estimates put annual GDP growth at 6.5% in 2018-2022, while Peking University’s Michael Pettis, for example, regards 3-4% growth as consistent with continuous rapid consumption growth and the targeted increase in consumption’s share of GDP. 
While hard-landing scenarios, associated with a potential debt crisis, are also possible, the authorities have enough policy space to manage them. 
In any case, downside risks are high, and room on the upside is essentially non-existent. 
The main engine of the post-crisis global economy is therefore slowing, which has serious implications for one of the last decade’s most positive economic trends: the convergence of developed and developing countries’ per capita income levels. 
Just as China’s economic boom benefited commodity-dependent economies, primarily in the developing world, its slowdown is reflected in these economies’ declining growth rates. 
(In fact, while several South American countries have been among the hardest hit, even developed countries like Australia have not been immune.) 
If weak global demand causes the current commodity super-cycle’s downswing to be as sharp as those of the post-1918 period and the late twentieth century, the world should be prepared for sluggish economic growth and a significant slowdown – or even the end – of income convergence worldwide. 

China’s Happy Mask 
BEIJING – China’s “face” may be its Achilles’ Heel. 
As it basks in its new status as an economic superpower – the dragon that is outpacing Asia’s tigers as well as the donkeys of the West – China is mistakenly downplaying its own serious structural weaknesses. 
The communist leadership finds it hard to mention, let alone emphasize, the country’s problems. 
Officials’ preoccupation with commanding respect and not losing face leads them to focus almost exclusively on China’s achievements. 
This is a strategy that risks backfiring, because it misunderstands the dynamics of international politics. 
Emphasizing China’s meteoric rise means less understanding in the rest of the world of the need to sustain rapid economic development in order to satisfy the expectations of its 1.3 billion inhabitants. 
The government knows that it has a political tiger by the tail, but refuses to acknowledge it, either inside China or outside. 
Trade tensions continue to mount. 
The United States is deeply concerned, following the minimal results of its “strategic economic dialogue” with China in May, and Congress is threatening tough protectionist measures. 
The European Union may not be far behind; much will depend on how China presents its case over the coming 18 months as the two sides negotiate a wide-ranging Partnership Cooperation Agreement, which will determine the quality of bilateral relations for the next decade. 
German Chancellor Angela Merkel has just visited Beijing, with French President Nicolas Sarkozy likely to follow soon. 
Both are surely aware that China’s surging exports last year helped it surpass the US as Europe’s largest foreign supplier. 
What they won’t see, of course, are the desperately low living standards of China’s teeming millions, especially the rural poor. 
Yet China is in no mood to plead poverty when dealing with the West. 
Its aim is to gain as much prestige as possible from the Olympic games in 2008 and the six-month World Expo in Shanghai during the spring and summer of 2010. 
It remains to be seen whether the two events will be capable of swinging world opinion in China’s favor and keeping it there. 
Indeed, the government’s suspicion of the international media is liable to spark friction when thousands of journalists arrive and inevitably widen their coverage beyond athletics to politics and human rights. 
For the time being, sentiment about China’s future remains relentlessly upbeat. 
McKinsey consultants have even forecast that the upper middle-class will number 520 million by 2025 – the sort of projection that the communist mandarins welcome as a tribute to their strange hybrid of a market economy and rigid state control. 
Yet it is almost certainly the sort of forecast of which they should beware. 
The reality of life in today’s China looks very different from the vantage point of a province far from the heady atmosphere of Beijing or Shanghai. 
For example, like much of the country, Gansu Province, at China’s geographical center, is grappling with structural and social problems that range from the daunting to the apparently insuperable. 
Average annual output per capita is about $900, and incomes among the peasants who make up most of its rural population of 26 million are less than $250. 
Gansu’s challenges range from modernizing its heavy industries to resisting desertification and the encroachment of the Gobi desert. 
While it has been making slow but steady progress, its future is clouded by worsening water shortages; though it straddles the Yellow River, the water table is dwindling fast. 
Back in Beijing, the chief preoccupation is to safeguard 11% GDP growth while assuaging Western governments. 
By the end of this year, China’s exports will be 24% higher than in 2006, at $1.2 trillion, and its trade surplus will have grown by 43%. 
But trade will probably not be the main worry for China’s international relations. 
Trouble seems more likely to come from growing concern in the West over climate change. 
Political leaders in EU capitals and the US may be well aware of China’s global economic importance, but the widespread public perception is that its factories are dirty and environmentally harmful. Rows over product safety and intellectual piracy could all too easily fuel calls for tough new trade limits. 
The answer is not for China to step up its public-relations effort. 
Instead, it should be revealing its weaknesses and vulnerabilities to gain Western understanding. 
That really would be a cultural revolution. 

China’s Incredible Shrinking Economy 
ITHACA, NY -- The World Bank recently announced that the Chinese and Indian economies are 40% smaller than previously estimated. 
Since these are the fastest-growing large economies, the Bank’s revision has clipped half a percentage point off world growth over the last five years, according to the IMF. 
The new numbers set off a firestorm of debate, and have brought conspiracy theorists out in force. 
But when the dust settles, the new data may be less revolutionary than some people believe. 
They may also have the unintended benefit of shifting a key policy debate in a more productive direction. 
The new data are based on improved estimates of purchasing power parity (PPP). 
The basic idea is that, when comparing incomes across countries, variations in purchasing power should be taken into account. 
Market exchange rates are not a good indicator of these differences, because they can fluctuate for other reasons. 
The World Bank and some other organizations have, collectively, gathered a massive amount of data – covering 1,000 similar products in 146 countries – to construct comparable international prices. 
Price levels in China and India, among other developing countries, turn out to be much higher than previously estimated. 
Hence, their real per capita incomes are lower relative to other countries. 
Despite this massive shrinkage, the reality on the ground is unchanged. 
Indeed, people in Beijing and Delhi are showing more equanimity than most would if their incomes were cut by 40%. 
The bottom line is that China and India are still large economies, growing rapidly, and consuming massive amounts of resources. 
All that has changed is that both countries have been downgraded to smaller roles on the world stage. 
But size is not all that matters. 
The new PPP data also have implications for evaluating the extent of poverty and the level of a currency’s exchange rate. 
This is where the conspiracy theories come in. 
The reduction in income levels at international prices means that many more people in China and India are now classified as poor – an automatic boon for the World Bank, whose primary business is to end poverty. 
And the fact that China’s market exchange rate was far lower (i.e., more yuan per dollar) than the earlier PPP exchange rate had been interpreted as evidence of huge undervaluation. 
The new data, by contrast, show that the exchange rate of the renminbi relative to the dollar is about right. 
The calculations can be tweaked, but it is difficult to generate anything close to the dramatic figures of 40-50% undervaluation that had been bandied about by some researchers. 
This has fomented accusations that China apologists have cooked the new numbers. 
But the conspiracy theories are off the mark. 
The World Bank has engaged in a good faith effort to make progress on a hugely complicated matter. 
Of course, there remain gaping holes in the data. 
For example, the data for China are based on surveys in just 11 cities. 
Prices for rural areas – where two-thirds of China’s population still resides – are based on extrapolations from these data. 
There is guesswork involved, but at least it’s been done in a systematic way. 
In any case, earlier calculations depended on an even greater amount of guesswork. 
Whatever one makes of the data, the number of people leading lives of quiet desperation in these countries is unconscionably large. 
As for the exchange rate, PPP is only one of many ways to calculate its equilibrium level. 
Given China’s massive current account surplus (12% of GDP), the renminbi is still undervalued. 
But the degree of undervaluation is not the point. 
What China needs is a more flexible exchange rate that can respond freely to market forces. 
Otherwise, China’s central bank must focus on keeping the exchange rate stable and doesn’t have a truly independent monetary policy. 
More flexibility would help attain more balanced and sustainable growth. 
It would allow the central bank to raise interest rates aggressively to control runaway credit and investment growth, and keep inflation in check. 
Raising interest rates on bank deposits, which are now negative in real terms, would reduce incentives for individuals to pour money into equity markets or real estate, mitigating the risk of asset market bubbles and boom-bust cycles in the economy. 
Trying to determine the “right” level of the renminbi, by contrast, is a fool’s game, and the proposal of a step revaluation to get to that level has become a polemical distraction. 
Perhaps the new data will cool the heated rhetoric about undervaluation and currency manipulation, and instead generate a substantive discussion about exchange-rate flexibility and its benefits for China and the world. 

China’s Industrial Nightmare 
The Western media have a habit of going on feeding frenzies. 
Ironically, when it comes to China, the latest frenzy concerns food itself. 
The execution this week of the former head of China’s State Food and Drug Administration (SFDA), Zhen Xiaoyu, who accepted almost $1 million in bribes, shows that the frenzy has now seeped into China as well. 
First came a spate of stories about pet food laced with melamine (a coal derivative), cough medicine and toothpaste adulterated with diethylene glycol (a sweet-tasting industrial chemical used in anti-freeze and brake fluid), toy trains decorated with lead-based paints, bacteria-infected antibiotics, exploding cell phone batteries, and defective car tires. 
Now, attention has now turned to food. 
The world press is filled with stories about honey laced with industrial sweeteners, canned goods contaminated by bacteria and excessive amounts of additives, rice wine braced with industrial alcohol, and farm-raised fish, eel, and shrimp fed large doses of antibiotics and then washed down with formaldehyde to lower bacterial counts. 
In response, China’s government acted almost instantly. 
The General Administration of Quality and Supervision, Inspection, and Quarantine conducted a survey and reported that nearly one-fifth of all products made in China for domestic use did not measure up to safety and quality standards. 
At the same time, regulators increased inspections, closed down some 180 food manufacturers and now post the names of violators on their Web site. 
Moreover, not only was Zhen Xiaouyu executed, but Cao Wenzhuang, who was in charge of drug registration at the SFDA, was sentenced to death for accepting roughly $300,000 in bribes from drug manufacturers. 
Both verdicts were doubtless calculated, as a famous Chinese proverb puts it, to “kill some chickens in order to scare the monkeys.” 
But why does this surprise us? 
After all, “capitalism with Chinese characteristics” has been a chaotic free-for-all for some time. 
Roughly 75% of China’s food is now produced by small, private, and un-licensed operations that are difficult to regulate. 
With little knowledge of China’s tectonic changes, foreigners have been investing, buying, trading, and extravagantly praising its amazing, but hell-bent, “economic boom.” 
Fear of “China bashing” has made it difficult for so-called “friends of China” to discuss its darker side openly. 
The Chinese people themselves, however, have been far from unaware that the purity of their food, medicine, water, and air is in doubt. 
The xiadao xiaoxi (back alley news) has long been replete with rumors of things going awry. 
One small-time operation ground up sheet-rock and put it in gel-caps to sell as medicine. 
A peasant village raided a hospital dumpster to reclaim discarded surgical equipment, wash it in a nearby canal, re-package it in sealed plastic saying “sterilized,” and sell it back to the hospital at cut-rate prices. 
It has not helped, of course, that the Communist Party loathes a free press and a robust civil society, both of which are essential information feedback loops in ensuring any country’s well-being. 
Nor has it helped that China’s regulatory agencies lag far behind the growth of its economy. 
For example, the Beijing office of China’s State Environmental Protection Administration has less than 300 employees, whereas the United States Environmental Protection Administration has over 17,000. 
China’s mad rush toward fuqiang (wealth and power) has given it little chance to develop all the compensatory institutions that any truly developed, not to say enlightened, society needs to achieve equilibrium and social health. 
But in today’s globalized world, where national boundaries have morphed into synapses for myriad kinds of uncontrollable interactions, each country’s problems have become everyone’s problem. 
So, before we in the West becomes too censorious of China’s quality control problems, we should remember our complicity in making China the world’s industrial park and global dumping ground for many toxic industries. 
While we may lament the loss of manufacturing jobs through “outsourcing,” we certainly do not lament exporting massive amounts of pollution to China. 
China may come to rue the wanton eagerness with which it has embraced industrialization. 
Already, the Chinese are beginning to awaken from the infatuation with development that besieged them as they began to emerge from the commodity-starved Cultural Revolution. 
In a world of scarcity, more always seemed better. 
But now, just as the West began to understand decades ago that the natural environment has limits, China is showing the first signs of entering a post-industrial phase. 
So, rather than simply shutting our doors to Chinese products, we might contemplate helping China by opening the doors of our regulatory agencies to Chinese regulators. 
To do so would actually help ourselves. 
For, even with “strategic competitors” like China, we now live in a global commons in which we share air, water, manufactured goods, and even food. 

China’s Internet Dictatorship 
Eleven years after its initial connection to the World Wide Web (WWW), China’s access to the Internet is still guarded by firewalls, embedded in its proxy servers, which have proven to be more practical and impenetrable than the Berlin Wall. 
Moreover, an increase in the demand for broadband connection has triggered the launch of an $800 million “Jin Dun (Golden Shield) Project,” an automatic digital system of public policing that will help prolong Communist rule by denying China’s people the right to information. 
The principle underlying the Golden Shield is that “as virtue rises one foot, vice rises ten.” 
Aided by systems developed by western intelligence agencies, China has forged a virtual sword that threatens to block the path to democracy. 
Internet “gateways” mainly supervise and filter political information in China. 
Their technical functions include blocking overseas Web sites, filtering content and key words on Web pages, monitoring email and Internet cafes, hijacking PC’s, sending out viruses, and inter-connecting with the monitoring systems of the Public Security Bureaus. 
Rather than heralding a new era of freedom, the Internet is enabling Chinese authorities to perfect totalitarian control in a way that puts the rulers in George Orwell’s 1984 to shame. 
Since April 15 of this year, the Golden Shield’s advanced science and technology has been monitoring every thought and action of those Chinese people who use the Internet. 
But what Orwell failed to predict is that China’s government has accomplished this with the help of Western democracies. 
Today, China is the only country in the world that has enshrined in law the concept of a “Web political criminal.” 
Publishing articles on the Internet can amount to “committing an offense,” and “radical views” may result in imprisonment. 
The real criminals, the officers of the companies – Nortel, Cisco, and Sun Microsystems – that built this sinister system of mind control, will never get closer to a prison than China’s five-star hotels. 
Since the first Chinese Web criminal, Lin Haiyin, was imprisoned for instigating subversive actions in 2000 to the recent arrest of writer Shi Tao, more than 100 independent intellectuals have been imprisoned for expressing their views. 
Internet monitoring is also behind the constant rise in the number of Falun Gong practitioners executed by the state – a total of 1,692 as of April 18. 
Internet communication in modern China is filled with baits and traps: user-friendly Web page designs, easy-to-click icons and symbolized facial expressions, beautiful female stars in online ads and constantly updated international news induce users to participate and express their own ideas. 
But once someone’s fingertips touch the keyboard, the “Kitchen Table Democracy” of the Web no longer exists – he or she may find themselves stepping into a trap, because the Internet Police monitor every word that is typed. 
In a country where freedom of expression has been off limits for half a century, the Internet had at first proven to be a godsend: people poured their enthusiasm into it by building Web sites and personal homepages. 
Now these people find themselves exposed to the Public Security Bureaus. 
For example, the Democracy and Freedom Web site has been either temporarily shut down or blocked 43 times in three years. 
Its robust reports on the death of Zhao Ziyang, the reform-minded leader of the 1980’s who was imprisoned for objecting to the Tiananmen Square crackdown of June 1989, ultimately forced it to succumb to the power of the “Golden Shield.” 
Today, the average online lifespan of proxy servers in China is a mere 30 minutes, and 17,000 Internet cafes have been shut down. 
The online filtering technology is capable of blocking or intercepting the emails of the 80 million or so “Net citizens” in China. 
Because Internet chat rooms and personal emails have become essential to many Chinese, the upgrading of Internet supervision is also gaining momentum. 
As a result, thinkers today are far more likely to get caught expressing “unsanctioned” ideas than they ever were in the 1980’s and early 1990’s, when underground publications served as the main channel of free expression. 
Indeed, although the Internet’s coverage in China has been expanding steadily, the Communist Party’s ability to censor it has grown even faster, thanks to Western technology. 
The Party has been dreaming of this kind of oversight ever since its revolutionary days. 
Dictatorship is not only safe in China, but, at least for now, it is on the offensive. 
But not forever. 
Although “the Golden Shield Project” is the Communist Party’s largest single investment in the ideological field since it gained control of China in 1949, it is also likely to be the last big bet before the Party’s collapse. 
Like the Berlin Wall, China’s Internet restrictions may be technically sound, even as they defend the indefensible and sustain the unsustainable. 

China’s Lessons for the World Bank 
The China Daily recently ran a front-page story recounting how Paul Wolfowitz used threats and vulgarities to pressure senior World Bank staff. 
The newspaper noted that Wolfowitz sounded like a character out of the mafia television show The Sopranos . 
At the same time, while the Wolfowitz scandal unfolded, China was playing host to the Africa Development Bank (ADB), which held its Board meeting in Shanghai. 
This is a vivid metaphor for today’s world: while the World Bank is caught up in corruption and controversy, China skillfully raises its geopolitical profile in the developing world. 
China’s rising power is, of course, based heavily on its remarkable economic success. 
The ADB meeting took place in the Pudong District, Shanghai’s most remarkable development site. 
From largely unused land a generation ago, Pudong has become a booming center of skyscrapers, luxury hotels, parks, industry, and vast stretches of apartment buildings. 
Shanghai’s overall economy is currently growing at around 13% per year, thus doubling in size every five or six years. 
Everywhere there are startups, innovations, and young entrepreneurs hungry for profits. 
I had the chance to participate in high-level meetings between Chinese and African officials at the ADB meetings. 
The advice that the African leaders received from their Chinese counterparts was sound, and much more practical than they typically get from the World Bank. 
Chinese officials stressed the crucial role of public investments, especially in agriculture and infrastructure, to lay the basis for private-sector-led growth. 
In a hungry and poor rural economy, as China was in the 1970’s and as most of Africa is today, a key starting point is to raise farm productivity. 
Peasant farmers need the benefits of fertilizer, irrigation, and high-yield seeds, all of which were a core part of China’s economic takeoff. 
Two other critical investments are also needed: roads and electricity, without which there cannot be a modern economy. 
Farmers might be able to increase their output, but it won’t be able to reach the cities, and the cities won’t be able to provide the countryside with inputs. 
The officials stressed how the government has taken pains to ensure that the power grid and transportation network reaches every village in China. 
Of course, the African leaders were most appreciative of the next message: China is prepared to help Africa in substantial ways in agriculture, roads, power, health, and education. 
And the African leaders already know that this is not an empty boast. 
All over Africa, China is financing and constructing basic infrastructure. 
During the meeting, the Chinese leaders emphasized their readiness to support agricultural research as well. 
They described new high-yield rice varieties, which they are prepared to share with their African counterparts. 
All of this illustrates what is wrong with the World Bank, even aside from Wolfowitz’s failed leadership. 
Unlike the Chinese, the Bank has too often forgotten the most basic lessons of development, preferring to lecture the poor and force them to privatize basic infrastructure, rather than to help the poor to invest in infrastructure and other crucial sectors. 
The Bank’s failures began in the early 1980’s, when, under the ideological sway of President Ronald Reagan and Prime Minister Margaret Thatcher, it tried to get Africa and other poor regions to cut back or close down government investments and services. 
For 25 years, the Bank tried to get governments out of agriculture, leaving impoverished peasants to fend for themselves. 
The result has been a disaster in Africa, with farm productivity stagnant for decades. 
The Bank also pushed for privatization of national health systems, water utilities, and road and power networks, and grossly underfinanced these critical sectors. 
This extreme free-market ideology, also called “structural adjustment,” went against the practical lessons of development successes in China and the rest of Asia. 
Practical development strategy recognizes that public investments – in agriculture, health, education, and infrastructure – are necessary complements to private investments. 
The World Bank has instead wrongly seen such vital public investments as an enemy of private-sector development. 
Whenever the Bank’s extreme free-market ideology failed, it has blamed the poor for corruption, mismanagement, or lack of initiative. 
This was Wolfowitz’s approach, too. 
Instead of focusing the Bank’s attention on helping the poorest countries to improve their infrastructure, he launched a crusade against corruption. 
Ironically, of course, his stance became untenable when his own misdeeds came to light. 
The Bank can regain its relevance only if it becomes practical once again, by returning its focus to financing public investments in priority sectors, just as the Chinese leadership is prepared to do. 
The good news is that African governments are getting the message on how to spur economic growth, and are also getting crucial help from China and other partners that are less wedded to extreme free-market ideology than the World Bank. 
Many African governments at the Shanghai meeting declared their intention to act boldly, by investing in infrastructure, agricultural modernization, public health, and education. 
The Wolfowitz debacle should be a wake-up call to the World Bank: it must no longer be controlled by ideology. 
If that happens, the Bank can still do justice to the bold vision of a world of shared prosperity that prompted its creation after World War II. 

China's Looming WTO Revolution 
China is now an active member of the world economic and political community. 
Relative affluence and greater personal freedom exist for many, even as other Chinese citizens are racked by the travails of modernization. 
Many anticipate that China's entry into the World Trade Organization (WTO) will speed these trends along and may even precipitate fundamental and legal political change. 
Although forward momentum will be slower than many anticipate, the changes exacted by WTO membership will be profound because China's future will be dictated or determined more than ever before by factors beyond Beijing's control. 
Moreover, WTO membership will not only prevent backsliding but will raise fundamental questions about national sovereignty and powerful debates about the amount of foreign engagement China is willing to tolerate. 
The impact will go beyond economics to affect, deeply, social and political life. 
Although some analysts produced doomsday scenarios about increasing unrest from rising unemployment and inequality, liberal intellectuals in China welcome membership in anticipation of a more rule-bound and democratic political order. 
In reality, entry will push forward trends set in motion well before China joined the WTO. 
The demise of the old economic order will be hastened while the emerging private enterprise and new sectors will become ever more privileged. 
In the social realm, WTO entry will increase inequality and the restructuring of the labor force into extremes of wealth and poverty. 
In this process, the concentration of foreign direct investment (FDI) along the coasts will also continue to exacerbate regional inequalities. 
In 1998, Guangdong province alone received 26.5% of FDI while the entire West of China received 3%. 
As a result, those living in Shanghai enjoy a real income twice that of the Northwest and 60% higher than the Southwest. 
Already radically different levels of education, resource endowment and skilled labor mean that, with WTO entry, the already privileged coastal areas of China will continue to advance disproportionately over more backward inland areas. 
Increased economic competition will also add to unemployment in the state-owned sector while new, private job creation will not match the rising need. 
For example, the real unemployment rate in the Northeast is already over 10% and this region will feel the strongest impact from agricultural changes. 
While much of China will gain from agricultural diversification, areas such as the Northeast that are overly dependent on grain production will suffer because under the WTO China will import much cheaper and better quality grain for both human consumption and animal fodder, causing rural incomes to decline even further. 
Migration to a city will be the only choice for many dispossessed peasants. 
It is no surprise, then, that rural and urban unrest is mounting. 
China's new leadership must address this rising tide of disaffection when calculating the pace with which to move ahead with WTO compliance. 
The CCP must decide how to accommodate the social forces that will benefit from further globalization while disentangling itself from its traditional power base, housed in the failing state-owned sector propped up by the old central planning apparatus. 
To deal with the social cleavages that will increase as a result of WTO accession, China will have to develop more participatory and open mechanisms by allowing for a competitive political market place to develop to parallel the economic one. 
Doubtless, such changes will be difficult for the CCP to accept. 
No less necessary will be further development of a legal and regulatory framework as a means to improve the potential for both domestic and international investment. 
Here the major challenge will be for the CCP to accept that WTO membership presumes that disputes will be resolved by an independent, rules-based, supra-national body rather than by party-fiat or through the mediation of local political connections. 
Within China, pressure will mount for a more independent judiciary to adjudicate economic issues and create greater transparency in international transactions. 
Such changes run counter to current practice and will not be easy for party members to swallow. 
The developed economies of the world can facilitate this process. 
Sluggish progress may be unacceptable, but outsiders must recognize that the CCP must balance the imperatives of progress against mushrooming social unrest. 
China has agreed to implement its WTO commitments in a stunningly short period of time that can only have been agreed to because of extreme American pressure. 
But China is too big and too political to be pushed so fast that it is not permitted sufficient time to adapt properly. 
Cooler heads must prevail around the world so that China is not taken to WTO dispute mechanisms for each and every insignificant infraction. 
In short, there needs to be political maturity exercised by everyone as China integrates with the world economy. 
Importantly, those countries who expect China to yield to WTO protocols will have to behave responsibly when demanding it abide by international decisions beyond its own jurisdiction, not all of which will be to its liking. 
To date, this has not been a strong suit, particularly for America. 
But if disdain is shown for the WTO process, there will be little incentive for China to comply during the difficult months ahead. 

China’s Losing Battle Against Corruption 
China’s rulers rarely wash their dirty linen in public. 
So the arrest of Politburo member and Shanghai Communist Party boss Chen Liangyu on corruption charges has sent shock waves across the country. 
Some speculate that the arrest is really part of a power struggle, with President Hu Jingtao demonstrating his authority against a local power broker who had thwarted national policy. 
Whatever the truth behind Chen’s fall, and despite the widening corruption probe of other senior government officials, data and evidence recently released by the government and multilateral institutions suggest that the authorities are fighting a rearguard battle against a rising tide of graft. 
Consider the grim statistics recently released by the Supreme People’s Procuratorate (SPP). 
More than 42,000 government officials on average were investigated for corruption every year from 2002 to 2005, with more than 30,000 per year facing criminal charges. 
These startling figures do not include economic crimes outside the public sector. 
For example, in 2005 alone, the China Banking Regulatory Commission (CBRC) unearthed irregularities involving misused funds of RMB767.1 billion ($93.7 billion). 
The CBRC uncovered 1,272 criminal cases and disciplined 6,826 bank employees (including 325 senior managers). 
According to Ye Feng, a SPP Director-General, “[a]lmost every type of financial institution has seen the emergence of criminal cases involving the solicitation of bribes in return for loans.” 
Despite the government’s intermittent anti-corruption campaigns, progress has been slow. 
On the contrary, as Ye has candidly acknowledged, the number of corruption cases “has continued to rise.” 
Indeed, international measures of graft show that the authorities may be reaching a stalemate or even retreating in the fight. 
Transparency International’s Corruption Perception Index, the most widely-used benchmark to gauge businessmen’s and experts’ beliefs about the extent of corruption in various countries, ranked China 78th out of 158 countries in 2005 – not much improvement from 2000. 
Indeed, among the World Bank’s six “Governance Indicators,” China’s scores on the “Control of Corruption” index have actually slipped in recent years, from -0.20 in 1998 to -0.40 in 2002 and -0.69 in 2005. 
In 2005, the World Bank ranked China 142nd out of 204 countries on the “Control of Corruption” index. 
While the economic toll of graft cannot be precisely quantified, indirect evidence suggests that the costs are significant. 
Multinational executives frequently cite China as their favorite investment destination, but many of them also complain about rampant graft. 
According to the World Bank’s “Investment Climate Surveys”, 27% of nearly 4,000 firms doing business in China in 2002-03 described corruption as a “major constraint” on their commercial operations, while 55% reported that they had paid bribes to government bureaucrats and/or local business partners to get things done. 
Likewise, Hu Angang, an economics professor at Beijing’s Tsinghua University, has estimated that corruption in 1999-2001 alone caused economic losses worth RMB1,293 billion ($156 billion), or 13.2% of GDP. 
Not surprisingly, the financial services sector suffered the most from corruption, losing RMB547 billion (6.25% of GDP). 
Fraudulent public expenditure cost 2.4% of GDP, siphoning off privatization proceeds amounted to almost 2.1% of GDP, and smuggling caused losses of more than 1.1% of GDP. 
The Chinese government has neither censored nor refuted Hu’s dreadful findings. 
The biggest obstacle to fighting graft is the weakness of the judiciary, especially at sub-national levels. 
Since most government corruption occurs at the county, township and village levels, it usually involves abuses of power by local officials. 
However, since these petty bureaucrats’ power is almost absolute, they also control the channels for addressing grievances. 
Indeed, among the World Bank’s six “Governance Indicators,” China’s score on the “Rule of Law” index has also slid in recent years, from -0.28 in 1998 to -0.47 in 2005, when China ranked 124th out of 208 countries in this category. 
With little recourse to legal means, an increasing number of frustrated victims of graft resort to extra-legal measures such as strikes, demonstrations, and sit-ins in order to gain media and public attention. 
Some even carry their fights to the provincial and central authorities, stoking a sharp rise in the incidents of “public order disturbances” nation-wide. 
Whereas the Ministry of Public Security reported only 8,700 such disturbances in 1993, by 2005 the number had jumped ten-fold, to 87,000. 
Needless to say, government mishandling of such disturbances, or a decision to repress them with force, would only fuel further social discontent. 
In fact, the government’s success in clamping down on corruption, especially at sub-national levels, will be a litmus test of its legitimacy. 
To fail would risk igniting a severe political backlash, including a spontaneous escalation of anti-regime activities. 

China’s Made-in-America Success Story 
NEW DELHI – America’s strategy in Asia for more than a century has sought a stable balance of power to prevent the rise of any hegemon. 
Yet the United States, according to its official National Security Strategy, is also committed to accommodating “the emergence of a China that is peaceful and prosperous and that cooperates with us to address common challenges and mutual interests.” 
So America’s Asia policy has in some ways been at war with itself. 
In fact, the US has played a key role in China’s rise. 
For example, rather than sustain trade sanctions against China after the Tiananmen Square massacre in 1989, the US decided instead to integrate the country into global institutions. 
But US foreign policy had been notable for a China-friendly approach long before that. 
In 1905, President Theodore Roosevelt, who hosted the peace conference in Portsmouth, New Hampshire, after the Russo-Japanese War, argued for the return of Manchuria to Manchu-ruled China and for a balance of power in East Asia. 
The war ended up making the US an active participant in China’s affairs. 
After the Communists seized power in China in 1949, the US openly viewed Chinese Communism as benign, and thus distinct from Soviet Communism. 
And it was after the Communists crushed the pro-democracy movement in 1989 that the US helped to turn China into an export juggernaut that has accumulated massive trade surpluses and become the principal source of capital flows to the US. 
America’s policy toward Communist China has traversed three stages. 
In the first phase, America courted Mao Zedong’s regime, despite the Korean War, China's annexation of Tibet, and domestic witch hunts, such as the Hundred Flowers Campaign. 
Courtship gave way to estrangement during the second phase, as US policy for much of the 1960’s sought to isolate China. 
The third phase began immediately after the 1969 Sino-Soviet military clashes, with the US actively seeking to exploit the rift in the Communist world by aligning China with its anti-Soviet strategy. 
Although China clearly instigated the bloody border clashes, America sided with Mao’s regime. 
That helped to lay the groundwork for the China “opening” of 1970-1971, engineered by US National Security Adviser Henry Kissinger, who until then had no knowledge of the country. 
Since then, the US has pursued a conscious policy of aiding China’s rise. 
Indeed, President Jimmy Carter sent a memo to various US government departments instructing them to help in China’s rise – an approach that remains in effect today, even as America seeks to hedge against the risk that Chinese power gives rise to arrogance. 
Indeed, even China’s firing of missiles into the Taiwan Strait in 1996 did not change US policy. 
If anything, the US has been gradually loosening its close links with Taiwan, with no US cabinet member visiting the island since those missile maneuvers. 
Seen in this light, China’s spectacular economic success – including the world’s largest trade surplus and foreign-currency reserves – owes much to US policy from the 1970’s on. 
Without the significant expansion in US-Chinese trade and financial relations, China’s growth would have been much slower and more difficult to sustain. 
Allies of convenience during the second half of the Cold War, the US and China emerged from it as partners tied by interdependence. 
America depends on China’s trade surplus and savings to finance its outsize budget deficits, while China relies on its huge exports to the US to sustain its economic growth and finance its military modernization. 
By plowing more than two-thirds of its mammoth foreign-currency reserves into US dollar-denominated assets, China has gained significant political leverage. 
China is thus very different from previous US adversaries. 
America’s interests are now so closely intertwined with China that a policy to isolate or confront it is not feasible. 
Even on the issue of democracy, the US prefers to lecture other dictatorships rather than the world’s largest autocracy. 
Yet it is also true that the US is uneasy about China’s not-too-hidden aim to dominate Asia – an objective that runs counter to US security and commercial interests and to the larger goal of securing a balance in power in Asia. 
To avert Chinese dominance, the US has already started to build countervailing influences and partnerships, without making any attempt to contain China. 
For the US, China’s growing power actually helps to validate its forward military deployments in Asia, maintain existing allies in the region, and win new strategic partners. 
Indeed, an increasingly assertive China has proven a diplomatic boon for the US in strengthening and expanding its Asian security relationships. 
The lesson is clear: The muscle-flexing rise of a world power can strengthen the strategic relevance and role of a power in relative decline. 
Barely a decade ago, the US was beginning to feel marginalized in Asia, owing to several developments, including China’s “charm offensive.” 
But now America has returned firmly to center stage. 
South Korea has beefed up its military alliance with the US; 
Japan has backed away from an effort to persuade the US to move its Marine base out of Okinawa; Singapore has allowed the US Navy to station ships; 
Australia is hosting US Marine and other deployments; and India, Vietnam, Indonesia, and the Philippines, among others, have drawn closer to the US as well. 
But no one should have any illusions about US policy. 
Despite America’s “pivot” to Asia, it intends to stick to its two-pronged approach: seek to maintain a balance of power with the help of strategic allies and partners, while continuing to accommodate a rising China. 

China’s Monetary Sterilization 
BEIJING – Not long after the United States Federal Reserve Board announced its second round of “quantitative easing” (known as QE2), the People’s Bank of China (PBC), China’s central bank, announced two increases of 0.5 percentage points in the required reserve ratio (RRR) of bank deposits. 
The RRR now stands at 18.5%, a historic high, even in global terms. 
While the Fed is planning to pump more money into the US economy, the PBC is trying to reduce the amount of money in circulation in China. 
Money used by commercial banks to satisfy the RRR, which is held in accounts at the PBC, can no longer be extended as loans. 
As a result, more money than ever is now frozen or inactive in China. 
It is understandable that the Fed wants to boost demand as long as the US economy remains depressed. 
But why has the PBC tightened monetary policy so much? 
The Chinese economy is not over-heating. 
Growth is still high, at about 10% per year, but has started to moderate. 
And, while inflation is a concern – having risen to 4.4% year on year in October, from 3.6% in September – this cannot explain why the PBC raised the RRR three times earlier this year, when inflation was lower. 
Instead, the PBC’s policy is preemptive: sterilize over-liquidity and get the money supply under control in order to prevent inflation or over-heating. 
At the beginning of the year, the RRR increases could be regarded as part of efforts to correct the over-supply of money that arose from the anti-crisis stimulus package. 
But the most recent RRR increases serve mainly to sterilize the “passive money supply” caused by the increase in foreign-exchange reserves. 
Indeed, in September alone, China’s foreign-currency reserves increased by almost $100 billion compared to August. 
With the global economy recovering, China’s trade surplus began to grow. 
Moreover, capital inflows increased significantly, owing to real investment opportunities in the high-growth economy and the expectation of renminbi revaluation. 
But rapid growth in foreign-exchange reserves means an increase in the domestic money supply, because the PBC issues RMB6.64 (down 3% since June) for every dollar it receives. That means that money supply increase by nearly RMB700 billion in September. 
The two 50-basis-point RRR increases just locked up the same amount of liquidity. 
A country with current-account and capital-account surpluses and increasing foreign-exchange reserves normally sees an excessive money supply and high inflation. 
But, while excessive money supply is a reality for China – the PBC now holds more than $2.6 trillion in foreign reserves – inflation has been quite moderate so far, thanks to the sterilization policy. 
The RRR is only one example of a textbook sterilization instrument. 
Another is to sell off government bonds held by the central bank in order to take money out of circulation – again, just the opposite of what the Fed is now doing. 
Because China’s government does not owe much debt to the public, the PBC sold out its holdings of government bonds in 2005. 
So it had to create something else to sell. 
It created so-called “Central Bank Bills,” which commercial banks are supposed to buy voluntarily. 
When they do, the money they pay is also locked up in the PBC’s accounts. 
To date, up to 5-6% of total liquidity has been returned to the central bank in this way. 
Furthermore, the PBC uses unconventional instruments from time to time, such as “credit ceilings” or “credit quotas” imposed on commercial banks. 
This may result in “extra reserves,” which commercial banks cannot use to extend their credit lines. 
Credit quotas imposed early this year have left Chinese commercial banks with 2-3% of extra reserves. 
Adding up the impact of the PBC’s sterilization efforts, roughly one-quarter of China’s total monetary base is illiquid. 
Thus, although China’s total money supply seems excessive, with the M2-to-GDP ratio now at about 190%, the real monetary base is actually much smaller than it appears. 
As a result, China’s inflation, as well as asset prices, remain under control. 
For how long will this sterilization continue, and how far will it go? 
At what point will higher RRR levels cause Chinese commercial banks to begin running losses? 
There may be room for further sterilization. 
First, unlike in some other countries, Chinese commercial banks are paid reasonable interest rates on required reserves, except for the “extra reserves” that they hold. 
So they do not lose much, if anything, from the PBC’s sterilization policies. 
Second, China’s central bank still controls interest rates by enforcing a roughly three-percentage-point spread between deposit rates and lending rates. 
As a result, Chinese commercial banks can operate longer with a higher RRR than their counterparts elsewhere. 
One key issue facing China is how to reduce the current- and capital-account surpluses in order to reduce foreign-exchange holdings. 
Yes, further revaluation of the exchange rate is needed, but this can play only a secondary role. 
The most important task for China is to reduce the saving rate, which equaled 52% of GDP in 2009. 
A number of fiscal, social-security, and tax reforms should be a priority for this purpose. 
But it seems that both revaluation and reform will take time. 
Meanwhile, the causes of global imbalance on the US side also seem unlikely to disappear any time soon. 
And now, with the Fed’s QE2 on the table, conditions may worsen before they improve. 
The PBC may have to continue its sterilization for some time in the foreseeable future. 

China’s New Economic Model 
China’s success since it began its transition to a market economy has been based on adaptable strategies and policies: as each set of problems are solved, new problems arise, for which new policies and strategies must be devised. 
This process includes social innovation . 
China recognized that it could not simply transfer economic institutions that had worked in other countries; at the least, what succeeded elsewhere had to be adapted to the unique problems confronting China. 
Today, China is discussing a “new economic model.” 
Of course, the old economic model has been a resounding success, producing almost 10% annual growth for 30 years and lifting hundreds of millions of Chinese out of poverty. 
The changes are apparent not only in the statistics, but even more so in the faces of the people that one sees around the country. 
I recently visited a remote Dong village in the mountains of Quizho, one of China’s poorest provinces, miles away from the nearest paved road; yet it had electricity, and with electricity had come not just television, but the internet. 
While some rising incomes came from remittances from family members who had migrated to coastal cities, the farmers, too, were better off, with new crops and better seeds: the government was selling, on credit, high-grade seeds with a guaranteed rate of germination. 
China knows that it must change if it is to have sustainable growth. 
At every level, there is a consciousness of environmental limits and the realization that the resource-intensive consumption patterns now accepted in the United States would be a disaster for China – and for the world. 
As an increasing share of China’s population moves to cities, those cities will have to be made livable, which will require careful planning, including public transportation systems and parks. 
Equally interesting, China is attempting to move away from the export-led growth strategy that it and other East Asian countries have pursued. 
That strategy supported technology transfer, helping to close the knowledge gap and rapidly improving the quality of manufactured goods. 
Export-led growth meant that China could produce without worrying about developing the domestic market. 
But a global backlash has already developed. 
Even countries seemingly committed to competitive markets don’t like being beaten at their own game, and often trump up charges of “unfair competition.” 
More importantly, even if markets are not fully saturated in many areas, it will be hard to maintain double-digit growth rates for exports. 
So something has to change. 
China has been engaged in what might be called “vendor finance,” providing the money that helps finance the huge US fiscal and trade deficits, allowing Americans to buy more goods than they sell. 
But this is a peculiar arrangement: a relatively poor country is helping to finance America’s War on Iraq, as well as a massive tax cut for the richest people in the world’s richest country, while huge needs at home imply ample room for expansion of both consumption and investment. 
In fact, to meet the challenge of restructuring China’s economy away from exports and resource-intensive goods, China must stimulate consumption. 
While the rest of the world struggles to raise savings, China, with a savings rate in excess of 40%, struggles to get its people to consume more. 
Providing better social services (public health care, education, and nation-wide retirement programs) would reduce the need for “precautionary” savings. 
More access to finance for small and medium sized businesses would help, too. 
And “green taxes” – such as on carbon emissions – would shift consumption patterns while discouraging energy-intensive exports. 
As China moves away from export-led growth, it will have to look for new sources of dynamism in its growing entrepreneurial ranks, which requires a commitment to creating an independent innovation system. 
China has long invested heavily in higher education and technology; now it is striving to create world-class institutions. 
But if China wants a dynamic innovation system, it should resist pressure by Western governments to adopt the kind of unbalanced intellectual property laws that are being demanded. 
Instead, it should pursue a “balanced” intellectual property regime: because knowledge itself is the most important input in the production of knowledge, a badly designed intellectual property regime can stifle innovation – as has been the case in America in some areas. 
Western technological innovation has focused too little on reducing the adverse environmental impact of growth, and too much on saving labor – something that China has in abundance. 
So it makes sense for China to focus its scientific prowess on new technologies that use fewer resources. 
But it is important to have an innovation system (including an intellectual property regime) that ensures that advances in knowledge are widely used. 
That may require innovative approaches, quite different from intellectual property regimes based on privatization and monopolization of knowledge, with the high prices and restricted benefits that follow. 
Too many people think of economics as a zero-sum game, and that China’s success is coming at the expense of the rest of the world. 
Yes, China’s rapid growth poses challenges to the West. 
Competition will force some to work harder, to become more efficient, or to accept lower profits. 
But economics is really a positive-sum game. 
An increasingly prosperous China has not only expanded imports from other countries, but is also providing goods that have kept prices lower in the West, despite sharply higher oil prices in recent years. 
This downward pressure on prices has allowed Western central banks to follow expansionary monetary policies, underpinning higher employment and growth. 
We should all hope that China’s new economic model succeeds. 
If it does, all of us will have much to gain. 

China’s New Latin Beat 
China’s President Hu Jintao has just returned home from his first trip to Latin America, where he sought new long-term sources of supplies for his country’s booming economy. 
These new ties offer Latin America and the Caribbean both a new market and an example of how a dynamic economy can reduce poverty. 
But Latin America should also be on its guard. 
While China may be a ravenous importer of Latin American commodities, it is also a formidable competitor. 
Both the public and private sector throughout the region should take immediate measures to face up to this new competition and to work toward cooperative projects with the Chinese. 
Ordinary people in Latin America are only now recognizing China’s importance as a global economic player. 
Indeed, until recently, most people took little notice of China. 
But China’s soaring growth, seen in contrast with stagnation in Latin America’s economies, has awakened governments and businessmen across the region. 
Comparisons between China’s economy and that of Latin America are stunning. 
The World Bank estimates that dire poverty in China, calculated as individual income of $1 per day, has been reduced from about 500 million people at the start of the 1980’s to less than 90 million in 2000. 
Meanwhile, poverty rates in South America have remained relatively constant. 
Economic growth rates reveal the same gap. 
From 1978 to 2003, annual real GDP growth in China averaged 8.1% while growth in Mexico – the fastest in Latin America, barely reached 1% a year. 
Although growing, China’s trade with Latin America and the Caribbean remains small, representing less than 2% of both exports and imports in 2002. 
The nature of that trading relationship differs substantially from country to country. 
Brazil and Argentina have, for example, significantly increased agricultural exports to China, while Central America and Mexico have seen their imports from China increase dramatically. 
This is important because it illustrates the dissimilar regional impact that trade with China has on Latin America and the Carribean, owing to the export of South America’s basic goods, coupled with the growth of Chinese imports into Mexico. 
In the 10 years between 1993 and 2003, China’s and Hong Kong’s exports to Mexico rose from 1.12% of total Mexican imports to 5.8%. 
Since 2003, China has become Mexico’s most important trading partner after the United States. 
Indeed, Mexico’s trade deficit with China reached $9 billion in 2003. 
In the second quarter of 2004, Chinese exports to Mexico grew by 67%, while Mexico’s exports to China fell by 1.3 %. 
These changes have also had a severe impact on Mexico’s trade with the US. 
Although Latin American and Chinese exports to the US have both grown significantly since 1990, China replaced Mexico in 2003 as the second-leading exporter to the US in value terms after Canada. 
Mexico’s competition in the US market from China has increased particularly in light manufacturing – mostly clothing and electronics. 
In Central America and Mexico clothing production is vitally important – generating 400,000 and 600,000 jobs, respectively – and represents the heart of Central America’s maquiladoras (free trade zones), which account for more than 70% of regional exports to the US. 
Losing this sector of the economy to the hyper-competitive Chinese will be a hard hit, as textile exports are often the first step on the development ladder. 
With respect to other goods, including computers, Chinese-made products are set to replace Mexican output in overwhelming numbers. 
Mexico’s so-called “Silicon Valley South” companies in Guadalajara have, by their own estimates, already lost more than $500 million worth of projects and approximately 20,000 jobs to Asia, especially to China, and this trend will continue in the short term. 
If Latin America fails to deal with its new competitor, the peoples of the region will lose jobs and opportunities to develop as they should. 
But there are lessons to be learned and advantages to be gained from China if Latin American governments and businesses are willing to think creatively. 

China’s Next Mountain to Climb 
MILAN – China is entering a complex set of transitions that will lay the foundations for the advanced-country status that it hopes to reach in the next 25 years. 
After three decades of sustained growth and a remarkably successful policy response to the recent global crisis, Chinese self-confidence is soaring. 
But the lessons that the government may draw from the crisis may not be the best guides for the long term. 
China faces several parallel and related challenges that are crucial for its internal development as well as its global economic relations. 
Among these are: 
● a major microeconomic restructuring of the economy to anchor the country’s emerging middle income country status; 
● a macroeconomic shift to a higher level of household income and consumption and a more rapid expansion of the middle class; 
● a reversal of the country’s now rising income inequality; lowering the very high savings level relative to investment and thus reducing the current-account surplus; 
● reducing the energy and carbon intensity of future growth; 
● assuming greater global responsibilities. 
Indeed, China has arrived at a point where its impact on the global economy is systemically important. 
But it has reached this point at a much lower level of per capita income than any systemically important predecessor. 
The reason is that China is, by far, the most populous country to have sustained very rapid growth for 30 years. 
So reckoning with the country’s global impact has been added to an already complex policy agenda, at a point when most countries have the luxury of maintaining a largely domestic focus. 
China needs to balance these domestic and international priorities, but it has very little historical experience to guide it. 
(India will take on this problem in about a decade, as it continues on its rapid-growth path.) 
With a per capita income of around $4000 (more with purchasing power adjustments), important parts of China’s economy are already, or are now entering, middle-income status. 
This is a difficult transition, during which many countries have lost momentum as structural transformations stall. 
For example, China’s labor-intensive export sectors are losing their competitive edge. 
They must be allowed to decline or move inland (and eventually decline). 
They will be replaced by sectors that rely more on technology and human capital. 
In this transition, services will undoubtedly grow. 
Higher value-added sectors and functions that are upstream and downstream from processing industries will also need to flourish. 
Global brands should start to appear, and government ownership of enterprises will continue to diminish. 
Public-sector investment will shift toward education and R&D. 
Global and domestic markets, rather than China’s government, will increasingly drive this transition. 
Targeting of sectors will decline. 
The domestic market and a growing middle class will assume greater prominence. 
Urbanization will accelerate with supporting public-sector investment. 
Household disposable income is about 60% of national income in China, and the household savings rate is close to 30% of disposable income. 
These numbers are low and high, respectively, compared to other countries. 
For China, this puts consumption in the range of 40-45% of GDP. 
To empower the domestic market to drive income growth, and to accelerate the growth of the middle class, these numbers need to shift. 
Household income must rise, and, with more ample provision of social security, insurance, and services, precautionary savings should fall. 
Both will support the middle-income transition by expanding the domestic market as a driver of growth, and will help sustain growth in the face of prospectively weaker global demand. 
But, most important, rapid growth of the domestic market, especially the service sector, needs to largely replace the export sector as the employment engine pulling the rural population into the modern economy. 
As the export sector moves into higher value-added sectors, it will no longer serve this function as effectively as it did in the past. 
China ’s corporate sector has financed much of its investment out of retained earnings without having to raise capital from the household sector. 
The government continues to own more than 50% of remaining state-owned enterprises, but does not need or use the income. 
A big portion of these two income streams (corporate and government) needs to be redirected to the household sector. 
High growth and urbanization have caused rapid rises in incomes in urban areas, with smaller increases in the rural areas. 
A large group of migrant workers and families (on the order of 150 to 200 million people) are formally still rural, but in fact are marginal urban residents with constrained rights and access to services. 
The resulting rise in social tensions is being addressed through expanded provision of rural services, investment in urban infrastructure and service provision, and regularization of migrants’ status. 
China has faced daunting challenges in the past – and has generally outperformed the forecasts of skeptics. 
But now China must face global pressures and responsibilities as well. 
These partly reflect China’s sheer size and impact. 
But China also faces an external environment that is occasionally hostile to the country’s form of government; that sometimes overlooks or undervalues the rapid rise of millions of Chinese from poverty; that tends to view the global economy as a zero-sum game; and that mistakenly attributes China’s economic success to non-cooperative policies in areas like exchange-rate management. 
China must confront the challenge of domestic restructuring to sustain growth, while asserting the right to develop without being penalized because of its size. 
But it must also assume greater responsibility for global imbalances, economic and financial stability, and governance, as well as represent the interests of less powerful developing countries. 

China’s Next Transformation 
HONG KONG – During three decades of favorable global economic conditions, China created an integrated global production system unprecedented in scale and complexity. 
But now its policymakers must deal with the triple challenges of the unfolding European debt crisis, slow recovery in the United States, and a secular growth slowdown in China’s economy. 
All three challenges are interconnected, and mistakes by any of the parties could plunge the global economy into another recession. 
To assess the risks and options for China and the world, one must understand China’s “Made in the World” production system, which rests on four distinct but mutually dependent pillars. 
The first of these pillars, the China-based “world factory,” was largely created by foreign multinational corporations and their associated suppliers and subcontractors, with labor-intensive processing and assembly carried out by small and medium-size enterprises (SMEs) that have direct access to global markets through a complex web of contracts. 
Starting modestly in coastal areas and special economic zones, the “world factory” supply chain has spread throughout China, producing everything from stuffed animals to iPads. 
The “world factory” could not have been built without the second pillar: the “China infrastructure network,” installed and operated mostly by vertically integrated state-owned enterprises in logistics, energy, roads, telecoms, shipping, and ports. 
This pillar relies heavily on planning, large-scale fixed investment, and administrative controls, and its quality, scale, and relative efficiency were strategic to Chinese competitiveness and productivity. 
The third pillar is the “Chinese financial supply chain,” which provided the financing needed to construct and maintain the infrastructure network. 
This supply chain is characterized by the dominance of the state-owned banks, high domestic savings, relatively under-developed financial markets, and a closed capital account. 
The final pillar is the “government services supply chain,” by which central and local officials affect every link of production, logistics, and financial networks through regulations, taxes, or permits. 
Most foreign observers miss the scale and depth of institutional and process innovation in this supply chain, which has managed (mostly) to protect property rights, reduce transaction costs, and minimize risks by aligning government services with market interests. 
For example, Chinese local governments became highly adept at attracting foreign direct investment (FDI) by providing attractive infrastructure and supporting services that facilitate the expansion of global production chains. 
With the onset of the current global crisis, and given dramatic changes in social media, demographics, urbanization, and resource constraints, all four pillars are now under stress. 
Production chains are facing labor shortages, wage increases, and threats of relocation to lower-cost countries. 
Meanwhile, global investors are questioning local governments’ solvency. 
Chinese experts are now debating a key governance question: which top-level architecture would enable the country to adopt the reforms needed to meet global and domestic pressures? 
Investors are concerned about Chinese equities’ erratic performance, regulatory risks, and policy surprises, as well as the uncertainties stemming from greater volatility in asset prices, including property prices, interest rates, and the exchange rate. 
What makes the Chinese economy more difficult to read is the increasingly complex interaction of all four of its production system’s components, with each other and the rest of the world. 
First, favorable conditions for the growth of the “world factory” have begun to dissipate. 
Production costs – in terms of labor, resources, regulation, and infrastructure – have been rising domestically, while consumption bubbles in the West have burst. 
Second, the early success of “China infrastructure” was built on cheap land, capital, and labor. 
But, despite modern infrastructure, logistical costs within China are 18% of production costs, compared with 10% in the US, owing to various internal inefficiencies. 
Third, the success of China’s financial system was built on state-owned banks’ financing of large infrastructure projects and foreign financing of export production through FDI and trade. 
The financial system has yet to address adequately the challenges of financial inclusivity, particularly funding of SMEs and rural areas, and exposure to excess capacity in selected industries. 
Last but not least, the three pillars could not have remained standing without the anchor provided by the fourth. 
Until now, its success was based on positive competition between local governments and different ministries, benchmarked according to performance indicators such as GDP and fiscal revenues. 
Unfortunately, this has led to problems of social equity and environmental sustainability, which require complex coordination of bureaucratic silos in order to overcome the resistance of powerful vested interests. 
There is general recognition and consensus that the path of reform requires profound re-engineering of all four pillars. 
First, the production chain must shift from export dependence toward domestic consumption. 
Realigning China’s infrastructure means emphasizing quality over quantity, and reducing state ownership and controlled prices in favor of market forces. 
State orchestration should instead be focused on fighting corruption, reducing transaction costs, promoting competition, lowering entry barriers, and removing excess capacity. 
For the financial supply chain, the key is to address systemic risks and realign incentives in order to induce investors to support the engines of real economic growth, rather than the creation of asset bubbles. 
The Chinese miracle was engineered by institutional and process innovation at all levels of the government services supply chain. 
China requires nothing less than another radical re-engineering to become a more balanced, socially equitable, and sustainable economy. 
That process has already begun with another round of experimentation through three new Special Economic Zones in Hengqin, Qianhai, and Nansha to pilot the emergence of a creative, knowledge-based services economy. 
Of course, such an economy relies crucially on the quality of governance. 
The real challenge for Chinese officials is how to balance creativity and institutional innovation with order, thereby ensuring the integrity of all four of its economy’s pillars. 

China’s Perfect Storm 
New York – A perfect storm is brewing that could threaten China’s relations with the world. 
Although some China bashers in the West and nationalists in China may be rejoicing, the potential deterioration of China’s international relations serves nobody’s interest and threatens to undermine global peace and security. 
As the Beijing Olympics approach, what the Chinese seem to want most – that the Games herald China’s return as a leader among nations – appears close to slipping from their grasp. 
If things go wrong, China could move to embrace isolation. 
The uprising in Tibet, and the government’s response, have highlighted ethnic tensions within China that the Chinese government is having difficulty managing. 
Politically unable to accept or sufficiently address the aspirations of the Tibetan protestors, China’s authorities have focused almost exclusively on the narrow law-and-order issues connected with the violence in March. 
For many in the West who sympathize with Tibetans’ aspirations for more meaningful autonomy under Chinese sovereignty, China’s crackdown, vilification of the Dalai Lama, and hard-line approach have fueled disenchantment. 
Many Chinese, however, came to view pro-Tibetan protests in Paris, London, San Francisco, Delhi, and elsewhere as an effort to sabotage the Olympics and keep China down after almost two centuries of perceived national humiliation. 
China has recently suffered other public-relations disasters as well. 
The Chinese ship containing arms for the reviled Mugabe regime in Zimbabwe is finally headed home after protests and global condemnation prevented it from delivering its cargo. 
British Prime Minister Gordon Brown has called for a full arms embargo of Zimbabwe, a position clearly targeted at the Chinese. 
Moreover, the international community continues to pillory China for its arms sales to Sudan, which is believed to have used the weapons in the Darfur genocide. 
Moreover, after a seemingly unending litany of stories about tainted Chinese products, a row has now erupted between China and the United States regarding contaminated Chinese heparin, a blood thinner. 
Although Chinese authorities have disputed US claims that Chinese-made heparin led to at least 81 American deaths, the scientific evidence has damaged China’s credibility and has strengthened perceptions around the world that Chinese products are unregulated and unsafe. 
Finally, growing economic insecurity is creating a backlash against trade and globalization, which may significantly alter attitudes towards China. 
As Americans and other Westerners increasingly perceive China as a country unable to address its political problems and addicted to growth at all costs, the Chinese government appears to be reverting to a national narrative of victimization that has poisonous roots in China’s perception of historical events such as the 1899-1901 Boxer rebellion. 
If the Olympics turn out to be a public relations disaster – because of potential protests by Tibetan, Uighur, or Falun Gong activists or supporters, a lockdown in China of foreign journalists, or even doping scandals – there is a real chance that the Chinese will blame the West, particularly America. 
Because China’s rise is an irreversible fact, all of those who believe that it must become more of a “responsible stakeholder” in world affairs cannot wish for its return to nationalist isolation. 
Just as China needs access to world markets, the world needs China to become a full partner in addressing major global challenges. 
Both sides owe each other an open and honest dialogue to help realize this outcome. 
Western critics of China have every right to protest any aspect of Chinese behavior, and vice versa. 
Certainly, America’s actions in Iraq, contribution to global warming, and uneven commitment to multilateral problem-solving leave a much room for criticism of US behavior both. 
At the same time, those protesting Chinese behavior must remember that China’s rise has brought hundreds of millions of people out of poverty, and that China is playing a far more positive role in international relations now than at any other time in its recent history. 
Chinese leaders must in turn work to prevent China’s national narrative from returning to one of victimization, even if problems surrounding the Olympics emerge, as they likely will. 
China’s recent willingness to reopen a dialogue with envoys of the Dalai Lama, and improvement in its relations with Taiwan demonstrate that there is room for creating a more positive environment. 
The storm is on the horizon, but there may still be time to prepare to weather it safely. 

China's Political Bedlam 
The last time China’s President Jiang Zemin attended the Fortune Global Forum in Hong Kong, Time-Warner CEO Gerald Levin gave him an award named after Abraham Lincoln. 
President Jiang returned recently to that global gathering of business leaders but, thankfully, a repeat of that appeasement did not occur. 
Even Western bosses keen on China, it appears, are finding it hard nowadays to praise Jiang, as he crushes the Falun Gong spiritual movement by imprisoning or confining its members to psychiatric hospitals. 
Forced removal into mental hospitals of many Falun Gong members is central to this campaign. 
Overseas Falun Gong support groups have documented well over a hundred such cases. 
Estimates of the number being “treated” in this way run to 600. 
Three of those sent to mental asylums are reported to have died as a result of their ill treatment. 
Little known to the outside world is China’s gulag archipelago of Ankang (“Peace and Health”) institutions. 
The twenty-or-more institutions of this type are run by the Ministry of Public Security and are subordinate provincial departments. 
Political dissidents and others in similar categories brought before State forensic psychiatrists are often treated as the most “serious and dangerous” of all supposed mentally ill offenders, and face compulsory committal in these secretive institutions. 
Chinese forensic psychiatry has gone through several phases. 
In the 1950s, Soviet influences (characterized by heretical clinical theories whereby particular forms of political and religious dissent were attributed to specific varieties of “dangerous” mental illness) dominated. 
During the Cultural Revolution (1966�76), when human psychology was officially repudiated and “correct” political ideology was equated with mental health, some 50% to 70% of psychiatric appraisals of criminal detainees in areas including Shanghai were categorized as “political in nature.” 
The 1980s saw a return to the more low�level psychiatric abuses of the pre�Cultural Revolution era. 
At first, the 1990s brought a decrease in politically directed psychiatry. 
In the wake of the Tiananmen massacre, however, individual dissidents and other political nonconformists were again committed to special psychiatric hospitals on an involuntary and indefinite basis. 
One example is Xue Jifeng, a labor�rights activist detained by police in Zhengzhou, the capital of Henan province, in December 1999 for attempting to meet with other labor activists. 
He was committed involuntarily to the Xinxiang Municipal Mental Hospital, where he remained until July 2000. 
Mr. Xue was reportedly force�fed psychiatric drugs and held in a room with true mental patients who kept him awake at night and harassed him by day. 
Another labor organizer, Cao Maobing, was committed more recently by police to a mental hospital in Jiangsu province. 
He was arrested after complaining to foreign reporters, and has since been administered medicine and forced to undergo electric shock therapy. 
A coterie of experts, says the hospital’s director, found that Mr. Cao suffers from “paranoid psychosis.” 
Why resort to such elaborate and costly measures against political/religious opponents when simpler methods of neutralizing them - such as execution or imprisonment - are available to dictators? 
One reason is that in post�Mao China, as in the Soviet Union after Stalin's death, physical liquidation of political enemies was ended by reformist leaders dedicated to curtailing past “excesses.” 
But because arrest no longer meant execution but long imprisonment, dissidents acquired a reasonable chance to emerge from prison or labor camps. 
As a result, networks of dissidents arose in both the USSR and China after the deaths of Stalin and Mao. 
The successors to those dictators, however, found this turn of events to be an unwanted complication in their political “thaws”; more sophisticated mechanisms to induce fear among their peoples were needed, and there are few deterrents to dissident activity more potent than the threat of removal to an institution for the criminally insane. 
The outside world is not helpless in fighting against China’s abuse of psychiatry. 
In 1983, a protracted campaign by Western psychiatric professional bodies and international human rights organizations led the Soviet All�Union Society of Psychiatrists and Neuropathologists to withdraw from the World Psychiatric Association so as to avoid expulsion. 
It was not readmitted until 1989, after years of perestroika and the opening of direct access to Western psychiatric delegations by Soviet forensic�psychiatric institutions. 
As a first step in this struggle, the World Psychiatric Association and national professional bodies should demand direct access to the Ankang network and other places of psychiatric incarceration. 
Advocacy by local and international psychiatric bodies may also encourage Western governments and the European Union to place the issue of political�psychiatric abuse on the formal agenda of the regular sessions devoted to human rights that are now a staple of Sino�Western relations. 

China’s Political Storm 
NEW DELHI – As senior leaders are purged and retired provincial officials publicly call for Politburo members to be removed, it has become clear that China is at a crossroads. 
China’s future no longer looks to be determined by its hugely successful economy, which has turned the country into a world power in a single generation. 
Instead, the country’s murky and increasingly fractured politics are now driving its fate. 
One need look no further than the ongoing power struggle in the run-up to this autumn’s planned leadership changes, or official figures showing that rural protests have been increasing at the same rate as China’s GDP. 
The sudden downfall of Bo Xilai – and the call from Yunnan Province for the removal of the two Politburo members closest to him – is just one example of the no-holds-barred infighting now taking place in Zhongnanhai, the closed leadership compound in Beijing. 
Indeed, the internecine squabbles are said to be so vicious that there have been rumors, denied by the regime, that the Communist Party’s congress at which a new president and prime minister are to be anointed this autumn, might be postponed. 
The Party’s abrupt vilification of Bo after lauding him for his leadership in Chongqing has fueled public cynicism over his orchestrated downfall and laid bare the leadership’s thin ideological core. 
If China is to preserve its gains in global stature, it must avoid a political hard landing. 
For the time being, at least five different scenarios are conceivable. 
Re-equilibration: The Party protects its legitimacy, keeps the military subordinate, and manages to put a lid on popular dissent. 
In other words, the status quo prevails for the foreseeable future. 
This is the least likely scenario, owing to deepening internal Party disagreements and rising popular discontent. 
Implosion: This likelihood of political disintegration, economic collapse, and social disorder may be no higher than that of re-equilibration. 
The government’s fixation on weiwen, or stability maintenance, has resulted in China becoming the world’s only important country whose official internal-security budget is larger than its official national-defense budget. 
This underscores the extent to which authorities have to carry out internal repression to perpetuate one-party rule and maintain control over the restive ethnic-minority homelands that make up more than 60% of China’s landmass. 
But it may also explain why one self-immolation in Tunisia helped to kindle the Arab Spring, whereas some three dozen self-immolations by Tibetan monks and nuns have failed to ignite a similar popular movement against the Chinese state. 
The Soviet Union imploded because the party was the state, and vice versa. 
China, by contrast, has established strong institutional capacity, a multi-tiered federal structure, a tradition of civilian leadership turnover every ten years, and a well-oiled, sophisticated security apparatus that has kept pace with technological advances. 
Thus, China’s government can pursue a policy of wai song nei jin – relaxed on the outside, vigilant internally. 
Guided reform: A process of gradual political change begins, in keeping with outgoing Premier Wen Jiabao’s warning that without “urgent” reforms, China risks turmoil and disruption of economic growth. 
Can China emulate the recent example of neighboring Myanmar (Burma), which has initiated significant, if still tenuous, political reforms? 
As the political heirs of the country’s Communist revolutionaries, the third-generation leaders that are taking over the reins of power in China may possess a strong pedigree, but they are also scarred and limited by it. 
These so-called princelings are trapped in the same political culture that led to the death of millions of Chinese and the continuing repression of opponents (real or imagined). 
They do not look like political reformers in the slightest. 
Great leap backward: A new “Cultural Revolution” erupts, as the clique in power ruthlessly seeks to suppress dissent within and outside the establishment. 
As the Dalai Lama recently warned, there are still plenty of “worshippers of the gun” in power in China. 
Indeed, such is China’s political system that only the strongest advance. 
One fallen princeling, Bo, has been accused of cruelty and corruption – traits that are endemic in China’s cloistered but fragmented oligarchy, which values family lineage and relies on networks of allies. 
Praetorian takeover: The People’s Liberation Army rules from behind a civilian mask, increasingly calling the shots with government officials, who are beholden to it. 
While the civilian leadership has become diffuse (every Chinese leader since Mao Zedong has been weaker than his predecessor), the military has enjoyed greater autonomy and soaring budgets since 1990. 
Indeed, the Party, having ceased to be a rigid monolith obedient to a single leader, has become dependent on the military for its political legitimacy and to ensure domestic order. 
The PLA’s growing political clout has been manifest in the sharpening power struggle within the Party. 
In recent weeks, an unusual number of senior military officers have published articles in official newspapers calling for Party discipline and unity, and alluding to the military’s role in containing the infighting. 
Another development is the increasing tendency of military generals to speak out of turn on strategic issues and undercut diplomatic strategy. 
The simple truth is that the foreign ministry is the Chinese government’s weakest branch, often overruled or simply ignored by the security establishment, which is ever ready to upstage even the Party. 
China’s internal politics has a bearing on its external policy. 
The weaker the civilian leadership has become, the more China has been inclined to discard Deng Xiaoping’s dictum tao guang yang hui (hide brightness, nourish obscurity). 
China has lately taken more to the spotlight than to the shadows. 
Under any plausible scenario, a restrained and stable Chinese foreign policy may become more difficult. 

China's Political Time Warp 
On June 1, Dr. Jiang Yanyong, a surgeon at Beijing 301 Military Hospital, and his wife, Dr. Hua Zhongwei, both seventy-two years old, left home to pick up a visa at the American Embassy. 
They have not been heard from since. 
Family and friends assumed that Public Security Bureau police detained them and that the couple would be released after the June 4 anniversary of the Tiananmen Square massacre of fifteen years ago passed. 
But on June 8, unnamed officials asked the doctors' son to collect some personal effects for his parents, including dentures, and deliver them to the authorities. 
This was not, of course, the first time someone had been detained without explanation in China, so it was not a good omen. 
With China's economy booming, foreign investors flocking, and the country's role in global markets ever more central, the disappearance of this elderly couple hardly caused a break in China's hectic march. 
But the disappearance underscores the ongoing imbalance between economic and political reform. 
Jiang Yanyong is no ordinary doctor. 
He is someone who had long since reached the point in life when he felt compelled by duty and patriotism to step beyond the role of a surgeon and become a public citizen. 
His odyssey began on June 4, 1989, when he spent a horrific night trying to save hundreds of wounded and dying victims who flooded through his hospital's eighteen operating rooms as the People's Liberation Army opened fire on its way to Tiananmen Square. 
Dr. Jiang, traumatized and anguished, nonetheless kept his silence. 
However, as the SARS epidemic flared up in 2003, Dr. Jiang realized in April that Health Ministry reports of only 19 confirmed cases of the disease in Beijing were bogus - he knew of almost ten times that amount. 
He decided to go public. 
"I felt I had to reveal what was happening, not just to save China, but to save the world," he said. 
His exposé of the SARS epidemic cover-up forced China's government to confront the disease more openly and aggressively, averting a public health catastrophe. 
But if Dr. Jiang became a hero in the process, he was also marked as insubordinate, the kind of potentially uncontrollable person that the Chinese Communist Party fears. 
Indeed, the Party's worst fears were realized this past March just before the 15th anniversary of the Tiananmen Massacre. 
As the National People's Congress was meeting, Dr. Jiang broke his silence by writing a long, heartfelt appeal to the leaders of China. 
In it, he charged that "a small number of leaders who supported corruption" had resorted to measures on June 4th that were "unprecedented in the world or China" when it used "tanks, machine guns, and other weapons to suppress totally unarmed students and citizens." 
In grim detail, his letter described the bloody mayhem that the slaughter brought to his hospital and the hysteria of ordinary people as they arrived to find children and loved ones dead. 
Without deference to or fear of the Party, Dr. Jiang castigated China's leaders for the way that they "mobilized all sorts of propaganda to fabricate lies and used high-handed measures to silence the people across the country." 
Finally, Dr. Jiang implored the Party to re-assess the 1989 student movement by "reversing its verdict" from "counter-revolutionary rebellion" or "political storm" to "patriotic acts that had the support of the overwhelming majority of the people in Beijing and the country." 
"Our Party must address the mistakes it has made," he concluded unambiguously. 
"Anyone whose family members were unjustly killed should voice the same request." 
Before giving his name, address, and phone number, he said, "Of course, I have considered the consequences that I might encounter after writing this letter. 
But, I have decided to tell you all the facts." 
How does one reconcile an isolated retrograde incident such as the disappearance of an elderly Chinese couple with the hopeful progress of the "Chinese economic miracle" that has so transformed this once seemingly desperate, backward land? 
China today is a contradiction. 
The tensions between its increasingly open economy and its still closed political system and institutions (established during the Stalin era in the 1950's) make China the most conflicted nation of consequence in the world today. 
The old state planner Chen Yuan once cautioned that Chinese reformers had created "a birdcage economy" in which a capitalist bird was growing within a socialist cage. 
His inference was that, unless Party leaders were careful, this capitalist bird would literally burst out of its socialist cage, spelling an end to China's Marxist-Leninist revolution. 
Indeed, the old socialist economic birdcage has now been largely burst by China's capitalist reforms, releasing with a vengeance a mutant "people's republic" into the global marketplace of consumerism. 
But the demolition process that has transformed or razed so many of China's old Stalinist economic institutions has not been matched by a demolition of stultifying political structures. 
Although Chinese leaders speak of "One country, two systems" as their formula for governing Hong Kong - and possibly Taiwan some day - their slogan is far more relevant to China itself, given the co-existence of a capitalist economic system within a Leninist political system. 
Dr. Jiang Yanyong may become a millionaire, wear any clothes he likes, redecorate his living room, even buy a car, but he cannot inform the public about an epidemic or write government officials an honest letter of admonition. 
Does this matter? 
That depends on whether one believes that Leninist capitalism is a viable and stable form of government for China over the long term. 

China's Post-Olympic Challenge 
NEW YORK – Almost everyone in the world who watched the 2008 Olympics in Beijing was impressed by China’s preparations, the acumen of the Chinese in running such a complex and challenging event, and the rich harvest of medals – especially gold medal – that Chinese athletes won. 
It was abundantly evident in the run-up to the Games how important it was to Chinese everywhere to show themselves to advantage. 
One got a sense of this when China’s reputation and the Games’ status came under attack during the Tibetan demonstrations and protests against the Olympic torch as it made its tortured progress around the world. 
But, when all was said and done, through what turned out to be often Draconian controls, China pulled off quite a feat! 
Indeed, it is hard to imagine that the British will care as much, or go to such extremes, for the London Olympics in 2012. 
For many years, especially since the Tiananmen Square massacre of 1989, China has felt a deficit of global respect. 
This feeling has deeply troubled its leaders and filled its people with a sense that, despite all their economic progress, their proper place in the world was not only eluding them, but being denied to them by the endless criticism of the so-called “developed world.” 
For the last two decades, Chinese leaders have been diligently trying to build a new edifice in order to gain some of that missing respect. 
This made a successful Olympic Games, when all the world would be watching, an urgent matter. 
But, now that the Games have ended, Chinese leaders cannot quite say, “Mission accomplished.” 
While China’s achievement is worthy of genuine esteem, its efforts to gain a full measure of international respect and real “great power” status will not succeed until it matches its new economic and military power with a certain essential moral force. 
That, in turn, requires a society and a leadership that seeks to be exemplary in all ways that make human beings more human, including respect for truthfulness, openness, tolerance, and people’s right to disagree with their government. 
I fear that China’s leaders and people will continue to feel a certain gnawing, inchoate sense of deficiency and incompleteness in their quest for global respect until they find the strength to begin addressing the crucial, but elusive, issue of making China an ethical, as well as an economic and military, power. 
For a country steeped in millennia of Confucianism, the need for ethical leadership should be clear. 
To fully address the question of the moral and ethical base of a new form of Chinese governance, China’s government and its people must be able to look back freely and come to terms with their recent history: the Great Leap Forward, the Cultural Revolution, the events of 1989, Tibet, and other sensitive issues. 
They must also freely be able to discuss the future and what kind of society they wish to see rise from the ashes of Mao’s revolution. 
I make these somewhat critical observations about China not with any sense of moral superiority or a wish to relieve myself of the responsibility to level the same critique at my own country’s recent failures. 
As most of the world knows, America’s quest to maintain its claim to the title of “greatness,” has, of late, also been elusive. 
Arriving from different staring points, both the United States and China now find themselves confronting a similar challenge: restoring global trust and respect. 
Their success inevitably requires directly confronting their evident moral failures. 
If many of those same viewers who have been impressed by China’s successes in Beijing now also find themselves recoiling at the idea of a stronger and more prideful China, that is understandable. 
For strength unalloyed by checks and balances – and by a capacity for self-critical reflection about the rightness and wrongness of state action – can be unnerving. 
Many Americans, too, have recently had to learn this. 
One hopes that China will derive a new measure of respect and self-confidence from these astounding Games. 
But one also hopes that China’s successes will enable its leaders to feel strong enough to begin looking honestly at China’s recent past in a more critical way. 
Such forthrightness is not easy for any country. 
But, having completed such an important step forward, China must now find new, more humanistic ways to continue to re-invent itself. 

China’s Recovery and Global Growth 
CAMBRIDGE – China is likely to be the first of the major economies to recover from the current global downturn. 
Its pace of expansion may not reach the double-digit rates of recent years, but China in 2010 will probably grow more rapidly than any country in Europe or in the western hemisphere. 
But, even as China recovers from its current slowdown, it is not likely to provide a similar boost to all of its trading partners. 
That lack of spillover will reflect the recovery’s focus on expansion of domestic demand. 
There is no doubt that China currently is suffering from the global collapse in demand for a wide range of manufactured products. 
The sharp drop in retail sales in the United States and Europe means fewer orders for the goods produced in Chinese factories. 
And, while the Chinese yuan has remained more or less unchanged relative to the US dollar in the past year, the dollar’s sharp appreciation relative to the euro and other currencies caused the overall trade-weighted value of the yuan to rise. 
This further depressed Chinese exports. 
The resulting layoffs of Chinese factory workers has caused second-round declines in local demand for Chinese goods and services, as Chinese households cut back on their spending. 
Small firms that exported 100% of their production have been forced to close. 
Millions of low-skilled workers who left farms in China’s interior to work in coastal manufacturing centers are now being forced to return to their villages. 
The families benefiting from their remittances will now be forced to cut their consumption as well. 
The Chinese authorities are determined to reverse the resulting decline in growth in order to reemploy those who have lost their jobs and to create employment for the millions of young people who join the labor force each year. 
Failure to do so would not only create hardship for the millions of unemployed, but would also threaten political stability, which depends on the expectation of continuing economic prosperity. 
The government’s initial policies aimed at raising aggregate demand focused on major infrastructure spending, including roads and mass transit. 
But the more significant strategy is to alter government policies in ways that will lead to higher spending by Chinese consumers, and that raise the level of those government outlays, like health care, which directly benefit Chinese households. 
Spending by China’s consumers has lagged behind the Chinese economy’s overall rate of growth for many years. 
This reflects the declining share of wages in total GDP and the rising share of savings relative to household incomes. 
To raise consumer spending, the Chinese government must reverse both of these trends. 
Although private enterprises are the fastest growing part of the Chinese economy, enterprises that are partially or fully owned by the state continue to be major employers. 
The government can directly affect wage levels in these firms, thereby altering the general wage level in the economy. 
The high saving rate of Chinese households reflects both the normal high rate of saving among younger generations and the fact that older generations had very little income – and therefore did very little saving – when they were young. 
The aggregate saving rate of the household sector reflects the difference between the saving of the savers and the dissaving of the dissavers. 
Since the saving of younger savers is now high and the dissaving of the older dissavers is low, the net saving rate is high. 
Young people have many reasons to save. 
The public pension system is unreliable, there is little health insurance available to pay for the high cost of Western-style care, parents must pay tuition for their children’s schooling, there is little credit available for purchases of consumer durable, and buying an apartment requires a large down-payment. 
I believe that the government will act on all of these reasons for high saving, making credit more widely available, introducing a health insurance system, and relaxing some of the down-payment requirements. 
Premier Wen Jiabao made clear in his recent remarks to the People’s Congress that he will do what it takes to stimulate demand in order to ensure strong growth in China. 
I have little doubt about his willingness and ability to do so. 

China's Reforms Stall Again 
As the 82 nd anniversary of the founding of the Chinese Communist Party approached last July, the Party's new General Secretary, Hu Jintao, seemed on the verge of announcing a whole new range of reforms. 
In a ceremony celebrating the promulgation of the current 1982 constitution, Hu reportedly expressed interest in strengthening constitutional protections against official intrusions in people's lives and in promoting extensive legal reform. 
Indeed, he was even rumored to be considering more inner-Party democratization, greater press freedom, strengthening non-Communist political parties, and permitting exiled dissidents to return home. 
Such optimistic views were re-enforced when Chinese intellectuals--even some official scholars--began writing and speaking out in favor of re-evaluating controversial Party verdicts on historical incidents (such as the Tiananmen Square massacre). 
Similarly, there was an increase in public advocacy on behalf of rural workers (who have been migrating by the tens of millions into China's cities), as well as calls for significant constitutional changes. 
For example, legal scholar Cao Siyuan began writing on, lobbying for, and organizing conferences about constitutional reform. 
The fact that Cao was detained after the 1989 Beijing Massacre, expelled from the Party, spent time abroad lecturing, and now runs a research consulting firm, seemed no impediment. 
Mr Cao was careful to stay within the bounds of moderate reformism, yet he openly called for reform within five areas of governance: the constitution, separation of powers, elections, political parties, and the culture of politics. 
For their part, Hu Jintao and Premier Wen Jiabao were even reported to have authorized a top-level body, "The Leading Group On Revising the Constitution," to draft "sweeping changes" that would be considered in March 2004 when the next plenary session of the National People's Congress met. 
The proposed changes were reported to include an amendment that would guarantee the same rights to property for private entrepreneurs as for state-owned enterprises, the constitutional right of Party members to choose their leaders, and even some steps toward a multi-party political system. 
The Party's evident tolerance toward these ideas was assumed to emanate from Hu Jintao himself. 
When Hu also cancelled the traditional closed-door summer caucus of old Party elders that takes place each year at the beach resort of Beidaihe, hopes were raised that political reform might actually burst forth. 
However, when none of these issues were raised in Hu's July 1 st speech to the nation, reform-minded Chinese were palpably discouraged. 
To the disappointment of many, Hu ended up giving a lackluster oration that, instead of extolling political reform, re-emphasized the dreary notion of the Three Represents--the banal theory advanced by former Party chief Jiang Zemin, which allowed businessmen to be included in the Party. 
Then reform-minded intellectuals like Cao Siyuan began to be trailed by Public Security Bureau goons, and members attending a conferences on legal reform organized by Cao were admonished by the Propaganda Department (China's censors) to stop discussing the "three unmentionables," (political reform, constitutional revision, and reversing the verdicts on historical incidents). 
It was clear that the reform bandwagon had hit a wall. 
Indeed, the Party soon issued a document to think tanks, media outlets and universities banning all public debate on these issues. 
What happened? 
As so often in the past, this latest reform effort hit the limits of permissible Party tolerance almost before it got going. 
It is an old story in China: calls for reform by liberalizers end up antagonizing conservative Party members--in this case, the political faction of Jiang Zemin, who, although not on the Politburo standing committee, still heads the powerful central Military Commission and wields substantial influence. 
The reformers were silenced in the name of maintaining stability. 
Since the early 1980's China has experienced many iterations of this dynamic. 
While it is true that some modest residue of progress often remains after these episodes end, China's current political environment is far more censorious and intolerant now than it was in the mid-1980's. 
Indeed, this most recent example of reformus interruptus once again raises the all-important question of whether China can actually undergo a "peaceful evolution," at least so long as the Chinese Communist Party remains in control. 
What this pattern suggests is that the Party can rarely choke down more than the smallest dose of political reform, much less outright criticism before reacting in an almost autonomic fashion against it. 
While a process of "peaceful evolution" offers the best prospect for change in this mutating "people's republic," the Party's demonstrated inability to countenance even the most modest quotients of political challenge--even with a new generation of leaders in power--does not inspire confidence in the prospect for piecemeal reform. 
The failure of this latest mini-reform movement suggests that when it comes to politics, fazhi , or the rule of law, has still made relatively little progress in eclipsing renzhi , the rule of men. 
China may be something of a miracle of economic reform, but until changes come in its Leninist governmental system, borrowed from the USSR during the Stalinist era, a truly new New China will never arise. 
While one hopes that China will find some way to continue transforming itself peacefully, the Communist Party's continuing intolerance of free expression, and its refusal to allow its people even to discuss in public how their government might be reformed, does not bode well for the future. 

China’s Roadmap 
China is about to adopt its 11th five-year plan, setting the stage for the continuation of probably the most remarkable economic transformation in history, while improving the well-being of almost a quarter of the world’s population. 
Never before has the world seen such sustained growth; never before has there been so much poverty reduction. 
Part of the key to China’s long-run success has been its almost unique combination of pragmatism and vision. 
While much of the rest of the developing world, following the Washington Consensus, has been directed at a quixotic quest for higher GDP, China has once again made clear that it seeks sustainable and more equitable increases in real living standards. 
China realizes that it has entered a phase of economic growth that is imposing enormous – and unsustainable – demands on the environment. 
Unless there is a change in course, living standards will eventually be compromised. 
That is why the new five-year plan places great emphasis on the environment. 
Even many of the more backward parts of China have been growing at a pace that would be a marvel, were it not for the fact that other parts of the country are growing even more rapidly. 
While this has reduced poverty, inequality has been increasing, with growing disparities between cities and rural areas, and between coastal regions and the interior. 
This year’s World Bank World Development Report explains why inequality, not just poverty, should be a concern, and China’s 11th five-year plan attacks the problem head-on. 
The government has for several years talked about a more harmonious society, and the plan describes ambitious programs for achieving this. 
China recognizes, too, that what separates less developed from more developed countries is not only a gap in resources, but also a gap in knowledge. 
So it has laid out bold plans not only to reduce that gap, but to create a basis for independent innovation. 
China’s role in the world and the world’s economy has changed, and the plan reflects this, too. 
Its future growth will have to be based more on domestic demand than on exports, which will require increases in consumption. 
Indeed, China has a rare problem: excessive savings. 
People save partly because of weaknesses in government social-insurance programs; strengthening social security (pensions) and public health and education will simultaneously reduce social inequalities, increase citizens’ sense of well-being, and promote current consumption. 
If successful – and, so far, China has almost always surpassed even its own high expectations – these adjustments may impose enormous strains on a global economic system that is already unbalanced by America’s huge fiscal and trade imbalances. 
If China saves less – and if, as officials have announced, it pursues a more diversified policy of investing its reserves – who will finance America’s more than $2 billion a day trade deficit? 
This is a topic for another day, but that day may not be far off. 
With such a clear vision of the future, the challenge will be implementation. 
China is a large country, and it could not have succeeded as it has without widespread decentralization. 
But decentralization raises problems of its own. 
Greenhouse gases, for example, are global problems. 
While America says that it cannot afford to do anything about it, China’s senior officials have acted more responsibly. 
Within a month of the adoption of the plan, new environmental taxes on cars, gasoline, and wood products were imposed: China was using market based mechanisms to address its and the world’s environmental problems. 
But the pressures on local government officials to deliver economic growth and jobs will be enormous. 
They will be sorely tempted to argue that if America cannot afford to produce in a way that preserves our planet, how can we? 
To translate its vision into action, the Chinese government will need strong policies, such as the environmental taxes already imposed. 
As China has moved toward a market economy, it has developed some of the problems that have plagued the developed countries: special interests that clothe self-serving arguments behind a thin veil of market ideology. 
Some will argue for trickle-down economics: don’t worry about the poor, eventually everybody will benefit from growth. 
And some will oppose competition policy and strong corporate governance laws: let Darwinian survival work its wonders. 
Growth arguments will be advanced to counter strong social and environmental policies: higher gasoline taxes, for example, will kill our nascent auto industry. 
Such allegedly pro-growth policies would not only fail to deliver growth; they would threaten the entire vision of China’s future. 
There is only one way to prevent this: open discussion of economic policies in order to expose fallacies and provide scope for creative solutions to the many challenges facing China today. 
George W. Bush has shown the dangers of excessive secrecy and confining decision-making to a narrow circle of sycophants. 
Most people outside China do not fully appreciate the extent to which its leaders, by contrast, have engaged in extensive deliberations and broad consultations (even with foreigners) as they strive to solve the enormous problems they face. 
Market economies are not self-regulating. 
They cannot simply be left on autopilot, especially if one wants to ensure that their benefits are shared widely. 
But managing a market economy is no easy task. 
It is a balancing act that must constantly respond to economic changes. 
China’s 11th five-year plan provides a roadmap for that response. 
The world watches in awe, and hope, as the lives of 1.3 billion people continue to be transformed. 


China’s See-No-Evil Diplomacy 
Ever since its founding, the People’s Republic of China has adhered to a foreign policy of non-interference in other country’s internal affairs – or so it claims. 
But with China’s rapid ascent and ever-closer integration with the outside world, this doctrine has become increasingly anachronistic. 
Overseas, China’s role in places like Sudan and Burma not only draws international opprobrium, but also taints its reputation. 
By maintaining cozy relations with repressive regimes and protecting them from international sanctions, China risks being seen as their accomplice. 
Even when China’s voice could be decisive in resolving crises or preventing bloodshed, instead of acting, its diplomats repeat the old platitudes about non-interference. 
The recent “saffron revolution” in Burma presented China with not only a challenge, but also an opportunity to exert its influence. 
Yet it failed the test of statesmanship once again by sitting on its hands and merely calling for restraint. 
Thanks to China’s collusion, the suffering of Burma’s people continues. 
China’s mixture of inaction with a mercantilist approach to its Third World trading partners attests to the hypocrisy of its foreign policy. 
For, where access to natural resources is concerned, China is more than willing to discard its non-interference doctrine. 
This has not gone unnoticed, as a wave of anti-China movements has spread across Africa. 
In Zambia, Chinese mining firms’ indifference to the death of their African employees provoked large protests against China’s presence. 
Though China finally pacified the situation by threatening to withdraw investment, doing so meant reneging on the promise not to meddle in other countries’ domestic affairs. 
Of course, interference in the internal affairs of another country isn’t inherently evil. 
When it is harnessed to promote growth and human rights, interference should be appreciated, regardless of the regime that is doing it. 
China’s vast influence over a few fellow dictatorships still holds out the best hope of softening their misrule. 
But can China be persuaded to wield its influence constructively, rather than maintaining its pretense of neutrality when its assistance is badly needed? 
So far, China’s leaders have not seen the merits of abandoning non-interference. 
Their reasons also seem to have a pragmatic ring: they don’t want to cause North Korea to collapse by being too harsh; they fear losing influence in Burma to India or the United States; no one is doing much about Darfur, so to jeopardize the supply of Sudanese oil by pushing the regime in Khartoum appears futile. 
But pragmatism has its limits, particularly when it permits dangerous situations to fester. 
Indeed, China’s pandering to dictators in its quest for resources contradicts its long-term interest in being acknowledged as a benign and legitimate power and commanding the international respect that it craves. 
Had China put pressure on the Burmese junta to stop slaughtering its own people, it would have earned substantial moral credit around the world. 
Moreover, the suspicions of China’s neighbors fueled by its rise could be partly allayed by such efforts to improve regional stability. 
China now faces a dilemma. 
Should its parochial interests give way to more cosmopolitan responsibilities? 
How it answers this question will largely determine how the world views it for decades to come. 
If China doesn’t want to be seen as complicit in the crimes of its client regimes, then it is time for it to alter its concept of diplomatic interference. 
If China maintains its non-interference policy, it will become increasingly difficult to mask that doctrine’s malevolence behind the façade of the country’s “charm offensive.” 
China still has a long way to go before it will be perceived as a responsible stakeholder in the world. 
Reforming the non-interference doctrine is a necessary step in that direction. 

China’s Short March 
BEIJING – China’s government is making massive preparations for a grand National Day parade in Beijing’s Tiananmen Square to celebrate both the 60th anniversary of the PRC’s founding and the 30th anniversary of Deng Xiaoping’s program of “reform and opening up.” 
Walking through the square the other evening, I found myself thinking back to when I first began following China’s amazing odyssey. 
The iconic, Mona Lisa-like visage of Chairman Mao still gazes out from the Gate of Heavenly Peace, but what was happening all around me suggested how much things had changed. 
When I first began studying China at Harvard a half-century ago, China’s leaders trumpeted the superiority of their socialist command economy, which controlled every aspect of life. 
Hostility between the United States and China, however, prevented students like me from actually traveling there. 
But in 1975, while Mao still lived, the Cultural Revolution still raged, class politics still held sway, and there were no private cars, shops, advertisements, or private property, I arrived in Beijing. 
Even we visiting foreigners – all dutifully clad in blue Mao suits and caps – were expected to attend regular political “study sessions” to purify our bourgeois minds with proletarian tracts written by the Gang of Four. 
That trip set an indelible baseline against which I have since been able to measure all the changes China has undergone. 
As Deng Xiaoping began to encourage individual incentives over the next several decades – embodied in such slogans as, “To Get Rich Is Glorious” – I watched with wonder and amazement as China’s private economy began to rise from the ashes of Mao’s revolution. 
As this process unfolded, it became fashionable for market fundamentalists in the West to bask in a sense of vindication. 
After all, were the scales not falling away from the eyes of Chinese leaders, and were they not now turning for salvation toward the God of capitalism that they had once so militantly denounced? 
This “end-of-history” interlude, when “Communism” was either failing or recycling itself into its opposite, also encouraged many latter-day American political missionaries to proselytize for democracy as well as capitalism – to urge China’s leaders to abandon state controls not only over their economy, but over their political system as well. 
Of course, China’s leaders vigorously resisted that evangelism, especially after the collapse of communism in Europe in 1989, often berating the West for “intruding in the internal affairs of China” and clinging even more defiantly to their Leninist, one-party form of governance. 
As the imbalance between China’s ever more dynamic, modern, and globalized economy and its opaque, single-party system of political rule deepened, many Western specialists predicted that the contradiction would inevitably trip China up. 
Instead, it was America and the West that went into an economic tailspin. 
When, after the eight catastrophic years of George W. Bush’s presidency, Barack Obama entered the White House, it seemed for a moment as if America might be able to arrest its downward slide. 
But then an unwelcome thing happened. 
Obama ran right into a perfect storm of the worst aspects of American democracy: red-state provincialism and ignorance, fearful conservatism, Republican Party obstructionism and even some Democratic Party dissidence. 
The US Congress became paralyzed by partisan politics. 
Seemingly lacking a central nervous system, it has become a dysfunctional creature with little capacity to recognize any common national, much less international, interest. 
Under such circumstances, even a brilliant leader, with an able staff and promising policies, will be unable to pursue his agenda. 
As governments across the West have become increasingly bogged down trying to fix a broken economy, China has been formulating a whole series of new, well-considered policies and forging ahead with bold decision-making to tackle one daunting problem after another. 
Triumphant from the 2008 Olympic Games, its leaders have undertaken the most impressive infrastructure program in history, implemented a highly successful economic stimulus package, and now are moving into the forefront of green technology, renewable energy, and energy efficiency – the activities out of which the new global economy is certain to grow. 
In short, China is veritably humming with energy, money, plans, leadership, and forward motion, while the West seems paralyzed. 
As I strolled through Tiananmen Square, the paradox that struck me was that the very system of democratic capitalism that the West has so ardently believed in and advocated now seems to be failing us. 
At the same time, the kind of authoritarianism and state-managed economics that we have long impugned now seems to be serving China well. 
It is intellectually and politically unsettling to realize that, if the West cannot quickly straighten out its systems of government, only politically un-reformed states like China will be able to make the decisions that a nation needs to survive in today’s high-speed, high-tech, increasingly globalized world. 

China’s Show Trial of the Century 
LONDON – The trial, conviction, and suspended death sentence of Gu Kailai, the wife of purged Chinese leader Bo Xilai, has called into question not only China’s legal system, but the very unity of the Communist Party leadership. 
Let us begin with the many questions raised at the trial. 
For starters, Gu claimed that she killed the British businessman Neil Heywood only to protect her son. 
But, given Gu’s power as Bo’s wife, she could have had someone like Heywood jailed or expelled from China at the snap of her fingers. 
No need for cyanide. 
Still, she not only admitted her guilt, but seemed to embrace it as a sort of historical necessity. 
“In order to uphold the sanctity of the law,” she told the court, “I am willing to accept and calmly face whatever judgment I am given, and I also expect a fair and just judgment.” 
Not since Stalin’s show trials of the 1930’s has a defendant so effusively praised a judge who seemed bound to condemn her at a trial where no witness or evidence against her was presented. 
The bitter irony of Gu’s high-speed trial is that she was a true believer in China’s legal system. 
Indeed, following a victory in an American court, Gu, a lawyer, wrote a book in which she claimed that China provides “the fairest method of trial.” 
She continued, “Chinese lawyers would not quibble over the meaning of each little word. 
Once they are sure that you murdered someone, you will be arrested, judged, and executed by firing squad.” 
Indeed, Gu was an avatar of the Maoist form of legality that China has maintained long after Mao’s death. 
Having failed the entrance examination to Peking University, Gu was nonetheless granted an exception and admitted to read law soon after the Communist Party restored the law departments. 
Prior to that, she sold pork in a Beijing market, where she earned the nicknamed, “Yi dao zhun,” meaning that she could hack off a desired slice of meat with one blow. 
Gu was one of the first lawyers to receive her license. 
But, with the Tiananmen Square incident of 1989, the authorities clamped down on the profession’s autonomy. 
The Party reasserted control over every aspect of justice through a core department: the Communist Party Central Committee’s Political and Legal Affairs Committee (PLAC). 
This totalitarian organ has no known address, yet it manages China’s police, prosecutors, courts, and justice ministry, and appoints their leadership. 
All lawyers fall under its remit. 
Most important, all local PLAC secretaries simultaneously lead the local public-security bureau. 
Small wonder, then, that the artist Ai Weiwei could be detained in secret, Liu Xiaobo could be sentenced to 11 years in prison for starting a petition, and Li Wangya could “commit suicide” while in custody. 
But even this monolithic system of control is porous. 
Had Wang Lijun, the former Chongqing police commissioner and close ally of Bo Xilai, not feared for his life and fled to the United States’ consulate in Chengdu, Gu would still be helping Bo to rule the city. 
Wang is no saint. 
Before he became Bo’s police commissioner, he was the director of the Field Psychology Research Center, where the condemned were executed and their live organs removed. 
Wang’s paper, “A Study of Organ and Receptor Transplantation after Execution by Injection,” earned him the Guanghua Innovation Contribution Award. 
In the paper, he credits “our achievements” to the “thousands of transplantations.” 
Given his familiarity with the brutality of the Chinese system, Wang no doubt understood that, after falling out with Gu and Bo, the US consulate might be the only place he could find safety. 
After all, when it came to the public-security organs, the courts, and the prison system, Gu always had the final say. 
She acted as her husband’s adviser for cracking down on crime and corruption, and was responsible for sending two people – including the PLAC secretary in Wushan County – to prison. 
In fact, a few days after killing Heywood, Gu donned a major general’s uniform (which could have belonged to her father, General Gu Jingsheng), convened police officers in Chongqing, and falsely claimed that she had received a secret order from the Ministry of Public Security to protect Wang’s personal safety. 
The uniform, perhaps, was intended to intimidate the Chongqing police. 
But, in a strange and unexplained twist, Wang was whisked from the consulate to Beijing, where he presented the Party leadership with the evidence that brought about Bo’s downfall and Gu’s arrest. 
But revealing the skeletons in Bo’s closet also meant revealing the secret world of the “red aristocracy.” 
So Wang can expect no leniency at his trial, which will most likely end with a commuted death sentence and forced labor. 
In order to protect the red aristocracy, the PLAC made no mention during Gu’s trial of her myriad economic crimes. 
So, in the PLAC’s rewrite of history, Heywood was murdered so that Gu could protect her son, Bo Guagua. 
And Wang did not defend China’s honor by revealing Bo’s and Gu’s criminality, but aired his stories to hostile foreign forces. 
Only through his punishment can popular indignation be contained. 
But the Bo Xilai and Gu Kalai affair may only be a prologue, because the only clear truth to emerge from it is that the Party leadership is fractured. 
The wolves are now turning on each other. 

China's Silent Rural Revolution 
When China's National People's Congress (NPC) concluded its annual meeting recently, it voted to enshrine protection of human rights and private property in the constitution. 
But other major changes in China's development strategies that appear to be taking place have attracted far less notice. 
China's current leadership, one year after coming to power, has criticized "the single-minded pursuit of GDP growth" over the past decade and unveiled a new approach to modernization characterized as "balanced, human-centered, and environmentally friendly." 
The change in priorities - and outsiders' tendency to overlook it - is not difficult to understand. 
The world is fascinated by China's economic miracle, but it is much less interested in the costs associated with the country's 8-9% annual growth rate in the past 25 years. 
For instance, the energy consumption of every unit of Chinese industrial output is close to three times the global average. 
In may places, the environment has been devastated almost beyond recovery. 
Similarly, a recent Chinese bestseller, A Survey of Chinese Peasants , reveals the tremendous human costs of China's modernization drive. 
The book caught the attention of both the elites and the mass public with its heart-breaking stories of the suffering endured by 900 million farmers and its bold criticism of the government's rural policies. 
Beyond the glamorous skyscrapers of Beijing, Shanghai, and other urban centers, the majority of Chinese who live in the countryside have gained little from the material progress of the past two decades. 
On the contrary, the initial benefits that peasants gained from the rural reforms of the late 1970's and early 1980's have disappeared; real income among farmers has dropped in recent years as their production costs rise and agricultural prices decline. 
In most parts of China, farming can no longer sustain a respectable standard of living. 
Most worrying is the ever-growing tax burden placed on the rural population. 
While average agricultural income grew by 90% in the 1994-97 period, the rural tax burden jumped by 800%. 
More than 300 taxes and fees have been imposed on peasants by all levels of government. 
For example, some townships demand 14 kinds of fees to register a marriage. 
Today, a farmer's annual income is only one-sixth that of an urban dweller's, but he has to pay three times more in taxes. 
This comes in addition to many other financial burdens exacted at the local level. 
Indeed, 25 years of reforms have changed nothing of China's "one country with two systems" - a model that segregates China's urban centers from its agricultural areas, with development of the former realized at the expense of the latter. 
If we use what is called the "Gini coefficient" to measure this income gap, with "0" indicating perfect equality of income distribution and "1" meaning perfect inequality, the number for China is 0.454 in 2002. 
This is an internationally recognized level of "absolute disparity." 
India, long known for gross disparities between rich and poor, has a Gini coefficient that has hovered around 0.30 to 0.32 over the past five decades. 
So today's China is a much less equitable society than India. 
A recent study by the Chinese Academy of Social Sciences concluded that China's urban-rural income gap is the worst on earth, maybe only slightly better than Zimbabwe. 
The irony here is that China is widely hailed as a success story, while Zimbabwe is generally viewed as a failed state. 
Such an unfair distribution of wealth based on economic exploitation, social injustice and political exclusion has caused silent but persistent resistance by Chinese peasants. 
They protest, they petition, and they participate in local riots when all other means are exhausted. 
Yet little changes. 
As a result, the "peasant question" is now threatening social stability and is potentially explosive in a way reminiscent of when Mao organized his revolution around peasant disaffection with the rural policies of the Nationalist government of Chiang Kai-shek. 
In response, Premier Wen Jiabao announced a series of measures during the NPC, ranging from phasing out agricultural taxes over the next five years to measures aimed at increasing farmers' income. 
But while official attention to rural poverty is music to the ears of the poor, experience shows that such promises are usually inadequate. 
Wen's predecessor, Zhu Ronji, also said that his "biggest headache" was how to reduce the rural tax burden and increase peasant income. 
Yet the situation only worsened. 
China's government must acknowledge that deep income inequality and rural poverty is no longer exclusively an economic problem, but threatens social peace and political stability. 
Comprehensive reform is the only way out. 
Unless China commits to greater political openness, allowing the poor and disadvantaged to voice their concerns, represent themselves, and monitor policy implementation, it will continue to be jeopardized by a false and perilous prosperity. 

China’s Slave Power 
When a government-run brick plant in Hongdong County of Shanxi Province was revealed to be using slave labor, a famous episode from a Beijing opera flashed through my mind. 
In that opera, a prostitute named Su San, after being sentenced to death, pleads for mercy to unconcerned passersby as she is marched down the main roads of Hongdong County in shackles. 
As I click on the Web site of the county government, there is no mention of slave labor or child workers at the brick factory. 
All you can find are newsreaders from national television covering the smiling faces of people who come back to Hongdong to seek their roots and pay homage to their ancestors. 
There are also reports of visits by high officials to Hongdong. 
Indeed, were it not for the 400 fathers who petitioned for the rescue of their kidnapped children who had been sold into slavery, Hongdong County would still remain a tourism hot spot for Chinese people seeking their roots. 
As a result of the slave-labor brick plants, as well as reports of an eight-year-old child worker being buried alive and migrant workers killed, Hongdong’s name has become infamous. 
Yet despite the scandal, migrant workers and children in school uniforms are still being abducted from other provinces and pushed into monstrous brick plants and coalmines. 
Girls are forced into prostitution at a mere $5 a session. 
The 400 fathers of the enslaved children, of course, are left to wonder where, precisely, respect for life is in President Hu Jintao’s so-called “harmonious society.” 
How many more Chinese children will become slaves in the maw of our capitalist/communist system? 
Who is responsible when such crimes happen? 
These men simply want their children back, but all the government is doing is watching these anxious fathers with suspicion. 
Moreover, these fathers are allowed to demand only their children, not compensation. 
After all, the brick factory bosses paid 400 Yuan for each child, so their property rights are at stake. 
China is now a society rotten to the core. 
For slavery is not confined to Hongdong’s brick plants. 
There are such dark spots everywhere in the country. 
What makes matters worse is that the state authorities, particularly the police, patrol these slave operations to keep them running. 
Four years ago, a college graduate named Sun Zhigang was arrested for walking on the streets of the city of Guangzhou. 
He was beaten to death while in custody. 
This incident revealed the extent to which the police cooperated in turning ordinary Chinese into slaves. 
Media coverage fueled a backlash of overwhelming public revulsion. 
But change went only skin-deep. 
Human trafficking was transferred from the police to job agencies and the Ministry of Labor Supervision. 
State officials themselves are among the worst human traffickers. 
And the grimmest statistic of all is that many child slaves who are rescued are resold by officials to another slave-labor plant. 
Seven years ago, a lawmaker from Hunan province went to Shanxi province to rescue slave workers from brick plants. 
At that time, the rescued workers knelt down and wept. 
Fortunately, they were not beaten or buried alive for not showing up for their shift, as has happened to others. 
Today, however, that legislator would not be able to rescue a single worker, because the local government and police have learned from past experience how to keep busybodies away. 
There are more than 1,000 brick plants and coalmines around China, and most are under the protection of corrupt officials. 
Hu Wenhai, a brave man from Shanxi who killed two corrupt officials, said before his execution, “Officials are forcing people to rebel. 
I can’t let these assholes squeeze people any more. 
I know I’m going to die, but my death will get the attention of those officials.” 
So, instead of China being convulsed with rage at news that children are being turned into slaves, the media are censored and the 400 parents of the Hongdong children are blacklisted by the government. 
They cannot leave their homes to find their children. 
It seems today that in China the daily work of government is to keep people from protecting themselves and their families in an attempt to gloss over the crimes of a “harmonious society.” 
The socialism established by Mao Zedong has been replaced by a thoroughly cynical creed. 
Organized criminals lead much of the country’s economic development. 
The former paradise of the poor has become a living hell for them. 
And the corrupt officials? 
You can be sure that, this time next year, they will be paying homage to their ancestors, as they tramp over the ground where child slaves were buried alive for daring to proclaim their humanity. 

China’s Struggling Public Intellectuals 
Is China’s political environment loosening up, or is the government cracking down? 
It’s hard to tell. 
President and Communist Party General Secretary Hu Jintao sometimes seems to be going both ways simultaneously. 
For example, Hu has decided to honor the memory of his mentor, former General Secretary Hu Yaobang, in order to burnish his aura as a reformist. 
But, in many ways, Hu Jintao’s tenure as the head of the fourth generation of Communist leaders, which began when he became party secretary in 2002, differs sharply from that of his mentor. 
Hu Yaobang was a founder of the China Youth League, regarded as a relatively liberal institution in the People’s Republic, who in the 1980’s promoted political reforms and rehabilitated virtually all the victims of the Mao Zedong’s purges. 
By contrast, the younger Hu has narrowed the public space for political discourse that had opened up during the latter years of his predecessor, Jiang Zemin, when market pressure was forcing media outlets to be more daring and wide-ranging. 
Since taking over, Hu Jintao has arrested a number of outspoken journalists in an effort to rein in the media. 
His government has also detained an array of public intellectuals who have been critical of its policies, including cyber-dissidents Liu Di and Shi Tao (who was arrested thanks to Yahoo’s collaboration with the police in identifying him) and freelance writers Yu Jie and Liu Xiaobo. 
Military doctor Jiang Yanyong was detained in 2003 after he publicly rebutted the Party’s assertion that the SARS epidemic had been brought under control. 
In 2004, he was placed under surveillance when he called on the Party to revise its judgment of the 1989 Tiananmen demonstration. 
Hu’s tightening of controls over political discourse and the media intensified with the publication in September 2004 of a list of “Top Fifty Public Intellectuals” in Southern Weekly. 
The list, dominated by intellectuals who in the 1990’s had called for freedom of speech and political participation, appeared with the statement: “This is the time when China is facing the most problems in its unprecedented transformation, and when it most needs public intellectuals to be on the scene and to speak out.” 
On November 23, 2004, an article in the Shanghai Party Committee’s orthodox Liberation Daily disagreed. 
It attacked the concept of “public intellectuals,” claiming that their “independence drives a wedge” between intellectuals and the Party and between intellectuals and the masses. 
Hu’s leadership has tried to draw public attention to the growing gap between rich and poor. 
But its reaction to the book A Survey of Chinese Peasants, which is based on interviews over several years with farmers in the poor province of Anhui, was a telling reminder that public intellectuals are not welcome to contribute to that effort. 
The authors, the husband-and-wife team of Chen Guidi and Wu Chuntao, who spent their early years in the countryside, described in detail the imposition of unfair taxes by local officials and the authorities’ rapacious seizure of land farmed by rural residents. 
The increasingly impoverished lives of peasants that the book vividly documented resulted from the very abuses of power that Hu Jintao had declared himself to be against. 
Yet, in February 2004, one month after its publication, A Survey of Chinese Peasants was banned. 
Hu’s government has also tightened controls over the media. 
Reports on peasant and worker demonstrations against corrupt officials and illegal property confiscations have been banned. 
Those who dare to protest, such as Beijing University journalism professor Jiao Guobiao, are silenced. 
Similarly, Wang Yi, a law lecturer at Chengdu University who called for freedom of speech and association, was barred from teaching. 
The liberal journal Strategy and Management was closed down. 
Even the editor-in-chief of China Youth Daily, the newspaper affiliated with Hu Jintao’s own China Youth League power base, which had been aggressive in exposing official corruption, was recently detained. 
Hu Jintao’s rule is not a return to the Mao Zedong era. 
Despite the regime’s vast means of censorship, its embrace of new communications technologies like the Internet make it increasingly difficult for the party to maintain effective control over people’s views. 
Moreover, persecution of political dissenters does not now reach far beyond the accused to involve their associates. 
While scores have lost their positions and others have been imprisoned, most are briefly detained and then allowed to find other jobs in China’s burgeoning civil society. 
By comparison with the late 1990’s, however, the space for political discourse has undeniably narrowed, crushing expectations that the country would continue on a liberalizing course. 
Hu Jintao may have made a genuflection to his more liberal mentor, but in the two decades since the elder Hu’s fall from power, even as private space has expanded, China has become a politically far less open society. 

Asia’s Dammed Water Hegemon 
NEW DELHI – As if to highlight that Asia’s biggest challenge is managing the rise of an increasingly assertive China, the Chinese government has unveiled plans to build large new dams on major rivers flowing to other countries. 
The decision by China’s State Council to ride roughshod over downstream countries’ concerns and proceed unilaterally shows that the main issue facing Asia is not readiness to accommodate China’s rise, but the need to persuade China’s leaders to institutionalize cooperation with neighboring countries. 
China is at the geographical hub of Asia, sharing land or sea frontiers with 20 countries; so, in the absence of Chinese participation, it will be impossible to establish a rules-based regional order. 
How, then, can China be brought on board? 
This challenge is most striking on trans-boundary rivers in Asia, where China has established a hydro-supremacy unparalleled on any continent by annexing the starting places of major international rivers – the Tibetan plateau and Xinjiang – and working to reengineer cross-border flows through dams, reservoirs, barrages, irrigation networks, and other structures. 
China – the source of trans-boundary river flows to more countries than any other hydro-hegemon – has shifted the focus of its dam-building program from dam-saturated internal rivers to international rivers after having already built more large dams than the rest of the world combined. 
Most of China’s dams serve multiple functions, including generating electric power and meeting manufacturing, mining, irrigation, and municipal-supply water needs. 
By ramping up the size of its dams, China now not only boasts the world’s largest number of mega-dams, but is also the biggest global producer of hydropower, with an installed generating capacity of 230 gigawatts. 
The State Council, seeking to boost the country’s already-large hydropower capacity by 120 gigawatts, has identified 54 new dams — in addition to the ones currently under construction — as “key construction projects” in the revised energy-sector plan up to 2015. 
Most of the new dams are planned for the biodiversity-rich southwest, where natural ecosystems and indigenous cultures are increasingly threatened. 
After slowing its dam-building program in response to the serious environmental consequences of completion in 2006 of the Three Gorges Dam – the world’s largest – China is now rushing to build a new generation of giant dams. 
At a time when dam building has largely petered out in the West – and run into growing grassroots opposition in other democracies like Japan and India – China will remain the nucleus of the world’s mega-dam projects. 
Such projects underscore the zero-sum mentality that seemingly characterizes China’s water-policy calculations. 
By embarking on a series of mega-dams in its ethnic-minority-populated borderlands, China is seeking to appropriate river waters before they cross its frontiers. 
Asia, the world’s driest continent in terms of per capita freshwater availability, needs a rules-based system to manage water stress, maintain rapid economic growth, and ensure environmental sustainability. 
Yet China remains the stumbling block, refusing to enter into a water-sharing treaty with any neighbor – much less support a regional regulatory framework – because it wants to maintain its strategic grip on trans-boundary river flows. 
Among the slew of newly approved dam projects are five on the Salween, three on the Brahmaputra, and two on the Mekong. 
China has already built six mega-dams on the Mekong – the lifeblood for continental Southeast Asia – with its latest addition being the 254-meter-high Nuozhadu Dam, whose gargantuan reservoir is designed to hold nearly 22 billion cubic meters of water. 
The current dam-building plans threaten the Salween River’s Grand Canyon – a UNESCO World Heritage site – and the pristine, environmentally sensitive areas through which the Brahmaputra and the Mekong flow. 
These three international rivers originate on the Tibetan plateau, whose bounteous water resources have become a magnet for Chinese planners. 
The Salween, which runs from Tibet through Yunnan Province into Burma and Thailand, will cease to be Asia’s last largely free-flowing river, with work on the first project – the giant, 4,200-megawatt Songta Dam in Tibet – to begin shortly. 
The State Council’s decision reverses the suspension of dam building on the Salween announced by Premier Wen Jiabao in 2004, after an international uproar over the start of multiple megaprojects in the National Nature Reserves, adjacent to the world heritage area – a stunning canyon region through which the Salween, the Mekong, and the Jinsha flow in parallel. 
This reversal is consistent with the pattern established elsewhere, including on the Yangtze: China temporarily suspends a controversial plan after major protests in order to buy time while public passions cool, before resurrecting the same plan. 
Meanwhile, China’s announcement of three new dam projects on the Brahmaputra, the main river running through northeastern India and Bangladesh, has prompted the Indian government to advise China to “ensure that the interests of downstream states are not harmed” by the upstream works. 
Water has emerged as a new divide in Sino-Indian relations. 
China’s new focus on building dams in the southwest of the country also carries larger safety concerns. 
Indeed, Chinese scientists blamed the massive 2008 earthquake that struck the Tibetan plateau’s eastern rim, killing 87,000 people, on the newly constructed Zipingpu Dam, located next to a seismic fault. 
The weight of the water impounded in the dam’s massive reservoir was said to have triggered severe tectonic stresses, or what scientists call reservoir-triggered seismicity. 
China’s rush to build more dams promises to roil relations across Asia, fostering greater competition for water and impeding the already slow progress toward institutionalizing regional cooperation and integration. 
If China continues on its current, heedless course, prospects for a rules-based order in Asia could perish forever. 

China’s Threat to Russia 
Last week, Russia and China held joint military maneuvers in the presence of both Russian President Vladimir Putin and Chinese President Hu Jintao. 
But a new strategic alliance between the two countries is not likely, as it is China that poses the greatest strategic threat to Russia, although many in the Kremlin seem blind to this as they rattle sabers at America and the West. 
Indeed, China officially considers several regions in Russia’s Far East to be only “alienated” from it. 
China’s territorial claims on Russia are often noted in Chinese grade school geography textbooks, which include a number of Russian Far Eastern regions within China’s borders. 
This is consistent with the Chinese strategic concept of “vital space,” which includes all spheres of a state’s strategic activities, on land, at sea, under water, in the air, and in space. 
The dimensions of “vital space” are determined by a country’s economic, scientific, technical, social, and military capabilities – in essence, its “total power.” 
According to Chinese theorists, the “vital space” of great powers extends far beyond a state’s borders, whereas the “vital space” of weak countries is limited to strategic boundaries that do not always correspond to the borders of their national territory. 
Today, China has territorial claims against 11 of its 24 neighbors, including India, Japan, Vietnam, and the Philippines, in addition to Russia. 
In China’s relations with all of them, the potential use of military force was and remains an important factor. 
In September 2006, China’s People’s Liberation Army (PLA) conducted an unprecedentedly large 10-day exercise, involving the Shenyang and Beijing military districts, the two most powerful of China’s seven military districts. 
Shenyang abuts the Russian Armed Forces’ Far Eastern District, and the Beijing district shares a border with Russia’s Siberian Military District. 
During the exercises, Shenyang units advanced 1,000 kilometers into the Beijing district, where they engaged in joint war games. 
To military observers, the Beijing/Shenyang exercises seemed to be practice for a possible offensive operation against Russia, because exercises on such a scale are undertaken only at the final stage of a multi-year program to train troops to enact specific strategic and operational plans. 
The geography of the exercises, and the offensive nature of the tasks undertaken, leaves little doubt that Russia was cast in the role of “potential adversary.” 
Such a show of force is an ancient, traditional Chinese political technique. 
Paradoxically, these exercises were undertaken during a period when bilateral political and economic ties appeared on the surface to be at their highest point. 
Russia has an important place in Chinese geopolitical calculations, as a supplier of both modern weaponry and energy resources needed to continue its modernization. 
Therefore, the Chinese are doing everything possible to strengthen their economic and political position in Russia, and to draw Russia into their sphere of influence. 
And China is succeeding, most importantly by consistently reinforcing Putin’s anti-American and anti-Western agenda. 
While Beijing/Shenyang exercise should have indicated to Russian leaders that China’s intentions toward Russia may not always be benign, Russia’s political and military leadership seem not to sense any threat; on the contrary, they continue to sell the Chinese advanced weapons. 
Russia’s current diplomatic tilt, indeed, is clearly against its own long-term national security interests. 
China will never be interested in Russia’s economic and political modernization, for it prefers Russia to remain a source of mineral and energy resources and a vast “strategic rear” in its looming challenge with the United States. 
Likewise, the Shanghai Cooperation Organization (SCO), which just concluded its annual meeting, is in China’s eyes a tool of regional policy that helps strengthen China’s influence and control over Central Asia’s natural resources at the expense of Russia. 
No nation threatens China’s land borders. 
China can solve its domestic problems, such as separatism, by itself. 
China is militarily self-sufficient and needs military cooperation under the SCO framework only in order to free its hands if any conflict should arise that affects its interests. 
In fact, conflict between Russia and China is possible precisely in Central Asia, given the clear differences in the two countries’ economic and political interests in that region. 
Aside from control of the region’s energy supplies, water has become a potential source of conflict, given China’s serious shortages. 
Yet, while the Chinese clearly understand these contingencies and are preparing themselves to deal with them diplomatically and militarily, the Kremlin remains myopically obsessed with the phantom threat of America. 
Thus, as the Kremlin dreams of re-establishing its domination over what Russians refer to as the “near abroad” (Ukraine, Belarus, the Baltic countries, and the other post-Soviet states), China is increasingly looking at Russia as its own “near abroad.” 
Will the Kremlin finally wake up to this? 
Thirty-six years ago, Richard Nixon and Mao Zedong turned world politics upside down, as both America and China realized that it was the Soviet Union, and not each other, that posed the greater threat. 
Vladimir Putin needs his own “Nixon moment.” 
Alienating the West is a foolish strategy when the greatest long term threat to Russia comes from the East. 

China’s Triumph of the Will 
MOSCOW – When the opening ceremony of the Beijing Olympic Games begins in a few days, viewers will be presented with a minutely choreographed spectacle swathed in nationalist kitsch. 
Of course, images that recall Hitler’s goose-stepping storm troopers are the last thing that China’s leaders have in mind for their Olympics; after all, official Chinese nationalism proclaims the country’s “peaceful rise” within an idyll of “harmonious development.” 
But, both aesthetically and politically, the parallel is hardly far-fetched. 
Indeed, by choosing Albert Speer Jr., the son of Hitler’s favorite architect and the designer of the 1936 Berlin Olympics, to design the master plan for the Beijing Games, China’s government has itself alluded to the radical politicization of aesthetics that was a hallmark of twentieth-century totalitarianism. 
Like those regimes, whether fascist or communist, China’s leaders have sought to transform public space and sporting events into visible proof of their fitness and mandate to rule. 
Speer Jr.’s commission was to lay out a master plan for the access to the Olympic complex in Beijing. 
His design centered on the construction of an imposing avenue to connect the Forbidden City and the National Stadium in which the opening ceremony will take place. 
His father’s plan for “Germania,” the name Hitler selected for the Berlin that he planned to construct after World War II, also relied on such a mighty central axis. 
China’s rulers see the Olympics as a stage for demonstrating to the world the exceptional vitality of the country they have built over the past three decades. 
And that demonstration serves an even more important domestic political objective: further legitimizing the regime’s continuing rule in the eyes of ordinary Chinese. 
Given this imperative, an architectural language of bombast and gigantism was almost inevitable. 
So it is no surprise that the Beijing Games may resemble the hubristic Games that beguiled the Führer and enthralled the German masses in 1936. 
Like the Beijing Games, the Berlin Olympics were conceived as a coming-out party. 
Josef Goebbels’ Nazi propaganda machine was fully deployed. 
Athletic imagery – used to brilliant effect in Leni Riefenstahl’s acclaimed documentary – appeared to create a link between the Nazis and the ancient Greeks, and to confirm the Nazi myth that Germans and German civilization were the true heirs to the “Aryan” culture of classical antiquity. 
While designing the master plan for the Beijing Games, Speer Jr., an acclaimed architect and town planner, also sought, like his father, to create a futuristic global metropolis. 
Of course, the language that he used to sell his scheme to the Chinese was very different from the words his father used to present his plans to Hitler. 
Instead of emphasizing his design’s pomposity, the younger Speer insisted on its environmental friendliness. 
The 2,000-year-old city of Beijing should be transported into hyper-modernity, whereas his father’s 1936 Berlin design was, in his words, “simply megalomania.” 
Of course, the sins of the father should never be visited on the son. 
But, in this case, when the son borrows essential elements of his father’s architectural principles and serves a regime that seeks to use the Games for some of the same reasons that animated Hitler, is he not willingly reflecting those sins? 
Totalitarian regimes – the Nazis, the Soviets in 1980, and now the Chinese – desire to host the Olympics as a way to signal to the world their superiority. 
China believes that it has found its own model to develop and modernize, and its rulers regard the Games in the same way as the Nazis and Leonid Brezhnev did, as a means of “selling” their model to a global audience. 
Obviously, the Chinese were politically tone-deaf in choosing an architect whose name carried such dark historical connotations. 
The name of Speer itself probably did not matter to the officials who chose him. 
They sought to stage an Olympics that made manifest their image of themselves, and Speer Jr., looking back to his father’s mastery of the architecture of power, delivered the goods. 
The realization of Speer Jr.’s Olympic vision, and that of his patrons, marks the end of a welcome interlude. 
For years following the end of the Cold War, politics had been removed from the Games. 
A gold medal signified the sporting abilities and dedication of individual athletes, not the supposed merits of the political system that produced them. 
But now we have returned to an aesthetic of political mesmerization, reflected in the host government’s declared aim that China should win more gold medals than any country before. 
As the Olympic torch relay – itself a creation of the Nazis, first employed in the Berlin Games – makes its way down Speer Jr.’s avenue of power, the world will once again be made to witness a triumph of the totalitarian will. 

China’s Turning Point 
NEW HAVEN – In early March, China’s National People’s Congress will approve its 12th Five-Year Plan. 
This Plan is likely to go down in history as one of China’s boldest strategic initiatives. 
In essence, it will change the character of China’s economic model – moving from the export- and investment-led structure of the past 30 years toward a pattern of growth that is driven increasingly by Chinese consumers. 
This shift will have profound implications for China, the rest of Asia, and the broader global economy. 
Like the Fifth Five-Year Plan, which set the stage for the “reforms and opening up” of the late 1970’s, and the Ninth Five-Year Plan, which triggered the marketization of state-owned enterprises in the mid-1990’s, the upcoming Plan will force China to rethink the core value propositions of its economy. 
Premier Wen Jiabao laid the groundwork four years ago, when he first articulated the paradox of the “Four ‘Uns’” – an economy whose strength on the surface masked a structure that was increasingly “unstable, unbalanced, uncoordinated, and ultimately unsustainable.” 
The Great Recession of 2008-2009 suggests that China can no longer afford to treat the Four Uns as theoretical conjecture. 
The post-crisis era is likely to be characterized by lasting aftershocks in the developed world – undermining the external demand upon which China has long relied. 
That leaves China’s government with little choice other than to turn to internal demand and tackle the Four Uns head on. 
The 12th Five-Year Plan will do precisely that, focusing on three major pro-consumption initiatives. 
First, China will begin to wean itself from the manufacturing model that has underpinned export- and investment-led growth. 
While the manufacturing approach served China well for 30 years, its dependence on capital-intensive, labor-saving productivity enhancement makes it incapable of absorbing the country’s massive labor surplus. 
Instead, under the new Plan, China will adopt a more labor-intensive services model. 
It will, one hopes, provide a detailed blueprint for the development of large-scale transactions-intensive industries such as wholesale and retail trade, domestic transport and supply-chain logistics, health care, and leisure and hospitality. 
Such a transition would provide China with much greater job-creating potential. 
With the employment content of a unit of Chinese output more than 35% higher in services than in manufacturing and construction, China could actually hit its employment target with slower GDP growth. 
Moreover, services are far less resource-intensive than manufacturing – offering China the added benefits of a lighter, cleaner, and greener growth model. 
The new Plan’s second pro-consumption initiative will seek to boost wages. 
The main focus will be the lagging wages of rural workers, whose per capita incomes are currently only 30% of those in urban areas – precisely the opposite of China’s aspirations for a more “harmonious society.” 
Among the reforms will be tax policies aimed at boosting rural purchasing power, measures to broaden rural land ownership, and technology-led programs to raise agricultural productivity. 
But the greatest leverage will undoubtedly come from policies that foster ongoing and rapid migration from the countryside to the cities. 
Since 2000, annual rural-to-urban migration has been running consistently at 15-20 million people. 
For migration to continue at this pace, China will have to relax the long-entrenched strictures of its hukou, or household registration system, which limits labor-market flexibility by tethering workers and their benefits to their birthplace. 
Boosting employment via services, and lifting wages through enhanced support for rural workers, will go a long way toward raising Chinese personal income, now running at just 42% of GDP – half that of the United States. 
But more than higher growth in income from labor will be needed to boost Chinese private consumption. 
Major efforts to shift from saving toward spending are also required. 
That issue frames the third major component of the new Plan’s pro-consumption agenda – the need to build a social safety net in order to reduce fear-driven precautionary saving. 
Specifically, that means social security, private pensions, and medical and unemployment insurance – plans that exist on paper but are woefully underfunded. 
For example, in 2009, China’s retirement-system assets – national social security, local government retirement benefit plans, and private sector pensions – totaled just RMB2.4 trillion ($364 billion). 
That boils down to only about $470 of lifetime retirement benefits for the average Chinese worker. 
Little wonder that families save out of fear of the future. 
China’s new Plan must rectify this shortfall immediately. 
There will be far more to the 12th Five-Year Plan than these three pillars of pro-consumption policy. 
The Plan’s focus on accelerated development of several strategic emerging industries – from biotech and alternative energy to new materials and next-generation information technology – is also noteworthy. 
But the emphasis on the Chinese consumer is likely to be the new Plan’s defining feature – sufficient, in my opinion, to boost private consumption as a share of Chinese GDP from its current rock-bottom reading of around 36% to somewhere in the 42-45% range by 2015. 
While still low by international standards, such an increase would nonetheless represent a critical step for China on the road to rebalancing. 
It would also be a huge boost for China’s major trading partners – not just those in East Asia, but also growth-constrained European and US economies. 
Indeed, the 12th Five-Year Plan is likely to spark the greatest consumption story in modern history. 
Today’s post-crisis world could hardly ask for more. 
But there is a catch: in shifting to a more consumption-led dynamic, China will reduce its surplus saving and have less left over to fund the ongoing saving deficits of countries like the US. 

China’s U-Turn 
BEIJING – Hope and danger collided at the recently concluded National People’s Congress in Beijing. 
The two-week conclave meets annually, and while it is unfair and inaccurate to characterize the Congress as a rubber-stamp exercise, delegates tend, in the main, to jump on the bandwagon of policies constructed by the central government, and by the Communist Party. 
The hope was that the Chinese leadership would finally do something – preferably something bold – to forestall further decline in the country’s major economic indicators. 
Growth has slowed, exports have plummeted, and unemployment has jumped, and the prevailing view has been that a “blame America first” strategy makes the most sense. 
Analysts kept waiting for Chinese officials to salvage capitalism by spelling out a plan to save its economy first. 
The danger is that this is exactly what China’s leaders did. 
China’s government is divided on a number of matters, but there is a strong, sharp-edged consensus that social stability is at risk unless a robust stimulus package emerges to stave off further job loss. 
(Never mind that Chinese history lacks evidence of a clear, causal connection between unemployment and national unrest.) 
Premier Wen Jiabao confirmed that a major effort was being made to extend and implement the previously announced four-trillion-yuan plan, and that more funds were available if conditions worsened. 
Data on the scope of the stimulus package – for example, investment per province or the number of new projects versus those that more cash would restart or reinvigorate (and these projects versus those that would be shut down) – are difficult to determine. 
The transparency and consistency of official figures lags well behind the authorities’ hyped promises about government reform, streamlining of the bureaucracy, and the retreat of the Party apparatus. 
Still, it is not what we don’t know about the stimulus plan that is troublesome. 
China’s government, as prone to political maneuvering and policy gridlock as any, appears to agree that immediate economic growth is crucial and that an 8% annual rate is essential. 
Many officials (and the analysts and advisers who support them) assumed that this magic number represents the minimum rate needed to provide jobs to workers and managers and absorb the more than six million new graduates who spill out of China’s campuses each year in search of employment. 
That 8% target will be met, because in China directed objectives are always attained, and often exceeded. 
After all, political careers depend on acceding to the demands of the central government. 
And yet China’s reliance on economic policies that require the heavy hand of the state to achieve officially decreed targets had been fading. 
The government’s renewed focus on such a target is thus another indication that the global economic crisis has strengthened those Chinese officials and intellectuals who advocate a socialist system. 
After all, it is much more difficult to make an argument for market economies when they are under siege. 
The real danger of the new stimulus package is not ideological but environmental. 
What the figure of 8% signals to provincial officials and industrial managers is that the emerging promise of green GDP – wherein a local government had to show not only growth, but also clean and energy-efficient growth – has been abandoned. 
Few Party officials really wanted to be troubled by the complexities of such calculations anyway, but either abided by them or paid them lip service, for the sake of maintaining patronage and seeking promotion. 
Now, with the Party’s ability to manage the economy seemingly at stake, its stimulus package implies a green light to bypass environmental regulations if jobs or growth targets are in jeopardy. 
A big loser here is energy efficiency. 
The proportion of new outlays devoted to energy conservation and reduction have been cut almost in half, just when reforms in the price structure of energy use were beginning to kick in. 
Some measures aimed at redistributing the energy load – such as solar and wind power – have been retained. 
But the funding for expanding these efforts will rest largely on provincial officials, who will be reluctant to compel local cadres to disrupt production and lay off even more workers. 
Much of politics in China is local, but little of environmental protection is. 
There is worse news elsewhere in the new plan. 
Nearly every industrial sector that, according to the stimulus package, deserves direct and immediate government support is energy-intensive and polluting (cement and steel, for example) or heavily managed by the state sector, and therefore missing incentives to balance growth with environmental protection (as is the case with the oil industry). 
Political lobbies that oversee these sectors and overlap with certain factions in the Party are simply too powerful for nascent interests in society and the bureaucracy to parry. 


China’s Victimization Syndrome 
A contest for China’s soul is now underway in that giant country, pitting two powerful forces and two very different stances toward the outside world against each other. 
The outcome will have a major impact on whether China succeeds in becoming a nation capable of having truly constructive and durable relations with the outside world. 
On one hand, China’s economic revolution has helped position it in the world as a confident powerhouse of trade, a more responsible global powerbroker, and even as a reassuring military presence. 
On the other hand, China remains trapped by a past and a mindset steeped in a sense of victimization, which tempts it to export blame for internal problems. 
The main question is whether China can escape the pull of this old psychological syndrome – which kept it preoccupied throughout the twentieth century with debilitating sentiments of weakness, insecurity, and humiliation – and allow itself to be guided by a new outlook on the world, and even on old enemies. 
The anti-Japanese demonstrations are a symptom of the old syndrome, fueled by grievances born at a time when China was, indeed, aggrieved and humiliated. 
With China’s growing economic clout, rising standard of living, and increasingly respected place in the world, one would hope that the Chinese and their leaders would find a way to let go of the dead. 
Yet, even as the luster of the “China miracle” dazzles the world, the Chinese seem loath leave behind their dark feelings of victimization. 
Instead of assuming a new national paradigm based on the reality of their accomplishments (national unity, robust international trade, and growing global influence), China’s leaders cling to the old paradigm of their country as victim, the “sick man of Asia” being “cut up like a melon” by predatory imperial and colonial powers like Japan. 
That bitter memory of oppression and exploitation lingers in the minds of too many Chinese like the afterimage of a bright light long after it has been turned off. 
The Japanese occupation of China was a particularly galling and humiliating period because Japan was an Asian, not a Western, power. 
Moreover, like China, Japan was a society steeped in Confucian culture, which many Chinese reformers in the nineteenth and twentieth centuries blamed as a critical impediment to their own country’s development and modernization. 
Of course, Japan did occupy China, committed unimaginable savagery, and has since paid no reparations or apologized in a convincing way. 
Nevertheless, what benefit does China gain by continuing to raise these issues 60 years later? 
What is worth the risk of alienating the world’s second largest economy and one of China’s most important trade partners? 
First and foremost, aiding and inciting the expression of popular anger against Japan gives China’s Communist Party leaders a powerful and readily available vehicle for rallying domestic support, thereby legitimizing their own power. 
At the same time, the demonstrations represent China’s experience of the world as an unequal place where the weak are inevitably bullied, exploited, and humiliated. 
This mindset suggests that, despite the panoramic city skylines, the billboards, and the flashy five-star hotels say otherwise, China has a long way to go before it truly comes to understand and appreciate its actual accomplishments and status. 
Indeed, surges of organized anger when China is attacked or insulted are hardly new. 
The reaction of China’s leaders to the America’s accidental attack on China’s embassy in Belgrade in 1998, and to the collision of an American spy plane with a Chinese plane over the Pacific, was to permit, if not foment, large anti-foreign demonstrations. 
In keeping with this syndrome, Foreign Minister Li Zhaoxing has accused Japan of having “hurt the feelings of the Chinese people” by not apologizing for their crimes, as if he were Minister of Psychology, rather than foreign affairs. 
Of course, China’s wounded psyche and the desire for restitution from its former tormentors deserve sympathy. 
In this sense, China, like many countries, could be said to have something of a bi-polar personality. 
Much of the emotional force of Mao’s revolution derived from the widespread sense of unequal treatment and humiliation by foreign powers, and this revolutionary fervor has never been properly interred. 
Just as Mao’s portrait has never been taken down from The Gate of Heavenly Peace, so whole elements of his revolution continue to survive in China’s institutions, ways of thinking, and modes of interacting with the world. 
Like recessive genes, they sometimes suddenly re-express themselves. 
The role of victim is all too familiar to the Chinese, perhaps even somewhat comforting, for it provides a way to explain (and explain away) China’s problems. 
But it is also dangerous, because it derives from China’s old weaknesses rather than its new strengths. 
The era of Japanese militaristic and imperialist power has long gone, and the world is beating a path to China’s door. 
The last thing the country needs is to remain trapped in the past. 

China's Virtual Revolution 
After eight years of explosive growth, there are now almost as many internet users in China as there are members of the 70-million-strong Communist Party. 
China's "information elite," the largely urban, educated, professionals who are China's internet surfers, are becoming a force of equal size to the ruling political power base. 
What will this new center of power mean for the transformation of Chinese society? 
Since the mid-1990s, China's government has promoted the rapid growth of the internet for its economic benefits. 
But it has also been developing a sophisticated political and technological system to control online information. 
The government employs a host of new legal regulations, a shadowy internet police force, and a powerful hardware-based national information filtering system. 
Control also relies on the demography of internet users, most of whom belong to China's economic elite and are more likely to adopt the internet as part of a newfound consumer lifestyle than as a tool for political or social revolution. 
What is surprising is that the government's control mechanisms have been largely effective. 
But it is also prompting profound social changes that are rooted in a rising rights consciousness within society, something strengthened--and amplified-- not only by the growth of the economy, but by the rapid spread of the internet. 
After two and a half decades of market-oriented economic reform, Chinese citizens are increasingly aware of how to protect their economic and social interests by using the language of rights. 
When confronting abuses of power, people are increasingly using a new term, "weiquan" (defending rights), to challenge the system. 
Another new term, "zhi qing quan" (right to know), has also entered public discourse. 
The new terminology inspired by the information technology revolution was especially prevalent after the SARS outbreak last spring, when the government covered up the epidemic until after it had spread throughout China and beyond. 
The momentum of this rising demand in China for "rights" can also be seen in the coverage of other major events in the traditional media. 
For example, when covering a natural disaster, a major industrial accident, or an urgent public health issue, journalists in the traditional media are not allowed to investigate and report without official sanction. 
But the internet is helping to change these rules. 
Journalists now learn how to evade government guidelines by distributing and collecting information online, making it more difficult for propaganda bosses to silence the spread of information considered "sensitive." 
Ordinary internet users can also write about events they witness and broadcast their reports online, making the suppression of important breaking news almost impossible. 
Moreover, the authorities have a difficult time tracking down and punishing people who spread this kind of "subversive" information--a term frequently used by the government to suppress political dissent--online. 
Because Chinese internet users are now more likely to find out about a breaking story in real time and question why the official press hasn't covered it, China's conventional media now feel pressure from the public to cover events that they might otherwise dodge. 
Online discussion of current events, especially through internet bulletin boards, is another new phenomenon. 
One recent survey shows that the number of users registered with China's ten most popular bulletin boards, which focus on news and political affairs, range from 100,000 to 500,000. 
Mainly through bulletin boards, email mailing list services and an emerging "Web log" community, the internet has begun to provide an alternative public sphere that did not exist in China a few years ago. 
Under the state censorship system, most discussions are limited to politically acceptable topics, such as legal reform and anti-corruption efforts. 
However, within these boundaries, internet-enabled activism, such as online petitions, have not only expanded the boundaries of traditional media reporting, but presaged some interesting new political consequences as well. 
When college student Sun Zhigang was beaten to death by the police in the southern city of Guangzhou this spring, for example, it inspired a storm of online calls for "weiquan," and provoked debates over the "custody and repatriation system." 
That form of "administrative detention," used primarily against migrant workers, was the basis for Sun's detention. 
The online protest that ensued undoubtedly played a role in the government's decision to abolish the system and arrest the officials involved in the case. 
Despite government efforts to control the internet, a space to support the rising rights consciousness within Chinese society has been carved out. 
As the pervasiveness and flexibility of the new medium weakens traditional media censorship, internet-enabled social activism plays an increasingly influential role in China's legal reform and the development of its nascent civil society. 
China's 70 million "netizens" may now be in a prime position to guide the transformation of society and determine the country's future. 
But the outcome of this grand experiment, which pits an authoritarian government dedicated to controlling politics against an information technology inherently resistant to such controls, is far from certain. 
Ultimately, what happens may tell us as much about the inherent nature of the internet in our evolving world as about a changing China. 

China’s War on Inequality 
BEIJING – A major new target in the “Five-Year Plan for Economic and Social Development” that China just unveiled is to boost the growth rate for household (disposable) income so that it equals the growth rate of the country’s GDP. 
The reason is simple: over the past 10 years or so, China’s household income grew more slowly than GDP, making it a smaller and smaller proportion of total national income. 
Many important structural problems have resulted from this trend. 
Lagging household income has held back private consumption, even though the economy has the capacity to produce more consumer goods. 
It has also driven up corporate savings, because firms’ earnings are growing faster than household income and (and, for that matter, faster than overall GDP). 
That, in turn, may cause higher investment or asset bubbles, as businesses seek to reinvest their savings somewhere. 
And lagging household income clearly contributes to China’s trade surplus, because low domestic consumption tends to keep exports higher than imports. 
But there are even more problems related to China’s disproportionately small household income, particularly growing income disparity. 
Indeed, not all of China’s “households” have benefited alike from rapid GDP growth. 
Some social groups, such as skilled workers, engineers, and financial-sector employees, have seen their wages rise strongly. 
Urbanites – people with formal registration as urban residents – have recorded income gains as well, owing to their coverage by the government-run education system and social safety net. 
And, as corporate profits have grown, those who share the capital gains in one way or another have also seen their incomes increase faster than the national average. 
Those with less education, however, such as migrant workers and farmers, have fared much worse. 
The former earn an annual salary (including fringe benefits!) totaling $2,000; the later may earn only half that. 
They comprise, in roughly equal parts, the low-income workers who account for up to 65-70% of the total workforce. 
Their average income has grown, but more slowly than the 8-10% annual GDP growth rate of the past 20 years. 
The target set by the new five-year plan is thus also a policy manifesto to battle these social disparities, which are now a burning issue for the country. 
But why did these disparities arise in the first place? 
Thirty years ago, 80% of China’s labor force was composed of farmers. 
But, while that figure is down now to about 30%, rural education has continued to suffer from inadequate funding and human capital relative to urban, industrializing regions. 
That caused rising inequality between the urban privileged and the rural poor. 
Geographical differences and government social policies that have been more favorable to urban and industrial sectors may be also be to blame. 
But the most fundamental problem is that development does not take place overnight. 
It takes a long time to bring education and better-paid jobs to everyone. 
During this long period, some get rich first, which means that others lag behind. 
Thirty years of rapid growth brought only half of China’s famers (about 200 million people) into the industrial or service sectors, where their wages doubled. 
But at least another 150 million famers are still coming into the labor market, competing for higher-paying jobs. 
The old generation of farmers may stay put, but younger generations will continue to leave the land, creating a seemingly infinite supply of labor, which suppresses wages in all industries and services for lower-educated workers. 
As a result, the income of almost 70% of the labor force cannot increase as fast as their labor productivity, and average household income thus cannot grow as fast as the economy as a whole. 
Given China’s massive stock of “surplus labor,” this trend will not reverse itself soon. 
Indeed, the situation may worsen for another decade or two before it improves. 
This is why the government wants to intervene. 
In recent years, the central government has increased its spending on rural compulsory education and poverty relief, and local governments have changed regulations to increase the minimum wage by 20-30% in all 30 provinces. 
In the next five years, more efforts in that direction are planned. 
The social-security system is to be extended to cover all workers and farmers. 
Fiscal and taxation reform is to be accelerated in order to transfer more income from the corporate sector to households and public budgets for social programs, including low-rent housing for the urban poor and more and better services for new immigrants from rural areas. 
But none of this will solve the problem. 
The best a government plan can do is to prevent the worst. 
Government subsidies may (temporarily) redress income disparity in a developed country where farmers account only for 2% of the labor force, or in a country in which low-income groups count for only 10% of the total population. 
But in China, where farmers make up 30-35% of the labor force and 70% of the population falls into low-income categories, government can play only a marginal role. 
In such circumstances, the old adage that the best social-welfare program is economic growth is all the more applicable. 
All the lessons from developing countries from the 1950’s through the 1980’s, and recent lessons from some advanced developed countries, tell us that over-burdening social programs with too great a focus on redistribution may cause large fiscal deficits, debt crises, hyper-inflation, or financial meltdown, with the end result being not a narrowing of disparity but an enlargement. 
China must keep these lessons in mind over the next 20-40 years. 
Indeed, continued growth and job creation is the only real solution for lifting hundreds of millions of Chinese out of poverty permanently. 

China's Worrisome Nationalism 
Nationalist sentiment has been on the rise in China for a decade. 
This may be hidden from President Bush when he visits China next month, but it is there all the same. 
From 1993 to 2001 a series of abrasive encounters poisoned the atmosphere: the forced boarding of a Chinese merchant ship (wrongly suspected of carrying chemical warfare components to Iran) in the Arabian Gulf; US efforts to block China's bid to host the 2000 Olympics; escalating tensions over Taiwan; the Wen Ho Lee affair (where China was falsely implicated in the theft of American nuclear secrets); the accidental bombing of China's embassy by US warplanes during the Kosovo war; and the mid-air collision of a US spy plane and a Chinese jet fighter last year. 
Cumulatively, these events evoked bitter memories of 19 th century Western imperialism, when ``foreign devils'' subdued and humiliated China, running roughshod over a once-proud people. 
Echoes of past humiliations were clearly evident in a spate of popular anti-American books published in the late 1990s with such inflammatory titles as ``China Cannot be Intimidated;'' ``America's Evil Schemes;'' and ``A China That Can Say NO.'' 
In these and other best-selling publications the 19 th century concept of guochi - ``national humiliation'' - was invoked to express China's righteous indignation at the bullying imperialists. 
Nor was this a propaganda ploy, as some suggested. 
Though initiated by the government, the guochi revival resonated in Chinese society. 
A 1999 public opinion survey of more than 1200 university students in Beijing revealed that fully 75% of well-educated respondents agreed with the statement that, ``The [Belgrade] embassy bombing was a deliberate act of the US Government.'' 
By the end of the 1990s a majority of Chinese citizens regarded America as their primary adversary. 
In this environment, more than a few Chinese reacted to the events of September 11 th with barely disguised satisfaction. 
Equally troubling was the near-hysterical tone adopted by many Chinese netizens in the aftermath of the EP-3 incident of April 2001, when websites and chatrooms around the country were flooded with messages demanding that America be made to pay a ``blood debt'' for the death of martyred Chinese fighter pilot Wang Wei. 
Evoking the self-righteous outrage of guochi , three young Chinese males engaged in the following exchange of messages on the internet: 
Righteous Eagle : The US uttered a few shameful words of apology and our government released 24 pigs.... 
On the surface it appears that the United States apologized to China, but what commitments did the US assume, really? 
They didn't agree to anything.... 
Who can swallow this? 
We need to settle a blood debt but we just let the devils go home? 
Gracious : ....My web comrades, how can we face the martyrs who have fought these past several hundred years for national self-respect and the strengthening of the country? 
How can we face our ancestors? 
I feel so ashamed before you.... 
Lin Zi ... 
What difference is there between the China of today and the China of one hundred years ago? ... 
As our tears flow down our cheeks, I do not dare believe that this is our country, the China that gave birth to me and raised me.... 
I would sooner die than go on living like this. 
My life belongs to my country. 
Do not make the people distrust you, my motherland! 
Let's wake you up. 
Mother! 
Your sufferings are far from over.... 
These rants display a second major feature of the Chinese cult of guochi : the tendency to blame a weak, feckless Chinese government for not standing up to predatory foreigners. 
On many such occasions in the past, from the Boxer Rebellion to the May 4 th Movement (which culminated in the massacre at Tiananmen Square, Chinese patriots angrily accused their own government of betraying the country by colluding with foreign imperialists. 
In effect, such feelings of national betrayal served to transform China's cult of national shame from a useful tool of government propaganda into a two-edged sword wielded against the government itself. 
Indeed, fearful of popular backlash against its decision to release the crew of the US spyplane without securing either a meaningful American apology or adequate financial compensation, China's government quietly shut down several popular internet sites in the weeks following the spy plane incident - including the chatroom that posted the above-cited messages. 
Since September 11 th , the guochi revival has abated somewhat. 
In the interest of promoting Sino-American cooperation against terrorism the Chinese government has toned down the emotional content of its anti-American rhetoric. 
Last month, for example, the revelation that an American-made Boeing 737, specially outfitted for the use of President Jiang Zemin, was bugged with dozens of listening devices, elicited only a mild from the Chinese government. 
No stoning of US embassies; no mass internet hysteria. 
Some Chinese scholars now question the wisdom of allowing the bitter anti-foreignism of the 19 th century to poison China's 21 st century diplomacy. 
As one influential scholar at Peking University put it: ``For Chinese diplomacy, the most important thing is to walk out of the shadow of the past 100 years of our diplomacy of humiliation and avoid either overreacting to offenses or hiding passively, and instead face the world like a big country.'' 
Evidently, China's top leader agrees. 
Speaking last July on the occasion of the 80 th anniversary of the founding of the Chinese Communist Party, Jiang Zemin proclaimed ``We Have to put an end once and for all to the... diplomacy of humiliation.'' 
As President Jiang prepares to meet George W. Bush later this month at their long-awaited presidential summit in Beijing, we can only hope he is right. 
It is indeed time for China to put guochi to rest and ``face the world like a big country.'' 

China's WTO Revolution 
China's accession to the World Trade Organization (WTO) is the most important event in the country's history since the inception of its "open door" economic policy a quarter-century ago. 
Trade liberalization will benefit consumers, small entrepreneurs, and foreign investors. 
But for China's peasants, WTO membership appears to pose a direct and immediate threat to the tremendous gains made since Deng Xiaoping's agricultural reforms in the late 1970s. 
The fear felt by China's peasants is understandable because it is deeply rooted in China's history and politics. 
Since the founding of the People's Republic in 1949, the peasantry has been the country's most under-represented and manipulated social group, bearing the brunt of the Communists' promotion of heavy industry. 
But WTO membership does not come at the expense of agriculture, for it promises to erode rather than reinforce the peasantry's legacy of discrimination and powerlessness. 
It is a legacy built on deception. 
During China's civil war in the late 1940s, the promise of land reform attracted tens of millions of landless peasants to support the Communists. 
After the founding of the People's Republic, they did receive land, only to see it taken back when the new regime embarked on its massive agricultural collectivization drive. 
The harshness of the subsequent industrialization campaign culminated in the Great Leap Forward of 1958-60, producing a famine that killed 30 million people, mostly in rural areas. 
By the time Mao Zedong died, in 1976, the rural economy was a shambles. 
In desperation, village leaders in Anhui province initiated an experiment that returned land to peasants-a de facto privatization that violated official policy. 
The government, believing that the situation in the countryside could not get worse, did not stop them. 
These village experiments with private ownership were highly successful, boosting agricultural output significantly. 
Indeed, it was the peasantry that fired the first shot in the reform campaign that has transformed China in the decades since. 
Mindful of the bitter memory of famine (and trade embargoes), China's government remains obsessed with ensuring self-sufficiency in food. 
But despite owning the means of production such as land and tools, Chinese peasants have not achieved the social and political status accorded industrial workers in state-owned sectors - people who, according to the constitution, remain the official "vanguard" class. 
The government erected trade barriers and adopted other measures to protect China's agriculture, but this reflects its concern for factory workers, not-as in the US and Europe-farmers' political clout. 
Inefficient and loss-making state-owned enterprises (SOEs) remain the primary beneficiaries of official economic policy, kept alive on a drip-feed of government subsidies and cheap loans from state-owned banks. 
Township and village enterprises (TVEs)-which are owned by and employ mostly former peasants-had to rely on themselves to become the most dynamic and productive sources of China's economic growth. 
WTO membership will expose China's agricultural sector to foreign competition. 
Rural labor will be displaced and the agricultural sector as a whole may experience net job losses. 
But the WTO-induced expansion of non-agricultural labor-intensive sectors, particularly the textile and clothing industries, could absorb these workers. 
Today, peasants move to seek new and better employment opportunities created by economic liberalization. 
Free internal migration has become a fait accompli, effectively shunting aside China's apartheid-like system of residency permits. 
WTO membership will also force the government to cease discriminating in favor of SOEs and against economic sectors with a high degree of private ownership, including agriculture. 
China's industrialization strategy in the pre-reform era rejected the notion of "comparative advantage"- the principle that an economy produces some goods more efficiently than others owing to factors such as natural resources, geography, and climate. 
Jamaica, say, does not produce frozen salmon or hockey players because investing in industries such as citrus fruit and tourism provides far more certain profits. 
The same WTO-induced sectoral adjustment underlies the decline of steel and textiles in advanced countries such as the US. 
In China, most SOEs survived because central planners emphasized economic autarky, regardless of cost. 
With trade liberalization, the cost of ignoring comparative advantage soars. 
China's increasing openness to global competition will eventually jeopardize the SOEs' continued survival and undermine the sustainability of politically biased development schemes. 
With the entry of foreign competitors, China's state-owned banks will be forced to base lending policy on the ability of borrowers to service their debts. 
The bottom line will replace the Party line in determining how investment is allocated. 
With social stability the government's overwhelming priority, fundamental institutional changes are unlikely to come from within. 
So accession to the WTO may be just the external catalyst China needs, promising the emergence of a level economic playing field, with respect for and protection of property rights, transparent rules and regulations, free and fair competition, and equal participation. 
Although there will be pain, this should benefit many, if not most, social groups. 
It will, at long last, liberate the peasantry from the greatest historical burden it bears-the dead hand of a state that dotes on its inefficient industrial proletariat. 


China’s Scientific Revolution 
BEIJING – The Chinese economy has undergone radical transformation in recent years and is now laying the groundwork for impressive advances in science and technology. 
In particular, China is setting itself up to be a major player in the fight against disease, and there are many reasons to believe that the country will play a central role in the life-sciences research of the future. 
For starters, according to a report in McKinsey Quarterly, China spends more than $200 billion on research annually, a level of investment that is second only to the United States. 
Chinese President Xi Jinping has positioned science-based innovation near the top of the national agenda, with the government’s 13th Five-Year Plan prioritizing complex projects in emerging fields like brain research, gene science, big data, and medical robotics. 
China is devoting so much to medical research in part because the country has significant unmet medical needs. 
By 2050, the Chinese population over age 65 is expected to increase by about 190 million. 
Meanwhile, chronic illnesses now account for more than 80% of China’s disease burden. 
So it is no surprise that China is already the world’s second largest pharmaceutical market, or that its innovation expenditure, according to the McKinsey Quarterly report, is expected to reach $1 trillion by 2020. 
Another reason to expect a Chinese research revolution is that China now graduates more university students in the fields of science, technology, engineering, and mathematics than any other country – about 2.5 million students per year, or about five times more than the US. 
In science and engineering alone, China generates nearly 30,000 PhDs annually. 
At the same time, government incentives are luring Chinese scientists who have been working abroad – many with top-tier Western institutions – back home. 
From its inception in 2008 through mid-2014, this “Thousand Talents” program has attracted more than 4,000 returnees. 
These trends clearly indicate that China has a real opportunity to become a major force in global pharmaceuticals research, and that there will soon come a time when breakthrough innovation occurs in China on a regular basis. 
Global pharmaceutical companies have taken notice. 
My own company has been working in research and development in China for ten years. 
Back in 2006, we opened the first integrated R&D facility in the country, and the largest among international firms. 
And we recently opened a new R&D center in Shanghai’s Zhangjiang Hi-Tech Park. 
In Shanghai, premier scientists – many having returned to China from major research centers like Harvard Medical School and MIT – will focus on diseases that are endemic to the Chinese population. 
These include lung, liver, and gastric cancers, as well as other liver diseases, such as chronic hepatitis B, liver fibrosis, and cirrhosis. 
These diseases disproportionately affect people in China. 
For example, the incidence of hepatitis B in China is nearly 30 times higher than in the US; stomach and liver cancer rates are 11-18 times higher than in the US or Europe. 
Thanks to advances in recent years, scientists can now identify epigenetic modification enzymes that regulate gene activities. 
This area of research is especially promising in the search for effective new oncological therapies. 
And by better understanding how these diseases manifest in Chinese patients, the industry is honing targeted therapies that can then be introduced in other settings worldwide. 
China could very well set the global standard for using epigenetics to gain a better understanding of the underlying causes of diseases. 
In China, Novartis scientists alone are already running 15 drug discovery projects at different stages, and this pace of development will only accelerate. 
I am inspired by China’s potential for making landmark scientific discoveries. 
As the country becomes increasingly important to global R&D, its contributions will be a boon for the fight against disease, both in China and worldwide. 

A Silk Glove for China’s Iron Fist 
NEW DELHI – For years, China has sought to encircle South Asia with a “string of pearls": a network of ports connecting its eastern coast to the Middle East that would boost its strategic clout and maritime access. 
Not surprisingly, India and others have regarded this process with serious concern. 
Now, however, China is attempting to disguise its strategy, claiming that it wants to create a twenty-first-century maritime Silk Road to improve trade and cultural exchange. 
But friendly rhetoric can scarcely allay concern in Asia and beyond that China's strategic goal is to dominate the region. 
That concern is well founded. 
Simply put, the Silk Road initiative is designed to make China the hub of a new order in Asia and the Indian Ocean region. 
Indeed, by working to establish its dominance along major trade arteries, while instigating territorial and maritime disputes with several neighbors, China is attempting to redraw Asia's geopolitical map. 
The strategic dimension of the maritime Silk Road is underscored by the fact that the People's Liberation Army has led the debate on the subject. 
The PLA National Defense University's Major General Ji Mingkui argues that the initiative can help China to craft a “new image" and “win influence," especially as the US “pivot" to Asia “loses momentum." 
Yet PLA experts remain eager to disavow the Silk Road initiative's link with the “string of pearls." 
Instead, they compare it to the fifteenth-century expeditions of Zheng He, a Chinese eunuch admiral who led a fleet of treasure ships to Africa. 
According to Central Military Commission member Sun Sijing, Zheng used the ancient Silk Road without seizing “one inch of land" or seeking “maritime hegemony" (though history attests to his use of military force – for example, executing local rulers – to control maritime chokepoints). 
In reality, little distinguishes the maritime Silk Road from the “string of pearls." 
Though China is employing ostensibly peaceful tactics to advance the initiative, its primary goal is not mutually beneficial cooperation; it is strategic supremacy. 
Indeed, the Silk Road is integral to President Xi Jinping's “China dream" ambitions, which entail restoring China's past glory and status. 
China, especially under Xi, has often used aid, investment, and other economic leverage to compel its neighbors to deepen their economic dependence on – and expand their security cooperation with – the People's Republic. 
Xi's use of a $40 billion Silk Road Fund and the new China-sponsored Asian Infrastructure Investment Bank to develop the maritime Silk Road reflects this approach. 
Already, China is constructing ports, railroads, highways, and pipelines in the region's littoral states, not only to facilitate mineral-resource imports and exports of Chinese manufactured goods, but also to advance its strategic military goals. 
For example, China concluded a multi-billion dollar deal with Pakistan to develop the port at Gwadar, owing to its strategic location at the mouth of the Strait of Hormuz, which more than offsets the port's limited commercial potential. 
Twice last autumn, Chinese attack submarines docked at Sri Lanka's newly opened, $500 million container terminal at Colombo Harbor – built and majority-owned by Chinese state companies. 
China has now embarked on a $1.4-billion project to build a sprawling complex roughly the size of Monaco on reclaimed land in Colombo – a “port city" that will become a major stop on China's nautical “road." 
Zhou Bo, an honorary fellow with the PLA Academy of Military Science, admits that China's mega-projects “will fundamentally change the political and economic landscape of the Indian Ocean," while presenting China as a “strong yet benign" power. 
This is important, because the new Asian order will be determined less by developments in East Asia, where Japan is determined to block China's rise, than by events in the Indian Ocean, where China is chipping away at India's longstanding dominance. 
India is certainly suspicious of China's behavior. 
But China is treading carefully enough that it can continue to advance its goals, without spooking its intended quarry. 
The American academic John Garver depicted it best using a Chinese fable: “A frog in a pot of lukewarm water feels quite comfortable and safe. 
He does not notice as the water temperature slowly rises until, at last, the frog dies and is thoroughly cooked." 
Seen in this light, it is not surprising that China has invited India to join the maritime Silk Road initiative. 
The aim is not only to help calm a suspicious neighbor, but also to slow the development of India's strategic ties with the US and Japan. 
China's plans for the Silk Road combine economic, diplomatic, energy, and security objectives in an effort to create an expansive network of linked facilities to boost trade, aid strategic penetration, and permit an increasingly potent and active submarine force to play an expanded role. 
In the process, China aims to fashion an Asian order based not on a balance of power with the US, but on its own hegemony. 
Only a concert of democracies can block this strategy. 

Development Finance with Chinese Characteristics? 
GENEVA – After a late flurry of additions to the founding membership of the Asian Infrastructure Investment Bank, attention now turns to setting the China-led AIIB’s rules and regulations. 
But important questions remain – most important, whether the AIIB is a potential rival or a welcome complement to existing multilateral financial institutions like the World Bank. 
Since China and 20 mostly Asian countries signed the AIIB’s initial memorandum of understanding last October, 36 other countries – including Australia, Brazil, Egypt, Finland, France, Germany, Indonesia, Iran, Israel, Italy, Norway, Russia, Saudi Arabia, South Africa, South Korea, Sweden, Switzerland, Turkey, and the United Kingdom – have joined as founding members. 
According to China’s finance ministry, the AIIB’s founding members are to complete negotiations on the Articles of Agreement before July, with operations to begin by the end of the year. 
China will serve as the standing chairman of the negotiators’ meetings, which will be co-chaired by the member country hosting the talks. 
The fourth chief negotiators’ meeting was completed in Beijing in late April, and the fifth will take place in Singapore in late May. 
The Chinese economist Jin Liqun has been selected to lead the AIIB’s Multilateral Interim Secretariat, charged with overseeing the bank’s establishment. 
While GDP will be the basic criterion for share allocation among the founding members, the finance ministry suggested in October that China does not necessarily need the 50% stake that its GDP would imply. 
Moreover, although the AIIB will be based in Beijing, the ministry has said that regional offices and senior management appointments will be subject to further consultation and negotiation. 
Like the $50 billion New Development Bank announced by the BRICS countries (Brazil, Russia, India, China, and South Africa) last summer, the AIIB has faced considerable scrutiny, with some Western leaders questioning its governance, transparency, and motives. 
Indeed, many in the West have portrayed their establishment as part of an effort to displace existing multilateral lenders. 
But the new development banks seem less interested in supplanting current institutions than in improving upon them – an objective shared by those institutions themselves. 
As Deputy Finance Minister Shi Yaobin pointed out recently, by recognizing the need to reform their governance, existing multilateral lenders have shown that there are, in fact, no “best practices” – only “better practices.” 
There is no reason improvements cannot originate elsewhere. 
In fact, given its experimental approach to development, China is well-suited – and, as some top officials have hinted, more than willing – to contribute to this process. 
If China can help find a way to balance the need for high standards and safeguards in project lending with the imperative of rapid loan dispersion, global economic governance would benefit significantly. 
In pioneering a more pragmatic approach to development finance, China’s institutional model could be the $40 billion Silk Road Fund that President Xi Jinping announced last November. 
The SRF and the AIIB will serve as the key financial instruments of China’s “One Belt, One Road” strategy, centered on the creation of two modern-day Silk Roads – the (overland) “Silk Road Economic Belt” and the “Twenty-First Century Maritime Silk Road” – stretching across Asia toward Europe. 
The initiative will aim to promote economic cooperation and integration in the Asia-Pacific region, mainly by providing financing for infrastructure like roads, railways, airports, seaports, and power plants. 
Yet the SRF has received scant attention from Western media. 
This is unfortunate, because what little is known about it suggests that it could play an important role in transforming development finance. 
According to Chinese media, the SRF will be capitalized by four state agencies. 
The State Administration of Foreign Exchange will hold a 65% stake; the China Investment Corporation (CIC, the country’s sovereign-wealth fund) and the China Export-Import Bank (China Exim) will each have a 15% stake; and the China Development Bank (CDB) will hold the remaining 5%. 
The Fund was officially registered in December 2014, and held its first Board of Directors meeting the following month. 
In a sense, the SRF can be considered China’s latest sovereign-wealth-fund initiative, and some media have even referred to it as the “second CIC.” 
But, whereas the CIC is under the managerial control of the finance ministry, the SRF’s operations appear to reflect the influence of the People’s Bank of China. 
In a recent interview, the PBOC’s governor, Zhou Xiaochuan, suggested that the SRF would concentrate more on “cooperation projects,” particularly direct equity investment, before hinting at the Fund’s “just right” financing features. 
For example, Zhou indicated that the SRF will adopt at least a 15-year time horizon for investments, rather than the 7-10-year horizon adopted by many private equity firms, to account for the slower return on infrastructure investment in developing countries. 
Moreover, the SRF could act as a catalyst for other state financial institutions to contribute to a selected project’s equity and debt financing. 
The Fund and other private and public investors – would first make joint equity investments in the project. 
China Exim and the CDB could subsequently disburse loans for debt financing, with the CIC providing further equity financing. 
When the AIIB is up and running, it, too, could support this process, by arranging debt financing alongside SRF’s initial equity investment. 
Of course, there is still much to digest in these new financing initiatives. 
But one can see the emerging contours of a South-South development-finance landscape – one with the potential to transform multilateral lending more broadly. 

China’s Soft and Sharp Power 
CAMBRIDGE – China has invested billions of dollars to increase its soft power, but it has recently suffered a backlash in democratic countries. 
A new report by the National Endowment for Democracy argues that we need to re-think soft power, because “the conceptual vocabulary that has been used since the Cold War’s end no longer seems adequate to the contemporary situation.” 
The report describes the new authoritarian influences being felt around the world as “sharp power.” 
A recent cover article in The Economist defines “sharp power” by its reliance on “subversion, bullying and pressure, which combine to promote self-censorship.” 
Whereas soft power harnesses the allure of culture and values to augment a country’s strength, sharp power helps authoritarian regimes compel behavior at home and manipulate opinion abroad. 
The term “soft power” – the ability to affect others by attraction and persuasion rather than the hard power of coercion and payment – is sometimes used to describe any exercise of power that does not involve the use of force. 
But that is a mistake. 
Power sometimes depends on whose army or economy wins, but it can also depend on whose story wins. 
A strong narrative is a source of power. 
China’s economic success has generated both hard and soft power, but within limits. 
A Chinese economic aid package under the Belt and Road Initiative may appear benign and attractive, but not if the terms turn sour, as was recently the case in a Sri Lankan port project. 
Likewise, other exercises of economic hard power undercut the soft power of China’s narrative. 
For example, China punished Norway for awarding a Nobel Peace Prize to Liu Xiaobo. 
It also threatened to restrict access to the Chinese market for an Australian publisher of a book critical of China. 
If we use the term sharp power as shorthand for information warfare, the contrast with soft power becomes plain. 
Sharp power is a type of hard power. 
It manipulates information, which is intangible, but intangibility is not the distinguishing characteristic of soft power. 
Verbal threats, for example, are both intangible and coercive. 
When I introduced the concept of soft power in 1990, I wrote that it is characterized by voluntarism and indirection, while hard power rests on threats and inducements. 
If someone aims a gun at you, demands your money, and takes your wallet, what you think and want is irrelevant. 
That is hard power. 
If he persuades you to give him your money, he has changed what you think and want. 
That is soft power. 
Truth and openness create a dividing line between soft and sharp power in public diplomacy. 
When China’s official news agency, Xinhua, broadcasts openly in other countries, it is employing soft-power techniques, and we should accept that. 
When China Radio International covertly backs 33 radio stations in 14 countries, the boundary of sharp power has been crossed, and we should expose the breach of voluntarism. 
Of course, advertising and persuasion always involve some degree of framing, which limits voluntarism, as do structural features of the social environment. 
But extreme deception in framing can be viewed as coercive; though not violent, it prevents meaningful choice. 
Techniques of public diplomacy that are widely viewed as propaganda cannot produce soft power. 
In an age of information, the scarcest resources are attention and credibility. 
That is why exchange programs that develop two-way communication and personal relations among students and young leaders are often far more effective generators of soft power than, say, official broadcasting. 
The United States has long had programs enabling visits by young foreign leaders, and now China is successfully following suit. 
That is a smart exercise of soft power. 
But when visas are manipulated or access is limited to restrain criticism and encourage self-censorship, even such exchange programs can shade into sharp power. 
As democracies respond to China’s sharp power and information warfare, they have to be careful not to overreact. 
Much of the soft power democracies wield comes from civil society, which means that openness is a crucial asset. 
China could generate more soft power if it would relax some of its tight party control over civil society. 
Similarly, manipulation of media and reliance on covert channels of communication often reduces soft power. 
Democracies should avoid the temptation to imitate these authoritarian sharp-power tools. 
Moreover, shutting down legitimate Chinese soft-power tools can be counter-productive. 
Soft power is often used for competitive, zero-sum purposes; but it can also have positive sum aspects. 
For example, if both China and the US wish to avoid conflict, exchange programs that increase American attraction to China, and vice versa, would benefit both countries. 
And on transnational issues such as climate change, where both countries can benefit from cooperation, soft power can help build the trust and create the networks that make such cooperation possible. 
While it would be a mistake to prohibit Chinese soft-power efforts just because they sometimes shade into sharp power, it is also important to monitor the dividing line carefully. 
For example, the Hanban, the government agency that manages the 500 Confucius Institutes and 1,000 Confucius classrooms that China supports in universities and schools around the world to teach Chinese language and culture, must resist the temptation to set restrictions that limit academic freedom. 
Crossing that line has led to the disbanding of some Confucius Institutes. 
As such cases show, the best defense against China’s use of soft-power programs as sharp-power tools is open exposure of such efforts. 
And this is where democracies have an advantage. 

The Sino-Korean Trade War Must End 
SEOUL – South Korea has decided to deploy a US missile-defense system, and China is furious. 
Chinese leaders worry that the Terminal High Altitude Area Defense (THAAD) system will undermine its security and disrupt the regional strategic balance, by monitoring flights and missile launches in Chinese territory. 
But, as long as North Korea poses such an acute threat on the Korean Peninsula, China’s opposition to it is pointless – and highly destructive. 
As the United States and South Korea rush to deploy THAAD before the South’s snap presidential election on May 9, China is ramping up economic sanctions, in the hope of compelling the next president to reconsider. 
Already, South Korea’s tourism, consumer goods, and entertainment industries have been hit hard. 
Chinese travel agencies have suspended the sale of group tours to South Korea. 
And China has temporarily closed the 55 discount stores owned by the Lotte Group – South Korea’s fifth-largest conglomerate and the supplier of the land for the THAAD system – for supposed safety violations. 
Chinese media have issued threats that sanctions could be extended to other South Korean companies, like Samsung and Hyundai. 
China is eager to take advantage of its position as South Korea’s largest trading partner, accounting for nearly one-quarter of its external trade, and main source of foreign tourism. 
(Chinese tourists accounted for half the total number of foreign visitors to South Korea last year – more than eight million people.) 
But it is hardly a one-sided relationship. 
South Korea is China’s fourth-largest trading partner, providing key intermediate inputs on which many Chinese firms rely. 
Indeed, intermediate and capital goods comprised more than 70% of South Korea’s exports to China last year, including key inputs such as semiconductors (20%) and display panels (11%). 
South Korea is also the number one source of foreign tourists to China. 
Given these dynamics, if the dispute over the THAAD system escalates into a full-fledged trade war, both China and South Korea will suffer. 
As we have seen in the recent past, protracted tensions – for example, the territorial disputes between China and Japan over the Senkaku/Diaoyu Islands in 2012 – can severely damage economic and diplomatic relations. 
Already, South Korea is considering bringing the Chinese sanctions to the World Trade Organization (WTO) for adjudication, and the authorities are reviewing whether China has violated relevant clauses of the two countries’ bilateral free-trade agreement. 
China and South Korea should protect the diplomatic relationship that they have maintained since 1992. 
But that requires China to recognize that South Korea’s next president is unlikely to cancel the THAAD deployment, given the threat North Korea poses. 
If China continues to apply pressure for a concession on THAAD, the only result will be an increase in anti-Chinese sentiment in South Korea. 
The good news is that the Chinese authorities seem to recognize these risks, the clearest sign being their apparent containment of anti-South Korea protests. 
China’s leaders know that realizing their global leadership ambitions requires them to adhere to global norms and accept greater responsibility. 
In this context, South Korea’s move to involve the WTO – and the risk to China’s international reputation that a formal dispute would imply – may have focused Chinese leaders’ minds concerning the risks of escalation. 
This is not to say that the THAAD system’s deployment is inevitable. 
If China devoted its energy to reining in its North Korean client, the threat confronting South Korea – and thus the South’s need for an advanced missile shield – might be mitigated. 
And yet some in China equate South Korea’s THAAD deployment with North Korea’s weapons programs. 
A recent article in the Global Times, a nationalistic Chinese state paper, asserted that, if South Korea installs the THAAD system, it should face Chinese sanctions equivalent to those that are already choking North Korea. 
This view fails to account for differences in intent. 
The North Korean regime, led by Kim Jong-un, is engaged in a remorseless quest to develop nuclear weapons and intercontinental missiles capable of delivering them. 
South Korea’s leaders have agreed to deploy the THAAD system as a defensive maneuver. 
Instead of imposing sanctions on South Korea, China should increase economic pressure on North Korea, say, by cutting off oil supplies. 
But economic sanctions alone aren’t enough: the Kim regime has so far proved largely impervious to them. 
Given this, China would also need to engage with the US in sustained diplomatic efforts to reach a consensus on how to stabilize the Korean Peninsula and eliminate the risk of a military conflict. 
Locked between China and Japan, the Korean Peninsula is, to use an old Korean saying, “a shrimp among whales,” and it has been subjected to untold horrors as a result. 
The Korean War turned it into a proxy battleground for major powers, causing it to lose two million inhabitants in just three years. 
For nearly 70 years since then, the peninsula has been divided, and now it may be the world’s most dangerous flashpoint. 
Another major military conflict – bringing millions more deaths and a surge in refugees – must be avoided. 
Warren Buffet famously said, “Only when the tide goes out do you discover who’s been swimming naked.” 
If world powers continue to delay tackling the North Korea threat, they will soon be exposed. 
US President Donald Trump and Chinese President Xi Jinping, who will meet next month, must work together to reduce tension on the Korean Peninsula, before they are caught with their pants down. 

China’s Creditor Imperialism 
BERLIN – This month, Sri Lanka, unable to pay the onerous debt to China it has accumulated, formally handed over its strategically located Hambantota port to the Asian giant. 
It was a major acquisition for China’s Belt and Road Initiative (BRI) – which President Xi Jinping calls the “project of the century” – and proof of just how effective China’s debt-trap diplomacy can be. 
Unlike International Monetary Fund and World Bank lending, Chinese loans are collateralized by strategically important natural assets with high long-term value (even if they lack short-term commercial viability). 
Hambantota, for example, straddles Indian Ocean trade routes linking Europe, Africa, and the Middle East to Asia. 
In exchange for financing and building the infrastructure that poorer countries need, China demands favorable access to their natural assets, from mineral resources to ports. 
Moreover, as Sri Lanka’s experience starkly illustrates, Chinese financing can shackle its “partner” countries. 
Rather than offering grants or concessionary loans, China provides huge project-related loans at market-based rates, without transparency, much less environmental- or social-impact assessments. 
As US Secretary of State Rex Tillerson put it recently, with the BRI, China is aiming to define “its own rules and norms.” 
To strengthen its position further, China has encouraged its companies to bid for outright purchase of strategic ports, where possible. 
The Mediterranean port of Piraeus, which a Chinese firm acquired for $436 million from cash-strapped Greece last year, will serve as the BRI’s “dragon head” in Europe. 
By wielding its financial clout in this manner, China seeks to kill two birds with one stone. 
First, it wants to address overcapacity at home by boosting exports. 
And, second, it hopes to advance its strategic interests, including expanding its diplomatic influence, securing natural resources, promoting the international use of its currency, and gaining a relative advantage over other powers. 
China’s predatory approach – and its gloating over securing Hambantota – is ironic, to say the least. 
In its relationships with smaller countries like Sri Lanka, China is replicating the practices used against it in the European-colonial period, which began with the 1839-1860 Opium Wars and ended with the 1949 communist takeover – a period that China bitterly refers to as its “century of humiliation.” 
China portrayed the 1997 restoration of its sovereignty over Hong Kong, following more than a century of British administration, as righting a historic injustice. 
Yet, as Hambantota shows, China is now establishing its own Hong Kong-style neocolonial arrangements. 
Apparently Xi’s promise of the “great rejuvenation of the Chinese nation” is inextricable from the erosion of smaller states’ sovereignty. 
Just as European imperial powers employed gunboat diplomacy to open new markets and colonial outposts, China uses sovereign debt to bend other states to its will, without having to fire a single shot. 
Like the opium the British exported to China, the easy loans China offers are addictive. 
And, because China chooses its projects according to their long-term strategic value, they may yield short-term returns that are insufficient for countries to repay their debts. 
This gives China added leverage, which it can use, say, to force borrowers to swap debt for equity, thereby expanding China’s global footprint by trapping a growing number of countries in debt servitude. 
Even the terms of the 99-year Hambantota port lease echo those used to force China to lease its own ports to Western colonial powers. 
Britain leased the New Territories from China for 99 years in 1898, causing Hong Kong’s landmass to expand by 90%. 
Yet the 99-year term was fixed merely to help China’s ethnic-Manchu Qing Dynasty save face; the reality was that all acquisitions were believed to be permanent. 
Now, China is applying the imperial 99-year lease concept in distant lands. 
China’s lease agreement over Hambantota, concluded this summer, included a promise that China would shave $1.1 billion off Sri Lanka’s debt. 
In 2015, a Chinese firm took out a 99-year lease on Australia’s deep-water port of Darwin – home to more than 1,000 US Marines – for $388 million. 
Similarly, after lending billions of dollars to heavily indebted Djibouti, China established its first overseas military base this year in that tiny but strategic state, just a few miles from a US naval base – the only permanent American military facility in Africa. 
Trapped in a debt crisis, Djibouti had no choice but to lease land to China for $20 million per year. 
China has also used its leverage over Turkmenistan to secure natural gas by pipeline largely on Chinese terms. 
Several other countries, from Argentina to Namibia to Laos, have been ensnared in a Chinese debt trap, forcing them to confront agonizing choices in order to stave off default. 
Kenya’s crushing debt to China now threatens to turn its busy port of Mombasa – the gateway to East Africa – into another Hambantota. 
These experiences should serve as a warning that the BRI is essentially an imperial project that aims to bring to fruition the mythical Middle Kingdom. 
States caught in debt bondage to China risk losing both their most valuable natural assets and their very sovereignty. 
The new imperial giant’s velvet glove cloaks an iron fist – one with the strength to squeeze the vitality out of smaller countries. 

A Growth Agenda for China 
MILAN/BEIJING – At a time when the United States is poised to turn inward, China’s economic performance is more important globally than ever. 
Whether China can achieve sustainable growth patterns in the coming years will depend upon a number of key factors. 
One of the leading external factors shaping China’s prospects will be its relationship with the US under President Donald Trump. 
Ideally, the two governments would work together to negotiate mutually beneficial trade and investment agreements, with sensitivity to the challenges faced by both sides. 
But the opposite outcome – the escalation of mutually damaging trade and investment disputes – is also a distinct possibility. 
Political uncertainty is also on the rise in Europe. 
While its impact on China would not be as direct as Trump’s actions, it is a source of significant medium-term risks for the entire global economy. 
Within Asia, a key factor shaping China’s economic prospects is progress on Chinese-led regional trade and investment agreements. 
In particular, investments in regional development via the “one belt, one road” initiative and the Asian Infrastructure Investment Bank may produce expanded trade and growth in Asia (and beyond), though the effects will not be immediate. 
The fourth major external factor relates to exchange rates. 
As it stands, the renminbi is facing significant depreciation pressure, caused largely by a surge in capital outflows. 
Meanwhile, the US dollar is strengthening in anticipation of Trump’s fiscal expansion. 
China’s performance will depend partly on how these dynamics play out. 
But, beyond the external uncertainties and headwinds, China faces a slew of internal challenges, which may well present even greater risks to its economy. 
Those challenges – including weaknesses in the real economy and the private sector, overcapacity, excessive leverage, and high housing prices – are rooted largely in the financial sector’s mounting problems and the failure of China’s leaders to address them. 
Consider efforts to promote investment in the real sector. 
The People’s Bank of China has been providing spurts of liquidity to the market, in the hope of relieving financial constraints on productive private businesses and industries. 
But the monetary-policy transmission mechanism is broken, and liquidity is not making it to the real economy. 
Instead, China’s banks continue to allocate credit largely to state-owned enterprises (SOEs) and local-government financing vehicles (LGFVs). 
Credit to the state sector ends up flowing not into productivity-enhancing investments, but into the housing market (fueling price bubbles) and industries with excess capacity (fueling even more overcapacity and enabling companies to avoid much-needed restructuring). 
While LGFVs use the low-cost loans to build infrastructure, the social returns of those investments are often low; and, after decades of rapid infrastructure construction, the marginal returns are declining. 
Meanwhile, local governments’ leverage continues to rise. 
SOEs may also use the unregulated shadow banking system to re-lend at higher interest rates the cheap money they receive to private businesses, which cannot borrow reliably from the formal banking system. 
Whereas the interest rate of a one-year loan in the formal banking system is around 5%, the average one-year interest rate in the Wenzhou shadow banking market (to cite one example) was around 16% in November. 
This state of affairs is jeopardizing the entire economy. 
Banks are bailing out bankrupt companies, while private firms – especially small and medium-size enterprises – continue to get squeezed. 
Given that the private sector is generally significantly more productive than SOEs or LGFVs, generating much higher returns on investment, the absence of hard budget constraints on troubled SOEs clearly must be addressed. 
Of course, China’s leaders have known this for a while, and have created a reform agenda that seeks to reform the SOEs, while unleashing the private sector’s potential. 
But it is still a work in progress. 
Convincing banks to lend to private enterprises, rather than to SOEs and LGFVs, will require substantial structural shifts in China’s economy. 
For financial institutions, SOEs and LGFVs represent much lower risk than private businesses, regardless of how leveraged or uncompetitive they are. 
After all, because SOEs and LGFVs are implicitly guaranteed by central or local governments, they are highly unlikely to default. 
Banks know (or believe) that if an SOE or LGFV faces bankruptcy, the government will step in with favorable policies and subsidies, tax cuts, and low-cost financing instruments. 
In some cases, banks have no choice but to lend to failing SOEs; their provincial government may demand that they provide large low-cost loans to a struggling and unproductive firm, particularly if it contributes significantly to local fiscal revenue and employment. 
Given that private firms enjoy no such official protections and thus play on a field that is nowhere near level, they must be substantially more productive and competitive than the SOEs. 
And even then, if the SOEs with which they are competing struggle too much, they are vulnerable to policy shifts that increase their disadvantage further. 
Simply put, the Chinese financial sector’s bias in favor of SOEs is contributing to some of the biggest risks faced by China’s economy. 
Investors’ recognition of these risks may be one driver of capital outflows, meaning that distortionary incentives in the financial system are also contributing to the downward pressure on the exchange rate. 
China has made great strides in recent years in implementing reforms that boost domestic private consumption. 
And, despite the barriers it faces, the country’s private sector has become highly dynamic and innovative. 
Earlier reforms are now bearing fruit, and this has helped to sustain economic growth. 
But achieving faster, more resilient growth will require China to eliminate the biases, protections, and implicit guarantees favoring SOEs in the marketplace and in the financial system. 
Only then can monetary policy achieve its goal: supporting productive investment, innovation, the scaling of private-sector businesses, and real economic growth. 

Three Threats to China’s Economy 
SHANGHAI – After a decades-long “growth miracle,” China’s economy has lately become a source of mounting concern. 
Some factors – from high corporate debt to overcapacity in the state sector – have received a lot of attention. 
But three less-discussed trends point to still other threats to the country’s economic growth. 
First, despite the decline in GDP growth, total social financing – and especially bank credit – has increased. 
This relates directly to China’s debt problem: the continual rolling over of large liabilities creates a constant demand for liquidity, even if actual investment does not increase. 
Such “credit expansion” – which is really just rolled-over debt – is not sustainable. 
Clearly, the debt issue must be addressed. 
And the Chinese government has been working to do so, implementing policies aimed at supporting debt restructuring. 
For example, the central government has helped local authorities to replace CN¥3.2 trillion ($471.9 billion) of risky debt in 2015, and an expected ¥5 trillion this year. 
Its corporate debt-for-equity swap plan could augment the impact of these efforts. 
But these strategies cannot fully address China’s debt problem, not least because the largest share of debt in China is held by state-owned enterprises. 
One important solution that has not yet been proposed would involve a far-reaching restructuring of large SOEs. 
The sale or transfer of state-owned assets would cover liabilities, breaking the state sector out of its debt-ridden status quo. 
This approach would also create an opportunity to advance privatization, which could bolster innovation and competitiveness. 
The second risky trend is the rapid decline in fixed-asset investment, from 20-25% to around 8% today. 
The decline has been particularly marked in the private sector. 
In 2002-2012, growth in private-sector investment averaged around 20%; by the end of last year, it amounted to just 10%, and from January to August of this year, it reached just 2.1%, including a stunning 1.2% contraction in July. 
Investment in real estate has also slowed, having increased by just over 1% last year, owing to a number of policy constraints. 
Given that private investment accounts for at least 60% of total investment in manufacturing, this will undoubtedly have macroeconomic consequences. 
And, though double-digit growth in state-sector investment will temper the overall effect, this trend also reflects problems with state-sector dominance. 
Private companies struggle to gain credit from state-owned commercial banks and are at a disadvantage in the direct financing market. 
Moreover, private firms are blocked from entering SOE-dominated, capital-intensive, and high-end service industries. 
In most of the modern service sectors, the share of non-state actors remains small, limiting private investment. 
The third trend that should be worrying China is that unemployment remains relatively steady. 
Because the unemployment rate is not excessively high, this might seem like a good thing. 
But it reflects some negative trends – starting with long-term weakness in productivity growth. 
China’s productivity growth rate, which averaged 8% over the last 20 years, may have dropped now to less than 6%. 
And the country is not exactly positioned for a surge in productivity. 
According to the National Bureau of Statistics of China, the services sector has far outpaced manufacturing in employment growth since 2010, a reversal of the earlier trend. 
Given the need for China to move away from manufacturing, this is not altogether bad news. 
But most of the service-sector jobs being created are in low-end, low-productivity activities. 
Worse, these are often informal jobs characterized by high turnover, which impedes long-run human-capital accumulation. 
Stable employment levels in China also reflect – yet again – shortcomings in the state sector. 
Few workers have been released from SOEs, despite the overall growth slowdown. 
In other words, there is considerable hidden unemployment in China’s state sector, which is already plagued by other kinds of overcapacity. 
China has no easy option for addressing this problem. 
If the government continues to prop up SOEs, especially “zombie” firms, the concentration of a large number of workers in low-productivity, stagnant SOEs will continue to undermine productivity growth. 
But if China pursues state-sector restructuring, unemployment will rise. 
And, once unemployed, state-sector workers tend to take much longer to find a new job than their private-sector counterparts do. 
Yet state-sector restructuring seems unavoidable. 
Indeed, it would help to address a number of the most fundamental challenges facing China, from debt and overcapacity to lack of competitiveness. 
To be sure, some claim that SOEs should be allowed to continue their operations, citing their huge profits. 
But those profits are the result of their monopoly status and massive state investment, which brings lower returns than private-sector investment. That is why progress on SOE reform is so urgent, regardless of the short- and even medium-term challenges that it might create. 
Two decades ago, then-Premier Zhu Rongji began to pursue such reform, with the goal of bolstering the efficiency of SOEs and creating space for private-sector investment. 
But the reforms were incomplete, and some have even been rolled back, with SOEs regaining market share in some cases. 
In 2013, the Third Plenum of the 18th Central Committee of the Communist Party of China took up the mantle, with a plan to reform SOEs through mixed ownership. 
But here, too, progress has been inadequate. 
And, in fact, without a strategic reorganization of SOEs, mixed ownership will become a feature of only non-essential sectors. 
If China is to succeed in its economic restructuring, industrial upgrading, and expansion of high-productivity services, the role of SOEs needs to be once again limited to a few relevant sectors. 
Only then can China recapture its dynamism and keep its economic growth on track. 

Global Growth – Still Made in China 
NEW HAVEN – Despite all the hand-wringing over the vaunted China slowdown, the Chinese economy remains the single largest contributor to world GDP growth. 
For a global economy limping along at stall speed – and most likely unable to withstand a significant shock without toppling into renewed recession – that contribution is all the more important. 
A few numbers bear this out. 
If Chinese GDP growth reaches 6.7% in 2016 – in line with the government’s official target and only slightly above the International Monetary Fund’s latest prediction (6.6%) – China would account for 1.2 percentage points of world GDP growth. 
With the IMF currently expecting only 3.1% global growth this year, China would contribute nearly 39% of the total. 
That share dwarfs the contribution of other major economies. 
For example, while the United States is widely praised for a solid recovery, its GDP is expected to grow by just 2.2% in 2016 – enough to contribute just 0.3 percentage points to overall world GDP growth, or only about one-fourth of the contribution made by China. 
A sclerotic European economy is expected to add a mere 0.2 percentage points to world growth, and Japan not even 0.1 percentage point. 
China’s contribution to global growth is, in fact, 50% larger than the combined 0.8-percentage-point contribution likely to be made by all of the so-called advanced economies. 
Moreover, no developing economy comes close to China’s contribution to global growth. 
India’s GDP is expected to grow by 7.4% this year, or 0.8 percentage points faster than China. 
But the Chinese economy accounts for fully 18% of world output (measured on a purchasing-power-parity basis) – more than double India’s 7.6% share. 
That means India’s contribution to global GDP growth is likely to be just 0.6 percentage points this year – only half the 1.2-percentage-point boost expected from China. 
More broadly, China is expected to account for fully 73% of total growth of the so-called BRICS grouping of large developing economies. 
The gains in India (7.4%) and South Africa (0.1%) are offset by ongoing recessions in Russia (-1.2%) and Brazil (-3.3%). 
Excluding China, BRICS GDP growth is expected to be an anemic 3.2% in 2016. 
So, no matter how you slice it, China remains the world’s major growth engine. 
Yes, the Chinese economy has slowed significantly from the 10% average annual growth recorded during the 1980-2011 period. 
But even after transitioning from the “old normal” to what the Chinese leadership has dubbed the “new normal,” global economic growth remains heavily dependent on China. 
There are three key implications of a persistent China-centric global growth dynamic. 
First, and most obvious, continued deceleration of Chinese growth would have a much greater impact on an otherwise weak global economy than would be the case if the world were growing at something closer to its longer-term trend of 3.6%. 
Excluding China, world GDP growth would be about 1.9% in 2016 – well below the 2.5% threshold commonly associated with global recessions. 
The second implication, related to the first, is that the widely feared economic “hard landing” for China would have a devastating global impact. 
Every one-percentage-point decline in Chinese GDP growth knocks close to 0.2 percentage points directly off world GDP; including the spillover effects of foreign trade, the total global growth impact would be around 0.3 percentage points. 
Defining a Chinese hard landing as a halving of the current 6.7% growth rate, the combined direct and indirect effects of such an outcome would consequently knock about one percentage point off overall global growth. 
In such a scenario, there is no way the world could avoid another full-blown recession. 
Finally (and more likely in my view), there are the global impacts of a successful rebalancing of the Chinese economy. 
The world stands to benefit greatly if the components of China’s GDP continue to shift from manufacturing-led exports and investment to services and household consumption. 
Under those circumstances, Chinese domestic demand has the potential to become an increasingly important source of export-led growth for China’s major trading partners – provided, of course, that other countries are granted free and open access to rapidly expanding Chinese markets. 
A successful Chinese rebalancing scenario has the potential to jump-start global demand with a new and important source of aggregate demand – a powerful antidote to an otherwise sluggish world. 
That possibility should not be ignored, as political pressures bear down on the global trade debate. 
All in all, despite all the focus on the US, Europe, or Japan, China continues to hold the trump card in today’s weakened global economy. 
While a Chinese hard landing would be disastrous, a successful rebalancing would be an unqualified boon. 
That could well make the prognosis for China the decisive factor for the global economic outlook. 
While the latest monthly indicators show China’s economy stabilizing at around the 6.7% growth rate recorded in the first half of 2016, there can be no mistaking the headwinds looming in the second half of the year. 
In particular, the possibility of a further downshift in private-sector fixed-asset investment could exacerbate ongoing pressures associated with deleveraging, persistently weak external demand, and a faltering property cycle. 
But, unlike the major economies of the advanced world, where policy space is severely constrained, Chinese authorities have ample scope for accommodative moves that could shore up economic activity. 
And, unlike the major economies of the developed world, which constantly struggle with a tradeoff between short-term cyclical pressures and longer-term structural reforms, China is perfectly capable of addressing both sets of challenges simultaneously. 
To the extent that the Chinese leadership is able to maintain such a multi-dimensional policy and reform focus, a weak and still vulnerable global economy can only benefit. 
The world needs a successful China more than ever. 

The Contradictions of China’s Communist Capitalism 
BERKELEY – The recent dizzying plunge in the Shanghai and Shenzhen stock exchanges has posed a unique test for China’s Communist rulers. 
So long as the markets were rising, the paradox of vigorous capitalist development overseen by the world’s largest and strongest Communist party confounded only academics and old-school Marxists. 
As the Chinese Communist Party elite and their relatives, foreign financial institutions, and some Chinese small investors (enabled by margin lending) made money on stocks, no one bothered to comprehend the mutant creature they were milking. 
But now, as the realization sinks in that Chinese stock prices will not keep rising indefinitely, the CCP is taking desperate, if clumsy, measures to control the correction. 
All new initial public offerings have been halted, and much trading has been curtailed; the central bank has been asked to help the China Securities Finance Corporation induce investors to buy shares and thus stabilize the market. 
Indeed, even the country’s sovereign wealth fund has gotten into the act. 
But, unlike in other capitalist economies, money is not the only tool at the authorities’ disposal. 
If your brokers in China advise you to sell shares, they must be careful not to appear to be rumormongers, subject to official punishment. 
And there are reports that sales of large holdings may trigger investigations by the authorities. 
Causing public disorder or financial instability can be a serious offense in China, where conspiracy theories about foreigners’ efforts to undermine the economy abound. 
What Chinese officials desire is a capitalist stock market without the possibility of large losses that can shake confidence in the CCP’s credibility and control. 
But that is a market that no one has yet invented. 
The spectacle of a communist regime trying to jack up a casino-like capitalist market is just one of the many contradictions that have been accumulating in almost every corner of China’s economy and politics. 
And now, their weight is perhaps becoming too heavy for the Party hierarchy to bear. 
Indeed, the composition of the CCP is itself a contradiction. 
The revolutionary party of peasants and workers is now dominated by businessmen, college students, and professionals. 
One-third of the people listed in the Hurun Report, the Shanghai-based monitor of China’s wealthiest people, are Party members. 
The average wealth of the richest 70 members of the National People’s Congress, China’s parliament, far exceeds $1 billion. 
(The richest 70 members of India’s parliament or even the US Congress, both now controlled by right-wing political parties, are substantially less wealthy.) 
Of course, President Xi Jinping’s recent drive against corruption high and low has made many Communist Party plutocrats jittery. 
But questions abound as to whether the corruption charges being brought against the so-called “tigers” are a fig leaf for an old-fashioned purge of Xi’s rivals in the Party and the military. 
Ordinary Chinese generally support the anti-corruption drive; it is they who usually initiate protests and point fingers at dishonest officials. 
But, if such protests attract too much attention, it is more likely that they will be quashed and their leaders repressed than that the corruption will be stopped. 
In 2008, for example, following the Sichuan earthquake, thousands of children died when their shoddily built schools collapsed. 
For a while, tales of corruption in the schools’ construction dominated even the official news. 
In the end, however, it was the protesting parents and teachers of the dead children who were detained and harassed by the state. 
What the CCP refuses to recognize is that corruption cannot be rooted out as long as the Party maintains its monopoly on political power; with no organized opposition or functioning civil-society institutions, officials will continue to use their positions of public authority as a vehicle to generate personal wealth. 
The Third Plenum of the 18th Party Congress gave primacy to the principle of market competition; but, as a senior Chinese banker commented in a related context some years back: “It’s quite hard to compete when you’re playing against the referee.” 
That observation extends to the rule of law and constitutionalism. 
Under Xi, the CCP has repeatedly insisted that the rule of law is a “core socialist value” and has pledged to promote the authority of the constitution. 
Yet the rule of law in the Party’s eyes is a law that it dictates, interprets, and enforces. 
Chinese citizens’ references to the constitution (especially article 35, which guarantees freedom of speech, press, assembly, and association) and constitutionalism in general are routinely censored, and lawyers who cite the constitution in court are frequently detained. 
Mao famously speculated on the nature of contradictions in a 1937 essay: “The law of contradiction in things, that is, the law of the unity of opposites, is the fundamental law of nature and of society.” 
One wonders, though, if even he could have grasped, much less managed, the contradictions of communist capitalism. 

A False Alarm About China 
MANILA – To hear some pundits tell it, China’s economic miracle – one that lifted 300 million people out of poverty and shifted the world’s geopolitical center of gravity – is coming to a tumultuous end. 
The volatile stock market and the renminbi’s “surprise” depreciation are signs of imminent economic collapse, according to this view, as risky investments and high levels of government debt put the brakes on decades of turbo-charged output growth. 
Fortunately, there is little reason to believe such dire predictions, or that the market gyrations that have been driving recent headlines represent anything more than short-term volatility. 
After all, equity-price movements are a poor predictor of the real economy’s performance. 
Indeed, when Chinese GDP was growing strongly during 2010-2013, stock prices were falling. 
More recently, when stock prices began soaring during the first half of 2015, the economy’s slowdown had already begun. 
As the American economist Paul Samuelson famously quipped, “The stock market has called nine of the last five recessions.” 
China’s growth has slowed largely as a result of changes in its fundamentals: less favorable demographics, a shift in emphasis from exports and public investment to the service sector and domestic consumption, and lower demand from advanced economies. 
But China’s past success also contributed to this slowdown, in the form of higher wages, which narrow the scope for rapid growth based on low-cost labor and technological catch-up. 
Additional signs of weakness, including soft data on exports and investment, emerged in the first half of 2015. 
But other important indicators – like retail sales and housing – show upticks. 
And, perhaps most important, the country’s labor market remains healthy, creating some 7.2 million new urban jobs – many of them in services – in the first half of 2015. 
Meanwhile, wage growth remains strong and uninterrupted. 
China’s growth rate may be lower than 7% this year, but I do not believe that it will end up very far from the government’s target of “about 7%.” 
The volatility in equity prices in recent months has more to do with the peculiarities of China’s stock markets than with the country’s underlying economic fundamentals. 
In more developed economies, such as the United States and Europe, many institutional investors – who tend to be focused on long-term fundamentals – help stabilize stock markets. 
By contrast, the Chinese markets are dominated by retail investors, who are more likely to pursue short-term gains and engage in momentum trading, thereby exacerbating volatility and creating a greater disconnect between equity prices and real economic growth. 
Moreover, the firms listed on China’s stock exchanges are not representative of the country’s companies. 
Majority state-owned firms account for two-thirds of the market value of the country’s exchanges, for example, though they are responsible for no more than one-third of Chinese GDP and an even smaller share of employment. 
The rise and fall of the Chinese stock market should also be understood in the context of Chinese households’ limited options for storing savings. 
The run-up in prices took place at a time when deposit interest rates were officially capped. 
When the alternatives are few and provide only low returns, the equity market looks more attractive, especially if – as was the case – the country’s major newspapers are running bullish editorials about stock prices. 
More recent developments may have contributed to the downward pressure on prices, including discussion about abolishing interest-rate ceilings on deposits (the cap on term deposits of one year or more was removed on August 25). 
The greater ease with which wealthy households can move savings out of the country, along with an anticipated increase in interest rates in the United States, was likely another contributing factor. 
Furthermore, as Harvard’s Jeffrey Frankel has pointed out, regulators increased margin requirements several times this year, making it harder to buy stocks with borrowed money. 
And, as with all stock markets, shifts in sentiment that are not connected to fundamentals can also drive volatility. 
Whether China’s economy can continue to grow rapidly will depend far more on its ability to reform than on how its stock markets perform. 
If China is to thrive in the long term, raising its aggregate productivity is key. 
This means that it will need to overhaul its state-owned firms and the financial sector so that resources can flow to the most productive investment projects. 
Lowering the tax burden on firms – including the payroll tax – would also be useful. 
Reforms that increase the flexibility of the labor market are also in order. 
While China used to have a relatively flexible labor market in the manufacturing sector, firms’ reallocation of workers based on market needs has become more difficult in recent years. 
Greater flexibility might not stimulate short-term growth, but it would improve resilience to future negative shocks, whether they originate at home or abroad. 
As long as China continues to pursue pro-market reforms, it will remain the largest single-country contributor to global GDP growth over the medium term – unperturbed by stock-market volatility. 
If reforms stall, falling stock prices are likely to be the least of China’s worries. 

China’s Painful Structural Transformation 
SHANGHAI – For more than a year, headlines worldwide have been pointing to a Chinese economic slowdown. 
But a closer look at regional dynamics within China tells a different story – one that is less about deceleration than changing gears. 
According to China’s National Bureau of Statistics, the resource-rich province of Shanxi has suffered an economic slowdown, but the southwestern provinces of Chongqing and Guizhou have experienced vibrant growth. 
Hebei and three other northeastern provinces are feeling the effects of recession, but the heavy-industry economies of Tianjin, Shandong, and Jiangsu are booming. 
After the 2008 financial crisis, when slower growth became the “new normal” for many countries, China began to accelerate its economic rebalancing by shifting the drivers of growth from manufacturing and exports toward goods and services for domestic consumption. 
This transition has had far-reaching implications for the future dynamics of China’s economy. 
With its previous export strategy, the government’s main priority was to integrate domestic manufacturing operations into global production chains. 
Now, however, its aim is an economy that meets domestic consumers’ diverse demands, and it is the industries closely connected to those demands that are quickly expanding. 
Previously, the economic activities that are now flourishing weren’t categorized as manufacturing industries at all, but as “services.” 
But services do not exist in a vacuum. 
All businesses need manufactured products, transportation, information and communications technology (ICT), logistics, real estate, finance, insurance, and more. 
Thus, new demand for new services has virtuous-cycle effects in terms of capital investment in infrastructure and equipment. 
Contrary to the conventional wisdom, the growth of services in China to meet domestic demand does not mean the end of manufacturing and capital investment, much less of economic growth. 
Service sectors stand to make up for much, if not all, of the growth lost to lower output in export-oriented manufacturing branches. 
China’s transportation, ICT, finance, insurance, real estate, education, and health-care sectors have long had inappropriately low labor productivity, which means they have significant room to grow faster. 
According to a paper by the economists Jong-Wha Lee and Warwick J. McKibbin, service-sector productivity growth in Asia “benefits all sectors eventually, and contributes to the sustained and balanced growth of Asian economies.” 
Examining economic development trends in South Korea, the authors find that the average value added per worker in transportation, real estate, and ICT is now higher than the average in manufacturing, and they point to similar dynamics in the United States, Japan, and China. 
This finding suggests that rapid development in China’s service economy could reverse the externally triggered dampening of growth since 2008. 
But, as the Japanese and South Korean transitions from export to domestic demand-driven growth demonstrate, structural transformation is a slow and painful process. 
China is in the midst of that process, and it must be careful not to undermine existing sources of growth lest it fall into a structural trap where the cost of transition itself derails new gains. 
It is not a good sign that the high costs in many Chinese provinces have been weighing down overall growth. 
This points to fundamental challenges ahead, notwithstanding the significant economic potential of Chinese consumers. 
For starters, economic development based on diversified domestic demand is more complicated than export-driven development, because these new sectors rely more heavily on sophisticated financial services, free and equitable market access, better educated workers, and higher investment in research and development. 
As a result, the new businesses emerging from the shift to a new growth model are demanding far more from China’s current economic-governance system than it can bear. 
Further structural reforms would go a long way toward fixing this problem, but they will also require China’s leaders to make tough political decisions that won’t please everyone. 
Another fundamental challenge is China’s slow rate of urbanization, which is still lagging, even after 25 years of export-led growth. 
Each of a thriving service economy’s major components – ICT, finance, insurance, transportation, and real estate – needs the others to prosper, and cities are what bring them all together – a phenomenon of network externalities. 
Unfortunately, China’s enduring system of dividing urban and rural regions, together with poor urban planning, has led to fragmented and scattered metropolitan communities without diversified networks that would otherwise have helped boost productivity. 
China’s cities will be a key ingredient of its long-term economic success. 
Urbanization should start accelerating today, and over the next 10-15 years, with the expansion of metropolitan areas geared toward the needs of services-led economic growth. 
If China can rise to that challenge, it will be well positioned to clear the remaining hurdles in its path toward high-income status. 

China Stuck in the Net 
There is nothing "virtual" about the problems China's communist rulers confront with the internet. 
Although critical to China's goals of modernization and globalization, the internet threatens the political status quo. 
So no surprise at the government's often schizophrenic response to it: while broadly encouraging the internet's development, some party factions seek to suppress it by arresting IT entrepreneurs and web dissidents. 
Nonetheless, China's more than 35 million internet users - a number that doubles every nine months - have access to a wide variety of previously censored information, including sites that are officially banned. 
Staggering changes have already occurred. 
When, a little over a year ago, 42 elementary school children and teachers in impoverished Jiangxi (south central China) were killed in an explosion, China's domestic newspapers and internet sites reported the explosion as the result of an appalling child-labor scheme: nine-year-old children had been forced to install detonators in firecrackers so that teachers could sell fireworks to supplement their salaries. 
Two days later, Premier Zhu Rongji denied the reports. 
He claimed that the explosion was the result of a "deranged man." 
Typical of China, state-owned media that carried the original story instantly retracted their reports to parrot the party line. 
Atypical of China, however, the true story refused to die. 
In internet forums and chat rooms, Chinese citizens continued to express their outrage about what they saw as a government cover up. 
Evidence that party leaders were lying, including interviews with witnesses, was posted on the net. 
Some websites deleted the information, others refused. 
Links to obscure websites with uncensored news about the catastrophe could even be found on the government newspaper's official website, People's Daily. 
A few days later, the breaking news from China was astonishing. "Responding to reports on the internet and elsewhere, Premier Zhu Rongji apologized for an explosion that gutted an elementary school in rural China," read a report. 
Zhu said that the government bore "unshirkable responsibility" for the imbroglio and ordered an investigation. 
The turnaround was unprecedented. 
Premier Zhu apologized primarily in response to the public outcry on the internet. 
Though still in its infancy, the internet has shown that it has the power to shake China loose from its stagnant, isolated and repressive past. 
Historically, information in China was controlled by the Communist Party, making popular opinion irrelevant. 
Now the internet provides ordinary Chinese what they never had before: uncensored information. A voice. 
So the Communist Party is trapped in the internet, because the government cannot pull the plug on it without hamstringing the economy. 
Furthermore, China will probably need to ease up on the restrictions it has already imposed if it wants to gain all of the internet's benefits; that is, unless the conservative factions who feel most threatened by the internet consolidate their power in the upcoming leadership succession. 
When I first visited China a few years ago, US President Clinton had just departed Beijing, where he charmed the Chinese people in an historic televised discussion with President Jiang Zemin. 
Since the April 2001 US-China spy-plane crisis, when China demanded an apology and US President Bush refused to give one, the Bush administration has been alienating the Chinese. 
The implications go beyond public relations. 
The Communist Party is preparing to change its old-guard leadership over the next two years. 
Hardliners who feel most threatened by the internet's free flow of information were the people emboldened by the nationalistic waves of anti-American sentiment that swept China. 
In the aftermath of the terrorist attack on America on September 11, angry and vengeful messages appeared in some Chinese chat rooms. 
"I'm glad that the USA was attacked," read one. 
"Airplanes? 
Why not atomic bombs," read another. 
Were these the xenophobic rants of extremist rightists or did they reflect a majority sentiment of the Chinese? 
In China, like the US, reactionary groups often congregate on line, but with one important difference. 
In China, only the educated and relatively privileged can take part in online discussion. 
Thus, they can't all be written off as a purely lunatic fringe. 
For the first time, as the explosion at Jaingxu school and the response to the attacks of September 11 th proved, China's public can use the internet to both gain information and express views that may influence the government. 
Now that popular opinion is emerging as a force in China, the Chinese people as well as its government will need to be wooed by those wishing to influence China. 
The internet has provided ordinary Chinese with access to the real story as well as to a public voice, which means that they can be a powerful ally in efforts to effect change in the most populace nation on earth. 

Greening China’s Financial System 
BEIJING – China’s establishment of the Asian Infrastructure Investment Bank (AIIB) has intensified debate about whether a new generation of development banks, led by emerging countries, is needed to ensure that financing decisions account adequately for principles of environmentally sustainable growth. 
Far more important, however, is whether such principles underpin developing countries’ broader capital markets, which have become increasingly central to the international financial system. 
The answer, as of now, seems to be yes. 
Indeed, China and other major emerging economies appear committed to designing financial systems that serve the long-term imperatives of inclusive and sustainable development. 
But they cannot create a genuinely inclusive and sustainable global economy alone. 
Policy-directed investment vehicles, which have grown in number and significance in recent years, are critical to this effort. 
While the AIIB and the forthcoming New Development Bank, operated by the BRICS countries (Brazil, Russia, India, China, and South Africa), are the most visible internationally, they are only the tip of the iceberg. 
The world’s two largest development banks – the Brazilian Development Bank and the China Development Bank – together manage about $1.5 trillion in assets. 
Sovereign wealth funds – the assets of which have swelled from just over $3 trillion in 2007 to more than $7 trillion today – also have a significant influence on global asset markets. 
Likewise, monetary authorities have been playing an increasingly active role, with the major central banks’ balance sheets having expanded from about $5.5 trillion in 2005 to $13.9 trillion earlier this year. 
But such figures, though large, pale in comparison with the $305 trillion worth of financial assets held by commercial banks, institutional investors, and other private financial institutions and individuals. 
How these funds are deployed will determine the shape of tomorrow’s economies and the state of the environment on which they depend. 
Recent reports commissioned by the United Nations Environment Programme (UNEP) neatly summarize where we are with two key data points: While global investment in renewables increased by 17% last year, 116 of 140 countries registered a deterioration in their stock of natural capital. 
In other words, financial markets are responding to environment-related risks and opportunities, but far too slowly to halt, let alone reverse, the potentially catastrophic damage being wrought by human activity. 
This must change. 
Finance needs to be directed more rapidly and decisively away from natural-resource-intensive and polluting investments and toward green opportunities. 
While greener economic and industrial policies are vital, they are inadequate; policy and market failures in the financial economy must be addressed as well. 
The OECD countries, despite being the source of modern history’s most devastating financial meltdown, have shown less appetite to advance sustainability as a design principle of their financial systems (the Bank of England’s ongoing prudential review of climate-related risks to the financial sector is a notable exception). 
This contrasts with the approach of some developing economies, which not only face more immediate environmental and social challenges, but also take a “developmental” view of the financial system’s role. 
Consider China, where a task force created by the Peoples’ Bank of China has just unveiled 14 ambitious proposals to green the country’s financial system. 
The so-called “green finance task force” – co-convened by the PBOC’s Research Bureau and the UNEP Inquiry into Design Options for a Sustainable Financial System – initially comprised 40 ministers, regulators, academics, and financial actors, supported by international experts. 
It was recently expanded to include more than 100 institutions, which are working together to create detailed execution plans for each proposal. 
The proposals cover four broad areas. 
• Specialized investment vehicles to support green investment, domestically and internationally. 
• Fiscal and financial support, including interest subsidies for green loans, incentives for developing the green bond market, and better mechanisms for green firms to communicate their environmental performance in equity markets. 
• New financial infrastructure, including carbon markets, a green ratings system, and a green investor network. 
• Legal infrastructure, including clearer lender liability provisions, compulsory environmental liability insurance, and the disclosure of environmental information. 
Green finance is at an early stage in China, just as it is in the rest of the world. 
Fortunately, according to UNEP’s two-year inquiry into policy options for greening financial and capital markets, the movement is gaining traction in emerging countries such as Brazil, Kenya, and Indonesia, as well as developed economies like the United Kingdom. 
China’s recent move marks the beginning of a new phase of its financial-market development, in which green-finance goals are central, rather than an add-on, to relevant initiatives. 
According to Pan Gongsheng, the PBOC’s deputy governor, green finance will be a “key element” of “the 13th Five-Year Plan for the reform and development of China’s financial sector.” 
The current shift toward green finance in developing countries can have a significant international impact. 
China’s efforts, in particular, could take the world to a tipping point, through their effects on the country’s growing global financial footprint. 
And, indeed, international action – from knowledge sharing to the development of suitable standards and oversight – is vital to advance green finance. 
Fortunately, progress is being made here, too. 
UNEP’s work has helped to invigorate a vibrant informal network involving central banks and other rule-makers and market actors. 
The major rating agency Standard & Poor’s is integrating climate risks into its sovereign-credit analysis. 
And the G-20 recently asked the Financial Stability Board to consider the risks that a possible “carbon bubble” – caused by markets’ overvaluation of fossil-fuel companies’ oil, coal, and gas reserves, owing to a failure to account for future limits on extraction and use – pose to the global financial system. 
Progressive national leadership and international coalitions – together with more deeply engaged multilateral institutions – are needed to build a more inclusive green global financial system. 
Only such a system can effectively advance sustainable development. 

A Chinese Dinner for Two 
LONDON – A great deal of water has flowed through the Taiwan Strait in the 70 years since the leader of China’s Communists, Mao Zedong, met the leader of his nationalist opponents, Chiang Kai-shek. 
So the recent meeting in Singapore between their heirs, President Xi Jinping of the People’s Republic and his Taiwanese counterpart, Ma Ying-jeou, could legitimately be described as historic. 
The diplomatic negotiation that preceded the meeting was exquisitely complex, even covering who should pay for dinner (they split the bill). 
But, after a brief exchange of views behind closed doors, no joint statement was issued and only a heavily sanitized account of the meeting was made available to China’s state media. 
So why did the meeting happen, and what does it portend? 
Ever since Mao’s Communists won the civil war (which the last meeting between the parties, in 1945, had been called to try to avert) and Chiang Kai-shek’s Kuomintang forces withdrew to Taiwan, relations between the two sides have smoldered without ever really catching fire. 
While there was no love lost between the United States and the Kuomintang leadership, the US gave Taiwan assurances of military protection, which deterred China from trying to unify the island with the mainland by force. 
Mao’s adventures on the Korean peninsula, supporting the North against the South and its Western allies, helped to cement the Washington-Taipei axis, which, thanks to some nifty diplomatic footwork, survived President Richard Nixon’s rapprochement with China in the early 1970s. 
America recognized the communists in Beijing as China’s legitimate government, while helping to sustain Taiwan in a limbo between sovereignty and the practical exercise of statehood. 
The island ran its own affairs, becoming a rambunctious democracy in the 1980s, but never insisted on international recognition as a full-fledged sovereign state. 
For China’s rulers, Taiwan was a “renegade province,” and it steadily picked off members of the international community who tried to treat it as anything more than this. 
But there has also been a recognition of reality – especially economic reality – along the way. 
People remember 1989 for the Tiananmen Square killings. 
But that May and June, ministers like me flew to Beijing for what seemed to us all to be a positive and truly historic occasion. 
China allowed Taiwan to attend the Asian Development Bank’s annual board meeting for the first time, provided it was called “Taipei, China.” 
Some years later, when I was a European Union commissioner, after we had negotiated World Trade Organization membership with both the People’s Republic and Taiwan, we wanted to set up an EU office in Taipei to monitor the island’s compliance with the WTO’s rules. 
Before doing so, I made a point of telling the Chinese government what we were doing – opening a commercial regulator, not an embassy. 
Money of course talks for both China and Taiwan, and their economies are now closely linked, with large numbers of Taiwanese living and working in China (especially in the Shanghai area) and huge Taiwanese investments in Chinese manufacturing. 
Taiwan’s Foxconn, the world’s largest electronics manufacturer (including Blackberries, iPhones, and Kindles), has 12 factories in China, including one in Shenzhen that employs hundreds of thousands of workers. 
But, though Taiwanese politics is naturally dominated by the island’s relationship with the mainland, the reality of deep commercial ties between China and Taiwan has had no diplomatic equivalent. 
The Kuomintang (also called the Chinese Nationalist Party) wants to improve relations without surrendering Taiwan’s independence. 
Its opponent, the Democratic Progressive Party, wants to strike a more autonomous posture, though whether it would ever really go for anything more substantial than tweaking China’s nose is doubtful. 
A survey three years ago suggested that 80% of Taiwan’s 25 million people would support a formal declaration of independence, provided that it did not prompt a Chinese invasion. 
That is a rather large caveat. 
China regularly warns Taiwan against any such reckless action, and the US puts the squeeze on the island’s leaders whenever they seem to be getting too uppity with the mainland. 
There appear to be two reasons why Xi and Ma met. 
First, they are clearly worried that the Kuomintang, which lost last year’s local elections in a landslide, will lose the general election in January as well. 
Both hope that showing that China and Taiwan can get along without too much trouble will bring electoral benefits for the Nationalists. 
In addition, at a time when the Chinese economy is slowing and regional tensions are rising because of China’s muscle flexing in the South and East China Seas, Xi seems eager to radiate peace-loving ambitions. 
Having unsettled many of his neighbors, not just the Americans, his upcoming visit to Vietnam, and his prime minister Li Keqiang’s visit to South Korea, are of a piece with his dinner-hour diplomacy with Ma. 
China’s real, long-term intentions are not entirely obvious, and maybe that’s part of its strategy: ambiguous signals play an important role in diplomacy. 
But two things are clear. 
First, Xi’s initiative shows the extent to which he dominates Chinese politics. 
A weaker leader could not have taken such an ambitious step, which represents a real break with past Communist orthodoxy. 
Second, peaceful reunification of the mainland and Taiwan remains unlikely, unless it takes place – as China continues to promise – on the basis of “one country, two systems.” 
But the Taiwanese cannot be very reassured by what they see happening today in Hong Kong, which was promised the same thing before its return to China in 1997. 
Taiwan’s system is democratic; China’s is not. 
What the example of Hong Kong suggests is that China would have to force Taiwan to give up democracy and the rule of law – or embrace both itself – before it could welcome its “renegade province” back into the fold. 

China as Seen from a Glass House 
NEW HAVEN – The removal from the Chinese constitution of the provision limiting presidents to two five-year terms came as a shock to many. 
For China, the institutionalization of leadership succession was one of Deng Xiaoping’s most important legacies, signaling an end to the wrenching instability of the chaotic leadership cult of Mao Zedong. 
For the West, the term limit was an ideological bridge that led to a path of engagement. 
Could its abolition be the tipping point for an already precarious Sino-American relationship? 
Start with China and what the move means for its future. 
To figure out what will change under a different framework for leadership succession, it is important to cut through the authorities’ opaque rhetoric – the “moderately well-off society” transitioning into the “new era” – and stress-test their basic development strategy. 
While anything is possible, and there is always a risk of mistakes, my bet is that China stays its current course. 
Succession or not, there can be no turning back from a transition that has brought a large, poor developing country to the brink of prosperity as a modern, high-income economy. 
Initially, China’s leadership – responding to former Premier Wen Jiabao’s surprising 2007 critique of a Chinese economy that had become increasingly “unstable, unbalanced, uncoordinated, and unsustainable” – made its case from an analytical perspective. 
Last October, in a speech to the 19th Party Congress, President Xi Jinping made the same point from an ideological perspective, reframing the so-called Marxian principal contradiction around the pitfalls of “unbalanced and inadequate” development. 
Significantly, these two perspectives – analytical and ideological – take China to the same destination: a prosperous economy and society with a thriving middle class. 
To get there, China must go through a transformative rebalancing, from manufacturing to services, from export dependence to domestic consumption, from state-owned to private, and from rural to urban. 
By now, all of this is well understood. 
The current debate in China is less about strategy design and more about implementation. 
This, in fact, was Xi’s highest priority on assuming office in late 2012, and it formed the rationale behind an unprecedented anti-corruption campaign aimed at dislodging deeply entrenched power blocs that have stymied the transition. 
But now, five years later, the Chinese leadership is poised to tackle the next phase of the implementation challenge. 
There is a palpable sense of urgency to this task. 
Behind the public façade of a confident leader, Xi has owned up to the possibility of failure. 
From an analytical perspective, this has been expressed in terms of a Japanese-like stagnation if China mismanages its economy. 
From an ideological perspective, an endgame of chaos and revolution looms if the “principal contradiction” is not resolved. 
Given these mounting concerns, implementation risks are now being presented in a different light. 
At the World Economic Forum in Davos in January, Liu He, China’s new vice premier for economic policy, hinted that upcoming reforms would be carried out with surprising speed. 
In a recent signed commentary published in People’s Daily, he also noted that, “Strengthening the party’s overall leadership is the core issue.” 
These views do not come out of thin air. 
Liu, a master tactician, seems to be underscoring the link between leadership power and the pace of reforms. 
The perceived need for greater leadership power – reflected in the elimination of the presidential term limit – has become a key element of the authorities’ implementation efforts. 
Consistent with Xi’s early instincts, this may well be the only way for China to avoid the “blind alley” of which Deng warned in 1992. 
Yes, viewed from the perspective of liberal democracies, China’s constitutional revision is a disappointing governance setback. 
From China’s perspective, however, it may well be the only option to address its daunting implementation imperatives head-on. 
And the recent experience of other countries, particularly the United States, certainly cautions against the Western tendency to conflate succession and leadership quality. 
America’s leadership deficit is, in fact, pushing the US and China to the brink of a trade war. 
The plight of the US middle class has been framed as a blame game, with China and its alleged unfair trading practices singled out as the culprit. 
Yet the evidence points elsewhere: to a dramatic shortfall of domestic saving that leaves America dependent on surplus saving from abroad to fill the gap. 
The result is a multilateral trade deficit, with China and 101 other countries, required to provide the foreign capital needed for the balance of payments. 
In other words, China is actually an important part of America’s “solution” to its saving-short growth problem. 
Yet US leaders find it expedient to make China a scapegoat. 
And the situation is going from bad to worse. 
The large tax cut enacted at the end of 2017 will expand the US federal budget deficit by $1.5 trillion over the next decade, pushing domestic saving even lower – an outcome that will lead to even wider trade deficits. 
As if that’s not bad enough, a protectionist Trump administration has elevated anti-China tariffs to a central role in its international policy agenda. 
Yet protectionism in the face of widening trade deficits spells nothing but trouble for frothy financial markets and a saving-short US economy. 
And it risks the most serious rupture in the Sino-American relationship since 1989. 
No one knows how long Xi will remain in office. 
If China stays the course, the succession question is inconsequential – at least for the time being. 
If China slips, the verdict will be very different. 
While the US has a very different political feedback loop, accountability also matters. 
In the end, the quality of leadership is what matters most for both countries. 
Sadly, those living in glass houses always find it easiest to throw stones. 

Putting Tibet Back on the Agenda 
WASHINGTON, DC – In 2001, when Beijing was selected to host the 2008 Summer Olympics, expectations were high that China’s human-rights performance would improve in the international spotlight. 
Even Chinese officials predicted change; as Beijing’s mayor said at the time, hosting the games would “benefit the further development of our human-rights cause.” 
But ten years later, China remains one of the world’s most illiberal countries. 
Ethnic minorities are targeted, the regime’s critics are imprisoned, and promises of reform have been virtually meaningless. 
As a Tibetan political dissident, I am living proof of this reality. 
In December 2017, I arrived in the United States after being held in Chinese prisons for more than six years. 
I endured beatings and torture for the “crime” of asking Tibetans what they thought about China’s leadership. 
As a boy, I was only dimly aware of China’s repression in Tibet. 
It wasn’t until the early 1990s, when I first visited the Tibetan capital of Lhasa, that I understood what it meant to be a target of China’s occupation. 
In 1992, when I was 18, I watched as monks from Lhasa’s Ganden Monastery were dragged off to prison for demanding religious and political freedom. 
Many spent years in jail for daring to speak out against China, and as I grew older, I vowed to speak out, too. 
My first stint in a Chinese prison was tied to work I began in the early 2000s printing and distributing Tibetan-language books. 
I considered these texts to be important readings on Tibetan politics, culture, and religion. 
Chinese authorities, however, viewed them as a challenge to their rule, and they punished me accordingly. 
As the 2008 Olympics approached, I began looking for new ways to record my people’s history. 
This was when friends and I began planning a documentary film – eventually called Leaving Fear Behind – about Tibetans’ aspirations. 
In the winter of 2007, we left our fear behind and traveled throughout Tibet, cameras in hand. 
To gain our subjects’ trust, we shared DVDs of the Dalai Lama being awarded the Congressional Gold Medal by President George W. Bush in October 2007. 
In interview after interview, Tibetans expressed their desire to see the Dalai Lama return to Tibet, and shared their frustrations that the lead-up to the Olympics had not brought more freedom. 
On March 26, 2008, my work caught up with me when I was arrested by China’s secret police. 
Once in custody, the torture began immediately. 
For days, I was forced to sit in the “tiger chair,” a restraining device used to immobilize prisoners during long hours of questioning. 
During these sessions, I was told that I would be released if I admitted that my film project was illegal. 
But I refused, firm in my belief that I had done nothing wrong. 
Eventually, I received a six-year prison sentence for “subversion of state power.” 
During the course of my incarceration, I was moved often and forced to carry out manual labor for hours with no breaks. 
At one prison in Xining, my health deteriorated after I became infected with hepatitis B. But it wasn’t until I was released, in June 2014, that I was able to receive treatment. 
Even without bars around me, I remained caged. 
I was kept under house arrest, and my communications were closely monitored. 
All I wanted to do was study, improve my Tibetan language skills, and find a job. 
But in much of Tibet, even simple dreams have become impossible for Tibetans; for many, the only option is to flee. 
My long, risky, and costly journey to freedom ended on Christmas Day last year, when I arrived in San Francisco and was reunited with my family (they left China years ago for their own safety). 
For various reasons, I must keep the details of my escape private, but it is no secret that many around the world aided me. 
Leaders in the US, Germany, Switzerland, and the Netherlands frequently called on China to release me, and I am convinced that this pressure is why I received fewer beatings and slightly better treatment than my cellmates. 
Unfortunately, many other Tibetans remain locked up for their beliefs. 
They need support, too. 
As I told US lawmakers during congressional testimony in February, Western governments have long supported the people of Tibet. But, as China has grown more economically and politically powerful, that support has waned. 
Tibetans are not bargaining chips to appease an ascendant China; although the Chinese authorities bristle when democratic governments support us, our aspirations must not be traded away for political expedience. 
One way President Donald Trump’s administration could recommit to US support would be by appointing a Special Coordinator for Tibetan Issues, a State Department post mandated by the Tibet Policy Act of 2002 that has been vacant since Trump took office. 
Congress should also pass the Reciprocal Access to Tibet Act – a legislative solution to promoting positive change in Tibet – and demand the release of all Tibetan political prisoners. 
Nearly a decade has passed since the curtain fell on the 2008 Olympics. 
But while the Chinese government doesn’t talk much about human rights anymore, the international community must never stop. 
I can assure you that Tibetans inside Tibet have not given up their struggle – even if fewer people are listening. 

China’s Smart Trade Moves 
SHANGHAI – US President Donald Trump’s announced plans to target China with trade tariffs represent a significant departure from his predecessors’ approach. 
China is now seen primarily as an economic adversary, rather than an economic partner. 
That may be a difference of degree rather than kind: Trump’s policies are the culmination of a decade of US trade frustration. 
The sources of US frustration are well known. 
Since joining the World Trade Organization in 2001, China has been accused of failing to meet its market-access obligations, and even of having regressed in some areas. 
Moreover, China is believed to have long used state intervention, including industrial policy, to limit US businesses and investment in the domestic market, while enabling Chinese enterprises to achieve rapid technological progress. 
More fundamentally, however, the US is concerned that China’s rapid economic development now poses a real challenge to America’s global influence. 
This has fueled a sense that China must be “contained.” 
In Trump’s view, part of the solution is trade protectionism. 
In the 1980s, protectionist US policies successfully contained the growth of Japan, which, like China today, maintained a large trade surplus with the US. 
But those policies’ success was rooted partly in Japan’s problematic policy choices, including slow fiscal and monetary responses. 
In order to reduce the bilateral trade surplus, Japan introduced so-called voluntary export restraints, which hollowed out its real economy, while providing excessive protection to its non-tradable sectors. 
The result was a decades-long recession. 
But trade patterns have changed so much since the 1980s, particularly owing to the emergence of regional and global supply chains, that the very notion of a bilateral trade imbalance – one of the main sticking points for Trump – seems outdated. 
After all, the added value China actually derives from its exports is not nearly as large as its trade surplus. 
In fact, over the last decade, China’s global current-account surplus has shrunk at an unprecedented rate, falling from 10% of GDP in 2007 to a mere 1.4% today. 
Meanwhile, there has been little change in the US trade imbalance, indicating that America’s massive deficit is not China’s fault at all. 
In fact, the blame lies squarely with US macroeconomic realities, namely a low rate of domestic saving and a high rate of federal borrowing, which Trump’s tax cuts will cause to increase further. 
China recognizes the absurdity of the Trump administration’s obsession with forcing it to reduce the bilateral trade surplus. 
But it also knows that a trade war would not be good for anyone. 
To ease trade frictions, unlike Japan’s voluntary export restraints, China’s leaders have promised to increase imports and open up the domestic market, with President Xi Jinping predicting $8 trillion worth of merchandise imports within the next five years. 
This is a smart move, and not just because it will help appease the US, as well as European countries that have complained about limited access to the Chinese market, not to mention international financial institutions. 
As underscored in a joint statement of the US and China regarding trade consultations, “significantly” increased Chinese purchases of foreign – in particular, US – goods and services will also enable the country “to meet the growing consumption needs of the Chinese people and the need for high-quality economic development.” 
China imported $2 trillion worth of goods in 2017, of which consumer goods accounted for only 8.8%. 
Expanding the share of consumer goods might significantly improve the welfare of Chinese citizens, who, because of existing tariffs and non-tariff barriers, now often travel abroad to make purchases. 
In fact, international purchases by Chinese are now equivalent to the value of all of the consumer goods China currently imports, even without taking into account fast-rising online overseas purchases. 
Shifting those purchases to China would help propel the shift toward a more consumption-driven economy, particularly as the middle class – and its purchasing power – grows. 
The impact would be even greater if US and European countries responded to Chinese calls to export high-tech products more freely. 
Similarly, greater openness to investment is crucial for China as it seeks to ensure continued technological progress. 
As it stands, even if China’s economy is the same size as America’s, China will maintain a competitive advantage in manufacturing, because its per capita GDP is only one-quarter that of the US. 
Yet China remains in a low position on global value chains, despite recent improvements. 
And, so far, its technological advancement has depended largely on greater openness to direct investment, which has supported progress in research, development, and application of advanced technologies. 
If China is to continue upgrading its economy, this process must continue, supported by initiatives to promote entrepreneurship and protect intellectual property rights. 
Fortunately, China knows this well. 
The authorities are hoping for foreign direct investment of $600 billion in the coming five years, and expect Chinese outward direct investment to reach $750 billion five years later. 
Already, China is backing up its words with action. 
To promote expanded consumer imports, the country will hold its first import expo in Shanghai in November. 
To spur financial investment, China will raise foreign-ownership limits to 51% within three years, on the path toward ultimately removing restrictions altogether. 
By 2022, it will scrap foreign ownership limits on local auto firms, boosting companies like Tesla, which could then fully own a subsidiary in China. 
To be sure, more must be done, and China needs to go further to clear institutional barriers to manufacturing and financial reforms. 
But China has already shown itself to be handling US trade pressure in a more savvy way than Japan did in the 1980s. 
Indeed, far from laying the groundwork for a protracted recession, China’s response – increasing imports and accelerating domestic structural reforms – will support high-quality long-term growth. 

China’s Summer of Discontent 
CLAREMONT, CALIFORNIA – Politics has a nasty habit of surprising us – especially in a country like China, where there is little transparency and a lot of intrigue. 
Five months ago, President Xi Jinping jolted his countrymen by abolishing the presidential term limit and signaling his intention to serve for life. 
But the real surprise was to come later. 
At the time of Xi’s announcement, the conventional wisdom was that his dominance inside the Chinese party-state was virtually absolute, and thus that his authority could not possibly come under attack. 
Xi is now facing the worst summer since he came to power in November 2012, characterized by a steady stream of bad news that has left many Chinese – and especially Chinese elites – feeling disappointed, anxious, angry, helpless, and dissatisfied with their increasingly powerful leader. 
The latest piece of bad news, which broke late last month, was the discovery by government investigators that a pharmaceutical company had been producing substandard vaccines for diphtheria, tetanus, and whooping cough, and had faked data for its rabies vaccine. 
Hundreds of thousands of Chinese children nationwide have been given the faulty vaccines. 
Of course, China has experienced many similar scandals before – from tainted baby formula to the contamination of the blood-thinning drug heparin – with greedy businessmen and corrupt officials held to account. 
But Xi has staked considerable political capital on rooting out corruption and strengthening control. 
The fact that a private company with deep political connections is at the center of the vaccine scandal is painful evidence that Xi’s top-down anti-corruption drive has not been as effective as claimed. 
An unintended consequence of Xi’s consolidation of power is that he is accountable for the scandal, at least in the eyes of the Chinese public. 
But the backlash against Xi began even before the vaccine revelations. 
Concerns were rising over the gradual creation of a personality cult. 
In recent months, Xi’s loyalists have spared no effort in this regard. 
The desolate village where Xi spent seven years as a farmer during the Cultural Revolution has been branded as a source of “great knowledge” and become a red-hot tourist destination. 
For some, this is all too reminiscent of the quasi-divine status attributed to Mao Zedong which, during the “Great Leap Forward” and “Cultural Revolution” resulted in millions of deaths and nearly destroyed the Chinese economy. 
And, in fact, today’s economic news in China is grim, beginning with a 14% decline in stock prices this year. 
Three summers ago, in the face of sharply falling stock prices, Xi ordered state-owned companies to buy shares to prop up the market. 
But as soon as the forced purchases stopped, another market decline followed, this time against a background of depleted foreign-exchange reserves. 
Xi has not repeated that bit of economic illiteracy this time around, but what will come next for China’s stock market remains an open question. 
And there is more bad economic news. 
The renminbi has reached a 13-month low, and while GDP growth is ostensibly on track to meet the 6.5% target for 2018, the economy is showing signs of weakness. 
Investment, real-estate sales, and private consumption are all slowing, prompting the government to halt its deleveraging effort and allocate more funds to propping up growth. 
The worst economic development, however, is the unfolding trade war with the United States. 
Though its economic impact has yet to be felt, the clash over trade that US President Donald Trump has initiated is likely to be the toughest challenge Xi has faced so far, for reasons that extend far beyond the economy. 
For starters, there is Xi’s promotion of the “China Dream,” which entails the country’s revival as a world power. 
But, as the trade war makes starkly apparent, China remains deeply dependent on US markets and technology. 
Far from a rejuvenated hegemon poised to reshape the global economy, Xi’s China has been exposed as a giant with feet of clay. 
The geostrategic implications are difficult to exaggerate. 
In the 40 years since Deng Xiaoping began to lead China out of the Maoist dark ages, the country has achieved unprecedented economic growth and development. 
But that progress would have been impossible – or, at least, much slower – were it not for China’s policy of maintaining a cooperative relationship with the US. 
Xi has upended that policy during his tenure, not least with his increasingly aggressive actions in the South China Sea. 
These developments point to a straightforward conclusion: China is headed in the wrong direction. 
This is not lost on China’s elites, whose frustration is palpable – and rising. 
Yet, despite rumors of pushback against his power by retired elderly leaders, Xi is unlikely to be overthrown. 
He remains solidly in control of the Chinese party-state’s security apparatus and the military. 
Moreover, he has no rivals with the courage or influence genuinely to challenge his authority, as Deng and other veteran revolutionaries did in 1978, when they pushed out Hua Guofeng, Mao’s hand-picked successor as leader of the Communist Party of China. 
Nonetheless, the road ahead for Xi remains treacherous. 
If he stays his current course, so will China, with each stumble reinforcing negative perceptions of his leadership. 
Yet changing course could also hurt Xi’s reputation, as it would amount to an admission of flawed judgment – a problem for any leader, but especially for a strongman like Xi. 
And some of the new policies Xi would have to adopt conflict with his instincts and values. 
The risks are real. 
But Xi probably doesn’t have much choice but to face them. 
As China’s summer of discontent clearly suggests, he needs a new game plan. 

China’s Weapons of Trade War 
BEIJING – China exports more to the United States than the US exports to China. 
That makes US President Donald Trump furious – so furious, in fact, that he may be willing to start a trade war over it. 
Trump has leveled tough protectionist threats against China. 
As he attempts to consolidate his presidency, he is unlikely to back away from them. 
And with the Communist Party of China’s 19th National Congress set to take place in Beijing in November, Chinese leaders are unlikely to yield to US pressure. 
A trade war would undoubtedly hurt both sides. 
But there is reason to believe that the US has more to lose. 
If nothing else, the Chinese seem to know precisely which weapons they have available to them. 
China could stop purchasing US aircraft, impose an embargo on US soybean products, and dump US Treasury securities and other financial assets. 
Chinese enterprises could reduce their demand for US business services, and the government could persuade companies not to buy American. 
The bulk of numerous Fortune 500 companies’ annual sales come from China nowadays – and they already feel increasingly unwelcome. 
Beyond being America’s second most important trading partner, China is America’s main jobs supplier. 
A trade war could thus cost the US millions of jobs. 
If China switched from Boeing to Airbus, for example, the US would lose some 179,000 jobs. 
Reduction in US business services would cost another 85,000 jobs. 
Soybean-producing regions – for example, in Missouri and Mississippi – could lose some 10% of local jobs if China halted imports. 
Moreover, though the US exports less to China than vice versa, it is China that controls key components in global supply chains and production networks. 
Consider the iPhone. 
While China provides just 4% of value added, it supplies the core components to Apple at low prices. 
Apple cannot build an iPhone from scratch in the US, so it would have to search for alternative suppliers, raising its production costs considerably. 
This would give Chinese smartphone businesses an opportunity to seize market share from major players. 
Today, 80% of global trade comprises international supply chains. 
Declining trade costs have allowed firms to splinter their production lines geographically, with goods processed and value added in multiple countries along the chain. 
If China threw a handful of sand in the gears of these chains, it could disrupt entire production networks, doing serious damage to the US (and, indeed, all the countries participating in such networks). 
An escalating trade war, with each side erecting symmetric import barriers, would fuel inflationary pressure in the US, potentially driving the Federal Reserve to raise interest rates higher and faster than it would otherwise. 
That, together with diminished growth prospects, would depress equity markets, and declining employment and household income could lead to a sizeable loss of GDP in both the US and China. 
A more likely scenario, however, is that both countries would initiate disputes in specific sectors, particularly traditional manufacturing industries like iron and steel production. 
Meanwhile, Trump will continue to accuse China of manipulating its exchange rate, ignoring the recent downward pressure on the renminbi (which indicates that the currency was actually overvalued), not to mention the simple fact that many governments intervene to manage their exchange rates. 
Both Japan and Switzerland have engaged in outright currency intervention in recent years, and the US itself may well join their ranks, when the strong dollar’s impact on US export competitiveness becomes untenable. 
In any case, China can probably forget about achieving “market economy status” under World Trade Organization rules until after Trump is out of the White House. 
The trade confrontation between the US and China will also affect bilateral investment flows. 
The US may cite national security concerns to block Chinese investments. 
It may also stop government purchases from Chinese companies like Huawei, and force Chinese firms and wealthy individuals to reduce investments that have hitherto bolstered US asset prices. 
A high-quality US-China bilateral investment treaty would create a level playing field for American companies, giving them better access to China’s large market. 
But those talks will invariably be pushed back, while disputes over intellectual property rights and cyber security will be reinvigorated. 
For now, China’s leaders seem convinced that they have little reason to bend to US pressure. 
For one thing, Trump seems more concerned with other priorities, such as repealing the US Affordable Care Act, reforming the tax system, and investing in infrastructure. 
Even if a trade war does happen, China’s leaders assume, it probably would not be sustained for long, given the income and job losses that both sides would suffer. 
In any case, they have no intention of sending any signal of weakness to a leader so intent on testing other’s limits. 
For the past five years, China has sought to establish a growth model that is less reliant on exports and more reliant on domestic consumption. 
But China often needs a crisis or an external shock to drive reform. 
Perhaps Trump is that shock. 
While his policies will be bad for China in the short term, they may also provide the impetus China needs to stop subsidizing exports and perpetuating distortions in the domestic economy. 
If this happens, China may actually emerge from the era of Trump better off than before. 

China Unbound 
Sydney – The appointment of five provincial-level Chinese Communist Party chiefs in early December is a reminder that the ascension of China’s next generation of leaders, who will take power in 2012, may be the most significant development in Chinese politics since Deng Xiaoping’s reign begin in 1978. 
The upcoming generation of leaders will be the first with little or no personal memory of the turmoil and hardship endured during the Mao Zedong years. 
Forgetting that history might doom China to repeat the mistakes of the past; but, for better or worse, it might also ease constraints and set its leaders free. 
All five appointees were born after the founding of the People’s Republic in 1949. 
Two of them, Hu Chunhua and Sun Zhengcai, are only 46 years old. 
This is in line with the Party’s recently announced policy that the next generation of leaders should have an average age of around 55 years, with up to four top positions filled by leaders not yet in their fifties. 
The Party’s aim is to ensure that it remains energetic and dynamic as China rises. 
This seems a wise decision. 
Chinese leadership over the past decade and a half has been about fine-tuning and maintaining the momentum of Deng’s state-led development model, launched after the Tiananmen protests of 1989. 
In this respect, China’s third and fourth generation of leaders, under the technocrats Jiang Zemin and Hu Jintao, have been competent but unimaginative. 
But the viability of Deng’s model is nearing its end, and China is now addicted to inefficient state-led fixed investment and unsustainable export-led growth, rather than domestic consumption, to generate jobs and growth. 
Progress on further structural reforms – such as currency and capital-account liberalization and weaning state-controlled industries off state capital – has been slow, and new initiatives have been piecemeal rather than comprehensive. 
Likewise, since the mid-1990’s, China’s foreign policy has been cautious rather than bold. 
Both Jiang and Hu have faithfully followed Deng's dictum to “Hide capacity and nourish obscurity.” 
Although increasingly assertive in Africa and Latin America, China largely remains a free-rider under the American security umbrella. 
The older generations see such caution as prudence, and that conservatism is reflected in China’s current leaders. 
The lack of big-picture reform attests to the older generations’ collective fear that fundamental structural changes will bring disruption and chaos, threatening the Party’s hold on power. 
They still remember the suffering of the Mao years, when China headed in the wrong direction – and tried to do too much too quickly – and they vividly recall how the Tiananmen protests brought the regime to its knees, and how urban labor unrest erupted when centrally managed state businesses were merged or closed down in the 1990’s. 
Similarly, though China remains fundamentally dissatisfied with its southern land borders and its sea borders to the east and southeast, its current leaders fear that isolation would result from an assertive and aggressive foreign policy. 
All elites – young and old – see China as Asia’s natural leader and America as a recent interloper. 
But, for the third and fourth generation leaders, giving America and its allies and partners an excuse to “contain” China – and restrict its economic development – remains the great nightmare. 
Without personal experience of China’s recent traumatic history, the next generation will be more confident and assertive. 
Schooled in economics, politics, and law, rather than engineering, they will seek to accelerate China’s rise and transformation, viewing caution as paralysis. 
Even now, emerging leaders argue that China is moving too slowly on economic reform and foreign-policy goals. 
For better or worse, they will not be restrained by the same fear of unintended consequences when it comes to change and experimentation. 
Optimists hope that this might hasten economic liberalization, and perhaps even lead to moderate political reform, especially greater accountability for far-flung local officials. 
After all, it has been China’s young guns who consistently raise the issue of local corruption at Party summits. 
But the foreign-policy consequences could be even greater. 
Having grown up in a China that is now accepted as a legitimate great power, the new generation of leaders will be more impatient about China resuming its place as the paramount power in Asia. 
While older statesmen take pride in how far China has come, younger Party figures and elites – especially those who have returned from American and other Western graduate schools – are frustrated by that China’s strategic position in Asia and status within global and regional institutions remain relatively weak, despite the country’s rising economic power. 
For example, much of the talk that China should take the lead in regional institutions, and that Chinese ships should have a greater presence in vital sea lanes such as the Malacca Straits and even the Indian Ocean comes from the younger generation. 
The younger Party leaders are also more impatient when it comes to a timeframe for winning back Taiwan. 
China is currently in a holding pattern. 
But that will end when the next generation of leaders assumes power in 2012. When their time comes, the world will be dealing with a much more unpredictable power than the one we know now. 

Are China’s Trade Practices Really Unfair? 
BRUSSELS – The temporary truce reached by US President Donald Trump and his Chinese counterpart Xi Jinping at the just-concluded G20 meeting in Buenos Aires should give both sides some time to reflect on the issues in question. 
And the most fundamental of those issues is whether American grievances against China – shared by many of the advanced economies – are justified. 
To be sure, unilateral US measures are indefensible under global trading rules. 
But some pushback conceivably could be warranted if the advanced economies – which have already created an informal contact group of “China losers,” including representatives of the European Union, Japan, and the United States – are right that China has been engaging in unfair trading practices. 
For the US, the biggest concern seems to be so-called forced technology transfer – that is, the requirement that foreign companies share their intellectual property with a domestic “partner” in order to gain access to the Chinese market. 
But this is a misnomer, at best, because companies that do not want to share their technology can always choose not to invest in China. 
Europe’s complaints – or, more specifically, the complaints of over 1,600 European companies – are summarized in a new report issued by the European Union Chamber of Commerce in China. 
But, interestingly, few of those complaints are about China’s trading practices per se, at least in the narrow sense. 
Tariffs, for example, are not cited. 
With its accession to the World Trade Organization in 2001, China was forced to reduce its tariff protections by one-half. 
In the ensuing years, the average tariff rate applied by China has continued to fall, and now stands at less than 4%, though China does maintain an unusually high number of tariff peaks (that is, high tariffs for very limited categories of product). 
Of course, tariffs are far from the only way to create obstacles to trade. 
Indeed, in many ways, tariffs are yesterday’s problem – at least they were, until Trump dusted them off as a weapon for his trade war. 
But when it comes to non-tariff barriers, China’s record also does not seem as problematic as is claimed. 
To be sure, it is difficult to measure the overall importance of non-tariff barriers to trade, because they can take so many forms. 
But, according to the independent Global Trade Alert observatory, since 2008, China has introduced only 25 measures (referred to as “state interventions”) per year, on average, that might restrict trade with the US. 
Meanwhile, China enacted about the same number of new measures that liberalize trade with the US. 
Overall, then, China has not become more protectionist against the US; on the contrary, the opening process is continuing, albeit very slowly. 
By contrast, the US has enacted between 80 and 100 restrictive measures against China every year, and far fewer liberalizing measures. 
Other indicators confirm China’s gradual move toward liberalization. 
This is the case even for foreign investment – an issue about which both US and European companies complain. 
Although China remains far less open to foreign direct investment than most advanced economies, the OECD’s composite indicator shows that there has been continuous, albeit sluggish, improvement. 
In short, even if China’s non-tariff barriers (both formal and informal) remain high, they are lower than in the past. 
So, why are the US, Europe, and Japan pushing back now? 
The answer lies in the increased competitiveness of Chinese producers. 
When Western companies had a near-monopoly on know-how and technology, their competitive edge more than compensated for distortions created by Chinese barriers to trade and investment. 
But, as Chinese enterprises have become increasingly serious competitors in their own right, Western countries’ capacity to bear the extra costs of non-tariff barriers has diminished. 
Complaints about unfair Chinese trade practices, therefore, are actually complaints about the mismatch between the slow pace of economic opening and the very fast pace of modernization. 
The competitiveness gap between China and the OECD countries is closing much faster than the regulatory environment is converging. 
In fact, per capita GDP – and thus productivity – in a number of Chinese provinces with a combined population of over 100 million is similar to that of advanced countries (around $30,000 per capita at purchasing power parity). 
Of course, the national average is much lower (about one-half), as overall productivity is much lower, and the Chinese authorities have to calibrate policies for their entire vast country. 
But, for the outside world, the high-productivity regions are what matters. 
If we are to avoid further escalation of tensions, the West and China must acknowledge each other’s perspectives. 
Ultimately, however, foreign pressure will have little effect on China’s massive and powerful economy. 
The real question for China lies at home: Do enduring distortions and barriers to investment really serve the development of the country’s lagging provinces? 
In the past, it might have made sense to protect the nascent industries in the coastal regions from foreign competition. 
Today, however, China’s protectionist regime does little to help nascent industries in the poor interior, because their biggest competitors are no longer foreign companies, but rather firms from the dynamic coastal areas. 
This implies that China must rethink its very development strategy. 
And to do that, the last thing policymakers need is an ongoing trade war. 

American Leadership in a Multipolar World 
LONDON – Giving up the spotlight is never easy. 
The United States, like many aging celebrities, is struggling to share the stage with new faces, especially China. 
The upcoming meetings of the International Monetary Fund and the World Bank – two institutions dominated by the US and its Western allies – provide an ideal opportunity to change that. 
The US must come to terms with the reality that the world has changed. 
The longer the US remains in a state of denial, the more damage it will do to its interests and its global influence, which remains substantial, if more constrained than before. 
The world no longer adheres to the static Cold War order, with two blocs locked in open but guarded confrontation. 
Nor does it work according to the Pax Americana that dominated in the decade after the Soviet Union’s collapse, when the US briefly emerged as the sole superpower. 
Today’s world is underpinned by a multipolar order, which emerged from the rise of developing economies – most notably China – as major actors in trade and finance. 
The US – not to mention the other G-7 countries – now must compete and cooperate not only with China, but also with India, Brazil, and others through expanded forums like the G-20. 
To this end, the US must show leadership and adaptability. 
It cannot refuse to support China’s efforts to expand its role in global governance. 
Nor should it issue harsh rebukes to its allies when they do not follow suit, as it did when the United Kingdom announced its intention to join the new China-led Asian Infrastructure Investment Bank. 
The US seems to be stuck in the Bretton Woods system, the rules-based order – underpinned by the IMF and the World Bank, with the US dollar at its heart – that emerged after World War II. 
The Bretton Woods system institutionalized America’s geopolitical supremacy, leaving the old imperial power, the UK, to step aside – a step that it took graciously, if a little desperately, given its grave postwar economic situation. 
Over the years, however, the Bretton Woods system, with its mix of liberal multilateralism and market-oriented economic policies, has come to symbolize the Anglo-American dominance of the global economy that much of the world now criticizes, especially since the global financial crisis. 
In particular, the Washington Consensus – the set of free-market principles that influences the policies of the IMF, the World Bank, the US, and the UK – has generated considerable resentment, especially after the Asian financial crisis of the 1990s. 
Against this backdrop, it is hardly surprising that China has been using its growing global influence to help engineer a new economic order – one in which the US dollar does not reign supreme. 
Zhou Xiaochuan, the governor of the People’s Bank of China, China’s central bank, has repeatedly called for a shift toward an international monetary system that allows for the use of multiple currencies for payments and investment. 
Such an approach would reduce the risk and impact of liquidity crises, while decoupling the international monetary system from the “economic conditions and sovereign interests of any single country.” 
Of course, China believes that its own currency, the renminbi, should eventually play a central role in this new monetary system, so that it reflects China’s role not only as a leading engine of global economic growth, but also as the world’s largest creditor. 
Indeed, together with the other systemically important economies (the US, the UK, Japan, and the eurozone) China drives trends that, for better or worse, extend far beyond its borders. 
Since 2009, China’s leadership has been pursuing a set of policies that encourage the use of the renminbi in regional trade and reduce its dependence on the dollar in international payments. 
But expanding the renminbi’s role in the international monetary system is just the first step toward institutionalizing a multipolar world order. 
China has also spearheaded the establishment of new multilateral institutions, with AIIB following on the heels of the New Development Bank, created with other major emerging economies (Brazil, Russia, India, and South Africa). 
By taking these steps, China’s leaders have called attention to the inadequacy of the existing international monetary system, and its institutional framework, in today’s complex, multipolar world economy. 
In particular, China’s agenda highlights questions about America’s capacity to provide the needed liquidity to support international trade and finance. 
To be sure, the US is right to wonder whether the new order that China hopes to build will be as open and rules-based as the American-led order – the one that gave China the market access it needed to achieve its spectacular economic rise. 
But the answer to that question can be found only by engaging China on the issue of reform of global governance – not by denying that change is needed at all. 
As the US stubbornly pursues a policy of containment toward China – exemplified in its fight against the AIIB’s establishment, its relentless accusations of currency manipulation, and its refusal to ratify IMF reforms that would increase China’s influence – it risks losing its ability to shape what comes next. 
The result could be a world of fragmented blocs – an outcome that would undermine not only global prosperity, but also cooperation on shared challenges. 
The Spring Meetings of the IMF and the World Bank offer an important opportunity to signal a new approach toward China. 
And there could be no more credible signal than US support for the renminbi’s addition to the basket of currencies that the IMF uses to value its international reserve asset, the Special Drawing Right. 
America will be in the spotlight once again. 
But how will it perform? 

How Cities Are Saving China 
HONG KONG – The world has a demand problem, and it is dealing with it all wrong. 
Rather than allowing itself to be harmed by other countries’ problematic policies, China must work to create its own demand by making full use of its capacity for policy experimentation, long-term planning, and pragmatic decision-making. 
In the decade since the 2008 global economic crisis, advanced economies have leaned heavily on easy monetary policy, hoping that large amounts of liquidity and ultra-low interest rates would generate enough demand to eliminate excess capacity. 
But this has undermined productivity, encouraged speculative activity, fueled asset bubbles, and exacerbated income and wealth inequality. 
As developed-country citizens have become increasingly frustrated with this state of affairs, politicians – in particular, US President Donald Trump – have attempted to appease them with immigration restrictions and protectionist trade measures. 
But while this might temporarily satisfy some segments of these countries’ populations, it will ultimately make matters worse, by curbing global demand, exacerbating structural imbalances (including trade imbalances), and eventually leading to recession for all. 
All of this has significant implications for China, which has become the primary target of the Trump administration’s tariffs, amid accusations that it is responsible for global excess production capacity. 
In this context, it is more urgent than ever that China curbs its reliance on foreign demand and high levels of investment, by fostering sustainable domestic consumption. 
Success will hinge on China’s continued use of what we call the “BREEP methodology,” whereby policymakers browse, research, experiment, evaluate, and push forward what works, continually refining and adapting their tools and tactics. 
Since 2000, China’s long-term plan for boosting incomes, reducing inequality, and protecting the environment has depended on the harmonious progression of innovation and urbanization. 
Specifically, China hopes to create green and efficient urban clusters populated by increasingly educated workers who can consume in a sustainable manner. 
Current economic theory gives little guidance on how to achieve the virtuous circle of rising income and rising productivity that is vital to dynamic and prosperous cities. 
But, using its BREEP methodology, China has learned that rejecting one-size-fits-all approaches and promoting competition among cities is a valuable means of achieving breakthroughs in development strategies. 
In 2010, China’s State Council identified three major urban clusters as launch-pads for smart urbanization: the Yangtze River Delta (YRD), the Pearl River Delta (PRD), and the Beijing-Tianjin-Hebei cluster (BTH). 
By 2014, the PRD had morphed into the Greater Bay Area (GBA), covering nine cities around the PRD in Southern Guangdong, plus Hong Kong and Macau. 
As a recent HSBC report notes, each of China’s top three urban clusters has a GDP greater than that of Spain; together, they will account for 45% of China’s total GDP by 2025. 
Of these, the GBA is the smallest by population, with 70 million inhabitants, compared with 120 million in the YRD and 112 million in the BTH. 
Yet the GBA contributes $1.5 trillion to China’s GDP – a total of 12% – and accounts for 37% of the country’s total exports. 
And the cluster’s GDP growth is significantly higher than the rest of China. 
The GBA is home to a high concentration of dynamic private businesses, such as Tencent, Midea, and Huawei. 
It is also China’s most innovative urban cluster, generating more than 50% of the country’s international patent applications. 
And, according to HSBC, the GBA is the least burdened by inefficient state-owned enterprises and excess capacity. 
The reason is simple: the GBA is far more market-oriented than its counterparts, with Hong Kong and Macau much more open to the outside world than any other Chinese cities. 
Both cities not only permit the freer flow of goods, services, capital, technology, talent, and resources, but also meet global standards in terms of regulations, business practices, soft infrastructure, and even lifestyles. 
Of course, China’s leaders are not content simply to rest on the laurels of their successful urban clusters; on the contrary, they are working to apply their lessons across the country. 
For example, beginning in 2013, China’s National Development and Reform Commission studied in-depth lessons from Foshan, one of the GBA’s most dynamic cities, in order to plan the further development of the cluster with better and more innovative strategies. 
The NDRC browsed studies on smart urbanization by the World Bank, McKinsey, and others, in order to gain insight into how clustering could support economic growth and innovation. 
To augment their research, NDRC planners worked directly with local officials, investors, and foreign experts. 
Then the experimentation phase began, with the establishment of the Shanghai Free-Trade Zone and the Qianhai-Shekou Pilot Free-Trade Zone. 
Evaluations of those experiences led to last year’s announcement of more FTZs, as well as the Xiong’an New Area, an ambitious plan to transform – using cutting-edge technology – dusty plains in Hebei near Beijing and Tianjin into a dynamic green model city. 
In fact, China is currently creating 19 “supercity clusters,” by strengthening the links among cities. 
By 2030, HSBC projects, those clusters will account for about 80% of the country’s GDP. 
China should also work to foster even faster growth in urban clusters that are already successful. 
Within the GBA, Hong Kong, home to several of the world’s top 100 universities, has a clear comparative advantage in basic research. 
Meanwhile, Shenzhen, Dongguan, Foshan, and other GBA cities have a strong capacity for innovative market-oriented research and development as well as manufacturing. 
Improving connectivity within the GBA will thus support innovation in each segment of the supply chain, which can lead to products that can be sold to China’s 1.4 billion consumers and adapted to global markets. 
The threat of a trade war may not be good news for China, but it will not bring down the economy. 
The real challenge China faces is to take advantage of dynamic urban clusters like the GBA not only to generate growth, but also to address structural challenges like inequality and excess capacity in financially and environmentally sustainable ways. 

Why China’s Cities Will Drive Global Growth 
SHANGHAI – For 15 years, China has been a key engine of global growth. 
But now that China’s investment-led boom has run its course, continued economic growth – in China and globally – will depend on urban Chinese consumers. 
By 2030, people living in cities will drive 91% of global growth in consumption, and China is emphasizing both urbanization and a consumer-led growth model. 
The McKinsey Global Institute’s latest research is optimistic that China’s strategy will succeed. 
MGI (where one of us is a partner) foresees continued growth in the number and income of urban consumers, and predicts that 700 Chinese cities will generate $7 trillion, or 30%, of global urban consumption growth between now and 2030. 
Today, China’s urban working-age consumers number 521 million; in just 15 years, their ranks will have swollen to 628 million. 
Beijing, Guangzhou, Shanghai, and Shenzhen will each add more than one million households with annual income above $70,000 – the number of Hong Kong households in that income bracket today. 
Per capita spending is set to jump from $4,800 to $10,700 by 2030, at which point this group will spend 12 cents of every $1 of urban consumption worldwide. 
Urban incomes in China are now reaching a threshold where spending on both goods and services accelerates rapidly. 
Annual household spending on personal products and on dining out will more than double, to $770 and $720, respectively. 
Chinese consumers are also traveling more, with the China Outbound Tourism Research Institute predicting that more than 100 million Chinese will travel abroad by 2020. 
China’s new consumer army will have the means and, more important, the willingness to spend its higher earnings. 
According to McKinsey’s 2016 Global Sentiment Survey of more than 22,000 consumers in 26 countries, China’s working-age population has the world’s highest propensity to spend additional income, rather than save it or use it to pay off debt. 
Just like Western baby boomers, Chinese urban consumers – who have grown up in post-reform China and have different views from their parents about saving versus spending – will make a generational break from the past. 
That shift in mindset will fuel China’s transition to a consumer-led economy. 
China’s working-age consumers, as children of the digital age, are driving innovation by interacting directly with companies to help reinvent products and services. 
In a McKinsey survey, 55% of them said that they would be willing to recommend a product, service, or company to their friends or family on the social network WeChat. 
Xiaomi, the Chinese smartphone company, conducts direct online polling of consumers to find out what innovations they would like to see. 
The company has more than ten million “fans” on Weibo, the microblogging platform. 
And now Western companies are following suit. 
Volkswagen’s China operation engages with potential customers directly online, rather than relying solely on traditional dealerships. 
The Fung Group (where one of us is a managing director), in partnership with IBM and Pico, has set up a “retail laboratory” in Shanghai to provide a controlled setting for businesses to observe – in real time – how consumers react to new technologies and products. 
In addition to driving further innovation, Chinese consumers – even those with relatively low incomes – are also investing heavily in the next generation, with 12.5% of overall consumption growth expected to go to education between 2015 and 2030. 
That’s the second-highest rate of any country MGI examined, behind only Sweden (12.6%). 
By investing in the skills and capacity of the next generation now, Chinese consumers are building a strong foundation for continued growth and innovation in the future. 
That continued growth will require China to shift its economic model further from production to consumption. 
No pivot of this kind is easy, and many challenges lie ahead. 
But China’s increasingly prosperous, educated, and confident consumers have the clout – and the numbers – to transform the way the world spends, possibly even more than Western baby boomers did in their prime. 
Their mobile-first shopping habits, openness to travel and new experiences, and rising purchasing power suggest that the products and services they buy will influence consumer markets worldwide, fueling global economic growth. 
The world economy needs them – and no consumer-facing company can afford to ignore them. 

China’s Shift to City-Led Growth 
SHANGHAI – China has achieved some four decades of rapid economic growth. 
But one powerful source of growth has yet to be fully tapped: urbanization. 
Now, the potential of megacities as an engine of dynamism and increased prosperity is finally getting the high-level attention it deserves. 
Over the last decade, China has been working to shift from a manufacturing-led growth model fueled by low-cost labor to an innovation-led, higher-value-added model underpinned by strong productivity gains. 
Urbanization will be critical to facilitate this shift, not least by enabling economies of scale. 
Currently, though China is the world’s most populous country and its second-largest economy, only half the population lives in urbanized areas, and less than 10% reside permanently in megacities. 
And the country’s urbanization rate remains well below the global average. 
Growth in China’s megacities – metropolitan areas with a population exceeding ten million – has long been heavily constrained by rigid state administrative divisions and planning agencies. 
Indeed, in pursuing rapid industrialization, megacities have often been less successful than smaller cities – which have largely evaded such constraints – in accumulating productive capital, attracting foreign direct investment (FDI), and demonstrating entrepreneurial spirit. 
In the 1990s, the small city of Kunshan became China’s leading center for manufacturing electronic products. 
By integrating themselves into global supply chains, small cities in Guangdong province – including Dongguan, Huizhou, Shunde, and Zhongshan – have played a critical role in establishing China as the “Factory of the World.” 
But while the success of smaller cities is to be celebrated, it is China’s megacities where the greatest potential to fuel future progress in productivity – and thus GDP growth – is to be found. 
So far, China has just four “first-tier” cities (with populations exceeding 20 million): Beijing, Shanghai, Guangzhou, and Shenzhen. 
Given the size of China’s population and economy, that is not a lot. 
And, in fact, there is no reason to believe that these megacities have reached their capacity, in terms of population or contribution to economic growth. 
Moreover, China has many dynamic second-tier cities – such as Chengdu, Tianjin, Hangzhou, Wuhan, and Suzhou – that are capable of reaching first-tier status, if given the chance. 
In order to maximize the potential of China’s cities, the government will need to be much more adaptive and flexible, especially regarding its notoriously strict control of urban land-development ratios. 
In particular, China must abandon its land-quota system, which not only limits the amount of land cities can develop for future productivity growth, but also allocates a disproportionate share of land to factories. 
Otherwise, urbanization will continue pushing up already-high housing costs, but not efficiently enough to power sustained growth and development. 
The good news is that local governments are already working with the central government to alleviate or even eliminate existing administrative constraints. 
In China, cities’ administratively defined boundaries include both urban and rural jurisdictions, with the latter – called the “county” – engaged mainly in agriculture. 
For example, about half of Shanghai’s administrative jurisdiction of 6,340 square kilometers (2,448 square miles) is rural. 
Local governments are now introducing so-called county-district conversions, in order to expand urban districts into rural jurisdictions. 
Such efforts, which the central government broadly supports, will enable more housing construction and industrial and commercial expansion. 
Another strategy for advancing China’s transition toward a city-led growth model is to expand the role played by urban clusters that leverage the strength of first-tier cities to boost growth in less-developed areas. 
From an economic standpoint, the Yangtze and Pearl River Deltas – which encompass megacities like Guangzhou, Shanghai, and Shenzhen – are undoubtedly the most important such urban agglomerations, set to generate the higher future productivity gains from economies of scale and complementarity. 
Here, too, China’s leadership has already caught on. 
This past March, Chinese Premier Li Keqiang announced a plan for the development of a city cluster in the Guangdong-Hong Kong-Macau Greater Bay Area, which covers nine cities, including Guangzhou and Shenzhen, as well as the special administration regions of Hong Kong and Macau. 
From 2010 to 2016, the annual GDP of the Greater Bay Area soared from CN¥5.42 trillion ($82 billion) to CN¥9.35 trillion ($1.42 trillion), making it the world’s third-largest urban economy, after Tokyo and New York. 
Yet the population of the Guangdong-Hong Kong-Macau Greater Bay Area is growing fast, and its GDP per capita is less than half that of Tokyo, suggesting that its potential is nowhere near depleted. 
Moreover, China’s leaders seem to be eyeing a second greater bay area, centered on Hangzhou Bay, which, because it overlaps with the Yangtze River Delta, could go a long way toward integrating that already-prosperous region. 
Such a cluster could cover the coastal megacity of Shanghai, as well as about ten more important cities across the Zhejiang and Jiangsu provinces. 
It would include world-class ports, such as the Port of Ningbo-Zhoushan (the world’s busiest in terms of cargo tonnage). 
And it would cover two of China’s 11 existing free-trade zones. 
The result would be a bay area on the scale of San Francisco and Tokyo. 
The pace of China’s economic growth over the last four decades has been unprecedented. 
But China has yet to complete its rise to rich-country status. 
As it upgrades its economy to become more knowledge-based and technology-driven, it is again leveraging its strengths. 
There is no better example of this than the ongoing effort to tap the potential of megacities. 

The Restructuring of the World 
MILAN – The global economy is undergoing a far-reaching transformation. 
Change is being driven by shifts in countries’ populations, productivity, wealth, power, and ambitions, and accelerated by US President Donald Trump’s moves to reshape supply-chain structures, alter cross-border investment incentives, and limit the movement of people and technology across borders. 
The tensions that these changes are producing are most apparent in escalating disputes over trade. 
Notwithstanding some dislocations in emerging economies, markets’ reaction to the tit-for-tat tariffs so far has been only muted. 
Investors probably assume that it is all just part of a renegotiation process that will ultimately produce new rules of engagement for global business – rules that are even more favorable to the powerful. 
But such assumptions may underestimate the complexity of the issues at play, beginning with the politically salient matter of where investment and employment are created. 
On their own, tariff and trade barriers, if viewed as transitory negotiating tactics, will not significantly change global investment patterns or the structure of global supply chains and employment. 
Protectionists like Trump argue that the power of tariffs and other trade barriers lies in their ability to curb cheating and free-riding. 
The implication is that such measures can help to eliminate the tensions, imbalances, and polarization associated with globalization. 
“Cheating,” of course, is in the eye of the beholder. 
State subsidies for specific sectors, including preferential treatment of state-owned enterprises, may be regarded as cheating. 
So may requiring technology transfer in exchange for market access, public procurement favoring domestic entities, acceptance of unsafe work environments and exploitative labor practices, and exchange-rate manipulation. 
The test of free-riding is whether a country contributes too little, relative to its capacity, to the provision of global public goods, such as defense and security, scientific and technical knowledge, mitigation of climate change, and absorption of refugees. 
The culprits depend on the topic in question. 
But whatever the downsides to cheating or free-riding, tackling these behaviors is unlikely to eliminate the conditions that have contributed to economic, social, and political polarization. 
After all, labor arbitrage has been the core driver of the organization of global supply chains for at least three decades – accelerating, of course, with China’s rise – with significant distributional and employment effects. 
It seems unlikely that, had China and other emerging economies adhered to the letter of World Trade Organization rules, the distributional effects of their integration into the global economy would have disappeared. 
What, then, is the real purpose of the tariffs? 
Trump could be interested only in leveling the playing field, at which point he will accept global market outcomes. 
But it is more plausible that this is all part of his strategy – echoed by leaders in a growing number of countries worldwide – to win support by asserting national priorities and sovereignty. 
Such efforts are pushing the world toward a more balkanized system. 
Moreover, the challenges and fears raised by advances in technology, especially digital technology, with regard to both national security and economic performance are also propelling the world toward greater fragmentation. 
Fifteen years ago, few would have predicted that mega-platforms like Google or Facebook would become key players in areas like image recognition, artificial intelligence, and the development of autonomous vehicles (including military vehicles). 
Yet that is exactly what has happened. 
In fact, Google is now a defense contractor (though it may not renew its contract). 
Given the security implications of these developments, as well as a host of issues like data privacy and security, social fragmentation, and foreign interventions in elections, countries are unwilling to leave the Internet unregulated. 
But they are also unwilling to delegate regulation to a supra-national body. 
As a result, many are taking matters into their own hands, leading to a growing divergence among countries regarding Internet regulation. 
Reflecting the national-security tilt of these initiatives, the scope and authority of the Committee on Foreign Investment in the United States – responsible for reviewing the national-security implications of foreign ownership of US companies or operations – has recently been expanded. 
Despite these efforts, however, the fact remains that innovation cannot easily be blocked by national borders. 
On the contrary, the diffusion of ideas may well become the most consequential dimension of globalization in the future. 
While this may complicate national-security planning, it represents powerful new opportunities for business, even as trade faces headwinds. 
Already, there has been an explosion of innovative, digitally-based business models, many of which could become powerful engines of inclusive growth, especially in emerging economies. 
Digitally-enabled ecosystems, with open architecture and low barriers to entry, are one example of an emerging model with considerable economic potential. 
There is one more crucial dynamic that will shape how the global economy will develop in the coming decades: the strategic rivalry between China and the US. 
At this point, it is impossible to say precisely what form this rivalry will take. 
What is clear is that every part of the global economy will be affected by the mix of cooperation and competition that emerges. 
In the face of a powerful rival, one might expect the US to pursue a strategy focused on building, expanding, and consolidating alliances with natural allies – that is, countries with similar governance structures and shared views about the benefits of international cooperation and open markets. 
Instead, Trump has alienated longtime allies and attacked multilateral structures and institutions, all while antagonizing China in what is quickly becoming a two-player game. 
This is a bizarre strategy. 
Whatever advantage Trump thinks he will gain by positioning the US in opposition to its natural allies will be dwarfed by the losses. 
A split between the US and its traditional allies, if it becomes a permanent feature of the new global order, would lead to deeper fragmentation among the world’s market-oriented democracies. 
That will surely shift the long-term balance of power in China’s favor, as it moves steadily toward becoming the world’s largest economy. 

Optimizing Decision-Making in a Dangerous World 
CAMBRIDGE AND NEW YORK – The United States and China have reached a precarious moment in their relationship. 
Ensuring a peaceful outcome will be the greatest geopolitical challenge of the twenty-first century. 
Are our leaders up to it? 
As things stand today, the risks seem only to be escalating. 
US President Donald Trump’s administration has imposed economic sanctions on Chinese entities with financial ties to North Korea, because it does not believe that China has done enough to constrain the North Korean regime. 
And, as Trump has said bluntly, if the Chinese don’t deal with North Korea, he will. 
As North Korea inches closer to developing a nuclear-tipped missile that can hit the continental US, Trump has threatened the country with “fire and fury like the world has never seen.” 
China, for its part, rejects what its foreign ministry has called the “China responsibility theory” regarding North Korea. 
A recent editorial in a Chinese state-run newspaper asserted that while China would stay neutral if North Korea attacked first, US strikes aimed at regime change would cause China to intervene. 
The Chinese also responded furiously to the passage of a US naval warship through disputed waters in the South China Sea last month, a move that the foreign ministry called a “provocation” that “severely undermines China’s sovereignty and security.” 
While these issues are modern, the underlying political dynamic is not new. 
Describing a similar power struggle in classical Greece, the historian Thucydides wrote that, “It was the rise of Athens, and the fear that this instilled in Sparta, that made war inevitable.” 
Across the ages, the so-called Thucydides Trap has appeared repeatedly, fueling tensions between rising and reigning powers that caused otherwise manageable events to fuel cycles of action and reaction that ended in devastating wars. 
Over the last 500 years, in 16 cases where a rising power threatened to displace a ruling power, 12 led to war. 
The US and China should take note: business as usual is likely to produce history as usual. 
But, beyond dire warnings, history offers instructive clues for avoiding conflict. 
Consider the seemingly insurmountable dilemma faced by US President Franklin Roosevelt in 1940, when the United Kingdom was under serious strain in its fight against Nazi Germany. 
The UK’s supplies and money were running low, but Roosevelt knew that the US Congress would never simply loan Britain the money it needed. 
Roosevelt’s problem “seemed insoluble,” writes historian Doris Kearns Goodwin in her book No Ordinary Time. 
But Roosevelt did something that would seem inconceivable in today’s political climate: he took a ten-day break on a navy ship, and gave the predicament the thought it deserved. 
Then, too, the idea of the US president escaping from the world at a critical juncture initially drew criticism. 
“I didn’t know for quite a while what he was thinking about, if anything,” Roosevelt aide Harry Hopkins later said. “But then – I began to get the idea that he was refueling, the way he so often does when he seems to be resting and carefree. 
So I didn’t ask him any questions. 
Then, one evening, he suddenly came out with it – the whole program.” 
Hopkins was referring to the groundbreaking $50 billion Lend-Lease Act, which became the primary means by which the US provided military aid to foreign countries during World War II. Through that program, the president could transfer defense materials for which Congress had appropriated funds to the government of any country whose defense was considered vital to US security, without requiring compensation. 
Today, leaders are under extraordinary pressure to apply similarly inspired decision-making skills to an array of daunting challenges. 
Beyond deepening tensions between China and the US, they must confront Russia’s growing assertiveness, the Middle East’s continued instability, and the looming specter of catastrophic climate change. 
How many have the courage to learn from Roosevelt’s approach? 
It is hard to imagine Trump following in FDR’s footsteps. 
But to insist that the most certain path to potentially catastrophic decisions begins with an exhausted, intemperate mind is not a partisan observation. 
The Stoics understood this. 
In his 19 years as Rome’s emperor, Marcus Aurelius faced nearly constant war, a horrific plague, and a coup attempt. 
But instead of lashing out at those he presumed were against him, Aurelius calmly asked himself, “Does what’s happened keep you from acting with justice, generosity, self-control, sanity, prudence, honesty, humility, straightforwardness, and all other qualities that allow a person’s nature to fulfill itself?” 
Chinese wisdom offers another helpful perspective. 
Central to Taoism is the concept of wu wei, which can be literally translated as “non-action,” but is really much more than that. 
In Taoism, when we are in a state of harmony and connection with ourselves, we operate in a kind of effortless, intuitive, and spontaneous way. 
Looking back on his own presidency, Bill Clinton recognized the dangers of burnout. 
“Every important mistake I’ve made in my life, I’ve made because I was too tired,” he once said. 
David Gergen, in his book Eyewitness to Power, detailed the costs of Clinton’s undisciplined rest habits in the first period of his presidency. 
“Clinton was still celebrating the victory and loved staying up half the night to laugh and talk with old friends,” he wrote. 
This had a visible impact on the president, who according to Gergen, “seemed worn out, puffy, and hyper,” as well as “out of sorts, easily distracted, and impatient.” 
Creating the time and the space needed to recharge, refuel, and reflect is essential for the human operating system to function optimally. 
That is not a systemic bug; it’s a powerful feature – one that leaders today should be using to its fullest extent. 

Lies, Damn Lies, and Vietnam’s Trade Statistics 
SINGAPORE – On April 17, Bloomberg reported that China had overtaken the United States as Vietnam’s largest export market. 
According to figures cited by the news organization and tallied by the International Monetary Fund, Vietnam’s exports to China totaled $50.6 billion in 2017, compared to $46.5 billion in exports to the US. 
If these numbers are accurate, they would represent a significant shift in the triangular relationship between Vietnam, China, and the US. 
As Bloomberg succinctly put it, the data underscore how the world’s second-largest economy is “growing its influence in the region” at the expense of the US. 
But the trade numbers do not tell the whole story; a closer reading suggests they might even be wrong. 
Preliminary statistics from the General Department of Vietnam Customs (GDVC), which oversees Vietnam’s trade data, contradict the IMF assessment. 
According to the GDVC, exports to the US last year totaled $41.6 billion, while exports to China stood at $35.5 billion. 
In other words, by Vietnam’s count, the US remained its largest export market by a margin of 17%, a gap that held steady during the first three months of 2018. 
Moreover, the GDVC figures show that historic trends in Vietnam’s trade ties have remained intact; 
Vietnam continues to run a large trade deficit with China and a surplus with the US. 
So, what can account for the discrepancies between the official data and the IMF’s figures? 
One possible explanation is methodological: the Fund and the GDVC simply used different formulas to arrive at their estimates. 
But a gap of $15.1 billion on the China side of the ledger makes this highly unlikely. 
Another possibility is that the IMF sourced its data exclusively from Chinese authorities. 
But evidence for that scenario is thin. 
A third theory – which, admittedly, is impossible to prove beyond a reasonable doubt – may be the most credible: both sides manipulated annual and monthly trade data to bolster their own narratives. 
For Vietnam, data indicating lower exports would support the government’s efforts to extend trade deeper into Chinese markets. 
Plagued by a large and persistent bilateral trade deficit, Vietnamese officials have long requested that their Chinese counterparts allow more imports from Vietnam. 
The numbers released by GDVC would advance – or at least not undermine – that goal. 
For China, on the other hand, inflating the figures for imports from Vietnam could help neutralize such a request, reminding the Vietnamese authorities of how important trade with China is to their country’s economy. 
Higher trade figures may persuade Vietnam to maintain friendly bilateral ties, and perhaps even to adopt more accommodating positions on thorny regional security issues, such as the South China Sea dispute. 
Of course, the Trump administration’s protectionist trade policies could render all of this speculation meaningless. 
While Vietnam’s bilateral trade with China is expanding and could exceed $100 billion sometime this year, its trading relationship with the US is being hurt by America’s inward turn. 
Major Vietnamese exporters of seafood and steel have already been hit with new US tariffs,and additional sectors, such as textiles, could be next. 
With the US having withdrawn from the Trans-Pacific Partnership, growth in bilateral trade is bound to suffer further. 
If these trends continue, the IMF’s analysis – as questionable as it may be now – will eventually become reality. 
And, if China, which has long been Vietnam’s largest source of imports, does replace the US as Vietnam’s most important export market, Vietnam will find it nearly impossible to continue its current strategy of hedging between two great powers. 
At that point, no amount of creative accounting will be able to mask the new realities of Vietnam’s economic constraints. 

How China Views Trump 
LONDON – Donald Trump’s stunning victory in the US presidential election has shaken the world. 
From Mexican President Enrique Peña Nieto’s conspicuous silence to French President Francois Hollande’s statement that it opens up a “period of uncertainty” to the Kremlin’s barely concealed giddiness, Trump has not been received internationally like past US presidents. 
But one country has remained largely unmoved: China. 
Trump’s stance on China is well known: he has blamed the country for everything from hacks on his opponent (thought by the US government to be the work of Russia) to climate change (which he has called a hoax cooked up by China to undermine US competitiveness). 
And he has promised to impose a 45% tariff on Chinese goods. 
Yet prudence flows through China’s Confucian veins. 
Rather than jumping to conclusions about future US policies, much less taking premature action, China’s leaders have remained neutral in their response to Trump’s victory. 
They seem confident that, though the bilateral relationship will change somewhat, it will not be fundamentally transformed. 
It will still be neither very good nor very bad. 
It helps that Trump has all but ceased China-bashing since the election. 
Instead, he posted on Twitter a video of his granddaughter reciting a poem in Mandarin – an instant hit in China. 
Whether intended explicitly as a message to China or not, the move highlighted the possibility of a gulf between Trump’s campaign rhetoric and his actual positions and plans. 
Some in the West might think that the rhetoric alone would be enough to incense China’s leaders. 
But the truth is that the Chinese are far more offended by national leaders meeting with the Dalai Lama, as President Barack Obama did in June. 
And, as past US elections have made clear, rhetoric may well bear little relation to reality. 
That is all the more true when the rhetoric in question includes promises that would harm everyone involved, as Trump’s proposed tariffs would. 
The availability of inexpensive products from China has long placed downward pressure on prices even of non-Chinese goods in the US market. 
For low-income households, which are the most likely to consume inexpensive imported goods, this has been a godsend, as it has effectively raised their purchasing power. 
If Chinese imports were blocked, prices would rise, undermining consumption, impeding economic growth, and exacerbating inequality. 
And the US would not even be protected from manufacturing employment losses; the jobs would just go to Vietnam or Bangladesh, where labor costs are even lower than in China nowadays. 
The same goes for investment flows – the second engine of globalization – which are often conveniently forgotten in discussions of the US-China economic relationship. 
China is one of the biggest purchasers of US Treasuries, and continues to finance US consumption and investment. 
China may even help to finance the large infrastructure projects that Trump has promised, thereby reducing pressure on the US budget. 
So Trump is unlikely to change much in terms of US economic policy, at least if he knows what’s good for him. 
Where he might make some changes is in foreign policy; but those changes may be more likely to please China than to aggravate it. 
The Obama administration has for years been engaged in a strategic rebalancing toward Asia. 
At a time when China was rapidly accumulating both economic and military strength, Obama seemed committed to containing its rise as best he could, including by involving the US in territorial disputes in the South China Sea. 
By contrast, Trump, with his “America first” approach to foreign policy, has paid little attention to the South China Sea dispute. 
That works just fine for China, which would welcome less US involvement in Asia – in particular, in the South China Sea, as well as in Taiwan. 
But here, too, there is a gap between rhetoric and reality, and no radical change should be expected. 
Soon after the election, Trump assured the leaders of Japan and South Korea of America’s commitment to their countries’ security, despite a campaign vow to demand more payment for US protection. 
Add to that the threat posed by North Korea, and a destabilizing US strategic retreat from Asia remains highly unlikely. 
If Trump follows through on his pledge to mend fences with Russia, the odds that China will escape US pressure would lengthen further. 
Without Russia to deal with, the US would have even more time to dedicate to Asian affairs. 
Moreover, a warming of the Russia-US relationship could lead to subtle changes in the Russia-China relationship, which has deepened since Russia’s annexation of Crimea wrecked its relations with the West. 
Trump’s victory is far from inconsequential. 
He is no ordinary US president, and he must be taken seriously, though not literally, to borrow a phrase from The Atlantic’s Salena Zito. 
But, as China’s leaders seem to recognize, he will have little choice but to color mostly inside the lines as president. 
Even if he wants to deviate more from the foreign-policy consensus, the US system limits his ability to do so. 
So, rather than worrying about Trump’s personal predilections or trying to predict the unpredictable, China’s leaders are remaining focused on what is really important: the need for a cooperative bilateral relationship. 
Other world powers should do the same. 

China’s Weaponization of Trade 
NEW DELHI – China denies mixing business with politics, yet it has long used trade to punish countries that refuse to toe its line. 
China’s recent heavy-handed economic sanctioning of South Korea, in response to that country’s decision to deploy the Terminal High Altitude Area Defense (THAAD) anti-missile system, was just the latest example of the Chinese authorities’ use of trade as a political weapon. 
China’s government has encouraged and then exploited states’ economic reliance on it to compel their support for its foreign-policy objectives. 
Its economic punishments range from restricting imports or informally boycotting goods from a targeted country to halting strategic exports (such as rare-earth minerals) and encouraging domestic protests against specific foreign businesses. 
Other tools include suspending tourist travel and blocking fishing access. 
All are used carefully to avoid disruption that could harm China’s own business interests. 
Mongolia became a classic case of such geo-economic coercion, after it hosted the Dalai Lama last November. 
With China accounting for 90% of Mongolian exports, the Chinese authorities set out to teach Mongolia a lesson. 
After imposing punitive fees on its commodity exports, Chinese Foreign Minister Wang Yi voiced “hope that Mongolia has taken this lesson to heart” and that it would “scrupulously abide by its promise” not to invite the Tibetan spiritual leader again. 
A more famous case was China’s trade reprisals against Norway, after the 2010 Nobel Peace Prize was awarded to the jailed Chinese dissident Liu Xiaobo. 
As a result, Norwegian salmon exports to China collapsed. 
In 2010, China exploited its monopoly on the global production of vital rare-earth minerals to inflict commercial pain on Japan and the West through an unannounced export embargo. 
In 2012, after China’s sovereignty dispute with Japan over the Senkaku Islands (which the Japanese first controlled in 1895) flared anew, China once again used trade as a strategic weapon, costing Japan billions of dollars. 
Likewise, in April 2012, following an incident near the disputed Scarborough Shoal in the South China Sea, China bullied the Philippines not only by dispatching surveillance vessels, but also by issuing an advisory against travel there and imposing sudden curbs on banana imports (which bankrupted many Philippine growers). 
With international attention focused on its trade actions, China then quietly seized the shoal. 
China’s recent trade reprisals against South Korea for deploying the THAAD system should be viewed against this background. 
China’s reprisals were not launched against the US, which deployed the system to defend against North Korea’s emerging missile threat and has the heft to hit back hard. 
Nor was this the first time: in 2000, when South Korea increased tariffs on garlic to protect its farmers from a flood of imports, China responded by banning imports of South Korean cellphones and polyethylene. 
The sweeping retaliation against unrelated products was intended not only to promote domestic industries, but also to ensure that South Korea lost far more than China did. 
China will not use the trade cudgel when it has more to lose, as illustrated by the current Sino-Indian troop standoff at the border where Tibet, Bhutan, and the Indian state of Sikkim meet. 
Chinese leaders value the lopsided trade relationship with India – exports are more than five times higher than imports – as a strategic weapon to undercut its rival’s manufacturing base while reaping handsome profits. 
So, instead of halting border trade, which could invite Indian economic reprisals, China has cut off Indian pilgrims’ historical access to sacred sites in Tibet. 
Where it has trade leverage, China is not shy about exercising it. 
A 2010 study found that countries whose leaders met the Dalai Lama suffered a rapid decline of 8.1-16.9% in exports to China, with the result that now almost all countries, with the conspicuous exception of India and the US, shun official contact with the Tibetan leader. 
The harsh reality is that China is turning into a trade tyrant that rides roughshod over international rules. 
Its violations include maintaining nontariff barriers to keep out foreign competition; subsidizing exports; tilting the domestic market in favor of Chinese companies; pirating intellectual property; using antitrust laws to extort concessions; and underwriting acquisitions of foreign firms to bring home their technologies. 
China regards even bilateral pacts as no more than tools to enable it to achieve its objectives. 
From China’s perspective, no treaty has binding force once it has served its immediate purpose, as officials recently demonstrated by trashing the 1984 Sino-British Joint Declaration that paved the way for Hong Kong’s handover in 1997. 
Ironically, China has developed its trade muscle with help from the US, which played a key role in China’s economic rise by shunning sanctions and integrating it into global institutions. 
President Donald Trump’s election was supposed to end China’s free ride on trade. 
Yet, far from taking any action against a country that he has long assailed as a trade cheater, Trump is helping make China great again, including by withdrawing the US from the Trans-Pacific Partnership and shrinking US influence in the Asia-Pacific region. 
The TPP, which Japanese Prime Minister Shinzo Abe is seeking to revive, but without US participation, can help rein in China’s unremitting mercantilist behavior by creating a market-friendly, rule-based economic community. 
But if the TPP is to be truly effective in offsetting the trade sword wielded by a powerful, highly centralized authoritarian regime, it needs to be expanded to include India and South Korea. 
China’s weaponization of trade has gone unchallenged so far. 
Only a concerted international strategy, with a revived TPP an essential component, stands a chance of compelling China’s leaders to play by the rules. 

The Chinese Economy and Fed Policy 
CAMBRIDGE – Janet Yellen’s speech on September 24 at the University of Massachusetts clearly indicated that she and the majority of the members of the Federal Reserve’s Federal Open Market Committee intend to raise the short-term interest rate by the end of 2015. 
It was particularly important that she explicitly included her own view, unlike when she spoke on behalf of the entire FOMC after its September meeting. 
Nonetheless, given the Fed’s recent history of revising its policy position, markets remain skeptical about the likelihood of a rate increase this year. 
The Fed had been saying for several months that it would raise the federal funds rate when the labor market approached full employment and when FOMC members could anticipate that annual inflation would reach 2%. 
But, although both conditions were met earlier in September, the FOMC decided to leave the rate unchanged, explaining that it was concerned about global economic conditions and about events in China in particular. 
I was unconvinced. 
I have believed for some months that the Fed should start tightening monetary policy to reduce the risks of financial instability caused by the behavior of investors and lenders in response to the prolonged period of exceptionally low interest rates since the 2008 financial crisis. 
Events in China are no reason for further delay. 
Consider, first, domestic economic conditions, starting with the employment picture. 
By the time the FOMC met on September 16, the unemployment rate had fallen to 5.1%, the level that the Fed had earlier identified as full employment. 
Although there are still people who cannot find full-time jobs, driving the unemployment rate below 5.1% would, according to the Fed, eventually lead to unwanted increases in inflation. 
The current inflation picture is more confusing. 
The annual headline rate over the past 12 months was only 0.2%, far short of the Fed’s 2% target. 
This reflected the dramatic fall in energy prices during the previous year, with the energy component of the consumer price index down 13%. 
The rate of so-called core inflation (which excludes energy purchases) was 1.8%. 
Even that understates the impact of energy on measured inflation, because lower gasoline prices reduce shipping costs, lowering a wide range of prices. 
The point is simple: When energy prices stop falling, the overall price index will rise close to 2%. 
And the FOMC members’ own median forecast puts inflation at 1.8% in 2017 and 2% in 2018. 
So if the Fed, for whatever reason, wanted to leave the interest rate unchanged, it needed an explanation that went beyond economic conditions in the United States. 
It turned to China, which had been much in the news in recent weeks. 
China was reducing its global imports, potentially reducing demand for exports from the US. 
The Chinese stock market had fallen sharply, declining some 40% from its recent high. 
And China had abruptly devalued the renminbi, potentially contributing to lower import prices – and therefore lower inflation – for the US. 
But when it comes to the impact of China’s troubles on the US economy, there is less than meets the eye. 
China’s import demand is slowing in line with its economic structure’s shift away from industry and toward services and household consumption. 
This means that China needs less of the iron ore and other raw materials that it imports from Australia and South America and less of the specialized manufacturing equipment that it imports from Germany and Japan. 
The US accounts for only 8% of China’s imports, and its exports to China represent less than 1% of its GDP. 
So China’s cut in imports could not shave more than a few tenths of a percentage point from US GDP, and even that would be spread over several years. 
As for the stock market – widely viewed as a kind of casino for a small fraction of Chinese households – only about 6% of China’s population own shares. 
The Shanghai stock market index soared from 2,200 a year ago to a peak of 5,100 in mid-summer and then dropped sharply, to about 3,000 now. 
So, despite the sharp drop that made headlines recently, Chinese shares are up more than 30% from a year ago. 
More important, wealth and consumption in China are closely related to real-estate values, not equity values. 
Finally, the renminbi’s recent decline against the dollar was only 2.5%, from CN¥6.2 to CN¥6.35 – far below the double-digit declines of the Japanese yen, the euro, and the British pound. 
So, on an overall trade-weighted basis, the renminbi is substantially higher relative to the currencies with which it competes. 
Even more relevant, the decline of the renminbi and other currencies in the past year has had very little impact on US import prices, because Chinese and other exporters price their goods in dollars and do not adjust them when the exchange rate changes. 
While official US data show overall import prices down 11% in the 12 months through August, this is almost entirely due to lower energy costs. 
When energy products are excluded, import prices are down only 3%. 
So the Fed is right to say that inflation is low because of the sharp drop in energy prices; but it need not worry about the effect of major trading partners’ lower currency values. 
And, again, when the price of energy stops declining, the inflation rate will rise close to the core rate of 1.8%. 
So, unless there are surprising changes in the US economy, we can expect the Fed to start raising interest rates later this year, as Janet Yellen has proposed, and to continue raising them in 2016 and beyond. 
I only hope that it raises them enough over the next 18 months to avoid the financial instability and longer-term inflation that could result from the long era of excessively easy monetary policy. 

Chinese Finance Comes of Age 
LONDON – The Chinese financial system’s evolution in recent years has been extraordinary. 
I have observed its transformation as a member of the International Advisory Council of the China Banking Regulatory Commission (CBRC). 
Back in 2002, all of China’s major banks were awash in non-performing loans (NPLs), which in some cases amounted to more than 10% of the total balance sheet. 
None of the major banks met even the Basel 1 standards for capital adequacy. 
Few financiers in London or New York could have named any bank other than Bank of China, which was often wrongly thought to be the central bank. 
And to suggest that the United States Federal Reserve, or the United Kingdom’s Financial Services Authority, might have anything to learn from China’s financial authorities would have been thought absurd. 
Less than a decade later, much has changed. 
The old NPL problem was resolved, primarily by establishing asset-management companies to take over doubtful assets, and injecting new capital into the commercial banks. 
Now, reported NPLs amount to little more than 1% of assets. 
Foreign partners have been brought in to transfer skills, and minority shareholdings have been floated. 
Current valuations put four Chinese banks in the global top ten by market capitalization. 
They are now expanding overseas, fortified by their strong capital backing. 
Of course, challenges remain. 
Even in China there is no magic potion that can revive a loan to a defunct exporter. 
And China’s big banks have lent large sums, willingly or otherwise, to local governments for infrastructure projects – many of them of dubious economic value. 
There is an ever-present risk that the property market might one day collapse, though banks would emerge in better shape than have banks in the US and the UK, because much speculative investment has been funded with cash, or with only modest leverage. 
The authorities in Beijing, especially the CBRC and the People’s Bank of China (the real central bank), have a good record of managing incipient booms and busts, and I would not bet against their success this time. 
They have considerable flexibility, owing to a range of policy tools, including variable capital and reserve requirements and direct controls on mortgage lending terms. 
They have already been tightening the screws on credit growth for several months, with positive effects. 
It would be flattering to think that this turnaround in China’s financial system been attributable to the wise counsels of foreign advisers. 
But, while external influences have been helpful in some ways – the stimulus of Basel 1 and 2 strengthened the hands of those in Beijing determined to clean up the banking system – the Chinese now, not unreasonably, treat advice from the City of London and Wall Street with some skepticism. 
For example, recent criticism of Asian regulators by US Treasury Secretary Timothy Geithner is viewed across the region with scorn, not to mention incredulity. 
A little more humility is in order, given US regulators’ performance in the run-up to the crisis. 
People who live in glass houses should not throw even rhetorical stones. 
The most interesting development is that we can now see increasing convergence in the regulatory philosophies and toolkits in Beijing, London, and New York. 
Until the recent near-implosion of Western capitalism, the North Atlantic authorities thought that the end of financial history had been reached. 
Financial conditions could be controlled with one tool – the short-term interest rate – deployed exclusively in pursuit of a target, implicit or explicit, for consumer price inflation. 
Banks’ capital-adequacy ratios were set globally, and, once set, remained fixed. 
Otherwise, the market knew best. 
Banks had their own incentives to lend wisely, and controls on lending would necessarily prove ineffective. 
By contrast, in China, all aspects of a bank’s business were directly overseen. 
Indeed, most banks were under the sway of the central bank. 
Now, in Beijing, officials see the advantages of a more hands-off approach, and of institutions with a primarily commercial focus. 
But they have not eschewed the use of variable capital and reserve requirements, loan-to-deposit ratios, and thresholds for minimum deposits and maximum leverage as controls on property lending. 
Meanwhile, in developed capital markets, we are busily reinventing these “macroprudential instruments,” to use the term now in vogue in Basel. 
We can now see the utility of a more flexible toolkit to respond to excessive credit expansion, or asset-price bubbles, where the manipulation of short-term interest rates can be a blunt instrument or, worse, a double-edged sword. 
An interest-rate rise might take the heat out of the mortgage market, but it will also chill the rest of the economy. 
Regulatory philosophies are converging, too. 
Former British Prime Minister Margaret Thatcher’s famous injunction that “you cannot buck the market” was part of the regulatory mindset in the pre-crisis Anglosphere. 
And former Fed Chairman Alan Greenspan resisted any attempts to rein in the animal spirits of the wealth creators on Wall Street. 
The Chinese were less ideological. 
They had no compunction about calling a bubble a bubble, or in intervening to deflate it. 
Now, only Sarah Palin reveres Thatcher’s views on all issues, and Greenspan has been airbrushed out of financial history, Chinese-style. 
When the G-7 morphed into the G-20 in early 2009, many were understandably worried that, with such a diverse range of participants, coming from such different traditions, it would be difficult to achieve consensus on regulatory matters in the Basel Committee and elsewhere. 
These concerns turned out to have been overstated. 
The elements of a broader consensus on the future role of financial regulation are in place, as long as Americans like Geithner can resist their constant desire to tell the rest of the world to do as they say, not as they do. 

China’s Financial Floodgates 
NEW YORK – As China’s economy starts to slow, following decades of spectacular growth, the government will increasingly be exposed to the siren song of capital-account liberalization. 
This option might initially appear attractive, particularly given the Chinese government’s desire to internationalize the renminbi. 
But appearances can deceive. 
A new report argues that the Chinese authorities should be skeptical about capital-account liberalization. 
Drawing lessons from the recent experiences of other emerging countries, the report concludes that China should adopt a carefully sequenced and cautious approach when exposing its economy to the caprices of global capital flows. 
The common thread to be found in the recent history of emerging economies – beginning in Latin America and running through East Asia and Central and Eastern Europe – is that capital flows are strongly pro-cyclical, and are the biggest single cause of financial instability. 
Domestic financial instability, associated with liberalization, also has a large impact on economic performance, as does the lack of control over non-bank financial intermediaries – an issue that China is now starting to face as the shadow banking sector’s contribution to credit growth becomes more pronounced. 
Most academic research also supports the view that financial and capital-account liberalization should be undertaken warily, and that it should be accompanied by stronger domestic financial regulation. 
In the case of capital flows, this means retaining capital-account regulations as an essential tool of macroeconomic policy. 
Indeed, during the 1990s, China – and also India – taught the rest of the developing world the importance of gradual liberalization. 
It was a lesson that many countries fully learned only in the wake of the economic and financial crises that began in East Asia in 1997, spread to Russia in 1998, and affected most of the emerging world. 
By maintaining strong capital-account regulation, China avoided the contagion. 
Even the International Monetary Fund, in late 2012, adopted a cautious approach. 
The IMF now recognizes that capital-account liberalization comes with risks as well as benefits, and that “liberalization needs to be well planned, timed, and sequenced in order to ensure that its benefits outweigh the costs.” 
Moreover, the Fund now regards capital-account regulations as part of the broader menu of macro-prudential measures that countries should be free to use to prevent economic and financial instability. 
To the extent that capital-account volatility is the major pro-cyclical financial shock in emerging economies, regulation should be the major macro-prudential instrument used to counter it. 
These regulations should complement, not substitute for, other countercyclical macroeconomic policies. 
The IMF recommends giving higher priority to those other policies, whereas we have previously recommended using them and capital-account regulations simultaneously. 
It is not just emerging markets that have had to pay heed to the dangers of rapid liberalization. 
Japan’s experiences also offer valuable lessons about the importance of prudence in capital-account liberalization for a currency in increasingly high demand internationally. 
For an extended period, Japan allowed only strongly regulated financial intermediaries to manage capital flows, effectively discouraging the international use of its currency. 
And when a tsunami of capital looked set to flood the economy, policymakers did not shy away from trying to contain the inflows. 
In a sense, Western Europe was once in the same boat. 
Its capital-account liberalization was also a long-term process, beginning with current-account convertibility in 1958 and ending with capital-account convertibility in 1990. 
And it faced a crisis of its payments system two years later that led to significant depreciation for some countries’ currencies. 
None of this is intended to suggest that the internationalization of the renminbi should not take place in the foreseeable future. 
Given the importance of China in the global economy, the denomination of an increasing share of trade and investment in renminbi seems inevitable. 
But China’s authorities should manage that process gradually, choosing the specific channels through which it should take place. 
Indeed, China is perhaps the most successful example in history of gradual and pragmatic economic transformation. 
It should not allow itself to be tempted from its tried and tested course by calls for a policy that has led too many emerging economies onto the rocks. 

North Korea’s Step Too Far? 
BEIJING – After nearly a month of belligerent bluster from North Korea, China appears to have had enough, ending its silence about North Korea’s brinkmanship and suddenly roaring its disapproval of its ally’s reckless threats. 
China’s exceptional tough talk does not necessarily mean that it intends to abandon Kim Jong-un’s regime; but, at the very least, it does suggest that a radical shift in China’s policy toward North Korea might no longer be unthinkable. 
When Chinese Foreign Minister Wang Yi exchanged phone calls with United Nations Secretary-General Ban Ki-moon on April 6, he expressed China’s rejection of rhetoric and action aimed at destabilizing the Northeast Asian region. 
Moreover, Wang made clear that China would not allow “troublemaking on China’s doorstep.” 
The next day, Chinese President Xi Jinping, speaking to an assembly of primarily Asian political and business leaders at the annual government-sponsored Boao Forum for Asia, declared that no country “should be allowed to throw a region and even the whole world into chaos for selfish gain.” 
Xi did not mention any country by name, but his implicit condemnation of North Korea was clear to all. 
Before these official rebukes, there had been much speculation about whether China would risk a fundamental change in its relations with North Korea, the socialist “little brother” that it continues to subsidize heavily. 
Following the rare display of open indignation by Xi and Wang, such speculation has now become stronger than ever. 
Some ask what “value” Kim’s hermit kingdom provides that prevents China from acting decisively; others wonder to what extent Chinese leaders’ domestic concerns continue to inhibit their willingness to switch course on North Korea. 
In fact, China’s leaders have agonized over North Korea’s recent provocations. 
They have been struggling to persuade the Kim regime to temper its volatility and accept a “grand bargain”: official recognition and normalization of relations with all of its neighbors, and with the United States, in exchange for denuclearization. 
Indeed, this has led to considerable squabbling between the two countries in recent years. 
China understands that North Korea’s intractability is rooted in its deep isolation from the world, mass deception of its people, and Kim’s fear of losing control of a country that only his family has ruled. 
So the country’s rulers have come to believe that they can gain attention and resources only through provocation. 
For China, the Kim regime’s survival can be assured only if it follows China’s lead in reforming and opening up. 
But, faced with South Korea’s shining democracy and booming economy, the Chinese model is irrelevant to the North: following it would mean acknowledging the South’s supremacy on the Korean Peninsula, and thus an instant loss of legitimacy. 
During the past two decades, North Korea’s leaders have experimented lightly with minimal “reform,” only to retreat from it quickly. 
China patiently bore this pattern of intermittent brinkmanship and timid reform, largely owing to its belief that the risks posed by the Kim dynasty could be controlled as long as China did not cut off the regime’s lifeline of oil, food, and other necessities. 
More important, China’s leaders believed that by shielding the North from US pressure, it was acting in the interest of its own national security. 
But here China’s analysis has been completely wrong, for it underestimates the Kim regime’s unmanageable desperation whenever it believes that its survival in doubt. 
Moreover, North Korea does not want to be beholden to any power, including China. 
So it exploits China’s goodwill and national-security concerns, and even regards Chinese patronage as its due. 
A further complication concerns North Korea’s nuclear aspirations. 
The North appears to be convinced that, with nuclear weapons, it can maintain complete diplomatic independence, and that China, fearing nuclear blackmail, will never abandon it. 
Now, however, it is North Korea’s turn to make a mistake. 
Kim Jong-un’s childish tantrums have genuinely enraged China. 
Yes, the country’s leaders have sometimes complained about the heavy burden of subsidizing North Korea; but, until now, they had never shown such open disgust with the North’s performance. 
China’s warning that it will not allow North Korean “troublemaking on China’s doorstep” can be considered the equivalent of a “yellow card” in soccer. 
China has not decided to abandon North Korea. 
But the warning is a stern one for Kim Jong-un: China may send him to the sidelines if he does not change his behavior. 
US Secretary of State John Kerry is set to visit Beijing in the coming days. 
It is now time for American and Chinese leaders to negotiate a real and viable exit from the current crisis, while productively exploring ways to restart the denuclearization process on the Korean peninsula. 
If Kim’s bombast and nuclear threats lead to China-US bonding over a joint North Korea settlement, the entire world will be the safer for it. 

China’s India Land Grab 
NEW DELHI – Stoking tensions with Japan, Vietnam, and the Philippines over islands in the South and East China Seas has not prevented an increasingly assertive China from opening yet another front by staging a military incursion across the disputed, forbidding Himalayan frontier. 
On the night of April 15, a People’s Liberation Army (PLA) platoon stealthily intruded near the China-India-Pakistan tri-junction, established a camp 19 kilometers (12 miles) inside Indian-controlled territory, and presented India’s government with the potential loss of a strategically vital 750-square-kilometer high-altitude plateau. 
A stunned India, already reeling under a crippling domestic political crisis, has groped for an effective response to China’s land-grab – the largest and most strategic real estate China has seized since it began pursuing a more muscular policy toward its neighbors. 
Whether China intends to stay put by building permanent structures for its troops on the plateau’s icy heights, or plans to withdraw after having extracted humiliating military concessions from India, remains an open – and in some ways a moot – question. 
The fact is that, with its “peaceful rise” giving way to an increasingly sharp-elbowed approach to its neighbors, China has broadened its “core interests” – which brook no compromise – and territorial claims, while showing a growing readiness to take risks to achieve its goals. 
For example, China has not only escalated its challenge to Japan’s decades-old control of the Senkaku (Diaoyu) Islands, but is also facing off against the Philippines since taking effective control of Scarborough Shoal last year. 
What makes the Himalayan incursion a powerful symbol of China’s aggressive new stance in Asia is that its intruding troops have set up camp in an area that extends beyond the “line of actual control” (LAC) that China itself unilaterally drew when it defeated India in the 1962 Chinese-initiated border war. 
While China’s navy and a part of its air force focus on supporting revanchist territorial and maritime claims in the South and East China Seas, its army has been active in the mountainous borderlands with India, trying to alter the LAC bit by bit. 
One of the novel methods that the PLA has employed is to bring ethnic Han pastoralists to the valleys along the LAC and give them cover to range across it, in the process driving Indian herdsmen from their traditional pasturelands. 
But the latest crisis was sparked by China’s use of direct military means in a strategic border area close to the Karakoram Pass linking China to India. 
Because the LAC has not been mutually clarified – China reneged on a 2001 promise to exchange maps with India – China claims that PLA troops are merely camping on “Chinese land.” 
Yet, in a replay of its old strategy of furtively encroaching on disputed land and then presenting itself as the conciliator, China now counsels “patience” and “negotiations” to help resolve the latest “issue.” 
China is clearly seeking to exploit India’s political disarray to alter the reality on the ground. 
A paralyzed and rudderless Indian government initially blacked out reporting on the incursion, lest it come under public pressure to mount a robust response. 
Its first public statement came only after China issued a bland denial of the intrusion in response to Indian media reports quoting army sources. 
To add to India’s woes, Salman Khurshid, the country’s bungling foreign minister, initially made light of the deepest Chinese incursion in more than a quarter-century. 
The garrulous minister called the intrusion just “one little spot” of acne on the otherwise “beautiful face” of the bilateral relationship – a mere blemish that could be treated with “an ointment.” 
Those inept comments fatally undercut the government’s summoning of the Chinese ambassador to demand a return to the status quo ante. 
With Prime Minister Manmohan Singh’s corruption-tainted government tottering on the brink of collapse, there has been no official explanation of how India was caught napping in a militarily critical area where, in the recent past, China had made repeated attempts to encroach on Indian land. 
In fact, the government inexplicably replaced regular army troops with border police in 2010 to patrol the mountain-ringed plateau into which the PLA has now intruded. 
Known as Depsang, the plateau lies astride an ancient silk route connecting Yarkand in Xinjiang to India’s Ladakh region through the Karakoram Pass. 
India, with a military staging post and airstrip just south of the Karakoram Pass, has the capacity to cut off the highway linking China with its “all-weather ally,” Pakistan. 
The PLA intrusion, by threatening that Indian base, may have been intended to foreclose India’s ability to choke off supplies to Chinese troops and workers in Pakistan’s Gilgit-Baltistan region, where China has expanded its military footprint and strategic projects. 
To guard those projects, several thousand Chinese troops reportedly have been deployed in the rebellious, predominantly Shia region, which is closed to the outside world. 
For India, the Chinese incursion also threatens its access to the 6,300-meter-high Siachen Glacier, to the west of Depsang. 
Pakistan claims the Indian-controlled glacier, which, strategically wedged between the Pakistani- and Chinese-held parts of Kashmir, served as the world’s highest and coldest battleground (and one of the bloodiest) from the mid-1980’s until a cease-fire took effect in 2003. 
India’s nonmilitary options to force a Chinese withdrawal from Depsang range from diplomatic (suspension of all official visits or reconsideration of its recognition of Tibet as part of China) to economic (an informal boycott of Chinese goods, just as China has hurt Japan through a nonofficial boycott of Japanese-made products). 
A possible military response could involve the Indian army establishing a camp of its own on Chinese territory elsewhere that China’s leaders regard as highly strategic. 
But, before it can exercise any option credibly, India needs a stable government. 
Until then, China will continue to press its claims by whatever means – fair or foul – it deems advantageous. 

Chinese Values? 
BERLIN – There can be little reasonable doubt today that the People’s Republic of China will dominate the world of the twenty-first century. 
The country’s rapid economic growth, strategic potential, huge internal market, and enormous investment in infrastructure, education, and research and development, as well as its massive military buildup, will see to that. 
This means that, in political and economic terms, we are entering an East and Southeast Asian century. 
Lest we forget, the outcome for the world would have been far worse if China’s ascent had failed. 
But what will this world look like? 
We can foresee the power that will shape its geopolitics, but what values will underlie the exercise of that power? 
The official policy of “Four Modernizations” (industrial, agricultural, military, and scientific-technological) that has underpinned China’s rise since the late 1970’s has failed to provide an answer to that question, because the “fifth modernization” – the emergence of democracy and the rule of law – is still missing. 
Indeed, political modernization faces massive opposition from the Chinese Communist Party, which has no interest in surrendering its monopoly of power. 
Moreover, the transition to a pluralist system that channels, rather than suppresses, political conflict would indeed be risky, though the risk will grow the longer one-party rule (and the endemic corruption that accompanies it) persists. 
Ideologically, Chinese leadership’s rejection of human rights, democracy, and the rule of law is based on the contention that these supposedly universal values are a mere stalking horse for Western interests, and that repudiating them should thus be viewed as a matter of self-respect. 
China will never again submit to the West militarily, so it should not submit to the West normatively either. 
And here we return to the concept of “Asian values,” originally developed in Singapore and Malaysia. 
But until this day, three decades later, its meaning remains unclear. 
Essentially, the concept has served to justify collectivist-authoritarian rule by aligning it with local tradition and culture, with autonomy defined in terms of otherness – that is, differentiation from the West and its values. 
Thus, “Asian values” are not universal norms, but rather a self-preservation strategy harnessed to identity politics. 
Given the history of Western colonialism in Asia, the desire to maintain a distinct identity is both legitimate and understandable, as is the belief in many Asian countries – first and foremost China – that the time has come to settle old scores. 
But the effort to preserve one’s power, the need for a distinct “Asian” identity, and the desire to settle historical scores will not solve the normative question raised by China’s emergence as the century’s dominant power. 
How that question is answered is crucially important, because it will determine the character of a global power, and thus how it deals with other, weaker countries. 
A state becomes a world power when its strategic significance and potential give it global reach. 
And, as a rule, such states then try to safeguard their interests by imposing their predominance (hegemony), which is a recipe for dangerous conflict if based on coercion rather than cooperation. 
The world’s acclimation to a global hegemonic structure – in which world powers guarantee an international order – survived the Cold War. 
The Soviet Union wasn’t ideologically anti-Western, because Communism and Socialism were Western inventions, but it was anti-Western in political terms. 
And it failed not only for economic reasons, but also because its internal and external behavior was based on compulsion, not consent. 
By contrast, the United States’ economic and political model, and that of the West, with its individual rights and open society, proved to be its sharpest weapon in the Cold War. 
The US prevailed not because of its military superiority, but because of its soft power, and because its hegemony was based not on coercion (though there was some of that, too), but largely on consent. 
Which path will China choose? 
While China will not change its ancient and admirable civilization, it owes its re-emergence to its embrace of the contemporary Western model of modernization – the huge achievement of Deng Xiaoping, who put the country on its current path more than three decades ago. 
But the decisive question of political modernization remains unanswered. 
Clearly, national interests, and sometimes pure power, play a part in how the US and other Western countries apply values like human rights, the rule of law, democracy, and pluralism. 
But these values are not mere ideological window dressing for Western interests; in fact, they are not that to any significant extent. 
They are indeed universal, and all the more so in an era of comprehensive globalization. 
The contribution of Asia – and of China, in particular – to the development of this universal set of values is not yet foreseeable, but it will surely come if the “fifth modernization” leads to China’s political transformation. 
China’s course as a world power will be determined to a significant extent by the way it confronts this question. 

Choosing Mr. Europe 
BRUSSELS – America’s riveting presidential election campaign may be garnering all the headlines, but a leadership struggle is also underway in Europe. 
Right now, all eyes are on the undeclared frontrunners to become the first appointed president of the European Council. 
Nobody – not even people closely involved in the process – really knows how the European Union’s leaders are chosen. 
There are no formal rules, much less elections; somehow, names just surface in the media to become part of the EU’s mysterious internal bargaining system. 
In fact, there are five jobs up for grabs, so a complex but secretive discussion is being conducted between Europe’s chancelleries over who might do what without disturbing the delicate balances between political families or between large and small states. 
At the heart of this process is the even touchier issue of whether the people who will take charge of the EU’s main institutions should be strong leaders. 
In principle, everyone wants heavy-hitters; in practice, many national leaders resist the idea of a more independent and assertive team in Brussels. 
The dilemma is neatly summed-up by the two clear candidates for the top job as “Mr. Europe.” 
On the one hand, there’s the safe pair of hands personified by Jean-Claude Juncker, the veteran prime minister of tiny Luxembourg, who knows the ins and outs of the EU’s political machinery and chairs the euro zone’s ministerial set-up. 
He won’t make waves, but he won’t make headlines either. 
Then there’s Tony Blair. 
World famous but controversial, Blair is capable of rallying public opinion and giving the European project the high profile that the EU craves. 
But he’s also liable to turn a 30-month ceremonial post as the EU’s figurehead into one with much more political clout than its 27 national leaders might like. 
The other four posts will probably be decided as part of a package deal, owing to the need to achieve some sort of balance. 
First, there’s the question of whether the European Commission’s current president, former Portuguese Prime Minister Jose Manuel Barroso, should get another five-year term. 
His early promise to be the EU executive body’s new broom has turned into a steady-as-she-goes captaincy, and there’s the added question of whether his re-appointment might turn the job into a standard 10-year post for his successors, regardless of their abilities. 
The choice for No. 3 job – the foreign policy supremo who will have extra resources and powers to build on the position created by Javier Solana – looks more straightforward. 
Solana, the soft- spoken Spaniard who was previously NATO’s secretary-general, looks like the odds-on favorite to take the new job for a few months before handing it over to Carl Bildt, the Swedish foreign minister and ex-premier who gained international stature in the Balkans in the 1990’s. 
But nothing is certain. 
If Denmark’s prime minister, Anders Fogh Rasmussen were to succeed as a compromise candidate between Juncker and Blair, as is widely suggested, the presence of two center-right Scandinavians would present a problem. 
The remaining two posts, president of the European Parliament and the “Mr. Euro” job currently held by Juncker, will also have to contribute to overall balance and reflect the outcome of the European Parliament elections in mid-2009. 
The parliament is a further wild card in this wholly undemocratic and unpredictable process. 
Under the Reform Treaty – the look-alike successor to the controversial European constitution that creates the post of EU president – the parliament’s 785 members will also have their say. 
In years past, only governments could torpedo candidates for Europe’s top jobs, but now the parliament also will be able to reject them. 
It’s not at all clear which will have the greater power to decide the outcome. 
This uncertainty is beginning to focus attention on the fundamental question of whether the EU can continue to choose its leaders in such a strange and furtive manner. 
When the Union was smaller and more modest, inter-governmental horse-trading seemed acceptable, not least because national politicians could downplay the importance of “Europe.” 
Today, with the EU eager to play a forceful role on the world stage, a move towards a more open system appears to be inevitable. 
The EU’s interlocutors in Washington, Beijing, and elsewhere already make it plain that national leaders claiming to speak for Europe lack credibility, as do EU leaders who so evidently have no convincing political mandate. 
Two clearly defined schools of thought are emerging. 
There are those who argue that these are sensitive and complicated issues beyond most voters’ understanding, and that more democracy would result in either populism or embarrassingly widespread abstentions. 

Choosing the IMF’s Next Leader 
NEW YORK – Sooner than expected, the International Monetary Fund will have a new managing director. 
For more than a decade, I have criticized the Fund’s governance, symbolized by the way its leader is chosen. 
By gentlemen’s agreement among the majority shareholders – the G-8 – the managing director is to be a European, with Americans in the number two post and at the head of the World Bank. 
The Europeans typically picked their nominee behind the scenes, as did the Americans, after only cursory consultation with developing countries. 
The outcome, however, was often not good for the IMF, the World Bank, or the world. 
Most notorious was the appointment of Paul Wolfowitz, one of the main architects of the Iraq War, to lead the World Bank. 
His judgments there were no better than those that got the United States involved in that disastrous adventure. 
Having placed fighting corruption at the top of the Bank’s agenda, he left in the middle of his term, accused of favoritism. 
Finally, as a new order seemed to emerge in the aftermath of the US-made Great Recession, the G-20 agreed (or so it was thought) that the next IMF head would be chosen in an open and transparent manner. 
The presumption was that the outcome of such a process almost surely would be a managing director from an emerging-market country. 
After all, the IMF’s main responsibility is to fight crises, most of which have been in developing countries – more than a hundred since the disastrous policies of financial deregulation and liberalization began some 30 years ago. 
There were many heroes of these battles in the emerging markets. 
Crises need to be carefully managed. 
In 1997, the mismanagement of the East Asia crisis by the IMF and the US Treasury transformed downturns into recessions, and recessions into depressions. 
The world cannot afford to repeat that performance. 
Today, the imminent crisis is in Europe, where the European Central Bank seems to be putting its own balance sheet and those of European banks – loaded with debt from Ireland, Greece, and Portugal – above the well-being of these countries’ citizens. 
This debt almost surely needs to be restructured, but, having allowed the banks to leverage themselves beyond any level of prudence and load up on toxic derivatives, the ECB is now warning against any sort of restructuring or write-down. 
But it is a bit late for the ECB to describe debt restructuring as “unthinkable.” 
The ECB should have done some thinking before it let this state of affairs arise. 
Indeed, more than thinking, it should have done some regulating to prevent Europe’s banks from becoming so vulnerable. 
Now the ECB needs to think about how to help everyone, not just the bankers who bought the bonds. 
The new thinking should put people first, and banks’ shareholders and bondholders second. 
Even if the shareholders and bondholders lose everything, with the right restructuring, we can still save the banks and protect taxpayers and workers. 
Where the IMF’s next managing director will come down on this issue – and on whether fiscal salvation is to be achieved through austerity, with costs borne by ordinary citizens, even as bankers get only a mild slap on the wrist – is critically important, but hard to predict. 
Despite the failure of the IMF’s strategy in East Asia, Latin America, and elsewhere, it still has adherents, even within the emerging markets. 
The leadership contest has turned out differently from what many had expected. 
Some of the most qualified candidates (in both developed and developing countries) have not received the support of their own governments that the political process seems to require. 
Other qualified people from emerging markets have been reluctant to put their hats into the ring – it is a brutal job, with a travel schedule that requires physical stamina to match wisdom and experience. 
Much as I would like to see someone from the emerging markets and the developing world head the IMF, the first priority is to choose a leader with the requisite skills, commitments, and understandings in an open and transparent process, someone who will continue along the reform path on which the Fund has embarked. 
Realpolitik might mean that there will be senior people from both China and the US in the top management team, but the presumption that the number two position should be filled by an American also has to go. 
Whatever the outcome, the IMF, the World Bank, and the international community need to reaffirm their commitment to an open and transparent process – and ask how that process can be improved. 
For example, rather than nominations from governments, which often are reluctant to support excellent candidates from opposition parties, an international nominating committee could put forward names. 
Similarly, changes in voting procedures (public voting by countries, rather than through constituencies, or a requirement that candidates win the support of a majority of developing and emerging countries) could persuade more emerging-market officials to put their names forward. 
What we are seeing now – open campaigning, as opposed to selection behind closed doors – seems to be a move in the right direction. 
But one hopes that campaign promises won’t tie the new leader’s hands, as so often happens in electoral politics. 
Simplistic ideologies got the world into the mess in which it now finds itself, and simplistic prescriptions (even of the “tough-love austerity” form) will only compound the problems. 
One of the leading candidates to be the IMF’s next managing director has turned out to be a Frenchwoman, Christine Lagarde, who, as France’s finance minister, helped lead her country through the Great Recession. 
She has been an outspoken advocate of financial-sector reforms, and has won the respect of all of those with whom she has worked. 
Politics is not always kind to good candidates. The world should be thankful that there is at least one. 
Where she was born should not be an impediment to her prospects. 

Choosing to Learn 
STOCKHOLM – The Nordic countries’ economies are performing well, and a part of the reason is that they are gradually reforming their “social model,” adapting it to new realities in ways that respond to people’s demands. 
But there is nothing uniquely “Nordic” about this change. 
On the contrary, it is one that others can emulate. 
Obviously, such a policy requires significant investment in research and development. 
Sweden, for example, invests more than any other European country in this area – well above the EU target of 3% of GDP. 
Many countries invest less, and even Sweden’s 4% of GDP might not be enough, given higher spending on R&D in China, India, and the United States. 
Moreover, large investments in R&D may be of limited use if knowledge can’t be transformed into successful businesses. 
That requires adopting policies that cover everything from kindergarten training to collaboration between universities and companies, as well as an overall business climate in which success is rewarded and failure is not treated as a human catastrophe. 
America’s success is to a great extent based on this kind of thinking. 
Unfortunately, most European educational systems are based on outdated practices and theories. 
Although educational possibilities and structures have gradually been diversified, the major shortcoming of most European educational systems remains: students have too few choices, and teachers, if they want to remain in their profession, must adhere to a severely compartmentalized pedagogy. 
As with corporate monopolies, the consumers (students) are often seen as a homogeneous mass, where all students can be educated according to the same pedagogical approach. 
But schools must be able to meet the needs and abilities of individual children in a way that makes learning a stimulating adventure. 
Other countries might find Sweden’s system worth studying. 
Its schools are financed by local communities and work within the framework of a national curriculum designed by the parliament and government. 
But, while everyone must follow these rules, individual schools are run in a competitive manner. 
Anyone – parents, teachers, or even companies – can apply for a license to operate a school. 
The National School Board is, in principle, instructed to approve an application if the proposed school is likely to fulfill the national goals and has a solid financial base. 
Moreover, private schools are not seen as mere supplements to public schools, but as fully-fledged alternatives, so they need not offer something different. 
A community where a private school offers its services must support it with the same amount of money, or vouchers, per student that it provides to public schools. 
The amount of financing per student is the same, and schools that receive vouchers cannot charge additional fees. 
After this system was adopted in the 1990’s, many non-public schools were established. 
The pioneers were often parents’ or teachers’ cooperatives, usually with a special pedagogical philosophy. 
Companies operating chains of schools later came to play an important role as well. 
As a result, the variety of schools has increased throughout Sweden. 
The voucher system means that all students, irrespective of family income, can attend the school of their choice. 
Even in rural areas, there is now a wide choice of schools, and it seems that competition has improved the overall quality of Swedish schools, as non-public schools’ very existence has created a demand for reform of public schools. 
If there is any difference, it seems that non-public schools often are better than public schools in dealing with children with learning problems. 
There are, of course many alternatives to what Sweden has done to revitalize education. 
But three features of Sweden’s reform seem particularly important: it was based on a combination of public and market systems; it was general in form, without demanding that non-public schools be special in order to be licensed; and it covered all students. 
Sweden’s voucher educational system is probably the most ambitions of its kind in the world. 
This is all the more remarkable insofar as the principle of competition on which it relies has taken root in a country where competition within the area of public services has not generally been accepted. 

Reuniting the United Kingdom 
LONDON – In the end, democracy came to the rescue. 
The people of Scotland voted by a comfortable margin of about 10% to remain part of the United Kingdom – not least because of the campaigning of three Labour politicians, Alastair Darling, Gordon Brown, and Jim Murphy. 
At times, it seemed that the result would be much closer, or even that we British might engineer the dismemberment of our country, which for centuries has brought together four national communities: England, Wales, Northern Ireland, and Scotland. 
The Scots have been part of the British state for more than 300 years, at the heart of the Protestant, imperial, adventuring, outward-looking culture that forged Britain’s identity. 
Still, that identity has been fractured; I hope not beyond repair. 
In any case, things will never be quite the same again. 
Now, the people of England, Wales, and Northern Ireland – not rejected, after all – must behave as well as possible to salvage something workable from the sometimes bitter and divisive arguments. 
We have to display magnanimity – a difficult enough virtue to practice at the best of times. 
Before trying to rise to this challenge, what can we learn from this walk along the cliff edge? 
Despite the huge turnout on polling day in Scotland, referendums are a lamentable way of trying to settle big political issues. 
Those who established and developed parliamentary democracy in Britain knew this very well. 
Referendums are the favorite device of populists and would-be dictators. 
One vote on one day subsumes complex matters with one ballot question, which in any event is frequently not the question that many people actually answer. 
Parliamentary democracies should have nothing to do with them. 
In the event, we did not dispose of 300 years of shared experience and common prosperity on one Thursday in September 2014. 
But there are three reasons why we seemed at times to come so close to that outcome, none of which reflect well on the British political process or, in my view, justify the claim that our future will, and must, be different. 
First, while Scottish nationalism has many honorable roots and aspirations, the campaign and its incubation showed a nasty tinge of chauvinism and an occasionally brutish hostility toward pluralism, reflected, for example, in the intimidation of some journalists. 
Overall, the English took on the role of what philosophers and social scientists call the “other,” an alien threatening force, in the pro-independence campaign. 
The English were every day’s villains. 
Now we have to try to forget all of that. 
Second, Britain, like other countries in Europe, is suffering from the rise of angry, populist, anti-enlightenment political forces, fueled by conspiracy theories. 
In England, the electoral success of the UK Independence Party is one such example. 
Demagogues stack prejudices atop half-truths, and any attempt to connect discussion with reality is shot through with contemptuous accusations of dishonesty and self-interest. 
Responsible political leaders will have to be more aggressive, bold, and vigorous in confronting such interlocutors. 
Finally, as far as policy is concerned, we Britons have deluded ourselves to think that our system of government – increasingly shown to be unrepresentative, inefficient, and over-centralized – could survive with a little tinkering here and there. 
This belief has suited the two main political parties. 
Labour has sought to avoid a constitutional debate, because any move in the direction of federal institutions requires addressing the party’s over-representation in the UK parliament. 
It is unfair to give ever more power to a Scottish parliament while continuing to give Labour, which controls 41 Scottish constituencies in the House of Commons, disproportionate say over what happens in England. 
As for the Conservatives, the party has allowed its belief in the union of the country’s constituent parts to foreclose any discussion of how that union can be modernized. 
If we are to prevent the UK from rattling to pieces, we have to change the way we govern ourselves. 
The pace that Prime Minister David Cameron has now proposed for this process is breathtaking. 
Conservatives held a majority of the seats in Scotland less than 60 years ago. 
Today, there is one Scottish Conservative MP out of 59 in the UK Parliament, a mark of how the Tories have allowed themselves to be frozen out of some parts of the country. 
In some respects, this is the biggest challenge of all to the UK’s political culture. 
Conservatives are losing touch with parts of the country where once they were strong – not just Scotland, but also cities and the north of England – and there is a growing disconnect between the party and Britain’s increasingly important minority ethnic groups. 
Some of the same problems affect Labour. 
Both big parties will have to address these issues as we start on the long and difficult task of reforming a UK that has lost some of the glue of affinity and solidarity that has held it together for so long. 
For some British citizens south of the Scottish border, it will be difficult to act with the goodwill now required to recover from the referendum episode. 
I do not know how much Alex Salmond, the now-resigned Scottish Nationalist Party leader who pressed for the referendum, is responsible for the surge in his own party’s support; but I suspect that he may, alas, have galvanized all too much nationalist sentiment in England. 
I heard one commentator claiming that the referendum campaign was “beautiful.” 
Perhaps in the end, we really could “trust the people,” and that is an invigorating thought. 
Let others, who oppose democracy in their own countries, take note. 
But the campaign did come perilously close at times to being a triumph for un-reason. 
The challenge now is to figure out how to banish half-truths and big lies from our politics and restore reason and moderation to our divided land. 

From Beethoven to Beijing 
LONDON – On July 1, 17 years ago, I was sailing on Britain’s Royal Yacht away from Hong Kong where, at midnight the previous day, China assumed sovereignty under the terms of an international agreement with the United Kingdom (tabled at the United Nations) known as the Joint Declaration. 
That agreement guaranteed Hong Kong’s way of life for 50 years under Deng Xiaoping’s slogan “One country, two systems.” 
The rule of law and the freedoms associated with pluralism – due process and the freedom of speech, assembly, and worship – were to remain the bedrock of Hong Kong’s prosperity and stability. 
Fast forward to this year. 
On a date that meant so much to me personally as the colony’s last governor, and much more to the citizens of Hong Kong, I attended a magnificent production of Beethoven’s “Fidelio” on the grounds of a country house near Oxford. 
Beethoven’s only opera, written in 1805 (the year of Napoleon’s victory at Austerlitz) and rewritten in 1814 (when Napoleon abdicated), is one of the supreme cultural expressions of fundamental human values – freedom and opposition to tyranny – that resonate in every society. 
“Fidelio’s” most dramatic moment comes when political prisoners are briefly released from their dungeons. 
“Oh Heaven! 
Salvation! 
Happiness,” they sing. 
“Oh Freedom! 
Will you be given us?” 
As they sang of liberty, the setting sun’s rays dazzled the prisoners and the Oxfordshire audience. 
Nature underlined the importance of the message. 
Much of the history of the two centuries since Beethoven composed his opera has centered on that quest for freedom: the fight against colonial powers, the campaigns for basic human rights, the resistance to modern totalitarian and authoritarian regimes. 
On the whole, liberty has triumphed. 
But the struggle is not yet over; it continues on every continent and takes many forms. 
Consider the victims of torture from Central America to Côte d’Ivoire to Pakistan; the legal harassment – not least of journalists – in Egypt; the persecution of gays in Russia and Uganda; human trafficking, prevalent even in developed countries; and the abduction of young Christian women in northern Nigeria. 
In many countries, political dissidents (like the captives in “Fidelio”) are locked up – or worse – in defiance of the clear and open procedures that should ensure the rule of law. 
The extent to which concern for human rights should be a consideration in setting foreign policy is a contentious issue in most democracies, which often believe that their own record entitles them to lecture others. 
Sometimes it does; often it does not. 
For example, the United States’ own record, at Guantánamo Bay and elsewhere, has undermined American politicians’ credibility on this subject. 
There is also the question of consistency. 
One cannot credibly thump the table about human rights in one country, but keep one’s opinions to oneself in another – an all-too-common occurrence when, say, a trade deal might suffer. 
A lack of consistency has been one of the European Union’s sins in attempting to establish a value-based foreign policy. 
The EU sought to build a partnership of economic and political cooperation in the Mediterranean region, for example, in which financial assistance and trade liberalization would be contractually linked to progress in advancing human rights and developing democratic institutions. 
This sensible objective was sabotaged by the tendency to overlook what was actually happening in some countries. 
Many suspect that some EU member states, while insisting on robust human-rights clauses in bilateral agreements with countries known to torture prisoners, secretly aided in the rendition of suspected terrorists to these same countries. 
I have no doubt that it is in the national interest of democracies to promote freedom and human rights. 
Though these values cannot be imposed by force or manufactured like instant coffee, the world is likely to be more peaceful, stable, and prosperous the more that countries treat their own citizens decently. 
This is not a prescription for a soggy policy that denies the demands of the real world. 
But reliance on realpolitik as the guiding light of foreign policy has a pretty shabby track record. 
Realpolitik brought us the bombing of Cambodia and the mass killings under Pol Pot. 
Moreover, “realist” assumptions often turn out to be remarkably implausible. 
Trade deals often are not secured or sustained by political kowtows. 
Countries buy what they need and sell what they can at the best price they can get, regardless of whether another country has or has not written a ministerial communiqué. 
Rather, all relevant policies – from aid to political and security cooperation – should be related to strengthening the institutions and values to which one adheres. 
All of this brings me back to July 1 of this year. 
While I was listening to “Fidelio,”tens of thousands of Hong Kongers (organizers say hundreds of thousands) were demonstrating for liberty. 
They want a fair and open system for electing their government, and to defend the freedom and rule of law that make Hong Kong so special and successful, a genuinely liberal – in the classical sense – society. 
Eventually, Hong Kong’s people will get what they want, despite China’s objections; freedom invariably wins in the end. 
But China’s rulers would take a giant step forward by recognizing that such aspirations are not a threat to the country’s wellbeing. 
For now, however, China, a great country and a growing power, is handling its economic affairs with more sophistication and a surer touch than it is addressing its political challenges. 

The High Cost of Cheap Meat 
BERLIN – Factory-style livestock production is a critical driver of agricultural industrialization. 
Its remorseless expansion is contributing to climate change, deforestation, biodiversity loss, and human-rights violations – all to satisfy Western societies’ unhealthy appetite for cheap meat. 
Europe and the United States were the largest meat consumers in the twentieth century, with the average person eating 60-90 kilograms (132-198 pounds) annually – far more than is required to meet humans’ nutritional needs. 
Though Western consumption rates are now stagnating and even declining in some regions, they remain far higher than in most other regions in the world. 
Meanwhile, in emerging economies – especially the so-called BRICS (Brazil, Russia, India, China, and South Africa) – members of the burgeoning middle class are changing their diets to resemble those of their rich-country counterparts. 
In the coming decades, as incomes continue to rise, so will demand for meat and dairy products. 
To meet this demand, the world’s agribusiness firms will attempt to boost their annual meat output from 300 million tons today to 480 million tons by 2050, generating serious social challenges and ecological pressures at virtually every stage of the value chain (feed supply, production, processing, and retail). 
One major problem with factory-style livestock production is that it leads to considerable greenhouse-gas emissions – and not just because the digestive processes of ruminant animals produce methane. 
The waste from the animals, together with the fertilizers and pesticides used to produce feed, generate large quantities of nitrogen oxides. 
Indeed, the factory model implies significant land-use change and deforestation, beginning with the production of feed. 
As it stands, about one-third of existing agricultural land is used for feed production, with the total share used for livestock production, including grazing, amounting to about 70%. 
With expanded meat consumption, soybean production alone would nearly double, implying a proportional increase in the use of inputs like land, fertilizer, pesticides, and water. 
Increased crop diversion to feed livestock will put upward pressure on food and land prices, making it increasingly difficult for the world’s poor to meet their basic nutritional needs. 
Making matters worse, the shift from mixed-use or indigenous systems of raising livestock to large-scale operations jeopardizes rural livelihoods, particularly in developing countries. 
Pastoralists, small producers, and independent farmers simply cannot compete with low retail prices that fail to account for the industry’s true environmental and health costs. 
And the industrial livestock system, with its low wages and poor health and safety standards, does not provide a good alternative for employment. 
Finally, there is the public-health impact of industrial livestock production. 
For starters, excessively high levels of meat and dairy consumption are contributing to nutrition-related health problems like obesity and cardiovascular disease. 
Moreover, keeping large concentrations of animals in confined spaces facilitates the proliferation of infectious diseases that can spread to humans, such as avian flu. 
And measures used to mitigate that risk, such as the administration of low doses of antibiotics to prevent disease (and promote growth), are creating a public-health crisis by strengthening resistance to antimicrobial drugs. 
Add to this the horrific conditions suffered by the animals themselves, owing to the industry’s resistance to applying reasonable animal-welfare standards, and one might wonder how the industry could have been allowed to grow so large. 
The answer lies in its oligopolistic power, which enables industrial livestock producers to externalize their true social and environmental costs, which must then be covered by workers and taxpayers. 
The reality is that there are other ways to meet the world’s need for meat and dairy. 
In the European Union, only two key elements of the Common Agricultural Policy (CAP) would have to be changed to reduce drastically the distortions in the production system. 
Implementing these changes would send a clear signal that European policymakers take consumers’ wishes seriously. 
The first change would be to prohibit imports of genetically modified feed, and require that farmers produce at least half of their animal feed on their own farms. 
A clear set of rules on feed procurement would eliminate international imbalances in nutrients, and diminish the power of multinational agricultural biotechnology corporations like Monsanto. 
Moreover, slurry and manure would no longer be transported long distances, and could be used to fertilize farmers’ own land to produce feed. 
Second, the unnecessary administration of antibiotics in feed and watering systems should be prohibited. 
This would force farmers to treat animals individually for illnesses, based on veterinary diagnosis. 
In the United States, the Food and Drug Administration could ban the non-therapeutic use of antibiotics. 
And the US Department of Agriculture’s farm bill programs could provide increased support for free-range livestock operations, in order to encourage more sustainable approaches to meat production. 
Of course, these actions would be only important first steps. 
As emerging-economy middle classes grow, it is vital to recognize that existing Western models of meat production and consumption do not provide a sound blueprint for the future. 
It is time to create a system that adheres to our ecological, social, and ethical boundaries. 

Getting to Yes on Transatlantic Financial Regulation 
WASHINGTON, DC – As 2014 gets underway, signs of a fraying regulatory relationship between the European Union and the United States seem to be everywhere. 
The US Federal Reserve’s tough new regulations on foreign banks have spurred the European Commission to threaten retaliation. 
Progress toward reconciling US and EU rules on derivatives – one of the main causes of the financial crisis – has fallen apart. 
And plans by the EU and the United Kingdom to “ring-fence” bank deposits are poised to depart in form and substance from one another and from the newly unveiled Volcker rule in the US. 
But the lesson that most observers draw from these increasingly high-profile disputes – that, even in financial regulation, power politics trumps the common good – is incomplete. 
After all, regulatory disparities are not just a product of divergent national interests; how effectively diplomacy is practiced and coordinated can play a role as well. 
For example, a recent study highlighted the failure of G-20 leaders to define a consistent and achievable roadmap for implementing the financial-reform agenda announced after the 2008 crisis. 
For roughly the past decade, heads of state have been calling on regulators to tackle big issues, such as capital standards, along with other matters like over-the-counter derivatives and credit-ratings reforms. 
But, during this period, officials have acted more or less at their discretion, leaving problems to be addressed according to different economic and political cycles. 
Radical disparities between the rule-making cultures of the US and the EU are exacerbating the problem. 
Unlike the US, where independent agencies lead the rule-making process according to Congressional dictates, legislative actors in Brussels and Strasbourg – the European Commission, the European Council, and the European Parliament – set regulatory agendas and write the rules. 
And, though EU agencies like the European Central Bank are assuming an increasing share of regulatory responsibility, divergences in decision-making procedures continue to affect the rate and nature of transatlantic coordination. 
Making matters worse, market and monetary reforms have occasionally merged, with rule-making becoming partly dependent on the decisions of disparate agencies and institutions. 
Meeting enhanced Basel III capital standards, for example, is about more than just rules; it requires the recapitalization of banks – a process that is taking longer in Europe than in the US, partly because the eurozone has had to negotiate funding mechanisms for banks and cash-strapped governments. 
Now these delays are raising doubts in the US about the EU’s commitment to reform. 
All of these problems reflect the simple fact that policymakers lack suitable tools for conducting regulatory diplomacy in a world of dynamic market reform. 
The conventional means for doing so – mutual recognition and substituted compliance – were developed in an environment in which countries would spur each other to raise standards by offering foreigners easier access to domestic markets once regulations in their home countries mirrored their own. 
Neither mechanism foresees a situation whereby all countries simultaneously seek to upgrade their financial systems across a variety of sectors. 
Meanwhile, the traditional forum for EU-US talks, the Financial Markets Regulatory Dialogue – which brings regulators together at irregular intervals to haggle over lists of divergent regulations one by one – is all too often slow and circumvented. 
The good news is that European and American policymakers have options for clearing the structural roadblocks. 
They should begin by developing a new “toolkit” to help countries not just meet existing standards, but also work together to improve standards in an environment of rapidly changing markets. 
Whether implemented as part of the Transatlantic Trade and Investment Partnership talks or on an informal basis, mutual-recognition and substituted-compliance programs should become more robust, and they should provide procedural mechanisms for coordinating rule-making and administrative processes in real time. 
Moreover, coordinating mechanisms should be – to the extent possible – objectives-based processes measured against international commitments and best practices. 
Finally, given the interface between financial supervision and monetary relations, the Financial Markets Regulatory Dialogue should be revived alongside G-20 meetings of treasury officials and central bankers. 
Instead of relying on the multi-regional Financial Stability Board to hash out differences and set the regulatory pace, EU and US regulators should be encouraged to present joint solutions and reforms for wider international consideration. 
Of course, reforming the transatlantic regulatory architecture can do only so much for financial diplomacy, and national interests will always be important. 
But, in a world of trillion-dollar capital flows and ever-higher stakes in a sound global financial system, even modest improvements can make a big difference. 
Better rule-making mechanisms are a good place to start. 

Facing Up to Chronic Disease 
MONTREAL – Many of us are terrified by the prospect of having a debilitating stroke or a fatal heart attack. 
Few of us, however, respond as emotionally to the threat of chronic disease, a vague and elastic term that is mainly useful for organizing health services. 
And yet chronic disease has become a major social problem that requires a collective response. 
Historically, chronic disease referred to conditions lasting over a long period. 
But, with the increasing organization of medicine around specific diseases, the term has come to refer to an open-ended set of conditions including cardiovascular disease, cancer, and diabetes, but not infectious diseases, such as tuberculosis and malaria, or mental illness. 
In the nineteenth century, chronic disease was considered problematic in part because sufferers took up scarce beds in hospitals that were increasingly focused on treating acute, curable diseases. 
But chronic disease soon became a wider public-health issue as the death toll from cancer, cardiovascular disease, and diabetes seemed to rise. 
In fact, the initial increase in the number of reported deaths from these diseases most likely reflected better identification and diagnosis. 
Filling in death certificates is not an exact science, and doctors focus on causes with which they are familiar. 
Over time, though, the incidence of chronic disease almost certainly did rise in developed countries. 
As infectious diseases have been brought increasingly under control, more people live into old age, when they become susceptible to long-term illnesses. 
As a result, chronic diseases now comprise a large proportion of health-care systems' total caseloads. 
Our collective interest in addressing the problem of chronic diseases does not rest only on epidemiological statistics. 
It also reflects deep, long-standing concerns about the effects of civilization: urban overcrowding, sedentary lifestyles, unhealthy habits like tobacco and alcohol consumption, overeating, and stress. 
Moreover, we have come to believe that most diseases, including previously hopeless conditions, can be prevented, cured, ameliorated, or controlled by scientific medicine, and that even those patients unlikely to benefit have a right to medical care. 
As chronic disease has become an increasingly prevalent social problem, it has been dealt with in two ways. 
The most common response is disease-specific. 
The American Cancer Society and the American Heart Association, as well as the disease-based research institutes of the National Institutes of Health, are notable examples. 
An alternative approach is to treat these illnesses as a single, comprehensive problem. 
The earliest example occurred in the United States, where a focus on welfare measures and health insurance for vulnerable populations – the elderly, the disabled, and the very poor – led to a strong push to confront the chronic diseases widespread among them. 
European countries, preoccupied with national health-care systems that addressed the needs of the entire population, took longer to move toward comprehensive strategies. 
Both approaches have given rise to new forms of epidemiological surveillance. 
Since the 1950s, for example, the field has been extended to risk factors, a concept that grew out of debates about the health effects of tobacco and studies of cardiovascular diseases with multiple potential causes. 
Some risk factors – moderate hypertension and high cholesterol, for example – have themselves become chronic diseases, requiring medical (and sometimes surgical) treatment and further contributing to the rise in illness rates. 
A new vision of health care, which has grown out of the US managed-care movement, has recently heightened the relevance of embracing a comprehensive approach to treating these conditions. 
Originally intended to cut costs, the goal now is to provide more appropriate care for a new era, the premise being that long-term care for many diseases requires forms of medical organization that are different from those geared toward acute care. 
Acute episodes and expensive hospitalization can be avoided by providing expert team support for patient self-care. 
The most successful and radical of these initiatives is the Chronic Care Model developed by Edward Wagner, an American doctor. 
Less sweeping is the Medical Home Model, also developed in the US, which seeks to create teams of caregivers to provide better access and continuity of care to patients suffering from multiple diseases. 
Massive health-care systems cannot shift course easily or quickly. 
But efforts like these, by focusing on the need to provide appropriate and less expensive care for chronic diseases, constitute a small step in the right direction. 

Local Solutions for Global Problems 
MONTRÉAL – On June 8, leaders from the largest advanced economies will gather for the annual G7 summit to discuss the most pressing challenges the world faces. 
Most of the items on the agenda – from climate change to inequality – resonate particularly strongly for people living in urban areas, who comprise 54% of the world’s population. 
And yet, municipal governments will not be represented in any official capacity during the G7 meetings. 
This is a mistake; if the world’s biggest problems are to be solved, cities must become part of the conversation. 
Historically, cities have played a marginal role in global debates. 
In the United States, for example, early cities were rife with corruption and factionalism; local politics was messy enough. 
But today’s urban centers are economically stronger and politically bolder. 
Twenty-first-century cities’ determination to act in their own interests became clear in late 2017, when more than 50 US mayors pledged to meet the commitments of the 2015 Paris climate agreement – directly challenging President Donald Trump’s withdrawal from the deal. 
This week, leaders from Montreal and 10,000 other cities around the world will deliver a similar message to the G7. 
They will present a declaration that includes a diverse collection of municipal views on the summit’s key themes, and urge national governments to collaborate more closely with their local counterparts. 
These demands, and the manner in which they are being made, will be a first for a G7 meeting. 
The goal is to make this the norm. 
Still, even without a seat at the table, many of the world’s megacities – powered by strong human capital, competitive markets, and widespread appeal – are already working to build a more progressive, inclusive, and sustainable future. 
From Buenos Aires to Tokyo, city leaders are making their concerns known globally – often irrespective of national agendas. 
Small and mid-sized cities are also raising their international profiles. 
By investing in “smart” and “resilient” urban planning, governments from Bordeaux in France to Curitiba in Brazil are strengthening their brand identities and luring talent, investment, and businesses from around the world. 
The American-Canadian author and urban activist Jane Jacobs famously observed that cities are the true engines of national prosperity. 
Cities power growth through innovation, trade, and exchange. 
And city services are often more visible to citizens than federal aid; consider, for example, who responds during a traffic accident or a natural disaster. 
To be sure, today’s cities face many challenges. 
As urban areas have grown, leaders have been forced to change how they plan. 
Amid tightening budgets, city governments are moving away from overly bureaucratic systems toward those that encourage greater levels of entrepreneurship. 
But, as Chicago Mayor Rahm Emanuel noted last month, this has been positive for many cities, allowing them to become testing grounds for the future of mobility, work, housing, energy, education, and health. 
“Twenty years from now,” Emanuel told fellow mayors in New York City, we will see “an inflection point where the nation-state is in decline, and the city-state à la Singapore is driving the cultural and economic activity.” 
Of course, not all cities have the same resources, influence, or needs as Chicago or Singapore. 
But any city leader nowadays can appreciate the importance of standing on the frontlines of change. 
Inspired by this solidarity, and connected through international networks like Metropolis, C40 Cities, and 100 Resilient Cities, municipal leaders everywhere are forging partnerships to create united urban agendas. 
At nearly every turn, on just about every major issue, national governments are failing to deliver solutions, while city leaders continue to inspire public confidence. 
According to a 2017 survey by the Centre for Political Research at Sciences Po, 64% of French adults believe their local mayor is working harder than the executive branch to solve everyday problems. 
No doubt many other urbanites feel the same way. 
This is an opportune time for city leaders to become global players. 
When gatherings like the G7 summit are convened to discuss the world’s most difficult challenges, the people closest to those challenges, who are likely to have the most valuable insights concerning how to overcome them, should be in the room. 

Cities Hold the Key to Food Sustainability 
AUSTIN – Living in a city turns you into a cannibal. 
That, at least, is the metaphor preferred by Jean-Jacques Rousseau, who considered cities a pit of human corruption. 
Rousseau was so convinced of the malign effects of urbanization that he “would rather see men grazing on meadow grass than devouring each other in cities.” 
Urbanization inures people to the suffering of the countryside, and as townspeople crowd together, their capacity for compassion toward others atrophies. 
Urbanites become the kind of people who are ready to sacrifice one another to satisfy their appetites: cannibals. 
Rousseau’s fear that cities inspire inhabitants to pursue their own interests at the expense of others remains as relevant today as it was in the eighteenth century. 
And nowhere is this truer than in the food system. 
For as long as there have been towns, there have been strategies to feed them. 
In the United Kingdom, the allotment movement during the Industrial Revolution established a system that gave the working poor access to land for the cultivation of fruits and vegetables. 
Today, these urban gardens remain a popular means of sustenance for British urbanites; an estimated 350,000 people have allotments and another 800,000 want them. 
Cities worldwide are recognizing the importance of urban agriculture, and particularly urban agroecology, which uses biological diversity – rather than chemical inputs – to build soil quality, increase crop yields, and manage water use. 
Metropolitan areas from Rome to São Paolo have supported agroecology to tackle health crises, climate change, and poverty. 
But if you have never heard of this type of farming, a careful reading of Rousseau might explain why: it threatens the wealth that urban elites accumulate. 
Rousseau anticipated where and how democracy becomes subverted: “If cities are harmful, capitals are even more so,” he once wrote. “A capital is an abyss where nearly the entire nation goes to lose its morals, its laws, its courage, and its liberty.” 
In the context of food, capitals today are where money is spent to stop local governments from protecting citizens. 
Consider the food industry’s lobbying campaign during the run-up to the recent midterm elections in the United States. 
In Washington State, The Coca-Cola Company, PepsiCo, and Keurig Dr Pepper spent over $20 million to craft a ballot measure to prevent cities from raising taxes on groceries – including sugar-sweetened beverages, which are known to increase the risk of type 2 diabetes. 
The initiative passed, and although Seattle’s current soda tax was exempted, other cities will not be able to follow suit. 
In order to keep grocery bills low and industry profits high, Washington State residents were persuaded to sacrifice one another. 
They are not alone. 
Over the last decade, 12 American states have passed legislation to stop municipalities from addressing the public-health crisis of processed foods, and at least 26 states have enacted laws to shield food companies from lawsuits linked to diet-related diseases. 
Although some policymakers do recognize that the food industry is emulating Big Tobacco’s tactics, Rousseau predicted a more general trend: urban wealth is incompatible with public liberty. 
In the 1760s, when Corsicans asked Rousseau for advice on writing a constitution, he counseled that they should remain peasants. 
“An agricultural people should never covet the leisure of the cities and envy the life of the do-nothings that inhabit them,” he admonished. “Commerce produces wealth, but agriculture ensures freedom. 
You may say it would be better to have both wealth and liberty, but they are incompatible.” 
To be sure, Rousseau’s unyielding anti-urbanism is well past its expiration date. 
One reason the modern food industry is so aggressive in pushing its products is precisely because cities have become engines of progressive change. 
More than presidents, mayors recognize that ensuring a healthy food system requires uprooting an unhealthy one. 
In fact, a growing number of municipal governments are embracing efforts like the Milan Urban Food Policy Pact, which encourages new approaches to tackling hunger, ecological risk, and sustainability. 
But Rousseau is still right in another sense: policies cannot happen without politics, and the greatest challenge to feeding tomorrow’s cities lies in the problems that concentrated wealth creates. 
Urban and rural hunger are products of poverty, and poverty is a consequence of modern food systems. 
In the US, seven of the ten lowest-paying jobs are in the food industry, even as the companies that comprise it post record profits. 
It is not through the literal tilling of the land that we will feed future cities. 
Rather, it will be in undoing Rousseau’s social “cannibalism.” 
That means cultivating solidarity with those most hurt by today’s food system and using shared outrage at the growing number of malnourished and poorly nourished to organize collectively for genuine change. 

Inclusive Growth Depends on Cities 
PARIS, WASHINGTON, DC – We live in turbulent times, and popular discontent with the status quo is mounting. 
The reasons for popular frustration vary from country to country, but the common thread everywhere is a growing sense that the economy is rigged in favor of the few. 
Indeed, the gains from economic growth are increasingly going to the very highest earners. 
In OECD countries, people in the top 10% of the income distribution earn around ten times more than people in the bottom 10% – up from seven times more nearly 30 years ago. 
In 2012, among the 18 OECD countries with comparable data, the top 10% accounted for 50% of total household wealth, while the bottom 40% accounted for only 3%. 
We all pay a price when inequality reaches new heights. 
In a range of OECD countries, rising inequality knocked 6-10 percentage points off overall GDP between 1990 and 2010. 
When the poorest people are unable to fulfill their potential, economic growth suffers. 
As policymakers and political leaders look for ways to make economic growth more inclusive, cities will play a central role in any solution. 
A survey of OECD countries shows that half the total population lives in cities of more than 500,000 inhabitants, and that cities have accounted for 60% of total growth of employment and GDP since 2001. 
However, this growth has not been inclusive: income inequality in cities is higher than the national average in all OECD countries surveyed, except Canada. 
In the United States, 95 of the 100 largest metropolitan areas added jobs and increased their economic output in the five years following the Great Recession, but only 20 experienced median-wage growth. 
Economic gains in recent years have not made the typical worker better off, and as wealthy individuals have reaped the benefits of growth, poverty has become more concentrated. 
According to research by the Brookings Institution, the number of extremely poor neighborhoods in the US has more than doubled since 2000. 
This has far-reaching costs. 
Growing up in a poor neighborhood has been shown to reduce a person’s life prospects dramatically, even when earnings remain constant. 
And in metropolitan areas such as London and Baltimore, the difference in life expectancy between poor and wealthy neighborhoods just a few miles apart can be more than 20 years. 
As the site of both economic opportunity and disparity, cities are where we must look to tackle inequality. 
In March, the OECD, the Ford Foundation, Brookings, and other institutions launched the Inclusive Growth in Cities Initiative, in partnership with New York City Mayor Bill de Blasio and 20 other mayors from around the world. 
By bringing together “Champion Mayors” to define a shared inclusive-growth agenda, the Initiative acknowledges the crucial role mayors play in creating economic opportunity and boosting the productive capacity of individuals and firms. 
At a recent Brookings event, OECD Secretary-General Angel Gurría discussed four key areas where cities can work to reduce inequality. 
These ideas will be developed further at a meeting in Paris on November 21, hosted by Paris Mayor Anne Hidalgo. 
First, cities should make education systems more inclusive by investing in vocational schools where people of all ages and backgrounds can learn marketable skills. 
For example, in Atlanta, Mayor Kasim Reed has launched a partnership between a local startup incubator, the city’s workforce development agency, and a coding school to provide young people with mentorship networks, through which they can develop financial literacy and critical thinking skills, while also learning how to write code. 
Second, cities should ensure that employment and entrepreneurship opportunities are available to all people, including women, young adults, immigrants, and disadvantaged populations. 
In Stockholm, which took in 8,000 asylum-seekers between fall 2015 and spring 2016, Mayor Karin Wanngård is developing a new type of school for adults. 
As part of a comprehensive integration strategy, the new schools will teach the language, cultural, and technical proficiencies necessary to participate in Stockholm’s job market. 
In Seoul, Mayor Park Won-soon is leveling the playing field for small and medium-size enterprises with targeted financial support, fairer transaction and subcontracting rules, and informal-work regularization. 
Third, cities must ensure high-quality, affordable housing for all in safe, healthy neighborhoods. 
In Paris, Hidalgo’s “right of first refusal” plan allows the municipal government to acquire residences that come on the market in selected neighborhoods so that it can provide them to poorer residents at risk of being displaced. 
Finally, cities should ensure that public infrastructure and services – including public transportation, water, energy, waste management, and broadband – are easily accessible for all. 
In New York, de Blasio’s IDNYC initiative is providing free government-issued identification cards for all residents – including the homeless, undocumented immigrants, and former convicts – so that marginalized groups can make use of the city’s resources. 
Efforts such as the Inclusive Growth in Cities Initiative and the United Nation’s Habitat III conference are helping to turn the tide against rising inequality one city at a time. 
The more we can capitalize on local solutions for common global problems, the more progress all of us will make. 

Citizens versus Extreme Poverty 
Twenty years ago, a grass-roots movement led by Rotary International, a voluntary organization with around 1.2 million members in more than 200 countries, decided to attack. 
As of the mid-1980’s, there were more than 300,000 cases of polio per year worldwide, despite the disease’s virtual elimination in the richest countries, where vaccination was routine. 
Rotary took on the challenge of getting vaccines to the poor, in regions with weak or non-existent public health systems. 
Rotarians dreamed not only of reducing the number of polio cases, but of eradicating the disease entirely. 
This goal is now within reach. 
Rather than wait for politicians to take up the fight against polio, Rotarians led the way. 
A few years later, the World Health Organization, and then other international agencies and donor countries, joined the cause, creating a coalition of official and private organizations that now support Rotary’s vision. 
By 2006, the number of polio cases had been cut dramatically, to well under 3,000 cases per year. 
Complete eradication is in reach, but is still proving elusive, as small outbreaks have plagued one country or another in recent years. 
In some cases, such as Northern Nigeria, social resistance to the vaccine has blocked adequate coverage of the population. 
Pockets of polio transmission also persist in India, Pakistan, and Afghanistan. 
In a few other countries, the disease has been sporadically reintroduced by travelers from regions where polio has not yet been eliminated. 
And, in rare cases, the vaccine itself has failed and led to infection. 
Still, despite the difficulties of rooting out the very last cases, the progress made against polio has been historic. 
More importantly, Rotary’s leadership on polio offers a more general lesson in the fight against extreme poverty, hunger, and disease. 
Even when politicians don’t lead, it is still possible for committed individuals and voluntary organizations to change the world. 
The key is to link a bold idea with a practical and powerful technology, and then to push the idea and technology forward through mass citizen action. 
These same lessons can be applied to the Millennium Development Goals (MDG’s), the targets for fighting poverty, disease, and hunger that the world’s governments adopted in 2000. 
The MDG’s are bold but achievable. 
For example, they call for reducing by 2015 the proportion of the world’s population that was chronically under-nourished in 1990, and for cutting the child mortality rate by three quarters. 
The MDG’s also address the scourges of maternal death in childbirth, lack of access to safe drinking water, and killer diseases such as malaria, tuberculosis, and AIDS. 
Just as with polio, the fight against hunger, disease, and lack of access to safe water and sanitation can be carried forward with practical and powerful technologies. 
Indeed, these technologies are so powerful that they can enable families currently trapped in poverty to escape it once and for all. 
Consider hunger in Africa. 
Most of Africa’s farmers, working tiny plots, do not produce enough food to feed their families, much less to earn an income. 
The root of the problem is that Africa’s farmers are too poor to obtain the basic modern inputs—including high-yield seed varieties, fertilizers, and small-scale water management systems—that could enable them to double or triple their output of food and cash crops. 
The solution is therefore not much more complicated than a polio vaccine. 
If organizations like Rotary International can help African farmers to get a 50 kilogram bag of appropriate fertilizer and a 10 kilogram tin of improved seeds, the rise in farm output could be enough to relieve extreme hunger and help farm households begin to earn some income. 
Such practical approaches can solve many of the key problems of extreme poverty. 
Consider, similarly, the death and illness caused by malaria, which can be reduced very sharply through the use of mosquito nets for beds and anti-malaria medicines. 
An anti-malaria bed net costs just $5, lasts five years, and can accommodate two children. 
Thus, for just $0.50 per year, each child can be protected by a bed net. 
And a $1 medical treatment can cure malaria if the child gets infected despite the bed net. 
Yet bed nets and anti-malaria medicines do not reach the people who need them, because the people who need them are too poor. 
Fortunately, the American Red Cross and other organizations have been following the Rotary model, using private donations and private volunteers to fill the gap left by our political leaders. 
Red Cross chapters across Africa, in partnership with other organizations, are now distributing bed nets free of charge to impoverished families, in the same way that Rotary has been distributing polio vaccines. 
The time has arrived for a massive effort by voluntary organizations to take up the MDG’s through private action. 
We need not wait for the politicians. 
In a short period of time, the world’s citizens can make deep inroads in the fight against disease, hunger, and poverty. 
Then the politicians will follow. 
The key is practicality, boldness, and, most importantly, a commitment by those who are better off to volunteer their time and money to bring practical help–in the form of high-yield seeds, fertilizers, medicines, bed nets, drinking wells, and materials to build school rooms and clinics—to the world’s poorest people. 

The Hidden Wealth of Cities 
STOCKHOLM – The world is becoming increasingly urbanized, as more people are choosing to live in towns and cities than ever before. 
The trouble is, most urban areas are unprepared to manage the influx. 
Cities around the world face a looming investment crisis that makes them less livable than they should be. 
The maintenance of vital social and economic infrastructure, not to mention development planning, is being delayed because of a lack of cash. 
With local governments’ finances burdened by continuously expanding spending commitments, public resources in many cities are highly constrained. 
It doesn’t have to be this way. 
Even struggling cities own a range of commercial assets that can be used to reverse these trends. 
Unlocking the public value of poorly utilized real estate, for example, or monetizing transportation and utility assets, could and should become core urban strategies. 
This does not require privatization, but rather that assets could yield a reasonable return, freeing more resources than most cities currently have on hand. 
In fact, through smarter asset management, cities could more than double their investments without having to raise taxes or cut spending. 
For the last 50 years, government ownership of vast commercial holdings has triggered a polarized debate, especially in Europe, but recently also in the United States. 
But private versus public ownership is a false dichotomy. 
What matters most is the quality of professional management of such assets supporting local economies. 
Compiling an accurate balance sheet – knowledge that is, despite its importance, shockingly rare in most cities – is a crucial step toward adopting a management-focused approach. 
With a list of assets in hand, and a proper understanding of their market value, taxpayers, politicians, and investors can better reckon with the long-term consequences of political decisions. 
They can also make better choices about mobilizing returns, and avoid the traditional routes of tax increases, debt-financed spending, or austerity. 
For various reasons, cities generally do not assess the market value of their economic assets. 
Consider a city like Boston, which, at first glance, does not appear to be particularly wealthy. 
Its financial statements underestimate the true value of public assets, reporting total assets worth $3.8 billion, of which $1.4 billion is real estate. 
That is slightly less than its liabilities of $4.6 billion in 2015. 
But, like most cities, Boston reports its assets at book value, which are tied to the historic cost. 
If holdings were reported using the International Financial Reporting Standards, which require the use of market value for assets, Boston’s holdings would be worth significantly more than what is currently reported. 
In other words, the city is operating without fully understanding its hidden wealth. 
And that wealth is vast. 
An estimate of the market value of Boston’s property portfolio suggests that the city’s real estate alone is worth some $55 billion. 
But, because Boston’s leaders have not accounted for this value, they cannot fully measure the cost of leaving these assets undermanaged. 
If they could, they would get a sense of the benefits to be gained by developing these assets more astutely. 
After accounting for the market value of municipal assets, the next step toward sound asset management is to understand the yield that a city earns from the revenue and rising market values of its assets. 
This is crucial for comparing all investment options, but also for determining whether performance has been satisfactory, and to show stakeholders that their wealth is being managed responsibly. 
Using Boston as an example again, let’s cautiously assume that the city could earn a 3% yield on its commercial assets with more professional and politically independent management. 
A modest yield of 3% on a portfolio worth $55 billion would amount to an income exceeding its current total revenues, and many times more than Boston’s current capital plan. 
Even with a modest yield, Boston could more than double its infrastructure investments. 
Boston is by no means exceptional. 
On the contrary, its approach to historical valuation is shared by cities worldwide. 
As a result, public wealth is trapped in real estate and other non-optimized commercial assets. 
The best way forward would be to consolidate publicly owned assets in a common investment vehicle that Stefan Fölster and I have called an “urban wealth fund.” 
The fund would be managed at arm’s length in a transparent, accountable manner, guided by a city mandate but directed by a dedicated professional staff to keep it free from political influence. 
This sounds challenging, but it canbe done. 
Hamburg’s HafenCity GmbH, and parts of Copenhagen that were revitalized by the City & Port Development Company, are just two examples of urban areas that have used this type of development mechanism. 
These efforts have not only increased the amount of residential housing; they have also funded vital infrastructure such as the Copenhagen Metro, schools, and universities. 
In Hamburg, the recently opened Elbe Symphony Hall was also funded via a government-owned holding company. 
Managing city assets better would help local leaders boost their economies, finance social and economic infrastructure, and develop strategies for vibrant and innovative mixed-use projects. 
Better management of city assets would also help cover the costs of required maintenance without competing with government budgets, leaving more for spending on health care, education, and other social initiatives. 
As urban populations grow, city planners must become more adept at budgeting for the long term. 
And there is no better way to do that than by using the assets that are already in place. 

Reimagining Palestine 
AMMAN – In the 50 years that have elapsed since the 1967 Arab-Israeli War, the prospects of a “final status” agreement to end the conflict have never looked bleaker. 
Decades of failed negotiations have left Palestinians with sharply diminished expectations of ever having a state of their own, as well as a deep lack of faith in their leadership and institutions. 
While a two-state solution has long been the objective for a negotiated settlement, it is time to acknowledge that, two decades after the failure of the Oslo Accords, the current pathway to statehood is blocked. 
A course correction is long overdue. 
The Israeli government is not interested in changing the status quo; its strategy of continued settlement expansion carries minimal diplomatic, economic, and security costs. 
Israel is not being pressured to negotiate in good faith, and it sees no benefit to making concessions, especially as most of the world remains silent on the Palestinians’ plight. 
Meanwhile, the political legitimacy of the Palestinian leadership has long been declining, and many Palestinians doubt that it can articulate a national strategy and deliver an agreement with Israel in any form. 
Until now, efforts to resolve the conflict have been confined to the contours of the Oslo model, according to which the route to Palestinian self-determination traverses bilateral agreement on borders, settlements, territory, and the right of return. 
But this narrow paradigm has left all sides exasperated and no closer to a solution. 
Rather than starting with the statehood question, perhaps it’s time to end with it. 
By putting the core issue of Palestinian rights front and center, the Palestinian leadership would be acknowledging a shift that is already occurring within Palestinian society. 
Young people and civil-society groups are increasingly focused on how to secure individual rights, and regard their civil liberties as a precursor to, rather than the result of, statehood. 
In fact, two thirds of Palestinians believe that the two-state solution is no longer feasible. 
While past decades have centered on the establishment of a state as the pathway to collective freedom, this approach has yielded little more than years of lost hope and political stagnation. 
Reordering the political agenda would position Palestinians’ civil and human rights as the highest priority, and leave for later discussions the structure and form of the state itself. 
Such an approach has been exemplified in local non-violent resistance movements, as well as the Boycott, Divestment, Sanctions (BDS) movement to pressure Israel at the international level. 
While this shift from the Oslo paradigm could inject new energy into finding a solution, it is almost certain to have a major impact on Palestinian nationalism, which is itself at an impasse, divided between those who hold firm to the tenets of the Oslo framework, and those who focus more on greater legal protections and universal freedoms. 
The rift has only widened with every round of failed negotiations. 
Palestinian identity – which has long been defined by a narrative centered on independence – hangs in the balance. 
The trajectory of the Palestinian national movement is examined in a forthcoming report by the Carnegie Endowment for International Peace, entitled “Revitalizing Palestinian Nationalism: Options Versus Realities.” 
The report assesses Palestinian nationalism in the current political climate, and offers proposals for rejuvenating the project. 
Its conclusions are based on a survey of 58 Palestinian experts, who not only explore the barriers to Palestinian statehood, but also offer perspectives on the future course of a national strategy. 
Two questions are at the center of “Revitalizing Palestinian Nationalism.” 
First, can an idea that was originally centered on statehood be redefined with a rights-based focus? 
And, second, can the principles of a Palestinian state come to replace the form of such a state? 
How Palestinians, Israelis, and the international community answer these questions will shape the future of the struggle. 
But they cannot be avoided, given the changes occurring within the Palestinian national movement itself. 
While the current situation on the ground stagnates – amid continued settlement expansion, extensive Israeli military control, and anemic Palestinian institutions – an emerging generation of Palestinians is determined to take the stage. 
Palestinian nationalism will survive; it is a core element of Palestinian identity. 
But whether the Palestinian national project will proceed with a redefined vision and strategy, or remain bogged down by old ideas, is the key question that must be addressed in the months and years ahead. 

The Return of Repression 
BERLIN – Governments around the world are taking draconian steps to suppress civil-society organizations, with measures ranging from restrictive laws and bureaucratic burdens to smear campaigns, censorship, and outright repression by intelligence agencies or police. 
Whatever the means, governments are striving to interfere with the work of political, social, and environmental activists to an extent not seen since before communism collapsed in Europe a quarter-century ago. 
Of course, governments cite all sorts of reasons, security concerns such as those relating to terrorism now being at the top of the list, to justify the repression of NGOs and other civil society groups. 
But the reality is that security risks – which may well be genuine – are no excuse for the kind of blanket suspicion that governments are using as a pretext for silencing or prohibiting independent organizations. 
This troubling trend does not seem to be a fleeting phenomenon, but a sign of fundamental changes in international geopolitics. 
Among the most important of these is the growing emphasis on “sovereignty” among emerging economies, from Egypt to Thailand. 
Indeed, as part of their claimed desire to protect the nation’s sovereignty, governments in developing and emerging countries now regard cash transfers from rich countries for, say, democratization processes, with far more suspicion than they did in the 1990s. 
Viewing such aid to local NGOs as undue interference in their affairs, a growing number of governments in the global south want to maintain or recover full control over cash flows from abroad – especially if they are destined for civil-society actors, which, because of their international connections, are viewed as having divided loyalties. 
As a result, cash flows and networking among national and international NGOs, foundations, and other external donors are coming under ever stricter scrutiny by governments. 
Laws that restrict or prohibit the provision of funding to NGOs by external sources are among the most prominent instruments used to monitor or block the work of these groups. 
Such laws are in place or under consideration in some 50 countries worldwide. 
In Russia, for example, 12 foreign NGOs were put on a blacklist last July and threatened with a ban on any further activity in the country. 
As cooperation with foreign organizations has become potentially punishable by law, Russian civil-society organizations have lost access to their financial lifeblood. 
In early February, after a fierce debate, Israel's Knesset passed in a first reading a bill stipulating that NGOs that receive more than half of their budget from foreign public institutions must disclose their funding sources. 
Governments are also cracking down on popular social movements. 
In recent years, local-level protests – opposing everything from poor working conditions to illegal logging, land grabs, and environmentally or socially damaging infrastructure projects – have proliferated. 
With digital technology giving local protesters access to political networks and a broad international audience, governments have come under growing pressure to accede to demonstrators’ demands. 
But instead of bowing to popular pressure, the political and economic elites have, in many cases, preferred to crack down on the protests themselves. 
Moreover, they have implemented repressive media laws that amount to state control of the Internet, which they claim is necessary to preserve stability, fight terrorism, or defend national sovereignty from Western interference. 
The denunciation of popular protests is not just the province of autocratic regimes. 
Even democratic governments – such as those of Australia, Canada, and India – have resorted to claims that protests are externally controlled in order to discredit local resistance to, say, oil pipelines or coal mines that are supposed to generate profits and growth. 
In all of these cases, the goal is the same: to preserve political power and/or secure the economic interests of those at the top. 
There is nothing new about rulers persecuting people who fight for human rights, gender equality, the rule of law, LGBTI rights, and socially and ecologically oriented economic policies. 
Civil-society actors can and should make their respective governments uncomfortable. 
They are watchdogs of official policy, drawing attention to unsound developments, initiating and focusing public debate, and offering political and social alternatives. 
NGOs continue to be called upon in multilateral policy processes, such as helping to implement the United Nations Sustainable Development Goals or guarantee the outcomes of the Paris climate agreement. 
The issue of shrinking and closing spaces for civil society must be added to the agenda of national parliaments, multilateral organizations, and international negotiation processes. 
Freedom of opinion, association, and assembly are the essence of democracy. 
Efforts to limit such freedoms therefore must be regarded as a challenge to all democratic governments and to global cooperation – and they must be stopped. 


Civil Society Unbound 
MOSCOW – The challenges facing civil-society organizations are greater in Russia than in many parts of the world, but the challenges facing civil society itself are similar everywhere. 
Indeed, around the world there is a gap between civil-society organizations and the societies they profess to serve. 
Civil-society organizations do not gain power through elections (legitimate or otherwise), but through reaching the broader world. 
In short, their goal is to build civil society itself. 
They are most successful when people behave as part of civil society without necessarily being “civil-society” professionals. 
That is, they will do such things as take care of their own health, engage in public discussions or blog about safety conditions in their community, rate school performance, organize weekly runs for dog owners, care for their local forests or rivers- as part of their lives, not as part of their jobs. 
One area of concern for civil society nowadays is the press and new media. 
In many places today information is flowing more than ever, but mass media are under both political and financial pressure. 
Most people think of a free press as a way to keep track of what governments are doing – and so it is. 
That is why the press as a whole, and journalists in particular, are so frequently targeted by the authorities. 
When media outlets aren’t owned – and tamed – by the authorities or people close to them, they still face censorship, intimidation, tax audits, and occasionally assassination of their journalists and editors. 
In Russia in particular, the situation is mixed. 
The government owns or controls most of the mass media – the major newspapers and television stations – but there is an abundance of mostly marginalized publications and radio stations (to say nothing of the Internet) that retain a remarkable degree of independence. 
They are not directly censored, but they operate under the chilling knowledge that they can be shut down on vague charges at any moment. 
And, of course, most of them are struggling to survive financially. 
Yet there’s more to journalism than keeping an eye on the government. 
Journalism’s other task is to reflect a society back to itself – to spread an accurate picture of its current situation, to share information about the activities of private citizens and businesses as they build civil society, and to encourage citizens to become active in improving their own lives and developing their communities. 
Consider health care. 
As far as I’m concerned, the ultimate goal should be not so much a better health care system, but a population so healthy that it hardly needs health care. 
Health problems may take you to a clinic, but many of them start with how you behave at home – what you eat and drink, whether you smoke or exercise or sleep enough, etc. 
This is the kind of thinking that was driving us at a recent health care working group gathered as part of the recent Civil Society Summit organized in Moscow by the Eurasia Foundation, the New Eurasia Foundation and the CSIS. 
(I was there as a Eurasia Foundation board member.) 
To tackle these problems, we came up with an “open data/information liquidity” project, which will advocate and organize the publication, exchange, aggregation, and analysis of health data – not just general statistics, but specific data about health outcomes in terms of drugs and treatments, hospital performance, and the like. 
Of course, many of those statistics are not even collected, yet alone published. 
But we can start with what exists, and by so doing create demand for the rest. 
In the United States, people are already rating their own doctors at sites such as RateMDs.com and vitals.com; third-party doctor and hospital ratings are available at HealthGrades.com. 
Civil-society groups don’t often run hospitals directly, but they can make their performance more transparent. 
So there are plans afoot to develop and distribute tools to analyze information, discover correlations (data-mining), and display the results as graphs and charts. 
But, again, health really begins at home, so the real victory – and one where such civil-society cooperation may have a more immediate impact – is to give people better data about themselves and what they should be doing for their own health. 
That includes everything from nutritional information and baby care, to (ultimately) records of each person’s own health and treatments, and it starts with using new media to reach people where they live, with content that’s relevant. 
In the Soviet Union, they used to call this “sanitary propaganda,” but it was widely disregarded. 
One Russian friend told me, “Whenever we would read an article about the health dangers of butter, we would immediately run out and buy as much butter as we could find, because we knew it meant there would be a butter shortage.” 
Today, that type of information is called “healthy lifestyle promotion.” 
We are also working on a project along these lines, reaching out to target populations with two-way new media such as the Internet and mobile phones, rather than harangues in newspapers and TV. 
Imagine a program where pregnant women could sign up by cell phone for weekly reminders and updates, and to answer questions such as, “Is the baby kicking?” 
If not, she could be referred to a local clinic. 
When I made those same points in a wrap-up to the Civil Society Summit as a whole, I was interrupted by none other than US president Barack Obama, who was in Moscow for his summit with President Dmitry Medvedev but also took the time to listen our gathering of civil-society organizations. 

The Day of the Drone 
LONDON – Drones, it seems, are suddenly everywhere. 
They have buzzed through the plot lines of American television thrillers like 24 and Homeland, been floated as a possible delivery option by the online retail giant Amazon.com, seen action in disaster zones in Haiti and the Philippines, and hovered menacingly over French nuclear power plants. 
This once secretive technology has become nearly ubiquitous. 
With policymakers in the United States and Europe committed to opening civilian airspace to non-military drones, the pilotless aircraft will only become more common. 
So it is crucial that the unique challenges they present to civil liberties and privacy are quickly identified and addressed. 
For starters, drones are significantly changing the way data are collected. 
Until now, most civilian drones have been equipped only with high-resolution cameras, offering police officers, search-and-rescue teams, journalists, filmmakers, and inspectors of crops and infrastructure a bird's-eye view of their surroundings. 
But that is about to change. 
Manufacturers are experimenting with drones that can collect thermal images, provide telecommunications services, take environmental measurements, and even read and analyze biometric data. 
In addition, some operators have become interested in collecting “big data," using a range of different sensors at the same time. 
Meanwhile, drones are becoming smaller, allowing them to infiltrate spaces that normally would be inaccessible. 
They can peek through windows, fly into buildings, and sit, undetected, in corners or other small spaces. 
Their size and silence mean that they can be used for covert surveillance, raising concerns about industrial espionage, sabotage, and terrorism. 
The next drone that flies over a French nuclear power plant might be too small to be noticed. 
The price of drones is plummeting, too. 
Already, a basic model can be deployed for no more than a few hundred dollars. 
Commercial operators, who want to maintain good customer relations, have an interest in using drones responsibly. 
But private individuals are likely to have fewer scruples about using them to spy on neighbors, family members, or the general public. 
Action is necessary. 
But, though the privacy implications of small, ubiquitous, low-cost drones, equipped to collect a broad range of data, are obvious, the proper response is not. 
Simply banning them would deprive society of the many benefits drones have to offer, from their deployment in dangerous, dirty, or dull duties to their lower operating and maintenance costs compared to manned aircraft. 
Using drones for crop dusting, pollution monitoring, or most search-and-rescue operations is unlikely to raise serious concerns. 
But other applications, especially by police, journalists, and private citizens, clearly could. 
The sheer variety of the technology's potential applications makes it almost impossible to regulate with legislation alone. 
Instead, interested parties at all levels need to assess the potential impact on privacy, data protection, and ethics on a case-by-case basis. 
Well-meaning drone operators need to consider carefully how their activities might violate privacy and breach civil liberties, and they should take steps to minimize these effects, using – to the best of their abilities – existing tools, such as privacy-impact assessments. 
Data protection authorities, civil-society organizations, and privacy officers in businesses and public organizations should publish guidance on drone use, as they have done for other existing and emerging technologies. 
The guidelines governing the use of closed-circuit television could serve as a good starting point – but must be supplemented to account for the different types of data a drone can collect. 
Drone manufacturers need to play their part as well, including by providing guidance to assist users – especially private citizens – in operating their products within the bounds of the law. 
Serial numbers should be included, so that drones are traceable. 
Civil authorities should complement these efforts by considering how existing legislation on privacy, data protection, trespassing, and harassment could be used to prosecute operators who infringe on human rights. 
Finally, insurance companies can provide the right incentives by exploring the market potential arising from liability in the event of misuse or accidents. 
The challenge is both urgent and complex. 
The rights of citizens need to be protected before the market for drones really takes off. 

Civilized Talk 
PARIS – What does it mean to be “civilized”? 
Obviously, being highly educated, wearing a tie, eating with a fork, or cutting one’s nails weekly is not enough. 
We all know that being “civilized” in this formal way doesn’t prevent people from behaving like barbarians. 
Everywhere and at all times, being civilized means being able to recognize and accept the humanity of others, despite their different modes of living. 
That may seem like an obvious point, but it is not universally accepted. 
The idea of dialogue between civilizations usually gets a good press, but it is also sometimes mocked. 
The conclusion of Elie Barnavi’s recent essay Les religions meurtrières (“Murderous religions”) is entitled “Against the dialogue of civilizations.” 
His argument is implacable: “There is civilization on one hand and barbarism on the other. 
There is no possible dialogue between them.” 
But if you look at this line of argument more closely, the flaw in Barnavi’s argument is immediately apparent. 
The meaning of the words civilization and culture is very different when they are used in singular and plural forms. 
Cultures (plural) are the modes of living embraced by various human groups, and comprise all that their members have in common: language, religion, family structures, diet, dress, and so on. 
In this sense, “culture” is a descriptive category, without any value judgment. 
Civilization (singular) is, on the contrary, an evaluative moral category: the opposite of barbarism. 
So a dialogue between cultures is not only beneficial, but essential to civilization. 
No civilization is possible without it. 
Contrary to what proponents of the idea of a “clash of civilizations” claim, encounters between different cultures usually take place easily and peacefully, because we are psychologically prepared for them. 
Everyone is the product of several cultures, even if one has never left his home country, because culture is not only national. 
All of us carry within us the culture of our sex, age group, wealth, class, and job. 
This plurality of cultures usually does not present any problems for us, because shifting from one cultural code to another is a universal human faculty. 
After all, we don’t talk in the same way to every person we meet during the day. 
Moreover, cultures related to a given territory are never really “pure”. 
As far back as you can go in the history of a country like France, you will find meetings between different tribes and ethnic groups, and thus different cultures: Gallics, Franks, Romans, and many others. 
Everywhere we look (except, perhaps, in New Guinea’s deep valleys, where obscure tribes may remain isolated from one another), there are only mixed cultures. 
But, while some cultures are proud of their plurality, others try to hide it. 
The concept of a dialogue between cultures is sometimes strained, or seems only a pious hope, because we ask it to do the impossible: solve inflamed political conflicts. 
Dialogue, as benevolent as it may be, can’t resolve questions related to people’s freedom of movement, or to the sharing of territory or natural resources. 
Politics and culture don’t work on the same level: the former governs action, the latter influences mentalities; the former deals with emergencies, the latter can require generations to produce any result. 
We should work for this type of dialogue by beginning with simple and modest initiatives. 
We need more translations of the ideas and literatures of other countries, more long stays abroad for university students, more teaching of foreign languages and encouragement of study about other cultures, and more confrontation between national memories (say, between France and Algeria). 
Some measures of this type already exist in the European Union, but they should be introduced elsewhere: North Africa, the Middle East, India, China, Japan, and Latin America. 
The best way to initiate a dialogue is to disregard clichés and generalities, and instead to promote gatherings between human beings. 
For the moment, politics has claimed paramount status. 
Yet, from another point of view, dialogue prevails over war and the stubborn defense of what one believes to be his identity, because it brings us closer to the vocation of humanity. 
The novelist André Schwarz-Bart used to tell this story: A chief rabbi was once asked why the stork, which is called Hassada (affectionate) in Hebrew because it loves its own kind, is classified among unclean animals. 
“Because,” the rabbi replied, “it gives its love only to its own kind.” 

Clarity about Diamonds 
PRINCETON – Diamonds have an image of purity and light. 
They are given as a pledge of love and worn as a symbol of commitment. 
Yet diamonds have led to gruesome murders, as well as widespread rapes and amputations. 
Charles Taylor, a former president of Liberia currently facing war crimes charges at a special court in The Hague, is alleged to have used diamonds to fund rebels in Sierra Leone’s civil war. 
The case against Taylor represents only one of several examples in which diamonds have facilitated widespread human rights violations. 
When diamonds’ role in fueling violent conflict in Africa gained worldwide attention, the diamond industry established the Kimberley Process in order to keep “blood diamonds” out of international trade. 
The initiative has met with some success, although it has not completely halted trade in diamonds from conflict-torn countries like the Democratic Republic of Congo. 
Recently, however, concern has been expressed – from within the diamond trade – that the scope of the Kimberley Process is too limited, and that consumers have thus been lulled into believing that there are no longer any ethical problems with diamonds. 
That is far from the truth. 
The problem came to a head this year when the Kimberley Process began to certify diamonds from Marange, in Zimbabwe. 
The Marange diamond field, discovered in 2006, is one of the richest ever found. 
According to Diamonds and Clubs, a recent report from Partnership Africa Canada, soldiers have press-ganged peasant farmers into working in mining syndicates at Marange. 
The soldiers then take half the proceeds. 
There have also been extensive beatings and arbitrary detentions. 
When Farai Maguwu, a Zimbabwean human rights activist, disseminated information about the abuses, he was arrested (he has since been released). 
Zimbabwean authorities claim that the violent human rights abuses have stopped, but the ethical problem with Marange diamonds goes much deeper. 
Soon after the field was discovered, the Zimbabwean military took control of the area. 
According to the Zimbabwean finance minister, Tendai Biti, four years after the military took over the diamond fields, the national treasury has received not one penny of royalties from the sale of Marange diamonds. 
Zimbabwe’s military and political elite has appropriated the diamond field’s immense wealth for itself, with no benefits for the millions of desperately poor Zimbabweans who need the kind of services that the country has the resources to provide. 
This is not, of course, the first time that the discovery of resources in an undeveloped country has led to riches for a few rather than greater prosperity for all. 
Teodoro Obiang, the dictator of tiny, oil-rich Equatorial Guinea, has an official salary of $60,000, but owns six private jets and a $35 million house in Malibu, as well as other houses in Maryland and Capetown and a fleet of Lamborghinis, Ferraris, and Bentleys. 
Most of the people over whom Obiang rules live in extreme poverty, with an average life expectancy of 49 years and an infant mortality rate of 87 per 1,000 live births (in other words, more than one child in twelve dies before its first birthday). 
Nigeria and Angola are other glaring examples of countries that have failed to use their oil wealth for the benefit of their people. 
Paradoxically, resource-rich developing countries are often worse off than comparable countries that lack those resources. 
One reason for this is that large resource endowments provide a huge financial incentive for attempts to overthrow the government and seize power. 
Rebels know that if they succeed, they will gain immense personal wealth, be able to reward those who backed their coup, and have enough arms to keep themselves in power, no matter how badly they rule. 
Unless, of course, some of those whom they arm are themselves tempted by the prospect of controlling all that wealth. 
Thus, the resources that should benefit developing countries instead become a curse that brings corruption, coups, and civil wars. 
If we use goods made from raw materials that are obtained from a poor country without the proceeds being used to benefit the people of that country, we become complicit in a particularly iniquitous form of grand larceny. 
It is therefore encouraging that concerns about Zimbabwean diamonds are being raised within the diamond trade itself. 
The Rapaport Group, an international network of companies providing services to the diamond industry, refuses to list Marange diamonds on its diamond-trading platform, RapNet. 
Martin Rapaport, chairman of the group, has called for free access to the diamond fields by non-governmental organizations and industry representatives to monitor the human rights situation. 
More significantly, in a speech in Mumbai earlier this year, he laid out requirements for legitimizing Marange diamonds that included some assurance that “the revenues from the diamond sales are distributed legally and in a way that reasonably and fairly benefits the people of Zimbabwe.” 
There is a need for higher standards than those set by the Kimberley Process. 
If consumers insist on buying only ethical diamonds, traders might be able to push the demand back to their sources. 

The High Cost of Denying Class War 
ATHENS – The Anglosphere’s political atmosphere is thick with bourgeois outrage. 
In the United States, the so-called liberal establishment is convinced it was robbed by an insurgency of “deplorables” weaponized by Vladimir Putin’s hackers and Facebook’s sinister inner workings. 
In Britain, too, an incensed bourgeoisie are pinching themselves that support for leaving the European Union in favor of an inglorious isolation remains undented, despite a process that can only be described as a dog’s Brexit. 
The range of analysis is staggering. 
The rise of militant parochialism on both sides of the Atlantic is being investigated from every angle imaginable: psychoanalytically, culturally, anthropologically, aesthetically, and of course in terms of identity politics. 
The only angle that is left largely unexplored is the one that holds the key to understanding what is going on: the unceasing class war unleashed upon the poor since the late 1970s. 
In 2016, the year of both Brexit and Trump, two pieces of data, dutifully neglected by the shrewdest of establishment analysts, told the story. 
In the United States, more than half of American families did not qualify, according to Federal Reserve data, to take out a loan that would allow them to buy the cheapest car for sale (the Nissan Versa sedan, priced at $12,825). 
Meanwhile, in the United Kingdom, over 40% of families relied on either credit or food banks to feed themselves and cover basic needs. 
William of Ockham, the fourteenth-century British philosopher, famously postulated that, when bamboozled in the face of competing explanations, we ought to opt for the one with the fewest assumptions and the greatest simplicity. 
For all the deftness of establishment commentators in the US and Britain, they seem to have neglected this principle. 
Loath to recognize the intensified class war, they bang on interminably with conspiracy theories about Russian influence, spontaneous bursts of misogyny, the tide of migrants, the rise of the machines, and so on. 
While all of these fears are highly correlated with the militant parochialism fueling Trump and Brexit, they are only tangential to the deeper cause – class war against the poor – alluded to by the car affordability data in the US and the credit-dependence of much of Britain’s population. 
True, some relatively affluent middle-class voters also supported Trump and Brexit. 
But much of that support rode on the coattails of the fear caused by observing the classes just below theirs plunge into despair and loathing, while their own children’s prospects dimmed. 
Twenty years ago, the same liberal commentators were cultivating the impossible dream that globalizing financialized capitalism would deliver prosperity for most. 
At a time when capital was becoming more concentrated on a global scale, and more militant against non-owners of assets, they were declaring the class war over. 
As the working class was growing in size worldwide, even though its jobs and employment prospects were shrinking in the Anglosphere, these elites behaved as if class were passé. 
The 2008 financial collapse and the subsequent Great Recession buried that dream. 
Still, liberals ignored the undeniable fact that the gigantic losses incurred by the quasi-criminal financial sector were cynically transferred onto the shoulders of a working class they thought no longer mattered. 
For all their self-image as progressives, the elites’ readiness to ignore widening class divisions, and to replace it with class-blind identity politics, was the greatest gift to toxic populism. 
In Britain, the Labour Party (under Tony Blair, Gordon Brown, and Edward Miliband) was too coy even to mention the post-2008 intensification of the class war against the majority, leading to the rise across the Labour heartland of the UK Independence Party (UKIP), with its Brexit parochialism. 
Polite society seemed not to give a damn that it had become easier to get into Harvard or Cambridge if you were black than if you were poor. 
They deliberately ignored that identity politics can be as divisive as apartheid if allowed to act as a lever for overlooking class conflict. 
Trump had no compunction to speak clearly about class, and to embrace – however deceitfully – those too poor to buy a car, let alone send their children to Harvard. 
Brexiteers, too, embraced the “great unwashed,” reflected in images of UKIP leader Nigel Farage drinking in pubs with “average blokes.” 
And when large swaths of the working class turned against the establishment’s favorite sons and daughters (the Clintons, the Bushes, the Blairs, and the Camerons), endorsing militant parochialism, the commentariat blamed the riffraff’s illusions about capitalism. 
But it was not illusions about capitalism that led to the discontent that fueled Trump and Brexit. 
Rather, it is the disillusion with middle-of-the-road politics of the kind that intensified the class war against them. 
Predictably, the embrace of the working class by Trump and the Brexiteers was always going to arm them with electoral power that, sooner or later, would be deployed against working-class interests and, of course, minorities – always the penchant of populism in power, from the 1930s to today. 
Trump has thus used his working-class support to usher in scandalous tax reforms, whose naked ambition is to help the plutocracy while millions of Americans face reduced health coverage and, as the federal budget deficit balloons, higher long-term tax bills. 
Similarly, Britain’s Tory government, which has espoused Brexit’s populist aims, has recently announced another multi-billion-pound reduction in social security, education, and tax credits for the working poor. 
Those cuts are matched exactly by reductions in corporate and inheritance tax cuts. 
Today, establishment opinion-makers, who scornfully rejected the pertinence of social class, have contributed to a political environment in which class politics was never more pertinent, toxic, and less discussed. 
Speaking on behalf of a ruling class comprising financial experts, bankers, corporate representatives, media owners, and big industry functionaries, they act exactly as if their goal were to deliver the working classes into the grubby hands of the populists and their empty promise of making America and Britain “great again.” 
The only prospect for civilizing society and detoxifying politics is a new political movement that harnesses on behalf of a new humanism the burning injustice that class war manufactures. 
Judging by its callous treatment of US Senator Bernie Sanders and Labour leader Jeremy Corbyn, the liberal establishment seems to fear such a movement more than it does Trump and Brexit. 

The Interest-Rate Enigma 
BASEL – Today, the United States government can borrow for ten years at a fixed rate of around 2.5%. 
Adjusted for expected inflation, this translates into a real borrowing cost of under 0.5%. 
A year ago, real rates were actually negative. 
And, with low interest rates dominating the developed world, many worry that an era of secular stagnation has begun. 
How problematic low real rates are depends on the reason for their decline. 
The prevailing view is that the downward trend largely reflects a fall in equilibrium or “natural” interest rates, driven by changes in saving and investment fundamentals. 
In other words, a higher propensity to save in emerging economies, together with investors’ growing preference for safe assets, has increased the supply of saving worldwide, even as weak growth prospects and heightened uncertainty in advanced economies have depressed investment demand. 
This perceived decline in “natural” interest rates is viewed as a key obstacle to economic recovery, because it impedes monetary policy’s capacity to provide sufficient stimulus by pushing real rates below the equilibrium level, owing to the zero lower bound on nominal rates. 
How to stem the decline in equilibrium rates has thus become the subject of lively debate. 
Conspicuously absent from the debate, however, is the role of financial factors in explaining the trend decline in real rates. 
After all, interest rates are not determined by some invisible natural force; they are set by people. 
Central banks pin down the short end of the yield curve, while financial-market participants price longer-dated yields based on how they expect monetary policy to respond to future inflation and growth, taking into account associated risks. 
Observed real interest rates are measured by deducting expected inflation from these nominal rates. 
Thus, at any given point in time, interest rates reflect the interplay between the central bank’s reaction function and private-sector beliefs. 
By identifying the evolution of real interest rates with saving and investment fundamentals, the implicit assumption is that the central bank and financial markets can roughly track the evolution of the equilibrium real rate over time. 
But this is by no means straightforward. 
For central banks, measuring the equilibrium interest rate – an abstract concept that cannot be observed – is a formidable challenge. 
To steer rates in the right direction, central banks typically rely on estimates of unobserved variables, including the equilibrium real rate itself, potential output, and trend unemployment. 
These estimates are highly uncertain, strongly model-dependent, and subject to large revisions. 
Moreover, central banks’ policy frameworks may be incomplete. 
By focusing largely on short-term inflation and output stabilization, monetary policy may not pay sufficient attention to financial developments. 
Given that the financial cycle is much more drawn out than the business cycle, typical policy horizons may not allow the authorities to account adequately for the impact of their decisions on future economic outcomes. The fact that financial booms and busts can occur amid relatively stable inflation does not help. 
With financial-market participants as much in the dark as central banks, things can go badly wrong. 
And so they have. 
Over the last three decades, several credit-induced boom-bust episodes have caused major, sustained damage to the global economy. 
It is difficult to square this reality with the view that interest rates, which set the price of leverage, have been on an equilibrium path all along. 
The focus on fundamental saving and investment determinants of interest rates is entirely logical from the perspective of mainstream macroeconomic models, which assume that money and finance are irrelevant (“neutral”) for the output path in the long run. 
But successive crises have shown that finance can have long-lasting effects. 
Financial factors, especially leverage, not only can amplify cyclical fluctuations; they can also propel the economy away from a sustainable growth path. 
Indeed, a growing body of evidence shows that output is permanently lower in the wake of a financial crisis. 
All of this suggests that the trend decline in real interest rates does not just passively mirror changes in underlying macroeconomic fundamentals. 
On the contrary, it also helps drive them. 
Low interest rates can sow the seeds of financial booms and busts. 
Policies that do not lean against the booms but ease aggressively and persistently during busts induce a downward bias in interest rates over time, and an upward bias in debt levels. 
This creates something akin to a debt trap, in which it is difficult to raise rates without damaging the economy. 
The accumulation of debt and the distortions in production and investment patterns induced by persistently low interest rates hinder the return of those rates to more normal levels. 
Low rates thus become self-reinforcing. 
This alternative perspective highlights the trade-off inherent in ultra-accommodative monetary policy. 
Monetary policy cannot overcome structural impediments to growth. 
But the actions that central banks take today can affect real macroeconomic developments in the long term, primarily through their impact on the financial cycle. 
These medium- to long-term side effects need to be weighed carefully against the benefits of short-term stimulus. 
While low interest rates may be a natural response to perceptions of a chronic demand shortfall, such perceptions are not always correct – and can be very costly over time. 
Laying the foundations of a sustained recovery requires measures to strengthen public- and private-sector balance sheets, together with structural reforms aimed at raising productivity and improving growth potential. 
More stimulus may boost output in the short run, but it can also exacerbate the problem, thus compelling even larger dosages over time. 
An unhealthy dependence on painkillers can be avoided, but only if we recognize the risk in time. 

Toward a Green New Deal 
LONDON – The global agreement reached in Paris last week is actually the third climate agreement reached in the past month. 
The first happened at the end of November, when a group of billionaires led by Bill Gates, Mark Zuckerberg, and Jeff Bezos announced the creation of a $20 billion fund to back clean-energy research. 
On the same day, a group of 20 countries, including the United States, the United Kingdom, Germany, India, China, and Brazil, agreed to double their investment in green energy, to a total of $20 billion a year. 
Of the two pre-Paris announcements, it was that of the Breakthrough Energy Coalition (BEC) – Gates and his fellow entrepreneurs – that grabbed most of the headlines. 
This is not surprising, given the strong association in the popular imagination between innovation and the private sector. 
If a technological breakthrough is needed in the fight against climate change, whom should we expect to provide it, if not the wizards of Silicon Valley and other hubs of free-market innovation? 
Gates himself is the first to acknowledge that the public perception is far from accurate. 
“The private sector knows how to build companies, evaluate the potential for success, and take the risks that lead to taking innovative ideas and bringing them to the world,” reads his coalition’s manifesto. “But in the current business environment, the risk-reward balance for early-stage investing in potentially transformative energy systems is unlikely to meet the market tests of traditional angel or VC investors.” 
On its own, the free market will not develop new sources of energy fast enough. 
The payoff is still too uncertain. 
Just as in previous technological revolutions, rapid advances in clean energy will require the intervention of a courageous, entrepreneurial state, providing patient, long-term finance that shifts the private sector’s incentives. 
Governments must make bold policy choices that not only level the playing field, but also tilt it toward environmental sustainability. 
Then – and only then – will private financing follow. 
So far, however, austerity has prevented sufficient public financing. 
One hopes that the Paris agreement changes that. 
As with the information technology revolution, advances in clean energy will require the involvement of both the public and the private sector. 
Because we do not yet know which innovations will be the most important in decarbonizing the economy, investment must be allocated to a wide array of choices. 
Long-term, patient finance must also be available to help companies minimize uncertainty and bridge the so-called “Valley of Death” between basic research and commercialization. 
The BEC’s argument – that the “new model will be a public-private partnership between governments, research institutions, and investors” – shines a welcome spotlight on the relationship. 
Unfortunately, however, aside from Gates and his colleagues, there are few signs that the private sector can be counted on to lead the way. 
The energy sector has become over-financialized; it is spending more on share buybacks than on research and development in low-carbon innovation. 
The energy giants ExxonMobil and General Electric are the first and tenth largest corporate buyers of their own shares. 
Meanwhile, according to the International Energy Agency, just 16% of investment in the US energy sector was spent on renewable or nuclear energy. 
Left to their own devices, oil companies seem to prefer extracting hydrocarbons from the deepest confines of the earth to channeling their profits into clean-energy alternatives. 
Meanwhile, government R&D budgets have been declining in recent years – a trend driven partly by under-appreciation of the state’s role in fostering innovation and growth, and more recently by austerity in the wake of the 2008 financial crisis. 
Tight budgets are straining the agencies that could be driving path-breaking innovation. 
The US Defense Advanced Research Projects Agency (DARPA) was a catalyst for the IT revolution. 
By contrast, the Advanced Research Projects Agency-Energy (ARPA-E) has a 2015 budget of $280 million – barely a tenth of DARPA’s. 
In 1981, energy accounted for 11% of the total US public R&D budget. 
Today, it accounts for just 4%. 
Meanwhile, problematic demand-side policies are also in crisis, impeding the deployment of existing renewable-energy technologies. 
The main public-sector bodies playing a leading role in promoting the diffusion of green-energy technologies are state development banks. 
Indeed, Germany’s KfW, the China Development Bank, the European Investment Bank, and Brazil’s BNDES are four of the top ten investors in renewable energy, amounting to 15% of total asset finance. 
The public sector can – and should – do much more. 
For example, subsidies received by energy corporations could be made conditional on a greater percentage of profits being invested in low-carbon innovations. 
After all, it was this kind of condition – imposed on the US telephone company AT&T in the early twentieth century, in exchange for being allowed to retain its monopoly – that led to the creation of Bell Labs, a crucial incubator of innovation. 
Similarly, while charitable donations by billionaires certainly should be welcomed, companies should also be made to pay a reasonable amount of taxes. 
After all, as the BEC’s manifesto points out, “current governmental funding levels for clean energy are simply insufficient to meet the challenges before us.” 
And yet, in the UK, for example, Facebook paid just £4,327 in tax in 2014, far less than many individual taxpayers. 
The willingness of Gates and other business leaders to commit themselves and their money to the promotion of clean energy is admirable. 
The Paris deal is also good news. 
But they are not enough. 
If the low-carbon revolution is to be achieved, we will need both the public and private sectors to commit more fully to green innovation, from both the supply and demand sides. 

Energy, Economics, and the Environment 
LONDON – To secure a low-carbon future and begin to address the challenge of climate change, the world needs more investment in renewable energy. 
So how do we get there? 
No system of power production is perfect, and even “green” power projects, given their geographic footprint, must be managed carefully to mitigate “energy sprawl” and the associated effects on landscapes, rivers, and oceans. 
Hydropower offers one of the clearest examples of how the location of renewable energy infrastructure can have unintended consequences. 
Dam-generated electricity is currently the planet’s largest source of renewable energy, delivering about twice as much power as all other renewables combined. 
Even with massive expansion in solar and wind power projects, most forecasts assume that meeting global climate mitigation goals will require at least a 50% increase in hydropower capacity by 2040. 
Despite hydropower’s promise, however, there are significant economic and ecological consequences to consider whenever dams are installed. 
Barriers that restrict the flow of water are particularly disruptive to inland fisheries, for example. 
More than six million tons of fish are harvested annually from river basins with projected hydropower development. 
Without proper planning, these projects could jeopardize a key source of food and income generation for more than 100 million people. 
Consequences like these are not always apparent when countries plan dams in isolation. 
In many parts of Asia, Latin America, and Sub-Saharan Africa, hydropower is an important source of energy and economic development. 
But free-flowing rivers are also essential to the health of communities, local economies, and ecosystems. 
By some estimates, if the world completes all of the dam projects currently underway or planned without mitigation measures, the resulting infrastructure would disrupt 300,000 kilometers (186,411 miles) of free-flowing rivers – a length equivalent to seven trips around the planet. 
There is a better way. 
By taking a system-scale approach – looking at dams in the context of an entire river basin, rather than on a project-by-project basis – we can better anticipate and balance the environmental, social, and economic effects of any single project, while at the same time ensuring that a community’s energy needs are met. 
The Nature Conservancy has pioneered such a planning approach – what we call “Hydropower by Design” – to help countries realize the full value within their river basins. 
Even one dam changes the physical attributes of a river basin. 
Multiplied through an entire watershed, the impact is magnified. 
Hydropower projects planned in isolation not only often cause more environmental damage than necessary; they often fail to achieve their maximum strategic potential and may even constrain future economic opportunities. 
As a result, even dams that meet their power-generation goals may fail to maximize the long-term value of other water-management services such as flood control, navigation, and water storage. 
Our research shows that these services add an estimated $770 billion annually to the global economy. 
Failure to design dams to their fullest potential, therefore, carries a significant cost. 
In the past, some developers have been resistant to this sort of strategic planning, believing that it would cause delays and be expensive to implement. 
But, as the Conservancy’s latest report – The Power of Rivers: A Business Case – demonstrates, accounting for environmental, social, and economic risks up front can minimize delays and budget overruns while reducing the possibility of lawsuits. 
More important, for developers and investors, employing a holistic or system-wide approach leverages economies of scale in dam construction. 
The financial and development benefits of such planning enable the process to pay for itself. 
Our projections show that projects sited using a Hydropower by Design approach can meet their energy objectives, achieve a higher average rate of return, and reduce adverse effects on environmental resources. 
With nearly $2 trillion of investment in hydropower anticipated between now and 2040, the benefits of smarter planning represent significant value. 
System-scale hydropower planning does not require builders to embrace an entirely new process. 
Instead, governments and developers can integrate principles and tools into existing planning and regulatory processes. 
Similar principles are being applied to wind, solar, and other energy sources with large geographic footprints. 
Completing the transition to a low-carbon future is perhaps the preeminent challenge of our time, and we won’t succeed without expanding renewable-energy production. 
In the case of hydropower, if we plan carefully using a more holistic approach, we can meet global goals for clean energy while protecting some 100,000 kilometers of river that would otherwise be disrupted. 
But if we don’t step back and see the whole picture, we will simply be trading one problem for another. 

New Politics for Clean Energy 
NEW YORK – The diplomats have done their job, concluding the Paris climate agreement in December. 
And political leaders gathered last week at the United Nations to sign the new accord. 
But implementation is surely the tough part. 
Governments need a new approach to an issue that is highly complex, long term, and global in scale. 
At its core, the climate challenge is an energy challenge. 
About 80% of the world’s primary energy comes from carbon-based sources: coal, oil, and gas. 
When burned, they emit the carbon dioxide that causes global warming. 
By 2070, we need a world economy that is nearly 100% carbon-free to prevent global warming from running dangerously out of control. 
The Paris agreement recognizes these basic facts. 
It calls on the world to cut greenhouse-gas emissions (especially CO2) to net-zero levels in the second half of the century. 
To this end, governments are to prepare plans not only to the year 2030 (the so-called Nationally Determined Contributions, or NDCs), but also to mid-century (the so-called Low-Emission Development Strategies, or LEDS). 
The world’s governments have never before attempted to remake a core sector of the world economy on a global scale with such an aggressive timeline. 
The fossil-fuel energy system was created step by step over two centuries. 
Now it must be comprehensively overhauled in just 50 years, and not in a few countries, but everywhere. 
Governments will need new approaches to develop and implement their LEDS. 
There are four reasons why politics as usual will not be sufficient. 
First, the energy system is just that: a system of many interconnected parts and technologies. 
Power plants, pipelines, ocean transport, transmission lines, dams, land use, rail, highways, buildings, vehicles, appliances, and much more must all fit together into a working whole. 
Such a system cannot be overhauled through small incremental steps. 
A deep overhaul requires system-wide re-engineering to ensure that all parts continue to work effectively together. 
Second, there are still many large technological uncertainties in moving to a low-carbon energy system. 
Should vehicles be decarbonized through battery-electric power, hydrogen fuel cells, or advanced biofuels? 
Can coal-fired power plants be made safe through carbon capture and storage (CCS)? 
Will nuclear energy be politically acceptable, safe, and low cost? 
We must plan investments in research and development to resolve these uncertainties and improve our technological options. 
Third, sensible solutions require international energy cooperation. 
One key fact about low-carbon energy (just like fossil fuels) is that it is not generally located where it will ultimately be used. 
Just as coal, oil, and gas must be transported long distances, so wind, solar, geothermal, and hydropower must be moved long distances through transmission lines and through synthetic liquid fuels made with wind and solar power. 
Fourth, there are of course powerful vested interests in the fossil-fuel industry that are resisting change. 
This is abundantly clear in the US, for example, where the Republican Party denies climate change for the sole reason that it is heavily funded by the US oil industry. 
This is certainly a species of intellectual corruption, if not political corruption (it’s probably both). 
The fact that the energy system involves so many complex interconnections leads to tremendous inertia. 
Shifting to a low-carbon energy system will therefore require considerable planning, long lead times, dedicated financing, and coordinated action across many parts of the economy, including energy producers, distributors, and residential, commercial, and industrial consumers. 
Policy measures such as a tax on carbon emissions can help to address some – but only some – challenges of the energy transition. 
Here is another problem. 
If governments plan only 10-15 years ahead, as is typical in energy policy, rather than 30-50 years, they will tend to make poor system-related choices. 
For example, energy planners will move from coal to lower-carbon natural gas; but they will tend to underinvest in the much more decisive shift to renewable energy. 
Similarly, they may opt to raise fuel standards for internal-combustion automobiles rather than to push the needed shift to electric vehicles. 
In this sense, planning 30-50 years ahead is vital not only to make the correct long-run choices, but also to inform the correct short-term choices. 
The UN’s Deep Decarbonization Pathways Project has shown how long-term plans can be designed and evaluated. 
None of these challenges sits easily with elected politicians. 
The decarbonization challenge requires consistent policies over 30-50 years, while politicians’ time horizon is perhaps a tenth of that. 
Nor are politicians very comfortable with a problem that requires large-scale public and private financing, highly coordinated action across many parts of the economy, and decision-making in the face of ongoing technological uncertainties. 
Small wonder, then, that most politicians have shied away from this challenge, and that far too little practical progress has been made since the UN Framework Convention on Climate Change was signed in 1992. 
One key step, I believe, is to remove these issues from short-term electoral politics. 
Countries should consider establishing politically independent energy agencies with high technical expertise. 
Of course, key energy decisions (such as whether to deploy nuclear energy or to build a new transmission grid) will require deep public participation, but planning and implementation should be free of excessive partisan politics and lobbying. 
Just as governments have successfully given their central banks some political independence, they should give their energy agencies enough leeway to enable them think and act for the long term. 
At the next global climate meeting (COP22 in Marrakesh in November), Morocco’s government and my team at the UN Sustainable Development Solutions Network will join with other partners to co-host a “Low-Emissions Solutions Conference.” 
This conference will bring together energy experts from UN member countries, businesses, and cities to work on highly practical approaches to deep decarbonization. 
With the Paris climate agreement now in force, we must move urgently to effective implementation. 

A Climate Apollo Program 
LONDON – In 1961, when the United States was faced with the threat of falling behind the Soviet Union in the space race, President John F. Kennedy called for a program – eventually known as Project Apollo – to put a man on the moon before the end of the decade. 
The program’s clearly articulated vision – and the resources and effort mustered in its service – ensured its success. 
Just eight years after Kennedy’s announcement, astronaut Neil Armstrong pressed his footprint into the lunar dust. 
As representatives from 196 countries prepare to gather in Paris at the end of the year to craft an agreement to tackle global warming, it is becoming clear that we need a similar project. 
In early June, I joined David King, a former chief scientific adviser to the British government, former BP CEO John Browne, and several other co-authors in a call for a Global Apollo Program. 
Until now, the diplomatic effort to prevent dangerous climate change has focused on coordinating national cuts in greenhouse-gas emissions. 
But what is needed is more spending, not just more coordination. 
The decade-long effort we propose would require the whole planet to work together to make a breakthrough in the fight against climate change. 
It would seek to reduce the cost of electricity from sources that do not emit greenhouse gases below that of coal power by 2025. 
In order to achieve this, countries joining the program would pledge to devote at least 0.02% of their GDP toward the effort. 
David Attenborough, the British naturalist and broadcaster, has said of the proposal, “at last, we have an authoritative, practical, and comprehensive plan that could avert the catastrophe that is threatening our planet.” 
Bjørn Lomborg, known for his skepticism toward traditional approaches to fighting climate change, has described this idea as “a much smarter approach and more likely to actually succeed.” 
Indeed, the most frequently floated proposals leave much to be desired. 
Many in Paris will argue in favor of putting a price on carbon, which most economists believe would channel consumption away from carbon-intensive fuels. 
But there are doubts about whether such a policy would be political feasible. 
John Watson, CEO of Chevron, recently rejected carbon pricing as unworkable. 
“It’s not a policy that is going to be effective, because customers want affordable energy,” he said. 
“They want low energy prices, not high energy prices.” 
Similarly, national leaders in the developing world – where some three billion people do not have access to affordable energy – are under immense pressure to deliver standard-of-living improvements. 
They are likely to shy from policies that raise the cost of energy. 
Indian Prime Minister Narendra Modi, for example, has called for global public investment in clean energy. 
“We are more likely to succeed if we offer affordable solutions, not simply impose choices,” he argues. 
“This requires access to more resources and better technology.” 
A Global Apollo Program would help the world reduce its CO2 emissions and cut its energy bills. 
The price of solar energy is already plummeting: the National Bank of Abu Dhabi has noted that a large solar installation in Dubai could produce energy at a price that would be competitive with oil at $10 per barrel. 
But there are significant obstacles to the widespread use of solar energy and other sources of renewable electricity, including a desperate need for cheaper, more efficient means of energy storage and transmission. 
Currently, only 2% of the world’s investment in research and development is allocated to clean energy; at this rate, solutions to these problems are unlikely to be found anytime soon. 
The Global Apollo Program would double these investments and coordinate the effort to bridge the technological gaps, bringing forward the day when we could eliminate coal and other carbon-intensive fuels. 
Following the recent G-7 summit in Germany, the leaders of the world’s largest economies issued a pledge to “work together and with other interested countries to raise the overall coordination and transparency of clean energy research, development, and demonstration, highlighting the importance of renewable energy and other low-carbon technologies.” 
But an initiative like the Global Apollo program will succeed only if the world’s emerging powers, such as China and India, throw their weight behind it. 
They will have a chance to do so at the G-20 summit in Turkey in November. 
The 2015 United Nations Climate Change Conference in Paris must produce an agreement to introduce a price on carbon worldwide. 
But that approach will not work without a coordinated strategy to reduce the cost of carbon-free energy. 
If countries sign up to the Global Apollo Program as part of the agreement in Paris, the meeting might just mark one giant leap for mankind in the fight against climate change. 

A Bright Future for Clean Technology 
MUNICH – Observers might be forgiven for thinking that so-called clean technology's moment in the sun has passed. 
Over the last two years, many clean-tech equity indexes have performed poorly. 
In Europe, solar power took a hit after the European Commission decided to phase out subsidies for renewable energy by 2017. 
The installation of solar panels fell by nearly 60% in Germany in 2013, and by 70% in Italy. 
Meanwhile, in the United Kingdom, less than 30% of early-stage venture-capital-funded clean-tech deals were financed. 
The truth is that we have been here before. 
The convulsions in the clean-tech sector are simply symptoms of a cycle that characterizes emerging technologies: excitement, inflated expectations, and consolidation – ultimately followed by stability and the resumption of growth. 
Indeed, underlying recent developments are signs of a much more significant transformation: clean tech is becoming commercially viable. 
Confidence in the clean-tech sector's future is rooted in the need for sustainable solutions for a planet that is supporting an ever-wealthier population. 
Over the next 20 years, the number of middle-class consumers is expected to rise to some three billion, from 1.8 billion today. 
Their new lifestyles will require resources, including energy. 
This surge in demand will occur at a time when finding, developing, and extracting new sources of energy and resources will be increasingly challenging and expensive. 
Over the last 12 years, for example, the average real construction cost of an oil well has doubled, and in recent years new mining discoveries have been few, despite the industry's best (and often expensive) efforts. 
But clean-energy costs are trending in the opposite direction, ripening these solutions at a time when need – particularly in some of the world's largest developing cities – is becoming acute. 
One pivotal question for the future of clean tech has been whether it needs regulatory support to thrive. 
To be sure, the withdrawal of subsidies in Europe hit the sector hard. 
But, even as Germany and Italy lost their first- and second-place rankings in terms of new solar-power installations, China and Japan took their place. 
Globally, the solar-power industry has grown at an average annual rate of 57% since 2006. 
Regulatory support has been effective in creating demand and allowing sources of renewable supply to reach scale. 
But such support has not always been economically efficient. 
One lesson from the German experience is that sudden changes in regulation can create peaks and valleys in demand that are not helpful to an industry that is still emerging. 
The biggest risk in many markets is not that subsidies and other supports will be withdrawn, but that the regulatory structure will not adapt as the sector develops. 
As industries mature, the case for policy support weakens. 
And, indeed, solar power increasingly appears to be able to survive without regulatory help. 
A thriving global marketplace goes a long way toward leveling the playing field across all resource options. 
During the last five years, dozens of solar manufacturing companies have failed, only to be replaced by stronger, more innovative, and more efficient players. 
More than one-quarter of cumulative global solar photovoltaic capacity was installed just in the past year. 
The International Energy Agency, which has been conservative regarding solar energy's prospects, now expects it to be the world's largest power source by 2050. 
Nonetheless, concerns about the future of clean tech have made new projects more difficult to finance. 
But innovative new schemes, such as clean-tech bonds and third-party financing, are changing the picture. 
Third-party ownership, in which a company installs and maintains solar panels, in exchange for either a set monthly rate or a fixed price per unit of power, has driven up adoption rates in California, financing more than two-thirds of new installations in 2012 and 2013. 
Similarly, new partnerships with large industry incumbents – such as the tie-up between Daimler and Tesla and the controlling stake that Total took in SunPower – are reducing the cost of finance for smaller firms. 
Meanwhile, clean-tech companies are becoming more sophisticated and creative. 
An entire new industry has been created around the use of information technology to reduce energy consumption. 
Some companies, such as C3 Energy, offer electric utilities software that can analyze their electrical networks to improve grid operations and asset utilization, thereby increasing profits. 
Smart-grid hardware has been deployed widely in the past decade, and as companies figure out how to use big data and analytic tools, it will become much more important. 
Google's acquisition of Nest Labs for $3.2 billion is a good example of the value that companies are placing on this kind of data. 
All of this adds up to an industry that Bloomberg calculates reached $310 billion in investment last year. 
This is not a “niche" segment, but an asset-intensive industry on its way to commoditization. 
Clean tech is maturing and adopting proven management practices in operations, marketing, sales, and distribution. 
Increasingly, the industry is implementing approaches that have ensured success in other sectors, such as reducing procurement costs and deploying lean principles in manufacturing. 
As clean-tech businesses continue to scale up, there will be additional opportunities to improve. 
The shakeout in the clean-tech industry has been tough; but it has also been typical of emerging technologies, and, by weeding out the weaker players, it has made the sector more robust. 
This is a global segment meeting a growing global need. 
There is little room for doubt that the clean-tech industry can expect plenty of sunny days ahead. 

Cleaning Up Economic Growth 
British Prime Minister Tony Blair has promised that the G-8 meeting on July 6-8 at Gleneagles, Scotland, which he will chair, will focus on two of the most important and longstanding global problems—Third-World poverty and global warming. 
For a long time, these two issues seemed to be at odds. 
The developing world understandably does not want to sacrifice its growth for a global public good, especially when the United States, the richest country in the world, seems unwilling to sacrifice even a little of its luxurious life style. 
Led by Papua New Guinea and Costa Rica, a group of developing countries, a new rainforest coalition has now come forward with an innovative proposal, not only offering to commit to greenhouse-gas limits, but also showing how this can be done in a way that will promote their development. 
Developing countries have long provided a vital global public good: maintaining global environmental assets. 
Their rainforests are a vast storehouse of biodiversity, and forests are major carbon sinks, reducing the level of CO2 in the atmosphere. 
I served on the International Panel for Climate Change in the mid-1990’s, reviewing the scientific evidence concerning the magnitude of increases in greenhouse gasses and their economic and social consequences. 
At the time, there was already overwhelming evidence of a serious problem that needed to be addressed, and data since then ­­– concerning, for example, the rapid melting of the polar ice cap – have strongly reinforced this conclusion. 
About a quarter of all greenhouse gas emissions are from land-use change, mainly deforestation, an amount comparable to US emissions from burning fossil fuels (the US is the single largest contributor to greenhouse gas emissions.) 
By maintaining their rainforests, tropical countries provide an invaluable global service, one for which they have so far failed to be compensated. 
But, especially after the signing of the Kyoto protocol, we can value at least part of these environmental services: carbon sequestration (that is, if they did not maintain their forests, the level of carbon concentrations in the atmosphere would be enormously higher). 
The Kyoto Protocol has generated new markets for trading carbon emissions, such as the European Emissions Trading Scheme (ETS). 
At current carbon prices, the value of carbon sequestration by tropical rainforests likely equals or exceeds the current level of international aid being provided to developing countries. 
In effect, the poor are aiding the rich. 
Biodiversity and climatic stability are global public goods. 
The benefits of conservation to the world as a whole far exceed the value of exploitation to a country like Papua New Guinea (PNG). 
The PNG government would like to do the right thing, to maintain its natural capital for future generations. 
But officials there believe that that they have currently no choice. 
A huge mistake was made (for a variety of reasons) at Kyoto. 
While countries can be compensated for planting forests, they cannot be compensated for avoiding deforestation. 
Countries like PNG would thus be doubly better off if they cut down their ancient hardwood trees and replanted. 
But this makes no sense economically or socially. 
These countries should be given incentives to maintain their forests. 
(There are, as always, technical issues to be resolved, concerning monitoring and measurement, but these can be overcome easily with modern technologies.) 
At the very least, markets like ETS should credit emissions reductions that result from limiting deforestation. 
Without such a program, unfortunately, developing countries have neither the means nor incentives to underwrite conservation. 
There are some 2.7 billion people in over 60 developing countries that are home to the world’s tropical forests. 
Cutting down the hardwood forests – even when they presently receive just 5% of the final price in, say, New York – is the only way people can make ends meet. 
Some have suggested waiting to address this issue until 2012, when a revised protocol is supposed to come into effect. 
But, can we wait? 
At currents rates of deforestation, the combined contributions to greenhouse gas concentrations from Brazil and Indonesia alone would offset nearly 80% of the emission reductions gained from the Kyoto protocol. 
What is so impressive about the new rainforest initiative is that it comes from the developing countries themselves; it represents their creativity and social commitment. 
For the first time, developing countries seem willing to undertake the kinds of commitments that Europe, Japan, and the other advanced industrial countries (except the US) have made to avoid what could be a global disaster. 
Costa Rica, for example, has already shown that a system of paying for the provision of environmental services (like maintaining natural forests) can work in ways that preserve the environment and boost the economy. 
Compensating the developing countries for providing these environmental services would be one way of substantially increasing aid – and at the same time, providing these countries with the right market incentives. 
From a global point of view, the best use of these resources is to maintain the forests, which is even possible with managed cutting. 
This is an initiative around which all countries can and should rally. 
In a world divided – between rich countries and the poor, between those focusing on environmental protection and those concentrating on growth – this initiative can unite us all. 
The G-8 leaders should heed the call. 

How Climate Action Can Make America Great 
SINGAPORE – Climate change is the single biggest challenge facing humankind. 
Yet the next president of the United States – the world’s second-largest greenhouse-gas emitter and a critical actor in climate policy – does not believe it is happening, or at least that humans have a role in driving it. 
If Donald Trump actually wants to “Make America Great Again,” as his campaign slogan declared, he will need to change his attitude and embrace the climate agenda. 
So far, the situation does not look promising. 
Despite a mountain of scientific data, Trump claims that there is no evidence that humans contribute to global warming. 
He once even called climate change a “hoax,” invented by the Chinese to make US manufacturing less competitive (though he later walked back that accusation). 
He has not, however, rethought his broader skepticism about human-driven climate change. 
Reflecting this line of thinking, Trump has announced his intention to reverse carbon-emission limits for coal-fired power plants, step up fossil-fuel production, and roll back support for wind and solar power. 
He has also pledged to pull the US out of the global climate-change agreement concluded last December in Paris. 
Such a reversal would be catastrophic for global efforts to tackle climate change. 
Just as US President George W. Bush’s refusal to sign the Kyoto Protocol on climate change in 2005 initiated a spiral of rising emissions, a decision by Trump not to fulfill America’s commitments under the Paris agreement could spur others to follow suit. 
After all, many countries are already worried about the costs of meeting their national commitments, especially at a time of sluggish economic recovery. 
And burning fossil fuels remains, in most economic activities, cheaper than using cleaner energy (when one does not account for the relevant environmental damage). 
Of course, in the longer term, burning more fossil fuels will drive up health-care costs and impede worker productivity. 
Then there are the economic and human costs of increasingly frequent and severe climate-related disasters – including floods, droughts, storms, and heat waves, all of which are already on the rise worldwide. 
To be sure, Trump recently met with the former US vice president and vocal climate activist Al Gore. 
Nonetheless, it seems unlikely that Trump will change his tune on climate change, not least because the cabinet members he has selected are largely singing the same song. 
The good news is that he may not have to. 
In fact, there are actions that Trump can take for other ends – from boosting the US economy to enhancing America’s global influence – that would also advance the climate agenda. 
The first such action is to increase investment in research and development in climate-friendly sectors, such as energy efficiency and storage, renewable-energy systems, and safer and smaller cars. 
Technological breakthroughs in these areas – which the US is particularly qualified to realize – would be great for business. 
And building high-tech production and efficient energy sectors may be Trump’s best chance of fulfilling his campaign promise to create a large number of jobs for Americans. 
As much as Trump might like to revive steel and coal in the so-called Rust Belt states that were crucial to his electoral victory, that is likely impossible (as is bringing back large numbers of manufacturing jobs from abroad). 
Indeed, coal power is already on its way out in the US, as health and environmental (not just climate) concerns force plants to shut down. 
Natural-gas production, meanwhile, is at an all-time high; its 33% share in power generation now exceeds that of coal. 
Renewable-energy sources and nuclear power are also on the rise, a trend that is almost certain to continue. 
To create a Rust Belt revival, Trump must capitalize on these trends, advancing a more innovative, energy-efficient approach, much like the one that is helping to support growth in the economies of California and New York. 
Trump could reinforce progress in dynamic and profitable energy-efficient industries by entrenching energy efficiency in construction codes. 
New buildings and other infrastructure should feature energy-efficient lighting (including better use of sunlight), heating, and air conditioning. 
There are also huge payoffs from retrofitting existing buildings for more efficient energy use. 
There is one more key reason why Trump, the climate-skeptic, might be convinced to sustain progress on climate action: preserving and enhancing America’s international influence. 
Other prominent global leaders – including Chinese President Xi Jinping, Indian Prime Minister Narendra Modi, and German Chancellor Angela Merkel – have expressed concern about the devastation caused by pollution and environmental degradation. 
If the US repudiates its leadership role in this area, it risks considerable reputational damage. 
Global climate leadership will require the US, first and foremost, to fulfill its Paris commitments. 
It is vital that Trump upholds America’s Clean Power Plan, which establishes state-by-state targets for carbon-emissions reductions, with the goal of lowering national emissions from electricity generation by one-third relative to their 2005 level by 2030. 
The extension of tax credits for renewable-energy producers and consumers would go a long way toward advancing this goal. 
But even achieving the Paris agreement’s goals will not be enough to avert a catastrophic rise in global temperature. 
We must overshoot our targets by advancing clean energy, clean transport, and clean industry. 
For that, American know-how and savvy will be indispensable. 
Trump already wants to invest in energy and infrastructure. 
If he does so in a climate-friendly way, the US will reap enormous benefits – and so will the rest of the world. 
If the mogul-turned-president does not recognize the threat that climate change poses, he should at least be able to recognize a tremendous business opportunity when he sees one. 

In Defense of the 1.5°C Climate Change Threshold 
MANILA – The Earth today is more than 1°C hotter than it was in pre-industrial times, and the terrible symptoms of its fever are already showing. 
This year alone, back-to-back hurricanes have devastated Caribbean islands, monsoon flooding has displaced tens of millions in South Asia, and fires have raged on nearly every continent. 
Pulling the planet back from the brink could not be more urgent. 
Those of us who live on the front lines of climate change – on archipelagos, small islands, coastal lowlands, and rapidly desertifying plains – can’t afford to wait and see what another degree of warming will bring. 
Already, far too many lives and livelihoods are being lost. 
People are being uprooted, and vital resources are becoming increasingly scarce, while those suffering the most severe consequences of climate change are also among those who have done the least to cause it. 
That is why the Philippines used its chairmanship of the Climate Vulnerable Forum (CVF) – an alliance of the 48 countries that stand to bear the brunt of climate change – to fight to ensure that the 2015 Paris climate agreement aimed explicitly to cap global warming at 1.5°C above pre-industrial levels. 
For us, 1.5°C isn’t merely a symbolic or “aspirational” number to be plugged into international agreements; it is an existential limit. 
If global temperatures rise above that level, the places we call home – and many other homes on this planet – will become uninhabitable or even disappear completely. 
When we first introduced the 1.5°C target back in 2009, we met substantial resistance. 
Climate-change deniers – those who refuse to believe the science of human-induced global warming – continue to dismiss any such effort to stem the rise in the planet’s temperature as futile and unnecessary. 
But even well-meaning climate advocates and policymakers often opposed the 1.5°C target, arguing that, according to the science, humans had already emitted enough greenhouse gases to make meeting that goal virtually impossible. 
Yet, on this front, the science is not as clear-cut as it might have seemed. 
According to a recent paper published in Nature, the world’s remaining “carbon budget” – the amount of carbon-dioxide equivalents we can emit before breaching the 1.5°C threshold – is somewhat larger than was previously thought. 
This finding is no reason for complacency, as some commentators (not scientists) seem to think. 
It does not mean that previous climate models were excessively alarmist, or that we can take a more relaxed approach to reining in global warming. 
Instead, the paper should inspire – and, indeed, calls for – more immediate, deliberate, and aggressive action to ensure that greenhouse-gas emissions peak within a few years and net-zero emissions are achieved by mid-century. 
What would such action look like? 
Global emissions would need to be reduced by 4-6% every year, until they reached zero. 
Meanwhile, forest and agricultural lands would have to be restored, so that they could capture and sequester greater amounts of carbon dioxide. 
Fully decarbonizing our energy and transportation systems in four decades will require a herculean effort, but it is not impossible. 
Beyond their environmental consequences, such efforts would generate major economic gains, boosting the middle class in developed countries and pulling hundreds of millions out of poverty in the developing world, including by fueling job creation. 
The energy transition will lead to massive efficiency savings, while improving the resilience of infrastructure, supply chains, and urban services in developing countries, particularly those in vulnerable regions. 
According to a report published last year by the United Nations Development Programme, maintaining the 1.5°C threshold and creating a low-carbon economy would add as much as $12 trillion to global GDP, compared to a scenario in which the world sticks to current policies and emissions-reduction pledges. 
The paper asserting that the 1.5°C target is achievable was written by well-respected climate experts and published in a top-ranking journal after extensive peer review. 
But it is just one paper; there is still a lot more to learn about our capacity to limit global warming. 
That is why top scientists are already discussing and debating its findings; their responses will also be published in top journals. 
That is how scientific research works, and it is why we can trust climate science – and its urgent warnings. 
Next year, the Intergovernmental Panel on Climate Change will publish its own meta-analysis of all of the science related to the 1.5°C target, in what promises to be the most comprehensive summary of such research. 
But we cannot afford to wait for that analysis before taking action. 
The members of the CVF have already committed to doing our part, pledging at last year’s UN Climate Change Conference in Marrakech to complete the transition to 100% renewable energy as soon as possible. 
Our emissions are already among the world’s smallest, but our climate targets are the world’s most ambitious. 
But whether the world manages to curb climate change ultimately will depend on the willingness of the largest current and historical emitters of greenhouse gases to fulfill their moral and ethical responsibility to take strong action. 
Keeping global temperatures below 1.5°C may not yet be a geophysical impossibility. 
But, to meet the target, we must ensure that it is not treated as a political and economic impossibility, either. 

Fifty Years of Climate Dithering 
SYDNEY – In November 1965, US President Lyndon B. Johnson was presented with the first-ever government report warning of the dangers that could result from burning large amounts of fossil fuels. 
Fifty years is a long time in politics, so it is remarkable how little has been done since then to address the threat posed by carrying on with business as usual. 
In remarkably prescient language, Johnson’s scientific advisory committee warned that releasing carbon dioxide into the atmosphere would lead to higher global temperatures, causing ice caps to melt and sea levels to rise rapidly. 
“Man is unwittingly conducting a vast geophysical experiment,” warned the scientists. 
“Within a few generations he is burning the fossil fuels that slowly accumulated in the earth over the past 500 million years…The climatic changes that may be produced by the increased CO2 content could be deleterious from the point of view of human beings.” 
The committee’s foresight is not surprising; the existence of the greenhouse effect had been known to science since the French physicist Joseph Fourier suggested in 1824 that the earth’s atmosphere was acting as an insulator, trapping heat that would otherwise escape. 
And in 1859, the Irish physicist John Tyndall carried out laboratory experiments that demonstrated the warming power of CO2, leading the Swedish physicist and Nobel Laureate Svante Arrhenius to predict that burning coal would warm the earth – which he saw as a potentially positive development. 
Johnson’s advisers were not so Pollyannaish. 
Their report accurately predicted that the amount of CO2 in the atmosphere would increase by close to 25% over the course of the twentieth century (the actual number was 26%). 
Today, the atmospheric concentration of CO2 is 40% higher than it was at the beginning of the Industrial Revolution – by far the highest it has been during the past one million years, as we know from drilling into the Antarctic ice. 
Furthermore, Johnson’s scientific committee rebutted objections that continue to be used today by those who deny the dangers of climate change, including the claim that natural processes might be behind the rise in CO2 levels. 
By showing that only about half of the CO2 produced by burning fossil fuels remains in the atmosphere, the committee proved that the earth acts not as a source of greenhouse gases, but as a sink, soaking up half of our emissions. 
What Johnson’s advisers could not do was offer specific predictions for how much the rise in atmospheric CO2 would affect global temperature; they said they would first need better models and more powerful computers. 
Those calculations formed the basis of the next landmark report, the 1979 “Carbon Dioxide and Climate: A Scientific Assessment,” prepared by the US National Academy of Sciences. 
Widely known as the Charney Report – after its lead author, Jule Charney of MIT – it is a model of careful scientific deliberation. 
Charney’s report estimated that doubling the amount of CO2 in the atmosphere would warm the earth by about 3° Celsius – a number that is well confirmed today. 
It also predicted that the heat capacity of the oceans would delay warming by several decades. 
Both findings are consistent with the global warming observed since the report’s publication. 
“We have tried but have been unable to find any overlooked or underestimated physical effects that could reduce the currently estimated global warming … to negligible proportions,” the report concluded. 
Since then, the scientific evidence has only gotten stronger; today, the basic findings laid out in these two early reports are supported by more than 97% of climate scientists. 
And yet, despite 50 years of growing scientific consensus, the warming of the earth continues unabated. 
Well-funded lobby groups have sowed doubt among the public and successfully downplayed the urgency of the threat. 
Meanwhile, geopolitics has impeded the development of an effective global response. 
The international climate negotiations that are expected to culminate in an agreement at the United Nations Climate Change Conference in Paris in November and December have been hampered by the requirement of consensus among the 195 countries participating. 
If action is not taken, billions of people will suffer the consequences of drought, crop failure, and extreme weather. 
Eventually, rising sea levels will flood large coastal cities and destroy entire island states. 
The hottest years since record-keeping began in the nineteenth century were 2005, 2010, and 2014, and last year’s record will almost certainly be broken again this year. 
It is time that world leaders put an end to 50 years of dithering. 
They must seize the opportunity in Paris, set aside their short-term interests, and finally act decisively to avert a looming planetary catastrophe. 

The Health Benefits of Fighting Climate Change 
LIMA – Governments often see climate change as too costly to address. 
In fact, it is too costly to ignore. 
That is why the World Health Organization (WHO), for example, has linked the prevention of disastrous climate change to “immediate health benefits and health cost savings” from the reduction of air pollution. 
The statistics are grim. 
Air pollution caused more than seven million premature deaths – one in eight globally – in 2012, compared to nearly six million premature deaths from tobacco. 
One of the biggest causes of harm are the fine particles called PM2.5, with a diameter of less than 2.5 micrometers. 
They wreak havoc by traveling deep into the lungs, contributing to inflammation, cancer, and respiratory infection, or by passing into the bloodstream, where they can trigger changes in blood vessels that cause heart attacks and strokes. 
The combustion of diesel and coal are among the main causes of air pollution, with 3.7 million deaths attributed to outdoor fumes and 4.3 million resulting from poorly ventilated homes. 
Motorized transport now accounts for half of premature deaths from ambient particulate matter in the 34 OECD countries. 
Coal-fired power is also the main source of carbon dioxide, the main greenhouse gas responsible for climate change, which causes about 150,000 premature deaths annually and threatens pervasive risks this century and beyond. 
To be sure, the coal industry has helped billions of people escape poverty, not least in China, where coal-fired power has underpinned the nearly 700% growth in per capita income since 1990. 
But human health is at greater risk in countries that burn more coal. 
Research for the Global Commission on the Economy and Climate last year calculated that particulate matter alone caused 1.23 million premature deaths in China – the world’s top coal-consuming economy – in 2010. 
Estimates for 2012 suggest that 88% of air-pollution-related deaths occur in low- to middle-income countries, representing 82% of the world’s population. 
The Western Pacific and Southeast Asian regions bear the burden of 1.67 million and 936,000 deaths, respectively. 
But pollution is worsening and taking lives in high-income countries as well. 
For example, PM2.5 reduces life expectancy across the European Union by eight months and, together with ozone, was responsible for 430,000 premature deaths in the EU’s 28 member states in 2011. 
In Britain, more than six decades after the Great Smog of 1952, PM2.5 pollution levels still persistently exceed WHO guidelines. 
The health costs of air pollution in the EU are up to €940 billion annually. 
The WHO recently carried out a review of the evidence on the health effects of air pollution, and found that the range of such effects is broader and occur at lower concentrations than previously thought. 
In addition to the well-known effects of air pollution on the lungs and heart, new evidence points to its detrimental impact on children’s development, including in utero. 
Some studies even link air pollution to diabetes, a major chronic disease and health challenge in Indonesia, China, and Western countries. 
Despite the overwhelming evidence of health risks, many countries routinely ignore air-quality standards – as well as the emissions monitoring needed for effective regional cooperation – mainly owing to governments’ fear of their economic impact. 
Economic models used by advisers to shape development strategy – and touted by lobbyists to influence decisions on major infrastructure projects – exclude the human cost of air pollution and the long-term benefits of measures to reduce it. 
Any solutions to the problems posed by air pollution will require not only new economic models, but also integrated measures by local, national, and international governments. 
Cutting emissions from urban transport, for example, will involve city mayors, local planners, and national policymakers working together to induce compact development. 
Fortunately, government support for effective action is growing. 
Air pollution is at the top of China’s domestic agenda, following the choking smog dubbed “airpocalypse” that engulfed its major cities in January 2013 and Chai Jing’s recent documentary (and social-media phenomenon) “Under the Dome,” which exposed the catastrophic health impacts of air pollution. 
Indeed, China’s government has closed some of the country’s dirtiest power plants, resulting in a drop in coal consumption last year for the first time since 1998. 
A recent draft resolution on air pollution and health for the World Health Assembly (the WHO’s governing body) suggests that countries should “underscore” a link between air pollution and climate change. 
Countries should adopt the WHO air-quality guidelines and highlight additional opportunities for greener urban planning, cleaner energy, more efficient buildings, and safer walking and cycling. 
A formal acknowledgement by governments of the immediate health-related benefits of cutting carbon-dioxide emissions can tip the scales toward greater progress on climate change, air pollution, and human health simultaneously. 
Policymakers everywhere should recognize the economic opportunities – and the political benefits – that such an outcome promises to deliver. 

Beyond Carbon Metrics 
BERLIN – Over the last ten years, “climate change” has become almost synonymous with “carbon emissions.” 
The reduction of greenhouse gases in the atmosphere, measured in tons of “carbon equivalents” (CO2e) has emerged as the paramount objective in the quest to preserve the planet. 
But such a simplistic approach cannot possibly resolve the highly complex and interconnected ecological crises that we currently face. 
Global environmental policy’s single-minded focus on “carbon metrics” reflects a broader obsession with measurement and accounting. 
The world runs on abstractions – calories, miles, pounds, and now tons of CO2e – that are seemingly objective and reliable, especially when embedded in “expert” (often economic) language. 
As a result, we tend to overlook the effects of each abstraction’s history, and the dynamics of power and politics that continue to shape it. 
One key example of a powerful and somewhat illusory global abstraction is the gross domestic product (GDP), which was adopted as the main measure of a country’s economic development and performance after World War II, when world powers were building international financial institutions that were supposed to reflect relative economic power. 
Today, however, GDP has become a source of widespread frustration, as it fails to reflect the realities of people’s lives. 
Like a car’s high beams, abstractions can be very illuminating; but they can also render invisible what lies outside their light. 
Nonetheless, GDP remains by far the dominant measure of economic prosperity, reflecting the obsession with universality that accompanied the spread of capitalism worldwide. 
Complex, nuanced, and qualitative imaginings that reflect local specificities are simply not as appealing as linear, overarching, and quantitative explanations. 
When it comes to climate change, this preference translates into single-minded support for solutions that marginally reduce “net” carbon emissions – solutions that may impede broad economic transformations or undermine communities’ capacity to define specific problems and develop appropriate solutions. 
This approach can be traced back to the 1992 Earth Summit in Rio de Janeiro, where climate policy embarked on a rocky and violent path of forgotten alternatives. 
In the course of the last quarter century, at least three critical mistakes were made. 
First, governments introduced the CO2e unit of calculation to quantify in a consistent manner the effects of disparate greenhouse gases, such as CO2, methane, and nitrous oxide. 
The variations among these gases – in terms of their warming potential, how long they remain in the atmosphere, where they appear, and how they interact with local ecosystems and economies – are profound. 
A single unit of measure simplifies matters considerably, allowing policymakers to pursue one blanket solution aimed at meeting a specific overarching target. 
Second, the UN climate change convention emphasized “end of pipe” techniques (methods aimed at removing contaminants from the atmosphere). 
This enabled decision-makers to deflect attention away from the more politically challenging objective of limiting the activities producing those emissions in the first place. 
Third, policymakers decided to focus on “net” emissions, considering biological processes involving land, plants, and animals together with those associated with the burning of fossil fuels. 
Just like industrial facilities, paddy fields and cows were treated as emissions sources, and tropical forests, monoculture tree plantations and bogs as emission sinks. 
Policymakers began to seek solutions that involved offsetting emissions abroad, rather than cutting them at home (or at the source). 
By 1997, when the Kyoto Protocol was introduced, “more flexibility” was the order of the day, and trading in emissions certificates (or permits to pollute) was the preferred policy option. 
Nearly two decades later, the effort to offset emissions is not only entrenched in climate politics; it has also made its way into the broader environmental-policy debate. 
New markets for so-called “ecosystem services” are emerging all over the world. 
For example, “wetland mitigation banking” in the United States is one of the older such markets. 
It entails the preservation, enhancement, or creation of, say, a wetland or stream that offsets the adverse impacts of a planned project on a similar ecosystem elsewhere. 
This is done by issuing certificates that can be traded. 
“Biodiversity offsetting” schemes work in much the same way: A company or individual can purchase “biodiversity credits” to offset their “ecological footprint.” 
If these schemes sound a little too convenient, that is because they are. 
In fact, they are based on the same faulty concept as emissions trading, and in some cases, they actually translate biodiversity and ecosystems into CO2e. 
Instead of changing our economic system to make it fit within the planet’s natural limits, we are redefining nature so that it fits within our economic system – and, in the process, precluding other forms of knowledge and real alternatives. 
Now, in the wake of last December’s climate summit in Paris, the world is on the verge of taking yet another wrong turn, by embracing the idea of “negative emissions,” which assumes that new technologies will be able to remove CO2 from the atmosphere. 
Yet such technologies have yet to be invented, and even if they were, their implementation would be highly risky. 
Rather than pursue proven solutions – leaving fossil fuels in the ground, moving away from industrial agriculture toward agro-ecology, creating no-waste economies, and restoring natural ecosystems – we are counting on some miraculous innovation to save us, deus ex machina, just in the nick of time. 
The folly of this approach should be obvious. 
If carbon metrics continue to shape climate policy, new generations will know only a carbon-constrained – and, if they are lucky, a low-carbon – world. 
Instead of pursuing such a simplistic vision, we must pursue richer strategies aimed at transforming our economic systems to work within – and with – our natural environment. 
For that, we will need a new way of thinking that spurs active engagement to reclaim and conserve the spaces where alternative approaches can grow and flourish. 
It will not be easy, but it will be worth it. 


Climate Change and Water Security 
The Intergovernmental Panel on Climate Change recently released alarming data on the consequences of global warming in some of the world’s poorest regions. 
By 2100, one billion to three billion people worldwide are expected to suffer from water scarcity. 
Global warming will increase evaporation and severely reduce rainfalls – by up to 20% in the Middle East and North Africa – with the amount of water available per person possibly halved by mid-century in these regions. 
This sudden scarcity of an element whose symbolic and spiritual importance matches its centrality to human life will cause stress and exacerbate conflicts worldwide. 
Africa, the Middle East, and Central Asia will be the first to be exposed. 
The repercussions, however, will be global. 
Yet this bleak picture is neither an excuse for apathy nor grounds for pessimism. 
Conflicts may be inevitable; wars are not. 
Our ability to prevent “water wars” will depend on our collective capacity to anticipate tensions, and to find the technical and institutional solutions to manage emerging conflicts. 
The good news is that such solutions exist, and are proving their efficacy everyday. 
Dams – provided they are adequately sized and designed – can contribute to human development by fighting climate change and regulating water supply. 
Yet in a new context of scarcity, upstream infrastructure projects on international rivers may impact water quality or availability for neighboring states, thus causing tensions. 
River basin organizations such as that established for the Nile, Niger, or Senegal rivers help facilitate dialogue between states that share hydraulic resources. 
By developing a joint vision for the development of international waterways, these regional cooperation initiatives work towards common ownership of the resource, thereby reducing the risk that disputes over water use will escalate into violence. 
Most international waterways have such frameworks for dialogue, albeit at different stages of development and levels of achievement. 
If we are to take climate change predictions seriously, the international community should strengthen these initiatives. 
Where they do not exist, they should be created in partnership with all the countries concerned. 
Official development assistance can create incentives to cooperate by financing data-collection, providing technical know-how, or, indeed, by conditioning loans on constructive negotiations. 
Yet international water conflicts are only one side of the coin. 
The most violent water wars take place today within rather than among states. 
A dearth of water fuels ethnic strife, as communities begin to fear for their survival and seek to capture the resource. 
In Darfur, recurrent drought has poisoned relations between farmers and nomadic herdsmen, and the war we are helplessly witnessing today follows years of escalating conflict. 
Chad risks falling prey to the same cycle of violence. 
It is thus urgent to satisfy populations’ most basic human needs through local development initiatives. 
Rural hydraulic projects, which ensure access to water for these populations over large stretches of land, can prove to be efficient conflict prevention tools. 
Secured grazing corridors are being established with the help of modern satellite imagery to orient nomads and their herds to appropriate areas. 
Such initiatives provide rare opportunities for dialogue and collaboration between rival communities. 
The key is to anticipate the need for action before tensions escalate to the point of no return. 
Water consumption also must be addressed. 
Agriculture accounts for more than 70% of water use in the world. 
Agronomical research and technical innovations are crucial to maximizing water efficiency in this sector, and they must be taken much further. 
But addressing scarcity will inevitably imply revising agricultural practices and policies worldwide to ensure their sustainability. 
The development challenge no longer solely consists in bringing agricultural water to deprived areas. 
As the dramatic shrinkage of the Aral Sea, Lake Chad, and the Dead Sea illustrate, it now requires preserving scarce natural resources and ensuring their equitable distribution among conflicting needs. 
Responsible use will require adequate economic incentives. 
In West Africa or the Middle East, Central Asia or India, this, too, can contribute to abating clashes over water. 
Given the unprecedented scale of the threat, business as usual is not an option. 
The Cold War came to a peaceful end thanks to realism, foresight, and strength of will. 
These three qualities should be put to work if our planet is to be spared major water wars. 
This global challenge also demands innovation in global governance, which is why we support the creation of a UN Environment Agency, endowed with the legal and financial resources needed to tackle the issues at hand. 
Humanity must begin to resolve this water dilemma. 
Waiting is not part of the solution. 

Sounding the Alarm on Biodiversity Loss 
NORWICH – With the United Nations’ climate change conference underway in Bonn, Germany, rising global temperatures are once again at the top of the world’s agenda. 
But why care about the increase in temperature, if not because of its impact on life on Earth, including human life? 
That is an important question to consider, in view of the relative lack of attention devoted to a closely related and equally important threat to human survival: the startling pace of global biodiversity loss. 
The availability of food, water, and energy – fundamental building blocks of every country’s security – depends on healthy, robust, and diverse ecosystems, and on the life that inhabits them. 
But, as a result of human activities, planetary biodiversity is now declining faster than at any point in history. 
Many policymakers, however, have yet to recognize that biodiversity loss is just as serious a threat as rising sea levels and increasingly frequent extreme weather events. 
This lack of sufficient attention comes despite international commitments to protect biodiversity. 
In October 2010, global leaders met in Aichi, Japan, where they produced the Strategic Plan for Biodiversity 2011-2020, which included 20 ambitious targets – such as halving global habitat loss and ending overfishing – that signatories agreed to meet by 2020. 
Safeguarding biodiversity is also specifically included in the UN’s Sustainable Development Goals. 
Yet progress toward these global biodiversity goals is likely to fall dangerously short of what is needed to ensure an acceptable future for all. 
Policymakers have largely agreed on the importance of holding the increase in global temperature to less than 2°C above pre-industrial levels – the goal of the Paris climate agreement. 
But too few leaders have shown any sense of urgency about stemming biodiversity losses. 
The sustainable future we want depends on ending this indifference. 
Toward that end, the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), which I chair, will release a series of landmark reports next March on the implications of biodiversity decline. 
Prepared over three years by more than 550 experts from some 100 countries, these expert assessments will cover four world regions: the Americas, Asia and the Pacific, Africa, and Europe and Central Asia. 
A fifth report will address the state of land degradation and restoration at regional and global levels. 
The reports will highlight trends and plausible futures, outlining the best policy options available to slow the degradation of ecosystems, from coral reefs to rainforests. 
Taken together, the IPBES assessments will represent the global scientific community’s consensus view on the state of biodiversity and ecosystem services. 
Moreover, the reports will highlight the close links between biodiversity loss and climate change, which should be addressed simultaneously. 
The world will not be able to meet the goals of the Paris agreement – or many of the SDGs, for that matter – unless it takes into account the state of biodiversity and ecosystem services. 
Today, most governments separate their environmental authorities from those focusing on energy, agriculture, and planning. 
This makes it difficult to address climate change or biodiversity losses in a holistic way. 
New types of innovative governance structures are needed to bridge these policy silos. 
After the release of IPBES regional reports next year, a global assessment building on them will be published in 2019. 
This will be the first global overview of biodiversity and ecosystem services since the authoritative Millennium Ecosystem Assessment of 2005. 
It will examine the health of terrestrial, freshwater, and marine ecosystems, and the impact of factors including acidification, rising sea surface temperatures, trade, invasive species, overfishing, pollution, and land use changes. 
The success of efforts to reverse unsustainable uses of the world’s natural assets will require policymakers to reconsider the value of biodiversity for their people, environments, and economies. 
But the first step is ensuring that we have the best peer-reviewed knowledge available to make sound decisions; the forthcoming IPBES assessments will move us in that direction. 
If the full consequences of climate change are to be addressed in our lifetime, we must recognize that human activity is doing more than just adding a few degrees of temperature to the annual forecast. 
By early next year, we will have the data on biodiversity and ecosystem services to prove it, and the policy options to change course. 

The Right Price for Preserving Our Climate 
WASHINGTON, DC – When world leaders convene in Paris this week for the United Nations Climate Change Conference, their task will be to reach a global agreement on curbing greenhouse-gas emissions. 
A successful outcome, demonstrating that countries can work together for the good of the planet, would send a powerful message of hope to the world – and to the people of Paris, who remain unbowed after the recent terrorist attacks. 
Climate pledges will be made on the basis of Intended Nationally Determined Contributions (INDCs), or commitments to the reduction of emissions worldwide. 
I believe that the price of emissions should be at the center of these pledges. 
Achieving a decline in greenhouse-gas emissions at the lowest possible cost requires a revolution in energy use and production. 
Gradual, predictable, and reliable increases in energy prices would provide strong incentives for consumers to reduce their energy bills. 
At the same time, the right carbon price would enable a smooth transition away from fossil fuels by encouraging investments in technological innovation. 
That is why the International Monetary Fund’s staff have recommended a three-part strategy on carbon fuel: “price it right, tax it smart, and do it now.” 
Each component is essential. 
First, setting the right price for fossil fuels means taking into account their true environmental costs. 
Prices should pass on to end users the full cost not only of production and acquisition, but also of the damage – including air pollution and climate change – caused by intensive reliance on fossil fuels. 
A fairer carbon price will drive energy savings and boost demand for cleaner fuels and “greener” investments. 
Second, the necessary change in prices would be achieved by taxing energy, using tools that are both practical and efficient. 
The best option is to build a carbon charge into existing fuel taxes and apply similar charges to coal, natural gas, and other petroleum products. 
The revenue implications would be significant. 
If large emitting countries were to impose carbon prices of $30 per ton of CO2, they could generate fiscal revenues amounting to about 1% of their GDP. 
These revenues could be used to manage the overall fiscal burden of climate action, as well as to finance cuts in taxes on labor and capital that distort economic activity and harm growth, or to reduce deficits where needed. 
In short, carbon pricing is about “smart” taxes, not higher taxes. 
Smart taxes should be phased in gradually to allow households and firms time to adjust and for new technologies to come on stream. 
Gradual and tailored adjustment is particularly important for developing economies, many of which make little contribution to global emissions. 
Time may be necessary, in many cases, to ensure that social safety nets are in place to protect low-income households and to provide retraining programs for workers in energy-intensive industries. 
This approach would also allow for climate investments to be financed through private capital flows. 
Third, there is no time to lose: policymakers need to act immediately. 
Given the slump in energy prices, there has never been a better time to undertake the transition to smart, credible, and effective carbon pricing. 
Nor should countries wait for others to move first. 
Work at the IMF has shown that a fair amount of carbon pricing is in many countries’ national interest – even ignoring adverse climate effects on other countries – because it would help resolve major domestic environmental problems. 
According to the World Health Organization, outdoor air pollution causes more than three million premature deaths a year. 
And early action is essential to avoid the need for much more drastic – and costly – efforts later. 
Ahead of the Paris summit, more than 160 countries submitted emissions mitigation pledges. 
By implementing these commitments, countries will substantially reduce projected future global warming. 
The challenge now is to deliver on these pledges. 
This is why we need a concerted push for carbon pricing. 
In Paris, a select group of leaders who are true champions of carbon pricing will issue a call for action. 
The Carbon Pricing Panel, led by the IMF and World Bank, will further increase the policy momentum at the national, regional, and municipal levels. 
In addition to public-sector efforts, we also need the robust engagement of financial institutions and markets. 
Hedging instruments such as so-called catastrophe bonds can help insure against the increasing risk posed by natural disasters. 
Other financial instruments, such as “green” stock indices and “green” bonds, can help reallocate investment to sectors that support environmentally sustainable growth. 
Here, too, carbon prices that are predictable and sufficiently high will be essential to guide investment choices. 
There is a lot at stake this week in the City of Light. 
Paris recently experienced humanity at its worst. 
The climate summit will be an opportunity to show it at its best. 

Carbon Pricing Takes Off 
BONN – The hurricanes that pummeled the Caribbean, Texas, and Florida this year left highways submerged, homes and businesses demolished, and lives lost. 
The floodwaters have since receded, but the images of upheaval remain etched in our collective memory. 
Recovery will take years, perhaps decades, and it will cost billions of dollars. 
Experts tell us that warming oceans are causing hurricanes to become more powerful, and other consequences of anthropogenic climate change – from severe droughts in the Horn of Africa to extreme flooding in Asia – are leaving millions without food and basic shelter. 
But while the link between burning fossil fuels and deadly weather has been strengthening for years, policymakers have not always heeded the warnings. 
This is changing rapidly. 
Today, countries, citizens, and a growing number of businesses around the world are finally taking action. 
This month, thousands gathered for the UN’s climate change conference in Bonn, Germany, to ratchet up global ambition in the fight against climate change. 
Following the successful Paris climate agreement two years ago, expectations for further progress and continued collaboration are high. 
One of the more promising recent initiatives is the Carbon Pricing Leadership Coalition (CPLC), which brings together 30 governments and more than 180 businesses and strategic partners to put a value on carbon dioxide emissions. 
The idea is simple: if we are to meet the Paris accord’s target of limiting the increase in global average temperature to less than 2° Celsius above preindustrial levels – ideally, to 1.5° above preindustrial levels – we must dramatically cut emissions. 
As co-chairs of the CPLC, we believe that one of the best ways to do that is by shifting the social and economic costs of heat-trapping gases from the public to the polluter. 
With the sense of climate urgency increasing, it is no longer acceptable to pollute for free and pass the bill to future generations. 
Putting a price on carbon is the most efficient way to reduce global emissions while encouraging sustainable and robust economic growth. 
Moreover, by putting a price on pollution, governments can generate revenue for investments like clean energy, schools, and health care, making it a double win. 
The ultimate goal, of course, is to encourage businesses to clean up their acts, and today, a growing share of business leaders understand that pricing carbon is one of the best ways to combat climate change. 
They also recognize that their businesses can thrive even as they work to reduce emissions. 
In fact, many business leaders are among the most enthusiastic supporters of effective carbon pricing. 
Just last month, the Carbon Disclosure Project revealed that the number of companies with plans to pursue internal carbon price mechanisms has grown to almost 1,400 globally, up from 150 in 2014. 
This includes more than 100 of the world’s largest companies, with total annual revenues of some $7 trillion. 
Royal DSM (which is led by one of the authors) has set a carbon price of €50 ($59) per ton, joining other global companies like Michelin, Danone, and General Motors in applying meaningful carbon prices to “future-proof” their business. 
Some 40 countries – including Canada – are also putting a price on carbon pollution, and more governments are planning to implement similar schemes soon. 
In 2015, China announced plans to create the world’s largest carbon-pricing system. 
And earlier this year, Ontario, Québec, and California signed an agreement to create the world’s second-largest carbon market. 
This trend must continue – for environmental and economic reasons. 
A May 2017 study conducted by the High-Level Commission on Carbon Prices – led by two of the world’s top economists, Joseph E. Stiglitz and Nicholas Stern – found that setting a “strong carbon price” is essential not only for reducing global emissions, but also for sustaining innovation and growth. 
To be sure, putting a price on carbon pollution must become part of a broader set of actions to future-proof our economies and societies. 
To reduce greenhouse-gas emissions further and foster economic vitality, we must improve public transportation; construct energy-efficient buildings; and support efforts by businesses, innovators, and investors to develop clean-energy solutions. 
This is what Canada is already doing, because we know that these policies can reduce emissions and help create new, well-paying jobs. 
As is often said, climate change represents both a challenge and an opportunity. 
By pricing carbon pollution and harnessing our collective abilities, we can address the former and seize the latter. 
Pooling the innovative and entrepreneurial spirit found in countries and businesses will enable us to fight climate change, strengthen our economies and societies, and leave our children and grandchildren a healthier planet. 

Climate Change and the Catholic Church 
ROME – Pope Francis is calling on the world to take action against global warming, and many conservatives in the United States are up in arms. 
The pope should stick to morality, they say, and not venture into science. 
But, as the climate debate unfolds this year, most of humanity will find Francis’s message compelling: we need both science and morality to reduce the risk to our planet. 
The first point to note is that an overwhelming majority of Americans agree with Francis’s call for climate action. 
Unfortunately, their views are not represented in the US Congress, which defends Big Coal and Big Oil, not the American people. 
The fossil-fuel industry spends heavily on lobbying and the campaigns of congressmen such as Senators Mitch McConnell and James Inhofe. 
The world’s climate crisis has been aggravated by America’s democratic crisis. 
In a survey of Americans conducted in January 2015, an overwhelming majority of respondents (78%) said that, “if nothing is done to reduce global warming,” the future consequences for the US would be “somewhat serious” or “very serious.” 
Roughly the same proportion (74%) said that if nothing is done to reduce global warming, future generations would be hurt “a moderate amount,” “a lot,” or “a great deal.” 
Perhaps most tellingly, 66% said that they would be “more likely” to support a candidate who says that climate change is happening and who calls for a shift to renewable energy, while 12% would be “less likely” to support such a candidate. 
In March 2015, another survey examined the attitudes of US Christians, who constitute 71% of Americans. 
The responses were reported for three groups: Catholics, non-Evangelical Protestants, and Evangelicals. 
These groups’ attitudes mirror those of Americans more generally: 69% of Catholics and 62% of mainline Protestants responded that climate change is happening, with a smaller majority of Evangelicals (51%) agreeing. 
Majorities in each group also agreed that global warming will harm the natural environment and future generations, and that reducing global warming would help the environment and future generations. 
Which minority of Americans, then, opposes climate action? 
There are three main groups. 
The first are free-market conservatives, who seem to fear government intervention more than climate change. 
Some have followed their ideology to the point of denying well-established science: because government intervention is bad, they tell themselves that the science simply cannot be true. 
The second group comprises religious fundamentalists. 
They deny climate change because they reject earth science entirely, believing the world to be newly created, contrary to the overwhelming evidence of physics, chemistry, and geology. 
But it is the third group that is by far the most powerful politically: oil and coal interests, which contributed hundreds of millions of dollars to the 2014 campaign. 
David and Charles Koch, America’s biggest campaign financiers, are simply oilmen out to multiply their gargantuan wealth, despite the costs to the rest of humanity. 
Perhaps they are true climate deniers as well. 
Then again, as Upton Sinclair famously quipped, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” 
Francis’s right-wing critics perhaps come from all three groups, but they are at least partly funded by the third. 
When the Pontifical Academies of Sciences and Social Sciences and some of the world’s top earth and social scientists met at the Vatican in April, the libertarian Heartland Institute, supported over the years by the Koch brothers, mounted a fruitless protest outside of St. Peter’s Square. 
The scientists at the Vatican meeting took extra care to emphasize that climate science and policy reflect fundamental principles of physics, chemistry, geology, astronomy, engineering, economics, and sociology, key parts of which have been well understood for more than 100 years. 
Yet the pope’s right-wing critics are as mistaken in their theology as they are in their science. 
The claim that the pope should stick with morality betrays a basic misunderstanding of Roman Catholicism. 
The Church champions the marriage of faith and reason. 
At least since the publication of Thomas Aquinas’s Summa Theologica (1265-74), natural law and the Golden Rule have been viewed as the fundamental pillars of the Church’s teachings. 
Most people know that the Church opposed Galileo’s advocacy of Copernican heliocentrism, for which Pope John Paul II apologized in 1992. 
But many are unaware of the Church’s support for modern science, including many important contributions to biology, chemistry, and physics by world-leading Catholic clerics. 
Indeed, the founding of the Pontifical Academy of Sciences traces its origins back more than 400 years, to the Academy of Lynxes (Accademia dei Lincei), which inducted Galileo in 1611. 
Francis’s purpose, of course, is to marry modern science, both natural and social, with faith and morality. 
Our hard-won scientific knowledge should be used to promote human wellbeing, protect the vulnerable and the poor, preserve Earth’s fragile ecosystems, and keep faith with future generations. 
Science can reveal the environmental dangers caused by humanity; engineering can create the tools to protect the planet; and faith and moral reasoning can provide the practical wisdom (as Aristotle and Aquinas would have said) to choose virtuously for the common good. 
The Vatican gathering in April included not only world-leading climate scientists and Nobel laureates, but also senior representatives of the Protestant, Hindu, Jewish, Buddhist, and Muslim faiths. 
Like Francis, religious leaders of all the world’s major religions are urging us to take wisdom from faith and climate science in order to fulfill our moral responsibilities to humanity and to the future of Earth. 
We should heed their call. 

The Adaptation Imperative 
NAIROBI – In the run-up to the recent United Nations meeting on climate change in Lima, Peru, much of the world’s attention focused on how strongly countries would commit to a framework for cutting greenhouse-gas emissions. 
Governments’ commitment to such a framework, after all, is vital to ensure that the agreement to be signed in Paris in December will keep global temperatures from rising more than 2º Celsius above pre-industrial levels. 
The good news is that the Lima “Call for Climate Action” made sufficient progress to enable preparations for a comprehensive climate deal in Paris. 
But it also left many questions unresolved – a shortcoming that was reflected in discussions on adaptation. 
Though the new emphasis on this important topic is welcome, how to deliver the funding, technology, and knowledge that countries, communities, and ecosystems need to adjust to climate change requires further articulation. 
Even if we limit the rise in global temperatures, climate change is here to stay. 
Communities are already facing more extreme and frequent droughts, floods, and other weather events. 
These consequences will only intensify. 
Yet the UN Environment Programme’s first adaptation report, released in Lima, showed that the world remains wholly unprepared to cover the costs of adaptation. 
And those costs will be far higher than was previously thought. 
According to the report, even if the temperature target is met, the cost of adaptation will reach 2-3 times the previously anticipated $70-100 billion per year by 2050 (an increase of as much as fivefold is possible, though less likely). 
If global temperatures exceed the two-degree ceiling significantly, adaptation costs could reach double the worst-case figures, placing a crippling burden on the world economy. 
If world leaders needed another compelling reason to reach a deal in Paris that keeps global temperatures below the target, this is it. 
The burden of adjustment will be borne by everyone. 
But it will be heaviest for developing countries, least-developed countries, and Small Island Developing States. 
Though international funding will be available, costs will fall largely to countries, with governments forced to divert scarce resources from development projects to adaptation initiatives. 
To be sure, the world is making some progress toward addressing adaptation needs. 
Adaptation funding from public sources reached $23-26 billion in 2012-2013. 
According to a recent assessment by the UN Framework Convention on Climate Change, global financial flows for mitigation and adaptation measures amounted to $340-650 billion in 2011-2012. 
Furthermore, pledges at the Lima conference by Australia, Austria, Belgium, Colombia, Norway, and Peru bring the Green Climate Fund to nearly $10.2 billion. 
And the impact of climate change is increasingly, though still inadequately, being factored into national and local budgets. 
But much more financing will be needed to prevent a funding gap after 2020. 
The Green Climate Fund, for example, is supposed to reach $100 billion per year – ten times higher than it is now – in the next five years. 
Commitments on adaptation in the Paris agreement would go a long way toward closing this gap. 
The international auctioning of emissions allowances and allowances in domestic emissions-trading schemes, a carbon tax, revenues from international transport, a surcharge on electricity transmission, and financial transaction taxes could generate as much as $220 billion per year in additional revenues. 
Of course, funding is not the only component of a successful adaptation strategy. 
As the adaptation report emphasizes, closing gaps in technology and knowledge is also crucial. 
Many technologies that could help countries adapt to the consequences of climate change already exist. 
For example, by planting scientifically engineered crops that grow faster, farmers can harvest them before, say, cyclone season, which will become increasingly violent as global temperatures rise. 
But there remain significant barriers to adoption – barriers that governments should dismantle through a combination of incentives, regulatory reform, and institutional upgrading. 
The benefits of such action would extend beyond increased climate resilience. 
Accelerating harvests would mean higher, more reliable production with less labor – a formula for stronger, more stable livelihoods. 
Policymakers should thus pursue integrated solutions that combine climate-change adaptation and mitigation with broader societal concerns, including development. 
Knowledge would offer similarly monumental benefits. 
Science magazine recently published research suggesting that universal education, by giving populations the appropriate intellectual tools and skills they need, is the single most efficient mechanism for adapting to climate change and reducing fatalities associated with extreme weather events. 
International support on adaptation – incorporating financing, technology, and knowledge – could go a long way toward advancing countries’ sustainable-development aspirations. 
World leaders should recognize this – and establish adaptation as an integral part of the global climate-change agreement to be reached in Paris. 
Some argue that the global economy cannot afford adaptation. 
But, as the latest evidence shows, delaying action will mean higher costs later. 
If we truly want to build a sustainable, prosperous, and equitable future, we cannot afford to wait. 

Breaking Europe’s Climate-Change Stalemate 
LONDON – Europe has a strong tradition as a leader in the fight against climate change. 
Lately, however, the continent has reached an ideological impasse over how to address the problem, with environmental sustainability and growth often portrayed as being mutually exclusive. 
If Europe is to remain an environmental leader, as well as a center of innovation and competitiveness, it will have to abandon its ideological rigidness and embrace realistic, pragmatic solutions that can deliver environmental benefits without sacrificing economic development. 
The challenges posed by climate change are real, and the consequences of inaction are impossible to ignore. 
At the same time, there is a growing demand for energy and a desperate need for a long-term exit from the ongoing economic crisis. 
There is no single, easy solution that addresses both of these imperatives. 
Reining in global warming while ensuring economic growth will require a balanced portfolio of solutions, including renewable energy and increased energy efficiency. 
Essential among such solutions is carbon capture and storage. 
CCS technology captures carbon dioxide at the source of its emission, compresses it, and stores it permanently underground. 
In doing so, it provides an important bridge between our modern economy, which relies heavily on carbon-intensive fossil fuels, and a future in which CO 2 emissions are greatly reduced. 
This provides the means for maintaining a competitive industrial sector while simultaneously combating global warming. 
To be sure, as with any innovation, there are questions about the technology's viability. 
Some question the scale of the investment needed to install and maintain the systems necessary for capturing and storing CO 2. 
It is important to note, however, that these costs pale in comparison with the far greater costs of reducing CO2 emissions without CCS. 
According to the International Energy Agency, for example, a ten-year delay in deploying CCS would increase the cost of decarburizing the power sector by €750 billion ($880 billion). 
The United Nations Intergovernmental Panel on Climate Change has been unequivocal in its insistence that reducing CO 2 emissions and diminishing dependence on fossil fuels is more urgent than ever. 
It has made it clear that CCS, the only technology that can capture at least 90% of the CO2 emissions from the world's largest producers, must be a part of the solution. 
Beyond Europe's borders, governments and businesses are already forging ahead. 
In Canada, the world's first full-scale CCS project, Boundary Dam, came onstream in October 2014, proving that the technology is viable and ready to be deployed. 
The United Arab Emirates has initiated the world's first large-scale CCS project in the iron and steel sector. 
China continues to show great interest in the technology, and is collaborating with the United States to develop its CCS capabilities. 
Europe cannot afford to lag behind. 
Energy-intensive industries directly support four million jobs across the continent. 
Investing in CCS would help preserve Europe's economic base by securing and creating jobs and protecting vital industries. 
It would help to realize a vision of Europe that supports both sustainability and growth – a vision that is clearly in line with European Commission President Jean-Claude Juncker's priorities of creating jobs, sustaining growth, and developing a competitive energy union. 
The continent's largest petroleum companies, and equipment suppliers, are ready to invest what is needed to reduce CO 2 emissions. 
But, in order for that to be possible, realistic policies and strategies are needed. 
CCS has been recognized at the highest political level as a part of the European Union's 2030 Climate and Energy framework and the European Energy Security Strategy. 
But it is time to translate recognition into concrete action. 
That, in turn, requires investment incentives, improved carbon pricing, and an upgrade to the emissions trading system. 
A game-changing solution presupposes substantial political will; it is essential that European leaders show that they know what needs to be done. 
Sustainable growth need not be an oxymoron. 
But to achieve it, Europe must overcome the ideological stalemate that is paralyzing the environmental debate. 
To reconcile our environmental priorities with continued growth, we must act realistically, pragmatically, and – above all – immediately. 

We Are All Climate Refugees Now 
NEW YORK – Modern humans, born into one climate era, called the Holocene, have crossed the border into another, the Anthropocene. 
But instead of a Moses guiding humanity in this new and dangerous wilderness, a gang of science deniers and polluters currently misguides humanity to ever-greater danger. 
We are all climate refugees now and must chart a path to safety. 
The Holocene was the geological age that started more than 10,000 years ago, with favorable climate conditions that supported human civilization as we know it. 
The Anthropocene is a new geological era with environmental conditions that humanity has never before experienced. 
Ominously, the Earth’s temperature is now higher than during the Holocene, owing to the carbon dioxide that humanity has emitted into the atmosphere by burning coal, oil, and gas, and by indiscriminately turning the world’s forests and grasslands into farms and pastures. 
People are suffering and dying in the new environment, with much worse to come. 
Hurricane Maria is estimated to have taken more than 4,000 lives in Puerto Rico last September. 
High-intensity hurricanes are becoming more frequent, and major storms are causing more flooding, because of the increased heat transfer from the warming waters of the oceans, the greater moisture in warmer air, and the rise in sea levels – all made more extreme by human-induced climate change. 
Just last month, more than 90 people perished in the suburbs of Athens from a devastating forest fire stoked by drought and high temperatures. 
Huge forest fires are similarly raging this summer in other hot and newly dry locales, including California, Sweden, Britain, and Australia. 
Last year, Portugal was devastated. 
Many record-high temperatures are being reached around the world this summer. 
How utterly reckless of humanity to have rushed past the Holocene boundary, ignoring – like a character in a horror movie – all of the obvious warning signs. 
In 1972, the world’s governments assembled in Stockholm to address the growing environmental threats. 
In the lead-up to the conference, the Club of Rome published The Limits to Growth, which first introduced the idea of a “sustainable” growth trajectory and the risks of environmental overshooting. 
Twenty years later, the warning signs flashed brightly in Rio de Janeiro, where United Nations member states assembled at the Earth Summit to adopt the concept of “sustainable development” and to sign three major environmental treaties to halt human-induced global warming, protect biological diversity, and stop land degradation and desertification. 
After 1992, the United States, the world’s most powerful country, ostentatiously ignored the three new treaties, signaling to other countries that they could slacken their efforts as well. 
The US Senate ratified the climate and desertification treaties but did nothing to implement them. 
And it refused even to ratify the treaty to protect biological diversity, in part because western-state Republicans insisted that landowners have the right to do what they want with their property without international meddling. 
More recently, the world adopted the Sustainable Development Goals in September 2015 and the Paris climate agreement in December 2015. 
Yet, once again, the US government has willfully ignored the SDGs, ranking last among the G20 countries in terms of government implementation efforts. 
And President Donald Trump has declared his intention to pull the US out of the Paris climate agreement at the earliest possible moment, 2020, four years after the accord entered into force. 
Worse is to come. 
The human-caused rise in CO2 hasn’t yet reached its full warming effect, owing to the considerable lag in its impact on ocean temperatures. 
There is still another 0.5º Celsius or so of warming to occur over the coming decades based on the current concentration of CO2 (408 parts per million) in the atmosphere, and far more warming beyond that if CO2 concentrations continue to soar with the business-as-usual burning of fossil fuels. 
To achieve the Paris agreement’s goal of limiting warming to “well below 2ºC” relative to the pre-industrial level, the world needs to shift decisively from coal, oil, and gas to renewable energy by around 2050, and from deforestation to reforestation and restoration of degraded lands. 
So why does humanity keep plunging dumbly ahead, toward certain tragedy? 
The main reason is that our political institutions and giant corporations willfully ignore the rising dangers and damage. 
Politics is about obtaining and holding power and the perks of office, not about solving problems, even life-and-death environmental problems. 
Managing a major company is about maximizing shareholder value, not about telling the truth or avoiding great harm to the planet. 
Profit-seeking investors own the major media, or at least influence it through their advertising purchases. 
Thus, a small yet very powerful group maintains the fossil-fuel-based energy system at growing peril to the rest of humanity today and in the future. 
Trump is the latest useful fool doing the polluters’ bidding, abetted by congressional Republicans who finance their election campaigns with contributions from environmental culprits such as Koch Industries. 
Trump has filled the US government with industry lobbyists who are systematically dismantling every environmental regulation they can reach. 
Most recently, Trump has nominated a former lawyer for mega-polluter Dow Chemical to lead the Environmental Protection Agency’s Superfund toxic cleanup program. 
You can’t make this stuff up. 
We need a new kind of politics that starts with a clear global goal: environmental safety for the planet’s people, by fulfilling the Paris climate agreement, protecting biodiversity, and cutting pollution, which kills millions each year. 
The new politics will listen to scientific and technological experts, not self-interested business leaders and narcissistic politicians. 
Climatologists enable us to gauge the rising dangers. 
Engineers inform us how to make the rapid transition, by 2050, to zero-carbon energy. 
Ecologists and agronomists show us how to grow more and better crops on less land while ending deforestation and restoring previously degraded land. 
Such a politics is possible. 
In fact, the public yearns for it. 
A large majority of the American people, for example, want to fight global warming, stay in the Paris climate agreement, and embrace renewable energy. 
Yet, as long as a narrow and ignorant elite condemn Americans and the rest of humanity to wander aimlessly in the political desert, the more likely it is that we will all end up in a wasteland from which there will be no escape. 

Making Migration Safe for Climate Nexus 
NEW YORK – Humanity is on the move. 
We are living in an era of unprecedented mobility of ideas, money, and, increasingly, people. 
The sheer size of the human population, combined with how we consume resources, is profoundly reshaping our world. 
While our “take-make-dispose” economic model has created wealth for hundreds of millions of people in many countries, reducing global poverty significantly, it has also left too many behind. 
Crucially, it exposes future generations to immense social, economic, and environmental risks. 
And perhaps the most important risk stems from filling the atmosphere with greenhouse gases at a rate higher than at any time in the last 66 million years. 
One billion people alive today are migrants, having moved within or beyond their national borders. 
They have done so for a variety of complex reasons, including population pressure, a lack of economic opportunities, environmental degradation, and new forms of travel. 
Combined, these factors are contributing to human displacement and unsafe migration on an unprecedented scale. 
And the levels of both will only rise as the effects of climate change gradually erode millions of people’s livelihoods. 
Climate change is fundamentally redrawing the map of where people can live. 
Food supplies are being disrupted in North Africa’s Sahel region and Central America; and water stress and scarcity are growing worse in North Africa and the Middle East. 
Somalia, for example, is experiencing more frequent droughts. 
Iraq is battling more frequent heat waves. Unprecedented storms and floods have battered the Caribbean and Gulf of Mexico. 
As the abnormal becomes the new normal, scarcities, zero-sum competition, and mass displacements will become more common. 
But there is good news to report on two fronts. 
First, we are making major strides in building resilience to extreme weather. 
In the 1970s, Bangladesh lost hundreds of thousands of people to extreme flooding. 
Today, the fatalities from similar occurrences, while no less tragic, are far fewer in number. 
We are getting better at coping with disasters. 
Second, for the first time in history, the international community is coming together to build a framework to manage international migration. 
Intergovernmental negotiations started in February 2018 with the aim of adopting a Global Compact for Safe, Orderly, and Regular Migration (GCM). 
And last month, the United Nations General Assembly finalized the GCM, which heads of state are now expected to adopt at a high-level conference in Marrakesh this December. 
The GCM promises to provide a sound framework for taking action that addresses climate-driven migration. 
But now we must ensure that it is implemented. 
The GCM represents a once-in-a-generation opportunity to set in place an internationally-agreed system for managing safe and orderly migration. 
As such, it has the potential to improve the lives and prospects of tens of millions of people. 
Once it is formally adopted, we will need to ensure that the new framework maximizes the benefits of international travel and exchange, while also addressing the concerns that many people have with unregulated migration. 
Finally, and most important, we will have to do everything possible to reduce greenhouse-gas emissions drastically. 
That is the only way to keep the Earth’s temperature within 2°C of pre-industrial levels – the threshold at which spiraling feedback loops could trigger runaway climate change. 
The recent report that atmospheric carbon dioxide now exceeds 410 parts per million should serve as a wake-up call. 
We urgently need to become more resource-efficient, by adopting sustainable consumption and production methods, and by fundamentally altering our economic model. 
The window for action is quickly closing. 
Climate change and environmental degradation are creating unacceptable levels of human insecurity. 
If our environment is sustainably managed, we will have a better chance of upholding migrants’ dignity, rights, and prospects. 
These two goals are inseparable, and the organizations that we lead are ready to support the efforts of the world’s governments to achieve them. 
The year 2018 presents us with a unique opportunity to think and plan for the decades ahead, by stepping up action on both migration and the environment. 
As we set in place a framework to provide for safe, regular, and orderly migration, we must harness our creativity to address its causes. 
Above all, we need far-sighted world’s leaders with the will to fix a problem that is already upon us, and that is entirely of our own making. 

Why Climate Change Is an Education Issue 
NEW YORK – Climate change affects us all, but we still are not acting as quickly as we should to address its causes, mitigate the damage, and adapt to its effects. 
Many people don’t understand the risks climate change poses to global economic and social structures. 
And, sadly, many who do understand are dismissive of the far-reaching benefits a global shift to sustainability and clean energy would bring about. 
According to a recent Pew study, seven out of ten Americans classified as political independents were not very concerned that climate change would hurt them. 
Worse still, Yale University researchers recently found that 40% of adults worldwide have never even heard of climate change. 
In some developing countries, such as India, that figure climbs to 65%. 
These figures are discouraging, but they can be improved. 
The Yale study concluded that, “educational attainment tends to be the single strongest predictor of public awareness of climate change.” 
By investing in quality education, we can set the next generation on the right path to addressing this global problem. 
Education and climate action work together in three ways. 
For starters, education fills knowledge gaps. 
Understanding how climate change is already having an impact on one’s life can have practical benefits. 
This is especially true for poor populations that are most vulnerable to crop failures and natural disasters, such as landslides and floods, caused by climate change. 
Populations that must rebuild from scratch after each new catastrophe miss out on opportunities for rapid development. 
By understanding that their world is changing – and that the likelihood of future disasters is increasing – these populations can build resilience and learn to adapt to the sudden and slow stresses of a changing climate. 
Second, education challenges apathy. 
Knowing the measures available to address climate change can open up vast opportunities for economic growth. 
Global investors should be made to understand that sustainable solutions can increase wellbeing and create additional economic opportunities. 
To take one example, in Niger, education and improved farming techniques helped double real farm incomes for more than one million people, while restoring huge tracts of severely degraded land. 
In the US, as of 2014, there were more jobs that depended on solar energy than on coal mining. 
Still, many people insist that implementing measures to mitigate the effects of climate change is too costly to our current way of life. 
According to the Pew study, almost seven out of ten people believe that, given the limitations of technology, they would have to make major lifestyle changes. 
This does not have to be the case, and education can challenge the kind of skepticism that forecloses opportunities for climate-smart living. 
Finally, education furnishes the technical knowledge needed to build a better future through innovation – one that includes clean and safe energy, sustainable agriculture, and smarter cities. 
Broadening access to education would lead to more homegrown innovation – entrepreneurs spotting opportunities to address local problems. 
Globally, we cannot rely on knowledge centers such as Silicon Valley or Oxford to develop a silver bullet to the climate problem. 
Solutions may come from tech hubs, but they will also come from villages and developing cities, from farmers and manufactures with vastly different perspectives on the world around them. 
And this will create a virtuous cycle. 
It is easier for educated people to migrate and integrate into new societies, sharing the knowledge they’ve brought with them. 
Fortunately, younger generations today are better educated and more committed to reducing their own carbon footprint than previous generations were. 
They are leading the way and forcing us all to reconsider our own actions. 
But we must broaden the availability of education worldwide to ensure that their efforts are not in vain. 
In recognition of education’s importance, the government of Norway, under the visionary leadership of Prime Minister Erna Solberg, has established the International Commission on Financing Global Education Opportunity, of which I am a member. 
We will meet this week in Oslo, and it is my hope that we will confront the challenges of our time and act on the knowledge that education is the best problem-solving asset we possess. 
Addressing the dangers of climate change is not only an existential imperative; it is also an opportunity to move toward a cleaner, more productive, and fairer path of development. 
Only an educated global society can take the decisive action needed to get us there. 

Making Water-Smart Energy Choices 
NEW DELHI – Climate change undoubtedly poses a potent – even existential – threat to the planet. 
But the current approach to mitigating it, which reflects a single-minded focus on cutting carbon dioxide emissions, may end up doing serious harm, as it fails to account for the energy sector’s depletion of water resources – another major contributor to climate change. 
“Water is at the heart of both the causes and effects of climate change,” a National Research Council report declares. 
And, indeed, the water cycle – the processes of precipitation, evaporation, freezing, melting, and condensation that circulate water from clouds to land to the ocean and back – is inextricably linked to the energy exchanges among the land, ocean, and atmosphere that determine Earth’s climate. 
Just as the accumulation of carbon in the atmosphere contributes to climate change, so does the degradation and depletion of water resources. 
And these processes are mutually reinforcing, with each propelling and intensifying the other. 
Energy extraction, processing (including refining), and production is highly water-intensive. 
The energy sector is the largest consumer of water in every developed country except Australia, where, like in most developing countries, agriculture comes out on top. 
In the European Union, electricity-generating plants alone account for 44% of all freshwater consumed each year; in the United States, that figure is 41%. 
The more stressed water resources become, the more energy the water sector demands, as groundwater must be pumped from greater depths, and surface water must be transported across longer distances. 
In India, for example, energy now comprises about 90% of the cost of groundwater. 
As these processes fuel climate variability, they reduce water availability and boost energy demand even further, producing a vicious cycle that will be hard to break. 
In fact, meeting higher electricity demand and achieving national targets for production of biofuels and other alternative fuels would require a more than twofold increase in global water use for energy production over the next quarter-century. 
The only way to break this cycle – and thus to mitigate climate change effectively – is to manage the nexus between water and energy (as well as food, production of which depends on water and energy). 
In other words, countries must make energy choices that are not only less carbon-intensive, but also less water-intensive. 
With global water supplies already strained, the shift to a water-smart approach to energy could not be more urgent. 
Two-thirds of the world’s people – especially in Central and South Asia, the Middle East, and North Africa – confront serious water shortages. 
Asia – the biggest driver of increased global energy demand – is also the world’s driest continent, measured by water availability per capita. 
In these water-stressed regions, shortages have already begun to constrain the expansion of energy infrastructure. 
One important reason why China has failed to develop its shale hydrocarbon industry is inadequate water in the areas where its deposits are located. 
(To extract energy from shale, millions of gallons of water must be shot into it.) 
Increasing water stress has also driven up costs for existing power-generation projects, possibly jeopardizing their viability. 
Australia’s Millennium drought, which lasted from the late 1990s until 2012, undermined energy production, causing prices to rise. 
With energy shortages usually most severe in water-stressed areas, what are affected countries to do? 
For starters, they must recognize that energy that is “clean” in terms of carbon can be “dirty” from a water-resource perspective. 
For example, “clean” coal involving carbon capture and sequestration ranks, along with nuclear power, at the top of the water-intensity chart. 
Some renewables, such as solar thermal power and geothermal energy, are also notoriously water-intensive. 
By contrast, solar photovoltaic and wind power – two renewable technologies gaining traction globally – require no water for their normal operations. 
Encouraging the development of such sources should thus be a high priority. 
But the type of energy that is used is not the only issue. It is also important to select the right types of plants at the planning stage. 
Alternative cooling technologies for power generation, including dry or hybrid cooling, can reduce water consumption (though the use of such technologies currently is constrained by efficiency losses and higher costs). 
Power plants should also be located in places where they will rely not on freshwater resources, but instead on saline, brackish, degraded, or reclaimed water. 
In Asia, which now leads the world in terms of adding nuclear power capacity, most new plants are located along coastlines, so that these thirsty facilities can draw more on seawater. 
Yet here, too, there are serious risks. 
Rising sea levels, as a result of climate change, could pose a much more potent threat than natural disasters, such as the tsunami that caused the 2011 Fukushima catastrophe in Japan. 
Moreover, with coastal areas often densely populated and economically valuable, finding suitable seaside sites for new nuclear plants is no longer easy. 
Despite having more than 4,500 miles (7,200 kilometers) of coastline, India has struggled to implement its planned expansion of nuclear power through seaside plants, owing to strong grassroots opposition. 
True energy security is possible only in the context of resource, climate, and environmental sustainability. 
The global focus solely on carbon reduction not only obscures these critical linkages, but also encourages measures that adversely impact resource stability. 
It is time to adopt a more comprehensive, integrated, and long-term approach to the management and planning of energy, water, and other resources, with a view toward broader environmental protection. 
Otherwise, we will fail to meet the sustainable-development challenges we face, with devastating consequences, beginning with the world’s most water-stressed regions. 

The Myth of a Fossil Fuel Phase-Out 
BRUSSELS – How the world uses energy is a hot topic for a warming planet, and fears of pollution and resource strain have produced a virtual arms race of energy-efficiency strategies. 
From the European Union to China, economies are vowing to reduce their energy intensity with the help of technological innovations and legislative changes. 
Yet, despite these promises, consumer demand for energy is forecast by the International Energy Agency to rise until at least 2040. 
With the world’s energy needs growing, how can policymakers guarantee supply? 
To put it bluntly, the world has nothing to worry about when it comes to reserves. 
After 40 years of fearing energy shortages, we have entered an era of abundance. 
We need to guard against false narratives, not scarce resources. 
The culprit of this storyline is the Club of Rome, a global think-tank that, in the 1970s, spurred energy anxiety with its absurd prophecies derived from questionable models. 
As devoted followers of Thomas Malthus and Paul Ehrlich, the club argued that bad things come from exponential growth, and good things from linear growth. 
This idea fueled the prediction that the world would run out of oil by 2000. 
By adopting this nonsense dogma, developed countries enabled resource-rich authoritarian leaders like Muammar el-Qaddafi in Libya, and Ayatollah Ruhollah Khomeini in Iran, to use their oil reserves as tools to oppose the West – and particularly its support for Israel. 
This contributed to the oil shocks of the 1970s, and reinforced the erroneous perception that hydrocarbon reserves were even more limited, and largely confined to the Middle East. 
Rapid advances in technology, particularly in the field of exploration and the ability to extract hydrocarbons in new places, eventually upended such narratives. 
Today’s energy “crisis” stems not from shortages, but from anxiety over pollution. 
But this anxiety has not slowed our exploration habits. 
On the contrary, politics and international law, like the United Nations Convention on the Law of the Sea, have been adapted to enable discovery. 
Consider, for example, the Rovuma gas field off the coast of Mozambique. 
Today, a consortium of international companies from countries including Italy and China is preparing production, and one of Africa’s poorest countries is set to reap huge rewards. 
Similarly, Israel, once thought to be the only place in the Middle East without hydrocarbons, is sitting on 800 billion cubic meters of offshore gas reserves, more than 130 years of the country’s current annual gas consumption. 
Once a net energy importer, Israel today faces the very real challenge of exporting its gas bonanza. 
But perhaps the biggest technology-driven upheaval for global energy markets in recent years has come from shale gas and shale oil production in the United States. 
At 8.8 million barrels per day, US oil production is now higher than that of Iraq and Iran combined. 
US shale gas is being delivered to Asia, Latin America, and parts of Europe. 
These markets were long locked up by Qatar, Russia, and Australia, but now the global liquefied natural gas (LNG) industry, like the oil market, has entered a period of overproduction. 
Taken together, these developments have contributed to lower energy prices, and reduced the strength of OPEC. 
Furthermore, because LNG is favored by the transport sector (particularly freight and maritime shippers) for environmental reasons, the ability to use oil as a geopolitical weapon has disappeared. 
Iran was so desperate to ramp up its oil exports that it agreed to abandon its nuclear program (strikingly, the Iran nuclear deal mentions the word “oil” 65 times). 
Wind and solar are often presented as alternatives to oil and gas, but they cannot compete with traditional sources for electricity generation. 
If they could, there would be no reason for the EU to support renewable energy production through legislation. 
Moreover, while wind and solar technologies generate electricity, the biggest energy demand comes from heating. 
In the EU, for example, electricity represents only 22% of final energy demand, while heating and cooling represents 45%; transportation accounts for the remaining 33%. 
All of these factors help explain why fossil fuels, which currently meet more than 80% of the world’s energy needs, will remain the backbone of global energy production for the foreseeable future. 
This may not come as welcome news to those pushing for an immediate phase-out of hydrocarbons. 
But perhaps some solace can be gained from the fact that technological innovation will also play a key role in reducing the negative impacts on air and water quality. 
Amid the global conversation about climate change, it is understandable that developed economies would promise significant gains in energy efficiency. 
But while the EU may be committed to reducing CO2 emissions, other signatories of the 2015 Paris climate agreement do not seem as resolute. 
It would not be surprising if most of the signatories actually raised their energy consumption in coming years, turning to fossil fuels because they cannot afford any other option. 
Energy policy will remain on the agenda for advanced economies for many years to come. 
But as countries work to balance security of supply with environmental goals, they must also commit to getting their facts straight. 

The Geoengineering Fallacy 
BERLIN – As the world struggles to rein in emissions of climate-changing gases and limit planetary warming, a new technological silver bullet is gaining supporters. 
Geoengineering –the large-scale manipulation of the Earth’s natural systems – has been popularized as a means of counteracting the negative effects of climate change. 
Proponents of this science feed the illusion that there is a way to engineer an exit from the climate crisis, meet the goals of the 2015 Paris climate agreement, and maintain a consumption-heavy lifestyle. 
But this solution is not as simple as proponents would have us believe. 
Betting on climate engineering – either as a planetary insurance policy or as a last-ditch measure to combat rising temperatures – is not only risky; it also directs attention away from the only solution we know will work: reducing carbon emissions. 
Each of the engineered technologies being discussed carries dangers and uncertainties. 
For example, the only way to test the effectiveness of solar radiation management (SRM) on a global scale would be to carry out experiments in the environment – either by spraying particles into the stratosphere, or by artificially modifying clouds. 
While such tests would be designed to determine whether SRM could reflect enough sunlight to cool the planet, experimentation itself could cause irreversible damage. 
Current models predict that SRM deployment would alter global precipitation patterns, damage the ozone layer, and undermine the livelihoods of millions of people. 
Beyond the ecological risks, critics warn that, once deployed globally, SRM could spawn powerful weapons, giving states, corporations, or individuals the ability to manipulate climate for strategic gain (an idea that not even Hollywood can resist). 
But perhaps the most important criticism is a political one: in a world of challenged multilateralism, how would global ecological interventions be governed? 
Similar questions surround the other major group of climate engineering technologies under debate – so-called carbon dioxide removal (CDR). 
Proponents of these technologies propose removing CO2 from the atmosphere and storing it underground or in the oceans. 
Some CDR approaches are already prohibited, owing to concerns about possible environmental consequences. 
For example, fertilization of oceans with carbon-sequestering plankton was banned by the London Protocol on marine pollution in 2008. 
Parties to that decision worried about the potential damage to marine life. 
But other CDR approaches are gaining support. 
One of the most discussed ideas aims to integrate biomass with carbon capture and storage (CCS) techniques. 
Called “bioenergy with CCS,” or BECCS, this method seeks to pair the CO2-absorption capabilities of fast-growing plants with underground CO2 storage methods. 
Proponents argue that BECCS would actually yield “negative” emissions. 
Yet, as with other engineered solutions, the promises are simply too good to be true. 
For example, huge amounts of energy, water, and fertilizer would be required to operate BECCS systems successfully. 
The effects on land use would likely lead to terrestrial species losses, and increase land competition and displacement of local populations. 
Some forecasts even suggest that the land clearing and construction activities associated with these projects could lead to a net increase in greenhouse gas emissions, at least in the short term. 
Then there is the issue of scale. 
In order for BECCS to achieve emissions limits set by the Paris agreement, between 430 million and 580 million hectares (1.1 billion to 1.4 billion acres) of land would be needed to grow the required vegetation. 
That is a staggering one third of the world’s arable land. 
Simply put, there are safer – and proven – ways to withdraw CO2 from the atmosphere. 
Rather than creating artificial CO2-binding “farms,” governments should focus on protecting already-existing natural ecosystems and allowing degraded ones to recover. 
Rainforests, oceans, and peatlands (such as bogs) have immense CO2 storage capacities and do not require untested technological manipulation. 
By pushing unproven technologies as a cure for all climate-changing ills, proponents are suggesting that the world faces an unavoidable choice: geoengineering or disaster. 
But this is disingenuous. 
Political preferences, not scientific or ecological necessity, explain the appeal of geoengineering. 
Unfortunately, current debates about climate engineering are undemocratic and dominated by technocratic worldviews, natural science and engineering perspectives, and vested interests in the fossil-fuel industries. 
Developing countries, indigenous peoples, and local communities must be given a prominent voice, so that all risks can be fully considered before any geoengineering technology is tested or implemented. 
So what conversation should we be having about geoengineering? 
For starters, we need to rethink the existing governance landscape. 
In 2010, parties to the United Nations’ Convention on Biological Diversity (CBD) agreed to a de facto international moratorium on climate-related geoengineering. 
But today, with powerful advocates generating so much pressure to bring geoengineering technologies out of the lab, informal bans are no longer sufficient. 
The world urgently needs an honest debate on the research, deployment, and governance of these technologies; the CBD and the London Protocol are essential starting points for these governance discussions. 
Among the technologies that require the most scrutiny are CDR projects that threaten indigenous lands, food security, and water availability. 
Such large-scale technological schemes must be regulated diligently, to ensure that climate-change solutions do not adversely affect sustainable development or human rights. 
In addition, the outdoor testing and deployment of SRM technologies, because of their potential to weaken human rights, democracy, and international peace, should be banned outright. 
This ban should be overseen by a robust and accountable multilateral global governance mechanism. 
No silver bullet for climate change has yet been found. 
And while geoengineering technologies remain mostly aspirational, there are proven mitigation options that can and should be implemented vigorously. 
These include scaling up renewable energy, phasing out fossil fuels (including an early retirement of existing fossil infrastructure), wider diffusion of sustainable agroecological agriculture, and decreased energy and resource input into our economy. 
We cannot afford to gamble with the future of our planet. 
If we engage in a serious discussion about ecologically sustainable and socially just measures to protect the Earth’s climate, there will be no need to roll the dice on geoengineering. 

The Coming Wave of Climate Displacement 
JOHANNESBURG – Governments around the world are engaged in a series of talks that could fundamentally alter how the movement of people across borders is managed. 
One dialogue is focused on the protection of refugees; the other on migration. 
These discussions, which are being led by the United Nations, will not result in legally binding agreements. 
But the talks themselves are a rare chance to forge consensus on contemporary migration challenges. 
And, most importantly, they will offer the international community an opportunity to plan for the impact of climate change, which will soon become a key driver of global displacement and migration. 
At last count, there were some 258 million migrants worldwide, with 22.5 million people registered as refugees by the UN Refugee Agency. 
These numbers will be dwarfed if even the most modest climate-related predictions are borne out. 
According to the International Organization for Migration, climate change could displace as many as one billion people by 2050. 
And yet no international treaty covers climate-induced migration – a gap that must be addressed now. 
Not since 1951 have international standards for refugee protection received so much attention. 
That year, with more than 80 million people displaced after World War II, UN member countries ratified a comprehensive framework to standardize their treatment of refugees. 
The Global Compact on Refugees that is currently under discussion builds on this framework with strategies to empower refugees and assist host governments. 
Most significantly, it would commit signatories to protecting “those displaced by natural disasters and climate change.” 
The second agreement is even more consequential for the management of climate-induced displacement. 
There has never been a global treaty governing migration, and past bilateral efforts have focused almost exclusively on violence and conflict as root causes of displacement. 
The proposed Global Compact for Migration goes beyond these factors, and notes that climate change is among the “adverse drivers and structural factors that compel people to leave their country of origin.” 
This type of regulatory language reaffirms what at-risk populations around the world already know: droughts, natural disasters, desertification, crop failure, and many other environmental changes are upending livelihoods and rendering entire communities uninhabitable. 
In my country, South Africa, a record drought is forcing major cities to consider water rationing. 
If water shortages persist, migration is certain to follow. 
Resource scarcity is particularly dangerous in politically unstable states, where climate change has already been linked to violent conflict and communal upheaval. 
For example, disputes over fertile land and fresh water fueled the war in Darfur, and even the current crisis in Syria – one of the greatest sources of human displacement today – began after successive droughts pushed Syrians from rural areas into cities. 
It is not a stretch to predict that climate change will produce more bloodshed in the coming years. 
The two UN frameworks could serve as a basis for planning how to manage the coming climate-induced migrations. 
With scientific modeling to guide decision-making, states could draft orderly, dignified, and equitable relocation strategies. 
This is certainly a smarter approach than the ad hoc responses to date. 
But history tells us that governments are reluctant to seek out collective solutions to forced migration. 
This failure is visible today in the haunting and inexcusable plight of refugees around the world. 
As we enter the final months of the Compact talks, what should we expect of those negotiating the global plan for managing unprecedented movements of people? 
The causes and consequences of climate change demand close attention. 
Displaced people must be able to get on with their lives in dignity. 
The test of world leaders will be whether the global compacts on refugees and migrants can achieve this. 

Canada Takes the Lead on Methane Emissions 
OTTAWA/WASHINGTON, DC – In the fight against climate change, carbon dioxide attracts the bulk of regulators’ attention. 
But while long-lived CO2 is a key contributor to rising temperatures, it is not the only culprit. 
Other short-lived super pollutants are also warming the planet, and none is in greater need of regulation than methane. 
According to the Intergovernmental Panel on Climate Change, methane is 86 times more potent than CO2 as a heat-trapping gas over a 20-year period, and is responsible for about a fifth of the warming caused by humans. 
If the international community is to have any chance of meeting targets set by the Paris climate agreement and keep global warming well below 2°C above preindustrial levels, the control of methane must be a high priority. 
At the moment, however, that is not happening on a global scale, and only a handful of countries – led most recently by Canada – have committed to managing methane. 
A recent report by the US National Academy of Sciences (NAS) called methane an “intriguing” policy problem, because there is no dominant cause. 
Recent spikes in emissions have been attributed to a variety of sources, including forest fires and fermentation in rice fields. 
Measuring methane, including by using today’s infrared cameras, is challenging. 
According to the NAS report, not even the United States has the tools to measure, monitor, and account for methane effectively. 
But improved measurement tools for detecting sources of methane are on the horizon, and are being successfully tested in California on low-flying planes, with the goal of perfecting the tools for use on satellites. 
Even as we improve our tools for detecting methane leaks, we must pursue aggressive methane reductions. 
If the world follows the lead of methane-mitigation innovators like Canada and California, it is possible to make fast and dramatic reductions. 
Three sectors need urgent regulatory attention, starting with the oil and gas industry. 
According to the International Energy Agency, improving methane capture in the oil and gas value chain would be cheap and effective, given that roughly half of the sector’s 76 million tons of annual methane emissions results from easily contained leaks. 
And, because methane is actually a marketable product, capturing it can be achieved at no net cost. 
Second, methane emissions in agriculture, and especially in livestock farming, need tighter controls. 
Here, too, improved management has a strong economic rationale. 
For example, mandating the use of methane-capture devices such as anaerobic digesters would help farmers harness methane from cattle and pigs, providing a renewable source of energy generation that could replace fossil fuels used to power equipment. 
Finally, governments at all levels should require the capture and use of methane emitted by landfills and wastewater treatment plants. 
With new methane-measurement practices, countries, cities, and companies could address sources of methane that are easily controlled, laying the groundwork for tougher challenges in the years ahead. 
And yet, despite the availability of viable solutions, many countries continue to ignore the low-hanging fruit of methane mitigation. 
Two years after the US, Mexico, and Canada pledged to take collective action and reduce methane emissions from the oil and gas sector, progress has stalled. 
In the US, the Trump administration has exempted energy companies from methane capture during drilling, while Mexico has offered only non-binding pledges. 
Fortunately, Canada is going in the other direction. 
Canadian regulators just released new rules aimed at reducing methane emissions from the oil and gas industry by as much as 45% over the next seven years. 
These rules solidify Canada as a global leader in methane-reduction efforts. 
The rules also advance Canada’s national interests. 
Projections for the Arctic show that the region is warming at twice the global average and is losing reflective sea ice at a staggering pace. 
Without this icy shield to reflect heat back into space, warming accelerates, permafrost melts, and ancient stores of methane and CO2 are returned to the atmosphere. 
Not only does this cycle drive up global temperatures, it also threatens the survival of Canada’s northern communities. 
Canada may have an added source of motivation for implementing new methane rules. 
But such rules amount to an opportunity to help countries and cities around the world recommit to methane-mitigation strategies. 
When Canada hosts the G7 summit in June, its leaders will have an opportunity to advance this agenda; they must take it. 
If the world is to meet the temperature targets of the Paris accord and slow the pace of warming, every gas responsible for a warmer planet – not just CO2 – must be measured and appropriately managed. 

The Meaty Side of Climate Change 
BERLIN – Last year, three of the world’s largest meat companies – JBS, Cargill, and Tyson Foods – emitted more greenhouse gases than France, and nearly as much as some big oil companies. 
And yet, while energy giants like Exxon and Shell have drawn fire for their role in fueling climate change, the corporate meat and dairy industries have largely avoided scrutiny. 
If we are to avert environmental disaster, this double standard must change. 
To bring attention to this issue, the Institute for Agriculture and Trade Policy, GRAIN, and Germany’s Heinrich Böll Foundation recently teamed up to study the “supersized climate footprint” of the global livestock trade. 
What we found was shocking. 
In 2016, the world’s 20 largest meat and dairy companies emitted more greenhouse gases than Germany. 
If these companies were a country, they would be the world’s seventh-largest emitter. 
Obviously, mitigating climate change will require tackling emissions from the meat and dairy industries. 
The question is how. 
Around the world, meat and dairy companies have become politically powerful entities. 
The recent corruption-related arrests of two JBS executives, the brothers Joesley and Wesley Batista, pulled back the curtain on corruption in the industry. 
JBS is the largest meat processor in the world, earning nearly $20 billion more in 2016 than its closest rival, Tyson Foods. 
But JBS achieved its position with assistance from the Brazilian Development Bank, and apparently, by bribing more than 1,800 politicians. 
It is no wonder, then, that greenhouse-gas emissions are low on the company’s list of priorities. 
In 2016, JBS, Tyson and Cargill emitted 484 million tons of climate-changing gases, 46 million tons more than BP, the British energy giant. 
Meat and dairy industry insiders push hard for pro-production policies, often at the expense of environmental and public health. 
From seeking to block reductions in nitrous oxide and methane emissions, to circumventing obligations to reduce air, water, and soil pollution, they have managed to increase profits while dumping pollution costs on the public. 
One consequence, among many, is that livestock production now accounts for nearly 15% of global greenhouse-gas emissions. 
That is a bigger share than the world’s entire transportation sector. 
Moreover, much of the growth in meat and dairy production in the coming decades is expected to come from the industrial model. 
If this growth conforms to the pace projected by the UN Food and Agriculture Organization, our ability to keep temperatures from rising to apocalyptic levels will be severely undermined. 
At the United Nations Climate Change Conference (COP23) in Bonn, Germany, last month, several UN agencies were directed, for the first time ever, to cooperate on issues related to agriculture, including livestock management. 
This move is welcome for many reasons, but especially because it will begin to expose the conflicts of interest that are endemic in the global agribusiness trade. 
To skirt climate responsibility, the meat and dairy industries have long argued that expanding production is necessary for food security. 
Corporate firms, they insist, can produce meat or milk more efficiently than a pastoralist in the Horn of Africa or a small-scale producer in India. 
Unfortunately, current climate policies do not refute this narrative, and some even encourage increased production and intensification. 
Rather than setting targets for the reduction of total industry-related emissions, many current policies create incentives for firms to squeeze more milk from each dairy cow and bring beef cattle to slaughter faster. 
This necessitates equating animals to machinery that can be tweaked to produce more with less through technological fixes, and ignoring all of this model other negative effects. 
California’s experience is instructive. 
Pursuing one of the world’s first efforts to regulate agricultural methane, the state government has set ambitious targets to reduce emissions in cattle processing. 
But California is currently addressing the issue by financing programs that support mega-dairies, rather than small, sustainable operators. 
Such “solutions” have only worsened the industry’s already-poor record on worker and animal welfare, and exacerbated adverse environmental and health-related effects. 
Solutions do exist. 
For starters, governments could redirect public money from factory farming and large-scale agribusiness to smaller, ecologically focused family farms. 
Governments could also use procurement policies to help build markets for local products and encourage cleaner, more vibrant farm economies. 
Many cities around the world are already basing their energy choices on a desire to tackle climate change. 
Similar criteria could shape municipalities’ food policies, too. 
For example, higher investment in farm-to-hospital and farm-to-school programs would ensure healthier diets for residents, strengthen local economies, and reduce the climate impact of the meat and dairy industries. 
Dairy and meat giants have operated with climate impunity for far too long. 
If we are to halt global temperature spikes and avert an ecological crisis, consumers and governments must do more to create, support, and strengthen environmentally conscious producers. 
That would be good for our health – and for the health of our planet. 

The Next Migrant Wave 
MANILA – Imagine that you are a farmer. 
Your crops are withering as weather patterns become more volatile, your well water is too salty to drink, and rice is too expensive to buy at the market. 
So, you leave home in search of a better life. 
Millions of people in vulnerable communities around the world do not have to imagine such a scenario. 
They are living it now, as an increasingly unpredictable climate takes its toll; and their numbers are likely to soar as the effects of climate change intensify. 
But the world is even less prepared for these future climate migrants than Europe is for the current wave of people fleeing from the Middle East and North Africa. 
Most climate migrants will relocate within their own borders, but others will have no choice but to seek refuge abroad. 
If sea levels rise by more than one meter, entire populations of Pacific-atoll and reef-island countries might have to relocate. 
If it is well planned and managed, migration can help people adapt to such threats. 
But if it is not, it can lead to humanitarian crises. 
Overall, today’s policies are inadequate. 
Source and destination countries urgently need to make it easier and safer for people to move, or to remain where they are if they cannot afford or choose not to leave. 
Climate change will be one of many factors fueling future migration waves. 
Although it will become increasingly difficult to distinguish between people fleeing from environmental factors and those who have left for other reasons, we know that climate will play a larger role in migration, as slow-onset threats such as erosion and acute hazards such as cyclones threaten more people’s livelihoods. 
Most of the people at risk live in Asia, which is uniquely exposed to the effects of climate change. 
Nine of the ten countries with the most people living in low-lying areas (who are therefore threatened by flooding, storm surges, salinity, and erosion) are in Asia, owing to mass migration to megacities in recent decades. 
A recent study forecasts that Asia’s low-elevation population could double by 2060, to 983 million, from its level in 2000, thus accounting for 70% of the world’s total. 
Elsewhere in the region, water stress from reduced rainfall, salinity, glacial retreat, and desertification will hit water stocks, threaten livelihoods, and drive up food and water prices. 
These drastic scenarios might not materialize if the world succeeds in mitigating climate change. 
But no country should be complacent. 
Asian countries, especially, should prepare for worst-case scenarios, and implement far-sighted national policies, such as Kiribati’s “migration with dignity” program, which provides education and vocational training to citizens of the low-lying Pacific island state to improve their chances of finding decent work abroad. 
Preparations for any future scenario in Asia will require more complete data to judge the potential impact and timing of climate-related events, and to assess their effect on migration patterns. 
Country-specific data would allow individual governments to hone their policies. 
This includes more thorough national censuses, which too often disregard marginalized communities like slum-dwellers. 
Censuses should be conducted inclusively, fed into national databases to monitor progress and identify vulnerable populations, and shared across the region. 
Governments should educate their citizens about the effects of climate change, in order to prepare those who want to stay or cannot afford to leave. 
Migrant source countries should have national disaster risk assessments (so that they can plan for potential losses), comprehensive hazard maps, and disaster early-warning systems to reassure their citizens. 
And new houses, roads, bridges, and other infrastructure, such as water systems, should be built to withstand extreme weather. 
At the same time, governments should provide access to portable benefits for those people who do leave, so that they can support themselves abroad. 
And destination countries should consider providing emergency employment for displaced workers, using Australia and New Zealand’s seasonal worker programs as a model. 
Destination countries could also establish urban work and training centers for incoming migrants, many of whom will lack the skills required to land city jobs; and they should recognize the qualifications of those who do have expertise, and help them to find work. 
It will be essential for destination countries to invest in sustainable infrastructure and basic services for new arrivals. 
Some cities are hesitant to provide services, because they fear it will attract new migrants. 
But this attitude only forces migrants into slums, which creates even bigger problems. 
A better approach is to steer migrants from vulnerable rural areas to nearby medium-size cities equipped with the necessary services to absorb them; this, in turn, will prevent megacities from growing unsustainably. 
A comprehensive approach along these lines would help to make migration part of the solution to climate change, not just another of its harmful effects. 
Many countries will need funding to implement such plans, and, encouragingly, the 2015 Paris climate agreement established a taskforce to address climate-related displacement. 
One of its main goals should be to ensure that funding mechanisms for climate-change adaptation encompass migration issues. 
For now, we need a more energetic global discussion on this pressing issue. 
Whether climate-induced migration brings relief or chaos will depend on the policies and investments we agree to today. 
We should act now to give vulnerable communities a say in their future. 


The Climate Categorical Imperative 
CAPE TOWN – Nowadays, people are too often forced to choose between doing what is morally right and doing what is economically beneficial. 
Indeed, their options sometimes appear to be mutually exclusive, making the decision of which path to take exceedingly challenging. 
Sometimes, however, moral rectitude and economic interest merge, presenting an opportunity that must not be missed. That is the case – from the perspectives of this Archbishop and former finance minister – with the world’s response to climate change. 
The moral imperative is indisputable, as the effects of climate change – including extreme weather, temperature changes, and rising sea levels – are felt most keenly by the global poor, who have also benefited the least from the economic activities that cause it. 
Moreover, climate change could accelerate poverty and inequality in the future, meaning that, unless we address it in a timely manner, it will diminish – or even eliminate – future generations’ chances to achieve their development goals. 
Making every effort to minimize climate change today is, quite simply, the right thing to do. 
Fortunately, the economic benefits of addressing climate change are also clear. 
After all, climate change carries significant economic costs – for example, those associated with more frequent and extreme weather events. 
Moreover, building a “green” economy, based on continued technological innovation, is the smartest and most efficient way to create new engines of sustainable growth and job creation for the next generation. 
Action at the individual, company, municipal, and national levels is crucial. 
But the fact is that climate change is a global problem – and thus requires a global solution. 
The most important tool the world has for doing the right thing – and reaping vast economic benefits – is a universal climate-change agreement. 
That is why world leaders must take the opportunity presented by the United Nations Climate Change Conference in Paris this December to develop a single global framework for action. 
In fact, world leaders already pledged to do so. 
The UN Climate Change Conference in 2011 – initiated and hosted by South Africa – produced an agreement to adopt a universal legal agreement on climate change as soon as possible, no later than this year. 
Important progress has been made since the Durban conference. 
Last month, more than 30 countries – including the European Union’s members, Gabon, Mexico, Norway, Russia, Switzerland, and the United States – submitted their post-2020 plans to reduce greenhouse-gas emissions. 
In the coming weeks and months, this momentum will continue to build, as other countries – including, it is expected, major emerging economies like Brazil, China, and India – submit their commitments as well. 
But if the Paris meeting is to be successful – in terms of both fulfilling the moral imperative and capturing the economic benefits of confronting climate change – every participating country must submit its national contributions for the period beginning in 2020 as soon as possible. 
Furthermore, the final agreement must include an effective and ambitious plan for de-carbonization over the next 50 years. 
The fact is that short- and medium-term commitments alone are simply inadequate to fulfill the pledge, made by the world’s governments in 2009 and reiterated in 2010, to cap the rise in global temperatures at 2° Celsius relative to the pre-industrial era. 
It is crucial to create – and adhere to – a progressive long-term emissions-reduction strategy that sends a clear signal to capital markets that governments are serious about confronting climate change. 
Such a strategy could include, for example, incentives for investment in low-carbon solutions. 
With some $90 trillion dollars set to be invested in infrastructure globally over the next 15 years, the impact of such an approach could be considerable – if not decisive. 
The moral and economic imperatives to act on climate change could not be stronger. 
Although the road ahead will be difficult, with new and unexpected challenges arising along the way, we can find inspiration in Nelson Mandela’s famous dictum: “It always seems impossible until it’s done.” 
We face an unprecedented opportunity to achieve a more sustainable, prosperous, and socially just future. 
Creating that future must start now. 

Why Markets Can’t Cool the Planet 
MILWAUKEE – With global temperatures rising at an alarming rate, the race is on to lower the world’s consumption of fossil fuels and accelerate the adoption of greener forms of energy. 
Among the most discussed remedies are those that would use market forces to make traditional fuels more expensive; ideas include putting a price on carbon and protecting natural resources that remove carbon dioxide from the atmosphere. 
At first glance, market-based strategies might seem appealing. 
After all, as Adam Smith noted in The Wealth of Nations, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” 
In other words, the best way to convince emitters like Chevron or General Motors to help save the planet must be to appeal to their profit motive, right? 
Not necessarily. 
While free markets may have steered much of the world toward a wealthier, healthier future, placing our faith in Smith’s “invisible hand” to win the fight against climate change would be a tragic mistake. 
In a capitalist economy, our relationship with the future is guided by economic forces that are notoriously fickle. 
Commodities like sugar, soybeans, oil, and gas are relatively standardized products, meaning that they can be traded instantly and globally through the use of derivative contracts. 
But because these contracts price in assumptions about the future, commodity prices can fluctuate wildly. 
And that variability complicates environmental planning in three important ways. 
For starters, price unpredictability makes it virtually impossible to detect the depletion of natural resources merely by looking at short-term changes in value. 
On the contrary, the more uncertainty there is about the scarcity of a resource, the greater the price swing, which only compounds the planning difficulty. 
As the French mathematician Nicolas Bouleau observed in a 2013 paper, “markets cannot spell out trends; it is absolutely impossible on an ontological level.” 
If resource-related trends were discernible from outcomes in financial markets, those who could see them would trade accordingly and the trends would disappear. 
Second, uncertainty about the future price of any commodity makes it exceedingly risky for producers to invest in whatever new technologies might help reduce greenhouse-gas emissions. 
For most producers and consumers, it usually makes more economic sense to maintain the status quo than to change their habits, even if they know that the status quo will be disastrous for the environment. 
Finally, although it’s possible to put a price tag on precious but non-marketable natural resources – like the capacity of a boreal forest to absorb atmospheric CO2 – the price fluctuations for resources that can be traded make most conservation strategies untenable in the long run. 
That’s because at some point, the volatile price of the tradable resource will exceed the fixed cost of destroying it. 
The pressure to plunder can be especially strong when a combustible resource is found. 
As Canadian Prime Minister Justin Trudeau conceded at a March 2017 energy conference in Houston, Texas, “no country would find 173 billion barrels of oil in the ground and just leave them there.” 
Financial volatility is like a superstorm on an already-warming planet. 
Not only does it make it impossible to see what lies ahead; it is itself also a force of environmental devastation, leaving irreparable damage in its wake. 
“Market volatility is ill suited to environmental cycles,” as MIT’s Janelle Knox-Hayes puts it. “Economic systems recover from market turmoil in time. 
Environmental systems do not have the same luxury; their cycles of reproduction are inflexible.” 
Ecological devastation should be expensive, and the world no doubt needs workable strategies to move people away from dirty sources of energy toward greener, more sustainable alternatives. 
But to defer to markets to overcome the environmental woes of capitalism is a blueprint for disappointment – and a recipe for planetary suicide. 

Weathering the Violence of Climate Change 
SANTA MONICA – With India experiencing its worst drought in 140 years, Indian farmers have taken to the streets. 
At a protest in Madhya Pradesh this summer, police opened fire on farmers demanding debt relief and better crop prices, killing five. 
In Tamil Nadu, angry growers have held similar protests, and lit candles in remembrance of those killed. 
And at one rally in New Delhi, farmers carried human skulls, which they say belonged to farmers who have committed suicide following devastating crop losses over the past six months. 
According to a recent study by Tamma A. Carleton of the University of California, Berkeley, suicides among Indian farmers have increased with the temperature, such that an increase of 1º Celsius above the average temperature on a given day is associated with approximately 70 additional suicides, on average. 
Beyond exposing failed farming policies, this year’s drought-fueled turmoil also underscores the threat that climate change poses not just to India, but to all countries. 
As global temperatures rise and droughts become more common, political agitation, social unrest, and even violence will likely follow. 
In 2008, when severe weather cut into the world’s grain supply and drove up food prices, countries ranging from Morocco to Indonesia experienced social and political upheavals. 
More recently, food insecurity has been used as a weapon in the wars in Yemen and Syria. 
According to the Center for Climate and Security, failure to address such “climate-driven risks” could lead to increased fighting over water, food, energy, and land, particularly in already unstable regions. 
CCS identifies 12 “epicenters” where climate change might ignite or exacerbate conflicts that could engulf large populations, and spill across national borders. 
It is no coincidence that conflicts proliferate alongside rising temperatures. 
A 2013 study estimates that interpersonal violence rises by 4%, and intergroup conflicts by 14%, “for each one standard deviation change in climate toward warmer temperatures or more extreme rainfall.” 
Moreover, psychological studies have shown that when people are subjected to uncomfortably hot temperatures, they show increased levels of aggression. 
And new research is finding that what is true for the individual also holds true for populations. 
In Sub-Saharan Africa, researchers have found a strong correlation between three decades of rising temperatures and outbreaks of civil war. 
If warming trends continue, civil wars and other conflicts will become more common in Africa, the South China Sea, the Arctic, Central America, and elsewhere. 
Avoiding such outcomes will require renewed support for multilateral treaties such as the 2015 Paris climate agreement, which has been weakened by the withdrawal of the United States. 
But it will also require increased engagement by countries, cities, and industries on three key areas: resource management, disaster mitigation, and migration. 
In largely agricultural societies, farm productivity affects the entire economy. 
As we’ve seen in the Horn of Africa and India this year, changes in temperature and rainfall can reduce crop yields, and thus rural incomes. 
Under such conditions, and in the absence of other economic opportunities, communities may resort to violence as they compete for food and scarce resources. 
International aid organizations, working with state and federal governments, should go beyond addressing the immediate causes of poverty to also develop long-term strategies for helping agricultural communities survive bad harvests. 
Such strategies should focus on arable-land management and water conservation, among other areas. 
Additionally, new strategies are needed to coordinate disaster-relief efforts. 
As the climate changes, weather-related calamities such as floods, hurricanes, landslides, and typhoons will increase in frequency, intensity, and duration, undermining individual livelihoods and the broader economy. 
Governments must work together to mitigate these risks, and to respond forcefully to disasters when they happen. 
Otherwise, the fallout will disproportionately hurt poor and vulnerable communities, perpetuating the cycle of poverty and violence. 
Finally, we need better policies for managing human migration, much of it related to severe weather and droughts. 
In 2015, the number of international migrants reached a record high of 244 million. 
As the climate shifts, entire regions could become uninhabitable, and many more people will be uprooted. 
Parts of the Middle East, for example, could become too hot for humans by the end of this century; and heavily populated cities such as New Delhi could experience temperatures over 95º Fahrenheit (35º C) up to 200 days out of the year. 
The International Organization for Migration fears that as more people flee the heat, the concentration of humanity into smaller spaces will have an unprecedented impact on local “coping capacity.” 
Scientists agree that climate change poses a grave danger to the planet. 
But for some reason, politicians and government officials have not connected the dots between a changing climate and human conflicts. 
Among the many threats associated with climate change, deteriorating global security may be the most frightening of all. 
It is bad enough to see farmers carrying skulls through the streets of India. 
But if we do not get serious about climate-driven security risks, we could see far worse. 

Energy for the Common Good 
NEW YORK – The climate crisis we now face is a reflection of a broader crisis: a global confusion of means and ends. 
We continue to use fossil fuels because we can (means), not because they are good for us (ends). 
This confusion is why Pope Francis and Ecumenical Patriarch Bartholomew are spurring us to think deeply about what is truly good for humanity, and how to attain it. 
Earlier this month, the pope and patriarch each convened business, scientific, and academic leaders, in Rome and Athens, respectively, to hasten the transition from fossil fuels to safe renewable energy. 
In most of the world today, the purposes of politics, economics, and technology have been debased. 
Politics is regarded as a no-holds-barred fight for power, economics as a ruthless scramble for wealth, and technology as the magic elixir for more economic growth. 
In truth, according to Francis and Bartholomew, we need politics, economics, and technology to serve a far greater purpose than power, wealth, or economic growth. 
We need them to promote human wellbeing today and for future generations. 
America may be the most confused of all. 
The United States today is rich beyond imagining, with median household income and gross domestic product per capita each equal to nearly $60,000. 
The US could have it all. 
Instead, what it has is widening income inequality, falling life expectancy, a rising suicide rate, and epidemics of obesity, opioid overdoses, school shootings, depressive disorders, and other grave ills. 
The US incurred $300 billion in losses from climate-related disasters last year, including three massive hurricanes – the frequency and intensity of which has risen, owing to fossil-fuel dependence. 
The US has vast power, wealth, and growth, and yet diminished wellbeing. 
The US economy and politics are in the hands of corporate lobbies, including Big Oil. 
Resources are relentlessly allocated to developing more oil and gas fields not because they are good for America or the world, but because the shareholders and managers of ExxonMobil, Chevron, Conoco Philipps, and others demand it. 
Trump and his minions work daily to undermine global agreements and domestic regulations that have been put in place to accelerate the shift from fossil fuels to renewable energy. 
Yes, we can produce more oil, coal, and gas. 
But for what? 
Not for our safety: the hazards of global warming are already upon us. 
Not because we lack alternatives: the US has ample wind, solar, hydro, and other sources of primary energy that don’t cause global warming. 
The US economy, alas, is an out-of-control juggernaut, chasing oil wealth and jeopardizing our very survival. 
Of course the US is not alone in the mad pursuit of wealth over wellbeing. 
The same get-rich-quick confusion of means and ends is causing Argentina, host of the G-20 Summit later this year, to pursue fracking of natural gas, with all the associated climate and environmental risks, instead of tapping its bounteous potential in wind, solar, and hydro power. 
The same corruption of purpose is causing the Canadian government to guarantee a new pipeline to export output from its polluting and expensive oil sands to Asia, while under-investing in Canada’s vast renewable energy sources. 
In his meeting with the CEOs of major oil and gas companies, Francis told them, “Our desire to ensure energy for all must not lead to the undesired effect of a spiral of extreme climate changes due to a catastrophic rise in global temperatures, harsher environments, and increased levels of poverty.” 
He noted that the oil companies are engaged in “the continued search for new fossil fuel reserves, whereas the Paris Agreement clearly urged keeping most fossil fuels underground.” 
And he reminded the executives that, “Civilization requires energy, but energy use must not destroy civilization!” 
Francis underscored the moral dimension of the problem: 
“The transition to accessible and clean energy is a duty that we owe toward millions of our brothers and sisters around the world, poorer countries and generations yet to come. 
Decisive progress on this path cannot be made without an increased awareness that all of us are part of one human family, united by bonds of fraternity and solidarity. 
Only by thinking and acting with constant concern for this underlying unity that overrides all differences, only by cultivating a sense of universal intergenerational solidarity, can we set out really and resolutely on the road ahead.” 
As Francis was meeting the CEOs in Rome last week, Bartholomew was similarly convening leaders of scientific institutions, UN agencies, and major faiths in Athens and the Peloponnese, to chart a path to environmental safety. 
Bartholomew also underscored the fundamental moral concern. “The identity of every society and measure of every culture are not judged by the degree of technological development, economic growth or public infrastructure,” he said. 
“Our civil life and civilization are defined and judged primarily by our respect for the dignity of humanity and integrity of nature.” 
The 300 million faithful of the Eastern churches led by the Ecumenical Patriarch are in lands facing extreme dangers from global warming: intense heat waves, rising sea levels, and increasingly severe droughts. 
The Mediterranean region is already beset by environmental distress and forced migration from conflict zones. 
Unchecked climate change – which has already contributed to conflict – would spell disaster for the region. 
Bartholomew’s conference opened at the Acropolis, the very heart of ancient Athens, where 2,300 years ago Aristotle defined ethics and politics as the quest for wellbeing. 
The political community, wrote Aristotle, should aim “at the highest good,” to be achieved by cultivating the virtues of the citizenry. 
Aristotle famously contrasted two types of knowledge: techne (technical know-how) and phronesis (practical wisdom). 
Scientists and engineers have given us the technical knowledge to move rapidly from fossil fuels to zero-carbon energy. 
Francis and Bartholomew urge us to find the phronesis, the practical wisdom, to redirect our politics and economies toward the common good. 

Climate Change Posers 
COPENHAGEN – One of the stranger spectacles of the climate change debate was the sight, earlier this month, of NASA climate scientist Jim Hansen marching hand-in-hand with Hollywood actress Darryl Hannah outside the Capitol Coal Power Plant in Washington, DC. 
Hansen promised to brave arrest at what was billed as the world’s largest direct-action climate change protest. 
Instead, the worst snowstorm in three years reduced the size of the crowd, prevented special guests from arriving, and hindered efforts to use a solar panel to light up a protest billboard. 
The police reportedly told the crowd that they didn’t want to arrest anybody who didn’t want to be arrested, and nobody was. 
That didn’t stop the protesters from proclaiming the event a success. 
“VICTORY: THIS IS HOW TO STOP GLOBAL WARMING,” declared the Web site of Capitol Climate Action. 
And, indeed, the US House Speaker and Senate Majority Leader called on the Architect of the Capitol to stop using coal for the Capitol Power Plant (albeit days before the rally). 
But if stopping global warming were this easy, I – and everybody I know – would be painting placards for the next round of direct action. 
Hansen condemns coal-fired power plants as “death factories,” and his belief that coal is evil is widely shared. 
It is also obviously wrong. 
If we were to stop using coal tomorrow, we would discover that it remains a vital source of life. 
Coal accounts for almost half of the planet’s electricity supply, including half the power consumed in the United States. 
Coal keeps hospitals and core infrastructure running, provides warmth and light in winter, and makes life-saving air conditioning available in summer. 
In China and India, where coal accounts for about 80% of power generation, it has helped to lift hundreds of millions of people out of poverty. 
It is little wonder, then, that US Energy Secretary Steven Chu, who two years ago described the expansion of coal-fired power plants as his “worst nightmare,” now calls coal a “great natural resource.” 
The vital question is what would replace coal if were to stop using it. 
Judging from their chant – “No coal, no gas, no nukes, no kidding” and “Biofuels - hell no!” – the protesters in Washington would rule out many plausible alternatives. 
Solar and wind power appear to be acceptable, but both are much less reliable than coal, and much more expensive. 
Only about 0.5% of the world’s energy comes from these renewable sources. 
Even with optimistic assumptions, the International Energy Agency estimates that their share will rise to just 2.8% by 2030. 
One reason is that we don’t know how to store the energy from these sources: when the wind doesn’t blow and the sun doesn’t shine, what powers your computer or the hospital’s operating room? 
Moreover, renewables are still costly. 
Recently, former US Vice President Al Gore and United Nations Secretary General Ban Ki-moon claimed that, “in the US, there are now more jobs in the wind industry than in the entire coal industry.” 
Never mind that the numbers were massaged, because they still hold a valuable lesson. 
The US gets 50% of its electricity from coal but less than 0.5% from wind. 
If it takes about the same manpower to produce both, wind power is phenomenally more expensive. 
The equivalent of more than 60 million barrels of oil is consumed in coal every day, and there is no affordable “green” alternative. 
There is an ample and cheap supply of coal for several centuries. 
We need to accept that much of the world’s cheap coal will be burned – but we should focus on capturing the CO2. 
In agreements announced by the Obama administration, the US is working with China and Canada on projects to develop this technology. 
The end of fossil fuel’s stronghold will come when we have cheap alternatives, especially in developing countries. 
That day will arrive sooner if governments spend a lot more money on low-carbon energy research, which is woefully inadequate. 
Every nation should ideally commit to spending 0.05% of GDP exploring non-carbon-emitting energy technologies. 
This would cost $25 billion per year – a 10-fold increase in global financing – and create momentum to recapture the vision of delivering a low-carbon, high-income world. 
Coal contributes strongly to global warming, but no amount of political theater can alter the inescapable fact that it also provides benefits that we cannot yet replicate with renewable energy. 
Braving arrest with Hollywood stars is a diversion. 
Declaring true victory over global warming will take a lot more pragmatism, and a lot more work. 

Climate Change Realism 
NEW YORK – “Wonderful, Wonderful Copenhagen,” a popular song from the 1952 film musical “Hans Christian Andersen,” will probably be played many times this fall, as world leaders will be gathering in the Danish capital in December (and in New York in September) to confront the challenge of climate change. 
But, unless international thinking gets considerably more realistic in a hurry, what happens in Copenhagen will be anything but wonderful. 
It should come as no surprise that there is little consensus on a comprehensive accord that would have a meaningful impact on the world’s climate. 
Governments will not sacrifice near- and medium-term economic growth for long-term environmental benefits. 
This is especially true now, given that much of the developed world is in the midst of a painful recession. 
The United States, for one, will not accept ceilings that reduce its greenhouse-gas emissions significantly if it means accepting higher costs and taxes that risk slowing economic recovery. 
Developing countries are, if anything, even more opposed to such ceilings or “caps.” 
Four hundred million Indians still lack electricity; India cannot be expected to rule out greater use of coal if that proves to be the best way to produce electricity for one-third of its citizens. 
China, too, is unlikely to agree to “caps” on emissions of any kind, given the relatively low standard of living of most Chinese. 
But such a stance dooms prospects for a new global treaty, as developed countries will rightly insist that poorer countries be part of the solution. 
The consequences of failure in Copenhagen could be considerable. 
In the short run, we may well see climate-related concerns become the newest excuse for increased trade protectionism. 
So-called “carbon tariffs” are likely to be introduced to penalize imports from countries or companies deemed not to be doing enough to curb emissions. 
World trade is already down sharply as a result of the economic crisis; introducing new tariffs would inevitably reduce trade further, causing the loss of additional jobs and leading to new frictions. 
Over time, a failure to reduce greenhouse gas emissions would lead to additional climate change, which in turn would increase the severity of poverty, the scale of internal displacement and migration, the scarcity of water, the prevalence of disease, and the number and intensity of storms. 
The result could be more failed states and more conflict between states. 
Climate change is as much a matter of security as it is an economic and human concern. 
So what should be done? 
The most important step for those preparing for Copenhagen is to embrace national policies that increase energy efficiency and reduce greenhouse-gas emissions. 
The US has at long last done some of this in adopting new and much higher standards for automobile fuel efficiency. 
Regulatory policy can increase the efficiency of appliances, housing, and machinery. 
Such reforms should appeal to rich and poor countries alike, as they would reduce spending on energy and dependence on oil imports. 
Coordinated national actions are not the same as unilateralism. 
There is no unilateral answer to what is a global challenge. 
But to describe a challenge as global is not to argue that the remedy is to be found only in an ambitious, formal, and universal treaty. 
Such an accord might well be desirable, but it is simply not an option for climate change any time soon. 
The goal for the representatives of the nearly 200 countries who will meet in Copenhagen should not be a single sweeping agreement so much as a set of more modest agreements. 
Coal is one place to begin, as it will continue to generate the lion’s share of the world’s electricity for decades to come. 
Greater sharing of existing cleaner-coal technologies is needed, as is continued development of next-generation clean-coal plants. 
Nuclear power is another area requiring attention. 
So, too, are renewable forms of power, such as solar and wind. 
Here, too, mechanisms are needed for sharing new technologies and helping poorer countries pay for them in exchange for adopting policies that reduce greenhouse-gas emissions. 
Moreover, stopping the destruction of forests is essential, given how much carbon is trapped in them. 
One objective for Copenhagen should be to create a well-endowed global fund to support policies that discourage the cutting and burning of trees, help countries such as Brazil and Indonesia protect their rain forests, and provide alternative livelihoods to those who currently benefit from destroying them. 
Focusing on steps such as these would go a long way toward attaining the often-discussed goal of halving global carbon emissions by mid-century. 
But reaching an accord that sets binding ceilings for what each country will be allowed to emit is not an option in Copenhagen. 
The consensus simply does not exist. 
Smaller steps, however, can and should be taken. 
Those who want to master the challenge of climate change now will reject such realism. 
But, as is often the case, those who insist on getting everything risk getting nothing. 

A Green Alliance With Europe 
SANTIAGO/SAO PAULO – In December, world leaders will meet in Paris for the United Nations Climate Change Conference, which is expected to produce a new agreement to tackle global warming. 
But, in the run-up to the conference, heads of state and ministers will meet at various other related events. 
Having attended countless summits, we can attest that, if these other meetings are correctly prepared, and heads of state engage meaningfully in them, the prospects of success in Paris could be improved. 
One such meeting in particular could be decisive: the June 10-11 bi-annual summit in Brussels between the European Union and the Community of Latin America and the Caribbean States (CELAC). 
Efforts by Europe and Latin America and the Caribbean have set the groundwork for the world’s strongest bi-regional partnership on climate change. 
Leaders in both regions have declared their commitment to holding the rise in global temperature to below 2º Celsius and to achieving legally binding outcomes in Paris. 
The EU and CELAC heads of state can – and should – forge a close alliance and capitalize on favorable political conditions to advance a progressive climate agenda, one that mandates their negotiators to push for a fair, equitable, and ambitious agreement in December. 
Together, the two regions represent nearly a third of the 195 parties that have signed the UN Framework Convention on Climate Change, and account for roughly 20% of global greenhouse-gas emissions. 
Given soaring climate-related economic costs in Europe and Latin America, both sides have much to gain (and save) from a global regime that significantly reduces emissions and strengthens resilience to climate risks. 
This common sense of purpose is reflected in our regions’ policies. 
Latin America and the Caribbean are taking concerted action to help bringing down global emissions and could do much more with funding and technology transfers from developed countries. 
Brazil, for example, has drastically reduced deforestation in the Amazon – a major contribution. 
Chile is on track to reach its goal of producing 20% of its electricity from renewable sources by 2025. 
And in 2012, Mexico enacted a climate-change law that aims to reduce emissions by 30% below their business-as-usual level by 2020, and by 50% by 2050. 
For its part, the EU is offering the strongest pledge yet for the Paris agreement: a reduction in domestic greenhouse-gas emissions by at least 40%, relative to their level in 1990, by 2030. 
This is in line with the EU’s long-term goal of reducing emissions by 80-95% (again, relative to the 1990 level) by 2050. 
The EU-CELAC summit can also benefit from diplomatic efforts within CELAC, which includes all of the region’s 33 countries. 
A regional effort led by Brazil and Chile is promoting dialogue among CELAC countries to build trust, with the goal of identifying common positions for the UN climate negotiations. 
CELAC has emphasized that a new global climate-change deal should treat adaptation and mitigation in a balanced manner. 
In keeping with its commitment to the 2º C cap on the rise in global temperature, CELAC not only supports a legally binding agreement, but also calls for wealthy countries to meet their promises to provide developing countries with $100 billion per year in climate finance by 2020. 
Wealthy countries that have not complied with the emissions-reduction commitments enshrined in the 1997 Kyoto Protocol owe this debt to the planet. 
CELAC seeks rules to ensure the transparency and verification of countries’ climate actions, and calls on developed countries to increase their technology transfer and capacity-building efforts to support its member countries. 
Latin American and the Caribbean countries can also use the upcoming summit in Brussels to reassure the EU that it is a valued partner. 
It can call on Europe to provide greater predictability of financial flows and alignment on climate and development objectives, especially to reduce inequality and poverty, boost clean energy, and build sustainable urban transport and other infrastructure. 
Following the difficult climate negotiations in Copenhagen in 2009, we understand why some European leaders may be lowering expectations for the Paris talks. 
They are understandably reluctant to expend too much political capital by calling for a far-reaching deal. 
But, at a time when concern about global warming among citizens in both regions is growing, this is no time for indecisiveness. 
European leaders should boldly show that they are committed to an ambitious outcome in Paris, and that Europe will enhance its support of CELAC climate actions. 
The Inter-American Development Bank estimates that CELAC can more than meet its future energy needs through renewable energy sources, including solar, wind, and geothermal. 
Indeed, such resources are sufficient to cover projected 2050 electricity needs 22 times over. 
The EU can play a leading role in promoting renewable energy cooperation, in part by transferring technology that is adapted to our tropical conditions, which would support CELAC countries’ efforts to reduce emissions and pollution, increase their resilience to climate change, and create jobs. 
This type of enhanced cooperation and diplomacy could pay large dividends. 
Progress in Brussels next week would increase CELAC countries’ confidence, thereby encouraging them to offer the strongest-possible commitments – known technically as “intended nationally determined contributions” – in Paris. 
More generally, a successful meeting in Brussels could help bring all sides closer together on thorny issues, such as the scale and scope of efforts that countries at different levels of development should make to address climate change. 
By forming an ambitious alliance – which could be enlarged to include other groups, such as the Alliance of Small Island States and the Least-Developed Countries group – EU and CELAC heads of state can contribute to setting the course that the world must follow to create a low-carbon, sustainable, and resilient future. 
We urge them to take the necessary steps in Brussels next week to achieve that goal. 

Building Climate Trust 
WASHINGTON, DC – In less than 80 days, world leaders will have the opportunity to strike a once-in-a-generation agreement in the fight against climate change. 
The United Nations Climate Change Conference in Paris in December could mark a turning point in world history: unanimous recognition of the need to act to prevent the most harmful consequences of global warming. 
But if a deal is to be secured, participants in the conference will have to overcome the mistrust that has led to polarization and inaction during past negotiations. 
Implementing an agreement with robust limits on greenhouse-gas emissions will first require honoring the commitments that have already been made, including promises by developed countries to spend $100 billion a year by 2020 to help the developing world mitigate its contribution to climate change and adapt to a warming world. 
Given the scale of the challenge and the costs that inaction imposes on the world’s most vulnerable people, development financial institutions and other interested parties must demonstrate their commitment to preventing the most harmful effects of climate change. 
Doing so requires a renewed – and transparent – dedication to the effort. 
That is why the World Bank Group is examining what more can be done to help put economies on a sustainable path. 
Keeping a keen eye on the national plans being submitted ahead of the Paris summit, we are surveying the full spectrum of our work in order to find opportunities to help countries in the areas of energy, transport, agriculture, forests, urban management, and much more. 
Indeed, the fight against climate change must be carried out across a wide variety of fronts. 
Rising global temperatures and an increasingly unstable climate will influence all aspects of development and jeopardize existing investments unless adequate mitigation and adaptation strategies – which are also central to the new Sustainable Development Goals that the United Nations will adopt later this month – are put in place. 
Part of this effort to fight climate change must involve addressing sources of economic inefficiency, such as fossil-fuel subsidies and inadequate accounting of the cost of pollution. 
And there is a growing recognition that development funds and climate finance can be used to spur and catalyze investment from public and private sources. 
But, above all, a successful climate deal will have to include proper measures for the management of the trillions of dollars that will need to be invested in low-carbon infrastructure and increased resilience to the harmful effects of rising global temperatures. 
This must be carried out in as public and transparent a fashion as possible. 
It is crucial that we ensure that financial flows being channeled into the fight against climate change can be tracked, so that citizens can hold their governments and institutions to account. 
In order to accomplish this, the six large multilateral development banks and the International Development Finance Club – a network of national, regional, and international development institutions – have been painstakingly working on developing common principles for tracking climate finance. 
These principles should apply to all projects intended to help countries adapt to or mitigate the impact of climate change. 
In a report released in June, the six banks described how they have provided more than $100 billion in climate finance in the four years since joint reporting began. 
The World Bank Group finances can also be tracked under its access to information policy. 
The conference in Paris offers the opportunity to establish a clear path toward averting the most harmful effects of climate change; world leaders attending the meeting must not allow it to slip through their fingers. 
By credibly and transparently honoring their promises, rich countries can demonstrate their commitment to the effort and increase the likelihood of an effective agreement. 
The time to invest in the fight against climate change is now. 
Our emissions are already having devastating effects around the world. 
As climate-related volatility and uncertainty mounts, the cost of inaction will only continue to rise. 

Keeping the Climate-Finance Promise 
LONDON – In 2009, the world’s rich countries pledged to mobilize $100 billion a year by 2020 to help poor countries tackle climate change. 
Since then, that promise has come to be regarded as a key test of the developed world’s resolve to do its part in the fight against global warming. 
Reaching the $100 billion target is important. 
Poor countries must believe that rich countries will honor their pledges. 
Otherwise, the prospects for an effective international agreement at the United Nations Climate Change Conference in Paris in November and December could be at risk. 
Fortunately, there are encouraging signs that the commitment will be honored. 
But larger financial flows are needed, particularly from the private sector. 
According to the OECD and the Climate Policy Initiative, developed countries collectively mobilized $52.2 billion in 2013 and $61.8 billion in 2014 to help poor countries reduce greenhouse-gas emissions and build resilience against the effects of climate change that can no longer be avoided. 
While it is important to note that this figure is only an estimate, it represents a preliminary but credible indicator of climate finance, based on information provided by developed countries. 
If one assumes greater leverage for private-sector investment, the number would be higher. 
Similarly, conservative assumptions about how much “genuinely extra” money is being spent to fight climate change through overseas aid and the multilateral development banks might have produced a lower figure. 
In reaching their estimate, the researchers took into account major investments by both the public and private sectors in a wide range of projects. 
Examples include the funding of small-scale renewable energy projects in Uganda by the United Kingdom, Germany, Norway, and the European Union, as well as the African Risk Capacity – supported by the UK and Germany – which offers insurance to governments against drought and other natural disasters. 
What the report reveals is the relatively low level of investment by the private sector in projects that will increase poor countries’ resilience (though the authors acknowledge that limited information might mean that the true amount is higher). 
This is both a challenge and an opportunity; with the right incentives, a sharp rise in private investment that enhances resilience could go a long way toward meeting the $100 billion target. 
Reaching that goal will require increased confidence in the policies and institutions of the countries in which the money is to be spent. 
New processes for sharing and reducing risk will be necessary. 
In this effort, development banks and bilateral aid institutions have much to offer. 
It is crucial that this new climate finance be used to complement the even-larger investments in sustainable development that will be necessary over the next few decades. 
A central aim for climate financing should be to establish and implement the policies, regulations, and frameworks that will create the appropriate incentives for investors. 
This could provide very large “multipliers.” 
According to the Global Commission on the Economy and Climate, some $90 trillion will need to be spent on infrastructure over the next 15 years, mostly in developing and emerging economies that are experiencing rapid growth and urbanization. 
If that infrastructure locks in dependence on fossil fuels, it will be very difficult to reduce global emissions of greenhouse gases. 
However, if countries invest wisely in the transition to a low-carbon economy, they will stimulate innovation and generate decades of sustainable growth. 
Thus, it is important that climate finance be used to foster public and private investment in low-carbon infrastructure and technologies, particularly to lower the cost of capital, which is crucial to scale up projects and encourage renewable-energy adoption. 
Furthermore, climate funding provided by rich countries should help improve resilience to climate change in the most vulnerable countries. 
It should also be used to avoid deforestation and to protect fragile resources, including oceans and biodiversity. 
And it should boost innovation and break new ground for climate action, including novel ways for the public and private sectors to work together, such as projects on carbon capture and storage. 
Some of the $100 billion will be channeled through the newly created Green Climate Fund; but the existing multilateral development banks should also play a central role, along with national aid agencies and departments. 
Money spent on sustainable development and climate action should be mutually reinforcing. 
And finance ministries in developing countries should reaffirm that, in addition to fostering growth and poverty reduction, wise action to mitigate climate change can lower levels of air pollution and raise energy efficiency. 
Success will ultimately depend on rich countries’ willingness to live up to their promises. 
Their leaders must recognize that financial support for action against climate change in developing countries is not only morally right; it is also in the interest of their constituencies and, indeed, the world community. 

A Healthy, Climate-Friendly Diet 
BERLIN – This December, world leaders will meet in Paris for the United Nations Climate Change Conference, where they will hammer out a comprehensive agreement to reduce carbon emissions and stem global warming. 
In the run-up to that meeting, governments worldwide should note one critical, but often overlooked, fact: the single biggest driver of environmental degradation and resource stress today is our changing diet – a diet that is not particularly conducive to a healthy life, either. 
In recent decades, rising incomes have catalyzed a major shift in people’s eating habits, with meat, in particular, becoming an increasingly important feature of people’s diets. 
Given that livestock require much more food, land, water, and energy to raise and transport than plants, increased demand for meat depletes natural resources, places pressure on food-production systems, damages ecosystems, and fuels climate change. 
Meat production is about ten times more water-intensive than plant-based calories and proteins, with one kilogram of beef, for example, requiring 15,415 liters of water. 
It is also an inefficient way of generating food; up to 30 crop calories are needed to produce one meat calorie. 
At any given time, the global livestock population amounts to more than 150 billion, compared to just 7.2 billion humans – meaning that livestock have a larger direct ecological footprint than we do. 
Livestock production causes almost 14.5% of global greenhouse-gas emissions and contributes significantly to water pollution. 
Moreover, livestock production consumes one-third of the total water resources used in agriculture (which accounts for 71% of the world’s water consumption), as well as more than 40% of the global output of wheat, rye, oats, and corn. 
And livestock production uses 30% of the earth’s land surface that once was home to wildlife, thereby playing a critical role in biodiversity loss and species extinction. 
It took more than a century for the European diet to reach the point at which meat is consumed at every meal, including breakfast. 
But, in large parts of Asia, a similar shift has occurred in just one generation. 
Meaty diets have created a global obesity problem, including, of all places, in China, whose expanding international clout is accompanied by expanding waistlines at home. 
Americans consume the most meat per capita, after Luxembourgers. 
Given the size of the US population, this is already a problem. 
If the rest of the world caught up to the United States – where meat consumption averages 125.4 kilograms per person annually, compared with a measly 3.2 kilograms in India – the environmental consequences would be catastrophic. 
Already, the signs are worrying. 
The demand for meat is projected to increase by 50% from 2013 to 2025, with overall consumption still rising in the West and soaring in the developing world, especially Asia. 
In order to meet this demand, meat producers have had to adopt an extremely problematic approach to raising livestock. 
In order to ensure that their animals gain weight rapidly, meat producers feed them grain, rather than the grass that they would naturally consume – an approach that is a major source of pressure on grain production, natural resources, and the environment. 
Making matters worse, the livestock are injected with large amounts of hormones and antibiotics. 
In the US, 80% of all antibiotics sold are administered prophylactically to livestock. 
Yet this has been inadequate to stem the spread of disease; in fact, with many of the new and emerging infectious diseases affecting humans originating in animals, veterinarians, microbiologists, and epidemiologists have been trying to understand the “ecology of disease” (how nature, and humanity’s impact on it, spreads disease). 
Though the environmental and health costs of our changing diets have been widely documented, the message has gone largely unheard. 
With the world facing a serious water crisis, rapidly increasing global temperatures, staggering population growth, and growing health problems like coronary disease, this must change – and fast. 
For starters, to ease some of the resource pressure, livestock producers should switch to water-saving technologies, including drip irrigation. 
At the same time, governments and civil-society groups should promote healthier diets that rely more on plant-based proteins and calories. 
According to recent research, if the world stopped producing crops for animal feed or diverting them to biofuels, it could not only end global hunger, but also feed four billion extra people – more than the number of projected arrivals before the global population stabilizes. 
Meat consumption actually leads to more greenhouse-gas emissions annually than the use of cars does. 
This is not to say that everyone must become vegetarian. 
But even a partial shift in meat-consumption habits – with consumers choosing options like chicken and seafood, instead of beef – could have a far-reaching impact. 
Indeed, beef production requires, on average, 28 times more land and 11 times more water than the other livestock categories, while producing five times more greenhouse-gas emissions and six times more reactive nitrogen. 
Adopting a balanced, largely plant-based diet, with minimal consumption of red and processed meat, would help conserve natural resources, contribute to the fight against human-induced global warming, and reduce people’s risk of diet-related chronic diseases and even cancer mortality. 
Just as governments have used laws, regulations, and other tools with great success to discourage smoking, so must they encourage citizens to eat a balanced diet – for the sake of their health and that of our planet. 

Climate Hysteria 
You would have had to be stuck in deepest Mongolia to avoid hearing that the United Nations’ climate panel, the IPCC, issued a new report last week. 
Perhaps even in the depths of Mongolia, you would have heard the dire warnings emitted by journalists. 
You would have distilled from these agonized noises that the report concluded that global warming is worse than we had imagined, and that we need to take swift and strong action right now. 
You would have been misinformed. 
The IPCC has produced a good report – an attempt to summarize what the world’s scientists know about global warming. 
Unlike the Bush administration, caught downplaying the science, the IPCC squarely tells us that mankind is largely responsible for the planet’s recent warming. 
And, unlike Al Gore, who has travelled the world warning that our cities might soon be under the oceans, it refrains from scaremongering. 
But lost among the hype is the unexciting fact that this report is actually no more dire than the IPCC’s last report, issued in 2001. In two important ways, this year’s effort was actually less dire. 
The report reflected the fact that since 2001, scientists have become more certain that humans are responsible for a large part of global warming. 
Otherwise, though, this report had a definite sense of déjà vu . 
Estimates of temperature increases, heat waves, and cold waves are all nearly identical to those produced six years ago. 
The report did, however, contain two surprising facts. Both went unmentioned in most reports. 
First, the world’s scientists have re-jigged their estimates about how much sea levels will rise. 
In the 1980’s, America’s Environmental Protection Agency expected oceans to rise by several metres by 2100. 
By the 1990’s, the IPCC was expecting a 67-centimeter rise. 
Six years ago, it anticipated ocean levels would be 48.5 centimeters higher than they are currently. 
In this year’s report, the estimated rise is 38.5 centimeters on average. 
This is especially interesting since it fundamentally rejects one of the most harrowing scenes from Al Gore’s movie An Inconvenient Truth . 
In graphic detail, Gore demonstrated how a 20-foot rise in the sea level would inundate much of Florida, Shanghai, and Holland. 
The IPCC report makes it clear that exaggerations of this magnitude have no basis in science – though clearly they frightened people and perhaps will win Gore an Academy Award. 
The report also revealed the improbability of another Gore scenario: that global warming could make the Gulf Stream shut down, turning Europe into a new Siberia. 
The IPCC simply and tersely tells us that this scenario – also vividly depicted in the Hollywood movie The Day After Tomorrow – is considered “very unlikely.” 
Moreover, even if the Gulf Stream were to weaken over the century, this would be good , as there would be less net warming over land areas. 
So why have we been left with a very different impression of the climate panel’s report? 
The IPCC is by statute “politically neutral” – it is supposed to tell us just the facts and leave the rest to politicians and the people who elect them. 
This is why the report is a careful and sensible document. 
But scientists and journalists – acting as intermediaries between the report and the public – have engaged in greenhouse activism. 
Elsewhere calling for immediate and substantial cuts in carbon emissions, the IPCC’s director even declared that he hoped the IPCC report would “shock people, governments into taking more serious action.” 
It is inappropriate for somebody in such an important and apolitical role to engage in blatant activism. 
Imagine if the director of the CIA published a new assessment of Iran, saying “I hope this report will shock people, governments into taking more serious action.” 
Climate change is a real and serious problem. 
But the problem with the recent media frenzy is that some seem to believe no new report or development is enough if it doesn’t reveal more serious consequences and more terrifying calamities than humanity has ever considered before. 
Indeed, this media frenzy has little or no scientific backing. 
One of England’s foremost climatologists, Mike Hulme, director of the Tyndall Centre for Climate Change Research, points out that green militancy and megaphone journalism use “catastrophe and chaos as unguided weapons with which forlornly to threaten society into behavioral change.” 
In his words, “we need to take a deep breath and pause.” 
A 38.5 cm rise in the ocean’s levels is a problem, but by no means will it bring down civilization. 
Last century sea levels rose by half that amount without most of us even noticing. 
The UN tells us that there is virtually nothing we can do that would affect climate change before 2030. So we have to ask the hard question of whether we could do better by focusing on other issues first – helping real people improve their lives and resilience so they can better deal with the world’s challenges. 
When Nobel Laureate economists weighed up how to achieve the most good for the world in a recent project called the Copenhagen Consensus, they found that focusing on HIV/AIDS, malaria, malnutrition, and trade barriers should all be tackled long before we commit to any dramatic action on climate change. 
With the world in a fury about cutting greenhouse gasses, it is easy to forget that there are other and better ways to do some good for the planet. 
Good decisions come from careful consideration. 
The IPCC report provides that. 
But the cacophony of screaming that has accompanied it does not help. 

Climate Justice 
DURBAN – Before the Copenhagen climate-change summit two years ago, the two of us sat together in Cape Town to listen to five African farmers from different countries, four of whom were women, tell us how climate change was undermining their livelihoods. 
Each explained how floods and drought, and the lack of regular seasons to sow and reap, were outside their normal experience. 
Their fears are shared by subsistence farmers and indigenous people worldwide – the people bearing the brunt of climate shocks, though they played no part in causing them. 
Now, two years later, we are in Durban, where South Africa is hosting this year’s climate-change conference, COP17, and the situation for poor people in Africa and elsewhere has deteriorated even further. 
In its latest report, the United Nations Intergovernmental Panel on Climate Change concludes that it is virtually certain that, in global terms, hot days have become hotter and occur more often; indeed, they have increased in frequency by a factor of 10 in most regions of the world. 
Moreover, the brutal paradox of climate change is that heavy precipitation is occurring more often as well, increasing the risk of flooding. 
Since 2003, East Africa has had the eight warmest years on record, which is no doubt contributing to the severe famine that now afflicts 13 million people in the Horn of Africa. 
These are the consequences that a mere one degree of warming above pre-industrial levels has wrought. 
The UN Environment Program’s just published report Bridging the Emissions Gap shows that over the course of this century, warming will likely rise to four degrees unless we take stronger action to cut emissions. 
Yet the latest evidence demonstrates that we are not acting – the International Energy Agency’s World Energy Report 2011 reveals that CO2 emissions have rebounded to a record high. 
We are alarmed that expectations for COP17 are so low. 
Where is the global leadership that must respond urgently? 
We desperately need a global deal. 
At the heart of this deal is the preservation of the Kyoto Protocol. 
The Protocol is not a perfect instrument. 
It does too little to cut global emissions, and it requires too few countries to cut their emissions growth. 
But it is part of international law, and that is vital. 
Climate change is a global problem: if countries are not confident that others are addressing it, they will not feel an imperative to act themselves. 
So, having a legal framework with clear and common rules to which all countries are committed is critically important – and the only assurance we have that action will be taken to protect the most vulnerable. 
The first commitment period of the Kyoto Protocol expires at the end of 2012. 
So the European Union and the other Kyoto parties (the United States never ratified the agreement, and the Protocol’s terms asked little of China, India, and other emerging powers) must commit to a second commitment period, in order to ensure that this legal framework is maintained. 
At the same time, all countries must acknowledge that extending the lifespan of the Kyoto Protocol will not solve the problem of climate change, and that a new or additional legal framework that covers all countries is needed. 
The Durban meeting must agree to initiate negotiations towards this end – with a view to concluding a new legal instrument by 2015 at the latest. 
All of this is not only possible, but also necessary, because the transition to a low-carbon, climate-resilient economy makes economic, social, and environmental sense. 
The problem is that making it happen requires political will, which, unfortunately, seems in short supply. 
Climate change is a matter of justice. 
The richest countries caused the problem, but it is the world’s poorest who are already suffering from its effects. 
In Durban, the international community must commit to righting that wrong. 
Political leaders must think inter-generationally. 
They need to imagine the world of 2050, with its nine billion people, and take the right decisions now to ensure that our children and grandchildren inherit a liveable world. 

Nature’s Answer to Climate Risk 
LONDON – Nearly half the world’s population – some 3.5 billion people – lives near coasts. 
As climate change exacerbates the effects of storms, flooding, and erosion, the lives and livelihoods of hundreds of millions of those people will be at risk. 
In fact, the latest edition of the World Economic Forum’s World Risk Assessment Report names failure to adapt to the effects of climate change as the single greatest risk, in terms of impact, to societies and economies around the world. 
Beyond endangering lives, more frequent and stronger storms could cost many billions of dollars, owing to infrastructure damage and lost revenues from farming, fisheries, and tourism. 
And, as the Harvard Business Review recently noted, the projected cost rises with each new study. 
Yet the international community currently spends on risk mitigation less than one-fifth of what it spends on natural-disaster response. 
When it comes to climate risk, an ounce of prevention is worth a pound of cure. 
As Rebecca Scheurer, Director of the Red Cross Global Disaster Preparedness Center, put it, “We spend millions of dollars on the response side, and were we to invest more of those resources on the front end we’d save more people. 
It’s as simple as that.” 
With the human and the financial costs of climate change attracting more attention than ever, now is the time to shift resources toward risk reduction. 
Doing so will require national governments, industry, aid organizations, and other NGOs to make the most of their investments. 
And some of the most effective and cost-effective solutions are already available in nature. 
Coastal and marine ecosystems have considerable potential to mitigate the effects of storms and other risks, especially when combined with traditional built infrastructure. 
A 100-meter belt of mangroves, for example, can reduce wave height by up to 66% and lower peak water levels during floods. 
A healthy coral reef can reduce wave force by 97%, lessening the impact of storms and preventing erosion. 
These and other coastal ecosystems are the first line of defense for many cities around the world, from Miami to Manila. 
Until recently, such nature-based solutions were too often overlooked. 
But leaders increasingly recognize their importance, and are beginning to take action, including on the international level. 
The Paris climate agreement, reached last December and signed last month, not only established a consensus on the importance of addressing climate change, but also explicitly affirmed that ecosystems play a role in capturing greenhouse gases and helping communities adapt to the effects of climate change. 
At the national level, some of the most at-risk island countries are taking important steps. 
For example, last year, the Seychelles announced a first-of-its-kind “debt for nature” swap with its Paris Club creditors and The Nature Conservancy. 
The swap will allow the country to redirect $21.6 million of its debt toward investment in a comprehensive approach to ocean conservation that will bolster its resilience to climate change. 
Private-sector leaders, too, are starting to look toward natural tools. 
Engineering firms like CH2M are working with coastal communities in the Gulf of Mexico and beyond to find hybrid solutions that combine traditional and nature-based approaches. 
Even the insurance industry – comprising what may be the most risk-averse companies in the world – sees the potential in natural solutions. 
Over the last decade, insurers have paid out some $300 billion for climate-related damage, often to rebuild the same vulnerable structures. 
It is not surprising, then, that the reinsurer Swiss Re has conducted studies on mitigating the costly risks of hurricanes to coastal communities. 
According to one Swiss Re study, Barbados loses the equivalent of 4% of its GDP every year to hurricane-related costs. 
But every dollar spent to protect mangroves and coral reefs saved $20 in future hurricane losses. 
Given such findings, it is no longer inconceivable that insurance companies might one day write coverage for wetlands and other natural infrastructure that offers protection for coastal communities and economies. 
Nature can also help to protect livelihoods. 
A Red Cross-led mangrove restoration project in Vietnam not only reduced damage to dykes and other built infrastructure, but also resulted in higher aquaculture yields and thus more income for the local communities. 
A mangrove and coral restoration project in Grenada – a joint effort of the Red Cross, the Nature Conservancy, and the fishers of Grenada’s Grenville community – has also shown great potential to increase resilience. 
Just 30 meters of reef and coral have been shown to increase substantially the population of lobster, conch, octopus, and urchins. 
Climate and disaster resilience is a challenge that spans across sectors. 
So too must our solutions. 
Such collaborative efforts are vital to the development and implementation of more effective preventive strategies. 
The World Bank, the Nature Conservancy, and partner researchers (including ecologists, economists, and engineers) have recently published a report offering guidelines for such cooperation. 
Specifically, the report recommends calculating the value of coastal ecosystems in terms of protected capital and infrastructure, based on approaches commonly used by the insurance and engineering industries. 
In the face of rising climate and disaster risk, investments in nature-based solutions can protect lives and safeguard prosperity in a cost-effective manner – all while preserving imperiled natural ecosystems around the world. 
It is time for governments, business, and NGOs alike to recognize that when it comes to fighting the effects of climate change and protecting coastal communities, preserving and restoring nature may be the smartest investment we can make. 

Climate Science or Climate Evangelism? 
COPENHAGEN – As George W. Bush and Tony Blair learned the hard way, the public does not take kindly to being misled about the nature of potential threats. 
The after-the-fact revelation that the reasons for invading Iraq were vastly exaggerated – and in some cases completely fabricated – produced an angry backlash that helped toss the Republicans out of power in the United States in 2008 and may do the same to Britain’s Labour Party later this year. 
A similar shift in global public opinion is occurring with respect to climate change. 
The process picked up momentum late last year, after hackers leaked thousands of e-mails from a top British research facility showing that some of the world’s most influential climatologists had been trying to disguise flaws in their work, blocking scrutiny, and plotting together to enforce what amounts to a party line on climate change. 
More recently, the United Nations’ respected advisory group, the Intergovernmental Panel on Climate Change (IPCC), has been deeply embarrassed by the revelation that some alarming predictions contained in an influential report that it released in 2007 have little or no scientific basis. 
Although none of these lapses provides any reason to doubt that global warming is real, is man-made, and will create problems for us, these challenges to the IPCC are taking their toll. 
Indeed, recent surveys show that the public is growing steadily less trusting of the scientific consensus on global warming. 
The biggest headlines about IPCC errors concern a claim about melting Himalayan glaciers that it made in its 2007 report on the likely impacts of climate change. 
“Glaciers in the Himalaya are receding faster than in any other part of the world,” the report noted, adding that “if the present rate continues, the likelihood of them disappearing by the year 2035 and perhaps sooner is very high.” 
As it happens, this prediction was not based on any peer-reviewed scientific research but was lifted from a report by the World Wildlife Fund, which was repeating an unproven speculation by a single researcher. 
This lack of scientific basis did not stop countless global-warming activists from citing the glacier prediction at every opportunity. 
When the Indian government suggested last year that the Himalayan glaciers were in better shape than the IPCC claimed, the IPCC’s chairman, Rajendra Pachauri, dismissed India’s objections as being based on “voodoo science.” 
Earlier this month, the Indian government reacted to the revelations about the baseless nature of the glacier claim by announcing plans to establish what amounts to its own “Indian IPCC” to assess the impact of global warming. 
India’s environment minister, Jairam Ramesh, declared: “There is a fine line between climate science and climate evangelism. 
I am for climate science.” 
Climate evangelism is an apt description of what the IPCC has been up to, for it has exaggerated some of the ramifications of climate change in order to make politicians take note. 
Murari Lal, the coordinating lead author of the section of the IPCC report that contained the Himalayan error, admitted that he and his colleagues knew that the dramatic glacier prediction was not based on any peer-reviewed science. 
Nonetheless, he explained, “we thought that if we can highlight it, it will impact policy-makers and politicians and encourage them to take some concrete action.” 
The concrete action that they had in mind was getting governments to mandate drastic cuts in carbon-dioxide emissions. 
Activists have been pursuing this approach to tackling global warming without success for nearly 20 years, most recently at last December’s failed climate summit in Copenhagen. 
The problem is that it is too expensive a solution for politicians and the public to swallow easily –which is why many well-meaning climate scientists have apparently concluded that instead of relying on reasoned discussion, they might as well try to scare us witless. 
Consider what the IPCC had to say about extreme weather events such as intense hurricanes. 
The cost of such events in terms of destroyed property and economic disruption has been rising steadily. 
Every peer-reviewed study has shown that this is not because of rising temperatures, but because more people live in harm’s way. 
Nonetheless, in the IPCC’s influential 2007 assessment of climate change, the panel’s Working Group II (charged with assessing the potential impact of global warming) chose to cite one, then-unpublished study that supposedly found that global warming had doubled damage costs over the past 35 years. 
In fact, when this study was finally published, it stated categorically that there was “insufficient evidence” to link the increased losses to global warming. 
In other words, what Working Group II reported was plain wrong. 
Elsewhere in the 2007 assessment, Working Group II claimed that “up to 40% of the Amazonian forests” were at imminent risk of being destroyed by global warming. 
The basis for this claim was a single report from the World Wildlife Fund that itself cited only one study, which didn’t even look at climate change, but rather at the impact of human activities like logging and burning. 
In similar fashion, Working Group II claimed that “by 2020, in some [African] countries, yields from rain-fed agriculture could be reduced by up to 50%.” 
Much quoted since, this alarming statistic turns out to have been based on a single, unreferenced bullet-point from a report by an environmental think tank. 
There are numerous other examples of similar shenanigans by Working Group II. 
Yet, aside from a grudging admission that its predictions about Himalayan glaciers were “poorly substantiated,” the IPCC has yet to acknowledge – much less apologize for – any of the lapses. 
If the IPCC is to do to its job properly, it must own up to all of its missteps and clean house. 
Nobody expects it to be infallible. 
But neither should we tolerate its attempts to scare policy-makers rather than inform them. 

When Climate Leaders Protect Dirty Investments 
GENEVA – Solutions to the climate crisis are often associated with big conferences, and the next two weeks will no doubt bring many “answers.” 
Some 20,000 delegates have now descended on Bonn, Germany, for the latest round of United Nations climate change talks. 
The talks in Bonn should focus on the implementation of the Paris climate agreement. 
And the path forward is clear. 
The only way to keep the rise in global temperatures within the limit set in Paris – “well below 2°C” higher than pre-industrial levels – is to shift capital away from fossil fuels and toward zero-carbon projects. 
To do that, we must change how global energy investments are governed. 
At the moment, the very governments leading the fight against climate change continue to support and protect investment in fossil-fuel exploration, extraction, and transportation. 
Rather than investing in efficient housing, zero-carbon mobility, renewable energy, and better land-use systems, these governments say one thing but still do another. 
According to the most recent World Energy Investment report from the International Energy Agency, global expenditure in the oil and gas sector totaled $649 billion in 2016. 
That was more than double the $297 billion invested in renewable electricity generation, even though achieving the Paris agreement’s target implies leaving at least three quarters of known fossil-fuel reserves in the ground. 
As these numbers suggest, institutional inertia and entrenched industry interests continue to stand in the way of shifting investment into sustainable energy. 
Much of the problem can be traced to bilateral investment treaties and investment rules embedded within broader trade pacts, such as the North American Free Trade Agreement (NAFTA), the Energy Charter Treaty, and the EU-Canada Comprehensive Economic and Trade Agreement (CETA). 
Because these treaties were designed to shield foreign investors from expropriation, they include investor-state dispute settlement (ISDS) mechanisms that allow investors to seek compensation from governments, via international arbitration tribunals, if policy changes affect their business. 
This has handcuffed governments seeking to limit fossil-fuel extraction. 
Compensation from ISDS cases can be staggering. 
In 2012, an American investor filed a lawsuit against the Quebec government’s decision to deny a permit for hydraulic fracturing under the Saint Lawrence River. 
Arguing that the denial was “arbitrary, capricious, and illegal” under NAFTA, the Delaware-based energy firm sought $250 million in damages. 
In January 2016, the TransCanada energy company used NAFTA to sue the United States, claiming $15 billion in losses after President Barack Obama denied a permit for the Keystone XL oil pipeline. 
(The company suspended its suit after President Donald Trump approved the project in January 2017). 
And in July 2017, Quebec agreed to pay nearly $50 million in compensation to companies after canceling oil and gas exploration contracts on Anticosti Island in the Gulf of Saint Lawrence. 
These and other payments are in addition to the hundreds of billions of dollars in subsidies that continue to flow to the fossil-fuel industry. 
Big payouts do more than drain public coffers; the mere threat of them discourages governments from pursuing more ambitious climate policies, owing to fear that carbon-dependent industries could challenge them in international tribunals. 
Fortunately, this state of affairs is not set in stone. 
Many governments now see reform of the investment regime not just as a possibility, but as a necessity. 
Last month, the UN Conference on Trade and Development convened a high-level meeting in Geneva, with the goal of developing options for comprehensive reform of the investment regime, including the renegotiation or termination of some 3,000 outdated treaties. 
Governments should start by overhauling or exiting the Energy Charter Treaty, the world’s only energy-specific investment pact. 
The ECT’s investment protections and lack of climate provisions are no longer appropriate. 
Since its inception, the ECT has served as the basis for more than 100 claims by energy firms against host countries, with some challenging national environmental policies, such as the nuclear phase-out in Germany. 
Russia and Italy have already withdrawn from the ECT; other countries should do the same or commit to renegotiating it. 
Moreover, countries should put climate concerns at the center of their trade and investment negotiations, such as by carving out fossil-fuel projects from investment clauses. 
That is essentially what France recently proposed, when ecology minister Nicolas Hulot announced his country’s intention to enact a “climate veto” to CETA. 
Hulot said France would ratify the treaty only if it contained assurances that its climate commitments could not be challenged before arbitration tribunals. 
Fossil-fuel projects could also be exempted from investment protection in new environmental treaties, such as the Global Pact for the Environment presented by French President Emmanuel Macron to the UN General Assembly in September. 
Rebalancing the global investment regime is only the first step toward a zero-carbon economy. 
To shift capital from fossil-fuel heavy initiatives to green energy projects, countries will need new legal and policy frameworks at the regional, national, and international levels. 
These agreements should promote and facilitate zero-carbon investments. 
Big meetings like the one getting underway this week and the Paris Climate Summit next month can kick-start these conversations. 
(The authors wish to thank Ivetta Gerasimchuk and Martin Dietrich Brauch of the IISD for their help with this commentary.) 

America’s Race to the Ballot’s Bottom 
WASHINGTON, DC – Hillary Clinton’s US presidential campaign has been torn between trying to secure the largest possible victory for the candidate herself and explicitly helping fellow Democratic gubernatorial and legislative candidates further down the ballot. 
It’s an open question whether Clinton could do more for down-ballot candidates by winning decisively – so that the enthusiasm trickles down – or by expending time and money to help those candidates individually. 
The Clinton camp has decided to pursue both strategies. 
With just a week left before the election, the presidential candidates are crisscrossing the country: whereas Republican nominee Donald Trump is struggling to cobble together the 270 Electoral College votes needed to win, Clinton is trying to lock up as large a victory – in both the popular vote and the Electoral College – as possible. 
Just a week ago, Clinton seemed to be heading toward an overwhelming victory. 
But on October 28, FBI Director James Comey sent a letter to Congress announcing that he was reopening the investigation into Clinton’s use of a private email server when she was Secretary of State. 
The reason? 
Thousands of emails had been discovered on the laptop of the estranged husband of Clinton’s closest assistant, Huma Abedin, during a separate inquiry into his own activities. 
(No, this isn’t a movie plot.) 
Comey’s announcement triggered an uproar, but it hasn’t so far had a notable impact on the race. 
The Clinton campaign has not given up even on winning states that have long been considered Republican strongholds, such as Arizona, Georgia, and Utah. 
And Trump, despite feeling invigorated by the discovery, has continued to pursue states, such as New Mexico, that would do him little good in the Electoral College count. 
But Trump, new to politics, fancies himself a great political strategist. 
Trump has few political allies to help him out, while Clinton’s many surrogates include her husband, former President Bill Clinton; President Barack Obama and First Lady Michelle Obama, the breakout star of this election; and Vice President Joe Biden and Clinton’s vice-presidential running mate, Tim Kaine. 
Two stars of the left, Elizabeth Warren and Bernie Sanders, have also campaigned for Clinton; if she wins, they will call in the debt both in policy terms and on appointees. 
Meanwhile, Clinton has appeared with Democratic Senate candidates who are challenging incumbent Republicans, including Katie McGinty, who is running to oust Senator Pat Toomey in Pennsylvania; Governor Maggie Hassan, who hopes to topple Senator Kelly Ayotte in New Hampshire; and Deborah Ross, who is mounting a strong challenge to Senator Richard Burr in North Carolina. 
The Clinton campaign has poured money into several Senate, House of Representatives, gubernatorial, and even state-legislature races, and Clinton field workers and volunteers have been encouraged to help down-ballot candidates in contentious races. 
Obama, for his part, recently recorded a series of video endorsements for Democrats running for the Senate, the House, and state legislatures. 
Numerous pundits say that the FBI announcement will help Republicans down-ballot, but that’s pure speculation. 
If Clinton wins the White House and many Republican incumbents are swept out of office, the US will have had a “wave” election. 
But we likely won’t know if this is happening until the last minute. 
In the 1980 wave election, when Ronald Reagan and the Republican ticket overwhelmed President Jimmy Carter and toppled several liberal Democrats in the Senate, the presidential race was nearly tied until the final weekend. 
Even if the Democrats retake the Senate in a wave, the honeymoon won’t last long. 
In two years, another third of the Senate will be up for reelection, and far more Democrats than Republicans will have to defend their seats – a reversal of the situation this year. 
Of course, the Clinton campaign isn’t just being charitable by helping down-ballot candidates. 
Her administration will be far better off with more Democrats in Congress. 
The Democrats are still widely expected to retake the Senate, though not the House, where they would need to flip an unlikely 30 Republican seats. 
(Most House seats are gerrymandered, with district boundaries manipulated to benefit the incumbent party.) 
But even if the Democrats do regain a majority in the 100-member Senate, Republicans will still be able to hold the threat of a filibuster – which requires 60 votes to break – over Clinton’s legislative proposals and nominations to the executive branch and Supreme Court. 
There’s another important reason for the Clinton campaign and its high-profile surrogates to help down-ballot Democrats. 
Both parties want to strengthen their hold on as many state-level offices as possible, because the party that controls a state’s governorship and at least one of its legislative chamber gets to oversee how congressional districts are drawn (which happens every ten years). 
How districts are drawn affects the partisan makeup of the House, and therefore the fate of federal legislation. 
(Only the Senate votes on presidential nominations.) 
The states are also where the parties can build their bench of potential future federal officeholders. 
The Republicans figured out the importance of state-level politics long before the Democrats, and they have built a much stronger foundation in the states than the Democrats have. 
For example, even though Obama carried Ohio in the last two elections, its current congressional delegation is 75% Republican. 
The US election is now a volatile affair. 
No one knows what might pop up next to shake up the race, but it is sensible to assume that something will. 
At the very least, the WikiLeaks disclosures will presumably continue, though, despite being somewhat embarrassing to the Clintons, they haven’t revealed corruption by the Clinton Foundation or improprieties in how Hillary Clinton conducted policy as Secretary of State. 
By the time Comey sent his letter, several million Americans had already cast their ballots. 
We cannot know how the various disclosures will affect turnout between now and Election Day. 
What we do know is that, ultimately, nothing that has or might happen makes Trump better suited for the presidency than Clinton. 

The Chimera of Stock-Market Short-Termism 
CAMBRIDGE – An often-heard refrain, increasingly voiced in US politics, is that corporate America is excessively influenced by short-term stock-market considerations. 
While the US presidential election is not particularly focused on policy at the moment, the campaign will soon end, at which point people will govern and policies will be adopted. 
Given that both Republicans and Democrats have criticized short-termism, it is possible that some of those policies might aim to address it. 
They are unlikely to make any difference. 
Not only has the problem of short-termism been woefully exaggerated, but the policy proposals for addressing it are severely lacking. 
Consider Democratic presidential nominee Hillary Clinton’s proposal – which Vice President Joe Biden has endorsed – to use the capital gains tax to encourage shareowners to hold on to their stock for a longer time. 
The idea is that when shareowners furiously trade their stock, corporate executives feel pressed to ensure high earnings every quarter, so that the share price does not fall. 
Investment in, say, research and development, despite its long-term benefits, can induce shareowners to sell, punishing the company with a declining stock price. 
Today, the lower capital gains rate is available on shareholder profits made when selling stock held for one year or more. 
Clinton and her advisors hope, instead, to tax capital gains at ordinary rates for stock held for up to two years, after which the rate would decline by four percentage points per year until, after several years, it reached the current long-term rate, which tops out for wealthy investors at 20%. 
If stockholders know that holding a company’s stock will eventually allow them to benefit from a lower tax rate, the argument goes, they will be more willing to withstand a drop in that company’s quarterly earnings. 
With greater scope for longer-term thinking, executives would make decisions that have a long-term payoff, even if they are costly today. 
The plan certainly sounds reasonable. 
The problem is that a falling tax rate for capital gains will not stop most stockholders from trading; at most, it will impel some of them trade less often. 
Executives will still have to worry about the price that traders accord to their stock. 
Of course, curtailing the velocity of trading may have other effects, both good and bad. 
If too many resources and too much brainpower are now devoted to finding slight underpricing or overpricing of stock, Clinton’s program might be a good thing, as it would help to reallocate those resources. 
If, however, less trading makes markets more volatile and unpredictable, taxing short-termism could turn out to be a cure worse than the disease. 
In any case, Clinton’s program will not achieve its stated goal of inducing those doing the trading, and thus setting stock prices, to take a longer-term perspective. 
Nor will it make corporate executives less concerned about the next quarter’s results. 
Prices will, after all, still be going up and down. 
There is another reason the proposal will not be effective: many of the largest shareowners are institutions that don’t pay tax anyway, such as pension funds and foundations. 
And many other stockholders buy and sell within a year, even though it means paying the full tax rate. 
Their decision-making time horizon will not be affected by a long phase-in of the more advantageous tax rate. 
But the fact that Clinton’s plan will not achieve its goal is not exactly the end of the world. 
Contrary to widespead belief, stock-market-induced short-termism is probably not much of an economic handicap anyway. 
There is considerable (though not conclusive) evidence that it is not nearly as widespread – or as problematic – as many think. 
Consider this: four of the ten biggest companies in the United States today, measured by stock-market capitalization, are Amazon, Apple, Alphabet (Google), and Microsoft. 
None of them can be accused of failing to invest in R&D or other long-term, sometimes even visionary, projects. 
And the stock market supports all of them well. 
If they can do it, others can – and surely do. 
Simply put, ending short-termism has turned into a bigger political issue than it deserves to be. 
It is a cause that resonates widely not because short-termism is hampering the economy, but because saying that it is justifies protecting those with a stake in the status quo – well-paid employees; CEOs and senior managers; and board directors – from rapid change. 
The bottom line is that there are bigger, more pressing problems to address. 
And, even if short-termism were a major problem, Clinton’s tax proposal would not resolve it. 
The good news here is that the plan is not particularly high on Clinton’s agenda, leaving a chance that she might not feel compelled to implement it when elected. 

Clintonomics vs. Trumponomics 
STANFORD – Little more than two months from America’s presidential election, Hillary Clinton leads Donald Trump by five points in opinion polls, nationally and in several important swing states. 
But nothing is decided yet, especially given the Trump campaign’s staffing shakeup and major policy speeches, not to mention the email scandals that continue to plague the Clinton campaign, including recently released email correspondence between top staff from the Clinton Foundation and officials from the State Department under Clinton. 
So far, the media and public have focused on immigration, terrorism, foreign policy, and each candidate’s potentially problematic personality traits, but far less has been said about economic policy. 
This is a serious oversight, because there are substantial differences between the candidates’ economic-policy platforms. 
First, consider government spending. 
Clinton favors welfare-state expenditures such as expanded Social Security benefits (the unfunded liabilities of which already exceed the national debt), free tuition at public colleges and student-loan debt relief, as well as an added “public option” to the 2010 Affordable Care Act, known as Obamacare. 
She also says she will double down on President Barack Obama’s costly green-energy industrial policy, which favors some energy sources, and even specific companies, at the expense of others. 
By contrast, Trump says he will leave Social Security as is, repeal and replace Obamacare, and make government spending more efficient and effective (though here he has not been specific). 
On taxation, Clinton says she will make the US tax system more progressive, even though it is already the most progressive system among the advanced economies. 
Specifically, Clinton calls for increases to the estate tax and the personal tax rate for the highest earners – which also affects small businesses – and caps on itemized deductions. 
She shows little inclination to lower corporate taxes. 
Trump is proposing lower tax rates for individuals and US companies. 
The US currently has a federal corporate tax rate of 35%, the highest in the OECD. 
Trump is calling for it to be lowered to a below-average 15%, with first-year business investments to be deductible in full. 
On trade, Clinton has flip-flopped to oppose the Trans-Pacific Partnership, a multinational trade deal negotiated by the Obama administration and 11 other Pacific Rim countries. 
Unlike her husband, who supported and signed free-trade agreements during his presidency, Clinton is inching closer to the protectionist wing of the Democratic Party. 
Clinton’s trade position has little to recommend it, but Trump’s is even worse. 
Among other things, Trump has threatened a trade war with China and Mexico, and says he would renegotiate America’s existing trade agreements. 
Clinton and Trump are understandably giving voice to lower- and middle-class workers who have been left behind by globalization. 
But the best policy response is not to embrace protectionism (which would leave many more people worse off), but to assist displaced workers better. 
Lastly, Clinton and Trump differ on deficit spending and the national debt. 
Clinton’s Social Security expansion and other spending, and her plans to entrench the Obamacare health-care system further, without reining in future entitlement costs – which are projected to soar – suggest that large deficits would only continue during her presidency. 
That’s a far cry from her husband’s record: Bill Clinton worked with a Republican-controlled Congress to balance the budget in the final years of his presidency. 
Trump recently reduced the budget cost of his proposed tax reductions to bring them more in line with Republican legislators’ own targets. 
If properly scored to account for increased tax revenue from economic growth, he would still need to pair his tax cuts with controls on spending, and especially on entitlements. 
Otherwise, a Trump presidency could also have serious debt problems. 
One proposal the candidates agree on is massive infrastructure spending. 
Unfortunately, while a portion of this is appropriate for the federal government, neither candidate has ensured that money wouldn’t be misspent through politicization or cronyism. 
The United States does not need a repeat of the Obama administration’s “shovel-ready” stimulus-spending boondoggle. 
All told, Clinton would prioritize redistribution above economic growth, while Trump is more growth-oriented. 
American growth is a global concern because it fuels growth elsewhere through US consumer demand and trade. 
But the two primary sources of growth, productivity gains and labor inputs (such as total man-hours worked), have both fallen off sharply in recent years. 
The US economy grew at an average annual rate of 3% during the decades after World War II, but it has not had even three consecutive quarters of 3% growth during the past decade. 
There are different explanations for slowing productivity growth. 
Northwestern University economist Robert Gordon singles out technological innovation for contributing less to economic growth than did previous breakthroughs such as electricity, locomotion, aviation, and computing. 
Harvard University economist Lawrence Summers points to “secular stagnation,” a term coined by the economist Alvin Hansen in the 1930s to describe long-term tepid demand and insufficient opportunity for profitable investment. 
My own opinion is that poor economic policy has discouraged business investment, entrepreneurship, and work. 
Polling shows that undecided voters deeply distrust both candidates. 
To get elected and actually have the mandate to enact her agenda, Clinton will need to be more transparent and honest about past mistakes. 
And on economic policy, she should move to the center, toward growth-focused measures, and away from leftist positions she adopted during her primary campaign against Vermont Senator Bernie Sanders. 
Trump, for his part, will need to show some humility and inclusiveness, and be open to advice from others on issues where he lacks experience. 
While the Republicans are in a tight battle with the Democrats to retain control over the Senate, they are likely to maintain a majority in the House of Representatives. 
As a result, on many policy issues, all eyes will be on House Speaker Paul Ryan, who would likely operate either as a counterbalance – and occasional partner – to Clinton, or as a guide and more regular partner for Trump. 

Clipping the Euro’s Wings 
French President Nicolas Sarkozy’s call for the European Central Bank to intervene to curtail the soaring euro is commonly seen as a sign that he neither understands nor trusts markets. 
Indeed, some now view Sarkozy as a traditional Gaullist who wants to help French producers by artificially devaluing the euro. 
But could Sarkozy be right in believing that currency markets do not automatically drive exchange rates to levels consistent with the fundamentals of international trade? 
After all, comparable goods often sell internationally at very different prices. 
For example, according to The Economist , a Big Mac hamburger sells in the euro zone for about three euros – roughly $4 at the current exchange rate – but for only about $3.20 in the United States, implying that the euro is overvalued by about 25%. 
It is clear from the last three decades of floating currencies that market-determined exchange rates tend to swing widely and persistently from parity levels that would make comparable goods sell at comparable prices in different countries. 
So politicians like Sarkozy may have grounds to argue that central banks should intervene to limit such swings. 
But economists, including many central bank staff, usually do not see things this way. 
Despite wide and persistent swings in actual currency markets, their so-called “rational expectations models” predict that exchange rates should not deviate from parity in any lasting way. 
Believing that they have found a way to model precisely how currency traders should think about the future, they see no need for intervention because, save for temporary deviations, markets always get currency values right. 
In contrast, “behavioral economists” acknowledge that currencies can depart from parity for a protracted period, but argue that this results not from traders’ attempts to interpret movements in macroeconomic fundamentals, but from market psychology and irrational trading. 
For them, intervention is not so much unnecessary as it is impossible. 
Faced with wide swings, central banks are helpless to counteract traders’ irrational zeal to bid a currency further away from historical benchmark levels. 
After all, speculative flows account for more than 95% of the $2 trillion traded daily in currency markets. 
But both the “rational expectations” and the “behavioral” models are fundamentally flawed for the purpose of assessing policy interventions. 
As different as they might appear, they attempt to generate exact predictions of human behavior, whether “rational” or “irrational.” 
Both disregard the fact that rationality depends as much on individuals’ imperfect understandings of history and society as on their motivation. 
They also ignore the importance for market outcomes of individual creativity and unforeseeable socio-political change. 
Once this “imperfect knowledge” is placed at the heart of economic analysis, the implications of our inherently limited ability to predict market outcomes become clear. 
When it comes to currency markets, parity levels based on international trade are merely one of many factors that traders may consider. 
In attempting to cope with imperfect knowledge, they are not irrational when they pay attention to other macroeconomic fundamentals and thereby bid an exchange rate away from its parity level. 
The euro’s recent rise against the dollar is a case in point: by most accounts, euro bulls have been reacting to the enormous US current account deficit, a surging euro-zone economy, and rising euro interest rates. 
What is irrational about factoring in such fundamentals when trading a currency? 
Of course, persistent swings from parity do not last forever. 
While movements in macroeconomic fundamentals may lead bulls to bid the value of a currency further above parity, they simultaneously become more concerned about a counter-movement back to parity – and thus capital losses – which moderates their desire to increase their long positions. 
This concept of risk builds on a neglected insight of John Maynard Keynes, who was keenly aware of the centrality of imperfect knowledge for understanding price fluctuations in asset markets. 
Moreover, relating the riskiness of holding an open position in a currency market to the exchange rate’s divergence from parity levels suggests a novel way to think about how central banks can influence the market to limit departures from parity. 
Every month, the central bank should announce its estimate of a range of parity values, backed by analysis, which, unlike a precise value, reflects the inherent imperfection of knowledge concerning a currency’s parity. 
As the exchange rate moves away from this range, the central bank’s regular announcements would heighten the concern of currency traders that other traders will consider it increasingly risky to hold open positions. 
This should moderate their willingness to do so, thereby limiting the magnitude of the currency swing. 
This strategy does not imply that central banks should attempt to confine the exchange rate to a pre-specified target zone. 
Given the enormous size of daily volumes in currency markets, such attempts almost always fail, leading to currency crises. 
Instead, the “ limit-the-swings” strategy proposed here implies that, as the exchange rate moves further away from parity, central banks should use their reserves to intervene at unpredictable moments in order to reinforce the effect of their regular announcements of the parity range on traders’ perception of increased risk of capital losses. 
Our proposal to reduce ­­– but not eliminate – swings from parity recognizes that price fluctuations may be crucial for markets to ascertain the price of assets that promise an uncertain payoff. 
But currency swings, if too wide and protracted, can impede real economic activity, which is why intervention is sometimes necessary. 
Only by explicitly acknowledging the limits to economists’ and policymakers’ knowledge would such policies have a chance of succeeding. 

Cloning's Slippery Slope 
Sometime in the next two years a human being will likely be cloned. 
This may or may not bring shudders of horror, but will certainly not occur outside the law or in some shadowy offshore location. 
The medical, scientific, legal and political establishment will fully support the effort. 
This clone, however, will never leave the British laboratory in which it was created. 
Last January, a form of human cloning called “therapeutic cloning” – or more properly “cell nuclear replacement” – was legalized in Britain. 
As with in vitro fertilization, the British appear to have been the first to devise a regulatory scheme for morally contentious technology. 
The world is watching what will happen next. 
It is rather like a Woody Allen script, but run backwards. 
In Allen's 1973 film Sleeper, attempts are made to clone Hitler from his preserved nose. 
Today, instead of cloning people from spare parts – or spare cells, as is the case with reproductive cloning – scientists hope to grow those parts by cloning people. 
The first part of this procedure is similar to that used to create Dolly the sheep, the first cloned mammal. 
The nucleus from a human cell is inserted into an egg that had its nucleus removed. 
An embryo forms, but it will not be implanted in a uterus. Instead, embryonic stem cells will be derived from its inner cell mass. 
These cells have the potential to become every cell-type in the body, a potential which may lead to cures for many chronic diseases. 
Stem cells cannot become a baby. 
While Britain has legalized therapeutic cloning, they are poised to ban reproductive cloning. 
They oppose projects such as that of Drs. Severino Antinori of Rome and Panayiotis Zavos of Kentucky in America, who plan to enable infertile men to become fathers by inserting their DNA into an egg from their partner. 
Reproductive cloning raises several moral issues – principally those of safety. 
Scientists believe that human clones would have defects. Because the egg that receives the new nucleus has to reprogram it quickly – teaching it to give the instructions necessary to construct an entire human being - genes that should be “turned on” might well be “turned off,” and vice versa. 
This probably explains why at least some animal clones have problems with their hearts, lungs, and immune systems. 
Weight is a problem too. 
Dolly the sheep – although still going strong five years after her birth, and the mother of six (all conceived the old-fashioned way) – has always been plump. 
During a trip to the Roslin Institute where Dolly was cloned, I found her, shorn of her fleece and revealing an ample midsection, mournfully staring from behind a sign that said, "hay only." 
The Duchess of York, Sarah Ferguson is not the only British celebrity on a diet. 
Being overweight is obvious. 
Other defects may be subtler and, perhaps, insignificant for farm animals. 
But where humans are concerned, safety must come first. 
Because the defects found in clones are not genetic mutations, pre-implantation diagnosis at the embryo stage will not reveal their existence. 
Problems caused by these defects could emerge at any point in the person's life. 
We would see a greater range of defects than we do in animals like mice because it is easier to analyze human behavior and physiology. 
Therapeutic cloning would probably be safer than reproductive cloning because any reprogramming defects would not affect every cell in the body – just the cells used in therapy. 
Thus far, only the UK has legalized therapeutic cloning. 
A law passed late last year in Japan permits it but forbids transferring the embryo to the uterus. 
In March, Denmark’s Council of Ethics endorsed therapeutic cloning. 
Will any country that legalizes therapeutic cloning inevitably slide down the so-called slippery slope and end up tolerating reproductive cloning? 
The idea behind a slippery slope is that if you do x, which is acceptable, you will end up doing y, which is not. 
Indeed, two types of slippery slopes – logical and sociological – exist. 
On the logical slippery slope, you slide to the bottom and embrace the morally unacceptable because there is no way to distinguish it from an acceptable practice. 
You can slide down the sociological slippery slope from one practice to the other – even if the two are conceptually different – just because the existence of one creates a social climate receptive to the other. 
Therapeutic cloning is conceptually distinct from reproductive cloning. 
Although the first step is the same, the intent behind the practices is not. 
The former would be done in order to save lives by treating diseases now incurable – say, Parkinson's, ALS, and multiple sclerosis. 
The latter – creating a person by cloning – would be done for reasons extending from egomania, to confusion between replication and resurrection, to the understandable desire to have a biologically related child. 
Will therapeutic cloning make it more likely that people come to accept reproductive cloning? 
I don't think so. 
Therapeutic cloning is intended to heal the sick. 
The cells created through cloning would be an extension of the patient: a means to treat him with cells generated by his own body. 
It’s almost like donating a pint of blood for yourself in case you need it for subsequent surgery. 
Even though I do not believe in a slippery slope from therapeutic to reproductive cloning, a society’s laws should give voice to its values. 
In countries which allow for the former, it is probably a good idea to ban the latter. 

Close Encounters with Recessions of the Third Kind 
PARIS: Three types of recessions exist. 
The first type are those caused by major shocks, say an outbreak of war or a sudden, sharp increase in the price of petroleum. 
Recall that the OPEC oil shocks of the 1970's incited two world recessions. 
The second category of recessions arise by chance, for example when consumer confidence dips, or businesses become uneasy and cut back on investment and/or inventory. 
This was the cause of America’s recession in the early 1990’s. 
The third type of recession occurs when imbalances in an economy build up to unsustainable levels before exploding. 
This form of recession is sometimes characterized by vast increases in debt (corporate or consumer), or by dizzying stock market or capital asset speculations that eventually come crashing down. 
The “popping” of such an asset bubble is what happened in Japan 10 years ago, an event from which that country has not yet recovered. 
Recessions of the first type are, almost by definition, largely unpredictable. 
Those of the second type are minor and relatively easy to repair if not to avoid. 
All that they usually require is a reduction in interest rates or a bit of reflation. 
Recessions of the third kind are the most worrying. 
Is America facing this third type of recession? 
What, indeed, will be the nature of America’s next recession, that is, if America has a recession? 
Optimists predict a recession of the second type; pessimists suspect that a third variety recession is lurking in the economic shadows. 
Who is right? 
The answer depends almost entirely on one single number: the growth rate of American productivity in the future. 
After adjusting for inflation, America’s stock exchanges roughly tripled in value in the 1990’s. 
Indeed, stock prices doubled compared to profits. 
The savings rate for households has gone from 5% of American GDP in 1990 to zero in 2000. 
America’s current account balance – the surplus of imports over exports – is now in deficit to the tune of 3% of GDP. 
Do these figures reflect alarming imbalances or are they the usual signs of a boom? 
If America’s rate of growth in the coming decades remains what it has been over the past thirty years, the answer is simple, and terrifying. 
Stock market prices would be much too high. 
Households would be behaving in a totally irresponsible manner. 
The exterior imbalance would be unjustifiable, indeed, unsustainable. 
If America’s annual rate of improvement in productivity turns out to be higher in the next thirty years than they have been over the past three decades, the country’s worries will be few. 
High stock market valuations would reflect a radiant future, households would be behaving in a reasonable way, and America would be wise to run a trade deficit in order to invest. 
Under such conditions, a mere nudge in interest rates by the Federal Reserve should set right any residual problem; if not, a tax cut will do the trick. 
Any recession would likely be short and limited. 
What level of improved productivity can America expect in future years? 
Productivity growth will probably be higher than before 1995: the soaring growth rates of recent years are not accidents; the high tech explosion is real. 
All the same, I still fear that improvements in productivity will turn out to be lower than the prophets of the New Economy promise. 
This prospect literally gives me the shivers. 
Not only may the future be less radiant, but the adjustments that will be required once reality sets in could set off a nastier recession and a more persistent slowing of the economy than anything predicted today. 


Closing Asia’s Security Gap 
TOKYO – There was little surprise in President Barack Obama’s announcement late last year that the United States will strengthen its position in East Asia while drawing down its forces in Europe. 
After all, the security environment in East Asia is unpredictable and rapidly changing, unlike in Europe, where it is relatively stable. 
Against this background, efforts now underway to establish a comprehensive multilateral framework for the region can learn from the recent history of the Organization for Security and Cooperation in Europe (OSCE). 
The US is not alone in shifting its security focus to East Asia. 
Russian President Vladimir Putin’s decision to host Russia’s first Asia-Pacific Economic Cooperation (APEC) meeting in Vladivostok in September reflects his country’s growing interest in the region. 
And, like the US, Russia attended last November’s East Asia Summit (EAS). 
The EAS, along with the ASEAN Regional Forum (ARF) ministerial meetings last July, made important contributions to improving the region’s security environment. 
The ARF’s effort to build a more predictable and constructive pattern of relations for the Asia-Pacific region is based on three stages: confidence-building, preventive diplomacy, and conflict resolution. 
At its 18th ministerial conference last year, ARF entered the second phase, preventive diplomacy, while continuing to strengthen confidence-building measures. 
Maritime cooperation was a focus of attention at both the ARF ministerial meeting and at the EAS, not least because China’s activities in the South and East China Seas have generated fresh uncertainty in the region. 
The ARF welcomed the adoption of “Guidelines for Implementation of the Declaration on the Conduct of Parties in the South China Sea.” 
Likewise, the EAS focused on combating “sea piracy, search and rescue at sea, marine environment, maritime security, maritime connectivity, freedom of navigation, fisheries, and other areas of cooperation.” 
Both meetings also focused on disaster management, with the ARF ministers reaching a common understanding on furthering regional cooperation. 
The ASEAN Coordinating Center for Humanitarian Assistance in Jakarta is expected to play a central role in building a disaster-related information network across the region, and in developing concrete measures for disaster management. 
Similarly, many of the countries attending the EAS stressed the need for response capabilities, such as emergency disaster relief. 
Japanese Prime Minister Yoshihiko Noda announced his country’s readiness to host an international conference this summer on major disasters, giving Japan an opportunity to share lessons learned from the 2011 Great East Japan Earthquake and tsunami. 
The aim must be to make the region more resilient to natural disasters as part of a broader framework for regional cooperation. 
The rapid changes occurring in the Asia-Pacific region demand policies to maximize growth opportunities while minimizing risks. 
That is why Koichiro Gemba, Japan’s foreign minister, has proposed new “open and multilayered networks” with other Asia-Pacific countries. 
“Multilayered” means multinational cooperation on various activities that can be promoted through bilateral, trilateral, or multilateral mechanisms. 
Work within the ARF and EAS frameworks is already aligned with this concept, and Japan is pursuing its own trilateral dialogues with China and the Republic of Korea, as well as with the US and Australia. 
Japan believes that these networks must be open to all of the Asia-Pacific region’s countries, as their establishment requires China’s full participation. 
But the rule needed to form the foundation of such a network must obviously adhere to international law, and the ARF meeting’s final declaration clearly reflected this concern. 
This is where lessons from the OSCE’s experience are relevant to Asia’s budding efforts to establish a regional architecture. 
In particular, despite the significant socioeconomic and political differences between the Asia-Pacific region and Europe, the OSCE’s confidence- and security-building measures are worthy of careful consideration. 
Such measures aim to reduce the risk of conflict by increasing trust among participating OSCE states, and by contributing to greater transparency in the field of military planning and other activities. 
The Vienna Document, which is the key to understanding these OSCE efforts, obliges annual exchanges of information on existing military forces, the structure of armed forces, and major weapons and defense systems. 
It also requires annual information exchanges on defense planning and budgets. 
Adoption of such measures in the Asia-Pacific region would do much to promote confidence and trust among Asian countries. 
A few steps in this direction have already been taken within the ARF framework, including the publication for more than a decade of an Annual Security Outlook based on contributions from ARF countries. 
In 2010, ARF ministers widened the Outlook’s scope with the Simplified Standardized Format, which includes publication of national defense doctrines, defense expenditure, and the total number of personnel in a country’s armed forces. 
There have been two main approaches to meeting modern regional-security challenges: traditional alliances of the NATO type, which prepare for any potential threat to members, and comprehensive multilateral frameworks of the OSCE type, which include all relevant players within a region. 
As Europe’s post-1945 history clearly shows, traditional alliances and a comprehensive multilateral framework can be complementary, and are essential to maintaining regional peace and stability. 
Now the Asia-Pacific region is witnessing efforts to establish a similar comprehensive and multilateral framework through the ARF and the EAS. 
But, however successful such efforts may be, they will enhance, not lessen, the importance of existing bilateral relationships, such as the Japan-US alliance. 

Closing Pakistan’s Electoral Gender Gap 
ISLAMABAD – One hundred years ago, women in the United Kingdom gained the right to vote, and today, most women in the developed world are enfranchised. 
But in many developing countries, the resistance that British suffragettes faced a century ago, rooted in misogyny, persists. 
This is certainly true in Pakistan, where the general election set for July 25 provides an ideal opportunity to advocate for change. 
At first glance, Pakistan seems progressive. 
The law has permitted women to vote since 1956, almost a decade after independence from Britain. 
Since then, the number of women in parliament has steadily increased, aided by a 33% quota and rules dictating how many women must be included on party lists. 
Women are also contesting elections with more frequency, even in culturally conservative parts of the country. 
For example, in the northwestern region of Khyber Pakhtunkhwa, a 100-year-old woman is running in the general election against former cricket star Imran Khan. 
And in Tharparkar, an impoverished part of Sindh province, a female candidate is on the ballot for the first time ever. 
But a closer look at voting data reveals many challenges in Pakistan’s push for electoral equality. 
Female candidates may be on the ballot, but that does not mean women will vote for them – if they vote at all. 
Of the country’s 97 million registered voters, 54.5 million are male and 42.4 million are female (the remaining 100,000 are transgender). 
With a gender gap of roughly 12 million voters, Pakistan ranks last in the world for female participation in elections. 
A recent analysis of district-level data by the Election Commission of Pakistan (ECP) revealed that even in the most developed parts of the country – such as Lahore and Faisalabad – the gap is more than a half-million. 
Part of this is due to administrative hurdles. 
To vote in Pakistan, voters must register with their National Identity Card (NIC). 
But many women don’t have an NIC – either because they are unaware of the need or cannot apply easily – making it technically impossible to vote. 
Although an NIC can be requested in person or online, women in Pakistan face serious restrictions on their mobility, and many lack access to the Internet. 
But the bigger obstacle is religious and cultural prejudice. 
For example, during past elections, leaflets circulated warning men not to allow female family members to vote, because women’s participation in democracy was somehow “un-Islamic.” 
In 2008, not a single woman cast a vote in 31 polling stations in Punjab, Pakistan’s most liberal province. 
A similar tally marked local elections in Khyber Pakhtunkhwa in 2015. 
National figures are only slightly more encouraging. 
During the last general election, in 2013, female voter turnout was less than 10% at 800 polling stations across the country, and in 17 districts, fewer than 5% of eligible female voters cast a ballot. 
When women don’t vote, their voices are diminished in Pakistan’s already patriarchal politics. 
This makes it less likely that lawmakers will address women’s concerns, and harder for the few women who seek office to win. 
Of the 342 members of the National Assembly, just 70 are women, and only nine were elected; the rest were appointed under the quota system. 
It stands to reason that if more women voted, political parties would field more candidates concerned with issues that especially concern women, and that more women would win seats. 
But how can the status quo be changed, and female electoral turnout increased? 
It is probably too late for this election cycle. 
While the ECP has launched a drive to increase female turnout, and a new law will allow for results to be nullified in districts where it dips below 10%, the reality is that when votes are counted, more will have been cast by men than by women. 
For one thing, based on the current pace of NIC processing, it will take another 18 years to close the current gap in voter registration. 
Add to this the religious and cultural constraints on female political participation, and the reform process could take decades. 
Still, steps can be taken now to empower Pakistani women. 
For starters, better gender-segregated data could help the ECP and other organizations design more effective solutions. 
Political parties could also help by conducting voter registration drives targeting women, and officially sanctioned messaging campaigns could encourage women to register and families to assist them. 
Finally, religious scholars could work with election officials to help dispel misconceptions about female voting. 
Most important, all of these activities should be continuous and not limited to election years. 
Elections are essential to democracy, but if a large percentage of the population is excluded, the process lacks credibility. 
Pakistan must strive for gender equality by including women in all decision-making processes – particularly when it comes to legislation. 
While women in Britain and other democracies have voted freely for a century or more, their counterparts in Pakistan are still waiting for their day to come. 

Closing Europe’s Defense Deficit 
The gap between Europe’s security needs and its military capacities is widening, and most European leaders lack the will to do what is necessary to close it. 
Forces built to defend the European heartland from a Soviet attack are unsuitable for the kinds of operations that define today’s post-Cold War environment. 
Today, Europe needs improved capacity to combat terrorism and the proliferation of weapons of mass destruction, deal with failed or failing states, contend with regional conflicts, and respond to humanitarian crises. 
Yet defense spending across Europe remains flat or in decline. 
The problem is more than budgetary. 
The fragmented nature of European defense procurement, the Byzantine rules of the European defense trade, and industrial capabilities shaped by the Cold War legacy all sap Europe’s ability to meet its military needs. 
Given these hurdles, the obvious way to improve European defense capabilities is by coordinating the efforts of individual countries, the European Union, and NATO to create a set of enhanced collective defense capacities. 
The overlap in membership between NATO and the EU makes such defense cooperation both possible and logical, if not unavoidable. 
Of course, difficult choices lay ahead. 
Political leaders must create incentives and financial headroom for their forces to undergo the necessary changes. 
First and foremost, savings generated from restructuring must be reinvested in transforming military forces. 
After all, generals will be more inclined to identify efficiencies if they believe that doing so will ultimately enable them to enhance their capabilities. 
Political leaders should also seek to stabilize defense budgets by creating separate funds for unforeseen multilateral peacekeeping operations, like the Balkans and Afghanistan, and by putting defense planning on a multi-year rather than an annual cycle. 
Such predictable budgets will better enable European leaders to establish defense planning targets that address the priorities of military transformation. 
At a minimum, 25% of annual budgets should be allocated toward research, development, and procurement, with no more than 40% spent on personnel. 
This won’t be easy, because there is a basic conflict between modernizing an army and the political pressures to maintain military wages and jobs. 
But these trade-offs must be made if Europe’s military is to meet the Continent’s security needs. 
At the most basic level, governments must take a hard look at conscription and territorial defense forces, which eat up far too much of Europe’s military budgets. 
Because no European state can afford to “go it alone,” military reform demands greater integration and information sharing, as control of information will be key in future conflicts. 
Pooling of infrastructure (bases and ports) and logistical assets (transport), including training facilities for common equipment, will generate big savings, as individual countries rationalize the long “logistical tails” of manpower and equipment that support armies in the field. 
Nations should forge partnerships across national lines with like-minded allies – a model exemplified by the new joint Spanish-Italian Amphibious Force. 
Nations that cannot afford to field expeditionary forces capable of performing the full spectrum of 21st-century missions should make greater use of specialization to enhance their contribution to Europe’s collective defense. 
But states that specialize in a capability should do so as a part of a “country cluster” to minimize the risk of a nation facing a military challenge that its forces are unprepared to meet. 
The EU can help by strengthening its defense planning. 
It should articulate more clearly Europe’s future military roles and missions, determine the military capabilities required, identify shortfalls, and develop projects and initiatives to address the most critical gaps. 
The EU should also take steps to improve its ability to conduct operations. 
New EU “Battlegroups” should be strengthened through regular training and certification, preferably using NATO standards, and the EU Military Committee should hold regular Battlegroup conferences to solicit country contributions to future formations. 
For the EU to do its part, larger budgets appear unavoidable. 
Battlegroups should be expanded to include naval and air components for missions such as maritime interdiction and close support for ground troops. 
Common funding for operations should be increased, and member states should continue to be encouraged to make civilian and police forces as readily deployable in peacekeeping operations as their military. 
All of these reforms demand coordination with NATO. 
While NATO and the EU have improved their working relations, more steps need to be taken to eliminate mistrust, unhealthy competition, and information-sharing blockages. 
The two bodies must expand their strategic dialogue beyond their current focus on the Balkans and Afghanistan. 
To do this, the often pre-scripted and stale dialogue between the North Atlantic Council and the EU’s Political and Security Committee should be opened up to include topics such as combating terrorism and the proliferation of WMD, or regions such as Ukraine or Moldova. 
This would enable NATO and the EU to assess future scenarios and find ways to work together to prevent and manage crises. 
European industry is also a vital factor in European defense integration, but it suffers from fragmented demand, counterproductive intra-European trade regulations, and a mostly outdated Cold-War military infrastructure. 
Specialization of military capabilities and industrial efforts by certain member states shows some promise, but needs to be coordinated to avoid redundancy and ensure interoperability. 
Moreover, transatlantic defense trade must be used to augment European capabilities at the lowest possible cost. 
Both NATO and the EU have roles to play in working with industry to enhance Europe’s defense capabilities. 
Greater military integration in Europe will require sustained leadership by heads of government, military officials, and NATO and EU leaders. 
This is no small challenge, but there is no viable alternative. 
Greater defense integration in Europe is not just an appealing or interesting idea; it is an imperative. 

The Slow March to Gender Parity 
BERKELEY – Christine Lagarde, the International Monetary Fund’s managing director, recently warned that the world risks a new “mediocre normal” of slower growth. 
She is not alone in her concern. 
Economic policymakers around the world are looking for ways to boost growth, with infrastructure investment topping most lists. 
But, as Lagarde regularly reminds her audiences, another, often-overlooked remedy is to increase the economic participation and advancement of women. 
Women account for half of the global labor supply and about 70% of the world’s consumption demand. 
Yet there remains a long way to go in realizing their economic potential, as the World Economic Forum’s just-released Global Gender Gap Report 2014 confirms. 
In many countries, both developed and developing, men and women are at or near parity when it comes to education and health, according to the report, which covers 142 countries and 94% of the world’s population. 
But, as the attack on the heroic Pakistani schoolgirl and Nobel Peace Prize laureate Malala Yousafzai demonstrated, girls and women are still blocked from education in many places, sometimes through violence. 
Moreover, in terms of economic participation and opportunity, women continue to lag behind men by a considerable 15-25% even in the most gender-equal societies. 
Globally, only about half of working-age women are employed, and they earn three-quarters as much as men, even when they have the same level of education and are in the same occupation. 
Meanwhile, women are over-represented in informal, temporary, and part-time jobs, most of which are low-productivity positions with low pay, no benefits, and limited opportunities for advancement. 
Based on the rate of progress over the last nine years, it will take another 81 years to close the world’s economic gender gap and unlock the associated economic benefits. 
By one estimate, women hold about 24% of top management positions globally, with comparable figures across regions and development levels. 
A recent study by the Credit Suisse Research Institute (CSRI) of 3,000 companies in diverse sectors and countries, however, yields a more depressing conclusion: women occupy only about 13% of top management positions (CEOs and people who report directly to them), on average, with even the highest rate, in North America, amounting to only 15%. 
Women’s participation, moreover, is skewed toward positions in less influential areas like shared services, in which opportunities for promotion to top positions are limited. 
And, though female participation on company boards has increased in almost every country and sector over the last three years, with the largest gains occurring in countries that have introduced quotas, women hold only about 12.7% of board positions, on average. 
The gender gap does not hurt only women; it hurts everyone. 
Healthy, educated women are more likely to have healthier and more educated children, creating a virtuous circle of development. 
WEF data suggest a strong correlation between a country’s progress in closing the gender gap – particularly in education and the labor force – and its economic competitiveness. 
The business case for women in leadership is strong. 
Companies with more women in top management and board positions better reflect the profiles of their customers and employees, benefit from more diverse views when solving problems, rank higher on indicators of organizational cooperation and health, and report higher profitability and returns on equity. 
Furthermore, the CSRI study indicates higher returns on equity, higher valuations, and higher payout ratios, with no discernible differences in risk-taking. 
Realizing the economic potential of women requires changes in policies, business practices, and attitudes. 
Developed countries should invest in affordable child care, early childhood education, and parental leave; shift from family to individual taxes; and provide more generous tax credits, benefits, and protections for low-wage and part-time workers. 
In developing countries, legal reforms that give women equal rights in land ownership, inheritance, and access to credit are essential. 
Businesses can commit to gender parity by taking several concrete steps. 
They can set targets for recruitment and retention levels; initiate affirmative searches to meet those targets; introduce mentorship programs and diversity training to attract, retain, and promote women; and establish transparent salary bands to help track and reduce gender pay gaps. 
At the same time, human-resource practices should take account of unconscious biases, risks of stereotyping, and documented gender differences in behavior. 
For example, research finds that women tend to be less confident and less likely to negotiate for pay raises and promotions than equally qualified men. 
Companies can also use their influence with suppliers, distributors, and partners to support women-owned businesses and encourage gender-neutral advertising. 
And companies can change how jobs are structured and remunerated to enhance flexibility, thereby helping both men and women balance work and family demands. 
Gender gaps in economic participation and opportunity for women vary significantly across regions. 
The WEF’s findings show that the Middle East and North Africa suffer from the widest gender gap, with women reaching only 40% of parity in the workplace, on average, compared with nearly 80% in North America. 
Indeed, the overall gap has widened in Jordan and Tunisia. 
Even so, there are positive trends. 
Over the last nine years, Saudi Arabia has reduced its economic gender gap, relative to its starting point, more than any other country. 
Lagarde challenges policymakers and business leaders alike to make changes that broaden economic participation and opportunity for women. 
The economic gains from doing so are significant. 
In the words of Klaus Schwab, the WEF’s founder, “Only those economies which have full access to all their talent will remain competitive and will prosper. 
But, even more important, gender equality is a matter of justice.” 
It would be difficult to identify more compelling reasons to accelerate progress toward gender parity. 

Closing the Education Gender Gap 
WASHINGTON, DC – Completing primary school in Niger was never a certainty for Aishetu Mahmoudu Hama, given all the obstacles that stood in her way. 
“It was hard to study,” she recalls. “We sat on the ground – sometimes on a mat, sometimes just in the dirt.” 
But Aishetu persevered, and she is now a 23-year-old university student. 
Aishetu knows that without school, her life chances would likely be confined to herding, farming, getting married, and having a lot of children. 
There simply would be no other opportunities for her to pursue. 
Like the female teachers who inspired her to learn, Aishetu wants to be a role model to younger girls and her own siblings. 
She hopes that her story will motivate them to complete their education, too. 
On this International Day of the Girl, Aishetu stands as proof of the difference that education can make for girls and the people around them. 
But the struggles that Aishetu overcame also remind us that education remains beyond reach for far too many girls. 
Consider one appalling statistic: The number of girls not attending school, despite having fallen by 40% since 2000, still stands at 130 million. 
This helps to explain why women struggle more than men to find meaningful, well-paying work, and why the share of women in the global workforce persistently lags behind that of men. 
Making matters worse, even where girls’ educational attainment has grown rapidly, commensurate improvements for women in the workforce have remained elusive. 
According to a 2015 study by the World Economic Forum, “while more women than men are enrolling at university in 97 countries, women make up the majority of skilled workers in only 68 countries and the majority of leaders in only four.” 
These gender gaps represent a major generational challenge for large and small businesses alike. 
Worldwide, companies are already struggling to find enough qualified workers for their increasingly automated work processes. 
The International Commission for Financing Global Education Opportunity reported last year that nearly 40% of employers are having difficulties recruiting workers with the right skills. 
Businesses investing in lower-income countries also need their workers to be healthy. 
This is more likely when mothers are educated: they and their families tend to be healthier than in the case of less educated mothers. 
In fact, research shows that if all childbearing-age women were to complete secondary education, the number of children dying before age five would drop by about 350,000 each year. 
The businesses investing in developing- and emerging-market countries that are home to most out-of-school girls thus have an interest in helping girls get the education they deserve. 
If educational outcomes improve, we will likely see far more women pursuing the higher-level technical training that today’s workplaces are demanding. 
To put 130 million additional girls into school, we will have to overcome an array of stubborn barriers. 
In many countries, educating girls is not considered important, owing to expectations that they will work exclusively at home or on the family farm. 
Early marriage, sexual assault, a lack of sanitary facilities for menstruating girls, and humanitarian crises are just some of the factors that make completing an education more difficult for girls than for boys. 
And in remote areas in particular, school fees and arduous commutes pose further challenges. 
Even if these cultural, political, and geographic hurdles can be cleared, wealthier countries will need to commit far more resources to educating girls in developing economies than they have in the past. 
Shockingly, the share of donor countries’ overseas development aid that is allocated for education has shrunk over the last six years, and is now smaller than it was in 2010. 
Donor countries urgently need to reverse that trend. 
The Global Partnership for Education has been one of the leading catalysts in educating girls over the past decade and a half. 
Thanks to GPE funding, an additional 38 million girls in developing countries were enrolled in primary school from 2002 to 2014. 
To build on that progress, GPE will hold a financing conference, co-hosted by the Senegalese and French governments, on February 8, 2018, in Dakar. 
We are appealing to donors around the world to help us reach $2 billion in annual funds by 2020. 
With sufficient funding, GPE can support the education needs of 870 million children in more than 80 countries. 
And it can help developing countries build education systems that will give girls like Aishetu the chance to realize their potential. 
When girls and women are empowered through education, they can and do transform the world for the better. 
Investment in their potential is a bet that can’t lose. 

Closing the US-Europe Technology Gap 
In the second half of the 1990's, Europe's average annual growth rate of productivity amounted to 0.7%, while the US hummed along at 1.4%. 
However, if we distinguish between the industries that produce information and communications technologies (ICT) and those that are simply users of such technologies, we can see that the productivity growth gap stems almost entirely from the weakness of Europe's ICT producing sector. Annual productivity growth in sectors that are users of ICT technologies averaged 0.63% in the US between 1995 and 2000, and a very similar 0.41% in Europe. 
This confirms a well known fact: Europe is less efficient than the US at producing research that is conducive to innovation--either because Europe allocates fewer resources to research, or because the available resources are used less efficiently, or both. 
To be sure, total spending on research and development is lower in Europe than in the US, but not by much. 
In the 1990's, the US devoted 2.8% of GDP annually on R&D, compared with 2.3% in Germany, 2% in the UK, and 1.9% in France. 
Still, European governments typically complain about the lack of fiscal resources to support R&D (a far fetched argument given the miniscule share of research spending in the oversized European budgets) and, whenever the European Commission allows them, they subsidize innovative firms, or those that they think are more likely to invest in R&D. 
France and Italy, for example, demanded that the limits imposed the budget deficits of euro zone members by the Stability and Growth Pact exclude public spending for research. 
Similarly, the French government decided to bail out Alstom--a company that developed a number of high-tech products, including the TGV, the French fast train--before ending up bankrupt. 
But both tactics are unlikely to boost the European high-tech sector. 
Why? 
Because weakness in research is not--at least not primarily--a funding issue. 
Subsidies will not produce efficient high-tech firms. 
Let us consider research first. 
Europe trails the US in every dimension: the number of patents, the number of Nobel laureates, the number of researchers it is able to attract from the rest of the world. 
But funding is only part of the problem. 
A euro spent on research in Europe is less productive than a dollar spent in the US for two reasons: incentives and the demand for technology. 
We fear that spending more money without changing archaic university rules would produce more waste, not more research output. It would only increase the power, prestige, and resources of entrenched lobbies of established university professors who often prevent entry and competition. 
Demand for technology is also important. 
It helps focusing research, it provides deadlines, screens the output, and allows patents to be valued at market prices. 
Without the incentives provided by those on the receiving end of its output, research risks drifting along, often without clear direction. 
Admittedly this is not true in all fields: the study of Ancient Greek fragments is valuable even it meets hardly any demand. 
But it is important in those fields, both theoretical and applied, that might be used as an input in the production of new technologies: physics, biology, chemistry, engineering, etc. 
But it is defense spending that is the major factor in the demand for research. 
Most technological breakthroughs in the postwar period--from microchips to the Internet to the new batteries for cellular phones developed for the US Army in Iraq--had, at least initially, a military application. 
Cell phones, satellite tracking, and high-resolution cameras are not cheap to come by, but happily for the industries that use them, costs for their development have been partly picked up by the government. 
One key reason for the superiority of the US in research is the size and the composition of defense expenditure. 
The Pentagon's budget is not simply big: it accounts for more than one half of all US government spending on research and development: in France, defense spending is only around a quarter of the total. 
In 1999, US spending on defense-related R&D was 0.45% of GDP; the UK and France were next, but with just half as much, 0.26% and 0.22%, respectively. 
As the Alstom case suggests, the French have a different model in mind. 
Rather than supporting R&D with large defense budgets, they prefer to do it directly, subsidizing French high-tech firms. 
The official justification is that national defense budgets are too small to create the demand that would be needed to support R&D in high-tech sectors, while there is still no European defense budget. 
This is no coincidence: if allocated competitively, such a supra-national budget would identify winners and losers. 
But many European countries still refuse to accept that some of their high-tech firms might not make it: better, they think, to keep them alive with generous subsidies, and in the meantime avoid the consolidation of EU defense budgets. 
By integrating its defense expenditures and increasing their size, Europe would hit two birds with one stone. 
It would be more credible when it demands to be heard at international bargaining tables, particularly vis-à-vis the US, and it would stimulate scientific research. 
The way to achieve these goals is not to run larger deficits, which merely imply higher taxes tomorrow, but to cut spending in other parts of the budget. 
In short: short-run pain for long-run gain. 

The Immorality of Coal 
SYDNEY – Momentum seems to be building for a global deal at the United Nations Climate Change Conference in Paris this December. 
With this sense of optimism comes a keen awareness that the use of fossil fuels must be phased out globally as rapidly as possible. 
Indeed, the idea that greenhouse-gas emissions should be reduced to zero by 2050 is gaining wider acceptance. 
Early movers are already shaking things up. 
Universities, pension funds, churches, banks, and even the heirs to the Rockefeller oil fortune are pulling their money out of fossil-fuel assets or are considering the possibility of divestment – an option made increasingly attractive by the swiftly falling cost of renewable energy. 
In the face of this progress, though, one sector stands apart. 
The coal industry seems determined to fight for profits at the expense of the global environment. 
Perversely, it is furiously attempting to capture the moral high ground by claiming that coal is essential to ending energy poverty. 
Coal companies and their allies argue that limiting coal production would keep the lights off in rural communities by preventing poor countries from building big, cheap power plants. “Let's have no demonization of coal," as one ally, Australian Prime Minister Tony Abbott, put it. 
“Coal is good for humanity." 
Speaking at an event hosted by the Global Warming Policy Foundation, a think tank that is skeptical of climate change, the United Kingdom's former environment secretary, Owen Paterson, accused climate-change activists of having “African blood" on their hands. 
Setting aside the deeply offensive character of such efforts to silence its critics, the coal industry is posing a false choice: end the use of coal or end poverty. 
But, though energy is indeed central to efforts to end poverty, one must be clear: at this point in history, coal is not good for anyone. 
Consider this: for all of the attention the Ebola virus has received in recent months, coal is a far deadlier killer. 
Toxic fly ash kills some 800,000 people per year and sickens millions more. 
Beijing's ongoing battle with smog – a problem that has become known as the “airpocalypse" – provides a potent reminder of coal's impact on air quality. 
But China's capital is hardly unique in that respect. 
Many Indian cities have air pollution that is just as bad – and in some cases far worse. 
Coal is also the single largest contributor to climate change, which threatens to put 400 million people in the poorest countries at risk of severe food and water shortages by 2050. 
The coal industry is seeking to burden developing countries with the same unsustainable growth model that has brought the earth to the brink of climate disaster. 
As the Intergovernmental Panel on Climate Change has repeatedly warned – and as the experience of countries like the Marshall Islands increasingly demonstrates – climate change is no longer a distant threat. 
The terrible consequences of burning fossil fuels are already upon us, and those suffering the most are the world's poor. 
Most people understand that coal is a dirty business, one that countries like Australia should abandon for their own economic wellbeing, as well as for the sake of the global climate. 
That is why we are witnessing such resistance from the industry. 
Coal's day is over, but it is trying desperately to hang on. 
The world needs a rapid and fair transition away from dirty energy sources. 
That means cleaning up developed economies and working to prevent the massive expansion of industries that damage our collective health and future. 
It also means working with developing countries to help them develop modern, clean energy sources that provide cheap, locally produced power, and do not oblige them to buy fossil fuels. 
Above all, it means that we must stop telling the poor in developing countries what they should do and start listening to what they want. 

Coexistence or No Existence 
Now that the conflict over the cartoons depicting the Prophet Muhammad is dying down, or so I hope, it is clear that the only winners are the extremists -- in the Islamic World and in Europe. 
I regret the fact that the controversy started in my own country when a newspaper chose to publish the cartoons in a naïve effort to demonstrate freedom of expression. 
It happened last autumn, and at that time I argued publicly against what I regarded as an insensitive act, because it hurt other peoples’ religious feelings. 
It was also an unnecessary provocation, and constituted in itself a caricature of our cherished freedom of expression, that is guaranteed in our constitution. 
As my father (an old journalist himself) used to say: Freedom of expression provides a right to say what you think, but it is not an obligation to do so! 
When the controversy blew up a few weeks ago, a lot of fuel was added to the fire. 
Many incorrect stories were circulated. False rumours that the Holy Koran had been burned in demonstrations, false information on the status of Islam in Denmark, incorrect translations of what our Queen had said, etc. 
This added to the anger, and it led to burning embassies and threats of violence. 
The conflict has been called “A Clash of Civilizations.” 
It could well deteriorate into that; the potential is there. 
But I would still prefer to call it “A Clash of the Misinformed.” 
There were so many mistakes on both sides: On one side there was a lack of understanding of the deep religious feelings that were hurt by a show of disrespect. 
On the other side people were given exaggerated and even falsified stories of what had actually happened. 
The potential for a “clash of civilizations” lies in the deep differences between European and Islamic cultures and traditions. 
We should all be aware of those who seek to deepen these differences and turn them into insurmountable gulfs instead of inspirations to a richer life. 
It is only too easy for them to point to the case of the cartoons and say: Now you see how western-style democracy and freedom of expression mean that you will face ridicule and mockery of your religious faith! 
It is easy because freedom of expression was used, when publishing the cartoons, merely to demonstrate itself and therefore became a caricature of itself. 
Our globalized world brings us not only economic opportunities but also cultural and spiritual challenges. 
Internet and SMS have developed over less than a decade and we still have not made the mental adjustments to the implications of such instantaneous communication. 
The Danish cartoonists and newspaper editors that published the cartoons obviously failed to understand that they were not just addressing themselves to a local audience but to other inhabitants of the global village. 
If they had realized that, they would not have published the cartoons – as they stated clearly when they made their apology. 
The lessons of this unfortunate incident seem to me to be clear: We should all acknowledge that in the modern world it is increasingly necessary for all sensible people to work for mutual respect, tolerance and better understanding. 
We must avoid situations where different values are confronted with each other in ways that trigger violence. 
Instead we must try to build bridges between religions, ethics and norms. 
Call it self-censorship if you wish. 
But self-censorship is practised all the time by sensible people. 
If you wish to stay in the same room as other people you try not to offend them through unnecessary provocations. 
The room we are talking about is no longer the local pond but the global village. 
Co-existence is the key. 
Some people are unwilling to accept this. 
They are not open to values other than their own. 
They want confrontations. 
You find such people in Europe as well as in the Islamic world. 
Unfortunately they are the beneficiaries of the conflict that was triggered by the cartoons in a Danish newspaper. 
But if we do not stand up to them we all run a grave risk of repeating some of history’s great mistakes. 
The risk was explained in a very small poem by the late Danish poet and philosopher Piet Hein in one of his famous “Grooks” called “That is the question”: 
Coexistence 
or no existence 

Coke Is It in Europe 
European leaders need to get serious about Europe’s cocaine problem. 
The “white lady” is seducing a steadily growing number of Europeans, and remaining in a state of denial will only worsen the consequences. 
Cocaine used to be America’s problem, to the point that the United States started a major campaign against sellers and consumers of crack cocaine in the inner cities, drug traffickers, and suppliers in the Andes. 
But now demand for cocaine in most of the world is stable or dropping. 
Coca cultivation has been slashed by a quarter in the past five years, and seizures of cocaine have almost doubled. 
An impressive 42% of all of the world’s cocaine was seized in 2005. 
Only Europe is bucking the trend. 
Cocaine use is on the rise, especially in Spain, Great Britain, and Italy. 
There is plenty of anecdotal evidence indicating traces of cocaine found on bank notes and in water supplies. 
Here are some harder facts. 
For the first time, the level of cocaine use in Spain – 3% of the population aged 15 to 64 – now exceeds that in the US. 
And the United Kingdom is not far behind. 
In 2005, 2.4% of the UK population used cocaine at least once, up sharply from 0.6% a decade earlier. 
Consider another telling indicator. 
Ten years ago, 20% of all new clients entering treatment for drug abuse in the Netherlands were addicted to cocaine. 
Now it is 40%. 
In Spain, the proportion has soared to 42% in 2002, from just 7% in 1995 – and it has no doubt risen again since then. 
Europe’s growing cocaine problem is due to several factors. 
First, drug users in Europe are switching to cocaine from heroin. 
Cocaine is fashionable because it is attractive: white, not dark; sniffed, not injected; consumed in a living room or a fashionable night-club, not in a dark alley. 
It is seen as a drug for winners, not losers. 
To many it is a symbol of success, until they end up in a hospital or treatment center. 
Cocaine use by high-profile entertainers, executives, models, and socialites who flaunt their illicit drug habit certainly does not help. 
Nor does uncritical reporting by the media. 
It seems many Europeans need to be reminded that cocaine is highly addictive and harmful. 
That is why it is a controlled substance. 
While addicts may be in denial, thinking that they can control their “recreational use,” cocaine, to quote the famous song by J.J. Cale, “she don’t lie.” 
Second, too many governments – particularly in rich countries – fail to invest political capital in preventing and treating drug abuse. 
They are ill equipped to deal with the problem, so their societies have the drug problem they deserve. 
This raises a basic credibility issue: how can Europe urge Colombia and Peru to reduce supply when its own drug habit is driving cultivation? 
The solution is to attack the problem at its source by addressing both supply and demand. 
Coca crops in Latin America need to be replaced with agricultural crops, and cocaine use in affluent Europe must be reduced. 
Solving the cocaine problem is a shared responsibility. 
On the supply side, there must be more support for poor farmers in drug-producing countries to give them viable alternatives to growing coca. 
Most illicit coca growers are extremely poor. 
Crop eradication will not work over the long term if there is no legal economy to replace drugs. 
Drug control and development assistance must therefore go hand in hand. 
Environmental protection is also at issue. 
Coca farmers and producers slash and burn forests, polluting streams with toxic chemicals and damaging fragile ecosystems. 
The Andean region has less than 1% of the world’s land area, but more than 15% of its plant life. 
Vast areas of vegetation are being destroyed for lines of white powder. 
At a time of growing concern about climate change, Europeans should be made aware of the long-term destruction done to a precious and fragile habitat for the sake of a short-term high. 
But controlling supply is not enough. 
If all of Colombia’s farmers stopped growing coca tomorrow, unrestrained demand by the world’s 13 million cocaine users would quickly generate as much cultivation somewhere else. 
Clearly, the ultimate challenge is to prevent drug abuse and to treat and rehabilitate drug users successfully. 
Sweden is a good example of how to do it right. 
Drug use there is a third of the European average – the result of decades of consistent policies (irrespective of changes in government) that combine tough punishment of dealers and comprehensive treatment for users. 
The more that can be done to prevent people from becoming cocaine addicts, the less damage these people will do to themselves and their families, the less money will get into the pockets of criminals, insurgents, and terrorists, and the less damage will be done to the environment. 
But nothing will be done until Europe wakes up and faces its pandemic. 

Cold War Lessons for George W. Bush 
President Bush recently drew an analogy between the current struggle against violent jihadi terrorism and the Cold War. 
He is right in one respect: waves of terrorism tend to be generational. 
Unfortunately, like the Cold War, the current “war on terror” is likely to be a matter of decades, not years. 
But Bush missed another lesson implicit in his analogy: the importance of using the soft power of culture. 
The Cold War was won by a combination of military power, which deterred Soviet aggression, and the attractive power of Western culture and ideas. 
When the Berlin Wall fell in 1989, hammers and bulldozers, not artillery, brought it down. 
Unfortunately, Bush has not learned this lesson. 
Academic and scientific exchanges during the Cold War played a significant role in enhancing American soft power. 
While some American skeptics feared that Soviet scientists and KGB agents would steal American technology, they failed to notice that the visitors vacuumed up political ideas alongside scientific secrets. 
Many of these scientists became leading proponents of human rights and liberalization inside the USSR. 
Some 50,000 Soviets – writers, journalists, officials, musicians, dancers, athletes, and academics – visited the United States between 1958 and 1988. 
Aleksandr Yakovlev was strongly influenced by his studies at Columbia University in 1958. 
Yakovlev went on to become a Politburo member and key liberalizing influence on Mikhail Gorbachev. 
Oleg Kalugin, who became a high KGB official, said in looking back from the vantage point of 1997, “Exchanges were a Trojan Horse for the Soviet Union. 
They played a tremendous role in the erosion of the Soviet system….They kept infecting more and more people over the years.” 
Yet today, the Bush administration oversees a cumbersome visa program that has cut the number of such exchanges, particularly with Muslim countries. 
Popular culture was also important during the Cold War. 
Many intellectuals disdain popular culture because of its crude commercialism. 
But such scorn is misplaced, because popular entertainment often contains subtle images and messages about individualism, consumer choice, and other values that have important political effects. 
American films, for example, include sex, violence, and materialism, but that is not the whole story. 
They also portray American life as open, mobile, individualistic, anti-establishment, pluralist, populist, and free. 
As the poet Carl Sandburg put it in 1961: “What, Hollywood’s more important than Harvard? 
The answer is, not as clean as Harvard, but nevertheless, further reaching.” 
The line between information and entertainment has never been as sharp as some intellectuals imagine, and it is becoming increasingly blurred. 
Some popular music lyrics can have political effects. 
Cultural messages can also be conveyed by the way that sports teams or stars conduct themselves, or in the multiple images purveyed by television or cinema. 
Pictures often convey values more powerfully than words. 
Even the consumption of fast food can make an implicit statement. 
As one Indian family described their visit to McDonald’s, it was stepping out for “a slice of America.” 
Although the Soviet Union restricted and censored Western films, those that made it through had devastating political effects. 
As one Soviet journalist commented after a restricted showing of films that were critical of American nuclear weapons policies, “They absolutely shocked us….We began to understand that the same thing would happen to us as to them in a nuclear war.” 
Soviet audiences watching films with apolitical themes nonetheless learned that people in the West did not have to stand in long lines to purchase food, did not live in communal apartments, and owned their own cars. 
All of this discredited the negative views promulgated by the Soviet media. 
Even rock and roll played a part. 
As one of Gorbachev’s aides later testified, “The Beatles were our quiet way of rejecting ‘the system’ while conforming to most of its demands.” 
Czech Communist officials sentenced a group of young people to prison in the 1950’s for playing tapes of “decadent American music,” but their efforts turned out to be counter-productive. 
In 1980, after John Lennon was murdered, a monument to him spontaneously appeared in Prague, and the anniversary of his death was marked by an annual procession for peace and democracy. 
In 1988, the organizers founded a Lennon Peace Club that demanded the removal of Soviet troops. 
Lennon trumped Lenin. 
The Cold War was won by a mixture of hard and soft power. 
Not all of the sources of soft power were American – witness the role of the BBC and the Beatles. 
But it would be a mistake to ignore the role that popular culture played. 
One has to be careful in drawing lessons for today. 
Eastern European cultures were more similar to Western cultures than are Muslim cultures. 
In some fundamentalist circles, and among the terrorists, Western culture evokes repulsion, not attraction. 
But even in Iran, where the ruling mullahs describe America as “the great Satan,” the young want to watch American videos in the privacy of their homes. 
Polls in the Muslim world show that American culture remains attractive to the moderate majority. 
It is American policies that have led to America’s unpopularity. 
For a start, Bush could learn to get out of the way and encourage more popular and grassroots contacts. 


Colombia and the International Crisis 
BOGOTA – Just five months ago, Colombia’s government was assuring its citizens that they were protected from the international crisis. 
Now, analysts predict that the economy will barely grow 1% this year, and that is the best case scenario. 
This bleak forecast marks the end of Colombia’s longest cycle of growth in three decades, leaving the country in the same fragile situation as that of many other developing economies. 
Of course, a deteriorating economy is not exclusive to Colombia. 
Since the middle of last year, the International Monetary Fund has been reducing its projections for growth across Latin America. 
Last October, the Fund estimated that growth in the region would reach 3.2% this year; now, it says that growth will barely be positive. 
And, most likely, the worst is yet to come: if the Obama administration does not succeed in stabilizing the United States economy in the coming weeks, Latin America will most likely face even steeper declines. 
The good news for Colombia is that it is better off than many of its neighbors. 
Although projecting concrete figures is a sterile exercise in these worrisome times, most analysts predict that Colombia’s economic performance this year will be inferior to Peru’s, but similar to Chile’s and Brazil’s and better than that of Argentina, Venezuela, and Mexico, a country expected to contract by more than 2%. 
This comparatively benign situation reflects Colombia’s relatively favorable macroeconomic conditions. 
Although the country was never as protected from the global downturn as its authorities claimed, the country benefits from some factors that do help ease the damage inflicted by the international crisis, especially with regard to the availability of foreign currency in these times of restrictions on external financing. 
During the past few years, Colombia has become one of the three most attractive destinations for foreign investment in Latin America, allowing it to cover a significant part of its external financing needs this year. 
Moreover, remittances by Colombians working abroad grew 8% in 2008, a surprising result when compared to countries such as Mexico and Ecuador, where remittances have fallen. 
In addition, international financial markets perceive Colombia’s economy as being fundamentally sound. 
The current risk premium for government borrowing in international markets is very similar to that paid by Peru and Brazil, and much less than that demanded of Argentina, Venezuela, and Ecuador. 
But, while Colombia is not as bad off as some of its neighbors, the country will not be able to pull itself out of the crisis easily. 
Unfortunately, the authorities do not have much margin for error in working to counteract the damage done by the international crisis. 
The government did not set aside resources while things were going well, and now it does not have the fiscal space needed for an aggressive boost to public spending of the type that many other governments are attempting. 
Although Colombia’s government announced a few weeks ago a strategy based on important infrastructure work, its impact will be limited: most of the investment was already in the budget last year, and the officials in charge of public works have consistently demonstrated inefficiency when executing large-scale projects. 
Meanwhile, the country’s monetary authorities have much more leeway to boost the economy by lowering interest rates at a time when the threat of inflation is diminishing. 
In fact, the Bank of the Republic has reduced its interest rates from 10% at the end of last year to 7% at its last meeting in March. 
These policies should allow Colombia’s economy to grow – barely – this year, but only as long as the world economy begins to stabilize before the end of the first quarter. 
If so, the outlook for Colombia is more favorable in 2010 and 2011, when growth should be close to 3%, thanks to inflows of foreign investment, improvements in security, and a better business environment. 
But if the international crisis lasts longer than the first half of 2010, all bets are off, and Colombia will struggle to find its economic footing in a region devastated by generalized contraction. 

Colombia at Peace? 
BOGOTÁ – The Framework Agreement for the End of the Armed Conflict in Colombia that has just been announced by President Juan Manuel Santos is a historic landmark for his country and all of Latin America. 
It is also a tribute to diplomatic resourcefulness and negotiating skill. 
The agreement with the Revolutionary Armed Forces of Colombia, better known as the FARC, came after long years of failed attempts by Colombian governments of all political shades to reach an accommodation with the last, and among the most odious, guerrilla movement to have operated in Latin America. 
Never before has the FARC – a monumental apparatus of terror, mass murder, and drug trafficking – agreed to discuss disarmament, its fighters’ social and political reintegration, victims’ rights, an end to drug production, and participation in “truth and responsibility” commissions to examine the crimes committed during a half-century of conflict. 
But now it has. 
This momentous shift reflects the decimation of the FARC following long years of struggle, the resilience of Colombian society, and, perhaps most important, Santos’s brilliant regional policy. 
By weakening the so-called Bolivarian Axis (Venezuela, Ecuador, and Bolivia), the FARC guerrillas were left without a supportive regional environment. 
As with peace processes in the Middle East and Central America following the Cold War’s end, regional changes created the conditions for the start of the Colombian process. 
But, in the Middle East and Central America, external actors – the United States and the Soviet Union – produced the change; in the case of the Colombian process, the change came from within. 
Prior to engaging the FARC in secret talks in Cuba, Santos’s regional diplomacy shifted the region’s politics from saber rattling to the hard work of cooperation. 
He turned Venezuela and Ecuador, which had long been safe havens for the FARC, into friendly neighbors willing to bring an end to the archaic tradition of revolutionary wars. 
In fact, in what is perhaps the most remarkable diplomatic turnaround, Venezuelan President Hugo Chávez has become a key facilitator in the resolution of the Colombian conflict. 
The talks with the FARC evolved as regional détente was followed by an ambitious initiative to address the root causes of the Colombian conflict. 
Most notably, Santos signed the Victims and Land Restitution Law in June 2011, in the presence of United Nations Secretary-General Ban Ki-moon. 
The law provides reparation for the victims of human-rights violations in the course of a 60-year conflict, as well as restitution of millions of hectares stolen from peasants. 
The law thus puts Colombia on a path to peace by blunting the FARC’s appeal to land reform to justify its untold atrocities. 
The law is undeniably complex, and by no means without shortcomings. 
But, if implemented as planned, it could bring about a profound social revolution. 
It also represents a novel approach to peace, given that such laws are normally introduced only after a conflict has ended. 
In this case, returning land to dispossessed peasants and offering financial reparation to the victims and those who were displaced by the conflict became the way to peace. 
Indeed, it was none other than Alfonso Cano, a former FARC leader, who called the law “essential to a future of reconciliation” and a “contribution to a real solution to the conflict.” 
Skeptics and opponents of the negotiations do have a case, however. 
The FARC’s record in previous peace talks reveals a penchant for manipulating negotiations to gain national and international legitimacy without actually being willing to strike a deal. 
Santos could, therefore, have been tempted to choose the Sri Lanka way – a ruthless military onslaught to defeat the insurgents, at the price of major human-rights violations and the destruction of civilian communities. 
Instead, Santos opted for the path of least expedience. 
After all, war, in Colombia and elsewhere, frequently unites nations, while peace divides them. 
The repercussions of a genuine end to the Colombian armed conflict would be felt far beyond the country’s borders. 
If Chávez’s Venezuela has become a narco-state in which the regime’s acolytes are drug lords, this reflects their privileged relations with the FARC. 
Repercussions would also be felt in Mexico, where drug cartels are tearing apart the country, and the US, the world’s largest source of demand. 
West Africa, too, would be affected, having become in recent years the main transit point for South American drugs headed to Europe. 
Formidable difficulties still lie ahead, and a final agreement is by no means certain. 
But Santos nonetheless has a fair chance of burying, once and for all, the specious mystique of violent revolutionary change that has held back Latin America’s political and economic modernization for so long. 

Colombia’s Eternal Agony 
Colombia is in better shape today than it has been for years, thanks largely to President Alvaro Uribe’s leadership, but it remains a bizarre place, one facing strange and intractable challenges. 
Colombia’s FARC guerrillas have held some of their kidnapping victims for many years. 
Child soldiers still linger in paramilitary groups, and there are compromising video recordings of leading Colombian politicians and drug lords. 
Perhaps weirdest of all, there are imprisoned guerrillas who refuse to be set free, and a government that insists on liberating them, even against their will. 
Uribe was re-elected just over a year ago by a landslide, a tribute to the popularity and effectiveness of his “democratic security” policy of combating both the guerrillas and the country’s generalized violence. 
Latin America’s oldest standing two-party system was decimated in that election, as the Polo Democrático presidential candidate won more votes than the Liberal Party’s contender, finally giving electoral expression to left-wing forces that had never been able to see more potential for change at the ballot box than by fighting in the mountains. 
Negotiations on Colombia’s Free Trade Agreement (FTA) with the United States had been finalized. 
Even the questionable deal Uribe cut with the right-wing paramilitary AUC groups, pardoning up to 30,000 of their members for often horrendous crimes in exchange for their disarmament, appeared successful. 
With Uribe in charge, Colombia seemed to be on a roll. 
But much of this success has since been squandered, with both Colombia and Uribe now in deep trouble. 
The so-called parapolítica scandals have rocked Uribe’s government, forcing the resignation of some cabinet ministers, and embarrassing others, including the president himself. 
Photographs, videos, and audio recordings of politicians and paramilitary thugs (including one who boasts of having personally killed more than 300 of his enemies) have discredited a political elite that, while never very popular, has now had some of the worst suspicions that many held about it graphically confirmed. 
For years human rights activists and scholars suspected the obvious: the emergence of an enormous, vicious, well-armed, and well-trained parallel army to fight the guerillas was not some spontaneous act. 
It was, many believed, a deliberate policy devised and carried out by the official military and the political elite to wage war “off the books.” 
The parapolítica or paragate revelations seem to confirm another suspicion as well: the distinction between the paramilitaries and the drug cartels, like that between the guerrillas and the cartels, is a nuanced one. 
Unfortunately, these revelations come at the worst possible moment. 
Colombia’s FTA with the US was in danger the moment the US Republicans lost their majority in both houses of Congress last November. 
Still, it seemed more likely to pass than the other two pending Latin American trade deals with Panama and Peru. 
Now it appears that President George W. Bush’s closest ally in the hemisphere will not only have its FTA rejected, owing to human rights concerns in the US House and Senate. 
Moreover, it might also lose Plan Colombia, the huge – and hugely controversial – American aid program that has funneled tens of billions of dollars into Colombia since the late 1990’s, ostensibly to fight the drug cartels, but also, in fact, to wage counter-insurgency. 
Uribe has spent weeks directly and personally lobbying key American legislators, and he is undoubtedly his own best advocate. 
But, just as former US Vice-President Al Gore recently refused to share a dais with Uribe in Miami, many members of Congress refuse to approve a trade agreement or an aid package that may link them to a government tainted by egregious human rights abuses, complicity with drug lords, or both. 
The US has never really wanted to include human rights issues in trade agreements; at best, and only when forced, US presidents have consented to incorporating labor and environmental chapters. 
The European Union thinks differently; in its economic cooperation and free trade agreement with Mexico, for example, it insisted on – and achieved – the inclusion of a “democracy clause” that made its economic benefits conditional on ongoing respect for democratic rule and human rights. 
Colombia’s blemished human rights record is affecting its government’s international standing and providing ammunition for those who wish to sabotage the FTA. 
For example, protectionist Democrats in the US Congress have been able to insulate themselves from charges of opposing free trade if they scuttle Colombia’s FTA, because they will most likely ratify the deals for Panama and Peru. 
Can Uribe survive his current travails? 
The answer is almost certainly yes, unless the parapolítica mess reaches him directly, or the US explicitly rejects the FTA and postpones or attaches conditions to renewal of funding for Plan Colombia. 
Uribe’s political demise would hurt everyone, but the rejection of the FTA on human rights grounds could set a healthy precedent. 
In a region where threats to democracy and human rights are growing, linking trade and economic policy to these considerations is not a bad idea. 
Uribe may not deserve such a fate, but history works in strange ways. 

Colombia’s New Dawn 
MADRID – Trapped since the 1960’s in a protracted armed conflict with the most unscrupulous militias imaginable, and hostage to drug lords who turned the country’s vast rural areas into fiefdoms of crime and untold atrocities, Colombia long projected to the world the image of a country addicted to violence. 
But no more. 
The Colombian paradox is that violence and the drug economy coexisted with one of the oldest and most genuinely constitutional traditions in Latin America. 
Yet a long succession of presidents failed to solve the paradox. 
It was Alvaro Uribe’s exceptionally effective administration in 2002-2010 that finally made the difference. 
President Uribe’s unwavering fortitude in sticking to his policy of “democratic security” – admittedly, its flaws were rightly and severely criticized by human rights groups – radically changed Colombia’s course and national self-image. 
Violence decreased most significantly with the disbanding of the right-wing paramilitaries, and with the decimation in battle of the left-wing FARC guerillas and the decapitation of its leadership. 
Colombia’s homicide rate, for years one of the highest in the world, has almost halved since 2002. 
Moreover, Colombia is no longer the world’s gold medalist in producing cocaine. 
According to a report by the United Nations Office Against Drug and Crime, Colombia’s cocaine output has now reached its lowest level since 2000. 
In 2009 alone, the government eradicated more than 165,000 hectares of coca. 
Colombia’s new president, Juan Manuel Santos, who as defense minister in Uribe's second government was responsible for the army’s most spectacular exploits against the FARC, is probably the best-equipped politician to build on this success. 
An economist with an impeccable ministerial career behind him, and a statesman who made peace with Venezuela within three days of assuming office, thus both averting war and opening huge economic and commercial opportunities – Santos is bent on shifting Colombia’s course from to conflict to peace. 
But do not expect Santos to be softer on security matters than Uribe. 
Unless the FARC abandons the armed struggle, there will be no peace negotiations. 
Nonetheless, Santos is determined to shift from Uribe’s emphasis on “democratic security” to one of “democratic prosperity” – a shift for which Uribe deserves credit. 
Over the course of Uribe’s presidency, foreign investment increased 50% and annual economic growth averaged 4%. 
Even so, Santos’s “civilian” presidency faces challenges no less demanding than the war against the militias. 
With a colossal and diverse geography of 1.2 million square kilometers, Colombia’s dramatically inadequate infrastructure is as much a handicap for economic development as poor security. 
To reduce the country’s appalling levels of poverty, Santos will need to focus on an ambitious plan for infrastructure improvement, modernization of agriculture and mining, housing construction, and the introduction of new technologies. 
Another major objective is to resolve yet another paradox. 
Colombia, America’s staunchest and most loyal ally in Latin America, and the third largest recipient of United States aid – after Israel and Egypt – has so far failed to convince the US Congress to sign the kind of free-trade agreement that America has with other countries on the continent. 
Much of the congressional opposition stems from worries about an influx of cut-rate Colombian goods, costing US jobs. 
This is a legitimate concern, but one that can be resolved through careful negotiations. 
Hence, Colombia’s opponents prefer to focus their criticism on the violation of human rights in the course of the government’s fight against the insurgents. 
Especially sensitive is the targeted killing of trade-union leaders. 
There have, indeed, been many human-rights violations in Colombia. 
Most appalling was the army’s murder of thousands of innocent civilians in order to present the deaths as FARC casualties. 
But the rule of law did eventually prevail. 
Once these atrocities were discovered, the government dealt with them swiftly. 
The commanders responsible were fired, and the assassins are being brought to trial before civilian courts. 
Unionists continue to be threatened and murdered, but the number of such homicides has fallen at a steeper rate than the general number of homicides in Colombia. 
Moreover, a meticulous study conducted by the Center for the Study of Economic Development at the Universidad de los Andes in Bogota has shown that there was no evidence that union members are being systematically killed because of their involvement in union activities. 
Frequently the driving motivation is their ideological and political stance, as might be the case for other victims in Colombia’s armed conflict. 
This, of course, does not make the killings more palatable. 
What US lawmakers should do, however, is to help make the decline in violence irreversible. 
A free-trade agreement that enhances the well-being of the Colombian people can be no less effective than military operations in reducing violence and drug traffic, which remains a major US strategic objective. 

Colombia’s Perilous Success 
Recent months have been very good for Colombian President Alvaro Uribe. 
His “Democratic Security” policy now seems to have definitively turned the tables in the country’s fight against the Revolutionary Armed Forces of Colombia (FARC), which have seen their leaders killed and their hostages freed. 
Uribe has also proven to be a strong economic administrator, attracting increasing flows of foreign direct investment to Colombia. 
But success presents Uribe with a new set of challenges that risk undoing most of his achievements. 
The first and most tangible challenge is that Uribe – with popularity ratings of more than 90% following the rescue of 15 high-profile hostages, including former presidential candidate Ingrid Betancourt, in early July – will be more tempted to run for a third term. 
This would not be catastrophic per se, but amending the constitution again to favor one of the players would undermine the country’s relatively deep political institutionalization – one of the factors that has helped attract foreign investors. 
Changing the rules of the game to prop up personal rule would help perpetuate weaknesses such as a lack of accountability, and prevent important government policies from becoming entrenched as state policies. 
One can only hope that Uribe has learned the lessons of doomed third-term experiments in the region – Peru’s Alberto Fujimori and Argentina’s Carlos Menem spring to mind – and leave the presidency on a high note. 
If he does, he will probably be remembered as one of Colombia’s most successful and influential presidents, and can look forward to a continuing career as a regional and international statesman. 
Perhaps more importantly, were Uribe to step down after his current term, he would still wield considerable proxy power at home, playing an integral role in choosing his successor – whoever he backs stands a very good chance of winning – and boosting his political supporters’ prospects in legislative elections. 
If the outcome of the first challenge rests solely on Uribe’s shoulders, two others are tied to the FARC’s reaction to these latest developments – whether it chooses to negotiate or to continue its armed struggle. 
Under the first scenario, Uribe faces the danger of being pushed into a “weak” or “unconditional” peace process. 
For more than six years, the government has resisted calls to negotiate with the FARC, rejecting the group’s requests for a demilitarized zone, dismissing overtures, and demanding the release of all hostages and a cease-fire as a precondition for talks. 
The problem is that a weakened FARC may expose the government to popular pressure to launch negotiations, even if FARC does not declare a cease-fire. 
In that case, the FARC might use peace talks – as it has several times in the past – to bid for time, re-arm and regroup. 
For the last couple of years, the FARC, many of whose leaders believe that they “win” simply by prolonging the conflict, has been seeking ways – for example, a humanitarian exchange and political recognition – to ease the military pressure that it has faced since Uribe came to power. 
The danger, then, is a failure to deliver the knockout blow at a time when the group appears to be disintegrating. 
But continuing the fight also poses a serious threat to Uribe’s main success, which has been to improve perceptions of security, including among investors. 
The FARC, now wounded and cornered, may decide that its only option is to go on the offensive in order to demonstrate its continuing relevance and remaining strength. 
Although the FARC’s capabilities have been seriously degraded over the last six years, and its geographical dispersion has shifted away from the main population centers, a series of high-profile attacks against business and civilian targets in the main cities would suffice to shatter the impression of security in the country. 
Worryingly, this might also happen if the FARC splits, with one part deciding to negotiate while hard-line military commanders fight on. 
If Uribe stands down, whoever succeeds him will probably maintain most of his policies and continue to work toward improving security in the country. 
Investors will know that Colombia is not a one-man show, and that the political system’s vaunted institutionalization and effective checks and balances are real. 
Strengthening the state and fostering a stable and growing economy would also provide the best rebuke to the FARC and its bid for time. 

Colombia’s Gift to the World 
MADRID – After four long years of talks in Havana, Cuba, Colombian President Juan Manuel Santos has negotiated an end to successive governments’ armed conflict with the Revolutionary Armed Forces of Colombia (FARC), the most resilient insurgent group in Latin America. 
Colombia’s civil war, which lasted for six decades, has killed an estimated 220,000 people and displaced another six million. 
Ending it was a remarkable feat of diplomacy, and Santos deserves the world’s applause. 
Indeed, he should be far and away the leading candidate for this year’s Nobel Peace Prize. 
Three significant factors led to the peace accord: the Colombian armed forces’ increased effectiveness, which enabled them to decimate the FARC’s ranks; 
Santos’s previous diplomatic groundwork, wherein he repaired Colombia’s previously fraught relations with neighboring Venezuela, Ecuador, and Bolivia, an axis that had long contributed to sustaining the FARC by providing logistical and political support; and, finally, Cuba’s new policy of rapprochement with the United States, which Santos was wise to exploit in his own efforts to make peace. 
With the conditions for negotiations in place, Santos also had to address the root cause of the conflict. 
He did this by signing the Victims and Land Restitution Law in June 2011, in the presence of UN Secretary-General Ban Ki-moon. 
The law was a watershed, because it simultaneously pacified violent regions, delivered justice for millions of dispossessed peasants, radically improved standards of living, and blunted the appeal of a guerrilla group that used the banner of land reform to justify its untold atrocities. 
It even drew praise from the Office of the UN High Commissioner for Human Rights in Colombia for its special provisions for women and children survivors of human rights abuses, and for those targeted for their perceived sexual orientation. 
While not flawless, the Victims and Land Restitution Law clearly helped pave the way for peace and national reconciliation in Colombia. 
Indeed, none other than the FARC’s former leader, Alfonso Cano (the nom de guerre of Guillermo Sáenz Vargas), acknowledged this in 2011. 
Inevitably, the Colombian government’s transitional-justice regime to end the conflict and re-assimilate the FARC into the Colombian political process has some detractors, and has divided the Colombian electorate. 
Former President Álvaro Uribe is now leading those who stridently oppose the peace deal on the grounds that it does not go far enough to punish FARC militants. 
Nonetheless, the accord signed in Havana is historic and innovative, because it emphasizes truth-telling without eschewing justice altogether. 
Its focus is not on vengeance and retribution, but on “restorative justice,” a principle Archbishop Desmond Tutu used to describe South Africa’s transition to majority rule after apartheid. 
The Colombian model of transitional justice acknowledges that national reconciliation is achievable only if the communities broken by the long, savage war are repaired and revitalized. 
In other words, Colombia’s approach to transitional justice puts the victims first – more so than any peace process seen in recent years. 
Victims’ delegations even joined the Havana talks and met with the FARC leadership that was responsible for so many past atrocities. 
The Colombian government’s pioneering approach seems to have benefited from a gender sub-commission that considered proposals from nongovernmental organizations representing women’s rights and the LGBT community. 
The government was also wise to establish a special sub-commission to examine the history of the bloodshed, because disagreement about the past often constitutes an insurmountable obstacle to peace and reconciliation. 
Colombian domestic politics should now move to the forefront of attention, because peace processes are vulnerable to public opinion. 
While war often unites countries, peace tends to divide them, because it inevitably requires concessions and sacrifices. 
Peace comes at a cost, and people often disagree about who should foot the bill. 
For a democratic leader, negotiating peace is – perversely – riskier than waging war. 
This is especially true for an asymmetric peace process between a democratically elected government and an unaccountable non-state actor, which doesn’t have to worry about upcoming elections, opposition political parties, the press, or a skeptical public. 
Despite these enormous constraints, the Santos government never deviated from proper democratic procedures. 
It considered proposals from popular assemblies around the country, and it maintained transparency throughout the process. 
Santos has overcome formidable challenges, and the next one is a forthcoming plebiscite, where the Colombian people, one hopes, will recognize that their country has furnished a conflict-ridden world with a new model for peace. 
The international community should take note of this and assist Colombia in the difficult transition ahead as it implements policies in accordance with the new agreement. 
The post-conflict phase will be no less demanding than the peace process itself. 

Colonization of Palestine Precludes Peace 
For more than a quarter century, Israeli policy has been in conflict with that of the United States and the international community. 
Israel’s occupation of Palestine has obstructed a comprehensive peace agreement in the Holy Land, regardless of whether Palestinians had no formalized government, one headed by Yasir Arafat or Mahmoud Abbas, or with Abbas as president and Hamas controlling the parliament and cabinet. 
The unwavering US position since Dwight Eisenhower’s administration has been that Israel’s borders coincide with those established in 1949, and, since 1967, the universally adopted UN Resolution 242 has mandated Israel’s withdrawal from the occupied territories. 
This policy was reconfirmed even by Israel in 1978 and 1993, and emphasized by all American presidents, including George W. Bush. 
As part of the Quartet, including Russia, the UN, and the European Union, he has endorsed a “Road Map” for peace. 
But Israel has officially rejected its basic premises with patently unacceptable caveats and prerequisites. 
With Israel’s approval, The Carter Center has monitored all three Palestinian elections. 
Supervised by a blue-ribbon commission of college presidents and distinguished jurists, they have all been honest, fair, and peaceful, with the results accepted by winners and losers. 
Hamas will control the cabinet and prime minister’s office, but Mahmoud Abbas retains all authority and power exercised by Yasir Arafat. 
He still heads the PLO, the only Palestinian entity recognized by Israel, and could deal with Israeli leaders under this umbrella, independent of Hamas control. 
He has unequivocally endorsed the Quartet’s Road Map. 
Post-election polls show that 80% of Palestinians still want a peace agreement with Israel and nearly 70% support Abbas as president. 
Israel has announced a policy of isolating and destabilizing the new government (perhaps joined by the United States). 
The elected officials will be denied travel permits, workers from isolated Gaza barred from entering Israel, and every effort is being made to block funds to Palestinians. 
The Quartet’s special envoy, James Wolfensohn, has proposed that donors assist the Palestinian people without violating anti-terrorism laws that prohibit funds from being sent directly to Hamas. 
In the short run, the best approach is to follow Wolfensohn’s advice, give the dust a chance to settle in Palestine, and await the outcome of Israel’s election later this month. 
Hamas wishes now to consolidate its political gains, maintain domestic order and stability, and refrain from any contacts with Israel. 
It will be a tragedy – especially for the Palestinians – if they promote or condone terrorism. 
The preeminent obstacle to peace is Israel’s colonization of Palestine. 
There were just a few hundred settlers in the West Bank and Gaza when I became president, but the Likud government expanded settlement activity after I left office. 
President Ronald Reagan condemned this policy, and reaffirmed that Resolution 242 remained “the foundation stone of America’s Middle East peace effort.” 
President George H.W. Bush even threatened to reduce American aid to Israel. 
Although President Bill Clinton made strong efforts to promote peace, a massive increase of settlers occurred during his administration, to 225,000, mostly while Ehud Barak was prime minister. 
Their best official offer to the Palestinians was to withdraw 20% of them, leaving 180,000 in 209 settlements, covering about 5% of the occupied land. 
The 5% figure is grossly misleading, with surrounding areas taken or earmarked for expansion, roadways joining settlements with each other and to Jerusalem, and wide arterial swaths providing water, sewage, electricity, and communications. 
This intricate honeycomb divides the entire West Bank into multiple fragments, often uninhabitable or even unreachable. 
Recently, Israeli leaders have decided on unilateral actions without involving either the US or the Palestinians, with withdrawal from Gaza as the first step. 
As presently circumscribed and isolated, without access to the air, sea, or the West Bank, Gaza is a nonviable economic and political entity. 
The future of the West Bank is equally dismal. 
Especially troublesome is Israel’s construction of huge concrete dividing walls in populated areas and high fences in rural areas – located entirely on Palestinian territory and often with deep intrusions to encompass more land and settlements. 
The wall is designed to surround a truncated Palestine completely, and a network of exclusive highways will cut across what is left of Palestine to connect Israel with the Jordan River Valley. 
This will never be acceptable either to Palestinians or to the international community, and will inevitably precipitate increased tension and violence within Palestine and stronger resentment and animosity from the Arab world against America, which will be held accountable for the plight of the Palestinians. 
Acting prime minister Ehud Olmert and others pointed out years ago that Israel’s permanent occupation will be increasingly difficult as the relative number of Jewish citizens decreases demographically both within Israel and in Palestine. 
This is obvious to most Israelis, who also view this dominant role as a distortion of their ancient moral and religious values. 
Over the years, opinion polls have consistently shown that about 60% of Israelis favor withdrawing from the West Bank in exchange for permanent peace. 
Similarly, an overwhelming number of both Israelis and Palestinians want a durable two-state solution. 
Casualties have increased during the past few years as the occupying forces imposed tighter controls. 
From September 2000 until March 2006, 3982 Palestinians and 1084 Israelis were killed in the conflict, and this includes many children: 708 Palestinians and 123 Israelis. 
There is little doubt that accommodation with Palestinians can bring full Arab recognition of Israel and its right to live in peace. 
Any rejectionist policies of Hamas or any terrorist group will be overcome by an overall Arab commitment to restrain further violence and to promote the well-being of the Palestinian people. 
Down through the years, I have seen despair and frustration evolve into optimism and progress and, even now, we need not give up hope for permanent peace for Israelis and freedom and justice for Palestinians if three basic premises are honored: 
1. 
Israel’s right to exist – and to live in peace – must be recognized and accepted by Palestinians and all other neighbors; 
2. 
The killing of innocent people by suicide bombs or other acts of violence cannot be condoned; and 
3. 
Palestinians must live in peace and dignity, and permanent Israeli settlements on their land are a major obstacle to this goal. 

A Long Way from Comey to Watergate 
PRINCETON – President Donald J. Trump’s firing of FBI Director James Comey is unprecedented, as is much of what Trump has undertaken as president. 
Despite similarities with President Richard M. Nixon’s infamous “Saturday Night Massacre” 44 years ago, during the Watergate scandal, the political situations are utterly different. 
In October 1973, Nixon, waiting until a weekend, ordered the dismissal of a newly appointed special prosecutor, Archibald Cox, who had issued a subpoena demanding that Nixon hand over secretly recorded – and, as would become clear, highly damning – White House tapes. 
Nixon’s defiance was direct, and the result was disastrous. 
Attorney General Elliot Richardson and Deputy Attorney General William Ruckelshaus resigned in protest rather than carry out the president’s order. 
A federal judge ruled the firing of Cox illegal. 
Public opinion polls showed, for the first time, a plurality of Americans favoring Nixon’s impeachment. 
It was the beginning of the end. 
Congressmen introduced impeachment resolutions. 
Nixon was forced to appoint a new special prosecutor. 
The drama thickened for another ten months, until the Supreme Court unanimously ordered Nixon to surrender the tapes. 
A few days after that, Nixon resigned rather than face certain impeachment and removal from office. 
By contrast, unless the stars realign, Trump’s firing of Comey may mark the beginning of nothing, or at least of nothing bad for the president. 
Trump, like Nixon, may well be guilty of grave impeachable offenses – even graver offenses than Nixon’s. 
Trump, like Nixon, may have feared that unless he fired the person in charge of investigating him, some terrible revelation would be forthcoming. 
But, even if all this is so, Trump, unlike Nixon, may very well get away with it. 
The two events differ in many ways, including their timing. 
By the time Nixon fired Cox, the Watergate affair had been building for far longer than the allegations about Trump and Russia have, so nerves had been rubbed raw. 
The main differences, though, are political. 
In Nixon’s time, there were solid adversarial Democratic majorities in both houses of Congress, and there were also some Republicans, especially in the Senate, who put concerns about the Constitution ahead of concerns for their party. 
The Senate appointed a special select committee, headed by Democrat Sam Ervin and Republican Howard Baker, which heard testimony and gathered official evidence that led to the indictment of 40 administration officials and the conviction of several top White House aides, as well as to Nixon’s resignation. 
Today’s Republican congressional majorities, however, have seemed singularly devoted to slowing and narrowing any serious inquiry into the thoroughly substantiated reports of Russian efforts to throw the 2016 election to Trump. 
Although there has been talk, even from some Republicans, about appointing a select committee or a special prosecutor to look into the allegations about the Russians and the Trump campaign, the resistance has been extraordinary compared to 1973. 
Based on the events of the last week, Republicans evidently would rather rail against insider leaks and, yes, Hillary Clinton’s email server than inquire into the White House’s insouciance about former National Security Adviser Michael Flynn’s alarming links to Russia and Turkey. 
Without a significant shift, the congressional investigations will continue to remain confined to the standing House and Senate committees, where they will likely remain understaffed and under-motivated. 
Then there is the press. 
In 1973, dogged reporting by Carl Bernstein and Bob Woodward of the Washington Post kept the Watergate story alive, after most news outlets had dropped it. 
Once their reporting gained traction, the rest of the press picked up the scandal and kept up the pressure on the Nixon White House. 
Today, Trump can count on the fervent support of propaganda operations that Nixon could only have prayed for, including the unabashedly polemical Fox News and Breitbart News, as well as the countless bloggers (and, for that matter, Russian-controlled cyberbots) pumping out pro-Trump propaganda. 
As I write this, one Fox commentator after another is parroting the White House’s absurd claim that Trump fired Comey because of the terrible things the FBI director did to Clinton during the campaign. 
One almost expects the network’s biggest star, Sean Hannity, to start leading on-air anti-Comey chants of “Lock Him Up!” 
The effect on anyone who recalls Trump’s cheerleading for Comey last October – followed by the red-hatted crowds’ ritualistic baying to jail crooked Hillary – is psychedelic. 
But fans of Fox News usually believe what the channel reports. 
And while Nixon had Fox News' future Svengali, a young Roger Ailes, behind him, Fox and the rest were still two decades away. 
It is possible, of course, that Trump’s firing of Comey will push some Republicans to decide that enough is enough and follow Baker’s example. 
The early responses have been mixed: although Republican Senators Jeff Flake, John McCain, and Ben Sasse have expressed varying degrees of disappointment, normally independent-minded Senators Susan Collins and Lindsey Graham have backed Trump’s decision. 
There is always a chance, in such a volatile climate, that deals will be broken, witnesses will flip, and facts will emerge that are every bit as incriminating as the evidence that felled Nixon. 
International developments might also awaken some Republicans to the magnitude of the Russian offensive on Western democracies, an offensive which, in the wake of the French elections, feels like an undeclared war. 
For the moment, though, there is no reason to see Trump’s firing of Comey as a re-run of Nixon’s “Saturday Night Massacre,” or any other event in American political history. 
The president may be acting as if he has something terrible to hide, just as Nixon did, but that won’t be enough under the circumstances to cause the exposure of whatever it may be. 
Ironically, Trump, the self-declared outsider who lost the popular vote and squeaked into office by winning the Electoral College, finds himself, for the moment, in some ways more protected than the party man Nixon, who won the 1972 election by overwhelming popular as well as electoral margins. 
It may be unsettling to acknowledge, but history is not repeating itself, no matter how tragic or farcical things might appear. 
Trump may yet fall, but a lot will have to change. 

The Coming Anti-National Revolution 
NEW HAVEN – For the past several centuries, the world has experienced a sequence of intellectual revolutions against oppression of one sort or another. 
These revolutions operate in the minds of humans and are spread – eventually to most of the world – not by war (which tends to involve multiple causes), but by language and communications technology. 
Ultimately, the ideas they advance – unlike the causes of war – become noncontroversial. 
I think the next such revolution, likely sometime in the twenty-first century, will challenge the economic implications of the nation-state. 
It will focus on the injustice that follows from the fact that, entirely by chance, some are born in poor countries and others in rich countries. 
As more people work for multinational firms and meet and get to know more people from other countries, our sense of justice is being affected. 
This is hardly unprecedented. 
In his book 1688: The First Modern Revolution, the historian Steven Pincus argues convincingly that the so-called “Glorious Revolution” is best thought of not in terms of the overthrow of a Catholic king by parliamentarians in England, but as the beginning of a worldwide revolution in justice. 
Don’t think battlefields. Think, instead, of the coffeehouses with free, shared newspapers that became popular around then – places for complex communications. 
Even as it happened, the Glorious Revolution clearly marked the beginning of a worldwide appreciation of the legitimacy of groups that do not share the “ideological unity” demanded by a strong king. 
Thomas Paine’s pamphlet Common Sense, a huge bestseller in the Thirteen Colonies when it was published in January 1776, marked another such revolution, which was not identical with the Revolutionary War against Britain that began later that year (and had multiple causes). 
The reach of Common Sense is immeasurable, because it wasn’t just sold but was also read aloud at churches and meetings. 
The idea that hereditary monarchs were somehow spiritually superior to the rest of us was decisively rejected. 
Most of the world today, including Britain, agrees. 
The same could be said of the gradual abolition of slavery, which was mostly achieved not by war, but by an emerging popular recognition of its cruelty and injustice. 
The 1848 uprisings around Europe were substantially a protest against voting laws that limited voting to only a minority of men: property holders or aristocrats. 
Women’s suffrage followed soon after. 
In the twentieth and twenty-first centuries, we have seen civil rights extended to racial and sexual minorities. 
All of the past “justice revolutions” have stemmed from improved communications. 
Oppression thrives on distance, on not actually meeting or seeing the oppressed. 
The next revolution will not abolish the consequences of place of birth, but the privileges of nationhood will be tempered. 
While the rise in anti-immigrant sentiment around the world today seems to point in the opposite direction, the sense of injustice will be amplified as communications continue to grow. 
Ultimately, recognition of wrong will wreak big changes. 
For now, this recognition still faces strong competition from patriotic impulses, rooted in a social contract among nationals who have paid taxes over the years or performed military service to build or defend what they saw as exclusively theirs. 
Allowing unlimited immigration would seem to violate this contract. 
But the most important steps to address birthplace injustice probably will not target immigration. 
Instead, they will focus on fostering economic freedom. 
In 1948, Paul A. Samuelson’s “factor-price equalization theorem” lucidly showed that under conditions of unlimited free trade without transportation costs (and with other idealized assumptions), market forces would equalize the prices of all factors of production, including the wage rate for any standardized kind of labor, around the world. 
In a perfect world, people don’t have to move to another country to get a higher wage. 
Ultimately, they need only be able to participate in producing output that is sold internationally. 
As technology reduces the cost of transportation and communications to near the vanishing point, achieving this equalization is increasingly feasible. 
But getting there requires removing old barriers and preventing the erection of new ones. 
Recent free-trade agreements under discussion, the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership, have suffered setbacks as interest groups attempt to bend them to their own aims. 
But, ultimately, we need – and probably will get – even better such agreements. 
To achieve factor-price equalization, people need a stable base for a real lifetime career connected to a country in which they do not physically reside. 
We also need to protect the losers to foreign trade in our existing nation-states. 
Trade Adjustment Assistance (TAA) traces its roots in the United States back to 1974. 
Canada experimented in 1995 with an Earnings Supplement Project. 
The European Globalization Adjustment Fund, started in 2006, has a tiny annual budget of €150 million ($168.6 million). 
US President Barack Obama has proposed to expand the TAA program. 
But, so far, this has meant little more than experiments or proposals. 
Ultimately, the next revolution will likely stem from daily interactions on computer monitors with foreigners whom we can see are intelligent, decent people – people who happen, through no choice of their own, to be living in poverty. 
This should lead to better trade agreements, which presuppose the eventual development of orders of magnitude more social insurance to protect people within a country during the transition to a more just global economy. 

Coming Out in Africa 
The lead story in a recent issue of the Daily Graphic , Ghana's most influential newspaper, was designed to shock: "Four Gay Men Jailed." 
Homosexual acts are crimes in Ghana - and across much of sub-Saharan Africa. 
Uganda's leader, Yoweri Museveni, is vehemently opposed to homosexuality. 
So is Zimbabwe's embattled Robert Mugabe. 
Namibia's President Sam Nujoma complains that the West wants to impose its decadent sexual values on Africa through the guise of gay tolerance. 
Indeed, the global movement to fight discrimination against people living with HIV/AIDS - which first surfaced as a "gay disease" in the United States - has elicited little sympathy for homosexuals in sub-Saharan Africa. 
Only in South Africa have gays and lesbians won significant legal protections. 
The arrests in Ghana, while typical of African bigotry towards gays, were all the more shocking because gays and lesbians actually thrive in Ghana's capital, Accra. 
A country of 20 million people, Ghana is unusually tolerant. 
Whites, Asians, and Middle Easterners mix well. 
Ghana has never had a civil war - a badge of honor in conflict-prone sub-Saharan Africa - and three years ago staged a peaceful transfer of power from one elected government to another. 
Although homosexuality remains taboo, gays seem safe. 
Physical attacks against them are rare. 
In Accra, a trendy street club named Strawberries is well known as a hangout for gays, and there are a few prominent, if still discreet, clubs where homosexual men and women gather. 
One gay man has his own television show, even though his sexual preferences are no secret. 
Precisely because gays seem so accepted, the arrests sent a disturbing message. 
The paper that reported the story is owned by the government and sells more copies than all other newspapers combined. 
In the day following its original report, the Daily Graphic went further in showing its revulsion over gay activities by publishing a lead editorial that blamed Europeans and Americans for "all the reported cases of homosexuality" in Ghana. 
The paper alleged that the men had been enticed into such practices by a Norwegian, who gave them money and gifts in exchange for photos of them engaged in homosexual acts. 
The Norwegian posted the photos on the Web and supposedly mailed printouts to his Ghanaian friends. 
I am neither gay, nor Ghanaian, but I have spent considerable time in Ghana and I reject the argument - heard in other parts of Africa as well - that Western notions of sexuality have perverted Africans. 
In my experiences, Africans simply have a moral blind spot on the subject of homosexuality. 
Journalists seem especially ignorant. 
Last year I worked in Ghana as country director of Journalists for Human Rights, a Canadian group that helps African journalists give voice to the voiceless in their society while raising awareness of human rights abuses. 
The editor of the Daily Graphic supported my organization, and I held training sessions for his newspaper's reporters and editors. 
The sessions resulted in stories that highlighted mistreatment of women and children and the failures of government agencies to deliver promised services. 
But when I complained about bias against gays, the editor responded that gays don't deserve any sort of protection. 
Although this example may suggest that Africans are united against homosexuality, they are not; gay advocates are simply terrified of speaking out, frightened that their support will be interpreted as an admission that they are gay. 
Two years ago, the silence was broken briefly by Ken Attafuah, who directs Ghana's truth and reconciliation commission, charged with investigating rights violations during two decades of dictatorships. 
"It should not be left to gays alone to fight for gay rights, because we are talking about fundamental violations of justice," Attafuah said. 
"You do not have to be a child to defend the rights of children." 
That point is lost in Ghana. 
After the gay arrests, I spoke at the University of Ghana about media coverage of homosexuals. 
While no one objected to the coverage by the Daily Graphic , no one denounced homosexuality either. 
Instead I received a short dissertation from one of the female students on how older married women often proposition her in nightclubs. 
Two other females said the same thing happens to them and asserted that lesbianism is widely practiced in Accra, if publicly unacknowledged. 
Lesbianism is, of course, a less threatening practice to the men who run Ghana. 
No African man is supposed to be gay, and physical contact between men is presumed to be innocent. 
Yet contradictions abound. 
Once, at a traditional ceremony, in which an infant child receives his tribal name, I watched the proud father and a half dozen male friends dance together before a crowd of well-wishers. 
The movements of these men were sexually suggestive, and at times they touched, even held hands. 
As I watched, a European next to me explained that such dancing is accepted, so long as the contact between the men is left undefined. 
In Ghana and in much of Africa, a culture of silence exists around same-sex love - a culture that many Westerners, raised on a belief in rights and openness - find unacceptable. 
Yet the notion of "coming out" may not be a solution for every African homosexual. 
Notions of what is right and wrong often collapse under the irreconcilable tensions between tradition and modernity, the individual and the community. 
In sub-Saharan Africa, I am reminded of the saying that silence is golden. 
Under the cover of silence, gays refrain from provoking the conflicts that a more vocal advocacy of homosexuality would bring. 
But the recent arrests in Ghana expose this strategy's true price. 

Coming Soon: Capitalism 3.0 
CAMBRIDGE ­– Capitalism is in the throes of its most severe crisis in many decades. 
A combination of deep recession, global economic dislocations, and effective nationalization of large swathes of the financial sector in the world’s advanced economies has deeply unsettled the balance between markets and states. 
Where the new balance will be struck is anybody’s guess. 
Those who predict capitalism’s demise have to contend with one important historical fact: capitalism has an almost unlimited capacity to reinvent itself. 
Indeed, its malleability is the reason it has overcome periodic crises over the centuries and outlived critics from Karl Marx on. 
The real question is not whether capitalism can survive – it can – but whether world leaders will demonstrate the leadership needed to take it to its next phase as we emerge from our current predicament. 
Capitalism has no equal when it comes to unleashing the collective economic energies of human societies. 
That is why all prosperous societies are capitalistic in the broad sense of the term: they are organized around private property and allow markets to play a large role in allocating resources and determining economic rewards. 
The catch is that neither property rights nor markets can function on their own. 
They require other social institutions to support them. 
So property rights rely on courts and legal enforcement, and markets depend on regulators to rein in abuse and fix market failures. 
At the political level, capitalism requires compensation and transfer mechanisms to render its outcomes acceptable. 
As the current crisis has demonstrated yet again, capitalism needs stabilizing arrangements such as a lender of last resort and counter-cyclical fiscal policy. 
In other words, capitalism is not self-creating, self-sustaining, self-regulating, or self-stabilizing. 
The history of capitalism has been a process of learning and re-learning these lessons. 
Adam Smith’s idealized market society required little more than a “night-watchman state.” 
All that governments needed to do to ensure the division of labor was to enforce property rights, keep the peace, and collect a few taxes to pay for a limited range of public goods. 
Through the early part of the twentieth century, capitalism was governed by a narrow vision of the public institutions needed to uphold it. 
In practice, the state’s reach often went beyond this conception (as, say, in the case of Bismarck’s introduction of old-age pensions in Germany in 1889). 
But governments continued to see their economic roles in restricted terms. 
This began to change as societies became more democratic and labor unions and other groups mobilized against capitalism’s perceived abuses. 
Anti-trust policies were spearheaded in the Unites States. 
The usefulness of activist monetary and fiscal policies became widely accepted in the aftermath of the Great Depression. 
The share of public spending in national income rose rapidly in today’s industrialized countries, from below 10% on average at the end of the nineteenth century to more than 20% just before World War II. 
And, in the wake of WWII, most countries erected elaborate social-welfare states in which the public sector expanded to more than 40% of national income on average. 
This “mixed-economy” model was the crowning achievement of the twentieth century. 
The new balance that it established between state and market set the stage for an unprecedented period of social cohesion, stability, and prosperity in the advanced economies that lasted until the mid-1970’s. 
This model became frayed from the 1980’s on, and now appears to have broken down. 
The reason can be expressed in one word: globalization. 
The postwar mixed economy was built for and operated at the level of nation-states, and required keeping the international economy at bay. 
The Bretton Woods-GATT regime entailed a “shallow” form of international economic integration that implied controls on international capital flows, which Keynes and his contemporaries had viewed as crucial for domestic economic management. 
Countries were required to undertake only limited trade liberalization, with plenty of exceptions for socially sensitive sectors (agriculture, textiles, services). 
This left them free to build their own versions of national capitalism, as long as they obeyed a few simple international rules. 
The current crisis shows how far we have come from that model. 
Financial globalization, in particular, played havoc with the old rules. 
When Chinese-style capitalism met American-style capitalism, with few safety valves in place, it gave rise to an explosive mix. 
There were no protective mechanisms to prevent a global liquidity glut from developing, and then, in combination with US regulatory failings, from producing a spectacular housing boom and crash. 
Nor were there any international roadblocks to prevent the crisis from spreading from its epicenter. 
The lesson is not that capitalism is dead. 
It is that we need to reinvent it for a new century in which the forces of economic globalization are much more powerful than before. 
Just as Smith’s minimal capitalism was transformed into Keynes’ mixed economy, we need to contemplate a transition from the national version of the mixed economy to its global counterpart. 
This means imagining a better balance between markets and their supporting institutions at the global level . 
Sometimes, this will require extending institutions outward from nation states and strengthening global governance. 
At other times, it will mean preventing markets from expanding beyond the reach of institutions that must remain national. 
The right approach will differ across country groupings and among issue areas. 
Designing the next capitalism will not be easy. 

Coming to Grips with History 
May 9th will be the mother of all celebrations in Moscow. The victory over Nazi-Germany 60 years ago will be commemorated and the human sacrifices to this end honoured. 
So far, so good. But some nations will be missing from the party. 
Two Baltic presidents have decided to stay home, because their hosts are not willing to concede that there is more to the history of WWII’s end than the victory over Hitler. Their peoples had to face half a century of occupation because of a deal struck before the war’s onset by Hitler and Stalin, the so-called Molotov-Ribbentrop Pact of 1939 that divided Eastern Europe between Nazi-Germany and the Soviet Union. 
I have to admire the third Baltic president – Vaira Vike-Freiberga from Latvia – who decided to go to Moscow, honouring what should be honoured, and speaking aloud about what should not be hidden. 
By doing so she demonstrates the strong position her country has obtained as a member of NATO and the EU, and she will be the one riding the high moral ground. 
It is a pity that the Russian leadership of today has chosen not to condemn the Molotov-Ribbentrop Pact that damaged the development of the whole Baltic Sea region for so many years – and still is a source of political pollution threatening to poison relations between neighbors around the Baltic Sea. 
I find it difficult to accept those who tend to describe the Molotov-Ribbentrop Pact as only a measure to build up Soviet national security. 
In the Baltic Sea Region we have a particularly difficult history to deal with, if we look at the last 90 years. 
After the end of WWI and the old order – “Die Welt von Gestern” – the Baltic region saw bloody revolutions, terrible civil wars, fascism, communism, genocide, occupations, oppression, terrorism, deportations – you name it, in our part of the world we have indeed had our share of all the horrors of the modern history. 
When the Cold War ended, it seemed clever to say that this was “the end of History.” 
But if we believe that – if we put a lid on history and leave it behind us – we run a risk that history will resurrect itself with all its horrors. 
Therefore we must come to terms with history, particularly in the Baltic Sea region, where such a reckoning is a fundamental precondition for building mutual confidence and cooperation. 
If you want to open “new chapters” in relations between old adversaries, you cannot simply close “old chapters” by denying or suppressing history. 
Nothing good comes out of doing so – and we have seen enough of that in the past. 
For too many years the Baltic Sea was a blind alley on the political map of Europe – divided by the Iron Curtain. 
It was not a “Sea of Peace” – as the communist propaganda tried to describe it – it was a Sea of Threats, a sea of insecurity and lost opportunities. 
To my country – Denmark – WWII’s end meant a return to freedom and democracy, and we could use the rest of the 20th century to strengthen our freedom, bolstering it with affluence. 
But to the three Baltic countries the end of WWII led to half a century of occupation and lost opportunities. 
We know to day the cause: the secret protocol to the Treaty of Non-aggression between the Soviet Union and Nazi-Germany, signed in 1939 – the Molotov-Ribbentrop Pact – defining the spheres of interest of the two dictatorships in eastern Europe which led to the war with Finland, the occupations of the Baltic countries, the assault on and division of Poland, and probably also the occupations of Norway and Denmark. 
In short, this pact with its excrescence had an enormous impact on the history of our region, right up to this day. 
That it why it will continue to haunt us, continue to disturb normal relations between the countries in this region with so much unused potential, as long as we do not deal with it in a forthright manner. 
Debating, recognizing, denouncing – whatever…. anything but suppressing! 
You cannot build lasting future relations between countries that have each in their own way suffered so much, without coming to terms with the past. 
It was not until 1989 that the existence of this protocol was officially admitted, thanks to the Glasnost-policy of Mikhail Gorbachev. 
But too many people still have difficulties with acknowledging this pact for what it really was. 
Such denial is in no one’s interest. Not in the kind of Europe we still have to build – a Europe where big and small countries are assured that they share the same rights and obligations, where minorities feel safe, where basic human rights are accepted as an inextricable part of our political system, and where neighbors are regarded with respect and expectations, not fear and anxiety. 
But it is no surprise that coming to terms with history can be damnably difficult. 
The Danish philosopher Soren Kierkegaard put his finger on one of the more fundamental problems: “Life must be lived forwards – but can only be understood backwards”. 
In order to look forward with confidence, you also have to look back – and understand what went wrong. 
Every leader in Moscow May 9th should remember this. 

Coming to Grips with Man-Made Climate Change 
CAMBRIDGE: This month the United States Government issued a path-breaking report on the impact of long-term climate change on America's society and environment. 
We know that human activity is causing serious and complex changes in the global climate, mainly through the effects of burning fossil fuels like oil and gas, and the effects of deforestation. 
These activities raise the level of carbon dioxide in the atmosphere, which in turn has many effects: a rise in average temperature, a rise in the water level of the oceans, significant changes in the global patterns of rainfall, and an increase in "extreme weather events" such as hurricanes and droughts. 
The new US study is the first systematic attempt to understand the long-term consequences of these climatic trends in a single country. 
It is a project of such significance and scope that it should quickly be followed up by similar studies in other parts of the world. 
The new report, "Climate Change Impacts on the United States" (available on the website www.gcrio.org) is a remarkable accomplishment, even though it is really only one step in a long-term effort to understand the interactions of climate, environment, and human society. 
It was produced by a huge team of scientists working in different disciplines and different parts of the United States. 
If there is one main lesson, it is that long-term climate change is for real, and is likely to have major impacts on US society. 
If there is a second lesson, it is that those impacts are complex and varied, and depend very much on the characteristics of particular regions. 
What is good for one part of the country, or indeed one part of the world, might be a disaster for another. 
The report stresses that climate change will have several interacting elements. 
The rise of carbon dioxide in the atmosphere B which is the main cause of the long-term climate change B might actually have some directly beneficial effects, since a higher concentration of carbon dioxide can stimulate the faster growth of some types of forests and some crops. 
On the other hand, the effects on temperature, rainfall, ocean levels, flooding and droughts, and other climate patterns, will hurt some regions, while even helping some others. 
Northern regions, for example, could enjoy a longer growing season for some crops, while more Southerly regions, which are already hot, might suffer from the adverse effects of rising temperatures. 
A major novelty of the study is to analyze the impacts of climate change on several different regions of the US, and on several different sectors such as agriculture, health, water management, forestry, and coastal resources (many of which will be submerged or damaged by rising ocean levels and the increased severity of storms). 
There are strong hints of what might go right or wrong, but also clear warnings in the report that much more scientific work will be needed to get more accurate results. 
For example, the report relies on two different mathematical models of the atmosphere. 
These models point in similar directions about long-term trends, but they often give very different specific predictions. 
Also, little is known about how fast our societies will be able to adjust to the future changes if we can see them coming. 
The problem of climate change is undoubtedly one of the toughest global issues to address. 
First, it is truly a global problem. 
One country can't protect itself by behaving well (for example using energy efficiently) if other countries are not taking similar actions. 
Second, it is a very huge problem, since the climatic changes in the coming decades are likely to be quite sizeable. 
Third, it is a very complicated problem. 
The scientific understanding of long-term climate change is still very limited, and even when it is understood, the effects of climate on society are complicated. 
And fourth, nations are likely to differ widely in their particular interests in this issue. 
Some countries are major contributors to the problem; others are major victims. 
Victims and perpetrators might not be the same. 
It is now vital for other countries to carry out "national assessments" of the effects of long-term climate change, following the example of the US study. 
There is good scientific reason to believe that many tropical regions will experience vastly more damage from global warming than will temperate-zone countries like the US. 
For example, the effects of global warming on Africa and India could be very severe, even though their economies have contributed very little to the overall problem (since Africa and India use so little energy per person, they also contribute very little to the build up of atmospheric carbon dioxide). 
Some regions - especially in the tropics - might be big losers in this process, even though they themselves have done little to cause the problems. 
Ironically, it is the poorest countries that have the least resources to carry out the needed analyses. 
Donor agencies such as the World Bank should therefore help to fund such studies. 
Unless these studies are done, poor countries might find themselves continuing victims of worsening climatic shocks, such as severe hurricanes, droughts, and flooding, without realizing that the events are not accidental, but the result of long-term patterns of global energy use. 
By understanding those linkages better, poor countries will have a much better idea of how to prepare for the likely climatic changes in the future, and how better to represent their own interests in the future negotiations over global responses to climate change. 
This, in turn, should help us to reach more realistic and sound global responses to this tremendous challenge. 

Commercialize the SDR 
BERKELEY – Zhou Xiaochuan, the governor of the People’s Bank of China, made a splash prior to the recent G-20 summit by arguing that the International Monetary Fund’s Special Drawing Rights should replace the dollar as the world’s reserve currency. 
His reflections elicited nothing if not mixed reactions. 
Sympathizers acknowledged the contradictions of a system in which a national unit is used internationally. 
Central banks understandably seek more reserves as their economies grow. 
But if those reserves mainly take the form of dollars, then their rising demand allows the United States to finance its external deficit at an artificially low cost. 
In turn, this allows unsustainable imbalances to build up, leading to an inevitable crash. 
Recent events have highlighted this problem – and Governor Zhou thus was right to call for a different system. 
But skeptics question whether the SDR could ever replace the dollar as the world’s leading reserve currency, for the simple reason that the SDR is not a currency. 
It is a composite accounting unit in which the IMF issues credits to its members. 
Those credits can be converted into dollars and other currencies at the Fund, and can be used in official transactions among IMF member countries. 
But they cannot be used in the other transactions in which central banks and governments engage. 
They cannot be used to intervene in foreign-exchange markets, or in other transactions with market participants. 
This means that the SDR is not an attractive unit for official reserves. 
This would not be easy to change. 
Despite the trials and tribulations of the American economy, dollar securities remain the dominant form of reserves because of the unparalleled depth and liquidity of US markets. 
Central banks can buy and sell dollar securities without moving those markets. 
There is also the convenience factor: dollars are widely used in a variety of other transactions. 
As a result, not even the euro has seriously challenged the dollar as the dominant reserve currency. 
Doing so would be even more difficult for the SDR. 
But difficult does not mean impossible. 
If China is serious about elevating the SDR to reserve-currency status, it should take steps to create a liquid market in SDR claims. 
It could issue its own SDR-denominated bonds. 
Better still, it could encourage other G-20 countries to do likewise. 
They would pay a price, since investors in these bonds would initially demand a novelty premium. 
But nothing is free. 
That price would be an investment in a more stable international system. 
Of course, an earlier attempt was made to create a commercial market in SDR-denominated claims. 
Back in the 1970’s, there was some limited issuance of SDR-denominated liabilities by commercial banks and SDR-denominated bonds by corporations. 
But these efforts ultimately went nowhere. 
The dollar being more liquid, its first-mover advantage proved impossible to surmount. 
Overcoming that advantage now would require someone to act as market-maker for private as well as official transactions and subsidize the market in its start-up phase. 
The obvious someone is the IMF. 
The Fund could stand ready to buy and sell SDR claims to all comers, private as well as official, at narrow bid/ask spreads competitive with those for dollars. 
The dollar originally acquired international currency status in the 1920’s, when the newly established Federal Reserve started buying and selling dollar acceptances, backstopping the market and enhancing its liquidity. 
If the international community is serious about the SDR as an international currency, it will have to empower the IMF to do likewise. 
Again, there would be a cost. 
The IMF would be using real resources to subsidize the market until private market-makers saw it as attractive to provide those services at comparable cost. 
The Fund’s shareholders would have to agree to incur those costs. 
But, again, what is this if not an investment in a more stable global monetary system? 
Transforming the SDR into a true international currency would require surmounting other obstacles. 
The IMF would have to be able to issue additional SDRs in periods of shortage, as when the Fed provided dollar swaps to ensure adequate dollar liquidity in the second half of 2008. 
At the moment, countries holding 85% of IMF voting power must agree before SDRs can be issued, which is no recipe for liquidity. 
The IMF’s management would also have to be empowered to decide on SDR issuance, just as the Fed can decide to offer currency swaps. 
For the SDR to become a true international currency, in other words, the IMF would have to become more like a global central bank and international lender of last resort. 
Before the crisis, such ideas would have been dismissed out of hand. 
Even now they won’t materialize overnight. 
But they are the real implications of Governor Zhou’s remarks. 

The Commodity Roller Coaster 
CAMBRIDGE – The global commodity super-cycle is hardly a new phenomenon. 
Though the details vary, primary commodity exporters tend to act out the same story, and economic outcomes tend to follow recognizable patterns. 
But the element of predictability in the path of the commodity-price cycle, like that in the course of a roller coaster, does not make its twists and turns any easier to stomach. 
Since the late eighteenth century, there have been seven or eight booms in non-oil commodity prices, relative to the price of manufactured goods. (The exact number depends on how peaks and troughs are defined.) 
The booms typically lasted 7-8 years, though the one that began in 1933 spanned almost two decades. 
That exception was sustained first by World War II and then by the post-war reconstruction of Europe and Japan, as well as rapid economic growth in the United States. 
The most recent boom, which began in 2004 and ended in 2011, better fits the norm. 
Commodity-price busts – with peak-to-trough declines of more than 30% – have a similar duration, lasting about seven years, on average. 
The current bust is now in its fourth year, with non-oil commodity prices (relative to the export prices of manufactures) having so far fallen about 25%. 
Commodity-price booms are usually associated with rising incomes, stronger fiscal positions, appreciating currencies, declining borrowing costs, and capital inflows. 
During downturns, these trends are reversed. 
Indeed, since the current slump began four years ago, economic activity for many commodity exporters has slowed markedly; their currencies have slid, after nearly a decade of relative stability; interest-rate spreads have widened; and capital inflows have dried up. 
Just how painful the downturn turns out to be depends largely on how governments and individuals behave during the bonanza. 
If they perceive improvements in their terms of trade as permanent – a view that gains traction as prices climb – increases in consumption and investment tend to outpace income gains, and public and private leverage grows. 
The risk is that when the roller coaster careens downward, a debt crisis will derail markets. 
And, indeed, during commodity-price downturns, banking, currency, and sovereign-debt crises tend to proliferate – and crisis-avoidance becomes a hot topic for policymakers, as highlighted in the International Monetary Fund’s most recent World Economic Outlook. 
It is no accident that the last commodity-price collapse, which ran from the late 1970s until 1992, coincided with more than a decade of sovereign-debt crises in the developing world. 
Of course, that was no ordinary downturn. 
On the contrary, it was the most severe commodity-price collapse to date, resulting in a 40% peak-to-trough decline. 
More atypical, it involved three waves of price declines, divided by 1-2 year respites. 
The first wave was connected with the US Federal Reserve’s efforts to bring inflation under control in the fall of 1979, which caused international interest rates to spike, triggering a deep recession in the US and elsewhere. 
The second wave, which began in 1985, reflected a supply glut, as many commodity exporters simultaneously sought to raise hard currency, often in the midst of economic crisis. 
The third wave, from 1989 to 1992, was fueled by the disintegration of the Soviet Union, which caused output there to collapse. 
The question now is whether the current crash will follow a similar trajectory, with the recent break soon giving way to another drop. 
The answer lies primarily (but not exclusively) with China. 
If China’s economic slowdown persists – as those following investment booms and fueled by debt overhangs often do –the commodity downturn is likely to continue, as no other economy is capable of picking up the demand slack. 
The US economic expansion is likely to slow soon, as the Fed raises interest rates. 
And Europe’s relatively recent recovery will probably be moderate and tilted toward domestic services. 
Furthermore, at this stage of the commodity cycle, price declines typically retain downward momentum. 
By the end of the boom, many commodity exporters had already initiated investment projects to expand production. 
As these investments bear fruit, the increased supply will sustain downward pressure on prices. 
And many emerging-economy governments’ understandable aversion to running substantial and persistent current-account deficits will lead them to counter weaker export prices by increasing export volume, even if that drives down prices further. 
This commodity-price roller-coaster ride is probably not over yet. 
While we cannot know for sure what will happen, it would be prudent to brace ourselves for another drop – and do what we can to avoid a crash. 

Common Sense on Capital Controls 
SANTIAGO – Few policy debates are stranger than the one concerning capital controls. 
Mention the issue to a banker or a mainstream economist and you are likely to get a vehement reply: capital controls do not work, because speculators can evade them at little or no cost, but countries should never adopt such controls, because doing so is very costly. 
Am I the only one who finds this logic a bit crooked? 
The next stage of the conversation is usually just as strange. 
When dealing with surges of potentially destabilizing capital inflows, capital controls are a no-no, but something called prudential regulation is quite okay. 
Capital controls, you are likely to be told, discriminate between transactions depending on the country of residence of the parties involved, and that is bad. 
Prudential regulation discriminates on the basis of the transaction’s currency of denomination or maturity, and that is good. 
If this conversation is taking place at a cocktail party, at this point you would be well advised to ask for another drink. 
That has been the state of the debate – until recently. 
The big intellectual change has come from the International Monetary Fund, once an outright enemy of capital controls. 
In a series of studies, IMF economists have stopped treating the issue as one of good versus evil, and have started treating it as a run-of-the-mill economic choice: capital controls have costs and benefits that can be measured and compared. 
The Fund now argues that they should be one more tool for prudent policymakers to use as circumstances require. 
Another big change has come from fast-growing emerging-market countries, many of which, facing a wall of money coming their way from slow-growth advanced countries (and mindful of the costs that large and volatile capital flows can bring), have chosen to apply capital controls. 
Brazil, Indonesia, South Korea, Thailand, and Taiwan have all recently introduced disincentives to capital inflows. 
Other emerging countries, like Peru, have tightened domestic prudential regulations with the same aim in mind. 
Those who claim that capital controls are ineffective seldom specifyat what they are presumed to be ineffective. 
A recent paper by Marcos Chamon, Atish Ghosh, Jonathan Ostry, and Mahvash Qureshi, economists at the IMF´s Research Department, suggests that capital controls can be effective indeed. 
The authors conclude that, by reducing the share of short-term foreign-currency debt in a country’s total liabilities, capital controls can reduce vulnerability to financial crises. 
The IMF economists ask how 50 countries fared during the recent world financial meltdown, with performance measured by economic growth in 2008-09 relative to 2003–2007. 
Their main finding is that countries with capital controls in place beforehand fared better – their growth rates fell less during the crisis. 
This was because they had less leverage to be unwound and less footloose capital that could leave in the event of a global financial squeeze. 
This does not mean that capital controls can solve all problems: the same paper shows that they are relatively ineffective at preventing lending booms – another key cause of economic vulnerability. 
This should not be surprising, since many factors besides international debt flows can cause domestic banks to throw caution to the wind and start lending recklessly. 
But the paper also shows that domestic prudential policies – such as capping home-mortgage loans at a certain percentage of the property’s value, or increasing banks’ capital requirements during economic upswings – can be effective at restraining lending booms. 
This suggests that capital controls and prudential policies can complement each other, contrary to what conventional wisdom often assumes. 
Nor do these findings suggest that capital controls have no costs. 
For example, as the MIT economist Kristin Forbes has documented, they increase the cost of financing for small and medium-size companies. 
All aspiring economists are taught the discipline’s cardinal rule: governments (and people, for that matter) should undertake an action to the point where, at the margin, its benefits equal its costs. 
Recent research, by carefully quantifying the potential costs and benefits, allows this standard logic to be applied to the question of whether and when to apply capital controls. 
For an economist, this is cause for celebration – no cocktail required. 

Educating the Commonwealth 
DAR ES SALAAM/LAGOS – With 53 member countries and 2.4 billion people, the Commonwealth is a powerful force for positive change. 
For nearly seven decades, Commonwealth states have been global leaders on trade, female empowerment, natural-resource protection, and many other issues. 
But as the Commonwealth moves to tackle new challenges in human development, its leadership is failing to place sufficient emphasis on the most important factor of all: education. 
Without a renewed commitment to this key building block of prosperity, progress on other goals will be elusive. 
Today, some 140 million children in the Commonwealth are not in school. 
According to a recent UNESCO report, the situation is most dire in the poorest Commonwealth countries. 
In Pakistan, for example, nearly 20 million children are not enrolled in formal education, while seven million are out of school in Bangladesh, 2.3 million in Mozambique, 1.8 million in Ghana, and 1.6 million in Cameroon. 
The situation is particularly worrisome in Nigeria, where nearly nine million primary-school-age children are not enrolled, and millions more – especially girls – are denied access to secondary education. 
Educational opportunities are also highly unevenly distributed between the richest and poorest Commonwealth countries, while gender discrimination plagues many states. 
If current trends continue, by the year 2030 – the deadline for meeting the 17 United Nations Sustainable Development Goals – more than 70% of children in Commonwealth countries will be failing reading and math. 
This would represent more than half of the total number of young people expected to lack the skills needed to succeed in the twenty-first-century job market. 
When a child doesn’t attend school, their absence perpetuates the cycle of poverty in families, communities, and countries. 
The Commonwealth’s leaders cannot afford to fail their countries’ young people by failing to invest in education. 
The good news is that educational opportunities could be delivered effectively, and at low cost, to a majority of those currently excluded. 
In fact, most children living in developing Commonwealth countries could benefit from an innovative solution designed by the International Commission on Financing Global Education Opportunity, where we serve as commissioners. 
The approach, called the International Finance Facility for Education (IFFEd), aims to leverage countries’ own investments in education with support from public and private donors. 
The IFFEd program, which was acknowledged by the G20 last year, would secure financial guarantees from donors in Australia, Canada, New Zealand, the United Kingdom, and elsewhere to increase the lending capacities of multilateral development banks in Africa and Asia. 
For every $1 in guarantees, as much as $5 is made available for spending on education. 
Several multilateral development banks have already recognized the value of this mechanism and are working with the commission to develop the facility further. 
To maximize the impact of this financing strategy, IFFEd will favor countries that have committed to educational reforms and are able to monitor and track results. 
Our aim is to leverage an initial $2 billion in guaranteed funding during the first funding cycle. 
We believe that this mechanism could help as many as 16 disadvantaged Commonwealth countries improve educational opportunities for millions of young people – especially marginalized girls. 
The additional financing would complement domestic resources, bilateral aid, and multilateral grants that are already available through programs like the Global Partnership for Education. 
Bold action is needed if the Commonwealth’s educational shortcomings are to be solved. 
That is why we are urging Commonwealth leaders to support the IFFEd when they gather in London later this month for their biennial Heads of Government Meeting. 
With an agenda focused on building prosperity, democracy, and peace, the Commonwealth is clearly committed to a stronger, more “common future.” 
And the fastest way to achieve its goals is by making education a top priority in every member state. 
“If we are to reach real peace in this world,” Mahatma Gandhi said in 1931, nearly two decades before the Commonwealth was established, “we shall have to begin with the children.” 
His words are no less prescient today; in a world that seems increasingly prone to domestic and international conflict, there is no time to waste when it comes to investing in education. 

Building a Gender-Inclusive Workplace 
NEW YORK – The wave of high-profile sexual harassment cases that began with revelations from Hollywood is having a profound impact on far less glamorous work environments. 
Just as major film studios have been forced to take action against abuse, a similar revolution – powered by the #MeToo movement of women speaking out – is sweeping workplaces everywhere. 
It has been terrible to learn of the abuse that women suffered at the hands of powerful men like Harvey Weinstein, Matt Lauer, and Al Franken. 
But it is also deeply encouraging to see the corporate world take this issue seriously, by attempting to create a “shared future” for their female employees. 
The collective response to the #MeToo movement could mark a turning point in the way employers think about sexual harassment and other issues involving gender – like pay and power. 
But the workplace revolution is far from over. 
New strategies are needed to encourage healthy interactions among employees. 
When handled properly, gender equality promotes business output and productivity, whereas sexual discrimination, if ignored, can destroy an office culture – and so much more. 
Companies have traditionally taken a box-ticking approach to addressing harassment, using written policies and trainings in a feeble bid to encourage respect. 
But this top-down approach has proven ineffective, as scandals at Uber and other tech firms have demonstrated. 
If workplace abuse is to be curtailed, business leaders and C-Suite executives need a fresh approach. 
The first priority is to achieve gender balance at the top. 
Diversity in leadership encourages employee cooperation and leads to healthier organizations. 
This is not a new idea; a 2016 study published in the Harvard Business Review found that companies with more high-level female executives generate higher profits. 
Other studies have shown that women perform better under stress, often making smarter decisions. 
But, despite the obvious benefits that women bring, they remain under-represented in senior leadership positions at companies around the world. 
Change is needed in the digital workplace as well. 
Predators may lurk around the water cooler, but they are also active in online communities, chat rooms, and forums. 
Concerns raised by the #MeToo movement spread virally on social media within hours, and similar anger could engulf an organization at any time. 
Companies must therefore place a premium on promoting online decorum, and take seriously any comments and concerns expressed by their employees. 
Most companies already monitor social media for reputational risks and customer satisfaction; they should do the same to protect their staff. 
Finally, companies must be responsive to the concerns of their youngest employees, who will inherit the office of the future. 
With more millennials entering the workforce and demanding greater equality, the youngest employees already have a stronger voice at work than previous generations. 
A recent Boston Consulting Group study found that young male employees are often more open-minded than their superiors on issues like family leave and diversity, suggesting that true leadership on gender equality may actually come from a company’s youngest staff members. 
Moreover, researchers at Rutgers University have shown that more than 50% of millennials would consider a pay cut if it meant working for a company that shared their values, while the Society for Human Resource Management notes that 94% of young workers want to use their skills to benefit a good cause. 
Rather than resist these trends, companies should look to harness the benevolence of their youngest talent. 
To build a more inclusive workplace, management must craft narratives that support the changes their employees are demanding. 
Most important, employees need role models. 
The willingness of celebrities like Salma Hayek, Rose McGowan, and Reese Witherspoon to share their stories of sexual harassment empowered women from many walks of life to speak out, too. 
Changing workplace culture will demand similarly strong leadership. 
That shift is on the horizon, and I am inspired by the women and men who are calling on future generations to work together more equitably. 
It is easy to feel overwhelmed by the complexity of these issues, but if managers and employees can commit to building purpose-driven and inclusive work environments, change is inevitable. 
The women of Hollywood may have initiated what has become a global call for equality at work, but the workplace revolution is no less significant for those of us who walk on less colorful carpets. 

 

The Long Road to Nuclear Disarmament 
CANBERRA – This is crunch time for the global nuclear order. 
By May 12, US President Donald Trump must decide whether to recertify the Iran nuclear deal or reimpose sanctions. 
Only a few weeks later, he is expected to meet North Korean leader Kim Jong-un for a summit that will have implications for that country’s nuclear program. 
With Trump surrounded by hawkish advisers – like Secretary of State Mike Pompeo and National Security Adviser John Bolton – the odds are good that efforts to denuclearize will suffer setbacks before the month is out. 
For this reason, it is more important than ever that the international community upholds existing treaty obligations, starting with the 1968 Nuclear Non-Proliferation Treaty (NPT). 
But to do that, tough conversations must be had. 
Multilateral agreements are always prone to gaps in application; the international non-proliferation regime is no different. 
For example, while neither Israel nor India have signed the NPT, both states are considered responsible members of the nuclear-weapons club. 
Israel has never been sanctioned for its bomb, and India has a waiver from the Nuclear Suppliers Group, as well as several civil nuclear agreements with the United States, Australia, Canada, and Japan. 
Pakistan’s nuclear weapons, on the other hand, are tolerated but not accepted; North Korea’s de facto nuclearization is considered intolerable; and Iran’s nuclear program was curbed before a weapon could be developed. 
Amid this imperfect framework, many countries have become frustrated by the refusal of NPT signatories to discuss their own disarmament. 
Article VI of the NPT obliges parties to pursue “in good faith” negotiations to disarm, but the nuclear-weapons states that have ratified the treaty do not interpret this as a prohibition on their possessing a nuclear arsenal. 
Rather, buoyed by the doctrine of deterrence, they argue that reductions would weaken global security. 
Perhaps not surprisingly, non-nuclear-weapon states see things differently. 
And, last year, they committed their views to a supplementary treaty at the United Nations. 
Today, the Treaty on the Prohibition of Nuclear Weapons (TPNW) has been signed by 58 countries and ratified by eight, and if it ever comes into force will ban the use, threat of use, or possession of nuclear arms. 
Better known as the “ban treaty,” the TPNW is an important step toward the establishment of a new international norm. 
It is also a logical consequence of the NPT’s failings. 
But, because the ban treaty goes beyond the NPT in two key respects, it has also drawn heavy opposition. 
The ban treaty would prohibit so-called nuclear sharing arrangements, whereby allies of nuclear weapon states could store weapons on these states’ territory. 
Moreover, it undermines the logic of deterrence by making the “threat of use” illegal. 
If the global non-proliferation regime is to remain viable, the competing visions reflected in the NPT and the ban treaty must be reconciled. 
For that to happen, the international community needs to agree on a strategy to achieve an international order in which the reduction of nuclear stockpiles reinforces, rather than jeopardizes, regional and global security. 
No doubt these will be difficult discussions, but the alternative is far worse than a few bruised egos. 
Some experts have suggested that hardline opposition to the ban treaty could prompt a backlash from countries that have grown disillusioned with the NPT, leading to widespread withdrawal from the 1968 treaty. 
Needless to say, this would be hugely counter-productive. 
Not only would it destabilize the existing nuclear order and heighten many countries’ sense of insecurity; it would also deepen armed states’ attachment to the bombs they already have. 
Its flaws notwithstanding, the NPT has brought years of nuclear stability. 
Even countries that have refused to sign the treaty have a stake in its survival, with or without the ban treaty, given the serious global security implications of its unraveling. 
Therefore, all sides must urgently rediscover their common interest in practical and effective disarmament. 
The two treaties can converge in a framework that minimizes nuclear threats in the near term; reduces the number of nuclear weapons in the medium term; and aspires to the complete, verifiable, and irreversible elimination of nuclear weapons in the long term. 
This approach was outlined in 2009 by the International Commission on Nuclear Non-Proliferation and Disarmament; a version of it must be resurrected today. 
By the end of this week, the fate of the Iran nuclear deal will be clear; Trump’s refusal to recertify it would very likely signal its demise. 
But, regardless of what becomes of Iran’s nuclear program, or of North Korea’s for that matter, a weakening of the NPT – the bedrock of the global nuclear order for a half-century – represents the biggest threat of all. 

Restoring Competition in the Digital Economy 
MUNICH – The digital economy is carving out new divides between capital and labor, by allowing one firm, or a small number of firms, to capture an increasingly large market share. 
With “superstar” companies operating globally, and dominating markets in multiple countries simultaneously, market concentration throughout the Group of 20 developed and major emerging economies has increased considerably in just the past 15 years. 
To address this phenomenon, the G20 should create a World Competition Network to restore competition and address income inequality between capital and labor. 
As a larger share of total income shifts to capital across many G20 countries, the World Competition Network would seek to reverse the decline in labor’s share of GDP. 
During the period after World War II, 70% of national GDP went to labor income, and the remaining 30% to capital income. 
John Maynard Keynes described the stability of the labor share as something of a “miracle.” 
But the rule has since broken down. 
Between the mid-1980’s and today, labor’s share of world GDP declined to 58%, while capital’s share rose to 42%. 
Two forces in today’s digital economy are driving the global decline in labor’s share of total income. 
The first is digital technology itself, which is generally biased toward capital. 
Advances in robotics, artificial intelligence, and machine learning have accelerated the rate at which automation is displacing workers. 
The second force is the digital economy’s “winner-takes-most” markets, which give dominant firms excessive power to raise prices without losing many customers. 
Today’s superstar companies owe their privileged position to digital technology’s network effects, whereby a product becomes even more desirable as more people use it. 
And although software platforms and online services can be costly to launch, expanding them is relatively inexpensive. 
Consequently, firms that are already established can keep growing with far fewer workers than they would have needed in the past. 
These factors help to explain why the digital economy has given rise to large firms that have a reduced need for labor. 
And, once these firms are established and dominate their chosen market, the new economy allows them to pursue anti-competitive measures that prevent actual and potential rivals from challenging their position. 
And, as the economists David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, and John Van Reenen show, the US industries with the fastest-growing market concentration have also seen the largest drop in labor’s share of income. 
This increased market concentration is widening the gap between the firms that own the robots (capital) and the workers whom the robots are replacing (labor). 
But confronting it will require us to reinvent antitrust for the digital age. 
As it stands, national competition authorities in G20 countries are inadequately equipped to regulate corporations that operate globally. 
Moreover, the G20 cannot simply trust that global competition will correct on its own the tendency toward increased market concentration. 
As Andrew Bernard has shown for the United States and Thierry Mayer and Gianmarco Ottaviano have demonstrated for Europe, international trade favors large superstar firms. 
Indeed, globalization may provide advantages to the largest and most productive firms in each industry, causing them to expand – and forcing smaller and less productive firms to exit. 
As a result, industries become increasingly dominated by superstar firms with a low share of labor in value added. 
The US is a case in point. 
It is host to many of today’s superstar firms, and yet US antitrust regulators have not been able to restrain those firms’ market power. 
As the G20 looks for ways to address the problem of market concentration, it should take lessons from the US experience, and look for ways to improve upon the US’s failures. 
Rather than starting from scratch, we will need to build on national-level competition authorities’ institutional knowledge, and include experienced personnel in the process. 
The European Competition Network can serve as a blueprint for a G20-level network. 
The objective of a world competition network is to build an effective legal framework to enforce competition law against companies engaging in cross-border business practices that restrict competition. 
The network may coordinate investigations and enforcement decisions and develop new guidelines for how to monitor market power and collusive practices in a digital economy. 
In the past, the G20 has focused on ensuring that multinational firms are not able to take advantage of jurisdictional differences to avoid paying taxes. 
But the G20 now needs to expand its scope, by recognizing that digital technologies are creating market outcomes that, if unchecked by a new World Competition Network, will continue to favor multinational firms at the expense of workers. 

Completing the G-20’s Agenda 
NEW YORK – The near-complete collapse of financial systems worldwide has exposed fundamental weaknesses in their architecture and in how they are regulated. 
In calling for measures to “guard against systemic risk,” the G-20 summit has begun the process of reconstruction by recognizing that the system in its entirety, not just individual institutions, must be regulated. 
Unfortunately, the G-20 communiqué offers only more of the same prescriptions for managing systemic risk that the Financial Stability Forum (FSF), the United States Federal Reserve, and others have put forward. 
These proposals have focused on the problems caused by poor transparency, over-leveraging, outsized financial institutions, tax havens, bad incentives for financial bosses, and credit rating agencies’ conflicts of interest. 
All of these are important, but they miss a fundamental point. 
No one now denies that the past year’s sharp downswings in housing and equity prices, which followed long upswings – far above historical benchmark levels – helped to trigger and fuel the crisis. 
As these downswings continue, there is a danger that they, too, may become excessive, dragging the financial system and the economy even deeper into crisis. 
Containing systemic risks, therefore, requires not just ensuring transparency and managing leverage in the system, but also recognizing that these risks vary along with asset values. 
If institutions that were heavily exposed had understood this, they would have raised their capital buffers during the run-up in housing and equity prices in order to protect themselves against the inevitable reversals. 
But, as we now know, they did not. 
One reason for this failure is that pillar 1 of the Basel II Agreement, which outlines how banks around the world should assess credit risks and determine the size of capital buffers, makes no explicit allowance for long-swing fluctuations in asset markets. 
Instead, it relies on value-at-risk (VaR) measures that link risk to standard notions of short-term market volatility. 
The problem here is that these measures implicitly assume that risk declines when markets are doing well: they demand less capital during calm periods and more capital during volatile periods. 
In effect, the presumption is that capital losses are random, so the sharp reversals and losses that usually ensue after excessive upswings in prices are disregarded in risk calculations. 
Indeed, because standard measures of the probability of default fall when the economy is doing well and rise when it is not, capital requirements based on these measures tend to be pro-cyclical. 
But this increases systemic risk, rather than reducing it. 
The G-20 has now called for revising the Basel II standards so that capital requirements become countercyclical, and Spain’s experience with such requirements suggests that doing so is a step in the right direction. 
But such revisions of Basel II are not enough, because bank portfolios – especially those of international banks with large trading books – are vulnerable to the risks stemming from long-swing fluctuations in asset markets. 
As a result, not only are countercyclical measures needed, but banks’ capital requirements should vary inversely with the boom-and-bust fluctuations in the asset markets to which they are heavily exposed. 
Banks’ defenses need to be fortified during excessive upswings in asset prices so that they are able to weather the inevitable reversals. 
The connection between financial risk and asset-price swings emerges from the use of a new approach – Imperfect Knowledge Economics (IKE) – to understanding risk and fluctuations in asset markets. 
This approach implies that more can be done to reduce systemic risk, beyond reforming how risk is measured and capital buffers determined. 
IKE acknowledges that, within a reasonable range, the market does a far better (though not perfect) job in setting prices than regulators can. 
But it also recognizes that price swings can become excessive, in the sense that participants may bid asset prices far from levels that are consistent with their long-term values. 
History teaches that such swings are not sustainable, and that the more excessive they become, the sharper and more costly are the eventual reversals – and the graver the consequences for the financial system and the economy. 
The lesson of this crisis is that excessive swings need to be dampened with a set of prudential measures. 
One possible measure is to announce “guidance ranges” for asset prices, with targeted variations of margin and capital requirements, not to eliminate, but to help damp down movements outside these ranges. 
The key feature of these measures is that they are applied differently depending on whether an asset is over- or undervalued relative to the guidance range. 
Their aim is to discourage trading that pushes prices further away from the range and to encourage trading that helps to bring them back. 
Improving the ability of financial markets to self-correct to sustainable values is the entire point of prudential regulation. 
By contrast, wholesale restrictions on short-selling (and other such measures that pay no regard to whether an asset is over- or undervalued) – an option that some have suggested – could actually lead to greater instability. 
Rules that are beneficial in some circumstances may become counterproductive in others. 
So the idea that what the world needs now is more fixed rules will not do. 
Unfortunately, contemporary economic theory, with its presumption of perfect price discovery in asset markets, has discouraged economists and policymakers from paying any attention to the role of asset-price swings in managing systemic risk. 

The Complexity of Inequality 
MUNICH – Since 2013, when Thomas Piketty published his much-discussed study of the distribution of income and wealth, inequality has been at the forefront of public debate in most advanced economies, blamed for everything from slow growth and stagnating productivity to the rise of populism and the Brexit vote. 
But inequality remains poorly defined, its effects highly variable, and its causes hotly debated. 
Even the most basic question – how much inequality is too much – is virtually impossible to answer. 
There is no “natural rate of inequality” characterizing an economy in equilibrium, a level at which policymakers can aim. 
Instead, countries’ rates of inequality are measured against one another – a narrow approach that ignores everything from broader economic trends to differences in the impact of wealth inequality on populations in different social environments. 
At a time when everyone seems to be complaining about inequality, wealth is, at the global level, more broadly distributed than ever. 
In the last 16 years alone, the number of people who qualify for inclusion in the global middle class – at today’s level, people with net financial assets of €7,000-42,000 ($7,400-$44,600) – has more than doubled, to over one billion, or about 20% of the world population. 
And it is not just the middle class that is growing. 
At the end of last year, around 540 million people around the world could count themselves among the global wealthy, with net assets above €42,000. 
That is some 100 million, or 25%, more than in 2000. 
The key to this progress has been the success of the emerging economies, especially China. 
And, indeed, many of those who have joined the high-wealth group are not from the traditional “rich” countries; on the contrary, the United States, Japan, and Western Europe now have just 66% of the world’s high-wealth households, compared with over 90% in 2000. 
On the national level, inequality is rising, but only in some places. 
In the emerging economies, the share of wealth owned by the middle class is increasing, indicating a drop in wealth inequality. 
It is primarily in the industrialized world that inequality is on the rise, with the share of wealth held by the top 10% growing the most. 
This discrepancy may be explained partly by the fact that the global financial crisis was most painful for the advanced countries, especially in Europe. 
But the expansionary monetary policies that advanced-country central banks pursued after the crisis made a bad situation worse. 
Those policies pushed up prices of assets – especially bonds and equities – that were held largely by wealthy households. 
At the same time, they hurt middle-class savers, who typically rely on duller savings instruments like bank deposits. 
With zero or, later, negative interest rates, those savers lost out. 
Though median households are generally benefiting from lower borrowing costs, wealthier households are benefiting much more, thanks in part to savings on mortgage loans, which are highest relative to income for the upper middle class. 
But the impact of ultra-loose monetary policy extends far beyond today’s wealth and income effects. 
With advanced-country populations aging rapidly, saving for old age is more important than ever. 
With very low interest rates reducing the rate of accumulation of pension assets, all but the wealthiest households will probably have to boost savings and/or reduce consumption, now and in the future. 
The decline in lifetime spending will ultimately have a negative impact on growth and potentially generate social fault lines for the coming generations. 
Complicating the inequality narrative further are differences across individual economies, including among those that, technically, have similar levels of inequality. 
Consider the disparities between the US, Denmark, and Sweden – all three of which are among the world’s most unequal societies, with respect to the distribution of wealth. 
Denmark and Sweden are known for their well-developed social-welfare systems, free education, and high labor-market participation. 
Moreover, Denmark took the top spot in the United Nations’ World Happiness report last year, suggesting that wealth inequality does not trouble Danes too much. 
By contrast, in the US, which lacks many of the social protections provided by its northern European counterparts, inequality is very troubling indeed. 
The increase in wealth inequality there over the last decade has been the most pronounced of any country. 
Today, the US has the smallest middle class, holding just 22% of total net financial assets, half the average of other industrialized countries, and the highest concentration of wealth than in any other country. 
As in Europe or Japan, the financial crisis and subsequent monetary policy might be a major cause for this development. 
However, another factor could also be the digital revolution which, at least for the main protagonists, is increasingly turning out to be a “wealth catalyst”. In any case, it is important to recognize that America’s situation is extraordinary. 
It does not represent the state of Western capitalism. 
It is the exception, not the rule. 
All of this has important implications for how to tackle inequality. 
Simply put, if the causes and impacts of inequality differ across countries, so should the policy prescriptions. 
For some countries, such as in southern Europe, tackling unemployment is critical to enable middle- and lower-income households to save and consume. 
Other countries should focus on improving the conditions for long-term savings, such as through occupational pension schemes. 
Still others would do well to reduce the tax burden, in particular for low- and middle-wage earners. 
There is, however, one policy prescription that would benefit many of the countries with the highest levels of inequality. 
Central banks must bring down the curtain on zero and, especially, negative interest rates. 
Doing so would certainly be a good start to combating rising wealth inequality. 

Saving Refugees to Save Europe 
NEW YORK – The refugee crisis in Europe was already pushing the European Union toward disintegration when, on June 23, it helped drive the British to vote to Brexit the EU. 
The refugee crisis and the Brexit calamity that it spawned have reinforced xenophobic, nationalist movements that will seek to win a series of upcoming votes– including national elections in France, the Netherlands, and Germany in 2017, a referendum in Hungary on the EU refugee policy on October 2, and a rerun of the Austrian presidential election on December 4. 
Rather than uniting to resist this threat, EU member states have become increasingly unwilling to cooperate with one another. 
They pursue self-serving, beggar-thy-neighbor migration policies – such as building border fences – that further fragment the Union, seriously damage member states, and subvert global human-rights standards. 
The current piecemeal response to the refugee crisis, culminating in the agreement reached earlier this year between the EU and Turkey to stem the flow of refugees from the Eastern Mediterranean, suffers from four fundamental flaws. 
First, it is not truly European; the agreement with Turkey was negotiated and imposed on Europe by German Chancellor Angela Merkel. 
Second, it is severely underfunded. 
Third, it has transformed Greece into a de facto holding pen with inadequate facilities. 
Most important, the response is not voluntary. 
The EU is trying to impose quotas that many member states strenuously oppose, forcing refugees to take up residence in countries where they are not welcome and do not want to go, and returning to Turkey others who reached Europe by irregular means. 
This is unfortunate, because the EU cannot survive without a comprehensive asylum and migration policy. 
The current crisis is not a one-off event; it augurs a period of higher migration pressures for the foreseeable future, due to a variety of causes. 
These include demographic shortfalls in Europe and a population explosion in Africa; seemingly eternal political and military conflicts in the broader region; and climate change. 
The agreement with Turkey was problematic from its inception. 
The very premise of the deal – that asylum-seekers can legally be returned to Turkey – is fundamentally flawed. 
Turkey is not a “safe third country” for most Syrian asylum-seekers, especially since the failed coup in July. 
What would a comprehensive approach look like? 
Whatever its final form, it would be built on seven pillars. 
First, the EU must take in a substantial number of refugees directly from front-line countries in a secure and orderly manner. 
This would be far more acceptable to the public than the current disorder. 
If the EU made a commitment to admit even a mere 300,000 refugees annually, most genuine asylum-seekers would view their odds of reaching their destination as good enough to deter them from seeking to reach Europe illegally – an effort that would disqualify them from legal admission. 
Second, the EU must regain control of its borders. 
There is little that alienates and scares publics more than scenes of chaos. 
Third, the EU needs to find sufficient funds to finance a comprehensive migration policy. 
It is estimated that at least €30 billion per year will be needed for a number of years, and the benefits of “surge funding” (spending a large amount of money up front, rather than the same amount over several years) are enormous. 
Fourth, the EU must build common mechanisms for protecting borders, determining asylum claims, and relocating refugees. 
A single European asylum process would remove the incentives for asylum shopping and rebuild trust among member states. 
Fifth, a voluntary matching mechanism for relocating refugees is needed. 
The EU cannot coerce member states to accept refugees they do not want, or refugees to go where they are not wanted. 
A scheme like the one used by Canada could elicit and match the preferences of both refugees and receiving communities. 
Sixth, the EU must offer far greater support to countries that host refugees, and it must be more generous in its approach to Africa. 
Instead of using development funds to serve its own needs, the EU should offer a genuine grand bargain focused on the needs of recipient countries. 
This means creating jobs in refugees’ home countries, which would reduce the pressure to migrate to Europe. 
The final pillar is the eventual creation of a welcoming environment for economic migrants. 
Given Europe’s aging population, the benefits migration brings far outweigh the costs of integrating immigrants. 
All the evidence supports the conclusion that migrants can contribute significantly to innovation and development if they are given a chance to do so. 
Pursuing these seven principles, described in greater deal elsewhere, is essential in order to calm public fears, reduce chaotic flows of asylum-seekers, ensure that newcomers are fully integrated, establish mutually beneficial relations with countries in the Middle East and Africa, and meet Europe’s international humanitarian obligations. 
The refugee crisis is not the only crisis Europe has to face, but it is the most pressing. 
And if significant progress could be made on the refugee issue, it would make the other issues – from the continuing Greek debt crisis to the fallout from Brexit to the challenge posed by Russia – easier to tackle. 
All the pieces need to fit together, and the chances of success remain slim. 
But as long as there is a strategy that might succeed, everyone who wants the EU to survive should rally behind it. 

Compute To Compete 
Many Europeans look at globalization and throw up their hands in frustration: the challenge of competitiveness seems so great. 
But Europeans have an advantage in today’s global competition, for which we should thank Jean Monnet and Jacques Delors, who created the Single Market before globalization was a buzzword. 
For it is open competition within the Single Market that enables Europeans to compete globally. 
But this alone will not suffice. 
More daring policies are needed. 
In 1991, my country, Estonia, was emerging from 50 years of Soviet-imposed backwardness. 
I despaired over how long it would take to build the infrastructure needed for Estonian businesses to compete internationally. 
Fortunately, the world was just then entering the new era of the information revolution, so by opting for the new infrastructure of information technology, Estonia was soon able to play on a level playing field. 
Investment by both the public and private sector permitted Estonia to reach by the mid-1990’s a level of IT that was above the EU average. 
By 2000, Estonia’s IT development in government services and sectors like banking had reached a level attained by only a few other countries in Europe. 
So a small and once developmentally challenged post-Soviet country was able to overcome seemingly overwhelming obstacles. 
But I fear that the steps needed to emulate Estonia’s achievements may not be very welcome elsewhere in the EU. 
Increasing government efficiency, reducing paperwork, and eliminating the temptations of corruption through innovative computerization would mean a smaller, leaner public sector. 
The same is true for the private sector. 
For example, since the late 1990’s, around 98% of all banking transactions in Estonia have been Internet-based, so banks needed fewer tellers and fewer branch offices. 
While large numbers of bank employees were laid off, Estonia’s emphasis on IT allowed it to become more competitive, with rising productivity fueling a sustained period of rapid economic growth – 11% in 2006. 
But this alone will not be sustainable unless Estonia begins to produce its own innovations. 
Now that Estonia’s competitiveness can no longer count on a low-cost labor force, it needs to generate new technologies. 
Yes, Estonians invented Skype, the Internet telephone system, but in general Estonia, like the rest of Europe, is falling behind in both innovation and pure science. 
Instead innovations come first and foremost from the United States, whose universities and laboratories attract the best and brightest from Europe, India, and China. 
Europeans, meanwhile, suffer from their aversion to immigration, their children’s increasing avoidance of math, science, and engineering, and the fact that the EU is closing itself off from internal competition in services, one of the most competitive sectors in the world economy. 
Lack of competition within the EU also has security implications. 
Given the importance of energy in our lives, it is understandable that many EU countries want to shield their companies from competition, and so oppose liberalizing the energy market. 
But the reality is that Europe’s single largest source of energy – Russia – uses energy as a foreign policy tool. 
Recall that in May 2006, Viktor Chernomyrdin, Russia’s ambassador to Ukraine, said that Russia would be willing to reduce the price of natural gas it charged Ukraine if that country adopted a less pro-Western orientation. 
If we are to avoid seeing the EU subjected to divide-and-rule policies that lead them to jockey for better gas deals, then a common energy policy – overseen by an EU Energy Commissioner with the negotiating heft of the Trade Commissioner – is vital. 
Even Germany is a small country when negotiating on its own with Gazprom. 
But for Europe to develop a common energy policy comparable to our common trade regime, it will need the sine qua non of external policy: internal liberalization. 
That imperative transcends energy. 
Europeans worry about their lack of engineers, but they do little to promote science education. 
Instead, when they recognize that they are having difficulty competing internationally, they resort to protectionism. 
But this is a recipe for further decline in Europe’s competitiveness – one that we must reject sooner rather than later. 

The Future of Computing 
ZURICH – Ever since the American computer scientist John McCarthy coined the term “Artificial Intelligence” in 1955, the public has imagined a future of sentient computers and robots that think and act like humans. 
But while such a future may indeed arrive, it remains, for the moment, a distant prospect. 
And yet the foreseeable frontier of computing is no less exciting. 
We have entered what we at IBM call the Cognitive Era. 
Breakthroughs in computing are enhancing our ability to make sense of large bodies of data, providing guidance in some of the world’s most important decisions, and potentially revolutionizing entire industries. 
The term “cognitive computing” refers to systems that, rather than being explicitly programmed, are built to learn from their experiences. 
By extracting useful information from unstructured data, these systems accelerate the information age, helping their users with a broad range of tasks, from identifying unique market opportunities to discovering new treatments for diseases to crafting creative solutions for cities, companies, and communities. 
The Cognitive Era marks the next stage in the application of science to understand nature and advance human prosperity. 
Its beginning dates to early 2011, when the cognitive computing system Watson beat two human champions on the game show “Jeopardy!”. 
Since then, Watson has gone on to do much more, demonstrating how cognitive computing can use big data to tackle some of the most difficult systemic issues facing humanity. 
Broadly, cognitive systems offer five core capabilities. 
First, they create deeper human engagement, using data about an individual to create more fully human interactions. 
Second, they scale and elevate expertise, learning from experts in various fields and making that know-how available to broad populations. 
Third, they provide products, such as those connected to the Internet of Things, with the ability to sense the world around them and to learn about their users. 
Fourth, they allow their operators to make sense of large amounts of data, helping manage workflows, providing context, and allowing for continuous learning, better forecasting, and improved operational effectiveness. 
And, finally – perhaps most important – they allow their users to perceive patterns and opportunities that would be impossible to discover through traditional means. 
Cognitive systems are inspired by the human brain, an organ that still has much to teach us. 
With systems growing in size and complexity, traditional computer architecture seems to be reaching its limits, as power consumption soars and the transmission delay between components becomes increasingly burdensome. 
Indeed, when it comes to energy efficiency – measured in terms of the number of computations per energy unit on “unstructured” data – the human brain performs roughly 10,000 times better than the best man-made machines. 
Today, computers consume about 10% of the world’s electricity output, according to Mark Mills, CEO of the Digital Power Group. 
In order to benefit fully from the Cognitive Era, we will have to be able to harness huge amounts of information; during the next 15 years, the amount of “digitally accessible” data is expected to grow by a factor of more than 1,000. 
Performing the calculations necessary for using such a large amount of data will not be possible without huge strides in improving energy efficiency. 
Matching the performance and efficiency of the human brain will likely require us to mimic some of its structures. 
Rather than attempting to squeeze energy-intensive performance out of ever-larger chips, we can arrange computer components in a dense 3D matrix similar to a human brain, maximizing not performance, but energy efficiency. 
Arranging computer chips in a 3D environment puts the various elements of the computer closer to one another. 
This not only reduces the time they take to communicate; it improves energy efficiency by a factor of as much as 5,000 – potentially providing computers with efficiency close to that of a biological brain. 
Already, a much denser computer built from available mobile technology and hot water cooling allows for ten times higher efficiency than a conventional system. 
But man-made computers are so inefficient not only because they need to power the chips, but also because they need energy to run the air conditioners that remove the heat generated by the processors. 
The human brain has a lesson to teach here as well. 
Just as the brain uses sugar and blood to provide energy and cooling to its various regions, a 3D computer could use coolant fluid to deliver energy to the chips. 
In addition to dissipating heat, the fluid could be used to power an electrochemical system providing power to the processors. 
This, in turn, would allow for further increases in packaging density – and thus efficiency. 
By adopting some of the characteristics of the human brain, computers have the potential to become far more compact, efficient, and powerful. 
And this, in turn, will allow us to take full advantage of cognitive computing – providing our real brains with new sources of support, stimulus, and inspiration. 

Smart Immigration for Europe 
PARIS – Immigration-related headlines have become a staple in Europe, whether the story is of an illegal Malian immigrant scaling a Paris building to rescue a toddler or the formation of a populist government in Italy that aims to deport a half-million migrants. 
And yet, despite the constant coverage of the issue – or, more likely, precisely because of it – the immigration policy debate remains beset by misconceptions and politicization. 
In the United Kingdom, the Brexit vote was fueled partly by false and distorted claims, such as that unrestrained migration from the rest of Europe was driving down wages. 
Since the vote, however, the anti-Brexit camp has engaged in similar distortions, warning that, once it has left the European Union, the UK will face a skills shortage. 
But plenty of countries – such as Australia, Canada, and Singapore – do just fine without agreements guaranteeing freedom of movement from other countries, by issuing skills-matching visas. 
Such distortions, by both pro- and anti- immigration forces across Europe, have consistently thwarted sober debate on the topic. 
Even when parties seem to be carrying out a reasonable cost-benefit analysis of immigration’s economic impact, they tend to cite only the studies and data that back their own viewpoint. 
This precludes agreement on creative and effective solutions. 
Judging by my years spent studying the international migration of highly skilled workers, not to mention living as an immigrant, a rational and balanced debate on immigration must begin with the perspective of immigrants themselves. 
What drives a person to move to a new and usually unknown country? 
In answering this question, it quickly becomes clear that immigration is a highly varied phenomenon, depending as it does on a diversity of factors such as nationality, skill level, intended duration abroad, and motivation. 
The experience of a medical specialist moving permanently to the UK from India is very different from that of a construction worker from Romania hoping to secure a better salary in France. 
From the ease of the journey to the living conditions into which they settle, both the experiences of both are very different from those of a refugee from Syria hoping to wait out that country’s civil war in Germany. 
What these experiences do have in common is they are generally driven by a desire to raise one’s living standards, whether through a more prestigious position, a higher salary, or increased physical safety. 
In short, immigrants want better lives – not a new culture or identity. 
Economic migrants, in particular, are simply job-seekers from overseas. 
If comparable employment could be created at home, they might never migrate at all. 
In this sense, the economic migration challenge boils down to an issue of job brokerage. 
Given this, economic migrants should be matched with jobs where they are needed, potentially through newly created job-brokering agencies for major immigrant-sending countries. 
A program inspired by the EU-Turkey refugee-exchange program – in which the number of rotating work visas made available for a country are tied to the number of illegal job-seeking immigrants repatriated to that country – could also be created. 
Of course, once in the host country, the immigrants’ rights as foreign workers should be protected. 
But they do not need to be granted full access to the political rights and social benefits of their host society’s citizens. 
This is roughly the system that is in place in the United Arab Emirates, where millions of foreign-born workers voluntarily pursue employment. 
They know they will enjoy labor and human-rights protections, with abuses prosecuted under the law, but no additional privileges. 
This system enables the UAE to give nearly eight million people the opportunity to raise their living standards, while avoiding a backlash from the indigenous population. 
Another innovative solution, which may work in some areas, is Switzerland’s “G permit” scheme, available to foreigners who live in a border zone in their home country and work in a border zone in Switzerland. 
(Border zones are established by treaty.) 
All cross-border commuters must return to their home country at least once a week. 
Could the EU create its own “border zone” category permitting a system of flexible mobility for non-permanent workers from Africa and the Near East? 
Denying migrants the privileges associated with living in their host country may seem to contradict traditional European liberal and egalitarian values. 
As a liberal myself, I share these values, but recognize that insisting on them as a matter of policy ultimately undermines migrants’ interests . 
With vehemently anti-immigrant political forces gaining ground throughout Europe, one must ask whether the newcomers desperate for a job are better served by being admitted on a conditional basis (including, potentially, for a limited period), or by not being admitted at all. 
Skills-biased immigration gives rise to a similar dilemma. 
Many in Europe argue that this approach not only discriminates against the weakest groups of immigrants, but also leads to a brain drain from countries that need highly skilled workers. 
But, again, one must examine the trade-off. 
Skilled immigrants are more likely to integrate smoothly into the host society, to which they can add more value. 
This enables the construction of cultural bridges between host societies and home countries. 
More important, those immigrants can send more money home in remittances than they would have been able to contribute in taxes had they remained. 
The immigration issue has long been a thorn in the EU’s side, not least because of the fear-mongering and emotional manipulation that have impeded constructive debate. 
The key to softening the thorn, if not removing it altogether, may be to establish, at the national and EU levels, a social contract for economic migrants. 
Such a “foreign worker rights charter” would protect immigrants’ rights, while restricting their social privileges. 
With immigration no longer dominating the political agenda, the EU might finally be able to address the myriad other challenges it faces. 
Ideally, it would do so with the same kind of cooperative, creative, and clear-eyed approach. 

Common Sense on Conflict Minerals 
LONDON – “That diamond upon your finger, say how came it yours?” asks Shakespeare’s Cymbeline. 
“Thou’lt torture me,” responds the villainous Iachimo, “to leave unspoken that which, to be spoke, would torture thee.” 
The story behind certain parts of the global trade in natural resources today, whether spoken or not, is no less a source of anguish. 
Natural resources should be a major contributor to development in some of the countries that need it most. 
And yet, in some of world’s poorest and most fragile states, they bring just the opposite. 
In many of these countries, the trade in natural resources motivates, funds, and prolongs conflict and egregious human-rights abuses. 
Resources such as diamonds, gold, tungsten, tantalum, and tin are mined, smuggled, and illegally taxed by violent armed groups, and provide off-budget funding to abusive militaries and security services. 
Consider just four African countries: Sudan, South Sudan, the Central African Republic, and the Democratic Republic of Congo. 
Together, these resource-rich countries account for just over 13% of the population of Sub-Saharan Africa, but some 55% of the region’s internally displaced persons (and one in five worldwide) due to conflict. 
But the problem is global, with similar patterns in parts of countries such as Colombia, Myanmar, and Afghanistan. 
The deadly trade in conflict resources is facilitated by supply chains that feed major consumer markets, such as the European Union and the United States, with cash flowing back the other way. 
Natural resources, such as tin, tantalum, tungsten, and gold – all minerals that have been linked in some parts of the world to conflict and human-rights abuses – are found in our jewelry, cars, mobile phones, games consoles, medical equipment, and countless other everyday products. 
There is clear consumer demand for information that will help buyers make sure that their purchases do not implicate them in appalling abuses. 
But the responsibility to reconcile global commerce with the protection of basic human rights does not fall first and foremost on consumers. 
Conflict prevention and human-rights protection are primarily the responsibility of states, and it is increasingly recognized that businesses must play their part as well. 
Indeed, we are now at a critical point in what has become a global movement to stop irresponsible corporate practices from being viewed as business as usual. 
Since 2010, companies working in conflict areas have had a global standard at their disposal. 
The OECD offers guidance on how to source minerals responsibly. 
Developed in close collaboration with the industry, it offers “detailed recommendations to help companies respect human rights and avoid contributing to conflict through their mineral purchasing decisions and practices.” 
The United Nations has also endorsed similar requirements. 
In 2011, the UN published a set of Guiding Principles on Business and Human Rights, according to which companies whose “operating contexts pose risks of severe human rights impacts should report formally on how they address them.” 
And yet, with the exception of a few progressive industry leaders, few companies have responded to this voluntary guidance. 
In 2013, Dutch researchers surveyed 186 companies listed on European stock exchanges that make use of conflict minerals. 
More than 80% made no mention on their Web sites of what they had done to avoid funding conflict or human rights abuses. 
Similarly, the European Commission’s Directorate General for Trade found that only 7% of 153 EU companies refer to a due-diligence policy for conflict minerals in their annual reports or on their Web sites. 
The United States has already taken the next logical step. 
The Securities and Exchange Commission requires companies that use tantalum, tin, gold or tungsten in their products to investigate these raw materials’ origin, and to mitigate risks in their supply chains in line with the OECD Guidance if they are found to originate in certain conflict-affected or high-risk areas. 
The 12 member countries of Africa’s International Conference on the Great Lakes Region have committed to similar mandatory due-diligence requirements. 
That is as it should be. 
Responsible sourcing is a duty, not a choice. 
And here, the EU is lagging behind. 
In March, the European Commission proposed a plan under which disclosure would continue to be voluntary, meaning that the minerals that enter the EU would not be subject to mandatory checks. 
The proposal, furthermore, focuses exclusively on raw ores and metals, and excludes products that contain the relevant minerals, such as mobile phones, vehicles, and medical equipment. 
The proposal is now being reviewed by the European Parliament and the European Council. 
It is crucial that both institutions seize this opportunity to strengthen the EU’s response by making disclosure and compliance mandatory and extending coverage to include finished and semi-finished products. 
Better regulating the trade in these resources will not itself bring peace to conflict-affected areas. 
But funding conflict and human-rights abuses is not an acceptable cost of doing business. 

Confronting Fear 
WASHINGTON, DC – Even as the squeeze in interbank lending has started to ease after the rescue of financial systems across the advanced countries, falling economic indicators have sent stock markets tumbling. 
Pressures on emerging-market countries, which were once thought by many to have “decoupled” from the rest of the world, have intensified as foreign loans are called in and assets sold off. 
With fear gripping consumers, companies, and countries worldwide, talk has turned from a moderate advanced-country recession to a major world depression. 
A sense of despondency has set in that nothing can be done to stop it. 
What is going on? 
Were the measures taken two weeks ago to shore up the financial system simply wrong? 
Absolutely not. 
The provision of liquidity, the recapitalization of banks, more uniform deposit insurance across the advanced countries – these were all correct and necessary measures. 
But they were only the first installment on what needs to be done. 
In the advanced countries, the fall in asset values and, more generally, fear of what comes next has shattered consumer and business confidence. 
Consumption is dropping, and companies are cutting investment. 
The financial crisis has created a sharp fall in demand, what economists call a “Keynesian recession.” 
To help confidence revive, there is no alternative but to use macroeconomic tools to boost demand and sustain output. 
Monetary policy can be used in countries where interest rates remain high, but its effectiveness in a credit squeeze is likely to be limited. 
Fiscal policy must, therefore, play a central role. 
Fiscal expansion is always risky, as it adds to debt and raises dangers later. 
But, given where we are, the benefits exceed the costs in countries with sustainable debt. 
Emerging-market countries face an additional problem. 
Not only must they contend with the prospect of falling exports and confidence; they also are the latest victims of a financial crisis that started in the United States, traveled to Europe, and now has swept across their borders. 
Foreign banks are cutting credit. 
Foreign investors are repatriating their funds on an unprecedented scale. 
Ironically, the measures being taken to resolve the crisis in advanced countries are making it more attractive to bring money home, making life harder for emerging-market countries. 
In order to shore up their financial systems and overall demand, emerging-market countries must be ready to take actions similar to those pursued by the advanced countries. 
But the recent prosperity of many of these countries has come from access to global capital. 
A sudden stop to such flows is a severe blow and raises special challenges that cannot be solved by these countries alone. 
So the advanced countries must be ready to provide the required financing, and to do so on an unprecedented scale. 
The alternative is the prospect of widespread debt default, banking controls, and protectionism – an outcome that would set back these countries, and the global economy as a whole, for years to come. 
The IMF has the wherewithal to commit up to $250 billion. 
We have set in motion the internal procedures and facilities that will allow us to provide resources quickly, with conditions limited to the core crisis-policy response at hand. 
In addition, the Fund is working on a new liquidity line to provide resources immediately to strongly performing emerging markets with sound policies and fundamentals. 
This should give confidence to investors. 
But, given the scale of capital flows, I am also urging the governments and central banks of the advanced countries to provide parallel financing to the IMF’s crisis-response programs. I also am convinced of the need to find ways to bring into play the resources of countries with large reserves. 
The Fund will play its part, but all these actions are needed to reinforce the credibility of the coordinated global response to the crisis. 
We must also think ahead – especially in regard to low-income countries in Africa. 
Because of their limited participation in international financial markets, these countries have, so far, been somewhat shielded from the storm. 
But it is an uneasy calm that probably will not last. 
Many low-income countries will suffer from the decline in commodity prices. 
Others, including those that were becoming the new frontier in emerging markets, may see their access to foreign capital dry up. 
They, too, will need help from the international community. 
Lending by the IMF and global development banks, and the maintenance of donor aid at current levels, will be essential if we are to avoid new human tragedies. 
The dynamics of fear are potentially catastrophic, but these dynamics can be broken. 
Whatever the problems in the financial system, the massive improvements over the years in technology, productivity, and social progress – the real fundamentals – are a genuine testament to the power of globalization as a force for good. 
It may be too late to avoid a recession in the advanced countries and a slowdown in emerging and low-income countries. 
But it is not too late to avoid a global depression. 

Condemning Khashoggi’s Killers 
AMSTERDAM – The details of the brutal, premeditated murder of Saudi journalist Jamal Khashoggi are astonishing. 
For starters, there is the location: not some dark alley but inside his country’s consulate in Istanbul. 
Next, there are the alleged perpetrators: a 15-member team that included a forensic doctor who once worked in Australia and brought a bone saw, and a body double who put on Khashoggi’s clothes – probably while they were still warm – and casually slipped out the back door. 
But the most shocking revelation may be this: the Saudis knew they could get away with murder. 
Recent figures published by UNESCO, the United Nations organization that is tasked, in part, with promoting the safety of journalists worldwide, show that in nine of ten cases, perpetrators are never punished for murdering a journalist. 
Because impunity is the norm, Saudi authorities took the gamble that even if the killing came to light, the consequences would be minor. 
And they were right: although prosecutors in Saudi Arabia are seeking the death penalty for five of the suspects, the international response has so far been meek. 
Despite the global attention the murder has received, most leaders have only promised to “consider” sanctions against Saudi Arabia; others have dismissed the idea outright. 
US President Donald Trump, for example, has said that although the official Saudi explanation is unsatisfactory, he has no intention of responding by curbing arms sales or trade. 
Leaders in France and Spain have expressed similar sentiments. 
Such bluntness illustrates that when economic interests are pitted against human rights, the former always take precedence. 
It is not only the loss of a journalist’s life that needs to be mourned, but also the erosion of civil liberties and free speech – especially in the Middle East. 
As the Committee to Protect Journalists reported last month, three of Saudi Arabia’s closest regional allies – the United Arab Emirates, Egypt, and Bahrain – issued statements supporting the Kingdom’s response to the Khashoggi killing. 
Saudi-owned domestic and pan-Arab media toed the line, too, while an army of online trolls quickly set to work to defend the Kingdom’s rulers and smear its critics. 
This type of whitewash is not limited to the Khashoggi case; it is even harder to find serious criticism in mainstream Arab media of the Saudi-led war in Yemen. 
With tens of thousands dead and a devastating famine threatening to kill millions more, the region’s news outlets are virtually silent on the role of the Kingdom’s interventionist crown prince, Mohammed bin Salman. 
If the international community genuinely cares about defending human rights, the rule of law, and democratic values, it must denounce Saudi Arabia’s brutality. 
One of the Middle East’s most powerful countries is directly responsible for widespread death, destruction, and misery. 
And yet Western countries are not only condoning these activities; in some cases, they are actively facilitating them by supplying the weapons. 
Whose interests are really served when Saudi Arabia is a strategic ally of the West? 
It is certainly not the marginalized people of Yemen, Bahrain, and Syria. 
Nor is it anyone concerned with human rights, gender equality, and many other values Western leaders claim to uphold. 
It is impossible to overemphasize the importance of journalists like Khashoggi to a country like Saudi Arabia. 
Without these purveyors of truth, institutional and political corruption would never be challenged. 
That is why Saudi officials’ extrajudicial killing of a journalist overseas must not go unpunished; governments must urgently reconsider their alliance with the Kingdom. 
Simply condemning human-rights violations without applying meaningful sanctions will not change its behavior. 
Beyond that, the international community must stop delegating the responsibility to investigate and prosecute the murder of journalists to the governments that wanted them dead. 
In most instances, the rule of law is too weak, and the very people in charge are those who ordered the executions. 
Justice may never be served in Khashoggi’s case, but his murder must not be in vain. 
Governments that value transparency and free speech must work together to create an international tribunal to prosecute cases of slain journalists in countries unable or unwilling to do so themselves. 
The alternative – allowing impunity to prevail – will let criminals off the hook and erode the very values that journalism is meant to defend. 

Confronting the Global Water Crisis 
CAMBRIDGE – Around the world, demand for fresh water doubles every 20 years, owing to increasing population and affluence. 
Yet pollution, climate change, and seawater intrusion are diminishing supplies of fresh water at similar rates. 
So, is a global fresh water crisis looming? 
Fortunately, the situation appears to be less alarming. 
This is not to deny that the supply of fresh water is getting tight. 
Left unattended, major disruptions for human society could occur. 
Many argue that water is different from resources such as oil, because there are often no substitutes for water in most uses (particularly growing food). 
Moreover, water is an essentially fixed resource, albeit one that renews itself every year. 
There are prodigious quantities of water on the globe, but most of it is salty ocean water and brackish groundwater. 
There are huge resources of fresh water, but most is in ice sheets and glaciers, with only a small percentage readily available where and when we need it. 
The supply of water is also highly variable across regions and within countries, with floods and droughts occurring at irregular times. 
One new factor influencing water supplies is rising global temperature. 
Although we are not certain about the exact effects, many scientists believe that total annual precipitation will increase, but that its seasonality and the frequency of extremes may also increase. 
This would make it difficult to use the existing supply infrastructure of dams, reservoirs, treatment systems, and pipelines without big modifications. 
From the writings of the earliest modern commentators on the drivers of socio-economic growth and decline – Adam Smith, Edward Gibbon, Thomas Malthus, David Ricardo, and Karl Marx – we see that concern about exhausting resources is not new. 
Malthus and Ricardo were particularly prescient about the roles of population, food, and energy resources. 
Malthus postulated a geometric rate of population growth (like compound interest on a bank deposit) and an arithmetic rate of growth (simple interest on a bank account) of food production. 
These curves always intersect after a couple of decades, and Malthus predicted widespread famine or violent conflicts: food and population would be aligned with each other by “misery, war, pestilence, and vice.” 
Ricardo projected “declining returns” on investments in resources, whereby the best (least-cost) resources are used first, followed by the next best, and so on. 
Increasing demand for resources leads to price increases that will continue until the resource becomes too expensive to use. 
Of course, these constraints were at work over previous centuries, before Malthus and Ricardo articulated them, but homo sapiens was able to “cheat” by expanding our resource base (colonialism) to bring in cheaper resources and food; by finding substitutes for scarce resources; and by improving our technology so that the same amounts of land and resources could be used more efficiently. 
Because the world is now pretty much filled up, there are few opportunities to expand the physical supply of resources. 
The real question now facing the planet is whether we can continue improving our technologies or finding cheaper substitutes. 
Just because something worked over the past 200 years does not mean that it will necessarily continue to work. 
This is the crux of the problem facing global water resources. 
But we can avoid a crisis by embracing the following technical and managerial adaptations: 
- Trade virtual water – the amount of water that is embodied in producing a product (usually food) and shipping it somewhere else to be used. 
This saves the recipient from using his own water, which can be saved for higher-value activities; 
- Conserve irrigation water. 
Because agriculture routinely accounts for 75-90% of all water consumed in a country, a 10% efficiency gain would save as much water as all the water used by the country’s municipalities and industry. 
Another way of improving irrigation efficiency is by developing crops that produce more food with the same, or less, water. 
Research on such genetically modified (GM) foods is well advanced in several of the largest water-scarce countries, such as China and India; 
- Exploit advanced desalination. 
Modern developments in desalination have brought the cost per unit of desalinated seawater to levels comparable to obtaining fresh water from natural sources (approximately US$0.05 per cubic meter). 
- Expand wastewater recycling. 
Urban areas typically dispose of about 85% of their fresh-water intake as wastewater, often in neighboring water bodies. 
The wastes could be treated and used to replenish groundwater. 
Emerging low-water-using sanitation technologies such as urine-separating dry-composting toilets could also significantly reduce urban water demands if properly developed; 
- Develop creative pricing policies for urban water and wastewater. 
Protecting human and ecosystem health are difficult to price, because they form part of the pervasive externalities associated with water use. 
Nevertheless, many water uses would respond well to more efficient prices. 
Although avoiding a global water crisis will not be easy, we have at hand policies and technologies that, if properly applied, could see us safely through the next several decades, even in the face of increasing – and increasingly wealthy – populations. 

Confronting the UN's Anti-Human Rights Lobby 
UN High Commissioner for Human Rights, Mary Robinson is to be replaced by the Brazilian Sergio Vieira de Mello, a longtime UN diplomat, on September 12 th . 
That transition will be a tricky one, because the governments that dominate the UN commission for human rights (CHR) are increasingly trying to protect themselves - and their allies - from any scrutiny or criticism. 
During the last annual session of the CHR, held in Geneva last spring, the body voted one by one to ignore severe human rights violations in such places as Russia/Chechnya, Zimbabwe, Iran and Equatorial Guinea. 
For several other violators - such as China, Algeria, Uzbekistan, Vietnam and Saudi Arabia - the CHR couldn't even muster the will to put their abuses on its agenda. 
It also cut back on several country-specific monitoring mechanisms, compromising one of the most powerful of human rights tools, that of naming and shaming. 
This is happening, in part, because countries with vile human rights records - Algeria, Burundi, China, Cuba, the Democratic Republic of Congo, Indonesia, Kenya, Libya, Malaysia, Saudi Arabia, Sudan, Syria, and Vietnam - command a powerful bloc within the CHR. 
They compose a near majority on the fifty_three member body. 
In 2003, Zimbabwe will joined them and, unless African countries reverse an earlier decision, Libya will chair this body for a year! 
Such countries go out of their way to secure seats on the commission and then actively work to build alliances with pliable governments. 
In addition, they have developed a number of clever procedural ploys to undermine the commission. 
Their resolve to render the commission toothless is not matched by a balancing impulse on the part of the traditional promoters of human rights in the West. 
To some extent, this is because - all rhetoric notwithstanding - human rights rank relatively low among these governments' priorities. 
Trade often trumps human rights and governments, especially in Europe, are often loath to jeopardize lucrative contacts when governments that violate human rights retaliate at being criticized. 
These tendencies have been compounded more recently by the war against terrorism. 
Western democracies are unwilling to irritate important allies in the counter-terrorism struggle simply because they might be violating the rights of their own citizens. 
During the past year, for the first time in its history, the US was not a member of the Commission (though it will be regaining its seat in 2003). 
You might think that America's absence contributed to the CHR's sorry state as, in the past, the US was often principled and outspoken on some issues, in particular regarding certain specific abusive countries. 
But you would be wrong. 
Increasingly obsessed at the prospect of its own citizens and practices coming under international scrutiny, America has over the past few years contributed to the general erosion of the UN human rights monitoring system. 
It adamantly opposed several important and promising new human rights initiatives, notably the International Criminal Court (ICC), and a new anti-torture mechanism. 
On the anti-torture protocol, the US sought to derail the creation of a universal system of visits to places of detention, under an optional protocol to the Convention Against Torture. 
Here America found itself allied with some strange bedfellows that it normally rebukes as chronic human rights violators - Cuba, China, Iran, Libya, Sudan or Zimbabwe. 
Yet, without US support, the initiative was overwhelmingly endorsed in late July by the UN's Economic and Social Council. 
Of course, not everything in the UN's human rights picture is uniformly bleak. 
The International Criminal Court will be beginning its work soon, and with greater international support than expected, thanks to America's efforts to undermine it. 
The universal system of visits to places of detention is gaining ground. 
Even at the CHR, there has been some recent progress, for example, on work to establish "disappearances" as an international crime. 
Here, countries with fresh memories of repressive rule, such as Latin American and East European nations, have increasingly taken the lead in promoting human rights initiatives and defending the principles. 
(Latin America, in particular, played a pivotal role in all the situations described above.) 
All the same, manipulation by powerful countries and the foes of human rights have left the CHR in bad shape. 
Vieira de Mello - who has had a distinguished career in the UN system and is a brilliant diplomat - must be willing and able to draw on his own region and on others to make sure that the UN human rights system serves the victims rather than the violators. 
But he will also need to entice the West into becoming more pro-active and the US in particular into re-establishing its role as a constructive rather than destructive force in human rights affairs. 

Confused by the Veil 
On July 23 millions of Turks will wake up into a new, post-elections Turkey. 
What will happen is hard to foresee. 
Turkish politics is full of surprises that only foreigners find surprising . 
Today, and this seems to surprise most people outside Turkey, it is women, not men, who are at the heart of political debate. 
Indeed, in these elections the number of women candidates from all parties has visibly increased and so has female political overall activism. 
This election is taking place because when the AKP party, the conservative party now in power, designated Foreign Minister Abdullah Gul as its candidate for president, the country’s secular elite cringed. 
Gul was not the issue; the issue was his wife. 
Had Gul been chosen as president, Turkey would have had its first headscarf wearing First Lady. 
Gul’s wife’s headscarf was interpreted as the symbol of darker changes to come. 
If the First Lady wears a headscarf, maintained the secular-minded elite, the whole secular system could be undermined. 
What followed was unprecedented political turbulence, including mass demonstrations on a scale never seen before. 
There was feverish talk of a possible military takeover, and the army again proved itself to be a seminal political actor. 
Through all this, Turkish women were at the forefront. 
In particular, Turkey’s Westernized, modernized, secular women seemed determined to show their opposition to the existence of “the other” Turkish woman. 
Gender issues have always been vital in the Turkish nation-state. 
Kemalism (the beliefs associated with the founder of modern Turkey, Musfafa Kemal Atutűrk) is unique among all Muslim reform movements in that it transformed not only the public sphere, but also the private sphere – the domain of mothers, wives, sisters, daughters. 
In the 1920’s and 1930’s – the years of Atutűrk’s rule -- the “new Turkish women” became the icon of the modern, secular regime. 
The difference between what the French call laicité and secularism is more than a linguistic nuance for Turkey, which adopted its Kemalist system not long after France entrenched its secular republic. 
Religious symbols and references have to a large extent been removed from the public sphere here, and religion is thought to be a private matter. 
Many Turks who go to the US for the first time are puzzled, indeed, by its religiosity . 
It comes as a surprise to see religious symbols and statements at the entrance of public buildings, on money, inside the courtroom. 
But in Turkey the headscarf is not seen as a trivial symbol. 
Eighty years after the republic’s founding the trouble with headscarved women is that they do not fit into the picture of the ideal modern Turkish woman. 
At the first glance there seems to be a huge mental, cultural and political gap dividing Turkey’s women. 
Yet if we look closer this gap becomes illusory. 
In everyday life the two types of Turkish women are more mixed than they are usually assumed to be. 
It is not uncommon for one sister to wear a headscarf while another does not, or a mother to wear a headscarf while her daughters do not. 
Sometimes among two best friends, one is covered and one is not. 
Any stroll along a crowded Istanbul street will show covered and uncovered women effortlessly -- almost naturally -- mixing. 
Why then can’t a similar sisterhood be achieved in the realm of politics? 
A recent opinion poll shows that around 60% of women in Turkey cover their heads outside their homes. 
But does this mean 60% wear the veil? 
Does it mean that they all support Islamic fundamentalism? 
The answer to both questions is negative. 
As a novelist, when writing in Turkish I can encounter more than eight different words to stand for the headscarf. 
Yemeni, türban, eşarp, çarşaf,… Each is different. 
Different women wear the headscarf for different reasons. 
Some wear it out of habit or for traditional reasons rather than religious ones. 
For others the motivation is political. 
Not all women wear a headscarf because of religious conservatism. 
And not all headscarved women are “ignorant” or “repressed.” 
But this complexity is lost due to the concept of “the veil.” 
If one makes no distinctions and disregards nuances one will end up believing that 60% Turkish women wear the veil. 
The same poll, however, revealed that the percent of women who cover their heads fully and for more political than traditional reasons is no more than 11%. 
Paying attention to nuances makes a huge difference– the difference between saying that 60% women wear the veil and saying that 11% do. 
This complexity is lost not only on Western observers but also on Turkey’s elite. 
Because ideological clashes here seem to center around women’s bodies and clothes perhaps it is time we stopped asking “how should an ideal Turkish woman look?” and start asking “should there be an ideal woman Turkish woman at all?” 
After all, pluralism is not only a political principle, it is one a free society applies to individuals – male and female – as well. 
We in Turkey have been tackling the question of whether Islam can coexist with Western democracy for more than 150 years. 
After150 years of Westernization and modernization, the answer we have come up with is a definite “yes.” 
Turkey is a complicated country, with multiple dilemmas. 
Its women both heal and intensify its tensions. 

Congo’s Infinite War 
HARARE – Some time ago, the head of the United Nations refugee agency, Antonio Guterres, said of the Democratic Republic of Congo: “Nobody in the outside world feels threatened, and so the international community is not really paying attention.” 
Not anymore: currently, Congo’s eastern province of North Kivu is in the headlines almost every day. 
Last August, fighting to the north of the provincial capital Goma flared up again, provoking a major humanitarian crisis that has no end in sight. 
Like the eight-year civil war (in what was then known as Zaire) that nominally ended in 2002, the current fighting involves many different local groups: not only the Congolese government forces, which oppose the insurgents loyal to the Tutsi General Laurent Nkunda, but also the Rwandan Hutu rebels who were responsible for the genocide in Rwanda in the 1990’s and a jungle force known as the “Mai-Mai” militias. 
As always, the main victims are civilians caught in the crossfire. 
The renewed fighting, coming eight months after a promising peace initiative known as the “Goma Agreement,” means more civilian deaths and little chance of normality returning to the eastern part of Congo. 
Yet, even at times when fighting is less intense Congo suffers from the indirect effects of the war. 
A mortality survey conducted by the International Rescue Committee (IRC) and released earlier this year demonstrates that this conflict is the world’s most deadly crisis since World War II: an estimated 5.4 million people have died as a consequence of the war and its lingering effects in the last decade. 
Today, a quarter of a million people are on the run, almost half of them on territory under rebel control and with almost no access to aid. 
They need food and shelter, clean water and latrines, medical care, and education. 
Women and girls need protection from sexual violence, which flares up when families are forcibly displaced. 
It may sound strange, but from the point of view of a humanitarian relief agency, it is not important on whose territory civilians in need are, as long as there is access to them. 
Aid workers who have been in the country for a dozen years, especially from groups like my own IRC, must work with all parties to the conflict because civilians in need are everywhere. 
But aid agencies need access. 
The UN peacekeeping force in Congo, MONUC, has a mandate from the Security Council for full intervention in order to provide protection to the civilian population. 
So when aid workers are stopped at gunpoint and cannot talk their way through, humanitarian agencies naturally turn to MONUC to guarantee access. 
Humanitarian workers are not military strategists, so they cannot judge what kind and what size of deployment of peacekeepers is adequate. 
But the aid agencies that work on the ground have first-hand experience of the impact of peacekeepers’ presence, and we have the authority to say that protection of aid workers can be dangerously inadequate. 
Indeed, at the height of the fighting for control of the northern town of Rutshuru last October, the IRC teams that were stationed there decided to evacuate temporarily because the risk was simply too great. 
Together with other aid agencies, IRC staff formed a convoy and MONUC offered armed vehicles to protect it. 
But when armed men stopped the convoy on the road, the Uruguayan peacekeepers from MONUC simply turned around and vanished, leaving the aid workers to their fate. 
What followed were many hours of harassment, humiliation, threats with live hand grenades, shots fired at the feet of one of our colleagues, and looting and ransacking of the IRC premises. 
Finally, another group of MONUC peacekeepers – this time from India – came to the rescue and helped evacuate the aid workers on helicopters. 
Protecting the humanitarian effort now underway is essential to the sheer physical survival of the Congolese displaced in North Kivu, but the only lasting solution is a ceasefire followed by a peace treaty, possibly along the lines of the “Goma agreement.” 
Paradoxically, the current fighting and the masses of displaced persons that it produced have helped to draw attention to the crisis. 
This moment must be seized not only to beef up MONUC, but, more importantly, to use all existing leverage with the combatants and the governments that back them to get all the parties to return to the negotiating table. 
The televised tragedy, and the shortcomings that can be observed close up, can and must be stopped, lest – as often happens with Congo – the crisis disappears from the front pages, while the killing continues unseen. 

The Shape of US Tax Reform 
CAMBRIDGE – Major tax reform is high on the agenda for the United States in 2017. 
The Republican-controlled House of Representatives has been preparing for this for years, creating detailed plans for overhauling how corporate and personal income are taxed. 
Now, with a Republican majority in the Senate and a Republican president in the White House, those plans can provide the basis for legislative action. 
The proposed corporate tax reform is especially significant. 
I believe it will have a highly favorable impact on business investment, raising productivity and overall economic growth. 
The new tax rules will also have significant effects on foreign economies. 
Although none of the proposed changes is guaranteed, the likely shape of the proposed tax package is becoming clear. 
It includes four major components. 
A lower tax rate on corporate profits. 
The current 35% rate is the highest rate among all industrial countries. 
The House Republicans and the Trump administration have both proposed halving that rate, which would cause capital to shift to corporate investment from real estate, unincorporated businesses, and foreign holdings. 
With corporate-tax revenue currently equal to 2% of GDP, the proposed rate cut would reduce revenue by about 1% of GDP, or $190 billion a year in today’s economy. 
The resulting increase in investment would boost growth and lower the revenue loss; but congressional Republicans, who favor a revenue-neutral tax reform, would still face a challenge. 
A territorial system for taxing US firms’ foreign subsidiaries. 
The US is unique among industrial countries in subjecting repatriated profits earned by its companies’ foreign subsidiaries to the full domestic tax rate (with a credit for tax paid to the foreign government). 
Thus, a US firm that earns a profit in Ireland pays a 12% tax to the Irish government and would now pay an additional 23% on any repatriated profits. 
Not surprisingly, US firms choose to keep their profits abroad. 
Adopting a territorial system would increase investment in the US, stimulating productivity and growth. 
The proposal would allow all future foreign profits of US corporations to be repatriated without any extra tax. 
The $2.1 trillion of previously accumulated overseas profits would be subject to a one-time tax of about 10%, to be paid over several years. 
A cash-flow corporate tax. 
This means two things: allowing companies to deduct all investments in equipment and structures immediately, instead of spreading the cost over time; and eliminating the deduction for interest costs on newly incurred debts. 
This would reduce the risk caused by high-debt ratios and put debt and equity on an equal footing. 
I doubt that Congress will actually enact this reform when it digs into the operational details. 
When is a loan a new loan, and when is it just a continuation of an existing line of credit? 
What happens when companies shift from borrowing to finance an equipment purchase to leasing that equipment? 
Border tax adjustment. 
Unlike most other countries, the US does not have a value-added tax. 
The border tax adjustment would give the US the international advantage of a value-added tax without levying that tax on domestic transactions. 
Here’s how it would work: Companies that import goods would not be allowed to deduct those imports’ cost in calculating their taxable profits. 
With a 20% corporate tax rate, that would be equivalent to a 20% import tax. 
Companies that export goods would be able to exclude the export earnings from taxable income, equivalent to a 20% export subsidy. 
Although it looks like this would reduce imports and increase exports, that will not happen. 
As every economics student learns, the trade balance depends on the difference between domestic saving and domestic investment. 
Because the border tax adjustment does not change saving and investment, it wouldn’t change imports and exports. 
Instead, the changes in taxes on imports and exports would lead to a rise in the value of the dollar that offsets the direct impact of the border tax changes. 
More specifically, if the border tax adjustment is adopted, the dollar will increase by 25% relative to other currencies. 
A 25% rise in the dollar lowers the cost of imports by 20% (just enough to offset the increase in import prices caused by the 20% tax), while raising the cost of US exports to foreign buyers (just enough to offset the implied 20% subsidy). 
But if the border tax adjustment would not improve the US trade balance, why are congressional Republicans eager to enact it? 
The real reason that it would boost tax revenue substantially, without increasing the burden on US consumers or producers. 
Currently, US imports and exports are 15% and 12% of GDP, respectively. 
Given the difference of 3% of GDP, the 20% import tax and 20% export subsidy raises a net 0.6% of GDP, now equal to $120 billion a year. 
The border tax adjustment therefore pays for about two-thirds of the $190 billion cost of the corporate tax cut, and an even larger share when the lower corporate rate’s favorable effect on growth is taken into account. 
And, because there is no change in prices paid by American consumers or received by American exporters, that tax is borne by foreign producers, who, owing to the dollar’s appreciation, receive less in their own currencies for their exports to the US. 
There is substantial opposition to the border tax adjustment among US importers who are not convinced that the dollar will strengthen enough to balance the higher implicit import tax. 
But the prospect of raising more than $100 billion a year without hurting US consumers or producers will drive Congress to move forward with this feature of the overall plan. 
This year’s legislation will be the first major reform of the US tax system in three decades. 
Enacting it will produce a more favorable and competitive tax framework for American companies. 

The New Health-Care Continuum 
DAVOS – The health-care industry has changed dramatically over the past few decades. 
Research and development have given us astonishing new treatments, powerful diagnostics, and a rapidly growing wealth of knowledge. 
Medical specializations and providers have proliferated. 
Governments and insurers have become powerful players. 
And the patient has become a vocal and proactive consumer, ready to search for better options, even if that means going abroad. 
But, even as health care has become more effective, it has also become more complex and costly. 
Growing and aging populations are putting increased pressure on health-care systems that are already buckling under the burden of chronic diseases like cancer and diabetes. 
The Institute of Medicine estimates that in the United States alone, some $750 billion a year – about 30% of total health-care spending – is “wasted on unnecessary services, excessive administrative costs, fraud, and other problems.” 
If we are to ensure that health care remains affordable and widely available for future generations, we need to rethink radically how we provide and manage it. 
Crucially, health care needs to become connected. 
It should become effortless for medical professionals to share relevant data with colleagues around the world. 
Medical devices and systems in hospitals should be able to combine multiple sources of information. 
A new generation of consumer technology, such as wearable health sensors, could automatically alert doctors to potential medical problems before they become acute episodes. 
Though such innovations must confront challenges like system interoperability and the need to protect patients’ privacy, the Internet’s integration into the travel and banking industries shows what is possible. 
Indeed, connected health care is already becoming a reality. 
Philips, for example, has developed a technology that allows doctors to share medical data from a prostate cancer biopsy with colleagues around the world. 
In the past, the biopsy could be shared only physically, which made diagnosing the exact type of prostate cancer difficult. 
As a result, surgeons and patients may have opted for invasive surgery just to be safe. 
Now, teams of doctors worldwide have an additional tool, enabling them to work together toward more accurate diagnoses and enhanced treatment plans for individual patients. 
The entire patient experience will be transformed, with better prevention, quicker diagnoses, shorter hospital stays, and longer independent living becoming the norm. 
If patients return to the hospital, they will bring useful data, captured by wearable devices, about the evolution of their vital signs. 
They can continue to track themselves as their treatments progress, and their data can be integrated with medical records to provide a long-term view of their health, rather than an episodic snapshot of the day they visit a doctor. 
With access to professional coaching and support around the clock, patients will feel more empowered to manage their own physical wellbeing. 
Connected health care can also provide access to life-saving treatment to more people, particularly in developing countries and rural areas. 
In Indonesia, which has one of the world’s highest infant mortality rates, midwives in the rural area of Medan collect medical data from pregnant women using a mobile app. 
The data are analyzed by obstetricians and gynecologists elsewhere, allowing women at high risk of illness to be identified and treated early. 
In Uganda, midwives in village health centers send compressed ultrasound scans to remote specialists, nearly doubling the number of newborns that can be delivered by a skilled health worker. 
More broadly, connected health technology will cause professional health care and consumer markets to converge. 
This will create a continuum that starts with a focus on healthy living and prevention, empowers consumers to take control of their own health, and enables countries to improve their citizens’ overall wellbeing. 
The continuum will then move on to definitive diagnostics and minimally invasive treatments, optimized for quality and cost, and, finally, to recovery and home care, shifting medical care as soon as possible to more comfortable and cost-effective non-hospital settings. 
Governments, insurers, medical professionals, patients, and caregivers need to work together to ensure that the transition to this health continuum is well managed, so that access can be expanded, outcomes can be improved, and productivity can be enhanced. 
Together, we have the opportunity to improve the lives of billions of people, create healthier societies, save costs, and boost economic growth. 

Connecting the Solutions 
WASHINGTON, DC – The world does not need to be reminded of the urgency of this historical moment. 
We sense it every day in the news. 
One day a major bank, insurance company, or automaker announces a record loss. 
The next brings word about the impact on nations and peoples least able to cope with these blows – the poorest of the world’s poor. 
During the last two years, I have dealt with many crises, from Darfur and the Democratic Republic of Congo to such global challenges as the food crisis and climate change. 
But the financial crisis is unique and potentially overwhelming. 
What was a purely financial crisis has become an economic crisis, spreading across the globe. 
Every projection of growth has been revised downward. 
And while there are signs that mature economies are recovering from the panic that froze credit markets, we are by no means beyond the danger zone. 
My greatest concern is that today’s financial crisis evolves into tomorrow’s human crisis. 
We need to recognize what Martin Luther King, Jr. called the “fierce urgency of now” if we are to safeguard millions of people’s livelihoods and hopes for the future. 
Many financial experts have diagnosed the causes of the crisis. 
Policymakers have offered prescriptions for solving it. 
We hear talk of new banking regulations and even of a new global financial architecture. 
All this is desirable. 
Yet, while I welcome this debate and fully recognize the need for long-term measures, I am acutely conscious of time. 
Immediate problems require immediate responses. 
Nor can we allow the financial crisis to become a reason for neglecting other critical issues: unacceptable levels of poverty and hunger, the food crisis, climate change. 
For that will only exacerbate the already fragile political and security situation in many of the hardest hit countries. 
At the G-20 financial summit in Washington this weekend, I delivered four messages reflecting my conversations with various UN member states. 
First, we need a global stimulus package to turn this crisis around. 
The IMF recently projected that virtually all global growth in 2009 will come from emerging and developing economies. 
Large increases in public and private expenditures will therefore be required in many regions of the world to counteract falling demand. 
Second, these financial rescue and assistance packages cannot stop at the borders of the richest countries. 
Emerging markets and other developing countries will need oxygen in the form of credit lines and trade financing. 
And we must stand against protectionism. 
Without open trade, growth and development could break down entirely. 
Third, some part of our global stimulus should come from commitments that the international community has made on aid. 
In today’s environment, fulfilling the Millennium Development Goals (MDGs) is more than a moral imperative. 
It is a matter of pragmatic economic necessity. 
Finally, inclusivity must be our watch-word. 
In our interdependent world, these tasks can be met only through reinvigorated multilateralism – one that is fair, flexible and responsive, with leaders coming from all quarters. 
While the G-20 nations whose leaders met in Washington account for nearly 80% of world production, trade and investment, more than 170 other countries, representing one-third of the world’s people, were not there. 
It is our responsibility to listen to their voices and respond to their concerns. 
The next few months will be crucial. 
Many of us will meet again in two weeks in Doha to review progress on financing for development. 
Six years ago, President George W. Bush and other leaders adopted the ambitious goals that constitute the core of the MDGs. 
History will judge us harshly if we fail to live up to these commitments. 
I therefore urge all nations, rich and poor, to send their highest-level representatives to Doha with full determination to do what must be done. 
In December, our climate change negotiators meet in Poland. 
We have one year until they meet in Copenhagen – one year to reach an agreement that all nations can embrace. 
The sooner we have such an agreement in place, the sooner we will see the green investments and green growth we so badly need. 
The great challenges before us are interrelated: the global economy, climate change, and development. 

Connectivity for All 
NEW YORK – It is not every day that one gets to join two global powerhouses to promote a planetary breakthrough, but that is the reality with Connect to Learn (www.connecttolearn.org), a new worldwide initiative to ensure that all children on the planet can attain at least a secondary education. 
The telecommunications giant Ericsson and the pop singer Madonna are teaming up to get kids into school and connected worldwide through wireless broadband. 
My colleagues and I at the Earth Institute and the Millennium Promise Alliance are joining the effort. 
The stakes could not be higher – or the prospects more exciting. 
The information-and-communications-technology (ICT) revolution is surely the most powerful single force for economic development in the world today. 
It is not just in New York, Shanghai, or Paris that one finds a mobile telephone in the hands of each passerby. 
These days, one finds mobile phones in Nairobi taxis and among camel-herders in Northern Kenya. 
There are now 4.6 billion mobile subscribers, and the numbers are soaring. 
An estimated 250 million subscribers live in Sub-Saharan Africa alone. 
The spread of 3G (and soon 4G) offers the prospect of a technological breakthrough in education. 
Suddenly, even remote schools can connect to the Internet and to other schools through a solar panel, low-cost computers, and wireless access. 
A school that lacked even rudimentary supplies suddenly can have access to the same global store of information as any other place in the world. 
When it happens, the results are galvanizing. 
Within minutes of going online in a pastoralist community in northeast Kenya, kids were reading about their own community as part of the Africa-wide Millennium Villages Project. 
Communities that had little school attendance have seen kids stream in as low-cost interventions, starting with Internet connectivity, in-school meals, and a safe water supply, lead to a surge in schools’ quality, performance, and attractiveness to students and parents. 
With modest up-front financing, impoverished and traditional rural communities that had not considered educating girls suddenly see the immense value to the community of educating both boys and girls. 
In a Millennium Village in Ethiopia that I recently visited with the country’s health minister, a local father explained to me how he had decided to keep his daughter in school rather than marrying her at age 12 to a neighbor’s son. 
“I asked my daughter what she wanted to do,” the father explained, “and she told me that she wants to stay in school, so she is continuing in school.” 
The health minister turned to me and said that he had never before heard such a conversation in that region: that the father would not only ask the daughter, but happily heed her decision! 
We are seeing such rapid changes throughout Africa. 
Impoverished communities are cheering the prospect of a rapid ramp-up in girls’ education, if meager resources permit. 
On a sunny day in Malawi recently, Madonna and the CEO of Ericsson, Hans Vestberg, attended the groundbreaking for a new girls’ school and launched the new global education initiative. 
On the horizon in two directions, spaced at around four kilometers, were the mobile towers to connect the new school with the world. 
The promise was not lost on the national government. 
The education minister committed to scale up education nationally as rapidly as resources would permit. 
Universal secondary education, especially for girls, is transformative for societies attempting to escape poverty, because education changes the demographic dynamics of the country as well. 
In the poorest parts of the world where girls are still not in secondary school, they are married at a young age and have 6-8 children on average. 
Those who stay in school end up marrying much later, perhaps in their early to mid-twenties, entering the workforce, and having 2-3 children. 
The interplay of voluntary fertility reduction and declining poverty are profound and rapid. 
When poor families have fewer children, they can afford to invest more per child in health, nutrition, and schooling. 
Mothers can spend more time in the job market, breaking long-standing barriers of gender inequality. 
Reduced population growth means less pressure on land, water, and biodiversity. 
In short, the links between education and reduced fertility, faster economic development, and lower environmental degradation are too powerful and obvious to be ignored. 
Connecting kids around the world in shared on-line curricula, and facilitating “social networks” of kids around the world at an early age, will yield far-reaching educational benefits. 
At a recent launch of a “school-to-school” link connecting an elementary school in the United States with one in Kenya, young children across an 8,000-mile divide shared a “read-aloud,” and then reflected in amazement and delight that they could share a story with kids in another part of the world. 
The Teachers College at Columbia University will watch the school-to-school process carefully, with formal monitoring methods, to assess the value of school experiences in terms of expanded cognitive and ethical learning. 
Current estimates suggest that around 300 million school-age children worldwide are deprived of the chance to complete secondary school, largely for economic reasons. 
That deficit, which threatens the futures of these kids and their societies, can now be closed at low cost. 
A Global Fund for Education, combined with a global voluntary effort to connect kids around the world, offers the chance for a breakthrough that was not realistic even a few years ago. 
Such initiatives are another dramatic example of a basic truth of our time: extreme poverty, illiteracy, and death from preventable diseases are anachronistic scourges when we have the technologies and global goodwill to end them. 

Consequences of the Iraq War 
The Iraq war's main consequences will not be on the battlefield. 
They will come later, and will depend on whether George Bush and Tony Blair can justify their onslaught on a largely defenseless population. 
They launched this war for certain declared reasons, all of which were heatedly debated around the world. 
If they are vindicated, then the war could conceivably bring a safer world. 
If their arguments remain unproved or are disproved, then the war will incite instability. 
In that case, a critical step towards healing the world would be their quick departure from office. 
The Iraq War was not and could not be justified on the basis that Saddam Hussein was a tyrant. 
Justification, if it exists, rests on the danger Saddam's regime posed. 
Bush and Blair made four claims: 
Iraq possesses weapons of mass destruction; 
those weapons pose a grave, immediate threat; 
UN inspections were not eliminating that threat; 
the threat could best be eliminated by war. 
The first claim should be the easiest to verify. 
Bush and Blair talked repeatedly about stockpiles of weapons of mass destruction, massive underground and mobile units to produce or launch such weapons, and active programs to obtain nuclear weapons. 
It is incumbent upon Bush and Blair to prove their case, and to prove it in the face of worldwide suspicion that the US and UK security agencies might plant phony evidence. 
For this reason, independent UN experts should assess any evidence that is uncovered. 
If no evidence of such weapons is produced, then both Bush and Blair deserve to be finished politically, no matter what else happens in Iraq. 
The second claim will be trickier to prove. 
Bush and Blair must show that any weapons of mass destruction that are recovered posed a grave and urgent threat. 
We know that Iraq at one time possessed chemical and biological weapons, because the US sold them to Iraq. 
The test is not whether traces of those weapons remain, as such traces will be found at disposal sites, but whether those weapons were poised for use in threatening amounts. 
If the Iraqis launch an attack with such weapons, this would demonstrate that the weapons were ready for use. 
Whether they posed any real threat outside Iraq's borders, or would have been used in the absence of the current war, must still be assessed. 
The third claim is hugely contentious. 
Bush and Blair should demonstrate that the UN inspection process was failing. 
This can be done by showing that the Iraqis were simply hiding the evidence at sites visited by the inspectors and declared free of weapons. 
There should be a systematic review of sites that were visited. 
There should also be an explanation, if weapons of mass destruction are uncovered at other sites, as to why the inspectors could not have found such weapons in a realistic period of time. 
The fourth claim will be subject to wild propaganda on both sides. 
Was the war justified in terms of costs and benefits, and was war really the last resort? 
This will depend on an objective assessment of the costs of the war in terms of loss of life, destruction of property, economic impact within Iraq, spillovers into other forms of violence such as terrorism, and geopolitical consequences. 
To date, Bush and Blair have failed to make the case to the world, with the partial exception of their own countries. 
The American people have been treated to a spectacle of jingoism, fear mongering, confusion of Iraq with Osama bin Laden's terrorists, and simple patriotism. 
None of this swayed the rest of the world, which views the war with disdain and alarm. 
This would change if evidence on the four points is mustered. 
When the 13 British colonies in North America launched their own War of Independence, Thomas Jefferson understood that "the decent respect to the opinions of mankind" required an explanation for that war, which he set forth in the Declaration of Independence. 
Such an explanation, backed by rigorous evidence, is no less necessary today. 
If the arguments for war are not proved, the consequences will be profound. 
Propaganda, streets lined with cheering Iraqis, amazement over the prowess of US smart bombs, would not distract us from an awful truth-that Bush and Blair shattered world peace, engaged in massive premeditated killing, and did so against overwhelming global opinion. 
Healing today's divided world could start only with fresh political leadership in both the US and UK, and a strong assertion of UN authority. 
Given the terrible costs, I hope that this war will prove justified, though I have my doubts based on the current evidence. 
If compelling evidence proves that weapons of mass destruction were at hand; that they were poised for use on a threatening scale; that the UN inspectors had poor prospects of uncovering and dismantling those weapons, then we must acknowledge the arguments made by Bush and Blair. 
Even in those circumstances, war might well have been unwise compared to a policy of containment. 
Still, the war would then at least make some sense. 
The horrors of a senseless war are almost too frightening to contemplate. 

Solidarity With Sharks 
SAN JOSE – It has long been said that we know more about the Moon than we do about the oceans. 
After all, 12 people have walked on the surface of the Moon, but only three have been to the deepest part of the sea. 
But it now seems that we know even less about the oceans than we thought – and we may well have been doing even more damage than we realized. 
A recent study found that fishing catches have been substantially underestimated for years. 
This should grab the attention of both regional fisheries management organizations, which oversee commercial fishing in the high seas, and those monitoring compliance with the United Nations Convention on the Conservation of Migratory Species of Wild Animals (CMS), which covers endangered migratory species. 
According to the CMS, the species demanding the strictest protection today – listed in Appendix I – include great white sharks, five species of sawfish, and eleven species of ray. 
The CMS meetings on migratory sharks, set to take place this month in San Jose, Costa Rica, represent an important opportunity for advancing regulations to ensure the conservation and sustainable use of these species, so that they can continue to fulfill their critical ecological role as apex predators. 
At their last conference, held in Quito, Ecuador, in 2014, the CMS parties added several shark species, the protection of which governments are encouraged to secure through the negotiation of international agreements. 
One such agreement, reached in 2010 and so far signed by 39 parties, is the Memorandum of Understanding on the Conservation of Migratory Sharks. 
Despite being legally non-binding, the initiative provides an important forum to reach agreement on policies ensuring that any exploitation of migratory shark populations is sustainable. 
But, as the recent study on fishing catches underscores, we often lack the accurate data needed to determine what level of consumption is sustainable. 
Without it, the precautionary principle – if in doubt, don’t do it – should be applied. 
The problem is that the absence of reliable data can make the need to protect a species seem more abstract and less urgent, weakening governments’ capacity to resist other, more immediate demands, especially the need to protect relevant livelihoods. 
In the meantime, consumption of the oceans’ resources continues to surge. 
Over the last two generations, as the world population has doubled to 7.3 billion, the amount of fish taken from the oceans each year has grown even faster, from 20 million metric tons in 1950 to 77 million in 2010. 
And these are only the official figures, which do not account for illegal, unregulated, and unreported catches. 
Given that sharks are a commercially valuable secondary catch of fisheries (usually those targeting tuna), regional fisheries management organizations tend not to elaborate specific regulations for them. 
It is thus easier for sharks to slip through the gaps in international law than to elude fishermen’s nets – especially the massive specialized nets that fisheries employ nowadays. 
Indeed, unlike the artisanal fisherman of the past, factory ships and modern technologies have enabled the massive scaling up of catches to satisfy demand not only locally, but in distant markets as well. 
Given this, the addition of so many species to the endangered list in recent years should come as no surprise. 
In this challenging environment, initiatives like the Memorandum of Understanding become even more crucial as a means of encouraging (often region-specific) action. 
Some signatories, including certain Pacific island states, have declared their huge exclusive economic zones to be shark sanctuaries and have established areas where all fishing is prohibited. 
For their part, Australia, New Zealand, and the United States have created observer schemes and systems to assess and manage fish stocks. 
Furthermore, in response to the outcry at the wasteful practice of shark finning, the European Union now requires that all sharks are landed intact, thereby preventing the removal of fins from sharks at sea and the disposal overboard of their less valuable bodies. 
This has been reinforced by the Chinese government’s pledge not to serve shark fin soup, considered a delicacy, at official banquets. 
Even freight companies and airlines have been spurred to act, with a growing number now refusing to transport shark fins. 
While such progress should be applauded, there is a long way to go. 
For example, efforts must be made to address bycatch (the trapping of sharks in nets intended for other fish, especially tuna). 
The key is for all interested parties – from fisherman and conservationists to governments and international forums – to work together through the Memorandum of Understanding and similar initiatives. 
The adverse economic impact implied by such efforts is not nearly as large as one might expect; in many cases, it could be more than offset by other kinds of commercial activities that take advantage of live sharks. 
The thriving ecotourism operations in the Maldives, Kenya, South Africa, Fiji, and some Central American and Caribbean countries are a case in point. 
As a tourist draw, seen at close quarters in its natural habitat, a manta ray can be worth thousands of dollars; dead on a slab at the quayside, its flesh and gills fetch a fraction of that. 
The short-term thinking that impedes environmental conservation efforts today could prove devastating; indeed, to some extent, it already has. 
If we continue to deplete critical ecosystems, they will soon become unable to regenerate. 
Only with a concerted, cooperative, and urgent effort to preserve marine ecosystems and protect the livelihoods of those who depend on them will the oceans be able to continue to feed – and fascinate – the world for generations to come. 

Conservation With a Human Face 
PARIS – The world is witnessing a drastic decline of its natural capital. 
Plant and animal species worldwide are vanishing at an unprecedented pace – 100 to 1,000 times the natural extinction rate. 
The planet’s most endangered ecosystems are located in developing countries, and thus depend on some of the world’s neediest communities for their preservation. 
Conversely, the poor are the first to suffer from deterioration of their natural environment. 
But in the developing world, immediate economic needs often override long-term imperatives, and protecting a fragile environment is rarely a priority at the national level. 
The biodiversity hosted by the world’s developing nations provides both local and global services. 
Local, because the most fragile communities often rely for their survival on the biological resources that surround them, which constitute a precious source of food, energy and income. 
The World Bank estimates that natural capital constitutes a quarter of total wealth in low-income countries, compared to 3% in the highly developed economies. 
Global, because the array of services that natural ecosystems provide, such as clean air and fresh water, benefit people far beyond national borders. 
Destruction of these precious natural environments generates international ills. 
Consider climate change: few people realize that tropical forest destruction accounts for 20% of overall carbon emissions – more than the world’s cars, trucks, and airplanes combined. 
Halting the cutting and burning of tropical forests, which are found almost exclusively in developing nations, is among the most readily achievable and effective possible steps to reduce carbon emissions. 
On the grounds that the environment in developing countries provides unique ecological services to the whole of mankind, some argue that their populations should not exploit the natural resources on their territories. 
But this would be ethically wrong, because developed nations have largely destroyed their own primary forests and ecosystems on the path to industrial development, and continue to import large quantities of raw material extracted in developing countries. 
It would also be ineffective, because developing countries will – legitimately – refuse to assume by themselves the burden of protecting the world’s biodiversity to the detriment of their economic growth. 
Thus, what is needed is a means to reconcile the task of helping some of the world’s poorest people with that of protecting irreplaceable ecosystems. 
Addressing this two-fold challenge implies expanding the ability of local communities to manage the natural resources on which they depend. 
The Critical Ecosystem Partnership Fund (CEPF), an international initiative launched eight years ago, is based on the principle that local communities themselves are the best trustees of the environment that surrounds them, and that their economic growth will advance their capacity to care for nature. 
By focusing on “biodiversity hotspots” – regions with unique and highly threatened natural environments – the CEPF relies on the common-sense principle that protecting what nature provides for free is a crucial element of sustainable economic development. 
The Fund, by delivering financial and technical assistance to people and places that need it the most, has helped create more than nine million hectares of new protected areas – a region larger than Portugal. 
Such conservation-based development projects prove that economic growth and environmental protection are not incompatible. 
On the contrary, mounting environmental challenges in some of the world’s economically deprived regions will not be overcome in a context of poverty. 
Development agencies and environmentalists must thus urgently work toward the convergence of development and conservation priorities. 
This is the kind of progress the world needs if it is to address effectively one of the most pressing issues of our time: providing a healthy, sustainable planet for rich and poor alike. 

Conservative Interventionism 
BERKELEY – At this stage in the worldwide fight against depression, it is useful to stop and consider just how conservative the policies implemented by the world’s central banks, treasuries, and government budget offices have been. 
Almost everything that they have done – spending increases, tax cuts, bank recapitalization, purchases of risky assets, open-market operations, and other money-supply expansions – has followed a policy path that is nearly 200 years old, dating back to the earliest days of the Industrial Revolution, and thus to the first stirrings of the business cycle. 
The place to start is 1825, when panicked investors wanted their money invested in safe cash rather than risky enterprises. 
Robert Banks Jenkinson, Second Earl of Liverpool and First Lord of the Treasury for King George IV, begged Cornelius Buller, Governor of the Bank of England, to act to prevent financial-asset prices from collapsing. 
“We believe in a market economy,” Lord Liverpool’s reasoning went, “but not when the prices a market economy produces lead to mass unemployment on the streets of London, Bristol, Liverpool, and Manchester.” 
The Bank of England acted: it intervened in the market and bought bonds for cash, pushing up the prices of financial assets and expanding the money supply. It loaned on little collateral to shaky banks. 
Ever since, whenever governments largely stepped back and let financial markets work their way out of a panic out by themselves – 1873 and 1929 in the United States come to mind – things turned out badly. 
But whenever government stepped in or deputized a private investment bank to support the market, things appear to have gone far less badly. 
For example, the US government essentially authorized J.P. Morgan to act as the country’s central bank in the aftermath of the 1893 and 1907 panics, created the Resolution Trust Corporation at the start of the 1990’s, and, together with the IMF, intervened to support Mexico in 1995 and the East Asian economies in 1997-98. 
At the very least, few modern governments are now willing to let financial market heal themselves. 
To do so would be a truly radical step indeed. 
The Obama administration and other central bankers and fiscal authorities around the globe are thus, in a sense, acting very conservatively, even as they embrace deficit-spending programs, boost the volume of government bonds, guarantee risky private debt, and buy up auto companies. 
I understand what they are trying to do, and I am somewhat reluctant to second-guess them. 
They are all doing their absolute best, and I know that if I were in any of their shoes I would be making bigger mistakes than they are – different mistakes, probably, but bigger ones for sure. 
Nevertheless, I do have one big question. 
The US government especially, but other governments as well, have gotten themselves deeply involved in industrial and financial policy during this crisis. 
They have done this without constructing technocratic institutions like the 1930’s Reconstruction Finance Corporation and the 1990’s RTC, which played major roles in allowing earlier episodes of extraordinary government intervention into the industrial and financial guts of the economy to turn out relatively well, without an overwhelming degree of corruption and rent seeking. 
The discretionary power of executives, in past crises, was curbed by new interventionist institutions constructed on the fly by legislative action. 
That is how America’s founders, such as James Madison and Alexander Hamilton, envisioned that things would work. 
They were suspicious of executive power, and thought that the president should have rather less discretionary power than the various King Georges of the time. 
Yet, today’s crisis has not led to the establishment of such financial institutions. 
So I wonder: why didn’t the US Congress follow the RFC/RTC model when authorizing George W. Bush’s and Barack Obama’s industrial and financial policies? 
Why haven’t the technocratic institutions that we do have, like the IMF, been given a broader role in this crisis? 

Conservatives for Obama 
SAN FRANCISCO -- John McCain, the likely Republican presidential nominee for president, likes to say that he was a “foot soldier” in the Reagan Revolution. 
So was I, working out of the Hoover Institution at Stanford University. 
But, unlike McCain, a good man and a true American hero, I don’t intend to vote Republican this November. 
I am voting for Barack Obama. 
Meritocracy is at the core of American conservative beliefs. 
So let’s face it: George W. Bush has been the worst US president in memory. 
His administration has been inept, corrupt, and without accomplishment. 
After this performance, why give the Republicans another turn at the helm? 
Let’s give the other party a chance, even if its policies are not exactly what conservatives may like. 
In America, we call it “throwing the bums out.” 
When meritocracy is downgraded, as it has been during the Bush years, bad things happen. 
Worst of all, racism has flourished, because productivity and social utility have become less effective in protecting targets of discrimination. 
Nowhere is this better illustrated than in America’s current debate over illegal immigration. 
It is not so much the illegality of their entrance into the US that riles many conservative Republicans; it’s the migrants themselves, especially Hispanics who can’t speak English. 
Never mind that Hispanic migrants are among the hardest-working people in the US. 
It is a bitter irony that John McCain, the war hero, is considered a traitor by the conservative wing of his party because he has a compassionate attitude towards undocumented immigrants. 
Sadly, the Republican Party has been hijacked during the Bush years by sloganeers using code phrases like “illegal immigration” and “protecting the middle class” to mask their racism, and “economic incentive effects” to justify tax policies that are blatantly tilted to the rich. 
Responding to this politics of hate, Obama likes to call himself a “hope monger,” not a “hate monger.” 
It’s a great line and it applies. 
Hope always sells well in America. 
Reagan understood that, and it is one of the reasons he was a great and beloved president, even if some of his policies were flawed. 
As Hillary Clinton, Obama’s rapidly fading rival for the Democratic nomination is finding out to her dismay, policies can be an overrated commodity in presidential elections that really matter. 
The hope that Obama is holding out for Americans is one of reconciliation – racial, political, between the wealthy and the poor, and between America and its allies. 
This is powerful stuff, and dwarfs the narrow technocratic instincts of Mrs. Clinton, whose schoolgirl approach to the campaign has justly earned her defeat after defeat in the primaries. 
Just as Reagan had his “Reagan Democrats” who were attracted by his message of hope after the malaise of the Jimmy Carter years, Obama will have his “Obama Republicans,” attracted by the hope of national reconciliation and healing. 
Non-Americans must understand that there is yet another revolution brewing in the US, and that Senators Clinton and McCain are both likely to be swept away by it. 
When conservative Republicans support liberal Democrats (Obama has been rated the most liberal member of the US Senate), “the times they are a-changin’,” as Bob Dylan wrote 45 years ago. 
Moreover, a crucial difference today is that the generational conflict that so characterized the 1960’s – “Your sons and your daughters are beyond your command,” as Dylan put it – is absent. 
The young may be taking the lead – what Obama calls “a revolution from the bottom up” – but there is little opposition from today’s parents. 
Indeed, I personally know a successful US hedge fund manager who is quite conservative and consistently votes Republican, but who is thinking of supporting Obama. 
His daughter dates an African-American, and, to his credit, he believes in racial reconciliation. 
True, an Obama victory would certainly increase his own taxes, but some things – for example, the promise of a multi-cultural America – are simply more important. 
There appear to be many Republicans and independents who feel the same way. 
Obama can lose these people, however, if he forgets that he is a reconciler, not a class warrior, and goes from tilting towards the poor to soaking the rich. 
In any case, America’s allies should feel relieved by how the presidential election is shaping up. 
America needs Obama, but McCain is a reasonable alternative. 
He is no Bush, and conservative Republicans’ hatred of him is his badge of honor. 
He would stand up to the haters at home (including those in his own party) and to the terrorists abroad. 
That’s a lot better than what we have today. 

Consolidation or Competition for Financial Regulators? 
How many financial regulatory agencies does a country need? 
One? 
Two? 
Perhaps three or four? 
How about two hundred? 
Such questions are gaining in urgency as more and more countries, and the European Union itself, debate whether or not to consolidate financial regulation under the umbrella of one all-powerful body. 
Financial regulators' activities focus on maintaining the integrity of a country's financial system: its financial institutions and financial transactions. 
Their domain encompasses banks, other depository institutions, insurance companies, securities firms, pension funds, finance companies - indeed, just about any entity that conducts financial transactions. 
The current trend is for countries to consolidate their financial regulatory apparatus into a single agency, with Britain's Financial Services Agency (FSA) a leading example. 
I believe that this trend is a serious mistake which, quite myopically, overlooks the potential for mistakes in regulation. 
Though I do not necessarily advocate 200 financial regulatory agencies (more about this below), I believe that a structure involving multiple financial regulators in a country is likely to create a healthier financial system than would a single all-encompassing regulator. 
The argument for a single regulator is deceptively simple: after all, a single country has a single national government, so why not have a single regulator for all financial regulation? 
If the European Union is to have a single market, the argument continues, then it needs a single financial regulator. 
Agency rivalries will be avoided. No one will be confused as to who is responsible. 
There can be ``one stop shopping.'' Government will speak with ``one voice.'' 
Fine, as far as it goes. 
But consider another possibility: suppose that the financial regulator is mistaken in its approach to a particular issue. A promising financial instrument, capable of improving the efficiency of credit markets, is rejected; or the agency's investigative and review procedures become stultified. 
After all, government agencies are not omniscient; they do make mistakes; they can become ossified. 
What happens then? 
With a single financial regulator, where can a rejected financial innovator turn? 
Where is the alternative forum? 
How can an agency's procedures be reformed? 
Where are the competitive pressures for innovative thinking in government? 
Now consider the alternative structure of multiple financial regulatory agencies - say, one for banks, another for other deposit institutions, yet another regulator for insurance, another for securities, maybe another for pensions. 
Yes, this sounds messy, and may duplicate work or become overly compartmentalized. 
But it also creates safety valves, alternative forums, bases of comparison, sources of new ideas, and potential arenas for innovation. 
Regulatory competition is possible. 
Won't this mean a regulatory ``race to the bottom?'' 
It need not. 
There are many aspects of financial regulation - e.g., information requirements, entry limitations, facilities limitations - where more choice and competition will often be beneficial. 
An exception may be prudential (safety-and-soundness) standards for banks, insurance companies, and some forms of pension plans, which should be tough, because national governments almost always will bear the losses in the event of failures of these types of financial institutions. 
Even here, multiple agencies can lead to beneficial innovations that can reduce the regulatory burden on institutions while maintaining effective levels of safety. 
I write from the perspective of a former American financial regulator. 
In the US there are three national agencies that regulate commercial banks, one that regulates savings institutions, one that regulates credit unions, one that regulates securities markets, one that regulates commodity and financial options/futures markets, and two that regulate pension funds. 
In addition , the 50 American states each have separate bank regulators (with overlapping jurisdictions with the national regulators), most have savings bank regulators, all have credit union regulators, all have insurance regulators (which is solely a state responsibility), and all have securities regulators. 
Phew! 
Of course, this system is a little messy; it does have the problem of duplicated efforts. 
(It's nearly impossible to explain the details to anyone who hasn't been an American financial regulator or a lawyer.) 
But the system works. 
In fact, it works pretty well, though mistakes do occur (as they do in any regulatory system). 
Most important, this multiple agency structure ensures regulatory competition - each agency generally wants to expand its domain of chartering and jurisdiction - that is generally beneficial for the financial system and for the health of the American economy. 
I am not arguing for the world to replicate the American system of 200-plus regulatory agencies. 
Far fewer will suffice for most countries. 
But the next time that someone advocates a single financial regulator and its simplicity, remember that there is another side to that coin: where are the safety valves? 
Where are the alternatives? 
What about errors? 
How will innovation occur? 
In government (as well as in the private sector) a golden rule is that more competition and less monopoly is likely to be beneficial. 

When Obama Is Always Listening 
VIENNA – What unites “America first” President Donald Trump, Poland’s political puppet master Jarosław Kaczyński, and Russian President Vladimir Putin? 
Trump and Kaczyński, chest-thumping nationalists, should revile Russia’s revanchist leader for his expansionist policies in ex-Soviet countries like Georgia and Ukraine. 
Yet Trump warmly praises Putin, while Kaczyński increasingly emulates his autocratic methods. 
And all three seem predisposed not only to believe in outlandish conspiracies, but also to use those beliefs to shape policy and manipulate the public. 
Putin sees clandestine plots to undermine Russian greatness everywhere, mostly initiated by the Western spymasters, the United States and the United Kingdom. 
The theories to which he subscribes often have no basis in reality, but one can at least understand why he might believe them: for a former KGB agent, himself a spymaster, a heightened degree of suspicion that things may not be as they appear is not exactly shocking. 
Trump’s susceptibility to – even enthusiasm for – radical conspiracy theories is less easy to explain. 
Trump is far from a master of intrigue, unless the cutthroat world of New York real estate is even more Mafia-ridden than outsiders imagine. 
It seems clear that Trump’s chief strategist, Stephen Bannon, a life-long anti-liberal fabulist, reinforces his boss’s lumpen worldview. 
But not even Bannon’s influence can explain Trump’s feverish tweets, sent early last Saturday morning, accusing former US president Barack Obama of having Trump Tower’s “wires tapped” before the election. 
Lacking any evidence for his allegation, Trump has called for an investigation, much like he demanded an investigation into widespread voter fraud (in favor of his opponent, Hillary Clinton) that never actually took place. 
So bizarre and implausible was this latest rant – extreme even for a cable news-addled, Twitter-addicted president – that one can only wonder (as many are) whether Trump is experiencing some sort of psychological disturbance. 
Kaczyński has his own paranoid theories. 
He believes that European Council President Donald Tusk, a former Polish prime minister, conspired with Putin to assassinate his twin brother, then-Polish President Lech Kaczyński. 
The plane crash near Smolensk in 2010 that claimed the lives of 92 Polish dignitaries, including Lech Kaczyński, has been thoroughly investigated – and none of the evidence supports Kaczyński’s claims. 
And yet, on the basis of his morbid delusions, Kaczyński engaged in a stealth plot in Brussels to have Tusk replaced. 
What the late historian Richard Hofstadter called the “paranoid style” has reached the commanding heights of political power in the US and Poland. 
The question is how these two democracies fell under the spell of leaders more reminiscent of Putin than of conventional Western leaders. 
Ordinary political analysis – and even psychology – may be incapable of providing an answer. 
The novelist Joan Didion may come closest to charting a path through the politics of Trump and Kaczyński. 
In her essay “Notes Toward a Dreampolitik,” Didion describes people who move about the world “forever felling trees in some interior wilderness.” 
They are “secret frontiersmen who walk around right in the ganglia of the fantastic electronic pulsing” that characterizes modern life, and they “continue to receive information only through the most tenuous chains of rumor, hearsay, haphazard trickledown.” 
They are “nominally literate,” yet “they participate in the national anxieties only through a glass darkly.” 
It is scary enough that the US president refuses most of his daily briefings from the professionals at the State Department and in the military and intelligence services. 
The fact that he relies instead on Fox News, racist alt-right blogs, and the unhinged enragés of talk radio is truly, even existentially, terrifying. 
The leader of the free world has made his home on the manic fringes of US political discourse. 
Under Kaczyński, Poland seems to be stuck in a similar Internet and talk-radio sinkhole. 
Indeed, a Roman Catholic Church radio station, Radio Maria, is among the most notorious of the “secret frontiersmen.” 
But, as Putin’s leadership has demonstrated, the paranoid style is not just some personal weakness. 
In his book Voodoo Histories: The Role of the Conspiracy Theory in Shaping Modern History, the British journalist David Aaronovitch has described this political paranoia as a kind of voodoo of our social media age. 
The choice of words is telling. 
As the Voodoo doctor François “Papa Doc” Duvalier showed during his nearly 15-year dictatorship in Haiti, where no basis for political legitimacy exists, the ruler’s paranoia must be relentless. 
Papa Doc turned fear into the blackest form of political magic. 
Anyone in Haiti who questioned his rule could expect to be dispatched – often in a public and theatrically violent manner – by Papa Doc’s dreaded Tonton Macoute. 
Foreign critics had their reputations trashed. 
Graham Greene, who witheringly dissected Papa Doc’s rule in his novel The Comedians, was called a Benzedrine addict – and worse – by the regime’s propagandists. 
Putin is no stranger to such tactics. 
And now the West is experiencing something similar. 
US President George H.W. Bush once famously warned against “voodoo economics.” 
Today, we face a form of voodoo politics: rule based on “alternative facts” and unfounded and untestable theories that cast their own kind of spell on citizens struggling to comprehend a globalized world and economy from which they feel alienated. 
Trump, Kaczyński, and Putin embrace this approach because it works. 
Regardless of whether, and to what extent, they believe their own claims, they can be confident that for many of their supporters, the magic will never wear off, no matter how badly they fail or how baldly they lie. 

Constitutional Politics 
A cynic might be tempted to say that when politicians run out of ideas, they turn to making or changing the constitution. 
Take the European Union. 
Its last big project was the single market as conceived by Jacques Delors, the European Commission's then-President. 
That project has still not been completed, but the missing bits are a continuing process, not a new idea. 
Since then, the EU has tried a little of this and a little of that: a little common economic policy around the introduction of the Euro, a little common foreign policy around the Iraq war. 
None of it has been very successful. Indeed, none of it has an advocate of the stature of Delors. 
So the EU turned to constitution making. 
It set up a Convention, which produced a draft treaty, and soon an Intergovernmental Conference will try to take the project to a conclusion. 
Chancellor Gerhard Schröder of Germany liked the idea so much that he is now thinking of setting up his own Convention to review Germany's constitutional arrangements. 
His target-agreed with the other main parties-is the precarious relationship between Federal authority (notably the power of the purse) and that of the Länder and local governments. 
Perhaps the German Chancellor hopes that in the shadows of such an all-party Convention he can quietly slip through "reforms" that are, for the most part, really cuts in public expenditure for social services. 
The case of Prime Minister Tony Blair of the UK is even more extreme. 
The inventor of New Labour would like to be remembered as the man who squared the circle of sustainable economic growth and a reformed welfare state, the man who reconciled wealth creation and social cohesion. 
But the British economy is in a precarious state, and public services remain a mess. 
What has changed under New Labour's rule is the British constitution. 
Scotland has a parliament, Wales an assembly. 
English regions may soon follow. 
London and other cities have directly elected mayors. 
Ancient institutions, notably the House of Lords, have been "modernized." 
The judicial system has seen root and branch change. 
In fact, Blair is reportedly not very interested in these changes, but it is they-not some beacon of British prosperity and social justice-that are his lasting legacy. 
Other European leaders could be added to the list, not least Prime Minister Berlusconi of Italy. 
In all these cases, the cynic would be half-right. 
Constitutional change is for political leaders a welcome distraction from the much more change-resistant issues of social policy. 
But there are at least two exceptions to this suspicion. 
One is the establishment of democracy and the rule of law in countries that have recently emerged from dictatorship. The process requires constitution making of an often complex and painful kind. 
The most recent example is Turkey, where a courageous prime minister has confirmed the secular (rather than Islamist) rule of law, sought to modernize the economy, and has kept the military out of the Cabinet. 
Turkey wants desperately to be accepted into the EU, whose "Copenhagen criteria," approved in 1993, define what may be called the constitutional prerequisites of membership. 
The accession countries of East Central Europe all fulfilled the criteria; Turkey is now following their example. 
The other serious issue of a constitutional nature is that of levels of government. 
In a globalized world environment, the question of who is responsible for what has become as opaque-if not unanswerable-as it is urgent. 
This is all the more true in view of the fact that the migration of decisions to an ill-defined global space is being accompanied by a widespread demand for more direct forms of democracy that can bring decisions closer to people, regions, and local communities. 
There are as yet no "Copenhagen criteria" to guide constitution-makers here. 
Britain is a good example of the confusions that attend mere pragmatism. Scotland may have a new (and expensive) government, but what about the English regions? 
Are the East Midlands really an appropriate unit of self-government? 
In Germany the issue is the distribution of tax revenue. 
Central government can easily starve the regions and local communities of their lifeblood. 
Who is to prevent it from doing so? 
In France and Spain there are small but effective (and sometimes violent) regional movements. 
Should the rest of the country simply give in to them? 
Where lies the right answer between a Scottish solution and a Chechen non-solution? 
The point of asking such questions is to remind ourselves that genuine constitutional politics requires serious thought and careful preparation. 
It must never be a substitute for the absence of other ideas. 
In that sense, Conventions such as the one led by former French President Valery Giscard d'Estaing for Europe are a good idea. 
They just might dissuade politicians who are bereft of ideas from indulging in pet projects that lead nowhere. 

Awaiting the Construction Revolution 
LONDON – For 20 years, productivity in the global construction industry has grown at an annual rate of just 1%. 
Now, the industry needs to enter the twenty-first century, so that it can meet increasing demand for new structures and address the world’s growing housing and infrastructure gaps. 
The construction industry’s glacial pace of change is unlike that of other sectors such as agriculture and manufacturing, which have transformed their productivity performance over time. 
Between 1947 and 2010, US manufacturing achieved 760% cumulative real (inflation-adjusted) productivity growth, compared to just 6% for construction. 
Although the construction industry has long recognized its weaknesses, it has yet to muster the will to do anything about them. 
But, given the pressing housing and infrastructure shortfalls around the world, this is no longer sustainable. 
Urbanization may be leveling off in many advanced economies, but it will continue in emerging countries. 
The world’s 20 largest cities, 75% of which are in Asia, will need an estimated 36 million new housing units by 2025. 
Moreover, in 2014, an estimated 330 million urban households lived in substandard housing, or struggled financially due to housing costs; that number is projected to rise to 440 million by 2025. 
Even in an advanced economy such as the United States, over 40% of California’s population cannot afford decent housing at market rates. 
The growing demand for structures presents a huge opportunity to reshape the construction sector and create value through concerted action. 
According to research from the McKinsey Global Institute, the industry could boost its labor productivity by up to 60% if changes are made in seven key areas: regulation; design processes; contracts; procurement and supply-chain management; on-site execution; advanced automation, new technologies, and materials; and skills. 
A 60% increase in productivity would create an additional $1.6 trillion in annual output – roughly the equivalent of the Canadian economy – and add 2% to global GDP. 
These gains, more than a third of which can be realized in the US alone, would be enough to meet half the world’s current infrastructure needs. 
Managing a construction project is rarely simple. 
Success requires coordination and an end-to-end project operating system, so that everyone on a project understands their role and agrees on key performance indicators. 
At the same time, the parts of the industry with repeatable elements – particularly large-scale affordable housing – could negate many of the root causes of low productivity by shifting toward a manufacturing-style system of mass production. 
This would entail more standardization, modularization, and prefabrication. 
In such a system, most structures would actually be built in factories. 
Instead of having different trades and subsectors jostling for room on construction sites, the bulk of the work would be carried out offsite, in a controlled environment. 
Some residential homebuilders are already implementing this approach. 
For example, a Spanish company that builds replicable four-story multifamily buildings can construct 5-10 times more units than it could with traditional construction methods, but employ the same amount of labor. 
Similarly, a Canadian homebuilder offers a fixed number of repeatable designs with several customization options, and lists the costs and specifications of each clearly on its website. 
But if the construction industry now has a chance to reinvent itself after decades of tepid productivity growth, economic incentives will have to be realigned. 
For example, in the case of contractors, there is a clear link between productivity and profitability, but it is not as strong as it could be. 
Unless owners change their expectations, many contractors could lose revenue by moving to a more efficient, larger-scale system with fewer redundancies. 
Owners, for their part, usually do not operate on a large enough scale to change industry dynamics singlehandedly. 
And because they are reluctant to take on more risk, or change their requirements without knowing the final benefits of doing so, deadlock sets in. 
Still, growth in demand for new construction may mean that the industry is about to start moving. 
Policymakers are starting to look seriously at cost and scale issues. 
These include affordable-housing crises; tight public budgets that make it necessary to squeeze more out of every dollar in infrastructure projects; and lower oil prices putting pressure on capital costs in the hydrocarbons sector. 
Within the industry, aggressive large firms, including many from China, are now flexing their muscles on the global stage. 
They have the capital to invest in efficiency-enhancing approaches and new production systems, and they are making use of increasingly accessible technologies – such as digital tools, advanced robotics, or new materials – to turbo-charge efficiency. 
Many industry leaders are finally recognizing the need to change, and expressing a willingness to do so. 
They know that if they do not prepare for the coming industry-wide disruption by rethinking their operations, they could be left behind in what may turn out to be the world’s next great productivity story. 

The Case for Constructive Populism 
WASHINGTON, DC – The Brexit vote has unleashed a huge amount of commentary on anti-establishment politics, the failure of experts, the abdication of the left, and much else. 
Juxtaposed to the presidential campaign in the United States, Brexit is regarded by many as a wake-up call. 
In response, former US Treasury Secretary and former president of Harvard Larry Summers is calling for “responsible nationalism” to counter the often chauvinistic, anti-immigrant, and protectionist language of the populist right. 
It would be “understood that countries are expected to pursue their citizens’ economic welfare as a primary objective but where their ability to harm the interests of citizens elsewhere is circumscribed.” 
We would judge international agreements “not by how much is harmonized or by how many barriers are torn down but whether citizens are empowered.” 
As Summers and others argue, globalization has brought large gains to the world economy as a whole, but seldom have the winners compensated the losers, directly or indirectly. 
Moreover, lately the winners have often been much smaller in number than the losers, particularly in a given geographical area, or because of winner-take-all markets. 
Finally, the economic policies preferred by the “winners” – and adopted under their influence – are usually far from beneficial for all. 
All of this is correct. 
Unfortunately, these arguments often lead political moderates to retreat under the pressure of nativism, aggressive nationalism, and incoherent economic slogans. 
Those who shout or tweet one-liners and promote narrow identity politics have forced those who believe in a global human community, one bound together by shared interests, to fight a rearguard battle to articulate why the one-liners make little sense. 
But this counterattack, if it can be called that, seems unable to formulate even two-liners capable of refuting populist tendentiousness. 
There are of course decent economic analyses and sensible policy proposals that are being put forward by the moderate camp; but the debate is usually in the language – and body language – of technical experts, inciting yawns, not popular support. 
There is an urgent need for a moderate, humanist, global, and “constructive” populism that can counter the extremists, not with complicated mathematical models of, say, the employment implications of Brexit, but with simple yet powerful ideas that resonate with millions. 
Liberal democracies, when faced with dire challenges, have found such voices before. 
Think of the rhetoric of Franklin Roosevelt in the 1930s, or of the founding fathers of the European Community. 
What makes “constructive” populism constructive is that it simplifies what is known with a reasonable degree of certainty. 
By contrast, “destructive” populists consciously distort what is known and have no qualms fabricating what isn’t. 
This kind of destructive populism is far less common at the local level, where debate focuses on concrete solutions to citizens’ real problems. 
This does not mean that local politics is easy; witness today’s fraught relations between police and racial minorities in US cities. 
But, as Bruce Katz and Luise Noring have documented, in many cities in America and around the world, elected officials, civic organizations, and private business often unite beyond party lines to design and find funding for innovative projects in public transport, housing, or economic development. 
Where constructive populism is most needed is at the national and international level, because many problems cannot be addressed locally. 
Consider foreign policy. 
There is a strong trend in many countries toward the aggressive nationalism that has led to so many catastrophes in history, not least during the first half of the twentieth century. 
Some dismiss the dangers of this nationalist resurgence, arguing that economic interdependence will protect us from our own atavistic urges. 
But this was not the case in the past. 
After all, the three disastrous decades that started in 1914 followed a period of rapid and deep globalization. 
A political message embodying a commitment to constant vigilance in support of peace has again become essential. 
But it must be made concrete. 
In the world’s liberal democracies, such a message should emphasize three components: strong defense and intelligence capabilities; the legitimacy of negotiating with friends and foes alike to find common ground; and the understanding that lasting alliances and friendships will be built around shared democratic values and support for human rights. 
Short-term commercial or other interests should not be permitted to undermine core matters of principle. 
If human rights, including women’s rights, for example, are indeed a key element of democratic values, we can negotiate on all kinds of issues with those who suppress them; but as long as there is no progress on these rights, we cannot be true friends and at the same time claim to uphold universal human values. 
Constructive populism cannot be cynical; it must be realistic, and it must recognize that progress may be gradual and take different forms in different places. 
On economic policy, many reasonable disagreements rule out consensus. 
But it can be argued in simple language that markets work for all only if they are regulated in the interests of all; that public expenditures that create productive assets can reduce the ratio of public debt to national income; and that performance should be measured by how widely the fruits of growth are shared. 
The way to overcome identity politics and irresponsible populism is not to meet it in the middle or to fight it with detailed technical analysis. 
The way to avoid disaster is constructive populism: simple, accurate, and always sincere. 

 

Journalism’s Comeback 
OXFORD – After years of ill health, the news industry is finally showing signs of a modest recovery. 
According to the Digital News Report 2018 – the most comprehensive survey of digital media consumption – subscriptions are trending up while consumer confidence has stabilized. 
For a much-maligned business that trades in trust, these fragile gains amount to meaningful progress. 
To be sure, the world’s media remain troubled; the report, produced by the Reuters Institute for the Study of Journalism, shows that only 44% of news consumers believe what established media brands publish. 
But that represents an increase of one percentage point from last year, suggesting that the industry’s trust deficit has either stopped growing or is actually narrowing. 
Other surveys are even more bullish; for example, the annual Edelman Trust Barometer found that journalists are regaining their credibility, while overall trust in traditional and online-only journalism is at its highest point in seven years. 
These findings prompted the firm to declare that “the return of experts” is upon us. 
Although it may be too early for media executives to declare victory just yet, these are clearly good signs for an industry that has had its reputation battered in recent years. 
Political polarization has made people suspicious of media outlets that don’t support their views, while cost cutting in newsrooms has degraded the quality of journalism on offer. 
But, as the new data suggest, journalists appear to be finding ways to address these challenges. 
Perhaps the most revealing trend in this year’s Digital News Report is the growing distrust in news shared via social media. 
For example, our study found that only 23% of respondents trust news they find on social media, and just 34% believe what they turn up in search engines. 
These figures will likely trouble Google, Facebook, and other tech giants whose businesses are no less reliant on trust than traditional media organizations. 
But while platforms like Facebook stumble, many traditional media outlets are finding their footing; subscription trends support this conclusion. 
Of the 74,000 survey respondents, 14% said they paid for digital news at least once during the previous 12 months, while the average in the Nordic countries was closer to 30%. 
In the United States, President Donald Trump’s attacks on so-called “fake news media” have had the opposite effect, pushing more people to support independent journalism than ever before. 
In 2016, for example, only 9% of American consumers paid for news online; that share rose to 16% in 2017 and has held steady this year. 
Even in countries like the United Kingdom, which has no shortage of free news websites, people are investing in quality reporting. 
The Guardian’s model of soliciting donations or membership payments is fueling a financial turnaround. 
In nearly every country surveyed, young people on the political left demonstrate the highest propensity to pay. 
Some critics argue that the media’s payment model contradicts the original spirit of the Internet as a place for the free exchange of ideas, news, and information. 
Moving the best stories behind paywalls, opponents say, will give rise to second-rate news for second-class citizens. 
But this argument misses three key points. 
For starters, the number of digitally connected people who cannot afford to pay for news at all can be presumed to be quite small; willingness to pay is much more a question of spending priorities. 
Moreover, paying for something that one perceives as valuable helps make it so, as the move to prioritize membership models over purely transactional approaches illustrates. 
Finally, for those who truly cannot pay, there are viable options for bringing quality journalism to low-income households. 
For example, tax codes could be reformed to make the practice of journalism more affordable, while government or foundation funding could increase support for public media programming. 
When people pay for content, journalists gain an incentive to deliver. 
They scrutinize their products for value, check facts thoroughly, innovate, investigate, and cut down on the cheap, attention-grabbing noise that plagues so many social-media platforms. 
Best of all, these trends are mutually reinforcing; the better the journalism is, the more consumers will value it. 
It has been a long time since the media industry had good news to report about itself. 
Now that we do, it is imperative that we work harder than ever to sustain the trend toward quality, credibility, and financial viability. 

A Bangladeshi Prescription for Cholera 
DHAKA – By now, cholera should be history. 
For decades, health officials have understood how to prevent the disease, doctors have known how to treat it, and development experts have recognized that with clean water and sanitation, outbreaks rarely become epidemics. 
Unfortunately, the world is not so simple and neat, and the nightmare of cholera persists. 
In many parts of the world, cholera has in fact been tamed. 
Waterborne illnesses are virtually nonexistent in advanced economies. 
And even in resource-starved countries and regions where cholera remains a problem, the availability of oral rehydration therapy, or ORT, has helped prevent countless deaths. 
And yet cholera continues to flare up during times of crisis, killing the most vulnerable among us. 
One of the worst epidemics today is ravaging Yemen, where armed conflict has led to the collapse of health, water, and sanitation systems – precisely the conditions under which cholera thrives. 
The first cholera cases were reported in October 2016; within a year, the number of cases had soared to more than 600,000. 
International organizations like the United Nations and the World Health Organization, in cooperation with Yemeni health-care officials, have mounted an impressive response. 
Their efforts have kept the fatality rate to roughly 0.33% of infections (some 2,000 deaths), mitigating the tragedy. 
But Yemenis are working in impossible conditions, and need resources and training. 
My country is leading the effort to ensure that they receive both. 
In October, a team of Yemeni nurses and doctors arrived at the International Centre of Diarrhoeal Disease Research, Bangladesh (icddr,b), where I have worked for much of my professional life. 
Our institute is the birthplace of ORT, and medical professionals from around the world come to Dhaka to be trained to administer this simple solution of sugar, salt, other elements, and water. 
Over the course of a week, Yemen’s health professionals received training on outbreak management, surveillance methods, and sanitation. 
They observed the treatment of cholera patients in our hospital, an experience that provided hands-on training for case management and assessing dehydration status. 
This is just one example of how icddr,b has helped alleviate human suffering in times of crisis. 
As a founding member of the WHO’s Global Outbreak Alert and Response Network (GOARN), icddr,b has deployed expert teams to Zimbabwe, Sudan, South Sudan, Mozambique, Syria, Somalia, Haiti, Sierra Leone, Ethiopia, and Iraq. 
By sharing the knowledge and expertise that we have developed over decades of diarrheal disease management and research, we are playing a leading role in global efforts to tackle outbreaks. 
Bangladesh knows wartime cholera all too well. 
In 1971, fighting broke out when Bangladesh, then known as East Pakistan, declared independence from Pakistan. 
In the ensuing conflict, refugees poured across the border into neighboring India into crowded camps, creating conditions that inevitably gave rise to cholera outbreaks. 
The standard of care at the time was poor, and a dearth of intravenous drips meant that rehydration solutions could not be administered widely. 
As many people lay dying, a pioneering doctor named Dilip Mahalanabis took a chance in a desperate situation. 
American researchers in Bangladesh had shown that ORT could reverse fatal dehydration in cholera patients, but its effectiveness outside hospitals had not yet been proven. 
Lacking proper equipment and medical facilities, Mahalanabis administered ORT in camps, and in the process, saved thousands of lives. 
As a result, ORT became the new standard of care for diarrheal disease treatment; it has since saved more than 80 million people around the world. 
Now, new wartime cholera crises have emerged, and Bangladeshi expertise is again being called into service. 
Yemen is only one example. 
Since August, hundreds of thousands of Rohingya have crossed the border into Bangladesh from Myanmar, the highest weekly outflow of refugees anywhere in the world since the Rwandan genocide in 1994. 
These desperate and vulnerable people are crowded into refugee camps, and there is a high risk that conditions may lead to a deadly cholera epidemic. 
In response to this threat, icddr,b is collaborating with UNICEF, the WHO, and other important stakeholders on multiple cholera-prevention initiatives. 
Efforts are being made to improve access to clean water and sanitation, and ORT sachets are being stockpiled. 
We have also worked with the WHO to secure some 900,000 doses of oral cholera vaccine (OCV), an internationally accepted tool to prevent and control outbreaks. 
Like ORT, the development of OCV has roots in Bangladesh, and at icddr,b in particular. 
The vaccine’s first successful field trials were conducted at icddr,b in the 1980s, and today, our scientists are drawing on decades of institutional knowledge to execute the second-largest OCV campaign ever conducted. 
It might be hard to imagine that a developing country like Bangladesh could play a pioneering role in managing a disease of such magnitude. 
But time and again, researchers and health workers in Bangladesh have demonstrated their expertise at containing cholera outbreaks and saving lives. 
As the world looks for new ways to curb opportunistic epidemics, it must not overlook the science that developing countries already possess. 
Cholera is back in the Global South. 
But, as our work in Bangladesh demonstrates, the Global South has the skills to beat it. 

Containing Financial Turmoil 
Today’s ongoing financial market turmoil comes as no surprise to those who have been warning about the risks to the world economy from the end of the housing market bubble in the United States. 
Back in January, the United Nations’ outlook for the global economy raised concerns about the economic pain this might impose on heavily indebted US households. 
It also emphasized how weakly regulated, closely interconnected global financial markets, together with persistent global macroeconomic imbalances, jeopardize growth and development prospects in the world economy, including poorer countries. 
The US current account deficit has been the most widely discussed indicator of global imbalances. 
For the past five years, the US has been sucking in more than $2 billion a day of other countries’ savings, as the easy provision of domestic credit on an unprecedented scale has allowed households to spend more than they earn. 
Such borrowing was especially attractive as asset (housing and equity) prices kept rising, interest rates remained low, and succeeding generations of financial market innovators could convince investors that they had mastered the exigencies of risk. 
Thus, further lending, even against over-valued collateral, was “sold” as a sign of good times ahead. 
Warnings about irrational market exuberance were largely ignored, especially as US consumer spending helped fuel strong growth across the global economy. 
Robust exports from Japan and Europe supported economic recovery and steadied investor confidence, providing, in turn, further export opportunities for newly industrializing countries, most notably China. 
Meanwhile, heightened international competition kept the lid on inflation, and interest rates remained low, giving a further boost to consumer spending and completing what looked like a virtuous growth circle. 
Even many of the poorest countries seemed, at long last, to be joining in, posting strong growth on the back of rising energy and raw material prices, renewed mining investments from abroad, and increasing fiscal revenues. 
Although the numbers were never as rosy as market enthusiasts seemed to think, they did divert attention away from the shaky foundations of the newfound prosperity. 
The growing need for measures to correct global imbalances was met with disbelief by influential policymakers and market analysts alike: “Why change a winning formula?” 
The fate of the rest of the world depends on the responses to the unfolding financial turmoil. 
The contraction of property and stock markets will undoubtedly dampen US household borrowing and demand, potentially triggering a downward spiral. 
If protection is sought through tariff and other trade-related measures, then the knock-on effects could have even more devastating consequences for all. 
In recent weeks, leading central bankers have injected over $300 billion into the financial system, lowered the rates at which they lend to private banks, and announced that such activism will continue until calm returns. 
This may be enough to calm financial markets for now, but it will not redress the more fundamental problems behind the current turmoil. 
In today’s interdependent world, a coordinated strategy is needed to avoid recession and to return lasting stability to financial markets. 
Indeed, the fact that the world is again worrying about the economic fallout from financial shocks highlights the lack of progress since the Asian crisis a decade ago in moving towards a new international financial architecture. 
While there has been some progress on harmonizing standards and extending surveillance, there has been far too much emphasis on strengthening governance in developing countries and not enough on systemic problems linked to unregulated private capital flows. 
With the imminent threat of global recession, austerity measures are not the way to correct global imbalances. 
Rather, deficit countries need to export their way back to balance, while imports should increase in surplus countries. 
Moreover, productive investments are needed in the poorest countries to resume or sustain economic development. 
Policymakers need the fiscal and monetary space to move in this direction. 
Institutionalizing a mechanism for broad-based international economic surveillance and policy coordination will be an important longer-term goal, but at this point, world leaders urgently need to rebalance global demand and improve the management of the exchange-rate system. 
Moving forward requires all governments to act through inclusive multilateral organizations and arrangements. 
Despite the IMF’s undemocratic and corporate-like governance, which has undermined its legitimacy and credibility in the developing world and distorted efforts to extend its surveillance role, there is no alternative multilateral body available. 
Such a coordinated response will need to address immediate short-term problems as well as provide medium-term solutions without plunging the world economy into another painful recession. 
And it is imperative that this time around, reforms offer a lasting solution to global imbalances and tackle head on the most unruly elements of international financial capital. 


Containment, not Appeasement 
America and the world are focused on whether the Bush administration will adopt the Iraq Study Group’s recommendations for an exit strategy from Iraq. 
That is the most pressing immediate question, but America’s leaders should also be thinking ahead. 
America needs a post-occupation strategy for Iraq and the Middle East, one grounded in a viable national security strategy for the twenty-first century. 
That strategy is containment. 
In the run-up to the Iraq invasion, the Bush administration rejected containment as an obsolete Cold War hangover. 
The weapons inspectors were pulled out, and America opted for preemptive war. 
Bush was portrayed as facing down a new Hitler with Churchillian resolve, and advocates of containment were accused of appeasement. 
But now we know that the containment regime worked. 
Saddam Hussein’s Iraq was in no position to threaten anyone, let alone the United States. 
This was not the first time that containment – a strategy devised by George Kennan, the director of the US State Department’s Policy Planning Staff under President Harry Truman, in response to the Soviet threat after World War II – has been rejected as appeasement. 
In the 1952 presidential election campaign, Dwight Eisenhower and his future secretary of state, John Foster Dulles, heaped scorn on containment, calling instead for a “rollback” of the Soviets in Eastern Europe. 
Fortunately, once in office, the Eisenhower administration had the sense to stick with containment in Europe, continuing a policy that is widely credited for winning the Cold War. 
President John F. Kennedy’s insistence, against much advice, on containment during the Cuban missile crisis saved the world from nuclear war. 
This was calculated resolve, not appeasement. 
Containment’s goal was to prevent Soviet expansion without saddling the US with unsustainable military obligations. 
So long as the USSR did not stage a military attack, containment’s reliance on economic sticks and carrots, competition within the world communist movement, intelligence and diplomacy, and promoting the vitality of the capitalist democracies would guarantee security. 
Kennan was right: the dysfunctional features of Soviet system, and its over-extension internationally, would lead to its demise. 
When containment has been abandoned, America has paid a high price. 
The Eisenhower administration toppled Iran’s elected government in 1953 believing it to be too pro-Soviet. 
The hugely unpopular Shah they installed was swept away in the Islamic revolution in 1979. 
America made comparable errors in Guatemala and elsewhere in Latin America. 
Vietnam was America’s costliest departure from containment. 
As Kennan explained, when America goes to war over something less than a vital interest, the adversary – for whom vital interests are at stake – will fight long after the war has become too unpopular at home to sustain. 
Bush repeated this mistake in Iraq. 
Containment is hardly a relic of the Cold War. 
It worked against Libya, leading Muammar Khadafi in the late 1990’s to stop sponsoring terrorism, turn over the Lockerbie bombers for trial, and pay compensation to British and French victims of Libyan-sponsored terrorism. 
Claims that he abandoned his nuclear program in response to the US-led invasion of Iraq have been refuted by Flynt Leverett, director for Middle Eastern affairs at the US National Security Council from 2002 to 2003. 
According to Leverett, Khadafi’s decision predated the invasion and was a response to an explicit quid-pro-quo to end international sanctions against Libya. 
Containment against Libya was not appeasement. 
It should have been the model in Iraq, as it now should be the model in Iran. 
Instead, defenders of the contemporary equivalent of “rollback” advocate attacking Iran because it is developing nuclear weapons. 
This makes about as much sense as it would to attack China in the 1950’s. 
One of Kennan’s great insights was that the US is well served by conflict among America’s adversaries. 
He welcomed Tito’s rise in Yugoslavia as an internal challenge to Moscow’s hegemony that he hoped others would emulate. 
This lesson is lost on the Bush administration, which senselessly alienated Iran in 2002, when moderates had the upper hand there and were cooperating in Afghanistan, and reversed decades of US policy by insisting that any Middle East settlement must accept changed “realities on the ground” in the West Bank. 
The administration seems bent on herding adversaries together – transforming Samuel Huntington’s “clash-of-civilizations” dystopia into a self-fulfilling prophecy. 
Kennan maintained that the US should work to create a world that no one can dominate, and that the best way to spread democracy is to demonstrate its superiority. 
Ramming democracy down people’s throats is self-defeating. 
Just as it produced a potent fusion of communism and anti-American nationalism in Southeast Asia and Latin America, it is now producing a similar combination of radical Islam and anti-American nationalism across the Middle East. 
Terrorist groups can be minimized if their enabling states are contained. 
Defenders of the Bush doctrine claim that this is impossible when they operate out of failed states that cannot police their borders. 
But, given that the Bush doctrine has compounded the failed-state problem, this is a bogus argument. 
However many failed states there were in the world before America invaded Iraq, there is one more now. 
To build a containment regime against terrorism emanating from the Middle East, a date for America’s departure from Iraq must be set. 
There is no other way to reverse the widespread perception across the region that the US has imperial ambitions. 
The other essential step is to place resolution of the Israel-Palestine conflict at the center of America’s foreign policy agenda. 
America must push for a solution that can garner the support of significant majorities of all the peoples between the Jordan River and the Mediterranean. 
That is the surest means of protecting and promoting democracy. 

Containment Begins at Home 
NEW YORK – Earlier this month, Muhammad Youssef Abdulazeez, a 24-year-old US citizen of Middle Eastern descent, opened fire at two military sites in Chattanooga, Tennessee, killing five. 
This act of local horror was also one of national significance, for it vindicated the late US diplomat and strategist George F. Kennan’s warning that American foreign policymakers should hold in check their urge to act, especially militarily. 
One can never know when the blowback will come, Kennan warned, but it will. 
Indeed, unforeseeable consequences were precisely what concerned Kennan when the United States charged into Afghanistan in 2001 and Iraq two years later. 
After all, it was no coincidence that many of those the US was fighting in Afghanistan, including Osama bin Laden himself, had been associated with the Mujahedeen, the guerilla-style units of Muslim warriors whom US forces trained as insurgents during the 1979-1989 Soviet occupation. 
Likewise, the US had armed Saddam Hussein’s Iraq to go to war with Iran in the 1980s. 
Following the terrorist attacks of September 11, 2001, Americans asked, “Why do they hate us?” 
Yet, though the US has experienced no attack on its soil since then, US President George W. Bush’s administration pursued, virtually unchecked, the destruction of two Muslim countries – and the devastation has continued beyond Bush’s tenure with an ever-intensifying campaign of drone strikes. 
These policies have helped push Afghanistan to the precipice of state failure, while opening the way for the Islamic State to take over more than one-third of Iraq’s territory. 
The resulting discontent in those countries and across the Muslim world has increasingly been felt in Europe – and now is emerging in the US, too. 
To be sure, US criminal investigators have not officially identified the motives of the Kuwaiti-born Abdulazeez, who does not seem to have belonged to a terror network. 
But there is plenty of precedent for an alienated and disenchanted young man, brought up in the West (Abdulazeez attended high school and college in Chattanooga), to seek a cause worth fighting for – and to find it in the perceived humiliation of Islam by America and the West. 
Of course, as soon as the word “Islam” appears, Western media start painting such “lone wolves” as agents of some vast Islamic conspiracy, rather than deeply wounded and desperate individuals. 
Such an interpretation makes the act easier to understand: a cog in a terrorist network would be compelled, even brainwashed, to mount such an attack. 
But when the attacker is a solitary individual – an American citizen, no less– it raises serious questions about the system from which he or she (though almost always a he in these cases) emerged. 
According to some press accounts, Abdulazeez felt a sense of failure at his inability to meet America’s standard of success, of which money is the primary measure. 
Though he did not appear deeply religious, he allegedly praised the late Anwar al-Awlaki, a US-born al-Qaeda cleric and an advocate of attacks on “hypocritical” America, as a model of triumph over failure. 
Another question about the US system stems from the refusal of Abdulazeez’s health insurer to approve his participation in an in-patient drug and alcohol program. 
This is far from the first time the US has experienced a mass murder by someone whose mental-health issues, including addiction, had been overlooked. 
Does this reflect a systemic failure? 
More fundamentally, does it controvert America’s principles? 
Rather than considering such questions, the US remains focused on the external scourge of Islamic terrorism. 
Kennan recognized this tendency decades ago, when he warned that shortsighted policies at home and abroad had already put America in a vulnerable position. 
Instead of basking in its own superiority, he advised, the US should learn from the mistakes of its enemies, including Russia. 
In the 2000s, Kennan compared the Bush administration’s “global war on terror” to Russia’s wars against Chechen separatists in the North Caucasus. 
When the Soviet Union dissolved in 1991, Boris Yeltsin, Russia’s first president, promised its subjects “as much sovereignty as they can swallow.” 
The Chechens, who had sought independence from Russia for centuries, took this promise as an opportunity for self-determination. 
But Yeltsin, unwilling to lose any more territories after the Soviet Union’s initial breakup, reneged on his pledge. 
In 1993, the first Chechen war erupted. 
Russia managed to defeat the separatists and maintain control over Chechnya. 
But it was a Pyrrhic victory, given that it drove many disillusioned and angry Chechens toward religious fundamentalism. 
As a result, when the second Chechen war began in 1999, the fight was no longer just about Chechen independence from Russia; it was a fight for Islam, waged against Christians everywhere. 
Russia, under Yeltsin’s successor, Vladimir Putin, defeated the separatists again, restoring federal control over the territory. 
Fifteen years later, Chechen extremists are fighting alongside the Islamic State. 
One might object to comparing America’s desire to export democracy at the barrel of a gun to Russia’s imperial death spasms under Yeltsin and Putin. 
But, whether we like it or not, there is a strong parallel between them: both countries are perceived to be dictating to Muslims. 
And, in fact, it was Kennan who first drew my attention to this similarity, when in a private conversation about 9/11, he noted that, for many Muslims, Russia and the West were becoming indistinguishable. 
Both were viewed as secular states antagonistic to Islam. 
Kennan warned that, just as the first Chechen war bred national and individual resentment, America’s wars in Afghanistan and Iraq would only fuel more hatred and frustration – which would eventually blow back onto the US. 
“The failure to fit the system makes people attack that system,” he said, “so it is never wise to bomb nations to freedom.” 

The Right Stuff in Foreign Policy 
CAMBRIDGE – Some critics complain that US President Barack Obama campaigned on inspirational rhetoric and an ambition to “bend the arc of history,” but then turned out to be a transactional and pragmatic leader once in office. 
In this respect, however, Obama is hardly unique. 
Many leaders change their objectives and style over the course of their careers. 
One of the great transformational leaders in history, Otto von Bismarck, became largely incremental and status quo-oriented after achieving the unification of Germany under Prussian direction. 
Likewise, Franklin Delano Roosevelt’s foreign-policy objectives and style were modest and incremental in his first presidential term, but became transformational in 1938 when he decided that Adolf Hitler represented an existential threat. 
Transactional leadership is more effective in stable and predictable environments, whereas an inspirational style is more likely to appear in periods of rapid and discontinuous social and political change. 
The transformational objectives and inspirational style of a leader like Mahatma Gandhi in India or Nelson Mandela in South Africa can significantly influence outcomes in fluid political contexts, particularly in developing countries with weakly structured institutional constraints. 
By contrast, American foreign-policy formation is highly constrained by institutions like Congress, the courts, and the constitution. 
Thus, we would expect less opportunity for transformational leadership. 
But even the US Constitution is ambiguous about the powers of Congress and the president in foreign policy. 
At best, it creates what one constitutional expert called “an invitation to struggle.” 
Moreover, much depends on external conditions. 
Woodrow Wilson, Franklin Roosevelt, and Harry Truman developed transformational objectives only in response to external events after they entered office. 
Crisis conditions can liberate a gifted leader from the accumulated constraints of vested interests and bureaucratic inertia that normally inhibit action in the American system. 
Bill Clinton, caught up in the complacent 1990’s, is said to have envied Franklin Roosevelt’s crisis conditions of the 1930’s. 
In such situations, action becomes more fluid. 
A leader with transformational objectives faces better odds, and an inspirational style is more likely to find responsive followers and to make their role more relevant. 
For example, George W. Bush used the crisis conditions after September 11, 2001, in the service of an assertion of executive power, as well as to invade Iraq. 
But, while turbulent times may set the stage for transformational leaders, it does not follow that bold and risk-loving leaders are always best suited to address the crises that define such periods. 
President George H. W. Bush, unlike his son, was transactional, but implemented a very successful foreign policy. 
Whether they are transformational or incremental in their objectives, leaders need certain soft- and hard-power skills to be effective. 
Among the soft-power skills are emotional intelligence (self-control and the ability to use emotional cues to attract others); vision (an attractive portrait of the future that balances ideals, objectives, and capabilities); and communication (the ability to use words and symbols to persuade both an inner circle and a broader audience). 
For the use of hard-power resources, two skills are particularly important: organizational capacity and a Machiavellian proficiency in bullying, buying, and bargaining to form winning coalitions. 
Above all, effective leadership requires contextual intelligence and an intuitive diagnostic ability that helps a leader understand change, set objectives, and align strategies and tactics accordingly. 
As Lee Kuan Yew, the founding father of modern Singapore, once told me, a leader must be a quick learner, test reality, be prepared to change his mind as conditions change, and act calmly in a crisis. 
Contextual intelligence implies both a capability to discern trends in the face of complexity and adaptability while trying to shape events. 
Bismarck once referred to this skill as the ability to intuit God’s movements in history, and seize the hem of His garment as He sweeps past. 
More prosaically, leaders with contextual intelligence, like surfers, have the ability to judge and adjust to new waves and ride them successfully. 
Leaders of this type not only adapt their style to the situation and to their followers’ needs; they also create flows of information that “educate their hunches.” 
This involves the ability to size up group politics and understand the positions and strengths of various stakeholders in order to decide when and how to use transactional and inspirational skills. 
It is the self-made part of luck. 
This skill is crucial in unstructured situations, when it is often more difficult to ask the right questions than it is to get the right answers. 
Leaders with contextual intelligence are good at providing meaning or a road map by defining the problem that a group confronts. 
They understand the tension between the different values involved in an issue, and how to balance the desirable with the feasible. 
In particular, contextual intelligence requires an understanding of groups’ cultures; the distribution of power resources; followers’ needs and demands; information flows; and timing. 
Contextual intelligence is particularly important in foreign policy, because an effective leader must understand the culture and power structure of other societies, and how they interact as an international system. 
With years of experience in foreign affairs, George H. W. Bush had excellent contextual intelligence. 
With almost no experience in foreign affairs, “W” did not. 
That gap proved the difference between the success of the father and the failure of the son. 

The Return of Yellow Fever 
SEATTLE – Before the horrors of the latest Ebola outbreak in West Africa could even begin to fade from our minds, the Zika virus emerged as a major global health risk, and is now occupying researchers and doctors in South America, Central America, and the Caribbean. 
Yet the death toll from another virus is rising fast: yellow fever. 
In southwestern Africa, Angola is facing a serious yellow fever epidemic – its first in 30 years. 
Since the virus emerged in Luanda, Angola’s capital and most populous city, last December, it has killed 293 people and infected a suspected 2,267. 
The virus has now spread to six of the country’s 18 provinces. 
Travelers have taken cases to China, the Democratic Republic of Congo, and Kenya. 
Namibia and Zambia are on high alert. 
Yellow fever virus is transmitted by Aedes aegypti – the same mosquito that spreads the Zika virus. 
Symptoms include fever, muscle pain, headache, nausea, vomiting, and fatigue. 
At least half of untreated patients with severe cases of yellow fever die within 10-14 days. 
The good news is that, unlike Zika or Ebola, yellow fever can be controlled with an effective vaccine, which confers lifelong immunity within a month of administration. 
And, indeed, vaccination forms the core of Angola’s National Response Plan, initiated early this year with the goal of administering the yellow fever vaccine to more than 6.4 million people in Luanda Province. 
So far, nearly 90% of that target population has been vaccinated, thanks largely to the World Health Organization, the International Coordinating Group for Vaccine Provision, and other countries, including South Sudan and Brazil, which together made some 7.35 million doses of the vaccine available. 
The mass vaccination effort has stemmed the spread of yellow fever. 
But to end the outbreak, vaccination has to continue not only in Luanda, where an additional 1.5 million are at risk of infection, but also encompass other affected provinces. 
This will be a major challenge. 
One key problem is cost. 
In 2013, the yellow fever vaccine cost $0.82 per dose in Africa – a price that most developing countries cannot afford. 
A 2015 report by Médecins Sans Frontières showed that the vaccine is now almost 70 times more expensive than it was in 2001. 
Making matters worse, even if countries have the money, there are serious supply constraints. 
Senegal’s Pasteur Institute of Dakar, one of only four facilities in the world producing yellow fever vaccines, manufactures about ten million doses per year, and the manufacturing process is extremely difficult to scale up. 
Moreover, the Pasteur Institute is about to close down for a five-month renovation, during which it will be unable to produce more vaccine. 
Fortunately, the situation is set to improve. 
The Pasteur Institute is constructing a new facility about 30 kilometers from Dakar, in Diamniadio, that is expected to triple production by 2019. 
Another yellow fever vaccine manufacturer, Sanofi Pasteur in France, is also expanding its manufacturing capacity. 
(The other two manufacturers are based in Brazil and Russia.) 
For now, however, supplies are tight. 
One way to stretch existing stores could be by administering a fractional dose (one-fifth of the usual dose), which has also been shown to protect against yellow fever. 
But even that may not be enough if the virus spreads further. 
And, unfortunately, the high density of Aedes aegyptii mosquitoes in the affected areas means that the risk of transmission remains high. 
An outbreak in a region like Asia, which lacks experience with a yellow fever epidemic and has no capacity to manufacture the vaccine, would be particularly difficult to control. 
According to John P. Woodall, the founder of the disease-alert service ProMED, if yellow fever spreads to parts of Asia with the right climate and mosquito species, hundreds of thousands could be infected (and possibly die) before vaccine stocks are delivered. 
The virus also has the potential to spread to the Americas, which are home to Aedes mosquito vectors that transmit not only yellow fever, but also dengue, Zika, and chikungunya. 
Already, the Pan American Health Organization has declared an epidemiological alert for yellow fever in Latin America. 
To help limit yellow fever’s spread, international health regulations require that all travelers to the 34 countries where yellow fever is endemic present a vaccination certificate. 
But the implementation of those regulations depends on each country’s capacity, and is thus far from perfect. 
Already, a total of nine laboratory-confirmed cases of yellow fever imported from Angola have been reported by the National IHR Focal Point of China. 
Reports of yellow fever infection in non-immunized travelers returning from a country where vaccination against the disease is mandatory highlights the need to reinforce the implementation of vaccination requirements. 
The WHO is working closely with several partners and the Angolan government to combat the current outbreak. 
But, as some health experts have pointed out, even more needs to be done. 
The WHO now must convene an emergency committee to coordinate a broader international response, mobilize funds, and spearhead the rapid scale-up of vaccine production, as well as a “standing emergency committee” capable of addressing future public-health crises quickly and effectively. 

Controlling Chinese Television 
The 2003 World Press Freedom report put out by the group Reporters without Borders ranks China 161st among 166 nations, somewhere between Iran and North Korea. 
But Chinese television fare, at least, no longer consists of the prudish melodramas and clumsy indoctrination programs of the Maoist past. 
Casual observers of today's freewheeling offerings of sex, crime, drugs, violence, and banal game shows on Chinese TV might come away with the impression that most of the shackles have been removed from televised content. 
To be sure, this impression disappears if one focuses on explicit political content. 
Viewpoints that deviate in the slightest from Party doctrine are still absent from Chinese TV. 
Despite the surface diversity of programming, the monolithic control of political discourse has changed little since the 1950's. 
But the sheer volume of China's TV programming makes maintaining such control difficult. 
China Central Television (CCTV) alone has 12 channels (many broadcasting 24 hours a day), and employs about 3,000 people. 
CCTV falls under the control of the Propaganda Department and the Ministry of Radio, Film, and Television. 
Numerous provincial and municipal TV stations are also required to carry some CCTV programming. 
This combination represents a vast administrative undertaking. 
Given the staggering amount of programming needed to fill the time slots, content monitoring must be implemented with maximum efficiency. 
Censorship has been made easier, not more difficult, by the government's decision in the 1990's to shift to a free-market strategy for entertainment products. 
Big subsidies to TV stations were mostly discontinued, and the new "sink or swim" approach forced TV outlets to compete for advertising revenues, resulting in programming with greater mass appeal. 
Thus, in a strategy mirrored elsewhere in the cultural sphere, the government simply relinquished much control over the moral component of TV content. 
The anti-pornography saohuang campaigns carried out in the 1980's and early 1990's are a thing of the past. 
Perhaps realizing that an entertained and distracted populace is less likely to complain about public policy, the Party has allowed entertainment programming to follow the Western model, lessening the need for micro-managed censorship. 
The result is a de facto separation between news and everything else. 
This conveniently allows the authorities to control news programming with an iron hand while relegating the bulk of programming to a looser and less labor-intensive monitoring system. 
Of course, given China's highly politicized atmosphere, politics can leak into even the most innocuous areas of discourse, and the many talk shows and audience participation formats necessitate a less intrusive but nonetheless effective system of content regulation. 
The first surprise I encountered while working for CCTV as a program planner was how minimal this system is. 
Top-down directives and outright censorship are rare. 
Few written guidelines outlining forbidden or sensitive topics exist. 
No constant memoranda dictate content. 
Party officials don't hover over each step of the process, and virtually no cutting of completed products is carried out on Party orders. 
On the surface, writers, directors, and performers seem free to plan and produce their shows with little or no supervision or monitoring. 
So how does such a system block offending content? 
First and foremost, the system is largely reactive. 
The department heads and oversight committees that meet to evaluate programming seldom dictate content, but merely pass their complaints and recommendations down to programming heads. 
The top-down hierarchy is autocratic and arbitrary; lower levels have little collaborative input and no right of appeal. 
Serious breaches can result in reprimands or dismissals. 
In effect, the system has become largely self-regulating. 
In my experience, 99% of all censorship occurs with the writers and producers themselves. 
Sporadic complaints and warnings from above enable them to develop an intuitive sense for the boundaries of acceptable content, so they create shows that are free from offending material from the outset. 
The lack of explicit guidelines also keeps content more conservative than it need be, because producers tend to err on the safe side. 
Vague but pervasive intimidation is the main factor keeping TV personnel in line. 
But another force serves the Party's interests as well: the deep-seated Chinese cultural inertia that stresses collectivist, group-oriented behavior. 
In such an atmosphere, inclusion of politically incorrect content is not merely a risky move, but constitutes a breach of social decorum. 
Indeed, working daily with Chinese TV creators, I noticed a subtle, almost instinctive tendency to avoid any content or format that is unusual, novel, or unorthodox, never mind subversive. 
The exceptions to this state of affairs are when the Party initiates a propaganda campaign, such as the one associated with the turnover of Hong Kong in 1997, or the more recent anti-Falun Gong blitzkrieg. 
At such times, directives are issued to produce programming with specific ideological content, and such shows - dubbed renwu (duties) - are perfunctorily overseen by TV producers, after which the more bottom-up mode returns. 
Many TV producers have internalized these controls so well that they are an unconscious fact of life, and audiences now entertained by endless costume dramas and soap operas are not clamoring for freer political content. 
Barring some catastrophic change, this method of information control can be expected to continue well into the 21st century. 

TB, NCDs, and the Lessons of HIV 
NEW YORK – Global health is once again in the spotlight. 
In September, the United Nations General Assembly convened two high-level meetings – one on ending tuberculosis (TB), and the other on fighting noncommunicable diseases (NCDs). 
It was the first time ever that the UN featured two health crises so prominently on its annual agenda. 
But with these discussions now over, the global health community must focus on securing the necessary political commitments to sustain international coordination and planning. 
One model worth emulating in the fight against both TB and NCDs is the approach taken to confront the HIV epidemic. 
Since 2001, when the UN General Assembly hosted its first meeting on HIV/AIDS, the trajectory of the disease has shifted dramatically. 
Today, some 22 million people living with HIV are receiving treatment. 
As a result, annual AIDS deaths have fallen by half – from 1.9 million in 2003 to 940,000 in 2017 – while the rate of new infection has decreased by nearly half in several of the hardest-hit countries. 
Efforts to control TB and NCDs – which, like HIV/AIDS, place a heavy burden on low- and middle-income countries – can leverage the lessons learned from the response to HIV. 
Three lessons in particular stand out. 
First, as the global AIDS response expanded, it faced the dual challenge of including hard-to-reach communities while continuing to support a growing number of patients receiving treatment. 
In response, HIV programs have evolved to offer services shaped by the preferences of patients. 
Such novel models of care also relieve the burden of large numbers of patients on health facilities and health workers. 
For example, in several countries, stable patients who prefer to visit their health-care provider less often receive multi-month supplies of medications. 
In South Africa, where as many as 4.3 million people with HIV are receiving treatment, prescriptions can be refilled at pharmacist-managed vending machines. 
In Lesotho, where people may live hours from a health facility, HIV testing is offered in the home and, for those found to have HIV infection, community treatment is supported by local health workers. 
A similar approach could be taken for TB and NCDs. 
For TB, this might mean longer gaps between checkups for patients who adhere to treatment and show no signs of drug resistance, while those experiencing side effects or who require more complex treatments could receive more intensive care. 
Likewise, patients with well-controlled NCDs who show no symptoms and are doing well on medications may need only occasional visits to a health-care provider, while those with more complicated cases could benefit from closer medical monitoring and counseling. 
Second, HIV programs succeeded in part because they established goals for the entire “cascade of care” – from diagnosis to treatment. 
For example, the “90-90-90” targets set by the Joint United Nations Programme on HIV/AIDS (UNAIDS) – in which 90% of people living with HIV have been diagnosed, 90% of those diagnosed with HIV are on treatment, and 90% of those on treatment are virally suppressed – helped focus the global AIDS response. 
In fact, models suggest that if these targets are achieved, HIV will no longer be a public-health threat by the year 2030. 
Setting targets is useful for benchmarking progress and identifying coverage gaps. 
For example, in many countries, the largest gap in the coverage of HIV services is in diagnosis, particularly of men and young people. 
As a result, many programs now offer new options to reach these groups, such as confidential workplace testing and self-testing. 
Another gap is among populations that are disenfranchised and stigmatized in some countries, such as men who have sex with men. 
Targets along the cascade could be similarly beneficial for controlling TB and NCDs. 
The Stop TB Partnership, for example, has proposed 90-(90)-90 treatment goals for the disease, although they have yet to be widely adopted. 
For NCDs, the focus is on achieving UN Sustainable Development Goal 3.4, which calls for a one-third reduction in premature deaths from such illnesses by 2030. 
But the latter goal is not disaggregated along the NCD care cascade of diagnosis and treatment. 
For example, it would be useful for programs to monitor how many people with high blood pressure have been diagnosed and placed on treatment, what proportion of those on treatment have achieved blood-pressure control, and what treatment level would be required to reduce premature deaths by the desired target. 
Finally, the AIDS effort was able to expand as a result of strong advocacy and collaborations that reshaped markets for diagnostic and treatment programs. 
By forecasting medication needs, aggregating orders, and promoting competition, in combination with intense advocacy, policymakers and providers were able to secure market efficiencies. 
The resulting economies of scale allowed suppliers to shift from low-volume, high-margin solutions to high-volume, low-margin profit models. 
As a result, these efforts reduced the cost of annual HIV treatments from more than $10,000 per patient in 2001 to less than $100 in 2016. 
Likewise, controlling TB and NCDs will require making medications more convenient and affordable. 
While the TB response has leveraged strategic partnerships to expand coverage, large gaps remain, the largest being treatments for children and patients with drug-resistant TB. 
For NCDs, companies like Novartis, Pfizer, and the Indian drug maker Cipla have made efforts to bring affordable medicines to patients in Africa. 
But while donations may help stimulate initial demand, a more deliberate market approach will be needed to achieve price reductions. 
A multisectoral coalition launched in 2017 could help drive efficiencies, but it will need additional support to succeed. 
Tedros Adhanom Ghebreyesus, Director-General of the World Health Organization, recently called on governments to increase their leadership and investments in health systems to fight TB and NCDs. 
But while more resources are no doubt needed, they must be accompanied by sound strategies that engage communities, guide programming, and scale up prevention and care. 
Best of all, with the AIDS response blueprint already in hand, there is no need to reinvent the wheel. 

Converting Syria 
An Arab-Israeli peace requires a comprehensive approach, because the problems at stake are intertwined. 
Not only are key issues such as Jerusalem and Palestinian refugees insoluble without an all-Arab consensus, but any country that is left out of the peace process is bound to persist in its role as a revolutionary power bent on regional destabilization. 
Admittedly, Israeli governments have never liked the idea of negotiating peace with all enemies simultaneously, if only because the political costs of the required concessions would be unbearable. 
The Israeli strategy of peacemaking therefore oscillates between two visions: while the Israeli left gives priority to the Palestinian problem, the Israeli right prefers pursuing a settlement with the big Arab powers. 
The current Israeli-Palestinian peace talks and the American veto on negotiations with Syria indicate that we have returned to the “Palestine first” concept. 
But the prospects of success are desperately dim. 
With the Americans still refraining from engaging in a Clinton-like level of committed mediation, the parties look to be incapable of meeting each other’s minimal requirements for a settlement. 
Their failure would have dire consequences for the entire region. 
The Syria-Iran-Hamas-Hezbollah axis would be emboldened in its challenge to American leadership in the region, and, with Palestinian President Mahmoud Abbas humbled and defeated, a third Intifada would be a likely scenario. 
It is therefore vitally important to take Syria, an ally of Iran and the patron of spoilers such as Hamas and Hezbollah, out of the war equation. 
But this requires that both Israel and the United States change course. 
Syria has a keen interest in being invited into an US-led settlement with Israel. 
The muted response of the Arab states to Israel’s recent mysterious air raid on its territory reflects its isolation within the Arab world – an isolation with which the Syrians are extremely uncomfortable. 
The Ba’athist regime in Damascus is marked by two major formative experiences: Hafez al-Assad’s loss of the Golan Heights to Israel, and his son Bashar’s loss of Lebanon. 
Recovering the Golan, gaining recognition of Syria’s special interests in Lebanon, and reconciling with America are thus vital objectives for the regime and the best way that Bashar al-Assad can boost his legitimacy at home. 
Syria’s readmission into the Arab consensus and financial support from the Gulf monarchies for abandoning the Shi’a alliance with Iran and Hezbollah would also be significant gains. 
Bashar may lack his father’s acumen, but he, too, knows a simple truth: peace with Israel is the price to pay. 
The question remains whether Bashar understands that peace is not only about regaining the Golan, but also about normalization of relations with Israel, which his father was reluctant to allow. 
The old Assad feared that open borders and the end of the politics of conflict might erode his one-party system. 
Peace thus requires a degree of political and socioeconomic change to diminish the appetite for military adventurism. 
A Damascene conversion is not only possible, but is also vital for regional peace. 
The most realistic scenario is now a three-front war pitting Israel against Syria, Hamas, and Hezbollah. 
But a Syrian-Israeli peace would drive a wedge between Syria and Iran, thereby cutting off Hezbollah’s lines of arms supply while allowing the vital task of stabilizing Lebanon to succeed. 
The only way to extricate Syria from the fatal Iranian embrace is to draw it into a regional scheme for peace. 
Alas, precisely because of their isolation and the Ba’athist regime’s paranoiac nature, the Syrians are unlikely to meet the US condition for peace talks: abandoning their current rogue alliances and their marriage with terror. 
But a Damascene conversion can only be the outcome of negotiations, not a prerequisite for them. 
The idea that the Arab-Israeli peace process requires choosing between a Syrian or a Palestinian track has proved to be a dangerous fallacy. 
Neither the Palestinians nor the Syrians will acquiesce to their exclusion. 
A revolutionary force in international relations is one whose level of dissatisfaction with the status quo is such that it works to undermine it at any price. 
In addition to reviewing the state of the Israeli-Palestinian negotiations, the November Middle East conference that President George W. Bush has called should begin to build a platform for an Israeli-Syrian negotiating track and a region-wide forum where clear rules of conduct and engagement are agreed by all. 
Of course, this conference will not bring an end to the Damascus-Tehran axis. 
But if the US exercises a brand of statesmanship different from the one that has so far put it on the defensive on almost every front, it could start to eat away at the foundations of that axis. 

How Britain Lost Its Cool 
BERLIN – The recent meeting between German Chancellor Angela Merkel and British Prime Minister Theresa May in the Estonian capital of Tallinn was a portrait in contrasts. 
Merkel has pursued openness and internationalism, and leads a country with a world-beating industrial base and strong trade ties. 
May talks more about the past than the future, and has disparaged “citizens of the world” while claiming to defend her country’s confused national identity. 
Among other things, the Merkel-May dynamic shows how cyclical history can be. 
Twenty years ago, Germany was the “sick man of Europe,” struggling to dispel its demons so that it could look out and to the future. 
The United Kingdom, on the other hand, had become “Cool Britannia.” 
In 1997, much of the world was tuning in to Brit-pop; and top British artists, fashion designers, and architects were the hottest names in their fields. 
Even British chefs were seen as global arbiters of taste, to the chagrin of their French counterparts. 
I had a walk-on part in that moment of British national revival. 
In the report BritainTM: Renewing Our Identity, I proposed a strategy of national rebranding that was picked up by the new Labour government under Prime Minister Tony Blair. 
The idea was to rethink the idea of Britishness, and then reintroduce Britain to the world. 
Rebranding was clearly necessary. 
By the mid-1990s, a fog of malaise had settled over British politics. 
Prime Minister John Major had lost control of the Conservative Party, and declining public trust in British institutions was fueling anxiety among voters. 
Britain, once known as the “workshop of the world,” had become a service economy. 
The British retail chain Dixons decided to name one of its consumer-electronics brands Matsui, because it sounded Japanese. 
The soap operas coming outof Buckingham Palace had turned adulation of the royal family into voyeurism. 
And according to opinion polls, around half of the country’s population wanted to emigrate, and a similar percentage (particularly Scots, Welsh, ethnic minorities, Londoners, and the young) no longer felt British. 
Rather than mourning the ethnic-based, exclusionary Englishness that former Prime Minister Margaret Thatcher had done so much to promote in the 1980s, I argued that Britons should embrace a new civic identity, based on deeper stories about their country. 
Britain, after all, was a global hub, but also an island with a long history of creativity, quirkiness, and innovation. 
It was a hybrid country that gloried in its diversity. 
It had pioneered social and technological change not with revolutionary fanfare, but through sound governance. 
And it was a country that valued “fair play,” a value embodied in the National Health Service. 
Of course, I should not overstate the influence of my pamphlet. 
BritainTM was just one part of a larger phenomenon. 
The British national story was moving toward openness, and that change would have a profound impact on both Labour and a Conservative Party that needed to detoxify its own brand. 
Conservative leaders such as former Prime Minister David Cameron and even Boris Johnson, when he was the mayor of London, came to represent a modern, multiracial, and multiethnic Britain. 
This is the Britain that the director Danny Boyle depicted in the opening ceremony to the 2012 Olympic Games in London. 
How, then, did the country move from cosmopolitanism back to nationalism and nativism? 
The short answer is that Britain’s rebranding became a victim of its own success. 
By accommodating previously excluded citizens, the new national story made those at the center of the older, narrower version feel like a threatened minority. 
And when the Brexit referendum rolled around, they fought back. 
May’s main goal since succeeding Cameron has been to appeal to the emotions of the old tribes at the heart of Thatcher’s version of Britishness – all who felt disenfranchised in Cool Britannia. 
Still, demography dictates that the new, open Britain will inevitably replace the old one. 
Most polls show that the country is becoming more liberal and tolerant every year. 
But one lesson from the Brexit vote is that identity politics – manifested in the fears of older, white, less-educated voters – can wreak havoc in the interregnum. 
What remains to be seen is how far the nativist turn will go, and whether its leaders will overreach. 
Will the populist wave recede once a critical mass of voters starts to feel the economic effects of Brexit on the British economy? 
And could it have been prevented with a slower, more gradual change in the national story? 
Similar questions have surely been on Merkel’s mind since Germany’s federal election last month. 
The fact that the far-right Alternative for Germany made unprecedented gains while Merkel’s own party lost support owes something to her bold open-door policy during the refugee crisis. 
She may now be wondering if the Willkommenskultur (welcoming culture) that she has promoted will share the same fate as Blair’s Cool Britannia. 
Ensuring that it does not will be Merkel’s big challenge in her fourth term. 
Unfortunately, May, having ridden the wave of nativism, rather than trying to redirect it, will have little to teach her German counterpart. 
If anything, May could fall victim to her own opportunism. 
If history does indeed move in cycles, it stands to reason that Britain will turn back toward openness sooner or later. 
And when that happens, May’s brand of backward-looking politics, like Thatcher’s, will be swept aside. 

 

The Human City 
SINGAPORE – The tangled web of international organizations that constitutes global governance has become so remote and ineffective that few count on it to deliver results anymore. 
Now, after decades of turf wars and self-marginalization, international organizations must rally around an increasingly pressing global priority: sustainable urbanization. 
The world is undergoing an unprecedented and irreversible wave of urbanization, with the share of the global population living in cities set to reach 60% by 2030. 
But rapid urbanization is driving up industrial fossil-fuel consumption and household water consumption, and is increasing demand for food in areas where arable land is scarce. 
In short, the current urbanization trajectory is not sustainable. 
But existing efforts to alter the situation remain woefully inadequate. 
While the United Nations General Assembly has tasked its agency for human settlements, UN-HABITAT, with promoting sustainable urbanization, the agency lacks the influence to ensure that this vital issue makes it onto the global agenda. 
Moreover, international development players – including UN agencies, NGOs, corporate citizenship programs, and other charitable organizations – rarely coordinate their activities, even though their interventions are increasingly concentrated in densely populated cities. 
Given that promoting sustainable urbanization and improving coordination would bolster progress in other priority areas (including women’s rights, climate change, youth unemployment, and literacy), sustainable urbanization must become a bureaucratic priority. 
And it must be complemented by a technological disruption, with investments channeled toward developing and distributing innovations that would make cities more livable, efficient, and sustainable. 
In fact, many useful innovations, such as energy-generating building materials and zero-emissions transportation, already exist; they simply need to be made accessible to those who need them most. 
Devices like small-scale water-filtration systems, portable heart monitors, and low-cost tablet computers are already dramatically improving the lives of the world’s poorest citizens and helping to level the economic playing field. 
The future impact of global governance rests on forging new alignments that facilitate the flow of vital knowledge and technologies from an increasingly diverse array of sources to urban populations worldwide. 
The tools needed to make urban life more sustainable are no longer flowing only from North to South and West to East. 
China has taken the lead in exporting solar photovoltaic cells, while clean-tech parks are arising even in the Arab world. 
Governments, companies, supply-chain managers, corporate-citizenship strategists, NGOs, and others should commit to reducing their carbon footprints and to leveraging their resources to contribute to sustainable urbanization. 
Opportunities to make such contributions are appearing constantly – and across all sectors. 
In construction, for example, contractors are forming partnerships with labs to test materials that better reflect heat while absorbing energy to power cooling systems, and utility companies are leveraging new software tools to deploy smart meters in homes and offices. 
Two US cities – New York and Seattle – have raised efficiency standards for new construction to record levels. 
Similarly, automobile manufacturers, mobility-services companies, and local governments are working together to advance sustainable transportation by providing incentives for efficient non-ownership of vehicles. 
As a result, carpooling is gaining prevalence in cities like Berlin. 
Furthermore, MIT has developed the foldable electric CityCar, four of which can fit into a conventional parking space. 
At last year’s Rio+20 conference, the eight largest multilateral development banks pledged $175 billion to develop sustainable transportation. 
Information technology can also reduce stress on the transportation system. 
For example, Singapore is harnessing its near-complete fiber-optic network to reduce urban congestion by introducing a spate of measures encouraging workers to telecommute. 
As these measures take effect, self-sufficient satellite towns will likely develop, reducing transportation-related energy consumption further, while fostering a more active civil society. 
Singapore is leading the way in another area as well: production and distribution of potable recycled water. 
Many cities worldwide are following its example, expanding their water catchment and treatment programs. 
Meanwhile, vertical farm experiments – which aim to augment urban food supplies by cultivating crops in skyscraper greenhouses – are proliferating from the American Midwest to Osaka, Japan. 
And India has become a leader in converting biomass and food waste into energy. 
Of course, the billions of farmers and villagers worldwide should not be forgotten. 
Interventions like rural electrification, the provision of drought-resistant seeds and agricultural technology, and the expansion of micro-insurance are vital not only to rural populations’ welfare, but also to catalyze a new “Green Revolution,” without which city dwellers will face severe food shortages. 
With new, innovative solutions appearing every day, the real challenge lies in bringing them to scale – and that requires international cooperation. 
But the “smartest” cities are not necessarily the most technologically advanced. 
Rather, they are the places where technology and public policy support citizens’ welfare and aspirations. 
This crucial fact will guide discussion at the New Cities Foundation’s second annual summit in June – the theme of which is “The Human City” – and should be at the heart of sustainable urbanization initiatives. 
Making sustainable urbanization a strategic priority might be the only way to overcome the interrelated crises of jobless growth, youth unemployment, and income inequality. 
While some factory jobs can be outsourced or automated, robots cannot yet retrofit buildings, install solar PV cells on rooftops, or construct vertical farms. 
Even the movement in some cities, such as Singapore and Tokyo, toward driverless subways or cars will demand substantial labor to build and manage the relevant systems. 
In the future, as in the past, the most labor-intensive jobs will involve building homes, production facilities, and, in turn, communities. 

Time for Helicopter Money? 
WASHINGTON, DC – “Out of ammo?” The Economist recently asked of monetary policymakers. 
Stephen Roach has called the move by major central banks – including the Bank of Japan, the European Central Bank, and the Bank of Sweden – to negative real (and, in some cases, even nominal) interest rates a “futile” effort that merely sets “the stage for the next crisis.” 
And, at the February G-20 finance ministers meeting, Bank of England Governor Mark Carney reportedly called these policies “ultimately a zero-sum game.” 
Have the major advanced economies’ central banks – which have borne the burden of sustaining anemic post-2008 recoveries – really run out of options? 
It certainly seems so. 
Central-bank balance sheets have swelled, and policy rates have reached their “near zero” lower bounds. 
There is plenty of cheap water, it seems, but the horse refuses to drink. 
With no signs of inflation, and growth still tepid and fragile, many anticipate chronic slow growth, with some even fearing another global recession. 
But policymakers have one more option: a shift to “purer” fiscal policy, in which they directly finance government spending by printing money – a so-called “helicopter drop.” 
The new money would bypass the financial and corporate sectors and go straight to the thirstiest horses: middle- and lower-income consumers. 
The money could go to them directly, and through investment in job-creating, productivity-increasing infrastructure. 
By placing purchasing power in the hands of those who need it most, direct monetary financing of public spending would also help to improve inclusiveness in economies where inequality is rising fast. 
Helicopter drops are currently proposed by both leftist and centrist economists. 
In a sense, even some “conservatives” – who support more public infrastructure spending, but also want tax cuts and oppose more borrowing – de facto support helicopter drops. 
Recently, more radical proposals have surfaced, reflecting a sense of urgency and widespread disappointment with the impact of current monetary policy. 
Beyond advocating higher minimum wages, some are calling for “reverse income policies,” with governments imposing across-the-board wage increases on private employers – a move that would drive up prices and defeat deflationary expectations. 
The fact that economists whose views typically fall nowhere near those of the far left are even thinking about such interventionism shows just how extreme circumstances have become. 
I favor all of these proposals, in some form. 
The details of their implementation would obviously have to vary, depending on each economy’s circumstances. 
Germany, for example, is in a strong position to implement a reverse income policy, given its huge current-account surplus, though there would undoubtedly be major political barriers. 
More spending on education, skills upgrading, and infrastructure, however, is a no-brainer almost everywhere, and is politically more feasible. 
But there is another dimension of the challenge that has so far not been emphasized nearly enough, despite the warnings of Carney, Roach, and others. 
Zero or negative real interest rates, when they become quasi-permanent, undermine the efficient allocation of capital and set the stage for bubbles, busts, and crises. 
They also contribute to further income concentration at the top by hurting small savers, while creating opportunities for large financial players to benefit from access to savings at negative real cost. 
As unorthodox as it may sound, it is likely that the world economy would benefit from somewhat higher interest rates. 
Raising interest rates cannot, however, be a stand-alone policy. 
Instead, small policy-rate increases must be incorporated into a broader fiscal and distributional strategy, implemented alongside more public spending on infrastructure and skills upgrading, as well as some gentle forms of income policies, employing, for example, “moral suasion.” 
Even with such an approach, however, major central banks would have to coordinate their policies. 
If a single major central bank attempted to introduce higher interest rates, its economy would immediately be “punished” through currency appreciation, declining competitiveness, and falling exports, all of which would undermine aggregate demand and employment. 
If the major central banks decided to increase their policy rates simultaneously, these spillover effects would cancel one another out. 
A coordinated move, perhaps raising rates in two modest 25 or 30 basis-point increments, would be neutral in terms of exchange rates and short-term competitiveness, even as it moved real interest rates back into positive territory. 
If successful, this effort could eventually be followed by further small increases, creating space for more traditional monetary-policy “ammunition” to be deployed in the future. 
Success also hinges on the simultaneous pursuit of fiscal expansion worldwide, with each country’s efforts calibrated according to its fiscal space and current-account position. 
The expansion should finance a global program of investment in physical and human infrastructure, focusing on the two key challenges of our time: cleaner energy and skills for the digital age. 
A coordinated and well-timed policy package could boost global growth, improve capital allocation, support a more equitable income distribution, and reduce the danger of speculative bubbles. 
The various meetings in the run-up to the G-20 summit in China, including the spring meetings of the International Monetary Fund and the World Bank, would be ideal forums for designing such a package, and advancing its implementation. 
Economic orthodoxy and independent actions have clearly failed. 
It is time for policymakers to recognize that innovative international policy cooperation is not a luxury; sometimes – like today – it is a necessity. 

For Climate Safety, Call in the Engineers 
NEW YORK – This month’s United Nations Climate Change Conference (COP24) in Katowice, Poland succeeded in producing a rulebook to implement the 2015 Paris climate agreement. 
Every UN member state signed on. 
But that will not be enough to head off climate catastrophe. 
It’s time to call in the engineers. 
The diplomatic success at COP24 was remarkable, given relentless lobbying and foot-dragging by the fossil-fuel industry. 
The diplomats have read the science and know the truth: without a rapid move to a zero-carbon global energy system by mid-century, humanity will be in grave peril. 
In recent years, millions of people have suffered the hardships of extreme heatwaves, droughts, flood surges, powerful hurricanes, and devastating forest fires, because the Earth’s temperature is already 1.1º Celsius (roughly 2º Fahrenheit) above the pre-industrial average. 
If warming exceeds 1.5ºC or 2ºC later this century – temperatures never experienced in the entire 10,000-year history of human civilization – the world will become vastly more dangerous. 
The Paris accord commits national governments to keep temperatures “well below 2°C above pre-industrial levels and [to pursue] efforts to limit the temperature increase to 1.5°C above pre-industrial levels.” 
We now have a rulebook for measuring greenhouse-gas emissions, sharing know-how, and measuring financial transfers from rich to poor countries. 
Yet we still lack the plans for shifting the world energy system to renewable energy by mid-century. 
The diplomats, of course, are not technical experts. 
The next stage needs the world’s engineering experts on power generation and transmission, electric vehicles, hydrogen fuel cells, artificial intelligence for energy systems management, urban design for energy efficiency and public transport, and related specialists. 
Diplomats, rather than engineers, have been at the forefront at UN climate summits for the past 24 years. 
The time for engineers to take center stage has arrived. 
The Paris accord assumes that each government consults with its own country’s engineers to devise a national energy strategy, with each of the 193 UN member states essentially producing a separate plan. 
That approach reflects a deep misunderstanding of how the global energy transition must work. 
We need solutions that are agreed and coordinated at the international scale, not country by country. 
Global engineering systems require global coordination. 
Consider civil aviation, a triumph of globally coordinated engineering. 
In 2017, there were 41.8 million flights without a single fatal passenger jet accident. 
The civil aviation system works so well because all countries use aircraft manufactured by a few global companies and share standard operating procedures for navigation, air traffic control, airport and airplane security, maintenance, insurance, and other operations. 
Other global systems are similarly coordinated. 
Transfers of US-dollar bank balances average a staggering $2.7 trillion per day, yet are routinely settled through the use of standardized banking and communications protocols. 
Billions of daily Internet activities and mobile phone calls are possible because of shared protocols. 
Both the scale and reliability of these globally connected high-tech systems are astounding, and depend on solutions implemented internationally, not country by country. 
The transition to renewable energy can be greatly accelerated if the world’s governments finally bring the engineers to the fore. 
Consider that in May 1961, President John F. Kennedy called on Americans to land a man on the moon and return him safely to Earth before the end of the decade. 
NASA quickly mobilized hundreds of thousands of engineers and other experts, and completed the moonshot in July 1969, meeting JFK’s remarkably ambitious timeline. 
I was recently on a panel with three economists and a senior business-sector engineer. 
After the economists spoke about carbon prices, internalizing externalities, feed-in tariffs, carbon offsets, and the like, the engineer spoke succinctly and wisely. “I don’t really understand what you economists were just speaking about, but I do have a suggestion,” he said. 
“Tell us engineers the desired ‘specs’ and the timeline, and we’ll get the job done.” 
This is not bravado. 
Here are the specs. 
To limit warming to 1.5ºC, the world’s energy system must be decarbonized by mid-century. 
This will require the vast mobilization of zero-carbon energy sources such as wind, solar, and hydro power, implying a power system that can handle intermittent energy sources that depend on when the sun shines, how hard the wind blows, and how fast the rivers flow. 
This zero-carbon electricity will power electric vehicles that replace our internal-combustion engine cars. 
It will also be used to produce zero-carbon fuels such as hydrogen for ocean shipping and synthetic hydrocarbons for airplanes. 
We will heat our homes and office buildings with zero-carbon electricity rather than with coal, oil, or natural gas. 
And energy-intensive industries such as steel and aluminum will also replace fossil fuels with zero-carbon electricity and hydrogen. 
These zero-carbon solutions will extend beyond any country’s borders. 
The lowest-cost and most plentiful renewable energy is often found far from population centers, in deserts and mountains, and offshore for wind. 
This energy will therefore need to be transmitted long distances, often crossing national boundaries, with the use of special high-voltage transmission lines. 
The advantages of a long-distance, internationally connected transmission system have been powerfully emphasized by the Global Energy Interconnection Development and Cooperation Organization, a worldwide partnership of engineering companies and institutions launched by the State Grid Corporation of China in 2016. 
In a sensible global decarbonization plan, many of today’s fossil-fuel exporting countries and companies will become tomorrow’s exporters of zero-carbon energy. 
The oil-producing Gulf countries should export solar energy from the vast Arabian Desert to both Europe and Asia. 
Coal-producing Australia should export solar power from the enormous outback to Southeast Asia via submarine cable. 
Canada should increase its exports of zero-carbon hydropower to the US market and finally end its efforts to export products from its high-carbon oil sands. 
At the Katowice climate conference, the diplomats delivered the climate rulebook on time and as promised – an enormous accomplishment. 
The next big act belongs to the engineers. 
Energy transformation for climate safety is our twenty-first-century moonshot. 
When heads of state convene at the UN next September, the world’s leading engineers should greet them with a cutting-edge framework for global action. 

Coping with Catastrophic Risks 
One year after the Indian Ocean tsunami, what are the lessons? 
The biggest one is that it was the type of disaster to which policymakers pay too little attention – one that has a very low or unknown probability of occurring, but that creates enormous losses if it does occur. Great as the death toll, physical and emotional suffering of survivors, and property damage caused by the tsunami were, even greater losses could be inflicted by other disasters of low (but not negligible), or unknown, probability. 
For example, the asteroid that exploded above Siberia in 1908 with the force of a hydrogen bomb might have killed millions of people had it exploded above a major city. 
Yet that asteroid was only about 200 feet in diameter. 
A much larger one (among the thousands of dangerously large asteroids in orbits that intersect the earth’s) could strike the earth and cause the total extinction of the human race through a combination of shock waves, fire, tsunamis, and blockage of sunlight, wherever it struck. 
Other catastrophic risks include natural epidemics (the 1918-1919 Spanish influenza killed between 20 million and 40 million people), nuclear or biological attacks by terrorists, certain types of lab accidents, and abrupt global warming. 
The probability of catastrophes, whether intentional or not, resulting from human activity appears to be increasing because of the rapidity and direction of technological advances. 
The fact that a catastrophe is unlikely to occur is not a rational justification for ignoring the risk of its occurrence. 
Suppose that a tsunami as destructive as the one in the Indian Ocean last year occurs on average once a century and kills 250,000 people. 
That is an average of 2,500 deaths per year. 
If such a toll could be substantially reduced at moderate cost, the investment would be worthwhile. 
Educating residents of low-lying coastal areas about the warning signs of a tsunami (tremors and a sudden recession in the ocean), establishing a warning system involving emergency broadcasts, telephoned warnings, and air-raid-type sirens, and improving emergency response systems would have saved many who were killed by the Indian Ocean tsunami. 
At the same time, the cost would have been well below any reasonable estimate of the average losses that can be expected from tsunamis. 
There are several reasons why such measures weren’t taken in anticipation of a tsunami on the scale that occurred. 
First, although a once-in-a-century event is as likely to occur at the beginning of the century as at any other time, it is much less likely to occur in the first decade of the century than later. 
Politicians with limited terms of office and thus foreshortened political horizons are likely to discount low-risk disaster possibilities, since the risk of damage to their careers from failing to take precautionary measures is truncated. 
Second, to the extent that effective precautions require governmental action, the fact that government is a centralized system of control makes it difficult for officials to respond to the full spectrum of possible risks against which cost-justified measures might be taken. 
Given the variety of matters to which they must attend, officials are likely to have a high threshold of attention below which risks are ignored. 
Third, where risks are regional or global rather than local, many national governments, especially in poorer and smaller countries, may drag their heels in the hope that larger and richer countries will bear the costs of addressing them. 
Knowing this, larger and richer countries may be reluctant to take precautionary measures, as this would reward and thus encourage “free riding.” 
Fourth, countries are poor often because of weak, inefficient, or corrupt government, characteristics that may disable them from taking cost-justified precautions. 
And the difficulty people everywhere have in thinking in terms of probabilities – especially low probabilities, which they tend to write off – weakens political support for incurring the costs of taking precautionary measures. 
An even more dramatic example of neglect of low-probability/high-cost risks is the danger of an asteroid strike, which is analytically similar to the menace of tsunamis. 
Indeed, in part because tsunamis are one of the risks of an asteroid collision, the Indian Ocean disaster has stimulated new interest in asteroid defense. 
Deflecting an asteroid from its orbit when it is still hundreds of millions of miles from Earth is a feasible undertaking. 
Nevertheless, in the United States, the National Aeronautics and Space Administration (NASA) spends only $4 million of its annual budget of more than $10 billion on mapping dangerously close large asteroids. 
At the current rate, NASA may not complete the task for another decade, even though such mapping is the key to an asteroid defense because it may give us years of warning. 
The fact that a disaster of a particular type has not occurred recently or even within human memory (or even ever) is a bad reason to ignore it. 
The risk may be slight, but if the consequences should it materialize are great enough, the expected cost of disaster may be sufficient to warrant defensive measures. 

Is Anti-Semitism Curable? 
LONDON – Protesters in the United Kingdom are sounding the alarm over a perceived resurgence of anti-Semitism in politics. 
At the center of the crisis are revelations that Jeremy Corbyn, the leader of the Labour Party and an ardent critic of Israel, supported the artist of an anti-Semitic mural in 2012. 
But as the British public accuses the left-wing party and its boss of encouraging anti-Jewish sentiment, an important psychological question needs to be addressed: Can we really blame Corbyn for failing to identify the controversial mural for what it was? 
The answer may indeed be yes, but the reasons are complicated. 
Psychologists have long studied the effects of prejudice on the ability to identify bias in images. 
In 2008, a team of psychologists at Northeastern University discovered that people who are more prejudiced toward Jews are less accurate in discerning whether a photograph is of a Jewish or non-Jewish person. 
More broadly, the more accurate people believe they are at guessing elements of people’s identity – for example, their sexual orientation – the less accurate they actually are. 
Not long ago, the opposite was true. 
In the decades immediately after World War II, when anti-Semitism was even more widespread than it is today, people with deeper prejudices were actually more accurate in identifying Jewish people in pictures. 
What changed? 
One possible explanation is that today’s racism is more implicit, and that anti-Semitic biases operate at a subconscious level. 
People know that it is no longer socially acceptable to express racist views publicly, so they actively suppress those views. 
But what this suggests is that people may not be reliable reporters of what they really think; actions speak louder than words. 
Another theory is that increasingly multicultural societies have altered their members’ perception. 
People who are less prejudiced toward Jewish people will likely have more Jewish friends, and this familiarity makes it easier to identify someone as Jewish. 
This hypothesis is supported by the findings of a 2013 study that tested people’s ability to predict male sexual orientation by looking only at photographed faces. 
Strikingly, test subjects with gay male friends were significantly more accurate in predicting sexual preference than those unfamiliar with gay people. 
But, like the 2008 photo study of anti-Semitic views, the ability to predict sexual preference appears to operate in the subconscious. 
Finally, a third theory suggests that racial bigots in past studies were better at identifying Jewish people simply because they selected “Jewish” for more faces. 
Perhaps fear led them to identify more Jews than were actually present. 
Although the causes of anti-Semitism’s evolution remain unclear, psychologists contend that, today, people who are openly anti-Semitic may be more psychologically different from the rest of the population than they were in the past. 
Simply put, the “norm” is now to be more tolerant. 
Given this, researchers are wondering whether treating or eliminating racial bias today would require something more akin to medical or psychological treatment, as opposed to political debate (which may have had a better chance of working in the past). 
Here, the science is encouraging. 
In 2012, researchers at the University of Oxford found that when white test subjects were administered propranolol, a beta blocker used to treat anxiety and hypertension, they experienced a temporary suspension of racial bias. 
More study is needed to corroborate the findings; the drug had no measurable impact on religious, sexual, or other forms of prejudice. 
Nor did the Oxford experiment gauge whether a single dose of propranolol permanently abolished racial bias, or if regular doses could offer a more permanent “cure.” 
But other studies have confirmed that medication can alter a person’s racial prejudice. 
For example, in 2011, psychologists at the University of Amsterdam who study Dutch attitudes toward Arab and German minorities discovered that the hormone oxytocin – which has been connected to feelings of trust and cooperation – can actually increase racial bias and xenophobia. 
The authors said the findings “call into question the view of oxytocin as an indiscriminate ‘love drug’ or ‘cuddle chemical,’” and raise new questions about how humans might manage “intergroup conflict and violence.” 
Today, most people with racist views recognize that their ideas are outside the mainstream. 
But, as the recent uproar in Britain demonstrates, that does not mean bigotry has been erased. 
Rather, it means that modern racism often presents in subtler but equally powerful ways. 
Doctors know that misprescribing or overprescribing antibiotic creates more resistant microbes. 
Treating modern racism is similar. 
The psychological nature of anti-Semitism is changing, and research suggests that as it does, bias will be driven even deeper underground. 
If the psychology and fear surrounding anti-Semitism have indeed shifted, then how we identify and address it must evolve as well. 
That does not mean slapping a Band-Aid on it while treating the symptoms; it means truly addressing the underlying causes of unconscious prejudice. 

Back to Socialism 
LONDON – The remarkable thing about Jeremy Corbyn, the hard-left outsider who stunned the British establishment by capturing the leadership of the Labour Party, is not his alleged lack of patriotism. 
Whether he wishes to sing God Save the Queen at public events seems a rather trivial matter. The remarkable thing about his brand of leftism is how reactionary it is. 
Corbyn is an old-fashioned socialist who would like to soak the rich and put transport and utilities back under state control. 
His rhetoric of class war suggests a complete break with mainstream social democracy. 
Postwar European social democracy was always a compromise with capitalism. 
Left-wing ideology, especially in Britain, owed more to certain Christian moral traditions (“more Methodist than Marx”) than to any political dogma. 
Labour leaders like Clement Attlee, the first prime minister after World War II, were not opposed to a market economy; they just wanted to regulate markets in such a way that might best serve working-class interests. 
During the Cold War, social democracy was Western Europe’s egalitarian alternative to communism. 
Attlee, for one, was ferociously anti-communist. 
Lip service was paid at Labour Party conferences to the old symbols of socialism. 
Party leaders sang the Internationale with teary-eyed nostalgia. 
And, until Tony Blair struck it out in 1995, Clause 4 of the party’s constitution still promised “common ownership of the means of production” and “popular control” of industry. 
(Corbyn might well try to restore it.) 
But when it came to national government, ideological socialists were swiftly shunted aside to make way for more pragmatic operators. 
By the time Blair, following the example of his friend US President Bill Clinton, became Prime Minister by promoting the “third way,” socialism seemed to be dead and buried. 
Clinton and Blair – who came to power after that other odd Anglo-American couple, Ronald Reagan and Margaret Thatcher, had started to tear at the fabric of social democracy – made compromises of which Attlee would not have dreamed. 
The genius of Clinton and Blair was to combine genuine concern for the underprivileged with an unseemly devotion to the fat cats of Wall Street, the City of London, and some murkier places, too. 
Blair vacationed with Silvio Berlusconi, Italy’s plutocrat prime minister. 
Clinton used his presidential pardon to allow wealthy cronies to elude justice. 
And after leaving office, both men swiftly put their reputations in the service of their bank accounts. 
One might say that by compromising with capitalism too much, the third-way leaders compromised themselves. 
This is one reason why, under Corbyn, the hard left struck back and finally managed to wrest power from the compromisers. 
Especially to many young people, Corbyn is the longed-for man of conviction, the “authentic” voice of the people. 
Never having had much of an ideology in the first place, the soft-left social democrats, faced with a real socialist, ended up having nothing much to say. 
Could Hillary Clinton be similarly punished in her quest to be the Democratic Party’s nominee in next year’s US presidential election? 
Could the center left, which she represents, lose control of the party? 
In recent opinion polls, her main opponent, Bernie Sanders, who proudly calls himself a socialist, is edging ever closer to Clinton – and is actually leading her in some states. 
Like Corbyn, he has the air of authenticity – a politician who says what he thinks, unlike the scripted professionals of mainstream Washington. 
And yet there is no Democratic left, including Sanders, that is remotely as hard as the Corbynites. 
Compared to Corbyn, Sanders is a moderate. 
More important, what a militant faction did to the Labour Party is being done now not to the Democrats, but to the Republicans. 
Indeed, the Republican rebels look far more extreme than Corbyn, let alone Sanders. 
The Republican Party is in danger of being taken over by fanatics who see compromise in government as a form of villainous treachery. 
Forcing the archconservative John Boehner to quit as Speaker of the House for being too soft was an act of war by Republicans against their own party. 
Most aspiring Republican presidential candidates are not only extreme, but also more reactionary than Corbyn. 
Their favored slogans – “Take back our country” or “Make America great again” – invoke a past when neither the New Deal nor the expansion of civil rights disturbed the peace of upstanding white Christians. 
These hard-right Republicans, too, prize “authenticity” – indeed, they prize it above anything else (hence the appeal of Donald Trump). 
And they, too, are in angry revolt against party leaders, who are believed to have compromised themselves simply by trying to govern. 
It is too soon to predict who will win the Republican nomination. 
It is unlikely, but possible, that a hardliner like Ted Cruz, or a rank amateur with deep religious convictions, such as the neurosurgeon Ben Carson, will capture the party. 
But capturing the leadership of a political party is still easier than being elected US President. 
Few people expect Corbyn to win a national election in Britain, either; that is why his parliamentary party is in such despair. 
So Clinton, despite her so far lackluster campaign, and despite a popular perception of inauthenticity, even outright shiftiness, will probably hang on to her party and scrape through in the end. 
She will prevail not because her views look any more convincing than those of the center-left professional pols of the Labour Party, but because her opponents look so much worse. 

Corporate Crimes and Punishments 
Capitalism will not take root around the world if corruption defiles it. 
Socialism collapsed a decade ago because it became discredited in the eyes of the peoples who lived under it. 
Now capitalism is receiving severe rebukes, with its critics given powerful evidence that they are right in seeing it as a system that works for insiders and their cronies. 
After all, isn't Enron's bankruptcy a crystal-clear example of inmates controlling their guards? 
If America wants to lead capitalism's global march, it must exorcize a growing culture of corporate crony capitalism. 
The choice, of course, is no longer between socialism and capitalism. 
Socialism became a mess as great expectations of a workers' paradise were bogged down in bureaucracy. 
Without incentives and radical decentralization, economic progress is simply a dream. 
So the past century demonstrated time and again, which is why China - nostalgic egalitarian rhetoric notwithstanding - opted for all-out capitalism under its post-Mao rulers. 
Did Deng Xiao Peng foresee the vast inequalities that would result? 
Possibly. 
But Deng wanted higher standards of living for every Chinese, even if inequality resulted. 
To function and remain socially acceptable, however, capitalism must be as clean as possible. 
Everybody may not get a chance to become rich in a capitalist system, but the system should not be perceived as rigged in ways that allow only insiders to get rich while everyone else pays the bill. 
If inequality is one negative aspect of radical capitalism - to some extent mitigated by the public sector - the other one is the potential corruption of capitalist institutions: call it the Enron syndrome. 
When American Congressional committees weaken regulatory oversight of their business friends; when accounting firms surrender their independence because of the lure of mega-contracts; when corporate boards can't say no because the fees of board members are stunningly large relative to the effort; and when managers live in a frenzy of self-dealing, the stage is set for capitalism to lose its reputation. 
That clearly is the case of late in America. 
Capitalism involves a delicate problem of agency and trust; giving managers the green light for entrepreneurship is not enough to make certain that the interests of investors are safeguarded; nor is it enough for stock markets to price securities realistically. 
While evidence about the Enron debacle is not fully in, it is fair to say that Enron is both a great moral scandal and a blot on capitalism. 
It throws a stark light on the flaws of capitalism's core institutions. 
The witch-hunt underway - with politicians, regulators, and even the White House seeking to save their political skins - is, indeed, essential. 
Inevitably, it contains populist, anti-business sentiments. 
At times, it almost looks as if anti-globalization protesters are taking over. 
But in the swing of the pendulum the excesses of yesterday will incite greater scrutiny and a tougher rulebook for business in the future. 
All for the good. 
Capitalism is a public trust; it works if everybody has a fair chance and corporate theft receives highly visible punishments. 
The ritual witch-hunt now underway may be the only way for bosses to regain their bearings. 
For the only way capitalism can be made acceptable, and hence deliver growth and prosperity around the world, is to practice this rite of exorcism in public. 
Enron bosses will be humiliated; other bosses will (in private) shake their heads at the scale of these purges. 
They will argue that all the Congressional and newspaper investigations are excessive; that we should put Enron behind us and move on to the business of making money again. 
But to act in such a way will leave those doubtful of capitalism in even greater doubt. 
Such, indeed, would create the ultimate moral hazard - a world of corporate crime without punishment. 
Some will say that it will be impossible to build good boards of directors if members can be sued; some will ponder what will happen to stocks if hard questions are asked about financial reporting by companies. 
A clean sweep, however, will ultimately be good for stocks and certainly much better than cover-up and lingering doubts about what the books really look like. 
Capitalism, indeed, has always needed its morality tales. 
But distinctions must be made. 
The failure of Long Term Capital Management a few years ago provided a lesson about risk management and the need to not be dreamy-eyed about a string of huge returns. 
Nothing remotely illegal happened then; there was no government bailout nor facilitation of management's errors. 
Investors simply made a mistake out of greed and lost, big time. 
By contrast the Enron affair involved impropriety and perhaps criminal conduct of just about anyone coming close to management. 
Moreover, it is not yet clear whether or not top Enron managers won't walk away with a bundle of cash while the company's workers lose their retirement assets. 
Chinese capitalism, too, is rife with corruption and self-dealing. 
The Chinese government's reaction - every so often - is to behead a bunch of obvious and odious villains. 
That may seem an extreme solution for Western democracies. 
But to imprison corrupt managers, regulators and politicians is an essential element of a functioning and respected capitalism. 
Because capitalism redistributes aggressively, it is vital that there be trust, transparency and accountability. 
After Enron - standing not just for a single event but a slippage in corporate culture altogether - we will only regain our bearings through the imposition of severe punishment for corporate crimes. 

The Promise of Middle East Sovereign Wealth Funds 
DUBAI – A decade ago, sovereign wealth funds (SWFs) from the Middle East and North Africa (MENA) were the behemoths arriving on the global financial scene. 
Funds like the Qatar Investment Authority (QIA) grabbed headlines as they gobbled up assets – including listed securities, private companies, and real estate – primarily in Europe and North America. 
But the world in which SWFs invest has changed, and they must change with it. 
Over the last 20 years, as strong hydrocarbon revenues have enabled Middle Eastern SWFs to proliferate and grow, a variety of labels have been created to categorize them, including stabilization funds, future generation funds, and investment funds. 
But most sovereign investors – which also include sizeable social security and pension funds, such as Saudi Arabia’s General Organization for Social Insurance and Public Pensions Agency – belie clear-cut labels. 
Few Middle Eastern SWFs are pure financial investors. 
Because many of them held stakes in state-owned enterprises before becoming financial investors, their holdings tend to be diverse, and often include those same SOEs, as well as real estate and equity stakes in listed and unlisted companies. 
These holdings also include a growing volume of assets in the developed economies – a reality that has raised eyebrows in Europe and the United States. 
To allay concerns over SWFs’ potential political considerations, the International Monetary Fund convened 26 SWFs – over 30% of them from the Middle East – in 2008 to develop the Santiago Principles. 
The goal was to promote transparent and sound governance of SWFs, ensure that they adequately account for investment risk, and help to maintain global financial stability. 
But, since then, the situation has changed substantially. 
In the aftermath of the 2008 global financial crisis, investment capital became far scarcer and efforts to ensure SWF transparency and accountability gave way to competition for their capital. 
Far from a source of apprehension, SWFs have become beneficiaries of fiscal incentives designed to encourage investment in Europe. 
At the same time, however, Middle Eastern SWFs have confronted new constraints on their international purchasing power, owing to fiscal austerity at home, induced by falling hydrocarbon prices. 
Domestically, governments have largely abandoned their efforts to divide sovereign holdings into multiple “pockets” that reflected the funds’ diverse investment objectives and wider political considerations. 
The June 2016 announcement of a merger between Abu Dhabi’s International Petroleum Investment Company and Mubadala Development Company – two entities that had quite different objectives and strategies – heralded another change. 
Consolidation of sovereign assets became the name of the game. 
Saudi Arabia’s Public Investment Fund (PIF), for example, is now expected to become an almost $2 trillion investment vehicle, with holdings including SOEs and financial investments. 
Even prior to this, SWFs in the MENA region held substantial assets in public equity markets at home and abroad. 
According to a recent analysis by GOVERN (of which I am Managing Director), the state is a significant shareholder in 89 of the region’s 100 largest listed firms – and a majority shareholder in 34. 
Sovereign investors, including SWFs, are the largest institutional investors in most Arab stock exchanges, holding over 40% of the total market capitalization in the region. 
As SWFs consolidate their assets, their attention will likely be focused on domestic exchanges. 
After all, any further sales of state-owned assets will be conducted through public equity markets, owing to the interest of the region’s policymakers in developing local capital markets and improving the transparency of the privatization process. 
In times of crisis, SWFs could also be mobilized to inject assets into domestic markets to restore market stability. 
Tellingly, the mandate of the Turkish sovereign fund includes deepening the domestic capital market. 
The time has come to consider more carefully the impact of SWFs on companies’ governance and performance. 
That issue was not addressed in detail by the Santiago Principles, which focused on SWF transparency. 
Nor has it been adequately addressed by domestic capital-market regulators, who have focused on developing rules and regulations for listed companies, not the investors who might act as their owners. 
Middle Eastern SWFs, as owners of full and partial SOEs, are often active shareholders – and sometimes even manage companies directly, side-stepping boards in the name of greater decision-making efficiency. 
Yet they are not using their influence to improve governance or support sustainability across the board. 
As financial investors, SWFs are not active; many do not even vote their shares. 
This contrasts sharply with the approach of their global peers like Norway’s Norges Bank, which in recent years has fought poorly governed firms and divested from polluting industries like coal. 
Middle Eastern and North African SWFs’ reluctance to engage in the governance of their portfolio investments abroad may be a legacy of the “investment protectionism” of the Santiago Principles days. 
But, in the world of today, investors need to change their ways, engaging more effectively with the companies, both at home and abroad. 
Otherwise, they may face serious financial and reputational risks, exemplified in QIA’s losses following Volkswagen’s 2015 emissions scandal. 
The importance of engagement is also highlighted by the terms of recent acquisitions, such as PIF’s purchase of a stake in Uber, which gave it the right to nominate a board member to represent its interests. 
It is with regard to domestic firms that Middle Eastern SWFs have the most urgent responsibility, especially considering that most other institutional investors in these markets are also inactive when it comes to corporate governance. 
As some of largest public equity investors in the region, SWFs should be encouraged to take more responsibility for their investments. 
Indeed, the only way SWFs can safeguard wealth for future generations – fulfilling the purpose for which they were established – is to participate meaningfully in corporate governance. 

Redefining Business Competence 
DURHAM, NORTH CAROLINA – One of the most interesting parts of my job as a business school dean is engaging in candid conversations with leaders across industries. 
A few years ago, I started hearing a troubling refrain: business leaders are feeling the type of public disdain once reserved for politicians. 
The problem is one of trust – or lack thereof. 
The 2014 Edelman Trust Barometer reveals that less than one-fifth of the global public believes that business and government officials will tell the truth when confronted with a difficult issue. 
That public sentiment is affecting business worldwide. 
The Duke University CFO Magazine Global Business Outlook Survey found that nearly 60% of chief financial officers in the United States believe that a lack of public trust has harmed the business environment. 
Those percentages are even higher in other parts of the world. 
Given the constant stream of security and data breaches and allegations of financial manipulation involving some of the world’s most respected banks, who can blame the public for feeling this way? 
Now, more than ever, we need leaders who can regain the public’s trust. 
To do that, we must redefine what it means to be a competent business leader. 
Traditionally, society has measured business competence by a person’s intellectual ability to examine problems broadly and deeply. 
But, in order to seize global opportunities today, we need to emphasize a new dimension: the ability to create a shared set of values and foster a culture that embraces those beliefs. 
Doing so requires taking three, sometimes uncomfortable, steps. 
First, business leaders must overcome their fear of learning from others. 
That sounds simple, but how many executives can admit that they don’t know everything or that they aren’t the smartest person in the room? 
Many business leaders talk a good game about diversity, but surround themselves with people who are just like them. 
Working closely with others who think differently can be scary and frustrating. 
But the best leaders have the courage to encourage authenticity in both themselves and others. 
Second, embrace the ambition of others. 
The downfall of many business leaders in recent years has been greed and selfish ambition. 
Great leaders are other-directed instead of self-focused. 
They adopt a “your success is my success” mentality. 
This attitude goes a long way toward developing trust among team members and helps foster strong commitment to a common vision. 
It also requires leaders to trust others that they will not abuse the faith placed in them. 
Finally, business leaders must value collaboration – and mean it. 
Leaders who overcome fear and frustration, embrace the ambition of others, and possess a strong character and sense of purpose are likely to build diverse teams whose members share an identity and common goals but still represent themselves authentically. 
Research has shown that such teams outperform others, which means that this approach can lead to a tremendous competitive advantage. 
In short, collaboration not only matters; it wins. 
Imagine the immense potential we would have to solve some of the world’s toughest challenges if business leaders adopted this strategy. 
Consider the global threat posed by Ebola. 
Efforts are underway to research, manufacture, and distribute experimental drugs that could treat the disease. 
But until now drug companies had largely ignored Ebola, because there appeared to be little profit in developing a drug for populations that could not afford to pay for it. 
The New York Times reported last month that United States officials are planning to scale up the production of one experimental drug, but it is still not likely to meet demand. 
If some of the brightest minds in business and health care had found a way to encourage the production of an Ebola drug before the outbreak, thousands of lives might have been saved. 
The type of leadership that I am advocating poses no threat to a company’s bottom line. 
On the contrary, it is the starting point for scaling a business to its full potential. 
As former Procter & Gamble CEO and current US Secretary of Veterans Affairs Bob McDonald is fond of saying, leaders have a responsibility to make sure that their organization can “do well and do good.” 
Business can be the common thread that weaves positive change throughout the world. 
In order to reach that goal, we need business leaders with the vision, skills, and commitment to make a profit and a difference. 
A new standard for business competence that incorporates more than the bottom line will go a long way toward winning back the public’s trust. 

Corporate Liability for Human Rights 
Wittingly or unwittingly, individuals do things that injure other individuals. 
For society to function, it must provide individuals with incentives not to do so, through rewards and punishments, regulations and fines. 
By polluting the air, one harms anyone who breathes. 
The legal system has an important role here. 
If I injure you, you should be able to sue me. 
Of course, individuals have a moral responsibility not to injure others. 
Indeed, this is perhaps the central moral imperative--do unto others as you would have them do unto you, and do not do unto others as you would not have them do unto you. 
Immanuel Kant, with his categorical imperative, provided the philosophical foundations for those who wanted an alternative basis for ethics than that provided by religious aphorisms. 
But modern society cannot and does not simply rely on individuals doing the "right" thing. 
It provides carrots and sticks. 
Motivating corporations to do the right thing is even more difficult. 
After all, corporations don't have a conscience; it is only the conscience of those who run the corporation, and as America's recent corporate scandals have made all too clear, conscience often takes a backseat to profits. 
America's legal system makes sure that firms that produce a defective, and particularly an unsafe product, are held liable for the consequences. 
Firms are in a far better position than consumers to assess the safety of their product; we all benefit knowing that our legal system has provided corporations with incentives to pay attention to the safety of what they produce. 
Similarly, environmental laws make firms liable for their toxic wastes, and many countries, including the US, have enshrined the principle that "polluters pay," that is, companies must pay for the damage they cause. 
It is a matter both of incentives and social justice. 
In other realms, however, we are only beginning to think about what corporate responsibility should mean for our legal system. 
In World War II, German corporations were all too willing to profit from the slave labor of those in concentration camps, and Swiss banks were happy to pocket the gold of Jewish victims of Nazi terror. 
Recent suits have made them at least pay back some of what they took. 
More recently, oil companies have demonstrated little conscience in providing money that feeds guerrilla movements--so long as their own interests are preserved. 
When, in Angola, one brave firm, BP, wanted to do the right thing by trying to make sure that oil royalties actually go to the government, rather than to corrupt officials, other oil companies refused to go along. 
In the Congo, the profits of mining companies helped maintain the late President Mobuto of Zaire, now the Congo, in power for decades--enabling him to pillage his country, allegedly facilitated by the secret bank accounts that are the specialty of countries like Switzerland, the Cayman Islands, and Cyprus. 
World Bank and IMF money also helped sustain Mobuto. 
These institutions knew, or they should have known, that their loans and aid was not going to help the country's desperately poor people. 
It would only leave them deeper in debt. 
Today, we believe that individuals, corporations, and institutions should be held accountable for their actions. 
But what should that mean, if it is to be more than rhetoric? 
For a start, it means debt forgiveness: international lenders may not be able to compensate fully the damage caused when their money helps maintain odious autocrats in power, but at least the victims should not be burdened by a disastrous financial legacy. 
In South Africa, it was arguably the economic pressure brought by sanctions which eventually brought down the racist Apartheid system; but by the same token, it was economic support from the outside--including loans from multinational banks--which kept the system going for so long. 
Much the same may be true about Iraq during the 1990's. 
Those who contributed to maintaining Apartheid--and especially those who did not adhere to the sanctions after the UN approved them--should be held accountable. 
The Truth and Reconciliation process may or may not work to heal South Africa's wounds, but if corporations are to be provided with incentives to do the right thing, they must now pay the price for the profits that they reaped from that abhorrent system. 
If corporations had a conscience, they would act, without being forced to do so: they would estimate their profit from the Apartheid system and pay it back to the country, with interest. 
For Apartheid's demise has not solved the country's deep economic problems, including an unemployment rate in excess of 25%. 
So far, there appears to be no rush to make amends in South Africa, and, as elsewhere, the evidence is meager that the corporate conscience runs very deep. 
But it is to be hoped that the West's legal systems will provide an alternative recourse, one that will not only partially redress past injustices, but provide incentives for corporations to think twice before profiting from brutal regimes in the future. 


Corrupting the Fight Against Corruption 
At its recent annual meeting, World Bank officials spoke extensively about corruption. It is an understandable concern: money that the Bank lends to developing countries that ends up in secret bank accounts or finances some contractors’ luxurious lifestyle leaves a country more indebted, not more prosperous. 
James Wolfensohn, the Bank’s previous president, and I are widely credited with putting corruption on the Bank’s agenda, against opponents who regarded corruption as a political issue, not an economic one, and thus outside the Bank’s mandate. Our research showed systematic relationships between corruption and economic growth, which allowed us to pursue this critical issue. 
But the World Bank would do well to keep four things in mind as it takes up the fight. 
First, corruption takes many forms, so a war on corruption has to be fought on many fronts. You can’t fight the diversion of small amounts of money by weak and poor countries while ignoring the massive diversion of public resources into private hands of the sort that marked, say, Russia under Boris Yeltsin. 
In some countries, overt corruption occurs primarily through campaign contributions that oblige politicians to repay major donors with favors. 
Smaller-scale corruption is bad, but systemic corruption of political processes can have even greater costs. Campaign contributions and lobbying that lead to rapid privatizations of utilities – before appropriate regulatory frameworks are in place, and in a manner that produces only a few bidders – can impede development, even without direct kickbacks to government officials. 
Life is never black and white. 
Just as there is no “one size fits all” policy for economic development, there is no such policy for fighting corruption. 
The response to corruption needs to be as complex and variegated as corruption itself. 
Second, it’s fine for the World Bank to deliver anti-corruption sermons. 
But policies, procedures, and institutions are what matter. In fact, the Bank’s procurement procedures are generally viewed around the world as a model to be admired. 
Indeed, some countries with large dollar reserves – hardly in need of World Bank credit – borrowed from the Bank at far higher interest rates than they were getting from the United States, believing that these procedures would help ensure high-quality projects free of corruption and become standard in other areas. 
But success in fighting corruption entails more than just good procurement procedures (avoiding, for instance, single-source non-competitive bidding). 
Many other policies and procedures can be enacted that reduce incentives for corruption. 
For example, some tax systems are more corruption-resistant than others, because they curtail the discretionary authority of tax officials. 
Third, the World Bank’s primary responsibility is to fight poverty, which means that when it confronts a poor country plagued with corruption, its challenge is to figure out how to ensure that its own money is not tainted and gets to projects and people that need it. 
In some cases, this may entail delivering assistance through non-governmental organizations. But seldom will it be the case that the best response is simply to walk away. 
Finally, while developing countries must take responsibility for rooting out corruption, there is much that the West can do to help. At a minimum, Western governments and corporations should not be complicit. 
Every bribe that is taken has a payer, and too often the bribe payer is a corporation from an advanced industrial country or someone acting on its behalf. 
Indeed, one reason for the so called “natural resource curse” ­– the fact that resource-rich countries do not, on average, do as well as resource-poor countries – is the prevalence of corruption, too often aided and abetted by companies that would like to get the resources they sell at discount prices. 
The US under President Jimmy Carter made an important contribution in passing the Foreign Corrupt Practices Act, which made bribery by American companies anywhere in the world illegal. 
The OECD’s Convention on Bribery was another step in the right direction. Making all payments to governments transparent would bring further progress, and Western governments could encourage this simply by tying this requirement to tax deductibility. 
It is equally important to address bank secrecy, which facilitates corruption by providing corrupt dictators with a safe haven for their funds. 
In August 2001, just before the terrorist attacks on America, the US government vetoed an OECD effort to limit secret bank accounts. 
While the government has since reversed its stance on bank secrecy for terrorists, it has not done so for corrupt officials. 
A strong stand by the World Bank would enhance its credibility in the war on corruption. 
Those who criticize the Bank’s stance on corruption do not do so because they favor corruption. 
Some critics worry about corruption in the corruption agenda itself: that the fight will be used as a “cover” for cutting aid to countries that displease the US administration. 
Such concerns have found resonance in the seeming incongruity of the Bank’s tough talk on corruption and simultaneous plans to expand lending to Iraq. 
No one is likely to certify that Iraq is corruption-free – or even ranks low on corruption internationally. 
The most strident criticism, however, comes from those who worry that the World Bank is straying from its mandate. 
Of course, the Bank must do everything that it can to ensure that its money is well spent, which means fighting both corruption and incompetence. 
But money itself will not solve all problems, and a single-minded focus on fighting corruption will not bring development. 
On the contrary, it might merely divert attention from other issues of no less moment for those struggling to lift themselves out of poverty. 


Corruption and Liberalization 
Corruption is one of Africa's endemic problems. 
Indeed, it is a key issue in Nigeria's approaching presidential election, given President Obasanjo's high-minded but failed struggle to curb it. 
But the winds of globalization were supposed to blow away the cobwebs of bribery and inefficiency. 
Harvard political scientist Devesh Kapur suggests why this is not happening. 
Evict the state from direct economic activity, curb its discretionary powers, and both economic efficiency and governance will improve. 
Developing countries have been nagged about this for years. 
By opening economies to international competition and investment, governments will supposedly become disciplined because they will be watched over by international financial capital. 
There is undoubtedly merit in shrinking the size of government and making it less intrusive. 
Uganda is a case in point that this can bring early benefits. 
Yet official corruption has clearly not declined in the way liberalization's promoters said it would, nor has governance improved markedly for the better in most countries. 
Why? 
First, opening an economy bids up the price of talent. 
In India a decade ago, students who chose careers in public service could expect lifetime earnings of between a fifth to a third of their private sector counterparts. 
Today, they get less than 10%. 
The highest level civil servant or chief justice of the Supreme Court at the end of their careers is nowadays paid barely half the salary of graduates of India's elite educational institutions, who are snapped up by the global economy. 
Of course, talent should go where it is most productive, and higher private-sector wages reflect the potential for higher productivity. 
But the lure of high private-sector wages has consequences for the quality of government, as South Africa is discovering. 
Second, exposing the arrogance and venality of the state was no doubt necessary to enact liberal reforms. 
But these critiques became self-inflicted prophecies. 
Treating the state as a house of ill repute makes it difficult for governments to recruit honest, capable individuals. 
A well-educated person seeking a career in government can be seen not only as a fool, but as corrupt as well-hardly inspirational! 
The quality of any organization, private or public, depends on the quality of the individuals it attracts. 
Third, although curtailing the state's role in allocating goods and services that can be provided more efficiently by markets may reduce corruption, it is unrealistic to think that the number of fields in which the state deploys its regulatory powers can be reduced greatly. 
In a modern economy the state is active in many non-economic areas, from food safety to building regulations. 
Although official corruption is greater when the state is involved in economic activities, shifting the focus of state regulation appears to change only the magnitude of corruption. 
The incidence of corruption could well increase. 
But the weakest assumption about the benefits of a small state centers around the pace at which institutions develop. 
The centrality of institutions in fostering "good governance" is underscored almost everywhere. 
Unfortunately, globalization/liberalization and institutional development often work at cross purposes because of their different time horizons. 
Indeed, the key factor distinguishing institutional development in the West from that in developing countries is time. 
The bedrock economic, social, and political institutions in Western societies took decades, if not centuries, to develop. 
Exceptions to this time frame exist-Singapore is one example-but exceptions prove a rule, they do not negate it. 
Institution building is painful and laborious ("a slow boring of hard boards," as Max Weber called it), as evidenced in the recurrent crises faced by African countries from Nigeria to Botswana. 
Globalization accelerates the pace of economic and social change in developing countries, which means that new institutions must adapt even before they fully take root. 
The temporal dimension of institution building and the issue of human capital are also linked. 
The reality of successful institution building is that key individuals are critical in the early stages, even if successful institutions may later make particular individuals less indispensable. 
But globalization makes it more difficult for developing countries to retain the talented individuals needed for institutional development, because the wages of talented people are set globally; many states, if not most, simply can't afford to pay what it takes to create the institutions they need. 
In fact, data on emigration and inequality suggest that developing countries with lower levels of inequality are threatened by "human capital flight," as thousands of their most talented people remain abroad after studying at elite universities-a bane across Africa. 
So poor countries must either suffer the loss of people essential to their institutional development or tolerate higher levels of inequality, with the political and economic consequences that follow. 
Some of these shortcomings may be improved by reducing the state even more through privatization and out-sourcing. 
States could, in theory, reinvent themselves as the political equivalent of Nike-minimizing in-house activities by contracting out ever more of their functions to providers in the global market. 
Such out-sourcing may be possible and, to some degree, necessary. 
But there are limits to this. 
As beguiling as the reforms now being promoted by international organizations sound, countries must be wary of taking short cuts in constructing their institutions. 
The path to good governance is more painstaking and bumpier than anyone believed when globalization and liberalization became popular twenty years ago. 
Mimicking simplistic fashions is only likely to make the path longer. 

Corruption and Occupation 
TEL AVIV – Police investigations, commissions of inquiry examining the errors committed during the Lebanon war of 2006, repugnance at former President Moshe Katsav’s alleged sex crimes, and now Prime Minister Ehud Olmert’s announcement that, with charges of corruption swirling about him, he will resign in September: all of this suggests profound wounds in Israel’s moral tissue. 
Old Israelis like myself are stupefied by the scope and scale of today’s corruption and the multiplying investigations. 
Is corruption something that has always existed here but was somehow hidden until now? 
Are we learning of it because our prosecutor and police are bolder and better equipped nowadays? 
I do not believe that corruption is coming to light just because law enforcement is somehow better, or because citizens, like the presidential staff who accused President Katsav of sexual crimes and harassment, are more courageous. 
What is coming to light is a much deeper evil, a loss of values within Israeli society and its government, such as never existed before. 
This moral deterioration is most prominent in the behavior of today’s accused, who are much more impudent and aggressive than in the past. 
I remember how in the 1970’s, when suspicion of corruption arose with respect to a Labor Party minister, the minister took his own life. 
So did a director of a great bank, a brilliant economist, when he was suspected of financial crimes. 
When Pinkhas Sapir, Prime Minister Golda Meir’s legendary finance minister died, all that he owned was a modest apartment in Tel Aviv and some small savings. 
David Ben Gurion, Israel’s founder and most prominent political personality, spent the last 11 years of his life living in a little wooden house in the desert kibbutz Sde Boker. 
Today, that house’s extreme modesty still surprises visitors. 
Former Prime Minister Menachem Begin also lived until his death in a simple apartment in Tel Aviv. 
Not the smallest shadow of the slightest suspicion of corruption ever disturbed his peace. 
True, corruption has also become more common in other countries in recent years, and many democracies are stained by links between politics and finance. 
Economic interests are supplanting ideology as the motor of politics, and money serves as the key instrument in elections. 
But how is it that Israel, which only a few years ago was hardly touched by fraud and corruption, is now swept by them? 
The recent episodes of corruption, I believe, are rooted in the division, beginning in 1967, of two altogether distinct sets of norms and values. 
On the one hand, the moral and jurisdictional principles of the democratic state have continued to be applied in Israel in accordance with the tradition of the rule of law. 
On the other hand, in the Palestinian territories, a new system of values has been progressively established. 
These two systems operate side by side, but the border that separates them has gradually become more porous, and the open breaches in it have become ever greater. 
Unlike colonial states, in which colonizers came from distant metropolises (and only in small numbers) the Palestinian territories are just across the border from Israel. 
In the West Bank the organs of jurisdiction operate in a completely different way. 
Palestinian lands are illegally confiscated. 
Jewish settlers act outside of the law and commit provocative acts harming Palestinians, rarely incurring any penal sanctions. 
Injustice and exploitation are an everyday occurrence, justified by references to security or the ideology of Greater Israel. 
The boundaries between the two types of legalities could not remain impenetrable forever. 
Little by little, the state of occupation, which should have been temporary, became a stable reality, and the policy of creating Israeli settlements in the heart of the Palestinian population strengthened the connection between Israel and the occupied territories. 
The norms of a colonial and militarist regime have begun to infiltrate the governing organs of Israel’s democracy, perverting their proper activities. 
Politicians, functionaries, army officials – usually coming from the right – introduced into Israeli political life the disgraceful norms in force in the occupied territories. 
So corruption has grown. 
Fortunately, Israel’s judicial system remains independent and rests on foundations of proven integrity. 
The presence of many women in the magistrature and the police has also contributed significantly, in my view, to reinforcing the system. 
But when inadmissible norms become tolerated in silence, even the strongest juridical system becomes destabilized. 
Nor should we forget that the global economy, with which Israel is deeply integrated, creates infinite and complex opportunities for financial crimes. 
In these conditions, a strong judicial system and police force do not always suffice to contain corruption. 
The support of public opinion is also needed. 
I have the impression that the latest disturbing episodes of corruption among politicians and state functionaries have awakened Israel’s citizens from their stupor. 
They are now demanding that the rule of law and justice return to their central place in public life. 


How Corruption Impedes Universal Health Coverage 
ISLAMABAD – Half of the planet cannot access essential health services. 
For many people, paying to see a doctor, obtaining medications, seeking family-planning advice, or even getting immunized against common illnesses is a choice between staying healthy and slipping into poverty. 
And, more than ever, the health-care options that poor people do have are being degraded by a familiar foe. 
In many low- and middle-income countries, corruption, inadequate spending, and wasted resources pose enduring challenges for health-care systems. 
Growing up in Pakistan, I saw people forced to go to extremes to secure health care. 
For example, families might be forced to sell off cattle and other valuables to pay exorbitant medical bills. 
What is shocking is that the scourge of health-related poverty continues to claim victims today. 
Indeed, in some countries, people falling into poverty due to the high cost of health care is an everyday reality. 
On a recent trip to Africa, I heard a harrowing story of a hospital where women and their newborns are routinely held hostage – often for months – until families can find the money to settle their bills. 
According to researchers at the University of California, San Diego, corruption, waste, and unethical billing cost patients and health systems billions of dollars annually. 
In the United States, as much as 10% of public-sector spending on health care is lost to fraudulent billing, and tens of millions face significant economic barriers to health care. 
Clearly, improving health outcomes requires both increased government spending and an end to shady practices that siphon crucial resources from the health system. 
But how? 
Around the world, corruption and collusion are institutionalized in many health-care systems. 
Of the $6.5 trillion spent annually on healthcare, an estimated $455 billion is lost, misused, or stolen. 
Simply put, health costs are bankrupting some of the poorest people in the world, because many of the richest are lining their pockets. 
There is growing consensus that affordable, quality health care is a basic human right. 
The United Nations Sustainable Development Goals include universal health coverage as a target. 
And it is not only rich countries that have embraced this goal: from Thailand to Costa Rica to Rwanda, countries with mixed health systems and limited resources have dedicated funds and political capital to making universal health care a reality. 
Steps are being taken to help these countries succeed. 
Last year, Japan pledged $2.9 billion to help developing countries achieve universal health coverage. 
And the World Bank has indicated that a country’s ability to borrow from it could eventually be tied to investments in human capital, including health spending. 
But such gestures, however laudable – and overdue – will not be enough to remove the barriers to quality health services. 
Until corruption, theft, and wasteful and inefficient spending are addressed more vigorously, universal health coverage will remain aspirational. 
Fortunately, governments are increasingly committed to solving the corruption crisis. 
Tax evasion and fraud – both common crimes – are drawing closer scrutiny from law enforcement agencies. 
Tax evasion doesn’t just enable money laundering; it also robs the public sector of important resources. 
This is one reason why the UN has made reducing illicit financial flows a key component of achieving the Sustainable Development Goals. 
With broad agreement on the need to combat corruption in the health sector, the harder challenge will be developing workable remedies. 
National treasuries, finance ministries, and anti-corruption agencies need to strengthen their efforts to cooperate on prevention, detection, and enforcement. 
Improving transparency in financial systems could also help curb corruption, while civil-society groups, journalists, and patients should push for greater accountability from governments and medical providers. 
In the future, new technologies like data mining, artificial intelligence, and blockchain could offer new ways to detect wrongdoing in the health sector; these and other tools should be investigated fully. 
Expanding health-care access and protecting the sector’s finances are dual challenges that the international community must address together. 
There is an urgent need to act without delay. 
Rates of noncommunicable diseases like cancer, diabetes, and cardiovascular disease are increasing almost exponentially, and lack of access to quality care will add to many countries’ governance challenges. 
Development strategists understand that poor health is a harbinger of poverty and a barrier to eliminating it. 
Today, some 800 million people spend at least 10% of their household budgets on health, often going into debt to fund the treatment they need. 
The fact that so many people cannot afford to visit a doctor is truly shameful. 
The world needs universal health coverage; but to achieve it, the world’s health sector must undergo treatment of its own. 

Cory Aquino’s Legacy 
MANILA – The death of President Corazon Cojuangco Aquino – "Tita Cory" to most of the 92 million people of the Philippines – left behind a precious inheritance: a legacy of freedom that the Philippines came to share with oppressed peoples around the world. 
For her revolution was the first of the wave of “velvet revolutions” that liberated countless millions from Manila to Seoul to Johannesburg to Prague, Warsaw and Moscow. 
President Aquino’s "People Power" revolution, indeed, is among the proudest moments in my country’s history, and the distinctive contribution of our people to the saga of mankind's long struggle for freedom and dignity. 
Cory Aquino motivated ordinary Filipinos to peaks of daring and selflessness at a time when their spirit had almost been broken by a 14-year dictatorship. 
While her husband Ninoy Aquino lived, she – as the unassuming but caring housewife – was the stabilizing influence that tempered his dynamic personality. 
But after the assassination of Senator Ninoy Aquino in August 1983, she stepped resolutely into his role as political leader of my country’s democratic opposition to an entrenched despotic regime. 
Devoid of histrionics, without pretension – "simply by telling people what the dictator has done to this country" – she touched the hearts of freedom-loving Filipinos everywhere, the pain of the traumatic murder by the regime of her husband evoking in them memories of their own suffering and thwarted hopes. 
It was in her name that concerned Filipinos mobilized families and neighbors to confront the tanks, guns and barbed wire of the dictator's cohorts. 
And, in God's infinite wisdom, the militancy of common people burst forth in the non-violent revolution that overthrew Ferdinand Marcos. 
We the soldiers and policemen who backed her were reinforced by Cory's steel core of values and principles. 
In crisis after crisis during her presidency, she exemplified unwavering firmness in the democratic exercise of power as a servant-leader. 
Cory provided policy guidance as Commander-in-Chief, but trusted the Defense Department and Armed Forces to carry out their missions in the face of 9 coup attempts which were all frustrated. 
These mutinies were all death-dealing situations that threatened national stability, and yet she never flinched. 
Prayer and spiritual devotion were important components of Cory’s daily endeavors – and a major influence in her decision-making and personal relations. 
Her inner reserves of faith, indeed, kept her going through every hardship. 

The Toll of Putin’s Wars 
STOCKHOLM – Wars are expensive, as the Russian people are now learning. 
The Kremlin is pursuing military adventures in Eastern Ukraine and Syria, and though these conflicts are limited in scope, one wonders if the country can really afford them. 
As the world’s 11th largest economy, Russia can manage in the short term. 
But the long term is quite another matter. 
From 2008 to 2016, Russia increased its military expenditures from 3.3% of GDP – which roughly corresponds to the current US level – to 5.3%, according to the authoritative Stockholm International Peace Research Institute. 
According to the Russian government’s own fiscal statistics – which remain surprisingly open – its civilian expenditures in occupied Crimea come to around $2 billion per year. 
And while there are no public data on its presence in Eastern Ukraine, it is safe to assume that the costs there are roughly the same, in which case Russia is spending $4 billion per year – 0.3% of GDP – on these two operations alone. 
Yet, beyond military expenditures, Russia is also incurring the costs of lost trade and investment, as well as escalating sanctions, which are more than enough to condemn the country to stagnation for as long as its wars last. 
In July 2014, the United States and the European Union imposed sanctions on Russia’s finance, oil and gas, and defense technologies sectors, in response to its military aggression in Ukraine’s Donbas region. 
So far, these measures have been effective. 
In global finance, the dollar is king. 
And because every dollar passes through US banks, dollar transactions are ultimately subject to the US Department of the Treasury’s jurisdiction. 
Through financial sanctions, the US can thus starve Russia of foreign investment. 
In August 2015, the International Monetary Fund estimated that Western sanctions would immediately reduce Russia’s real (inflation-adjusted) GDP by 1-1.5%. 
In the medium term, however, the IMF concluded that sanctions “could lead to a cumulative output loss…of up to 9% of GDP, as lower capital accumulation and technological transfers weaken already declining productivity growth.” 
After being cut off from the dollar, Russian corporations have had no choice but to pay off debt as it comes due. 
As a result, Russia’s total foreign debt declined from $732 billion in June 2014 to $519 billion in December 2015, and it has stayed near that level ever since. 
Similarly, Russia’s international currency reserves declined from $510 billion at the end of 2013 to a low of $356 billion in March 2015. 
Since then, they have recovered to $458 billion, owing to Russia’s persistent and large current-account surplus. 
But, from 2015 to 2017, foreign direct investment in Russia amounted to less than 2% of GDP per year, on average – almost half what it had been in the preceding years – reflecting not just falling investment, but also reduced technology imports. 
Through all of this, Russia has managed to maintain macroeconomic stability and external balances, but it has suffered a minor decline in output and a major decline in the standard of living. 
During the four sanction years from 2014 to 2017, real disposable incomes plunged by 17%, and investment slumped by 12%, though GDP fell by only 0.5% in this period. 
Meanwhile, Russia and Ukraine have been imposing escalating trade sanctions on each another. 
As a result, their mutual trade fell by 80% between 2012 and 2016. 
The trade war has hurt Ukraine more; but Russia, too, has lost a significant export market and a major source of imported military equipment. 
Once Russia’s most important energy customer, Ukraine has not imported any natural gas from Russia since November 2015. 
Russia’s asset seizures in Crimea and Donbas have also been costly. 
For example, under a 1998 Ukrainian-Russian bilateral investment treaty, Ukrainian companies have filed at least eight lawsuits against the Russian Federation at the Permanent Court of Arbitration in The Hague. 
The Ukrainian state-owned energy giant Naftogaz and its subsidiaries alone are claiming $7 billion in damages, while Oschadbank, Privatbank, and Ukrnafta are seeking compensation of $1 billion each. 
One case brought by a group of Ukrainian companies has already been won, and the rest are likely to go the same way. 
At this rate, Russia’s illegal confiscations will probably cost it at least $10 billion. 
Naftogaz has also brought a successful case against the Russian energy giant Gazprom. 
In February, the Stockholm arbitration court ruled that Gazprom must award Naftogaz $2.56 billion in damages for breach of a previous agreement between the two companies. 
Gazprom has since refused to pay, and Naftogaz has responded by going after its assets abroad. 
Gazprom’s disregard for a commercial arbitration verdict could prove costly indeed. 
With no solution to the Ukraine conflict in sight, sanctions will likely remain in place for the long term. 
Sanctions tend to be sticky, because the conflicts that spur them usually multiply and evolve. 
For example, in April, the US imposed additional sanctions in response to Russia’s interference in the 2016 US presidential election. 
Those new measures have hit the Russian ruble and stock market hard. 
And now, the US Congress is leading a new offensive, following Putin and Trump’s suspicious summit in Helsinki this summer. 
Having already enacted the Countering American Adversaries Through Sanctions Act last year, a bipartisan congressional coalition will soon approve even more severe sanctions, most likely hitting Russian sovereign debt and state-owned financial institutions. 
The mere threat of more US sanctions has already roiled the Russian market. 
While Russia’s annual growth rate is stuck at an anemic 1.5%, the annual civilian, legal, and other related costs of its military aggression are now at least 3-4% of GDP – or $45-60 billion. 
The Kremlin may be managing for now. 
But sooner or later, these mounting costs will have serious political consequences. 

How Costa Rica Gets It Right 
SAN JOSÉ – With authoritarianism and proto-fascism on the rise in so many corners of the world, it is heartening to see a country where citizens are still deeply committed to democratic principles. 
And now its people are in the midst of trying to redefine their politics for the twenty-first century. 
Over the years, Costa Rica, a country of fewer than five million people, has gained attention worldwide for its progressive leadership. 
In 1948, after a short civil war, President José Figueres Ferrer abolished the military. 
Since then, Costa Rica has made itself a center for the study of conflict resolution and prevention, hosting the United Nations-mandated University for Peace. 
With its rich biodiversity, Costa Rica has also demonstrated far-sighted environmental leadership by pursuing reforestation, designating a third of the country protected natural reserves, and deriving almost all of its electricity from clean hydro power. 
Costa Ricans show no signs of abandoning their progressive legacy. 
In the recent presidential election, a large turnout carried Carlos Alvarado Quesada to victory with more than 60% of the vote, against an opponent who would have rolled back longstanding commitments to human rights by restricting gay marriage. 
Costa Rica has joined a small group of countries in the so-called Wellbeing Alliance, which is implementing ideas, highlighted by the International Commission on the Measurement of Economic Performance and Social Progress, for constructing better welfare metrics. 
Recognizing the shortcomings of GDP that the Commission emphasized, the Alliance seeks to ensure that public policy advances citizens’ wellbeing in the broadest sense, by promoting democracy, sustainability, and inclusive growth. 
An important part of this effort has been to broaden the scope for the country’s cooperatives and social enterprises, which are already strong, embracing in one way or another a fifth of the population. 
These institutions represent a viable alternative to the extremes of capitalism that have given rise to morally reprehensible practices, from predatory lending and market manipulation in the financial sector to tech companies’ abuse of personal data and emissions cheating in the automobile industry. 
They are based on building trust and cooperation, and on the belief that focusing on the welfare of their members not only enhances wellbeing, but also increases productivity. 
Like citizens of a few other countries, Costa Ricans have made clear that inequality is a choice, and that public policies can ensure a greater degree of economic equality and equality of opportunity than the market alone would provide. 
Even with limited resources, they boast about the quality of their free public health-care and education systems. 
Life expectancy is now higher than in the United States, and is increasing, while Americans, having chosen not to take the steps needed to improve the wellbeing of ordinary citizens, are dying sooner. 
But for all of its successes, Costa Rica faces two critical problems: a persistent, structural fiscal deficit and a gridlocked political system. 
The economics of fiscal deficits are easy: boost economic growth, raise taxes, or lower expenditures. 
But the politics are not easy at all: While every political leader wants economic growth to solve the problem, there is no magic formula to achieve it. 
No one loves the two remaining options. 
Most governments in such circumstances cut items like infrastructure, because the costs go unseen for decades. 
That would be an even graver mistake for Costa Rica, where infrastructure has not fully kept up with economic growth and, if improved, could itself be important in promoting growth. 
Of course, government could always be more efficient, but after years of retrenchment, further rationalization is unlikely to deliver much. 
Almost surely, the best way forward would be to raise taxes. 
To reconcile taxation with an overall economic strategy that seeks to maximize all citizens’ wellbeing, the tax system should adhere to three central principles: tax bad things (like pollution), rather than good things (like work); design taxes to cause the least possible distortion in the economy; and maintain a progressive rate structure, with richer individuals paying a larger share of their income. 
Because Costa Rica is already so green, a carbon tax would not raise as much money as elsewhere. 
But, because virtually all of the country’s electricity is clean, a shift to electric cars would be more effective in reducing carbon dioxide emissions. 
Such a tax could help Costa Rica become the first country where electric cars dominate, moving it still closer to the goal of achieving a carbon-neutral economy. 
With inequality still a problem (though nowhere near as acute as elsewhere in Latin America), more progressive and comprehensive income, capital gains, and property taxes are essential. 
The rich receive a disproportionately large share of their income through capital gains, and to tax capital gains at rates lower than other forms of income exacerbates inequality and leads to distortions. 
While economists differ on many matters, one thing they can agree on is that taxing the revenues or capital gains derived from Costa Rica’s land won’t cause the land to move away. 
That’s one reason why the great nineteenth-century economist Henry George argued that the best taxes are land taxes. 
The biggest challenges are political: a presidential system like Costa Rica’s works well in a polity divided into two main parties, with rules designed to ensure that minority views are adequately respected. 
But such a system can quickly lead to political gridlock when the electorate becomes more fractured. 
And in a fast-changing world, political gridlock can be costly. 
Deficits and debts can explode, with no path towards resolution. 
Alvarado, who is just 38, is attempting to create a new presidential model for Costa Rica, without changing the constitution, by drawing ministers from a range of parties. 
One hopes that the spirit of cooperation fostered by the cooperative movement, and ingrained in so much of Costa Rican culture, will make it work. 
If it does, Costa Rica, despite its small size, will be a beacon of hope for the future, showing that another world is possible, one where Enlightenment values – reason, rational discourse, science, and freedom – flourish, to the benefit of all. 

Could the IMF Have Prevented This Crisis? 
WASHINGTON D.C. -- Until recently, the International Monetary Fund’s main job was lending to countries with balance-of-payment problems. 
Today, however, emerging countries increasingly prefer to “self-insure” by accumulating reserves (and sharing them through regional pooling arrangements). 
As a result, the Fund must change, reinforcing its supervisory role and its capacity to oversee members’ compliance with their obligation to contribute to financial stability. 
So its failure to press the United States to redress the mortgage-market vulnerabilities that precipitated the current financial crisis indicates that much remains to be done. 
Indeed, in its 2006 annual review of the US economy, the IMF was extraordinarily benign in its assessment of the risks posed by the relaxation of lending standards in the US mortgage market. 
It noted that “borrowers at risk of significant mortgage payment increases remained a small minority, concentrated mostly among higher-income households that were aware of the attendant risks,” and concluded that “indications are that credit and risk allocation mechanisms in the U.S. housing market have remained relatively efficient.” 
This, it added, “should provide comfort.” 
Likewise, the problem was not mentioned in one of the IMF’s flagship publications, the Global Financial Stability Report (GFSR), in September 2006, just ten months before the sub-prime mortgage crisis became apparent to all. 
In the IMF’s view, “[m]ajor financial institutions in mature...markets [were]...healthy, having remained profitable and well capitalized,” and “the financial sectors in many countries are in a strong position to cope with any cyclical challenges and further market corrections to come.” 
The IMF began to take notice only in April 2007, when the problem was already erupting, but there was still no sense of urgency. 
On the contrary, according to the IMF, “weakness has been contained to certain portions of the sub-prime market (and, to a lesser extent, the Alt-A market), and is not likely to pose a serious systemic threat.” 
Moreover, “the US housing market appears to be stabilizing....Overall, the US mortgage market has remained resilient, although the sub-prime segment has deteriorated a bit more rapidly than had been expected.” 
The GFSR confidently noted that “stress tests conducted by investment banks show that, even under scenarios of nationwide house price declines that are historically unprecedented, most investors with exposure to subprime mortgages through securitized structures will not face losses.” 
Why has the Fund’s surveillance of the US economy been so ineffective? 
Suppose that the vulnerabilities piling up in the US mortgage market – right under the IMF’s Washington-headquartered nose – had taken place in a developing country. 
It is, frankly, inconceivable that the Fund would have failed so miserably in detecting them. 
The IMF has been criticized for burdening borrowers with unnecessary and sometimes perverse lending conditions, but its highly qualified staff has not been shy in blowing the whistle when it perceived domestic vulnerabilities in other countries. 
So why didn’t they scrutinize the US economy with equal zeal? 
The answer may be found in the IMF’s governance structure. 
Currently, the distribution of power within the IMF follows the logic of its lending role. 
The more money a country puts in, the more influence it has. 
This may be prompting the Fund to turn a blind eye to the economic vulnerabilities of its most influential members – precisely those whose domestic policies have large, systemic implications. 
This “money-for-influence” model of governance indirectly impairs the IMF’s capacity to criticize the economies of its most important members (let alone police compliance with their obligations). 
In any event, if its staff’s criticism ever becomes too candid, these countries can always use their leverage to water down the public communiqués issued by the IMF’s board. 
The Fund can help to prevent future crisis of this kind, but only if it first prevents undue influence on its capacity to scrutinize, and if necessary criticize, influential countries’ policies and regulations. 
This requires a different governance structure in which power is more evenly distributed, so that the IMF can effectively exercise surveillance where it should, not just where it can. 

Countdown to Withdrawal from Iraq 
How long will the United States maintain a large deployment of troops in Iraq? 
That is now the central question of George W. Bush’s second term. 
Until recently, the Bush administration answered with an evasive cliché: “as long as it takes and not one day longer.” 
But not anymore. 
The ice began to crack on November 17, when Representative John Murtha, a hawkish Democratic congressman and marine veteran, suggested pulling troops out of Iraq in six months. 
Soon after, the Republican-controlled Senate voted for “a significant transition to full Iraq sovereignty in 2006.” 
After initial resistance, Bush began to change his rhetoric by suggesting that a troop drawdown would occur sooner than previously expected. 
The erosion in public support for Bush’s Iraq policy is stark. 
Fifty-four percent of Americans now say that the US erred in sending troops, up from 24% at the start of the war in March 2003. 
In part, this reflects the rising casualty rate, with more than 2,100 American soldiers killed thus far. 
But it also reflects a growing belief that the war is failing. 
As Duke University’s Peter Feaver, an expert on public opinion who is now serving as a White House advisor, recently pointed out, Americans will tolerate casualties when they believe that a war is just and has a reasonable prospect of success. 
But citizens now doubt both these points. 
The administration is paying the price for overselling the reasons for the war and bungling the post-invasion occupation. 
Not surprisingly, Bush’s new rhetoric stresses that he has a “strategy for victory.” 
If “victory” remains defined as stable democracy in Iraq, it is unlikely that Bush will have enough time to implement his strategy. 
In September, General George Casey, the senior American military commander in Iraq, testified to Congress that modern insurgencies last about a decade, and that the Iraqi army had only one battalion capable of fighting without help from American military forces. 
A month later, the influential International Institute for Strategic Studies in London estimated that US troop withdrawals next year were likely to be small, and that it would take at least five years for Iraq to build the 300,000-strong army needed to fight the insurgency on its own. 
But, with Congressional elections in 2006 and a presidential election in 2008, five years is too long. 
It seems more realistic that the Republican administration will have only 18 months to two years to implement its strategy. 
The Democrats, meanwhile, are divided. 
Some, like John Murtha and Nancy Pelosi, the minority leader in the House of Representatives, want a short timetable, while others, like Senator Joseph Biden, resists a firm timetable but predicts a withdrawal of 50,000 US troops in 2006, with many of the remaining 100,000 to follow in 2007. 
Those of us who believe that invading Iraq was a mistake, and that Bush is guilty of hubris in his failure to plan adequately for the aftermath, face a dilemma: if America withdraws too precipitously, it may compound these mistakes. 
Iraq is not like Vietnam, where American departure was followed by stability imposed by an authoritarian government. 
In Iraq, the danger is that departure could be followed by civil war and chaos – ideal conditions for terrorists to maintain havens. 
Iraq differs from Vietnam in another way as well. Unlike the North Vietnamese, the Sunni insurgents will have a difficult time taking over a country where they represent only 20% of the population. 
Indeed, with Shia Arabs and Kurds making up 80% of the country, the insurgency is focused on only four of Iraq’s 18 provinces. 
America’s quandary is that it is both part of the problem and part of the solution. 
So long as a large number of American troops remains as an occupying force, they serve as a recruiting tool for insurgents. 
As the political scientist Robert Pape has shown in a careful study, resistance to foreign occupation is a prime motivation for suicide bombers. 
But, if America leaves too soon, the elected Iraqi government may be unable to cope with the insurgency, sending Iraq the way of Lebanon in the 1980’s or Afghanistan in the 1990’s. 
Similarly, if Bush sets a short timetable, he may encourage the insurgents to wait him out. But, unless he makes it clear that American troops will leave in the near term, he will reinforce the impression of imperial occupation. 
The key to resolving this dilemma will be to press for local compromises that involve Sunnis in the political process, and to step up the rate of training of Iraqis to manage their own security. 
Even then, success is uncertain. 
One failure is already clear: that of the neo-conservative dream of creating a military ally that could serve as a long-term base for American troops in the campaign to transform and democratize the Middle East. 
Three elections have produced some degree of legitimacy for the Shia-dominated Iraqi government, but without a sense of community and effective institutions, elections merely create a tyranny of the majority. 
That may be better than Saddam Hussein’s tyranny of the minority, but it is hardly modern democracy. 
Bush compares his goal in Iraq to the democratization of Japan after World War II. 
But Japan was a totally conquered, ethnically homogeneous country with no insurgency, a large middle class, and previous experience of political openness. 
Even then, success took seven years. 
Instead, Bush should plan on a two-year window to give the Iraqi government as strong a chance as possible before the Americans leave, while emphasizing that Iraqis will thereafter be responsible for their own security and political salvation. 

Local Innovation for Local Problems 
BOSTON – As we learn more about the threat from substandard and counterfeit medicines, it is becoming clear that it is a far greater problem than previously thought. 
It is also a scourge that is most acutely felt in developing countries, where fake and low-quality pharmaceuticals kill more than 500,000 people a year and affect millions more by contributing to the emergence of diseases that are resistant to existing treatments. 
Compounding the problem is the approach taken by policymakers in the developing world, who are far more likely to look for solutions abroad than at home. 
This shortsightedness is a grave mistake that impedes innovation and progress. 
When it comes to tackling high-impact health challenges like the proliferation of fake or inferior drugs, local solutions and local innovations are not only likely to be central to any successful effort; they have the potential to provide benefits that go far beyond the scope of the original problem. 
Throughout the developing world, but most evidently in Africa, two groups are interested in finding tools to combat the menace of bad drugs. 
One group, comprising students, entrepreneurs, and researchers, seeks solutions that are local, original, and tailored to the needs of their societies. 
Its members are quick to share ideas and eager to collaborate. 
While this group has produced some innovative solutions – for example, the Ghanaian entrepreneur Bright Simmons is using mobile technology to address the counterfeit-drug problem – many more passionate local inventors and entrepreneurs must get involved. 
The other group is made up of government officials, including regulators. 
They, too, are deeply concerned about the scourge of low-quality and fake drugs, but they are reluctant to rely on local innovation. 
In their minds, the solutions already exist, in the form of high-end technology designed and developed in the world’s richest countries. 
The challenge, for this group, lies in finding the financial resources to import these technologies. 
For developing-country leaders, the effort needed to create an ecosystem that supports innovation simply appears too great, and the return on investment too little. 
At countless conferences and symposia, ministry officials and government personnel insist that funds must be found to import solutions, à la carte. 
Research and innovation, or engagement with local entrepreneurs and inventors, is, unfortunately, never on the agenda. 
There simply is little interest in tapping into the enormous pool of intellect, passion, and energy at home. 
Officials would be wise to reconsider. 
There is mounting evidence that sustainable solutions must have local support and local partners. 
Raising funds to import solutions from abroad addresses just one part of the challenge. 
Many countries lack the resources to install, operate, and maintain equipment that has not been designed locally. 
As misuse and neglect causes equipment to malfunction, more funds become required or the program simply dies. 
Not only does this approach fail to nurture local ecosystems of innovation, which is deeply frustrating; it also fails – repeatedly – to solve the problem at hand. 
While some solutions in the area of drug-quality testing have come from African entrepreneurs like Simmons, such examples are extremely rare, and many are developed in the diaspora with the support of organizations from outside the region. 
For the most part, such initiatives never engage local students. 
Local curricula do not focus on local challenges or promote local innovation. 
And yet local talent is critical for solutions that are both original and sustainable. 
Indeed, by nurturing an inclusive culture of research, local innovation has the potential to provide benefits that extend far beyond the specific problem that is being addressed. 
Nurturing the participation of underrepresented groups and creating opportunities for education and learning not only creates goodwill and promotes transparency and accountability. 
Building a stable foundation for future research also enables more productive public-private partnerships and stronger links between academia and domestic industry, thereby promoting economic growth. 
Foreign organizations, such as aid agencies or pharmaceutical companies, do have a role to play in boosting local innovation. 
They can support it financially, create new partnerships, and encourage policymakers to give it more credence. 
The international community has a role to play as well. 
This year, the United Nations will adopt the Sustainable Development Goals, marking the start of the next phase of global efforts to eradicate poverty and improve health. 
As the example of developing countries’ ongoing fight against counterfeit and low-quality medicines shows, success will depend – far more often than not – on local innovation. 

The Education Antidote to Radicalization 
DUBAI – No visitor to the Middle East can avoid noticing the yawning gap between the educational, entrepreneurial, and occupational aspirations of the region’s young people and the harsh reality that deprives so many of them of a positive future. 
Indeed, in the Middle East, half of those aged 18-25 are either unemployed or underemployed. 
Aggravating this situation is the global refugee crisis, which has displaced some 30 million children, six million from Syria alone, very few of whom are likely to return home during their school-age years. 
It should come as no surprise that the group known in the region as Daesh (the Islamic State) believes that it can find fertile ground for recruitment in this vast population of dispossessed and disaffected young people. 
Daesh propagandists are misusing social media in the way that their extremist predecessors and contemporaries have sometimes misused mosques – as a forum for radicalization. 
The group consistently posts content that challenges the possibility of coexistence between Islam and the West and calls young people to jihad. 
The grotesquely violent videos that Daesh produces have shock appeal. 
But what really attracts disaffected young people is the invitation to be part of something that seems larger than themselves and the societies in which they live. 
Shiraz Maher of the International Center for the Study of Radicalization (ICSR) at King’s College London identifies a common thread of sentiment among recruits: “righteous indignation, defiance, a sense of persecution, and a refusal to conform.” 
As a recent Quilliam Foundation report concludes, Daesh plays on the youthful desire to be part of something worthwhile; it is the organization’s utopian appeal that is most alluring to new recruits. 
Given this, few would disagree that we find ourselves in a generational battle for hearts and minds that cannot be won by military means alone. 
Hard power can eliminate Daesh’s hardcore leaders. 
But we will need more than that to convince nearly 200 million young Muslims that extremism is, quite literally, a dead end. 
There are many examples of under-the-radar operations working to counter extremism across the Indian subcontinent and the Middle East: children’s magazines in Pakistan, videos aimed at teenagers in North Africa, radio stations in the Middle East, and books and publications opposing Al Qaeda. 
They can help to expose the truth about life in Daesh – that it is brutal, corrupt, and prone to internal purges – in several ways, including by drawing attention to defections. 
As a 2014 report states, “[the very existence of defectors] shatters the image of unity and determination that [the group] seeks to convey.” 
But we must be more ambitious if we are to win the war of ideas, sustaining the cultural space that Daesh calls the “the grey zone,” which it longs to destroy. 
It is a space in which Muslims and non-Muslims can coexist, discover their shared values, and cooperate. 
Peter Neumann, the director of the ICSR, has proposed a YouTube contest for videos that explain the failings of Daesh. 
“You would receive 5,000 videos in no time,” he says. 
“Four thousand are junk, but 1,000 of them are effective – 1,000 videos against [Daesh] propaganda.” 
The best long-term tool for countering extremism, however, is education. 
In Jaffa, Israel, a school run by the Church of Scotland teaches the virtues of tolerance to Muslim, Jewish, and Christian children. 
Throughout Lebanon, a common school curriculum championing religious diversity – including the “refusal of any radicalism and religious or sectarian seclusion” – is being taught to Sunni, Shia, and Christian children starting at the age of nine. 
The country has also introduced double shifts in its school system to accommodate some 200,000 Syrian refugee children. 
If troubled Lebanon, wracked by sectarian violence and religious divides, can champion coexistence and provide Syrian refugees with a chance to study, there is no reason other countries in the region should not follow its example. 
The choice could not be clearer. 
We can stand by and watch a new generation of web-savvy Muslim youth be deluged with false claims that Islam cannot coexist with Western values. 
Or we can recognize that the young people of the Middle East and the rest of the Muslim world share the aspirations of young people in every other part of the world. 
All the evidence indicates that the region’s young people want education, employment, and the chance to make the most of their talents. 
Our resolution for 2016 should be to make that happen. 

Countering the Contagious West 
NEWPORT BEACH – Imagine for a moment that you are the chief policymaker in a successful emerging-market country. 
You are watching with legitimate concern (and a mixture of astonishment and anger) as Europe’s crippling debt crisis spreads and America’s dysfunctional politics leave it unable to revive its moribund economy. 
Would you draw comfort from your country’s impressive internal resilience and offset the deflationary winds blowing from the West; or would you play it safe and increase your country’s precautionary reserves? 
That is the question facing several emerging-market economies, and its impact extends well beyond their borders. 
Indeed, it is a question that also speaks to the increasingly worrisome outlook for the global economy. 
The very fact that we are posing this question is novel and notable it its own right. 
You can add this to the list of previously unthinkable things that we have witnessed lately. 
That list includes, just in the last few weeks, America’s loss of its sacred AAA rating; its political flirtation with a debt default; mounting concern about debt restructurings in peripheral European economies and talk about a possible eurozone breakup; and Switzerland’s dramatic steps to reduce (yes, reduce) its safe-haven status. 
The answer to the emerging markets’ question would have been straightforward a few years ago. 
It is not today. 
In the world of old, the West’s economic malaise already would have pulled the rug from beneath most emerging-market countries. 
Indeed, the conventional wisdom – supported by many painful experiences – was that when the industrial countries sneezed, the emerging world caught a cold. 
Today, however, several (though not all) emerging-market countries are benefiting from years of considerable efforts to reduce their financial vulnerability by accumulating huge amounts of international reserves. 
They have also paid back a significant share of external debt and converted much of what remains into more manageable local-currency liabilities. 
This sharp balance-sheet improvement has been instrumental in enabling emerging countries to bounce back strongly from the 2008-2009 global financial crisis, whereas the West continues to hobble along. 
Indeed, until the recent renewed downturn in America and Europe, the emerging world’s major policy concern was too much growth, mounting inflationary pressure, and economic overheating. 
Today’s emerging countries have considerable policy flexibility and much greater latitude to act than they had in the past. 
Accordingly, faced with a weakening global economy, they confront two basic policy choices. 
On the one hand, they can compensate for the global weakness by turbo-charging their own internal demand through aggressive fiscal stimulus. 
This would shield their populations from the West’s problems and, at the global level, provide a counter-impetus to the deteriorating global outlook. 
In the process, they would shift some of the policy emphasis from production to consumption. 
They would run down their trade surpluses and, in some cases, allow their currencies to appreciate. 
Their international reserves would decline and/or their debt would rise. 
On the other hand, these economies can opt for greater self-insurance. 
In this scenario, rather than stimulating domestic demand, they would fortify their defenses, positioning themselves for a long and stormy winter for the global economy. 
Thus, they would minimize the deterioration in their trade surpluses, maintain competitive exchange rates, and safeguard their foreign reserves and net-creditor positions. 
In the process, they would accentuate the pressure on the global economy from the West’s seemingly endless downturn. 
I suspect that emerging-market policymakers’ hearts are advocating the former. 
After all, a domestic stimulus would help maintain economic growth. 
Moreover, a counter-cyclical policy would signal to the world these countries’ willingness to take on global responsibilities. 
But I also suspect that their heads are cautioning against spending a lot of money in an attempt to accomplish a difficult, if not impossible, task. 
After all, there is little to suggest that emerging economies could counter, effectively and sustainably, a large synchronized slowdown in the West, especially when it comes with the risk of another banking crisis. 
My inclination is to believe that the head will prevail – but not completely. 
Emerging-market economies will take some steps, including interest-rate cuts, to safeguard domestic growth. 
They will also signal willingness to help the West financially. 
But such steps, while notable, would prove insufficient to counter fully the slowdown emanating from the West; and it certainly would not materially change the outlook for the United States and Europe. 
Despite their strong fundamentals, emerging countries still feel vulnerable in the face of the West’s economic weakness, policy shortfalls, and political paralysis. 
Moreover, they know from experience that there are no easy and immediate solutions to the West’s debt overhang and structural impediments to growth. 
And they have no illusions about the potential for effective global policy coordination. 
In such circumstances, policymakers in emerging markets will eschew boldness for prudence. 
They will hope for a short winter for the global economy, but they will plan and position for a long one. 
Accordingly, they will show very limited appetite for risking the hard-earned policy gains of the last 10-15 years, and the resilience and self-assurance that has come with those gains. 
Having put yourself in their position for a moment, can you blame them? 

Counting Iraqi Casualties 
In times of war, accurate figures on the civilian death toll are almost always hard to come by. With few exceptions, demographers and epidemiologists have not applied their expertise to making rigorous, credible estimates of civilian mortality and morbidity. 
Sometimes, a lack of professional freedom prevents those who may be most familiar with the data – for example, analysts whose livelihoods depend on the government(s) involved in the conflict – from using their expertise for purposes that could be politically damaging. 
But there are other challenges as well. 
Isolating the conflict’s impact from that of other interventions (e.g., economic sanctions) may be impossible. 
Moreover, the high-quality population data needed for credible estimates may not be available due to their “sensitive nature,” or because they never have been collected (sometimes the case in developing nations), or because refugee movements have made data obsolete. 
As a result, the degree of uncertainty in such estimates may be unacceptably high, making them of little real worth. 
Consider the different approaches that have been used to examine the Iraq war. 
The Iraq Body Count aims to tally only deaths from violence during the current war by creating a data set based on media reports. 
If there is no double counting, and if the incidents included in the data were reported correctly, their tally represents a minimum number, because media reports may not be comprehensive. 
Another approach estimates the total change in mortality that the war caused (including deaths due to the war’s direct and indirect effects) by calculating the change in the death rate from the pre-war period. 
This requires data upon which to base the rise in mortality, usually derived by conducting a household survey on a random sample of the population. 
Typically, interviewers ask the head of the household to disclose the number and demographic characteristics of pre-war household members, whether any of the people in the pre-war household had died between the pre-war period and the time of the survey, and the date of any household member’s death. 
If household surveys are carried out properly, the number of excess deaths during the war can be estimated within a range of statistical uncertainty. 
But, when conducted during wartime, risks abound. 
Aside from the risks to interviewers collecting such data during a conflict, these include the selection bias of households in the sample, a lack of credible population data to which to apply the changed mortality rates, and mistaken or misleading accounts by participants. 
The survey approach was used twice by a group of researchers based primarily at Johns Hopkins University, who published their results in the medical journal The Lancet . 
Their estimates have been lauded, but also questioned because of their misinterpretation of their own figures. 
For example, in a summary of the 2004 study, they wrote, “Making conservative assumptions we think that about 100,000 excess deaths, or more, have happened since the 2003 invasion of Iraq.” 
But the first study yielded very imprecise estimates of the number of deaths, which the authors glossed over. 
They should have said, “We can say with 95% certainty that between 8,000 and 194,000 excess Iraqi deaths occurred during the period.” 
The group essentially repeated the study in 2006, using a larger sample size. 
Again, the researchers had interviewers administer what resembled a typical survey of a random sample of households. 
Appropriately, at the end of the article in The Lancet , the authors discuss issues that may have resulted in a sample that in fact did not meet the “random” threshold. 
Problems with interpretation also plagued that second effort. 
The authors used crude death rates (CDR’s), which reflect the number of deaths per thousand people, in explaining the rise in mortality. 
But demographers rarely use CDR’s, thinking instead in terms of age- and sex-specific mortality rates, usually summarized as “life expectancy.” 
That being said, the group reported that the CDR increased from 5.5 per thousand people in 2002 to 13.3 per thousand in the post-invasion period (March 2003-March 2006). 
To put the pre-invasion figure in perspective, consider United Nations Population Division figures, which are generally considered to be of very high quality. 
The UN estimates that Iraq’s pre-invasion CDR was 10 per thousand, not the 5 per thousand estimated from the two studies. 
Comparing internationally, the UN reports that Iran’s CDR in the 2000-2005 period was 5.3 per thousand. 
Prior to the war, most observers thought that the situation in Iraq was considerably worse than in Iran. 
So the pre-war CDR that the two Lancet studies yield seems too low. 
It may not be wrong, but the authors should provide a credible explanation of why their pre-war CDR is nearly half that of the UN Population Division. 
If the pre-war mortality rate was too low and/or if the population estimates were too high – because, for example, they ignored outflows of refugees from Iraq – the resulting estimates of the number of Iraqi “excess deaths” would be inflated. 
More fundamentally, what purpose do these numbers serve? 
Certainly, after the dust has settled, numbers play a role in evaluating the costs and benefits (if any), of a war. 
But in real time, do the numbers really add to the debate? 
Do they really provide us with more information than the Iraq Body Count figures provide? 
Do we have the appropriate context to help us interpret the numbers? 
The war in Iraq has been exceptionally bloody. 
For now, that is about all that statistics can safely tell us. 

Can We Have Too Much Sex? 
LONDON – “Sex is like money,” John Updike wrote, “only too much is enough.” 
As it turns out, that is not strictly true, at least not in the context of monogamous relationships. 
So how much sex is enough? 
In 2015, a group of University of Toronto-based psychologists set out to find out. 
In their study, “Sexual Frequency Predicts Greater Well-Being, But More is Not Always Better,” Amy Muise, Ulrich Schimmack, and Emily Impett revealed that there is, in fact, a precise rate of sex that, for the average couple, optimally benefits the partners’ wellbeing: once per week. 
The study found that the difference in wellbeing for people in relationships who engage in sex once per week, compared with those who have sex less than once per month, was greater than the difference in wellbeing for those earning $75,000 versus those making $25,000. 
In other words, having sex four times as much boosted participants’ moods as much as an additional $50,000 per year would do. 
But, just as having sex too infrequently can leave couples less happy, having sex too frequently can end up being more stressful than pleasurable, particularly if busy couples feel under pressure to do so. 
Yet such pressure – stemming, at least partly, from social expectations and comparisons – is very real. 
The University of Colorado sociologist Tim Wadsworth, in his 2014 study, “Sex and the Pursuit of Happiness: How Other People’s Sex Lives are Related to our Sense of Well-Being,” repeats Updike’s assertion that sex is like money. 
But, in Wadsworth’s argument, what they have in common is that they both derive value from comparison. 
As Wadsworth points out, past research has shown that it is not absolute income levels that determine happiness, but rather income levels relative to those around you – the colleagues, neighbors, former classmates, and others who form your reference group. 
That is why a rising income does not necessarily bring a corresponding increase in happiness: it is crucial that the incomes of one’s reference group aren’t also rising. 
Similarly, Wadsworth’s survey found that respondents who believe that they have more sex than their reference group are happier, while those who believe that their cohorts are having more sex than them are less content. 
Wadsworth therefore concludes that happiness is positively correlated with one’s own sexual frequency, but negatively correlated with the sexual frequency of others. 
But, beyond a certain point – roughly once per week, apparently – the benefits that a couple derives from sex wane. 
This suggests that there is more to the relationship between sex and happiness than keeping up with the Joneses. 
And, in fact, by putting pressure on couples to have sex as often as possible, the sense of competition may be doing more harm than good. 
A recent study – “More Than Just Sex: Affection Mediates the Association Between Sexual Activity and Well-Being” – offers a novel theory regarding the link between sex and happiness. 
Its authors – Anik Debrot, Nathalie Meuwly, Amy Muise, Emily Impett, and Dominik Schoebi – contend that the true power of sex in a relationship lies in the capacity of sex to foster a stronger connection between partners through shared affection, not just shared pleasure. 
The authors even suggest that sex and affection could compensate for each other in supporting wellbeing, with increased affection counterbalancing reductions in sexual activity during some life phases, such as just after childbirth – a period sometimes associated with higher risk for infidelity in male partners. 
The idea is that more alternative expressions of affection may help to sustain wellbeing, thereby decreasing the temptation to stray (though, because men generally report higher sexual desire, they may rely more on sex as a way of experiencing affection than the average woman does). 
It seems that psychology may rebut Updike’s dictum that only too much sex is enough. 
In fact, while regular sex is vital to promote intimacy and foster happiness through shared affection, more is not always better. 
So sex may be like money, but only in that too little is bad. 

The End of Cross-Border Surrogacy? 
LONDON – The global trade in babies born through commercial surrogacy is slowly being shut down. 
India, Nepal, Thailand, and Mexico have introduced measures that would limit or ban foreigners from hiring locals as surrogate mothers. 
Cambodia and Malaysia look likely to follow suit. 
In an industry in which the conventional wisdom has long dismissed efforts to “buck the market,” this is a surprising – and welcome – development. 
Uncritical proponents of biotechnology tend to celebrate the fact that technological breakthroughs have outpaced government regulations, arguing that this has allowed science to progress unfettered. 
But the determination of countries that have historically been centers of commercial surrogacy to stop the practice underscores the naiveté of that position. 
It is no coincidence that the countries cracking down on cross-border surrogacy are those in which the practice takes place. 
The argument that all parties – surrogate mothers, babies, and commissioning parents – benefit from the transaction has not withstood scrutiny. 
Consider India, where the surrogacy industry is valued at $400 million per year; until recently, some 3,000 fertility clinics were operating in the country. 
And yet, as worries have mounted that commercial surrogacy leads to human trafficking and the exploitation of women, India’s authorities have concluded that the ethical concerns outweigh the economic benefits. 
India has yet to finalize its anti-surrogacy legislation. 
But the way the debate has evolved since the first bill was proposed in 2008 illustrates the rapid change in how the practice is viewed. 
The earliest drafts of the legislation actually encouraged commercial surrogacy, mandating that mothers employed as surrogates surrender their babies. 
Given that under common law, the woman who bears a child is legally its mother, this provision would have been radically pro-surrogacy. 
Since then, however, the focus of the discussion has shifted, as unsavory – and sometimes bizarre – aspects of the trade have come to light. 
For example, in one case, Germany – where surrogacy is illegal – refused to accept twin children of a German father born to an Indian surrogate, while India demurred at giving the father an exit visa so that he could remove the children. 
In October 2015, India’s Ministry of Health and Family Welfare, under pressure from the country’s Supreme Court, declared that international commercial surrogacy was unconstitutional. 
The Council for Medical Research sent out a notification to all clinics, instructing them not to “entertain” foreign couples – including non-resident Indian citizens and people of Indian origin. 
The next month, the Department of Health Research banned the importation of embryos to be implanted into surrogate mothers, making the procedure nearly impossible. 
To be sure, India is not the only country involved in cross-border surrogacy. 
Indeed, Indian regulations limiting surrogacy services to heterosexual couples who have been married for at least two years had already caused some of the trade to relocate, most notably to Thailand. 
But there, too, attitudes have been shifting, especially after an Australian couple refused to take responsibility for a baby born through surrogacy who was diagnosed with Down Syndrome. 
The couple did take the boy’s twin sister, however, making it clear that what they had paid for was not the “service” provided by the mother, but the children themselves – or rather, just the one who met their requirements. 
As a result, it has become harder to deny that cross-border surrogacy is akin to selling babies. 
In August 2015, Thailand restricted surrogacy to couples in which at least one partner holds Thai nationality. 
Offenses under the law are punishable by up to ten years in prison – for the surrogate and commissioning parents alike. 
As in India, surrogacy touched a deep nerve in Thailand, where some see it as neo-colonialist exploitation, with babies as the raw commodities being extracted for the benefit of Westerners. 
“This law aims to stop Thai women’s wombs from becoming the world’s womb,” was how Wanlop Tankananurak, a member of Thailand’s National Legislative Assembly, put it. 
By November 2015, about a dozen Indian and Thai clinics had shifted operations to Phnom Penh. 
That development might at first seem to support the argument that the trade can never be stamped out – only relocated. 
But, so far, the number of clinics that have set up shop in Cambodia is small. 
And some reports indicate that Cambodia’s interior ministry intends to treat commercial surrogacy as human trafficking, with a potential prison sentence. 
Nepal, too, has declared a moratorium on surrogacy, after some in the country denounced the practice as exploitative. 
In April 2015, after an earthquake struck Kathmandu, Israel evacuated 26 babies born through surrogacy, but left their mothers – most of whom had crossed over from India – stranded in a disaster zone. 
Malaysia also seems on track to ban the practice. 
And in Mexico, the state of Tabasco, the only jurisdiction in the country where surrogacy is legal, has restricted it to Mexican heterosexual married couples in which the wife is infertile. 
During the legislative debate, Deputy Veronica Perez Rojas denounced surrogacy as a “new form of exploitation of women and trafficking.” 
There is the risk, of course, that the ongoing international clampdown will drive commercial surrogacy underground. 
But that risk only underscores the need for clear and strict legislation. 
Even if some would-be parents are willing to break the law, the vast majority will be deterred by the penalties, including the risk that they will not be allowed to keep the baby or that they will be unable to obtain an exit visa for it. 
The pro-surrogacy camp emphasizes the benefits of the practice, which include increased reproductive choice and the accommodation of sexual pluralism. 
But while these may be genuine and important considerations, they cannot be placed above the need to prevent the exploitation of some of the world’s most vulnerable women. 


Create Growth-Linked Bonds 
A year ago, at the Summit of the Americas, 34 western hemisphere heads of state agreed to promote the creation of government-issued growth-linked bonds whose payout is tied to gross domestic product (GDP). 
But progress has mostly stalled. 
Only one major proposal related to such bonds, from Argentina, is on the table. 
A unique opportunity to strengthen the world’s financial infrastructure and increase economic efficiency for many years to come could be slipping away. 
I have argued for growth-linked bonds since my 1993 book Macro Markets . 
GDP is the most comprehensive measure we have of an economy’s success. 
The simplest form of growth-linked bonds would be a long-term government security that pays a regular dividend proportional to the GDP of the issuing country. 
Suppose that the Argentine government issued perpetual bonds that paid an annual dividend equal to one ten-billionth of Argentine GDP, payable in pesos. 
Because Argentina’s annual GDP now runs at about 500 billion pesos, one of these bonds today would pay a dividend of 50 pesos (about $17 or €13) a year. 
The dividend would rise or fall as the success of Argentina’s economy is revealed through time. 
The market for GDP-linked bonds would arrive at a price that makes them attractive to investors, reflecting expectations and uncertainties about the issuing country’s future. 
Until there is a market for such bonds, we cannot know what the price will be. 
But we can expect that the market for long-term GDP-linked bonds from countries like Argentina, where the future of the economy is uncertain, would be volatile, as investors adjust their expectations of future GDP growth up and down in response to new information. 
What will happen to Argentina in the next 25 years? 
Argentina’s long-term GDP growth has been disappointing. 
In fact, real GDP per capita declined 15% over the 25-year period from 1965 to 1990 – a period that saw some Asian economies quintuple in size. 
But the 8% real GDP growth recorded in 2004 might encourage some to expect a surge in economic performance, as has occurred elsewhere in the world. 
Could there be another decline in Argentina? 
Or a huge growth breakthrough? 
Nobody knows. 
The economic costs implied by this uncertainty could be reduced if there were a market for growth risk. 
Indeed, Argentina’s economy would be better off today if Argentina had borrowed in terms linked to its GDP decades ago rather than at an interest rate denominated in dollars. 
Its foreign debt would have declined in line with its GDP, thus sheltering the economy from default and economic disaster. 
To be sure, investors would have then lost on their bet on Argentina’s growth, but they would still have been protected against inflation, even if their bonds had not been denominated in dollars (because Argentina’s nominal GDP would have moved up with inflation). 
Can we engineer new debt contracts for countries like Argentina? 
The stumbling block has been potential investors’ fear that accounting fiascos in emerging countries would render the bonds unsafe. 
If you don’t trust the numbers, you can’t trust the debt. 
Clearly, more work is needed to improve the quality of the numbers. 
In the meantime, we should not give up on trying to create these bonds. 
Instead, advanced countries should issue them first. 
True, advanced economies are relatively more stable, which means that the bonds would have a less distinctive risk-management advantage. 
But the demonstration effect would be immediate. 
Once any major country develops a market for GDP-linked debt, the concept will be established, making it much easier for other countries to join in. 
The spread of inflation-indexed bonds serves as a historical precedent. 
Finland was the first to issue national inflation-indexed bonds, in 1946, in response to massive wartime price growth. 
Israel and Iceland were next, in 1955, followed by Brazil, Chile, Columbia, Argentina, the UK, Australia, Mexico, Canada, Sweden, New Zealand, the US, France, Japan, and Italy. 
It took a long time, but the contagion of a sound financial idea has been unmistakable. 
GDP-linked bonds would also allow hedging the risk of inflation, plus respond to GDP growth. 
Some will object that there is little point in creating GDP-linked bonds in advanced countries, because there is little uncertainty about GDP growth there. 
However, even in the relative calm of the post-war era, long-term real GDP growth in advanced countries has been rather variable. 
For example, US real per capita GDP grew by a factor of 1.87 – that is, nearly doubled in size – from 1961 to 1986, but by a factor of only 1.58 from 1978 to 2003. 
Such differences in 25-year growth rates are important: if US GDP grows by a factor of 1.87 over the next 25 years, annual GDP will be $3.6 trillion ($10,000 per person) higher than if it grows by a factor of only 1.58. 
Much of today’s debates about the future of old-age pensions hinges on this uncertainty. 
If the economy grows rapidly, there will be no problem; if it does not, a pension crisis looms. 
Creating a marketplace where such uncertainties are traded and hedged would be a fundamental step toward managing the risks involved. 
If personal pension accounts or provident funds are invested in GDP-linked bonds, the payments that retirees receive in 25 years will reflect the growth rate of the economy – and that of the tax base – to that date, which all makes good sense. 
Sweden’s pension system recently created a link between national income growth and benefits, but the reforms did not include creating GDP-linked bonds, a natural adjunct to such a scheme. 
At a time when many advanced countries run government deficits, GDP-linked bonds would improve risk management and bring down financing costs. 
They might also spur developing countries to do what it takes to join that market. 

Creating a Learning Generation 
MEXICO CITY – Over the last 15 years, the number of students worldwide has increased by some 243 million, a reflection of governments’ commitment to expanding access to education. 
But some countries have made far more progress than others, not only by increasing the share of young people in school, but also by guaranteeing the quality of that education. 
Closing this education gap must be a top priority. 
The International Commission on Financing Global Education Opportunity, of which I am a proud member, is working to do just that. 
Led by former British Prime Minister Gordon Brown, who is currently the United Nations Special Envoy for Global Education, the Education Commission operates on the strong belief that education is a fundamental human right, and the route to substantially improved living standards. 
The Commission is co-convened by Norwegian Prime Minister Erna Solberg, Chilean President Michelle Bachelet, Indonesian President Joko Widodo, Malawian President Peter Mutharika, and the director-general of UNESCO, Irina Bokova. 
And it draws on the experience of many types of leaders – including former heads of state, legislators, successful entrepreneurs and businesspeople, artists, and academics – from around the world. 
There is also a youth panel that elicits the perspectives of distinguished young people. 
That panel is chaired by Kenya’s Kennedy Odede, who developed an educational model that combats extreme poverty and gender inequality through education, and Guyana’s Rosemarie Ramitt, an advocate for young people with disabilities. 
Also on the panel is Pakistan’s Malala Yousafzai, the youngest-ever Nobel Peace Prize laureate, who courageously defied the Taliban to campaign for girls’ access to education. 
This impressive group of leaders and thinkers has worked tirelessly to assess the state of education worldwide, with an eye to identifying the particular challenges that confront different countries. 
The resulting report, “The Learning Generation: Investing in Education for a Changing World,” provides a series of recommendations that will enable low- and middle-income countries to boost education quality and enrollment rates within a generation. 
It was presented this week to UN Secretary-General Ban Ki-moon, who has already agreed to act on the recommendations it contains. 
The report’s recommendations focus on several fundamental objectives, including innovation, inclusiveness (with the lowest-income citizens getting particular attention), and a comprehensive, long-term investment plan for education. 
Of course, achieving these goals will cost money. 
That is why the Education Commission calls for a financing compact between developing countries and the international community, whereby wealthier countries offer increased finance and guidance to developing countries that commit to educational reform and investment. 
There is certainly space for developing countries to boost investment in education. 
Fuel subsidies are widespread in developing countries, consuming some 25-30% of government revenues – much more than education spending, in most cases. 
These subsidies do not just undermine efforts to reduce environmental damage from emissions; they also tend to benefit the rich significantly more than the poor. 
Eliminating energy subsidies would free up public funds for scientific research and education, generating benefits for the environment and improving the wellbeing and prospects of the poor. 
Though reducing subsidies can be politically challenging, Ghana and Indonesia have shown that reallocating funds to social sectors can help build popular support for it. 
I plan to do my part to by pushing for subsidy cuts in my own country, Mexico. 
As I have argued before, if money for energy subsidies were reallocated to education, the environmental benefits would be compounded. 
After all, the better people understand the science of climate change and its effects, the greater their capacity to help mitigate it. 
With the right knowledge, people can build resilience to climate change, thereby safeguarding their livelihoods. 
Moreover, they can help to advance important innovations, such as clean energy and solar power, and develop tailored climate-smart solutions that bring social and economic benefits to their communities. 
There is no justification for neglecting education, the foundation on which social and economic development is built. 
By combining the resources and capabilities of national and sub-national governments, the private sector, and civil society, we can create a learning generation: children with the knowledge and skills they need to lead lives of meaning and purpose. 
Only then will we be able to realize the hope of a more just and sustainable world. 

Writing the Future 
ADDIS ABABA – What does the future hold for the global economy? 
Will living standards rise worldwide, as today’s poor countries leapfrog technologies to catch up with richer countries? 
Or will prosperity slip through our fingers as greed and corruption lead us to deplete vital resources and degrade the natural environment on which human well-being depends? 
Humanity faces no greater challenge than to ensure a world of prosperity rather than a world that lies in ruins. 
Like a novel with two possible endings, ours is a story yet to be written in this new century. 
There is nothing inevitable about the spread – or the collapse – of prosperity. 
More than we know (or perhaps care to admit), the future is a matter of human choice, not mere prediction. 
Despite the ongoing economic crisis in Europe and the United States, the developing world has sustained rapid economic growth. 
While the International Monetary Fund forecasts that the advanced economies will grow by just 1.5% in 2013, developing-country growth is projected to reach 5.6%. 
Asia’s developing economies, now the world’s pacesetters, are expected to grow by 7.2%, with output in Sub-Saharan Africa set to rise by a healthy 5.7%. 
What is happening is both powerful and clear. 
Technologies that were once found only in rich countries now belong to the entire world. 
Mobile phone coverage in Sub-Saharan Africa, for example, has gone from nearly zero subscribers 20 years ago to around 700 million today. 
And those phones are helping to bring banking, health care, education, business, government services, and entertainment to the poor. 
Within a few years, the vast majority of the world will have access to wireless broadband. 
Yet there is another truth as well. 
Last year was the hottest ever recorded in the US. 
Droughts afflicted around 60% of US counties, including the breadbasket states of the Midwest and the Great Plains. 
In October, an extraordinary “superstorm” smashed into the Atlantic coastline around New Jersey, causing losses of around $60 billion. 
Climate problems – floods, droughts, heat waves, extreme storms, massive forest fires, and more – also ravaged many other parts of the world in 2012, including China, Australia, Southeast Asia, the Caribbean, and Africa’s Sahel region. 
These environmental disasters are occurring with rising frequency, as they are partly caused by human actions, such as deforestation, coastal erosion, massive pollution, and, of course, the greenhouse-gas emissions that are changing the world’s climate and acidifying the oceans. 
What is new is that scourges like climate change – until recently described as a future threat – are now clear and present dangers. 
Scientists have even given a name to our era, the Anthropocene, in which humanity (“anthropos” in Greek) is having a large-scale impact on the planet’s ecosystems. 
Herein lies our great challenge – the one that will determine whether we follow the path of prosperity or ruin. 
The rapidly growing developing countries cannot simply follow the economic-growth path that today’s rich countries traveled. 
If they try, the world economy will push the planet beyond safe operating conditions. 
Temperatures will rise, storms will intensify, the oceans will become more acidic, and species will go extinct in vast numbers as their habitats are destroyed. 
The simple fact is that humanity faces a stark choice. 
If the world economy’s current growth patterns continue, we face ecological disaster. 
If the world economy embraces a new growth pattern – one that harnesses advanced technologies like smart phones, broadband, precision agriculture, and solar power – we can spread prosperity while saving the planet. 
I call today’s growth pattern the business-as-usual option; the smart-technology growth pattern, by contrast, represents the sustainable-development option. 
Business as usual can work for a while, but it will end in tears, while the sustainable-development path can lead to long-term prosperity. 
So, what will it take to write the happy ending? 
First, we must recognize that we, as a global society, have a choice to make. 
Business as usual is comfortable. 
We think we understand it. 
Yet it is not good enough: on our current trajectory, short-term prosperity is coming at the cost of too many future crises. 
Second, we must recognize the powerful new tools and technologies that we have at hand. 
Using advanced information technologies – computers, satellite mapping, image processing, expert systems, and more – we now have the means to grow more food with less environmental damage; improve public health for rich and poor alike; distribute more electricity with lower greenhouse-gas emissions; and make our cities more livable and healthier, even as urbanization raises their populations by billions in the coming decades. 
Third, we should set bold goals for the years ahead – to spread prosperity and improve public health while saving the planet. 
Fifty years ago, US President John F. Kennedy said that we should to go to the moon not because it was easy, but because it was hard – it tested the best in us. 
In our generation, sustainable development will be our test, encouraging us to use our creativity and human values to establish a path of sustainable well-being on our crowded and endangered planet. 
I am proud and honored that United Nations Secretary-General Ban Ki-moon has asked me to help mobilize the world’s expertise as we seek to achieve that goal. 
The greatest talents in our societies – in universities, businesses, NGOs, and especially among the world’s young people – are ready to take on our greatest challenges, and are joining the UN’s new Sustainable Development Solutions Network. 
In the months and years ahead, these leaders will share their visions of a prosperous and sustainable global society. 

Creating the Next Crisis 
WASHINGTON, DC -- Informed opinion is sharply divided about how the next 12 months will play out for the global economy. 
Those focused on emerging markets are emphasizing accelerating growth, with some forecasts projecting a 5% increase in world output. 
Others, concerned about problems in Europe and the United States, remain more pessimistic, with growth projections closer to 4% – and some are even inclined to see a possible “double dip” recession. 
This is an interesting debate, but it misses the bigger picture. 
In response to the crisis of 2007-2009, governments in most industrialized countries put in place some of the most generous bailouts ever seen for large financial institutions. 
Of course, it is not politically correct to call them bailouts – the preferred language of policymakers is “liquidity support” or “systemic protection.” 
But it amounts to essentially the same thing: when the chips were down, the most powerful governments in the world (on paper, at least) deferred again and again to the needs and wishes of people who had lent money to big banks. 
In each instance, the logic was impeccable. 
For example, if the US hadn’t provided essentially unconditional support to Citigroup in 2008 (under President George W. Bush) and again in 2009 (under President Barack Obama), the resulting financial collapse would have deepened the global recession and worsened job losses around the world. 
Similarly, if the eurozone had not stepped in – with the help of the International Monetary Fund – to protect Greece and its creditors in recent months, we would have faced further financial distress in Europe and perhaps more broadly. 
In effect, there were repeated games of “chicken” between governments and major financial institutions in the US and Western Europe. 
The governments said: “No more bailouts.” 
The banks said: “If you don’t bail us out, there will most likely be a second Great Depression.” 
The governments thought briefly about that prospect and then, without exception, blinked. 
Creditors were protected and financial sectors’ losses were transferred to the domestic government (as in Ireland) or to the European Central Bank (as in Greece). 
Elsewhere (the US), the losses were covered up with a great deal of regulatory “forbearance” (i.e., agreeing to look the other way while banks rebuild their capital by trading securities). 
And it worked – in the sense that we are now experiencing an economic recovery, albeit one with a disappointingly slow employment rebound in the US and some European countries. 
So what is the problem with the policies of 2007-2009, and why can’t we just plan on doing something similar in the future if we ever face a crisis of this nature again? 
The problem is incentives – what bailouts imply for attitudes and behavior within the financial sector. 
The protection that was extended to banks and other financial institutions since summer 2007, and more comprehensively since the failure of Lehman Brothers and AIG in September 2008, sends a simple signal. 
If you are “big” relative to the system, you are more likely to get generous government support when there is system-wide vulnerability. 
How big is “big enough” remains an open and interesting question. 
Major hedge funds are presumably looking for ways to become bigger and take on “systemic importance.” 
Ideally – from their point of view – they will bulk up without attracting regulatory scrutiny, i.e., no ex ante limits on their risk-taking activities will be imposed. 
If all goes well, these hedge funds – and of course the banks that are already undoubtedly Too Big to Fail (TBTF) – get a great deal of upside. 
Of course, if anything goes wrong, everyone who is TBTF – and who has lent to TBTF firms – expects to receive government protection. 
This expectation lowers the cost of credit for megabanks today (relative to their competitors, which are small enough that they are more likely to be allowed to fail). 
As a result, all financial institutions gain a powerful incentive to bulk up (and borrow more) in hope of also becoming bigger and therefore “safer” (from creditors’ point of view, not from a social perspective.) 
Top US policymakers acknowledge that this structure of incentives is a problem – interestingly, many of their European counterparts are not yet willing even to discuss these issues openly. 
But the rhetoric from the White House and the Treasury Department is “we have ended TBTF” with financial reform legislation currently before Congress and likely to be signed by Obama within a month. 
Unfortunately, this is simply not the case. 
On the critical dimension of excessive bank size and what it implies for systemic risk, there was a concerted effort by Senators Ted Kaufman and Sherrod Brown to impose a size cap on the largest banks – very much in accordance with the spirit of the original “Volcker Rule” proposed in January 2010 by Obama himself. 
In an almost unbelievable volte face, for reasons that remain somewhat mysterious, Obama’s administration itself shot down this approach. 
“If enacted, Brown-Kaufman would have broken up the six biggest banks in America,” a senior Treasury official said. “If we’d been for it, it probably would have happened. 
But we weren’t, so it didn’t.” 
Whether the world economy grows now at 4% or 5% matters, but it does not much affect our medium-term prospects. 
The US financial sector received an unconditional bailout – and is not now facing any kind of meaningful re-regulation. 
We are setting ourselves up, without question, for another boom based on excessive and reckless risk-taking at the heart of the world’s financial system. 
This can end only one way: badly. 

Secular Stagnation or Self-Inflicted Malaise? 
MUNICH – Almost exactly eight years ago, the Lehman Brothers collapse plunged the global economy into recession. 
The interbank market collapsed, and the entire industrialized world was thrown into the worst crisis since the end of World War II. 
Though central banks have maintained ultra-low interest rates, the crisis hasn’t yet been fully overcome. 
On the contrary, numerous economies, such as the southern European countries and France, simply aren’t making any headway. 
And Japan has been on the ropes for a quarter-century. 
Some economists believe that this is evidence of “secular stagnation,” a phenomenon described in 1938 by the American economist Alvin Hansen, who drew on Karl Marx’s Law of the Tendency of the Rate of Profit to Fall. 
Owing to the gradual exhaustion of profitable investment projects, according to this view, the natural real interest rate has continued to fall. 
Stabilizing the economy thus is possible only by an equivalent decline in policy interest rates. 
In view of the huge credit bubble that preceded the crisis in Japan, the United States, and southern Europe, and the aggressive policies pursued by central banks over the last few years, I doubt that this theory is correct. 
In fact, I find it plausible that a very different mechanism lies behind the post-2008 stagnation, which I refer to as “self-inflicted malaise.” 
This hypothesis is best understood in the context of the economist Joseph Schumpeter’s theory of the business cycle. 
Faulty expectations on the part of market participants regularly cause credit and asset-price bubbles. 
Investors, expecting prices and incomes to rise, purchase residential and commercial properties, and they take chances on new business ventures. 
Real-estate prices start to rise, a construction boom occurs, and a new phase of rapid expansion begins, partly sustained by the revitalization of the domestic economy, including services. 
The growth in incomes increasingly emboldens borrowers, which further heats things up. 
Then the bubble bursts. 
Investment collapses and real-estate prices fall; businesses and banks go bankrupt; factories and residential buildings are vacated; and employees are laid off. 
Once prices and wages have fallen, new investors step in with new business ideas and establish new firms. 
After this “creative destruction,” a new phase of rapid expansion sets in. 
In the current crisis, however, monetary policy preempted the creative destruction that could have formed the basis for a new upswing in growth. 
Asset holders talked central bankers into believing that Schumpeter’s economic cycle could be overcome by large-scale bond purchases financed via the printing press, and by corresponding interest-rate reductions. 
To be sure, these measures stopped the fall in asset prices halfway and thus saved much wealth. 
But they also prevented sufficient numbers of young entrepreneurs and investors from risking a new start. 
Instead, established firms remained in place, keeping themselves afloat but lacking the wherewithal for new investments. 
In Japan and Europe, in particular, large numbers of such zombie firms and banks survived, and they are now blocking would-be competitors able to drive the next upswing in growth. 
The resulting economic ossification looks like the secular stagnation that Hansen described; in fact, the malaise is self-inflicted. 
And, because low interest rates have reduced asset managers’ returns, some central banks – and the European Central Bank, in particular – have relied on successive interest-rate cuts in an effort to engineer ersatz value gains for assets. 
The economy is thus caught in a trap, forcing the ECB to engage in ever more radical monetary-policy measures. 
Its current program of quantitative easing is meant to double the money supply in a very short period. 
Further guns are being moved into position, such as successively more negative nominal interest rates or so-called helicopter money. 
The only way out of the trap is a hefty dose of creative destruction, which in Europe would have to be accompanied by debt relief and exits from the eurozone, with subsequent currency devaluations. 
The shock would be painful for the incumbent wealth owners, but, after a rapid decline in the dollar values of asset prices, including land and real estate, new businesses and investment projects would soon have room to grow, and new jobs would be created. 
The natural return on investment would again be high, meaning that the economy could expand once again at normal interest rates. 
The sooner this purge is allowed to take place, the milder it will be, and the sooner Europeans and others will be able to breathe easy again. 

Creative Europe 
LJUBLJANA – At the Spring European Council meeting on March 13-14, EU member states’ leaders will launch the second cycle of the Lisbon Strategy for Growth and Jobs, a strategy launched in 2000 with the aim of making the EU the most competitive knowledge-based economy in the world. 
The EU’s current economic upturn suggests that the strategy is working, particularly after its renewal in 2005. 
But some areas in which Europe could gain a competitive advantage have been neglected. 
One such area is creativity. 
The Lisbon Strategy owes much to the Austrian economist Joseph Schumpeter, who claimed that profit results from innovation. 
This is an appropriate European compromise between the theory that profit comes from exploitation (Marx) and the view that it results from transactions that make both parties happier than they were before (Friedman). 
It is also appropriate for an economy where goods and services fulfill people’s needs and where products compete on their technical or functional features. 
But in post-industrial societies, consumers look for more in a product than just functionality. 
Relatively prosperous Europeans tend not to purchase a car merely to get from point A to point B, shoes to keep their feet dry, a watch just to tell the time, or a bottle of water only to quench their thirst. 
We buy things that mean something more to us than what we use them for. 
The intangible characteristics that make a product more than simply useful are what differentiate expensive products from cheap products, and include design, brand name, and environmental friendliness. 
We may also be willing to pay more for products that are manufactured at home, in a safe workplace, without child labor, etc. 
These characteristics are intimately linked to the values and morals – to the general culture – prevailing in the market. 
Companies apparently recognize this. 
According to the popular business writer Daniel Pink, giving meaning or sense to a product or a service is increasingly becoming the main source of added value. 
This is all the more true as Asian universities turn out vast numbers of engineers and other knowledge workers who are just as qualified as their European colleagues, and as brilliant in technical design as they are in optimizing the manufacturing process. 
Adding value in this non-functional sense is a quintessentially European strength. 
It is at least as much an art as it is a science, and it goes beyond technical and business innovation. 
World-class design and brands already have a foothold in Europe, where creative industries are stronger that the car industry. 
There are good reasons for that. 
Europe gave the world Hippocrates, da Vinci, Voltaire, Beethoven, Florence Nightingale, Dostoyevski, Nobel, John Lennon, and many others who have shaped world culture. 
Today, Europe is defending the moral high ground when it comes to values such as human rights, peaceful conflict resolution, social welfare, and care for the environment. 
Far from being actual or potential obstacles to material success, it is precisely such values that should be celebrated and actively projected into Europe’s economy. 
Embedding Europe’s cultural and ethical background in goods and services that reflect these values would not only set the European economy apart from the rest of the world, but would also strengthen these values globally. 
Perhaps the most urgent example is Europe’s moral leadership on climate change, which, supported through policies such as the Lisbon Strategy, should be translated into technical leadership and early entry into lucrative markets for low-carbon products. 
The “soft power” of goods and services reflects the cultural environment that creative individuals require for their work and growth. 
In addition, such goods and services require properly cultivated consumers. 
As the urban studies theorist Richard Florida has argued, it is technology and tolerance that attract talents. 
Europe should therefore become a magnet for creative people from all over the world and should, based on its rich cultural heritage, raise its own. 
Creating meaning and preserving values is probably the one task that Europe has to undertake on behalf of the entire world. 
If the EU focuses on infusing its goods and services with Europe’s guiding ideas and values, its economy will reap significant rewards. 
This will require an explicit emphasis on ensuring the conditions that promote and sustain creativity, and the updated Lisbon Strategy that is to be launched in March should include a commitment that Europe will move in this direction. 

Credit Default Swaps on Trial 
CHICAGO – The lawsuit filed by the US Securities and Exchange Commission against Goldman Sachs for securities fraud, charging the bank with misrepresenting the way a collateralized debt obligations (CDO) had been formed, has revived public disgust at credit default swaps (CDS), the instrument used to bet against these CDOs. 
Before the 2008 financial crisis, CDSs were an esoteric product, known only to a restricted number of sophisticated investors and specialized academics. 
Today, they are a household name, synonymous with unruly speculation, boundless greed, and, ultimately, systemic instability. 
Indeed, CDSs are blamed as one of the main causes of the financial crisis. 
The legality of Goldman Sachs’ behavior will be determined by a court of law, but CDSs’ odious reputation is jeopardizing the survival of this instrument in the court of public opinion. 
Riding the populist wave, several politicians have proposed a ban on CDSs. 
The recent Greek crisis has further galvanized the anti-CDS camp. 
After all, isn’t it the fault of the CDS market’s avaricious speculators that Greece was on the verge of default and that Greek public employees have had to endure deep wage cuts? 
In a word, no. 
Far from being the spawn of the devil, CDSs are a useful financial instrument that can improve not only financial stability, but also the way that companies and countries are run. 
Banning them will do more harm than good. 
Any attempt in that direction is detrimental, because it would divert attention from the useful goal of disciplining the CDS market to make it more transparent, stable, and efficient. 
One key advantage (if not the key advantage) of capitalism over central planning is the information conveyed by market prices. 
When the demand for potatoes at the current price exceeds supply, the price of potatoes rises, signaling scarcity. 
Individual farmers do not need any bureaucratic directive to decide whether to plant more potatoes: an increase in prices creates an incentive to plant more potatoes; a decrease in prices is a signal that they should plant less. 
The same is true with stock prices. 
An increase in the stock price of steel manufacturers suggests an increase in the demand for steel, which induces entrepreneurs to start more steel plants and investors to provide them with the money. 
Conversely, a decrease in the stock price of steel manufacturers leads entrepreneurs to liquidate existing plants and dissuades investors from committing more resources to the sector. 
Unfortunately, sometimes prices fail to perform this signaling function properly, as the dot-com and housing bubbles in recent years showed. 
During the dot-com bubble, prices signaled huge demand in the Internet sector. 
For this reason, hundreds of millions of dollars were wasted in advertising improbable companies on TV and building network capacity beyond any foreseeable need. 
During the housing bubble, prices signaled a severe scarcity of houses. 
So billions of dollars were poured into new developments in remote locations where nobody wants to live. 
Given the large misallocation of resources in such cases, it is vital to understand why prices failed to provide an accurate signal to investors. 
Why did the United States, with the most developed financial market in the world, experience two major bubbles in less than a decade? 
An expansive monetary policy is partly to blame, but the real problem is an institutional setting that favors bullish sentiment. 
Pension funds, mutual funds, and investment banks are all long in the stock market. 
Shorting a stock is difficult and risky: it is difficult because borrowing stocks is hard to do, and it is risky because shorting has limited upside but infinite downside. 
In other words, the traditional securities available to investors make it easier to bet in favor of a company than against it, causing prices to be affected more by irrational exuberance than by panics. 
In this respect, CDSs are unique. 
Because they function as insurance on borrowers’ ability to meet their obligations, they make it easier to express a negative opinion on a company or a security. 
To express a negative view via the CDS market, investors do not need to locate securities to borrow (a prerequisite to shorting), and they risk only a limited premium, while they have the opportunity to gain many times that. 
It was the CDS market that allowed the negative – and correct – view of the housing market held by John Paulson and others finally to be embedded into market prices. 
They made the bubble burst. 
While painful for the rest of society, this is healthy. 
The longer a bubble lasts, the more damage it causes. 
The same reasoning applies to the Greek crisis. 
The CDSs on Greece provide a useful signal of the country’s compromised financial situation. 
It is thanks to the spike in the CDS market that the Greek government tightened its budget and improved its fiscal position. 
Medical tests, too, often bring bad news, but abolishing medical testing does not solve problems, it only hides them, making them worse. 
The reason that politicians and corporate managers alike hate CDSs is precisely because CDS rates are so useful and so prompt in exposing their mistakes. 
Nobody likes to be found wrong. 
For this reason, politicians and powerful businessmen often cajole the press, the credit rating agencies, and even the analysts to portray their actions in a positive light. 
As the main source of negative information that is not sensitive to power, the CDS market is feared, and politicians want to eliminate it. 
Of course, the CDS market is not perfect. 
In fact, it is not really an organized market, but only an informal virtual exchange. 
The existing rules are designed not to make it transparent or resilient, but to make it more profitable for large institutions like Goldman Sachs and JP Morgan. 
So intervention is needed to formalize the CDS market and force appropriate collateralization, so that no government has to step in to rescue any counterparty. 
But regulating the CDS market does not mean banning it. 
To do so would only sow the seeds of the next bubble. 

The Real Engine of the Business Cycle 
CHICAGO – Every major financial crisis leaves a unique footprint. 
Just as banking crises throughout the nineteenth and twentieth centuries revealed the importance of financial-sector liquidity and lenders of last resort, the Great Depression underscored the necessity of counter-cyclical fiscal and monetary policies. 
And, more recently, the 2008 financial crisis and subsequent Great Recession revealed the key drivers of credit-driven business cycles. 
Specifically, the Great Recession showed us that we can predict a slowdown in economic activity by looking at rising household debt. 
In the United States and across many other countries, changes in household debt-to-GDP ratios between 2002 and 2007 correlate strongly with increases in unemployment from 2007 to 2010. 
For example, before the crash, household debt had increased enormously in Arizona and Nevada, as well as in Ireland and Spain; and, after the crash, all four locales experienced particularly severe recessions. 
In fact, rising household debt was predictive of economic slumps long before the Great Recession. 
In his 1994 presidential address to the European Economic Association, Mervyn King, then the chief economist at the Bank of England, showed that countries with the largest increases in household debt-to-income ratios from 1984 to 1988 suffered the largest shortfalls in real (inflation-adjusted) GDP growth from 1989 to 1992. 
Likewise, in our own work with Emil Verner of Princeton University, we have shown that US states with larger household-debt increases from 1982 to 1989 experienced larger increases in unemployment and more severe declines in real GDP growth from 1989 to 1992. 
In another study with Verner, we examined data from 30 countries over the past 40 years, and showed that rising household debt-to-GDP ratios have systematically resulted in slower GDP growth and higher unemployment. 
Recent research by the International Monetary Fund, which used an even larger sample, confirms this result. 
All told, the conclusion that we draw from a large body of research into the links between household debt, the housing market, and business cycles is that expansions in credit supply, operating primarily through household demand, are an important driver of business cycles generally. 
We call this the “credit-driven household demand channel.” 
An expansion in the supply of credit occurs when lenders either increase the quantity of credit or decrease the interest rate on credit for reasons unrelated to borrowers’ income or productivity. 
In a new study, we show that the credit-driven household demand channel rests on three main conceptual pillars. 
First, credit-supply expansions, rather than technology or permanent income shocks, are the key drivers of economic activity. 
This is a controversial idea. 
Most models attribute macroeconomic fluctuations to real factors such as productivity shocks. 
But we believe the financial sector itself plays an underappreciated role through its willingness to lend. 
According to our second pillar, credit-supply expansions affect the real economy by boosting household demand, rather than the productive capacity of firms. 
Credit booms, after all, tend to be associated with rising inflation and increased employment in construction and retail, rather than in the tradable or export-oriented business sector. 
Over the past 40 years, credit-supply expansions appear to have largely financed household spending sprees, not productive investment by businesses. 
Our third pillar explains why the contraction phase of the credit-driven business cycle is so severe. 
The main problem is that the economy has a hard time “adjusting” to the precipitous drop in spending by indebted households when credit dries up, usually during banking crises. 
Even when short-term interest rates fall to zero, savers cannot spend enough to make up for the shortfall in aggregate demand. 
And on the supply side, employment cannot easily migrate from the non-tradable to the tradable sector. 
On top of that, nominal rigidities, banking-sector disruptions, and legacy distortions tend to make post-credit-boom recessions more severe. 
Our emphasis on both the expansionary and contractionary phases of the credit cycle accords with the perspective of earlier scholars. 
As the economists Charles P. Kindleberger and Hyman Minsky showed, financial crises and credit-supply contractions are not exogenous events hitting a stable economy. 
Rather, they should be viewed as at least partly the result of earlier economic excesses – namely, credit-supply expansions. 
In short, credit-supply expansions often sow the seeds of their own destruction. 
To make sense of the bust, we must understand the boom, and particularly the behavioral biases and aggregate-demand externalities that play such a critical role in boom-bust credit cycles. 
But that leaves another question: What sets off sudden credit-supply expansions in the first place? 
Based on our reading of historical episodes, we contend that a rapid influx of capital into the financial system often triggers an expansion in credit supply. 
This type of shock occurred most recently in tandem with rising income inequality in the US and higher rates of saving in many emerging markets (what former US Federal Reserve Chair Ben Bernanke described as the “global savings glut”). 
Although we have focused on business cycles, we believe the credit-driven household demand channel could be helpful in answering longer-run questions, too. 
As the Federal Reserve Bank of San Francisco’s Òscar Jordà, Moritz Schularick, and Alan M. Taylor have shown, there has been a long-term secular increase in private – particularly household – credit-to-GDP ratios across advanced economies. 
And this trend has been accompanied by a related decline in long-term real interest rates, as well as increases in within-country inequality and across-country “savings gluts.” 
The question now is whether there is a connection between these longer-term trends and what we know about the frequency of business cycles. 

Credit Where Credit is Due 
In the old days, when communist central planning suffocated China’s economy, fixed-asset investment was the regime’s measure of economic progress. 
The more tons of steel produced, slabs of concrete poured, and gallons of crude oil pumped out of the ground the better. 
The consumption-based economy, to which the capitalist West had apparently succumbed, was written off as a paper tiger. 
On the surface, nothing much has changed. 
China remains obsessed with investing –construction of factories and infrastructure accounted for 41% of GDP and around half of economic growth in 2005. 
Moreover, the country’s continuing high levels of fixed-asset investment make sense – building roads, water pipes, metro systems, telecommunication networks, and electronics factories is what a vast and rapidly modernizing country must do. 
But the Communist Party leadership has decided that in the next decade hairdressers, accountants, karaoke hostesses, tour guides, and movie directors will be the new pillars of economic performance. 
As investment growth slows and export markets endure their unpredictable business cycles and protectionist moods, China will increasingly rely upon consumption for creation of jobs and income – and the service industry is where most consumption occurs. 
There is only one problem: Chinese people do not seem to want to consume, at least according to commonly cited data. 
National savings amounted to roughly 50% of GDP in 2005, which apparently means that households are so afraid of hospital bills, school fees, and the down-payment on the new apartment they dream of that they save every penny they earn. 
But that savings number hides something very critical. 
Chinese households do save a lot, about one quarter of their income. 
But as Louis Kuijs of the World Bank has pointed out, what sets China apart from many other developing countries is not that households save uniquely high levels of their income, but that enterprises do. 
Indeed, private consumption in China has been growing in real terms at an annual rate of around 10% for the last seven years. 
This means that getting Chinese households to spend more is not a hopeless mission. 
According to the credit card provider MasterCard, by 2010 China’s middle class will number 100 million, each with discretionary spending of $5,590, and 7.5 million affluent people, each with $13,500 to spend. 
But why wait until 2010? 
If a decent credit culture can be created, people can have access to tomorrow’s income today. 
People in their twenties could borrow money to buy a house, start a family, and go on holiday, paying the money back when they are in their fifties and would much rather stay at home and enjoy their grandchildren. 
Consumer credit began in China only in the late 1990’s, with regulations allowing banks to offer mortgage loans, which now amount to about 10% of total loans. 
According to a recent survey by the People’s Bank (the central bank), households in the ten largest cities spend about 35% of their monthly income on average on mortgage repayments, which is comparable to other countries. 
Loans for education and car purchases are now also possible, and 2% of households have credit cards, which is obviously still low compared to 75% in the United States, but there were no such households just five years ago. 
Although debit cards remain far more common, banks like China Merchants Bank have been aggressive in issuing real credit cards. 
A key problem with the credit card rollout is that the payment system is not yet in place. 
UnionPay, the market leader, is expensive for retailers to install, and many shops prefer cash to avoid tax. 
However, outstanding credit on cards is growing, more than quadrupling year on year in 2004, to 0.18% of GDP, according to the consulting firm McKinsey. 
Several other obstacles must nonetheless be surmounted in order to boost consumption. 
First, banks still have few reliable means of checking borrowers’ creditworthiness, including previous loans from other banks. 
Educational loans should be booming in urban and rural China, but banks do not know to whom to lend, so they are not. 
Second, banks are vulnerable to non-repayment. 
The car loan market underwent a mini-boom in 2003-04, but non-repayment rates in excess of 50% forced banks to pull back. 
The difficulty of repossession (where did the borrower park the car?) and sale (the used-car market is still in its infancy) meant that most of these bad loans had to be written off. 
There is also a dark cloud over the mortgage market following a judgment by the Supreme People’s Court in 2003 that banned the repossession of homes that are a primary residence. 
A recent revision of that decision permits banks to repossess homes, but only if they help arrange alternative lower-cost housing – an administrative nightmare for lenders, particularly if a lot of people start defaulting at the same time. 
Third, consumers are generally not adept at dealing with interest-rate risk. 
Nearly all mortgages have floating rates that vary with the five-year loan rate set by the People’s Bank. 
However, late last year, Everbright Bank and some others began offering fixed-rate mortgages. 
Take-up has been slow, but the April 2006 surprise hike in bank rates may help to sow greater public awareness of interest-rate risk. 
Finally, China needs a greater diversity of financial products. 
Until recently, banks could offer only simple savings accounts. 
But structured deposits – for example, deposits whose rate of return is linked to the performance of the New York Stock Exchange – are becoming increasingly popular. 
Securities investment funds now account for roughly 30% of tradable stock market capitalization, although this represents only 0.9% of GDP, compared to more than 5% in India. 
The economic significance of new financial products is likely to grow more rapidly as foreign banks enter the market. 
If China’s regulators issue the right licenses, the financial sector will play a key role in nurturing and sustaining the consumer society of tomorrow. 

Crime and Punishment, Refugee Style 
The horrible murder of Giovanna Reggiani that took place near a Romanian refugee camp in the suburb of Tor di Quinto in Rome shocked both Italy and Romania. 
The case gained significance by adding fuel to the fiery public debates now underway not only in Italy but across Europe on the status of refugees and foreign residents. 
Some Italians responded violently; some Italian and Romanian politicians, eager to offer quick and tough solutions, made scandalous statements that echoed the xenophobic and totalitarian slogans of the past. 
We are encountering, not without irony, a kind of grotesque reverse of the “national pride” seen when cultural and sporting stars are appropriated by the state and presented as part of the collective patrimony. 
Although the murder was an individual crime, to compound the tragedy of a crime through measures that target an entire minority is irresponsible, and will have grave moral and social consequences not only for the unjustly punished but also for the punishers. 
No minority is, after all, homogenous, which was demonstrated by the fact that the person who alerted the police was a compatriot of the killer and from the same camp of refugees. 
Collective punishment also means not only a type of amnesia by Italians and Romanians about what happened under fascism, nazism, communism, but also for their own national histories. 
Italians, after all, migrated not only from Italy’s south to its north, but also to other countries looking for a better life. 
They, too, know what it is like to be a refugee, an exile, a stranger. 
Romania, for its part, has a history not at all admirable in regard to it its “Roma” minority, whose shortcomings and deeds always attract blame but never any real action by the state to improve their condition. 
The Roma minority first appeared in Romania in the 14th century, but only in 1856 was its slavery abolished! 
Romanian society nowadays is dealing with the consequences of decades of terror and lies, of demagogy and poverty that scarred several generations. 
These wounds cannot be instantly healed. 
Communism’s fall unleashed a huge surge of human energy, but this started with a bizarre and cynical transfer of privileges and assets within the old “nomenklatura,” and with a new general Darwinian struggle. 
Although economic progress is visible across Romania, and a gradual renewal of a civic conscience through the arrival of democracy has appeared, Romania’s burlesque of a political life – despite its European Union membership – shows how persistent its bad old habits of duplicity, inconsistency, fatalism, inertia, and corruption are. 
Corruption, indeed, now seems to be the society’s engine. 
There remain in Romania today disadvantaged and neglected groups who are pushed to society’s sordid margins. 
The Roma population, indeed, has 41% seasonal workers, 33.5 % lack any professional skills, 38.7 % are illiterate. 
This is not only a Romanian problem, but has become a problem for all of Europe. 
Nicolae Romulus Mailat, the young man of 25 accused of Giovanna Reggianni’s murder, had been interned at age 14 in a school for re-education. 
He was later condemned again for theft, but was pardoned a year before arriving in Italy. 
Was poverty the cause of his juvenile offenses in Romania and his crime in Italy? 
In Dostoievski’s great novel Crime and Punishment , Raskolnikov is pushed to committing his crime not only by his nihilism and rebelliousness, but also by poverty. 
His social identity is not the same as Mailat’s, his spiritual “entity” is drastically different, but his double crime is no less abominable. 
For now, there is no reason to hope that Mailat will find through his crime a new start towards salvation through suffering and spiritual renewal. 
But perhaps we should hear again the words of one of Raskolnikov’s interlocutors when he speaks about the “disgusting Sodome” in which he wanders and says that poverty is not a vice, but misery. 
In poverty one still keeps a kind of “innate noble sentiment,” while in misery moral collapse is inherent and disastrous. 
Mailat sought escape from his Romanian misery and his Romanian past, but could not imagine that he would find in an Italian refugee camp as much misery as before; that the image in the mirror of his daily new life would be that of a killer. 
People who know the frightening neighborhood of Tor di Quinto, where Giovanna Reggiani was killed have harsh words to say about the neglect and indifference of Rome’s city government. 
This isn’t, of course, an excuse for this crime or for any crime, but it cannot be ignored. 
Although we cannot expect a miraculous reincarnation of the criminal Mailat, we can and must ask for a radical review of the situation that marginalized people like him face. 
That review must be done not only by Romanian and Italian states, but by the Roma community in Romania and Italy and also by the European community itself. 
For the perpetrator is a member of all these communities. 
We hear voices now who are exasperated by the EU’s enlargement and the social tensions it provoked. 
Increased migration is, indeed, a daily fact in our centrifugal and global modernity, but it isn’t only a negative one. 
The free movement of people doesn’t only mean more social conflict and criminality. 
It also means a gradual and beneficial cohabitation that began immediately after WWII as a common effort to help out the defeated countries and enhance their chances for democracy and prosperity. 
When I visited Barcelona and Madrid last year, I was delighted to receive enthusiastic news about the successes of the growing Romanian community in these cities. 
Some Romanian refugees were already candidates for the local elections, praised for their hard work and honesty. 
It will happen, I hope, also in other places and not only with Romanians but with all the people ready to face the provocations of our time. 
For these are examples not only of individual success, but are victories for the community as well. 
Europe deserves to prove that it is a real community, one diverse, democratic, spiritual, free, and prosperous. 

Criminal Genes? 
Can genes predispose a person to crime? 
Some American lawyers are now using such a “genetic defense” as mitigation for convicted murderers. 
Are there genes for alcoholism? 
Or genes that make you gay, religious, prone to divorce, or even genes that determine how you vote? 
If you believe the claims of some of the scientists who call themselves “behavior geneticists”, many aspects of human behavior are in some way laid down by our genes. 
Claims of this type have a long, discredited history, stretching back through the eugenics movement of the early 20th century to its acknowledged ‘father,’ Francis Galton, in Victorian England. 
But whatever the eugenics movement’s extravagant claims and social crimes, including the forced sterilization of thousands (mainly women) in Europe and the US, today it is supposed to be different. 
Today, the claims are supposedly backed by advances in real molecular science, in genetics. 
Of course, many social problems run in families; our societies are not egalitarian; people living in poverty tend to rear children who live in poverty. 
This doesn’t, however, make poverty genetic. 
Similarly the children of rich parents may inherit wealth, but this is social, not genetic inheritance. 
Sorting out the influence of genes and environment during the long, complex processes of human development is difficult – indeed, it is never possible to say of any individual, that x% of some aspect of their character is genetic, y % environmental. 
The two are indissolubly associated over the many years during which we construct ourselves out of the raw material of genes and environment. 
What geneticists do try to do is to find a measure of how much of the variation in some trait within a population may be attributed to genes, and whether any specific genes play a part in generating that trait. 
While it is possible to do this for diseases where the diagnosis is relatively unambiguous and there is only a single abnormal gene associated with the condition (Huntington’s disease is a good example), this is a far cry from saying that a specific gene causes you to be criminal or alcoholic. 
Genes certainly help shape our behavior, but that behavior is profoundly mediated by the processes of development, culture, social environment, and even technology. 
It is impossible to speak of genes that ‘determine’ any complex aspect of human thought or action. 
Take ‘aggression’. 
We use the word to mean many different types of behaviour. 
We speak of aggressive businessmen, or aggressive surgery, in positive terms. 
But we also speak of men’s aggressive behaviour to their partners or children, aggressive confrontations among football fans, or of police against protestors. 
We also speak of waging aggressive war. 
Are all these manifestations of the same ‘condition?’ 
Complicating matters, the same act involving the same genes, muscles and so forth, can sometimes be seen as criminally aggressive and sometimes as doing your duty. 
Take the case of the British soldier Lee Clegg who, while on duty in Northern Ireland, shot and killed a teenage joyrider whose car failed to stop at a security check. 
Clegg was tried, convicted, and imprisoned for murder but had his conviction quashed and was reinstated – and then promoted – in the army. 
So, did he have genes for criminal aggression, or is he a good soldier? 
If this ‘aggression phenotype’ is so poorly defined how can we hope to study its genetics? 
Sadly, this hasn’t stopped people from trying. 
This is illustrated by a research paper‚ published in the journal Science in 1993 by a team led by Han Brunner describing a Dutch family some of whose men were reported as being abnormally violent. 
In particular, eight men “living in different parts of the country at different times across three generations showed an ‘abnormal behavioural phenotype.’” 
The types of behavior included “aggressive outbursts, arson, attempted rape and exhibitionism.” 
Can such widely differing types of behavior honestly be subsumed under the single heading of aggression? 
Such an assertion, if made in the context of a study of non-human animal behaviour, would not be likely to pass scientific muster. 
Yet Brunner's paper was published in one of the world’s most prestigious journals to considerable publicity. 
Much attention was devoted to its report that each of these ‘violent’ individuals also carried a mutation in the gene coding for the enzyme monoamine oxidase‚ (MAOA). 
Could this mutation be the ‘cause’ of the reported violence? 
Brunner subsequently denied the direct link and dissociated himself from public claims that his group had identified a ‘gene for aggression’. 
Yet the paper is now widely cited, and what was described in its title as ‘abnormal’ now becomes ‘aggressive behaviour.’ 
Thus a paper describing mice lacking the monoamine oxidase A enzyme, appeared in Science under the title “Aggressive Behaviour” two years after the Brunner paper. 
The authors, primarily a French group headed by Olivier Cases, described mouse pups showing “trembling, difficulty in righting, and fearfulness...frantic running and falling over..(disturbed) sleep...propensity to bite the experimenter...hunched posture...” 
Of all these features of disturbed development the authors chose only to highlight aggression in their paper’s title, and to conclude their account by claiming that these results “support the idea that the particularly aggressive behavior of the few known human males lacking MAOA ...is a more direct consequence of MAO deficiency.” 
Such evidence‚ slight though it is‚ has become part of the arsenal employed by, for example, the US Federal Violence Initiative, which aims at identifying inner city children regarded as ‘at risk’ of becoming violent as result of predisposing biochemical or genetic factors. 
This program, proposed originally by the then director of the US National Institute of Mental Health, Frederick Goodwin, originally ran into a hostility over its potentially racist overtones – ie, repeated coded references to “high-impact inner city” youth. 
Not long after, Goodwin left his directorship, and proposals to hold a meeting to discuss his proposals were abandoned several times. 
Nonetheless, aspects of the research program continue in Chicago and other cities. 
The example of ‘aggression genes’ could be made over and over again in relationship to many of the other claims to explain the genetic roots of abnormal or undesirable human behavior. 
Such claims hit the headlines, and now influence social policy initiatives. 
Yet uncritical attempts to apply biological science to legislation about the human condition, if we are not careful, may lead us back into the dark days of eugenics. 

Libor Unplugged 
LONDON – Last year’s Libor scandal was a shock to the body politic in London. 
Despite all that had gone before, the public and their representatives were stunned to learn that bankers had systematically undermined the foundations of a global market benchmark – one with London in its name to boot – for personal gain. 
Britain’s Chancellor of the Exchequer, George Osborne, felt compelled to launch a parliamentary inquiry. 
On June 19, after a year’s work, the Parliamentary Commission on Banking Standards finally laid a large egg. 
Bankers will certainly regard the outcome as what in England we like to call a “curate’s egg” (served a rotten egg by his bishop, a young clergyman, when asked whether the egg was to his liking, replied that it was “good in parts”). 
They will choke on the commission’s recommendation of a new criminal offense for reckless conduct that leads to taxpayer bailouts, reinforced by a new “senior persons” regime that would ascribe all bank functions to a specific individual, who would be held personally liable when things go wrong. 
The commission argues that “top bankers dodged accountability for failings on their watch by claiming ignorance or hiding behind collective decision-making.” 
Its members aim to make that impossible. 
If they have their way, behaving recklessly with banking assets will result in a prison sentence, with no Monopoly-style “get out of jail free” card for financial masters of the universe. 
I can already hear the sound of lawyers sharpening their pencils: the offense must be defined specifically enough to withstand a human-rights challenge. 
But, if implemented, the commission’s proposed regime would certainly be tougher than what is now on offer in New York or other banking centers. 
And British MPs are noticeably impatient with what they consider the glacial pace of change in global regulation; they want action now. 
If the United Kingdom does proceed in this unilateral way, what would the consequences be for London’s banking industry? 
Would New York, Frankfurt, or even Paris receive a competitive boost as international bankers, alarmed at the prospect of time behind bars if their derivative trades blow up again, flee the City? 
The commission’s members offer two, somewhat contradictory, answers to that question. 
The first is that, frankly, they don’t care. 
“The risk of an exodus should be disregarded,” the commission says, noting that the advantages of being a global financial center have been accompanied by serious associated risks to the domestic economy. 
Unlike the United States, where the financial sector is smaller as a share of GDP, the UK economy has still not recovered the output lost in the post-2008 Great Recession, owing to continued retrenchment in the banking sector. 
The commission’s members do recognize that London’s loss of status as a global financial center would be costly in terms of jobs and output, so they developed a second line of argument. 
“There is nothing inherently optimal,” they say, about a level playing field in international finance. 
Attempts to develop a single European financial market have, in their view, forced countries to respond to the failings revealed by the 2008 crisis at the speed of the “slowest ship in the convoy.” 
By contrast, the commission argues, “there may be big benefits to the UK as a financial center from demonstrating that it can establish and adhere to standards significantly above the international minimum.” 
In addition to the tough new regime of personal accountability, the commission would supplement the Basel standards on bank capital with a tight leverage ratio. 
The British government, preoccupied with finding ways to stimulate growth as the next election approaches, will no doubt think hard before making any changes that might drive business offshore. 
But the government is caught between a rock and a hard place, hemmed in by a parliament that, strongly backed by a bank-hostile press and public opinion, is eager to enact reforms, and by EU directives to implement a tougher regime. 
So, is the Commission right that the government should move quickly on reform and disregard the consequences? 
Such evidence as one can find from international surveys suggests that the regulatory changes implemented so far have not driven bankers away. 
London has already implemented an approach that is tougher than that of most other financial centers. 
Taxes levied on executive bonuses have cost international banks dearly. 
Regulators are now appreciably tougher and more intrusive than their counterparts in New York. 
Bankers don’t like it, but they have not yet left for more congenial locations. 
Nor do they indicate that they will. 
Indeed, the latest Z-Yen index of global financial centers showed London maintaining its first-place position – and with its margin over New York unchanged. 
The Asian centers are catching up, as one would expect, but they are hardly direct competitors for business that would otherwise be done in London. 
Frankfurt and Paris, the most plausible European competitors, languish in tenth and 26th place, respectively. 
Rating agencies and shareholders are nervous when they hear that a stricter regulatory environment is not necessarily a disadvantage. 
But a regime in which personal responsibility strongly affects individuals in one jurisdiction will give bankers pause for thought, especially in the case of global banks with complex matrix-management systems that enable product heads to be moved elsewhere. 
British legislators will need to be satisfied that any new regime captures the right people, in the right way. 
However politically appealing the idea of rogue bankers behind bars might be, putting them there is likely to remain very challenging in practice. 

Criminalizing HIV 
JOHANNESBURG – “If the law supposes that,” Mr. Bumble says in Charles Dickens’ novel Oliver Twist, “the law is an ass.” 
A criminal law that makes it preferable for carriers of HIV not to know that they are infected and capable of spreading it to others, including their loved ones, seems particularly suited to Mr. Bumble’s condemnation. 
Yet tragically, in a misguided attempt to thwart the spread of HIV and AIDS, lawmakers in many parts of the world have passed criminal statues that promote ignorance about the disease, punish its victims, and enhance the chances that the virus will infect new victims. 
Some countries in Western and Central Africa are enacting poorly drafted policies based on the African Model Law, which makes it a criminal offense for any person infected by the virus to transmit it to someone else or to expose another person to it. 
In some jurisdictions, prosecutors can bring charges against pregnant women who are HIV-positive for potentially exposing the virus to their unborn children. 
There are, to be sure, rare and dramatic cases in which a person with HIV infects another with the specific intention of inflicting harm. 
It is a reality that men infected with HIV or AIDS in some parts of Africa have even raped girls believing that sex with virgins is a cure. 
And some women’s rights advocates have supported laws that criminalize transmitting HIV, arguing that these laws would punish men who concealed their HIV-positive status from their sexual partners, including their wives and girlfriends. 
But existing criminal laws are more than adequate to allow willing justice systems to mete out appropriate sanctions against people who intend harm. 
Criminal laws targeting all HIV carriers, however, are counter-productive and inherently unjust. 
These laws effectively make criminals out of millions of the disease’s innocent victims, especially its women victims. 
In Zimbabwe, for example, a woman was recently sentenced for exposing her lover to HIV even though she did not infect him. 
In Ukraine, human rights lawyers report the troubling case of a woman who was convicted for transmitting HIV to her husband even though he had used a condom, and despite the fact that he asked for the charges to be withdrawn. 
Gender bias against women permeates throughout Africa, and women are usually blamed for bringing HIV into a relationship. 
This popular misconception springs, at least in part, from the fact that women are more likely to know their HIV status because they are routinely tested for HIV at maternity clinics when they seek pregnancy tests or examinations. 
Most men on the other hand—deterred by fear, ignorance, pride, and, sometimes, taboo—refuse to be tested voluntarily. 
This skews the outcomes of legal cases because the lack of testing of men makes it nearly impossible for a woman infected with HIV to establish before a court of law that her male sex partner infected her. 
Laws criminalizing the transmission of HIV undermine public health because they deter people who are HIV-positive and those at risk of acquiring the virus from seeking testing, counseling, and treatment. 
When persons face the possibility of criminal sanctions, not knowing their HIV status can be their most-effective legal defense. 
Prosecutions will act to deter many people—especially men as well as persons living in areas where HIV treatment is largely unavailable—from being tested because it would expose them to the risk of criminal liability. 
Such laws also transform HIV victims into scapegoats for a societal problem for which the governments and broader societies are failing to undertake effective, and sometimes politically or culturally risky, steps that can defeat the disease. 
Sadly, these “risky” steps include things as rudimentary as open discussion of the disease, education, and encouraging people, and especially men, to undergo testing. 
AIDS has claimed more than 25 million lives since medical scientists first identified it in 1981. 
New infections continue to outpace treatment efforts. 
Basic precautionary options such as HIV testing, male and female condoms, and sterile syringes for drug injection remain out of reach for the vast majority of those who need them. 
This woeful situation demands effective action and not more victims and scapegoats. 


The Disintegration of Europe 
LONDON – If a clear signal was needed that the European Union is falling apart at an alarming rate, Hungary’s construction of razor-wire fences along the border with its fellow EU member Croatia is it. 
The crisis in the eurozone has, of course, fragmented financial flows, caused economies to diverge, eroded political support for EU institutions, and set Europeans against one another. 
Now, as governments erect barriers and reinstate border controls, the refugee crisis is disrupting flows of people and gumming up trade. 
And, as the EU unravels, the risk of Britain voting to leave is rising. 
It is often argued that the EU progresses through crises, because they focus minds on the overwhelming need for further integration. 
But such breakthroughs require at least four ingredients: a correct shared understanding of the problem, agreement on an effective way forward, willingness to pool more sovereignty, and political leaders able to drive change forward. 
All four are now lacking. 
EU leaders are weak, divided, and seemingly incapable of setting out a credible vision of the future benefits that European integration could provide, without which they cannot rally popular support and convince recalcitrant governments to bear their fair share of current costs. 
In the absence of an effective, common response, Europe’s crises fester, feed on each other, and foment unilateralism. 
The eurozone and refugee crises have common features that make them tricky to resolve. 
Both involve disputes about sharing costs, complicated by a clash of values, at the center of which lies a newly dominant Germany. 
The EU is hopeless at burden sharing. 
Rather than agree on a fair division of costs, whether of the financial crisis or of welcoming refugees, governments try to minimize their obligations and shift them onto others – thereby increasing the collective costs. 
A banking crisis that could have been resolved through a fair and decisive restructuring of unsustainable debts has ballooned into a much greater economic and political crisis that pits creditors against debtors, both within and among countries. 
Likewise, EU rules stipulating that refugees should be granted asylum in the first member country they reach have proved both unworkable and unfair; because asylum-seekers mostly arrive in southern Europe and want to head north, Greece and Italy ignore the rules and facilitate their passage. 
Transit countries such as Hungary try to divert refugees elsewhere. 
Resettling the almost 750,000 people who have sought asylum in the EU this year – still only 0.14% of the EU population – has thus become an existential crisis. 
Part of the problem is blinkered decision-making. 
EU leaders focus narrowly on limiting short-term financial and political costs, rather than thinking strategically about broader longer-term consequences. 
Restructuring Greek debt in 2010 would have implied a financial hit for French and German banks (and the governments that stood behind them), but a much smaller loss than that implied by the mushrooming costs of an enduring crisis. 
Likewise, whereas welcoming refugees requires an initial investment of public funds, it can pay dividends as soon as the newcomers start working. 
A graying continent needs dynamic young workers to do jobs that locals spurn (or for which they lack the skills), pay for and care for the old, start businesses, and pursue spark new ideas that boost economic growth. 
The clash of values also impedes compromise. 
Germans insist that debtors have a moral obligation to pay what they owe and atone for their sinful profligacy. 
A Slovak prime minister who rejects refugees on the grounds that “Slovakia is built for Slovaks, not for minorities” is hard to buy off. 
Even though the EU’s plan to resettle refugees would remove unwanted newcomers from Hungary, Viktor Orbán, the country’s authoritarian and nationalist leader, objects to it in principle, accusing Germany of “moral imperialism” in trying to foist its generous attitude toward refugees on its neighbors. 
Until recently, German policymakers sought to atone for the country’s Nazi past by seeking a more European Germany and bankrolling the EU, thus helping to smooth over many disputes. 
But, with Germany’s position as creditor-in-chief having thrust it into the driver’s seat, Chancellor Angela Merkel’s administration now seeks to create a more Germanic Europe. 
Germany refuses to accept that its beggar-thy-neighbor economic policies – reflected in its massive current-account surpluses – are both a cause of the eurozone crisis and a major impediment to resolving it. 
Instead, it bullies others to get its way, wrongly identifying its narrow interests as a creditor with those of the system as a whole. 
Merkel has played a much more positive role in the refugee crisis. 
Germany unilaterally suspended application of the EU’s asylum rules and pledged to accept all arriving Syrian refugees. 
But Merkel’s failure to offer those refugees safe passage has exacerbated the chaos. 
Subsequently reimposing border controls within the supposedly border-free Schengen Area set a terrible precedent, prompting Germany’s neighbors to do likewise. 
Meanwhile, with the EU increasingly viewed as a source of economic crisis, political turmoil, and unwanted migrants, the risk that Britons will vote to leave in a referendum due before the end of 2017 is rising. 
Britain is already semi-detached – outside of Schengen and with opt-outs from the euro and many home-affairs matters (including asylum policy). 
With the government now seeking to negotiate even looser membership terms, Britain will end up more estranged from the EU even if it remains a member. 
Polls are finely balanced and referendums unpredictable. 
At a time of anti-establishment rage and political upheaval, anti-EU campaigners can peddle three fantasies of a post-EU future: a free-market, foreigner-free, or socialist Utopia. 
The pro-EU camp, by contrast, has to sell the reality of the EU as it is, warts and all. 
Until recently, EU integration seemed inevitable. 
It might stall, but it would never go into reverse. 
Countries joined; none left. 
But with the EU already crumbling, Brexit could turn that dynamic on its head. 
That is all the more reason to fix the EU before it is too late. 

A Better Bailout Was Possible 
NEW YORK – The recent exchange between Joe Stiglitz and Larry Summers about “secular stagnation” and its relation to the tepid economic recovery after the 2008-2009 financial crisis is an important one. 
History does not repeat itself, but it rhymes, Mark Twain reportedly once said. 
But, to paraphrase Bob Dylan, in light of our recent economic history, history doesn’t rhyme, it swears. 
Stiglitz and Summers appear to agree that policy was inadequate to address the structural challenges that the crisis revealed and intensified. 
Their debate addresses the size of the fiscal stimulus, the role of financial regulation, and the importance of income distribution. 
But additional issues need to be explored in depth. 
We believe a critical opportunity was missed when the balance of the burden of adjustment was tilted heavily in favor of creditors relative to debtors in the response to the crisis and that this contributed to the prolonged stagnation that followed the crisis. 
The long-term social and political ramifications of this missed opportunity have been profound. 
Back in September 2008, when then-US Secretary of the Treasury Hank Paulson introduced the $700 billion Troubled Asset Relief Program (TARP), he proposed using the funds to bail out the banks, but without acquiring any equity ownership in them. 
At that time, we and our colleague Robert Dugger argued that a much more effective and fair use of taxpayers’ money would be to reduce the value of mortgages held by ordinary Americans to reflect the decline in home prices and to inject capital into the financial institutions that would become undercapitalized. 
Because equity could support a balance sheet that would have been 20 times larger, $700 billion could have gone a long way toward restoring a healthy financial system. 
The ability to use funds to inject equity into the banks was not part of the bill presented to the US House of Representatives. 
So we organized for Representative Jim Moran to ask House Financial Services Chairman Barney Frank in a pre-arranged question whether it was in the spirit of the TARP legislation to allow the Treasury to use taxpayers’ money in the form of equity injections. 
Frank replied in the affirmative on the House floor. 
This was in fact a tool that Paulson used in the closing days of George W. Bush’s administration. 
But Paulson did it the wrong way: he summoned the heads of major banks and forced them to take the money he allocated to them. 
But by doing so he stigmatized the banks. 
A few months later, when President Barack Obama’s administration arrived, one of us (Soros) repeatedly appealed to Summers to adopt a policy of equity injection into fragile financial institutions and to write down mortgages to a realistic market value in order to help the economy recover. 
Summers objected that this would be politically unacceptable because it would mean nationalizing banks. 
Such a policy reeked of socialism and America is not a socialist country, he asserted. 
We found his argument unconvincing – both then and now. 
By relieving financial institutions of their overvalued assets, the Bush and Obama administrations had already chosen to socialize the downside. 
Only the upside of sharing in the possible stock gains in the event of a recovery was still at issue! 
Had our policy recommendation been adopted, stockholders and debt holders (who have a higher propensity to save) would have experienced greater losses than they did, whereas lower- and middle-income households (which have a higher propensity to consume) would have experienced relief from their mortgage debt. 
This shift in the burden of adjustment would have imposed losses on the people who were responsible for the calamity, stimulated aggregate demand, and diminished the rising inequality that was demoralizing the vast majority of people. 
We did recognize a problem with our proposal: providing relief to over-indebted mortgage holders would have encountered resistance from the many homeowners who had not taken out a mortgage. 
We were exploring ways to overcome this problem until it became moot: the Obama administration refused to accept our advice. 
The approach of the Bush and Obama administrations stands in stark contrast both to the policy followed by the British government, and to earlier examples of successful financial bailouts in the United States. 
In Great Britain, led by then-Prime Minister Gordon Brown, undercapitalized banks were told to raise additional capital. 
They were given the opportunity to go to the market themselves, but they were warned that the UK Treasury would inject funds into them if they failed to do so. 
The Royal Bank of Scotland and Lloyds TSB did require government support. 
The equity injections were accompanied by restrictions on executive pay and dividends. 
In contrast to Paulson’s method of injecting funds, banks were not stigmatized if they could borrow from the markets. 
Similarly, during the Great Depression of the 1930s, the US took ownership and recapitalized banks via the Reconstruction Finance Corporation (RFC) and managed mortgage restructuring through the Home Owners’ Loan Corporation (HOLC). 
No doubt the Obama administration helped to alleviate the crisis by reassuring the public and downplaying the depth of the problems, but there was a heavy political price to pay. 
The administration’s policies failed to deal with the underlying problems, and by protecting the banks rather than mortgage holders, they exacerbated the gap between America’s haves and have-nots. 
The electorate blamed the Obama administration and the Democratic Congress for the results. 
The Tea Party was formed in early 2009 with large-scale financial support from the billionaire Koch brothers, Charles and David. 
In January 2010, Massachusetts held a special election for the late Ted Kennedy’s Senate seat, just after Wall Street paid extravagant bonuses, and elected the Republican Scott Brown. 
The Republicans subsequently took control of the House of Representatives in the 2010 midterm elections, gained control of the Senate in 2014, and nominated Donald Trump, who was elected in 2016. 
It is essential that the Democratic party recognize and correct its past mistakes. 
The 2018 midterm elections, which will set the stage for the 2020 presidential election, is an excellent opportunity to do so. 
The political and economic problems that confront the country are much deeper today than they were ten years ago, and the public knows it. 
The Democrats must recognize these problems, not downplay them. 
This year’s midterm elections will be a plebiscite on Trump, but the Democratic presidential candidate in 2020 must have a program that many Americans find inspiring. 
The electorate has seen where the Republicans’ demagogic populism leads, and a majority should reject it in 2018. 

The Holy Grail of Genetic Engineering 
HONG KONG – Since its introduction four decades ago, genetic engineering has been a source of high hopes for health, agriculture, and industry. 
But it has also provoked deep anxiety, not least owing to the laborious nature of the genome-editing process. 
Now, a new technique, CRISPR-Cas, offers both precision and the ability to modify the genome text at several places simultaneously. 
But this has not eliminated reason for concern. 
The genome can be viewed as a kind of musical score. 
Just as sheet music tells musicians in an orchestra when and how to play, the genome tells the cell’s component parts (generally proteins) what they must do. 
A score may also include notes from the composer, showing possible changes, frills that can be added or omitted depending on the circumstances. 
For the genome, such “notes” emerge from cell survival over many generations in an ever-changing environment. 
The DNA genetic program is akin to a fragile book: the order of its pages can change, with some even being moved to another cell’s program. 
If a page is, say, laminated, it is less likely to be damaged as it is moved around. 
Likewise, elements of a genetic program protected by a solid coating are better able to invade a variety of cells, and then to reproduce as the cell reproduces. 
Ultimately, that element becomes a virus, spreading rapidly. 
The next step is for the cell that reproduces a virus, whether useless or harmful, to develop some way to resist it. 
And, in fact, it was in this manner – as a bacteria’s defense against invading viruses – that the CRISPR-Cas process first emerged. 
That process allows acquired characteristics to become inherited. 
In the course of a first infection, a small fragment of the viral genome – a kind of signature – is copied into the CRISPR genomic island (an extra piece of genome, outside of the parent genome text). 
As a result, the memory of the infection is retained across generations. 
When a descendant of the cell is infected with a virus, the sequence will be compared to the viral genome. 
If a similar virus has infected a cell’s parent, the descendant will recognize it, and ad hoc machinery will destroy it. 
This complex process took many decades for scientists to decipher, not least because it controverted standard theories of evolution. 
But now scientists have figured out how to replicate the process, enabling humans to edit, with the utmost precision, specific genomes – the Holy Grail of genetic engineering for nearly 50 years. 
This means that scientists can apply the CRISPR-Cas mechanism to correct problems in the genome – the equivalent of typos in a written text. 
For example, in the case of cancer, we would want to destroy those genes that allow the multiplication of tumor cells. 
We are also interested in introducing genes in cells that never gained them by natural genetic transfer. 
There is nothing new about these objectives. 
But, with CRISPR-Cas, we are far better equipped to achieve them. 
Previous techniques left traces in the modified genomes, contributing, for example, to antibiotic resistance. 
A mutation obtained by CRISPR-Cas, by contrast, is not distinguishable from a mutation that emerged spontaneously. 
That is why the US Food and Drug Administration has ruled that such constructs do not need to be labeled as genetically modified organisms. 
Previous techniques were especially arduous if one needed to modify several genes, because the process would need to occur sequentially. 
With CRISPR-Cas, the ability to perform genome modifications simultaneously has already enabled the creation of fungi and apples that do not oxidize, or turn brown, when they come into contact with air – a result that required several genes to be deactivated simultaneously. 
Such apples are already on the market, and are not considered genetically modified organisms. 
Other applications are in development. 
The so-called gene drive procedure for manipulating the genome could diminish the harm caused by disease-carrying insects. 
Targeted modification of gametes in mosquitoes – the world’s deadliest animal to humans – would render them incapable of transmitting a virus or parasite. 
But the application of CRISPR-Cas must be approached with care. 
While the technology could prove a boon in the fight against many deadly diseases, it also implies serious – and potentially entirely unpredictable – risks. 
For starters, because genomes multiply and spread with reproduction, modifying an entire population would require modifications to only a limited number of individuals, especially if the organism’s lifecycle is short. 
Moreover, given the ubiquity of hybridization among neighboring species, it is possible that the modification of a mosquito species would also spread progressively and uncontrollably to other species. 
Analysis of animal genomes shows that such events have taken place in the past, with species invaded by genetic elements that could have affected ecosystem balances and species evolution (though it is impossible to say how). 
And, if modifying a mosquito population is dangerous, there is no telling what could happen if we modify human cells – in particular, germ cells – without doing our due diligence. 
CRISPR-Cas technology is poised to change the world. 
The imperative now is to ensure that those changes are positive. 

Strategies for Responsible Gene Editing 
CAMBRIDGE – The discovery of a powerful new tool capable of addressing health and environmental problems as diverse as malaria, Lyme disease, and invasive species should be a cause for celebration. 
But, because the tool, called CRISPR, can alter entire populations of wild organisms (and thus shared ecosystems), ensuring that these interventions are developed responsibly poses an unprecedented challenge for science and society. 
Humans have been altering animals and plants through selective breeding for millennia; but, because these changes typically reduce the capacity for survival and reproduction in the wild, they do not spread to wild populations. 
Alterations accomplished using CRISPR, which enables scientists to edit a cell’s DNA with unprecedented precision, are different in one crucial respect: The process can result in “gene drive,” a naturally occurring feature of some genes that enables them to spread through a population over generations, even if they do not help survival (and thus reproduction). 
Simply put, we can now contemplate altering wild populations in very specific and consequential ways. 
Those changes can be highly positive. 
By altering certain features of mosquitos, we could reduce or even eradicate ancient scourges such as malaria and dengue that afflict hundreds of millions of people each year. 
(Malaria alone kills a child every 90 seconds, on average.) 
By permanently immunizing the relevant animal populations, we could prevent new cases of Lyme and other diseases that originate in wild organisms, or we could block newly emergent pathogens such as the Zika virus, which has been linked to an epidemic of stunted brain development in newborns in Latin America. 
As for the environment, human activities have already impacted every ecosystem on Earth, with far-reaching consequences – for us and many other species – many of which are yet to unfold. 
Gene drive elements could potentially reverse much of this damage. 
For example, limiting invasive species – such as cane toads in Australia, mosquitoes in Hawaii, or rats and mice almost everywhere – could help to restore damaged biomes. 
And eliminating pests’ attraction to our crops, without diminishing their capacity to fulfill their other ecological roles, would remove the need for toxic pesticides. 
As we attempt to realize these tremendous potential benefits, however, we must bear in mind that the effects of gene drive interventions will be shared by entire communities. 
Given the vast complexity of ecosystems, careful research will be needed to assess the consequences of each intervention before proceeding. 
CRISPR gene drives also highlight a problem that goes beyond ecology: Existing systems for developing and evaluating new technologies are woefully inadequate for powerful new tools with broad impacts. 
It should be self-evident that technologies like gene drives, which don’t require widespread adoption to have a widespread effect, should never be released without informed community consent. 
Yet history shows the opposite pattern, with decision-making seldom factoring in environmental consequences or citizens’ opinions. 
Nowadays, there are few opportunities for public input until after products are developed, when it is typically too late to make changes. 
By ignoring potentially helpful contributions from an increasingly knowledgeable public, closed-door technological development has precluded balanced assessments and created acrimony – a dangerously irresponsible and wasteful outcome for both science and society. 
CRISPR gene drives offer an opportunity to chart a new course. 
For starters, public notification and broadly inclusive discussions should always precede and inform development of gene drive interventions in the lab. 
A clear description of the potential impact of an experiment – as my colleagues and I have provided for the technology as a whole – must be followed by transparency throughout the development process. 
This community-guided approach to research provides opportunities to identify and address potential problems and concerns during development. 
If a perceived problem cannot be adequately addressed, researchers should be prepared to terminate the project. 
Transparency and collective scrutiny would also help to ensure that scientists fulfill their fundamental responsibility to protect against laboratory accidents. 
Experiments involving gene drive organisms are almost unique in terms of the potential harm that a mishap could cause beyond the lab. 
Though DNA-level changes spread by one gene drive can be overwritten by another gene drive – an important safeguard against unwanted side effects and misuse – the ecological impacts would not be so easy to reverse. 
To be sure, most gene drive experiments will pose little, if any, environmental risk. 
Nonetheless, an accidental release would prove devastating to public confidence in researchers' ability to develop this powerful technology with wisdom and humility. 
That is why my colleagues and I have detailed, demonstrated, and publicized several easily implementable confinement strategies. 
Another feature of a responsible approach would be a commitment by scientists to evaluate each proposed gene drive intervention – say, immunizing mice so that they cannot transmit Lyme disease to ticks – individually, rather than making a blanket decision on the technology as a whole. 
After all, the benefits and risks of each intervention would be entirely different. 
A final safeguard against the irresponsible development of gene drive technology is to ensure that early interventions are developed exclusively by governments and nonprofit organizations. 
Given the potential of financial incentives to skew the design and results of safety tests, keeping the profit motive out of the development and decision-making processes will encourage balanced assessments. 
The bottom line is that existing models for technological development are inadequate for technologies with broadly shared effects. 
Only with early discussion, transparent research, careful safeguards, and community guidance can we build a responsive model of scientific development well suited to ecological technologies. 
Given the life-saving (and environment-saving) potential of CRISPR gene drive interventions, let us determine how to develop them – and when to decline to do so – together. 

Cristina Kirchner’s Choice 
BUENOS AIRES – Bolstered by Argentina’s economic stability and widespread sympathy for her widowhood, President Cristina Kirchner’s easy re-election has confirmed that she can, indeed, govern a complex, contentious, and at times self-destructive society without her husband, Néstor. 
His presidency paved the way for hers, but she is a leader in her own right. 
The question now is what kind of leader she will want to be in today’s more difficult domestic and international context. 
The Kirchners lifted Argentina out of the deep crisis of 2001, presiding over GDP growth rates similar to those of China. 
They partly restored Argentina’s social and political fabric, which had been weakened by the brutal adjustments made during that crisis, which triggered a president’s fall from power, default on the country’s debts, and a dramatic decline in living standards that left more than half of the population below the poverty line. 
Their management of the economy, which included a deluge of subsidies, reduced unemployment and poverty. 
The opposition underestimates the Kirchners’ achievements, arguing that the international context, particularly high commodity prices – and thus strong export revenues – bailed them out. 
While that is true, high export prices alone were no guarantee for success. 
But that tailwind may have been squandered, because the Kirchners have yet to make the structural changes – in industry, in the country’s energy policy, in education, and elsewhere – needed to free Argentina from extreme dependence on commodity prices. 
As a result, if the price of soy continues to fall, subsidies – a source of corruption and patronage – will be an increasingly heavy burden for public spending. 
According to unofficial figures, subsidies already represent 5% of GDP, and only painful adjustments can reduce them. 
But what was an emergency remedy has become a long-term policy, because there is no economic activity to take its place. 
Few in Argentina, which is enjoying a consumer boom, are worried about inflation. 
But prices are already rising at a 20% annual pace, which, if unchecked, will lead to conflict with the powerful Peronist unions. 
Moreover, given the country’s history of high inflation ravaging the economy, the problem needs to be addressed soon, before it gets out of hand. 
Relations with Brazil expose other difficulties. 
Brazilian President Dilma Rousseff’s government, which began its term this year with an understanding that economic growth will slow sharply, devalued the real in order to shore up the country’s competitiveness. 
That was bad news for Argentina, because Brazil, its main trading partner, will now buy less and sell more, undermining Argentina’s external position. 
In this difficult international context, Cristina Kirchner will need to rebuild relations with the United States and Europe, which have been impaired since the default in 2001. 
Subsequent actions by her husband’s administration and her own have blocked improvement. 
Néstor ridiculed President George W. Bush in front of the world: host to a summit of heads of state, he organized a parallel anti-summit with supporters of Fidel Castro and Venezuelan President Hugo Chávez. 
More recently, Cristina’s foreign minister presided over the requisitioning of a US military plane on Argentinean soil. 
These spectacles were intended for national consumption, but the Americans deeply resented them. 
As for Europe, the Kirchner’s have not yet paid off Argentina’s debt – pending since the default – to the Paris Club of sovereign creditors. 
All of this hinders foreign investment and access to international credit. 
In the meantime, the US is opposed to concessionary loans for Argentina from the World Bank and the Inter-American Development Bank. 
In this context, Argentina’s rich and powerful vote with their wallets and send their dollars overseas. 
This year, the outflow is nearly $20 billion – almost a record. 
Argentina is a country that lives in an almost continual state of emergency. 
Its history has seen many coups, tens of thousands of people missing, a war with Great Britain, bouts of hyperinflation, a brutal economic crisis, default on foreign debt, and its most vulnerable citizens going hungry. 
But there is also a theatrical intensity about the Argentine character: we are dramatic like the tango and somber like the novels of Ernesto Sábato. 
That exceptional spirit benefited her husband, but the country’s institutions paid a high price. 
Néstor convinced Parliament to allow him to modify the budget. 
Later, he took the liberty of manipulating official statistics in order to hide inflation. 
And, while building a system that would do whatever the government wanted, he began a struggle against critical journalism that continues under his wife. 
With hard times approaching, will Cristina try to be a twenty-first-century Evita and create an epic by exploiting Argentines’ flamboyant tendencies, armed with an exceptional power or will she adopt Rouseff’s sensible attitude and combat inefficiency and corruption while strengthening governmental institutions? 
If she chooses Rouseff’s approach, she will first have to resist the temptation of perpetual re-election. 
She and her husband had hit upon a novel scheme: alternating power between them every four years. 
Now a widow, she is exposed to the lame-duck syndrome, since she can’t be re-elected again. 
The same Peronist caudillos that have obeyed her until now could start a war of succession if she does not find a way to continue in office. 
If she wants to retain power four years from now, she might do just that. 
After all, she now holds absolute control over a docile parliament. 
In Argentina, as in many Latin American countries, presidents have so much power that other governmental institutions’ authority fades, eradicating the boundaries between the executive and the state. 
If the only limits on Cristina are her own, Argentina will not weather the coming storm well. 

Crony capitalism American-style 
Remember the East Asia crisis? when the US Treasury and its IMF allies blamed that region's problems on crony capitalism, lack of transparency, and poor corporate governance? 
Countries were told to follow the American model, use American auditing firms, bring in American entrepreneurs to teach them how to run their companies. 
(Never mind that under the leadership of their own entrepreneurs East Asia grew faster than any other region - and with greater stability - over the previous three decades.) 
The unfolding Enron scandal brings new meaning to two favorite American sayings: ``What goes around comes around,'' and ``People in glass houses shouldn't throw stones.'' 
Enron used fancy accounting tricks and complicated financial products (derivatives) to mislead investors about its value. 
No transparency here. 
It used its money to buy influence and power, shape U.S. energy policy, and avoid regulations. 
Crony capitalism is not new; nor is it the province of a single party. 
Former US Treasury Secretary Robert Rubin reportedly tried to influence the current government to intervene on behalf of Enron in its hotly contested dispute in India. 
In office, he had intervened when the supposedly independent board for setting accounting standards tried to clean up the accounting of senior executives' share options. 
Partly thanks to him, this effort to make corporate accounting more transparent was stymied. 
America's willingness to provide multi-billion dollar bail-outs to airlines or to create cartels to protect its steel and aluminum industries suggests that free market ideology is but a thin guise for old-fashioned corporate welfare: give to those with the appropriate connections. 
To some, the fact that Enron was not bailed out and the problems uncovered, is testimony to the absence of crony capitalism. 
I have a different interpretation: it is testimony to the importance of a free press, which may not stop but can curtail abuses. 
As the press started taking a closer look at Enron, the number of members of Congress who had accepted money from Enron became clear. 
Campaign contributions were not just a matter of public spirit, but an investment. 
Like many of Enron's investments, it worked well in the short run, but did not pan out in the long run. 
Many lessons emerge. 
Some concern politics: the Enron scandal strengthens the case for campaign finance reform, and the need for even stronger laws requiring public disclosure. 
Democracies are undermined by corporate interests being able to, in effect, buy elections. 
The Bush administration, however, refuses to disclose information which would show the role of corporate interests in setting its energy policy. 
Other lessons concern economics, especially the economics of information. 
For markets to work, for the appropriate signals for efficient resource allocation to be provided, investors must have as much information as possible. 
There are inherent conflicts of interest: owners and managers have a natural incentive to present a picture as rosy as possible. 
Auditing is intended to put limits on potential abuses. 
But who is to guard the guardians? 
Who is to audit the auditors? 
We rely heavily on incentives . 
Auditors desire to maintain their reputation. 
But the interlinking of consulting and auditing practices puts other perverse incentives in place: an incentive to please the clients, who dislike unfavorable reports. 
Arthur Levitt, the former Chairman of the Securities and Exchange Commission, recognized the conflict: as many within the auditing firms focus on their own short-term interests, the integrity of the audits could be compromised. 
He is perhaps the unsung hero of the entire debacle. 
But the auditing firms and their corporate clients - not surprisingly, given the cabal that developed - roundly attacked his proposal for separating consulting from auditing. 
What Levitt grasped - and what the Enron debacle shows so clearly - is that incentives matter, but that unfettered markets by themselves may not provide the right incentives. 
Markets may not provide incentives for wealth creation; they may provide incentives for the kind of shenanigans Enron pursued. 
The new economy - and its complicated new financial instruments - enhance the problems of reliable accounting frameworks; they make it easier to obfuscate. 
Rather than facing up to the issues, corporate America systematically turns its back - aided and abetted by crony capitalism, American style. 
The central issue of our time is finding the right balance between the government and the market. 
The status quo will argue that Enron is an exception: that its demise was due to fraud, that we have laws against fraud, and that those who violate these laws should and will bear the consequences. 
But much of what Enron did was not illegal. 
Its auditors claim that its central practices were within the law; that thousands of firms do the same. 
They are right - and that's the problem. 
Investors need assurance that information received adequately reflects the economic situation of a firm. 
Within the current regulatory and legal environment, with derivatives and other off-balance-sheet liabilities, there is no way for investors to have that assurance today. 
We need better standards and stronger laws. 
While we will never be able to prevent all abuses, we can get the incentives right. 
We can try to inculcate better ethical standards. 
But we cannot rely on them when so many worldly people see nothing wrong with revolving doors. 
They claim to manage conflicts of interest; but we see that they may manage them for their own interests. 
But even as evidence for such abuses becomes apparent, new venues for abuse are repeatedly opened up - take the US repeal of the Glass Steagall Act, which separated commercial from investment banking. 
Repeatedly, we have seen the consequences of the excesses of deregulation, of unfettered markets. 
Now we must resist the temptation to go to the other extreme. 
The challenge is: get the balance right. 

Russia’s Gloomy Prospects 
MOSCOW – Russia’s economic prospects are looking increasingly grim. 
Last year, plunging energy prices and international sanctions contributed to a 3.7% fall in GDP. 
Real wages in the country plummeted by around 10%. 
This year, the negative trend is expected to continue. 
In 2016, public spending on education and health care is slated to decline by 8%. 
The Kremlin’s desultory attempts at diversifying the Russian economy have largely failed. 
Labor productivity remains chronically low, and investment – foreign and domestic – has dried up. 
Sadly, a turnaround is unlikely. 
Under current conditions, neither higher energy prices nor the lifting of sanctions would likely be enough to reinvigorate the country’s moribund economy. 
Over the past decade, Russian President Vladimir Putin’s regime has degraded the institutions that are essential to the functioning of a modern economy. 
The judicial system, for example, is largely in tatters. 
And above all, the ownership and governance of key assets and resources are almost all in state hands. 
Indeed, in 2012, the IMF calculated that the consolidated public sector accounted for nearly 70% of Russia’s GDP. 
Though comparably detailed estimates are not available for earlier years, in the early 2000s, this share was around 30-40%. 
The expansion of the state’s control of the Russian economy has been driven by a proliferation of state-owned corporations, whose gross liabilities now amount to 150% of GDP. 
Firms in the energy, infrastructure, banking, and armaments sectors have been nationalized. 
In 2014, publicly owned or controlled entities accounted for nearly 70% of the turnover and 85% of employment among Russia’s top 15 companies. 
For the largest 100 companies, these shares were 54% and 68%, respectively. 
The consolidated public sector now accounts for one third of total employment. 
Russia’s big state-owned corporations are, for the most part, controlled – with considerable lack of transparency – by management that has been appointed by Putin personally. 
Many major corporate decisions are made during one-on-one meetings between Putin and a company’s CEO. 
Many mergers and acquisitions require the president’s personal approval. 
Lack of transparency is pervasive. 
Only a few state-owned companies file International Financial Reporting Standards (IFRS) accounts and many have large numbers of subsidiaries, which can dilute benefits to shareholders, while offering opportunities for managers and other connected parties to enrich themselves. 
Russian Railways, for example, has more than 23,000 subsidiaries. Gazprom has more than 4,300. 
Lack of detailed information makes it difficult to document the state’s full asset portfolio, let alone set up a workable and transparent system of oversight. 
The agency charged with managing state property (Rosimushchestvo) is unable to act as an effective controlling shareholder. 
Putin’s Russia is increasingly reminiscent of President Suharto’s Indonesia – an intricate system of crony capitalism without real property rights. 
Many close to Putin have acquired great fortunes through their connections to state companies. 
One route to enrichment is to privately appropriate the financial flows of state companies. 
Another is to leverage connections in order to secure no-bid contracts or to purchase state assets for a pittance. 
The size of the crony economy is hinted at in the Panama Papers, but even those revelations are just the tip of the iceberg. 
In 2014, the net worth of those who are subject to sanctions by the US and EU was estimated at around $17 billion; one sanctioned bank alone holds assets valued at more than $11 billion. 
This system comes at considerable costs to the Russian economy, favoring rent-seeking at the expense of productivity growth. 
Russia does possess some efficient, dynamic, large private companies, but the space for these firms is quickly receding. 
Experience suggests that large public sectors are associated with sub-par growth and the crowding out of investment in the private sector. 
Indeed, with the expansion of the large state corporations, many of them in the hands of cronies, competition has drastically diminished in many sectors. 
Despite all this, Putin’s commitment to the system that he has built is unwavering. 
Even proposed measures to raise fiscal revenues – such as the privatization of minority shares in seven state-owned corporations – will likely be done in a way that favors his cronies. 
Part of the reluctance to change is due the fact that Putin remains very popular – for now. 
As the economy continues to crumble that could shift very rapidly, as Putin seems to have acknowledged when – in apparent anticipation of trouble – he created a National Guard of 400,000 paramilitary security forces and put it under the command of his long-time bodyguard. 
Given the regime’s dependence on the personalization of power, it would be hard to design any credible path for change that preserves the prerogatives of Putin and his cronies. 
Opening up the economy to competition and expanding the private sector would undermine the system of wealth and power that Putin’s associates enjoy. 
And that why Russia’s economic troubles are likely to continue. 

Crony Central Banking in Hong Kong 
HONG KONG – Joseph Yam, the head of the Hong Kong Monetary Authority (HKMA) and a career civil servant, is retiring. 
Ordinarily, that should not be a newsworthy event, yet it is, and for good reasons. 
Donald Tsang, Chief Executive of Hong Kong’s government, has the opportunity to restore integrity and proper governance in one of the most important statutory bodies in the territory by choosing a person solely on the basis of unimpeachable honesty and competence. 
Yam remains a hero to many in Hong Kong, including journalists unschooled in international finance. 
To them, he is the guardian of the Hong Kong dollar, which has been fixed at 7.8 to the US dollar for 26 years. 
During the 1998 financial crisis, devaluation would have hurt those who owned local real estate but had little earnings or assets in US dollars. 
Not surprisingly, Hong Kong’s oligopoly of property tycoons opposed changing the peg despite the currency’s gross overvalue at the time. 
The 7.8 exchange rate was maintained at the cost – borne by all citizens – of six years of economic stagnation. 
The currency was in theory governed by a rules-based Currency Board, which the British invented for their smaller colonies. 
It tied the local currency to the British Pound, giving local authorities no discretion in monetary policy. 
While imperial in origin, the rationale behind the Currency Board was sound. 
Colonies were short on expertise. 
Freedom in money creation or in interest-rate policy could mean economic disaster – as, indeed, it did in many ex-colonies following independence. 
Yam was always frustrated by the lack of policy freedom under the Currency Board. 
Before the crisis struck in 1998 he put in place measures giving him room to manipulate liquidity and interest rates. 
His deviation from the system also created loopholes that he did not know about or thought irrelevant. 
This was precisely what the British empire-builders had wanted to prevent. 
When, during the 1997-98 Asian financial crisis, global investment professionals turned their attention from Thailand and Korea to Hong Kong, they quickly spotted structural weaknesses in the way the currency was managed. 
Local experts had previously warned Yam about this, but he dismissed their argument in a way that one economist who was present at a meeting with him described as “demeaning and contemptuous”. 
Moreover, they left in shock in realizing Yam, and the financial secretary, Donald Tsang, nominally his boss but without real power, didn’t really understand the experts’ economic reasoning. 
Hong Kong ’s government, led by the HKMA, launched an unprecedented intervention, buying up local shares to “defeat” the speculators, but failed to stop the stampede by global investors, including conservative pension and mutual funds. 
Finally, with the government about to exhaust its entire foreign reserves, Yam realized that he had to change course. 
He wisely accepted his critics’ suggestions, fixing the problems that he had denied existed. 
He was awarded the highest public-service medal by the then Hong Kong Chief Executive Tung Chi-wah, who was later ousted by Beijing for incompetence. 
At this writing, Yam is widely criticized in Hong Kong for failing to protect small investors against the dishonest sales tactics of a number of banks in their selling of toxic Lehman Brothers derivatives disguised as bonds. 
He denies any responsibility, even though the HKMA oversees all financial institutions. 
Yam is the highest-paid civil servant in the world, earning US$1.5 million last year. 
His salary is seven times that of the chairman of the US Federal Reserve and nearly 3 times higher than that of his own superior, the Hong Kong Chief Executive. 
He claims that he should be rewarded as a fund manager supervising a multibillion-dollar fund in the private sector. 
But, whereas private-sector professionals are fired or have their salaries reduced for poor performance, Yam wanted private-sector pay with none of the downside risk. 
The HKMA’s Compensation Committee had the sole responsibility for setting Yam’s salary. 
But, during his 16-year tenure, Yam put his own appointees on that committee, choosing them from the financial sector that he regulates. 
The Committee routinely rubber-stamped his salary demands. 
Yam’s retirement presents an opportunity for Hong Kong’s government to redress a major issue of governance. 
It should replace the compensation structure by the same civil-service scale applied to the government of which the HKMA is an integral part. 
Hong Kong ’s civil servants are already the best paid in the world. 
Anyone seeking to compare a public-service job with the private sector in negotiating an employment contract should simply seek work in the private sector rather than for the public good. 
Anything else merely opens the door for corruption. 
There is much speculation that Hong Kong Chief Executive Donald Tsang is about to appoint a generalist civil servant better known for his personal loyalty than for his financial expertise. 
Nor is there any sign that the entire HKMA pay scale should be scrapped. 


Crouching Tiger or Paper Dragon? 
When a senior defense expert recently testified before a US Congressional commission on China's military capability, he detailed the extraordinarily robust weapons program the People's Liberation Army (PLA) has been pursuing. 
He pointed particularly to the PLA's increasing number of short-, intermediate- and even long-range ballistic missiles. 
But the expert concluded that, despite the alarming number of missiles, they did not constitute a ``buildup.'' 
Baffled by that conclusion, the Congressmen began asking one question relentlessly: if the existing PLA missiles did not constitute a ``buildup,'' then what number of missiles would? 
The inability to answer this question clearly exorcised and angered both the senior expert and the committee. 
But this episode illustrates a fundamental and frustrating problem: the more we know about what is going on in China the less we are sure about whether China has actually become a threat. 
We know China has doubled and redoubled its defense budget for, among other things, a massive weapons development program, including modernizing a deterrent and second-strike nuclear capability. 
Yet we cannot decide whether this build-up is menacing. 
The prevailing consensus is not to regard China as a threat. 
But there are several serious conceptual flaws in this reasoning. 
It fails, for example, to take into account the hostile strategic culture against the US--and against US strategic goals in the Asian and Pacific regions-- that has long been ingrained within the PLA. 
Moreover, a cursory glance at the PLA's readiness training, research and development, weapons acquisition, and indoctrination programs shows that Chinese officials are preparing to fight future wars not only against regional powers, but against a superpower. 
Its preparations focus not on parity with the US's modern weaponry, but on the development of ``asymmetrical warfare'' theory and capability. 
As the 9-11 terrorist attacks on the US brutally reminded us, a lethal threat need not come from equivalent military hardware. 
The PLA has spent an inordinate amount of its rapidly growing resources in areas that give it an asymmetrical advantage, such as electronic warfare and human intelligence. 
Such tactics are aimed at confronting an enemy that is armed with the most advanced weapons systems, but is vulnerable to sabotage and asymmetrical attack, even latter-day guerilla warfare. 
Throughout the PLA's history, a chief tactic has always been to launch asymmetrical attacks on an enemy's command and communication centers, thus obviating direct confrontations where parity in technological development would determine a clearer definition of victory and defeat. 
The PLA has never been deterred or become less aggressive when confronted with an enemy possessing more advanced hardware. 
This was true of Mao's guerrilla war against the Japanese occupation, the Civil War against Chiang Kai-shek's Nationalists, the Korean War against the US, and even the Vietnam War, where China backed the North. 
More recently, PLA officials have been among the most interested observers of the two US-led Gulf Wars. 
They have been impressed by US technology and remote firepower, but they have also been searching for US military weaknesses in such a context. 
While awed by American hardware, some PLA brass are convinced that if Saddam Hussein had been a better commander, the battle for Baghdad could have been, to quote Zhang Zhaozhong of the Chinese National Defense University, ``George Bush's Stalingrad.'' 
One aspect often over-looked in foreign assessments of the PLA is its political indoctrination and the level of fanaticism this can create for an actual battlefield scenario. 
Despite all the years of stressing ``military modernization,'' the system of indoctrination by Political Commissars remains the soul of PLA units. 
We have seen the ferocity of ideologically intoxicated PLA soldiers during the Korean War, and even at Tiananmen Square in 1989. 
Finally, China is far from being an Iraq or an Afghanistan. 
Despite the obvious imbalance with the US in terms of modern armaments, it would be shortsighted to ignore China's own formidable military hardware. 
It has a nuclear first- and second-strike capability; its own satellite communications systems; increasingly sophisticated and numerous aircraft and war ships; a rapidly growing economy to sustain high levels of military investment; as well as its own political and diplomatic points of leverage at places like the UN. 
The supposition that China cannot become a threat in the near future, or in the next twenty years, is simplistic, because it ignores basic aspects of China's political system. 
The reality is that China has been through a half century of Marxist-Leninist revolutionary indoctrination, which emphasizes the predatory nature of imperialism, colonialism, and capitalism--with America singled out as the leader of oppressive global forces. 
This ideology feeds a deep popular perception of China as a wounded, humiliated third-world victim and instills in the ruling Communist Party a powerful sense of unresolved grievance. 
It was from this mindset that Mao's theory of guerilla war--the last century's mother of all asymmetrical strategies of warfare--was born. 
It would be naive to assume that this mindset, which has become more deeply rooted in the PLA than anywhere else in Chinese society, is a thing of the past. 
Whether China will prove to be a paper dragon of little military substance or a crouching tiger with sharp claws remains unresolved. 
But, as the saying goes, ``Eternal vigilance is the price of freedom.'' 

Creativity, Corporatism, and Crowds 
NEW HAVEN – Economic growth, as we learned long ago from the works of economists like MIT’s Robert M. Solow, is largely driven by learning and innovation, not just saving and the accumulation of capital. 
Ultimately, economic progress depends on creativity. 
That is why fear of “secular stagnation” in today’s advanced economies has many wondering how creativity can be spurred. 
One prominent argument lately has been that what is needed most is Keynesian economic stimulus – for example, deficit spending. 
After all, people are most creative when they are active, not when they are unemployed. 
Others see no connection between stimulus and renewed economic dynamism. 
As German Chancellor Angela Merkel recently put it, Europe needs “political courage and creativity rather than billions of euros.” 
In fact, we need both. 
If we are to encourage dynamism, we need Keynesian stimulus and other policies that encourage creativity – particularly policies that promote solid financial institutions and social innovation. 
In his 2013 book Mass Flourishing, Edmund Phelps argues that we need to promote “a culture protecting and inspiring individuality, imagination, understanding, and self-expression that drives a nation’s indigenous innovation.” 
He believes that creativity has been stifled by a public philosophy described as corporatism, and that only through thorough reform of our private institutions, financial and others, can individuality and dynamism be restored. 
Phelps stresses that corporatist thinking has had a long and enduring history, going back to Saint Paul, the author of as many as 14 books of the New Testament. 
Paul used the human body (corpus in Latin) as a metaphor for society, suggesting that in a healthy society, as in a healthy body, every organ must be preserved and none permitted to die. 
As a public-policy credo, corporatism has come to mean that the government must support all members of society, whether individuals or organizations, giving support to failing businesses and protecting existing jobs alike. 
According to Phelps, Pope Leo XIII advocated a corporatist view in his 1891 encyclical Rerum Novarum, and Pope Pius XI amplified these ideas in his 1931 encyclical Quadragesimo Anno. 
But, in reading these works, I do not find a clear or persuasive statement of any economic doctrine, except for basic notions of fairness and Christian charity. 
In fact, an Ngrams search of books shows that the term corporatism began to become popular only after the mid-1930s, and achieved broad currency by the 1970s and 1980s. 
The term seems to have been used most often by critics, often to denounce the defunct Fascist philosophy, or by those extolling elements of a “new” corporatism. 
Surely, elements of corporatist thinking persist today. 
People who might not stress that the government should protect failing businesses or redundant workers still have sympathies that might often lead to such outcomes. 
Historically, an important spur toward corporatist thinking was Gustave Le Bon’s 1895 book The Crowd, which coined the terms “crowd psychology” and “collective mind.” 
For Le Bon, “An individual in a crowd” – not only angry mobs on the street, but also other psychologically interconnected groups of people – “is a grain of sand amid other grains of sand, which the wind stirs up at will.” 
Le Bon believed that crowds need strong leaders, to distance them from their natural madness and transform them into civilizations of splendor, vigor, and brilliance. 
Mussolini and Hitler both took inspiration from his book, and incorporated his ideas into Fascist and Nazi ideology; and those ideas did not die with those regimes. 
Still, the word “crowd” has taken on an entirely different meaning – and political valence – in our century. 
Crowdsourcing and crowd-funding have created new kinds of crowds, of the sort that Le Bon never could have imagined. 
As Le Bon emphasized, people cannot easily do great things as individuals. 
They need to operate together within organizations that redirect crowd psychology, facilitate creativity, and are led by people of integrity. 
Any such organizational technology, however, is subject to error and requires experimentation. 
When the crowd-sourced Wikipedia was started in 2001, its success was not obvious. 
Even one of its founders, Jimmy Wales, found it a little hard to believe: “It’s kind of surprising that you could just open up a site and let people work.” 
When the United States’ Jumpstart Our Business Startups (JOBS) Act, which facilitated true crowd-funding of enterprises, was signed by President Barack Obama in 2012, it was an experiment, too. 
Many critics said that it would result in the exploitation of naive investors. 
We still do not know whether that is true, or how well the experiment will work. 
But if the JOBS Act does not succeed, we should not abandon the idea, but try to modify it. 
Ultimately, we need economic institutions that somehow promote the concerted creative actions of a wide swath of the world’s people. 
They should not be corporatist institutions, dominated by central leaders, but should derive their power from the fluid actions of modern crowds. 
Some of those actions will have to be disruptive, because the momentum of organizations can carry them beyond their usefulness. 
But there must also be enough continuity that people can trust their careers and futures to such organizations. 
Acknowledging the need to experiment and design new forms of economic organization must not mean abandoning fairness and compassion. 

Cry, the Newborn Baby 
Each year, four million babies die in their first four weeks of life – over 10,000 deaths a day. 
Most of these neonatal deaths go unrecorded and remain invisible to all but their families. 
Virtually all (99%) occur in low- and middle-income countries, but most research and funding focuses on high-tech care for the 1% of deaths occurring in rich countries. 
The greatest risk of death is at the beginning of life: three-quarters of all neonatal deaths (three million) occur within one week of birth, and at least one million babies die on their first day of life, many at home without any formal healthcare. 
Moreover, almost 40% of all child deaths occur in the neonatal period, with Africa and South Asia accounting for two-thirds of the total. 
Unfortunately, child survival programs in the developing world have focused primarily on pneumonia, diarrhea, malaria, and vaccine-preventable causes of deaths after the first month of life, while safe motherhood programs have focused primarily on the mother. 
Prevention of newborn deaths has thus dropped between the cracks of programs focusing on mothers and on older children. 
This represents a tragedy that is as avoidable as it is immense. 
A recent series on neonatal issues in the British science journal Lancet estimated that between 41% and 72% of neonatal deaths could be prevented if simple interventions were provided effectively where they are needed most. 
In other words, up to three million babies needlessly die each year. 
Well known, low-cost, and low-tech interventions do not reach those most in need – for example immunization against tetanus, exclusive breastfeeding, simple care for low-weight babies, and antibiotics for infection. 
Such interventions are extremely cost-effective, and packaging these interventions together and linking them with other health programs reduces costs further. 
Saving lives requires that mothers and babies in the highest-mortality countries be reached at the time of greatest risk. 
Currently, only about half of all women worldwide deliver with a skilled attendant present. 
In sub-Saharan Africa, less than 40% of women deliver with skilled care; in South Asia, the figure is less than 30%. 
Latin America and Southeast Asia have rapidly increased coverage, but at the current rate of progress in Africa, 50% of women will still deliver without skilled care in the year 2015. 
In Ethiopia, a quarter of pregnant women in the highest income group use skilled care at delivery, compared to 1% of the poorest women. 
Low-income countries have demonstrated that rapid progress is possible. 
Sri Lanka, Indonesia, Peru, and Botswana all halved neonatal mortality during the 1990s. 
These countries’ success has depended on sustained high-level political commitment to providing high-quality maternal and newborn care. 
In particular, integrated planning is essential. 
In India, newborn health forms part of the national Reproductive and Child Health Program. 
In Ethiopia, newborn care is being incorporated into a new community-based healthcare program. 
Of course, there is no “one-size-fits-all” solution. 
The numbers and causes of neonatal deaths, the capacity of the health system, and the obstacles faced differ between and within countries, as does support from policymakers and the availability of resources. 
The additional cost of maintaining essential newborn health interventions at 90% coverage in the 75 countries with the highest mortality is estimated to be a mere $4.1billion per year. 
This would supplement current spending of $2 billion, only about 30% of which is for interventions specifically aimed at newborns, while the majority is for interventions that also benefit mothers and older children. 
Even with a weak health system, it is possible to achieve measurable mortality reduction. 
But the world needs to act now to generate the political will and financial resources needed to save the lives of up to three million babies who die each year simply because they are born without the basic care that is their right. 
Indeed, to continue to fail the world’s at-risk children is to deliver a verdict of wanton inhumanity against ourselves, for we are a knowing party to an entirely preventable mass destruction of human life. 

Crying over Spilt Parmalat 
In the war of values between America and much of the world, corporate governance plays a big role. 
Different visions of how capitalism is run both reflect and in some cases fuel resentment of the US. 
In the 1990's, it looked as if the rest of the world wanted to do business the American way, with active capital markets and company bosses responding to shareholder interests. 
This Americanization was often described simply as "globalization." 
Then came a backlash, fuelled in large part by the Enron debacle and other corporate scandals. 
Much of the world began to turn away from the American way of doing business. 
Europeans and Asians claimed with renewed vigor that their capitalist model involved a greater commitment to long-term values and a long-term vision. 
Shareholder value was dismissed as a fad and a fraud. 
In continental Europe and parts of Asia, there has always been a vision of core business values centered on long-term institutions, especially the family. 
The extended family, indeed, remains central even in the large-enterprise sector. 
According to one recent calculation, 17 of the biggest 100 companies in Germany are in family hands, 26 in France, and 43 in Italy. 
At the beginning of the 21st century, family interests reasserted themselves in continental Europe in a surprising way, ousting managers who seemed to have become too Americanized. 
In Germany, the Mohn family dismissed the lead manager of Bertelsmann, Thomas Middelhoff, who wanted to turn a family company into an almost denationalized enterprise. 
In France, Jean-Marie Messier was deposed from Vivendi Universal for similar reasons, and the Lagardère dynasty tried to regain control. 
Unlike Messier, the Lagardères were seen as deeply French. 
President Jacque Chirac's wife, the Prime Minister, and five ministers attended the funeral of Jean-Luc Lagardère in 2003. 
Just as Europe was recovering its confidence in its version of capitalism, however, the Parmalat scandal hit. 
The scandal looked like an obvious weapon to be used in the war of rival models of business organization: critics portrayed Parmalat as the latest manifestation of a crisis of European-style family capitalism. 
Indeed, in Italy, Fiat had long been in a sad decline. 
Mediobanca, the financial institution long at the heart of Italian family capitalism, was struggling since the death of its founder Enrico Cuccia and the removal of the man he had designated as his heir apparent. 
It tried to redefine itself as a more normal financial institution, less committed to holding long-term strategic stakes in companies. 
So are both types of capitalism discredited by a mire of deceit and bankruptcy? 
Historically, the resilience of family firms was rooted in the fact that they were good at managing trust when other institutions - the state or the market - were shaky. 
The upheavals of the French Revolution and the Napoleonic wars produced great uncertainty, but they also produced business dynasties such as the Rothschilds. 
In the aftermath of defeat in WWII, family links provided a way for Japan and Germany to reconstruct business quickly. 
They provided a highly efficient means of obtaining information about markets, suppliers, and sources of finance. 
This capacity remains attractive whenever a crisis strikes. 
But the attraction depends on seeing what is at the core of the family tradition. 
The two styles of capitalism can be contrasted as the family firm versus the post-modern firm. 
The US-style post-modern firm sees market dominance in terms of branding, or a manipulation of images that gives intellectual hegemony and can lead to market dominance. 
As consumers, we recognize the big brands because so much has been invested in them, and we are invited to trust them. 
New brands can assert themselves by acquiring symbolic capital. 
In the corporate landscape, there is the old, say, Coca Cola, but also alongside it the new, say, Microsoft or Amazon. 
Enron aimed at getting a dominant position as the premier energy trader. 
Parmalat wanted to do the same for the long-life milk market. 
In this vision of how corporations work, the company that isn't globally dominant is an also-ran. 
The family firm has a vastly different logic, and often does not want to become too big. 
Its strong point is that it aims to be there in the future, while a company with a more flexible ownership structure may more easily disappear. 
In the past, the concern with long corporate life was criticized for restricting growth. 
If big is better, then it is better to become a post-modern company than remain a traditional one. 
Parmalat was a family firm trying to be a post-modern firm, and which simply cheated on the way as it tried to expand fast. 
Its problems should not be seen as a test of family capitalism, but rather of the dangers that come from the temptation to break out of the old order. 
As the future shape of global capitalism grows increasingly uncertain, family values are as relevant as ever. 
Family ownership builds trust and promises a commitment to long-run income and employment. 
That, surely, is a model that is beneficial in Europe, Asia, and beyond. 

Betting on Dystopia 
CAMBRIDGE – With the price of Bitcoin down 80% from its peak a year ago, and the larger cryptocurrency market in systemic collapse, has “peak crypto” already come and gone? 
Perhaps, but don’t expect to see true believers lining up to have their cryptocurrency tattoos removed just yet. 
At a recent conference I attended, the overwhelming sentiment was that market capitalization of cryptocurrencies is still set to explode over the next five years, rising to $5-10 trillion. 
For those who watched the price of Bitcoin go from $13 in December 2012 to roughly $4,000 today, this year’s drop from $20,000 is no reason to panic. 
It is tempting to say, “Of course the price is collapsing.” 
Regulators are gradually waking up to the fact that they cannot countenance large expensive-to-trace transaction technologies that facilitate tax evasion and criminal activity. 
At the same time, central banks from Sweden to China are realizing that they, too, can issue digital currencies. 
As I emphasized in my 2016 book on the past, present, and future of currency, when it comes to new forms of money, the private sector may innovate, but in due time the government regulates and appropriates. 
But as I also pointed out back then, just because the long-term value of Bitcoin is more likely to be $100 than $100,000 does not necessarily mean that it definitely should be worth zero. 
The right way to think about cryptocurrency coins is as lottery tickets that pay off in a dystopian future where they are used in rogue and failed states, or perhaps in countries where citizens have already lost all semblance of privacy. 
It is no coincidence that dysfunctional Venezuela is the first issuer of a state-backed cryptocurrency (the “Petro”). 
The ultimate obstacle for any cryptocurrency is that eventually there has to be a way to buy a range of goods and services beyond illicit drugs and hit men. 
And if governments ever make it illegal to use coins in retail stores and banks, their value must ultimately collapse. 
Many crypto-evangelists insist that Bitcoin is “digital gold,” in part because the long-term supply is algorithmically capped at 21 million. 
But this is nutty. 
For one thing, unlike gold – which has always had other purposes and today is employed widely in new technologies from iPhones to spacecraft – Bitcoin has no alternative use. 
And even if Bitcoiners manage to find a way to lower the phenomenal energy cost of verifying transactions, the very nature of decentralized ledger systems makes them vastly less efficient than systems with a trusted central party like a central bank. 
Take away near-anonymity and no one will want to use it; keep it and advanced-economy governments will not tolerate it. 
The evangelists dismiss such concerns: Bitcoin can still be incredibly valuable as long as enough people perceive it as digital gold. 
After all, they argue, money is a social convention. 
But economists (including me) who have worked on this kind of problem for five decades have found that price bubbles surrounding intrinsically worthless assets must eventually burst. 
The prices of assets that do have real underlying value cannot deviate arbitrarily far from historical benchmarks. 
And government-issued money is hardly a pure social convention; governments pay employees and suppliers, and demand tax payments in fiat currency. 
But it is too soon to say how the new world of digital currencies will play out. 
Central banks will get into the game (their reserves are already a form of wholesale digital currency), but that is not the end of the story. 
US Treasury Direct, for example, already offers retail customers an extremely low-cost way to hold very short-term Treasury debt for amounts as little as $100, tradable to others in the system. 
Still, heavy security makes the system relatively cumbersome to use, and just maybe governments might adopt one of today’s private digital technologies. 
For the moment, the real question is if and when global regulation will stamp out privately constructed systems that are expensive for governments to trace and monitor. 
Any single large advanced economy foolish enough to try to embrace cryptocurrencies, as Japan did last year, risks becoming a global destination for money-laundering. 
(Japan’s subsequent moves to distance itself from cryptocurrencies were perhaps one cause of this year’s gyrations.) 
In the end, advanced economies will surely coordinate on cryptocurrency regulation, as they have on other measures to prevent money laundering and tax evasion. 
But that leaves out a lot of disgruntled players. 
After all, many today – including Cuba, Iran, Libya, North Korea, Somalia, Syria, and Russia – are laboring under United States financial sanctions. 
Their governments will not necessarily care about global externalities if they encourage cryptocurrencies that might have value as long as they are used somewhere. 
So, while we shouldn’t be surprised by this year’s cryptocurrency price bust, the price of these coins is not necessarily zero. 
Like lottery tickets, there is a high probability that they are worthless. 
There is also an extremely small outside chance that they will be worth a great deal someday, for reasons that currently are difficult to anticipate. 

America Returns to Cuba 
BEIJING – Barack Obama’s visit to Cuba is the first by a US president since Calvin Coolidge went in 1928. 
American investors, expat Cubans, tourists, scholars, and scam artists will follow in Obama’s wake. 
Normalization of the bilateral relationship will pose opportunities and perils for Cuba, and a giant test of maturity for the United States. 
The Cuban Revolution led by Fidel Castro 57 years ago was a profound affront to the US psyche. 
Since the founding of the US, its leaders have staked a claim to American exceptionalism. 
So compelling is the US model, according to its leaders, that every decent country must surely choose to follow America’s lead. 
When foreign governments are foolish enough to reject the American way, they should expect retribution for harming US interests (seen to align with universal interests) and thereby threatening US security. 
With Havana a mere 90 miles from the Florida Keys, American meddling in Cuba has been incessant. 
Thomas Jefferson opined in 1820 that the US “ought, at the first possible opportunity, to take Cuba.” 
It finally did so in 1898, when the US intervened in a Cuban rebellion against Spain to assert effective US economic and political hegemony over the island. 
In the fighting that ensued, the US grabbed Guantánamo as a naval base and asserted (in the now infamous Platt Amendment) a future right to intervene in Cuba. 
US Marines repeatedly occupied Cuba thereafter, and Americans quickly took ownership of most of Cuba’s lucrative sugar plantations, the economic aim of America’s intervention. 
General Fulgencio Batista, who was eventually overthrown by Castro, was the last of a long line of repressive rulers installed and maintained in power by the US. 
The US kept Cuba under its thumb, and, in accordance with US investor interests, the export economy remained little more than sugar and tobacco plantations throughout the first half of the twentieth century. 
Castro’s revolution to topple Batista aimed to create a modern, diversified economy. 
Given the lack of a clear strategy, however, that goal was not to be achieved. 
Castro’s agrarian reforms and nationalization, which began in 1959, alarmed US sugar interests and led the US to introduce new trade restrictions. 
These escalated to cuts in Cuba’s allowable sugar exports to the US and an embargo on US oil and food exports to Cuba. 
When Castro turned to the Soviet Union to fill the gap, President Dwight Eisenhower issued a secret order to the CIA to topple the new regime, leading to the disastrous Bay of Pigs invasion in 1961, in the first months of John F. Kennedy’s administration. 
Later, the CIA was given the green light to assassinate Castro. 
In 1962, Soviet leader Nikita Khrushchev decided to forestall another US invasion – and teach the US a lesson – by surreptitiously installing nuclear missiles in Cuba, thereby triggering the October 1962 Cuban missile crisis, which brought the world to the brink of nuclear annihilation. 
Through dazzling restraint by both Kennedy and Khrushchev, and no small measure of good luck, humanity was spared; the Soviet missiles were removed, and the US pledged not to launch another invasion. 
Instead, the US doubled down on the trade embargo, demanded restitution for nationalized properties, and pushed Cuba irrevocably into the Soviet Union’s waiting arms. 
Cuba’s sugar monoculture remained in place, though its output now headed to the Soviet Union rather than the US. 
The half-century of a Soviet-style economy, exacerbated by the US trade embargo and related policies, took a heavy toll. 
In purchasing-power terms, Cuba’s per capita income stands at roughly one-fifth of the US level. 
Yet Cuba’s achievements in boosting literacy and public health are substantial. 
Life expectancy in Cuba equals that of the US, and is much higher than in most of Latin America. 
Cuban doctors have played an important role in disease control in Africa in recent years. 
Normalization of diplomatic relations creates two very different scenarios for US-Cuba relations. 
In the first, the US reverts to its bad old ways, demanding draconian policy measures by Cuba in exchange for “normal” bilateral economic relations. 
Congress might, for example, uncompromisingly demand the restitution of property that was nationalized during the revolution; the unrestricted right of Americans to buy Cuban land and other property; privatization of state-owned enterprises at fire-sale prices; and the end of progressive social policies such as the public health system. 
It could get ugly. 
In the second scenario, which would constitute a historic break with precedent, the US would exercise self-restraint. 
Congress would restore trade relations with Cuba, without insisting that Cuba remake itself in America’s image or forcing Cuba to revisit the post-revolution nationalizations. 
Cuba would not be pressured to abandon state-financed health care or to open the health sector to private American investors. 
Cubans look forward to such a mutually respectful relationship, but bristle at the prospect of renewed subservience. 
This is not to say that Cuba should move slowly on its own reforms. 
Cuba should quickly make its currency convertible for trade, expand property rights, and (with considerable care and transparency) privatize some enterprises. 
Such market-based reforms, combined with robust public investment, could speed economic growth and diversification, while protecting Cuba’s achievements in health, education, and social services. 
Cuba can and should aim for Costa Rican-style social democracy, rather than the cruder capitalism of the US. 
(The first author here believed the same about Poland 25 years ago: It should aim for Scandinavian-style social democracy, rather than the neo-liberalism of Ronald Reagan and Margaret Thatcher.) 
The resumption of economic relations between the US and Cuba is therefore a test for both countries. 
Cuba needs significant reforms to meet its economic potential without jeopardizing its great social achievements. 
The US needs to exercise unprecedented and unaccustomed self-control, to allow Cuba the time and freedom of maneuver it needs to forge a modern and diversified economy that is mostly owned and operated by the Cuban people themselves rather than their northern neighbors. 

Cuba’s Back 
MEXICO CITY – After 47 years, the Organization of American States, at its annual General Assembly, has repealed its suspension of Cuba’s membership. 
The so-called ALBA countries (the Spanish acronym for the so-called Bolivarian Alternative for the Americas), which includes Cuba, Venezuela, Honduras, Nicaragua, Bolivia, Dominica, and Ecuador, were able partly to outwit – and partly to “out-blackmail” – Canada, the United States, and the Latin American democracies in getting Cuba rehabilitated. 
The OAS did, however, lay down two conditions. 
Cuba must explicitly request reinstatement, and a dialogue must be initiated in accordance with the premises of the OAS Charter and other basic OAS documents, and in consonance with the principles on which those documents are based – most importantly, democracy and respect for human rights. 
Like many diplomatic compromises, the outcome left everyone a bit happy and a bit disappointed. 
Everyone could claim victory, and no one was obliged to acknowledge defeat. 
But those compromises are like statistics or skimpy swimsuits: what they show is less important than what they hide. 
Two fundamental considerations come to mind, and their ramifications in “up-for-grab” countries in Latin America, such as El Salvador, are particularly significant. 
The first consideration involves the ALBA countries’ conduct of foreign policy. 
Given that the smaller countries do not act independently of Venezuela, and that Venezuelan President Hugo Chávez does not act without Cuba’s guidance on weighty matters such as these, it is now clear that the Cubans and their allies will cut US President Barack Obama no slack on Latin American issues. 
They could have easily let the OAS assembly go by, giving the new American president more time to prepare his Congress and public opinion for a delicate balancing act. 
The key issue here is how to lift the now almost fifty-year old US embargo on trade, investment, and travel to Cuba unilaterally, while portraying it as the result of a negotiation. 
The ALBA countries decided they would concede nothing to Obama, and attempt, instead, to back him into a corner: either the US would go along with the new OAS consensus, angering both parts of the Cuban-American lobby and the human rights community by abandoning principles and commitments, or the US would have to act alone (perhaps with Canada by its side), leaving it totally isolated in Latin America – the last thing Obama wants. 
The ALBA group pushed hard for a vote, or a compromise on its terms, which it could then flaunt to the world and to domestic public opinion. 
Obama had no choice but to go along. 
The second consideration is that this behavior will continue. 
The reason seems clear enough: Cuba needs international aid desperately, and there are not too many places where it can find it. 
Hopes that Brazil and China would provide cash to Cuba have been dashed by the international financial crisis and geo-politics. 
And Chávez, despite the recent increase in oil prices, can no longer afford to subsidize Cuba as he did during the boom years. 
So it seems that the Cubans are hoping to find resources elsewhere, and the only possibility, as remote as it seems, is the Inter-American Development Bank. 
In principle, IDB membership requires OAS membership, and therein may lie the reason why Cuba insisted so strongly on returning, and why it was ultimately disappointed in not obtaining unconditional re-admission. 
It will nonetheless attempt to have its allies push for some sort of association with the IDB, while at the same time radicalizing its stance elsewhere, as it is now doing in El Salvador. 
Indeed, the new Salvadoran president, Mauricio Funes, was elected on the ticket of the FMLN, the party that succeeded the old, hard-left guerrilla group of the 1980’s and 1990’s. He is a moderate, modern leftist who has openly identified himself with Brazilian President Lula and Barack Obama, as opposed to Chávez. 
But his party is as close to Cuba and Venezuela as one can get. 
In a showdown over the composition of the cabinet just before his inauguration on June 1, the FMLN old guard won, threatening to take the conflict to the streets. 
The Cubans, Nicaraguans, and Venezuelans will not cut Funes any slack, either, believing that history is on their side, and that now is the time to force every issue in sight. 
They are probably right, up to a certain point, because the second lesson from the OAS assembly concerns the behavior of the Latin American democracies, mainly Mexico, Brazil, Chile, and Colombia. 
They tried to accommodate the US (it is rumored that Obama phoned Lula and asked for his help), but were nonetheless unwilling to break with Cuba and Venezuela to side openly with the US. 
They will not do so any time soon, on any issue that may spring up, if it means confrontation with the ALBA countries. 
Fidel Castro knows this, and will take advantage of the democracies’ diluted commitment to human rights and democracy. 
In each country where conflict is present or emerging (Bolivia, Guatemala, El Salvador, Paraguay, and Ecuador) the hard-left will push hard, the democracies will look the other way, and Obama will either give in (as at the OAS) and pay a domestic political price, or step back from Latin America, for fear of appearing isolated. 
A magnificent opportunity for a new start in US-Latin American relations will have been missed. 

Cultivating Energy 
From climate change to volatile oil prices, all signs point to a looming global energy crisis. 
Confronting the growing challenge means that humanity can no longer afford to ignore the inexhaustible resource found in the organic material that the sun provides each day through photosynthesis. 
Solar energy enables plants to absorb carbon gas and thereby produce not only oxygen, but also matter that the animal kingdom uses for food – and that our machines can use for energy. 
Since the Neolithic (or late Stone Age) period, humans have been cultivating this “biomass” in order to feed itself. 
Yet, even in today’s world, its energy potential is ignored. 
Beginning with the industrial revolution, humans sought energy from coal, and later from oil and natural gas, but this leads to the exhaustion of non-renewable resources. 
Existing alternatives for diversifying energy production are limited. 
Nuclear energy presents a number of disadvantages, owing to concerns about safety and disposal of radioactive waste. 
Hydroelectric power is already widely used, while wind and solar energy are structurally sporadic and disparately available. 
Biomass, on the other hand, has several advantages. 
Supplies of it are large and available throughout the world. 
Moreover, the technology necessary to convert it into energy – including high-yield burning, gas conversion, and liquefaction into synthetic fuel – has long been mastered. 
Widely used during World War II, this technology has since advanced considerably. 
Biomass energy, however, is the victim of unfair competition from fossil fuels. 
Oil’s price reflects its extraction, refining, and distribution costs, but not that of creating the raw material. 
Millions of years and 200 tons of plant matter are necessary to produce one liter of oil, whereas just 15 kilograms of plant matter are required to make one liter of synthetic fuel. 
After the oil glut, with oil below $20 a barrel, interest in developing energy from biomass ebbed, attractive only to “green” militants and those interested in fundamental science. 
Yet the potential is immense. 
The planet’s biomass – forests, pastureland, savannas, and crops – make up productive capital that generates a 10% “return” every year. 
Like a battery that runs out and is then recharged by the sun, this supply is renewable indefinitely, as long as it is managed properly. 
The annual return on this capital is currently estimated at 60 billion tons, yet only two billion tons is consumed for food purposes and 10 billion tons for energy. 
Increasing the responsible use of this energy source would contribute to the fight against climate change by reducing the amount of carbon in the atmosphere and diminishing the amount of fossil fuel required to produce energy. 
Moreover, its abundance in southern countries promises to facilitate their economic development. 
Considered the “energy of the poor” until today, biomass could become a source of wealth if it is grown and harnessed with the support of the international community. 
Thus, “energy crops” could be developed to produce biofuel. 
Residue from forest, agricultural, and agro-industrial activities could be collected and converted. 
For example, the six million tons of waste produced annually by Niger could theoretically be used to meet that country’s entire energy needs. 
However, in many places, energy cropping would certainly compete with food crops. 
Long-term estimates project that over a 50-year time horizon, most of the planet’s arable land would have to be used to feed the world and for forest conservation. 
Thus, areas dedicated to energy production, particularly biofuel, may not reach the level that societies would wish. 
But, while such competition would reveal new global scarcities, it would also bring higher prices, thereby encouraging producers to increase yields and productivity. 
Thus, while cultivating energy would create new constraints, it would also open new possibilities for many economic actors. 
The farmer and the forest worker could become more involved in the market, the mine engineer could begin to take an interest in crop fields, the banker in plant shares, etc. 
But, in order to prepare for a scaling up of energy cropping, new policies must be implemented, both in northern and southern countries, in terms of agriculture, land and water management, protection of biodiversity, fuel taxes, and information and awareness-raising. 
The ancient Egyptians and the Incas practiced a religion of the Sun, believing it to be at the beginning of all life on Earth. 
Science has since proven this to be the case. 
Nowadays, when it has become more important than ever that we embrace renewable resources, we should use the Sun to cultivate our energy, just as our ancestors used it to cultivate their food. 

Cultural Imperialism and the Ban on DDT 
The UN Environment Program (UNEP) is embarked on a misguided campaign to ban the pesticide DDT under its Persistent Organic Pollutants (POPs) Framework Convention. 
Tropical countries that sign this convention will seriously damage the health of their peoples. 
DDT is the most cost-effective agent ever produced for the control of diseases spread by flies and mosquitoes. 
The US National Academy of Sciences estimates that DDT saved 500 million lives from malaria before 1970. 
In India, effective spraying virtually eliminated the disease by the 1960s. 
The number of malaria cases fell from 75 million in 1951 to 50,000 in 1961, and the number of malaria deaths from a million in the 1940's to a few thousand in the 1960s. 
The mosquito nets ubiquitous in my childhood disappeared from urban houses by the time I was at university in the late 1950s. 
Then, in the 1970s, largely as a result of an environmental scare promoted by Rachel Carson's book Silent Spring , foreign aid agencies and UN organizations stopped promoting DDT, and its usage declined. 
Mosquitoes soon hit back and endemic malaria returned to India. 
By 1997 the UNDP estimates that there were 2.6 million malaria cases. 
The same story can be told about kala-azar, which is spread by the sand fly. 
DDT largely rid India of kala-azar in the 1950s and 1960s. 
With the decline in DDT use it returned. 
According to the State minister of health in Bihar, kala-azar has since afflicted 12,000 people in 30 districts, killing 408. 
Why did DDT fall into disfavor? 
The DDT scare started with Carson's claim that its use had devastating effects on bird life. 
It was also blamed for causing hepatitis in humans. 
But numerous scientific studies showed that these fears were baseless. 
DDT was shown to cause death in humans only if eaten like pancakes! 
Commission after commission, expert after Nobel prize-winning expert, gave DDT a clean bill of health. 
In 1971, Philip Handler, then the president of the US National Academy of Science, called DDT is "the greatest chemical that has ever been discovered." 
Yet in 1972, President Nixon's head of the US Environmental Protection Agency banned it. 
Most developed countries followed America's lead, with developing countries proscribing its use in agriculture, and some for all purposes. 
If both science and economics favor DDT, why has the ban spread? 
The environmental movement's supposedly key concept is "sustainable development." 
This was endorsed in the report Our Common Future by the World Commission on Environment and Development, whose chair, Norway's then Prime Minister, Gro Harlem Bruntland, now heads the World Health Organization (WHO). 
The notion of sustainability asserts that natural capital, such as forests, wildlife, and other natural resources cannot be substituted by manmade capital. 
As pesticides are assumed to have adverse effects on natural capital they are inconsistent with sustainable development. 
Instead of using them to control bugs, bed nets and drugs to fight the disease should be used. 
Advocates of this position go on to deploy the so-called "precautionary principle" to counter the argument that there is no scientific evidence that DDT spraying damages natural capital. 
The precautionary principle is a variant on Pascal's famous wager on the existence of God. 
As Paul Ehrlich put it in 1968 in his book The Population Bomb , "If I'm right, we will save the world [by curbing population growth]. 
If I'm wrong, people will still be better-fed, better-housed, and happier thanks to our efforts. 
Will anything be lost if it turns out later that we can support a much larger population than seems possible today?" 
The late Julian Simon provided a tart response to this bit of weak reasoning. Simon noted that Pascal's wager was very different: "Live as if there is God, because even if there is no God you have lost nothing. 
Pascal's wager applies entirely to one person. 
No one else loses if he or she is wrong. 
But Ehrlich bets what he thinks will be the economic gains that we and our descendants might enjoy against the unborn's very lives. 
Would he make the same wager if his own life rather than other lives were at stake?" 
Environmentalists ban DDT because they are willing to sacrifice human lives for those of birds. 
This underlying misanthropy is revealed by Ehrlich's statement about India: "I came to understand the population explosion emotionally one stinking hot night in Delhi.... 
The streets seemed alive with people. 
People eating, people washing, people sleeping, people visiting, arguing, and screaming. 
People thrusting their hands through the taxi window, begging. 
People defecating and urinating. 
People clinging to buses. 
People herding animals. 
People, people, people." 
Not surprisingly, many environmentalists argue that, in the words of one: "It may be unkind to keep people dying from malaria so that they could die more slowly of starvation. 
[Malaria may even be] a blessing in disguise, since a large proportion of the malaria belt is not suited to agriculture, and the disease has helped to keep man from destroying it--and from wasting his substance on it." 
The environmental movement is a new secular Christian creed, for which saving Spaceship Earth has replaced saving souls. 
It must be resisted as fiercely as the Christian crusaders of yore. 
There is no better place to begin than with countries refusing to join the UNEP Convention or kowtow to its ban on DDT use. 

Curing Hereditary Breast Cancer 
In developed countries, breast cancer affects about one in ten women, and in many of these countries the disease is on the increase. 
But, whatever the reason (or reasons) for the rise in their occurrence, we also know that between 5% and 10% of breast cancers are due to an inherited defect that affects the BRCA1 or BRCA2 genes. 
Women carrying a mutated BRCA1 or BRCA2 gene have roughly an 80% risk of developing breast cancer. 
A mutation in these genes also leads to an increased risk of developing ovarian tumors. 
When the BRCA1 and BRCA2 genes were discovered more than a decade ago, there were high hopes for novel and targeted therapies. 
Disappointingly, no new treatments have yet arisen. 
As a result, many women with a high level of mutated BRCA1 or BRCA2 genes face the tragic choice of having their breasts and ovaries surgically removed to pre-empt cancer. 
Recently, my research group, along with researchers in London, provided some real hope for carriers of mutated BRCA1 or BRCA2 genes. 
Both research teams describe how the use of a chemical inhibitor can kill tumor cells that have either a BRCA1 or BRCA2 gene defect causing hereditary breast cancer. 
This new treatment targets only the tumor cells and is unlikely to affect other healthy cells in the body. 
The discovery could also work to prevent hereditary breast cancer cells from growing into tumors. 
The chemical inhibitors used in this treatment target the enzyme polymerase (PARP1), which is normally involved in the repair of DNA single-strand breaks – a common form of spontaneous DNA lesions. 
Chemical inhibition of the PARP1 protein results in reduced occurrence of these single-strand break repairs. 
Unrepaired single-strand breaks are not very toxic to cells. 
However, these breaks disrupt and damage the DNA when they are copied as DNA replicates. 
The damage arising when copying the DNA is repaired with recombination, involving the BRCA1 and BRCA2 proteins. 
But cells with mutated BRCA1 or BRCA2 genes are unable to undergo recombination and are therefore much more sensitive to an increased level of unrepaired single-strand breaks. 
The normal cells of women carrying the BRCA1 or BRCA2 mutations can still recombine, because they retain one functional allele—or alternative form—of the gene. 
Only those cells losing this remaining functional allele of the BRCA1 or BRCA2 gene will become tumors. 
Thus, only the tumor cells will have a non-functional recombination pathway and rely completely on PARP to repair single-strand breaks before copying the DNA. 
In our research, we exploit this requirement to specifically target the BRCA1 or BRCA2-defective cancer cells with inhibitors of PARP. 
This treatment is unlikely to cause many side effects; prolonged treatments with PARP inhibitors are well tolerated in mice. 
We have shown that PARP inhibitors are effective at killing BRCA2-defective breast cancer cells, and that the tumors they cause can fully regress and disappear following treatment with a PARP inhibitor. 
The next step is to investigate how efficient this treatment is in human patients. 
We are now initiating clinical trials to determine how efficient these PARP inhibitors are in the treatment of metastasized breast tumors. 
But caution is in order. 
BRCA1 and BRCA2-defective tumors are characterized by a high degree of genetic instability. 
It is possible that highly metastasized breast tumors might have acquired additional genetic changes causing resistance to treatment with PARP inhibitors. 
Therefore, we suggest that PARP inhibitors might be more useful in the prophylactic treatment of women carrying the gene responsible for this form of inherited breast cancer. 
The reason is simple: cells that have recently lost the functional BRCA1 or BRCA2 allele and that will later grow into tumors will also be unable to undergo recombination. 
This means that early cancerous cells should be sensitive to PARP inhibitors. 
However, unlike fully developed tumors, they are not likely to have acquired many genetic changes and are therefore unlikely to have gained resistance to PARP inhibitors. 
Treating women carrying BRCA1 or BRCA2 mutations with PARP inhibitors to kill cancer cells before they grow into tumors is a new and hopeful concept in cancer prevention. 
However, the usefulness of this treatment relies on the fact that PARP1 inhibitors are completely non-toxic to humans. 
It will also take longer to validate a PARP inhibitor for use as a prophylactic treatment, because the treatment cannot be proven effective in a short time. 
Thus, while the use of PARP inhibitors to treat established tumors may be feasible within a few years, we could have to wait at least a decade before a prophylactic treatment for inherited breast cancer is widely available. 

Currency Chaos 
BRUSSELS – Guido Mantega, Brazil’s finance minister, aptly captured the current monetary Zeitgeist when he spoke of a looming “currency war.” 
What had seemed a bilateral dispute between the United States and China over the renminbi’s exchange rate has mutated into a general controversy over capital flows and currencies. 
Today, every country seems to want to depreciate its currency. 
Japan has resumed foreign-exchange intervention, and the US Federal Reserve and the Bank of England are preparing another large-scale purchase of government bonds – a measure called “quantitative easing,” which lowers long-term interest rates and indirectly weakens the currency. 
China is fiercely resisting US and European pressure to accelerate the snail-paced appreciation of the renminbi against the dollar. 
Emerging-market countries are turning to an array of techniques to discourage capital inflows or sterilize their effect on the exchange rate. 
Only the eurozone seems to be bucking the trend, as the European Central Bank has allowed a rise in the short-term interest rate. 
But even the ECB cannot be indifferent to the risks of appreciation, because a strong euro may seriously complicate economic adjustment in countries like Spain, Portugal, Greece, and Ireland. 
A world in which every country wants a weaker exchange rate is not without precedent. 
It happened in the 1930’s, when one country after another abandoned the gold standard, trying to export its unemployment. 
But everyone cannot have a weak currency at the same time, so, in 1944, responsibility for preventing beggar-thy-neighbor depreciation was assigned to the International Monetary Fund, whose Articles of Agreement mandate it to “exercise firm surveillance over the exchange-rate policies” of member countries. 
Given this mission, it would seem that the IMF should help extract concessions from China and the rest of the world should declare a truce. 
But this would ignore a fundamental asymmetry between advanced and emerging countries. 
Both have suffered from the crisis, but not in the same way. 
According to the IMF, real output in advanced countries this year will still be below 2007 levels, whereas it will be 16% higher in emerging and developing countries. 
Looking ahead, advanced countries will continue to struggle with the fallout of the 2008 crisis, especially with the deleveraging of indebted households and dire public finances. 
The IMF also reckons that the advanced countries must cut spending or increase taxes by nine percentage points of GDP on average over the current decade, in order to bring the public-debt ratio to 60% of GDP by 2030. 
Emerging countries, however, do not need any consolidation to keep their debt ratio at 40% of GDP. 
Asymmetry of this magnitude requires a significant adjustment of relative prices. 
The relative price of the goods produced in the advanced countries (their real exchange rate) needs to depreciate vis-à-vis the emerging countries in order to compensate for the expected shortfall in internal demand. 
In fact, this will happen whatever the exchange rate between currencies. 
The only difference is that, if exchange rates remain fixed, advanced countries will have to go through a protracted period of low inflation (or even deflation), which will make their debt burden even harder to bear, and emerging countries will have to enter an inflationary period as capital flows in, driving up reserves, increasing the money supply, and ultimately boosting the price level. 
For both sides, it is more desirable to let the adjustment take place through changes in nominal exchange rates, which would help contain deflation in the north and inflation in the south. 
But, compared to July 2007, at the onset of the crisis, exchange rates between advanced and emerging countries have barely changed. 
True, some currencies have risen and others have fallen, but on average almost nothing has happened. 
The adjustment that needs to take place is blocked. 
For each central bank, the question is not what happens to, say, emerging countries as a whole, but what happens to its own currency vis-à-vis competitors. 
So Brazil does not want to appreciate vis-à-vis other Latin American countries, Thailand does not want to appreciate vis-à-vis other Asian countries, and no one wants to appreciate vis-à-vis China, which fears that renminbi appreciation would lead labor-intensive industries to migrate to Vietnam or Bangladesh. 
Thus, a change that is in everyone’s interest is hampered by lack of coordination. 
Quantitative easing in the advanced countries also raises a question of coordination. 
QE is a legitimate monetary-policy instrument, but the Fed and the Bank of England would probably not embrace it with such enthusiasm were it not for the anticipated exchange-rate depreciation. 
In fact, the ECB’s perceived reluctance to follow suit is likely to add to the expected growth effects of US or British monetary-policy choices, at the expense of the eurozone. 
The controversy over China’s exchange-rate policy thus is no mere bilateral US-China trade dispute, but rather a global macroeconomic clash between advanced and emerging countries. 
Moreover, the lack of coordination in both advanced and emerging countries suggests that the solution to currency wars is not to declare a truce, but to recognize the nature of the issue and overcome the problems that stand in the way of agreed common solutions. 
This is not to say that the renminbi’s exchange rate is a secondary issue. 
On the contrary, its importance stems from the fact that China holds the key to global adjustment. 
The recent IMF/World Bank annual meetings indicate that this is gradually being recognized, with emerging countries increasingly critical of China’s inflexibility. 
So now is the IMF’s moment. 
The Fund should propose a conceptual framework for the discussions to be held on exchange-rate problems by providing an objective assessment of the adjustments that are needed, and by facilitating settlement within the multilateral framework. 
The IMF cannot substitute for governments’ choices. 
But it can help the search for a solution. 


The Current Account Counts 
NEW HAVEN – In an increasingly interconnected global economy, cross-border trade and financial-capital linkages have come to matter more than ever. 
The current-account balance, the difference between a country’s investment and saving position, is key to understanding these linkages. 
The dispersion of current-account positions tells us much about the state of global imbalances, which are often a precursor of crises. 
The same is true of trade tensions, such as those now evident around the world. 
Current-account disparities often pit one country against another. 
Economies running current-account deficits tend to suffer from a deficiency of domestic saving. 
Lacking in saving and wanting to invest, consume, and grow, they have no choice but to borrow surplus saving from others, which gives rise to current-account and trade deficits with the rest of the world. 
The opposite is the case for countries with current-account surpluses. 
They are afflicted by subpar consumption, excess saving, and chronic trade surpluses. 
There is a long-standing debate over who is to blame for this state of affairs – the deficit countries, which draw freely on the saving of others to finance economic growth, or the surplus countries, which choose to grow by selling their output in foreign markets. 
This blame game, which has long been central to disputes over international economic policy and trade tensions, is particularly contentious today. 
The United States has the largest current-account imbalance in the world. 
It has recorded a deficit for all but one year since 1982, the sole exception being 1991, when foreign contributions to its military campaign in the Persian Gulf underpinned a miniscule surplus (0.05% of GDP). 
During the 2000-2017 period, the US amassed $9.1 trillion in cumulative current-account deficits. 
That is larger than the $8.9 trillion of cumulative surpluses run collectively by the three largest surplus economies – Germany, China, and Japan – over the same period. 
Many observers believe that the US is doing the rest of the world a huge favor by running chronic current-account deficits – namely, supporting the large surplus countries, which tend to suffer from a shortfall of domestic demand. 
Others, including me, are more critical of America’s long-standing penchant for excess consumption and the role that surplus economies play in enabling it. 
While there is undoubtedly some validity to both points of view, I worry more about the destabilizing role of the US. 
America’s consume-now-save-later mindset, which is at the heart of its current-account deficit, is deeply embedded in its political economy. 
The US tax code has long been biased toward low saving and debt-financed consumption; the deductibility of mortgage interest, the absence of any value-added or national sales tax, and a dearth of saving incentives are especially problematic. 
So, too, are the wealth effects from a profusion of recent asset bubbles. 
Aided and abetted by the Federal Reserve’s über-accommodation since the late 1990s, there was no stopping the interplay between America’s asset-dependent economy and an equally pernicious leverage cycle underwritten by bubble-inflated collateral. 
Why save out of income when frothy asset markets can do the job? 
The preference for asset-based saving over income-based saving is central to America’s current-account deficit. 
The surplus countries have been delighted to go along for the ride. 
It didn’t matter that the US consumption binge was built on a foundation of quicksand. 
Excess export growth in the large surplus economies enabled the excesses of the world’s largest consumer. 
That was especially the case in China. 
Spurred by Deng Xiaoping’s “reform and opening up,” China’s export sector increased sixfold – from 6% of GDP in 1980 to 36% in 2006. 
Mirroring America’s massive current-account deficit, China’s current account went from relative balance in 1980 (+0.1% of GDP) to a massive surplus of 9.9% in pre-crisis 2007. 
The same was true in major developed economies, albeit to a lesser extreme: Germany’s export share of GDP went from 19% in 1980 to 43% in 2007, while Japan’s went from 13% to 17.5% over the same period. 
In many respects, a marriage of convenience between the surplus and deficit countries eventually blossomed into full-blown codependency. 
But then, with the wrenching global financial crisis in 2008, the music stopped. 
Since then, frictions between deficit and surplus countries have intensified, now risking the possibility of a full-blown trade war. 
President Donald Trump’s administration has played an especially antagonistic role in asserting that the US is being victimized by large trade deficits. 
Yet America’s trade gaps have, in fact, been spawned by a chronic deficiency of domestic US saving. 
Despite the government’s recent upward revision to a still-depressed personal saving rate, the overall US national saving rate, which drives the current account, remains woefully deficient, averaging just 1.9% in net terms (adjusted for depreciation) over the post-crisis 2009-17 period. 
That is less than one-third the 6.3% average during the final three decades of the twentieth century. 
Large and growing federal budget deficits over the next several years will only exacerbate this problem. 
Blaming China misses the obvious and important point that the Chinese current-account surplus has fallen sharply in recent years, from 9.9% of GDP in 2007 to an estimated 1% in 2018. 
In 2017, China’s current-account surplus of $165 billion was well below that of Germany ($297 billion) and Japan ($195 billion). 
As China presses ahead with consumer-led rebalancing, it will continue to move from surplus saving to saving absorption, with the distinct possibility that its current account will shift into permanent deficit (a small deficit actually was recorded in the first quarter of this year). 
That will leave a deficit-prone America with one less surplus country to draw on in funding the growth of its saving-short, excess-consumption economy. 
Maybe the rest of the world will step up and fill the void. 
But with the Trump administration now disengaging from globalization, that seems less and less likely. 
History suggests that current-account imbalances ultimately matter a great deal. 
A still-unbalanced global economy may be forced to relearn that painful lesson in the coming years. 

Cut Now, Save Later 
WASHINGTON, DC – Central banks around the world have finally reacted to the global financial crisis by engineering a coordinated half-point interest-rate cut. 
That is welcome, but far more is needed – and quickly. 
If implemented now, steep rate cuts can still have a significant positive effect. 
If delayed, their effect is likely to be minimal. 
Across the board, the world’s major central banks have been slow to respond to the deepening crisis. 
This failure reflects the dominance of conventional economics, which has produced closed-minded group-thinking within the global central banking community. 
As a result, central banks failed to see the oncoming financial tsunami, and even after it arrived they continued to fight the last war against inflation. 
The European Central Bank and the Bank of England have been the worst offenders. That is no surprise, as European central bankers are the most conventional in their thinking and have been the most obsessed with inflation. 
It also explains why Continental Europe has had such high unemployment rates for so long. 
The United States Federal Reserve Board has done a much better job, though it, too, has moved in fits and starts, repeatedly playing catch-up with a crisis that has persistently remained one step ahead of policy. 
This pattern reflects the Fed’s own obsession with price stability, which encourages preemptive interest-rate increases to head off inflation, but restrains equivalent preemptive reductions to head off unemployment. 
Consequently, the Fed left its interest rate unchanged throughout the summer of 2008, despite the collapse of mortgage giants Fannie Mae and Freddie Mac, the bankruptcy of Lehman Brothers, AIG’s insolvency, and the emergence of global financial-market contagion. 
Moreover, Fed policy remained constant despite rapid deterioration in America’s real economy, indicated by accelerating job losses and rising unemployment. 
The coordinated rate cut now undertaken by the world’s major central banks begins the process of policy catch-up, but further cuts are needed. 
Whereas the bogey of inflation seems finally to have been laid to rest, another myth must still be challenged – that the Fed and other central banks should save their “bullets” for a rainy day and should therefore resist cutting rates. 
There is an old saying about monetary policy being useless in recession because the effect of lowering interest rates is like “pushing on a string.” That happens when confidence and wealth have been destroyed, at which point rate cuts do indeed become useless. 
This is because the destruction of confidence undermines the “animal spirits” of capitalism: borrowers are unwilling to borrow and lenders are unwilling to lend. 
The destruction of wealth also destroys collateral, which means that even those who wish to borrow cannot. 
Meanwhile, insolvencies and foreclosures triggered by excessive interest burdens are not reversed by later rate cuts. 
By failing to act in a timely fashion, central banks have allowed a dangerous erosion of confidence and wealth, which is creating “pushing on a string” conditions. 
Fortunately, there is still time for decisive rate cuts now to have a robust impact. 
But the window of opportunity is closing fast. 
If central banks save their “rate cut” bullets for a later day, they may find that their ammunition is useless. 
The time to shoot is now. 

Lessons from the Fiscal Cliff 
CAMBRIDGE – One of the many things I learned from Milton Friedman is that the true cost of government is its spending, not its taxes. 
To put it another way, spending is financed either by current taxes or through borrowing, and borrowing amounts to future taxes, which have almost the same impact on economic performance as current taxes. 
We can apply this reasoning to the United States’ unsustainable fiscal deficit. 
As is well known, closing this deficit requires less spending or more taxes. 
The conventional view is that a reasonable, balanced approach entails some of each. 
But, as Friedman would have argued, the two methods should be considered polar opposites. 
Less spending means that the government will be smaller. 
More taxes mean that the government will be larger. 
Hence, people who favor smaller government (for example, some Republicans) will want the deficit closed entirely by cutting spending, whereas those who favor larger government (for example, President Barack Obama and most Democrats) will want the deficit closed entirely by raising taxes. 
As the economist Alberto Alesina has found from studies of fiscal stabilization in OECD countries, eliminating fiscal deficits through spending cuts tends to be much better for the economy than eliminating them through tax increases. 
A natural interpretation is that spending adjustments work better because they promise smaller government, thereby favoring economic growth. 
For a given size of government, the method of raising tax revenue matters. 
For example, we can choose how much to collect via a general income tax, a payroll tax, a consumption tax (such as a sales or value-added tax), and so on. 
We can also choose how much revenue to raise today, rather than in the future (by varying the fiscal deficit). 
A general principle for an efficient tax system is to collect a given amount of revenue (corresponding in the long run to the government’s spending) in a way that causes as little distortion as possible to the overall economy. 
Usually, this principle means that marginal tax rates should be similar at different levels of labor income, for various types of consumption, for outlays today versus tomorrow, and so on. 
From this perspective, a shortcoming of the US individual income-tax system is that marginal tax rates are high at the bottom (because of means testing of welfare programs) and the top (because of the graduated-rate structure). 
Thus, the government has moved in the wrong direction since 2009, sharply raising marginal tax rates at the bottom (by dramatically increasing transfer programs) and, more recently, at the top (by raising tax rates on the rich). 
One of the most efficient tax-raising methods is the US payroll tax, for which the marginal tax rate is close to the average rate (because deductions are absent and there is little graduation in the rate structure). 
Therefore, cutting the payroll tax rate in 2011-2012 and making the rate schedule more graduated (on the Medicare side) were mistakes from the standpoint of efficient taxation. 
Republicans should consider these ideas when evaluating tax and spending changes in 2013. 
Going over the “fiscal cliff” would have had the attraction of seriously cutting government spending, although the composition of the cuts – nothing from entitlements and too much from defense – was unattractive. 
The associated revenue increase was, at least, across the board, rather than the unbalanced hike in marginal tax rates at the top that was enacted. 
But the most important part of the deal to avert the fiscal cliff was the restoration of the efficient payroll tax. 
I estimate that the rise by two percentage points in the amount collected from employees corresponds to about $1.4 trillion in revenue over ten years. 
This serious revenue boost was not counted in standard reports, because the payroll-tax “holiday” for 2011-2012 had always been treated legally as temporary. 
It is true that some macroeconomic modelers, including the Congressional Budget Office, forecasted that going over the cliff would have caused a recession. 
But those results come from Keynesian models that always predict that GDP expands when the government gets larger. 
Entirely absent from these models are the negative effects of more government and uncertainty about how fiscal problems will be resolved. 
Another recession in the US would not be a great surprise, but it can be attributed to an array of bad government policies and other forces, not to cutting the size of government. 
Indeed, it is nonsense to think that cuts in government spending should be avoided in the “short run” in order to lower the chance of a recession. 
If a smaller government is a good idea in the long run (as I believe it is), it is also a good idea in the short run. 


Cyber Insecurity 
CAMBRIDGE – In August 2008, Russian troops moved into Georgia. 
Observers dispute who fired first, but there was a little noticed dimension of the conflict that will have major repercussions for the future. 
Computer hackers attacked Georgian government Web sites in the weeks preceding the outbreak of armed conflict. 
The Russia-Georgia conflict represents the first significant cyber attacks accompanying armed conflict. 
Welcome to the twenty-first century. 
Cyber threats and potential cyber warfare illustrate the increased vulnerabilities and loss of control in modern societies. 
Governments have mainly been concerned about hacker attacks on their own bureaucracy’s information technology infrastructure, but there are social vulnerabilities well beyond government computers. 
In an open letter to the US president in September 2007, American professionals in cyber defense warned that “the critical infrastructure of the United States, including electrical power, finance, telecommunications, health care, transportation, water, defense, and the Internet, is highly vulnerable to cyber attack. 
Fast and resolute mitigating action is needed to avoid national disaster.” 
In the murky world of the Internet, attackers are difficult to identify. 
In today’s interconnected world, an unidentified cyber attack on non-governmental infrastructure might be severely damaging. 
For example, some experts believe that a nation’s electric power grid may be particularly susceptible. 
The control systems that electric power companies use are thought vulnerable to attack, which could shut down cities and regions for days or weeks. 
Cyber attacks may also interfere with financial markets and cause immense economic loss by closing down commercial Web sites. 
Some scenarios, including an “electronic Pearl Harbor,” sound alarmist, but they illustrate the diffusion of power from central governments to individuals. 
In 1941, the powerful Japanese navy used many resources to create damage thousands of miles away. 
Today, an individual hacker using malicious software can cause chaos in far-away places at little cost to himself. 
Moreover, the information revolution enables individuals to perpetrate sabotage with unprecendented speed and scope. 
The so-called “love bug virus,” launched in the Phillipines in 2000, is estimated to have cost billions of dollars in damage. 
Terrorists, too, can exploit new vulnerabilities in cyberspace to engage in asymmetrical warfare. 
In 1998, when America complained about seven Moscow Internet addresses involved in the theft of Pentagon and NASA secrets, the Russian government replied that phone numbers from which the attacks originated were inoperative. 
The US had no way of knowing whether the Russian government had been involved. 
More recently, in 2007, China’s government was accused of sponsoring thousands of hacking incidents against German federal government computers and defense and private-sector computer systems in the US. 
But it was difficult to prove the source of the attack, and the Pentagon had to shut down some of its computer systems. 
In 2007, when Estonia’s government moved a World War II statue commemorating Soviet war dead, hackers retaliated with a costly denial-of-service attack that closed down Estonia’s access to the internet. 
There was no way to prove whether the Russian government, a spontaneous nationalist response, or both aided this transnational attack. 
In January 2008, President George W. Bush signed two presidential directives that called for establishing a comprehensive cyber-security plan, and his 2009 budget requested $6 billion to develop a system to protect national cyber security. 
President-elect Barack Obama is likely to follow suit. 
In his campaign, Obama called for tough new standards for cyber security and physical resilience of critical infrastructure, and promised to appoint a national cyber adviser who will report directly to him and be responsible for developing policy and coordinating federal agency efforts. 
That job will not be easy, because much of the relevant infrastructure is not under direct government control. 
Just recently, Donald Kerr, the US deputy director of national intelligence, warned that “major losses of information and value for our government programs typically aren’t from spies....In fact, one of the great concerns I have is that so much of the new capabilities that we’re all going to depend on aren’t any longer developed in government labs under government contract.” 
Kerr described what he called “supply chain attacks” in which hackers not only steal proprietary information, but go further and insert erroneous data and programs in communications hardware and software – Trojan horses that can be used to bring down systems. 
All governments will find themselves exposed to a new type of threat that will be difficult to counter. 
Governments can hope to deter cyber attacks just as they deter nuclear or other armed attacks. 
But deterrence requires a credible threat of response against an attacker. 
And that becomes much more difficult in a world where governments find it hard to tell where cyber attacks come from, whether from a hostile state or a group of criminals masking as a foreign government. 
While an international legal code that defines cyber attacks more clearly, together with cooperation on preventive measures, can help, such arms-control solutions are not likely to be sufficient. 
Nor will defensive measures like constructing electronic firewalls and creating redundancies in sensitive systems. 
Given the enormous uncertainties involved, the new cyber dimensions of security must be high on every government’s agenda. 

Cyber War and Peace 
CAMBRIDGE – Two years ago, a piece of faulty computer code infected Iran’s nuclear program and destroyed many of the centrifuges used to enrich uranium. 
Some observers declared this apparent sabotage to be the harbinger of a new form of warfare, and United States Secretary of Defense Leon Panetta has warned Americans of the danger of a “cyber Pearl Harbor” attack on the US. 
But what do we really know about cyber conflict? 
The cyber domain of computers and related electronic activities is a complex man-made environment, and human adversaries are purposeful and intelligent. 
Mountains and oceans are hard to move, but portions of cyberspace can be turned on and off by throwing a switch. 
It is far cheaper and quicker to move electrons across the globe than to move large ships long distances. 
The costs of developing those vessels – multiple carrier task forces and submarine fleets – create enormous barriers to entry, enabling US naval dominance. 
But the barriers to entry in the cyber domain are so low that non-state actors and small states can play a significant role at low cost. 
In my book The Future of Power, I argue that the diffusion of power away from governments is one of this century’s great political shifts. & Cyberspace is a perfect example. 
Large countries like the US, Russia, Britain, France, and China have greater capacity than other states and non-state actors to control the sea, air, or space, but it makes little sense to speak of dominance in cyberspace. 
If anything, dependence on complex cyber systems for support of military and economic activities creates new vulnerabilities in large states that can be exploited by non-state actors. 
Four decades ago, the US Department of Defense created the Internet; today, by most accounts, the US remains the leading country in terms of its military and societal use. 
But greater dependence on networked computers and communication leaves the US more vulnerable to attack than many other countries, and cyberspace has become a major source of insecurity, because, at this stage of technological development, offense prevails over defense there. 
The term “cyber attack”covers a wide variety of actions, ranging from simple probes to defacing Web sites, denial of service, espionage, and destruction. 
Similarly, the term “cyber war” is used loosely to cover a wide range of behaviors, reflecting dictionary definitions of war that range from armed conflict to any hostile contest (for example, “war between the sexes” or “war on drugs”). 
At the other extreme, some experts use a narrow definition of cyber war: a “bloodless war” among states that consists solely of electronic conflict in cyberspace. 
But this avoids the important interconnections between the physical and virtual layers of cyberspace. 
As the Stuxnet virus that infected Iran’s nuclear program showed, software attacks can have very real physical effects. 
A more useful definition of cyber waris hostile action in cyberspace whose effects amplify or are equivalent to major physical violence. 
In the physical world, governments have a near-monopoly on large-scale use of force, the defender has an intimate knowledge of the terrain, and attacks end because of attrition or exhaustion. 
Both resources and mobility are costly. 
In the cyber world, by contrast, actors are diverse (and sometimes anonymous), physical distance is immaterial, and some forms of offense are cheap. 
Because the Internet was designed for ease of use rather than security, attackers currently have the advantage over defenders. 
Technological evolution, including efforts to “reengineer” some systems for greater security, might eventually change that, but, for now, it remains the case. 
The larger party has limited ability to disarm or destroy the enemy, occupy territory, or use counterforce strategies effectively. 
Cyber war, though only incipient at this stage, is the most dramatic of the potential threats. 
Major states with elaborate technical and human resources could, in principle, create massive disruption and physical destruction through cyber attacks on military and civilian targets. 
Responses to cyber war include a form of interstate deterrence through denial and entanglement, offensive capabilities, and designs for rapid network and infrastructure recovery if deterrence fails. 
At some point, it may be possible to reinforce these steps with certain rudimentary norms and arms control, but the world is at an early stage in this process. 
If one treats so-called “hacktivism” by ideological groups as mostly a disruptive nuisance at this stage, there remain four major categories of cyber threats to national security, each with a different time horizon: cyber war and economic espionage are largely associated with states, and cyber crime and cyber terrorism are mostly associated with non-state actors. 
For the US, the highest costs currently stem from espionage and crime, but over the next decade or so, war and terrorism could become greater threats than they are today. 
Moreover, as alliances and tactics evolve, the categories may increasingly overlap. 
In the view of Admiral Mike McConnell, America’s former director of national intelligence, “Sooner or later, terror groups will achieve cyber-sophistication. 
It’s like nuclear proliferation, only far easier.” 
The world is only just beginning to see glimpses of cyber war – in the denial-of-service attacks that accompanied the conventional war in Georgia in 2008, or the recent sabotage of Iranian centrifuges. 
States have the greatest capabilities, but non-state actors are more likely to initiate a catastrophic attack. 
A “cyber 9/11” may be more likely than the often-mentioned “cyber Pearl Harbor.” 
It is time for states to sit down and discuss how to limit this threat to world peace. 

Can Cyber Warfare Be Deterred? 
CAMBRIDGE – Fear of a “cyber Pearl Harbor” first appeared in the 1990s, and for the past two decades, policymakers have worried that hackers could blow up oil pipelines, contaminate the water supply, open floodgates and send airplanes on collision courses by hacking air traffic control systems. 
In 2012, then-US Secretary of Defense Leon Panetta warned that hackers could “shut down the power grid across large parts of the country.” 
None of these catastrophic scenarios has occurred, but they certainly cannot be ruled out. 
At a more modest level, hackers were able to destroy a blast furnace at a German steel mill last year. 
So the security question is straightforward: Can such destructive actions be deterred? 
It is sometimes said that deterrence is not an effective strategy in cyberspace, because of the difficulties in attributing the source of an attack and because of the large and diverse number of state and non-state actors involved. 
We are often not sure whose assets we can hold at risk and for how long. 
Attribution is, indeed, a serious problem. 
How can you retaliate when there is no return address? 
Nuclear attribution is not perfect, but there are only nine states with nuclear weapons; the isotopic identifiers of their nuclear materials are relatively well known; and non-state actors face high entry barriers. 
None of this is true in cyberspace where a weapon can consist of a few lines of code that can be invented (or purchased on the so-called dark web) by any number of state or non-state actors. 
A sophisticated attacker can hide the point of origin behind the false flags of several remote servers. 
While forensics can handle many “hops” among servers, it often takes time. 
For example, an attack in 2014 in which 76 million client addresses were stolen from JPMorgan Chase was widely attributed to Russia. 
By 2015, however, the US Department of Justice identified the perpetrators as a sophisticated criminal gang led by two Israelis and an American citizen who lives in Moscow and Tel Aviv. 
Attribution, however, is a matter of degree. 
Despite the dangers of false flags and the difficulty of obtaining prompt, high-quality attribution that would stand up in a court of law, there is often enough attribution to enable deterrence. 
For example, in the 2014 attack on SONY Pictures, the United States initially tried to avoid full disclosure of the means by which it attributed the attack to North Korea, and encountered widespread skepticism as a result. 
Within weeks, a press leak revealed that the US had access to North Korean networks. 
Skepticism diminished, but at the cost of revealing a sensitive source of intelligence. 
Prompt, high-quality attribution is often difficult and costly, but not impossible. 
Not only are governments improving their capabilities, but many private-sector companies are entering the game, and their participation reduces the costs to governments of having to disclose sensitive sources. 
Many situations are matters of degree, and as technology improves the forensics of attribution, the strength of deterrence may increase. 
Moreover, analysts should not limit themselves to the classic instruments of punishment and denial as they assess cyber deterrence. 
Attention should also be paid to deterrence by economic entanglement and by norms. 
Economic entanglement can alter the cost-benefit calculation of a major state like China, where the blowback effects of an attack on, say, the US power grid could hurt the Chinese economy. 
Entanglement probably has little effect on a state like North Korea, which is weakly linked to the global economy. 
It is not clear how much entanglement affects non-state actors. 
Some may be like parasites that suffer if they kill their host, but others may be indifferent to such effects. 
As for norms, major states have agreed that cyber war will be limited by the law of armed conflict, which requires discrimination between military and civilian targets and proportionality in terms of consequences. 
Last July, the United Nations Group of Government Experts recommended excluding civilian targets from cyberattacks, and that norm was endorsed at last month’s G-20 summit. 
It has been suggested that one reason why cyber weapons have not been used more in war thus far stems precisely from uncertainty about the effects on civilian targets and unpredictable consequences. 
Such norms may have deterred the use of cyber weapons in US actions against Iraqi and Libyan air defenses. 
And the use of cyber instruments in Russia’s “hybrid” wars in Georgia and Ukraine has been relatively limited. 
The relationship among the variables in cyber deterrence is a dynamic one that will be affected by technology and learning, with innovation occurring at a faster pace than was true of nuclear weapons. 
For example, better attribution forensics may enhance the role of punishment; and better defenses through encryption may increase deterrence by denial. 
As a result, the current advantage of offense over defense may change over time. 
Cyber learning is also important. 
As states and organizations come to understand better the importance of the Internet to their economic wellbeing, cost-benefit calculations of the utility of cyber warfare may change, just as learning over time altered the understanding of the costs of nuclear warfare. 
Unlike the nuclear age, when it comes to deterrence in the cyber era, one size does not fit all. 
Or are we prisoners of an overly simple image of the past? 
After all, when nuclear punishment seemed too draconian to be credible, the US adopted a conventional flexible response to add an element of denial in its effort to deter a Soviet invasion of Western Europe. 
And while the US never agreed to a formal norm of “no first use of nuclear weapons,” eventually such a taboo evolved, at least among the major states. 
Deterrence in the cyber era may not be what it used to be, but maybe it never was. 

Information Warfare Versus Soft Power 
CAMBRIDGE – Russia’s interference in the 2016 US presidential election, and its suspected hacking of French President Emmanuel Macron’s campaign servers, should surprise no one, given President Vladimir Putin’s (mis)understanding of soft power. 
Before his re-election in 2012, Putin told a Moscow newspaper that “soft power is a complex of tools and methods to achieve foreign policy goals without the use of force, through information and other means of influence.” 
From the Kremlin’s perspective, color revolutions in neighboring countries and the Arab Spring uprisings were examples of the United States using soft power as a new form of hybrid warfare. 
The concept of soft power was incorporated into Russia’s 2013 Foreign Policy Concept, and in March 2016, Russian Chief of General Staff Valery Gerasimov stated that responding to such foreign threats “using conventional troops is impossible; they can be counteracted only with the same hybrid methods.” 
What is soft power? 
Some think it means any action other than military force, but this is wrong. 
Soft power is the ability to get what you want through attraction and persuasion rather than threats of coercion or offers of payment. 
Soft power is not good or bad in itself. 
Value judgments depend on the ends, means, and consequences of an action. 
It is not necessarily better to twist minds than to twist arms (though the subject usually has more autonomy in mental rather than physical processes). 
Osama bin Laden neither threatened nor paid the men who flew aircraft into the World Trade Center in September 2001: he attracted them by his ideas to do evil. 
The soft power of attraction can be used for offensive purposes. 
Countries have long spent billions on public diplomacy and broadcasting in a game of competitive attractiveness – the “battle for hearts and minds.” 
Soft-power instruments like the Marshall Plan and the Voice of America helped to determine the outcome of the Cold War. 
After the Cold War, Russian elites believed that European Union and NATO enlargement, and Western efforts at democracy promotion, were designed to isolate and threaten Russia. 
In response, they tried to develop Russian soft power by promoting an ideology of traditionalism, state sovereignty, and national exclusivity. 
This resonated in countries like Hungary, where Prime Minister Victor Orbán has praised “illiberal democracy,” as well as among the diaspora along Russia’s borders, in impoverished countries of Central Asia, and among right-wing populist movements in Western Europe. 
Information warfare can be used offensively to disempower rivals, and this could be considered “negative soft power.” 
By attacking the values of others, one can reduce their attractiveness and thus their relative soft power. 
Nongovernmental actors have long understood that multinational corporations are vulnerable to having their brand equity diminished through “naming and shaming” campaigns. 
The available evidence suggests that when the Russians began their intervention in the American presidential election in 2015, their objective was to sully and discredit the US democratic process. 
The election of Donald Trump, who had praised Putin, was a bonus. 
Now, Russian interference in European democracies’ domestic politics is designed to reduce the attractiveness of NATO, the embodiment of Western hard power, which Russia views as a threat. 
In the nineteenth century, the outcome of contests for mastery of Europe depended primarily on whose army won; today, it also depends on whose story wins. 
Information warfare goes well beyond soft power, and it is not new. 
Manipulation of ideas and electoral processes by cash payments has a long history, and Hitler and Stalin were pioneers in radio attacks. 
But broadcasting that seems too propagandistic lacks credibility and thus does not attract – or produce soft power among – some audiences. 
With international politics becoming a game of competitive credibility, exchange programs that develop personal relations among students and young leaders are often far more effective generators of soft power. 
In the 1960s, the broadcaster Edward R. Murrow said the most important part of international communications is not the ten thousand miles of electronics, but the final three feet of personal contact. 
But what happens in today’s world of social media, where “friends” are a click away, fake friends are easy to fabricate, and fake news can be generated and promoted by paid trolls and mechanical bots? 
Russia has perfected these techniques. 
In addition to formal public diplomacy mouthpieces like Russia Today and Sputnik, Russia employs armies of paid trolls and botnets to generate false information that can later be circulated and legitimated as if it were true. 
Then, in 2016, Russian military intelligence went a step further, by hacking into the private network of the Democratic National Committee, stealing information, and releasing it online to damage Hillary Clinton’s presidential candidacy. 
Though information warfare is not new, cyber technology makes it cheaper, faster, and more far-reaching, as well as more difficult to detect and more easily deniable. 
But while Russian information warfare has been somewhat successful in terms of disruption, affecting the 2016 US election somewhat, it has failed in terms of generating soft power. 
The Portland Consultancy in London publishes a “Soft Power 30” index that ranks Russia 27th. 
In 2016, Finland’s Institute of International Affairs found that Russian propaganda had little impact on mainstream Western media and had never resulted in any change in policy. 
And a Chicago Council on Global Affairs poll in December indicated that Russia’s popularity among Americans was the lowest since the Cold War year of 1986. 
Ironically, rather than pocketing the Trump bonus, Russia’s information warfare has handicapped the US president by greatly reducing Russia’s soft power in America. 
As some analysts point out, the best response to a “fire hose of falsehoods” is not to try to answer each lie, but to forewarn and inoculate against the process. 
As Macron’s victory has shown, the European elections of 2017 may benefit from such forewarnings. 

Cycling and Cancer 
The cyclist Lance Armstrong recently celebrated an anniversary. 
It has been ten years since he was diagnosed with metastatic testicular cancer, which his doctors believed would kill him. 
Based on his inspiring story and his efforts to publicize the disease, Armstrong has become an anti-cancer crusader. 
But on examining his foundation’s website ( www.laf.org ) and his writings, a nagging question remains: Did the same tenacity that enabled Armstrong to win seven Tour de France bicycle races help cure his cancer? 
Armstrong is careful not to equate cycling with cancer, but he—and his legions of fans—often cannot help but do so. 
Such a connection may be highly misleading. 
By his early twenties, Armstrong was becoming a force in the racing world, but all was not well. 
In 1996, at age 25, Armstrong developed fatigue, testicular pain and a bloody cough. 
Doctors diagnosed him with testicular cancer. 
More distressingly, Armstrong’s cancer was far-advanced, having spread to his lungs, abdomen and brain. 
He was given roughly a 40% chance of survival, which was probably an overestimate. 
One doctor told Armstrong’s mother that her son would die. 
After undergoing surgery to remove his cancerous testicle, Armstrong became “a student of cancer.” 
He was treated at Indiana University, perhaps America’s leading center for testicular cancer. 
Armstrong chose Indiana because its oncologists said they could treat him without bleomycin, a type of chemotherapy that would have damaged his lungs and ended his cycling career if he survived. 
They removed his brain tumors with surgery instead of radiation, which might have caused balance problems. 
But the doctors made no bones about what Armstrong was to receive: extremely caustic drugs that would make him sick as a dog. 
Armstrong later wrote that “by the fourth cycle [of chemotherapy], I was in the fetal position, retching around the clock.” 
Armstrong’s cancer responded extremely well. 
He then underwent extensive rehabilitation, gradually regaining strength and confidence. 
By 1998, he was again riding his bicycle. 
The illness changed Armstrong’s body. 
When he resumed serious training, he was leaner and more muscular. 
In addition to the emotional advantage that Armstrong believed that cancer gave him, his new body also made him a more effective cyclist. 
In 1999, less than three years after his diagnosis, Armstrong won his first Tour de France. 
Six more followed, making him the greatest cyclist in history. 
For his part, Armstrong has tried to steer clear of facile associations between his Tour de France triumphs and his recovery from cancer. 
“Good, strong people get cancer,” he has written, “and they do all the right things to beat it, and they still die.” 
Perhaps he was a racing hero, Armstrong has stated, but “it wasn’t heroic to survive cancer.” 
Even though he participated in his care and had excellent doctors, his survival was “more a matter of blind luck.” 
Still, at times, Armstrong seems to slip into the sort of language he wishes to avoid. 
At the close of his second book, Armstrong summarized his history with cancer as: “I got treated, I fought like hell, and I got better.” 
A quotation on his foundation’s website reads “When I was sick, I didn’t want to die. 
When I race I don’t want to lose. 
Dying and losing, it’s the same thing.” 
More worrisome is the adoption of the same reasoning by those who hear Armstrong’s story. 
“Lance refused to become a statistic and instead rallied and became cancer’s worst enemy,” wrote a reviewer of his first book. 
“He refused to give in and chose to fight the disease with all he had.” 
An Internet biography states that “with the same fierce focus he brings to competition,” Armstrong “tackled his illness and won.” 
To some people, Armstrong has become a symbol for the notion that anything is possible. 
“Lance beat cancer and then he went on to win 5 Tour de Frances,” a computer programmer wrote on his blog in 2003. 
“That pretty much means I can overcome whatever ills I have in my life so I can keep going after that.” 
The trouble is that data about the “will to live” among cancer patients are not so rosy. 
One 1989 study showed that women with metastatic breast cancer who attended support groups survived longer, but these results have not been duplicated. 
A recent study showed that a positive attitude did not lengthen the lives of lung cancer patients. 
Anecdotally, clinicians can recall “fighters” with cancer who die and others who “give up” but live. 
This is a sobering message for Armstrong’s many fans. 
After all, we all want to think that hard work always pays off. 
Unfortunately, in the world of cancer, this may not be so. 
But Armstrong’s legacy is about more than data. 
He has educated and provided inspiration to thousands, perhaps millions, of cancer patients and raised money that is being used to finding cures. 
Oh, and there are those seven bike races that he won. 

Europe’s Perpetual Crisis 
ATHENS – The Cyprus bailout deal is a watershed in the unfolding eurozone crisis, because responsibility for resolving banks’ problems has been shifted from taxpayers to private investors and depositors. 
But imposing major losses on Cypriot banks’ depositors violates the deposit-insurance guarantee that forms part of the proposed European banking union, while the imposition of capital controls further erodes the monetary union’s foundations. 
So, is Europe chasing its tail? 
Germany and the other countries of the eurozone core are signaling that debt mutualization within the monetary union is out of the question, and that bailouts of countries or financial institutions will be balanced by “bail-ins” of their creditors. 
Increased uncertainty concerning the safety of deposits will push up interest rates and deepen Europe’s recession, and may also trigger capital outflows from the eurozone’s weaker peripheral economies to the core. 
The implications of this shift may be far-reaching. 
The German model for resolving the debt crisis and returning to internal or external balance relies on fiscal consolidation and structural reforms for the deficit countries. 
But, if all countries simultaneously attempt to improve their fiscal or external balances by cutting spending and raising taxes, all will fail, because each country’s austerity implies less demand for other countries’ output, in turn perpetuating both domestic and external imbalances. 
“Bailing in” creditors will exacerbate these trends. 
Moreover, a deep and prolonged recession implies vanishing support for reforms, as governments fail to convince citizens that current sacrifice will ensure a better future. 
Privatization, market liberalization, the opening of closed professions, and government downsizing involve conflicts with powerful vested interests, such as businesses in protected industries, public-sector unions, or influential lobbies. 
Resolving such conflicts requires social alliances, which are invariably undermined by discontent, civil disorder, and political instability. 
The recent Italian election has shown how toxic the association of austerity policies with the pursuit of reform has become. 
Anti-austerity anger swept away the reform agenda of Mario Monti’s previous technocratic government, leaving Italy, its future uncertain, to continue muddling through. 
The same scenario seems to be emerging in Greece, where the depth of the austerity-induced recession, with output down by 25% over five years and unemployment at 27%, is paralyzing a reform-minded center-right government. 
The gaps in the strategy are clear. 
First, the eurozone authorities misread the real causes of the debt crisis, which stemmed mainly from a growing competitiveness gap between the core and periphery countries. 
The resulting private-sector imbalances culminated in banking problems that were eventually transferred to sovereigns. 
Greece’s fiscal profligacy was the exception rather than the rule. 
Indeed, in contrast to the United States, eurozone authorities were slow to consolidate the banking system after the global financial crisis erupted in 2008, and failed to sever the ties between sovereigns’ and banks’ balance sheets. 
Nor did they push strongly for structural reforms. 
Instead, they emphasized harsh austerity, which was to be pursued everywhere. 
Second, the effects of austerity were exacerbated by the choice to pursue nominal, rather than structural, fiscal-deficit targets. 
Countries with a stronger fiscal position (that is, smaller structural deficits) should be encouraged to adopt more expansionary policies in order to contribute to lifting overall demand. 
Moreover, the European Investment Bank’s lending capacity could be increased substantially, and European Union structural funds mobilized, to finance investment projects in the peripheral economies. 
Third, the European Central Bank’s announcement last August of its “outright monetary transactions” program – through which it guarantees eurozone members’ sovereign debt, subject to policy conditionality – has contributed significantly to subduing financial turbulence in the eurozone. 
But the OMT scheme has not been reinforced by a reduction in key interest rates, which would boost inflation in core countries with external surpluses and thus help to close the competitiveness gap with the periphery. 
Crucially, monetary-policy measures do not address the underlying problem of lack of demand. 
Last, but not least, the eurozone authorities misread the confidence factor. 
In theory, simultaneous fiscal consolidation and supply-side reform facilitates economic recovery, because it increases confidence among consumers and investors, thereby inducing higher spending and production. 
But this does not necessarily work in an imperfectly functioning monetary union, such as the eurozone, where the continual appearance of systemic flaws erodes confidence; in such circumstances, the result may be hoarding and capital outflows, rather than increased spending. 
The eurozone’s flaws reflect its conceptual distance from the US, which is the only model of a well-functioning monetary union. 
Europe’s history rules out emulating the US model. 
But, to make the eurozone work, monetary unification should extend to the fiscal and financial fields, thereby creating an integrated economic union. 
The longer that European authorities postpone the introduction of Eurobonds, an effective banking and fiscal union, and lender-of-last-resort status for the ECB, the longer the crisis will last. 
By effectively defaulting on a deposit-insurance guarantee through its actions in Cyprus, the eurozone backtracked on the planned banking union. 
Pursuing a strategy that simultaneously deepens recession and weakens confidence will not resolve the debt crisis. 
As funding problems recur in the recession-hit economies, governments may resist “bailing in” and the associated losses. 
Civil unrest and political destabilization could erupt into financial and social crises that ultimately threaten the monetary union’s survival. 
In short, the “solution” to the Cyprus crisis is no solution at all for the eurozone. 
Unless the authorities embrace a growth strategy – and do so quickly – the eurozone’s prospects will become increasingly bleak. 

Cyprus’s Last Best Chance 
NICOSIA – It is tempting to see the results of the recent parliamentary elections in northern Cyprus as a blow for the peace process. 
Voters in the Turkish Cypriot north rejected the party of their leader, Mehmet Ali Talat, who has been meeting almost weekly for eight months with his Greek Cypriot counterpart, Demetris Christofias, to work out the terms of a settlement to reunify the island. 
But the election result has more to do with the dire state of the economy than it does with the peace process. 
Voters are feeling the pain of economic isolation, made worse by the global downturn. 
While he has lost his parliamentary majority, Talat is still head of the Turkish Cypriot administration and will continue to lead negotiations on behalf of the north. 
Both he and Christofias remain committed to finding a solution, despite the difficulties they face. 
The election result nonetheless underscores the fact that time is running out to find a solution to the Cyprus problem. 
Talat has set the presidential election in early 2010 as a deadline for agreement, while Christofias is not without political challenges within his own coalition. 
Cyprus presents visitors with a deceptive image. 
The sunny climate of the eastern Mediterranean draws a steady stream of tourists, and European Union membership in the south has pushed income levels for Greek Cypriots higher than the EU average. 
The island might be divided, but life for many is comfortable. 
However, Cyprus remains a conflict zone: there are still fortified streets in Nicosia, a United Nations peacekeeping operation patrols the buffer zone, and there is a substantial Turkish military force in the north. 
This is all the more reason to make sure that the energy and courage of Talat and Christofias are not squandered. 
These two leaders have limited political capital, and they need more than their own goodwill to succeed. 
First, they need their own people to join them in the peace process. 
An overwhelming majority of Cypriots are unhappy with the status quo, believe a settlement is possible, and reject any return to violence, but are deeply distrustful of each other and of the peace process. 
They have seen too many previous efforts fail. 
A culture of cynicism and complacency seems to be the default position, especially among politicians and the media. 
Opening up the debate about what peace could look like would help. 
When we visited Cyprus late last year, we noticed how few women and young people were engaged in politics. 
Old men (like us) dominate public debate, and we strongly urge Cyprus’s leaders to make more space for those whose voices are not so readily heard. 
Second, strengthening links between the two communities is essential. 
The island has been split for so long that generations have grown up with no idea of life on the other side. 
It is very difficult for schools, law enforcement agencies, soccer clubs, and telephone, electricity, and water companies to cooperate across the Green Line. 
Teenagers can’t even send text messages across the divide. 
Trade between the communities is limited. 
Lowering these barriers with respect and sensitivity would help to heal the wounds of the past and, importantly, to build trust. 
Researchers already estimate that reunification could raise annual incomes by about €1.8 billion – more than €5,500 per household. 
Everyone needs to see that there are benefits to reunification that will simplify life, strengthen the economy, and outweigh the compromises that any settlement will require. 
Third, the major regional powers, whose presence hangs heavily over the island, need to play their part. 
Greece is urgently called upon to play a more constructive role in the peace process by explaining the benefits of its own normalization of relations with Turkey and its support for that country’s EU membership. 
And Turkey could give a tremendous boost to confidence in the peace process by announcing a symbolic withdrawal of some troops from northern Cyprus as a goodwill gesture – a move that would also greatly assist Turkey’s convergence with Europe. 
Finally, explicit international expressions of support for a settlement would help to persuade the leaders of both communities that success would bring proper recognition and reward. 
It would certainly help if the EU promised substantial development funds, including for resolution of property issues, once an agreement is in place. 
This is the best chance in 30 years for a federal settlement in Cyprus, and it may be the last. 
If these talks fail, partition will probably be permanent, and, no matter how benign the environment today, geopolitics will catch up with the island over time. 
Failure to resolve the Cyprus problem is a potentially serious threat to good relations between NATO, Turkey, and the EU. 
Cypriots must seize this chance to build a healthy, reunited country that can make the most of its economic potential in the region, and play its part in world affairs with confidence and security. 

Déjà-vu in the Middle East 
BERLIN -- Does history repeat itself, after all? 
Recent developments in the Middle East suggest that the answer is “yes,” because the situation at the end of President George W. Bush’s tenure increasingly resembles that of Bill Clinton’s final year in the presidency. 
Both presidents, at the end of their respective terms, sought to resolve one of the world’s most dangerous conflicts, while facing the threat that time was running out on them. 
One could despair: the Bush administration has obviously wasted almost seven years during which it could have pursued a solution. 
We are now back to the starting point: the Camp David and Taba talks – flippantly abandoned in January 2001 – are to be taken up again. 
Still, as the wise saying goes, better late than never! 
The Middle East conference to be held in Annapolis, Maryland should be a forum for final status negotiations between the parties, dealing above all with the establishment of a Palestinian state and its borders (those of June 1967, with some negotiated exchanges of territory), its capital (Jerusalem), Israeli settlements, and the right of return for Palestinian refugees. 
It should also address questions of security, the termination of the decades-long state of war, and recognition of Israel by the Arab states. 
Indeed, it is high time for progress on a two-state solution, because the Palestinians are increasingly losing hope of ever having a state of their own. 
Without it, the Middle East conflict will remain at a stalemate and violence will only intensify. 
Acceptable compromises on all of these questions have been negotiated repeatedly by the parties and stowed away for many years. 
The only missing ingredient is the political will and strength to enter into a peace agreement. 
But this very political strength is precisely what both the Israeli and Palestinian governments lack. 
Israeli Prime Minister Ehud Olmert and Palestinian President Mahmoud Abbas are very weak domestically, and, given the compromises needed on both sides, they will be risking a lot. 
The same is true of President Bush. 
Indeed, the US government does not even stand whole-heartedly behind its own initiative. 
Secretary of State Condoleezza Rice wants the conference to happen and has done much to push it ahead. 
But how much risk is Bush – without whom a real breakthrough will be impossible – prepared to accept? 
Fortunately, existing taboos about what is acceptable in the final status talks have fallen – on both sides. 
The parallel weakness of Olmert and Abbas has produced a parallel interest in a peace settlement. 
Indeed, both men hope for political survival through a peace agreement: Olmert by means of new elections and Abbas by a referendum through which he can regain ascendancy over Hamas. 
So will a failed “Peace of the Strong“ be followed by a successful “Peace of the Weak”? 
As the domestic situations in Israel and Palestine have changed, so, too, has the regional political environment changed in a positive direction, because most Arab states today are more afraid of Iran’s regional domination than they are of Israel. 
This development offers an unprecedented opportunity. 
There are obvious pitfalls, to be sure. 
Olmert’s room for maneuver within his party, and particularly within his coalition, is very small. 
Can he make sufficient concessions on borders and Jerusalem? 
Similar doubts apply to Abbas. 
Can he deliver the security guarantees that Olmert needs, especially given the Palestinians’ fear that, in the end, they will give too much, without getting back concessions on what they see as their fundamental demands? 
Moreover, the critical hurdle will not be the negotiations, but rather implementation of whatever agreement may emerge – and its political cost will be very high. 
The Palestinians are already in the midst of a civil war. 
The compromises necessary for peace are likely to lead to a stark political confrontation in Israel as well. 
Obviously, Olmert is thinking of fusing an agreement on the final status with the Road Map mechanism. 
Such an agreement should be implemented gradually, and progress should depend on the parties’ fulfillment of their obligations each step of the way. 
Yet a mechanism of this kind can only work if a third party (the US, the “US plus,” or the Middle East Quartet) is available to monitor the agreement. 
Otherwise, disputes about fulfillment of this or that provision will lead the entire process back into the familiar quicksand of Middle East futility. 
So, from a realistic point of view, a positive outcome for the Annapolis talks seems almost impossible. 
Why should this conflict, which has proven to be unsolvable in the past, be suddenly solved (or brought closer to a solution) by three actors – Bush, Olmert, and Abbas – who are all in a state of profound domestic weakness? 
Karl Marx wrote that history always repeats itself, first as tragedy, then as farce. 
One might fear that Camp David proves to be the tragedy and Annapolis the farce. 
But, then, this is the Middle East, where earlier breakthroughs grew out of defeat, not victory. 
So one should never give up hope, even when hope seems impossible to sustain. 

Lifesaving Convictions 
GENEVA – The plight of more than 200 girls abducted in northern Nigeria is a brutal reminder of just how vulnerable children in Africa – particularly girls – can be. 
But it is equally important to recognize that this is not a true reflection of modern Africa, and that African leaders are strongly committed to protecting their countries’ children. 
Their ability to provide the same kind of protection that children in wealthy countries enjoy requires two key ingredients: partnership and conviction. 
That is because, though terrorism is an insidious threat, the biggest risk to Africa’s children is disease, which often can be prevented through routine immunization. 
Indeed, as the world debates the best way to recover the missing girls, another menace is resurfacing: the World Health Organization recently declared the spread of polio an international public-health emergency, with several African countries now posing an ongoing risk of exporting the disease. 
Fortunately, there are immediate and tangible ways to beat polio and a host of other vaccine-preventable diseases that currently claim innocent lives in Africa and beyond. 
Moreover, African leaders recognize that the best way to provide children with long-term and sustainable protection is through routine immunization. 
Earlier this month, African leaders meeting in Nigeria’s capital, Abuja, endorsed the Immunize Africa 2020 declaration, committing themselves to invest in a healthy and sustainable future for all children in their countries. 
Such declarations are important, because it is only through the power of our convictions that we can ever truly bring about positive change. 
And change is indeed occurring. 
Since 2001, there have been no fewer than 140 new vaccine launches in Africa, thanks to local leadership and support from my organization, the GAVI Alliance, and its partners, UNICEF, the World Health Organization, the World Bank, and the Bill and Melinda Gates Foundation. 
As a result of this kind of work, immunization coverage in Africa has increased dramatically, from 10% in 1980 to 72% in 2012. 
And now, from 2016 to 2020, Africa’s 50-plus countries will commit more than $700 million directly toward the cost of childhood vaccines through GAVI and its partners. 
This will make Africa the fourth-largest investor in GAVI, behind only the United Kingdom, the Bill & Melinda Gates Foundation, and Norway. 
This kind of commitment signals a shift in development aid away from the traditional model of charity toward one built on partnership. 
However, given that African countries already spend billions of dollars on health services, and that the continent has so many other competing needs, investing in vaccines may not always seem an obvious choice. 
Norway was in a similar situation in 2003 when, as Minister of Health and Social Affairs, I led the effort to ban public smoking. 
At the time, there was strong opposition to the ban, and I was compared to the world’s worst dictators. 
But I knew that the move would save many lives for years to come, and I was convinced that if I did not act, I would not be doing my job properly. 
And I was not alone: My Irish counterparts agreed. 
As the gains to individuals – and society – became clear, more than 100 other countries followed Norway and Ireland’s lead, and today the number of smokers in Norway has been halved, and nine out of ten people support the ban. 
With the benefit of hindsight, some solutions may seem obvious; but it took the power of conviction to make the solution apparent in the first place. 
Such is the case now with immunization in Africa and poor countries worldwide. 
These countries’ leaders have already seen what can be achieved with vaccines, and they see further benefits from immunization in the coming years. 
Indeed, since its launch in 2000, GAVI has already supported the vaccination of 440 million additional people, helping to save six million lives. 
But now, as GAVI Alliance partners and donors prepare to meet in Brussels this week to map out GAVI’s funding for the next five years, there is a very real opportunity to do more. 
With GAVI support, we have within our grasp the chance to double the number of children immunized by 2020, approaching one billion in total and averting the deaths of more than five million lives between now and then. 
African leaders have demonstrated their resolve; but, at a time when many donor countries are still struggling to consolidate a fragile economic recovery, it will take commitment and conviction on the part of their leaders, too. 
None of us can do it alone, but through partnership we really can help to protect the world’s most vulnerable children. 


Damaged Democracy 
New York – Even before the Supreme Leader, Ayatollah Ali Khamenei, decided to throttle what little legitimacy was left of Iran’s “managed democracy,” it was a peculiar system, indeed. 
Although Iranian citizens had the right to elect their president, the candidates had to be vetted by the Council of Guardians, half of whom were picked by the unelected Supreme Leader. 
The only candidates allowed to run were men with impeccable religious credentials, loyal to a regime whose most important decisions are made by unelected clerics. 
Mir-Hossein Mousavi, chosen by the late Ayatollah Khomeini to be prime minister in 1981, was such a figure. 
Mousavi ran as a reformist who said he would strive for greater freedom of the press, more rights for women, and fewer restrictions on the private lives of Iranians. 
He also hinted at more flexibility in negotiations with the United States. 
Yet Mousavi’s defeat by the hardliner, Mahmoud Ahmadinejad, in what looked like a rigged electoral process, was greeted by some neo-conservatives in the US with relief. 
One prominent commentator, Max Boot, took “some small degree of satisfaction from the outcome of Iran’s elections,” because Obama would now find it harder to stand in the way of an Israeli attack on Iran’s nuclear installations. 
Since Iran is the enemy (remember George W. Bush’s “axis of evil”?), it is better to deal with a president who talks and acts like a crazy thug, than with a reasonable-sounding figure who promises reforms. 
This would seem like the height of cynicism, which of course it is. 
It reminds us of the closeness, in spirit, between extreme neo-cons and communist idealogues. 
Compromise is anathema to the radical mind. 
Some radical leftist Muslims, obsessed with their opposition to Western “imperialism” and Israel, saluted Mousavi’s defeat, for, as one such activist put it, “the [anti-Zionist] resistance cannot afford a pro-American velvet revolution.” 
Communists always had a tendency to dismiss the differences between candidates in liberal democracies (let alone “managed” ones). 
They were just different faces of the same rotten system. 
In fact, social democrats were regarded as more dangerous than hard-line conservatives, because their moderate left-wing talk only served to postpone the revolution. 
This kind of thinking helped the Nazis destroy German democracy in the 1930’s. 
The reaction of Boot, and others of his persuasion, points to a genuine dilemma that always occurs in authoritarian systems that use some semblance of democracy to bolster their legitimacy. 
What are opposition candidates to do when they are asked to take part in elections that they know they cannot win, or that, even when they can win, will give them only minimal authority? 
If they agree, they help to legitimize a system in which they do not really believe. 
If they refuse, they have no influence at all. 
There are valid arguments to made for either course. 
Any chance for people to voice their views, even in rigged elections, is a good thing. 
And, because democracy is about institutions as much as about individual candidates, it is also good for citizens to exercise their right to vote. 
Then, when real change does occur, no one can claim that the people “are not ready for it.” 
Still, if voting confers dignity on citizens, participation in a fraud is humiliating. 
There is no absolute yardstick on how to behave in these impossible circumstances, so people must judge every election on its merits. 
Since 85% of Iranian voters decided that it was worth taking part in the last election, their decision must be respected. 
Although their options were limited, many of them had enough confidence that the reformist candidate would not only get elected, but also make life a little better. 
This is also why 70% voted for Mohammed Khatami, the reformist president, in 1997. 
Khatami, too, had good ideas about press freedom, individual rights, and democratic reforms. 
They were mostly quashed by the clerics who held ultimate power. 
It probably did not help that the Bush administration gave up on Khatami. 
Like some neo-cons today, Bush’s foreign policy advisers saw no difference between reformists and hardliners. 
This undermined Khatami’s authority even further. 
Mousavi was regarded by many Iranians as a second chance. 
Unfortunately, Khamenei thought so, too, and made sure that Ahmadinejad held onto his presidency. 
This was a sickening blow to all Iranians who crave the dignity of democratic politics. 
But it does not mean that they were wrong, or naïve, to try. 
Mousavi’s campaign, and its aftermath, showed clearly that those who professed to see no difference between the candidates, except in style and presentation, were wrong: even if the election was rigged, the voices of opposition to clerical authoritarianism were heard. 
The quiet dignity of the protests that followed did more for Iran’s standing in the world than any amount of belligerent posturing by a populist president. 
There may have been a more important consequence. 
The election, the fraud, and the violent crackdown on the subsequent protests revealed, and clearly widened, deep rifts inside the regime. 
This is the best reason why in most cases it is best to contest elections, even in unpromising circumstances. 
They expose cracks in the wall of dictatorial power. 
Ahmedinejad won the election, but the regime is weakened as a result. 
Terror can prolong the agony, but in the end an illegitimate regime is doomed. 
To persist in the belief that reformists and hardliners are just masks of the same enemy, and to take pleasure in the victory of the latter, is not merely cynical, but is an added insult to a people that has already been humiliated enough. 

A Grand Unified Economic Theory? 
NEW YORK – Last month’s US government shutdown – the result of a partisan standoff in congressional budget negotiations – epitomizes the polarization that prevails in modern economic-policy debates. 
On one side, John Maynard Keynes’s cohort argues that government intervention can help any economy grow its way out of crisis by spurring aggregate demand and, in turn, raising the employment rate. 
A country’s government, Keynesians contend, has the capacity – and responsibility – to solve many, if not all, of its economic problems. 
On the opposite side, followers of the Austrian School of economic thought, especially the ideas of Friedrich Hayek, assert that limited government and free enterprise form the only viable path to liberty and prosperity. 
The market is the best arbiter of how to allocate scarce resources, and thus should serve as an economy’s main driver. 
In recent years, this long-running debate has become increasingly contentious – and the costs of stalemate are mounting. 
In order to restore growth in developed economies, while sustaining strong GDP growth and reducing poverty in the developing world, a more unified approach to economic policymaking that draws from both traditions is needed. 
Official responses to the global economic crisis highlight the interventionist model’s merits, proving that decisive government action can help to enhance efficiency and clear unbalanced markets, thereby protecting the economy from the demand shortfall caused by falling investment and rising unemployment. 
But the free market also has a crucial role to play, with longer-term, incentive-based policies catalyzing scientific and technological advancement – and thus boosting economies’ growth potential. 
In determining how to promote innovation without sacrificing social protection, economists and policymakers should take a lesson from the field of physics. 
For nearly a century, physicists have attempted to merge the competing ideas of the field’s titans, including Wolfgang Pauli, the first physicist to predict the existence of neutrinos (the smallest particles of matter), and Albert Einstein, who explained the curvature of space-time. 
The so-called “theory of everything” would reconcile the inconceivably small with the unimaginably large, providing a comprehensive understanding of the universe’s physical properties. 
Policymakers should be working to unite seemingly disparate theories to align policy decisions with the business cycle and the economy’s level of development. 
Such an approach should seek to protect economies from the destabilizing impacts of politically motivated policy changes, without impeding governments’ ability to correct dangerous imbalances. 
Officials must be at least as vigilant about reducing expenditure and withdrawing stimulus measures during periods of growth as they are inclined to introduce such policies during downturns. 
To the extent that this approach reflects the view that policymaking is an art, not a science, that is a good thing: the world needs more flexibility in economic policymaking. 
But some might consider it a cause for concern, especially given growing suspicion of incentive-based economic policies in the wake of the global economic crisis. 
Many blame the crisis on the decades-long ascendancy of a laissez faire approach to economic policymaking, and rightly credit government intervention with facilitating recovery. 
The tremendous economic success of countries like China, where hundreds of millions of people have escaped abject poverty in a single generation, has reinforced support for state-led systems. 
In developed countries, too, many advocate a greater role for the state, in order to ensure that promised social benefits are delivered to rapidly aging populations. 
In fact, in many countries, the government’s capacity is already strained. 
As German Chancellor Angela Merkel has pointed out, though Europe is home to just 7% of the world’s population and produces 25% of the world’s wealth, it accounts for 50% of global welfare payments. 
When the United States is included, 11.5% of the global population receives 88% of the world’s welfare payments. 
But relegating free-market principles to the past would simply create a new set of imbalances. 
Rather than allow extremists to continue to hijack economic-policy debates, policymakers must work to bridge competing schools of thought. 
Only then will productive discourse – the kind that does not end in government shutdown – be possible. 
Keynes once wrote that he agreed with “almost all” of Hayek’s ideas. 
And Hayek found it “reassuring” to know that he and Keynes agreed “so completely.” 
This raises the question: What is really preventing economists and policymakers from devising – or even seeking – a unified theory of economics? 

Damming Capital 
NEW YORK – Capital-account regulations have been at the center of global financial debates for two years. 
The reasons are clear: since the world has experienced a “multi-speed recovery,” as the International Monetary Fund puts it, slow-growth advanced countries are maintaining very low interest rates and other expansionary monetary policies, while fast-growth emerging economies are unwinding the expansionary policies that they adopted during the recession. 
This asymmetry has spurred huge capital flows from the former to the latter, which are likely to continue. 
Emerging economies fear that this flood of capital will drive up their currencies’ exchange rates, in addition to fueling current-account deficits and asset bubbles, which past experience has taught them is a sure recipe for future crises. 
The problem is compounded by the fact that one of the countries undertaking expansionary policies is the United States, which has the world’s largest financial sector and issues the paramount global currency. 
Small wonder, then, that several emerging economies are using capital controls to try to manage the flood. 
This, of course, contradicts the wisdom that the IMF and others have preached in the past – that emerging economies should free their capital accounts as part of a broader process of financial liberalization. 
The G-20 recognized in 2008 that unfettered finance can generate costly crises; thus, it decided to re-regulate finance. 
But it left cross-border capital flows entirely off the agenda, as if they were not a part of finance. 
Furthermore, by a twist of language, regulations affecting capital flows are pejoratively called “controls,” rather than their correct name. 
This is why it is so important that the IMF has taken steps to address the issue. 
In early April, the Fund made public two documents, one presented to the Board and a more technical “staff note,” together with a statement by Managing Director Dominique Strauss-Kahn. 
These followed another technical note issued a year ago. 
The basic conclusion of all of these documents is that regulations of cross-border capital flows can complement macroeconomic policy and so-called “macro-prudential” financial regulations. 
Indeed, it has been shown that countries that used such regulations were hit less severely by the recent global financial crisis, and many economists argue that this was also true of the 1997-1998 Asian financial crisis. 
We know from experience that there are many regulations that make sense, not just those now sanctioned by the IMF. 
One of them is a reserve requirement on cross-border flows – successfully implemented in Chile, Colombia, and elsewhere – or, even better, on cross-border liabilities. 
Taxes on inflows can play a similar role, as can minimum-stay periods for capital inflows. 
Prohibition of certain transactions for prudential reasons also makes sense, particularly for borrowing in foreign currencies by economic agents that do not have revenues in those currencies. 
Alternatively, if those economic actors borrow from domestic financial institutions, regulations could resemble recent measures adopted in Brazil and South Korea, which include high capital and provision requirements for the associated liabilities. 
In the recent IMF document, the Fund proposes a set of guidelines that countries should use for capital-account regulations (which they call “capital-flow management measures,” or CFMs). 
The guidelines correctly emphasize that these regulations should complement, not replace, counter-cyclical macroeconomic policies. 
But they make CFMs seem like an intervention of last resort, to be used only after everything else has been tried: exchange-rate adjustments, reserve accumulation, and restrictive macroeconomic policies. 
In fact, CFMs should play an integral part in avoiding excessive exchange-rate appreciation and reserve accumulation in the first place. 
The IMF also prefers CFMs to be temporary. 
But this runs counter to “strengthening the institutional framework on an ongoing basis,” another recommendation of the guidelines. 
An institutional framework implies that CFMs should be part of a country’s permanent policy toolkit, and that regulations are strengthened or weakened depending on the phase of the business cycle. 
Temporary, improvised measures have had reduced effectiveness in many countries. 
Moreover (and again counter to the guidelines), CFMs, almost by definition, require some discrimination between residents and non-residents. 
After all, we live in a global system in which different countries use different currencies, which implies that residents and non-residents have asymmetric demands for assets issued in those currencies. 
Most importantly, a policy framework issued by international institutions like the IMF should include a clear mechanism to cooperate with countries using these policies. 
But none is to be found in the IMF’s guidelines, even though it recognizes that capital-account volatility is in a sense a negative externality inflicted upon recipient countries. 
In fact, implementing the IMF’s guidelines may require eliminating provisions in several free-trade agreements (particularly those signed by the US) that restrict the use of capital-account regulations. 
More importantly, countries could use similar instruments, as part of a true international regulatory regime, to increase the effectiveness of their expansionary monetary policies. 
Finally, any regulation in this area should recognize that capital-account convertibility is not obligatory for the IMF’s “clients.” 
This issue was settled in 1997, when then IMF Managing Director Michel Camdessus tried to include some commitment to capital-account liberalization in the Fund’s Articles of Agreement. 
The failure of that effort is implicitly recognized in the guidelines, which indicate that they do not imply any new obligations under IMF surveillance. 
In other words, the new IMF framework is welcome, but countries will need the freedom to manage their capital account more than ever in the years ahead. 

Damming China’s Rivers 
Of all China’s problems, none will be more critical over the long run than how it resolves the tension between economic development and environmental protection. 
Nowhere are consequences of this struggle clearer than in the Himalayan foothills of the southwestern province of Yunnan. 
Yunnan is home to three great Asian rivers: the Mekong, the Salween (or Nu), and the Jinsha. 
All start on the great Tibetan Plateau and flow in parallel through the northwest corner of the province into Southeast Asia. 
They are China’s last pristine rivers, but are now slated for sacrifice to satisfy the country’s insatiable thirst for power. 
Plans call for dozens of dams to be placed along their serpentine courses through the mountains of Yunnan. 
I had the chance to see one of these rivers – and the proposed site of one of the country’s most controversial dams – on a recent trek through the stunning Tiger Leaping Gorge, north of the town of Lijiang in northern Yunnan. 
On its descent from the roof of the world, the Jinsha River, tributary of the mighty Yangtze, cascades through this ten-mile gorge on its way to Shanghai and the East China Sea. 
If, or rather when, the river is dammed, it will help power the cities and factories of coastal China. 
The sun was high above white-crowned Jade Dragon Snow Mountain when my guide pointed down the gorge at the brown waters churning thousands of feet below. 
“That’s where they will build the dam,” Xiao Chun, a 17-year-old Naxi, one of Yunnan’s 22 ethnic minorities, said. 
“It will be very bad for us. 
There will be a lot of pollution. 
I hope it doesn’t happen.” 
The dam will have its uses. 
Dianchi Lake near the provincial capital, Kunming, is so shrunken and polluted that the city faces a serious water shortage. 
Water from the Tiger Leaping Gorge will be diverted to flush out Dianchi Lake, without which Kunming will not prosper. 
As China seeks to keep its economic engine running, dams and hyrdopower do represent a cleaner alternative to coal. 
China plans to double its hydropower capacity to over 120 GW by 2010 and to build more hydropower-projects for at least another 20 years. 
Experts reckon that only a quarter of China’s hydropower has yet been tapped. 
Yet the costs may outweigh the benefits. 
Northwestern Yunnan is one of the world’s most biologically diverse areas, home to half of China’s animal species and a quarter of its plant species. 
Whatever portions of this ecosystem that the dams don’t submerge are certain to be disrupted in potentially disastrous ways. 
A more immediate concern is the immense number of people who will need to be resettled when reservoirs inundate the region’s densely populated valleys. 
Since 1949, 16 million people have been displaced by reservoirs. 
Some 10 million of them still live in poverty. 
At Tiger Leaping Gorge, where a mere 100,000 residents will have to be relocated, residents fear that they will be ordered to move up the steep mountainsides to open marginal land at 6,000 to 9,000 feet. 
Dam opponents, including vocal indigenous environmental groups, have waged a seemingly successful battle to protect Tiger Leaping Gorge and the Salween (the Nu River). 
In early 2005, three years after a new law on environmental impact assessments (EIA’s) was passed, the State Environmental Protection Bureau (SEPA), ordered the halt of 30 large projects, including 26 hydropower plants that had failed to submit proper EIA’s. 
Among the suspended projects was the first dam across the Nu/Salween. 
These efforts appear to have catalyzed greater environmental sensitivity among the country’s leaders. 
The government recently called for more balanced development, even proposing a “green index” to measure growth. 
Indeed, Prime Minister Wen Jiabao has declared that he wants to see more “scientific development” in China’s approach to its problems, and even called for a temporary halt of the Salween (Nu) River dam. 
Environmentalists were even permitted to take part in a public hearing on the Tiger Leaping Gorge project, a first for China. 
Unfortunately, the Communist Party’s tolerance of such civic activity blows hot and cold. 
The Party, alarmed by the “color revolutions” that toppled post-Soviet leaders in Georgia, Ukraine, and Kyrgyzstan, is cracking down on domestic non-government organizations for fear that they, too, might become catalysts for popular uprisings. 
Support for “green development” inside central government organizations like SEPA offers little assurance of an effective countervailing force. 
“We must sharpen our teeth,” Pan Yue, SEPA’s deputy director, said when the agency halted the dam projects. 
But China has seen a steady decentralization of power in recent years, making it harder for SEPA to affect policies at the regional and local levels. 
Indeed, local governments appear less afraid of Beijing’s bite than before. 
When boundaries were negotiated for Three Parallel Rivers Park – designated a UNESCO World Heritage site in 2003 – local authorities won a fight to exclude Tiger Leaping Gorge, knowing that a dam there would triple tax revenues. 
China urgently needs to maintain an annual growth rate of over 9% as a bulwark against social disorder. 
As a result, however, China is slowly consuming itself, and no major part of China may remain pristine. 

The Danger of a Weak Europe 
CAMBRIDGE – In 1973, US Secretary of State Henry Kissinger, following a period of American preoccupation with Vietnam and China, declared a “year of Europe.” 
More recently, after President Barack Obama announced a US strategic “pivot,” or rebalancing, toward Asia, many Europeans worried about American neglect. 
Now, with an ongoing refugee crisis, Russia’s occupation of eastern Ukraine and illegal annexation of Crimea, and the threat of British withdrawal from the European Union, 2016 may become, by necessity, another “year of Europe” for American diplomacy. 
Regardless of slogans, Europe retains impressive power resources and is a vital interest for the United States. 
Although the US economy is four times larger than that of Germany, the economy of the 28-member EU is equal to that of the US, and its population of 510 million is considerably larger than America’s 320 million. 
Yes, American per capita income is higher, but in terms of human capital, technology, and exports, the EU is very much an economic peer. 
Until the crisis of 2010, when fiscal problems in Greece and elsewhere created anxiety in financial markets, some economists had speculated that the euro might soon replace the dollar as the world’s primary reserve currency. 
In terms of military resources, Europe spends less than half of what the US allocates to defense, but has more men and women under arms. 
Britain and France possess nuclear arsenals and a limited capacity for overseas intervention in Africa and the Middle East. 
Both are active partners in the airstrikes against the Islamic State. 
As for soft power, Europe has long had wide appeal, and Europeans have played a central role in international institutions. 
According to a recent study by the Portland Group, Europe accounted for 14 of the top 20 countries. 
The sense that Europe was uniting around common institutions made it strongly attractive for the EU’s neighbors, though this eroded somewhat after the financial crisis. 
The key question in assessing Europe’s power resources is whether the EU will retain enough cohesion to speak with a single voice on a wide range of international issues, or remain a limited grouping defined by its members’ different national identities, political cultures, and foreign policies. 
The answer varies by issue. 
On questions of trade, for example, Europe is the equal of the US and able to balance American power. 
Europe’s role in the International Monetary Fund is second only to that of the US (although the financial crisis dented confidence in the euro). 
On anti-trust issues, the size and attractiveness of the European market has meant that American firms seeking to merge have had to gain approval from the European Commission as well as the US Justice Department. 
In the cyber world, the EU is setting the global standards for privacy protection, which US and other multinational companies cannot ignore. 
But European unity faces significant limits. 
National identities remain stronger than a common European identity. 
Right-wing populist parties have included EU institutions among the targets of their xenophobia. 
Legal integration is increasing within the EU, but the integration of foreign and defense policy remains limited. 
And British Prime Minister David Cameron has promised to reduce the powers of EU institutions and to subject the results of his negotiations with the Union’s leaders to a popular referendum by the end of 2017. 
If Britain votes no and exits the EU, the impact on European morale will be severe – an outcome that the US has made clear should be avoided, though there is little it could do to prevent it. 
In the longer term, Europe faces serious demographic problems, owing to low birth rates and unwillingness to accept mass immigration. 
In 1900, Europe accounted for a quarter of the world’s population. 
By the middle of this century, it may account for just 6% – and almost a third will be older than 65. 
Although the current immigration wave could be the solution to Europe’s long-term demographic problem, it is threatening European unity, despite the exceptional leadership of German Chancellor Angela Merkel. 
In most European countries, the political backlash has been sharp, owing to the rapid rate of the inflows (more than a million people in the past year) and the Muslim background of many of the newcomers. 
Again, an important American diplomatic interest is at stake, but there is not much the US can do about it. 
There is little long-term danger that Europe could become a threat to the US, and not only because of its low military expenditure. 
Europe has the world’s largest market, but it lacks unity. 
And its cultural industries are impressive, though, in terms of higher education, whereas 27 of its universities are ranked in the global top 100, the US accounts for 52. 
If Europe overcame its internal differences and tried to become a global challenger to the US, these assets might partly balance American power, but would not equal it. 
For US diplomats, however, the danger is not a Europe that becomes too strong, but one that is too weak. 
When Europe and America remain allied, their resources are mutually reinforcing. 
Despite inevitable friction, which is slowing the negotiation of the proposed Trans-Atlantic Trade and Investment Partnership, economic separation is unlikely, and Obama will travel to Europe in April to promote the TTIP. 
Direct investment in both directions is higher than with Asia and helps knit the economies together. 
And while Americans and Europeans have sniped at each other for centuries, they share values of democracy and human rights more with each other than with any other regions of the world. 
Neither a strong US nor a strong Europe threaten the vital or important interests of the other. 
But a Europe that weakens in 2016 could damage both sides. 

The Empathy Trap 
PRINCETON – Soon after Barack Obama was elected President of the United States, he told a young girl: “We don’t have enough empathy in our world today, and it is up to your generation to change that.” 
Obama expressed a widespread view, so the title of a new book, Against Empathy, by Yale University psychologist Paul Bloom, comes as a shock. 
How can anyone be against something that enables us to put ourselves in others’ shoes and feel what they feel? 
To answer that question, we might ask another: For whom should we have empathy? 
As Donald Trump prepares to succeed Obama, analysts are suggesting that Hillary Clinton lost last month’s election because she lacked empathy with white Americans, particularly Rust Belt voters yearning for the days when the US was a manufacturing powerhouse. 
The problem is that empathy for American workers is in tension with empathy for workers in Mexico and China, who would be even worse off without jobs than their American counterparts are. 
Empathy makes us kinder to people with whom we empathize. 
That’s good, but it also has a darker side. 
Trump, in his campaign speeches, made use of the tragic murder of Kate Steinle by an undocumented immigrant to stoke support for his anti-immigrant policies. 
He did not, of course, offer any similarly vivid portrayals of undocumented immigrants who have saved the lives of strangers, although such cases have been reported. 
Animals with big round eyes, like baby seals, arouse more empathy than chickens, on whom we inflict vastly more suffering. 
People can even be reluctant to “harm” robots that they know can feel nothing at all. 
On the other hand, fish – cold, slimy, and unable to scream – arouse little sympathy, although, as Jonathan Balcombe argues in What a Fish Knows, there is plenty of evidence that they feel pain just as birds and mammals do. 
Likewise, empathy with a handful of children who are, or are believed to be, harmed by vaccines largely drives popular resistance to vaccinating children against dangerous diseases. 
As a result, millions of parents do not have their children vaccinated, and hundreds of children become ill, with many more affected, sometimes fatally, by the disease than would have suffered adverse effects from the vaccine. 
Empathy can make us act unjustly. 
Subjects in an experiment listened to an interview with a terminally ill child. 
Some were told to try to be as objective as possible, while others were told to imagine what the child feels. 
All were then asked if they wanted to move the child up the waiting list for treatment, ahead of other children who had been assessed as having higher priority. 
Three-quarters of those told to imagine what the child feels made this request, compared to only one-third of those told to try to be objective. 
“One death is tragedy; a million is a statistic.” 
If empathy makes us too favorable to individuals, large numbers numb the feelings we ought to have. 
The Oregon-based nonprofit Decision Research has recently established a website, ArithmeticofCompassion.org, aimed at enhancing our ability to communicate information about large-scale problems without giving rise to “numerical numbness.” 
In an age in which vivid personal stories go viral and influence public policy, it’s hard to think of anything more important than helping everyone to see the larger picture. 
To be against empathy is not to be against compassion. 
In one of the most interesting sections of Against Empathy, Bloom describes how he learned about differences between empathy and compassion from Matthieu Ricard, the Buddhist monk sometimes described as “the happiest man on earth.” 
When the neuroscientist Tania Singer (no relation to me) asked Ricard to engage in “compassion meditation” while his brain was being scanned, she was surprised to see no activity in the areas of his brain normally active when people empathize with the pain of others. 
Ricard could, on request, empathize with others’ pain, but he found it unpleasant and draining; by contrast, he described compassion meditation as “a warm positive state associated with a strong pro-social motivation.” 
Singer has also trained non-meditators to engage in compassion meditation, by thinking kindly about a series of persons, starting with someone close to the meditator and then moving outward to strangers. 
Such training may lead to kinder behavior. 
Compassion meditation is close to what is sometimes called “cognitive empathy,” because it involves our thought and understanding of others, rather than our feelings. 
This brings us to the final important message of Bloom’s book: the way in which psychological science proceeds has led it to downplay the role of reason in our lives. 
When researchers show that some of our supposedly carefully considered choices and attitudes can be influenced by irrelevant factors like the color of the wall, the smell of the room, or the presence of a dispenser of hand sanitizer, their findings are published in psychology journals and may even make headlines in the popular media. 
Research showing that people make decisions based on relevant evidence is harder to publish, much less publicize. 
So psychology has an inbuilt bias against the view that we make decisions in sensible ways. 
Bloom’s more positive view of the role of reason fits with what I take to be the correct understanding of ethics. 
Empathy and other emotions often motivate us to do what is right, but they are equally likely to motivate us to do what is wrong. 
In making ethical decisions, our ability to reason has a crucial role to play. 


The Case Against Cash 
CAMBRIDGE – The world is awash in paper currency, with major country central banks pumping out hundreds of billions of dollars’ worth each year, mainly in very large denomination notes such as the $100 bill. 
The $100 bill accounts for almost 80% of the US’s stunning $4,200 per capita cash supply. 
The ¥10,000 note (about $100) accounts for roughly 90% of Japan’s per capita cash holdings at almost $7,000. 
And, as I have been arguing for two decades, all this cash is facilitating growth mainly in the underground economy, not the legal one. 
I am not advocating a cashless society, which will be neither feasible nor desirable anytime soon. 
But a less-cash society would be a fairer and safer place. 
With the growth of debit cards, electronic transfers, and mobile payments, the use of cash has long been declining in the legal economy, especially for medium and large-size transactions. 
Central bank surveys show that only a small percentage of large-denomination notes are being held and used by ordinary people or businesses. 
Cash facilitates crime because it is anonymous, and big bills are especially problematic because they are so easy to carry and conceal. 
A million dollars in $100 notes fits into a briefcase, a million dollars in €500 notes (each worth about $565) fits into a purse. 
Sure, there are plenty of ways to bribe officials, engage in financial crime, and evade taxes without paper currency. 
But most involve very high transaction costs (for example, uncut diamonds), or risk of detection (say, bank transfers or credit card payments). 
Yes, new-age crypto-currencies such as Bitcoin, if not completely invulnerable to detection, are almost so. 
But their value sharply fluctuates, and governments have many tools with which they can restrict their use – for example, by preventing them from being tendered at banks or retail stores. 
Cash is unique in its liquidity and near-universal acceptance. 
The costs of tax evasion alone are staggering, perhaps $700 billion per year in the United States (including federal, state, and local taxes), and even more in high-tax Europe. 
Crime and corruption, though difficult to quantify, almost surely generate even greater costs. 
Think not just of illegal drugs and racketeering, but also of human trafficking, terrorism, and extortion. 
Moreover, cash payments by employers to undocumented workers are a principal driver of illegal immigration. 
Scaling back the use of cash is a far more humane way to limit immigration than building barbed-wire fences. 
If governments were not so drunk from the profits they make by printing paper currency, they might wake up to the costs. 
There has been a little movement of late. 
The European Central Bank recently announced that it will phase out its €500 mega-note. 
Still, this long overdue change was implemented against enormous resistance from cash-loving Germany and Austria. 
Yet even in northern Europe, reported per capita holdings of currency are still quite modest relative to the massive outstanding supply in the eurozone as a whole (over €3,000 per capita). 
Southern European governments, desperate to raise tax revenue, have been taking matters into their own hands, even though they do not control note issuance. 
For example, Greece and Italy have been trying to discourage cash use by capping retail cash purchases (at €1,500 and €1,000, respectively). 
Obviously, cash remains important for small everyday transactions, and for protecting privacy. 
Northern European central bankers who favor the status quo like to quote Russian novelist Fyodor Dostoevsky: “Money is coined liberty.” 
Of course, Dostoevsky was referring to life in a mid-nineteenth century czarist prison, not a modern liberal state. 
Still, the northern Europeans have a point. 
The question is whether the current system has the balance right. 
I would argue that it clearly does not. 
A plan for reining in paper currency should be guided by three principles. 
First, it is important to allow ordinary citizens to continue using cash for convenience and to make reasonable-size anonymous purchases, while undermining the business models of those engaged in large, repeated anonymous transactions on a wholesale level. 
Second, any plan should move very gradually (think a decade or two), to allow adaptations and mid-course corrections as unexpected problems arise. 
And, third, reforms must be sensitive to the needs of low-income households, especially those that are unbanked. 
In my new book, The Curse of Cash, I offer a plan that involves very gradually phasing out large notes, while leaving small notes ($10 and below) in circulation indefinitely. 
The plan provides for financial inclusion by offering low-income households free debit accounts, which could also be used to make government transfer payments. 
This last step is one that some countries, such as Denmark and Sweden, have already taken. 
Scaling back paper currency would hardly end crime and tax evasion; but it would force the underground economy to employ riskier and less liquid payment devices. 
Cash may seem like a small, unimportant thing in today’s high-tech financial world, but the benefits of phasing out most paper currency are a lot larger than you might think. 



What Makes Greece Special? 
BRUSSELS – The euro crisis seems to be largely over. 
Risk premiums continue to fall across the board, and two countries – Ireland and Portugal – have already exited their adjustment programs. 
They can now finance themselves in the market, and their economies seem to have started growing again. 
By contrast, Greece is still having problems fulfilling the goals of its adjustment program and is engaged in seemingly endless negotiations over yet another multilateral financing package. 
The problem can be summed up in one word: exports (or, rather, lack of export growth). 
The news from Greece these days has been dominated by the announcement that the government achieved a primary budget surplus (the fiscal balance minus debt service) in 2013. 
For the first time in decades, the Greek government has been able to pay for its expenditure with its own revenues. 
This is indeed a milestone. 
But another, much more important news item has received much less attention: Greece exported less in 2013 than in 2012. 
This lackluster performance, which followed years of decline in market shares, is difficult to explain, given that all other countries on the eurozone periphery recorded solid export growth. 
For example, Portuguese exports increased by about 5-6% per year over the last years, despite challenging external conditions (Spain is its biggest market) and a credit crunch, which made it difficult for exporters to obtain financing. 
Neither weak foreign demand nor a lack of financing, therefore, can be the reason for Greece’s poor export performance. 
Low competitiveness, too, is not an explanation, as real (inflation-adjusted) wage costs have declined by more in Greece in recent years than in any other eurozone country, with the exception of Ireland. 
But it would be strange to conclude from Greece’s experience that wage deflation is a useless tool for improving competitiveness, given the widespread assumption that Germany benefited massively from it. 
So the only explanation for Greece’s poor export performance must be that the Greek economy has remained so distorted that it has not responded to changing price signals. 
This lack of adjustment capacity is crucial. 
In Ireland, Spain, and even Portugal, exports grew strongly when the domestic economy collapsed and wages adjusted. 
But these countries were already more flexible and, in some cases, undertook strong reforms. 
In Greece, by contrast, there is no evidence that the many structural reforms imposed by the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) have led to any real improvement on the ground. 
On the contrary, many indicators of efficiency of the way the government and the labor market work have actually deteriorated. 
The facile argument that Greece has little to export is irrelevant here. 
The problem is not that Greek exports are low, but rather that they have failed to grow, which should have been possible, especially from a low base. 
Several years ago, Greek exports of goods and services were equal to those of Portugal. 
Today, Portugal is ahead by almost €20 billion ($27.5 billion). 
This represents a potential loss of more than 10% of output for Greece. 
Lack of export growth thus has made the recession in Greece much longer and deeper than it would have been otherwise. 
If Greek exports had increased at the same rate as those of Portugal (or Spain), the recession would have ended by now. 
Moreover, the lack of export growth made the fiscal adjustment much more difficult. 
Higher exports would not only have yielded directly higher revenues; they would have had a multiplier effect on the domestic economy as well, thereby increasing consumption tax revenues. 
Greece now has a balanced current account – quite an achievement after double-digit deficits (as a percentage of GDP) a few years ago. 
But, in contrast to other economies on the eurozone periphery, this improvement was achieved entirely through import compression. 
This implies that there cannot be any hope for a sustained recovery unless exports start growing. 
It is often argued that with less austerity, domestic demand would be stronger. 
That might be true, but stronger domestic demand would lead to higher imports, which would need to be paid for with higher export revenues, because the country cannot afford to accumulate more foreign debt. 
No exports, no growth: Greece’s debt sustainability ultimately depends on this key parameter. 
What went wrong in Greece was not the fiscal adjustment. 
On the contrary, austerity was perhaps too successful (and painful). 
But it was the wrong target. 
The really important target for any country starting an adjustment program with a double-digit current-account deficit must be export growth. 
Missing this target is what has set Greece apart. 
Unfortunately, there is very little the outside world can to do to ensure that the Greece exports more. 
The government can be forced to pass decrees, and Parliament can be pressured to adopt all the reform legislation known to humanity. 
But, in the end, it is how reform is applied on the ground, and how the economy responds, that counts. 
An adjustment program succeeds or fails at home, not in Brussels or Washington. 

Europe’s Big Bang at Ten 
BRUSSELS – Ten years ago, eight countries from the former Soviet bloc, together with the island states of Malta and Cyprus, joined the European Union, bringing its membership from 15 to 25. 
At the time, it was feared that this eastern enlargement would create tensions within the EU because new members from Central and Eastern Europe were poor and some had large agricultural sectors. 
Because the EU spends mainly on poor regions and on farmers, many worried that enlargement would overburden its budget. 
In the end, this problem was resolved through a typical European compromise that allowed enlargement to proceed, even though the budget, as a proportion of Europe’s GDP, was reduced. 
Agriculture has now largely disappeared as a major item on the EU agenda. 
Moreover, the planning horizon under the EU’s Multi-Annual Financial Framework implies that the issue of who pays for whom has to be addressed only once every seven years. 
The purpose of economic integration is ultimately to boost GDP growth and improve living standards. 
Judged from this perspective, enlargement has worked well. 
The transition countries have caught up considerably over the last decade. 
In the mid-1990’s, many transition countries’ per capita GDP was only about one-quarter to one-third of that of the old EU-15 (in purchasing-power-parity terms). 
Some of the distance had already been covered when the new member states finally joined the EU, but the process of convergence has continued, even through the financial crisis. 
The new members’ income has reached about two-thirds the level of the EU-15. 
Moreover, the poorest new members gained the most (in contrast to the poorest members of the EU-15, like Portugal and Greece, which are now back to income levels last seen in the 1990’s). 
This convergence is the reason why job seekers from the eastern member states are not overwhelming the richer EU-15 countries’ labor markets. 
The fact that the new members were initially so much poorer, initially a source of tension, turned out to be a source of economic advantage for both sides, as EU-15 firms (especially German companies) could outsource labor-intensive tasks. 
They gained in terms of global competitive, while the target countries gained much-needed direct investment, jobs, and knowledge transfer. 
In purely economic terms, enlargement was clearly a mutually beneficial proposition. 
Of course, other aspects of enlargement have worked less well. 
A large part of the aid that has flowed from the EU budget to the new member states has been used for prestige projects that enriched local construction companies. 
And, though this problem is not specific to the new member states – the same thing happens in countries like Italy or Greece, with their slow and inefficient administrative systems and extensive corruption – it was rendered more acute by enlargement; indeed, many of the eastern members still have lower-quality public administrations than one finds in the EU core. 
Thus, enlargement should be viewed as a qualified success. 
One of the biggest fears, namely that EU institutions would be overwhelmed by the simultaneous absorption of ten new members, also never materialized. 
The new member states have integrated smoothly into the EU institutions, where they defend their national interests in much the same way as the older members. 
The difficulties that the EU has experienced in the last years have little to do with the increase in the number of member states, which has now reached 28. 
The most important consequence of the EU’s eastern enlargement has turned out to be one that few thought about at the time: it brought the Union much closer to Russia. 
And, for a Russia that has become authoritarian and has seen how the EU can transform struggling transition countries into increasingly prosperous (albeit imperfect) democracies, Europe is too close for comfort. 
The prospect of relative prosperity and freedom proved so attractive to the people of Ukraine that they toppled a president who preferred a Russian-led “Eurasian Union” to an EU association agreement. 
Unfortunately, a significant minority in eastern Ukraine does not share this “European vocation” and feels threatened by the recent turn of events. 
Russia supports these tendencies and has used military and other hard-power tools to stoke tensions, because its regime would be threatened by the living example of a “European” Ukraine that is democratic and prosperous. 
So, ten years on, enlargement is turning out differently than expected. 
The internal challenges have proved manageable, but now the EU needs to confront an external challenge for which it is ill prepared. 
We will not have to wait a decade to find out whether the EU can help to stabilize Ukraine while confronting a Russia whose leadership feels threatened by its fundamental values of democracy and the rule of law. 

The Transatlantic Growth Gap 
BRUSSELS – The global financial crisis that erupted in full force in 2008 affected Europe and the United States in a very similar way – at least at the start. 
On both sides of the Atlantic, economic performance tanked in 2009 and started to recover in 2010. 
But, as the financial crisis mutated into the euro crisis, an economic gulf opened between the US and the eurozone. 
Over the last three years (2011-2013), the US economy grew by about six percentage points more. 
Even taking into account the increasing demographic differential, which now amounts to about half a percentage point per year, the US economy has grown by about 4.5 percentage points more over these three years on a per capita basis. 
The main reason for the gap is the difference in private consumption, which grew in the US, but fell in the eurozone, especially in its periphery. 
A retrenchment of public consumption actually subtracted more demand in the US (0.8 percentage points) than in the European Union (0.1 points). 
This might appear to be somewhat surprising in light of all of the talk about Brussels imposed austerity. 
In fact, public consumption in the eurozone has de facto remained fairly constant over the last three years, whereas it has declined substantially in the US. 
(The same is true of public investment, though this constitutes such a small proportion of GDP that transatlantic differences could not have had a large impact on growth over a three-year horizon.) 
The contraction of private investment in Europe accounts for only a small part (one-third) of the growth gap. 
Though the financial-market tensions that accompanied the euro crisis had a strong negative impact on investment in the eurozone periphery, investment demand has also remained weak in the US, minimizing the overall difference. 
The resilience of private consumption in the US, the key to the growth gap, is not surprising, given that American households have reduced their debt burden considerably from the peak of more than 90% of GDP reached just before the crisis. 
The lower debt burden is also a key reason why consumption is expected to continue to grow much faster in the US than in the eurozone this year and next. 
But the crucial question – and one that is rarely asked – is how US households were able to reduce their debt burden during a period of high unemployment and almost no wage gains while sustaining consumption growth. 
The answer lies in a combination of “no recourse” mortgages and fast bankruptcy procedures. 
Millions of American homes that were purchased with subprime mortgages have been foreclosed in recent years, forcing their owners, unable to service their debt, to leave. 
But, as a result of no-recourse mortgages in many US states, the entire mortgage debt was then extinguished, even if the value of the home was too low to cover the balance still due. 
Moreover, even in those states where there is full recourse, so that the homeowner remains liable for the full amount of the mortgage loan (that is, the difference between the balance due and the value recovered by selling the home), America’s procedures for personal bankruptcy offer a relatively quick solution. 
Millions of Americans have filed for personal bankruptcy since 2008 , thereby extinguishing their personal debt. 
The same applies to hundreds of thousands of small businesses. 
Of course, there has also been a surge of bankruptcies in the eurozone’s periphery. 
But in countries like Italy, Spain, and Greece, the length of a bankruptcy proceeding is measured in years, not months or weeks, as in the US. 
Moreover, in most of continental Europe a person can be discharged of his or her debt only after a lengthy period, often 5-7 years, during which almost all income must be devoted to debt service. 
In the US, by contrast, the corresponding period lasts less than one year in most cases. 
Moreover, the terms of discharge tend to be much stricter in Europe. 
An extreme case is Spain, where mortgage debt is never extinguished, not even after a personal bankruptcy. 
This key difference between the US and (continental) Europe explains the resilience of the US economy to the collapse of its credit boom. 
The excessive debt accumulated by households has been worked off much more rapidly; and, once losses have been recognized, people can start again. 
The cause of the transatlantic growth gap thus should not be sought in excessive eurozone austerity or the excessive prudence of the European Central Bank. 
There are structural reasons for the eurozone economy’s slow recovery from the financial meltdown in its periphery. 
Most important, compared to the US, the excess debt created during the boom years has been much more difficult to work off. 
European officials are right to promote structural reforms of EU countries’ labor and product markets. 
But they should also focus on overhauling and accelerating bankruptcy procedures, so that losses can be recognized more quickly and over-indebted households can start afresh, rather than being shackled for years. 

Restarting Ukraine’s Economy 
BRUSSELS – In capitals East and West, one question currently looms large: “Who lost Ukraine?” 
Unfortunately, that is not the most important question to be asking right now. 
The more relevant question is how to stabilize the situation in Ukraine. 
Given that little can be done in practice to dislodge Russia from Crimea, the key challenge now is to keep the rest of the country united and to restart its economy, which is now in a state of suspended animation, owing to unsustainable fiscal and external deficits. 
The key reform issues are well known: the price of gas must be increased substantially to reflect its cost, subsidies for domestic coal production must be stopped, and governance of the country’s pipelines, which still earn huge royalties for carrying Russian gas to Western Europe, must be overhauled. 
Ever since these pipelines were effectively handed over to nominally private companies in murky deals, earnings from transit fees have gone missing, along with vast amounts of gas, while little maintenance has been carried out. 
All three of these issues are crucial to the fight against corruption. 
An energy ministry that decides who can obtain gas at one-fifth of its cost and who cannot is obviously subject to irresistible pressures to distribute its favors to whomever offers the largest bribes or kickbacks. 
The same applies to coal subsidies, except that the subsidies go to the most inefficient producers. 
The International Monetary Fund will certainly require Ukraine to reform its gas and coal subsidies as a precondition for implementing its package of financial support (of which a substantial contribution comes from the European Union). 
The first steps are already being taken, with the authorities recently announcing that household gas prices will rise by 50% next month. 
But, while abolishing energy subsidies is absolutely essential to balance the budget and put the economy on a sound footing, these steps also risk hitting eastern Ukraine, which contains a substantial Russophone minority, particularly hard. 
Some there might be tempted by the allure of a better life in “Mother Russia,” with its vast resources of cheap energy. 
Eastern Ukraine is dominated by old-fashioned energy-intensive coal and steel industries. 
But it also harbors some centers of technological excellence, such as the factories that produce important spare parts for Russian military helicopters. 
The challenge for policymakers will thus be to ensure that the creation of new jobs in these competitive enterprises keeps pace with the job losses arising from higher gas prices and the elimination of subsidies for coal production. 
The EU should support this in two ways. 
It should provide special marketing assistance to enterprises that have suddenly lost their Russian markets. 
And it should open its markets, not only by abolishing its import tariffs on Ukrainian products, which has already been decided, but also by granting a temporary exemption from the need to meet all of the EU’s complicated technical standards and regulations. 
Winning the people’s “hearts and minds” is the key to victory in an insurgency. 
In the case of eastern Ukraine, winning the support of those who are still nostalgic for the “good old days” must go beyond creating productive jobs that fill their wallets. 
Here, too, the EU could help this process along. 
For starters, it could alleviate the social hardship that will arise when the price for heating alone exceeds household income. 
At the same time, the EU should help to address the cause of extraordinary heating costs: the woeful energy inefficiency of most of the existing housing stock. 
The EU should thus quickly implement a targeted program of social support for the “energy poor,” coupled with financial support for investment in energy efficiency. 
Experience in Eastern Europe, where energy prices had to be increased substantially in the 1990’s, demonstrated that simple measures – such as better insulation, together with maintenance and repair of the region’s many long-neglected central heating systems – yield a quick and substantial payoff in reducing energy intensity. 
Even a slight improvement in Ukraine’s energy efficiency would contribute more to reducing greenhouse-gas emissions than the vast sums currently being spent to develop renewable energy sources. 
But, given widespread government corruption and inefficiency, such a program would have to be administered directly by a joint EU-Ukrainian task force. 
Nearby member states, especially those whose languages are similar to Russian and Ukrainian, should be able to mobilize quickly the required technical expertise. 
Finally, the revenues from the gas pipelines must be returned to the state’s coffers. 
Here the EU can also play a prominent role by recognizing Russia’s special interest in proper pipeline maintenance and a proper accounting for the gas they carry. 
Of course, no one should expect the Ukrainian government to trust the word of a country that has just annexed part of its territory. 
But, as a confidence-building measure, Russia should be invited into a tripartite agreement under which operational control over the pipelines would be entrusted to the European Bank for Reconstruction and Development, an institution in which all parties have a stake. 
The EBRD would safeguard the legitimate interests of all parties (including Russia), ensuring the proper operation and maintenance of the pipelines and overseeing the distribution of transit fees. 
Regardless of whether Ukraine is “lost,” or who lost it, the country can still offer an attractive future for all of its citizens if unavoidable economic reforms can be made compatible with regional cohesion. 
The EU can play an important role by opening its market and providing funding and technical assistance in crucial areas. 

The Government Europe Deserves? 
BRUSSELS – With the final allocation of portfolios within its executive branch, the European Commission, the European Union has completed its change of guard. 
The process took almost four months, following the European Parliament election in late May, and the end result was inevitably based on a series of compromises – to be expected for an EU of 28 prickly nation-states. 
Indeed, the proper functioning of EU institutions requires that no important constituency (left or right, East or West, and so forth) feels left out. 
And the new European Commission looks rather strong, given that more than 20 of its 28 members previously served as prime ministers, deputy prime ministers, or ministers. 
People who have held high political office at home find it worthwhile to come to Brussels. 
But most attention has focused on the EU’s three top positions: the President of the European Commission, the President of the European Council, and the High Representative for external affairs. 
The Commission’s new president, Jean-Claude Juncker, was the first ever to be selected based on his faction’s strong showing in the European Parliament election. 
As a seasoned Brussels insider, he was not one to move the crowds. 
But sometimes this can be an advantage. 
An insider knows best how to reconcile contrasting interests and how to get the institutional machinery moving again, as Juncker showed with his deft handling of the distribution of tasks among the individual Commissioners. 
Selecting the president of the European Council required considerable time and horse-trading, with Polish Prime Minister Donald Tusk emerging as the final choice. 
But, though Tusk now has an important-sounding position, the European Council President decides nothing. 
The president mainly presides over the meetings of the EU’s national leaders, and an incumbent’s influence depends on his or her ability to set the agenda and facilitate compromises. 
The experience of the previous incumbent, former Belgian Prime Minister Herman van Rompuy, in dealing with his own country’s fractious coalitions proved very useful when he had to persuade national leaders to make decisions during the euro crisis. 
Tusk will have to achieve something similar in the face of the new challenges confronting Europe today, which include Russian aggression in Ukraine, the rise of terrorism in the Middle East, and a stagnant economy at home. 
On the EU’s most immediate challenge, posed by Russia, Tusk will have to broker decisions with leaders from countries that feel immediately threatened (like his own) and those for which economic ties with Russia outweigh any threat to European security, which they feel to be remote. 
On the economy, he must reconcile the priorities of full-employment Germany with those of Greece and Italy, which remain in the grip of recession and sky-high unemployment. 
Being able to converse directly with the Council’s members, mostly in English, might be the biggest immediate challenge, as he admitted immediately. 
The appointment of the Italian foreign minister, Federica Mogherini, as High Representative of the Union for Foreign Affairs and Security Policy has been widely questioned, owing to her limited executive experience in foreign policy. 
But, since the de facto invasion of Ukraine in late August, her government has changed its position on Russia, and she has sought to convince many critics that she knows the problems facing Europe well (her university thesis, for example, was about political Islam). 
But can she lead? 
Europe’s foreign service, the European External Action Service (EEAS), is a huge bureaucracy, which must be managed well if it is to be effective. 
And, though the head of the EEAS has been dubbed the “EU’s foreign-policy chief,” Mogherini should be seen as its CEO, with key decisions taken by the member states’ leaders when they convene in the European Council. 
Her lack of managerial experience is thus her key weakness, and she will have to find a strong team to support her. 
But there is at least one encouraging, if hidden, signal from Mogherini’s appointment: The fact that the European Central Bank President Mario Draghi is also an Italian was not an impediment. 
This implies that the ECB presidency is not counted among the posts to be distributed according to nationality quotas, and that Draghi’s nationality is not regarded as having influenced his decisions in any way. 
Leaders of the EU’s institutions have to be political entrepreneurs if they are to leave a mark on history. 
Their decision-making power is limited. 
But they can often frame the choices and broker coalitions to push the existing boundaries of European integration. 
None of the EU’s top three new faces (Juncker, Tusk, and Mogherini) has a track record in this sense. 
Evidently the national bosses like it that way. 
The most sobering message from the appointment process is thus that the member states’ leaders will not suffer anyone who might rock the boat and push integration forward. 
There will be little movement toward the “ever closer union” envisioned in the Treaty of Rome. 
That might come as a relief for those in the United Kingdom and elsewhere who fear domination by Brussels, but it can only dismay those who hope that, despite its sluggish economy and declining population, Europe can become a relevant global actor. 



Sanctions and Solidarity 
BRUSSELS – The European Union has finally agreed on its “third-level sanctions” against Russia for its actions in Ukraine. 
As is usual for the EU, arriving at this point has been a long and difficult process. 
A key problem all along has been that, though sanctions serve a common purpose, the costs of implementing them are borne by individual member states. 
Moreover, the costs are very concrete and visible, as jobs in enterprises that depend on exports to Russia seem to be at stake. 
So it was not surprising that many member states were more concerned about the potential cost of the sanctions on their economies than they were about the overall foreign-policy goal of signaling to Russia that its disregard of international law and norms has consequences. 
That is why a common fund to provide compensation for the economic costs of sanctions should be an integral part of the EU’s emerging foreign-policy stance toward Russia. 
Creating such a fund would provide a potent symbol of solidarity within the EU, while providing an ideal opportunity to reflect on the nature of the sanctions’ costs. 
From an economist’s perspective, a key point is that losing export sales does not represent a cost per se. 
For example, if a company that produces a generic consumer good like food, or even cars, sells less in Russia than it did before, one should not necessarily count the reduction as a loss. 
After all, if such goods have a global market, a loss of sales in one market can be compensated by higher sales in another. 
In fact, a large proportion of Russian imports from the EU are precisely of these generic consumer goods, which are not affected by sanctions. 
Thus, reports claiming that sanctions imply a high cost – because EU exports to Russia amounted to €120 billion ($161 billion) last year and represent tens of thousands of jobs – are highly misleading. 
An economic loss arises only if a firm produces some specialized good that can be sold only in Russia using labor and capital that are also specialized and cannot be employed to produce something else. 
This applies especially to Germany: The famous German Mittelstand often does produce highly specialized goods; but it also prides itself on its flexibility and adaptability. 
Given this, there might be a case for compensation in some cases, but it should be strictly limited in time. 
It would not be difficult to develop objective criteria for access to an EU “Sanctions Compensation Fund.” 
A firm could be eligible for compensation if it operated in the sectors covered by sanctions, and if the product in question had special characteristics that prevented sales from being redirected elsewhere. 
A quantitative test of eligibility could be that sales to Russia over the previous three years accounted for more than one-quarter of total sales and diminished by more than a certain percentage this year. 
Compensation would take the form of retraining programs for personnel, and maybe refinancing of loans taken to finance specialized machinery. 
But there are two sectors in which no compensation is needed: energy and finance. 
Why? 
For starters, the risk to Europe’s energy imports from Russia is negligible. 
Should Russia demand a higher price for its oil, Europe could simply turn to the global market. 
Likewise, Russian gas giant Gazprom could increase the price it charges its European customers only by breaking existing contracts. 
Moreover, Europe is the only customer for a large share of Russian gas exports, which, at least in the short run, must be transported through the existing pipelines. 
Given this, the case for compensation in the energy sector is exceptionally weak. 
Only the makers of highly specialized equipment, perhaps for exploration under Siberian conditions, might have grounds for drawing on the compensation fund. 
The case for compensation is even weaker in the European financial sector. 
Providing the kind of medium- to long-term financing that is now subject to sanctions constitutes an infinitesimal fraction of European banks’ business. 
Moreover, as Russia’s political system becomes ever more oppressive, and its legal system ever more arbitrary, rich Russians will be more inclined than they already are to establish a safe base abroad for their wealth and families. 
The freedom and rule of law provided by financial centers such as London will become even more attractive. 
In 2006, the EU established a “Globalization Adjustment Fund” to cushion those sectors hardest hit by rising imports. 
Though the Fund initially was allocated only €500 million, a rather modest sum compared to the overall annual EU budget of around €100 billion, its creation was an important signal of the EU’s readiness to compensate those who lose out from a common policy. 
A similar political signal is needed today to overcome EU member states’ resistance to decisions that advance a common foreign policy. 
Here, too, the sum needed would probably be rather small compared to the overall EU budget. 

Who Won Europe? 
BRUSSELS – The fight over who will be the European Commission’s next president is heating up. 
Several European Union leaders were recently spotted in a small rowboat on a Swedish lake, reportedly scheming against the frontrunner, and British Prime Minister David Cameron has launched a public campaign to reassert the right of EU member states’ governments to decide who will occupy the EU’s executive arm. 
The process of choosing the Commission’s president appears to be a conflict between the voice of the people, as expressed in the results of last month’s European Parliament election, and backroom deal-making by governments. 
But reality is more complex, and the genuine democratic mandate did not go to the person who claims to have “won” the election. 
In the run-up to the election, the major European party “families” (there are no pan-European parties, only loose alliances of national parties) each nominated a Spitzenkandidat as their choice for President of the European Commission. 
The center-right European People’s Party, which gained a narrow plurality of 221 seats in the 751-seat parliament, has claimed victory in the election; and many others, including socialists, greens, and liberals, concur that the EPP’s Spitzenkandidat, Jean-Claude Juncker, has a moral right to be selected as President of the Commission. 
In fact, though the EPP won 29% of the seats, versus 24% for the Progressive Alliance of Socialists and Democrats (S&D), the S&D can claim victory. 
After all, its affiliated parties at the national level won a greater number of votes – a combined total of 40 million, compared to 39.9 million for parties affiliated with the EPP. 
The difference is small, but there can be no doubt that the S&D won the popular vote (24.4% to 23.8%). 
Though the election system is purely proportional and the S&D won the popular vote, the reason that it ended up with fewer seats is simple: its affiliated parties won relatively more votes in the larger countries, where it “costs” more voters to gain a single seat. 
Conversely, the EPP performed relatively better in small countries, where the vote cost per seat is much lower. 
The most extreme example is Luxembourg, Juncker’s home country, where the EPP received almost 38% of the popular vote, versus 11% for the S&D – a difference, in absolute terms, of only about 52,000. 
But the EPP obtained two more MEPs than the S&D, which implies a per seat cost of roughly 26,000 votes. 
The other extreme is Italy, where the S&D won 41% of the votes, versus 22% for the EPP. 
In absolute terms, the difference was more than five million votes, but the S&D won only 14 more MEPs than the EPP. 
In Italy, the S&D needed about 370,000 voters to gain one MEP, more than 14 times as many as the EPP needed in Luxembourg. 
The EPP’s “victory” was thus due mainly to the fact that the ratio of voters per MEP varies greatly across countries. 
A single vote in Italy (and in other large countries) is worth much less than a vote in smaller countries. 
The German Constitutional Court recently relied on this fact in a controversial decision striking down the 3% electoral threshold for parties to gain European Parliament seats in Germany (the small far-right National Democratic Party picked up one seat in the European Parliament as a result). 
The German court’s rationale was that the European Parliament election is not a true election, because the principle of “one person, one vote” is not respected. 
This is not only a problem from the standpoint of democratic principles; the results of the recent election have shown the extent to which it can influence political outcomes. 
Juncker came out ahead in the MEP count for only one reason: he obtained his votes in small countries, and votes are de facto weighted by country size. 
Thus, the claim that the European Parliament directly represents Europe’s people and that the people have given the EPP’s candidate a direct popular mandate that the member states’ representatives in the European Council should respect rings hollow. 
The S&D obtained more votes, giving its Spitzenkandidat, Martin Schulz, a claim to greater democratic legitimacy. 


 

Daniel Ortega Rides Again 
With the left on the march in much of Latin America, it is no surprise that Nicaragua’s Sandinista leader Daniel Ortega is trying to make a comeback. 
But Ortega is creating a state of emergency in his party as he tries to diminish the threat posed by Herty Lewites, the former mayor of Managua and the country’s most popular politician. 
With one demarche, Ortega dismissed the need for a party primary and designated himself as the Sandinistas’ nominee for next year’s presidential election. 
What’s striking about Ortega’s move is that he is ready to risk so much political capital, not only expelling Lewites from the party but canceling his challenger’s permits to hold political rallies and forbidding him to use Sandinista party symbols. 
Yet, despite all this, Ortega has yet to diminish Lewites’s ability to rally the masses. 
Ortega’s display of raw power is thus merely a reminder of his autocratic ways. 
This will be Ortega’s fifth run for the presidency, having lost his last three attempts. 
It plays handily into the Bush administration’s recall to office of veterans of the anti-Sandinista “Contra War” of the 1980’s, including Elliot Abrams, John Negroponte, Roger Noriega, Dan Fisk, and Otto Reich. 
In a reminder of that confrontation, Ortega accused his old enemies in the United States of drafting a plan to assassinate him. 
US Undersecretary of State for Latin America Roger Noriega responded by calling Ortega a “hoodlum.” 
Ortega is wagering that attacking Bush will resonate with the Sandinistas and provoke them to close ranks, thereby stifling internal party dissent. 
But in an already polarized environment, an Ortega-Bush standoff is nothing more than a self-fulfilling prophecy. 
In arguing for his candidacy, Ortega wants supporters to believe that his presidential campaign is part of the wave of recent victories won by the Latin American left. 
But this is only half right. 
A new Latin American left is developing, but Ortega is not part of it. 
In the context of the new Latin American left, Ortega resembles a shoddy imitation of Fidel Castro without the oil wealth of Hugo Chávez. 
The standard bearer of Nicaragua’s new left is Lewites. 
Like Vázquez, Lagos, Kirchner, and Lula elsewhere in the region, Lewites offers the possibility of a modern and democratic left, socially committed and at the same time capable of orchestrating national solutions while recognizing and negotiating profound differences with the US and the IMF. 
These new leaders seek to deal with the US in a manner that avoids alienating a superpower and isolating their countries. 
To Ortega, such a posture reeks of betrayal, social democratic aberrations and imperialist tendencies. 
But despite Ortega’s anachronistic politics, he has a good chance of winning the election in November 2006. 
He has only to keep his party united and the anti-Sandinista vote divided. 
Ironically, his principal ally in this adventure will be his old enemy, former President Arnoldo Alemán, who is under house arrest for corruption. 
Between them, the two caudillos control 90% of the parliament, the Supreme Court, and the Electoral Commission. 
Together, they can keep Nicaragua’s current president, Enrique Bolaños, in check indefinitely. 
Alemán, too, faces a rebellion in his Liberal Constitutional Party (PLC), led by former Treasury Minister Eduardo Montealegre, a presidential hopeful popular in the party’s liberal wing. 
If Alemán blocks Montealegre’s candidacy in the PLC and pushes him to form another political party, Ortega’s chances for winning the presidency increase sharply. 
The business interests that finance political campaigns face a difficult dilemma: Is it preferable to align with a PLC dominated by a corrupt Alemán or support a new democratic force and risk helping Ortega win? 
Although a three-way race is pure speculation at this point, it’s clear that it offers Ortega the best of all electoral worlds. 
It’s so tempting that Ortega is likely to help rehabilitate Arnoldo Alemán, betting that freeing him will serve his political interests. 
The main glitch in this scenario, however, is Lewites. 
Polls show that an overwhelming majority of Sandinista voters prefers the former Managua mayor – 72% versus 18% for Ortega. 
If Lewites is able to organize nationally and maintain a presence in the streets, he could quickly become unbeatable. 
A poll conducted in January projected that in a four-way race, Lewites would come in first, followed by Montealegre. 
Ortega would manage only a third-place finish. 
Alemán, or his candidate, would run dead last. 
If voters continue to lean toward Lewites and Montealegre, the two candidates could elect more deputies to the National Assembly than the Sandinistas and the PLC combined. 
Such an outcome would be a welcome end to the dominance of Alemán and Ortega, who have served Nicaraguans poorly. 
While it’s premature to make definitive predictions, the Lewites and Montealegre rebellions have already done more in eight weeks to change the country’s political landscape than anything else in the last two years. 
As a result, Nicaragua’s people, not its strongmen, may yet choose the next president. 

The System is Working 
MEDFORD, MASSACHUSETTS – As the latest G-20 meeting of finance ministers starts in Cairns, Australia, the Legion of Gloom is at it again. 
Their conventional wisdom is that “the system” – global governance structures ranging from the World Trade Organization and the G-20 to the major central banks – is badly broken and in desperate need of repair. 
In fact, the global economic order has worked remarkably well since 2008. 
True, the first year of the Great Recession was more severe than the first year of the Great Depression. 
But, despite this initial shock, the system responded in a surprisingly nimble fashion. 
Compared to previous global downturns triggered by a financial crisis, the global economy bounced back robustly. 
Trade and output levels exceeded pre-crisis levels in most countries a few years ago, and global poverty continues to decline rapidly. 
One key to this rebound was that, in contrast to the 1930s, the global economy maintained existing conditions: trade barriers remained low, as did restrictions on foreign direct investment, and cross-border exchange continued to spread with the Internet. 
As the McKinsey Global Institute noted, with the exception of cross-border finance, global flows are just as robust now as they were before the crisis. 
There has even been a partial revamping of key global institutions, from the rise of the G-20 to reform of the International Monetary Fund. 
Indeed, the resiliency of markets to geopolitical tensions in Ukraine or the South China Sea has begun to worry some Fed officials. 
By any reasonable metric, multilateral institutions and great-power governments did what was necessary to preserve the global economy’s openness. 
So why the widespread misperception that the system failed? 
Here, we run into a dirty little secret of world politics: many commentators on international politics do not know much about economics or economic policy. 
International-affairs professionals frequently talk about “high politics” and “low politics,” and they usually relegate economic issues to the latter category. 
This ignorance matters when political commentators try to write about the global economy. 
They will naturally rely on the most accessible facts as their guide. 
To be fair, some of the most obvious data have indeed suggested fragmentation of the global economic order. 
The dormancy of the Doha Round of WTO talks, the public deadlock of some G-20 summits, and stalemates at the United Nations Security Council seem like sufficient evidence to proclaim that the status quo is imperiled – even if facts beyond the headlines belie that consensus. 
Consider the kerfuffle over “currency wars.” 
In 2010, the Fed began hinting at a second round of quantitative easing, or QE2. 
One of the policy externalities of QE – the Fed’s purchase of long-term financial assets – was a depreciating dollar. 
Fearing domestic asset-price bubbles and upward pressure on their currencies from an inward rush of capital, many emerging-economy leaders complained loudly about what Brazilian Finance Minister Guido Mantega called an “international currency war.” 
Lost in all of the hype was the fact that neither markets nor financial analysts were terribly perturbed about excessive exchange-rate volatility or the possibility of an actual currency war. 
After the autumn of 2008, exchange-rate volatility slowly receded toward pre-crisis levels. 
Another common reason for the collective misperception is misplaced nostalgia. 
Former US National Security Adviser Brent Scowcroft encapsulated the post-crisis conventional wisdom in 2012: “The postwar leaders set up the International Monetary Fund, the World Bank, and the General Agreements on Tariffs and Trade to develop rules of the road. 
The new G-20 is but a pale reflection of that once-brilliant institution building.” 
But past efforts at building a global order have had their share of futility. 
Anyone familiar with the history of the Bretton Woods institutions knows that they experienced as many misses as hits. 
Compared to the past, the current order performed well above average. 
Perhaps the deepest explanation for the Legion of Gloom’s strength is where they live. 
According to the Economist Intelligence Unit, the OECD economies averaged annual GDP growth of 0.5% from 2008 to 2012, whereas non-OECD economies averaged 5.2% growth. 
This matters because analysis of the international order remains anchored in the West. 
It is a general rule of political science that a faltering economy causes greater distrust in institutions. 
A weak economy feeds perceptions that the system is broken, and that those in authority are not to be trusted. 
So greater skepticism about all levels of governance in the OECD economies is not surprising. 
Analysts might be looking first at their local circumstances, and then extrapolating from that to their assessments of global institutions. 
Pessimism about slow national recoveries in the developed world is causing analysts to conflate poor domestic and regional governance with poor global governance. 
But the primary causes for domestic economic weakness in Japan, the US, the United Kingdom, and the eurozone are not global in origin. 
Japan’s economy had been stagnating for almost two decades when the 2008 crisis erupted. 
Likewise, domestic policy stalemates and political uncertainty acted as a significant drag on the US recovery from the Great Recession. 
Does the system’s remarkable resiliency since 2008 mean that it can withstand the next crisis? 
In theory, yes – many of the post-2008 reforms have been designed to add shock absorbers to the global economy. 
But, in international relations, collective misperceptions can create their own reality. 
If pundits continue to insist that the system failed, wonks will devote time and effort to figuring out how to fix what is not broken. 
Moreover, it is extremely difficult to correct misperceptions once they ossify – particularly if the topic in question is outside a pundit’s range of expertise. 
Ironically, the only thing that might stop the system from continuing to work is the low confidence of its greatest proponents. 

South Korea’s Japanese Mirror 
SEOUL – Given the daunting challenges facing Japan, one can only admire Prime Minister Shinzo Abe’s determination to end the country’s two-decade-long period of economic stagnation. 
His strategy – the “three arrows” of massive monetary expansion, increased government spending, and structural reform – is theoretically sound. 
But only one and a half arrows have been launched so far. 
The stimulus package is being offset by consumption-tax hikes aimed at reducing Japan’s massive debt burden – a process that will lead many Japanese consumers to adjust their spending downward. 
The promised structural reforms of the energy sector, labor market, and competition policy have yet to be introduced, and appear unlikely to take effect anytime soon. 
Even more worrisome are larger immutable realities – like a rapidly aging and shrinking population – that will limit Japan’s economic growth in the coming decades. 
But Japan’s problems are not unique. 
Indeed, its neighbor and historical rival, South Korea, is headed down a similar path. 
The difference is that South Korea may still have time to ameliorate these trends, and avoid a Japanese-style quagmire of permanent low growth and long-term decline. 
South Korea – the seventh-largest trading country in the world, and one of the most prominent economic success stories of the last 50 years – is at risk of such a bleak future as a result, first and foremost, of demographics. 
South Korea’s working-age population is falling by 1.2% annually – the fastest decline among OECD countries. 
While there are many reasons for South Korea’s low fertility rate, two economic factors stand out. 
First, household-debt levels are enormous, capturing a quarter of income, with mortgage payments taking the lion’s share. 
The ratio of housing prices to incomes is more than double that of the United States. 
Second, South Korean families feel compelled to spend a large share of their income (10%, on average) on education. 
With households already saving only around 4% of their disposable income, compared to 20% in 1988, there is little room for additional expenditure. 
A concomitant feature of South Korea’s labor market is that women’s labor-force participation rate – a paltry 33% for women aged 30-39 – is among the lowest in the OECD. 
This partly reflects the difficulty of balancing child rearing with work in South Korea, compared to, say, Europe or the US. 
South Korea’s female labor-force participation rate is even lower than in Japan, where there are waiting lists for childcare. 
Moreover, South Korea has underinvested in day-care centers, with firms rarely offering childcare support. 
Given that South Korean women tend not to hold lucrative jobs, the cost of childcare is often prohibitive. 
The recent increase in South Korea’s minimum normal retirement age has done little to improve the labor-market outlook. 
Wages in the small and medium-size enterprises (SMEs) that employ 88% of workers still lag behind those of major conglomerates, the chaebols; and the middle class is shrinking in terms of its share of earnings. 
But South Korea does have some advantages over Japan. 
Although the government’s stimulus policies have increased the national debt, the debt/GDP ratio remains relatively low, at roughly 37%. 
Public debt in Japan, by contrast, exceeds 220% of GDP. 
Moreover, despite South Korea’s dependence on exports, domestic consumption is robust. 
And ample spending on research and development, together with an unrelenting drive to be at the forefront of technological innovation, implies a brisk pace of innovation. 
This creates room to address one of the economy’s two main challenges: low productivity in services. 
As it stands, productivity in services is six times lower than in manufacturing. 
The operations of South Korea’s chaebols – which dominate production, if not employment – should be adjusted to support productivity gains in the increasingly dominant services sector. 
The key here, as in Japan, is to foster greater competition in services. 
If the chaebols continue to do their own advertising, financing, and IT, they will starve SMEs. 
A review of industrial concentration is warranted, as is a major government effort to foster SME growth in new ventures by offering incentives, ensuring access to capital, and lowering barriers to market entry. 
More employment in higher-end service jobs, especially for women, would also improve South Korea’s prospects considerably. 
In the longer term, however, South Korea’s prospects hinge largely on the labor force. 
The rising dependency ratio – expected to exceed 50% by 2030, when 36% of the population will be above the age of 65 – could spell disaster for the country. 
Health-care costs will rise, increasing the strain on budgets. 
While increased immigration could help to ease labor-force pressures, it would be met with public resistance. 
In this context, potential growth may well fall back to the predicted 2.5% annual rate, even though the economy’s capital stock is in good shape. 
South Korea has learned numerous positive lessons from Japan. 
It captured many of Japan’s export markets; it imported and adapted Japanese technologies; it employed similar planning methods; and the chaebols are an outgrowth of Japan’s zaibatsu corporate model. 
Now, however, South Korea must learn from Japan’s negative experiences. 
Structural reform cannot wait. 
Nationalism should be channeled toward securing public support for deep economic and social reforms. 
South Korea’s leaders do not have to look far to find out what will happen if they fail to address looming challenges quickly and resolutely. 

Today’s Dark Lords of Finance 
LONDON – In his Pulitzer-Prize-winning book, Lords of Finance, the economist Liaquat Ahamad tells the story of how four central bankers, driven by staunch adherence to the gold standard, “broke the world” and triggered the Great Depression. 
Today’s central bankers largely share a new conventional wisdom – about the benefits of loose monetary policy. 
Are monetary policymakers poised to break the world again? 
Orthodox monetary policy no longer enshrines the gold standard, which caused the central bankers of the 1920s to mismanage interest rates, triggering a global economic meltdown that ultimately set the stage for World War II. 
But the unprecedented period of coordinated loose monetary policy since the beginning of the financial crisis in 2008 could be just as problematic. 
Indeed, the discernible effect on financial markets has already been huge. 
The first-order impact is clear. 
Institutional investors have found it difficult to achieve positive real yields in any of the traditional safe-haven investments. 
Life insurers, for example, have struggled to meet their guaranteed rates of return. 
According to a recent report by Swiss Re, had government bonds been trading closer to their “fair value,” insurers in America and Europe would have earned some $40-$80 billion from 2008 to 2013 (assuming a typical 50-60% allocation to fixed income). 
For public pension funds, an additional 1% yield during this period would have increased annual income by $40-50 billion. 
Investors have responded to near-zero interest rates with unprecedented adjustments in the way they allocate assets. 
In most cases, they have taken on more risk. 
For starters, they have moved into riskier credit instruments, resulting in a compression of corporate-bond spreads. 
Once returns on commercial paper had been driven to all-time lows, investors continued to push into equities. 
Approximately 63% of global institutional investors increased allocations in developed-market equities in the six months prior to April 2015, according to data from a recent State Street survey – even though some 60% of them expect a market correction of 10-20%. 
Even the world’s most conservative investors have taken on unprecedented risk. 
Japan’s public pension funds, which include the world’s largest, have dumped local bonds at record rates. 
In addition to boosting investments in foreign stocks and bonds, they have now raised their holdings of domestic stocks for the fifth consecutive quarter. 
These allocation decisions are understandable, given the paltry yields available in fixed-income investments, but the resulting second-order impact could ultimately prove devastating. 
The equity bull market is now six years old. 
Even after the market volatility following the crisis in Greece and the Chinese stock market’s plunge, valuations appear to be high. 
The S&P 500 has surpassed pre-2008 levels, with companies’ shares trading at 18 times their earnings. 
As long as the tailwinds of global quantitative easing, cheap oil, and further institutional inflows keep blowing, equities could continue to rally. 
But at some point, a real market correction will arrive. 
And when it does, pension funds and insurance companies will be more exposed than ever before to volatility in the equity markets. 
This overexposure comes at a time when demographic trends are working against pension funds. 
In Germany, for example, where 20% of the population is older than 65, the number of working-age adults will shrink from about 50 million today to as few as 34 million by 2060. 
Among emerging markets, rapidly rising life expectancy and plunging fertility are likely to double the share of China’s over-60 population by 2050 – adding roughly a half-billion people who require support in their unproductive years. 
If the combined effect of steep losses in equity markets and rising dependency ratios cause pension funds to struggle to meet their obligations, it will be up to governments to provide safety nets – if they can. 
Government debt as a percentage of global GDP has increased at an annual rate of 9.3% since 2007. 
In Europe, for example, Greece is not the only country drowning in debt. 
In 2014, debt levels throughout the eurozone continued to climb, reaching nearly 92% of GDP – the highest since the single currency’s introduction in 1999. 
If pensions and governments both prove unable to provide for the elderly, countries across the continent could experience rising social instability – a broader version of the saga playing out in Greece. 
The new Lords of Finance have arguably been successful in many of their objectives since the financial crisis erupted seven years ago. 
For this, they deserve credit. 
But, when an emergency strikes, large-scale policy responses always produce unintended consequences typically sowing the seeds for the next full-blown crisis. 
Given recent market turmoil, the question now is whether the next crisis has already begun. 

Darkness at Darfur 
Darfur is shorthand for the latest example of a recurring international problem, one that gained headlines a decade ago in Rwanda. 
What should the world do when a large number of people are the victims of violence originating from within their own country? 
Darfur itself is a region of Western Sudan comprised of Arab and African Muslims. 
Conflict erupted in early 2003 when rebels of the Sudan Liberation Movement attacked government troops in an effort to gain greater autonomy and resources for their region. 
Sudan government aircraft and government-supported troops (known as jangaweed) retaliated against not only armed rebels but also against civilians deemed to be supporting them. 
Villages have been emptied, women raped, non-Arab men killed. 
The origins of the current crisis may be in some dispute, but the costs are not. 
More than 50,000 men, women and children have lost their lives; more than 1.5 million have been made homeless. 
This is arguably genocide, a word used by the U.S. government but by few others to describe what is going on in Darfur. 
Meanwhile, world leaders are debating what if anything should be done. 
UN Security Council Resolution 1564, passed on 18 September 2004, reserves the bulk of its criticism for the government of Sudan. But the UN is not yet prepared to go beyond words. 
The resolution threatens that the Security Council will consider imposing sanctions against Sudanese leaders or against the country’s important oil sector, but introduces no penalties at this time. 
Why the hesitation? 
More than anything else it stems from international reluctance to challenge any government over what it is doing within its own territory. This reflects a widely-held view of sovereignty, one that allows governments to do essentially what they want within their own borders. 
Such thinking is inadequate and outmoded. 
To begin with, there is a moral element. There is something wrong in looking the other way when one’s fellow human being is being slaughtered. 
We all have some basic obligation to one another. 
There are as well pragmatic considerations. 
In a global world, what happens within one country can all too easily affect others. 
For example, refugees leaving Sudan can strain the stability of neighboring Chad. 
Opposition to genocide and other large-scale acts of violence against a population also reflects the established principle that citizens as well as governments have rights. 
This principle is enshrined in various international documents, beginning with the 1948 Universal Declaration of Human Rights. 
Governments ought not to be allowed to massacre their own people. 
And weak governments should not be allowed to permit massacres to take place on their own territory even if they are not themselves carrying out the massacre. 
What all this adds up to is a requirement for a concept of state sovereignty that is less than absolute. 
To be precise, we need to embrace a contractual approach to sovereignty, one that recognizes the obligations and responsibilities as well as the rights of those who enjoy it. 
Such an approach to sovereignty would essentially communicate to governments and their leaders that the rights and protections they associate with statehood are in fact conditional, and that governments and leaders would forfeit some or, in extreme cases, all of these rights and protections if they failed to meet their obligations. 
This idea will only have an impact if the international community is prepared to go beyond voicing this principle and accept the necessary consequence: that other states and the world at large have a right and a duty to act to protect innocent life when it is jeopardized on a large scale. 
Some movement in just this direction was suggested by widespread international support for the humanitarian interventions in Bosnia, Kosovo, and East Timor. 
Another sign of change is the basic document (“Constitutive Act”) of the African Union, the regional organization launched in July 2000 to replace the ineffective Organization of African Unity. 
After citing the principle of non-interference by one member state in the internal affairs of another, the document goes on to declare “the right of the Union to intervene in a member state pursuant to a decision of the assembly in respect of grave circumstances, namely war crimes, genocide and crimes against humanity.” 
Intervention in such circumstances can take any number of forms, from public rhetoric and private diplomacy to economic and political sanctions to armed intervention. 
All of which brings us back to Darfur. 
What needs doing? 
There is a need for massive assistance to the displaced people of Darfur. 
Those who have survived conflict require help if they are not to succumb to disease and starvation. 
There is also every reason to renew diplomatic efforts to bring about a lasting cease-fire and, following that, a settlement that addresses the grievances that helped bring about this crisis in the first place. 
Two other points require highlighting, though. 
First, and consistent with UN Security Council Resolution 1564, countries should provide the African Union with the logistical, material, and financial help it has asked for. 
With such support, AU-authorized troops could guard the refugee camps and, over time, protect villages so that men, women and children could return home in safety. 
Second, the UN ought to make good on its threat and impose sanctions against the Sudanese government unless it stops using its aircraft to destroy villages and unless it stops supporting the jangaweed. 
Criminal indictments for war crimes ought to be issued against specific officials who do not comply. 
It is important that the world act, not simply to save the people of Darfur, but to prevent future Darfurs. 
A great deal of innocent human life depends on it. 

The Hidden Danger of Big Data 
CAMBRIDGE – In game theory, the “price of anarchy” describes how individuals acting in their own self-interest within a larger system tend to reduce that larger system’s efficiency. 
It is a ubiquitous phenomenon, one that almost all of us confront, in some form, on a regular basis. 
For example, if you are a city planner in charge of traffic management, there are two ways you can address traffic flows in your city. 
Generally, a centralized, top-down approach – one that comprehends the entire system, identifies choke points, and makes changes to eliminate them – will be more efficient than simply letting individual drivers make their own choices on the road, with the assumption that these choices, in aggregate, will lead to an acceptable outcome. 
The first approach reduces the cost of anarchy and makes better use of all available information. 
The world today is awash in data. 
In 2015, mankind produced as much information as was created in all previous years of human civilization. 
Every time we send a message, make a call, or complete a transaction, we leave digital traces. 
We are quickly approaching what Italian writer Italo Calvino presciently called the “memory of the world”: a full digital copy of our physical universe. 
As the Internet expands into new realms of physical space through the Internet of Things, the price of anarchy will become a crucial metric in our society, and the temptation to eliminate it with the power of big data analytics will grow stronger. 
Examples of this abound. 
Consider the familiar act of buying a book online through Amazon. 
Amazon has a mountain of information about all of its users – from their profiles to their search histories to the sentences they highlight in e-books – which it uses to predict what they might want to buy next. 
As in all forms of centralized artificial intelligence, past patterns are used to forecast future ones. 
Amazon can look at the last ten books you purchased and, with increasing accuracy, suggest what you might want to read next. 
But here we should consider what is lost when we reduce the level of anarchy. 
The most meaningful book you should read after those previous ten is not one that fits neatly into an established pattern, but rather one that surprises or challenges you to look at the world in a different way. 
Contrary to the traffic-flow scenario described above, optimized suggestions – which often amount to a self-fulfilling prophecy of your next purchase – might not be the best paradigm for online book browsing. 
Big data can multiply our options while filtering out things we don’t want to see, but there is something to be said for discovering that 11th book through pure serendipity. 
What is true of book buying is also true for many other systems that are being digitized, such as our cities and societies. 
Centralized municipal systems now use algorithms to monitor urban infrastructure, from traffic lights and subway use, to waste disposal and energy delivery. 
Many mayors worldwide are fascinated by the idea of a central control room, such as Rio de Janeiro’s IBM-designed operations center, where city managers can respond to new information in real time. 
But with centralized algorithms coming to manage every facet of society, data-driven technocracy is threatening to overwhelm innovation and democracy. 
This outcome should be avoided at all costs. 
Decentralized decision-making is crucial for the enrichment of society. 
Data-driven optimization, conversely, derives solutions from a predetermined paradigm, which, in its current form, often excludes the transformational or counterintuitive ideas that propel humanity forward. 
A certain amount of randomness in our lives allows for new ideas or modes of thinking that would otherwise be missed. 
And, on a macro scale, it is necessary for life itself. 
If nature had used predictive algorithms that prevented random mutation in the replication of DNA, our planet would probably still be at the stage of a very optimized single-cell organism. 
Decentralized decision-making can create synergies between human and machine intelligence through processes of natural and artificial co-evolution. 
Distributed intelligence might sometimes reduce efficiency in the short term, but it will ultimately lead to a more creative, diverse, and resilient society. 
The price of anarchy is a price well worth paying if we want to preserve innovation through serendipity. 

My Best Investment 
JAKARTA – When I was boy, I dreamed of becoming a doctor. 
I was born in Indonesia in the early 1950’s, a time when most families in my country lacked access to health care. 
As a result, thousands of children died each year from preventable diseases such as measles, polio, and malaria. 
But revolutionary breakthroughs in medicine were starting to turn the tide on these killers, and Indonesia’s doctors were celebrated as heroes. 
I wanted to be a hero, too, so I studied hard and enrolled in medical school. 
My plans changed, however, when my father got ill. 
He was a hard-working man who made pedicabs in Surabaya, and I left university when he could no longer manage the family business. 
Ultimately, I became a successful entrepreneur and established a bank that is now one of Southeast Asia’s largest financial institutions. 
Looking back, I have no regrets. 
Indeed, I know that I have been incredibly blessed. 
Millions of children in developing countries in Africa, Asia, and the Western Pacific are forced into extreme poverty when a parent gets sick or dies. 
And millions more suffer from diseases that prevent them from leading a healthy and productive life. 
That is why I have decided to invest $65 million in the Global Fund to Fight AIDS, Tuberculosis, and Malaria. 
When the Global Fund was created a decade ago, HIV incidence was rising around the world, and the drugs used to treat the virus were still prohibitively expensive. 
Malaria was killing one million people each year, with mortality concentrated among pregnant women and children under the age of five. 
More than two million people were dying from tuberculosis, because they lacked access to low-cost, first-line treatment. 
Since then, the Global Fund has played a key role in reversing the course of these epidemics. 
Worldwide, HIV incidence has fallen by one-third, and the cost of HIV drugs has dropped more than 99%. 
The number of African households that sleep under insecticide-treated bed nets has risen from 3% to 53%, and malaria deaths have fallen by one-third. 
And TB mortality has dropped more than 40%. 
Altogether, support provided by the Global Fund has saved more than nine million lives – a remarkable achievement. 
But the impact of the Global Fund extends far beyond lives saved. 
When an HIV-positive mother receives antenatal treatment so that her child can be born HIV-free, we change the future. 
When a child is spared cerebral malaria and the lifelong mental disabilities that it can cause, new possibilities are created. 
The world becomes a better place when we commit to giving our children a better start. 
The Global Fund also plays a critical role in strengthening health care in developing countries. 
Its resources have helped to train new generations of doctors, nurses, and technicians, while dramatically improving the overall quality of maternal and child health. 
These investments are helping countries take direct ownership of the fight against infectious disease, ultimately reducing their dependence on foreign aid. 
For example, support from the Global Fund has helped Indonesia, which has the world’s fourth-highest TB burden, develop an efficient and effective national TB-control program. 
As a result, more than one million active cases have been successfully treated, while the incidence of the disease – which has cost Indonesia’s economy millions of dollars in lost productivity – has been driven down. 
With technical support like this, Indonesia’s government is creating an affordable and sustainable national health-care system that will be fully financed with domestic resources by 2019. 
I believe that the Global Fund is one of the smartest investments that we can make – as many governments have understood from the outset. 
The United States has been the Global Fund’s largest supporter, but many others have done their part. 
For example, Australia has provided US$410 million to the Global Fund since 2002, an amount that has enabled nearly 200,000 people to receive lifesaving HIV treatment, 80,000 people to receive TB treatment, seven million people to be cured of malaria, and 14 million bed nets to be delivered to families in need. 
The Global Fund has brightened the futures of hundreds of thousands of children across Africa and Asia – a heroic achievement that should make donor countries’ citizens proud. 
I hope that others with the means to support its work will invest so wisely. 

David Cameron’s Culture War 
NEW YORK – British Prime Minister David Cameron’s government has announced some of the most draconian public-sector cuts any developed country government has ever attempted. 
Indeed, his minister of education recently declared that funding for Britain’s universities would be slashed by as much as 40%. 
But the most shocking aspect of the move is that arts and humanities departments will be targeted more aggressively than science and engineering, which are supposedly better for business. 
The war against the arts and humanities is nothing new – though this is the first time that the fight has migrated so directly to Britain. 
Ronald Reagan pioneered a wave of policy and propaganda in the United States in the 1980’s that demonized the National Endowment for the Arts. 
Ever since, Republican governments in the US have slashed funding for ballet, poetry in schools, and sculpture, while demagogues like former New York Mayor Rudolph Giuliani have gained political traction by attacking controversial visual arts. 
But the Cameron government’s approach is more sinister than the old right-wing tactic of taking aim at disciplines that can be derided as effete. 
The British cuts reveal a push in developed countries – one that also started in the US – to target the kinds of education that lead to an open, vigorous civil society and a population that is hard to suppress. 
In the former Soviet bloc, it was the poets, dramatists, cartoonists, and novelists whose works encoded forbidden themes of freedom, and who were targeted by the secret police. 
Today, they are bullied, silenced, and tortured in places like Iran, Syria, China, and Myanmar. 
Obviously, neither the US nor Britain has reached that point. 
But the attack on the arts and humanities is a giant step in the direction of a pliable, dumbed-down citizenry. 
Indeed, the war against the arts and humanities in the US coincided with the emergence of an increasingly ignorant and passive population and a government that serves at the pleasure of corporate interests. 
Academics in the arts and humanities are notoriously bad at defending why their work has value. 
But, apart from strengthening civil society and the habits of freedom, these disciplines yield bottom-line benefits as well. 
Who needs to read closely, seek evidence, and make a reasoned argument – skills that the study of poetry, the novel, history, and philosophy provide? 
Who needs to study languages and comparative literature? 
For Cameron, evidently, the answer is: no one of importance. 
Let us imagine, then, a Britain of tomorrow that includes parliamentarians who don’t know what led to World War I, or what the Enlightenment was; journalists who can’t write compellingly; attorneys and judges who can’t figure out their cases; and spies and diplomats who don’t speak the languages or understand the cultures in which they work. 
That Britain will look more like the US of today. 
In a heartbeat, Cameron (who himself studied philosophy, politics, and economics at Oxford, having previously attended that bastion of classical education, Eton) has signed away Britain’s global influence. 
Having lost its empire, Britain retains outsized global influence simply because of the power of its civilization and the education absorbed by its decision-makers. 
That allure is why foreign students from emerging countries around the world flock to Britain, putting millions of pounds annually into the coffers of its universities. 
By slashing the funding for the institutions which created that civilization, Cameron has guaranteed that tomorrow’s Britain will be a nation not of world-class politicians, writers, and cultural innovators, but of wonky technocrats raised on bad TV, with little influence beyond their tiny island. 
If what has been cut is not restored, Cameron and his ideological heirs will create a nation of quiescent citizens who, like their US counterparts, are better suited to a society whose official policies are more directly aligned to the will of corporate interests. 
While the fiscal savings may appear attractive to Cameron in the short term, for the British people – and for the rest of the world, which benefits from Britain’s liveliness, civilization, and tradition of democracy – the cost is far too high. 

David Cameron’s Great Expectations 
NEW YORK – As I listen to the news coming out of England after the recent wave of urban riots – and as I read Robert Douglas-Fairhurst’s compelling new biography of Charles Dickens, Becoming Dickens – life and art seem to be echoing each other. 
In the wake of the riots, British Prime Minister David Cameron has proposed reviving children’s courts, urged harsh sentences and orange jumpsuits for convicts, and floated even more odious ideas. 
For example, convicts could be intentionally exposed to public harassment through cleanup assignments, and their families, who have not committed crimes, could be evicted from their state-subsidized housing. 
Cameron is also testing arrests for Facebook comments, the suspension of social networks, and more lethal power for police. 
In Dickens’ England, the judiciary was not independent, and newspapers were subject to state censorship. 
Kids (like Oliver Twist) were punished in ways designed to break them; poor people convicted of relatively minor offenses were transported to Australia, or given publicly humiliating forms of punishment; police had unchecked and violent power over the poor. 
I am not endorsing leniency for looters and thugs; but we already know where the raft of punitive legislation that Cameron is proposing, and his efforts to exploit civil unrest to clamp down on civil liberties, would lead the country. 
Likewise, we already know what an England without a social safety net – where the poor have no hope and no mobility – looks like. 
Public education barely existed for the “lower orders” 150 years ago, and university was a fantasy for them – as it could well be again, with tuition fees set to triple under Cameron. 
In Becoming Dickens, Douglas-Fairhurst, rejecting recent “poststructuralist” literary theory, reexamines Dickens and his England within their historical and political contexts. 
This approach yields valuable insights – and not a moment too soon. 
Such “historicist” interpretations of Victorian London have also appeared recently in the fascinating current exhibit at the Wellcome Collection, “Dirt: The Filthy Reality of Everyday Life,” and in Bill Bryson’s new bestseller, At Home, which examines the social history surrounding a Victorian curate’s manor. 
The renewed interest in Victorian social history – what people ate and wore, who worked for whom, etc., as opposed to the history of battles and “great men” – may not be a coincidence. 
Western capitalist societies, especially the United Kingdom and the United States, are currently in the process of spooling time backward to the pre-Victorian era, for the benefit of a small group of elites that excludes the working and middle classes who benefited most from the Victorians’ social, economic, and political reforms – let alone the poor. 
As a result, it has become urgent to remember that it was the later Victorians who recognized modernity’s moral dimension, originating almost every kind of public reform that we now take for granted as the mark of a civilized society. 
Early Victorian reality – destitute street children, raging cholera epidemics, and mounds of uncollected “night soil” in the streets – was a highly “privatized” reality. 
In the 1830’s, as Douglas-Fairhust movingly demonstrates, boys and girls who came from economically vulnerable families could find themselves unschooled and working 18 hours a day in blacking factories, like the 12-year-old Dickens. 
People who did not pay their creditors were sent – with their families – to debtors’ prisons, as John Dickens, Charles’ father, was for owing 40 pounds. 
Elderly people with no means of support died in rags in alleyways, while lower-middle-class families, with no unemployment insurance or welfare benefits, were perpetually in terror of illness or layoff, which would mean "ruin" and, possibly, being turned out into the street. 
London in the 1830’s was a city in which a third of women were servants and another third were prostitutes. 
A massive gap between the elites and everyone else ensured that the top echelons of literature, business, and politics were managed by the wealthy few, and that the talents that would emerge a generation later, in the wake of wider state-funded education, were suppressed. 
And this is more or less what all of England looked like without a social safety net. 
In contrast, the later Victorians, from the 1850’s-1880’s, created major public works and public-welfare initiatives, including state-funded infirmary networks and compulsory primary education. 
They expanded a system of workhouses and poor relief for the destitute, built up municipal water and sewage systems, municipalized police forces, and oversaw public investment in landmarks that are still with us, such as the Thames Embankment and the Victoria and Albert Museum. 
Likewise, with tens of thousands of street children entirely dependent for food on what they could scavenge or steal, the later Victorians established systems of orphanages. 
They commissioned the first epidemiological surveys to identify the source of cholera outbreaks – which could wipe out half the population of a neighborhood in a matter of weeks – and built new waterworks to stop the spread of the disease from the filthy Thames and tainted local pumps. 
They built the first major public hospitals at a time when home births and other home care spread contagion and death. 
In today’s advanced capitalist democracies, most citizens’ obliviousness to this history serves elite interests; otherwise, many more people, if not most, would be screaming bloody murder at increasingly successful efforts to shrink the public sector. 
As Cameron and other Western conservatives intensify their efforts to clear a path to the past, it is important to bear in mind that there is nothing novel or innovative about the absence of a welfare state and the privatization of basic services. 
We have been there already – indeed, much of what is now being dismantled in Britain was built in the Victorian era because of appalling social conditions for most people. 
If today’s conservative political forces remain in power, the dark, dangerous, and ignorant past is where England – and other Western countries – risks returning. 

The UK’s Immigration Distraction 
LONDON – Do British voters hate foreigners, or merely freeloaders? 
That is essentially the question British Prime Minister David Cameron posed in his long-awaited speech on immigration from other European Union countries, delivered last month at the headquarters of the construction-equipment manufacturer JCB. 
Cameron’s gamble is that voters do not mind Poles or Lithuanians operating JCB’s machines on construction sites all over the United Kingdom. 
What they mind is people immigrating to the UK to take advantage of its welfare benefits. 
The speech was Cameron’s answer to the recent defections of two of his Conservative Party MPs to the anti-EU, anti-immigration UK Independence Party, which he fears could steal Conservative votes in the general election next May. 
But, as clever as the speech was, it is unlikely to succeed in beating back UKIP – and it leaves the British debate about EU membership focused on the wrong issue. 
To be sure, Cameron’s speech was a more statesmanlike gamble than many – even within his own government – had anticipated. 
Some of his remarks in recent weeks had suggested that he might reject outright the free movement of EU citizens – one of the union’s founding principles – and dare other European governments to oppose him. 
Instead, Cameron emphasized the UK’s enduring desire to be open to the world while restricting EU migrants’ welfare rights. 
Specifically, he proposed requiring EU migrants to spend four years working in the UK before becoming eligible for the top-up welfare payments that low-paid British workers receive, and to end benefit payments for migrant workers’ children living in their home country. 
Though such moves could be challenged in the European Court of Justice on grounds of discrimination, any cases are unlikely to arise until well after the upcoming election. 
The political danger for the Conservatives is that they are misjudging public sentiment. 
Perhaps voters have just as much of a problem with foreigners as they do with freeloaders. 
If that is the case, reducing immigrants’ welfare benefits will be inadequate. 
This is not to say that Cameron should target foreigners. 
On the contrary, he must change the conversation to reassure voters that their economic future is bright. 
As it stands, the British, like their counterparts elsewhere in Europe, feel overtaxed for spotty public services that are constantly being cut, and are angry that their incomes have been falling for the last five years. 
As a result, many resent welfare recipients and fear competition for jobs – a sentiment that is fueling the rise of populist, anti-EU, and anti-immigrant parties across Europe. 
The key difference in the UK is that UKIP is gaining ground with voters despite rapid economic growth (more than 3% annually, the highest rate in the EU). 
Between now and May, Cameron must persuade voters that the British economy will continue to perform strongly, fueling an increase in real incomes. 
A change of subject would also be in the national interest. 
By banging on about immigration, Cameron risks making it central to the question of whether Britain should remain in the EU. 
He is, after all, the politician who has promised to hold a referendum in 2017, if he is still Prime Minister, on whether to stay or leave, following a period variously described as a “renegotiation” of the UK’s membership and “reform” of the EU’s structure. 
He is now making it seem as if immigration will be the key test of that effort. 
That is a big problem. 
For starters, there is little or nothing that other EU governments can concede on the free movement of people, which is enshrined in the founding document of European integration, the 1957 Treaty of Rome. 
In any case, Britain receives more migrants from outside the EU than from other EU countries. 
And migrants from Poland, Italy, or France are much more likely than those from Somalia, Syria, or India to return home eventually. 
If the British public truly opposes immigration, they are probably referring to non-EU immigration, not the arrival of, say, Italian university graduates. 
In fact, there is a far more important issue that should serve as the main focus of the British debate on the EU: the UK’s future status inside the EU as a non-member of the eurozone. 
This is what Cameron and Chancellor of the Exchequer George Osborne were focusing on until UKIP surged in the opinion polls. 
It is time to renew that focus. 
Cameron’s government must recognize that there is only one good reason to wonder whether the UK might be better off leaving the EU: the risk that remaining outside of the eurozone would leave Britain at a serious disadvantage in EU decision-making, even about rules affecting the single market. 
It sounds a bit technical, and it is. 
But sorting out the relationship between EU members within and outside the eurozone can be done in a fairly short time without new treaties; indeed, progress has already been made on this front. 
Cameron and Osborne would then be able to boast that they have procured for the British public the best of both worlds: much faster economic growth than the stagnant eurozone members, together with all of the advantages of EU membership, including access to the single market and enhanced global influence. 
That narrative would be far more powerful than a few tweaks to welfare rights for immigrants. 

David Cameron and the EU’s Waterloo 
PRINCETON – Two hundred years ago this month, at the Battle of Waterloo, Napoleon Bonaparte’s defeat at the hands of an allied army, led by the Duke of Wellington, reshaped Europe’s future. 
Britain may now be poised to do so once again. 
The United Kingdom, whose new majority Conservative government has pledged to hold a referendum on European Union membership by the end of 2017, perhaps even next year, is not the outlier that it is often portrayed as being. 
Indeed, it is at the vanguard of the EU’s institutional atrophy. 
Even if it does retain its EU membership, the UK will continue to move steadily away from Europe. 
With more attractive commercial opportunities elsewhere, most European countries will follow suit. 
For the EU, meeting the UK’s demands – to restrict benefits for migrant workers, limit financial regulation that could hurt the City of London, and disavow the goal of “ever closer union” – would require a fundamental transformation, including utterly unfeasible changes to the treaties that underpin European institutions. 
The discussion has thus turned to the possibility of providing the UK with a special status or allowing it to opt out of more EU provisions. 
But, given intensifying doubts about the benefits of integration, even that solution would risk unraveling the EU. 
By emphasizing that Europe no longer offers an economic dividend, the UK’s move away from the EU will spur ever louder calls for change elsewhere. 
Simply put, talk of “Brexit” has exposed Europe’s economic and political fault lines – and there is no going back. 
Robert Peston, in his 2005 biography of then-Chancellor of the Exchequer Gordon Brown, described Brown’s “pragmatic view that the EU was a good thing only insofar as it delivered practical benefits of peace and prosperity to Britain.” 
While the British have been particularly open about the nationalist nature of their support for European integration, other EU members have been no less mindful of their domestic interests. 
In the wake of World War II, European countries’ national interests were aligned. 
Nonetheless, efforts to establish political unity through a common army failed in 1954, highlighting that economic common ground was the key to European integration. 
And, indeed, the 1957 Treaty of Rome, which opened national borders within the new European Economic Community, enabled the rapid proliferation of intra-European trade, thereby contributing to a shared economic recovery. 
The material gains of these commercial relationships fostered empathy among Europeans, fueling increased support for – and trust in – shared institutions. 
This process began later for the UK, which joined the community in 1973; but it followed a similar trajectory, with British citizens responding to economic gains by supporting increased integration. 
Prime Minister Margaret Thatcher, by advocating the 1986 Single European Act, sought to maximize those gains. 
In the spirit of the Treaty of Rome, she ensured that the act focused on developing an open and competitive common market, in which all members participated on equal terms. 
By contrast, her German counterpart, Chancellor Helmut Kohl, often regarded as one of that generation’s preeminent European champions, offered only lukewarm support for the Single European Act. 
He preferred to help steer Europe toward monetary and political union, just when its economy had begun to fall behind the rest of the world. 
The result was the 1991 Maastricht Treaty – the point when European integration went into overdrive. 
But the Treaty’s architects were so busy playing internal power games that they failed to recognize that monetary union could not stem Europe’s decline, especially as the United States was experiencing rapid productivity growth and Asia’s economic rise had begun. 
With Europe’s post-war recovery long complete, the logic of integration had to be rethought. Unfortunately, that did not happen. 
As a result, intra-European trade and support for European institutions, having soared in the previous two decades, began to decline practically before the ink on the Maastricht Treaty was dry. 
The eurozone’s protracted crisis, which began in 2008, has exacerbated this trend, with member countries still struggling to restore economic and financial stability – and likely to continue to lag behind the rest of the world in terms of GDP growth. 
No institutional framework can survive unless it serves the material interests of its constituency. 
In the nineteenth century, when the Tunisian craft guilds failed to adapt to industrialization, they became irrelevant, and the amins, or guild masters, were left as figureheads in shell institutions. 
Today, European institutions could face the same fate. 
Unencumbered by the euro, and benefiting from long-standing commercial relationships beyond Europe, Britain is in a particularly strong position to push back against EU institutions. 
This may be self-serving, but it should not be a surprise; in fact, with businesses throughout Europe seeking markets elsewhere, Britain’s approach may well herald similar developments elsewhere. 
European integration in the shadow of WWII was a wise and magnificent achievement. 
But, with that historic task now complete, European institutions need a new rationale. 
And with the EU, unlike other federations, lacking a common political destiny, that rationale must center on material benefits. 
The EU must return to the fundamental driver of its success, pursuing a renewed single-market agenda that reflects the rationale of the Treaty of Rome. 
Unfortunately, Europe is so divided nowadays that the ability to achieve such an outcome is not promising, with new initiatives along these lines facing “increasing political resistance.” 
If Europeans merely invoke the lofty mantra of “an ever closer union,” their institutions will atrophy. 
Without a new unifying objective – one based on shared material gains, not on fear of Vladimir Putin’s resurgent Russia – the European amins will soon be out of business. 

Beyond Inflation Targets 
EDINBURGH – Over the last three decades or so, central bankers and academics have become increasingly confident that inflation targeting is the key to preserving macroeconomic stability. 
But this is virtually impossible to prove, and the 2008 financial crisis suggested to many that monetary policy should focus on more than the prices of goods and services. 
So how should a revised mandate for central banks be structured to maintain their focus on low inflation while allowing monetary policy to address other issues when appropriate? 
The contribution that inflation targeting makes to macroeconomic stability is difficult to discern for a simple reason: it is impossible to know what would happen if a country’s central bank pursued the opposite course. 
Unable to compare outcomes directly, researchers have employed a variety of strategies to identify the impact of inflation targeting, and have typically found it to be substantial (though the effect becomes small or even zero when countries’ starting points are taken into account). 
For example, a case study of the United Kingdom for 1997-2007 – a period of full inflation targets and policy independence for the Bank of England (BoE) – indicates considerable improvement from a poor starting point. 
The focus on price stability was accompanied by relatively low inflation (compared to the past, as well as to other major economies), strong growth, and little output volatility. 
However, over this period the UK also experienced sustained exchange-rate misalignment, which the BoE’s Monetary Policy Committee was unwilling or unable to address within its existing mandate. 
The MPC also failed to respond to any of the three bouts of rapid growth in house prices that preceded the financial crisis, arguing that they were structural in nature –caused by the decline in inflation and interest rates since the 1980’s – so a monetary response was not appropriate. 
In the run-up to the crisis, the US Federal Reserve Board (an informal inflation targeter) was even more committed than the MPC to this orthodox view – so committed, in fact, that it barely allocated any time or resources to analyzing house-price fluctuations. 
So, while inflation-targeting central banks worked hard to nail down inflation expectations in goods and services, they made no effort to influence asset-price expectations. 
Indeed, the “Greenspan put” (former Fed Chairman Alan Greenspan’s monetary-policy approach) eliminated the downside risk by setting a floor under asset prices; but it set no ceiling on the upside. 
If major banks had had a “lean against the wind” strategy in reserve, that would have influenced expectations and at least partly stabilized asset prices, possibly mitigating – or even averting – the most damaging effects of the financial crisis. 
The notion of integrating asset-price concerns into inflation targeting remains a source of significant controversy, with opponents citing the Tinbergen Principle: if policymakers have one instrument, the interest rate, they can pursue only one objective, price stability. 
Attempts to pursue multiple objectives, the logic goes, would confuse financial markets and private-sector agents. 
But central banks have pursued multiple objectives simultaneously, without bringing about bad outcomes or destroying their own credibility. 
Likewise, since 2008, many central banks – under pressure from governments – have been reacting specifically to other developments in the real economy (particularly unemployment), rather than maintaining their single-minded focus on long-term price stability. 
This is particularly obvious in the UK, where the government, desperate to see an economic recovery before the 2015 elections, has been pushing the BoE to introduce credit subsidies and, more recently, forward guidance. 
As a result, the BoE’s decisions have been attuned to the short-run trade-off between growth and inflation – meaning that it has been making decisions about goals, not just instruments. 
What central banks need now is a revised mandate that upholds price stability as the primary, long-term objective, while allowing policymakers to pursue other objectives when appropriate. 
Specifically, the central bank should be able to move slowly on price stability if it regards the real economy as unacceptably weak, or if an asset-price misalignment threatens financial stability and cannot be defused quickly by the new macro-prudential instruments. 
Under the current arrangements for the BoE, if inflation moves more than one percentage point away from its target (in either direction), the bank’s governor is obliged to write an open letter to the Chancellor of the Exchequer explaining the deviation and providing a plan to eliminate it, including a projected timeline. 
A revised remit for the BoE – or, in some form, for other inflation-targeting central banks – could take this requirement further, specifying a primary and long-term target for inflation from which policymakers can deviate if doing so is deemed necessary. 
In such cases, the central bank’s governor should be required to write an open letter explaining the bank’s decision, including how long it expects to give priority to the non-inflation objective and how it foresees returning to normal operations. 
Such an arrangement would allow the central bank to take a wider view of its responsibilities in a context of transparency and accountability, but in a way that both preserves its anti-inflationary credibility and prevents politically motivated or otherwise inappropriate policy decisions. 

Rethinking Emissions Reduction 
THE HAGUE – Whether at United Nations climate-change summits or one of the many “green growth” forums, renewables and energy efficiency are consistently regarded as the solution to global warming. 
Even the coal industry adopted the efficiency line in its Warsaw Communiqué, released ahead of the UN’s COP19 summit last November. 
But a closer look at the global energy system, together with a more refined understanding of the emissions challenge, reveals that fossil fuels will likely remain dominant throughout this century – meaning that carbon capture and storage (CCS) may well be the critical technology for mitigating climate change. 
The widespread focus on efficiency and renewable energy stems from the dissemination of the Kaya Identity, which the Japanese economist Yoichi Kaya developed in 1993. 
Kaya calculated CO2 emissions by multiplying total population by per capita GDP, energy efficiency (energy use per unit of GDP), and carbon intensity (CO2 per unit of energy). 
Given the impracticality of winning support for proposals based on population management or limits on individual wealth, analyses using the Kaya Identity tend to bypass the first two terms, leaving energy efficiency and carbon intensity as the most important determinants of total emissions. 
But this convenient interpretation does not correspond to reality. 
The fact is that the rate at which CO2 is being released into the ocean-atmosphere system is several orders of magnitude greater than the rate at which it is returning to geological storage through processes like weathering and ocean sedimentation. 
In this context, what really matters is the cumulative amount of CO2 being released over time – a fact that the Intergovernmental Panel on Climate Change recognized in its recently released Fifth Assessment Report. 
Since the industrial age began some 250 years ago, roughly 575 billion tons of fossil-fuel and land-fixed carbon – more than two trillion tons of CO2 – have been released into the atmosphere, leading to a shift in the global heat balance and a likely 1°C increase in surface temperature (the median of a distribution of outcomes). 
At the current rate, a trillion tons of carbon, or some 2°C of warming, could be reached as early as 2040. 
This view does not align with the prevailing mechanisms for measuring progress on emissions reduction, which target specific annual outcomes. 
While reducing the annual flow of emissions by, say, 2050 would be a positive step, it does not necessarily guarantee success in terms of limiting the eventual rise in global temperature. 
From a climate perspective, the temperature rise over time is arguably more a function of the size of the fossil-fuel resource base and the efficiency of extraction at a given energy price. 
As supply-chain efficiency increases, so does the eventual extraction and use of resources and, ultimately, the accumulation of CO2 in the atmosphere. 
This means that efficiency may drive, not limit, the increase in emissions. 
In fact, since the Industrial Revolution, efficiency through innovation has revolutionized just a handful of core energy-conversion inventions: the internal combustion engine, the electric motor, the light bulb, the gas turbine, the steam engine, and, more recently, the electronic circuit. 
In all of these cases, the result of greater efficiency has been an increase in energy use and emissions – not least because it improved access to the fossil-resource base. 
Countries’ efforts to rely on renewable energy supplies are similarly ineffective, given that the displaced fossil-fuel-based energy remains economically attractive, which means that it is used elsewhere or later. 
And, in the case of rapidly developing economies like China, renewable-energy deployment is not replacing fossil fuels at all; instead, renewables are supplementing a constrained fuel supply to facilitate faster economic growth. 
In short, placing all bets on renewable-energy uptake outpacing efficiency-driven growth, and assuming that enhanced efficiency will drive down demand, may be a foolish gamble. 
Instead, policymakers should adopt a new climate paradigm that focuses on limiting cumulative emissions. 
This requires, first and foremost, recognizing that, while new energy technologies will eventually outperform fossil fuels both practically and economically, demand for fossil fuels to meet growing energy needs will underpin their extraction and use for decades to come. 
Most important, it highlights the need for climate policy that focuses on the deployment of CCS systems, which use various industrial processes to capture CO2 from fossil-fuel use and then store it in underground geological formations, where it cannot accumulate in the biosphere. 
After all, consuming a ton of fossil fuel, but capturing and storing the emissions, is very different from shifting or delaying its consumption. 
Unfortunately, a policy framework built on this thinking remains elusive. 
The European Union’s recently released 2030 framework for climate and energy policies maintains the focus on domestic policies aimed at boosting efficiency and deployment of renewable energy. 
While the framework mentions CCS, whether the EU commits to its deployment remains to be seen. 
Rallying support and political will for CCS – rather than for derivative approaches that misconstrue the nature of the problem – will be the real challenge for 2030 and beyond. 

A Long-Term Plan for Syria’s Refugees 
BEIRUT – After spending just three days with refugees and aid workers in Lebanon and Turkey, the apocalyptic nature of the Syria crisis is all too apparent: more than 100,000 deaths, nine million people displaced, two million children out of school, diseases like polio resurfacing, and neighboring countries struggling to cope with waves of refugees. 
Countless heartrending stories of lost husbands, wives, siblings, and children, to say nothing of homes and livelihoods destroyed, provide yet more troubling evidence of how Syria’s civil war has become a regional conflict (as the bombing of Iran’s Beirut embassy suggests). 
Anti-Assad rebels are now fighting each other, as jihadists make gains. 
Experts no longer talk of the conflict lasting months; they speak in terms of years, or even decades. 
Despite heroic efforts by aid agencies like the International Rescue Committee (IRC) to save lives and bring hope to the region, the terrible truth is that it is not possible to protect civilians, especially from snipers and stray missiles, never mind hunger and homelessness. 
Warring factions do not even recognize the notion of unaffiliated noncombatants, and flout international norms of war. 
In addition to the use of chemical weapons, the United Nations estimates that 2.5 million civilians lack food, water, and medicines, because some towns and villages are too hard to reach, with an estimated 250,000 people completely cut off from outside help. 
Syria’s neighbors have been overwhelmed by calls for help. 
Lebanon is trying to accommodate nearly one million refugees. 
In Turkey, an estimated 200,000 refugees are in official camps, but at least twice that number are struggling alone in towns and cities. 
Support from around the world is fitful: only 60% of aid pledges have come in, with only a fraction actually reaching the intended beneficiaries. 
Although some agencies have been able to get aid supplies across national borders, they cannot get through the frontlines of the fighting to reach those caught in the crossfire. 
International diplomatic efforts must therefore focus on achieving temporary ceasefires to bring in the most urgently needed help, such as polio vaccines for children. 
Aid should not be a mere side show to the seemingly endless peace talks taking place in Geneva; as United Nations emergency relief coordinator Valerie Amos insisted, it must be central to those negotiations. 
But, with the conflict and its impact expected to drag on for years, agencies must also plan for the longer term. 
This includes building capacity in neighboring states, as the World Bank is doing in Jordan and Lebanon, to provide services for refugees. 
This can be done in creative ways. 
The IRC, for example, is involved in three areas: 
· Innovative education: Mainstream school systems in neighboring countries cannot cope with the refugee influx; and, with more than 80% of refugees living in urban areas rather than in camps, there is little point to focusing on camp-based models of teaching. 
Instead, a more informal system, supported by networks of local and refugee teachers – a model that was successfully pioneered in Congo and Afghanistan – can provide accredited learning. 
· Exploiting technology: Syrians are generally literate, numerate, and technologically sophisticated. 
A pioneering social-networking platform called Tawasul (“Connection”), established by the IRC and the non-profit news organization Internews, has been set up to help refugees help one another through the exchange of information and advice. 
· Doing business: Syrian refugees are accustomed to working in a market economy, so programs that allow them to trade, and therefore support themselves, should be encouraged. 
The IRC is investing in “cash for work” programs that will help refugees (and their hosts) build businesses. 
If we are to lessen the horrors of the Syrian conflict and its consequences, we must think not only about emergency action to save lives, but also about meeting longer-term needs that make those lives worth living. 
Bringing medical aid into conflict zones, setting up water and sanitation facilities, and protecting victims during harsh winters are crucial to saving lives; but we must also think about how to safeguard the education and livelihoods of those who survive. 

Trouble Amid Plenty in Emerging Africa 
NEW YORK – Africa is changing dramatically – and so are outsiders’ attitudes toward it, with the US finally seeming determined to catch up with China, Europe, and India in their interest in the continent. 
US President Barack Obama’s recent summit with 40 African heads of state and more than 200 US and African business leaders suggests a new, more confident mood. 
That is encouraging; but as long as parts of Sub-Saharan Africa continue to struggle with violent conflict, poverty, and corruption, the continent’s economic potential will not be fully realized. 
Africa’s economic growth and commercial opportunities are exciting and enticing. 
The region’s 300 million-strong middle class is growing by more than 5% annually. 
The continent leads in mobile banking. 
Consumer spending per capita is close to Indian and Chinese levels. 
If foreign investment, in partnership with the continent’s vibrant private sector, can benefit key sectors – particularly education, health care, and infrastructure – Africa may gain the broad-based development boost that its people need. 
But investment and growth – “Africa rising” – are only part of the story. 
There is also the Africa that is struggling, with conflict and crisis afflicting much of the continent, especially the tens of millions of people living in a belt of countries running from Mali to Somalia. 
Even before the recent Ebola outbreak in Liberia and Sierra Leone, South Sudan, the Central African Republic (CAR), and Mali were at risk of joining a long list of fragile or failing states that already includes Somalia and the Democratic Republic of Congo. 
Ethnic, religious, economic, and other forms of strife in these countries too often overshadow the objectives of effective governance and the delivery of the most basic services. 
These countries come to the wider world’s attention – and then only briefly – following a mass killing or a refugee crisis. 
Then attention shifts, leaving problems to grow and living conditions to worsen. 
In South Sudan, the world’s newest country, political unity across ethnic lines was maintained during the fight for independence, but collapsed this year into violent conflict. 
Roughly 1.5 million people have now lost their homes, and 400,000 have fled to neighboring states. 
Amid the widespread terror, no one is safe. 
In April, my own organization lost two staff members working inside a United Nations compound with displaced people. 
And, in early August, seven locally hired aid workers were targeted and executed. 
In the CAR, attacks on Christians by Muslim ex-Séléka fighters have been superseded by Christian and animist Anti-balaka militias’ violence against fleeing Muslims. 
CAR’s Muslim population has dropped from an estimated 15% to less than 5%. 
As always, women and children suffer the most. 
In the past three months alone, International Rescue Committee centers in the CAR’s capital, Bangui, have witnessed a surge of women escaping violence and abuse. 
Help is urgently needed but slow to come. 
The UN appeal to raise $565 million for the CAR is still only 39% funded. 
The UN appeal for South Sudan, which faces famine after fighting prevented farmers from planting crops, has reached only half of its funding target. 
Donor fatigue – and the multitude of global crises now confronting policymakers – is taking its toll. 
Humanitarian action is undoubtedly essential to address immediate crises. 
But it is important to recognize that, just as political crises often lead to humanitarian crises, humanitarian need can cause political instability, with mass exodus from crisis-ridden neighboring countries destabilizing entire regions. 
Indeed, civil wars are rarely contained within the countries where they begin. 
Refugee problems are deeply rooted. 
Half of the world’s poor, for example, live in fragile and conflict-ridden states – 20% more than ten years ago – and 75% of refugees live among locals in urban areas. 
Crisis and under-development are closely interlinked. 
We increasingly know what kind of humanitarian action works. 
Community-based initiatives that build trust are better than centrally or externally administered projects. 
Empowering women to protect themselves from violence, or teaching displaced children how to cope with their trauma, are among the most effective paths to recovery. 
We also know that without security, there can be no development. 
Today, more than 100,000 UN and African Union peacekeepers are stretched across struggling African states. 
More are needed, especially in the CAR and South Sudan. 
Economic investment in Africa is important and deserves serious thought and long-term planning. 
The Obama administration is right to promote commercial opportunities on the continent. 
But that alone will not address the sources of violent conflict that still blight millions of lives. 
Humanitarian relief must stand alongside economic development and good governance as the pillars of Africa’s drive to achieve its true potential. 

Saving General Petraeus 
PRINCETON – The United States has moved from the high of a presidential election to the low of a political sex scandal in one short week. 
For many Americans, the election demonstrated what is best about the country, only to be followed by the sadly familiar process of knocking heroes off their pedestals. 
For many non-Americans, the election brought the welcome and reassuring victory of Barack Obama, whereas the resignation of David Petraeus as Director of the CIA was an unnecessary, self-inflicted wound. 
In fact, both the election and Petraeus’s resignation are pieces of a larger whole: an America that lives up to its promises. 
The election reminded many Americans that the US is a country committed to and capable of progress – of moving forward toward an ideal vision. 
Obama was supported by a coalition of minorities: African-Americans, Latinos, Asian-Americans, Muslim-Americans, gay and lesbian Americans, and an under-represented majority – women – all of whom perceive continuing inequalities and injustices that need to be remedied. 
But the winners were all who believe that America is, in fact, dedicated to “equal justice under law,” the words emblazoned on the pediment of the Supreme Court. 
In the election of an African-American president less than a half-century after the end of official racial segregation in much of the country, these Americans see the triumph of the values enshrined in the US Constitution over America’s legacy of social, political, and economic prejudice. 
They see a president committed to the advancement of all Americans, regardless of race, gender, creed, ethnic origin, sexual orientation, handicap, or economic status. 
They also see a country that truly does reflect the world, attracting immigrants from every nation and giving them an equal chance to succeed as Americans. 
And they see a president with a vision of a country that can rebuild its infrastructure, reform its health care, strengthen its educational system, and boost its economic prosperity in ways that require all citizens to contribute – and that will, in turn, allow all citizens to flourish. 
But how is this vision connected to the resignation of Petraeus, a storied and much-decorated general before he took over the CIA, following the revelation that he had an extra-marital affair? 
Judging by my Twitter feed, most foreign observers simply cannot understand why a man serving his country in one of its highest and most sensitive positions should step down over something that happened in his private life – something that directly affects only those involved and their families. 
American culture, I explained, judges extra-marital affairs very harshly, so a senior official caught in such a position could easily be subject to blackmail – something that a CIA director, of all people, must avoid. 
My foreign interlocutors replied that, with the affair now exposed, the blackmail threat has been removed, so Petraeus should stay in office. 
Many Americans agree. 
Indeed, Obama himself was reportedly reluctant to accept Petraeus’s resignation. 
From my perspective, however, Petraeus did the right thing: resigning was the only course open to him if he is to have any chance of repairing his reputation. 
Petraeus, after all, had been General Petraeus, a four-star general who had spent his life in the military, commanding the US missions in Iraq and Afghanistan. 
He graduated from – and later taught at – the US Military Academy at West Point, an institution guided by the motto “Duty, Honor, Country.” 
In our cynical age, many might scoff at such an old-fashioned motto (or, indeed, at the power of any motto or slogan). 
West Point cadets do not. 
As General Douglas MacArthur told them in 1962, those three words “build your basic character. 
They mold you for your future roles as the custodians of the nation’s defense. 
They make you strong enough to know when you are weak, and brave enough to face yourself when you are afraid.” 
They teach you, he continued, “to master yourself before you seek to master others; to have a heart that is clean, a goal that is high.” 
MacArthur’s rhetoric is stirring; some would say overblown. 
The ideals he expressed are lofty; he himself fell short of them on more than one occasion. 
But, by and large, the men and women of the US military believe in these ideals and do their best to live up to them, just as US citizens generally believe in their Constitution’s lofty words and seek to correct their national shortcomings. 
Petraeus violated his own personal code of honor and duty toward his wife and family – and thus, in his eyes, toward his country, particularly to the men and women whom he was entrusted to lead at the CIA. 
When his affair came to light, he faced up to his failure, took responsibility for the consequences, and did what he believed that duty, honor, and country required. 
The hubbub of tawdry disclosures and investigations addressing every aspect of a widening scandal may well last for weeks. 
In the meantime, Americans can only hope that their national elected representatives show an equal willingness to face up to and take responsibility for their failures, pettiness, and insistence on putting partisanship ahead of the country’s manifest and urgent needs. 
These officials must now carry out their most fundamental duty: to govern. 
They must be willing to negotiate in good faith and compromise in order to enact laws, solve problems, avert crises, and build faith in the future. 
Let us hope that their oaths to defend and uphold the Constitution are more than just words. 

An Advocacy of Dunces 
CONCORD, MASSACHUSETTS – Imagine that a group of advocates tried to alert the public to a danger that they perceived, only the evidence showed that the danger was not real, and that by spreading their fears, this group was causing people to behave in ways that put the wider public – and you – at risk. 
What would you do? 
What should the government do? 
The government of Australia has answered that question in a dramatic way. 
It has revoked the tax-exempt charity status of an anti-vaccination advocacy group, on the grounds that their fear-mongering misinformation about the danger of vaccines threatens public health, especially the health of children. 
The government has also required the group to change its name, from the Australian Vaccination Network to the Australian Vaccination-Skeptics Network, in order to make the advocate’s perspective clear. 
“We will continue to ensure that they present themselves as an anti-vaccination advocacy,” said New South Wales Fair Trading Minister Stuart Ayres. “We want to make sure that they don’t ever promote misleading information.” 
This is, of course, dangerous territory. 
Though the evidence is clear that vaccination does not cause the harms that its opponents stubbornly claim it does, any effort by a government to restrict speech is worrying. 
No free society should permit its government to decide which advocacy groups can say what, based on what those advocates believe. 
But, in this case, the Australian officials’ action was an entirely appropriate, and essential, public service: protecting public health and safety, based on robust and consistent medical evidence. 
That evidence conclusively disproves the claims of anti-vaccination advocates that childhood vaccination causes autism and other long-term neurodevelopmental damage. 
Yet a small but vocal group of alarmists and self-serving profiteers continues to spread fear-mongering distortions and outright lies claiming that vaccines do more harm than good. 
As a result, vaccination rates are declining in some communities, especially those with high concentrations of anti-government libertarians or back-to-nature environmentalists. 
As a result, in some areas, community-wide “herd” immunity levels for diseases like measles and pertussis (whooping cough) have fallen below those necessary to keep them from spreading into the general population. 
Adults in whom the vaccine has worn off or is not 100% effective are increasingly getting sick. 
Infants too young to be vaccinated against pertussis are also falling ill, with some actually coughing and choking themselves to death. 
So the Australian government’s decision is clearly justified. 
Protecting us from threats from which we cannot protect ourselves as individuals is, after all, a central part of what we empower government to do. 
When the evidence is as clear as it is with vaccines (and the consequences as grave), the government has the well-established authority – indeed, obligation – to act in the name of public safety. 
But vaccination is only one example of how advocates sometimes put the public at risk by rejecting scientific evidence. 
The ideology-driven denial of human-induced global warming is impeding efforts to mitigate climate-altering emissions or prepare for the increasingly obvious – and dangerous – consequences of this enormous threat. 
Absolutist opposition to any regulation of gun ownership, particularly in the United States, is making it harder to keep deadly weapons out of the hands of those who pose a threat to society. 
Resistance to biotechnology, especially genetically modified (GM) foods, is another example. 
Some applications could bring enormous net benefits to human health, but society is not enjoying those benefits – and people are suffering and dying as a result – because opponents reject all GM applications, owing to a fundamental dislike of large companies, commercial agriculture, or modern technologies generally. 
Consider “golden rice,” a GM hybrid that carries the gene from carrots that makes vitamin A. A recent study found that, in India alone, had golden rice been approved when it was technically ready in 2002, it could have saved 1.4 million disability-adjusted life years for those who instead suffered blindness or death from vitamin A deficiency. 
It is time to push back against advocates when their values-driven views deny clear scientific evidence and put you and me at risk. 
Scientists must speak out, as they did recently in England, where researchers testing a new strain of wheat challenged anti-GM advocates to a public debate. 
The advocates refused, but went ahead with planned attacks on the field trials, causing public support for those activists to diminish. 
You and I and our fellow citizens must push back, by choosing which groups to join or to support financially. 
We need to push back at public hearings and in testimony about pending legislation, and not let the most passionate voices bully our politicians and policymakers into choices that placate the loudest few, but that deny the greater community the most good. 
And, when the evidence is clear and the risk imminent, governments must push back, as Australia’s has done. 
Feelings and values must always have a voice in any democracy. 
We need the passion of advocates on all sides to move society forward. 
But when those passions fly in the face of the facts and put us at risk, it is entirely fair that in the name of public health and safety, you and I and our governments all say, “Enough is enough.” 

Post-Davos Depression 
DAVOS – I’ve been attending the World Economic Forum’s annual conference in Davos, Switzerland – where the so-called global elite convenes to discuss the world’s problems – since 1995. 
Never have I come away more dispirited than I have this year. 
The world is plagued by almost intractable problems. 
Inequality is surging, especially in the advanced economies. 
The digital revolution, despite its potential, also carries serious risks for privacy, security, jobs, and democracy – challenges that are compounded by the rising monopoly power of a few American and Chinese data giants, including Facebook and Google. 
Climate change amounts to an existential threat to the entire global economy as we know it. 
Perhaps more disheartening than such problems, however, are the responses. 
To be sure, here at Davos, CEOs from around the world begin most of their speeches by affirming the importance of values. 
Their activities, they proclaim, are aimed not just at maximizing profits for shareholders, but also at creating a better future for their workers, the communities in which they work, and the world more generally. 
They may even pay lip service to the risks posed by climate change and inequality. 
But, by the end of their speeches this year, any remaining illusion about the values motivating Davos CEOs was shattered. 
The risk that these CEOs seemed most concerned about is the populist backlash against the kind of globalization that they have shaped – and from which they have benefited immensely. 
Not surprisingly, these economic elites barely grasp the extent to which this system has failed large swaths of the population in Europe and the United States, leaving most households’ real incomes stagnant and causing labor’s share of income to decline substantially. 
In the US, life expectancy has declined for the second year in a row; among those with only a high school education, the decline has been underway for much longer. 
Not one of the US CEOs whose speech I heard (or heard about) mentioned the bigotry, misogyny, or racism of US President Donald Trump, who was present at the event. 
Not one mentioned the relentless stream of ignorant statements, outright lies, and impetuous actions that have eroded the standing of the US president – and thus of the US – in the world. 
None mentioned the abandonment of systems for ascertaining truth, and of truth itself. 
Indeed, none of America’s corporate titans mentioned the administration’s reductions in funding for science, so important for strengthening the US economy’s comparative advantage and supporting gains in Americans’ standard of living. 
None mentioned the Trump administration’s rejection of international institutions, either, or the attacks on the domestic media and judiciary – which amounts to an assault on the system of checks and balances that underpins US democracy. 
No, the CEOs at Davos were licking their lips at the tax legislation that Trump and congressional Republicans recently pushed through, which will deliver hundreds of billions of dollars to large corporations and the wealthy people who own and run them – people like Trump himself. 
They are unperturbed by the fact that the same legislation will, when it is fully implemented, lead to an increase in taxes for the majority of the middle class – a group whose fortunes have been in decline for the last 30 years or so. 
Even in their narrowly materialistic world, where growth matters above all else, the Trump tax legislation should not be celebrated. 
After all, it lowers taxes on real-estate speculation – an activity that has produced sustainable prosperity nowhere, but has contributed to rising inequality everywhere. 
The legislation also imposes a tax on universities like Harvard and Princeton – sources of numerous important ideas and innovations – and will lead to lower local-level public expenditure in parts of the country that have thrived, precisely because they have made public investments in education and infrastructure. 
The Trump administration is clearly willing to ignore the obvious fact that, in the twenty-first century, success actually demands more investment in education. 
For the CEOs of Davos, it seems that tax cuts for the rich and their corporations, along with deregulation, is the answer to every country’s problems. 
Trickle-down economics, they claim, will ensure that, ultimately, the entire population benefits economically. 
And the CEOs’ good hearts are apparently all that is needed to ensure that the environment is protected, even without relevant regulations. 
Yet the lessons of history are clear. 
Trickle-down economics doesn’t work. 
And one of the key reasons why our environment is in such a precarious condition is that corporations have not, on their own, lived up to their social responsibilities. 
Without effective regulations and a real price to pay for polluting, there is no reason whatsoever to believe that they will behave differently than they have. 
The Davos CEOs were euphoric about the return to growth, about their soaring profits and compensation. 
Economists reminded them that this growth is not sustainable, and has never been inclusive. 
But such arguments have little impact in a world where materialism is king. 
So forget the platitudes about values that CEOs recite in the opening paragraphs of their speeches. 
They may lack the candor of Michael Douglas’s character in the 1987 movie Wall Street, but the message hasn’t changed: “Greed is good.” 
What depresses me is that, though the message is obviously false, so many in power believe it to be true. 

Davos Man’s Depression 
NEW YORK – For 15 years, I have attended the World Economic Forum in Davos. 
Typically, the leaders gathered there share their optimism about how globalization, technology, and markets are transforming the world for the better. 
Even during the recession of 2001, those assembled in Davos believed that the downturn would be short-lived. 
But this time, as business leaders shared their experiences, one could almost feel the clouds darkening. 
The spirit was captured by one participant who suggested that we had gone from “boom and bust” to “boom and Armageddon.” 
The emerging consensus was that the IMF forecast for 2009, issued as the meeting convened, of global stagnation – the lowest growth in the post-war period – was optimistic. 
The only upbeat note was struck by someone who remarked that Davos consensus forecasts are almost always wrong, so perhaps this time it would prove excessively pessimistic. 
Equally striking was the loss of faith in markets. 
In a widely attended brainstorming session at which participants were asked what single failure accounted for the crisis, there was a resounding answer: the belief that markets were self-correcting. 
The so-called “efficient markets” model, which holds that prices fully and efficiently reflect all available information, also came in for a trashing. 
So did inflation targeting: the excessive focus on inflation had diverted attention from the more fundamental question of financial stability. 
Central bankers’ belief that controlling inflation was necessary and almost sufficient for growth and prosperity had never been based on sound economic theory; now, the crisis provided further skepticism. 
While no one from either the Bush or Obama administrations attempted to defend American-style free-wheeling capitalism, European leaders argued for their “social market economy,” their gentler form of capitalism with its social protections, as the model for the future. 
And its automatic stabilizers, with spending automatically increasing as economic woes increased, held out the promise of moderating the downturn. 
Most American financial leaders seemed too embarrassed to make an appearance. 
Perhaps their absence made it easier for those who did attend to vent their anger. 
But business leaders from the “real” sector and the few labor leaders who work hard at Davos each year to advance a better understanding of the concerns of working men and women among the business community were particularly angry at the financial community’s lack of remorse. 
A call for the repayment of past bonuses was received with applause. 
Indeed, some American financiers were especially harshly criticized for seeming to take the position that they, too, were victims. 
The reality is that they were the perpetrators, not the victims, and it seemed particularly galling that they were continuing to hold a gun to the heads of governments, demanding massive bailouts and threatening economic collapse otherwise. 
Money was flowing to those who had caused the problem, rather than to the victims. 
Worse still, much of the money flowing into the banks to recapitalize them so that they could resume lending has been flowing out in the form of bonus payments and dividends. 
The fact that businesses around the world were not getting the credit they need compounded the grievances expressed at Davos. 
This crisis raises fundamental questions about globalization, which was supposed to help diffuse risk. 
Instead, it has enabled America’s failures to spread around the world, like a contagious disease. 
Still, the worry at Davos was that there would be a retreat from even our flawed globalization, and that poor countries would suffer the most. 
But the playing field has always been unlevel. 
How could developing countries compete with America’s subsidies and guarantees? 
So how could any developing country defend to its citizens the idea of opening itself even more to America’s highly subsidized banks? 
At least for the moment, financial market liberalization seems to be dead. 
The inequities are obvious. 
Even if poor countries were willing to guarantee their deposits, the guarantee would mean less than that from the United States. 
This partly explains the curious flow of funds from developing countries to the US – from whence the world’s problems originated. 
Moreover, developing countries lack the resources to engage in the massive stimulus policies of the advanced countries. 
Making matters worse, the IMF still forces most countries that turn to it for help to raise interest rates and lower spending, worsening the downturns. 
And, to add insult to injury, banks in advanced countries, especially those receiving aid from their governments, seem to be pulling back from lending in developing countries, including through branches and subsidiaries. 
So the prospects for most developing countries – including those that had done everything “right” – are bleak. 
As if all this were not enough, as the Davos meeting opened, America’s House of Representatives passed a bill requiring American steel to be used in stimulus spending, despite the G-20’s call to avoid protectionism in response to the crisis. 
To this litany of concerns we can add the fear of borrowers that the massive American deficits would drain the supply of global savings, and worries of holders of US dollar reserves, that America may be tempted to inflate away its debt. 
At Davos, those who trusted the US not to inflate away its debt intentionally worried that it might happen unintentionally. 
There was little confidence in the none-too-deft hand of the US Federal Reserve – its reputation marred by massive monetary-policy failures in recent years – to manage the massive buildup of debt and liquidity. 
President Barack Obama seems to be offering a needed boost to American leadership after the dark days of George W. Bush; but the mood in Davos suggests that optimism and confidence may be short-lived. 

De Gaulle at the Barricades 
LONDON – By coincidence, this is a busy year for round-number anniversaries for France’s greatest leader since Napoleon. 
Charles de Gaulle was born 120 years ago in Lille. 
He died 40 years ago at his home in Colombey-les-deux-Églises, expiring of a heart attack as he played solitaire one evening. 
Seventy years ago, he delivered his celebrated call to resistance over the BBC after flying to London from France as it collapsed in June 1940. 
This year also marks a much less noted anniversary, an occasion on which de Gaulle showed how his rare combination of determination, political skill, and rhetorical ability could be brought to bear to face down determined opposition. 
It was a central moment in the establishment of the Fifth Republic, which continues to this day. 
The war in Algeria played the key role in enabling de Gaulle to return to power in May 1958, at the age of 67. 
Though his memoirs paint a characteristic portrait of a leader who knew what he was doing, research for my new biography shows that his policy towards the crisis across the Mediterranean combined hope and frustration. 
He hoped that France could dominate the National Liberation Front (FLN) militarily, and was frustrated at the extremely messy political situation on the ground and the difficulty of persuading the settlers that maintaining the status quo was untenable. 
In 1958, he told a crowd in Algiers made up mainly of pieds noirs Europeans “Je vous ai compris” (“I have understood you”). 
But, by 1960, euphoria had given way to rancor among those whom he had used to regain office but who now saw him as a traitor to be neutralized along with the regime he had brought into being. 
The catalyst for what came to be known as “Barricades Week” was an interview published in the German newspaper Sueddeutsche Zeitung with the parachute general Jacques Massu, in which he said that part of the army regretted having called de Gaulle back to power, did not understand his policy, and was disappointed that he had become “a man of the left.” 
Massu, a convinced Gaullist, should have known better than to say such home truths publicly, whatever his own frustrations. 
He was promptly sidelined to a command in provincial France. 
After a stormy meeting with de Gaulle at the Élysée Palace, Massu telephoned his chief of staff, Colonel Antoine Argoud, who had been pressing for a coup. 
A general strike was called, and militant students threw up barricades in the center of Algiers. 
When police attacked with tear gas, pieds noirs opened fire. 
In the ensuing gun battle, 14 members of the security forces and eight demonstrators were killed, and 200 people were wounded. 
“The hour has come to bring down the regime,” the extremist ideologue, Jean-Jacques Susini declared. “The revolution will start from Algiers and reach Paris.” 
De Gaulle was at Colombey, but returned immediately to Paris. 
An official who saw him in the corridor of the palace recalled him muttering: “What a business! 
What a business!” 
At a cabinet meeting, he insisted that the challenge to the new republic had to be put down. 
The prime minister, Michel Debré, was sent to Algiers, but the rebels treated him contemptuously, and he flew back empty handed. 
Rumors flew of the creation of a shadow government by extremists in Paris. 
Members of the presidential military staff were told to carry handguns. 
Summoning Massu’s successor, General Jean Crépin, de Gaulle told him, “The Europeans do not want the Arabs to make a choice, [but] the Muslims do not want to be Bretons. 
If the army collapses, it is Algeria [and] France which collapses.” 
The decisive moment came when de Gaulle, in military uniform, went on television to demonstrate his mastery of the new medium. 
“Well, my dear and old country, here we are again facing a heavy test,” he said. 
Insisting that self-determination was the only way ahead, he called on the army to reject even passive association with the insurrection and instructed it to re-establish public order. 
If the state bowed before the challenge it faced, “France would be no more than a poor, broken toy floating on an ocean of uncertainty,” he warned. 
Within 15 minutes of the General’s face fading from the screen, 40 army units in Algeria declared their loyalty. 
The men at the barricades were persuaded to leave their stronghold; the insurrectionary leaders were either detained or escaped to Spain. 
The defeat of the military revolt was the first time that the republican authority of Paris had been asserted over the pieds noirs who had helped to bring down the Fourth Republic. 
De Gaulle’s firmness and rhetoric – aided, it must be said, by the fumbling of the rebels – established the primacy of the state. 
The next day, de Gaulle’s face was drawn, but he was resolute and full of energy. 
Ministers who sympathized with the settlers, notably the long-time Gaullist Jacques Soustelle, were sacked. 
The National Assembly granted de Gaulle the power to rule by decree for a year. 
Trade unions held a symbolic one-hour strike to back the government. 
An opinion poll gave the General 75% backing. 
The Fifth Republic was safe, and a historic page had been turned. 
The disdain felt by de Gaulle, a man of the north, for the emotional settlers across the sea had deepened. 
Two years later, after de Gaulle’s steeliness repulsed a second uprising, the Evian peace agreements between France and the FLN brought Algeria’s independence. 

De-Nationalizing the ECB’s Executive Board 
The European Central Bank’s chief economist, Otmar Issing, may not be scheduled to retire until May 2006. 
But behind the scenes, maneuvering and politicking over his replacement are already in full swing. 
If current practices are maintained, the choice for this key post will be made on the basis of nationality, not merit. 
The only certainty about Mr. Issing’s successor at the present moment is that he or she will be a German. 
This is because the big countries are acting as if they “own” seats on the Executive Board – that there is a “German chair”, a “Spanish chair”, an “Italian chair”, and so on. 
They are getting away with their power grab even though it goes against the Maastricht Treaty, which excludes nationality as a criterion for membership on the Executive Board. 
The pattern has been all too obvious. 
First, there was the controversial appointment of the Spaniard Jose Manuel Gonzales-Paramo to replace his countryman Domingo Solans on the Executive Board in May 2004. 
In May of this year, Lorenzo Bini-Smaghi will replace another Italian, the retiring Tommaso Padoa-Schioppa. 
These appointments set a bad precedent, regardless of the merits of the individual members in question. 
Current practice is blatantly unfair, because it excludes candidates from small countries from competing for the vacated seats. 
This practice is also unwise. 
Some of the best people serving the ECB – or who have served in the past – are from small countries. 
Preventing small countries – as well as other big ones – from competing for specific vacant seats reduces the Executive Board’s potential competency. 
Giving big countries permanent seats on the Executive Board also makes it easier for their politicians to control the ECB through the appointments process. 
It is much more difficult to appoint a political puppet to the Board in a system of open competition than under the current scheme. 
The last thing the ECB needs is a political crony of German Chancellor Gerhard Schroeder assuming Mr. Issing’s key post. 
Of course, opening up the competition for Executive Board portfolios to all member countries does not guarantee the most qualified and politically independent person gets the job; it only increases the probability of such an outcome. 
After all, member governments would still pick the candidates, and there can be no escaping politics in what is essentially a political process. 
If member governments are intent on bad candidates, it will be impossible to avoid them. 
Still, an open competitive process, even with all the inevitable political horse-trading and compromise that this entails, will most likely result in better Executive Board members than under the current system. 
Aware of the danger that Schroeder may pick a dubious candidate for Issing’s post, senior ECB officials are already quietly discussing ways to outmaneuver him. 
One proposal currently making the rounds in Frankfurt is to split Issing’s current portfolio in two, transferring part of the chief economist’s responsibilities to another Board member. 
Another is to decouple the economics portfolio from the “German chair” altogether. 
The question is whether Germany will respond by claiming that it “owns” Issing’s portfolio as well as his chair. 
So far, the big countries have been able to get away with their power grab because the small ones have been too disunited to launch an effective counterattack. 
Belgium, for example, complains constantly about its lack of representation on the Executive Board, but it has been more interested in demanding equal treatment with the Netherlands in the ECB than pursuing a common strategy with its neighbor to counter the big countries’ unwarranted assumption of permanent seats. 
The new EU members from Central and Eastern Europe, in particular, have a big stake in how the issue plays out. 
Many of the new members will be small countries who will introduce the euro someday and will want to have a seat on the Executive Board. 
If that is not possible because the original big countries have locked up most of the six seats on the Board for themselves, public opinion in Europe – which is broader than German, French, Spanish, and Italian opinion – could turn against the ECB. 
For this reason alone, the competition for the limited seats on the Executive Board must be an open one. 

Dear World, Please Confront America 
Is it possible to fall out of love with your own country? 
For two years, I, like many Americans, have been focused intently on documenting, exposing, and alerting the nation to the Bush administration’s criminality and its assault on the Constitution and the rule of law – a story often marginalized at home. 
I was certain that when Americans knew what was being done in their name, they would react with horror and outrage. 
Three months ago, the Bush administration still clung to its devil’s sound bite, “We don’t torture.” 
Now, Physicians for Human Rights has issued its report documenting American-held detainees’ traumas, and even lie detector tests confirm they have been tortured. 
The Red Cross report has leaked: torture and war crimes. 
Jane Mayer’s impeccably researched exposé The Dark Side just hit the stores: torture, crafted and directed from the top. 
The Washington Post gave readers actual video footage of the abusive interrogation of a Canadian minor, Omar Khadr, who was seen showing his still-bleeding abdominal wounds, weeping and pleading with his captors. 
So the truth is out and freely available. 
And America is still napping, worrying about its weight, and hanging out at the mall. 
I had thought that after so much exposure, thousands of Americans would be holding vigils on Capitol Hill, that religious leaders would be asking God’s forgiveness, and that a popular groundswell of revulsion, similar to the nineteenth-century anti-slavery movement, would emerge. 
To paraphrase Abraham Lincoln, if torture is not wrong, nothing is wrong. 
And yet no such thing has occurred. 
There is no crisis in America’s churches and synagogues, no Christian and Jewish leaders crying out for justice in the name of Jesus, a tortured political prisoner, or of Yahweh, who demands righteousness. 
I asked a contact in the interfaith world why. 
He replied, “The mainstream churches don’t care, because they are Republican. 
And the synagogues don’t care, because the prisoners are Arabs.” 
It was then that I realized that I could not be in love with my country right now. 
How can I care about the fate of people like that? 
If this is what Americans are feeling, if that is who we are, we don’t deserve our Constitution and Bill of Rights. 
Even America’s vaunted judicial system has failed to constrain obvious abuses. 
A Federal court has ruled that the military tribunals system – Star Chambers where evidence derived from torture is used against the accused – can proceed. 
Another recently ruled that the president may call anyone anywhere an “enemy combatant” and detain him or her indefinitely. 
So Americans are colluding with a criminal regime. 
We have become an outlaw nation – a clear and present danger to international law and global stability – among civilized countries that have been our allies. 
We are – rightly – on Canada’s list of rogue nations that torture. 
Europe is still high from Barack Obama’s recent visit. 
Many Americans, too, hope that an Obama victory in November will roll back this nightmare. 
But this is no time to yield to delusions. 
Even if Obama wins, he may well be a radically weakened president. 
The Bush administration has created a transnational apparatus of lawlessness that he alone, without global intervention, can neither roll back nor control. 
Private security firms – for example, Blackwater – will still be operating, accountable neither to him nor to Congress, and not bound, they have argued, by international treaties. 
Weapons manufacturers and the telecommunications industry, with billions at stake in maintaining a hyped “war on terror” and their new global surveillance market, will deploy a lavishly financed army of lobbyists to defend their interests. 
Moreover, if elected, Obama will be constrained by his own Democratic Party. 
America’s political parties bear little resemblance to the disciplined organizations familiar in parliamentary democracies in Europe and elsewhere. 
And Democrats in Congress will be even more divided after November if, as many expect, conservative members defeat Republican incumbents damaged by their association with Bush. 
To be sure, some Democrats have recently launched Congressional hearings into the Bush administration’s abuses of power. 
Unfortunately, with virtually no media coverage, there is little pressure to broaden official investigations and ensure genuine accountability. 
But, while grassroots pressure has not worked, money still talks. 
We need targeted government-led sanctions against the US by civilized countries, including international divestment of capital. 
Many studies have shown that tying investment to democracy and human rights reform is effective in the developing world. 
There is no reason why it can’t be effective against the world’s superpower. 
We also need an internationally coordinated strategy for prosecuting war criminals at the top and further down the chain of command – individual countries pressing charges, as Italy and France have done. 
Although the United States is not a signatory to the statute that established the International Criminal Court, violations of Common Article 3 of the Geneva Conventions are war crimes for which anyone – potentially even the US president – may be tried in any of the other 193 countries that are parties to the conventions. 
The whole world can hunt these criminals down. 
An outlaw America is a global problem that threatens the rest of the international community. 
If this regime gets away with flouting international law, what is to prevent the next administration – or this administration, continuing under its secret succession plan in the event of an emergency – from going further and targeting its political opponents at home and abroad? 
We Americans are either too incapable, or too dysfunctional, to help ourselves right now. 
Like drug addicts or the mentally ill who refuse treatment, we need our friends to intervene. 
So remember us as we were in our better moments, and take action to save us – and the world – from ourselves. 
Maybe then I can fall in love with my country again. 

Death and Tobacco Taxes 
A global killer is ripping through the world’s poorer countries largely unchecked. 
Within 25 years, it will cause 10 million deaths a year worldwide –more than malaria, maternal deaths, childhood infections, and diarrhea combined . 
Over half of the dead will be aged 30 to 69, losing about 25 years of life expectancy. 
The culprit? 
Tobacco. 
The same addiction that became the top preventable cause of death in Western countries has made big inroads in developing countries. 
Smoking killed 100 million people in the twentieth century, mostly in developed countries. 
On current trends smoking will kill about one billion people in the twenty-first century, mostly in developing countries. 
In India, smoking triples the risk of death from tuberculosis in men and women and may even contribute to the spread of tuberculosis to others. 
About 1 million people per year will soon die from smoking in China and India. 
Perhaps 150 million young adults will be killed by tobacco in these two countries alone, unless there is widespread cessation. 
But the death tolls of the past need not become the world’s future. 
We know how to control tobacco use. 
Cessation by the 1.1 billion current smokers is needed to lower tobacco deaths over the next few decades. 
Reduced uptake of smoking by children would save lives chiefly after 2050. 
Quitting works: even those who stop smoking in their 40’s lower their risk of death remarkably, and those who quit in their 30’s have death risks close to lifelong non-smokers. 
Tobacco tax increases, dissemination of information about the health risks of smoking, smoking bans in public, complete bans on advertising and promotion, and cessation therapies are effective in helping smokers to quit. 
Tobacco taxes are probably the single most cost-effective intervention for adult health in the world. 
A tripling of the excise tax would roughly double the price of cigarettes (as has happened in New York City), preventing about three million deaths per year by 2030. 
Most OECD countries began to take tobacco control seriously in the last two decades, and have decreased male tobacco deaths since. 
But effective tobacco control measures are not underway in developing countries. 
Taxes are about 80% of the street price of cigarettes in Toronto, but less than 30% in Beijing or Delhi. 
In many countries, tobacco taxes have fallen in real terms. 
Knowledge of the health risks from smoking is low: 61% of Chinese smokers in 1996 thought tobacco did them “little or no harm.” 
Opposition from the tobacco industry is an obvious obstacle to tobacco control. 
Spurious economic arguments against higher taxes have been debunked in the West, but are still commonly repeated in the finance ministries of developing countries. 
Money not spent on tobacco would be spent on other goods and services. 
Indeed, even sharply reduced demand for tobacco would not mean unemployment in most countries. 
Tax hikes lower consumption and raise revenue in the medium-term: a 10% higher tax means about 7% higher revenue over the medium term. 
These funds are a precious resource in fighting poverty. 
In China, a 10% higher price would reduce consumption by 5% and raise enough excise revenue to pay for a basic health package for 33 million poor rural Chinese. 
Even in the face of smuggling, higher taxes reduce consumption and raise revenue. 
Smuggling is abetted by the tobacco industry in order to gain market share and scare finance ministers into lowering taxes. 
But governments can counter it in several ways: local language warnings with a prominent tax stamp on cigarette packs are one example. 
Another common argument against tobacco control – that if people are not harming others, governments should not interfere with their individual decisions – is at odds with both common sense and the evidence. 
Most smokers become addicted as adolescents or young adults, when shortsightedness and lack of information make rational decisions difficult. 
In countries with good information about tobacco risks, by the time child smokers become adults, more than 80% wish they never started. 
Recently, no less than William F Buckley has argued that nicotine addiction cannot be dismissed as free choice. 
Moreover, recent economic research finds that higher taxes are justified on welfare grounds, because the costs to smokers are huge (even though the external costs to others might be small), and that higher cigarette taxes do not hurt the poor (since the self-control value of higher taxes helps the poor more). 
Nobel laureate Amartya Sen wisely reminds us that “it is important that the practical case for tobacco control is not dismissed on the basis of an incomplete libertarian argument.” 
The agenda is clear. 
Governments must take tobacco seriously as a leading killer of adults worldwide. 
International poverty goals must include tobacco control. 
Developing countries must not be fooled by the empty economic arguments that paralyzed control efforts in the West for so long. 
The Gates Foundation can fund action and research. 
There are hopeful signs: more than 160 countries have signed the World Health Organization’s global tobacco control treaty, and the Caribbean heads of state have recently declared they want to tackle tobacco together. 
About 150-180 million tobacco deaths would be avoided before 2050 if the proportion of adults in developing countries who quit smoking increases from below 5% today to 30-40% by 2020 (like current quit rates in Canada). 
Because control policies deter children from starting, even greater benefits can be expected beyond 2050. 
Benjamin Franklin once said, “In this world, nothing can be said to be certain, except death and taxes.” 
Yet we have a tax that could prevent hundreds of millions of premature deaths. 
It is time to use it. 

Death by Renminbi 
WASHINGTON, DC – Over the last several weeks, the dollar’s depreciation against the euro and yen has grabbed global attention. 
In a normal world, the dollar’s weakening would be welcome, as it would help the United States come to grips with its unsustainable trade deficit. 
But, in a world where China links its currency to the dollar at an under-valued parity, the dollar’s depreciation risks major global economic damage that will further complicate recovery from the current worldwide recession. 
A realignment of the dollar is long overdue. 
Its overvaluation began with the Mexican peso crisis of 1994, and was officially enshrined by the “strong dollar” policy adopted after the East Asian financial crisis of 1997. 
That policy produced short-term consumption gains for America, which explains why it was popular with American politicians, but it has inflicted major long-term damage on the US economy and contributed to the current crisis. 
The over-valued dollar caused the US economy to hemorrhage spending on imports, jobs via off-shoring, and investment to countries with under-valued currencies. 
In today’s era of globalization, marked by flexible and mobile production networks, exchange rates affect more than exports and imports. 
They also affect the location of production and investment. 
China has been a major beneficiary of America’s strong-dollar policy, to which it wedded its own “weak renminbi” policy. 
As a result, China’s trade surplus with the US rose from $83 billion in 2001 to $258 billion in 2007, just before the recession. 
So far in 2009, China’s surplus has accounted for 75% of the total US non-oil-goods trade deficit. 
The under-valued renminbi has also made China a major recipient of foreign direct investment, even leading the world in 2002 – a staggering achievement for a developing country. 
The scale of recent US trade deficits was always unsustainable, and the dollar has therefore fallen against the yen, euro, Brazilian real, and Australian and Canadian dollars. 
But China retains its under-valued exchange rate policy, so that the renminbi has appreciated relatively less against the dollar. 
When combined with China’s rapid growth in manufacturing capacity, this pattern promises to create a new round of global imbalances. 
China’s policy creates adversarial currency competition with the rest of the world. 
By maintaining an undervalued currency, China is preventing the US from reducing its bilateral trade deficit. 
Furthermore, the problem is not only America’s. 
China’s currency policy gives it a competitive advantage relative to other countries, allowing it to displace their exports to the US. 
Worse still, other countries whose currencies have appreciated against the renminbi can look forward to a Chinese import invasion. 
China’s currency policy means that dollar depreciation, rather than improving America’s trade balance and stanching its leakage of jobs and investment, may inadvertently spread these problems to the rest of the world. 
In effect, China is fostering new imbalances at a time when countries are struggling with the demand shortfall caused by the financial crisis. 
The dollar is part of an exchange-rate Rubik’s cube. 
With China retaining its under-valued currency policy, dollar depreciation can aggravate global deflationary forces. 
Yet a mix of political factors has led to stunning refusal by policymakers to confront China. 
On the US side, a lingering Cold War mentality, combined with the presumption of US economic superiority, has meant that economic issues are still deemed subservient to geo-political concerns. 
That explains the neglect of US-China economic relations, a neglect that is now dangerous to the US, given its weakened economic condition. 
With regard to the rest of the world, many find it easy to blame the US, often owing to resentment at its perceived arrogance. 
Moreover, there is an old mentality among Southern countries that they can do no wrong in their relationships with the North, and that they should exhibit solidarity with each other regarding those relationships. 
Finally, all countries likely have been shortsighted, imagining that silence will gain them commercial favors from China. 
But that silence merely allows China to exploit the community of nations. 
The world economy has paid dearly for complicity with and silence about the economic policies of the last 15 years, which have culminated in the deepest and most dangerous recession since the 1930’s. 
It will pay still more if policymakers remain passive about China’s destructive currency policy. 

Death-Defying Europe 
As the European Union prepares to celebrate the 50th anniversary of the Treaty of Rome later this month, the EU is widely perceived to be on its knees. 
European integration, is felt to have, somehow met its Waterloo in 2005, when Dutch and French referendums unexpectedly torpedoed the draft EU constitution. 
Media stories have focused on the paralysis that is said to have gripped EU decision-making, but the reality is different. 
Far from suffering an irreversible decline in its fortunes, the EU has been has been conducting business as usual, quietly getting on with the job of constructing new policies and projects. 
Take a look at some recent headlines. 
The EU is putting together an energy and environment strategy that aims to end the self-defeating competition within Europe for oil and gas, while also establishing Europe as global leader in the effort to halt climate change. 
The Union’s common foreign and security policy may not yet mean that Europe speaks to the world with one voice, but it is taking shape and has already healed some of the wounds inflicted by disagreements over the war in Iraq. 
Of equal importance, Europe’s economic integration continues to move ahead, with the euro buoyant and a single marketplace for financial services now coming into sight. 
The starting point for the EU’s unhappy bid to create a shared constitution had been fears that its decision-making mechanisms were being overloaded by the accession of so many new members, first in May 2004 and again at the beginning of this year. 
The constitutional treaty was originally designed to streamline the system, and it was only later that it was over-enthusiastically expanded into the lengthy and pompous document that is now a dead letter. 
Yet there are signs that the EU machine has so far been coping rather well without the constitution. 
The volume of EU rule-making last year was almost exactly the same as 10 years ago. 
During 2005 and 2006, the flow of EU directives, regulations, and associated reports, green papers, and communications continued at the same rate as the 2,800 a year chalked up in 1996, when Jacques Delors was at the helm of the European Commission and the EU project was being widely hailed as unstoppable. 
Brussels is nowadays a government town akin to Washington, D.C, even if it is also a place where complex negotiations among the Union’s 27 members grind forward only slowly. 
On top of all this, the European economy is looking brighter. 
In Germany, the EU’s economic locomotive, unemployment is down and business confidence is up. 
And throughout the EU, the positive effects of the enlargement strategy that has brought in 10 ex-communist countries over the past three years looks to be generating a new self-confidence. 
None of this should be surprising. 
It would take a good deal more than a hiccup in the EU’s delicate political process to bring integration to a standstill, let alone put it into reverse. 
The global pressures pushing European nations closer together are as strong as ever, so the impasse over the EU’s constitutional treaty was never going to push Europe off course for very long. 
The path ahead is far from clear, of course. 
But a consensus does seem to be emerging on how the EU’s future will pan out. 
Diplomats and policy analysts are generally agreed that key elements of the failed constitution will be rescued from the wreckage and turned into something along the lines of the “mini-treaty” that Nicolas Sarkozy, the front-runner in the French presidential race, proposed last autumn at a Friends of Europe meeting in Brussels. 
The details are still anyone’s guess, but the consensus view is that the EU will have many of the constitution’s most important procedural mechanisms by sometime next year. 
The EU is far from being out of the woods. 
Creating coherent policies is unremittingly difficult when there are so many nations, each with a different political culture. 
But the idea that the constitutional crisis is holding everything back is mistaken. 
The much greater problem has been that EU governments have been concentrating so hard on the details of “building Europe” that they have neglected broader strategic questions. 
There is little or no discussion of where Europe is heading and what sort of Europe its people want. 
It is strange but true that even American unilateralism under President George W. Bush has not provoked a genuine debate over Europe’s future role in the world. 
The EU’s problem is not its so-called “constitutional crisis,” but rather its lack of a recognizable political identity. 

Death in Lhasa 
PRAGUE – On April 8, two Tibetans, Lobsang Gyaltsen and Loyak, were sentenced to death by the Municipal Intermediate People’s Court in Lhasa. 
Both men were convicted of committing arson that caused death against Chinese owned businesses. 
Another two Tibetan activists, Tenzin Phuntsok and Kangtsuk, received a suspended death sentence, and a third, Dawa Sangpo was sentenced by the same court to life imprisonment. 
These latest verdicts are the first death sentences meted out by Chinese courts to those who took part in protests that swept Lhasa and other Tibetan cities in the spring of 2008. 
Since these trials took place in complete isolation from the rest of the world, with no impartial observers or foreign journalists present, it is to be doubted, strongly, that the defendants received anything remotely like a fair trial in accordance with international judicial standards. 
We therefore appeal to the authorities of the People’s Republic of China to rescind the decision to execute these protesters, and to provide them with an opportunity to be re-tried in a judicial process that is more in keeping with the international standards that China says that it adheres to. 
And the first standard that must be met is that the trial, first of all, must be verifiable and open to international observation. 
But beyond the grim fates of the Tibetans that have now been sentenced by the Tibetan court to death or life imprisonment for the protests that took place a year ago, we are also concerned about the hundreds of other detained protesters who have yet to be tried by the Municipal Court in Lhasa. 
Indeed, it is our belief that the recent death sentences could mark the onset of an avalanche of highly doubtful Court rulings in Tibet, which could lead to a worrying number of executions in that tense and troubled region. 
If China is to gain an international position of respect commensurate with its position in the world economy, as well as to benefit from its rise to pre-eminence among the world economic powers, it is vital that China’s representatives in Tibet acknowledge the need for due legal process for all of its citizens, including its ethnic minorities. 
Tied to that sense of due process of law is a call for the Chinese leadership to allow representatives of the international community to have access to Tibet and its adjoining provinces. 
For these provinces have now been, for the most part, cut off from international observation ever since the protests that wracked Tibet last spring. 

The Death of World Heritage Sites 
SAN FRANCISCO, CALIFORNIA – Climate change has claimed another victim. 
Almost one-quarter of the coral in Australia’s Great Barrier Reef World Heritage Area – one of the world’s richest and most complex ecosystems – has died this year, in the worst mass coral bleaching in recorded history. 
Even in the far northern reaches of the Reef, long at a sufficient distance from human pressures like coastal development to preserve, to a large extent, coral health, a staggering 50% of the coral has died. 
The above-average sea temperatures that triggered this bleaching were made 175 times more likely by climate change. 
As the ocean continues to absorb heat from the atmosphere, large-scale coral bleaching like that which has decimated the Great Barrier Reef – not to mention other destructive phenomena spurred by rising temperatures – is likely to become even more frequent and devastating. 
The future of priceless World Heritage sites – and, indeed, our planet – depends on the immediate reduction of climate-change-inducing greenhouse-gas emissions. 
Yet many of the governments responsible for protecting these sites within their borders are not only failing to take strong climate action; they are actively pursuing dirty energy projects like coal mines and coal-fired power plants. 
Even as the Great Barrier Reef dies before our eyes, Australia continues to increase its exploitation of dirty fossil fuels. 
In the past year, the Australian government has approved both the massive Carmichael coalmine and the Abbot Point terminal, located near the Reef, to facilitate the global export of output from the Carmichael mine. 
The emissions attributable to the Carmichael mine will be some of the highest resulting from a single project anywhere in the world. 
And the problem isn’t limited to Australia. 
In low-lying Bangladesh, one of the countries most vulnerable to climate change, the government supports a proposal to build two huge coal-fired power plants adjacent to the Sundarbans World Heritage site. 
India, too, supports the proposal. 
Not only will these power plants emit large quantities of greenhouse gases; they will also devastate the Sundarbans, where the Ganges and other rivers meet the Bay of Bengal in a spectacular delta of mangrove islands that is home to endangered Bengal tigers and river dolphins. 
The power plants will pollute the waters with toxic coal ash, bring constant coal-barge traffic, and require the dredging of riverbeds. 
Mercury from the smokestacks will accumulate in the marine life, permanently contaminating the food supply of hundreds of thousands of people and vulnerable wildlife. 
It is true that Bangladesh is energy poor, a problem that must be addressed if it is to continue to develop economically. 
But there are alternatives. 
The country has significant potential for renewable-energy production, and it is already a world leader in rooftop solar energy. 
Of course, the responsibility to avert dangerous anthropogenic climate change does not fall only on countries that are home to World Heritage sites. 
But, knowing what we know today, initiating such damaging dirty energy projects is indefensible. 
With governments failing to protect our natural heritage, the World Heritage Committee must step up, in order to help bring an end to the relentless exploitation of fossil fuels. 
Specifically, the WHC should make recommendations to governments for reducing fossil-fuel-related threats, identify sites that are in particular danger from such threats, and carry out monitoring missions. 
The objective should be, first and foremost, to encourage governments with the capacity to reduce fossil-fuel-related threats to designated sites to take action. 
Such action from the WHC would also help to educate and empower civil society, while placing pressure on financial institutions to withhold the funding required for massive development projects. 
The WHC’s annual meetings, such as that which just ended in Istanbul, are the ideal forum for such an effort. 
Already, dozens of organizations and more than 60,000 individuals have called on the committee to urge India and Bangladesh to cancel the proposed coal plants and invest in renewable energy instead. 
Similarly, dozens of renowned scientists, NGOs, and international and Australian lawyers have demanded that the WHC counsel Australia not to continue supporting developments that will exacerbate the impact of climate change on the Great Barrier Reef. 
As the threat of climate change grows increasingly menacing, influential institutions like the WHC must take a stand against the toxic and insidious legacy of dependence on coal and other fossil fuels. 
If the committee remains silent on this crucial issue, World Heritage sites around the world will suffer. 

Deaths of the Poor and Responsibilities of the Rich 
In a shocking book of last year entitled " Late Victorian Holocausts ," Mike Davis described the British Empire's attitude to famines in India and elsewhere. 
When monsoons failed, millions of Indians faced imminent death. 
Food could have been transported by rail within British India to save many starving people, but the British believed in a hands-off, laissez faire policy. 
Starvation was part of nature. 
Actually, British attitudes were even more shocking. 
British officers believed that they were being brave by not being swayed by "emotions"! 
They congratulated themselves on their stiff upper lips. 
Unbelievable nowadays? 
No, for the US is doing something similar. 
America has idly stood by as millions of Africans die of AIDS. 
Recently, the US Treasury Secretary and Health Secretary visited Africa and looked dying people in the eye. 
Such people are dying not because early death is inevitable, but because they cannot afford the medicines to keep themselves alive. 
If every American gave $10 per year to this cause, over 1 million Africans could be saved from AIDS death each year, with money left over to fight the disease. 
As recent studies show, if the 1 billion people in the rich world gave $10 per year, the resulting total of $10 billion could finance a serious battle against AIDS, TB, and malaria. 
The new Global Fund to Fight AIDS, TB, and Malaria was started this year, but rich countries contributed less than one-tenth of the money it needs. 
In its first months of operation the Fund committed all of the money that it received from rich countries. 
Neither the US nor Europe has stepped forward with more money. 
Every excuse is made to avoid giving what is needed. 
Senior US officials continue to say that there is no infrastructure to dispense medicines, even as these officials visit hospitals that possess the necessary doctors, clinics, nurses, and pharmacies. 
As doctors patiently explain, what they are missing is medicine, because they lack the money to buy needed drugs. 
When US Treasury Secretary Paul O'Neill visited an AIDS clinic in Soweto, South Africa, doctors told him that they could increase by ten times the number of people treated with AIDS drugs if sufficient money was available. 
Twenty-two years into the AIDS pandemic the Bush Administration insists that it won't let emotion push it into action. 
We need a plan, says the US; we cannot throw money at the problem. 
As in the late 19 th century, we have the spectacle of the world's superpower treating indifference as a sign of seriousness! 
The truth is simpler. 
Africans barely count in American politics. 
Africans don't vote; they don't buy US products; they don't threaten violence. 
They are simply poor, hungry, and disease-ridden. 
Few rich countries do better than the US. 
I single out America not because it is unique in its neglect, but because it is unique in its capacity to lead. 
Europe and Japan have also avoided the financial contributions to AIDS control that could keep millions of HIV-infected Africans alive. 
In coming months, rich countries will face three opportunities to mend their ways. 
In early June, the UN's Food and Agriculture Organization will host the World Food Summit. 
With nearly 900 million chronically hungry people around the globe, the Summit presents an opportunity to reverse the collapse of financial assistance for food production to poor countries. 
As with AIDS, a few dollars per person of assistance for agriculture each year could spare millions from hunger. 
Later in June, rich countries will hold their annual G-7 Summit. 
They have promised to make Africa its centerpiece. 
More money for Africa rather than more soothing words will be the true test of the summit. 
In August, political leaders from the entire world will gather in Johannesburg for the World Summit on Sustainable Development. 
Rich countries will once again have a chance to be true partners of the poor. 
The rich may feel that clever words will absolve them of responsibility, but the hungry and dying stand witness to the tragic realities. 

Debt and America’s Decline 
MILAN – Italians and other Europeans have serious problems addressing their own national debts, public and private, so it may seem immodest for a European to discuss America’s growing and grave debt problem. 
But the fiscal realities on both sides of the Atlantic nowadays are very similar, and only lingering trust in the promise of America keeps alive the expectation among some Europeans that some grand American coup de théâtrewill resolve the country’s dire debt situation. 
Of course, many Americans recognize the scale of the country’s debt burden. 
Admiral Mike Mullen, Chairman of the Joint Chiefs of Staff and thus America’s highest ranking military officer, recently said, “The greatest danger to American security comes from the national debt.” 
Four Americans out of ten agree with him, whereas less than three in ten deem terrorism or Iran more dangerous. 
America’s Great Power status has always been tied to its level of debt. 
Indeed, it was the absence of debt that marked the United States’ emergence as a world power between 1914 and 1917. 
The US went from owing $3 billion (mostly to Great Britain) to being a net creditor for about the same amount, thanks to $6 billion in war credits given to the Western Allies. 
A further $3 billion in credits for European post-war reconstruction cemented America’s status as the world’s premier creditor nation, with its surplus equal to roughly 8% of GNP at the time. 
This shift meant that the US had essentially replaced Britain as the heart of the world’s financial and monetary system. 
Previously, thanks to the gold standard and Britain’s political stability, the City of London had been the world’s key source of capital and financial guarantees for more than a century. 
The new era began suddenly in January 1915, when, after a few months of deep uncertainty, gold started to be shipped to New York in increasing quantities. 
A few months earlier, the veteran Boston financier Henry Lee Higginson had sketched in a letter to President Woodrow Wilson what America’s new strategy should be. 
“This is our chance to take first place,” he wrote. 
America’s financial house had to be put in order, all debts repaid, and, as London had done for a long time, confidence had to be maintained, which meant guaranteeing the dollar’s convertibility into gold. 
Alone among the world’s great nations, the US did manage to guarantee dollar convertibility throughout the Great War. 
With peace, the dollar and Wall Street became the dominant force on the world’s financial landscape. 
The financial-market rules established after 1933 by President Franklin Roosevelt’s New Deal enabled the dollar to replace the British pound at the center of the international system. 
America’s role as the world’s banker went unchallenged for the next 40 years ago, until President Richard Nixon decoupled the dollar from gold. 
Yet, even without the gold standard, America’s economic might, together with the recycling of petrodollars, kept the dollar on top. 
Indeed, the US remained the world’s premier creditor nation until 1986-1987, when it became a debtor nation again. 
In the two decades that followed, America’s debt usually was around $3 trillion, rising or falling with the exchange rate of the dollar. 
Starting in 1990, the US began to import more and more capital, particularly from Asia. 
In the 2000’s, China became the prime source of debt financing, and Americans were happy, because it enabled the US Federal Reserve to keep interest rates low. 
There were some who foresaw danger. 
The Swedish economist Axel Leijonhufvud foresaw asset-price inflation – houses in particular – and a worsening of credit quality. 
Financial innovation soon made that prediction come true. 
It is enough to remember that in 2008 there were only 12 public companies in the world with AAA credit ratings, but more than 60,000 – mostly American – triple-A structured financial products. The US, the world’s banker, had mutated into the world’s hedge fund. 
With that change, the banker’s traditional imperative to maintain fidelity and trust – to “keep faith,” as Higginson put it – was forgotten. 
And it is in America’s public debt that the debris of its financial system’s broken promises are collected, just as Italy’s massive public debt reflects its past national prodigality. 
The figures for the US are staggering. 
Public debt includes not only the federal government’s current $13.2 trillion, but another $3 trillion owed by America’s states, counties, and cities. 
In addition, there is the $3.9 trillion in debt owed by America’s government-backed housing-finance agencies (Fannie Mae, Freddie Mac, and others), which currently underwrite more than 90% of all US mortgages. 
As a result, America’s public debt has reached roughly 140% of GDP. 
The US Congress is well aware of what these numbers portend, but its members have chosen to avert their eyes. 
Indeed, the president is no longer required to provide the usual five-year forecast of the country’s fiscal position. 
A one-year perspective is now deemed sufficient. 
So, where does that leave the world economy? 
There is no newly emerging Great Power that can assume responsibility for global finance, as there was in 1914. 
Back then, Wall Street was ready for the job. 
Someday, Shanghai and Hong Kong might be ready, but that possibility is of little help now. 

Debt and Delusion 
NEW HAVEN – Economists like to talk about thresholds that, if crossed, spell trouble. 
Usually there is an element of truth in what they say. 
But the public often overreacts to such talk. 
Consider, for example, the debt-to-GDP ratio, much in the news nowadays in Europe and the United States. 
It is sometimes said, almost in the same breath, that Greece’s debt equals 153% of its annual GDP, and that Greece is insolvent. 
Couple these statements with recent television footage of Greeks rioting in the street. 
Now, what does that look like? 
Here in the US, it might seem like an image of our future, as public debt comes perilously close to 100% of annual GDP and continues to rise. 
But maybe this image is just a bit too vivid in our imaginations. 
Could it be that people think that a country becomes insolvent when its debt exceeds 100% of GDP? 
That would clearly be nonsense. 
After all, debt (which is measured in currency units) and GDP (which is measured in currency units per unit of time) yields a ratio in units of pure time. 
There is nothing special about using a year as that unit. 
A year is the time that it takes for the earth to orbit the sun, which, except for seasonal industries like agriculture, has no particular economic significance. 
We should remember this from high school science: always pay attention to units of measurement. 
Get the units wrong and you are totally befuddled. 
If economists did not habitually annualize quarterly GDP data and multiply quarterly GDP by four, Greece’s debt-to-GDP ratio would be four times higher than it is now. 
And if they habitually decadalized GDP, multiplying the quarterly GDP numbers by 40 instead of four, Greece’s debt burden would be 15%. 
From the standpoint of Greece’s ability to pay, such units would be more relevant, since it doesn’t have to pay off its debts fully in one year (unless the crisis makes it impossible to refinance current debt). 
Some of Greece’s national debt is owed to Greeks, by the way. 
As such, the debt burden woefully understates the obligations that Greeks have to each other (largely in the form of family obligations). 
At any time in history, the debt-to-annual-GDP ratio (including informal debts) would vastly exceed 100%. 
Most people never think about this when they react to the headline debt-to-GDP figure. 
Can they really be so stupid as to get mixed up by these ratios? 
Speaking from personal experience, I have to say that they can, because even I, a professional economist, have occasionally had to stop myself from making exactly the same error. 
Economists who adhere to rational-expectations models of the world will never admit it, but a lot of what happens in markets is driven by pure stupidity – or, rather, inattention, misinformation about fundamentals, and an exaggerated focus on currently circulating stories. 
What is really happening in Greece is the operation of a social-feedback mechanism. 
Something started to cause investors to fear that Greek debt had a slightly higher risk of eventual default. 
Lower demand for Greek debt caused its price to fall, meaning that its yield in terms of market interest rates rose. 
The higher rates made it more costly for Greece to refinance its debt, creating a fiscal crisis that has forced the government to impose severe austerity measures, leading to public unrest and an economic collapse that has fueled even greater investor skepticism about Greece’s ability to service its debt. 
This feedback has nothing to do with the debt-to-annual-GDP ratio crossing some threshold, unless the people who contribute to the feedback believe in the ratio. 
To be sure, the ratio is a factor that would help us to assess risks of negative feedback, since the government must refinance short-term debt sooner, and, if the crisis pushes up interest rates, the authorities will face intense pressures for fiscal austerity sooner or later. 
But the ratio is not the cause of the feedback. 
A paper written last year by Carmen Reinhart and Kenneth Rogoff, called “Growth in a Time of Debt,” has been widely quoted for its analysis of 44 countries over 200 years, which found that when government debt exceeds 90% of GDP, countries suffer slower growth, losing about one percentage point on the annual rate. 
One might be misled into thinking that, because 90% sounds awfully close to 100%, awful things start happening to countries that get into such a mess. 
But if one reads their paper carefully, it is clear that Reinhart and Rogoff picked the 90% figure almost arbitrarily. 
They chose, without explanation, to divide debt-to-GDP ratios into the following categories: under 30%, 30-60%, 60-90%, and over 90%. 
And it turns out that growth rates decline in all of these categories as the debt-to-GDP ratio increases, only somewhat more in the last category. 
There is also the issue of reverse causality. 
Debt-to-GDP ratios tend to increase for countries that are in economic trouble. 
If this is part of the reason that higher debt-to-GDP ratios correspond to lower economic growth, there is less reason to think that countries should avoid a higher ratio, as Keynesian theory implies that fiscal austerity would undermine, rather than boost, economic performance. 
The fundamental problem that much of the world faces today is that investors are overreacting to debt-to-GDP ratios, fearful of some magic threshold, and demanding fiscal-austerity programs too soon. 
They are asking governments to cut expenditure while their economies are still vulnerable. 
Households are running scared, so they cut expenditures as well, and businesses are being dissuaded from borrowing to finance capital expenditures. 
The lesson is simple: We should worry less about debt ratios and thresholds, and more about our inability to see these indicators for the artificial – and often irrelevant – constructs that they are. 

The Lesser Evil for the Eurozone 
PARIS – It was not supposed to happen like this. 
The formation of a new German government took so long that it was only after the Italian general election on March 4 resulted in a political earthquake that France and Germany started to work on reforming the eurozone. 
German Chancellor Angela Merkel and French President Emmanuel Macron have now resolved to sort out their differences and deliver a joint reform roadmap by July. 
But they cannot ignore changes brought by the landslide victory of Italy’s anti-system parties. 
Until then, populism had seemed contained. 
It has now become mainstream. 
For those who will have to draw the Franco-German blueprint, the message from Italy is that the policy framework that has dominated Europe since the mid-1980s no longer commands broad support. 
For three decades, the consensus on the need for market reforms and sound public finances has been strong enough to overcome opposition in small countries (Greece) and outlast procrastination in large ones (France). 
In the coming years, however, the eurozone playing field may well become a battleground. 
The first casualty is bound to be the European Stability and Growth Pact, with its plethora of fiscal rules, monitoring procedures, and eventual sanctions for excessive deficits. 
The 224-page Vade Mecum on implementing fiscal discipline in the EU is hopelessly complex, to such a degree that no finance minister, let alone parliamentarian, fully understands what his or her country must abide by. 
For populists, however, indecipherable rules made in Brussels are a simple, straightforward political target. 
In “Baron Noir” (Black Baron), a popular French TV series, a president engulfed in a financial scandal nearly escapes public indignity by mounting a coalition against EU deficit fines. 
With populism rising almost everywhere in Europe, reality may soon exceed fiction. 
For large countries, the threat of sanctions has always been a paper tiger. 
The difference now is that the EU’s bluff may be called. 
Absent sanctions, what will ensure that participants in the eurozone behave? 
This is what Germany is understandably worried about. 
Whatever reservations one may have about Germany’s fiscal obsession, rules of the game are required to deal with unsustainable public-debt accumulation in a monetary union. 
Policy ambiguity cannot be relied on, in a system deprived of a strong power center. 
If no one knows what will happen if a country does not behave, the expectation may turn out to be that debts will be monetized – at a high inflationary cost. 
At a recent conference in Berlin, economists debated what to do if the euro proves unsustainable. 
Prominent German scholars expressed the view that, absent credible sanctions, only the threat of forced exit could discipline wayward eurozone members. 
In other words, governments should be facing a clear choice: behave or leave. 
Technically, this would not be hard to implement. 
To force out a delinquent country, the ECB could simply unplug its banking system from euro liquidity. 
That nearly happened in 2015, when Greece was on the brink of exit, and Wolfgang Schäuble, Germany’s finance minister at the time, considered pushing Greece out. 
It took a long, dramatic night of talks for eurozone leaders to agree not to do it. 
Pushing a country out would, however, have dire consequences. 
The irreversibility of the euro may be a myth – nothing is irreversible – but it is a useful myth. 
If businesses and savers were to start speculating about the next exit, trust in the common currency would soon vanish. 
People would move their savings to protect them from redenomination risk. 
A German euro would be worth more than a French euro, which in turn would be worth more than an Italian euro. 
That’s why Mario Draghi, the ECB’s president, said in 2012 that he would do “whatever it takes” to preserve the euro’s integrity. 
So, what if sanctions don’t work and the threat of exit is a cluster bomb that would hurt everyone? In a recent paper with French and German colleagues, we advocate making debt restructuring within the eurozone a credible possibility. 
We do not regard debt restructuring as benign, let alone desirable, and we do not advocate making it automatic or driven by numerical triggers. 
But, in a system without sanctions, fiscal responsibility can be enforced only if two conditions are met. 
First, governments and those who finance them must face the consequences of irresponsibility – that is, ultimately, debt restructuring. 
Second, the ensuing financial disruption must be limited, so that policymakers do not want to avoid restructuring at all costs. 
This, in turn, requires a number of reforms that we spell out in our paper. 
This idea elicits strong reservations, not only in Italy, where the policy establishment is obsessed with the country’s record indebtedness, but also in France, where debt repayment is regarded as the dividing line between advanced and developing countries. 
The memories of the Deauville summit – an ill-conceived regime for addressing excessive public debt hashed out by Merkel and then-French President Nicolas Sarkozy – are still vivid. 
The French view is that debt restructuring should not be contemplated, even as a possible outcome. 
But the French must confront the new reality. 
While the euro survived the financial disruption of 2010-2012, it is now confronted by a potentially more challenging political disruption. 
This threat must be faced. 
Absent a shared consensus on the sanctity of rules, there are not many possibilities. 
One is a euro without an anchor, something Northern Europe would not want to remain part of for long. 
Another is a euro with a wide-open exit door, something that would quickly lead to another financial crisis. 
And still another is a euro with defined and predictable internal debt-resolution mechanisms. 
The latter option is, admittedly, not without risks, but it is certainly safer than the exit threat. 
France, and Europe, should choose the lesser evil. 

How Much Development Data Is Enough? 
NAIROBI – Rapid advances in technology have dramatically lowered the cost of gathering data. 
Sensors in space, the sky, the lab, and the field, along with newfound opportunities for crowdsourcing and widespread adoption of the Internet and mobile telephones, are making large amounts of information available to those for whom it was previously out of reach. 
A small-scale farmer in rural Africa, for example, can now access weather forecasts and market prices at the tap of a screen. 
This data revolution offers enormous potential for improving decision-making at every level – from the local farmer to world-spanning development organizations. 
But gathering data is not enough. 
The information must also be managed and evaluated – and doing this properly can be far more complicated and expensive than the effort to collect it. 
If the decisions to be improved are not first properly identified and analyzed, there is a high risk that much of the collection effort could be wasted or misdirected. 
This conclusion is itself based on empirical analysis. 
The evidence is weak, for example, that monitoring initiatives in agriculture or environmental management have had a positive impact. 
Quantitative analysis of decisions across many domains, including environmental policy, business investments, and cyber security, has shown that people tend to overestimate the amount of data needed to make a good decision or misunderstand what type of data are needed. 
Furthermore, grave errors can occur when large data sets are mined using machine algorithms without having first having properly examined the decision that needs to be made. 
There are many examples of cases in which data mining has led to the wrong conclusion – including in medical diagnoses or legal cases – because experts in the field were not consulted and critical information was left out of the analysis. 
Decision science, which combines understanding of behavior with universal principles of coherent decision-making, limits these risks by pairing empirical data with expert knowledge. 
If the data revolution is to be harnessed in the service of sustainable development, the best practices of this field must be incorporated into the effort. 
The first step is to identify and frame frequently recurring decisions. 
In the field of development, these include large-scale decisions such as spending priorities – and thus budget allocations – by governments and international organizations. 
But it also includes choices made on a much smaller scale: farmers pondering which crops to plant, how much fertilizer to apply, and when and where to sell their produce. 
The second step is to build a quantitative model of the uncertainties in such decisions, including the various triggers, consequences, controls, and mitigants, as well as the different costs, benefits, and risks involved. 
Incorporating – rather than ignoring – difficult-to-measure, highly uncertain factors leads to the best decisions. 
When put in the service of sustainable development, such a model will often involve projecting the impact of interventions on livelihoods and the environment over several decades. 
This process is most successful when stakeholders as well as experts are recruited to identify the relevant variables and their relationships. 
These participants must be trained to provide quantitative estimates of their uncertainty for the different variables. 
For example, experts might estimate with 90% confidence, based on available data and their own experience, that farmers’ average maize yields in a given region are 0.5-2 tons per hectare. 
The third step is to compute the value of obtaining additional information – something that is possible only if the uncertainties in all of the variables have been quantified. 
The value of information is the amount a rational decision-maker would be willing to pay for it. 
So we need to know where additional data will have value for improving a decision and how much we should spend to get it. 
In some cases, no further information may be needed to make a sound decision; in others, acquiring further data could be worth millions of dollars. 
This process is repeated until there is no further value in acquiring data and a sound decision – a logical conclusion, based on the information, values, and preferences of the decision-makers or decision-making body – is reached. 
It provides decision-makers and stakeholders insights into how to improve policies to maximize positive outcomes and reduce risks, such as the possibility of low rates of adoption or limited institutional capacity for effective implementation. 
It is not enough simply to assume that the data revolution will benefit sustainable development. 
Ensuring that it does will require recognizing the importance of rigorous analysis in every data-collection effort and the formation of a new generation of decision scientists to work alongside policymakers. 

Decision Time for the Eurozone 
ATHENS – Germany’s arguments against introducing Eurobonds, expanding the eurozone’s bailout fund, and instituting a comprehensive system of economic governance are transparent and easy to understand. 
But are they right? 
The Germans fear that such innovations would lead to a rise in domestic borrowing costs, and to direct and indirect fiscal transfers to poorer countries. 
Moreover, they warn of the moral hazard generated by relieving over-indebted countries from the pressure to put their public finances in order. 
Third, they cite treaty-related and constitutional difficulties in establishing rules and procedures that would simulate a “fiscal union.” 
Finally, the need to move ahead with European unification in order to legitimize the inevitable infringement of over-indebted countries’ sovereignty might eventually infringe upon German sovereignty as well. 
On the other hand, refusing to accept the growing consensus that fiscal union is the key to resolving the debt crisis exposes the eurozone, and Germany, to serious risks. 
Sticking to half-measures exacerbates markets’ impatience and provokes increasingly determined speculative attacks, not only on the weaker peripheral countries, but also on core AAA-rated countries – like France and, eventually, Germany itself – whose banking sectors hold large volumes of peripheral countries’ debt. 
Indeed, weakening banking conditions are emerging as a major threat to the eurozone’s recovery and stability. 
In the event of sovereign defaults, moreover, the cost of bailing out the banks may far exceed the cost of issuing Eurobonds or instituting a reasonable transfer regime. 
Investors need to be reassured that debt-service costs are under control, and that debt volumes and deficit limits are firmly monitored in order to minimize default risks and strengthen banks’ ability to lay the groundwork for sustainable growth. 
In fact, the emerging systemic risk concerning the sustainability of the eurozone produces a vicious circle. 
Systemic risk raises doubts about the solvency of over-indebted countries, which means that these countries’ efforts to consolidate their fiscal position and promote reform do not lead to improvement in financial conditions, which is essential for overcoming the crisis and promoting recovery. 
As a result, fiscal consolidation becomes increasingly difficult to achieve, inviting renewed speculative attacks. 
Moreover, viewed from a wider perspective, economic and social turbulence on Europe’s southern periphery will constitute a geopolitical risk. 
That risk would be exacerbated by the eruption of a major default-related crisis within the eurozone, which might not be contained and, through a Lehman-like domino sequence, could jeopardize the entire edifice. 
The eurozone’s dilemmas, and the pros and cons of proposed solutions, can be debated endlessly. 
It could be argued, for example, that Eurobonds would allow eurozone members to pool their financial strength and, by enhancing the attractiveness of the euro as a reserve currency, hold down borrowing costs to such an extent that AAA-rated countries are not overburdened. 
Legal problems could also be overcome in the short term by designing Eurobonds to include credit guarantees, repayment priorities, and the use of specific tax streams as collateral. 
Proposals to limit moral hazard, meanwhile, would do so by limiting Eurobonds to 60% of GDP – the eurozone’s current ceiling for member states’ public debt. 
A more substantial constraint would be to establish a tougher disciplinary regime on fiscally profligate countries as part of a reinforced institutional framework. 
Political problems, however they are addressed, should be weighed against the vulnerability of European banks. 
Germany’s banks today are the most highly leveraged of any of the major advanced economies, while at the start of the crisis they held close to one-third of all loans made to the public and private sectors of Greece, Portugal, Ireland, Spain, and Italy. 
So long as the eurozone’s systemic risk is not addressed, sovereign defaults are not unlikely, leading to extended bank bailouts that could carry unacceptable costs. 
In that case, a full-blown banking crisis could bring about a depression in the eurozone and, perhaps, globally. 
Europe-wide bank recapitalization is essential in the short term to contain the cost arising from possible sovereign defaults. 
However, addressing the eurozone’s deeper defects cannot be postponed endlessly. 
Of course, in the midst of so much uncertainty, it is remarkable that the over-indebted countries’ consolidation efforts remain broadly on track; but the European Central Bank’s continued bond-buying and liquidity support is only a temporary palliative. 
An impasse is inevitable, so playing for time is not a solution. 
By contrast, a combination of Eurobonds, a fully-fledged debt facility, enhanced powers for the ECB so that it can act as a lender of last resort, and solid economic governance would work. 
In the longer term, radical reforms in capital, product, and labor markets will also be needed, complemented by a stronger and more cohesive investment strategy at the European level, aimed at boosting competitiveness and restoring growth prospects. 
European competitiveness does not have only a global dimension. 
Large discrepancies exist within the eurozone, reflected in structural trade imbalances between the core and the periphery that lie at the heart of the debt crisis. 
The eurozone’s cohesion and future growth depend critically on creating a framework – through grants and loans – for investment capital to flow to the poorer countries in order to close the competitiveness gap. 
To borrow a phrase from the financial world, the euro is too big to fail. 
Decisions should be taken sooner rather than later, so that the eurozone itself shapes events, rather than being commanded by them. 

“Health for All” Forty Years On 
GENEVA – Forty years ago last month, thousands of delegates from 134 countries gathered in Kazakhstan, then a part of the former Soviet Union, to adopt the Declaration of Alma-Ata. 
This landmark agreement committed the world to expanding health access, and the principles it enshrined in a mere three pages continue to have a profound effect on the field of public health. 
The declaration’s continuing appeal consists in its dual character: it is part gospel of applied science, part political manifesto. 
Among its key messages are increasing community leadership in health planning; reducing elitism in modern medicine; and tackling social inequality for better health outcomes. 
The declaration’s central contribution was its articulation of “health for all,” a precursor to universal health coverage (UHC). 
Examining the origins and evolution of UHC’s founding doctrine could prove useful in the ongoing struggle to achieve it. 
One of the biggest differences between 1978 and today is the breadth of health vulnerabilities. 
Climate change and shifting diets have created new risk categories, while wealth inequalities and political exclusion have produced deeper pockets of vulnerability. 
Consider, for example, the issue of migration: the politicization of this age-old phenomenon has serious public-health consequences. 
Health markets have also changed dramatically. 
Today, poorly-regulated private health-care sectors predominate in many countries in Asia, Latin America, and Africa. 
While the expansion of health-care markets expands patient choice, personal debt is also increasing. 
Moreover, commercial interests within the food, alcohol, and tobacco industries undermine people’s health and complicate efforts to curb the rise in noncommunicable illnesses like heart disease and diabetes. 
Regrettably, community involvement in health planning has remained virtually unchanged since 1978. 
Although research shows that services improve when people participate in health planning, “participatory governance” is not a common feature in many developing countries. 
With few exceptions – Brazil and Thailand are often singled out – community-centered health systems remain rare. 
The Declaration of Alma-Ata’s lasting legacy is the consensus that health can be improved only with a combination of good science, sound economics, and action against social injustices. 
This was true in the 1970s, and it is true today. 
The international community should mark the declaration’s anniversary by recommitting to the values it upholds. 
Three of Alma-Ata’s messages merit special attention. 
First, to improve health, leaders need to do more than build clinics and train physicians; they must also protect the environment, ensure access to clean water and sanitation, promote gender equality, create jobs, and strengthen infrastructure. 
Although these objectives are incorporated in the UN Sustainable Development Goals (SDGs), there needs to be more serious commitment to the holistic approach advocated by the Declaration of Alma-Ata. 
Second, more needs to be done to promote interdisciplinary health sciences that address both the practical and ethical questions posed by Alma Ata. 
One opportunity to reaffirm this principle will come this month, when some 2,000 stakeholders from around the world gather in Liverpool for the Fifth Global Symposium on Health Systems Research. 
Engaging government policymakers, civil society, the media, and funders on the message of Health for All will be crucial to strengthening health systems. 
Finally, just as the declaration prescribed, international health organizations and donors are beginning to reorient their strategies to empower leaders at the local and national levels. 
While there is still room for improvement, more women and citizens of developing countries occupy prominent positions in global organizations than before. 
The world has yet to achieve the ideals announced in 1978. 
But we are moving in the right direction. 
True change takes place close to common people, and not just in centers of global power. 
It can come through more representative public institutions, more relevant science, or more social action. 
In all of these areas, the Declaration of Alma-Ata will no doubt be a source of continued inspiration. 

The Death of the Party 
MOSCOW – Nearly 26 years ago, President Boris Yeltsin issued a decree that effectively banned Communist Party organs from operating in factories, universities, and all other workplaces across the Russian Federation. 
But Yeltsin’s bold decree was, in some ways, superfluous: the Communist Party of the Soviet Union (CPSU), once a fearsome organizational weapon, had already been decimated by its own incompetence and brutality, to the point that the public was simply indifferent to it. 
Today, once-great political parties in the West and some developing countries also seem to be on a fast track to oblivion. 
But whereas the CPSU’s demise was perfectly logical – Yeltsin’s decree came just months before the Soviet Union’s collapse – the decline of major political parties in countries like France and India is not so easy to explain. 
In France, President Emmanuel Macron has just secured a massive majority in the French National Assembly for his own year-old movement, ostensibly consigning the Socialist Party – with which Macron himself was affiliated while serving as economy minister – to Trotsky’s dustbin of history. 
France’s other major mainstream party – the center-right Republicans, rooted in Charles de Gaulle’s political legacy – does not seem to be doing much better. 
Until recently, the United Kingdom’s Labour Party, under the leadership of the far-left Jeremy Corbyn, also seemed to be on the edge of extinction. 
But it has been granted something of a reprieve, thanks to Conservative Prime Minister Theresa May’s sheer incompetence during the recent parliamentary campaign. 
But whether Corbyn will actually be able to unite and reinvigorate his party remains far from certain. 
In the developing world, India is witnessing the decline of the Indian National Congress, the party of the country’s first prime minister, Jawaharlal Nehru, who led the country to independence from the UK. 
Under the feeble dynastic leadership of Sonia Gandhi (the widow of assassinated prime minister Rajiv Gandhi, Nehru’s grandson and the son of Prime Minister Indira Gandhi) and her son Rahul, Congress now seems unable even to retain seats in its historic bastions, such as Uttar Pradesh. 
Indeed, its main opponent, the ruling Bharatiya Janata Party, seems to have the 2019 parliamentary election already locked up. 
In South Africa, another great party of national liberation – the African National Congress, which helped to bring about the downfall of apartheid – is facing similar rot. 
Just 18 years after Nelson Mandela left the presidency, the ANC is crumbling under the ruinously corrupt leadership of President Jacob Zuma. 
An official split among embattled and embittered rival factions may very well take place when the ANC chooses a new leader later this year. 
Of course, great political parties have died before. 
In the nineteenth and early twentieth centuries, the Liberal Party, not Labour, was the Conservatives’ main rival in the UK, thriving under the leadership of figures like William Gladstone and David Lloyd George. 
Yet that ended just a few years after World War I, as the British journalist-turned-historian George Dangerfield chronicled in his book The Strange Death of Liberal England. 
In Italy, the postwar political parties – the Christian Democrats, the Communists, and the Socialists – experienced something of a mass extinction, after the Tangentopoli (Bribesville) corruption scandal erupted in 1992. 
The next year, Canada’s Conservative Party was practically wiped out in a parliamentary election, in which it lost all but two of its 151 seats. 
Many explanations for the fall of political parties have been advanced. 
Working-class voters’ move to the middle class did as much to kill off Western Europe’s communist parties as the failure of the Soviet regime. 
More broadly, in countries where coalition governments comprise parties with similar ideologies, it can be easy for voters to shift their loyalty. 
This is particularly true nowadays, as voters increasingly view parties as brands that can be replaced if they fail to keep up with consumer tastes, rather than as focal points of unassailable tribal loyalty. 
Moreover, voters nowadays are more and more likely to focus on one or two key policies, rather than a party’s entire program. 
It is this thinking that has allowed single-issue parties like the immigration-focused UK Independence Party (UKIP) to thrive. 
The increased use of referenda in the world’s developed democracies seems a direct outgrowth of the turn toward consumer-oriented politics. 
The problem is that referenda undermine accountability, as they enable ill-advised decisions based on simplistic questions, as was the case with the UK’s feckless Brexit vote. 
In such situations, the playwright Bertolt Brecht once quipped ironically, the only alternative is to “dissolve the people and elect another.” 
But, while consumer-minded voting goes some way toward explaining the demise of parties like France’s Socialists, it does not explain the decline of the Indian National Congress and the ANC. 
Their problems seem, instead, to be rooted in arrogance. 
For the Indian National Congress, that arrogance is largely hereditary. 
From Nehru to Indira and Rajiv Gandhi to the current incompetent face of the party, Rahul, the Gandhi family has viewed leadership and control of Congress as a birthright that cannot be rescinded, regardless of the individual’s actual skill or qualifications. 
As for the ANC, its arrogance seems more akin to that of the CPSU: an overweening sense of “owning” the state, which makes corruption seem like a form of electoral entitlement. 
Arrogance of this sort cuts a party off from its actual supporters, who then find it easier to search, and to find, a viable alternative. 
But, in politics, death need not be permanent. 
Mexico’s Institutional Revolutionary Party (PRI), for example, ruled the country for 71 years, before its defeat in 2000. 
At the time, it was assumed that the PRI would never return to power. 
Yet, by 2012, it did, with the election of current President Enrique Peña Nieto. 
This possibility may be why the Gandhi family and Zuma are so nonchalant about their parties’ decay. 
The question, though, is whether anything that comes back from the dead can ever again be what it was. 

The Retreat of the Renminbi 
NEW YORK – “The globalization of the yuan seems remorseless and unstoppable,” pronounced The Economist in April 2014. 
Indeed, use of the Chinese yuan, or renminbi (RMB), in global payments would double between then and August 2015, to 2.8% of the total, making China’s currency the fourth most used in the world. 
Since then, however, this growth has been almost entirely reversed. 
The RMB’s share in global payments has fallen to 1.6%, knocking it down to number seven. 
Its use in global bond markets is down 45% from its 2015 peak. 
RMB deposits in Hong Kong banks are also down by half. 
And whereas 35% of China’s cross-border trade was settled in RMB in 2015 (with most of the remainder in dollars), that share has fallen to about 12% today. 
The RMB’s reversal of fortune reflects four factors in particular. 
For starters, whereas the dollar value of the RMB rose nearly every year from 2005 to 2013 – by 36.7% in total – it has since fallen steadily, discouraging speculators. 
Since 2014, the exchange rate has weakened by an increasing amount every year, and is now down over 11% since the drop began, despite intervention by the People’s Bank of China (PBOC) to support the currency (not to hold it down, as US President Donald Trump has alleged). 
As a result, investors have abandoned the idea that RMB appreciation is a one-way bet. 
Capital inflows driven by that bet are over. 
The RMB’s fall against the dollar reflects the slowing of China’s debt-fueled economic growth and the accumulation of default risks. 
Chinese residents and companies are, not surprisingly, seeking new ways (legal and otherwise) to move money out of the country. 
In April, PBOC Deputy Governor Yi Gang tried to reassure nervous investors in a presentation in New York by saying that the level of non-performing loans (NPLs) in the Chinese banking sector had “pretty much stabilized after a long time of climbing.” 
This was, he said, “a good development in the financial market.” 
But Yi was spinning. 
NPLs have stabilized as a percentage of total bank loans, but only because the number of loans has continued to rise. 
Many of these new loans are to deadbeat clients, and can be expected to go sour in due course. 
In fact, in absolute terms, NPLs grew by $35 billion in 2016, reaching $220 billion. Banks are also using accounting tricks to hide trillions in further exposures. 
In an effort to stem the weakening of the exchange rate, the authorities have made it more difficult to convert RMB to dollars. 
Having previously supported Chinese investment abroad, they are now blocking outbound mergers and acquisitions to keep domestic companies from exporting capital. 
They have simultaneously made capital repatriation more difficult for foreign investors. 
While this helps keep existing capital in China, it is also discouraging foreigners from committing more. 
This is the second factor discouraging accumulation of the Chinese currency. 
Faced with the choice between short-term economic stability and currency flexibility, Chinese policymakers are choosing stability. 
This raises questions about their long-term commitment to full convertibility, an important step for the RMB to reach genuine reserve-currency status. 
The third factor undermining the RMB is that China has exhausted its export potential. 
The country and its currency have gained prominence because of China’s extraordinary integration into the global economy since its admission into the World Trade Organization in 2001. 
China’s share of world exports grew from 1% in 1980 to 14% in 2015, making it the world’s largest exporter. 
But its share of global exports has since fallen, to 13.3%. 
Those who saw China as the national equivalent of Amazon.com, selling more to more people year on year, have been disappointed. 
The fourth factor is the reversal of globalization itself. 
Capital flows – in the form of equity and bond purchases, foreign direct investment, and lending – fell by over two thirds, from $11.9 trillion to $3.3 trillion, between 2007 and 2015. 
Trade barriers are up. 
Discriminatory measures are spreading faster than liberalizing policies. 
Merchandise trade is falling, too, contracting 10% between 2011 and 2015, which was the largest drop over any four-year period since World War II. 
China is therefore not only losing export-market share, but is doing so in a shrinking global market. 
As a consequence, the dollar value of China’s exports has fallen by 9.1% since its peak in early 2015. 
The net result is that, compared to just a few years ago, the world has little, if any, reason to continue accumulating RMB. 
The globalization of the RMB is no longer “remorseless and unstoppable.” 
On the contrary, it appears, for the foreseeable future, to be well and truly over. 

A New Macroeconomic Strategy 
NEW YORK – I am a macroeconomist, but I dissent from the profession’s two leading camps in the United States: the neo-Keynesians, who focus on boosting aggregate demand, and the supply-siders, who focus on cutting taxes. 
Both schools have tried and failed to overcome the high-income economies’ persistently weak performance in recent years. 
It is time for a new strategy, one based on sustainable, investment-led growth. 
The core challenge of macroeconomics is to allocate society’s resources to their best use. 
Workers who choose to work should find jobs; factories should deploy their capital efficiently; and the part of income that is saved rather than consumed should be invested to improve future wellbeing. 
It is on this third challenge that both neo-Keynesians and supply-siders have dropped the ball. 
Most high-income countries – the US, most of Europe, and Japan – are failing to invest adequately or wisely toward future best uses. 
There are two ways to invest – domestically or internationally – and the world is falling short on both. 
Domestic investment comes in various forms, including business investment in machinery and buildings; household investment in homes; and government investment in people (education, skills), knowledge (research and development), and infrastructure (transport, power, water, and climate resilience). 
The neo-Keynesian approach is to try to boost domestic investment of any sort. 
Indeed, according to this view, spending is spending. 
Thus, neo-Keynesians have tried to spur more housing investment through rock-bottom interest rates, more auto purchases through securitized consumer loans, and more “shovel-ready” infrastructure projects through short-term stimulus programs. 
When investment spending does not budge, they recommend that we turn “excess” saving into another consumption binge. 
Supply-siders, by contrast, want to promote private (certainly not public!) investment through more tax cuts and further deregulation. 
They have tried that on several occasions in the US, most recently during the George W. Bush administration. 
Unfortunately, the result of this deregulation was a short-lived housing bubble, not a sustained boom in productive private investment. 
Though policy alternates between supply-side and neo-Keynesian enthusiasm, the one persistent reality is a significant decline of investment as a share of national income in most high-income countries in recent years. 
According to IMF data, gross investment spending in these countries has declined from 24.9% of GDP in 1990 to just 20% in 2013. 
In the US, investment spending declined from 23.6% of GDP in 1990 to 19.3% in 2013, and fell even more markedly in net terms (gross investment excluding capital depreciation). 
In the European Union, the decline was from 24% of GDP in 1990 to 18.1% in 2013. 
Neither neo-Keynesians nor supply-siders focus on the true remedies for this persistent drop in investment spending. 
Our societies urgently need more investment, particularly to convert heavily polluting, energy-intensive, and high-carbon production into sustainable economies based on the efficient use of natural resources and a shift to low-carbon energy sources. 
Such investments require complementary steps by the public and private sectors. 
The necessary investments include large-scale deployment of solar and wind power; broader adoption of electric transport, both public (buses and trains) and private (cars); energy-efficient buildings; and power grids to carry renewable energy across large distances (say, from the North Sea and North Africa to continental Europe, and from California’s Mojave Desert to US population centers). 
But just when our societies should be making such investments, the public sectors in the US and Europe are on a veritable “investment strike.” 
Governments are cutting back public investment in the name of budget balance, and private investors cannot invest robustly and securely in alternative energy when publicly regulated power grids, liability rules, pricing formulas, and national energy policies are uncertain and heavily disputed. 
In the US, public investment spending has been slashed. 
Neither the federal government nor the states have political mandates, funding strategies, or long-term plans to catalyze investment in the next generation of smart, clean technologies. 
Both neo-Keynesians and supply-siders have misunderstood the investment paralysis. 
Neo-Keynesians see investments, public and private, as merely another kind of aggregate demand. 
They neglect the public-policy decisions regarding energy systems and infrastructure (as well as the targeted R&D to promote new technologies) that are needed to unleash smart, environmentally sustainable public and private investment spending. 
Thus, they promote gimmicks (zero interest rates and stimulus packages), rather than pressing for the detailed national policies that a robust investment recovery will require. 
The supply-siders, for their part, seem utterly oblivious to the dependence of private investment on complementary public investment and a clear policy and regulatory framework. 
They advocate slashing government spending, naively believing that the private sector will somehow magically fill the void. 
But, by cutting public investment, they are hindering private investment. 
Private electricity producers, for example, will not invest in large-scale renewable energy generation if the government does not have long-term climate and energy policies or plans for spurring construction of long-distance transmission lines to carry new low-carbon energy sources to population centers. 
Such messy policy details have never much bothered free-market economists. 
There is also the option of using domestic saving to boost foreign investments. 
The US could, for example, lend money to low-income African economies to buy new power plants from US companies. 
Such a policy would put US private saving to important use in fighting global poverty, while strengthening the US industrial base. 
Yet here, too, neither the neo-Keynesians nor the supply-siders have exerted much effort to improve the institutions of development finance. 
Instead of advising Japan and China to raise their consumption rates, macroeconomists would be wiser to encourage these economies to use their high savings to fund not only domestic but also overseas investments. 
These considerations are reasonably clear to anyone concerned with the urgent need to harmonize economic growth and environmental sustainability. 
Our generation’s most pressing challenge is to convert the world’s dirty and carbon-based energy systems and infrastructure into clean, smart, and efficient systems for the twenty-first century. 
Investing in a sustainable economy would dramatically boost our wellbeing and use our “excess” savings for just the right purposes. 
Yet this will not happen automatically. 
We need long-term public-investment strategies, environmental planning, technology roadmaps, public-private partnerships for new, sustainable technologies, and greater global cooperation. 
These tools will create the new macroeconomics on which our health and prosperity now depend. 

America’s Overrated Decline 
CAMBRIDGE – With the approach of the US Congressional elections, questions about the health of America’s political institutions and the future of its global leadership have become rampant, with some citing partisan gridlock as evidence of America’s decline. 
But is the situation really that bad? 
According to the political scientist Sarah Binder, the ideological divide between America’s two main political parties has not been as large as it is now since the end of the nineteenth century. 
Despite the current gridlock, however, the 111th Congress managed to pass a major fiscal stimulus, health-care reform, financial regulation, an arms-control treaty, and revision of the military policy on homosexuality. 
Clearly, the US political system cannot be written off (especially if partisan gridlock is cyclical). 
Nonetheless, today’s Congress is plagued by low legislative capacity. 
Though ideological consistency has more than doubled over the last two decades, from 10% to 21% of the public, most Americans do not have uniformly conservative or liberal views, and want their representatives to meet one another halfway. 
Political parties, however, have become more consistently ideological since the 1970s. 
This is not a new problem for the US, whose constitution is based on the eighteenth-century liberal view that power is best controlled by fragmentation and countervailing checks and balances, with the president and Congress forced to compete for control in areas like foreign policy. 
In other words, the US government was designed to be inefficient, in order to ensure that it could not easily threaten the liberty of its citizens. 
This inefficiency has likely contributed to the decline in confidence in American institutions. 
Today, less than one-fifth of the public trusts the federal government to do the right thing most of the time, compared to three-quarters in 1964. Of course, these figures surged occasionally during that period, such as after the September 11, 2001, terrorist attacks; but the overall decline is considerable. 
The federal government is not alone. 
Over the last several decades, public confidence in many influential institutions has plummeted. 
From 1964-1997, the share of Americans who trusted universities fell from 61% to 30%, while trust in major companies fell from 55% to 21%. 
Trust in medical institutions dropped from 73% to 29%, and in journalism from 29% to 14%. 
Over the last decade, confidence in educational institutions and the military has recovered, but trust in Wall Street and large corporations has continued to fall. 
But these ostensibly alarming figures can be misleading. 
In fact, 82% of Americans still consider the US to be the world’s best place to live, and 90% like their democratic system of government. 
Americans may not be entirely satisfied with their leaders, but the country is certainly not on the brink of an Arab Spring-style revolution. 
Moreover, though party politics have become more polarized in recent decades, this follows the 1950s and early 1960s, when the escape from the Great Depression and victory in World War II fueled unusually high confidence in US institutions. 
In fact, the sharpest decline in public trust in the government occurred in the late 1960s and early 1970s. 
Moreover, declining trust in the government has not been accompanied by significant changes in citizens’ behavior. 
For example, the Internal Revenue Service is among the government institutions that inspire the least public confidence; yet there has been no major surge in tax evasion. 
In terms of controlling corruption, the US still scores in the 90th percentile. 
And though voting rates in presidential elections declined from 62% to 50% in the latter half of the twentieth century, they stabilized in 2000, and rose to 58% in 2012. 
The loss of confidence that Americans have expressed may be rooted in a deeper shift in people’s attitudes toward individualism, which has brought about decreased deference to authority. 
Indeed, similar patterns are characteristic of most post-modern societies. 
This social shift probably will not influence US institutions’ effectiveness as much as one might think, given America’s decentralized federal system. 
In fact, gridlock in the national capital is often accompanied by political cooperation and innovation at the state and municipal levels, leading citizens to view state and local governments, as well as many government agencies, much more favorably than the federal government. 
This approach to governance has had a profound impact on the mentality of the American people. 
A 2002 study indicated that three-quarters of Americans feel connected to their communities, and consider their quality of life to be excellent or good, with nearly half of adults participating in a civic group or activity. 
That is good news for the US. 
But it does not mean that America’s leaders can continue to ignore the political system’s shortcomings, such as the gerrymandered “safe seats” in the House of Representatives and obstructive processes in the Senate. 
Whether such sources of gridlock can be overcome remains to be seen. 
And there is legitimate reason to doubt America’s ability to maintain its “hyperpower” status, not least owing to the rise of major emerging economies. 
But, as the conservative author David Frum notes, over the last two decades, the US has experienced a swift decline in crime, auto fatalities, alcohol and tobacco consumption, and emissions of sulfur dioxide and nitrogen oxide, which cause acid rain – all while leading an Internet revolution. 
Given this, dire comparisons to, say, the decline of Rome are simply unwarranted. 

Deconstructing Saleh 
LONDON – Ali Abdullah Saleh is finished as Yemen’s president. 
Popular democratic protests that started on a small scale in mid-February outside Sanaa University have widened to encompass the whole country. 
The continuity and strength of the demonstrations clearly indicate that the regime’s days are numbered. 
Tribal leaders have joined the protesters. 
Even close allies who belong to Saleh’s own Hashid tribe, such as Ali Mohsen al-Ahmar, have abandoned him. 
Now, even his long-term protector, the United States, seems to be abandoning him. 
Saleh, who has been in power since 1978, knows that his time is up. 
“They are falling like leaves in autumn,” he recently said of the regime’s defectors. 
Resignations have increased: ambassadors, ministers, significant media figures, and army generals. 
It is the last group that is decisive: when senior military and security personnel abandon an authoritarian regime in the face of popular pressure, its days are numbered. 
Yet Saleh retains the loyalty of the interior ministry, the Republican Guard, and part of the air force. 
Still, clashes between the army and the Republican Guard are further eroding the regime’s coherence. 
Like other dictators in their political death throes – former Egyptian President Hosni Mubarak and Libya’s Col. Muammar el-Qaddafi, for example – Saleh has warned of the dangers the world would face if he is forced to depart: the Muslim Brotherhood, al-Qaeda attacks, Iranian regional hegemony, and the breakup of Yemen.Après moi le déluge seems to be the sole justification he can offer for his continued rule. 
His desperation mounting, Saleh has ordered deadly attacks on protesters, evidently believing that his considerable skill at political manipulation would see him through. 
But, when he declared a state of emergency on March 23, the number of protesters in the streets doubled. 
Given his regime’s obvious lack of legitimacy, Saleh is playing a dangerous game; the sooner he leaves, the better for Yemen’s stability and security. 
Indeed, all Yemenis – Houthis, Harak, and even al-Hashids – appear united in their opposition to Saleh’s ailing regime and in their quest for civil and human rights. 
Members of hundreds of tribes have erected tents in “Change Square” in Sanaa. 
Perhaps more remarkably, in a country containing more than 12 million guns, the protesters have not fired a shot. 
Then, on the eve of the Yemeni opposition’s planned “Friday of Departure” protests in late March, the United States resuscitated Saleh’s rule. 
Defense Secretary Robert Gates declared that, “the fall of Saleh would pose a real problem for US counterterrorism work.” 
Saleh, emboldened by Gates’ remarks, immediately appeared on television and ordered all opponents to leave Yemen, as if millions of Yemenis would simply desert the country, leaving him and his family to reside in peace. 
Since 2009, the US has showered Saleh’s government with military aid. 
But the US knows that al-Qaeda is an enemy of convenience for Saleh, and that the danger to the US from post-Saleh chaos in Yemen is exaggerated. 
Democracy does not coexist with al-Qaeda. 
On the contrary, the rising threat of radicalization stems from delaying Saleh’s departure. 
America’s credibility, already low in Yemen, has hit rock bottom; its leaders’ words are no longer taken at face value. 
The gap between US rhetoric and policies has widened. 
The Obama administration relied on the language of human rights in Libya, but it was content to ignore the democratic demands of millions of Yemenis. 
The reality is that the US has known for weeks that it cannot save Saleh’s regime. 
Its concern for Saleh’s political survival is closely linked to its guardianship of the Saudi regime, which fears that ferment in Yemen could give Saudi Arabia’s own Shia, Zaidi, and Ismaili populations dangerous ideas about democratic reform, if not threaten the very existence of the Saudi state. 
After all, Saudi Arabia’s southern tribes and Yemen’s northern tribes are historically the same people, while the Shia in the Kingdom’s oil-rich Eastern Province are protesting in political harmony with the Shia of Bahrain. 
Not surprisingly, Saleh tried to reach for the familiar Saudi lifeline, sending his foreign minister to Riyadh to plead for the sort of help the Saudi king provided to Bahrain. 
But the Saudis, having backed Saleh financially, and having sent troops to Yemen in 2009 to help him wage war against the Houthis, now consider him beyond saving. 
Instead, they are betting on potential new alliances within Yemen to deal with their unpredictable neighbor. 
Finally, the US now appears to have concluded that Saleh’s regime cannot be revived. 
The most compassionate measure that the US, and Saudi Arabia, should take is a form of political euthanasia. 
A young Yemeni protester put this case succinctly: “America, stop administering life support to Saleh and deal with us directly. 
Yemen is the Yemeni people. 
We are Yemen. 
Saleh is only your crony.” 

Deconstructing Yeltsin 
PRINCETON: Around the world commentators fondly insist that Boris Yeltsin's relations with reality are episodic, unpredictable, erratic, maybe even insane. 
Sacking your entire cabinet when everyone thinks you are home sick in bed only adds to this impression. 
But those who subscribe to it are very wrong. 
True, Yeltsin is not the healthiest president Russia has ever had, but his actions in dismissing his government are neither strange nor the result of illness. 
They are very Russian. 
The sheer "Russianness" of Russia’s president should not be hard for outsiders to grasp. 
The problem is that, for years, the world has misinterpreted Yeltsin. 
By declaring himself anti-communist a decade ago, Yeltsin earned the nearly unconditional support of the United States and the West. 
But being a democrat does not make Yeltsin any less Russian. 
Every time he does something typically Russian, the world (America most of all) seems genuinely stunned. 
Rash and rushed attempts are made to explain away his behavior as caused by bad advisers, old age, failing health, and/or a feeble mental capacity. 
It is, of course, difficult to make sense of someone who declares himself just like you and then acts in ways you can scarcely fathom. 
Look again at Yeltsin's actions over the past five years, however, and each makes perfect sense from the point-of-view of an authoritarian Russian leader a little modernized and democratized by the existence of open borders. 
In 1993 Russia’s president ordered his tanks to open fire at his own Parliament, excusing this as necessitated by a threat to democracy. 
In 1994 Yeltsin started a war in Chechnya, insisting that guns were the only means with which to deal with uppity nationalist rebels. 
In 1995 at the United Nations he declared that Russia would not support an American presence in Bosnia; after a personal meeting with President Clinton, however, he suddenly agreed to back up the American president, apparently for the sake of the presidential buddy system. 
After being out of his office for almost a year because of illness, on his return in March 1997 Yeltsin sacked practically his entire cabinet, accusing them of not working, and claiming that a little anxiety was a good way to teach Russians how to do their jobs. 
This year’s cabinet dismissals are a familiar sort of deja-vu, at least through Russian eyes, and not only because these mass firings happened two years running. 
Russians remember that when Stalin felt that things were getting too quiet, he would shake people up with a purge. 
Granted, Stalin's urges were bloody and violent, but the impulse to upset the applecart on a whim remains incredibly familiar to Russians. 
Russian leaders (as do ordinary Russians) like drama; they lack patience. 
This is why Russians prefer revolutions: it is easier to fix the blame on someone for the world’s imperfections than bring about change in a steady, persistent way. 
To achieve most things you need a clear strategy. 
But Russians are not good at stratagizing. 
They act on impulse; wait to see what happens; hoping that things will turn out right. 
Yeltsin, I believe, has no clear understanding of what his government should do or be. 
He felt an urge, and now the chips will fall and only he can pick up the pieces. 
One other thing to keep in mind about Yeltsin is this: Russian leaders are not prepared mentally to leave office in their lifetime. 
Chernomyrdin, an acting president whenever Yeltsin took to his sick bed, acquired excessive power insofar as Yeltsin was concerned. 
More and more Chernomyrdin appeared anointed the president's successor. 
It became a question of Boris Nikolaevich's honor to show "who is a master in the house." 
So he did, and in a very clever way. 
Yeltsin didn't simply fire his prime minister, allowing Chernomyrdin to go into opposition and become a real threat, which is the mistake Gorbachev made with Yeltsin in 1989. 
No, Yeltsin gently shifted his premier into managing a future presidential campaign, most likely Yeltsin's own. 
As for Sergei Kirienko, the 35- year-old acting prime minister, the message is obvious: it doesn't matter who governs, as long as I, President Yeltsin, am in charge. 
All of this tumult is mere prelude. 
Any number of articles in the Russian press suggest the possibility of Yeltsin running once more for president in 2000. 
Russia’s Constitutional Court will decide about the legality of this come October. 
Although the constitution limits the president to 8 years in office, just when the clock started on Yeltsin is in question: did it begin when he was elected president of a Russia still part of the USSR, or did it only begin in July 1996, after he won the first presidential campaign conducted by the Russian Federation? 
I’m no constitutional scholar, but I see all sorts of escapes for Yeltsin within his constitution. 
So imagine what kind of loopholes a real lawyer can discover if the president asks him nicely to find them? 
In a country where law is the man in power, this remains probable. 
Instead of seeing Yeltsin’s actions as erratic, we should recognize them for what they are: declarations that he remains strong and powerful, and planning to stay high up for years to come. 
Yeltsin may lack the stamina to complete another 6 years as president, but that doesn’t matter. 
He will insist on serving his country until his dying breath, on leaving this world only from his Kremlin office. 
In this, Boris Yeltsin is a most typical Russian leader. 

Deepening NAFTA 
The good news about NAFTA is that there is little news about NAFTA. 
That quiet, so different from the protests that greeted the North American Free Trade Area's creation a decade ago, reflects NAFTA's clear achievement in facilitating and integrating economic exchange among its three partners. 
Next week's meeting between the Mexican and American presidents should take advantage of this success to push NAFTA forward in creative new ways. 
Luckily, a road map for NAFTA exists. 
When the then President-elect Vicente Fox of Mexico traveled to the United States and Canada in the fall of 2000, he carried a bold proposal: after eight years it was time for Canada, the US and Mexico to establish a longer-term goal of creating a North American Community. 
Although his unorthodox suggestion met with skepticism, his ideas established an agenda that NAFTA's three partners should pursue. 
Why fix what is not broken? 
Because, from Mexico's perspective, NAFTA has not yet achieved one of its key goals: to deliver the benefits of free trade to all of the country's regions and sectors. 
For NAFTA to realize its full potential and move the convergence process, opening borders to trade and reducing tariff barriers are not enough. 
Since its founding in 1994, NAFTA has been characterized (at best) by a bilateral management of issues and problems. 
Too often, the US has taken a unilateral approach. 
Trilateral or sub-regional cooperation is our goal. 
As it stands, Mexico and Canada have been limited to dealing with the US on an individual basis because the three countries - for different reasons - prefer to keep separate bilateral links with their neighbors. 
The result of this is to neglect the overall North American perspective while giving preference to a domestic or bilateral vision that sometimes fails to promote the larger objective of integration. 
To promote a regional perspective, Mexico, Canada, and the US must consider establishing an institutional forum where such discussions can take place and where recommendations to governments can emerge. 
This is especially the case as the three countries assess the feasibility of common migration policies, border development and infrastructure, shared natural resources, environmental protection, economic and social policy coordination, and other issues of common concern. 
Several concrete proposals have been advanced on how to achieve this. 
At a minimum, a North American Commission or coordinating mechanism should be set up to begin the process. 
While the European Commission model may not be what NAFTA needs, the governments of Canada, Mexico, and the US should establish a permanent mechanism for channeling ideas and proposals, and transforming those ideas into action. 
One area ripe for an institutional mechanism is energy. 
North America shares one of the richest and most varied energy resource pools in the world. 
Having excluded energy from the original NAFTA talks, Canada and Mexico are now willing to engage with the US on a common energy strategy. 
Indeed, talks on the subject have taken place among ministers from the three countries. 
As each advances its domestic energy strategy, identifying synergies can help in rationalizing and making optimum use of what energy resources are available. 
Another example of the new regional agenda can be found in the aftermath of the attacks of September 11 th . 
Protecting North America and securing its borders has become a major priority in the fight against international terrorism and there must be a common response. 
Having created a functioning, regional, open trade area, the three countries must ensure that the new imperative to secure borders does not obstruct legitimate flows of goods, services and people. 
A NAFTA-wide security perimeter could transform internal borders in much the same way that the Schengen Agreement transformed borders within much of continental Europe. 
The re-casting of the bilateral agenda on migration between Mexico and the US, well underway prior to 9/11, must be reconciled with America's new concept of homeland security. 
While some argue that the fight against terrorism is the natural enemy of regularizing migration, others agree that now more than ever the countries of North America need to address this issue trilaterally. 
Migration, security, energy, labor and the other issues that make up the North American agenda must be discussed, managed and implemented in trilateral bodies with the expertise necessary to identify, harmonize and eventually converge policy-making for the region. 
This requires greater communication between and among decision-makers in all three NAFTA members. 
The agenda and timetable for convergence must be set by NAFTA's elected leaders, but implementation should be in the hands of a new commission. 
Possible subjects for that commission's agenda include: financial, fiscal and customs harmonization; transport infrastructure; natural resources and regional development. 
There are, of course, many other issues, some of which already receive intensive cooperative efforts, especially in the fields of combating organized crime, drug and human trafficking, and the cross-border flow of contraband. 
In any case, problems need to be identified so that opportunities for cooperation are created. 
Today's challenge is to renew NAFTA by adding the concept of partnership to it. 
Although recognizing that much still divides us, major common goals do provide a solid foundation for future cooperation. 
All three countries now find themselves at a juncture favorable to building a North American Commission to address the needs of the North American Community. 
We should seize the moment and proceed with negotiations to create such a forum. 

Defamation and Development in the Arab World 
AMMAN – With the violent radicalism and civil wars of the Middle East and North Africa capturing the world’s attention, the region’s grossly distorted legal systems are being given short shrift. 
Yet problematic laws, like those criminalizing defamation, \ facilitate political and economic repression, undermine development, and destroy lives. 
Egypt’s government is perhaps the biggest abuser of defamation and blasphemy laws to suppress differing views. 
In particular, the Egyptian authorities brazenly use Article 98(f) of the Egyptian Penal Code – which prohibits citizens from defaming a “heavenly religion,” inciting sectarian strife, or insulting Islam – to detain, prosecute, and imprison members of non-majority religious groups, especially Christians. 
All that is needed is a vague claim that their activities are jeopardizing “communal harmony.” 
Moreover, the writer Ahmed Naji was recently handed a two-year prison sentence for violating “public modesty,” by publishing a sexually explicit excerpt from his novel. 
This came just a month after the author Fatma Naoot appealed the three-year sentence she received when a Facebook post criticizing the slaughter of animals for a Muslim feast led to a guilty verdict for “contempt for Islam.” 
The list goes on. 
Ominously, according to a 2015 report by the US Commission on International Religious Freedom, blasphemy cases have been on the rise since 2011. 
In January 2015, President Abdel Fatah al-Sisi issued a decree that permits the government to ban any foreign publications it deems offensive to religion, thereby expanding the government’s already significant censorship powers and increasing pressure on journalists further. 
The situation is not much better in Tunisia, where, according to Freedom House’s 2015 report, “criminal defamation remains one of the biggest obstacles to independent reporting.” 
Moreover, many are concerned that the country’s newly established cyber-crime investigative agency will carry out “unchecked government surveillance on Tunisian citizens,” as occurred under former President Zine El Abidine Ben Ali, who was ousted in the Arab Spring revolution. 
Jordan has also ratcheted up its attempts to limit free expression, with a June 2015 amendment to its cyber-crime law allowing the attorney-general to detain, without a court order, anyone deemed to have used the Internet for defamation. While Jordan’s Press and Publications Law prohibits the arrest of journalists for opinions expressed in print, journalists are now fair game if those opinions appear online. 
And, indeed, charges have already been brought against several. 
Among the highest-profile defamation-related cases in the Middle East today is that involving Najat Abu Bakr, a member of Palestine’s parliament who has been summoned for interrogation by the attorney-general after leveling corruption accusations against Hussein al-Araj, a cabinet minister with close ties with President Mahmoud Abbas. 
The move seems also to be motivated by Bakr’s support for a teacher’s strike in the West Bank – an embarrassment to the Abbas government. 
Though Palestine’s attorney-general is allowed, under existing defamation legislation, to hold a person for 48 hours of questioning, human-rights groups have condemned the move. 
Bakr, for her part, refused the order, and staged a sit-in at the parliament building. 
Palestinian security forces surrounded the building, but did not attempt to arrest her. 
The intensification – and increasingly broad application – of defamation laws in the Middle East and North Africa represents a dangerous trend, one that is fueling an increasingly powerful backlash from civil-society groups. 
Naji’s case, for example, spurred Egyptian writers, artists, and filmmakers to launch a public campaign for greater freedom of creativity and expression. 
Furthermore, the former Google executive Wael Ghonim, who was active in the country’s 2011 uprising, publicly criticized the verdict against Naji. 
And several state-owned artistic publications were issued with their front pages either depicting Naji or including just a few words expressing support for free speech, with the rest of the page left blank. 
In Jordan, a coalition led by the Center for Defending Freedom of Journalists has launched a new campaign, “Talk is Not a Crime,” to raise awareness about declining media freedom. 
And in Palestine, protests against the use of defamation laws to imprison political opponents have gained traction, with popular support for Bakr having played a key role in spurring the agreement that allowed her to return to her house in Nablus without being arrested or called in for questioning. 
Outcries against individual cases can go only so far. 
Campaigns must – and, increasingly, do – focus on genuine changes to defamation laws, to ensure that governments cannot use them to stifle dissent. 
The key will be to remove the criminal element from defamation cases, and thus the prospect of imprisonment, and instead prosecute them as civil cases, with those found guilty of defamation being subject to reasonable fines. 
Compelling lawmakers to decriminalize defamation will not be easy. 
But with a concerted effort from all relevant parties – especially the media, civil society, and human-rights activists – plus the support of regional and international actors, it is possible. 
Given the critical importance of free speech to economic and social progress, there is no time to waste. 

Defeating Communism Isn't Enough for Ukraine 
NEW YORK: Leonid Kuchma may have trounced his nearest contender -- the Communist Petro Simonenko -- but his recent election to a second five-year term as Ukraine's president is no victory for democracy. 
Nor is it a victory for Ukraine. 
Indeed, Kuchma seems to have torn a page from Boris Yeltsin's 1996 campaign manual, employing strong-arm tactics to intimidate and silence the opposition, as well as a tainted privatization process to buy support from Ukraine's powerful and corrupt oligarchs. 
While election day itself was relatively free from fraud and thuggery, the process leading up to the ballot was fraught with abuse. 
President Kuchma's administration has proved a jealous overseer of Ukraine's media, particularly the electronic outlets. 
Out of four national television stations, two are directly controlled by Kuchma, and a third by his allies. 
The fourth, STB, initially tried to present a balanced picture but was intimidated by tax police raids and forced to become yet another pro-government organ. 
In this environment of intimidation, those who yet dared oppose the President got a clear warning through official channels. 
Partisan abuse of the country's administrative structures to discourage dissent is widespread, particularly the use of tax collectors to harass opponents. 
On November 1, the day after the first round of voting that later pitted Kuchma against Simonenko, three governors were unceremoniously dismissed when returns in their oblasts did not favor Kuchma. 
While opponents are silenced and maginalized, the President's supporters grow richer and more powerful. 
Victor Pinchuk, a powerful figure from Kuchma's home town of Dnipropetrovsk, and the boyfriend of the President's daughter, secured a profitable metalworks in a September round of privatization. 
And Oleksander Volkov, who headed one of Kuchma's campaign teams is a key figure in the President's camp, with access to inside information despite the fact that investigators in Brussels have frozen his foreign assets and Ukraine's own Parliament has repeatedly targeted him as part of an "anti-mafia" campaign. 
The result for ordinary Ukrainians has been disappointing. 
They voted for Kuchma not because they approve of his policies -- his administration's economic record is dismal -- but because they did not want to see a return of communism. 
Young people, who this time turned out in droves, voted for Kuchma because he promised them market reform and integration with Europe. 
Their hopes should not be dashed. 
President Kuchma must move fast to use his 56% victory at the polls to distance himself from greedy oligarchs and institute long-promised economic and political reform. 
The President needs to be put on notice that the Western governments that have supported him will not tolerate a continuance of the status quo. 
A bloated, inefficient, and corrupt government has been able to survive with international help provided largely on account of Ukraine's geopolitical position. 
But a system of crony capitalism that enriches a tiny elite while the vast majority of the country's 50 million beleaguered citizens live in poverty and are bullied by bureaucrats cannot be sustained in the long run. 
The West must make it clear that Ukraine's geopolitical position isn't enough to guarantee continued support. 
The most important action that can be undertaken is to make continued assistance conditional on political and economic reform. 
Ukraine has $3.1 billion in debt payments coming due in the year 2000. 
Most of that is owed to the International Monetary Fund, which is rightly insisting on a more transparent privatization process, administrative reform, deregulation, anti-corruption and other measures before allowing the country to borrow new cash or roll over its current debt. 
Further assistance should also be made conditional on greater freedom of the mass media and an end to intimidation. 
Political conditions are as important as this or that economic target. 
I have been deeply committed to helping the development of democracy and open society in Ukraine for over a decade. 
I established a nonprofit foundation there in 1989, two years before the country became independent in 1991. 
I shall continue my support for that foundation. 
And I urge other donors to maintain or increase their support for building an open society in Ukraine. 
But financial support to the government must be strictly conditioned on performance. 
The weeks ahead will be decisive. 
Kuchma has appointed Yevhen Marchuk, a former KGB man who was a presidential candidate, to head Ukraine's National Security Council. 
Will Marchuk begin to clean the stables as many Ukrainians hope? 
He needs to break the stranglehold of the crony capitalists if he is to survive in his position. 
Or will he be co-opted by corruption as Kuchma himself has been? 
In that case it is better to withdraw support than to allow the same disreputable tactics to be used in two years time when the next parliamentary elections are due. 


Cutting ISIS’s Lifelines 
FREIBURG, GERMANY – The fall of Aleppo last month to the Russia-backed forces of Syrian President Bashar al-Assad has spurred yet another wave of discussion about the prospects for ending the civil war. 
Despite the recent countrywide ceasefire, guaranteed by Turkey and Russia, between Assad’s forces and most rebel groups, most seem to agree that the conflict is far from over. 
After all, the Islamic State (ISIS) has not agreed to anything – and is not going to. 
These observers are right about one thing: the war in Syria will not end until ISIS is defeated. 
But the belief, espoused by many, that the fall of Raqqa – ISIS’s self-declared capital – will achieve that goal is, to be frank, wrong. 
To be sure, Raqqa is, in the words of the French historian Jean-Pierre Filiu, “the operational command center” for ISIS terror attacks, such as the murder of 12 people at a Christmas market in Berlin last month, or the killing of 39 at an Istanbul nightclub on New Year’s Day. 
But the conclusion of Filiu and others that Raqqa’s fall is the key to ending attacks on Europe conflates the Syrian civil war’s causes, symptoms, and solutions. 
In fact, while ISIS’s short-term prospects are certainly linked to Raqqa’s fate, its long-term survival and influence will likely be decided thousands of miles away. 
In many ways, Saudi Arabia is the wellspring of ISIS. 
Saudis account for the second-largest number of foreign fighters in Syria and Iraq, owing largely to an identity shaped by two key historical developments. 
The first development was the adoption by Muhammad ibn Saud, the founder of the First Saudi State, of the radical “puritan” views of Muhammad ibn Abd al-Wahhab in the mid-eighteenth century – views that came to be known as Wahhabism and continue to define Saudi politics and society. 
The second was King Abdulaziz’s decision in the 1920s to institutionalize the original Wahhabi vision. 
In the view of many Saudis, ISIS’s rise represents a return to the true origins of the Saudi-Wahhabi project. 
And, indeed, it is Wahhabism that forms the core of ISIS’s ideology. 
ISIS actually distributes copies of texts written by Al-Wahhab in the areas of Iraq and Syria under its control, and draws on many of his most significant lessons. 
From an ideological perspective, therefore, defeating ISIS requires addressing the role and legacy of Wahhabism in Saudi Arabia. 
From an operational perspective, ISIS’s future will be decided largely in Tunisia, the country that has sent the most foreign fighters to Syria and Iraq, and the home country of the Berlin attacker. 
This partly reflects the authorities’ failure to produce sufficient economic opportunities for its young population, at a time when the country’s nascent democratic transition has raised expectations. 
As Shams Talbi, a 55-year-old man from the poverty-stricken city of Kasserine, explained to me in 2015, “many young people in our area consider ISIS a means to regain their dignity.” 
Reducing the number of fighters flocking to join ISIS’s ranks thus demands the economic and social integration of marginalized regions. 
Otherwise, young Tunisians (and others) will continue to find themselves so desperate that criminal groups like ISIS look like the most reliable socioeconomic equalizers. 
ISIS’s future will also have much to do with France, the European country that supplies the most fighters to the group – a fact that likely reflects its aggressive form of secularism. 
France is one of only two countries in Europe (Belgium is the other) that bans the full veil in its public schools. 
And it is the only country in Western Europe (other than Belgium) not to gain the highest rating for democracy, according to Polity data. 
Seventy percent of France’s prison population is Muslim. 
All of this lends a hand to extremist recruiters. 
The final key determinant of ISIS’s survival will be the willingness of countries, particularly in the West (and especially the United States), to recognize, finally, that oppressive regimes like those of Saudi Arabia and Egypt are part of the problem, not part of the solution. 
As one Israeli ex-general exclaimed in 2015 to Michael Oren, his country’s former ambassador to the US, “Why won’t Americans face the truth? 
To defend Western freedom, they must preserve Middle Eastern tyranny.” 
The fall of Raqqa would mark a major victory against ISIS. 
But it would not mean the end of the group or its violent attacks, which would surely persist, perhaps in new forms. 
To defeat ISIS once and for all, we need to recognize – and eliminate – its many sources of sustenance. 

Defeating North Korea’s Nuclear Blackmail 
North Korea’s announcement that it possesses nuclear weapons has fuelled a diplomatic frenzy. 
To persuade North Korea to return to the six-party talks – with China, Japan, the US, Russia, and South Korea – on defusing the nuclear threat on the Korean peninsula, Japan, the US, and South Korea have now offered to expand the scope of the talks to allow North Korea to raise any issue that concerns it. 
This could be a grave mistake. 
The talks ground to a halt in June 2004, when the North Koreans pulled out, citing the allegedly hostile policies of the US and Japanese governments. 
Now they claim to have manufactured nuclear weapons for self-defense. 
Although there had been several unofficial statements by Kim Jong-Il’s regime admitting that North Korea possessions nuclear arsenal, the announcement was the first official confirmation. 
What lay behind the declaration was the regime’s recognition that a second-term Bush administration would not soften its demand for a complete repudiation of its nuclear program, but would instead continue to pursue policies aimed at isolating and stifling North Korea. 
The same goes for Japan, whose stance on the abduction of its citizens by North Korean agents in the 1970’s and 1980’s was also cited by the Kim regime last June as a reason for walking out of the six-party talks. 
With this in mind, the North Koreans’ motives in playing the nuclear trump card are clear, and the timing couldn’t have seemed more advantageous for them: force the Americans into making concessions while the situation in Iraq leaves the US with no room for maneuver, and undercut the rising call in Japan for economic sanctions against North Korea over the abduction issue. 
Thus, whereas North Korea’s announcement of its nuclear capability strongly condemned Japan and the US, it did not mention China, Russia, and South Korea, which had been more conciliatory during the six-party talks. 
Indeed, in withdrawing from the six-party talks, North Korea did not completely abandon the possibility of resolving the nuclear standoff through dialogue. 
Rather, North Korea’s aim was to postpone the six-party talks as long as possible in order to force direct bilateral negotiations with the US, in which it would presumably extract energy assistance and other aid while demanding a security guarantee for “Dear Leader” Kim Jong-il. 
America didn’t budge on bilateral negotiations, and its response to North Korea’s recent announcement that it possesses nuclear weapons likewise emphasized the need to revive the six-party talks. 
Japan adopted a similar stance. 
Like Japan, the Bush administration’s relatively moderate stance toward North Korea has changed since the talks broke down last year. 
The US seems to be tightening its diplomatic encirclement of North Korea with a view to shifting the nuclear discussion to the UN Security Council. 
Moreover, the Japan-US Security Consultative Committee brought together the countries’ foreign and defense ministers in Washington in February to discuss common strategic objectives related to the reformation of US forward forces. 
This includes US forces in Japan, which will focus on responding to North Korean nuclear and ballistic-missile threats, as well as new threats posed by international terrorism and China’s military build-up. 
Remaining in step with each other on security issues is essential if Japan and the US are to maintain a firm alliance to ensure the stability of the Asia-Pacific region. 
The Japanese government has also been searching for effective measures to respond to North Korea’s consistently insincere attitude on regional and bilateral issues, including the abduction cases. 
Militarily, Japan revised its law on the Self-Defense Forces to establish procedures for ballistic missile defense, with a strong focus on North Korea. 
The decision, coming at the cabinet’s regular meeting on February 15th, was not intended to coincide with Kim Jong-il’s 63rd birthday the following day. 
But it did show that Japan’s government, having long suspected that North Korea already possessed nuclear weapons, would not be intimidated into a fundamental policy change by confirmation of the threat. 
The revision establishes the future direction of Japan’s military posture by delegating greater authority to the commanders of the Self-Defense Forces to initiate defensive actions against immediate threats. 
According to South Korean news reports, in addition to its existing mid-range Nodong missiles, North Korea has improved its Scud missiles, extending their range to reach Japan’s main islands. 
If North Korea is, indeed, continuing to develop not only its nuclear arsenal, but also various types of ballistic missiles, in defiance of international commitments, it is truly a rogue state. 
As for the nuclear issue, Japan’s policy toward North Korea should continue to emphasize solidifying ties with the US and strengthening cooperation with China, South Korea, and Russia, making every effort to promote early resumption of the six-party talks. 
But dialogue with the Kim regime cannot be an end in itself. 
Negotiation is necessary, and it must be sufficient, but progress will be impossible if North Korea is allowed to turn its mere participation in the six-party talks into a bargaining chip. 

 


Defending Democracy’s Essence 
PARIS – On December 10, 1948, the United Nations General Assembly adopted the Universal Declaration of Human Rights, affirming the view that “the will of the people” – democracy – should form the basis of any government. 
But seven decades later, the world’s democracies are in peril. 
After a fourfold increase in the number of democracies between the end of World War II and 2000, we are now in a sustained period of political regression. 
Once-open societies are veering toward dictatorship, and in many countries, despotic tendencies are strengthening. 
These trends can be reversed, but only if we agree on the causes of democratic backsliding and target our solutions accordingly. 
That is easier said than done. 
In her 1967 essay “Truth and Politics,” the philosopher Hannah Arendt noted that, “Freedom of opinion is a farce unless factual information is guaranteed and the facts themselves are not in dispute.” 
Unfortunately, Arendt’s farce has become our reality. 
For any democracy to be meaningful, its people need access to trustworthy information produced in a free and pluralistic environment. 
But this basic requirement is being tested as never before. 
Around the world, oligarchs are buying up media outlets to promote their interests and increase their influence, while journalists who report on issues like discrimination and corruption are met with intimidation, violence, and murder. 
How can we guarantee freedom of opinion under such conditions? 
Information and communication technologies were supposed to give us more freedom, not less. 
The early Internet democratized news and ended the dominance of traditional publishers and pro-government conglomerates. 
But this initial promise has given way to an “information jungle,” where deep-pocketed predators outmaneuver an unassuming public. 
Today, governments wage information wars; politicians use social media to spread lies; and corporate lobbyists disseminate deceptive content with ease. 
As a study from the Massachusetts Institute of Technology recently found, fake news spreads online faster than real news – often significantly so. 
Simply put, the globalization of information has tipped the scales in favor of those who view falsehood as a tool of control. 
Dictators easily export their ideas to open societies, whereas content produced under conditions of freedom rarely moves in the opposite direction. 
This challenge has been magnified by the growth of multinational technology companies, which have come to dictate the architecture of the public sphere. 
In the history of democracy, mechanisms have evolved to improve the accuracy and ethics of journalism. 
Although imperfect and often invisible, these regulatory protections have brought many benefits to users and producers alike. 
But the pace of change in the media industry – for example, between television and print, or news and advertising – has blurred the clear distinctions on which these rules were originally based. 
Protecting democratic ideals in this conflicting environment is a vital and historic task. 
That is why Reporters Without Borders (RSF) is joining with Nobel laureates, technology specialists, journalists, and human rights activists to launch the Information and Democracy Commission. 
As co-chairs of this independent initiative, our goal is to refocus global attention on the value of “a free and pluralistic public space,” and to offer solutions that enable journalists to work without fear of reprisal and allow the public to access accurate information easily. 
In the coming weeks, we will draft an International Declaration on Information and Democracy, and in coordination with the leaders of several democratic countries, work to secure support from governments around the world. 
Our efforts will accelerate in mid-November, when global leaders gather in Paris to commemorate the 100th anniversary of Armistice Day and to attend the Peace Forum and the Internet Governance Forum. 
Democracy, with its roots in the Enlightenment ideals of freedom and reason, must be defended. 
Democratic governments and citizens must not fall victim to fake news, “trolls,” and the whims of despots. 
The International Declaration on Information and Democracy is intended to strengthen open societies’ ability to combat authoritarian forces. 
We all have the good fortune to be alive during a period of extraordinary technological potential. 
And yet, we also have the responsibility to ensure that new ways to share information are not turned into tools of oppression. 
As the mission statement of our commission succinctly puts it: “Democracy’s survival is at stake, because democracy cannot survive without an informed, open, and dynamic public debate.” 

Defending India's Growth 
As India worries about instability among its neighbors, defense spending will likely rise in the year ahead. 
Because approximately 20% of India's expenditures already go to defense, there is a risk that the government's budget deficits may hit unmanageable levels, threatening the hard won growth of the last decade. 
Even before America and its allies began their bombing campaign against Afghanistan's terrorist infrastructure, India's expenditures on defense were rising fast. 
In the fiscal year ending in March 2002 the government budgeted 731.4 billion rupees (US$15.2) for defense, up 12% from the previous fiscal year. 
Coming atop an already bloated government deficit, India's government now faces hard choices if it is to maintain its reputation for economic reform. 
Early in the 1990s, India moved away from the dozy statist system bequeathed by Nehru by adopting market-friendly policies. 
These reforms put the economy on a higher growth trajectory, with average real GDP growth hitting 6% over the last decade, compared to under 4% average annual growth in previous decades. 
Inflation remained in single digits throughout the 1990s and, despite mushrooming fiscal deficits, economic growth became more stable. 
The global technology boom helped here, as India created its own ``new economy'' that had a big impact on the structure of India's exports. 
High tech exports surged from 16% annual growth in 1995-96 to 53.5% in 2000-01. Still, as in so many other countries, high tech was no magic bullet. 
Old-fashioned infrastructure bottlenecks lingered, cramping private sector expansion. 
Even though reform bolstered economic growth by improving productivity in the non-agricultural economy, scant progress was made in raising the living standards of the poor. 
Over 65% of Indian workers continue to earn their livelihood on the land, yet as the economy adjusted to the 1990's reforms, the amount of capital available for government investment in agriculture fell. 
Instead of becoming more modern, agriculture remained as dependent as ever on erratic monsoon rains and became even more volatile in its production. 
Neglect of agriculture should, perhaps, have been expected in the government's rush to modernize; what was unexpected was the government's increasing reliance on dubious fiscal strategies. 
Fiscal deficits have been growing at unsustainable levels. 
Domestic indebtedness, indeed, was 36.8% of GDP in the fiscal year ending March 2001 compared to 25.7% in 1997-98. 
The combined fiscal deficit of the central and state governments now exceeds 10% of GDP, a key risk in the eyes of international rating agencies. 
Both Standard and Poor's and Moody's downgraded India's sovereign creditworthiness by revising the outlook on long-term foreign-currency debt from stable to negative, and from positive to stable respectively. 
Trimming the deficit is now the government's biggest challenge, yet it consistently fails even to make the cuts promised in past budgets. 
Moreover, it has proven unable to speed the pace of privatization (which would add to government revenue), partly due to barriers thrown up by India's bureaucracy. 
These problems, however, are not made in Delhi exclusively. 
Indeed, India's central government has (for the most part) managed to hit its deficit targets in recent years. 
Instead, state finances are an increasing drain on overall government finance, as they have deteriorated extensively. 
This deterioration in government finances is not due to declining revenues, but to sharp increases in expenditures (such as wages, subsidies, interest payments and defense spending), which do little to boost growth in the way that government capital expenditures can. 
This growing fiscal deficit, however, has created a higher monetized deficit, inciting greater inflationary pressures. 
For a while, the government dodged trouble by turning to an improved local bond market, which helped reduce borrowing from the central bank. 
But state incursions into the capital markets are now crowding out the private sector's ability to borrow. 
Indeed, the government's market borrowing as a ratio of its total financing needs increased to 66.5% in the current fiscal year, compared to 20.6% in fiscal 1991-92. 
If India is to maintain the faster growth it achieved over the past decade, it must get its fiscal house in order by cutting government expenditures on consumption and speeding up privatization. 
But with the non-agricultural sectors of the economy declining and external trade and the balance of payments weakening because of the global economic slowdown, fiscal prudence will be harder to accomplish. 
Because of this downward spiral in economic activity, banks are now flush with liquidity, which is supporting a rally in the domestic bond market, as the slump in domestic demand drags down demand for bank credit (see the chart below). 
At a time of economic downturn, domestic banks find government bonds a safe place to park their money, making it less difficult for the government to finance its mounting fiscal deficit. 
The government can, of course, live with current conditions, but why not aim for something bolder and better? 
At the core of India's reform agenda lay a reorientation of the government's role in the economy: to improve efficiency by minimising unnecessary state intervention, thus freeing the private sector to raise long-term economic growth. 
Because that agenda remains unfinished, now is not the time for India to merely consolidate its decade of reform. 
Although the lax monetary policy environment of recent years has proven to be relatively efficient in supporting growth, greater fiscal discipline will be needed if increased private investment is to be attracted. 
Faster liberalisation, too, is essential, if India is to achieve the growth rates - say, of between 7%-8%, that can begin to improve the lives of its poor. 
Only growth on that scale can provide the government with the money it needs to increase spending on education and health at the same time it increases defense spending, and only investments in human capital can sustain the long-term growth India craves. 

Defending Japanese Defense 
Japan’s government and National Security Council plan to revise the country’s National Defense Program Outline (NDPO) by the end of this year. 
A draft of proposed changes submitted to Prime Minister Junichiro Koizumi assigns three key tasks to the Self-Defense Forces (SDF): effective response to new threats, participation in international peacekeeping activities, and defense against invasion. 
Today’s complex security environment, with terrorist attacks by non-state actors occurring alongside traditional state-to-state wars, demands a nimble, integrated strategy. The draft revision of the NDPO seems to recognize this, emphasizing the need for Japan’s own defense efforts, cooperation through the Japanese-US alliance, and contributions to multilateral missions. 
Moreover, the National Security Council has indicated the need to introduce a new plan for multi-functional flexible defense forces. 
Unfortunately, key components of Japan’s emerging security strategy remain vague and contradictory. 
For example, while the likelihood of an invasion threat is judged to be low, the Defense White Paper of 2004 argues that the SDF’s “most fundamental function” is to prepare for the worst, because sufficient defensive power cannot be developed overnight. 
In other words, Japan will clearly assert its will to defend the nation, and to prevent invasion in combination with the Japan-US security system. 
On the other hand, the National Security Council proposes “scaling down the size of defense forces,” implying mitigation of the will to defend. 
Indeed, the failure to suggest any possibility of an “emergency expansion” of the SDF compounds this anxiety. 
To be sure, the government is ultimately responsible for determining the appropriate scale of defense power in line with fiscal considerations. 
But it is also the responsibility of the government to prepare a detailed and realistic policy aimed at securing the necessary level of defense capability in the event of unforeseen threats. 
Japan’s government should thus give a clear indication of a true will to defend the country’s security. 
Of course, defense capability cannot be judged solely according to force levels. 
The draft NDPO’s vision of a new, more adaptable, mobile, flexible, and multi-purpose SDF, with advanced technological resources and information gathering capacity, calls for a fundamental reassessment of the existing organization and equipment. 
In conformity with the international community’s efforts to secure peace and stability, the draft also creates a core unit within each of the military branches, and establishes an integrated operational system. 
The military reorganization that the NDPO envisages is far-reaching. Japan’s ground forces are to reorient their current structure, which is geared to combat capability in response to large-scale invasion, toward increased adaptability for military action in less severe circumstances. 
The navy is to shift its focus away from the anti-submarine warfare (ASW) capability of the Cold War era, creating a structure aimed at defending islands, monitoring and responding to ballistic missiles, and combating illegal spy ship activities. 
The air force is to continue its monitoring activities in neighboring airspace and maintain response readiness against air attack, while modifying invasion response tactics somewhat as the likelihood of an attack from the air diminishes. 
One problem is the dilution of ASW capability. 
Japan needs to develop well-balanced defense forces with the capacity needed to respond to new threats, such as the rapid build-up of China’s navy, especially its submarine forces. 
The importance of ASW capability in the Western Pacific has not waned. 
On the contrary, recent illegal violation of Japanese territorial waters by Chinese nuclear submarines suggests that, rather than being reduced, ASW capability should be built up further. 
If Japan does decide to scale down its defense forces in this respect, a bold and qualitative change is inevitable. 
In particular, this could mean the introduction of what has so far been viewed as somewhat taboo equipment, such as light aircraft carriers or nuclear submarines. 
In this age of uncertainty, when even the nature of the threats that nations face is uncertain, Japan’s strategic and military planners must continue to seek ways to adapt the SDF to today’s myriad current threats. 
But they must do so in a way that provides genuine direction, and that Japan’s people, military, and neighbors find convincing. 

In Defense of Economic Populism 
CAMBRIDGE – Populists abhor restraints on the political executive. 
Since they claim to represent “the people” writ large, they regard limits on their exercise of power as necessarily undermining the popular will. 
Such constraints can only serve the “enemies of the people” – minorities and foreigners (for right-wing populists) or financial elites (in the case of left-wing populists). 
This is a dangerous approach to politics, because it allows a majority to ride roughshod over the rights of minorities. 
Without separation of powers, an independent judiciary, or free media – which all populist autocrats, from Vladimir Putin and Recep Tayyip Erdoğan to Viktor Orbán and Donald Trump detest – democracy degenerates into the tyranny of whoever happens to be in power. 
Periodic elections under populist rule become a smokescreen. 
In the absence of the rule of law and basic civil liberties, populist regimes can prolong their rule by manipulating the media and the judiciary at will. 
Populists’ aversion to institutional restraints extends to the economy, where exercising full control “in the people’s interest” implies that no obstacles should be placed in their way by autonomous regulatory agencies, independent central banks, or global trade rules. 
But while populism in the political domain is almost always harmful, economic populism can sometimes be justified. 
Start with why restraints on economic policy may be desirable in the first place. 
Economists tend to have a soft spot for such restraints, because policymaking that is fully responsive to the push and pull of domestic politics can generate highly inefficient outcomes. 
In particular, economic policy is often subject to the problem of what economists call time-inconsistency: short-term interests frequently undermine the pursuit of policies that are far more desirable in the long term. 
A canonical example is discretionary monetary policy. 
Politicians who have the power to print money at will may generate “surprise inflation” to boost output and employment in the short run – say, before an election. 
But this backfires, because firms and households adjust their inflation expectations. 
In the end, discretionary monetary policy results only in higher inflation without yielding any output or employment gains. 
The solution is an independent central bank, insulated from politics, operating solely on its mandate to maintain price stability. 
The costs of macroeconomic populism are familiar from Latin America. 
As Jeffrey D. Sachs, Sebastián Edwards, and Rüdiger Dornbusch argued years ago, unsustainable monetary and fiscal policies were the bane of the region until economic orthodoxy began to prevail in the 1990s. 
Populist policies periodically produced painful economic crises, which hurt the poor the most. 
To break this cycle, the region turned to fiscal rules and technocratic finance ministers. 
Another example is official treatment of foreign investors. 
Once a foreign firm makes its investment, it essentially becomes captive to the host government’s whims. 
Promises that were made to attract the firm are easily forgotten, replaced by policies that squeeze it to the benefit of the national budget or domestic companies. 
But investors are not stupid, and, fearing this outcome, they invest elsewhere. 
Governments’ need to establish their credibility has thus given rise to trade agreements with so-called investor-state dispute settlement (ISDS) clauses, allowing the firm to sue the government in international tribunals. 
These are examples of restraints on economic policy that take the form of delegation to autonomous agencies, technocrats, or external rules. 
As described, they serve the valuable function of preventing those in power from shooting themselves in the foot by pursuing short-sighted policies. 
But there are other scenarios as well, in which the consequences of restraints on economic policy may be less salutary. 
In particular, restraints may be instituted by special interests or elites themselves, to cement permanent control over policymaking. 
In such cases, delegation to autonomous agencies or signing on to global rules does not serve society, but only a narrow caste of “insiders.” 
Part of today’s populist backlash is rooted in the belief, not entirely unjustified, that this scenario describes much economic policymaking in recent decades. 
Multinational corporations and investors have increasingly shaped the agenda of international trade negotiations, resulting in global regimes that disproportionately benefit capital at the expense of labor. 
Stringent patent rules and international investor tribunals are prime examples. 
So is the capture of autonomous agencies by the industries they are supposed to regulate. 
Banks and other financial institutions have been especially successful at getting their way and instituting rules that give them free rein. 
Independent central banks played a critical role in bringing inflation down in the 1980s and 1990s. 
But in the current low-inflation environment, their exclusive focus on price stability imparts a deflationary bias to economic policy and is in tension with employment generation and growth. 
Such “liberal technocracy” may be at its apogee in the European Union, where economic rules and regulations are designed at considerable remove from democratic deliberation at the national level. 
And in virtually every member state, this political gap – the EU’s so-called democratic deficit – has given rise to populist, Euroskeptical political parties. 
In such cases, relaxing the constraints on economic policy and returning policymaking autonomy to elected governments may well be desirable. 
Exceptional times require the freedom to experiment in economic policy. 
Franklin D. Roosevelt’s New Deal provides an apt historical example. 
FDR’s reforms required that he remove the economic shackles imposed by conservative judges and financial interests at home and by the gold standard abroad. 
We should constantly be wary of populism that stifles political pluralism and undermines liberal democratic norms. 
Political populism is a menace to be avoided at all costs. 
Economic populism, by contrast, is occasionally necessary. 
Indeed, at such times, it may be the only way to forestall its much more dangerous political cousin. 

In Defense of Globalization 
LONDON – I was recently in beautiful Chile for a Futures Congress, and I had a chance to travel south to the very tip of Latin America. 
I also recently made a BBC radio documentary called “Fixing Globalization,” in which I crisscrossed the United Kingdom in search of ideas for improving certain aspects of it and discussed topical issues with well-known experts. 
In both cases, I saw things that convinced me that it is past time for someone to come to globalization’s defense. 
Chile today is Latin America’s richest country, with per capita GDP of around $23,000 – similar to that of Central European countries. 
This is quite an achievement for a country that depends so heavily on copper production, and it sets Chile apart from many of its neighbors. 
Like many other countries, Chile is facing economic challenges, and its growth rate leaves something to be desired; but it also has many promising opportunities beyond its borders. 
For example, when I led a review on antimicrobial resistance, I learned that copper has powerful antibacterial properties and is an ideal material for use in health-care facilities where bacteria often spread. 
This means that copper producers such as Chile, Australia, and Canada can improve global health – and boost exports – by introducing affordable copper infrastructure into hospitals and other clinical settings around the world. 
Chile is also a storehouse of knowledge for managing earthquakes and tsunamis. 
While I was there, I visited La Serena, which in 2015 experienced the sixth-strongest earthquake ever recorded. 
But the ensuing tsunami killed only 11 people, though it surely would have killed far more in many other places. 
Chilean officials’ advanced preparation and rapid response seems to have made the difference. 
With so much institutional experience, Chile can be a valuable resource for other countries threatened by seismic events. 
La Serena is also near one of the world’s best stargazing sites, which attracts leading astronomers from around the globe. 
In fact, Chile hosts much remarkable collaboration among the world’s scientists, in part because it is just north of the Antarctic – long a site for scientific and environmental cooperation. 
Beyond Chile, it is interesting that Chinese President Xi Jinping is attending the World Economic Forum’s Annual Meeting in Davos this year. 
Now that Donald Trump has been elected President of the United States, and the United Kingdom is withdrawing from the European Union, I had assumed that such an elitist event’s glory days were behind it. 
Xi’s presence suggests that China is exploring where it can position itself on the world stage, and which elements of globalization it can harness to its advantage, now that Western powers are turning inward. 
Indeed, as the Chinese ambassador to the UK pointed out on my radio program, China is already the largest importer – yes, importer – for at least 70 countries, and accounts for about 10-11% of all imports globally. 
Despite its supposed economic challenges, China will likely be a bigger importer than the EU before this decade is over, and it will probably surpass the US soon thereafter. 
Moreover, economic inequality among countries has declined sharply in the past 20 years, owing partly to China’s rise, as well as to economic development across Asia, Latin America, and elsewhere. 
In fact, by 2010, the United Nations had already achieved its Millennium Development Goal of halving poverty by 2015, and recent projections suggest that, by 2050, poverty will be eradicated everywhere except Africa. 
This will not happen without globalization. 
African countries, in particular, will need to trade more with one another, and there is talk of creating an African free-trade area. 
But this could prove difficult now that anti-trade sentiment is on the rise. 
Are globalization’s critics – those who wrongly consider it a zero-sum game – against eradicating global poverty? 
Policymakers can take action to alleviate anxieties about globalization. 
For starters, the seemingly endless growth of profits as a share of global GDP must stop. 
Anyone who thinks this sounds radical needs to brush up on economics. 
Higher profits should attract new market entrants, which would then erode incumbents’ profits through competition. 
The fact that this isn’t happening suggests that some markets have been rigged, or have simply failed. 
Policymakers need to address this with stronger regulation in some areas. 
For example, as I have previously argued, the current climate is far too permissive of share-repurchase programs. 
At the same time, policymakers need to pursue measures to increases wages for the lowest earners, which could actually help boost productivity as capital becomes less expensive relative to labor. 
And, as World Bank President Jim Yong Kim recently pointed out to me, we need to strengthen enforcement of laws governing trade deals, and do more to help challenged domestic sectors that lose out as a result of those deals. 
This reminds me of a sad story I heard from some laid-off Goodyear Tire workers in Wolverhampton, in England’s West Midlands. 
They told me that job listings for their lost positions were posted on a notice board, and they could re-apply for them if they wanted to move to Mexico. 
The workers surmised that it was easier for the company to close its factory in the UK than to close even less productive factories in France or Germany. 
Surely changes like this can be handled better. 
Lastly, policymakers need to prioritize development projects such as the UK’s “northern powerhouse” and “Midlands engine.” 
And more such initiatives should be launched elsewhere. 
Despite the many challenges it has created, globalization has made the world a better place than it otherwise would have been. 
And we still need it to eradicate poverty and generate higher living standards for all. 

Defining Terrorism 
Every age has its enemies. 
In the mid-20th century, Fascists were the evildoers. 
After WWII, Communists became civilization's nemesis. 
Now terrorists have become the designated masters of malevolence. 
The word "terrorism" appears in law books and legislation around the world. 
Various civil sanctions apply to "terrorist organizations," and it can be a crime to assist one. 
But it is not always easy to determine who "they"--the terrorists--are. 
Whether organizations are terrorist or not is largely a determination motivated by politics. 
The UN repeatedly passes resolutions against terrorism, but cannot agree on how to define the term. 
Official definitions of terrorism are unpersuasive. 
The US Congress, for example, defines terrorism as including a motive to coerce or intimidate a population or influence a government. 
But this formula does not clearly cover even the terrorist attacks of September 2001. 
If the motive of the airline hijackers was simply to kill infidels, their attack would fall outside the Congressional definition. 
It is a mistake to try to define terrorism in the same way that we define theft or murder. 
There are too many contested issues. 
A better approach is to identify the issues that arise in thinking about terrorism and clarify why people experience terror from certain acts of violence. 
Then we can define terrorism with reference to all these variables, but without making any one of them decisive. 
The three primary points of controversy are: the identity of the victims, the perpetrators, and the relevance of a just cause. 
Must terrorism's victims be civilians? 
Some think so, but Al Qaeda blew up the USS Cole and most people regarded the killing of the sailors onboard a terrorist attack. 
The same logic applies in the guidelines for President George W. Bush's military tribunals, which treat those who attack military personnel and civilians alike. 
There is a similar question about the perpetrators. 
Can terrorists be soldiers or state agents? 
Islamic states within the UN favor this position, and I think they are right. 
The International Criminal Court will prosecute heads of states for war crimes. 
By the same logic, state officials should bear responsibility for acts of terrorism committed under their authority. 
The most controversial issue in defining terrorism is captured by the slogan: "One person's terrorist is another's freedom fighter." 
The problem is whether a good cause justifies using horrendous means. 
Islamic states think that it does, which puts them at odds with Western opinion. 
Those who opt for terror always believe their cause is just. 
Sometimes it is, sometimes not. 
No American would be happy about branding the Boston Tea Party an act of terrorist aggression against British property. 
Nor would any Frenchman accept a description of the maquisards of the French Resistance as terrorists. 
Yet both committed acts of violence against property and people, and so do meet the conventional tests of terrorism. 
There are other troubling borderline cases. 
What about the Stern gang's blowing up of Jerusalem's King David Hotel in order to liberate Palestine from the British? 
Is there good terror and bad terror? 
For some the political cause counts heavily, but in fact there are only a few historical cases in which most people actually disagree. 
Behind the phenomenon, the nagging question remains: why is terrorism different, why does it require a special definition, why are we more afraid of this form of violence than other criminal acts? 
One reason is that terrorism is typically organized activity. 
In July 2002, when an Egyptian opened fire and killed two people waiting in line at the El Al counter at Los Angeles International Airport, the FBI decided that the suspect was not a terrorist because he was acting alone. 
Terrorists are organized, and the group can continue even after the individual is caught. 
That makes them more frightening than ordinary criminals. 
Another reason for our greater fear of terrorism is that whereas ordinary criminals prefer secrecy, terrorists crave publicity. 
Effective terrorism always captures headlines. 
It is unexpected, with great shock value. 
Like good theater, terrorism always acts out some moral drama, and to strike terror in the public mind, terrorists must act in public, without guilt or remorse. 
But suppose we try to define the attacks of September 11, 2001, as terrorism by using the following formula: a violent, organized, and public attack by private parties on other civilians, without guilt, regardless of the justice of the cause. 
Problems still remain, because there are counter-examples for each of these six dimensions. 
Sometimes the victims are military and the perpetrators are states, sometimes the cause appears to be just, and sometimes one person with enough weapons but no organization might wreak terror. 
A conspiracy to lace letters with anthrax might incite private terror. 
Some terrorists might feel remorse and guilt about their actions. 
These counter-examples should not be surprising. 
Many definitions face this problem. 
The great 20 th century philosopher Ludwig Wittgenstein proposed a different approach to troublesome definitions: explaining concepts by the analogy of "family resemblances." 
Family members might share many physical features, such as height, skin tone, or hair color. 
Each member might share some of the common characteristics, but not all of them, with other members. 
There may be no single common feature, but all are readily identified as members of the same family. 
The same can be said of terrorism. 
At least six features are relevant, but exceptions occur in each of the six. 
Complex definitions with built-in exceptions may make lawyers uncomfortable, but in the real world, they are perhaps the best we can devise. 

What Is the International Community? 
PARIS – Despite the frequency with which the phrase “international community” is invoked, its precise meaning – like its origins – is difficult to discern. 
And, as France’s recent intervention in Mali has shown, this ambiguity lies at the root of many of today’s most urgent foreign-policy problems. 
For some, an international community simply does not exist. 
For others, the term refers, more pragmatically, to all countries when they decide to act together. 
Still another, more accurate definition encompasses all countries with international influence – that is, any country whose identity and sovereignty is recognized, and that chooses to participate in global discussions and decision-making. 
Beyond semantics lies the more consequential, but equally ambiguous, question of the international community’s role and responsibility. 
Just as too broad a definition could undermine a country’s sovereignty, too narrow a definition – like that which seems to predominate today – allows violence and instability to proliferate. 
For centuries, sovereign states have regulated their relations – from ending wars and demarcating borders to establishing diplomatic privileges and conducting trade – with treaties. 
Together, these official agreements comprise international law, which compensates for its lack of specific penalties by establishing strict and unambiguous concepts and one overarching sanction – universal blame for its transgression – that matters to everybody. 
And yet, throughout these centuries of treaty-making, violence between countries persisted. 
So countries began to deepen and develop international law by building shared institutions. 
The process began quietly, with the establishment in 1874 of the Union Générale des Postes (which later became the Universal Postal Union), and went virtually unnoticed by those in fields that lacked any need for global agreements. 
The devastation of World War I, however, highlighted the need for stronger international cooperation on peace-keeping, leading to the establishment of the League of Nations. 
But the organization was weak and inefficient, largely owing to the United States’ refusal to ratify its charter. 
As a result, it failed to accomplish its primary objective of preventing another world war. 
In the wake of World War II, a stronger and more influential institution – the United Nations – was established. 
The UN, which has a specialized agency for each aspect of a humane society, has successfully supported decolonization, helped to build states, and averted the spread of regional conflicts, especially that between Israelis and Palestinians. 
UN efforts have also led to the eradication of many infectious diseases; the adoption in 1982 of the Convention on the Law of the Sea, the principal framework for handling maritime disputes; and the establishment in 1988 of the Intergovernmental Panel on Climate Change, whose regular reports play an important role in assessing hazards related to climate change. 
But the UN was unable to avert the Cold War, wars in Algeria, Vietnam, and Yugoslavia, or genocide in Cambodia and Rwanda. 
Contrary to expectations, the collapse of communism did not bolster international cooperation. 
On the contrary, all international negotiations – on global warming, financial regulation, and nuclear disarmament (despite the efforts of US President Barack Obama and former Russian President Dmitri Medvedev to conclude a bilateral nuclear-disarmament agreement) – launched since the end of the twentieth century have failed. 
Another force – global public opinion – is needed to strengthen and expand the scope of international law. 
Indeed, global public opinion, galvanized by the actions of NGOs, has pushed governments to sign treaties, such as the 1997 Mine Ban Treaty, and to establish international institutions, such as the International Criminal Court in 1998. 
Global public opinion should be channeled more effectively in order to compel the international community to take responsibility in new areas. 
This will require a more acute collective awareness of the violence and chaos threatening territories and people worldwide, including in Somalia, Haiti, Liberia, Sierra Leone, and, most recently, Mali. 
In January, France, which no longer has strategic or economic interests in western Africa, responded to a request from Mali’s citizens and caretaker leaders to intervene to prevent Islamist rebels from Libya and Algeria from overrunning the country. 
Four months after France’s military operation successfully expelled occupying forces from northern Mali, most French troops and equipment are headed home. 
The intervention lacked the support of the international community, which, with the exception of the United Kingdom, failed to understand the sense of responsibility that underpinned France’s decision. 
But, with French forces on their way out and Mali desperately in need of rebuilding, the international community must adopt a new perspective and offer its support. 
The UN, which carries the mantle for the international community, has already deployed a peacekeeping force to Mali. 
Moreover, in accordance with its regulations and practices, the UN has called for a presidential election, which has now been set for July 28. 
But, given that Mali lacks political parties with popular support, candidates who command respect, and a permanent polling-station system, an election held so soon would probably bring an international civil servant to power – an outcome that could reignite internal conflicts. 
Restoring security in Mali requires dialogues between village and tribal leaders. 
Likewise, rebuilding the country’s infrastructure depends on talks between any remaining municipal authorities and village leaders. 
Both processes will take time, and neither can be completed successfully without external support. 
A country that lacks a government cannot rebuild after a crisis without help. 
That does not mean forcing it to follow an unrealistic and potentially dangerous electoral ritual just because it is embedded in UN regulations. 
The international community should support Mali’s gradual process of renewal where it counts – on the ground in the country’s conflict-battered communities. 
And it is up to the global public to stand up for that idea. 

The Deflation Bogeyman 
BRUSSELS – Central banks throughout the developed world have been overwhelmed by the fear of deflation. 
They shouldn’t be: The fear is unfounded, and the obsession with it is damaging. 
Japan is a poster child for the fear. 
In 2013, decades of (gently) falling prices prompted the Bank of Japan to embark on an unprecedented monetary offensive. 
But while headline inflation increased for a while, the factors driving that increase – a competitive depreciation of the yen and a tax increase – did not last long. 
Now, the country is slipping back into near-deflation – a point that panicked headlines underscore. 
But, contrary to the impression created by media reports, the Japanese economy is far from moribund. 
Unemployment has virtually disappeared; the employment rate continues to reach new highs; and disposable income per capita is rising steadily. 
In fact, even during Japan’s so-called “lost decades,” per capita income grew by as much as it did in the United States and Europe, and the employment rate rose, suggesting that deflation may not be quite as nefarious as central bankers seem to believe. 
In the US and Europe, there is also little sign of an economic calamity resulting from central banks’ failure to reach their inflation targets. 
Growth remains solid, if not spectacular, and employment is rising. 
There are two key problems with central banks’ current approach. 
First, they are focused on consumer prices, which is the wrong target. 
Consumer prices are falling for a simple reason: energy and other raw material prices have declined by more than half in the last two years. 
The decline is therefore temporary, and central banks should look past it, much as they looked past the increase in consumer prices when oil prices were surging. 
Instead, central banks should focus on the rate of revenue increase, measured in nominal GDP growth; that is, after all, what matters for highly indebted governments and enterprises. 
By this measure, there is no deflation: The GDP price index (called GDP deflator) in developed countries is increasing by 1-1.5%, on average. 
In the eurozone, it is rising at 1.2%. 
This may fall short of the European Central Bank’s target of “below but close to 2%,” but not by a margin substantial enough to justify the ECB’s increasingly aggressive use of monetary instruments to stimulate the economy. 
Moreover, nominal GDP growth exceeds the long-term interest rate. 
When, as is usually the case, the long-term interest rate is higher than the GDP growth rate, the wealthy may accumulate wealth faster than the rest of the economy – a point made by the economist Thomas Piketty. 
But today, nominal GDP growth far exceeds average long-term interest rates (which, in some countries, include risk premia of up to 100 basis points) – even in the eurozone, where nominal GDP growth is expected to reach about 3% this year. 
This means that financing conditions are as favorable as they were at the peak of the credit boom in 2007, and much better than they have been at any other point in the last 20 years. 
One might expect this evidence to compel central bankers to rethink their current concerns about deflation. 
But they remain committed to pursuing their inflation targets, convinced that even a slight bout of deflation could initiate a downward spiral, with falling demand causing prices to decline further. 
This is their second mistake. 
Of course, a deflationary spiral is possible, and its consequences could be serious. 
If real interest rates were significantly positive, demand could plummet, pushing down prices to the point that it becomes impossible for borrowers to service their debts. 
Such a spiral contributed to the Great Depression in the US in the 1930s, with prices falling, in some years, by some 20-30%. 
But we are nowhere near such conditions today. 
In fact, nominal interest rates are at zero, while the broadest price indices are increasing, albeit gently. 
Given that financing conditions are so favorable, it is not surprising that domestic demand has remained robust, allowing unemployment to return to pre-crisis lows almost everywhere. 
The eurozone is the only large developed economy where unemployment remains substantial, and thus the only economy where the case could be made for a downside risk of deflation. 
But even in the eurozone, GDP growth is slightly above its (admittedly very meager) potential, so that the remaining output gap is being closed gradually. 
Furthermore, the only reason why unemployment remains high in the eurozone is that the labor-force participation rate has continued to increase throughout the recession; and, indeed, employment is returning to pre-crisis levels. 
This is the exact opposite of what the deflation hawks warn about. 
The popular “discouraged worker” hypothesis holds that a slide into deflation is costly, because a long recession induces workers to leave the labor force altogether. 
That is simply not the case in Europe today. 
The evidence is clear. 
Developed-economy central banks should overcome their irrational fear of a deflationary spiral, and stop trying desperately to stimulate demand. 
Otherwise, they will find themselves with massively expanded balance sheets, and very little to show for it. 

Deflation Doldrums? 
CAMBRIDGE – The rate of inflation is now close to zero in the United States and several other major countries. 
The Economist recently reported that economists it had surveyed predict that consumer prices in the US and Japan will actually fall for 2009 as a whole, while inflation in the euro zone will be only 0.6%. 
South Korea, Taiwan, and Thailand will also see declines in consumer price levels. 
The prospect of falling prices reflects the collapse of industrial production, the resulting high level of unemployment, and the dramatic decline in commodity prices. 
Industrial production is falling at double-digit rates in the negative-inflation countries, and the price index for all commodities is down more than 30% over the past year. 
Deflation is potentially a very serious problem, because falling prices – and the expectation that prices will continue to fall – would make the current economic downturn worse in three distinct ways. 
The most direct adverse impact of deflation is to increase the real value of debt. 
Just as inflation helps debtors by eroding the real value of their debts, deflation hurts them by increasing the real value of what they owe. 
While the very modest extent of current deflation does not create a significant problem, if it continues, the price level could conceivably fall by a cumulative 10% over the next few years. 
If that happens, a homeowner with a mortgage would see the real value of his debt rise by 10%. 
Since price declines would bring with them wage declines, the ratio of monthly mortgage payments to wage income would rise. 
In addition to this increase in the real cost of debt service, deflation would mean higher loan-to-value ratios for homeowners, leading to increased mortgage defaults, especially in the US. 
A lower price level would also increase the real value of business debt, weakening balance sheets and thus making it harder for companies to get additional credit. 
The second adverse effect of deflation is to raise the real interest rate, that is, the difference between the nominal interest rate and the rate of “inflation.” 
When prices are rising, the real interest rate is less than the nominal rate since the borrower repays with dollars that are worth less. 
But when prices are falling, the real interest rate exceeds the nominal rate. 
This is exacerbated by the fact that borrowers can deduct only nominal interest payments when calculating their taxable income. 
Because the US Federal Reserve and other central banks have driven their short-term interest rates close to zero, they cannot lower rates further in order to prevent deflation from raising the real rate of interest. 
Higher real interest rates discourage credit-financed purchases by households and businesses. 
This weakens overall demand, leading to steeper declines in prices. 
The resulting unusual economic environment of falling prices and wages can also have a damaging psychological impact on households and businesses. 
With deflation, we are heading into unknown territory. 
If prices fall at a rate of 1%, could they fall at a rate of 10%? 
If the central bank cannot lower interest rates further to stimulate the economy, what will stop a potential downward spiral of prices? 
Such worries undermine confidence and make it harder to boost economic activity. 
Some economists have said that the best way to deal with deflation is for the central bank to flood the economy with money in order to persuade the public that inflation will rise in the future, thereby reducing expected real long-term interest rates. 
That advice would lead central banks to keep expanding the money supply and bank reserves even after doing so no longer lowers interest rates. 
In fact, the Federal Reserve, the Bank of England, and the Bank of Japan are doing just that under the name of “quantitative easing.” 
Not surprisingly, central bankers who are committed to a formal or informal inflation target of about 2% per year are unwilling to abandon their mandates openly and to assert that they are pursuing a high rate of inflation. 
Nevertheless, their expansionary actions have helped to raise long-term inflation expectations toward the target levels. 
In the US, the interest rate on government bonds now rises from 1.80% at five years to 2.86% for 10-year bonds and 3.70% for 30-year bonds. 
Comparing these interest rates with the yields on government inflation-protected bonds shows that the corresponding implied inflation rates are 0.9% for five years, 1.3% for 10 years and 1.7% for 30 years. 
Ironically, although central banks are now focused on the problem of deflation, the more serious risk for the longer term is that inflation will rise rapidly as their economies recover and banks use the large volumes of recently accumulated reserves to create loans that expand spending and demand. 

Rebuilding the World’s Forests 
OXFORD – Humankind has always had a tricky relationship with forests. 
We depend on them to regulate the climate and rainfall, clean our air and water, sustain myriad species of plants and animals, and support the livelihoods of over a billion people. 
Yet we continue to destroy them, to the point that only half the world’s original forest cover remains. 
The price of deforestation can hardly be overstated. 
Trees consume large amounts of carbon dioxide as they grow, making them vital tools for absorbing the greenhouse-gas emissions – from cars, factories, power stations, and livestock – that result in climate change. 
If we continue to lose forest cover, the Paris climate agreement’s goal of limiting global warming to less than two degrees Celsius (above pre-industrial levels) by 2050 will be impossible to achieve. 
In fact, to meet that target, we will need to restore a significant amount of forest cover that is already gone. 
There are two ways to approach reforestation. 
The first is to allow agricultural lands to fall into disuse, and then wait for them to revert naturally to forest. 
This wouldn’t cost much, but it would take decades. 
The second option is more proactive: plant billions of new trees. 
As part of the New York Declaration on Forests, signed in 2014, governments pledged to restore hundreds of millions of hectares of forests. 
But, with most governments short on cash these days, financing the pledge has proved challenging. 
Against this background, we must try to engage the private sector to deliver the needed investment. 
When forests have an economic value, they are more likely to be cultivated than destroyed. 
And, indeed, trees have been cultivated for profit for millennia. 
Today, productive forests cover an area of more than a billion hectares, or about one-quarter of the world’s forested land. 
Such forests produce fuelwood, which accounts for about half of tree removals. 
They also produce materials for clothes, oils for soaps and lubricants, fruits, and other foods, such as cocoa. 
Demand for these products is growing, though not as fast as demand for newspaper print falls as a result of computerization. 
How can demand for forest products be increased? 
A promising opportunity lies in construction. 
Timber has always been an important building material, and remains so for residential construction in places like the United States, Scandinavia, and parts of Southeast Asia. 
But most buildings today are constructed using bricks and mortar, concrete, and, for larger structures, steel – all materials that produce substantial carbon emissions during the manufacturing process. 
While it is unlikely that timber can fully replace any of these materials, new types of engineered wood are making it more competitive. 
One of these is cross-laminated timber (CLT), which is made by gluing together layers of wood to create panels that are as strong as steel or concrete, and thus can replace those materials in buildings. 
More research is required to determine the precise benefits of using timber to cut CO2 emissions. 
One estimate comes from architect Anthony Thistleton-Smith, one of the United Kingdom’s leading experts on wooden buildings. 
He recently noted that, whereas a typical British home has a carbon footprint of around 20-21 tons, a CLT home has a negative footprint of 19-20 tons. 
In other words, every home built with CLT saves 40 tons of CO2 emissions. 
If the 300,000 new homes targeted for completion in the UK this year were built using CLT, it would be like taking 2.5 million cars off the road. 
The climate benefits could be massive. 
As with so many climate measures, cost can be a major barrier to implementation. 
And, according to a United Nations report, CLT is more expensive than concrete in Europe. 
But CLT is still in its infancy, with only a handful of factories in operation. 
As the CLT supply chain develops, costs will inevitably fall, as has happened with renewable energy. 
Moreover, builders report that the total costs of building with CLT already end up similar to those of building with concrete, because it takes less time. 
After all, unlike concrete, CLT doesn’t need time to set. 
Of course, delivering such a transformation will not be easy. 
Vested interests – pressure from industries producing traditional building materials – must be overcome, including by ensuring a level playing field in terms of subsidies. 
Furthermore, public concerns – for example, regarding fire safety or infestation prevention – must be addressed, and builders will have to learn new skills. 
Most important, monitoring will have to be improved considerably, so that increased demand does not result in more deforestation. 
For many countries, the economic opportunities should be sufficient to make addressing these challenges worthwhile. 
New plantations could regenerate rural areas, as new factories created opportunities for investors and entrepreneurs. 
Governments and larger companies would be able to tap the fast-growing green-bond market to fund the early transition, including the creation of systems using drones and satellite imaging to monitor for unsustainable forestry practices. 
Opportunities to align economic development with the reduction of greenhouse-gas emissions are rare. 
Yet that is what reforestation offers. 
We must take advantage of this opportunity, by pursuing a construction transformation based on restoring trees, the world’s most effective carbon-capture tool. 
In this “new age of timber,” we would grow wood, build with wood, and allow our forests to thrive. 

REDD+ Handed in Paris 
BERLIN – It’s been 30 years since the Food and Agriculture Organization of the United Nations launched the Tropical Forestry Action Plan, the first global intergovernmental initiative to halt forest loss. 
Since then, deforestation has continued unabated, and the latest international effort to stop it – an initiative known as Reducing Emissions from Deforestation and Forest Degradation (REDD+) – looks no more likely to be effective. 
Far from protecting the world’s forests, the most notable outcome of these two agreements has been, ironically, the production of reams of expensive consultancy reports. 
REDD+ was created as part of the UN Framework Convention on Climate Change, and the agreement governing its implementation is expected to be finalized during the UN Conference on Climate Change in Paris. 
But if world leaders are serious about halting forest loss, they should instead abandon REDD+ and replace it with a mechanism that addresses the underlying drivers of large-scale deforestation. 
The flaws in REDD+ are evident in how it approaches the problem it is meant to solve. 
The vast majority of its projects treat forest peoples and peasant farmers as the main agents of deforestation. 
REDD project developers seem to be especially fond of projects that focus on restricting traditional farming practices, even as they shy away from efforts to tackle the true causes of deforestation: the expansion of industrial agriculture, massive infrastructure projects, large-scale logging, and out-of-control consumption. 
These shortcomings are exemplified in the Socio Bosque Program, a REDD+ initiative in Ecuador, in which efforts to control forest communities and peasant farming overlook the far larger potential damage caused by industrial activity. 
Under the program, forest-dependent communities sign five-year agreements with the Ministry of Environment, agreeing to restrict forest use in return for small cash payments. 
At the same time, the program’s documentation explicitly nullifies the agreement if the area under its jurisdiction becomes slated for oil exploitation or mining. 
Today, peasant farmers are being barred from forests as part of the fight against climate change; tomorrow, the same forests could be uprooted in order to allow companies to extract the fossil fuels that are the underlying cause of the problem. 
There is a disturbing rationale for this myopic focus on peasants and forest people and for the prominence of this approach on the agendas of international agencies and climate negotiators. 
REDD+, it turns out, has less to do with stopping forest loss than with allowing industrialized countries to continue to pollute. 
The approach underlying the initiative is part of a broader effort to create a market for emission credits, which would allow polluters to continue releasing greenhouse gases if they can produce a certificate attesting that they have contributed toward preventing a similar amount of emissions elsewhere. 
The forests being protected by REDD+ are important producers of these tradable certificates to pollute, known as carbon credits. 
And REDD implementation through experimental projects provides advocates of this approach a solid foundation on which to advance their agenda. 
For industrialized countries, carbon credits have proved to be an easy way to meet their international commitments under agreements like the Kyoto Protocol. 
If REDD credits are approved in Paris, countries and companies could pay peasant farmers in Ecuador or elsewhere to protect trees that programs like REDD+ claim they otherwise would have chopped down – thereby avoiding the need to make difficult structural changes to cut emissions at home. 
Under the rules governing these transactions, the fact that no emissions were actually cut does not matter; what is important is that the tradable permission to pollute has been obtained. 
Unfortunately, few of those meeting in Paris have incentives to question this approach. 
For governments, programs like REDD+ offer an opportunity to avoid politically costly changes. 
And for international conservation groups like The Nature Conservancy, Conservation International, the World Wildlife Fund, and the Wildlife Conservation Society, the program provides access to international development and philanthropic funding. 
The biggest beneficiaries, of course, are the corporations whose hunger for land is driving most of the large-scale deforestation. 
In addition to allowing them to continue cutting down trees as long as they can produce the necessary carbon credits, REDD+ effectively shifts the blame for forest loss away from their actions and onto communities that have the greatest stake in forests’ long-term health. 
If the climate negotiators meeting in Paris are truly interested in halting forest loss and bringing climate change under control, they should pull the plug on REDD+ and address the underlying causes of these problems. 
Rather than attempting to control the lives and actions of forest peoples and peasant farmers, the effort in Paris should focus on ending large-scale deforestation and leaving fossil fuels in the ground. 

Defusing Iran’s Oil Weapon 
Like North Korea, the Iranian government will not shy from a showdown over its nuclear program. 
Why should it? 
A nuclear weapon is the ultimate guarantee that the United States can never do to Iran what it did to Iraq. 
Moreover, this struggle with the US rallies much-needed domestic support. 
What, then, can the US do to undermine Iran’s position? 
As the world’s fourth largest oil exporter, Iran has profited mightily from the tripling of global oil prices over the last four years. 
Its economic stability is dependent on oil revenues, so it is here that Iran’s rulers are vulnerable. 
American diplomats are never going to persuade the UN Security Council to impose sanctions on Iran’s energy exports. 
But the Bush administration can seek ways to contain global energy prices – and it should begin by refusing to be baited into escalating tensions whenever Iranian President Mahmoud Ahmadinejad pleases. 
Ahmadinejad has proven resourceful in driving the diplomatic conflict. 
His government has rejected international calls to halt uranium enrichment, ignored UN-imposed deadlines, armed Iraqi militias, supplied Hezbollah with weapons for attacks on Israel, denied the Holocaust, and staged military exercises near the Strait of Hormuz, through which 40% of the world’s sea-traded oil passes. 
All these provocations add upward pressure on oil prices, enriching the Iranian government. 
When Supreme Leader Ayatollah Ali Khamenei hinted that Iran could play the oil card, US Secretary of State Condoleezza Rice dismissed the idea. 
“Let’s just remember that Iran is some 80% dependent on oil in its budget,” she said, so it is “not really able to live with a disruption.” 
But if Iran pulls modest amounts of its oil from international markets, price increases are likely to offset (perhaps completely) any loss in revenue from the supply cut. 
In addition, threats to the Strait of Hormuz would allow Iran to force prices up without any reduction in output. 
It is not an accident that virtually every public move Iran’s government has made in the international arena over the past year has added risk to energy markets. 
At times, the US has effectively – if unintentionally – undercut Iran’s position. 
This summer, the Bush administration offered Iran direct talks. 
In September, Bush made an unexpectedly low-key speech to the UN General Assembly. 
Resistance to sanctions from Russia, China, and France has persuaded US officials to “allow more time for diplomacy” before pushing for punitive action in the Security Council. 
All of these choices helped return slack to energy markets. 
Oil prices have fallen from above $78 per barrel in mid-July to less than $60 in early October. 
The drop – due in no small measure to an easing of tensions over Iran’s nuclear program – is costing the Iranian government money, compounding the regime’s domestic problems. 
Inflation in Iran is rising, perhaps to as high as 20%. 
On October 1, Khamenei called on Ahmadinejad to address the growing problem. 
There are price freezes on certain subsidized goods and services, and rising inflation makes these subsidies even more expensive for the government. 
Indeed, the government indicates that it may begin rationing gasoline. 
Unemployment stands at about 12%, and is probably twice as high among young people. 
The US can undermine the Iranian regime by avoiding statements and actions that help drive energy prices higher and bolster Iran’s economy. 
Administration officials should lower the political temperature. 
They should again offer Iran direct talks. 
Bush should invite Ahmadinejad to Washington. 
Better yet, invite him to Crawford. 
Make him breakfast. 
Washington can also press the Saudis, who control virtually all of the world’s spare capacity, to keep their output high to contain prices. 
Saudi Arabia’s ruling Sunnis are more threatened than is the US by Iran’s support for a shift in the regional balance of power toward Shia Muslims. 
Yes, Ahmadinejad will probably find a way to re-escalate the conflict. 
No one can stop Iran from threatening the Strait of Hormuz. 
But no one can blame the US for that when Bush is offering to talk. 
Iran probably needs two or three years to develop a nuclear weapon. 
How strong will Ahmadinejad’s domestic position be then? 
If the US does not provide him with threats that help rally domestic support, his failure to revitalize Iran’s economy will erode his standing at home. 
Lower oil prices would mean less money to spend on domestic projects that buoy his popularity – or on the nuclear program. 
If cutting into Iran’s oil income fails to weaken Ahmadinejad, the US would retain military options. 
But undermining his domestic standing by limiting Iran’s revenues stands a better chance of succeeding than diplomatic efforts to persuade the regime to suspend uranium enrichment voluntarily, or coercive sanctions. 
Easing tensions will not win Bush points with those who prefer a muscular strategy. 
But the administration’s confrontational approach is failing, because it is precisely what Iran’s rulers want. 

Defusing the Nuclear Arms Race 
BERLIN – As the recent UN and Washington summits have demonstrated, nuclear arms control and disarmament are among the top issues on the world’s political agenda. 
They are likely to remain so for the foreseeable future. 
Indeed, 2010 will determine whether US President Barack Obama’s vision of a nuclear-free world will remain a distant but achievable hope, or must be abandoned. 
No one should be under any illusions. 
Even if all of the world’s nuclear-weapon states embrace the vision of a world free of the threat of nuclear conflict, nuclear weapons will remain with us for two decades at least, and even that would require the most favorable conditions for disarmament. 
This year is crucially important. 
The agreement signed in early April in Prague between Russia and the United States on the reduction of strategic nuclear weapons and possibly on further cuts was accompanied by the publication of the US Nuclear Posture Review, identifying the nuclear capabilities that Obama’s administration wishes to preserve for the next four years. 
The Nuclear Non-Proliferation Treaty review conference will begin the work of adapting the NPT to our rapidly changing world. 
Many policymakers hope that 2010 will bring clarity on the North Korean and Iranian nuclear programs. 
There are roughly 23,000 nuclear weapons today, which is 40,000 fewer than at the Cold War’s height. 
These weapons’ total yield is greater than 150,000 Hiroshima-size nuclear explosions. 
Nuclear disarmament is therefore still urgently needed, and prominent politicians in the US and Germany have produced the US-led Global Zero initiative and createdthe International Commission on Nuclear Non-Proliferation and Disarmament (ICNND), sponsored by Australia and Japan and co-chaired by former Foreign Ministers Yoriko Kawaguchi and Gareth Evans. 
The US, Russia, France, the United Kingdom, and China – all NPT signatories – possess nine-tenths of the world’s nuclear weapons, while India, Pakistan, and probably Israel possess around 1,000. 
North Korea presumably has a few, and Iran is most likely pursuing a nuclear-weapons program. 
Obama and Russian President Dmitri Medvedev have agreed to reduce their strategic arsenals to 1,550 weapons each – far more than the 1,000 that Obama had in mind, but nonetheless a huge step that could bring about further cuts. 
But the road to global nuclear disarmament will be long and bumpy. 
To begin with, the capacity to dismantle and destroy nuclear warheads is limited, and likely to remain so. 
Current capacity is roughly 500 weapons annually in both Russia and the US, which means that the total of 2,000 weapons each that the ICNND Report suggests for the year 2025 cannot be fully implemented much before 2028. 
Then, there is the risk that other countries, particularly in the Middle East, will follow the example of North Korea and Iran. 
The ICNND report Eliminating Nuclear Threats, released late last year, proposes meeting these challenges with a comprehensive agenda for reducing nuclear risks. 
As the German ICNND Commissioner, I believe that this report is the first and only one so far to suggest precise and feasible steps towards a nuclear-free world. 
The report consists of 20 proposals to be decided on at this year's NPT review conference, and ends with proposed decisions to be taken after 2025. 
It leaves no room for doubt that a nuclear-free world is achievable without any risk to the security of individual states, provided that for the next 20 years or so there is sustained political will around the world, particularly in the nuclear-weapon states. 
In addition, the report proposes a declaration by these states that the sole purpose of nuclear weapons is to deter others from their use, coupled with an obligation not to increase their stockpiles. 
For the 2025 timeframe, the aim is to reduce the global nuclear stockpile to 2,000, or less than 10% of today’s total. 
A “No First Use” declaration should be collectively agreed upon, in conjunction with corresponding verifiable force structures, deployments, and readiness status. 
As supplementary steps, the report suggests negotiating limitations on missiles, strategic missile defense, space-based weapons, and biological weapons, as well as holding talks on eliminating conventional weapons imbalances." Achieving this ambitious agenda by 2025 would usher in the last phase in the quest for a nuclear-free world, and requires, first and foremost, political conditions that reliably rule out regional or global wars of aggression. 
Nuclear weapons would thus become superfluous. 
Only then could they be banned and their total elimination begin. 
In parallel, mandatory measures would penalize any states attempting to circumvent the ban, as well as individuals involved in producing nuclear weapons. 
Obama’s vision could thus become reality 20 years from now, provided that the US and Russia take the first steps this year. 
Immediate further cuts must include sub-strategic weapons, with the few remaining American nuclear weapons in Europe withdrawn in exchange for the elimination of the still substantial Russian stockpile. 
But the withdrawal of American nuclear weapons from Europe is by no means the first step towards nuclear disarmament. 
To suggest it as an opening move could damage European security and jeopardize transatlantic cohesion, so the message has to be “no” to unilateral withdrawal, but “yes” to including these weapons in future arms-control negotiations. 
Withdrawal of these weapons would not mean the end of nuclear deterrence for Europe, as deterrence will remain necessary until the last nuclear weapon is dismantled. 
But the sole purpose of retaining some degree of deterrence will be to deter the use of nuclear weapons. 
Europe perhaps benefited more than any other part of the world from nuclear deterrence, because it helped to preserve peace during the Cold War and prevented nuclear proliferation. 
But the time has now come to join Presidents Obama and Medvedev in bringing about disarmament. 

Demand or Supply? 
CHICAGO – Economics is all about demand and supply. 
Typically, the two are equal, and, if not, powerful forces push them towards each other. 
But, with high and persistent levels of unemployment in the United States, there is a real question about the nature of the problem: is aggregate demand too low, or are there problems with supply? 
President Barack Obama’s administration seems to think that the problem is one of demand, and has passed stimulus measure after stimulus measure, reducing taxes and increasing transfers and government spending in order to boost consumption and investment. 
The Federal Reserve is of a similar mind, not only maintaining rock-bottom short-term interest rates, but also embarking on an adventurous policy targeting long-term rates. 
Some progressive economists want even more. 
Why have these policies not worked thus far in bringing down unemployment, even though the growth recovery is well under way? 
The progressive economist says that stimulus worked, staving off a much deeper recession – if not worse – but that the measures were too timid to generate a robust recovery. 
The conservative economist responds that it is precisely because the government has become so free with taxpayers’ money that households, fearful of future taxes, are hunkering down and increasing savings. 
Moreover, the increasingly activist government has left businesses uneasy about future regulatory and tax measures, and thus reluctant to invest. 
The truth probably lies somewhere in between. 
Government spending – especially on unemployment benefits, aid to states, and some construction projects – probably helped avert a more wrenching downturn, but continued red ink worries households, which are also trying to rebuild savings and reduce debt after a spending binge. 
The regulatory uncertainty created in areas such as health care makes it difficult not only for the health-care industry to make long-term investment decisions, but also for businesses to make long-term hires. 
Nevertheless, before rushing to judgment about current policy, we should recognize the trend in recent US recoveries of slow job growth. 
From 1960 until 1991, recoveries from recessions in the US were typically rapid. 
From the trough of the recession, the economy recovered the lost jobs in eight months on average. 
The recoveries from the recessions of 1991 and 2001 were very different. 
For instance, in 2001, it took just one quarter for output to recover, but 38 months for jobs to come back. 
Explanations abound. 
Some economists argue that, unlike past recessions, in which workers were temporarily laid off from an industry only to be rehired as the recovery picked up, job losses starting in 1991 were more permanent. 
Matters were exacerbated by firms’ postponement until a recession of hard choices about closing unviable plants and shedding workers. 
As a result, unemployed workers had to find jobs in new industries, which took more time and training. 
Others suggest that the Internet has made it easier for firms to hire quickly. 
So, rather than hire in a panic at the first sign of recovery, as they did in the past, for fear that they will be unable to do so later and lose sales, firms today would rather ensure that the recovery is well established before hiring. 
Hence also the growth in temporary hires today. 
Regardless of what the right explanation is, the history of recent recessions suggests that we should not be surprised that the job recovery is taking time. 
There is, however, an aspect of the problem that is different this time: layoffs in construction. 
Therein lies an additional explanation for tepid job growth, as well as a salutary lesson about policy. 
In the last boom, construction jobs expanded significantly, with investment in housing as a share of GDP increasing by 50% from 1997 to 2006. 
As my colleague Erik Hurst and his co-authors have shown, states that had the largest rise in construction as a share of GDP in 2000-2006 tended to have the greatest contraction in that industry in 2006-2009. 
These states also tended to have the largest rise in unemployment rates between 2006 and 2009. 
The unemployed comprise not only construction workers, but also ancillary workers, such as real-estate brokers and bankers, as well as all those who work on houses, such as plumbers and electricians. 
So the job losses extend far beyond those in the construction industry. 
It is hard to believe that any increase in aggregate demand will boost the housing market – which, remember, was buoyed by visions of steady price appreciation that few seem likely to hold today – sufficiently to re-employ all these workers. 
Hurst estimates that this “structural” unemployment may account for up to three percentage points of total unemployment. 
In other words, were it not for construction, the US unemployment rate would be 6.5% – a far healthier situation than today. 
Policymakers should remember that the housing boom was fueled by easy monetary policy, which sought to expand job growth as the US recovered from the last recession. 
Indeed, high-school graduation rates dropped in Las Vegas as people left school for readily available unskilled construction jobs. 
Now those uneducated unemployed are experiencing more than three times the unemployment rate of college graduates. 
It will be very hard for them to return to the workforce. 
The lesson for policymakers is clear: instead of constantly trying to boost spending and potentially creating problems for the future, a more sustainable way to improve job growth is to facilitate the “re-skilling” of the unemployed, especially those who were in construction-related jobs. 
Eventually, better labor-force supply will create healthier and more sustainable demand. 

Demilitarizing Muslim Politics 
ISLAMABAD – Can Muslim governments free themselves from their countries’ powerful militaries and establish civilian control comparable to that found in liberal democracies? 
This question is now paramount in countries as disparate as Egypt, Pakistan, and Turkey. 
To predict how this struggle will play out, it helps to understand the region’s past. 
Since Islam’s founding in the seventh century, it has maintained a tradition of deep military engagement in politics and governance. 
Indeed, Islam’s increasing military prowess helped it to spread rapidly around the world. 
The military was responsible for Islam’s implantation throughout the Middle East, as well as in Persia, Southern Europe, and the Indian sub-continent. 
And once a Muslim state was established in newly conquered lands, the military became integral to its governance. 
The military’s incorporation into the state was most prominent in the Ottoman Empire, whose rulers created a new type of military force that drew its manpower mostly from Islamic-ruled parts of Europe. 
These Janissaries (Christian boys conscripted to serve in Ottoman infantry units) were either recruited from Europe or abducted from countries under Ottoman control. 
Janissaries were not allowed to marry or to own property, which prevented them from developing loyalties outside of the imperial court. 
But, after these restrictions were removed in the sixteenth century, and up until their extermination in the nineteenth century, the Janissaries became extremely powerful in Istanbul (and even established their own dynasty in Egypt). 
Military domination in Muslim countries survived right up to the fall of the Ottoman Empire in the early twentieth century. 
The colonial powers that filled the vacuum left by the declining empire had their own militaries, and therefore did not need local forces to govern. 
But when Europeans withdrew from the Muslim world in the twentieth century, these forces rushed back in to wrest control of politics. 
The military rose to power in Egypt, Pakistan, and other Arab countries in the early and mid-twentieth century. 
In Turkey, the military proclaimed itself the guardian of the secular Republic of Turkey, founded in 1923 by Mustafa Kemal Atatürk, himself a military man. 
Today, the revolutions rocking much of the Muslim world are bedeviled by Islam’s military past. 
In the first phase of these popular uprisings, those who had been politically and economically excluded began to demand inclusion and participation. 
Now a second phase is underway, marked by a serious effort to divest the old military establishment of its power. 
This struggle is manifesting itself in different ways in Egypt, Turkey, and Pakistan. 
In Egypt, the military’s takeover of the political transition after the ouster of former President Hosni Mubarak is unacceptable to Muslim and secular forces alike. 
Most Egyptians want the soldiers to leave politics and return to their barracks. 
Essam el-Erian, whose Islamist Freedom and Justice Party recently won the most seats in Egypt’s parliamentary elections, recently said that the Muslim Brotherhood (to which the party is closely tied), does not expect the military rulers to relinquish power voluntarily. 
They will have to be persuaded to leave, and, if that does not work, forced out. 
The parliament’s first step in ultimately removing them would be to defend its authority to choose the members of a planned 100-person constitutional assembly. 
Meanwhile, in Turkey, the Justice and Development Party, which has strong roots in the country’s Islamic tradition, is now seeking to limit the military’s role. 
The armed forces, however, claim a constitutional mandate to protect the Republic’s secular traditions. 
And Turkey’s generals have intervened in politics several times to defend Kemalism – Atatürk’s secular ideology of modernization that pushed Islamic Turkey towards European-style liberalism. 
But, of the three countries, Turkey has most successfully demilitarized its politics. 
The charismatic prime minister, Recep Tayyip Erdoğan, having won three consecutive elections, has been able to exert his authority over the military. 
Controversially, he has jailed the army’s top general, İlker Başbuğ, whom Turkish prosecutors have accused – many say implausibly – of plotting to overthrow the government. 
Finally, Pakistan’s military, which has governed the country for half of its 64-year history, is fighting hard to retain influence over policymaking. 
Humbled by its inability to control United States military operations, including the one that killed Osama bin Laden, the army is struggling to play a hand in the country’s evolving relations with India and the US. 
Nevertheless, wary of provoking widespread hostility, military leaders have indicated recently that they have no intention of intervening in politics. 
Since the Arab Spring began, four long-established regimes have been removed, while others are under increasing pressure, giving ordinary Arabs hope that their demands will no longer be ignored, and that those who govern will be mindful of citizens’ needs. 
But that – the real revolution – will happen only when true representatives of citizens, rather than the military, begin to set their countries’ political course. 


Democracy at Bay 
Is the democratic tide reversing? 
Little more than a decade ago, people spoke of the end of history, of the final, unchallengeable triumph of free markets and democracy. 
But public opinion in a number of countries now seems to be turning against democracy, argues Bronislaw Geremek, Poland's former foreign minister, and proposes ways in which this trend might be reversed. 
Eight of the countries that will enter the European Union in May 2004 were until recently governed by totalitarian dictatorships and enslaved by another nation. 
The return of governments based on the will of the majority of their citizens seemed for decades an unattainable dream in these countries, much as it remains a dream for the citizens of Burma under the rule of its military junta. 
Democracy has undoubtedly achieved success around the world. 
Yet, stunningly, support for democracy is eroding almost everywhere. 
The Pew Global Attitudes Project for 2003 highlights countries in which few people recognize the importance of elections: 28% in Jordan, 37% in Russia, 40% in Indonesia. 
Given the choice between a democratic government and a strong leader, 70% of Russians, 67% of Ukrainians, and 44% of Poles and Bulgarians opt for the latter. 
(This choice is especially common among people in the lowest income brackets). 
In Latin America, only in Venezuela is support for democracy unambiguously dominant (79%). 
In other Latin American countries, support for a strong leader either is stronger or nearly as strong as support for democracy. 
An opinion poll in Israel shows that the majority of Israelis opt for democracy, but there is a downward trend there as well. 
Five years ago, 90% of Israelis supported democracy; today the number is 77%. 
Suicide bombers, the prolonged state of tension, and the overall weakening of the hope for peace have slashed support for democratic government. 
In Asia, people in most countries still believe that a ¡°good democracy¡± is more important than a ¡°strong economy.¡± The opposite is true, however, in democratic Indonesia, where 69% prefer a strong economy. 
Even in a number of European countries with old democratic traditions, a wave of populist, radical political parties opposed to minorities and immigrants has achieved success, sometimes even winning elections. 
In other European countries, which have only recently embarked on the democratic path, a truly stunning change of mood is visible. 
In Russia's recent parliamentary elections, which were - regardless of various reservations - conducted according to democratic standards, parties advocating political and economic freedom suffered painful defeat, while parties proclaiming hostility to the rule of law and modern pluralist democracy were successful. 
In December's parliamentary election in Serbia, the extreme nationalist Radical Party achieved the greatest success, and people being tried before the International War Crimes Tribunal in The Hague, such as Vojislav Seslj, the Radicals' founder and long-time leader, and Slobodan Milosevic, were elected to parliament. 
These results demonstrate the grave dangers that young democracies face, as well as the fragility of democratic culture. 
They are also a failure of human beings: democratic values do not function without citizens; there can be no democracy without democrats. 
This poses dramatic questions about the place of democratic values in international affairs, about the effectiveness of action in support of democracy, and about the way in which democracy is to be understood. 
Three sets of issues are worth noting. 
First, almost no one disputes the claim that democracy serves the cause of peace, but little is being done to make democracy - together with human rights - a basis of the international order. 
A step was made in this direction in June 2000, when the Community of Democracy, bringing together more than half of the member states of the United Nations, was created in Warsaw. 
The creation of that body was an important step, because it introduced a set of criteria that must be fulfilled by countries that want to call themselves democratic. 
The organization promised to monitor the behavior of members and thus create a chance for coordinated support of the democratic order. 
It amounted to an agreement that the continuing absence of democracy in many parts of the world is a disgrace. 
Second, as the Pew poll suggests, today's weakening of democratic culture usually takes the form of nostalgia for strong leadership - a clear incitement to launching coups. 
The weapons of shame and international opprobrium should be mustered to make it impossible for any democratic nation to legitimize a coup in another democratic country. 
It should become a principle of international relations that democracy and democratization must be supported in all situations; that democratic societies should forego any opportunistic benefits that may come from supporting the enemies of democracy. 
Third, democracy should not be reduced to mere respect for majority decisions. 
Nowadays, a more telling test of the vitality of a democracy is respect for the rights of minorities, recognition of the supremacy of the principles of the rule of law, and the acceptance of legal equality among citizens. 
Pericles, in his speech about democracy, as recorded by Thucydides, expressed a timely thought: ¡°Guided by tolerance in private life, we respect the law in public life; we obey all laws, especially those unwritten ones, laws that defend those to whom injustice is being done, and laws the transgression of which brings universal disgrace.¡± That ancient sense of the potent power of shame should be employed today, lest the democratic tide continue to run out. 

Democracy Begins At Home 
The Bush administration has put expansion of democracy at the center of its foreign policy. 
This is a far nobler calling than simply expanding American hegemony. 
The question is, does Bush really mean it, and does he genuinely understand what democracy means? 
The Bush administration praised Saudi Arabia’s municipal elections, but what about the rights of women—including their voting rights? 
It welcomed (if it did not actively participate in) the toppling of Venezuela’s democratically elected leader, but it continues to support Pakistan’s military dictator. 
It criticizes Russian President Vladimir Putin, but only after he goes against business interests. 
And it may raise concerns about media concentration in Russia, but remains silent about media concentration in Italy. 
There is a taint of hypocrisy in a more fundamental sense. 
The Bush administration is right to emphasize the importance of elections, without which democracy is inconceivable. 
But democracy entails more than periodic elections, and the legitimacy of elections depends on the public’s confidence in the electoral process itself. 
In this respect, the last two American presidential elections have hardly been models for the world. 
Former President Jimmy Carter, whose Atlanta center monitors elections around the globe, has raised questions about whether America’s recent election lives up to the standards the United States should uphold. 
Where former President Bill Clinton sought to ensure that all Americans who are entitled to vote are registered to vote, the Republicans have tried to reverse these advances, putting obstacles in the way both of registration and voting. 
Modern technology makes it easy to have a paper trail for voting machines, at little cost; yet several states chose not to provide this minimal safeguard. 
Beyond elections, citizens can provide an effective check on government only if they are well informed. 
That is why right-to-know laws are so important. 
Of course, politicians prefer to work in secrecy, without oversight. 
No one can imagine hiring a worker, but allowing him not to inform his employer about what he is doing on the job. 
Politicians work for the citizenry, which has the right to know what their employees are doing. 
Citizens have the right to know how their money is being spent and who is being consulted to form policy. 
They have the right to know whether Enron and the oil companies are shaping energy policy. 
They have the right to know why America, and the world, was misled by false claims about weapons of mass destruction in Iraq. 
My research has focused on the consequences of asymmetries in information for the functioning of the economy. 
But a lack of accurate information has equally, if not more, severe consequences for political processes. 
The decision to go to war in Iraq is the most dramatic example of this, but there have been many others in America under Bush. 
Providing drug benefits under Medicare, America’s health-care program for the aged, may have been the right decision. 
But restricting government’s ability to bargain with the drug companies was a pure give-away, and nothing justifies providing grossly distorted information about the costs—now estimated to be in excess of 1.1 trillion over the next decade. 
This is three times the amount original projected by the Bush administration. 
Today, the Bush administration is engaged in a disinformation campaign about an impending social security crisis. 
While something should be done, the magnitude of the problem hardly foreshadows a crisis. 
On the contrary, the system could almost surely be put on a solid footing for the next 75 years with a fraction of what was spent on the 2001 and 2003 tax cuts. 
Good information requires not just the right to know, but also the right to tell—a diversified media. 
There are, as we noted, justified complaints about the lack of diversity in television broadcasting in Russia, yet Bush has not opposed efforts by America’s Federal Communications Commission to weaken laws on media concentration. 
Democracy also requires recognizing the rights of individuals. 
Undermining any individual’s rights jeopardizes everyone’s rights. 
Yet under Bush, the US has undermined basic civil rights, such as habeas corpus, which guarantees individuals recourse to judicial review when the state detains them. 
The extended detention of dozens of individuals in Guantanamo—without charge and without trial—is a basic abrogation of this right. 
Fortunately, even if Bush does not understand such basic principles, America’s courts do, and they are now, albeit belatedly, forcing his administration to abide by them. 
Finally, of what value is the right to vote without recognition of the right to a certain minimal standard of living, as enshrined in the Universal Declaration of Human Rights? 
In countries where much of the population lives below subsistence level, buying votes is all too easy. 
But the only economic rights the Bush administration recognizes are intellectual property rights, putting the interests of drug companies ahead of those with life threatening diseases, and the free mobility of capital, which has had such devastating effects on many countries. 
America’s democracy remains the envy of much of the world, and it is good that the Bush administration now champions the expansion of democracy forcefully. 
But the administration would be far more credible, and have far more success, if it took a closer look at home, if it examined its own practices more honestly, and if it engaged in a broader discussion of what democracy really means. 

Democracy Comes Second 
Democracy is slowly spreading around the world. 
From the Middle East to Latin America and Asia, many autocracies are taking gradual steps towards more democratic and accountable forms of government, or have become fully-fledged and well functioning democracies. 
The US administration is determined to consolidate political freedoms in many developing countries under its sphere of influence; indeed, expansion of democracy has become a cornerstone of American foreign policy. 
There are many reasons to celebrate the current democratic wave. 
Democracy is associated with less injustice and abuse, with basic civic and political freedoms, and with greater sensitivity by governments for the true priorities of its citizens. 
But how important is democracy for economic success? 
Not much, the empirical evidence suggests. 
This might appear surprising. 
After all, is it not true that virtually all rich countries have democratic forms of government, while the poorest countries (mainly in Africa) are non-democracies? 
Indeed, throughout the world, democracy is strongly correlated with higher per capita income. 
But this correlation goes missing when one looks at the dimension of time rather than space. 
Countries that become democracies do not, on average, achieve faster economic growth after their political transition; and, vice versa, democracies that fail and relapse into autocracy do not, on average, do worse than before. 
The positive correlation between income and democracy that one sees across countries could be due to reverse causation: democracy is more likely to persist as a country grows richer. 
It could also be due to special historical or cultural circumstances: some societies are just more successful than others, both in terms of economic development and with regard to their ability to develop and maintain democratic political institutions. 
Whatever the reason for the observed positive cross-country correlation between income and democracy, it should not be confused with causality. 
Being democratic does not seem important in securing economic success. 
Of course, there are many different kinds of democratic transitions, and lumping them all together might be misleading. 
An important distinction in practice concerns the interaction between the economic and the political system. 
A democracy born in an open economic environment, with a well functioning market system, widespread foreign direct investment, and sizeable international trade, is likely to consolidate economic liberalism, stabilize expectations, and hence lead to more investment and faster growth. 
Conversely, if an economy is tightly controlled by the state, has protectionist barriers against foreign imports and capital movements, or relies on rents from exhaustible resources to obtain foreign currency, transition to democracy can be plagued by populism and struggles for redistribution, hurting economic growth. 
Empirical evidence supports the idea that the success of a democracy depends on the openness of the underlying economic system at the time of political transition. 
In the post-WWII period, the more successful episodes of democratic transitions have been preceded by widespread economic reforms that extended the scope of the market and facilitated international integration. 
Examples include Chile and South Korea in the late 1980’s and Mexico in the mid-1990’s. 
Conversely, when democratic transition was attempted in a fragile and closed economic environment, the outcome was much worse. 
This applies to the episodes of democratization in Latin America and the Philippines in the mid-1980’s, but also to Turkey in the early 1980’s and Nepal in 1990. 
The contrast between China and Russia also fits this pattern very well. 
China first opened its economic system to the rest of the world, and only now is it thinking (a bit too slowly) about political reform. 
Russia instead jumped into democracy, and only then worried about replacing socialism with a market system. 
There was probably no other way to do it in Russia, but the Chinese path seems much more likely to lead to lasting economic success. 
This does not mean that democracy is unimportant. 
But the sequence of reforms is critical for successful economic development, with economic reforms coming first. 
When an open and well functioning market system is in place, democracy has a much better chance to lead to lasting prosperity. 
An important reason for this is that, in order to create a successful market system, the state must respect basic individual rights: the rule of law, private property, and the enforcement of justice. 
These fundamental rights are part and parcel of democratic government. 
But when it comes to economic development, these fundamental rights are more important than other purely political aspects of democracy, such as universal suffrage and genuine political competition. 
This is how the Western world became democratic in the nineteenth and twentieth centuries. 
Economic liberalism came first, political liberalism later. 
But today’s young democracies have to do everything much faster. 
They don’t have the luxury of restricting suffrage to property owners, or to more educated citizens. 
Nevertheless, we should remember the lessons of history. 
Political reforms are more likely to be successful if they are preceded by economic reforms. 
We should insist that Egypt or Pakistan improve their market system, apply the rule of law, and open their economies to international trade and capital movements. 
Allowing free elections and true political competition is also critically important, but this should follow economic reforms, not precede them. 

Democracy Disconnected 
Something has happened to democracy in the sense of popularly elected government, and it has happened all over the world. 
Somehow people have lost faith in elections. 
Turnout is declining in many countries; in the case of elections to the European Parliament, the level of voter participation is so risibly low as to call into question the legitimacy of the result. 
But turnout apart, we have become accustomed to accepting that parties or candidates who receive 25% of the popular vote are "winners." 
From Holland and Finland to Argentina and Japan, majority governments are formed with minority support. 
Nor are the apparent exceptions proof to the contrary. 
Few American Presidents have been supported by much more than 10% of eligible voters: half of the US's eligible voters, indeed, are not even registered to vote; of those who are registered, half do not vote; of those who do vote, less than half vote for the winning candidate. 
Even Tony Blair's "landslide" majority in Britain's House of Commons rests on shaky ground: Labour received just over 40% of the vote with a 60% turnout at the last election in 2002. 
So only 24% of the total electorate supported Blair's party. 
In most countries, this is clearly very different from what elections looked like twenty, let alone fifty, years ago. 
What has happened? 
One answer must be that voters distrust political parties. 
Electoral democracy operates in most countries through the intermediary of organizations which put up candidates representing specific bundles of policy options, a "manifesto" or a "platform." 
For a number of reasons, however, this time-honored practice no longer works. 
Ideological party platforms have lost their force; voters do not accept the specific bundles offered by parties but want to pick and choose. 
Moreover, political parties have become "machines" made up of highly organized cadres of insiders. 
The paradox here is that parties have become more tribal having lost their ideological distinctiveness. 
It is more important to belong than to have a certain set of beliefs. 
Such developments removed parties from the ambit of voters. 
Because most people don't particularly want to belong to a party, playing the party game becomes a minority sport. 
This increases the public's suspicion of political parties, not least because--like all professional sports--playing the game is expensive. 
If the cost is borne by the taxpayer, it is resented. 
But if parties are not state-supported, they must find funds through channels that are often dubious, when not illegal. 
Many of the great political scandals of recent decades began with the financing of parties and candidates. 
Other indices--such as sharply declining membership rolls--confirm that parties have become unpopular. 
Yet parties remain indispensable to elective democracy. 
The result is an evident disconnection of the visible political actors from the electorate. 
Because parties operate in parliaments, the disconnection affects one of the crucial democratic institutions. 
People no longer think of parliaments as representing them and thus vested with the legitimacy needed to take decisions on their behalf. 
At this point, a second, quite separate, development comes into play. 
People are more impatient than ever. 
As consumers they are used to instant gratification. 
But as voters, they must wait before they see any results delivered by the choice they made at the ballot box. 
Sometimes they never see the desired results. 
Democracy needs time, not just for elections, but for deliberation and the exercise of checks and balances. 
The consumer-voter, however, will not accept this and therefore turns away. 
There are alternatives, but each has its own problems as a democratic solution. 
Direct action by demonstrations has become a regular and often effective occurrence. 
For the less mobile it can be replaced by electronic expressions of views, from Internet chat-rooms to e-mails to political leaders. 
Then there are non-governmental organizations, often undemocratic in their own structures and yet more closely connected, it seems, to citizens. 
Beyond these, of course, is the possibility of switching off altogether and leaving politics to the professionals so as to concentrate on other dimensions of life. 
The latter is the most risky, because it supports the creeping authoritarianism that is a sign of our times. 
But the other signs of disconnection also create a highly unstable condition in which one can never tell how representative the prevailing views are. 
Some want to cut through the tangle with more direct democracy. 
But lasting connections between leaders and governed can not be created by reducing public debate to simple referendum alternatives. 
There is much to be said for holding on to the classical institutions of parliamentary democracy and trying to reconnect them with the citizenry. 
After all, unpopular parties and falling electoral turnout may merely be passing phenomena. 
New parties may arise and breathe more life into elections and representative government. 
But this will probably not be enough to restore the popular legitimacy that elected governments have lost. 
So rethinking democracy and its institutions must be a top priority for all to whom the constitution of liberty is dear. 

Overcoming Democratic Myopia 
NEW YORK – Despite positive indicators, the global economy remains beset with risks. 
And because virtually every one of those risks arises from structural challenges, mitigating them will require long-term thinking by leaders. 
Unfortunately, there is not a lot of that on offer nowadays, particularly in the world’s democracies. 
The problem lies in the disconnect between political and economic cycles. 
A normal economic cycle lasts 5-7 years. 
But, according to the McKinsey Global Institute, the average tenure of a G20 political leader has fallen to a record-low 3.7 years (compared to six years in 1946). 
Focused on winning the next election, politicians often implement policies that will bring short-term rewards, even at the cost of long-term growth or stability. 
This trade-off is exemplified by widening fiscal deficits. 
In the United States, according to the Congressional Budget Office, the budget deficit is on course to triple over the next 30 years, from 2.9% of GDP in 2017 to 9.8% in 2047, owing to the effects of tax cuts and other budget-busting measures implemented to appeal to voters (or, equally important, to appease donors). 
This undercuts the government’s ability to make forward-thinking investments in areas like education and infrastructure. 
With politicians effectively rewarded for myopic thinking, the Western democracies find themselves struggling to secure stable long-term growth in a way that, say, authoritarian China is not. 
There are at least two ways to address this problem in a democratic context. 
First, governments could be bound more firmly to their predecessors’ policy decisions. 
That way, more forward-thinking legislation that has been debated and enacted will have time actually to take effect, without the risk that it will simply be repealed by a subsequent administration. 
The European Union provides one example of how long-term binding commitments can work. 
The 1992 Maastricht Treaty committed European governments to cap public debt at 60% of GDP, and annual budget deficits at 3% of GDP. 
Since then, governments have gradually brought their countries into alignment with this standard. 
But, as the EU’s experience also shows, such “binding” obligations are not always treated as unassailable, particularly during times of economic stress. 
In the aftermath of the 2008 financial crisis, it became clear that countries like Greece, Italy, Spain, and Portugal breached their Maastricht commitments. 
Nonetheless, establishing commitments for governments that extend beyond electoral cycles can imbue legislative agendas with a longer-term perspective, as they reduce partisan policy turnover. 
Such an approach would have been useful for US President Barack Obama’s signature legislation, the Affordable Care Act. 
Ensuring that the ACA would remain in place for some minimum fixed term, rather than leaving it vulnerable to immediate repeal by Donald Trump’s administration, might have enabled a more fundamental transformation of America’s flawed health-care system, including through improvements to “Obamacare” itself. 
Another way to encourage longer-term thinking among policymakers would be to extend their terms in office to, say, six years – roughly the length of economic cycles. 
Instead of spending their entire term campaigning for reelection, policymakers would have the time and political space to consider the nuances of complex structural challenges and formulate policies that boost the economy’s potential growth. 
In some countries, political leaders already serve longer terms. 
In Brazil, for example, federal senators are elected for an eight-year term. 
In Mexico and the Philippines, each presidential term lasts six years. 
In the US, by contrast, members of the House of Representatives face an election every two years, forcing even the president and senators – who serve four- and six-year terms, respectively – to operate, to some extent, on a two-year time horizon. 
Of course, longer electoral terms are risky, as they could enable incompetent and otherwise problematic leaders to remain in power for longer. 
That is why the change would have to be pursued in tandem with another reform: changing the eligibility requirements for would-be policymakers, with an eye to securing leaders who have experience not just running for office, but also handling real-world challenges. 
In a 2012 article, the University of Nottingham’s Philip Cowley noted that, in late 2010, the leaders of the major British political parties had less experience than any others of the post-war era. 
Similarly, a 2012 study by the British House of Commons Libraryrevealed that, from 1983 to 2010, the number of career politicians in Parliament had more than quadrupled, from 20 to 90. 
The rise of career politicians has coincided with growing cynicism about the effectiveness of elected leaders. 
In fact, according to a 2016 World Economic Forum survey, citizens in democratic countries trust their leaders less than those elsewhere, while a 2015 Pew survey found that more than 80% of US citizens do not trust the federal government to do what is right consistently. 
Such suspicion probably contributed to the victory of the political neophyte Donald Trump over Hillary Clinton in the 2016 US presidential election. 
In any case, today’s economic risks will not go away, and they can be minimized only with the type of reforms that must form part of a long-term policy agenda. 
In terms of crafting such agendas, democracies seem to be at a disadvantage. 
But this need not be the case. 

Bring Back Egypt’s Elected Government 
NEW YORK – Putting an end to Egypt’s deepening polarization and rising bloodshed requires one urgent first step: the reinstatement of Mohamed Morsi as Egypt’s duly elected president. 
His removal by military coup was unjustified. 
While it is true that millions of demonstrators opposed Morsi’s rule, even massive street protests do not constitute a valid case for a military coup in the name of the “people” when election results repeatedly say otherwise. 
There is no doubt that Egyptian society is deeply divided along sectarian, ideological, class, and regional lines. 
Yet the country has gone to the polls several times since the February 2011 overthrow of Mubarak’s 30-year rule. 
The results have demonstrated strong popular support for Islamist parties and positions, though they also make clear the country’s schisms. 
In late 2011 and early 2012, Egypt held parliamentary elections. 
Morsi’s Freedom and Justice Party, created by the Muslim Brotherhood, secured a plurality, and the two major Islamist blocs together received roughly two-thirds of the vote. 
In June 2012, Morsi defeated his rival Ahmed Shafik, Mubarak’s final prime minister, by a margin of 52-48% to win the presidency. 
In a national referendum in December 2012, a 64% majority of those voting approved a draft constitution backed by the Muslim Brotherhood (though turnout was low). 
The secular argument that Morsi’s lust for power jeopardized Egypt’s nascent democracy does not bear scrutiny. 
Secular, military, and Mubarak-era foes of the Muslim Brotherhood have used every lever at their disposal, democratic or not, to block the Islamist parties’ democratic exercise of power. 
This is consistent with a decades-old pattern in Egyptian history, in which the Brothers – and Islamist political forces in general – were outlawed, and their members imprisoned, tortured, and exiled. 
Claims that Morsi ruled undemocratically stem from his repeated attempts to extricate the popularly elected parliament and presidency from anti-democratic traps set by the military. 
After the Islamist parties’ huge victory in the 2011-2012 parliamentary elections, the military leadership and the Supreme Court (filled with Mubarak-era judges) worked to derail the new parliament and prevent it from establishing an assembly to draft a new constitution. 
The key action came in June 2012, when the Supreme Court, staffed entirely with Mubarak-era holdovers, nullified the results of the parliamentary elections on specious grounds. 
The military was set to reassert full legislative powers. 
Morsi’s subsequent victory in the presidential election therefore set up an epic battle over the future of the parliament and the constitution, as Morsi attempted to protect the democratically elected parliament while the military fought to dissolve it. 
In the end, Morsi insisted that the elected parliament create a constitutional assembly, which produced the draft approved in the December 2012 referendum. 
As is typical of political revolutions, Egypt’s economic situation has gone from bad to worse in the course of these power struggles. 
Revolutions tend to confront new governments with steeply rising social demands (for wage increases and higher welfare spending, for example) at a time of capital flight, financial turmoil, and deep disruptions of production. 
In Egypt’s case, the crucial tourist sector contracted sharply after the revolution. 
Unemployment soared, the currency depreciated, and food prices rose dangerously. 
None of this is surprising, and little of it can be managed by a new government that lacks experience, market confidence, and full control of the levers of power. 
Historically, outside parties have thus played a decisive role. 
Will foreign governments and the International Monetary Fund extend vital finances to the new government, or will they let it flounder and drown in a tsunami of currency depreciation and inflation? 
Here, the feckless West – torn between its democratic rhetoric and its antipathy to the Islamists – showed its hand. 
The result was equivocation and delay, rather than commitment and assistance. 
The IMF has talked with the Egyptian government for two and a half years since Mubarak’s overthrow without so much as lending a single cent, sealing the Egyptian economy’s fate and contributing to public unrest and the recent coup. 
It appears from press reports that the West finally gave the green light to the Egyptian military to overthrow Morsi, arrest the Muslim Brotherhood’s leadership, and repress the Islamist rank and file. 
US President Barack Obama’s unwillingness to stand up for Egypt’s elected leaders, or even to label their overthrow a “coup” (thereby protecting the continued flow of US funds to the Egyptian military), shows that when push came to shove, the West sided with the anti-Islamists in subverting democracy. 
Of course, in classic Orwellian fashion, the West did so in democracy’s name. 
The coup and the West’s complacency about it (if not complicity in it) could devastate Egypt. 
The Islamists are neither a marginal political group nor a terrorist force. 
They represent a large part of Egypt’s population, perhaps half or more, and are certainly the country’s best-organized political force. 
The attempt to repress the Muslim Brotherhood and to deny Morsi the presidency to which he was elected will most likely lead to massive violence and the strangulation of democracy, however the West and Egyptian anti-Islamists try to justify their actions. 
At this point, the correct course for the West would be to call on Egypt’s military to reinstate Morsi; to offer prompt financing to help stabilize the Egyptian economy; and to support true pluralism, not the kind that reverts to military coups when elections produce inconvenient results. 
True pluralism means accepting the strength of Islamist political forces in the new Egypt and other countries in the region. 
Short of this, the West will most likely end up as an accomplice to Egypt’s continuing downward spiral into violence and economic collapse. 

Democracy in Inaction at the World Bank 
James Wolfensohn, the president of the World Bank, has announced his intention to leave, and the search is on for a new head of the world’s most important multilateral organization promoting development. 
The choice is especially important now, when poverty in the Third World is finally being recognized as our greatest problem and challenge. 
The World Bank’s designation as a “bank” understates its importance and its multifaceted roles. 
It does lend money to countries to undertake a variety of projects, and to help them through crises (such as the $10 billion it provided to Korea in 1997-1998). 
It has been, and is, playing a vital role in post-conflict reconstruction around the world. 
But the Bank also provides grants and low-interest loans to the poorest countries, particularly for education and health, and advises these countries on development strategies. 
It has often joined with the IMF in strong-arming countries into accepting this “advice”: unless they do, they will not only be cut off by the IMF and the World Bank, but also by other donors, and capital markets will be discouraged from providing funds. 
Sometimes – its critics will say often – the advice provided by the IMF and World Bank is misguided. 
This was certainly true in the 1980’s and early 1990’s, when right-wing ideology dominated, producing a one-size-fits-all prescription entailing privatization, liberalization, and macroeconomic stability (meaning price stability), with little attention to employment, equity, or the environment. 
The term “bank” is a misnomer in a second sense: while the World Bank refers to its members as “shareholders,” it is hardly a private bank. 
On the contrary, the World Bank is a global public institution. 
But, while the G-7 countries, which dominate voting at the Bank, all declare their commitment to democracy and good governance – and espouse promoting them as one of their central objectives – there is a yawning gap between what they preach and what they practice. 
Indeed, the entire process of choosing these international institutions’ leaders is a historical anachronism that undermines their effectiveness and makes a mockery of the G-7 countries’ commitment to democracy. 
This process, established at the outset 60 years ago, is framed by an agreement that an American would lead the World Bank and a European would lead the IMF. 
The American president would choose the Bank’s head, and Europe would collectively decide on the IMF leader, with the understanding that the other side would exercise its veto only if a candidate were totally unacceptable. 
Within the United States, all major presidential appointments must be ratified by the Senate; even if rejections are rare, the vetting process is important, for the president knows that he can go only so far. 
But the presidency of the World Bank is a rare presidential plum – an appointment that is not subject even to Congressional hearings. 
How can advice on democratic reforms be taken seriously when the multilateral institutions that offer it do not subscribe to the same standards of openness, transparency, and participation that they advocate? 
Why should the search for Wolfensohn’s successor be limited to an American (and especially an American loyal to a particular political party)? 
Why is the search process going on behind closed doors? 
Shouldn’t these international public institutions be looking for the best-qualified person, regardless of race, religion, gender, or nationality? 
The two names that have been floated so far ­– presumably leaked as trial balloons – are particularly disturbing. 
To put it bluntly, given the World Bank’s importance, consideration of either putative US candidate, Assistant Defense Secretary Paul Wolfowitz or former Hewlett-Packard CEO Carleton Fiorina, have been highly controversial around the world. 
Even if convention allows the American president to appoint the World Bank’s head, the organization’s success depends on the confidence of others. 
Neither Wolfowitz nor Fiorina have any training or experience in economic development or financial markets. 
Of course, some past appointees turned out to be far better than anticipated; they rose to the occasion, despite qualifications that, in any open and objective selection process, would never even have left them on the short list. 
They proved that there is always a chance of outperforming. 
But this does not outweigh the risk of underperforming, which is why the best policy is to look for the best candidate. 
There are some absolutely first-rate individuals who could step into the job, people who have shown their command of economic development, their intellect and personal integrity, and their political and managerial skills. 
Such potential candidates include former Mexican president Ernesto Zedillo, a Yale Ph.D. who now teaches there and has been strongly supported in an editorial in the Financial Times; Arminio Fraga, a Princeton Ph.D. and former head of Brazil’s central bank; and Kemal Dervis, a former World Bank vice-president who has taught at Princeton and successfully managed one of Turkey’s crises as finance minister. 
Why should the world settle for anything less than candidates of this caliber? 
It is time that the G-7 countries back up their democratic rhetoric with action. 
Many stood up to the US as it pushed for the war in Iraq. 
They were right to be skeptical about US claims of an imminent danger from weapons of mass destruction. 
What is at stake here is no less important: the lives and well being of billions in the Third World depend on a global war on poverty. 
Choosing the right general in that war will not assure victory, but choosing the wrong one surely enhances the chances of failure. 

 

Democracy on the Nile? 
The surprise decision by Egyptian President Hosni Mubarak to propose a constitutional amendment that would allow direct and competitive presidential elections may be a giant step for democracy in Egypt and the Arab World. 
Westerners used to pluralistic democracy may find it hard to understand what a potentially huge shift this will be in a country accustomed to military rule for over 50 years. 
Under the current system, Egyptian citizens can only show up on the day of a presidential referendum every six years and say yes or no to the single name that appears on the presidential ballot. 
This explains why someone like Mubarak always received over 90% of the vote, albeit amid indifferent turnout. 
Syrian and Iraqi strongmen have done even better with this system, no doubt because they demanded that the names and addresses of voters be put at the bottom of each ballot. 
Many people have long argued that democratization in the Middle East will not get far until Egypt becomes fully engaged in the process. 
Egypt could not truly set out on a path of democratization without first amending its constitution – to downsize the Pharaonic powers of its president and set limits on his term in office. 
Mubarak, after all, is already in his 24th year as president. 
So the announcement that he wants competitive presidential elections is an important first step. 
The regime may assume that it will be able to use the process to its own advantage, but events may not be that easy to control once people begin to feel empowered. 
The democratic genie is out of the bottle. 
In any case, Egypt is not the only country in this troubled region that is now embarking on the road of democracy. 
Turkey at one end of the Middle East and Morocco at the other are already well on their way. 
The real groundswell this time seems to have come from the close timing and positive outcomes of recent elections in Iraq, Palestine, and to a lesser degree in Saudi Arabia. 
The unprecedented demonstrations against Syria’s occupation of Lebanon following the assassination of its former prime minister, Rafiq al-Hariri, show no signs of abating. 
Egyptian opposition groups, too, have staged increasingly bold marches and other forms of civil disobedience in the last few weeks. 
The catalyst for their anger was the arrest and detention of the ailing opposition leader Ayman Nour at the end of January. 
The government’s heavy-handed behavior reinvigorated the homegrown “Kifaya” (Enough) movement, which has demanded an end to the Mubarak regime. 
Suddenly the popular wisdom that Egyptians are passive and afraid to act did not seem to be holding up. 
An alliance of local, regional, and international forces is uniting against tyranny-as-usual on the banks of the Nile. 
The recent wave of popular pressure appears to have shaken the regime. 
Only a month ago, Mubarak dismissed demands for constitutional reform as “futile.” 
But, whatever combination of events brought about his change of heart, election initiative should be welcomed. 
It is a necessary – but insufficient – first step for overhauling Egypt’s stagnant political system. 
Egyptians are already wary of token reforms à la Tunisia, where longstanding President Zine El Abidin Bin Ali created a caricature of a constitutional amendment that appeared to open the door for competitive presidential elections, but then staged a sham contest with a few handpicked “opponents.” 
In previous Tunisian presidential referenda, Bin Ali routinely received 99% of the vote; he now got 96%. 
Let us hope that Mubarak is more serious about electoral reform. 
As a measure of sincerity, he needs to order the immediate release of Ayman Nour and take steps to terminate the 24-year-long state of emergency, which effectively prevents political campaigning from taking place. 
Mubarak should also endorse a limit of no more than two successive five-year terms for any president. 
Equally necessary are confidence-building measures, including open and equal access to the media, which are now state-controlled. 
I have announced that I intend to contest this upcoming presidential election as a way of opening debate on these essential reforms. 
But I would gladly go back to my life as a private citizen once guaranteed a free and open election this fall. 
If seriously implemented, these steps will transform Mubarak’s legacy. 
Along with events in Lebanon, Iraq, and Palestine, it may well usher in an Arab spring of freedom, one long overdue. 

Democracy Promotion Reconsidered 
Cambridge – President George W. Bush was famous for proclaiming the promotion of democracy a central focus of American foreign policy. 
He was not alone in this rhetoric. 
Most American presidents since Woodrow Wilson have made similar statements. 
So it was striking when Secretary of State Hillary Clinton testified to Congress earlier this year about the “three D’s” of American foreign policy – defense, diplomacy, and development. 
The “D” of democracy was noticeable by its absence, suggesting a change in policy by Barack Obama’s administration. 
Both Bill Clinton and George W. Bush frequently referred to the beneficial effects of democracy on security. 
They cited social science studies that show that democracies rarely go to war with each other. 
But, more carefully stated, what scholars show is that liberal democracies almost never go to war with each other, and it may be that a liberal constitutional culture is more important than the mere fact of elections. 
While elections are important, liberal democracy is more than “electocracy.” 
Elections in the absence of constitutional and cultural constraints can produce violence, as in Bosnia or the Palestinian Authority. 
And illiberal democracies have fought each other, as Ecuador and Peru did in the 1990’s. 
In the eyes of many critics at home and abroad, the Bush administration’s excesses tarnished the idea of democracy promotion. 
Bush’s invocation of democracy to justify the invasion of Iraq implied that democracy could be imposed at the barrel of a gun. 
The word democracy came to be associated with its particular American variant, and took on an imperialist connotation. 
Moreover, Bush’s exaggerated rhetoric was often at odds with his practice, giving rise to charges of hypocrisy. 
It was far easier for him to criticize Zimbabwe, Cuba, and Burma than Saudi Arabia and Pakistan, and his initial criticism of Egypt was soon toned down. 
There is a danger, however, in over-reacting to the failures of the Bush administration’s policies. 
The growth of democracy is not an American imposition, and it can take many forms. 
The desire for greater participation is widespread as economies develop and people adjust to modernization. 
Democracy is not in retreat. 
Freedom House, a non-governmental organization, listed 86 free countries at the beginning of the Bush years, and a slight increase to 89 by the end of his term. 
Democracy remains a worthy and widespread goal, but it is important to distinguish the goal from the means used to attain it. 
There is a difference between assertive promotion and more gentle support of democratization. 
Avoiding coercion, premature elections, and hypocritical rhetoric should not preclude a patient policy that relies on economic assistance, behind-the-scenes diplomacy, and multilateral approaches to aid the development of civil society, the rule of law, and well-managed elections. 
Equally important to the foreign-policy methods used to support democracy abroad are the ways in which we practice it at home. 
When we try to impose democracy, we tarnish it. 
When we live up to our own best traditions, we can stimulate emulation and create the soft power of attraction. 
This approach is what Ronald Reagan called the “shining city on the hill.” 
For example, many people both inside and outside the United States had become cynical about the American political system, arguing that it was dominated by money and closed to outsiders. 
The election of Barack Hussein Obama in 2008 did a great deal to restore the soft power of American democracy. 
Another aspect of America’s domestic practice of liberal democracy that is currently being debated is how the US deals with the threat of terrorism. 
In the climate of extreme fear that followed the attacks of September 11, 2001, the Bush administration engaged in tortured legal interpretations of international and domestic law that tarnished American democracy and diminished its soft power. 
Fortunately, a free press, an independent judiciary, and a pluralist legislature helped to hold for such practices up public debate. 
Obama has proclaimed that he will close the Guantánamo Bay detention facility within a year, and he has declassified the legal memos that were used to justify what is now widely regarded as torture of detainees. 
But the problem of how to deal with terrorism is not just a matter of history. 
The threat remains alive, and it is important to remember that people in democracies want both liberty and security. 
In moments of extreme fear, the pendulum of attitudes swings toward the security end of that spectrum. 
Abraham Lincoln suspended the right of habeas corpus – the principle that detainees are entitled to challenge their detention in a court of law – during the Civil War, and Franklin Roosevelt interned Japanese-American citizens during the early days of World War II. 
When some of the Bush administration’s more reasonable members are asked today how they could have taken the positions they did in 2002, they cite the anthrax attacks that followed 9/11, the intelligence reports of an impending attack with nuclear materials, and the widespread fear of a second attack against the American people. 
In such circumstances, liberal democracy and security are in tension. 
Terrorism is a form of theatre. 
It invokes its effects not by sheer destruction, but by dramatizing atrocious acts against civilians. 
Terrorism is like Ju-jitsu. 
The weaker adversary wins by leveraging the power of the stronger against itself. 
Terrorists hope to create a climate of fear and insecurity that will provoke us to harm ourselves by undercutting the quality of our own liberal democracy. 
Preventing new terrorist attacks while understanding and avoiding the mistakes of the past will be essential if we are to preserve and support liberal democracy both at home and abroad. 
That is the debate that the Obama administration is leading in the US today. 

Democracy’s Drama in Terrorism’s Theater 
CAMBRIDGE – President George W. Bush was famous for proclaiming democracy promotion as a central focus of American foreign policy. 
He was not alone in this rhetoric. 
Most US presidents since Woodrow Wilson have made similar statements. 
So it was a striking departure when US Secretary of State Hillary Clinton testified to Congress earlier this year about the “three D’s” of American foreign policy – defense, diplomacy, and development. 
The “D” of democracy was glaringly absent, suggesting a fundamental policy change by President Barack Obama’s administration. 
Both Bill Clinton and George W. Bush frequently referred to democracy’s benefits for security. 
They cited social-science research showing that democracies rarely go to war with each other. 
But, more carefully stated, what scholars have shown is that liberal democracies almost never go to war with each other. 
Indeed, it might be that a liberal constitutional culture is more important than the mere fact of competitive elections. 
While free and fair elections are important, liberal democracy is more than “electocracy.” 
Elections in the absence of constitutional and cultural constraints can produce violence, as in Bosnia or the Palestinian Authority. 
And illiberal democracies have in fact gone to war with each other quite recently, as Ecuador and Peru did in the 1990’s. 
In the eyes of many critics at home and abroad, the Bush administration’s excesses tarnished the idea of democracy promotion. 
Bush’s invocation of democracy to justify the invasion of Iraq implied that democracy could be imposed at the barrel of a gun. 
Democracy came to be associated with its particular American variant, and took on an imperialist connotation. 
Moreover, Bush’s exaggerated rhetoric was often at odds with his practice, giving rise to charges of hypocrisy. 
He somehow found it easier to criticize Zimbabwe, Cuba, and Burma than Saudi Arabia and Pakistan, and he quickly toned down his initial reproach of Egypt. 
There is a danger, however, in over-reacting to the Bush administration’s policy failures. 
Democracy is not an American imposition, and it can take many forms. 
The desire for greater participation grows as economies develop and people adjust to modernization. 
Nor is democracy in retreat. 
Freedom House, a non-governmental organization, listed 86 free countries at the beginning of the Bush years, a total that increased slightly, to 89, by the end of his term. 
Democracy remains a worthy and widespread goal, which should be distinguished from the means chosen to attain it. 
There is a difference between assertive promotion of democracy and more gentle support. 
Avoiding coercion, premature elections, and hypocritical rhetoric does not rule out a patient policy of economic assistance, quiet diplomacy, and multilateral efforts to support the development of civil society, the rule of law, and support for well-managed elections. 
Equally important to the foreign-policy methods used to support democracy abroad are the ways in which we practice it at home. 
When we try to impose democracy, we tarnish it. 
When we live up to our own best traditions, we can stimulate emulation and generate the soft power of attraction. 
This approach is what Ronald Reagan called the “shining city on the hill.” 
For example, many people both inside and outside the US had become cynical about the American political system, arguing that it was dominated by money and closed to outsiders. 
The election of Barack Hussein Obama in 2008 did a great deal to restore the soft power of American democracy. 
Another aspect of America’s domestic practice of liberal democracy that is currently being debated is how the country deals with the threat of terrorism. 
In the climate of extreme fear that followed the attacks of September 11, 2001, the Bush administration’s tortured legal interpretations of international and domestic law tarnished American democracy and diminished its soft power. 
Fortunately, a free press, an independent judiciary, and a contentious legislature helped to bring such practices into public debate. 
Obama has proclaimed that he will close the Guantánamo detention facility within a year, and he has declassified the legal memos that were used to justify what is now widely regarded as torture of detainees. 
But the problem of how to deal with terrorism is not just a question of the past. 
The threat remains with us, and it is important to remember that people in democracies want both liberty and security. 
In moments of extreme fear, the pendulum of attitudes swings toward the security end of that spectrum. 
Abraham Lincoln suspended the right of habeas corpus during the Civil War, and Franklin Roosevelt interned Japanese-American citizens during the early days of World War II. 
When some of the more reasonable members of the Bush administration are asked today how they could have taken the positions that they did in 2002, they cite the anthrax attacks that followed 9/11, the intelligence reports of an impending attack with nuclear materials, and widespread public fear of a second attack. 
In such circumstances, liberal democracy and security are in tension. 
Terrorism is a form of theater. 
It works not by sheer destruction, but rather by dramatizing atrocious acts against civilians. It is like jiu jitsu: the weaker adversary wins by leveraging the power of the stronger against itself. 
Terrorists hope to create a climate of fear and insecurity that will provoke liberal democracies to harm themselves by undercutting their quality in terms of their own values. 
Preventing new terrorist attacks while understanding and avoiding the mistakes of the past will be essential if we are to preserve and support liberal democracy both at home and abroad. 
That is the debate that the Obama administration is leading in the US today. 

Democracy Without Democrats 
The philosopher Karl Popper had ample reason to propose a precise definition of democracy. 
Democracy, he said, is a means to remove those in power without bloodshed. 
Popper's preferred method, of course, was the ballot box. 
Popper's definition avoids theological disputes about the "rule of the people," and whether such a thing can actually exist. 
It also spares us the attempt to stick all kinds of possibly desirable objectives into the definition, like equality in social as well as technical terms, a general theory of the actual process of "democratisation," or even a set of civic virtues of participation. 
But Popper's definition of democracy does not help when it comes to a question that has become topical in many parts of the world: what if those removed from power believe in democracy, whereas those who replace them do not? 
What in other words, if the "wrong" people are elected? 
There is no shortage of examples. 
In Europe, parties of dubious democratic pedigree have done well in recent years: Jörg Haider in Austria, Christoph Blocher in Switzerland, Umberto Bossi in Italy, Jean-Marie LePen in France - the list is long. 
At best, the electoral victories of such groups make the formation of responsible governments difficult; at worst, they foreshadow actively antidemocratic movements capable of getting a majority by election.-- 
This is what has happened or is happening in many parts of the world. 
Two recent examples stand out. 
One is found in the postcommunist countries of East and Southeast Europe, a surprising number of which have elected members of the old nomenklatura under a new guise. 
The most extreme current case is Serbia, where a big part of the electorate gave their votes to men standing trial for war crimes in The Hague. 
The other example is Iraq. 
What if the American dream of bringing democracy to that troubled country ends in its citizens electing a fundamentalist movement to power? 
The mere thought of such examples leads to the clear conclusion that democracy is not just about elections. 
In fact, of course, the early advocates of democracy had all kinds of things in mind. 
John Stuart Mill, for example, regarded "nationality," a cohesive society within national boundaries, as a precondition for democracy. 
Another precondition for Mill was the ability and desire of citizens to make considered choices. 
Today we no longer take such virtues as given. 
They were probably exercised by only a minority of people even at the time when Mill wrote on representative government. 
Today democracy has to mean "elections plus" - but plus what? 
There may be some technical measures that can be taken, like banning parties and candidates who campaign against democracy, or whose democratic credentials are weak. 
This worked in postwar Germany, but then traumatic memories of the Nazis and the relative weakness of antidemocratic movements helped. 
A more relevant example may well be Turkey, where Islamist movements were dissolved by the courts; when they reappeared in a different guise, they had to undergo severe tests. 
Yet one can easily see the problems: who judges the eligibility of candidates and how are such judgements enforced? 
What if the groundswell of support for an antidemocratic movement is so strong that the suppression of its organisation leads to violence? 
In a sense it might be better to let such movements have a go at government and hope that they will fail - as have most of the current European groups of an antidemocratic ilk. 
But that too is risky. 
When Hitler came to power in January 1933, many if not most German democrats thought: "Let him! 
He will soon be exposed for what he is and above all for what he is not." 
But time is relative: "soon" came to mean twelve years that included a savage war and the Holocaust. 
Active citizens who defend the liberal order must thus be its safeguard. 
But there is another, and a more important element to safeguard, which is the rule of law. 
The rule of law is not the same as democracy, nor does one necessarily guarantee the other. 
The rule of law is the acceptance that laws given not by some supreme authority, but by the citizenry, govern all - those in power, those in opposition, and those outside the power game. 
The rule of law is the strongest feature of Turkey today. 
It has rightly been the prime objective of the High Representative for Bosnia, Paddy Ashdown. 
It is something that must be defended; so-called "enabling laws" that suspend the rule of law are the first weapon of dictators. 
But it is harder to use the rule of law to undermine law than it is to use popular elections against democracy. 
"Elections plus" must mean, therefore, democracy plus the rule of law. 
At the risk of offending many friends of a democratic persuasion, I have now concluded that the rule of law should come first when constitutionalism is brought to an ex-dictatorship, and democracy second. 
Incorrupt independent judges are even more influential than politicians elected with massive majorities. 
Lucky are those countries that have both, and that nurture and protect them! 

Democratic Alliances 
America's foreign alliances have become an issue in this year's presidential election campaign. 
Senator John Kerry, the Democratic candidate, has accused President George W. Bush of neglecting and offending America's allies, particularly in Europe. 
A Kerry administration, he claims, will restore respect for America in the world. 
Anti-Americanism is not new in Europe, but views of America have generally been more positive in the past. 
During the Cold War, the United States not only pursued far-sighted policies like the Marshall Plan, but also represented freedom and democracy. 
Admiration for American values does not mean, of course, that others want to imitate all the ways Americans implement them. 
While many Europeans admire America's devotion to freedom, they prefer policies at home that temper the liberal economic principles of individualism with a robust welfare state. 
Despite all the rhetoric about "old" and "new" Europe, at the end of the Cold War opinion surveys showed that two-thirds of Czechs, Poles, Hungarians, and Bulgarians perceived the US as a good influence on their respective countries, but fewer than a quarter wanted to import American economic models. 
Popular culture can often be an important source of "soft" power. 
Simple items like blue jeans, cola, or Hollywood movies helped produce favorable outcomes in at least two of the most important American objectives after 1945. 
One was the democratic reconstruction of Europe after WWII, and the other was victory in the Cold War. 
The Marshall Plan and NATO were crucial instruments of economic and military power, but popular culture reinforced their effect. 
The dollars invested by the Marshall Plan helped achieve US objectives in reconstructing Europe, but so did the ideas transmitted by American popular culture. 
Today, about two-thirds of the people polled in ten European countries say they admire America for its popular culture and progress in science and technology, but only a third think the spread of American customs in their country is a good idea. 
The US doesn't have to make others look like little Americans, but it does have to live up to its core values in order to use its soft power effectively. 
This is why the examples of the prisons at Abu Ghraib and Guantanamo Bay have been so costly. 
It is also why a free press that reports these problems, congressional hearings that investigate them, and a recent set of Supreme Court decisions that give detainees legal recourse are also so important. 
America is not perfect, but as long as it abides by its core values, it can overcome its mistakes and regain its soft power in democratic countries. 
For example, America was extraordinarily unpopular at the time of the Vietnam War, yet it recovered its soft power within a decade, and it is interesting to consider why. 
Part of the answer may be that when students were marching in the streets protesting, they did not sing the "Internationale"; they sang "We Shall Overcome." 
America's democratic values will be the key to success in restoring its soft power. 
Some skeptics argue that this emphasis on values is the wrong explanation of how changes occur in world politics, and that the real problem between Europe and the US is structural. 
With the demise of the Soviet Union, according to this argument, the bi-polar balance of power vanished and America became the world's only superpower, engendering resentment and envy - and hence a difficult time for US-European relations. 
If European resentment is inevitable, some US leaders say, then the proper response is to shrug it off. 
Popularity is ephemeral and should never guide national policy. 
The US, in these leaders' view, can act without the world's applause. 
America doesn't need permanent allies and institutions, they say, because a coalition of the willing will suffice. 
As Secretary of Defense Donald Rumsfeld has put it, "The issues should determine the coalition, rather than the coalition determining the issues." 
But it is a mistake to dismiss America's declining attractiveness so lightly. 
America's recovery from unpopular policies in the past, such as the Vietnam War, took place against the backdrop of the Cold War, in which allied countries feared the Soviet Union as a greater evil. 
Moreover, while America's status as the world's sole superpower is a structural fact, wise policies can soften the sharp edges of this reality. 
After WWII, America was able to use soft power resources and co-opt others into a set of alliances and institutions that lasted sixty years. 
When we recall the Cold War, it is important to remember that America's strategy of containment combined the deterrent of its hard military power with the attractiveness of its soft cultural power, which eroded confidence and belief in Communism behind the Iron Curtain. 
The Bush administration's emphasis on promoting democracy in the Middle East suggests it understands the importance of values in foreign policy. 
Nevertheless, the administration refuses to be held back by institutional restraints. 
It advocates soft power, but focuses only on the substance and not enough on the process. 
The only way to achieve the type of transformation in the Middle East that the Bush administration seeks is by working with others and avoiding the backlash that arises when America acts as a unilateral, imperial power. 
Democracy cannot be imposed in any reasonable time by force alone. 
It takes time to set down roots, as the successful cases of Southeast Asia demonstrate. 
The Bush administration's impatience with institutions and allies thus undercuts its own objectives. 
The irony is that it was the US that built some of the longest lasting alliances and institutions the modern world has seen, and that were central to American power for over half a century. 

A Better Future for the Congo 
LONDON – The Democratic Republic of Congo (DRC) has become synonymous with state failure. 
No country has endured more brutal conflicts, hosted more kleptocratic and corrupt governments, or squandered more resource wealth. 
Trapped in a cycle of political uncertainty, economic recession, and escalating violence, humanitarian disaster has become a way of life. 
Yet a better future is possible. 
At the ramshackle Rubaya primary school, in a small town in the lush green hills of North Kivu province, bordering Rwanda, one gets a glimpse of that possibility. 
Children sit attentively in overcrowded classrooms, with enthusiasm, ambition, and hope lighting up their faces. 
Dorothy Gakoti, aged 13, wants to become a nurse. 
“If I succeed in school, I can have a better life with more opportunity – and I can help my family and community,” she declares. 
Yet the DRC – including North Kivu – remains beset with challenges. 
Dozens of ethnically based armed groups called Mai-Mai prey on local populations. 
Sexual violence, often targeting young girls, is as endemic as it is under-reported. 
Some 4.5 million children are malnourished, almost half of them severely. 
Less than half of the children who contract potentially deadly diseases like pneumonia and malaria receive treatment. 
Making matters worse, about one-quarter of the DRC’s school-age children are not receiving any education at all. 
And those who do go to school face abysmal learning outcomes: Dorothy doesn’t have a book or pencil to her name, and she struggles to understand French, the language of instruction. 
Yet writing off the DRC as a development failure would be a mistake. 
Since the end of a devastating five-year war in 2003, the country has made marked gains. 
While two-thirds of its people still survive on less than $1.25 per day, poverty and child mortality have fallen, while rates of immunization and school enrollment are rising. 
Moreover, the DRC has vast untapped economic potential. 
It possesses over half of the world’s known reserves of cobalt (a key component in computer chips and lithium-ion batteries) and around 80% of the world’s supply of coltan (a heat-resistant metal used in mobile phones and other devices). 
The country is also a major producer of copper, gold, tin, tungsten, and diamonds. 
Add to that fertile soils and some of the world’s greatest hydro-power potential, and the DRC should be a regional, if not continental, economic powerhouse. 
What explains the disconnect between the DRC’s vast economic potential and the condition of its children? 
For starters, the government has failed to create a tax system to mobilize resources for public investment in health and education. 
In fact, the DRC has one of the world’s lowest revenue-to-GDP ratios, with foreign actors and local vested interests effectively pillaging the country. 
In his novel Heart of Darkness, set in the DRC, Joseph Conrad wrote about what he later described as “the vilest scramble for loot that ever disfigured the history of human conscience.” 
Yet even Conrad would have been aghast at the windfall gains and rock-bottom tax rates that foreign mining investors have secured over the last decade. 
Both the International Monetary Fund and the World Bank have criticized the excessive generosity of the deals provided for foreign investors in mining, despite having designed and pushed them. 
The US Treasury Department has accused one foreign investor of gaining $1.3 billion – more than five times total government health financing in the DRC – through “opaque and corrupt” deals. 
The lack of government revenue is directly reflected in under-investment in public services. 
Parents seeking treatment for a malaria-stricken child, or a place for that child in school, must pay from their own pocket – an impossibility for many. 
As crowded as the Rubaya primary school’s classrooms are, every child I spoke to there had a sibling not attending school, because their family couldn’t cover the fees – around $10 per term. 
Political turbulence has further disrupted development efforts. 
The election that President Joseph Kabila was supposed to have called in 2016 is now scheduled for December 2018 – a delay that has intensified grievances and spurred violence. 
Last year, some two million people in the DRC, half of them in the previously peaceful central province of Kasai, were forced to flee their homes. 
The total number of internally displaced people now stands at 4.5 million – second only to Syria in current conflicts – while another 750,000 have fled to neighboring countries. 
These displaced people and refugees are living in desperate conditions, without adequate shelter, nutrition, and health care, and with virtually no access to education. 
Boosting productivity and creating jobs for the more than 1.5 million workers entering the labor market each year are essential to put the DRC on a different, more hopeful path. 
Here, education is critical. 
Each additional year of schooling is associated with a 9% increase in income. 
Expanded opportunities for learning would thus go a long way toward reducing poverty, especially given that almost half of the DRC’s population is under 15 years of age. 
But improved access to education must go hand in hand with strategies to combat child malnutrition and poor health. 
Education for all and universal health provision hold the key to a better future for DRC’s children. 
Progress will require the next government to take urgent action to build a tax base. 
More immediately, unless an effective response to the DRC’s escalating humanitarian crisis is mounted this year, the level of suffering will be immense – and not just in the country itself. 
As neighboring countries know all too well, what happens in the DRC often doesn’t stay in the DRC. 
An emergency summit planned for this week in Geneva is an opportunity for donors to stave off the worst, by providing the $1.7 billion the United Nations estimates an effective response will require. 
That will require donors to abandon their short-sighted and wrong-headed perceptions of the DRC as a lost cause, and instead help the country build the future that its children deserve. 

Democratizing Artificial Intelligence 
OXFORD – Artificial Intelligence is the next technological frontier, and it has the potential to make or break the world order. 
The AI revolution could pull the “bottom billion” out of poverty and transform dysfunctional institutions, or it could entrench injustice and increase inequality. 
The outcome will depend on how we manage the coming changes. 
Unfortunately, when it comes to managing technological revolutions, humanity has a rather poor track record. 
Consider the Internet, which has had an enormous impact on societies worldwide, changing how we communicate, work, and occupy ourselves. 
And it has disrupted some economic sectors, forced changes to long-established business models, and created a few entirely new industries. 
But the Internet has not brought the kind of comprehensive transformation that many anticipated. 
It certainly didn’t resolve the big problems, such as eradicating poverty or enabling us to reach Mars. 
As PayPal co-founder Peter Thiel once noted: “We wanted flying cars; instead, we got 140 characters.” 
In fact, in some ways, the Internet has exacerbated our problems. 
While it has created opportunities for ordinary people, it has created even more opportunities for the wealthiest and most powerful. 
A recent study by researchers at the LSE reveals that the Internet has increased inequality, with educated, high-income people deriving the greatest benefits online and multinational corporations able to grow massively – while evading accountability. 
Perhaps, though, the AI revolution can deliver the change we need. 
Already, AI – which focuses on advancing the cognitive functions of machines so that they can “learn” on their own – is reshaping our lives. 
It has delivered self-driving (though still not flying) cars, as well as virtual personal assistants and even autonomous weapons. 
But this barely scratches the surface of AI’s potential, which is likely to produce societal, economic, and political transformations that we cannot yet fully comprehend. 
AI will not become a new industry; it will penetrate and permanently alter every industry in existence. 
AI will not change human life; it will change the boundaries and meaning of being human. 
How and when this transformation will happen – and how to manage its far-reaching effects – are questions that keep scholars and policymakers up at night. 
Expectations for the AI era range from visions of paradise, in which all of humanity’s problems have been solved, to fears of dystopia, in which our creation becomes an existential threat. 
Making predictions about scientific breakthroughs is notoriously difficult. 
On September 11, 1933, the famed nuclear physicist Lord Rutherford told a large audience, “Anyone who looks for a source of power in the transformation of the atoms is talking moonshine.” 
The next morning, Leo Szilard hypothesized the idea of a neutron-induced nuclear chain reaction; soon thereafter, he patented the nuclear reactor. 
The problem, for some, is the assumption that new technological breakthroughs are incomparable to those in the past. 
Many scholars, pundits, and practitioners would agree with Alphabet Executive Chairman Eric Schmidt that technological phenomena have their own intrinsic properties, which humans “don’t understand” and should not “mess with.” 
Others may be making the opposite mistake, placing too much stock in historical analogies. 
The technology writer and researcher Evgeny Morozov, among others, expects some degree of path dependence, with current discourses shaping our thinking about the future of technology, thereby influencing technology’s development. 
Future technologies could subsequently impact our narratives, creating a sort of self-reinforcing loop. 
To think about a technological breakthrough like AI, we must find a balance between these approaches. 
We must adopt an interdisciplinary perspective, underpinned by an agreed vocabulary and a common conceptual framework. 
We also need policies that address the interconnections among technology, governance, and ethics. 
Recent initiatives, such as Partnership on AI or Ethics and Governance of AI Fund are a step in the right direction, but lack the necessary government involvement. 
These steps are necessary to answer some fundamental questions: What makes humans human? 
Is it the pursuit of hyper-efficiency – the “Silicon Valley” mindset? 
Or is it irrationality, imperfection, and doubt – traits beyond the reach of any non-biological entity? 
Only by answering such questions can we determine which values we must protect and preserve in the coming AI age, as we rethink the basic concepts and terms of our social contracts, including the national and international institutions that have allowed inequality and insecurity to proliferate. 
In a context of far-reaching transformation, brought about by the rise of AI, we may be able to reshape the status quo, so that it ensures greater security and fairness. 
One of the keys to creating a more egalitarian future relates to data. 
Progress in AI relies on the availability and analysis of large sets of data on human activity, online and offline, to distinguish patterns of behavior that can be used to guide machine behavior and cognition. 
Empowering all people in the age of AI will require each individual – not major companies – to own the data they create. 
With the right approach, we could ensure that AI empowers people on an unprecedented scale. 
Though abundant historical evidence casts doubt on such an outcome, perhaps doubt is the key. 
As the late sociologist Zygmunt Bauman put it, “questioning the ostensibly unquestionable premises of our way of life is arguably the most urgent of services we owe our fellow humans and ourselves.” 

Democratizing Brexit 
ATHENS – As deadlines approach and red lines are redrawn in the United Kingdom’s impending withdrawal from the European Union, it is imperative for the people of Britain to regain democratic control over a process that is opaque and ludicrously irrational. 
The question is: How? 
Democracy can never aspire to being more than a work in progress. 
Decisions made collectively must constantly be reappraised collectively in the light of new evidence. 
Yet, in the UK’s current circumstances, nothing would be more poisonous to democracy than revisiting Brexit by means of a second referendum. 
Both sides, Leavers and Remainers, feel betrayed. 
Even though Brexit was meant to restore its sovereignty, Parliament has no real say in a process that will mark Britain for decades to come. 
The Scots and the people of Northern Ireland are hostages to a distinctly English feud that could do them serious damage. 
The young feel the old have hijacked their future, while the old feel that their accumulated wisdom and legitimate concerns are being ignored by insiders striking bad deals behind closed doors on behalf of vested interests. 
In short, British democracy is failing its latest and most stringent test. 
But a fresh referendum cannot be the answer to the unfolding disaster triggered by the original referendum. 
In June 2016, a stark choice was available to the people of Britain: leave the EU or stay in. 
While one can question the wisdom of making such a collective choice via a referendum, the logical coherence of the enterprise was beyond dispute. 
Once the verdict came in, and the process stipulated by the Treaty of Lisbon’s Article 50 was triggered, no binary yes-or-no choice to steer Britain out of its mess became available. 
In fact, there are now at least five options that must be collectively appraised. 
Boris Johnson and his merry No-Deal Brexiteers are campaigning for Britain to sail away from the EU and, once outside, seek a relationship with the EU similar to that which Canada struck recently. 
Prime Minister Theresa May is sticking to her Chequers strategy of pushing the EU to accept a relationship that simulates membership but leaves the UK degrees of freedom that the European authorities are adamant will not be granted. 
The Labour Party is proposing that the UK remain within a customs union with the EU but not within the single market. 
Another proposal, which the European democracy movement DiEM25 and I support, would have the UK leave the EU but remain in both a customs union and the single market for a five-year period that can be renewed by mutual consent. 
Finally, there is of course the aspiration to remain fully within the EU. 
Any democratic reappraisal of the decision to leave the EU must involve these options – and maybe others, too. 
It must also expose the contradictions of the leading proposals. 
For example, a people’s vote must be informed about the implications of the “Irish backstop” that May has already agreed with the EU (guaranteeing there will be no border between Northern Ireland and the Republic of Ireland). 
In particular, Canada-style solutions are inconsistent with both a successful divorce settlement and keeping Northern Ireland in a customs union with the rest of the UK. 
Alas, referenda are not designed to sift through five distinct alternatives and to separate the logical repercussions of each from wishful thinking. 
Even if a preferential voting mechanism were to be employed, with voters ranking their preferences from one to five on the ballot paper, the process of successive elimination of the less-preferred options would be mechanical on the day of the referendum, ruling out any debate between rounds of elimination. 
A second referendum poses a second threat to democracy. 
Since the 1970s, when neoliberalism began shrinking the realm of democratic decision-making and transferred all important political choices to financial institutions and unelected “independent” authorities (for example, central banks), people have rightly felt that voting is a mere ritualistic validation of decisions taken by an establishment beyond their control. 
The Brexit referendum was a rare exception. 
The large turnout marked a high-water mark in participation, with more than 17 million voting – many for the first time in their lives – against the wishes of all the main establishment institutions. 
In my view, it is utterly regrettable that the people decided to rediscover their power by supporting Brexit. 
Those of us who opposed Brexit but who are also desperate to see democracy revitalized cannot support a second referendum that, in essence, tells these people: “You made the wrong decision. 
Now go back and deliver the ‘correct’ verdict.” 
If we do, we will confirm their suspicion that democracy is respected only when they are disrespected. 
The only beneficiaries, in the end, will be Boris Johnson and his ilk, who want the silent majority to remain silent, reactionary, and distraught while they rule. 
So, if a second referendum is not the way for the British people to regain control of the Brexit process, what is? 
The answer, as called for by Labour leader Jeremy Corbyn, is an immediate general election, to be fought on all of the relevant issues at once and presenting the various alternatives in full. 
The people’s next vote on Brexit must concern not only their preferred exit path but, crucially, the mix of domestic economic, social, and institutional reform policies that go with it. 
We all have a duty to spell out our proposals precisely. 
In the interest of revitalizing democracy and ending the toxicity of the current Brexit process, DiEM25 and I will be backing the UK’s inclusion in the single market and a customs union with the EU for a renewable five-year period. 
During that period, implementing the Labour Party’s sensible manifesto would mitigate the damage inflicted on the peoples of England, Scotland, Wales, and Northern Ireland by the financialized casino capitalism of successive Tory and New Labour governments. 

Democratizing Capitalism 
Capitalism is the world's engine of growth. 
But its very dynamism--its "creative destruction"--tends to produce great uncertainties. 
Unsuccessful firms are tossed aside to make way for new and better firms, and individuals who become economically less productive (often through no fault of their own) can also be "discarded" by the market, their careers interrupted and their investments cut to a fraction of their previous value. 
This uncertainty has been at the root of demands for the state to intervene and protect the individual against the market's mercilessness. 
Beginning with Bismarck's social security system in 19 th century Germany, through the American New Deal of the 1930's, to the social-democratic policies of postwar Europe, many countries created a "mixed" welfare state in which governments control and temper market forces, providing an extensive "safety net" for individuals. 
But despite its achievements, many people believe that the welfare state comes at too high a price in terms of dampening economic dynamism. 
The prospect raised by today's new technologies in finance and information is that some of the "market failures" at the root of state involvement in the economy may cease to exist. 
Indeed, the "creative destruction" that generates unacceptable risk to individuals is poised to deliver the means for tempering these same risks. 
In fact, the most important capitalist mechanisms for blunting the impact of risk on individuals--insurance, diversification, and hedging--have been around for centuries. 
But broader application of these tools has accelerated with the advent of new information technology, which also allows us to apply these tools without undermining people's incentive to work. 
Indeed, the world seems to be entering an age in which the basic principles of finance will be integrated into the world capitalist economy, and our lives, in a more thoroughgoing way than ever before. 
Aided by advanced information technology, financial institutions will be democratized and made available to everyone, which will go a long way toward solving today's problems of increasing inequality and declining economic vitality. 
An example of recent progress illustrates what I mean. 
For most middle-class people in developed countries, the home they own is their most valuable asset. 
Although the postwar population boom and heavy regulation meant that real estate prices in many countries went up more often than down, a sudden collapse of the property market--such as happened in Japan a decade ago--may dramatically reduce the value of most people's savings. 
Such a financial "hit" may affect their consumption patterns, complicate their retirement plans, and even bring them to the brink of indigence. 
Yet, until recently, one could insure one's home against fire or other damage, but not against a loss in market value. 
That is changing. 
Two recent developments indicate the shape of things to come, although neither has attracted much notice. 
First, in October 2001, the spread-betting firm City Index created futures markets on home prices in the United Kingdom. 
In May 2003, the investment bank Goldman Sachs created options markets for home prices, for the UK as a whole and for Greater London, with both to be traded on the London Stock Exchange. 
Theoretically, homeowners can use these new instruments to protect themselves against their home losing value. 
But these instruments are rather sophisticated--too sophisticated, in fact, for most homeowners to embrace. 
Second, in July 2002, the city of Syracuse, New York, in conjunction with the Neighborhood Reinvestment Corporation, the Yale School of Management, and Realliquidity, LLC, created home equity insurance that pays out if an index of city home prices declines. 
Like the British options and futures market for home prices, this novel insurance policy is also, for the time being, a limited development, made possible by new information technology in the form of electronic databases of home prices and characteristics. 
Someday, these two institutions will be brought together in one country. 
Regulators permitting, insurance companies will then be able to write policies against loss of home value for individuals, and then will be able protect themselves against the risk to which these policies expose them by taking offsetting positions in the futures or options markets. 
This should make them willing to offer such policies to millions of people in different localities. 
Home equity insurance will clearly not solve all the problems of individual risk, but it will solve a very big one. 
Moreover, it is only one example of the democratization of finance now underway. 
Further advances along these lines will follow. 
Many risks are gradually being added to the list of those that can be insured against. 
The types of risks traded on electronic marketplaces are steadily expanding. 
Trading platforms are being improved to allow more complex trading. 
Databases are rapidly improving in depth, and are becoming more deeply integrated with personal financial-planning Web sites. 
Even systems of taxation and social welfare are more sophisticated in using new tools of insurance, finance, and information technology. 
As a result, our mechanisms for dealing with risk can become increasingly differentiated and complex. 
With modern computers and information technology, it will be possible to deal individually with a million different risks. 
The combined effect of many different financial innovations will be to blunt the impact of capitalist risk on our individual lives, helping to reduce economic uncertainty and inequality. 

Demographics and Development 
WASHINGTON, DC – Achieving the ambitious Sustainable Development Goals – which aim to end poverty, boost shared prosperity, and promote sustainability, between now and 2030 – will require overcoming some major obstacles, ranging from securing enough financing to addressing climate change to managing macroeconomic shocks. 
But there is one potential obstacle that could turn out to be a blessing in disguise: the diverse demographic shifts that will take place in the coming years. 
By the time the SDG agenda reaches its end date, there will be an estimated 8.5 billion people worldwide. 
Twenty years later – just 34 years from now – there will be nearly ten billion, or nearly 2.5 billion more people than there are on Earth today. 
What will such a world look like? 
Where will those additional people live? 
How will they make their living? 
Will they bolster or weigh down national economies? 
For clues, we can look 35 years in the past, to the early 1980s. 
US President Ronald Reagan, Chinese leader Deng Xiaoping, British Prime Minister Margaret Thatcher, French President François Mitterrand, and Soviet President Mikhail Gorbachev dominated the world’s headlines. 
Personal computer sales were miniscule. 
And children competed over Rubik’s cubes, rather than augmented-reality Pokémon. 
At that time, the world’s population was about 4.5 billion, 42% of whom – almost two billion – lived in extreme poverty. 
Excessive population growth, it was feared, would outpace agricultural production and create yet more poverty. 
Yet the Malthusian predictions were wrong. 
Although the world population has surged to 7.5 billion, only about 750 million people – just 10% of the total population – live in extreme poverty today. 
China and India, in particular, lifted hundreds of millions out of poverty in recent decades, increasing their citizens’ incomes and improving their health. 
China and India achieved this partly by strengthening institutions and pursuing policies that supported strong, relatively inclusive growth. 
China, for its part, also took advantage of a “demographic dividend”: fertility rates fell, and the labor force grew faster than the dependent population, freeing up resources to invest in people and capital. 
This produced higher growth and living standards. 
Such a dividend can run for decades. 
And, for China, it has, though it is now reaching its conclusion. 
For India and other developing countries, however, the demographic dividend is just starting to be felt. 
In fact, fully 90% of global poverty is concentrated in countries with growing working-age populations, creating an important opportunity for rapid poverty reduction in the coming decades. 
For example, in Sub-Saharan Africa, which is currently plagued with high levels of extreme poverty, children under 15 years of age account for 43% of the total population. 
When these children are old enough to enter the labor force, the proportion of income-earners in the economy could be increased substantially, boosting average per capita incomes. 
But not all countries are set to benefit from a “youth bulge.” 
Between now and 2030, several middle-income countries will experience a decline in the share of the working-age population. 
Among other things, this reflects the tendency, supported by empirical evidence, for higher incomes to impel households to delay having children. 
Even here, however, the demographic news is not all bad – and not just because the shift from higher to lower fertility typically correlates with a shift from lower to higher life expectancy. 
History suggests that there is a second type of demographic dividend – one that actually lasts longer and is more durable than the first – which emerges when the accumulated savings of an aging population produce a surge in investment. 
Many wealthier countries have followed this path. 
But reaping a demographic dividend takes work. 
As the World Bank Group’s 2015/2016 Global Monitoring Report emphasized, countries’ policy responses make all the difference in how demographic trends affect the wellbeing of the population. 
With the wrong approach, a surging youth population can be destabilizing, and a rapidly aging population can become a burden on economic growth and public budgets. 
For countries with a growing working-age population, the key challenge is to generate a large number of productive jobs. 
For those with an aging population, it is to improve productivity and adapt social-welfare systems. 
In both cases, investment in human capital and an enabling environment for businesses to boost employment are essential. 
Furthermore, countries should take advantage of differences in their demographic situations with appropriate policies on cross-border capital flows, migration, and trade. 
More capital should flow to countries with younger populations – with their growing manufacturing bases and consumer markets – to support investment and employment growth; and more labor should flow to countries with aging populations, to fill gaps in the workforce. 
For all of these policies to work, countries need to improve the effectiveness and credibility of their civic and government institutions. 
Mitigating uncertainty, in order to avoid fueling instability, is also essential. 
The last 35 years prove that a larger population does not have to be poorer. 
While the increasing concentration of the poor in fragile and conflict-affected countries will compound the challenge of poverty reduction over the next few decades, this is no excuse for not ensuring continued progress. 
We have the resources and knowledge to achieve far greater prosperity, equity, and sustainability. 
The real challenge will be to use them effectively. 

Denuclearization Means the US, Too 
NEW YORK – There are two types of foreign policy: one based on the principle “might makes right,” and one based on the international rule of law. 
The United States wants to have it both ways: to hold other countries accountable to international law while exempting itself. 
And nowhere is this truer than on the matter of nuclear weapons. 
America’s approach is doomed to fail. 
As Jesus declared, “all they that take the sword shall perish with the sword.” 
Rather than perishing, it’s time to hold all countries, including the US and other nuclear powers, accountable to the international rules of non-proliferation. 
The US demands that North Korea adhere to the provisions of the Nuclear Non-Proliferation Treaty (NPT), and on that basis has encouraged the United Nations Security Council to impose sanctions on North Korea in pursuit of denuclearization. 
Similarly, Israel calls for sanctions or even war against Iran to stop the country from developing a nuclear weapon in violation of the NPT. 
Yet the US brazenly violates the NPT, and Israel does worse: it has refused to sign the treaty and has claimed the right to a massive nuclear arsenal, acquired through subterfuge, that it refuses to acknowledge to this day. 
The Nuclear Non-Proliferation Treaty was signed in 1968, with signatories agreeing to three key principles. 
First, nuclear-weapon states pledge not to transfer nuclear weapons or to assist non-nuclear states’ manufacture or acquisition of them, and non-nuclear states pledged not to receive or develop nuclear weapons. 
Second, all countries have the right to the peaceful use of nuclear energy. 
Third, and crucially, all parties to the treaty, including the nuclear powers, agree to negotiate nuclear – and indeed general – disarmament. 
As the NPT’s Article VI puts it: 
“Each of the Parties to the Treaty undertakes to pursue negotiations in good faith on effective measures relating to cessation of the nuclear arms race at an early date and to nuclear disarmament, and on a treaty on general and complete disarmament under strict and effective international control.” 
The core purpose of the NPT is to reverse the nuclear arms race, not to perpetuate the nuclear monopoly of a few countries. 
Still less is it to perpetuate the regional nuclear monopoly of countries that have failed to sign the treaty, such as Israel, which now seems to believe that it can evade negotiations with the Palestinians because of its overwhelming military power. 
Such is the self-destructive hubris conjured by nuclear weapons. 
Most of the international community – with the conspicuous exception of the existing nuclear powers and their military allies – reiterated the call for nuclear disarmament by adopting in 2017 the Treaty on the Prohibition of Nuclear Weapons. 
The treaty calls on every nuclear-armed state to cooperate “for the purpose of verifying the irreversible elimination of its nuclear-weapon program.” 
Whereas 122 countries voted for it, one voted against, one abstained, and 69, including the nuclear powers and NATO members, did not vote. 
As of last week, 58 countries had signed the treaty and eight had ratified it. 
The US demands that North Korea live up to its NPT obligations and denuclearize, and the Security Council agrees. 
Yet the brazenness with which the US demands not true denuclearization, but rather its own nuclear dominance, is stunning. 
The Trump administration’s Nuclear Posture Review, published in February, calls for a massive modernization of the US nuclear arsenal while paying no more than lip service to its NPT treaty obligations: 
“Our commitment to the goals of the Treaty on the Non-Proliferation of Nuclear Weapons (NPT) remains strong. 
Yet we must recognize that the current environment makes further progress toward nuclear arms reductions in the near term extremely challenging.…This review rests on a bedrock truth: nuclear weapons have and will continue to play a critical role in deterring nuclear attack and in preventing large-scale conventional warfare between nuclear-armed states for the foreseeable future.” 
In short, the US demands that only other countries denuclearize. 
Denuclearizing itself would be “challenging” and would violate the “bedrock truth” that nuclear weapons serve US military needs. 
Aside from America’s failure to abide by its NPT obligations, another huge problem is that US military needs are not really about deterrence. 
The US is the major war-making entity in the world by far, fighting wars of choice in the Middle East, Africa, and elsewhere. 
Its military has repeatedly engaged in regime-change efforts during the past half-century, wholly in violation of international law and the UN Charter, including two recent operations to overthrow leaders (Iraq’s Saddam Hussein and Libya’s Muammar el-Qaddafi) who had acceded to US demands to end their nuclear programs. 
We can put it this way: power corrupts, and nuclear power creates the illusion of omnipotence. 
Nuclear powers bluster and boss rather than negotiate. 
Some overthrow other countries’ governments at their whim, or at least aim to do so. 
The US and it nuclear allies have repeatedly arrogated to themselves the right to ignore the UN Security Council and the international rule of law, such as the illegal NATO attacks against Qaddafi’s regime in Libya and the illegal military incursions by the US, Israel, the United Kingdom, and France in Syria in the effort to weaken or overthrow Bashar al-Assad. 
By all means, let us urge a rapid and successful denuclearization of North Korea; but let us also, with equal urgency, address the nuclear arsenal of the US and others. 
The world is not living under a Pax Americana. 
It is living in dread, with millions pushed into the vortex of war by an unrestrained and unhinged US military machine, and with billions living in the shadow of nuclear annihilation. 

Denying Democracy in Hong Kong 
This week marks the 15th Anniversary of the promulgation of Hong Kong’s constitution, the Basic Law, by China’s National People’s Congress. 
The Basic Law supposedly established a political framework to accord with the late Deng Xiaoping’s policy of “one country, two systems,” with Hong Kong’s people ruling Hong Kong with a high degree of autonomy. 
Under this policy, Hong Kong’s capitalist system, the rule of law, and its people’s freedoms and way of life were to be preserved. 
It provided for a popularly elected Chief Executive and Legislative Council. 
Indeed, apart from defense and foreign affairs, Hong Kong was to be master of its own house. 
But, despite its promise of universal suffrage, the Basic Law restricts democratic development during the first ten years after the handover of Hong Kong to China. 
As a result, full democracy is to be permitted only in 2007. 
I said in my maiden speech in the Legislative Council in 1985 that the policy of “one country, two systems” cannot work without democracy. 
As Deng once said of China: “With a good system, even evil men cannot do evil. 
But without a good system, even good men cannot do good, but may be forced to do evil.” 
For Hong Kong, the only good system is democracy. 
For under a democratic system, those in power realize that it is the people who put them in office, and they will be voted out if they are perceived to be serving Beijing’s interests rather than Hong Kong’s. 
Of course, Deng’s policy can work only if Beijing wants it to work. 
Indeed, not only must China refrain from interfering in Hong Kong’s internal affairs, but it must encourage the people of Hong Kong to defend their much smaller system. 
Unfortunately, Beijing has other ideas. 
On July 1, 2003, the sixth anniversary of the handover, nearly a million people took to Hong Kong’s streets in a peaceful protest against an anti-subversion bill that would have eroded freedom of the press, of religion, and of association. 
The demonstration led to a postponement of the bill, and ultimately to its withdrawal, as well as to the resignation of the Secretary for Security, who was responsible for it. 
But that demonstration also spurred a major change in China’s policy towards Hong Kong. 
Until then, interference from China was covert and subtle, so that the public perception was that Hong Kong’s Chief Executive, Tung Chee-hwa, was in charge. 
After the demonstration, China’s government adopted a hands-on approach, letting the people of Hong Kong know who the boss really is. 
Thus, on April 26, 2004, China announced its unilateral decision that Hong Kong is not to have democracy in 2007 without saying when Hong Kong will have it. 
Then came Tung’s resignation as Chief Executive in March. 
The popular belief is that Tung was sacked or pressured to step down. 
Tung was handpicked by former Chinese President Jiang Zemin in 1996 and was openly endorsed by Jiang for a second term in 2002. But he was not popular because the public viewed him as a puppet of China and a crony of big developers, particularly Li Ka-shing, Hong Kong’s richest person. 
Although the election of the next Chief Executive will not take place until July, China has let it be known that our present Chief Secretary, Donald Tsang, is the chosen one. 
Moreover, although the Basic Law prescribes a five-year term for the Chief Executive, China is insisting that the winner will only serve for the remainder of Tung’s term, until June 30, 2007. 
The clear message is that after almost eight years of Chinese rule, China’s leaders do not trust anyone in Hong Kong to govern for five years. 
This, surely, is the greatest indictment of China’s Hong Kong policy since 1997. But the solution lies in changing the system, not just the leader. 
The way forward is not more control or suppression, but more trust and democracy. 
The latter leads to the full implementation of Deng’s policy, enshrined in the Basic Law, of “one country, two systems,” while the former turns the Basic Law into a worthless piece of paper. 
In 1984, British Prime Minister Margaret Thatcher, said of the impending handover of Hong Kong, “The eyes of the world are on us.” 
That may or may not be true today, but at least the people of Taiwan are watching. 

Depression Economics 
BERKELEY – A decade ago, the 2008 Nobel laureate in economics, Paul Krugman, wrote a little book entitled The Return of Depression Economics . 
It sank like a stone. 
The East Asian financial crisis of 1997-1998 was sharp but short and quickly cured once the IMF realized that feckless governments were not the problem and then United States Treasury Secretary Robert Rubin parachuted the New York banks into South Korea’s economy. 
The collapse, not long after, of the dot-com bubble in 2000-2001 brought on not a depression but merely an output decline so mild as to barely warrant the name “recession.” 
Now Krugman is back with a revised and expanded version of his book, and, sadly, the timing is perfect. 
For there is a much better case to be made today than there was in 1998 that we should be thinking in terms of “depression economics.” 
But the book does not tell us what “depression economics” is supposed to replace. 
So let me try my hand at defining non-depression economics: 
· Short-run economic policy should be left in the hands of the central bank, with the legislature and the executive focusing on the long run and keeping their noses out of year-to-year fluctuations in employment and prices; 
· Central banks’ highest priority should be to maintain their credibility as guardians of price stability, and only then turn their attention to keeping the economy near full employment, which they should do by influencing asset prices – upward when unemployment threatens to rise, and downward when an inflationary spiral looms; 
· Central banks should influence asset prices through normal open-market operations – by buying and selling short-term government securities for cash, thus changing the “safe” interest rate and the price of longer-duration assets; 
· While the central bank should stand ready to intervene to prevent bank runs, it should let the financial sector run itself with a light regulatory hand, viewing itself not as a chaperone but rather as the designated driver in the case of speculative excess. This is the doctrine that Krugman argues is no longer sufficient for our age. 
And he has a very good case. 
Nearly all of these principles are, today at least, honored more in the breach than in the observance. 
Today, short-run economic policy cannot just be left to the central bank alone. 
For one thing, its balance sheet is not big enough. 
At a minimum, the central bank now needs the assistance of that part of the government that taxes and borrows. 
Moreover, the highest priority for central banks can no longer be to maintain their credibility as guardians of price stability, but rather their credibility as guardians of the financial system’s stability and soundness. 
Once that highest goal has been achieved, central banks can turn their attention to trying to keep the economy near full employment. 
One principle does remain true: central banks should try to keep the economy at near full employment by pushing asset prices up when unemployment threatens to rise. 
But central banks today are influencing asset prices through a very large number of channels and procedures other than conventional open-market operations: they are trying to affect not just duration discounts but risk, default, and information-driven discounts as well. 
Nor is it any longer accepted that such actions will be sufficient. 
Fiscal stimulus is needed as well. 
Non-depression economics eschews fiscal policy, on the grounds that central banks’ tools are powerful enough and their decision-making more effective and technocratic than that by legislatures. 
But in today’s prevailing conditions, we cannot afford this perspective. 
Finally, central banks still stand ready to intervene to prevent bank runs. 
But the presumption in favor of light financial-sector regulation now has few defenders. 

Higher Education Misconceived 
CAMBRIDGE – Ever since economists revealed how much universities contribute to economic growth, politicians have paid close attention to higher education. 
In doing so, however, they often misconceive universities’ role in ways that undermine their policies. 
For example, US President Barack Obama has repeatedly stressed the need to increase the percentage of young Americans earning a college degree. 
This is undoubtedly a worthwhile aim that can contribute to national prosperity and help young people realize the American Dream. 
Yet economists who have studied the relationship between education and economic growth confirm what common sense suggests: the number of college degrees is not nearly as important as how well students develop cognitive skills, such as critical thinking and problem-solving ability. 
Failure to recognize this point can have significant consequences. 
As countries embrace mass higher education, the cost of maintaining universities increases dramatically relative to an elite system. 
Given that governments have many other programs to support – and that people resist higher taxes – finding the money to pay for such an effort becomes increasingly difficult. 
Universities must therefore try to provide a quality education to more students while spending as little money as possible. 
Accomplishing all three objectives – quality, quantity, and cost efficiency – simultaneously is difficult, and the likelihood of compromise is great. 
With graduation rates and government spending easy to calculate, educational quality, which is difficult to measure, is likely to be the objective that slips. 
No one need know – and thus no one can be held accountable – when graduation rates rise but the hoped-for economic benefits fail to materialize. 
A second misconception by policymakers is that the only important benefit from a college education is the opportunity that it gives graduates to find a middle-class job and contribute to economic growth and prosperity. 
But, while this contribution is important, it is not the only one that matters. 
Apart from finding a first job, college graduates seem to adapt more easily than those with only a high school degree as the economy evolves and labor-market needs change. 
They also tend to vote at higher rates, engage in more civic activities, commit fewer crimes, educate their children better, and get sick less frequently by adopting healthier lifestyles. 
Researchers estimate that these additional benefits are worth even more than the added lifetime income from a college degree. 
If policymakers overlook them, they run the risk of encouraging quicker, cheaper forms of education that will do far less to serve either students or society. 
These misconceptions are clearly evident in government leaders’ speeches over the past two decades. 
As former President Bill Clinton remarked in his State of the Union address in 1994: “[W]e measure every school by one high standard: Are our children learning what they need to know to compete and win in the global economy?” 
Since then, George W. Bush and Obama have echoed similar sentiments when speaking about their educational-policy goals. 
The same attitudes are manifest in other countries as well. 
A telling example is the shift in jurisdiction over British universities since 1992 from the Department of Education and Science to the Department for Education and Employment, and, in 2009, to a new Department for Business, Innovation, and Skills. 
This shrunken conception of the role of higher learning is unprecedented. 
It ignores what were long regarded as the most essential aims of education: strengthening students’ moral character and preparing them to be active, informed citizens. 
In light of this tradition, the recent shift to material objectives comes as something of a surprise. 
John Maynard Keynes prophesied in the 1920’s that as countries grew wealthier, people’s preoccupation with money and possessions would diminish. 
Instead, just the opposite has occurred. 
Granted, democratic political leaders must be responsive to the people, and money and jobs are clearly on people’s minds. 
According to a recent survey, among first-year university students in the United States in 2012, 88% cited getting a better job as an important reason for attending college, and 81% listed “being very well off financially” as an “essential” or “very important” goal. 
But it is also true that 82.5% of these freshmen sought “to learn more about things that interest me” as an important reason for attending college, and 73% wanted “to gain a general education and appreciation of ideas.” 
Among the objectives they considered “essential” or “very important,” 51% mentioned “improving my understanding of other countries and cultures,” 45.6% cited “developing a meaningful philosophy of life,” and substantial fractions listed such goals as “becoming a community leader,” “helping to promote racial understanding,” and “becoming involved in programs to clean up the environment.” 
In the end, surveys suggest that what people want most is not wealth so much as happiness and the satisfaction that comes from a full and meaningful life. 
Money helps, but so do other things, such as close human relationships, acts of kindness, absorbing interests, and the chance to live in a free, ethical, and well-governed democratic society. 
A stagnant economy and lack of opportunity are undoubtedly problems, but so are low voting rates, civic apathy, widespread disregard for ethical standards, and indifference to art, music, literature, and ideas. 
It is the responsibility of educators to help their students live satisfying, responsible lives. 
However well or badly universities perform this task, their efforts to succeed at it are worth fighting for and deserve their governments’ recognition and encouragement. 
After all, as Louis Brandeis observed: For good or ill, “our government is the potent, the omnipresent teacher.” 
If our leaders regard education merely as a means to jobs and money, no one should be surprised if young people eventually come to think of it that way, too. 

Designer Diets? 
Throughout our lives, we are exposed to a complex mixture of food compounds. 
Intricate biochemical processes extract from food the energy and other useful components that enable us to grow and function. 
Many compounds, seemingly unimportant in the past, are now recognized as influencing our health. 
For example, lycopene from cooked tomato sauces may help prevent prostate cancer. 
Everyone, indeed, knows that food can have a positive or negative impact on health. 
Food may never cure any particular disease, but diets rich in fruits and vegetables, cereals and plant-sourced oils offer protection from many cancers, cardiovascular disease, and other illnesses associated with old age. 
The problem, for scientists and consumers alike, is that the benefits are not the same for everyone. 
So we need to understand how what we eat interacts with our bodies – or, more specifically, our genes – to affect our health. 
This is the science of nutrigenomics. 
The long-term aim of nutrigenomics is to define how the whole body responds to food using so called “systems biology.” 
Every cell in your body (except mature red blood cells) – there are about 50 trillion in an adult – contains copies of your DNA, which are coiled up tightly to form 46 separate bundles called chromosomes. 
These chromosomes are stored in the core of the cell (nucleus), and there are 22 matching pairs, one of each pair from each of your biological parents, plus an X-chromosome from your mother and either an X- or Y-chromosome from your father; 
XX makes you a girl and XY a boy. 
DNA stores information that is vital to the growth, repair, replacement, and correct functioning of our cells. 
It consists of two strings – formed from phosphate and sugar – along which four unique chemical compounds (DNA bases) are attached. 
There are about three billion bases, and the sequences in which they occur is our genetic code, or human genome. 
Within the genetic code, there are 30,000-40,000 highly organized regions called genes. 
Genes are the basic unit of heredity, and, unless you are an identical twin, the combination of genes inherited from your parents is unique to you. 
The genes that you have make up your genotype. The resulting product, for example eye color, is your phenotype. 
Genotyping can be used to determine which genes you have, but it cannot always predict your phenotype. 
The inheritance of some characteristics, including eye color, is simple. 
The majority of phenotypes are, however, the product of complex multi-gene interaction, environment, and lifestyle choices. 
This includes our risk of developing a host of age-related diseases. 
Genes code for proteins, the body’s workers, which are not made directly from DNA, because they do not speak the same language. 
Ribonucleic acid (RNA) acts as an interpreter in a process called transcription (the reading of genes). 
Translation from RNA creates three-dimensional proteins from combinations of 22 essential amino acids – essential only because our bodies are not able to make them, so they must be obtained from our diet instead. 
The proteins that are produced, their quantities, and their characteristics collectively form the proteome, and their activities, in combination or in response to signals from within the body or external to it, form our metabolism. 
Such is the complexity of nutrigenomics that it is no longer possible for nutritional researchers to work alone. 
Expertise in a wide variety of different areas – molecular and cell biology, mathematics and statistics, nutrition and diet, food chemistry, and social science – is fundamental to progress. 
To this end, 22 leading groups have united to create The European Nutrigenomics Organization, or NuGO. 
Funded by the European Commission, NuGO gives scientists from organizations that usually compete for funding and the best researchers their first real opportunity to work together. 
Difficulties stemming from professional jargon, organizational structure, and distance are more than offset by the benefits of integrating nutrigenomics facilities and expertise to ensure cooperative use of knowledge and its application in nutritional research. 
Nutrigenomics is not the Holy Grail of nutrition, but neither is it irrelevant to all but the worried-but-wealthy few that will be able to afford the new food products when they arrive. 
Determining the structure of DNA and the sequence of the human genome has revolutionized biology and medicine. 
It has created new specialties and advanced our understanding of disease. 
But rarely does this knowledge allow us to control outcomes – prevention rather than cure. 
Indeed, in the twenty-first century, we still cannot describe health except in terms of the absence of disease. 
Today’s new technologies enable health to be identified in terms of patterns of gene expression, protein production, and metabolic response. 
Applied to nutrition, nutrigenomics will allow us to understand, and perhaps more importantly, to manipulate our individual response to existing foods so as to benefit our health. 
For some people, this will mean expensive genetic testing and designer diets, but for most, it will mean realistic advice based on visibly demonstrable phenotypes – a tendency to gain weight, for example, or an intolerance or allergic response to certain food types. 
Above all, nutrigenomics holds out the promise of providing the healthy independence that everyone hopes for in later years. 

Desperate Central Bankers 
NEW HAVEN – The final day of the summer marked the start of yet another season of futile policymaking by two of the world’s major central banks – the US Federal Reserve and the Bank of Japan. 
The Fed did nothing, which is precisely the problem. 
And the alchemists at the BOJ unveiled yet another feeble unconventional policy gambit. 
Both the Fed and the BOJ are pursuing strategies that are woefully disconnected from the economies they have been entrusted to manage. 
Moreover, their latest actions reinforce a deepening commitment to an increasingly insidious transmission mechanism between monetary policy, financial markets, and asset-dependent economies. 
This approach led to the meltdown of 2008-2009, and it could well sow the seeds of another crisis in the years ahead. 
Lost in the debate over the efficacy of the new and powerful tools that central bankers have added to their arsenal is the harsh reality of anemic economic growth. 
Japan is an obvious case in point. 
Stuck in what has been essentially a 1% growth trajectory for the last quarter-century, its economy has failed to respond to repeated efforts at extraordinary monetary stimulus. 
Whatever the acronym – first, ZIRP (the zero interest-rate policy of the late 1990s), then QQE (the qualitative and quantitative easing launched by BOJ Governor Haruhiko Kuroda in 2013), and now NIRP (the recent move to a negative interest-rate policy) – the BOJ has over-promised and under-delivered. 
In fact, with Japan’s real annual GDP growth slipping to 0.6% since Shinzo Abe was elected Prime Minister in late 2012 – one-third slower than the sluggish 0.9% average annual rate over the preceding 22 lost years (1991 to 2012) – the so-called maximum stimulus of “Abenomics” has been an abject failure. 
The Fed hasn’t fared much better. 
Real GDP growth in the US has averaged only 2.1% in the 28 quarters since the Great Recession ended in the third quarter of 2009 – barely half the 4% average pace in comparable periods of earlier upturns. 
As in Japan, America’s subpar recovery has been largely unresponsive to the Fed’s aggressive strain of unconventional stimulus – zero interest rates, three doses of balance-sheet expansion (QE1, QE2, and QE3), and a yield curve twist operation that seems to be the antecedent of the BOJ’s latest move. 
(The BOJ has just announced that it is targeting zero interest rates for ten-year Japanese government bonds.) 
Notwithstanding the persistent growth shortfall, central bankers remain steadfast that their approach is working, by delivering what they call “mandate-compliant” outcomes. 
The Fed points to the sharp reduction of the US unemployment rate – from 10% in October 2009 to 4.9% today – as prima facie evidence of an economy that is nearing one of the targets of the Fed’s so-called dual mandate. 
But when seemingly solid employment growth is juxtaposed against weak output, the story unravels, revealing a major productivity slowdown that raises serious questions about America’s long-term growth potential and an eventual buildup of cost and inflationary pressures. 
The Fed can’t be faulted for trying, argue the counter-factualists who insist that only unconventional monetary policies stood between the Great Recession and another Great Depression. 
That, however, is more an assertion than a verifiable conclusion. 
While policy traction has been notably absent in the real economies of both Japan and the US, asset markets are a different story. 
Equities and bonds have soared on the back of monetary policies that have led to rock-bottom interest rates and massive liquidity injections. 
The new unconventional monetary policies in both countries are obviously missing the disconnect between asset markets and real economic activity. 
This reflects the aftermath of wrenching balance-sheet recessions, in which aggregate demand, artificially propped up by asset-price bubbles, collapsed when the bubbles burst, leading to chronic impairment of overleveraged, asset-dependent consumers (America) and businesses (Japan). 
Under such circumstances, the lack of response at the zero bound of policy interest rates is hardly surprising. 
In fact, it is strikingly reminiscent of the so-called liquidity trap of the 1930s, when central banks were also “pushing on a string.” 
What is particularly disconcerting is that central bankers remain largely in denial in the face of this painful reality check. 
As the BOJ’s latest actions indicate, the penchant for financial engineering remains unabated. 
And as the Fed has shown once again, the ever-elusive normalization of policy interest rates continues to be put off for yet another day. 
Having depleted their traditional arsenal long ago, central bankers remain myopically focused on devising new tools, rather than owning up to the destructive role their old tools played in sparking the crisis. 
While financial markets love any form of monetary accommodation, there can be no mistaking its dark side. 
Asset prices are being manipulated across the board – stocks and bonds, long- and short-duration assets, as well as currencies. 
As a result, savers are being punished, the cost of capital is repressed, and reckless risk taking is being encouraged in an income-constrained climate. 
This is especially treacherous terrain for economies desperately in need of productivity-enhancing investment. 
And it is not dissimilar to the environment of asset-based excess that incubated the 2008-2009 global financial crisis. 
Moreover, frothy asset markets in an era of extreme monetary accommodation take the pressure off fiscal authorities to act. 
Failing to heed one of the most powerful (yes, Keynesian) lessons of the 1930s – that fiscal policy is the only way out of a liquidity trap – could be the greatest tragedy of all. 
Central bankers desperately want the public to believe that they know what they are doing. 
Nothing could be further from the truth. 

Deterring Arab Democracy 
CAMBRIDGE – The lack of democracy in the Arab world results from an unholy alliance between Western interests and local autocrats, justified by what both sides claim to be the region’s “cultural specificity.” 
In a nutshell, it has been much easier for the West to do business in the post-colonial Middle East with un-democratic regimes, which have found Western support and recognition useful in marginalizing local liberal and democratic forces, even as it paved the way for the rise of Islamist radicalization. 
Sticks as well as carrots have been used – by both sides – to maintain this alliance. 
For example, the Western emphasis on reform and democracy in recent years has been used more often than not as a threat, a typical message being: “Help us in Iraq or we will press for democracy and human rights in your own country.” 
And the Arab reply is equally threatening: “Stop pressing us on the reform issue or we won’t cooperate in the ‘war on terror’!” 
Two other major issues have sustained the trade-off: Israel and the rise of the Islamist movements. 
The Arab public overwhelmingly regards Israel as an alien and illegitimate entity imposed by force on Palestinian land with Western support. 
If this perception was channeled democratically and allowed to shape Arab countries’ policies toward Israel, any peace negotiations would be even more complicated than they are now. 
So it is far easier for authoritarian regimes like Egypt and Jordan (and in the future perhaps Syria), where there is no need for parliamentary agreement, to launch negotiations and sign peace agreements with Israel. 
Likewise, in Morocco, Tunisia, Mauritania, Qatar, Oman, and Bahrain, where various low-level contacts and Israeli representations exist, undemocratic regimes can define whatever relationship with Israel they choose. 
The rise of radical Islamism has been no less obstructive when it comes to Arab democracy. 
Decades of unholy alliance between Arab autocrats and the West have seen radical Islam emerge as a “salvation” force. 
If free and fair elections were to be held in any Arab country, Islamists would come to power. 
That was the case in Algeria in 1991-92, in Iraq in 2005, and in the West Bank and Gaza in 2006. 
Other countries, such as Jordan, Morocco, Kuwait, Yemen, and Bahrain, have created more limited space for democracy. 
There, too, Islamists have immediately filled it. 
The West has wasted decades, missing countless chances to establish regimes that could empower Arab liberal and democratic forces. 
The West’s blind support for autocratic Arab rulers has reduced all hope of peaceful change. 
The democratic process has lost its aura and its thrust, not least because democratization seems to lead to the rise of political movements the West finds unacceptable. 
The whole notion of democracy has been eroded and discredited, with the radicalization that engulfs many Muslim societies now spilling over into their emigrant communities in the West. 
When US President George W. Bush’s administration launched its Middle East Partnership Initiative for democratization in 2002, it turned out to be too little too late – and it died too soon. 
The allocated budget was just $29 million, but its rapid death can also be ascribed to its short-sighted design – and to Barack Obama, who has shown little interest in the issue. 
Obama’s praise of Egypt’s Hosni Mubarak as a man with whom one could do business demoralized Egyptian opposition groups, which have been struggling against the long-serving autocrat and his efforts to ensure that his son, Gamal Mubarak, succeeds him. 
The US is not the only guilty party. 
Europe has played a major role in retarding democratic reform in Libya and Saudi Arabia. 
Libya has become a Mecca for European leaders trying to win multi-billion dollar oil and investment deals. 
The rehabilitation of the Qaddafi regime has never included any push to ease political repression in Libya. 
An even more telling case is Saudi Arabia. 
No European leader risks antagonizing the Saudis by raising the issue of democracy and human rights. 
Saudi women remain prohibited from driving cars, traveling on their own, and working or studying without the permission of a male relative. 
Saudi society, and those of some other Gulf States, lacks minimum levels of political freedom and participation. 
The status quo is excused by Arab regimes in the name of cultural specificity – the same pretext used by Western governments to justify their “value-free” policies toward these regimes. 
Add together all the trade-offs between the West and the Arab regimes, along with the Israeli and Islamist factor, and the conclusion at which one arrives is as inescapable as it is alarming: the West cannot afford democracy in the region. 

Is Cyber the Perfect Weapon? 
CAMBRIDGE – For years, political leaders such as former US Secretary of Defense Leon Panetta have warned of the danger of a “cyber Pearl Harbor.” 
We have known for some time that potential adversaries have installed malicious software in our electricity grid. 
Suddenly the power could go out in large regions, causing economic disruption, havoc, and death. 
Russia used such an attack in December 2015 in its hybrid warfare against Ukraine, though for only a few hours. 
Earlier, in 2008, Russia used cyber attacks to disrupt the government of Georgia’s efforts to defend against Russian troops. 
Thus far, however, cyber weapons seem to be more useful for signaling or sowing confusion than for physical destruction – more a support weapon than a means to clinch victory. 
Millions of intrusions into other countries’ networks occur each year, but only a half-dozen or so have done significant physical (as opposed to economic and political) damage. 
As Robert Schmidle, Michael Sulmeyer, and Ben Buchanan put it, “No one has ever been killed by a cyber capability.” 
US doctrine is to respond to a cyber attack with any weapon, in proportion to the physical damage caused, based on the insistence that international law – including the right to self-defense – applies to cyber conflicts. 
Given that the lights have not gone out, maybe this deterrent posture has worked. 
Then again, maybe we are looking in the wrong place, and the real danger is not major physical damage but conflict in the gray zone of hostility below the threshold of conventional warfare. 
In 2013, Russian chief of the general staff Valery Gerasimov described a doctrine for hybrid warfare that blends conventional weapons, economic coercion, information operations, and cyber attacks. 
The use of information to confuse and divide an enemy was widely practiced during the Cold War. 
What is new is not the basic model, but the high speed and low cost of spreading disinformation. 
Electrons are faster, cheaper, safer, and more deniable than spies carrying around bags of money and secrets. 
If Russian President Vladimir Putin sees his country as locked in a struggle with the United States but is deterred from using high levels of force by the risk of nuclear war, then perhaps cyber is the “perfect weapon.” 
That is the title of an important new book by New York Times reporter David Sanger, who argues that beyond being “used to undermine more than banks, databases, and electrical grids,” cyberattacks “can be used to fray the civic threads that hold together democracy itself.” 
Russia’s cyber interference in the 2016 American presidential election was innovative. 
Not only did Russian intelligence agencies hack into the email of the Democratic National Committee and dribble out the results through Wikileaks and other outlets to shape the American news agenda; they also used US-based social-media platforms to spread false news and galvanize opposing groups of Americans. 
Hacking is illegal, but using social media to sow confusion is not. 
The brilliance of the Russian innovation in information warfare was to combine existing technologies with a degree of deniability that remained just below the threshold of overt attack. 
US intelligence agencies alerted President Barack Obama of the Russian tactics, and he warned Putin of adverse consequences when the two met in September 2016. 
But Obama was reluctant to call out Russia publicly or to take strong actions for fear that Russia would escalate by attacking election machinery or voting rolls and jeopardize the expected victory of Hillary Clinton. 
After the election, Obama went public and expelled Russian spies and closed some diplomatic facilities, but the weakness of the US response undercut any deterrent effect. 
And because President Donald Trump has treated the issue as a political challenge to the legitimacy of his victory, his administration also failed to take strong steps. 
Countering this new weapon requires a strategy to organize a broad national response that includes all government agencies and emphasizes more effective deterrence. 
Punishment can be meted out within the cyber domain by tailored reprisals, and across domains by applying stronger economic and personal sanctions. 
We also need deterrence by denial – making the attacker’s work more costly than the value of the benefits to be reaped. 
There are many ways to make the US a tougher and more resilient target. 
Steps include training state and local election officials; requiring a paper trail as a back-up to electronic voting machines; encouraging campaigns and parties to improve basic cyber hygiene such as encryption and two-factor authentication; working with companies to exclude social media bots; requiring identification of the sources of political advertisements (as now occurs on television); outlawing foreign political advertising; promoting independent fact-checking; and improving the public’s media literacy. 
Such measures helped to limit the success of Russian intervention in the 2017 French presidential election. 
Diplomacy might also play a role. 
Even when the US and the Soviet Union were bitter ideological enemies during the Cold War, they were able to negotiate agreements. 
Given the authoritarian nature of the Russian political system, it could be meaningless to agree not to interfere in Russian elections. 
Nonetheless, it might be possible to establish rules that limit the intensity and frequency of information attacks. 
During the Cold War, the two sides did not kill each other’s spies, and the Incidents at Sea Agreement limited the level of harassment involved in close naval surveillance. 
Today, such agreements seem unlikely, but they are worth exploring in the future. 
Above all, the US must demonstrate that cyber attacks and manipulation of social media will incur costs and thus not remain the perfect weapon for warfare below the level of armed conflict. 

Can Europe’s Banks Save the EU? 
NEW YORK – The multi-billion-dollar fine that the US government recently sought to impose on Germany’s Deutsche Bank for mis-selling mortgage securities in the United States has done little to improve confidence in the European Union, which remains plagued by slow economic growth, high unemployment, immigration challenges, and mounting uncertainty. 
What the Deutsche Bank scandal has done is shine a light on a last-resort option – a kind of “Hail Mary pass,” in American football terms – that could potentially save the European project. 
Despite representing around 20% of world GDP, the eurozone does not have a top-ten bank or financial services institution in the FT 500 global ranking. 
The knock-on effects of such a fragmented and vulnerable banking system are apparent in Europe’s relatively poor showing in other sectors, such as technology and energy, that are vital for EU members’ economic future. 
Europe has no shortage of banks: Germany has more than 1,500, and Italy has over 600. 
But many are “zombie banks,” with too many branches, too few deposits, and funding costs that far exceed those of their more successful peers. 
In fact, according to the International Monetary Fund, some one-third of Europe’s banking sector, representing assets worth $8.5 trillion, remains weak and unable to generate sustainable profits. 
All of this creates significant downside risks for the EU economy and, ultimately, the entire European political experiment. 
Restoring stability in Europe’s banking system, by the IMF’s own estimate, will require at least one-third of Europe's banks to close or merge. 
For Deutsche Bank, market speculators already seem to be expecting a merger, such as with Commerzbank, another German institution. 
But, if such a merger is to be the first step toward consolidating the European banking sector and strengthening the EU, it should be a cross-border affair, bringing Deutsche Bank together with a significant French and/or Italian financial institution. 
Such an approach could be a game changer in terms of the EU’s political credibility, which is perhaps most crucial to keeping the EU dream alive. 
A cross-border European bank merger would have several benefits. 
As with any merger, consolidating weak, underperforming banks would enable them to strengthen their balance sheets and restructure non-performing loans – estimated to be worth some €1 trillion ($1.1 trillion), roughly three times higher than other global jurisdictions – thereby benefiting the wider economy. 
But a cross-border merger that creates a kind of European super-bank would be even more effective in addressing perennial operational challenges (in particular, liquidity and capital). 
More important, this type of financial restructuring would open credit channels that are vital to fund investment and drive economic growth. 
A cross-border European merger would also give a key region of the world economy a bank that is commensurate with its global importance. 
A European banking champion would be far more competitive globally, rivaling the brawn of America’s dominant banks. 
Creating such an institution is particularly urgent today, given that many countries worldwide seem to be increasingly rejecting economic openness in favor of more protectionist policies and balkanized regulation. 
In a more fragmented, less globalized world, where cross-border capital flows are declining – last year, the Institute of International Finance reports, net capital flows for emerging markets were negative for the first time since 1988 – Europe’s banking infrastructure will need to become broader and deeper in order to thrive. 
The third – and perhaps most important – reason why cross-border mergers might be the key to saving Europe’s banking sector is that they would signal to market participants and European citizens alike that political leaders are committed to European integration. 
Again, the political and economic backdrop intensifies the urgency of such a move. 
Progress toward fiscal integration has stalled. 
National agendas have often taken priority over cooperation. 
And the United Kingdom is set to start negotiating its way out of the EU altogether – a decision that can reasonably be viewed as an indictment of Europe’s current integration model. 
From the perspective of financial markets and investors, a cross-border merger would be viewed bullishly, boosting confidence. 
Even for ordinary citizens, any indication that the EU is not simply going to fall apart would carry major benefits, offering some semblance of assurance in a highly uncertain environment. 
To be sure, a cross-border merger is a radical proposal. 
The amount of political will it would require will not be easy to muster. 
But no bold play is ever a sure thing. 
The truth is that, without credible and transparent evidence of deepening linkages – not just in fiscal matters, but also in business and finance (the backbone of a modern economy) – the EU will remain a loosely connected and not particularly credible collection of countries. 
As we have seen in the last few years, such an arrangement will not resolve those countries’ economic woes. 
One might argue that now is not the time to push toward greater integration. 
The situation is too fragile, and popular opposition is too strong. 
If growth were even middling, skeptics might say, the political environment would be far more amenable. 
But the EU’s current disjointed structure will not hold. 
If strong action is not taken soon, the cracks will only widen, generating increasingly powerful political discord and, ultimately, dooming the entire European project. 

Devaluing Life 
In August 2001, President George W. Bush told Americans that he worried about “a culture that devalues life,” and that he believed that, as President of the United States, he has “an important obligation to foster and encourage respect for life in America and throughout the world.” 
That belief lay behind Bush’s denial of federal government funds for stem-cell research that could encourage the destruction of human embryos. 
Although the Bush administration acknowledged that some scientists believe stem cell research could offer new ways of treating diseases that affect 128 million Americans, this prospect evidently did not, in Bush’s view, justify destroying human embryos. 
Last month, the military forces that this same president commands aimed a missile at a house in Damadola, a Pakistani village near the Afghanistan border. 
Eighteen people were killed, among them five children. 
The target of the attack, Al Qaeda’s number two man, Ayman al-Zawahiri, was not among the dead, although lesser figures in the terrorist organization reportedly were. 
Bush did not apologize for the attack, nor did he reprimand those who ordered it. 
Apparently, he believes that the chance of killing an important terrorist leader is sufficient justification for firing a missile that will almost certainly kill innocent human beings. 
Other American politicians took the same stance. 
Senator Trent Lott, a conservative Republican – and a prominent opponent of abortion – said of the attack: “Absolutely, we should do it.” 
Senator John McCain, another leading Republican, though one often ready to disagree with Bush, expressed regret for the civilian deaths, but added, “I can’t tell you that we wouldn’t do the same thing again.” 
Indeed, it would be hard for the current administration to say that it wouldn’t do the same thing again, because it has done it many times before. 
On November 1, 2001, American planes bombed Ishaq Suleiman, a group of mud huts, because a Taliban truck had been parked in one of the streets. 
The truck left before the bomb hit, but 12 local villagers were killed and 14 were injured. 
There are many more such stories of innocent lives being lost in the war in Afghanistan. 
In Iraq, too, American attacks have taken the lives of many civilians. 
Again, one of many examples will suffice. 
On April 5, 2003, a civilian neighborhood in Basra was bombed. 
The target was General Ali Hassan al-Majid, known as “Chemical Ali” because of his use of chemical weapons against Iraqis. 
One bomb hit the home of the Hamoodi family, a respected, educated family, none of whose members belonged to the ruling Baath Party. 
Of the extended family of 14, ten were killed, including an infant, a two-year-old baby, a 10-year-old boy, and a 12-year-old girl. 
Four months later, Majid was captured alive; the bombs had missed their intended target. 
This consistent pattern of readiness to inflict civilian casualties – often when striking targets that are not of vital military significance – suggests that Bush and other pro-life American leaders have less concern for the lives of innocent human beings in Afghanistan, Iraq, and Pakistan, than they have for human embryos. 
This is a bizarre set of priorities. 
No parents grieve for a lost embryo in the way that they would grieve over the death of a child. 
No embryos are capable of suffering, or have hopes or desires for the future that are abruptly cut off by their death. 
It might be possible to justify the loss of innocent human life in Damadola by a utilitarian calculation that killing Al Qaeda’s leaders will, in the long run, save a larger number of innocent human beings. 
After all, if they remain at large, they may succeed in carrying out further terrorist attacks that take hundreds or even thousands of innocent lives. 
Bush, however, cannot rely on that argument, for it is precisely the kind of justification that he rejects when it comes to destroying embryos in order to save, in the long run, those dying from diseases for which we currently have no cure. 
Other moralists will say that the difference between destroying embryos for research purposes and killing civilians in military attacks is that the former is deliberate killing, whereas the latter deaths are “collateral damage” – unintended, if foreseeable, side-effects of a justifiable act of war. 
We can grant that it was not the primary intention of those who planned and authorized the attack on Damadola to kill innocent people. 
We can also accept that al-Zawahiri is undoubtedly a dangerous foe, still active in a terrorist movement, and that he is a legitimate military target. 
Perhaps this particular attack can be justified on those grounds. 
Nevertheless, the doctrine that it is acceptable to take actions that will foreseeably kill innocent people can have the effect of leading us to treat more lightly than we should the deaths of those killed. 
That, it seems, is what has happened somewhere in the American chain of command. 
The presence of a Taliban truck does not justify bombing a village in which civilians are going about their daily lives. 
Killing innocent people in order to bring a kind of rough justice to “Chemical Ali” – a particularly nasty member of Saddam’s military elite, but one who at the time of the raid was no longer in command of military forces – is wrong. 
A culture that allows – and even endorses – such tactics is not one that is genuinely committed to encouraging respect for life. 
We can be quite sure that American forces would not have acted in the same way if the civilians nearby had been other Americans. 

Developing Countries and the Global Crisis 
NEW YORK – This year is likely to be the worst for the global economy since World War II, with the World Bank estimating a decline of up to 2%. 
Even developing countries that did everything right – and had far better macroeconomic and regulatory policies than the United States did – are feeling the impact. 
Largely as a result of a precipitous fall in exports, China is likely to continue to grow, but at a much slower pace than the 11-12% annual growth of recent years. 
Unless something is done, the crisis will throw as many as 200 million additional people into poverty. 
This global crisis requires a global response, but, unfortunately, responsibility for responding remains at the national level. 
Each country will try to design its stimulus package to maximize the impact on its own citizens – not the global impact. 
In assessing the size of the stimulus, countries will balance the cost to their own budgets with the benefits in terms of increased growth and employment for their own economies. 
Since some of the benefit (much of it in the case of small, open economies) will accrue to others, stimulus packages are likely to be smaller and more poorly designed than they otherwise would be, which is why a globally coordinated stimulus package is needed. 
This is one of several important messages to emerge from a United Nations Experts Commission on the global economic crisis, which I chair – and which recently submitted its preliminary report to the UN. 
The report supports many of the G-20 initiatives, but it urges stronger measures focused on developing countries. 
For instance, while it is recognized that almost all countries need to undertake stimulus measures (we’re all Keynesians now), many developing countries do not have the resources to do so. 
Nor do existing international lending institutions. 
But if we are to avoid winding up in another debt crisis, some, perhaps much, of the money will have to be given in grants. 
And, in the past, assistance has been accompanied by extensive “conditions,” some of which enforced contractionary monetary and fiscal policies – just the opposite of what is needed now – and imposed financial deregulation, which was among the root causes of the crisis. 
In many parts of the world, there is a strong stigma associated with going to the International Monetary Fund, for obvious reasons. 
And there is dissatisfaction not just from borrowers, but also from potential suppliers of funds. 
The sources of liquid funds today are in Asia and the Middle East, but why should these countries contribute money to organizations in which their voice is limited and which have often pushed policies that are antithetical to their values and beliefs? 
Many of the governance reforms proposed for the IMF and the World Bank – affecting, most obviously, how their heads are chosen – finally seem to be on the table. 
But the reform process is slow, and the crisis will not wait. 
It is thus imperative that assistance be provided through a variety of channels, in addition to, or instead of, the IMF, including regional institutions. 
New lending facilities could be created, with governance structures more consonant with the twenty-first century. 
If this could be done quickly (which I think it could), such facilities could be an important channel for disbursing funds. 
At their November 2008 summit the G-20 leaders strongly condemned protectionism and committed themselves not to engage in it. 
Unfortunately, a World Bank study notes that 17 of the 20 countries have actually undertaken new protectionist measures, most notably the US with the “buy American” provision included in its stimulus package. 
But it has long been recognized that subsidies can be just as destructive as tariffs – and even less fair, since rich countries can better afford them. 
If there was ever a level playing field in the global economy, it no longer exists: the massive subsidies and bailouts provided by the US have changed everything, perhaps irreversibly. 
Indeed, even firms in advanced industrial countries that have not received a subsidy are at an unfair advantage. 
They can undertake risks that others cannot, knowing that if they fail, they may be bailed out. 
While one can understand the domestic political imperatives that have led to subsidies and guarantees, developed countries need to recognize the global consequences, and provide compensatory assistance to developing countries. 
One of the more important medium-term initiatives urged by the UN Commission is the creation of a global economic coordinating council, which would not only coordinate economic policy, but would also assess impending problems and institutional gaps. 
As the downturn deepens, several countries may, for example, face bankruptcy. 
But we still do not have an adequate framework for dealing with such problems. 
And the US dollar reserve-currency system – the backbone of the current global financial system – is fraying. 
China has expressed concerns, and the head of its central bank has joined the UN Commission in calling for a new global reserve system. 
The UN Commission argues that addressing this old issue – raised more than 75 years ago by Keynes – is essential if we are to have a robust and stable recovery. 
Such reforms will not occur overnight. 
But they will not occur ever unless work on them is begun now. 

Closing Developing Countries’ Capital Drain 
NEW YORK – Developing countries are bracing for a major slowdown this year. 
According to the UN report World Economic Situation and Prospects 2016, their growth averaged only 3.8% in 2015 – the lowest rate since the global financial crisis in 2009 and matched in this century only by the recessionary year of 2001. 
And what is important to bear in mind is that the slowdown in China and the deep recessions in the Russian Federation and Brazil only explain part of the broad falloff in growth. 
True, falling demand for natural resources in China (which accounts for nearly half of global demand for base metals) has had a lot to do with the sharp declines in these prices, which have hit many developing and emerging economies in Latin America and Africa hard. 
Indeed, the UN report lists 29 economies that are likely to be badly affected by China’s slowdown. 
And the collapse of oil prices by more than 60% since July 2014 has undermined the growth prospects of oil exporters. 
The real worry, however, is not just falling commodity prices, but also massive capital outflows. 
During 2009-2014, developing countries collectively received a net capital inflow of $2.2 trillion, partly owing to quantitative easing in advanced economies, which pushed interest rates there to near zero. 
The search for higher yields drove investors and speculators to developing countries, where the inflows increased leverage, propped up equity prices, and in some cases supported a commodity price boom. 
Market capitalization in the Mumbai, Johannesburg, São Paulo, and Shanghai stock exchanges, for example, nearly tripled in the years following the financial crisis. 
Equity markets in other developing countries also witnessed similar dramatic increases during this period. 
But the capital flows are now reversing, turning negative for the first time since 2006, with net outflows from developing countries in 2015 exceeding $600 billion – more than one-quarter of the inflows they received during the previous six years. 
The largest outflows have been through banking channels, with international banks reducing their gross credit exposures to developing countries by more than $800 billion in 2015. Capital outflows of this magnitude are likely to have myriad effects: drying up liquidity, increasing the costs of borrowing and debt service, weakening currencies, depleting reserves, and leading to decreases in equity and other asset prices. 
There will be large knock-on effects on the real economy, including severe damage to developing countries’ growth prospects. 
This is not the first time that developing countries have faced the challenges of managing pro-cyclical hot capital, but the magnitudes this time are overwhelming. 
During the Asian financial crisis, net outflows from the East Asian economies were only $12 billion in 1997. 
Of course, the East Asian economies today are better able to withstand such massive outflows, given their accumulation of international reserves since the financial crisis in 1997. 
Indeed, the global stock of reserves has more than tripled since the Asian financial crisis. 
China, for example, used nearly $500 billion of its reserves in 2015 to fight capital outflows and prevent the renminbi’s sharp depreciation; but it still has more than $3 trillion in reserves. 
The stockpile of reserves may partly explain why huge outflows have not triggered a full-blown financial crisis in developing countries. 
But not all countries are so fortunate to have a large arsenal. 
Once again, advocates of free mobility for destabilizing short-term capital flows are being proven wrong. 
Many emerging markets recognized the dangers and tried to reduce capital inflows. 
South Korea, for example, has been using a series of macro-prudential measures since 2010, aimed at moderating pro-cyclical cross-border banking-sector liabilities. 
The measures taken were only partially successful, as the data above show. 
The question is, what should they do now? 
Corporate sectors in developing countries, having increased their leverage with capital inflows during the post-2008 period, are particularly vulnerable. 
Capital outflows will adversely affect their equity prices, push up their debt-to-equity ratios, and increase the likelihood of defaults. 
The problem is especially severe in commodity-exporting developing economies, where firms borrowed extensively, expecting high commodity prices to persist. 
Many developing-country governments failed to learn the lesson of earlier crises, which should have prompted regulations and taxes restricting and discouraging foreign-currency exposures. 
Now governments need to take quick action to avoid becoming liable for these exposures. 
Expedited debtor-friendly bankruptcy procedures could ensure quick restructuring and provide a framework for renegotiating debts. 
Developing-country governments should also encourage the conversion of such debts to GDP-linked or other types of indexed bonds. 
Those with high levels of foreign debt but with reserves should also consider buying back their sovereign debt in the international capital market, taking advantage of falling bond prices. 
While reserves may provide some cushion for minimizing the adverse effects of capital outflows, in most cases they will not be sufficient. 
Developing countries should resist the temptation of raising interest rates to stem capital outflows. 
Historically, interest-rate hikes have had little effect. 
In fact, because they hurt economic growth, further reducing countries’ ability to service external debts, higher interest rates can be counterproductive. 
Macro-prudential measures can discourage or delay capital outflows, but such measures, too, may be insufficient. 
In some cases, it may be necessary to introduce selective, targeted, and time-bound capital controls to stem outflows, especially outflows through banking channels. 
This would entail, for example, restricting capital transfers between parent banks in developed countries and their subsidiaries or branches in developing countries. 
Following the successful Malaysian example in 1997, developing countries could also temporarily suspend all capital withdrawals to stabilize capital flows and exchange rates. 
This is perhaps the only recourse for many developing countries to avoid a catastrophic financial crisis. 
It is important that they act soon. 
The views expressed here do not represent the views of the United Nations or its member states. 

Reversing Africa’s Medical Brain Drain 
OXFORD – There is understandable consternation over Uganda’s plan to send almost 300 health workers to Trinidad and Tobago. 
The plan reportedly includes four of Uganda’s 11 registered psychiatrists, 20 of its 28 radiologists, and 15 of its 92 pediatricians. 
In return, the Caribbean country (which has a doctor-to-patient ratio 12 times higher than Uganda’s) will help Uganda exploit its recently discovered oil fields. 
Uganda’s foreign ministry says the agreement is part of its mandate to promote the country’s interests abroad through the transfer of skills and technology, as well as an opportunity to earn foreign exchange by sourcing employment for its citizens. 
But Uganda’s international donors are not convinced; the United States has voiced strong concern, and Belgium has suspended development aid to Uganda’s health-care sector. 
Two of my friends, a gynecologist and a pediatrician, have applied to go. 
Had I still been working with them in Uganda, I might have been tempted to join the exodus. 
Uganda’s health-care professionals are talented and highly qualified. 
But they often work in appalling conditions at great personal sacrifice. 
So it is not surprising that they become disheartened and seek professional opportunities elsewhere. 
They know that the status quo is failing, and that something has to change. 
I knew it, too. 
In 2009, I was on track to become only the sixth neurosurgeon in Uganda, working at Mulago National Referral Hospital, the country’s main tertiary institution. 
We sometimes had to cancel major operations when the malfunctioning sewage system in our theatre regurgitated waste into what was supposed to be a sterile environment. 
We were severely understaffed. 
Once, during a string of consecutive night shifts, I was so tired that I accidentally pricked myself with a needle while drawing blood from an HIV-positive patient. 
I was given an antiretroviral treatment called Post-Exposure (PEP) for a month and had to take time off work because of the drug’s side effects. 
Meanwhile, adding to my anguish, the government delayed payment of our salaries – and not for the first time. 
The deal between Uganda and Trinidad and Tobago violates the World Health Organization’s global code on the International Recruitment of Health Personnel, which is aimed at discouraging the recruitment of personnel from countries that have a critical shortage of health-care workers. 
A Ugandan think tank, the Institute of Public Policy Research, has called the plan a “state-sanctioned brain drain.” 
It has taken the government to court in an effort to force it to reverse its decision. 
But the truth is that Uganda may have inadvertently stumbled upon an innovative policy. 
If the plan is executed properly, it could benefit both the health-care sector and the country, by raising additional funds, strengthening medical workers’ skills and motivation, and creating a model for engaging with the diaspora. 
Other developing countries facing similar challenges with retaining health-care workers could learn from Uganda’s experience. 
Of course, this type of mass recruitment could have a major adverse impact on developing countries’ health-care systems. 
But it also should be recognized that it is not sensible to chain health-care workers to a failing system. 
There has to be a way to encourage doctors to contribute to their country’s health-care system, while offering them an opportunity to achieve their personal and professional goals. 
In order to make it work, the recipient country would have to agree to recruit health-care professionals solely through the government. 
The country could then tax the foreign income of its workers and use the revenues to develop its health-care system. 
Moreover, any agreement should explicitly require the provision of education and professional-development opportunities for recruited health-care workers. 
The recipient country might open their medical schools and health-care training to new recruits, or help pay for health-care education and a scholarship fund back home. 
That way, developing countries like Uganda could not only train more health-care professionals, but also have funds to send workers abroad for training. 
The impact of such programs could be far-reaching, because the deficit of medical professionals is not limited to Sub-Saharan Africa. 
With so many qualified doctors emigrating to the United Kingdom and the US, the rest of the world, including developed countries, is also experiencing a tremendous medical brain drain. 
Roughly 35,000 Greek doctors have emigrated to Germany, while Bulgaria is “bleeding doctors,” losing up to 600 every year (equal to the country’s annual number of medical-school graduates). 
But developing countries face the biggest challenge. 
Eighty percent of countries where the density of skilled health workers is less than 22.8 per 10,000 people are in Africa, and another 13% are in Southeast Asia. 
The effects of such shortages were made clear during the recent Ebola crisis in West Africa. 
The trouble is that the so-called brain drain in Uganda and elsewhere is not the cause of this dearth of health-care workers. 
It is only a symptom of health-care systems that are already in crisis. 
The ultimate solution is not to discourage professionals from working abroad; it is to ensure better training and more amenable working conditions. 
That way, we health-care professionals can focus on the task at hand: providing health care to our people. 

A World Turned Inside Out 
NEW HAVEN – Slowly but surely, a bruised and battered global economy now appears to be shaking off its deep post-crisis malaise. 
If the International Monetary Fund’s latest forecasts are borne out – an iffy proposition, to be sure – the nearly 3.6% average annual growth in world GDP expected over the 2017-2018 period would represent a modest uptick from the 3.2% pace of the past two years. 
Fully a decade after the Great Financial Crisis, global growth is finally returning to its 3.5% post-1980 trend. 
But this round trip hardly signals that the world is back to normal. 
On the contrary, the overhyped idea of a “new normal” for the world economy overlooks an extraordinary transformation in the global growth dynamic over the past nine years. 
At the margin, the recent improvement has been concentrated in the advanced economies, where GDP growth is now expected to average 2% over 2017-2018 – a meaningful pick-up from the unprecedentedly anemic 1.1% average growth of the preceding nine years. 
Relative strength in the United States (2.4%) is expected to be offset by weakness in both Europe (1.7%) and of course Japan (0.9%). 
However, annual growth in the advanced economies is expected to remain considerably below the longer-term trend of 2.9% recorded during the 1980-2007 period. 
By contrast, the developing world keeps chugging along at a much faster pace. 
Although the average growth rate expected for these economies over 2017-2018, at 4.6%, is about half a percentage point lower than during the preceding nine years, they would still be expanding at more than twice the pace of the developed world. 
Unsurprisingly (at least to those of us who never bought into the Chinese hard-landing scenario), strength in the developing world is expected to be concentrated in China (6.4%) and India (7.5%), with growth lagging in Latin America (1.5%) and Russia (1.4%). 
This persistent divergence between developed and developing economies has now reached a critical point. 
From 1980 to 2007, the advanced economies accounted for an average of 59% of world GDP (measured in terms of purchasing power parity), whereas the combined share of developing and emerging economies was 41%. 
That was then. 
According to the IMF’s latest forecast, those shares will completely reverse by 2018: 41% for the advanced economies and 59% for the developing world. 
The pendulum of world economic growth has swung dramatically from the so-called advanced countries to the emerging and developing economies. 
New? 
Absolutely. 
Normal? 
Not even close. 
It is a stunning development, one that raises at least three fundamental questions about our understanding of macroeconomics: 
First, isn’t it time to rethink the role of monetary policy? 
The anemic recovery in the developed world has occurred against the backdrop of the most dramatic monetary easing in history – eight years of policy interest rates near the zero bound and enormous liquidity injections from vastly expanded central-bank balance sheets. 
Yet these unconventional policies have had only a limited impact on real economic activity, middle-class jobs, and wages. 
Instead, the excess liquidity spilled over into financial markets, sustaining upward pressure on asset prices and producing outsize returns for wealthy investors. 
Like it or not, monetary policy has become an instrument of mounting inequality. 
Second, has the developing world finally broken free of its long-standing dependence on the developed world? 
I have long argued that claims of such a “decoupling” were spurious, given the persistence of export-led growth in poorer countries, which tethers their economies to external demand in richer countries. 
But the facts now speak otherwise. 
Growth in global trade slowed to a 3% average pace over the 2008-2016 post-crisis period – half the 6% norm from 1980 to 2016. 
Yet, over the same period, GDP growth in the developing economies barely skipped a beat. 
This attests to a developing world that is now far less dependent on the global trade cycle and more reliant on internal demand. 
Finally, has China played a disproportionate role in reshaping the world economy? 
Chinese rebalancing suggests that this may well be the case. 
Historically, China’s hugely successful export-led growth strategy, together with the rapid growth of China-centric global supply chains, was the major reason why I never bought the decoupling story. 
Yet the export share of Chinese GDP tumbled from 35% in 2007 to 20% in 2015, while its share of global output surged from 11% to 17% during this period. 
China, the world’s largest exporter, may well be in the vanguard of global decoupling. 
This hints at an even more powerful trend: the rapid transformation of China’s industrial structure. 
China’s tertiary sector (services) has gone from 43% of GDP in 2007 to 52% in 2016, whereas the share of the secondary sector (manufacturing and construction) has fallen from 47% to 40% over the same period. 
While the private consumption share of aggregate demand increased more slowly, largely owing to high precautionary saving (which reflects gaps in the social safety net), there are grounds for optimism on this front as well. 
Indeed, the explosive growth of Chinese e-commerce points to a shortcut toward a newly vibrant consumer culture that was unavailable to today’s advanced economies at a similar stage of development. 
In the annals of structural change, where shifts tend to be glacial, China’s evolution is a sprint. 
All of this speaks to a radically different world than that which prevailed prior to the Great Financial Crisis – a world that raises profound questions about the efficacy of monetary policy, development strategies, and the role of China. 
While some healing of an $80 trillion global economy is now evident, progress needs to be seen through a different lens than used in past cycles. 
A world turned inside out, with new dynamism in the developing world far eclipsing lingering malaise in the advanced economies, is new – but hardly normal. 

A New Direction for Global Health 
NEW YORK – It is easy to be discouraged about the state of international cooperation today, but global health remains an area in which the world has come together to do significant good. 
Over the last dozen years, international initiatives have delivered HIV/AIDS treatment to millions, expanded childhood immunization, and spurred a dramatic increase in global support for addressing other health challenges, from malaria to maternal health. 
International support for global health is an investment in developing countries’ future prosperity and the wellbeing of their people. 
It is an investment that the world’s richest countries can well afford. 
For example, the United States is the leading contributor of global health aid, which accounted for just 0.23% of US spending in 2013. 
The returns on that investment have been remarkable. 
Child mortality is plunging. 
Millions who would have otherwise perished from HIV/AIDS are still alive. 
Countries that were aid recipients are increasingly self-sufficient – and have become better trade and strategic partners as a result. 
But the health needs of low- and middle-income countries are now shifting. 
Dramatic changes in urbanization, global trade, and consumer markets – which occurred over decades in wealthy countries – are happening at a faster rate, and at a much larger scale, in still-poor countries. 
These trends have brought substantial health benefits, such as better sanitation and increased food production, but have given rise to significant challenges as well. 
Ebola is one high-profile example. 
Prior to this year, Ebola had killed fewer than 2,000 people, all in Central Africa, since it was first identified in 1976. 
The virus has killed more than three times that number in 2014, with enough cases spreading internationally to dominate nightly news broadcasts and spook voters in recent US state and local elections. 
A major reason is the growth of small- and medium-size cities. 
Urbanization is increasing in West Africa at a rate of 3% per year (compared to 0.2% and 0.3%, respectively, in North America and Europe). 
The result has been the proliferation of settlements of a million people or fewer living with limited public-health infrastructure. 
These cramped cities are ideal incubators for outbreaks of emerging infectious diseases like Ebola. 
With greater trade and travel to the region, outbreaks are likely to spread before international containment can coalesce. 
Another example of changing global health needs is the stunningly fast increase of heart disease, cancers, and other noncommunicable diseases (NCDs) in low- and middle-income countries. 
Once thought to be challenges for affluent countries alone, these diseases have quickly become the leading cause of death and disability in developing regions, killing nearly eight million people before their 60th birthdays in 2013. 
In a recent report sponsored by the Council on Foreign Relations, we highlight the contrast between rising rates of heart disease, cancer, diabetes, and other NCDs in developing countries and the success of international efforts on HIV/AIDS and other infectious diseases. 
From 1990 to 2010, death and disability from NCDs in low-income countries increased 300% faster than the rate of decline in infectious diseases. 
Some of the same factors at work in the recent Ebola outbreak drive the high rates of NCDs. 
Inhabitants of densely packed urban areas in emerging economies often face both indoor and outdoor pollution, and are less likely to have access to adequate nutrition. 
Most health systems in these countries are not built for chronic or preventive care and lack basic consumer protections. 
From 1970 to 2000, cigarette consumption tripled in developing countries. 
Diseases that in high-income countries are preventable, like cervical cancer, or treatable, such as diabetes, are often death sentences in developing countries. 
International investments have not yet adjusted to changing global health needs, especially with respect to NCDs. 
In 2010, $69.38 of international aid was spent for each year lost to death or disability from HIV/AIDS (as measured in disability-adjusted life years, or DALYs), $16.27 was spent per DALY lost to malaria, and $5.42 per DALY lost to poor maternal, newborn, and child health. 
But only $0.09 was spent per DALY lost to heart disease, cancer, and other NCDs. 
Meanwhile, the emerging NCD epidemic is worsening. 
Indeed, the World Economic Forum is predicting $21.3 trillion in losses from these diseases in developing countries by 2030. 
Yet progress on NCDs is possible. 
Despite much higher rates of obesity in high-income countries, premature death and disability from heart disease, cancers, and other NCDs have declined substantially. 
Most of the tools and policies underlying this success are cheap, but not widely implemented in developing countries. 
They include low-cost drugs to reduce heart attacks, vaccines to prevent cervical cancer, and the same tobacco taxes and advertising rules that dramatically cut smoking rates throughout Europe and the US. 
Pilot programs have successfully integrated these tools and policies into donor-funded programs on HIV/AIDS and other infectious diseases in low- and middle-income countries. 
If, over the next decade, low- and middle-income countries could improve NCD prevention and treatment at the same rate as the average rich country from 2000 to 2013, they would avert more than five million deaths. 
That return is comparable to the most successful global health investments in HIV and childhood immunization, and it is an investment worth making for the same reason: a peaceful, inclusive global economy presupposes healthier, more productive lives. 

Why Economists Put Health First 
PALO ALTO – In an ideal world, everyone, everywhere, would access the health services they need without having to pay more than they could afford. 
But is “health for all” – also known as universal health coverage – really possible, not just in rich countries, but in the poorest countries, too? 
In short, yes. 
That’s why we joined hundreds of fellow economists in almost 50 countries to urge leaders to prioritize investments in universal health coverage. 
And the broader impetus behind this Economists’ Declaration, convened by The Rockefeller Foundation and now with more than 300 signatures, has placed global health and development at a historic crossroads. 
In September, the United Nations General Assembly adopted a new set of 15-year global goals to guide the world’s efforts to end poverty, foster inclusive prosperity, and secure a healthy planet by 2030. 
As world leaders prepare to enact the most ambitious global to-do list yet – the Sustainable Development Goals will be launched on January 1 – deciding where to begin may seem a daunting task. 
For economists, however, the answer is clear: The next chapter of development strategy should assign a high priority to better health – and must leave no one behind. 
Reaching everyone with high-quality, essential health services without the threat of financial ruin is, first and foremost, the right thing to do. 
Health and survival are basic values to virtually every individual. 
Furthermore, unlike other valuable goods, such as food, they cannot be supplied without deliberate social policy. 
The fact that “preventable deaths” remain common in low- and middle-income countries is a symptom of broken or under-resourced health-care delivery systems, not a lack of medical know-how. 
If we increase investments in health now, by 2030 we can be that much closer to a world in which no parent loses a child – and no child loses a parent – to preventable causes. 
Universal health coverage is also smart. 
When people are healthy and financially stable, their economies are stronger and more prosperous. 
And, with benefits ten times greater than initial costs, investing in health first may ultimately pay for the rest of the new global development agenda. 
So the question is not whether universal health coverage is valuable, but how to make it a reality. 
More than a hundred countries have taken steps down this path; in the process, they have revealed important opportunities and strategies to accelerate progress toward the goal of health for all. 
In particular, we believe that three areas – technology, incentives, and seemingly “non-health” investments – have the potential to advance universal health coverage dramatically. 
First, technology is fast becoming a game changer, especially in developing countries, where the gap in access to health care is the widest. 
In Kenya, which already leads the world in mobile money through “m-PESA,” an upsurge in telemedicine is enabling rural patients and health practitioners to interact, through video conferencing, with staff in Kenya’s main hospitals – thereby increasing quality of care at very little cost. 
The m-PESA Foundation, in partnership with the African Medical Research Foundation, has also begun implementing online training of community health volunteers and complementing these trainings with bulk SMS/WhatsApp group messages to keep the group connected and share important updates. 
Investments in high-value, low-cost technologies will help us achieve more with every dollar. 
Harnessing the power of incentives is another way to accelerate health reforms. 
This can and should be done without forcing the poor to pay for health-care services at the point of delivery. 
For example, when the state pays the private sector based on outcomes (for example, the number or share of vaccinated children), both accountability and results have been known to improve. 
Voucher programs for reproductive health care in Uganda and Kenya are now providing access to quality services from the private sector. 
Finally, building resilient health-care systems – flexible enough to bend, but not break, in the face of shocks – means improving other public goods that are closely linked to human health. 
These include clean water and sanitation, and roads and infrastructure that enable emergency care and delivery of services. 
Health systems do not exist in a vacuum, and if we are serious about sustainable development, it is time to understand that investments in complementary systems are “trade-ons” not trade-offs. 
We should be wary of viewing medicine as the only path to better health. 
The success of the world’s development goals hinges on our ability to reach the poorest and most marginalized populations, who continue to bear the brunt of death and disability worldwide. 
A natural progression of the status quo will not be enough to reach them. 
Instead, we must push public health systems beyond their usual boundaries by investing in and promoting new technologies, sharpening incentives, and recognizing that health systems do not exist in a vacuum. 
Universal health coverage is right, smart, and overdue. 
To achieve a world where everyone’s health needs are met and nobody is trapped in poverty, our leaders must heed this message and act on it. 

Could a Basic Income Help Poor Countries? 
BERKELEY – The old idea of recasting the welfare state by instituting an unconditional universal basic income has lately been capturing imaginations across the political spectrum. 
On the left, it is regarded as a simple and potentially comprehensive antidote to poverty. 
On the right, it is viewed as a means to demolish complex welfare bureaucracies while recognizing the need for some social transfer obligations in a way that doesn’t weaken incentives significantly. 
It also provides some assurance for the dreaded future when robots may replace workers in many sectors. 
But could it actually work? 
So far, the question has been addressed primarily in advanced countries – and the figures do not look promising. 
Though Canada, Finland, and the Netherlands are reportedly now considering the idea of a basic income, some prominent advanced-country economists warn that it is blatantly unaffordable. 
In the United States, for example, an annual handout of $10,000 to every adult – less than the official poverty threshold for a single person – would exhaust almost all federal tax revenue, under the current system. 
Perhaps it was that kind of arithmetic that spurred Swiss voters to reject the idea overwhelmingly in a referendum earlier this month. 
But what about low- or middle-income countries? 
In fact, a basic income may very well be fiscally feasible – not to mention socially desirable – in places where the poverty threshold is low and existing social safety nets are both threadbare and expensive to administer. 
Consider India, where about one-fifth of the population live below the official poverty line, which is itself very low. 
While citizens with so-called “below-poverty-line” cards are eligible for government relief, surveys show that about half of the poor do not have the card – while about one-third of the non-poor do. 
Many other developing countries face similar problems, with benefits intended for the poor accruing to better-off people, while many of the intended recipients miss out, owing to a combination of political and administrative collusion and genuine structural challenges. 
Means-testing can be very difficult in an environment where jobs are concentrated in the informal sector, primarily in self-employment, without any formal account-keeping or income data. 
Under those circumstances, identifying the poor can be costly, corrupt, complicated, and controversial. 
An unconditional basic income could eliminate much of this mess. 
The question is whether governments can afford it, without increasing the burden on taxpayers and undermining economic incentives. 
In India, the answer could be yes. 
If each of India’s 1.25 billion citizens received an annual basic income of 10,000 rupees ($149) – about three-quarters of the official poverty line – the total payout would come to about 10% of GDP. 
The National Institute of Public Finance and Policy in Delhi estimates that every year the Indian government doles out significantly more than that in implicit or explicit subsidies to better-off sections of the population, not to mention tax exemptions to the corporate sector. 
By discontinuing some or all of these subsidies – which, of course, do not include expenditures in areas like health, education, nutrition, rural and urban development programs, and environmental protection – the government could secure the funds to offer everyone, rich and poor, a reasonable basic income. 
If the government lacks the political courage to eliminate enough subsidies, two options remain. 
Either it could take steps to boost tax revenues, such as by improving property-tax collections (currently extremely low), or it could reduce the level of any basic income it introduces. 
What governments should not do is fund a basic-income scheme with the money from other key social-welfare programs. 
While a basic income can replace some egregiously dysfunctional welfare spending, it cannot substitute for, say, public education and health care, preschool nutrition programs, or employment guarantees in public works. 
After all, the basic income would still be severely limited, and there is no way to ensure that individuals would allocate enough of it to achieve socially desirable education, health, or nutrition levels. 
If these limitations are taken into account, there is little reason to think that a basic-income program could not work in developing countries. 
Indeed, the most frequently heard arguments against such schemes are far from convincing. 
The main drawback, according to critics, is that a basic income would weaken the motivation to work, particularly among the poor. 
Given that the value of work extends beyond income, the logic goes, this could pose a serious problem. 
European social democrats, for example, worry that a basic income could undermine the worker solidarity that underpins current social-insurance programs. 
But, in developing countries, workers in the dominant informal sector are already excluded from social-insurance programs. 
And no feasible basic income would be large enough, at least for now, to enable people simply to leave work behind. 
In fact, among the poorest groups, basic incomes would enhance the dignity- and solidarity-enhancing effects of work, by easing some of the pressure on people – particularly women – who are now vastly overworked. 
Instead of constantly fearing for their livelihoods, self-employed people, such as small-scale producers and vendors, could engage in more strategic decision-making, taking advantage of their enhanced bargaining power against traders, middlemen, creditors, and landlords. 
The final argument against basic income is that the poor will use the money to fund personally or socially detrimental activities, such as gambling and alcohol consumption. 
But experiences with direct cash transfers in a range of countries, including Ecuador, India, Mexico, and Uganda, have not provided much evidence of such misuse; in general, the cash is spent on worthwhile goods and services. 
Proposals for a universal basic income, fancied by utopian socialists and libertarians, may be premature in the advanced countries. 
But such schemes should not be dismissed in the developing world, where conditions are such that they could offer an affordable alternative to administratively unwieldy and ineffective welfare programs. 
Basic incomes are no panacea; but for overworked developing-country citizens living in extreme poverty, they would certainly be a relief. 

Health-Care Innovation in the Global South 
DHAKA – Children die from preventable and treatable conditions like diarrhea and pneumonia every day, with the developing world accounting for the majority of victims. 
The need to produce innovative and cost-effective solutions that can be delivered in resource-deprived settings could not be more apparent. 
Consider pneumonia, which accounts for 15% of all deaths of children under five years old – nearly a million children – each year. 
A key component of the treatment of hospitalized children with severe pneumonia is “bubble CPAP” (continuous positive airway pressure), in which a compressor delivers oxygen to the patient, ensuring a continuous flow of air during the treatment process. 
In the developed world, mechanical ventilators provide the respiratory support of bubble CPAP. 
But mechanical ventilators are far too expensive for developing-country health systems, leaving millions of patients in much of the Global South without access to life-saving bubble CPAP. 
But with a combination of medical expertise and inventive thinking, Jobayer Chisti, my colleague at the health research organization icddr,b, has developed a simple and affordable alternative to bubble CPAP using materials that are readily available even in poor countries, such as empty shampoo bottles and plastic tubing. 
Last year, Chisti and his team, in collaboration with colleagues from Australia and with funding from the Australian Agency for International Development, conducted a clinical trial in Bangladesh to compare the efficacy of this alternative apparatus to the low- and high-flow oxygen therapies recommended by the World Health Organization in resource-poor contexts. 
The results were inspiring. 
Bubble CPAP delivered with the ultra-low cost apparatus was shown to be as effective as the standard low- and high-flow oxygen therapies. 
In fact, just 4% of infants died when treated with the improvised bubble CPAP device, compared with 15% of those receiving low-flow oxygen therapy. 
The case for further testing of Chisti’s alternative bubble CPAP delivery system – not to mention its implementation in places where alternative treatments are not available – is clear. 
If future trials demonstrate similar high efficacy, low-cost bubble CPAP could become the standard of care for pneumonia in resource-deprived settings, potentially saving thousands of lives every year. 
But Chisti’s research has implications far beyond the invention itself. 
It reinforces the idea, which has been a defining motivation of my own work leading the Maternal and Child Health Division at icddr,b, that innovators living and working in resource-poor settings are among the best equipped to develop and test cost-effective health solutions. 
After all, nobody understands the limitations of a weak health-care system better than someone who has to work in one. 
That is why globally networked, developing-country-based health research institutes like icddr,b are invaluable. 
They provide a platform for local researchers and innovators to recognize opportunities that an outsider may never see, and to develop and evaluate their ideas in the precise environment for which they are designed. 
With the data they collect, developing-country health-care innovators can set the stage for their clinical advances to be transformed into national public policies, not just in their own countries, but in resource-deprived communities worldwide. 
The results promise to transform the lives of neglected and impoverished people everywhere. 

Closing the Health-Care Data Gap 
BOSTON – While much of the world today suffers from information overload, there are still places where information is scarce. 
And that scarcity sometimes costs people their lives. 
In the maternity ward of Zanzibar’s largest public-health facility, Mnazi Mmoja Hospital, patient data are listed on a dry-erase board. 
The information on the board consists of the number of women admitted, the type and severity of their conditions, and whether or not they survived. 
These data may be better than nothing, but not by much. 
There are no dates or timestamps or long-term filing systems. 
With photographs of the board strictly forbidden, records last only as long as they are on it. 
Zanzibar’s attitude toward health records is not unique. 
In fact, Zanzibar is probably more careful than many other places throughout in Africa and Asia, where data-collection systems simply do not exist. 
When a country suffers from such a data deficit, its public-health policies, budgets, and strategies are decided by political expediency or guesswork. 
Sometimes the guesses are right, but most often they are not. 
This is a major challenge for health-care systems in the developing world. 
Collecting accurate information on all patients (while still respecting privacy) is vital to tracking public-health threats, lapses in care, and medical errors, and is a necessary and essential condition for holding open and honest debates about health-care issues that can affect entire communities or countries. 
According to a British Medical Journal analysis by Martin Makary and Michael Daniel of the Johns Hopkins University School of Medicine, in the United States, medical errors alone are the third leading cause of death, after heart disease and cancer. 
In the context of their analysis, medical errors could include bad doctors, poor clinical judgment, miscommunications between staff members or departments, and incorrect diagnoses. 
There is no reason to think this problem is confined to the US. 
Health-care settings in the developing world often face even steeper challenges, such as lack of technical capacity among hospital management, staff shortages, poor training, low-quality medicines, and relative impunity for medical malpractice. 
Unfortunately, because we have such limited data, we cannot know the extent to which any of these factors contribute to poor health outcomes and avoidable deaths in developing countries. 
Aside from potentially saving countless lives, reliable data can reduce costs, financially and psychologically. 
The financial burden of health care in low- and middle-income countries is substantial, despite the progress that has been made in fighting HIV, malaria, and tuberculosis. 
Beyond these diseases, for which there is treatment and tracking, thanks partly to ample awareness, many illnesses go unidentified and continue to strain public-health services. 
Understanding common causes of death is the only way to improve health care in communities with a high disease burden, patriarchal hierarchies, and large and dispersed rural populations that rely on traditional medicine. 
In these settings, patient interactions with doctors are rare, so it is important to collect records on them at every opportunity. 
Different societies have different health-care needs, and fully comprehending what they are is no easy task. 
But we can begin the process with three steps. 
The first is to create awareness within communities. 
All people want healthy and productive lives for themselves and their loved ones, so they will welcome new insights into why people in their community die or get sick. 
With the advent of citizen journalism and social media, even in poor countries, public-awareness campaigns are now more affordable than ever. 
The second step is to devise better ways to collect data. 
Many developing countries lack the funds, infrastructure, and training needed to use sophisticated data-collection tools; but that doesn’t mean they can’t make significant improvements in data collection. 
As Atul Gawande of Harvard University’s School of Public Health has shown, simple checklists can be effective in both collecting data and making better decisions. 
If health-care workers and policymakers know which data are useful and why, they will already be in a better position to change public-health outcomes. 
The final step is to establish transparent oversight of the data being collected. 
Some data may point to politically inconvenient or counterintuitive conclusions, and politicians could be tempted to sweep it under the rug. 
In the age of social media and open-access journals, we should demand that newly collected data be made available to a broad range of people researching public-health issues and working in health-care settings. 
Ultimately, we may not be able to prevent deaths caused by certain illnesses. 
But with more information, it is within our power to prevent those deaths that are caused by our own complacency or incompetence. 

Development Aid for Development’s Sake 
Almost daily, the United States and Europe brandish threats to impose economic sanctions or cut off development assistance unless some vulnerable government accepts their political strictures. 
The most recent threats are towards the new Hamas-led government in Palestine. 
Other recent examples include threats vis-à-vis Chad, Ethiopia, Haiti, Kenya, Bolivia, Uganda, and long-standing sanctions against Myanmar. 
Such tactics are misguided. 
The use of development aid as a political stick merely deepens the suffering of impoverished and unstable countries, without producing the political objectives sought by donors. 
To understand why requires taking a long-term view of geopolitics, particularly the gradual decline of US and European global domination. 
Technology and economic development are proliferating across Asia and the developing world, while the spread of literacy and political awareness during the past century made national self-determination by far the dominant ideology of our age, leading to the end of colonialism. 
Nationalism continues to produce powerful political “antibodies” to American and European meddling in other countries’ internal affairs. 
The failure to understand this lies behind repeated US foreign policy debacles in the Middle East, at least since the toppling of the Shah of Iran in 1979. The US naively continues to view the Middle East as an object of manipulation, whether for oil or for other purposes. 
In the Middle East, the Iraq war is widely interpreted as a war for US control of Persian Gulf oil – a rather plausible view given what we know about the war’s true origins. 
Only incredible hubris and naiveté could bring US (and UK) leaders to believe that Western troops would be greeted as liberators rather than as occupiers. 
The politicization of foreign aid reflects the same hubris. 
Even as the US rhetorically champions democracy in the Middle East, its first response to Hamas’s victory was to demand that the newly elected government return $50 million in US aid. 
Hamas’s doctrines are indeed unacceptable for long-term peace, as even some Arab states, such as Egypt, have made clear. 
But cutting aid is likely to increase turmoil rather than leading to an acceptable long-term compromise between Israel and Palestine. 
A newly elected Palestinian government should be treated, at least initially, with legitimacy. 
Later, if it behaves badly by sponsoring terror, policies can change. 
An aid cutoff should be a policy of last resort, not a first strike. 
Aid cutoffs regularly fail to produce desired political results for at least two reasons. 
First, neither the US nor European countries have much standing as legitimate arbiters of “good governance.” 
Rich countries have long meddled, often with their own corruption and incompetence, in the internal affairs of the countries that they now lecture. 
The US preaches “good governance” in the shadow of an unprovoked war, congressional bribery scandals, and windfalls for politically connected companies like Halliburton. 
Second, US and European threats to cut off aid or impose sanctions are in any case far too weak to accomplish much besides undermining already unstable and impoverished countries. 
Consider the recent threats to cut Ethiopia’s aid, which is on the order of $15 per Ethiopian per year – much of it actually paid to US and European consultants. 
It is sheer fantasy to believe that the threat of an aid cutoff would enable the US and Europe to influence the course of Ethiopia’s complex internal politics. 
An aid cutoff to Ethiopia would nonetheless lead to a lot of death among impoverished people, who will lack medicines, improved seeds, and fertilizer. 
Indeed, the track record of on-again-off-again aid is miserable. 
Stop-and-go aid has left Haiti in an unmitigated downward spiral. 
The decade-long sanctions against Myanmar have not restored Aung San Suu Kyi to power, but have deepened the disease burden and extreme poverty in that country. 
Threatened aid cutoffs in Kenya, Chad, and elsewhere would make desperately bad situations worse. 
None of this is to suggest that the US and Europe should abide every move by every corrupt dictator. 
But realism in international economic affairs requires accepting that official development assistance can help achieve the broad political objectives of stability and democracy only in the long run. 
The most reliable path to stable democracy is robust and equitable economic progress over an ample period of time. 
The overwhelming standard for supplying official development assistance should therefore be whether official assistance actually promotes economic development. 
As such, it must be reliable, predictable, and directed towards development needs in ways that can be monitored, measured, and evaluated. 
Can the aid be monitored and measured? 
Is it being stolen? 
Is it supporting real development needs, such as growing more food, fighting disease, or building transport, energy, and communications infrastructure? 
If development aid can be directed to real needs, then it should be given to poor and unstable countries, knowing that it will save lives, improve economic performance, and thus also improve the long-term prospects for democracy and good governance. 


Making the Most of More Aid 
PARIS – The effort to eradicate global poverty has never been more intense. 
In 2014, for the second consecutive year, official development assistance (ODA) totaled a historic high of $135 billion, according to new OECD data. This indicates that advanced economies remain committed to promoting global development, despite their own recent problems. 
Add to this total the substantial spending by China, Arab states, and Latin American countries in the form of investments and loans, and it is clear that flows of ODA toward the developing world have reached unprecedented levels. 
And yet happiness about the headline numbers should not be allowed to obscure opportunities to channel these funds more effectively. 
Official aid from donor countries has helped to halve extreme poverty and child mortality, and it has driven progress on many other fronts as well. 
But it is becoming clear that sustained flows of development aid will not be enough to eradicate extreme poverty by 2030 and implement the new United Nations Sustainable Development Goals, which are to be agreed upon later this year. 
The money being spent on aid today could have a substantially greater impact if it were used to mobilize domestic tax flows and private investment in aid-dependent countries. 
This use of ODA can be better captured in the new indicator introduced on April 8 by the OECD: Total Official Support for Development. 
On average, developing countries raise 17% of their GDP in taxes, compared with 34% in OECD countries. 
Some collect as little as 10%. 
Much of the lost tax revenue escapes in illicit flows and ends up abroad. 
Africa, for example, loses around $50 billion a year in illicit flows, much more than it receives in development aid. 
Enabling developing countries to generate just 1% more of GDP in taxes would mobilize twice as much money as the total amount of ODA – and all of it could be channeled into education, health, security, or cash disbursement schemes. 
The returns from money spent on strengthening tax systems can be staggering. 
In Kenya, Tax Inspectors Without Borders, a project led by the OECD, found that every dollar spent working with authorities on cracking down on tax avoidance produced $1,290 in increased revenues. 
Similarly, in the Philippines, a half-million dollars provided to support tax reform generated well over $1 billion in additional tax receipts. 
Yet today, only 0.1% of all development aid, just under $120 million, goes toward supporting tax systems in developing countries. 
Development aid, properly channeled, also has the potential to mobilize private investment if it is spent to reduce risk. 
Guarantees, soft loans, and equity investments backed by development aid can help attract investors, as has occurred with solar energy projects in Mali and manufacturing plants in Ethiopia. 
In 2014, then-EU Commissioner for Development Andris Piebalgs reported that grants worth €2.1 billion ($2.2 billion) had “achieved an estimated leverage of €40.7 billion in 226 projects since 2007.” 
It is important, too, that aid target the areas where it is most needed. 
Even as aid remained at record levels last year, funds provided to the world’s least-developed countries actually dropped. 
Long-standing programs in better-off countries received greater amounts of money, while a string of poorer candidates were once again overlooked. 
When world leaders meet in Addis Ababa in July for the Financing for Sustainable Development Summit, they must agree to channel aid to those countries with the least access to other sources of finance, the greatest difficulty in attracting investors, and the weakest tax systems. 
Vulnerable groups, such as ethnic and religious minorities and indigenous rural populations struggling to break out of poverty, should receive special attention. 
The 29 member countries of the OECD’s Development Assistance Committee have committed to reversing the decline in aid to the world’s poorest countries. 
These donor countries have also pledged to meet a UN target of spending at least 0.15% of their gross national income on development assistance to the least-developed countries. 
Moreover, they have agreed on new rules that should channel more resources on softer terms to the poorest countries, and that implement new safeguards to ensure debt sustainability. 
We are the first generation in human history with the means to pull every person on the planet out of abject poverty. 
There is enough money in the world. 
It is critical that we use it more wisely. 

New Paths for Leadership in International Development 
SEATTLE – Official development assistance (ODA) helps to save lives, build more stable and safer societies, and project soft power around the world. 
That is a point that my boss, Bill Gates, drove home recently, when he addressed the United Kingdom’s leading military and security thinkers at the Royal United Services Institute in London. 
Bill had been asked how he would respond to anyone in the UK who felt “demoralized” by the fact that Britain is one of only a few countries that meet the United Nations-mandated commitment to spend 0.7% of its gross national income on development aid. 
But highlighting the impact of British ODA was just part of the answer; 
Bill also emphasized the many other countries that are also meeting their aid commitments. 
In Europe, Denmark, the Netherlands, Norway, Luxembourg, and Sweden have been meeting the UN threshold for a while, and Germany recently joined their ranks. 
France is not there yet, but it is increasing its contribution. 
Beyond Europe, Saudi Arabia, the United Arab Emirates, and Qatar are also among the world’s largest significant ODA donors – a reality of which not many people are aware. 
They are all donors to the Lives & Livelihoods Fund, the Middle East’s biggest multilateral development initiative. 
The fund’s other donors are the Islamic Development Bank, the Islamic Solidarity Fund for Development, and the Bill & Melinda Gates Foundation. 
The $2.5 billion Lives & Livelihoods Fund is supporting critical projects targeting disease eradication, primary health care, support for farmers, and basic infrastructure in the poorest communities throughout the Muslim world. 
It began last year with $363 million in approved funding for six large projects in Arab and African countries. 
In February, the first initiative, a $32 million project to combat malaria in Senegal, got underway, and another round of projects was approved earlier this month, taking the total authorized funding to more than $600 million. 
Aid cannot solve all the problems facing Muslim countries in the Middle East and Africa. 
But it can support the emergence of more stable, more prosperous, and healthier societies that are less vulnerable to civil war or terrorism. 
The Gates Foundation believes that donors from the Muslim world, in particular, have an integral role to play in addressing poverty and instability. 
Far more can be achieved together – by combining resources and sharing expertise – than separately. 
Domestic projects can support these countries’ capacity to lead the way on international development. 
For example, the Shaghaf fellowship program, supported by the King Khalid Foundation and the Gates Foundation, is designed to encourage some of the brightest young Saudis – many of them women – to pursue careers in the non-profit sector that focus on local and global social impact. 
But the real key to success in international development is cooperation. 
By combining resources and sharing expertise, organizations like the Gates Foundation and donor governments, from the UK to the UAE, can achieve far more than would be possible alone. 
Fortunately, governments in the Middle East seem to recognize this, and are increasingly seeking development partnerships. 
And there are plenty of opportunities. 
The UAE has been a major champion of polio eradication, an endeavor that the UK has funded generously. 
Qatar has joined recently as a donor to Gavi, the Vaccine Alliance, to which the UK has been the largest donor in recent years. 
Saudi Arabia is a longstanding donor to the Global Fund for AIDS, Tuberculosis and Malaria, another partnership in which the UK is a significant player. 
Observers often point to the soft-power benefits of providing aid to developing countries. 
But they often fail to notice the advantages brought about by strengthening relationships among donor countries that work together to advance international development. 
Donor countries would do well to embrace this reality and seize opportunities to build ties with new global partners that share their commitment to fighting poverty. 

Leave No Refugee Behind 
NEW YORK – The world has entered an era in which people are being displaced at an unprecedented rate. 
In 2014, conflict and persecution forced 42,500 people a day to flee their homes, nearly quadruple the number from 2010. 
Almost 60 million people are now forcibly displaced – a crisis unmatched since World War II. 
This is unacceptable, but it is not inevitable. 
In 1945, the world responded to the deadliest conflict in human history by establishing the United Nations. 
Today, as heads of UN refugee and development agencies, we call for the world to respond to this monumental upheaval by giving people the tools they need to rebuild their lives. 
We believe that the path forward begins with the 2030 Sustainable Development Goals, which the UN, affirming a pledge to “leave no one behind” in the fight against poverty and inequality, adopted unanimously last September. 
The international community’s current approach to displacement relies mainly on humanitarian aid, which provides rapid, lifesaving relief while the search for a permanent solution is underway. 
But solutions are proving more elusive than ever. 
Just 1% of refugees were able to return home in 2014. 
The vast majority of those displaced spend not days or months in exile, but years or decades, even entire lifetimes. 
They risk being left behind. 
Consider Somaya, a third-generation refugee in Kenya. 
Decades ago, her grandmother fled to the Hagadera refugee camp to escape the brutal conflict in Somalia. 
Her mother was born there, and so was she. 
Neither of them has set foot outside the five-square-mile (13 square kilometers) camp. 
They still live out of her grandmother’s suitcases, waiting for a chance to move on. 
Like Somaya, most refugees live in the developing world. 
And yet, too often, development organizations that could provide refugees with a hand up face insufficient funding and stiff regulations that prevent them from addressing refugees’ needs. 
Long-term displacement inflicts profound burdens on people like Somaya. 
Refugees too often face limits on their ability to work and move freely, making it all but impossible to provide for their families or to contribute to their host communities. 
They live in limbo, with no choice but to rely on humanitarian aid. 
Or they are obliged to seek a living in the informal economy, where they risk falling victim to arrest, sexual exploitation, child labor, or other abuses. 
Consider another example: Anas, a 13-year-old Syrian refugee in Lebanon. 
His family cannot survive without the $5 he earns every day. 
So, instead of going to school, he sorts lumps of coal for sale as fuel. 
Refugees like Anas struggle to exercise precisely those rights – to education, health care, freedom of movement, and access to work, land, and housing – that are essential to escaping poverty. 
Fixing this will require political and economic changes that allow the development community to provide more support. 
The relationship between development and displacement is clear, and we need to begin to consider these challenges as areas of joint responsibility. 
Large-scale displacement strains public resources, even in middle-income countries; without sufficient outside help, it can undo years of progress. 
Until the world gives more and better support to host countries and the refugees living there, we can expect to pay ever-larger sums for humanitarian programs that never end. 
But there is another side to the coin. 
When displaced people are allowed to develop their skills and pursue their aspirations, they create new opportunities for growth. 
This is why development agencies must have more flexibility to address new cycles of poverty and fragility – wherever they appear – before they spiral out of control. 
The time has come to discard the clichéd image of refugees as passive recipients of aid, sitting idly with outstretched hands. 
If anything, that image reflects circumstances that have been imposed upon refugees and reinforced by the world’s incomplete response. 
Refugees are entrepreneurs. 
They are artists. 
They are teachers, engineers, and workers of all types. 
They are a rich source of human capital that we are failing to cultivate. 
The international community can no longer afford to ignore so much potential or to sit by while the most vulnerable are pushed to the margins of society. 
As news headlines call attention to the human costs of these tragedies, we must remember that we have the choice to respond with more than just shock. 
We can reject the economic exclusion of those who live among us but were born somewhere else. 
We can redouble our efforts to seek political solutions to conflict and persecution. 
We can empower humanitarian and development partners to work together from the moment a crisis erupts. 
In short, we can honor our pledge to “leave no one behind.” 

Financing the Fight Against Climate Change 
PARIS – Climate change is already wreaking havoc throughout the developing world. 
Vietnam, for example, has reported that natural disasters, some of them exacerbated by climate change, have caused annual losses equivalent to 2% of its GDP. 
In agriculture-dependent countries like Ethiopia, longer droughts and more frequent flooding are threatening livelihoods and food supplies. 
As the international community gears up for the United Nations Climate Change Conference in Paris in December, identifying and streamlining sources of financing for the fight against climate change must be a top priority. 
Development banks like the French Development Agency (AFD), where I am CEO, are well placed to contribute. 
For starters, development banks can finance projects that benefit both development and the environment. 
Global warming is now a vital factor to consider when planning any development project. 
For example, the effects of climate change can pose critical risks to infrastructure – agricultural irrigation, public transportation, or nearly anything else. 
Meanwhile, rising incomes – a goal of any development effort – nearly always means increased consumption of natural resources and energy, resulting in more emissions and further warming. 
Such interlocking relationships between global warming and development explain why the French government requires that at least 50% of the funding provided by the AFD be directed toward development projects that also have a positive impact on the environment. 
Examples include wind farms in Ethiopia, better forest management in Madagascar, nationwide climate plans in Indonesia and Vietnam, and clean urban transport in Colombia. 
Development banks can also play an important role in designing financial tools that allow private investors to contribute to the fight against climate change. 
But today’s funding challenge is no longer just about quantity. 
Though potential sources for climate-friendly development financing now include pension funds, insurance companies, foundations, and sovereign wealth funds, what is often missing are mechanisms to ensure that investments are channeled into well-targeted and effective projects. 
One solution is “green” (or “climate”) bonds. 
These instruments have all the characteristics of conventional bonds, but they are backed by investments that contribute to sustainable development or the fight against climate change. 
Until recently, only a few organizations or governments, including the World Bank, the American state of Massachusetts, and the French region of Île de France, issued green bonds, and generally the amounts involved were modest. 
But in the past two years, other players have entered the market, and volumes have skyrocketed. 
In 2014, emissions of green bonds exceeded the total in all previous years combined. 
Indeed, demand is outstripping supply. 
The latest bond offers were all oversubscribed – and the trend is likely to continue. 
The insurance industry has committed to double its green investments, to $84 billion, by the end of 2015. 
And in September, three major pension funds from North America and Europe announced plans to increase their holdings in low-carbon investments by more than $31 billion by 2020. 
As the market for these bonds expands, they must be better labeled and certified. 
Today, harmonized standards do not exist. 
The quality of the assets backing the bonds depends solely on issuers’ goodwill and technical skills. 
Specific guidelines and rating methods need to be developed. 
In this context, the recent decision by a coalition of institutional investors to measure and disclose the carbon footprint of at least $500 billion in investments is a step forward. 
In September, the AFD issued €1 billion ($1.2 billion) in climate bonds, with one goal being to contribute to the development of concrete quality standards. 
With the help of a major agency that rates corporate social responsibility, we were able to provide investors with solid information – and an accountability process – about the portfolio’s direct impact on greenhouse-gas emissions. 
Indeed, the projects financed by these bonds were required to meet stringent criteria, including a prior analysis of their carbon footprint, proof of a clear and significant impact on climate change, and a design that is aligned with the broader strategies being pursued by local actors and countries. 
Climate bonds have the potential to empower countries and institutions as they move toward meeting enforceable commitments to reduce CO2 emissions. 
However, if they are to be effective, they will require clear guidelines and a reliable framework for assessment. 
As leaders from countries and institutions from around the world prepare to meet in Paris in December, getting the financing right should be a top priority. 

What’s Wrong with Evidence-Based Medicine? 
SEATTLE – Every health-care system balances coverage, quality, and cost – often focusing on one or two at the expense of the others. 
European systems, for example, tend to focus on coverage and ensure universal access to care; in the United States, by contrast, quality appears to be paramount. 
But, whatever one’s view is about the proper priorities, it is clear that the US has room for improvement in all three areas. 
Fortunately, efforts are underway to address each of them. 
And efforts in the US have implications for other countries as well. 
The US Patient Protection and Affordable Care Act (the landmark legislation now widely known as “Obamacare”) aims to widen coverage, while so-called accountable care organizations, such as Kaiser Permanente, try to contain costs by aligning the interests of providers and payers. 
However, efforts to raise quality through the application of evidence-based medicine (EBM) risk ignoring what we know about human cognition and expertise, and may undermine the vital role played by a physician’s expert judgment. 
There are at least three reasons to be wary. 
For starters, EBM is grounded in a fundamental distrust of physicians’ intuition – that is, the rendering of pattern-based judgments that rely on years of experience. 
To be sure, there are good reasons to be skeptical of intuition, given the countless cases in which it has proved to be wrong. 
But it does not follow that all cases of intuition are flawed or that skilled intuition has no function in healthcare. 
Physicians develop expertise over many years, and when they have ample opportunities for feedback about their judgments, their intuitions are valuable, particularly in more complex cases. 
An experienced physician will evaluate a patient’s vital signs and test results in the context of the patient’s life – for example, whether he is an octogenarian with diabetes and a smoker’s cough, or a three-week premature baby. 
With heuristics, intuition, and experience, an experienced physician can best understand a complicated case and develop a plan. 
In fact, an experienced doctor’s conclusions may be more accurate than those provided by EBM. 
That is because EBM, though based on data from randomized trials and rigorous experiments, is designed for situations that approximate the conditions of patients in those tests. 
The problem is that when the context changes, the trial results become less reliable. 
In such cases, the physician must determine how close his or her patient’s situation matches that in the relevant studies. 
If the disease is not as advanced as in the trials, the doctor will have to decide whether to embark on the recommended protocol. 
And clinicians may be unsure about which constraints are inviolate. 
Ultimately, the final judgment is informed by personal experience and pattern recognition, an approach that EBM supporters discount or even disparage. 
A second problem with EBM is that it offers little guidance when a medical condition is evolving. 
For example, acute asthma may be the focus of care at one moment, but might shift to the patient’s diabetes later. 
EBM guidelines focus on asthma treatment or diabetes, but not both, or even how they may interact and change over time. 
Finally, and perhaps most critically, one must ask how clinicians are to make decisions when there are gaps in the EBM knowledge base. 
Doctors often spot trends and develop hypotheses that involve guesswork, and that are validated by trials only later. 
Should doctors therefore ignore observed patterns until the data are in? 
Indeed, one might wonder how such trials are initiated at all if clinicians do not tentatively explore a problem in the first place. 
To insist that all treatment decisions be based on existing best practices stifles this exploration and prevents potential medical breakthroughs. 
Advocates of EBM respond that it is the job of researchers to generate the data that are turned into best practices; the clinician’s role is to implement the results. 
But this approach runs counter to medical history, in which advances come only after practitioners notice anomalies, discover flaws in current “best practices,” or improve on existing approaches. 
Many medical advances, from ulcer therapies to joint replacement, have evolved through clinician curiosity, not as a result of trials. 
Moreover, important sources of EBM have themselves proved to be misleading. 
The Framingham Heart Study, considered the gold standard in its field, was shown to be flawed, owing to its focus on white males. 
For example, a key symptom of a heart attack identified by the study (the feeling of “an elephant sitting on my chest”) is found in only 5% of women. 
As one emergency medicine physician ruefully admitted to us, “I think about all the women I sent home to their deaths because I was following best practices.” 
As we consider a likely future in which physicians adhering to EBM are paid more, we must consider the cognitive limitations and the human cost of unquestioning compliance with so-called “best practices.” 
A more effective approach must be to combine EBM with the expertise and intuition of experienced caregivers, and to take the benefits of both. 

Diagnosis as Public Policy 
When we think about medical diagnosis, we usually think in terms of science. 
The conventional (and accurate) wisdom is that diseases are named and classified on the basis of scientific research. 
For example, the roughly decennial revisions of the World Health Organization’s International Classification of Diseases (ICD) partly reflect advances in scientific understanding of diseases and injuries. 
The cataloging and naming of diseases is a condition of scientific research, as well as its product. 
Indeed, how are doctors to explain and control disease without a common language for the phenomena that they observe? 
The ICD comprehends the entire spectrum of human disease and injury, and its updates reflect the best new knowledge as well as set the stage for the next wave of medical advances. 
But the formal classification of diseases has another aspect, one that concerns a variety of important social functions. 
It provides a set of disease names and numeric codes for assigning and tracking health-care expenditures and services. 
Governments, insurance companies, and patients use these names and codes in accounting and budgeting. 
The ICD code also frames eligibility for related social goods like hospital care, medical retirement, claims for disability compensation, hospice care, and home health care, to name a few. 
From the doctor’s perspective, diagnostic classifications like the ICD provide the official language to be used in medical records, discussions with patients and their families, and in billing for services. 
For patients, diagnostic classifications provide the framework for understanding their own and others’ disease processes. 
Finally, diagnostic classification provides politicians the language for building or dismantling health programs. 
Clearly, the public and social character of diagnostic classifications of disease extends to private organizations. 
Consider organizations that regulate medical licenses or administer medical emergency relief funds. 
(In the non-medical area, think of business organizations that regulate trade or educational commissions that accredit schools). 
Government is hardly alone in creating the formal rules, principles, and guidelines that structure and regulate public life. 
Public policy is defined by the public’s interest in the policy, not who made it. 
At least in democratic societies, such policies should be accountable to the public, and the classification of diseases, since it serves many of the functions of public policy should be no different. 
It turns out that psychiatry, in particular, has exhibited leadership and innovation in recognizing the public-policy aspects of diagnostic classification. 
Both the ICD classification of mental disorders, and its American counterpart, the American Psychiatric Association’s Diagnostic and Statistical Manual of Mental Disorders (DSM) efforts have taken pains to make diagnostic classification accountable as examples of public policy. 
Both organizations have included diverse representation on their working committees, invited input from “outsiders” to the professions and collaborated with related institutions and organizations in preparing their classification revisions. 
In my view, the classification of mental disorders, as a form of public policy making, poses exceptional challenges. 
A primary challenge is posed by the nature of mental illness itself. 
Mental illness invades the mind and the self, the same domains where political beliefs and social interests reside. 
The history of world psychiatry is peppered with diagnoses of mental illness based on political dissent. 
Public policy concerning mental illness must, therefore, consider carefully the potential for imposing unjustified social and political values on people in the guise of the classification of disease. 
On the other hand, psychiatric public policy must also take into consideration the feeble social and political status of the severely mentally ill. 
Public policy concerning the mentally ill should empower, not marginalize. 
The latter point, however, is where the current puzzles reside for psychiatric diagnosis as public policy. 
As the WHO begins to plan the ICD eleventh edition and the American Psychiatric Association begins to plan the fifth edition of the DSM, one wonders how to ensure additional moral, social, and political accountability in what traditionally have been viewed as the instruments and products of science. 
Should patients and their families be directly involved in the development of classifications? 
If so, how? 
If not, how can the needs of scientific credibility and public accountability be met? 
While psychiatry may be leading the debate about these problems, other medical specialties cannot be far behind. 
As scientific progress broadens the range of options regarding health, the trappings of social, political, and moral choice will increasingly infiltrate medical diagnoses. 
Debates about reproductive freedom and “cosmetic” enhancements – such as the use of growth hormone to “treat” short stature – already occupy the news. 
How will the associated conditions be classified? 
By whose authority and with what accountability? 
What social values will be advanced? 
Classifying disease should reflect the best collaborations between science and politics. 
With thoughtfulness and perseverance, psychiatry’s current deliberations about diagnosis as public policy will provide a road map for the broader medical debates lurking ahead. 

The Power of Dialogue in a Disrupted World 
GENEVA – Closing the divides in our fractured world will require collaboration among many stakeholders. 
And, more often than not, it is dialogue that sets cooperation apart from conflict, and progress from painful reversals of fortune. 
Good-faith dialogue – the ability to see the world through the eyes of other people, especially those with whom we disagree – has never been more important. 
We are living in an age when the Internet and other information and communications technologies have broken down traditional borders and brought us closer together. 
But it is also an age in which the drumbeat of nationalism is pushing us further apart. 
In the absence of calm, constructive, and sometimes uncomfortable conversations about what kind of future we want, intolerance and isolationism threaten to roll back centuries of progress. 
The stakes really are that high. 
The World Economic Forum’s 2018 Global Risks Report shows that an overwhelming majority of experts worldwide believe that a catastrophic conflict between major powers could erupt this year. 
In the meantime, problems within countries will continue to fuel public suspicion that the system is rigged to favor elites. 
Chief among those problems are rising inequality and declining social mobility. 
According to the International Monetary Fund, income inequality has increased in 53% of all countries over the past 30 years, and particularly in advanced economies. 
The Greek Stoic philosopher Epictetus once said, “We have two ears and one mouth so that we can listen twice as much as we speak.” 
The same principle applies to dialogue, which requires that we listen to different perspectives, and always keep an open mind. 
In 2018, that means heeding the public’s grievances, and working together toward collective solutions. 
Only joint responses will suffice to tackle the complex problems we face. 
The indispensability of multi-stakeholder dialogue to global progress is why it is the cornerstone of the Forum’s guiding ethos. 
Beyond the vital work of organizations such as the United Nations, the Forum has created a space on the world stage where business leaders can rub shoulders with labor activists, and world leaders can talk – but, more important, listen. 
Back in 1987, the WEF’s annual meeting in Davos played a key role in preventing a war between Greece and Turkey. 
Turgut Őzal, Turkey’s prime minister at the time, met with his Greek counterpart, Andreas Papandreou, and the two men formed a bond of trust that helped stave off a military conflict. 
In Davos this year, a group of Israeli and Palestinian business leaders met to renew their commitment to a two-state solution, and pledged their support for strengthening the Palestinian economy. 
Moreover, Greek Prime Minister Alexis Tsipras and the prime minister of the Former Yugoslav Republic of Macedonia (FYROM), Zoran Zaev, held the first prime-ministerial-level meeting between their two countries in seven years. 
Together, they advanced negotiations to end a lingering dispute that has stymied FYROM’s bid for European Union accession. 
Last but not least, Davos hosted diplomatic talks to bolster ongoing multilateral peacemaking and political-reconciliation efforts on the Korean Peninsula, in Venezuela, and in Sub-Saharan Africa and Somalia. 
In 2018 and in the years ahead, longstanding geopolitical challenges will persist alongside fresh disruptions from the digital world. 
The Fourth Industrial Revolution and its attendant technologies – artificial intelligence (AI), bioengineering, and so forth – offer abundant opportunities for material and social progress. 
But they are also upending established business models and pushing modern warfare in frightening new directions. 
The dilemmas confronting us today are profound. 
Should driverless vehicles value the lives of their passengers over those of pedestrians? 
Is there still such a thing as privacy in a world of facial recognition software and big-data applications? 
Should companies be able to patent human genes that they have isolated? 
Should AI make battlefield decisions? 
None of these questions can be answered without thoughtful, open dialogue between segments of society that rarely interact. 
Technology companies, start-ups, international organizations, academics, and civil-society leaders need to come together with regulators and policymakers to develop measures that will limit the risks of new technologies without restricting innovation. 
The Forum’s San Francisco-based Center for the Fourth Industrial Revolution was founded in 2016 to facilitate this type of dialogue. 
And it has already brought together various stakeholders to formulate policy responses to the challenges posed by AI and machine learning, the Internet of Things, digital trade and cross-border data flows, civilian drones, and blockchain technology. 
The world needs more of this kind of cooperative dialogue. 
Many people might hanker for a return to the supposedly simpler world of the past. 
But withdrawing into our cultures, nations, industries, and organizations is not the answer. 
In fact, it is part of the problem. 
For the sake of our shared future, we must recognize the power of dialogue. 

Dictating Limits to Dictatorsdd75f80346f86f9414bc2e16 
Robert Mugabe is an aging tyrant who is single-handedly destroying Zimbabwe's economy and social stability. 
Like many other tyrants, he seems ready to do anything to extend his 22 years in power, including resorting to violence and rigging elections. 
His corrupt cronies and military officials who benefitted during his lawless regime stand by him - not only to preserve their own corrupt incomes, but also out of fear of the retribution that might follow their fall from power. 
Despite protests from the US and Europe, Mugabe has so far had his way despite his thuggery. 
Tyranny is of course one of the oldest political stories. 
But in an interconnected world, isn't it possible for the international community to do more to restrain tyrants in order to ensure a more stable global environment? 
A tricky question, no doubt. 
No country is ready to cede political sovereignty to outside powers or electoral monitors. 
Yet the high costs of tyranny spill over to the rest of the world, in the forms of uncontrolled disease, refugee movements, violence, and criminality. 
The world has a stake in preventing the continued misrule of Mr. Mugabe and others like him. 
One plausible idea is regional monitoring - that a country's neighbors would help forestall such tyranny. 
This is plausible, since neighbors are the biggest direct losers when instability spills across borders. 
Yet neighbors are also the most fearful of challenging one of their own. 
So far, the Southern African Development Community (SADC) has been acquiescent in the face of Mugabe's abuses. 
If that silence continues, it will gravely undermine SADC institutions, and will cast a deep pall over the most important leader in SADC, South Africa's President Thabo Mbeki. 
Sanctions offer another approach. 
America, Europe, and other democracies should not continue to do ``business as usual'' with Zimbabwe. 
Mugabe and his henchmen have stashed millions of dollars abroad in the past year according to plausible press accounts. 
These accounts should be frozen, despite the difficulty in doing so in a world rife with secret banking and nominee accounts that disguise true ownership. 
Mugabe's phony elections, moreover, should go unrecognized, and Mugabe denied a welcome as a legitimate head of state in international gatherings. 
Sanctions, however, are clumsy, costly, and often ineffective. 
They are insufficient to stop abuses (after all, sanctions were threatened before the elections) and risk pushing Zimbabwe's economy deeper into crisis, hurting millions of innocent people, especially during a period of intensifying hunger and drought. 
Sanctions are also unlikely to secure wide acclamation. 
Africans will no doubt feel that Africa is being singled out unfairly when such abuses exist throughout the world. 
An alternative approach, giving positive inducements to a tyrant to leave office, might work in some circumstances. 
Some long-time leaders have been coaxed from office through blandishments, high-profile international positions, or even amnesties and comfortable exiles in safe locations. 
A more general, perhaps more powerful approach, is for the international community to agree on general, enforceable political standards. 
One such standard, which might conceivably win international consent, would be an ``international term limit'' on heads of government. 
The world community would agree that no individual should serve as the head of government (president, prime minister, or other equivalent position) for more than ``X'' years. 
International agencies such as the World Bank and the IMF would automatically stop making loans to countries where the head of government exceeds that limit. 
Many countries already have such limits. 
In America, presidents are limited to two terms in office. 
In other countries, there is a single presidential term, usually of 5 to 8 years. 
The world as a whole might agree on a weaker, but globally acceptable minimum standard, say a term limit of no more than 20 years. 
Any head of government who stays in power for more than two decades would automatically lose international recognition. 
Even non-democracies such as modernized China could accept this rule, because it would apply to heads of government, not ruling parties. 
China routinely rotates the highest executive positions, as it realizes that a change of power prevents tyrants from gaining excessive power, a lesson learned painfully during Mao's long and often disastrous reign. 
Corruption is limited by the frequent alternation of power, since tyrants typically need many years to build up systems of mega-corruption, usually involving family and business associates. 
An international term limit, of course, could infringe the right of a real democracy to keep a popular leader for more than 20 years. 
Some parliamentary leaders of Western democracies have approached to this limit, such as Helmut Kohl and his 16 years in office in Germany. 
But even in strong democracies, the final years of a long rule are typically the worst. 
Kohl's last years, for example, were marked by electoral corruption. 
Given the incredible advantages that incumbents have over challengers in nearly every political system, a firm time limit would strengthen even the strongest of existing democracies. 
An international term limit would have put Zimbabwe (and its neighbors) on notice early on: Mugabe's continued rule after 22 years would be tantamount to international isolation. 
Mugabe's challengers would have been given the upper hand in the political conflict, and it might have been taken for granted inside Zimbabwe and the SADC that Mugabe would not and should not contest this round of elections. 
In looking at the roster of long-serving heads of government in the second half of the twentieth century - such as Stalin, Mao, Franco, Kim Il Sung, and Ceausescu - it is clear that an enforced international term limit would have spared the world considerable grief and turmoil. 
In our much more democratic and interconnected world, it is possible that a clear international norm limiting time in power could spare the world from dictatorship and destabilization in the future. 

Dictators in the Dock 
NEW YORK: Britain's law lords will begin to decide this week (after botching the first attempt) whether General Augusto Pinochet should continue to be detained for possible extradition to Spain. 
The case has inspired many debates over amnesties such as that which Pinochet decreed for himself decades ago. 
Some commentators, ranging from the liberal Polish ex-dissident Adam Michnik to ultra-conservative US Senator Jesse Helms, oppose prosecuting Pinochet on the ground that, unless such dictators are allowed to retire with their impunity intact, it will be impossible to persuade them to relinquish power. 
In Pinochet’s case, there is an ahistorical aspect to this argument. 
Pinochet did not abdicate voluntarily. 
He had no choice. 
After seizing power in September 1973, torturing and murdering thousands in the process of consolidating his rule, Pinochet needed to establish his legitimacy, domestically and internationally. 
So the dictator promulgated a Constitution in 1980 which required that his continuation as President be subject to a plebiscite eight years later. 
That plebiscite was scheduled for October 5, 1988, fifteen years after Pinochet’s coup. 
Pinochet's opponents were permitted little opportunity to campaign against him. As the date of the plebiscite approached, it became apparent that they were likely to prevail. 
Signs appeared that Pinochet was planning to abort the plebiscite. 
To prevent this, the American State Department summoned the Chilean Ambassador, issued a stern warning to Pinochet, and announced publicly its demand that the plebiscite be held as planned. 
So it did. 
Early returns (not publicly reported) indicated that Pinochet had been defeated. 
However, his fellow military commanders insisted on compliance with Pinochet's own Constitution, forcing the General to back down from a demand for emergency powers to set aside the results. 
When the ballot counting was completed, Pinochet's continuation had been rejected by a margin of 55% to 43% (the remaining votes were blank or invalid). 
A year-and-a-half later, Pinochet stepped down. 
Though it is not often the case that severely repressive regimes go of their own volition or through a negotiated transfer of power, it does happen. 
Perhaps the outstanding example of a peaceful transition made possible by a guarantee of non-prosecution is South Africa. 
There, even many of the most dedicated opponents of apartheid favored the provision of the 1993 Temporary Constitution that required an amnesty. 
Without amnesty, it was widely accepted, whites would fight to keep power, leading to all out war. 
South Africa made the best of amnesty by not providing it collectively, but only individually to those on both sides of the struggle who acknowledged and disclosed their crimes. 
Even so, amnesty allowed many people with blood on their hands to escape punishment in the interest of avoiding greater bloodshed. 
It is difficult to quarrel with those who made the decision in South Africa to accept an amnesty. 
Yet there are compelling arguments to call a halt to the practice, inaugurated by Pinochet in 1978 and copied by military regimes in several other Latin American countries, to protect themselves by issuing amnesties for their own crimes. 
A crucial factor in many countries that facilitates the commission of great crimes is the belief by the perpetrators that they will never be held accountable. 
Amnesties allowed the development of what is often called a culture of impunity. 
It is high time to signify the end of the era in which that culture prevailed. 
Dictators who demand amnesty as a condition for leaving power are somewhat like airplane highjackers who insist on freedom for themselves and imprisoned comrades as the price for releasing hostages. 
We know that innocent persons will die unless we accede to the highjackers. 
Nevertheless, a consensus has developed internationally that yielding to such extortion costs even more lives. 
Though we do what we can to save the lives of passengers, we do not give in to the demands of terrorists. 
Similarly, we should not submit to those who have terrorized nations. 
Whatever its outcome, Pinochet’s case demonstrates that the amnesties tyrants grant themselves provide only limited protection. 
Another contributing factor to the culture of impunity is the difficulty in deciding how and where to try those whose crimes include the destruction of the judicial systems of their countries. 
Here is a difficulty illustrated by the recent surrender in Cambodia of two Khmer Rouge leaders, Khieu Samphan and Nuon Chea, who claim that their crimes should be forgotten, that "bygones should be bygones." 
Everyone seems to agree that Cambodia’s courts are unable to try them for the murder of millions. 
On the other hand, there is limited enthusiasm for establishing yet another ad hoc international tribunal – in addition to those now at work for ex-Yugoslavia and Rwanda – because of the costs. 
In years to come, when a permanent International Criminal Court is established, such problems will no longer present insurmountable obstacles and the significance of amnesties will be further reduced. 
It will take another two or three years before the treaty for such a Court (adopted in Rome last summer) is ratified by the required sixty governments. 
Thereafter, the Court will not be able to consider the crimes of the past, such as those committed by Pinochet and the Khmer Rouge. 
It will only have prospective jurisdiction. 
The International Criminal Court’s existence will reinforce the message being sent by the proceeding against Pinochet: there are no statutes of limitations and there will be no permanent safe havens for those who use state power to engage in mass torture or mass murder. 
Denying dictators a guarantee of impunity will only rarely figure in whether they depart from power. But it may be an important factor in how they exercise power. 

Did America Really Kill the Trade Talks? 
It is appalling that the world has decided to blame the United States for the crushing end to five years of global trade talks last month (the so-called “Doha round”). 
I am the first to admit that the US under President George W. Bush has not covered itself with multilateral glory in recent years. 
But accuse America of sabotaging the trade talks? 
Give me a break. 
Has anybody noticed that for more than a decade now, US imports have been averaging several hundred billion (thousand million) dollars more than exports? 
Do people seriously believe that the US has accomplished its majestic trade deficit by shutting its doors to foreign goods? 
On the contrary, through its low tariffs and general lack of import restrictions, the US has turned itself into an international shopping theme park. 
Americans buy more foreign-made refrigerators, cars, clothing, computers – you name it – than anyone else. 
Happily for world exporters, the same binge mentality that makes a whopping two-thirds of Americans either overweight or obese seems to extend to all their purchasing habits. 
Since the start of this decade, neither recession nor hurricanes nor sky-high oil prices have seemed to dent their appetites. 
The simple fact is that even if US trade negotiator Susan Schwab had refused to make a single “concession,” and if Europe, Japan, and the big emerging markets had kept their best offers on the table, the US would still remain more open than all but a few small countries. 
True, in the endgame of the talks, the US caved in to its wealthy and powerful agribusiness lobby. 
But that was only after five years of intransigence by Europe’s even more powerful farm lobbies. 
And this is not to mention emerging market politicians’ failure to grasp that unilaterally reducing their excessive import restrictions would be a good idea even if rich countries sat on their hands. 
What does last month’s trade fiasco mean? 
Old hands know that global trade deals often rise out of the ashes of failed talks. 
Unfortunately, such an outcome seems improbable now, especially since the US is unlikely to rejoin the talks anytime soon. 
The opposition Democratic Party seems poised to take up growing wage inequality as a central issue in this year’s mid-term US congressional elections and in the 2008 presidential election. 
To be sure, we economists have found that globalization appears to have played a far lesser role in growing wage inequality than have technological advances. 
Even so, the explosion of exports coming out of low-wage regions like China and India is at least a piece of the puzzle. 
The last thing that Bush’s Republicans want is to appear indifferent to the plight of the middle classes. 
So, unfortunately, even if Europe came to its senses and emerging markets showed greater enthusiasm for liberal trade, we may not see a big global deal until the next decade. 
How bad would that be? 
After all, many Asian countries have achieved impressive export-led growth under the current system. 
And bilateral or regional trade deals can chip away at some of the barriers in the current global system. 
For example, a fundamental problem is that the nature of global trade is constantly evolving, and existing agreements have only limited capacity to adapt. 
Services like education, banking, accounting, and insurance account for an ever larger share of global output (now roughly two-thirds), and further expansion requires significant changes in existing agreements. 
Even if Asia has succeeded by relentlessly exporting manufactures, today’s poorest countries, especially in Africa, can realistically export only agriculture and textiles. 
But these are precisely the range of goods that remain most protected under existing agreements. 
Bilateral deals can help, but they can also lead to higher trade barriers for everyone else. 
The current state of affairs is all the more depressing because global economic growth in the past four years has been the fastest since the early 1970’s. 
Rapidly expanding global trade, combined with an ever-freer and faster exchange of people and ideas, has been a cornerstone of this growth, particularly of the strong productivity gains that underlie it. 
Absent further trade agreements, there is a big risk that the pace of globalization will slow, with profound consequences for global poverty and welfare. 
Outside Africa, the people who will suffer the most are those in countries like Brazil, India, China, and Mexico, whose leaders rightly took on rich-country farm subsidies, but wrongly failed to recognize the profound costs of the developing world’s own import restrictions. 
So for now, the world must hope that Americans continue gorging on foreign imports. 
Wallis Simpson, the controversial US-born Duchess of Windsor, once famously quipped, “You can never be too rich or too thin.” 
Fortunately for everyone, America’s motto nowadays is “You can never be too rich or too large.” 
When Americans finally decide to go on an import diet, as they will someday, the world’s hypocrisy over the failed global trade talks will become apparent to all. 

Did Development Fail in Kenya? 
Nairobi -- A month ago, Kenya fell prey to a sudden burst of post-electoral violence that has left over 1000 dead and hundreds of thousands displaced. 
The intensity and scale of the violence have stunned the world. 
Of course, Kenya had lived through tense electoral periods before, and few people who know Africa were blind to the many difficulties the country continued to face. 
But things seemed to be going well recently. 
This year’s campaign was exceptionally peaceful, and millions of citizens voted on December 27 – at times walking and queuing for hours to cast their ballot. 
Perhaps more fundamentally, Kenya was unanimously seen as the “good student” of development, sometimes referred to as a symbol of an African renaissance. 
The “Kenya vision 2030 framework,” a set of ambitious macroeconomic, legal, and constitutional reforms, was being implemented in close partnership with the World Bank. 
Cherished by the donor community, Kenya received almost $1 billion of official development assistance in 2006 – up by 250% since 2002. 
Its booming horticulture and tourist industries were hailed as models for other African states in their efforts to integrate into world trade. 
The country’s economic expansion, which averaged 5.5% in the last four years and fuelled the progress of neighboring economies, appeared to prove that vigorous growth is possible in Africa even without mineral or fossil resources. 
Today, this economic miracle is up in the air. 
All is not lost, and there are strong reasons to believe that Kenyans will surmount the current political crisis and put the country back on its promising track. 
Nevertheless, as we sit on the brink of the abyss, it is worth re-examining our assumptions that since poverty breeds conflict, socio-economic development must foster political stability and reduce recourse to violence. 
The first lesson we should draw from this month of civil strife is that development, however well-managed, cannot solve everything. 
Some tensions are deeply ingrained in societies, and peace requires more than any development agency can deliver. 
Parallel to the growth agenda, there is a specific role for bilateral and multilateral diplomacy to play in support of improved governance. 
In fact, development itself generates a number of strains on societies that lie at the very roots of conflict. 
Fast-paced changes of identity caused by urbanization, the empowerment of women or exposure to foreign media tend to weaken traditional norms and social networks. 
And, at least initially, economic growth tends to increase inequalities within a country, as some communities or individuals benefit from rising income and others don’t. 
By displacing traditional centers of power, development can nurture collective resentment. 
Ethnic manipulation is a small step away, which many political leaders are disposed to take. 
None of this, however, disproves the link between development and peace, or inverts the correlation. 
At both the micro and the macro level, development projects and economic growth can do much to alleviate some of the structural causes of political violence. 
But development professionals, whose first duty is to “do no harm,” should be more conscious of the complex strains brought upon developing societies. 
In Kenya too, this sensitivity has not sufficiently infused our organizations and projects. 
Ultimately, the enhanced economic activity that development generates is the only way to reduce inequalities, particularly in a context of rapid demographic growth: it is easier to work on a fairer distribution of a growing pie than of a shrinking one. 
Moreover, fast-paced but ill-distributed economic growth can be accompanied by programs that focus on those who are left behind, thereby mitigating grievances. 
It is no coincidence that much of Kenya’s ongoing violence is occurring in the slums of its large cities. 
Had more attention been given to the country’s most glaring inequalities in access to water, shelter, or jobs, this population might not have chosen violence as an instrument of change. 
Let us draw the right lessons from Kenya: socio-economic progress remains our best tool to prevent conflict in the long run. 
But the relationship between growth and political stability is subtler and less linear than we like to believe. 
Development is no miracle solution to violence, and may create its own set of grievances – particularly when done without regard to the abrupt changes it brings to societies. 
Kenya isn’t an illustration of development failing, but of development at work: complex, powerful, and yet fragile. 

Did Hezbollah Win? 
In the immediate aftermath of the October War of 1973, the Arab world rejoiced because the myth of Israeli invincibility had been shattered by Egypt’s crossing of the Suez Canal and the Syrian offensive that swept across the Golan Heights. 
In Israel, there was harsh criticism of political and military chiefs alike, who were blamed for the loss of 3,000 soldiers in a war that ended without a clear victory. 
Prime Minister Golda Meir, Defense Minister Moshe Dayan, Israel Defense Forces (IDF) Chief of Staff David Elazar, and the chief of military intelligence were all discredited and soon replaced. 
Only afterwards did a sense of proportion take hold, ironically by the Egyptian and Syrian leaders before anyone else. 
While commentators in Israel and around the world were still mourning or gloating over Israel’s lost military supremacy, both Egyptian President Anwar Sadat and Syrian President Hafez Al-Assad soberly recognized that their countries had come closer to catastrophic defeat than in 1967, and that it was imperative to avoid another war. 
That lead to Sadat’s peace and Assad’s 1974 cease-fire on the Golan Heights, which has never been violated since. 
It is easy to read the 1973 war only in retrospect. 
Israel had been caught by surprise, because good intelligence was misinterpreted in a climate of arrogant over-confidence. 
The frontal sectors, left almost unguarded, were largely overrun. 
The Egyptians had an excellent war plan and fought well, and Syrian tanks advanced boldly, attacking in wave after wave for three days and nights. 
Within 48 hours, Israel seemed on the verge of defeat on both fronts. 
But as soon as the IDF was fully mobilized and the reservist brigades that make up nine-tenths of its strength were ready to deploy for battle, the Israelis stopped both the Egyptian and Syrian armies in their tracks and began their own advance almost immediately. 
The war ended with Israeli forces 70 miles from Cairo, and less than 20 miles from Damascus, their success obscured by the shock of the surprise attack, emotional over-reactions, and the difficulty of seeing clearly through the fog of war. 
It is the same now with the Lebanon war and the gross misperceptions that have followed. 
No one should be surprised the latest anti-tank missiles can penetrate even the heaviest and best protected of battle tanks. 
But Israel’s tanks did well enough in limiting Israeli casualties. 
Likewise, the lack of defenses against short-range rockets with small warheads is simply common sense. 
They are just not powerful enough to justify spending billions of dollars for laser weapon systems the size of football fields. 
More serious misperceptions are equally obvious. 
For example, instead of dismissing Sheikh Hassan Nasrallah’s boasts of victory, many commentators around the world repeat and endorse his claim that Hezbollah fought much more bravely than the regular soldiers of Arab states in previous wars. 
But in 1973, after crossing the Suez Canal, Egyptian infantrymen by the thousand stood their ground unflinchingly against advancing Israeli battle tanks. 
They were in the open, flat desert, with none of the cover and protection that Hezbollah had in their stone-built villages in Lebanon. 
What is true is that the Israelis lacked a coherent war plan, so that even their most purposeful bombing came off as brutally destructive (though with a deterrence payoff, as Syria’s immobility showed). 
Similarly, Israel’s ground actions were hesitant and inconclusive from start to finish. 
A fully developed contingency plan – a sophisticated blend of amphibious, airborne, and ground penetrations to reach swiftly and deeply behind the front, before rolling back and destroying Hezbollah positions one by one from the rear, all the way to the Israeli border – was never implemented. 
The contingency plan remained on the shelf because of the lack of casualties among Israeli civilians. 
It had been assumed that thousands of Hezbollah rockets fired in concentrated barrages – which cancel out the inaccuracy of unguided rockets and powerfully compound blast effects – would kill many civilians, perhaps hundreds each day. 
That would make a large-scale offensive by more than 45,000 soldiers a compelling necessity, justifying politically the hundreds of casualties it would have cost. 
Hezbollah, however, distributed its rockets to village militias that were good at hiding them from air attacks, sheltering them from artillery, and from probing Israeli unmanned air vehicles, but that were incapable of launching them effectively in simultaneous launches against the same targets. 
Instead of hundreds of dead civilians, the Israelis were losing one or two a day. 
Even after three weeks, the total was less than in some one-man suicide bombings. 
That made it politically unacceptable to launch an offensive that would kill young soldiers and family men. 
Indeed, nor would such an offensive have eradicated Hezbollah, because it is a political movement in arms, and not just an army or a band of gunmen. 
For that very reason, the outcome of the war is likely to be more satisfactory than many now seem to believe. 
Unlike Yasser Arafat, who fought for eternal Palestine and not for actual Palestinians, whose prosperity and safety he was always willing to sacrifice for the cause, Nasrallah has a political constituency centered in southern Lebanon. 
Having implicitly accepted responsibility for starting the war, Nasrallah has directed Hezbollah to focus on rapid reconstruction in villages and towns, right up to the Israeli border. 
Nasrallah’s power base is now a hostage of Hezbollah’s good behavior. 
He can hardly afford to start another round of fighting that would destroy everything again. 

Did Humans Invent Modernity? 
Fossil remains and genetic data suggest that modern humans come from Africa, and in the last decade anthropologists, archaeologists, linguists, and other scientists have tended to identify our species' biological origin with the origin of modern intelligence. 
The idea is quite simple. 
The process that produced our species in Africa granted it a number of advantages - syntactical language, advanced cognition, symbolic thinking - that favored its spread throughout the world and determined its eventual evolutionary success. 
If, however, such advantages were dramatic and mainly determined by biological change, we should expect to find them reflected in the material culture produced by these early, anatomically modern populations. 
Complex technologies, regional trends in the style and decoration of tools, use of pigments, abstract and representational depiction, burials, grave goods, and personal ornaments are among the more common long-lasting creations that attest to the complex symbolic nature of ethnographically recorded human cultures. 
Specifically, we should find such archeological evidence at sites in Africa from between 200,000 and 100,000 years ago. 
But what we see instead is a gradual emergence of behavioral innovations in and outside Africa between 300,000 and 20,000 years ago. 
Moreover, anatomically modern populations shared a number of these innovations with Neanderthals, which many anthropologists and geneticists consider a different species, or a human type inherently incapable of reaching our cognitive level. 
For example, elongated stone blades are found not only at Neanderthal sites in Europe and the Near East, but also at sites inhabited by Moderns in the Near East and Africa since at least 100,000 years ago. 
Blade technologies then disappeared and reappeared cyclically in these areas, and in some regions, such as Australia, they only appeared a few thousand years ago. 
Similarly, standardized tools produced by both Neanderthals and Moderns appeared 80,000 years ago. 
Pigments, probably used in symbolic activities such as tattooing or body painting, are found at Southern African sites since 300,000 years, but also at contemporaneous and more recent Neanderthal sites in Europe. 
The intentional character and symbolic significance of burials prior to 30,000 years ago, especially those of Neanderthals, remain the subject of intense debate. 
But there is enough evidence to believe that both anatomically modern humans and Neanderthals began burying their dead 100,000 years ago - and probably before, as suggested by the recent dating at 160,000 years of a Neanderthal burial site at Tabun, Israel. 
To be sure, sophisticated bone tools, such as harpoons, spear points, and awls, seem to have appeared in Africa 90,000 years ago, much earlier than in the rest of the world. 
This also applies to such artifacts of modern humans as personal ornaments, with recently discovered shell beads dated at 75,000 years ago. 
But these innovations do not seem to have been widespread. 
Bone tools and beads are virtually absent from sites in Africa and the Near East inhabited by modern humans beginning 100,000 years ago, and few abstract engravings on bone and on fragments of ochre are found at African sites dated to 75,000 years ago. 
Depictions of animals, human beings, and other natural features do not occur in the three records - Africa, Europe, and the Near East - before 40,000-30,000 years ago, and they appear much later in some areas than others. 
In sum, certain behavioral innovations seem to appear in Africa between 10,000 and 30,000 years before Neanderthals express them. 
But I doubt that this gap is evidence of different cognitive abilities. 
After all, it took 7,000 years for agriculture to arrive in England from the Near East, and nobody would argue that the cognitive abilities of Mesolithic hunter-gatherers from England were inferior to those of early agriculturalists. 
This suggests that the trajectory of we "moderns" in our transformations since the end of the Ice Age has varied enormously in material culture. 
Future archaeologists would do well not to seek an explanation of this variation in terms of visible differences in our skeletal biology! 
"Modern" behavior may have appeared in different regions and among different groups of humans, much as would happen later in history with the inventions of agriculture, writing, and transport. 
More fundamentally, behavior is certainly a significant component in determining a species' adaptation, geographic range, and mate-recognition system - all of which contribute to the maintenance of species boundaries. 
But this does not imply that modern behavior must have developed in a single species. 
Very close species may have similar behavioral systems and, in the case of our close predecessors, the shared features probably included many traits we have preferred to consider the monopoly of our species, including symbolic behavior. 
The most important implication of believing that cultural modernity emerged in more than one species is that it largely eliminates the dichotomy that Western thought has traditionally detected between the natural world and human culture. 
The archaeology of early modern and Neanderthal populations suggests that we are not the chosen people who received from God the light, the divine mandate to go forth, multiply, and eliminate their subhuman neighbors. 
This is a liberating, as well as a humbling, prospect. 
If the fact that we are the only human species left on earth is the result of an historical accident rather than Darwinian competition, we can open our minds and accept that we share some of our "culture" with both our living and no longer living relatives. 
Our modernity is probably a part of their legacy as well. 

Did the Poor Cause the Crisis? 
WASHINGTON, DC – The United States continues to be riven by heated debate about the causes of the 2007-2009 financial crisis. 
Is government to blame for what went wrong, and, if so, in what sense? 
In December, the Republican minority on the Financial Crisis Inquiry Commission (FCIC), weighed in with a preemptive dissenting narrative. 
According to this group, misguided government policies, aimed at increasing homeownership among relatively poor people, pushed too many into taking out subprime mortgages that they could not afford. 
This narrative has the potential to gain a great deal of support, particularly in the Republican-controlled House of Representatives and in the run-up to the 2012 presidential election. 
But, while the FCIC Republicans write eloquently, do they have any evidence to back up their assertions? 
Are poor people in the US responsible for causing the most severe global crisis in more than a generation? 
Not according to Daron Acemoglu of MIT (and a co-author of mine on other topics), who presented his findings at the American Finance Association’s annual meeting in early January. 
(The slides are on his MIT Web site.) 
Acemoglu breaks down the Republican narrative into three distinct questions. 
First, is there evidence that US politicians respond to lower-income voters’ preferences or desires? 
The evidence on this point is not as definitive as one might like, but what we have – for example, from the work of Princeton University’s Larry Bartels – suggests that over the past 50 years, virtually the entire US political elite has stopped sharing the preferences of low- or middle-income voters. 
The views of office holders have moved much closer to those commonly found atop the income distribution. 
There are various theories regarding why this shift occurred. 
In our book 13 Bankers, James Kwak and I emphasized a combination of the rising role of campaign contributions, the revolving door between Wall Street and Washington, and, most of all, an ideological shift towards the view that finance is good, more finance is better, and unfettered finance is best. 
There is a clear corollary: the voices and interests of relatively poor people count for little in American politics. 
Acemoglu’s assessment of recent research on lobbying is that parts of the private sector wanted financial rules to be relaxed – and worked hard and spent heavily to get this outcome. 
The impetus for a big subprime market came from within the private sector: “innovation” by giant mortgage lenders like Countrywide, Ameriquest, and many others, backed by the big investment banks. 
And, to be blunt, it was some of Wall Street’s biggest players, not overleveraged homeowners, who received generous government bailouts in the aftermath of the crisis. 
Acemoglu next asks whether there is evidence that the income distribution in the US worsened in the late 1990’s, leading politicians to respond by loosening the reins on lending to people who were “falling behind”? 
Income in the US has, in fact, become much more unequal over the past 40 years, but the timing doesn’t fit this story at all. 
For example, from work that Acemoglu has done with David Autor (also at MIT), we know that incomes for the top 10% moved up sharply during the 1980’s. 
Weekly earnings grew slowly for the bottom 50% and the bottom 10% at the time, but the lower end of the income distribution actually did relatively well in the second half of the 1990’s. 
So no one was struggling more than they had been in the run-up to the subprime madness, which came in the early 2000’s. 
Using data from Thomas Piketty and Emmanuel Saez, Acemoglu also points out that the dynamics of the wage distribution for the top 1% of US income earners look different. 
As Thomas Philippon and Ariell Reshef have suggested, this group’s sharp increase in earning power appears more related to deregulation of finance (and perhaps other sectors). 
In other words, the big winners from “financial innovation” of all kinds over the past three decades have not been the poor (or even the middle class), but the rich – people already highly paid. 
Finally, Acemoglu examines the role of federal government support for housing. 
To be sure, the US has long provided subsidies to owner-occupied housing – mostly through the tax deduction for mortgage interest. 
But nothing about this subsidy explains the timing of the boom in housing and outlandish mortgage lending. 
The FCIC Republicans point the finger firmly at Fannie Mae, Freddie Mac, and other government-sponsored enterprises that supported housing loans by providing guarantees of various kinds. 
They are right that Fannie and Freddie were “too big to fail,” which enabled them to borrow more cheaply and take on more risk – with too little equity funding to back up their exposure. 
But, while Fannie and Freddie jumped into dubious mortgages (particularly those known as Alt-A) and did some work with subprime lenders, this was relatively small stuff and late in the cycle (e.g., 2004-2005). 
The main impetus for the boom came from the entire machinery of “private label” securitization, which was just that: private. 
In fact, as Acemoglu points out, the powerful private-sector players consistently tried to marginalize Fannie and Freddie and exclude them from rapidly expanding market segments. 
The FCIC Republicans are right to place the government at the center of what went wrong. 
But this was not a case of over-regulating and over-reaching. 
On the contrary, 30 years of financial deregulation, made possible by capturing the hearts and minds of regulators, and of politicians on both sides of the aisle, gave a narrow private-sector elite – mostly on Wall Street – almost all the upside of the housing boom. 
The downside was shoved onto the rest of society, particularly the relatively uneducated and underpaid, who now have lost their houses, their jobs, their hopes for their children, or all of the above. 
These people did not cause the crisis. 

Digital Dreams 
A few years ago, a local Internet entrepreneur was arrested in Ghana, her employees jailed and her computer equipment confiscated. 
Her crime? 
Providing consumers with a way to make low-cost telephone calls over the Internet. 
That businesswoman's brush with the law typifies the main reason-aside from low incomes-that bridging the so-called "digital divide" between rich and poor countries is so difficult. 
It's not a lack of equipment or of local knowledge. 
No, a large part of the divide is a direct result of domestic policies that suppress Internet and technology use. 
While we shouldn't exaggerate the Internet's benefits, it can reduce business costs, increase access to information, and create opportunities. 
As a result, developing countries face a stark choice: take advantage of new technologies to stimulate economic growth and enhance productivity or fall even further behind as businesses and consumers in rich countries increasingly embrace digital advances. 
The threats and opportunities presented by new technologies for developing countries are widely discussed. 
But the ways governments in developing countries exacerbate the divide through their own regulatory policies are much less well understood. 
Some governments are afraid to allow their citizens easy access to information. 
Other governments want to protect the profits of favored companies. 
Either way, the result can be an environment hostile to people and businesses wishing to use new technologies. 
Without technology-friendly regulations and public policies, no amount of donations or technical training will make much of a difference. 
Consider the telecommunications industry in developing countries more generally. 
Through the 1980's, massive loans, grants, and "technical assistance" to state-owned monopoly telecom providers did almost nothing to increase the number of people with telephones in poor countries. 
For example, nearly $200 million provided by the World Bank and other donors to Ghana for telecommunications development in a 1988 development project had almost no measurable impact. 
According to the International Telecommunications Union, when the project began less than 0.3% of Ghana's population had a telephone. 
Four years later, that figure had not budged. 
In 1996, however, the government opened the market to competition. By last year, the share of Ghana's population with telephones had increased almost six times. 
The same story is true in poor countries around the world: telephone penetration remained stubbornly stagnant in developing nations until they allowed competitive entry-primarily in the form of mobile telephony-in the 1990's. 
Telephone use has soared in poor countries as a result. 
Regulatory policies have often been unfriendly to digital development and innovation, even where traditional telecommunications have been liberalized. 
In addition to capricious laws such as those criminalizing Internet telephony, many poor countries strictly control the number of Internet Service Providers (ISPs) that can operate. 
A recent survey of telecommunications regulatory agencies conducted by The World Bank found that 23 of the 38 poor countries that responded require ISPs to obtain formal regulatory approval before they are allowed to operate. 
Others regulate the prices ISPs charge customers. 
Countries that regulate entry by new ISPs in this way have fewer Internet users per capita, regardless of national income and general development of the telecommunications network. 
Likewise, consumers in poor countries that regulate ISP prices pay more for Internet access than consumers in countries that don't. 
Regulation, per se, is not the problem. Indeed, creating a regulatory agency is often a crucial component of successful telecommunications reforms, which typically start by privatizing the state-owned monopoly telecom company. 
The biggest improvements for consumers, though, come not from privatization, but from competition. 
A sound regulatory framework and effective enforcement are frequently necessary for introducing competition, as well as to protect investors and consumers in the presence of a newly-privatized firm that might otherwise be able to use its substantial market power to stifle and prevent competition. 
But governments in developing countries are often accustomed to controlling all aspects of their economies and tend not to want regulators to promote competition. 
Thus, even when regulatory agencies are crucial to encouraging competition in telecommunications, regulators are often given control over areas where there is no particular reason for government oversight. 
It is irrelevant whether Internet regulations that fail to promote competition and protect consumers are passed by governments afraid of freely flowing information or, as in the case of the jailed entrepreneur, in order to protect established companies. The result is the same: worse access to new technology, higher prices for consumers, and a chilling effect on innovation and local entrepreneurship. 
The bottom line is that regulatory policies in developing countries, particularly countries in Africa, often bear much of the responsibility for low Internet penetration and slow adoption of technology. 
Institutions matter at least as much as equipment if developing countries hope to join the global digital economy in any meaningful way. 
A regulatory framework friendly to entry by ISPs and other companies relevant to the technological infrastructure will do a lot more to bring developing countries into the 21st century than donations ever will. 


Why Build Financially Inclusive Economies? 
SEATTLE – The theme of this week’s G20 summit in Hamburg, Germany, is “shaping an interconnected world,” and when leaders get down to business, many of the highest-profile topics – climate change, counter-terrorism, trade – will take center stage. 
But the attention received by a less well-known agenda item will be no less critical to ensuring global prosperity: digital financial inclusion. 
Today, some two billion adults still lack access to even the most basic financial services. 
Digital financial inclusion is about broadening access to the formal economy by making electronic financial tools – like debit accounts that people can access on their mobile phones – affordable and available on a large scale. 
When the poor start using these services, two things happen. 
First, they manage money more effectively – with new ways to save, make payments, access credit, or obtain insurance. 
Second, they spend less time taking care of simple financial transactions and more on productive work or running a small business of their own. 
Moreover, additional earnings and savings boost poor people’s resilience against financial shocks resulting from, say, an unexpected medical expense or a seasonal crop failure. 
There is no shortage of evidence for the transformative effect of digital financial inclusion on economies. 
In Kenya, for example, “mobile money,” which allows users to transfer funds by text message, has helped an estimated 194,000 households escape extreme poverty. 
The breakthrough there was driven by changes in savings behavior and greater occupational choice, especially for women. 
As more countries experience gains like these, the prospects for lasting economic growth improve dramatically. 
One recent study projected that broadening access to digital finance tools could increase developing countries’ GDP by an estimated $3.7 trillion by 2025. 
But, in order to capitalize on the promise of greater financial inclusion, effective policies are needed at the national level. 
Last year, the G20 published “High-Level Principles for Digital Financial Inclusion,” which focuses on eight of the most successful strategies adopted by national governments around the world. 
A new G20 report published this spring probes those strategies further, and shows how to turn principles into action. 
China has been a leader in this regard, demonstrating how to strike a balance between innovation and risk. 
When online payment services, like Alibaba’s Alipay, first emerged, regulators were faced with an entirely new category of financial provider. 
Rather than impose a battery of rules up front, they watched and learned to see what types of regulations were needed. 
This gave providers a chance to find their footing and evolve. 
That approach helped Alipay to become the world’s largest online payment platform. 
Regulatory innovations elsewhere are solving another key challenge: the lack of personal identification for new account holders. 
This is a common problem in many developing countries, and has prevented hundreds of millions of people from signing up for financial services. 
To overcome this hurdle, Tanzania and Mexico implemented systems that require nothing more than a phone number to sign up for the most basic accounts. 
Programs in both countries have been successful; in Mexico, for example, more than nine million new accounts were opened in the first two years. 
India, meanwhile, is launching a massive digital identification program that collects fingerprints and other biometric data. 
More than one billion digital profiles have been created since the program began six years ago; today, more than one-third of those profiles are linked to bank accounts. 
Yet the most recent G20 report also highlights some challenges. 
For example, “interoperability” – the ability of customers to transact with one another even if they are using different platforms – is the norm in only a few markets today. 
Government action to address this would help increase customer convenience and lower operating costs for providers. 
Users with little or no experience navigating online payment systems would also benefit from the adoption of policies that improve financial literacy. 
Overall, the G20 reports make clear that digital financial inclusion is a powerful tool for tackling poverty. 
But wealthier countries can benefit as well, because digital financial inclusion, when rolled out well, increases consumer activity and trade. 
The G20, under China’s presidency last year, made improving access to digital financial services a global priority, and it will remain so under Germany’s tenure. 
This focus will help improve access to the global economy for the billions who need it most — especially the poor, the elderly, and women in developing countries. 
The world is getting better at understanding the mechanics of financial inclusion, and the ways that digital technology can accelerate it. 
This is great news for the unbanked. 
But placing the topic on a summit agenda is not enough. 
To keep the innovation going, global challenges need localized solutions. 
As leaders in China, Kenya, Mexico, and many other countries have already discovered, an economy that includes everyone benefits all. 

Harnessing the Digital Revolution for Sustainable Development 
JOHANNESBURG/NEW YORK – Financial digitalization – the digital revolution’s system-level transformation of the entire financial ecosystem – could catalyze global efforts to finance sustainable development. 
According to the McKinsey Global Institute, the expanded use of financial technology could drive growth across developing countries by up to $3.7 trillion by 2025, thanks mainly to increased productivity gains and broader financial inclusion. 
But if the promises of digitalization are to be fulfilled, the world will need to align financing and investment strategies more tightly to sustainable development outcomes. 
Last month, United Nations Secretary-General António Guterres convened a task force on digital financing to tackle this complex challenge. 
We are honored to serve as co-chairs for this global effort. 
For obvious reasons, financing is key to achieving the Sustainable Development Goals (SDGs) and meeting the emissions targets set by the 2015 Paris climate agreement. 
But although global savings are more than adequate to fuel the transition to sustainable development, the global financial system has so far failed to effectively intermediate supply and demand. 
The modest success that some countries have achieved in financing sustainable development has not been commensurate with the need. 
Many factors can influence sustainable development outcomes. 
For example, the global financial and economic crises that began in 2008 – and the subsequent responses by regulators and policymakers – have impacted economic growth, job creation, and income equality. 
Ventures like China’s Belt and Road Initiative, likewise, can unlock fresh funds for infrastructure investment. 
Any number of national and international policies can determine whether financing delivers, or diverts us from, sustainable development. 
But it is digitalization that could make the biggest long-term difference by harnessing the power of new business models driven by technologies including mobile connectivity, artificial intelligence, big data, blockchain, and the Internet of Things. 
That immense potential, however, is not guaranteed. 
Ultimately, the impact of digitalization on sustainable development will depend on whether the advent of more and cheaper data, together with faster analytics, results in financing decisions that take greater account of today’s social and environmental costs. 
Fintech can place citizens center stage in delivering good development outcomes. 
Kenya’s digital revolution has helped poor households gain access to everything from solar energy to government bond markets. 
Crowdfunding platforms like the United Kingdom’s Abundance, Germany’s EcoCrowd, and Japan’s NPO Bank are unlocking responsible, sustainable lending solutions. 
In China, Ant Financial’s Ant Forest platform has helped more than 300 million people reduce their ecological footprint. 
Bicycle-sharing services use app-based fintech payment solutions to make their low-carbon, healthier transportation option available to millions of people in cities all over the world. 
In short, there are already tantalizing hints of the power of the digital revolution in advancing finance for sustainability. 
Changing how people bank and invest, and democratizing access to the financial system, is essential to spurring development more broadly. 
According to the UN Capital Development Fund, financial inclusion for the unbanked and underserved is a direct enabler for at least eight of the SDGs. 
The challenge now is to think and act systemically: to extrapolate from retail-level examples to consider how digitalization can align the financial system to sustainable development; how investors identify, analyze, and mitigate risk; how capital markets move; and how policymakers and regulators approach their work. 
The problem is that most solutions are fragmented and narrowly focused, while issues that pose an existential threat to humanity – like climate change – are largely external to most financing decisions. 
Domestic savings are not being channeled to fund sustainable infrastructure. 
Illicit financial flows continue to drain development resources. 
Sustainable financing for biodiversity remains virtually ignored by the fintech revolution. 
And even financial inclusion – where fintech has had the biggest development impact to date – has a long way to go in reducing poverty and inequality. 
These are just a few of the challenges our task force will study. 
Our membership includes tech entrepreneurs, bank CEOs, civil society leaders, international standard-setters, capital markets experts, central bank governors, finance and economic ministers, and heads of UN agencies. 
Throughout 2019, we will work closely with established and emerging leaders to analyze the issues, identify opportunities, and make recommendations to ensure that the transformations being wrought by financial digitalization will be ones that ultimately benefit the planet and its people. 
We begin our work in January and aim to present our initial set of findings in September 2019. 
As Secretary-General Guterres said last month when he announced the launch of the task force, digital technology “can be a game changer” in delivering progress on the SDGs. 
With leadership and policy guidance, the digitalization of financing can open up roles for empowered citizens to shape the future of the real economy. 
The focus now must be on seizing this disruptive opportunity to ensure that the finance system fulfills its potential to support inclusive, sustainable development. 

Adapting to the New Globalization 
BERKELEY – Around the world, countries are rethinking the terms of engagement in global trade. 
This is not all bad; in fact, acknowledgement of globalization’s disruptive effects on millions of advanced-economy workers is long overdue. 
But new trade policies must be based on a clear-eyed understanding of how globalization is evolving, not on a backward-looking vision based on the last 30 years. 
Globalization has done the world a lot of good. 
Research from the McKinsey Global Institute shows that, thanks to global flows of goods, services, finance, data, and people, world GDP is more than 10% higher – some $7.8 trillion in 2014 alone – than it would have been had economies remained closed. 
More interconnected countries capture the largest share of this added value. 
For example, the United States, which ranks third among 195 countries on MGI’s Connectedness Index, has done rather well. 
Emerging-market economies have also reaped major gains, using export-oriented industrialization as a springboard for rapid growth. 
Yet, even as globalization has narrowed inequality among countries, it has aggravated income inequality within them. 
From 1998 to 2008, the middle class in advanced economies experienced no income growth, while incomes soared by nearly 70% for those at the top of the global income distribution. 
Top earners in the US, accounting for half of the global top 1%, reaped a significant share of globalization’s benefits. 
To be sure, this isn’t all, or even mostly, a result of globalization. 
The main culprit is technological change that automates routine manual and cognitive tasks, while increasing demand (and wages) for highly skilled workers. 
But import competition and labor arbitrage from emerging economies have also played a role. 
Perhaps more important, they have proved more salient targets of voters’ fear and resentment. 
Indeed, in the industries and regions hit hardest by import competition, years of simmering discontent have now boiled over, fueling support for populists promising to roll back globalization. 
But, as the advanced economies reformulate trade policy, it is critical that they understand that globalization was already undergoing a major structural transformation. 
Since the global financial crisis, cross-border capital flows have plummeted, with banks pulling back in response to new regulation. 
From 1990 to 2007, global trade grew twice as fast as global GDP; since 2010, GDP growth has outpaced that of trade. 
Both cyclical and secular forces are behind the trade slowdown. 
Investment has been anemic for years. 
China’s growth has slowed – a secular trend that is unlikely to be reversed. 
And the expansion of global supply chains seems to have reached the frontier of efficiency. 
In short, slower global trade is likely to be the new normal. 
None of this is to say that globalization is in retreat. 
Rather, it is becoming a more digital phenomenon. 
Just 15 years ago, cross-border digital flows were almost non-existent; today, they have a larger impact on global economic growth than traditional flows of traded goods. 
The volume of cross-border data flows has soared 45-fold since 2005, and is expected to grow another nine-fold over the next five years. 
Users worldwide can stream Beyoncé’s latest single immediately upon its release. 
A manufacturer in South Carolina can use the e-commerce platform Alibaba to buy components from a Chinese supplier. 
A young girl in Kenya can learn math through Khan Academy. 
Eighty percent of students taking Coursera’s online courses live outside the US. 
This new form of digital globalization is more knowledge-intensive than capital- or labor-intensive. 
It requires broadband connections, rather than shipping lanes. 
It reduces barriers to entry, strengthens competition, and changes the rules governing how business is done. 
Consider export activities, which once seemed out of reach for small businesses lacking the resources to scout out international prospects or navigate cross-border paperwork. 
Now, digital platforms like Alibaba and Amazon enable even small-scale entrepreneurs to connect directly with customers and suppliers around the world, transforming themselves into “micro multinationals.” 
Facebook estimates that 50 million small businesses are on its platform, up from 25 million in 2013; 30% of these companies’ Facebook fans, on average, are from other countries. 
While digital technologies open the door for small companies and individuals to participate in the global economy, there is no guarantee that sufficient numbers will walk through it. 
That will require policies that help them take advantage of new global market opportunities. 
The US has pulled out of the Trans-Pacific Partnership (TPP) deal, but many of the issues it addressed still require global rules. 
Data localization requirements and protectionism are on the rise, and data privacy and cyber-security are pressing concerns. 
In the absence of the TPP, it will be critical to find some other vehicle for establishing new principles for digital trade in the twenty-first century, with a greater emphasis on intellectual property protection, cross-border data flows, and trade in services. 
At the same time, advanced economies must help workers acquire the skills needed to fill high-quality jobs in the digital economy. 
Lifelong learning cannot just be a slogan; it must become a reality. 
Mid-career retraining must be made available not only to those who have lost their jobs to foreign competition, but also to those facing disruption from the continuing march of automation. 
Training programs should be able to impart new skills in a matter of months, not years, and they should be complemented by programs that support workers’ incomes during retraining, and that help them relocate for more productive work. 
Most of the advanced economies, including the US, have not adequately responded to the needs of the communities and individuals left behind by globalization. 
Addressing these needs is now of paramount importance. 
Effective responses will require policies that help people adapt to the present and take advantage of future opportunities in the next phase of digital globalization. 

The Global Promise of Digital Health 
BASEL – In his recent best-selling book Factfulness, the late international health expert Hans Rosling shows that horrors such as natural disasters, oil spills, and battlefield deaths are trending steeply downward, and that harvest yields, literacy rates, and other development indicators are on the rise. 
Taking a fact- and evidence-based approach, Rosling makes the case for optimism in what seems like an increasingly chaotic world. 
There is also cause for optimism in the realm of global health, and for a simple reason. 
Just as the Industrial Revolution produced far-reaching advances in medicine, the ongoing digital revolution will allow us to improve health care in ways that were hard to imagine just a few years ago. 
Almost every country in the world has committed to the United Nations Sustainable Development Goals (SDGs), an international agenda for improving the wellbeing of humanity and the planet that sustains it. 
In terms of global health, the SDGs aim to eliminate preventable child deaths and major epidemics, and to achieve universal health coverage. 
Though highly ambitious, the SDGs are eminently achievable. 
We need only seize the opportunities offered by the Internet, mobile devices, and other digital technologies, which are already expanding health-care access and improving quality of care in hard-to-reach communities. 
Consider India. 
Earlier this year, Prime Minister Narendra Modi’s government introduced “Modicare,” the world’s largest government-funded health insurance program, which will cover up to 40% of India’s 1.3 billion citizens. 
The government aims to halt the rise of noncommunicable diseases (NCDs) such as diabetes and cancer, while preventing poverty-inducing health-care expenditures at the household level. 
In a country the size of India, the program relies heavily on technology to link people with health-care services, to store and analyze patient data, and to prevent catastrophes that could arise from mixing up patients’ health records. 
Digital technology can also ensure that patients in remote areas receive care from highly skilled providers. 
In the Novartis Foundation’s telemedicine program in Ghana, 70% of provider-patient consultations are handled by phone, thus sparing patients from arduous journeys to primary-care centers. 
Digital technologies are also revolutionizing health education. 
In isolated regions, health workers often travel on foot for hours to receive training, and many inevitably end up without the training they need. 
But now health-care providers can receive training from anywhere by way of smartphones and tablets. 
One of our partners, Last Mile Health, has created an entire digital platform specifically tailored for community health education. 
These and other efforts are decentralizing health-care provision and training, and empowering local practitioners – all of which is essential for achieving universal health coverage. 
Needless to say, digital technologies will also be driving the next wave of life-changing therapies. 
Social-networking technologies have already made recruitment for clinical trials more efficient, and artificial intelligence and predictive analytics have allowed for trials to be conducted much faster. 
Across the digital landscape, however, it is broadband that will deliver some of the most significant improvements of all. 
In low-income countries, high-speed Internet can be a game-changer at every level of the health system. 
Building broadband infrastructure in resource-poor countries is a complex challenge, though. 
Too often, digital-health services are fragmented among government agencies, businesses, and nongovernmental organizations. 
Many efforts are duplicated as a result, and chances for collaboration are squandered. 
Uganda is a cautionary tale: In 2012, so many conflicting digital health projects were in play that the government was forced to declare a temporary moratorium on all of them. 
The Broadband Commission Working Group on Digital Health, which is co-chaired by the Novartis Foundation, is focusing on how technology can improve care for NCDs. 
During the United Nations General Assembly in September, the Commission published The Promise of Digital Health: Addressing Non-communicable Diseases to Accelerate Universal Health Coverage in LMICs. 
The goal is to offer pragmatic advice to policymakers and other stakeholders to help them reimagine the way digital health can address NCDs. 
Clearly, governments must do more to integrate digital-health efforts across ministries, and to coordinate with private- and nonprofit-sector stakeholders when possible. 
Such collaboration is already happening in places like the Philippines, where a National eHealth Steering Committee oversees a suite of digital-health initiatives, thus creating an ideal environment for digital innovation. 
Still, digital technology is not a panacea, so we must choose our priorities wisely. 
The first priority should be on outcomes. 
In many countries, health providers are rewarded for tasks they perform, rather than for end results. 
Outcome-oriented digital technologies can ensure that this changes. 
A second priority is to improve data literacy. 
Digital technologies allow us to capture and mine data for insights at every level – from individual biology to global patterns of disease. 
Training curricula for health-care providers and administrators should thus include instruction in statistics, data management, and analytics so that providers can keep up with digital advances. 
A final priority is to bear in mind that digital technology is valuable only if it is being used to improve how systems function. 
Physicians should not be spending more time entering data than they do caring for patients. 
Fortunately, when applied properly, digital technology can help automate the process so that providers are freed up to do what they do best. 
It has been three years since the world ratified the SDGs, including near-term objectives to achieve universal health coverage and universal, affordable Internet access. 
Recent progress shows that we should be optimistic about achieving these targets. 

Securing the Digital Revolution 
BRUSSELS – Pity the person who invests heavily in canals right before the railways start operating. 
You could understand, for example, why the sponsor of the Bridgewater Canal (perhaps England’s first) would vehemently oppose the planned Liverpool and Manchester Railway. 
But the march of technology could not be stopped – nor could the new challenges it raised. 
The same is true of today’s digital innovations. 
When the L&M Railway eventually opened in 1830, it was a revolutionary success, kickstarting the age of steam and changing the world in ways that could not have been foreseen. 
As the railway age unfolded, with metal tracks spreading across the industrializing world like veins on a leaf, a new level of connectivity was achieved, which criminals were quick to exploit. 
Indeed, an entire police force eventually had to be created to manage railway security. 
With the world on the brink of another revolution in connectivity, especially in terms of infrastructure that will fundamentally change the way we connect with each other, the lessons of this experience should not be ignored. 
And the coming phase of the digital age will affect far more than just transportation. 
We are not talking about the Internet of Things, but about the Internet of Everything: a more decentralized digital future, connecting people, data, and objects like never before. 
In terms of security, we need to ensure we aren’t sitting, as it were, on a slow-moving canal barge while the 8:15 to Manchester flashes past. 
We need to take a clear-eyed look at the strategic vulnerabilities that these technologies will bring, and anticipate how malicious actors could attempt to exploit new digital infrastructure for their own gain or to deploy it as a weapon. 
Some challenges, such as the misuse of social media to spread disinformation – using, among others, cutting-edge tools like deepfake videos and artificial intelligence – are already clear. 
But, crucially, we are also talking in terms of the infrastructure itself. 
The fifth generation of mobile communication technology, 5G, poses a particular challenge. 
It will be the backbone of global connectivity, which raises strategic and security questions about issues like supply-chain security and provenance. 
How can we be sure that the components used in future generations of European technology – not only 5G – will be secure? 
Already, digital supply-chain security is far from airtight, reflected in recent reports of companies finding mysterious chips on their server motherboards, seemingly added at the time of manufacture. 
The British government has warned telecoms companies to consider their suppliers very carefully, while the United States has been looking to restrict some kinds of foreign direct investment in key technologies like semiconductors and robotics. 
To secure the digital-infrastructure supply chain, we need greater transparency regarding the provenance of technological components. 
Maintaining a diversity of suppliers is also vital. 
Furthermore, common standards and rules are needed to establish the trustworthiness of international partners. 
That is the basis of a recent proposal by French President Emmanuel Macron, described in the Paris Call for Trust and Security in Cyberspace. 
The Internet, according to Macron, has become a site of conflict, where malicious actors exploit the vulnerabilities of digital products and services. 
He proposes that Europe create an “Internet of Trust,” based on lawfulness and cooperation. 
I agree. 
Europeans should be able to continue enjoying their online lives secure in the knowledge that their fundamental values and rights, such as free speech, are protected. 
We need a strategy that balances our need to harness technological innovation in order to safeguard our economic future with the need to avoid creating massive security vulnerabilities in the process. 
And with the technology train already hurtling down the track, we must act fast to mitigate current risks and ensure that we are laying the groundwork needed to avoid future threats. 
In confronting this admittedly huge challenge, we need to avoid short-sighted responses, such as protectionism and other measures that stifle innovation. 
Instead, we must map the scale and extent of the risk, and decide what is truly strategic. 
For Europe, this means not just protecting supply chains, but also pursuing large-scale, coordinated investment in our own tech industries. 
The European Commission is uniquely well placed to drive this cross-sectoral work. 
It is not too late for Europe to safeguard its digital future. 
Even the owner of the Bridgewater Canal eventually saw the way the wind was blowing – and invested heavily in the rival railway. 

How IT Threatens Democracy 
MUNICH – The Internet and social media were once hailed for creating new opportunities to spread democracy and freedom. 
And Twitter, Facebook, and other social media did indeed play a key role in popular uprisings in Iran in 2009, in the Arab world in 2011, and in Ukraine in 2013-2014. 
Back then, the tweet did at times seem mightier than the sword. 
But authoritarian regimes soon began cracking down on Internet freedom. 
They feared the brave new digital world, because it was beyond the reach of their analogue security establishments. 
Their fears proved unfounded. 
In the event, most social media-enabled popular uprisings failed for want of effective leadership, and traditional political and military organizations retained the upper hand. 
In fact, these regimes have begun to wield social media for their own ends. 
We have all heard the allegations that Russia covertly used social media to influence electoral outcomes in Ukraine, France, Germany, and, most famously, in the United States. 
Facebook has estimated that Russian content on its network, including posts and paid ads, reached 126 million Americans, around 40% of the nation’s population. 
We should recall earlier accusations by Russia of the West’s role in fomenting the “color revolutions” in Ukraine and Georgia. 
The Internet and social media provide another battlefield, it seems, for the surreptitious manipulation of public opinion. 
If even the most technologically advanced countries cannot protect the integrity of the electoral process, one can imagine the challenges facing countries with less know-how. 
In other words, the threat is global. 
In the absence of facts and data, the mere possibility of manipulation fuels conspiracy theories and undermines faith in democracy and elections at a time when public trust is already low. 
Social media’s ideological “echo chambers” exacerbate people’s natural biases and diminish opportunities for healthy debate. 
This has real-world effects, because it fosters political polarization and erodes leaders’ capacity to forge compromises, the basis of democratic stability. 
Likewise, the hate speech, terrorist appeals, and racial and sexual harassment that have found a home on the Internet can lead to real-world violence. 
But social media are hardly the first communication revolution to challenge political systems. 
The printing press, radio, and television were all revolutionary in their day. 
And all were gradually regulated, even in the most liberal democracies. 
We must now consider how to submit social media to the same rules of transparency, accountability, and taxation as conventional media. 
In the US, a group of senators has introduced the “Honest Ads Act,” which would extend the rules that apply to print, radio, and television to social media. 
They hope it will become law before the 2018 midterm election. 
In Germany, a new law, the Netzwerkdurchsetzungsgesetz, requires social-media companies to remove hate speech and fake news within 24 hours or face fines of up to €50 million ($63 million). 
As useful as these measures may be, I am not sure that national laws will be adequate to regulate online political activity. 
Many poorer countries will not be able to put up such resistance, and enforcement will be difficult everywhere, because much of the data are stored and managed outside the regulating country. 
Whether or not new international norms are necessary, we should be careful that in seeking to curb the excesses, we do not jeopardize the fundamental right to freedom of expression. 
Indeed, open societies should not over-react, lest they undermine the very freedoms on which they base their legitimacy. 
But nor can we remain idle. 
A few major players, in Silicon Valley and elsewhere, hold our fate in their hands; but if we can get them on board, we can address the failings of the current system. 
In 2012, I convened the Global Commission on Elections, Democracy, and Security to identify and tackle the challenges to the integrity of elections and promote legitimate electoral processes. 
Only elections that the population generally accepts as fair and credible can lead to a peaceful and democratic rotation of leadership, conferring legitimacy on the winner and protecting the loser. 
Under the auspices of the Kofi Annan Foundation, I will now convene a new commission – this time, with the masterminds of social media and information technology, as well as political leaders – to help us address these crucial new issues. 
We will set out to find workable solutions that serve our democracies and safeguard the integrity of our elections, while harnessing the many opportunities new technologies have to offer. 
We will produce recommendations that will, we hope, reconcile the disruptive tensions created between technological advances and one of humanity’s greatest achievements: democracy. 
Technology does not stand still, and nor should democracy. 
We have to act fast, because digital advances could be just the start of a slippery slope leading to an Orwellian world controlled by Big Brother, where millions of sensors in our smartphones and other devices collect data and make us vulnerable to manipulation. 
Who should own all the data collected by our phones and watches? 
How should such data be used? 
Should its use by others require our consent? 
To whom are those using our data accountable? 
These are the big questions that will shape the future of freedom. 


Dignity or Decline? 
TOKYO – Kokka no Hinkaku, The Dignity of a State, is the title of a recent book by the Japanese mathematician Masahiko Fujiwara that has sold three million copies. 
Talk about the book in Japan is so fervid that the term “dignity” (hinkaku) has become a buzzword. 
That Japan’s dignity is now a central issue should surprise no one. 
For this is a moment when Japan must chart its course – either decline or dignity – as a “state” (kokka) in relation to its giant neighbor, China. 
The issue of relations with China crystallized in September, when the Japanese Coast Guard arrested the captain of a Chinese trawler after his ship hit two Japanese patrol boats near the Senkaku Islands, which are part of Japan and within its territorial waters. 
Tension between Japan and China – which claims the islands – immediately soared. 
For many years, Japanese governments have taken a “let-sleeping-dogs-lie” approach to territorial disputes over the islands, ignoring repeated provocations by China (and Taiwan). 
But that ended with the election of September 2009, which ushered in the pro-China administration of Prime Minister Yukio Hatoyama. 
Hatoyama was naïve enough to declare publicly his intention of turning the East China Sea into a Chinese-led “Sea of Fraternity.” 
He also earned the distrust of the United States, Japan’s most important ally, by advocating the relocation outside Japan of a US air base on Okinawa. 
Diplomatic realism was not restored after Hatoyama’s fall from power earlier this year. 
Instead, his successor, Naoto Kan, continues to believe that Japan can somehow opt out of history and a turbulent region. 
Speaking at the United Nations plenary meeting this September, Kan said that his government seeks to achieve a “society in which human suffering is reduced a minimum.” 
National security is treated as a low-grade issue. 
Meanwhile, China is following its own definition of “dignity,” which looks to almost everyone in Asia – other than Kan’s government – as a right to dominate. 
Indeed, China no longer even tries to hide its desire for hegemony in the Pacific. 
China appears to have seen the standoff over the Senkaku Islands as a test of wills – a test Kan’s government failed abysmally. 
In retaliation for Japan’s refusal to release the trawler captain, China hinted that it might recall its ambassador from Tokyo, suspended bilateral ministerial-level exchanges, and canceled a tour to Japan for about 10,000 Chinese. 
More ominously, the Chinese arrested four employees of Fujita, a Japanese construction company, on suspicion of espionage. 
The four were in China for a project commissioned by the Japanese government to dispose of chemical weapons abandoned by the Japanese military after World War II. 
Chinese officials also suggested the possibility of banning exports to Japan of rare-earth elements – raw materials crucial for many Japanese manufacturing processes – and appear to have done so informally. 
Inexperienced and diplomatically inept, Kan’s administration buckled, releasing the trawler captain early. 
His government then sought to pin the blame on the local prosecutor who had formally arrested the captain. 
This display of weak-kneed diplomacy appalled many Japanese, and popular support for Kan’s administration has plummeted. 
The de facto export ban on rare-earth elements – often referred to as “industrial vitamins” – struck a terrible blow to Japanese companies, which rely on China for 97% of their supply. 
Among a variety of rare-earth elements, neodymium and dysprosium are widely used as a magnetic material for motors in environmentally friendly vehicles and home appliances, while erbium is used as a dopant in optical fibers and cerium as an abrasive for polishing liquid crystal display (LCD) glass. 
The “rare-earth threat” is not confined to Japan, as China accounts for over 90% of the world’s production, roughly 120,000 tons. 
But this shouldn’t be a threat at all, because the world has ample reserves of these elements. 
Indeed, rare-earth elements are “rare” only in the sense that they are distributed in small quantities and must be extracted from ores, a time-consuming process. 
Rare-earth mines are found throughout the world. 
China dominates the global market simply because it has fairly abundant rare-earth ores close to the surface. 
Of course, China also has abundant cheap labor to process ore. 
Rare-earth ores in southern China – all except for those in Inner Mongolia – contain radioactive substances that pose significant threats to human health and the environment. 
Other countries might worry about the health risk to workers in rare-earth processing, but that does not appear to be true of China. 
In the face of aggressive price cutting by Chinese rare-earth producers, many mines in the US and elsewhere in the world were shut down over the years. 
Even before the trawler incident, China was trying to regulate rare-earths, defining them as a strategic resource. 
Chinese officials say that concern over the overexploitation and illicit export of rare earths prompted them to regulate the industry more closely. 
But this regulation, when combined with China’s aggressive pricing, suggests a desire to assert monopoly control, and the de facto ban of rare-earth exports to Japan looks like an effort to test the benefits of this looming monopoly. 
China’s move, however, put the rest of the world on alert. 
Many countries are now planning to develop their own or alternative sources of rare-earth elements, and to accelerate efforts to develop technologies that are free of them. 
But China has another motive for tightening the noose on rare-earth exports: it wants to force high-tech firms to operate in China, so that local companies can absorb their technologies. 
A senior official of a Chinese company has said that, even though rare-earth exports have been restricted, Japanese companies can secure their supply by launching operations in China. 
If there is a response to such blackmail that could preserve Japan’s dignity, the Kan government is unlikely to find it. 

A Dim Outlook for Trumponomics 
NEW YORK – Now that US President Donald Trump has been in office for six months, we can more confidently assess the prospects for the US economy and economic policymaking under his administration. 
And, like Trump’s presidency more generally, paradoxes abound. 
The main puzzle is the disconnect between the performance of financial markets and the real. 
While stock markets continue to reach new highs, the US economy grew at an average rate of just 2% in the first half of 2017 – slower growth than under President Barack Obama – and is not expected to perform much better for the rest of the year. 
Stock-market investors continue to hold out hope that Trump can push through policies to stimulate growth and increase corporate profits. 
Moreover, sluggish wage growth implies that inflation is not reaching the US Federal Reserve’s target rate, which means that the Fed will have to normalize interest rates more slowly than expected. 
Lower long-term interest rates and a weaker dollar are good news for US stock markets, and Trump’s pro-business agenda is still good for individual stocks in principle, even if the air has been let out of the so-called Trump reflation trade. 
And there is now less reason to worry that a massive fiscal-stimulus program will push up the dollar and force the Fed to raise rates. 
In view of the Trump administration’s political ineffectiveness, it is safe to assume that if there is any stimulus at all, it will be smaller than expected. 
The administration’s inability to execute on the economic-policy front is unlikely to change. 
Congressional Republicans’ attempts to replace the Affordable Care Act (Obamacare) have failed, not least because moderate Republicans refused to vote for a bill that would deprive some 20 million Americans of their health insurance. 
The Trump administration is now moving on to tax reform, which will be just as hard, if not harder, to enact. 
Earlier tax-reform proposals had anticipated savings from the repeal of Obamacare, and from a proposed “border adjustment tax” that has since been abandoned. 
That leaves congressional Republicans with little room for maneuver. 
Because the US Senate’s budget-reconciliation rules require all tax cuts to be revenue-neutral after ten years, Republicans will either have to cut tax rates by far less than they had originally intended, or settle for temporary and limited tax cuts that aren’t paid for. 
To benefit American workers and spur economic growth, tax reforms need to increase the burden on the rich, and provide relief to workers and the middle class. 
But Trump’s proposals would do the opposite: depending on which plan you look at, 80-90% of the benefits would go to the top 10% of the income distribution. 
More to the point, US corporations aren’t hoarding trillions of dollars in cash and refusing to make capital investments because the tax rate is too high, as Trump and congressional Republicans claim. 
Rather, firms are less inclined to invest because slow wage growth is depressing consumption, and thus overall economic growth. 
Beyond tax reform, Trump’s plan to stimulate short-term growth through $1 trillion in infrastructure spending is still not on the horizon. 
And, instead of direct government investment of that amount, the administration wants to provide modest tax incentives for the private sector to spearhead various projects. 
Unfortunately, it will take more than tax breaks to bring large infrastructure projects from start to finish, and “shovel-ready” projects are few and far between. 
On trade, there is good news and bad news. 
The good news is that the administration has not pursued radically protectionist policies, such as branding countries as currency manipulators, introducing across-the-board tariffs, or pushing for the border adjustment tax. 
The bad news is that Trump is sticking to his “buy American, hire American” credo, and his protectionist gestures will hurt growth more than they save jobs. 
He has already abandoned the Trans-Pacific Partnership and negotiations for the Transatlantic Trade and Investment Partnership with the European Union. 
He is renegotiating the North American Free Trade Agreement, and he may try to renegotiate other free-trade agreements, such as the bilateral deal with South Korea. 
And he could still start a trade war with China by introducing tariffs on steel and other products – especially now that China has been uncooperative in responding to North Korea’s escalating nuclear threat. 
Trump could also limit the US’s growth potential by restricting immigration. 
In addition to barring visitors from six predominantly Muslim countries, the administration is intent on restricting migration for high-skill workers, and is ramping up deportations of undocumented immigrants. 
This, along with the much-ballyhooed border wall, will cut future labor supply, and thus economic growth, especially as the American population continues to age and drop out of the labor force. 
Lastly, Trump’s deregulation agenda will not boost economic growth, and may actually weaken it over time. 
If financial regulations are loosened too much, the result could be another asset and credit bubble, and even another financial crisis and recession. 
Meanwhile, Trump’s decision to withdraw from the Paris climate agreement, combined with a rollback of environmental regulations, will lead to ecological degradation and slower growth in green-economy industries such as solar power. 
And weaker labor protections will further reduce workers’ bargaining power, thus holding down wage growth and overall consumption. 
It is little wonder that actual and potential growth is stuck at around 2%. 
Yes, inflation is low, and corporate profits and stock markets are soaring. 
But the gap between Wall Street and Main Street is widening. 
High market valuations that are fueled by liquidity and irrational exuberance do not reflect fundamental economic realities. 
An eventual market correction is inevitable. 
The only question is whom Trump will blame when it happens. 

Diplomacy 2.0 
FLORENCE – There is much talk in the air – especially in Britain and the United States – about reinventing diplomacy for the twenty-first century. 
Both US Secretary of State Hillary Clinton and the British Tories’ leader, David Cameron, have spoken recently of a new synthesis of defense, diplomacy, and development, noting that recent American and British foreign policy has placed too much emphasis on the first element at the expense of the latter two. 
Meanwhile, the European Union has established a new foreign-policy apparatus called the European External Action Service (EEAS), which is meant to represent the common interests of all 27 of the EU’s member states. 
The lines of authority between the new Euro-diplomats and existing national foreign ministries are still unclear; but the EEAS is, nonetheless, a fact. 
Similar plans for Asia and elsewhere remain largely on the drawing board; but the members of such organizations as the ASEAN Regional Forum, the African Union, and the Shanghai Cooperation Organization at least are talking more and more seriously about harmonizing policies on issues of common interest. 
Regionalism has moved to the foreground of global politics – except in the US, where the two are seen as antithetical. 
Clinton has described today’s major global challenge for her country as being the improvement of communication across borders and at all levels of society, evidently everywhere. 
To this end, her chief policy planner, the Princeton professor Anne-Marie Slaughter, has touted the US as the favored hub of a global network of people, institutions, and relationships. 
But, while America thinks in terms of networks, the rest of the world is busy connecting circuits. 
Will the twain ever meet? 
There is no reason why not. 
Both visions sound appealing and consistent with traditional tenets of international relations, particularly Thomas Jefferson’s desire for “peace, commerce, and honest friendship with all nations,” to which Clinton might add “individuals and groups within and among nations.” 
Neither individuals nor nations have identical interests, however. 
Clinton’s global network is already meeting roadblocks, particularly with China. 
She is finding out that the old ways of doing business – treaties, ambassadors, démarches, alliances, and the rest – may be useful after all. 
Ever since modern diplomacy was invented in Renaissance Italy, states have found it necessary to exchange envoys for the purpose of reaching (or breaking) agreements, whether on parchment or by video conference. 
This does not appear to have been overtaken by globalization. 
Yet we should not deny that technology has had an important effect almost everywhere. 
Just as the telegraph made it possible to eliminate weeks from the time it took to exchange messages overseas, and the airplane and telephone allowed leaders to interact directly with far greater frequency than ever before, today’s technologies will surely continue to alter the basic means of exchange, whether among nations, regions, or supra-regional entities. 
We should take care, however, not to confuse the means and ends of policy. 
Better and faster communication is not a valuable end in itself, at least for diplomats. 
We need only recall the chaotic atmosphere during the recent United Nations climate conference in Copenhagen to fear the kind of disordered and disappointing result that can arise from the desire of everyone to be in the room and to be applauded everywhere at once – and to have every means of doing so. 
If such “global summits” are going to be the principal means of governing in the twenty-first century, we have real cause for concern. 
Fortunately, a counter-trend in Copenhagen is also worth noting. 
Like-minded states, often neighbors, grouped together to pool their leverage: this was notable among some of the smaller and poorer states with the most at stake in addressing climate change. 
With care, such groupings may become the building blocks, rather than the spoilers, of global consensus. 
The world has seen such a synthesis before. 
When, after the First World War, President Woodrow Wilson proclaimed the advent of the so-called New Diplomacy, whereby secrecy and the balance of power would be replaced by open covenants and collective security, many people regarded such things as the dreams of an idealist-preacher. 
Machtpolitik is indeed alive and well in many parts of the world today. 
Yet nobody can deny that the ways of diplomacy in 2010 are vastly different from – and arguably superior to – those in 1910, with better results all around. 
This is not simply due to some iron law of progress. 
Many valuable elements of the so-called Old Diplomacy persisted: the alignment of foreign policies with national and regional interests, the preference for the possible over the merely desirable, and the cultivation of what are today called “confidence-building measures,” that is, methods for establishing trust among small groups of professional negotiators, and between them and the people they represent. 
Those who assume that the obsolescent diplomacy of the twentieth century – as it is described by today’s global network enthusiasts – was conducted entirely behind closed doors by elites have got their history wrong. 
We need only read the contemporary press accounts of any major international conference during this period to realize how important various pressure groups – not only the press, but also “peace activists,” bankers, industrialists, labor unions, religious organizations, and countless others – were in nearly all of these instances. 
Indeed, diplomats have long been some of the most proficient social networkers and connectors. And they have long confronted multiple agendas and constituencies, from those clamoring to influence the League of Nations’ disarmament conferences of the 1930’s to those wielding the megaphones in Copenhagen in December. 
The challenge today is to channel such passions into results. 
This can be done only by the tried and tested ways of matching advocacy with professionalism, and by nourishing a new generation of international public servants called diplomats. 
The world needs them and their diplomatic baggage more than ever. 

Diplomacy’s Darkest Hours 
MADRID – Diplomacy is not having its finest hour nowadays. 
Quite the contrary: resistance to diplomatic solutions is a common thread in most of today’s major conflicts. 
Afghanistan will continue to bleed until the allies finally recognize that only by engaging the Taliban do they stand a chance of ending the war. 
But the West will also have to recognize that conflicts with a potent cultural and religious component are simply not susceptible to a military solution – a realization that points toward ending the ostracism of political Islam – Hamas and Hezbollah, for example. 
Meanwhile, Iran’s unstoppable rush to develop nuclear weapons could prove to be a monument to the international community’s failure to stem the atomic tide in the region. 
The Israeli-Palestinian conflict continues to be the diplomatic charade that it has been for many years now. 
And nothing has attenuated the tensions between Israel and both Syria and Lebanon. 
History teaches that diplomacy all too frequently produces results only when backed by overwhelming power. 
Such was the existentialist worldview of US President and Nobel Peace Prize laureate Theodore Roosevelt, a major advocate of American expansionism: “A just war is, in the long run, far better for a man’s soul than the most prosperous peace.” 
A century later, another American president, Barack Obama, immersed in two hopeless wars in the Middle East, received his Nobel Peace Prize with an apology for “just wars.” 
Indeed, the list of Nobel Peace Prize laureates is not lacking in men – Roosevelt, George Marshall, Menachem Begin, Anwar Sadat, Yitzhak Rabin, Yasser Arafat, and Henry Kissinger – who either ended up recognizing the limits of military power or were simply following Clausewitz’s dictum that war is the continuation of politics by other means. 
Conflicts start to be ripe for diplomatic solutions only when the parties get trapped in an unbearably painful mutual deadlock. 
Without such a deadlock, neither United Nations resolutions, nor premature peace initiatives can cut short the dynamic of war. 
It is only then that formulas for power-sharing – such as those in Northern Ireland, Lebanon, Guatemala, or Iraq – emerge as a realistic alternative. 
It was NATO’s robust military intervention, not European diplomacy, that created the conditions for the end of genocide and ethnic cleansing in the former Yugoslavia. 
Martti Ahtisaari fully deserved his Nobel Peace Prize for articulating a diplomatic solution to Kosovo’s drive for independence. 
But this could not be achieved before Serbia was militarily humbled. 
However encouraging, Czechoslovakia’s peaceful “velvet divorce” into two states has not been the norm in Europe or elsewhere. 
If it were not for the 1973 Yom Kippur War, Israel and Egypt would never have reached a peace settlement. 
And it was the first Gulf War and Palestinian Intifadah that created the conditions for the 1991 Madrid Peace Conference and the subsequent Oslo Accords. 
After Rabin’s assassination, the notion has been gaining ground that any Israeli-Palestinian accord would be the “peace of the exhausted,” not Rabin’s “peace of the brave.” 
But the Israeli-Palestinian conflict is nonetheless sui generis: either the parties’ six-decade mutual deadlock is not unbearable enough, or they prefer to pay the price of conflict rather than compromise their national ethos. 
Such is now the loss of hope in a negotiated solution that those who advocate an internationally imposed solution seem to be gaining ground. 
Internal conflicts that end not with mutual deadlock but with an overwhelming victory by one of the parties hardly ever produce diplomatic solutions. 
Long years of mediation and endless peace proposals in the Sri Lanka conflict failed to end the war and the devastation of entire Tamil communities. 
“Peace” came about only with the total and unconditional defeat of the Tamil Tiger rebels. 
Likewise, the failure of Chechnya, Biafra, Tibet, or the Kurdish areas of the Middle East to reach independent statehood is attributable entirely to their military impotence. 
By contrast, Eritrea, East Timor, and parts of the former Yugoslavia achieved independence by exhausting their occupiers and/or their internal rivals. 
There are few cases where diplomacy actually succeeded in preventing war. 
Almost invariably, the greatest diplomatic successes have followed, rather than preceded, bloodshed. 
In 1919, John Maynard Keynes told the statesmen of post-World War I Europe to abandon their vindictive patriotism for the sake of building a future of peace based on European integration. 
Alas, it took another world war to convince European leaders of the validity of Keynes’s approach. 
The European Union – an empire built through diplomacy and consensus – emerged out of the ashes. 
One should, however, resist falling back on fatalism. 
Colombia’s new president, Juan Manuel Santos, showed genuine courage in cutting short a march to war with Venezuela and calming down the entire Bolivarian axis (Venezuela, Ecuador, and Bolivia) by reviving the region’s diplomatic channels. 
His was a truly revolutionary shift from the politics of saber-rattling to the hard work of establishing regional peace. 
To be sure, much hope still lies in popular diplomacy, in civil society mobilizing for peace. 
Frequently, governments need to be coaxed into accepting the inevitability of compromise, thanks to pressure from below. 
Civil society’s support for bridging the psychological gap between Catholics and Protestants in Northern Ireland helped pave the way to peace. 
And Israel’s withdrawal from Lebanon in May 2000, after 18 years of useless military occupation, largely reflected the immense impact of the “Four Mothers’ Movement” on Israel’s government. 
But popular diplomacy alone never forces political leaders to end wars and make peace. 
Official diplomacy begins where the battlefield ends. 
Unfortunately, in today’s most consequential militarized conflicts, that boundary is still nowhere in sight. 

Direct Democracy Strikes Again 
NEW YORK – Once again, a referendum has turned a country upside down. 
In June, British voters decided to take their country out of the European Union; now, a narrow majority of Colombians have rejected a peace agreement with the Revolutionary Armed Forces of Colombia (FARC). 
Colombians have taken a leap in the dark – and perhaps a leap back into the violent abyss of never-ending war. 
Populists everywhere are no doubt celebrating the outcome as another clear rebuke to self-interested elites who have “rigged” their governments against the people. 
And the people, they say, should have a direct voice in the important decisions affecting their lives – apparently even decisions about war and peace. 
But if there really is a “democracy deficit,” as populists claim, the increased use of referendums is no cure for it. 
On the contrary, referendums tend to make matters far worse, and can undermine democracy itself. 
It’s an old story: Napoleon III, for example, used such a vote to reconstitute his elected presidency into the imperial title his uncle, Napoleon Bonaparte, had held. 
After the rise of fascism and during the Cold War, the world’s democracies seemed to recognize that referendums and plebiscites are the handmaidens of autocrats seeking to concentrate power. 
Adolf Hitler used plebiscites in the Sudetenland and Austria to consolidate the Third Reich. 
And, after Hitler, Joseph Stalin used referendums to incorporate Eastern Europe into the Soviet bloc. 
More recently, Russian President Vladimir Putin organized a snap referendum in Crimea that supposedly justified his annexation of the territory. 
In the tradition of Napoleon III, Hitler, and Stalin, he used direct democracy to pursue dictatorial ends. 
To be sure, not all recent referendums have been instruments of dictatorial power. 
But mendacity and deception worthy of the dictators of the 1930s was certainly on display in the United Kingdom’s “Leave” campaign, and in the opposition to a Dutch referendum in April to approve an EU-Ukraine free-trade and association agreement. 
In the UK, Boris Johnson cynically helped lead the Leave campaign with an eye toward unseating, and potentially replacing, Prime Minister David Cameron. 
But, when Cameron resigned in July, Johnson’s fellow Brexiteers betrayed him, so he had to settle for becoming Foreign Secretary in Theresa May’s new government. 
In the Dutch case, Euroskeptics, seeking to drive a wedge between the Netherlands and the EU, exploited the 2014 tragedy of Malaysia Airlines Flight 17, which departed from Amsterdam and was shot down over Ukraine by Russian-backed separatists, leaving a deep wound in the Dutch public psyche. 
The British, Dutch, and Colombian referendums all required that complex issues be radically simplified, which played to populist leaders’ strengths. 
In the Netherlands, voters were asked to approve or reject an agreement that runs to more than 2,000 pages, which surely no more than a handful of voters have actually read. 
Instead, most voters relied on populist leader Geert Wilders’ glib talking points, which provided a less-than-candid assessment of the issue. 
Similarly, the Brexit referendum posed a question with so many ramifications that no voter could possibly have considered them all. 
And in the Colombian plebiscite, voters would have needed a deep understanding of faraway South Africa’s truth-and-reconciliation process, and post-apartheid history, to assess the peace agreement properly. 
Representative government was created to manage these types of complex issues. 
We vote for representatives – either individually or as part of a political party with a relatively predictable platform – to advocate public policies that we support. 
But, as Edmund Burke famously pointed out, “Your representative owes you, not his industry only, but his judgment, and he betrays, instead of serving you, if he sacrifices it to your opinion.” 
The populist campaigns in the major referendums this year have differed in important respects. 
For example, Colombian opponents of the peace deal appealed to universal norms of justice for war crimes committed by the military and the FARC, not to national particularism, as in the UK and the Netherlands. 
Nonetheless, they have all been motivated by a desire to scuttle governments and institutions that they oppose. 
And they have all been willing to follow the tradition of dictators, and to resort to smears, distortions, and fantastical claims. 
In the real world, messy compromises are a fact of democratic life; and the only thing messier than a negotiated peace is war itself. 
As long as compromises do not violate individual rights, citizens in democracies accept them as necessary for the sake of functioning governance. 
When we reduce a peace agreement, a trade treaty, or EU membership to a single sentence or sound bite, genuine democratic debate gives way to the political noise of opt-outs, logrolling, and side deals. 
This is arguably a particularly ill-advised time to hold referendums, because democratic malaise has taken hold in many countries since the 2008 financial crisis. 
In the EU, mainstream politicians must accept some responsibility for expediently blaming “Brussels” for every problem, or for fudging the truth about what EU membership or association agreements with neighbors actually mean. 
Mainstream leaders, to some degree, set the stage for the populist demagogues who are now trumping reasoned argument with angry, nativist appeals. 
Plebiscitary governance has little to recommend it. 
In the decades since California introduced statewide “ballot initiatives” – which can be proposed by any voter and require a simple majority to pass – the state became practically ungovernable. 
Current California Governor Jerry Brown has spent the last eight years cleaning up the fiscal mess the state’s voters created back in 1978, when they passed Proposition 13, lowering property taxes by 57%. 
Europe could soon become as dysfunctional as California. 
This month, Hungary’s increasingly autocratic prime minister, Viktor Orbán, held a referendum to oppose a common EU migration policy. 
If more EU countries resort to such initiatives, European integration could be thrown into reverse. 
One need only listen to the politicians calling for referendums to know where direct democracy can lead. 


Disarming the Middle East 
TEL AVIV – Israel’s desperate plea that the world act to curtail what its intelligence service describes as Iran’s “gallop toward a nuclear bomb” has not gotten the positive response that Israel expected. 
With the United Nations sanctions regime now having proven to be utterly ineffective, and with international diplomacy apparently futile in preventing the Iranians from mastering the technology for enriching uranium, Israel is being boxed into a corner. 
What was supposed to be a major international effort at mediation is deteriorating into an apocalyptic Israeli-Iranian showdown. 
This is an intriguing anomaly, for, notwithstanding Iranian President Mahmoud Ahmadinejad’s vile anti-Semitic rhetoric, the implications of Iran’s emerging power extend far beyond the Jewish state. 
Indeed, it affects the entire Arab world, particularly the vulnerable Gulf countries, and even Afghanistan and Pakistan. 
The United States, as a major Middle East power, and Europe also have an interest in stemming the tide of nuclear proliferation that now threatens the Middle East. 
For a nuclear Iran would open the gates to an uncontrolled rush for the bomb across the region. 
The international system’s failure to address effectively the nuclear issue in the Middle East stems mostly from the Russia-US divide, to which wrongheaded American strategy has contributed mightily. 
Russia cannot want a nuclear Iran. 
But in its quest for leverage against what it perceives as hostile American policies, and as way to bargain for a more acceptable security framework with the West, the Russians refuse to join America’s leadership in international efforts to curtail Iran’s nuclear ambitions. 
Russia holds the key not only to Iran’s diplomatic isolation, but also – through the weapons transfers that it has already pledged to Iran – to the Iranian government’s capacity to protect its nuclear installations. 
In October 2007, Vladimir Putin became the first Russian leader since Leonid Brezhnev to visit Iran, bringing along five leaders of the Caspian Sea states. 
Since then, Putin has sought to expose the bankruptcy of America’s policy of isolating Iran. 
Russia probably can tame the Iranian regime, but it will do so only in exchange for America’s respect for its interests in the former Soviet Republics, and possibly also a revision of post-Cold War strategic agreements. 
But, even if abandoned by the Russians, it is highly unlikely that Iran will give up its nuclear ambitions unless its regional concerns are addressed. 
Iran’s nuclear drive reflects a broad national consensus, the result of a deep-seated sense of vulnerability and betrayal. 
The Iranians remember how the international community remained indifferent when Saddam Hussein attacked with chemical weapons in the 1980’s. 
Nor is the presence of America’s formidable might in today’s Iraq comforting to them. 
Iran believes that it is the victim of an international double standard – acceptance of Pakistan’s and India’s nuclear status, not to mention Israel’s – which only fuels its sense of discrimination and its resolve to pursue its ambitions. 
By exposing the inadequacy of the Nuclear Non-Proliferation Treaty, Iran, a signatory, has signaled to Israel that the regional order can no longer be based on Israel’s nuclear monopoly as a non-NPT member. 
Hence, the solution lies not only in forcing NPT members like Iran and Syria to comply with their commitments, but in creating a broader regional security and cooperation architecture in the Middle East. 
But it is highly unlikely that the Arabs will agree to such a system so long as Israel refuses to address her own nuclear capabilities. 
Any regional security architecture will have to be premised on the Middle East becoming a zone free of all weapons of mass destruction, including nuclear, chemical, and biological weapons. 
The Middle East retains the infamous distinction of being the only region in the world to have used such weapons since the end of World War II. 
Indeed, Arab states have both developed and used chemical and biological weapons – not against Israel, so far, but against others in the region. 
Iraq used them against Iran, Egypt in its war in Yemen of the 1970’s, and Iraq against its own Kurds. 
In 1993, Israel signed the international treaty banning chemical weapons, but did not ratify it because of the Arab states’ refusal to follow suit as long as Israel maintained its nuclear advantage. 
The international community must recognize that the Middle East security equation is not a simple linear one involving Israel versus the Arab world. 
The proliferation of nuclear weapons in a region that has seen fit to use weapons of mass destruction before threatens everyone. 
So a concerted effort is needed by outside powers such as the US and Russia, not to act as spoilers of each other’s policies in the region, but to create a WMD-free zone. 
Such a regional system cannot be built in a political vacuum. 
A major effort to assist in the solution of the region’s major political disputes is a vital prerequisite. 
The nuclear clock is ticking. 


Solving the Disinformation Puzzle 
MENLO PARK, CALIFORNIA – Ever since the November 2016 US presidential election highlighted the vulnerability of digital channels to purveyors of “fake news,” the debate over how to counter disinformation has not gone away. 
We have come a long way in the eight months since Facebook, Google, and Twitter executives appeared before Congress to answer questions about how Russian sources exploited their platforms to influence the election. 
But if there is one thing that the search for solutions has made clear, it is that there is no silver bullet. 
Instead of one comprehensive fix, what is needed are steps that address the problem from multiple angles. 
The modern information ecosystem is like a Rubik’s Cube, where a different move is required to “solve” each individual square. 
When it comes to digital disinformation, at least four dimensions must be considered. 
First, who is sharing the disinformation? 
Disinformation spread by foreign actors can be treated very differently – both legally and normatively – than disinformation spread by citizens, particularly in the United States, with its unparalleled free-speech protections and relatively strict rules on foreign interference. 
In the US, less sophisticated cases of foreign intervention might be addressed with a mix of natural-language processing and geo-locating techniques to identify actors working from outside the country. 
Where platform-level changes fail, broader government interventions, such as general sanctions, could be employed. 
Second, why is the disinformation being shared? 
“Misinformation” – inaccurate information that is spread unintentionally – is quite different from disinformation or propaganda, which are spread deliberately. 
Preventing well-intentioned actors from unwittingly sharing false information could be addressed, at least partly, through news literacy campaigns or fact-checking initiatives. 
Stopping bad actors from purposely sharing such information is more complicated, and depends on their specific goals. 
For example, for those who are motivated by profit – like the now-infamous Macedonian teens who earned thousands of dollars running “fake news” sites – new ad policies that disrupt revenue models may help. 
But such policies would not stop those who share disinformation for political or social reasons. 
If those actors are operating as part of organized networks, interventions may need to disrupt the entire network to be effective. 
Third, how is the disinformation being shared? 
If actors are sharing content via social media, changes to platforms’ policies and/or government regulation could be sufficient. 
But such changes must be specific. 
For example, to stop bots from being used to amplify content artificially, platforms may require that users disclose their real identities (though this would be problematic in authoritarian regimes where anonymity protects democracy advocates). 
To limit sophisticated microtargeting – the use of consumer data and demographics to predict individuals’ interests and behaviors, in order to influence their thoughts or actions – platforms may have to change their data-sharing and privacy policies, as well as implement new advertising rules. 
For example rather than giving advertisers the opportunity to access 2,300 likely “Jew Haters” for just $30, platforms should – and, in some cases, now do – disclose the targets of political ads, prohibit certain targeting criteria, or limit how small a target group may be. 
This is a kind of arms race. 
Bad actors will quickly circumvent any changes that digital platforms implement. 
New techniques – such as using blockchain to help authenticate original photographs – will continually be required. 
But there is little doubt that digital platforms are better equipped to adapt their policies regularly than government regulators are. 
Yet digital platforms cannot manage disinformation alone, not least because, by some estimates, social media account for only around 40% of traffic to the most egregious “fake news” sites, with the other 60% arriving “organically” or via “dark social” (such as messaging or emails between friends). 
These pathways are more difficult to manage. 
The final – and perhaps the most important – dimension of the disinformation puzzle is: what is being shared? 
Experts tend to focus on entirely “fake” content, which is easier to identify. 
But digital platforms naturally have incentives to curb such content, simply because people generally do not want to look foolish by sharing altogether false stories. 
People do, however, like to read and share information that aligns with their perspectives; they like it even more if it triggers strong emotions – especially outrage. 
Because users engage heavily with this type of content, digital platforms have an incentive to showcase it. 
Such content is not just polarizing; it is often misleading and incendiary, and there are signs that it can undermine constructive democratic discourse. 
But where is the line between dangerous disagreement based on distortion and vigorous political debate driven by conflicting worldviews? 
And who, if anybody, should draw it? 
Even if these ethical questions were answered, identifying problematic content at scale confronts serious practical challenges. 
Many of the most worrisome examples of disinformation have been focused not on any particular election or candidate, but instead on exploiting societal divisions along, say, racial lines. 
And they often are not purchased. 
As a result, they would not be addressed by new rules to regulate campaign advertising, such as the Honest Ads Act that has been endorsed by both Facebook and Twitter. 
If the solutions to disinformation are unclear in the US, the situation is even thornier in the international context, where the problem is even more decentralized and opaque – another reason why no overarching, comprehensive solution is possible. 
But, while each measure addresses only a narrow issue – improved ad policies may solve 5% of the problem, while different micro-targeting policies may solve 20% – taken together, progress can be made. 
The end result will be an information environment that, while imperfect, includes only a relatively small amount of problematic content – unavoidable in democratic societies that value free speech. 
The good news is that experts will now have access to privacy-protected data from Facebook to help them understand (and improve) the platform’s impact on elections – and democracies – around the world. 
One hopes that other digital platforms – such as Google, Twitter, Reddit, and Tumblr – will follow suit. 
With the right insights, and a commitment to fundamental, if incremental, change, the social and political impact of digital platforms can be made safe – or at least safer – for today’s beleaguered democracies. 

Dispersing the Terrorist Storm 
WARSAW – On September 11, 2001 at three p.m., Warsaw time, I was talking on the telephone with Poland’s Consul General in New York. 
She informed me that two planes had hit the World Trade Center. 
That moment, I realized, was more than just a plane crash. 
The United States, the world, indeed our very lives, were about to change fundamentally. 
Ten years later, it is clear that the fanatics behind those attacks miscalculated in two central respects. 
They regarded Western democracies as weak – unwilling or unable to respond to their evil extremism. 
And they expected Muslim communities and countries around the world to rise up and mobilize behind their millenarian worldview. 
But, far from being uncertain or indecisive, the democratic world responded with unrelenting determination to terrorist outrages of all shapes and sizes. 
Across Europe and in America, new arrangements have been set up to pool information about possible terrorist attacks and take the speedy (and sometimes robust) action needed to prevent or disrupt them. 
Where possible, we work closely with India, Russia, Pakistan, the Gulf states, and other key international partners. 
The institutions and policies established by the European Union are a vivid example of the unobtrusive benefits of modern cross-border integration. 
EU member states share highly sensitive intelligence and police information as never before, thereby increasing public security while upholding world-class legal and democratic standards. 
These operational measures have been complemented by carefully calibrated policies that aim to acknowledge social diversity but reduce the political space available for intolerance and bigotry. 
Success does not come easy. 
Most of Al Qaeda’s leaders are dead, but our democracies rightly experience impassioned debates about means and ends, and about the balance between individual freedom and state authority. 
In the current difficult global economic climate, public concerns about immigration and access to jobs inevitably grow more acute, increasing the risk that rival forms of lumpen populism and associated tensions will emerge. 
Above all, the West’s effective crackdown on domestic extremism has tended to drive would-be terrorists – now often based in remote parts of the world, where they hope to operate with impunity – to higher levels of technical sophistication. 
As a result, painful policy dilemmas arise, and they can divide even the closest allies. 
How best to respond if some states cannot or will not take the necessary steps to thwart terrorist planning on their territory? 
How to deal with evidence of terrorist planning gleaned from states suspected of practicing torture? 
The sheer nihilistic irrationality of terrorism strains and tests our own beliefs like nothing else can. 
Yet the terrorist blows inflicted on New York, London, and Madrid over the past decade have not shaken Western democracies. 
Our societies are more resilient, open, and diverse than ever. 
That said, we are not doomed to succeed. 
Even well-intentioned social policies can have unwelcome consequences. 
Above all, we should be grateful to the police forces and intelligence agencies whose unflagging hard work and dedication far away from the public eye help keep us safe. 
The 9/11 terrorists’ second blunder was to believe that their terrorist attacks would inspire irresistible surge in anti-Western Islamist extremism. 
In some parts of the world, radicalization of this sort did take place. 
Yet, since 9/11, most victims of Islamist-inspired terrorist extremism – often in the vile form of suicide attacks – have been Muslims, in Iraq, Pakistan, and elsewhere. 
Terrorist groups have to resort to organized crime to fund themselves. 
In short, far from leading some sort of worldwide Islamist revolution, the violent fanaticism of Al Qaeda and other organizations now resembles a repulsive, but manageable, form of ideological toxic waste. 
And the focus this year has shifted decisively away from it. 
Millions of people in North Africa and the Middle East have started to demand a normal society with basic democratic rights and, above all, the rule of law. 
They welcome measured and respectful US, European, and wider support. 
Faced with this unexpected challenge, some desperate rulers, above all now in Syria, have been using repressive, even terrorist methods against their open people. 
European pressure on President Bashar al-Assad’s regime is intensifying. 
In Libya, Col. Muammar el-Qaddafi’s appalling tyranny has collapsed; the EU will be generous in helping the Libyan people start to build a modern pluralist society. 
Poland’s initiative to create a European Endowment for Democracy could play a leading role here, and with Europe’s own unfinished business of democratization in Belarus and elsewhere, like backsliding Ukraine. 
Few people decide to commit terrorist outrages. 
Of those who do, a minute fraction actually tries to carry them out, and only a tiny number of those succeed. 
But the main lesson of 9/11 is that in any free society a tiny number of people can exploit their freedom and do vast damage, especially when the underlying motivation is incoherent. 
This is exemplified in very different ways by the murderous killing spree in Norway in July, and now by WikiLeaks’ disgraceful release of huge numbers of unredacted diplomatic cables. 
The terrorism threat ten years from now probably will be even more diverse and unpredictable. 
In Europe various homegrown “single issue” extremist groups need close monitoring. 
In each case, we see obsessive people arrogating to themselves the right to decide others’ fate, and using modern technology for their harmful purposes. 
By its very nature, this sort of disaggregated but highly focused threat is almost impossible to identify and intercept in advance. 
Of course, the democratic world cannot build a bomb-proof house. 
But we can minimize risk by remaining vigilant and upholding at all times the values on which our societies are based. 

Disrupting Climate Change 
DENVER – After a season of record-breaking hurricanes in the United States and floods across Asia, it would be easy to despair about the accelerating pace of climate change. 
Yet, despite the apocalyptic omens, an energy transformation big enough and fast enough to curb the spike in global temperature remains within reach. 
Better still, we do not need to wait for new inventions to implement the changes we need; the transformation can happen right now, with profitable solutions delivered by businesses and driven by markets. 
Limiting the increase in global temperature to within 2º Celsius of preindustrial levels – the target set by the 2015 Paris climate agreement – will require decreasing reliance on fossil fuels, and changing how the world grows crops, harvests timber, and uses land. 
New research by the Rocky Mountain Institute (RMI) shows that both outcomes are possible, and that, together, the impact can “positively” disrupt the trajectory of climate change. 
According to our analysis, there are pathways for the future supply and demand of energy, and for how forests and land store carbon, that, if followed, will dramatically slow the pace of warming. 
By accelerating the clean-energy transition that is underway, it is possible to reduce greenhouse-gas emissions below what would be expected under current consumption patterns. 
This scenario is not as far-fetched as some might believe. 
The world is already switching to cleaner energy, to electric mobility, and to smarter power and land-use systems faster than anyone, including experts, anticipated. 
And it’s not the first time the pace of change has exceeded expectations. 
In 1980, for example, AT&T hired McKinsey & Company to forecast the number of mobile phones that would be in use in the US within two decades. 
The consultants predicted that by 2000, the US mobile phone market would support about 900,000 devices. 
In fact, over 100 million phones were sold that year. 
Today, the planet has more phones than people. 
Solar and wind energy have suffered similarly flawed projections. 
For decades, experts at the International Energy Agency and the US Energy Information Agency underestimated how quickly supplies from these sources would grow. 
They consistently guessed low, increasing their forecasts only slightly every year, without ever catching up to reality. 
But as clean-energy businesses innovated, the cost of production from wind and solar declined. 
Energy became cheaper, and usage increased as a result. 
Government models typically do not account for such expanding returns. 
Another reason for underestimating the speed of today’s energy transition is that the scale is different from previous conversions to new technologies. 
When people switched from burning wood to burning coal, and then to burning oil, the “new” energy sources came from very large capital projects, like coalmines, offshore oil and gas fields, and refineries. 
The high costs of deploying these projects were then passed on to consumers. 
By contrast, in today’s energy market, consumers have more control. 
Consider how easy it is to install rooftop solar panels; it can be done in a single day. 
Millions of small machines – photovoltaic cells, wind turbines, batteries, and smart appliances – are driving today’s energy transformation. 
Each new device in this distributed system is cheap and pays off quickly, so experimentation is affordable, and the technology can improve rapidly. 
The result is a huge field of global competitors, with faster innovation and new business models that are helping to achieve economies of scale. 
The hardware of the clean-energy revolution has more in common with mobile phones and laptops than with mines and refineries. 
Because it can be sold in very large markets, with scalable production chains and still-maturing technologies, the transition to cleaner power is happening faster than many experts predicted it would. 
Still, not even a rapid shift toward “greener” energy will be enough to keep global average temperature within 2º of preindustrial levels. 
To achieve that, the world will also need to take more greenhouse gases out of the atmosphere. 
Fortunately, that, too, is possible. 
By incorporating carbon-reducing strategies into agriculture and land conservation, more heat-trapping gases can be locked up in forests and soils. 
But while the techniques already exist, success will require increasing the use of no-till farming, adopting permaculture principles, better managing wetlands, and using rotational grazing techniques, among other measures. 
The power of markets to drive radical changes in energy and land use is great, but as the storm season of 2017 should remind us, the climate emergency we face requires vigorous and urgent action. 
Transforming the way people acquire and consume energy, and use land, will require strong incentives and policy frameworks to set the course for success. 
But don’t despair: there is still time to save our climate. 
The transformation has already begun – and it will play out faster than most people expect. 

Managing the Age of Disruption 
NEW YORK – Bold predictions based on intuition are rarely a good idea. 
Margaret Thatcher, as Education Secretary in 1973, famously asserted that the United Kingdom would not have a woman prime minister in her lifetime. 
IBM’s president, Thomas J. Watson, declared in 1943 that there was “a world market for perhaps five computers.” 
And, when movies with sound made their debut in 1927, Warner Brothers’ Harry Warner asked, “Who the hell wants to hear actors talk?” 
At a time when four powerful forces are disrupting the global economy, upending most of our assumptions, such pronouncements on the future, shaped by intuitions based on the past, are even more likely to be wrong. 
Each of these four “great disruptions” is transformational on its own, and all are amplifying the effects of the others, producing fundamental and unpredictable changes on a scale the world has never seen – and that will prove our intuitions wrong. 
The first great disruption is the shift of economic activity to emerging-market cities. 
As recently as 2000, 95% of the Fortune Global 500 was headquartered in developed economies. 
By 2025, nearly half of the Fortune Global 500 companies will be based in emerging economies, with China home to more of them than the United States or Europe. 
Cities are at the vanguard of this shift. 
Nearly half of global GDP growth from 2010 to 2025 will come from 440 emerging-market cities, many of which Western executives may not even know exist. 
They are places like Tianjin, a city southeast of Beijing with a GDP that is practically on par with Stockholm’s today – and could equal all of Sweden’s by 2025. 
The second great disruption is the acceleration of technological change. 
While technology has always been transformative, its impact is now ubiquitous, with digital and mobile technologies being adopted at an unprecedented rate. 
It took more than 50 years after the telephone was invented for half of American homes to have one, but only 20 years for cellphones to spread from less than 3% of the world’s population to more than two-thirds. 
Facebook had six million users in 2006; today, it has 1.4 billion. 
The mobile Internet offers the promise of economic progress for billions of emerging-economy citizens at a speed that would otherwise be unimaginable. 
And it gives entrepreneurial upstarts a greater chance of competing with established firms. 
But technological change also carries risks, especially for workers who lose their jobs to automation or lack the skills to work in higher-tech fields. 
The third disruption is demographic. 
For the first time in centuries, our population could plateau in most of the world. 
Indeed, population aging, which has been evident in the developed world for some time, is now spreading to China and soon will reach Latin America. 
Thirty years ago, only a few countries, home to a small share of the global population, had fertility rates substantially below the replacement rate of 2.1 children per woman. 
In 2013, about 60% of the world’s population lived in countries with sub-replacement fertility rates. 
As the elderly increasingly outnumber working-age people, pressure is building on the labor force, and tax revenues, needed to service government debt and fund public services and pension systems, are diminishing. 
The final disruption is the world’s increasing interconnectedness, with goods, capital, people, and information flowing ever more easily across borders. 
Not long ago, international links existed primarily among major trading hubs in Europe and North America; now, the web is intricate and sprawling. 
Capital flows among emerging economies have doubled in just ten years, and more than one billion people crossed borders in 2009, over five times the figure in 1980. 
The resulting challenges – a host of new and unexpected competitors, volatility stemming from faraway places, and the disappearance of local jobs – are already overwhelming workers and companies. 
Of course, this interconnectedness also offers important opportunities; but an implicit bias toward the familiar is impeding the ability of workers, firms, and even governments to take full advantage of them. 
This is especially true for companies. 
According to McKinsey research, from 1990 to 2005, US companies almost always allocated resources on the basis of past, rather than future, opportunities. 
Firms that succumb to such inertia will probably sink, rather than swim, in the new global economy. 
Some firms, however, will adapt, taking advantage of unprecedented opportunities to remain agile. 
Instead of, say, building a new headquarters, renting a storefront, or purchasing a restaurant – traditional requirements that demanded large amounts of up-front capital – they can open a satellite sales office, create an online store, or launch a food truck. 
Flexibility and responsiveness will enable such firms to thrive. 
The pace and scale of the current economic transformation is undoubtedly daunting. 
But there is plenty of reason for optimism. 
Inequality may be on the rise within countries, but it has dropped dramatically among them. 
Nearly a billion people were lifted out of extreme poverty from 1990 to 2010; another three billion will join the global middle class in the next two decades. 
In 1930, at the height of the Great Depression, John Maynard Keynes declared that the standard of living in “progressive economies” would increase 4-8 times over the subsequent 100 years. 
His prediction, which was regarded as hopelessly Pollyannaish at the time, has turned out to be correct, with the improvement likely to be at the top of his projected range. 
Keynes, unlike many of his contemporaries, recognized the forces at work in the economy, adjusted his thinking, and, crucially, was not afraid to be optimistic. 
We must do the same. 

Dissecting the Poverty Trap 
Without exception, population growth in rich countries has slowed to a crawl. 
Average fertility rates in Europe and North America, for example, have fallen to 1.5 to 3 births per woman. 
By contrast, average fertility rates in the world's poorest countries--say, Somalia, Yemen, and Uganda--are vastly higher, reaching more than seven births per woman. 
Must countries produce fewer children if they want to accumulate more wealth? 
All available historical and contemporary evidence suggests that they must. 
Rich countries' transition from subsistence economies to sustained growth and prosperity was conditioned on a profound demographic shift--occurring in the 19 th century in Western Europe and throughout the 20 th century in East Asia--in which fertility rates fell dramatically. 
The last two decades have witnessed similarly sharp fertility declines in poor countries that are now showing solid signs of economic progress. 
In Egypt, for example, fertility rates declined from 4.8 to 2.9 children per woman in the last 15 years. 
During the last decade, Egypt's average annual per capita income grew by 2.6%. 
During the same period, Tunisia's rate of population growth fell by more than 50%, to a European level of slightly more than two children per woman, while per capita income grew at an impressive annual rate of 3%. 
Botswana's incredible annual per capita income growth of approximately 13% in the last decade was accompanied by a decrease from nearly six children per woman to less than four. 
Why is rapid population growth bad for a country's standard of living? 
The math is simple: more people means that (on average) everyone gets less. 
A growing population dilutes not only the accumulation of physical capital, but also human capital. 
The quality of children in poor households goes down as their quantity goes up, because poor families with many children are unable to invest enough in the education of each child to ensure that future adults benefit from a key determinant of economic success. 
One reason that the poor have high fertility rates and invest little in education is because raising children in poor countries is cheap. 
Children go to work at relatively young ages, and the prevalence of low wages--particularly for women--means that the cost of parental time is negligible relative to other opportunities. 
Most important, the cost of educating a child relative to the cost of having additional low-educated children is very high in poor countries. 
In other words, families in rich countries, who are relatively well educated, have a comparative advantage in "child quality," whereas parents in poor countries have a comparative advantage in "child quantity." 
For example, while the ability of a mother to feed her child is not highly related to her level of human capital, her effectiveness in helping her children with their school homework increases with her own level of education. 
As a result, poverty in poor countries persists over long periods of time. 
Poor people with little education choose high fertility rates and thus low quality children. 
These children grow up to be poor adults, and the cycle goes on, viciously. 
In addition, the negative impact of low child quality on economic performance is amplified by the diluting effect of population growth on the accumulation of physical capital. 
What can be done to break this pattern? 
Policies such as tax benefits for large families, child allowances, and subsidized day care and meals--all of which reduce the cost of raising children--may be attractive in the short term. 
But they have a negative impact on income in the long run because they encourage households to increase fertility rates. 
What is needed is precisely the opposite: an increase in the cost of child quantity. 
Increasing the cost of raising a child creates a powerful incentive for households to reallocate resources towards improving child quality through higher investment in education. 
This change in relative costs can release a country from the trap of poverty, setting the stage for a demographic transition and economic advancement. 
A revealing example of the effect of policy on fertility patterns comes from the poorest groups in Israel. 
Fertility rates among Israel's ultra-Orthodox Jews are exceptionally high, averaging six births per woman. 
But in the 1950s and 1960s, before the introduction of generous child allowances to large families, fertility rates among the same group were significantly lower--just three children per woman. 
Moreover, as a result of the benefits, fertility rates among Israeli Bedouins have remained probably the highest in the world, at nearly eight children per woman. 
The implications of this may at first glance seem inhumane, but they are straightforward and unavoidable. 
Canceling, or even reversing, policies that reduce the cost of bearing a high quantity of children would contribute to higher living standards over the long run. 
Public schooling, too, can release people from the poverty trap, because highly educated people have a comparative advantage in raising quality children. 
Policies that encourage economic growth therefore include reallocating government resources or foreign aid from programs that reduce the cost of raising children to financing for public education. 
All it takes is one generation to break the cycle of choosing quantity over quality. 
Even temporary improvement in educational opportunities could permanently affect the level and distribution of skills in the economy. 

Divest in a Better Future 
SEATTLE – Sometimes the best measure of a movement’s momentum is the reaction of its critics. 
When, in early October, the Australian National University (ANU) announced that it would sell its shares in seven fossil-fuel and mining companies, it triggered a chorus of criticism from the country’s conservative politicians. 
These nominal champions of the free market were quick to tell the university what it should do with its money. 
The Treasurer of Australia, Joe Hockey, disparaged the ANU’s decision as being “removed from reality.” 
Others chimed in, calling it “a disgrace,” “very strange,” and “narrow-minded and irresponsible.” 
Never mind that the sums involved were relatively small – making up less than 2% of the university’s estimated $1 billion portfolio. 
As the drive to divest from fossil fuels picks up speed, such panicky responses are becoming increasingly common. 
The outrage of Australia’s conservatives reminds me of the reaction I received when I testified before the US Congress in 2013 that we should “keep our coal in the ground where it belongs.” 
David McKinley, a Republican congressman from West Virginia, in the heart of America’s coal country, replied that my words “sent a shiver up [his] spine,” then changed the subject to the crime rate in Seattle, where I was Mayor. 
Even ExxonMobil appears shaken. 
The company recently published a long, defensive blog post responding to what it described as a “full-throated endorsement” of fossil-fuel divestment by Mary Robinson, United Nations Secretary-General Ban Ki-moon’s special envoy for climate change. 
The fossil-fuel industry clearly sees the divestment movement as the political threat that it is. 
When enough people say no to investing in fossil-fuel production, the next step has to be keeping coal, oil, and gas in the ground. 
That is a necessary step if we are to head off the most dangerous consequences of climate change. 
To prevent world temperatures from rising above the 2º Celsius threshold that climate scientists believe represents a tipping point beyond which the worst effects could no longer be mitigated, we will need to leave approximately 80% of known fossil-fuel reserves untapped. 
Oil and coal companies and their political allies warn us of fiscal catastrophe if we do that – as if heat waves, droughts, storms, and rising seas did not bring their own fiscal and social catastrophes. 
As Mayor of Seattle, I supported the creation of energy-efficient buildings, the development of solar, wind, and hydroelectric power, and a shift toward walking, biking, and public transit as alternatives to driving – strategies that can help to build a more resilient economy and provide viable alternatives to fossil fuels. 
But they cannot prevent the worst of global warming, particularly if they result in coal and oil simply being sold elsewhere. 
As imperfect as our governance systems are, at some point the public and its leaders may demand that we confront the truth about global warming. 
At that point, they will put in place the regulatory or legal controls needed to reduce fossil-fuel use dramatically. 
If you are a prudent and cautious investor, contemplate that possibility for a moment. 
Stock values in the fossil-fuel industry – which are based on the assumption that companies will be able to extract and burn all known reserves – will plummet. 
Investing in these companies, it turns out, is extraordinarily risky. 
As anyone who receives investment statements knows, “past performance is no guarantee of future performance.” 
That reality implies another compelling case for divestment. 
To be sure, some will claim that the world will never change and that we will continue to depend on fossil fuels forever. 
But one has only to look to Seattle, where gay couples marry in City Hall and marijuana is sold in licensed retail outlets, to see the human capacity to reexamine deeply held assumptions. 
The prudent investor, and the wise business leader, will look where the economy is headed, not where it has been. 
The ANU’s decision looks like a sage one to anyone not in thrall to oil and gas companies, and it will only look wiser with the passing of time. 
Good on them. 
When I put Seattle on the path to divestment in 2013, my decision was well received by the young people who will have to live with the consequences of global warming, as well as the general public. 
As the political pressure mounts, the university’s administrators need only listen to the students. 
We need more courage like that shown by the ANU. 
Its leaders bucked the power of coal and oil interests, which wield enormous power in Australia. 
If they can do it to popular acclaim, others can, too. 

Divided Asia Stands 
Why can't Asia unite even for the sake of its own security? 
For decades, Western experts have complained about the failure of the Association of Southeast Asian Nations (ASEAN) to learn the value of collective security from Europe's post-War experience. 
ASEAN's leaders have ignored the lessons offered first by the Common Market, and then the European Union. 
The benefits of these models are supposedly so obvious that it seems incomprehensible that ASEAN's leaders cannot see them. 
East Asia's apparent disarray over a response to North Korea's nuclear démarche brings these complaints into the open once again. 
A North Korea with nuclear bombs surely poses a common threat to all Asians. 
Everybody, it is said, should help the US put Kim Jong Il in his place. 
The fact that North Korea's close neighbors seem unable to grasp this seems to confirm that Asian disunity is not just stupid, but chronic and willful. 
But history and geography matter in assessing the nature of a threat. 
Different traditions in tactical and strategic thinking also matter--to say nothing of the unique way Europeans forged their current cooperative arrangements out of aggressive nation-states that shared a common civilization. 
Nothing in Asia's history, however, remotely compares to Europe's half-century of division and veritable occupation by two rival superpowers. 
So it is no surprise that Asia's leaders do not look to Europe for solutions to their regional problems. 
Of course, human beings and nation states do often behave in similar ways. 
When threatened, countries tend to group together against a common enemy. 
When the world was divided into two camps during the Cold War, deciding who was an enemy and who a friend seemed easy. 
Alliances were established along pro-American or pro-Soviet lines. 
But even then, things in Asia were not so clear-cut. 
A jagged line loosely joining Tokyo to Jakarta via Seoul, Taipei, Hong Kong, Bangkok, Kuala Lumpur, and Singapore was sufficient to sustain international cooperation. 
But that cooperation was nothing like a lasting alliance. 
Why? 
There are many layers of explanation. 
At one level, Asian history has been dominated by rival elites from China, "Turkestan," India, Persia, "Arabia", Japan, and Java (to name but a few examples) who claimed to lead separate indigenous cultural entities. 
This differs markedly from Europe's shared Greco-Roman-Christian civilization. 
Throughout Asian history, the continent's ancient foundations of power were more sharply divided from one another--and over much longer time spans--than in Europe. 
Modern history, however, did teach Asians that disunity led to European triumphs over them. 
In the 20 th century, leaders advocating unity against the colonial and imperial powers emerged. 
But the Europeans, who controlled over half the globe, seemed able to disrupt any temporary gains. 
Europe's approach was two-pronged. 
First, it aimed to keep Asia divided insofar as the West was concerned. 
This was relatively easy during the Cold War, as Asia's postcolonial elites were forced to choose sides in a conflict of ideologies. 
Today's global war against terrorism permits this approach to be modified to create new divisions. 
Second, Asia was brought under the rubric of a single interdependent global economy in which the West holds the key technological and financial cards. 
That strategy has proved remarkably successful. 
Over the past decade, Asia moved from division between two superpowers to something that could be described as dominance by one super-economy. 
Either way, no regional unity on politics and security has arisen. 
The only prospect for a feeble identity of interest is the emergence of some form of economic regionalism, pursued by Asian leaders through free-trade agreements. 
Asian disunity can be overcome only if Asia as a whole confronts a common enemy. 
The West will do everything possible to prevent Asians from viewing Westerners as that enemy. 
In fact, most calls for Asian unity are concerned with uniting Asia with the West (often equated with the interests of the whole world) against some part of Asia, whether it be Iraq, Iran, North Korea, or Myanmar. 
Given that most Asian leaders believe Asian disunity made the West all-powerful in the first place, these calls are treated with understandable caution. 
What, then, of the future? 
It will take time for Asia's leaders to shed the burdens of the past, in some cases especially where relations with the West are concerned. 
In the meantime, if the global economy continues to integrate, will the prospect of Asian unity be enhanced or hindered? 
Much depends on whether the West retains its sway in other parts of the world. 
If that dominance continues through increasingly powerful networking technologies, the chances of Asia creating a distinct unity of its own are slim. 
It is in this context that we can see why Asian leaders appear two-faced or unreliable in the eyes of Europe and the US. 
Asia cannot afford to unite against the West. 
But Asia equally cannot afford to divide itself by ostracizing one of its parts. 
For that way lies permanent dependence on the West. 


Divided We Fall 
LONDON – Politics trumped sensible economics in the United States this summer, when Congress and President Barack Obama could not agree on taxes, entitlements, deficits, or an investment stimulus. 
Europe’s leaders were also paralyzed – ruling out defaults and devaluations, as well as deficits and stimulus. 
And, having run negative real interest rates, printed money, plowed in liquidity, and subsidized commercial banks, central bankers everywhere – most recently US Federal Reserve Chairman Ben Bernanke – appear to have concluded that they, too, have reached the limit of what they can do. 
As a result, few people today doubt that the world is drifting, rudderless and leaderless, towards a second downturn. 
The pre-summer debate about whether we faced a “new normal” of slower growth has been resolved: nothing now looks normal. 
Muddling through has failed. 
Unable to conclude a global trade deal, climate-change agreement, growth pact, or changes in the financial regime, the world is likely to descend into a new protectionism of competitive devaluation, currency wars, trade restrictions, and capital controls. 
But this is not a time for defeatism. 
Countries claiming to have reached the limit of what they can do really mean that they have reached the limit of what they can do on their own. 
The way forward to sustained growth and employment is not through a flurry of one-off national initiatives, but rather through global policy coordination. 
That was the goal back in April 2009, when the G-20 set itself three critical tasks. 
The first, preventing a global depression, was achieved. 
The other two – a growth pact, underpinned by a reformed global financial system – should now be the main items on the G-20’s agenda when it meets. 
In 2010, the International Monetary Fund estimated that a coordinated approach to macroeconomic, trade, and structural policies could achieve 5.5% higher global GDP, create 25-50 million additional jobs, and lift 90 million people out of poverty. 
But a global growth pact looks even more indispensable today, given the world economy’s structural problems and huge imbalances between production and consumption. 
It may seem strange to describe the greatest financial crisis since the 1930’s as a symptom of a bigger problem. 
But, when historians look back on the wave of globalization after 1990 – which has brought two billion new producers into the world economy – they will find a turning point around 2010. For the first time in 150 years, the West (America and the European Union) was out-manufactured, out-produced, out-exported, out-traded, and out-invested by the rest of the world. 
Indeed, by the early to mid-2020’s, the Asian consumer market will be twice the size of the US market. 
Today, however, the West and Asia remain mutually dependent. 
Two-thirds of Asia’s exports still end up in the West, and south-south trade accounts for just 20% of global turnover. 
Put another way, ten years ago the US engine could drive the world economy, and ten years from now the emerging-market countries stand to take over that role, particularly given the rising purchasing power of their middle classes. 
But, for now, America and Europe cannot expand their consumer spending without increasing exports, while China and the emerging markets cannot easily expand their production or consumption without the guarantee of strong Western markets. 
So, first, we must restore the broad vision of global cooperation contained in the G-20 growth pact (which has since been downgraded to what the IMF now calls “an in-depth analysis of…those countries identified as having large imbalances”). 
But a broader and deeper agenda is needed: China should agree to raise household spending and consumer imports; India should open its markets so that its poor can benefit from low-cost imports; and Europe and America must boost competitiveness in order to increase their exports. 
The G-20 was also adamant in 2009 that future stability required a new global financial regime. 
David Miles of the Bank of England predicts three more financial crises in the coming two decades. 
And, if the BoE’s Andrew Haldane is right that rising pressures in Asia threaten future turmoil, the West will regret its failure to entrench global capital-adequacy and liquidity standards and a more transparent early-warning system. 
The problem is already evident. 
Europe’s banking-sector liabilities are nearly five times higher than in the US, at 345% of GDP. 
Germany’s banks are leveraged at 32 times their assets. 
So, not only is bank recapitalization essential for financial stability, but so is a reformed euro, built on fiscal and monetary coordination and an enhanced role for the European Central Bank in supporting individual governments (not individual banks) as lender of last resort. 
The G-20 will not achieve growth and stability without a renewed focus on long-term debt reduction. 
But there is also a short-term imperative to avoid a cycle of decline. 
So we should draw on Robert Skidelsky’s national investment bank proposals to equip our infrastructure – not least our environment – for future challenges and to stimulate growth and job creation. 
One model is the European Investment Bank, which, with €50 billion of capital, has been able to invest €400 billion. 
But there is perhaps a deal to be done with the Chinese on investing their reserves and with Western multinationals on the tax treatment of repatriated profits. 
Finally, as the Nobel laureate economist Michael Spence has shown, growth is now a necessary but insufficient condition for job creation. 
Today’s epidemic of youth unemployment, in particular, requires new approaches – a development bank, for example, to help employ the bulging youth population in the Middle East and North Africa, and training and apprenticeship programs elsewhere. 
The G-20’s growth compact must be a jobs compact, too. 
The G-20, which represents 80% of world output, came into its own in 2009 as the only multilateral body able to coordinate global economic policy. 
Unfortunately, its member states soon abandoned that goal and defaulted to national solutions. 
Predictably, going it alone has proven futile in ensuring economic recovery. 
The G-20’s time has come again. 
The sooner French President Nicolas Sarkozy calls the G-20 together to act, the better. 

China’s Victory in Ukraine 
MOSCOW – For a generation, relations between the United States and Russia were essentially about history. 
Since the Cold War’s end, Russia had become increasingly peripheral to the US and much of the rest of the world, its international importance and power seemingly consigned to the past. 
That era has now ended. 
To be sure, the current conflict between the US and Russia over Ukraine is a mismatch, given the disparity in power between the two sides. 
Russia is not, and cannot even pretend to be, a contender for world domination. 
Unlike the Soviet Union, it is not driven by some universal ideology, does not lead a bloc of states ruled by the same ideology, and has few formal allies (all of which are small). 
Yet the US-Russia conflict matters to the rest of the world. 
It obviously matters most to Ukraine, part of which has become a battlefield. 
The future of Europe’s largest country – its shape, political order, and foreign relations – depends very much on how the US-Russian struggle plays out. 
It may well be that Ukraine becomes internally united, genuinely democratic, and firmly tied to European and Atlantic institutions; that it is generously helped by these institutions and prospers as a result; and that it evolves into an example for Russians across the border to follow. 
It may also be that at the end of the day, several Ukraines emerge, heading in different directions. 
Ukraine’s fate, in turn, matters to other countries in Eastern Europe, particularly Moldova and Georgia. 
Both, like Ukraine, have signed association agreements with the European Union; and both will have to walk a fine line to avoid becoming battleground states between Russia and the West. 
Similarly, Russia’s nominal partners in its Eurasian Union project – Armenia, Belarus, Kazakhstan, and Kyrgyzstan – will need to balance carefully between Russia, their nominal “strategic” ally, and the US, which holds the keys to the international political and economic system. 
What happens to Ukraine matters to Western and Central Europe, too. 
Even though an enduring military standoff along NATO’s eastern border with Russia would pale in comparison to the Cold War confrontation with the Warsaw Pact, Europe’s military security can no longer be taken for granted. 
And as security worries on the continent rise, EU-Russia trade will fall. 
As a result of US pressure, the EU will eventually buy less gas and oil from Russia, and the Russians will buy fewer manufactured goods from their neighbors. 
Distrust between Russia and Europe will become pervasive. 
The idea of a common space from Lisbon to Vladivostok will be buried. 
Instead, the EU and the US will be aligned even more closely, both within a reinvigorated NATO and by means of the Trans-Atlantic Trade and Investment Partnership. 
Japan has a stake as well: its decision to join the US-led sanctions against Russia means foregoing plans to build a solid relationship with the Kremlin to balance China in Asia. 
The US-Japan alliance will be reaffirmed, as will Japan’s position in that alliance. 
In a somewhat similar way, South Korea will need to bow before US demands to limit its trade with Russia, potentially eliciting a less cooperative Kremlin stance on the divided Korean Peninsula. 
As a result, the US-Russia conflict will probably lead to a strengthening of America’s position vis-à-vis its European and Asian allies, and a much less friendly environment for Russia anywhere in Eurasia. 
Even Russia’s nominal allies will have to look over their shoulder to the US, and its forays into Latin America and enclaves of influence in the Middle East will be of little importance. 
There is only one exception to this pattern of heightened US influence: China. 
The sharp reduction of Russia’s economic ties with the advanced countries leaves China as the only major economy outside of the US-led sanctions regime. 
This increases China’s significance to Russia, promising to enable the Chinese to gain wider access to Russian energy, other natural resources, and military technology. 
China will study US strategy toward Russia and draw its own conclusions. 
But China has no interest in Russia succumbing to US pressure, breaking apart, or becoming a global power. 
Its interests are in keeping Russia as its stable strategic hinterland and a natural-resource base. 
Chinese support for Russia to stand up to the US would be a novelty in world affairs. 
Many do not view it as a realistic scenario; Russia, after all, would find an alliance with China too heavy to bear, and, whatever their ideology or whoever their leaders, Russians remain European. 
That may be true. 
Yet it is also true that one of the most revered Russian heroes from medieval history, Prince St. Alexander Nevsky, successfully fought Western invaders while remaining loyal to the Mongol khans. 
There is no question that Russia will pay a price for its actions in Ukraine. 
The question for the US and its allies is whether exacting that price will come with a price of its own. 

Securing the Sochi Olympics 
MOSCOW – In 2007, when Russian President Vladimir Putin traveled to Guatemala City to support his country’s bid to host this year’s Winter Olympics in Sochi, he knew that winning would be the easiest step in the process. 
Many joked that only Russia would propose a subtropical seaside resort for a winter-sports competition. 
But, while concerns about a lack of snow in the surrounding mountains, or about Russia’s ability to build the needed infrastructure in time, have gradually receded since Russia was awarded the games, one major apprehension has remained: the threat of terrorism. 
Sochi is located in the North Caucasus region, which, following the Soviet Union’s dissolution, experienced a long and brutal armed insurgency in Chechnya, while neighboring Dagestan, in particular, later became a hotbed of Islamist extremism and terrorism. 
In fact, Putin gained widespread support among the Russian people through his decisive and ruthless handling of separatism in the North Caucasus – support that helped persuade then-President Boris Yeltsin to appoint Putin as his successor in 1999. 
Once in office, Putin – with a military victory and a policy of reconciliation – managed to pacify Chechnya, leaving it more a feudal khanate associated with Russia than a real part of the Russian Federation. 
As a result, for the last dozen years, there has been peace with – and within – Chechnya. 
Terrorism has turned out to be a more stubborn challenge. 
As the war in Chechnya was drawing to a close in 2002, hundreds of people in a Moscow theater were taken hostage by terrorists from the North Caucasus. 
Similarly, in 2004, hundreds of schoolchildren in Beslan, North Ossetia, were seized by an armed group. 
The death toll in these two attacks alone topped 500. 
In 2005, armed Islamists seized Nalchik, a regional capital in the North Caucasus, and held it for a day. 
In 2010, at least 40 people died in two explosions in the Moscow metro set off by suicide bombers from Dagestan. 
The following year, 37 people were killed in a similar fashion at Moscow’s Domodedovo airport. 
The attacks have continued, despite Putin’s stated willingness to authorize strikes against suspected terrorists, “wherever they may be.” 
It is fair to say that terrorists have been at war with Russia almost from the very moment the Soviet Union dissolved. 
But it is no longer a fight for independence for a particular region in the Caucasus; instead, it is a fight to establish a “Caucasus caliphate” based on Sharia law. 
The terrorists’ methods have also changed. 
Their tactic of choice is no longer armed insurgency, as in the 1990’s, or raids by groups of militants, as in the 2000’s, but individual acts of terror. 
The targets range from police stations and liquor stores in the Caucasus to mainstream Muslim clerics in Tatarstan to ordinary people elsewhere in Russia. 
The Tsarnaev brothers – responsible for last year’s Boston Marathon bombings – exemplify this brand of terrorism, aimed at modern secular society in general, whether in Russia or elsewhere. 
It has been clear from the beginning that the Sochi Olympics, which epitomize everything that the terrorists oppose, would be a likely target. 
The recent bombings in Volgograd, in southern Russia, and Pyatigorsk, in the North Caucasus – which claimed three dozen lives – were probably designed to send the message to Russians that they are defenseless, while communicating to the rest of the world that Sochi is too dangerous to visit. 
And, to some extent, they have succeeded. 
Some have canceled their trips to Sochi, despite the international community’s condemnation of the attacks and vow to defy terrorism. 
US Defense Secretary Chuck Hagel recently told reporters that the US, working with Russian security officials, will be prepared to extract Americans from Sochi in the event of an attack. 
But the fact is that Sochi is perhaps the best-protected place in Russia today. 
With Putin’s personal standing at stake, the top priority of Russia’s police and security services is to ensure that the games proceed without incident. 
This raises another risk: with major law-enforcement assets deployed in or near Sochi, terrorists might try to strike elsewhere during the Olympics. 
After all, Russia is a vast country, and the terrorist cells are small and notoriously difficult to penetrate, partly because they often use primitive modes of communication that are difficult to detect. 
And, while international cooperation to combat terrorism is useful, its impact is constrained by suspicion and mistrust, as the Boston Marathon bombings highlighted. 
Parallel to the Sochi Olympics, another contest is already underway between the terrorists who seek to disrupt the games, or at least mar the atmosphere surrounding them, and the forces of the Russian state, whose task is to thwart the terrorists’ plans. 
This is one contest that Russia absolutely must win. 

DNA: Oracle or Nemesis? 
NEW YORK: Throughout history, shamans and soothsayers, wizards and witches have tried to read and tame the future. 
Today, geneticists have joined the prediction business. 
If scientists can decode the genetic code and read the instructions, so the argument goes, they will find the key to human ailments and predict our predispositions. 
Based on research, biotechnology companies have invested in sequencing technologies and developed predictive tests to identify those who are asymptomatic, but genetically predisposed to a growing number of genetic diseases and more common disorders such as certain types of cancer. 
Some scientists, indeed, are convinced that genetic tests will eventually help predict behavioral tendencies and personality traits – including predispositions to mental illness, homosexuality, addiction, even risk taking, timidity, and religiosity. 
In futuristic scenarios, they promise that genetic information will enhance control over both behavior and disease. 
Genetic tests differ significantly from other clinical tests. 
They can be used to detect a condition in healthy people who have no reason to suspect they are at risk. 
They provide probabilistic information about a person’s predisposition to a disease that may or may not occur far in the future; they provide information that implicates not only the future of the individual but of family members as well. 
There are among the many dangers that lurk here and many parties have less than a detached interest in this issue. 
Some people hope that predictive information will open therapeutic possibilities. 
But even when genetic tests correctly predict that a person is at risk, there may be little or no benefit from that knowledge. 
Despite decades of promises, tests are available far in advance of therapies. 
On the other hand, once identified, a genetic predisposition to a debilitating disease for which there is no cure may immediately expose a person to stigmatization and discrimination. 
A person “predisposed” to cancer, say, may have the biological qualities that heighten the odds of developing cancer, but many variables will influence the actual expression of the disease. 
In its social meaning, however, a predisposition is often defined as equivalent to having the disease. 
In a non-clinical context, individuals at risk in the future may be regarded as deserving differential treatment before it is known whether or not the disease will ever occur. 
Carrying the trait for a disorder, they can be labeled as “persons at risk” and deemed unsuited for normal activities. 
Genetic labeling may create an underclass of individuals whose genes condemn them to discrimination. 
For this reason, many people who know they are at risk for a disease because of their family history have chosen not to be tested. 
Among people at risk for Huntington's Disease, for example, about 15% spurn taking the test that would provide definitive information. 
Individuals considering genetic testing thus face difficult questions. 
Of what use is genetic information about a disease when there are no therapeutic options? 
Should a healthy woman diagnosed as susceptible to breast cancer undergo a prophylactic mastectomy? 
Should children and other family members who may also be at risk be informed? 
What are the implications of genetic screening for family planning? 
Eliminating genetic conditions ultimately depends on controlling reproduction. 
But policies of gene selection that may reduce the burden of disease border on the nightmare of eugenic controls. 
While the patient may derive limited or no benefit from testing, others may have great interest in administering it. 
Predictive information allows various organizations to reduce costs or increase profits. 
The rising cost of medical care and insurance, for example, encourages insurance companies to try to weed out those who may have “unprofitable,” i.e., reimbursable, illnesses. 
The need for profit encourages employers to give genetic tests to workers to discover who may be most productive, or who may be prone to illness that might lead to costly claims for compensation. 
Companies using toxic materials want to anticipate which workers may be genetically sensitive to toxic exposure. 
Schools, motor vehicle bureaus, adoption agencies, mortgage lenders, organ transplant registries all have a stake in information about genetic predispositions. 
But above all, pressures from a biotechnology industry that stands to profit from the proliferation of tests drives the expansion of genetic testing. 
There are more than 450 research programs in America developing genetic tests. 
The commercial stakes are growing as it becomes possible to test for predisposition to common diseases such as breast cancer and heart disease where the potential market is immense. 
Genetic prediction marks the intersection of scientific possibilities, economic interests, and consumer hopes and expectations. 
The ability to predict a growing number of complex and common diseases encourages testing, but also creates ethical dilemmas. 
The institutional interest in the predictive information from genetic tests conflicts with the rights and interests of individuals. 
Efforts to predict predisposition to behavior (as opposed to disease) will only compound these conflicts. 
Today genetic tests yield probabilities and uncertain, inadequate information. 
But even if perfected, how should this information be used? 
Can we avoid the creation of a genetic underclass? 
Should we be seeking “genetic fixes” or ways to re-engineer the genes we pass on to our children? 
As we seek to control disease, can we afford to mandate controls over reproduction? 
Such questions will have increasing salience in light of the concerns about economic efficiency and cost containment that are shaping the efforts of today's shamans to read, assess, and tame the future in this, the age of biotechnology. 

Do Antioxidant Supplements Work? 
NIS, Serbia – The influence of diet on health has been known since the Ancient Greeks. 
Our bodies simply cannot synthesize many essential compounds, so our health partly depends on what we eat and drink. 
Antioxidants, which are believed to help protect us against both cancer and heart disease, are one such element that must import into our bodies. 
Studies have shown that there is a significant positive association between a higher intake of fruits and vegetables and reduced risk of chronic disease. 
Fruits and vegetables are sources of numerous micronutrients, and some, including b-carotene (a precursor of vitamin A), vitamin C, vitamin E, and selenium, have potential as antioxidants. 
But what specifically makes fruits and vegetables so beneficial is not clear. 
The main role of antioxidants is to prevent oxidative damage to cellular components, so it has been proposed that dietary antioxidants decrease such damage and with it the risk of disease. 
This has stimulated interest in the possible preventive potential of antioxidant supplements. 
Indeed, consumption of antioxidant supplements in developed countries has become widespread. 
More than one-third of adults in developed countries now ingest antioxidant pills, which is much easier than eating fruits and vegetables. 
But will the benefits be the same? 
As with any therapeutic intervention, the most convincing and direct proof of the preventive efficacy of antioxidant supplements requires randomized, controlled clinical trials. 
Such trials eliminate the problems of participants’ dietary record and controls the effects of both known and unknown confounding factors. 
So far, many studies have been conducted to verify the supposed beneficial effects of antioxidant supplements. 
But, while the results of epidemiological studies have been almost uniformly positive, the results of clinical trials have remained largely inconclusive. 
Some clinical trials were terminated prematurely because harmful effects of antioxidant supplements were observed. 
Indeed, the overwhelming evidence currently calls into question the preventive effect of antioxidant pills. 
On the contrary, they may be harmful, leading to an increased risk of mortality in people consuming them. 
There are several possible explanations for the negative effect of antioxidant supplements. 
First, the “free radicals” that anti-oxidants act against perform a dual biological function. 
Free radicals are produced continuously in all cells as part of their normal functioning. 
In moderate concentrations, they are essential mediators of reactions by which our bodies eliminate unwanted cells. 
By eliminating free radicals from our body, we interfere with important defensive mechanisms for eliminating damaged cells, including cancerous cells. 
So antioxidant substances can also harm people. 
Whereas our diets typically contain safe levels, highly concentrated antioxidant supplements can be hazardous. 
In fact, the amounts of antioxidants that lend protection are not known and probably differ among individuals. 
People exposed to increased oxidative stress may have elevated antioxidant requirements. 
Moreover, antioxidant supplements in pills are synthetic and biochemically unbalanced compared to their naturally occurring counterparts. 
Nor are they subjected to the same rigorous toxicity studies as other pharmaceutical agents. 
Indeed, we still lack substantial information on how our bodies metabolize them and how they interact with one another. 
As a result, it is still unclear whether dosage, duration of use, or parallel intake of other agents determine differences in their effect. 
It also is unclear whether oxidative stress is a primary cause or a secondary phenomenon of chronic diseases, as well as of the aging process. 
In most human disease, oxidative stress is merely a symptom. 
So the link between oxidative stress and disease should not be overemphasized. 
There are still many gaps in our knowledge of the mechanisms of action of antioxidant supplements. 
Basic issues concerning the efficacy and safety of consuming relatively high doses of antioxidant supplements need to be resolved. 
Results of ongoing clinical trials and further studies are required to improve our knowledge. 
In the meantime, we know that antioxidants can cause unwanted health consequences. 
So the optimal source for antioxidants is diet, not supplements. 
In short, we should stop taking pills and eat more fruits and vegetables. 

Do Central Banks Have an Exit Strategy? 
SINGAPORE – A year into the global financial crisis, several key central banks remain extraordinarily exposed to their countries’ shaky private financial sectors. 
So far, the strategy of maintaining banking systems on feeding tubes of taxpayer-guaranteed short-term credit has made sense. 
But eventually central banks must pull the plug. 
Otherwise they will end up in intensive care themselves as credit losses overwhelm their balance sheets. 
The idea that the world’s largest economies are merely facing a short-term panic looks increasingly strained. 
Instead, it is becoming apparent that, after a period of epic profits and growth, the financial industry now needs to undergo a period of consolidation and pruning. 
Weak banks must be allowed to fail or merge (with ordinary depositors being paid off by government insurance funds), so that strong banks can emerge with renewed vigor. 
If this is the right diagnosis of the “financial crisis,” then efforts to block a healthy and normal dynamic will ultimately only prolong and exacerbate the problem. 
Not allowing the necessary consolidation is weakening credit markets, not strengthening them. 
The United States Federal Reserve, the European Central Bank, and the Bank of England are particularly exposed. 
Collectively, they have extended hundreds of billions of dollars in short-term loans to both traditional banks and complex, unregulated “investment banks.” 
Many other central banks are nervously watching the situation, well aware that they may soon find themselves in the same position as the global economy continues to soften and default rates on all manner of debt continue to rise. 
If central banks are faced with a massive hit to their balance sheets, it will not necessarily be the end of the world. 
It has happened before – for example, during the 1990’s financial crises. 
But history suggests that fixing a central bank’s balance sheet is never pleasant. 
Faced with credit losses, a central bank can either dig its way out through inflation or await recapitalization by taxpayers. 
Both solutions are extremely traumatic. 
Raging inflation causes all kinds of distortions and inefficiencies. 
(And don’t think central banks have ruled out the inflation tax. 
In fact, inflation has spiked during the past year, conveniently facilitating a necessary correction in the real price of houses.) 
Taxpayer bailouts, on the other hand, are seldom smooth and inevitably compromise central bank independence. 
There is also a fairness issue. 
The financial sector has produced extraordinary profits, particularly in the Anglophone countries. 
And, while calculating the size of the financial sector is extremely difficult due to its opaqueness and complexity, official US statistics indicate that financial firms accounted for roughly one-third of American corporate profits in 2006. 
Multi-million dollar bonuses on Wall Street and in the City of London have become routine, and financial firms have dominated donor lists for all the major political candidates in the 2008 US presidential election. 
Why, then, should ordinary taxpayers foot the bill to bail out the financial industry? 
Why not the auto and steel industries, or any of the other industries that have suffered downturns in recent years? 
This argument is all the more forceful if central banks turn to the “inflation tax,” which falls disproportionately on the poor, who have less means to protect themselves from price increases that undermine the value of their savings. 
British economist Willem Buiter has bluntly accused central banks and treasury officials of “regulatory capture” by the financial sector, particularly in the US. 
This is a strong charge, especially given the huge uncertainties that central banks and treasury officials have been facing. 
But if officials fail to adjust as the crisis unfolds, then Buiter’s charge may seem less extreme. 
So how do central banks dig their way out of this deep hole? 
The key is to sharpen the distinction between financial firms whose distress is truly panic driven (and therefore temporary), and problems that are more fundamental. 
After a period of massive expansion during which the financial services sector nearly doubled in size, some retrenchment is natural and normal. 
The sub-prime mortgage loan problem triggered a drop in some financial institutions’ key lines of business, particularly their opaque but extremely profitable derivatives businesses. 
Some shrinkage of the industry is inevitable. 
Central banks have to start fostering consolidation, rather than indiscriminately extending credit. 
In principle, the financial industry can become smaller by having each institution contract proportionately, say, by 15%. 
But this is not the typical pattern in any industry. 
If sovereign wealth funds want to enter and keep capital-starved firms afloat in hopes of a big rebound, they should be allowed to do so. 
But they should realize that large foreign shareholders in financial firms may be far less effective than locals in coaxing central banks to extend massive, no-strings-attached credit lines. 

Do Economic Sanctions Work? 
CAMBRIDGE – With Western economic sanctions against Russia, Iran, and Cuba in the news, it is a good time to take stock of the debate on just how well such measures work. 
The short answer is that economic sanctions usually have only modest effects, even if they can be an essential means of demonstrating moral resolve. 
If economic sanctions are to play an increasingly important role in twenty-first-century statecraft, it might be worth reflecting on how they have worked in the past. 
As Gary Hufbauer and Jeffrey Schott note in their classic book on the topic, the history of economic sanctions goes back at least to 432 BC, when the Greek statesman and general Pericles issued the so-called “Megarian decree” in response to the abduction of three Aspasian women. 
In modern times, the United States has employed economic sanctions in pursuit of diverse goals, from the Carter administration’s efforts in the 1970s to promote human rights, to attempts to impede nuclear proliferation in the 1980s. 
During the Cold War, the US also employed economic sanctions to destabilize unfriendly governments, especially in Latin America, though they do not appear to have played more than a minor role, even where regime change eventually occurred. 
Economic sanctions on Serbia in the early 1990s did not deter the invasion of Bosnia. 
Certainly, the US government’s symbolic punishment of chess legend Bobby Fischer (for playing a match in Belgrade that violated sanctions) provided no relief for the besieged city of Sarajevo. 
The old Soviet Union played the sanctions game as well – for example, against China, Albania, and Yugoslavia. 
It, too, did not have much success, except perhaps in the case of Finland, which ultimately bent its policies to gain relief from sanctions imposed in 1958. 
Most modern cases of sanctions pit a large country against a small country, though there are a few cases involving countries of equal size, such as the long quarrel, from the 1950s to the 1980s, between the United Kingdom and Spain over Gibraltar. 
As Hufbauer and Schott, among others, have illustrated, the effects of sanctions are often fairly disappointing – so much so that many scholars have concluded that such measures often are imposed so that governments can appear to domestic audiences to be “doing something.” 
Certainly, severe US sanctions on Cuba failed to bring the Castro regime to heel; indeed, President Barack Obama’s move to reestablish full diplomatic relations may have more effect. 
But sometimes sanctions do work. 
The strong international consensus to impose sanctions on South Africa in the 1980s eventually helped bring an end to apartheid. 
Likewise, sanctions have helped bring Iran to the bargaining table, though it is not clear how long its government will be willing to defer its nuclear ambitions. 
And the Russian economy today is in big trouble, though this might be described as a lucky punch, with the real damage being done by an epic collapse in global oil prices. 
Some in Russia, where the price collapse has hit government revenues hard, claim that the US and Saudi Arabia are conspiring to bring Russia to its knees. 
But that gives US strategists far too much credit. 
A more likely culprit for the steep price decline is a combination of the shale-energy revolution in the US and the sharp slowdown in Chinese growth. 
China’s slowdown has helped precipitate a broad-based fall in commodity prices that is having a devastating effect on countries like Argentina and Brazil, with which the US authorities presumably have little quarrel. 
One of the major reasons economic sanctions have fallen short in the past is that not all countries have complied. 
Indeed, significant differences of domestic opinion in the imposing country often undermine sanctions as well. 
Moreover, countries imposing sanctions must be prepared to address their own vulnerabilities. 
North Korea is perhaps the most noxious regime in the world today, and one can only hope that its cruel government collapses sometime soon. 
The Kim regime has clung to power despite being subject to severe economic sanctions, perhaps because China, fearing a united Korea on its border, has not yet been willing to withdraw its support. 
Yet it is easy to forget that there are different viewpoints in international relations, even in the most extreme situations. 
Though North Korea’s alleged attack on Sony Pictures’ computers has been rightly condemned, it must be admitted that from the perspective of the North Korean elite, their country simply applied economic retaliation much like anyone else does. 
Sony Pictures had produced a satire poking fun at North Korea’s leader, the “Young General” Kim Jong-un. 
This was an intolerable affront, to which the elite responded with economic sabotage rather than military action. 
Let us also not forget that Russia, too, has deployed cyber attacks in the service of foreign-policy goals. 
Indeed, Russia has far more formidable hackers than North Korea (though much of the top talent currently is employed in mafia rings, rather than in strategic operations). 
In a world where nuclear proliferation has rendered global conventional war unthinkable, economic sanctions and sabotage are likely to play a large role in twenty-first-century geopolitics. 
Rather than preventing conflict, Pericles’s sanctions in ancient Greece ultimately helped to trigger the Peloponnesian War. 
One can only hope that in this century, wiser heads will prevail, and that economic sanctions lead to bargaining, not violence. 

Do Low Interest Rates Ensure High Asset Prices? 
Asset prices– stocks, commercial real estate, and even oil – are, historically, at high levels around the world. 
Although history is often a good predictor of future trends, every now and then something fundamental changes that makes for a new pattern. 
The important question now is whether today’s high asset prices are the result of some such fundamental development, or whether bubbles have formed. 
One oft-heard justification for high asset prices is that real (inflation-adjusted) long-term interest rates are very low. 
But investors should be wary of this argument. 
It may sound plausible, but it is hardly conclusive, and, more importantly, it certainly does not tell us that high prices are sustainable. 
It is, of course, true that real long-term interest rates have declined quite markedly – not suddenly and not only recently, but at a fairly steady pace for more than twenty years. 
According to the IMF, world real long-term interest rates peaked at nearly 7% on average in 1984, and fell to just below 2% by 2004. 
There were some ups and downs along the way, but the overall trend has been downward, and the magnitude of the decline – nearly five percentage points – is striking. 
Ben Bernanke, the Chairman of President George W. Bush’s Council of Economic Advisors and a likely candidate to succeed Alan Greenspan as the Federal Reserve’s chairman in January, has called the decline in real interest rates over just the last decade a “global savings glut.” 
It is not that there is “too much” saving around the world today, but that the amount of saving has been high enough that returns, as measured by real interest rates, are a lot lower than they once were. 
In a March 2005 speech, Bernanke argued that this “glut” helps explain several features of the American economy, possibly including the enormous fiscal and trade deficits. 
Low real long-term rates mean that any long-term asset that pays, say, $100 a year in real terms would have been worth a real $1,429 in 1984, when it yielded 7%, but would have to be worth a real $5,000 now, when it yields just 2%. 
A decline in long-term rates of such magnitude would thus appear to imply massive price inflation for real assets, justifying the high prices we are in fact seeing. 
Case closed, according to some advocates of pricey investments. 
But there are holes in this case. 
We have to look at the reasons that real interest rates were so much higher 10 or 20 years ago, and think about what that means, and we also have to look at the broader history of asset prices and their relation to real interest rates. 
Twenty years ago, real short-term interest rates were exceptionally high by historical standards because the major central banks of the world wanted to combat what was seen at the time as inaction against spiraling inflation. 
It took the courage – or recklessness, depending on your point of view – of US Federal Reserve Chairman Paul Volcker to send the world into recession in 1981-2 in order to break the back of inflation. 
That recession was destructive, but it had one silver lining: an inspiration to the world that an independent central bank can take tough measures to ensure price stability. 
But, while the worldwide recession of 1981-2 brought inflation down rapidly, nominal long-term interest rates did not fall immediately, for the world’s markets were still not convinced. 
Hence, real long-term rates remained quite high in the mid-1980’s. 
Gradually, with lenders becoming increasingly confident in subsequent years that low inflation was here to stay, real long-term interest rates began heading south. 
But this history means that the true real long-term interest rate was not as high in the 1980’s as our measures show, because long-term inflation expectations must have been much higher than the one-year inflation rate was at the time. 
Holders of long-term bonds, for example, must have thought that inflation would come roaring back after the effects of the 1981-2 global recession had passed. 
The inflation-indexed bond markets were not well developed in the 1980’s. 
But we do know that in 1984 the best-developed such market (in the United Kingdom) was quoting long-term real interest rates of only around 3% – far below the IMF’s figure. 
Even if we were to accept that real rates were genuinely very high in the mid-1980’s, then the logical conclusion would be that the stock and housing markets should have been even lower in the 1980’s, not that real prices should be very high in 2005. 
In fact, if one takes a longer view of real interest rates in the US, calculated by subtracting the previous year’s inflation from the nominal government bond yield, one finds that, while they are much lower than 20 years ago, they are not low by historical standards. 
The average real long-term government interest rate in 1891-1979 – a period ending just before Volcker oversaw soaring growth in borrowing costs – was a mere 1.25%, which is very close to the real long-term interest rate today. 
In short, we simply shouldn’t read too much into the decline in real long-term interest rates over the last 20 years. 
Historically, real rates have jumped around a lot, showing little correlation with asset prices. 
Whatever their other benefits, the low rates we see around the world now hardly amount to insurance against future drops in asset prices. 

Do What We Did, Not What We Say 
Today, many emerging markets, from Indonesia to Mexico, are told that there is a certain code of conduct to which they must conform if they are to be successful. 
The message is clear: here is what advanced industrial countries do, and have done. 
If you wish to join the club, you must do the same. 
The reforms will be painful, vested interests will resist, but with enough political will, you will reap the benefits. 
Each country draws up a list of what to be done, and each government is held accountable in terms of its performance. 
In all countries, balancing the budget and controlling inflation are high on the list, but so are structural reforms. 
In the case of Mexico, for example, opening up the electricity industry, which Mexico's constitution reserves to the government, has become the structural reform of the day demanded by the West. 
So analysts--mindlessly one is tempted to say--praise Mexico for its progress in controlling its budget and inflation, but criticize it for lack of progress in electricity reform. 
As someone who was intimately involved in economic policy making in the US, I have always been struck by the divergence between the policies that America pushes on developing countries and those practiced in the US itself. 
Nor is America alone: most other successful developing and developed countries pursue similar "heretical" policies. 
For example, both political parties in the US now accept the notion that when a country is in a recession, it is not only permissible, but even desirable , to run deficits. 
Yet all over the world, developing countries are told that central banks should focus exclusively on price stability. 
America's central bank, the Federal Reserve Board, has a mandate to balance growth, employment, and inflation--and it is a mandate that brings it popular support. 
While free marketers rail against industrial policy, in the US the government actively supports new technologies, and has done so for a long time. 
The first telegraph line was built by the US Federal Government between Baltimore and Washington in 1842; the Internet, which is so changing today's economy, was developed by the US military. 
Much of modern American technological progress is based on government-funded research in biotechnology or defense. 
Similarly, while many countries are told to privatize social security, America's public social security system is efficient (with transactions costs a fraction of private annuities), and customers are responsive to it. 
It has been pivotal in almost eliminating poverty among America's elderly. 
While the US Social Security System now faces a problem with under-funding, so do a large fraction of America's private pension programs. 
And the public pension system has provided the elderly with a kind of security--both against inflation and the vagaries of the stock market--that the private market to date simply has not. 
Correspondingly, many aspects of American economic policy contribute significantly to America's success, but are hardly mentioned in discussions of development strategies. 
For more than a hundred years, America has had strong anti-trust laws, which broke up private monopolies in many areas, such as oil. 
In some emerging markets, telecom monopolies are stifling development of the Internet, and hence economic growth. 
In others, monopolies in trade deprive countries of the advantages of international competition, while monopolies in cement significantly raise the price of construction. 
The American government also played an important role in developing the country's financial markets--by providing credit directly or through government-sponsored enterprises, and by partially guaranteeing a quarter or more of all loans. 
Fannie Mae, the government-created entity responsible for providing mortgages for middle-class Americans, helped lower mortgage costs and played a significant role in making America one of the countries with the largest proportion of private home ownership. 
The Small Business Administration provided the capital to help small businesses--some of which, like Federal Express, have grown into major businesses creating thousands of jobs. 
Today, US Federal Government student loans are central to ensuring that all Americans have access to a college education, just as in earlier years, government finance helped bring electricity to all Americans. 
Occasionally, America has experimented with free-market ideology and deregulation--sometimes with disastrous effects. 
President Ronald Reagan's deregulation of the Savings and Loan Associations led to an infamous wave of bank failures that cost American taxpayers several hundred billion dollars and contributed to the economic recession of 1991. 
Those in Mexico, Indonesia, Brazil, India and other emerging markets should be told a quite different message: do not strive for a mythical free-market economy, which has never existed. 
Do not follow the encomiums of US special interests, whether in the corporate or financial arena, because, although they preach free markets, back home they rely on the US government to advance their aims. 
Instead, developing economies should look carefully, not at what America says, but at what it did in the years when America emerged as an industrial power, and what it does today. 
There is a remarkable similarity between those policies and the activist measures pursued by the highly successful East Asian economies over the past two decades. 

Is the Financial Sector Safe Enough Yet? 
CAMBRIDGE – A decade after the global financial crisis, policymakers worldwide are still assessing how best to prevent bank failures from tanking the economy again. 
Two recent publications – one from the US Department of the Treasury, and another by Federal Reserve economists – provide an indication of where we are. 
The US Treasury report examined whether to replace the 2010 Dodd-Frank Act’s regulator-led process for resolving failed mega-banks – the Orderly Liquidation Authority (OLA) – with a solely court-based mechanism. 
The Treasury’s study was undertaken under instructions from President Donald Trump, who was responding to pressure from several Republican congressional leaders – such as Representative Jeb Hensarling of Texas, the chair of the House Financial Services Committee – who advocate replacing regulators with courts. 
Ultimately, while the Treasury extolled the virtues of basic bankruptcy for failed banks, it rejected repealing regulators’ powers to lead bank restructurings. 
Hensarling expressed deep disappointment with the Treasury’s conclusion, and he and his colleagues continue to insist that Dodd-Frank is an example of inappropriate government meddling that raises the risks of taxpayer-funded bailouts. 
But, as the Treasury recognized, eliminating the regulators is a problematic proposition. 
Restructuring banks in a crisis requires planning, familiarity with the bank’s strengths and weaknesses, knowledge of how best to time the bankruptcy in a volatile economy, and a capacity to coordinate with foreign regulators. 
The courts cannot fulfill these tasks, especially not in the time currently allotted for a bank bankruptcy – a 48-hour weekend – without regulators’ prior planning and immediate advice, as well as international coordination. 
Moreover, if multiple mega-banks sank simultaneously, bankruptcy courts could not manage the economy-wide crisis that would follow. 
They lack the training to devise a nationwide recovery plan. 
And they are in no position to coordinate proceedings with foreign regulators. 
Given all of this, eliminating regulator-led restructuring would amount to a big step backward. 
So the Treasury’s report is good news, especially because, without Treasury support, the House of Representatives may well stop pushing for this change. 
Yet the second recent publication – by several Fed economists – suggests that there is work to be done. 
That report’s main conclusion is that restructuring planning is not yet reflected in the market’s pricing of bank bonds. 
After the crisis, studies by International Monetary Fund staff and others concluded that banks needed much more loss-absorbing equity. 
In 2009, only five cents of every dollar of funding for many major banks came from equity; the rest was debt (deposits, overnight loans, and long-term loans). 
So if the bank lost six cents in its operations per dollar of debt, some creditor could not be fully paid. 
Seeking to avoid losses, many creditors would rush to cash out, putting pressure on the entire banking system and potentially triggering a run. 
According to the IMF study, most banks could have weathered the crisis effectively if 15 cents of every dollar of funding had come from equity. 
Yet banks still hold only eight or nine cents per dollar of funding in equity, despite regulators’ pushed for an increase , and the biggest banks have called for reducing even this suboptimal ratio. 
Regulators and bankers have sought a middle ground to boost safety. 
In addition to the eight cents of equity they are holding, banks are now aiming to hold another eight cents per dollar of debt that could be turned into equity in the course of a weekend. 
In such a scenario, a damaged bank could absorb more losses and remain in operation, diminishing creditors’ incentive to run. 
But there is a potential hitch. 
Under the current plan, certain creditors are designated in advance to absorb a failed bank’s losses once the equity is wiped out. 
Those creditors’ debts are thus riskier, and should be more expensive to the bank than the debt that is not designated to be turned into equity. 
Yet the Fed economists conclude that, in the market, this is not the case. 
Why? 
The first possibility is rather optimistic: financial markets don’t think there could be another financial crisis during the life of the existing debt. 
But could markets really believe that there is zero chance of a crisis in the next decade? 
The risks of, say, a trade war or a fiscal crisis (when the projected trillion-dollar deficits are reached) are real, apparent, and priced by volatile stock markets. 
Another more neutral possibility is that markets aren’t pricing the different types of debt differently because they do not understand that the plan involves hitting some creditors hard and keeping others safe. 
But this is also unlikely, because the plan has been well publicized in financial circles, and ratings agencies like Moody’s count the loss-absorbing debt as riskier than banks’ regular debt. 
The third explanation is more ominous. 
Maybe financial markets understand the plans, but don’t (yet) find them credible. 
Weekend restructuring of mega-banks has never been tried, and commentators still see potential hurdles to overcome. 
Maybe knowledgeable investors assume that, ultimately, banks and the government will not treat the designated loss-absorbing creditors any differently than others. 
Either everyone will go down, or everyone will get bailed out. 
If this is the reason, it is disappointing, given how much work has gone into developing both the regulatory-led and the court-led restructuring mechanisms. 

Could Hensarling’s Dodd-Frank “Off-Ramp” Work? 
CAMBRIDGE – Jeb Hensarling, the Republican chair of the Financial Services Committee in the US House of Representatives, delivered a wide-ranging speech last month at the Economic Club of New York, proposing to overhaul US financial regulation. 
Hensarling blamed regulators and excused Wall Street for the financial crisis; condemned government-funded bank bailouts; characterized the 2010 Dodd-Frank financial-reform legislation as a power grab; and called for increased congressional oversight of the Federal Reserve. 
Most of Hensarling’s proposals – even backed, as they now are, by a partisan-sounding document from the House Banking committee and a favorable Wall Street Journal review – are political nonstarters. 
(They would have to get 60 Senate votes and a presidential signature to pass.) 
They have already been sharply criticized by Democrats as being too risky and pro-bank – which they largely are. 
That said, one of Hensarling’s ideas is well worth exploring: an “off-ramp,” as he put it, from Dodd-Frank regulation for banks that willingly increase their available capital. 
Let’s go back to basics for a moment. 
The government guarantees bank deposits because a banking failure could hurt the entire economy. 
This creates moral hazard, as banks, looking for big shareholder gains, become lax in managing what effectively becomes the public’s money. 
They feel comfortable taking big risks, because if they lose, they just turn the bank over to the government to pay off depositors and other creditors. 
And if they win, they and their shareholders keep the bonanza. 
Regulators use two key measures to mitigate such risk-taking: they require banks to hold more capital and to keep investments, loans, and operations safer (and potentially less profitable) than the banks want them to be. 
Because these two central regulatory methods achieve the same end, they can theoretically be substituted for one another – regulators can set banks’ capital requirement very high, or they can set the riskiness of banks’ activities very low. 
In practice, because regulators cannot do either perfectly, they do some of each. 
Hensarling’s off-ramp proposal builds on that tradeoff, giving banks more leeway to decide whether they want less risk or more capital. 
Baseline regulation would be the typical mixture of the two, but individual banks could opt for substantially higher capital requirements in exchange for permission to engage in riskier investments and operations. 
In other words, they could reduce the constraints of one regulatory measure in exchange for tightening those of the other. 
This is conceptually sound. 
But there are problems with Hensarling’s proposal as he has articulated it. 
And they are not small. 
First, the ratio of capital that Hensarling would require of banks that take an off-ramp is far too low, at 10% of total assets. 
That is higher than current levels, but not high enough to ensure bank safety. 
The Financial Stability Board and the International Monetary Fund each found that many banks threatened during the financial crisis of 2007 and 2008 would have needed double today’s levels of capital to survive intact. 
Were the Hensarling proposal to be implemented, those levels would have to be even higher, owing to the reduction in risk regulation. 
Only if capital were increased substantially – to “shock and awe” levels – would the banks and their executives conclude, without regulatory instruction, that it is not in their or their stockholders’ interest to take on much risk. 
A second problem with Hensarling’s proposal is that banks are likely to reject it as long as corporate tax policy remains unchanged. 
As I have argued in previous commentaries, and in a recent academic paper written with Michael Troege, requiring banks to have more capital raises their tax bill, because it reduces the level of tax-deductible debt and increases that of taxable equity. 
If the tax code is not reformed, few banks will find the tradeoff attractive, because a higher tax bill will cancel out returns from taking Hensarling’s offer. 
The third problem is one of logistics: Hensarling’s plan would hardwire into legislation the parameters for banks to take a regulatory off-ramp, thus tying regulators’ hands. 
Once a bank had the 10% capital, it could neither be stopped from key mergers nor be determined to be systemically important and risky. 
Because financial circumstances change quickly, regulators, who can adapt to new conditions faster than Congress can, should have discretion to set capital-requirement and loan-risk tradeoff benchmarks. 
Under Hensarling’s plan, they would not. 
More insidious, by repealing much of the Dodd-Frank risk regulation, the Hensarling proposal would virtually eliminate banks’ incentive to choose the off-ramp. 
There wouldn’t be enough regulation for them to feel the need to escape. 
Banks could thus have their cake and eat it. 
Despite all of this, regulators should thank Hensarling for pushing forward the concept of a flexible tradeoff framework. 
While the details of his particular proposal are problematic, to say the least, the concept has real potential. 
The result could be a more dynamic financial system – and also a safer one. 

Does “Curing” Cancer Kill Patients? 
TAMPA – Patients and politicians increasingly demand a “cure” for cancer. 
But controlling the disease may prove to be a better strategy than striving to cure it. 
A century ago, the German Nobel laureate Paul Ehrlich introduced the concept of “magic bullets” – compounds engineered to target and kill tumor cells or disease-causing organisms without affecting normal cells. 
The success of antibiotics 50 years later seemed to validate Ehrlich’s idea. 
So influential have medicine’s triumphs over bacteria been that the “war on cancer” continues to be driven by the assumption that magic bullets will one day be found for tumor cells if the search is sufficiently clever and diligent. 
Yet lessons learned in dealing with exotic species, combined with recent mathematical models of the evolutionary dynamics of tumors, indicate that eradicating most cancers may be impossible. 
Trying to do so, moreover, could worsen the problem. 
In 1854, the year Ehrlich was born, the diamondback moth was first observed in Illinois. 
Within five decades, the moth had spread throughout North America. 
It now infests the Americas, Europe, Asia, and Australia. 
Attempts to eradicate it using chemicals worked only fleetingly. 
In the late 1980’s, biologists found strains that were resistant to all known insecticides. 
So farmers abandoned their efforts to eliminate the moth. 
Instead, most now apply insecticides only when infestation exceeds some threshold level, with the goal of producing a sustainable and satisfactory crop. 
Under the banner of “integrated pest management,” hundreds of invasive species are now successfully controlled by strategies that restrict the population growth of pests but do not attempt to eradicate them 
The ability of tumor cells to adapt to a wide range of environmental conditions, including toxic chemicals, is similar to the evolutionary capacities demonstrated by crop pests and other invasive species. 
As in the case of the Diamondback moth, successful eradication of disseminated cancer cells is rare. 
But despite the paucity of success, the typical goal in cancer therapy remains similar to that of antimicrobial treatments – killing as many tumor cells as possible under the assumption that this will, at best, cure the disease and, at worst, keep the patient alive for as long as possible. 
Some types of cancer – for example, Hodgkin’s lymphoma, testicular cancer, and acute myeloid leukemia – can be consistently cured using aggressive chemotherapy. 
But these malignant cells seem to be particularly responsive to “treatment.” 
Just as invasive species adapt to pesticides, most cancer cells adapt to therapies. 
Indeed, the parallels between cancerous cells and invasive species suggest that the principles for successful cancer therapy might be found not in the magic bullets of microbiology but in the evolutionary dynamics of applied ecology. 
Recent research suggests that efforts to eliminate cancers may actually hasten the emergence of resistance and tumor recurrence, thus reducing a patient’s chances of survival. 
The reason arises from a component of tumor biology not ordinarily investigated: the cost of resistance to treatment. 
Cancer cells pay a price when they evolve resistance to chemotherapy. 
For example, to cope with toxic drugs, a cancer cell may increase its rate of DNA repair, or actively pump the drug out across the cell membrane. 
In targeted therapies, in which drugs interfere with the molecular signaling needed for proliferation and survival, a cell might adapt by activating or following alternative pathways. 
All these strategies use up energy that would otherwise be available for invasion into non-cancerous tissues or proliferation, and so reduce a cell’s fitness. 
The more complex and costly the mechanisms used, the less fit the resistant population will be. 
That cancer cells pay a price for resistance is supported by several observations. 
Cells in laboratory cultures that are resistant to chemotherapies typically lose their resistance when the chemicals are removed. 
Lung cancer cells that are resistant to the chemotherapy gemcitabine are less proliferative, invasive, and motile than their drug-sensitive counterparts. 
Although resistant forms are commonly found in tumors that haven’t yet been exposed to treatment, they generally occur in small numbers. 
This suggests that resistant cells are not so unfit that drug-sensitive cells completely out-competed them, but that they struggle to proliferate when both types are present. 
Our models show that in the absence of therapy, cancer cells that haven’t evolved resistance will proliferate at the expense of the less-fit resistant cells. 
When a large number of sensitive cells are killed, say, by aggressive therapies, resistant types can proliferate unconstrained. 
This means that high doses of chemotherapy might actually increase the likelihood of a tumor becoming unresponsive to further therapy. 
So, just as judicious use of pesticides can control invasive species, a therapeutic strategy designed to maintain a stable, tolerable tumor volume could improve a patient’s prospects for survival by allowing sensitive cells to suppress the growth of resistant ones. 
To test this idea, we treated a human ovarian cancer, grown in mice, with conventional high-dose chemotherapy. 
The cancer rapidly regressed but then recurred and killed the mice. 
Yet when we treated the mice with a drug dose continuously adjusted to maintain a stable tumor volume, the animals, though not cured, survived for a prolonged period of time. 
Designing therapies to sustain a stable tumor mass rather than eradicate all cancer cells will require a strategy that looks beyond the immediate cytotoxic effects of any one treatment. 
Researchers will need to establish the mechanisms by which cancer cells achieve resistance and what it costs them. 
They will need to understand the evolutionary dynamics of resistant populations, and design strategies to suppress or exploit the adapted characteristics. 
Of course, cancer researchers should not abandon their search for ever-more-effective cancer therapies, even for cures. 
But it may be time to temper our quest for magic bullets and recognize the cold reality of Darwin’s evolutionary dynamics. 



Does Clinton Deserve Credit for US Prosperity? 
CAMBRIDGE: A pivotal question to be debated in this year’s US presidential election is whether American prosperity resulted from Clinton Administration policies or from deeper changes arising from new technology and globalization. 
In short, should Bill Clinton or Bill Gates get the credit for America’s boom? 
The economic successes of Clinton’s eight years are undoubted. 
America enjoys its longest continuous economic expansion in history, now more than nine years old. 
Economic growth averaged 3.6% per year between 1992-1999, far above the 2.9% per year growth between1980-92. 
15 million jobs were created between 1992 and 1999; the unemployment rate, now 4%, is the lowest in 30 years. 
The stock market’s performance is legendary, with capital gains totaling 7 trillion dollars since the start of 1996. 
No government, of course, could be fully responsible for such large trends. 
Still, the Clinton Administration was more than a bystander. 
For President Clinton took a favorable inheritance B the results of the policies of previous governments, as well as global trends and innovations in science and technology B and skillfully fashioned an economic governance well designed for a knowledge based economy. 
His Administration deserves much credit, both for policies followed and mistakes avoided. 
First the inheritance. 
A good starting point was the end of the Cold War which enabled the US to reduce military spending by around 2.5% of GDP (comparing 1990 and 2000), a saving worth around $225 billion per year. 
This helped Clinton reduce the budget deficit in a rather painless manner. 
The second inheritance was a flexible, deregulated economy with fairly low marginal tax rates, a legacy of the Reagan-Bush era. 
The third inheritance was low inflation. 
When Clinton came to office there was no need for heroic stabilization policies. 
The battle against high inflation was won ten years earlier. 
So Clinton and the Federal Reserve Board under Alan Greenspan could pursue economic growth without worrying about the economy overheating. 
The first distinct accomplishment of the Clinton Administration was to adopt some key mainstream choices of economic policymaking. 
When Clinton came to office in 1993, he had to make several key choices: 
1. promote free trade, in line with policies of the Reagan and Bush administrations, or turn more protectionist as his trade-union allies urged? 
2. reduce the budget deficit, in line with mainstream economic thinking, or boost government spending, as many left-of-center economists were arguing? 
In both cases, pressures from the Republicans as well as from centrist Democrats helped to pull the Clinton Administration onto the correct track: supporting free trade despite powerful protectionist allies in the Democratic Party; supporting budget deficit reduction instead of large fiscal spending programs. 
Clinton Administration support for the North American Free Trade Agreement with Mexico, completion of the Uruguay Round on multilateral trade, and recent agreement to admit China into the World Trade Organization, are all accomplishments in support of global trade. 
More recently, Clinton defended the economic mainstream against attack by conservative Republicans, who pushed for deep tax cuts that would undermine the fiscal surpluses of recent years. 
These Conservatives also pressed for sharp cuts in government spending that would hurt the poor. 
Clinton held the line against these excesses as well. 
Clinton’s Administration has done much more, however, than defend the economy against ideological extremists. 
It fashioned, bit by bit, a kind of “industrial policy” for the new Knowledge Economy. 
Clinton understood earlier than most politicians, and economists as well, that US economic strength derived from a combination of basic science, technological innovation, and high-quality education. 
His Administration therefore shaped a role for government that supports the generation and diffusion of knowledge in all spheres of knowledge creation. 
First, America increased the level of government support for science, reaching a sum of around $85 billion in this year’s budget. 
Government-supported research shaped scientific advances in information technology and biotechnology, two critical fields in which the US has the global scientific lead. 
Second, Clinton policies fostered development and expansion of the internet as a core strategy of economic growth. 
Clinton pushed for, and achieved, a period of tax holidays on electronic commerce. 
His administration shaped the regulatory environment to achieve rapid adoption of internet-based activities and championed government programs to help get schools and libraries connected to the internet. 
It even advocated liberalization of work permits for foreign workers skilled in internet technologies. 
Third, Clinton pushed expansion of various programs to support higher education. 
The share of US students going on to higher education after secondary school is now 67%, up 10% over the preceding decade. 
The Administration recognized that higher education is the sine qua non for a successful high-technology economy. 
The basic lessons of US success should be recognized: macroeconomic stability; budgetary prudence; global trade, competition and de-monopolization in telecommunications and finance; and an active industrial policy geared towards a knowledge-based economy, building upon science, research and development, information technology, and higher education. 
All of this depends, as well, on continuing reduction of global tensions. 
This is not to say that all is now right with US policymaking or that the path ahead is risk-free. 
The run-up in stock market prices in recent years was partly a financial bubble, and there may be a price to pay for it. 
Moreover, despite US economic successes at home, America has neglected its moral and practical responsibilities as an aid giver to poor countries. 
This is a sad counterpoint to American successes at home. 

Does Egypt Need a Pharaoh? 
NEW YORK – As Egypt’s revolution hangs in the balance, what factors are most likely to determine the outcome? 
While all eyes seem to be focused on the army, watching to see which way it will jump, other key questions are being overlooked. 
Of course, what the army does is hugely important. 
Splits in a military-supported authoritarian regime can create gaps between the temporary interests of the small group closest to the “military as government” and the long-term interest of the “military as institution,” which is to be a respected part of the state and nation. 
The Egyptian army’s statement early in the protests that its soldiers would not shoot at anti-Mubarak protesters was a classic “military as institution” move, and useful in itself for a democratic transition. 
By contrast, the army’s decision to allow Mubarak loyalists – some riding camels or horses – to charge into Cairo’s Tahrir Square and attack thousands of anti-government demonstrators was a classic “military as government” move. 
At this point, a democratic transition will most likely require that the army play a more active role in protecting protesters. 
What is clear is that the interest of the “military as institution” depends on the army’s ability to establish much greater separation from the regime. 
Successful political transitions are also helped if more and more citizens come to feel that they “own” the protests and the resulting transition. 
In this respect, the fact that the demand for Mubarak’s immediate resignation originated from Cairo’s Tahrir Square rather than from the Obama administration is a positive development. 
Many of the opposition groups, representing a broad spectrum of opinion – including a traditional liberal party, the Islamist Muslim Brotherhood, and the Facebook activists of the April 6 Youth Movement – have indicated that they might support an interim government, possibly one led by the Nobel Peace Prize winner Mohamed ElBaradei. 
But, in order to choose a leader, these groups must coalesce into a coherent force. 
Great civil-society protest movements – such as have occurred in Egypt and Tunisia – can overthrow a dictatorship, but a true democracy requires parties, negotiations, election rules, and agreement on constitutional changes. 
In most successful transitions, the first step toward forging the unity required to create an interim government is taken when the diverse groups begin to meet more often, develop common strategies, and issue collective statements. 
Regardless of who leads it, there are some things an interim government should not do. 
Judging by the transitions that we have studied, a successful democratic outcome stands the best chance if the interim government does not succumb to the temptation to extend its mandate or write a new constitution itself. 
The interim government’s key political task should be to organize free and fair elections, making only those constitutional changes needed to conduct them. 
Writing a new constitution is best left to the incoming, popularly elected parliament. 
Most activists and commentators are now asking who will or should be the next president. 
But why assume that a presidential political system, headed by a powerful unitary executive, will be instituted? 
Of the eight post-communist countries that are now in the European Union, not one chose such a system. 
All of them established some form of parliamentary system, in which the government is directly accountable to the legislature and the president’s powers are limited (and often largely ceremonial). 
That was a wise decision. 
A presidential election at a moment of great uncertainty, and in the absence of experienced democratic parties or broadly accepted leaders, is filled with danger. 
To elect a president is to commit to one person, generally for at least four years. 
But it is very uncertain that any person elected today in Egypt would have the same support in even a year. 
For example, if there are many candidates in a first round of a presidential election, it is conceivable that neither of the two candidates in the second-round run-off will have won more than 20% in the first round. 
The winner would thus assume all the burdens of leadership with the support of only a small minority of the electorate. 
It is also possible that a new president turns out to be incompetent, or is in a permanent minority position and unable to pass legislation. 
Many new democracies thus fall rapidly into “super-presidentialism” with plebiscitary qualities. 
Fortunately, Egyptian and Tunisian democratic activists and theorists are actively debating the parliamentary alternative. 
In that case, Egypt’s first free and fair election would give rise to a constituent assembly that immediately provided a democratic base for the government, as well as for efforts to amend or re-write the constitution. 
At that point, the constituent assembly and government could decide whether to switch to a presidential form of government or establish a parliamentary system on a permanent basis. 
Under a parliamentary system, future democratic governments in both countries would gain invaluable flexibility, for two major reasons. 
First, unlike presidentialism, a parliamentary system can give rise to multiparty ruling coalitions. 
Second, unlike a president, who, however incompetent or unpopular, remains in power for a fixed term, the head of government in a parliamentary system can be removed at any time by a vote of no confidence, clearing the way for a new, majority-backed government – or, failing that, fresh elections. 
Some democratic nationalists in Egypt defend parliamentarianism with an important new argument: a contentious, pluralist, probably multiparty coalition government would be harder for the United States to dominate than a lone “super-president” like Mubarak. 
Tunisian advocates of parliamentarianism like this argument, but they also stress that a parliamentary system would address the huge task of creating democratic and effective political parties better than presidentialism would. 
A parliamentary system, not a president-cum-pharaoh, looks like the best path for both countries. 

Does Europe Have a Death Wish? 
BERLIN – From the start of the Greek debt crisis in 2010, the major European players should have understood the risks and consequences that it posed for the European Union. 
They certainly don’t give that impression to onlookers. 
The crisis was always about much more than Greece: a disorderly insolvency there would threaten to pull other economies on the EU’s southern periphery, including some very big ones, into the fiscal abyss, along with major European banks and insurers. 
That could plunge the global economy into another financial crisis, delivering a shock equivalent to the autumn of 2008. 
It would also mean a eurozone failure that would not leave the Common Market unharmed. 
For the first time in its history, the very continuance of the European project is at stake. 
And yet the behavior of the EU and its most important member states has been irresolute and dithering, owing to national egotism and a breathtaking absence of leadership. 
States can go bust just like companies, but, unlike companies, they don’t disappear when that happens. 
That is why states should not be punished, and why their ongoing interests should not be underestimated. 
Insolvent states need help with restructuring, both in the financial sector and well beyond it, so that they can work their way out of crisis. 
This is certainly true of Greece, whose structural problems are much more sweeping than even its financial difficulties. 
Thus far, the EU and the Greek government have failed to address Greece’s structural problems. But they need to develop (and fund) an appropriate strategy for economic reconstruction, in order to make clear to the Greeks – and to skittish financial markets – that there is light at the end of the tunnel. 
Everyone knows that Greece will be unable to work its way out of crisis without massive debt relief. 
The only question is whether the country’s debt restructuring will be orderly and controlled or chaotic and contagious. 
Either way, Germany’s internal debate about whether to pay for the Greek debt is risible. 
Refusing to pay is not a viable option, because Germany and all other eurozone members are in the same boat. 
A Greek default would threaten to sink them, too, for it would raise immediate concerns about the solvency of Europe’s systemically important banks and insurance companies. 
So what are the eurozone’s heads of government waiting for? 
Are they reluctant to come clean with their people out of fear for their own political futures? 
The European financial crisis is really a political crisis, because EU leaders are unable to decide on the necessary measures. 
Instead, time is lost on secondary issues largely rooted in domestic policy concerns. 
It is certainly right, in principle, to argue that the banks should participate in financing the resolution of the debt crisis. 
But it makes little sense to insist on it as long as losses by banks that remain “too big to fail” could trigger a renewed financial crisis. 
Any chance to make this work would have required overhauling the financial system early in 2009, but that opportunity was largely wasted. 
As long as the EU’s life-threatening political crisis continues, its financial crisis will continue to destabilize it. 
At the heart of resolving the crisis lies the certainty that the euro – and with it the EU as a whole – will not survive without greater European political unification. 
If Europeans want to keep the euro, we must forge ahead with political union now; otherwise, like it or not, the euro and European integration will be undone. 
Europe would then lose nearly everything it has gained over a half-century from transcending nationalism. 
In the light of the emerging new world order, this would be a tragedy for Europeans. 
Unfortunately, when the outgoing president of the European Central Bank, Jean-Claude Trichet, proposed a step in this direction by suggesting that a “European Secretary of the Treasury” be created, heads of state and government dismissed the idea out of hand. 
Hardly anyone on the European Council seems willing even to acknowledge the depth of the EU crisis. 
Resolving this crisis requires more Europe and more integration, not less. 
And yes: the rich economies – first and foremost Germany – will have to pay for the way out. 
Germany and France, the two crucial players in this crisis, will have to devise a joint strategy, because only they, working together, can push through a solution. 
The problem is that the French referendum on the EU constitution in 2005 vetoed further political integration, while further economic integration may now fail because of Germany. 
What is required, therefore, is an open bilateral French-German dialogue about a comprehensive realignment of the monetary union. 
Treaty changes are impossible; therefore, different methods will need to be found, which makes the Franco-German partnership all the more important. 
Regardless of the EU’s political crisis and paralysis, Europeans should not forget how important its existence is and will continue to be. 
One has only to look back to the first half of the twentieth century to understand why. 


 

Does Iran’s Parliamentary Election Matter? 
TEHRAN – Does Iran’s upcoming Parliamentary election on March 14 deserve to be taken seriously? 
Or is it simply a sham vote for an emasculated institution? 
Paradoxically, Iranian elections are abnormal by both democratic and autocratic standards. 
While they are neither free nor fair, there are real differences among candidates, and the outcomes are often unpredictable. 
In contrast to rigged elections in which the victors are pre-determined, Iran’s system allows competitive elections among pre-selected candidates. 
Hardly anyone predicted the reformist Mohammed Khatami’s resounding presidential victory in 1997, and even fewer foresaw hard-line President Mahmoud Ahmedinejad’s victory in 2005. 
For those who view Iran’s democratic glass as being half full, the March 14 Majles elections will mark the 28th national election since the founding of the Islamic Republic in 1979, further entrenching a political culture unique in the Middle East. 
As Iran scholar Mohsen Milani puts it, “With all its serious flaws, it is through this process that changes in Iranian policy and behavior can be expected.” 
But there are valid reasons to view Iran’s democratic glass as being half empty. 
Candidates deemed insufficiently pious or lacking loyalty to the country’s theocratic constitution cannot run. 
This year, hundreds of reformist candidates were disqualified. 
Even a grandson of Ayatollah Khomeini decided against running after he was initially disqualified and his religious values and political loyalties were called into question. 
What’s more, the 290-seat Majles is a second-tier player in Iran’s power structure. 
On the surface, it looks like any other parliament. 
Its members draft legislation, ratify international treaties, and sign off on the nation’s annual budget. 
In theory, they even have the authority to remove cabinet ministers and impeach the president for misconduct. 
In practice, however, all of the Majles’s decisions are subject to the approval of the Guardian Council, an unelected body of twelve jurists (all of whom are either directly or indirectly appointed by Supreme Leader Ayatollah Khamenei) that has the constitutional authority to vet all electoral candidates and veto any parliamentary legislation. 
Ironically, in 2003 the reformist parliament passed legislation aimed at limiting the power of the Guardian Council, which predictably rejected it. 
Nonetheless, in a political system in which decisions are made by consensus, the Majles can play an important role in framing national debates. 
The reformist-dominated Majles that served from 2000-2004 comprised allies of Khatami who sought to expand the realm of acceptable political discourse, champion democracy and human rights, and advocate a more conciliatory approach to foreign policy. 
By contrast, the current parliament, elected following a massive purge of reformists, began its inaugural session with chants of “Death to America.” 
Its members share Ahmedinejad’s social conservatism and aversion to diplomatic compromise on the nuclear issue. 
In the upcoming Majles elections, the battle between conservatives and reformists has largely been superseded by one between hardliners sympathetic to Ahmedinejad and more pragmatic conservatives less beholden to revolutionary ideology. 
The latter group is coalescing under the leadership of former chief nuclear negotiator Ali Larijani, Tehran mayor Mohammmed Bagher Ghalibaf, and former Revolutionary Guard commander Mohsen Rezaii. 
While these individuals were themselves considered hardliners three years ago, today, compared to Ahmedinejad, they appear moderate. 
The hardliners’ Achilles heel is Ahmedinejad’s mismanagement of the economy. 
Heat shortages at the height of this year’s bitter winter left more than 60 people dead, and Iran is perhaps the only major oil producer whose population claims that economic conditions have worsened despite a tripling of oil prices. 
This should help the more pragmatic conservatives. 
But elections in Iran are notoriously unpredictable for two reasons. 
First, it is difficult to gauge popular sentiment outside the capital. 
Though Tehran is Iran’s political heart and soul, low turnout among disaffected urban voters has reduced its influence over the rest of the country. 
Ahmedinejad understands this, making frequent visits to the provinces with promises of economic handouts. 
Second, in a country that lacks organized political parties, the campaign role played by paramilitary and military organizations loyal to Supreme Leader Ayatollah Khamenei could prove decisive. 
Their mass mobilization helped propel Ahmedinejad to victory in 2005. 
A victory for the more pragmatic conservatives is unlikely to have a marked impact on Iranian foreign policy. 
However, it would be a welcome reprieve for Iranians and those in the international community concerned about Iran’s seeming return to revolutionary radicalism. 

Does Islam Threaten Democracy? 
Is Islam incompatible with multicultural democracy? 
Many people point to the fact that few Muslim societies are democratic and conclude that Islam must be inherently undemocratic. 
They point to Muslim rhetoric suffused with hatred of the West, and deduce that Muslims cannot be good citizens of Western democracies. 
Britain, with around 1.6 million Muslims in a population of 58.7 million, provides an excellent place to test these notions. 
Three quarters of British Muslims come from the Indian subcontinent, mainly rural Pakistan and Bangladesh. 
This is important because some of their difficulties in settlement arise not from religion but from unfamiliarity with modern life. 
So far, Britain has seen only four Muslim riots, compared to about eight race-related riots by Afro-Caribbeans. 
One concerned Salman Rushdie's novel The Satanic Verses ; the others were triggered by police insensitivity and white racist marches. 
With the qualified exception of the first, all riots were local, relatively minor, and lasted barely a day or two. 
So Britain's Muslims have presented no major problems of law and order. 
But Muslims' presence in British society has presented other challenges. 
One is a ``clash of practices,'' including demands for Halal meat for Muslim schoolchildren, Muslim dress, prayer time, female circumcision, polygamy, and arranged marriages. 
Female circumcision and polygamy are banned, and Muslims accept this. 
Muslims also generally respect ``Western values'' such as equality, freedom of expression, tolerance, peaceful resolution of differences, and respect for majority decisions. 
Indeed, equality among races is an important Muslim value and practice. 
Equality of the sexes poses the gravest difficulties--particularly because Muslim girls in Britain increasingly assert it. 
Similarly, after some theological debate, British Muslims have widely accepted that they owe unreserved loyalty to Britain. 
However there is some ambiguity about what they should do when the claims of the state clash with those of the umma (the worldwide community of Islam). 
For example, Muslims objected to the 1991 war against Iraq, but did not mount public protests. 
The government urged the country to respect Muslims' ``understandable sympathies for their fellow-religionists,'' and tensions were avoided. 
A small number of young Muslims later fought with the Taliban. But most British Muslims condemned them, insisting on loyalty to Britain. 
Most Muslims also approved when the police raided and confiscated weapons at the Finsbury Park mosque in London, whose Imam had long preached hatred of the West and support for terrorists. 
Moreover, Muslims eagerly participate in public affairs, voting at a rate not much different from the rest of the population. 
There are 150 local Muslim councillors and eight mayors, slightly fewer than other ethnic minorities, but not alarmingly so. 
There are four Muslims in the House of Lords and three in the House of Commons, more than for some other ethnic minorities. 
Indeed, in formal and informal ways, Islam is increasingly interpreted in a manner that brings it closer to the central values of British democracy. 
A distinctively British brand of Islam is beginning to emerge, just as France, Germany, the Netherlands, and Spain are producing their own forms of Islam. 
``British'' Islam obviously clashes with some aspects of the Islam with which immigrants arrived. 
But religion does not operate in a vacuum. 
Its influence is mediated by many other factors. 
When Muslims find themselves living in democracies, they adjust. 
Political survival is one reason: when in a minority, the option of pressing for an Islamic state, with all its undemocratic potential is closed. 
Others welcome the opportunity in a democracy to pursue legitimate interests, and even to protest. 
The main problem for Muslims is not democracy, but coping with a multicultural society. 
Muslims are convinced of the absolute superiority of Islam, which is reflected in the constant invocation and desperate desire to revive past glory, as well as a positive duty to convert followers of other religions. 
They may marry non-Muslims, but do not allow others to marry their women, and expect those marrying within Islam to convert to it. 
This cannot be attributed to the current widespread feeling among Muslims that their identity is under threat. 
Even in the self-confident Ottoman Empire, where Jews and Christians enjoyed considerable tolerance, followers of these religions were second-class citizens. 
While free to convert to Islam, they were forbidden to convert Muslims or marry their women. 
Muslim attitudes towards multiculturalism are consequently one-sided. 
They welcome it because it gives them the freedom to retain their religious identity and to familiarize others with their beliefs. But they resent it because it denies their superiority and exposes them and their children to other religions and secular cultures. 
Islam and Europe have long shaped one another's cultural identity. 
Each has been the other's ``other,'' and their sometimes friendly, sometimes hostile, relations have bonded them more deeply than either realizes. 
But with the exception of Spain and parts of Eastern Europe, they have until very recently interacted at a distance and outside Europe's boundaries. 
They now need to find new ways of coexisting and cultivating civic amity. 
Britain's experience shows that there are strong reasons for optimism. 

Does Legalizing Prostitution Work? 
AMSTERDAM – Prostitution is virtually the only part of the personal services industry in the Netherlands that works. 
One can’t get a manicure in Amsterdam without booking an appointment two weeks in advance, but men can buy sex anytime – and at an attractive price. 
The legalization of prostitution in October 2000 merely codified a long-standing Dutch tradition of tolerance towards buying and selling sex. 
But is legalization the right approach? 
Even in the Netherlands, women and girls who sell their bodies are routinely threatened, beaten, raped, and terrorized by pimps and customers. 
In a recent criminal trial, two German-Turkish brothers stood accused of forcing more than 100 women to work in Amsterdam’s red-light district ( De Wallen ). 
According to the attorney who represented one of the victims, most of these women come from families marred by incest, alcohol abuse, and parental suicide. 
Or they come from countries in Eastern Europe or Southeast Asia and have fallen victim to human trafficking, lured by decent job offers or simply sold by their parents. 
These women are Amsterdam’s leading tourist attraction (followed by the coffee shops that sell marijuana). 
But an estimated 50-90% of them are actually sex slaves, raped on a daily basis with police idly standing by. 
It is incomprehensible that their clients are not prosecuted for rape, but Dutch politicians argue that it cannot be established whether or not a prostitute works voluntarily. 
Appalled by their daily routine, police officers from the Amsterdam vice squad have asked to be transferred to other departments. 
Only this year, the city administration has started to close down some brothels because of their ties to criminal organizations. 
According to a study published in the American Journal of Epidemiology , the average age of death of prostitutes is 34. 
In the United States, the rate at which prostitutes are killed in the workplace is 51 times that of the next most dangerous occupation for women, working in a liquor store. 
Other studies show that nine out of ten prostitutes urgently want to escape the job. 
Almost half have attempted suicide at least once. 
In 1999, the Swedish government decriminalized the sale of sex, but made it an offense to pimp or to buy sex. 
Under Sweden’s so-called “Sex Purchase Law,” paying for sex is punishable by fines or up to six months in prison, plus the humiliation of public exposure. 
According to the Swedish authorities, the number of prostitutes in Sweden has dropped 40% as a result. 
Human trafficking rings tend to avoid Sweden, because business has gone sour. 
Norway, a country that has a reputation to lose when it comes to women’s rights, carefully compared the Swedish and Dutch models and concluded that Sweden’s was the one to follow. 
It has now changed its legislation accordingly. 
The success of the Swedish approach is not so surprising. 
According to a study in California, most men who bought sex would be deterred by the risk of public exposure. 
For example, 79% said that they would be deterred if there was a chance that their families would be notified. 
And a whopping 87% said that they would be deterred by the threat that the police might publish their photographs or names in the local newspaper. 
Most of these men showed pathological behavior towards women. 
One in five admitted to having raped a woman, while four out of five said that going to prostitutes was an addiction. 
Prostitution is often dubbed “the oldest profession.” 
But this is merely a way of justifying the exploitation of mostly vulnerable women (there is also a much smaller number of male prostitutes in the Netherlands, but they are not pimped out like female prostitutes). 
It takes leadership and a vision of true gender equality to put an end to prostitution. 
The Swedish practice of naming and shaming is quite un-Dutch. 
But, for some men, part of the pleasure of buying sex may be the humiliation conferred on the woman involved. 
For others, like former New York Governor Eliot Spitzer, the promise of discretion and anonymity may be the most appealing aspect of buying sex. 
In any case, pillorying the clients is both a just punishment and an effective deterrent. 


Does the UN Still Matter? 
With 192 members and a mandate that covers everything from security to refugees to public health, the United Nations is the world’s only global organization. 
But polls in the United States show that two-thirds of Americans think the UN is doing a poor job, and many believe it was tarnished by corruption during the Iraq oil-for-food program under Saddam Hussein. 
Many also blame the UN for failing to solve the Middle East’s myriad problems. 
But such views reflect a misunderstanding of the UN’s nature. 
The UN is more an instrument of its member states than an independent actor in world politics. 
True, UN Secretary General Ban Ki Moon can make speeches, convene meetings, and propose actions, but his role is more secretary than general. 
Sometimes likened to a “secular Pope,” the UN Secretary General can wield the soft power of persuasion but little hard economic or military power. 
What hard power the UN has must be begged and borrowed from the member states. 
And when they cannot agree on a course of action, it is difficult for the organization to operate. 
As one wag has put it, “We have met the UN and it is us!” 
When blame is assigned, much of it belongs to the members. 
Consider the oil for food program, which was designed by member states to provide relief to Iraqis hurt by sanctions against Saddam’s regime. 
The secretariat did an inadequate job of monitoring the program and some corruption was involved. 
But the much larger sums that Saddam diverted for his own purposes reflected how the member governments designed the program, and they chose to turn a blind eye to the abuse. 
Yet the program’s problems are portrayed in the press as “the UN’s fault. 
The cost of the entire UN system is about $20 billion, or less than the annual bonuses paid out in a good year on Wall Street. 
Of that sum, the secretariat in New York accounts for a mere 10%. 
Some universities have larger budgets. 
Another $7 billion supports UN peacekeeping forces in places like the Democratic Republic of Congo (DRC), Lebanon, Haiti, and the Balkans. 
The rest – more than half – is spent by the UN’s specialized agencies, which are located around the world and often play an important role in managing global trade, development, health, and humanitarian assistance. 
For example, the UN High Commission for Refugees helps to alleviate the problems of displaced persons, the World Food Program provides assistance to malnourished children, and the World Health Organization supports the public health information systems that are crucial for dealing with threats from pandemics like avian flu. 
The UN does not have the resources to solve the problems in new areas like AIDS or global climate change, but it can play an important convening role in galvanizing the actions of governments. 
Even in the area of security, the UN retains an important role. 
The original 1945 concept of collective security, by which states would band together to deter and punish aggressors, failed because the Soviet Union and the West were at loggerheads during the Cold War. 
For a brief moment after a broad coalition of countries acted together to force Saddam Hussein out of Kuwait in 1991, it looked like the original concept of collective security would become “a new world order.” 
Such hopes were short-lived. 
Consensus within the UN proved unachievable on both Kosovo in 1999 and Iraq in 2003. 
Skeptics concluded that the UN had become irrelevant for security questions. 
Yet in 2006, when Israel and Hezbollah fought to a stalemate in Lebanon, states were only too happy to turn to a UN peacekeeping force. 
Ironically, peacekeeping was not specified in the original charter. 
It was invented by the second Secretary-General, Dag Hammarskjold, and Canadian Foreign Minister Lester Pearson after Britain and France invaded Egypt in the Suez crisis of 1956. 
Since then, UN peacekeeping forces have been deployed more than 60 times. 
There are now roughly 100,000 troops from various countries wearing UN blue helmets around the world. 
Peacekeeping has had its ups and downs. 
Bosnia and Rwanda were failures in the 1990’s, and then Secretary General Kofi Annan proposed reforms to deal with genocide and mass killings. 
In September 2005, the states in the UN General Assembly accepted the existence of a “responsibility to protect” vulnerable peoples. 
In other words, governments could no longer treat their citizens however they wanted. 
A new Peace-building Commission was also created to coordinate actions that could help prevent a recurrence of genocidal acts. 
In East Timor, for example, the UN proved vital in the transition to independence, and it is now working out plans for the governments of Burundi and Sierra Leone. 
In the DRC, peacekeeping forces have not been able to curb all violence, but they have helped to save lives. 
The current test case is the situation in Sudan’s Darfur region, where diplomats are trying to establish a joint peacekeeping force under the UN and the African Union. 
In the poisonous political atmosphere that has bedeviled the UN after the Iraq War, widespread disillusionment is not surprising. 
Ban Ki Moon has a tough job. 
But, rather than calling the UN into question, states are likely to find that they need such a global instrument, with its unique convening and legitimizing powers. 
While the UN system is far from perfect, the world would be a poorer and more disorderly place without it. 

Dog Days For The Super Dollar 
CAMBRIDGE -- Is the United States’ position as the world’s dominant superpower at risk if the dollar loses its super-currency status? 
Maybe not, but Americans will certainly find global hegemony a lot more expensive if the dollar falls off its perch. 
Until now, Americans have been raking in profits by borrowing cheaply from pliant foreigners and investing the money in high-yield foreign equities, land, and bonds. 
Counting capital gains, Americans have profited to the tune of $300 billion to $400 billion annually in many recent years – an amount roughly equivalent to the entire US military budget. 
Former French president Valéry Giscard d’Estaing once famously complained about America’s “exorbitant privilege.” 
D’Estaing was incensed that the US seemed to be able to flood the world with dollar currency and debt without ever seeming to pay a price in terms of higher inflation or interest rates. 
At least half the $800 billion US currency supply is held abroad, mainly in the world’s underground economy. 
But the really big bucks come from the fact that places like the People’s Bank of China and the Bank of Japan passively hold enormous volumes of low-interest US debt, while Americans romp around the world with venture capital, private equity, and investment banks, reaping huge gains. 
It has been a great ride for the US, and America’s financial supremacy has certainly eased the burden of being a superpower. 
But, between the sub-prime US mortgage crisis and the dollar’s ongoing decline, America’s exorbitant privilege now looks a bit shaky. 
The dollar is already down 25% over the past five years, and if the US tips into recession – a 50/50 chance right now -- the dollar is going to drop a lot more. 
Foreign investors are already reshuffling their portfolios, moving into euros, pounds, and even emerging-market currencies like the Brazilian real and the South African rand. 
Controversial “sovereign wealth funds,” which invest funds for governments in the Middle East, Asia, Russia, and elsewhere, are just one manifestation of the search for alternatives to low-yielding, rapidly depreciating, dollar bonds. 
Even without any portfolio shift, Americans shouldn’t expect their recent luck to hold up in the future. 
If there is a global downturn, any region that is long stocks and short bonds is going to get burned. 
Unfortunately, faced with the growing risks to the dollar’s status, American policymakers, rather than nursing the country’s premier export, seem to be more interested in milking it. 
The US government itself has taken advantage by running vast deficits. 
The Federal Reserve appears to care about exchange rates only to the extent that they affect growth and inflation, and right now the weak dollar is helping US exports. 
Last but not least, US tax policy hardly encourages private-sector savings, especially giving the preferential tax treatment of real estate. 
Professor Maury Obstfeld of the University of California at Berkeley and I have been warning for some time that without pro-active policy adjustments, the dollar is vulnerable to a sharp collapse, with many attendant risks. 
Unfortunately, that scenario now seems to be unfolding. 
This year alone, the dollar’s value has fallen by another 10% in purchasing power terms against America’s major trading partners, and it could fall at the same rate in 2008 – or faster if global investors decide to cut and run. 
When the Chinese premier, OPEC heads of state, and the world’s richest supermodel all express concern about the dollar, you can be sure we are in for a bumpy ride. 
The good news for Americans is that there is enormous inertia in the world trading and financial system. 
It took many decades and two world wars before the British pound lost its super-currency status. 
Nor is there any obvious successor to the dollar yet. 
Indeed, the sub-prime crisis has made the European financial system look just as vulnerable as that of the US. 
Likewise, while the Chinese Yuan might be king in 50 years, China’s moribund financial system will prevent it from being crowned anytime soon. 
A huge share of world trade is denominated in dollars, even if some OPEC presidents, such as Venezuela’s Hugo Chávez, openly preach mutiny. 
Central banks still hold more than 50% of their foreign exchange reserves in dollars. 
But danger signs abound. 
Unless the US gets its act together soon, it may find the value of its super-currency franchise much diminished. 
American voters, who are famously loathe to increase taxes, might start thinking a lot harder about the real economic costs of their country’s superpower status. 

Doing Better on Climate Change 
Los Angeles – Tackling global warming, we are often told, is the defining task of our age. 
An army of pundits tells us that we need to cut emissions, and cut them immediately and drastically. 
But this argument is clearly losing the battle for hearts and minds. 
Global warming has now become the lowest-priority policy problem among Americans, according to a new Pew survey. 
Another Pew survey showed that China, the world's biggest emitter, cares even less than the US about global warming. 
Just 24% of Chinese regard global warming as a very serious problem, making China the world's least concerned country. 
In the UK, an Opinium survey shows that most voters think green taxes are mainly for raising cash rather than the environment, and 7 out of 10 are not willing to pay more in taxes to combat climate change. 
At the same time, the proposed solutions for the problem of global warming have been awful. 
In Rio de Janeiro in 1992, politicians from wealthy countries promised to cut emissions by 2000, but did no such thing. 
Leaders met again in Kyoto in 1997 and promised even stricter carbon cuts by 2010, yet emissions keep increasing, and Kyoto has done virtually nothing to change that. 
What is most tragic is that when leaders meet in Copenhagen this December, they will embrace more of the same solution: promises of even more drastic emission reductions that, once again, are unlikely to be fulfilled. 
Measures that consistently over-promise and under-achieve at vast cost do not win hearts and minds in the best of times. 
And this is manifestly not the best of times. 
Fortunately, we have a much better option, with a much better chance of success: we should make low-carbon energy sources like solar power become a real, competitive alternative to old energy sources, instead of the preserve of rich people who want to feel “greener.” 
We should therefore invest on an effective scale in inventing new technology. 
Contrary to what one would imagine, the Kyoto Protocol has not prompted this research. 
Indeed, research investment has plummeted since the 1980’s and has actually not increased since, even among Kyoto-participating countries. 
Investing heavily in research and development of low-carbon energy, solar power, or other new technologies would become cheaper than fossil fuels much more quickly. 
Economic estimates show that for every $1 spent, we would do $16 worth of good. 
Every country should agree to spend 0.05% of its GDP on low-carbon energy R&D. The total global cost would be 15 times higher than current spending on alternative energy research, yet six times lower than the cost of Kyoto. 
An agreement of this nature could be the new Kyoto treaty for the world – the principal difference being that this protocol would actually make a difference and stand a good chance of global acceptance. 
Why not do both: invest in R&D, but still promise to cut carbon emissions now? 
Kyoto-style policies can only ever be an expensive distraction from the real business of weaning us off fossil fuels. 
There are two fundamental reasons why a focus on reducing carbon emissions is the wrong response to global warming. 
First, using fossil fuels remains the only way out of poverty for developing countries. 
Coal provides half of the world’s energy. 
In China and India, it accounts for about 80% of power generation, and is helping Chinese and Indian laborers enjoy a quality of life that their parents could barely imagine. 
Capping emissions means, effectively, ending this success story for hundreds of millions of people. 
There is no “green” energy source that is affordable enough to replace coal in the near future. 
Instead, our upsized research will make green energy cheaper than fossil fuels by mid-century. 
Second, immediate carbon cuts are expensive – and the cost significantly outweighs the benefits. 
If the Kyoto agreement had been fully implemented throughout this century, it would have cut temperatures only by an insignificant 0.2°C (0.3°F), at a cost of $180 billion every year. 
In economic terms, Kyoto only does about 30 cents worth of good for each dollar spent. 
And deeper emissions cuts like those proposed by the European Union – 20% below 1990 levels within 12 years – would reduce global temperatures by only one-sixtieth of one degree Celsius (one-thirtieth of one degree Fahrenheit) by 2100, at a cost of $10 trillion. 
For every dollar spent, we would do just four cents worth of good. 
The saddest thing about the global warming debate is that nearly all of the key protagonists – politicians, campaigners, and pundits – already know that the old-style agreement that is on the table for Copenhagen this December will have a negligible effect on temperatures. 
Unless we change direction and make our actions realistic and achievable, it is already clear that the declarations of “success” in Copenhagen this December will be meaningless. 
We will make promises. 
We will not keep them. 
And we will waste another decade. 
Instead, we must challenge the orthodoxy of Kyoto. 


Doing Poorly by Doing Good 
KIEL – The new catchphrase in business seems to be “do well by doing good.” 
In other words, undertaking socially responsible activities boosts profits. 
For example, Pepsi bolsters its bottom line by shifting to more nutritious, healthier food. 
Yet, in much of the world, doing well still implies that you must be up to no good, especially if you are dealing with the poor. 
A recent case in point is the imbroglio in Andhra Pradesh in India, where the administration has moved to curb microfinance. 
Microfinance has become the darling of development enthusiasts. 
After all, who could be against an activity that produces uplifting stories like the cell phone ladies of Bangladesh, who lift themselves out of poverty by obtaining loans to buy phones and then selling minutes to others in the village. 
The benefits of microfinance are in danger of being over-hyped – there are not that many successful micro-businesses that the poor can start solely with the help of loans, because skills and management abilities are also often necessary. 
Nevertheless, the benefits are real: while there is little evidence that microfinance sets substantial numbers of poor people on the path to riches, it does help the poor save, smooth consumption, deal with emergencies, and expand existing businesses. 
These are not trivial benefits. 
One problem the poor often have in accumulating savings is lack of easy access to savings accounts where they can deposit money. 
The money is kept in a tin at home, and is easily spent when a neighbor is in difficulty, or the ne’er-do-well cousin comes calling. 
By taking a loan from a micro-financier to buy a needed asset, and then making regular mandatory weekly payments out of her income, the housewife borrows to save – she no longer has spare cash lying around for others to fritter away. 
The “asset” that is purchased need not be a physical asset. 
In India, a big portion of college dues is paid at the beginning of the year. 
Households whose members have steady jobs borrow from micro-financiers to pay the fees, and then spend the rest of the year repaying the loan. 
That way, they do not have to cut spending substantially in the months before the fee is due, but can instead smooth spending over the year. 
This is helpful when people live at the margin – where cutting spending means foregoing food or medicines. 
Emergency loans are equally important. 
When children fall sick, parents do not have the time to apply for a loan from a state-owned bank (perhaps the only alternative source of loans for the poor other than the moneylender). 
Usually, the bank takes months to process the application, and may demand a bribe even in the unlikely event it is willing to take on the credit risk. 
The micro-financier, confident of being repaid, is willing to extend the emergency loan quickly and with little bureaucracy. 
Finally, while I am skeptical that microfinance alone can promote a lot of successful entrepreneurship, it certainly can be helpful in allowing a farmer to buy more cattle or a tractor, or allowing a village shopkeeper to expand inventory. 
Thus, it also helps expand incomes. 
But, despite all these benefits, politicians are generally unwilling to accept that money can be earned honestly from those at the bottom of the income pyramid. 
If micro-financiers are making profits off the poor, it must be because they are bilking them. 
Suspicions are further reinforced by politicians’ underlying paternalism – the poor do not know what is good for them and are easily fooled. 
Of course, the fact that micro-financiers charge the very poor relatively high interest rates exacerbates the perception that they are gouging society’s most vulnerable members. 
But micro-financiers may have no choice: given the small size of the loans, the costs of processing them and collecting payments are relatively large, driving up the break-even interest rate. 
Matters came to a head in August this year, when an initial public offering in India of SKS, a microfinance institution started by Vikram Akula, a graduate of the University of Chicago’s Booth School of Business, raised roughly $ 350 million. 
The IPO valued the company at $1.6 billion. 
Such a high valuation can be justified if SKS provides a better service than the competition, but darker interpretations are possible. 
If SKS is doing so well, the official thinking went, it must be up to no good. 
So the authorities acted. 
The Andhra Pradesh administration accused the industry of charging usurious interest rates, urging the gullible poor to over-borrow, and then driving some delinquent borrowers to commit suicide. 
It imposed severe curbs on the industry in October. 
The widespread belief among micro-financiers is that the curbs were imposed not because the industry was exploitative, but because it offered an alternative to political patronage. 
Politicians gained influence and popular support by directing state-owned banks to make loans to favored constituencies. 
By threatening this source of power, the microfinance industry created a powerful opponent, who found an opportune moment to strike. 
The truth probably lies somewhere in the middle – the microfinance sector has made some mistakes, which politicians have exaggerated in an effort to destroy an industry that undermines them by making the poor more independent. 
There is a lesson to draw from all this. 
There is money to be made at the bottom of the income pyramid, and businesses can do immense good while making that money by giving the poor choices that they have never had. 
But skepticism that money can be made off the poor extends well beyond the politician. 
It is incumbent on industries that deal with the poor to be transparent about how they earn their money – and to make the case for their activities strongly and publicly. 

The Dollar Joins the Currency Wars 
NEW YORK – In a world of weak domestic demand in many advanced economies and emerging markets, policymakers have been tempted to boost economic growth and employment by going for export led-growth. 
This requires a weak currency and conventional and unconventional monetary policies to bring about the required depreciation. 
Since the beginning of the year, more than 20 central banks around the world have eased monetary policy, following the lead of the European Central Bank and the Bank of Japan. 
In the eurozone, countries on the periphery needed currency weakness to reduce their external deficits and jump-start growth. 
But the euro weakness triggered by quantitative easing has further boosted Germany’s current-account surplus, which was already‎ a whopping 8% of GDP last year. 
With external surpluses also rising in other countries of the eurozone core, the monetary union’s overall imbalance is large and growing. 
In Japan, quantitative easing was the first “arrow” of “Abenomics,” Prime Minister Shinzo Abe’s reform program. 
Its launch has sharply weakened the yen and is now leading to rising trade surpluses. 
The upward pressure on the US dollar from the embrace of quantitative easing by the ECB and the BOJ has been sharp. 
The dollar has also strengthened against the currencies of advanced-country commodity exporters, like Australia and Canada, and those of many emerging markets. 
For these countries, falling oil and commodity prices have triggered currency depreciations that are helping to shield growth and jobs from the effects of lower exports. 
The dollar has also risen relative to currencies of emerging markets with economic and financial fragilities: twin fiscal and current-account deficits, rising inflation and slowing growth, large stocks of domestic and foreign debt, and political instability. 
Even China briefly allowed its currency to weaken against the dollar last year, and slowing output growth may tempt the government to let the renminbi weaken even more. 
Meanwhile, the trade surplus is rising again, in part because China is dumping its excess supply of goods – such as steel – in global markets. 
Until recently, US policymakers were not overly concerned about the dollar’s strength, because America’s growth prospects were stronger than in Europe and Japan. 
Indeed, at the beginning of the year, there was hope that US domestic demand would be strong enough this year to support GDP growth of close to 3%, despite the stronger dollar. 
Lower oil prices and job creation, it was thought, would boost disposable income and consumption. 
Capital spending (outside the energy sector) and residential investment would strengthen as growth accelerated. 
But things look different today, and US officials’ exchange-rate jitters are becoming increasingly pronounced. 
The dollar appreciated much faster than anyone expected; and, as data for the first quarter of 2015 suggest, the impact on net exports, inflation, and growth has been larger and more rapid than that implied by policymakers’ statistical models. 
Moreover, strong domestic demand has failed to materialize; consumption growth was weak in the first quarter, and capital spending and residential investment were even weaker. 
As a result, the US has effectively joined the “currency war” to prevent further dollar appreciation. 
Fed officials have started to speak explicitly about the dollar as a factor that affects net exports, inflation, and growth.‎ And the US authorities have become increasingly critical of Germany and the eurozone for adopting policies that weaken the euro while avoiding those – for example, temporary fiscal stimulus and faster wage growth – that boost domestic demand. 
Moreover, verbal intervention will be followed by policy action, because slower growth and low inflation – partly triggered by a strong dollar – will induce the Fed to exit zero policy rates later and more slowly than expected. 
That will reverse some of the dollar’s recent gains and shield growth and inflation from downside risks. 
Currency frictions can lead eventually to trade frictions, and currency wars can lead to trade wars. 
And that could spell trouble for the US as it tries to conclude the mega-regional Trans-Pacific Partnership. 
Uncertainty about whether the Obama administration can marshal enough votes in Congress to ratify the TPP has now been compounded by proposed legislation that would impose tariff duties on countries that engage in “currency manipulation.” 
If such a link between trade and currency policy were forced into the TPP, the Asian participants would refuse to join. 
The world would be better off if most governments pursued policies that boosted growth through domestic demand, rather than beggar-thy-neighbor export measures. 
But that would require them to rely less on monetary policy and more on appropriate fiscal policies (such as higher spending on productive infrastructure). 
Even income policies that lift wages, and hence labor income and consumption, are a better source of domestic growth than currency depreciations (which depress real wages). 
The sum of all trade balances in the world is equal to zero, which means that not all countries can be net exporters – and that currency wars end up being zero-sum games. 
That is why America’s entry into the fray was only a matter of time. 

Dollars and Depression 
The falling dollar has emerged as a source of profound global macroeconomic distress. 
The question now is how bad that distress will become. 
Is the world economy at risk? 
There are two possibilities. 
If global savers and investors expect the dollar’s depreciation to continue, they will flee the currency unless they are compensated appropriately for keeping their money in the US and its assets, implying that the gap between US and foreign interest rates will widen. 
As a result, the cost of capital in the US will soar, discouraging investment and reducing consumption spending as high interest rates depress the value of households’ principal assets: their houses. 
The resulting recession might fuel further pessimism and cutbacks in spending, deepening the downturn. 
A US in recession would no longer serve as the world’s importer of last resort, which might send the rest of the world into recession as well. 
A world in which everybody expects a falling dollar is a world in economic crisis. 
By contrast, a world in which the dollar has already fallen is one that may see economic turmoil, but not an economic crisis. 
If the dollar has already fallen – if nobody expects it to fall much more – then there is no reason to compensate global savers and investors for holding US assets. 
On the contrary, in this scenario there are opportunities: the dollar, after all, might rise; US interest rates will be at normal levels; asset values will not be unduly depressed; and investment spending will not be affected by financial turmoil. 
Of course, there may well be turbulence: when US wage levels appear low because of a weak dollar, it is hard to export to America, and other countries must rely on other sources of demand to maintain full employment. 
The government may have to shore up the financial system if the changes in asset prices that undermined the dollar sink risk-loving or imprudent lenders. 
But these are, or ought to be, problems that we can solve. 
By contrast, sky-high US interest rates produced by a general expectation of a massive ongoing dollar decline is a macroeconomic problem without a solution. 
Yet so far there are no signs that global savers and investors expect a dollar decline. 
The large gap between US and foreign long-term interest rates that should emerge from and signal expectations of a falling dollar does not exist. 
And the $65 billion needed every month to fund the US current-account deficit continues to flow in. 
Thus, the world economy may dodge yet another potential catastrophe. 
That may still prove to be wishful thinking. 
After all, America’s still-large current-account deficit guarantees that the dollar will continue to fall. 
Even so, the macroeconomic logic that large current-account deficits signal that currencies are overvalued continues to escape the world’s international financial investors and speculators. 
On one level, this is very frustrating: we economists believe that people are smart enough to understand their situation and capable enough to pursue their own interests. 
Yet the typical investor in dollar-denominated assets – whether a rich private individual, a pension fund, or a central bank – has not taken the steps to protect themselves against the very likely dollar decline in our future. 
In this case, what is bad for economists is good for the world economy: we may be facing a mere episode of financial distress in the US rather than sky-high long-term interest rates and a depression. 
The fact that economists can’t explain it is no reason not to be thankful. 

Domestic Spying and Chinese Politics 
Corruption charges are flying between Prime Minister Zhu Ronghi, China's number three leader, and Li Peng, the country's second leading politician. 
Those charges are, invariably, produced by China's domestic surveillance agencies. 
But China's secret policemen are already working overtime nowadays, trying to keep up with China's millions of internet users. 
None of this zeal is new in China. 
Paranoia, informers, and domestic spying are so essential to Communist rule that few people are ever surprised at the extent of secret police operations here. 
Still, domestic spying did not arrive in China either with the computer revolution or Mao's Communist one. 
Indeed, the darkest moments in China's long history often coincide with massive domestic spying systems; usually these herald not only renewed tyranny but instability as well. 
China's secret policemen, indeed, have deep roots. 
The Ming Emperor Cheng Zu's internal espionage agency (1403-1424) was known as the Dong Chang or "Eastern Workshop." 
Staffed by eunuchs, it reported to the emperor directly. 
Cheng Zu used the Dong Chang to bypass other state organs and persecute countless innocent people who had offended him. 
Cheng Zu's regime marked one of the darkest times in China's long history. 
The Nationalist government of Chiang Kai-shek believed in domestic spying as well, and practiced it both before and after the Communist takeover of 1949, with Chiang's spies harshly suppressing any and all signs of domestic dissent. 
Nationalist "white terror" continued even after Chiang Kai-shek and his armies escaped to Taiwan. 
Only the flowering of Taiwan's democracy in recent years saw a decrease in domestic spying. 
After being victimized by Chiang Kai-shek's spies, China's Communist rulers created a vast spying apparatus of their own. 
Mao, indeed, called domestic spying "an invisible magic weapon." 
Today, although Mao's socialist economy is shrinking, his spy networks remain as potent as ever. 
Indeed, Jiang Zemin, China's president and paramount leader, relies on spies from the Public Security Bureau and the Bureau of National Security to maintain his rule. 
As well as suppressing political dissent, these operatives play vital roles in the Party's internal power struggles. 
Such spying is necessary, says Jiang, in order to uphold the "stability" of Communist rule in the face of vast and unsettling economic reforms. 
Like Saturn devouring his children, however, Chinese spying devours Central Committee members and dissidents alike. 
Cheng Kejie, a high Party official executed for corruption last year, was long under special surveillance by the Public Security Bureau. 
The purge of a former mayor of Beijing, Chen Xitong, and his cronies, also on charges of corruption, could not have happened without evidence gathered by official spies. 
Indeed, it is widely believed that President Jiang and his confidante Zeng Qinghong obsessively gather politically embarrassing evidence against corrupt officials in order to blackmail these officials into subservience. 
A telling case here surrounds Bao Tong, a former Politburo member who ran afoul of the President's inner circle. 
Bao is now under around-the-clock surveillance by eighteen state agents who have even set up a guard post in front of his house. 
This is all happening despite Party claims that Bao retains all his citizenship rights. 
Lately, Ms. He Qinglian, a well-known author, journalist, and critic of China's reforms has been watched daily by as many as twelve agents. 
Government spies have hacked into her personal computer to download her files and documents and have forced their way onto her server to censor her emails and monitor and control her Internet access. 
"Internet spies" of this type now flock to the many Internet cafes found in China's major cities. 
Since the era of Emperor Cheng Zu's Dong Chang domestic spying has been a sign of insecurity, not self-confidence. 
Domestic spying is growing and taking new forms nowadays because China's leaders, unsettled by the changes their own economic reforms have unleashed, bluntly refuse to consider democratic reforms. 
This failure is progressively undermining the regime's legitimacy and the Central Committee knows it. 
Making matters worse are the repeated demonstrations of President Jiang's profound lack of personal self-confidence. 
China's president achieved and consolidated his power by relying on a small coterie drawn from his Shanghai political base. 
The narrow circle of Jiang's supporters reminds many people of unpopular emperors like Cheng Zu. 
Jiang's increasing dependence on internal spying and the "security apparatus" may also be due to Jiang's close relations with his confidante Zeng Qinghong, the son of Zeng Shan, who was Minister of the Interior in charge of domestic espionage in the earliest days of Communist rule. 
Under his father's tutelage, Zeng Qinghong learned to use spy networks to entrench Communist and personal power. 
Given what happened in the former Soviet Union and its East European satellites, the paranoid fears about losing power are unlikely to vanish among Chinese leaders soon. 
Jiang and his colleagues understand that governance-by-spying, through eviscerating personal responsibility and civil society, left behind moribund economies and discredited governments across the former Soviet world. 
Instead of slackening domestic spying in order to prepare the Chinese people for the ever increasing personal responsibility that a modern economy demands, however, Jiang remains obsessed only with maintaining Communist and personal power. 
That failure may one day make China's inevitable postcommunist transition as corrupt and chaotic as that seen in the most violent and backwards of former Soviet states. 

Age of Disruption 
LONDON – The year 2013 moved the world further into the Digital Age – a global epoch of changes whose likely impact on the world economy will be 2-3 times greater than that of the Industrial Revolution. 
Some 90% of the world’s total data were created in the past two years. 
By 2020, the quantity of stored data could be 50 times greater than it was in 2010. 
Many pundits regard this massive explosion of data as the new oil, even a new asset class. 
This profusion of data is being fueled by the near ubiquity of the Internet. 
Smart phones are set to connect an additional 2-3 billion of the world’s citizens by 2020, with billions of machine sensors monitoring everything from tractors to jet engines, and further breakthroughs in computing power enabling massive increases in data storage and analysis. 
In this environment, fluency in data management and analytics will be vital for successful organizations. 
A study published in 2011 by MIT’s Erik Brynjolfsson and his colleagues found that companies using data-driven decision-making had a 5-6% higher productivity rate than those that did not. 
The ability to capture, organize, extract insights from, and transact with data has now become a core competency for every industry and across every sector. 
The disruptions resulting from the new crucible of data and analytics are spreading across both the public and private sectors. 
Netflix, the popular video-streaming website, used its vast database of user searches, views, pauses, and reviews to design the made-for-the-Internet series “House of Cards.” 
The series combined a popular director (David Fincher), actor (Kevin Spacey), and plotlines borrowed from a popular British show with the same title – all of which scored highly on Netflix’s popularity metrics. 
In other industries, too, data-driven decision-making in product development, marketing, and customer interactions is fast becoming the standard, supplementing (and in some cases replacing) intuition and experience. 
It is also streamlining supply chains, refining workforce schedules, and optimizing manufacturing processes. 
More significant disruption is likely to occur across industries, as privileged access to proprietary data redraws competitive battle lines. 
Companies with deep data sets will increasingly have the ability to play in markets outside their traditional domains – and leaders already are seizing the opportunities. 
At Alibaba, the Chinese e-commerce company, small and midsize vendors in its network can also apply for credit. 
Alibaba has financed the working capital of 320,000 companies (more than $16 billion) using transaction data to underwrite the lending – and has done so far more efficiently than the average bank. 
Governments, too, are sensing that data analytics can change their global standing. 
Singapore, for example, has a ten-year master plan that focuses on the development of a robust information and communications industry, including data analytics. 
More recently, the authorities launched an open-data initiative, making vast amounts of government data easily accessible. 
And yet, though many organizations recognize the importance of data analytics, there is wide variation in how aggressively they have moved to embrace it. 
Early adopters, such as Amazon and Tesco, which quickly built up the requisite talent bases and experience, are now shifting gears to maximize the impact of analytics on their organizations (that is, exploring disruptive opportunities). 
Many more organizations, however, are still only conducting small-scale experiments and hiring their first data scientists. 
The good news is that many companies will be able to accelerate the pace of change. 
Talent is one promising area. 
Tapping the potential of data analytics requires deep pools of advanced technical expertise. 
To be sure, workers skilled in data management and advanced analytics are in short supply, as are members of an emerging class of “translators” – those whose talents bridge IT and data, analytics, and business decision-making. 
Translators are essential to complex transformation efforts that cross many business functions. 
Universities are quickly adapting to meet the swelling demand, and many have launched interdisciplinary programs that combine analytics and business expertise. 
Rapid advances in technology are also making it easier to realize the impact of analytics. 
One of the biggest challenges for many companies has been to convert insights from statistical models into real changes in day-to-day operations. 
Individuals on the front lines have lacked intuitive tools that link insights to action. 
But advances in data visualization, faster development cycles for applications, and the steady consumerization of technology are changing that, putting customized, easy-to-understand solutions in managers’ hands. 
For example, the Climate Corporation, recently acquired by Monsanto, combines more than 30 years of weather data, 60 years of crop-yield data, and multiple terabytes of information on soil types. 
With that reservoir of historical information and sophisticated algorithms, the company offers fee-based advice to farmers through an intuitive online portal. 
As organizations pursue these opportunities to innovate, boost revenues, or increase productivity, leadership teams will also need to adjust. 
Defining new data-driven strategies, managing massive new stores of information, reaching out to new partners, managing across functions, and energizing the organization around a new mission will likely require new management capacity. 
Firms innovate organizationally all the time. 
In 1961, Ampex, a California electronics manufacturer, became the first company formally to use the term “Chief Financial Officer.” 
Today, that role is ubiquitous. 
Leading in the Digital Age may require creating new roles such as Chief Digital Officer, Chief Analytics Officer, or Chief Data Officer, though relatively few companies so far have taken such steps. 
In the future, an organization’s overall success will require that the leader responsible for such capabilities be a trusted member of the top management team. 
Few leaders have ever developed management muscle in completely new fields while assembling teams combining previously unknown types of talent. 
The strategic options confront equally fresh terrain, perhaps similar to when mass media opened a new era of marketing, or globalization required radical reshaping of organizational footprints. 
In 2014 and beyond, CEOs and their boards will need to establish new priorities, invest wisely, and be willing to support experimentation. 
In times when major disruption is certain, the enormous potential rewards accrue to those who, while vigilant against risk, are prepared to act boldly and swiftly. 

Don Quixote, Dissident 
It is now four centuries since the birth of a masterpiece whose author and hero both seem younger than we do. 
The simplest explanation for this may be found in Flaubert’s words about Don Quixote : “I found my origins in this book, which I knew by heart before I learned how to read.” 
Indeed, at the core of Don Quixote is something essential that we knew even before we read it but which became part of our nature only after we completed its mesmerizing journey. 
This is the unmistakable stamp of greatness in a writer. 
Hunting after his own ghost – an obvious sign of inner unhappiness – Hidalgo searched for a place where dreams, reality, sainthood, love, and justice coexist. 
In their burlesque approach to humanity, Don Quixote and Sancho Panza are the most enduring and endearing clownish couple in world literature. 
It is no surprise, then, that for the last 400 years Don Quixote and Panza have bred many relatives and successors, including countless buffoonish boss-and-servant couples. 
Even the history of the circus is focused on such a pairing: the vain, dignified White Clown and Augustus the Fool, the humble loser who is kicked in the pants by his stiff, pompous partner. 
For an East European like myself, it is not easy to ignore the history of the circus – or history itself. 
The solemn Communist Manifesto announced the specter of the Great Utopia haunting Europe, but failed to warn us of the bloody tyranny. 
The gullible Sancho Panza was meant to adopt the revolution’s deceptive dogma as entitlement to wage a brutal war against all. 
The dream of improving the world disguised a farce that affected not only a single life, as in Cervantes’ story, and affected not only the misleading army of buffoons believed to be missionaries. 
This dream destroyed generations of victims. 
In the world circus, the poet looks like a Knight of the Sorrowful Countenance, and Augustus the Fool appears ill-equipped for everyday life. 
Like Don Quixote – and Cervantes himself – the artist dreams of other rules and rewards than his fellow men, who are content to digest their everyday lives. 
In the socio-political arena, Augustus the Fool faces the Clown of Power. 
Cervantes’ political parody can be read in many twentieth-century East European stories. 
Its incomparable vitality and language, for example, find their way into the work of the Soviet writer Andrei Platonov. A communist who considered himself an honest proletarian writer, but called by Stalin, the Red Clown of Power, “svoloc” (scoundrel) and “balagancik” (buffoon), Platonov lived a lifelong ordeal. 
His carnivalesque odyssey of totalitarianism displays a world of misery, boredom, and obedience in its dark journey to an unreachable paradise. 
The communist Knight, the new “caballero de la triste figura,” a kind of enlightened idiot, blinded by his loyalty to the unreal and by his harsh political correctness, considers Lenin a new Moses. 
He rides the Rosinante of the Proletarian Force, falls in love with the dead Rosa Luxemburg in her role as Comrade Dulcinea and has intercourse with a locomotive. 
In today’s free-market carnival, nothing seems visible unless it is scandalous and nothing is scandalous enough to be memorable. So we pay homage to Cervantes at a time when we routinely co-habit with a very different outrageousness: religious fanaticism and terrorism, political manipulation, the cacophony of perverted simplification, the belligerent marriage between a new messianism and an aggrandizing quixotic blindness. 
So long as we celebrate Cervantes, however, perhaps all is not lost. 

Don't Bet on a Quick US Recovery 
Whither the US economy? 
Every piece of good news suggesting that America's recession is about to end is followed by bad news suggesting otherwise. 
The Federal Reserve Board's current monetary policy reflects this ambiguity: it is neither lowering nor raising interest rates. 
Instead, it maintains a "neutral" stance. 
The meanderings of the stock market are a similar indication of uncertainty. 
Much of the discussion of the US economy is of little help, for it is focused on the wrong question: when did the recession start and end? 
Recessions typically are defined by whether GDP has fallen . 
But what is of real concern is the gap between the economy's potential and its actual performance. 
In these terms, the American economy's performance is likely to remain dismal. 
Increases in measured productivity mean that the economy's potential growth rate is now somewhere between 3.5-4% annually. 
(There have been changes in the way we correct for price changes, so that what we measure today as 4% actually represents what we used to measure as a substantially smaller number.) 
Even when America grows at 0.5%, a gap of 3% in a $10 trillion economy means a loss of output of $300 billion--an enormous amount by any definition. 
The shortfall, in turn, implies rising unemployment. 
Given the huge gap, the US will have to grow in excess of its long run potential in order to get back to utilizing its resources fully. 
Even with the surprisingly strong growth numbers for the first quarter of the year, most forecasters see growth over 2002 as a whole falling short of its long run potential, and by a significant amount, implying that unemployment will rise. 
There is a simple interpretation of what has been happening to the US economy. 
The recession of 2001 combined an inventory downturn with an investment downturn. 
The first is now over; the second--the result of overinvestment in high technology and telecommunications, the sectors that were so important in the boom of the late 90s--may last considerably longer. 
There remains a considerable capacity overhang--such as fiber optic lines that remain dark, having yet to see any light pass through them. 
Merely lowering interest rates did not, and will not, lead firms to invest more in these sectors. 
The good news--and the bad--is that the pace of technological change in these sectors is sufficiently fast that much of the equipment may become obsolete well before it is worn out, or even used, enabling new investment to start faster than it otherwise would. 
Meanwhile, the US cannot expect much relief from exports, given the global economic slowdown, or from consumer spending. 
Typically, a rebound in consumption helps to reinvigorate the economy; but consumption has, almost miraculously, sustained the economy as investment has fallen, and thus there is little scope for a rebound. 
The risks are mainly on the downside. 
There is a significant chance that with Americans' savings rate at dismally low levels - sustained last year by car purchases and home refinancing - consumer spending may moderate. 
Some of the sales in 2001, moreover, reflected purchases that would have been postponed until this year were it not for special offers inducing consumers to buy cars earlier than they otherwise would. 
Even Americans can consume only so many new cars. 
On the contrary, a high level of indebtedness now afflicts US households. 
This sharp deterioration in the US fiscal position means that long-term interest rates have fallen little, even as short-term interest rates reached record lows. 
Rising unemployment adds to a sense of economic insecurity, and may further weaken consumption. 
Record levels of military expenditures are the only major source of expansion, and while such expenditures may be necessary and do stimulate the economy in the short run, they do not enhance its long-term competitiveness and strength. 
After initially believing that its economy was so strong that it would not only be unaffected by America's slowdown but also maintain robust growth, Europe has turned to looking to the US recovery to lift it out of its malaise. 
I think this is a risky strategy; if a strong US recovery is not around the corner, then Europe needs to act on its own, using the standard counter-cyclical tools of monetary and fiscal policy. 
The threat today is not inflation, but unemployment. 
It is unemployment and economic insecurity that breed xenophobia and support for extreme rightist movements across the continent. 
Unfortunately, Europe's hands are partially tied by a central bank that focuses on capping inflation, and a Stability Pact that, as customarily interpreted, limits the use of deficit spending as an economic stimulus. 
The challenge going forward will be to reinterpret these strictures. 
The prospect of sustained long-term growth and social justice requires that Europe's new institutions retain sufficient flexibility to reshape themselves as they confront new problems. 

Don’t Blame it on Rio 
PARIS – We are little more than a decade into the twenty-first century, but a terrible precedent has already been set: all of the major international negotiations and cooperative efforts initiated in this century thus far have ended in failure. 
With regard to the environment, the fight against global warming has come to a standstill, with the United Nations’ last three annual climate-change conferences, in Copenhagen, Cancún, and Durban, failing to renew the Kyoto Protocol. 
Similarly, although last year’s conference in Paris to review the Non-Proliferation Treaty, and subsequent nuclear-disarmament talks between US President Barack Obama and Russian President Dmitri Medvedev in New York, made positive inroads, the results were a far cry from ensuring a future free of nuclear arms. 
The list goes on: events in the Middle East have killed all prospects for peace in the region; the measures taken to aid global recovery –ampnbsp;including regulatory improvements, such as separation of retail and investment banking, elimination of tax havens, and cracking down on rating agencies’ conflicts of interest –ampnbsp;have been feeble; and the last two G-20 meetings have been gross failures. 
The causes and parties responsible for these failures are diverse, but there is one constant: in recent years, nationalistic, even xenophobic, rhetoric has intensified dramatically. 
Patriotism and sovereignty are now stressed ever more insistently, while expressions of distrust of “others” have appeared everywhere – even in the Arctic Ocean, where Canada and Russia are engaged in what one expert has called “Cold War lite.” 
The consequence of the international community’s increasing balkanization is that consensus-oriented conferences tend to end in impasses. 
These failures do not mean that most people around the world do not see eye-to-eye on these issues, or that they are unprepared to make timely, even courageous, decisions. 
Unfortunately, ordinary people’s sentiments rarely triumph when governments meet. 
The conclusion is unavoidable: it is the quest for absolute consensus – unanimity – that is undermining progress on major global concerns. 
Consensus-oriented negotiations can work when a treaty is being struck between victors and vanquished –ampnbsp;the strong and the weak. 
After World War I, the Allied Powers tried to promote international peace by creating the League of Nations. 
But the League’s unanimity requirement effectively gave all members veto power, and the United States Senate’s refusal to ratify its Covenant condemned the effort to a premature death. 
The League’s abject failure to prevent World War II resulted in a second effort to build international comity after the fighting ended. 
The new UN was much better structured than its predecessor, and the world gained an institution that fosters debate and deliberative decision-making much more vigorously than is possible in consensus-driven organizations. 
But a shift that contradicts the UN Charter’s spirit has occurred. 
In an effort to avoid resolutions or measures that expose their disagreements, the world’s great powers have adopted the habit of organizing worldwide debates and conferences that revert to decision-making by consensus. 
According to the UN Charter, the primary focus of the General Assembly and the Security Council is to promote international security. 
But the UN has become the “general operator” for global conferences, acting as administrator and furnisher of services and facilities (such as locations and interpreters) for events that are not officially part of its core operations. 
As a result, the UN is increasingly taking the blame for these conferences’ failures, which not only leave the issues unresolved, but also undermine the UN’s authority. 
The Rio+20 conference, which will examine the progress made since the first “Earth Summit” in Rio de Janeiro 20 years ago, will take place there this June. 
Designed with a wide range of objectives, including a focus on both the green economy and sustainable development, the conference seems destined to fail. 
Without consensus, no action can be taken, and consensus will be impossible. 
Of course, there is a chance that the world will recognize its quandary at Rio. 
If a majority of the countries present dares to declare that demanding consensus is equivalent to enforcing paralysis, and if they insist upon following the voting procedures enshrined in the UN Charter, we could see enormous progress. 
Global warming and economic crisis are threatening international security. 
This alone justifies referring these issues to the UN General Assembly, which, unlike the Security Council, knows no veto power. 
A strong declaration and a call for binding measures to address these issues would then be possible. 
The economic and environmental crises before us are too urgent to play games that give the appearance of international unanimity. 
It is past time to address not only global warming and the economic crisis, but also the international decision-making process. 
Why not start with Rio? 


Don’t Blame the Poor for Poverty 
CAMBRIDGE: The divisions of income between the world’s rich and the poor are wider than at any time in world history. 
Rich countries, eager not to be held accountable for poverty in the rest of the world, hold the view that the poor have only themselves to blame for their condition. 
The theory goes that if poor countries simply adopt the right policies, and if they follow the advice of rich countries via institutions such as the IMF and the World Bank, all will be right. 
This strategy is doomed to fail, however, because it misunderstands many of the root causes of impoverishment. 
Perhaps the most urgent item on the world agenda is a more realistic view of the global development challenge. 
Here are the facts. 
According to 1997 classifications of the World Bank for countries with populations more than 1 million people, there are 26 high-income economies in the world, with an average income per person (in 1995) of $24,930, and a combined population of 902 million people. 
At the same time, there are 107 low-and-middle-income economies in the world, with an average income per person of $1,090, and a combined population of 4.8 billion people, or 84 percent of the world’s population. 
The gap is actually a bit narrower than this, since the dollar price of goods is lower in poorer countries, so that each dollar of income buys more than in rich countries. 
Once we take into account the purchasing power of dollars, the gap in incomes is approximately seven times between the rich and the poor countries. 
Some poor countries have achieved rapid progress, and have narrowed the gap with the rich countries, at least to some extent. 
Fortunately, the two largest countries, India and China both fall within that category. 
If we leave out India and China, however, the rest of the developing world — on average — is falling further and further behind the rich countries. 
Indeed, between 1985-95, the low-income economies other than China and India had average annual decline of 1.4 percent per year in GDP per person, while the rich countries had average annual growth of 1.9 percent per year. 
The middle-income countries had a decline of 0.7 percent per year. 
Thus, the gap widened between the rich and the poor in most of the world. 
And now with the collapse of several fast growing emerging-market economies in the past year, the gap between rich and poor is widening still further. 
Why don’t the poor countries grow more rapidly? 
The World Bank and the IMF have been peddling their cures for decades, but nothing seems to work. 
Each failure, in fact, brings new complaints against the poor countries themselves. 
The most popular charge is that it is all a matter of "bad governance," Washington’s code word for corruption. 
This theory is dubious for several reasons. 
First, in most cases, poverty breeds poor governance at least as much as poor governance breeding poverty. 
Thus, the Washington diagnosis often confuses cause and effect. 
Second, and even more important, many very well-meaning governments in the developing world, in places ranging from Bolivia to Kyrgyzstan, have had a very hard time generating sufficient economic growth. 
It’s not just a matter of will power or policy choices. 
More and more research suggests that the poor are suffering in large part because of tremendous biological, ecological, and geographical obstacles not faced in the rich countries. 
In fact, the distribution of poverty in the world is amazing. 
There are, in essence, only three groups of poor countries: those in tropical, sub-tropical, or desert climates; those that are landlocked in the center of poor regions, and therefore cut off from world trade; and those that are escaping from the nightmare of communism. 
In general, the non-socialist, temperate-zone countries are all fairly rich. 
The advantages of the rich countries therefore lie more in nature and geography than in the their supposed cultural or political superiority. 
The tropical countries have several severe disadvantages. 
These include: susceptibility to infectious diseases such as malaria, transmitted by insects that thrive in the tropics; poor soils; vulnerability to extreme natural disasters such as tropical cyclones (of the kind that killed around 11,000 people in Central America); and low agricultural productivity due to the effects of excessive heat on plant growth, and other causes. 
Scientists are still in the process of unraveling the biological mysteries that underlie the poor tropical productivity. 
The IMF and the World Bank have acted unscientifically in their advice, saying what is convenient for the rich countries, not what is scientifically accurate. 
The result is a misdirection of foreign aid. 
Instead of lecturing so much about governance, the rich countries should do much more to promote a serious scientific understanding of the tropical environment -including infectious diseases, energy use, agricultural productivity, climate change, and natural disasters - as the real source of help for the 87 percent of humanity living in the poor countries of the world. 
The sooner we understand the scientific and technological underpinnings of prosperity and poverty, the sooner we will be able to promote successful long-term economic development. 

Don't Block Our Medical Future 
We are at the juncture between the old medicine and the new - still mired in the limitations of the old but able to see on the horizon something utterly different in conception. 
That way is so new, so revolutionary, so transforming, that it deserves the name it has received. 
We are entering the world of regenerative medicine. 
We will remake ourselves - rebuilding and replacing the parts of our bodies that let us down; the parts that have sickened, degenerated or ceased to function. 
Medicine of the 21 st century will have a new paradigm as the focus turns inward, to understand and harness the ways our bodies function on the molecular and cellular levels. 
Unlike today's other profound biomedical revolution - a high tech affair involving decoding our genome - stem cell research is a much more low-tech enterprise. 
It's not lack of scientific tools that is the main impediment; it is restrictive laws and public policies. 
The first fruits of these revolutions will not come next week or next year, so it is important not to raise public expectations unrealistically. 
How to precisely direct the transformation of embryonic stem cells down predictable and desirable pathways remains unknown. 
But we could see some applications entering clinics in five years or so. 
These could address such hitherto intractable diseases as Parkinson's disease and diabetes, or even such scourges such as end stage heart failure. 
A stem cell can come from an embryo, fetus or adult. 
It has two properties. 
Under the right conditions it can reproduce itself and it can also give rise to the specialized cells that make up the tissues and organs of the body. 
Human embryonic stem cells are "pluripotent," which means that they have the potential to develop into all basic tissue types and hence to provide a virtually limitless source of cells for transplantation. 
Another kind of stem cell is also in the news - the adult stem cell. 
These are found in major organs and they both self-renew and give rise to specialized cells. 
There have been stunning advances in getting these cells to change their destiny - transforming blood cells into nerve cells, for example. 
Such evidence fuels the moral debates about embryo research. 
Those opposed to embryonic stem cell research believe in the absolute sanctity of the human embryo. 
As this is a minority view, they often couch their arguments in scientific rather than moral terms. 
In testimony before the UK's House of Lords Select Committee on Stem Cell Research, one "expert" actually stated that not only were adult stem cells just as promising as embryonic stem cells (untrue, according to the prevailing scientific consensus) but they were even better - more versatile, more malleable. 
Of course, embryo research involves legitimate moral concerns, and it is the British who subjected these concerns to the earliest and the most sustained examination. 
That is only fitting because it was in the UK that a new and problematical moral construct - the embryo in a dish - came into being in 1978, with the birth of the first "test tube" baby, Louise Brown, the product of in vitro fertilization. 
There were no moral paradigms to deal with the extra corporeal embryo. 
Abortion ethics is of little help, although the opponents are often but not always the same. 
No, a new way of thinking was required and Britain provided that with the Warnock Report of 1984. 
Its conclusions were enshrined in the Human Fertilisation and Embryology Act of 1990. 
Under British analysis, the embryo outside the body did have moral status, but only after the appearance of the so-called primitive streak on or about the 14 th day of development. 
Before that, it could not be said to be a unique, identifiable future person; it might still split and become twins. 
Embryo research was allowed for purposes such as improving the efficiency of IVF. 
It was only a small step for the British to allow stem cell research as a permissible purpose. 
Most people approve of in vitro fertilization, but it is the technology that gives the infertile the chance to be parents that also poses moral questions. 
IVF is inefficient so extra embryos are produced in case they are needed. 
These are frozen and many if not most are discarded. 
Improving IVF also requires embryo research. 
Does it make any moral sense to say that embryos destined to be destroyed should not be used for life saving stem cell research? 
Embryonic stem cells are derived from an early embryo called blastocysts at about the 5 th day. 
At this point, the embryo is a hollow ball of about 100 cells, none of which can be identified as destined to become any particular part of any particular human being. 
Stem cell research requires a sensible, predictable policy environment in order to flourish. 
Paradoxically, given its enormous impact on basic research in biological sciences, the United States is not leading this effort and, perhaps, is not even a major player. 
For more than twenty years, anti-abortionists have so frightened America's Congress that it left the field of assisted reproduction unregulated at the national level. 
So there is no policy framework within which to situate stem cell research or reproductive or therapeutic cloning. 
Into this vacuum has stepped President Bush. 
But his belief in the absolute sanctity of the early embryo is not shared by a majority of Americans. 
The President's stem cell policy - developed without consulting Congress - impedes US science and cruelly prolongs the agony of millions of sick and suffering people. 
Scientists elsewhere must forge ahead without America. 
Their work - their dreams - will change all of our lives for the better. 

Don’t Cripple the Tigers 
COPENHAGEN – This December, global leaders will meet in Copenhagen to negotiate a new climate change pact to reduce carbon emissions. 
Yet, the way that it has been set up, it will inevitably fail. 
The best hope is that we use this lesson finally to deal with this issue in a smarter fashion. 
The United States has made it clear that developing countries must sign up to substantial reductions in carbon emissions in Copenhagen. 
Developing nations – especially China and India – will be the main greenhouse gas emitters of the twenty-first century – but were exempted from the Kyoto Protocol because they emitted so little during the West’s industrialization period. 
Europe, too, has grudgingly accepted that without developing nations’ participation, rich nations’ cuts will have little impact. 
Some would have us believe that getting China and India on board will be easy. 
According to former US Vice President Al Gore, “developing countries that were once reluctant to join in the first phases of a global response to the climate crisis have themselves now become leaders in demanding action and in taking bold steps on their own initiatives.” 
But Gore’s fellow Nobel laureate, Rajendra Pachauri, the chair of the United Nations’ Intergovernmental Panel on Climate Change, is not so sure. 
He recently told an Indian audience, “of course, the developing countries will be exempted from any such restrictions, but the developed countries will certainly have to cut down on emissions.” 
It is likely that Pachauri is right and Gore is wrong: neither China nor India will commit to significant cuts without a massive payoff. 
Their reasons are entirely understandable. 
The biggest factor is the massive cost and the tiny reward. 
Reducing emissions is the only response to climate change that environmental campaigners talk about, despite the fact that repeated attempts to do so – in Rio in 1992 and in Kyoto in 1997 – failed to make a dent in emission levels. 
Some believe that past agreements did not go far enough, but Kyoto actually turned out to be overly ambitious. 
Ninety-five percent of its envisioned cuts never happened. 
Yet, even if Kyoto were fully implemented throughout this century, it would reduce temperatures by an insignificant 0.3°F (0.2oC), at an annual cost of $180 billion. 
China and India are enjoying swift growth that is helping millions of people lift themselves out of poverty. 
India’s External Affairs Minister Pranab Mukherjee recently said, “India is very concerned about climate change, but we have to see the issue in the perspective of our imperative to remove poverty so that all Indians can live a life of dignity.” 
And Chinese Premier Wen Jiabao recently said, “it’s difficult for China to take quantified emission reduction quotas at the Copenhagen conference, because this country is still at an early stage of development. 
Europe started its industrialization several hundred years ago, but for China, it has only been dozens of years.” 
Some environmental campaigners argue that, given the effects of global warming, every nation must act. 
But if one takes a closer look at China, this argument disintegrates. 
Climate models show that for at least the rest of this century, China will actually benefit from global warming. 
Warmer temperatures will boost agricultural production and improve health. 
The number of lives lost in heat waves will increase, but the number of deaths saved in winter will grow much more rapidly: warming will have a more dramatic effect on minimum temperatures in winter than on maximum temperatures in summer. 
There are few arguments for China and India to commit to carbon caps – and compelling reasons for them to resist pressure to do so. 
Kyoto’s successor will not be successful unless China and India are somehow included. 
To achieve that, the European Union has made the inevitable, almost ridiculous proposal of bribing developing nations to take part – at a cost of €175 billion annually by 2020. 
In the midst of a financial crisis, it seems unbelievable that European citizens will bear the financial burden of paying off China and India. 
The sadder thing, though, is that this money would be spent on methane collection from waste dumps in developing nations, instead of on helping those countries’ citizens deal with more pressing concerns like health and education. 
There is an alternative to spending so much to achieve so little. 
Cutting carbon still costs a lot more than the good that it produces. 
We need to make emission cuts much cheaper so that countries like China and India can afford to help the environment. 
This means that we need to invest much more in research and development aimed at developing low-carbon energy. 
If every country committed to spending 0.05% of its GDP exploring non-carbon-emitting energy technologies, this would translate into $25 billion per year, or ten times more than what the world spends now. 
Yet, the total also would be seven times cheaper than the Kyoto Protocol, and many times cheaper than the Copenhagen Protocol is likely to be. 
It would ensure that richer nations pay more, taking much of the political heat from the debate. 
Decades of talks have failed to make any impact on carbon emissions. 
Expecting China and India to make massive emission cuts for little benefit puts the Copenhagen meeting on a sure path to being another lost opportunity. 
Yet, at the same time, the Chinese and Indian challenge could be the impetus we need to change direction, end our obsession with reducing emissions, and focus instead on research and development, which would be smarter and cheaper – and would actually make a difference. 

Don’t Cry for Doha 
CAMBRIDGE – Will they or won’t they? 
Will the world’s trade ministers eventually sign a new multilateral trade agreement that reduces agricultural subsidies and industrial tariffs, or will they walk away empty-handed? 
The saga has been ongoing since November 2001, when the current round of negotiations was launched in Doha, Qatar, with numerous subsequent ups and downs, near-collapses, and extensions. 
The latest round of talks in Geneva has once again failed to produce an agreement. 
Judging by what the financial press and some economists say, the stakes could not be higher. 
Conclude this so-called “development round” successfully, and you will lift hundreds of millions of farmers in poor countries out of poverty and ensure that globalization remains alive. 
Fail, and you will deal the world trading system a near-fatal blow, fostering disillusionment in the South and protectionism in the North. 
And, as the editorialists hasten to remind us, the downside is especially large at a time when the world’s financial system is reeling under the sub-prime mortgage crisis and the United States is entering a recession. 
But look at the Doha agenda with a more detached set of eyes, and you wonder what all the fuss is about. 
True, farm-support policies in rich countries tend to depress world prices, along with the incomes of agricultural producers in developing countries. 
But for most farm products, the phasing out of these subsidies is likely to have only modest effects on world prices – at most a few percentage points. 
This is small potatoes compared to the significant run-up in prices that world markets have been experiencing recently, and it would in any case be swamped by the high volatility to which these markets are normally subject. 
While higher world farm prices help producers, they hurt urban households in developing countries, many of which are also poor. 
That is why the recent spike in food prices has led many food-growing countries to impose export restrictions and has caused near panic among those concerned about global poverty. 
It is hard to square these fears with the view that the Doha trade round could lift tens, if not hundreds, of millions out of poverty. 
The best that can be said is that farm reform in rich countries would be a mixed blessing for the world’s poor. 
Clear-cut gains exist only for a few commodities, such as cotton and sugar, which are not consumed in large quantities by poor households. 
The big winners from farm reform in the US, the EU, and other rich countries would be their taxpayers and consumers, who have long paid for the subsidies and protections received by their farming compatriots. 
But make no mistake: what we are talking about here is domestic policy reform and an internal redistribution of income. 
This may be good on efficiency and even equity grounds. 
But should it have become the primary preoccupation of the World Trade Organization? 
What about industrial tariffs? 
Rich countries have demanded sharp cuts in import tariffs by developing countries such as India and Brazil in return for phasing out their farm subsidies. 
(Why they need to be bribed by poor countries to do what is good for them is an enduring mystery.) 
But here, too, the potential benefits are slim. 
Applied tariff rates in developing countries, while higher than in advanced countries, are already at an all-time low. 
According to World Bank estimates, complete elimination of all merchandise trade restrictions would ultimately boost developing-country incomes by no more than 1%. 
The impact on developed-country incomes would be even smaller. 
And, of course, the Doha Round would only reduce these barriers, not eliminate them altogether. 
The Doha Round was constructed on a myth, namely that a negotiating agenda focused on agriculture would constitute a “development round.” 
This gave key constituencies what they wanted. 
It provided rich-country governments and then-WTO Director General Mike Moore with an opportunity to gain the moral high ground over anti-globalization protesters. 
It gave the US a stick with which to tear down the EU’s common agricultural policy. 
And it was tailor-made for the few middle-income developing countries (such as Brazil, Argentina, and Thailand) that are large agricultural exporters. 
But the myth of a “development” round, promoted by trade officials and economists who espouse the “bicycle theory” of trade negotiations – the view that the trade regime can remain upright only with continuous progress in liberalization – backfired, because the US and key developing countries found it difficult to liberalize their farm sectors. 
What ultimately led to the collapse of the latest round of negotiations was India’s refusal to accept rigid rules that it felt would put India’s agricultural smallholders in jeopardy. 
More importantly, the fears underlying the bicycle theory are wildly inflated. 
We live under the most liberal trade regime in history not because the WTO enforces it, but because important countries – rich and poor alike – find greater openness to be in their best interest. 
The real risks lie elsewhere. 
On one side is the danger that today’s alarmism will prove self-fulfilling – that trade officials and investors will turn the doomsday scenario into reality by panicking. 
On the other side is the danger that a completed “development round” will fail to live up to the high expectations that it has spawned, further eroding the legitimacy of global trade rules over the longer run. 
In the end, it may well be the atmospherics – psychology and expectations – rather than the actual economic results on the ground that will determine the outcomes. 
So don’t cry for Doha. 

Don't Cry Yet for Argentina's President De la Rua 
BUENOS AIRES: After ten years of democratic rule under President Carlos Menem, Argentina's transition to its new president, Fernando De la Rua, has been swift and smooth. 
The ease of change from Peronist rule to the center/left Alianza signals Argentina's democratic maturity. 
Stability prevails in financial markets; country risk fell 300 basis points between July and the day De la Rua assumed power; industrial production grew 14.9% in the second half of last year. 
Policy continuity eased this change of regime. 
Sensibly, the new government maintained "Convertibility," the local name for a Currency Board system that sets a 1:1 exchange rate between the peso and the US dollar. 
Yet despite this, De la Rua's government denounces President Menem's economic legacy, claiming that its fiscal irresponsibility nearly incited a run on the banks and currency. 
That catastrophic assessment led the new government to enact a tax package which hiked taxes on middle income wage earners and exempted earnings from dividends or interest. 
Tax evaders were offered deals to repay overdue taxes. 
Nothing, however, angers paying taxpayers more than having their taxes raised while shirkers get special breaks. 
Economists, although they praised the idea of balancing the budget, sharply criticized the means. 
Moreover, persistent effort to blame everything bad in Argentina on Menem's administration boomeranged: people viewed it as a smokescreen for a lack of leadership. 
Such finger-pointing has a price. 
During the new government's first three months, trends in industrial production, services, construction, consumption and, worst of all, tax collection reversed. 
Although nominal GDP was expected to be 2% higher (in annual terms) in the first quarter of 2000, nominal tax collection fell by 1.5 %, exposing the inadequacies of De la Rua's tax package. 
Government economists now accept that recovery will be slow, but expect improvements due to lower interest rates and higher exports, even though both may only be the result of ongoing slowdown. 
The banking sector, indeed, is showing excess liquidity as a result of a fall in demand for credit. 
To offset this, a reduction in bank reserve requirements is expected, although this cuts against the rules of Convertibility and may cause a fall in international reserves. 
The financial system, still strong thanks to Convertibility and a buoyant global economy, favors recovery - but a later recovery. 
Nothing, however, indicates that Argentina will grow again at the 5% to 8% rates of the 1990's. 
For growth and investment to improve, Argentina needs a long term strategy for integration in the world trading system which pushes productivity up. 
Mercosur, the regional trading pact of which Argentina is a member, served as a growth engine in the 1990's, seems insufficient to the task now. 
President De la Rua cannot take Argentina out of Mercosur, yet the country cannot live permanently within it. 
This paradox demands a solution: muddling through will not attract investment or induce appropriate scale in new export projects. 
Investors need to know whether they must compete with Brazil alone or the whole world. 
Under prevailing conditions, Argentina cannot compete globally. 
To do so requires labor market deregulation and tax reform. 
High employment costs and nominal tax rates promote small scale enterprises that only thrive on black market employment and tax evasion. 
With much industry operating at small scale, it is no surprise that many firms cannot compete internationally. 
De la Rua has not been completely idle here. 
A proposed Labor Reform Law is now being considered by the Peronist controlled Senate. 
While the proposed law does not kill all the distortions favored by unions, it is clearly a step in the right direction and may be accepted by the Peronists. 
Legislative approval will help De la Rua recover lost momentum and perhaps encourage new investments. 
Unfortunately, De la Rua botched other competitiveness initiatives. 
Despite 14% joblessness, unemployment taxes were increased last December after three years of cuts by Menem. 
A law promoting small enterprises (so long as they remain small!) only increases the bias against large scale operations embedded in Argentina's high tax rates and strict labor market regulations. 
Reforms of the opposite sort are needed in an economy plagued by unemployment and low productivity. 
Other Menem era reforms are also under threat. 
Privatization of much of the Social Security System was one key change wrought by President Menem. 
Some members of the ruling administration now want to allow people to voluntarily switch back to the state system, bringing with them contributions made during their years in the private capitalization system. 
Because the state system is based on redistribution, those extra funds are likely to be spent immediately, risking bankruptcy of the system for a second time. 
President De la Rua's worse problem is not this or that policy, but his tendency to send contradictory messages that confuse markets. 
In his state of the nation address he promised to increase competition in the economy, yet in the same week suspended an 'open sky' airline agreement reached with the US by the Menem administration. 
Perversely, he did so to defend the monopoly of a now privatized national airline which is 85% owned by foreigners. 
President De la Rua's first four months weakened Argentina's economy. 
His misfortunes do not seem to be ideologically motivated, but are based on an inability to see the conflicts intrinsic within his policy initiatives. 
Hope, however, is not lost. 
It took President Menem two years to find his footing and act boldly; he then delivered a death blow to inflation by implementing Convertibility in 1991. 
No test of that magnitude faces President De la Rua - at least not yet. 
What he needs to do is abandon the politics of blame and get on with implementing a coordinated policy package designed to lift Argentina's international competitiveness. 

Don’t Feed the Dragon 
The European Union, after a three-year spat with President Bush, is keen to be regarded as a world player to be reckoned with. 
Many EU leaders see newfound respect coming in the form of a “strategic partnership” with China that is designed to balance the power of the United States. 
Some want that partnership to include trade in advanced weaponry—witness the recent push to remove the EU’s 15-year-old ban on arms sales to China. 
Although America objects strongly, a number of Europeans shrug off any opposition. 
But China is no ordinary trading partner. 
If not openly committed to opposing Western values and interests, China’s interests in cowing Taiwan and in asserting regional hegemony across Asia certainly are not those of Europe and the West, not to mention Japan, India, and the rest of Asia. 
Indeed, China stood with Russia, Belarus, and a few other despotic regimes in prematurely recognizing the thuggish, ballot-stuffing Viktor Yanukovych as President of Ukraine. 
This should come as no surprise, as the Chinese government does not plan to hold free and fair elections soon. 
Indeed, perhaps Ukraine’s Orange Revolution, with those thousands of protesters in Kiev’s Independence Square served as a potent reminder to China’s leaders of the Tiananmen Square protests 15 years ago, and – in contrast to Ukraine – their own strategy of brutal repression. 
If not as dark as 15 years ago, China’s human rights record remains abysmal. 
The British Foreign Office’s annual human rights report for 2004, the most comprehensive in the EU, condemns China’s extensive use of the death penalty (even for such crimes as corruption, pimping, drug offenses, and tax fraud), its systematic torture of dissidents, and its restrictions on freedom of speech – including the Internet – and religion. 
All of these abuses are raised repeatedly at EU-China summits, to little or no avail. 
So is this the time to end the arms ban imposed by both Europe and America after the Tiananmen Square massacre in 1989? 
China’s human rights record is not the only problem. 
It is bad enough that no mechanism exists to prevent China’s government from using EU arms for internal repression. 
But nor does any mechanism exist that would stop China from re-exporting the weapons to places like North Korea. 
Indeed, China has a track record as a serial proliferator, having helped Pakistan build its atomic bomb. 
Its role in providing missile and rocket propulsion materials to Iran remains unclear. 
Yet France and Germany, with Britain and Italy not far behind, say such criticism is outdated. 
(They are strongly opposed by Holland, the Scandinavian countries, and the former Communist countries of Eastern Europe, which are familiar with communist repression.) 
Supporters of lifting the arms export ban argue that this litany of sins does not reflect China’s real improvements in human rights and penalizes European armaments jobs to the benefit of Russia, which enjoys a lively arms trade with its neighbor (something it might one day regret). 
For France, lifting the embargo is also an important symbol, one that recognizes China’s role in fighting Islamist terrorism. 
Libya had such EU restrictions lifted last October ostensibly for joining the fight against terrorism and abandoning its weapons of mass destruction. 
In addition, those in favor of reviving EU-China arms trade see such sales as a stabilizer in bouts of political turbulence and are loath to let bad politics interfere with good business. 
China apologists claim that the 1998 EU Code of Conduct on Arms Exports is sufficient to limit arms sales. 
But they conveniently ignore the fact that the Code of Conduct is voluntary and thus not enforceable. 
This is why the European Parliament voted across party and national lines in November against lifting the ban until the EU Code of Conduct is made binding. 
Can anything pull the Atlantic alliance’s policies on arms exports together? 
Trade with a country with China’s human rights record must not only make economic sense; it must also fit the wider aims of foreign policy. 
That means, above all, avoiding trade that makes it more difficult to pursue those aims. 
Just as American presidents looked foolish when they bent US foreign policy to the dictates of American wheat farmers in the 1970’s and 1980’s, European governments that are prepared to mortgage Asian security to a restless China also command no respect. 
The lesson is clear: security interests must come before business interests. 
So transatlantic coordination is needed, to ensure that any trade of sophisticated arms and weapons-related technologies with China does nothing to enhance China’s military power, and that competition between Western producers of goods that may legitimately be sold to China does not damage Western political unity. 
In the Cold War era, there was a mechanism for such trade. 
From 1949 until the fall of the Berlin Wall, the Consultative Group Coordinating Committee (Cocom) monitored and controlled the export of Western technology to the Soviet Union. 
It did so by a gentlemen’s agreement, and with reasonable success. 
Cocom provided an opportunity to settle squabbles and plug loopholes quietly. 
Something similar is urgently needed now. 

Don’t Follow The Fed 
The US Federal Reserve faces a dilemma, for it needs to continue raising interest rates in the face of a hurricane-devastated economy. 
The Fed’s failure to raise rates earlier thus holds a powerful lesson for the European Central Bank: after a prolonged period of monetary stability at unusually low interest rates, waiting too long to raise rates to more normal and appropriate levels holds dangerous consequences. 
The Fed was late in beginning the interest-rate normalization process, and it is now paying a price. 
The ECB must not make the same mistake, even bearing in mind that the two central banks operate in different milieus and under different constraints. 
Warning signs of impending inflation abound across the euro zone. 
Money-supply growth has been well above target levels for some time now, indicating excess liquidity. 
September headline inflation, at 2.6%, is above the ECB’s 2% target ­– as is the latest forecast for 2006 inflation (updated forecasts will be released at the beginning of December). 
“The period of wage moderation may be coming to an end,” warns Otmar Issing, the ECB’s chief economist, implying that soaring energy prices may now be feeding through into the overall price level (so-called “second-round effects”). 
In these circumstances, there is no good reason to wait to raise interest rates. 
The longer energy prices remain at their current lofty levels, the greater the probability that inflationary expectations will increase and that second-round effects will materialize. 
Further procrastination on interest-rate normalization by the ECB could well lead to a nasty bout of inflation. 
This would be disastrous for Europe’s economic recovery, as the ECB would have no choice but to slam down hard on the monetary brakes. 
No one wants this. 
Better a 50-basis-point increase now – thereby allowing the economic recovery to continue by keeping inflation in check – than triple or quadruple that figure down the road. 
The old adage that “an ounce of prevention is worth a pound of cure” applies with particular force to monetary policy. 
Judging from the outcome of last month’s meeting of the ECB’s Governing Council, that “ounce of prevention” appears to be right around the corner for the euro-zone economy. 
Indeed, the pace of ECB warnings about the risks of inflation has quickened in recent months – the earlier “We are vigilant” became “We are particularly vigilant” in September, which became “Strong vigilance with regard to upside risks to price stability is warranted” in October. 
The Governing Council is in danger of running out of adjectives – as well as credibility – if it does not act soon. 
The tone of ECB President Jean-Claude Trichet’s comments in the Q & A section of the press conference following the October meeting was unusually hawkish. 
Trichet appeared to be calling for a pre-emptive approach when he said, “We must not allow second-round effects to materialize.” 
For the first time, the ECB president was willing to admit publicly that the Governing Council had discussed the pros and cons of a rate hike at the meeting. 
Nonetheless, current interest rates were described as “still appropriate” in October, signaling that the ECB has not yet reached a decision to bite the bullet. 
To be sure, an unexpected slowdown in economic activity or a strong rise in the value of the euro could postpone the inevitable rate hike. 
But what seems clear is that the ECB used the October press conference to warn politicians, trade unions, and the markets that its long period of monetary-policy inactivity is coming to an end. 
The exit process has begun. 
Not everyone is happy with this news. 
Politicians – like Jacques Chirac in France, Silvio Berlusconi in Italy, and ECOFIN (the finance ministers of the European Union’s member states) – continue to press for fixed, even lower, interest rates. 
But it’s easy for politicians to be irresponsible about monetary policy. 
They are not the ones who will be blamed for soaring prices, nor are they the ones who will have to force the inflation genie back into the bottle. 
By constantly pushing for lower interest rates than the ECB can deliver, politicians set the central bank up as a scapegoat for Europe’s poor economic performance. 
Europe is doing badly, they argue, not because of their own failure to lead the structural reform process, but because interest rates are too high. 
At the same time, the ECB does not need to go nearly as far as the Fed, which has raised interest rates in increments of 25 basis points at 12 consecutive meetings, with still more to come. 
For the ECB, an increase of 50 basis points could do the job at this point – after which rates could probably be put on hold for some time. 
The Fed waited too long to start the normalization process, and, because it was more aggressive in lowering rates in the downward phase of the interest-rate cycle, it has had to be more aggressive in raising them in the upward phase. 
This is not the type of volatile monetary policy that Europe wants or needs. 

Don’t Forget Wim Duisenberg’s Legacy 
The most surprising and controversial thing about last December’s rate hike by the European Central Bank was that, after two and a half years of keeping interest rates at exceptionally low levels, the bank ventured an increase of only 25 basis points with no promise of more to come. 
Political pressure on Europe’s central bank may be the reason for that timid move. 
Jean-Claude Trichet, the current ECB president, may be in the same job but not the same environment as his predecessor Wim Duisenberg, who famously remarked, “I hear the politicians, but I don’t listen.” 
Political pressure on the ECB today is much greater than in Duisenberg’s time. 
The political environment is much more hostile. 
Some of this pressure may be seeping through and affecting ECB policy decisions. 
This is an extremely negative development ­– and one of the central bank’s biggest challenges for 2006. 
Not only will politicians’ influence be towards monetary excess, which of course is a serious enough matter for a bank whose primary mandate is price stability, but also the excess will constitute a serious barrier to structural reform, which is essential for European prosperity in a competitive global economy. 
Increasingly, Europe’s politicians regard excess liquidity and economic reform as substitutes for one another. 
The more the bank gives on liquidity, the less the politicians will do on reform. 
Duisenberg recognized this linkage and held firm. 
The ECB’s paltry rate hike in December, together with the supine promise of no plans for further monetary tightening, demonstrates that Trichet is no Duisenberg. 
Europe’s finance ministers have played a clever game with the ECB. 
Even though they were already resigned to a 25-basis-point rate increase, the politicians made a big show of being opposed to it, aiming to prevent what they really feared and what was certainly more warranted: a 50-basis-point hike and a warning of more on the way. 
Their strategy worked. 
Luxembourg’s finance minister, Jean-Claude Juncker, diplomatically declared after the December meeting that, “The result could have been worse.” 
Indeed, even the markets were fooled, giving the ECB a good grade for its unremarkable rate hike. 
Inflationary expectations, as measured by the rates on certain market instruments, actually fell after the hike, indicating increased confidence that the ECB will keep a lid on price pressures. 
Although the meager rate hike was presented as a consensus of the ECB’s Governing Council, it soon became apparent that the decision had been controversial. 
Some Council members, unhappy with Trichet’s dovish stance at the December press conference, made their displeasure known via the press soon after. 
In an interview with Frankfurter Allgemeine Zeitung, for example, Bundesbank president Axel Weber made it clear that future rate hikes were very much on the table. 
Others spoke out as well, and the futures markets quickly predicted another 25-basis-point rate hike in March. 
The consensus alleged at the December press conference simply did not exist. 
With political pressures encroaching on the bank’s policy decisions and a faux consensus, it is not surprising that there is now nostalgia in Frankfurt for earlier times and for Wim Duisenberg, even among his former critics. 
Duisenberg’s great skills – under-appreciated by the press and public alike – were genuine consensus-building in a potentially divisive body and, in Trichet’s own words, “an exceptional ability to keep his nerve in some highly demanding and extremely hostile environments.” 
In particular, the stubborn Dutchman understood the extreme danger if Europe’s top monetary authority became too cozy with Europe’s politicians, especially at a time when many EU finance ministers view economic reform and excess liquidity as being essentially the same thing. 
Wim Duisenberg died last year, but his values, philosophy, and wisdom must not be allowed to die with him. 
The New Year provides a perfect opportunity for Jean-Claude Trichet to resolve that, despite the more trying circumstances in which he must operate, his own policies and procedures will more faithfully reflect Duisenberg and his legacy. 
Europe deserves no less. 


Don’t Lose Ukraine 
WASHINGTON, DC – United States Secretary of State Hillary Clinton’s visit to Ukraine on July 4-5 provides an important opportunity to reassure Ukrainians that the US remains committed to Ukraine’s sovereignty and democratic evolution. 
This signal is of critical importance, because Ukraine’s hard-won independence and ability to pursue closer ties to Euro-Atlantic institutions are under threat. 
Many Ukrainians feel that the US – indeed, most of the West – has given up on their country. 
When Viktor Yanukovych was elected president in February, many Ukrainians hoped his victory would end five years of political infighting under former President Viktor Yushchenko and lead to increased stability, reform, and national unity. 
These hopes have proven illusory. 
Rather than bringing greater stability, Yanukovych has pursued a series of policies that have exacerbated domestic tensions and set the stage for Ukraine’s drift back into Russia’s economic and political orbit. 
In late April, the coalition headed by Yanukovych railroaded through parliament a 25-year extension of the agreement, due to expire in 2017, that allows Russia to base its Black Sea Fleet in Sevastopol in Crimea. 
The extension of the basing accord until 2042 was accompanied by an agreement permitting the return of Russian intelligence officers to the Sevastopol base and the termination of Ukraine’s long-term intelligence cooperation with NATO. 
The agreement was ratified without proper parliamentary oversight and in violation of a constitutional provision forbidding foreign bases on Ukrainian territory. 
It provoked a virtual riot in the parliament, complete with fistfights, hurling of eggs, and smoke bombs. 
In exchange for extending the base agreement, Russia agreed to cut by 30% the price of gas that it sells to Ukraine, throwing out the January 2009 contract signed by former Prime Minister Yulia Tymoshenko, which ended a 17-day gas crisis. 
But, given falling demand for gas, Russia had already begun renegotiating contracts in Europe and giving customers discounts. 
Thus, energy specialists point out that the 30% reduction simply brings the price negotiated with Yanukovych down to the current European average. 
Indeed, the final price is similar to the 2009 contract. 
The gas agreement, moreover, undermines Ukraine’s incentive to reform its inefficient and corrupt energy sector, and commits the country to buy more gas in subsequent years than it may need. 
At the same time, it increases energy dependence and economic reliance on Russia, hardening Ukraine into a one-dimensional – Russia-leaning – foreign policy. 
That appears to be precisely the Kremlin’s goal. 
Several days after the conclusion of the energy agreement, Prime Minister Vladimir Putin suggested at a news conference in Sochi that Ukraine’s national energy company, Naftogaz, should be merged with the state-owned Russian energy giant Gazprom. 
Such a move would put Ukraine’s strategic network of gas pipelines under direct Russian control, and, as Tymoshenko, now the opposition leader, has noted, would be tantamount to the “full absorption of Ukraine by Russia.” 
The Obama administration, including Clinton, initially portrayed these steps as part of a “balancing act” on Yanukovych’s part. 
But there is a critical difference between balancing and subservience. 
Yanukovych’s policies will significantly weaken Ukraine’s hard-won independence and its ability to pursue closer ties to the Euro-Atlantic community, which the US has supported. 
The US and the European Union have a strong stake in keeping open a European option for Ukraine. 
A reorientation of Ukrainian foreign policy back toward Russia would shift the strategic balance in Europe and have a negative impact on the prospects for democratic change on Europe’s eastern periphery, making it much more difficult for Georgia and Moldova to pursue their pro-Western course. 
It would also have a dampening impact on the long-term prospects for reform in Belarus by creating an eastern bloc of Slavic nations suspicious of the West. 
Finally, Ukraine’s turn toward Russia would set back prospects for democratic reform in Russia itself for years, if not decades, and make any serious “reset” of US-Russian relations in the near term much more difficult. 
In short, now is not the time to pursue a policy of benign neglect. 
Clinton’s trip should signal America’s firm commitment to building an independent and democratic Ukraine, and make clear that the US rejects a European security order based on spheres of influence. 
The EU should also be encouraged to be more forthright in agreeing to an Association Agreement and free-trade area. 

Don’t Save the Press 
LJUBLJANA - Throughout history, political leaders have supported existing communication technologies in order to defend the system in which they rule. 
Today, too, governments may be tempted to protect newspapers and public TV on the pretext of “saving democracy as we know it.” 
But efforts to block technological change have been futile in the past, and they would be unwise today. 
Instead, the political system (and the media) must adapt to the new reality. 
Faced with an existential crisis as new technologies lure away their readers and viewers, traditional news media – just like bankers, car manufacturers, and solar electricity producers – are increasingly turning to governments for help. 
But, such is the undertone, their cause is nobler. 
The media are a cornerstone of democracy. 
Left to the blogs and tweets, without journalists to report the news, how can citizens decide what politics to support? 
Such thinking reflects an age-old fear: as Plato put it, citizens would get “information without proper instruction and, in consequence, be thought very knowledgeable when they are for the most part quite ignorant.” 
It is a fear that has echoed down through history ever since, from the Catholic Church cursing Gutenberg’s movable type to the Victorian bourgeois complaining of the newly discovered freedom of the press. 
Political rulers, too, have never liked new communication technology, because the political system in which they rule is adapted to the existing technology. 
Scarcity of parchment required all decision-making to be concentrated in a court consisting of a handful of people. 
When cheap paper and printing presses – the first true mass-communication technology – challenged this system, the Catholic Church and the monarchs defended the parchment-based monopoly. 
They failed. 
Print, paper, and newspapers enabled the rise of new types of political systems based on expanded popular participation. 
The transition was not smooth, but those who understood the signs of the times early gained a historical head start. 
It is not a coincidence that Benjamin Franklin had a background in printing and newspaper publishing. 
The liberal-democratic political system that resulted from the American Revolution was well aligned with the emerging information technology of the time. 
In the “scarce bandwidth” media of the past, in which space and time were limited, the media had to select stories worthy of reporting. 
Mass media could report few big stories in which a few big actors took center stage. 
In stories about politics, these big actors were political parties. 
Indeed, it is not just traditional mass media that are in trouble. 
High-circulation newspapers correlate with high-circulation political parties. 
We are right, they are left; we think this, they think that: condensed narratives fit easily on a newspaper’s front page or into the tighter constraints of broadcast journalism. 
This created a mutually reinforcing symbiosis between the old mass media and old mass political movements, one hostile to the entry of new players. 
Newspapers and broadcast organizations, like political parties, were expensive to set up, but, once established, they benefited from economies of scale – operating costs remained relatively fixed as circulation (or party membership) grew. 
They maintain a keen interest in the public’s eyes and ears – and thus in each other. 
Unfortunately for both, their main strengths – transmitting information and connecting people – happen to be what the Internet does best. 
Blogs and social-networking platforms encourage seamless, cost-free association – the most efficient form of organization imaginable. 
No newspaper or broadcast news program can hope to report on what every Facebook group is up to. 
So it probably would not take much for politicians to be persuaded that the press is essential to democracy, and that its survival – like that of public television in many countries – depends on government support. 
Advertising revenue would be replaced by government subsidies, raising predictable questions about the impact on content. 
The alternative is to focus on what communication technology cannot do: create rather than transmit a good story or a good policy. 
There will always be a market for quality. 
The disruption caused by emerging communications technologies consists in the fact that the best pens may not be on the staffs of newspapers, and that policies need not be formulated only in the corridors of government. 
In 1990s, Bill Gates said, “In the next century, leaders will be those who empower others.” 
Deciding whom to empower, and whom to allow to participate, rather than deciding to save the existing media technology, will determine the future of political parties and the systems in which they govern. 

Don’t Shut the Door on Africa 
VIENNA – These days, a dollar won’t get you very far in a rich economy. 
But in a poor country like the one I come from, Sierra-Leone, even half a dollar can save a life or feed an entire family. 
Every penny invested in Africa counts today and to secure Africa’s future. 
Experts are unanimous: the financial, food and energy crisis will hammer the “bottom billion” – the poorest in some 60 countries that survive on around a dollar a day – the hardest. 
Because of the crisis, many African countries are likely to miss the 2015 deadline for the Millennium Development Goal of poverty reduction. 
The continent has made some significant socio-economic gains over the last decade. 
I’ve seen this for myself during recent travels to Benin, Ghana, Ethiopia, Egypt, Namibia, Nigeria, Senegal, and South Africa. 
These gains include, to name a few: free-market reforms, liberalization of economies, the steady introduction of pro-business environments, empowerment of women, education. 
But most of these gains are now seriously threatened. 
The financial crisis has dealt a blow to remittances. 
Migrants are losing their jobs or struggling to set aside cash for their relatives back home. 
The World Bank's latest global economic outlook suggests remittances will fall by 5% to 8% this year. 
But this is just the tip of the iceberg of the tens of millions that can be tracked. 
Foreign companies are pulling back capital, drying import and export financing. 
Trade is declining. 
The unemployment rate, especially among disadvantaged groups – young people and women – is staggering. 
In Sierra-Leone alone, over 60% of the country’s youth are jobless. 
A failure to help the "bottom billion" could fuel mass migration and global insecurity. 
Ignoring the poorest nations means postponing a much larger crisis which will lead to famine, unrest, and massive migration. 
Poverty is also an incubator for diseases, and the flow of legal and illegal migrants will carry them to rich nations. 
Poverty is not just ‘their’ problem. 
It is ‘our’ problem too. 
If developing countries collapse, there will be millions knocking on our front doors, and the first port of call will be Europe. 
Such mass migration will severely hurt already strained social relations in some countries and lead to unpredictable consequences. 
Only a coordinated global response can guarantee that in the long run people from the poorest billion will visit Europe as tourists and business partners, not as asylum seekers. 
Africa needs to do its share. 
It needs investments to shift away from a dependence on a donor-driven agenda and peasant-driven agriculture, and learn to compete on a global level. 
It can generate sustainable growth through industrialization, and by creating a single market. 
It needs to promote production and trade, expand agribusiness and agro-industries, and create wealth and new jobs. 
Agribusiness development can stimulate broader economic growth, boost regional trade, and at the same time enhance food security, and reduce poverty. 
Globalization has been good to many in the developing world. 
At this critical moment, we can’t allow this to fade away. 
We need to make this a more inclusive process, and make sure that: 
· financial resources keep flowing to Africa and the developing world so they continue integrating into the global economy; 
· protectionism is avoided and markets stay open; 
· the poorest nations can grow out of poverty through trade; 
· there is good governance of natural resources to fuel broader and inclusive development 
The abundance of relevant experiences from the newly industrialized countries in Asia and elsewhere can show African countries how to galvanize their economies, accelerating the process of wealth creation and poverty reduction on the continent. 
And last but not least. 
Development without access to energy won’t happen. 
This crisis could help formulate a new approach: increase access to reliable, affordable and renewable energy services for sustainable development, promote energy efficiency to make sure economic growth does not raise energy demand and environmental degradation, including climate change. 
Africa has great hydropower potential but only 7% has been exploited so far. 
Africa’s natural gas reserves amount to about 8% of global reserves. 
It has 10% of global oil reserves. 
But it requires major investments to develop both traditional energy means and renewable ones. 
It is still unclear exactly how much of the $1 trillion pledged at the London G20 summit will find its way to Africa. 
That’s why we need to keep an eye on the figures and keep reminding world leaders of the needs of those in the developing world that live in their shadow. 
This will set policy priorities straight, put strategies in place to avert a human catastrophe, and help Africa secure its rightful place at the global economic table. 

Don't Write off The New Economy as Dead 
CAMBRIDGE: Until recently America's booming New Economy reigned supreme: no inflation to speak of, stocks at all time highs, four years at over 4% growth, full employment, and budget surpluses. 
To that vision even cynics surrendered. 
Now everything looks different. 
Signs of inflation in product and labor markets loom; the only question now is whether the economy will slow quickly by itself or whether the Federal Reserve Board must beat it into the ground by quickly raising interest rates. 
So, was it all hype or will the New Economy survive slowdown? 
The answer: it will live and spread throughout the world, becoming as pervasive as the welfare state and big government became in the 1930s. 
It will shape our economies and our lives for decades. 
Why? 
The New Economy involves five interacting motors: technology, competition, and a new economic culture for government, households and business. 
Technology is the most obvious part: the telecommunications revolution is far more pervasive and spreading more rapidly than the telegraph or telephone did in their time. 
There is also the information revolution with its ability to create software programs that restructure dramatically tasks from accounting to ticketing, from finance to shopping to leisure. 
This part of the revolution is far from over: in fact, we are merely at the end of the beginning of this revolution. 
The explosion of computing capacity will soon introduce opportunities now out of reach of anyone's imagination today. 
In terms of competition: we have not had as much nor as pervasive competition since early in the century. 
Sharply higher competition is even becoming the rule in countries that hate it like the devil -- Germany, France, Japan and others. The agents of competition are of course world trade, made more effective by technology, domestic deregulation and dismantling welfare states. 
Stockholders insist on getting their pound of flesh. 
Risk capital is available to anyone, not just the establishment, and there is no limit. 
It is a short step from here to breaking down protected markets. 
The New Economy is a rat race, but everybody, at least as a buyer, is king. 
The third driver is a new economic culture. 
Central banks and treasuries have learned that stable prices and sound budgets make extraordinary contributions to prosperity. 
As important, individuals and businesses have gotten the two key messages of a world where everything is possible: "Don't take NO for an answer!" And "Don't wait for the government; if you have a problem, solve it yourself." 
These attitudes fundamentally change the way the world works: middle management, the bulwark of tradition, is being liquidated. 
As in every revolution, protagonists of the status quo are kicked out. 
Risk talking is valued, not shunned. 
Young people want to be in startup companies, not investment banks. 
The man who said something is impossible gets interrupted by someone who just did it. 
Josef Schumpeter (failed turn-of-the-century Austrian finance minister at age 21, bankrupt banker shortly after, formidable Harvard economist after that) called this process "creative destruction." 
He envisaged trade, changed rules of the game, or an important innovation shocking markets, the result being that prices, players, and rules of the game change throughout the entire economy. 
In the process, a dramatic reshuffling greatly raises productivity as established and tired organizations break up. 
There is no better example of Schumpeter's creative destruction than what has happened in America over the past decade. 
But this is no longer a US story. 
Creative destruction (reinforced by economic openness and technology) is sweeping the world. 
Skeptics keep arguing that competition and technology wreak havoc upon society's harmony; that they create inequality and eviscerate the middle class. 
True, the New Economy is tough for those who sit on their backsides and live at the expense of stockholders or taxpayers. 
True, it gives a chance to energetic people formerly on the sidelines. 
Interestingly, in the US it has meant full employment and a sharp improvement in the economic status of the poorest. 
Yes, people change jobs; yes, they must hustle. 
But who wants to go back? 
Not parents who see great mobility and opportunities for their kids; not the kids who have the time of their life. Three cheers for creative destruction. 
Despite stock market dips, the New Economy has come of age. 
It does not offer a quick way to riches; it does not double the growth rate; it does not happen by just breathing the air. 
The New Economy means hard work; its miracles are limited but real. 
In many places, it turns the world upside down: Finland as a high tech center, Germany lagging because change is denigrated, Japan's slumping economy rescued by its formidable technology potential. 
Central banks and treasuries can no longer create false prosperity. 
And most important, perhaps we have even done away with the business cycle. 
Far too early for a requiem, the New Economy is just starting. 


Donald Rumsfeld and Smart Power 
Donald Rumsfeld, America’s Secretary of Defense, recently spoke about the Bush administration’s global war on terror. “In this war, some of the most critical battles may not be in the mountains of Afghanistan or the streets of Iraq, but in newsrooms in New York, London, Cairo, and elsewhere. 
Our enemies have skillfully adapted to fighting wars in the media age, but for the most part we have not.” 
The good news is that Rumsfeld is beginning to realize that the struggle against terrorism cannot be won by hard military power alone. 
The bad news is that he still does not understand soft power – the ability to get what you want through attraction rather than coercion. 
As The Economist commented about Rumsfeld’s speech, “until recently he plainly regarded such a focus on ‘soft power’ as, well, soft – part of ‘Old Europe’s’ appeasement of terrorism.” 
Now Rumsfeld finally realizes the importance of winning hearts and minds, but, as The Economist put it, “a good part of his speech was focused on how with slicker PR America could win the propaganda war.” 
In other words, in blaming the media for America’s problems, Rumsfeld forgot the first rule of marketing: if you have a poor product, not even the best advertising will sell it. 
Rumsfeld’s mistrust of the European approach contains a grain of truth. 
Europe has used the attractiveness of its Union to obtain outcomes it wants, just as the US has acted as though its military pre-eminence could solve all problems. 
But it is a mistake to count too much on hard or soft power alone. 
The ability to combine them effectively is “smart power.” 
During the Cold War, the West used hard power to deter Soviet aggression, while it used soft power to erode faith in Communism behind the iron curtain. 
That was smart power. 
To be smart today, Europe should invest more in its hard-power resources, and America should pay more attention to its soft power. 
During President George W. Bush’s first term, Secretary of State Colin Powell understood and referred to soft power, whereas Rumsfeld, when asked about soft power in 2003, replied “I don’t know what it means.” 
A high price was paid for that ignorance. 
Fortunately, in his second term, with Condoleezza Rice and Karen Hughes at the State Department and Rumsfeld’s reputation dented by failures that in the private sector would have led to his firing or resignation, Bush has shown an increased concern about America’s soft power. 
Of course, soft power is no panacea. 
For example, soft power got nowhere in attracting the Taliban government away from its support for Al Qaeda in the 1990’s. 
It took hard military power to sever that tie. 
Similarly, North Korean dictator Kim Jong Il likes to watch Hollywood movies, but that is unlikely to affect his decision about whether to give up his nuclear weapons program. 
Such a choice will be determined by hard power, particularly if China agrees to economic sanctions. 
Nor will soft power be sufficient to stop Iran’s nuclear program, though the legitimacy of the Bush administration’s current multilateral approach may help to recruit other countries to a coalition that isolates Iran. 
But other goals, such as promoting democracy and human rights, are better achieved by soft power. 
Coercive democratization has its limits, as the US has learned in Iraq. 
This does not mean that Rumsfeld’s Pentagon is irrelevant to American soft power. 
Military force is sometimes treated as synonymous with hard power, but the same resource can sometimes contribute to soft power. 
A well-run military can be a source of attraction, and military cooperation and training programs can establish transnational networks that enhance a country’s soft power. 
The US military’s impressive work in providing humanitarian relief after the Indian Ocean tsunami in 2004 helped restore America’s attractiveness, and enhanced its soft power. 
But the misuse of military resources can also undercut soft power. 
The Soviet Union possessed a great deal of soft power in the years after World War II. 
But the Soviets’ attractiveness as liberators was destroyed by the way they later used their hard power against Hungary and Czechoslovakia. 
Brutality and indifference to “just war” principles of discrimination and proportionality can also destroy legitimacy. 
The efficiency of the initial American military invasion of Iraq in 2003 created admiration in the eyes of some foreigners. 
But this soft power was undercut by the inefficiency of the occupation, the mistreatment of prisoners at Abu Ghraib, and the policy – initiated by Rumsfeld – of detainment without hearings at Guantánamo. 
To be sure, no one expects that we can ever attract people like Mohammed Attta or Osama bin Laden. 
We need hard power to deal with such cases. 
But today’s terrorist threat is not Samuel Huntington’s clash of civilizations. 
It is a civil war within Islam between a majority of normal people and a small minority who want to coerce others into a accepting a highly ideological and politicized version of their religion. 
We cannot win unless the moderates win. 
We cannot win unless the number of people the extremists recruit is lower than the number we kill and deter. 
Rumsfeld may understand this calculus in principle, but his words and actions show that he does not know how to balance the equation in practice. 
Doing so – and thus being in a position to win the war – is impossible without soft power. 

The Trumping of American Politics 
WASHINGTON, DC – As Republicans and Democrats go through the long process of selecting a nominee for next year’s presidential election, both parties face the same question. 
Will the anti-establishment – even anti-political – mood now dominating the contest last? 
For once, Labor Day (the first Monday in September) was not the presidential race’s demarcation point: the overall themes had already been set. 
Revulsion at government and traditional politicians hit the presidential contest like a tornado in the summer, flattening the campaigns of some who were once seen as serious contenders. 
Among Republicans this sentiment is, of course, no surprise, given their party’s steady rightward drift and consistent antipathy toward President Barack Obama. 
But it suited a wealthy, noisy braggart who barreled into the race attacking conventional politicians as “stupid” and insisting that he alone could get things done. 
Those who wrote off Donald Trump as a “buffoon” failed to see that he has shrewdly read the Republican zeitgeist, and that he knows precisely where to stick the knife into competitors. 
His depiction of former Florida governor Jeb Bush as a man of “low energy” has done real damage to a candidate whom many had assumed – even before he formally entered the race – would be the favorite. 
“The Donald” (no one has better name recognition than the former TV personality) has pitched his appeal both to American patriotism and the country’s dark side. 
His slogan, “Make America Great Again,” is aimed at those who are frustrated that the US can no longer impose its will on an increasingly confusing world. 
For them, and for Trump, Obama is to blame: he doesn’t stand up to foreign leaders (Binyamin Netanyahu might disagree); he withdrew from Iraq too soon (though the timetable was set by his Republican predecessor); he even “apologizes” for America. 
Trump plays to America’s persistent veins of racism and nativism: he vows somehow to round up and deport some 11 million undocumented aliens and fortify America’s border with Mexico by building a wall – paid for by Mexico. 
His striking narcissism (everything he does is “outstanding, great, terrific, the best”) is both his trademark and his policy. 
Around mid-August, as Trump’s poll numbers rose even after public statements that would have brought down mere mortal candidates, it dawned on the pundits that he was no summer infatuation. 
It became evident that he might win the first nominating contest, the Iowa caucuses, and that he was leading in the second, New Hampshire, and other states. 
It was no longer laughable to say that he could be the Republican nominee. 
But the “anti-system” mood of this election campaign is not confined to the Republicans. 
Bernie Sanders the socialist and Donald Trump the plutocrat are addressing much the same impulse. 
Speaking in clear, declarative sentences, Sanders sets forth an idealistic conception of government policy that appeals to a great many people on the growing left of the Democratic Party. 
By contrast, Jeb Bush and the Democrats’ presumed nominee, Hillary Clinton, embody traditional politics. 
Both come across as focus-grouped, packaged, and cautious, whereas Trump and Sanders are seen by their followers as “telling it like it is.” 
Sanders appeals to the popular frustration with the compromises made by America’s leaders, including the centrist Bill Clinton. 
Hillary Clinton, trying to straddle the divide between the two wings of the Democratic Party, is increasingly leaning to the left as Sanders draws enormous crowds, something she has yet to accomplish. 
Moreover, her campaign is struggling to escape the quagmire produced by revelations that she conducted official business on a private email server during her tenure as Obama’s Secretary of State. 
Meanwhile, Trump’s appeal among Republicans is across the board: moderates and conservatives, college-educated, Evangelicals, men and women. 
It also includes white supremacists: in June Trump was endorsed by The Daily Stormer, America’s largest neo-Nazi “news” website. 
When two far-right activists in Boston beat a homeless Latino man, with one saying that they had acted in Trump’s name, the candidate commented that some of his followers are “passionate.” 
A poll of Trump supporters found that 66% believe that Obama is a Muslim, and 61% that he was not born in the US (a claim that Trump continued to trumpet long after it had been disproved). 
Trump’s closest Republican rival, Ben Carson, a renowned neurosurgeon, also has no political experience and says outlandish things. 
But Carson says them quietly, which may be why his favorability rating in Iowa is higher than that of his Republican competitors (pulling even with Trump in one poll). 
Carson has said, for example, that people enter prison as heterosexuals and come out gay; that America is like Nazi Germany in suppressing ideas and opponents; and that the president need not enforce the Supreme Court’s recent landmark decision legalizing gay marriage. 
Trump and Carson, along with two other candidates running as political outsiders – Ted Cruz, a senator from Texas, and former Hewlett-Packard CEO Carly Fiorina – currently account for around 60% of support among Iowa Republicans. 
Bush and the rest of the field, including Rand Paul, Scott Walker, and Marco Rubio – all one-time darlings of the political press – are floundering. 
To recover ground, some, especially Walker, have fallen into the trap of trying to out-Trump Trump. 
But there’s only one Trump, and his candidacy is causing conniptions on the part of Republican Party officials, particularly given his campaign’s open hostility toward Latinos. 
Following Obama’s re-election, in 2012, Republican leaders commissioned a study that showed that the party’s nominee will have to win more Latino votes than ever to win the White House. 
There is scant chance of that if Trump is the party’s standard-bearer. 
So far, Trump has defied the laws of political gravity. 
But it remains possible that his candidacy will crash as some of his rivals drop out and leave their supporters (and wealthy backers) to crystallize around someone they see as a more viable alternative. 
That would be a relief to Republican Party leaders, who recently obtained Trump’s vow (easily undone) not to mount an independent presidential campaign should he fail to win the party’s nomination. 
In the meantime, both party establishments have reason to be nervous. 
With Sanders now polling well ahead of Clinton in New Hampshire, serious commentators have begun speculating that Americans will ultimately be asked to choose between Sanders and Trump. 

Which Way for US-China Relations Under Trump? 
BEIJING – Donald Trump’s shocking victory in the US presidential election has upended all of the certainties that have shaped not only American politics, but also how the world thinks about the United States. 
Trump must now confront the nitty-gritty of managing America’s international relationships, and arguably none is more important for the world than that between the US and China. 
But it is also the relationship that was put in the most doubt by the tenor of Trump’s campaign. 
The president-elect could complicate bilateral relations, particularly given that his first year in office will coincide with the Chinese Communist Party’s 19th National Congress next fall. 
In an ideal world, both Trump and Chinese President Xi Jinping should want to keep US-China relations stable. 
But this will prove difficult, given not only Trump’s Sinophobic rhetoric, but also ongoing disagreements about Chinese territorial claims in the South China Sea and North Korea’s nuclear ambitions. 
Moreover, US-China relations could fall victim to US domestic disputes about global trade, the value of the dollar, and protectionism. 
Many Chinese observers accept that Trump will have to grapple with unprecedented divisions at home. 
He will be challenged not only by the now shell-shocked Democrats, but also by Republicans who opposed his candidacy, whether openly or covertly. 
Under these circumstances, he will have to emphasize putting America’s own house in order. 
If, however, he confuses such an effort with his campaign’s “America first” thrust, even more tension is likely. 
Beyond domestic politics, the international order has experienced several shocks in recent years, profoundly changing the global context for US-China relations. 
Protracted conflicts in Ukraine and Syria hint at a new Cold War between the US and Russia, and the turmoil in those countries, as well as elsewhere, is increasingly disrupting national economies and security regimes. 
As the world’s two leading powers, the US and China must figure out how to work together in such unstable conditions. 
Today, their unsteady relationship features cooperation alongside intensifying competition. 
Not unsurprisingly, the latter has gained more of the world’s attention than the former. 
President Barack Obama has been reinforcing the US military presence in and around China’s neighbors, beefing up security alliances in Asia, and very publicly intervening in the territorial disputes in the South China Sea. 
The Chinese leadership views these moves, as well as the proposed 12-country Trans-Pacific Partnership trade deal, as an effort to “contain” China. 
At the same time that the US is rebalancing its geopolitical strategy toward Asia, China is asserting its global presence with new security and international-development initiatives, including the “one belt, one road” project, which will link the Chinese economy with much of Eurasia. 
Likewise, the China-led Asian Infrastructure Investment Bank – which the US views as a Chinese tool for challenging the existing international order – continues to attract such faraway prospective members as Canada, which applied to join in August. 
Zero-sum competition between the US and China will make a conflict between the two countries more likely. 
One potential flashpoint will be North Korea’s nuclear-weapons program. 
The US is already taking measures to prevent North Korea from attacking it, or South Korea, through enhanced ballistic missile defense systems. 
The new Trump administration could supplement those efforts with military action to increase the pressure on China. 
But any effort to bring nuclear-weapons technology to Japan or the Korean Peninsula, something that Trump declared acceptable during the campaign, would create a crisis in Northeast Asia the likes of which the world has not seen since the Korean War. 
The US could also clash with China over Taiwan. 
Relations between Taiwan and mainland China have been fairly peaceful since the 1995-1996 Taiwan Strait Crisis, when then-US President Bill Clinton sent an American aircraft-carrier battle group into the strait. 
But Taiwan remains a highly sensitive – and emotive – issue for China. 
If relations with the island sour, so, too, could the US-China relationship. 
The world benefits when US-China relations stay on track, so both countries should be more transparent about their national interests. 
With clearly defined positions, each country could pursue a policy of strategic restraint, avoiding the swaggering displays of force that have sometimes tempted them in the past. 
If a conflict between the US and China were to erupt, China’s modernization could be derailed, and the Chinese people would miss out on the “Chinese Dream” that Xi has declared as their goal. 
For the US, a diplomatic breakdown would indicate that China had been “lost,” as it previously was thought to have been lost when Mao Zedong defeated Chiang Kai-shek’s US-supported Nationalist regime in 1949. 
More broadly, US-China hostility would be felt worldwide, and would disrupt international efforts to confront global challenges such as climate change. 
To avoid that scenario in the short term, the US and China should consider forming a joint team that includes experienced, high-ranking officials and prominent experts from both sides. 
This group could chart a course for US-China relations in 2017, identify potential conflicts, and recommend solutions before tensions can reach a boiling point. 
With a new diplomatic framework for bilateral relations, the US and China could ward off strategic confrontations. 
In the long term, the US and China need deeper dialogue and a shared vision for the international order, so that individual countries will not be tempted to form rival blocs among themselves. 
The US and China should also work together toward “globalization 2.0,” by reforming international rules and institutions to accommodate both established and emerging countries. 
While there is much potential for conflict between the US and China in the coming years, there is also space for improved cooperation. 
Indeed, amid the vast uncertainty created by Trump’s victory, a new relationship now makes more strategic sense than ever, given changing global circumstances, regional geopolitics, and domestic challenges in both the US and China. 
Trump must now choose between cooperation and confrontation as the framework for US policy toward China. 
His choice should be obvious: a collaborative effort to reform the international order would benefit both sides. 

Clowns on the Campaign Trail 
NEW YORK – Donald Trump, the real-estate tycoon and reality-show host, also known as “The Donald,” is unlikely to be the next president of the United States. 
He is loud, crude, ignorant about most things, and looks absurd in his puffed up blond comb-over hairdo. 
Even ardent Republicans have dismissed him as a “rodeo clown,” and his campaign as a “circus.” 
The Huffington Post covers Trump’s campaign strictly as entertainment news. 
Yet, for the moment, Trump is leaving all his rivals for the Republican presidential nomination in the dust. 
Even in US politics, which can be very strange, this is extraordinary. 
What explains Trump’s popularity? 
Are all his supporters “crazies,” as Senator John McCain, perhaps unwisely, called them? 
Trump’s critics argue that he is playing to the basest instincts of disaffected voters, who hate foreigners (especially Mexicans), distrust bankers (or anyone with a higher education, for that matter), and still can’t get over the election of a president whose father was black. 
Trump, in the comedian Jon Stewart’s words, is “America’s id,” or at least the id of a large number of mostly white, mostly older, mostly small-town Americans. 
Now, all this may be so. 
But Trump is part of a wider phenomenon throughout the democratic world. 
Disaffected voters can be found everywhere, whether in the US, Europe, or India. 
But they are not only turning away from mainstream political parties and following populists who promise to clean out the corrupt elites from the centers of power; they also share a taste for political entertainers, or clowns if you like. 
Beppe Grillo, a real professional comedian, now leads the second largest political party in Italy. 
His aim is to overturn the country’s political establishment and upset the European Union by taking Italy out of the euro. 
In a sense, of course, Italians already voted three times for a clownish figure as prime minister. 
Silvio Berlusconi, another real-estate billionaire, who began his career as a crooner on a cruise ship, was even more outrageous than Trump, as well as a master of the mass media – literally so, as he owned most of it in his country. 
As is true of The Donald, many people, especially men, liked him not despite his outrageous statements and behavior, but because of them. 
A television comic named Victor Trujillo, but better known as Brozo the Creepy Clown, became the most influential political commentator in Mexico. 
In the Netherlands, not normally a country known for clownish politicians, the surge of populism was first led by Pim Fortuyn, a flamboyantly gay man who staged provocative, and always richly entertaining, public appearances. 
Again, his talent for shocking statements was an asset, not a hindrance. 
After his violent death in 2002, Geert Wilders, a former punk rocker with a pile of dyed platinum blond hair, shone brightest in the Dutch populist firmament. 
Apart from peculiar hairstyles (the balding Berlusconi has his head painted), the new populists have several things in common. 
Whether billionaires or not, they share a prickly hostility to so-called elites, from whom they feel socially excluded. 
Wilders and Trump, among others of their ilk, also play on popular anti-immigrant sentiment. 
Trump called Mexicans in the US “rapists.” 
Wilders wants to ban the Koran and stop Muslims from moving to his country. 
But this, too, is part of the same resentment against elites, who are blamed for allowing foreigners to arrive in the first place. 
In Europe, antipathy to immigrants, or Islam, can quickly switch to hostility toward the European Union, which is seen as yet another bastion of entrenched elites. 
This is what Wilders and Grillo have in common. 
But I think there is a more basic reason why political clowns are doing so well. 
Many people are fed up with the professional political class. 
In the past, politicians of the left often came from the trade unions, while conservatives were rich businessmen or landowners. 
Social classes had their own interests, which were represented by parties divided by clear ideological differences. 
Increasingly, however, people see no difference between politicians from one party or another. 
They are lumped together under such rubrics as “Washington,” “Brussels,” or “Wall Street.” 
This perception is exaggerated, especially in the US. 
The country really would be a different place under a Republican president, especially with a Republican majority in both houses of Congress. 
But it is certainly true in many places that ideological differences have largely collapsed. 
Social democrats govern in coalition governments with laissez-faire conservatives. 
Neoliberalism reigns. 
More and more, politics looks like a rigged system whereby members of the same political class compete for jobs, rather than for the victory of ideas, or on behalf of larger collective interests. 
Trumpism, then, or Grilloism, is a revolt against the professional politicians. 
Trump is not just trying to run against a Democrat for the presidency; he is running against his own party’s establishment as well. 
His supporters are disgusted with the compromises made in Washington between leading Republicans and Democrats. 
To them, bipartisan cooperation is not necessary to the governance of a large and diverse country; it is a form of corruption. 
That is why they voted five years ago for Tea Party politicians, who preferred a government shutdown to a negotiated deal with Democrats. 
And that is why they are cheering for a showy loudmouth like Trump. 
But, without compromise, a democracy becomes ungovernable. 
The US is in grave danger of this now. 
Even though Trump will not become the next president, the populist damage has already been done. 

Donald Trump’s Normal Fed 
CAMBRIDGE – In a presidency that has shown little regard for conventional institutional norms, how can one explain Donald Trump’s completely reasonable appointments to the Federal Reserve Board? 
The most recent nominations, Columbia professor Richard Clarida and Michelle Bowman, the bank commissioner for the state of Kansas, continue a pattern of choosing seasoned technocrats, beginning, most importantly, with Jerome Powell, the new Fed chair. 
If Trump were a normal president, appointing highly regarded individuals who can ensure effective policymaking would be business as usual. 
But here is a president who has often chosen officials with little government experience, and then seems to task them with creating the most disruption possible in the departments they are selected to run. 
Yet for the Fed, the author of The Art of the Deal has nominated as vice-chair an academic (Clarida) whose most famous paper is entitled “The Science of Monetary Policy.” 
All right, you might say, giving Trump credit for maintaining stability at the Fed is like giving high marks for not starting a nuclear war. 
The idea of central-bank independence has gained enormous traction over the past 30 years among politicians worldwide. 
Not only is it the norm in democracies such as the United States, the eurozone and Japan, but even strongman leaders like Russian President Vladimir Putin and Hungarian Prime Minister Viktor Orbán pause long and hard before challenging their central banks. 
But people forget just how new the idea of central-bank independence really is. 
The venerable Bank of England gained monetary independence only 20 years ago. 
Back in the early 1980s, when I wrote an academic paper making the case for independence as a tool to establish central banks’ anti-inflation credibility, one journal after another rejected it. 
The referees scoffed at the idea that independence could be more than a meaningless façade, easily pierced by the government. 
Which brings us back to Trump. 
Is he just pausing long and hard before pressing the Fed to stoke the economy ahead of the 2020 election, and ultimately to monetize the massive deficits wrought by Republican tax cuts? 
If that is his plan – and who really believes a cornered Trump would not resort to high inflation? – the good news is that his Fed appointments will not make his life easy. 
Trump does appear to understand this. 
After all, on the campaign trail in 2016, he himself railed against Powell’s predecessor, Janet Yellen, for allegedly holding down interest rates to facilitate Hillary Clinton’s election. 
Now as president, that is exactly what he would like to see in 2020. 
Interviewing candidates to succeed Yellen last year, he supposedly asked just one key question: “You aren’t going to raise interest rates and ruin my beautiful stock market, are you?” 
True, Trump is somewhat constrained by the need to win Senate approval of his nominations. 
In fact, some conservative Republicans have objected to another of his appointments, Marvin Goodfriend of Carnegie Mellon University, for daring to suggest that the Fed might need a new approach to monetary policy (negative interest rates) to confront the next very deep recession or financial crisis. 
And although someday the Fed will almost surely embrace this advice (I have also published on the issue), Goodfriend’s nomination barely survived the US Senate Banking Committee. 
But, by and large, the Senate has given Trump what he wants, and many Republicans would have embraced a disrupter – for example, a disciple of Ron “End the Fed” Paul – or another conservative preaching a return to the pre-World War I gold standard. 
Unfortunately, the battle for the Fed’s independence is far from over. 
Trump may just be keeping his powder dry until a real conflict erupts. 
Right now, the Fed’s planned interest-rate hikes are largely prophylactic. 
Inflation is rising only very slowly, even as the economy seems to be running red-hot. 
But the moment of reckoning could still come. 
And, assuming that Trump stays healthy, avoids impeachment, and runs again, the last thing he would want in 2019 and 2020 is sharply higher interest rates, an untimely rise in unemployment, and a likely price collapse in his beautiful stock market. 
In a crunch, the Fed’s much-vaunted independence could prove more fragile than most people realize. 
It is not enshrined in the US Constitution, and the president and Congress maintain several levers of control. 
An act of Congress created the Fed in 1913, and in principle Congress could revamp it, say, by greatly increasing congressional oversight, or by starving it of funding. 
Indeed, from time to time bills have floated around Congress that would have done just that. 
For now, Fed appointees have been treated almost as well as generals in the Trump universe. 
True, with ballooning deficits and the approach of the 2020 election campaign, testing times lie ahead. 
But for now, let’s acknowledge that this is one area where the Trump presidency has been almost normal – so far. 

Donald Trump’s Foreign-Policy Challenges 
CAMBRIDGE – During his campaign, US President-elect Donald Trump questioned the alliances and institutions that undergird the liberal world order, but he spelled out few specific policies. 
Perhaps the most important question raised by his victory is whether the long phase of globalization that began at the end of World War II is essentially over. 
Not necessarily. 
Even if trade agreements like the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership fail and economic globalization slows, technology is promoting ecological, political, and social globalization in the form of climate change, transnational terrorism, and migration – whether Trump likes it or not. 
World order is more than just economics, and the United States remains central to it. 
Americans frequently misunderstand our place in the world. 
We oscillate between triumphalism and declinism. 
After the Soviets launched Sputnik in 1957, we believed we were in decline. 
In the 1980s, we thought the Japanese were ten feet tall. 
In the aftermath of the Great Recession of 2008, many Americans mistakenly believed that China had become more powerful than the United States. 
Despite Trump’s campaign rhetoric, the US is not in decline. 
Because of immigration, it is the only major developed country that will not suffer a demographic decline by mid-century; its dependence on energy imports is diminishing rather than rising; it is at the forefront of the major technologies (bio, nano, information) that will shape this century; and its universities dominate the world league tables. 
Many important issues will crowd Trump’s foreign policy agenda, but a few key issues will likely dominate – namely great power relations with China and Russia and the turmoil in the Middle East. 
A strong American military remains necessary but not sufficient to address all three. 
Maintaining the military balance in Europe and East Asia is an important source of American influence, but Trump is correct that trying to control the internal politics of nationalistic populations in the Middle East is a recipe for failure. 
The Middle East is undergoing a complex set of revolutions stemming from artificial post-colonial boundaries; religious sectarian strife, and the delayed modernization described in the United Nations’ Arab Human Development Reports. 
The resulting turmoil may last for decades, and it will continue to feed radical jihadist terrorism. 
Europe remained unstable for 25 years after the French Revolution, and military interventions by outside powers made things worse. 
But, even with reduced energy imports from the Middle East, the US cannot turn its back on the region, given its interests in Israel, non-proliferation, and human rights, among others. 
The civil war in Syria is not only a humanitarian disaster; it is also destabilizing the region and Europe as well. 
The US cannot ignore such events, but its policy should be one of containment, influencing outcomes by nudging and reinforcing our allies, rather than trying to assert direct military control, which would be both costly and counterproductive. 
In contrast, the regional balance of power in Asia makes the US welcome there. 
The rise of China has fueled concern in India, Japan, Vietnam, and other countries. 
Managing China’s global rise is one of this century’s great foreign-policy challenges, and America’s bipartisan dual-track strategy of “integrate but insure” – under which the US invited China to join the liberal world order, while reaffirming its security treaty with Japan – remains the right approach. 
Unlike a century ago, when a rising Germany (which had surpassed Britain by 1900) stoked fears that helped precipitate the disaster of 1914, China is not about to pass us in overall power. 
Even if China’s economy surpasses America’s in total size by 2030 or 2040, its per capita income (a better measure of an economy’s sophistication) will lag. 
Moreover, China will not equal US military “hard power” or its “soft power” of attraction. 
As Lee Kuan Yew once said, so long as the US remains open and attracts the talents of the world, China will “give you a run for your money,” but will not replace the US. 
For these reasons, the US does not need a policy of containment of China. 
The only country that can contain China is China. As it presses its territorial conflicts with neighbors, China contains itself. 
The US needs to launch economic initiatives in Southeast Asia, reaffirm its alliances with Japan and Korea, and continue to improve relations with India. 
Finally, there is Russia, a country in decline, but with a nuclear arsenal sufficient to destroy the US – and thus still a potential threat to America and others. 
Russia, almost entirely dependent on revenues from its energy resources, is a “one crop economy” with corrupt institutions and insurmountable demographic and health problems. 
President Vladimir Putin’s interventions in neighboring countries and the Middle East, and his cyber attacks on the US and others, though intended to make Russia look great again, merely worsen the country’s long-term prospects. 
In the short run, however, declining countries often take more risks and are thus more dangerous – witness the Austro-Hungarian Empire in 1914. 
This has created a policy dilemma. 
On the one hand, it is important to resist Putin’s game-changing challenge to the post-1945 liberal order’s prohibition on the use of force by states to seize territory from their neighbors. 
At the same time, Trump is correct to avoid the complete isolation of a country with which the US has overlapping interests when it comes to nuclear security, non-proliferation, anti-terrorism, the Arctic, and regional issues like Iran and Afghanistan. 
Financial and energy sanctions are necessary for deterrence; but we also have genuine interests that are best advanced by dealing with Russia. 
No one would gain from a new Cold War. 
The US is not in decline. 
The immediate foreign-policy task for Trump will be to adjust his rhetoric and reassure allies and others of America’s continuing role in the liberal world order. 

The Madness of King Donald 
WASHINGTON, DC – Much of America’s capital has entered a state of near-panic. 
In recent days, President Donald Trump has been acting more bizarrely than ever, and the question raised in the mind of politicians and civilians alike, though rarely spoken aloud, has been: What can be done with this man? 
Can the United States really afford to wait for Special Counsel Robert Mueller to wrap up his investigation (on the assumption that he’ll find the president guilty of something)? 
That could still take quite a while. 
The question of timing has become increasingly urgent, given the heightened danger that the US will deliberately or accidentally end up in a war with North Korea. 
That risk, coupled with Trump’s increasingly peculiar behavior, has made Washington more tense than I’ve ever known it to be, and that includes the dark days of Watergate. 
To put it bluntly: the worry is that a mentally deranged president might lead the US into a nuclear war. 
In just the past week, evidence of Trump’s instability has piled up. 
During an Oval Office ceremony to honor Native-American heroes of World War II, he offended them by issuing a racist comment. 
He picked an unprecedented and unnecessary fight with the prime minister of the United Kingdom, supposedly America’s closest ally, by retweeting a British neo-fascist group’s anti-Muslim posts. 
In an effort to win a Democratic senator’s vote for his pending tax-cut bill, he traveled to her state and told lies about her record (though the tax bill was so tilted to the richest 1% of Americans that no Democratic senator voted for it). 
And he continued to bait North Korean leader Kim Jong-un, who seems equally unstable. 
At the same time, both the Washington Post and The New York Times ran articles containing disturbing stories about the president’s private behavior. 
Trump, it was reported, told people close to him that he considers the infamous “Access Hollywood”recording of him joking, off-camera, about grabbing women’s genitals to be a fraud, even though he admitted its authenticity and apologized after the Post released it in the final weeks of the presidential campaign. 
Trump has also been revisiting his mendacious claim about Barack Obama having not been born in the US – the bogus allegation that launched his political career, which, under pressure from advisers, he’d renounced prior to the election. 
He said in a tweet that he had turned down Time magazine’s suggestion that it would name him “Person of the Year,” because it wasn’t definite. 
(Trump sets great store by such appearances on Time’s cover). 
But a Time official said that no such thing had occurred. 
The fact that Trump appears to have some mental disorder, or disorders, has created a dilemma for psychiatrists, politicians, and journalists alike. 
The American Psychiatric Association has a rule that its members may not offer diagnoses of people they have not examined. 
But, given what some psychiatrists see as a national emergency, many have broken the rule and spoken or written publicly about their professional assessments of Trump’s mental state. 
The most widely accepted view is that he suffers from a narcissistic personality disorder, which is far more serious than simply being a narcissist. 
According to the Mayo Clinic, such a disorder “is a mental condition in which people have an inflated sense of their own importance, a deep need for excessive attention and admiration, troubled relationships, and a lack of empathy for others.” 
Moreover, “behind this mask of extreme confidence lies a fragile self-esteem that’s vulnerable to the slightest criticism.” 
This definition is all too reflective of traits that Trump regularly exhibits. 
Another view held by a number of medical professionals, based on how Trump spoke in interviews in the late 1980s and how he speaks now – with a far more limited vocabulary and much less fluency – is that the president is suffering from the onset of dementia. 
According to the highly respected medical reference UpToDate, a subscription-financed service used by professionals, the symptoms of dementia include agitation, aggression, delusions, hallucinations, apathy, and disinhibition. 
Numerous Republican members of Congress are deeply worried about Trump’s capacity to handle the presidency – an incredibly demanding job. 
Secretary of State Rex Tillerson, rumored to be replaced soon, is said to have called Trump a “moron.” 
Trump’s heightened erratic behavior in recent days has been attributed to his growing anxiety about Mueller’s investigation into his and his campaign’s possible collusion with Russia in the Kremlin’s effort to tilt the 2016 election in his direction – an investigation that could end in a charge of conspiracy. 
(Trump appears to be the only significant figure in Washington who won’t accept that Russia interfered.) 
And that increasingly bizarre behavior came even before the news broke, on December 1, that Trump’s first national security adviser and close campaign aide, retired General Michael Flynn, had agreed to plead guilty to one count of lying to the FBI in exchange for his cooperation with the investigation. 
What made this highly significant was that Flynn is far and away the highest former official whom Mueller has “flipped.” 
Indeed, the generous plea deal makes it clear that Flynn is prepared to name figures higher than he was in the campaign and the White House. 
That’s not very many people. 
It has already been speculated, with reason, that Flynn will point a finger at Trump’s son-in-law and senior adviser, Jared Kushner. 
But Trump’s several earlier efforts to steer prosecutors away from Flynn were strong signals that Flynn knows something that Trump desperately hopes that prosecutors won’t find out. 
We may learn what that is fairly soon. 
Meanwhile, American and the world nervously await Trump’s reaction to this latest very bad turn of events for him. 

The Age of Incompetence 
BERKELEY – On January 20, 2017, US President-elect Donald Trump will take office having received almost three million fewer votes than his opponent; and he will work with a Republican Senate majority whose members won 13 million fewer votes than their Democratic opponents. 
Only the Republican majority in the House of Representatives, led by Speaker Paul Ryan, has any claim to represent a numerical majority of the 55% of Americans who voted on Election Day 2016. 
Trump will also begin his presidency with an approval rating below 50%. 
This is unprecedented – or “unpresidented,” as one of his semi-literate tweets put it (before he deleted it) – in the history of such ratings. 
The government of the world’s oldest democracy is, in fact, not democratic. 
Also unprecedented is the fact that so few members of the president-elect’s own party, and none of the Democratic opposition, consider him to be qualified for the duties of the presidency, apart from serving as Cheerleader-in-Chief. 
Of course, the Trump phenomenon has been gestating for a long period. 
With the honorable exception of George H.W. Bush, who had the requisite knowledge, intelligence, temperament, and values to serve, the last time a fully qualified Republican was inaugurated was in 1957. 
No one denies that Richard Nixon had the knowledge and intelligence to be president; but most people will admit that his temperament and values left something to be desired. 
Similarly, most people thought that Ronald Reagan lacked the requisite knowledge and intelligence for the office. 
According to the journalist Peter Jenkins, former British Prime Minister Margaret Thatcher once said of Reagan, “Poor dear, there’s nothing between his ears.” 
And the qualifications that Reagan did have on Inauguration Day eroded over time, after he was wounded in a failed assassination attempt 69 days into his presidency, and, later, when he began to suffer from Alzheimer’s disease. 
Still, Reagan’s temperament and values (generally speaking) were well suited to the presidency. 
He fully understood that being the star did not mean that he was the boss. 
Both as a Hollywood actor and as a US president, Reagan had smart, dedicated, and trained professionals writing his lines and directing his moves. 
He knew that his job was to be on screen, and not to interfere with the people behind the camera and in the post-production editing room, who were responsible for the finished product. 
This is what most observers expected to see when George W. Bush took office in 2001: a folksy cheerleader who would follow the lead of the wise advisers he had inherited from his father. 
But the younger Bush came to think of himself not just as the star, but as “the decider,” too. 
And while Vice President Dick Cheney and Secretary of Defense Donald Rumsfeld had been savvy policymakers back in the 1970s, they had become rather erratic by the early 2000s. 
For whatever reason, Bush bonded with the two, which sealed his fate. 
He has not attended any Republican National Conventions since leaving office, and he may wish that he had he never sent James Baker to Florida in November 2000 to secure his victory over Al Gore. 
Trump clearly has not taken any lessons from the second Bush presidency. 
He knows that he is the star, but he also wrongly believes that he has the knowledge and intelligence to be the boss. 
He seems unaware that his campaign is over, that he could fail catastrophically and permanently in his new role, and that it is in his own interest to ensure that his proposals are sound, not just as slogans, but as actual policies that will keep the US safe and create prosperity. 
So, what should the millions of Americans who now fear for the future do? 
First, we can work at the state level to try to neutralize any Trump policy initiatives that are flawed or infeasible. 
Democrats and principled Republicans in state legislatures need to work together to keep tax revenues flowing and to fund the many spending programs that are in the American interest, regardless of what is happening in Washington, DC. 
And they should promise each other that, regardless of who comes to power in 2021, they will not hold each other liable for acting as disruptors today. 
At the national level, we should constantly remind Senate Republicans that they speak for 13 million fewer voters than the Democrats do. 
And we should remind Paul Ryan that he made a mistake by going along with the Bush administration’s discredited economic and foreign-policy initiatives between 2001 and 2008, and that it is a disservice to the country to show unconditional partisan support for an administration that is so obviously unfit. 
And, if all else fails, we should remember that standing up to an unpopular president who received almost three million fewer votes than his opponent is not just the right thing to do; it will also make for great reality TV. 

Donald Trump’s Choices in the Middle East 
TEL AVIV – US President-elect Donald Trump has said a lot about foreign affairs, without really saying anything at all. 
His muddled statements offer little insight into what kind of foreign policy he will actually pursue, and there is not much reason to believe that, when his approach does become clear, it will be what the United States – or the world – needs. 
Trump is a businessman, not a statesman. 
He thinks in terms of immediate profits and losses – a worldview that is exemplified in his declarations that US allies need to contribute more to security alliances. 
At a time of evolving challenges and growing threats, adhering to this narrow-minded, isolationist approach is unlikely to do anyone much good. 
One region that Trump will not be able to ignore is the Middle East. 
The crisis in Syria, in particular, will draw the US in, though Trump’s choices there are limited. 
After all, America’s “moderate” jihadist allies are no more palatable than President Bashar al-Assad, and the so-called Islamic State is far from defeated. 
Former New York City Mayor Rudy Giuliani, a close Trump adviser and possible member of Trump’s cabinet, has identified defeating ISIS as the administration’s first foreign-policy priority. 
Trump has claimed that he knows “more about ISIS than the generals do.” 
But that is unlikely. 
After all, the only way fully to defeat a movement that thrives amid chaos is to build strong and competent states, a task for which Trump lacks both the inclination and the patience. 
If Trump opts for a purely military approach, he will find that every “victory” merely creates space for more violence and terror. 
While the conquest of Raqqa and Mosul by a US-led military campaign would improve America’s standing among its Sunni allies, it would also relieve pressure on the Russia-Iran-Hezbollah axis. 
Iran-backed Shia militias would unleash a killing spree against Sunni communities in Mosul after ISIS withdrew. 
The ensuing turmoil and pressure on Sunni populations would fuel more terrorism, whether associated with ISIS or with entirely new groups. 
Whatever tack Trump takes in Syria, it will surely be influenced by Russian President Vladimir Putin. 
Trump must cut America’s dependence on Russia in the Syria war, in order to resist Putin’s efforts to use his influence in Syria to gain leverage with regard to Ukraine. 
Of course, Trump’s willingness to challenge Putin, for whom the president-elect has voiced admiration, is uncertain. 
But America’s security and military establishment, together with Republican senators like John McCain, are unlikely to allow Trump to “Make Russia Great Again” by surrendering both Syria and Ukraine. 
The surrender of Ukraine alone would embolden Russia to reassert itself in its supposed “sphere of influence,” potentially causing NATO to come apart. 
Judging by his campaign statements, Trump might not be worried about the unraveling of NATO – or of any US security alliance, at least not yet. 
But the results could be disastrous, not least because a lack of US security guarantees and structures could spur nuclear proliferation. 
Trump’s promise to suspend the Iran nuclear deal is particularly worrying. 
Iran has prepared Hezbollah to be a powerful proxy for precisely those occasions when it needs to strike back at Iran’s enemies. 
Moreover, suspending the nuclear deal would cause Iran to become a nuclear power in no time. 
In a region with no collective security architecture, terrorist groups could easily acquire their own primitive nuclear devices. 
Given this, America’s estranged allies in the Middle East – Saudi Arabia, Egypt, and Israel – would be well advised to drop their opposition to the Iran deal, and instead encourage Trump to keep it in place. 
Likewise, Trump’s promise to reduce funding to foreign allies, as part of a broader “America first” strategy, should be tempering their joy at his victory. 
Another estranged ally that could shape Trump’s choices in the Middle East is Turkey, which has pursued something of a détente with Russia in recent months. 
To salvage the bilateral relationship, Trump would have to sacrifice America’s partnership with the Kurds, whose militias in Syria and Iraq have been America’s most reliable allies in the battles for Mosul and Raqqa. 
Turkish President Recep Tayyip Erdoğan may want ISIS defeated, but he wants to quell the Kurds’ ambitions of self-rule even more. 
Rewarding the Kurds for their help by backing their bid for statehood would be so unacceptable that, to prevent it, Erdoğan might even try to thwart the defeat of ISIS. 
Add to that opposition from Iraq, Syria, and Iran, and it is clear that Kurdish independence is not in the cards. 
Palestinian statehood, however, should be. 
In his own erratic way, Trump has said as much, fueling hopes among some Palestinians that his election could end up working in their favor. 
But Israel’s fanatic settler movement has the opposite impression, viewing Trump’s victory as a license for the unrestrained expansion of settlements in Palestinian lands. 
In the end, how Trump uses US leverage in the Israel-Palestine conflict – the only issue in the Middle East where the US enjoys such indisputable influence – might depend on events on the ground. 
Specifically, a settlement-building spree might end up triggering a particularly fierce third Palestinian intifada. 
But Trump should not wait for a crisis to impose an agenda on him. 
Instead, he should recognize that now, more than at any time since 1948, America’s estranged Sunni allies have a strong incentive to make peace with Israel and collaborate with it on regional security, and that such an arrangement could be legitimate only with the creation of a Palestinian state. 
Given that this would also support US reconciliation with the Arab peoples, thereby serving America’s national security interests, Trump should not hesitate to seize the initiative. 

America’s Neville Chamberlain 
PRINCETON – When countries get nervous about their security, they often insist that they need to reduce their dependence on foreign products, shorten supply chains, and produce more goods domestically. 
But does protectionism really improve security? 
Now that the world is hovering on the brink of a full-scale trade war, we should examine some of the arguments made in favor of protectionism, and then revisit the largest trade war of the twentieth century. 
There tends to be a great deal of duplicity in debates about trade. 
Import tariffs and other similar measures are often presented as convenient foreign-policy tools for serving the general good. 
But if one looks past the rhetoric, it is obvious that such measures really just reward particular constituents, and amount to an unfair form of taxation. 
US President Donald Trump would argue that a trade war is a means to an end. 
To his mind, tariffs are a reasonable response to unfair currency practices and national-security threats. 
But, of course, there is also a domestic political calculus: namely, tariffs will help specific producers and constituents by making their competitors’ goods more expensive. 
The problem is that tariffs inevitably force domestic consumers to foot the bill for that subsidy, by paying higher prices. 
There is nothing new in Trump’s assertion that, “Trade wars are good, and easy to win.” 
And that means we can test his claim against the historical record. 
When Neville Chamberlain was serving as Britain’s Chancellor of the Exchequer in 1932, he reversed his country’s century-old position as a champion of free trade. 
Worried about Britain’s longstanding trade deficit, he announced a new “system of Protection,” which he hoped to use “for negotiations with foreign countries which have not hitherto paid very much attention to our suggestions.” 
Chamberlain concluded that it was only “prudent to arm ourselves with an instrument which shall at least be as effective as those which may be used to discriminate against us in foreign markets.” 
In the event, he was paving the road to World War II. 
His trade policy weakened Britain and strengthened Germany. 
And in a mere six years, his appeasement policy toward the Nazi Germany regime would reach its pinnacle with the 1938 Munich Agreement, which Hitler discarded six months later by destroying the rump Czechoslovakia and bringing it under the control of the Third Reich. 
The interwar years were dominated by the fear of a German nationalist resurgence. 
For Western powers, containing Germany would require either an alliance system or a more ambitious collective-security pact. 
France preferred the former option, and advocated an arrangement in which its alliance with Poland, plus the “Little Entente” of Czechoslovakia, Romania, and Yugoslavia, would contain both Hungarian and German expansionism. 
Great Britain favored the second option, and saw the League of Nations as the most effective instrument for defending territorial integrity. 
Both approaches crashed in the Great Depression, owing primarily to France and Britain’s own protectionist policies. 
Both countries shifted abruptly to a policy of high tariffs and import quotas that gave preference to products from their overseas empires. 
The result was that Czechoslovakia’s industrial producers and Romanian and Yugoslav agricultural exporters could no longer sell to Western Europe. 
Instead, they became increasingly dependent – economically as well as politically – on Nazi Germany. 
Likewise, Poland, after fighting a customs war with Germany in the 1920s and early 1930s, entered into a non-aggression pact with the Nazi regime in 1934. 
Through all of this, the League of Nations and other multilateral bodies tried to organize conferences and summits to halt the slide toward protectionism. 
But those talking shops all failed. 
During the Great Depression, accusations of currency manipulation formed the primary impetus for protectionist measures. 
One hears the same sort of rhetoric today from Trump, both when he criticizes the US Federal Reserve for tightening monetary policy and when he claims – falsely – that China is artificially depreciating the renminbi. 
The lesson of the Great Depression is clear: trade wars intended to strengthen national security actually undermine it. 
This is especially true in the case of defensive alliances, because trade barriers force allies to forge closer ties with the very revisionist power that was supposed to be contained. 
Precisely this scenario is playing out today. 
Trump’s protectionist rhetoric is a response to the dramatic rise of China. 
But by launching a tariff war that also affects the European Union and Canada, Trump is making China look like a more attractive partner than the US. 
To be sure, Trump and European Commission President Jean-Claude Juncker have now reached a preliminary agreement to de-escalate the US-EU tariff fight. 
But Trump has already roiled the transatlantic alliance. 
Like Germany’s neighbors in the 1930s, Europe and Canada may feel as though they have no other choice than to seek out a more open – or at least more stable – partner. 
Trump’s trip to Europe last month went a long way toward destroying the alliances that have maintained global stability since the end of WWII. 
And his self-abasing press conference with Russian President Vladimir Putin had more than a whiff of Chamberlain-style appeasement. 
If Trump actually wanted to make China more attractive to the world, then he could do no worse than to continue his war on free trade and the multilateral institutions that arose from the ruins of 1945. 

Donald Trump’s Message 
CAMBRIDGE – Donald Trump’s lead in the race for the Republican Party’s nomination as its presidential candidate in November has caused consternation. 
The Republican establishment fears he will not be able to defeat Hillary Clinton, the likely Democratic nominee. 
But some observers worry more about the prospect of a Trump presidency. 
Some even see Trump as a potential American Mussolini. 
Whatever its problems, the United States today is not like Italy in 1922. 
The Constitution’s institutional checks and balances, together with an impartial legal system, are likely to constrain even a reality-TV showman. 
The real danger is not that Trump will do what he says if he reaches the White House, but the damage caused by what he says as he tries to get there. 
Leaders are judged not only on the effectiveness of their decisions, but also by the meaning that they create and teach to their followers. 
Most leaders gain support by appealing to the existing identity and solidarity of their groups. 
But great leaders educate their followers about the world beyond their immediate group. 
After World War II, during which Germany had invaded France for the third time in 70 years, the French leader Jean Monnet decided that revenge upon a defeated Germany would produce yet another tragedy. 
Instead, he invented a plan for the gradual development of the institutions that evolved into the European Union, which has helped make such a war unthinkable. 
Or, to take another example of great leadership, Nelson Mandela could easily have chosen to define his group as black South Africans and sought revenge for the injustice of decades of apartheid and his own imprisonment. 
Instead, he worked tirelessly to expand the identity of his followers both by words and deeds. 
In one famous symbolic gesture, he appeared at a rugby game wearing the jersey of the South African Springboks, a team that had previously signified South African white supremacy. 
Contrast Mandela’s efforts to teach his followers about a broader identity with the narrow approach taken by Robert Mugabe next door in Zimbabwe. 
Unlike Mandela, Mugabe used colonial-era grievances to build support, and now is relying on force to remain in power. 
In the US today, while the economy is growing and the unemployment rate is at a low 4.9%, many feel excluded from the country’s prosperity. 
Many blame rising inequality over the past few decades on foreigners, rather than technology, and it is easy to rally opposition both to immigration and globalization. 
In addition to economic populism, a significant minority of the population also feels threatened by cultural changes related to race, culture, and ethnicity, even though much of this is not new. 
The next president will have to educate Americans about how to deal with a globalization process that many find threatening. 
National identities are imagined communities in the sense that few people have direct experience of the other members. 
For the past century or two, the nation-state has been the imagined community that people are willing to die for, and most leaders have regarded their primary obligations to be national. 
This is inescapable, but it is not enough in a globalizing world. 
In a world of globalization, many people belong to a number of imagined communities – local, regional, national, cosmopolitan – that are overlapping circles sustained by the Internet and inexpensive travel. 
Diasporas are now connected across national borders. 
Professional groups like lawyers have transnational standards. 
Activist groups ranging from environmentalists to terrorists also connect across borders. 
Sovereignty is no longer as absolute as it once seemed. 
Former President Bill Clinton has said that he regrets his failure to respond adequately to the genocide in Rwanda in 1994, although he was not alone. 
Had Clinton tried to send US troops, he would have encountered stiff resistance in Congress. 
Good leaders today are often caught between their cosmopolitan inclinations and their more traditional obligations to the people who elect them – as German Chancellor Angela Merkel has discovered in the wake of her brave leadership on the refugee crisis last summer. 
In a world in which people are organized primarily in national communities, a purely cosmopolitan ideal is unrealistic. 
We see this in widespread resistance to acceptance of immigration. 
For a leader to say there is an obligation to equalize incomes globally is not a credible obligation, but to say that more should be done to reduce poverty and disease and help those in need can help to educate followers. 
Words matter. 
As the philosopher Kwame Anthony Appiah puts it, “Thou shalt not kill is a test you take pass-fail. 
Honor thy father and thy mother admits of gradations.” 
The same is true of cosmopolitanism versus insularity. 
As the world watches the US presidential candidates wrestle with issues of protectionism, immigration, global public health, climate change, and international cooperation, we should ask what aspect of American identities they are appealing to and whether they are educating followers about broader meanings. 
Are they stretching Americans’ sense of identity as best they can or just appealing to their narrowest interests? 
Trump’s proposal to bar Muslims from entering the US and his demands that Mexico pay for a wall to stop migration would be unlikely to pass constitutional or political muster were he elected President. 
Then again, many of his proposals are not policies designed to be implemented, but slogans crafted to appeal to an insular populist mood among a segment of the population. 
Given his lack of a strong ideological core and his celebration of “the art of the deal,” Trump might even prove to be a pragmatic president, despite his narcissism. 
But good leaders help us define who we are. 
On that score, Trump has already failed. 

The Taming of Trump 
NEW YORK – Now that Donald Trump has unexpectedly won the US presidency, it is an open question whether he will govern in accordance with his campaign’s radical populism, or adopt a pragmatic, centrist approach. 
If Trump governs in accordance with the campaign that got him elected, we can expect market scares in the United States and around the world, as well as potentially significant economic damage. 
But there is good reason to expect that he will govern very differently. 
A radical populist Trump would scrap the Trans-Pacific Partnership (TPP), repeal the North American Free Trade Agreement (NAFTA), and impose high tariffs on Chinese imports. 
He would also build his promised US-Mexico border wall; deport millions of undocumented workers; restrict H1B visas for the skilled workers needed in the tech sector; and fully repeal the Affordable Care Act (Obamacare), which would leave millions of people without health insurance. 
Overall, a radical Trump would significantly increase the US budget deficit. 
He would sharply reduce income taxes on corporations and wealthy individuals. 
And while he would broaden the tax base, increase the carried-interest tax, and encourage companies to repatriate foreign profits, his plan would not be revenue-neutral. 
He would increase military and public-sector spending in areas such as infrastructure, and his tax cuts for the rich would reduce government revenue by $9 trillion over a decade. 
A radical Trump would also drastically change the current monetary-policy approach – first by replacing US Federal Reserve Chair Janet Yellen with a monetarist hawk, and then by filling current and upcoming Fed Board vacancies with more of the same. 
Moreover, he would repeal what he could of the 2010 Dodd-Frank financial reforms; gut the Consumer Financial Protection Bureau; cut alternative-energy subsidies and environmental regulations; and slash any other regulations that supposedly hurt big business. 
Finally, a radical Trump’s foreign policy would destabilize America’s alliances and escalate tensions with rivals. 
His protectionist stance could incite a global trade war, and his insistence that allies pay for their own defense could lead to dangerous nuclear proliferation, while diminishing American leadership on the world stage. 
But it is actually more likely that Trump will pursue pragmatic, centrist policies. 
For starters, Trump is a businessman who relishes the “art of the deal,” so he is by definition more of a pragmatist than a blinkered ideologue. 
His choice to run as a populist was tactical, and does not necessarily reflect deep-seated beliefs. 
Indeed, Trump is a wealthy real-estate mogul who has lived his entire life among other rich businessmen. 
He is a savvy marketer who tapped into the political zeitgeist by pandering to working-class Republicans and “Reagan Democrats,” some of whom may have supported Vermont Senator Bernie Sanders in the Democratic primary. 
This allowed him to stand out in a crowded field of traditional pro-business, pro-Wall Street, and pro-globalization politicians. 
Once in office, Trump will throw symbolic red meat to his supporters while reverting to the traditional supply-side, trickle-down economic policies that Republicans have favored for decades. 
Trump’s vice-presidential choice, Mike Pence, is an establishment GOP politician, and his campaign’s economic advisers were wealthy businessmen, financiers, real-estate developers, and supply-side economists. 
What’s more, he is reportedly already considering mainstream Republicans for his cabinet, including former Speaker of the House Newt Gingrich, Tennessee Senator Bob Corker, Alabama Senator Jeff Sessions, and former Goldman Sachs executive Steven Mnuchin (who also advised his campaign). 
The traditional Republicans and business leaders Trump will likely appoint will then shape his policies. 
The executive branch adheres to a decision-making process whereby relevant departments and agencies determine the risks and rewards of given scenarios, and then furnish the president with a limited menu of policy options from which to choose. 
And, given Trump’s inexperience, he will be all the more dependent on his advisers, just as former Presidents Ronald Reagan and George W. Bush were. 
Trump will also be pushed more to the center by Congress, with which he will have to work to pass any legislation. 
House Speaker Paul Ryan and the Republican leadership in the Senate have more mainstream GOP views than Trump on trade, migration, and budget deficits. 
Meanwhile, the Democratic minority in the Senate will be able to filibuster any radical reforms that Trump proposes, especially if they touch the third rail of American politics: Social Security and Medicare. 
Trump will also be checked by the American political system’s separation of powers, relatively independent government agencies such as the Fed, and a free and vibrant press. 
But the market itself will be Trump’s biggest constraint. 
If he tries to pursue radical populist policies, the response will be swift and punishing: stocks will plummet, the dollar will fall, investors will flee to US Treasury bonds, gold prices will spike, and so forth. 
If, however, Trump blends more benign populist policies with mainstream pro-business ones, he will not face a market fallout. 
Now that he has won the election, there is little reason for him to choose populism over safety. 
The effects of a pragmatic Trump presidency would be far more limited than in the radical scenario. 
First, he would still ditch the TPP; but so would Hillary Clinton. 
He claimed that he would repeal NAFTA, but he will more likely try to tweak it as a nod to American blue-collar workers. 
And even if a pragmatic Trump wanted to limit imports from China, his options would be constrained by a recent World Trade Organization ruling against “targeted dumping” tariffs on Chinese goods. 
Outsider candidates often bash China during their election campaigns, but quickly realize once in office that cooperation is in their own interest. 
Trump probably will build his wall on the Mexican border, even though fewer new immigrants are arriving than in the past. 
But he will likely crack down only on undocumented immigrants who commit violent crimes, rather than trying to deport 5-10 million people. 
Meanwhile, he may still limit visas for high-skill workers, which would deplete some of the tech sector’s dynamism. 
A pragmatic Trump would still generate fiscal deficits, though smaller than in the radical scenario. 
If he follows the Congressional Republicans’ proposed tax plan, for example, revenue would be reduced only by $2 trillion over a decade. 
To be sure, the policy mix under a pragmatic Trump administration would be ideologically inconsistent and moderately bad for growth. 
But it would be far more acceptable to investors – and the world – than the radical agenda he promised his voters. 

The Many Extremes of Donald Trump 
WASHINGTON, DC – Much attention in the United States and elsewhere is focused on whether US presidential candidate Donald Trump will shift away from the anti-immigrant, anti-Muslim, and anti-rational rhetoric that carried him to the Republican Party nomination. 
Some of his advisers are reportedly recommending that he move toward “mainstream” Republican positions, such as those held by the leadership of the House of Representatives. 
It is entirely possible that Trump will follow their counsel. 
After all, his current positions are not generating enough support to make victory in November likely (the widely cited FiveThirtyEight website puts his odds at around 20%). 
And Trump’s running mate, Mike Pence, Governor of Indiana, served in the House from 2000 to 2012 and has close ties to Speaker Paul Ryan and other Republican leaders. 
The Republican establishment, deeply divided over Trump’s candidacy, certainly hopes for such a shift. 
But, if it comes about, no one should mistake it for a move toward more “moderate” positions. 
In any other year, the House Republicans would be regarded as irresponsible extremists. 
To see this, consider the record from a recent hearing of the House Committee on Oversight and Government Reform, chaired by Representative Jason Chaffetz. 
The ostensible focus of the hearing was the policies of the Federal Deposit Insurance Corporation (FDIC), particularly with regard to the creation of new banks. 
As the hearing unfolded, however, it became clear that most Republican members were intent on broad-ranging deregulation of finance – rolling back all of the reforms put in place after the 2008 financial crisis. 
(I testified at the hearing at the invitation of House Democrats.) 
In effect, most of the senior Republicans who spoke wanted to return to the pre-crisis world – or even to less financial regulation than existed under President George W. Bush. 
This is a recipe for repeating the boom-and-bust cycle that created the worst crisis since the 1930s and caused at least a decade of damage to the US economy. 
Moreover, while sitting officials are typically treated with respect, the Republicans on the committee were extraordinarily uncivil toward Martin Gruenberg, the FDIC chairman. 
Worse, in addition to their rudeness and confrontational manner, the Republican members displayed a striking lack of interest in even the most basic facts. 
For example, some of them claimed that low interest rates should make it attractive for new banks to be created – so, in their view, the lack of banking start-ups is an indication that the FDIC is doing something profoundly wrong. 
But researchers at the Federal Reserve have examined this closely and established, beyond any reasonable doubt, that the achievable interest-rate spread (the difference between deposit rates and loan rates) for potential start-up banks is extremely low. 
This lack of expected profitability – a side effect of monetary policy – is the primary reason people do not want to start new banks. 
Unfortunately, the House Republicans simply do not want to be confronted with the findings of social science (on banking) – or apparently of science (for example, on climate change). 
If you put the facts before them, as happened in that hearing, they become aggressive and unpleasant – sounding rather like smaller versions of Trump. 
A civilized exchange of ideas and information is impossible. 
The House Republicans have another big economic idea on their agenda about which we will likely hear more from Trump: a massive tax cut. 
If enacted, a few people at the top of the income distribution would do well; everyone else, not so much. 
Meanwhile, the deficit and government debt would soar, just like they did during the pre-2008 period. 
Any growth that resulted would prove illusory, with the inevitable hard landing leading to austerity, which would be imposed disproportionately on less well-off Americans. 
Good luck having a sensible discussion about those issues with House Republicans. 
Anyone wishing for Trump to “move to the middle” in today’s Republican Party is really just asking for a more dangerous version of George W. Bush, at home and abroad. 
Bush pushed through a big tax cut, along with other major increases in government spending – including for two disastrous foreign wars – and funded it all with debt. 
He also presided over a more complete form of financial deregulation than the US had ever seen, resulting in the largest economic contraction in almost 80 years. 
With Trump in the White House, the United States might get the white-supremacist agenda of his “alt-right” allies: massive discrimination against minorities and other groups, and probably some form of police state to detain and expel millions of residents. 
Or it might get complete financial deregulation and a return to the most irresponsible fiscal policies the US ever experienced. 
The most likely scenario is that it would get both. 

Donor Funds are Needed for Poverty, Not Iraq 
America wants the world to pledge billions of dollars to Iraq's reconstruction at a donor's meeting to be held in October in Madrid. 
The world's answer should be an unequivocal "No!" 
Iraq's long-term reconstruction does not need foreign financial assistance. 
What it needs is a political settlement, and that will be possible only with the withdrawal of America's occupying army. 
The billions of dollars that the US seeks should be directed towards true global emergencies, such as the fight against AIDS and hunger. 
The Bush Administration probably launched its war against Iraq because it intended to make the country a new base for long-term military operations in the Gulf region. 
After the terrorist attacks on the US of September 2001, it wanted to withdraw troops from Saudi Arabia, and it presumably chose Iraq as its new long-term base of operation. 
This, I believe, is why America is so opposed to a quick transfer of sovereignty to Iraqis. 
A truly sovereign Iraq might well tell the US to withdraw from the country. 
As long as America remains an occupying force in Iraq, political stability there is unlikely. 
Without political stability, Iraq's economic recovery is unlikely, too. 
The US is seen by many Iraqis as a colonial occupier, and is therefore the target of attack not only by loyalists of Saddam Hussein, but by Iraqi nationalists of various sorts, as well as by Arab fighters from neighboring countries. 
The attacks against the US occupation are destroying the Iraqi economy as well as lives. 
The attackers have successfully stopped the flow of a large part of Iraq's oil exports. 
The oil pipeline in the north to Turkey has been repeatedly bombed, and functions sporadically if at all. 
The oil fields in the South do not have enough electricity to operate at capacity because the power grid is also the target of repeated bombings. 
Indeed, Iraq is reportedly pumping 1-2 million barrels of oil a day rather than the 2-3 million barrels that the country could quickly achieve in peaceful circumstances. 
This shortfall in oil earnings, not the lack of foreign assistance, is the real cause of Iraq's financial crisis. 
Each reduction of one million barrels per day translates into lost revenues of around $30 million per day at today's world market price of $30 per barrel. 
This implies that if Iraq increased its oil exports by one million barrels a day--which it could quickly achieve with a cessation of attacks on its infrastructure--it would have around $10 billion per year in additional revenues to begin reconstruction. 
Iraq's oil production could probably rise to around five million barrels per day within three years. 
That would represent an extra 3-4 million barrels per day on top of today's production, or roughly $30-40 billion per year--enough not only to restore basic services, but to achieve big improvements in living standards and economic growth in the medium term. 
At that level of production, Iraq would be a middle-income country, with a gross national product per person of several thousand dollars per year, including non-oil production. 
In short, Iraq would not need official development assistance at all. 
The biggest costs in Iraq are not for reconstruction but for US troops. 
America is paying an astounding $51 billion per year to station 140,000 troops in the country, a staggering cost of around $360,000 per soldier per year. 
The US could save itself tens of billions of dollars per year by withdrawing its troops from Iraq. 
If the US were then to give just a fraction of the financial saving to Iraq in 2004, there would be plenty of incremental revenues to run the Iraqi Government and to support the recovery of oil production. 
In addition to the shocking waste of lives and money from the Iraq war, America has done the world another great disservice. 
By focusing global attention on an economic crisis that does not really exist, it has diverted public attention from serious crises that do. 
The world would stand up and cheer if the US called upon the October donor meeting to address truly life-and-death issues like the battle against AIDS and hunger. 
Consider the battle against AIDS, TB, and malaria. 
Around eight million impoverished people will die of these three preventable and treatable diseases in 2004. In 2001, the world created a Global Fund to Fight AIDS, TB, and Malaria. 
Yet for fiscal year 2004, the Bush Administration is committing $71 billion to Iraq and just $200 million for the Global Fund. 
For every dollar that it is giving to the Global Fund, the Bush Administration is committing $350 to Iraq. 
These are grotesquely distorted priorities. 
Worse, the US is encouraging other donor countries to misspend as well. 
It's time for the world to tell America some hard news. 
Other countries won't pay for America's occupation of Iraq. 
The US has to make clear that it plans to withdraw its troops quickly and entirely. 
Moreover, the US should stop wasting so much money on military spending and redirect its efforts towards the world's poorest people. 
That's a financial effort that the world can and should join. 

Doomsday for the Dollar? 
The United States' current-account deficit reached 5.7% of GDP in the second quarter of 2004. 
Yet the dollar remains at a relatively high value: less than 20% below its early 2001 highs and more than 10% higher in real terms than in the early to mid-1990's. 
As the US current-account deficit rose over the past half-decade, international economists have lined up to predict doom: returns on assets invested in the US are relatively low, so at some point - probably all at once - holders of dollar-denominated securities will realize that the risk of suffering a major crash in value is not being adequately compensated. 
Once portfolio investors start selling their dollar-denominated securities, a stampede will follow, causing the dollar's value to crash and triggering the first major global financial crisis of the twenty-first century. 
Fred Bergsten of the Institute for International Economics calls this situation "a disaster in the making." 
How far will the dollar have to fall? 
The first historical rule of thumb is 10% on the dollar for each percent of GDP's worth of unsustainable current-account deficit. 
The second historical rule of thumb is that currencies on the decline tend to overshoot: near the bottom, international currency speculators require a substantial risk premium out of the fear that the currency crash might trigger something even worse. 
So when will this promised dollar collapse and crisis come? 
Bergsten says, "Soon." 
But Bergsten is probably wrong about that. 
The late Rudiger Dornbusch - who used to write this column - used to say that unsustainable situations lasted longer than economists who believed in market rationality and equilibrium could imagine possible. They then tended to collapse more quickly than anyone could believe. 
In his view, currency overvaluations go through five stages: 
· First, short-term speculators seeking higher returns, or investors overanxious for safety, drive a currency's value to unsustainable levels. 
· Second, trend-chasers keep buying because the returns have been so good in the recent past, thus pushing the overvaluation to a height and duration that orthodox economists cannot explain. 
· Third, highly intelligent economists, puzzled by the duration of the overvaluation, evolve theories of why things are different this time, and why this time the overvaluation is perhaps sustainable after all. 
· Fourth, market bulls, encouraged by theories of a "new economy" that justify the extraordinarily good returns seen in the recent past, keep buying and keep the currency suspended above economic fundamentals even longer. 
· Fifth, the supply of eager purchasers and trend-chasing investors comes to an end, producing a crash that resembles the collapse of a Ponzi scheme. 
In the past six months, the current round of the US dollar cycle entered stage three. 
Louis Uchitelle of The New York Times quotes the highly intelligent Catherine Mann commenting on the "co-dependent relationship…between the US and its trading partners," which might "last for quite some time," because "the US and its main trading partners have a vested interest in the status quo." 
Japan, China, and other export-oriented East Asian economies are indeed eager to keep the value of the dollar relatively high, and their central banks have piled up close to $2 trillion in dollar-denominated assets. 
China's government regards the threat of capital losses on its dollar-denominated securities as less important than the need to maintain near-full employment in coastal manufacturing cities like Shanghai. 
After all, the ruling communist oligarchs have grown accustomed to a comfortable lifestyle. 
The last thing they want is mass unemployment and urban unrest to call their positions into question. 
But if international currency speculators get the scent of near-inevitable profits from an ongoing dollar decline in their nostrils, all Asian central banks together will not be able to keep the dollar high. 
Only the Federal Reserve can do that - and the Federal Reserve is very unlikely to sacrifice the jobs of American workers on the altar of the strong dollar. 
There may yet be a soft landing, whether slow or fast: during the last major dollar cycle, between 1985 and 1987, the dollar fell by 40% without ever causing panic, major bankruptcies, or a demand by investors for a substantial dollar risk premium to compensate them for holding assets denominated in a declining currency. 
But the historical rule of thumb is that the chances of a fast, hard landing have now surpassed 25%, and continue to climb. 

Double-Dip Days 
NEW YORK – The global economy, artificially boosted since the recession of 2008-2009 by massive monetary and fiscal stimulus and financial bailouts, is headed towards a sharp slowdown this year as the effect of these measures wanes. Worse yet, the fundamental excesses that fueled the crisis – too much debt and leverage in the private sector (households, banks and other financial institutions, and even much of the corporate sector) – have not been addressed. 
Private-sector deleveraging has barely begun. 
Moreover, there is now massive re-leveraging of the public sector in advanced economies, with huge budget deficits and public-debt accumulation driven by automatic stabilizers, counter-cyclical Keynesian fiscal stimulus, and the immense costs of socializing the financial system’s losses. 
At best, we face a protracted period of anemic, below-trend growth in advanced economies as deleveraging by households, financial institutions, and governments starts to feed through to consumption and investment. 
At the global level, the countries that spent too much – the United States, the United Kingdom, Spain, Greece, and elsewhere – now need to deleverage and are spending, consuming, and importing less. 
But countries that saved too much – China, emerging Asia, Germany, and Japan – are not spending more to compensate for the fall in spending by deleveraging countries. 
Thus, the recovery of global aggregate demand will be weak, pushing global growth much lower. 
The global slowdown – already evident in second-quarter data for 2010 – will accelerate in the second half of the year. 
Fiscal stimulus will disappear as austerity programs take hold in most countries. 
Inventory adjustments, which boosted growth for a few quarters, will run their course. 
The effects of tax policies that stole demand from the future – such as incentives for buyers of cars and homes – will diminish as programs expire. 
Labor-market conditions remain weak, with little job creation and a spreading sense of malaise among consumers. 
The likely scenario for advanced economies is a mediocre U-shaped recovery, even if we avoid a W-shaped double dip. 
In the US, annual growth was already below trend in the first half of 2010 (2.7% in the first quarter and estimated at a mediocre 2.2% in April-June). 
Growth is set to slow further, to 1.5% in the second half of this year and into 2011. 
Whatever letter of the alphabet US economic performance ultimately resembles, what is coming will feel like a recession. 
Mediocre job creation and a further rise in unemployment, larger cyclical budget deficits, a fresh fall in home prices, larger losses by banks on mortgages, consumer credit, and other loans, and the risk that Congress will adopt protectionist measures against China will see to that. 
In the eurozone, the outlook is worse. 
Growth may be close to zero by the end of this year, as fiscal austerity kicks in and stock markets fall. 
Sharp rises in sovereign, corporate, and interbank liquidity spreads will increase the cost of capital, and increases in risk aversion, volatility, and sovereign risk will undermine business, investor, and consumer confidence further. 
The weakening of the euro will help Europe’s external balance, but the benefits will be more than offset by the damage to export and growth prospects in the US, China, and emerging Asia. 
Even China is showing signs of a slowdown, owing to the government’s attempts to control economic overheating. 
The slowdown in advanced economies, together with a weaker euro, will further dent Chinese growth, bringing its 11%-plus growth rate towards 7% by the end of this year. 
This is bad news for export growth in the rest of Asia and among commodity–rich countries, which increasingly rely on Chinese imports. 
An important victim will be Japan, where anemic real income growth is depressing domestic demand and exports to China sustain what little growth there is. 
Japan also suffers from low potential growth, owing to a lack of structural reforms and weak and ineffective governments (four prime ministers in four years), a large stock of public debt, unfavorable demographic trends, and a strong yen that gets stronger during bouts of global risk aversion. 
A scenario in which US growth slumps to 1.5%, the eurozone and Japan stagnate, and China’s growth slows below 8% may not imply a global contraction, but, as in the US, it will feel like one. 
And any additional shock could tip this unstable global economy back into full-fledged recession. 
The potential sources of such a shock are legion. 
The eurozone’s sovereign-risk problems could worsen, leading to another round of asset-price corrections, global risk aversion, volatility, and financial contagion. 
A vicious cycle of asset-price correction and weaker growth, together with downside surprises that are not currently priced by markets, could lead to further asset-price declines and even weaker growth – a dynamic that drove the global economy into recession in the first place. 
And one cannot exclude the possibility of an Israeli military strike on Iran in the next 12 months. 
If that happens, oil prices could rapidly spike and, as in the summer of 2008, trigger a global recession. 
Finally, policymakers are running out of tools. 
Additional monetary quantitative easing will make little difference, there is little room for further fiscal stimulus in most advanced economies, and the ability to bail out financial institutions that are too big to fail – but also too big to be saved – will be sharply constrained. 
So, as the optimists’ delusional hopes for a rapid V-shaped recovery evaporate, the advanced world will be at best in a long U-shaped recovery, which in some cases – the eurozone and Japan – may be long enough to stretch into an L-shaped near-depression. 
Avoiding double dip recession will be difficult. 
In such a world, recovery in the stronger emerging markets – the great hope for the global economy – will suffer, because no country is an island economically. 
Indeed, growth in many emerging-market economies – starting with China – is highly dependent on retrenching advanced economies. 
Fasten your seat belts for a very bumpy ride. 

The Double Threat to Liberal Democracy 
CAMBRIDGE – The crisis of liberal democracy is roundly decried today. 
Donald Trump’s presidency, the Brexit vote in the United Kingdom, and the electoral rise of other populists in Europe have underscored the threat posed by “illiberal democracy” – a kind of authoritarian politics featuring popular elections but little respect for the rule of law or the rights of minorities. 
But fewer analysts have noted that illiberal democracy – or populism – is not the only political threat. 
Liberal democracy is also being undermined by a tendency to emphasize “liberal” at the expense of “democracy.” 
In this kind of politics, rulers are insulated from democratic accountability by a panoply of restraints that limit the range of policies they can deliver. 
Bureaucratic bodies, autonomous regulators, and independent courts set policies, or they are imposed from outside by the rules of the global economy. 
In his new and important book The People vs. Democracy, the political theorist Yascha Mounk calls this type of regime– in apt symmetry with illiberal democracy – “undemocratic liberalism”. 
He notes that our political regimes have long stopped functioning like liberal democracies and increasingly look like undemocratic liberalism. 
The European Union perhaps represents the apogee of this tendency. 
The establishment of a single market and monetary unification in the absence of political integration has required delegation of policy to technocratic bodies such as the European Commission, the European Central Bank, and the European Court of Justice. 
Decision-making increasingly takes place at considerable distance from the public. 
Even though Britain is not a member of the eurozone, the Brexiteers’ call to “take back control” captured the frustration many European voters feel. 
The United States has experienced nothing quite like this, but similar trends have made many people feel disenfranchised. 
As Mounk notes, policymaking is the province of an alphabet soup of regulatory bodies – from the Environmental Protection Agency (EPA) to the Food and Drug Administration (FDA). 
Independent courts’ use of their prerogative of judicial review to promote civil rights, expand reproductive freedom, and introduce many other social reforms have encountered hostility among considerable segments of the population. 
And the rules of the global economy, administered through international arrangements such as the World Trade Organization (WTO) or the North American Free Trade Agreement (NAFTA), are widely perceived as being rigged against ordinary workers. 
The value of Mounk’s book is to highlight the importance of both of liberal democracy’s constitutive terms. 
We need restraints on the exercise of political power to prevent majorities (or those in power) from riding roughshod over the rights of minorities (or those not in power). 
But we also need public policy to be responsive and accountable to the preferences of the electorate. 
Liberal democracy is inherently fragile because reconciling its terms does not produce a natural political equilibrium. 
When elites have sufficient power, they have little interest in reflecting the preferences of the public at large. 
When the masses mobilize and demand power, the resulting compromise with the elites rarely produces sustainable safeguards to protect the rights of those not represented at the bargaining table. 
Thus, liberal democracy has a tendency to deteriorate into one or the other of its perversions – illiberal democracy or undemocratic liberalism. 
In our paper “The Political Economy of Liberal Democracy,” Sharun Mukand and I discuss the underpinnings of liberal democracy in terms similar to those Mounk uses. 
We emphasize that societies are divided by two potential cleavages: an identity split that separates a minority from the ethnic, religious, or ideological majority, and a wealth gap that pits the rich against the rest of society. 
The depth and alignment of these divisions determine the likelihood of various political regimes. 
The possibility of liberal democracy is always undercut by illiberal democracy at one end and what we call “liberal autocracy” at the other, depending on whether the majority or the elite retain the upper hand. 
Our framework helps to highlight the fortuitous circumstances under which liberal democracy emerges. 
In the West, liberalism preceded democracy: separation of powers, freedom of expression, and the rule of law were already in place before elites agreed to expand the franchise and submit to popular rule. 
The “tyranny of the majority” remained a major concern for elites, and was countered in the US, for example, with an elaborate system of checks and balances, effectively paralyzing the executive for a long time. 
Elsewhere, in the developing world, popular mobilization occurred in the absence of a liberal tradition or liberal practices. 
Liberal democracy was rarely a sustainable outcome. 
The only exceptions seem to be relatively egalitarian and highly homogeneous nation-states such as South Korea, where there are no obvious social, ideological, ethnic, or linguistic divisions for autocrats of either kind – illiberal or undemocratic – to exploit. 
Today’s developments in Europe and the US suggest the vexing possibility that liberal democracy may have been a passing phase there as well. 
As we rue liberal’s democracy’s crisis, let us not forget that illiberalism is not the only threat that confronts it. 
We must find a way around the pitfalls of insufficient democracy as well. 

Down and Out in the United States? 
For most of the past decade the world has been lectured to by Americans who proclaimed the perfection of the US economy: its focus on competition, loose labor regulation, and a modest social safety net, all of which supposedly delivered dynamism and high growth rates. 
Continental Europeans were told to follow the US model and liberalize their labor markets, so that businesses that want to hire can do so without losing money and so that unemployed workers who find new jobs won't see their wages offset by cuts in welfare-state benefits. 
Japanese were told to socialize the losses their banking system incurred when Japan's bubble burst, then re-privatize those parts of it that could still succeed as going concerns and liquidate the rest. 
East Asia's Tigers were told to abandon the German-Japanese financial system based on universal banking and adopt the Anglo-American model based on liquid financial markets. 
They were also admonished to do a better job at regulating their financial system. 
Other developing countries were told that their trade barriers, their love of inflationary finance, their failure to curb tax evasion, and their lack of governments strong enough to enforce property and contract rights against local notables, organized bandits, and - most important - their own functionaries were keeping them from participating in the new globalized economic cornucopia. 
Now it's "pay back" time, when the world lectures America about how to fix its no-longer-perfect economy. 
But can this criticism be constructive, not a bout (pleasurable, of course) of Schadenfreude ? 
The most obvious piece of advice is that America's financial system should follow more faithfully the advice its advocates dispensed to others. 
In some countries, corporate managers are disciplined by the representatives of large universal banks who sit on corporate boards and vote large blocks of shares. 
In many countries, managers' leashes are also held by families of plutocrats who exercise control through pyramids of companies and special classes of stock. 
America's model of corporate governance was supposed to rely on the following set of factors: 
· managerial failures were supposed to trigger hostile takeovers; 
· even before a takeover occurs, managers were supposed to be disciplined by fears of a revolt by their boards of directors, especially when the directors think that the company might be become a target of a hostile takeover; 
· managers were to pursue good performance at all costs, because their stock options and other performance-related compensation made their own fortunes tied to that of shareholders and the corporation. 
Within those constraints, American managers were supposed to exercise considerably more discretion than their foreign counterparts, so that they could use their business judgment without being shackled and second-guessed. 
Combined, all of this was supposed to deliver dynamism. 
But for this system to work solid information about under-performing companies must be available to investors and the link between the pay of top managers and company performance must be real. 
Instead, what evolved was a lax accounting system and a "heads you win, tails your options will be re-priced and you still win" method of managerial compensation. 
No surprise, then, that bosses who couldn't legitimately show the market strong profits cooked the books, often with the help of their supposedly independent accountants. 
As things stand, it is in no one's short-term interest, certainly not in the short-run interest of accounting firms that make more money from consulting contracts than from doing a company's books, to allow accurate information - if it is bad - to leak into the market. 
Other countries must then tell America that the state can't stand back and let the market do this job: accurate business information is a governmental responsibility. 
Moreover, the greed of bosses cannot be the sole determinant of managerial remuneration. 
Unfortunately, America now has an administration keen to downplay the importance of timely reporting of insider stock sales (the President himself failed to do that when he was in business), the timely reporting of changes in the accounting treatment of a company's unrealized revenues (something that did happen at Halliburton when it was run by Vice President Cheney), and of executives' duty to know about the fraud committed by their subordinates (unlike what happened when current Army Secretary White was running Enron's energy trading operations). 
Outsiders should also remind America that its population is aging and that big savings will be needed to pay for the looming retirement of the baby boomers. 
Two years ago "Save Social Security" (America's state pension system) was a political mantra. 
The huge federal budget surplus was supposed to provide the means to do that. 
President Bush's tax cut, however, squandered the surplus. 
Huge deficits reappeared. 
Outsiders must remind America that its pension system is a ticking time bomb that must be defused. 
Third and last, the past two decades saw America change from a largely middle-class society of the same genus as Europe's social democracies into a creature with extremes of wealth unseen since before World War I. One driving force behind this is America's retreat from its unique emphasis on education. 
Declining public school quality, downward pressure on funding for public higher education, and a failure of political will to make higher education affordable for everyone has produced a growing education gap among those who can and cannot afford quality education. 
So while the economic case for greater private and public investment in education is stronger than ever, most individuals can't save enough to pay for it, and education - despite all the talk of politicians - is not the federal priority it should be. 
After lording it over the world for so long, Americans should accept today's rebukes with grace. 
But if the rest of the world really wants to help, it should lecture America along the lines I suggest. 
Some of us might listen. 

Down with “Emerging Markets” 
LONDON – It has been nine years since I coined the acronym “BRIC,” which has become synonymous with the rise of Brazil, Russia, India, and China. 
It has been more than seven years since my colleagues at Goldman Sachs and I first published an outlook to 2050 in which we suggested that the four BRIC economies could emerge bigger than the G-7 economies, and, together with the United States, would constitute the world’s five largest. 
It also has been more than five years since the expression “Next Eleven,” or “N-11,” first appeared. 
That term bracketed the next eleven largest countries by population, and sought to determine their BRIC-like potential. 
These 15 countries drive most of the positive momentum behind the world economy nowadays. 
China has overtaken Japan as the world’s second largest economy, with output roughly equal to that of the other three BRIC countries combined. 
Their aggregate GDP stands at around $11 trillion, or about 80% of the US level. 
Domestic demand in the BRIC countries is even more impressive. 
The collective dollar value of BRIC consumers is estimated conservatively at just over $4 trillion, possibly $4.5 trillion. 
The US consumer market is worth more than double that – around $10.5 trillion – but BRIC consumer power is currently growing at an annual rate in dollar terms of around 15%, which means an annual rate of roughly $600 billion. 
If this pace is maintained, BRIC consumers will be adding another $1 trillion to the global economy by the middle of this decade. 
By the end of the decade, they will be worth more than US consumers. 
Indeed, at some point during this decade, the BRIC economies combined will become as big as the US economy, with China’s GDP alone reaching about two-thirds that of the US. 
The four countries will be responsible for at least one-half of real GDP growth in the world, and possibly as much as 70%. 
Beyond the BRICs, among the likely top ten contributors to global GDP growth this decade are South Korea, Mexico, and Turkey. 
From the so-called developed world, only the US is guaranteed a place on this list – and the top 20 could include Iran, Nigeria, the Philippines, and Vietnam. 
So how should we now think about the term “emerging markets”? 
A few weeks ago, I decided with my colleagues to pursue the term ��growth economies,” which Goldman Sachs adopted in 2010 to describe how we treat many of the world’s most dynamic markets. 
At its simplest, a growth economy should be regarded as one that is likely to experience rising productivity, which, together with favorable demographics, points to economic growth that outpaces the global average. 
But an economy also needs sufficient size and depth in order to allow investors not only to invest, but also to exit when appropriate. 
So we opted for the following: any economy outside the so-called developed world that accounts for at least 1% of current global GDP should be defined as a growth economy. 
At this size, currently around $600 billion, an economy should be large enough to allow investors and businesses to operate as they do in advanced countries, yet also be likely to grow faster. 
All other economies should continue to be defined as emerging markets. 
According to this definition, eight countries currently qualify: the BRIC countries, along with South Korea, Indonesia, Mexico, and Turkey, while others – including Saudi Arabia, Iran, Nigeria, and the Philippines – could join the list in the next 20 years. 
It is also time that investors started to benchmark their portfolios more appropriately. 
In the past few decades, it has become conventional for equity investors to base their decisions on neutral benchmarks determined by the market capitalization of companies and indices. 
But this gives much more weight to the US economy and its companies relative to so-called emerging markets. 
An alternative approach is to use a GDP-weighted benchmark. 
For bold and aggressive investors, a benchmark that incorporates future predicted GDP gives a lot more weight to emerging markets, especially to the growth economies. 
The index that Goldman Sachs calculates every year for around 180 countries, called a Growth Environment Score (GES), is used to monitor productivity and the likelihood of sustainable growth. 
The index goes from 0 to 10, with 13 sub-indices for overall growth and productivity. 
Currently, for example, Korea’s GES is 7.5, compared to 6.9 for the US. 
Economies that remain small and have low GES scores are appropriately treated as emerging markets with lots of risk. 
While they may grow significantly and escape from their current situation, they are vulnerable to adverse developments in core developed countries – especially the US – and in these countries’ financial markets. 
Countries with low GES scores need to undertake policies that allow them to rise. 
For example, we forecast that within the next 20 years Nigeria, home to around 20% of Africa’s population, could account for 1% of global GDP. 
But its current GES score of 3.9 is significantly below the BRIC and N-11 average. 
On the other hand, Nigeria’s economy has almost doubled in size over the last 13 years. 
If it maintains this progress, before 2030 it will no longer be an “emerging economy.” 
That would be an exciting development for Nigeria – and for Africa. 
Even more exciting is the likelihood that Nigeria will not be alone at its graduation into a growth economy. 

Down with Euro-Paternalism 
Italy's presidency of the European Union bears an enormous responsibility, namely reinvigorating enlargement as the key aspect of the new EU. 
A good place to start would be to push for a different attitude on accession countries' adoption of the Euro. 
Indeed, EU institutions' current paternalistic stance towards the accession countries threatens to create a two-tier Europe that will complicate the task of integration. 
The accession countries have upheld their end of the bargain, achieving a degree of trade integration with EU countries that is even higher than many current members. 
Three of them--Estonia, Latvia, and Lithuania--have currency boards or a fixed exchange rate with the Euro, as does Bulgaria, which is expected to enter the EU in 2007. 
The others have declared for several years their interest in adopting the Euro early on, in some cases unilaterally, even before entry into the EU--a position openly supported by the National Bank of Poland, and less forcefully by the National Bank of Hungary and the Czech National Bank. 
But, despite their progress in bringing their inflation and interest rates closer to EU levels, many candidate countries fear that with the full opening up to capital flows--a requirement of accession--they will be exposed to the risk of sudden stops in capital flows and currency crises. 
They have learned the lesson from Latin America and Asia in the 1990's. 
Adopting the Euro would give them a great way to escape such risks and focus on creating real growth in their economies. 
But the response from EU institutions, namely the European Central Bank and the European Commission, has been negative: candidate countries were told that they first must spend at least two years in the European Exchange Rate Mechanism (ERM II), where Euro aspirants are expected to prove their policy mettle. 
Initially, even currency boards were considered unacceptable, although, as is often the case in Europe, exceptions were made: countries with currency boards could keep them after entry into the EU. 
The opposition of the ECB and the Commission to rapid Euro adoption lacks strong foundations. 
What should matter for the EU is that the policies of any member state are not harmful to other members. 
As Leszek Balcerowicz, the Governor of the National Bank of Poland, argues, adoption of the Euro by candidate countries will certainly create benefits for candidate countries, while in the worst case being neutral for current members. 
Indeed, the combined size of the candidate countries' economies is so small--around 6% of the enlarged EU's GDP--that they cannot possibly exert any significant effect on the Euro. 
But continuing opposition by EU institutions has led most candidate countries to abandon the idea of adopting the Euro unilaterally or as quickly as possible after entering the Union. 
Unfortunately, the stubbornness of the ECB and the European Commission is now providing ammunition to populist governments in accession countries that are counting on currency appreciation to escape the fiscal discipline that adopting the Euro would imply. 
However, such fiscal expansion would probably disqualify a country from entering the Euro any time soon. 
Indeed, the accession countries that have not implemented a currency board have seen their budget deficits surge--exceeding 9% of GDP in Hungary in 2002 and more than 5% in Poland, the Czech Republic, and Slovakia--while large capital inflows have kept their currencies under strong pressure to appreciate. 
This trend exposes candidate countries' real economies to precisely the risk of a capital flow reversal and currency crisis that early Euro adoption was meant to eliminate. 
It is ironic that the candidate countries are being lectured to by officials at the ECB and the European Commission on the trade-off between nominal and real convergence. 
The objective of growth for the accession countries is apparently the sole imperative in Brussels; macroeconomic stability can wait. 
Large budget deficits support growth, but inflation evidently is not a problem. 
If this line of thought sounds familiar, perhaps it is because it (more or less) recapitulates the foundations of the unsustainable planning system with which the accession countries broke at the beginning of the 1990's. 
It was, of course, the embrace of rational, market-driven economic policies by the former communist nations that has brought them to the brink of EU membership. 
So European institutions should abandon their paternalistic approach and take seriously the concerns of accession countries' central bankers about the risks of maintaining their own currencies for a long period during which their economies have to open up completely to capital flows. 
As it is, the ECB and the European Commission are de facto supporting the positions of populist governments in Eastern Europe that are already spending the funds they hope to get in the future from the EU. 
It is high time that EU institutions address more seriously the challenges and opportunities posed by enlargement. 
They can begin by viewing accession countries' early adoption of the Euro more favorably, both for countries with a currency board and for those with floating exchange rates. 

Down With Human Rights 
The relationship between the United Nations and the human-rights movement has always been ambiguous. 
On the one hand, human-rights ideology – and it is an ideology, every bit as much as Communism was or neo-liberalism is today – is profoundly legalist, claiming legitimacy from treaties and other international and national instruments. These include, as “first among equals,” the UN’s 1948 Universal Declaration of Human Rights. 
The modern human-rights movement was born out of the UN, and in many ways it has never entirely left home. 
On the other hand, the UN is more a bully pulpit for the promulgation of the high ideals of human rights, equality, and personal and economic freedom than it is a way station on the road to world government (no matter what some conservative extremists in the United States imagine). 
Indeed, at its institutional core, the UN is an inter-governmental body whose officials, from the most junior staffer to the Secretary General, serve at the pleasure of its member states – above all, its powerful member states. 
As a result of this profound contradiction between ambition and mandate, the UN often seems to impede the advance of human-rights goals as much as it realizes them. 
Doubters need only recall the unwillingness of Secretary General after Secretary General, from U Thant to Kofi Annan, to meet with – or, in some cases, even to permit on the UN’s premises – victims of human rights violations who had the misfortune of being born in powerful countries. 
For all the UN’s intellectual commitment to the furtherance of human rights, it knows better than to incite the displeasure of the Chinese or the Russians by receiving activists from Tibet or Chechnya. 
In fairness, no UN Secretary General has paid greater homage to the ideals of the human-rights movement, or attempted, at least rhetorically, to associate the UN with those ideals, than Kofi Annan. 
Rhetoric is not reality, of course, and the UN’s declarations have often seemed far removed from its daily practice. 
But words are not without consequences, and there is little question that human rights has occupied a higher place in international deliberations during Annan’s tenure than ever before. 
Moreover, Annan’s appointee as UN High Commissioner for Human Rights, former Irish President Mary Robinson, was instrumental in many developing countries’ adoption of a human-rights agenda, which previously was often viewed as a flag of convenience for Western meddling. 
People close to Annan say that he hoped to build on these successes during the UN’s recently concluded summit. 
In March, he wrote that “the Organization [must] take the cause of human rights as seriously as those of security and development.” 
Among his key proposals was the replacement of the largely discredited UN Commission on Human Rights – a body that has no mechanism for excluding even notorious human-rights violators like Libya, Cuba, or Zimbabwe – with a new Human Rights Council, where such embarrassments would in theory not be tolerated. 
It is generally agreed that the summit was largely a failure. 
Annan himself conceded as much in the speech he gave at the opening of the 60th UN General Assembly. 
There are many reasons for this. 
There was the US government’s eleventh-hour decision to table hundreds of objections to the final Summit Declaration, effectively reducing it to a series of lowest-common-denominator platitudes. 
There was also skepticism among developing countries about whether a stronger UN commitment to human rights was what Annan claimed it to be or, instead, merely a moral flag of convenience – or worse, a legal warrant for Western military intervention. 
A great deal of attention has been paid to the stratagems of John Bolton, the fiercely anti-UN diplomat whom President Bush recently appointed US ambassador to the UN, and rightly so. 
But what has tended to get lost in these discussions are the malign synergies between a Third World suspicious that so-called humanitarian interventions are only colonialism redux and a unilateralist US administration wedded to the concept of pre-emptive war against enemies that it equates with states that violate human rights. 
Because the Bush administration, as its officials repeatedly insist, placed the installation of democratic, human-rights-oriented regimes, by force if necessary, at the core of US foreign policy, those who see only aggressive imperialism in America’s interventions in Afghanistan and Iraq view human rights in a more skeptical light. 
In a sense, the UN, Annan, and the human-rights activists who have been perhaps his biggest backers, are caught in the crossfire. 
All of this brings to mind one of the great Spanish director Luis Buñuel’s late films. 
The pre-credit sequence shows a group of Spanish guerrillas during the insurgency against Napoleon being led to a wall where they are to be executed by firing squad. 
At the head of the firing party, a French soldier carries the Tricolor forward. 
On it are the great words, “Liberty, Equality, Fraternity.” 
The guerrillas are led to the wall, and, just as the soldiers are raising their guns to their shoulders, one insurgent shouts, “Down with liberty!” 
We have not progressed very far, it seems. 

Down with the Eurozone 
NEW YORK – The eurozone crisis seems to be reaching its climax, with Greece on the verge of default and an inglorious exit from the monetary union, and now Italy on the verge of losing market access. 
But the eurozone's problems are much deeper. 
They are structural, and they severely affect at least four other economies: Ireland, Portugal, Cyprus, and Spain. 
For the last decade, the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) were the eurozone's consumers of first and last resort, spending more than their income and running ever-larger current-account deficits. 
Meanwhile, the eurozone core (Germany, the Netherlands, Austria, and France) comprised the producers of first and last resort, spending below their incomes and running ever-larger current-account surpluses. 
These external imbalances were also driven by the euro’s strength since 2002, and by the divergence in real exchange rates and competitiveness within the eurozone. 
Unit labor costs fell in Germany and other parts of the core (as wage growth lagged that of productivity), leading to a real depreciation and rising current-account surpluses, while the reverse occurred in the PIIGS (and Cyprus), leading to real appreciation and widening current-account deficits. 
In Ireland and Spain, private savings collapsed, and a housing bubble fueled excessive consumption, while in Greece, Portugal, Cyprus, and Italy, it was excessive fiscal deficits that exacerbated external imbalances. 
The resulting build-up of private and public debt in over-spending countries became unmanageable when housing bubbles burst (Ireland and Spain) and current-account deficits, fiscal gaps, or both became unsustainable throughout the eurozone's periphery. 
Moreover, the peripheral countries’ large current-account deficits, fueled as they were by excessive consumption, were accompanied by economic stagnation and loss of competitiveness. 
So, now what? 
Symmetrical reflation is the best option for restoring growth and competitiveness on the eurozone's periphery while undertaking necessary austerity measures and structural reforms. 
This implies significant easing of monetary policy by the European Central Bank; provision of unlimited lender-of-last-resort support to illiquid but potentially solvent economies; a sharp depreciation of the euro, which would turn current-account deficits into surpluses; and fiscal stimulus in the core if the periphery is forced into austerity. 
Unfortunately, Germany and the ECB oppose this option, owing to the prospect of a temporary dose of modestly higher inflation in the core relative to the periphery. 
The bitter medicine that Germany and the ECB want to impose on the periphery – the second option – is recessionary deflation: fiscal austerity, structural reforms to boost productivity growth and reduce unit labor costs, and real depreciation via price adjustment, as opposed to nominal exchange-rate adjustment. 
The problems with this option are many. 
Fiscal austerity, while necessary, means a deeper recession in the short term. 
Even structural reform reduces output in the short run, because it requires firing workers, shutting down money-losing firms, and gradually reallocating labor and capital to emerging new industries. 
So, to prevent a spiral of ever-deepening recession, the periphery needs real depreciation to improve its external deficit. 
But even if prices and wages were to fall by 30% over the next few years (which would most likely be socially and politically unsustainable), the real value of debt would increase sharply, worsening the insolvency of governments and private debtors. 
In short, the eurozone's periphery is now subject to the paradox of thrift: increasing savings too much, too fast leads to renewed recession and makes debts even more unsustainable. 
And that paradox is now affecting even the core. 
If the peripheral countries remain mired in a deflationary trap of high debt, falling output, weak competitiveness, and structural external deficits, eventually they will be tempted by a third option: default and exit from the eurozone. 
This would enable them to revive economic growth and competitiveness through a depreciation of new national currencies. 
Of course, such a disorderly eurozone break-up would be as severe a shock as the collapse of Lehman Brothers in 2008, if not worse. 
Avoiding it would compel the eurozone's core economies to embrace the fourth and final option: bribing the periphery to remain in a low-growth uncompetitive state. 
This would require accepting massive losses on public and private debt, as well as enormous transfer payments that boost the periphery’s income while its output stagnates. 
Italy has done something similar for decades, with its northern regions subsidizing the poorer Mezzogiorno. 
But such permanent fiscal transfers are politically impossible in the eurozone, where Germans are Germans and Greeks are Greeks. 
That also means that Germany and the ECB have less power than they seem to believe. 
Unless they abandon asymmetric adjustment (recessionary deflation), which concentrates all of the pain in the periphery, in favor of a more symmetrical approach (austerity and structural reforms on the periphery, combined with eurozone-wide reflation), the monetary union's slow-developing train wreck will accelerate as peripheral countries default and exit. 
The recent chaos in Greece and Italy may be the first step in this process. 
Clearly, the eurozone’s muddle-through approach no longer works. 
Unless the eurozone moves toward greater economic, fiscal, and political integration (on a path consistent with short-term restoration of growth, competitiveness, and debt sustainability, which are needed to resolve unsustainable debt and reduce chronic fiscal and external deficits), recessionary deflation will certainly lead to a disorderly break-up. 
With Italy too big to fail, too big to save, and now at the point of no return, the endgame for the eurozone has begun. 
Sequential, coercive restructurings of debt will come first, and then exits from the monetary union that will eventually lead to the eurozone’s disintegration. 

The Year of Betting Conservatively 
NEW YORK – The upswing in global equity markets that started in July is now running out of steam, which comes as no surprise: with no significant improvement in growth prospects in either the advanced or major emerging economies, the rally always seemed to lack legs. 
If anything, the correction might have come sooner, given disappointing macroeconomic data in recent months. 
Starting with the advanced countries, the eurozone recession has spread from the periphery to the core, with France entering recession and Germany facing a double whammy of slowing growth in one major export market (China/Asia) and outright contraction in others (southern Europe). 
Economic growth in the United States has remained anemic, at 1.5-2% for most of the year, and Japan is lapsing into a new recession. 
The United Kingdom, like the eurozone, has already endured a double-dip recession, and now even strong commodity exporters – Canada, the Nordic countries, and Australia – are slowing in the face of headwinds from the US, Europe, and China. 
Meanwhile, emerging-market economies – including all of the BRICs (Brazil, Russia, India, and China) and other major players like Argentina, Turkey, and South Africa – also slowed in 2012. 
China’s slowdown may be stabilized for a few quarters, given the government’s latest fiscal, monetary, and credit injection; but this stimulus will only perpetuate the country’s unsustainable growth model, one based on too much fixed investment and savings and too little private consumption. 
In 2013, downside risks to global growth will be exacerbated by the spread of fiscal austerity to most advanced economies. 
Until now, the recessionary fiscal drag has been concentrated in the eurozone periphery and the UK. 
But now it is permeating the eurozone’s core. 
And in the US, even if President Barack Obama and the Republicans in Congress agree on a budget plan that avoids the looming “fiscal cliff,” spending cuts and tax increases will invariably lead to some drag on growth in 2013 – at least 1% of GDP. 
In Japan, the fiscal stimulus from post-earthquake reconstruction will be phased out, while a new consumption tax will be phased in by 2014. 
The International Monetary Fund is thus absolutely right in arguing that excessively front-loaded and synchronized fiscal austerity in most advanced economies will dim global growth prospects in 2013. 
So, what explains the recent rally in US and global asset markets? 
The answer is simple: Central banks have turned on their liquidity hoses again, providing a boost to risky assets. 
The US Federal Reserve has embraced aggressive, open-ended quantitative easing (QE). 
The European Central Bank’s announcement of its “outright market transactions” program has reduced the risk of a sovereign-debt crisis in the eurozone periphery and a breakup of the monetary union. 
The Bank of England has moved from QE to CE (credit easing), and the Bank of Japan has repeatedly increased the size of its QE operations. 
Monetary authorities in many other advanced and emerging-market economies have cut their policy rates as well. 
And, with slow growth, subdued inflation, near-zero short-term interest rates, and more QE, longer-term interest rates in most advanced economies remain low (with the exception of the eurozone periphery, where sovereign risk remains relatively high). 
It is small wonder, then, that investors desperately searching for yield have rushed into equities, commodities, credit instruments, and emerging-market currencies. 
But now a global market correction seems underway, owing, first and foremost, to the poor growth outlook. 
At the same time, the eurozone crisis remains unresolved, despite the ECB’s bold actions and talk of a banking, fiscal, economic, and political union. 
Specifically, Greece, Portugal, Spain, and Italy are still at risk, while bailout fatigue pervades the eurozone core. 
Moreover, political and policy uncertainties – on the fiscal, debt, taxation, and regulatory fronts – abound. 
In the US, the fiscal worries are threefold: the risk of a “cliff” in 2013, as tax increases and massive spending cuts kick in automatically if no political agreement is reached; renewed partisan combat over the debt ceiling; and a new fight over medium-term fiscal austerity. 
In many other countries or regions – for example, China, Korea, Japan, Israel, Germany, Italy, and Catalonia – upcoming elections or political transitions have similarly increased policy uncertainty. 
Yet another reason for the correction is that valuations in stock markets are stretched: price/earnings ratios are now high, while growth in earnings per share is slackening, and will be subject to further negative surprises as growth and inflation remain low. 
With uncertainty, volatility, and tail risks on the rise again, the correction could accelerate quickly. 
Indeed, there are now greater geopolitical uncertainties as well: the risk of an Iran-Israel military confrontation remains high as negotiations and sanctions may not deter Iran from developing nuclear-weapons capacity; a new war between Israel and Hamas in Gaza is likely; the Arab Spring is turning into a grim winter of economic, social, and political instability; and territorial disputes in Asia between China, Korea, Japan, Taiwan, the Philippines, and Vietnam are inflaming nationalist forces. 
As consumers, firms, and investors become more cautious and risk-averse, the equity-market rally of the second half of 2012 has crested. 
And, given the seriousness of the downside risks to growth in advanced and emerging economies alike, the correction could be a bellwether of worse to come for the global economy and financial markets in 2013. 

 

Dreaming of a New Edo Era 
SEOUL – In mid-November, all eyes will shift to Seoul, when G-20 leaders convene for the first time in the South Korean capital. 
The choice is long overdue, as South Korea is a remarkable success story: in one generation, the South Koreans, formerly pummeled by civil war, under constant threat from their Northern communist brethren, long mired in poverty, and ruled by military dictators for 40 years, have built the world’s 13th largest economy and Asia’s most vibrant democracy. 
Historically squeezed between its two giant neighbors, China and Japan, South Korea had long been perceived as an underdog with a fuzzy cultural identity. 
In Asia, however, Japan’s leaders are not waiting for the Seoul summit to take a closer look at South Korea. 
South Korea was formerly a Japanese colony (1910-1945), and the natives were treated like an inferior race. 
Today, South Korean’s economy has been growing annually by 5% on average for ten years, whereas Japan grew by 0.42% per year during the same period. 
One could argue that South Korea is not yet a mature economy and is only catching up with a more advanced Japan. 
This was the case in the 1970’s, but no more. 
Whereas China’s growth is fueled by low-cost labor as millions of peasants enter the industrial economy, this is not the South Korean recipe for success, which has been driven by private entrepreneurship, innovation, and quality products: Samsung and Hyundai, not cheap wages, are South Korea’s growth engines. 
Another key to South Korea’s success story is the well-balanced relationship between stable governments and the private sector. 
This was clearly demonstrated late last year when a South Korean consortium won a contract to build four nuclear reactors in the United Arab Emirates late last year, beating out the French. 
The Japanese knew how to coordinate state and private-sector goals in the 1970’s, but then lost their way. 
“We should now emulate the South Koreans,” says Eisuke Sakakibara, a leading Japanese economist, who was one of the architects of the Japanese “miracle” of the 1980’s. 
Japanese in search of a miracle now travel to Seoul. 
“In Japan, 1990 to 2000 was called the ‘lost decade,’” says the free-market economist Fumio Hayashi. 
Now Japan is completing its second lost decade. 
Hayashi and Sakakibara – indeed, most Japanese economists – more or less agree on the fundamental reason for such spectacular stagnation: the Japanese have stopped working hard. 
Fewer hours worked, longer vacations, and a declining population (since 2005) have, predictably, undermined Japanese growth. 
To turn this situation around, says Sakakibara, “the Japanese should work more, have more children, and allow immigration.” 
But the incentives to make any of this happen are just not there. 
The Japanese still live comfortably, better by one-third than the South Koreans, thanks to their past investments. 
Japanese companies abroad remain profitable and Japan is still the global leader in high-tech niches like electronics or carbon fibers. 
For example, Apple’s iPhone and Boeing’s latest airplane rely heavily on Japanese-patented innovations. 
These comparative advantages may keep Japan above water for a while, but only until China or South Korea catch up. 
One would thus expect Japan to be anxiety-ridden, but it is not. 
True, new forms of poverty and unemployment are rising, but they remain well hidden behind family solidarity or corporate customs. 
Companies reduce their superfluous employees’ annual bonuses, but do not get rid of them. 
Young Japanese tend not to work before their 30’s, and married women stay at home. 
Political parties that rely on an aging constituency are not tempted to call for change. 
The sort of shaky short-term political coalitions that rule Japan nowadays prefer to buy time through so-called public stimulus, or to preserve inefficient companies with subsidies. 
Twenty years of such shortsighted policies, whatever the party in power, have fueled government debt, hindering private investment. 
More strikingly, stagnation has found its promoters in Japan itself. 
A leading public intellectual Naoki Inose, who is also Tokyo’s vice governor, has declared that “the era of growth is over.” 
When Japan was threatened by Western imperialism, he says, the country had to open up (in 1868) and modernize. 
This process has been completed. 
Japan is now ready to reconnect with its own tradition of social harmony and zero growth. 
Referring to the 1600-1868 period, Inose calls this future the New Edo era: “a smaller population will enjoy the sufficient wealth that has been accumulated, and, from now on, it will invest its creativity in refining the culture.” 
The first Edo collapsed when the United States Navy opened up the Japanese market with the arrival of Commodore Perry’s “black ships” in 1853. 
Will the second Edo be able to resist Chinese ambitions? 
“The New Edo era needs a strong Japanese army,” admits Inose. 
This second Edo era may sound like a poetic utopia, but it has some influence: Sakakibara observes that Japanese students do not study abroad anymore, and that “nobody learns English.” 
At a time when South Koreans are becoming more globalized, learning English, and welcoming a growing number of immigrants, Japan is entering a “de-globalization process.” 
That is a worrying trend, and not only for Japan: South Korea can hardly stand alone as the lone Asian democracy. 
If the Japanese do not wake up from their Edo dream, Asia might very well become a Chinese empire. 
Will this be debated at the G-20? 


Flights of Unmanned Fancy 
BOSTON – Few pieces of modern hardware have inspired as much excitement as the drone. 
While nonmilitary unmanned aerial vehicles (UAVs) were initially marketed as purely recreational gadgets, it has not taken long for entrepreneurs and industrial giants to seize on the endless possibilities they offer. 
Annual sales in the United States are expected to reach seven million units by 2020, and many are already predicting a future in which drones reshape our cities – through remote delivery of goods, airborne surveillance, or as yet unforeseen applications. 
Yet one possibility has captured our collective imagination more than any other: the idea that drones will soon be moving people over cities en masse. 
Might flying taxis one day pluck us from our front gardens and delicately plop us down outside the cinema or our favorite restaurant? 
Before we mentally hail the next air cab, let’s consider what it would actually mean if the skies were filled with swarms of miniature helicopters ferrying people to their next destination. 
Though drones will have many important uses in the future, I do not believe moving people around cities will, or should, be one of them. 
The dream of unmanned aerial transportation is not new. 
When Fritz Lang created the futuristic cityscape for his groundbreaking 1927 film, Metropolis, he filled its skies with vertiginous towers and compact flying vehicles. 
Then, in the early 1960s, the Hanna-Barbera animation studio produced The Jetsons, a cartoon series following the escapades of a futuristic all-American family. 
In the opening credits the family whizzes around Orbit City in a hover car that folds up into a briefcase, which George, the family patriarch, then carries into his office. 
In 1982, the science-fiction blockbuster Blade Runner featured flying police cars called “spinners.” 
Today, a version of such make-believe futures would seem tantalizingly within reach. 
Uber is investing in flying car technology. 
Earlier this year, Airbus launched Pop.Up, a vertical takeoff and landing concept vehicle for personal mobility. 
And in a venture that promises “flight for all,” German start-up Volocopter has designed the 2X, a miniature helicopter with 18 rotors that will begin test flights in Dubai later this year. 
All of this suggests that urbanites will soon be zipping around urban airspace like George Jetson, right? 
Wrong. 
Despite big investments and bigger promises, there are physical and practical reasons why it is highly unlikely that our cities will be filled with airborne people movers anytime soon. 
First, let’s consider the physics. 
Anyone who has stood near a helicopter taking off will understand that a lot of energy is required to lift a heavy object vertically into the air. 
Drone rotors are essentially big fans, pushing air down to create upward propulsion. 
There is no way to achieve lift without creating a vast amount of both noise and air disturbance. 
Residents of New York City know this well. 
Complaints about noise from one of the city’s main helipads on the Hudson River led to increased regulation of tour operators. 
Yet, even before that legislation, there were fewer than 5,000 tourist flights per month. 
Imagine if all of the city’s eight million residents took even one flight every few weeks: the city would become unlivable. 
Other factors that should curb our enthusiasm are more technological. 
Even with dramatically improved batteries extending drones’ range, the crush of vehicles needed to move large numbers of people overhead would present a daunting safety hazard. 
Modern cars may be dangerous, but a dead battery or a broken rotor blade in a flying taxi would cause a heavy vehicle to fall onto a densely populated area. 
And we still don’t know whether such drones could be protected from hackers, terrorists, or other criminals, or how air traffic control systems might guide people safely. 
Drones will still have a transformative impact on how future populations live, do business, and interact. 
Small UAVs have already proven their potential across diverse fields – from humanitarian-aid delivery to security. 
Drones transcend geographical barriers without the need for large-scale physical infrastructure, and can bring isolated communities into close contact with the rest of the world. 
In Brazil, for example, the government is deploying camera-equipped drones to inspect remote agricultural producers suspected of breaking labor laws. 
And drones are already monitoring air quality and providing support during health emergencies. 
But urban mobility is not an appropriate application for UAV technology. 
The problems of mass transportation can be fixed with our feet planted firmly on the ground – and long before flying taxis are even a viable alternative. 
With improvements to digital networks and real-time data, autonomous cars, trucks, and boats – like the Roboat that colleagues and I are prototyping in Amsterdam – can be made fast and effective enough for all our needs. 
And staying on the ground will obviate the need for networks of new infrastructure, like costly “vertiports.” 
Society’s enduring dream of whizzing over a city in private flying cars has long captured the imagination of filmmakers – and now even some investors. 
For practical reasons large and small, however, it is a vision that will remain the stuff of fantasy. 

Drones for Development 
LAUSANNE – Unmanned aerial vehicles have populated both the imagination and nightmares of people around the world in recent years. 
In April, the United States Navy announced an experimental program called LOCUST (Low-Cost UAV Swarming Technology), which officials promise will “autonomously overwhelm an adversary” and thus “provide Sailors and Marines a decisive tactical advantage.” 
With a name and a mission like that – and given the spotty ethical track record of drone warfare – it is little wonder that many are queasy about the continued proliferation of flying robots. 
But the industrial use of the lower sky is here to stay. 
More than three million humans are in the air daily. 
Every large human settlement on our planet is connected to another by air transport. 
DJI, a Chinese UAV manufacturer, is seeking a $10 billion valuation. 
Cargo drones will grow into an even larger industry in the coming years, simply because, unencumbered by the weight of humans and their life-support systems, they will fly more cheaply but be just as fast and safe. 
In rich countries, early interest in cargo drones has focused on the so-called last mile – a tub of sorbet onto a suburban lawn. 
But the bigger opportunities are in flying the middle mile in poorer countries. 
Some 800 million people around the world have limited access to emergency services, and that will not change in the foreseeable future, because there will not be enough money to build roads to connect them. 
By flying medium-size loads middling distances to many of these isolated communities, cargo drones can save lives and create jobs. 
Cargo drones embody what Jim Yong Kim, the president of the World Bank, calls the “science of delivery.” 
We know what we need to deliver: the solutions to many of our most pressing problems already exist. 
The question is how. 
Answering that question is why humanitarians, roboticists, architects, logisticians, and others have joined together in a new initiative called Red Line, a Swiss-based consortium to accelerate development of emergency cargo drones and build the world’s first droneports – in Africa. 
It sounds techno-utopian – or at least like a huge waste of resources. 
After all, the experience of the most successful development organizations suggests that we should be skeptical about advanced technology’s power to bring about meaningful change for the poor. 
Yes, the falling cost of processing power creates new efficiencies, particularly in smartphones and related sky-fi connectivity. 
But gadgets are mostly blinking bling. 
It is boring stuff like low-cost teacher training, community health care, and apprenticeships that produces results for the poor. 
That is why many development experts favor “frugal innovation” over technology. 
The Bangladesh-based BRAC, the world’s largest development NGO, has 1.3 million children enrolled in one-room schools – and hardly a laptop in sight. 
So why be optimistic about cargo drones? 
Silicon Valley speaks the bulldozer language of “disruption,” but one reason to favor cargo drones is precisely that they are not disruptive at all. 
Instead, they can augment existing distribution networks in remote regions of Africa, Asia, and Latin America where poverty and disease are pervasive, distances are great, and roads will never be built. 
Cargo drones are particularly well suited to the so-called local-agent delivery model. 
Companies and organizations have shown that in hard-to-reach places in Africa and South Asia, women trained as micro-entrepreneurs are often best positioned to deliver essential goods and services to their villages, even if they have limited literacy and formal education. 
BRAC’s community health workers, for example, work entirely on a micro-franchising basis, making their money from margins on sales of basic commodities like de-worming medication, anti-malarial drugs, and contraceptives. 
Though cargo drones will never replace ground transport, they can ensure that vital goods and services get to where they are needed. 
Mobile phones took off in Africa because the technology was so much cheaper than investment in landline infrastructure. 
The same can be said today about Africa’s roads. 
Like the mobile phone, the cargo drone can prove to be the rarest of creatures: a gadget that works for those who need it most. 

The Drug War on Women 
NEW YORK – When I was growing up in communist Poland, International Women’s Day was viewed as an opportunity to celebrate women’s contributions and accomplishments. 
But it was a hollow token. 
The following day, women went back to their lives of limited opportunity. 
No one-day holiday can do much to redress generations of discrimination. 
The impact of the international drug-policy regime reflects this reality. 
In the drug supply chain, women are most commonly found at the bottom, often acting as “mules.” 
When a woman is caught, although she is often a non-violent first time offender, she faces a harsh mandatory minimum sentence. 
To the traffickers, these women are expendable. 
Bail is rarely put up for them, or a lawyer hired, because they hold no value to the trafficking structures. 
And, left on their own, these women lack the knowledge and resources to navigate the criminal justice system. 
Nor are they likely to have the right kind of information to trade with authorities in exchange for a lighter sentence. 
More women are sent to jail for drug offences than for any other crime. 
In Latin America alone, they account for 70% of women in prison. 
The impact on the drug trade of incarcerating a drug mule for a decade is minuscule; but the effect on the women and their families is devastating and irreversible. 
I first noticed the effects of drug policy on women when I traveled to Tajikistan and Kyrgyzstan after the collapse of the Soviet Union. 
In the Kyrgyz mountains, there were entire villages with not a man in sight; they had become migrant workers in Russia. 
Within two years of Kyrgyzstan’s independence, prisons filled with women held on drug-trafficking charges. 
These were ordinary women, some of them “babushkas” wearing headscarves. 
When speaking to senior law enforcement officials, I was told that the women were smuggling drugs from Afghanistan to pay for shoes and schoolbooks. 
To the Tajik and Kyrgyz criminal justice system, they were the lowest-hanging fruit in the newly launched war on drugs. 
Women in such circumstances face a double punishment: loss of liberty and family. 
To be convicted of a drug-related crime often means losing custody of one’s children. 
If the woman sent to jail is the head of a single-parent household and her children are placed in foster care, or if she is pregnant when entering prison, it is likely that she will never see them again. 
Women can be victims of laws designed to combat trafficking organizations. 
Many have been charged with conspiracy simply for living with a man involved in drug sales. 
In some US states, applicants for public assistance, who are usually women, have to undergo drug testing. 
In many countries, drug-treatment protocols effectively ensure that women with children will be unable to receive services. 
In much of Central Asia, a drug-dependent person has to register with authorities to receive treatment, which automatically puts women at risk of losing their children. 
In Eastern Europe, most available drug treatment takes place in long-term programs located at centers far from urban centers and without child-care services. 
Few women are able to take six months or more from caring for children or parents to enter such a facility. 
The criminalization and stigmatization of women who use illicit drugs means that they are less likely than men to self-identify as needing assistance for drug dependence. 
This helps explain the low numbers of women who use services. 
In the same way that in some cultures a woman eats only when men and children have finished, she injects with syringes that her partner has already used, putting them at higher risk of contracting HIV or Hepatitis C. The significant overlap between sex work and drug use also places women at higher risk. 
National drug regimes, moreover, prey on the vulnerabilities of women worldwide. 
I sat once with an official at a London airport who picked up a Kenyan woman bringing cocaine into the United Kingdom. 
The woman had been told by a person who recruited her that if she was stopped, she would simply be sent home without repercussions because she was a woman and a mother. 
In reality, the half-kilo of cocaine brought a ten-year mandatory sentence. 
Once imprisoned abroad, such mothers, with no legal support or economic resources, often have no contact with their children back home. 
Part of the effort to reform drug policy must address the systemic faults in criminal justice, health care, and welfare that exacerbate the plight of women caught in the crossfire of the war of drugs. 
The kind of policy that provides childcare for women seeking drug treatment might be anathema to the righteous occupiers of the world’s moral high ground. 
But until we start to look at drug policy through a gender-sensitive lens and focus on harm reduction, we will continue to wage a losing war on drugs, in which generations of our most vulnerable women and girls are casualties. 

Drugs, Sport, and Ethics 
When the Olympic Games return to Greece this summer, the results at the drug testing laboratory may get as much attention as what happens at the Olympic stadium. 
The history of drugs, and drug control, at the Olympics is discouraging - a farrago of ill-informed rules, outright state-sponsored cheating, and half-hearted and erratic attempts at enforcement. 
A new model has recently revived hope for effective drug control by moving testing and enforcement from the direct control of the International Olympic Committee and the national governing bodies to the World Anti-Doping Agency and similar organizations at the national level. 
The US Anti-Doping Agency, for example, played a central role in uncovering a new synthetic steroid known as THG linked to a California firm catering to Olympic and professional athletes. 
But the renewed hope will be frustrated unless we can respond effectively to the ethical challenge. 
No amount of interdiction will suffice if we do not explain clearly what, precisely, is wrong with using performance enhancing drugs in sport. 
There are three compelling reasons to ban such drugs: assuring all athletes that the competition is fair; preserving the integrity of the athlete; and safeguarding what gives sport its meaning and value. 
Young Olympians devote their lives to their sport for the opportunity to match themselves against the world's most gifted and dedicated athletes. 
The difference between gold medalist and also-ran may be measured in fractions of seconds or inches. 
A tiny advantage can make all the difference. 
What if that advantage comes from using a performance enhancing drug? 
For athletes who want to compete clean, the threat that they may be beaten by a competitor who is not faster, stronger, or more dedicated, but who takes a drug to gain the edge, is profoundly personal. 
When drugs are prohibited but some athletes use them anyway the playing field tilts in favor of the cheater. 
If we prohibit drugs in the Olympic Games, we owe it to the athletes to deter, detect, and punish those who cheat. 
Integrity seems like an old-fashioned idea, but it is at the heart of who we are and how we live. 
Performance enhancing drugs affect the individual athlete's integrity in two ways. 
First, if drugs are banned, then choosing not to use them is a test of one's character. A person of integrity does not behave dishonestly. 
A person of integrity does not seek to prevail over his competitors by methods that give him an illegitimate advantage. 
Second, the concept of integrity implies wholeness, being unbroken, moral soundness and freedom from corruption. 
When an athlete wins by using a performance enhancing drug, what does that mean for the athlete's own understanding of what happened? 
Am I the world's best? Or was my supposed victory hopelessly tainted by the drug's effects? 
The meaning of a drug-aided victory is ambiguous and elusive even for the athlete. 
It is the result of corruption and brokenness, the very opposite of authentic victory. 
What makes a victory authentic? 
What gives sport its meaning and value? 
We expect the winning athlete to combine extraordinary natural talents with exemplary effort, training and technique. 
These are all forms of human excellence. 
Some we are born with - or not. 
As much as I loved playing basketball, I was destined never quite to reach six feet in height. 
An accurate jump shot and the willingness to take punishment never made up for my size and mediocre leaping ability. 
Whatever natural abilities we have must be perfected. 
We achieve this - or not - through a combination of virtues such as fortitude in the face of relentless training, physical courage as we persevere through pain, and cleverness when we outsmart our opponents, along with other factors such as helpful coaching, optimized equipment, and sound nutrition. 
Natural talents should be respected for what they are: the occasionally awesome luck of the biological draw. 
Courage, fortitude, competitive savvy, and other virtues rightfully command our moral admiration. 
The other factors - equipment, coaching, and nutrition - contribute to an athlete's success but don't evoke the same awe or esteem. 
When we watch a sprinter set a new Olympic record in the hundred meter dash, it's not the shoes he or she wears that command our admiration. Nor is it the coaching received or the energy bar consumed just before the event. 
All of these contribute to the record, just like a good camera was necessary for Ansel Adam's unforgettable photos of the American West, or good marble and sharp chisels for Michelangelo's sculpture of David. 
But what we care about most, what gives that achievement its meaning and value, is the ineffable combination of remarkable natural talents and extraordinary dedication. 
Performance enhancing drugs disguise natural abilities and substitute for the dedication and focus that we admire. 
Performance enhancing drugs cheapen sport, making winners out of also-rans, and depriving virtuous and superior athletes of the victories that should be theirs. 
Getting performance enhancing drugs out of sport will not be easy, and success is not assured. 
But the effort is worthwhile as long as we care enough about fairness, integrity, and the meaning and value of sport. 

Life-Saving Drugs for All 
PRINCETON – The deadly outbreak of Ebola in Liberia, Sierra Leone, and Guinea that began last year highlighted a problem in the production of pharmaceuticals. 
Once it became clear that the epidemic would not be rapidly contained, several firms quickly arranged for clinical trials of potential treatments and vaccines, indicating that they already had the ability to produce plausible candidates. 
Ebola is not a new disease: it was first identified in 1976. 
Prior to 2014, however, the largest outbreak was in Uganda, in 2000, when 425 people were infected and 224 died. 
Though Ebola was known to be both contagious and often fatal, it was thought that only Africa’s impoverished rural population was at risk. 
For pharmaceutical firms, the development of a vaccine or treatment was not commercially attractive, and so it did not warrant investment. 
All that changed with the latest outbreak. 
In September 2014, the United States Centers for Disease Control and Prevention predicted that, in the worst case, 1.4 million people could be infected within four months. 
Media-fed fears that the disease could spread to affluent countries led to extraordinary precautions. 
In the United States, President Barack Obama asked Congress for $6.2 billion, including $2.4 billion to reduce the risk of the disease becoming established in America and set up 50 US Ebola treatment centers. 
The worst-case scenario did not materialize. 
As of April 2015, the best estimate is that about 25,000 people have been infected, with approximately 10,000 deaths. 
Outside West Africa, there have been fewer than 30 cases, and only five deaths. 
Nevertheless, the fears, and especially the prospect of a new and lucrative market, set pharmaceutical firms scrambling to develop Ebola-related products, while health officials lamented that nothing had been done beforehand. 
I am not criticizing pharmaceutical companies for not producing an Ebola vaccine when there was no market for it. 
They are not charities. 
If we want them to make products that will help the poor in developing countries, we need to find ways of giving them – and their shareholders – a return on their investment. 
Whereas pharmaceutical companies lack incentives to aid the poor in developing countries, they have strong incentives to develop products for people in affluent countries. 
One drug, Soliris, costs $440,000 per patient per year. 
In contrast, GiveWell estimates that the cost of saving a life by distributing bed nets in regions where malaria is a major killer is $3,400. 
Given that most of the lives saved are those of children, who even in developing countries have a life expectancy of at least 50 years, this equates to a cost of $68 per year of life saved. 
Should we really be valuing the life of a person in an affluent country at more than 6,000 times the value of the life of an impoverished child in a developing country? 
Because the overwhelming majority of medical and pharmaceutical research is directed toward products that affect people in affluent countries, it targets only part of the global burden of disease. 
Some government- and foundation-funded research addresses diseases that primarily affect poor people, but these efforts are not systematic and do not use the incentives that work well to drive pharmaceutical innovation elsewhere. 
One promising attempt to correct this imbalance is the proposal for a Health Impact Fund that Thomas Pogge, director of the Global Justice Program at Yale, and Aidan Hollis, an economist at the University of Calgary, launched seven years ago. 
If the Health Impact Fund could be adequately financed, it would provide incentives to develop products in proportion to their impact in reducing the global burden of disease. 
It is not certain that the existence of such a fund prior to the recent Ebola outbreak would have led to the development of vaccines or treatments for the disease. 
But pharmaceutical companies would have been considering such products – as well as other treatments to save lives or improve health anywhere in the world, regardless of people’s ability to pay. 
Pogge and Hollis have now refined their proposal to the point that it is ready for a real-world trial. 
A company that develops a product would earn a share of reward money based on its share of the health improvements achieved by all the products competing for the available funds. 
What is still needed, however, is sufficient reward money – perhaps $100 million from governments, NGOs, foundations and the pharmaceutical industry – to stimulate serious investment. 
Such a pilot program would benefit poor patients and would test scientists’ ability to measure health impact fairly and accurately. 
It would also provide the evidence needed to go to governments, foundations, and global institutions for the much larger sums required to expand the present system of incentives that guide pharmaceutical companies’ decisions. 
If the pilot is successful, we will have found a way to support the development of drugs and vaccines that gives equal weight to protecting the lives and improving the health of all human beings, irrespective of their nationality or wealth. 

Drugstore Geneticist 
LA JOLLA, CALIFORNIA – Back in June 2000, when the draft human-genome sequence was announced, US President Bill Clinton proclaimed, “It will revolutionize the diagnosis, prevention, and treatment of most, if not all, human diseases.” 
A decade later, hope has given way to disappointment, reflected in headlines like “Gene Map Yields Few New Cures.” 
But pessimism about the potential of human-genome research to yield medical breakthroughs has arisen from unrealistic expectations. 
Indeed, while “silver bullets” that can cure our most feared diseases have not been found, progress in the area of gene-drug interactions, known as pharmacogenomics, has been extraordinary. 
The ability to determine the principal genes that account for our variable response to prescription drugs has been advanced by a technique known as a genome-wide association study (GWAS). 
The whole human genome has approximately six billion bases, but a window into its composition can be probed using approximately one million bases (0.01% of the genome) via a gene chip. 
The bases on the chip are selected because they are informative, tagging bins of the genome, like a post-code directory. 
Using GWAS methodology, we have learned the biological basis for responses to many drugs – both their effectiveness and important side-effects. 
Examples of this progress in the past couple of years are plentiful, and include the statins, Plavix, interferon, warfarin, and the antibiotic flucloxacillin. 
The main side-effect of statins, which lower cholesterol in the blood, is severe muscle inflammation, and it can now be predicted with a simple genotype test, as can the response to Plavix, the second most commonly prescribed drug after statins. 
Those individuals who carry at least one copy of the gene variant that does not allow the body to metabolize Plavix have a 300% higher risk of clotting a stent. 
This variation of the genome is exceptionally common, present in 30% of individuals of European ancestry and more than 50% of those of Asian ancestry. 
In many such patients, doubling the dose of Plavix, and checking the platelet function with a point-of-care test to assure suppression, can override the lack of response. 
There are alternative drugs, such as prasugrel or ticagrelor, which can be used instead of Plavix to bypass the problem. 
The story of interferon, given for one year to patients with hepatitis C virus, is particularly striking. 
This treatment is very costly (about $50,000) and makes all patients feel quite ill with flu-like symptoms and general malaise. 
But the drug works in only half of the people treated. 
We now know that a simple genotype sorts out who will or will not benefit from interferon, and there are many new drugs in development for those who will not. 
The list goes on. 
For warfarin, a widely prescribed drug used to prevent blood clots, genotyping can guide the right dose and hasten the time it takes to get to steady state. 
Genotyping can also predict severe liver toxicity for drugs such as flucloxacillin or lumiricoxib. 
To be sure, our predictive ability is far from complete. 
We know only common gene variants from the GWAS approach. 
Furthermore, most drugs have not even been studied yet, so there is a long way to go fill in the holes. 
Nevertheless, substantive and remarkable progress has been made, all in the last few years. 
Moreover, someday we will know – via sequencing of the whole genome – about rarer genomic variations that are correlated with treatment response or side-effects. 
This has paved the way for next-generation pharmacies. 
Genotyping can now be accomplished in 20 minutes, and over time will get even faster. 
To fill a prescription for a drug with a known pharmacogenomic profile, a customer can get rapid genotyping to determine appropriate dose, drug, or predilection for serious side-effects. 
Or even better, many people will submit a saliva sample to a consumer genomics company, which will analyze all of their pharmacogenomic data and perform an extensive panel of genotypes, updated every month, and store the data on their smart phones. For mail-order prescriptions, such genomic data would be a routine part of the customer database. 
In the United States, pharmacy benefit managers (PBM) handle prescriptions for almost all large employers and account for more than 200 million individuals. Two of the largest PBMs, Medco and CVS/Caremark, have announced plans to conduct large-scale genotyping for many drugs. 
Their motives include more efficient use of prescription drugs, along with getting an edge on other PBM competitors. 
With annual expenditures for prescription drugs in the US totaling $300 billion, there is certainly room to cut costs. 
Unfortunately, the medical community is resisting the use of pharmacogenomic data in clinical practice, despite regulatory authorities’ recommendations for many drugs. 
PBMs and consumer genomic companies can be a positive force by facilitating or advancing the use of such data. 
The ultimate goal of pharmacogenomics is to provide the right drug, at the right dose, for the right individual, without any significant side-effects. 
Despite widespread misperceptions about the practical impact of genomic research, the science has hit its stride, and we need to capitalize on this momentum if we are to realize the opportunity of individualized medicine. 
Next-generation pharmacies represent a promising step toward that goal. 


The Secret of Dubai’s Success 
DUBAI – As governments across the Middle East try to wean themselves off natural resources and build diversified, resilient economies, they should take some lessons from Dubai. 
It’s a remarkable story. 
In less than a generation, Dubai has transformed itself into a major center for investment, commerce, and high-end culture. 
Although the 2008 global financial crisis hit the city-state hard (owing to its exposure to inflated real-estate assets), it recovered quickly, as evidenced by its bids for events such as the World Expo 2020. 
How Dubai managed not only to survive, but to thrive, in the wake of the crisis warrants closer scrutiny. 
So, this past summer, I began investigating the so-called Dubai model of resilient growth, and the challenges that may lie ahead for it. 
As part of my research, I conducted more than 40 in-depth interviews with government officials and business elites, and fleshed out my findings with secondary data sources. 
Dubai’s growth and resilience is attributable to its “ABS model” of attraction, branding, and state-led development. 
Just as a car’s anti-lock braking system prevents it from skidding out of control in dangerous situations, Dubai’s three-prong strategy keeps its development agenda on track, even during economic crises. 
With respect to state-led development, Dubai’s approach is typical of Gulf states. 
Its society adheres to tribal traditions that afford its ruling elite, headed by the royal family, a paternal and omnipotent role in determining the direction and form of economic development. 
This means that “Dubai, Inc.” can quickly and seamlessly adapt to changing economic circumstances. 
Dubai is sometimes called the Singapore of the Desert, because, like Singapore, it has experienced enormous state-directed economic growth, and benefits from proactive, visionary leadership that has turned a small city-state with limited natural resources into an important international entrepôt. 
Moreover, Dubai has done a good job of branding itself to attract the foreign investment and labor needed to achieve its growth ambitions. 
Like New York, Shanghai, and Las Vegas, which have all enhanced their images through architecture, Dubai conveys its innovation-oriented identity through its cityscape and skyline, which has around 150 skyscrapers, more than any other city except New York and Hong Kong. 
Dubai also has the first 3D-printed office building, stunning manmade islands, the world’s only (self-proclaimed) “seven-star hotel,” shopping malls combined with aquariums, indoor skiing, and skydiving facilities, and an array of iconic buildings and amusement parks. 
It also hosts the world’s most expensive horseraces and other lavish sporting events. 
Dubai’s brand is further strengthened by its political stability, safety, tolerance, cultural diversity, and high standard of living, which are a draw for skilled expatriates from around the world. 
Moreover, the emirate appeals to foreign investors with special economic zones that few other states can match. 
Two billion people live within a four-hour flight radius of Dubai, so it is unsurprising that it has emerged as a compelling location for visitors and investors alike. 
As one businesswoman I interviewed put it, “Dubai has all the ingredients of an extremely popular attraction for investors and tourists from around the world,” with “a substantial number of Arab youth aspiring to come and live the ‘Dubai Dream.’” 
Dubai has complemented its competitive advantage in attracting high-skill workers and investment with labor policies that also bring in lower-skill foreign workers to power its growth engine. 
But reliance on foreign workers could run into structural problems down the road. 
While firms can quickly shed workers during hard times, this then results in labor shortages when conditions improve. 
Higher-skill workers, in particular, take much longer to attract than to let go. 
Another risk is that, while the emirate has enjoyed a long period of political and economic stability, a significant regional upheaval could cause foreign workers, whatever their skill level, to take flight, regardless of the promise of high salaries and an attractive lifestyle. 
Dubai’s reliance on foreign labor thus threatens its long-term economic capacity to withstand future shocks. 
Aware of these potential risks, Dubai’s leadership has just approved a comprehensive plan to overhaul education aimed at developing indigenous human capital. 
Dubai’s ruler, Sheikh Mohammed Bin Rashid, said that, “We look forward to developing a new generation of students that is equipped to use the tools of the future.” 
Educational reforms will likely require a generation or more to bear fruit. 
Singapore eventually managed to develop a highly skilled base of indigenous talent by making large investments in education and setting completion of post-secondary study as a national priority. 
The city-state now scores near the top in science and math on international tests. 
The ABS model explains Dubai’s economic resilience and its quick recovery after the global financial crisis. 
But it also helps the emirate adjust its strategy to account for new challenges. 
Just as a car’s ABS makes it easier for a driver to slow down or change course to avoid dangerous obstacles, Dubai’s state-led development apparatus can realign its attraction and branding activities in accordance with its growth goals and changing circumstances in the Middle East and beyond. 
On the other hand, if the government fails to fix its structural problem – under-developed indigenous human capital – it will essentially be driving a more dangerous car, one in which it will become difficult or impossible to avoid obstacles without the wheels locking up. 

Dump the Lisbon Agenda 
As soon as he takes office as President of the European Commission, Durao Barroso - Portugal's former Prime Minister - should devote urgent attention to restoring order and focus to the European Union's economic policies. 
The thickest file on his desk concerns the Lisbon agenda, an ambitious programme approved in 2000 by the EU heads of state and government with the goal of making the Union "the most competitive and dynamic knowledge economy" by 2010. 
All major fields of economic policy are covered: innovation and entrepreneurship, welfare reform and social inclusion, skills and employability, gender equality, labour and product market liberalisation, and "sustainable" development. 
All of these are worthy goals, to be sure, but they belong intrinsically to the sphere of national political decisions. 
Indeed, under the European Treaties, the Union has no competence to enact legislation and policy in these domains, nor powers to enforce them. 
But the European Council, spurred by the European Commission, invented a new policy approach - called "open coordination" - in order to impinge on these fields. 
Open coordination entails the definition of common goals at the EU level, voluntary compliance by the member states, and peer review of results within the European Council. 
Inevitably, open coordination has failed to deliver on its promises. 
Moreover, the delusion that the European Council can somehow call growth and productivity into being has provided a diversion to national politicians who are unwilling to push for unpopular decisions back home. 
My first suggestion to Barroso, therefore, is to scrap the Lisbon agenda. 
Only this will make it clear that responsibility for national economic performance lies with national policy-makers. 
This brings me to the subject of macroeconomic coordination at the EU level. 
The Maastricht Treaty envisaged a simple policy framework for economic and monetary union. 
Monetary policy was centralized and entrusted to an independent central bank, while fiscal policy was left to the member states. 
National governments were made subject - under the excessive-deficit procedure - to the twin constraints that fiscal deficits should not exceed 3% of GDP and government debt should remain below 60% of GDP (or at least tend towards that value). 
Later on, the Stability and Growth Pact added a requirement that, over the medium term, government accounts should be "close to balance." 
Essentially, this aimed to prevent irresponsible budgetary policies after the euro's launch, while leaving sufficient room for cyclical oscillations of the deficit within the 3% limit. 
The credibility of this apparatus was badly damaged by the November 2003 public controversy between the Commission and the Ecofin Council over the application of the excessive-deficit procedure to France and Germany. 
This does not mean that it should be abandoned. 
On the contrary, a common external constraint on fiscal behavior is needed as a joint safeguard against an unsustainable accumulation of public debt that could affect financial stability and inflation throughout the EU - a risk aggravated by the impact of aging populations on pension systems. 
Such a constraint also provides a welcome anchor for domestic decision-making in member states with weaker political systems. 
But the system needs to be reviewed. 
I would not listen to those who advocate excluding investment from fiscal deficits: this would only offer new incentives for creative accounting and unsustainable accumulation of debt. 
Instead, the emphasis should shift from annual deficits to debt sustainability. 
The debt criterion, for example, could be supplemented by a limit on the (trend) growth rate of public spending, which would be kept below that of nominal GDP. 
The Commission's powers to initiate action when there is a risk of excessive deficits should be strengthened - provided, of course, that the Commission never again forgets that surveillance of national policies is a task that requires political judgment and cannot be left to accountants and lawyers. 
Finally, top priority should be assigned to completing the Single European Market, in which the Union has powerful legal instruments to pry open markets and sustain competition. 
The best therapy for reinvigorating growth is both direct, by increasing competitive pressure, and indirect, by triggering the necessary adaptation in national employment, welfare, and education policies. 
The job is far from finished. 
State aid to ailing companies remains ubiquitous, and common rules designed to ensure free circulation of goods and services are not fully respected by the member states - public procurement and energy markets being prime examples. 
Moreover, most markets for services - securities trading, wholesale and retail distribution, business services, and local utilities - remain sheltered from competition and free circulation rules. 
Empirical evidence indicates that these distortions in the market for services, which account for about two thirds of GDP, underlie most of the EU's productivity gap with the United States. 
In recent years the European Council has not devoted sufficient attention to these tasks, which require full and continuing commitment by member states to transpose and implement Community directives. 
All too often, the Commission has favored enacting new legislation and creating new spending programs over the effective administration of what already exists. 
So Barroso should forget the high-flying platitudes of the Lisbon agenda and focus instead on effective completion of the Single Market and keeping the member states' fiscal policies in order. 
Let national governments take responsibility for their countries' economic performance. 

Dying for Free Trade 
Last year was a bad one for free trade. 
The Doha Round was supposed to make agriculture the centerpiece of negotiations to assuage the deep frustrations of developing countries. 
But, instead of breathing life into free trade in food, rural protectionism in rich countries seems to have killed the Doha Round – and, with it, potentially the whole multilateral trading regime. 
Agriculture has always presented the greatest challenge to free-trade doctrine and its promise of empowering the poor, for it is one of the most distorted areas of global trade. 
In 2004, OECD countries spent more than four times their official development aid budgets on support for domestic farmers. 
In 2000, the World Bank estimated that OECD agricultural protectionism cost the developing world $20 billion in welfare losses annually. 
Most galling, agriculture is a small and declining part of these “rich club” economies, and the richer and larger they are, the less significant agriculture is and the more resources are wasted on rural welfare. 
The practical challenge comes from agriculture’s two advantages that insulate the rural sector from global market forces and turn even the most urbane, liberal politicians into its defenders. 
First, farming is geographically concentrated and farmers vote on agricultural policy above everything else, greatly enhancing the power of their votes – something that few, if any, urban consumers do. 
Second, protectionists have developed populist but logically questionable arguments that agricultural staples cannot be treated as tradable commodities subject to competition. 
Domestic farmers are portrayed as irreplaceable defenders of the social fabric and traditional values. 
On top of this, farming is presented as analogous to the military. 
Just as no government should outsource national security to untrustworthy foreigners, nor should any government permit the national food supply to rely on the supposed vagaries of foreign production. 
We accept paying a high and inefficient cost for national defense against what are often unknown enemies. 
Agricultural protectionists, through the language of food security and food self-sufficiency, claim that the same holds true for food. 
Japan has long been the paragon of rich-country agricultural protectionism. 
Its electoral system heavily favors rural voters. 
Farmers are well organized politically, and the Ministry of Agriculture, Forestry, and Fisheries (MAFF) has been a fierce defender of agricultural protectionism. 
Food security arguments resonate well in Japan, owing to memories of shortages during World War II and its aftermath. 
Ironically, Japan now offers a seed of hope for agricultural liberalization. 
The country’s declining number of voters are lining up in favor of cheaper, imported food. 
Japan’s demographic crisis is particularly acute in rural areas, where the average age of farmers is surpassing the retirement age. 
One enterprising village recently sold itself entirely to a waste disposal firm after it could no longer find any young people willing to return to bucolic bliss. 
Despite decades of immense government support, Japan’s rural sector cannot even aspire to feed its declining population. 
Food self-sufficiency in staple cereals now stands at 28% on a calorie supply basis, with no signs of growth. 
Farming, fishing, and forestry now account for less that 2% of the total economy and less than 4% of the workforce. 
The rapid aging and decline of Japan’s rural population is fundamentally shifting Japan’s approach to food. 
The MAFF is wistfully abandoning the cherished goal of food autarky. 
Its latest strategic plan calls for a self-sufficiency ratio of 45% by 2015 and focuses instead on “securing the stability of food imports” through diversification and free-trade agreements. 
For decades, the MAFF’s power meant that Japan’s trading partners would not even contemplate free-trade discussions. 
Now the Japanese government, supporting the reformers at the MAFF, is using free-trade deals and negotiations with competitive exporters like Thailand and Australia to pursue agricultural consolidation. 
Even more galling for the MAFF’s traditionalists, their food security argument is being turned on its head. 
Leveraging Japan’s inability to feed itself, trade negotiators now argue that Japan needs to open up to imports or face being shut out of global food markets by fast-growing giants like China. 
Deepening these fears, China’s free-trade deals in Southeast Asia give agriculture priority. 
While the logic of this argument is shaky, it taps into deep Japanese concerns about China’s rise. 
The rich countries face a similar demographic challenge, while the rest of the world waits to see how their responses will reshape the global economy. 
Japan, due to its advanced demographic decline, is the bellwether, yet other traditional rural protectionists like France and South Korea are not far behind. 
France now has half the number of farmers it had 20 years ago. 
That is good news for farmers and consumers around the world. 
Rich and aging countries may finally become promoters, rather than opponents, of free trade in food. 

Bob Dylan and the Literary Idiot Wind 
PARIS – Oh, the anger of the fusty at the announcement of Bob Dylan’s Nobel Prize! 
What an outcry from the academy – not the Swedish one, mind you, but that of the world church of literaturology. 
The panic of the literary bureaucracy, ensnared in its certainties and steeped in its petty calculations, its half-baked prognostications, its crafty shifts of position, has been palpable. 
Was the choice of Dylan political or non-political? 
Why an American? 
Why not a woman? 
Or a voice, any voice, of a visible minority? 
Or this one, who’s been waiting 20 years? 
Or that one, who’s given up hope? 
The truth, however unpleasant it may be for the fuddy-duddies, is that awarding the Nobel Prize in Literature to an author who has written just one book is no more surprising than giving it to Dario Fo or Winston Churchill. 
And here’s the even greater truth: to bestow it on one of our last popular poets, the distant relative of Rutebeuf, Villon, and all the minstrels and songsters of solitude and dereliction; to consecrate a troubadour, a bard of the brotherhood of lonely and lost souls; to crown the author of ballads that have been, to borrow André Suarès’s phrase about Rimbaud, “a moment in the life” of so many people in the twentieth and twenty-first centuries makes a lot more sense than pulling out of a hat the obscure Rudolf Christoph Eucken or picking poor old Sully Prudhomme instead of Tolstoy. 
Of course, it’s wrong to respond priggishly to priggishness. 
But, confronted with those who have been shouting, “That’s not literature! 
It’s just not!” one is tempted to side with Francis Ponge who, citing Lautréamont, defined the poet (he would say “proet”) as a bard or troubadour who, by expressing the “voice of things,” becomes “the most useful citizen of his tribe.” 
And to whom does that definition apply better than to the author of “Chimes of Freedom” or “Long and Wasted Years,” which bring to life and to music what the critic Greil Marcus has called the “invisible republic” of American culture? 
One is tempted to side also with Mallarmé, who urged us, in more or less the same terms, to “give a purer meaning to the words of the tribe.” 
Again, who better than this collage artist, this chameleon of citation and intertextuality, this laconic lyricist, this verbal alchemist who spent his life reinventing others’ words and his own, uncovering the embers of the era beneath the ashes of the day’s defeats, and transmuting into gold the lead he heard on the radio? 
Or consider the familiar distinction between scribes, who make instrumental use of language, and writers, who spin it into silk. 
Wasn’t Dylan alluding to something similar when, after years of struggle for civil rights, resistance to the war in Vietnam, and support for the feminist revolution, he titled one of his most beautiful songs “I’m Not There,” as in, I’m not here anymore, no longer your servant, goodbye to all that, so long? 
But the true question lies elsewhere. 
The most conclusive exercise would be to compare apples with apples and the author of “Blonde on Blonde” with those who were and remain his key contemporaries. 
Dylan is a Kerouac who can sing. 
He’s a Burroughs who put to music the great parade of the Beat generation, with its wild parties and naked lunches. 
He is what Allen Ginsberg said in describing his shock upon first hearing “A Hard Rain’s A-Gonna Fall” in 1963, a song in which the accents and pacing, the abrupt changes in emphasis, the voyage to the very heart of words and the imagination all echo the best literature of the time – but with music as well! 
Are we going to hold that against Dylan, charge him with the sin of having grafted the rhythms of the blues, soul, and country music onto those of the Bible, William Blake, and Walt Whitman? 
Why should we withhold from the trouper of the Never Ending Tour (more than two thousand performances!) the dignity accorded without hesitation to the author of On the Road? 
It was Louis Aragon, I think, who said that setting a poem to music was like moving from black and white to color. 
Aragon, the poet sung by Léo Ferré and others, believed that a poem unsung was half dead. 
Well, then, it seems that Dylan was the only one of his era to have been able to embody fully the musicality that is essential to great poetry, the second voice that haunts every poet, but which he generally delegates to those who recite or read him, the power of song that is his ultimate and secret truth and that some have gone mad – literally and tragically mad – trying to pull from cage into canto. 
Bard and rhapsodist both. 
A poetico-musical revolution in one man and one body of work. 
I like to think that it is this tour de force – this prolonged stroke of genius that is forever young – that the Nobel committee has recognized in its selection. 

Dysfunctional Disarmament 
GENEVA – As the United Nations Conference on Disarmament begins a seven-week session in Geneva, its future is on the line. 
Whereas countries and civil-society initiatives are on the move, the Conference has stagnated. 
Its credibility – indeed, its very legitimacy – is at risk. 
The “CD,” as it is informally known, has long served as the world’s only multilateral forum for negotiating disarmament. 
Its many impressive accomplishments include the Biological and Chemical Weapons Conventions, the Nuclear Non-Proliferation Treaty, and the Comprehensive Nuclear-Test-Ban Treaty. 
Much of this progress was achieved during the Cold War, proving that it is possible to create global legal norms even in times of deep political division. 
Yet today, all is not well at the CD. 
It operates under a consensus rule, and its member states have different priorities. 
Some want negotiations on nuclear disarmament; others want to ban the production of fissile material for weapon purposes; and still others insist that such a treaty should also cover existing stocks. 
Some want a treaty on security guarantees for non-nuclear-weapon states to assure them against the threat or use of nuclear weapons; others want a treaty to prevent an arms race in outer space. 
But, instead of compromise and the give-and-take of good-faith discussions, there has been paralysis. 
There was a brief glimmer of hope in 2009, when the sense of paralysis led the Conference to consensus on a program of work. 
Unfortunately, that agenda was never implemented. 
As a result, the CD has failed to make any substantive progress for 15 years. 
We simply must not let one lost decade turn into a second. 
The CD’s future is in the hands of its member states. 
But the disarmament and non-proliferation agenda is too important to let the CD lapse into irrelevancy as states consider other negotiating arenas. 
Last September, I convened a high-level meeting at the UN to consider ways to revitalize the CD’s work and to advance multilateral disarmament negotiations. 
The participants – who included dozens of foreign ministers – were unanimous in stressing that membership of the CD is a privilege. 
So is the consensus rule. 
Just one or two countries should not be able to block the organization’s work indefinitely. 
The message was clear: no more business as usual. 
The CD’s member states must recognize that the Conference’s future is at a critical juncture. 
Continued stalemate increases the risk that some like-minded countries might take up the matter elsewhere. 
After all, the deadlock has ominous implications for international security; the longer it persists, the graver the nuclear threat – from existing arsenals, from the proliferation of such weapons, and from their possible acquisition by terrorists. 
I have urged the CD to adopt an agenda based either on the consensus that was forged in 2009, or on an alternative arrangement. 
Upon my request, the UN’s entire membership will take up the matter in a first-of-its-kind General Assembly meeting this July. 
That schedule makes the CD’s current session crucial to its future. 
Reaffirming the CD’s agenda offers the prospect of renewed negotiations on disarmament issues. 
Prior agreement on the scope or outcome should not be a precondition for talks – or an excuse to avoid them – but rather a subject of the negotiations themselves. 
The current stalemate is all the more troubling in view of recent momentum on other disarmament tracks, including last year’s successful NPT Review Conference and heightened attention to nuclear security. 
With the world focused so intently on advancing disarmament goals, the CD should seize the moment. 
Shakespeare once wrote that “there is a tide in the affairs of men.” 
The tide of disarmament is rising, yet the CD is in danger of sinking. 
And it will sink unless it fulfills its responsibility to act. 

E Pluribus Unum for Europe’s Bank Supervisors 
STOCKHOLM – The European Union lacks an efficient supervisory framework for its vast financial industry, and the gap between what is needed and what exists is widening. 
To pave the way towards European financial integration, the Financial Services Action Plan (FSAP) was launched in 1999 with the aim of creating a regulatory framework for a single financial area. 
The European Commission, hoping to speed things up, published a White Paper on financial services policy covering 2005-2010. 
There has been clear progress on integration, as financial institutions across Europe have begun to realize the benefits of economies of scale. 
Yet the industry has acted more quickly than regulators and supervisors have been able to respond. 
At first, banks’ cross-border operations were small, which meant that that they were mainly supervised in their own countries. 
But, over the last decade, major European banks have acquired foreign banks through such mergers as the acquisition by Spain’s Banco Santander of the UK’s Abbey National, Italy’s UniCredito of Austria’s Hypovereinsbank and Holland’s ABN-AMRO. 
This raised questions about prudential supervision, chiefly whether sufficient resources exist to check whether the institutions are financially sound. 
Nordea, for example, was created by merging four major national banks, and some 70% of its business is outside its legal domicile, Sweden. 
This is a process that is likely to accelerate. 
Changes in the way banks are organized have put extra pressure on supervisors. 
Banks have begun to de-centralize essential functions, re-locating market and treasury operations, liquidity and capital management, and risk management, for example, in different countries. 
Banks nowadays create products and IT platforms to serve their customers in all their countries of operation; so separate prudential assessments of units in these cross-border groups, be they subsidiaries or branches, is hardly rational. 
More than 60% of banking assets in Europe are now in the hands of fewer than 50 multi-national European banks. 
In Eastern Europe, most new EU members’ banking sectors are owned by banks based elsewhere in the EU. 
In short, the main part of Europe’s banking assets, liabilities, and risks are concentrated in these large banks. 
The current de-centralized supervisory framework, with several independent “host” supervisors for subsidiaries and the parent bank’s home supervisor as primus inter pares , is clearly unsatisfactory. 
Capital adequacy and liquidity risks should be assessed on a group level, rather than country by country; how capital and risks are divided between countries is less important. 
Under EU law, the home supervisor deals with a bank’s operations as a whole – meaning the parent company and its subsidiaries. 
But the tools and powers available for home country supervisors are inadequate. 
Recent attempts to remedy this under the Capital Requirements Directive have been disappointing, even though it was plainly the best that could be achieved politically given EU countries’ differing views on prudential supervision. 
Host community supervisors look at business units in isolation from the international group to which they belong. 
They have their own national rules and regulations to apply, and every financial supervisory authority (FSA) in Europe has its own practices and traditions. 
Even when implementing directives, EU member countries are often tempted to “gold-plate” them by introducing extra rules. 
This adds to their complexity and cost, and compounds inefficiency. 
Europe’s financial industry wants a cost-effective, transparent, and competitively neutral supervisory framework that will foster market integration, create greater financial stability, and provide for crisis management. 
But Nordea’s recent history suggests that this is likely to take time. 
The regulatory infrastructure includes supervision, deposit guarantee, the lender of last resort, and emergency liquidity assistance. 
These are interlinked, and stakeholders include central banks, FSAs, national treasuries, and deposit guarantee funds. 
Nordea tried to get the deposit guarantee rules changed to create a level playing field in which a cross-border merger would not distort competition between banks. 
The Commission showed sympathy and understanding, but in the end it passed the problem on to national governments. 
EU member governments obviously want to minimize the risk of being called on to save a cross-border bank in trouble. 
So who would have to take the lead in such a situation? 
Would it be the home country FSA, with its responsibility for consolidated supervision, even though it would have only limited powers? 
Would host supervisors try to ring-fence the losses to include only those in their own country? 
What role should central banks and national treasuries play in a cross-border European banking collapse? 
Is it even possible to deal with such a situation on a purely national basis? 
To pose these questions is to conclude that there is no practical alternative to a European FSA with the sole authority to supervise multinational financial institutions, including all their subsidiaries and branches within the EU and globally. 
This would not spell the end of national supervisors, as many national FSAs would likely work as partners of the European supervisor. 
National banks would continue to be supervised by national FSAs, and consumer protection would also remain subject to national supervision. 
The problem is that currently there is a lack of convergence and coherence between national supervisors. And that is because perceived national interests still have the upper hand over the wider interests of an integrated European marketplace. 

Early Retirement for the Eurozone? 
NEW YORK – Whether the eurozone is viable or not remains an open question. 
But what if a breakup can only be postponed, not avoided? 
If so, delaying the inevitable would merely make the endgame worse – much worse. 
Germany increasingly recognizes that if the adjustment needed to restore growth, competitiveness, and debt sustainability in the eurozone’s periphery comes through austerity and internal devaluation rather than debt restructuring and exit (leading to the reintroduction of sharply depreciated national currencies), the cost will most likely be trillions of euros. 
Indeed, sufficient official financing will be needed to allow cross-border and even domestic investors to exit. 
As investors reduce their exposure to the eurozone periphery’s sovereigns, banks, and corporations, both flow and stock imbalances will need to be financed. 
The adjustment process will take many years, and, until policy credibility is fully restored, capital flight will continue, requiring massive amounts of official finance. 
Until recently, such official finance came from fiscal authorities (the European Financial Stability Facility, soon to be the European Stability Mechanism) and the International Monetary Fund. 
But, increasingly, official financing is coming from the European Central Bank – first with bond purchases, and then with liquidity support to banks and the resulting buildup of balances within the eurozone’s Target2 payment system. 
With political constraints in Germany and elsewhere preventing further strengthening of fiscally-based firewalls, the ECB now plans to provide another round of large-scale financing to Spain and Italy (with more bond purchases). 
Thus, Germany and the eurozone core have increasingly outsourced official financing of the eurozone’s distressed members to the ECB. 
If Italy and Spain are illiquid but solvent, and large-scale financing provides enough time for austerity and economic reforms to restore debt sustainability, competitiveness, and growth, the current strategy will work and the eurozone will survive. 
In the process, some form of fiscal and banking union may also emerge, together with some progress on political integration. 
But, however important the fiscal and banking union elements of this process may be, the key is whether large-scale financing and gradual adjustments can restore sustainable growth in time. 
This will require considerable patience from governments and publics in the core and periphery alike – in the former to maintain large-scale financing, and in the latter to avoid a social and political backlash against years of painful contraction and loss of welfare. 
Is this scenario plausible? 
Just consider what must be overcome: economic divergence and deepening recessions; irreversible balkanization of the banking system and financial markets; unsustainable debt burdens for public and private agents; daunting growth and balance-sheet costs in countries that pursue internal devaluation and deflation to restore competitiveness; asymmetrical adjustment, with moral-hazard risks in the core and insufficient financing in the periphery fueling incompatible political dynamics; fickle and impatient markets and investors; austerity fatigue in the periphery and bailout fatigue in the core; the absence of conditions for an optimal currency area; and serious difficulties in achieving full fiscal, banking, economic, and political union. 
If a gradual process of disintegration eventually makes a eurozone breakup unavoidable, the path chosen by Germany and the ECB – large-scale financing for the eurozone periphery – would destroy the core central banks’ balance sheets. 
Worse still, massive losses resulting from the materialization of credit risk might jeopardize core eurozone economies’ debt sustainability, placing the survival of the European Union itself in question. 
In that case, surely an “orderly divorce” now is preferable to a messy split down the line. 
Of course, a breakup now would be very costly, requiring an international debt conference to restructure the periphery’s debts and the core’s claims. 
But breaking up earlier could allow the survival of the single market and of the EU. 
A futile attempt to avoid a breakup for a year or two – after wasting trillions of euros in additional official financing by the core – would mean a disorderly end, including the destruction of the single market, owing to the introduction of protectionist policies on a massive scale. 
So, if a breakup is unavoidable, delaying it implies much higher costs. 
But politics in the eurozone does not permit consideration of an early breakup. 
Germany and the ECB are relying on large-scale liquidity to buy time to allow the adjustments necessary to restore growth and debt sustainability. 
And, despite the huge risk implied if a breakup eventually occurs, this remains the strategy to which most of the players in the eurozone are committed. 
Only time will tell whether betting the house to save the garage was the right move. 

An Earth Year 
STOCKHOLM – On April 22, the world will mark the 45th anniversary of Earth Day, established in 1970 to draw attention to environmental challenges. 
Never have those challenges been greater or more urgent than they are today. 
The combination of climate change, erosion of biodiversity, and depletion of natural resources is propelling the planet toward a tipping point, beyond which objectives like sustainable development and poverty reduction will be more difficult than ever to achieve. 
Since 1970, scientists have learned not only that human activity is the primary driver of environmental change on Earth, but also that it is pushing the planet beyond its natural limits. 
If we do not make big changes fast, the results could be devastating. 
Global leaders seemed to recognize this when they agreed five years ago to limit global warming during this century to 2º Celsius above pre-industrial levels – the threshold beyond which we risk triggering more devastating consequences of climate change. 
But strong action to reduce greenhouse-gas emissions has not been taken. 
On the contrary, emissions have increased markedly; as a consequence, last year was the hottest year on record. 
The world is now on track to deplete its remaining “budget” for CO2 emissions, which now amounts to less than one trillion tons, in just 25 years. 
The result would be catastrophic changes like unmanageable sea-level rises, devastating heat waves, and persistent droughts that create unprecedented challenges in terms of food security, ecosystems, health, and infrastructure. 
Unsurprisingly, the poorest and most vulnerable will be the hardest hit. 
We must change course. 
This Earth Day should serve as a reminder – and, indeed, a catalyst – of what the world really needs: strong and sustained action. 
Fortunately, 2015 may mark the beginning of just such a change for the better. 
This year, world leaders will meet three times to chart a new path for our planet. 
In July, they will meet in Addis Ababa, Ethiopia, for the Conference on Financing for Development. 
In September, they will convene to approve the Sustainable Development Goals, which will guide development efforts until 2030. 
And in December, they will head to Paris to negotiate a new global climate agreement. 
The outcomes of these meetings will shape this generation’s legacy for both the natural environment and economic growth and development. 
By decarbonizing the global economy and limiting climate change, world leaders can unleash a wave of innovation, support the emergence of new industries and jobs, and generate vast economic opportunities. 
It is up to all of us to encourage political leaders to do what is needed to secure such an outcome. 
Just as we demand that our governments address risks associated with terrorism or epidemics, we should put concerted pressure on them to act now to preserve our natural environment and curb climate change. 
Here, the scientific community has a special responsibility to share their research and its potential implications. 
That is why I and the 16 other scientists of the Earth League – representing world-leading academic institutions like the Potsdam Institute on Climate Impact Research, the Earth Institute, Tsinghua University, and the Stockholm Resilience Centre – have released the “Earth Statement,” which sets out the eight essential elements of a successful global climate deal, to be reached in Paris in December. 
· First, the agreement must reinforce countries’ commitment to limit global warming to below 2°C. 
· Second, the agreement needs to recognize the remaining global budget for CO2 emissions. 
· Third, the agreement should lay the foundation for a fundamental transformation of the economy, with deep decarbonization beginning immediately, in order to create a zero-carbon society by around 2050. 
· Fourth, all 196 countries in the United Nations Climate Convention must formulate an emissions pathway consistent with deep decarbonization, with richer countries taking the lead. 
· Fifth, countries must promote innovation in clean technologies and ensure universal access to existing technological solutions. 
· Sixth, governments must agree to support adaptation to climate change and to address the loss and damage associated with it. 
· Seventh, the agreement must include provisions to safeguard carbon sinks and vital ecosystems. 
· Eighth, to help developing countries fight climate change, donors need to provide additional support at a level at least comparable to current global development aid. 
The good news is that these eight objectives are realistic and achievable; indeed, some progress is already being made. 
Last year, total CO2 emissions from the energy sector remained unchanged year on year for the first time (in the absence of an economic downturn). 
And recent reports show that emissions in China, the world’s largest emitter of greenhouse gases, also did not increase from 2013 to 2014. 
The tide is turning. 
Decarbonization has already begun, and the appeal of a fossil-fuel-free world is growing – not only because it would limit climate change, but also because it would be more technologically advanced, democratic, resilient, healthy, and economically dynamic. 
This is the right time to move fully onto a more sustainable, zero-carbon path. 
With the right global deal, the world could finally do just that. 
For the sake of the planet, and the people who depend on it, let us make 2015 Earth Year. 

Earth is Enough 
COPENHAGEN – According to conventional wisdom, we are voraciously using the world’s resources and living way beyond Earth’s means. 
This narrative of decline and pessimism underlies much of today’s environmental discourse, and is often formulated in a simple fashion: by 2030, we will need two planets to sustain us, owing to higher living standards and population growth. 
If everyone managed to live at American living standards today, we would need almost five planets. 
But this received wisdom is fundamentally wrong. 
Environmental campaigners use the so-called “ecological footprint” – how much area each one of us requires from the planet – to make their point. 
We obviously use cropland, grazing land, forests, and fishing grounds to produce our food, fiber, and timber, and we need space for our houses, roads, and cities. 
Moreover, we require areas to absorb the waste emitted by our energy use. 
Translating all these demands into a common unit of physical area gives us an opportunity to compare it with Earth’s productive area – and thus to get a sense of how sustainable we are. 
For more than a decade, the World Wildlife Fund and several other conservation organizations have performed complicated calculations to determine individual “footprints” on the planet. 
Their numbers show that each American uses 9.4 hectares of the globe, each European 4.7 hectares, and those in low-income countries just one hectare. 
Adding it all up, we collectively use 17.5 billion hectares. 
Unfortunately, there are only 13.4 billion hectares available. 
So the WWF points out that we are already living beyond Earth’s means, using around 30% too much. 
And it will get worse. 
They tell us that the recent financial crisis “pales in comparison to the looming ecological credit crunch,” which could presage “a large-scale ecosystem collapse.” 
This message is being seared it into the public consciousness. 
The British newspaper The Observer used the headline “Wanted: New Earth by 2050”; according to the BBC, Earth is “on course for eco-crunch”; and The Washington Post was horrified by the four extra planets needed, and urged us to use more canvass shopping bags and energy-saving light bulbs. 
The message has been received loud and clear. 
We are using up too much of the planet’s area. 
But wait a minute. 
How can we do that? 
How can we actually use more area than there is on earth? 
Obviously, any measure that tries to aggregate many different aspects of human behavior will have to simplify the inputs; the ecological footprint is no different. 
For example, when we talk about American lifestyles needing five planets, we assume that technology is frozen, whereas it is likely that worldwide land-use productivity will increase dramatically. 
Likewise, organic farming actually leaves a larger footprint than its conventional cousin. 
Yet, despite such shortcomings, it is clear that areas we use for roads cannot be used for growing food, and that areas we use to build our houses takes away from forests. 
This part of the ecological footprint is a convenient measure of our literal footprint on earth. 
Here, we live far inside the available area, using some 60% of the world’s available space, and this proportion is likely to drop , because the rate at which the earth’s population is increasing is now slowing, while technological progress continues. 
So no ecological collapse here. 
There is just one factor that keeps increasing: our carbon emissions. 
It is not at all obvious to anybody how to convert CO2 to area. 
The WWF and some researchers choose to get around this by defining the area of emissions as the area of forest needed to soak up the extra CO2. 
This now makes up more than 50% of the ecological footprint, and will grow to three-quarters before mid-century. 
In essence, we are being told that we ought to cut emissions to zero, and to plant trees to achieve that, meaning that we would have to plant forests today on 30% more than all of the available land, and plant forests on almost two planets by 2030. 
This is unreasonable. 
Is it really necessary for us to cut all emissions? 
Just cutting about half of all emissions would reduce greenhouse gas concentrations in the medium term. 
More importantly, planting forests is one of the least area-efficient low-tech ways to cut carbon. 
Solar cells and wind turbines require less than 1% of the area of forests to reduce CO2, they become increasingly efficient, and they can often be placed on non-productive land (such as wind turbines at sea and solar panels in deserts). 
Measured this way, the scary eco-crunch disappears. 
Due to technology, the individual demand on the planet has already dropped 35% over the past half-century, and the collective requirement will reach its upper limit before 2020 way below any overdraft. 
Translating CO2 into an illogical and inefficient measure of forest cover seems intended mainly to ensure that an alarming message results. 
In the scientific literature, a leading modeler acknowledges that most modelers regard this method as “hard to defend.” 
Two other research teams have pointed out that the ecological footprint “itself is nothing more than an important attention-grabbing device,” and that “it is less a scientific measure than one designed to raise public awareness and influence politics.” 
When we really examine the “ecological footprint” calculations, we discover that the only thing the world is running out of is space to plant a colossal amount of imaginary forest that we wouldn’t have planted anyway, to avoid CO2 emissions that we can prevent through much smarter and cheaper means. 
That our profligate consumption requires five planets is a catchy story, but it is wrong. 
The planet we have is more than enough. 

East Asia's Historical Shackles 
TOKYO – Diplomatic relationships in East Asia have long been held hostage by history. 
But the region’s “history problem” has been intensifying lately, with growing nationalism among major actors like China, Japan, and South Korea fueling disputes over everything from territory and natural resources to war memorials and textbooks. 
Can East Asian countries overcome their legacy of conflict to forge a common future that benefits all? 
Consider the relationship between America’s closest East Asian allies, Japan and South Korea. 
Though historical disagreements have long hampered bilateral ties, the increasingly nationalistic stance of Japanese Prime Minister Shinzo Abe and South Korean President Park Geun-hye has aggravated festering tensions. 
If they fail to work together to stem the revival of bitter historical disputes, their relationship will remain frozen, playing into China’s hands. 
And nobody plays the history card with quite as much relish as China, where President Xi Jinping is also relying on nationalism to legitimize his rule. 
Last year, China introduced two new national memorial days to commemorate China’s long battle against Japanese aggression in World War II: “War against Japanese Aggression Victory Day” on September 3 and “Nanjing Massacre Day” on December 13. 
What would happen if countries like Vietnam and India dedicated days to remembering China’s aggression toward them since 1949? 
By reinforcing negative stereotypes of rival countries, such squabbles over history and remembrance sow fragmentation and instability, and have certainly fueled the region’s recent territorial disputes. 
Indeed, the politicization of history remains the principal obstacle to reconciliation in East Asia. 
Repeated attempts to rewrite history – sometimes literally, through textbook revisions – along nationalist lines make it nearly impossible to establish regional institutions. 
This should not be the case. 
Japan and South Korea, for example, are vibrant democracies and export-oriented economic powerhouses, with traditionally close cultural ties and many shared values. 
In other words, they are ideal candidates for collaboration. 
US President Barack Obama recognizes this potential, and has promoted increased strategic cooperation between South Korea and Japan in order to underpin a stronger trilateral security alliance with the US that can balance a rising China. 
But Japan and South Korea refuse to let go of history. 
To be sure, there is some truth to South Korea’s accusation that Japan is denying some of its past behavior. 
But it is also true that Park – who has refused to meet formally with Abe until he addresses lingering issues over Japan’s annexation of Korea – has used history to pander to domestic nationalist sentiment. 
Indeed, adopting a hardline stance has enabled her to whitewash some inconvenient family history: Her father, the dictator Park Chung-hee, collaborated with the Japanese military while Korea was under colonial rule. 
Abe, too, has stoked tensions, particularly by visiting Tokyo’s Yasukuni Shrine – a controversial memorial that honors, among others, Class A war criminals from World War II. 
Though Abe visited the shrine only once – in December 2013 – he felt compelled to do so in response to China’s unilateral declaration of an air-defense identification zone, covering territories that it claims but does not control. 
Of course, the divergences between Japanese and South Korean historical narratives go back further than WWII. 
More than a century ago, the Korean activist Ahn Jung-geun assassinated Japan’s first prime minister, Hirobumi Ito, at the railway station in the Chinese city of Harbin, cementing Ahn’s status as a hero in Korea and a terrorist in Japan. 
Ito’s image can be seen on Japan’s 1,000-yen note; 
Ahn has appeared on a 200-won postage stamp in South Korea. 
Last year, Park asked Xi to honor Ahn. 
Xi seized the opportunity to drive a wedge between America’s two main Asian allies, and built a memorial to Ahn. 
Japan responded by blasting China for glorifying a terrorist and propagating a “one-sided” view of history – a move that, Japan asserted, was “not conducive to building peace and stability.” 
Such conflicts have a clear catalyst: Asia’s rising prosperity. 
As their economies have expanded, Asian countries have gained the confidence to construct and exalt a new past, in which they either downplay their own aggressions or highlight their steadfastness in the face of brutal victimization. 
All countries’ legitimizing narratives blend historical fact and myth. 
But, in some cases, historical legacies can gain excessive influence, overwhelming leaders’ capacity to make rational policy choices. 
That explains why Park has sought closer ties with China, even though South Korea’s natural regional partner is democratic Japan. 
One source of hope stems from Abe’s landslide victory in the recent snap general election, which gives him the political capital to reach out to Park with a grand bargain: If Japan expresses remorse more clearly for its militaristic past, South Korea will agree to leave historical grievances out of official policy. 
Japan and South Korea cannot change the past. 
But they can strive to shape a more cooperative future. 
As a Russian proverb succinctly puts it, “Forget the past and lose an eye; dwell on the past and lose both eyes.” 

The Asian Sleepwalkers 
SEOUL – Whether East Asia’s politicians and pundits like it or not, the region’s current international relations are more akin to nineteenth-century European balance-of-power politics than to the stable Europe of today. 
Witness East Asia’s rising nationalism, territorial disputes, and lack of effective institutional mechanisms for security cooperation. 
While economic interdependence among China, Japan, South Korea, and the members of the Association of Southeast Asian Nations continues to deepen, their diplomatic relations are as burdened by rivalry and mistrust as relations among European countries were in the decades prior to World War I. 
One common characteristic, then and now, is a power shift. 
Back then, Great Britain’s relative power was in decline, while Germany’s had been rising since German unification in 1871. 
Similarly, at least in terms of economic, if not military, capability, the United States and Japan seem to have begun a process of decline relative to China. 
Of course, this process is not irreversible: Effective political leadership and successful domestic reforms in the US and Japan, together with China’s failure to manage political pressure from below, could yet halt this seemingly inexorable power shift. 
Major power shifts define eras in which key political leaders are likely to make serious foreign-policy mistakes. 
Indeed, poor management of international relations at such critical junctures has often led to major wars. 
Rising powers tend to demand a greater role in international politics, declining powers tend to be reluctant to adjust, and key policymakers are likely to misunderstand the intentions of other countries’ leaders and overreact to their actions. 
Historically, rising powers tend to become too confident too soon, leading them to behave imprudently, which frightens their neighbors. 
For example, Kaiser Wilhelm II dismissed Otto von Bismarck as chancellor in 1890, less than 20 years after the formation of the Second Reich, and began to destroy Bismarck’s carefully crafted alliance network. 
His rough diplomacy frightened France, Britain, and Russia, making it easier for them to unite against Germany. 
China’s new diplomatic assertiveness in 2010 – closely following the eruption of the worst financial crisis since the 1930’s – recalled that of Wilhelmine Germany. 
In both cases, insecurity resulted not from an external threat, but from top policymakers’ own actions. 
In late 2010, I was relieved – somewhat – when a key Chinese leader, State Councilor Dai Bingguo, announced that China would adhere to the path of peaceful development. 
But the rhetoric of some Chinese, particularly in the military, concerning the South China Sea and other disputed Chinese sovereignty claims suggests that not everyone in the country’s leadership is committed wholeheartedly to such a path. 
The extent to which policymaking by the country’s new leader, Xi Jinping, takes into account the insecurity felt by China’s neighbors – and abandons a quest for absolute security for China – will be one of the key variables influencing East Asia’s security environment in the years ahead. 
America’s foreign policy will be another key factor. 
If the US pursues a predominantly confrontational approach, East Asian politics will inevitably become polarized, just as multipolar nineteenth-century Europe gave way to an increasingly bipolar order in lockstep with rising tensions between Germany and Britain. 
America’s so-called “pivot to Asia” might have been necessary from its point of view, given the concerns of its Asian allies about China. 
But, unless the US wants a Cold War-style confrontation in Asia, it must try harder to engage China in shaping a viable regional security structure. 
A confrontational US approach toward China, moreover, would imply an additional destabilizing factor: Japan might become much bolder than necessary in its foreign policy. 
After Wilhelm II stopped engaging Russia in the 1890’s, bilateral relations worsened, which provided his ally, Austria, diplomatic carte blanche in dealing with Serbia – and, more important, Serbia’s Russian patron. 
Thus, Wilhelm unintentionally contributed to the outbreak of war in 1914. 
There are already some worrying signs of a Japanese miscalculation. 
Japan’s new prime minister, Shinzo Abe, reportedly said that he is considering renouncing the Kono Statement of 1993, which acknowledged that the Japanese military had raped and enslaved Asian and European women during World War II. 
If Abe does so, Japan’s relations with South Korea and China will suffer serious damage. 
That is in no one’s interest, including Japan’s, given that the Japanese share many security concerns with South Korea. 
So US diplomacy will need to be dexterous. 
It must ease Japan’s sense of insecurity in the wake of China’s rise, while persuading Japan’s new leaders to behave prudently and refrain from excessively nationalist behavior. 
Frankly, with two decades of economic stagnation already behind it, Japan has more important matters to pursue. 
In contrast to its multilateral efforts in Europe, the US created a hub-and-spoke security framework – formed by US-centered bilateral alliances – in Asia following WWII. 
One result is that no direct channel for security cooperation among Asian countries was ever established, which has contributed to the low level of trust in East Asia, even among close US allies like Japan and South Korea. 
And it is precisely here that South Korea, a medium-sized ally of the US, will be in a better position than Northeast Asia’s bigger powers to act as a facilitator. 
There is much to learn from the diplomatic failures that led to WWI. 
A new history, by Christopher Clark, of the diplomatic prelude to that war is called, fittingly, The Sleepwalkers. 
The question for the US and East Asia’s leaders today is whether they will wake up and develop effective multilateral mechanisms for security cooperation before doing themselves serious harm. 


East Timor’s Example 
MANILA -- East Timor, now known as Timor-Leste, is the world’s newest democracy. 
It may have a population of less than one million, but it has a proud, heroic history and a rich culture built up over centuries of diverse ethnic and colonial influences. 
The island attracted Chinese and Malay traders in the fifteenth century. 
The Portuguese arrived not long after, and stayed 400 years. 
Now it is attracting attention as an example of United Nations-led nation-building. 
The UN Integrated Mission in Timor-Leste (UNMIT), headed by Atul Khare, consists of a civilian staff of 1,568, of which 334 are volunteers, and a police commissioner, Rodolfo Tor, with 1,623 police personnel from 39 countries. 
UNMIT’s main job is a difficult one: bringing about national reconciliation. 
While peaceful parliamentary elections were held on June 30, an atmosphere of apprehension has prevailed ever since. 
Neither the former ruling party, Fretilin, nor the newly formed CNRT, led by Xanana Gusmão, the hero of the resistance to Indonesia’s occupation, won an outright majority. 
At first, the UN, like many Timorese, including José Ramos-Horta, the country’s Nobel Laureate president who won election last May, had hoped that a national unity government could be formed. 
But a month-long attempt to broker an inclusive government failed. 
So, in August, Ramos-Horta ended the deadlock by swearing in Gusmão, a long-term political ally and former president, as prime minister. 
Gusmão had forged a coalition with three other centre-left parties. 
Together they won a narrow 51% majority of the popular vote, giving them 37 of the 65 seats in parliament. 
Gusmão’s main rival, Mari Alkatiri, Fretilin’s leader and a former prime minister, denounced Ramos-Horta’s decision. 
Fretilin, he said, would not cooperate with an “illegal and unconstitutional” government. 
The constitution is open to interpretation, and he argues that Fretilin, which won the largest share of the vote (29%), should have been asked first to form a government – even a minority one. 
Fretilin at first sought to fight the decision through non-violent means. 
But some of its supporters began venting their anger on the streets. 
Groups of angry marauding young men armed with stones and slingshots ran amok, setting up roadblocks and torching buildings. 
But this did not last long, thanks to both the UN and the democratic processes it is helping to nurture. 
Of course, Timor Leste has been in something of a political limbo since last year, when clashes between rival factions in the security forces led to a brief breakdown of law and order. 
But with security now mainly in the hands of UN police and Australian and New Zealand peacekeepers, the political process is being given a chance to work itself out. 
Gusmão will now need to prove himself at the head of an inexperienced government. 
One big test will be whether the estimated 100,000 displaced people, amounting to 10% of the population, many living in tent camps, feel safe enough to return home. 
If Fretilin persists in its decision to obstruct the government, instability will persist. 
This is where the Association of Southeast Asian Nations (ASEAN) can help. 
At the top of the agenda at ASEAN’s Leaders Summit in Singapore this month is the adoption of a Charter to embody its “One Vision, One identity, One Community” concept for Southeast Asia. 
Timor-Leste is still only an observer in the ASEAN family, but it appears able to grasp – far better than Myanmar, an ASEAN member state – the need for a rules-based ASEAN that stands for democratic governance even in the most difficult of circumstances. 
Indeed, the Timorese people have consistently shown that what they want from their government is openness, dialogue, and majority voting under the rule of law. 
Myanmar’s people want the same, but their country is being pushed towards collapse by years of political and economic crisis, and might well become ASEAN’s pariah, like Africa’s Zimbabwe. 
That should stand as a warning to Timor Leste’s clashing factions, lest any of them conclude that repression and dictatorship are the best solution. 

Eastern Europe’s Authoritarian Return 
MADRID – The European Union is a remarkable achievement of modern statecraft. 
By building on shared values, it created a space of peace, progress, and freedom that overcame national enmities rooted in decades, if not centuries, of conflict. 
But the emerging political rift between the EU’s Eastern and Western members, together with resurgent nationalism throughout the continent, is putting those values – and thus the future of European integration – to their most severe test yet. 
In Eastern Europe, democracy is becoming increasingly illiberal. 
Leading the way is Hungary under Prime Minister Viktor Orbán, who has been implementing his declared vision of an “illiberal state” for the last six years. 
Now Poland is following suit, with Jarosław Kaczyński’s right-wing Law and Justice (PiS) party having moved swiftly to assert control over public broadcasting, the civil service, and the Constitutional Court since its election in October. 
Already, the EU has launched an official inquiry into potential violations of its rule-of-law standards. 
The move toward authoritarianism in Eastern Europe has been accompanied by outright defiance of EU-wide quotas for migrants, aimed at easing the massive refugee crisis that Europe now faces. 
Meanwhile, Germany registered about a million asylum-seekers last year alone. 
This split reflects a fundamental divergence in the two sides’ response to history. 
Germany’s enlightened approach in matters like migration and civil liberties amounts to a direct rejection of its actions during World War II. 
Though, as the Yale historian Timothy Snyder points out, collaborators in the “bloodlands” between Berlin and Moscow often supported the Nazis’ crimes, these societies lack Germany’s guilt complex. 
One reason for this is that Eastern Europeans do not share in the legacy of colonialism. 
The stepchild of empire – migration – is thus a problem to be handled by those who produced it: the old European colonial powers. 
The countries of Eastern Europe – insecure newcomers to the fragile economic progress offered by EU membership – do not believe that they have any obligations in this regard. 
But Eastern Europe does not simply lack the will to welcome migrants; it is actively opposed to doing so, in line with Władysław Gomułka’s maxim that “countries are built on national lines, not multinational ones.” 
This stance, too, stems at least partly from World War II, as first the Holocaust and then the postwar ethnic cleansing of more than 30 million people, including virtually all Germans in the region, reinforced an aversion to multiethnicity. 
Indeed, multinational states like Czechoslovakia and Yugoslavia disintegrated without dictatorships to hold them together. 
Historical memories die hard. 
Poles and others who fell under Soviet rule after 1945 cannot forgive Western Europe for sacrificing them to Stalin at Yalta. 
Nor do they see their liberation from totalitarianism as a Western European achievement. 
Eastern Europeans’ gratitude lies elsewhere. 
The Jewish Hungarian Nobel laureate Imre Kertész spoke for many in the region when he admitted an inability to shake off his emotional attachment to the United States, which liberated him from Buchenwald and later helped to free Hungary from Soviet Communism. 
In Eastern Europe, the resurgence of authoritarianism – which prevailed in the region even before the Communist era – is propelled by an ingrained fear of being sandwiched between two traditional enemies, Germany and Russia, both of which are still viewed with apprehension. 
To the PiS and the Polish right, the new Poland’s foundations do not lie in the non-violent Solidarity movement’s struggle for freedom in the 1980’s, which caught the imagination of the West; it lies in Poles’ heroic fight against the Asian Bolsheviks and the German hordes during WWII. 
As Polish Foreign Minister Witold Waszczykowski put it, the “Europe of cyclists and vegetarians,” with its naive culture of political correctness and liberalism, represents a threat, not a model. 
Conspicuously, when Germany’s EU Commissioner for the Digital Economy and Society Günther Oettinger first threatened to put Poland’s government under supervision for its takeover of the media and the Constitutional Court, Poland’s justice minister compared the scrutiny to the Nazi occupation. 
And Kaczyński defiantly insisted on staying the course while dismissing threats, “particularly by Germans.” 
This represents a sea change from the last several years, during which Poland emerged as the poster child for the EU’s eastern expansion. 
If Poland leads an axis of wayward member states, the EU’s capacity to protect civil liberties within its borders, much less sway other countries, such as Russia – will be severely diminished. 
And, given the lack of binding instruments to stop member states from moving toward authoritarianism, avoiding such an outcome will not be easy. 
Europe is a continent saturated by history, and haunted by the specter of its repetition. 
But if, as Mark Twain supposedly observed, history rhymes rather than repeating itself, the memory of the past should guide Eastern Europe, not take it hostage. 
The past is a warning, not a destination. 

Eastern Europe’s Ostrich Policy on HIV 
CARDIFF, CALIFORNIA – Russia and Ukraine account for roughly 90% of the 1.5 million people estimated to be infected with HIV in Central and Eastern Europe. 
On a recent trip to these countries, and despite repeated requests, no politician or public-health official in either country would meet with me. 
None returned the phone calls, faxes, or e-mails that I sent after I returned home. 
Both countries have epidemics driven by injecting drug users (IDUs) who share needles and syringes, the most efficient way to transmit HIV. 
Yet proven methods exist to slow the spread of HIV by IDUs. 
If IDUs inject heroin or related opiates – as is primarily the case in Eastern Europe – establishing opiate substitution programs with methadone or buprenorphine can dramatically slow HIV transmission. 
The success of such programs also depends on establishing needle/syringe exchanges at convenient locations, both to provide clean equipment and to draw users into the healthcare system. 
As the third leg of the stool, IDUs need counseling. 
This trio of policies forms the foundation of what’s known among health-care professionals as the “harm-reduction package.” 
Russia and Ukraine, however, spend no money on harm reduction. 
International aid supports harm-reduction efforts in both countries on a modest scale: most of the money comes from the Global Fund to Fight AIDS, Tuberculosis, and Malaria. 
But Russia, owing to a rise in its national income, no longer is eligible for HIV/AIDS Global Fund grants. 
A group of non-governmental organizations (NGOs) in Russia that has run a harm-reduction effort with Global Fund money received assurances from the government that it would continue to bankroll the work once that money ran out. 
But last fall the government reneged, and the Global Fund issued the group an emergency grant for two years. 
Cash-strapped Ukraine, which remains eligible for Global Fund help to combat HIV/AIDS, also relies entirely on NGOs – most created by affected communities – to run its harm-reduction programs. 
Aside from shaky funding, the harm-reduction efforts in Russia, and to a large degree in Ukraine, lack a fundamental tool: opiate-substitution treatment. 
Russia bans the use of methadone outright. 
“There is no evidence that use of methadone and buprenorphinefacilitates treatment of drug addicts,” declared Olga Krivonos, head of the Department of Medical Aid and Healthcare Development at Russia’s Ministry of Healthcare and Social Development, in March 2009. 
Ukraine, which legalized the import of methadone only in December 2007, had a mere 5,000 people receiving it when I visited. 
“There is a large body of scientific evidence on the effectiveness of substitution treatment vis-à-vis HIV/AIDS,” concluded the World Health Organization, the United Nations Office on Drugs and Crime, and the Joint United Nations Program on HIV/AIDS in a 2004 policy brief. 
The US Institute of Medicine weighed in on the issue in a 2007 report: “Given the strong evidence of its effectiveness in treating opioid dependence, opioid agonist maintenance treatment should be made widely available where feasible.” 
The popular explanation for lack of action in Russia and Ukraine is that their governments view IDUs as criminals, rather than people with a disease, and adopt an informal let-them-rot policy. 
Indeed, police regularly harass users (and people who help them), making matters worse. 
Many countries outside the region take a similar stance. 
But it’s more complicated in Eastern Europe. 
A leftover Soviet distrust of outsiders colors many opinions, and there’s an oft-repeated claim that the culture is different: an intervention that works in the West might fail in the East. 
There is also a suspicion that dirty capitalist pigs want to profit from the sale of opiate substitutes, regardless of whether they work. 
This is as silly as contending that antiretroviral drugs won’t work in the region, and that treating HIV is all a giant plot on the part of big pharmaceutical companies. 
Humans are humans. 
Harm reduction works everywhere, and the main financial benefactors are the countries themselves, which see reduced spread of HIV, drops in crime, and people returning to work. 
Playing ostrich about harm reduction does not harm only IDUs. 
HIV-infected IDUs of course have sex with non-users. 
Pregnant HIV-infected IDUs transmit the virus to their babies, and sometimes – shockingly often in Russia – abandon their newborns, relinquishing them to the state. 
The people infected by IDUs also can infect others sexually, further fortifying the bridge into the “general” population. 
In July, Vienna hosted the 18th International AIDS Conference, attracting nearly 20,000 people. 
Speakers included Austrian President Heinz Fischer, Bill Clinton, Bill Gates, and South Africa’s Deputy President Kgalema Motlanthe. 
Organizers held the meeting in Vienna specifically because it is “the gateway to Eastern Europe,” and they hoped to involve the region more than ever. 
For the first time, all proceedings were translated into Russian. 
But no high-level Russian or Ukrainian official attended. 
A “Vienna Declaration,” endorsing harm reduction – and emphasizing drug policy based on science, not ideology – was launched at the meeting, and gathered more than 10,000 signatories. 
But the most influential Eastern European signatory was the First Lady of Georgia, a country whose estimated 2,700 HIV-infected people account for just 0.018% of the regional total. 
Judging by their governments’ indifference, the remaining 99.982% of the HIV-infected people in Eastern Europe – and all those they place at risk of harm – can just rot. 


Dying to Live 
FREETOWN, SIERRA LEONE – I was a young medical officer working at the Emergency Unit of the Ola During Children’s Hospital in Sierra Leone when I advised the mother of a child with severe malaria to tell a blatant lie. 
Her daughter Mariama needed a life-saving blood transfusion. 
But her mother had no money to pay for the screening tests and to compensate the blood donor. 
I had seen many children die while their parents frantically sought the necessary funds. 
Determined to save Mariama’s life, I told her mother to go home and announce the death of her daughter. 
I knew this would provoke the sympathy of her relatives, and they would scrape together their meager resources to ensure a proper funeral. 
The mother agreed, and when she returned six hours later, she threw enough money on the table to cover all of Mariama’s care: a blood transfusion and treatment for malaria and worm infestation. 
A few days later, I discharged the still weak but recovering four-year-old from the hospital. 
Though Mariama’s illness did not move her relatives to action, her death did. 
The same thing happened, on a much larger scale, during the Ebola epidemic in West Africa. 
It is believed that the epidemic first took hold in the forested regions of Guinea in December 2013, then gradually spread into Sierra Leone and Liberia. 
The international community watched as the disease ravaged the three countries, decimating villages, wiping out entire families, and bringing economies to a standstill. 
But, at the start, it attracted little attention. 
The international community was content to ignore the truth, until the epidemic had become so widespread that they no longer could. 
By then, however, it was too late to avert a major catastrophe. 
We are still learning the full extent of the Ebola disaster in West Africa. 
For fear of catching the disease, schools were closed, with students and teachers staying at home. 
Indeed, many workers stayed home as well, causing restaurants, bars, and hotels to cease functioning and the economy to grind to a halt. 
Half of all private-sector jobs were lost. 
Farmers’ self-isolation led to a 30% drop in agricultural output. 
People’s social lives stalled as well. 
A curfew was imposed in many districts, and long-distance travel was discouraged. 
In several towns, accepting a visitor into your home meant the risk of a heavy fine. 
Nonetheless, the disease spread into urban areas and, like a wildfire, engulfed the three countries and spilled into others. 
To date, more than 8,500 infections and 3,500 deaths have been reported just in Sierra Leone. 
The health sector has perhaps been the hardest hit. 
The death of more than 220 health-care workers left only 3.4 skilled health personnel for every 10,000 citizens. 
As fear of Ebola mounted, many citizens stopped using health services, reflected in a 23% drop in births in hospitals or clinics, a 21% drop in children receiving basic immunization, and a 39% drop in children treated for malaria. 
As a result, these countries experienced a resurgence in vaccine-preventable diseases, malaria, maternal and child deaths, and acute malnutrition. 
In this sense, the worst may be yet to come. 
But Sierra Leone is picking up the pieces, and has embarked on a two-year recovery plan. 
The first priority is to get the number of Ebola cases to zero and keep it there. 
This means changing the conditions that allowed it to spread so rapidly in the first place. 
The first step is to rebuild the health-care system. 
The plan demands the restoration of health-care services in 40 hospitals and 1,300 primary health-care facilities across the country, so that children and mothers can receive free essential care, vaccinations, and treatment for diseases like tuberculosis, HIV/AIDS, and malaria. 
Moreover, in order to bolster safety – and restore confidence – in the health-care system, the plan calls for better infection-control practices and training for a new cadre of skilled workers. 
And it includes closer cooperation with community groups, which should be engaged in disease surveillance and response. 
The post-Ebola recovery will not be quick, easy, or cheap. 
In Sierra Leone alone, it is expected to cost $1.3 billion – $896.2 million of which has yet to be procured. 
To close that gap, we need help from our African partners and the broader international community. 
Many years ago, without the help of a lie, Mariama would have died. 
Today, we do not need lies. 
We need genuine engagement, open communication, and mutual accountability, at the local, national, regional, and global levels. 
We have already seen how a lack of essential health-care services can devastate a country, taking thousands of lives and shattering many more. 
We came together as a country to beat Ebola, and we are committed to prevent future epidemics. 
With ongoing international support, we will do just that. 

Ebola and Innovation 
BOSTON – Lives are not all that have been lost in the ongoing Ebola crisis. 
In recent discussions about how to combat the virus, the methodical rigor of science and medicine has given way to hyperbolic politics and public hysteria. 
To be sure, informed, data-driven public policy to manage the current outbreak must remain a top priority. 
But it is equally important to take stock of the epidemic’s lessons and to ensure that we are prepared for the emergence of other diseases. 
Two major lessons should be learned from the current Ebola outbreak. 
First, the fight against a single disease must not come at the expense of strengthening an entire health-care system. 
Countries with fragile health systems may be able to tackle a given ailment with the help of NGOs and foreign governments, but they are likely to be dangerously unprepared when confronted with unexpected outbreaks of new diseases. 
In Liberia, for example, the prevalence of malaria in children under the age of five declined from 66% in 2005 to below 32% in 2011. 
Nonetheless, when the Ebola virus entered Liberia from neighboring Guinea earlier this year, the country’s health-care infrastructure was quickly overwhelmed. 
More than 2,000 Liberians have died of the disease, and the virus remains rampant. 
Similarly, unless they strengthen the health-care system as a whole, other countries that have performed well in some areas – say, the fight against Ebola – could still face large death tolls and long-term economic turmoil. 
The second lesson that the Ebola epidemic holds concerns major gaps in our ability to develop new methods and technologies to fight the virus and other diseases like it. 
Our policies and approaches have too often been reactive, not proactive. 
As a result, affordable and easy-to-use protective equipment for frontline health-care workers and point-of-care tests that are quick, reliable, robust, and cost-effective have been hard to find. 
The public and non-profit sectors should support innovations that are not only focused on solving immediate problems, but that also address potential future challenges. 
The United States Agency for International Development, the White House Office of Science and Technology, the Centers for Disease Control and Prevention, and the Department of Defense have declared Ebola a “Grand Challenge for Development” and have launched an effort to sponsor practical, cost-effective innovations to treat and prevent it. 
This is an important step in the right direction, but such efforts need to start well before an outbreak if they are to have a significant impact. 
New technologies require time to be tested before they can be deployed in the field, and scaling up to large-scale production is a major challenge for any new invention. 
The Ebola crisis has shown that we need to think about developing our ability to innovate at the most basic level. 
Just as health-care systems in the developing world need to be strengthened, we also need to build up our capacity to develop new solutions for similar challenges when they arise. 
Engineering schools often fail to provide students with knowledge or understanding of the challenges faced by those outside of the developed world. 
Medical students and public-health professionals sometimes study or do internships in places where the disease burden is high; but a minuscule number of similar opportunities are available to engineers and technologists. 
As a result, talented scientists and engineers are often grossly unaware of problems that need to be solved, and even those that might be motivated to do so are unlikely to apply their training to address new and emerging threats. 
Developing technology takes time and commitment. 
In addition to promoting awareness of global challenges in science and engineering schools, and providing opportunities for students to start addressing them in the field, we need to establish mechanisms that will foster and sustain the ideas that this process brings forward. 
By creating research grants that do not expire as soon as an outbreak is under control, we would substantially increase our portfolio of solutions to manage the next epidemic better. 
When faced with the next Ebola-like challenge, our ability to meet it will depend on the strength of local institutions and our ability to develop the right tools with which to fight it. 
There is no telling how many lives may depend on the steps we take now. 

Ebola and Inequality 
NEW YORK – The Ebola crisis reminds us, once again, of the downside of globalization. 
Not only good things – like principles of social justice and gender equality – cross borders more easily than ever before; so do malign influences like environmental problems and disease. 
The crisis also reminds us of the importance of government and civil society. 
We do not turn to the private sector to control the spread of a disease like Ebola. 
Rather, we turn to institutions – the Centers for Disease Control and Prevention (CDC) in the United States, the World Health Organization (WHO), and Médecins Sans Frontières, the remarkable group of doctors and nurses who risk their lives to save those of others in poor countries around the world. 
Even right-wing fanatics who want to dismantle government institutions turn to them when facing a crisis like that caused by Ebola. 
Governments may not do a perfect job in addressing such crises, but one of the reasons that they have not done as well as we would hope is that we have underfunded the relevant agencies at the national and global level. 
The Ebola episode holds further lessons. 
One reason that the disease spread so rapidly in Liberia and Sierra Leone is that both are war-ravaged countries, where a large proportion of the population is malnourished and the health-care system has been devastated. 
Moreover, where the private sector does play an essential role – vaccine development – it has little incentive to devote resources to diseases that afflict the poor or poor countries. 
It is only when advanced countries are threatened that there is sufficient impetus to invest in vaccines to confront diseases like Ebola. 
This is not so much a criticism of the private sector; after all, drug companies are not in business out of the goodness of their hearts, and there is no money in preventing or curing the diseases of the poor. 
Rather, what the Ebola crisis calls into question is our reliance on the private sector to do the things that governments perform best. 
Indeed, it appears that with more public funding, an Ebola vaccine could have been developed years ago. 
America’s failures in this regard have drawn particular attention – so much so that some African countries are treating visitors from the US with special precautions. 
But this just echoes a more fundamental problem: America’s largely private health-care system is failing. 
True, at the top end, the US has some of the world’s leading hospitals, research universities, and advanced medical centers. 
But, though the US spends more per capita and as a percentage of its GDP on medical care than any other country, its health outcomes are truly disappointing. 
American male life expectancy at birth is the worst of 17 high-income countries – almost four years shorter than in Switzerland, Australia, and Japan. 
And it is the second worst for women, more than five years below life expectancy in Japan. 
Other health metrics are equally disappointing, with data indicating poorer health outcomes for Americans throughout their lives. 
And, for at least three decades, matters have been getting worse. 
Many factors contribute to America’s health lag, with lessons that are relevant for other countries as well. 
For starters, access to medicine matters. 
With the US among the few advanced countries that does not recognize access as a basic human right, and more reliant than others on the private sector, it is no surprise that many Americans do not get the medicines they need. 
Though the Patient Protection and Affordable Care Act (Obamacare) has improved matters, health-insurance coverage remains weak, with almost half of the 50 US states refusing to expand Medicaid, the health-care financing program for America’s poor. 
Moreover, the US has one of the highest rates of childhood poverty among the advanced countries (which was especially true before austerity policies dramatically increased poverty in several European countries), and lack of nutrition and health care in childhood has lifelong effects. 
Meanwhile, America’s gun laws contribute to the highest incidence of violent deaths among advanced countries, and its dependence on the automobile underpins a high rate of highway fatalities. 
America’s outsize inequality, too, is a critical factor in its health lag, especially combined with the factors mentioned above. 
With more poverty, more childhood poverty, more people without access to health care, decent housing, and education, and more people facing food insecurity (often consuming cheap foods that contribute to obesity), it is no surprise that US health outcomes are bad. 
But health outcomes are also worse in the US than elsewhere for those with higher incomes and insurance coverage. 
Perhaps this, too, is related to higher inequality than in other advanced countries. 
Health, we know, is related to stress. 
Those striving to climb the ladder of success know the consequences of failure. 
In the US, the rungs of the ladder are farther apart than elsewhere, and the distance from the top to the bottom is greater. 
That means more anxiety, which translates into poorer health. 
Good health is a blessing. 
But how countries structure their health-care system – and their society – makes a huge difference in terms of outcomes. 
America and the world pay a high price for excessive reliance on market forces and an insufficient attention to broader values, including equality and social justice. 

Ebola in America 
NEW YORK – Until Thomas Eric Duncan brought Ebola into the United States, the disease was largely dismissed as an exotic pestilence of concern mainly to impoverished West Africa, and those who dared to volunteer there. 
And its transmission to two nurses responsible for Duncan’s care – likely resulting from several breaches of medical protocol – has focused intense scrutiny on US preparedness for a possible outbreak. 
President Barack Obama even announced last week the appointment of an “Ebola Czar” to manage the detection, isolation, and control of the virus in the US. 
Medical and public health experts had been assuring the public that there was little cause for fear. 
The Centers for Disease Control and Prevention (CDC) and other health agencies were working behind the scenes, painstakingly tracing anyone who may have come into contact with Duncan and quarantining those who might transmit the disease. 
Transmission in the US was nearly impossible, owing to the strength of the US health system, it was thought. 
But, as recent events have illustrated, robust health agencies should not be taken for granted. 
In fact, over the past decade, the government has slashed budgets at several top health agencies, including the CDC, the National Institutes of Health (NIH), and state and local health departments. 
Between 2005 and 2012, for example, the CDC lost 17% of its funding, and officials recently reported that funding allocated for Ebola-type health emergencies is $1 billion less than it was in 2003. 
The challenges faced at the state and local levels may be even greater. 
Some 23% of local health departments reported that public health preparedness programs were reduced or even eliminated in 2011, while a further 15% reported similar cuts in 2012. 
In 2014 alone, the Hospital Preparedness Program, which links regional hospitals with local health departments to prepare for potential public health emergencies, suffered $100 million in budget cuts. 
These reductions have already left their mark. 
The Hospital Preparedness Program was designed specifically to train health personnel on disease containment in the setting of unforeseen epidemics, such as Ebola. 
Had it been adequately funded, perhaps the two nurses now infected would still be healthy. 
The NIH, which funds important advances in our understanding and treatment of diseases like Ebola, has also suffered cutbacks. 
Its budget has stagnated for most of the past decade, except for years when it was dramatically reduced, such as in 2013. 
This has forced productive research laboratories to close, putting potentially life-saving research – like that on an Ebola vaccine – on the back burner. 
One explanation for the drastic budget cuts of recent years is that public health institutions usually operate with little fanfare and out of the public eye. 
At their best, they prevent disease without a trace, leaving little visible evidence of their crucial function. 
Hence, funding for public health has been a tough sell in good economic times, and is one of the first targets for retrenchment. 
But global health emergencies like the current Ebola epidemic highlight the folly of these fiscal priorities. 
Though we may not lean too heavily on our health infrastructure typically, its importance becomes all too apparent when disease and death come knocking at our door. 
Indeed, though the threat of a serious Ebola outbreak in the US remains minimal, that is no reason for complacency. 
As the number of cases in West Africa rises, so does the potential for outbreaks outside of that context. 
And when members of the international community cannot contain the epidemic, the richest and most powerful actor, namely the US, has an obligation to step in and try to do so. 
But budget cuts have damaged America’s ability to fulfill this obligation, and thus may cost more than policymakers bargained for. 
In late September, Obama committed $88 million and 3,000 troops to support the fight against Ebola in Liberia. 
But his decision came only after the epidemic had been smoldering for many months, with 6,000 Ebola cases confirmed and many more believed to be undetected. 
Had CDC funding been at an appropriate level, US support – in the form of highly trained public health professionals, rather than ground troops – might have been deployed much earlier and been more effective. 
Ironically, the CDC and its leadership have come under intense scrutiny over the mishandling of Duncan’s care and the Ebola transmissions that resulted from it. 
However, had the same lawmakers who are now deriding the CDC listened to pleas for more support and warnings of the consequences of poor funding over the past several years, perhaps the US would not be in the situation in which it finds itself today. 
The guiding principle of public health is to prevent disease before it strikes, and this requires long-term investment in institutions that can protect us. 
Our collective health and wellbeing are evidence of such institutions’ effectiveness. 
Fortunately, the Ebola outbreak is unlikely to expose Americans fully to the poor fiscal choices of the past decade. 
But the disease’s sudden appearance on the global scene serves as a stark reminder of what can happen if we do not remain vigilant. 
The next epidemic could be just around the corner. 

Fighting Ebola on All Fronts 
PARIS – Judging by the media coverage in the United States and Europe of the Ebola outbreak in West Africa, one might conclude that conditions in the affected countries are gradually improving. 
But, though the epidemic is no longer a front-page story, the virus is far from being contained. 
On the contrary, it remains a serious global health threat. 
I recently traveled to Conakry, the capital of Guinea, together with French President François Hollande, and then visited Macenta, a rural district in the country’s forest region, close to where the outbreak began. 
In both places, I witnessed firsthand the virus’s devastating impact: suffering, fear, despair, and, ultimately, death. 
Even the trivial has become weighted with meaning: no one shook hands. 
The truth is that the Ebola virus continues to spread – and quickly. 
Granted, it has been contained in Liberia, but only in Liberia, and even there, there is no way to ensure that another outbreak will not occur. 
Ebola is spreading in ways that differ from what we have previously seen. 
The virus does not spread as rapidly as many others, such as influenza, which in the past limited the scale of epidemics, particularly because outbreaks were confined to rural areas. 
But this time, the virus has entered cities and towns, making it especially dangerous. 
High population density provides fertile ground for any virus, let alone Ebola. 
West Africa’s treacherous combination of widespread poverty, scarce medical resources, and crowded urban areas can be devastatingly deadly. 
Nearly 7,500 people are reported to have died from Ebola this year. 
More than 16,000 are reported to have been infected. 
These are ballpark figures, and while they provide important information about the trajectory of the epidemic and the effectiveness of response efforts, officials warn that the real numbers are probably far higher. 
Health is a global public good. 
In most countries, the right to health is enshrined in the constitution or legislation. 
The right, according to the World Health Organization (WHO), includes “access to timely, acceptable, and affordable health care of appropriate quality.” 
But, in the case of viruses like Ebola, few states, if any, can issue such guarantees. 
From a moral point of view, it is incumbent upon the international community, with its institutions, authorities, resourceful businesses, and individuals – as well as its knowledge and wealth – to deploy the necessary means to stop the spread of Ebola. 
The imperative is equally strong from a purely self-interested point of view. 
If the virus is not quickly contained, everyone – every country – will be at risk. 
The good news is that Ebola can be contained. 
Eventually, it can be eradicated. 
If we are to achieve this, however, the virus must be understood and diagnosed. 
Its spread must be prevented, and treatment must be offered. 
Though there is no clinically proven vaccine against Ebola, this could soon change. 
Since the outbreak of the virus in March, the Institut Pasteur, an independent, non-profit research organization, has worked to understand how the virus can be contained and what treatment can be offered. 
Our researchers are tracking the spread of the virus to understand how epidemics evolve, and we are working to empower local scientific and medical personnel. 
We expect to have two vaccine agents ready for clinical trials in 2015. 
The Institut Pasteur’s Ebola Task Force is fighting the virus on the ground in West Africa and in the laboratory in France, studying the virus and how it spreads, and leaving no stone unturned to find a medical solution that will stop this outbreak and prevent new ones. 
Together with the WHO and non-governmental organizations including Médecins Sans Frontières and the Red Cross and Red Crescent, the Institut Pasteur is committed to fighting the virus and its causes. 
Countries around the world have pledged support, financial and otherwise, to tackle the most immediate concerns: helping affected people and communities. 
Many countries already contribute to research into the causes, spread, and treatment of the Ebola virus. 
An international “coalition of the willing” has been established, and we call on all states, relevant organizations, interested businesses, and qualified individuals to join it. 
Together, we can and will see the end of Ebola. 

Ebola and Beyond 
WASHINGTON, DC – The United States and Europe have grossly overreacted to a few isolated cases of the Ebola virus within their borders. 
These panicked responses are not just futile. 
By violating basic scientific principles, they defy the fundamental ethical criterion for compulsory public-health action. 
And when it comes to protecting citizens from Ebola – not to mention preventing similar global health crises from emerging in the future – these responses may well be counterproductive. 
The most egregious examples of overreach have occurred in the US, where the initial response entailed enhanced screening of travelers from Guinea, Liberia, and Sierra Leone. 
More problematic, several states instituted mandatory 21-day quarantines for volunteer health workers returning to the US from Ebola-stricken countries. 
Fortunately, the political backlash against the quarantine orders quickly prompted some state governors to ease them. 
It is time for developed countries to recognize that the best way to protect their citizens from Ebola is to help stop the spread of the virus in West Africa. 
This requires, first and foremost, a sustained “surge response” to Ebola in the three most affected countries. 
Such a response must be underpinned by adequate (and considerable) funding; well-trained doctors, nurses, and community health workers; and improved local capacity for diagnosis, treatment, contact tracing, and the isolation of infected individuals. 
There is no time to waste. 
Indeed, the dearth of bold leadership has already delayed an effective international response to the current Ebola outbreak for far too long, drastically increasing the costs of the crisis. 
Beyond stemming the spread of Ebola, the international community must apply the lessons of the current crisis to future potential health hazards, by developing a credible response that emphasizes early, robust, and evidence-based action. 
To this end, three key initiatives should be launched. 
First, the World Health Organization should commit to an emergency contingency fund that it could deploy for surge capacity as soon as it declares a “public health emergency of international concern.” 
Had such funding been available to mount a robust initial response when Ebola emerged, the WHO would have had a strong incentive to declare an international emergency in a timely manner. 
In fact, a WHO review committee recommended just such a fund, amounting to at least $100 million, in 2011. 
Though that would have been eminently affordable, representing less than 0.5% of international health assistance, the WHO failed to establish it. 
The folly of this decision is now painfully obvious, as is the fact that the contingency fund should be significantly larger – up to $500 million. 
The second pillar of an effective crisis-response strategy is an emergency reserve workforce – established by the WHO, in cooperation with national governments – comprising well-trained health professionals who are prepared for rapid deployment in low-resource settings. 
This would provide countries with weak health-care systems – which are particularly susceptible to disease outbreaks – with the human resources they need to bring health crises quickly under control. 
Of course, such measures do not diminish countries’ responsibility for strengthening their health-care systems and safeguarding their populations. 
That is why the last and most important step toward preventing future global health crises is the creation of an international health system fund to support national efforts to acquire the capacity both to respond effectively in emergencies and to deliver comprehensive health services in normal times. 
Such a fund would fit into the International Health Regulations framework that was agreed to in 2005, and advance the cause of universal health care, based on the principle that all people have a right to health. 
Governments would also be expected to allocate adequate domestic funds to achieve these goals, with, for example, African heads of state fulfilling the 2001 Abuja Declaration’s pledge to allocate at least 15% of national budgets to the health sector. 
But, for lower-income countries, significant progress toward establishing strong health-care systems would be virtually impossible without support from a sustainable international fund. 
Given that creating such a fund would entail a massive multi-billion dollar investment in lower-income countries, social mobilization is the key to generating the necessary political support. 
In this sense, the global response to AIDS – spurred by the US President’s Emergency Plan for AIDS Relief and the Global Fund to Fight AIDS, Tuberculosis, and Malaria – could serve as a useful model. 
Beyond establishing strong health-care infrastructure, national governments will need to develop systems of accountability to deliver health services to their populations. 
This includes fair and transparent stewardship of resources, anti-corruption safeguards, tools for monitoring progress, civil-society engagement, and accountability for failures. 
To advance these objectives, an international coalition is pushing for a Framework Convention on Global Health, aimed at fostering good governance for health at the local, national, and global levels. 
The treaty, based on the principle of a right to health, would provide clear guidelines for the allocation of funding and other responsibilities. 
The West African Ebola epidemic should inspire a course correction on international health policy, reinforcing the need for rapid-response tools and strong health-care infrastructure. 
Establishing frameworks to provide scalable, sustainable funding to achieve these goals is a wise and affordable investment – one that is in everyone’s interest. 
This is one humanitarian response that would provide vast benefits worldwide, now and in the future. 

Development for the People 
NEW YORK – The Ebola epidemic in West Africa is destroying lives, decimating communities, and orphaning children at a rate not seen since the region’s brutal civil wars ended more than a decade ago. 
In Liberia, 60% of markets are now closed; in Sierra Leone, only one-fifth of the 10,000 HIV patients who are on anti-retroviral treatments are still receiving them; and Guinea’s government is reporting a $220 million financing gap because of the crisis. 
If the outbreak is not contained soon, most of the economic and social gains achieved since peace was restored in Liberia and Sierra Leone, and since Guinea’s democratic transition began, could be reversed. 
All three countries remain fragile, divided, and, as the current crisis highlights, uniquely prone to shocks. 
More broadly, the region’s current crisis should inspire reflection about how the world supports and advances development. 
One important reason for these countries’ vulnerability is the consistent lack of investment in their populations, which has prevented ordinary citizens from reaping the benefits of economic growth. 
Indeed, while the economies of Guinea, Liberia, and Sierra Leone grew rapidly in the ten years prior to the Ebola outbreak – at average annual rates of 2.8%, 10%, and 8%, respectively – their populations have seen little improvement in their daily lives. 
More than 65% of foreign direct investment has gone toward mining and logging, which are notorious for generating little employment and concentrating wealth in the hands of a few. 
Likewise, though health services in Liberia and Sierra Leone improved after their civil wars ended, quality and coverage have remained well below West African standards. 
When Ebola struck, Liberia had only 120 doctors for its four million citizens. 
Add to that sprawling urban slums – semi-governed, overcrowded, and poorly sanitized – and it is not surprising that these countries have struggled to contain the epidemic. 
The threat that Ebola poses in all three countries extends beyond health care. 
Throughout the region, a history of conflict and a legacy of poor governance have fueled a deep distrust of governments and state institutions, as indicated in a 2012 Afrobarometer survey. 
Indeed, these countries’ lack of an established social contract has been the main obstacle to establishing political authority and effective governance. 
Moreover, this environment has created fertile conditions for the spread of wild theories including that the government and aid workers are conspiring to infect citizens. 
Many people deny that the Ebola virus exists at all, claiming that their governments have invented it to raise additional funds – which they will never see – from the international community. 
Such doubts and fears are leading families to hide their dead and conduct funerals at night, with some communities going so far as to attack health workers. 
All of this is making it extremely difficult to halt the spread of the disease. 
With a highly contagious and lethal virus devastating poor and fragmented societies that distrust their leaders, business as usual is not enough. 
The only way to halt the current Ebola outbreak, and prevent similar epidemics, is to address the fundamental social and political vulnerabilities that have allowed the virus to flourish. 
The key is to place people at the center of development efforts, by increasing investments in health care, education, and other public services. 
At the same time, a strong effort must be made to bolster job creation. 
With a reliable support structure and adequate economic opportunity, households – and, in turn, countries – become more resilient. 
Those at the forefront of the fight against Ebola – including the United Nations Development Program – have been mobilizing communities against the disease, supporting medical teams, and helping survivors and families of the infected cope with the tragedy. 
While these efforts could not be more important, they must be backed by a longer-term strategy to strengthen these fragile countries’ defenses. 
Ebola will be defeated, but the vulnerabilities that this outbreak has exposed should spur a fundamental shift in focus among policymakers. 
The development approach that dominates global thinking today emphasizes economic growth and state-building over social progress. 
But the only way to boost a society’s resilience and ability to trust impersonal institutions is to give the people who comprise it the tools – and confidence – they need to prosper. 

Diseases Without Borders 
DAVOS – Today’s world seems more risk-laden than ever. 
The increasingly visible effects of climate change, rising geopolitical tensions, state crisis and collapse, inadequate or unequal economic opportunities, and the spread of infectious diseases – to name just some of the highest-profile threats – have created an environment of great uncertainty. 
Will 2015 be the year when these risks come to a head, or the moment when world leaders come together to develop real strategies for mitigating them? 
This week, I am joining leaders from the worlds of business, government, politics, the arts, and academia at the World Economic Forum in Davos, Switzerland, to discuss the risks that the world faces. 
Of course, determining which challenges merit the most attention will not be easy. 
That is where the WEF’s annual Global Risks reports can help. 
Drawing on the perspectives of roughly 900 experts and decision-makers from around the world who participate in the WEF’s global risks-perception survey, this year’s report found that, for the first time in its ten-year history, economic risks are taking a backseat to environmental and geopolitical concerns. 
Specifically, participants rated interstate conflict with regional consequences as the top risk, in terms of likelihood, facing the world in 2015, with extreme weather events coming in second. 
The top risks in terms of impact were water crises and the spread of infectious diseases. 
The point, of course, is not simply to highlight how much danger the world currently faces. 
By illuminating experts’ top-rated risks, the report highlights important opportunities for action. 
According to WEF founder Klaus Schwab, 2015 can be a “year of destiny for humankind.” 
Indeed, if global leaders – from multilateral organizations, governments, the private sector, and civil-society groups – seize opportunities for closer cooperation, long-simmering risks can be cooled before they boil over. 
One area where concerted, collaborative action can make a major difference is the spread of infectious diseases. 
During the meeting in Davos, officials will discuss the creation of a new global pandemic emergency facility that would enable countries to respond quickly to crises within their borders by providing them with the needed funds. 
To understand how badly the world needs this capacity, one need look no further than the ongoing Ebola pandemic, which has ravaged West African societies, claiming thousands of lives and upending many more. 
A rapid and determined response could have done much to contain the virus. 
But the international response was delayed and inadequate. 
Indeed, six months into the crisis, just 30 medical-response teams were treating and caring for patients on the ground in Guinea, Liberia, and Sierra Leone. 
The shortage of health workers, facilities, and supplies prevented many people from receiving treatment, allowing the virus to spread further. 
Fear of the disease’s seemingly inexorable spread hampered trade, business activity, and travel in the affected countries. 
In December, the World Bank downgraded its growth estimates for the formerly fast-growing economies of Guinea, Liberia, and Sierra Leone, which are now expected to lose $1.6 billion in income in 2015. 
In order to become better prepared to tackle future pandemics, the world must invest now in strengthening public-health systems, bolstering developing countries’ disease-prevention capacity, and establishing new and flexible financing instruments. 
A global pandemic emergency facility could mobilize public and private resources and frontload financing, so that when a global health emergency arises, funding is in place to support an immediate response at scale. As the Ebola crisis has demonstrated, passing the hat once a pandemic has taken hold is far too time-consuming and carries huge economic and, more important, human costs. 
Such a global resource could underpin the development of a comprehensive strategy to address the next outbreak, including a plan for putting health workers and supplies on the ground quickly. 
It could even provide a market signal for producers of vaccines and drugs. 
The WEF’s Global Risks report emphasizes the need for robust plans to face the threat of pandemics. 
This is especially urgent in light of the rapid growth of cities and informal settlements – where infectious diseases can spread more easily – in developing countries. 
We need to start creating those plans now. 
After all, we do not know when the next pandemic will strike. 
We cannot eliminate global risk. 
We can, however, make our economies and societies more resilient and thus better equipped to minimize the impact of the threats we face. 
In this sense, forward-thinking initiatives like the global pandemic emergency facility are crucial to making the world a safer place for all of us. 

Three Global Health Threats 
SAN FRANCISCO – The tragic Ebola outbreak in West Africa has underscored the imperative of strengthening health systems at both the national and global level. 
But, though Ebola has focused the world’s attention on systemic shortcomings, the goal must be to combat the abiding epidemics that are quietly inflicting suffering and death on populations worldwide. 
Ebola has undoubtedly wrought tremendous agony. 
But it is not the first – or the most devastating – pandemic the world has faced. 
In fact, smallpox is the deadliest disease known to humanity; until Edward Jenner developed the vaccine in 1796, it was the leading cause of death in Europe. 
Before its eradication in 1980, it killed an estimated 300-500 million people. 
The Bubonic plague of the fourteenth century killed 75-100 million people – more than half of Europe’s population. 
Nearly 75 million people, or 3-5% of the world’s population, died in just a few months during the 1918 influenza pandemic – more than twice the number of people killed in World War I. 
The world continues to grapple with HIV/AIDS, which has already caused more than 40 million deaths and infects a similar number of people today, with 95% of the epidemic’s victims living in developing countries. 
Only when HIV/AIDS began to gain traction in advanced countries were highly effective anti-retroviral therapies developed – therapy that most of the poor people suffering from the disease could not access or afford. 
Similarly, the failure of governments, multilateral organizations, and NGOs to respond quickly enough to the Ebola outbreak reflects the fact that the disease has ravaged poor countries. 
But, at a time of unprecedented global interconnectedness, everyone has a stake in ensuring that adequate health-care systems and structures are in place to address such a pandemic. 
Achieving this requires providing the needed investment; after all, effective national health systems and agile surveillance are the first lines of defense against outbreaks of disease. 
At this point, Ebola is not only a health crisis, but also a humanitarian, economic, and political crisis. 
To be sure, some progress has been made. 
The United Nations Mission for Ebola Emergency Response’s “70/70/60” plan – to isolate 70% of Ebola patients and ensure that 70% of burials are conducted safely within 60 days – has largely been implemented, reducing the number of new cases considerably. 
But people are still suffering and dying – often owing to a lack of access to credible information or adequate treatment. 
Of course, when it comes to safeguarding the health of populations, there is a fine line between protecting the public and impinging on individual rights. 
That is why all public-health interventions must focus first and foremost on scientific facts, and avoid emotional or panicked responses. 
In this context, the imposition of mandatory quarantines on travelers from Ebola-affected countries was an obvious policy failure – just as they were when authorities tried to contain the Black Death of 1350 in Europe or the Plague of London in 1665. 
Instead of wasting time on fear-based strategies, the international community must leverage human and financial resources to ensure fact-based, concerted, collective action. 
Such a united approach is possible; indeed, it has happened before. 
At the turn of the century, the establishment of institutions like the Global Fund to Fight AIDS, Tuberculosis, and Malaria, the Bill and Melinda Gates Foundation, and GAVI, the Vaccine Alliance, coincided with a renewed effort to improve global health. 
The UN’s commitment to the Millennium Development Goals – which included four health-related targets, covering nutrition, maternal and child health, and infectious diseases – reflected a political consensus to improve health worldwide. 
This institutional architecture has facilitated considerable progress in many of these areas; for example, the under-five mortality rate has plummeted by 49% since 1990. 
But there is far more to be done. 
In regions like Southeast Asia and Sub-Saharan Africa, maternal and child health and infectious diseases remain priorities. 
In fact, the ten countries with the highest child mortality rates are all located in Sub-Saharan Africa; a baby born in West Africa is 30 times likelier to die before the age of five than one born in Western Europe. 
Even within countries, massive inequalities remain. 
For example, there is a ten-fold difference in infant mortality between municipalities in the Mexican states of Guerrero and Nuevo León. 
Moreover, silent epidemics have taken hold, particularly in lower-income countries, as the combination of mega-trends like urbanization, population aging, obesity, sedentary lifestyles, smoking, and alcohol consumption has spurred the rise of chronic non-communicable diseases (NCDs). 
For adults in most countries, cancer, diabetes, and cardiovascular disease have become leading causes of disability and death. 
Emerging infectious diseases like Ebola may be more compelling, but the health impact of chronic NCDs, not to mention their high and growing social and economic costs, is substantially larger. 
There is no time to waste. Policymakers must pursue aggressive action to curb the spread of risk factors like the consumption of tobacco, alcohol, and obesogenic foods. 
The world is facing a three-prong health challenge: We must build sustainable national and global health systems that can respond quickly and effectively to crises like Ebola; eliminate or control infectious diseases; and address the quietly rising epidemic of chronic NCDs. 
To succeed on all three fronts, we need sustained investment in health infrastructure, management, and personnel. 
Equality is key. 
This means improving access to health care and education. 
But it also means addressing the deeper social inequities that extend beyond the public-health agenda. 
In formulating the post-2015 development goals, world leaders must remember that health is a fundamental human right. 

Turning the Page on Ebola 
WASHINGTON, DC – The Ebola outbreak that began last year in Guinea, Sierra Leone, and Liberia, three of the four countries of the Mano River Union, is the most severe on record since the disease was first diagnosed in Central Africa in 1976. 
The impact of the epidemic has been devastating, calling into question our three countries’ significant socioeconomic progress in the aftermath of decades of conflict and instability. 
The region has so far registered a total of 25,791 cases and 10,689 deaths – almost ten times the number of deaths from all other Ebola epidemics combined. 
For 2014, the projected growth rates for our three countries were 4.5%-11.3%. 
These projections have now been reduced to 2.2% at best. 
In the absence of mitigation measures, a recession cannot be ruled out. 
The uncontrolled spread of the disease exposed the shortcomings of our national health care systems, as well as regional and global institutions’ weak capacity for coordination and effective response. 
Simply put, we were ill prepared to cope with, much less prevent, an outbreak on this scale. 
We bear a collective responsibility for the thousands of lives lost to Ebola and the tens of thousands affected by the disease. 
And, today, thanks to institutional improvement and adaptation, we are closer to winning the fight against Ebola. 
Although the disease has not been contained and eradicated throughout the region, its spread has slowed; now we have to start planning our recovery, which must include strengthening the national, regional, and international systems that protect our people’s lives and futures. 
We, the presidents of the three affected countries, met in Conakry, Guinea, in February, joined by Côte d’Ivoire, to adopt a common strategy to end the epidemic and guide post-Ebola socioeconomic recovery. 
This meeting was followed by a donors meeting in Brussels at the beginning of March, and a meeting in Freetown, Sierra Leone, two weeks later to coordinate our technical committees. 
We will continue to build on these efforts in Washington, DC, at the spring meetings of the International Monetary Fund and the World Bank. 
We are determined to eradicate Ebola by exchanging information, sharing technical expertise, creating innovative and accessible community health systems, and intensifying public education strategies, including steps that can be shared in families, such as applied water, sanitation, and hygiene (WASH) standards. 
Only then can investment by the private sector – the engine of employment and stable livelihoods – begin to recover. 
The spread of the Ebola virus has been facilitated by our countries’ shared history and culture, which has enabled the disease to cross borders easily and move quickly from remote rural areas to urban centers. 
Unfortunately, the epidemic forced us to close some of our borders, preventing access to relatives and care. 
We want our infrastructure, health policies, and economic strengths to benefit people across borders through links – community support systems and development corridors – that encourage collaboration and job creation. 
And we ask our international partners to support a common economic stimulus plan, with an emphasis on practical solutions that can enhance growth and increase employment. 
Four elements are essential to our recovery effort. 
The first component is the creation of resilient public health systems, which requires trained community health workers in order to expand coverage in rural areas. 
It also requires nationwide water and sanitation programs and well-equipped centers for the control of infectious diseases in each country. 
Second, we need to focus on infrastructure, particularly roads and electricity and telecommunication networks. 
We ask the African Development Bank to take the initiative in creating an infrastructure fund, an extension of the Mano River Initiative, launched in 2013, with the objective of furthering regional integration. 
And we ask our partners to recognize that programs originally planned on a ten-year time horizon, must be implemented urgently. 
Third, we need to support economic recovery by encouraging confidence within the private sector, which has been hit by rising costs in the region. 
Specifically, the region would benefit from grants to local entrepreneurs, concessional financing and loans to foreign investors, and budgetary support from the government. 
Finally, in line with the recommendation of the Commission for Africa, the United Nations, and the African Union, we ask for a total cancellation of our foreign debt. 
This would allow us to recover the fiscal flexibility we need to enable us to co-finance the reconstruction of our health systems. 
We urge our international partners to support our economic recovery in the same spirit of cooperation, and with the same sense of urgency, that helped us fight the Ebola virus. 
Together, we can build health care systems, infrastructure, and regional institutions that will be stronger than before the start of the epidemic. 
Together, we can build a lasting legacy of health and progress for our peoples. 

Europe’s Trial by Crisis 
BERLIN – Some 2,500 years ago, the ancient Greek philosopher Heraclitus concluded that war is the father of all things. 
He might have added that crisis is their mother. 
Fortunately, war between world powers is no longer a realistic option, owing to the threat of mutual nuclear destruction. 
But major international crises, such as the current global financial crisis, remain with us – which might not be an entirely bad thing. 
Just as in war, crises fundamentally disrupt the status quo, which means that they create an opportunity – without war’s destructive force – for change that in normal times is hardly possible. To overcome a crisis requires doing things that previously were barely conceivable, let alone feasible. 
That is what has happened to the European Union over the last three years, because the global financial crisis has not only shaken Europe to its foundations; it has assumed life-threatening proportions. 
Compared to the beginning of 2009, we are now dealing with a significantly different EU – one that has become divided between a vanguard of member states that form the eurozone and a rearguard, consisting of member states that remain outside it. 
The reason is not evil intent, but rather the pressure of the crisis. 
If the euro is to survive, eurozone members must act, while other EU members with various levels of commitment to European integration remain on the fringe. 
Indeed, almost all taboos that existed after the eruption of the crisis have now been abolished. 
Most were established at German instigation, but now they have been removed with the German government’s active support. 
It is an impressive list: national responsibility for bank rescues; the sanctity of the EU treaty’s proscription of bailouts for governments; rejection of European economic governance; the ban on direct government financing by the European Central Bank; refusal to support mutual liability for debt; and, finally, the transformation of the ECB from a copy of the old Bundesbank into a European Federal Reserve Bank based on the Anglo-Saxon model. 
What remains is the rejection of Eurobonds, but that, too, will ultimately disappear. 
The only question is whether that taboo will fall before or after next year’s German general election. 
The answer depends on the future course of the crisis. 
Germany, Europe’s largest economy, is playing a strange, sometimes bizarre, role in the crisis. 
At no point since the founding of the Federal Republic in 1949 has the country been so strong. 
It has become the EU’s leading power; but it is neither willing nor able to lead. 
Precisely for this reason, many of the changes in Europe have occurred despite German opposition. 
In the end, the German government has had to resort to the art of the political U-turn, with the result that Germany, though economically strong, has grown institutionally weaker – a dynamic exemplified by its reduced influence in the ECB’s Governing Council. 
The old Bundesbank was laid to rest on September 6, when the ECB adopted its “outright monetary transactions” program – unlimited purchases of distressed eurozone countries’ government bonds – over the objections of a lone dissenter: Bundesbank President Jens Weidmann. 
And the undertaker was not ECB President Mario Draghi; it was German Chancellor Angela Merkel. 
The Bundesbank did not fall victim to a sinister southern European conspiracy; rather, it rendered itself irrelevant. 
Had it gotten its way, the eurozone would no longer exist. 
Placing ideology above pragmatism is a formula for failure in any crisis. 
Currently, the eurozone is on the threshold of a banking union, with a fiscal union to follow. 
But, even with only a banking union, the pressure toward political union will grow. 
With 27 members (28 with the approaching addition of Croatia), EU treaty amendments will be impossible, not only because the United Kingdom continues to resist further European integration, but also because popular referenda would be required in many member states. 
These plebiscites would become a reckoning for national governments on their crisis policies, which no sound-minded government will want. 
This means that intergovernmental agreements will be needed for some time to come, and that the eurozone will develop in the direction of inter-governmental federalism. 
This promises to be exciting, as it will offer completely unexpected possibilities for political integration. 
In the end, former French President Nicolas Sarkozy has prevailed, because the eurozone today is led by a de facto economic government that comprises member countries’ heads of state and government (and their finance ministers). 
European federalists should welcome this, because the more these heads of state and government turn into a government of the eurozone as a whole, the faster their current dual role as the EU’s executive and legislative branch will become obsolete. 
The European Parliament will not be able to fill the emerging vacuum, as it lacks fiscal sovereignty, which still lies with national parliaments and will remain there indefinitely. 
Only national parliaments can fill the vacuum, and they need a common platform within the eurozone – a kind of “Euro Chamber” – through which they can control European economic governance. 
Federalists in the European Parliament, and in Brussels generally, should not feel threatened. 
On the contrary, they should recognize and use this unique opportunity. 
National MPs and MEPs should come together quickly and clarify their relationship. 
In the medium term, a European Parliament with two chambers could emerge. 
This crisis offers a tremendous opportunity for Europe. 
It has defined the agenda for years to come: banking union, fiscal union, and political union. 
What remains missing is an economic-growth strategy for the crisis countries; but, given mounting unrest in southern Europe, such a strategy is inevitable. 
Europeans have reason to be optimistic if they recognize the opportunity that their crisis has created – and act boldly and decisively to seize it. 


The ECB Goes Rogue 
TILBURG – The European Central Bank has done it again. 
At its recent meeting in Frankfurt, the ECB Governing Council decided to increase bond purchases further, from €60 billion ($67 billion) to €80 billion per month, with corporate bonds now also eligible for purchase. 
The deposit rate, too, was reduced once again, and now stands at -0.4%. 
This is far from a neutral policy – and it takes the ECB far beyond its mandate of preserving monetary stability. 
The motivation behind the recent policy moves is clear: ECB President Mario Draghi is committed to curbing deflation, a serious threat to economic growth. 
After all, in a deflationary environment, it is more difficult to repay debt, so companies will tend to postpone investment. 
Recent Eurostat figures, which show that the annual consumer-price index fell by 0.2% last month, heighten concerns. 
But while what is happening is technically deflation – that is, sustained price-level decreases that may be reflected in employment or other contracts – it is not structural deflation. 
Instead, it largely reflects low oil prices, which have fallen by more than 70% since June 2014. In fact, if we discard energy and food prices, the eurozone is in a situation of structural low inflation. 
That, together with the oil price, should actually benefit the economy, as it gives a boost to consumption and investment. 
So why has the ECB’s massive quantitative easing (QE) program, which has put plenty of money into circulation, failed to stimulate demand for goods and services? 
One problem is that banks are reluctant to pass the negative deposit rate through to the savings rate, for fear of losing depositors. 
They are thus forced to increase further their margins on mortgages and loans to small and medium-size enterprises. 
As a result, contrary to the goal of QE, they are extending less credit to households and companies. 
Meanwhile, banks, households, and small and medium-size enterprises are still excessively leveraged, and need time to pay down their debts. 
While this might seem to suggest that the ECB’s focus on boosting inflation is the right one, the reality is that a straightforward expansion of the bond-purchase program ignores the underlying structural issues afflicting the eurozone’s weaker economies. 
Worse, by enabling those economies to borrow cheaply, QE permits them to avoid implementing difficult structural reforms. 
Draghi and the doves on the ECB Governing Council – namely, the presidents of southern European countries’ central banks – seem to think that they can get a car moving simply by giving it more gas, even if its clutch is broken. 
The hawks in the ECB Governing Council, such as Bundesbank President Jens Weidmann and De Nederlandsche Bank President Klaas Knot, see the folly in this approach, but they are in the minority. 
QE was effective in spurring economic growth in the United States, because it functioned via the capital market. 
But, in Europe, where there is no unified capital market to allow portfolios to rebalance, the policy works through the bank lending channel, so it inflates – and distorts – the prices of bonds and stocks. 
More problematic, the ECB policy results in a substantial redistribution of wealth from savers (including retirees) in the stronger northern eurozone countries – namely, Germany, Finland, and the Netherlands – to the debtors in the southern eurozone countries, including France, Greece, Italy, Portugal, and Spain. 
Such transfers were never supposed to be a feature of the Economic and Monetary Union, and it is clearly not within the ECB’s mandate to force fundamental changes to the EMU system – especially if those changes favor one group of countries. 
The problems with the ECB’s current policy approach are serious. 
Yet the ECB seems committed to it – not least, it seems, because QE’s beneficiaries outnumber those who are footing the bill. 
The longer the ECB keeps up this bizarre and irresponsible policy, the greater the chances that, when the car finally does get going, it will careen out of control. 

The Irresponsible ECB 
FRANKFURT – The Dow Jones Industrial Average’s recent “flash crash,” in which it plunged by nearly 1,600 points, revealed just how addicted to expansionary monetary policy financial markets and economic actors have become. 
Prolonged low interest rates and quantitative easing have created incentives for investors to take inadequately priced risks. 
The longer those policies are maintained, the bigger the threat to global financial stability. 
The fact is that ultra-loose monetary policy stopped being appropriate long ago. 
The global economy – especially the developed world – has been experiencing an increasingly strong recovery. 
According to the International Monetary Fund’s latest update of its World Economic Outlook, economic growth will continue in the next few quarters, especially in the United States and the eurozone. 
Yet international institutions, including the IMF, fear the sudden market corrections that naturally arise from changes in inflation or interest-rate expectations, and continue to argue that monetary policy must be tightened very slowly. 
So central banks continue to postpone monetary-policy normalization, with the result that asset prices rise, producing dramatic market distortions that make those very corrections inevitable. 
To be sure, the US Federal Reserve has moved away from monetary expansion since late 2013, when it began progressively reducing and ultimately halting bond purchases and shrinking its balance sheet. 
Since the end of 2015, the benchmark federal funds rate has been raised to 1.5%. 
But the Fed’s policy is still far from normal. 
Considering the advanced stage of the economic cycle, forecasts for nominal growth of more than 4%, and low unemployment – not to mention the risk of overheating – the Fed is behind the curve. 
Other advanced-economy central banks, still stuck in extreme crisis mode, are doing even worse. 
Neither the Bank of Japan nor the European Central Bank has provided any indication that it is set to tighten monetary policy, even though economic conditions today are totally different from those that prevailed during the crisis and subsequent double-dip recession in the eurozone. 
The ECB, in particular, defends its low-interest-rate policy by citing perceived deflationary risks or below-target inflation. 
But the truth is that the risk of a “bad” deflation – that is, a self-reinforcing downward spiral in prices, wages, and economic performance – has never existed for the eurozone as a whole. 
It has been obvious since 2014 that the sharp reduction in inflation was linked to the decline in the prices of energy and raw materials. 
In short, the ECB should not have regarded low inflation as a permanent or even long-term condition that demanded an aggressive monetary-policy response. 
The problem is that ECB officials have become excessively focused on ensuring price stability by meeting a short-term inflation target, defined broadly as “below, but close to, 2%,” with the specific goal being 1.9%. 
This is out of line with the intentions of the ECB’s Governing Council, as enunciated in 2003, after an evaluation of the previous four years of monetary policy. 
At that time, the ECB confirmed the definition of price stability it adopted in 1998, but clarified that it aims to maintain the inflation target over the medium term, while recognizing that a central bank cannot control inflation with enough precision to establish a specific rate. 
The ECB’s policy is also out of line with economic reality: the eurozone, like most of the rest of the global economy, is experiencing a strong recovery. 
Yet the ECB will probably view the recent stock-market turbulence as confirmation that it should maintain its current policies. 
Although the Governing Council seems convinced that expansionary policies remain vital to support GDP and employment growth, and to keep deflation at bay, that seems unlikely. 
Indeed, insofar as the impact of these policies on the recovery can be reliably measured, it is probably modest – definitely not worth the €2.3 trillion ($2.8 trillion) in assets purchased since April 2015, not to mention the other consequences of maintaining zero or negative interest rates. 
One of those consequences is that the ECB’s policy interest rate has lost its steering and signaling functions. 
Another is that risks are no longer appropriately priced, leading to the misallocation of resources and zombification of banks and companies, which has delayed deleveraging. 
Yet another is that bond markets are completely distorted, and fiscal consolidation in highly indebted countries has been postponed. 
So the benefits of the ECB’s policy are questionable, and its costs indisputable. 
The current ECB policy is thus simply irresponsible, as is the utter lack of any plan for changing it. 
In this sense, the ECB’s Governing Council is, consciously or unconsciously, following the Nobel laureate economist Paul Krugman’s 1998 advice that the Bank of Japan “credibly promise to be irresponsible” when nominal interest rates are already at zero and monetary policy is in danger of becoming ineffective. 
The central bank, Krugman declared, should stoke inflation through ongoing monetary expansion, in order to reduce real interest rates. 
Krugman repeated this recommendation a few years ago, when he, along with former US Treasury Secretary Lawrence H. Summers, revived the theory of “secular stagnation.” 
But discussion of that theory has now ended – and for good reason. 
It is time to end the ECB’s irresponsible expansionary policies as well. 
Today, monetary policy has become subordinate to fiscal policy, with central banks facing intensifying political pressure to keep interest rates artificially low. 
As the recent stock-market turmoil shows, this is drastically increasing the risk of financial instability. 
When more – and more severe – market corrections take place, possibly affecting the real economy, what tools will central banks have left to deploy? 

Is the ECB Doing Enough? 
FRANKFURT – Konrad Adenauer, Germany’s first chancellor after World War II, famously said: “Why should I care about the things I said yesterday?” 
What he meant was that events can sometimes unfold at a speed that outpaces our ability to understand them. 
So, as 2014 winds down, it is worth asking ourselves, with the benefit of hindsight: Have we at the European Central Bank reacted swiftly enough to maintain price stability in the face of threats, as our mandate requires? 
I think the answer is yes. 
We noticed that our monetary policy was no longer having the effect on private borrowing costs to which we were accustomed. 
It was obvious that the lending channels in the banking system had become dysfunctional; excessively restrictive borrowing conditions were suppressing demand. 
In response, the ECB did precisely what any central bank would have done: we acted to restore the relationship between our monetary policy and the cost of borrowing, aiming to bring down the average rate that households and firms have to pay. 
In June, we introduced a series of targeted longer-term refinancing operations (known as TLTROs) to provide funding for banks at very low fixed rates for a period of up to four years. 
The TLTROs were designed to maximize the chances that banks would pass on the funding relief to borrowers. 
Our programs to purchase asset-backed securities and covered bonds were tailored to help lubricate further the transmission of lower funding costs from banks to customers. 
Together, these measures offer a powerful response that addresses the root causes of impaired bank lending, thereby facilitating new credit flows to the real economy. 
And tentative evidence suggests that they are delivering some initial tangible benefits to the euro area’s economy. 
At the same time, inflation has continued trending down. 
In November, annual inflation in the euro area fell to a cyclical low of 0.3%, largely owing to the sharp fall in oil prices since the end of the summer. 
But falling core inflation (which excludes volatile energy and food prices) also points to weak aggregate demand. 
And, indeed, the ECB’s latest staff projections entail a notable downgrading of the macroeconomic outlook. 
Falling oil prices and the prospect of a prolonged period of low inflation also seem to have affected inflation expectations. 
Given the potency of the recent oil-price shock, the risk is that inflation may temporarily slip into negative territory in the coming months. 
Normally, any central bank would welcome a positive supply shock. 
After all, lower oil prices boost real incomes and may lead to higher output in the future. 
But we may not be able to celebrate. 
After all, because well-anchored inflation expectations are indispensable for medium-term price stability, monetary policy must respond to a risk of de-anchoring. 
That is why the ECB Governing Council has reiterated its unanimous commitment to use additional unconventional instruments within its mandate should it become necessary to address a prolonged period of low inflation, or should the monetary stimulus fall short of our intention to move our balance sheet toward its size in early 2012. This would imply altering the scope, pace and composition of our measures early next year, and staff from the ECB and national central banks have stepped up technical preparations for further measures, if needed, with a view to implementing them in a timely manner. 
If we were to judge that the economy is in need of further stimulus, one option could be to extend the ECB’s outright asset purchases to other asset classes. 
But it is important to remember that asset purchases are not an end in themselves. They are an instrument, not a target, of monetary policy. 
An important criterion for the choice of additional measures should be the extent of their influence over broad financing conditions in the private economy. 
For example, purchases of bonds issued by euro-area non-financial corporations (NFCs) would probably have some direct pass-through effect on firms’ financing costs. 
But, compared to other asset classes, the market for NFC bonds is relatively thin. 
It would be a different matter if we were to decide to buy bonds issued by euro-area sovereigns – the only market where size would generally not be an issue. 
Interventions in this market would likely entail a stronger signal that the ECB is committed to maintaining an accommodative monetary policy for an extended period of time. 
The effectiveness of interventions in the sovereign-bond market – that is, their ability to lower the borrowing costs of households and firms further – will also rest on the state of the banking sector. 
Higher capital ratios, lower exposure to bad loans, and more transparent balance sheets increase the chances that the ECB’s quantitative impulses will be transmitted to the wider economy. 
That is why the completion of the ECB’s comprehensive assessment of banks’ balance sheets and the start of Europe-wide banking supervision will help revitalize sluggish lending in the euro area. 
In particular, increased clarity and transparency about banks’ balance sheets, together with a better-capitalized banking sector, will create a more supportive lending environment. 
But a decision to purchase sovereign bonds would also need to build on and factor in the institutional specificities of the euro area, including the limits set by the EU Treaty. 
We take these limits very seriously. 
The year ahead will be challenging and rife with uncertainty. 
But if the past holds any lesson, it is that, if our ability to fulfill our mandate is at risk, we will not hesitate to act. 

The ECB’s Faulty Weapon 
BRUSSELS – With inflation in the eurozone stubbornly remaining on a downward trajectory, pressure on the European Central Bank to do “something” to prevent outright deflation is growing. 
This “something” is usually understood to be massive asset purchases, or quantitative easing (QE). 
But would QE actually do the trick? 
The discussion has so far followed easily predictable national patterns: Creditor countries do not object to deflation, because it increases the real value of their investment, whereas debtor countries’ repayment burdens would grow heavier. 
In a closed economy, to every credit there must a corresponding debt. 
But consider individual countries: some run a large foreign debt, while others maintain a large creditor position. 
The United States and Germany are at opposite extremes of the creditor-debtor scale. 
The US, benefiting from the “exorbitant privilege” of issuing debt denominated in its own currency, has run current-account deficits for more than 30 years. 
The total foreign debt of US residents (most of which is in US dollars) is above $7 trillion. 
This implies that any reduction in US interest rates would benefit the country as whole, relative to creditor countries, like Germany, where interest income would fall. 
Within the eurozone, where until recently external accounts were nearly balanced, a similar creditor/debtor spectrum has emerged, with Germany and the Netherlands at one end, and much of the eurozone south at the other. 
This partly explains both the hostile stance toward QE adopted in the German financial press and the over-indebted periphery countries’ increasingly desperate calls for more action by the ECB. 
In the eurozone, however, QE is a questionable response to such calls. 
QE is a special instrument used when a central bank’s short- and medium-term policy rates are already at zero and it wants to lower long-term interest rates. 
This implies that QE can be effective only in economies in which changes in long-term (market) interest rates play an important role in the private sector. 
But this is not the case in Europe, where most investment is financed via bank loans that typically do not have long-term maturities – often less than five years – because banks themselves have little secure long-term financing. 
Moreover, the interests rates charged on these loans are not linked to market rates, but rather to the bank’s refinancing cost, which is already close to zero. 
In the eurozone, lower long-term rates for government bonds are thus unlikely to improve the corporate sector’s financing conditions and boost investment demand. 
By contrast, in the US, a much larger proportion of investment is financed by issuing bonds, which can have a longer maturity than bank loans. 
Moreover, these bonds are priced as spreads on the government-bond yield curve, implying that QE will have an immediate impact on enterprises’ financing costs. 
For households, the main impact of lower interest rates is felt through mortgages. 
But most of southern Europe relies mainly on floating rates. 
This implies that QE would not reach, say, Spanish households, whose mortgages are indexed to short-term rates, which are already close to zero. 
In the US, households have a prepayment option on their mortgages should interest rates fall. 
Moreover, mortgages are usually securitized. 
This implies that a fall in the rate at which bundles of mortgages can be sold on the market can have a strong impact on household spending, because lower long-term rates typically lead to waves of mortgage refinancing, leaving households with lower monthly payments – and thus higher disposable income. 
When the central bank buys large amounts of bonds, all asset prices, including housing, tend to increase. 
Here, too, the US, where higher house prices stimulate consumption, is a misleading example for Europe. 
Owner occupancy rates are high in the US, and the financial system allows households to extract the equity in their homes relatively cheaply, either by second liens or by refinancing the entire mortgage. 
This is not possible in most of Europe, and especially not in Germany, where loan-to-value limits remain conservative, refinancing is costly, and most banks would frown on any attempt to cash in on “home equity” to finance a vacation or a new car. 
Moreover, higher house prices and rents distribute income from poorer households (which typically rent) to richer households (which own the houses). 
But the poor have a much higher propensity to spend than the rich. 
A housing boom in a nation of renters might actually lead to lower aggregate consumption. 
Differences in financial structure thus matter profoundly in the effort to prevent deflation. 
Though QE might work in a debtor economy with a flexible financial system like the US, it could backfire in a creditor economy with a conservative financial system. 
This, rather than the fear that the ECB might end up buying the bonds of untrustworthy governments, is the real argument against QE in the eurozone. 

The ECB’s New Macroeconomic Realism 
NEW YORK – The European Central Bank has finally launched a policy of quantitative easing (QE). 
The key question at this stage is whether Germany will give the ECB the freedom of maneuver needed to carry out this monetary expansion with sufficient boldness. 
Though QE cannot produce long-term growth, it can do much to end the ongoing recession that has gripped the eurozone since 2008. 
The record-high stock-market levels in Europe this week, in anticipation of QE, not only indicate growing confidence, but are also a direct channel by which monetary easing can boost both investment and consumption. 
But some observers, such as Nobel Laureate Paul Krugman and former US Treasury Secretary Larry Summers, continue to doubt whether QE can really be effective. 
As Krugman recently put it, a “deflationary vortex” is dragging down much of the world economy, with falling prices causing an inescapable downward spiral in demand. 
The World Bank and International Monetary Fund seem to agree, as both recently lowered their growth forecasts a few notches. 
Pessimists argue that the world economy suffers from an insurmountable shortage of aggregate demand, leading to a new “secular stagnation.” 
Monetary policy is seen to be relatively ineffective, owing to the notorious zero lower bound (ZLB) on nominal interest rates. 
With policy interest rates near zero, the argument goes, central banks are more or less helpless to escape the deflationary vortex, and economies become stuck in the infamous liquidity trap. 
In this scenario, the demand insufficiency feeds on itself, pushing down prices, raising real (inflation-adjusted) interest rates, and lowering demand further. 
This perspective has been prominent among Keynesian economists in the United States and the United Kingdom since 2008. 
Krugman argues that Japan was only the first of the major economies to succumb to chronic deflation, back in the 1990s, and has now been followed by the European Union, China, and most recently Switzerland, with its soaring franc and falling prices. 
The US, in this view, remains near the vortex as well, prompting the Keynesians’ repeated calls for more fiscal stimulus, which, unlike monetary policy, is seen by the pessimists to be especially efficacious at the ZLB. 
In my view, the pessimists have exaggerated the risks of deflation, which is why their recent forecasts have missed the mark. 
Most notably, they failed to predict the rebound in both the US and the UK, with growth rising and unemployment falling even as deficits were cut. 
Without a proper diagnosis of the 2008 crisis, an effective cure cannot be prescribed. 
The pessimists believe that there has been a large decline in the will to invest, something like the loss of “animal spirits” described by Keynes. 
Even with very low interest rates, according to this view, investment demand will remain low, and therefore aggregate demand will remain insufficient. 
Deflation will make matters worse, leaving only large fiscal deficits able to close the demand gap. 
But the causes of 2008’s deep downturn were more specific, and the solutions must be more targeted. 
A large housing bubble preceded the 2008 crisis in the hardest-hit countries (the US, the UK, Ireland, Spain, Portugal, and Italy). 
As Friedrich Hayek warned back in the 1930s, the consequences of such a process of misplaced investment take time to resolve, owing to the subsequent oversupply of specific capital (in this case, of the housing stock). 
Yet far more devastating than the housing bubble was the financial panic that gripped capital markets worldwide after the collapse of Lehman Brothers. 
The decision by the US Federal Reserve and the US Treasury to teach the markets a lesson by allowing Lehman to fail was a disastrously bad call. 
The panic was sharp and severe, requiring central banks to play their fundamental role as lenders of last resort. 
As poorly as the Fed performed in the years preceding the Lehman Brothers’ collapse, it performed splendidly well afterward, by flooding the markets with liquidity to break the panic. 
So, too, did the Bank of England, though it was a bit slower to react. 
The Bank of Japan and the ECB were, characteristically, the slowest to react, keeping their policy rates higher for longer, and not undertaking QE and other extraordinary liquidity measures until late in the day. 
Indeed, it required new leaders in both institutions – Haruhiko Kuroda at the BOJ and Mario Draghi at the ECB – finally to set monetary policy right. 
The good news is that, even near the ZLB, monetary policy works. 
QE raises equity prices; lowers long-term interest rates; causes currencies to depreciate; and eases credit crunches, even when interest rates are near zero. 
The ECB and the BOJ did not suffer from a lack of reflationary tools; they suffered from a lack of suitable action. 
The efficacy of monetary policy is good news, because fiscal stimulus is a weak instrument for short-term demand management. 
Ironically, in an influential 1998 paper, Krugman explained why. 
He argued at that time, and rightly in my view, that short-term tax reductions and transfers would be partly saved, not spent, and that public debt would multiply and create a long-term shadow over the fiscal balance and the economy. 
Even if interest rates are currently low, he noted, they will rise, thereby increasing the debt-service burden on the newly accumulated debt. 
With all major central banks pursuing expansionary monetary policies, oil prices falling sharply, and the ongoing revolution in information technology spurring investment opportunities, the prospects for economic growth in 2015 and beyond are better than they look to the pessimists. 
There are rising profits, reasonable investment prospects for businesses, a large backlog on infrastructure spending almost everywhere in Europe and the US, and the opportunity to finance capital-goods exports to low-income regions, such as Sub-Saharan Africa, and to meet the worldwide need for investment in a new, low-carbon energy system. 
If there is a shortfall of private investment, the problem is not really a lack of good projects; it is the lack of policy clarity and complementary long-term public investment. 
European Commission President Jean-Claude Juncker’s plan to finance long-term investments in Europe by leveraging relatively small amounts of public funds to unlock large flows of private capital is therefore an important step in the right direction. 
Obviously, we should not underestimate the capacity of policymakers to make a bad situation worse (for example, by pressing Greek debt service beyond the limits of social tolerance). 
But we should recognize that the main threats to growth this year, such as the unresolved Greek debt crisis, the Russia-Ukraine conflict, and turmoil in the Middle East, are more geopolitical than macroeconomic in nature. 
In 2015, wise diplomacy and wise monetary policy can create a path to prosperity. 
Broad recovery is within reach if we manage both ingredients well. 

The Drag on E-Cigarettes 
RENNES – Michael Russell and Murray Jarvik, two pioneers of smoking-cessation research in the 1970s, would probably have welcomed the development of the electronic cigarette or “personal nicotine vaporizer” (PNV). 
Beyond serving as a temporary aid for people attempting to quit smoking cigarettes, such new nicotine-delivery systems could act as long-term alternatives to tobacco – making it possible to eliminate tobacco consumption almost entirely. 
We have long known that people smoke for the nicotine, but die from the smoke. 
Indeed, the vast majority of cigarette-related diseases and deaths arise from the inhalation of tar particles and toxic gases, including carbon monoxide. 
Though nicotine replacement therapy (NRT) has helped many smokers quit, the cigarette habit remains pervasive in many countries. 
The use of nicotine in non-combustible forms like smokeless tobacco, or PNV, would enable millions of current smokers to reduce considerably the harm that their nicotine consumption is doing to their health. 
In Sweden, the widespread use of snus – a smokeless tobacco product with a lower concentration of carcinogenic nitrosamines – has contributed to a dramatic decline in the incidence of lung cancer, to the world’s lowest levels. 
The benefits of phasing out tobacco consumption could not be more compelling. 
That is why PNVs should be actively promoted as an alternative to tobacco products, aided by endorsements from health authorities, tax advantages, and support from the anti-smoking movement. 
But, so far, none of this has occurred, largely because nicotine is viewed as a highly addictive and toxic substance, with even smokers hesitating to try NRT or PNV for this reason. 
In fact, nicotine has been the primary target of anti-tobacco campaigns for more than three decades. 
But nicotine is only partly responsible for tobacco dependence. 
Other substances from tobacco smoke – such as monoamine oxidase inhibitors, which have antidepressant effects –reinforce tobacco dependence, but are absent from vaporized nicotine. 
That may be why PNV user surveys suggest that nicotine is less addictive in its vaporized form. 
In reality, nicotine is a relatively safe drug at dosages that a smoker or “vaper” inhales, with similar effects to caffeine. 
Moreover, smokers and PNV users control very precisely, on a puff-by-puff basis, the dose of nicotine they consume, virtually eliminating the risk of overdose. 
In fact, a lethal dose of nicotine is a lot higher than the 30-60 milligrams that many scientific papers claim. 
After reviewing case reports of nicotine intoxications and suicide attempts, the pharmacologist Bernd Mayer found that the lethal dose of nicotine in humans must be somewhere between 500-1000 mg of absorbed – not just ingested – nicotine. 
Given that one of the first symptoms of intoxication is vomiting, and that 70% of the remaining nicotine in the digestive tract is metabolized by the liver before it reaches other organs, absorbing that much nicotine is not easy. 
With minimal health risks compared to tobacco smoking, PNVs face only one real barrier to use: smokers’ willingness to switch. 
But, even on this front, the devices have had considerable success, with PNV use increasing exponentially in the last few years. 
Though, in an ideal world, people would simply be able to quit using nicotine altogether, experience suggests that many smokers cannot – or do not want to – give it up, and will continue to smoke if there is no safe and acceptable alternative. 
If smokers are willing to accept PNVs as a viable option, high-risk tobacco use could become a thing of the past. 
So far, converted smokers have taken the lead in promoting the shift to PNVs, sharing their experiences online, in Internet forums and on Facebook and Twitter. 
They are spreading the news that, for the first time in history, people can quit smoking without giving up the pleasure they derive from nicotine. 
Meanwhile, health authorities and governments have adopted a fear-based approach, scrambling to regulate – or even ban – PNVs. 
The European Union’s Tobacco Products Directive and the United Kingdom’s Medicines and Healthcare Products Regulatory Agency plan to introduce strict regulations of PNV sales and use, based on drug legislation, even though the devices are neither tobacco nor medical products. 
Even the World Health Organization has released a report expressing serious concern about the marketing and use of electronic nicotine-delivery systems. 
Such opposition is not based on scientific evidence. 
Indeed, an increasing number of scientific publications show that PNV use is much safer than smoking tobacco. 
In January, a group of scientists (including me) sent a letter to the European Commission imploring it to implement evidence-based, proportionate regulation that allows users of PNVs to identify the product and dosage that suits them. 
“If wisely regulated, electronic cigarettes have the potential to make cigarettes obsolete and save millions of lives worldwide,” we wrote. 
Excessive regulation, by contrast, “will contribute to maintaining the existing levels of smoking-related disease, death, and health-care costs.” 
Russell once declared, “It is nicotine that people cannot easily do without, not tobacco.” 
He was right. 
And it is tobacco smoke, not nicotine, that kills. 
That makes PNVs the ideal solution. 
It is time for health authorities to get on board. 

An Economic Agenda for South Africa’s Next Government 
CAPE TOWN – Almost two decades after Nelson Mandela was thwarted in his efforts to name Cyril Ramaphosa as his successor, African National Congress party members have now elected him as their leader. 
Of course, Ramaphosa is not yet president of South Africa. 
But expectations are already high that economic policy will take a new direction under his guidance. 
So what will a Ramaphosa presidency have to do to restore growth and ensure social progress in Africa’s lagging economic powerhouse? 
Since the 2008-2009 recession, South Africa’s economy has stagnated, held back by leadership failures and plummeting confidence. 
Unemployment has increased to 27.7%, the highest rate in 13 years. 
GDP growth will amount to 0.7% this year, and stood at just 0.3% in 2016. 
Public debt is rising, and real household income per capita has flatlined. 
Inequality remains extreme, and social discontent is high. 
The necessary commitment to coherent policies remains elusive, despite publication of a National Development Plan in 2011. 
Collaboration between business and government leaders to strengthen key reforms and forestall credit rating downgrades floundered when finance minister Pravin Gordhan was sacked from President Jacob Zuma’s cabinet in March. 
The worsening economic outlook has given rise to divergent prognoses. 
Some insist that the hatches must be battened down: fiscal consolidation, curtailment of union power, deregulation of markets. 
Others call for radical transformation: state-led industrialization, free tertiary education, land redistribution without compensation. 
In the past, despite South Africa’s strident political discourse, strong leadership and stakeholder engagement enabled social partners to find common ground. 
Today, however, the debate about reform is shallow and polarized, amid revelations of large-scale corruption and fraud in both the public and private sectors. 
The resulting erosion of trust is jeopardizing already-complex nation-building and economic-recovery projects. 
In seeking to restore political and social cohesion, the new ANC leadership will not only have to reinforce ethical principles in public service. 
Achieving inclusive growth while avoiding self-defeating fiscal deterioration will require hard economic choices. 
Accelerated development requires a heterodox policy mix and substantial shifts in the balance between state and markets. 
Creating a more employment-intensive economy remains a primary objective. 
Persistently high unemployment signals inefficiency in mobilizing human resources. 
It is also an obvious barrier to reducing poverty and inequality. 
South Africa will introduce a statutory minimum wage next year, which will help to protect many vulnerable workers, and could lead to simpler and fairer outcomes than the current thicket of collective-bargaining agreements and sectoral determinations. 
But, as the high-level panel chaired by former President Kgalema Motlanthe has recently argued, complementary measures are needed to support employment of young people and other vulnerable job seekers. 
The existing subsidy for young workers, which operates as a temporary tax incentive to employers, should be extended to all low-wage employees in registered employment. 
Originally proposed by Professor Sam Bowles of the University of Massachusetts to South Africa’s labor market commission 20 years ago, this remains the most compelling market-based option for addressing apartheid’s structural legacy of unemployment. 
Moreover, locally managed public works and community-based employment programs should be expanded, subject to the minimum wage and basic work standards. 
Household income support should run on twin tracks: cash transfers, already well-established, and basic employment assurance, which lags well behind needs. 
Active labor market interventions and the envisaged public employment services should be structured as public-private partnerships, building on the demonstrated success of established independent initiatives. 
Similarly, planning, oversight, and financing of technical and vocational education require effective collaboration among business groups, the national government, and municipalities. 
Beyond these institutional reforms, South Africa needs more rapid investment in cities, urban infrastructure and housing. 
Urbanization is a powerful determinant of productivity growth and improved livelihoods. 
South Africa’s cities are still racially fragmented and spatially inefficient. 
Too many people still live in informal settlements, often far from available work opportunities. 
The revenue systems needed to invest in better housing, modern transport, communication networks, industrial hubs, and enterprise development require strengthening, but they are not dysfunctional. 
South Africa’s cities are creditworthy. 
They have excellent universities and capable financial institutions. 
Bolder urban plans, more inclusive development strategies, and more streamlined business processes would catalyze investment and strengthen self-sustaining growth dynamics. 
Expanded opportunities in urban housing markets are imperative, but access to rural land and livelihoods are also important. 
The Motlanthe high-level panel’s proposals include strengthening land administration systems in informal settlements and traditional council areas, and facilitation of the subdivision of agricultural land. 
South Africa’s agriculture sector could expand employment and contribute to food security by strengthening partnerships between established commercial operators and emerging farmers. 
The energy sector and air and rail transport are still dominated by state-owned near-monopolies, whose balance sheets are in trouble amid rapidly rising costs. 
Competition and private ownership would relieve the state balance sheet of a large and troubling contingent liability. 
More rapid progress in regional economic cooperation, across the public and private sectors, is another imperative – one that would benefit both South Africa and its neighbors. 
There are growing financial, trade, and migration links among southern African countries, as well as shared water, transport, electricity, and communication networks. 
And yet the region suffers from a dearth of infrastructure co-investment projects, weak collaboration in trade promotion, and slow-moving cooperation in financial and tax arrangements. 
Reform of the Southern African Customs Union is long overdue. 
But perhaps the toughest test facing the ANC’s new leadership will be to reverse the creeping dirigisme that the country has faced in recent years, while steering bold reform. 
For too long, both private investment and critical state programs have been impeded by misdirected bureaucratic efforts to promote black economic interests, and public management regulations that are impenetrable and impractical. 
Of course, black socioeconomic advancement is central to more rapid and broad-based development. 
And rigorous rules and audit procedures are required for honest and transparent financial management. 
But South Africa needs instruments that facilitate activity and incentives that reward productivity, not barriers to investment or initiative. 
If the ANC’s new leadership opens up economic opportunity, while putting an end to self-serving deal-making, confidence and growth will return. 

The Consequences of a Trump Shock 
WASHINGTON, DC – With the United States’ presidential election on November 8, and a series of elections and other political decisions fast approaching in Europe, now is a good time to ask whether the global economy is in good enough shape to withstand another major negative shock. 
The answer, unfortunately, is that growth and employment around the world look fragile. 
A big adverse surprise – like the election of Donald Trump in the US – would likely cause the stock market to crash and plunge the world into recession. 
There is always a great deal of insight in the International Monetary Fund’s semi-annual economic outlook, which is based on detailed data from around the world. 
And, because the latest version was published in early October, it is particularly relevant. 
(I was previously the IMF’s chief economist and oversaw the forecasting process, but I left that position in August 2008.) 
Table 1.1 of the Fund’s World Economic Outlook covers the main points: a baseline forecast of 3.1% global GDP growth this year and 3.4% in 2017. 
This represented a nudge down from the projections in April, with signs of weakening perceived in the US, the eurozone, and of course the United Kingdom (grappling with the consequences of impending Brexit – the big and potentially traumatic step of leaving the European Union). 
The most obvious dark cloud on the global horizon is Europe. 
The British issues are not helping, but the deeper issues continue to be related to the eurozone itself (Britain never adopted the euro). 
The headline growth number in Spain is somewhat encouraging, continuing to show some rebound. 
But the ongoing gloom about Italy – the third-largest eurozone economy, growing at less than 1% per year – is a serious matter. 
Compounding these macroeconomic issues is the continuing pressure on eurozone banks. 
These banks have never fully recovered from earlier losses, and their equity capital levels remain low relative to international competitors (like the US) and to what investors regard as reasonable. 
The bigger problem remains uncertainty about who is on the hook if a bank’s losses imply potential insolvency. 
These banks are clearly too big to fail – no European government in its right mind would allow a default on bank debt. 
But there is no agreement on how to share bank losses across countries. 
Taken as a whole, the eurozone has enough fiscal capacity to stand behind its banks. 
But, unfortunately, doing so is still a country-by-country decision – the collective mechanisms for recapitalizing European banks remain partial and far too weak. 
Compounding these difficulties, growth in middle-income emerging markets is not strong. 
Slower growth in these countries is reflected in lower projected imports and lower expected commodity prices, which will negatively affect countries that export raw materials and energy resources. 
The Nigerian economy, just to take one example, is expected to contract by 1.7% this year. 
Growth in the US, as reported by the IMF, was 2.6% in 2015, and is forecast to slip to 1.6% this year before rebounding slightly to 2.2% in 2017. 
There has been a long steady recovery from the 2008 financial crisis, but the effects of that collapse still linger. 
Trump promises to boost US growth immediately to 4-5%, but this is pure fantasy. 
It is far more likely that his anti-trade policies would cause a sharp slowdown, much like the British are experiencing. 
In fact, the impact of a Trump victory on the US could well be worse. 
Whereas British Prime Minister Theresa May’s government wants to close the UK’s borders to immigrants from the EU, it does want trade with the world. 
Trump, on the other hand, is determined to curtail imports through a variety of policies, all of which are well within the power of a president. 
He would not need congressional approval to slam the brakes on the US economy. 
Even in the best of times, US policymakers often do not think enough about the impact of their actions on the rest of the world. 
Trump’s trade-led recession would tip Europe back into full-blown recession, which would likely precipitate a serious banking crisis. 
If this risk were not contained – and the probability of a European banking debacle is already disconcertingly high – there would be a further negative spiral. 
Either way, the effects on emerging markets and all lower-income countries would be dramatic. 
Investors in the stock market currently regard a Trump presidency as a relatively low-probability development. 
But, while the precise consequences of bad policies are always hard to predict, if investors are wrong and Trump wins, we should expect a big markdown in expected future earnings for a wide range of stocks – and a likely crash in the broader market. 

The Future is Old 
MUNICH – The aging of our societies is one of the greatest success stories of the twentieth century. 
More than three decades have been added to the lives of hundreds of millions of people over the last hundred years. 
This is an accomplishment well worth celebrating; but we must also bear in mind that with increased longevity come significant long-term economic consequences – and that many societies are aging at a record speed. 
Last year, the OECD warned that the world was aging at an unprecedented rate and that this could help slow global annual economic growth from an average of 3.6% this decade to about 2.4% from 2050 to 2060. 
OECD countries in particular will be hit by a double demographic shock. 
Not only will their societies be rapidly aging; diminishing income gaps between rich countries and emerging economies are likely to slow immigration flows, shrinking the workforce by 20% in the eurozone and 15% in the United States. 
Demographic researchers divide countries into four categories, according to the share of the over-65 population: young (less than 7% aged 65 or over), aging (7-13%), aged (14-20%), and super-aged (more than 21%). 
Today, just three countries – Germany (21%), Italy (22%), and Japan (26%) – qualify as super-aged societies. 
In the next five years, they are expected to be joined by Bulgaria, Finland, Greece, and Portugal. 
In the following decade, Europe will continue to age, with another 17 countries, including Austria, France, Sweden, and the United Kingdom, expected to become super-aged, along with Canada, Cuba, and South Korea. 
During this period, the challenges of rapid societal aging will confront mainly the developed world. 
But, by 2040 some 55 countries will be struggling to manage an older population, with the US, China, Singapore, Thailand, and Puerto Rico joining the ranks of the super-aged. 
What makes the phenomenon even more remarkable is the speed at which these transitions are taking place. 
When France went from being a young country to an aging one in 1850, slavery was still legal in the US, the light bulb had yet to be invented, and Germany had yet to become a unified country. 
It took another 130 years, for the country to become an aged society in 1980. 
France is expected to become super-aged in 2023. 
For many years, Japan was considered to have the most rapidly aging population on earth. 
It went from having the youngest population among G-7 countries in the early 1960s to being the world’s oldest country in 2008. 
But if current projections hold true, several countries will accomplish a similar transformation a decade faster. 
Indeed, today the world’s most rapidly aging country is South Korea, which became an aging society in 1999, is expected to become an aged one in 2017, and will be a super-aged one in 2027. In other words, South Korea will undergo in less than three decades a transformation that will have taken France nearly 175 years. 
And while South Korea may be getting old the fastest, it leads a closely bunched group of countries that includes Bangladesh, Singapore, Thailand, and Vietnam. 
Iran, still categorized as young, is another contender for the title of fastest-aging country. 
Aging is a product of rising life expectancies and falling fertility rates. 
The speed of the decline in fertility rates has been dramatic around the world; in Iran, it has been nothing less than astonishing, dropping from seven children per woman in 1984 to 1.9 in 2006. 
This will certainly have long-term consequences as the working-age population declines and the elderly population soars. 
Iran is expected to stay young until after 2020, but could then become super-aged less than 30 years later. 
And yet, whatever the adverse economic impact of aging, it is important to consider the alternative. 
Countries such as Sierra Leone, Lesotho, Central African Republic, and Zimbabwe have among the lowest life expectancies on the planet. 
They face many challenges – famine, corruption, conflict, lack of access to clean water and education, AIDS, and Ebola – but rapid societal aging is not one of them. 
A rapidly aging population may be a problem, but, overall, it is a pretty good problem to have. 

The Middle East’s Arc of Prosperity 
PRINCETON – As Egypt trembles on the brink of civil war, with alarming levels of violence and hardening divisions on all sides, it is hard to find a truly bright spot anywhere in the Middle East or North Africa. 
Syria’s agony continues unabated; sectarian attacks in Iraq are becoming more frequent and deadly; the threads of Lebanon’s fragile peace are fraying; Jordan is awash in refugees; 
Libya’s militias are running rampant and distorting its politics; Tunisia faces political crisis; and Turkey’s star as the embodiment of Islamic democracy has dimmed. 
Yet even with this litany of problems, US Secretary of State John Kerry has decided to focus on Israel and Palestine. 
His justification – “if not now, never” – is almost certainly true. 
But there is another, equally strong (albeit often overlooked) rationale: the tremendous potential for an Israeli-Palestinian-Jordanian economic zone that would drive the entire region’s growth and development. 
In the immortal words of James Carville, Bill Clinton’s campaign manager in 1992, “It’s the economy, stupid.” 
The dismal failure of Middle Eastern and North African economies to deliver the prosperity that their people desperately want is a constant factor pushing people into the streets. 
It is not the only factor, but rising food prices helped to spread revolutionary fervor from a small group of activists to much of Egypt’s population in 2011, and again this year in June, when the most frequent grievance against former President Mohamed Morsi concerned not his ideology but his indifference to ordinary Egyptians’ needs. 
Against this backdrop, Israel and the Palestinian territories are relatively stable places. 
Israel’s high-quality infrastructure could easily be extended to the West Bank and Gaza if security could be assured, and a young generation of entrepreneurs and technologists has grown up on both sides of the border. 
Forbes magazine reports that “hundreds of Israeli[s] and Palestinians are becoming actual business partners and colleagues in startups that are slowly transforming the Palestinian economy, at least in the West Bank.” 
This is most true in high-tech industries, the sector in which the Middle East lags the most. 
The author of the Forbes article describes a scene in Ramallah that is “indistinguishable from one in Austin or San Francisco,” where “twentysomething Palestinians sip cocktails, their laptops open, their smartphones on.” 
All of this activity is taking place against the odds. 
Alec Ross, a former senior adviser for innovation to former US Secretary of State Hillary Clinton, argues that the best way to reinvigorate the peace process is to provide 3G Internet connectivity to the West Bank. 
He quotes a young woman in the audience at Palestine Polytechnic University, who said, to loud applause, “We must have a better economy to have better lives, and we must have 3G to have…a better economy.” 
Without high-speed Internet, foreign investment and indigenous entrepreneurship are almost impossible. 
The human capital for rapid economic growth is there (roughly 2,000 Palestinians graduate every year with technical skills, yet only 30% of them find a way to use such skills in a paying job), as is the will and the investment capital; but the necessary infrastructure is lacking. 
A vision of a very different Palestine, and of the Israel beside it, is not hard to find. 
In 2005, the Rand Corporation, a US research institute, developed the “Arc,” a genuinely inspiring plan to build a transportation corridor that would link Palestine’s principal business and population hubs in the West Bank, then curve across Israel into Gaza, where a long-planned airport and seaport would be built. 
The concept behind this vision is that the size and population density of a future Palestine will be roughly the same as in extended urban regions like the San Francisco Bay area or greater Cairo. 
Thus, the West Bank should be viewed as “an integrated urban region of independent but connected cities.” 
Anyone who spends nine minutes watching the video presentation of the Arc will see that its potential is nothing short of breathtaking. 
While Palestine would gain economically, Israel would gain politically and socially. 
The costs of not reaching a peace settlement may not show up in Israel’s economic statistics or in formal diplomatic interactions. 
But young Israelis, in particular, are increasingly aware of the invitations to meetings and conferences that they do not receive – and of the increasing frequency with which their own are not accepted, even by sincere friends of Israel. 
Bernard Avishai, a distinguished Israeli professor of business and government who divides his time between Israel and the US, notes that whatever Israel’s young people may think of the Palestinians, they “expect to fly off from Ben-Gurion Airport and land, accepted, in the Western world.” 
Now they know that the stakes are rising. 
So are the opportunities. 
Whereas the Israeli-Palestinian conflict has long been an island of violence and turmoil in a relatively stable (if oppressed) region, now the tables are turned. 
An Israel and Palestine that could resolve their differences and live side by side as democracies would become an island of stability and sanity in a sea of political disorder and economic retrenchment. 
Add a free-trade agreement, or even a customs union with Jordan, and you have the makings of a Middle Eastern Benelux (the grouping of Belgium, the Netherlands, and Luxembourg that formed the economic kernel of what became the original European Community). 
A late summer night’s dream? 
Perhaps. 
But, Iran aside, all of the region’s major players – Saudi Arabia and its fellow Gulf states, Turkey, and both sides in Egypt – have plenty of reasons to want to see it realized. 
And Israelis and Palestinians themselves, with actual or potential civil war on three of their four borders, need no reminders of what could happen if they do not start spreading peace from the inside out. 

Economic Crisis and Regional Integration 
PRINCETON – Everyone now knows that we are in the worst economic crisis since the 1930’s. 
The protectionist responses are sadly familiar: protests against foreign workers, demands for trade protection, and a financial nationalism that seeks to limit the flow of money across national frontiers. 
In the 1930’s, however, economic nationalism was not the only show in town. 
Many people started to think of regional integration as the answer to depression. 
But the sort of integration that occurs in times of economic crisis is often destructive. 
The most unattractive versions of 1930’s regionalism came from Germany and Japan, and represented nothing less than a practical extension of their power over vulnerable neighbors, which were forced into trade and financial dependence on the basis of Germany’s Grosswirtschaftsraum or its Japanese equivalent, the Greater East Asia Co-Prosperity Sphere. 
As a consequence of the horrors of the 1930’s, there remains substantial suspicion of concepts like “Greater East Asia.” 
In the second half of the twentieth century, Europe had the chance to build a much more benevolent form of regionalism. 
But today, the European Union is stymied by having squandered the chance to build stronger institutions when times were better and tempers less strained. 
The EU is suffering from a number of problems that have been widely discussed for many years, but never seemed to be that urgent. 
Suddenly, in the face of the economic crisis, these problems have become major sources of political instability. 
There is a common monetary policy in the euro-zone countries, and an integrated capital market with financial institutions that are active across national frontiers. 
But banks are regulated and supervised nationally – as they must be, because any rescue in the event of a large bank failure becomes a fiscal issue, with the cost borne by taxpayers in individual states rather than by the EU as a whole. 
But this set-up makes little sense in the face of the economic logic of European integration. 
The second obvious problem is the smallness of the EU’s budget relative to those of the member states. 
The vast part of government activity takes place on a national level. 
But different governments have different degrees of fiscal room for maneuver. 
Italian, Greek, or Portuguese public debt is so high that any attempt to use fiscal spending as part of a strategy to combat the economic crisis is doomed to fail. 
But Ireland, with previously modest deficit and debt levels, also suddenly and unexpectedly faces the same kind of issue, owing to the government’s need to take over private debt from the banking sector. 
France and Germany, by contrast, have an inherently strong fiscal position. 
So only the EU’s strongest countries can really do anything against the sharply worsening recession. 
Moreover, the whole idea of Keynesian demand stimulus was developed, again in the 1930’s, in the context of self-contained national economies. 
Keynesians filled up the warm water of fiscal stimulus in a national bathtub. 
When the national bathtub has holes, and other people benefit from the warmth, the exercise loses its attraction. 
In any case, it only ever worked for the larger states. 
The smaller states could not do Keynesianism in a hand basin. 
There are ways to fix both the banking and the fiscal problem. 
Control of banking is the simplest. 
The European Central Bank clearly has the technical and analytical capacity to take on general supervision of European banks, using the member central banks as information conduits. 
The fiscal problem could be dealt with by issuing generally guaranteed European bonds, which might be a temporary measure, restricted to the financial emergency. 
Both bank regulation and fiscal policy require a great deal more Europeanization. 
The most obvious way is to use existing mechanisms and institutions, in particular the ECB or the European Commission. 
The difficulty with such a suggestion is that it would imply a relative weakening of the national states, including the largest, Germany and France. 
They would most likely resist, and try to stay in their own bathtubs. 
Indeed, the crisis has turned France and Germany once more into the key players of the European process. 
But the more the crisis affects them, the more they think largely in national terms. 
From the perspective of Berlin or Paris, there should be no systematic Europeanization. 
Instead, the large states are now promoting informal groupings to look for worldwide solutions. 
Overtones of the 1930’s are amplified, clearly exposing the Union’s predicament, because of an odd coincidence: the Czech Republic now holds the EU’s rotating presidency. 
The Czechs, probably the people with the most vivid historical memory of the bad regionalism of the 1930’s, succeeded France, the European country that today is the least constrained in asserting its national interest. 
The clash of two visions of Europe is eroding the political stability of an area that once represented the best model and greatest hope for benign regionalism. 

From Economic Crisis to World War III 
BEIJING – The next economic crisis is closer than you think. 
But what you should really worry about is what comes after: in the current social, political, and technological landscape, a prolonged economic crisis, combined with rising income inequality, could well escalate into a major global military conflict. 
The 2008-09 global financial crisis almost bankrupted governments and caused systemic collapse. 
Policymakers managed to pull the global economy back from the brink, using massive monetary stimulus, including quantitative easing and near-zero (or even negative) interest rates. 
But monetary stimulus is like an adrenaline shot to jump-start an arrested heart; it can revive the patient, but it does nothing to cure the disease. 
Treating a sick economy requires structural reforms, which can cover everything from financial and labor markets to tax systems, fertility patterns, and education policies. 
Policymakers have utterly failed to pursue such reforms, despite promising to do so. 
Instead, they have remained preoccupied with politics. 
From Italy to Germany, forming and sustaining governments now seems to take more time than actual governing. 
And Greece, for example, has relied on money from international creditors to keep its head (barely) above water, rather than genuinely reforming its pension system or improving its business environment. 
The lack of structural reform has meant that the unprecedented excess liquidity that central banks injected into their economies was not allocated to its most efficient uses. 
Instead, it raised global asset prices to levels even higher than those prevailing before 2008. 
In the United States, housing prices are now 8% higher than they were at the peak of the property bubble in 2006, according to the property website Zillow. 
The price-to-earnings (CAPE) ratio, which measures whether stock-market prices are within a reasonable range, is now higher than it was both in 2008 and at the start of the Great Depression in 1929. 
As monetary tightening reveals the vulnerabilities in the real economy, the collapse of asset-price bubbles will trigger another economic crisis – one that could be even more severe than the last, because we have built up a tolerance to our strongest macroeconomic medications. 
A decade of regular adrenaline shots, in the form of ultra-low interest rates and unconventional monetary policies, has severely depleted their power to stabilize and stimulate the economy. 
If history is any guide, the consequences of this mistake could extend far beyond the economy. 
According to Harvard’s Benjamin Friedman, prolonged periods of economic distress have been characterized also by public antipathy toward minority groups or foreign countries – attitudes that can help to fuel unrest, terrorism, or even war. 
For example, during the Great Depression, US President Herbert Hoover signed the 1930 Smoot-Hawley Tariff Act, intended to protect American workers and farmers from foreign competition. 
In the subsequent five years, global trade shrank by two-thirds. 
Within a decade, World War II had begun. 
To be sure, WWII, like World War I, was caused by a multitude of factors; there is no standard path to war. 
But there is reason to believe that high levels of inequality can play a significant role in stoking conflict. 
According to research by the economist Thomas Piketty, a spike in income inequality is often followed by a great crisis. 
Income inequality then declines for a while, before rising again, until a new peak – and a new disaster. 
Though causality has yet to be proven, given the limited number of data points, this correlation should not be taken lightly, especially with wealth and income inequality at historically high levels. 
This is all the more worrying in view of the numerous other factors stoking social unrest and diplomatic tension, including technological disruption, a record-breaking migration crisis, anxiety over globalization, political polarization, and rising nationalism. 
All are symptoms of failed policies that could turn out to be trigger points for a future crisis. 
Voters have good reason to be frustrated, but the emotionally appealing populists to whom they are increasingly giving their support are offering ill-advised solutions that will only make matters worse. 
For example, despite the world’s unprecedented interconnectedness, multilateralism is increasingly being eschewed, as countries – most notably, Donald Trump’s US – pursue unilateral, isolationist policies. 
Meanwhile, proxy wars are raging in Syria and Yemen. 
Against this background, we must take seriously the possibility that the next economic crisis could lead to a large-scale military confrontation. 
By the logic of the political scientist Samuel Huntington , considering such a scenario could help us avoid it, because it would force us to take action. 
In this case, the key will be for policymakers to pursue the structural reforms that they have long promised, while replacing finger-pointing and antagonism with a sensible and respectful global dialogue. 
The alternative may well be global conflagration. 

Economic Development Before the Law 
One of the most pervasive and apparently self-evident assumptions of development economics is that sustainable investment and growth requires the rule of law. 
Without impersonal, general norms and their enforcement by independent judicial authorities, according to this view, little development, if any, is possible, because the risks facing both labor and capital – including corruption, arbitrariness, and rigid traditions – will be too high. 
But is this conventional wisdom always right? 
Consider an admittedly limited but nonetheless revealing counter-example: South Africa’s booming mini-bus taxi industry. 
The mini-bus taxis developed in response to severe shortcomings in the country’s public transport system, one characterized by high prices, low-quality service, and a chaotic operating network, but they operate entirely outside of formal laws and regulations. 
What makes the industry work is a commonly agreed informal business “culture” that is flexible, innovative, and keeps operating costs down. 
The results are undeniable: at peak times, mini-bus taxis hold 65% of the entire commuter market. 
The mini-bus taxi industry thus illustrates the importance of informal conventions. 
Local culture and traditions not only matter, but they are decisive in shaping the behavior of people – all the more so in developing countries, particularly those that are labeled failed or fragile states, where the courts don’t work and regulations, assuming they exist, thus are inadequately enforced. 
But malfunctioning formal institutions do not mean that there are no functioning structures at all. 
In these societies, the social order is predominantly shaped by informal agreements rather than formal laws and regulations. 
As the South African example shows, such agreements can even promote a country’s development. 
In many developing countries, village associations that are solely based on trust and peer pressure provide access to credit and insurance, guarantee help in times of distress, and facilitate the construction of public roads and sewage systems. 
The community-based health insurance schemes that are prospering all over Africa are a good example of this. 
Even so, while informal institutions can improve people’s lives, they can also be detrimental to development. 
The very resources that form the basis of informal security systems – solidarity, social capital, and collective action, for example, can have perverse effects. 
For example, forced solidarity will oblige any hard-working farmer in Benin who has accumulated some wealth over the years to share the fruit of his labor with his enlarged family, including distant relatives. 
In economic terms, the “informal institution of sharing” may become a disincentive to invest and thus result in opportunistic behavior, because there is no obligation to reciprocate. 
For all of their success, South Africa’s mini-taxis could not escape high accident rates, violent incidents over un-commissioned routes and fare levels, and tax evasion, which imposed high costs on society, prompting the government to regulate the service. 
Moreover, some informal institutions based on longstanding cultural traditions lead to discrimination and violation of human rights, while undermining the authority of formal institutions like the judiciary, police, or military. 
In these cases, women are often the victims. 
They might be excluded from participation in informal networks, or have limited influence in appropriating the accrued benefits of collective action. 
The reported abuse of micro-credits to pay dowries is one alarming example. 
Likewise, the tradition of female circumcision is still a common practice in African countries such as Guinea, Sudan, Mali, Somalia, and Eritrea, where more than 85 % of young women suffer from it. 
Abolishing such customs is a moral obligation, but in other instances, the international community often needs to decide which institutions to change and how. 
Indeed, one of the most difficult tasks for policymakers is to identify correctly those institutions that are conducive to development and those that may be harmful. 
Even then, successfully changing institutions is easier said than done, as they are rooted in deeply enshrined norms and values. 
Neither the “romantic preservationist” nor the “bulldozing modernizer” approach promises an adequate solution. 
Institutional reform is a delicate affair that needs to be done with caution and sometimes against the conventional reform dogma. 
In some cases, good intentions may even aggravate the status quo. 
For example, trying to eliminate corruption in environments with strong patronage-based power and redistribution mechanisms while failing to address the root problems can do more harm than good, and might lead to violent conflicts over new resources. 
Reforms need to acknowledge the mindsets of people and the incentive structures that govern their behavior. 
Thus, those who benefit from reforms may champion the process, but losers must be adequately compensated in order to prevent them from resisting the transformation. 
Without building public support and providing proper enforcement mechanisms, changing laws alone is bound to be ineffective. 
Sometimes it might even pose high costs for the alleged beneficiaries. 
Given the complexity of institutional reform, striving for what appears to be optimal might not always be the best approach. 
Reforms must be adapted to the specific context of each country, and be applied within the boundaries of what is possible. 
Institutional change requires a long, tedious, and modest implementation of multiple small steps, in which the correct sequencing of reform is crucial. 
To obtain sustainable results, policymakers need to accept that sometimes “good enough is enough.” 



Fanatics, Charlatans, and Economists 
DAVOS – Throughout the world, it seems, crisis is gripping national politics. 
In election after election, voter turnout has hit historic lows. 
Politicians are universally reviled. 
Mainstream parties, desperate to remain relevant, are caught in a vice, forced to choose between pandering to extremism and the risk of being overwhelmed by populist, anti-establishment movements. 
Meanwhile, not since the end of World War II has money played such an important role in politics, trumping the power of ideas. 
In the United States, for example, the sound of billions of dollars flowing into election-campaign coffers is drowning out the voices of individual voters. 
In parts of the world where the rule of law is weak, criminal networks and corruption displace democratic processes. 
In short, the pursuit of the collective good looks sadly quaint. 
The trouble began at the end of the Cold War, when the collapse of a bankrupt communist ideology was complacently interpreted as the triumph of the market. 
As communism was discarded, so was the concept of the state as an agent around which our collective interests and ambitions could be organized. 
The individual became the ultimate agent of change – an individual conceived as the type of rational actor that populates economists’ models. 
Such an individual’s identity is not derived from class interests or other sociological characteristics, but from the logic of the market, which dictates maximization of self-interest, whether as a producer, a consumer, or a voter. 
Indeed, economics has been placed on a pedestal and enshrined in institutions like central banks and competition authorities, which have been intentionally separated and made independent from politics. 
As a result, governments have been confined to tinkering at the margins of markets’ allocation of resources. 
The 2008 global financial crisis, the resulting recession, and rapidly widening income and wealth inequality have punctured the glib triumphalism of economics. 
But politics, far from rising to take its place, continues to be discredited, as mainstream leaders – particularly in North America and Europe – call on economic theories to justify their policy choices. 
The pursuit of individual attainment is the hallmark of our time, eclipsing the collective dimension of human destiny. 
And yet the deep human need to be part of a group has yet to disappear. 
It lingers, but without a credible outlet. 
National projects ring hollow, and the so-called international community remains an abstraction. 
This unfulfilled desire for community may be felt particularly acutely by young people – including, for example, young jihadists. 
Indeed, nationalist politicians and religious leaders have been the first to spot the vacuum, and they are rapidly filling it. 
Pope Francis, Vladimir Putin, Abu Bakr al-Baghdadi, and Marine Le Pen have little in common. 
But they share one insight: There is a deep longing for the creation of communities defined by shared values, not functional needs. 
The crisis of national politics has consequences that echo far beyond the borders of individual countries. 
National chauvinism and religious fundamentalism are here to stay, and with them the terrorism that extremists of all stripes embrace, because both phenomena are ideally suited to the age of the individual: They provide imaginary answers to personal angst, instead of political answers to collective challenges. 
These movements’ amorphous nature – often channeled through charismatic leaders – allows each individual to project onto them his or her dreams, making them difficult to counter within the framework of traditional politics. 
But this strength can also be a weakness. 
When tasked with managing territories and governing populations, these movements begin to face the same bothersome logistical and organizational constraints as their rivals. 
As a result, bureaucracy is constantly at their heels, leaving them in perpetual need of upheaval and renewal. 
If politics is to retake the field of values from the fanatics, the charlatans, and the economists, it must be rebuilt from the ground up. 
More than half of the world’s population now lives in cities, and any political renaissance must counterbalance the appeal of vast virtual communities with resilient urban societies. 
Citizens must become reengaged with the political process, educated in public affairs, and provided with real (not merely virtual) platforms to air their differences and debate alternative views. 
Furthermore, institutions that provide bridges between states and the global community, such as the European Union, must be strengthened and refocused. 
In particular, their technical functions must be clearly distinguished from their political roles. 
But, above all, politicians must stop trying to shore up their diminished credibility with the pretense of economic science. 
Politics begins where contemporary economics ends – with ethics and the attempt to create a justly ordered society. 

The Age of Vulnerability 
NEW YORK – Two new studies show, once again, the magnitude of the inequality problem plaguing the United States. 
The first, the US Census Bureau’s annual income and poverty report, shows that, despite the economy’s supposed recovery from the Great Recession, ordinary Americans’ incomes continue to stagnate. 
Median household income, adjusted for inflation, remains below its level a quarter-century ago. 
It used to be thought that America’s greatest strength was not its military power, but an economic system that was the envy of the world. 
But why would others seek to emulate an economic model by which a large proportion – even a majority – of the population has seen their income stagnate while incomes at the top have soared? 
A second study, the United Nations Development Program’s Human Development Report 2014, corroborates these findings. 
Every year, the UNDP publishes a ranking of countries by their Human Development Index (HDI), which incorporates other dimensions of wellbeing besides income, including health and education. 
America ranks fifth according to HDI, below Norway, Australia, Switzerland, and the Netherlands. 
But when its score is adjusted for inequality, it drops 23 spots – among the largest such declines for any highly developed country. 
Indeed, the US falls below Greece and Slovakia, countries that people do not typically regard as role models or as competitors with the US at the top of the league tables. 
The UNDP report emphasizes another aspect of societal performance: vulnerability. 
It points out that while many countries succeeded in moving people out of poverty, the lives of many are still precarious. 
A small event – say, an illness in the family – can push them back into destitution. 
Downward mobility is a real threat, while upward mobility is limited. 
In the US, upward mobility is more myth than reality, whereas downward mobility and vulnerability is a widely shared experience. 
This is partly because of America’s health-care system, which still leaves poor Americans in a precarious position, despite President Barack Obama’s reforms. 
Those at the bottom are only a short step away from bankruptcy with all that that entails. 
Illness, divorce, or the loss of a job often is enough to push them over the brink. 
The 2010 Patient Protection and Affordable Care Act (or “Obamacare”) was intended to ameliorate these threats – and there are strong indications that it is on its way to significantly reducing the number of uninsured Americans. 
But, partly owing to a Supreme Court decision and the obduracy of Republican governors and legislators, who in two dozen US states have refused to expand Medicaid (insurance for the poor) – even though the federal government pays almost the entire tab – 41 million Americans remain uninsured. 
When economic inequality translates into political inequality – as it has in large parts of the US – governments pay little attention to the needs of those at the bottom. 
Neither GDP nor HDI reflects changes over time or differences across countries in vulnerability. 
But in America and elsewhere, there has been a marked decrease in security. 
Those with jobs worry whether they will be able to keep them; those without jobs worry whether they will get one. 
The recent economic downturn eviscerated the wealth of many. 
In the US, even after the stock-market recovery, median wealth fell more than 40% from 2007 to 2013. 
That means that many of the elderly and those approaching retirement worry about their standards of living. 
Millions of Americans have lost their homes; millions more face the insecurity of knowing that they may lose theirs in the future. 
These insecurities are in addition to those that have long confronted Americans. 
In the country’s inner cities, millions of young Hispanics and African-Americans face the insecurity of a dysfunctional and unfair police and judicial system; crossing the path of a policeman who has had a bad night may lead to an unwarranted prison sentence – or worse. 
Europe has traditionally understood the importance of addressing vulnerability by providing a system of social protection. 
Europeans have recognized that good systems of social protection can even lead to improved overall economic performance, as individuals are more willing to take the risks that lead to higher economic growth. 
But in many parts of Europe today, high unemployment (12% on average, 25% in the worst-affected countries), combined with austerity-induced cutbacks in social protection, has resulted in unprecedented increases in vulnerability. 
The implication is that the decrease in societal wellbeing may be far larger than that indicated by conventional GDP measures – numbers that already are bleak enough, with most countries showing that real (inflation-adjusted) per capita income is lower today than before the crisis – a lost half-decade. 
The report by the International Commission on the Measurement of Economic Performance and Social Progress (which I chaired) emphasized that GDP is not a good measure of how well an economy is performing. 
The US Census and UNDP reports remind us of the importance of this insight. 
Too much has already been sacrificed on the altar of GDP fetishism. 
Regardless of how fast GDP grows, an economic system that fails to deliver gains for most of its citizens, and in which a rising share of the population faces increasing insecurity, is, in a fundamental sense, a failed economic system. 
And policies, like austerity, that increase insecurity and lead to lower incomes and standards of living for large proportions of the population are, in a fundamental sense, flawed policies. 

The Global Economy in 2018 
HONG KONG – Economists like me are asked a set of recurring questions that might inform the choices of firms, individuals, and institutions in areas like investment, education, and jobs, as well as their policy expectations. 
In most cases, there is no definitive answer. 
But, with sufficient information, one can discern trends, in terms of economies, markets, and technology, and make reasonable guesses. 
In the developed world, 2017 will likely be recalled as a period of stark contrast, with many economies experiencing growth acceleration, alongside political fragmentation, polarization, and tension, both domestically and internationally. 
In the long run, it is unlikely that economic performance will be immune to centrifugal political and social forces. 
Yet, so far, markets and economies have shrugged off political disorder, and the risk of a substantial short-term setback seems relatively small. 
The one exception is the United Kingdom, which now faces a messy and divisive Brexit process. 
Elsewhere in Europe, Germany’s severely weakened chancellor, Angela Merkel, is struggling to forge a coalition government. 
None of this is good for the UK or the rest of Europe, which desperately needs France and Germany to work together to reform the European Union. 
One potential shock that has received much attention relates to monetary tightening. 
In view of improving economic performance in the developed world, a gradual reversal of aggressively accommodative monetary policy does not appear likely to be a major drag or shock to asset values. 
Perhaps the long-awaited upward convergence of economic fundamentals to validate market valuations is within reach. 
In Asia, Chinese President Xi Jinping is in a stronger position than ever, suggesting that effective management of imbalances and more consumption- and innovation-driven growth can be expected. 
India also appears set to sustain its growth and reform momentum. 
As these economies grow, so will others throughout the region and beyond. 
When it comes to technology, especially digital technology, China and the United States seem set to dominate for years to come, as they continue to fund basic research, reaping major benefits when innovations are commercialized. 
These two countries are also home to the major platforms for economic and social interaction, which benefit from network effects, closure of informational gaps, and, perhaps most important, artificial-intelligence capabilities and applications that use and generate massive sets of valuable data. 
Such platforms are not just lucrative on their own; they also produce a host of related opportunities for new business models operating in and around them, in, say, advertising, logistics, and finance. 
Given this, economies that lack such platforms, such as the EU, are at a disadvantage. 
Even Latin America has a major innovative domestic e-commerce player (Mercado Libre) and a digital payments system (Mercado Pago). 
In mobile online payments systems, China is in the lead. 
With much of the country’s population having shifted directly from cash to mobile online payments – skipping checks and credit cards – China’s payments systems are robust. 
Earlier this month on Singles’ Day, an annual festival of youth-oriented consumption that has become the single largest shopping event in the world, China’s leading online payment platform, Alipay, processed up to 256,000 payments per second, using a robust cloud computing architecture. 
There is also impressive scope for expanding financial services – from credit assessments to asset management and insurance – on the Alipay platform, and its expansion into other Asian countries via partnerships is well underway. 
In the coming years, developed and developing economies will also have to work hard to shift toward more inclusive growth patterns. 
Here, I anticipate that national governments may take a back seat to businesses, subnational governments, labor unions, and educational and non-profit institutions in driving progress, especially in places hit by political fragmentation and a backlash against the political establishment. 
Such fragmentation is likely to intensify. 
Automation is set to sustain, and even accelerate, change on the demand side of labor markets, in areas ranging from manufacturing and logistics to medicine and law, while supply-side responses will be much slower. 
As a result, even if workers gain stronger support during structural transitions (in the form of income support and retraining options), labor-market mismatches are likely to grow, sharpening inequality and contributing to further political and social polarization. 
Nonetheless, there are reasons to be cautiously optimistic. 
For starters, there remains a broad consensus across the developed and emerging economies on the desirability of maintaining a relatively open global economy. 
The notable exception is the US, though it is unclear at this point whether President Donald Trump’s administration actually intends to retreat from international cooperation, or is merely positioning itself to renegotiate terms that are more favorable to the US. 
What does seem clear, at least for now, is that the US cannot be counted on to serve as a principal sponsor and architect of the evolving rules-based global system for fairly managing interdependence. 
The situation is similar with regard to mitigating climate change. 
The US is now the only country that is not committed to the Paris climate agreement, which has held despite the Trump administration’s withdrawal. 
Even within the US, cities, states, and businesses, as well as a host of civil-society organizations, have signaled a credible commitment to fulfilling America’s climate obligations, with or without the federal government. 
Still, the world has a long way to go, as its dependence on coal remains high. 
The Financial Times reports that peak demand for coal in India will come in about ten years, with modest growth between now and then. 
While there is upside potential in this scenario, depending on more rapid cost reductions in green energy, the world is still years away from negative growth in carbon dioxide emissions. 
All of this suggests that the global economy will confront serious challenges in the months and years ahead. 
And looming in the background is a mountain of debt that makes markets nervous and increases the system’s vulnerability to destabilizing shocks. 
Yet the baseline scenario in the short run seems to be one of continuity. 
Economic power and influence will continue to shift from west to east, without any sudden change in the pattern of job, income, political, and social polarization, primarily in the developed countries, and with no obvious convulsions on the horizon. 

Inspiring Economic Growth 
NEW HAVEN – In his First Inaugural Address, during the depths of the Great Depression, US President Franklin Delano Roosevelt famously told Americans that, “The only thing we have to fear is fear itself.” 
Invoking the Book of Exodus, he went on to say that, “We are stricken by no plague of locusts.” 
Nothing tangible was causing the depression; the problem, in March 1933, was in people’s minds. 
The same could be said today, seven years after the 2008 global financial crisis, about the world economy’s many remaining weak spots. 
Fear causes individuals to restrain their spending and firms to withhold investments; as a result, the economy weakens, confirming their fear and leading them to restrain spending further. 
The downturn deepens, and a vicious circle of despair takes hold. 
Though the 2008 financial crisis has passed, we remain stuck in the emotional cycle that it set in motion. 
It is a bit like stage fright. 
Dwelling on performance anxiety may cause hesitation or a loss of inspiration. 
As fear turns into fact, the anxiety worsens – and so does the performance. 
Once such a cycle starts, it can be very difficult to stop. 
According to Google Ngrams, it was during the Great Depression – around the late 1930s – that the term “feedback loop” began to appear frequently in books, often in relation to electronics. 
If a microphone is placed in front of a loudspeaker, eventually some disturbance will cause the system to produce a painful wail as sound loops from the loudspeaker to the microphone and back, over and over. 
Then, in 1948, the great sociologist Robert K. Merton popularized the phrase “self-fulfilling prophecy” in an essay with that title. 
Merton’s prime example was the Great Depression. 
But the memory of the Great Depression is fading today, and many people probably do not imagine that such a thing could be happening now. 
Surely, they think, economic weakness must be due to something more tangible than a feedback loop. 
But it is not, and the most direct evidence of this is that, despite rock-bottom interest rates, investment is not booming. 
In fact, real (inflation-adjusted) interest rates are hovering around zero throughout much of the world, and have been for more than five years. 
This is especially true for government borrowing, but corporate interest rates, too, are at record lows. 
In such circumstances, governments considering a proposal to build, say, a new highway, should regard this as an ideal time. 
If the highway will cost $1 billion, last indefinitely with regular maintenance and repairs, and yield projected annual net benefits to society of $20 million, a long-term real interest rate of 3% would make it nonviable: the interest cost would exceed the benefit. 
But if the long-term real interest rate is 1%, the government should borrow the money and build it. 
That is just sound investing. 
In fact, the 30-year inflation-indexed US government bond yield as of May 4 was only 0.86%, compared with more than 4% in the year 2000. 
Such rates are similarly low today in many countries. 
Our need for better highways cannot have declined; on the contrary, given population growth, the need for investment can only have become more pronounced. 
So why are we not well into a highway-construction boom? 
People’s weak appetite for economic risk may not be the result of pure fear, at least not in the sense of an anxiety like stage fright. 
It may stem from a perception that others are afraid, or that something is inexplicably wrong with the business environment, or a lack of inspiration (which can help overcome background fears). 
It is worth noting that the US experienced its fastest economic growth since 1929 in the 1950s and 1960s, a time of high government expenditure on the Interstate Highway System, which was launched in 1956. 
As the system was completed, one could cross the country and reach its commercial hubs on high-speed expressways at 75 miles (120 kilometers) an hour. 
Maybe the national highway system was more inspirational than the kinds of things that Roosevelt tried to stimulate the US out of the Great Depression. 
With his Civilian Conservation Corps, for example, young men were enlisted to clean up the wilderness and plant trees. 
That sounded like a pleasant experience – maybe a learning experience – for young men who would otherwise be idle and unemployed. 
But it was not a great inspiration for the future, which may help to explain why Roosevelt’s New Deal was unable to end America’s economic malaise. 
By contrast, the apparent relative strength of the US economy today may reflect some highly visible recent inspirations. 
The fracking revolution, widely viewed as originating in the US, has helped to lower energy prices and has eliminated America’s dependency on foreign oil. 
Likewise, much of the rapid advance in communications in recent years reflects innovations – smartphone and tablet hardware and software, for example – that has been indigenous to the US. 
Higher government spending could stimulate the economy further, assuming that it generates a level of inspiration like that of the Interstate Highway System. 
It is not true that governments are inherently unable to stimulate people’s imagination. 
What is called for is not little patches here and there, but something big and revolutionary. 
Government-funded space-exploration programs around the world have been profound inspirations. 
Of course, it was scientists, not government bureaucrat, who led the charge. 
But such programs, whether publicly funded or not, have been psychologically transforming. 
People see in them a vision for a greater future. 
And with inspiration comes a decline in fear, which now, as in Roosevelt’s time, is the main obstacle to economic progress. 

China’s Growth Challenge 
BEIJING – Throughout the just concluded 18th Congress of the Chinese Communist Party ubiquitous television screens in trains and metro stations broadcast a live feed of the Chinese assembly. 
Beijing’s busy people, however, seemed not to pay close attention: for them, it was business as usual. 
The Chinese public’s indifference to their country’s ceremonial transition of power is hardly surprising. 
All critical decisions were taken well ahead of the Congress, behind closed doors, with very little input from outsiders. This apparently seamless transition, however, is widely expected to usher in a complex and potentially difficult decade for China – and for the rest of the world. 
China is at a turning point. 
With more than 100 million people still below the official poverty line and per capita income currently just over $6,000 in nominal terms, robust economic growth must be maintained. 
Outgoing President Hu Jintao indicated that China’s total GDP and per capita income should double by 2020, which will require 7.5% average annual growth. 
Is this feasible? 
Recent improvements in data for industrial production, fixed investment, and retail sales suggest that the Chinese economy, which had slowed in recent quarters, may already be on the mend. 
But the authorities remain cautious, given that China’s economic outlook depends heavily on external conditions, which is the source of most current uncertainty. 
However, as things stand, most independent economists expect 7-7.5% annual GDP in 2013-2017, while the International Monetary Fund forecasts a more optimistic 8.2-8.5% rate during this period. 
As we heard repeatedly during the Congress, China’s leadership reckons that its biggest policy challenge in the coming years will be the shift from export-led growth to an economic model based more firmly on domestic consumption. 
This has now become a matter of urgency, as the United States and Europe are unlikely to provide much support to Chinese exports. 
Indeed, China is now expected to undershoot its 10% growth target for trade in 2012, even though exports to emerging-market economies were up by more than that in the first nine months of the year. 
Income growth and a lower household savings rate are essential to the shift in China’s growth model, and each presupposes key reforms. 
For example, improving the provision of health care, education, and care for the elderly, and bringing it into line with the needs and expectations of the emerging middle class should encourage more households to allocate a larger share of their income to consumption. 
Likewise, increasing the interest rates paid on bank deposits would enable savings to decline without loss of income. 
At the same time, as China proceeds along the path toward a market-based economy established more than 30 years ago by Deng Xiaoping, policymaking has become more complex. 
The economy needs to be steered in the desired direction without triggering instability, making correct sequencing and coordination of policy measures essential. 
As some Chinese colleagues told me, the success of reforms in the next decade will depend more than ever on good design. 
In particular, the new leadership will have to attend to the linkages between the real economy and the expanding financial sector as it overhauls state-owned companies and liberalizes the banks. 
From commodities to financial assets, price formation should become more market-based and transparent, while capital allocation should become more efficient and the scope for rent-seeking and corruption should be reduced. 
Moreover, as the renminbi’s internationalization continues at a steady pace, domestic liberalization should occur in tandem with deeper global integration. 
In the coming years, the key issue, reflected in Hu’s Congress-opening speech, will be the relationship between the state and the market. 
But reforms will continue to be top-down and gradual, especially in the financial sector, where most efforts will be concentrated in the next decade. 
Many Chinese seem to believe that market discipline will bring fair competition and contribute to closing the widening gap between rich and poor. 
China’s income distribution has become highly skewed: at 0.438, the Gini coefficient, which measures income inequality, puts the country closer to the United States than to northern Europe’s egalitarian societies (with the exception of the United Kingdom). 
And the unjust allocation of resources, which has enriched so many politically well-connected individuals and families, has become more difficult to bear. 
A key question for the next decade, therefore, is whether the Chinese authorities’ growth targets will be enough to preserve social cohesion as further economic and political reforms are gradually implemented. 
As the economic pie grows less rapidly, greater fairness will be crucial to social stability. 
This much seems clear to the new leadership. 
Whether they will be able to engineer the necessary institutional shifts remains to be seen. 

The Danger in Today’s Good Economic News 
WASHINGTON, DC – As 2018 begins, things are looking up for the global economy. 
Over the last six months, growth projections by official institutions like the International Monetary Fund, matched or even exceeded by private forecasts, have been adjusted upward. 
But not all of the news is good. 
To be sure, there are plenty of positive indicators to inspire optimism. 
The eurozone Purchasing Managers’ Index for manufacturing hit an all-time high last month, and even Greece’s economy is finally growing. 
In the United States, growth now appears likely to exceed the IMF’s October prediction of 2.3% for 2018. 
In the emerging world, China seems to have staved off the risk of a sharp slowdown: while its economy is no longer achieving double-digit growth, its increased size implies that, in absolute terms, today’s 7% annual rate exceeds the 10% rates of the past. 
Turkey, for its part, posted 11% growth in the third quarter of 2017. 
Even Brazil, which experienced negative growth in 2016, is likely to exceed the IMF’s forecast of 1.5% growth in 2018. 
As the real economy strengthens, equity values – which, for a time, seemed disconnected from fundamentals – are increasingly being validated. 
The Financial Times Stock Exchange All-World Index rose by nearly 22% in 2017 – its best performance since the post-crisis rebound of 2009. 
As the growth pessimism of recent years fades, some of the warnings that have been made in recent years seem to have become outdated. 
Northwestern University’s Robert Gordon, for example, argued that the US economy was bound to slow down, because today’s technological innovations would not boost growth to the extent they had in the past. 
Harvard’s Lawrence H. Summers got a lot of attention for his argument that the world risked sliding toward “secular stagnation,” because the interest rate needed to bring desired investment in line with desired savings was below zero. 
Yet, while the zero lower bound no longer seems to be a binding constraint, there are potential causes for concern, one of which relates to debt levels. 
With the advanced economies no longer needing to maintain extraordinary monetary policies, nominal interest rates are set to climb from their current historic lows. 
As that happens, high debt levels could become problematic, impeding growth by triggering disorderly deleveraging. 
That said, given low inflation, there is little reason to expect interest rates to rise sharply, and gradual monetary-policy normalization would not necessarily have negative effects on growth or inflation. 
But there is another potential obstacle in the path of sustained recovery: the long-term decline in productivity growth has not yet been reversed. 
Instead, the current boom seems to be demand-led, with private consumption being the biggest driver, though private investment, too, is finally starting to rise. 
These trends have been accompanied by solid employment growth, which is welcome news, but cannot last forever. 
In the longer run, economic performance and potential growth will depend on the supply side and, in particular, on a revival of productivity growth. 
Techno-optimists claim that technology will fuel the needed gains, as the lag between digital capabilities and their applications in the economy shortens. 
But it is too early to say, with any evidence-backed certainty, whether they or techno-pessimists like Gordon are right. 
There are convincing arguments on both sides, though we count ourselves as cautious techno-optimists. 
What is not really up for debate is that inequality within countries is rising fast. 
While individual countries show different levels of inequality, its rise has been evident almost everywhere, with income and wealth increasingly concentrated at the very top. 
This trend will accelerate as new technologies, regardless of how much productivity growth they generate, continue to increase the skill premium, shift income to frontier firms, and allow new types of near-monopoly, “winner-take-all” positions to develop on a global scale. 
Herein lies the biggest danger in today’s exuberant headlines about growth. 
Many believe that rapid growth can act as a virtual panacea for countries’ political and social woes, including the rise of populism and nationalism. 
But if the benefits of rapid growth accrue to the top 5% or 1%, social tensions are bound to rise. 
And the fact is that it will be difficult to develop policies that can reverse damaging political trends and promote more widely shared growth. 
This is not to say that nothing can be done. 
On the contrary, devising solutions should be a high priority, with the policy debate centering on measures that would help to create truly inclusive economies. 
One such measure would be broad-based access to affordable and quality education, including skills upgrading and retraining. 
The development of regulatory frameworks that encourage competition would also help, as would limiting tax-base erosion. 
Public research should be funded in a way that gives taxpayers a stake in profitable outcomes. 
Likewise, infrastructure investments should have explicit equity-related objectives. 
The goal should be to attack inequality on two fronts: ensuring that pre-tax incomes rise in a more inclusive fashion and strengthening the equalizing role of taxes and transfers. 
Given the global nature of markets, many policies will require international cooperation to be effective. 
With issues concerning international trade, investment, competition, and intellectual property rights increasingly linked, global approaches that can address them in a holistic way have become vital. 
Failure to achieve greater inclusiveness – a difficult but attainable goal – would stoke social tensions and fuel already-resurgent nationalism, producing disruptions that would ultimately lead to losses for everyone. 
Yet today’s good growth news risks obscuring that risk, as it threatens to weaken the will to make the needed changes, leaving economies to rely on trickle-down effects. 

The Economic Trend Is Our Friend 
BERKELEY – These are days of grave disillusionment with the state of the world. 
Sinister forces of fanatical, faith-based killing – something that we in the West, at least, thought had largely ended by 1750 – are back. 
And they have been joined by and are reinforcing forces of nationalism, bigotry, and racism that we thought had been largely left in the ruins of Berlin in 1945. 
In addition, economic growth since 2008 has been profoundly disappointing. 
There is no reasoned case for optimistically expecting a turn for the better in the next five years or so. 
And the failure of global institutions to deliver ever-increasing prosperity has undermined the trust and confidence which in better times would serve to suppress the murderous demons of our age. 
Pessimism understandably comes easy these days – perhaps too easy. 
In fact, enthusiastic and positive contrarianism is in order: if we look at global economic growth not just five years out, but over the next 30-60 years, the picture looks much brighter. 
The reason is simple: the large-scale trends that have fueled global growth since World War II have not stopped. 
More people are gaining access to new, productivity enhancing technologies, more people are engaging in mutually beneficial trade, and fewer people are being born, thus allaying any continued fears of a so-called population bomb. 
Moreover, innovation, especially in the global north, has not ceased, even if it has possibly slowed since the 1880s. 
And while war and terror continue to horrify us, we are not witnessing anything on the scale of the genocides that were a hallmark of the twentieth century. 
Fortunately, these major trends are likely to continue, according to data from the Penn World Table research project, the best source for summary information on global economic growth. 
The PWT data on average real (inflation-adjusted) per capita GDP show that the world in 1980 was 80% better off than it was in 1950, and another 80% better off in 2010 than it was in 1980. 
In other words, our average material wellbeing is three times what it was in 1950. 
Tripling global material wellbeing may sound like a lot, but if anything it’s a low estimate. 
The way we measure real GDP accounts for all the goods and services being produced, but it doesn’t properly account for value that exists but cannot be measured – such as the immense benefits that accrue to social-media users from services that cost them nothing. 
More than ever before, we are producing commodities that contribute to social welfare through use value rather than market value. 
Some would argue that this is nothing new, but that argument is unpersuasive, given the sheer bulk of time we now spend interacting with information-technology systems where the revenue flow is, at most, a tiny trickle tied to ancillary advertising. 
The PWT data also allow us to sort by country, so let’s consider the cases of China and India, which comprise 30% of humanity. 
China’s real per capita GDP in 1980 was 60% lower than the world average, but today it is 25% above it. 
India’s real per capita GDP in 1980 was more than 70% below the world average, but India has since closed that gap by half. 
This is indisputable progress of one kind; but, to avoid painting too rosy a picture, we should also consider global inequality. 
The world’s countries have shown no sign since 1950 of converging at a shared level of prosperity. 
According to the PWT data, two-thirds of all countries in 1950 had real per capita GDP veering above or below the global average by at least 45%, and by as much as 225%. 
By 1980, that spread had widened to at least 33% and as much as 300%; and today it is 28% and 360%, respectively. 
Still, all told, the world economy is a more equal place for the average individual today than it was in 1980. 
This is partly thanks to a series of strong leaders, such as those in China since Deng Xiaoping, and in India since Rajiv Gandhi. 
But there are no more countries as big as China and India to stand up and make significant leaps in development, and few observers are confident that Chinese President Xi Jinping and Indian Prime Minister Narendra Modi will match their predecessors’ growth legacies. 
Indeed, such episodes of prolonged, rapid growth may become a thing of the past if the world economy has no more opportunities to accelerate technology transfer, and if more countries continue to mature from high-growth developing economies to more steady-state developed economies. 
It may well be true that the engine of innovation itself will run more slowly. 
But it will still run, and people will still adopt new technologies, and the world economy will still grow. 
Short of a nightmare scenario like terror-driven nuclear war, you can expect my successors in 2075 to look back and relish that, once again, their world is three times better off than ours is today. 
Beyond that, things are harder to predict. 
If we fail to act now to slow and reverse global temperature trends, climate change will be the specter stalking the post-2080 world. 
In that case, our great-grandchildren will have little to thank us for. 

Economic Growth’s Many Recipes 
CAMBRIDGE, MA. -- Development “big think” has always been dominated by comprehensive visions about transforming poor societies. 
From the so-called “Big Push” to “Balanced Growth,” from the “Washington Consensus” to “Second Generation Reforms,” the emphasis has been on wholesale change. 
Today’s fashion in development is no different. 
The prevailing obsession with the “governance” agenda entails a broad-based effort to remold institutions in developing societies as a prerequisite for economic growth. 
The United Nations Millennium Project involves a large-scale, coordinated big push of investment in human capital, public infrastructure, and agricultural technologies. 
But there have also been iconoclastic dissenters from such comprehensive approaches, among whom Albert Hirschman was without doubt the most distinguished. 
Indeed, Hirschman’s seminal contributions have now been recognized by the United States Social Science Research Council, which this year established a prize in his honor. 
Hirschman’s interests shifted away from economic development over the course of his illustrious career. 
But when he was still involved in development debates, he would frequently remind his contemporaries that any country that had the capacity to undertake comprehensive programs would not be underdeveloped to begin with. 
Indeed, he once chided John Kenneth Galbraith for enunciating a long list of prerequisites for foreign aid to be effective. 
If developing countries could meet these conditions, he wrote, they would be in a position to send foreign aid to the United States! 
Hirschman believed that the possibilities for economic development are not nearly as constrained as comprehensive theories would lead us to believe. 
The imbalances specific to underdevelopment create opportunities that policymakers can seize on. 
Instead of relying on fads emanating from abroad, we need to experiment and look for the unique solutions that will allow us to circumvent ingrained social structures that inhibit growth. 
Hirschman’s central insights on development have held up extremely well. 
The key lesson of the last half-century is that policymakers must be strategic, rather than comprehensive. 
They have to do the best with what they have instead of wishing they could transform their society wholesale. 
They need to identify priorities and opportunities, and work on them. 
They must seek sequential, cumulative change rather than a single, all-inclusive breakthrough. 
Successful countries do share some common features. 
They all provide some degree of effective property rights protection and contract enforcement, maintain macroeconomic stability, seek to integrate into the world economy, and ensure an appropriate environment for productive diversification and innovation. 
But how these ends are achieved differs. 
For example, greater integration with world markets can be achieved via export subsidies (South Korea), export-processing zones (Malaysia), investment incentives for multinational enterprises (Singapore), special economic zones (China), regional free trade agreements (Mexico), or import liberalization (Chile). 
The best-designed policies are always contingent on local conditions, making use of pre-existing advantages and seeking to overcome domestic constraints. 
That is why successful reforms often do not travel well. 
Reforms, after all, are not hothouse plants that can be transplanted at will in any soil. 
Moreover, generating economic growth requires hitting the right targets, not doing everything at once. 
What matters at any point in time is to alleviate a society’s immediate binding constraints – another reason why different policies are needed for different places. 
China was constrained by poor supply incentives in agriculture in the late 1970’s. 
Today’s Brazil is constrained by inadequate supply of credit. 
El Salvador is constrained by inadequate production incentives in tradable goods. 
Zimbabwe is constrained by poor governance. 
These problems all require different methods for unlocking growth. 
What we need is selective, well-targeted reforms, not a laundry list. 
Countries run into trouble when they do not use high-growth periods to strengthen their institutional underpinnings. 
Two kinds of institutions in particular need shoring up: conflict management institutions to enhance economies’ resilience to external shocks, and institutions that promote productive diversification. 
Growth collapsed in Africa in the late 1970’s because of the weakness of the former, and fizzled in Latin America after the first half of the 1990’s because of the weakness of the latter. 
This line of thinking has vast implications for the design of appropriate global economic arrangements. 
Hirschman would be aghast at the extent of intrusion into domestic policymaking that the World Trade Organization or the International Monetary Fund engage in nowadays. 
As international bureaucracies with a penchant for “best practices” and common standards, these institutions are woefully unsuited to the task of seeking innovative, unique pathways suited to each country’s particular circumstances. 
But Hirschman also would no doubt chide developing country governments for not living up to their responsibilities and for passing on the buck so freely to these external agencies. 
For, ultimately, it is up to each country to say, “Thanks, but no, thanks; we’ll do it our way.” 
Many economists were skeptical about Hirschman’s approach because they could not quite fit it into the economics they had been trained to practice. 
But, over the years, economics has become richer, too. 
Dynamic models have become much more common, an economics of the “second-best” has flourished, political economy has become mainstream, and behavioral economics has thrown the “rational actor” into doubt. 
As a result, Hirschman looks less and less the maverick that he fancied himself to be. 
Conventional wisdom may finally be catching up with him. 

The Growth Conundrum 
BERKELEY – The world faces a major dilemma. 
While rapid economic growth, such as that realized over the past 50 years, is critical to support development, we now also know that it can have serious adverse consequences, particularly for the environment. 
How can we balance the imperatives of growth and development with the need to ensure sustainability? 
The unprecedented growth of per capita income during the last 20 years has lifted more than one billion people out of extreme poverty. 
In developing countries, life expectancy has increased by 20 years since the mid-1970s, and the illiteracy rate among adults was almost halved in the last 30 years. 
But rapid economic growth has placed enormous pressure on the environment. 
Moreover, it has been accompanied by rising income inequality, which has now reached historic highs within many countries (though, across countries, such inequality has declined). 
Given this, one might argue that slower growth would be good for the world. 
In that case, the solution would be at hand. 
According to a new report by the McKinsey Global Institute (MGI), aging populations and declining fertility rates in many parts of the world could dampen global growth considerably over the next 50 years. 
Indeed, even if productivity were to expand at the same rapid rate as during the last half-century, global growth would fall by 40%, far below the anemic rate of the last five years. 
Employment growth is also set to slow significantly. 
As a result, even with slower population growth, per capita income growth would fall by about 19%. 
To be sure, GDP would still triple, and per capita income would double, over the next 50 years. 
Nonetheless this rate of long-term growth would constitute a sharp break with the six-fold GDP expansion and nearly three-fold increase in per capita income of the last 50 years. 
Despite its potential benefits, especially for the environment, the impending growth slowdown carries significant risks. 
While growth is not an end in itself, it enables the achievement of a broad set of societal goals, including the creation of economic and employment opportunities for millions of vulnerable and poor people and the provision of social goods like education, health care, and pensions. 
So how do we ensure that these imperatives are fulfilled, despite demographic and environmental constraints? 
The first step is to secure economic growth through productivity gains. 
The needed acceleration in productivity growth – by 80% to sustain overall GDP growth and by 22% to sustain per capita income growth at the rates of the last half-century – is daunting. 
But, based on case studies in five economic sectors, the MGI report finds that achieving it, though “extremely challenging,” is possible – and without relying on unforeseeable technological advances. 
Three-quarters of the potential pickup in productivity could come from “catch-up” improvements, with countries taking steps – modernizing their retail sectors, consolidating automobile production into a smaller number of larger factories, improving health-care efficiency, and reducing food-processing wastage – that have already proven effective elsewhere. 
The rest can come from technological, operational, and business innovations – for example, developing new seeds to increase agricultural yields, using new materials (such as carbon-fiber composites) to make cars and airplanes lighter and more resilient, or digitizing medical records. 
Another significant growth opportunity lies in boosting the employment and productivity of women. 
Today, only about half of the world’s working-age women are employed. 
They earn about three-quarters as much as men in the same occupations, and are over-represented in informal, temporary, and low-productivity jobs. 
MGI estimates that increasing women’s labor-force participation rate could contribute almost 60% of potential labor-force growth during the next half-century. 
Realizing this potential will require efforts by both employers and governments to eliminate discriminatory practices that impede the recruitment, retention, and promotion of women, as well as credit, tax, and family support policies to help workers balance their responsibilities at work and at home. 
Meanwhile, in order to mitigate the environmental impact of continued rapid growth, the world must improve its resource efficiency considerably. 
MGI and others have identified numerous ecologically responsible growth opportunities emanating from the smarter use of limited resources. 
Consider improvements in energy efficiency, which could halve projected energy demand between now and 2020. 
As California – the world’s eighth-largest economy – has demonstrated, strict energy-efficiency standards can actually be good for growth and jobs. 
Indeed, such policies have kept California’s per capita energy demand constant for the last three decades – even as such demand grew by 50% in the rest of the United States – without compromising growth. 
There is a strong business and consumer case for improving resource productivity, as it could lead to substantial cost savings. 
Fortunately, policies that support this goal are gaining momentum in developed and developing countries alike. 
Even if gains in female labor-force participation and resource-efficient productivity growth sustain high rates of economic growth, one key challenge remains: income inequality. 
In fact, there is no simple relationship between growth and income inequality; after all, inequality has been increasing in both slow-growing developed economies and fast-growing emerging economies. 
According to the French economist Thomas Piketty, income inequality rises when the return on capital exceeds economic growth, meaning that, by itself, faster economic growth would reduce inequality. 
Using a different approach, economists at the International Monetary Fund also find a positive relationship between lower income inequality and faster growth, concluding that policies that redistribute income can foster faster, more sustainable growth. 
Growth still matters. 
As demographic tailwinds turn into headwinds, and environmental challenges become ever more apparent, businesses and governments need to think carefully about how to improve resource efficiency while fostering more inclusive economic growth. 


Crazy Rich Asia 
CAMBRIDGE – In the surprise hit movie “Crazy Rich Asians” (based on a 2013 Kevin Kwan novel), a New York University economics professor (Rachel), travels with her boyfriend to Singapore to meet his family. 
There, she learns, apparently for the first time, that her significant other (Nick) is heir to one of Asia’s largest fortunes and has a mother intent on making sure her son does not marry a commoner, Asian-American or not. 
Partly because of its (terrific) all-Asian cast (an extreme rarity), and partly because it recalls earlier eras of great romantic comedies, the film has caused a lot of buzz. 
Perhaps there will even be a long overdue Oscar for Michelle Yeoh (from “Crouching Tiger, Hidden Dragon”), who plays the steely but loving mother. 
But the film also stars Singapore, a place unfamiliar to most Westerners. 
For some, the real shocker in the movie will be just how crazy rich parts of Asia have become. 
To get a sense of the island city-state’s meteoric rise, one need only compare the glittering metropolis depicted in “Crazy Rich Asians” with the hut-filled fishing village depicted in the 1940 classic comedy, “Road to Singapore,” starring Bing Crosby, Dorothy Lamour, and Bob Hope. 
The comparison makes it easy to understand how the fictional Young family became ultra-rich as early real-estate investors. 
With annual output of approximately $325 billion in 2017 and 5.6 million inhabitants, Singapore now ranks with Denmark economically (though its population is more diverse). 
This is a flattering comparison, given that Denmark typically ranks at or near the top in global quality-of-life surveys. 
Singapore does not redistribute income as aggressively as Denmark, choosing instead to maintain lower taxes and concentrate transfers on low-income individuals. 
Nevertheless, all citizens have access to high-quality health coverage and schooling, and many are also eligible for heavily subsidized housing. 
In “Crazy Rich Asians,” poverty is depicted (rather ingeniously and hilariously) as a long-haul flight in economy rather than first class. 
Although Asian Americans have embraced the film as a breakthrough for Asian actors in mainstream Hollywood productions, is hotly debated in Singapore itself. 
Although many Singaporeans are excited that “CRA” (as it is called in Singlish) will catalyze a tourist boom, complaints are rife. 
One is that the characters don’t use more Singlish phrases; another is that the city-state’s large Indian and Malay communities are invisible. 
Most of all, there is a populist backlash against the Young family’s outsize wealth, making some question why Singapore has no capital-gains or estate taxes. 
Why should Nick be allowed to inherit so much money? 
But the backlash is perhaps less than an American or a European might expect. 
This may be because the middle class has done fairly under Singapore’s unique system, which is very much a market economy, but one where the government plays a big role in long-term planning and investment. 
One might cynically say that the backlash would be much more visible if there were less restrictions on the media. 
But surely slowing growth, especially where it affects middle-class incomes, has been a major driver of populism in Europe and the United States, exacerbated no doubt by the financial crisis. 
Although Singapore’s growth has also slowed, it still compares favorably to Europe. 
The Monetary Authority of Singapore is forecasting that growth will exceed 3% in 2018, on par with the United States, which is now the envy of the advanced economies. 
Singapore’s success is all the more remarkable given that proximity to the equator is usually associated with weak growth and poverty. 
Yet Singapore is situated virtually on top of it. 
(In one implausible scene in “Crazy Rich Asians,” Nick and Rachel are picked up at the airport in an open-air jeep.) 
Economists who study growth almost come to blows at conferences over whether “institutions” or “culture” are more important to growth, with both sides seeking to take credit for Singapore, which inherited English institutions and elements of Chinese culture. 
And now, one hopes, Asia will become a bigger part of Hollywood culture, with more films featuring Asian locales and actors. 
Produced for just $30 million (compared to over $300 million for Disney’s “Avengers: Infinity War”), “Crazy Rich Asians” has already grossed over $200 million worldwide. 
That’s impressive for any film, and perhaps especially for one that opens with a lesson in game theory. 
In the first scene, Rachel uses poker to illustrate a concept to a large class sitting in rapt attention, and she schools a graduate teaching assistant. 
Of course, most courses on game theory involve a lot of mathematics about strategic relationships, not playing actual games. 
But they can be fun all the same. 
Princeton University Professor Avinash Dixit famously uses clips from films such as “Dr. Strangelove” to illustrate key concepts. 
Now perhaps Hollywood will use films like “Crazy Rich Asians” to illustrate key concepts about a region that is the biggest economic success story of the last several decades. 
There are many more stories about that story to be told. 

Making the Business Case for Gender Equality 
NEW YORK – Around the world, gender bias is attracting renewed attention. 
Through protest marches and viral social-media campaigns, women everywhere are demanding an end to sexual harassment, abuse, femicide, and inequality. 
But, as successful as the #MeToo and #TimesUp movements have been in raising public awareness, the struggle for parity is far from over. 
Empowering women and girls is key to achieving all 17 of the United Nations Sustainable Development Goals by 2030. 
At the moment, however, gender bias remains a significant obstacle to global progress, and it is particularly acute in the workplace. 
Today, only 5% of S&P 500 companies are led by women, according to Catalyst, a non-profit CEO watchdog. 
That dismal figure is all the more remarkable when one considers that 73% of global firms allegedly have equal-opportunity policies in place, according to a survey by the International Labour Organization (ILO). 
Moreover, while research shows a clear link between a company’s gender balance and its financial health, women occupy fewer than 20% of governing board seats in the world’s largest companies. 
Addressing such deficiencies is both an economic and a moral imperative. 
A 2015 report by the McKinsey Global Institute found that if women and men played an “identical role in labor markets,” $28 trillion would be added to the global economy by 2025. 
These global gains would be in addition to the benefits for individual companies. 
Firms with greater gender equality are more innovative, generous, and profitable. 
But, at the current rate of female empowerment, it would take nearly 220 years to close the gender gap. 
The world cannot afford to wait that long; we need a new approach. 
To help chart a path for companies to hire, retain, and promote female employees, we are joining more than 400 global business leaders and government representatives in Santiago, Chile, this week for the Fourth Global Forum on Business for Gender Equality. 
The gathering – organized by the Chilean government and the United Nations Development Programme (UNDP), in partnership with the ILO and UN Women – will highlight the importance of gender equality in the private sector. 
One solution that will be on the agenda is the UNDP-supported Gender Equality Seal program, a unique initiative that certifies companies that have eliminated pay gaps, increased the number of women in decision-making positions, and worked to end sexual harassment on the job. 
Today, these UNDP-certified companies are leading the way in building a more balanced global workforce. 
For example, Chile’s state-owned copper mining company, Codelco, is increasing its ranks of female employees – and boosting productivity in the process. 
Similarly, Costa Rica’s Banco Nacional has promoted dozens of women into managerial roles; the bank is now a leading regional provider of financing to female entrepreneurs. 
And in Canada, Scotiabank has used a female mentorship program to become one of the industry’s most gender-balanced companies. 
Our hope is that many more firms will strive for gender equality certification, possibly even by signaling their intent this week. 
Another initiative to be discussed is the Women’s Empowerment Principles, a set of operating guidelines developed by UN Women and the UN Global Compact that embodies the business case for gender equality. 
More than 1,700 CEOs have endorsed the principles, while nearly 300 companies in 61 countries have used the initiative’s free gender gap analysis tool to help managers implement them in the workplace. 
To be sure, global meetings, certification systems, and free software are only part of the solution. 
Women still bear disproportionate domestic burdens, and pressures stemming from social and cultural norms often rob them of the chance to attend school, start businesses, or participate in public life. 
Moreover, women who do have paying jobs outside the home are on the wrong side of a gender wage gap that averages 23%, suggesting that equality is not only about opportunity. 
Businesses, communities, and families must work together to level the playing field. 
Fortunately, the cost of doing nothing is too high for any business—and economies as a whole—to bear, which is why we are optimistic that eliminating gender bias at work is possible. 
When companies make female empowerment central to their business strategies, growth and equality can be mutually reinforcing to leave no one behind. 

Economic Reality Fights Back 
Almost every day, we learn of yet another greedy US corporate chief executive who conspired with accountants, lawyers, and investment bankers to defraud the investing public. 
But beyond the scandals, the public should be more aware of the erratic nature of today's financial markets. 
Exchange rates and stock market prices deviate enormously from long-run fundamental values, which can cause major dislocations in the real economy of jobs, production, and investment. 
And yet the financial analysts that discuss these trends in the media have failed to assess them realistically. 
Take the case of the US dollar, whose value against the Euro is now plummeting. 
From the mid-1990s until very recently, the dollar strengthened sharply against European currencies. 
When the Euro was introduced in January 1999, it traded at $1.17. 
It then steadily lost value, bottoming out at around $0.83, before climbing back in recent days to near-parity with the dollar. 
For academic economists, the Euro's recent rise is no surprise. Currency exchange rates have a tendency to return to long-run average values following large deviations. 
Thus, the enormous strength of the dollar in recent years implied an eventual reversal. That reversal is now underway. 
Of course, if two economies have persistently different rates of inflation, then the exchange rate between their currencies will not tend to return to its historic level. 
But US and European inflation rates have been roughly the same. 
It is also possible that the exchange rate will not return to the long-run average if one economy is hit by a huge structural change. 
But such changes occur less frequently than is often supposed or alleged. 
The past, if interpreted with care, therefore remains a good guide to the future. 
Listening to the financial pundits, however, it often seems that history no longer matters. 
When the dollar strengthened against the Euro after 1999, the investment analysts came up with one explanation after another for why the trend would continue. 
They hailed the strength of the US economy, bemoaned the alleged weaknesses of the European economy, and claimed that the Euro was mismanaged. 
In short, they over-interpreted short-term market movements, simplistically portraying them as long-term trends. 
Unfortunately, financial analysts are usually poorly trained in economics. 
Their job is to say something clever for the television cameras. 
They do not trade on fundamental information, but on the latest gossip and fads. 
Of course, if such fads are common, and if they do not last forever, a smart investor can profit handsomely from them, say, by selling the dollar short in recent months. 
Some investors do succeed at this, but it is tougher than it sounds. 
As the great British economist John Maynard Keynes warned seventy-five years ago, "markets can remain irrational longer than you can remain solvent." 
In other words, even if you know that the dollar will eventually fall, you could go bankrupt before you can prove your case if everyone else continues betting that it will rise. 
So it is often safer to run with the crowd, even if you think the crowd is running in the wrong direction. 
For the same reason, Keynes famously described the stock market as a beauty contest in which each judge chooses not the most beautiful contestant according to his own views, but rather the contestant that he believes will be chosen by the other judges! 
Indeed, when US equity prices reached astronomical levels in the late 1990s, the pundits and investment bankers trotted out their silly explanations and theories. 
We now know that some of those explanations were deliberately fraudulent. 
Many brokerages sought to boost investment banking fees from companies whose shares they pushed on an unwitting public. 
But more generally, the pundits simply ran with the crowd. 
As equity prices soared, they invented theories to justify the rise. Deeper analysis would have told them instead that the rise would be short-lived. 
A few analysts got it right. 
Economist Robert Schiller of Yale explained very clearly and at book length why US equity prices would fall. 
Leading economic columnist Martin Wolf of the Financial Times distinguished himself again by warning, stubbornly and correctly, that the US stock market would eventually reverse to more normal historical levels. 
But the real economic costs imposed by the crowd mentality have been high. 
The excessive boom of the US stock market led to over-investment in the United States and a subsequent US recession when the bubble finally burst. 
The strength of the dollar has similarly distorted investment decisions, and the same kinds of exaggerated swings in exchange rates in emerging markets have contributed to the boom-bust cycles in Asia and Latin America in the past five years. 
So what should be done? 
Clearly, the leading investment banks should become much more serious about training and licensing their analysts to provide knowledge rather than nonsense in their public pronouncements. 
The responsible media should scrutinize economic trends critically, rather than pandering to mass opinion. 
And academic economists should be more steadfast in explaining how financial market prices reflect fundamental economic values, even if this is not necessarily true in the short term. 
Finally, tightened financial market regulation could perhaps slow some of the hot-money flows that exaggerate the booms and busts. 
Alas, Keynes stressed these same deficiencies long ago, so we should not expect any miraculous changes in behavior now. 
Investor, beware! 

A Growth Pact for America 
NEW YORK – America, once again, will have a divided government, with the Democrats holding the White House, and the Republicans controlling both houses of Congress. 
But that does not necessarily mean that the final two years of Barack Obama’s presidency need to be defined by stalemate and mutual recrimination. 
The electorate’s desire for change and fear of continuing slow growth, which pushed the Republicans to their victory in this week’s mid-term congressional election, will invariably prompt discussion about new policy options designed to raise growth, employment, and incomes. 
Of course, America’s experience with divided government can leave one pessimistic about the two parties’ ability to compromise; but, as Mexico recently demonstrated when its three big parties agreed on a market-oriented “Pact for Mexico,” even bitterly opposed political parties can overcome their suspicions to embrace needed reforms. 
The list of potential policy actions that could benefit the United States – trade liberalization, comprehensive regulatory reform, and immigration and education reform, among others – is long. 
But only two policies are particularly promising for such a “Pact for America”: federal infrastructure spending and corporate-tax reform. 
Enactment of these reforms would generate a win for each side – and for both. 
But such a bipartisan consensus requires removing both the left and the right’s ideological blinders, at least temporarily. 
On the left, a preoccupation with Keynesian stimulus reflects a misunderstanding of both the availability of measures (shovel-ready projects) and their desirability (whether they will meaningfully change the expectations of households and businesses). 
Indeed, to counteract the mindset forged in the recent financial crisis, spending measures will need to be longer-lasting if they are to raise expectations of future growth and thus stimulate current investment and hiring. 
The right, for its part, must rethink its obsession with temporary tax cuts for households or businesses. 
The impact of such cuts on aggregate demand is almost always modest, and they are poorly suited for shifting expectations for recovery and growth in the post-financial-crisis downturn. 
Politics complicates matters further, because the exclusively short-term focus on the fiscal impact of spending and revenues clashes with policies whose benefits accumulate over time. 
While such benefits may not appear to be “stimulus,” their mounting effect better serves the objective of raising expectations of future demand and growth. 
But the concerns of serious people, whether on the left or the right, are not so different. 
Will economic growth accelerate sufficiently to boost job and income growth? 
Can the barriers that exclude many Americans from recovery and future prosperity be removed? 
Federal infrastructure spending and corporate-tax reform should top the list of policies capable of attracting bipartisan agreement, because they promise significant long-term productivity, income, and employment gains, while also supporting short-term growth. 
A commitment to a multi-year federal infrastructure-spending program, for example, could increase demand, private investment, and employment, even though projects may not be immediately available. 
And such a program, normally proposed by Democrats, can and should be crafted to secure Republican support as well. 
To that end, an infrastructure program should give states and localities a key role in selecting the projects to be funded, and these governmental units should have “skin in the game” by funding part of the costs. 
Policymakers should also give serious consideration to regulatory reforms that would reduce the expense of new projects and assure their timely completion. 
An infrastructure program oriented in this way – as opposed to a grab bag of politically expedient shovel-ready projects – should be able to muster conservative support. 
And, done properly, federally funded infrastructure projects should provide substantial benefits to lower-income Americans. 
Better transport infrastructure, for example, would not only create jobs, but would also reduce the costs of commuting to work. 
Corporate-tax reform also offers a good opportunity for bipartisan agreement, especially given that Obama and congressional leaders of both parties have expressed interest. 
While gains from fundamental tax reform – say, replacing the current tax system with a broad-based consumption tax – are large, on the order of 0.5-1 percentage point per year of economic growth for a decade, corporate-tax reform would also boost growth. 
Reducing the tax rate for companies substantially, while eliminating targeted business-tax preferences and broadening the corporate-tax base, would increase both investment and workers’ wages. 
Allowing multinational companies to repatriate overseas profits without paying additional US tax would also bolster investment and job creation at home. 
Given that recent research shows that much of the burden of corporate taxation is borne by workers in the form of lower wages, Democrats should embrace tax reform as a way to support income growth. 
One could add to such a reform further support for low-income Americans by increasing the Earned Income Tax Credit for single workers. 
Given their policy objectives, conservatives should support a well-crafted federal infrastructure program, and liberals should support corporate-tax reform. 
But changes in the political process would help move matters ahead. 
Because the payoffs from infrastructure spending and tax reform do not fit neatly within the five-year or ten-year budget window used by America’s fiscal scorekeepers, measuring more completely the benefits from such policies is vital to attracting political support. 
Moreover, any increase in spending on infrastructure or any revenue loss from tax reform should be offset elsewhere. 
For example, future growth in Social Security benefits or the home-mortgage-interest tax deduction could be scaled back for more affluent individuals, as progressive indexation, proposed by conservatives in the US, and the adjustment of mortgage-interest tax deductions in the United Kingdom, started during the Thatcher administration, attest. 
Clearly, the economy is Americans’ top concern. 
Its leaders must respond with a policy agenda focused on reviving growth now and sustaining it in the future. 
But that can happen only if enough legislators in both parties, and the president, remove their intellectual and political blinders and reach the long-term compromises needed to create jobs and increase incomes. 
The time for a Pact for America has arrived. 

Economists on the Refugee Path 
NEW HAVEN – Today’s global refugee crisis recalls the period immediately after World War II. 
By one contemporary estimate, there were more than 40 million refugees in Europe alone. 
These “displaced persons,” as they were called at the time, were forced to flee their homes because of violence, forced relocation, persecution, and destruction of property and infrastructure. 
The dire postwar situation led to the creation in 1950 of the United Nations High Commissioner for Refugees, which was expected to serve only a temporary mandate, protecting displaced people for three years. 
But the problem never went away. 
On the contrary, the UNHCR is not only still with us; it is sounding an alarm. 
In its 2015 mid-year report, the agency put the number of “forcibly displaced” people worldwide at 59.5 million at the end of 2014, including 19.5 million internationally displaced, which they define as true refugees. 
Some countries – Afghanistan, Azerbaijan, Colombia, Central African Republic, Democratic Republic of Congo, Iraq, Myanmar, Nigeria, Pakistan, Somalia, South Sudan, Sudan, Syria, and Ukraine – each accounted for more than a half-million forcibly displaced people at the end of 2014. The report noted that the total number had certainly grown substantially since. 
Unfortunately, the report underscores the incompleteness of our understanding of the refugee problem. 
In fact, throughout history, the fate of refugees seeking asylum in another land has largely been unstudied. 
Historians record wars, and they mention diasporas, but they rarely show much interest in how refugee crises arose or were resolved. 
To the extent that history is written by the victors, that is not surprising. 
The knowledge that one’s country terrorized a minority to the point that its members had to flee, or that a substantial share of one’s forebears arrived in defeat and panic, is not exactly an inspiring source of national identity. 
So the stories, unheard and untold, are lost. 
That is why we need more research on what can and should be done for refugees in the long term. 
The UNHCR has been doing an important job in protecting refugees, but it cannot possibly address their needs alone. 
Its budget of $7 billion in 2015 may seem large, but it amounts to only about $100 per displaced person – not enough to cover even essentials like food and shelter. 
As President of the American Economic Association for 2016, I felt a moral obligation to use our annual meeting earlier this month as a setting in which to bring attention to serious economic problems. 
And the refugee crisis, whatever else it may be, is an economic problem. 
But a dearth of papers addressing it had been submitted to the meeting. 
So I decided to create a session entitled Sixty Million Refugees, and invited some of our discipline’s most distinguished scholars on migration. 
I asked them to describe the dimensions of the refugee problem in economic terms, and to propose some sensible policies to address it. 
One of the papers, by Timothy J. Hatton of the University of Essex and Australian National University, examined refugee flows around the world, to see what drives them. 
Hatton confronts a popular argument against admitting refugees: that asylum-seekers are not really desperate, but are just using a crisis as a pretext for admission to a richer country. 
He finds that, contrary to some expectations, refugee flows are driven largely by political terror and human rights abuses, not economic forces. 
People in fear for their lives run to the nearest safe place, not the richest. 
There is no escape from the moral imperative to help them. 
Semih Tumen of the Central Bank of Turkey presented evidence regarding the impact of the 2.2 million Syrian refugees on the labor market in the border region. 
Tumen’s paper, too, takes on an argument frequently used to oppose admitting refugees: that the newcomers will take locals’ jobs and drive down wages. 
He found that in the formal sector, jobs for locals actually increased after the influx of refugees, apparently because of the stimulative effect on the region’s economy. 
If further research backs up this finding, countries might actually welcome the inflow of labor. 
Another paper, by Susan F. Martin of Georgetown University, described the arbitrariness of our current refugee procedures, calling for “legal frameworks based on the need for protection, rather than the triggering causes of the migration.” 
But formulating such rules requires some careful economic thought. 
The framers of a refugee system need to consider the rules’ incentive effects on the migrants themselves and on the governments of their countries of origin. 
For example, we do not want to make it too easy for tyrants to drive unwanted minorities out of their country. 
Finally, Jeffrey D. Sachs of Columbia University detailed a major new system for managing refugees. 
Sachs is concerned with how such a system’s rules will shape the world’s economies in the longer run. 
He wants such a system to prevent encouraging a brain drain by enforcing a commitment to admitting low-skilled and desperate immigrants, not just those who are highly useful to the host country. 
Moreover, the rate of flow must be regulated, and economists need to develop a way to ensure equitable burden sharing among countries. 
Under today’s haphazard and archaic asylum rules, refugees must take enormous risks to reach safety, and the costs and benefits of helping them are distributed capriciously. 
It does not have to be this way. 
Economists can help by testing which international rules and institutions are needed to reform an inefficient and often inhumane system. 

The Global Economy’s Hesitation Blues 
NEW HAVEN – Economic slowdowns can often be characterized as periods of hesitation. 
Consumers hesitate to buy a new house or car, thinking that the old house or car will do just fine for a while longer. 
Managers hesitate to expand their workforce, buy a new office building, or build a new factory, waiting for news that will make them stop worrying about committing to new ideas. 
Viewed from this perspective, how worried should we be about the effects of hesitation today? 
Hesitation is often like procrastination. 
One may have vague doubts and feel a need to mull things over; meanwhile, other issues intrude on thought and no decision is taken. 
Ask people why they procrastinate, and you probably won’t get a crisp answer. 
So how does such behavior become sufficiently widespread to bring about an economic slump? 
In fact, the reasons for postponing activities that would stimulate the economy may be difficult to discern. 
One thinks first of feedback from others who are hesitating. 
Income effects and crowd psychology may amplify individual vacillation. 
But there must have been some initial factor that started the feedback cycle – some underlying source of hesitation. 
Loss of economic “confidence” is one possible cause. 
Published confidence indices, available since the 1950s, are based on polls that ask consumers or businesspeople about their perceptions of business activity and expectations of future income and employment. 
“Uncertainty” about economic policy is another possible source of hesitation. 
If businesspeople don’t know what regulations, taxes, or worse, nationalizations, will be coming, they may dither. 
The idea is an old one, expressed during the Great Depression of the 1930s; but it was not measured well, at least until recently. 
In a 2015 working paper, the economists Scott R. Baker, Nicholas Bloom, and Steven J. Davis constructed Economic Policy Uncertainty (EPU) indices for a dozen countries using digital news archives. 
The indices (covering Canada, China, France, Germany, India, Italy, Japan, Russia, South Korea, Spain, the United Kingdom, and the United States) were created by counting the number of newspaper articles in each country and each month that had the trifecta of terms “economy” (E), policy” (P) and “uncertainty” (U). 
The index each month was the total number of articles with those three words, divided by the total number of articles in the targeted newspapers each month. 
Native speakers in each country were consulted on the appropriate translations of the three words. 
The indices spanned decades, and in two countries, the US and the UK, went all the way back to 1900. 
The US index correlates with implied equity-price volatility in the options markets (VIX). 
They found that their EPU index foreshadows economic contractions in the 12 countries, and that for the two countries with long-term indices, the EPU values were high during the Great Depression. 
But do contractions cause uncertainty, they ask, or does uncertainty cause contractions? 
Given that we know that people are highly reactive to each other, the causality most likely runs both ways, in a feedback loop. 
The deeper and more interesting question concerns what initiates this uncertainty. 
To answer it requires impressionistic characterizations of the extant stories and ideas that might influence public thinking – or avoidance of thinking – about the economy. 
As for the Great Depression, one wonders if the high degree of EPU was linked to social trends after the excesses of the 1920s, fueling fear of Communism and, in the United States, of the New Deal. 
One wonders if fear of fascist regimes, and of a coming war, prolonged the depression after Hitler came to power in 1933. 
The attention devoted to Johannes Steele’s 1934 book The Second World War, which predicted that eponymous event, indicates that fear of war must have been talked about enough to underpin some hesitation. 
To people who lived through World War I, the thought of a sequel must have seemed nightmarish. 
Of course, whether the Great Depression was really prolonged by these stories or ideas cannot be proved. 
How do we know which stories were affecting people’s thinking? 
On the other hand, we can be fairly certain that some of these stories really do affect perceived economic uncertainty. 
Psychologists have shown that people display an “affect heuristic,” or a tendency to tag memories with emotions and to let those emotions affect decision-making, even when the decision is unrelated to what caused the emotions. 
A mismatch of emotions can cause executive dysfunction, a failure to act, hesitation. 
Some kinds of stories circulating today – related to growing nationalism or fear of challenges by immigrants to traditional cultural values – might underpin greater hesitation. 
The Brexit vote in the United Kingdom last month has been viewed worldwide with extraordinary alarm as a signal of political instability. 
The rising incidence of terrorism has added a vivid emotional edge to such developments. 
Will these fears fuel enough economic hesitation to bring on another worldwide recession? 
Any answer at this time would be impressionistic and imprecise. 
Given the importance of the consequences, however, we should not shrink from considering how such fears are affecting economic decision-making. 

Three Surprises in 2017 
LONDON – Economic pundits traditionally offer their (traditionally inaccurate) New Year predictions at the beginning of January. 
But global conditions this year are anything but traditional, so it seemed appropriate to wait until US President Donald Trump settled into the White House to weigh in on some of the main surprises that might shake up the world economy and financial markets on his watch. 
Judging by current market movements and conditions, the world could be caught off guard by three potentially transformative developments. 
For starters, Trump’s economic policies are likely to produce much higher US interest rates and inflation than financial markets expect. 
Trump’s election has almost certainly ended the 35-year trend of disinflation and declining rates that began in 1981, and that has been the dominant influence on economic conditions and asset prices worldwide. 
But investors and policymakers don’t believe it yet. 
The US Federal Reserve Board’s published forecasts suggest only three quarter-point rate hikes this year, and futures markets have priced in just two such moves. 
As Trump launches his policies, however, the Fed is likely to tighten its monetary policy more than it had planned before the inauguration, not less, as the markets still expect. 
More important, as Trump’s policies boost both real economic activity and inflation, long-term interest rates, which influence the world economy more than the overnight rates set by central banks, are likely to rise steeply. 
The rationale for this scenario is straightforward. 
Trump’s tax and spending plans will sharply reverse the budget consolidation enforced by Congress on Barack Obama’s administration, and household borrowing will expand dramatically if Trump fulfills his promise to reverse the bank regulations imposed after the 2008 financial crisis. 
As all this extra stimulus fuels an economy already nearing full employment, inflation seems bound to accelerate, with protectionist trade tariffs and a possible “border tax” raising prices even more for imported goods. 
The only uncertainty is how monetary policy will respond to this “Trumpflation.” 
But whether the Fed tries to counteract it by raising interest rates more aggressively than its current forecasts imply, or decides to move cautiously, keeping short-term interest rates well behind the rising curve of price growth, bond investors will suffer. 
As a result, yields on ten-year US bonds could jump from 2.5% to 3.5% or more in the year ahead – and ultimately much higher. 
In Europe and Japan, by contrast, monetary conditions will remain loose, as central banks continue to support economic growth with zero interest rates and quantitative easing (QE). 
And this policy divergence suggests a second potential shock for which financial markets seem unprepared. 
The US dollar could strengthen much further, especially against emerging-market currencies, despite Trump’s stated desire to boost US exports. 
The catalyst for exchange-rate appreciation would be not only higher US interest rates, but also a dollar squeeze in emerging markets, where foreign debts have increased by $3 trillion since 2010. 
A confluence of dollar strength and excessive foreign borrowing caused the debt crises in Latin America and Asia in the 1980s and 1990s. 
This time, Trump’s protectionism could make matters even worse, especially for countries such as Mexico and Turkey, which have based their development strategies on rapidly expanding exports and have financed domestic business activity with dollar debts. 
So much for the bad news. 
Fortunately, a third major development that is not priced into financial markets could be more favorable for global economic conditions: the European Union – an even more important market than the US for almost every trading country apart from Mexico and Canada – could do much better than expected in 2017. 
Economic indicators began to improve rapidly in most EU countries from early 2015, when the European Central Bank stopped the fragmentation of the eurozone by launching a bond-buying program even bigger than the QE pioneered by the Fed. 
But this economic recovery was overwhelmed last year by fears of political disintegration. 
With the Netherlands, France, Germany, and Italy all facing populist insurgencies – and at least the first three holding elections this year – the Brexit and Trump shocks have naturally provoked anxiety that the next domino to fall will be one of these EU founding members, followed perhaps by the entire EU. 
These expectations create the possibility of the biggest surprise of 2017: instead of disintegrating, the EU stabilizes, facilitating an economic rebound and a period of strong financial performance similar to the US “Goldilocks period” from 2010 to 2014, when the economy recovered at a pace that was neither too hot nor too cold. 
The key event will be France’s presidential election, which will most likely be decided in a second-round runoff on May 7. 
If either François Fillon or Emmanuel Macron wins, France will embark on an economic reform process comparable to Germany’s in 2003, undertaken by then-Chancellor Gerhard Schroeder. 
Even a mild foretaste of such reforms would encourage a relaxation of the austerity terms demanded by the new German government that emerges from the general election there on September 24. 
A more cooperative and constructive Franco-German relationship would, in turn, erode support for the populist Five Star Movement in Italy. 
The risk to this benign scenario is, of course, that Marine Le Pen wins in France. 
In that case, a breakup of the EU will become a realistic prospect, triggering panic in European financial markets and economies. 
Every opinion poll and serious analysis of French politics indicates that President Le Pen is an impossible fantasy. 
But isn’t that what every opinion poll and serious analysis of US politics indicated last year about President Trump? 

Missing the Economic Big Picture 
BERKELEY – I recently heard former World Trade Organization Director-General Pascal Lamy paraphrasing a classic Buddhist proverb, wherein China’s Sixth Buddhist Patriarch Huineng tells the nun Wu Jincang: “When the philosopher points at the moon, the fool looks at the finger.” 
Lamy added that, “Market capitalism is the moon. 
Globalization is the finger.” 
With anti-globalization sentiment now on the rise throughout the West, this has been quite a year for finger-watching. 
In the United Kingdom’s Brexit referendum, “Little Englanders” voted to leave the European Union; and in the United States, Donald Trump won the presidency because he convinced enough voters in crucial states that he will “make America great again,” not least by negotiating very different trade “deals” for the country. 
Let us orient ourselves by considering what the economic-policy moon looks like today, particularly with respect to growth and inequality. 
For starters, technological innovation in areas such as information processing, robotics, and biotechnology continues to accelerate at a remarkable pace. 
But annual productivity growth in North Atlantic countries has fallen from the 2% rate to which we have been accustomed since 1870 to about 1% now. 
Productivity growth is an important economic indicator, because it measures the year-on-year decline in resources or manpower needed to achieve the same level of economic output. 
Northwestern University economist Robert J. Gordon maintains that all of the true “game-changing” innovations that have fueled past economic growth – electric power, flight, modern sanitation, and so forth – have already been exhausted, and that we should not expect growth to continue indefinitely. 
But Gordon is almost surely wrong: game-changing inventions fundamentally transform or redefine lived experience, which means that they often fall outside the scope of conventional measurements of economic growth. 
If anything, we should expect to see only more game changers, given the current pace of innovation. 
Measures of productivity growth or technology’s added value include only market-based production and consumption. 
But one’s material wealth is not synonymous with one’s true wealth, which is to say, one’s freedom and ability to lead a fulfilling life. 
Much of our true wealth is constituted within the household, where we can combine non-market temporal, informational, and social inputs with market goods and services to accomplish various ends of our own choosing. 
While standard measures show productivity growth falling, all other indicators suggest that true productivity growth is leaping ahead, owing to synergies between market goods and services and emerging information and communication technologies. 
But when countries with low-growth economies do not sufficiently educate their populations, nearly everyone below the top income quintile misses out on the gains from measured economic growth, while still benefiting from new technologies that can improve their lives and wellbeing. 
As economist Karl Polanyi pointed out in the 1930s and 1940s, if an economic system promises to create shared prosperity but only seems to serve the top 20% of earners, it has disappointed the vast majority of economic participants’ expectations. 
And market capitalism, for its part, has not delivered the ever-more affordable 1980s lifestyle that so many back then expected it would. 
Instead, during the past 30 years, an “overclass” has emerged, one that exercises even more relative economic power than Gilded Age robber barons did. 
The factors contributing to its rise and undue power, however, remain unclear. 
Elsewhere, China, India, and some Pacific Rim countries have matched, or will soon match, North Atlantic countries’ productivity and prosperity. 
The rest of the world is no longer falling further behind the North Atlantic, but nor is it closing the productivity and prosperity gap, implying that these countries will continue to lag behind indefinitely. 
The aforementioned features are all constituent parts of our proverbial market capitalist moon. 
As it develops and interacts with social, political, and technological forces, it creates elation alongside distress. 
Globalization is one piece in a larger puzzle: while it is important that we determine the best way to manage the global trade system, doing so cannot substitute for the much larger challenge of managing market capitalism itself. 
By focusing on individual free-trade agreements, whether proposed or already existing, or on closing national borders to immigrants, we are looking at the finger and missing the moon. 
If we are to get a grip on the global economy’s trajectory, is time to look up. 

Triangulating Brexit 
BRUSSELS – More than 100 days after the United Kingdom voted narrowly to leave the European Union, it remains far from clear what arrangement will regulate cross-Channel trade after Brexit. 
Political discussions tend to revolve around three key issues: immigration controls, access to the single market, and passporting rights for financial services. 
Which balance should European leaders strike? 
Many in Britain know exactly what they want: to impose controls on the movement of workers from the rest of the EU, thereby protecting the domestic labor market, but without losing access to the single market or passporting rights, which allow British firms to sell their financial services on the continent. 
That was, after all, the kind of deal many leaders of the “Leave” campaign promised before the June referendum. 
But the Brexiteers’ promise remains wishful thinking. 
As German Finance Minister Wolfgang Schäuble has pointed out, access to the single market is inextricably linked to the free movement of people. 
Indeed, he has even offered to send Boris Johnson, the UK’s foreign secretary, a copy of the Treaty of Lisbon, where that link is established. 
This may sound legalistic, and it certainly reflects political motivations. 
But basic economic principles imply that free movement is, indeed, at least as important as free trade. 
Trade usually benefits both sides. It is thus clear that it is in the common interest of the UK and the EU to minimize the losses from the introduction of new barriers through Brexit. 
From the point of view of European welfare, it is the size of the trade barriers that matters, not which side is a net exporter or importer. 
Low barriers typically have low costs, unless very large volumes of trade are affected. 
But as barriers become higher, the negative impact on welfare grows disproportionately. 
The good news for the UK is that it probably wouldn’t face substantially higher trade barriers even if it did leave the single market. 
After all, the EU has, in general, a liberal trade regime, with low external tariffs. 
That is why so many studies do not consider the economic benefits of tariff-free transatlantic trade as the primary reason for pursuing it. 
Even if the UK faced some additional barriers – such as new customs requirements and certificates of origin – their impact would most likely be relatively small. 
The case of Switzerland – which is even more integrated into EU production chains than the UK – shows that efficient customs administrations on both sides are enough to keep such barriers to a minimum. 
In any case, exports of goods to the EU generate only about 6% of the UK’s GDP. 
Yet another reason why the introduction of some low trade barriers is unlikely to produce large losses is that the differences in the cost of producing goods in one market or the other are small. 
Producing a car in Britain, for example, costs about the same as producing one in Germany. 
Barriers to the free movement of labor are a different story. 
Productivity and income per worker in the UK remains significantly higher than in, say, Poland. 
A worker would get about €25 ($27.70) for an hour of work in the UK, but only €8.50 in Poland. 
In other words, not allowing a Polish worker to work in the UK would imply large economic costs for Europe. 
Moreover, if British Prime Minister Theresa May follows through on her stated goal of reducing annual net immigration to less than 100,000, the UK would have to implement drastic – potentially costly – measures to close off the UK labor market. 
This means that the barriers that EU negotiators are in a position to impose – which largely affect trade in goods – are likely to have a much smaller impact than the UK-imposed barriers, such as quotas on EU workers. 
But there is one more issue that negotiators must consider: financial services. 
While overall trade in services is unlikely to suffer enormously from Brexit – the internal market for services never worked all that well, anyway – finance constitutes a special case, largely because of the passporting arrangements for banks. 
Economists are often ambivalent about the benefits of financial integration, not least because large flows of bank credit can have a serious impact on macroeconomic stability. 
Whereas securitization, for example, can help to reduce risk and increase the availability of credit for risky borrowers under the right framework, the 2008 global financial crisis starkly demonstrated that it can imply huge costs if it goes too far. 
But steps can be taken to maximize the benefits of cross-Channel provision of financial services after Brexit. 
The key is to base decisions not on sustaining the City of London’s role as Europe’s financial hub, but on ensuring that the services provided strengthen Europe’s capital markets. 
That would require an emphasis on equity over debt instruments, and on market-based financing over bank credit. 
From an economic standpoint, the priorities that should guide Brexit negotiations are clear. 
Negotiators must focus on minimizing new barriers to the free movement of labor; indeed, this should be an even higher priority than maintaining the free movement of goods. 
And British financial services should be welcomed in the EU, but only if they help it to move away from its bank-centric system and complete the capital market union. 
But politics continues to distort discussions, driving leaders to draw red lines on free movement and adopt mercantilist stances on financial services. 
It will take some statesmanship on both sides to shift attention to the common good. 

Economics in Denial 
PARIS – In an exasperated outburst, just before he left the presidency of the European Central Bank, Jean-Claude Trichet complained that, “as a policymaker during the crisis, I found the available [economic and financial] models of limited help. 
In fact, I would go further: in the face of the crisis, we felt abandoned by conventional tools.” 
Trichet went on to appeal for inspiration from other disciplines – physics, engineering, psychology, and biology – to help explain the phenomena he had experienced. 
It was a remarkable cry for help, and a serious indictment of the economics profession, not to mention all those extravagantly rewarded finance professors in business schools from Harvard to Hyderabad. 
So far, relatively little help has been forthcoming from the engineers and physicists in whom Trichet placed his faith, though there has been some response. 
Robert May, an eminent climate change expert, has argued that techniques from his discipline may help explain financial-market developments. 
Epidemiologists have suggested that the study of how infectious diseases are propagated may illuminate the unusual patterns of financial contagion that we have seen in the last five years. 
These are fertile fields for future study, but what of the core disciplines of economics and finance themselves? 
Can nothing be done to make them more useful in explaining the world as it is, rather than as it is assumed to be in their stylized models? 
George Soros has put generous funding behind the Institute for New Economic Thinking (INET). 
The Bank of England has also tried to stimulate fresh ideas. 
The proceedings of a conference that it organized earlier this year have now been edited under the provocative title What’s the Use of Economics? 
Some of the recommendations that emerged from that conference are straightforward and concrete. 
For example, there should be more teaching of economic history. 
We all have good reason to be grateful that US Federal Reserve Chairman Ben Bernanke is an expert on the Great Depression and the authorities’ flawed policy responses then, rather than in the finer points of dynamic stochastic general equilibrium theory. 
As a result, he was ready to adopt unconventional measures when the crisis erupted, and was persuasive in influencing his colleagues. 
Many conference participants agreed that the study of economics should be set in a broader political context, with greater emphasis on the role of institutions. 
Students should also be taught some humility. 
The models to which they are still exposed have some explanatory value, but within constrained parameters. 
And painful experience tells us that economic agents may not behave as the models suppose they will. 
But it is not clear that a majority of the profession yet accepts even these modest proposals. 
The so-called “Chicago School” has mounted a robust defense of its rational expectations-based approach, rejecting the notion that a rethink is required. 
The Nobel laureate economist Robert Lucas has argued that the crisis was not predicted because economic theory predicts that such events cannot be predicted. 
So all is well. 
And there is disturbing evidence that news of the crisis has not yet reached some economics departments. 
Stephen King, Group Chief Economist of HSBC, notes that when he asks recent university graduates (and HSBC recruits a large number of them) how much time they spent in lectures and seminars on the financial crisis, “most admitted that the subject had not even been raised.” 
Indeed, according to King, “Young economists arrive in the financial world with little or no knowledge of how the financial system operates.” 
I am sure they learn fast at HSBC. 
(In the future, one assumes, they will learn quickly about money laundering regulations as well.) 
But it is depressing to hear that many university departments are still in denial. 
That is not because students lack interest: I teach a course at Sciences Po in Paris on the consequences of the crisis for financial markets, and the demand is overwhelming. 
We should not focus attention exclusively on economists, however. 
Arguably the elements of the conventional intellectual toolkit found most wanting are the capital asset pricing model and its close cousin, the efficient-market hypothesis. 
Yet their protagonists see no problems to address. 
On the contrary, the University of Chicago’s Eugene Fama has described the notion that finance theory was at fault as “a fantasy,” and argues that “financial markets and financial institutions were casualties rather than causes of the recession.” 
And the efficient-market hypothesis that he championed cannot be blamed, because “most investing is done by active managers who don’t believe that markets are efficient.” 
This amounts to what we might call an “irrelevance” defense: Finance theorists cannot be held responsible, since no one in the real world pays attention to them! 
Fortunately, others in the profession do aspire to relevance, and they have been chastened by the events of the last five years, when price movements that the models predicted should occur once in a million years were observed several times a week. 
They are working hard to understand why, and to develop new approaches to measuring and monitoring risk, which is the main current concern of many banks. 
These efforts are arguably as important as the specific and detailed regulatory changes about which we hear much more. 
Our approach to regulation in the past was based on the assumption that financial markets could to a large extent be left to themselves, and that financial institutions and their boards were best placed to control risk and defend their firms. 
These assumptions took a hard hit in the crisis, causing an abrupt shift to far more intrusive regulation. 
Finding a new and stable relationship between the financial authorities and private firms will depend crucially on a reworking of our intellectual models. 
So the Bank of England is right to issue a call to arms. 
Economists would be right to heed it. 

Nobel Economics Versus Social Democracy 
OXFORD – Of the elites who manage modern society, only economists have a Nobel Prize, whose latest recipients, Oliver Hart and Bengt Holmström, have just been announced. 
Whatever the reason for economists’ unique status, the halo conferred by the prize can – and often has – lend credibility to policies that harm the public interest, for example by driving inequality and making financial crises more likely. 
But economics does not have the field entirely to itself. 
A different view of the world guides the allocation of about 30% of GDP – for employment, health care, education, and pensions – in most developed countries. 
This view about how society should be managed – social democracy – is not only a political orientation; it is also a method of government. 
Standard economics assumes that society is driven by self-seeking individuals trading in markets, whose choices scale up to an efficient state via the “invisible hand.” 
But this doctrine is not well founded in either theory or practice: its premises are unrealistic, the models it supports are inconsistent, and the predictions it produces are often wrong. 
The Nobel Prize in economics was endowed by Sweden’s central bank, the Riksbank, in 1968. 
The timing was not an accident. 
The new prize arose from a longstanding conflict between the interests of the better off in stable prices and the interests of everybody else in reducing insecurity by means of taxation, social investment, and transfers. 
The Royal Swedish Academy of Sciences awarded the prize, but Sweden was also an advanced social democracy. 
During the 1950s and 1960s, the Riksbank clashed with Sweden’s government over the management of credit. 
Governments gave priority to employment and housing; the Riksbank, led by an assertive governor, Per Åsbrink, worried about inflation. 
As recompense for restrictions on its authority, the Riksbank was eventually allowed to endow a Nobel Prize in economics as a vanity project for its tercentenary. 
Within the Academy of Sciences, a group of center-right economists captured the process of selecting prizewinners. 
The laureates comprised a high-quality sample of economics scholarship. 
An analysis of their influence, inclinations, and biases indicates that the Nobel committee kept up an appearance of fairness through a rigid balance between right and left, formalists and empiricists, Chicago School and Keynesian. 
But our research indicates that professional economists, on the whole, are more broadly inclined toward the left. 
The prize kingmaker was Stockholm University economist Assar Lindbeck, who had turned away from social democracy. 
During the 1970s and 1980s, Lindbeck intervened in Swedish elections, invoked microeconomic theory against social democracy, and warned that high taxation and full employment led to disaster. 
His interventions diverted attention from the grave policy error being made at the time: deregulation of credit, which led to a deep financial crisis in the 1990s and anticipated the global crisis that erupted in 2008. 
Lindbeck’s concerns were similar to those of the International Monetary Fund, the World Bank, and the US Treasury. 
These actors’ insistence on privatization, deregulation, and liberalization of capital markets and trade – the so-called Washington Consensus – enriched business and financial elites, led to acute crises, and undermined emerging economies’ growth. 
In the West, the priority accorded to the individualist self-regarding norms underlying the Washington Consensus created a nurturing environment for growth in corruption, inequality, and mistrust in governing elites – the unintended consequences of rational-choice, me-first premises. 
With the emergence in advanced economies of disorders previously associated with developing countries, Swedish political scientist Bo Rothstein has petitioned the Academy of Sciences (of which he is a member) to suspend the Nobel Prize in economics until such consequences are investigated. 
Social democracy is not as deeply theorized as economics. 
It constitutes a pragmatic set of policies that has been enormously successful in keeping economic insecurity at bay. 
Despite coming under relentless attack for decades, it remains indispensable for providing the public goods that markets cannot supply efficiently, equitably, or in sufficient quantity. 
But the lack of formal intellectual support means that even nominally social-democratic parties do not entirely understand how well social democracy works. 
Unlike markets, which reward the wealthy and successful, social democracy is premised on the principle of civic equality. 
This creates a bias for “one-size-fits-all” entitlements; but there have long been ways to manage this constraint. 
Because economics appears to be compelling, and because social democracy is indispensable, the two doctrines have mutated to accommodate each other – which is not to say that their marriage is a happy one. 
As with many unhappy marriages, divorce is not an option. 
Many economists have responded to the failure of their discipline’s core premises by retreating into empirical investigation. 
But the resulting validity comes at the cost of generality: randomized controlled trials in the form of local experiments cannot replace an overarching vision of the social good. 
A good way to begin acknowledging this would be to select Nobel Prize recipients accordingly. 

The Economics of the Climate Crisis 
BOGOTÁ – Two major events last week bear directly on global debates about climate change and how to address it. 
The first was the release of a report from the United Nations Intergovernmental Panel on Climate Change (IPCC), which sets out precisely what must be done to achieve the objectives of the 2015 Paris climate agreement. 
The second was the announcement that Yale University economist William Nordhaus will share this year’s Nobel Prize in economics for his work “integrating climate change into long-run macroeconomic analysis.” 
The first event should serve as a wake-up call for the international community. 
The IPCC report appeals to governments to take urgent action to reduce greenhouse-gas emissions significantly within the next decade. 
It warns that if average global temperatures are allowed to exceed 1.5°C – or, at worst, 2°C – above pre-industrial levels, the consequences could be catastrophic, and they will be felt as soon as 2040. 
Worse, the report shows that the Nationally Determined Contributions set voluntarily by signatories to the Paris accord are vastly insufficient. 
Even if they are met, the increase in average global temperature will surpass 3°C by 2100, and will continue to rise still further after that. 
Clearly, when policymakers revise their countries’ NDCs, they must raise them significantly. 
But substantive action needs to come well before 2030. 
Otherwise, the world will suffer irreversible damage in the form of rising sea levels, loss of biodiversity, and deterioration of both land and marine ecosystems, including the potential extinction of the world’s coral reefs. 
These developments will have far-reaching implications for water supplies and the health and living standards of the global population. 
And, needless to say, the greater the warming, the more severe these effects will be. 
The selection of Nordhaus for the Nobel Prize is a more welcome development. 
Even so, it is worth noting that his approach to addressing climate change tends to be rather conservative, which is to say gradualist. 
Nordhaus relies on traditional economic analysis, which “discounts” the present value of future consumption by the return on capital, or interest rates. 
In other words, $100 a half-century from now is worth $15, $10, or even less today, depending on the assumed interest rate. 
But, because the costs of any initiative to combat climate change must be borne in the present, they are necessarily higher at present values. 
The implication is that they must be incurred slowly. 
The problem with this approach is that it is inequitable toward future generations, which, of course, have no say in decisions that we make today. 
By definition, their welfare is being discounted. 
Yet were we to take intergenerational equity seriously, the leading factor to consider is that future generations will have better technologies than what we have today. 
Therefore, the appropriate social rate of discount should be equal to the rate of technological change, which is much lower than market interest rates. 
One could also argue that the traditional economic analysis is even inequitable toward individuals, in addition to future generations. 
Just ask an older person with an inadequate (or nonexistent) pension whether his present welfare is worth less than his past consumption. 
A much better approach has been developed by Nicholas Stern of the London School of Economics. 
In his now-famous “Review on the Economics of Climate Change,” Stern was calling for accelerated action to combat climate change as early as 2006. 
In his view, the costs of dealing with runaway global warming would far exceed the expense of addressing it early. 
Another alternative has been developed by Martin Weitzman of Harvard University. 
Weitzman relies on analytical tools similar to those used by Nordhaus, but his work also accounts for the catastrophic risks associated with climate change. 
As such, his approach is also similar to that of the IPCC and the UN Environment Programme (UNEP), both of which have concluded that global warming above a certain level will have truly disastrous effects. 
To my mind, the Nobel Committee should have recognized not just Nordhaus but also some of these other economists of climate change, particularly Stern. 
The fact is that humanity cannot afford to act gradually on this issue. 
The Stern Review, the latest IPCC report, and the UNEP have all concluded that current efforts to reduce emissions must be stepped up substantially. 
That means accelerating the global transition to clean-energy technologies (including in transportation), improving the efficiency of energy production/consumption, reversing deforestation, improving land use, and promoting technological innovation to facilitate all of these processes. 
The message from the IPCC report is clear. 
All countries must raise their emissions-reduction targets and strengthen their commitments under the Paris agreement. 
And the country that is historically responsible for the largest share of greenhouse-gas emissions – the United States – must return to the agreement and show leadership on this issue once again. 

Economics With a Humanities Face 
CHICAGO – In a 2006 survey, American university professors were asked whether it was better to possess knowledge from numerous fields of study, or from just one. 
Among professors of psychology, 79% were enthusiastic about interdisciplinary learning, as were 73% of sociologists and 68% of historians. 
The least enthusiastic? 
Economists: only 42% surveyed said they agreed with the need to understand the world through a cross-disciplinary lens. 
As one observer put it bluntly: “Economists literally think they have nothing to learn from anyone else.” 
In fact, economists would benefit greatly if they broadened their focus. 
Dealing as it does with human beings, economics has much to learn from the humanities. 
Not only could its models be more realistic and its predictions more accurate, but economic policies could be more effective and more just. 
Whether one considers how to foster economic growth in diverse cultures, the moral questions raised when universities pursue self-interest at the expense of their students, or deeply personal issues concerning health care, marriage, and families, economic insights are necessary but insufficient. 
If those insights are all we consider, policies flounder and people suffer. 
In their passion for mathematically-based explanations, economists have a hard time in at least three areas: accounting for culture, using narrative explanation, and addressing ethical issues that cannot be reduced to economic categories alone. 
People are not organisms that are first made and then dipped in some culture, like Achilles in the river Styx. 
They are cultural beings from the outset. 
But, because culture cannot be rendered in mathematical terms, economists typically embrace the idea of a pre-cultural humanness. 
To understand people as cultural beings, one must tell stories about them. 
Human lives do not unfold in a predictable fashion the way Mars orbits the sun. 
Contingency, idiosyncrasy, and unforeseeable choices play an irreducible role. 
Life displays what might be called “narrativeness,” implying the need for explanation in terms of stories. 
And the best appreciation of this is to be found in novels, which may be considered not just a literary form, but also a distinct way of understanding the social world. 
Although the events that novels describe are fictional, the shape, sequence, and ramifications of those events is often the most accurate account we have of how lives unfold. 
Finally, economics inevitably involves ethical questions that are not reducible to economics itself – or, for that matter, to any other social science. 
Economists often smuggle ethical concerns into their models with concepts like “fair” market price. 
But there are many ways to make these issues overt and open them to argument. 
There is no better source of ethical insight than the novels of Tolstoy, Dostoevsky, George Eliot, Jane Austen, Henry James, and the other great realists. 
Their works distill the complexity of ethical questions that are too important to be safely entrusted to an overarching theory – questions that call for empathy and good judgment, which are developed through experience and cannot be formalized. 
To be sure, some theories of ethics may recommend empathy, but reading literature and identifying with characters involves extensive practice in placing oneself in others’ shoes. 
If one has not identified with Anna Karenina, one has not really read Anna Karenina. 
When you read a great novel and identify with its characters, you spend countless hours engaging with them – feeling from within what it is like to be someone else. 
You see the world from the perspective of a different social class, gender, religion, culture, sexual orientation, moral understanding, or other features that define and differentiate human experience. 
By living a character’s life vicariously, you not only feel what she feels, but also reflect on those feelings, consider the character of the actions to which they lead, and, with practice, acquire the wisdom to appreciate real people in all their complexity. 
The point is not to abandon the great achievements of economics, but to create what we call a “humanomics,” which allows each discipline to keep its own distinctive qualities. 
Rather than fuse economics and the humanities, humanomics creates a dialogue between them. 
Such a conversation would actually bring economics back to its illustrious roots in the thought of Adam Smith, who, in The Theory of Moral Sentiments, explicitly denied that human behavior could be adequately described in terms of people’s “rational choice” to maximize their individual utility. 
After all, people often behave foolishly. 
More important for Smith, their care for others is an “original passion” that is not reducible to selfish concerns. 
Smith’s writings on economic and ethics share a deep sense of the limits of reason. 
Central planning is bound to fail, but so are algebraic models of behavior. 
One needs a subtle appreciation of particulars, the sort of sensitivity that was dramatized, a half-century after Smith’s moral treatise, by Jane Austen and her successors. 
A great psychologist, Smith knew that we need both cents and sensibility. 
Econometric methods and mathematical models teach us much, but only so much. 
When it comes to human lives, characterized as they are by contingency and narrativeness, stories are an indispensable way of knowing. 
That is why the quantitative rigor, policy focus, and logic of economics must be supplemented with the empathy, judgment, and wisdom that defines the humanities at their best. 
Economists must speak to other disciplines – and let them speak back. 

Economists’ New World Order 
Most academic economics rely on concepts laid down at the beginning of the twentieth century by the British economist Alfred Marshall, who said that “nature does not make leaps.” 
Yet we economists find ourselves increasingly disturbed by the apparent inadequacy of the neo-Marshallian toolkit that we have built to explain our world. 
The central bias of this toolkit is that we should trust the market to solve the problems we set it, and that we should not expect small (or even large) changes to have huge effects. 
A technological leap that raises the wages of the skilled and educated will induce others to become skilled and educated, restoring balance so that inequality does not grow too much. 
So a country where labor productivity is low will become an attractive location for foreign direct investment, and the resulting increase in the capital-labor ratio will raise productivity. 
Wherever one looks, using Marshall’s toolkit, one sees economic equilibrium pulling things back to normal, compensating for and attenuating the effects of shocks and disturbances. 
Marshall’s economics has had a marvelous run, and has helped economists make sense of the world. 
Yet there is a sense that progress and understanding will require something new – an economics of virtuous circles, thresholds, and butterfly effects, in which small changes have very large effects. 
Perhaps this has always been so. 
By the standards of centuries ago, we live in a world of unbelievable wealth. 
Within two generations human literacy will be nearly universal. 
Yet three centuries ago there was also technological progress, from the mechanical clock and the watermill to the cannon and the caravel, and on to strains of rice that can be cropped three times a year in Guangzhou and the breeding of merino sheep that can flourish in the hills of Spain. 
But these innovations served only to increase the human population, not raise median standards of living. 
Today, if we divided up equally what we produce worldwide, would it give us a standard of living ten times that of our pre-industrial ancestors? Twenty times? 
A hundred times? Does the question even have meaning? 
David Landes likes to tell the story of Nathan Meyer Rothschild, the richest man in the world in the first half of the nineteenth century, dead in his fifties of an infected abscess. 
If you gave him the choice of the life he led as the finance-prince of Europe or a life today low-down in the income distribution but with thirty extra years to see his great-grandchildren, which would he choose? 
No doubt, we live today in an extraordinarily unequal world. 
There are families today near Xian, in what was the heartland of the Tang Dynasty Empire, with two-acre dry wheat farms and a single goat. 
There are other families throughout the world that could buy that wheat farm with one day’s wages. 
Marshall’s economics – the equilibrium economics of comparative statics, of shifts in supply and demand curves, and of accommodating responses – is of almost no help in accounting for this. 
Why, worldwide, did median standards of living stagnate for so long? 
Why has the rate of growth undergone an acceleration that is extraordinarily rapid over so short a period? 
Where is the economics of invention, innovation, adaptation, and diffusion? 
Not in Marshall. 
And why is today’s world so unequal that it is hard to find any measures of global distribution that do not show divergence at least up until the 1980’s? 
It has been generations since economists Robert Solow and Moses Abramovitz pointed out that Marshall’s toolkit is a poor aid for understanding modern economic growth. 
The real sources of growth are not to be found in supplies and demands and the allocation of scarce resources to alternative uses, but in technological and organizational change – about which economists have too little to say. 
Economic historians like Ken Pomeranz rightly point out that before the Industrial Revolution, differences in median standards of living across the high civilizations of Eurasia were relatively small. 
A peasant in the Yangtze Valley in the late seventeenth century had a different style of life than his or her contemporary peasant in the Thames Valley, but not one that was clearly better or worse. 
Two centuries later that was no longer the case: by the end of the nineteenth century, median living standards in Britain and other countries to which the Industrial Revolution had spread were, for the first time in recorded history, light-years above any neo-Malthusian benchmark of subsistence. 
The early industrial-era economic accomplishments occurred despite the loss of a substantial proportion of national income to support a corrupt, decadent, and profligate aristocracy. They occurred despite a tripling of the population, which put extraordinary Malthusian pressure on the economy underlying natural resource base, and despite the mobilization of an unprecedented proportion of national income for nearly a century of intensive war against France, a power with three times Britain’s population. 
How, exactly, did these accomplishments occur? 
What were the small differences that turned out to matter so much? 
Economists are now awakening to the realization that the most interesting questions they face were always beyond the reach of Marshall’s toolkit. 
Clearly, economics – if it is to succeed and progress – must be very different in a generation from what it is today. 

Reclaiming Community 
CAMBRIDGE – Economics teaches that the measure of an individual’s wellbeing is the quantity and variety of goods he or she can consume. 
Consumption possibilities are in turn maximized by providing firms with the freedom they need to take advantage of new technologies, the division of labor, economies of scale, and mobility. 
Consumption is the goal; production is the means to it. 
Markets, rather than communities, are the unit and object of analysis. 
No one can deny that this consumer- and market-centric vision of the economy has produced plenty of fruit. 
The dazzling array of consumer goods available in the megastores or Apple outlets of any major city in the world would have been unimaginable as recently as a generation ago. 
But clearly something has gone wrong in the meantime. 
The economic and social divisions within our societies have provoked a broad backlash in a wide range of settings – from the United States, Italy, and Germany in the developed world to developing countries such as the Philippines and Brazil. 
This political turmoil suggests that economists’ priorities may not have been entirely appropriate. 
Two books, one forthcoming from Raghuram Rajan and another published this month by Oren Cass, revisit our economistic worldview and argue that we should instead put the health of our local communities front and center. 
Stable families, good jobs, strong schools, abundant and safe public spaces, and pride in local cultures and history – these are the essential elements of prosperous societies. 
Neither global markets nor the nation-state can adequately supply them, and sometimes markets and states undermine them. 
The authors come from different vantage points. 
Rajan is an economist at the University of Chicago and a former governor of the Reserve Bank of India. 
Cass is at the right-of-center Manhattan Institute for Policy Research and was domestic policy director for Republican Mitt Romney’s presidential campaign. 
You would not necessarily expect either a Chicago economist or a moderate Republican to treat markets and hyper-globalization with skepticism. 
But both are disturbed by what they see as the effects on communities. 
Rajan calls community the “third pillar” of prosperity, as important as the other two pillars – the state and market. 
No less than excessive centralized state power, he writes, unmanaged globalization can tear apart the fabric of local communities. 
Cass is explicit that US trade and immigration policy should focus on American workers first and foremost. 
This means ensuring that local labor markets are healthy and that there are plenty of goods jobs at decent wages. 
Both authors emphasize the gains from trade and reject US President Donald Trump’s protectionism. 
But they agree we may have gone too far into hyper-globalization and paid insufficient attention to the costs for communities. 
When a local factory closes because a firm has decided to outsource to a supplier across the border, more is lost than the hundreds (or thousands) of jobs that move abroad. 
The impact is multiplied through reduced spending on local goods and services, which means workers and employers across the entire local economy feel the hit. 
The local government’s tax revenues fall as well, so there is less money to spend on education and other public amenities. 
Anomie, family breakdown, opioid addiction, and other social ills often follow. 
Economists’ usual answer is to call for “greater labor market flexibility”: workers should simply leave depressed areas and seek jobs elsewhere. 
But as Cass reminds us, geographical mobility has to be coupled with “the opportunity to stay.” 
Even during times of significant migration, the bulk of local populations stayed put and needed good jobs and solid communities. 
Alternatively, economists might recommend compensating the losers from economic change, through social transfers and other benefits. 
Leaving aside the feasibility of such transfers, it is doubtful that they are the solution. 
Joblessness will undermine individual and community wellbeing even if consumption levels are propped up through cash grants. 
Ultimately, it is only through the creation and expansion of well-paying jobs that local communities can be made vital. 
Cass’s proposal is to encourage employment through wage subsidies. 
Rajan emphasizes the role of local leaders who can mobilize community assets, generate social engagement on the part of local residents, and create a new image – all in the context of more supportive state policies and managed globalization. 
Other economists have advocated regionally targeted manufacturing extension programs, fostering partnerships between local employers and universities. 
Yet others recommend local public spending, such as on job training programs for small and medium-sized enterprises. 
We do not have a good fix on what works best, and a fair amount of policy experimentation will be needed to make progress. 
But the urgency of action is heightened by the fact that ongoing technological trends threaten to exacerbate communities’ existing problems. 
New digital technologies tend to exhibit scale economies and network effects, which produce concentration rather than localization of production. 
Instead of diffusing gains, they create winner-take-all markets. 
The globalization of production networks magnifies such effects further. 
How we balance these forces with the needs of communities will shape not only our economic fortunes, but also our social and political environment. 
As Cass and Rajan show, it is a problem that economists should no longer ignore. 

Revenge of the Experts 
BERKELEY – The Brexit debate is an endless source of mirth for anyone with a dark sense of humor. 
My own favorite quote is from Michael Gove, currently Britain’s environment secretary. 
Just prior to the June 2016 Brexit referendum, Gove, who was justice secretary in David Cameron’s government at the time, dismissed the all-but-unanimous view of economists and others that a decision to leave the European Union would deeply damage the British economy. 
“People in this country have had enough of experts,” Gove testily explained, referring to “experts from organizations with acronyms, saying they know what is best and getting it consistently wrong.” 
The early post-referendum evidence suggested, to the surprise of many – or at least to many of the experts – that Gove was right and they were wrong. 
There was in fact no immediate recession in the United Kingdom following the Brexit vote; indeed, there was not even a slowdown in growth. 
To explain this, observers pointed to the nimble response of the Bank of England (BoE), which cut interest rates to prevent any softening of demand. 
They pointed to the big post-referendum depreciation of the pound, which promised to make British exports more competitive and offset any problems with the transition to a new trade regime. 
They suggested that a UK freed of burdensome EU regulations could offer a more business-friendly environment and lower corporate tax rates, and thus become a magnet for foreign investment. 
Most provocatively, they questioned predictions that the uncertainty surrounding Brexit would have a profoundly adverse impact on economic performance. 
Economists can’t measure uncertainty directly, they reminded us, while proxies, like the frequency with which the term appears in the financial press, do a poor job of capturing its effects. 
Indeed, we economists have had little success at reliably predicting when and why uncertainty spikes. 
And there is little agreement on the severity of its impact. 
Maybe we would be better off placing less weight on the effects of uncertainty when making forecasts in general, and in the case of Brexit in particular. 
But this view looks rather less compelling with the passage of a couple of additional quarters. 
British consumer confidence is down, with spending in the second quarter of this year falling to its lowest level in four years. 
New car sales have been down for four consecutive months. 
The BoE forecasts a whopping 20% decline in business investment in the coming years, whereas Brexit’s champions predicted the opposite. 
The drop in confidence, some might object, reflects an inconclusive general election and a hung parliament, not the Brexit vote. 
Or worsening conditions can be blamed on the government’s less-than-stellar negotiating strategy and the appearance that it is entering discussions with its EU partners unprepared. 
But the inconclusive election reflects the schizophrenia of both the Conservative and Labour parties on the Brexit issue. 
Prime Minister Theresa May opposed Brexit prior to the referendum, but now embraces it as the occupant of 10 Downing Street. 
The Labour opposition under Jeremy Corbyn officially opposes Brexit but seems to derive peculiar satisfaction from the fact that it is proceeding. 
Some argue that if the government adopted a more coherent negotiating strategy the damage would be less. 
But the fact is that there is no coherent negotiating strategy. 
May’s objectives – restriction of immigration from the EU while maintaining full access to the European single market – are fundamentally incompatible. 
The only surprise is that it took so long for the consequences to materialize. 
It evidently took more time than expected for the implications to sink in – to understand that “Brexit means Brexit,” as May’s pithy tautology put it. 
It took time to realize that there would be no smooth break with the EU and that negotiations would not be wrapped up in two years. 
There might be no free-trade agreement, no passporting rights for British banks seeking to do business in the EU, and not even an agreement on landing rights for British aircraft on the European continent. 
And now the chickens are coming home to roost with a vengeance (if chickens could be vengeful). 
Consumers, seeing the pound depreciate, front-loaded their spending in the second half of last year, because they understood that import prices would rise. 
Having incurred additional debt, they are now in no position to continue spending at that earlier pace. 
Sterling’s substantial depreciation, moreover, augurs a significant rise in inflation, which means that the BoE will have to start raising interest rates sooner rather than later. 
The consequences for growth will not be pretty. 
The Bank will no longer be the Brexiteers’ friend. 
What the late, great MIT economist Rudi Dornbusch – that most expert of experts – said about Mexico’s peso crisis in the 1990s applies to the damage from Brexit as well. 
A crisis, Dornbusch noted, “takes a much longer time coming than you think, and then it happens much faster than you would have thought.” 

Economizing Life and Death 
Have you ever sat at the deathbed of a statistical life? 
“Statistical lives” are what politicians save, or let die, or kill, when they decide on resource allocations for health care. 
Health care is not the only area where political decisions are matters of life and death. 
Environmental programs to reduce air pollution, educational efforts to publicize the adverse effects of smoking, traffic measures that lower the risk of car accidents: many policies save lives – and omit other lives that would have been saved if the money had been spent otherwise. 
So, if you have ever sat at somebody’s deathbed, the answer may very well be yes: you sat at the deathbed of a statistical life. 
Even so, we say that John died from cancer, not that he died from a policy decision to stop payment for cancer screening. 
We say that Mary died in a car accident, not that she was a casualty of the Road Traffic Act. 
In short, we do not usually identify policy decisions as the causes of individual deaths. 
This would be quite different if the identities of future victims were known at the time such decisions are taken. 
Imagine that they were known, and that the individual victims of policy decisions would somehow stare into the faces of decision makers just as if they were being held at gunpoint. 
Policy making, I am sure, would suddenly halt. 
In fact, the analogy of holding victims at gunpoint is misleading, because in public decision-making we can hardly claim that everything is all right as long as we don’t pull the trigger. 
Given that everything that happens is somehow a consequence of decision-making, the distinction between killing someone and letting her die is unconvincing. 
So perhaps decision makers, faced with the victims of previous policies and the future victims of current ones, would simply be happy that at last they could allocate resources in an optimally efficient way. 
That seems unlikely. 
Indeed, the thought experiment of turning statistical lives into identifiable lives highlights an important point about policy-making: much, if not all, of the appeal of “efficient” resource allocation depends on the anonymity of the victims. 
Full anonymity explains why efficiency rules – say, leaving the most “expensive” patients untreated when resources are scarce – meet with no protest. 
Such anonymity also holds for those who are left untreated in “triage” – the sorting of casualties when natural or man-made disasters strike. 
But, for the same reason, efficiency rules often do meet with protest when they are used or proposed for rationing medical services in everyday medicine. 
It is part of the everyday life of many citizens – even part of their identities – that they suffer from an expensive health problem. 
Under an efficiency regime, they might as well bear a target on their foreheads. 
What about young and healthy citizens? 
Many will develop expensive health problems in the future. 
But their future is unknown, as is the fate of future disaster victims. 
Why should they not fully embrace efficient resource allocation? 
Many statistical lives – your own, perhaps – could be saved by excluding future payment for some expensive medical treatment (say, hemodialysis) for those who are now healthy and reallocating the funds to cheap but effective prevention programs. 
Since there is no fairness problem here, would it not simply be irrational to reject efficiency? 
After all, saving statistical lives does save individuals. 
Whether or not you see a distinction between statistical lives and individual lives depends on whether you accord value not only to when you die, but also to how you die. 
Dying is hard. 
But it is our fate as humans, and it is usually accepted with dignity when the hour comes. 
Nevertheless, as long as we see a chance to escape death, we run from it, and we expect those who take care of us to look for the escape routes. 
So here is a difference: when you die from lack of medical care, there is an escape route. 
It is clearly marked, but nobody helps you get to it. 
They stand idly by, abandoning you to death. 
By contrast, when you die from the absence of prevention policies, you may be dying sooner than you otherwise would, but you are not being left to die. 
This is why sitting beside, and even lying on, the deathbed of a statistical life may be more tolerable after all. 
Perhaps a maximally extended life expectancy is of higher value to you than living in a society where doctors do not leave curable patients to die if they cannot pay for the required treatment out of their own pockets. 
But there is nothing irrational in deciding otherwise. 
It all depends on a value judgment – one of the many value judgments societies must make with respect to modern medicine. 
The higher the technical capabilities, and the costs, of modern medicine become, the more contested this particular value judgment will be. 

Economy, Insure Thyself 
NEW HAVEN – The basic principle of financial risk management is sharing. 
The more broadly diversified our financial portfolios, the more people there are who share in the inevitable risks – and the less an individual is affected by any given risk. 
The theoretical ideal occurs when financial contracts spread the risks all over the world, so that billions of willing investors each own a tiny share, and no one is over-exposed. 
The case of Japan shows that, despite some of our financial markets’ great sophistication, we are still a long way from the theoretical ideal. 
Considering the huge risks that are not managed well, finance, even in the twenty-first century, is actually still rather primitive. 
A recent World Bank study estimated that the damage from the triple disaster (earthquake, tsunami, and nuclear crisis) in March might ultimately cost Japan $235 billion (excluding the value of lives tragically lost). 
That is about 4% of Japanese GDP in 2010. 
Given wide publicity about international charitable relief efforts and voluntary contributions to Japan, one might think that the country’s economic loss was shared internationally. 
But newspaper accounts suggest that such contributions from foreign countries should be put in the hundreds of millions of US dollars – well below 1% of the total losses. 
Japan needed real financial risk sharing: charity rarely amounts to much. 
Insurance companies operating in Japan repaid some of the losses. 
The same World Bank study estimates that total claims accruing to insurers in Japan might ultimately cost these companies $33 billion. 
Clearly, the insured risks were a small part of the total risk. 
Moreover, much of that risk, even if insured, continues to be borne in Japan, rather than being spread effectively to foreign investors, so Japan is still alone in bearing the costs. 
Before the disaster, Japan issued about $1.5 billion in earthquake-related catastrophe bonds as a risk-management device: the debt is canceled if a precisely defined seismic event occurs. 
This design helped spread the earthquake risk from Japan to foreign investors, who could accept the risk and were enticed by higher expected yields. 
Unfortunately, $1.5 billion is little better than what charity could do – and still only a drop in the bucket compared to the extent of the damage. 
Worse yet, even this triple disaster often did not fit the definition of the seismic event defined by the bond indentures. 
We need far more – and better – catastrophe bonds. 
Of course, compared to Japan’s two “lost decades” since 1990, even this year’s triple disaster pales in significance. 
Japanese real per capita GDP growth averaged 3.9% a year in the 1980��s, but only 1.4% since 1990. 
If real per capita GDP growth had continued after 1990 at the rate of the 1980’s, Japan’s economy would be 60% larger than it is today – implying losses in the trillions of dollars. 
Japan could have insulated itself from a good deal of the effects of GDP fluctuations if it had managed this risk accordingly. 
Though no country has ever practiced risk management on such a massive scale, it is important to consider such an innovation now. 
I (among others) have been arguing for years that countries should cover their risks by issuing a different kind of national debt, tied to their own GDP or a similar measure of economic success. 
In its simplest form, the securities could be shares in GDP. 
My Canadian colleague Mark Kamstra and I have proposed issuing shares called “trills,” which would pay a dividend each year equal to a trillionth of that year’s GDP, in domestic currency. 
If the Japanese government had issued trills in 1990, when Japan’s nominal GDP was ¥443 trillion, the dividend paid to investors the first year would have been ¥443. 
Every year thereafter, the dividend paid would fluctuate in response to changes in GDP. 
Investors around the world would take on Japanese GDP risk in return for an expected yield, just as with catastrophe bonds. 
The trills would most likely have sold for a very high price in 1990, perhaps with a dividend yield under 1%. 
After all, people in 1990, witnessing recent high growth rates, would have expected Japanese GDP to grow rapidly in subsequent decades. 
In 2010, when GDP was still only ¥479 trillion, the same trills would pay a dividend of ¥479, not much larger than the initial yield and no doubt disappointing many investors. 
So, with lower growth expectations, the trills would likely have a much lower price now. 
That lower price would be a bane to investors but a boon to Japanese, compensating them for the losses that they have suffered. 
When considering today’s concern about Japan’s high public debt-to-GDP ratio, now at 202% on a gross basis, one needs to reflect that the ratio would most likely be profoundly lower if Japan had in the past financed more of its deficit spending with trills instead of conventional debt, and issued them to investors around the world. 
A lower debt burden would certainly help Japan deal with its economic slowdown. 
There is nothing we can do now to compensate for failures to manage risks in the past. 
But disasters and economic crises can have a silver lining if they spur fundamental innovation by forcing us to think about how to manage risks in the future. 

Who Really Creates Value in an Economy? 
LONDON – After the 2008 global financial crisis, a consensus emerged that the public sector had a responsibility to intervene to bail out systemically important banks and stimulate economic growth. 
But that consensus proved short-lived, and soon the public sector’s economic interventions came to be viewed as the main cause of the crisis, and thus needed to be reversed. 
This turned out to be a grave mistake. 
In Europe, in particular, governments were lambasted for their high debts, even though private debt, not public borrowing, caused the collapse. 
Many were instructed to introduce austerity, rather than to stimulate growth with counter-cyclical policies. 
Meanwhile, the state was expected to pursue financial-sector reforms, which, together with a revival of investment and industry, were supposed to restore competitiveness. 
But too little financial reform actually took place, and in many countries, industry still has not gotten back on its feet. 
While profits have bounced back in many sectors, investment remains weak, owing to a combination of cash hoarding and increasing financialization, with share buybacks – to boost stock prices and hence stock options – also at record highs. 
The reason is simple: the much-maligned state was permitted to pursue only timid policy responses. 
This failure reflects the extent to which policy continues to be informed by ideology – specifically, neoliberalism, which advocates a minimal role for the state in the economy, and its academic cousin, “public choice” theory, which emphasizes governments’ shortcomings – rather than historical experience. 
Growth requires a well-functioning financial sector, in which long-term investments are rewarded over short-term plays. 
Yet, in Europe, a financial-transaction tax was introduced only in 2016, and so-called patient finance remains inadequate almost everywhere. 
As a result, the money that is injected into the economy through, say, monetary easing ends up back in the banks. 
The predominance of short-term thinking reflects fundamental misunderstandings about the state’s proper economic role. 
Contrary to the post-crisis consensus, active strategic public-sector investment is critical to growth. 
That is why all the great technological revolutions – whether in medicine, computers, or energy – were made possible by the state acting as an investor of first resort. 
Yet we continue to romanticize private actors in innovative industries, ignoring their dependence on the products of public investment. 
Elon Musk, for example, has not only received over $5 billion in subsidies from the US government; his companies, SpaceX and Tesla, have been built on the work of NASA and the Department of Energy, respectively. 
The only way to revive our economies fully requires the public sector to reprise its pivotal role as a strategic, long-term, and mission-oriented investor. 
To that end, it is vital to debunk flawed narratives about how value and wealth are created. 
The popular assumption is that the state facilitates wealth creation (and redistributes what is created), but does not actually create wealth. 
Business leaders, by contrast, are considered to be productive economic actors – a notion used by some to justify rising inequality. 
Because businesses’ (often risky) activities create wealth – and thus jobs – their leaders deserve higher incomes. 
Such assumptions also result in the wrong use of patents, which in recent decades have been blocking rather than incentivizing innovation, as patent-friendly courts have increasingly allowed them to be used too widely, privatizing research tools rather than just the downstream outcomes. 
If these assumptions were true, tax incentives would spur an increase in business investment. 
Instead, such incentives – such as the US corporate-tax cuts enacted in December 2017 – reduce government revenues, on balance, and help to fuel record-high profits for companies, while producing little private investment. 
This should not be shocking. 
In 2011, the businessman Warren Buffett pointed out that capital gains taxes do not stop investors from making investments, nor do they undermine job creation. 
“A net of nearly 40 million jobs were added between 1980 and 2000,” he noted. “You know what’s happened since then: lower tax rates and far lower job creation.” 
These experiences clash with the beliefs forged by the so-called Marginal Revolution in economic thought, when the classical labor theory of value was replaced by the modern, subjective value theory of market prices. 
In short, we assume that, as long as an organization or activity fetches a price, it is generating value. 
This reinforces the inequality-normalizing notion that those who earn a lot must be creating a lot of value. 
It is why Goldman Sachs CEO Lloyd Blankfein had the audacity to declare in 2009, just a year after the crisis to which his own bank contributed, that his employees were among “the most productive in the world.” 
And it is also why pharmaceutical companies get away with using “value-based pricing” to justify astronomical drug-price hikes, even when the US government spends more than $32 billion annually on the high-risk links of the innovation chain that results in those drugs. 
When value is determined not by specific metrics, but rather by the market mechanism of supply and demand, value becomes simply “in the eye of the beholder” and rents (unearned income) become confused with profits (earned income); inequality rises; and investment in the real economy falls. 
And when flawed ideological stances about how value is created in an economy shape policymaking, the result is measures that inadvertently reward short-termism and undermine innovation. 
A decade after the crisis, the need to address enduring economic weaknesses remains. 
That means, first and foremost, admitting that value is determined collectively, by business, workers, strategic public institutions, and civil-society organizations. 
The way these various actors interact determines not just the rate of economic growth, but also whether growth is innovation-led, inclusive, and sustainable. 
It is only by recognizing that policy must be as much about actively shaping and co-creating markets as it is about fixing them when things go wrong that we may bring this crisis to an end. 

Edmund Phelps’s Journey 
The winner of this year’s Nobel prize for economics, Edmund Phelps, is a giant in the field. 
His contributions have been, and remain, so important as that they have altered traditional ways of thinking. 
According to the social science citations index, he ranks well among the most important economists since Adam Smith. 
Economists working on the macro economy, its micro foundations, exogenous and endogenous growth theory, the formation of expectations and problems of information and discrimination all refer back to Phelps. 
After a brilliant secondary education, Phelps entered Amherst College in Massachusetts without any specific idea about which discipline to embrace or which career to follow. 
He was passionate about philosophy but, at the insistence of his father, took classes in economics. 
As nearly always happens, Phelps’s choice of vocation came after meeting an important professor, in this case the Harvard economist James Nelson. 
After some hesitation, Phelps decided to pursue graduate education. 
Paul Samuelson admits that he agreed to do a conference at Amherst with the sole aim of recruiting Phelps to MIT. 
But Phelps chose Yale, where he came into direct contact with James Tobin and Thomas Schelling. 
He wrote his thesis under Tobin’s supervision. 
With Ph.D. in hand, Phelps spent a year at the Rand Corporation in Los Angeles before returning to Yale. 
He spent another year at MIT, where he taught with Robert Solow and met Samuelson and Franco Modigliani. 
Stints at the University of Pennsylvania and Columbia University followed. 
By this point, Phelps had already acquired an international reputation through his work on the golden rule of capital accumulation (he was 28). 
This concept now appears in the toolbox of every economist, is taught in all classes on growth, and serves as a reference in all works on the macro economy. 
Later, Phelps developed a long-term growth theory based on education and technical advances. 
However, this contribution was so far ahead of its time that the profession did not discover its importance until a quarter-century later, when theorists were developing endogenous growth theories. 
Phelps was also 10 to 20 years ahead of the profession when he developed the theories of wage efficiency and inflation targeting, which are now considered to be the state of the art concerning the labour market and monetary management. 
In the late 1960’s and early 1970’s, Phelps’s encounters with Amartya Sen, John Rawls, and Kenneth Arrow at Stanford revived his philosophical streak. 
He had extremely valuable intellectual conversations with Rawls, prompting him to write several essays on the theory of economic justice and publish a book on the subject in 1974 – a book still used today. 
Phelps was behind the modern reworking of the macro economy – and, according to Samuelson, the micro economy, too. 
His research programme consisted of introducing the imperfection of information and knowledge into economic theory, which he then reformulated, giving serious consideration to agents’ expectations. 
In Microeconomic Foundations of Employment and Inflation Theory , a famous work that he published and to which he made three major contributions, he set the scene for what would become the greatest revolution in economic theory of the last 50 years. 
It is to Phelps that we owe the theory of the natural unemployment rate – a cornerstone of modern macroeconomic theory and economic policy that Milton Friedman rediscovered a year later, albeit heuristically. 
Phelps was also responsible for the “island parable,” which helped explain why monetary policy can have temporary real effects as a result of imperfect information. 
The bulk of Phelps’s current work consists of a new reworking of structuralist theory, in an effort to show how changes in interest rates and asset prices affect the equilibrium unemployment rate over the medium term. 
Phelps’s new theory provides a logical backdrop against which we can assess the consequences of fluctuations in share prices, exchange rates, and, more generally, the value of physical assets and human capital under the powerful influence of new technologies and innovation. 
These are, of course, the main phenomena that economic theory struggles to explain nowadays. 
So it is easy to understand why Phelps still leads the way. 
Indeed, we can expect his new theoretical framework to become a reference point in a decade or two. 
When recommending an Indian mathematician to a Harvard colleague, Ludwig Wittgenstein wrote that: “scientific geniuses generally have one great idea in their life; he has had two.” 
What could we say about Phelps? 

Educating Americans about Muslim Voices 
NEW YORK – President Barack Obama has extended an open hand of friendship in his landmark Cairo speech to the Muslim world – seeking to engage Muslims with a commitment of mutual respect. 
No one can doubt his sincerity. 
From his first days in office, he has emphasized the importance of embarking on a new chapter in relations between the United States and the world’s Muslims. 
But this aspiration will remain elusive without acknowledging the sad fact that most Americans remain woefully ignorant about the basic facts of Islam, and about the broad geographic and cultural diversity of Muslim cultures. 
A majority of public opinion polls taken in the last four years show that the views of Americans about Islam continue to be a casualty of the attacks of September 11, 2001. 
Washington Post/ABC News polls from 2006, for example, found that nearly half of Americans regard Islam “unfavorably,” while one in four admits to prejudicial feelings against Muslims. 
American views of the Muslim world are so colored by the conflict in the Middle East and the wars in Iraq and Afghanistan that US citizens have no collective appreciation of the fact that most Muslims live in Asia. Or that the four countries with the largest Muslim populations – Indonesia, Pakistan, India, and Bangladesh – are all cultures with millennia-old histories of coexisting with other religions and cultures. 
A 2005 report by the US State Department’s Advisory Committee on Cultural Diplomacy called for a new vision of cultural diplomacy that “can enhance US national security in subtle, wide-ranging and sustainable ways.” 
In 2008, a bipartisan group of American leaders—the US-Muslim Engagement Project— convened by Search for Common Ground and the Consensus Building Institute, issued a report calling for a new direction for US relations with the Muslim world. 
A primary goal of this effort would be “to improve of mutual respect and understanding between Americans and Muslims around the world.” 
It is time for US citizens to commit themselves to working alongside the Obama administration to turn a new leaf in relations with the Muslim world. 
The first step is to make a concerted effort to become better educated about the multifaceted societies that comprise the one billion-strong Muslim population throughout the world. 
The power of culture resides in its ability to transform perceptions. 
From June 5-14, New Yorkers are experiencing the rich diversity of Muslim cultures through a city-wide initiative, entitled “Muslim Voices: Arts and Ideas.” 
More than 300 artists, writers, performers, and scholars from more than 25 countries, including the US, are gathering for this unprecedented festival and conference. 
Presentations include a dizzying variety of artistic forms from the Muslim world, ranging from the traditional (calligraphy, Sufi devotional voices) to the contemporary (video installations, avant-garde Indonesian theater, and Arabic hip-hop). 
A companion policy conference has attracted scholars and artists from around the world exploring the relationship between cultural practice and public policy and suggesting new directions for cultural diplomacy. 
A critical goal of this project is to help break stereotypes and create a more nuanced understanding of Muslim societies. 
Despite our enthusiasm for the possibilities of what this initiative can do to broaden understanding, a performance, a film, or an art exhibition cannot find solutions to all of the problems that divide Americans and the Muslim world. 
The current distance is rooted as much in ignorance as in hard political issues, many of which go beyond what arts and culture can realistically address. 
However, cultural diplomacy and initiatives such as “Muslim Voices” can open the door to the reality of the Muslim world as a rich space for world-class artistic production. 
That, in turn, can encourage an interest in addressing the harder political issues with respect and a sense of equity. 
For too long, the differences between the US and the Muslim world have been framed not in terms of diversity, but as the foundations of a permanent global conflict. 
But when people participate in an aesthetic experience that both addresses and transcends a particular culture, perceptions are bound to change. 
America has reached a pivotal moment in its national and global history, with new hopes for intercultural exchange, dialogue, and mutual understanding. 
President Obama and Secretary of State Hillary Clinton say that theirs will be an age of “smart power” that will effectively use all tools of diplomacy at their disposal, including cultural diplomacy. 
The US must focus once again on the arts as a meaningful way to promote stronger cultural engagement and, ultimately, to find new channels of communication with the Muslim world. 
Doing so will show that relations need not be defined only through political conflict. 
Rather, there is now an opportunity to define connections between America and the Muslim world by sharing the richness and complexity of Muslim artistic expressions – as a vital step in finding grounds for mutual respect. 

Educating Europe 
Education has played a big part in healing Europe's divisions. 
Four decades ago, Charles de Gaulle and Konrad Adenauer approved the creation of new textbooks that children in both countries would use to help heal the century-long Franco-German antagonism. 
Today's challenges call for such a dynamic use of educational policy. 
With the May accession of the ten central, eastern, and southern European candidate states, the European Union will be more politically, economically, and socially diverse than ever. 
This entails new opportunities, no doubt, but also new risks. 
Because an enlarged Union will become a reality in just two months, it is imperative to develop concepts for cultural understanding that contribute to the successful integration of the new members. 
Some values, long espoused by the Union, should be relatively easy to convey. 
A decade ago, with the Maastricht Treaty, EU members agreed to respect the history, culture, and traditions of all of their constituent peoples. 
The draft constitution that recently failed to gain acceptance in the first round of negotiations not only promises to respect cultural heritage; it obliges the Union actively to protect, maintain, and develop the wealth of Europe's cultural and linguistic diversity. 
But Europe can succeed in this task only if its various constituent cultures do not seal themselves off from one another. 
Within a mobile and open Europe, there can be no fencing off of foreign cultures; contact cannot be avoided. 
Diversity has to be lived, which means establishing one's own uniqueness and learning to cope in and with other regions and mindsets. 
Goethe already spoke of this in his play "Torquato Tasso," when he cried out: "Compare yourself! 
Discover what you are!" 
Indeed, Europeans will only succeed in building the wider Europe if they are open to what is foreign to them. 
Xenophobia is a sign of education gone wrong - an expression of narrow-mindedness and the inability to put oneself in the position of others. 
So, rather than embarking on a search for a European identity, we should agree on mutual educational objectives to increase the awareness of all Europeans of the "others" who are their brethren in Europe. 
A thirst for knowledge, a delight in engaging with the world, and empathy with people from different cultures are qualities that can ensure diversity in unity, and unity in diversity. 
The same is true for the virtue of tolerance and for multilingualism. 
Only those who are familiar with European history and who engage in discussion with the candidate countries about what Europe is and should be will be able to bridge the gap between different cultures and religions. 
This implies critical faculties and the ability to tolerate criticism. 
Moreover, the current EU member states will not only have to be able to tolerate the criticism by central, eastern, and southern Europeans of western civilization, but also to take such criticism into consideration as they ponder policy. 
A successful education teaches us to treat others with dignity, regardless of religion, race, origin, or gender. 
A significant element of a successful education is the willingness to be tolerant of others. 
Psychologically, this virtue implies the ability to put oneself in others' position. 
Communication between members of different cultures fails so often because we know too little about one another. 
Travel broadens the mind, they say, but for that to happen, more is required than merely frequent changes of location. 
To acquire an insight into how people from other cultures perceive the world, what is required is knowledge of how they live and experience life. 
A newer insight would be: multilingualism broadens the mind. 
Language is not just a means of communication. 
Language is culture. 
The very question of which states of mind, characteristics, and circumstances a language has words for tells us something about cultural peculiarities. 
For the German language, let me point here to Weltschmerz , Weltgeist , Zeitgeist , Schadenfreude , Realpolitik , or Bildung - all of them words for which other languages often lack precise equivalents. 
Moreover, by learning a foreign language, one acquires a new understanding of one's own. 
Most importantly, though, language provides access to the other culture. 
Calls for attendance in a foreign school - if possible for at least one year - as part of a future European curriculum should be heard and seriously considered. 
Of course, multilingualism, empathy, tolerance, and the acquisition of knowledge about foreign cultures cannot be decreed like taxes. 
But the state can and should organize a good ethical and political education that affords young people the opportunity to interact with others and recognize and accept their equality. 
Liberal democracy, in its search for civic-mindedness, depends on people and institutions that can guide the way by their example, beliefs, or worldview. 
Time and again throughout the course of our lives, we must bring ourselves to tolerate opinions and behaviours that seem contrary to our own. 
In this effort, we are sustained only by education. 
The actor and writer Peter Ustinov found a graphic image for this: "Education is important, especially when it comes to dismantling prejudices. 
You can't help being a prisoner within your own mind, but the least you can do is ensure that the cell is decently furnished." 

The Lost Generations 
NEW YORK – A country’s economic success depends on the education, skills, and health of its population. 
When its young people are healthy and well educated, they can find gainful employment, achieve dignity, and succeed in adjusting to the fluctuations of the global labor market. 
Businesses invest more, knowing that their workers will be productive. 
Yet many societies around the world do not meet the challenge of ensuring basic health and a decent education for each generation of children. 
Why is the challenge of education unmet in so many countries? 
Some are simply too poor to provide decent schools. 
Parents themselves may lack adequate education, leaving them unable to help their own children beyond the first year or two of school, so that illiteracy and innumeracy are transmitted from one generation to the next. 
The situation is most difficult in large families (say, six or seven children), because parents invest little in the health, nutrition, and education of each child. 
Yet rich countries also fail. 
The United States, for example, cruelly allows its poorest children to suffer. 
Poor people live in poor neighborhoods with poor schools. 
Parents are often unemployed, ill, divorced, or even incarcerated. 
Children become trapped in a persistent generational cycle of poverty, despite the society’s general affluence. 
Too often, children growing up in poverty end up as poor adults. 
A remarkable new documentary film, The House I Live In, shows that America’s story is even sadder and crueler than that, owing to disastrous policies. 
Starting around 40 years ago, America’s politicians declared a “war on drugs,” ostensibly to fight the use of addictive drugs like cocaine. 
As the film clearly shows, however, the war on drugs became a war on the poor, especially on poor minority groups. 
In fact, the war on drugs led to mass incarceration of poor, minority young men. 
The US now imprisons around 2.3 million people at any time, a substantial number of whom are poor people who are arrested for selling drugs to support their own addiction. 
As a result, the US has ended up with the world’s highest incarceration rate – a shocking 743 people per 100,000! 
The film depicts a nightmarish world in which poverty in one generation is passed on to the next, with the cruel, costly, and inefficient “war on drugs” facilitating the process. 
Poor people, often African-Americans, cannot find jobs or have returned from military service without skills or employment contacts. 
They fall into poverty and turn to drugs. 
Instead of receiving social and medical assistance, they are arrested and turned into felons. 
From that point on, they are in and out of the prison system, and have little chance of ever getting a legal job that enables them to escape poverty. 
Their children grow up without a parent at home – and without hope and support. 
The children of drug users often become drug users themselves; they, too, frequently end up in jail or suffer violence or early death. 
What is crazy about this is that the US has missed the obvious point – and has missed it for 40 years. 
To break the cycle of poverty, a country needs to invest in its children’s future, not in the imprisonment of 2.3 million people a year, many for non-violent crimes that are symptoms of poverty. 
Many politicians are eager accomplices to this lunacy. 
They play to the fears of the middle class, especially middle-class fear of minority groups, to perpetuate this misdirection of social efforts and government spending. 
The general point is this: Governments have a unique role to play to ensure that all young members of a generation – poor children as well as rich ones – have a chance. 
A poor kid is unlikely to break free of his or her parents’ poverty without strong and effective government programs that support high-quality education, health care, and decent nutrition. 
This is the genius of “social democracy,” the philosophy pioneered in Scandinavia, but also deployed in many developing countries, such as Costa Rica. 
The idea is simple and powerful: All people deserve a chance, and society needs to help everybody to secure that chance. 
Most important, families need help to raise healthy, well-nourished, and educated children. 
Social investments are large, financed by high taxes, which rich people actually pay, rather than evade. 
This is the basic method to break the intergenerational transmission of poverty. 
A poor child in Sweden has benefits from the start. 
The child’s parents have guaranteed maternity/paternity leave to help them nurture the infant. 
The government then provides high-quality day care, enabling the mother – knowing that the child is in a safe environment – to return to work. 
The government ensures that all children have a place in preschool, so that they are ready for formal schooling by the age of six. 
And health care is universal, so the child can grow up healthy. 
A comparison of the US and Sweden is therefore revealing. 
Using comparable data and definitions provided by the Organization for Economic Cooperation and Development, the US has a poverty rate of 17.3%, roughly twice Sweden’s poverty rate of 8.4%. 
And America’s incarceration rate is 10 times Sweden’s rate of 70 people per 100,000. 
The US is richer on average than Sweden, but the income gap between America’s richest and poorest is vastly wider than it is in Sweden, and the US treats its poor punitively, rather than supportively. 
One of the shocking realities in recent years is that America now has almost the lowest degree of social mobility of the high-income countries. 
Children born poor are likely to remain poor; children born into affluence are likely to be affluent adults. 
This inter-generational tracking amounts to a profound waste of human talents. 
America will pay the price in the long term unless it changes course. 
Investing in its children and young people provides the very highest return that any society can earn, in both economic and human terms. 

Ending the War on Education 
HONOLULU – My three-year-old niece believes strongly in the power of “the good guys.” 
Whenever I visit, she drags me to the bookshelf in her room and pulls out book after book, each with the same conclusion: in battles big or small, the good guys always win. 
I don’t have the heart to tell her that, in the real world, clean fights and gratifying outcomes are the exception. 
Modern warfare follows no rules, and loyalties are never black and white. 
For me, nothing illustrates this truth more terribly than the surge in violence directed at schools and educators in conflict areas. 
In May of this year, the Global Coalition to Protect Education from Attack will publish its “Education Under Attack” report, which confirms that wars and military engagements are affecting education more severely than any time in recent memory. 
The numbers are truly shocking. 
Around the world, some 80 million children are unable to attend school because of violence. 
In the first half of 2017, there were more than 500 attacks on schools in 20 countries, a significant increase from previous years. 
According to the United Nations, in 15 of those countries, government soldiers or rebel forces seized schools for military use. 
For obvious reasons, governments that support the targeting of schools and educators in any capacity must be held to account. 
Children forced to live in conflict zones are already suffering; when violence prevents them from learning, they suffer a double tragedy. 
Consider how completely a child’s education is uprooted by war. 
Before the current conflict in Syria, for example, the enrollment rate for primary school was above 90%. 
Today, in areas most affected by the fighting, it has dropped to below 30%. 
In Yemen, with war and famine raging, more than two million children between the ages of six and nine are out of school. 
And nearly half of the 700 UN-administered schools in Syria, Gaza, the West Bank, Lebanon, and Jordan have been attacked or shut down at least once in recent years. 
Humanitarian crises often produce a surge in political will; the needless suffering of others, and especially of children, pushes the international community to dedicate money and energy to ameliorating the misery. 
Unfortunately, that generosity rarely extends to supporting education in war-torn areas. 
Of the millions of children not attending school around the world, one in four lives in a crisis-affected country. 
Yet, education accounts for just 2% of total humanitarian aid, while only 38% of emergency aid requests for education are met. 
In April 2000, when the Dakar Framework for Action was adopted, signatories identified conflict as a “major barrier” to attaining the goal of “education for all,” one of the UN Sustainable Development Goals. 
The report also expressed the consensus view that governments and civil-society groups must move swiftly to “reconstruct destroyed or damaged education systems” whenever possible. 
Why, then, nearly two decades after the framework was signed, is this commitment to rebuilding routinely ignored? 
Education is the key to recovery for households and countries hit by conflict. 
Each year of additional schooling increases a learner’s earnings by 10%, on average, improving their long-term financial stability, and helping to lower the risk of a return to violence. 
In other words, as I explained at a recent panel organized by the Education Above All Foundation at the World Innovation Summit for Education (WISE), attacks on education are quite literally attacks on our collective future. 
Girls are are 2.5 times more likely than boys to be out of school in conflict-affected areas. 
Yet investing in girls has long-term benefits that can transform communities and eradicate poverty. 
Educated girls are less likely to marry at a young age, and more likely to have fewer, healthier children. 
Moreover, women in the workforce reinvest 90% of their incomes to their communities. 
Countries enduring and emerging from violence may not have the financial capacity to rebuild schools while simultaneously funding reconstruction. 
That is why international support is so crucial. 
The global community must find the $2.3 billion needed to improve access to education in conflict zones. 
At the same time, donors must fund institutions that will help children traumatized by the psychological stress of war. 
For many children in conflict areas, psychosocial and emotional support is as important as educational opportunity. 
The world of my niece’s picture books – where every struggle in summarized in 20 pages and ends with a “happily ever after” – will never be reality. 
But, in the absence of fairy godmothers and protective witches, the world needs workable solutions that can help the good guys (and girls) win. 
By educating every child, even those in harm’s way, we may succeed in making the world just a little less wicked. 

Education and the Invisible Child 
LONDON – In his 1952 novel, Invisible Man, the late Ralph Ellison famously portrayed American blacks as silent, long-suffering, and entirely unnoticed by the majority white population. 
In 2016, there is a new – and global – invisible class: the 260 million boys and girls who are currently denied access to basic education. 
Today’s invisible victims are refugee children holed up in tents, shacks, and hovels who will never enjoy a first day at school; they are the millions of 9-12-year-olds condemned to child labor, and the millions of young girls destined for child marriage and denied an education simply because of their gender. 
Ensuring a better future for these children is the civil-rights struggle of our time. 
Out-of-school children are losing out because of our failure to invest in education; but so, too, are another 600 million boys and girls who are in school, but not learning. 
In low- and middle-income countries, half of all primary-school-age children don’t learn basic literacy and numeracy skills. 
All told, 900 million of the world’s 1.4 billion children reach adulthood un- or under-educated. 
According to a forthcoming report from the International Commission on Financing Global Educational Opportunity (the Education Commission), which I chair, members of this neglected majority lack the skills they will need to succeed in a quickly changing global labor market. 
In the interconnected world of the future, children will need to be taught information-technology and computational skills if they are to find gainful employment. 
However, in low-income countries, where technology is most needed to improve educational services and inclusive growth, only 10% of pupils attend schools with Internet access. 
To close these education gaps, a “business-as-usual” approach is unlikely to suffice. 
Indeed, by 2030 – the year by which the UN sustainable development agenda promises to deliver universal basic education – 1.5 billion adults will have had no education beyond primary school. 
Worse still, half the world’s young people will still be entering the workforce with no recognizable qualifications, and will probably suffer long periods of unemployment. 
For years, the international community has held summits promising to redouble its commitment to education. 
But, time and again, it has failed to fulfill that promise, thus depriving the next generation of the most valuable gift it could bestow. 
In 2002, 13% of overseas development aid went to children’s education; today, that figure is 10%, and in low-income countries it amounts to no more than $17 dollars per child, on average. 
By short-changing the world’s children, we are squandering the most valuable untapped resource we have. 
Moreover, we could be setting the stage for a modern doomsday scenario, because an entire generation of uneducated, alienated young people will make easy prey for extremists and terrorist organizations. 
Fortunately, how to improve educational outcomes isn’t a secret: the best schools hire dedicated and competent teachers and administrators, and teach curricula relevant to children’s future needs. 
Moreover, the Internet enables the poorest children in the remotest areas to access the world’s best libraries and teachers. 
With auditing and accountability systems, we can make future investments dependent on results, and transform every classroom into a learning hub for every child. 
Toward this end, the Education Commission – which includes leaders from government, academia, business, and economics – just published a roadmap and a proposed global budget to provide universal, high-quality primary and secondary education. 
Our evidence shows that if developing countries can adopt domestic reforms to match the results of recent success stories, such as Vietnam, they can deliver education for all by 2030. 
For our program to succeed, the global investment in education will need to rise steadily from $1.2 trillion now to $3 trillion by 2030; and low- and middle-income countries will need to modernize their education sectors by increasing their domestic investments to 5.8% of national spending, 1.8% above the current average. 
If countries are willing to make this level of commitment, they should not fail to deliver universal education for lack of funding. 
To ensure that the money is there, the Education Commission is offering detailed proposals to reform the current global framework for funding education, and to bring multilateral development banks together to prioritize education and release new resources. 
Education is the most cost-effective investment we can make, so the economic case for increased funding could not be clearer. 
The Education Commission’s goal is to make today and tomorrow’s children a “learning generation.” 
If we succeed, we expect low-income countries’ per capita GDP to be 70% higher by 2050 than it is now. 
By contrast, if the world succumbs to inaction and paralysis, we predict that it will cost global GDP $1.8 trillion by 2050. 
The brunt of this cost will fall on low-income countries, where 25% of populations will still live in extreme poverty. 
Those are the quantifiable costs of ignoring an invisible generation of young people; the other costs, in terms of lost opportunities and ravaged, alienated lives, are impossible to quantify, but should be equally worrisome. 

Education in the Digital Age 
TOKYO – The Fourth Industrial Revolution stands out from its predecessors in a critical way: rather than making it easier for humans to use their surroundings more effectively for their own benefit, technology is displacing humans in the workplace. 
The question is who will benefit now. 
Automated or otherwise technology-enabled services can increase profit margins for companies, while representing for users cheaper, more convenient, or more reliable options than those produced exclusively by humans. 
But, of course, this comes at a high cost for the humans who previously filled those roles. 
People all over the world have embraced ridesharing and transportation services like Uber, to the detriment of traditional taxi drivers. 
When artificial intelligence-enabled driverless cars become cost-effective and reliable, Uber and taxi drivers alike will become obsolete. 
In stock trading, 79% of market transactions are now performed by software, according to Frank Zhang of the Yale School of Management, reflecting the hope that machines will be able to identify patterns more effectively than a human could – a hope that may have contributed to the recent stock-market correction. 
In any case, this doesn’t bode well for human traders. 
I myself have saved on translation costs since realizing that, with some edits by me, Google Translate can work just fine, though this means lost income for the graduate students whom I used to hire the task. 
While simultaneous interpreters – who occupy a high-paid profession – may scoff at the notion that machines will threaten their positions any time soon, the success of machine learning in highly complex strategic games like Go suggests that machines’ ability to learn should not be underestimated. 
In short, the AI-driven revolution will have its winners and losers. 
To win, it is vital not just to avoid being displaced by new technologies, but also to capitalize on the new opportunities they present. 
This might mean investing in cutting-edge businesses like Uber, as the Japanese-Korean industrialist Masayoshi Son has done. 
Or it might mean acquiring the knowledge and skills needed to secure a job that takes advantage of this new economy. 
Such responses are good not just for individuals, but also for economies as a whole. 
In Japan, for example, human-capital development is crucial to support growth as the population ages and shrinks. 
And that process begins early: as the Nobel laureate economist James Heckman has shown, education of young children has a significant impact on productivity. 
That is why Prime Minister Shinzo Abe has announced that half of the extra revenues raised from the consumption-tax hike that will go into effect in 2019 will be invested in pre-school education. 
To give young people the tools they will need to thrive in the changing digital economy, such investment must focus on improving the quality of education. 
That may mean transforming curricula to focus less on rote learning or straightforward calculation and more on skills like critical thinking, communication, and leadership. 
Education in Japan today – and perhaps also in South Korea – is something like the game “Jeopardy”: the one who knows the most facts is the winner. 
The best-known means by which Japanese students are ranked is hensachi – literally translated as “standard deviation” – which reflects how far from the statistical mean a typical student admitted to a given institution scores on a test focused on memorized formulas and facts. 
Students with higher positive hensachi scores are admitted to more rigorous high schools and colleges, where they are often encouraged to study medicine, simply because the entrance exam is difficult, even if they have no interest in a medical career. 
Otherwise, they compete to become bureaucrats at the most influential ministries – for example, finance, economy, or foreign affairs – or they try to get on the fast track to the top of elite firms like Toyota or Sony. 
Hensachi scores thus determine people’s entire career trajectories. 
High scores mean a comfortable life, all the way through retirement. 
Given this, Japanese students feel pressured to memorize information from a very young age. 
Parents will go so far as to move to a district where the kindergarten is linked to a renowned university. 
This system did not begin in Japan. 
On the contrary, it is an outgrowth of the system for assessing and promoting Chinese bureaucrats that prevailed until the early twentieth century.While it is a form of meritocracy, and thus superior to nepotism, it fails to take into account the reality that a capacity for rote learning does not necessarily imply an aptitude for creativity or ingenuity. 
Even if it did, we might not find out, because memorizing enough information to secure high scores on assessments leaves little time to learn to think – to develop skills or foster talents that could amount to a real contribution to one’s community and country. 
In fact, a system based on hensachi actively discourages those who do have valuable talents from developing them into useful skills. 
Yet, in the age of AI, those talents and skills are more valuable than ever. 
The Fourth Industrial Revolution will amount to a major test for a Japanese education system focused on reciting facts and performing formulaic calculations – precisely the areas where humans cannot compete with intelligent machines. 
With all of our technological developments, human ingenuity and creativity remain unmatched. 
We should make the most of that, and give our young people the opportunity to use their innate advantages as effectively as possible. 

Asia’s Invention Boom 
BELLEVUE, WASHINGTON – For more than a century, the United States has been the dominant global force for innovation. 
But China and other Asian countries are now testing that dominance, and the West should welcome the challenge. 
China’s move from imitation to innovation has been a matter of national policy in recent years. 
In 2011, for example, the government established a set of ambitious targets for the production of patents. 
Almost immediately, China became the world’s top patent filer. 
China soon surpassed the US in other important measures. 
Each year, Chinese universities award more PhD’s in science and engineering than US institutions do – and more than twice as many undergraduate degrees in these fields. 
Moreover, China is set to outpace the US in investment in research and development. 
Since 2001, China’s R&D expenditure has been growing by 18% annually and has more than doubled as a share of GDP. 
In the US, that ratio has remained relatively constant. 
To be sure, such metrics can easily be manipulated – a fact that critics are quick to point out. 
But statistics from the US National Science Foundation reveal a genuine drive to innovate across much of Asia, with East, South, and Southeast Asian countries together spending more on R&D than the US. 
And technology-intensive activity in the region is fast approaching that of North America and Western Europe. 
In fact, Asian countries are helping to fuel one another’s innovative success. 
China’s invention initiative has produced such rapid results in part because the government actively cooperates with its Asian competitors. 
Indeed, despite territorial disputes and other divisive issues, the commissioners of the patent offices of Japan, South Korea, China, and, to a lesser extent, Singapore and Taiwan meet often to define and coordinate their intellectual-property (IP) policies. 
China’s leaders know that they can learn from countries like Japan and South Korea, which implemented policies to encourage innovation and protect IP rights long before China did. 
The precise impact of Asia’s IP expansion is impossible to predict. 
But its transformative potential is obvious. 
Asian countries are essentially giving tens of thousands of top minds the opportunities and incentives to tackle today’s most pressing challenges, such as developing cost-effective sustainable-energy solutions, ensuring affordable health care for aging populations, and improving the quality of life in overcrowded cities. 
These complex problems demand a plurality of innovative talent and long-term international collaboration – not just to find solutions, but also to deploy them. 
In an increasingly knowledge-based global economy, partnerships and cooperation will be the natural order. 
In this context, the West would be foolish to resist Asia’s IP emergence. 
Instead, Western governments should support, learn from, and reap the rewards of the invention boom in the East. 
For example, the US, which leads the world in bringing innovative products to the market, should offer commercialization channels to innovative Chinese universities and small companies. 
And Chinese and Western companies should be encouraged to invest in one another’s IP. 
Such cooperation has already begun. 
For example, in 2008 Intellectual Ventures (which I helped found) established a presence in China and other countries with emerging innovation cultures in order to focus their inventors’ talent and energy. 
The resulting global network of more than 400 institutions and over 4,000 active inventors has produced more patent applications than many R&D-intensive companies do. 
In this ecosystem, everyone wins. 
The inventors gain access to the company’s expertise in IP development and to an international community of experienced problem-solvers. 
Intellectual Ventures gets a stake in valuable solutions. 
And the world benefits from those solutions. 
Imagine if more such initiatives were launched, not only by companies, but also by governments. 
A cooperative approach could help to improve the troubled trade dynamics between Asia and the West, characterized by disagreement over China’s lax enforcement of IP laws. 
Instead of shaking its fist, the West could provide incentives that encourage China to become a responsible actor in the existing IP regime. 
These could include, for example, efforts to organize viable alternatives to piracy for the tens of thousands of Chinese companies that currently earn a living from it. 
Some Western entrepreneurs already turn to these so-called Shan Zhai enterprises to manufacture their prototypes at scale, creating a kind of cross-border Kickstarter culture. 
Eventually, many Shan Zhai companies will evolve into legitimate businesses with their own IP. 
Given that Asian countries naturally will uphold and defend IP rights more vigorously when they have more at stake, the West should look for ways to hasten this transition. 
The West can also take some lessons from the various models Asian countries are experimenting with as they ramp up domestic innovation. 
In South Korea, LG recently launched a program to solicit invention ideas from the public, promising inventors a hefty 8% stake in the proceeds of any ideas the company commercializes. 
That is probably not an approach that many American companies have considered. 
But maybe they should. 
Asia is also experimenting with creative ways to finance innovation, such as China’s IP exchanges and Malaysia’s IP loan programs. 
The West should pay attention to these efforts, because they could offer alternatives to traditional avenues for sourcing and financing invention, such as venture capital, that are producing lackluster results. 
Finally, Western companies should be willing to supply inputs to Chinese businesses selling innovative products. 
This recommendation may seem radical, but only because the view of a one-way flow of innovation from West to East has become so entrenched. 
In fact, there is no good reason for Western businesses to stand on the sidelines as Asia produces whiz-kid entrepreneurs and high-tech start-ups. 
These pioneers are building ecosystems with points of entry at every level, and the West should enter at all of them. 
As Asian innovation comes into its own, the US and other developed countries must find ways to participate – or risk missing the opportunity of the century in a vain bid to recapture bygone supremacy. 

The Ingenious General 
WASHINGTON, DC – Had Ariel Sharon never entered politics, he would still be known around the world as a military commander and tactician. 
In both roles, he was extraordinary, because his methods diverged from normal military practices, even in the unconventional Israeli army. 
Consider the Yom Kippur War. 
On October 16, 1973, ten days after Egypt’s army surprised the Israelis by crossing the Suez Canal, Sharon turned defeat into victory by leading his own troops across the canal through a narrow gap in the Egyptian front. 
The Israelis swiftly spread out behind the Egyptians, overrunning anti-aircraft batteries and blocking supply and reinforcement routes. 
Within six days, Egyptian President Anwar Sadat had to plead for an immediate, unconditional ceasefire: so many Egyptian units were cut off, wrecked by air strikes, under attack, or fully encircled that no major forces were left to stop the advancing Israelis – not even to guard the road to Cairo. 
The Egyptian high command was convinced that Sharon’s crossing was only an overnight raid by light forces. 
Their reasoning was sound: The Israelis did not control even their own side of the canal, so they could not possibly reinforce the first wave of a few hundred men with a handful of tanks. 
Rather than pulling their units back across the canal to chase the raiding Israelis, the Egyptian commanders believed that their forces could capture all of them by converging toward one another, thus closing the two-mile gap that Sharon had exploited. 
Sharon’s superiors agreed with their Egyptian counterparts. 
They ordered Sharon to stop sending forces across the canal, and instead to widen the gap on the Israeli side. 
Sharon did not obey, pleading communications difficulties while sending as many of his forces as possible across the canal. 
He calculated that attacking the Egyptians from their own rear – destroying the missile batteries that impeded the Israeli air force, ambushing reinforcements and supplies, and simply causing massive confusion across the entire front – would induce organizational collapse in the Egyptian army. 
That is exactly what happened. 
But Sharon’s fellow generals were furious at him, as was often the case. 
In 1953, at the age of 25 and already a wounded veteran of the 1947-49 War of Independence, Sharon was recalled to active duty to establish Israel’s first commando unit. 
Arab raiders were crossing Israel’s unfenced borders to rob cattle and steal farm implements, sometimes attacking civilians. 
Guarding Israel’s elongated borders would have required 20 times more troops than Israel had. 
So Israel chose to mount punitive raids against Egyptian and Jordanian military outposts and villages that harbored marauders. 
Sharon was given a free hand to raise and train his unit. 
Instead of insisting on discipline, his men wore whatever they liked, never saluted anybody, and never drilled. 
But they launched devastating night raids while suffering few casualties, even when going up against Jordan’s Arab Legion, by far the best Arab military force. 
Sharon sought natural fighters rather than dutiful soldiers, and he carefully planned each raid, always sending some men well beyond the target of the attack to ambush any reinforcements. 
The main assault force advanced toward the target in the darkness until detected, then rushed forward, firing every weapon, while mortar and machine-gun emplacements remained in the rear, firing just ahead of the advancing troops. 
Within three years, Sharon commanded an entire brigade in the 1956 Sinai campaign, which he led in a swift advance across the desert to link up with a paratroop battalion that had been dropped deep into Egyptian territory at the entrance to the strongly defended Mitla Pass. 
There Sharon was to stop but did not, instead fighting a bloody battle to conquer the pass. 
His immediate superiors wanted him out, but the top leadership instead promoted him to command a division. 
That is how Sharon came to plan and fight the extraordinary battle of Umm Katef in the June 1967 war. 
The battle lasted only one night, but it was unique in its complexity. 
The Egyptian defenses blocked the central highway across the Sinai with a fortified box containing powerful artillery and more than a hundred tanks, fronted by three parallel trench-lines manned by thousands of infantrymen and anchored on sand dunes and high ground at each end. 
Sharon had his troops climb over the sand dunes to enter the trench lines at their top end and attack down their length – a simple maneuver that the Egyptians could have defeated had they not been pinned down by an artillery barrage and Israeli tanks firing directly at them. 
The Israeli infantrymen had taped flashlights to their helmets so that the tank gunners could direct their fire at the Egyptians just ahead of them. 
Still, the Egyptian artillery was superior, and should have at least silenced the tanks firing at the trench line. 
But paratroopers, flown in by helicopters, suddenly jumped the Egyptian gun crews, who never had a chance in hand-to-hand combat. 
The Egyptians’ tanks could still have counter-attacked, but they were engaged by an Israeli tank battalion that appeared from well behind the trench lines, having crossed supposedly impassable sand dunes. 
Then the Israeli tanks that had been shooting up the trench lines crossed over them to enter the box, and finish off Egyptian resistance. 
The road through Umm Katef was opened. 
Sharon had once again broken the basic rules of warfare, yet won total victory. 
But, even for the unconventional Israeli army, Sharon was too unconventional. 
When he was passed over for promotion to Army Chief of Staff and retired from active duty (he fought his epic 1973 battle as a reservist), a wise Israeli general warned his colleagues that he would return as Defense Minister, and that if he lost that office – as he did after the 1982 Lebanon War – he would return as Prime Minister. 
Only now has Sharon met an enemy that he cannot outmaneuver. 

A Perfectly Crazy Idea for the IMF 
GENEVA – In the movie Dangerous Minds, the actress Michelle Pfeiffer plays a former US Marine who becomes a teacher in an inner-city high school. 
In a difficult environment, where academic achievement is far from the top of the rebellious teens’ list of priorities, Pfeiffer’s character comes up with an unorthodox – and effective – new approach: each student will start the year with an “A” grade, which is theirs to lose. 
At a time when many emerging-market economies are as discouraged as Pfeiffer’s students, perhaps the International Monetary Fund should take a page out of her playbook. 
Emerging economies inhabit a risky world characterized by volatile capital flows. 
But, rather than rely on the IMF to fulfill its mandate of protecting them from liquidity crises, they self-insure by accumulating large stockpiles of international reserves. 
Emerging and developing economies now lend nearly $7.5 trillion to the US Treasury – resources that could be used to fund badly needed infrastructure projects. 
What is curious about this approach is that the IMF’s record in handling financial crises, though far from perfect, is generally quite good. 
So why the reluctance to count on the Fund? 
Perhaps the most obvious reason is timing. 
For historical reasons, most Fund facilities are better suited to managing crises than they are to preventing them. 
By the time countries turn to the IMF for support, they have already lost access to international capital markets. 
Yet they have to engage in protracted negotiations that allow the situation to deteriorate before it improves. 
Tapping a country’s own reserves may not be an ideal option, but at least it is fast. 
But the IMF does offer a fast option. 
The Flexible Credit Line (FCL) facility grants immediate access to Fund resources, no questions asked. 
It amounts to a pre-approved loan that eligible countries can obtain whenever they want, on the basis of the strength of their fundamentals and policy record. 
It is thus the perfect tool for preventing self-fulfilling liquidity crises. 
Yet IMF members do not seem to be interested in the FCL. 
Seven years after the facility was developed, only three countries (Colombia, Mexico, and Poland) have access to it. 
While not all of the Fund’s 189 members could qualify for it, the number that do is a lot higher than three. 
The FCL-like Precautionary and Liquidity Line, which has an even lower bar for eligibility, has only two takers. 
The problem is stigma. 
Countries fear that by applying for pre-approval – a process that they are not confident will remain confidential, as promised – they will signal potential economic problems. 
Worse, they could be rejected, either the first time they apply or when their approval comes up for review (every 1-2 years); that would surely undermine confidence in their economies, if word of it were to get out. 
This is where Pfeiffer’s strategy comes in. 
Instead of forcing countries to work for approval, the IMF could create a new FCL-like facility for which all of its members are pre-approved, with the exception of countries that do not meet certain criteria in terms of policies and fundamentals. 
Exceptions could be identified as part of the IMF’s so-called Article IV consultations with members – an approach that would strengthen IMF country surveillance. 
As for the rest, pre-approval would substantially diminish the temptation to self-insure by accumulating reserves. 
As with any attempt to change the status quo, this approach would raise challenges. 
For starters, IMF staff could face political pressure from countries that did not qualify, particularly if those countries were among the IMF’s more influential members. 
But, as Tito Cordella and Eduardo Levy Yeyati suggested in 2006, this risk could be mitigated by specific, measurable, and transparent criteria. 
The disadvantage of this approach is that it would preclude more nuanced country-specific analyses involving qualitative assessments. 
Moreover, if evaluations were made public, negative assessments could precipitate crises. 
Ensuring that the eligibility criteria are clear and specific could help to prevent such an outcome. 
A more direct approach to preventing crises in weaker economies would be to create a continuous eligibility scale, akin to the sovereign rating scale (which does not have a large effect on country risk), with countries at different points on the scale having access to different types of precautionary facilities. 
The final risk is that, if many countries fulfill the criteria, the Fund might not have enough resources to meet its commitments in a crisis. 
This problem could be solved by boosting the Fund’s capacity to borrow, while reducing the amount of resources that the Fund needs to set aside for FCL-like facilities. 
After all, a successful precautionary credit line is one that is never (or very rarely) used. 
Financial globalization demands a stronger global financial safety net. 
Economists and policymakers have been tinkering with the international financial architecture since the mid-1990s, without much success. 
While the idea of redefining the status quo may sound crazy, it may be, to paraphrase the physicist Niels Bohr, just crazy enough to be right. 

Egypt after Morsi 
BERLIN – Egypt lies at the heart of the Arab revolution, even if the original spark occurred in Tunisia. 
But Egypt – with its strategic location, stable borders, large population, and ancient history – has been the principal power of the Arab world for centuries, defining the movement of history there like no other. 
This implies that the overthrow of Egypt’s democratically elected president, Mohamed Morsi, will have much broader repercussions. 
Was Morsi’s ouster a classic counterrevolution in the guise of a military coup? 
Or did the coup prevent a total takeover of power by the Muslim Brotherhood, and thus avert Egypt’s economic collapse and chaotic descent into religious dictatorship? 
No one should deny that what happened in Egypt was a military coup, or that forces from former President Hosni Mubarak’s regime have returned to power. 
But, unlike in 2011, when the few pro-Western liberals and huge numbers of urban, middle-class youth rallied against Mubarak, now the same groups support the coup, lending it a certain (democratic?) legitimacy. 
Nonetheless, the overthrow of a democratically elected government by the military cannot be glossed over. 
So what options does Egypt now have? 
Will it repeat the Algerian tragedy, in which the military canceled an election to prevent Islamists from assuming power, leading to an eight-year civil war that claimed up to 200,000 lives? 
Will the country return to military dictatorship? 
Or will Egypt end up with something like a Kemalist “democracy” of the type that long prevailed in Turkey, with a civilian government but the military pulling the strings? 
All three alternatives are possible, though it is impossible to predict which one will come to pass. 
But one thing already can be said for certain: the basic distribution of power within Egyptian society has not changed. 
The military and the Muslim Brotherhood divide power between themselves. 
The Western-oriented liberals do not have any real power and stand, as we are seeing now, on the army’s shoulders. 
We should not forget that Morsi’s opponent in the presidential election in 2012 was Ahmed Shafik, a former general and the last Mubarak-era prime minister – certainly no liberal. 
A victory by either the Brotherhood or the military would not be a victory for democracy. 
Hamas, which has ruled Gaza since 2006, may serve as an example of what the Brotherhood wants: undivided power, including over the military. 
Likewise, the Egyptian army’s hold on power, beginning in the 1950’s, resulted in a decades-long military dictatorship. 
But there is a third and new factor now in play, one that does not measure power in the same way as the military and the Brotherhood. 
Through their leadership of the protests for two years, urban middle-class youth have gained their own legitimacy, and, with their technological and linguistic capacities, are able to dominate global debate about Egypt. 
These young people want progress, not power; they want the future to resemble the life that they see on the Internet and in the West. 
If this movement were channeled into institutional politics, it would significantly affect Egypt’s internal distribution of power. 
Egypt’s unfolding drama will be framed by the triangle of contradictions and demands among these three groups. 
And it should not be forgotten that, along with young people’s sense that they lacked a future under the nationalistic military dictatorships of the past, mass poverty was the second trigger of the 2011 revolution. 
Underlying the contradiction between the military and the Muslim Brotherhood is not only the question of religion, but also all of the social problems, including inequality, that riddle Arab societies. 
The Brotherhood has effectively assumed a role similar to that of left-wing European political parties in the nineteenth century. 
Whoever wants to weaken the Brotherhood has to address the urgent social issues that it raises and try to solve them. 
This means that whatever solution ultimately prevails will be measured according to whether it can solve the economic crisis (particularly the lack of job opportunities for the young) and deepening mass poverty. 
The chances of this are slim. 
Throughout the Arab world, nationalism constricts societies and retards cooperation, the dismantling of tariffs, and the creation of an economic community. 
And yet the economies of the Arab countries in crisis are too small to succeed on their own; even if everything goes well, they cannot offer their large and young populations hope of a positive future. 
They need enhanced cooperation, which, given a common language, would rest on a stronger foundation than it does in Europe. 
In Egypt, the West should work with all three leading political forces – the military, the Brotherhood, and the urban young – because no short-term solution will come in the form of one option. 
The worst approach would be to marginalize or even persecute the Muslim Brotherhood and political Islam again. 
More broadly, with Syria’s civil war destabilizing Lebanon and threatening to do the same in Jordan, and with Iraq plagued by similar sectarian violence, the military coup in Egypt appears to herald the end of the Arab revolutions, at least for the time being. 
Everywhere, the signs are pointing backwards. 
But we should not be deceived. 
Even if the struggle for power seems decided, this does not mean a return to the former status quo. 
When the revolutions of 1848 in Europe were rolled back the following year, everything was nonetheless different, as we now know. 
The monarchies remained in power for decades, but the Industrial Revolution and the advent of democracy had become unstoppable. 
We also know, however, that this led Europe to a future that was anything but serene. 
The Arab world might not be so deeply affected, but the near future there will certainly be neither peaceful nor stable. 

The Arab Wars of Religion 
MADRID – Throughout the Arab world, a struggle between two major historical forces, religion and secularism, is now unfolding. 
It is the type of battle between Caesar and God that took Europe centuries to resolve. 
The future of the Arab Middle East will be decided in the fight between Syria’s Sunni insurgents, supported throughout the region by the Saudi Wahhabis – the patrons of religious fundamentalism – and its secular Baath regime; between the fundamentalist Hamas and the secular PLO in Palestine; and between Egypt’s young secular opposition, forged in the protests of Tahrir Square, and the Muslim Brotherhood and radical Salafists. 
So far, the Arab revolts have vindicated the assumption that, given the structure of most Arab societies, toppling secular autocracies inevitably means opening the door to Islamic democracies. 
We saw that dynamic play out in Algeria in the early 1990’s, with the Islamic Salvation Front’s first-round victory in a parliamentary election (which prompted the cancellation of the second round); with Hamas’s electoral victory in Palestine in 2006; and, most recently, with the Muslim Brotherhood’s democratic rise to power in Egypt. 
In both Algeria and Egypt, secular forces were incapable of stemming political Islam’s rise, which could be cut short only by a military takeover. 
The Algerian military coup eventually ushered in a bloody civil war that is estimated to have taken more than 200,000 lives. 
The consequences of the Egyptian coup have still to unfold. 
The secular opposition’s accession to power on the back of a tank might feed the Islamists’ rage for years to come. 
The Muslim Brotherhood’s loss of trust in the democratic process would be bad news for Egypt and a boost to Al Qaeda and other jihadists who believe that power can be obtained only through blood and terror. 
The concept of separation of church and state is alien to Islam – former Iranian Supreme Leader Ayatollah Ruhollah Khomeini once famously declared that “Islam is politics or it is nothing” – and Islamists have still to prove that they are amenable to democratic governance. 
Indeed, Mohamed Morsi, Egypt’s deposed president, has only himself to blame for his political demise. 
His sectarian, authoritarian behavior polarized his country to such a degree that even the army’s chief, General Abdul Fattah al-Sisi, known for his Islamist sympathies, withdrew his support from the man who had appointed him. 
Likewise, the revival of the Shia-Sunni civil war in Iraq largely reflects the sectarian rule of Prime Minister Nouri al-Maliki. 
Nor has Hamas’s rise to power in Gaza ushered in inclusive, democratic governance. 
After having failed to reverse Hamas’s electoral victory by military means, the PLO agreed with its Islamist rivals on a plan for national reconciliation; but this pact remains a dead letter. 
As for Syria, the revolt against one of the most secular autocracies in the Arab world has degenerated into a fight to the death between Sunnis and Shia that is spilling over to other countries in the region. 
A Sunni jihad has now been launched against the Baath regime and its Shia allies, Iran and Hezbollah. 
Neighboring Lebanon, with its fierce Sunni-Shia divide, is already being directly affected. 
The struggle between religion and state in the Maghreb is less violent, but potentially explosive nonetheless. 
Tunisia, where the Arab Spring began, is now caught between secularists and religious fundamentalists. 
The Islamist Ennahda party leads the government, but it faces a serious challenge from the ultra-conservative Salafists of Hizb Ut-Tahrir. 
In Morocco, King Mohammed VI did not conceal his support for the Egyptian coup, but the Islamist Justice and Development Party, which leads his government, denounced it. 
Indeed, Istiqlal, a secular center-right party, left the government in the wake of the Egyptian coup, accusing the JDP, under Prime Minister Abdelilah Benkirane, of trying to “Egyptianize” Morocco by monopolizing power, as Morsi did in Egypt. 
Even in Turkey, a non-Arab Muslim country with strong aspirations to reconcile Islam with democracy, the agreement between Prime Minister Recep Tayyip Erdoğan’s Islamist government and the urban middle class to limit official encroachment on secular lifestyles is unraveling. 
Erdoğan now promises to “reconstruct Turkey” in his own authoritarian and religious image. 
The Arabs’ march to freedom is bound to be a long and tortuous process – perhaps the main geopolitical test of the twenty-first century. 
Yet the battle between secularism and religion in the Arab world does not have to last centuries, as it did in Europe, if only because contemporary generations can benefit from the long process of social and scientific progress that enabled the West to pave the way to modern democracy. 
But adapting this Western legacy for the contemporary Arab world, while recovering Arabs’ own medieval heritage of tolerance and scientific excellence, will be difficult. 
One hopes that Egypt’s defeated Islamists will move from the politics of vengeance to a soul-searching process that leads to the recognition that democracy is not a zero-sum game in which the winner takes all. 
The Leninist “democratic centralism” to which Morsi seemed to have subscribed, if maintained, will be a standing provocation to the new generations and their allies in the old state apparatus to rise up, even at the price of civil war. 

Egypt for Sale 
CAIRO – Last week’s visit to Egypt by King Salman of Saudi Arabia resulted in 22 agreements, including a $22 billion oil deal to prop up Egypt’s moribund economy. 
But the lavish aid came at a price: Egypt had to relinquish two Red Sea islands ceded to it by Saudi Arabia in 1950. 
The move exposed the Egyptian leadership’s narrative that the country remains a major regional power as a lie. 
Indeed, Egypt cannot even handle domestic challenges posed by a rapidly growing population dependent on unaffordable subsidies – a situation that jihadists are exploiting with much success. 
How did the country reach this point? 
When Muhammad Ali defeated the British in 1807, Egypt became the first Arab country to gain de facto independence. 
But Ali’s grandson, Ismail, squandered that independence with profligate spending, establishing a dependency on external assistance that persists to this day. 
First, Ismail was forced to sell Egypt’s shares in the Suez Canal in 1875 to cover his budget deficits. 
When that proved insufficient to stop the fiscal hemorrhaging, European creditors established a committee to ensure payment. 
By 1877, more than 60% of Egypt’s revenue was servicing this debt. 
In 1882, the British took control of the country to protect their investments. 
Egypt’s dependence on the British continued until Gamal Abdel-Nasser took power in 1952. 
He welcomed the Soviets, who provided sophisticated weapons in exchange for the same kinds of IOUs that doomed his predecessor. 
By the time Nasser died in 1970, the Soviet Navy had transformed the port of Alexandria into a virtual Soviet republic, with Russian spoken as a second language. 
Meanwhile, Nasser pursued costly populist economic policies. 
He expanded the bureaucracy by offering every college graduate a government sinecure; today, 24% of the workforce is employed by the state. 
He introduced subsidies for commodities, from bread to oil, that amounted to 8.1% of GDP in 2013-2014. 
In 2014-2015, 81% of the budget went to debt service, subsidies, and wages, crowding out education and other investments essential to long-term growth. 
All of this intensified Egypt’s need for foreign aid. 
And, in fact, despite Nasser’s pro-Soviet bent, Egypt was the largest recipient of American foreign aid until its disastrous war with Israel in 1967 froze relations. 
Unable to challenge Israel militarily, Soviet pilots engaged Israeli adversaries in dogfights over the Suez Canal. 
Nasser, who railed against imperialism and economic subservience, had delivered his country into vassalage. 
Nasser’s successor, Anwar Sadat, attempted to revive Egypt by liberalizing the economy, making peace with Israel, and abandoning the alliance with the Soviets in favor of the US and Western Europe. 
He was rewarded with an aid package that averaged more than $2 billion per year. 
But, with Egypt’s population growing at an annual rate of 2.2%, even this was not enough. 
Today, Egypt also depends on aid from Europe and the Persian Gulf, delivered through, for example, the Arab Fund for Economic and Social Development, the Abu Dhabi Fund for Development, and the Saudi Fund for Development. 
The Kuwait Fund for Arab Economic Development has given Egypt $2.5 billion – more than 50% in the form of grants – making Egypt its largest aid recipient. 
Such aid props up Egypt’s economy by funding infrastructure projects and providing budgetary relief. 
The occasional debt write-off also helps. 
Egyptians rarely hear about their country’s dire financial straits. 
Instead, the government-controlled press boasts about new bridges and increased industrial production, while highlighting Egypt’s role in regional affairs, such as the dormant Israeli-Palestinian peace process and the cobbling together of governments in Lebanon. 
Such propaganda aims to sustain the myth that Egypt holds a unique and powerful position in the Middle East. 
To be sure, unlike in most other Arab countries, particularly Lebanon and Yemen, Egypt has a sense of national identity, rooted in the Pharaonic empires of antiquity. 
And its largely homogenous population – 90% Sunni Muslim – has allowed it to avoid the sectarian conflicts plaguing countries like Iraq and Syria, and to forge a strong central government. 
But the narrative of regional dominance that Egypt’s leaders have fashioned increasingly rings hollow. 
The 750,000 Egyptians who graduate from college each year want jobs, not empty promises based on past glory. 
The unskilled laborers in the decimated tourist industry pine for foreigners to return. 
And factory workers yearn for production levels that local unemployed consumers’ purchasing power cannot sustain. 
Instead of delivering on these imperatives, Egyptian President Abdel Fattah el-Sisi has been forced to relinquish territory to the Saudis to secure the aid the country needs to stay afloat, facing considerable mockery in the process. 
In the zero-sum game that is Middle East politics, however, one party’s loss is another’s gain. 
And in the case of Egypt today, it is radical Islamists who are reaping the rewards of popular disillusionment with the government. 
The Islamists are offering their own narrative: The modern nation-state has failed Arabs and Muslims. 
This resonates with a population that is experiencing the state’s failure every day. 
Focusing on restoring past Islamic glory is becoming more appealing than resurrecting a regional power that could never even secure rights for Palestinians. 
Egypt’s leaders retain the legitimacy and strength needed to curtail this dangerous narrative. 
But, if they are to succeed, they will have to acknowledge what Egypt is – and what it is not. 
In a country where ancient artifacts are deeply cherished, the myth of regional greatness is one relic that should disappear soon. 

Egypt Holds Its Breath 
CAIRO – “You are the authority, above any other authority. 
You are the protectors, whoever seeks protection away from you is a fool...and the army and the police are hearing me,” said Egypt’s president-elect, Mohamed Morsi, to hundreds of thousands in Tahrir Square. 
A man imprisoned following the “Friday of Rage” (January 28, 2011) took the presidential oath in Tahrir on a “Friday of Power Transfer” (June 29, 2012). 
But he almost did not. 
Ten days earlier, on June 19, I was with a group of former Egyptian MPs in Tahrir Square. 
One received a phone call informing him that a senior Muslim Brotherhood leader was coming to announce that the group was being blackmailed: either accept the constitutional addendum decreed by the Supreme Council of the Armed Forces (SCAF), which practically eviscerated the presidency, or the presidential election’s outcome would not be decided in the Brothers’ favor. 
An hour later, the senior figure had not shown up. 
“The talks were about to collapse, but they resumed,” said the former MP. “Hold your breath.” 
The victory of the Brotherhood’s Morsi in Egypt’s first free presidential election is a historic step forward on Egypt’s rocky democratization path. 
His challenger, former President Hosni Mubarak’s last prime minister, Ahmed Shafiq, had no chance of winning a clean vote, despite the support of a huge state-controlled propaganda machine and various tycoons. 
“How many people can they trick, convince, or buy? 
We don’t have that short a memory,” a taxi driver told me when I asked whether he would vote for Shafiq. 
Indeed, the Egyptian revolution has defeated Mubarak’s regime and its remnants three times since January 2011: first with Mubarak’s ouster, then in the parliamentary elections held earlier this year, and now with Morsi’s victory. 
And yet a military-dominated regime remains a real possibility. 
The series of decisions by the ruling SCAF just before the presidential vote clearly indicated that the military has no interest in surrendering power. 
The most radical of these decisions was to dissolve parliament, for which 30 million Egyptians voted, based on a ruling by a SCAF-allied Supreme Court. 
The junta then assumed legislative authority, as well as the power to form a constitutional assembly and veto proposed constitutional provisions. 
It also formed a National Defense Council (NDC), dominated by the military (11 army commanders versus six civilians – assuming that the interior minister is a civilian). 
Meanwhile, efforts to clamp down on protests have continued. 
The justice minister, a Mubarak-era holdover, granted powers to the military intelligence and military police authorities to arrest civilians on charges as minor as traffic disruption and “insulting” the country’s leaders. 
Now the hard part begins for Morsi, who confronts an intense power struggle between the beneficiaries of Mubarak’s status quo – generals, business tycoons, National Democratic Party bosses, senior judges, media personnel, and senior state employees – and pro-change forces, whose largest organized entity is the Brotherhood. 
The junta certainly has no intention of abandoning its vast economic empire (with its tax-free benefits, land ownership and confiscation rights, preferential customs and exchange rates, and other prerogatives). 
It has also no intention of surrendering its veto power, including over national security, sensitive foreign policy (specifically regarding Israel and Iran), and war making – hence the NDC. 
In the absence of a compromise – and forces that can guarantee its terms – polarization can lead to bad outcomes, ranging in seriousness from Spain in 1982 to Turkey in 1980, and, most worryingly, Algeria in 1992, when the military regime’s nullification of an Islamist electoral victory touched off a prolonged and brutal civil war. 
Although Egypt’s generals are by no means as threatened as their Algerian counterparts were in December 1991, they do have enough power to flip the tables. 
Depending on the outcome of the ongoing negotiations between SCAF and Morsi, the size of protests in Tahrir Square and elsewhere, and the degree of pressure from the international community, a deadly confrontation cannot be ruled out. 
The most likely scenario, however, looks something like Turkey in 1980: an undemocratic, military-dominated outcome, but no serious bloodshed. 
In this scenario, the current constitutional assembly would be dissolved, and SCAF would form a new one to its liking. 
It would strongly influence the constitutional drafting process in order to enshrine its privileges. 
In other words, SCAF, not the elected president, would remain the dominant actor in Egyptian politics – an outcome likely to generate continuing resistance from pro-change forces. 
The best outcome – resembling Spain in 1982 – is the most optimistic. 
After the Spanish Socialist Workers Party (PSOE) won parliamentary elections and formed a government in October of that year, the right-wing military establishment accepted the new democratic rules of the game and foiled a coup attempt that sought to block the advance of the left. 
The PSOE also realigned the party along more moderate lines, renounced Marxist policies, and led a comprehensive reform program, El Cambio (the change). 
In Egypt, a similar scenario would enhance the prospects of democratic transition. 
But the SCAF leadership shows no inclination to emulate the Spanish generals. 
The Muslim Brotherhood’s leadership, for its part, usually takes a risk-averse, gradualist approach to crisis management. 
Confronted by a revolutionary situation, however, that approach could be hard to maintain. 
Further progress toward democratization would require Morsi to keep intact the broad coalition of Islamists and non-Islamists that brought him to the fore – and to sustain its mobilization capacity in Tahrir and elsewhere. 
Successful transitions from military to civilian rule in Turkey, Spain, and elsewhere partly reflected sustained American and European support. 
But, perhaps more than that, Morsi will need tangible achievements on the economic and domestic-security fronts to shore up his legitimacy at home. 
Otherwise, Egypt’s generals will not be returning to their barracks anytime soon. 

An Opportunity for Egypt and the IMF 
LAGUNA BEACH – The Egyptian authorities and International Monetary Fund staff have struck a deal. 
If the IMF Board agrees next month, Egypt will receive a $12 billion loan to support the implementation of economic reforms. 
The primary objective of the three-year program will be to unleash Egypt’s considerable potential, enhance growth and job creation, and tackle foreign-exchange shortages. 
But the deal also represents an important opportunity to improve relations between Egypt and the IMF – an outcome that would yield far-reaching benefits for both sides. 
Egypt’s relationship with the IMF has long been rocky. 
Most notably, in 1977, when Egypt reduced food subsidies in exchange for IMF financing, riots erupted in Egypt’s major cities, resulting in nearly 80 deaths and hundreds of injuries. 
The deal had to be terminated, and subsidies reinstated. 
Several more deals have been discussed since then, including in 2012; but most have gone off track or been abandoned. 
Against that background, it is not surprising that many Egyptians view the IMF as overbearing, seeking to impose its will on countries without sufficient regard for local conditions. 
Some even view it as a tool of Western domination. 
This perception has caused past Egyptian governments not only to shy away from IMF support, but also to delay the annual economic consultations required under the Fund’s Articles of Agreement. 
But Egypt’s economy is struggling, having been hit hard by both economic and non-economic shocks in the last few years. 
Security concerns, heightened by the downing of a Russian jet in Sinai last October, have produced a sharp decline in tourism, a major revenue generator. 
Remittances from Egyptians working in the wealthy Gulf states, another key source of income, are being undermined by the decline in oil prices. 
Receipts from the Suez Canal have been hit by to the slowdown in global growth and international trade. 
And foreign direct investment has declined, pending, among other things, greater clarification of the reforms that the government intends to pursue. 
This would be a tough combination of economic challenges for any country to address. 
But, for Egypt, which has been performing below economic potential for decades, it has been particularly difficult. 
Indeed, Egypt now faces large twin fiscal and balance-of-payments deficits, rising inflation, and reduced economic growth. 
As a result, its international reserves and exchange rate have come under pressure, despite assistance from wealthy countries like Kuwait and, especially, Saudi Arabia and the United Arab Emirates. 
Enter the IMF. 
The recent staff-level agreement with the Egyptian authorities is expected to be finalized in September, upon Board approval. 
On that basis, Egypt is already making plans to raise funds from other sources, including international bond markets, to support its reforms. 
The Fund’s involvement seems appropriate. 
After all, the IMF was designed to help member countries confronting precisely the types of challenges that Egypt faces. 
Specifically, it provides focused technical assistance in key areas of economic and financial management, while aiding in the design of macroeconomic frameworks for national policies. 
And its quickly disbursed financial assistance often catalyzes other financial inflows from public and private sources. 
But, as history shows, taking advantage of what the IMF offers is not always easy. 
Past experience from many countries indicates that success depends on six key factors. 
· A carefully designed economic program that is locally owned and accounts for a country’s economic realities. 
· A focus on addressing social challenges that may arise – in particular, protecting the most vulnerable segments of the population. 
· A strong and sustained political commitment to ensuring the program’s proper implementation. 
· Sufficient and timely external financing. 
· Transparent and timely communication, not only between the IMF and national officials, but also with other stakeholders, particularly citizens. 
· Trust, so that if (or, rather, when) things do not go according to plan, the relevant parties can work together effectively to make the needed adjustments. 
The good news is that the recently agreed deal between Egypt and the IMF seems to lay the groundwork for success (though the full details have yet to be released). 
For starters, Egyptian and IMF officials are said to have placed substantial emphasis on a set of pro-growth reforms aimed at improving sectors of Egypt’s economy with significant untapped potential. 
Moreover, the agreement is understood to include fiscal, monetary, and exchange-rate measures aimed at containing financial imbalances and ensuring the program’s medium-term viability. 
And, importantly, it promotes the strengthening of social-welfare programs and safety nets – features that can do much to revive the IMF’s reputation in Egypt and bolster trust among stakeholders. 
Of course, there is no way to guarantee careful implementation, comprehensive communication, or consistent efforts to reinforce trust – all of which are vital to enable mid-course adjustments that reflect inevitable changes in the domestic and external economic environment. 
But, based on their recent interactions, it seems that Egypt and the IMF have the potential to overcome their legacy of testy relations. 
A constructive relationship between Egypt and the IMF would help attract more support for the country, both through additional bilateral and multilateral agreements and from domestic and foreign investors. 
Given the enthusiasm showed at last year’s Egypt Economic Development Conference in Sharm El Sheikh, which focused on attracting investment, it seems clear that Egypt’s prospects for economic and financial recovery are considerable. 
As for the IMF, it is now in a better position to demonstrate its capabilities to help member countries, thereby strengthening both its credibility and effectiveness. 

Egypt Needs a President, Not a Pharaoh 
Egypt is undergoing a heated nationwide debate over political reform. 
The central issue is a demand by all opposition parties and civil society groups to amend the 1971 constitution and abolish the 23-year-old State of Emergency that was imposed following Anwar Sadat's assassination in 1981. 
Such demands are not new. 
But President Hosni Mubarak and the ruling National Democratic Party have been stonewalling since the mid-1980's. What makes the demands for reform more pressing this time are ominous developments in Egypt, the region, and in the wider world. 
At home, concern about Mubarak's age (76) and deteriorating health has grown. 
Mubarak's ill health, widely rumored for years, was never officially acknowledged until November 2003, when it could no longer be covered up. 
While speaking to Parliament, Mubarak fainted before millions of TV viewers. 
Although he returned an hour later and delivered the rest of his speech, Egyptians began to demand greater transparency regarding the president's health as well as other state affairs. 
Meanwhile, Egypt's sagging economy, high unemployment rate, and rampant corruption have driven many Egyptian youngsters to despair. 
More than one half of living Egyptians were born since Mubarak assumed office. 
According to a recent report by the UN Development Program, roughly half of those between 15 and 30 years old dream of emigrating to Europe, North America, or Australia. 
There are weekly reports of would-be illegal Egyptian immigrants drowning in the Mediterranean. 
A few weeks ago, several youngsters suffocated to death while being deported back to Egypt across the Libyan desert in overloaded trucks. 
The incident caused an uproar that compelled the authorities to arrest, interrogate, and try the Egyptian police officers in charge. 
Regional and international events have also emboldened the Egyptian opposition, not only to press for reform, but to focus on amending the constitution's articles that pertain to the presidency. 
Mubarak has been re-elected four times, and rumors have persisted that he will either seek a fifth six-year term or establish a "hereditary republic" and groom his 41-year old son, Gamal, to succeed him, like Syria's Hafez al-Assad and son, Bashar. 
The opposition battle cry is "No" to Mubarak's re-election and "No" to passing the presidency to Gamal. 
Many Egyptians may not have major misgivings about Gamal Mubarak per se, but they find it mortifying that, after 24 years of the father, they might be stuck with another 24 or more years of the son. 
The current constitution was adopted in October 1971, and has 211 articles, 30 of which concern the presidency. 
The president is nominated by two-thirds of the People's Assembly, and endorsed in a plebiscite that allows only for a simple "Yes" or "No." 
A simple majority of the ballots is required to win a six-year term, which is renewable indefinitely by the same process. 
These lax procedures contrast jarringly with the president's powers. 
The president is the head of state and commander-in-chief; officiates over the Supreme Judiciary Council, the Supreme Police Council, and the Cabinet of Ministers; and can appoint and recall one or more vice-presidents at his sole discretion. 
He also appoints the prime minister and senior ministers, and must approve all other ministers, ambassadors, and state representatives. 
He can call general elections, declare war, impose a state of emergency, and issue decrees that have the force of law. 
There are no checks and balances on these powers. 
A single article stipulates that, "Accusation of the President of committing grand treason or any other criminal act may be made upon a motion submitted by at least one-third of members of the People's Assembly and approved by two-thirds." 
The president is then suspended from carrying out his duties, and the vice-president fills in until the accusation is resolved. 
But Mubarak has never enacted the law essential to implementing this article or appointed a vice-president, despite repeated popular demands to do so. 
The result has been a de facto "imperial presidency," with Mubarak likened to the god-king Pharaohs of ancient Egypt. 
No other head of state in modern times enjoys as much power. 
A more apt analogy popular in Egypt compares Mubarak to Leonid Brezhnev, who for two decades presided over the Soviet Union's stagnation and decline. 
Egypt's status as a regional power under Mubarak has similarly weakened steadily. 
On the economic front, annual foreign investment inflows have plummeted from $3 billion in the mid-1990's to a minuscule $300 million in 2003. 
Demands for reform are now focused on introducing direct presidential elections with two or more contenders, and limiting presidents to two consecutive terms in office. 
It is no less important to reduce the presidency's sweeping powers and formulate viable mechanisms for enforcing the accountability of all public officials without exception. 
Should Mubarak and his government fail to recommend constitutional amendments that satisfy these demands, ever more Egyptians will desert the regime and risk their lives in search of salvation in other lands. 

Egypt on Jordan’s Mind 
AMMAN – The behavior of Jordan’s Royal Court in the days following the official announcement of the victory of the Muslim Brotherhood’s Mohamed Morsi in Egypt’s presidential election tells an intriguing story. 
At first, Jordan’s King Abdullah II hesitated to sign a long-sought-after election law. 
This was followed by approval of the law, a request for its revision, and a surprise official meeting with the leader of Hamas. 
During the past year, King Abdullah has been adamant that Jordanians should vote in free and fair elections no later than the end of 2012. Constitutional changes were adopted. 
An independent election commission was created by law. 
And a respected Jordanian jurist who had been a judge at the International Court of Justice was reprimanded for dragging his feet in getting the election law passed. 
So why did the king wait four days after both houses of parliament passed the law to sign it, and why did he immediately ask for changes? 
The law, which establishes a largely majoritarian system based on single-member districts, with only 17 of the parliament’s 140 seats to be elected according to national party lists, was approved by Jordan’s Senate just hours before Egypt’s independent election commission declared Morsi the winner. 
People to whom I spoke in Jordan’s government and palace say that they were led to believe that the post would go to Mubarak’s last prime minister, Ahmed Shafiq. 
Morsi’s victory changed everything. 
Jordan’s Muslim Brotherhood boycotted the country’s parliamentary election in 2010, arguing that the government “did not provide any guarantees of its integrity.” 
In the 2007 election, the Brotherhood accused the government of “fraud,” and opposed the majoritarian electoral system. 
Senior officials in Jordan have been slowly walking back from the comprehensive political reforms that were promised in the initial euphoria of the Arab Spring. 
Many, including former Prime Minister Awn Khasawneh, believe that this reflects a belief among senior Jordanian officials that the Arab Spring has run its course in Jordan and the region. 
After all, popular protests have failed to gather steam; Bashar al-Assad’s regime has held firm in Syria; and Egypt, with neither a constitution nor a parliament, has apparently veered from democracy, if not descended into chaos. 
But Khasawneh, who had encouraged Islamists to join the political process, and forged a rapprochement with the Palestinian Islamic movement Hamas, warns that it is a mistake to write off the Arab Spring. 
In May, shortly after his resignation, he warned Jordanian leaders of complacency in the reform process. 
His last word after being replaced by a conservative was to remind Jordan’s leaders that spring is a season that always returns. 
With the announcement of Morsi’s victory in Egypt, spring seems to have returned to Jordan more quickly than even Khasawneh had expected. 
The Islamic Action Front, the Brotherhood’s political party in Jordan, continued to reject the majoritarian electoral system, which favors tribes over political parties and other important social groups. 
In particular, owing to the relative insignificance of national party lists, Jordanians of Palestinian origin, who comprise nearly half the electorate, receive only a small percentage of elected officials. 
The King’s approval of the law will allow the newly established election commission to begin its work. 
But now he wants the parliament to make the law more representative as well. 
Indeed, he welcomed Hamas leader Khaled Mashal in an official meeting that included a royal lunch, meetings with Prime Minister Fayez Tarawneh, and, most important, talks with the head of Jordan’s intelligence service, which in 1999 had recommended the expulsion from Jordan of Mashal and four other senior Hamas officials. 
The decisions to improve the election law and receive Mashal are not aimed solely at persuading Jordan’s own Islamists to join the political process. 
Like other Arab countries, Jordan, with seven million people, looks up to Egypt, its most populous and powerful Arab neighbor. 
And, economically, Jordan is still dependent on Egypt for natural gas, which is delivered at reduced rates. 
Jordan seems to have read the political tea leaves and concluded that it makes more sense to improve relations with Egypt’s rising leaders than it does to fight them. 
And better relations with Egypt presuppose closer ties with Morsi and the Muslim Brotherhood. 

Egypt’s Broken Economy 
WASHINGTON, DC – Egyptians’ political aspirations have dominated the country’s public life since the fall of President Hosni Mubarak last year. 
Unfortunately, as those aspirations are addressed, the economy has entered a steep decline, jeopardizing one of the revolution’s main goals, namely improvement in Egyptians’ living standards and welfare. 
Indeed, the populist rhetoric of Egyptian politicians threatens to undo the economic reforms undertaken by the Mubarak regime. 
In 2004, a major reform program was launched under former Prime Minister Ahmed Nazif. 
It was aimed at removing bureaucratic constraints to growth by restructuring the financial sector, streamlining business regulations, liberalizing foreign trade, and reducing the government’s role in the economy. 
The 2004 reforms, with their elimination of restrictions on access to foreign exchange and reduction of import tariffs, gradually improved the business and investment climate. 
Coupled with favorable international conditions, Egypt’s annual GDP growth rate rose to 7.2% in 2008, from 4.1% in 2004, and remained at 5% in 2009-2010, despite the global recession. 
The new measures also helped to attract large capital inflows and foreign direct investment, underpinning a dramatic rise in foreign-currency reserves, from $14.8 billion in 2004 to more than $36 billion by the end of 2010. 
In 2011, the situation worsened on virtually all fronts. 
Annual growth fell to about 0.5%, and inflation remained in double digits. 
The unemployment rate reached 12.4% in the fourth quarter, up from 8.9% in the same period of 2010. 
The current-account balance deteriorated rapidly, owing to the loss of more than $4 billion in tourism revenues and a sharp fall in remittances by Egyptian workers abroad. 
The fiscal deficit widened to 10% of GDP, causing government debt (including external debt), which had been falling steadily, to rise to 76% of GDP. 
The most striking development, however, was the loss of international reserves in the year following the Tahrir Square revolution. 
The International Monetary Fund estimates that foreign-currency reserves fell by half, to $18 billion, by December 2011, owing partly to the worsening current-account balance, but, more importantly, to withdrawal from Egypt by foreign and domestic investors alike. 
In the face of large and growing external imbalances, the Central Bank of Egypt (CBE) chose to defend the Egyptian pound during last year’s political and economic turmoil. 
The CBE allowed the exchange rate, which is formally defined as a “managed float,” to depreciate by only 3%. 
Keeping the currency relatively stable was considered a higher priority than preventing the loss of foreign reserves. 
Today, Egypt not only remains vulnerable to unstable domestic politics; owing to the depletion of its international reserves – at a rate of roughly $2 billion a month since last October – the country now also faces the threat of a currency crisis. 
Moreover, this almost certainly underestimates the extent of the losses, because it does not exclude inflows of $3.5 billion since November of last year from auctions of US-dollar-denominated treasury bills. 
In addition, the Egyptian military gave a $1 billion loan to the government, and another $1 billion was received through grants from Saudi Arabia and Qatar, bringing the loss of reserves since December 2010 closer to $22 billion. 
The other source of international reserves, tourism, brought in only $8 billion, down sharply from $12 billion in 2010. 
Egypt continues to import almost double what it exports, resulting in a trade deficit of over $10 billion by the end of 2011. 
As a result, Egypt’s financing must continue to grow: the country now needs to borrow about $14-15 billion to plug its estimated financing gap of $24 billion. 
Much depends on when, or whether, external aid materializes, which is contingent on approval of Egypt’s renegotiated $3.2 billion IMF loan. 
If finalized, the IMF program could trigger further aid packages by the World Bank and other international donors. 
If the aid arrives, Egypt could begin to address some of its financing problems, but it is still in need of a long-term strategy to spur sustainable growth. 
Egypt’s economy is facing continued risks, owing to capital flight, rising inflation, unemployment, and populist policies. 
Even with the availability of external finance, Egyptian leaders must look for ways to engage the private sector in reviving the country’s economy. 
Unfortunately, the latest political incident involving the democracy-promoting activities of American NGOs has cooled bilateral relations and threatens the $1.3 billion in military assistance that Egypt receives annually from the United States. 
This may have an impact on other donors, as well as the international financial institutions, particularly the IMF and the World Bank. 
Egypt’s transition from populist economic policies to anti-American populism exemplifies the impact that political uncertainty can have on economic developments. 
The upcoming presidential election in May and the formation of a democratically elected government, one hopes, will calm the political turmoil and lead to economic stabilization and revival. 
Otherwise, Egyptians’ hard-won political gains may well be lost. 

Egypt the Peacemaker? 
TEL AVIV – Before the current fighting between Israel and Hamas in Gaza escalates further, a ceasefire must be negotiated. 
Of course, like previous ceasefires, any truce is likely to be temporary, inevitably undermined by the forces that perpetuate Israel’s armed conflict with Hamas. 
Nonetheless, with Syria consumed in civil war and the wider Middle East already unsteady, a ceasefire is essential both for saving lives and preserving today’s uneasy regional peace. 
Much depends on Egypt, which is best placed to broker an agreement. 
But assessing the prospects of any diplomatic effort requires understanding the protagonists’ perspectives and agendas. 
Israel does not have a comprehensive policy toward Gaza. 
Former Prime Minister Ariel Sharon took a courageous step by withdrawing unilaterally from Gaza and dismantling the Israeli settlements there. 
But he fell ill before these measures could be fitted into a larger effort to address the Palestinian issue. 
His successor, Ehud Olmert, began negotiating a final-status agreement with the Palestinian Authority’s president, Mahmoud Abbas. 
But this did nothing to end the violence emanating from Gaza, which has effectively seceded from the Palestinian Authority and become a Hamas-controlled proto-state. 
Israel’s Operation Cast Lead in the winter of 2008-2009 re-established deterrence and brought a period of relative calm; but it has been clear since the start of 2012 that the parties were once again on a collision course. 
During his first term as Israel’s prime minister, Binyamin Netanyahu refused to continue to negotiate with the Palestinian Authority on Olmert’s terms, and never considered holding talks with Hamas. 
He agreed to swap Palestinian prisoners for an abducted soldier, Gilad Shalit; but, for Netanyahu, as for most Israelis, negotiating with an organization whose blatantly anti-Semitic charter rejects Israel’s right to exist is pointless. 
From Netanyahu’s point of view, the Gaza problem has no satisfactory solution. 
His aim is to obtain and maintain calm along the border. 
Israel provides electricity, water, and passage to Gaza, but also maintains a siege intended to prevent imports of larger, more lethal weapons. 
Israeli leaders were aware of Hamas’s buildup of medium-range missiles, mostly smuggled through Sinai in underground tunnels, but continue to argue that, absent the siege, Iran and others would supply more (and more sophisticated) weapons. 
In fact, Israel discovered over the last few years that Gaza contained enough rockets and missiles to paralyze its south. 
Major Israeli cities were hit several times. 
During Operation Cast Lead, rockets struck perilously close to Tel Aviv and Ben Gurion Airport. 
For Israeli leaders, it was only a matter of time before Tel Aviv could and would be hit. 
For its part, Hamas, the Muslim Brotherhood’s Palestinian branch, seeks to consolidate its control over Gaza and use it as a base from which to take control of the West Bank and the Palestinian national movement. 
This outcome would be comparable to the Brotherhood’s takeover in Egypt, further establishing its ascendancy in the region. 
Recent events appear to have emboldened Hamas. 
Although the conflict between Iran and its Sunni rivals and the Syrian civil war forced it to loosen ties with Iran and Syria and move into the Sunni fold, in many respects this has been a comfortable shift. 
Hamas feels more confident next to an Egypt dominated by its parent movement. 
The Emir of Qatar paid a visit to Gaza as a reward for Hamas’s break with Iran and left a check. 
But Hamas is not alone in Gaza. 
Its hegemony is challenged by the more radical Islamic Jihad (which remains allied with Iran) and a host of Salafi and jihadi groups, some connected to radical elements in Sinai, which complicates Hamas’s relations with Egypt. 
Moreover, these groups have frequently initiated attacks on Israel from Gaza or through Sinai, generating cycles of violence that have embarrassed Hamas. 
At the same time, pressure from these more radical groups may have forced Hamas itself to become more aggressive in recent months, perhaps bolstered by the knowledge that its arsenal of dozens of Fajr-5 rockets could hit the Tel Aviv area should Israel retaliate on a larger scale. 
The change in Egypt’s politics and policies had a similar effect: Hamas calculated that Israel would not jeopardize its fragile relationship with Egypt by launching another ground operation in Gaza. 
Hamas was taken by surprise when Israel attacked, killing its military leader, Ahmed al-Jabari, and destroying most of its Fajr-5 arsenal. 
It responded with massive shelling of southern Israel, and managed to send several missiles toward Tel Aviv and one toward Jerusalem. 
Air raid sirens were finally heard in Israel’s two largest cities. 
In response, Israel is visibly preparing for a large-scale ground operation. 
There is no appetite in Israel for a second Operation Cast Lead; but nothing less than a stable, long-lasting ceasefire is acceptable. 
Such a truce is possible. 
Israel’s assault scored impressive initial successes, while Hamas can take pride in having reached Tel Aviv with its missiles, an achievement that eluded Hezbollah in the 2006 Lebanon War. 
Moreover, Egypt, Hamas’s patron and senior ally, maintains a relationship and channels of communication with Israel, and does not want to sever all ties – not least because to do so would provoke a confrontation with the United States, which underwrites the Egyptian army. 
In fact, Egyptian President Mohamed Morsi is seeking more financial aid from the US and the International Monetary Fund, and wants his coming visit to Washington, DC, to be a success. 
He also wants to restore Egypt’s position as a major regional force. 
Playing the peacemaker would serve him well on all counts. 
So Morsi is juggling. 
He has denounced and warned Israel, recalled Egypt’s ambassador to Tel Aviv, and sent his prime minister to Gaza. 
But, so far, he has not crossed a single red line. 
There is little time to act. 
More fighting will bring additional actors into the picture (including Turkey). 
If the US and Europe choose to remain inactive, they must at least encourage Egypt to play its role. 
Egypt’s major obstacle is Hamas’s insistence on an end to the Israeli siege and targeted killings as part of a ceasefire agreement. 
The challenge for Egyptian leaders is to persuade Hamas to settle on lesser terms without further fighting. 

Egypt’s Innocent Murderers 
CAIRO – “Bashar should abandon power and retire safely in Egypt. 
The general-prosecutor is murder-friendly,” a friend, referring to Syrian President Bashar al-Assad, told me as we watched former Egyptian President Hosni Mubarak’s trial in the Police Academy’s criminal court. 
Although Mubarak and his interior (security) minister, Habib al-Adly, were handed life sentences at the conclusion of their trials, the generals who ran Egypt’s apparatus of repression as deputy interior ministers were acquitted. 
Ismail al-Shaer, who led the Cairo Security Directorate (CSD); Osama Youssef, the head of the Giza Security Directorate; and Omar Faramawy, who oversaw of the 6th of October Security Directorate, were all cleared of any wrongdoing. 
Lawyers for Mubarak and al-Adly will appeal their life-sentences, and many Egyptians believe that they will receive lighter sentences. 
The verdicts sent an unmistakable message, one with serious consequences for Egypt’s political transition. 
A spontaneous cry was heard from the lawyers and the families of victims when they were announced: “The people want to cleanse the judiciary.” 
Indeed, many Egyptians – including senior judges – do not view the judiciary as an independent institution. 
“This is a major professional mistake. 
Those generals should have been handed life-sentences like Mubarak,” said Zakaria Abd al-Aziz, the former elected head of the Judges Club. “The killing went on for days, and they did not order anyone to stop it. 
The Ministry of Interior (MOI) is not the only place that should be cleansed. 
The judiciary needs that” as well. 
The verdicts certainly reinforce a culture of impunity within the security services. 
The SSI and its departments were responsible for many human-rights violations, including mass-torture and extra-judicial killings, throughout Mubarak’s 30-year rule. 
When protestors stormed the SSI headquarters and other governorates in March 2011, torture rooms and equipment were found in every building. 
Unlawful detentions, kidnappings, disappearances, systematic torture, rape, and inhuman prison conditions have all been documented since the 1980’s by human-rights organizations and a few Egyptian courts. 
Acquitting the heads of the SSI and the CSF (the 300,000-strong institution that acted as the “muscle” of Mubarak’s regime), after a revolution sparked by police brutality, led directly to renewed protests in Tahrir Square. 
“We either get the rights of the martyrs, or die like them,” chanted hundreds of thousands in Tahrir and other Egyptian squares. 
Sit-ins, reminiscent of the 18 days of January and February 2011 that ended Mubarak’s rule, have already started. 
A third consequence of the verdicts concerns the empowerment of an anti-reform faction within the MOI. 
Based on my year-long research on Egyptian security-sector reform, this faction is already the most powerful. 
Following the revolution, factional struggle within the MOI became public. 
“We have to save face,” said General Abd al-Latif Badiny, a deputy interior minister who was fired under al-Adly. “[M]any officers and commanders refused to torture detainees and were against corruption, but we need a revolutionary president to empower us and clean the ministry.” 
Badiny was reappointed after the revolution, but then reprimanded in November 2011, following clashes between demonstrators and police that left more than 40 protesters dead. 
“He was advocating dialogue with protesters, whereas al-Adly’s men wanted a harsh crackdown. 
They got their way in the end,” says Major Ahmad Ragab, the spokesperson of the reformist General Coalition of Police Officers (GCPO), which seeks to establish an official police syndicate and reform the security services along apolitical, professional lines. 
The verdicts will significantly affect two other processes: revolutionary forces’ capacity to mobilize, and thus to place pressure on the ruling Supreme Council of Armed Forces (SCAF), and the presidential elections. 
The objectives of those protesting the verdicts in Tahrir and other squares include: a judicial purge; a law that would ban Mubarak’s senior officials from holding political posts for ten years; new trials for al-Aldy’s generals; and removal of the general prosecutor (who was appointed by Mubarak). 
There are also calls, still undeveloped, for greater unity ahead of the presidential run-off election on June 16-17. 
Such appeals range from demanding an immediate transfer of power to a coalition of revolutionary presidential candidates (although the mechanism is vague) to the formation of a united presidential front in the runoff, with Mohamed Morsi of the Muslim Brothers (MB) as President and left-leaning Nasserist Hamadin Sabahi and liberal-leaning moderate-Islamist Abdel Moneim Aboul Fotouh as Vice-Presidents. 
MPs have already called on the three figures to come to the parliament and negotiate a coalition. 
The verdicts are likely to boost support in the runoff for Morsi, who split the Islamist vote with two other candidates in the election’s first round. 
Moreover, a significant share of the non-Islamist revolutionary vote will go to Morsi, owing to the absence of other revolutionary alternatives. 
The common saying in Tahrir is: “We’ve got differences with Morsi, but we’ve got blood with [Ahmed] Shafiq,” Mubarak’s last prime minister and Morsi’s opponent in the runoff. 
Pro-revolution, non-Islamist, and non-MB candidates received almost 9.7 million votes in the first round of the presidential election. 
The majority of these voters will probably now support Morsi, as opposed to staying home (the general drift before the verdicts). 
The MB must still decide for inclusiveness if it wants to attract the support of Aboul Fotouh and Sabahi voters in the runoff against Shafiq. 
But, for now, Tahrir and other squares are once again uniting the pro-change forces, whether Islamist or not. 
The key challenge for Egyptian revolutionaries is to sustain that unity, establish a leadership coalition, translate their chants into concrete demands, and maintain the pressure during implementation. 
Egypt’s revolution continues. 

Egypt’s New Old Government 
CAIRO – Egypt’s first-ever freely elected president, the Muslim Brotherhood’s Mohamed Morsi, has appointed his first cabinet, and guess what? 
It is crammed with officials from the old regime. 
Morsi’s government clearly reflects the balance of power between the president and the Supreme Council of the Armed Forces (SCAF). 
But it also reflects the strategy of the Muslim Brothers to shift that balance. 
Thirty-five ministers were chosen by the new prime minister, Hisham Qandil, seven of whom (including Qandil) were ministers in the previous SCAF-appointed government. 
Five ministries – information, higher education, youth, labor, and housing – were given to the Muslim Brothers’ Freedom and Justice Party (FJP). 
Other pro-revolution figures secured several cabinet portfolios as well: education, legal and parliamentary affairs, industry and foreign trade, and most importantly, the justice ministry. 
The “power” ministries – interior and defense – were kept under the control of figures associated with the former regime. 
Field Marshal (and SCAF leader) Hussein Tantawy retained his post as Defense Minister, and General Ahmed Gamal al-Din was appointed to head the interior ministry, whose brutal behavior sparked the revolution. 
Gamal al-Din’s uncle, Abd al-Ahad Gamal al-Din, was the ruling National Democratic Party’s parliamentary majority leader during the 2000’s. 
His nephew was a hardliner during negotiations to release political prisoners, as well as during talks to end the street clashes of November 2011. 
He was also a witness in the “Giza Officers Trial,” in which 17 policemen were accused of killing and injuring protesters in January 2011. He defended the policemen, claiming that the victims had been killed in “self-defense.” 
Nonetheless, Ashraf al-Banna, a co-founder of the reformist General Coalition for Police Officers (GCPO), remains hopeful: “He was an effective deputy [minister of interior]...[so] we expect some reforms. 
The situation in the ministry is unsustainable.” 
But others, like the members of the more revolutionary Officers but Honorable Coalition, accuse Gamal al-Din of being a member of a powerful anti-reform faction in the ministry, dubbed “al-Adly’s men” (after former Interior Minister Habib al-Adly). 
As for the pro-change forces, Minister of Information Salah Abd al-Maqsud, a leading figure in the Muslim Brothers’ media wing, will control a sector that continues to attack the group and Morsi, even after his electoral victory. 
The new youth minister, Osama Yassin, another leading Muslim Brother, was the de facto “security chief” in Tahrir Square during the 18 days that toppled former President Hosni Mubarak. 
He belongs to the so-called “iron organization,” a strong, committed faction led by Khairat al-Shater, the Brotherhood’s first deputy chairman (deputy general guide). 
Likewise, higher education went to Mostafa Mossad, an FJP member who was in charge of the education portfolio during Morsi’s campaign. 
The labor ministry went to Khaled al-Azhary, a Brother who was deputy head of the Workers Union and a victim of police brutality in 2010. 
For the Brothers, of course, everything could change if the government is dissolved after the upcoming parliamentary election. 
But, even if that happens, the experience, data, and knowledge gained will be of immense value to the Brotherhood. 
Four other ministries went to pro-revolution and Islamist figures. 
Mohamed Mahsoob, a leading figure in the moderate Islamist al-Wasat Party who campaigned against the return of Mubarak-era officials, became Minister of Legal and Parliamentary Affairs. 
Hatem Saleh, the deputy chairman of the Civilization Party, which joined the Muslim Brotherhood’s electoral coalition in the last parliamentary election, was named Minister of Industry and Foreign Trade. 
The religious endowment ministry, which influences the country’s main Islamic institution, al-Azhar, went to another of the Brothers’ allies, Talaat Afifi, the deputy head of the Islamic Legal Body for Rights and Reform, which comprises more than a hundred of Egypt’s leading Islamist scholars and activists. 
Finally, Ahmed Mekki, the former deputy head of the Court of Cassation, Egypt’s highest appeals court, will lead the justice ministry, which is in need of real change. 
Mekki is a strong proponent of judicial independence, and was dubbed “the revolution’s representative” in Qandil’s government. 
Overall, only ten of the 35 ministries went to pro-change forces, with the other ministers a combination of old-regime figures and technocrats without any publicly declared political affiliation. 
But the choice of the ten ministries was strategically clever, given the Muslim Brotherhood’s coming battles with SCAF. 
All of these ministries represent low-cost, soft power: official institutions that can enhance pro-change forces’ capacity to mobilize, give them religious legitimacy, and remove the threat of judicial repression as they strengthen unofficial networks on the ground. 
But the SCAF side is applying a similar strategy: strengthening its hold over the key power ministries. 
For example, in last week’s annual personnel changes at the interior ministry, many of those expected to be removed, owing to accusations of corruption, complicity in repression, or both, were not. 
A few were even promoted. 
The struggle for Egypt thus continues. 
The “Second Republic” is yet to be born. 

Egypt and Tunisia’s Divergent Paths 
CAMBRIDGE – It has been five years since Egypt and Tunisia underwent regime change, and both countries are still suffering from low economic growth, large fiscal deficits, high unemployment, and rising public debts. 
Having failed to institute reforms on their own, both have turned to the International Monetary Fund, which entered into an arrangement with Tunisia in 2013 and has just approved a $12 billion loan program for Egypt – the country’s first since 1991, and the largest ever for a Middle Eastern country. 
On the face of it, countries moving toward democracy seem as likely to experience poor economic performance as countries moving toward renewed dictatorship, because political instability and uncertainty of any kind naturally hurt investment and growth. 
But Tunisia has embraced political inclusion, and could soon find itself back on the path toward healthy economic growth, while Egypt’s closing society positions its economy for a downward spiral. 
Until recently, both countries’ governments showed a surprising lack of interest in economic reform. 
Instead, they engaged with identity issues and security challenges in ways that reflect their diverging political paths. 
In Tunisia, electoral contests between the Islamist Ennahda Party and the secular Nidaa Tounes Party have allowed for a productive debate about the role of religion in politics and society; in Egypt, by contrast, President Abdel Fattah el-Sisi’s autocratic government has violently repressed the Muslim Brotherhood. 
Meanwhile, governments in both countries could not resist increasing public spending. 
In Egypt, subsidies were still above 10% of GDP in mid-2016, suggesting a return to the old authoritarian bargain whereby citizens abstain from political participation in exchange for government economic support. 
Now, to qualify for the IMF’s assistance, Egypt has committed to reducing its subsidies and instituting a value-added tax. 
In Tunisia, labor unions have managed to push civil-servant wages – which now equal 15% of GDP, up from 10% of GDP in 2011 – well above IMF targets. 
And macroeconomic instability has impeded growth in both countries. 
Egypt’s low credit rating has forced the government to borrow domestically, which has crowded out other borrowers to the point that private investment amounts to just 11% of GDP. 
Tunisia’s external state borrowing has not crowded out the private sector; nonetheless, private investment has fallen to 18% of GDP. 
Both countries’ current-account deficits have widened as a result of falling tourism revenues and disrupted export activities, and neither country has taken measures to improve private-sector competitiveness. 
Sisi, like former Egyptian President Hosni Mubarak, is wary of allowing private-sector players to gain political clout, and has instead propped up cronies whom he can trust, such as army corporations and some of the firms previously connected to the Mubarak regime. 
In Tunisia, the state bureaucracy has hindered private-sector activity, and there are reports of increased corruption by politically connected firms since the Nidaa Tounes government assumed power in 2015. 
Tunisia has allowed its currency to adjust over time, and the dinar has lost a third of its value against the US dollar since 2014. 
Egypt, for its part, has disastrously mismanaged its exchange rate. 
With the exception of one minor adjustment in 2013, it has stuck to a fixed rate since 2011, even after its currency became massively overvalued and started to create imported-goods shortages. 
When Egypt complied with IMF conditions and floated its currency on November 1st, the exchange rate weakened from 8.5 to 15.5 pounds to the dollar; soon, imported goods will likely cost 40-60% more than they do now. 
The Egyptian and Tunisian people are becoming increasingly dissatisfied with their respective countries’ economic performance. 
But over time, this frustration will probably help Tunisia’s economy, while hurting Egypt’s. 
For starters, political inclusiveness in Tunisia fosters healthy dialogue about potential solutions. 
For example, the new Tunisian cabinet formed in August includes ex-union leaders, who can now shape broad economic policies, not just press for higher wages. 
This has already made public-policy debates more constructive, because policymakers are focusing on how labor and business can fairly share the burden of economic adjustment. 
Egypt’s closed political system, by contrast, has left the government constantly in fear of the street. 
With no channels for constructive political debate, the government’s best option has been to postpone necessary economic adjustments until they become unavoidable. 
This is not only economically inefficient (reflected in the absence of net foreign portfolio investment in Egypt in recent years); it is also politically risky. 
Egyptian politicians can do little but cross their fingers and hope that the street does not rise up in response to the recent currency devaluation. 
Political inclusiveness creates a more informed – and possibly more forgiving – public. 
In Tunisia, members of civil society and the media may freely scrutinize the government and call for change. 
While reforms have been slow in coming, the government cannot ignore growing public criticism forever. 
In fact, the 2017 draft budget law already includes urgent measures to fight corruption, trim the bureaucracy, and reduce tax evasion. 
In Egypt, on the other hand, the currency devaluation has come as a shock to ordinary citizens. 
There was very little public understanding about the state of the economy, because the mainstream media, having become a regime mouthpiece, has been painting a rosy picture of Egypt’s return to glory. 
At the same time, freedom of expression and association are severely limited; criticizing government policies is deemed tantamount to high treason. 
Tunisia has made political progress by shoring up its democratic processes, creating institutional space for all stakeholders, and allowing for free expression and assembly. 
This bodes well for the Tunisian economy’s long-term prospects. 
Egypt, for its part, may benefit from short-term gains as a result of the IMF package. 
Its “fierce but weak” rulers, however, cannot hope to make long-term progress by doubling down on despotism. 
If they do not take the long and winding road toward political inclusion, sooner or later they will face the wrath of those they have excluded. 

Showdown in Egypt 
LONDON – With massive anti-government protests across Egypt on June 30 – a year to the day after Egyptians elected their first-ever civilian president – a diverse and decentralized movement has challenged President Mohammad Morsi’s hold on power as never before. 
Hundreds of thousands were mobilized to take to the streets, with many storming and burning down the Cairo headquarters of the ruling Muslim Brotherhood. 
At the end of the day, the president was given an ultimatum. 
The first “revolutionary” statement of Egypt’s new grassroots Tamarod (rebel) movement demanded that Morsi leave within two days or face a march on the presidential palace. 
“In the name of 22 million citizens, we declare that Mohammad Morsi is no longer the legitimate President of Egypt.” 
The protesters then appealed to “the institutions of the state, the army, the police, and the judiciary to side with the popular will.” 
The army has spoken, issuing an ultimatum of its own to Morsi: Address the protesters’ demands or face a military solution to the crisis. 
As the day ended, Morsi’s office declared that it had not been consulted prior to the army’s statement, and tens of thousands of the president’s supporters demonstrated in several cities simultaneously at midnight. 
So what will happen next? 
And what impact will the Tamarod movement and the army intervention have on Egypt’s precarious democratization process? 
The path to today’s crisis was predictable. 
Morsi won the presidential election with only 51.7% of the vote, while the other 48.3% included very powerful forces, including figures from the Mubarak regime and their supporters. 
Opposition to Morsi hardened following the annulled November 2012 constitutional declaration, by which he had sought sweeping powers – allegedly to protect the country’s infant elected institutions against a politicized judiciary. 
The lack of tangible material gains for ordinary Egyptians also fueled public anger. 
All of the presidential candidates had made wild promises; but the absence of significant achievement, such as resolving the country’s chronic shortages of gas and electricity, helped to fuel the massive anti-Morsi mobilization. 
Incompetence during a political transition has a high price. 
But Morsi is not entirely without accomplishments or supporters. 
Last August, he culled the leaders of the Supreme Council of the Armed Forces (SCAF). 
On the economic front, the Egyptian Central Bank’s report for the period of July 2012 to March 2013 indicates that the balance-of-payments deficit fell from $11.2 billion to $2.1 billion, owing to rising tourism revenues and debt forgiveness. 
This improvement did not trickle down to ordinary citizens, and there was no effective media and communication strategy to capitalize on it. 
But Morsi’s core supporters remain committed. 
Whereas only a few hundred showed up to support the fraudulently elected Mubarak during the revolution, hundreds of thousands of Egyptians rallied for two consecutive weeks in Rab‘a al-‘Adawiyya square, near the presidential palace, to express their solidarity with Morsi. 
If Morsi survives in office, he will have to rely on the army to guarantee his government’s safety. 
He will also need a massive show of strength from his supporters. 
But this would mean returning the army to the center of politics – and thus sacrificing the gains from Morsi’s imposition last August of greater civilian control. 
And the army’s ultimatum indicates that the military is moving in the direction of a coup. 
Mobilization of Morsi’s Muslim Brotherhood and other Islamist supporters is also risky. 
Indeed, the revolutionary step of steering once-armed Islamists toward electoral and constitutional politics could be reversed in ongoing power struggle. 
If Morsi does not remain in power, much will depend on how he is removed. 
Reliance on street mobilization and army intervention to bring down an elected leader who has support on the ground is unlikely to lead to a positive outcome. 
On the contrary, that pattern – seen in Spain in 1936, Iran in 1953, Chile in 1973, Turkey in 1980, Sudan in 1989, and Algeria and Tajikistan in 1992 – usually leads to military dictatorships, civil wars, or both. 
But there is also Charles de Gaulle’s precedent of a peaceful exit by an elected president. 
The massive protests in France in 1968 led to an early parliamentary election, which de Gaulle’s supporters won decisively. 
But de Gaulle later resigned of his own volition, over an issue of minor importance. 
The problem with this precedent is that Morsi does not have de Gaulle’s background, and Egypt’s chaotic political transition of 2013 is far from France’s consolidated democracy of 1968. French Gaullists did not face persecution; several Egyptian opposition figures have already vowed that Morsi and the Muslim Brothers will. 
That raises the stakes of political survival considerably, especially given the absence of any credible guarantor of constitutional norms and behavior. 
Moreover, a possible replacement for Morsi is not very clear. 
Parts of the opposition speak of a transitional “presidential council.” 
But that idea failed once already, during the SCAF’s rule (February 2011-June 2012), owing partly to the lack of popular mobilization behind a uniting figure(s), but mostly because of the egos – indeed, megalomania – of the politicians involved. 
Morsi will almost certainly not be removed without the involvement of the army and the security establishment. 
And the winners will probably try their best to block the Islamist forces from a comeback, implying another cycle of no-holds-barred political – and perhaps physical – combat, in which democracy serves as a mask to legitimize the exclusion, and possibly the destruction, of one’s political opponents. 

One Hundred Years of Relativity 
STOCKHOLM – This year marks the centenary of Albert Einstein's general theory of relativity, his masterwork describing gravity as the curvature of space and time. 
Yet, as is often true in science, Einstein's insights have provided physicists with as many questions as they have answered. 
Finding solutions that fulfill Einstein's equations – space-times that describe the curvature of our universe – is difficult, so his theory was slow to catch on. 
Scientists carrying out early studies and the first crucial tests were forced to use approximations. 
It took decades to develop techniques to classify and derive new solutions. 
Today, however, many solutions are known, and other thorny problems, such as the gravitational field of two colliding stars, can be explored using computers to carry out the numerical calculations. 
Einstein's theory not only describes our universe, from the Big Bang to black holes; it has also taught physicists the relevance of geometry and symmetry – lessons that spread from particle physics to crystallography. 
But, despite the similarities that Einstein's theory has with other theories in physics, it stands apart by its refusal to fit together with quantum mechanics, the theory that explains the dominant behavior of matter at the atomic and subatomic scale. 
According to Einstein's theory, gravity, unlike all other physical forces known to man, is not quantized. 
It is not subject to Heisenberg's famed uncertainty principle. 
The electromagnetic field of a particle that passes through a double slit can pass through both slits at once. 
Its gravitational equivalent cannot. 
This mismatch between our understanding of gravity and the quantum theories of matter poses a huge conundrum for theoretical physicists, because it leads to mathematical contradictions. 
Clearly, there is something about the combination of quantum theory and gravity that remains unknown, and our understanding of space, time, and matter hinges on unraveling this connection. 
Finding a description of gravity that is compatible with our understanding of quantum physics would revolutionize cosmology, yield new insights into the first moments of our universe, and provide a deeper understanding of the theories on which all of modern physics is based. 
But, despite the enormous potential impact of such a breakthrough and the efforts of generations of physicists to achieve it, we still do not know which theory is the right one. 
Contrary to how it may feel when you try to get out of bed in the morning, gravity is by far the weakest fundamental force of all we have identified. 
It takes only the static repulsion of a few electrons to make your hair stand up, overcoming the gravitational pull of the entire planet. 
In the atomic and subatomic world, gravity is irrelevant compared to what else is going on, all of which can be described by quantum theories. 
Gravity's weakness makes it very difficult to measure its quantum effects; as a result, we have no experimental data to guide theoretical physicists in the development of the missing theory. 
Detecting a “graviton" – the hypothetical particle making up part of a gravitational field – would require a particle collider the size of the Milky Way or a detector with a mass of the planet Jupiter. 
These experiments are so detached from our technological capabilities that physicists have focused on trying to remove the mathematical contradictions first, developing approaches like string theory, loop quantum gravity, and asymptotically safe gravity. 
But to know which theory describes physical reality, experimental tests must eventually be developed. 
That is why, over the last decade, physicists have begun to look for indirect evidence of quantum gravity. 
Rather than seeking to detect a quantum of the gravitational field, researchers are looking for other effects that would imply that gravity is quantized. 
These tests work much like those that use the stability of atoms as indirect evidence for the quantization of the electromagnetic force. 
For example, some scientists are searching for evidence of quantum fluctuations of space-time that could blur images of distant stars or lead to systematic distortions. 
Others are looking for violations of certain symmetries that could enable normally forbidden particle decays, unexplained noise in gravitational wave detectors, or inexplicable loss of quantum coherence. 
So far, these attempts have failed to detect the sought-after evidence. 
Nonetheless, they have led to important developments, because the negative results have ruled out some plausible hypotheses. 
And, though researchers may not have found results supporting any one theory, they have advanced the cause of science by better defining the observational criteria any quantum theory of gravity will have to take into account. 
As we commemorate Einstein's achievement, we should also seize the opportunity to celebrate the unrelenting spirit of those who are pushing ahead and trying to answer the questions his theory left us. 
That quest has blossomed into astonishingly fruitful research areas like cosmology, numerical general relativity, and quantum gravity. 
General Relativity has brought us wormholes, evaporating black holes, and the Big Bang theory; it underlies the discovery that the universe is expanding and that so-called exoplanets are much more common than anybody thought; and it has utterly redefined the way we think of our own place in the universe, ultimately even calling into question whether this universe is the only one. 
None of these advances would have been possible had researchers been operating according to the three-year plans that characterize much of current academia. 
So this year is perhaps a good moment to appreciate the visionaries who have understood that sustainable progress relies on the development of new and better theories whose impact may not be fully grasped for decades – indeed, that may continue to ramify 100 years later. 

El Salvador’s Democratic Test 
Back in his radical days, Ken Livingstone, the former mayor of London, famously quipped that if voting changed anything, they would abolish it. 
It turns out that in Latin America, elections really do shake things up. 
The latest proof: Mauricio Funes, the standard bearer of the FMLN – until not long ago a Marxist guerilla movement – has just prevailed in El Salvador’s presidential election. 
This is remarkable in a country that for as long as anyone remembers has been ruled, by hook or by crook, by a reactionary oligarchy. 
If the Salvadoran left’s close electoral victory is peacefully accepted – as it has been so far – it means that Latin America has truly come a long way. 
Whether this profound change will be seen as a key moment in the consolidation of democracy in El Salvador, or as the beginning of a slide toward instability, will depend on Mr Funes’ ability to balance two complex and contradictory imperatives: calling for moderation across the political spectrum while implementing the deep social transformations that El Salvador sorely needs. 
With nearly half the population below the poverty line, the country’s pervasive inequalities underlie its tumultuous political history, soaring crime levels, and massive outward migration. 
By all accounts a reasonable man, Funes faces an uphill battle in preaching moderation. 
He will preside over a deeply polarized country, where conservative forces find themselves outside the presidential palace for the first time ever. 
If the vicious tone of his opponent’s campaign offers any indication, Funes cannot count on the good will of those who have yet to learn how to behave like a loyal opposition. 
More important, perhaps, is the new president’s relationship with his own allies. 
A political newcomer who did not participate in El Salvador’s civil war, Funes, along with all the FMLN’s congressional candidates, was handpicked as presidential nominee, behind closed doors by the party’s Political Commission, where diehard Marxist cadres still roam unchecked. 
The allegiance of the FMLN’s congressional caucus lies primarily with the party’s traditional structure and only accidentally with Funes. 
Even more forbidding are the constraints that Funes faces in pursuing a social reform agenda. 
To begin with, the FMLN is short of a congressional majority, which remains in the hands of its right-wing opponents, ARENA and its long-time allies, the small PCN. 
Funes’ administration seems to be doomed to political gridlock, a chronic ailment of Latin America’s presidential regimes. 
Moreover, the current economic downturn is creating especially severe problems for the Salvadoran economy. 
Remittances from the United States accounted for roughly 17% of GDP in 2008, more than the country’s total exports. 
This vital source of capital is falling at an alarming rate – 8.4% year on year in January. 
Unsurprisingly, El Salvador’s economic growth forecast for 2009 has been cut to barely 1%. 
The real problem, however, is less the economic contraction than the very limited room for maneuver that the government enjoys in a country that dollarized its economy in 2001. 
In the face of plummeting remittances and foreign investment, Funes will rapidly discover that dollarization without dollars is no fun. 
Funes is a moderate voice in a country where there are few of them. 
He needs all the help he can get. 
The US, which still has significant clout over what happens in El Salvador, would do well to welcome his election and offer him tangible support for key social reforms. 
The stakes are high. 
Confronted with daunting obstacles and a disloyal opposition, Funes may well decide to cater to FMLN hard-liners and pursue his reform agenda with no patience for democratic checks and balances, as other leftist leaders in Latin America, such as Ecuador’s Rafael Correa and Bolivia’s Evo Morales, have done. 
For Funes, choosing that path would be a historic mistake. 
It would endanger the single most important – if slightly ironic – legacy of the FMLN’s armed struggle: the creation of a liberal democracy in El Salvador. 
Democracy is a priceless bequest. 
If, amidst the indifference of the world, Funes chose to play fast and loose with it, Livingstone would be proven wrong: voting can change much, and sometimes for the worse. 

Diagnostics for Global Health 
CORVALLIS, OREGON – In developed countries, most people take for granted that when they are sick, they will have access to timely diagnosis and treatment. 
Indeed, while the diagnostic process – which typically involves sending a sample of blood, urine, or tissue to a laboratory for analysis – may be cumbersome and expensive, health-care providers and sophisticated laboratories remain widely available. 
As a result, the disease burden in the developed world has declined substantially. 
By contrast, in the developing world, millions of people die each year from treatable diseases like malaria, owing to the lack of sophisticated laboratories and alternative diagnostic tests. 
But there is reason for hope: Advances in the field of microfluidics have the potential to transform health care by allowing “gold standard” laboratory-based testing to be transferred to the point of care (POC). 
A POC test that provides an accurate and timely result would provide diagnostic access to underserved populations, enabling earlier treatment and helping to avoid mistreatment (treating another disease with similar symptoms). 
In order to meet their potential, however, POC tests must account for the wide range of factors affecting health-care applications. 
First, a POC test must meet the particular environmental and operating constraints of where it will be used. 
These may include an unreliable power supply, harsh or unpredictable environmental conditions, limited contact time between the health-care provider and patient, lack of user training, severe price constraints, and inadequate local infrastructure, which can impede the maintenance and repair of relevant instruments. 
Indeed, POC settings can vary from a semi-trained health-care provider working in a clinic with electricity and access to refrigeration to an untrained individual in an environment with no mechanism for controlling temperature or humidity. 
In order to ensure the broadest coverage possible, POC tests should be designed to work in the settings with the fewest resources. 
Likewise, POC tests must account for different tests’ requirements for clinical utility. 
While diagnosing malaria requires only a positive or negative result, an HIV viral-load test would need to provide a graded output indicating the amount of virus detected. 
One of the most successful POC test formats is that of the well-known pregnancy test, which requires only the user’s urine and takes roughly 15 minutes to deliver the result. 
This class of “rapid diagnostic tests” (RDTs), which are also used for infectious diseases like malaria and HIV, satisfy many of the key requirements for global health applications: they are fast and inexpensive, can be conducted easily by an untrained user, and do not require refrigeration. 
But they lack the sensitivity to provide adequate diagnostic information for many health conditions. 
Given this, researchers are working to develop more sophisticated paper-based tests. 
For example, a new class of device, about the size of a postage stamp, that splits a sample into multiple zones with different detection chemistries has been used to test multiple conditions associated with liver failure in HIV and tuberculosis patients. 
And “paper network” devices include built-in timing mechanisms to enable automated multi-step tests like those used in laboratories, but in a disposable format. 
Another mechanism for expanding the capabilities of diagnostic testing would take advantage of the penetration of mobile-phone networks in developing countries. 
RDTs are largely limited to applications that require visual interpretation. 
A non-dedicated mobile phone could be used to capture and send image data from an RDT to a remote site, where a health-care provider would provide feedback on the results. 
But implementing such a program raises a new set of challenges. 
In order to ensure accurate test results, the variability of camera positioning by the user and lighting conditions in different test environments must be addressed. 
(One promising approach under development would use an adapter to connect the non-dedicated mobile phone to the RDT.) 
Moreover, a phone-based test would require software infrastructure, such as communication protocols and prioritization procedures, to coalesce with the health-care system. 
And the compatibility issues raised by the wide variety of mobile-phone handsets would need to be addressed. 
Finally, the successful deployment of non-dedicated phone-based testing would require acceptance from the medical establishment. 
The US Food and Drug Administration’s recent approval of several medical devices supported by dedicated phone-based readers is a promising step. 
Effective POC tests are being developed; the proliferation of mobile phones will further augment the capabilities of these tests. 
These emergent capabilities promise to extend the reach of high-quality diagnostics to remote populations, improve health management, and reduce health-care costs everywhere. 

Elections are Not Enough 
There can be no liberal order without political democracy, but today we are frequently reminded that political democracy alone does not guarantee a liberal order. 
Free and fair elections may lead to the ascendancy of a president of Iran who wants to “wipe Israel off the map of the Middle East.” 
Or to a president of Venezuela whose intolerance of the business class causes jubilation in the streets, but emigration by those whose initiative is crucial for the welfare of the people. 
Less damaging, yet problematic, is the election – as in Poland – of a minority government that ruthlessly pursues its members’ personal interests and breaks all promises of cooperation made before the polls. 
In other words, elections are not enough if one wants to bring democracy to the world. 
Elections can lead to illiberal democracies and worse. 
They must be embedded in a much more complex institutional framework, which I would describe as the liberal order. 
The first feature of the liberal order is that democracies must not tolerate those who set out to destroy democracy. 
Some countries, like Germany, have laws that make it possible to ban political parties whose programs are recognizably anti-democratic. 
In the past, the law has been used to curb parties of both the extreme left and the extreme right. 
This has clearly contributed to preventing any sign of a possible return to the totalitarian ways of the twentieth century. 
However, it is not always evident when people and parties stand for election what they are going to do if they win. 
This is where rules that impose term limits on officeholders, such as the Twenty-Second Amendment of the United States Constitution, have their place. 
Many constitutions contain such a rule, and even President Vladimir Putin of Russia has stated that he will abide by it. 
Let us hope that this will in fact be the case. 
Elsewhere, notably in many of the Soviet Union’s other successor states and in Latin America, those in power have often simply changed the constitution – including rules on term limits – to their advantage. 
This is where the second pillar of a liberal order comes into play: the rule of law. 
It cannot be said too often that democracy and the rule of law are not the same thing. 
There are lawless democracies and undemocratic “states of law” (Rechtsstaat). 
The constitution of liberty requires both, and the rule of law is the more difficult of the two to establish and maintain, for it requires not just a constitution but, almost more importantly, an independent judiciary that is sensitive to violations of constitutional and other legitimate rules. 
It is extremely important that Iraq held elections to a constitutional assembly. 
This has produced – albeit with a certain amount of external pressure notably on behalf of the Sunnis – a document that may provide the basis for the rule of law. 
But the task of finding, appointing, and accepting independent judges remains. 
It will be particularly difficult in an environment in which the sharia – that is, Islamic religious law administered not by judges but by priests – is never far away. 
The rule of secular law is the most delicate prerequisite of a liberal order. 
Even then, we know from history that it takes but one Enabling Law to unhinge the rule of law and replace it by an ideological tyranny, as happened when Hitler came to power in Germany. 
This is where the third element of a liberal order comes into play: civil society. 
A plurality of civic associations and activities – regulated but not controlled by the state, and free to express its views and even to demonstrate its (diverse) sentiments publicly – is the most powerful pillar of a liberal order. 
A vibrant civil society will mobilize when the rule of law is violated, and it can also check the illiberal inclinations of democratic majorities. 
The near-universal availability of information makes it much easier than it was in earlier times for the voluntary non-governmental organizations that form civil society to emerge. 
However, there is no ultimate guarantee against the abuse of power, especially if that power is democratically gained. 
The international community must therefore recognize that it is not enough to promote, organize, or monitor elections in hitherto undemocratic countries. 
The program of spreading the liberal order requires a much more sophisticated approach. 
Above all, it requires international agencies and groupings that remain alert to the risks of illiberal democracies. 

Elections Are Venezuela's Last Chance 
Venezuela is mired in a dangerous stalemate. 
President Hugo Chávez clings to power despite the obvious failings of his government: severe economic deterioration and dangerous political polarization. 
The opposition, tainted by their botched coup of April 2002, now seeks to force Chávez from office through a costly general strike. 
Both sides justify their intransigence with one-sided interpretations. 
His sympathizers glorify Chávez as a defender of the poor besieged by a selfish, coup-plotting elite. 
His fiercest opponents demonize Chávez as an autocrat pursuing a Cuban-style revolution and destroying democracy. 
Both interpretations are flawed. 
The Chávez government has not helped Venezuela's poor in any significant way. 
On the contrary, his belligerent rhetoric and inept governance scared off investors, inciting economic decline and boosting unemployment and poverty. 
Now Chávez lacks majority backing even among the poor. 
The opposition comprises most of Venezuela's organized civil society, not only business, but also trade unions, professional associations, and NGOs. 
So Venezuela's polarization does not pit "the poor" against "the oligarchy," but a populist against civil society. 
The opposition's view--shared by rightists in the Bush administration--is equally unconvincing. 
Rather than initiating a revolution, Chávez merely spouts fiery rhetoric. 
While his democratic credentials are dubious, he has not acted in an openly authoritarian fashion. 
True, he has systematically concentrated power in his own hands and has undermined governmental checks and balances. 
But while harassing the opposition, he has not overturned the minimal principles of democracy. 
Indeed, he now invokes his formal democratic legitimacy to fend off demands for his resignation. 
But Chávez's insistence on the inviolability of the current constitution is hypocritical. 
Four years ago, Chávez deviated from the old constitution by using a plebiscite to engineer a new one, tailor-made for him. 
Now he invokes that charter to block calls for a plebiscite on his continuation in office. 
The paradox here is that Chávez's earlier example may provide the solution to today's standoff. 
As Chávez used para-constitutional means to advance a desire for change in 1999, so the international community should not be confined by the present constitution in pressing to resolve a crisis that is ruining the country. 
In fact, the Latin American members of the "group of friendly nations" trying to mediate this conflict can draw on interesting experiences to design such a solution. 
After all, confrontations like this are not unusual in Latin America's rigid presidential systems. 
When chief executives with fixed terms of office lose political support, they cannot be removed through a no-confidence vote, as in parliamentary systems. 
Presidential systems therefore risk lengthy stand-offs that threaten democracy--as in Venezuela today. 
But over the last decade, Latin American politicians have made presidential systems more flexible by finding innovative ways to remove unpopular presidents. 
One of Chávez's discredited predecessors was impeached on flimsy charges of malfeasance; 
Ecuador's Congress declared a disastrous chief executive "mentally incompetent"; in Peru, an autocratic president, after months of domestic and international pressure, was forced into exile. 
While politicians interpreted the law with a good deal of creativity in these instances, they usually did so to ensure the survival of fragile democracies facing a crisis. 
As long as these maneuvers do not proliferate and turn into easy ammunition for the opposition of the moment, they may provide a safety valve for presidential systems. 
International monitoring can also safeguard against frivolous use of such mechanisms. 
It is to be hoped that the group of friendly nations can help design an innovative solution to Venezuela's standoff. 
To be acceptable to both sides, such a solution must deviate from the favorite proposals of each. 
The opposition prefers an "up-or-down" vote on Chávez's continuation in office, which it would most likely win--and which Chávez will never accept. 
Chávez insists on the recall referendum mechanism included in his constitution, which the opposition cannot tolerate: removing the president in this way would require a larger absolute number of votes than Chávez garnered in the last election. 
But rising abstention makes this virtually impossible. 
Both proposals are thus politically unfeasible. 
Only a democratic mechanism for conflict resolution that has an uncertain outcome has any chance of being adopted. 
That mechanism is an election, to be held as soon as possible (realistically, by this summer). 
Both sides will have to work hard if they want to win. 
The fractious opposition will need to go beyond rejection of Chávez, elaborate a program for the country's reconstruction, and unite behind an attractive candidate. 
President Chávez will need to clarify the content and meaning of his "Bolivarian Revolution." 
Since Chávez is a skilled campaigner and the opposition so far lacks unity, he will have a realistic chance of winning--which should make a new contest acceptable to him. 
Pressure from the group of friendly nations may induce both sides to accept this last chance to avoid a political and economic meltdown. 
Elections can be made legitimate through a constitutional amendment shortening the presidential term, as proposed by Jimmy Carter in his recent mediation effort. 
Since this is designed to defuse an exceptional crisis, it would not become a precedent that encourages frivolous attacks on Latin America's democratically elected governments. 
An election now in Venezuela will save, not undermine, democracy. 

Elections Without Winners 
When football matches – at least those that must produce a winner – end in a draw, a penalty shoot-out must resolve the matter, as this World Cup has demonstrated so dramatically. 
The shoot-out’s individual competition for heroism or misery is really alien to such a team game as football, but it is accepted as a necessary way to resolve the stalemate. 
But when it comes to elections – which ideally should always produce a winner – there is no such device. 
Yet quite a few recent elections have ended in at least a near-stalemate. 
Mexico’s presidential election is only the latest example. 
Several weeks ago, the general election in the Czech Republic yielded a total impasse, with the left and right each gaining 100 lower-house seats and no resolution in sight. 
In Italy, a curious rule that provides for the grouping which has a handful of votes more than the other to get a bonus of several dozen seats in the lower house. 
Romano Prodi’s government must operate on a razor’s edge in the Senate. 
There are other recent examples, including, perhaps most notoriously, the 2000 presidential election in the United States. 
Why are we suddenly experiencing so many close results in democratic elections? 
How should we best deal with them? 
And what do they do to the legitimacy of the governments that result from them? 
The first question is the hardest to answer. 
To the committed observer, it does not appear that democratic countries’ electorates are so evenly divided along class or similar lines as to cause political stalemate. 
On the contrary, electorates everywhere seem more volatile than anything else, with voters prepared to change their preferences from one poll to the next. 
Often, they want change – just that. 
Nor is there any sign that political ideology has made a return among ordinary people. 
Yet nowadays divisions between candidates for office are deeper than ever – and are even sharper among party activists. 
This is certainly true in Latin America, where a wave of leftist populism has swept many countries. 
Several Europe countries, too, have revealed a less dramatic left-right split, with Spain and Italy – though not Poland and the Czech Republic – moving somewhat to the left. 
But the real issue is not so simple. 
Increasingly, the divisiveness of democratic polities reflects a combination of undecided voters, motivated by ephemeral sentiments, and the emergence of political activists, often focused on narrow issues, who exploit electoral volatility for their purposes. 
So what can be done in practical terms when division leads to stalemate? 
One solution is to form a grand coalition, as in today’s Germany. 
It is amazing to watch how quickly Christian Democrats and Social Democrats have forgotten their electoral promises and agreed on a program of higher taxation. 
One may doubt whether this will increase popular confidence in the political class, but for now, at least, the arrangement is working. 
Another possibility is to turn razor-thin majorities into one-sided governments that remain centrist in policy. 
This is what has happened in Italy, and it may well occur in the Czech Republic. 
In Latin American countries, on the other hand, an all-or-nothing attitude seems to prevail, with 50.1% of the popular vote regarded as being sufficient to stage a revolution of sentiment, if not of policy. 
What does this do to the legitimacy of governments, and of political institutions in general? 
As long as winners with razor-thin majorities, once in office, steer a middle course, they are more likely to remain acceptable to an electorate that is more volatile than divided. 
By contrast, grand coalitions are, in the long term, likely to raise doubts about the system and encourage radical groups. 
The same may also be true if narrow winners adopt a radical agenda, as some think George W. Bush has done in America and many feared Andrés Manuel Lopéz Obrador would do in Mexico. 
Yet, as long as such leaders respect the democratic constitution, they are not likely to get very far; the next election will dislodge them. 
Playing divisive games with an electorate that is not deeply divided never succeeds for long. 
The real question is whether an uncertain electorate is prepared to defend democratic constitutions if an extremist who wins by a hair tries to overturn it and usher in a new era of tyranny. 
There is currently no such risk in Europe. 
However reluctantly, Silvio Berlusconi accepted in the end that he had lost, if just by a whisker, as did Viktor Orban in Hungary. 
But one conclusion is perhaps more compelling than ever. 
Britain’s last election also produced a narrow outcome. 
However, seats in parliament, not percentages of the vote are what matters, owing to Britain’s winner-take-all electoral system based on single-member constituencies, which encourages political parties to gravitate to the center. 
A volatile electorate can replace last time’s winner, but both can try to persuade voters and govern without having to go to extremes to gain a majority. 
The first-past-the-post system is still the most effective method of ensuring orderly change. 

Electric Cars and Sustainable Development 
NEW YORK – The key to climate change control lies in improved technology. 
We need to find new ways to produce and use energy, meet our food needs, transport ourselves, and heat and cool our homes that will allow us to cut back on oil, gas, coal, nitrogen-based fertilizer, and other sources of the climate-changing greenhouse gases. 
There are enough good options available to suggest that the world can accomplish the goal of controlling climate change at a reasonable cost (perhaps 1% of global income per year) while enabling the world economy to continue to grow and raise living standards. 
One of the most exciting developments on the horizon is the new generation of electric automobiles. 
In the earliest days of the automobile in the late nineteenth century, many kinds of cars competed with each other – steam, battery, and internal combustion engine (ICE). 
The gasoline and diesel-powered internal combustion engines won the competition with the success of the Model T, which first rolled off of the assembly line in 1908. 
One hundred years later, competition is again stirring. 
The age of electric vehicles is upon us. 
The Toyota Prius, a hybrid-electric vehicle first introduced in Japan in 1997, marked an initial breakthrough. 
By connecting a small generator and rechargeable battery to the braking system of a standard car, the hybrid augments the normal engine with a battery-powered motor. 
Gasoline mileage is sufficiently enhanced to make the hybrid commercially viable, and gasoline-saving vehicles will become even more commercially viable when consumers are taxed for the carbon dioxide they emit from their vehicles. 
Much more innovation is on the way, led by General Motors’ plug-in hybrid vehicle, the Chevy Volt, at the end of 2010. 
While the Prius is a normal ICE automobile with a small motor, the Volt will be an electric vehicle with an engine alongside. 
The Volt’s battery will be a cutting-edge, high-performance lithium-ion battery, which promises a range of 40 miles per charge and a six-hour recharge time drawing from a normal wall socket. 
Based on typical driving patterns, the Volt will get so many miles on the battery that it will achieve around 230 miles per gallon of gasoline! 
Larry Burns, the visionary head of GM’s research and development until his recent retirement, sees the electric vehicle as much more than an opportunity to save gasoline, important as that is. 
According to Burns, the electric-vehicle age will reshape the energy grid, redefine driving patterns, and generally improve the quality of life in urban areas, where most of the world’s population will live and drive. 
First, there will be many types of electric vehicles, including the plug-in hybrid, the all-battery vehicle, and vehicles powered by the hydrogen fuel cell, essentially a battery fed by an external source of hydrogen. 
These different vehicles will be able to tap into countless energy sources. 
Solar, wind, or nuclear power – all free of CO2 emissions – can feed the power grid that will recharge the batteries. 
Similarly, these renewable energy sources can be used to split water into hydrogen and hydroxyl ion, and then use the hydrogen to power the hydrogen fuel cell. 
Second, the storage capacity of the vehicle fleet will play an important role in stabilizing the power grid. 
Not only will battery-powered vehicles draw power from the electricity grid during recharging, but, when parked, they can also feed additional power back into the grid during periods of peak demand. 
The automobile fleet will become part of the overall power grid, and will be managed efficiently (and remotely) to optimize the timing of recharging from, and returning power to, the grid. 
Third, electric-powered vehicles will open up a new world of “smart” vehicles, in which sensor systems and vehicle-to-vehicle communications will enable collision protection, traffic routing, and remote management of the vehicle. 
The integration of information technology and the vehicle’s propulsion system will thereby introduce new standards of safety, convenience, and maintenance. 
These are visionary ideas, yet they are within technological reach. 
But implementing these concepts will require new forms of public-private partnership. 
Automakers, utility companies, broadband providers, and government road builders will each have to contribute to an integrated system. 
All of these sectors will require new ways of competing and cooperating with the others. 
The public sector will have to put forward funding to enable the new generation of vehicles to reach commercialization – through R&D outlays, consumer subsidies, and support for complementary infrastructure (for example, outlets for recharging in public places). 
The new age of the electric vehicle exemplifies the powerful opportunities that we can grasp as we make our way from the unsustainable fossil-fuel age to a new age of sustainable technologies. 
Our climate negotiators today bicker with each other because they view the climate challenge only in negative terms: who will pay to reduce fossil-fuel use? 
Yet Burns’ vision for the automobile reminds us that the transition to sustainability can bring real breakthroughs in the quality of life. 
This is true not only in automobiles, but also in the choice of energy systems, building designs, urban planning, and food systems (remembering that food production and transport account for around one-sixth of total greenhouse gas emissions). 
We need to rethink the climate challenge as an opportunity for global brainstorming and cooperation on a series of technological breakthroughs to achieve sustainable development. 
By harnessing cutting-edge engineering and new kinds of public-private partnerships, we can hasten the worldwide transition to sustainable technologies, with benefits for rich and poor countries alike – and thereby find the basis for global agreements on climate change that have so far proven elusive. 

A World Without Exhaust Pipes 
SAN JOSÉ – The efficient movement of people is crucial for any society. 
When transportation networks function well, they drive economic development and literally bring people together. 
But in many parts of the world, mobility is a matter of life and death; it is dirty, unsafe, and chaotic. 
Pollution and congestion from trucks, buses, and cars are daily hazards for millions, especially in emerging countries. 
Fortunately, big changes are coming to how humans move. 
For the first time since the mid-nineteenth century, when the modern internal combustion engine was invented, its demise is within sight. 
Car manufacturers have announced plans for scores of electric models, and politicians in several European countries have put an expiry date on gasoline and diesel cars, with leaders in India and China aspiring to do the same. 
Companies around the world are making bold predictions that electric mobility is the future of transportation. 
Even those with the most to lose from a shift away from fossil fuels understand that electric vehicles (EV) are inevitable. 
In July, even Ben van Beurden, the CEO of Shell, conceded that his next car will be electric. 
More people are arriving at the same conclusion, and those of us who have been championing EVs as one of the solutions to climate change are optimistic that a tipping point is approaching. 
Sales of electric cars have increased dramatically in recent years; some 750,000 were registered in 2016 – nearly half in China. 
Still, it is human nature to resist change, and many prospective buyers remain hesitant. 
That is why addressing consumption bias must be the highest priority over the next few years. 
Several changes are needed to ensure that growth in EV usage and sales continues. 
For starters, consumers must overcome the belief that zero-emission mobility is only for wealthy people in developed countries. 
Every year, 6.5 million people die from polluted air, and 92% of the world’s population lives in places where the air is unsafe to breathe. 
Vehicle emissions are a major contributor to dirty air everywhere. 
Investing in electric mobility and infrastructure – including electrified public transportation, charging stations, and electric car-sharing programs – will help, not hurt, development. 
Support for such investments requires people to reject the false promise of “clean” fossil fuels. 
Some industry officials insist that electric cars are not ready for mass rollout, and that a better solution would be to build more efficient gasoline and diesel engines. 
This is the story we hear most often from car dealers in Latin America. 
But such views are as inaccurate as they are self-serving. 
I have been fortunate to experience firsthand what electric mobility feels like, and how it is superior to gasoline- and diesel-only cars. 
I’ve traveled for thousands of miles across several countries on all-electric road trips. 
Once a driver experiences the clean, silent, and powerful technology, it is difficult to hand back the keys. 
Governments and consumer groups everywhere must work together to put more people behind the wheel of these inspiring vehicles. 
Finally, we must address the structural imbalances that persist in our transportation policies. 
Simply put, those who suffer most from “dirty” mobility have the weakest political voice. 
For example, data from the United Kingdom show that it is often the poorest people that walk or take buses. 
Development of zero-emission public transit, therefore, is rarely a top priority for government leaders. 
To sway them, advocates must sharpen their defenses of the economic and social benefits of zero-emission mobility, such as the positive effects on public health. 
Changing course will take time. 
In Costa Rica, my organization is working to encourage businesses and governments to sign an “electric mobility pact” to encourage investment in EV infrastructure. 
In early 2018, we will open an online registry, and by the end of next year, we aim to have 100 public and private organizations on board. 
Costa Rica’s legislature is also debating a bill to provide tax incentives for electric transportation. 
Others in Latin America are finding their own ways to promote electric mobility. 
In Chile, for example, the focus is on solar power and the link between mining and EV manufacturing. 
But political changes alone will not push EVs into the fast lane. 
To do that, customers will need to embrace a new clean-mobility narrative. 
In Costa Rica, we pride ourselves on the fact that nearly all of our electricity is produced by renewable sources, including hydroelectric, geothermal, and wind. 
This gives us an incentive to lead the global transition from gas-powered vehicles to electric cars, buses, and trains. 
We Costa Ricans are striving toward “un país sin muflas” – a country without exhaust pipes. 
Expanding that goal globally is the ultimate objective. 
To be sure, pushing the electric engine past the gas-powered relic will remain an uphill battle. 
But new technologies, like better batteries and speedier charging stations, will help accelerate the transition. 
Just like the CEO of Shell, I, too, believe that the transition to electric mobility is inevitable. 
What we see on the roads today is just the beginning. 

Mini-Grids for Rural Growth 
NAIROBI/NEW DELHI – More than 300 million people in India lack access to electricity, while in Sub-Saharan Africa, twice that many live without power. 
With population growth forecast to exceed connection rates, “energy poverty” is expected to worsen before it improves. 
For decades, rural communities in frontier economies have waited in vain for government-supplied electricity to arrive. 
But today, new technologies – coupled with cheaper solar panels, better batteries, and mobile payment systems – are changing how power is produced and distributed. 
With so-called “mini-grids” – smaller, localized power utilities – independent producers can electrify remote communities faster and more cheaply than traditional utilities can. 
The challenge is convincing politicians, financiers, and vested interests of the value in going decentralized. 
Tackling rural electrification with mini-grids is not a new idea; communities from the United States to Cambodia have long used this approach to weave local infrastructure into regional or national grids. 
And for energy-starved communities, mini-grids are a potential game changer. 
According to the International Energy Agency, decentralized solutions such as mini-grids are the most cost-effective option to deliver electricity to more than 70% of the unconnected, provided that projects can attract new sources of capital. 
With $300 billion in investment and supportive policies, the IEA says, mini-grids could serve 450 million people by 2030. 
To be sure, mini-grids are not meant to operate in isolation for perpetuity; they are at their best when feeding power into larger distribution networks. 
But until larger grids arrive, rural areas in developing countries can, and should, go it alone. 
Simply put, compared to main-grid solutions, mini-grids are easier to assemble and deploy in hard-to-reach communities and deliver electricity more reliably. 
By powering health clinics, schools, and local businesses, including in the agriculture industry, such grids would help create more vibrant and prosperous local economies. 
In unelectrified areas that are vulnerable to climate change, natural disasters, and economic migration, mini-grids are often the only option. 
Unfortunately, despite these advantages, mini-grid power in India and Sub-Saharan Africa remains underused. 
For example, Smart Power India, with support from the Rockefeller Foundation, has helped to build over 140 (and counting) privately owned mini-grids across the country, representing the largest cluster of local generating capacity anywhere in India. 
And yet this is just a tiny fraction of the number of mini-grid systems (estimated at 100,000 to 200,000 in Africa alone) needed to meet projected demand over the next few years. 
African communities are facing similar shortfalls. 
In April, the industry’s first trade organization, the Africa Mini-grid Developers Association, was established to spur the growth of mini-grids in Kenya and Tanzania, and eventually all of Sub-Saharan Africa. 
By 2020, the number of renewable mini-grid connections in these two countries is expected to climb from 12,000 to more than 145,000. 
Still, relative to Africa’s massive energy needs, these are modest gains. 
In Nigeria, for example, 80 million people have no access to electricity, and another 60 million spend $13 billion annually to run polluting diesel generators, which could be displaced by mini-grids. 
Many other African countries are facing similar energy-related issues. 
The good news is that funding for mini-grids – including those powered by solar, hydroelectric, wind, or a mix of renewables and diesel – is slowly increasing. 
In India, two mini-grid developers, Husk Power Systems and OMC Power, recently secured a total of $30 million in new investments, while Yoma Micro Power netted $28 million. 
In Africa, meanwhile, the World Bank has loaned Nigeria $350 million for rural electrification, while the International Solar Alliance is expected to secure a $2 billion line of credit from India to support projects in Africa, including mini-grids. 
These commitments come after Deutsche Bank announced a $3.5 billion fund in 2016 to help finance sustainable energy projects in Africa, including 10,500 solar mini-grids systems. 
Additional financing will likely be secured as mini-grid designs and business models mature. 
One promising innovation is a “utility in a box” system – a modular, scalable mini-grid solution that is currently being field-tested in India and elsewhere. 
Despite these positive developments, however, mini-grids’ full potential to lay the foundation for rural economic development will remain unrealized until politicians, regulators, and international development practitioners embrace decentralized grids as viable, complementary, and inter-operable solutions to energy poverty, rather than sources of competition for traditional power utilities. 
While a growing number of governments are adopting mini-grid policies, most are still failing to integrate localized generation and distribution into national electrification planning. 
In India, for example, a draft mini-grid policy has languished for two years, while in Sub-Saharan Africa, good intentions are often derailed by bureaucracy and lobbying from big power companies. 
Rural mini-grids are often required to operate without the financial backing that larger utilities regularly receive, despite providing equivalent or better service. 
To turn the power on in India, Africa, and beyond, small energy producers need access to capital, and the support of policies that are impartial and fair. 
But, more than anything, they need the opportunity to put their technologies to work. 
The world already knows how to power rural communities; it’s up to politicians to flip the switch. 

Empty Promises and Dead Children 
LONDON – Buried among the 169 targets contained in the Sustainable Development Goals (SDGs) – adopted by the United Nations last September amid a blaze of glitzy events, celebrity endorsements, and back-slapping by world leaders, aid donors, and non-governmental organizations – was the vital pledge to eliminate “preventable child deaths” by 2030. 
It is a cause for our generation – but one that will take a lot more than UN communiqués to advance. 
The last set of international development targets, the Millennium Development Goals, certainly brought about important progress; the number of children who died before reaching their fifth birthday dropped from ten million in 2000, when the MDGs were adopted, to 5.9 million in 2015. 
Some of the world’s poorest countries have registered some of the most significant gains. 
This progress was driven by several factors, including falling poverty and heavy investment in community-based health systems. 
By deploying nurses, midwives, and other health workers, these systems extended the availability of prenatal care, simple obstetric interventions, clean cord cutting, and post-natal care. 
Ethiopia, for example, has deployed a small army of some 38,000 health workers over the last decade. 
International cooperation was also crucial. 
Aid for child and maternal health has grown dramatically since 2000, and now stands at some $12 billion annually. 
Development assistance has enabled the creation of community-based health programs, and played a key role in supporting the development and deployment of the vaccines, mosquito nets, and medical treatments that have cut child deaths from the major killer infectious diseases – pneumonia, diarrhea, malaria, and measles – by some 70% since 2000. 
Now for the bad news. 
In the time it takes you to read this article, more than 30 children will die from causes that could have been prevented or treated. 
Every year, more than one million children die the day they are born, and another million die within their first week of life. 
Almost half of all child deaths occur in the neo-natal period (the first 28 days) – and the share is rising. 
The vast majority of these deaths could be averted. 
Yet, if progress continues at its current rate, there will still be some 3.6 million such deaths per year by 2030. 
To jump-start progress, we must develop health-care and other interventions that address the poverty, vulnerability, and inequality that place so many children, and their mothers, at risk. 
Making health services more widely available is a starting point. 
But, all too often, the poor are excluded, even when the clinics exist. 
Consider India, which accounts for one-fifth of child deaths worldwide. 
Nearly all women from the richest 20% of households enjoy prenatal care and skilled attendants at delivery; coverage rates for the poorest are less than 10% – worse than in much of sub-Saharan Africa. 
Surging economic growth has done nothing to reduce the disparity. 
And India is just one example. 
Each year, some 36 million women in low- and middle-income countries give birth without a skilled attendant. 
An even greater number of children do not receive a post-natal health check. 
The vast majority of these women and children have one thing in common: they are poor. 
Indeed, being born to a low-income mother raises the risk of child mortality by a factor of 2-3 in much of South Asia and sub-Saharan Africa. 
Wealth-based disparities in health outcomes extend far beyond pregnancy and birth. 
Children born to poor mothers are less likely to be immunized or taken to clinics for treatment of potentially fatal diseases, such as pneumonia and diarrhea. 
Survey evidence points to cost as a major barrier excluding poor women and children from health care. 
Forcing desperately poor women to pay for maternal and child health care is a prescription for inequality, inefficiency, and child deaths. 
Publicly financed universal health coverage is the proven antidote. 
Yet political elites in high-mortality countries like India, Pakistan, and Nigeria – the same elites who have signed up to the SDGs – have conspicuously failed to deliver. 
If governments are sincere about delivering on the SDGs’ promise on child mortality, they must get serious about ensuring equity in health care. 
They could start by introducing national targets to halve the difference in death rates between the richest 20% and poorest 20% over the next seven years. 
But targets not backed by finance aren’t worth the communiqué paper they’re printed on. 
Developing-country governments should be spending at least 5% of GDP on health, eliminating charges on child and maternal health care, and ensuring that financial resources – and health workers – are allocated in a way that reduces inequalities in care. 
Foreign aid also has a vital role to play. 
Here, the emphasis should be shifted from delivering disease-specific interventions to building up health-care systems. 
We need a global social compact on health to close the financing gap – around $30 billion – for achieving universal health coverage, which requires linking populations to skilled health workers equipped to provide effective care. 
Sub-Saharan Africa alone will need to recruit and train another one million community health workers to deliver universal coverage. 
Any strategy for achieving the 2030 target for child mortality must go beyond the health sector and focus on the wider inequalities – for example, in nutrition, education, and access to clean water and sanitation – that fuel child mortality. 
Girls will need added protection, so that they are not forced into early marriage and child bearing. 
Children worldwide face a lethal combination of inequality, injustice, and gender discrimination. 
They deserve better. 
The promise to eliminate preventable child deaths by 2030 is our chance to ensure they get it. 

The Road to a TB-Free World 
GENEVA – When Mabruka was 18, she came home from school one day and started coughing up blood. 
She had been feeling sick for about two months, and when she went to a health clinic, she described symptoms such as weight loss, fatigue, shortness of breath, fever, night sweats, chills, loss of appetite, and pain when breathing and coughing. 
Mabruka was diagnosed with tuberculosis (TB) and prescribed a daily regimen of 9-10 pills. 
The treatment lasted six months, and during that time she could not attend school. 
Shockingly, Mabruka’s experience was almost the same as that of someone contracting TB in the 1950s, when the first treatments were discovered. 
Owing to a lack of therapeutic innovation since then, poor living conditions, and widespread poverty, millions of people around the world are still being deprived of their right to live free of TB. 
More than ten million people contract the disease each year. 
Despite being preventable and curable, it is the leading cause of death among people living with HIV, and the most common cause of death by an infectious agent in modern times. 
The standard treatment for TB is unacceptably antiquated. 
The process is so long, and the side effects so unpleasant, that, in the absence of community-based treatment programs, many people with TB stop taking their medicines midway through the regimen. 
One consequence has been a rise in antimicrobial resistance (AMR), which is now a top global health threat. 
In 2016, multidrug-resistant TB killed 240,000 people. 
More than half of those with MDR-TB do not have access to effective treatment. 
And for those who do, treatment often lasts for at least two years, assuming a drug can be found to fight the resistant bacteria. 
The United Nations Sustainable Development Agenda aims to eliminate TB by 2030. 
Yet the global leadership and investment needed to achieve that goal has been sorely lacking. 
At the current rate of progress, it will take us until 2180 to end one of the world’s oldest public-health threats. 
The international community needs to take five specific actions to eliminate the scourge of TB once and for all. 
For starters, the gaps in existing health systems must be closed, so that all people have access to services for preventing, diagnosing, and treating TB. 
Political and civil-society leaders need to do more to champion health as a human right. 
And they should focus especially on AMR, which poses a threat to current and future generations alike. 
Second, policymakers and health-care providers must transform the standard response to TB to make it more equitable, rights-based, non-discriminatory, and people-centered, not just in health settings but also in workplaces, schools, and jails. 
This is especially important for vulnerable populations, including children and people living with HIV. 
But, more broadly, the ultimate goal should be universal health coverage, in order to protect people from the potentially catastrophic health expenditures associated with TB and MDR-TB. 
Third, we must commit to making the investments necessary to end TB, recognizing that the right thing to do also makes financial sense. 
The UN estimates that, over the long term, “Every dollar spent on TB generates up to $30 through improved health and increased productivity.” 
The fourth priority is to leverage the private sector. 
To fuel innovation and new discoveries, we urgently need more partnerships between governments, businesses (particularly drug makers), and civil-society organizations. 
The goal should be to develop better, less toxic treatment regimens that work faster than what is currently available. 
Finally, the international community must commit to more decisive and accountable global leadership. 
Without accountability, goals and commitments have little meaning. 
Governments need to be pressured to improve living standards. 
That means ensuring access to nutritious food, a clean environment, and education, and fostering healthy economic conditions. 
Meeting those objectives will go a long way toward reducing the burden of TB. 
Major global health organizations such as The Global Fund to Fight AIDS, Tuberculosis and Malaria, Unitaid, the US President’s Emergency Plan for AIDS Relief, and others are supporting countries in this agenda. 
But with a global funding gap of $2.3 billion per year, the effort to end TB cannot be left to just a few organizations. 
Over the past 15 years, countries that have made significant progress in the fight against TB are the exception. 
To make progress the global norm, we will need to create a critical mass of countries that have both addressed the structural determinants of TB and appropriated adequate funding for treatments. 
Specifically, that means identifying the 40% of TB cases – 60% of which are among people living with HIV – that are missed each year. 
On September 26, the UN General Assembly will hold its first-ever High-Level meeting on TB, and member states will issue a political declaration of intent to tackle this issue. 
We would urge them to reflect on the five action items above. 
The path to a TB-free world starts there. 

Embracing Science 
Long-term economic progress comes mainly from the invention and spread of improved technologies. 
The scientific revolution was made possible by the printing press, the industrial revolution by the steam engine, and India’s escape from famine by increased farm yields – the so-called “Green Revolution.” 
Today’s era of globalization emerged with the spread of computers and the Internet. 
Thus, when we seek solutions to some of the world’s toughest problems, they, too, are likely to be found, at least in part, in new technologies that can resolve old and seemingly intractable problems. 
Consider poverty in Africa. 
Every conceivable explanation has been given, usually focusing on what Africans do wrong. 
But a visit to Africa’s villages makes clear that the problems have more to do with the struggle for survival under difficult physical conditions than with any special problems that are unique to African societies. 
Africa’s farmers produce roughly one-third or less food per hectare of farmland than their counterparts around the world, resulting in massive hunger, which is exacerbated by a heavy disease burden. 
Malaria poses a unique challenge, owing in large part to Africa’s mosquito species, which are especially adept at transmitting the disease. 
Other tropical parasitic diseases imply similarly extraordinary burdens in Africa. 
Add the practical difficulties of broken-down roads and few cars and trucks, and economic isolation follows. 
So the challenges of survival are enormous. 
Yet practical solutions are at hand, because simple and low-cost technologies can address specific problems. 
Low farm yields can be addressed through improved seed varieties specially adapted for African conditions, combined with technologies for replenishing soil and managing water. 
Malaria can be controlled through newly designed long-lasting mosquito nets and a new generation of effective medicines. 
Other tropical diseases also can be controlled, and practical technologies for safe drinking water can dramatically reduce diarrheal diseases. 
Mobile phones, local wireless Internet, and more paved roads could do much to break the economic isolation of Africa’s villages. 
Donor countries incessantly ask Africans to change their trade policies, government institutions, public administration, and more. 
Some of these changes are important, but the role of the rich countries has been lopsided, focusing on everything except how to finance and introduce practical technologies to solve practical problems. 
The rich countries’ mistakes wouldn’t matter if African countries had enough money to adopt the needed technologies on their own, but Africa is so poor that it must get financial help to escape poverty. 
The development challenges in Africa are just one example of how tough societal problems can be addressed by the design and spread of improved technologies. 
The same will be true of how the world best addresses manmade climate change – another of those seemingly intractable global problems. 
Right now, rich countries are changing the world’s climate by emitting billions of tons of carbon dioxide each year from the use of coal, oil, and natural gas. 
In future years, China and India also will make massive contributions to increased carbon dioxide in the atmosphere. 
Yet no country, rich or poor, is keen to cut its energy use, owing to concern that to do so would threaten jobs, incomes, and economic growth. 
New technologies will provide a key part of the solution. 
Already, “hybrid” automobiles, which combine gasoline and battery power, can roughly double fuel efficiency, cutting carbon dioxide emissions by half. 
Similarly, engineers have developed ways to capture the carbon dioxide that results from burning coal in power plants and store it safely underground. 
This new technology, called “carbon capture and sequestration,” can cut by 80% the carbon dioxide emitted during the production of electricity. 
The costs appear relatively small. 
Consider also the depletion of ocean fisheries through over-fishing. 
Global demand for fish consumption is growing, and so, too, is the global capacity to catch fish, driving some species to the point of extinction. 
Improved aquaculture, in which fish are grown at manmade fishponds and reservoirs is still far from being a perfect technology, mainly for environmental reasons, yet it is enormously promising. 
On a recent visit to Africa, a senior agricultural scientist said that in today’s world, the scientist is closer than ever before to the farmer, but farther away than ever from the policymakers. 
Politicians don’t understand science, and rarely seek the advice of scientists and engineers in addressing major issues. 
Everything is viewed as politics and votes, not as technical problems requiring technological expertise, which is why Africa’s poverty is so often attributed to corruption rather than to ecological challenges. 
It is easy to dismiss the suggestion that technology can save the day. 
After all, technological advance also requires good governance, market forces, effective universities, and more. 
Politics will still play its role. 
Nevertheless, it’s time to recognize that governments are ill-equipped to understand the sophisticated technological challenges and opportunities facing the world, and that new ways are needed to ensure that science and technology are given the prominence needed to address a wide range of increasingly urgent global problems. 
Now is the time for every major international agency and national government to assume responsibility for gaining the scientific and technological expertise that they will need in the twenty-first century. 

Embracing the Empire 
Bernard Kouchner, France’s new foreign minister, has a long and distinguished record as an advocate of intervention in countries where human rights are abused. 
As a co-founder of Doctors Without Borders, he stated that “we were establishing the moral right to interfere inside someone else’s country.” 
Saddam Hussein’s mass murder of Iraqi citizens is why he supported the war in Iraq. 
One should always be careful about attributing motives to other people’s views. 
But Kouchner himself has often said that the murder of his Russian-Jewish grandparents in Auschwitz inspired his humanitarian interventionism. 
One may or may not agree with Kouchner’s policies, but his motives are surely impeccable. 
The fact that many prominent Jewish intellectuals in Europe and the United States – often, like Kouchner, with a leftist past – are sympathetic to the idea of using American armed force to further the cause of human rights and democracy in the world, may derive from the same wellspring. 
Any force is justified to avoid another Shoah, and those who shirk their duty to support such force are regarded as no better than collaborators with evil. 
If we were less haunted by memories of appeasing the Nazi regime, and of the ensuing genocide, people might not be as concerned about human rights as they are. 
And by no means do all those who work to protect the rights of others invoke the horrors of the Third Reich to justify Anglo-American armed intervention. 
But the term “Islamofascism” was not coined for nothing. 
It invites us to see a big part of the Islamic world as a natural extension of Nazism. 
Saddam Hussein, who was hardly an Islamist, and Iranian President Mahmoud Ahmadinejad, who is, are often described as natural successors to Adolf Hitler. 
And European weakness, not to mention the “treason” of its liberal scribes, paving the way to an Islamist conquest of Europe (“Eurabia”) is seen as a ghastly echo of the appeasement of the Nazi threat. 
Revolutionary Islamism is undoubtedly dangerous and bloody. 
Yet analogies with the Third Reich, although highly effective as a way to denounce people with whose views one disagrees, are usually false. 
No Islamist armies are about to march into Europe – indeed, most victims of Revolutionary Islamism live in the Middle East, not in Europe – and Ahmadinejad, his nasty rhetoric notwithstanding, does not have a fraction of Hitler’s power. 
The refusal of many Muslims to integrate into Western societies, as well as high levels of unemployment and ready access to revolutionary propaganda, can easily explode in acts of violence. 
But the prospect of an “Islamized” Europe is also remote. 
We are not living a replay of 1938. 
So why the high alarm about European appeasement, especially among the neo-conservatives? 
Why the easy equation of Islamism with Nazism? 
Israel is often mentioned as a reason. 
But Israel can mean different things to different people. 
To certain evangelical Christians, it is the holy site of the Second Coming of the Messiah. 
To many Jews, it is the one state that will always offer refuge. 
To neo-conservative ideologues, it is the democratic oasis in a desert of tyrannies. 
Defending Israel against its Islamic enemies may indeed be a factor in the existential alarmism that underlies the present “war on terror.” 
A nuclear-armed Iran would certainly make Israel feel more vulnerable. 
But it is probably overstated as an explanation. 
Kouchner did not advocate Western intervention in Bosnia or Kosovo because of Israel. 
If concern for Israel played a part in Paul Wolfowitz’s advocacy of war in Iraq, it was probably a minor one. 
Both men were motivated by common concerns for human rights and democracy, as well as perhaps by geopolitical considerations. 
Still, Islamist rhetoric, adopted by Ahmedinejad among others, is deliberately designed to stir up memories of the Shoah. 
So perhaps the existential fear of some Western intellectuals is easier to explain than their remarkable, sometimes fawning trust in the US government to save the world by force. 
The explanation of this mysterious trust may lie elsewhere. 
Many neo-cons emerged from a leftist past, in which a belief in revolution from above was commonplace: “people’s democracies” yesterday, “liberal democracies” today. 
Among Jews and other minorities, another historical memory may also play a part: the protection of the imperial state. 
Austrian and Hungarian Jews were among the most fiercely loyal subjects of the Austro-Hungarian Emperor, because he shielded them from the violent nationalism of the majority populations. 
Polish and Russian Jews, at least at the beginning of the communist era, were often loyal subjects of the communist state, because it promised (falsely, as it turned out) to protect them against the violence of anti-Semitic nationalists. 
If it were really true that the fundamental existence of our democratic Western world were about to be destroyed by an Islamist revolution, it would only make sense to seek protection in the full force of the US informal empire. 
But if one sees our current problems in less apocalyptic terms, then another kind of trahison des clercs comes into view: the blind cheering on of a sometimes foolish military power embarked on unnecessary wars that cost more lives than they were intended to save. 

The Future of Economic Convergence 
WASHINGTON, DC – The world is now facing what observers are calling a “synchronized” growth upswing. 
What does this mean for the economic “convergence” of developed and developing countries, a topic that lost salience after the Great Recession began a decade ago? 
In the 1990s, developing economies, taken as a whole, began to grow faster than their advanced counterparts (in per capita terms), inspiring optimism that the two groups’ output and income would converge. 
From 1990 to 2007, the developing economies’ average annual per capita growth was 2.5 percentage points higher than in the advanced economies. 
In 2000-2007, the gap widened, to 3.5 percentage points. 
Though not all countries made progress – many small economies did not do well – on an aggregate basis, the structure of the world economy was being transformed. 
Asian countries were catching up at a particularly rapid clip, driven by the large, dynamic economies of India and, even more so, China (which experienced nearly three decades of double-digit GDP growth). 
After the global financial crisis began in 2007, however, the dynamic changed. 
At first, it seemed that convergence was accelerating. 
With advanced-economy growth having ground to a halt, developing countries’ lead in per capita growth increased to four percentage points. 
By 2013-2016, however, growth slowed in many emerging economies – particularly in Latin America, with Brazil experiencing negative growth in 2015 and 2016 – while growth in the United States picked up. 
Are we, as some observers have claimed, witnessing the end of convergence? 
The answer will depend on developing economies’ ability to find and tap new, more advanced sources of growth. 
In the past, the key engine of convergence was manufacturing. 
Developing countries that had finally acquired the needed skills and institutions applied advanced-country technologies locally, benefiting from plentiful, low-cost labor. 
But, as Dani Rodrik has argued, that source of easy copycat catch-up has mostly been exhausted. 
The low-hanging fruit in manufacturing has already been picked. 
Technological catch-up is more difficult in the services sector, which now accounts for a larger share of total value-added. 
Moreover, today’s cutting-edge technologies – such as robotics, artificial intelligence (AI), and bioengineering – are more complex than industrial machinery, and may be more difficult to copy. 
And, because intelligent machines can increasingly fill low-wage jobs, developing countries’ cost advantage may have been diminished significantly. 
Yet, as Daron Acemoglu and Pascual Restrepo show, the impact of such technologies – in particular, automation and AI – is more nuanced than that. 
According to them, aggregate output is a function of traditional labor, traditional capital, and capital involved in tasks that can be performed entirely without labor. 
Growth in traditional labor- and capital-augmenting technological progress, or in labor-displacing progress, would increase output, but growth in the latter would also lead to reduced labor demand and lower wages. 
By contrast, productivity growth, the deepening of automation, or the creation of entirely new tasks would increase labor demand and push up wages. 
Of course, for robotics and AI to appear in developing-country value chains, including services that rely on frontier technologies, a minimum set of specific skills and infrastructure will be needed. 
But deploying some new technologies and tasks in the emerging economies may turn out to be no more difficult or costly than in advanced countries. 
Here, much will depend on what kind of complementary labor is required. 
It is often assumed that a pool of very highly skilled labor is crucial to deploy AI. 
That may be true in some cases, but the opposite may be true in others. 
For example, the new labor-displacing technologies could make feasible activities for which there had been insufficient skilled labor. 
Thus, complete automation can lead to a greater share of an economic activity being located in a developing country. 
Another factor that will shape the process of technological upgrading in developing countries is global firms’ willingness to invest. 
Global market structures and pricing will partly determine the distribution of benefits. 
But so will countries’ efficiency at learning regulatory lessons, including how to design rules that attract investors, capture important segments of value chains, and secure a sufficiently large share of the gains from innovation. 
Those countries that learn quickly may actually grow faster than advanced economies, even in high-tech sectors. 
Of course, for many countries and sectors, there remains considerable room for traditional catch-up – a process that will likely continue to fuel growth. 
But it will not be enough to fuel true convergence. 
For that, developing countries will need to deploy new technologies relatively efficiently, taking into account the role of labor-market skills and regulations. 
This will not be easy, and we may never return to the “golden age” of convergence that preceded 2007. 
But new technologies should not be expected to stop convergence, even if, as is likely, they slow it down. 

Emerging Economies’ Demographic Challenge 
WASHINGTON, DC – Population aging is often cited as a major economic challenge for the developed world. 
But a new report from the McKinsey Global Institute (MGI) shows that shifting demographics pose an even greater threat to the growth prospects of many emerging economies. 
Over the last 50 years, the world's 1.6% annual population growth fueled a surging labor force and a rapid increase in GDP in many emerging economies. 
Employment more than doubled in China and South Africa, and at least tripled in Brazil, India, Indonesia, Mexico, and Nigeria. 
In Saudi Arabia, employment increased almost nine-fold. 
But, with population growth slowing, average annual employment growth in emerging economies is expected to drop from 1.9% to 0.4%. 
In absolute terms, the decline will exceed that of developed economies, where annual employment growth is expected to fall from 0.9% to 0.1% the coming years. 
In most economies, employment is expected to reach its peak within the next half-century; in China, the labor force could shrink by 20% over this period. 
Of course, there are exceptions to this trend. 
Indonesia and South Africa are projected to continue to experience rising employment (albeit at slower rates). 
Nigeria's labor force is expected to triple from 2014 to 2064, and many other economies in Sub-Saharan Africa will experience similar levels of growth. 
But, overall, economies' demographic tailwinds will wane, with serious consequences for GDP growth. 
With no other change in current trends, emerging economies' rates of GDP growth would fall by one-third, from 4.8% to 3.1% annually, by 2064. 
More problematic, the declining share of the working-age population is set to cause per capita GDP to decline by more than 30% in some countries – most notably, Brazil, Mexico, and Saudi Arabia. 
The good news is that emerging economies have at their disposal a powerful means to offset these trends: productivity growth. 
To be sure, annual productivity growth in emerging economies would need to accelerate by 57%, from 2.8% to 4.4%, to compensate fully for the demographic shift. 
But, even if that ambitious goal is not achievable everywhere, emerging economies have considerable scope for catch-up productivity growth. 
After all, over the last 50 years, the productivity gap between emerging and developed economies has barely narrowed; in absolute terms, it has more than doubled. 
Indeed, though average productivity growth in emerging economies has accelerated in every decade since the 1970s, this largely reflects rapid productivity growth in just one country: China, where the annual average has been 5.7% since 1964. 
Elsewhere, the record has been patchy. 
Mexico and Saudi Arabia improved their productivity by less than 1% per year over this period; 
Argentina, Brazil, Russia, and South Africa managed productivity growth of 1.2-1.5%. 
There is reason to believe that these economies can do much better. 
With a comprehensive approach, 11 emerging economies (Argentina, Brazil, China, India, Indonesia, Mexico, Nigeria, Russia, Saudi Arabia, South Africa, and Turkey) could, on average, boost their annual productivity growth to as much as 6% by 2025. 
Four-fifths of that growth would be achieved through the adoption of approaches that have already been successful elsewhere, with new technological, operational, and business innovations covering the rest. 
Opportunities to catch up to developed-country productivity levels abound across key sectors. 
In retail, emerging economies could double their productivity by 2025, largely by adopting modern store formats, such as supermarkets and hypermarkets, which are at least three times more productive than traditional small shops. 
In Mexico, boosting the share of modern retailers by 10% would yield a 25% increase in the sector's total productivity. 
Similarly, if China's huge automotive industry consolidated operations into a smaller number of larger plants operating close to capacity, the sector's productivity – which is well below the developed-country average – could rise by up to 50%. 
And many countries can improve the efficiency of food value chains considerably, such as by mechanizing agriculture. 
There is also enormous scope for productivity-enhancing innovation, particularly in health care, a sector that is just evolving in most emerging countries. 
Digitization of health records enabled India's Bhorugram Rural Dispensary nearly to double the number of immunizations it provided in just four years. 
Likewise, it allowed clerks at western Kenya's Mosoriot Rural Health Center to spend two-thirds less time interacting with other staff on administrative tasks, and almost twice as much time registering patients. 
In terms of operational innovations, there is the example of India's Aravind Eye Care System, which, by applying principles of industrial engineering to its work flow, has become the world's largest eye-care provider. 
Aravind can carry out two-thirds the number of operations conducted by the United Kingdom's entire National Health Service at one-sixth the cost – and with a lower infection rate. 
Governments can play an important role in promoting such innovation. 
Brazil's deregulation of agriculture and encouragement of R&D enabled the Brazilian Agriculture Research Corporation to pioneer more than 9,000 technology projects, including the design of a tropical soybean strain that can thrive in Brazil's climate. 
Efficiency soared, placing Brazil's crop yields on par with those of developed economies. 
The era of “easy" GDP growth driven by a massive army of young workers is ending. 
Emerging economies must face the resulting growth challenge head-on, by pursuing sweeping changes in policies, incentives, and established practices to boost productivity. 
Recognizing this imperative is the first step. 
Now the hard work must begin. 

Escape from the World Bank 
PHILADELPHIA – The elephants in the room at the annual International Monetary Fund/World Bank meeting in Lima, Peru, were the China-inspired Asian Infrastructure Investment Bank (AIIB) and New Development Bank (or “BRICS Development Bank,” as it was originally called). 
Will these new institutions behave like the World Bank or the more conventionally “bank-like” European Investment Bank (EIB)? 
Above all, will they be vehicles to promote – or, paradoxically, constrain – China’s interests? 
The reality is that over the next decade, these new institutions will not be huge lenders. 
The paid-in capital of each is $10 billion; so, even with an equity-to-loan ratio of 20% (the current floor for the World Bank), each will be able to lend only about $50 billion over the next decade – not chump change, but hardly a game changer – unless they “crowd in” substantial private investment. 
What matters is that the larger emerging markets are putting substantial capital into institutions that will be dominated by China – an indication of how frustrated they are with the World Bank and the IMF. 
The World Bank is like an old ship: in its seven decades, all kinds of barnacles – sticky budgetary accretions and transaction costs – have accumulated on its hull, steadily impeding its speed and performance. 
In the 2015 financial year, the EIB lent more than twice the amount provided by the Bank, but with one-sixth the staff. 
Whether measured by flows (loan disbursements) or stock (loans outstanding), the World Bank is massively over-staffed, with a much higher administrative budget than the EIB. 
When the Bank was formed, the key governance mechanism was a resident Board of Directors that reported to a Board of Governors – usually finance ministers or equivalent senior authorities from member countries. 
Over time, new offices proliferated: an Office of Internal Audit, an Independent Evaluation Office, an Inspection Panel, a Chief Ethics Officer, and an Office of Institutional Integrity. 
Most of this bureaucratic growth was the result of pressure from developed countries, which timed their efforts with the periodic replenishment of the International Development Association (the World Bank’s window for soft loans). 
Criticism from well-organized Western NGOs put more pressure on the Bank, deflecting attention from any real structural changes in the institution’s governance. 
And savvy Bank presidents have known that the best way to deflect political pressure is to add yet more bells and whistles – especially when they are visible and loud. 
Around two decades ago, there was an Ombudsman and a World Bank Administrative Tribunal to address internal staff grievances. 
Now there is a whole paraphernalia of “Internal Justice Services”: the Respectful Workplace Advisers, an Office of Mediation (presumably an Office of Meditation will follow), Peer Review panels, an Office of Ethics and Business Conduct, and an entire Integrity Vice-Presidency. 
To paraphrase the comedian Fred Allen, “On ships they call them barnacles; at the World Bank, they attach themselves to desks and are called vice presidents.” 
And, after the last reorganization, there are more than two dozen of them. 
Meanwhile, the Bank’s extreme risk-averse culture reflects a rational response to critics who make a huge fuss about every project or program failure. 
Critics who take failures in commercial projects in stride find the Bank sloth-like compared with the private sector and become indignant when its projects fail. 
Yet, instead of making the case that risk is intrinsic to economic development and developing a risk-balanced portfolio of projects (and loans priced accordingly), the Bank pretends that it can be infallible. 
As a result, the best has become the enemy of the good. 
Risk aversion has gone hand in hand with skewed institutional priorities, as is evident in the Bank’s budget. 
In the 2015 financial year, $623 million was allocated to “Client Engagement,” while nearly 1.5 times that amount, or $931.6 million, went to “Institutional, Governance & Administration” (the remaining $600 million, for “Program and Practice Management,” is ostensibly for supporting lending operations). 
Expenses for the Executive Board alone were $87 million. The Bank loudly proclaims the virtues of research – and then spends almost as much – $44 million – on “External and Corporate Relations.” 
Many of the challenges facing the World Bank come from the pressures placed on it by its larger shareholders. 
Because they refuse to cede power to smaller shareholders, or to allow a substantial increase in resources to meet much greater global needs, emerging economies had little choice but to create their own institutions. 
The World Bank will not disappear: there are too many vested interests (including academics and NGOs) eager for a share of other people’s money. 
But the Bank’s performance epitomizes how even well designed and well-built ships slow down as the barnacles build up, until they must cede the way to newer vessels. 

Emerging Vulnerabilities in Emerging Economies 
MILAN – Just before the collapse of the US investment bank Lehman Brothers triggered a financial crisis that would engulf the world economy, the Commission on Growth and Development published an assessment of emerging-economy growth strategies, aimed at drawing lessons from previous research and experience. 
Over a decade later, many – if not most – of those lessons remain unheeded. 
In emerging economies, sustained medium or high GDP growth is the key to advancing development and raising incomes. 
Of course, crises inevitably produce major setbacks with long recovery periods, drastically reducing growth in income and wealth. 
But ten years is a long time, and the gap between what experience dictates emerging economies should do and what they have been doing remains large. 
While some countries have achieved sustained medium or high growth, they have relied on high levels of public and private investment, financed mainly by domestic savings. 
By contrast, running persistently large current-account deficits creates vulnerabilities and often leads to disruptions, as external financial conditions change. 
Borrowing in foreign hard currencies is particularly risky, as depreciation of the local currency can cause liabilities to surge. 
Emerging economies thus should be working to constrain debt levels, though the extent to which this is needed depends on growth, as strong and resilient increases in GDP reduce leverage ratios. 
The value of the currency is also relevant. 
Persistent undervaluation, achieved through the accumulation of foreign-exchange reserves, reduces the incentive to pursue structural reform and achieve productivity growth. 
This is one element of the well-known middle-income trap. 
Moreover, the return on foreign-reserve assets is usually quite low, because the local currency will appreciate (even if it remains undervalued) if the economy is growing – a pattern that can be sustained for an extended period. 
The risks associated with an overvalued currency are more severe. 
For starters, growth and employment in the tradable sector is adversely affected, essentially because the terms of trade are mismatched with the economy’s productivity levels. 
Furthermore, an overvalued currency will usually be accompanied by a current-account deficit and excessive reliance on foreign capital to finance investment. 
If external financial conditions are favorable, this pattern can be sustained for some time. 
But, as recent experience has shown, a change in such conditions can force countries either to allow currency depreciation or to delay it by purchasing large amounts of local currency using the central bank’s foreign-currency reserves. 
In any case, markets eventually force an often-sharp depreciation of the currency. 
As a result, credit is tightened, balance sheets deteriorate (especially if companies or banks have borrowed in a foreign currency), investment contracts, and growth takes another hit. 
These imbalances develop as a result of a hands-off approach to capital-account management, based on the assumption that capital-market incentives and growth strategies are always aligned. 
In fact, it is hard to find any example of a country that has achieved sustained growth with such an approach. 
To be sure, capital markets are not the enemy. 
But the alignment of interests between external investors and domestic policymakers is imperfect, at best. 
Sophisticated investors routinely maintain that economic growth is not determinative of investment returns. 
It is valid point. 
Returns on an investment depend on the valuation of financial assets, among other factors. 
Only in a simplified theoretical model would these valuations be determined solely by growth in the expected underlying cash flows. 
One might argue that while valuations and the underlying growth dynamics can diverge in the short and medium run, they eventually converge. 
Whether or not that is true – and it may well be – most financial investors don’t care about the long run, and their agents usually do not get rewarded for long-run performance. 
Financial investors understand that adequate returns may persist for a while, but that imbalances and risks may necessitate a hasty exit at any moment. 
As the emerging-market economist Robert Subbaraman puts it in the title of a recent report: “Enjoy the Party, but Stay Close to the Door.” 
While this is rational for investors, it does not support policymakers’ interest in sustained growth. 
That is why successful capital-account management must focus on promoting stability, controlling risks, and aligning capital-market flows with economic-growth and employment objectives. 
In the post crisis period, ultra-low interest rates in developed economies spurred capital flows into higher-yielding emerging-market assets denominated in the local currency. 
At the same time, many emerging-market corporations borrowed in US dollars or euros, in some cases with little or no dollar revenues to match the dollar-denominated debt service. 
As experience shows, this is a risky approach. 
As long as interest rates remain very low, the risk premia they (and asset prices generally) imply remain below reasonable assessments of the actual evolving risks embedded in the system. 
For investors looking at the short term, that is a party worth enjoying – from a position near the exit. 
For many emerging economies, it is imperative to pursue a rebalancing of growth patterns, with a greater focus on resilience, and a more active approach to managing debt and capital flows and their effects on asset prices, exchange rates, and growth. 
Otherwise, the dangers of unsustainable growth patterns will bring the party to an abrupt halt, potentially triggering financial contagion. 
Already, as escalating trade tensions generate added uncertainty, nervous investors are edging toward the door. 

The Submerging-Market Threat 
WASHINGTON, DC – It is time to put the rise of the emerging economies in perspective. 
The rapid economic growth in much of the developing world since the beginning of the century was fueled by a commodity boom and an overextension of credit. 
But, because the emerging-market boom was not accompanied by sufficient structural reforms, it was not sustainable. 
Today, most of the major emerging economies have experienced a severe reversal of fortune. 
Russia and Brazil have plunged into severe crises, with double-digit inflation accompanying a 4% contraction in GDP last year. 
South Africa is barely growing. 
China’s phenomenal rate of expansion has slowed to below 7%. 
Unsurprisingly, Goldman Sachs has closed its money-losing BRIC fund for investment in Brazil, Russia, India, and China. 
Indeed, the future of the BRICS (including South Africa) – and that of other emerging markets – looks gloomy. 
Outside of Asia, most developing economies are principally commodity exporters, and thus are highly exposed to price shocks. 
Plunging oil prices have cut the value of the Russian ruble by more than half against the US dollar, and further declines appear likely – especially if the US Federal Reserve continues to hike interest rates. 
Commodity prices are likely to stay low for one or two decades, as they did in the 1980s and 1990s. 
When it comes to oil, for example, shale gas, tight oil, liquefied natural gas, and increasingly competitive solar and wind energy are boosting energy supply, even as a decade of high prices has spurred conservation and reduced demand. 
The commodity crunch is likely to prove painful to people in emerging markets, who often measure their income in US dollars. 
As exchange rates fall, they will quickly feel much poorer. 
Governments will suffer, too, as their foreign debt – boosted by fiscal and monetary expansion that yielded little growth – becomes much more burdensome, while the export stimulus from lower exchange rates will be small, owing to the absence of new capacity outside the commodity sectors. 
As countries come under pressure to make payments, multiple emerging-market debt crises are likely. 
In the short term, Brazil arouses the most worry, given its large public debt and its vast budget deficit. 
In the medium term, however, China appears even more frightening. 
As a rule of thumb, an emerging economy’s total private- and public-sector debt should not exceed 100% of GDP. 
China’s total debt is now more than 250% of GDP. 
The BRICS countries’ critical shortcoming is poor governance. 
On its corruption perception index of 175 countries, Transparency International ranks South Africa 61st, Brazil and India 76th, China 83rd, and Russia 119th. 
Poor governance limits a country’s ability to create lasting wealth and productive capacity – even if the shortcomings become evident and damaging only when booms turn to busts. 
As Warren Buffet has put it, “You only find out who is swimming naked when the tide goes out.” 
To combat corruption effectively, people need to oust corrupt leaders, which is why democracy is vital. 
The regime changes in Ukraine and Argentina, and the opposition’s victory in Venezuela’s recent parliamentary election, are harbingers of what is to come. 
Brazil may be next. 
The emerging markets may rise again, if and when improved governance and structural reforms are implemented to boost potential growth. 
But that will take time. 
We should not be surprised to see two decades of slow global growth. 
The West cannot afford to be complacent. 
After having focused too much on demand management, Europe should be trying to reduce the fiscal and regulatory burden of the state, so that its economies can start growing again. 
It should also open up stunted markets for labor, services, capital, and digital products. 
The West needs to work together to set global standards while it still can. 
Democracy, the rule of law, and market-based economies are all worth fighting for. 
Russia’s aggression in Ukraine and the wars in North Africa and the Middle East have demonstrated why NATO should be strengthened, and that Europe must become serious about defending itself – rather than simply continuing to depend on the United States. 
In coordinating Western sanctions against Russia, the G7 has already achieved renewed significance. 
This should be followed by efforts to manage the coming stagnation. 
The Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership are both important initiatives in this regard. 
Western-led organizations and institutional arrangements will become especially important as international organizations struggle to remain relevant. 
The United Nations, in particular, will likely be crippled by Russian and Chinese vetoes in the Security Council. 
Only the International Monetary Fund can be expected to rise in prominence, as major emerging economies – most likely Venezuela, Argentina, and Brazil – end up as its wards. 
Economics aside, China and Russia are likely to pose the biggest challenge. 
These two large emerging countries are still led by authoritarian governments, headed by ruling elites who – given how much wealth they have amassed – may be the most corrupt in history. 
As they come under pressure, their transformations are unlikely to be peaceful. 
The Kremlin has already shown, with its wars in Ukraine and Syria, that it is ready to counter domestic malaise with external aggression. 
That is unlikely to change unless something is done to stop it. 
The fall of the emerging economies could have a far more lasting impact than their rise. 

Making the Most of Emerging Economies 
PARIS – Once again, the world’s emerging economies are facing a bout of uncertainty. 
Argentina, South Africa, and Turkey are among those generating the most concern, owing to a combination of questionable monetary policies and currency depreciation vis-à-vis the US dollar that threatens to undermine these countries’ ability to service their debts. 
But not all emerging economies are created equal. 
To be sure, as in the past, there is a distinct risk of contagion. 
The emerging economies that are most vulnerable each must address its own challenges to avoid falling victim. 
And the approaches countries take to the challenges they face will have knock-on effects of their own. 
Given this, investors may find it tempting to pursue a broad risk-off approach to the entire emerging world, especially in the context of rising global trade tensions. 
But it would be a mistake to ignore the very favorable conditions that exist in some emerging economies. 
For example, many have made significant progress in managing their debt levels, raising productivity, improving infrastructure, and implementing needed reforms. 
All of this has contributed to strengthening these economies’ resilience to external shocks. 
Indeed, despite enduring uncertainties over the degree to which they have absorbed the lessons of the past, not to mention inconsistencies across countries, many emerging economies have developed much sounder fundamentals over an extended period. 
The disparity between perceived and actual risk and the tendency to paint all emerging economies with the same brush is a longstanding problem. 
But investors should eschew a wholesale retreat from emerging economies in response to high-profile problems in a few. 
Instead, they should adopt a more nuanced approach, one focused on improving the risk-return profile by investing in selected regions and markets, while working with the right institutions. 
In particular, now is not the time to ignore Latin America and the Caribbean, which have a wide range of investment needs – touched upon during the recent G20 meetings in Argentina – and also offer a broad range of growth opportunities. 
Countries in this region have pursued substantial reforms that have boosted economic growth and laid the foundations for strong financial returns in the longer term. 
More broadly, stakeholders should strengthen their commitment to using the “billions to trillions” approach to resolving the world’s most vexing problems. 
That approach uses a combination of measures related to finance, skills, capacity, and risk allocation to leverage relatively scarce public-sector capital to mobilize more robust private-sector resources. 
The multilateral development banks have a critical role to play here, and many have made great strides in responding to market needs. 
Moreover, the world has agreed, under the auspices of the United Nations, on complementary road maps for addressing global challenges: the Paris Climate Agreement and the Sustainable Development Goals. 
By establishing the right mechanisms to take advantage of related investment opportunities, we can use billions of public dollars to make trillions of dollars’ worth of progress. 
Many of us in the investment community are working to boost the effectiveness of our work by ensuring that the right financial and risk-management instruments are in place to connect the public and private sectors. 
Already, mechanisms are in place to facilitate capital flows into emerging economies, particularly those in Latin America and the Caribbean, where opportunities for attractive risk-adjusted returns are now available. 
In this context, even a very modest allocation by large institutional investors will have a major impact on the pursuit of sustainable outcomes, while also providing attractive, competitive financial returns. 
This dynamic – a fundamental component of the billions-to-trillions approach – can become embedded, creating the basis for a broader system in which there is no trade-off between making money and doing good. 
The current turmoil in some emerging economies must not be allowed to derail past progress. 
On the contrary, it should spur stakeholders to redouble their collective efforts to establish a broadly beneficial system. 
This means, first and foremost, taking a nuanced approach to risk assessment that recognizes the attractive long-term growth opportunities that many emerging-market economies offer. 

Emerging Hope from Africa 
German Chancellor Angela Merkel has put Africa squarely on the agenda of next week’s G8 Summit. 
We in Liberia and across Africa welcome her leadership, and are grateful for the G8’s support for Africa, particularly its commitments in recent years to reduce debt burdens, double aid by 2010, expand trade access, and fight HIV/AIDS. 
Strong efforts by Africans, coupled with the investments of the G8 and other partners, are paying off in important ways that are often unnoticed by the outside world. 
Consider three major historical trends. 
First, in 1989, there were just four democracies in Africa. 
Today, there are at least 18, including South Africa, Mozambique, Tanzania, Benin, Mali, Ghana, Senegal, with Liberia the most recent to join the group. 
Second, economic policies have greatly improved. 
With few exceptions, gone are the days of dual exchange rates, hyperinflation, and extensive trade barriers. 
Third, for many countries, the 25-year-old debt crisis is finally over, allowing much higher investment in health, education, and infrastructure. 
These three trends overlap in a group of about 15 African countries that are strongly committed to accountable governance and sensible economic policies. 
These countries are putting more kids in school, vigorously fighting diseases, and creating new economic opportunities for the poor. 
Average incomes have increased by 25% over the last decade – a far cry from the zero growth of the past. 
Their recovery is still fragile, but it is real and tangible, and it is providing new hope across the continent. 
Most of the credit for these changes goes to Africans who demanded an end to the misrule of the past. 
But the commitments by the G8 and other key partners – such as the Nordic states and the Netherlands – also have played a critical role. 
The dual challenges are to sustain this progress in countries where it has started, and to initiate it in others. 
The G8 can take four steps towards these ends. 
First, it can ensure that its members are on track to double aid to Africa by 2010. 
While progress has been made, it appears several countries are falling behind on this pledge. 
Second, it can focus new resources in critical areas such as education, malaria, agriculture, and infrastructure, and ensure that most funding goes to well-governed countries. 
Third, it can complete the process of debt relief for countries that have not received it, and help protect poor countries from predatory commercial creditors. 
Finally, it can expand market access for African exporters, especially by redoubling efforts to complete the Doha round of global trade talks. 
My own country, Liberia, embodies Africa’s emerging hope and the progress that can be made through a commitment to good governance and strong international support. 
Just four years ago, we were enmeshed in a brutal 14-year civil war that claimed 270,000 lives, destroyed the fabric of our communities, and reduced average income by over 80%. 
Liberia was Africa’s basket case. 
Today, the war is over. 
Through two rounds of free and democratic elections in 2005, the people of Liberia courageously chose peace, reconciliation, and development over ethnic divisions and violence. 
Since then revenues have doubled, the economy is growing by 8% per year, school enrollment is up 50%, and electricity and water have been restored to parts of Monrovia for the first time in 15 years. 
Families are being reunited, and, after years of suffering, there is finally hope for the future. 
Liberians have made tremendous sacrifices. 
But Liberia’s dramatic turnaround would not have been possible without the support of the United Nations’ peacekeepers, the G8, the European Union, and other partners around the world. 
Nevertheless, our recovery remains fragile, and our success is far from assured. 
It will take years to rebuild physical infrastructure, establish strong institutions, and heal the wounds of war. 
As has been the case in some other countries, a return to conflict remains a threat if a clear peace dividend does not quickly materialize throughout the country. 
The stakes for Liberia and for the region could not be higher. 
But the challenges are enormous, and we will be unable to meet them without strong international support to help rebuild schools and clinics, put children back in school, and provide the foundation for vibrant private-sector growth. 
With this support, in a few years we will be able to stand on our own two feet again. 
Debt relief is at the heart of the support we need. 
Our external debt exceeds $4 billion, more than 3,000% of annual exports. 
Most of this is accumulated interest on loans borrowed by rapacious dictators of the past. 
We have met all of the conditions asked by the international community to start the debt relief process, but creditor countries have not yet agreed on the financing. 
We hope that the G8 can help finalize these arrangements, and can help us ensure that the costs of debt relief are shared among all creditors, including those from the private sector. 
The people of Liberia are grateful for the strong support we have received as we have moved from the crisis of the past to the opportunity of the present. 
We hope you will continue to stand with us as we fight to secure peace, provide basic freedoms, and create the opportunity to rebuild our lives. 

Emerging Infectious Diseases 
Today’s bio-diversity crisis is not just one of lost habitats and extinct species. 
It is also a crisis of emerging infectious diseases (EID’s), such as HIV in humans, Ebola in humans and gorillas, West Nile virus and Avian Influenza in humans and birds, chytrid fungi in amphibians, and distemper in sea lions. 
There is every reason to take these events seriously, because EID’s appear to have a long evolutionary history. 
This is because many pathogens are capable of infecting a range of hosts, but evolved in places where only some of those hosts live. 
Pathogens also have specialized means of transmission from host to host. 
If, for example, a pathogen is transmitted by an insect that lives in the tops of trees, susceptible hosts will not be infected if they never leave the ground. 
For humans, HIV, Ebola, West Nile virus, and Avian flu are only the latest in a long line of EID’s. 
When our ancestors moved out of the African forest onto the savannah more than a million years ago, they rapidly became effective predators. 
Sharing prey with pre-existing carnivores, they acquired tapeworms that originally inhabited only hyenas, large cats, and African hunting dogs. 
When humans began to move out of Africa, they carried some of their pathogens to new areas, where they switched over to native hosts while native pathogens took up residence in the newly arrived humans. 
Agriculture and urbanization subsequently exposed us to yet more pathogens. 
If doctors were around back then, they would have called all these occurrences EID’s. 
Geographical restriction and specialized transmission mean that in most time periods, most pathogens occur in a small number of host species, often only one, but retain the ability to infect more. 
But climate change alters everything. 
Species move out of their areas of origin and ecosystems change. 
Pathogens come into contact with susceptible hosts that they have never before encountered, and that never had the opportunity to evolve resistance. 
As a result, EID’s are not just possible; they are inevitable. 
Indeed, every episode of climate change has produced them. 
Anticipating a problem is always more effective in terms of time and cost than responding to a crisis, no matter how viable the response. 
Unfortunately, we usually fight existing diseases but neglect looking forward. 
For example, white-tailed deer living in northwestern Costa Rica host six species of tick. 
None of the ticks is known to carry Lyme Disease, which has never been reported in Costa Rica. 
As a result, there are no public health advisories about Lyme Disease there. 
But some of the ticks are closely related to known carriers, and thus are potential carriers themselves. 
This debilitating – and difficult to diagnose – illness could thus be introduced to Costa Rica inadvertently by something as simple as an asymptomatic eco-tourist. 
The information about Costa Rican deer ticks comes from an inventory of parasites of vertebrates in northern Costa Rica, but it is the only inventory of its kind ever undertaken. 
We must do better. 
More than 50% of the species on this planet are parasites of some form, including pathogens affecting humans, livestock, crops, and wildlife. 
But, relative to our overall knowledge of biodiversity, we have documented less than 10% of the world’s pathogens. 
The remaining 90% are potential EID’s. 
We face a potential crisis, therefore, that stems from our fundamental ignorance about the biosphere, for it is impossible to be proactive about species of pathogens whose existence has not been documented. 
This makes many pathogens “evolutionary land mines” awaiting us as we relocate to novel habitats, move species around, and alter existing ecosystems. 
Nevertheless, most resources are still being allocated for responses to known EID’s rather than to assessing the risk of potential EID’s. 
Simply put, we must complete the global inventory of species. 
Now. 
Five hundred thousand years of experience in hunting and gathering, coupled with cheaper and faster molecular analysis, performed by faster and cheaper computers makes this task economically feasible. 
Rapid identification using genetic “bar codes” can increase the rate of discovering species and determining the transmission dynamics of potential EID’s. 
Pathogens have highly specialized transmission modes, and groups of closely related species tend to be very similar. 
All species of malaria, for example, are transmitted by mosquitos. 
Once classified, we will then be able to make predictions about two closely related species based on incomplete information about either, buying time and saving money. 
Finally, this information should be digitized and made freely available over the Internet to all concerned researchers and parties. 
If EID’s were rare, management through crisis response might be cost-effective. 
But EID’s are not rare at all. 
Rather, they are a common outcome of geographic dispersal associated with large-scale environmental changes. 
So we must cease being ignorant and reactive, and become informed and proactive. 
As a common sports adage puts it: never change a winning game, but always change a losing one. 

Emerging Lessons from the Crisis 
ITHACA, NY – The US financial system is careening on the edge of a meltdown. 
All that has kept the much-vaunted font of global capitalism from sliding into cataclysm is the US government, which has effectively become the guarantor and lender of last resort. 
How could things have come to such a pass in a financial system once touted as being the deepest and most sophisticated in the world? 
Where will it end? 
What effects will this have on the world financial system? 
It is difficult to answer these questions with much conviction while we are still in the midst of the crisis. 
Indeed, every passing day now seems to bring worse news—even weekends no longer provide respite from the steady stream of gloom! 
Whatever the final outcome, one thing is certain– the rest of the world will no longer be enthusiastic about adopting the free-market principles that guided US financial development. 
While desperate times may call for desperate measures, massive US government intervention will also make it difficult in the future to make the case that the state should stay out of the workings of the financial system. 
No doubt the satisfying emotion of schadenfraude – pleasure at the pain of others – is coursing through the minds of central bankers and policymakers in emerging markets, who for long bore the brunt of US hectoring about free-market principles. 
They are probably also saying their hosannas for having resisted financial innovations to some degree or another, thanking that for the fact that their economies have not yet been pummeled by the unfolding crisis to as great an extent as the US. 
Unfortunately, these lessons – if taken literally – may end up being the wrong ones for emerging market economies to be drawing. 
Unfortunate because the real lesson to be taken from this crisis is that the abnegation of certain free-market principles may in fact have led to the mess the US now finds itself in. 
Financial development, moreover, is ultimately going to be important for these economies to sustain high growth rates and allow a broader swath of their populations to participate in and benefit from the development process. 
What went wrong in the US? 
A key problem with Fannie Mae and Freddie Mac, for instance, was that their regulator failed to do its job of uncovering the massive accounting fraud embedded in their books. 
That and the implicit guarantee of government backing (which finally turned explicit) allowed these two institutions to expand enormously, including into exotic financial transactions that they had no business being involved in. 
The roots of the US crisis, of course, go back to the years when Alan Greenspan was chairman of the US Federal Reserve. 
Then, money was easy and regulation light. 
The famous ninja (no income, no job and no assets) mortgage loans were as clear a sign of regulatory negligence as any. 
But these obvious signs of malfeasance were all too easily ignored when times were good and in the face of the current US administration's hostility towards regulation. 
Clearly, financial innovation without effective regulation does not work well. 
In the new world of more sophisticated financial markets, dangers lurk in hidden places. 
Today’s crisis indicates that a set of rigid rules allows resourceful financial institutions to mask riskiness in their portfolios or shift things around to make standard risk metrics appear better than they really are. 
It is impractical to devise a regulatory framework that accounts for every specific financial instrument and institution. 
Rather, it makes more sense to develop a “principles-based” framework that can adapt to financial- market evolution and adopt a broader approach to managing systemic risks. 
Clearly, that was lacking. 
The crisis also confirms that some types of government involvement in financial markets – especially through implicit backing of ostensibly “private” institutions – generate bad outcomes that end up with taxpayers inevitably footing the bill. 
The real lessons from the Fannie and Freddie debacle should be about the dangers of implicit government guarantees coupled with moral hazard and weak regulation, and the risks that lurk even in advanced financial systems. 
These risks are greater in less-developed financial systems, and the costs of cleaning up the messes could also be proportionately larger for poorer economies. 
One thing the crisis does show is that fraud, corruption, and government interference can eat away at the foundations of even the deepest financial systems, especially when these problems are compounded by a regulatory system that is too narrow and rule-bound in its outlook and that, at times, turns a blind eye to obvious rot in the system. 
Now that, at least, is a lesson the emerging markets definitely should take away from the financial crisis. 

The Secret to Emerging-Economy Immunity 
BEIJING – Next month, policymakers and experts will gather in Bali Nusa Dua, Indonesia, for the Annual Meetings of the International Monetary Fund and World Bank Group. 
The location is fitting: Indonesia was at the epicenter of the Asian financial crisis that erupted just over 20 years ago. 
That crisis carries important lessons for the current turmoil in emerging markets like Argentina and Turkey. 
Predicting whether today’s problems will actually bring about a crisis like that of 1997-1998 is an exercise that I will leave to others. 
Nonetheless, it is worth comparing the circumstances surrounding the crisis a generation ago to those prevailing today, in order to discern better which emerging economies are most vulnerable. 
There are significant similarities between events of the last few years and the run-up to the 1997-1998 crisis. 
Following the recession of the early 1990s, the United States maintained low interest rates and an accommodative monetary policy, just as it did after the 2008 global economic crisis. 
In the middle of that decade, the US Federal Reserve began gradually tightening its policy – much as it is doing today – with the federal funds rate peaking in 1995. 
In the 1990s, however, emerging markets, especially in Asia, increased their external borrowing considerably, creating the currency and balance-sheet mismatches that later triggered the crisis. 
That is not the case today for many emerging economies, which have built ample foreign reserves and kept external debt low. 
But this does not mean that emerging economies are in the clear. 
After all, Argentina’s external debt was also considered relatively low until the peso’s recent sharp depreciation, which spurred the government to request funds from the IMF. 
The truth is that there is no foolproof approach to preventing a crisis. 
Of course, measures like keeping external debt low, maintaining flexible exchange rates, and implementing smart macroprudential policies can help to stave off disaster. 
So can the elusive set of policies that are supposed to show credibility and keep markets confident, summoning the “confidence fairy,” as Paul Krugman would say. 
But, just as a virus can afflict the healthiest of people, a crisis can sweep up even a well-prepared economy. 
That is why countries must look beyond preventive measures and strengthen their ability to support a speedy recovery. 
To figure out what that means in practice, we should consider the differences in how quickly economies recovered from the 1997-1998 crisis. 
South Korea’s real per capita GDP was back to pre-crisis levels within two years. 
But it took Malaysia and Thailand six years, Turkey eight years, and Indonesia and Argentina a decade to return to pre-crisis conditions. 
The difference does not lie in how wealthy each country was: Argentina was much richer than all of the other economies mentioned, except for South Korea. 
Instead, it reflects, at least partly, the structure and sophistication of production and exports. 
In 1997, South Korea would have ranked first in export sophistication, followed by Malaysia, Thailand, Turkey, Argentina, and Indonesia – a sequence that mirrors the duration of the recovery. 
Why would a more sophisticated export base support recovery from financial crisis? 
As the 2015 IMF World Economic Outlook report shows, despite the rise of global value chains, the exchange rate still matters for export growth. 
In addition, more sophisticated and differentiated export products tend to respond more to exchange-rate fluctuations. 
Currency depreciation during a crisis thus provides a bigger boost to exports and growth in economies with a more sophisticated production base. 
The experience during the Asian financial crisis bears this out. 
The depreciation of the South Korean won caused Samsung products to become more competitive, enabling the company to expand its market share. 
The main exports of Argentina and Indonesia – agricultural commodities – were far less responsive to currency depreciation. 
The IMF’s Reda Cherif, Fuad Hasanov, and Lichen Wang recently showed that export sophistication is the most robust determinant of an economy’s growth. 
But it may also be a powerful source of economic resilience. 
While emerging economies – particularly those economies that adopt flexible exchange rates and limit their external debt – may yet avoid a crisis, there is no guarantee that they will be able to do so. 
With a more sophisticated export base, however, the risks of protracted recession will be significantly diminished. 


Emerging Markets and Global Financial Reform 
BERKELEY – It is fitting that the upcoming G-20 summit is being held in Pittsburg, an old industrial center of an advanced industrial country, for the advanced countries have been allowed to set the agenda for strengthening financial systems. 
Other than schadenfreude , emerging markets have brought little to the table. 
The United States is emphasizing higher capital requirements. 
The Europeans are pushing for reform of compensation practices in the financial sector. 
While both proposals have merit, whether they will be enough to stabilize our dangerously unstable financial systems is at best dubious. 
What emerging markets can add to this agenda is, to put it charitably, unclear. 
They have said little about how they would reform financial systems. 
They can argue that this is not their problem – that the crisis of the last two years has been centered in the advanced economies, and that it is these countries’ financial systems that need to be fixed. 
But the agenda set at Pittsburgh will shape, for better or worse, not just the US and European financial systems, but also the global financial system. 
Financial markets are too integrated – and will remain so, like it or not – for whatever rules are established not to profoundly affect emerging markets. 
China, Brazil, and Russia have offered ambitious proposals, which may bear fruit in 10 or 20 years, to make the International Monetary Fund’s Special Drawing Rights a true international currency. 
But they have not said how they would reform financial systems and policies now. 
The first priority should be international banks. 
Until now, the international regime, led by the IMF and OECD, has pushed countries to allow foreign banks to enter their markets. 
It would be understandable if emerging markets, having seen deep problems in the conduct of foreign banks, now insist on domestic ownership and control of financial institutions. 
But a blanket policy would be a mistake. 
Contrary to concerns that foreign banks would cut and run at the first sign of trouble, in the current crisis they maintained a remarkable degree of support for their subsidiaries in emerging markets. 
Other things being equal, cross-border lending fell less in countries with significant foreign-bank presence than in emerging markets where foreign ownership of banks was not dominant. 
If anything, domestic banks with shallower pockets were more likely to cut back in the crisis. 
Some will say that Baltic and Southeast European countries were fortunate that responsible Swedish and Austrian banks, rather than their toxic US and British counterparts, had entered their markets. 
But this observation points to what is needed: a regime that defines the conditions to be met before a country’s banks are allowed in. 
The home country must put a cap on leverage, limit acceptable liquidity and funding practices, and have a resolution regime for winding up complex financial institutions. 
Otherwise, emerging markets should be able to say that banks from that country will not be allowed to enter. 
The second priority should be defining a strict emerging-market standard for regulating foreign banks after they are allowed in. 
Other positive aspects notwithstanding, the presence of foreign banks is associated with currency mismatches. 
In Central and Eastern Europe, foreign banks extended euro- and Swiss franc-denominated corporate, home, and car loans to firms and households with incomes in local currency, which added to corporate and household financial distress when local currencies tanked. 
Austrian, Italian, and Swiss regulators, seeing that their banks’ assets and liabilities were in their own currencies, looked the other way. 
The implication is that emerging markets, while encouraging foreign banks’ entry, should at the same time strictly regulate such banks’ local lending practices. 
And, since strict regulation, if adopted unilaterally, might simply cause foreign banks to shun a country, emerging markets need to put up a united front. 
Finally, emerging markets need to redouble their efforts to build bond markets, but on a local basis. 
Countries with more developed bond markets experienced less negative fallout from the crisis, since their large firms retained access to non-bank sources of finance. 
But opening those markets to foreign investors, which has been the dominant strategy for developing them, was a mixed blessing. 
South Korea, the Asian country with the largest share of foreign investment in its securities market, also experienced the sharpest price and exchange-rate declines as those investors, mainly hedge funds, were forced to deleverage and repatriate their funds. 
Encouraging participation by foreign investors is a quick way to jump-start local bond market activity. 
But recent experience suggests that quickest is not best. 
Regulations limiting foreign participation to prudent levels should be part of the new international regime. 
The next chair of the G-20 will be South Korea. 
Emerging markets should start preparing now to ask it for the floor. 

The Great Emerging-Market Bubble 
LONDON – Something has gone badly wrong in the emerging economies that were supposed to be shaping, even dominating, the future of the world. 
The search for culprits is under way: commodity prices, fracking, US interest rates, El Nino, China, these and others lead the field. 
But the answer is simpler and more traditional. 
It is politics. 
Look at Brazil. 
There an economy once tipped for ever-lasting boom has barely grown for more than two years, and is currently shrinking. 
Falling prices for its commodity exports haven’t helped, but Brazil’s economy was supposed to be about far more than just harvests and extractive industries. 
Or look at Indonesia. 
That economy is still expanding, but at a rate – 4.7% annually in the latest quarter – that is disappointing in terms both of previous expectations and of population growth. 
The same can be said of Turkey, where growth has sagged to 2.3% in the latest quarter – which at least beats population growth but is meager compared with the country’s go-go years of 2010 and 2011, when it expanded by 9%. 
Or South Africa, where economic progress has constantly been too slow, whether in boom years for gold and other resources or busts, to make any real dent in poverty levels. 
Then there is China itself, whose slowdown is everybody else’s favorite explanation for their own sluggishness. 
There, private economists are back enjoying their favorite pastime during periods of economic stress, namely trying to construct their own indices for GDP growth as at such times they do not believe the official statistics. 
Officially, Chinese growth is rock-steady at 7% per year, which happens to be the government’s declared target, but private economists’ estimates mostly range between 4% and 6%. 
One mantra of recent years has been that, whatever the twists and turns of global economic growth, of commodities or of financial markets, “the emerging-economy story remains intact.” 
By this, corporate boards and investment strategists mean that they still believe that emerging economies are destined to grow a lot faster than the developed world, importing technology and management techniques while exporting goods and services, thereby exploiting a winning combination of low wages and rising productivity. 
There is, however, a problem with this mantra, beyond the simple fact that it must by definition be too general to cover such a wide range of economies in Asia, Latin America, Africa, and Eastern Europe. 
It is that if convergence and outperformance were merely a matter of logic and destiny, as the idea of an “emerging-economy story” implies, then that logic ought also to have applied during the decades before developing-country growth started to catch the eye. 
But it didn’t. 
The reason why it didn’t is the same reason why so many emerging economies are having trouble now. 
It is that the main determinants of an emerging-economy’s ability actually to emerge, sustainably, are politics, policy and all that is meant by the institutions of governance. 
More precisely, although countries can ride waves of growth and exploit commodity cycles despite having dysfunctional political institutions, the real test comes when times turn less favorable and a country needs to change course. 
That is what Brazil has been finding so difficult for the past four disappointing years. 
Unable to keep inflation under control without causing a recession, the country has, since 2010, got stuck not because of bad luck, or any loss of entrepreneurial spirit in its private sector, but because of political failings. 
Brazil’s government has been unwilling or unable to cut back its bloated public sector, has been mired in vast corruption scandals, and yet its president Dilma Rousseff continues to evince a fondness for just the sort of state-led capitalism that leads to exactly these problems. 
The democracies of Brazil, Indonesia, Turkey, and South Africa are all currently failing to perform what is a basic task for any political system: to mediate smoothly between competing interest groups and power blocs in order to permit a broader public interest to prevail. 
By that is meant essentially a public interest in allowing the economy to evolve flexibly, so that resources move from uses that have become unprofitable to ones that have a higher potential. 
A clogged up economy, one that does not permit such creative destruction and adaptation to new circumstances, is one that will not grow sustainably. 
Is this something that democracies, especially immature ones with fragile institutions of the rule of law and freedom of speech, are simply bad at, when compared with authoritarian regimes? 
Certainly, what these stumbling economies are guilty of is a failure to learn from Singapore, a system whose managed democracy is celebrating its 50th anniversary this year, and which has successfully avoided the sort of interest-group sclerosis and corruption that is holding back Brazil, for example. 
One comfort, perhaps, for the democrats is that right now China is failing to learn the Singaporean lesson, too. 
Its current slowdown appears to arise from a failure by the Communist Party to challenge the monopoly powers of state-owned enterprises and to free up new sectors for private enterprise. 
No matter. 
It is not a question of whether democracy or authoritarianism is best. 
The bottom line is that unless emerging economies can ensure that they remain flexible and adaptable, they will not continue to “emerge.” 
And the determinant of that flexibility and ability to adapt lies in political institutions and their willingness to challenge interest groups, mediate social conflicts, and maintain the rule of law. 
It’s the politics, stupid. 

Emma Bonino and The War For Europe's Future 
CAMBRIDGE: Everybody agrees: Europe needs a revolution of its economic structure. 
But how to achieve this is another matter altogether. 
Advocates of the status quo note that there is no crisis, so why rush? 
They place their faith in a gradual restructuring and, above all, in the myriad high-tech companies now being started by the young. 
Somehow, they reckon, the information revolution will arrive in a European way. 
From here it is but a short step to proclaiming that the American model cannot work in Europe because it is socially reprehensible and, in any case, poised to crash any day now. 
On the other side of the debate, Europe's desperate reformers see no way to trim, roll back or blow up the Continent's obsessive bureaucracies and consensual politicians. 
In today's Europe they see only hints of a possibility – a glass far less than half full – for reform and restructuring, and are impatient at Europe's slow progress. 
True, Europe is moving at a painfully slow pace, but the attack on the State and its allies in an ossified supply side and the dinosaurs of industrial stake holders, is widening. 
New fronts in this war are opening every day. 
But this is not an issue of sweeping moves that will change the world from one day to the next. 
The devil is in the details, and that is where the attack must focus. 
A wonderful example is the referendum promoted by Emma Bonino, Italy's star political renegade. 
Among many issues, the referendum she put forward proposes three measures: end automatic tax withholding; end judicial power to reinstate dismissed workers; end automatic withholding of union dues from pay checks. 
Three cheers for Emma Bonino; never mind if she fails. 
Rome was not built in a day and it will take many such assaults to reform it! 
At first sight it seems unreasonable, indeed irresponsible, to undermine the all-too difficult task of collecting taxes by taking away the device of automatic withholding. 
It is hard enough to collect taxes, so how can societies possibly go back to a world where the tax office has to run after the taxpayer? 
True, withholding makes tax collection easier and that is the point. 
The referendum's advocates believe that making it much harder for the state to tax will force governments to retrench on the currently untouchable spending front. 
This is an old idea from the California tax revolt of twenty-five years ago that was an important part of America's supply side revolution. 
Milton Friedman always said: take away the government's tax revenues and that way, and only that way, can you get spending cuts. 
There is no better way to undermine taxation then to make government work hard to get its money. 
So, let people get their paychecks and then force the government to come and take the money from them. 
Only when the difference between gross and after-tax income becomes painfully obvious will tax payers revolt against the taxes they bear. 
Only when they figure out very concretely that half of the days they work are for the government will they really start agitating about big government. 
Here, indeed, is a wonderful plot to force the State to retrench, but Italians shouldn't get their hopes up too early, for Italy's supreme court ruled that taxation is not for the people to decide. 
The proposal about union dues works just the same way. 
At present dues are automatically withheld and hence workers have basically no clue as to how much they pay for their union. 
But if it becomes a matter of individual worker choice – do I send a check or do I keep the money? – union revenues and membership and power will shrink very rapidly. 
If one believes that less overweening unions and a smaller state are the first steps toward a better supply side in Europe, this referendum item deserves praise. 
The third issue highlighted by Ms. Bonino is the quaint Italian labor law that allows a dismissed worker to go to court and seek reinstatement. 
It is obvious that this measure creates havoc in business and leads to deeply unproductive outcomes. 
There is no issue here of weakening workers' rights but rather one of redressing a now grotesquely even playing field. 
The proposed alternative of separation payments but no recourse to the courts is the right economic answer, or at least it goes in the right direction. 
It will be interesting to watch status-quo Italian politicians face up to these issues. 
There are no supply-siders in Italy except the referendum-rebels; in Italy everybody near government is playing the end game of accepting the existing system and getting the maximum out of it. 
The central bank stands in the way of cross border financial mergers; union bosses stand in the way of free choice for workers; business leaders have too much to gain from the State to see their interest in rocking the boat. 
Yet, over the next few years Italy ultimately cannot avoid the road laid out by the referendum. 
Economic performance has been horrible for two decades; the system is grinding to a halt. 
The stock market, rightly looking ahead, already sees prospects for change. 
Italy's politicians and administrators, as always and as elsewhere in Europe, are missing the message. 
In the meantime, even if the referendum is held and eventually lost under the combined onslaught of bureaucrats, politicians and union bosses, the modernization revolution is alive. 

Can Macron Redraw the Political Map? 
WASHINGTON, DC – Many commentators have described Emmanuel Macron’s victory in the French presidential election as a triumph for the center right, because he received votes that otherwise would have gone to the scandal-plagued mainstream conservative candidate, François Fillon. 
But this electoral dynamic does not capture the meaning of Macron’s victory. 
It would be more accurate to say that Macron cut through traditional party divides and stood as a candidate for those who believe that, with proper management and new technologies, European integration and the forces of globalization can deliver widely shared benefits. 
By contrast, most of Macron’s opponents simply stoked fears about today’s economic realities. 
Consider the following statistics from the French presidential election’s first round: 42% of Macron’s supporters have in the past sympathized with the Socialist Party; and another 36% have tended to support centrists. 
These data indicate that voters on the left and in the center constitute the bulk of Macron’s support base, and that they regarded him as a center-left, rather than a center-right, candidate. 
Indeed, Macron hails from the modern, pro-globalization center left. 
He was most recently a member of former French President François Hollande’s government; and, earlier in his career, his mentor was former Socialist Prime Minister Michel Rocard. 
But even if Macron did not make a clean break with his political past, he broke through traditional party and political-identity barriers, by reaching out to voters across the political spectrum, except for those on the extreme left and extreme right. 
If anything, the many attempts to squeeze Macron into a traditional French political archetype show that European and global politics desperately need to be reframed to account for new arguments, narratives, and fault lines. 
The transitional government that Macron formed just after the election reflects great diversity, not only in terms of gender, but also with respect to political experience and affiliation. 
Macron’s cabinet draws from centrist, leftist, and right-leaning parties, including the Socialists and Greens. 
But his appointment of center-right Republicans such as Bruno Le Maire and Gérald Darmanin is of particular importance, because polling data indicate that Macron’s message resonated the least with right-leaning voters. 
Moreover, by appointing Édouard Philippe, also of the Republicans, as his prime minister, Macron firmed up his commitment to transforming French politics. 
His government will span the political spectrum from day one. 
And with such diverse political representation, Macron could bolster the prospects of his own party, La République En Marche !, in the National Assembly election this month. 
A strong showing would significantly improve his chances of fulfilling key campaign promises. 
As a social-liberal policymaker with a good understanding of how the global economy works, Macron could become what progressives everywhere have been looking for. 
To do that, he will have to forge a new social contract that protects the most vulnerable from the rapid shifts and abrupt disruptions inherent in a flexible, open twenty-first-century economy. 
This is undoubtedly a huge challenge. 
But if Macron succeeds, he will have delivered on reformists’ long-held idea of “modernity.” 
A new French social contract for the twenty-first century must rest on three pillars, starting with strong social-security policies, which will allow for improved labor-market flexibility and greater economic dynamism. 
For example, France’s current system would be much more efficient if it accounted for today’s increasingly mobile workers. 
French citizens would all benefit from more portable social-protection measures that follow them throughout their lives, whether they are pursuing new jobs or education and retraining opportunities. 
The second pillar is an industrial system that fosters technological diffusion and innovation, and encourages entrepreneurship, so that new entrants can compete with incumbent firms across all sectors. 
And, finally, any new social contract must maintain a firm commitment to economic openness, European integration, and globalization. 
Those who voted for Macron in the first round of the election – when the field was still crowded with other candidates – believe that these three pillars are not just compatible, but mutually reinforcing. 
Whereas candidates on the left have traditionally focused only on social solidarity – sometimes to the point of rejecting European integration – Macron has promised to stand simultaneously for social justice, growth, and openness. 
And for those on the center right, he has promised that, with reformed social policies, France can also have more market flexibility and innovation. 
By developing a new social contract, Macron could redraw the French political map. 
Right now, France is essentially stuck with “double conservatism,” whereby conservatives on the right argue for weaker social policies as a means to improve competitiveness, while “conservatives” on the left argue that that the existing system simply cannot be reformed. 
Under Macron, a new progressive political system that is based on a synthesis of social policies and liberalization could gradually emerge. 
Moreover, Macron will not be playing defense with respect to Europe. 
He has made his full commitment to the European project well known, and an important section of the French population seems to be standing with him. 
Unlike many of his opponents in the election, Macron sees Europe as a source of solutions, not problems. 
A successful Macron presidency would represent a step forward in using the EU’s attractive scale, pooled risk, and greater influence in global affairs to turn Europe into an engine of human progress. 
That is a fitting role for France and its president. 


Empowering Girls 
WASHINGTON, DC – In the lottery of life, being born female in a poor country places one at a double disadvantage. 
Women in poor countries have the highest global incidence of poverty of any demographic group, along with the worst health conditions, the least access to education, and the highest likelihood of being victims of violence. 
Gender inequality – through workplace exclusion and lower pay – costs the world a staggering 15.5% of GDP. 
Denying women opportunities to develop their potential means that societies forego their contribution. 
Yet the frustrating reality is that effective solutions to address gender inequality can be difficult to identify. 
At the most extreme end of the scale of disempowerment are the 30 million girls deemed at risk of female genital mutilation (FGM) over the next decade. 
The procedure is almost universal in Somalia, Guinea, Djibouti, Egypt, Eritrea, Mali, Sierra Leone, and Sudan. 
The World Health Organization warns that affected women suffer long-term health problems and higher rates of perinatal death. 
But the problem is easier to identify than it is to solve. 
Legal reforms have had little impact. 
Even in the United Kingdom, where FGM was outlawed 30 years ago, not a single person has been successfully prosecuted. 
The first-ever recorded figures, reported in July, showed that there were 5,702 new cases in England between April 2015 and March 2016. 
At least 18 young women and girls were subjected to FGM in the UK, while most underwent the procedure in Africa. 
There has been an overall decline in the prevalence of FGM over the last three decades. 
But not all countries have made progress. 
In fact, on current trends, the number of girls and women undergoing FGM will rise significantly over the next 15 years. 
This is not to say that charities and governments working in this area are not doing some excellent work. 
But we need more high-quality studies of how to identify and scale up effective programs. 
Child marriage is another unacceptable custom that robs girls of opportunity. 
From 2011 to 2020, more than 140 million girls worldwide will become child brides – defined by the United Nations as marriage before age 18. 
In nine countries – Niger, Central African Republic, Chad, Bangladesh, Mali, Guinea, South Sudan, Burkina Faso, and Malawi – UNICEF estimates that child marriage rates are higher than 50%. 
For young brides, the effects are far-reaching: lower education levels and lifetime earnings, higher rates of domestic violence, greater risk of dying during pregnancy or childbirth, and increased mortality rates for their children. 
As with FGM, laws alone are not enough to address the problem. 
Consider Bangladesh, where 52% of girls are married by the time they reach the legal age of 18. 
Numerous laws prohibiting child marriage and dowries have had scant effect, with 18% of girls – the world’s highest rate – married before they turn 15. 
Programs by community groups to give adolescent girls life skills and training have had limited impact. 
Analysis in Bangladesh by economists from Duke University and MIT’s Abdul Latif Jameel Poverty Action Lab suggests that providing financial incentives to delay marriage could be the most effective strategy. 
Girls in the poorest 20% of the global population are more than twice as likely as those in the wealthiest 20% to be married young. 
A promising program in southern Bangladesh gave cooking oil to parents of unmarried girls. 
Every four months, participants received four liters of oil, conditional upon a monitor confirming that the girls were still unmarried. 
This modest incentive worked: daughters of recipients were up to 30% less likely to marry before 16, yielding benefits four times higher than the costs. 
Promisingly, the program also improved girls’ education levels: daughters of recipients were up to 22% more likely to remain in school. 
This matters, because one of the key targets of the Millennium Development Goals, which concluded in 2015, was to eliminate gender disparity in primary and secondary education. 
Good progress was made in the primary sector, but access to secondary and university-level education still remains highly unequal. 
Differences in enrollment in primary education have decreased in all regions, but Sub-Saharan Africa, the Middle East, and North Africa lag behind. 
Reducing the gender gap in schooling would have benefits that reach the next generation as well. 
More education for girls means better health and nutrition outcomes for their children. 
How we achieve this will vary. 
Providing free school uniforms, for example, helps in some places, but not everywhere. 
In Bangladesh, the intervention for child marriage reduction had auxiliary benefits in furthering secondary education. 
New research shows that, globally, money spent to reduce gender disparity in education yields benefits around five times higher than the costs. 
Many well-meaning and even unquestionably good ideas to reduce gender inequality are harder to analyze and quantify. 
Ensuring that women have equal rights to inherit property, sign a contract, register a business, or open a bank account would all cost little and could have far-reaching benefits. 
Despite data problems, a panel of Nobel laureates convened by Copenhagen Consensus identified such measures as one of the 19 best development targets to pursue, with every dollar spent producing benefits worth more than $15. 
We do know how to tackle one problem – and we have ample data on costs and benefits. 
Some 225 million women who want to avoid pregnancy are not using safe and effective family-planning methods. 
The reasons range from a lack of access to information or services to lack of support from their partners or communities. 
Ensuring universal access to contraception would cost $3.6 billion annually, but would mean 150,000 fewer maternal deaths and 600,000 fewer orphans. 
Moreover, the demographic dividend from fewer dependents and more people in the workforce would accelerate economic growth. 
The total benefits are an astounding 120 times higher than the costs. 
There are no quick fixes for gender inequality, but one thing is clear: not all efforts are equally good or supported by sound data. 
On moral and economic grounds, policymakers should adopt those measures that do the most to empower girls and women. 

A Fish Called Development 
GENEVA – The just-adopted Sustainable Development Goals (SDGs) are expected to herald the start of a new era in global development, one that promises to transform the world in the name of people, the planet, prosperity, peace, and partnership. 
But there is an ocean of difference between promising and doing. 
And, while global declarations are important – they prioritize financing and channel political will – many of today’s pledges have been made before. 
In fact, whether the SDGs succeed will depend to a significant degree on how they influence other international negotiations, particularly the most complex and contentious ones. 
And an early test concerns a goal for which the Global Ocean Commission actively campaigned: to “conserve and sustainably use the oceans, seas, and marine resources for sustainable development.” 
When political leaders meet at the tenth WTO Ministerial Conference in Nairobi in December, they will have an opportunity to move toward meeting one of that goal’s most important targets: prohibition of subsidies that contribute to overfishing and illegal, unreported, and unregulated fishing by no later than 2020. 
This is not a new ambition; it has been on the WTO’s agenda for many years, and it has been included in other international sustainable development declarations. 
But, even today, countries spend $30 billion a year on fisheries subsidies, 60% of which directly encourages unsustainable, destructive, or even illegal practices. 
The resulting market distortion is a major factor behind the chronic mismanagement of the world’s fisheries, which the World Bank calculates to have cost the global economy $83 billion in 2012. 
In addition to concerns about finances and sustainability, the issue raises urgent questions about equity and justice. 
Rich economies (in particular Japan, the United States, France, and Spain), along with China and South Korea, account for 70% of global fisheries subsidies. 
These transfers leave thousands of fishing-dependent communities struggling to compete with subsidized rivals and threaten the food security of millions of people as industrial fleets from distant lands deplete their oceanic stocks. 
West Africa, where fishing can be a matter of life and death, is being particularly hard hit. 
Since the 1990s, when foreign vessels, primarily from the EU and China, began to fish on an industrial scale off its shores, it has become impossible for many local fishers to make a living or feed their families. 
From 1994 to 2005, Senegal’s catch fell from 95,000 to 45,000 tons, according to government estimates, and the country lost half of its fleet of traditional wooden pirogues. 
As the fish stocks collapsed in 2005, 5,000 people decided to put their redundant fishing boats to a different use, by fleeing to the Spanish Canary Islands. 
A year later, more than 30,000 others made the same perilous journey, and an estimated 6,000 drowned. 
Senegalese and Mauritanian fishermen and their families are also among the thousands of people risking their lives to get to Europe today. 
On the high seas, the distortion is even larger. 
According to fisheries economists, subsidies by some of the world’s richest countries are the only reason large-scale industrial fishing in areas beyond coastal countries’ 200-mile exclusive economic zones is profitable. 
But fish do not respect international boundaries, and it is estimated that 42% of the commercial fish being caught travel between countries’ exclusive zones and the high seas. 
As a result, industrial fishing far from shore undermines developing countries’ coastal, mostly artisanal, fisheries. 
Eliminating harmful fisheries subsidies by 2020 is not only crucial for conserving the ocean; it will also affect our ability to meet other goals, such as our promises to end hunger and achieve food security and to reduce inequality within and among countries. 
The credibility of both the WTO and the newly adopted SDGs will be on the line in Nairobi. 
The Global Ocean Commission has put forward a clear three-step program to eliminate harmful fishing subsidies. 
All that is needed is for governments finally to agree to put an end to the injustice and waste that they cause. 
Fortunately, there are encouraging signs. 
Nearly 60% of the WTO’s membership supports controlling fisheries subsidies, with support from the African, Caribbean, and Pacific Group of developing countries – together with the EU’s contribution to improve transparency and reporting – giving new momentum to the effort. 
Among the initiatives being put forward in advance of the Nairobi meeting is the so-called “NZ +5 proposal.” 
Co-sponsored by New Zealand, Argentina, Iceland, Norway, Peru, and Uruguay, the plan would eliminate fisheries subsidies that affect overfished stocks and contribute to illegal, unreported, and unregulated fishing. 
The Global Ocean Commission urges the remaining 40% of the WTO’s members – and especially the biggest players currently blocking this process – to accept the relatively modest proposals on the table. 
A sustainable future for our planet and its oceans depend on it. 

The End of AIDS 
NEW YORK – The AIDS pandemic claimed around 36 million lives between 1981 and 2016, and a similar number around the world currently live with the HIV virus. 
Some 1.2 million people died of AIDS last year, and another 1.8 million were infected. 
Those statistics are daunting, but the startling news is that the goal of an “AIDS-Free Generation” is realistically within reach. 
The required policy steps should be agreed in the early days of US President-elect Donald Trump’s administration. 
The key reason that the epidemic can be ended is a scientific finding back in 2011 that showed that HIV-positive individuals receiving antiretroviral (ARV) treatment suppress the HIV virus in their bloodstreams so dramatically that they are very unlikely to transmit the virus to others through sex or shared needles. 
This finding confirmed the concept of “treatment as prevention.” 
If a high enough proportion of HIV-positive individuals receive ARV treatment, it is possible not only to save their lives, but also to break the transmission of the virus itself, thereby ending the epidemic. 
Building on this idea, AIDS specialists developed two crucial ideas: “90-90-90” and the “cascade of AIDS care.” 
The 90-90-90 program aims to ensure that by the year 2020, 90% of all HIV-infected individuals know that they are infected (the first 90); 90% of all those who know they are infected are receiving ARV treatment (the second 90); and 90% of all those receiving ARV treatment successfully suppress the HIV virus in the blood. 
The idea of the cascade is that if each of the three “90s” is achieved, the proportion of all HIV-infected individuals with viral suppression would be 90% x 90% x 90%, which is equal to 72%. 
If 72% of those infected today can no longer infect others, the HIV/AIDS epidemic will be curtailed. 
Indeed, if 90-90-90 in 2020 becomes 95-95-95 by the year 2030, the proportion of HIV-positive individuals that cannot infect others would rise to 86%. 
The ongoing epidemic would grind to a halt, just as a measles epidemic among children in a metropolitan area ends when 80% percent of the children are vaccinated, even if the other 20% percent of children remain unvaccinated. 
Some cases would remain, but the AIDS catastrophe would be over. 
The goal of reaching 90-90-90 by the year 2020 and 95-95-95 by 2030 is realistic, if countries strive for success. 
Sweden recently announced that it has reached the 90-90-90 targets. 
Many other high-income countries are close. 
With international help and national efforts, 90-90-90 could be achieved not only in high-income countries but in developing countries as well. 
For most of the world, the biggest challenge is ensuring that by 2020 at least 90% of HIV-positive individuals are tested and learn that they are infected – the first of the three 90s. 
To reach this goal, people who are symptomatic or at high risk need to be connected to the health system for testing. 
Once an HIV-infected individual tests positive, achieving the second 90% (AVR treatment) depends mainly on funding and staffing; with a sufficient health budget, medicines can be made available for all infected individuals. 
Achieving the third 90% (suppression of the viral load) depends mainly on whether AVR-treated individuals take the medications on schedule. 
That may require social support to encourage the patients to continue the medications even when they feel healthy, and to help ensure the timely and affordable supply of medications. 
The 90-90-90 targets can be reached even among impoverished and hard-to-reach populations, thanks to a new and powerful public-health solution: community health workers (CHWs) supported by smartphones. 
CHWs are local community residents with at least a high-school education, who are trained for a few months in the management of specific health challenges, such as identifying potentially HIV-infected individuals, bringing them to the clinic for testing, and helping them to adhere to their medical protocols. 
New smartphone apps help them to do their job. 
In rural Africa, where doctors are typically very scarce and AIDS prevalence is often high, the high life-saving potential of CHWs has been very well demonstrated and documented. 
Moreover, being a CHW offers a good way for young people to start their careers. 
Though initial compensation is very modest (perhaps $100 per month), the experience and training can put these young workers on a path toward further education (such as nursing), rising skills, and higher incomes. 
Yet, despite the potential to bring the AIDS epidemic to an end, the world is currently stuck in limbo. 
Sadly, our governments operate not on the basis of bold goals and the means to achieve them, but on “business as usual.” 
Sixteen years ago, business as usual meant almost no treatment of poor people with AIDS, because financing was not available. 
At that time, I recommended a new “Global Fund” to finance AIDS treatment, an idea that was adopted and then helped to start an era of AIDS control in Africa. 
US President George W. Bush’s administration made a major US financial commitment to AIDS, and the Global Fund and US programs together helped millions of people gain access to treatment. 
Yet, after the 2008 financial crisis erupted, President Barack Obama leveled off the US financing, and the global AIDS control effort got caught in a “half-way” mode. 
As of 2016, roughly half of all HIV-positive individuals are on ARV treatment, far short of the 90% target. 
The incoming Trump administration should grasp the historic opportunity to help bring AIDS to an end through a modest financial commitment by governments and other funders. 
An extra $10 billion per year from all sources would likely be sufficient to get the job done, with just $3-4 billion annually from the US. 
Skeptics will scoff that Trump is an unlikely champion of such an effort; but, frankly, who would have guessed 15 years ago that Bush would be the key mover of the financial scale-up of the fight against AIDS? 
History is full of positive as well as negative surprises; the end of AIDS can be a historic achievement of our generation, if we reach for it. 

The End of the European Supernation? 
MADRID – Since the eurozone crisis began in 2008, the European Union has, from a political perspective, led an intergovernmental life in supranational clothing. 
But as the EU prepares to negotiate Britain’s exit, it is becoming increasingly apparent that the Union no longer has any clothes at all. 
The question now is whether the EU’s status as an enterprise dominated by its member states is permanent. 
The supremacy of member states – especially Germany – in EU decision-making is far from new. 
It was evident throughout the euro crisis, when German Chancellor Angela Merkel and her finance minister, Wolfgang Schäuble, along with the European Council’s then-president, Belgium’s Herman Van Rompuy, took center stage. 
But the myth of European supranationalism persisted. 
In particular, after Jean-Claude Juncker took over as President of the European Commission in 2014, the EU’s executive branch began to bill itself as a Brussels-based institution capable of leading the way toward what Juncker called in his 2015 State of the Union speech “more Union in our Union.” 
This year, Juncker delivered a far more sober speech. 
Indeed, it seems that the June Brexit vote has chastened not only Juncker, but all of the Commission’s Europhiles, who have largely been sidelined in the ensuing battle over what Europe will look like. 
(The notable exception is Competition Commissioner Margrethe Vestager’s very public stand on taxation, the outcome of which is still to be determined.) 
Instead, that battle has been playing out largely within the European Council, with Merkel assuming a central role. 
While it is impossible to say exactly what the EU that emerges will look like, it seems clear that it will look nothing like the Brussels-centric, deeply integrated Shangri-La long sought by many at the Commission. 
Council President Donald Tusk has been especially adamant on this point, criticizing “naive Euro-enthusiastic visions” and calling for a more modest Europe that promises less and delivers more. 
Tusk reiterated this position just before the recent informal European Council summit in Bratislava – the first not to include the United Kingdom – declaring that “giving new powers to European institutions is not the desired recipe.” 
Merkel, for her part, spent the summer preparing a member-state-led approach to the Brexit negotiations and Europe’s future. 
The discussion and outcome of the Bratislava summit underscored these efforts. 
As for the Commission, its only real action in recent months was to appoint Michel Barnier in July as its chief representative in the Brexit negotiations. 
With the Council taking command of that process, it is far from clear what Barnier will actually do. 
In fact, with member states’ domestic politics playing a more important role than the European Council in driving whatever EU policy momentum exists, even an intergovernmental EU may be too much to hope for. 
Consider Germany, where the dreadful performance of Merkel’s Christian Democrats in a string of regional elections, including in her home state of Mecklenberg-West Pomerania, has caused many to question the country’s trajectory. 
Now, the wait is on for next year’s federal election, which may send the country – and its approach to EU leadership – in a very different direction. 
Uncertainty is also coming from other directions: Italy will hold a constitutional referendum by the end of this year, and France and the Netherlands will hold elections next year. 
None of this is to say that supranationalism is a thing of the past. 
But it is likely that parochial interests will become even more dominant, at least until major elections are complete. 
An opening for a European approach may follow, but only if the current torpor does not lead to institutional atrophy. 
Earning the public’s trust is crucial. 
In the past, the EU has forged ahead, as if the public approved. 
It does not. 
As Hubert Vedrine, a former French foreign minister, recently estimated that only 15-20% of Europeans are Europhiles, another 15-20% oppose the EU outright, and the remaining 60% are “euro-allergic.” 
It is a rough but fair portrait. 
Put simply, for much of the public, EU institutions lack legitimacy. 
The reasons are well known: poor communication, a democratic deficit, finger pointing between member states and the Commission, a flawed institutional architecture. 
Juncker and Martin Schulz, the president of the European Parliament, can speak about méthode communautaire until they are blue in the face; it is not happening in the foreseeable future. 
The result is clear: in the struggle over how Europe will develop, the EU institutions lack the authority or support to put up much of a fight – or even fully enter the ring. 
But this moment of national navel-gazing among the member states may actually present an important opportunity for EU institutions to work on closing the legitimacy gap. 
This means resisting the urge to wax poetic about future actions that never actually materialize, or to roll out impressive-looking programs with few real-world effects. 
It means, instead, completing key initiatives, most urgently the banking union; improving accountability; and ensuring that the public understands what the EU institutions are doing. 
And it means staying out of political conflicts, which neither the European Commission nor the European Parliament are in any position to win. 
If this approach seems cautious, that is because it is. 
Now is the time not for risky shortcuts, but for meticulous, well-planned, incremental measures that gradually and consistently earn the public’s trust. 
The relatively modest list of concrete priorities issued by Juncker and Commission First Vice-President Frans Timmermans is a good start. 
Most people are not stupid. 
They can generally tell when they are being strung along, and they are tired of empty rhetoric and half-baked initiatives. 
Only if the EU institutions deliver genuine action, in a credible and transparent manner, can they ensure that the current inter-governmentalism is just a phase and that the future of Europe is Europe. 

Europe after Merkel 
PRINCETON – Next year, Germany will hold a federal election, and the new Bundestag will choose the country’s next chancellor. 
Whether or not Angela Merkel retains the role – at the moment, things are not looking good for her or her Christian Democratic Union (CDU) – one thing is certain: Germany’s chancellor will no longer be de facto Chancellor of Europe. 
That will profoundly change how Europe works – some of it for the better. But the disruption could be nasty. 
It was not inevitable that a German chancellor would assert so much authority over the European Union. 
It was former Chancellor Helmut Kohl who made it so. 
After overseeing German unification in 1989-1990, he began to pursue what he viewed as his historical task of unifying Europe as well. 
Kohl led Europe, from agreement on the Maastricht Treaty in 1991 to critical decisions about the shape of the euro in 1998. 
The concept of a common European currency could have died many times during those years. 
Kohl’s close associate Wolfgang Schäuble, who is now Germany’s finance minister, asserted in 1994 that only five countries – not including Italy – were ready to adopt the single currency. 
But Kohl pushed on, insisting that Italy be included. 
Kohl’s successor, Gerhard Schröder, took a very different approach. 
Lacking any personal memories of World War II, he – like a growing share of Germans at the time – was confident that Germany could rely on itself, without continually reaffirming its ties to Europe. 
Schröder actively pursued Germany’s national interests. 
He chastised the European Central Bank when it kept interest rates too high. 
And his government defied Europe’s fiscal rules – described, accurately, by then-European Commission President Romano Prodi as “stupid.” 
The German economy had come to a near-halt, and more austerity would have caused more – and possibly long-lasting – damage. 
Schröder nearly gutted the EU’s corporate takeover rules to protect Volkswagen. 
His only “pro-European” gesture was to wave Greece into the eurozone. 
Early in her tenure, which began in November 2005, Merkel seemed to resemble Schröder more than Kohl. 
Much younger than Schröder and raised in East Germany, she was even less connected to the significance of “post-war Europe,” both in time and geography. 
Feeling no compulsion constantly to present her “pro-European” credentials, she was content to serve simply as German Chancellor. 
At first, that worked just fine. 
European economies – including Germany – were riding a giant global economic and financial bubble. 
While virtually every country skirted the fiscal rules, Europeans believed that the euro was fueling economic growth and would eventually lead them to political union. 
Simply put, Europe did not need a chancellor. 
That all changed with the post-2008 global economic recession, which exposed weaknesses in the monetary union’s structure. 
On top of the damage from the global economy’s woes, the eurozone was faced with a looming Greek government bankruptcy. 
By March 2010, it was clear that the Greek crisis was not going to resolve itself, and Merkel, slowly but surely, began to take charge. 
She did not relish the task. 
On the contrary, she operated on the assumption that the euro was “a machine from hell” – a mess and a burden for her and her country. 
But she had little choice; whenever a major crisis-management decision had to be made, all eyes turned to her. 
Merkel acted as European Chancellor, but always kept her focus on German interests. 
She understood that the German public would not tolerate its taxes being spent on Europe. 
Spending on Greece, in particular, touched a nerve. 
So Merkel did the bare minimum – just enough to prevent a meltdown, but far too little to put an end to the Greek or the broader euro crisis. 
As a result, the crisis continued to develop and take on new forms, including, most dangerously, in the banking sector in Italy, the “fault line of Europe.” 
In late 2011, Merkel engineered the replacement of elected governments by technocrats in Greece and Italy. 
No one was happy, and political protest movements gained strength everywhere, including in Germany, where the right-wing, anti-euro Alternative for Germany (AfD) party was born in February 2013. 
Merkel took a principled stand on the refugee crisis, accepting more than a million refugees into Germany. 
But she did so without consulting her European partners or her own citizens. 
She was soon punished at home. 
The CDU has lately suffered a string of humiliating losses in state elections, while the AfD has made substantial gains. 
For now, Merkel retains her role as de facto European Chancellor, simply because there is no alternative. 
Italian Prime Minister Matteo Renzi still seeks Merkel out when he wants “flexibility” on budget rules. 
British Prime Minister Theresa May’s first official overseas trip was to Berlin. 
But both Germany and Europe are changing. 
The AfD’s recent gains have come by stirring xenophobic sentiments. 
Even if Merkel continues as German Chancellor after next year’s election, she will have much weaker support. 
Meanwhile, the European economy remains moribund, with the Italian fault line threatening to send shockwaves through Europe. 
Trust in European institutions has dissipated, and commercial ties among European countries have predictably eroded, as exporters look to more rapidly growing markets in Asia and the United States. 
Germany’s next chancellor, whoever it is, will have neither German backing nor European acceptance to serve as European Chancellor. 
The first casualty could be Greece, which, in lieu of the debt relief that Merkel has been unable to deliver, may finally have to exit the eurozone, leading the entire EU into uncharted territory. 
But the consequences may not be all bad. 
With no one in charge, the “stupid” fiscal rules will be more easily ignored. 
Such an expansion of national sovereignty could be a positive development, if it leads to what Harvard’s Larry Summers calls “responsible nationalism.” 
Eurozone governments will need to serve their citizens rather than some abstract European ideal, and live by the discipline of the ballot box and the market. 
A German as European Chancellor would only tear Europe further apart. 

Liberal World Order, R.I.P. 
NEW DELHI – After a run of nearly one thousand years, quipped the French philosopher and writer Voltaire, the fading Holy Roman Empire was neither holy nor Roman nor an empire. 
Today, some two and a half centuries later, the problem, to paraphrase Voltaire, is that the fading liberal world order is neither liberal nor worldwide nor orderly. 
The United States, working closely with the United Kingdom and others, established the liberal world order in the wake of World War II. 
The goal was to ensure that the conditions that had led to two world wars in 30 years would never again arise. 
To that end, the democratic countries set out to create an international system that was liberal in the sense that it was to be based on the rule of law and respect for countries’ sovereignty and territorial integrity. 
Human rights were to be protected. 
All this was to be applied to the entire planet; at the same time, participation was open to all and voluntary. 
Institutions were built to promote peace (the United Nations), economic development (the World Bank) and trade and investment (the International Monetary Fund and what years later became the World Trade Organization). 
All this and more was backed by the economic and military might of the US, a network of alliances across Europe and Asia, and nuclear weapons, which served to deter aggression. 
The liberal world order was thus based not just on ideals embraced by democracies, but also on hard power. 
None of this was lost on the decidedly illiberal Soviet Union, which had a fundamentally different notion of what constituted order in Europe and around the world. 
The liberal world order appeared to be more robust than ever with the end of the Cold War and the collapse of the Soviet Union. 
But today, a quarter-century later, its future is in doubt. 
Indeed, its three components – liberalism, universality, and the preservation of order itself – are being challenged as never before in its 70-year history. 
Liberalism is in retreat. 
Democracies are feeling the effects of growing populism. 
Parties of the political extremes have gained ground in Europe. 
The vote in the United Kingdom in favor of leaving the EU attested to the loss of elite influence. 
Even the US is experiencing unprecedented attacks from its own president on the country’s media, courts, and law-enforcement institutions. 
Authoritarian systems, including China, Russia, and Turkey, have become even more top-heavy. 
Countries such as Hungary and Poland seem uninterested in the fate of their young democracies. 
It is increasingly difficult to speak of the world as if it were whole. 
We are seeing the emergence of regional orders – or, most pronounced in the Middle East, disorders – each with its own characteristics. 
Attempts to build global frameworks are failing. 
Protectionism is on the rise; the latest round of global trade talks never came to fruition. 
There are few rules governing the use of cyberspace. 
At the same time, great power rivalry is returning. 
Russia violated the most basic norm of international relations when it used armed force to change borders in Europe, and it violated US sovereignty through its efforts to influence the 2016 election. 
North Korea has flouted the strong international consensus against the proliferation of nuclear weapons. 
The world has stood by as humanitarian nightmares play out in Syria and Yemen, doing little at the UN or elsewhere in response to the Syrian government’s use of chemical weapons. 
Venezuela is a failing state. 
One in every hundred people in the world today is either a refugee or internally displaced. 
There are several reasons why all this is happening, and why now. 
The rise of populism is in part a response to stagnating incomes and job loss, owing mostly to new technologies but widely attributed to imports and immigrants. 
Nationalism is a tool increasingly used by leaders to bolster their authority, especially amid difficult economic and political conditions. 
And global institutions have failed to adapt to new power balances and technologies. 
But the weakening of the liberal world order is due, more than anything else, to the changed attitude of the US. 
Under President Donald Trump, the US decided against joining the Trans-Pacific Partnership and to withdraw from the Paris climate agreement. 
It has threatened to leave the North American Free Trade Agreement and the Iran nuclear deal. 
It has unilaterally introduced steel and aluminum tariffs, relying on a justification (national security) that others could use, in the process placing the world at risk of a trade war. 
It has raised questions about its commitment to NATO and other alliance relationships. 
And it rarely speaks about democracy or human rights. 
“America First” and the liberal world order seem incompatible. 
My point is not to single out the US for criticism. 
Today’s other major powers, including the EU, Russia, China, India, and Japan, could be criticized for what they are doing, not doing, or both. 
But the US is not just another country. 
It was the principal architect of the liberal world order and its principal backer. 
It was also a principal beneficiary. 
America’s decision to abandon the role it has played for more than seven decades thus marks a turning point. 
The liberal world order cannot survive on its own, because others lack either the interest or the means to sustain it. 
The result will be a world that is less free, less prosperous, and less peaceful, for Americans and others alike. 

Present at the Destruction 
NEW YORK – At the 73rd session of the United Nations General Assembly this month, there was a widespread sense of foreboding among world leaders. 
The anxiety went beyond standard concerns about what US President Donald Trump would say, do, or tweet. 
Even before the summit began, Europeans, Canadians, Mexicans, South Koreans, and Japanese had been consulting in earnest about the need for a new alliance to save the multilateral system. 
In the late 1960s, former US Secretary of State Dean Acheson looked back at the immediate post-war era and felt as though he had been “present at the creation” of a new world based on shared rules and multilateral institutions. 
But at the UNGA this year, many attendees felt as though they were present at the destruction of that world. 
There are a number of reasons for this. 
But many of them are linked to Trump, whose attacks on the Paris climate accord, the Iran nuclear deal, NAFTA, NATO, the World Trade Organization, and the UN Human Rights Council have made it clear that he regards the international system as an unnecessary constraint on his administration. 
To Trump’s mind, multilateral institutions tend to strengthen the hand of weaker powers vis-à-vis the US, and are thus facilitating China’s bid for global dominance. 
Hence, his solution is to destroy the global order and then negotiate with other countries on a bilateral basis. 
That way, the US will always have the upper hand, enabling it to change the rules in its favor. 
But Trump is far from the only threat to the multilateral order. 
Chinese President Xi Jinping has sought to portray himself as a savior of the international system, and yet his goal is not to defend the institutions on which global governance depends, but rather to bolster China’s power. 
By deprioritizing human rights, Xi will be freer to pursue ambitious projects such as the Belt and Road Initiative, the aim of which is to enhance China’s influence throughout Eurasia and the Asia-Pacific region. 
Moreover, Trump and Xi are just two among a larger group of alpha leaders who are challenging the traditional Kantian international order. 
Other aspiring strongmen include Presidents Vladimir Putin of Russia and Recep Tayyip Erdoğan of Turkey, Prime Ministers Narendra Modi of India and Binyamin Netanyahu of Israel, and Saudi Crown Prince Mohammad Bin Salman. 
The rise of such leaders makes upholding the rules-based order increasingly difficult. 
The task ahead for the remaining multilateralists is to avoid becoming guardians of a status quo that is already dead. 
That will require carefully identifying the weak spots of the existing order, and forging coalitions of the willing to address them. 
On trade, for example, multilateralists will need to work with China to defend the WTO; but they also need to reform the WTO so that it is equipped to curtail China’s problematic trade and investment practices. 
The trickiest part of this strategy will involve knitting together a critical mass of countries that can uphold liberal values even when great powers will not. 
This will be essential as the world moves away from the vision of multilateralism that prevailed at the turn of the century. 
When I was in Beijing a few weeks ago, Chinese strategists were debating whether the new order will be multipolar or bipolar. 
Most agreed that it will center on a bipolar confrontation between the US and China; but they doubted that it will resemble the Cold War and interwar periods. 
Instead, many expect a return to the geopolitics of the pre-World War I era. 
In my view, the new world disorder will have four key features. 
First, “connectivity wars” will be commonplace. 
The ties that bind countries together will not be severed, but nor will they create the conditions for true multilateralism. 
Instead, the major powers will weaponize their interconnections, giving rise to more trade wars, cyber attacks, sanctions regimes, and electoral interference. 
Second, non-alignment will become the default foreign policy. 
While the Cold War pitted the Western alliance against the Soviet bloc, the new bipolar world will allow for much more promiscuity. 
Rather than pledging allegiance to China or the US, most countries will keep their options open, working with the Chinese on some issues and with the Americans on others. 
Third, strongmen will continue to reign. 
As geopolitical competition heats up, voters will turn to tough leaders whom they trust to uphold narrow national interests. 
But this lurch toward centralized decision-making will produce inconsistent and radical policies, along with perpetual cheating. 
Without an empowered multilateral system to police abuses, countries governed by strongmen will increasingly break their promises, lie, and peddle conspiracy theories – Trump’s modus operandi. 
Lastly, foreign policy will become more domestically oriented. 
Rather than trying to influence other countries or lead on the world stage, political leaders will focus on consolidating their base at home. 
When confronting this kind of disorder, committed multilateralists will have to stay focused on defending the most critical aspects of the international system. 
That means they should be willing to play hardball against the alpha leaders. 
With their respective responses to Trump’s trade bluster, the European Union, Canada, and Japan have shown that this is possible. 
But now they must go further, by developing a comprehensive approach to defending global rules in an age of national misrule. 

End Taiwan’s Isolation 
BRUSSELS – As protests over China’s crackdown in Tibet and the debate about Kosovo’s unilateral declaration of independence continue to fester, the injustice of Taiwan’s ongoing international isolation has barely stirred a flicker of interest, despite Taiwan’s recent presidential election and referendum on United Nations membership. 
This neglect is not only shortsighted, but may also prove dangerous. 
This seeming double standard can be explained partly by a sense of guilt: the West has, for the most part, embraced Kosovo’s independence in an effort to assuage its own culpability for not preventing Slobodan Milosevic’s campaign of ethnic cleansing there. 
Similarly, much of the world is protesting on behalf of Tibet because countless millions have witnessed China’s brutal suppression of Tibetan culture. 
Taiwan, on the other hand, does not grab our attention, because it is stable and flourishing economically. 
It has not been under Chinese central government rule for more than 100 years – indeed, since it was conquered by Japan at the end of the nineteenth century – and it has never been part of the People’s Republic of China. 
Taiwan is, de facto, an unrecognized independent state with a vigorous democracy and high standards of human rights. 
Because Taiwan has not allowed itself to become a victim, the world simply does not feel guilty about it, and so ignores it. 
But perhaps we should feel some guilt. 
Taiwan deserves great credit for standing on its own two feet, despite the international isolation imposed. 
China blocks it from participating fully in the international arena, whether through the World Trade Organization, the Olympics, or the UN’s specialized agencies, including the World Health Organization. 
To its shame, China allows its political goal of excluding Taiwan from membership in all international organizations to trump even urgent public health concerns. 
The small number of countries that recognize Taiwan diplomatically is dwindling constantly, owing to a mixture of Chinese pressure and blandishments. 
On top of all this, Taiwan’s 22 million people go about their daily business knowing that thousands of Chinese missiles are ready to be launched at them at a moment’s notice. 
It is not for me to say that Taiwan should be recognized as an independent country. 
To all intents and purposes, Taiwan is independent already, though without formal recognition. 
Equally, there are plenty of Taiwanese who would like their island eventually to reunify with China, particularly if China democratizes and ceases to be a one-party communist dictatorship. 
However, we cannot deny that Taiwan’s people are unjustly being refused their place in the wider world. 
The international community should do more to usher Taiwan into the international mainstream. 
Western powers have always been champions of human rights and self-determination within the bounds of international law. 
The campaigns that the West waged throughout the 1980’s in solidarity with democratic forces in Soviet-dominated Eastern Europe helped bring about the end of communist domination. 
A similar commitment to the democratic rights of Taiwanese could have salutary effects in China. 
Moreover, Taiwan is a natural ally of any party that espouses the values of pluralist politics, free markets, and human rights. 
It seems particularly short-sighted, indeed hypocritical, for the United States and Britain to seek to spread democracy and human rights throughout the world while failing to recognize and reward the Taiwanese, a people who have embraced these concepts wholeheartedly. 
The message that unquestioning recognition of “One China” is sending is that we appreciate you more if you are a big communist dictatorship than if you are a small multi-party democracy. 
For the record, there are clear precedents for divided countries to enter the UN as separate states and then eventually to reunify: West and East Germany, North and South Yemen, and perhaps one day the two Koreas. 
Ultimately, is for Taiwan and China to regulate and resolve their relations. 
There are already some positive signs of a bilateral thaw as a new administration prepares to take office in Taiwan, with high-level talks taking place between China’s President Hu Jin Tao and Taiwan’s Vice-President-elect Vincent Siew. 
The democratic world has an obligation to support this process – not only because Taiwan deserves its support, but also because engaging more with Taiwan could potentially be a powerful instrument of leverage for broader change in China. 

End the Silence Over Chechnya 
It is extremely difficult for an honest observer to break through the closed doors that separate Chechnya from the rest of the world. 
Indeed, no one even knows how many civilian casualties there have been in ten years of war. 
According to estimates by non-governmental organizations, the figure is between 100,000 (that is, one civilian out of ten) and 300,000 (one out of four). 
How many voters participated in the November 2005 elections? 
Between 60 and 80%, according to Russian authorities; around 20%, reckon independent observers. 
The blackout imposed on Chechnya prevents any precise assessment of the devastating effects of a ruthless conflict. 
But censorship cannot completely hide the horror. 
Under the world’s very eyes, a capital – Grozny, with 400,000 inhabitants – has been razed for the first time since Hitler’s 1944 punishment of Warsaw. Such inhumanity cannot plausibly be described as “anti-terrorism,” as Russian President Vladimir Putin insists. 
The Russian military leadership claims to be fighting against a party of 700 to 2,000 combatants. 
What would be said if the British government had bombed Belfast, or if the Spanish government bombed Bilbao, on the pretext of quelling the IRA or the ETA? 
And yet the world remains silent in the face of the looting of Grozny and other Chechen towns and villages. 
Are Chechen women, children and all Chechen civilians less entitled to respect than the rest of mankind? 
Are they still considered human? 
Nothing can excuse the seeming indifference displayed by our worldwide silence. 
In Chechnya, our basic morality is at stake. 
Must the world accept the rape of girls who were kidnapped by the occupying forces or their militias? 
Should we tolerate the murder of children and the abduction of boys to be tortured, broken, and sold back to their families, alive or dead? 
What about “filtration” camps, or “human firewood”? 
What about the villages exterminated to set an example? 
A few NGO’s and some brave Russian and Western reporters have witnessed countless crimes. 
So we cannot say “we did not know.” 
Indeed, the fundamental principle of democracies and civilized states is at issue in Chechnya: civilians’ right to life, including the protection of innocents, widows, and orphans. 
International agreements and the United Nations Charter are as binding in Chechnya as anywhere else. 
The right of nations to self-determination does not imply the right of rulers to dispose of their people. 
The fight against terrorism is also at stake. 
Who has not yet realized that the Russian army is actually behaving like a group of pyromaniac firefighters, fanning the fires of terrorism through its behavior? 
After ten years of a large-scale repression, the fire, far from going out, is spreading, crossing borders, setting Northern Caucasus ablaze and making combatants even more fierce. 
How much longer can we ignore the fact that, in raising the bogeyman of “Chechen terrorism,” the Russian government is suppressing the liberties gained when the Soviet empire collapsed? 
The Chechen war both masks and motivates the reestablishment of centralized power in Russia – bringing the media back under state control, passing laws against NGO’s, and reinforcing the “vertical line of power” – leaving no institutions and authorities able to challenge or limit the Kremlin. 
War, it seems, is hiding a return to autocracy. 
Sadly, wars in Chechnya have been going on for 300 years. 
They were savage colonial conflicts under the Czar and almost genocidal under Stalin, who deported the whole Chechen population, a third of which perished during their transfer to the Gulag. 
Because we reject colonial and exterminating ventures, because we love Russian culture and believe that Russia can bloom in a democratic future, and because we believe that terrorism – whether by stateless groups or state armies ­– should be condemned, we demand that the world’s blackout on the Chechen issue must end. 
We must help Russia’s authorities escape from the trap they set for themselves and into which they fell, putting not only Chechens and Russians, but the world at risk. 
It would be tragic if, during the G8 summit scheduled for St. Petersburg, Russia, in June 2006, the Chechen issue were pushed to the side. 
This dreadful and endless war needs to be discussed openly if it is to end peacefully. 


Ending America’s Disastrous Role in Syria 
NEW YORK – Much of the carnage that has ravaged Syria during the past seven years is due to the actions of the United States and its allies in the Middle East. 
Now, faced with an alarming risk of a renewed escalation of fighting, it’s time for the United Nations Security Council to step in to end the bloodshed, based on a new framework agreed by the Council’s permanent members. 
Here are the basics. 
In 2011, in the context of the Arab Spring, the US government, in conjunction with the governments of Saudi Arabia, Qatar, Turkey, and Israel, decided to bring down Syrian President Bashar al-Assad’s regime, even though overthrowing another country’s government amounts to a blatant violation of international law. 
We know that in 2012, if not earlier, President Barack Obama authorized the CIA to work with America’s allies in providing support to rebel forces composed of disaffected Syrians as well as non-Syrian fighters. 
US policymakers evidently expected Assad to fall quickly, as had occurred with the governments of Tunisia and Egypt in the early months of the Arab Spring. 
The Assad regime is led by the minority Alawi Shia sect in a country where Alawites account for just 10% of the population, Sunni Muslims account for 75%, Christians make up 10%, and 5% are others, including Druze. 
The regional powers behind Assad’s regime include Iran and Russia, which has a naval base on Syria’s Mediterranean coastline. 
Whereas America’s goal in seeking to topple Assad was mainly to undercut Iranian and Russian influence, Turkey’s motive was to expand its influence in former Ottoman lands and, more recently, to counter Kurdish ambitions for territorial autonomy, if not statehood, in Syria and Iraq. 
Saudi Arabia wanted to undermine Iran’s influence in Syria while expanding its own, while Israel, too, aimed to counter Iran, which threatens Israel through Hezbollah in Lebanon, Syria near the Golan Heights, and Hamas in Gaza. 
Qatar, meanwhile, wanted to bring a Sunni Islamist regime to power. 
The armed groups supported by the US and allies since 2011 were assembled under the banner of the Free Syrian Army. 
In fact, there was no single army, but rather competing armed groups with distinct backers, ideologies, and goals. 
The fighters ranged from dissident Syrians and autonomy-seeking Kurds to Sunni jihadists backed by Saudi Arabia and Qatar. 
While vast resources were devoted to overthrowing Assad, the effort ultimately failed, but not before causing massive bloodshed and displacing millions of Syrians. 
Many fled to Europe, fomenting Europe’s refugee crisis and a surge in political support for Europe’s anti-immigrant extreme right. 
There were four main reasons for the failure to overthrow Assad. 
First, Assad’s regime had backing among not only Alawites, but also Syrian Christians and other minorities who feared a repressive Sunni Islamist regime. 
Second, the US-led coalition was countered by Iran and Russia. 
Third, when a splinter group of jihadists split away to form the Islamic State (ISIS), the US diverted significant resources to defeating it, rather than to toppling Assad. 
Finally, the anti-Assad forces have been deeply and chronically divided; for example, Turkey is in open conflict with the Kurdish fighters backed by the US. 
All of these reasons for failure remain valid today. 
The war is at a stalemate. 
Only the bloodshed continues. 
America’s official narrative has sought to conceal the scale and calamitous consequences of US efforts – in defiance of international law and the UN Charter – to overthrow Assad. 
While the US vehemently complains about Russian and Iranian influence in Syria, America and its allies have repeatedly violated Syrian sovereignty. 
The US government mischaracterizes the war as a civil war among Syrians, rather than a proxy war involving the US, Israel, Russia, Saudi Arabia, Iran, and Qatar. 
In July 2017, US President Donald Trump announced the end of CIA support for the Syrian rebels. 
In practice, though, US engagement continues, though now it is apparently aimed more at weakening Assad than overthrowing him. As part of America’s continued war-making, the Pentagon announced in December that US forces would remain indefinitely in Syria, ostensibly to support anti-Assad rebel forces in areas captured from ISIS, and of course without the assent of the Syrian government. 
The war is in fact at risk of a new round of escalation. 
When Assad’s regime recently attacked anti-Assad rebels, the US coalition launched airstrikes that killed around 100 Syrian troops and an unknown number of Russian fighters. 
Following this show of force, US Secretary of Defense Jim Mattis disingenuously stated that, “Obviously, we are not getting engaged in the Syrian civil war.” 
In addition, Israel recently attacked Iranian positions in Syria. 
The US and its allies should face reality and accept the persistence of Assad’s regime, despicable as it may be. 
The UN Security Council, backed by the US, Russia, and the other major powers, should step in with peacekeepers to restore Syrian sovereignty and urgent public services, while blocking attempts at vengeance by the Assad regime against former rebels or their civilian supporters. 
Yes, the Assad regime would remain in power, and Iran and Russia would maintain their influence in Syria. 
But the US official delusion that America can call the shots in Syria by choosing who rules, and with which allies, would end. 
It’s long past time for a far more realistic approach, in which the Security Council pushes Saudi Arabia, Turkey, Iran, and Israel into a pragmatic peace that ends the bloodshed and allows the Syrian people to resume their lives and livelihoods. 

Ending Rogue Fishing 
LONDON – Seafood is by far the most highly traded commodity globally, feeding billions of people worldwide. 
Unfortunately, however, the industry is plagued by illegal, unreported, and unregulated fishing, which undermines conservation efforts and handicaps honest fishers and businesses that follow the rules. 
It is high time to address the problem. 
Rogue fishing accounts for up to one-fifth of all ocean fish caught globally. 
And while there have been encouraging signs of reform in some countries’ industrial-scale fisheries, the problem remains widespread, discouraging others from following suit and impeding the reform of small-scale fisheries that supply food and livelihoods for millions of families. 
Rules do exist, but they need to be clearer and more specific, effectively enforced, and implemented across national borders. 
If not, unscrupulous operators will continue to take advantage of the lack of regulation and monitoring, with huge implications for those who depend on coastal fisheries for their sustenance and livelihoods. 
A recent study found that 20-32% of seafood imported into the United States was likely from illegal, unreported, and unregulated sources. 
This alone accounts for 4-16% of the value of the total illegal fish catch worldwide, which has an estimated value of $15-23 billion a year. 
Collaboration among the US, the European Union, and Japan has the potential to underpin great strides in addressing the problem. 
The US imports more than 90% of its seafood. 
Japan is the second-largest seafood importer after the US. 
And the EU is the world’s largest single market for seafood products, importing about 60% of the fish it consumes. 
The potential power of these three markets’ joint action is immense. 
In late 2011, the EU and the US agreed to collaborate to combat illicit fishing. 
A little less than a year later, the EU and Japan agreed to prevent imports of illegally caught seafood, share information, and work together at regional fisheries-management organizations. 
They all agreed to encourage other countries to ratify and implement the Port State Measures Agreement (PSMA), which will make it harder for dishonest fishing operations to operate. 
Illicit fishing operations rely on a range of tactics and loopholes in international law to get their products to market. 
Ports known for lax enforcement or limited inspection capacity are a prime pathway for unethical fishermen and companies to move their catch from ship to shelf. 
Adopted in 2009 by the UN Food and Agriculture Organization, the PSMA requires parties to implement stricter controls on foreign-flagged fishing vessels. 
To date, 13 countries have ratified the agreement; another 12 must do so for it to enter into force and be globally effective. 
Encouragingly, rogue fishing is no longer viewed as an orphan policy issue in some countries. 
In March, the US Presidential Task Force on Illegal, Unreported, and Unregulated Fishing and Seafood Fraud released an “all of government” action plan. 
The fact that the issue made it to the desk of the US president underscores the need for governments to mobilize their resources and collaborate internationally. 
A variety of approaches is called for. 
The EU’s regulations are perhaps the strongest suite of measures to stop illicitly caught fish from entering the market. 
Early implementation shows great promise. 
European regulators have already introduced sophisticated monitoring and surveillance programs, blocked market access to countries with a record of illegal fishing, penalized European rogue operators, and helped support “yellow or red carded” countries reform their fisheries laws. 
The EU, Japan, and the US would be even more effective if they aligned their policies to prevent criminals from accessing their markets and enabled legitimate operators to benefit from a “supercharged” level of access. 
Working together could enable the use of affordable, sophisticated technology for seafood traceability – data and intelligence gathering that helps pinpoint exactly where seafood comes from, and when and by whom it was caught. 
Such efforts – for example, the electronic documentation scheme for the Atlantic bluefin tuna catch– represent one of the most effective tools to eliminate illicit fishing. 
Eliminating rogue fishing will help replenish marine life and secure food and livelihoods for billions of people. 
This must be accompanied by increased efforts, from the Arctic to the Antarctic, to protect key species affected by fishing practices and establish fully protected marine reserves or “regeneration zones” to help restock and restore habitats. 
Countries must also enact and implement laws ending overfishing within domestic and international waters. 
Illegal, unreported, and unregulated fishing is a problem that can be solved through leadership, action, and international cooperation. 
We are pleased to see Chile – which is hosting this year’s Our Ocean Conference – demonstrate leadership and commitment to action by ratifying the PSMA and standing up to illicit fishing operations. 
We remain optimistic that others will continue to take the steps needed to end the scourge of rogue fishing and work together to regenerate ocean life globally. 

Stop Killing the Messenger 
NEW YORK – What does it cost to silence a muckraking reporter? 
In the Philippines, officials needed just $250 in 2011 to buy the services of a journalist-slaying gunman. 
In Slovakia, Ján Kuciak and his fiancée were killed in February for about $80,000. 
For corrupt politicians and crime bosses, neither sum is significant. 
The cost to democracy, however, is immeasurable. 
Every year, more journalists are murdered because of their reporting than die in war zones. 
Since 1992, when the Committee to Protect Journalists (CPJ) began compiling data, 1,324 journalists have been killed on the job, and 849 of them were executed for their work. 
But in nearly 90% of these murders, the people who ordered the attacks escaped justice. 
On the rare occasion that a full investigation was conducted, only low-level associates were ensnared. 
The big fish usually got away. 
The problem is not confined to countries in the Global South. 
October 16 marked one year since Daphne Caruana Galizia, a Maltese journalist investigating corruption, was killed by a car bomb just minutes after filing a story that seemed to forecast her death. 
Three men have been charged with her assassination, but the masterminds remain at large. 
Similarly, Slovakia – like Malta a European Union country – has failed to deliver justice in the brutal murder of Kuciak and his fiancée, Martina Kušnírová, at their home near Bratislava. 
Although police have made arrests in the case, not all of the organizers – who presumably did not want him digging into allegations of mafia activity in the country – have been found. 
And while Saudi Arabia has now admitted that the journalist and Washington Post columnist Jamal Khashoggi was killed in the Kingdom’s consulate in Istanbul, the ongoing investigation of the case is equally unlikely to lead to the prosecution of all those responsible for his disappearance. 
Impunity in such cases is a cancer on accountability and democracy. 
Reporters need the rule of law to work effectively. 
When law enforcement and the judiciary are in thrall to organized crime, journalists know that no one will protect them when they dig up stories threatening the interests of criminals or corrupt officials. 
The consequences are easy to spot in a country like Mexico, where cartel crime goes unreported in huge swaths of the country. 
Brave reporters who have refused to be cowed have paid with their lives, and cartel-linked killings have had the intended effect of silencing others. 
In fact, most Mexican journalists can instinctively identify “zones of silence” where democracy and transparency perish. 
In 2013, the United Nations sought to bring global attention to the problem by making November 2 the annual International Day to End Impunity for Crimes Against Journalists. 
My organization supports this effort with our yearly Global Impunity Index, which shows that democracies like Mexico, Brazil, India, Pakistan, and the Philippines consistently fail to convict journalists’ killers. 
Journalists know that democracy and a free press are mutually dependent, and that when reporters are silenced, embezzlement, extortion, and environmental crimes increase. 
And while many are fighting back, they could use some help. 
One of the most promising weapons in the struggle against impunity is sanctions. 
Since 2016, the Global Magnitsky Human Rights Accountability Act in the United States has authorized the US president to impose visa bans and freeze the assets of foreign nationals suspected of gross human rights violations. 
Canada enacted its own Magnitsky law in October 2017, while Estonia, Lithuania, Latvia, and the United Kingdom have introduced similar measures. 
But enacting a law is not the same as using it. 
With the exception of several individuals implicated in the 2004 murder of Forbes editor Paul Klebnikov in Moscow, Magnitsky-type laws have not been widely deployed in the defense of journalists. 
Governments committed to upholding democracy should not hesitate to use the tools at their disposal to protect those who risk their lives defending free speech. 
Governments in Europe, in particular, have a responsibility to ensure that national and EU-level commitments are upheld. 
Press-freedom organizations can also do more to end impunity. 
In Mexico, for example, CPJ worked with reporters and advocacy groups to lobby the national government to treat attacks on journalists as federal offenses – and to bypass state-level law enforcement agencies when corruption is suspected. 
The federal government responded by creating the Special Prosecutor for Attention to Crimes Against Freedom of Expression (FEADLE). 
Still, a lack of funding for the prosecutor’s office is threatening to reverse its modest gains. 
The incoming government of President-elect Andrés Manuel López Obrador can tackle the impunity problem, but only if FEADLE is fully resourced. 
As governments dither, journalists are defending themselves the best way they know how: with journalism. 
The collective response to the deaths of Caruana Galizia and Kuciak illustrates this well. 
Both were members of international investigative networks, and today, those groups are following the leads and finishing the stories that murder interrupted. 
The message to would-be assassins is simple: killing reporters will not kill the story. 

Ending International Occupation 
To state the obvious, military/political occupations and international oversight of a country are never welcome to the people who are being occupied and/or overseen. 
For a while, they grin and bear it, sometimes recognizing the necessity of the loss of sovereignty that they are enduring. 
But their tolerance inevitably fades - and fast. 
In Bucharest recently, I was discussing the oversight role of the Organization for Security and Cooperation in Europe (OSCE) in my country, Albania, with an expert from that body. 
He was surprised to learn that the number of OSCE employees in Albania is equal to that of the entire staff of the OSCE's Vienna headquarters. 
The sheer scale of the OSCE's operations in Albania is not what troubles me. What is troubling is the seeming permanence of its mission. 
Indeed, who is to decide when the OSCE's mission in Albania is over? 
The question is, of course, broader than that of the OSCE in Albania. 
With UN administrators still holding sway in Kosovo and Bosnia years after their savage wars ended, and with talk of a UN mission to replace the US occupation administration in Iraq, when should an international administration be terminated and oversight of a country returned to its citizens? 
Let there be no mistake: the OSCE played a positive role in stabilizing Albania. 
Its presence throughout the country in 1997 helped keep Albania united at a time of near civil war. 
But 1997 is a long time ago, and Albania has changed dramatically. 
Its democracy is secure; its economy improving. 
Yet, despite these far-reaching changes, the dynamics of the OSCE's presence have scarcely budged. Indeed, the OSCE still sticks its nose and fingers into pretty much every aspect of Albanian political life. 
The problem with such intrusive oversight is that political issues that incite the strongest passions -- such as determining electoral lists -- are suppressed when an international body offers and imposes its own solutions. 
But suppression won't make these issues go away; it only lets them fester. 
Albanian problems now demand homemade Albanian compromises. 
For most issues, I suspect that Kosovo and Bosnia are experiencing similar side effects due to their occupations. 
A stultifying form of international oversight that offers only fiat or imposed conciliation paralyzes their domestic political development. 
Even more than in Albania, opportunities to develop the habits of compromise that make democratic politics workable are denied to the people. 
In Albania, instead of developing and strengthening our infant democratic institutions, the OSCE, in its desire to see its policies implemented, often seeks to bypass or override them. 
This retards the country's political stabilization and democratic consolidation. 
Indeed, on some issues, shades of the old imperial strategy of "divide and rule" can be seen, with the OSCE pitting one Albanian institution or political party against another. 
Of course, the OSCE's presence in Albania does have political backing from large portions of the country's electorate. 
Until 2000, the government tended more to rely on the advice of the OSCE, but even since 2001, it has tried to buttress its position by claiming that it gets along better than ever with the OSCE and its mission. 
When an Albanian minister tried last year to raise the question of the duration of the OSCE's mission, the opposition leapt to the OSCE's defense. 
Nonetheless, there is a creeping perception that the OSCE is becoming too deeply engaged in picking winners and losers in Albanian politics - a perception underpinned by wider questions of sovereignty. 
Is the OSCE's presence retarding the country's independence and economic vitality by creating an image of a protectorate, a country unable to forge international agreements or join powerful international bodies on its own volition? 
Is it the OSCE's presence, and not Albania's government, that is now keeping the country what it has long been, a hermit kingdom? 
I do not attribute any malign or sinister purposes to the OSCE presence in Albania, unless one considers inertia malign. 
But saying that a body means well and saying that it is actually doing any good are two different things. 
Worst of all, the OSCE's bureaucratic nature means that it will never have an incentive to leave because the first duty of a bureaucracy is to perpetuate itself. 
Of course, an effective OSCE mission, confined to Tirana and comprised of experts that the country still needs, would be useful. 
But Albania no longer needs the OSCE's staff to be scattered throughout the country to monitor every aspect of its political life. 
The reality is that the OSCE has achieved its goals. 
It is time for it to take a bow and go home to Vienna. 
That's a lesson other occupying international agencies should keep in mind. 

A New Approach to MENA’s Refugee Crisis 
BEIRUT – The human toll from violence in the Middle East and North Africa (MENA) has reached historic proportions. 
Since 2000, an estimated 60% of the world’s conflict-related deaths have been in the MENA region, while violence in Iraq, Libya, Syria, and Yemen continues to displace millions of people annually. 
For countries hosting refugees from these conflicts, the challenges have been acute. 
According to a 2016 report by the International Monetary Fund, MENA states bordering high-intensity conflict zones have suffered an average annual GDP decline of 1.9 percentage points in recent years, while inflation has increased by an average of 2.8 percentage points. 
Large influxes of refugees put downward pressure on a host country’s wages, exacerbating poverty and increasing social, economic, and political tensions. 
And yet most current aid strategies focus on short-term assistance rather than long-term integration. 
Given the scale and duration of MENA’s refugee crisis, it is clear that a new approach is needed, one that shifts the focus from temporary to semi-permanent solutions. 
To accomplish this, three areas of refugee-related support need urgent attention. 
First, donor countries must do more to strengthen the economies of host states. 
For example, by buying more exports from host countries or helping to finance health-care and education sectors, donors could improve economic conditions for conflict-neighboring states and, in the process, create job opportunities for refugees. 
For this to pay off, however, host countries will first need to remove restrictions on refugees’ ability to work legally. 
Allowing displaced people to participate in formal labor markets would enable them to earn an income, pay taxes, and eventually become less dependent on handouts as they develop skills that eventually can be used to rebuild their war-ravaged countries. 
Employment might seem obvious, but most MENA host countries currently bar refugees from holding jobs in the formal sector (Jordan is one exception, having issued some 87,000 work permits to Syrian refugees since 2016). 
As a result, many refugees are forced to find work in the informal economy, where they can become vulnerable to exploitation and abuse. 
But evidence from outside the region demonstrates that when integrated properly, refugees are more of a benefit than a drain on host countries’ labor markets. 
For example, a recent analysis by the Refugee Studies Centre at the University of Oxford found that in Uganda, refugee-run companies actually increase employment opportunities for citizens by significant margins. 
A second issue that must be addressed is protecting refugees’ “identity,” both in terms of actual identification documents and cultural rights. 
For these reasons, efforts must be made to improve refugees’ digital connectivity, to ensure that they have access to their data and to their communities. 
One way to do this would be by using blockchain technology to secure the United Nations’ refugee registration system. 
This would strengthen the delivery of food aid, enhance refugee mobility, and improve access to online-payment services, making it easier for refugees to earn and save money. 
Improved access to communication networks would also help refugees stay connected with family and friends. 
By bringing the Internet to refugees, donor states would be supporting programs like “digital classrooms” and online health-care clinics, services that can be difficult to deliver in refugee communities. 
Displaced women, who are often the most isolated in resettlement situations, would be among the main beneficiaries. 
Finally, when the conflicts end – and they eventually will – the international community must be ready to assist with reconstruction. 
After years of fighting, investment opportunities will emerge in places like Iraq, Syria, and Sudan, and for the displaced people of these countries, rebuilding will boost growth and create jobs. 
Regional construction strategies could reduce overall costs, increase efficiencies, and improve economies of scale. 
In fact, the building blocks for the MENA region’s postwar period must be put in place now. 
For example, the establishment of a new Arab Bank for Reconstruction and Development would ensure that financing is available when the need arises. 
This financial institution – an idea I have discussed elsewhere – could easily be funded and led by the Gulf Cooperation Council with participation from the European Union, China, Japan, the United States, the Asian Infrastructure Investment Bank, and other international development actors. 
With this three-pronged approach, it is possible to manage the worst refugee crisis the world has experienced in decades. 
By ensuring access to work, strengthening communication and digital access, and laying the groundwork for post-war reconstruction, the people of a shattered region can begin planning for a more prosperous future. 
The alternative – short-term aid that trickles in with no meaningful strategy – will produce only further disappointment. 

Ending Religious Violence in the Middle East 
FEZ – The escalation of radicalism, violence, and civil wars in the Middle East since the so-called Arab Spring revolts began in 2010 has exacted a massive toll in human lives and welfare. 
The need to build effective states that support peace, provide greater opportunity and prosperity, and protect human rights could not be more urgent. 
Already, the violence that has surged in the last few years has left more than 180,000 Iraqis and 470,000 Syrians dead. 
Moreover, 6.5 million Syrians have been internally displaced, and another 4.8 million driven from the country altogether. 
They have often been tortured in prisons and humiliated in refugee camps. 
An estimated 70-80% of the victims are civilians, most of them women and children. 
In fact, according to the Syrian Center for Policy Research, half of the refugees and internally displaced people are under the age of 18. 
This has a major impact on their future prospects. 
UNICEF reports that 2.1 million children in Syria and 700,000 Syrian refugee children are out of school. 
A total of 80,000 child refugees in Jordan lack access to an education. 
But all of these human costs are symptoms of a deeper problem – and, contrary to popular belief, that problem is not Islam. 
The fact that radical Islamists or jihadists are Muslim does not mean that their religion, not to mention their ethnicity or culture, is inherently violent. 
Watching Western news, it is easy to see why so many blame Islam. 
From the brutality of the Islamic State (ISIS) in Syria and Iraq to the terrorist attacks carried out by al-Qaeda to the stoning of adulterous women under Sharia law in Afghanistan, Middle East violence is almost always attributed to the religion. 
As a result, Islam is often viewed primarily as a threat. 
But, as the Canadian philosopher Charles Taylor explains, the real threat is not Islam itself, but “block thinking.” 
Islamic extremists comprise less than 0.5% of the global Muslim population, yet their worldview dominates media coverage not just of Islam, but also of political developments in the Middle East. 
By erasing the huge differences among Muslims, such coverage reinforces a single, simplistic perception of Islam. 
That is block thinking. 
And, as Michael Griffin documents in his book Islamic State: Rewriting History, such thinking is gaining ground in the United States and Europe. 
As a result, many have embraced Samuel Huntington’s theory of a “clash of civilizations,” which assumes that Islam is at odds with modernity. 
But that assumption ignores the ideas and impact of Islam’s early reformers – figures like Muhammad Abduh and Jamaleddin al-Afghani – who continue to influence Muslims everywhere. 
The most lasting impact of the first reformist wave was the establishment of a salafi (conservative traditionalist) movement, which came to regard the modern state as a means to improve the lot of Muslims. 
Today, Muslim thinkers – such as Iran’s Abdolkarim Soroush, Tunisia’s Tahar Haddad, Pakistan’s Fazlur Rahman, Morocco’s Fatema Mernissi, Egypt’s Qasim Amin, and Sudan’s Mahmud Muhammad Taha – continue to explore the connections between Islamic thought and modern values. 
While radical Islamists strongly oppose their work, these thinkers have had a huge influence on generations of Muslim intellectuals worldwide. 
None of this is to say that religion does not play a role in Middle East violence. 
On the contrary, such violence – including sexual assault and arbitrary deprivation of individual and public freedoms – is widespread and multifaceted, owing to the combination of religious beliefs, cultural tradition, race and ethnicity, war, and politics that influences it. 
Even the recruitment of jihadist fighters can be viewed as a form of religion-based violence, much like child marriage and honor killings. 
But none of that means that Islam is inherently violent. 
Resorting to fuzzy – and often bigoted – cultural, religious, or ethnic explanations is a recipe for ill-advised action, or no action at all. 
What the Middle East needs are effective social and economic strategies and policies that tackle the complex non-religious reasons behind the violence – and its decidedly non-religious effects. 
While cultural, ethnic, and religious factors may need to be considered, they are not the main causes of unemployment and marginalization. 
Middle Eastern governments must commit to pursuing bold and creative policies that address the inadequate education, high unemployment, and pervasive corruption that are helping to fuel violence and unrest in the region. 
Such efforts should aim to advance democratization, economic development, and the emergence of a strong civil society and progressive media. 
The key is not to “Islamize” every issue, but rather to develop real policy solutions that meet people’s needs. 
Education is of course critical to success: school curricula must become more inclusive, to broaden students’ knowledge of religions and cultures. 
More broadly, schools should also embody the separation of church and state – and well-protected religious freedom – that will be needed to end religion-based violence in the Middle East. 
Large-scale violence like that occurring in the Middle East causes devastating harm to individuals, erodes the capital base, hampers productivity, and undermines economic growth. 
Its impact on political, social, and economic structures needs to be addressed, and the capacity of the state to do so should not be underestimated or overlooked. 
But so long as the state frames or seeks to legitimize its policies in religious terms, the violence will not stop. 

Prevention Is the Best Migration Cure 
PARIS – With newspapers full of stories about the challenges migrant families face, it might be tempting to assume that the causes of displacement are also being addressed. 
In most cases, however, such an assumption would be wrong. 
Today, solutions to forced migration focus almost exclusively on aiding refugees after they flee, rather than targeting the reasons for their flight. 
To resolve the world’s refugee crises, the causes require as much attention as the effects. 
Why would parents risk their lives, or the lives of their children, to leave home and journey into the unknown? 
And what can be done to keep families from being forced to migrate in the first place? 
These are among the key questions that colleagues and I have attempted to answer in a new OECD study, States of Fragility 2018. 
The findings are as illuminating as they are troubling. 
By 2030, more than 80% of the world’s poor will live in an area defined as “fragile” – a status that may reflect any number of political, social, security, economic, or environmental causes. 
Unfortunately, if current trends hold, far too little development aid will be allocated to address the factors contributing to fragility. 
In 2016, for example, just 2% of the $68.2 billion in official development assistance (ODA) that went to places affected by fragility was used for conflict-prevention activities, and only 10% went to peace-building initiatives. 
There is no other conclusion to draw: we must change how ODA is allocated. 
According to the United Nations Refugee Agency, a record 68.5 million people were forcibly displaced in 2017. 
Many of these people hailed from just five countries – Afghanistan, Myanmar, Somalia, South Sudan, and Syria. 
But, while countries hosting refugees have an urgent need for money to support long-term relocation efforts, most ODA is still channeled to short-term solutions. 
Humanitarian initiatives – like food and shelter – accounted for roughly a third of all ODA last year, and that share has been climbing for nearly a decade. 
By contrast, funding for construction of schools, hospitals, and other infrastructure continues to lag. 
While it’s understandable that donors would gravitate toward solutions that offer immediate assistance to the displaced, neglecting refugees’ long-term needs is shortsighted. 
Simply put, the international community’s ambition for aid must evolve beyond keeping people alive; it must also offer migrants a future. 
If allocated properly, ODA can be a powerful tool in preventing conflict and reversing the trends that contribute to fragility. 
Moreover, this type of spending is often a source of hope for migrants, given that in many crisis-affected areas, ODA is among the most reliable funding sources. 
That is particularly true as emergencies age, because funding levels typically drop as donations from other sources dry up. 
To be sure, reversing current ODA spending trends will not be easy. 
Fragility manifests in myriad ways, and addressing challenges as diverse as violent extremism, climate change, organized crime, and gender discrimination will require a new playbook for development spending. 
Still, the need for actions has become urgent. 
If unaddressed, conflict, violence, and other forms of fragility will set development gains back decades, further fueling the very dynamics that lead to instability in the first place. 
Unless the international community changes its approach to investing in fragile regions, the world will fail to achieve a key objective of the UN Sustainable Development Goals: to leave no one behind. 
Spending on long-term solutions also makes financial sense. 
According to the UN and World Bank, if more money were allocated to conflict-prevention programs, up to $70 billion could be saved annually in refugee-relocation costs. 
While the world has accepted the premise of cost-effective prevention in health care (by promoting regular screenings and checkups, for example), this philosophy has yet to be applied to policymaking on migration. 
This can and should change. 
The global migration crisis – the worst since the end of World War II – has consumed huge sums of financial and political capital. 
To address it effectively, the focus must shift to improving stability and security, and hope for better futures, in the places where migrants originate. 
And that means the development community, and especially official donors, must rethink their priorities and policies. 

Ending Nuclear Evil 
CAPE TOWN – Eliminating nuclear weapons is the democratic wish of the world’s people. 
Yet no nuclear-armed country currently appears to be preparing for a future without these terrifying devices. 
In fact, all are squandering billions of dollars on modernization of their nuclear forces, making a mockery of United Nations disarmament pledges. 
If we allow this madness to continue, the eventual use of these instruments of terror seems all but inevitable. 
The nuclear power crisis at Japan’s Fukushima power plant has served as a dreadful reminder that events thought unlikely can and do happen. 
It has taken a tragedy of great proportions to prompt some leaders to act to avoid similar calamities at nuclear reactors elsewhere in the world. 
But it must not take another Hiroshima or Nagasaki – or an even greater disaster – before they finally wake up and recognize the urgent necessity of nuclear disarmament. 
This week, the foreign ministers of five nuclear-armed countries – the United States, Russia, Britain, France, and China – will meet in Paris to discuss progress in implementing the nuclear-disarmament commitments that they made at last year’s Nuclear Non-Proliferation Treaty (NPT) review conference. 
It will be a test of their resolve to transform the vision of a future free of nuclear arms into reality. 
If they are serious about preventing the spread of these monstrous weapons – and averting their use – they will work energetically and expeditiously to eliminate them completely. 
One standard must apply to all countries: zero. 
Nuclear arms are wicked, regardless of who possesses them. 
The unspeakable human suffering that they inflict is the same whatever flag they may bear. 
So long as these weapons exist, the threat of their use – either by accident or through an act of sheer madness – will remain. 
We must not tolerate a system of nuclear apartheid, in which it is considered legitimate for some states to possess nuclear arms but patently unacceptable for others to seek to acquire them. 
Such a double standard is no basis for peace and security in the world. 
The NPT is not a license for the five original nuclear powers to cling to these weapons indefinitely. 
The International Court of Justice has affirmed that they are legally obliged to negotiate in good faith for the complete elimination of their nuclear forces. 
The New START agreement between the US and Russia, while a step in the right direction, will only skim the surface off the former Cold War foes’ bloated nuclear arsenals – which account for 95% of the global total. 
Furthermore, these and other countries’ modernization activities cannot be reconciled with their professed support for a world free of nuclear weapons. 
It is deeply troubling that the US has allocated $185 billion to augment its nuclear stockpile over the next decade, on top of the ordinary annual nuclear-weapons budget of more than $50 billion. 
Just as unsettling is the Pentagon’s push for the development of nuclear-armed drones – H-bombs deliverable by remote control. 
Russia, too, has unveiled a massive nuclear-weapons modernization plan, which includes the deployment of various new delivery systems. 
British politicians, meanwhile, are seeking to renew their navy’s aging fleet of Trident submarines – at an estimated cost of £76 billion ($121 billion). 
In doing so, they are passing up an historic opportunity to take the lead on nuclear disarmament. 
Every dollar invested in bolstering a country’s nuclear arsenal is a diversion of resources from its schools, hospitals, and other social services, and a theft from the millions around the globe who go hungry or are denied access to basic medicines. 
Instead of investing in weapons of mass annihilation, governments must allocate resources towards meeting human needs. 
The only obstacle we face in abolishing nuclear weapons is a lack of political will, which can – and must – be overcome. 
Two-thirds of UN member states have called for a nuclear-weapons convention similar to existing treaties banning other categories of particularly inhumane and indiscriminate weapons, from biological and chemical arms to anti-personnel land mines and cluster munitions. 
Such a treaty is feasible and must be urgently pursued. 
It is true that nuclear weapons cannot be uninvented, but that does not mean that nuclear disarmament is an impossible dream. 
My own country, South Africa, gave up its nuclear arsenal in the 1990’s, realizing it was better off without these weapons. 
Around the same time, the newly independent states of Belarus, Kazakhstan, and Ukraine voluntarily relinquished their nuclear arms, and then joined the NPT. 
Other countries have abandoned nuclear-weapons programs, recognizing that nothing good could possibly come from them. 
Global stockpiles have dropped from 68,000 warheads at the height of the Cold War to 20,000 today. 
In time, every government will come to accept the basic inhumanity of threatening to obliterate entire cities with nuclear weapons. 
They will work to achieve a world in which such weapons are no more – where the rule of law, not the rule of force, reigns supreme, and cooperation is seen as the best guarantor of international peace. 
But such a world will be possible only if people everywhere rise up and challenge the nuclear madness. 

Confronting Journalism’s Misogynistic Trolls 
LONDON – Before the Internet revolutionized how news was gathered and shared, journalists rarely had to worry about the threat of virtual violence. 
The main risks they faced were in the field: the physical and psychological safety concerns of reporting on disaster and conflict. 
But today’s media battlefields are increasingly online, and more than ever, it is women who are coming under fire. 
According to Demos, a UK-based think tank, female journalists are three times more likely than their male counterparts to be targeted by abusive comments on Twitter, with perpetrators frequently using sexualized language (such as “slut” and “whore”) against their targets. 
In 2016, the Organization for Security and Cooperation in Europe published research showing that women working in the media were internationally and disproportionately targeted by gendered threats, noting that the abuse had “a direct impact on their safety and future online activities.” 
The threats of violence against women working in the media often extend to family members, and the intimate nature of the attacks, received as they are on personal devices outside the professional parameters of the newsroom, also heightens the impact. 
Here we see the blurring of virtual, physical, and psychological frontlines of safety. 
While this digital vitriol is not new, the misogynistic tenor is clearly deepening. 
Unless media executives begin to take these trends seriously, the voices of women journalists could be silenced. 
Another way in which women journalists are frequently targeted online is through the undermining of their work or reputation. 
Already there is evidence that women are self-censoring and drawing back from writing about certain issues, specifically rights-based issues and those affecting marginalized communities. 
But, by doing this, the voices of the vulnerable are also silenced. 
To be sure, some women are fighting back against the violence and refusing to let the trolls win. 
Alexandra Pascalidou, a Swedish-Greek journalist who has experienced threats online and offline for her work covering human-rights issues, has spoken openly about her experiences and has even publicly forgiven one of the neo-Nazis who ran a campaign of abuse against her. 
Speaking at the News Xchange media conference late last year, Pascalidou described it as her “duty” to bring attention to the abuse she and other female journalists regularly endure. 
“What we need is more people like us,” she said. “As soon as we are few, it is easier for them to scare us.” 
Maria Ressa, a former CNN war correspondent, is equally outspoken. 
The founder and CEO of Rappler.com, an online news organization in the Philippines, she has been the target of a campaign of sexualized harassment since 2016. 
Ressa has lost count of the number of death threats she has received and says none of her previous experiences covering physical conflict could have prepared her for the scale of the violence directed toward her and her Rappler colleagues. 
But she is fighting back with a strategy that could well serve as a blueprint for media leaders who recognize the severity of online harassment. 
Among the tactics she has used are investigative journalism to identify her abusers, and she has publicly called on social media platforms to do more to counter abuse and acknowledge the psychological impact it has on victims. 
Unfortunately, most female journalists bullied online are less willing to challenge their accusers. 
For many, fear of reputational or even physical harm has created a culture of shame that discourages a strong, dignified response. 
This reticence is understandable; after all, there is some truth to the argument that engaging trolls only feeds the fires of online hate. 
But by staying silent, targets and their supporters are essentially victimized twice – first by their attacker’s words and actions, and second by the powerlessness to respond. 
It’s an old-fashioned form of gendered power dynamics updated for the digital age. 
Most female journalists I know admit to self-censoring their online engagement. 
Many more have abandoned social-media platforms like Twitter, Facebook, and Instagram altogether, despite pressure from bosses to remain “connected” to audiences. 
For already-established female journalists, this digital distancing may not be such a big deal. 
But for female journalists at the start of their careers, the decision to renounce social media carries professional and reputational risks. 
Simply put, online abusers are forcing women in the media to make impossible choices. 
Despite evidence that some media executives are moving toward improving gender equality, many are not giving online harassment the attention it deserves. 
When I discussed this issue with several senior, predominantly male industry leaders, most were shocked to hear that their female colleagues felt so threatened in the digital space. 
Worse, the executives lacked adequate answers about how to address the problem. 
The lack of awareness is partly due to the way women minimize their online experiences; many worry that speaking out will somehow negatively affect their job status. 
For example, one female colleague told me that she didn’t want to make a fuss about a harassing post she had received, because it was “only” a threat of rape – not a death threat like the one a friend had received. 
Another colleague did not think her experience of digital violence would be taken seriously, because it had not happened in the “real world.” 
We cannot blame women for feeling this way, but we can demand more from the executives responsible for their journalists’ safety and security. 
At the moment, most media organizations are failing to tackle the problem, and if that results in more women leaving the industry altogether, journalism will become more skewed toward male perspectives than it already is. 
Traditionally hostile news environments – like war zones – have, for obvious reasons, drawn the bulk of sympathies from the public and media executives; raising the alarm about online harassment is not meant to diminish the dangers that journalists in these circumstances face. 
And yet, as any female journalist knows, digital combat leaves scars, too. 
If women are to navigate the industry’s virtual frontlines without injury, they must not be expected to go into battle alone. 

Ending the Syrian War 
NEW YORK – Syria is currently the world’s greatest humanitarian catastrophe and most dangerous geopolitical hotspot. 
The Syrian people are caught in a bloodbath, with more than 400,000 dead and ten million displaced. 
Violent jihadist groups backed by outside patrons mercilessly ravage the country and prey on the population. 
All parties to the conflict – President Bashar al-Assad’s regime, the anti-Assad forces supported by the United States and its allies, and the Islamic State – have committed, and continue to commit, serious war crimes. 
It is time for a solution. 
But such a solution must be based on a transparent and realistic account of what caused the war in the first place. 
The chronology is as follows. 
In February 2011, peaceful protests were staged in Syria’s major cities, amid the region-wide phenomenon dubbed the “Arab Spring.” 
The Assad regime reacted with a shifting mix of violent repression (shooting at demonstrators) and offers of reform. 
Soon, the violence escalated. 
Assad’s opponents accused the regime of using force against civilians without restraint, while the government pointed to the deaths of soldiers and policeman as evidence of violent jihadists among the protestors. 
It seems likely that as early as March or April 2011, Sunni anti-regime fighters and arms started to enter Syria from neighboring countries. 
Many eyewitness accounts tell of foreign jihadists engaging in violent attacks on policemen. 
(Such accounts are, however, hard to confirm, especially after almost five years.) 
The US and its regional allies tried to nudge Assad from power in the spring of 2011, thinking that he would fall quickly like Egypt’s Hosni Mubarak and Tunisia’s Zine El Abidine Ben Ali. 
Many observers assert that Qatar funded an increase in anti-regime activity within Syria and used the Doha-based broadcaster Al Jazeera to boost anti-Assad sentiment worldwide, though such claims are hard to pin down definitively. 
The US imposed a tightening noose of trade and financial sanctions on the regime. 
The Brookings Institution, a bellwether of US official policy, called for Assad’s ouster, and anti-Assad propaganda in the US media soared. 
(Until then, Assad was considered in the US media to be a relatively benign, albeit authoritarian, ruler, and then-Secretary of State Hillary Clinton noted as late as March 2011 that many in the US Congress regarded Assad as a reformer.) 
The launch of the war can be dated to August 18, 2011, when President Barack Obama and Clinton declared that “Assad must go.” 
Up to that point, the violence was still containable. 
Total deaths, including both civilians and combatants, ran perhaps to around 2,900 (according to one tally by regime opponents). 
After August, the death rate soared. 
It is sometimes claimed that the US did not act vigorously at this point. 
Obama’s political foes generally attack him for having taken too little action, not too much. 
But the US did in fact act to topple Assad, albeit mostly covertly and through allies, especially Saudi Arabia and Turkey (though neither country needed much prodding to intervene). 
The CIA and Saudi Arabia covertly coordinated their actions. 
Of course, the chronology of the war does not explain it. 
For that, we need to examine the motivations of the key actors. 
First and foremost, the war in Syria is a proxy war, involving mainly the United States, Russia, Saudi Arabia, Turkey, and Iran. 
The US and its allies, Saudi Arabia and Turkey, started the war in 2011 in order to overthrow Assad’s regime. 
The US alliance was met with escalating counterforce by Russia and Iran, whose Lebanese proxy army Hezbollah is fighting alongside Assad’s government. 
The US interest in overthrowing Assad’s regime was precisely its reliance on Iranian and Russian backing. 
Removing Assad, US security officials believed, would weaken Iran, undermine Hezbollah, and roll back Russia’s geopolitical reach. 
America’s allies, including Turkey, Saudi Arabia, and Qatar, were interested in replacing Assad’s Alawite regime in Syria with a Sunni-led regime (Alawites are a branch of Shia Islam). 
This, they believed, would also weaken their regional competitor, Iran, and curtail Shia influence in the Middle East more generally. 
In believing that Assad would be easily overthrown, the US – not for the first time – was relying on its own propaganda. 
The regime faced deep opposition, but also had considerable internal support. 
More important, the regime had powerful allies, notably Iran and Russia. 
It was naive to believe that neither would respond. 
The public should appreciate the dirty nature of the CIA-led fight. 
The US and its allies flooded Syria with Sunni jihadists, just as the US had flooded Afghanistan in the 1980s with Sunni jihadists (the Mujahideen) that later became Al Qaeda. 
Saudi Arabia, Turkey, Qatar, and the US have regularly backed some of the most violent jihadist groups in a cynical miscalculation that these proxies would do their dirty work and then somehow be pushed aside. 
According to the US and European mainstream media, Russia’s military intervention in Syria is treacherous and expansionist. 
The truth is different. 
The US is not allowed under the UN Charter to organize an alliance, fund mercenaries, and smuggle heavy weapons to overthrow another country’s government. 
Russia in this case is reacting, not acting. 
It is responding to US provocations against its ally. 
Ending the war requires adherence to six principles. 
First, the US should cease both overt and covert operations to overthrow Syria’s government. 
Second, the UN Security Council should implement the ceasefire now under negotiation, calling on all countries, including the US, Russia, Saudi Arabia, Turkey, Qatar, and Iran, to stop arming and funding military forces within Syria. 
Third, all paramilitary activities should cease, including those of so-called “moderates” backed by the US. 
Fourth, the US and Russia – and, indeed, the UN Security Council – should hold Syria’s government strictly responsible to desist from punitive actions against regime opponents. 
Fifth, the political transition should take place gradually and with confidence building on all sides, rather than through an arbitrary, destabilizing rush to “free elections.” 
Finally, the Gulf States, Turkey, and Iran should be pressed to negotiate face to face on a regional framework that can ensure lasting peace. 
Arabs, Turks, and Iranians have all lived with each other for millennia. 
They, not the outside powers, should lead the way to a stable order in the region. 

Ending the Chechen Nightmare 
Once again, Russia's war in Chechnya - which has rumbled murderously on for a decade - has blasted its way onto Moscow's streets. 
The horrific death toll among innocent theater-going Muscovites confirms Russia's struggle against Chechen rebels as a distinct and bloody front in the global war on terrorism. 
That war must be won. 
But the time has also come for Russia to change its policy. 
Chechnya should remain part of the Russian Federation. 
But, clearly, that strategic goal cannot be achieved by military means alone. 
Time after time, Russian federal forces deliver devastating blows on Chechen insurgents. 
But the Chechen resistance is never crushed as was proved, not only by the taking hostage of over 800 Muscovites last week, but by the numerous successful Chechen raids on Russian troops in and around Chechnya. 
It would be wrong to put the entire blame for Russia's inability to crush the rebellion on our military commanders, although their planning could be better. 
Why not? 
Because the Chechen rebellion began in politics and it can only end through a political understanding. 
What should be done? 
The first step must be to separate peaceful Chechens from the rebels. 
Regrettably, Russia failed to do this at the insurrection's onset, primarily because the bandits resided in villages and towns, which meant that many civilian deaths ensued when Russian forces attacked the rebels head-on. 
Today, Russian federal forces are trying to separate common people from the bandits by entrusting the powers of self-government and security in Chechen settlements to indigenous Chechens. 
But this method is not working and won't work if pursued along the current lines. 
Most peaceful Chechens have not fully turned their backs on the bandits, perhaps because the bandits hunt down those who collaborate with Russian authorities. 
Moreover, many Chechens fear Russian officials more than the bandits. 
This transfer of executive authority to local Chechen self-governments will continue to fail unless local Chechen rebel commanders are induced to join the talks. 
These commanders are often clan leaders who have never stood for election, and won't ever consider putting their authority up for a vote. 
These men alone have the ability to deliver peace, if not democracy. 
If maintaining their authority and local autonomy is the price that must be paid to end, or at least limit the slaughter, Russia should agree. 
A big worry here, however, is that some Chechen rebels want to negotiate so as to play for time to regroup and resupply themselves. 
The global war on terrorism has made it more difficult for them to secure financial and material support. 
Afghanistan is no longer a training and supply base; 
Saudi Arabia and Turkey now strictly control citizens who once helped Chechen separatists. 
Even Georgia now closely - although not as closely as Russia would like - restricts Chechen activity. 
The world must assist Russia in seeing to it that alternative supply routes for the rebels do not materialize. 
A year ago, President Putin offered negotiations between his representative and an envoy of Aslan Maskhadov, the Chechen rebel warlord who won internationally supervised elections as Chechen president in 1997. 
That initiative collapsed because the Chechens were ordered to surrender their weapons within 72 hours. 
But President Putin intended them to have 72 hours to ponder the good that might come from negotiations if they surrendered their weapons, not an instant surrender. 
That clumsy diplomacy should not stop talks from getting underway. 
But to start them, a cease-fire must is needed as the first step, to be swiftly followed by the Chechens publicly dissociating themselves from terrorist acts such as the Moscow slaughter. 
Anything less would be utterly unacceptable to ordinary Russians traumatized by the body count of dead hostages in Moscow. 
It must also be understood that negotiations cannot rule out Russian military operations against bandits who continue their attacks as the negotiations ensue. 
Thus part of the federal forces must remain in Chechnya during any peace talks, which will also serve to strengthen the hand of those Chechens who choose to negotiate and are prepared to ensure the security of their settlements. 
But just because Russia's troops will remain in Chechnya during any peace talks does not mean that they should conduct the talks. 
This happened after the first Chechen campaign (1994-1996), but the peace that ensued was merely an armed truce. 
Instead, a representative of President Putin must oversee everything in Chechnya: economic development, military action, and efforts to alleviate the suffering of the Chechen population. 
This person should assume control of Defense Ministry units, Interior Ministry troops, FSB agencies and local administrations. 
Chechnya could be granted the status of a special presidential area throughout any negotiations - indeed, until local Chechen authorities establish their ability to enforce the rule of law. 
A single command accountable directly to President Putin would rule out uncoordinated actions, improve discipline, strengthen the responsibility of those who are dealing with Chechnya, and diminish the carelessness with Chechen civilian lives of some Russian commanders. 
The world now sees and understands the mighty burden Russia has borne, and is bearing, in Chechnya. 
It must also know that international solidarity in the war on terror must mean not only Russia supporting America in Afghanistan, but America and the West backing Russia in its counter-terrorist struggle. 
The terrible death count in Moscow, much as Russians may want to seek revenge, must also help all Russians see that Chechnya is a political problem demanding a political, not a military, solution. 

Ending the Financial Arms Race 
CAMBRIDGE – People often ask if regulators and legislators have fixed the flaws in the financial system that took the world to the brink of a second Great Depression. 
The short answer is no. 
Yes, the chances of an immediate repeat of the acute financial meltdown of 2008 are much reduced by the fact that most investors, regulators, consumers, and even politicians will remember their financial near-death experience for quite some time. 
As a result, it could take a while for recklessness to hit full throttle again. 
But, otherwise, little has fundamentally changed. 
Legislation and regulation produced in the wake of the crisis have mostly served as a patch to preserve the status quo. 
Politicians and regulators have neither the political courage nor the intellectual conviction needed to return to a much clearer and more straightforward system. 
In his recent speech to the annual, elite central-banking conference in Jackson Hole, Wyoming, the Bank of England’s Andy Haldane made a forceful plea for a return to simplicity in banking regulation. 
Haldane rightly complained that banking regulation has evolved from a small number of very specific guidelines to mind-numbingly complicated statistical algorithms for measuring risk and capital adequacy. 
Legislative complexity is growing exponentially in parallel. 
In the United States, the Glass-Steagall Act of 1933 was just 37 pages and helped to produce financial stability for the greater part of seven decades. 
The recent Dodd-Frank Wall Street Reform and Consumer Protection Act is 848 pages, and requires regulatory agencies to produce several hundred additional documents giving even more detailed rules. 
Combined, the legislation appears on track to run 30,000 pages. 
As Haldane notes, even the celebrated “Volcker rule,” intended to build a better wall between more mundane commercial banking and riskier proprietary bank trading, has been hugely watered down as it grinds through the legislative process. 
The former Federal Reserve chairman’s simple idea has been co-opted and diluted through hundreds of pages of legalese. 
The problem, at least, is simple: As finance has become more complicated, regulators have tried to keep up by adopting ever more complicated rules. 
It is an arms race that underfunded government agencies have no chance to win. 
Even back in the 1990’s, regulators would privately complain of the difficulty of retaining any staff capable of understanding the rapidly evolving derivatives market. 
Research assistants with one year of experience working on derivatives issues would get bid away by the private sector at salaries five times what the government could pay. 
Around the same time, in the mid-1990’s, academics began to publish papers suggesting that the only effective way to regulate modern banks was a form of self-regulation. 
Let banks design their own risk management systems, audit them to the limited extent possible, and then severely punish them if they produce a loss outside agreed parameters. 
Many economists argued that these clever models were flawed, because the punishment threat was not credible, particularly in the case of a systemic meltdown affecting a large part of the financial system. 
But the papers were published anyway, and the ideas were implemented. 
It is not necessary to recount the consequences. 
The clearest and most effective way to simplify regulation has been advanced in a series of important papers by Anat Admati of Stanford (with co-authors including Peter DeMarzo, Martin Hellwig, and Paul Pfleiderer). 
Their basic point is that financial firms should be forced to fund themselves in a more balanced fashion, and not to rely so heavily on debt finance. 
Admati and her colleagues recommend requirements that force financial firms to generate equity funding either through retained earnings or, in the case of publicly traded firms, through stock issuance. 
The status quo allows banks instead to leverage taxpayer assistance by holding razor-thin equity margins, relying on debt to a far greater extent than typical large non-financial firms do. 
Some large firms, such as Apple, hold virtually no debt at all. 
Greater reliance on equity would give banks a much larger cushion to absorb losses. 
The financial industry complains that efforts to force greater equity funding would curtail lending, but this is just nonsense in a general equilibrium setting. 
Nevertheless, governments have been very timid in advancing on this front, with the new Basel III rules taking only a baby step toward real change. 
Of course, it is not easy to legislate financial reform in a stagnant global economy, for fear of impeding credit and turning a sluggish recovery into a full-blown recession. 
And, surely, academics are also to blame for the inertia, with many of them still defending elegant but deeply flawed models of perfect markets that create an illusion of safety for a system that is in fact highly risk-prone. 
The fashionable idea of allowing banks to issue “contingent capital” (debt that becomes equity in a systemic crisis) is no more credible than the idea of committing to punish banks severely in the event of a crisis. 
A simpler and more transparent system would ultimately lead to more lending and greater stability, not less. 
It is high time to restore sanity to financial-market regulation. 

Ending the Islamic Democracy Deficit 
Despite encouraging signs, it is impossible to ignore a "democracy deficit" in the Muslim world, especially the Arab part of it. 
Only one of every four countries with Muslim majorities has a democratically elected government. 
Worse yet, the gap between Muslim countries and the rest of the world is widening. 
Democracy and freedom expanded over recent decades into Latin America, Africa, Europe, and Asia, but the Muslim world continues to struggle. 
By the reckoning of Freedom House, a think-tank devoted to monitoring democracy worldwide, the number of "free" countries around the world increased by nearly three dozen over the past 20 years. 
Not one has a Muslim majority. 
This phenomenon has been noted within the Muslim world as well. 
In the summer of 2002, a team of Arab scholars produced the Arab Human Development Report , written on behalf of the UN Development Program and the Arab Fund for Economic and Social Development. 
It portrays an Arab world lagging behind other regions in key measures, including individual freedom and women's empowerment, as well as economic and social development. 
Disturbing trends, such as a demographic youth "bulge" combined with high youth unemployment rates--reaching almost 40% in some places--highlight potentially explosive social conditions. 
The Arab world faces serious problems that can only be met by more flexible, democratic political systems. 
The second Arab Human Development Report , issued in 2003, underscores the close relationship between the Arab world's educational shortcomings and its lack of democracy. 
Democracy requires an informed citizenry able to question its government. 
A well-educated citizenry is also essential if young men and women are to acquire the skills needed to perform the sort of jobs today's global and competitive world demands. 
Alas, instead of progress, what we see is a cycle of inadequate educational opportunity leading to a lack of economic opportunity. 
Neither freedom nor prosperity can develop in such conditions. 
Muslims cannot blame the United States for their lack of democracy. 
Still, America does play a large role on the world stage; and in many parts of the Muslim world, particularly in the Arab world, successive US administrations--Republican and Democratic alike--have not made democratization a priority. 
At various times, the US avoided scrutinizing the internal workings of friendly countries in the interest of ensuring a steady flow of oil; containing Soviet, Iraqi, and Iranian expansionism; addressing issues related to the Arab-Israeli conflict; resisting communism in East Asia; or securing military bases. 
By failing to foster gradual democratization--and yielding to a "democratic exception" in parts of the Muslim world--America missed an opportunity to help these countries adapt to the stresses of a globalizing world. 
Continuing this policy is not in America's interest. 
According to the Bush administration's 2002 National Security Strategy, US policy will be more actively engaged in supporting democratic trends globally, with no exception for the Muslim world. 
This commitment was made with the full knowledge that democracies are imperfect and terribly complicated. 
Leaders in some Muslim states contrast democratic systems with their more orderly arrangements and point with satisfaction to the seeming stability that alternatives to democracy provide. 
But stability based on authority alone is illusory and ultimately impossible to sustain. 
Iran, Romania, and Liberia illustrate that rigid authoritarian systems cannot withstand the shocks of social, political, or economic change, especially at the pace that characterizes today's world. 
Any doubt that promoting democracy now receives greater emphasis in US foreign policy was removed by President Bush's speech of last November, in which he made clear that the Muslim world's democratic deficit is not tied to religion, but to "failures of political and economic doctrines." 
President Bush also made clear that Americans had learned from the past. 
"Sixty years of Western nations excusing and accommodating the lack of freedom in the Middle East did nothing to make us safe--because, in the long run, stability cannot be purchased at the expense of liberty. 
As long as the Middle East remains a place where freedom does not flourish, it will remain a place of stagnation, resentment, and violence ready for export." 
So the US now actively supports the extension of democracy throughout the Arab and Muslim worlds, not simply for humanitarian reasons, or for theoretical reasons, but from self-interest. 
History shows that societies where opportunity is safeguarded tend to be societies that are good international citizens. 
But, like medical doctors' Hippocratic oath, America and others must pledge to do no harm in promoting democracy. 
Unrestrained zeal to make the world better could make it worse. 
Promoting democracy must be undertaken with humility, care, and wisdom. 
Many models of democracy exist; and some models cannot be exported. 
Moreover, mere elections should never be confused with democracy. 
Rather, what distinguishes democracy from other systems is a distribution of power both within government and within society. 
Until such a balance exists, elections can threaten freedom by concentrating too much authority in one person or body without providing adequate checks and balances, including independent media. 
Not surprisingly, this takes time, resources, and effort. 
Finally, political reform must go hand in hand with economic and educational reform for all the citizens in a society, including the 50% who happen to be women. 
No country can succeed if it denies itself the talents of half of its people. 
True, democracy can only be built and maintained from within, by a country's people and leaders. 
Outsiders, however, can and should help. 
There is a role for governments, international organizations, corporations, universities, and journalists--from the US, but also from Europe and countries in Latin America, Asia, and Africa where democracy has taken root. 
Indeed, it is difficult to imagine a more important task for established democracies than helping other countries join their ranks. 

Ending the Nation-State Myth 
NEW YORK – This fall, thousands of college students will be taught a myth presented as fact. 
It is a myth that has helped fuel wars and may hinder finding solutions to the world’s biggest problems. 
Though the origin of this myth is cloudy, science has proven its falsity, and a globalized world has rendered it anachronistic. 
I am talking about the nation-state. 
The nation-state myth conflates two ideas, one that is concrete, the state, and one that is fuzzy, the nation. 
The utility of the state is clear. 
It is a necessary organizing principle that allows people to pool their resources for the common good and mobilize against common threats, whether they are floods or invading armies. 
The state is also the final arbiter of law. 
State power is even on the rise, partly as a backlash to globalization and as a result of growing wealth from energy markets. 
But the nation-state as a basis for statecraft obscures the nature of humanity’s greatest threats. 
Pollution, terrorism, pandemics, and climate change are global phenomena. 
They do not respect national sovereignty, and, therefore, they necessitate global cooperation. 
The origin of the nation-state idea is unclear. 
Most agree that it offered a way to consolidate and legitimize a state’s rule over a group of people, whether defined by a common language, culture, or ethnicity. 
The problem is that the contours of a cultural community rarely coincide with a political entity. 
Nor does the ideal of national unity account for internal diversity and conflict. 
Identities within nations are fluid, even from minute to minute. 
About 15 years ago, I spent a summer in France’s Loire Valley. 
As many travelers to France will attest, people in the French countryside believe that they, not Parisians, constitute the “true” France. 
This division of core and periphery is common in many countries. 
But I also noticed that a person’s identity would change during the course of a conversation. 
“We French” would give way to “We Gauls,” “We Latins,” “We Bretons,” “We Franks,” or “We Europeans” depending on the topic. 
This ever-changing identity was startling, but, on second thought, it made sense: after all, Charles de Gaulle famously said that it is difficult to govern a country with 246 types of cheese. 
China is often thought to be governed by the Han majority. 
But this group is linguistically, culturally, and even genetically diverse. 
As the author Ian Buruma recently mused, it is not clear what people mean by “China.” 
Taiwan is an independent state but is officially part of China. 
Chinese culture and language has spread all over the world. 
“China” is much more than just a nation-state, Buruma concludes. 
Taiwanese scholar Lee Hsiao-feng has recently argued that the concept “Chinese” is a meaningless word that was fabricated to justify rule over minorities. 
It is difficult to imagine a nation that is confined to one state or a state that contains one nation. 
Some argue that Japan is an example of a nation-state. 
In countless heated discussions, I have reminded many Japanese that the Japanese people actually comprise Ainu, Koreans, Chinese, Filipinos, and Ryuku. 
Their response is always: “Yes, but we want to believe that there is a Japanese people.” 
They even have a field of study devoted to examining what it means to be Japanese. 
Like religion, the nation-state myth requires a leap of faith. 
Japanese scholar Yoshihisa Hagiwara argues that since it is not grounded in fact, the nation-state myth is bound to dissolve, giving way to an understanding that we are merely individuals who are part of a global community. 
He laments that the Japanese are especially fond of the idea of “Japaneseness,” making it possible that Japan may become the “last hero” of a dying ethos. 
Expressions of this notion appear frequently in popular culture. 
A recent credit card commercial depicts a father and son traveling to Norway to trace their family’s origins. 
After bonding over local beer, food, sweaters, and swimming, they discover their family is actually from Sweden. 
If I were to take that trip, I might have gone to Ireland to discover that my Irish ancestors were originally from Scotland. 
But where were the Scots from? 
Just across another sea, perhaps. 
The origin myth continues ad infinitum until we reach humanity’s common ancestor, or an actual myth – a black egg in China, a spear in the ocean in Japan, or the interaction of fire and ice in France. 
If policymakers are to address today’s problems, they must think more broadly. 
One place to start may be to reexamine the concept of the nation-state, which students around the world are taught is the basic unit of international relations. 
Beyond the core Realist theories of balance of power, an introduction to ethics in international affairs – moral philosophy, human rights, and the role of non-state actors – should be mainstreamed in international relations curricula. 
As the philosopher Peter Singer showed in his book One World, a united front against the biggest problems facing the world will require a fundamental shift in attitude – away from parochialism and toward a redefinition of self-interest. 
Enlightened self-interest can be state-based, but interests would be re-defined to encompass universal principles such as the Universal Declaration of Human Rights. 

Ending the Silent Russo-European War 
There has been little mutual trust lately between the governments of Russia and the European Union. 
European politicians viewed Russia’s recent parliamentary and presidential elections skeptically. 
Diplomatic relations between Britain and the Kremlin are at a low since Alexander Litvenenko, a critic of the Russian government, was murdered – allegedly by a Russian agent – in London in 2006. 
Such mistrust poses an obvious threat to trade and investment between Russia and the EU. 
Russia’s trade with the EU between January and August 2007 reached $173.3 billion, or 51.6% of its foreign trade turnover. 
More than a half of Russia’s goods are sold in Europe, and two of its top three trade partners are European: Germany, with turnover of $31.9 billion, and the Netherlands, $28.3 billion. 
Similarly, European countries account for 75% of direct investment in Russia. 
Britain ranks first, pouring in more than $15 billion in the first half of 2007, despite the Litvinenko case and the tit-for-tat expulsion of diplomats during this period. 
Nevertheless, the volume of foreign investment falls short of what Russia needs, for its economy is unbalanced. 
More than half of its exports are oil and gas, with the rest mainly chemicals and agricultural products. 
Petrodollars are Russia’s main resource for the development of an information-based society. 
EU countries will continue to demand energy, and Siberian deposits are far from exhausted. 
As a result, diversification of Russia’s economy seems a distant prospect – all the more so because Russia’s bureaucracy, together with the state’s interest in “strategic” areas of the economy, repels foreign business. 
Indeed, Europeans constantly reproach Russia for the increasing level of state interference. 
Russia’s relations with the EU are governed by an agreement signed in June 1994 concerning trade, business and investment, competition issues, protection of intellectual, industrial, and business property, and financial cooperation. 
Over time, economic cooperation between the two sides has grown more complex, and a new legal framework is needed. 
But the European Commission is unable to start working on a new agreement until it has a mandate from the 27 EU member states. 
Such a mandate has not yet been secured. 
At the same time, conditions for Russian investment in the EU are far from perfect. 
Investors face political discrimination and administrative and technical barriers, especially concerning the power industry. 
Some EU “open” tenders have turned out to be closed to Russian companies. 
Economic nationalism is growing. 
Foreign investment is limited in sectors that the EU considers to be strategically and politically important. 
Russian companies have had to face anti-dumping claims. 
European branches of Russian banks face over-regulation and expensive certification procedures. 
In September 2007, a move by the European Commission to prevent foreign companies from controlling European energy transport networks was an example of a skirmish in this “silent war.” 
The commission’s order to “unbundle” energy companies into transport and distribution units is hardly likely to encourage foreign energy companies working in the EU to seek structural reforms in the Russian economy. 
Business leaders in Europe and Russia are beginning to seek a bold way out of this impasse: a common economic space between Russia and the EU. 
But free trade and closer integration can be achieved only if supported by national governments. 
Russia’s new Minister for Economic Development and Commerce, Elvira Nabiullina, said recently that European business “is Russia’s main partner on international markets,” and that cooperation “is one of the cornerstones of Russian foreign economic policy.” 
She points to the government’s promise to create a comfortable environment for business by continuing institutional reforms and assisting in the development of financial markets. 
Such statements are encouraging. 
But Russian business needs a comprehensive action plan, which should include cutting bureaucracy, implementing real administrative reform, freeing the economy from excessive state control, and radical measures to combat corruption. 
Russia also has to become integrated into the international economic system, accepting the rules applied by the rest of the world. 
Russia’s eventual accession to the World Trade Organization will be crucial to this development, and its accession needs to be promoted more actively by Europe as well as by Russia. 
The long-delayed new trade and investment agreement will be less relevant once Russia is in the WTO, whose rules take precedence over those of regional economic organizations. 
The legitimacy of European laws limiting the scope of Russian business activity in Europe and contradicting WTO regulations would immediately be questioned. 
Russia’s business leaders are ready to work for the creation of a common economic space between Russia and the EU. 
For Russia, such integration would provide a real spark for economic and social modernization. 
Russia’s government will, of course, have the final word in this matter. 
But it is unlikely to balk at a policy that treats Russia fairly. 

Ending the Tragedy of Darfur 
The critical conditions that continue to prevail in Darfur are causing immense suffering to its people. 
Both sides of the conflict – the government of Sudan and its allied forces, as well as all the opposition groups in Darfur – must understand that civilians should no longer fall victim to their political disputes. 
The Sudanese government’s consent to the deployment of the hybrid United Nations/African Union mission, which aims to keep peace in the region, is of course a welcome development. 
But the mandate of this mission must be strong enough to allow for full protection of the civilian population. 
Moreover, the force must have sufficient manpower, capacity, and funding to put this vital objective into practice efficiently. 
The countries and institutions that have committed additional funds in order to help secure the success of this mission – notably France, Spain, and the European Commission – should all be applauded. 
It is important for international actors to assure Sudan’s government that the UN/AU mission will not strive for regime change in the country or otherwise exceed its peacekeeping mandate. 
At the same time, the Sudanese government must be fully aware that only by adhering to past commitments and by cooperating in helping to prepare, deploy, and maintain the mission will the international community be encouraged to continue its support. 
As for the Darfur opposition, the recent efforts by some of its leaders to overcome fragmentation and re-unify their movement are a welcome development. 
It is essential that all major opposition groups achieve agreement about their aims and negotiating positions. 
Only then can they act as credible partners of the international community and the Sudanese government. 
All parties to the conflict must realize that, ultimately, there is no way to end their dispute other than through an equitable and sustainable peace agreement endorsed by all stakeholders. 
The return of internally displaced persons and due care for them must be a core component of any such arrangement. 
Responsible people around the globe, particularly politicians and journalists, must remain focused on Darfur. For the grievances and harm suffered daily by millions of victims and refugees remain as gruesome as ever, notwithstanding the fatigue from the prolonged conflict that some may perceive. 
Now that there are signs of possible stabilization in the months to come, it is time to start preparing for increased volumes of international reconstruction and development assistance, in addition to humanitarian aid. 
Economically advanced countries in particular should meet their global responsibility and help Darfur move toward renewal and prosperity. 
This increased assistance should emerge from an extension or re-focusing of national development cooperation programs. 
Additionally, international arrangements aiming at effective use of synergies should be carefully explored. 
In facilitating the complex relations between the international community and the local actors in Darfur, the UN currently plays an indispensable role and must be actively supported. 
China in particular should use its considerable influence in Sudan to bring the country’s decision-makers to a definitive peaceful settlement of the dispute. 
Moreover, because Darfur is emblematic of wider difficulties in the world, the international community must look beyond the immediate circumstances of the conflict and increase efforts to deal with the threats that have played a role in the disaster, such as climate change and environmental degradation. 
Indeed, the accelerating expansion of deserts will likely lead to a decrease of agricultural yields from the surrounding areas, acute deterioration of the availability of water, and possibly to further conflicts and displacement of people. 
Similar conditions exist – or may begin to exist – in several locations worldwide. 
So the global nature of this problem must be recognized and addressed in places where environmental degradation is already bringing about a dangerous deterioration in peoples’ lives. 
Where such damage looms as a threat, early prevention is required. 

Closing the TB Funding Gap 
NEW YORK – In the 25 years since tuberculosis (TB) was declared a global-health emergency, policymakers and health-care professionals have devoted considerable time discussing ways to eliminate it. 
Over the last two years alone, they have held talks in Moscow, Brussels, New Delhi, and, most recently, in September at the United Nations General Assembly in New York, where they convened for the first-ever high-level meeting on TB containment. 
But while leaders generally agree on the need to invest in solutions, we have surprisingly few TB medicines to show for our quarter-century of effort. 
The 250 million people who have been infected since 1993 – and the millions who have died – deserved better. 
TB is the world’s deadliest infection, and it has been with us for a very long time. 
Researchers theorize that humans first acquired TB in Africa about 5,000 years ago, and that the disease then swiftly spread along trade routes to nearly every corner of the globe. 
Today, TB is among the world’s leading causes of death, killing approximately 1.6 million people in 2017, which was only slightly fewer than the year before. 
But the effectiveness of TB treatments is declining, raising concerns that drug-resistant strains are becoming more virulent. 
Given its prevalence and seriousness, TB is not purely a medical problem. 
The disease perpetuates poverty in developing countries, because patients and their families must routinely spend up to half of their income buying medicines and managing care. 
And yet, with drug-resistant forms of TB spreading, these expenditures do not always yield results. 
By 2050, drug‐resistant TB could cost the global economy as much as $16.7 trillion in medical expenses and lost wages – roughly the equivalent of the European Union’s entire economic output. 
To be sure, the world can still win the war on TB. 
Researchers are closing in on more effective drug regimens, better diagnostics tools, and viable vaccines. 
Still, we cannot get over the finish line without a significant increase in research and development spending. 
According to the World Health Organization, the annual funding deficit for TB research and development is more than $1.3 billion, a shortfall that is exacerbated by a lack of market incentives within the pharmaceutical industry. 
Despite TB’s global reach, two-thirds of new cases in 2017 occurred in just eight countries – India, China, Indonesia, the Philippines, Pakistan, Nigeria, Bangladesh, and South Africa. 
With drug makers apparently unwilling or unable to fund development costs unilaterally, rich and poor countries must collaborate to fill the gap. 
The R&D burden must be shared among the public and private sectors, and resulting treatments must be universally adopted and available. 
The goal should be to ensure that medicines are accessible and affordable for anyone who needs them; this includes high-risk populations such as health-care workers, as well as people living with HIV/AIDS, for whom TB is a leading cause of death. 
The high-level meeting in September was meant to galvanize the world’s TB-eradication efforts. 
Unfortunately, the rare political unity in the lead-up to the discussion was overshadowed by a debate about drug makers’ intellectual-property rights. 
While the declaration endorsed at the end of the UN meeting did offer a compromise, the quandary remains: how can we guarantee access to medications – especially for the poorest patients – while maintaining funding streams for pharmaceutical R&D? 
Patients’ needs must always be emphasized. 
But we cannot simply ignore the role that intellectual property plays in the creation of new treatments. 
To strike the right balance with TB, the international community must recommit to R&D initiatives by showing the financial leadership agreed upon in September. 
In the best-case scenario, that agreement will supplement the so-called product development partnerships that have already helped tackle many neglected diseases, including TB. 
Last year, an estimated 3.6 million people infected with TB were unable to access treatment, a staggering gap in coverage that must be quickly closed. 
The longer we wait to increase R&D funding and strengthen collaboration on treatment, the higher TB’s death toll will climb. 
With so many lives at stake, the time for talking is over. 

Endorse the Nuclear Test Ban 
STOCKHOLM/MEXICO CITY – Indonesia’s parliament has just taken a historic step, one that makes the planet safer from the threat of nuclear weapons. 
The importance of Indonesia’s decision to ratify the Comprehensive Nuclear-Test-Ban Treaty cannot be overstated. 
This is a golden opportunity for the remaining eight countries to endorse the CTBT, enabling it to come into legal effect. 
For the five decades following World War II, a nuclear test shook and irradiated the planet on average every nine days. 
This era was ended in 1996, when the Comprehensive Nuclear-Test-Ban Treaty was adopted by the United Nations General Assembly. 
But, for the CTBT to enter into force, all 44 states specified as holders of nuclear technology must ratify it. 
Until they do, the specter of nuclear testing will continue to haunt us. 
It is urgent that the CTBT take full legal effect around the world as soon as possible. 
A complete ban on all nuclear explosions would hamper the upgrading of existing nuclear arsenals and the development of new weapons, diminishing the capabilities of both current and potential nuclear-armed states. 
The CTBT reinforces both nuclear non-proliferation and nuclear disarmament, and is essential for global, regional, and national security. 
We applaud the fact that all of the nuclear-capable countries in Europe and Latin America and many in other regions in the world have ratified the CTBT. 
With Indonesia’s ratification, the number of countries that have yet to do so has decreased to eight: China, Egypt, India, Iran, Israel, Pakistan, North Korea, and the United States. 
These countries have a responsibility to make the legal ban on nuclear testing a reality. 
We strongly urge them to reconsider the CTBT; this important instrument for peace and security will bring us a step closer to a world without the threat of nuclear weapons. 
The CTBT has already had a dramatic impact, despite not yet being in force. 
Since its adoption, nuclear testing has virtually stopped, and all 182 signatory states have abstained from testing nuclear explosives. 
The three countries that have failed to ratify the CTBT and have tested such devices – India, Pakistan, and North Korea – have faced universal condemnation from the UN Security Council, and UN sanctions. 
A key measure of the viability of any arms-control treaty is how effectively it can be verified. 
In this respect, the international community has a formidable instrument at its disposal. 
The Preparatory Commission for the Comprehensive Nuclear-Test-Ban Treaty Organization (CTBTO) is creating a verification regime that has repeatedly proven its reliability in detecting even small underground nuclear tests. 
In addition to its verification mandate, the CTBT monitoring system also helps to mitigate disasters. 
During the tragic catastrophe in Japan last March, CTBTO data helped local authorities to issue timely alerts. 
The CTBTO continued to help by monitoring the global dispersion of radioactivity from the damaged Fukushima nuclear power plant. 
Mexico and Sweden are longstanding supporters of the CTBT. 
Over the coming two years, our countries will jointly oversee the process of bringing the CTBT into force. 
We pledge to spare no effort to advance this aim. 
We vow to: 
· Call upon political leaders in the states that have not yet ratified the CTBT to act without delay and take concrete steps to this end; 
· Encourage civil-society groups – NGOs, media, universities, and youth organizations – in these countries to urge their decision-makers to ratify the CTBT; 
· Use national, regional, and international meetings and conferences to promote the CTBT at every level of decision-making; 
· Complete the CTBTO’s verification regime, which all states should support as a powerful deterrent to any would-be nuclear testers. 
It is time to end this destructive experiment and close the door on nuclear testing once and for all. 
We appeal to decision-makers in the eight states that have not yet ratified the CTBT to move forward. 
Indonesia has set an example; now the spotlight is on you. 

Building Up the BRICS 
MANCHESTER – This year’s meeting of the BRICS in India is taking place just a fortnight after the 15th anniversary of the creation of the term “BRICs,” which I coined to refer to the major emerging economies: Brazil, Russia, India, and China (South Africa was added in 2010). 
Recently, my brief tenure in the British government came to an end, following the completion of an independent review on antimicrobial resistance (AMR) that I had been chairing. 
As I ponder what to do next, and as the BRICS leaders meet, I can’t help but wonder about the term’s meaning today. 
Have these large and promising emerging economies fulfilled expectations? 
Perhaps the simplest way to answer this question relates to my work on the AMR review, which was launched by former British Prime Minister David Cameron in 2014. 
On September 21, we achieved a major victory: a high-level agreement by the United Nations on the topic. 
After the agreement was reached, a German television crew that had occasionally followed my team and me as we worked to spread awareness of AMR asked me, on air, whether the outcome was more important than the BRIC concept. 
Without even waiting for me to answer, they declared that it obviously was. 
And they were right: no economy, emerging or otherwise, can hope to be successful if it is plagued by a health threat as serious and uncontrollable as AMR. 
But there is more to the story: the BRICS are just as important to tackling AMR as tackling AMR is to the BRICS. 
South Africa, for one, was a key supporter of the United Kingdom in discussions about AMR at the recent G20 summit in Hangzhou, China, and the issue might not have ended up in the meeting’s communiqué without its support. 
And that is the point. 
The BRICS today, like in 2001, have a vital role to play in tackling the most pressing international challenges. 
In fact, I came up with the acronym not just because the letters fit together, but also because of the word’s actual meaning: these emerging economies, I argued in my 2001 paper, should be the building blocks of freshly overhauled global financial and governance systems. 
Yet, as we approach this year’s autumn meetings of the International Monetary Fund and the World Bank, the BRICS remain severely underrepresented by these critical institutions. 
If this does not change, with reforms going much further than they have so far, we will soon find that “global governance” is no longer global at all. 
To be sure, the BRICS have lately been going through a rough time. 
The economic performance of Brazil and Russia, in particular, has been very disappointing so far this decade, to the point that many now perceive those countries as unworthy of the status the acronym afforded them. 
But the suggestion that the BRICS’ importance was overstated is simply naïve. 
The size of the original four BRICs economies, taken together, is roughly consistent with the projections I made all those years ago. 
Both Russia and Brazil now account for a similar share of global GDP as they did in 2001, though Russia, according to my simple calculation, might currently be outside the world’s ten largest economies. 
Brazil, for all of its considerable problems, is higher in the world ranking today than even I had envisaged back then. 
India continues along roughly the same path it was on 15 years ago. 
With the right structural reforms, it may even be able to achieve a sustained period of Chinese-style double-digit economic growth. 
But the biggest BRICS success story remains China, which, despite its recent slowdown, has far exceeded expectations. 
If the economy grows at an annual rate of around 6% for the remainder of the decade, it will fulfill my 20-year projection. 
This is not to diminish the challenges confronting China. 
But if it manages to address the most urgent among them – downside deflationary risks – its much-discussed debt challenge will become far more manageable. 
Fortunately for China, other countries want – or should want – it to succeed. 
After all, a dynamic Chinese economy is in the interest of many other countries, especially those that can export the goods and services that a more modern, consumer-driven China needs. 
In fact, the rise of the Chinese consumer may well be the most important single global economic variable today – even more important than, say, the economic problems afflicting Europe and Japan or questions about India’s enduring global relevance. 
The potential barriers to the BRICS’ growth and development are many, including health threats like AMR, educational challenges, inadequate representation in global governance bodies, and a number of short-term cyclical problems. 
Policymakers worldwide must commit themselves to dismantling these barriers, and enabling the BRICS to fulfill, finally, their true potential. 

Energizing Europe 
In France’s pre-presidential electoral campaign, European affairs are mentioned or whispered, but almost never debated. 
France is mostly concerned with its own problems, particularly the supposed malfunctioning of its political class and the apparent laziness of the French public, which is blamed for weak economic growth, especially when compared to the United States. 
France needs a debate on European Union affairs, but only as long as it does not degenerate – as is common in Europe – into self-flagellation. 
But the germ of such a debate exists, and it sounds very different from that which dominated the failed constitutional referendum campaign in France two years ago. 
The operation of European institutions – the European Central Bank, the European Commission, and the Stability Pact – is facing severe criticism, but not in the name of a nostalgia for national sovereignty. 
Europe is not being rejected; instead, the criticism has been in the spirit of improving European institutions in the name of the common good. 
Both of the major candidates for the French presidency, Ségolène Royal and Nicholas Sarkozy, have called for the creation of an economic government for the euro zone. 
Of course, such a “government” already exists in the form of the European Central Bank. 
But what is needed is an institutional framework that would establish greater political responsibility concerning the primary economic objectives that Europe should pursue – full employment and growth – and that would at least partly close the democratic deficit implied by the ECB’s takeover of monetary policy from euro-zone states. 
A moment of seeming political disunity, such as exists today, may not seem the right one to initiate such a project. 
But, historically, Europe has succeeded when, at moments of danger, it has initiated irreversible processes that outweigh any other consideration. 
Europe’s founding fathers understood this when they hatched the idea of creating the European Coal and Steel Community: encouraging old enemies to pool some of the most powerful tools of war under the pretext of advancing their economic interests was a strategy of rare intelligence. 
We now live in a similar moment of uncertainty and danger, and this time, too, there is a project, both economic and political, that can unite the Union: energy independence, a key factor in national sovereignty. 
Today, there is nothing on a pan-European scale that guarantees the responsibility of each member state to ensure the security of its future supplies. 
The European Commission is weary of trying to build a single energy market, which has required it to persuade governments that they must dismantle their existing monopoly operators – a prerequisite to competition. 
Although member states appear to have resigned themselves to this, they fervently resist other European firms taking control of their “national champion” companies. 
To be sure, governments cannot escape their responsibilities to their citizens, and only the most naïve technocrat believes that the market alone can ensure energy independence. 
At the same time, however, purely bilateral negotiations between individual EU members and oil- and gas-producing countries weakens the member states’ bargaining power, as well as undermining Europe’s geopolitical weight in world affairs. 
Yet, fortunately, there is no need for resignation. 
There is an obvious solution, similar to the Coal and Steel Community implemented by our founding fathers: a European energy, environment, and research community (E3RC). 
It is a mistake to believe that ecological concerns can be addressed only through negative growth. 
In fact, the opposite is true. 
New energy and environmental technologies will undoubtedly drive growth in the future. 
But only if research is doubled to create new energy-efficient technologies will we eventually consume less energy overall and more energy in an environmentally friendly way. 
The ecological disasters that today’s economic activity has already produced and the catastrophic potential of those to come have at last brought home the fact that energy policy and environmental protection cannot be separated. 
As it is, the E3RC would pursue two directly related objectives: European energy independence, which would be helped by new energy and environmental technologies, and Europe’s increased bargaining power in global markets. 
Its creation would also send out a new message to the European public: competition alone is not the only thing on Europe’s horizon. 
Above all, the EU requires cooperation. 

Energy Disarmament 
BRUSSELS – Has the “energy weapon” of the 1970’s – the withholding of energy supplies for political ends – returned? 
Using oil or gas as a political weapon is easier said than done, of course, but this year’s renewal of the Russia-Ukraine gas dispute, and the resulting cut-off of supplies to much of the European Union, should concentrate minds on the EU’s need to disarm those who would use the energy weapon. 
As a long-term strategy, energy embargoes have always proven to be futile. 
Saudi Arabia saw its share of world oil exports drop sharply in the 12 years after the 1973-1974 embargo. 
The huge price rises of the 1970’s became unsustainable because they drove governments in Europe and elsewhere to protect their consumers through higher oil taxes, conservation, and expansion of non-OPEC oil production. 
Europe cannot afford to let this history make it complacent. 
In the wake of the repeated Russia-Ukraine dispute, indeed, Europe must react with the same decisiveness to diversify its energy supplies that it demonstrated in the 1970’s in meeting OPEC’s challenge. 
As with the Middle Eastern countries, only bitter experience will teach Russia that secure energy supplies are in everyone's interest. 
The Kremlin will learn that lesson only if Europe designs, adopts, and sticks to an energy strategy that lessens its dependence on Russian supplies and builds its own common foreign policy on energy security, as recommended by the European Parliament's 2007 report. 
Gas is arguably more vulnerable than oil to unforeseen supply interruptions. 
Oil is reasonably easy to trade globally in maritime tankers, whereas in most gas markets the fixed pipeline between gas field and gas burner locks producers and consumers in an exclusive embrace. 
One task facing Europe now is to make that Russian bear hug less exclusive, which will require a coordinated and sustained effort between the EU’s member states and their neighbors on the question of external energy security. 
That means building new gas pipelines – such as the Nabucco, Trans-Saharan and White Stream projects – that bypass Russia, and perhaps making their completion a condition for any new Russian pipelines, particularly the controversial trans-Baltic Nordstream pipeline and the South Stream pipeline to the Balkans and Italy. 
Only by tying the fates of these projects to each other will Russia’s potential to disrupt them be dissipated. 
Another important internal aspect of an EU energy security policy must be a binding pan-European common energy policy that better coordinates national government infrastructure and distribution projects. 
Major public as well as private investments will be needed to build links between various national pipeline grids. 
These two reforms alone would deprive Russia of its ability to play one country off against another, because a concession granted to one national distributor would immediately become available to customers in all the other countries through enforceable supply contracts clauses and transit protocols overseen by the European Commission. 
This would be analogous to the role the Commission plays in promoting the Trans European Networks for road and rail communications. 
Across Europe, energy companies are beginning to realize the benefits of such reforms and are becoming less resistant to them than in the past, when many sought to protect their national markets and ignore the rest of Europe. 
Because a market in tradable liquefied natural gas (LNG) is emerging – flows to Europe have more than doubled over the past decade and represent about one-quarter of the world’s total cross-border gas trade – Europe will need to invest heavily in new LNG terminals as another alternative to Russian gas. 
Some $100 billion should be invested in LNG over the next decade. 
Such investments will have big implications for Europe’s gas industry and create more transparency in global gas pricing, because it is now possible to import gas from distant producers. 
Better integration of Europe’s electricity grid is also essential to energy security, because this will allow individual countries to trade freely with each other when some have surpluses and others face shortfalls. 
For example, the Baltic states need links to the Finnish and Polish grids to end their energy isolation. 
The EU Commission does seem to be getting this message. 
It recently authorized spending 5 billion euros for priority energy projects, including1.75 billion euros for gas and electricity interconnectors, 1.25 billion euros for carbon capture and gas storage, and 250 million euros for Nabucco. 
Not enough, of course, but it is a good start. 
Beyond these policy actions, Europe also needs to speak with one voice when dealing with monopoly suppliers such as Russia – or, in the future, with an Iran that might one day become linked to the planned Caspian pipelines. 
Such a single voice would not erode individual countries’ sovereign right to determine their energy production mix i.e. balance between conventional, renewables and nuclear, as some Eurosceptics claim; it is simply common sense between countries determined to defend their common security. 
Energy security in Europe ultimately depends on recognizing that, due to the linked natures of our energy supply and transmission systems, the EU and our neighbors must depend on each other. 
Thus a strengthened EU energy solidarity is vital, with every country in Europe helping via binding “solidarity clauses” to guarantee the energy supplies of others in an emergency – whether that emergency is deliberate or accidental. 
The European Energy Charter, which emphasizes market access and transparency, though laudable, is insufficient in moments of crisis when markets are at their worst. 
Europe’s leaders have a duty to tell their peoples what needs to be done to ensure a secure energy future. 

Energy Independence in an Interdependent World 
CAMBRIDGE – When President Richard Nixon proclaimed in the early 1970’s that he wanted to secure national energy independence, the United States imported a quarter of its oil. 
By the decade’s end, after an Arab oil embargo and the Iranian Revolution, domestic production was in decline, Americans were importing half their petroleum needs at 15 times the price, and it was widely believed that the country was running out of natural gas. 
Energy shocks contributed to a lethal combination of stagnant economic growth and inflation, and every US president since Nixon likewise has proclaimed energy independence as a goal. 
But few people took those promises seriously. 
Today, energy experts no longer scoff. 
By the end of this decade, according to the US Energy Information Administration, nearly half of the crude oil that America consumes will be produced at home, while 82% will come from the US side of the Atlantic. 
Philip Verleger, a respected energy analyst, argues that, by 2023, the 50th anniversary of Nixon’s “Project Independence,” the US will be energy independent in the sense that it will export more energy than it imports. 
Verleger argues that energy independence “could make this the New American Century by creating an economic environment where the United States enjoys access to energy supplies at much lower cost than other parts of the world.” 
Already, Europeans and Asians pay 4-6 times more for their natural gas than Americans do. 
What happened? 
The technology of horizontal drilling and hydraulic fracturing, by which shale and other tight rock formations at great depths are bombarded with water and chemicals, has released major new supplies of both natural gas and oil. 
America’s shale-gas industry grew by 45% annually from 2005 to 2010, and the share of shale gas in America’s overall gas production grew from 4% to 24%. 
The US is estimated to have enough gas to sustain its current rate of production for more than a century. 
While many other countries also have considerable shale-gas potential, problems abound, including water scarcity in China, investment security in Argentina, and environmental restrictions in several European countries. 
The American economy will benefit in myriad ways from its change in energy supply. 
Hundreds of thousands of jobs are already being created, some in remote, previously stagnating regions. 
This additional economic activity will boost overall GDP growth, yielding significant new fiscal revenues. 
In addition, the lower energy-import bill will cause America’s trade deficit to narrow and its balance-of-payments position to improve. 
Some US industries, such as chemicals and plastics, will gain a significant comparative advantage in production costs. 
Indeed, the International Energy Agency estimates that the additional precautions needed to ensure shale-gas wells’ environmental safety – including careful attention to seismic conditions, properly sealed shafts, and appropriate waste-water management – add only about 7% to the cost. 
With respect to climate change, however, the effects of greater reliance on shale gas are mixed. 
Because natural-gas combustion produces fewer greenhouse gases than other hydrocarbons, such as coal or oil, it can be a bridge to a less carbon-intensive future. 
But the low price of gas will impede the development of renewable energy sources unless accompanied by subsidies or carbon taxes. 
At this stage, one can only speculate about the geopolitical effects. 
Clearly, the strengthening of the US economy would enhance American economic power – a scenario that runs counter to the current fashion of portraying the US as being in decline. 
But one should not jump to conclusions. 
A balance of energy imports and exports is only a first approximation of independence. 
As I argue in my book The Future of Power, global interdependence involves both sensitivity and vulnerability. 
The US may be less vulnerable in the long run if it imports less energy, but oil is a fungible commodity, and the US economy will remain sensitive to shocks from sudden changes in world prices. 
In other words, a revolution in Saudi Arabia or a blockade of the Strait of Hormuz could still inflict damage on the US and its allies. 
So, even if America had no other interests in the Middle East, such as Israel or nuclear non-proliferation, a balance of energy imports and exports would be unlikely to free the US from military expenditures – which some experts estimate run to $50 billion per year – to protect oil routes in the region. 
At the same time, America’s bargaining position in world politics should be enhanced. 
Power arises from asymmetries in interdependence. 
You and I may depend on each other, but if I depend on you less than you do on me, my bargaining power is increased. 
For decades, the US and Saudi Arabia have had a balance of asymmetries in which we depended on them as the swing producer of oil, and they depended on us for ultimate military security. 
Now the bargains will be struck on somewhat better terms from America’s point of view. 
Likewise, Russia has enjoyed leverage over Europe and its small neighbors through its control of natural gas supplies and pipelines. 
As North America becomes self-sufficient in gas, more from various other regions will be freed up to provide alternative sources for Europe, thereby diminishing Russia’s leverage. 
In East Asia, which has become the focus of US foreign policy, China will find itself increasingly dependent on Middle Eastern oil. 
American efforts to persuade China to play a greater role in regional security arrangements may be strengthened, and China’s awareness of the vulnerability of its supply routes to US naval disruption in the unlikely event of conflict could also have a subtle effect on each side’s bargaining power. 
A balance of energy imports and exports does not produce pure independence, but it does alter the power relations involved in energy interdependence. 
Nixon got that right. 

Energy Markets or Energy Governance? 
MADRID – This month, the International Energy Agency will publish its annual report, the internationally definitive World Energy Outlook, which will confirm that we are not on the right track to reduce global warming. 
If the current trend in energy production continues, the earth’s average temperature will be more than 2ºC higher in 2100 than it was in 1990, irreversibly harming the planet and conditions for human life. 
Other, more immediate crises are occupying the world’s attention almost completely, distracting governments and citizens alike from the energy challenges that are still before us. 
In the United States, there has been no energy debate at the federal level for a long time; the European Union is in the eye of a financial hurricane; and the emerging countries want to maintain rapid economic growth in order to lift millions out of poverty. 
In this context, the next meeting of the United Nations Framework Convention on Climate Change (UNFCCC), set for the end of November in Durban, South Africa, is passing totally unnoticed. 
But energy is fundamental for humanity, not only because of its potentially negative externalities, but also given its economic relevance: Western countries spend 8-10% of their GDP on energy, and developing countries spend double or triple that amount. 
For this reason, we need a system to govern energy. 
Owing mainly to its environmentally negative externalities, an unregulated energy market is not a useful governing mechanism, because it is unable to internalize the environmental costs. 
It has been calculated that the most contaminating energy sources would have to pay a 70% tax to reflect their negative externalities. 
A substantial lack of information in this field is another reason why the free market doesn’t work. 
Often, as with the properties of a gas reserve, for example, information is technically difficult to obtain. 
In addition, governments consider natural resources to be strategic and don’t release information about them. 
Finally, time frames related to energy are usually long: centuries for environmental effects or decades for investments to pay off. 
Thus, energy must be governed through a system of cooperation and regulation. 
That will be complicated, of course. 
Managing energy requires taking into account technical, political, and economic dimensions simultaneously. 
Energy exploration and production requires many different disciplines and technologies – eolic (wind), photovoltaic, nuclear, coal, etc. 
Something similar exists in the political sphere, where industrial and economic sectors are organized but divided. 
And the need for international coordination poses an additional difficulty. 
The energy sector exemplifies the inadequacy of our multilateral institutions. 
Energy policy is national, but the sector’s externalities are global. 
A radioactive leak, the rupture of an undersea oil well and, above all, CO2 emissions do not threaten just one country. 
On the other hand, energy’s benefits adhere to specific agents, be they consumers, producers, or sellers. 
This imbalance creates a clear incentive for free riders: they benefit, while the rest of us pay. 
Moreover, global governance is necessary because energy supply and demand around the world are disconnected. 
Few countries have a neutral energy balance. 
Oil, the world’s main source of energy, is indicative in this regard. 
The Middle East has a 266% commercial surplus of oil, and the US a 65% deficit. 
This geographical imbalance requires an ordered system of trade, clear regulations, and a well-structured global market. 
Today, however, opaque bilateral agreements abound, and very different environmental requirements and contradictory subsidies coexist. 
As a result, our global energy institutions are woefully inadequate. 
The International Energy Agency admits only OECD countries, which excludes China, the largest energy consumer. 
The intergovernmental Energy Charter Treaty, which obliges signatories to apply impartial market rules to energy products and services, has not been signed by the US, the world’s second-largest energy consumer, or ratified by Russia, the world’s largest oil producer. 
World Trade Organization agreements apply to energy only tangentially, because energy is considered an exhaustible natural resource, and in many cases is thus exempt from the rules. 
Moreover, non-Western countries – which include big consumers like China and India, and the largest producers (the Gulf states and Russia) – don’t trust the institutional system created mainly by the West. 
The emerging countries rightly argue that the West is responsible for today’s climate-change problem. 
From the Industrial Revolution until very recently, the West’s development was free of any environmental restrictions, and the emerging countries believe that they should not have to bear the adjustment cost. 
Likewise, producing countries oppose giving up one of the few bases of power they have. 
The solution must include a new institution. 
Perhaps, for a start, it would be a good idea for the world’s largest emitters to negotiate through the G-20, or something like it, for energy. 
Later, negotiations could be opened up to all states, placing them under the ambit of the UNFCCC, for example. 
The focus of the negotiations must be comprehensive, resulting in emission limits and financial and technological support for energy sources that are less harmful to the environment. 
Limiting emissions would impose costs disproportionately on oil-exporting countries, and on consumers in emerging countries, where technology is less sophisticated. 
At the UNFCCC’s meeting in Durban, all countries – developed, emerging, with or without natural resources – must join together to ensure that when the other crises currently roiling the world are finally resolved, the biggest crisis of all does not catch us off guard. 

What Energy Shortage? 
MARTIGNY, SWITZERLAND – If we were able to capture and use the energy from just two minutes of sunlight falling on the earth, it would be enough to fuel our cars, light and heat our buildings, and provide for all of our other electricity needs for an entire year. 
Simply put, we humans are not facing a shortage of energy. 
We are facing a technical challenge in capturing it and delivering it to consumers; and one of the most efficient ways to meet that challenge is to invest in better ways to store it. 
Many of the world’s problems today can be traced to energy use, from conflicts over oil supplies and concerns about greenhouse-gas emissions to lost productivity and output stemming from shortages and blackouts. 
In many of the poorest parts of the world, the lack of energy stifles economic development. 
Globally, more than 1.3 billion people have no access to electricity; and some 2.6 billion have no access to modern cooking facilities. 
More than 95% of these people are in Sub-Saharan Africa or developing Asia, and 84% live in rural areas. 
During the run-up to the recent presidential election in Nigeria, for example, a woman was asked what she wanted the candidates to deliver. 
She replied with a one-word answer: “Light.” 
Electricity, a basic commodity, would allow her to continue to work and her children to study. 
Unreliable or unavailable energy is a problem in much of Africa and the Indian sub-continent, as well as some other parts of Asia. 
According to a report by the International Energy Agency, improvements to the energy sector could provide the equivalent of a decade of growth in some of the poorest parts of the world. 
Our global energy crisis has been aggravated by a lack of innovation. 
According to a study by the United States government’s Lawrence Livermore National Laboratory, more than 60% of the energy we use is lost between the time it is generated and the time it is consumed. 
This includes the inefficiency in converting fossil fuels to electricity, losses during transmission, wasteful consumer behavior, and the need to maintain a reserve to prevent blackouts. 
A new wave of innovation is required, one that can eliminate waste, reduce pollution, and broaden access to energy around the world. 
That means focusing on efficiency-boosting technologies such as wireless communication, machine-to-machine communication, smart metering, and better production management. 
Renewable energy sources, including solar and wind power, are well positioned to contribute to energy needs in both mature and emerging economies. 
But, because the sun does not always shine, and the wind does not always blow, energy from these sources is unstable and intermittent. 
And this will continue to be a problem unless, and until, we are able to store power from renewable sources efficiently. 
Studies by the US Western Electricity Coordinating Council have found that finding better ways to store energy could cut total waste by about 18% and boost the efficiency of electricity use by up to 11%. 
Better energy-storage methods would also make it easier to deliver electricity to hard-to-reach areas that are currently underserved, as well as help make the best use of often-scarce sources of power. 
One well-tested method for storing energy is to use excess capacity to pump water into reservoirs, so that it can be used later to power turbines when demand is high. 
But this approach is practical only in mountainous areas, making it unsuitable as a mass-market solution. 
Promising areas of research include grid-scale batteries with the ability to charge and discharge tens of thousands of times and data analytics to optimize the use of the batteries and make the grid as efficient as possible. 
It is not enough to generate energy. 
We must also use it efficiently, and the wide-scale adoption of state-of-the-art storage technology will be an essential part of the solution. 
Ensuring that the world’s energy supplies are stable, efficient, accessible, and affordable will take time. 
But breakthroughs are on the horizon. 
Our task is to keep our sights there. 

Engaging the Islamists 
The massive victory of Hamas in the Palestinian parliamentary elections stunned much of the world, but the outcome should not have been so surprising. 
Indeed, Hamas’s moment of triumph is part of a growing regional pattern. 
Four years ago, Turkey’s Islamic-oriented Justice and Development Party won a plurality in parliamentary elections and formed a government. 
A month later, a similarly named Islamic party in Morocco, Parti de la Justice et du Development (PJD), finished third in legislative elections. 
Last December, the Muslim Brotherhood in Egypt (legally banned since 1954) scored equally impressive results, garnering 20% of the popular vote and 88 seats in the Parliament, making it the main opposition bloc to Mubarak’s ruling National Democratic Party (NDP). 
Hezbollah in Lebanon and Shiite parties in Iraq have also performed well in elections. 
Despite this democratic endorsement, most Western governments have been reluctant to engage with these parties or to prepare for Islamists coming to power through the ballot box. 
The irony is obvious: Islamists, who seem suspicious of democracy as a Western plot, took President George W. Bush’s promotion of democracy in the Muslim world more seriously than America’s autocratic friends – and possibly more seriously than Bush himself. 
In his first press conference after Hamas’s victory, Bush was visibly at a loss for words in responding to this “unexpected development.” 
The truth is that over the last three years, some regional insiders, including me, had several lengthy discussions with Bush’s advisors on the National Security Council (NSC) and in the State Department. 
We urged the Bush administration to formulate a consistent policy that engages the region’s Islamists who are willing to rule by democratic principles. 
Some of this debate was widely publicized. 
Part of America’s reluctance to deal with Islamists reflected concern over the reaction of autocratic regimes, some of which are long-time allies. 
This fear proved not only unwarranted, but also counterproductive, for it has not stopped the march of the Islamists in the Arab Middle East. 
Now it is time for a fresh and bold approach toward all contending political forces in the Muslim world. 
First, America and the West must stop supporting autocrats with aid, trade, and arms. 
Second, there must be a push to expand the public space for the Muslim world’s democrats, so free media and independent judiciaries to protect press freedom need to be boosted. 
Third, an active dialogue that engages the Islamists, no matter how difficult, must begin and continue. 
The West needs to establish clear and consistent rules of engagement. 
It is legitimate and imperative to make resumption of aid to Palestinians contingent on Hamas’s recognition of Israel’s right to exist and on its commitment to all international agreements previously signed by the PLO and the Palestinian Authority. 
In an earlier step toward recognition by the world community, the PLO had to revamp the Palestinian Covenant, which called for the destruction of Israel. 
There is no reason why Hamas would not follow that precedent, if the demand to do so were made relentlessly. 
In fact, all militant liberation movements have renounced violence in due time, from the IRA to the Sandinistas to the African National Congress. 
Likewise, Israel must reciprocate every gesture of good will from Hamas, however psychologically difficult this may be. 
After all, in 1947 similar Jewish “freedom fighters” blew up the King David Hotel, killing tens of British officers. 
Until the 1970’s, these Zionist guerillas were wanted as terrorists by British authorities. Then one of them, Menachem Begin, was elected Prime Minister of Israel and became a partner in peace with Egypt’s President Anwar Sadat. 
Sadat himself was a suspected terrorist, according to Egyptian authorities, for having plotted and taken part in assassinating a prominent political figure. 
But both Sadat and Begin became respected worldwide for taking risks for peace and won a joint Nobel Peace prize. 
So, for Hamas as well as for America, the West, and Israel, it is futile to look back in anger and frustration. 
Instead, they all should look forward to creating anew the more positive legacies of Sadat, Begin, Rabin, and even Ariel Sharon. 
If those leaders could disavow their own violent pasts and take practical steps toward peace in the region, why can’t Hamas? 

A New Century’s New Technologies 
DAVOS – This year’s World Economic Forum meeting in Davos, Switzerland, addresses threats to geopolitical stability and human life, and seeks ways to accelerate the design of more effective political, economic, and technological tools to address them. 
Among this generation’s most daunting challenges are food, water, and energy shortages; climate change and rising sea levels; and the spread of new, drug-resistant diseases. 
Humanity has faced threats to its existence and the health of the planet before, yet we have managed to avoid the apocalypse, or at least postpone it, through ingenuity and invention. 
This year’s Davos meeting will offer a glimpse of where the next life-, planet- and economy-saving discoveries and products will come from, and where we should invest our talents and treasure to fuel the next generation of transformative technologies. 
An accelerating convergence of the biological, physical, and engineering sciences promises a stunning array of new technological solutions. 
Imagine a coal-fueled power plant that emits only water and clean air. 
Inside the plant, designer yeast cells transform the carbon dioxide released during the coal’s combustion into raw materials for floor tiles and other construction supplies. 
Or imagine a simple and inexpensive urine test that can diagnose cancer, eliminating the need for a surgical biopsy. 
And, when cancer treatment is needed, its toxic punch hits cancer cells selectively, with far fewer damaging side effects. 
Or imagine a future with plentiful food and fuel crops. 
Through improved seed stocks and more efficient water management, we can have crops that require less water, grow at higher density, and thrive in wider temperature ranges. 
And data-driven agriculture supply chains will move them more effectively to the market. 
These advances will enable us to feed and provide power – at a lower economic and environmental cost – to the anticipated 2050 population of nine billion people. 
These and other innovations are emerging from the convergence of biology and engineering that is now upon us. 
A new generation of scientists, engineers, and clinicians, educated more broadly than their predecessors, speak the languages of both and are working together in unprecedented ways. 
They are conversing across disciplines – not only engineering and biology, but also chemistry, physics, mathematics, and computation – and setting new paths for innovation, from initial discovery to the launch of advanced applications in the marketplace. 
The technologies on which many of us depend today arose from a parallel convergence of discoveries in physics and engineering in the early twentieth century. 
In 1900, the world did not have ready access to electricity, automobiles and aviation, or telecommunications. 
In much of the world, we now take these conveniences for granted; indeed, we regard them as necessities. 
What began as esoteric explorations of the workings of the physical world – the nature of electromagnetism and the atomic structure of matter, for example – became, in the hands of inventors and innovators, telecommunications, new drugs, medical imaging and devices, nuclear power, the computer chip, and the Internet. 
There are now more connected mobile devices than there are people on the planet. 
The products of electronic and digital industries will continue to expand their impact, with “big data,” the “Internet of things,” and the “industrial Internet” becoming increasingly prevalent. 
Beyond the extension of these twentieth-century technologies, we can also anticipate a new set of transformational industries – as yet nameless – as we advance into the new millennium. 
At the same time, just as the twentieth century’s convergence of physics and engineering transformed our lives, the accelerating convergence of biology and engineering is driving unprecedented discoveries that promise to create another platform for innovation, the rise of new industries, and economic growth. 
The manufacture of fuels and pharmaceuticals already relies on purpose-developed microbes that create sophisticated biological products. 
New manufacturing processes will incorporate specially designed microbes and computer-characterized compounds into an array of products. 
Likewise, the dramatic reduction in the cost of gene sequencing, from roughly $40 million per human genome in 2003 to about $5,000 today, together with a rapid increase in computational power, is boosting the speed, accuracy, and robustness of medical diagnostic tests. 
That promises not only more timely and effective therapies for cancer, but also similar advances against other currently intractable diseases. 
The industries and economic drivers of the twenty-first century will arise from the increasingly combined efforts of biology and engineering. 
It is this convergence that will help deliver the technological solutions needed to supply enough clean energy, food, and water, as well as better health, to sustain the world’s nine billion people in 2050. 

Engineering Financial Stability 
NEW HAVEN – The severity of the global financial crisis that we have seen over the last two years has to do with a fundamental source of instability in the banking system, one that we can and must design out of existence. 
To do that, we must advance the state of our financial technology. 
In a serious financial crisis, banks find that the declining market value of many of their assets leaves them short of capital. 
They cannot raise much more capital during the crisis, so, in order to restore capital adequacy, they stop making new loans and call in their outstanding loans, thereby throwing the entire economy – if not the entire global economy – into a tailspin. 
This problem is rather technical in nature, as are its solutions. 
It is a sort of plumbing problem for the banking system, but we need to fix the plumbing by changing the structure of the banking system itself. 
Many finance experts – including Alon Raviv, Mark Flannery, Anil Kashyap, Raghuram Rajan, Jeremy Stein, Ricardo Caballero, Pablo Kurlat, Dennis Snower, and the Squam Lake Working Group – have been making proposals along the lines of “contingent capital.” 
The proposal by the Squam Lake Working Group – named for the scenic site in New Hampshire where a group of finance professors first met to devise ideas for responding to the current economic crisis – seems particularly appealing. 
To me, the group’s work has exemplified the creative application of financial theory to find solutions to the crisis. (I am a member, but I am not the source of its important contingent-capital idea.) 
The group calls their version of contingent capital “regulatory hybrid securities.” 
The idea is simple: banks should be pressured to issue a new kind of debt that automatically converts into equity if the regulators determine that there is a systemic national financial crisis, and if the bank is simultaneously in violation of capital-adequacy covenants in the hybrid-security contract. 
The regulatory hybrid securities would have all the advantages of debt in normal times. 
But in bad times, when it is important to keep banks lending, bank capital would automatically be increased by the debt-to-equity conversion. 
The regulatory hybrid securities are thus designed to deal with the very source of systemic instability that the current crisis highlighted. 
The proposal also specifies a distinct role for the government in encouraging the issuance of regulatory hybrid securities, because banks would not issue them otherwise. 
Regulatory hybrid securities would raise the cost of capital to banks (because creditors would have to be compensated for the conversion feature), whereas the banks would rather rely on their “too big to fail” status and future government bailouts. 
Some kind of penalty or subsidy thus has to be applied to encourage banks to issue them. 
The theory of “debt overhang” – the intellectual origin of the proposal – explains why troubled banks are reluctant to issue new equity: the benefits accrue mostly to the bank’s bondholders and dilute existing shareholders. 
But the proposal does not follow directly from modern finance theory. 
It is a real innovation, with no prior precedent. 
Why wasn’t the idea of contingent capital seized upon in earlier crises? 
Wasn’t the same problem of debt overhang prominent in the banking crises of the Great Depression, for example? 
I think that part of the reason must be that the problem was poorly understood then, so that contingent capital could not be well articulated and lacked the force of argument that would allow it to be impressed upon government policy makers. 
Moreover, there is a fundamentally creative element to innovation: it results from an intellectual process that takes time, and that in retrospect always seem inexplicably slow or episodic. 
The Financial Stability Board (FSB), headed by Mario Draghi, publicly stated in its September 2009 report to the G-20 that it was studying contingent capital proposals. 
The FSB was created in April 2009 at the G-20’s London summit as the successor to the Financial Stability Forum. 
Its member organizations are the G-20’s central banks and top regulatory agencies. 
The G-20’s member states are committed by the G-20 statement that they signed to implement the FSB’s conclusions on a worldwide basis. 
As a result, the FSB is in a unique position to make innovation happen. 
In its recent reports, the FSB has concentrated on capital requirements, on closing legal loopholes that allow banks to evade them, and on improving accounting standards. 
The FSB has already facilitated a number of proposals that would help make our financial system more secure. 
Contingent capital, a device that grew from financial engineering, is a major new idea that might fix the problem of banking instability, thereby stabilizing the economy – just as devices invented by mechanical engineers help stabilize the paths of automobiles and airplanes. 
If a contingent-capital proposal is adopted, this could be the last major worldwide banking crisis – at least until some new source of instability emerges and sends financial technicians back to work to invent our way of it. 

Enlightenment on Trial 
Ugly debates about religion and science usually seem to be confined to the United States. 
In recent months, however, such debates have begun to spread – first to Europe and then around the world. 
Science, it seems, is drifting into political dangers it has not faced since before the Enlightenment. 
Europe began its own American-style debate on the origins of life when Cardinal Christoph Schönborn of Vienna cast doubt on the acceptability of Darwinism and evolutionary theory to people who see themselves as faithful Roman Catholics. 
The Cardinal argued that evolution is the work of God and that evolutionary theory should be interpreted in that light and no other. 
With Cardinal Schönborn’s intervention, the peace between science and religion that in Old Europe had held almost since the Enlightenment – and at least since the historically hard-won eviction of the Church from politics in the late nineteenth and early twentieth centuries – seemed suddenly to have been broken. 
Revealed truth, the Cardinal seemed to say, must be accorded primacy over the truths science reveals through reason. 
This is not to say that religious sentiment or, in the case of Germany, bitter historical experience stemming from the Nazi era, had not informed other European debates, say, on the ethics of stem-cell research. 
Indeed, the religious background of Europe’s nations clearly manifested itself in various European laws on such research, with the United Kingdom and Sweden being the most liberal and Italy, Austria, and Poland the most restrictive. 
But none of these debates directly challenged the role of science in society or posed, as Cardinal Schönborn did, the idea that religion and science are potentially incompatible. 
Following the Cardinal’s declaration, many pointed to the US as a warning sign of the dangers inherent in politicizing science through religion. 
They noted that President Bush had sided openly with those who want to make evolutionary theory optional in schools’ science curricula. 
The reason that such pseudo-science has prevailed in so many American schools is directly related to America’s tremendously decentralized school system, which allows committed local groups of the religious-minded to reshape the curriculum. 
The power of faith-based movements in the US is undeniable, and their influence in other areas where science and politics meet, including the availability of certain drugs – the so-called “morning after” pill being one example – is growing. 
It is unlikely that European schools, because of their structure, can be invaded by “creationism.” 
Yet Europe should not think itself immune to this problem. 
When dogmatic faith enters politics, compromises on controversial issues, which are indispensable in a democracy, become difficult to achieve. 
This is because fundamental values – as opposed to, say, the distribution of material resources – are seen as being non-negotiable. 
The danger is that scientific decisions with a scientific-technical component are no longer subject to study or rational argument, but instead are fought over by various interest groups, with some invariably claiming that their taxes should be used to fund only research that is compatible with their values. 
Debates about the nature and benefits of science are not confined to the US and Europe. 
When South Korea’s National University announced the first-ever successful cloning of a dog, the news triggered arguments about science and society throughout Asia. 
Although the language of religion was not used overtly, the debate in Asia reflected the same fears that science is somehow “out of control” and far too powerful. 
One key reason for this is the fact that China is pouring vast resources into research and development. 
Between 1995 and 2002, it doubled the percentage of its rapidly growing GDP that it invests in R&D, with biotechnology and other high-tech fields enjoying the highest priority. 
Science, it seems, is becoming a partner in the unnerving development of a new global superpower. 
Today, science belongs to a rapidly globalizing world. 
It is perceived as a motor of economic growth, but also as a threat to our security and beliefs. 
Cultural worldviews and religion, of course, will continue to shape the overall cultural and value context within which science and technology interact. 
But values are subject to change, often in response to past experience and fears about the future. 
It took centuries for science to carve out its sphere of autonomy, always a relative one, from politics and religion alike. 
This autonomy has served science well, and independent and accountable science has served society and the economy well. 
If this beneficial relationship is to be maintained, scientific independence – from both religious dogmatism and governmental intervention – must be defended. 

Ennobling Democracy 
WARSAW -- Ever since democracy appeared in ancient Athens, it has generated suspicion among those who believe that humanity’s highest purpose is virtue, not freedom. 
In the Eighth Book of The Republic , Plato rather unceremoniously defines political leaders in a democracy as “those who deprive the rich of their estates to distribute them among the people, at the same time taking care to reserve the larger part for themselves.” 
Of course, Plato’s disdain for democracy is never far from the surface of his prose, yet he has a legitimate point: how, after all, can high ethical standards be ensured when democratic elections tend to reward self-interest and the lowest common denominator? 
The citizens of today’s free societies are (almost always) democrats out of conviction, custom, and habit. 
Only a small minority exhibit populist tendencies that, if they gained power, could lead a society from democracy to dictatorship. 
Nevertheless, today’s democratic citizens mostly lack confidence in the public sphere, and are suspicious of their own economic and political elites. 
Among the youngest voters, indeed, this impulse is very strong, with their participation in elections falling sharply. 
In Europe, this apathy is often seen as a reaction to the slowdown of what once looked like an unending postwar economic boom. 
But this is really only part of the story. 
Of course, if we could guarantee rapid and universal economic growth, democracy’s other weaknesses would probably be forgotten. 
But we can’t, instead what is offered is a hollow vision of the common good that consists merely in successive rounds of cuts in state expenditures. 
It is little wonder, then, that democratic citizens nowadays focus increasingly on the low ethical standards of their national elites. 
Subconsciously, citizens expect their leaders to display the ancient leadership virtues of disinterestedness, courage, and devotion to service. 
But what they see is small-mindedness and the pursuit of narrow self-interest. 
Moreover, the dramatic democratization of mores in the last 20 years has resulted in a tremendous increase in ordinary human curiosity about people in the limelight: who our leaders are, how they live, and what they really believe. 
Former French President François Mitterrand was probably the last European statesman who was treated by his nation like a monarch of old. 
His numerous personal failings and indiscretions were never publicly judged. 
Today, tabloid media show us everything, and subject everything to public judgment. 
So the heads of our democracies are treated like a famous person living next door. 
The door is open, and we don’t like what we see. 
During a recent hearing before a Polish parliamentary investigative committee, a state functionary responded to the simplest questions of fact by repeating the phrase, “I don’t remember.” 
When pressed about his failing memory, he impatiently responded, “Why am I expected to remember things in a country in which the president does not remember whether he graduated from university?” 
The former Polish president, Aleksander Kwasniewski, had, it seemed, provided a perverse lesson in virtue when, having been caught lying about his educational credentials, protested that he did not remember whether he had actually defended his master’s thesis as required to receive his degree. 
In such an environment, can public ethics be revived? 
French President Nicolas Sarkozy, as one of his first initiatives, proposed a ban on “golden parachutes” for departing managers of firms traded on the stock exchange, in order to halt the practice of taking huge severance payments without the consent of shareholders. 
Sarkozy correctly assumed that managers of publicly-traded firms, much like politicians, are public figures who should be held to a minimum ethical standard of behavior. 
In Switzerland, Thomas Minder, the head of the cosmetics company Trybol, is fighting the same battle, and demanding a national referendum. 
In Germany, the Federal Constitutional Court has ordered parliamentarians to reveal their outside income – often from lobbying activities on behalf of big business – on the Internet. 
In Poland, where for many years such practices have been considered criminal, a proposed law would require full financial transparency for politicians and high state functionaries. 
British Prime Minister Gordon Brown, for his part, has proposed lifting the immunity that past prime ministers enjoyed in connection with the sale of peerages. 
Even if these initiatives are motivated by party rivalry, they nevertheless pose an essential question: do we know how to ennoble our democracy? 
Can we impose on ourselves a corset of higher ethical standards, thereby refuting Plato’s objections to democracy, which are no less our own? 
Europe can take the lead in writing ethics back into politics. 
The reform treaty that is to be adopted in 2009 is aimed at overcoming the EU’s supposed “democratic deficit.” 
But rendering Europe’s political institutions accountable to citizens is only half the battle. 
Preserving the democratic life of the EU and its member states implies a duty – which should be enshrined in the treaty – to uphold standards of official behavior that today’s citizens demand. 

Global Development’s Winning Goals 
NEW YORK – The world’s governments meet at a special session of the United Nations General Assembly on September 25 to discuss how to accelerate progress on the Millennium Development Goals, and also to agree on a timetable for a new set of Sustainable Development Goals. 
The MDGs, adopted in 2000, will conclude in 2015, to be followed by the SDGs, most likely for the 2015-2030 period. 
The MDGs focus on ending extreme poverty, hunger, and preventable disease. 
They have been the most important global development goals in the UN’s history. 
The SDGs will continue the fight against extreme poverty, but also add the challenges of ensuring more equitable economic growth and environmental sustainability, especially the key goal of curbing the dangers of human-induced climate change. 
Setting international development goals has made a huge difference in people’s lives, particularly in the poorest places on the planet. 
Sub-Saharan Africa has benefited enormously from the MDGs, and we can learn from that success in designing the SDGs. 
To see the MDGs’ importance for Sub-Saharan Africa, one need only compare the decade before their adoption with the decade after. 
In the ten years before the MDGs, economic growth in the region was slow, the poverty rate was high (and rising), and there was an increasingly heavy disease burden, including HIV/AIDS and malaria. 
The adoption of the MDGs focused increased attention by African governments, non-governmental organizations, UN agencies, international donors, foundations, and activists on the urgency of combating poverty, hunger, and disease. 
The MDGs also cast a global spotlight on the crippling debt burdens faced by many of Africa’s poorest countries, leading to a process of debt cancelation led by the International Monetary Fund and the World Bank. 
From 2000 to 2010, Sub-Saharan Africa’s poverty rate (as measured by the share of those living on less than $1.25/day) fell to 48.5%, after having risen from 56.5% to 58% in the 1990-1999 period, while overall annual economic growth, which averaged 2.3% from 1990 to 2000, more than doubled, to 5.7% during the 2000-2010 period. 
There were significant improvements in disease control as well. 
From 1990 to the peak year, around 2004, annual malaria deaths rose from roughly 800,000 to 1.6 million. 
After that point, upon the MDGs-inspired mass distribution of anti-malaria bed nets, malaria deaths began to decline, to around 1.1 million per year in 2010, and perhaps lower now. 
Likewise, as of 2000, there were still no official donor-supported programs to enable poor Africans to receive antiretroviral treatment for AIDS. 
Thanks in large part to the agenda-setting power of the MDGs, donor programs to fight AIDS began to be implemented, and more than six million Africans now receive antiretroviral treatment supported by official donor programs. 
As Special Adviser to the UN Secretary-General on the MDGs since 2001 (to Kofi Annan until 2006, and to Ban Ki-moon since 2007), I have seen how seriously many African governments take the targets, using them to set priorities, catalyze stakeholders, increase public awareness and motivation, and hold ministries accountable. 
Over time, the UN and the high-income countries’ donor agencies increasingly used the MDGs to help organize their own work in Africa as well. 
While the MDGs are not the only factor underpinning the improvements since 2000, they have played a huge role. 
Of course, much remains to be done to maximize progress on achieving the targets set by the MDGs. 
Most important, significant gains in health could be attained with adequate financial resources. 
Donor countries should provide ample replenishment funding later this year to the Global Fund to Fight AIDS, TB, and Malaria, which would ensure this vital agency’s continued success. 
When UN member states turn to the next set of global development goals, they should learn from the MDGs. 
First, keeping the list of SDGs relatively short – no more than ten – will make them easy to remember, which will help in mobilizing the public. 
Second, all governments, rich and poor, should be accountable for meeting the SDGs as implementers. 
The MDGs applied mainly to poor countries as implementers and to rich countries as donors. 
The SDGs should apply to all countries as implementers (and also to rich countries as donors). 
Indeed, when it comes to problems like climate change, which will be at the core of the new SDGs, rich countries have more work ahead of them than poor countries do. 
Third, the SDGs should build on the MDGs. 
The MDGs helped to cut global extreme poverty by more than half. 
The SDGs should take on the challenge of ending extreme poverty for good. 
The World Bank, to its credit, has already adopted the goal of ending extreme poverty by 2030. 
UN member states should do the same. 
Finally, the SDGs should mobilize expert groups around the key challenges of sustainable development. 
When the MDGs first appeared, the relevant specialists began to organize themselves to give advice on achieving them. 
The UN Millennium Project synthesized the counsel of roughly 250 global experts on crucial development issues. 
The same process of expert advice and problem solving is urgently needed on issues such as low-carbon energy, sustainable agriculture, resilient cities, and universal health coverage, all of which are likely to feature in the SDGs. 
Fifty years ago, US President John F. Kennedy declared that, “By defining our goal more clearly, by making it seem more manageable and less remote, we can help all people to see it, to draw hope from it, and to move irresistibly towards it.” 
The MDGs have helped to play that role in the fight against poverty. 
The SDGs can do the same for the complex challenge of achieving sustainable development. 

Planetary Boundaries and Human Prosperity 
STOCKHOLM – The future of humanity will depend on mastering a balancing act. 
The challenge will be to provide for the needs of more than ten billion people while safeguarding our planetary life-support systems. 
Recent scientific insights have made us better equipped than ever to strike that balance. 
Doing so will be our generation’s great task. 
Ending poverty has become a realistic goal for the first time in human history. 
We have the ability to ensure that every person on the planet has the food, water, shelter, education, health care, and energy needed to lead a life of dignity and opportunity. 
But we will be able to do so only if we simultaneously protect the earth’s critical systems: its climate, ozone layer, soils, biodiversity, fresh water, oceans, forests, and air. 
And those systems are under unprecedented pressure. 
For the last 10,000 years, the earth’s climate has been remarkably stable. 
Global temperatures rose and fell by no more than one degree Celsius (compared with swings of more than eight degrees Celsius during the last ice age), and resilient ecosystems met humanity’s needs. 
This period – known as the Holocene – provided the stability that enabled human civilization to rise and thrive. 
It is the only state of the planet of which we know that can sustain prosperous lives for ten billion people. 
But humans have now become the single largest driver of ecosystem change on earth, marking the start of a new geological age that some call the Anthropocene. 
Scientists argue over the exact starting point of this epoch, but it can be dated to somewhere around 1945, when modern industry and agriculture began to expand briskly. 
In the future, geologists will see telltale markers like radioactive carbon – debris from nuclear blasts – and plastic waste scattered across the planet’s surface and embedded in rock. 
More recently, human activity has undergone what is being called the Great Acceleration: the rapid intensification of resource consumption and ecological degradation. 
We risk disrupting the earth’s critical systems, and with them modern civilization itself. 
The planet’s response to our pressures is likely to be unpredictable. 
Indeed, the surprises have already begun. 
As we overdraw on our planet’s accounts, it is starting to levy penalties on the global economy, in the form of extreme weather events, accelerated melting of ice sheets, rapid biodiversity loss, and the vast bleaching of coral reefs. 
We face an urgent need to define a safety zone that prevents us from pushing our planet out of the unusually benevolent Holocene state. 
The Planetary Boundaries framework, which a group of scientists, including one of us (Johan), first published in 2009, does just that. 
It draws on the best science to identify the key planetary processes regulating the earth’s ability to sustain Holocene-like conditions. 
For each of those processes, it proposes a boundary – a quantitative ceiling – beyond which we risk inducing abrupt changes that could push our planet into a state that is more hostile to humanity. 
These nine boundaries include climate change, ozone depletion, ocean acidification, interference in the global nitrogen and phosphorus cycles, land-use change, global freshwater use, biosphere integrity, air pollution, and novel entities (such as organic pollutants, radioactive materials, nanomaterials, and micro-plastics). 
Worryingly, our most recent update in January, which confirms the nine boundaries and improves their quantifications further, indicates that humanity has already transgressed four: climate change, nitrogen and phosphorus use, biodiversity loss, and land-use change. 
Our challenge is to bring the earth’s systems back within the safety zone, while simultaneously ensuring that every person has the resources he or she needs to lead a happy and fulfilling life. 
Between these planetary and social boundaries lies humanity’s safe and just operating space: the limits we must respect if we are to create a world that is ecologically resilient and free of poverty. 
Meeting these goals will require a far more equitable distribution of the planet’s resources and far greater efficiency in how we use them. 
If we are to ensure that our planet remains one on which all of humanity can thrive, we will have to pursue a new paradigm of prosperity. 

The Geopolitics of Environmental Challenges 
LONDON – Much of the world seems to be on edge. 
The West’s relationship with Russia, the future of NATO, the Syrian civil war and refugees, rising right-wing populism, the impact of automation, and the United Kingdom’s impending departure from the European Union: all of these topics – and more – have roiled public debate worldwide. 
But one issue – one might say the most significant of them all – is being ignored or pushed aside: the environment. 
That was the case at this year’s annual meeting of the World Economic Forum at Davos, Switzerland. 
Beyond a mention of the Paris climate agreement by Chinese President Xi Jinping, topics like climate change and sustainable development didn’t even make it to the main stage. 
Instead, they were relegated to side meetings that rarely seemed to intersect with current political and economic events. 
Allowing environmental issues to fall by the wayside at this time of geopolitical and social instability is a mistake, and not just because this happens to be a critical moment in the fight to manage climate change. 
Environmental degradation and natural-resource insecurity are undermining our ability to tackle some of the biggest global issues we face. 
Environmental insecurity is a major, though often underestimated, contributor to global instability. 
The UN High Commission on Refugees reports that natural disasters have displaced more than 26 million people per year since 2008 – almost a third of the total number of forcibly displaced people in this time period. 
Even the current refugee crisis has an environmental element. 
In the years leading up to the war, Syria experienced its most extreme drought in recorded history. 
That drought, together with unsustainable agricultural practices and poor resource management, contributed to the internal displacement of 1.5 million Syrians and catalyzed political unrest ahead of the 2011 uprising. 
The link between environmental and agricultural pressures extends far beyond Syria. 
Over-reliance on specific geographies for agriculture means that food production can exacerbate environmental problems, or even create new ones. 
This can pit global consumer interests against local citizen interests, as it has along the Mississippi River, where fertilizer runoff from one of the world’s breadbaskets is contributing to concerns about water quality. 
The connection goes both ways, with environmental conditions also shaping agricultural production – and, in turn, the prices of agricultural commodities, which represent about 10% of traded goods worldwide. 
For example, rising temperatures and altered precipitation patterns are already driving up the price of coffee. 
With the global land area suitable for growing coffee set to contract by up to half by 2050, price pressures will only intensify. 
A sudden shift toward trade protectionism could drive up agricultural commodity prices further. 
Such an increase would affect farm-level household income, favoring some farmers while harming others. 
End consumers, particularly the poor and vulnerable, would also suffer. 
Another reason why the environment should be at the center of economic debates is its role as the world’s single largest employer. 
Almost a billion people, just under 20% of the world’s labor force, are formally employed in agriculture. 
Another billion or so are engaged in subsistence farming, and therefore don’t register in formal wage statistics. 
Any initiatives to support economic development must support this population’s transition toward higher-productivity activities. 
This is particularly important at a time when increasingly sophisticated and integrated technology threatens to leapfrog an entire generation of workers in some countries. 
Efforts to benefit this huge population must focus not only on training and education, but also on new models that allow countries to capitalize on their natural capital – the landscapes, watersheds, and seascapes – without depleting it. 
Just as natural-resource insecurity can cause displacement and vulnerability, effective natural-resource management can support conflict resolution and sustainable economic development. 
On this front, efforts to achieve environmental remediation, to boost the resilience of rural communities, to advance sustainable agricultural production, and to support community-based environmental stewardship have all shown promising results. 
Consider the Northern Rangelands Trust, an organization focused on creating community conservancies to enable sustainable and equitable land use in Kenya. 
NRT has helped pastoralist communities establish effective governance mechanisms for the environment on which they depend, reducing conflict over grazing rights, especially in times of drought. 
For many communities, members’ relationship with the landscape in which they live is an integral part of their identity. 
With effective governance and planning, open dialogue, resource-sharing frameworks, and sufficient investment, including in skills training, these communities can translate this relationship into effective environmental stewardship – and build healthier and more secure societies. 
The crises engulfing the modern world are complex. 
But one thing is clear: the environment is connected to all of them. 
Solutions will mean little without a healthy world in which to implement them. 

The Health Costs of Environmental Change 
OXFORD – In recent years, the world has become increasingly preoccupied with the catastrophic potential of global warming and other human-induced environmental changes, and rightly so. 
But one of the most serious risks has been all but ignored: the threat to human health. 
To be sure, concerns about what a rise in global temperatures above pre-industrial levels could mean for the planet are entirely justified. 
And many are understandably perturbed that the world’s poorest suffer disproportionately, while the United States, the planet’s second-largest emitter of carbon dioxide, seems to be shirking its responsibilities. 
But the health implications of human-induced environmental change are largely being overlooked, while future generations’ quality of life is being mortgaged for economic gain. 
Nowhere are these implications more visible than in the emerging markets of Africa, Asia, the Americas, and Europe. 
Rapid growth and rising incomes have led to unprecedented improvements in nutrition, education, and social mobility. 
Over the last 35 years, countries such as Brazil, China, India, Indonesia, Mexico, Russia, South Africa, and Turkey have all made extraordinary gains in human development. 
But this progress has often been pursued with little regard for the stability of natural systems. 
The contamination of roughly half of the world’s fresh water supply, the disappearance of more than 1.4 million square miles (2.3 million square kilometers) of forests since 2000, solid waste mismanagement, and widespread species loss, habitat destruction, and overfishing are destroying the very resources we need to survive. 
Humans are changing the natural environment so dramatically, and to our own detriment, that scientists believe we have entered a new geologic epoch – the “Anthropocene” – which began around 1950 and is characterized by unprecedented planetary pollution. 
The Emerging Markets Symposium at the University of Oxford’s Green Templeton College recently concluded that these changes have serious implications for human health, especially in developing economies. 
Up to a quarter of the world’s disease burden is associated with human-caused environmental factors, the symposium found. 
Children under five years old are at the greatest risk of suffering a disease caused by poor environmental stewardship. 
Repairing the Earth’s natural systems, and restoring the health of the planet’s most vulnerable populations, is possible. 
But success will require radical changes in environmental, economic, and social policies. 
Countries that developed early, before the advent of modern environmental science, can rightly claim they knew no better. 
It wasn’t until scientists pointed out the carcinogenic impact of asbestos, for example, or the neurological effects of pumping water through lead pipes, that laws and regulations were enacted to address these problems. 
But today, countries cannot hide behind scientific ignorance. 
Even developing countries must reconcile economic ambitions with full (or at least, partial) knowledge of the environmental consequences of growth. 
Leaders everywhere must be prepared to advocate changes in attitudes, lifestyles, and development strategies. 
And they must place a greater emphasis on development goals that protect the environment and public health. 
These adjustments will be hard to manage structurally, and even harder to sell politically. 
In certain cases, they will put the planet’s welfare above national interests. 
But leaders in emerging markets, as elsewhere, need to recognize that there is no other option. 
Years of unbridled growth, and the misguided assumption that natural systems would continue giving, no matter how extensively they were exploited, has brought us to this point. 
There is good news, however. 
Rigorous environmental stewardship is compatible with economic growth, social progress, and political stability. 
This is true for even the poorest countries that pursue environmentally sound policies that promote healthy, non-destructive models of development. 
Shortsighted decisions, like that taken by the Trump administration to withdraw the US from the Paris climate agreement, have the potential to move the world in the other direction. 
We must not let that happen. 
The agreement’s remaining signatories must work collectively to solve the world’s environmental challenges, paying close attention to the health costs of inaction. 
The current trajectory cannot be corrected unless all countries accept that economic growth and environmental stewardship can coexist. 
Global forums, like the G20 and the United Nations, can serve as key conduits for the promotion of sustainable development. 
In particular, strategies to promote health and wellbeing must be better integrated into local, state, and international environmental policymaking. 
Make no mistake: determined opponents will question the science and criticize those who claim that human health is being jeopardized by environmental disregard. 
But to these critics I pose a question of my own: “Are you willing to risk being wrong?” 

The Stock-Bond Disconnect 
CAMBRIDGE – How should one understand the disconnect between the new highs reached by global equity indices and the new depths plumbed by real interest rates worldwide? 
Several competing explanations attempt to reconcile these trends, and getting it right is essential for calibrating monetary and fiscal policy appropriately. 
The most popular explanations downplay risk factors in a way that can be dangerously misleading. 
For example, the “secular stagnation" theory claims that low interest rates tell the true story. 
The global economy is suffering from a chronic demand shortfall, which can be remedied through sustained growth in government spending. 
According to this view, soaring stock markets merely reflect low discounting of future profits. 
Moreover, labor's share of profits seems to have fallen markedly in recent decades across the world's eight largest economies, with the possible exception of the United Kingdom. 
Conversely, capital's share of profits has been rising, which of course raises the value of equities (though, stock prices have continued to rise in countries like the US and the UK where labor shares have begun at least a cyclical recovery, and where interest-rate hikes may soon be on the horizon). 
Proponents of secular stagnation argue that government spending as a share of GDP, which has more than doubled in most advanced economies since the 1950s, should continue to rise. 
Although one can readily agree that high-yielding government investments in education and infrastructure are especially justified today, the idea that demand permanently constrains supply in a significant way is dubious. 
More refined studies of the recent recession suggest that the lasting so-called “hysteresis" effects on unemployment have been limited, at least in the US. 
Another possible explanation of low interest rates is financial repression. 
The European Central Bank and the Bank of Japan, like the Federal Reserve before them, are gluttonously buying bonds. 
At the same time, a host of new regulations to promote financial stability are forcing banks, pension funds, and insurance companies to stock up on government securities. 
Thus, today's low interest rates are more a reflection of distortions in financial markets than of low growth expectations. 
Proponents of the financial repression explanation essentially view low interest rates as a hidden tax on bondholders, who receive a lower interest rate than they would otherwise. 
This is not necessarily a bad thing, given that all taxes are distorting, and that there really is no way to deal with today's outsize debt burdens that does not impinge on growth in some way. 
But the financial repression tax is not nearly as progressive as a more general wealth tax would be, because lower-income households typically have a smaller share of their assets in equities. 
In any event, it is unclear how financial repression can be the whole story. 
The fall in bond yields has extended to a far broader range of debt than just government paper. 
Other factors are contributing to today's ultra-low interest-rate environment as well. 
Adverse demographics and declining labor-supply growth in most advanced economies are undeniably important. 
The puzzle, though, is that this trend has played out in a very gradual and predictable way, whereas the decline in interest rates has been more rapid and somewhat unexpected (certainly by central banks). 
And it is difficult to argue that weak demographics is the main driver of strong stock prices, though some have tried. 
Curiously, heightened risk and fears of further disruptions – not just another financial crisis, but also geopolitical instability and pandemics – do not seem to carry much weight in current policy discussions, though the idea has been around. 
Though bonds are hardly a perfect hedge against such risks, they typically beat stocks (except, perhaps, in cases of global conflagration, when both fare badly). 
In recent work with Carmen and Vincent Reinhart, we show that even relatively minor shifts in disaster risk – say, a rise from a normal 2-3% to 3-4% – can lead to a massive decline in global real interest rates, even taking them well into negative territory. 
This can be the case even if expected growth is strong. 
But the policy implications of this are not straightforward. 
If the government has superior information and analysis, and correctly assesses that public fear is not justified, then of course it makes sense to take advantage of the information – by issuing more debt, for example. 
If, on the other hand, the public is basically right about heightened disaster risks, the policy issues become much more complex. 
The problem is that the government likely faces high costs if a disaster strikes, which implies a high option value to preserving fiscal space for when it is most needed. 
The idea that hyper-low interest rates are merely symptoms of deficient demand or financial repression is dangerously simplistic. 
Surely heightened public concern about the risk of future economic catastrophe in the wake of the financial crisis is still playing an important role, reinforced by lingering fragility in the eurozone and rising instability in emerging markets. 
This makes the public understandably more cautious. 
But if the risks that might help explain the price trends for stocks and bonds are real, policymakers, too, should be careful not to throw caution to the wind. 

Pakistan’s Polio Tipping Point 
ISLAMABAD – Early this month, tragedy struck Pakistan’s polio eradication campaign once again with the killing of two more polio workers and a policeman on patrol with the vaccination teams. 
The latest murders in Pakistan preceded the killing of nine polio workers in Nigeria, and follow the slaying of another nine Pakistani health workers in December and the New Year’s Day murders of development workers affiliated with public-health efforts. 
The continued targeting of such brave workers is posing a severe challenge to these countries’ public-health communities and their collective ambition to reach every child with lifesaving vaccines. 
For Pakistan, the irony is that the country has been a success story for polio eradication, with the number of cases falling from 197 in 2011 to 58 in 2012. 
Despite recent challenges, Pakistan put vaccinators back on the job in 28 districts, where 12 million children needed to be reached. 
Widespread public support for polio eradication efforts has been reflected in a parliamentary resolution. 
The Ulema Council, a group of influential clerics, has given its backing as well. 
The most recent report by the Independent Monitoring Board of the Global Polio Eradication Initiative, released in November 2012, acknowledged Pakistan’s recent progress – in stark contrast to the bleak outlook of its previous report. 
But it is critical that the country’s upcoming election does not jeopardize recent gains, particularly during the current low-transmission season, which is the best opportunity to stop the disease in its tracks. 
All political factions must remain committed to the eradication drive if it is to succeed. 
Indeed, despite progress in 2012, we have not been able fully to interrupt the spread of the poliovirus in Pakistan, owing primarily to obstacles affecting program implementation and management. 
These challenges must be addressed through stronger governance at all levels, particularly given that state authority has been badly eroded in roughly a quarter of the country, where complex factors have created distrust in the name of ethnicity, politics, and religion, resulting in a massive breakdown in law and order. 
Moreover, Pakistan shocked the global public-health community last year by adopting a constitutional amendment that led to the abolition of the national health ministry. 
Unfortunately, the sudden devolution of health responsibilities to the country’s provinces occurred without adequate preparation or oversight. 
The simultaneous scaling back of the local-government system, along with the divisive politics of coalition governments in Pakistan’s fragile democracy, continues to undermine implementation of the polio eradication program. 
The resulting shortcomings in the country’s provincial health systems have manifested themselves not just in the inability to eradicate polio, but also in a recent measles outbreak, which has killed more than 300 children. 
At the same time, local governments’ difficulties are having an adverse effect on provision of clean water and proper sanitation, which are vitally important for polio eradication and public health more broadly. 
There have also been cases of refusal by parents to vaccinate their children, typically at the behest of clergy members, owing to the belief that such public-health efforts are in fact a covert sterilization program. 
Indeed, refusal to vaccinate accounts for 2% of the children who are missed. 
A recent smear campaign aimed at discrediting polio vaccination, in which several MPs publicly took part, has complicated matters further. 
Daunting as all of this may be, stalling vaccination is not an option. 
It is well established that when vaccination is impeded, the number of cases rises drastically, as was shown in Nigeria in 2003, where a ten-month delay led to the infection of thousands of people domestically, and to reinfection in more than 20 other countries. 
A similar outcome was observed in Pakistan’s Swat Valley after the militant takeover of 2009 rendered the region inaccessible for months. 
This month’s decision to hold back vaccination in Karachi after health workers there were threatened, though understandable, is nonetheless a cause for serious concern in this respect. 
As in Nigeria, vaccination delays will be highly detrimental for neighboring countries. 
Nomadic populations move freely back and forth across the vast and porous Afghanistan-Pakistan border. 
In 2011, a polio outbreak in China was traced back to Pakistan. 
India, polio-free for the last two years, is well aware that lasting domestic success depends on eradication efforts elsewhere. 
Potential international risks go beyond the immediate neighborhood. 
Already, Pakistan is responsible for the recent appearance of wild poliovirus in Egypt. 
Fortunately, there is no evidence of transmission, but we may not be so lucky in the future. 
Indeed, the risk that Pakistani pilgrims could carry the problem with them on the 2013 Hajj, the largest annual congregation of Muslims, is not just a theoretical threat. 
A worst-case outcome there could set back the fight against polio by decades. 
The scale of the challenge, and hence the multifaceted response that is needed, must not be underestimated. 
Polio today has become an example of the complex problems plaguing Pakistan’s state and its society. 
Pakistan must increase its efforts on polio eradication for reasons that go beyond fulfilling a global health promise (which is reason enough in its own right). 
Success would be a sign of Pakistan’s ability to conquer complex challenges, and it would provide a blueprint for further development interventions. 
In eradicating polio, Pakistan would not just play its part in eliminating the disease worldwide. 
It would also reclaim its own global prestige and potential for progress in other areas. 

Winning the War on Tuberculosis 
JOHANNESBURG – The world is finally waking up to the threat posed by one of the most overlooked diseases of our time. 
Last month, the United Nations General Assembly (UNGA) hosted the first-ever high-level meeting on tuberculosis (TB) to explore options for international eradication efforts. 
But, as welcome as this new global focus is, the fact remains that the road to beating TB begins in Africa. 
Simply put, TB remains one of the deadliest epidemics in Africa today, and one-quarter of all TB deaths worldwide occur there. 
In 2016, some 417,000 people on the continent succumbed to the disease. 
Recent outbreaks of multidrug-resistant TB and extensively drug-resistant TB in South Africa, Mozambique, and Ghana could push the annual death toll even higher. 
These pockets of the bacterium, now completely immune to antimicrobial treatment, mean that the challenge of global eradication has become even more daunting. 
Part of the reason for TB’s persistence is the vulnerability of the populations it infects. 
For starters, TB is among the leading killers of HIV-positive people, claiming some 40% of those who die from HIV. 
This poses dangers for non-HIV patients as well, especially those with suppressed immune systems, young children, and infants. 
Eradication is also difficult because TB is a highly contagious airborne bacterium; people living and working in close quarters – such as miners, prisoners, migrants, and refugees – suffer the highest rates of infection. 
Finally, because TB prevalence is closely linked to poverty and social marginalization, reaching those most at risk is not always easy. 
Infectious diseases have no borders, and as African countries deepen their trade ties and intra-Africa migration grows, the threat of regional pandemics will only increase. 
This makes it all the more critical that Africa begin developing a multi-sector, integrated approach to containing, controlling, and eventually eradicating public-health challenges like TB. 
To this end, one approach that African governments could emulate is the TB management strategy in place for the continent’s mining sector, an inter-agency plan devised in 2014 by the Southern African Development Community. 
Although this so-called “harmonized” approach applies to a commercial industry, its focus on coordinating with the Regional Economic Communities (RECs) – African Union states grouped for economic integration – could serve as a model for more effective collective action on TB containment. 
But before a specific framework can be agreed upon, three issues require urgent attention. 
First, African health-care planners and disease specialists must set country, regional, and local containment targets. 
For example, setting goals for reductions in new TB infections would enable health officials to measure more accurately the impact of their strategies. 
Moreover, to end TB completely, Africa will need new and sustained financial commitments from the public and private sectors. 
And, finally, disease-control strategies must be designed to support the economic and health-care priorities of the RECs. 
At the moment, most state and regional health-care systems lack funding and human resources. 
African policymakers must therefore develop systems for prevention, diagnosis, and care that help governments share the disease burden and ensure that treatment protocols are consistent across regions. 
To be sure, there are some positive trends in the fight against TB. 
Global infection rates are falling by about 2% annually, and even African countries hit by TB still managed a 4% decline in infections from 2013 to 2017. 
And, with organizations like the World Health Organization and the African Union beginning to produce roadmaps for TB eradication, it is clear that momentum is steadily building. 
Still, sustaining this progress in Africa will require significant regional coordination, not to mention a lot more money. 
Most vaccines and medications are currently too expensive for the majority of Africans. 
But even those lucky enough to obtain treatment – usually a six- to eight-month course of powerful antibiotics – still face a 20% chance of relapse. 
The goal of eradicating TB is within reach; the recent gathering at the UNGA marked a critical turning point in the world’s war on the disease. 
But even as commitments are made and declarations signed, we must remember that in Africa, the battle is far from over. 

Winning the War Against TB 
SEATTLE – Humans have been battling tuberculosis since the Stone Age. 
But only in the last century has real progress been made against the disease. 
A vaccine, first used in humans in 1921, is still in use around the world today. 
And a series of antibiotics, beginning with streptomycin in the 1940s, has proven effective in treating infections. 
Since 1990, TB’s annual death toll has been cut nearly in half. 
From 2000 to 2014, better diagnosis and treatment saved some 43 million lives. 
Nonetheless, progress has slowed to a crawl, suggesting that the battle is far from over. 
The annual decline in cases over the past decade has been a mere 1.65%; in 2014, TB killed 1.5 million people. 
Meanwhile, strains of the disease are developing resistance against treatment. 
The misuse and mismanagement of antibiotics has resulted in multidrug-resistant TB. 
These strains must be treated with second-line medications, which are more expensive and often cause worse side effects. 
Strains that are resistant to second-line drugs, known as extensively drug-resistant TB (XDR-TB), have also appeared. 
Given the enormous economic burden and widespread human suffering caused by TB, a comprehensive effort to tackle the disease is urgently needed. 
In a series of articles in the British medical journal The Lancet, Salmaan Keshavjee, a professor of global health and social medicine at Harvard Medical School, outlined a strategy for defeating it. 
Keshavjee and a group of TB scientists, clinicians, and advocates from governmental and nongovernmental organizations, hospitals, and universities set themselves the goal of bringing TB’s death toll to zero – and outlined the measures needed to achieve it. 
The first step is to ramp up data-collection efforts. 
TB epidemics, like those of other infectious diseases, vary by geography; as result, eradication efforts need to be customized to local conditions. 
Local TB programs need to make better use of existing data, expand routine collection, modernize data-storage systems, and develop the analytical infrastructure needed to measure the effects of local interventions. 
These findings need to be made available within the country where data were collected, and the lessons learned must be shared with neighboring countries and regions. 
Moreover, health-care workers must expand efforts to prevent new infections and quickly treat fresh cases. 
By actively seeking out victims and treating them quickly, so that they are no longer infectious, the chain of TB transmission can be broken. 
This strategy has been proven effective by empirical evaluation and mathematical modeling. 
At the same time, efforts must be made to control the seedbeds of the disease, the latent infections that are the source of virtually all new cases of active TB. 
Mycobacterium tuberculosis, the bacteria that causes the disease, can lay dormant for long periods, during which the victim shows no symptoms of having been infected. 
Targeting TB at this stage would stop the bacteria’s spread and reduce the disease’s global burden. 
Rolling out preventive therapies in at-risk populations and developing better diagnostic tests to identify those with asymptomatic infections would help drain reservoirs of the bacteria. 
Developing a more effective vaccine would have the biggest impact on the epidemic. 
The Bacillus Calmette–Guérin vaccine is given to infants in many parts of the world, but its efficacy against pulmonary TB is highly variable. 
To eliminate the disease globally, a better vaccine would be crucial. 
Finally, any effort to eradicate TB must acknowledge that the disease is rooted in poverty and social exclusion. 
Since the middle of the twentieth century, worldwide efforts to address TB have emphasized biomedical solutions and focused on treating outbreaks. 
But, before the development of antibiotics, improvements in living standards had helped reduce the impact of TB. 
Integrating a biomedical approach with an emphasis on the importance of good nutrition, decent housing, and human welfare will be necessary if the disease is to be brought to heel. 
The global community must work together and translate existing knowledge and strategies into effective programmatic interventions in communities most afflicted by TB. 
By developing new tools – including rapid diagnostics, safe and shorter treatment of TB infection and disease, and an efficacious TB vaccine – strengthening health systems, and improving the living conditions of at-risk populations, we can neutralize one of humankind’s oldest killers. 
Only then will we be able to consign TB, at long last, to the history books. 

Erdoğan’s Choice 
ISTANBUL – “Turkish democracy is at a turning point,” Prime Minister Recep Tayyip Erdoğan announced after winning a crucial vote in a referendum to change Turkey’s constitution. “We are sitting an important exam.” 
Erdoğan is right, but it is he who must pass the test. 
If the plebiscite victory emboldens him and his allies to step up their tactics of judicial dirty tricks and media manipulation – used to great effect in recent years – the prospects for Turkey are bleak. 
The country will descend deeper into authoritarianism, political divisions will become irreconcilable, and yet another political rupture may become inevitable. 
Too few people in Europe and the United States comprehend the extent to which Erdoğan’s government has undermined the rule of law and basic freedoms – all in the name of “deepening Turkish democracy.” 
Government prosecutors have mounted a series of sham trials, charging hundreds of military officers, academics, and journalists with membership in an armed terrorist organization aiming to topple the Erdoğan government. 
In a separate but related prosecution, they used fabricated evidence to accuse nearly 200 active and retired military officers of planning a coup in 2003, during the early days of Erdoğan’s first government. 
Erdoğan and his ministers have been cheerleaders for these prosecutions. 
Their supporters in the media have spewed a stream of disinformation and leaked wiretaps to discredit and embarrass the accused. 
Meanwhile, the country’s largest independent media group has been brought to heel by huge, politically motivated tax fines. 
Erdoğan’s strategy has been to whip up frenzy around these cases to solidify his traditional, religious/conservative base, but also to gain the backing of domestic liberals. 
The prosecutions have allowed him to position himself as the protector of Turkish democracy against the coup plotters allegedly still running rampant among the military and secularists. 
The prosecutions entail indictments that are thousands of pages long and include annexes that take up several bookshelves. 
This, along with media disinformation, has made it difficult for outsiders to penetrate the cases and separate fact from fiction. 
But as soon as we engage with the details of the prosecutions, a shocking picture emerges: some of the key evidence in the cases is clearly planted, while much of the rest remains circumstantial at best. 
For example, the alleged 2003 coup plot was supposedly discovered when CDs containing detailed preparations (including assassination teams and plans to bomb two mosques) were delivered to a virulently anti-military newspaper. 
Of the hundreds of senior officers serving at the time, none has acknowledged any knowledge of these plans. 
Indeed, it is patently clear that people intent on framing military officers authored the documents in question many years later, in 2008 at the earliest. 
In addition to major internal contradictions and inconsistencies, the coup plot documents are full of references to entities that did not even exist in 2003, as well as to developments that took place later. 
The prosecutors have shown little interest in these discrepancies, doing their best to send the alleged conspirators to jail (and keep them there) even before the trial starts. 
Erdoğan has fanned the flames by claiming that he was aware of such coup plans at the time, but that he disregarded them. 
A dramatic book that was published just before the referendum on the constitution sheds light on who is behind these machinations. 
It claims that followers of Fethullah Gulen – the influential US-based spiritual leader – have effectively wrested control of the national police and large parts of the judiciary. 
The Gulen movement is independent from Erdoğan’s Justice and Development Party (AKP), but the two have long been closely allied, and now it has become a state within a state, employing extra-legal means, including illegal wiretaps and fabricated evidence, to go after perceived opponents. 
Accusations against the Gulen movement are not new in Turkey, but what made the book a bombshell is that its author is a distinguished police chief, well known for his courage and incorruptibility – as well as his closeness to the Gulenists and to Erdoğan’s government. 
No friend of the army, he pursued rogue elements within the military in a famous investigation several years ago. 
So he cannot be accused of harboring ultra-secularist or ultra-nationalist sympathies. 
This, along with his inside knowledge of the workings of the police and the prosecutorial branch, give his revelations a credibility that earlier accounts had lacked. 
Tellingly, the police chief went to his governmental superiors prior to the book’s publication, appealing personally to a minister. 
But the government refused to investigate and did nothing with the information. 
The most benign explanation for this behavior is that it is a consequence of the AKP’s own long history of persecution by the military and secular old guard. 
The AKP has been under constant threat of a ban through much of its existence, and Erdoğan was jailed for reciting a poem with religious imagery. 
Perhaps the dirty tricks are largely defensive, meant to ensure that the old guard never threatens the AKP’s existence again. 
If so, the referendum’s outcome should convince Erdoğan that the balance of power in the country has changed for good, and that the days of strong-arm tactics by the secular establishment are gone forever. 
Here is a chance for Erdoğan and his allies to back off from their gross violations of the rule of law and build the democracy that they so fervently claim as their goal. 
An important first step would be to restore confidence in the integrity and independence of the judiciary and law enforcement. 
The amended constitution expands the constitutional court and the supreme council of judges and prosecutors. 

Erdoğan’s Economic Revolution 
ISTANBUL – Since 2002, the Justice and Development Party (AKP) has been governing Turkey with remarkable success in economic terms. 
Indeed, its record is almost unique in Turkey’s modern history, comparable only with the rule of the Democratic Party (DP), which came to power in the 1950’s, at the start of multi-party parliamentary democracy in Turkey, and ran the country for a decade. 
The era of DP rule is ingrained in Turkey’s public consciousness as one of phenomenal growth and expanding freedoms. 
With the mandate it received in the June 12 election, and almost 42 years after the DP was deposed by a military junta, the AKP has emerged to set new benchmarks in Turkey’s development. 
Indeed, unlike the DP’s leader, Adnan Menderes, who was brutally executed following a sham military trial, the AKP’s Recep Tayyip Erdoğan, who will now begin his third term as Prime Minister, appears to have secured democratic political control of Turkey’s military and bureaucracy. 
Both institutions’ ability to challenge the results of elections appears at an end. 
Turkey’s latest transformation began with the severe economic, political, and social turmoil of 2001, which then-Prime Minister Bülent Ecevit called a “crisis of the Turkish state.” 
That year marked the last gasp of the authoritarian/bureaucratic regime that emerged in the early 1920’s, and that had become so isolated from the public that its legitimacy had evaporated. 
Over the years, that system had been captured by self-interested rent-seekers. 
Tension, and at times open confrontation, between a modernizing elite and ordinary people regarding the nature, function, and design of the state undermined the very capacity to govern. 
A political pendulum of reform and reaction, and of populist and pragmatic cabinets, weakened the republic for most of its history. 
Unlike Japan, for example, with its de facto one-party government for most of the period since 1945, the lifespan of Turkish governments averaged around 14 months between 1960 and 2000. 
Whereas political stasis supported a development miracle in Japan, the inertia created by Turkey’s self-interested establishment resulted in a discouraged society with unfulfilled expectations. 
With much of its immediate neighborhood convulsed in revolutionary change and in search of a viable road forward, understanding how Turkey moved from cronyism to economic dynamism is vitally important. 
First, Erdoğan’s government recognized that change can deliver greater stability than inertia, which invariably breaks down chaotically as economic decline and political infighting take hold. 
Second, Turkey shows that an external anchor, such as membership in the European Union or pressure from the International Monetary Fund, can be decisive in triggering change and, therefore, in enhancing prosperity. 
But the best way to understand what Erdoğan’s government has gotten right is to examine what went wrong in the “lost decade” of the 1990’s. 
That decade was characterized by low and unstable growth; low per capita GDP, at around $3,400 dollars; dramatically low productivity; an unsustainable fiscal and financial position in both the public and private sectors; average annual inflation of 70% for more than two decades; a lack of competitiveness, reflected in 10% unemployment; and widespread corruption. 
Partly as a result of these factors, Europeans tended to refer to Turkey as “too big, too poor, and too unstable” for full EU membership. 
Weary with crisis, Ecevit’s administration embarked on a comprehensive reform package– spearheaded by Minister for the Economy Kemal Dervis – that included a flexible exchange-rate system with a dedicated inflation-targeting regime. 
With this macroeconomic groundwork laid, greater economic, and soon political, stability followed. 
In 2003 came the formation of the AKP’s first single-party government, which enthusiastically backed the country’s IMF-based stabilization program. 
Turkey’s adoption of a road map for full membership in the EU also created a strong impulse to follow through on painful reforms. 
Exceptionally favorable economic conditions worldwide at this time no doubt helped significantly, but the real credit must go to a government that stuck to its liberalizing instincts. 
This consistency has paid off. 
From 2002-2007, Turkey experienced its longest period of uninterrupted economic growth, which averaged 6-7% year on year, while annual inflation has plummeted (it now stands at 3.9%). 
Moreover, the economy proved resilient following the global financial crisis, with growth recovering rapidly. 
Indeed, annual real GDP rose by 9% in 2010. 
And, despite Turkey’s fast-growing population, per capita GDP has tripled since 2002, reaching $10,500 in 2010. 
As a result, Turkey is projected to graduate from “middle-income” status and enter to the league of rich countries by 2012. 
Not surprisingly, Turkey’s capacity to attract foreign direct investment is now comparable to other fast-growing emerging-market economies. 
But serious problems remain. 
The ever-rising current-account deficit (6.8% of GDP in 2010) will require a second round of reforms. 
And unemployment remains stubbornly high, though employment is now more widespread than it has ever been. 
For the first time in its modern history, Turkey not only resisted a serious global economic crisis, but also decoupled itself from the rest of Europe by rebounding strongly in 2010. 
This economic prowess, together with the government’s “zero problem” foreign policy, have helped make Turkey a leading regional power. 
Turkey’s achievements form a case study in successful economic development. 
The question now is how Turkey will use its rapidly growing economic power. 

Erdoğan the Peacemaker? 
ISTANBUL – Turkey’s Prime Minister Recep Tayyip Erdoğan has taken on a daunting challenge. 
After participating in the nuclear-security summit in South Korea at the end of March, he went to Tehran to urge Iran’s leaders to make a deal during the next round of nuclear talks between Iran and the United Nations Security Council’s five permanent members (Britain, China, France, Russia, and the United States) plus Germany. 
And Erdoğan will host those talks in Istanbul in mid-April. 
Erdoğan last traveled to Tehran in May 2010 to finalize an agreement that he had negotiated under which Iran was to send large quantities of its low-enriched uranium to Turkey in exchange for nuclear fuel for Iran’s research reactor. 
The deal, mediated by Turkey and Brazil, was presented to the rest of the world as a groundbreaking confidence-building initiative. 
But the US and its allies quickly rejected the agreement as an Iranian ploy designed to halt the growing momentum for additional sanctions. 
Turkey’s insistence on pressing ahead with the deal caused tension with the US and fueled criticism at home and abroad that Erdoğan’s government was shifting away from its long-standing alliance with the West. 
The memory of this short-lived crisis with the US is still fresh in Turkish government circles. 
So why, despite having burned his fingers two years ago, is Erdoğan taking up the issue again? 
What did he hope to accomplish in Tehran? 
Much has changed in the Middle East during the past two years, and not to Turkey’s advantage. 
As a result, Turkey is now seeking to contain a rapidly deteriorating regional security situation. 
Events in Syria are forcing Turkish authorities to accept the harsh reality of the Assad regime’s resilience – and now its hostility towards Turkey. 
Iraq, another of Turkey’s neighbors, faces the risk of a protracted sectarian power struggle following withdrawal of US troops. 
Given this, Turkey’s main objective now is to prevent a military intervention against Iran. 
From Turkey’s perspective, an Israeli or American strike against Iran’s nuclear facilities would destabilize the region further, as Iran would undoubtedly retaliate by fueling sectarian tensions and undermining the prospects of a settlement in both Syria and Iraq. 
As a result, Turkey wants to prolong, at all costs, the time available for diplomacy. 
But Erdoğan’s specific objective was more modest this time than it was in 2010, because Turkey does not want to play the role of mediator and will not seek to negotiate the details of an agreement. 
Instead, Erdoğan emphasized to his Iranian counterparts the international community’s resolve to bring transparency to Iran’s nuclear program, and insisted on the importance of concrete progress in the next round of the nuclear talks. 
He warned that Iranian intransigence would doom the talks to failure, raising the prospects of yet another military confrontation in the Middle East. 
In particular, Erdoğan stressed the need for Iran to offer a gesture of goodwill about its nuclear program. 
The Iranian regime should, at the very least, commit itself to halt uranium enrichment at 20%, a figure short of the threshold needed to produce weapons. 
Having had direct meetings with both Iranian President Mahmoud Ahmadinejad and Supreme Leader Ayatollah Ali Khamenei, Erdoğan was in a unique position, as a prime minister of a NATO country, to convey these critical messages to a regime whose top-level decision-making processes remain as opaque as ever to the West. 
Paradoxically, however, Erdoğan’s task, while more modest than in 2010, is also more difficult, owing to the prospect of new sanctions on Iran, including a ban on oil exports, that are to enter into force in July. 
Advocates of sanctions argue that they are having a crippling effect on the Iranian economy. 
The value of the Iranian rial has fallen by 50% against the US dollar since the beginning of the year, and the country is suffering from a severe shortage of foreign exchange. 
So now is not the time to pull back. 
Moreover, US President Barack Obama, facing an election in November, does not wish to be accused of being soft on Iran, making it difficult for the West to reciprocate potential Iranian overtures. 
Yet Erdoğan’s best ally in his risky gambit may be the US consumer. 
Faced with rising gasoline prices as a result of the ongoing crisis with Iran, Americans’ concerns about the cost of driving have contributed to Obama’s shaky popularity ratings. 
Thus, the Obama administration may find it more politically expedient to seek a deal with Iran. 
If Iran displays a real willingness to compromise, the West should hold off on the new sanctions. 
It will soon become clear whether Erdoğan’s visit succeeds. 
If Iran decides to engage the international community with concrete confidence-building measures at the next round of multilateral talks, Erdoğan will take much of the credit for giving diplomacy a last chance – and quite possibly for averting a disastrous military confrontation in the Middle East. 

Turkey’s Critical Election 
ISTANBUL – In very few democracies could such a small shift in votes lead to outcomes as different as the ones that could result from Turkey’s general election on June 7. 
A swing of less than 1% of the national vote could decide whether the ruling Justice and Development Party (AKP) is forced to form a coalition government – Turkey’s first after 13 years of single-party rule – leaving it unable to fulfill President Recep Tayyip Erdoğan’s longstanding desire to strengthen the presidency. 
Turkish elections have been boring affairs since the AKP came to power in 2002. 
The party’s results have been all but preordained: landslide victories and majority governments. 
This year, however, the outlook is different: the results are far from certain, and the stakes could hardly be higher. 
Riding on the outcome is not only Erdoğan’s political future, but also the potential for a long-term settlement with the country’s Kurds and the long-term soundness of Turkish democracy itself. 
The uncertainty this time around is attributable to the predominantly Kurdish Peoples’ Democratic Party (HDP). 
Kurdish political parties shied away from contesting past elections, owing to their fear of failing to clear the 10% popular-vote threshold needed to enter the parliament. 
Instead, Kurdish politicians would run as independent candidates, who are not subject to the threshold. 
Once safely in office, they would reunite under the banner of a party. 
This year, however, the Kurdish political movement has decided to field its candidates as members of a single party. 
This electoral strategy, though risky, could yield large rewards, with the outcome holding significant implications for the party’s immediate fortune – as well as for Turkey’s long-term prospects. 
The HDP’s failure to clear the 10% threshold would open the way for an overhaul of the country’s political system. 
With the Kurds and their candidates excluded from the parliament, the AKP would have to do only slightly better than polls are predicting to maintain its political dominance. 
If the party is able to secure more than 45% of the national vote, the quirks in Turkey’s electoral law will give it more than 330 representatives in the country’s 550-seat legislature. 
Such a result would give Erdoğan the power to put in place the presidential system of governance that he has long sought. 
The AKP’s parliamentary majority would allow the party to draft a new constitution unilaterally and put it to a referendum within a year. 
At the same time, the country’s southeastern regions could become vulnerable to civil unrest, as the Kurdish movement – faced with a total lack of national political representation during a time of institutional transition – agitates for greater local autonomy. 
If, on the other hand the HDP can reach the 10% threshold, its fortunes – and Erdoğan’s – will swing in the other direction. 
The party’s candidates would command a sizable minority delegation in parliament, and the AKP would likely become the senior partner of a coalition government. 
Far from securing a dominant position, Prime Minister Ahmet Davutoğlu would be forced to choose between aligning his party with the HDP or the conservative Nationalist Movement Party (MHP). 
A grand coalition with the main opposition party, the center-left Republican People’s Party (CHP), though theoretically possible, is not congruous with Turkey’s political culture. 
Such a result would empower the executive, headed by Davutoğlu, to the detriment of the presidency. 
With the possibility that Erdoğan could become an executive president no longer realistic, his power would quickly begin to wane. 
Even assuming that the AKP remained the country’s largest party, the balance of power in Turkish politics would start to turn against him. 
In liberal democracies, national elections are intended to provide the winning side with a popular mandate to govern and to set policy priorities until the next election. 
Only rarely do they hold implications that will last longer than a single electoral cycle. 
But that is the case today in Turkey, where the outcome of the upcoming popular vote is likely to determine the rules of political life for years to come. 
The HDP is currently polling at around 10%. 
A little nudge in either direction could make all the difference in the world. 

Erdoğan’s Second Chance 
ISTANBUL – The outcome of Turkey’s latest general election – voters have gone to the polls twice in the last five months – reveals important insights into the nature of the country’s democracy and the preferences of its citizens. 
The first of Turkey’s two parliamentary elections this year, in June, was widely viewed as a referendum on President Recep Tayyip Erdoğan’s efforts to strengthen the powers of his office. 
The result was clear. 
Erdoğan’s Justice and Development Party (AKP) received just 41% of the vote, costing it the majority it had enjoyed since coming to power in 2002. 
On November 1, however, after negotiations following the June elections resulted in a hung parliament, Turks voted again, and the outcome could not have been more different. 
This time, the election was predominantly perceived as a referendum on the continuation of single-party rule, and the AKP won 49% of the vote, providing it with a comfortable majority. 
In the run-up to the latest election, Erdoğan and the AKP emphasized the importance of the party’s parliamentary majority for Turkey’s political stability. 
The opposition countered with the argument that a coalition government would counter the country’s deep political polarization, while helping to establish stronger checks and balances. 
The promise of stability proved to be the more resonant message. 
The political instability following June’s inconclusive election had been compounded by a sharp decline in domestic and regional security. 
A renewed campaign of violence by the separatist Kurdistan Workers’ Party (PKK) and attacks by the Islamic State, including suicide bombings in Ankara that killed more than 100 people, created a backdrop that reinforced the AKP’s message. 
The outcome of the vote attests to the ineffectiveness of Turkey’s parliamentary opposition, which once again failed to make a dent in the AKP’s popularity, almost as if they had set out to disprove the theory that electorates simply tire of long-serving governments. 
Instead the AKP obtained its landslide victory – a major achievement after 13 years of uninterrupted rule – by siphoning voters from its competitors. 
The party received nearly five million more votes than it did in June, corresponding to a 20% increase in its popularity. 
Two opposition parties, the conservative Nationalist Movement Party (MHP) and the predominantly Kurdish Peoples’ Democratic Party (HDP), together lost three million votes, while the center-left Republican People’s Party (CHP) held its ground, finishing second with 25% of the vote. 
Voters punished the nationalist MHP severely for its obstructionism following the June election, when it refused all offers to join a coalition government. 
With 12% of the popular vote, compared to 16% in June, the MHP lost almost half of its parliamentary seats. 
The HDP was handicapped by its inability to distance itself from the PKK, which a large section of the electorate regards as being responsible for the upsurge in domestic violence. 
Indeed, the HDP seemed at risk of failing to obtain the 10% of the vote it would need to enter parliament, an outcome that would have provided the AKP with a majority large enough to amend the constitution on its own. 
In the end, HDP ended with 10.75% of the vote, down from 13% in the June elections, preventing Erdoğan from securing the compliant parliament he would need to establish an executive presidency. 
Nonetheless, Turkey’s new government has been provided with a broad enough mandate to address some of the country’s most difficult and imminent policy challenges – most notably the peace process with the Kurds. 
A previous effort had been suspended ahead of the election, as the PKK returned to violence and the AKP’s leadership adopted increasingly nationalist and hawkish rhetoric. 
With the election over, however, there is hope that the new government will restart the negotiations. 
If successful, the talks would have a major impact not only domestically, but also on the ongoing fight against the Islamic State. 
The AKP’s majority will also enable it to continue to recalibrate the country’s foreign policy. 
Turkey’s policies following the Arab Spring had led to a loss of influence and friends in the region; but recently the country has begun to adapt its approach to the realities on the ground. 
For example, Turkey has lifted its objections to a role for Syrian President Bashar al-Assad in negotiations to end the civil war in Syria. 
Similarly, a new commitment to the struggle against the Islamic State has eliminated a core point of friction with Turkey’s Western partners. 
The main trap the new government must avoid is a return to a heavily paternalistic style of governance. 
The AKP should take comfort in its large majority and start to view minority views and even peaceful dissent more benignly, in a way that befits a country negotiating accession to the European Union. 
The lesson of the two elections is clear: Turkey’s voters want a strong, stable government, but not one that runs roughshod over its opponents. 

Erdoğan the Magnificent 
ISTANBUL – Turkish President Recep Tayyip Erdoğan has now fulfilled his ultimate political objective of being the country’s first ever popularly elected executive president, receiving almost 53% of the national vote in Sunday’s election. 
A year ago, Erdoğan pushed through constitutional amendments to transform Turkey’s parliamentary democracy into a highly centralized presidential system. 
Now those amendments will come fully into force. 
The constitutional changes give Erdoğan new powers to appoint vice presidents, ministers, and senior officials. 
They also allow him to dissolve parliament, be a member of a political party, have a greater say in appointing judges to the highest courts, issue decrees with the force of law, and impose a state of emergency. 
Narrowly approved by voters last April, the constitutional amendments also abolished the office of the prime minister. 
For the next five years, Erdoğan will be Turkey’s head of state, head of its ruling Justice and Development Party (AKP), and head of government. 
Erdoğan is secure in his position because an early presidential election requires a two-thirds parliamentary vote – an unlikely scenario given the AKP’s near-majority. 
He has thus become Turkey’s most powerful leader since the country began to hold contested elections in the years immediately following World War II. 
Turkey’s domestic and foreign policies will now be shaped, ultimately, by one man. 
This is of course the opposite of liberal democracy, a core feature of which is a robust set of institutional checks and balances designed to limit executive authority. 
The assignment of exceptionally broad powers to the executive president under the new constitution reflects a populist vision of government according to which the elected leader, as the true representative of the nation, should not be hindered in pursuing the nation’s interests. 
The nation can judge the president’s performance only every five years. 
By adopting the constitutional text in a referendum, a slim majority of Turkish voters seem to have given their blessing to this populist conception of democratic politics. 
But two key considerations will constrain how Erdoğan uses his impressive set of new prerogatives. 
First, despite winning the presidency, the AKP lost its outright majority in Parliament. 
With a tally of 42%, down seven points compared to the November 2015 election, the AKP was able to secure 293 of the parliament’s 600 seats. 
As a result, Erdoğan will be forced to seek alliances to enact legislation. 
Even with the parliament’s diminished role under the new constitution, control of the legislature remains important for the effective functioning of the state. 
Erdoğan’s natural ally in parliament is the far-right Nationalist Movement Party (MHP). 
The two parties were in a pre-electoral alliance, and Erdoğan owes his election to the 11% of the vote won by his political partner. 
But a deeper, long-term alliance with the MHP will have significant implications for Turkey’s domestic politics and international standing. 
It will also constrain Erdoğan’s room for policy maneuver. 
At home, the MHP stands for order and security. 
The alliance with MHP will therefore preclude any opening – akin to the peace initiative launched by the AKP government in 2015 – toward Turkey’s Kurds. 
By the same token, the MHP is not likely to be a natural partner for any large-scale democratic reforms aimed at strengthening fundamental freedoms. 
On the foreign-policy front, the MHP’s inherently Euroskeptic stance will further restrict Turkey’s diplomatic space to rebuild its relations with its partners in the West. 
During the campaign, the MHP leadership even called for Turkey to withdraw its moribund bid for accession to the European Union. 
Turkey’s economic vulnerabilities pose a second and equally important constraint on Erdoğan’s authority. 
Unlike commodity-based economies with current-account surpluses, like Russia and Brazil, Turkey is reliant on foreign savings. 
Turkey fuels its growth by tapping international capital markets to finance its annual external borrowing requirement of around $250 billion. This substantial deficit is the consequence of a chronic gap between investment and saving, and past AKP governments’ failure to enact structural reforms to raise total productivity and enhance Turkey’s international competitiveness. 
An overemphasis on growth in recent years has exacerbated these difficulties. 
Last year, Turkey growth rate of 7% was among the highest in the OECD. 
But Erdoğan’s expansionary policies have compounded the country’s structural imbalances, with inflation rising to double digits, nominal interest rates reaching 16%, and the current-account deficit surpassing 6% of national income. 
Erdoğan’s performance as Turkey’s executive president will therefore depend on his ability to chart a trajectory that satisfies the MHP’s main priorities and addresses the adverse consequences of economic overheating. 
Both constraints are likely to become stronger over time, with the MHP increasingly emboldened by its parliamentary leverage, and the economy in growing need of a potentially contractionary adjustment. 
Throughout Erdoğan’s coming term, the question will nonetheless remain: Can these practical – and thus ephemeral – constraints serve as even a minimal proxy for the robust guarantees of a consolidated democratic system? 

Erdoğan’s Tragic Choice 
CAMBRIDGE – Ever since Turkish President Recep Tayyip Erdoğan won his first general election in late 2002, he has been obsessed with the idea that power would be wrested from him through a coup. 
He had good reason to worry even then. 
Turkey’s ultra-secularist establishment, ensconced in the upper echelons of the judiciary and the military at the time, made no secret of its antipathy toward Erdoğan and his political allies. 
Erdoğan himself had been jailed for reciting religion-laced poetry, which prevented him from taking office immediately when his Justice and Development Party (AKP) assumed office in November 2002. 
In 2007, the military issued a statement opposing the AKP’s candidate for president – then largely a figurehead. 
And in 2008, the party narrowly escaped being shut down by the country’s top court for “anti-secular activities.” 
The old guard’s efforts largely backfired and served only to augment Erdoğan’s popularity. 
His strengthening grip on power might have mollified him and led to a less confrontational political style. Instead, in the ensuing years, his then-allies the Gülenists – followers of the cleric-in-exile Fethullah Gülen – managed to whip Erdoğan’s obsession into paranoia. 
From 2008 to 2013, Gülenists in the police, judiciary, and media concocted a series of fictitious conspiracies and plots against Erdoğan, each more gory than the last. 
They ran sensational show trials targeting military officers, journalists, NGOs, professors, and Kurdish politicians. 
Erdoğan may not have believed all of the charges – a military chief with whom he had worked closely was among those jailed – but the prosecutions served their purpose. 
They fed Erdoğan’s fear of being toppled, and eliminated the remaining vestiges of the secularist regime from the military and civilian bureaucracy. 
The Gülenists had another motive as well. 
They were able to place their own sympathizers in the senior ranks vacated by the military officers targeted by their sham trials. 
The Gülenists had spent decades infiltrating the military; but the commanding heights had remained out of reach. 
This was their opportunity. 
The ultimate irony of July’s failed coup is that it was engineered not by Turkey’s secularists, but by the Gülenist officers Erdoğan had allowed to be promoted in their stead. 
By the end of 2013, Erdoğan’s alliance with the Gülenists had turned into open warfare. 
With the common enemy – the secularist old guard – defeated, there was little to hold the alliance together. 
Erdoğan had begun closing Gülenist schools and businesses and purging them from the state bureaucracy. 
A major purge of the military was on the way, which apparently prompted Gülenist officers to move pre-emptively. 
In any case, the coup attempt has fully validated Erdoğan’s paranoia, which helps explain why the crackdown on Gülenists and other government opponents has been so ruthless and extensive. 
In addition to the discharge of nearly 4,000 officers, 85,000 public officials have been dismissed from their jobs since July 15, and 17,000 have been jailed. 
Scores of journalists have been detained, including many with no links to the Gülen movement. 
Any semblance of the rule of law and due process has disappeared. 
A great leader would have responded differently. 
The failed putsch created a rare opportunity for national unity. 
All political parties, including the Kurdish People’s Democratic Party (HDP), condemned the coup attempt, as did the vast majority of ordinary people, regardless of their political orientation. 
Erdoğan could have used the opportunity to rise beyond Islamist, liberal, secularist, and Kurdish identities to establish a new political consensus around democratic norms. 
He had a chance to become a democratic unifier. 
Instead, he has chosen to deepen Turkey’s divisions and erode the rule of law even more. 
The dismissal and jailing of opponents has gone far beyond those who may have had a role in the putsch. 
Marxist academics, Kurdish journalists, and liberal commentators have been swept up alongside Gülenists. 
Erdoğan continues to treat the HDP as a pariah. 
And, far from contemplating peace with the Kurdish rebels, he seems to relish the resumption of war with them. 
Unfortunately, this is a winning strategy. 
Keeping the country on high alert against perceived enemies and inflaming nationalist-religious passions serves to keep Erdoğan’s base mobilized. 
And it neutralizes the two main opposition parties; both are highly nationalistic and therefore constitute reliable allies in the war against the Kurdish rebels. 
Similarly, Erdoğan’s offensive against Gülen and his movement seems driven more by political opportunism than by a desire to bring the coup’s organizers to justice. 
Erdoğan and his ministers have endlessly griped about the United States’ reluctance to extradite Gülen to Turkey. 
Yet, nearly two months after the coup, Turkey has not formally submitted to the US any evidence of Gülen’s culpability. 
Anti-American rhetoric plays well in Turkey, and Erdoğan is not beneath exploiting it. 
In his testimony to the prosecutors investigating the coup, the army’s top general has said that the putschists who took him hostage offered to put him in contact that night with Gülen. 
This remains the strongest evidence that Gülen himself was directly involved. 
A leader intent on convincing the world of Gülen’s culpability would have paraded his military chief in front of the media to elaborate on what happened that night. 
Yet the general has not been asked – or allowed – to speak in public, fueling speculation about his own role in the attempted coup. 
And so Turkey’s never-ending cycle of victimization – of Islamists, communists, secularists, Kurds perennially, and now the Gülenists – has gained velocity. 
Erdoğan is making the same tragic mistake he made in 2009-2010: using his vast popularity to undermine democracy and the rule of law rather than restoring them – and thus rendering moderation and political reconciliation all the more difficult in the future. 
Erdoğan has twice had the chance to be a great leader. 
At considerable cost to his legacy – and even greater cost to Turkey – he spurned it both times. 

Putin’s Turkish Delight 
BRUSSELS – Beware of czars bearing gifts. 
It is sound advice for Turkish President Recep Tayyip Erdoğan, as he tries to leverage his rapprochement with Russian President Vladimir Putin in his relations with the West. 
Erdoğan’s meeting with Putin in St. Petersburg this month was ostensibly focused on burying the hatchet after Turkey shot down a Russian warplane near its border with Syria last year. 
But the Kremlin seems to view the visit as an opportunity to convince Erdoğan to “turn east” and join Russia, as well as China and the countries of Central Asia, in a kind of brotherhood of autocracies. 
The question is whether Erdoğan actually plans to take up the offer. 
Erdoğan certainly put on a show with Putin, promising friendship and cooperation. 
In doing so, he sent his Western allies – which have criticized the arrests of thousands of perceived opponents, including many journalists, following last month’s failed military coup – a powerful message: “I don’t need you.” 
Putin, by contrast, was the first world leader to call for support for Erdoğan’s government after the coup, which perhaps explains why Russia was Erdoğan’s first destination after the dust had settled. 
To be sure, Erdoğan may simply have been seizing an ideal opportunity to boost Turkey’s own security and that of the region. 
After all, it is in nobody’s interest – least of all NATO’s – to have Turkey and Russia at each other’s throats. 
But it would be surprising if Erdoğan had no desire to make his NATO allies nervous. 
And, in that endeavor, he succeeded. 
At the very least, the EU needs Turkey to continue, according to the deal struck in March, to stem the flow of refugees to its borders; any indication that Erdoğan may be turning against Europe is thus a cause for serious concern. 
There may, however, be more to Erdoğan’s rapprochement with Putin. 
If he is genuinely seeking to deepen Turkey’s relationship with Russia, at the expense of its ties with the EU and the US, as some warn, this would amount to a fundamental geopolitical realignment. 
But this seems unlikely. 
The Kremlin has a strong interest in the deterioration of Turkey’s relations with its Western partners. 
Putin has been vocal about his opposition to NATO policies – particularly its role in countries bordering Russia. 
Given that Putin cares little for human rights, the rule of law, or democracy, watching EU and US leaders butt heads with Erdoğan over his post-coup crackdown must have looked like a golden opportunity to weaken NATO. 
Another reason why Russia is keen to extend the hand of friendship to Turkey is the ongoing conflict in Syria, in which the Kremlin has intervened militarily to safeguard Syrian President Bashar al-Assad’s regime. 
Putin needs a win in Syria – and an escape route. 
To that end, he needs to move Erdoğan, who has been supplying arms and support to the Sunni rebels whom the Russian air force has been hunting, into his camp. 
But the case for an eastern pivot by Turkey is far weaker. 
True, Turkey needs Russian tourists to bolster its distressed economy. 
But whatever economic benefits Russia can offer are dwarfed by those provided by the EU – a critical trade and business partner that has been indispensable in driving Turkey’s modernization. 
Add to that Putin’s track record as an untrustworthy partner, and it is clear that, while a better relationship with Russia can benefit Turkey, Erdoğan cannot afford to abandon his country’s ties with the West. 
But while it would be a strategic error for Erdoğan to enter Putin’s orbit, plenty of leaders have made strategic errors before. 
That is why the next few months, when Turkey and the EU hash out contentious issues, are so critical. 
Erdoğan’s post-coup crackdown is far from the only source of tension between Turkey and the West, particularly the EU. 
Turkey insists that visa-free travel for Turkish citizens visiting the EU, promised by EU governments in January, should be delivered this year. 
But, with Turkey having so far failed to meet the agreed conditions, including overhauling its anti-terrorism legislation, that may not happen – an outcome made even more likely by the coup attempt. 
As a result, the migration deal concluded in March now hangs by a thread. 
To chart a way forward, a sustained dialogue between the EU and Turkey is urgently needed. 
Rather than allow Erdoğan to use his relationship with Putin to manipulate his NATO allies, the West – and the EU, in particular – must condemn, more clearly than ever, his accelerating shift toward autocracy. 
They must make him understand that his current path leads away from EU membership and could cost Turkey some of the economic ties on which it depends. 
It is decision time for Erdoğan. 
Either he renews his country’s commitment to a close partnership with the EU, with all of the prosperity that this would entail, or he continues to push Turkey toward a future of despotism and isolation, in which he would receive the occasional comforting phone call from the Kremlin – but little else. 
It’s not much of a choice. 
For the sake of Turkey’s citizens, one hopes that Erdoğan sees that. 

The Ghost of Hirohito 
NEW YORK – The completion by Japan’s Imperial Household Agency of the 61-volume record of the life of Emperor Hirohito (1901-1989) has generated much interest and attention in Japan. 
The entire formidable work was recently opened to limited public viewing, with a plan to publish it over the next five years. 
But it is already clear that the new record inadvertently reflects Japan’s continuing inability to address some fundamental questions about its past. 
Having taken a quarter-century to compile, the project relied on some 40 new sources, most notably the diary and notes of Saburo Hyakutake, an admiral who served as Court Chamberlain from 1936 to 1944. 
But, while acknowledging the enormous scale of the undertaking, specialists seem to agree that the new account offers no earth-shattering findings or innovative interpretations concerning Hirohito’s many and changing roles in the most tumultuous period of Japan’s modern history. 
Perhaps this is not surprising, coming from a conservative imperial institution’s official team of editors. 
The record takes to new lengths the idea that the historian’s task, as Leopold von Ranke put it in the nineteenth century, is to show “what actually happened.” 
It is said to be an excellent chronicle of the court’s day-to-day goings-on, revealing, for example, that the emperor celebrated Christmas as a boy, that he had nose surgery in his youth, and how often he met with whom. 
To be fair, such tidbits can be interesting and useful. 
But the new account fails to explain or analyze crucial events of Hirohito’s reign. 
Readers will be disappointed if they want to learn more about Japan’s entry into the Pacific War, its defeat, the Allied occupation (especially Hirohito’s relationship with General Douglas MacArthur), or Hirohito’s later reluctance to visit the Yasukuni Shrine, where Imperial Japan’s war dead, including Class-A war criminals, are honored. 
What is already known about Hirohito is sketchy. 
That he was a tragically conflicted man is not news. 
As a young sovereign (imperial regent at age 20; emperor at 25), he had to assume contradictory roles: divine pater familias of the Japanese state and Supreme Commander of the imperial armed forces that were colonizing Japan’s Asian neighbors. 
He could not have been the bravest or most decisive man, given that he was unable to resist rising militarism. 
But to say that he was powerless (and thus blameless) or did nothing to oppose it would also be wrong. 
The conflict between Hirohito’s divine and secular roles became most acute in the autumn of 1941, when Japan’s leaders debated whether to go to war with the United States and its allies. 
On September 6, an imperial conference was convened to approve a timetable for war mobilization in the event of a breakdown in US-Japanese diplomatic talks. 
As was true of all imperial conferences, Hirohito was expected to remain silent and approve a policy that already had been decided. 
Breaking with protocol, however, Hirohito cautioned against giving up on diplomacy too soon, and then recited his grandfather Emperor Meiji’s poem from the beginning of the Russo-Japanese War, in 1904: “Beyond all four seas, all are brothers and sisters/Then why oh why these rough winds and waves?” 
Thus, Hirohito might have been seeking to express his view that Japan should avoid a war with the US, especially given that the country had been fighting a savage and unsuccessful war of conquest in China for more than four years. 
But, whatever Hirohito’s true intentions (which we cannot know for certain), the larger fact remains that he went along with the war mobilization. 
And, while the new official record depicts this well-known episode in some detail, it sheds no new light on how Hirohito understood his own action. 
Just as he dithered over going to war with the US, Hirohito was hopelessly ambivalent about how to end it. 
The new record reports that Hirohito told his closest adviser, Privy Seal Kōichi Kido, on September 26, 1944: “If one could come to a peace without the question of disarmament or war responsibility, I don’t care [if] our conquered territories [are taken away].” 
This is reportedly the first indication in the new account about Hirohito’s desire to end the war. 
But, whatever his true desire, his subsequent actions were – once again – not those of a man actively trying to find a path to peace. 
For months, he told himself and others that first “Japan must have another brilliant military gain” over the US, so that it would have a modicum of diplomatic clout in negotiating a postwar settlement. 
Needless to say, many Japanese and non-Japanese lives were lost during those months of indecision. 
Indeed, the very existence of the Japanese nation was endangered, as most cities were bombed, Okinawa was invaded, and atomic bombs were dropped on Hiroshima and Nagasaki. 
In the end, Japan was disarmed, postwar trials were held, and most of the country’s imperial conquests were reversed. 
And yet Hirohito still managed to sidestep the question of his own responsibility in a war that was so obviously fought in his name. 
Amid the postwar devastation, he became a symbol of peace. 
The most important lesson of the new imperial record, then, might be quite different from what its compilers had intended. 
Japan’s notorious collective inability to come to terms with its past is deeply entwined with its inability to understand this emperor. 
Admittedly, the new account makes only selective use of primary sources, quite a few of which have not been declassified in their entirety. 
It is possible that more revelations will emerge in the future. 
But, for now, Hirohito remains a singularly unfathomable and isolated character who defies common understandings – alas, to the detriment of a better understanding of “what actually happened.” 


Escaping from the Deflation Trap 
Deflation will be the overriding topic when America's Federal Reserve Board meets on June 24th. 
Michael Woodford, one of the world's leading authorities on central banking, offers a strategy to break the grip of falling prices. 
Alan Greenspan's recent speech to a conference of bankers in Berlin--admitting the desirability of "insurance" against the risk of deflation in the US, even if it has not yet appeared--focused attention on a crucial issue. 
What can be done to stabilize an economy when nominal interest rates cannot be lowered any further, but prices still fall and the output gap--the difference between what it can produce and what it actually does produce--remains wide? 
What was a theoretical curiosity raised by John Maynard Keynes in the 1930's has become the fundamental issue confronting policymakers in the world's largest economies. 
Japan poses the clearest example of this problem. 
Growth there remains anemic, and deflation lingers, suggesting a need for monetary stimulus. 
But the benchmark interest rate in Japan has been essentially zero for the past four years, so the standard form of monetary stimulus--reducing short_term nominal interest rates--is unavailable. 
With the Fed's operating target now only 1.25% and signs of recovery in the US fragile, many now fear that the US is poised to confront a similar situation. 
The recent cut in the ECB's policy rate amid warnings of possible deflation in Germany lead some to fear that the euro zone may be equally at risk. 
Some economists recommend fundamental changes in the way monetary policy is conducted to avoid ever reaching this "zero bound" on interest rates. 
Paul Krugman, for example, calls deflation a "black hole": once you fall into it, monetary policy becomes ineffective because no amount of monetary expansion can further reduce interest rates. 
So policymakers must prevent deflationary expectations from ever taking root by targeting a sufficiently high inflation rate at all times. 
But what if it's too late, and the zero interest_rate bound is reached while prices are falling? 
Is there any point in having an inflation target that cannot be met? 
Kunio Okina, director of the Bank of Japan's Institute for Monetary and Economic Studies, resists inflation targeting for this reason. 
He argues that "because short_term interest rates are already at zero, setting an inflation target of, say, 2% wouldn't carry much credibility." 
Wrong. 
The "zero bound" on short_term rates does represent an important constraint on what monetary stabilization can achieve, but it is a more modest barrier than deflation pessimists insist. 
Monetary policy is far from powerless to mitigate a contraction in economic activity when deflation strikes, or when an economy flirts dangerously with it. 
The key is to create the right kind of expectations regarding how monetary policy will be conducted in the longer term. 
For expectations regarding policy in the future determine the severity and duration of the output gap that results from hitting the zero bound now . 
If the Bank of Japan, for example, were to commit itself to a target path for a broad price index, and credibly commit to keeping interest rates low until that target is reached, this commitment would influence investor behavior. 
For the more that prices fall, the greater should be the confidence in future inflation, and hence perceptions of lower real interest rates. 
A commitment to a price-level target path above the current level would imply a commitment to keep nominal interest rates low for a time in the future, even after prices begin to rise again. 
A commitment to hold down nominal interest rates for a longer period of time should stimulate aggregate demand immediately. 
This is true even when current rates cannot be lowered any further--and even if inflation expectations remain unaffected--owing to the effects of the expected future path of short rates on current long-term interest rates and on the exchange rate. 
The fact that an official price_level target is not hit immediately need not impugn such targets. 
The existence of an official target is crucial, even when it is not being reached, because it allows the private sector to judge how close the central bank is to a point at which it would feel justified in abandoning its zero_interest_rate policy. 
The current gap between the actual and target price levels should shape private_sector expectations regarding how long interest rates are likely to remain low. 
But why should the private sector believe that the central bank is serious about hitting its price_level target, if all that is observed in each period is a zero nominal interest rate and another target shortfall? 
Ideally, the best way to make its policy credible would be for the central bank to demonstrate its commitment to the price_level targeting framework before the zero bound is reached. 
In practice, and especially when deflationary fears are already present, managing private_sector expectations demands considerable subtlety. 
The private sector is likely to scrutinize the bank's current actions for clues to its future behavior. 
So "signaling" effects, such as shifts in the central bank's portfolio towards long_term securities, could help make the bank's price-level target credible. 
If, say, the central bank starts buying long_term bonds from the private sector at below_market interest rates, this should help convince the public that the bank intends to stick to a future low interest_rate policy. 
Such asset shifts would work because the level of long_term interest rates is an indicator of the markets' faith in the central bank's commitment to maintaining low short_term rates once inflation returns . 
So, if the private sector is skeptical about the bank's commitment, long_term rates will be too high. 
But if the bank buys long-term bonds, it will tend to show that skepticism is unwarranted. 
The stabilizing effect of such asset purchases is due not to any mechanical consequence of the shift in portfolio balances, but to a change in private_sector expectations regarding future interest_rate policy. 
Any central bank facing deflation should commit itself in advance to a price-level target and pursue actions that convince the private sector that the commitment is genuine. 
Only that change in private expectations will make the bank's policy effective. 

Escaping George Bush’s Future 
It always comes back to oil. 
The continuing misguided interventions in the Middle East by the United States and the United Kingdom have their roots deep in the Arabian sand. 
Ever since Winston Churchill led the conversion of Britain’s navy from coal to oil at the start of the last century, the Western powers have meddled incessantly in the affairs of Middle Eastern countries to keep the oil flowing, toppling governments and taking sides in wars in the supposed “great game” of energy resources. 
But the game is almost over, because the old approaches are obviously failing. 
Just when one is lulled into thinking that something other than oil is at the root of current US and UK action in Iraq, reality pulls us back. 
Indeed, President Bush recently invited journalists to imagine the world 50 years from now. 
He did not have in mind the future of science and technology, or a global population of nine billion, or the challenges of climate change and biodiversity. 
Instead, he wanted to know whether Islamic radicals would control the world’s oil. 
Whatever we are worrying about in 50 years, this will surely be near the bottom of the list. 
Even if it were closer to the top, overthrowing Saddam Hussein to ensure oil supplies in 50 years ranks as the least plausible of strategies. 
Yet we know from a range of evidence that this is what was on Bush’s mind when his government shifted its focus from the search for Osama bin Laden to fighting a war in Iraq. 
The overthrow of Saddam was the longstanding pet idea of the neoconservative Project for a New American Century, which was already arguing in the 1990’s that Saddam was likely to achieve a stranglehold over “a significant proportion of the world’s oil supplies.” 
Vice President Dick Cheney reiterated these fears in the run-up to the Iraq War, claiming that Saddam Hussein was building a massive arsenal of weapons of mass destruction to “take control of a great portion of the world’s energy supplies.” 
Cheney’s facts were obviously wrong, but so was his logic. 
Dictators like Saddam make their living by selling their oil, not by holding it in the ground. 
Perhaps, though, Saddam was too eager to sell oil concessions to French, Russian, and Italian companies rather than British and US companies. 
In any event, the war in Iraq will not protect the world’s energy supplies in 50 years. 
If anything, the war will threaten those supplies by stoking the very radicalism it claims to be fighting. 
Genuine energy security will come not by invading and occupying the Middle East, or by attempting to impose pliant governments in the region, but by recognizing certain deeper truths about global energy. 
First, energy strategy must satisfy three objectives: low cost, diverse supply, and drastically reduced carbon dioxide emissions. 
This will require massive investments in new technologies and resources, not a “fight to the finish” over Middle East oil. 
Important energy technologies will include conversion of coal to liquids (such as gasoline), use of tar sands and oil shale, and growth in non-fossil-fuel energy sources. 
Indeed, there is excellent potential for low-cost solar power, zero-emitting coal-based technologies, and safe and reliable nuclear power. 
Solar radiation equals roughly 10,000 times our current energy use. 
We tap that solar power in many fundamental ways – food production, wind power, hydroelectric power, solar heating, solar-thermal electricity, solar panels – but the possibilities for greatly increased use of inexpensive, widely available, and environmentally friendly solar power are huge. 
Coal, like solar energy, is widely available. 
It is already inexpensive, but it is a solid rather than a liquid, a major pollutant, and a source of greenhouse gas emissions. 
Yet all of these problems can be solved, especially if we make the needed investments in research and development. 
Gasification of coal allows for the removal of dangerous pollutants, and coal can already be converted to gasoline at low cost; a South African company is beginning to bring that technology to China on a large scale. 
Nuclear power, both fission-based and fusion-based, is yet another possibility for vast, reliable, secure, and environmentally safe primary energy. 
Here, too, there are technological obstacles, but they seem surmountable. 
Of course, there are also major political, regulatory, and security considerations, all of which need to be addressed properly. 
It is ironic that an administration fixated on the risks of Middle East oil has chosen to spend hundreds of billions—potentially trillions—of dollars to pursue unsuccessful military approaches to problems that can and should be solved at vastly lower cost, through R&D, regulation, and market incentives. 
The biggest energy crisis of all, it seems, involves the misdirected energy of a US foreign policy built on war rather than scientific discovery and technological progress. 

Escaping the Fossil Fuel Trap 
MILAN – There are many problems with fossil fuels. 
They are expensive and a source of political and supply volatility. 
As consumption rises globally, the costs associated with them will probably rise sharply. 
Worst of all, they carry large and unsustainable costs in terms of carbon emissions. 
Indeed, their contribution to rising levels of CO2 in the atmosphere is beginning to overshadow the other problems. 
But use of fossil fuels, and hence higher CO2 emissions, seems to go hand in hand with growth. 
This is the central problem confronting the world as it seeks to forge a framework to combat climate change. 
Compared to the advanced countries, the developing world now has both low per capita incomes and low per capita levels of carbon emissions. 
Imposing severe restrictions on the growth of their emissions growth would impede their GDP growth and severely curtail their ability to climb out of poverty. 
The developing world also has a serious fairness objection to paying for climate-change mitigation. 
The advanced countries are collectively responsible for much of the current stock of carbon in the atmosphere, as well as for a significant (though declining) share of the world’s annual emissions. 
As a consequence, the developing world’s representatives argue, the advanced countries should take responsibility for the problem. 
But a simple shift of responsibility to the advanced countries by exempting developing countries from the mitigation process will not work. 
To be successful, a strategy of fighting climate change must be not only fair, but also effective. 
If developing countries are allowed to grow, and there is no corresponding mitigation of the growth in their carbon emissions, average per capita CO2 emissions around the world will nearly double in the next 50 years, to roughly four times the safe level, regardless of what advanced countries do. 
Advanced countries by themselves simply cannot ensure that safe global CO2 levels are reached. 
Just waiting for the high-growth developing countries to catch up with the advanced countries is even less of a solution. 
So the world’s major challenge is to devise a strategy that encourages growth in the developing world, but on a path that approaches safe global carbon-emission levels by mid-century. 
The way to achieve this is to decouple the question of who pays for most efforts to mitigate climate change from the question of where, geographically, these efforts take place. 
In other words, if the advanced countries absorb mitigation costs in the short run, while mitigation efforts lower emissions growth in developing countries, the conflict between developing countries’ growth and success in limiting global emissions may be reconciled – or at least substantially reduced. 
These considerations suggest that no emission-reduction targets should be imposed on developing countries until they approach per capita GDP levels comparable to those in advanced countries. 
While such targets should be self-imposed by advanced countries, they should be allowed to fulfill their obligations, at least in part, by paying to reduce emissions in developing countries (where such efforts may yield greater benefits). 
A crucial corollary of this strategy is large-scale technology transfer to developing countries, allowing them both to grow and to curtail their emissions. 
The closer these countries get to being included in the system of restrictions, the greater incentive they will have to make their own additional investments to mitigate their emissions. 
The world has already accepted the basic principle that the rich should bear more of the cost of mitigating climate change. 
The Kyoto Protocol established a set of “common but differentiated responsibilities” that imply asymmetric roles for advanced and developing countries, with the obligations of developing countries evolving as they grow. 
The ingredients for such a grand bargain are fairly clear. 
The advanced countries will be asked to reduce their CO2 emissions at a substantial rate, while emissions in developing countries can rise to allow for rapid, catch-up economic growth. 
The goal is not to prevent developing countries’ growth-related emissions, but to slow their rise and eventually reverse them as these countries become richer. 
The best way to implement this strategy is to use a “carbon credit trading system” in the advanced countries, with each advanced country receiving a certain amount of carbon credits to determine its permissible emission levels. 
If a country exceeds its level of emissions, it must buy additional credits from other countries that achieve emissions lower than their permitted levels. But an advanced country could also undertake mitigation efforts in the developing world and thus earn additional credits equal to the full value of its mitigation efforts (thus allowing more emissions at home). 
Such a system would trigger entrepreneurial searches for low-cost mitigation opportunities in developing countries, because rich countries would want to pay less by lowering emissions abroad. 
As a result, mitigation would become more efficient, and the same expenditures by advanced countries would produce higher global emission reductions. 
As for developing countries, while they would not have explicit credits or targets until they graduate to advanced-country status, they would know that at some point (say, when their carbon emissions reach the average level of advanced countries) they would be included in the global system of restrictions. 
This would provide them with an incentive even before that point to make decisions concerning energy pricing and efficiency that would reduce the growth of their emissions without impeding economic growth, and thus extend the period during which their emission levels remain unrestricted. 
Conflict between advanced and developing countries over responsibility for mitigating carbon emissions should not be allowed to undermine prospects for a global agreement. 
A fair solution is as complex as the challenge of climate change itself, but it is certainly possible. 

Escaping the Oil Curse 
CAMBRIDGE – Libyans have a new lease on life, a feeling that, at long last, they are the masters of their own fate. 
Perhaps Iraqis, after a decade of warfare, feel the same way. 
Both countries are oil producers, and there is widespread expectation among their citizens that that wealth will be a big advantage in rebuilding their societies. 
Meanwhile, in Africa, Ghana has begun pumping oil for the first time, and Uganda is about to do so as well. 
Indeed, from West Africa to Mongolia, countries are experiencing windfalls from new discoveries of oil and mineral wealth. 
Heightening the euphoria are the historic levels that oil and mineral prices have reached on world markets over the last four years. 
Many countries have been in this position before, exhilarated by natural-resource bonanzas, only to see the boom end in disappointment and the opportunity squandered, with little payoff in terms of a better quality of life for their people. 
But, whether in Libya or Ghana, political leaders today have an advantage: most are well aware of history, and want to know how to avoid the infamous natural-resource “curse.” 
To prescribe a cure, one must first diagnose the illness. 
Why do oil riches turn out to be a curse as often as they are a blessing? 
Economists have identified six pitfalls that can afflict natural-resource exporters: commodity-price volatility, crowding out of manufacturing, “Dutch disease” (a booming export industry causes rapid currency appreciation, which undermines other exporters’ competitiveness), inhibited institutional development, civil war, and excessively rapid resource depletion (with insufficient saving). 
Oil prices are especially volatile, as the large swings over the last five years remind us. 
The recent oil boom could easily turn to bust, especially if global economic activity slows. 
Volatility itself is costly, leaving economies unable to respond effectively to price signals. 
Temporary commodity booms typically pull workers, capital, and land away from fledgling manufacturing sectors and production of other internationally traded goods. 
This reallocation can damage long-term economic development if those sectors nurture learning by doing and fuel broader productivity gains. 
The problem is not just that workers, capital, and land are sucked into the booming commodity sector. 
They also are frequently lured away from manufacturing by booms in construction and other non-tradable goods and services. 
The pattern also includes an exuberant expansion of government spending, which can result in bloated public payrolls and large infrastructure projects, both of which are found to be unsustainable when oil prices fall. 
If the manufacturing sector has been “hollowed out” in the meantime, so much the worse. 
Even if an increase in oil prices turns out to be permanent, pitfalls abound. 
Governments that can finance themselves simply by retaining physical control over oil or mineral deposits often fail in the long run to develop institutions that are conducive to economic development. 
Such countries evolve a hierarchical authoritarian society in which the only incentive is to compete for privileged access to commodity rents. 
In the extreme case, this competition can take the form of civil war. 
In a country without resource wealth, by contrast, elites have little alternative but to nurture a decentralized economy in which individuals have incentives to work and save. 
These are the economies that industrialize. 
The final pitfall is excessively rapid depletion of oil or mineral deposits, in violation of optimal rates of saving, let alone environmental preservation. 
What can countries do to ensure that natural resources are a blessing rather than a curse? 
Some policies and institutions have been tried and failed. 
These include, in particular, attempts to suppress artificially the fluctuations of the global marketplace by imposing price controls, export controls, marketing boards, and cartels. 
But some countries have succeeded, and their strategies could be useful models for Libya, Iraq, Ghana, Mongolia, and others to emulate. 
These include: hedging export earnings – for example, via the oil options market, as Mexico does; ensuring counter-cyclical fiscal policy – for example, via a variant of Chile’s structural budget rule; and delegating sovereign wealth funds to professional managers, as Botswana’s Pula Fund does. 
Finally, some promising ideas have virtually never been tried at all: denominating bonds in oil prices instead of dollars, to protect against the risk of a price decline; choosing commodity-price targeting as an alternative to inflation targeting or exchange-rate targeting for anchoring monetary policy; and distributing oil revenues on a nationwide per capita basis, to ensure that they do not wind up in elites’ Swiss bank accounts. 
Leaders have free will. 
Oil exporters need not be prisoners of a curse that has befallen others. 
Countries can choose to use their resource bonanzas for the long-term economic advancement of their people, not just that of their leaders. 

Escaping the Poverty Trap 
The elimination of poverty must remain at the top of the policy agenda in Latin America and the Caribbean, where inequality is higher than in any other region and one in five people survive on little more than two dollars per day (as measured by the 1993 purchasing power parity (PPP) exchange rate). 
Poverty is an intrinsically dynamic phenomenon. 
Poor people are locked into a low-level asset (or capability) trap. 
Hence, poverty reduction efforts must seek to provide incentives that will encourage the poor to acquire assets and capabilities that will enable them to escape poverty in the future. 
Of course, it is impossible to make serious inroads against poverty without generating persistent economic growth. 
But, based on the continent’s economic performance over the past last 15 years, growth alone is unlikely to reduce poverty by more than 25% in the next ten years. 
Even if policymakers were successful in creating an environment that better rewards investment and thus promotes faster growth, Latin America’s ills would not be solved. 
The high level of income inequality requires specific poverty reduction efforts. 
Indeed, a striking feature of Latin America is that very little redistribution currently takes place. 
Taxes generally have little redistributive effect, because most countries rely heavily on indirect taxes. 
Even Chile’s tax system – the most effective in Latin America – is actually regressive. 
Personal income tax revenue is low in Latin America and the Caribbean, suggesting that there is scope for policy makers to increase the intake so they have more money to distribute to those in need. 
There is a compelling economic case for increased public investment early in a child’s life. 
Severe malnutrition in early childhood harms cognitive development. 
Growth lost in early years is never recovered. 
Measures to reduce the prevalence of iron deficiency, anemia, and vitamin A, iodine, and zinc deficiencies – which remain significant in some countries of the region – would have a positive impact. 
Improving the nutrition of infants and young children by promoting both breastfeeding and better knowledge of weaning foods would be a cost-effective opportunity, with benefits between five and seven times higher than the costs. 
Conditional cash transfers are another option for Latin American policy makers to consider. 
These programs are designed to reduce poverty by making welfare programs conditional upon the recipients’ actions. 
The criteria for receiving aid may be sending children to school regularly or taking them to a doctor. 
A comprehensive Mexican program, PROGRESA, delivers targeted education grants for children, health-care services and nutritional supplements for pregnant women, nursing mothers, and children under five, and annual health check-ups for other household members. 
In 2002, it covered a fifth of the Mexican population, delivering payouts that added up to 20% of beneficiaries’ total expenditure. 
Evidence from this and smaller-scale programs show significant increases in household consumption, reducing poverty in the short run, and that such programs improve school enrollment and attendance rates, although they do less for achievement levels. 
Research also shows that these programs improve the health of children and adults. 
Moreover, there is no evidence that these programs generate major negative incentives, such as lower employment among adults or higher fertility rates. 
On the contrary, there is some evidence that beneficiary households increased their participation in microenterprise activities and made larger investments in agricultural production activities. 
These sorts of benefits are, in economic terms, worth at least twice as much as the cost of the program – the main expense is the cash that is transferred to households. 
Early childhood development projects – designed to improve children’s physical, intellectual, and social development – form a third effective set of redistributive policies. 
A wide range of interventions belong to this category. 
Some, such as growth monitoring, day care services, preschool activities, or improved hygiene or health services, work directly with children. 
They may also include training services for teachers and caregivers, and the strengthening of institutional and community resources and capacity. 
Researchers who looked at early childhood development programs in Latin America have concluded that program participation is associated with improved school readiness, a higher probability of on-time primary school enrollment, lower rates of grade repetition and dropout, and improved academic performance overall. 
The economic benefits, estimated to be between five and nineteen times higher than the costs, are dramatic. 
A plan to reduce poverty in Latin America and the Caribbean should go far beyond conditional cash transfers and early childhood interventions in nutrition and education. 
Although there is not yet enough evidence to assess the cost-benefit ratios of specific policies, the evidence available suggests that policy-makers should also prioritize improving the provision of education, creating more secure property rights through land reform, promoting microfinance, and improving rural infrastructure. 
Poverty rates in the region have fallen slightly in the last two decades, but to reduce the drastic levels of inequality, there needs to be a serious commitment to policies that encourage the poor to acquire the means to escape poverty in the future. 
Above all, policymakers should ensure that fighting poverty remains one of their highest priorities. 

From the CIA to the GFE 
NEW YORK – The United States needs to shift its spending from war to education, from CIA-backed regime change to a new Global Fund for Education (GFE). 
With hundreds of millions of children around the world not in school, or in schools with under-qualified teachers, a lack of computers, large class sizes, and no electricity, many parts of the world are headed for massive instability, joblessness, and poverty. 
The twenty-first century will belong to countries that properly educate their young people to participate productively in the global economy. 
The current imbalance in US spending on global education and military-related programs is staggering: $1 billion per year on the former, and roughly $900 billion on the latter. 
Military-related programs include the Pentagon (around $600 billion), the CIA and related agencies (around $60 billion), Homeland Security (around $50 billion), nuclear weapons systems outside of the Pentagon (around $30 billion), and veterans’ programs (around $160 billion). 
What US politicians and policymakers in their right minds could believe that US national security is properly pursued through a 900-to-1 ratio of military spending to global education spending? 
Of course, the US is not alone. 
Saudi Arabia, Iran, and Israel are all squandering vast sums in an accelerating Middle East arms race, in which the US is the major financier and arms supplier. 
China and Russia are also sharply boosting military spending, despite their pressing domestic priorities. 
We are, it seems, courting a new arms race among major powers, at a time when what is really needed is a peaceful race to education and sustainable development. 
Several recent international reports, including two this month by UNESCO and the International Commission on Financing Global Education, headed by former UK Prime Minister Gordon Brown, show that annual global development assistance for primary and secondary education needs to rise from around $4 billion to around $40 billion. Only this ten-fold increase can enable poor countries to achieve universal primary and secondary education (as called for by Goal Four of the new Sustainable Development Goals). 
In response, the US and other rich countries should move this year to create the GFE, with the needed funds shifted from today’s military spending. 
If Hillary Clinton, the likely next US president, genuinely believes in peace and sustainable development, she should announce her intention to back the GFE’s creation, just as President George W. Bush in 2001 was the first head of state to endorse the newly proposed Global Fund to Fight AIDS, TB, and Malaria. 
She should call on China and others to join this multilateral effort. The alternative – to continue spending massively on defense rather than on global education – would condemn the US to the status of a declining imperial state tragically addicted to hundreds of overseas military bases, tens of billions of dollars in annual arms sales, and perpetual wars. 
Without a GFE, poor countries will lack the resources to educate their kids, just as they were unable to finance the fight against AIDS, TB, and malaria until the Global Fund was established. 
Here’s the basic budgetary challenge: it costs at least $250 in a poor country to educate a child for a year, but low-income countries can afford, on average, only around $90 per child per year. 
There is a gap of $160 per child for around 240 million school-aged kids in need, or about $40 billion per year. 
The consequences of underfunded education are tragic. 
Kids leave school early, often without being able to read or write at a basic level. 
These dropouts often sign up with gangs, drug traffickers, even jihadists. 
Girls marry and begin to have children very young. 
Fertility rates stay high and the children of these poor, under-educated mothers (and fathers) have few realistic prospects of escaping poverty. 
The cost of failing to create decent jobs through decent schooling is political instability, mass migration to the US (from Central America and the Caribbean) and Europe (from the Middle East and Africa), and violence related to poverty, drugs, human trafficking, and ethnic conflict. 
Soon enough, the US drones arrive to exacerbate the underlying instability. 
In short, we need to shift from the CIA to the GFE, from the expensive failures of US-led regime change (including those targeting Afghanistan’s Taliban, Iraq’s Saddam Hussein, Libya’s Muammar el-Qaddafi, and Syria’s Bashar al-Assad) to investments in health, education, and decent jobs. 
Some critics of aid argue that funds for education will simply be wasted. 
Yet the critics said exactly the same about disease control in 2000 when I proposed a scale-up of funding for public health. 
Sixteen years later, the results are in: disease burdens have fallen sharply, and the Global Fund proved to be a great success (the donors now think so, too, and have recently replenished its accounts). 
To establish a successful counterpart for education, first the US and other countries would pool their assistance into a single new fund. 
The fund would then invite low-income countries to submit proposals for support. 
A technical and non-political review panel would assess the proposals and recommend those that should be funded. 
Approved proposals would then receive support, with the GFE monitoring and evaluating implementation, enabling well-performing governments to build track records and reputations for sound management. 
Since 2000, the US and other countries have squandered trillions of dollars on wars and arms purchases. 
The time has come for a sensible, humane, and professional new approach that would scale up investment in education while scaling back expenditures on wars, coups, and weaponry. 
The education of the world’s youth offers the surest path – indeed, the only path – to global sustainable development. 

Eternal Debts 
"Everything . . . everything changes." So goes the refrain in a famous Argentine song. 
But actually, in Argentina everything stays the same or becomes worse. 
Heraclitus's warning against bathing in the same sea twice is lost on our economic ministers, who insist on bathing regularly in contaminated waters. Whenever they go bathing, they follow the same path, first raising concerns over what will happen if Argentina pays back its foreign debt, and then inevitably paying back the debt under strong pressure from the International Monetary Fund and the US. 
Sometimes, Argentine negotiators respond to international bond owners, who harass the government in an effort to force payment on what cannot be paid. 
By playing this endless game, our ministers leave for tomorrow what they lack the courage to face today, knowing full well that this ruse will end tragically for Argentines. 
The sagacious historian and politician Arturo Jauretche liked to say, "It's not about changing our collar; it's about ceasing to be a dog." 
His companions, however, remain unconvinced and seem resigned to failing to find an alternative to the neo-liberal taxation model for paying the foreign debt. 
They believe we will be condemned to the abyss unless we accept rules created by the world's powerful. 
This is wrongheaded; it's time we cease being dogs. 
Our foreign debt, or more appropriately our eternal debt, cannot and should not be paid. 
It is an immoral debt and a profound human rights issue. 
The debt is used to dominate people, and the impact is cruel and abusive. 
The world's indebted nations, unfortunately known as the Third World, transfer capital to the rich nations by paying interest on their foreign liabilities. 
This generates a vicious, untenable cycle of deep poverty and social exclusion for the south. 
The northern countries, unfortunately known as the First World, use the hunger and poverty of southern nations to ensure a better life for themselves. 
Argentina's foreign debt was generated during the military dictatorships, when the rich nations of the north provided credit to despots and sold them weapons to repress their people. 
These private debts were passed along to the populace, which received nothing from the loans but is now expected to pay them back. 
Indeed, Argentina's case is pathetic. 
It was a rich country, a great producer of food, where endemic diseases such as leprosy, parasites, and tuberculosis had been defeated and literacy thrived. 
True, Argentina endured fifty years of military dictatorships and weak civil governments. But, up until the 1970's it was never heavily encumbered by debt. 
Today, 23 million Argentines are poor, and more than 10 million live below the poverty line. 
Everyday, nearly 100 children die from hunger and preventable diseases. 
Our indigenous communities continue to lose their land to foreign corporations. Endemic diseases and illiteracy are increasing. 
Hundreds of factories have closed, driving up the unemployment rate to nearly 30%. 
Nonetheless, we continue to transfer capital to rich countries to pay interest on our foreign debt. 
The more we pay, the more we seem to owe and the less we have. 
Still, Latin Americans know how to resist and how to create social movements to fight the "axis of evil" - militarization, foreign debt, and the Association of Free Trade for the Americas - that seeks to subject their continent to re-colonization by the US. 
The free trade agreement, for example, would provide North American companies with the same production and investment conditions that are available to our companies and grant them agricultural subsidies against which no Latin American country can compete. 
Because foreign debt has such a direct impact on people's lives, diverse proposals have been made to government officials, in the belief that the foreign debt burden is fundamentally a political problem - one that must be faced now, not later. 
Essential to any real change is the creation of continental unity and regional affiliations such as Mercosur, and the Andino and Caribbean Pacts. 
We must differentiate legitimate debt from illegitimate debt, which means taking the problem before the World Court in The Hague. 
The World Social Forum, which met this year in Bombay, India, is another useful body that is generating alternative proposals to overcome the dire situation of the heavily indebted countries. 
People across Latin America must unite to preserve their sovereignty, their environment, and respect for human rights, all of which are systematically being violated. 
We need to re-consider how we define our democracies, which appear to be mere formalities with little real substance. 
The fact that we can vote is an important victory, but it does not guarantee us the hope and dignity that we deserve. 

Eternal Hong Kong 
I have been a part of Hong Kong’s civil service for more than three decades. 
Throughout my entire career I have worked with many people whose driving impulse has been to serve Hong Kong. 
That remains as true today as it did almost 40 years ago, when I first entered government. 
The past couple of weeks have been among the most momentous periods since our reunification with China in 1997, and it has left me in the hot seat as Hong Kong’s Acting Chief Executive. 
It is not easy to describe the enormous level of responsibility I feel. 
What sets Hong Kong apart is our ability to sustain social stability and economic growth. 
One key element of our success is the institutions that buttress our development. 
These include our legal system, which is underpinned by an independent judiciary, our legislature, and our civil service. 
Each operates independently but is an integral part of the whole. 
In short, ours is a system of government like many others. 
However, Hong Kong has some distinguishing features, including a very internationally minded and outward-looking government, owing to our close integration into world markets long before globalization became a catchphrase. 
Within the ranks of our civil service and judiciary are nationals from Britain, Australia, the United States, Canada, and India. 
Moreover, our Court of Final Appeal calls on some of the most esteemed minds of the common-law world. 
We have a large foreign population and one of the world’s largest consular corps. 
International chambers of commerce play a very active and vital role in government consultations. 
Our Basic Law even allows for foreign nationals to be elected to one-fifth of the seats in our legislature. 
Hong Kong’s cosmopolitanism long ago planted the seeds of tolerance and respect in our approach to government. 
As a result, we are committed to dialogue and compromise as the only way to balance the many competing demands and opinions that pervade public affairs. 
Good government is not a competition. 
It’s not about winning or losing, or whose view or will prevails. 
It is about making the best decisions for the community as a whole. 
Inevitably, this will often involve compromise. 
Indeed, as Hong Kong’s society has grown more sophisticated, it has also become more complex, multi-faceted, and pluralistic. 
This means that government can no longer afford to view issues in isolation; its operations need to be de-compartmentalized and flattened, as well as streamlined. 
This is a difficult task, given that some of our systems have been in place for many years, often entrenched in law. 
Of course, pragmatism has its limits, because good government is also about upholding core values. 
I have often referred to what I call the four pillars of Hong Kong’s success: the rule of law, a level playing field for business, a clean and efficient civil service, and the free flow of information. 
These are values that we simply will not compromise. 
To do so would mark the beginning of the end for Hong Kong. 
Since reunification with our motherland, we have the added safeguard of the Basic Law, which gives effect to the principles of “one country, two systems” and “Hong Kong’s people running Hong Kong with a high degree of autonomy.” 
Good government also requires sharing a vision of the future – the purposes and thinking behind public policies – with the community. 
Our vision is to develop Hong Kong as Asia’s world city. 
This is an all-encompassing brief, covering everything we do as a community and an economy in areas ranging from international trade to art, culture, and tourism. 
The Basic Law embodies this vision, laying the foundations for our development over a 50-year period and providing the freedom and the power for us to position ourselves as Asia’s world city – and to do it on our own. 
At the same time, it also embodies the depth of the central government’s support for Hong Kong. 
It is thus crucial to the good governance of the Hong Kong Special Administration Region. 
In many areas – financial services, infrastructure, communications technology, and tourism – I would say we have reached our goals for Hong Kong. 
Hardly a day goes by when we don’t read something in the local press that refers to our status as Asia’s world city. 
Even when people feel we have not lived up to the standards expected of a world city, we are glad to be held to a high benchmark, because it keeps us on our toes. 
That may sound disingenuous to some, but Hong Kong’s officials share a common mission to maintain the stability and prosperity of our city. 
Our duty is to make Hong Kong a better place for us all, without hidden agendas or quid pro quos. 
It is an onerous and solemn undertaking, uplifting one day and extremely frustrating the next. 
But, above all, it is an honor and a privilege to play such a role in our society, and I know that the vast majority of officials, legislators, judges, and civil servants with whom I’ve worked would agree. 

Hacking the STEM Syllabus 
SAN FRANCISCO – After a prolonged honeymoon for the digital economy, the dark side of the Internet, social media, and “Big Tech” has become increasingly apparent in recent years. 
Online, what is good for business is not necessarily good for individuals or societies. 
Big Tech platforms make it easy to manipulate opinion, spew hate, and incite violence. 
We once naively believed that mass access to the World Wide Web would inevitably democratize information; today, we worry about the emergence of an “addiction economy” that is bad for everyone. 
What can be done to support more humane, ethical, and effective technology? 
One important way to address this problem in a systemic way is by reforming education in the so-called STEM disciplines: science, technology, engineering, and math. 
Policymakers worldwide are already focusing on increasing the number of STEM graduates and the diversity of STEM students. 
But we should also expand the scope of STEM education, to ensure that students learn to evaluate and respond to the social, economic, and political consequences of their work. 
This does not mean adding existing humanities or social sciences courses to a STEM curriculum. 
Rather, it will require the development of an entirely new curriculum that gives the next generation of technologists, engineers, scientists, and mathematicians the formal foundations – including shared vocabulary and intellectual frameworks – for considering the macro effects of their actions on society. 
Without such a framework, the gap between the promise of innovation and the reality of human experience will only grow. 
Fortunately, the seeds of this educational revolution are already sprouting. 
Some universities are adding ethics classes to the STEM curriculum. 
Stanford University, with its deep links to the tech industry, has recently added courses with topics like “Ethics, Public Policy, and Technological Change” and “Computers, Ethics, and Public Policy.” 
Stanford has also recently launched a new Human-Centered AI Initiative, which recognizes that “the development of AI should be paired with an ongoing study of its impact on human society, and guided accordingly.” 
Last year, Cornell launched the Milstein Program in Technology and Humanity. 
These early initiatives can serve as important testing grounds for new curricula and methods. 
But the real change will come only when all STEM programs provide students with the tools they need to carry out a credible assessment of their work’s effects on humanity. 
Of course, such changes will mean little if we do not know what the most effective tools actually are. 
That is why continued experimentation is also essential. 
Casey Fiesler of the University of Colorado, Boulder, is pursuing just such experimentation by crowd-sourcing syllabi focused on tech ethics. 
The growing online database already contains more than 200 different syllabi from universities around the world. 
Yet only one-quarter of these courses are taught by computer science faculty. 
The rest are taught in departments such as law, philosophy, and communications, which means that they are not being tailored to STEM-related challenges. 
More fundamentally, such standalone courses are not ideal. 
A better approach, as Fiesler herself agrees, would focus on integrating ethics into “everyday practice” in the STEM fields. 
(Fiesler hopes that her database will help faculty make this case to their universities.) 
This is the goal of the Responsible CS Challenge, launched last month by Omidyar Network, Schmidt Futures, Craig Newmark Philanthropies, and Mozilla. 
The two-year challenge should encourage computer science professors in the United States to integrate ethics into their undergraduate curriculum, so that STEM students can gain a deeper understanding of how technology affects humanity. 
This is a good first step, but much more must be done. 
For one thing, while the initial focus on ethics makes sense, similar explorations will be needed in a wide variety of disciplines such as economics, psychology, and many more of the so-called humanities. 
Expanding STEM education to include such broader considerations would serve as a cornerstone of a more comprehensive long-term strategy to ensure that technology serves society in overwhelmingly positive ways. 
That strategy must also include changes, say, to business models, incentives, innovation strategies, and regulatory regimes – changes that should be pursued by people whose education has prepared them to address the effects of their work on the rest of us. 

Ethics and Obama 
TUBINGEN – Many say that the world financial crisis could not have been foreseen. 
Perhaps not by financiers and economists, but others who were watching how markets were developing – often with dismay – were more than worried. 
As early as 1997, I warned about a repeat of the collapsed economic order of 1929-1933 in my book A Global Ethic for Global Politics and Global Economics : “The slightest remark, for example by the President of the American Federal Bank, Alan Greenspan, at the beginning of December 1996, that an “irrational exuberance” had led to an overvaluation of the financial markets was enough to drive the nervous investors on the high-flying stock markets of Asia, Europe and America into a spin, and panic selling. 
This also shows that crises in globalization do not a priori balance out, but perhaps get progressively worse.” 
Back then, I was already venturing what is, for economists, a heretical presumption: that chaos theory should be applied to the economy; that devastating effects can follow from the smallest causes. 
One could by no means rule out “a return of the world economic crisis and the collapse of the world economic order of 1929-1933.” 
So I was not at all surprised by the speed and dimension of events in recent months. 
Indeed, only a few economists – such as the 2001 Nobel economics laureate Joseph Stiglitz and the 2008 laureate Paul Krugman – warned against fatal developments that were mounting in the now globalized economy. 
Contrary to many predictions by economic experts, the crisis has not been limited to the financial sector. 
Instead, it is generating a massive impact on the real economy – hitting the automobile and chemical industries especially hard. 
In contrast to 1929, credits are not now being throttled; on the contrary, public money is being pumped into banks and the economy. 
But these measures will be successful only if they are not taken in an isolated and populist way. 
Instead, they need to be part of a convincing overall plan that combines responsible state intervention with relief of the financial burdens of individual citizens, as well as savings in public budgets. 
Unforeseeable state debt – at the cost of coming generations – is neither a viable nor an ethical solution. 
Fortunately, there are signs that the general state of mind that helped spawn the crisis is changing. 
In the rich industrialized countries, after an era of cynical and short-sighted profit-maximizing behavior, we may be at the dawn of a new age of modesty and sustainability. 
Companies are facing growing pressure to behave ethically, and unethical business behavior is at last being punished. 
On a lecture tour in the United States in November 2008, I could see that many people are now complaining about the overwhelming desire for profit in business and megalomania in politics. 
As markets failed, calls for ethical regulation of the quest for profit has become justified not only in principle, but also in fact. 
But ethics is not the icing on the cake; it is not merely an incidental addition to the global market economy. 
Rather, the new financial architecture that many are calling for, and which is urgently needed, must be supported by an ethical framework. 
The fatal human instincts of greed and hubris can be tamed only with some elementary ethical norms. 
So what should this ethical framework entail? 
A paragraph of the Declaration toward a Global Ethic of the Parliament of the World’s Religions in Chicago in 1993 reads as follows: 
“In the great ancient religious and ethical traditions of humankind we find the directive: You shall not steal! 
Or in positive terms: Deal honestly and fairly! 
Let us reflect anew on the consequences of this ancient directive: No one has the right to rob or dispossess in any way whatsoever any other person or the commonweal. 
Further, no one has the right to use her or his possessions without concern for the needs of society and Earth. 
To be authentically human in the spirit of our great religious and ethical traditions means the following: 
• We must utilize economic and political power for service to humanity instead of misusing it in ruthless battles for domination. 
We must develop a spirit of compassion with those who suffer, with special care for the children, the aged, the poor, the disabled, the refugees, and the lonely; 
• We must cultivate mutual respect and consideration, so as to reach a reasonable balance of interests, instead of thinking only of unlimited power and unavoidable competitive struggles; 
• We must value a sense of moderation and modesty instead of an unquenchable greed for money, prestige, and consumption. 
In greed humans lose their ‘souls’, their freedom, their composure, their inner peace, and thus that which makes them human.” 
Many hopes throughout the world are now directed toward President Barack Obama, who enters his presidency with a moral claim that is extraordinarily high for a politician. 
Of course, Obama is not the Messiah; he cannot work miracles. 
But he is in a position to define an ethical framework for the rebuilding global economy. 
In view of the oppressive – and unprecedented – abundance of problems with which Obama is confronted at home and abroad, he will certainly not be able to fulfill all expectations. 

The Feminization of African Politics 
BAMAKO/TORONTO – Last month, Ethiopian Prime Minister Abiy Ahmed appointed a new cabinet; ten of the 20 positions went to women. 
One week later, the country’s parliament unanimously elected Sahle-Work Zewde to become Ethiopia’s first female president, and a week after that, lawmakers appointed Meaza Ashenafi to serve as the first female Supreme Court president. 
Ethiopia is not alone. 
Rwandan President Paul Kagame installed a new gender-balanced cabinet last month. 
Rwanda already had the world’s highest percentage of women in a national parliament; now, the country will have even more female leaders. 
While Ethiopia and Rwanda are at the forefront of Africa’s push for gender parity in politics, other African countries are not far behind. 
Six of the world’s 20 top countries in terms of the share of legislative seats held by women are in Sub-Saharan Africa, and in two African countries toward the bottom of the global list – Nigeria and Mali – politicians are currently discussing ways to increase female representation. 
This shift is as inspiring as it is historic. 
By appointing so many young, energetic female leaders – like Paula Ingabire, Rwanda’s minister of information and communications technology and innovation, Kamissa Camara, Mali’s foreign affairs minister, or Bogolo Kenewendo, Botswana’s trade minister – African countries are demonstrating that young women can aspire to, and achieve, impactful goals. 
These changes are essential not only for the sake of fairness, but also for Africa’s long-term prosperity. 
On a continent where the average age of presidents is 62, Africa needs more young women in power to reflect the talent and desires of its youthful population. 
To sustain Africa’s socioeconomic progress, young women must be in leadership positions. 
Women experience the world differently than men. 
We grow up navigating cultural norms and expectations that, while certainly constraining, give us insights that are essential for inclusive policymaking. 
A growing body of evidence shows that women’s political leadership strengthens governance capacity, improves cooperation with allies and across parties, and advances issues like parental leave and childcare, access to pensions, and the elimination of gender-based violence. 
While it is unreasonable – and indeed undesirable – to expect that women will agree on all issues or be equally gender-sensitive in their politics, it is fair to assume that a female leader’s ideas will be informed by her unique experiences. 
As leaders everywhere strive to build more equitable societies, they must not underestimate the importance of giving political voice to gendered expertise. 
In much of the world, and in many African countries, a woman’s place is widely believed to be in the home; public space is regarded as a male domain. 
When governments in Africa boldly and intentionally crowd women into decision-making bodies, and entrust them with power, they are directly challenging these outdated assumptions. 
With more female role models, young women and girls will be able to imagine new career possibilities; parents will chart new paths of success for their daughters; teachers will teach girls differently; and social and cultural barriers will fall. 
Some critics argue that gender quotas in government are condescending and unnecessary. 
But in many parts of the world, they are essential. 
In some societies, for example, women cannot easily vote, meaning that even when female candidates are on the ballot, it can be difficult for them to garner electoral support. 
Ethiopia and Rwanda have recognized this challenge and have moved to address it. 
Moreover, by appointing gender-balanced cabinets, leaders are intentionally addressing a common experience for women in politics: being vastly outnumbered by male counterparts. 
These two governments now have the opportunity to bring women’s perspective to bear on the challenges their countries face. 
The creation of gender-equal cabinets reinforces the message that progress is about more than building individual capacity. 
Rather, it also requires transforming the structures and institutions that govern society. 
For young African women, the last few weeks of political change represents a milestone in the continuing push for gender equality, marking the beginning of a new era of progress for the continent. 

Ethiopia’s New Climate of Fear 
Vienna – The European Union, the United States, and other major donors will pump about $2.5 billion into Ethiopia this year, a sum that does not even begin to include the cost of medicines, famine relief, and countless other services provided by non-profit groups in one of the world’s most impoverished countries. 
That help is needed, because Ethiopians are prone to malnutrition, disease, and natural calamity. 
Its burgeoning population far outstrips the country’s ability to feed itself. 
So desperate is Ethiopia that celebrity causes – from Bob Geldoff’s Live Aid famine-relief concerts to Angelina Jolie and Brad Pitt’s adoption of orphaned babies – supplement what donors cannot possibly provide. 
But for all this generosity, an authoritarian government rules Ethiopia with virtual impunity. 
Prime Minister Meles Zenawi, in power for 18 years, has crushed the opposition. 
His ruling party dominates public institutions. 
Worse still, in a vast and predominantly rural country, the prime minister’s underlings control broadcasting and maintain a choke-hold on other media. 
Four years ago this month, Zenawi’s Ethiopian People’s Revolutionary Democratic Party (EPRDF) suffered its worst loss at the polls since the former guerrilla overthrew a ruthless, Soviet-backed regime in 1991. 
Rather than accept its losses, the EPRDF-run government responded with a brutal crackdown, claiming outright victory and accusing the opposition of trying to stage an insurrection. 
Security forces attacked peaceful protesters, jailed opposition leaders, sent thousands of their supporters to gruesome detention camps, and accused independent journalists of treason – a crime punishable by death. 
Some journalists and politicians sought asylum in other countries. 
During several months of unrest, roughly 200 people were killed. 
It was a disgraceful snub for donor nations that had invested time and capital in supporting Ethiopia’s democratic transition. 
Many of the journalists and opposition figures were eventually released or granted clemency, but there has been no letup to the torment. 
In late April 2009, security forces arrested 40 opposition figures, accusing them of trying to topple the government. 
Meanwhile, the authorities continue their assault on independent media through capricious licensing rules, interrogations, and, on occasion, revoking the permits of reporters for international broadcasters like the Voice of America. 
Leading journalists have been assaulted, the culprits never found. 
“There is only fear, not freedom, of expression in Ethiopia,” says one leading journalist. 
Ethiopia’s journalists are not entirely innocent. 
Some newspapers have stoked the country’s ethnic and regional animosities, and can be wildly inaccurate in their reporting. 
Yet badgering or jailing journalists is no way to resolve what could be handled through a voluntary media council or independent ombudsman. 
Furthermore, the government effort to portray independent journalists as vicious enemies unfairly condemns the many Ethiopian reporters and editors who take their responsibilities seriously. 
Zenawi has largely escaped sanction from his Western allies, in part because the erudite ex-Marxist had a friendly relationship with former British Prime Minister Tony Blair and cooperated closely with the Bush administration in counter-terrorism efforts in the Horn of Africa. 
There has not been total silence. 
Donald Payne, a leading member of the US House Foreign Affairs Committee, and Ana Gomes, a member of the European Parliament from Portugal and head of the EU’s observation team in the 2005 elections, have sought to tie non-humanitarian aid more closely to Ethiopia’s conduct on press freedom and other human rights. 
Britain and some other European governments responded to the post-election crackdown by temporarily withholding aid. 
But Ethiopia poses a dilemma for anyone who cares about human rights and democracy. 
Cutting off aid could have calamitous humanitarian consequences for the nation’s 80 million people. 
It could also destabilize a fragile region, sparking fresh wars with neighboring Somalia and Eritrea. 
Nevertheless, there are ways to pressure Zenawi: 
· Donors should deny Ethiopian ministers a seat at diplomatic tables, such as the coveted spot Zenawi got at the G-20 summit in London as head of the New Partnership for Africa’s Development; 
· While the Development Assistance Group, created by the EU and other principal donors to coordinate aid projects in Ethiopia, has improved the efficiency of donor contributions, a vigorous monitoring component is needed to ensure that international resources do not support policies that are anathema to human rights values; 
· As a leading donor, the EU wields considerable power in Ethiopia and should be more willing to use it. 
The EU should aggressively enforce the Cotonou Agreement, which requires Ethiopia and other nations that receive European assistance to respect “human rights, democratic principles, and the rule of law.” 
Cotonou is due for revision in 2010, so now is the time to develop enforcement mechanisms that establish clear penalties for failing to uphold human rights and freedom of the press. 
· The EU and the US should wield more of their clout at the World Bank and other international organizations to link development grants to progress on press freedom and human rights. 
The aid that Ethiopia receives from its friends may be a small price to pay to keep Africa’s second largest country from descending into chaos. 
But Ethiopia’s people deserve more from their government. 
Press freedom is a start, not just because it is a fundamental human right, but also because vigorous media are essential to keeping societies alert to the kinds of crises that are all too common in Ethiopia. 

Ethiopia’s Struggle for Democracy 
When we in Ethiopia’s political opposition agreed to participate in the election that the government called in June, we were under no illusion that the process would be faultless. 
After all, Ethiopia has never known democracy. 
The dictatorship of Mengistu Haile Mariam was Africa’s most blood-curdling Marxist regime, and was replaced by today’s ruling EPRDF, whose “Revolutionary Democracy” is but a more subtle variation on the same theme. 
So we knew that there would be problems with the election, that voting would not be clean in the way Western countries take for granted. 
Yet we nonetheless believed that the opposition, led by the Coalition for Unity and Democracy (CUD), would have room to maneuver and campaign, owing to the government’s desire for international legitimacy. 
So we decided to test the waters and push for a real political opening and a genuinely competitive vote. 
Many Ethiopians appear to have agreed with this strategy. 
The government did make some media available and engaged in more than 10 live televised debates. 
So, at least at first, there seemed to have been some intention on the government’s part to open up the process – if not completely, then somewhat. 
Now, however, it appears that the authorities wanted only a small, managed opening, on the assumption that they could control the outcome. 
About a month before the election, the government began to shut down the political space it had opened. 
Its election campaign took on a vilifying tone, charging that the opposition was bent on destroying ethnic groups through genocide. 
Indeed, it called the opposition “interahamwe,” invoking the memory of the Hutu militia that slaughtered 800,000 Rwandan Tutsis in 1994. 
The government also began to harass opposition parties, especially in rural areas. 
This was unpleasant, but tolerable. 
So we continued campaigning. 
But things became nastier a week before the vote. 
Attendance at an official pro-government rally in the capital, Addis Ababa, was dwarfed by our rally the following day, when millions of demonstrators peacefully demanded change and showed their support for us. 
At that point, the government realized that its democratic opening was slipping out of its control. 
Two days before the vote, our poll watchers and supporters were searched, arrested, and given one-day trials, with most sentenced to one or two months in jail. 
We feared that the voting would take place without the presence of our poll watchers. 
So we gave a press conference – all the opposition parties together – the day before the vote, demanding that the government release our party workers and allow people to vote freely. 
Although the government met neither of these demands, the early results clearly showed that the opposition was gaining a large number of seats. 
It became obvious that we were winning in many constituencies and that we had won in Addis Ababa, as well as in most of the major cities and the rural areas. 
What was surprising was the magnitude of the victory. 
In Addis Ababa, top government officials, including the ministers of education and capacity building, lost, as did the speaker of the House of People’s Representatives. 
In rural constituencies, opposition candidates defeated such EPRDF heavyweights as the ministers of defense, information, and infrastructure, along with the presidents of the two largest regions, Oromia and Amhara. 
The government wasted little time in responding: the next day, it declared itself the winner, with not even half of the constituencies reporting their results. 
No surprise, then, that the public erupted in anger. 
When university students protested, the police moved in, killing one. 
In demonstrations the following day, 36 more people were killed. 
Soon after, our office workers were detained, and Hailu Shawel, Chairman of the CUD, and senior CUD official Lidetu Ayalew were put under house arrest. 
One hundred staff members were taken from our head office in Addis Ababa alone, and many more from regional offices. 
Up to 6,000 people were jailed – CUD members and even ordinary citizens. 
My fear is that the will of Ethiopia’s people will be stifled by government hard-liners. 
Doubts about the authenticity of the final results will create a danger of instability. 
Everyone – the government, the opposition, and the public – must commit themselves to a peaceful resolution. 
To restore calm before a recount can be held, confidence-building measures are needed. 
The military must be taken off the streets. 
The ban on public demonstrations must be lifted. 
Those in jail must be released or given a fair trial. 
Those held simply because they do not support the government must be freed and allowed to participate in the democratic process. 
The government-controlled media must be open to diverse opinions; in particular, opposition access must be guaranteed. 
Equally important, the international community must send observers – and thus a clear signal to the government that any attempt to maintain power by force or intimidation is unacceptable. 
The world must keep watching, just as it watched in Georgia, Ukraine, Lebanon, and Palestine. 
For the first time in our ancient history, we Ethiopians have voted our conscience. 
Our people have played their part with courage and discipline. 
They deserve the opportunity to build a genuine democratic political system. 
That is their only guarantee to live in peace and to achieve prosperity. 

Ethnic Cleansing in the Caribbean 
SANTO DOMINGO – I am a native-born citizen of the Dominican Republic. 
I grew up, went to school, started a family, and raised my children on Dominican soil. 
This is the only place I have ever called home. 
Yet, after more than 45 years in this country, my nationality –along with that of thousands of other Dominicans – is being called into question. 
Like many Dominicans, I am of Haitian ancestry. 
My family came to the Dominican Republic from neighboring Haiti to find work. 
Their journey was not uncommon, nor was it discouraged. 
Hundreds of thousands of Haitians came to work in this country with the express permission of the Dominican government. 
But Dominicans like me have always paid a price for our ancestry. 
For more than a century, the government has promoted a policy of state-sponsored racial discrimination. 
We have been used as scapegoats to shift the focus away from the country’s economic and political problems. 
Even so, one lesson I learned growing up was that any person born in the Dominican Republic is a Dominican citizen. 
This no one questioned. 
This no one doubted. 
The Dominican Republic’s constitution says explicitly that anyone born on the country’s territory, except infants born to parents who happen to be diplomats or foreigners “in transit” – understood for decades to mean in the country for fewer than 10 days – is a Dominican citizen. 
Because of this, I never worried that my status as a citizen would ever be in doubt. 
I was wrong. 
Two years ago, my country’s government attempted to strip me of my nationality, and it is now trying to do the same to thousands of other Dominicans of Haitian descent. 
The government launched this effort with a bizarre reinterpretation of the constitution. 
It now deems individuals of Haitian descent born in the Dominican Republic to have no right to Dominican nationality, because their parents or grandparents, many of them residents for years, if not decades, were supposedly “in transit.” 
The government has ordered civil registry officers to refrain from issuing any identity documents for persons who were born to “foreign parents” and received Dominican birth certificates under what the government now calls “irregular circumstances.” 
Moreover, identity documents that the Dominican state already issued are being declared invalid retroactively. 
Only Dominicans of Haitian descent are being singled out. 
The discrimination by my country’s government against my racial and ethnic group is so blatant that some civil registry offices have distributed lists of “Haitian sounding names” so that staff members can recognize them. 
Some people are even singled out based solely on their appearance. 
The crudeness of the government’s campaign would almost be comical if it was not condemning so many Dominicans of Haitian descent to the uncertainty of statelessness. 
Indeed, the implications of losing one’s citizenship are enormous. 
Without identity documents, people are barred from schools, denied health care, prevented from marrying, and refused official documents like birth certificates and driver’s licenses. 
Worse still, the government is considering a constitutional amendment that would permanently strip nationality rights from thousands of Dominican of Haitian descent. 
The situation now is even more dangerous than before. 
For 30 years, I have worked to secure equal human and civil rights for Dominicans of Haitian descent. 
I have encountered many personal and professional difficulties. 
State officials have slandered me. 
Informants have tried to infiltrate my organization and undermine its work. 
I have received death threats on more than one occasion, and my children and I have had to flee our homeland. 
But, despite everything I have endured, I remain hopeful that change is possible. 
Perhaps the campaign against Dominicans of Haitian descent will stop when the Dominican judiciary acknowledges that the retroactive denial of citizenship violates fundamental human rights law. 
Perhaps it will stop when the international community starts speaking out against the Dominican Republic’s discriminatory policies. 
But one thing is certain: it won’t stop until all Dominicans who value democracy and the rule of law stand alongside their fellow citizens and declare that the time for unequal treatment is over. 

Keeping the Balkan Ghosts at Bay 
VISBY, SWEDEN – European Union leaders have suddenly awoken to new realities in the Balkans. 
At a recent summit, they emphasized the need for increased EU engagement to maintain stability – and to push back against Russian influence – in the region. 
But the Balkan countries’ geopolitical situation should not come as a surprise. 
After all, post-Ottoman fractures – stretching from Bihać in Bosnia’s northwestern corner to Basra on Iraq’s Persian Gulf coast – have repeatedly been a source of regional and global instability since the demise of the old empires a century ago. 
When the Habsburg and Ottoman empires collapsed at the end of World War I, attempts were made to establish modern nation-states in the Balkans, despite the region’s national and cultural diversity. 
Since then, nationalism has repeatedly clashed with the region’s enduring mosaic of civil life, fueling one conflict after another. 
Yugoslavia, like the nation-states that were established in the Levant and Mesopotamia, was created to manage these political contradictions; but atrocities – in Smyrna, Srebrenica, Sinjar, and elsewhere – remained a constant feature of post-imperial life. 
Yugoslavia collapsed in the early 1990’s, triggering a decade of brutal wars from Croatia to Kosovo. 
The emergence of seven new – and often mutually antagonistic – states made it clear that regional stability would depend on a new framework, namely, the EU. 
Owing to its success in settling other longstanding national conflicts, the EU was tasked with bridging the region’s longstanding nationalist divides and quelling its ethnic conflicts. 
At an EU summit in Thessaloniki in 2003, delegates solemnly vowed to bring all of the Balkan countries into the bloc as members. 
That promise would be as hard to keep as it was important to make. 
When the Balkans’ immediate problems had subsided, EU leaders assumed that they had secured peace for the region. 
Henceforth, their business-as-usual approach to the Balkans essentially meant maintaining the status quo. 
After Jean-Claude Juncker was appointed European Commission President in 2014, he confirmed the status quo, by declaring that the EU would undergo no further expansion during his five-year term. 
Juncker’s statement was technically correct, but politically disastrous. 
With the light that had been guiding reform and integration efforts now extinguished, nationalism in the region predictably started to rise again. 
And the EU, meanwhile, became fixated on its ongoing financial problems, such as member-state sovereign-debt crises. 
I spent a lot of time in the Balkans in the years after the Bosnian War. 
I was the EU’s Special Envoy to the Former Yugoslavia, then Co-chairman of the Dayton Peace Conference, High Representative for Bosnia and Herzegovina, and, finally, the United Nations Secretary-General’s Special Envoy for the Balkans. 
Last year, when I returned to Bosnia in an unofficial capacity, someone asked me if war was coming back to the region. 
At first, I shrugged off the question. 
“No way,” I responded. 
But then others kept posing the same question; by the fifth time, I started becoming concerned. 
I was certainly right to say that the wars of the 1990’s will not come back: the conditions today are very different from what they were then. 
But, as we have seen many times before, individual hotheads can ignite fires that are difficult to contain. 
Once upon a time in Sarajevo, a single person named Gavrilo Princip triggered a world war when he assassinated Archduke Franz Ferdinand of Austria. 
Today, the region is gradually becoming more combustible, and another spark could be lit, perhaps this time in Skopje. 
So what is to be done? 
For Europe, the only way forward is to assert its powers of containment, while also accelerating European integration. 
To address the emerging risks in the Balkans, the EU should demonstrate that it has the will and means to act, by deploying EU Battle Groups to conduct military exercises in the region. 
This would send a powerful message that its military forces are not paper tigers, and that it is capable of wielding more than just words. 
Further EU enlargement is also imperative. 
With only Slovenia and Croatia having joined the bloc so far, securing membership for the remaining Balkan countries obviously will take time. 
But the reforms needed to make these countries eligible for membership can and should be accelerated, with interim steps that have credibility with the region’s people. 
For example, we should replicate the EU Eastern Partnership, with the creation of a Balkan Partnership, while always keeping membership on the table. 
At the same time, the EU needs to step up its political engagement in the region. 
It can start by mediating outstanding minor border disputes, so that these are not left to fester. 
The EU, in today’s parlance, has a bandwidth problem: its challenges have multiplied in recent years, as have the summits it holds to address them. 
But European leaders have an obvious choice in the Balkans: either deal with the problem, or wait for it to deal with them. 

The Real Threats to the EU 
LONDON – In the United Kingdom, Brexit looms large, with everyone from government ministers to tabloid newspapers frothing daily about the deal that will be struck with the European Union and the effects that it will have. 
But the EU faces too many pressing challenges to be obsessing about Britain. 
The UK’s concern is understandable: evidence is mounting of the likely damage a departure from the single market and customs union will do to the UK economy. 
According to new research from the Centre for European Reform, the UK economy is already 2.1% smaller than it would have been had voters chosen to remain. 
The hit to public finances totals £440 million ($579 million) per week. 
The lack of information about how Brexit will play out has businesses worried. 
The CEO of Siemens UK, Jürgen Maier, recently urged British leaders to clarify how trade with the EU will work, urging them to ensure that the country remains in the customs union. 
Airbus has warned that a “no deal” outcome would force it to reassess its long-term position in the country, putting thousands of British jobs at risk. 
BMW has affirmed its commitment to remaining in the UK, but warned that costs could rise. 
Such warnings have not been received kindly by the Brexiteers. 
Britain’s health secretary, Jeremy Hunt, has called them “completely inappropriate,” insisting that they “undermine” Prime Minister Theresa May. 
But May is doing a fine job of undermining herself: her claim that a “Brexit dividend” will partly fund increases in spending on the National Health Service has been widely condemned as a lie. 
But what does the EU think of all of this? 
It seems that EU leaders have accepted that we British have taken leave of our senses, and there is not much they can do about it. 
They certainly are not going to undermine their own successful, law-based economic model to do us a favor. 
Brexit will hurt us a lot more than it will hurt the EU. 
What could hurt the EU – indeed, threaten its very fabric – is a slew of other challenges, beginning with US President Donald Trump’s threats to the health and even survival of the transatlantic alliance, a key pillar of the post-World War II global order. 
Trump plainly prefers dictators to democrats, and lacks any respect for his allies. 
His praise for North Korean leader Kim Jong-un at their summit in Singapore stood in jarring contrast to his criticism of Canadian Prime Minister Justin Trudeau after the G7 summit in Quebec. 
One of Trump’s most problematic stances relates to trade. 
He has determined, based on a profound misunderstanding of how trade works, that it pits the United States against the world. 
Rather than collaborating with Europe and Japan and strengthening the World Trade Organization to counter China’s mercantilism, he has decided to go it alone, attacking even his closest allies in what threatens to escalate into a full-blown trade war that will hurt everyone, not least American industry and consumers. 
Another pressing challenge facing Europe is immigration. 
Earlier this year, Trump approved a “zero-tolerance” immigration policy that would not only prosecute all adults – even asylum-seekers – illegally crossing the border, but also take their children away to be detained separately (although he has since issued an executive order to reverse the separation of families). 
It is an example that no civilized country should so much as consider copying. 
Yet some in Europe seem to believe that erecting barbed-wire fences along borders (Hungary) or closing ports to ships full of refugees (Italy and Malta) is justified. 
Such behavior certainly gets a Trumpian nod of approval. 
Indeed, right-wing populists in Europe are virtually guaranteed a pat on the back and a few words of encouragement from Trump’s former chief strategist, Stephen Bannon, and even some US ambassadors. 
European democrats with a civilized view of governance, meanwhile, are punished. 
What did Germany do to deserve Richard Grenell – who has asserted his desire to “empower other conservatives” – as its ambassador from the US? 
The answer, it seems, is that its centrist chancellor, Angela Merkel, has pushed back against Trump. 
Yet draining the poison from Europe will require a lot more than scolding the US and praying for Trump’s early departure. 
In fact, some EU leaders’ approaches to issues like immigration are threatening to create systemic problems that will endure long after Trump has returned to a life of golf courses and bankruptcy courts. 
Sensible European leaders can be forgiven for politely sending the UK on its way, so that they can focus their attention on threats to their long-term cohesion and fundamental values. 
The EU has always prided itself on being a community of values that protects minorities and has welcomed the poor and downtrodden. 
The EU is, after all, composed of minorities, and it has known its share of poverty and hardship. 
But what values could moderate democrats like Merkel, France’s Emmanuel Macron, and the Netherlands’ Mark Rutte possibly share with the right-wing political bosses in Hungary, Poland, Italy, and even Austria? 
Sebastian Kurz, Austria’s tiresome young chancellor, is actively seeking to mobilize opposition to Merkel, even though her attitude toward refugees saved Austria from a deluge of asylum seekers. 
Good sense and experience should tell us that selfish sloganeering, violating the rule of law, and dismissing international commitments is not a recipe for good policy. 
Macron is right to argue that Viktor Orbán’s Hungary and Jarosław Kaczynski’s Poland should no longer be allowed to pick the pockets of their richer European partners, while trampling over EU values. 
The EU must confront the challenges ahead with cohesive, collaborative policies that combine effectiveness with basic human decency. 
On migration, for example, it must work as one to strengthen its own borders, while helping, through development assistance and security cooperation, the countries from which people are fleeing. 
With more stability and open markets, they will be able to export their products, rather than their citizens. 
As for Britain, we made our bed; now we must endure our nightmares in it. 

Europe’s Digital Wrong Turn 
STOCKHOLM – When it comes to crafting good digital policy, Europe has failed its first big test. 
In May, the European Commission announced that it would create a unified digital market of 500 million consumers that would add €415 billion ($463 billion) to the European Union’s GDP and create some 3.8 million jobs. 
Unfortunately, a recent decision on one key digital issue – data privacy – threatens to derail that effort. 
In June, the EU’s home and justice ministers voted to retain significant national powers over the protection of digital privacy, rather than creating a single set of rules that would apply in all 28 EU countries. 
If the European Parliament approves their proposal, divergent national rules would be reintroduced. 
Even more worryingly, this would open the door for provisions outlawing the benign, low-risk data mining that drives online advertising. 
Online advertising allows EU citizens to access information, educational material, commerce channels, and entertainment sites without paying for them directly, and the amount being spent on it in Europe is growing fast. 
The industry’s revenues have more than quadrupled since 2006, even as the overall European economy has stagnated. 
The EU’s privacy crackdown threatens to undermine all of this. 
Not only will it create an administrative burden through additional costs and bureaucratic hassles; it also raises the real possibility that the new rules will undermine the business model of many of Europe’s most prominent online companies. 
That would be a pity – one that could have been easily avoided. 
In 2012, the European Commission presented a proposal to replace the EU’s existing data-protection legislation, the latest version of which had been drafted in 1995, when the Internet played only a tiny role in the economy. 
The initial text was promising. 
It aimed to harmonize Europe’s fragmented legal framework, provide businesses with a helpful “one-stop shop,” and reassure consumers that their data were being used properly. 
Unfortunately, many of the most benevolent provisions have since been discarded. 
At the June ministerial meeting, the important one-stop-shop principle was gutted. 
Instead of allowing businesses to deal with the data-protection authority in the country where they are headquartered or have their main European base, member states are insisting that national regulators maintain control. 
Under the newly proposed rules, any “concerned” authority could object to a decision by another national regulator, triggering a complex arbitration procedure involving all 28 agencies. 
The ministers also adopted a broad definition of personal data. 
Both cookies (small pieces of data stored on a web surfer’s computer) and IP addresses (a code used to identify a computer when it is connected to the Internet) would be included – even though neither provides a link to a particular individual. 
At best, this broad, indiscriminate definition of personal data threatens to create unnecessary obstacles for EU-based digital advertisers. 
At worst, it will outlaw their business model. 
Unnecessarily strict data rules will hurt European companies disproportionately. 
Google, Facebook, and other American Internet giants are in a position to receive explicit consent from users. 
But Europe’s online sector is dominated by business-to-business companies with little-known brands that process consumer data but lack direct contact with users. 
As a result, the only real alternative for European Internet companies will be to work with large American platforms and become even more dependent on them. 
The United Kingdom, Sweden, Norway, and the Netherlands are global online leaders, but many other European countries are lagging far behind. 
As a result, the digital economy contributes about 4% to the EU’s GDP, compared to 5% in the United States and 7.3% in South Korea. 
These new regulations will ensure that European companies will be left trailing far behind their international competitors. 
Europe is facing an important choice. 
To be sure, the EU needs to reassure its citizens that their data will be used properly; measures that do this will help the digital economy grow. 
But the continent’s policymakers must remember that a digital single market cannot exist as long as there are rules that reinforce divergent national approaches to privacy and hinder the Internet’s use of anonymous data for digital advertising. 
At stake is an entire generation of European digital entrepreneurs. 

Europe’s Pointless Deficit Targets? 
BRUSSELS – The fiscal rules of the European Union have undergone some much-needed improvements in recent years, but much more needs to be done. 
In addition to suffering from a lack of clarity on key issues, EU fiscal policy remains overly focused on short-term goals, reflected in its needless emphasis on nominal deficit targets within annual budget cycles. 
To be sure, all EU countries have a real interest in the fiscal sustainability of their fellow members. 
But annual deficits are poor approximations of the likelihood that one member may have to repay another’s debt. 
The fact that the existence of exceptional circumstances can now be invoked to distribute the burden of any needed adjustments over more than one year is helpful. 
But it does not eliminate the short-term bias embedded in the EU’s fiscal rules. 
In a fully integrated market, the annual financing of government deficits should not be an issue, provided the stock of debt is sustainable. 
That is why the EU should strive to create a fiscal framework that has the sole objective of ensuring that its members’ debts are sustainable. 
By definition, this target would be country-specific. 
It would not require a headline deficit of below 3% of GDP in each and every year, in each and every country. 
But it would require a more sophisticated analytical framework than the current one, which merely distinguishes between countries on the basis of whether they meet the EU’s 60%-of-GDP ceiling on public debt. 
The eurozone is much better positioned to manage fiscal pressures than it once was. 
The European Central Bank’s “outright monetary transactions” scheme provides an important backstop for debt sustainability. 
And a banking union, once completed, should contain the risk of financial crisis and contagion. 
Meanwhile, quantitative easing by the ECB has reduced fears that governments will run out of cash, at least for the time being. 
Efforts to make the rules more flexible are a welcome development, but shortcomings remain, particularly given that implementation risks make the macroeconomic effects of rule changes difficult to quantify. 
For example, it is not obvious how to deal with the fact that decisions by large countries have larger externalities, both positive and negative, than those made by their smaller peers, setting the ground for different treatment in a monetary union of supposed equals. 
Nor is it clear what room for discretion has been provided to the European Commission to address such outcomes. 
Above all, long-term fiscal outlooks must be fully embedded in the EU and its member states. 
Institutions will have to be redesigned to accommodate this approach and resolve some of the ambiguities in the current framework, while avoiding discrimination or politicization. 
One possible vehicle for accomplishing this is the independent councils that the EU’s so-called fiscal compact has now made mandatory for every country in the eurozone. 
These councils are tasked with assessing the accuracy of macroeconomic forecasts, overseeing compliance with targets, and ensuring long-term fiscal sustainability. 
But it remains unclear exactly how they fit into the overall fiscal framework; indeed, the complexity of EU rules may limit the councils’ capacity to fulfill their function. 
Fiscal councils should not be put in the position of trying to interpret the letter of the fiscal compact. 
It would be far better to provide them with the sole task of assessing debt sustainability and advising governments in this regard. 
Their recommendations should be binding, but they should also be focused on the medium term, rather than on annual fiscal outcomes. 
In a few cases, fiscal councils might impose conditions that are even more stringent than current EU rules stipulate, but they would be limited to enforcing the structural balance that each signatory of the fiscal compact has enshrined in its constitution or in equally binding legislation. 
In other cases, the councils’ recommendations are likely to be more relaxed on an annual basis than current EU rules. 
Either way, the recommendations would have the advantage of being better adapted to local needs – especially if the councils are accountable to national parliaments. 
The best way to preserve the councils’ independence over time would be through top-down monitoring and control at the eurozone level, for example through the establishment of a European Fiscal Council, which would be responsible for ensuring that every national council fulfills its mandate. 
The EFC would be authorized to request an amended assessment of a country’s fiscal trajectory and requirements. 
With such limited authority, there would be no need for the EFC to be accountable or democratically legitimated at the European level. 
In addition to favoring a long-term perspective, this governance structure would also answer some of the questions that arise with increased flexibility. 
Independent national authorities would be better placed not only to assess implementation risks, but also to advocate for structural reforms. 
Moreover, such a system would imply little risk of top-down discrimination against smaller countries. 
As national governments took responsibility for the European objective of fiscal sustainability, annual budget targets imposed by the EU would become obsolete, at which point that should be abandoned altogether. 


The Silent Death of Eurozone Governance 
BRUSSELS – Sometimes the most important thing that happens is what doesn’t happen – or, to paraphrase Sherlock Holmes, it’s the dog that doesn’t bark in the night. 
The lack of response to the European Commission’s non-enforcement in Spain and Portugal of the terms of the Stability and Growth Pact (SGP) is one of those times. 
According to SGP rules, the Commission should have proposed a fine to be levied on Spain and Portugal for overshooting their fiscal deficit targets by a wide margin. 
The fine would have been largely symbolic, but the Commission seems to have decided that the symbolism wasn’t worth it. 
And it was not only the Commission that chose not to bark; the rest of Europe remained silent as well. 
Not even Germany, the European Union’s leading austerity watchdog, perked up. 
In fact, there have been reports that German Finance Minister Wolfgang Schäuble lobbied several commissioners not to impose fines on Spain or Portugal. 
The German financial press, which often criticizes the European Commission for being too lax, barely registered the decision. 
What explains the silence? 
There is precedent for fiscal leniency in the EU. 
In 2003, all three large eurozone countries (France, Germany, and Italy) were running deficits in excess of 3% of GDP, the upper limit established by the SGP. 
Toward the end of that year, it was clear that France and Germany (then with record-high unemployment) were not fulfilling their deficit-reduction commitments. 
But, unlike today, the Commission did bark (even if it could not really bite). 
It proposed ratcheting up the SGP’s so-called excessive deficit procedure. 
The proposal did not entail any fines; rather, it focused on the stage before fines would be considered. 
Nonetheless, EU finance ministers strenuously opposed it, largely for political reasons. 
The clash occupied the front pages of newspapers all over Europe, especially in Germany, where the press, like the political opposition, was eager to chastise Chancellor Gerhard Schröder’s government for its failure to uphold fiscal rectitude. 
There were heated debates on the fiscal rules, and the Commission’s role in enforcing them. 
In short, everyone was howling. 
Despite the resistance, the Commission decided to plow ahead and censure Germany and France. 
With that decision, it sent a clear message that it took seriously its responsibility to administer the EU treaties – so seriously, in fact, that it would enforce rules with which it did not necessarily agree. 
Indeed, the Commission’s then-president, Romano Prodi, had already harshly criticized the SGP’s rigidity. 
Ultimately, however, political interests won the day, and the EU finance ministers voted down the proposal. 
The ministers subsequently moved to reform the SGP, shifting the focus from headline deficits to a measure of the fiscal position that takes into account the state of the economy. 
The Commission accepted the reform, and has since made several additional changes, each time proudly declaring that the SGP is more “flexible” and “intelligent” than ever. 
Today, Spain and Portugal are not adhering even to the new flexible rules. 
Yet the current Commission, led by President Jean-Claude Juncker, was divided on whether to enforce them, with some commissioners favoring leniency. 
Schäuble’s intervention, it seems, settled the matter. 
Clearly, when it comes to allowing political considerations to affect enforcement of the rules, not much has changed. 
And, in fact, this time around, the Commission had more power to override resistance from finance ministers. 
After the 2008 economic crisis, Europe introduced a “reverse majority rule,” under which any Commission proposal to impose a fine is final, unless EU finance ministers can muster a two-thirds majority against it. 
And herein lies a key difference between today and 2003: the Commission’s commitment to enforcing SGP rules has waned. 
The relative silence of the public and the media drive the point home. 
Support for the fiscal rules has faded. 
Perhaps, with a surge in terrorist attacks, particularly in Germany and France, citizens and leaders are too preoccupied with security issues. 
The United Kingdom’s impending “Brexit” from the EU is also consuming much attention. 
And continuing high unemployment in many countries may seem to be a more urgent economic issue than reducing deficits. 
But the decline in support for European fiscal rules carries serious risks. 
If the most concrete elements of the eurozone’s governance framework are not applied rigorously, what will compel member states to undertake reforms and stabilize their debt levels? 
Vague exhortations will not work. 
It seems that the crisis, and the untenably large risk premia for highly indebted governments that followed, has already been forgotten. 
Officially, the Commission is still working to realize the blueprint for a “genuine” Economic and Monetary Union. 
But in the wake of the Commission’s decision not to enforce the SGP, this effort has become meaningless. 
It is now clearer than ever that EU member states prioritize domestic political imperatives over common rules – and Europe’s common good. 

Europe’s Make-or-Break Year 
BERLIN – The euro crisis, it is said, is over. 
Calm has returned to financial markets, amid ironclad assurances by the European Union authorities – particularly the European Central Bank – that the monetary union will be preserved. 
But Southern Europe’s economies remain depressed, and the eurozone as a whole is suffering from stagnant growth, deflationary pressure, and, in the crisis countries, persistently high unemployment. 
Not surprisingly, given the EU authorities’ obvious inability to end the malaise, many member states are losing patience with austerity. 
Indeed, some countries are facing a political upheaval. 
When the turmoil comes, it is likely to be triggered – as with the euro crisis – by Greece, which is holding a presidential election that seems unlikely to produce a winner. 
If the Greek parliament does not elect a new president by a two-thirds majority in next week’s third and final round, it will be dissolved and a snap election will be called. 
The risk is that Syriza, a far-left socialist party, will come to power. 
To win, Syriza must either mislead its voters about its options, or insist that it will renegotiate the repayment conditions imposed on Greece by the so-called Troika (the European Commission, the ECB, and the International Monetary Fund), all while pursuing unilateral action should renegotiation fail. 
But any renegotiation following a Syriza victory would undoubtedly unleash a political avalanche in the southern EU that would sweep away austerity and fully reignite the eurozone crisis. 
Of course, Greece itself is too small for its problems to present any real danger to the eurozone. 
But the election result in Athens could fuel panic in financial markets, causing a crisis that would threaten to spill over into Italy, the eurozone’s third-largest economy, and, with some delay, France, the second largest. 
A miracle could occur: a new president could be elected in Athens next week, or Syriza might not win the next parliamentary election. 
Unfortunately, either outcome would merely delay a politics-induced crisis in the EU. 
After all, in Italy, too, the signs point to a coming storm – one bearing down not only on austerity, but also increasingly on the euro itself. 
And after the storm hits Italy, France could be next. 
The conflict over austerity has become politically explosive because it is becoming a conflict between Germany and Italy – and, worse, between Germany and France, the tandem that drove European integration for six decades. 
And this is happening at a time when anti-European, nationalist forces are establishing themselves in Germany’s national and state parliaments – and on the streets – thereby substantially reduce Chancellor Angela Merkel’s room for compromise. 
The battle between austerity’s defenders and opponents thus threatens to tear apart not just the eurozone, but the EU as a whole. 
The crisis in the eurozone and the refusal to attempt any real European approach to reviving growth has contributed – not exclusively, but significantly – to the rebirth of nationalism within the EU. 
The strength of this political tendency became fully apparent in May 2014, when anti-European populists performed well in the European Parliament election. 
The nationalist trend has continued unabated ever since. 
On one level, this seems bizarre. 
After all, none of the problems that Europe is or will be facing can be solved more easily alone and at the national level than within the EU and through the framework of a supranational political community. 
Indeed, nationalist xenophobia is particularly absurd in view of demographic realities: An aging Europe urgently needs more immigrants, not less. 
It is also remarkable how little Europe has been scandalized by the support that the EU’s new and old nationalists have received from Russia; for example, President Vladimir Putin’s government helped to finance the French National Front via a multi-million-euro loan drawn on a Russian bank. 
Apparently, authoritarian values and nationalist worldviews (together with a strong dose of anti-Americanism) create ties that bind. 
It is no exaggeration to say that the EU is currently both internally and externally threatened by reactionary nationalism, which is why the next euro crisis will come in the form of a political crisis. 
So why are the authorities in Berlin, Brussels, and the other EU capitals still not willing to change their policies, which quite obviously have made a bad situation worse? 
Observing the EU from the outside is like watching a train collision in slow motion – and one that was announced at the station. 
And then there is the United Kingdom, moving steadily and with apparent determination ever closer to a “Brexit.” 
That danger extends beyond 2015; nonetheless, it is an important component of the overall picture of impending crisis in the EU. 
Regardless of whether the UK ultimately separates politically from the continent, the coming year will mark a turning point for Europe. 

Will Italy Sink Europe? 
LONDON – Despite political turmoil and emerging risks at the global level, the eurozone has had two years of strong economic growth, at least by its own historically disappointing standards – and even with the United Kingdom lurching toward withdrawal from the European Union. 
But with the emergence of a populist government in Italy this year, it is no longer safe to assume that the eurozone’s worst days are behind it. 
Italy was the first country that I studied when I entered the financial world back in 1982, so I have a special affection for it. 
I was working for a very large American bank at the time, and I can still remember joining frequent transatlantic conference calls to discuss Italy’s debt-to-GDP ratio. 
The question on everyone’s mind was when the country would default; but it never did. 
Instead, Italy muddled through, and has continued to do so ever since. 
Still, now that the Italian government seems poised for a standoff with the EU, it would not be surprising if worries about a default were to re-emerge. 
As my experience more than 30 years ago shows, Italy’s economic problems far predate its adoption of the euro. 
It has long had poor productivity by European standards, and that translated into relatively low trend growth in the pre-euro decades. 
At the same time, occasional spurts of faster growth regularly sowed the seeds for various crises, often resulting in devaluations of the Italian currency, the lira. 
Of course, there are some who now yearn for the days when the lira could be weakened to restore growth. 
That is no longer an option under the single currency. 
But what the pre-euro romanticists overlook is that euro membership has given Italy low inflation, and thus lower interest rates. 
Moreover, there is reason to think that lira devaluations did more harm than good. 
Even if they offered an occasional competitive boost, they stood in for tougher structural reforms that would have increased productivity over the long term. 
There are also some who believe that the eurozone’s fiscal and monetary framework locks Italy into weak nominal GDP growth, possibly too-low inflation, and high debt. 
Yet before the new government took office, Italy’s cyclically adjusted fiscal deficit – as opposed to its underlying debt position – was often rather restrained compared to the rest of the eurozone, as well as the other members of the G7 (Canada, France, Germany, Japan, the United Kingdom, and the United States). 
Still, the mainstream political parties that governed Italy until this year did not deliver the nominal GDP growth that the country needs. 
As a result, Italians elected an unconventional coalition whose program combines the policies of the populist left with those of the populist right. 
While the League party promises to cut taxes, the Five Star Movement (M5S) is pursuing a form of basic income. 
But what Italy needs is a broad structural reform program to improve productivity. 
That is the only way to achieve a higher long-term growth rate, given the country’s demographics. 
In addition to enacting policies to boost the labor-force participation rate among women, Italy must provide more attractive opportunities for its young people. 
For its part, the EU should do more to help Italy take the tough steps it needs. 
The European Commission, the European Central Bank, and the German government have erred in insisting on rigid enforcement of the EU Stability and Growth Pact, particularly the 3%-of-GDP cap on fiscal deficits. 
Although some countries have been allowed to breach the deficit cap during challenging times, Italy is almost never afforded much accommodation, owing to its high debt levels. 
Yet as the experience of Belgium and Japan shows, high government debt can be reduced only through sustained economic growth. 
Complicating matters further, some reforms to boost long-term productivity can actually reduce growth in the short term. 
Thus, any government enacting such measures will need to have the option of pursuing counter-cyclical stimulus. 
Another problem concerns monetary policy. 
The ECB could stand to be more broad-minded in how it pursues its inflation target of just under 2%. 
That target, along with Germany’s own 2% target, leaves Italy locked into a state of low inflation, even when it could benefit from more monetary-policy stimulus. 
Under these conditions, the EU authorities would do well not to oppose the current Italian government’s plans too aggressively. 
If mainstream liberals are worried about the implications of a democratically elected populist government, then they should worry even more about what could come next if economic circumstances worsen. 
At this stage, Italy needs stronger nominal GDP growth – plain and simple. 
Some will say that it was a mistake to have allowed Italy into the eurozone in the first place, and that an optimal currency zone should have been more discriminating in its membership. 
But the German and French business communities insisted that the monetary union must include some of Italy’s more competitive companies. 
And once Italy was considered eligible, so, too, were many other countries. 
At the end of the day, those with the power to set and enforce EU fiscal and monetary rules know full well that the eurozone could not survive a Greek-style crisis in Italy. 
It is their responsibility in the months ahead to make sure it doesn’t come to that. 

European Jobs Wanted 
BERLIN – When the European Union held its first summit on growth and jobs in 1997, EU-wide unemployment stood at 11%. 
Last autumn, when it held another, not much seemed to have changed. 
Unemployment in the eurozone was 11.5% – up from a low of 6.8% in the first quarter of 2008. 
If the EU is to fulfill its promise of peace and prosperity, it will need to find ways to create opportunities for more of its citizens. 
Youth unemployment is a particularly serious concern, even in countries with otherwise positive employment statistics; in countries with worse labor-market conditions, it represents a potential source of social and political instability. 
Participation in the workforce is linked not only to income levels, but also to self-esteem, social inclusion, and social status. 
Being left out of the labor market increases the risk of poverty and poor health, and the longer unemployment lasts, the more damaging the effects. Young people who are unemployed have fewer opportunities later in life – representing a waste of education and skills that has a detrimental effect on national economies. 
To be sure, some EU countries have managed to weather the crisis reasonably well. 
According to a new Social Justice ranking by the Bertelsmann Stiftung’s Sustainable Governance Indicators (SGI) project, Austria, Denmark, and Germany top the list in terms of labor-market access, followed by Sweden and Finland. 
But even in these countries, there is room for improvement. 
Denmark, for example, once served as a model for labor-market reform. 
Since the start of the euro crisis, however, unemployment has risen – from 3.5% in 2008 to 6.4% in November 2014. 
Germany has radically reduced its unemployment rate in the last decade, even during the economic crisis. 
After years of high and long-term structural unemployment, the country implemented a series of labor-market and other reforms beginning in 2003, turning its economy into one of the top performers in the EU. 
The German system of vocational training has matched the skills of the country’s workforce to the needs of its firms, contributing to low youth unemployment. 
But one troubling factor remains: the emergence of a dual labor market, in which low-wage and temporary workers find it hard to transfer out of inadequate working conditions into the mainstream labor market. 
Dual labor markets are a problem throughout the EU. 
Austria has dealt with the issue best, according to the SGI study: only 8.1% of temporary employees surveyed had taken temporary work because they could not find permanent positions. 
Germany ranks a distant second, with 21% of those surveyed saying they would prefer a permanent position. 
In crisis-stricken southern Europe, the problem is even worse. 
In Spain and Cyprus, more than 90% of people in temporary positions cannot find permanent employment. 
Another problem in top-ranked Germany and Austria is the lack of educational opportunities for certain groups, which contributes to a lack of opportunity and mobility in the labor market. 
In Austria, children are divided from fourth grade into separate education streams. 
As a result, their later educational development is set in stone from an early age. 
The social status of parents often determines their children’s ability to access higher education. 
Children of higher-income parents and of parents who attended tertiary institutions are far more likely to graduate from university. 
In Germany, educational opportunities for children from immigrant and low-income families are fewer than in many other economically advanced countries. 
Labor-market conditions for immigrants are also a troublesome issue in Scandinavian countries, which otherwise perform well in enabling access to employment. 
In Denmark, non-Western immigrants experience higher unemployment rates and lower educational achievement than others. 
Similarly, despite Sweden’s excellent record on non-discrimination in general, immigrants find it difficult to integrate into Swedish society and face disadvantages in the labor market relative to native Swedes. 
Moreover, though Sweden has one of the EU’s highest employment rates, it has failed to tackle its longstanding problem of youth unemployment, which currently stands at 23%. 
In Spain and Greece, youth unemployment is above 50%, and the situation is not much better in crisis-hit Cyprus, Portugal, Italy, and Croatia. 
In the EU as a whole, youth unemployment stood at a dispiriting 21.9% in November. 
According to one study, this costs the EU €150 billion ($183 billion) per year in lost wages and spending, in addition to the hardship suffered by the many young people who are unable to find work. 
In February 2013, EU leaders launched a Youth Employment Initiative, with a budget of €6 billion, to help alleviate the problem. 
But German Chancellor Angela Merkel admitted in June 2014 that the initiative has so far been a failure. 
The EU’s most recent jobs summit did not provide much in the way of new ideas. 
The EU has said that young people should not be out of employment or education for more than four months; but no progress has been made toward making this a reality. 
Unless new thinking is adopted soon, Europe’s many unemployed young people risk becoming a lost generation. 

Decision Time for Europe 
STOCKHOLM – Say what you will against the European Union, but it does not lack ambitions or plans for realizing them. 
Almost immediately after the June 2016 Brexit referendum, the EU’s 27 other member states agreed to the “Bratislava Roadmap,” charting the course for a future without the United Kingdom. 
One year later, EU leaders reconvened in Tallinn and adopted a “Leaders’ Agenda” to “guide EU action up until the European Parliament elections in May 2019.” 
And now, the EU is preparing for a summit in Sibiu, Romania, that same month, where these blueprints will be finalized. 
Still, the EU ultimately will be judged on results, not resolutions. 
Over the past decade, the bloc has faced two profound challenges, and it is now in the process of confronting a third. 
The first was the euro crisis, which could have ended with the demise of the common currency. 
Instead, a series of summits were held, and Europe managed to muddle through. 
With time, member states’ economies started to recover, and new instruments for coordinating economic policy within the eurozone were adopted. 
But just when the EU was starting to regain the public’s trust, it was hit by the 2015 refugee crisis, which affected some countries far more than others, exposing glaring inconsistencies in the application of common rules concerning the movement of people. 
The number of asylum seekers traveling to Europe has since fallen substantially, but fears of a return to 2015 continue to haunt voters. 
And, more broadly, there is a growing awareness of how conflicts in the Middle East and demographic trends in Africa could threaten European stability. 
Now comes the third challenge: the UK’s impending withdrawal from the EU. 
With Prime Minister Theresa May having so far failed to secure parliamentary support for her negotiated exit deal, Britain is in the midst of a full-scale political crisis, and EU leaders have no choice but to watch from the sidelines as the drama unfolds. 
A country that once led the world now cannot even lead itself. 
With the European Parliament election fast approaching, this is no time for complacency. 
After the horrors of the Brexit referendum and Donald Trump’s election in 2016 came a renewal of hope with French President Emmanuel Macron’s election in 2017. 
But in 2018, Europe’s prospects reverted to a state of deep uncertainty – nowhere more so than in France itself. 
There can be no telling what 2019 will bring. 
What we do know is that governance across the EU is becoming more challenging as large mainstream political parties lose support to upstart parties and movements of both the left and the right. 
In this increasingly fragmented and polarized political landscape, the process of forming national governments has become long and arduous; even Sweden is following this unfortunate new pattern. 
Making matters worse, economic growth across the EU appears to be slowing – and that was even before the eruption of mass protests in France and Italy’s confrontation with the EU over its proposed budget. 
Whereas Italy’s populist government has sought to blame the country’s problems on the EU bureaucracy in Brussels, Macron has responded to public concerns by calling for even stronger EU institutions. 
But both perspectives elide the fact that change will depend on politically painful domestic reforms. 
And besides, regardless of how long Chancellor Angela Merkel remains in office, it is already clear that German backing for a “transfer union” is not in the cards. 
The danger now is that political uncertainty in Germany, France, Italy, and the UK will create an opening for populists and self-declared “illiberal” democrats such as Hungarian Prime Minister Viktor Orbán to build more walls (physically as well as metaphorically) and mobilize the ghosts of nationalism. 
Moreover, Europe’s external environment has become more dangerous. 
Though the world’s attention is currently fixed on the risks of an escalating Sino-American trade war, the threat of an equally destructive transatlantic conflict cannot be ignored. 
Trump seems genuinely to believe that German cars on the streets of New York pose a threat to US national security. 
Should he wake up one morning and decide to impose heavy import tariffs on European cars, things could get very ugly, very fast. 
Many European policymakers, already convinced that the US-based tech giants are a threat to European security, would welcome the opportunity to pursue stronger actions against them. 
If the US responded in kind, the casualties would pile up quickly. 
One also cannot forget the mounting geopolitical and humanitarian challenges on the EU’s periphery. 
Trump, driven by an obsession with Iran, seems intent on aggravating ongoing conflicts in the Middle East. 
And it would be absurd to think that Russian President Vladimir Putin will refrain from interfering in Ukraine’s upcoming presidential and parliamentary elections. 
Russia’s blockade of the Kerch Strait – the entry point to the strategically important Sea of Azov – and military buildup on Crimea indicate that Europe cannot let down its guard. 
To manage these and future challenges, the EU will have to redefine itself, starting in 2019. 
In an increasingly dangerous geopolitical environment, the EU can no longer rely solely on soft power. 
And, as is the case for all governments, it must start preparing for the digital revolution, or risk punishing costs over the near and long term. 
The Bratislava Roadmap, the Leaders’ Agenda, and the upcoming Sibiu summit are all well and good – even necessary. 
But whereas 2018 was a year of confusion, 2019 will be year for decision-making. 
European leaders must face up to the brutal realities of a changing world. 
Only then will voters trust them to forge a new path toward a future of peace and prosperity. 

Europe’s Migration Paralysis 
BERLIN – For many centuries, Europe was a continent plagued by wars, famines, and poverty. 
Millions of Europeans were driven to emigrate by economic and social deprivation. 
They sailed across the Atlantic to North and South America, and to places as far away as Australia, to escape misery and seek a better life for themselves and their children. 
All of them were, in the parlance of the current immigration and refugee debate, “economic migrants.” 
During the twentieth century, racial persecution, political oppression, and the ravages of two world wars became the predominant causes of flight. 
Today, the European Union is one of the world’s richest economic regions. 
For decades, an overwhelming majority of Europeans have lived in peaceful democratic states that uphold their fundamental rights. 
Europe’s own misery and migration has become a distant (if not entirely forgotten) memory. 
And yet many Europeans feel threatened once again, not by Russia, which is aggressively pushing outward against its neighbors, but by refugees and immigrants – the poorest of the poor. 
While hundreds of boat people have drowned in the Mediterranean Sea this summer, voices have emerged in almost every corner of Europe, 26 years after the fall of the Iron Curtain, calling for isolation, mass deportations, and the construction of new walls and fences. 
Throughout Europe, xenophobia and open racism are running rampant, and nationalist, even far-right parties are gaining ground. 
At the same time, this is only the beginning of the crisis, because the conditions inciting people to flee their homelands will only worsen. 
And the EU, many of whose members have the world’s largest and best-equipped welfare systems, appears to be overwhelmed by it – politically, morally, and administratively. 
This paralysis creates a significant risk for the EU. 
No one seriously believes that individual member states – particularly Italy and Greece, the two countries most affected – can overcome the long-term challenges posed by large-scale migration on their own. 
But many member states reject a common European effort, a stance that threatens to accelerate the erosion of solidarity within the EU and reinforce the current trend toward disintegration. 
There are three distinct causes of the current migration to Europe: the Western Balkans’ continuing economic malaise; the turmoil in the greater Middle East; and Africa’s civil wars and conflicts. 
Intensification or expansion of the war in eastern Ukraine would quickly add a fourth cause of flight. 
In other words, all of the migration that Europe currently faces is rooted in grave crises in its own neighborhood. 
And yet the EU can do little to address any of them. 
Clearly, the EU must substantially strengthen its Common Foreign and Security Policy, including the European Neighborhood Policy, in order to address more effectively the causes of migration at the source. 
Perhaps the only failure more glaring than the member states’ refusal to back such reforms is their own failure to act, not least because it has created a legitimacy vacuum that xenophobic populists are now filling. 
Given its foreign-policy weakness, Europe can have only a minor impact on the wars and conflicts ravaging Africa and the Middle East (though its influence, however small, should be used and developed). 
The Western Balkans, however, is a different story. 
Croatia is already an EU member; 
Montenegro and Serbia have begun membership negotiations; 
Albania and Macedonia are accession candidates; and Bosnia and Herzegovina and Kosovo are potential candidates. 
Here, the EU has considerable influence. 
Why the EU has not become more engaged in the Western Balkans – a region where it can make all the difference by supporting economic and administrative modernization and infrastructure projects to link the region to the Union’s industrial centers – remains the secret of the European Commission and the member states. 
The absurd result, however, is that citizens from EU candidate countries are subject to asylum procedures, because no possibility for legal immigration to the EU exists for them. 
One special case is that of the Roma, a large minority in the Western Balkans whose members often confront vicious discrimination. 
This is a pan-European problem. 
The Roma suffered disproportionately after the collapse of communism in 1989, as they worked largely in unskilled industrial jobs that were the first to be cut. 
Indeed, many of them – current or future European citizens – have fallen back into deep poverty. 
Continuing discrimination against them constitutes a Europe-wide scandal, and the EU, its member states, and candidate countries need to address it. 
This summer’s refugee crisis highlights another – and much larger – structural problem in Europe: demography. 
As European populations age and shrink, the continent urgently needs immigration. 
Yet many in Europe strongly oppose immigration, because it also means social change. 
In the long run, policymakers will have to explain to their people that they cannot have economic prosperity, a high level of social security, and a population in which pensioners place a growing burden on the economically active. 
Europe’s labor force must grow, which is just one reason why Europeans should stop treating migrants as a threat and start viewing them as an opportunity. 

Putting People First in Europe 
PARIS – The same type of populist discontent that fueled Brexit in the United Kingdom is on the rise throughout Europe, suggesting that policymakers have lost sight of the European project’s central objective: to ensure the wellbeing of all Europeans. 
As the first United Nations Human Development Report put it in 1990: “People are the real wealth of a nation.” 
The best way to capitalize on the people of a country or region is through social equity. 
Amartya Sen, in his magisterial The Idea of Justice, concluded that true social equity requires not equal treatment for all, but rather unequal treatment in favor of the poor and most disadvantaged. 
Mere equity in public finance or in the eyes of the law is not enough if we don’t also consider the different starting points for individuals and groups in society. 
Recognizing this, successive UN development reports since 1990 have made the case that both economies and societies are stronger when public policy puts people’s wellbeing first. 
However, this outlook hasn’t yet taken root in the EU’s elite policymaking circles, where well-meaning economists and politicians often believe they are doing the right thing by balancing budgets and reining in spending, usually by cutting health, education, and infrastructure budgets. 
These policymakers, with little empirical evidence, believe that fiscal prudence today will lead to a stronger economy tomorrow. 
This is the thinking behind the current policy mix in Europe, where fiscal austerity is combined with “structural reform,” meaning less spending on the social safety net and less regulation to protect workers. 
Obviously, the costs of these policies are mostly borne by the poor and the middle class. 
But there are several other problems with this approach as well. 
First, it isn’t good for most people’s incomes. 
When the Oxford University economist Tony Atkinson looked at the UK’s economic performance through the lens of inequality, the 1980s, generally considered a strong decade in terms of growth, appeared much worse; and the 1990s, regarded as a low-growth decade, appeared much better. 
Atkinson’s findings point to a central question: Who benefits from growth – the many or the few? 
If an economy can be said to be growing when a small minority receives most of the gains while everyone else’s lot stays the same or decreases, the concept of economic growth loses much of its meaning. 
This leads to a second problem with the prevailing paradigm, which is that it puts abstract economic indicators before actual people. 
Because gross domestic product is the preferred gauge of any economy’s value, many factors that contribute to human wellbeing are ignored, and spending on fundamental needs, such as health and education, comes to be seen as an expense rather than an essential investment. 
If policymakers viewed such spending as an investment, they could start thinking about how to maximize returns. 
Like all investments in human or fixed capital, there may be diminishing returns at high levels. 
So, rather than funneling economic benefits to the rich and assuming it will “trickle down,” policymakers should assess whether investing in opportunities for the poor actually does more for economic growth. 
In the US, the 1944 Servicemen’s Readjustment Act (better known as the GI Bill) was a success because it provided training for those most in need of it, enabling returning World War II veterans to re-enter the productive economy. 
The bill created a more educated workforce and ushered in a period of rising incomes for most Americans. 
A third problem with the current approach is that its central objective is not full employment. 
It is time to return to the macroeconomic policies of the 1950s and 1960s, which recognized the benefits of full employment in fostering social stability and sustainable growth. 
As the Nordic model shows, high employment is good for the economy because it ensures adequate tax revenues to finance high levels of social investment, which creates a virtuous cycle. 
Many European countries are now in a vicious cycle instead, with austerity policies worsening the problem of youth unemployment. 
This is not only unnecessary, but also wasteful, because it risks creating a generation that will be ill equipped to drive future growth. 
As John Maynard Keynes pointed out in 1937, “The boom, not the slump, is the right time for austerity at the Treasury.” 
In the current slump, European countries should be investing in their human capital to spur their economies’ potential growth. 
The fourth problem is that European countries’ fiscal policies do not emphasize creativity and innovation, which benefits not only from a conducive regulatory environment, but also from high-quality education and infrastructure. 
Governments need to reduce bureaucratic red tape so that entrepreneurs can take more risks. 
But breakthrough technology companies such as Apple, Facebook, and Twitter also depend on people who had access to well-funded education systems. 
And while there is a growing “tech for good” sector in Europe, it will succeed only if it is supported by up-to-date infrastructure, which generally requires public outlays. 
Policymakers in Europe (and elsewhere) need to adjust their thinking – especially their fiscal thinking – to put people first. 
Governments that make it their central objective to maximize human wellbeing end up not only encouraging higher economic growth, but also nurturing healthier politics. 

Britain’s Watershed Year 
LONDON – On a grey and rain-sodden London day at the beginning of 2016, it can be tough to find reason for optimism. 
The sun still comes up in the morning. 
At some point, it will presumably stop raining. 
My grandchildren offer a ray of sunshine; all Star Wars fans, they can just about convince me that, like Princess Leia’s dissident forces, the good guys will eventually win. 
Newspaper headlines, however, are pretty good at tempering such sentiments. 
With economic prospects in China and Brazil looking distinctly gloomy, the world economy is at risk of flat-lining – or worse. 
Western Asia is in turmoil, and Saudi Arabia and Iran have shown no sign that they are prepared to work together to ease Sunni-Shia hostilities. 
Migrants continue to arrive by the thousand at Europe’s fragile borders. 
North Korea claims that it is building a bigger and better nuclear weapon. 
The good news from last month’s United Nations climate change conference in Paris has been buried in an avalanche of geopolitical gloom. 
And things could get even worse by the end of this year. 
In the United Kingdom, where a referendum on whether to remain in the European Union is likely to take place before the end of the year, things could get a lot worse. 
If, deluded by mendacity and make-believe, Britain votes to quit the EU, the referendum – introduced as a way to placate the growing number of anti-EU voices in the Conservative Party – will have blown up Prime Minister David Cameron’s cabinet and done irreparable harm to Britain. 
I don’t think it will happen. 
But, then again, I wouldn’t have believed a few years ago, or even a few months ago, that the Republican Party in the United States would be choosing between Donald Trump and Ted Cruz as its presidential nominee. 
Clearly, populist folly can eviscerate reason and common sense. 
A vote against EU membership, especially in such a dangerous international environment, truly would be irrational. 
For starters, the argument that the UK could negotiate favorable terms for selling its goods in the EU makes little sense, as Europe’s single market matters far more to British exporters than the UK market matters to European businesses. 
Claims that leaving the EU would enable the UK to pursue its own commercial interests, like Norway or Switzerland, fail to acknowledge that these countries have to accept the rules of Europe’s single market in order to access it – rules that they have no part in making. 
At the beginning, the Norwegians called it “fax democracy”: Instructions from Brussels would simply appear in Oslo government offices, to be implemented without debate. 
This, remarkably, is what British Euroskeptics call “sovereignty.” 
But sovereignty is always a slippery concept. 
Nationalists often argue as though it was akin to virginity – there one moment, gone the next. 
But sovereignty is far from an absolute condition. 
How much sovereignty does the UK enjoy as a net energy importer, with much of its future supply set to be provided by nuclear power stations in French and Chinese hands? 
How sovereign is a country once the hedge funds and bond traders mark it down? 
And what good is sovereignty when we face environmental threats that can be countered only through international cooperation? 
The idea of making all decisions unilaterally may sound nice, but it simply isn’t plausible in today’s integrated world. 
Even as the world’s fifth-largest economy, the UK probably would not find it easy to negotiate favorable trade deals with giants like America, Japan, and China. 
In fact, if the UK decides to go it alone, big investors could soon rush to the exit. 
By the end of this year, manufacturers could be trying to calculate how much of their plant they should move to the continent. 
And by January, Britain, having just kicked the EU in the teeth, could find itself attempting to negotiate, under a new prime minister and cabinet, a new political and economic relationship with the EU’s 27 other members. 
It looks like mayhem to me. 
Of course, it is possible that none of this will happen. 
British voters could – as our closest friends and allies, from the US to Japan, have advised – choose to remain citizens of the real world. 
Following such a vote, the UK could begin to repair its reputation in the EU – a reputation that has been severely undermined by our prolonged status as the carping, semi-detached member of the club. 
Nowadays, even if another EU member agrees with the UK, it might not say so, in order to avoid being tainted by our toxic brand. 
Changing negative perceptions does not mean that we must act against our interests. 
It means that we must make clear our desire to pursue an agenda that suits others as well as us. 
It means being constructive, instead of simply criticizing everything from the sidelines. 
In this spirit, Britain should be leading the effort to complete the single market. 
We should be at the forefront of the campaign to complete the Transatlantic Trade and Investment Partnership with the US. 
We should be pressing for an EU energy policy that reinforces our security. 
We should be spearheading a European strategy to address the serious challenges facing our neighbors, as well as the countries of Western Asia and North Africa. 
If we are doing all of this by the end of 2016, some good will have emerged in a year that seems likely to provide a lot of bad news. 

Neville Cameron? 
LONDON – The European question is the grim reaper of British politics – dividing parties, debilitating governments, and destroying careers. 
But never before have the stakes surrounding the question been so high. 
Prime Minister David Cameron’s decision to hold a referendum – perhaps as early as June – on the United Kingdom’s continued membership in the European Union could bring down his government, destroy his political party, and literally tear his country apart. 
Cameron is doing all he can to renegotiate the terms of membership in order to persuade voters to choose to remain in the EU. 
But referendums are notoriously unpredictable. 
And there is no reason to believe that the storms of populism blowing across the continent will not make landfall in the UK. 
A decision to leave the EU would fall like a sledgehammer on the British economy and greatly diminish its international stature. 
Far worse, it could lead to the dissolution of the UK. 
The Scottish National Party has threatened to hold a second independence referendum if British voters decide to leave the EU. 
This, the SNP’s leaders argue, would allow an independent Scotland to remain part of Europe, even as England, Wales, and Northern Ireland set out on their own. 
Were this to happen, the dismemberment of the UK would make Cameron’s legacy the worst of any prime minister in British history. 
That might seem like a high bar, given that the title is usually associated with Neville Chamberlain, who famously tried to appease Adolf Hitler. 
But while the stakes were certainly higher in Chamberlain’s case, at least his polices could be reversed before they destroyed the country (and Winston Churchill did just that). 
If Cameron loses both the EU and Scottish referendums, his successors will not be able to put the EU or the UK back together again. 
As Cameron fights to save his party and his country, a line from Oscar Wilde resonates: “For each man kills the thing he loves.” 
The prime minister’s predicament is that his political strength depends on his ability to stretch the Conservative Party’s blanket over its uneasy bedfellows of flag-waving nationalists and free-market fundamentalists; but the European question pits one side against the other. 
For capital and big business, EU membership is an economic imperative, offering access to 500 million consumers and reserves of cheap, qualified labor. 
For nationalists, it is a threat, undermining British sovereignty and control over the country’s borders. 
Cameron’s call for a referendum, first issued when he was in opposition, was an attempt to appease both sides, allowing each to stick to their principles while promising to give voters the final say. 
The trouble began when he became Prime Minister and was forced to pick a side. 
Fortunately for Cameron, he has a lot going in his favor. 
The facts are clear: the UK’s economy, security, and international stature all benefit from EU membership. 
And broadly, the business community, trade unions, parliament, the media, and even a plurality of the British public all favor remaining in the EU. 
Meanwhile, opponents of EU membership have yet to make the case for a credible alternative. 
Moreover, Cameron has an impressive track record of exceeding expectations. 
Few predicted he would take control of his party when he launched his leadership campaign in 2005. 
When the Conservatives came to power in 2010, many doubted that he would serve a full term as Prime Minister. 
And even Cameron himself did not expect to win an outright majority in last year’s general election. 
But there is no guarantee that his winning streak will continue. 
The news from Europe has been unrelentingly grim, and it could ultimately sway the result of the referendum. 
The refugee crisis, terrorist attacks, and the lingering effects of the global economic crisis are all providing fuel for simmering nativist sentiment. 
Worries over migration and the spectacle of a divided, dysfunctional Europe have benefited xenophobes and extremists across the continent. 
And terrorist attacks, by their very nature, are intended to provoke irrational backlashes (as evidenced by a recent referendum in Denmark, in which voters unexpectedly rejected a proposal to modify the country’s opt-outs from certain EU home-affairs regulations). 
Cameron’s allies say he has only two modes of operation: complacency and panic. 
So far, he has faced his referendum challenge calmly. 
But that is likely to change as the vote approaches and the risk grows that he will be remembered as the leader who, to paraphrase Churchill, was given a choice between his party and his country, chose his party, and ended up losing both. 

Staying the Course in Europe’s East 
STOCKHOLM – As the European Union’s leaders gather in Riga for a summit with the six members of the EU’s “Eastern Partnership,” many recall the dramatic meeting in Vilnius of November 2013. 
It was there that Ukraine’s then-president, Viktor Yanukovych, under heavy Russian pressure, refused to sign the EU-Ukraine Association Agreement that had been negotiated from 2007 to 2012. 
Of course, when Yanukovych returned home, he had to face thousands of protesters in Kyiv’s Maidan (Independence Square). 
Determined to hold him to his promise to sign the EU agreement and not take Ukraine into a customs union with Russia, the protesters mobilized the country. 
Yanukovych, failing to crush them with his security forces, simply fled. 
Russia’s behavior in Ukraine since then has made the Eastern Partnership more important than ever. 
The Eastern Partnership was launched in 2009 on the initiative of Poland and Sweden, where I was the foreign minister at the time. 
The aim was to respond to the desire of Armenia, Azerbaijan, Belarus, Georgia, Moldova, and Ukraine for some of the instruments of integration that had helped transform the Central European and Baltic countries into the democracies – and now EU members – that they are today. 
The Eastern Partnership was also seen as a way to balance the EU’s “Russia first” approach. 
Enormous resources had been invested in the relationship with Russia, but very little had gone into helping the countries in the neighborhood that the EU and Russia share – including the most important of these neighbors, Ukraine. 
Until 2013, the EU’s Eastern Partnership seemed to raise no concerns in the Kremlin. 
It was never brought up at any of the numerous high-level bilateral meetings, nor at any meeting in which I participated. 
The Kremlin probably regarded it as irrelevant. 
That changed after Vladimir Putin returned to Russia’s presidency in 2012. 
His main geopolitical project was now the creation of the Eurasian Union, which he knew could not succeed without forcing Ukraine off of its EU path and into his embrace. 
While the EU’s vision of “wider Europe” relies on soft power, economic integration, and long-term institution building, Putin’s “wider Russia” policy depends on intimidation and violence. 
The EU pursues long-term geo-economics, whereas the Kremlin plays short-term hardball geopolitics. 
That is why, soon after Yanukovych decided to flee to Russia, Putin’s “little green men” began to appear openly in Crimea, while Russian Buk anti-aircraft missiles and Russian battalion battle groups appeared in Ukraine’s eastern Donbas region not long after. 
In annexing Crimea and stoking separatist violence in Donbas, the Kremlin’s aim has clearly been to destabilize Ukraine in order to bring it under Russia’s thumb. 
Indeed, the very notion of an independent Ukrainian state is openly questioned by Russia’s leaders, Putin included. 
In Riga, the EU’s leaders will reaffirm the so-called deep and comprehensive free-trade agreements concluded with Ukraine, Moldova, and Georgia. 
The most important signal will be the EU’s pledge that these agreements will take effect. 
Despite massive propaganda, intense economic pressure, and overt military aggression, the EU can and will stay the course in its Eastern Partnership and its offers to its neighbors. 
Clearly, no one in Europe should underestimate the challenges ahead. 
When I left the Vilnius meeting in 2013, I could certainly see storm clouds gathering, but I did not know that Putin was prepared to unleash so much aggression and turmoil. 
Now we in Europe have every reason to prepare for the long-term effort needed to help our neighbors along their chosen paths. 
But this will require a greater European commitment, both politically and economically, than we have seen thus far. 
Ukraine has been misgoverned for decades, and it will have to pass through a valley of reform-induced tears before it starts to reap the benefits of association and integration with the EU. 
Unfortunately, it is far easier for Russia to fuel short-term volatility than it is for Europe to help build long-term stability. 
But to allow the Kremlin and its proxies to succeed would not only undermine the Eastern Partnership countries; it might jeopardize peace in Europe itself. 
After all, the appetite grows with eating, which might well apply to the Kremlin’s “wider Russia” strategy. 
At some point, the risk of an open confrontation between NATO and Russia could grow. 
Even China, as it poses as Russia’s friend and patron, should consider the consequences for itself of such a risk. 
Such a clash must be prevented. 
By confirming the Eastern Partnership agreements, the EU’s leaders will demonstrate that they are not prepared to acquiesce in a new Yalta-style division of the continent that would deprive these countries of their right to choose their own destiny. 
The Riga meeting is unlikely to produce any headline-grabbing new initiatives. 
But none is needed. 
With everything from massive disinformation to tanks and soldiers thrown against the Eastern Partnership since 2013, just staying the course is a powerful sign of success. 
And, in the interest of long-term stability across Europe, that should be welcomed – even in Putin’s nationalistically aroused Russia. 

Brexit and King Canute 
LONDON – The legend of King Canute describes how an early Anglo-Saxon King showed his subjects the limits of royal power. 
Canute set his throne by the sea and commanded the rising tide to turn back. 
When the sea rose as usual and soaked Canute, he told his courtiers: “Now let all men know how empty is the power of kings.” 
British Prime Minister Theresa May, whose motto is “Brexit means Brexit,” seems to believe that Canute’s message was about democracy, not astronomy: he should have held a referendum. 
Though May opposed the United Kingdom’s withdrawal from the European Union, she now has a new mantra: “We will make Brexit a success because people voted for it.” 
This is nonsense. 
If Britain becomes the only European country apart from Russia to exclude itself from the EU single market, it will not succeed economically, regardless of how people vote. 
Democracy would not have prevented the ocean tides, driven by gravity, from drowning Canute if he had stayed on his throne, and a referendum will not turn back the economic tides driven by globalization. 
Businesses understand this. 
That is why Britain now faces what economists call “radical uncertainty,” a situation where risks cannot be rationally quantified, making changes in interest rates, taxes, and currency values largely ineffective. 
As the Bank of England has noted, many investment and hiring decisions will now be delayed until Britain’s trading terms are clarified. 
If Brexit goes ahead, this will take many years. 
As Britain’s economy sinks into recession, and the government’s promises of a quick “successful Brexit” prove unrealistic, public opinion will shift. 
May’s small parliamentary majority will come under pressure, not least from the many enemies she made by purging all of former Prime Minister David Cameron’s allies from office. 
The main decisions on Brexit will therefore be made not in London but in Brussels and Berlin. 
In making these decisions, European leaders must answer two questions: Should Britain keep the main benefits of EU membership if it rejects EU rules and institutions? 
And should some of these rules and institutions be reformed to make the EU more attractive to voters, not just in Britain but throughout Europe. 
The answers to both questions are obvious: “No” to the first; 
“Yes” to the second. 
EU leaders should present a clear choice: either Britain remains an EU member after negotiating some additional reforms to satisfy public opinion; or it disengages completely and deals with the EU on the same basis as “any country in the World Trade Organization, from Afghanistan to Zimbabwe,” which is how Britain’s Institute for Fiscal Studies describes the most plausible alternative to full membership. 
By making exit conditions non-negotiable, while offering room for maneuver on the terms of continuing membership, Europe could shift attention to the second, constructive question: Can voters be persuaded to feel positive again about the EU? 
Addressing this question seriously would focus attention on the many tangible benefits of EU membership beyond technocratic abstractions about the single market: environmental improvements, rural subsidies, financing for science, infrastructure, and higher education, and the freedom to live and work throughout Europe. 
By excluding spurious intermediate options such as the “Norwegian” or “Swiss” models – which May has, in any case, rejected, because they imply free movement of people – the EU could make Brexit’s economic implications unequivocally clear. 
London would cease to be Europe’s financial capital because regulations would be deliberately changed to shift business activities into EU jurisdictions. 
For the same reason, many UK-based export industries would become non-viable. 
Facing this prospect, businesses on both sides of the English Channel would be impelled to campaign openly for Britain to keep full EU membership, instead of quietly lobbying for special deals for their own sectors. 
The media might even point out the constitutional absurdity of a representative democracy treating a narrow referendum majority as permanently binding on parliamentary decisions. 
Hard-core nationalists might pay no attention, but enough marginal Euroskeptics would probably reconsider their positions to flip the 52%-48% Brexit majority the other way. 
The reversal of public opinion would become near-certain if European leaders genuinely heeded UK voters’ message, not by facilitating Brexit, but by recognizing the referendum as a wake-up call for EU reform. 
Suppose EU leaders invited the British government to negotiate on the policies that dominated the referendum and are also fueling resentment in other European countries: loss of local control over immigration; the transfer of power from national parliaments to Brussels; and erosion of social models that depend on strong bonds of citizenship and generous welfare states. 
Imagine, for example, that EU leaders endorsed Denmark’s recent proposal to allow national governments to differentiate between welfare payments to citizens and recent immigrants, or that it extended to all of Europe the Swiss plan for an “emergency brake” against sudden immigration surges. 
Imagine them easing the counterproductive budget and banking rules that have suffocated southern Europe. 
Imagine, finally, that the EU acknowledged that centralization of power has gone too far and formally ended the drive for “ever closer union.” 
Such reforms are considered unthinkable in Brussels, because they would require treaty changes and could be rejected by voters. 
But voters who opposed previous EU treaties for centralizing power would almost certainly welcome reforms that restored authority to national parliaments. 
The real obstacle to reform is not the difficulty of treaty change; it is the bureaucracy’s resistance to ceding power. 
The European Commission remains obsessed with defending the acquis communautaire, the collection of powers “acquired” by the Union, which EU doctrine dictates must never be returned to nation-states. 
Jean-Claude Juncker, the Commission President, and his chief of staff, Martin Selmayr, have even welcomed Brexit as a chance to “strengthen the acquis” by centralizing power even more. 
Juncker, like May, should recall King Canute. 
The tide of national democracy is rising across Europe, and slogans about “ever closer union” will not reverse it. 
European leaders must acknowledge reality – or watch Europe drown. 

An EU-Turkey Reset 
ROME – Later this year, Turkey will host the 2015 G-20 Leaders' Summit, the tenth annual meeting of the G-20 heads of government. 
The country's prominence on the world stage comes at an odd time, when it finds itself surrounded by a widening arc of instability. 
Indeed, two geopolitical orders are unraveling in Turkey's immediate neighborhood: the post-Cold War entente with Russia, and the national borders in the Middle East defined by the 1916 Sykes-Picot Agreement and 1919 Treaty of Versailles. 
Never have the European Union and Turkey needed one another more, and yet rarely have they been so distant. 
Turkey is no longer the rising regional star that it was during the first half of President Recep Tayyip Erdoğan's 12 years in office. 
Long gone are the days when the country was booming economically and advancing toward true democracy, a source of inspiration to many in the region. 
Today, Turkey faces myriad challenges: growing authoritarianism, unimpressive growth, and a faltering Kurdish peace process. 
With a 900-kilometer border with Syria, it is hosting nearly two million Syrian refugees and is vulnerable to attacks and infiltration by the Islamic State. 
Tensions with both Iran and Israel have become deeply entrenched, and the country has become increasingly dependent on energy from a revanchist Russia. 
Turkey cannot confront these challenges alone. 
The EU accounts for almost 40% of Turkish trade, 70% of its foreign direct investment, and more than 50% of its tourism industry. 
Meanwhile, the country's economic ties with its southern neighbors have spiraled downward since the Arab Spring in 2011. 
This reality is reflected in Turkish public opinion, with support for the EU rising from a low of 34% in 2009 to 53% last year. 
Simply put, Turkey is waking up to the reality that it has no attractive alternative to the EU and close cooperation with the transatlantic community. 
The country's “EU Strategy" announced by European Affairs Minister Volkan Bozkir last fall can be read as an implicit recognition of this fact. 
Meanwhile, Europe has never had a greater interest in a stable, democratic, and Western-oriented Turkey. 
Without Turkey's cooperation, Europe and the international community will struggle to confront the threat of foreign fighters, defeat the Islamic State, stabilize Iraq, and craft a political solution to the Syrian quagmire. 
The EU also needs a sound partnership with Turkey to achieve energy security through diversification. 
And yet, rather than being drawn closer together, the EU and Turkey are drifting apart. 
Freedom of expression, the separation of powers, and the rule of law have been progressively eroded under Erdoğan. 
The country risks being sucked into the region's sectarian conflicts – and being tempted by the authoritarian sirens of Vladimir Putin's Russia. 
The EU-Turkey relationship hit a new low at the close of last year, when Turkey increased its pressure on media close to the self-exiled Islamic leader Fethullah Gülen. 
The clampdown triggered strong criticism by the EU, which Erdoğan, in turn, angrily rejected. 
Some in Europe argue that the deterioration of rights and freedoms in Turkey is so serious that the already-moribund EU accession process should be suspended. 
Indeed, it would be difficult to make the case that Turkey fulfills the Copenhagen political criteria. 
For example, Turkey slid in Reporters Without Borders' World Press Freedom Index to 154th place (out of 180 countries). 
But it is unlikely that a formal suspension of accession negotiations would do anything other than remove the last incentive for Turkey to pursue democratization and EU harmonization. 
Instead, the EU should redouble its efforts, strengthening both its criticism of Turkey's democratic backsliding and the credibility of its accession process. 
Until now, Cyprus has posed the biggest obstacle to Turkish accession. 
EU member states should engage more actively with the Cypriot government to bring about the necessary change. 
This would enable the EU to open chapters 23 and 24 of the accession talks – those that deal with rights, fundamental freedoms, and the judiciary – as the European Parliament and the European Commission advocate. 
The EU would then be able to cast its criticism within the appropriate legal framework, while Turkish leaders would no longer be in a position to brush aside the EU's concerns. 
Lifting its blockade on negotiations would benefit Cyprus as much as Europe. 
No country would gain more than Cyprus from stable democracy in Turkey, whereas a de-democratizing Turkey in an unraveling neighborhood seriously threatens Cypriot and European interests alike. 
Beyond the EU accession process, other important measures should be taken to rebuild trust and deliver concrete benefits to both sides, thereby revitalizing an ailing and yet increasingly strategic relationship. 
Such steps should include deepening EU-Turkey cooperation on counter-terrorism, Syrian refugees, and the multiple crises from Libya to Ukraine, as well as upgrading and modernizing the customs union agreement (as the World Bank recently advocated) and vigorously pursuing visa liberalization. 
Though these measures are not alternatives to a revamped accession process, they would help to revive it. 
Above all, by embedding Turkey within the European family, such measures would counter the country's dangerous drift away from our common European values. 
This commentary was also signed by Wolfgang Ischinger, Chairman of the Munich Security Conference; 
Hans van den Broek, a former Dutch foreign minister and EU commissioner for external relations; 
Marcelino Oreja Aguirre, a former Spanish foreign minister; 
Michel Rocard, former French Prime Minister; and Nathalie Tocci, Deputy Director of the Istituto Affari Internazionali in Rome. 

The Case for an EU-Ukraine Customs Union 
COPENHAGEN – There will be an upbeat mood at this week’s European Union-Ukraine summit. 
Reforms and international support are beginning to bear fruit for Ukraine’s economy. 
An EU free-trade agreement is in place. 
And Ukrainians can now travel to the EU on just a biometric passport – a prospect most thought unrealistic just a few years ago, when more than 140 preconditions for visa-free travel still had to be met. 
Ukraine’s recent successes mirror a more optimistic mood in the EU. 
Yet, despite its achievements, Ukraine is not out of the woods, and its reform process is far from over. 
The EU must not allow a sense of complacency to set in now that we are making progress. 
And the best way to guard against that is to establish an EU-Ukraine customs union. 
Ukrainian President Petro Poroshenko is personally committed to the country’s modernization and fighting corruption. 
But European leaders need to recognize that he faces an uphill battle to implement major reforms, with populist forces in the Verkhovna Rada (parliament) turning up the heat on the government in anticipation of elections less than two years away. 
In Kyiv, the EU will stress the need to continue reforms and implement the EU’s technical standards. 
But if we want to keep Ukraine moving forward, we cannot just engage in mutual celebration of the road already traveled. 
Europe’s most powerful lever in promoting stable, viable, and successful democracies has always been its use of conditionality, linking reforms to clear and tangible benefits. 
We must continue to place new milestones along the road to show that we are committed to Ukraine’s success and serious about rewarding reforms. 
The prospect of a customs union is the strongest incentive to implement the agreed free-trade deal and continue Ukraine’s long-term economic integration with Europe. 
This is not a short-term project; it will take over a decade before Ukraine is ready. 
However, once fulfilled, Ukrainian businesses would be able to join European manufacturing supply chains, and the government would be able to pursue a much-needed diversified industrial strategy to capitalize on its geographical proximity to the world’s biggest market. 
Rather than being an addendum to Europe’s economy, Ukraine would become intertwined with it. 
Why does this matter? 
For the EU, there are significant opportunities for trade and commerce in an economy of 46 million people. 
Since Turkey forged a customs union with the EU in 1996, bilateral trade in goods has increased more than fourfold. 
Moreover, Ukraine, which had previously straddled the EU-Russia divide, has chosen a clear European future. 
What kind of signal would we send to other states in our neighborhood, or to Russian President Vladimir Putin for that matter, if we turned Ukraine away? 
I do not view an EU-Ukraine customs union through rose-tinted glasses; there are some downsides. 
(The arguments for and against it are being rehearsed daily in the United Kingdom’s Brexit debate.) 
Joining the customs union would limit Ukraine’s ability to negotiate its own trade agreements. 
Even if the EU is by far Ukraine’s largest trade partner, more than half of its trade is with the rest of the world. 
Ukraine would not be able to negotiate with the Eurasian Customs Union, which will become Brussels’ responsibility. 
Protectionist tendencies are already apparent in certain Eastern European states, where governments are – perhaps unsurprisingly – concerned about the potential impact of trade liberalization on agriculture. 
Even so, Ukraine’s trade and investment patterns are increasingly converging with the EU. 
On balance, the economic case is strong, and the political case is compelling, with potential gains far outweighing any pitfalls. 
The EU and Ukraine have much to celebrate this week; both have turned an important corner. 
But a celebration alone would be a missed opportunity. 
The EU needs to consider the next steps forward for Ukraine, to keep it on the path of reform and toward a better future. 
And the EU needs to show that it remains a transformative force in its own neighborhood. 

How Far Will the Euro Fall? 
LONDON – The US dollar is hitting new 12-year highs almost daily, while the euro seems to be plunging inexorably to below dollar parity. 
Currency movements are often described as the most unpredictable of all financial variables; but recent events in foreign-exchange markets seem, for once, to have a fairly obvious explanation – one that almost all economists and policymakers accept and endorse. 
French President François Hollande, for one, has ecstatically welcomed the plunging euro: “It makes things nice and clear: one euro equals a dollar," he told an audience of industrialists. 
But it is when things seem “nice and clear" that investors should question conventional wisdom. 
A strong dollar and a weak euro is certainly the most popular bet of 2015. 
So is there a chance that the exchange-rate trend may already be overshooting? 
In one sense, the conventional explanation of the recent euro-dollar movement is surely right. 
The main driving force clearly has been monetary divergence, with the Federal Reserve tightening policy and the European Central Bank maintaining rock-bottom interest rates and launching quantitative easing. 
But how much of this divergence is already priced in? 
The answer depends on how many people either are unaware of the interest-rate spread or do not believe that it will widen very far. 
Last year, many investors questioned the ECB's ability to launch a bond-buying program in the face of German opposition, and many others doubted the Fed's willingness to tighten monetary policy, because doing so could choke off the US economic recovery. 
That is why the euro was still worth almost $1.40 a year ago – and why I and others expected the euro to fall a long way against the dollar. 
But the scope for dollar-bullish or euro-bearish surprises is much narrower today. 
Does anyone still believe that the US economy is on the brink of recession? 
Or that the Bundesbank has the power to overrule ECB President Mario Draghi's policy decisions? 
With so much of the monetary divergence now discounted, perhaps we should focus more attention on the other factors that could influence currency movements in the months ahead. 
On the side of a stronger dollar and weaker euro, there seem to be three possibilities. 
One is that the Fed could raise interest rates substantially faster than expected. 
Another is that investors and corporate treasurers could become increasingly confident and aggressive in borrowing euros to convert into dollars and take advantage of higher US rates. 
Finally, Asian and Middle Eastern central banks or sovereign wealth funds could take advantage of the ECB's bond-purchase program to sell increasing proportions of their German, French, or Italian debt and reinvest the proceeds in higher-yielding US Treasury securities. 
These are all plausible scenarios. 
But at least four factors could push the dollar-euro exchange rate the other way. 
First, there is the effect of the strong dollar itself on the US economy and its monetary policy. 
If the dollar continues to rise, US economic activity and inflation will weaken. 
In that case, the Fed, instead of raising interest rates faster than expected, will probably become more dovish. 
Second, there must be serious doubts about whether Asian and Middle Eastern governments will in fact want to shift more reserves into dollars, especially if this means converting the euros they have acquired since 2003 at a loss and far below their purchasing power parity. 
Many countries have spent decades diversifying their wealth away from dollars, for both financial and geopolitical reasons. 
With the US increasingly prone to using its currency as an instrument of diplomacy, even of warfare – a process known in Washington as “weaponizing the dollar" – China, Russia, and Saudi Arabia, for example, may well be reluctant to shift even more of their wealth into US Treasury bonds. 
A third factor suggesting that the euro's downward trend against the dollar may not last much longer is the trade imbalance between the US and Europe. 
The gap is already wide – the International Monetary Fund forecasts a $484 billion deficit this year for the US, versus a $262 billion surplus for the eurozone – and is almost certain to widen much further, owing to the euro's 20% depreciation since the IMF released its estimate last autumn. 
The implication is that hundreds of billions of dollars of capital will have to flow annually to the US from Europe just to maintain the present euro-dollar exchange rate. 
And as the transatlantic trade imbalance widens further, ever larger capital flows will be needed to keep pushing the euro down. 
Such huge capital flows are entirely possible, but what will drive them? 
That question leads to the final and most important reason for expecting the euro's decline to reverse or at least stabilize. 
While higher US interest rates will attract some investors, others will move away from the dollar if the combination of a more competitive euro, the ECB's enormous monetary stimulus, and an easing of fiscal pressures in France, Italy, and Spain generates a genuine economic recovery in Europe. 
The resulting flows of global capital into European shares, property, and direct investment – all of which are now substantially cheaper than corresponding US assets – could easily outweigh the cash and bond investments attracted by rising US interest rates. 
What, then, can strike a balance between the opposing forces operating on the euro-dollar exchange rate? 
No one can say for sure, but one thing is certain: Whereas the profits from playing transatlantic interest-rate differentials may run to 1% or 2% per year, investors can easily lose that amount in a single day – or even an hour – by buying the wrong currency when the trend turns. 
As we know from decades of Japanese and Swiss experience, selling a low-interest-rate currency simply to chase higher US yields is often a costly mistake. 

The Euro’s Narrow Path 
BERKELEY – With Emmanuel Macron’s victory in the French presidential election, and Angela Merkel’s Christian Democratic Union enjoying a comfortable lead in opinion polls ahead of Germany’s general election on September 24, a window has opened for eurozone reform. 
The euro has always been a Franco-German project. 
With a dynamic new leader in one country and a fresh popular mandate in the other, there is now an opportunity for France and Germany to correct their creation’s worst flaws. 
But the two sides remain deeply divided. 
Macron, in long-standing French tradition, insists that the monetary union suffers from too little centralization. 
The eurozone, he argues, needs its own finance minister and its own parliament. 
It needs a budget in the hundreds of billions of euros to underwrite investment projects and augment spending in countries with high unemployment. 
Merkel, on the other hand, views the monetary union’s problem as one of too much centralization and too little national responsibility. 
She worries that a large eurozone budget wouldn’t be spent responsibly. 
While not opposed to a eurozone finance minister, she does not envision that official possessing expansive powers. 
But there is a narrow path forward that should be acceptable to both sides. 
It starts with completing the banking union. 
Europe now has a single supervisor in the European Central Bank, but it lacks a common deposit insurance scheme, which German officials oppose on the grounds that there has been inadequate risk reduction in the European banking system. 
In other words, they worry that the fees levied on German banks will be used to pay off depositors in other countries. 
The solution lies in bulletproofing the banks by strictly applying the demanding capital standards of Basel III and limiting concentrated holdings of government bonds. 
The paradox here is that European regulators, including German regulators, have in fact been arguing for looser application of those regulations in negotiations with the United States. 
In doing so, they have been arguing against their own best interests. 
Next, Europe needs to transform the European Stability Mechanism, its proto-rescue fund, into a true European Monetary Fund (EMF). 
Its resources could be augmented by increasing governments’ capital subscriptions and expanding its ability to borrow. 
Decision-making could be streamlined by moving from the current unanimity rule to qualified majority voting. 
The EMF could then take the place of the ECB and the European Commission in negotiating the terms of financing programs with governments. 
The final decision of whether to extend an emergency loan would no longer fall to heads of state in all-night talks. 
Rather, it would be taken by a board made up of eurozone representatives, including from civil society, nominated by the European Council and confirmed by the European Parliament, giving the process a legitimacy it currently lacks. 
But Germany will agree only if it sees steps limiting the likelihood of expensive intervention. 
This brings us to the vexed question of fiscal policy. 
It is past time to abandon the fiction that the ultimate source of fiscal discipline is a set of strictly enforced EU rules. 
Taxation and public spending remain sensitive national prerogatives, rendering outside oversight ineffectual. 
Assigning oversight to the European Commission in Brussels promises, inevitably, not discipline but a dangerous populist backlash. 
The alternative is to return control of fiscal policy to national governments, abandoning the pretense that policy can be regimented by EU rules. 
Governments could then make their own decisions; if they make bad decisions, they will have to restructure their debts. 
Adopting a European debt-restructuring mechanism would help to avoid the worst fallout. 
Any adverse consequences would no longer spread to other countries, because their banks would no longer hold concentrations of government bonds. 
They would not bankrupt the EMF, which would be able to lend only in cases of illiquidity, not insolvency. 
These ideas will horrify dedicated euro-federalists. 
One bone they can be thrown is a pilot unemployment insurance fund amounting to, say, 1% of eurozone GDP. 
This would be analogous to US arrangements under which the federal government provides partial funding for state-administered unemployment insurance. 
And it would give the eurozone finance minister something to do. 
If the initial modest program was shown to work, it could be scaled up. 
But German politicians are aware that unemployment is 2.5 times higher in France than at home, raising the danger that transfers would all go one way. 
That’s why such proposals are contingent on structural reforms that reduce unemployment where it is high and increase the flexibility of labor and product markets. 
This is essentially the bargain Macron has offered Merkel. 
To paraphrase, “I’ll undertake deep structural reforms if you agree to modest steps in the direction of fiscal federalism, completing the banking union, and creating a European Monetary Fund.” 
No one on either side of the Rhine will regard this bargain as perfect. 
But with the euro in the balance, the perfect should not be allowed to become the enemy of the good. 

Eurobonds without Fear 
SANTIAGO – The day of the Eurobond may be near. 
What was once a quack’s idea for resolving Europe’s financial crisis is now the only reliable way to save the euro. 
Having their bonds purchased by the European Central Bank did not keep Greece, Ireland, and Portugal from needing a bailout. 
It will not save Spain and Italy, either. 
But Spain and Italy are too large to be bailed out. 
The new European Financial Stability Facility (EFSF) is not up to the task. 
And enlarging the EFSF to an appropriate size would require massive additional French borrowing, which could well place France itself at the receiving end of a speculative attack. 
This is where Eurobonds come in. 
The five countries in trouble will need to place tens of billions of euros in new debt and roll over even larger amounts of old debt. 
Markets long ago stopped buying bonds issued by Greece, Ireland, and Portugal, and might soon stop buying paper issued by Italy and Spain – or do so only at prohibitive interest rates. 
But markets would happily gorge on bonds backed by the full faith and credit of the eurozone. 
Eurobonds would cut borrowing costs for the European Union’s two large troubled members. 
And it would spare German and other taxpayers from the EU’s solvent northern countries from having to fund yet another bailout of a southern member state. 
The debate about whether and how to introduce Eurobonds has focused on the appropriate limits on issuance. 
With no limit, profligate countries could go on a spending spree at the expense of thriftier ones. 
After the advent of the euro, the eurozone’s Mediterranean members enjoyed a lending boom while piggybacking on Germany’s low interest rates. 
There is understandable reluctance to allow that to happen again. 
But arguments about whether the limit should be 60% of GDP or more miss a larger point. 
Nineteen years of experience with the Maastricht Treaty, which created both the EU and the euro, has shown convincingly that such limits are unenforceable. 
Countries with the clout to flaunt the limits will do so whenever it is politically convenient. 
And, if a debt crisis is near, exceptions will be found, waivers will be issued, and buyers for the additional debt will be lined up. 
So the question is not what to do when debt gets near its limit, however high or low. 
It is how to prevent debt from getting near that limit in the first place, except in very extreme and unusual circumstances. 
And for that, you need fiscal rules. 
A fiscal rule is any pre-specified mechanism that constrains spending or the deficit. 
According to a study by the International Monetary Fund, 80 countries around the world use some kind of fiscal rule. 
But not all fiscal rules are created equal. 
If too loose, a rule is merely ornamental. 
If too tight – a constitutional amendment requiring a balanced budget, for example – the rule could create rather than solve problems: think of the economic and political chaos that would ensue if Spain, with unemployment at 21%, were forced to eliminate its huge fiscal deficit overnight. 
Sweden and Chile are almost poles apart geographically, but both have used sophisticated fiscal rules successfully. 
Chile sets a target for its cyclically-adjusted fiscal balance – that is, the balance that emerges after accounting for the deviations in commodity prices and domestic output from their trends. 
When commodity prices boomed in the middle of the last decade, the rule called for huge budget surpluses – which Chile achieved, repaying almost all of its public debt and accumulating a sizable rainy-day fund. 
When the financial crisis came, Chile was able to mount an aggressive fiscal stimulus without so much as a hiccup from financial markets. 
Of course, no fiscal rule can account for all contingencies. 
That is why you need an independent fiscal council to administer it, just as you need an independent central bank to pursue an inflation-targeting monetary rule. 
Agreeing on the composition of such a council for Europe would be hard, but no harder than it was to agree on the makeup of the ECB’s board. 
Eurobonds plus fiscal rules: this formula is the euro’s best hope for salvation. 
Unfortunately, another crisis or two might be necessary before European leaders consider it seriously. 

Europe, America, and the Drumbeat of War with Iran 
America’s capital is once again abuzz with talk of war, not only of the latest “strategy for victory” in Iraq, but now also of military action against Iran. 
The harder it becomes to discern any rationality in the Bush administration’s actions, the louder the rumor mill grinds. 
Will Bush order an air and Special Forces attack on Iran? 
Ever since Bush’s State of the Union address at the end of January, hardly a day has passed without something happening in connection with Iran or without the Bush administration’s ratcheting up its rhetoric. 
Clearly, the US is also pressing ahead with preparations for an air strike. 
(A more extensive military commitment is scarcely possible, given how overstretched US ground forces already are.) 
Indeed, the confrontation with the Iranians in Iraq is visibly intensifying, and it may be gathering strength elsewhere as well. 
A bomb directed at the Iranian Revolutionary Guard recently exploded on Iran’s border with Afghanistan. 
And there are, of course, new attempts by the United States to drum up “evidence” of an Iranian threat that may justify an attack. 
Is this all a bluff? 
The world could perhaps calmly wait for an answer, but for the fact that the progress of Iran’s nuclear program and the approaching end of President Bush’s term might create an incalculable dynamic of its own. 
As with Iraq, America’s strength may be enough to start a war, but not to win it. 
But the consequences of a military adventure in Iran would far surpass those of the war in Iraq. 
Doing things by halves yet again in the Middle East would be the worst of all possible options – bad for the region and bad for its neighbors. 
The first among the neighbors affected would be Europe. 
So how has Europe, with its vital security interests at stake, responded to these developments? 
British Prime Minister Tony Blair has already adapted to the US administration’s new confrontational rhetoric. 
French President Jacques Chirac unguardedly speculated that an Iran with one or two nuclear bombs might not pose a serious a threat, given the possibility of nuclear retaliation -- his musings so startled French officials that they quickly jumped in to correct the President’s comments. 
German Chancellor Angela Merkel gives speeches at security conferences that find favor in America, but otherwise Germany prefers to stay in the background. 
Across Europe, risk avoidance seems to be the order of the day, even at the expense of the common interest and NATO solidarity. 
The German navy is defending the Lebanese coast against Hezbollah, while other European nations bear the brunt of policing Lebanon on the ground. 
In Afghanistan, Germany, with its strong military presence in the north, has been turning a deaf ear to calls for help from the Canadian allies fighting a revived Taliban in the south. 
Germany now wants to send some Tornado jets for reconnaissance purposes – better than nothing, but not by much. 
In terms of security policy, Europe is stagnating, if not regressing, at the very moment when unity is needed more then ever. 
The Big Three of Europe – and Germany, as the current EU president in particular – must find a way to act together in strategic security matters. 
If they don’t, Europe will largely cease to matter when the going gets rough. 
And the going is now getting quite rough in Iran and the Persian Gulf. 
Should Iran be attacked this year, the consequences will be borne first and foremost by the region, but also by Europe as the Middle East’s immediate western neighbor – and they will be felt for a long time to come. 
Indeed, Europe will have to share the costs if Iran prevails and becomes a nuclear power. 
So there is much at stake for the old continent. 
To be precise, two overriding EU security interests are at stake: avoiding a war with Iran and preventing Iran from becoming a nuclear power. 
These two apparently contradictory interests can be reconciled and translated into a common strategy by adopting a three-pronged approach based on efficient isolation, effective containment, and direct negotiations. 
The Europeans – led by Merkel, Blair, and Chirac – should agree to assure the US that Europe is ready to pay a high, perhaps very high, economic price by taking decisive action to intensify the sanctions against Iran. 
But they should offer this only on two strict preconditions: that the military option be taken off the table, and that all parties involved – including the US – enter into direct negotiations with Iran. 
The policy of isolation coupled with direct negotiations would be strengthened further by a common strategy toward Syria, aimed not at “regime change,” but at “coalition change” – that is, drawing Syria away from its close alliance with Iran. 
It was both right and important that the EU Council of Foreign Ministers agreed on sanctions against Iran. 
Faced with the threat of financial sanctions, Iran’s political elite is increasingly realizing the price of its confrontational course. 
It is imperative to further this process in a resolute manner, while at the same time rejecting military adventurism. 
It is up to Europe to prevent the two worst developments in Iran – war and nuclear armament – by acting jointly and with determination. 
Vital European and transatlantic interests are at stake. 
It is thus Europe’s responsibility – and especially Germany’s, as the current EU president – to act now. 

Europe, An Engine of Peace 
Critics of European monetary integration often point out that, in the absence of political union, monetary union is doomed to fail. 
I agree with the critics’ conclusion, but not with their premise, for the success of the single currency so far has been due precisely to the political commitments of the Union’s member countries. 
In other words, it is not true that the European Union does not constitute a political union. 
European economic integration – in all its aspects – reflects the desire to integrate Europe politically, which, at least in my view, implies that European economic and monetary integration is irreversible. 
This has been true from the outset of the European integration process in 1952, when six countries established the European Coal and Steel Community (ECSC). 
The aim of the ECSC was explicitly political: to remove control of the two most important raw materials for the production of heavy weaponry from states that had just fought the bloodiest war in history. 
This drive for peace remained, quietly, the key motivation behind further steps toward Europe’s economic integration, which was regarded as the vehicle for achieving political integration. 
In 1951, French Prime Minister Rene Pléven proposed establishing a European Defense Community (EDC) alongside the ECSC. 
He failed, but the idea did not vanish. 
Later that year, Robert Schumann – the French foreign minister at the time and a founding father of European integration – explicitly identified the ECSC with the drive for peace. 
He described it as a means for creating a “fusion of interests…that will be the leavening from which may grow a wider and deeper community between countries long opposed to one another by bloody conflicts.” 
These words were echoed on the eve of the introduction of the single currency. 
In particular, Germany under Chancellor Helmut Kohl often linked monetary integration with the objective of political union. 
Kohl once referred to the single currency’s success as a matter of “war and peace.” 
For this reason, I do not agree with those who argue that Germany’s support for European monetary integration was the price it paid for Europe’s acceptance of German reunification. 
On the contrary, the historical record shows that Germany made the case for a parallel drive to monetary and political integration well before the fall of the Iron Curtain. 
Of course, there are other motives behind support for economic integration. 
The EU’s leaders are convinced that achieving the so-called four freedoms – i.e., freedom of movement of goods, services, capital, and people – will optimize the well-being of Europe’s population. 
They also aspire to increase the Continent’s strategic power. 
But peace was the principal driving force in the minds of people like Schumann and Jean Monnet at the beginning of the European integration process, as it was for Helmut Schmidt and Valéry Giscard d’Estaing when they laid the foundations of the single currency and today’s European Central Bank. 
For half a century, the process of European integration proceeded – sometimes with setbacks, sometimes with giant steps forward – joining formerly separate markets by creating very close trade relations. 
Over time, this stimulated ever-greater economic convergence. 
Of course, Europe’s economies have not become “look-alikes,” nor has GDP per capita been fully equalized. 
But the differences between Europe’s economies were never so dramatic as to form an insurmountable barrier to embarking upon the most ambitious project of all: adopting a common currency. 
Understanding this history is vital, because Europe’s Union once again stands at a threshold: should it keep its promise to start membership talks with Turkey? 
In the wake of the defeat of the EU’s Constitutional Treaty in France and the Netherlands this spring, many say that Europe’s decade-old promise cannot and should not be kept. 
What strikes me as dangerous is that the issue of peace – the motor that has driven European integration from the start – rarely comes up in the debate about what to do in the wake of these events. 
On the contrary, responsible statesmen and party leaders have come out openly against Turkish membership. 
I would have hoped that these people had learned from Schumann and Monnet what really matters for Europe and its future; sadly, this does not seem to be the case. 
Of course, I do not fear some sort of military clash between Turkey and the EU. 
After all, Turkey has been and remains a loyal member of NATO. 
But an increasingly virulent and violent clash of cultures is emerging in Europe – particularly in France, Germany, Spain, and the Netherlands – between Islam and the humanitarian, Christian, and Jewish traditions. 
For me, Europe’s integration of Muslim Turkey into its political union is the same sort of question of peace that Schumann and Monnet successfully confronted. 
Today, Europe needs peace between cultures as much as it once needed peace between nations, and it is for this reason that we must welcome Turkey into our midst. 


Europe’s Year of Living Defensively 
BERLIN – From a European perspective, 2019 promises to be another difficult year, dominated by large challenges that could easily turn into menacing crises. 
Barring a major reversal, the United Kingdom will withdraw from the European Union on March 29. 
A brewing economic and financial crisis in Italy will intensify, threatening the stability of the eurozone. 
And France will likely remain beset by populist protests, diminishing its potential to take a lead role in the pursuit of EU-level reforms. 
Moreover, the European Parliament election in May could well deliver a nationalist majority or near-majority, which would then determine the next members of the European Commission, the leaders of the European Council and European Central Bank, and the High Representative for Foreign Affairs and Security Policy. 
Needless to say, a nationalist victory would be a disaster for the EU, because it would derail necessary reforms and further divide member states. 
Whatever happens, Europe’s internal political drama will play out against a backdrop of international turmoil. 
At the same time that Russia is stepping up its aggression in eastern Ukraine, US President Donald Trump is waging a trade war against China, and could expand it to the EU (which he has deemed a “foe”). 
And, more broadly, the global economy is weakening, and growth will continue to slow in the months ahead. 
In the face of these foreseeable challenges, the survival of the European project itself is at stake. 
As far as Brexit is concerned, much will depend on whether the UK’s withdrawal occurs in an orderly or chaotic fashion. 
In the latter case, there would be losers all around, and UK-EU relations could be poisoned for a long time to come. 
No one on either side of the English Channel should wish for this outcome. Life goes on after divorce, and it is generally in the interest of both sides to maintain a healthy relationship. 
One hopes that common sense prevails. 
As with Brexit, the EU leadership in Brussels cannot solve the Italian crisis, but it can and should offer a helping hand. 
Italy needs growth, which will require full-scale modernization of its economy. 
Unfortunately, its current government is not pursing policies needed to achieve this, and has instead provoked a confrontation over EU budget rules. 
The EU will have to show flexibility, while upholding the principles that underpin the sustainability of the monetary union. 
This suggests that long and excruciating negotiations lie ahead. 
In France, the “Yellow Vests” have articulated their demands largely in economic terms, having first taken to the streets to protest against a proposed fuel tax. 
But the movement also comprises strong “identitarian” elements that have seized on feelings of discontent over the loss of traditional ways of life in the age of globalization and European integration. 
As in most Western countries, these sentiments are concentrated among traditional working- and middle-class voters who have concluded that the post-war social contract is invalid. 
Hard work no longer ensures economic security and upward mobility. 
Western elites will not regain the public’s trust until they offer a response to this loss of trust, without which democracy and its core institutions will not be able to function. 
Complicating matters further, the global balance of power is quickly shifting from West to East, the climate crisis is intensifying, new digital technologies are revolutionizing how we live and work, and migration and refugee waves are adding fuel to the populist backlash. 
But if populist forces have a plan that would enable their object of desire – the traditional nation-state – to address these mounting challenges, they have kept it a secret. 
In reality, only a united Europe is up to the task, which is why next year’s European elections are so important. 
If populism wins, Europe loses. 
It doesn’t help that most of the great changes to the international order over the past few decades have come at Europe’s expense. 
The rise of China and the revolution in artificial intelligence seem to be leaving Europe on the sidelines. 
So far, the Old Continent has been asleep at the wheel. 
If it does not wake up soon, it will have lost the chance to harness the forces of change for its own good. 
A new era has begun, and this will become increasingly clear over the course of the next year. 
Traditional European debates can no longer take for granted the strength of the transatlantic alliance or steady progress toward “ever closer union.” 
Trump’s America has said its goodbyes, and Europe’s old social model is broken, with no replacement on offer. 
Neither nostalgia for a mythical past nor China’s authoritarian model of governance represents a serviceable alternative. 
The crises threatening Europe will unfold relentlessly and for all to see. 
At best, 2019 will be a year of defensive maneuvering, rather than the start of a European renewal. 
But in the long run, a reconstructed Europe is the only option. 
That contradiction will define this age of transition, which brooks no shortcuts or panaceas. 

Europe after the Kosovo War 
The Kosovo war should force the European Union to rethink its future. 
As the new commission chaired by Romano Prodi takes over it should seize the opportunity to move the EU from an inward looking institution consumed with an economic agenda to an all-European political project. 
"The return to Europe" was a central motto of the peaceful revolution in Central Europe ten years ago. 
The reunification of Europe was to overcome the legacy of Yalta and ensure peace, security, democracy and development. 
While the idea of a "return" expressed an idealised vision of the Europe of values and common heritage, its concrete expression was the desire to join the process of European integration successfully developed in the Western part of the continent. 
The West, however, was ill prepared to face the revolutionary challenge from the East. 
Western Europe's attitude towards its eastern neighbours remained ambiguous. 
On the one hand, the EU has always claimed to support the 'unification of Europe'. 
This translated into series of positive initiatives towards the aspiring newcomers: the PHARE programme, the EBRD, the association agreements leading to a slow but steady strengthening of the EU's ties with candidate countries. 
Yet the identity of integrated western Europe was the product of the horrors of the second world war and of the divisions and fears of the cold war period. 
This distinct genealogy contributed to the fact that after 1989 the real priorities of the Union was not the rapid reunification of Europe but rather deepening integration of its western half, and protecting itself from possible destabilizing effects of radical geopolitical changes. 
The Maastricht agreement and the launch of euro were landmarks of that process. 
Ten years after the fall of the Berlin Wall the vision of a reunited Europe seems to have vanished. 
In spite of official declarations to the contrary, EU enlargement is not considered a real priority. 
The member states do not seem ready to make the necessary reforms and bear the costs of enlargement. 
These are actually overstated, while the long-term positive effects of enlargement are generally underestimated. 
The re-nationalisation of the priorities of the member states became clear at the Berlin summit earlier this year. 
The negotiations on the so-called 'Agenda 2000' were marked by squabbling between the member states defending their vested interests. 
The final compromise was based on a tacit understanding that EU enlargement would not be possible before the second half of the next decade. 
There is now a striking asymmetry in the process of institutional adaptation necessary for EU enlargement. 
The EU has been unable so far to transform its institutions and procedures in order to cope with the new members. 
The candidate states, on the other hand, have, in order to qualify for membership of the EU, to swallow 80 000 pages of rules and regulations known as the 'acquis communautaire'. 
This is a labour of Sisyphus, since the 'acquis' grows faster than the capacity to absorb it in East European legislation. 
Much of the 'acquis'- the product of a long and complex history of the EU - is hardly relevant to the development of the new democracies. 
Nor is this straitjacket of regulations the best way to equip free market economies to compete if parts of it are not implemented by existing member states themselves. 
Yet, they are authoritatively imposed as a condition sine qua non for new candidate states feeding frustration and potential resentment in Central Europe in a process where the ends seem to have been confused with the means. 
History moves faster than politics, which moves faster than institutions. 
The Balkan wars and their consequences have overtaken the EU's enlargement policy. 
They point to the special role of the western alliance, and most of all of the European Union, in assuring peace and security in the Balkans, in promoting democratic nation-state building in the region. 
The real long-term success of the Kosovo war can be assured only by the prospect of integration of Balkans with the developed Europe. 
Failed states of south eastern Europe are being transformed into formal or informal protectorates implying deep involvement of Europe in the creation of security for the whole region. 
This requires political involvement as well as massive inflows of resources in order to rebuild and to ensure their development. 
The European Stability Pact for the Balkans is a decision not dictated by economic considerations but a result of political, strategic, and moral considerations. 
Central Europe with its experiences of democratic and economic transformation can and should make a useful contribution to the reconstruction in the Balkans. 
However, two undesirable consequences could follow from the present situation. 
Given the Balkan emergency the enlargement process to the stable, consolidated democracies would be downgraded or slowed down. 
Even more unsettling would be the consequences for countries that fall between two stools (neither protectorate nor first circle of enlargement) such as Slovakia, Bulgaria and Romania. 
In both cases the result could be a destabilizing anti-European backlash. 
Instead, the EU's direct involvement in the Balkans should lead it to rethink its enlargement strategy. 
It should embark now on a policy of an accelerated political and security integration of the countries of Central Europe without slowing down their economic integration. 
This would not be seen as 'second class' membership, but rather as the right 'Agenda 2000', the proper answer to the hopes of a genuinely reunited Europe that were reborn in 1989. 
It would also send a positive European signal for the post-war reconstruction in the Balkans. 

Europe Agonistes 
In transatlantic relations, nothing is potentially more divisive than the issue of Israel’s security. 
From that standpoint, in spite of a rapprochement between France and the United States, culminating in a joint UN resolution, the latest Middle East war is in reality widening and deepening the emotional gap that has existed between Europe and the US since the war in Iraq began. 
What is unfolding in front of us can be seen as a real-life version of Luigi Pirandello’s play To Each His Own Truth. 
And, in all fairness, each side has its grains of truth. 
For a majority of Americans, now more than ever, Israel is the first line of defense for the West against Iranian-led radical Islam, even if they disagree with the tactical choices made by Ehud Olmert’s government. 
This war, unlike the previous 1982 war in Lebanon, is for Americans not a war of choice but of necessity. 
For a majority of Europeans, though they have absolutely no sympathy for radical Muslims, be they Sunni or Shia, Israel’s offensive against Hezbollah and its result, the destruction of Lebanon, are seen as self-defeating for Israel and as potentially detonating a clash of civilizations between Islam and the West. 
For, ultimately, a resolution of the conflict between Israel and its neighbors can be only political. 
The “falling out of love” between Europe and Israel, so visible in most European reporting about the war, is part of a process rather than the result of a single event. 
Until the Six-Day War in 1967, Israel’s image benefited from living memories of the Shoah and the silent guilt of an entire generation of Europeans. 
The transformation of Israel’s image in Europe since then is above all a product of time and size, magnified by the power of images in our global age. 
With the passing of time and the transformation of Israel from a small pioneer state to a regional superpower, Israel’s image became blurred and progressively negative, while sympathy for the Palestinian cause spread, despite Palestinian terrorism. 
Israel’s settlement policies, opposition to the ever closer alliance between Israel and the US, and integration of the sensitivities of a growing Muslim population all contribute to explaining the evolution of Europe’s disenchantment with Israel. 
Paradoxically, given the initial Christian origins of anti-Semitism in Europe, the process of “dechristianization” on the Continent has played against Israel. 
At a time of reconciliation between Christianity and Judaism, a less Christian Europe has been more reluctant to consider the spiritual specificity of Israel. 
This stands in total contrast with the growing strength of America’s Christian revival, with the evangelical right combining support for the Greater Israel of the Bible with a rather classical form of Anti-Semitism. 
After all, Jews are destined to be converted to Christianity before the end time. 
Europeans, with some nuances, are now emotionally united in their “coolness” toward Israel. 
Germany is no longer an exception when it comes to public opinion, and European governments are united in their reluctance to send troops on the ground to separate Israel and Hezbollah. 
Nonetheless, political divisions within Europe are reminiscent of those that prevailed at the time of the Iraq war. 
Of course, Germany under Angela Merkel has adopted a somewhat different stance, owing to the Christian Democratic Party’s special relationship with Israel. 
By contrast, Spain and Italy are more critical and have moved closer to France. 
Indeed, in the context of the latest Middle East war, there is “more” France and “less” Europe, at least on the visible diplomatic front. 
Paradoxically, it is France, which initiated – or at least reinforced – the European Union’s deep identity crisis by its resounding “No” to the EU constitution in 2005, that could emerge with more clout from today’s Middle East morass. 
This is easy to explain. 
As a former mandate power, France had always had a keen interest and presence in Lebanon, and its influence has been deepened by the close personal rapport between President Jacques Chirac and Lebanon former Prime Minister, the late Rafiq Hariri. 
But will France ultimately deliver i.e. send a significant amount of troops for the UN force set to police the peace in southern Lebanon? 
By not doing so France would damage her credibility as a "serious country,” and her reputation for being a rare breed in Europe, a country that is not shy to intervene militarily with her troops. 
Where is the France whose motto once was "I intervene therefore I exist" 
Europe’s other natural interventionist, Great Britain, has its hands more than full in Iraq and Afghanistan, and Germany remains reluctant to intervene in general, and in a conflict that so directly involves Israel in particular, leaving only France to act. 
The lesson for the EU is clear: if it wants to matter diplomatically, the Union must be able at least to give the impression that it matters militarily. 
The EU’s current formula, “United we fall, divided I stand,” does not augur well for the future of Europe’s foreign and security policy. 
The Middle East was a natural ground for the emergence of a new European presence in the world. 
Given that Europe’s legacies of anti-Semitism and colonialism stand at the origins of the Middle East’s core problems, the EU could have been at least part of the solution. 
Unfortunately, the Middle East, beyond suffering its own tragic fate, has also revealed the extent of Europe’s weakness. 

The Coming Atlantic Century 
PRINCETON – The United States is rising; 
Europe is stabilizing; and both are moving closer together. 
That was the principal message earlier this month at the annual Munich Security Conference (MSC), a high-powered gathering of defense ministers, foreign ministers, senior military officials, parliamentarians, journalists, and national-security experts of every variety. 
The participants come primarily from Europe and the US; indeed, when the conference began in 1963, it was focused entirely on NATO members. 
This year, however, senior government officials from Brazil, China, India, Nigeria, Singapore, Qatar, and Saudi Arabia also joined, an important sign of the times. 
John McCain, the US senator and 2008 presidential candidate, always leads a large congressional delegation to Munich. 
The US administration also typically sends the Secretary of Defense or the Secretary of State to deliver a ritual speech reassuring the Europeans of the strength of the transatlantic alliance. This year, Vice President Joe Biden did the honors, bumping the US representation up a notch. 
The conference also featured a panel on an unusual subject – “The American Oil and Gas Bonanza: The Changing Geopolitics of Energy.” 
US Special Envoy and Coordinator for International Energy Affairs Carlos Pascual described “the US internal energy revolution”: a 25% increase in natural-gas production, which should push down US gas prices, and enough oil output to reduce oil imports from 60% to 40% of consumption, with an additional 10% increase projected. 
Pascual projected that the US will be able to import all of its energy needs from within the Americas by 2030. 
A recent confidential study by the German Intelligence Agency raises the possibility that the US could actually become an oil and gas exporter by 2020, in contrast to its present position as the world’s largest energy importer. 
That honor would likely fall to China, which would become increasingly dependent on the Middle East. 
As an extra bonus, the higher US proportion of gas use has reduced US carbon emissions to 1992 levels. 
The sense of US good fortune, a phrase that is not often heard around the world these days, increased with the panelists’ description of how lower energy prices for US manufacturing has a broad positive impact on the American economy’s competitiveness. 
As a result, the country’s energy reserves have also become an investment magnet. 
German Minister of Economics and Technology Philipp Rösler said that many German firms are already relocating to the US because of lower energy prices. 
Equally important, the panelists reported on the rising importance of liquid natural gas relative to pipeline gas, which has enormous geopolitical implications. 
In a nutshell, if gas is exported in liquid form, it is fungible. 
In other words, if Russia restricts the flow of gas to Ukraine for political reasons, but the rest of Europe has gas from other sources, they can simply resell their gas to Ukraine and export it via the Baltic Sea. 
Jorma Ollila, Chairman of Royal Dutch Shell, described the global map of major shale oil and gas deposits. 
Ukraine itself has the third-largest reserves in Europe; other countries with large deposits include Poland, France, China, Indonesia, Australia, South Africa, Argentina, and Mexico. 
And the US has already taken over from Russia as the world’s largest gas producer. 
All of this data got Brazilian Foreign Minister Antonio de Aguiar Patriota’s attention. 
On a panel entitled “The Rising Powers and Global Governance,” Patriota referred to the energy discussion and noted that the rising powers should remember that “the established powers are not sinking powers.” 
In short, the pervasive narrative of Western decline suddenly reversed itself. 
The horizon seemed brighter on the European side as well. 
In the opening panel on “The Euro Crisis and the Future of the EU,” cautious optimism prevailed. 
No one thought that the European Union’s troubles were resolved, but no one thought that the eurozone was coming apart, either. 
On the contrary, German Finance Minister Wolfgang Schäuble made clear that German resolve to see the eurozone through its troubles was firm. 
And a prominent economist in the audience who has often predicted the eurozone’s demise was backtracking rapidly. 
Aside from reports of a rising US (fiscal woes notwithstanding) and a stabilizing Europe (despite the common currency’s troubles), the conference featured a speech by Biden that went far beyond the reassuring rhetoric that US policymakers typically offer in European capitals. 
Biden told the audience that he and US President Barack Obama believe that “Europe is the cornerstone of our engagement with the rest of the world” and “the catalyst for our global cooperation.” 
Biden pointed out that “Europe is America’s largest economic partner,” recalling figures that the Asia-focused Obama administration has often seemed to forget: “over $600 billion in annual trade that creates and sustains millions of jobs on the continent and at home, and a $5 trillion overall commercial relationship.” 
Biden went on to suggest a “comprehensive transatlantic trade and investment agreement”; a week later, in his State of the Union Address, Obama announced the launch of negotiations for precisely such an agreement. 
Biden concluded with a flourish. 
“Europe remains America’s indispensable partner of first resort,” he declared. “And, if you forgive some presumptuousness, I believe we remain your indispensable partner.” 
Those strong words reflect a new sensibility in Washington. 
As former Secretary of State Hillary Clinton declared in one of her last foreign-policy speeches, the US is not planning to pivot away from Europe to Asia, but rather with Europe to Asia. 
Western fortunes are rising, slowly but surely. 
Together, Europe and the US account for more than 50% of global GDP, have the largest military force in the world by many multiples, and control a growing proportion of global energy reserves. 
They also have a formidable diplomatic and development-assistance capacity, representing a peaceful community of democracies that share a common commitment to the rights, dignity, and potential of all human beings. 
Imagine that community spreading down the east coast of Latin America and the west coast of Africa. 
It might be an Atlantic century after all. 

Europe and Asia’s Arms Race 
When European unification was launched, it was thought that “ever closer union” would establish a community that would protect Europeans from political blackmail. 
Now we see – though the lifting of the Union’s arms embargo may now be delayed thanks to US pressure and Chinese aggressiveness – that the European Union has become merely a tool for corruption when France and China draw up joint action plans. 
The strategy is simple and ruthless. 
The world’s largest dictatorship is preparing to crush and occupy the first Chinese democracy in history – Taiwan. 
In order to do so, the People’s Republic needs much more sophisticated arms than those it possesses today. 
The United States naturally does not export such arms to China. 
Instead, the US is trying to deter China’s rulers from launching a military attack on the democrats in Taiwan. 
But if the EU ever begins to offer China extensive exports of powerful and offensive weapons systems, the military power of the People’s Liberation Army would be able to defeat Taiwan’s defense forces. 
Over 600 missiles, already deployed on the mainland, are aimed at cities and military bases on the island. 
The threat is more apparent than real – for now. 
Russia currently sells certain arms to China, but avoids exporting its most sophisticated systems, since the Kremlin views China as a potential future threat. 
However, if EU countries start competing for a share of the Chinese market, the Russians could soon be tempted to sell their best arms to the communist regime in Beijing. 
China’s new armaments, together with the North Korean crisis, will probably force half a dozen countries in the region to renew their armed forces. 
Thus, by whenever the Union should decide to lift its ban on weapons exports to China, the EU could help fuel an arms race in East Asia. 
How did China and France manage to fool the EU into thinking that it should ever take part in this? 
When Jacques Chirac’s government decided to expound its economic co-operation with China, arms became an important component in the strategy. 
Just as a ruthless Prime Minister Chirac sold a nuclear reactor to Saddam Hussein in the 1970’s, so the President Chirac of today is being lured into doing big business with another aggressive dictatorship. 
The rest is a question of economic blackmail. 
French diplomats have of course informed China about the reluctance of other European countries about lifting the arms embargo, which was imposed after the massacre in Tiananmen Square in 1989. 
China then simply threatened to abandon or never to conclude trade deals with these EU members. 
To the Germans, the Chinese probably murmur something about Siemens and Volkswagen. 
To the Dutch their whispers are most likely about Philips. 
China follows the power game within the EU through its French friends, and therefore knows which governments need to be whipped into line. 
In Sweden, it has probably been enough to whisper “Ericsson” and “Volvo” to make Primer Minister Göran Persson understand what is at stake for his country commercially. 
What European nation, indeed, dares to put at risk a Chinese order for several billion euros? 
Typically enough, no EU-country has mentioned Taiwan as a reason not to resume arms exports. 
Instead, the EU talks of a “code of conduct” (which probably does not mean very much, but sounds nice) and “free trade” (another charming euphemism for arms exports to dictatorships. 
This silence gives a hideous signal. 
For what the EU in practice says to China is this: “Taiwan’s cause in not our own.” 
If and when the Union lifts the embargo, Europe will be refusing to take responsibility for the catastrophe that may be approaching. 
As usual, it is up to America to protect a free nation that may otherwise be destroyed. 
Compare this situation to the drama 60 years ago. 
Then it was American troops and arms that liberated Western Europe from Nazism. 
Now it may be European arms in the hands of the Chinese that will be aimed at American troops protecting a democracy with 23 million inhabitants (in other words, as many people as in all the Nordic countries combined). 
As Tom Lantos, a Democratic US Congressman from California, put it, the move to lift the ban on arms exports to China clearly shows that the EU has “lost its moral compass.” 
Lantos knows about moral compasses: as a boy, he was rescued by Raoul Wallenberg from being deported to Auschwitz by the Nazis in Budapest. 
Wallenberg was a Swede. 
But now Sweden is revealing that it, too, lacks political morality. 
Several friends of mine in the Conservative party’s parliamentary group have long been engaged in supporting a free Taiwan. 
Over the past ten years, we have held Scandinavian conferences on Taiwan in the parliaments in Copenhagen, Oslo, and Stockholm. 
But a call from Prime Minister Persson was enough to render the Conservative party leader Fredrik Reinfeldt docile. 
Persson had discovered that he lacked a majority in the Swedish parliament to lift the arms embargo on China. 
By whispering “Ericsson” into Reinfeldt’s ear, it seems, Persson achieved the desired result. 
Reinfeldt became the first Conservative party leader in Swedish history to encourage arms exports to a Communist dictatorship. 
But Reinfeldt, like Jacques Chirac, has forgotten something. 
Liberal-minded people may very well prefer not just to exchange one cynical prime minister for another at the next election. 
They may prefer a clear choice. 

Europe and Its Discontents 
LONDON: Waves of street protests by French farmers, fishermen and truck drivers against surging fuel prices dominate television and newspapers. 
If Europe is moving into an autumn and winter of discontent, however, it is not so much because French truckers are blockading oil refineries in France, as because some key political issues on the European agenda seem to be getting out of hand and out of control, especially in Germany and Britain. 
In one sense, indeed, the French protests are reassuringly familiar. 
Street demonstrations (or, as the French say: Amanif”) are a traditional part of the political vocabulary in France, and these seem to be evolving along customary lines. 
On this occasion, the socialist government of Lionel Jospin belatedly tried to summon a bit more firmness than usual, but otherwise it’s a familiar story: alarming to foreigners, but not very surprising or disturbing to the French. 
Recent events in Germany, by contrast, are less traditional and more worrying. 
First, there is the spate of neo-Nazi attacks on foreigners, which hit the headlines again recently when three young skinheads were convicted and sentenced for killing a black Mozambican man. 
In one sense, this is not a new phenomenon. 
Over the past decade 90 people died in anti-immigrant attacks in Germany; and these attacks appear to be directly related, first to the collapse of the East German economy after re-unification, and second to a huge wave of refugees, especially from the Balkans. 
Yet the government is obviously worried by the upsurge of xenophobia and neo-Nazi violence. 
Chancellor Gerhard Schröder has been actively campaigning for tougher measures by police and the courts, and has called on the German people to have the courage to stand up against anti-foreigner racism. 
The second worrying development in Germany - intimately linked to the first - is the latest twist in the debate on the planned enlargement of the European Union to bring in ten or more countries from Central and Eastern Europe. 
It has long been clear that there is a substantial difference of opinion on this issue between the German people and their leaders: the political élite sees enlargement as a moral and strategic imperative; voters fear a flood of immigrants and job-seekers from the East. 
The spat between Austria, Germany and the Czech Republic over the opening of a Soviet-designed nuclear plant near the Austrian border complicates Germany’s response even more. 
With the passage of time, enlargement has become more unpopular, not less: at last count, only 20% of Germans are keen on the idea, and 68% are unenthusiastic. 
Unfortunately, there is an analogous picture elsewhere in the EU. 
In France only 21% are keen, and 71% are unenthusiastic; the EU average is only 27% pro, 60% anti. 
Support for enlargement, however, is lowest in Germany, especially in East Germany, where voting has been decisive in determining the outcomes of all recent German elections. 
What really stirred things up are recent suggestions by Günther Verheugen, the German member of the European Commission who (as it happens) holds the portfolio for eastward expansion, that eastward enlargement should be put to the German people in a referendum. 
As things stand, this is impossible, because Germany’s constitution does not provide for holding referenda; so the first step would have to be a revision of the Constitution. 
Still, some German politicians, especially in the ruling SPD, are in principle in favour of giving the people their say in referenda. 
Mr Verheugen argued that a referendum would force Germany’s political élite to take more account of the concerns of the people, which they failed to do when taking Germany into the single European currency. 
Indeed, German public opinion remains deeply ambivalent about the euro, and increasingly disillusioned its continual decline against the dollar (and the pound). 
Chancellor Schröder shrugged off the euro’s recent weakness by saying it was good for exports - which immediately triggered a further decline, and prompted the newspaper Bild to headline “The Curse of the Euro”. 
Chancellor Schröder’s response to Verheugen’s suggestion was merely to reiterate that his government remains firmly committed to early enlargement of the EU. 
But it is only too easy to imagine what would be the consequence of holding a referendum: enlargement would almost certainly be rejected in practice and in principle by a large majority. 
In Britain, by contrast, we are now seeing a steep intensification of political controversy, not about enlargement (even though it is unpopular), but about the question of membership of the single currency. 
The ever-active anti-Euro lobby has now spawned a new grouping called “NO”, led by Lord David Owen, the former foreign secretary, to oppose not just membership of the euro, but even the holding of a referendum on the issue. 
They claim that the government intends to “bounce” Britain into the euro in the next year or so, against the wishes of the people. 
The irony is that it was the Euro-sceptics who originally secured the commitment to a referendum on the euro. 
It is that commitment by which the government is now bound. 
“Bouncing” Britain in is simply impossible. 
British public opinion is now so hostile, to the EU in general and to the euro in particular, that a referendum could not be won without a massive government campaign of persuasion. 
Denmark’s government has done just this and seems to be bringing the Danish public around to the idea of joining the euro. 
Prime Minister Tony Blair is apparently convinced of the strategic desirability of joining the euro, but because a Yes vote in a referendum now looks so implausible he is unlikely to try. 
This means that Britain will stay on the outside, not just for a long time, but for good. 
So much for the virtues of referenda. 

Europe and President Bush 
ROME: What does the future hold for transatlantic relations? 
That question arises with every new American administration. 
Because worries about a “widening Atlantic” gap have existed since the early 1970s, it is tempting to proceed as if transatlantic relations will remain on roughly the same wavelength as before. 
The truth is, however, that the US and the EU are rapidly evolving along their own paths: both sides of the Atlantic thus face the challenge of managing an ever more complex relationship. 
Two other temptations must also be resisted. 
On the European side is the temptation to speed the emergence of the Union as an international actor by constantly claiming autonomy or independence from the US. 
Lingering anti-American undertones, of course, will invariably surface for, as in any long unbalanced relationship, the junior partner will tend to make declaratory statements that generate misperceptions. 
Europeans should not succumb to this temptation, for the move from dependency to equal partnership is not measured by rhetoric. 
Instead, Europeans must assume a fairer share of the transatlantic burden, putting in place a truly common European foreign policy, and think and act as a regional power with a global outreach. 
If the Euro succeeds as a global currency, which I believe it will, and if Europe’s rapid reaction force becomes a reality soon, as I also think it will, the EU will have secured the preconditions for a more equal partnership – literally by putting its money (and soldiers) where its mouth is. 
On the American side, the temptation is to overplay its “sole superpower” role by acting unilaterally. 
But this is loneliness disguised as leadership and is not in America’s interest. 
National interests can no longer be effectively pursued unilaterally; US global interests are served best by multilateral action and bodies. 
Even if, in military terms, America remains the sole superpower, military might is of limited use in the daily conduct of foreign policy. 
America would benefit not less than Europe from an effective system of global governance in the achievement of its goals – be it freer trade, a viable non-proliferation regime, containment and prevention of regional conflicts, or better regulated financial markets. 
To this end, the US has a vital stake in the EU’s coming of age as an international actor. 
It should therefore do away with the traditional ambivalence of demanding a more mature and active Europe on one hand, all the time feeling uncomfortable with it on the other. 
True, America officially welcomed the launching of a common European security and defense policy. 
But recurring signs of US nervousness about the nature of this process exist. 
Americans often ask whether it is all about better European capabilities – which would be fine for NATO – or about European integration (i.e. instrumental to a political project). 
My response is that it is about both, and that Washington should support both. 
A sober assessment of this process leads me to assert that a more capable and united Europe will usher in a more effective Atlantic Alliance and not, as some believe, in American disengagement from European commitments. 
What the EU aims at is not a duplication of NATO structures or an alternative to the Atlantic Alliance. 
The EU is preparing to deal – jointly with US forces or with purely European forces when NATO as a whole decides not to engage – with crises in and around Europe. 
More than defense – which will remain NATO-centered – Europe is building up its security role as a regional stabilizer: a role that EU enlargement to include candidate countries in Central and Eastern Europe will strengthen. 
For, contrary to what is often said in America’s Congress, Europe already bears the lion’s share of the peacekeeping burden (let alone reconstruction aid) in the Balkans. 
It goes without saying that there should be “no taxation without representation.” 
If Europe’s foreign and defense policies succeed, NATO should become more European. 
Washington, however, should not worry about this: if Europeans see the Alliance as a more European organization they are more likely to commit themselves (in budgetary terms, too) to its success. 
A similar logic of partnership applies to enlargement. 
The concept of Europe is not immutable, and rightly so. 
On the basis of a broad notion of security and stability, EU enlargement is every bit as important as deepening the EU. 
Here a common transatlantic approach to both EU and NATO enlargement would enhance stabilization and integration in post-Cold War Europe – to everyone’s benefit. 
A new and functional division of labor between Europeans and Americans is thus conceivable, provided it retains the framework of common political commitments and shared responsibilities. 
What should not be pursued is a rigid, vertical and artificial division of labor, whereby the US plays the lone global leader (with Europe simply following) while the EU concentrates exclusively on enlarging its “house” (with the US disengaging from Continental security). 
This would be unhealthy and make the transatlantic compound unsustainable. 
The antidote is a genuine sharing of choices and decisions. 
If divisive decisions must be taken, healthy partnership requires that they be discussed openly and honestly. 
A case in point is the issue of National Missile Defense. 
No matter what policy the Bush administration adopts, European reservations and doubts should be taken into account. 
If Europeans want to have some influence here, they must play a unitary role by, say, encouraging America to update the ABM Treaty in agreement with Moscow. 
That would help strategic stability, prevent antagonizing Russia (which remains a fundamental factor in European security) and avoid deteriorating the security climate in Asia. 
The same is true of dealing with so-called “rogue States”: here again, a better combination of US and European strategies could produce a more effective approach, based on a blend of engagement and resolve. 
A new division of labor, and a new sharing of responsibilities, depends as much on economics as on security. 
A stable Euro makes stronger cooperation possible and desirable: not only to prevent global financial instability but to avoid the risk of conflicting currency blocs arising. 
Provided that the Bush Administration pragmatically pushes for more trade liberalization, we will be able to deepen transatlantic market integration, which will act as a boost for our economies. 
Scope will also then exist for revitalizing the WTO, for which a strong European-American commitment is a necessary precondition, though not the entire solution. 
Here a serious reassessment of our negotiating tactics and old habits is needed. 
The WTO, but also the IMF and World Bank, must understand the evolving needs of those societies most vulnerable to the impact of globalization. 
We need to reach out to the rest of the world in a more open and persuasive way. 
The G-8 process, which Italy chairs this year, will test such resolve - on which rests the legitimacy of the entire process. 
A renewed Euro-American partnership based on our own respective styles and instruments in foreign policy will benefit both sides. 
The EU is rightly searching for its identity as a collective actor. 
As Europe changes, so too does America – in terms of its demographic and social composition, economic and political structures, geopolitical orientation and national psychology. 
Granted, transatlantic diversity might cause occasional squabbles. 
However, mutual interaction and equal partnership remain the only response – especially if they are reflected into long overdue reforms of multilateral institutions and increased global governance. 
Operating within multilateral frameworks, however tiresome, has more often than not served US national interests as well as those of Europe. 
This will not change. 
A stronger EU is America’s natural partner, occasional competitor, but certainly not a rival. 
It is the duty of governments on both sides of the Atlantic to persuade their publics of this. 

Europe and the Euro 
PARIS – For anyone living in the 16 eurozone member states, the euro’s enduring success is both a technical and an emotional issue; both hearts and minds are involved. 
I consider it axiomatic that the euro is vital to Europe and, indeed, to the world economy. 
First of all, it should be recalled that the European idea began as a project for ensuring peace and democracy among Europe’s peoples. 
When the new currency was introduced in 1999 – and even more so when European citizens had their first opportunity to use it in January 2002 – it was experienced as the most tangible, decisive proof that European integration was a reality. 
As the slogan goes: euro in your wallet, Europe in your pocket. 
Twenty years after the European Parliament was elected by universal suffrage in 1979, the introduction of the euro marked a logical extension of the European dream. 
It should also be recalled, however, that when Slovenia entered the eurozone in 2007, many people suggested that the country was somehow joining “Old Europe.” 
But Cyprus, Malta, and Slovakia have since followed suit in making the euro their currency. 
From Dublin on the shore of the Irish Sea to Bratislava in the foothills of the Carpathians, the same coins and banknotes are legal tender, and they are constantly pushing back the European Union’s boundaries. 
Tomorrow will bring additional members, such as Estonia, which is slated to join the eurozone on January 1, 2011. 
Europe’s “Founding Fathers” were right that “Europe will not be made all at once,” and neither will the euro. 
Our common currency should rather be viewed as an inspiring symbol – the symbol of a Europe that is vibrant, attractive, and, above all, cohesive. 
Just how cohesive Europe can be is something that we know from the experience of the past few months. 
The history of the euro, not surprisingly, has turned out to represent a further stage in the ongoing saga of a European economy that has been in a state of perpetual construction since the Treaty of Rome. 
The financial support provided to Greece; the new European Financial Stability Facility, which we created to extend guarantees to eurozone member states in need; and our efforts to achieve more effective financial regulation are among the latest illustrations of European cohesion in practice. 
Admittedly, the various crises affecting the eurozone have highlighted – sometimes starkly so – the need to reform our institutions and the way they operate. 
It has been argued that Europe’s institutions move forward only in times of crisis. 
Perhaps the same is true of the single currency, which will derive strength and validation from the challenges that it overcomes. 
In the last few months, as it just barely emerged from the deepest economic and financial crisis in close to a century, the eurozone experienced the worst jolts in its history, although in terms of public finance, the eurozone as a whole has fared better than the United States or Japan. 
Once the extent of Greece’s financial crisis and the difficulties encountered by other member states became known, the eurozone economies found themselves on the brink of disaster. 
But the EU reacted swiftly and forcefully, with a support program for Greece and a financial guarantee plan for the entire eurozone. 
In this state of emergency, a genuine European economic government, most compellingly advocated by German Chancellor Angela Merkel and French President Nicolas Sarkozy, began to take shape. 
Following the European Council meeting in June, France and Germany jointly outlined a number of possible reforms. 
Three key points emerged, concerning the need to: 
· strengthen the Stability and Growth Pact, notably through enhanced European coordination during a “European Semester”; 
· maintain our efforts to expand the scope of economic surveillance to include government deficits and public as well as private-sector debt, if necessary by imposing “political penalties”; 
· establish a credible crisis-resolution framework without encroaching on the budgetary prerogatives of member states. 
Other possible approaches are under consideration as well. 
But what they all share is the recognition that the time has clearly come to stabilize and institutionalize a European economic government. 
That process is already well under way. 
The European Commission has made proposals, and the working group chaired by European President Herman Van Rompuy, in which I represent France, will be submitting its own in the fall. 
We all expect that the euro, which proved to be such an asset during the crisis, will be just as effective in getting our economies back on the path to vigorous, sustainable growth. 
Indeed, according to Eurostat (the EU’s statistical office), by the second quarter of 2010, the eurozone was growing faster than the US, while the euro remains the second most widely used trading currency. 
The euro, like the EU itself, is an exciting adventure that must continue – and we intend to make sure that it does. 

Europe and the Global Food Crisis 
PARIS – The world has been shaken by unprecedented spikes in food prices, by hunger riots, and by social tensions that demonstrate that food supplies have returned as a source of insecurity – to which global warming and declining natural resources are adding unprecedented urgency. 
By 2050, it is estimated that there will be nine billion people on earth, so the need for food may double – primarily among urban populations in the world’s poorest countries. 
But there is more to finding a solution than simply identifying those nations that are capable of feeding the rest of the world. 
It is increasingly urgent that every nation gain the means of feeding itself. 
This means that agriculture should become an international priority, with the poorest countries helped to safeguard the security and independence of their food supplies. 
Countries and organizations are already mobilizing. 
The United Nations’ Food and Agriculture Organization argues that rising food prices could lead to increasing global conflicts. 
The Davos World Economic Forum ranks food insecurity as a major risk to humanity. 
The World Bank has forcefully emphasized the importance of agriculture to jump-starting economic expansion and breaking the cycle of poverty. 
UN Secretary Ban Ki-moon has created a working group to define a common plan of action, and France’s President Nicolas Sarkozy has proposed a global partnership for food. 
Sarkozy’s proposed partnership has three pillars. 
First, an international group should draft a worldwide strategy for food security. 
Second, an international scientific platform should be charged with evaluating the world’s agricultural situation, sending out warnings of upcoming crises, and possibly facilitating governments’ adoption of political and other strategic tools to deal with food crises. 
Finally, the international finance community, despite its current problems, must be mobilized. 
The reliability and size of the European Union’s farm output means that it can and should play the role of regulator in global markets. 
If Europe cut back on its agricultural production, the increase in its own food imports would contribute significantly to a worldwide increase in food prices. 
This makes it imperative that EU food production levels be held steady – for the sake of Europeans and of people in the world’s poorest countries. 
But Europe cannot build up its own agriculture to the detriment of the less fortunate. 
So the EU must harmonize its policies with poorer countries. 
At present, export subsidies and support payments represent less than 1% of the European agricultural budget, and the EU has undertaken to eliminate them once it receives reciprocal undertakings from major food-exporting countries. 
Since 2001, with the “Everything but Arms” initiative, all products from poor countries – with the exception of weapons and munitions – can enter the EU single market on a duty-free basis. 
This has led to the EU becoming the primary market for the poorest countries’ products. 
The EU is also developing ways to respond to new global challenges through changes to its Common Agricultural Policy. 
This was reflected in the decision to suspend the “set aside” rule that requires a proportion of agricultural land to lie fallow. 
Now the EU is preparing to increase dairy quotas progressively, and evaluating the impact on world markets of its decisions regarding bio-fuels. 
But Europe’s focus must be on encouraging the development of local agriculture. 
Doing so is the only way to achieve greater global food security and reduce poverty. 
It will also make it possible to ensure that today’s high prices for agricultural products are transformed into opportunity for poor farmers. 
This is vital because, according to the World Bank, growth in farming eliminates poverty twice as much as growth in any other economic sector. 
Indeed, agriculture remains the primary productive sector in the world’s poorest countries, employing 65% of the working population and, on average, contributing more than 25% to GDP. 
But over the past 20 years, support for agricultural development has been declining. 
Only 4% of public development assistance is now earmarked for agriculture. 
The European Commission and EU member states are therefore planning to increase their assistance, both through the European Development Fund and by developing new sources of financial support. 
Further liberalization of farm trade will not ensure food security. 
Faced with the erratic nature of agricultural markets, regulation is needed to soften the impact on poorer countries of volatile food prices. 
This does not mean that protectionism is the way forward, only that taking account of specific issues that affect international farm trade – weather, price volatility, or health risks – may be necessary from time to time. 
But, in a world where productivity differentials can be as great as one to 1,000, it would be unwise to rely on markets alone to enable the poorest countries to expand their economies. 
Nor is it likely that much economic expansion will result from competition between multinational food distributors and producers in countries where famine still stalks the land. 
Instead, bringing together outside expertise and local knowledge of the geography and environmental and economic constraints in order to spread risks and share the management of resources and projects is far more likely to help poor countries achieve food independence. 
It was such an approach that, in less than 20 years, helped postwar Europe achieve food sovereignty. 
Countries that have protected their agricultural development from the threats posed by international markets – such as India or Vietnam – have achieved substantial reductions in agricultural poverty. 
The time has also come to prioritize agriculture in order to ensure growth with a more human face. 
At the heart of the EU, France wants to play its part in a collective effort that is fast becoming a major issue for us all. 

Europe and the New World Order 
BERLIN – November 15, 2008, is a date to remember, because on that day history was made. 
For the first time, the G-20, the world’s 20 leading economies, came together in Washington, D.C., to find an answer to the global financial and economic crisis. 
While this first meeting resulted in nothing more than declarations of intent, it still marks a historic turning point. 
Faced with the gravest financial and economic crisis worldwide since the 1930’s, the Western industrial nations (including Russia) that previously dominated the world economy are no longer capable of coming up with an effective response. 
Moreover, hopes for mitigating or, indeed, overcoming the global economic crisis rest exclusively with the emerging economic powers, first and foremost China. 
As a result, the G-8, which excludes the most important emerging-market countries, has lost its significance for good. 
Globalization has resulted in a lasting change in the distribution of power and opportunities, laying the groundwork for a new world order for the twenty-first century. 
Once the current global crisis is over, nothing will ever be the same again. 
The West – the United States and Europe – are in relative decline, while the emerging Asian and Latin American powers will be among the winners. 
The US has responded to the decline of its global strength in an impressive manner, with the election of its first African-American president, Barack Obama. 
Amidst one of the gravest crises in its history, America has proven to itself and the world its ability to reinvent itself. 
And it is clear even now that this decision will have three long-term consequences. 
First, the election of a black president will put to rest the tragic legacy of slavery and the American Civil War. 
From now on, the issues of skin color, eye shape, or gender will no longer play a deciding role for a candidate for high, or even the highest, office. 
The US political system now reflects the country’s demographic changes, as non-white sections of the population grow the fastest. 
Second, Obama’s election will lead to a reorientation of US foreign policy in the medium term. 
In particular, the transatlantic/European focus of American foreign policy, which was previously a matter of course, will increasingly become a thing of the past. 
Third, the internal realignment of America’s political-cultural perspective will be reinforced by the ongoing global shift of wealth and power from the West to the East. 
The Northeastern Pacific powers – China, Japan, and South Korea – are already America’s most significant creditors by far, and their importance will increase further as a result of the financial crisis. 
For the foreseeable future, the greatest opportunities for growth lie in this region, and for both economic and geopolitical reasons America will increasingly turn toward the Pacific region, thus downgrading its transatlantic orientation. 
All of this is bad news for Europe, because once this global crisis is over, Europeans will simply have become less important. 
And, unfortunately, Europe is not only doing nothing to hold off or reverse its decline – it is accelerating the process through its own behavior. 
With the election of Obama, America has turned toward the future within a globalized, multipolar world; 
Europe, on the other hand, is rediscovering national action in this time of crisis, and thus banking on the past! 
The European constitution has failed, the Lisbon reform treaty is in limbo after the Irish rejected it, and stronger European economic governance is blocked by German-French disunity. 
The reaction of EU member states to this ongoing self-inflicted impasse is unambiguous: rather than trying to reenergize the process of further political and economic integration, they are primarily acting on their own to try to fill the vacuum that has emerged. 
Certainly, coordination between the member states exists, and is even successful at times, but without strong European institutions, such singular successes will not last. 
There is a very real danger that Europe will simply miss out on an historic strategic turn towards a multipolar world – and at a high price. 
After the summit in Washington, it should have sunk in among Europeans everywhere – even the Euroskeptics of the British Isles – that this strategic realignment is taking place right now! 
If Europeans cannot get their heads around the fact that the nineteenth century is over, the global caravan will continue to move forward into the twenty-first century without them. 

Europe and the Rising Powers 
KYIV – The world’s center of gravity is heading eastward so fast that we Europeans can almost feel the ground moving beneath our feet. 
Because almost all major actors on the international stage are redefining their roles in response to this tectonic shift, Europe must do the same. 
So it is right that the EU Council of Ministers is meeting to grapple with this challenge. 
For decades, however, Europeans have been more concerned with unification and constitutional arrangements than with traditional diplomacy. 
Europe’s historic rivalries have, of course, been civilized into a political model that European diplomats often see as applicable across the international arena. 
To be sure, consensus, compromise, and a pooling of sovereignty are the only ways to resolve many of the great issues – climate change, nuclear proliferation – that bedevil our world. 
But on the great issues of war, peace, and the balance of power, Europe seems trapped between an insufficiently cohesive foreign policy and uncertainty among individual countries about how to define and secure their national interests. 
By contrast, the world’s rising powers – Brazil, China, India, and Russia – insist not only on the primacy of their national interests, but, as the failed climate negotiations in Copenhagen last December demonstrated, on sovereign freedom of action as well. 
To them, geopolitics is not anathema; it is the basis of all their external actions. 
Defending the national interest still rallies their publics; the exercise of power remains at the heart of their diplomatic calculations. 
In the face of this new/old reality, Europe must not merely make itself heard on the great global issues of trade and fiscal imbalances, important as they are. 
Instead, Europe must recognize which of its strategic assets matter to the world’s rising powers and leverage those assets to gain influence. 
Unfortunately, one of Europe’s key strategic assets – the European countries, in particular Ukraine, that straddle the great energy corridors that will deliver more and more of the fossil-fuel resources of the Middle East and Central Asia to the world – is probably its most neglected. 
Indeed, ever since the Russia-Georgia war of 2008, Europe has mostly averted its eyes from developments in the region. 
This neglect is both unwarranted and dangerous. 
The countries that lie between the European Union and Russia are not only a source of geopolitical competition between Europe and Russia, but now intersect with the national interests of the world’s rising powers, particularly China. 
The Russia-Georgia war showed just how much this region matters to the wider world. 
In its wake, China began a systematic effort to buttress the former Soviet countries’ independence by offering them huge aid packages. 
Countries from Belarus to Kazakhstan have benefited from Chinese financial support. 
China cares about this region not only because it is concerned with maintaining the post-Cold War settlement across Eurasia, but also because it recognizes that it will provide the transit routes for much of the energy wealth of Iraq, Iran, and Central Asia. 
Indeed, China has been pouring billions of dollars into developing the oil and gas fields of Iraq and Iran. 
Given that security issues will likely prevent most of this energy from being transported eastward to meet China’s domestic needs, Chinese energy concerns will need to become players in international energy markets – which means shipping Chinese-developed oil and gas in Iraq and Iran westward for sale. 
But two countries essential to this trade – Turkey and Ukraine – are increasingly estranged from the EU. 
For Turkey, tensions reflect the lack of progress on the country’s application for EU membership. 
Ukraine is another matter. 
Until Viktor Yanukovych bludgeoned his way into Ukraine’s presidency earlier this year, Ukraine was becoming emphatically European in its orientation. 
Now, Yanukovych seems determined – for the most shortsighted of motives – to weaken Ukraine fatally as an energy-transit country. 
Indeed, his latest gambit is an effort to sell Ukraine’s transit pipelines to Russia’s Gazprom in exchange for cut-rate gas. 
That idea is foolish economically and strategically. 
Ukraine’s industries need to modernize, not become more addicted to cheap gas, and gas transit will become almost as monopolistic as gas supply – a dismal prospect, given past cut-offs of gas supplies between Russia and Europe. 
Moreover, Ukraine’s politics is fracturing. 
A witch hunt is under way against opposition politicians. 
Crusading journalists disappear without a trace. 
The country’s biggest media baron, who happens to be the head of state security, expands his media empire by abusing the courts. 
Yanukovych’s systematic dismantling of Ukraine’s democratic institutions is damaging the country’s potential as a European strategic asset. 
Of course, it is up to Ukrainians to defend their democracy, but Europe is at fault as well, because the EU lacks a grand strategy toward the East. 
The moral and strategic vision of the 1990’s, which culminated in the EU’s “big bang” of eastward expansion, has exhausted itself. 
Nowadays, Europe is full of whispers that “neo-Finlandization” might be a reasonable compromise for countries like Ukraine and Georgia. 
Rebuilding the EU’s relations with Ukraine and the other countries to the Union’s east would, however, also help shape relations with Russia, which today is facing a series of strategic challenges: relations with the USSR’s former republics; the proximity of a dynamic China; the exposed emptiness of Siberia; the future of Central Asia’s energy resources, around which the nineteenth-century “great game” between Russia, China, India, and America is restarting. 
The EU can play a constructive role through permanent dialogue that is sensitive to Russia's concerns without acquiescing in all of Russia's answers to them. 
Today, the art of diplomacy is to translate power into consensus. 
This requires better relations with all of the world’s rising powers. 
But it also implies, above all, a unifying vision, not only concerning the challenges that affect all countries – weapons proliferation, terrorism, epidemics, and climate change, for example – but also concerning one’s strategic assets. 
If the EU is to craft a successful policy toward the world’s rising powers, it must speak in a strategic language that they understand. 

Europe as a Task 
For me as Prime Minister of the Czech Republic, Europe has a meaning that goes far beyond geography. 
It is a synonym for a new beginning, new hope, the rule of the "better me" that exists in all of us. 
It's an expression of prosperity, progress, and justice. 
Perhaps these words sound exaggerated to cynical ears. But they clearly express the changes that Europe has witnessed over the past half-century, changes for the good that all Czechs now want to secure for themselves, having been denied the fruits of European peace and prosperity for so long. 
Throughout its history, Europe saw countless bloody conflicts; peoples and states clashed, with the Czech lands often the bloody crossroads of these battles. 
The disasters of two world wars, and the half-century of Cold War, pushed Europe to embrace cooperation and integration in order to avoid another suicidal battle. 
Those far-sighted Europeans who set Europe on its road to peace through unification deserve our heartfelt appreciation. 
Simply put, the idea of European integration transformed our continent. 
The open economic space and the principle of solidarity helped ensure that economically less developed countries that joined the European Economic Community and, later, the European Union, progressed at an astonishing pace, enhancing the living standards of their peoples. 
Nowadays, indeed, instead of deepening disparities in standards of living in Europe, which was the historic norm, differences are actually blurring as the quality of life everywhere in Europe rises. 
Yet this prosperous and peaceful Europe is not idyllic; sometimes Europe is not at all an easy place for its citizens to live, as the tumultuous Balkan Wars and painful postcommunist transitions of the past decade demonstrated. 
But even in hard times, every European knows deep down that European integration has delivered peace with clear prospects for broadening Europe's zone of peace and stability. 
On the other hand, to secure that promise of peace and stability, Europeans must recognize that the Union is not and cannot be perceived as a work set in stone. 
The half-century of peace that integration has delivered involved constant changes. 
Today, we must also continue forming and correcting the EU to maximize its ability to reflect the needs of its inhabitants in an ever-changing world. 
These changes, however, must always be undertaken in the light of core European virtues. 
Foremost among these, perhaps, is the Union's open character. 
The European Union is neither closed nor static; it is a living organism. 
The European Union, as I grasp it, is primarily a process, leading from worse to better; a process with only one end - the continuous development of European prosperity and peace. 
Indeed, it is vital to understand that Europe's integration process is not mechanical but organic. 
It is not a machine that goes on of its own accord, but is instead something that must be lived and worked for by Europeans. 
For no one should be mistaken: there are alternatives to European integration - all of them bad, unwanted, and dangerous. 
Unless all Europeans remain devoted to integration and the creation of an open Europe, the Continent's dark past may once again become its future. 
There are a number of qualities that must be understood if integration is to continue to build an ever more open Europe. 
Voluntary self-restraint, a voluntary sharing of our own rights and privileges with a wider collective, is paramount here. 
While states once enforced their rights at the expense of others, they now transfer their rights in favor of others. 
The heart of this miracle is that it benefits all - Europe's citizens, its states, the whole continent, and the world. 
For states to voluntarily limit themselves is unique in human history. 
Europe's states have been able to achieve this discipline primarily because they are democracies. 
Europe's peoples have sanctioned limiting their own governments powers so as to achieve peace across Europe. 
There would be no Union and no integration, were it not built on the principles of democracy. 
This is why, having regained their democratic regimes, Central and Eastern European countries unequivocally voted to join the continent's integration process. 
This is why these countries associate the future of their democracies with ever-closer and more integrated cooperation with other European states. 
Of course, democracy does not automatically mean integration. 
But without democracy, no genuine, fair, and universally beneficial integration would be possible. 
The people of the Czech Republic, like most Europeans, wish to jointly build an irreversible system of mutual relationships among states, regions, municipalities, and their inhabitants. 
Their desire is to eliminate violence and, at the same time, generate stable conditions for economic and social progress for everyone in Europe. 
The end of history may not be at hand in Europe, but the end of Europe's dark history is clearly in sight - so long as Europeans continue on the path of integration. 

Europe’s Battle on Four Fronts 
LONDON – With Germany’s election over, Europe has reached the end of a season of continuous political upsets. 
It is now time for actions that adequately respond to the upheavals created by all these votes. 
Frans Timmermans, the European Commission’s first vice president, last year described the state of Europe as “multi-crisis”: Brexit, refugees, “illiberal democracy” in Hungary and Poland, the still-unresolved euro crisis, and the geopolitical risks attributable to Donald Trump and Vladimir Putin. 
All are challenging the “European project” that began 60 years ago with the Treaty of Rome. 
But crises invariably create opportunities. 
And last year’s multi-crisis has produced a convergence of opportunities. 
European leaders no longer have an excuse for inaction while they wait for voters’ next rebuff. 
Economic reforms in France, German unease about refugees and the euro, new attitudes toward European integration in Brussels, and signs that Brexit will be delayed indefinitely or even completely averted: all have created new possibilities for taming the dangerous forces unleashed by last year’s populist revolts. 
But realizing these opportunities will require four simultaneous political and economic breakthroughs across Europe. 
France must act on over-regulation and excessive public spending. 
Germany must rethink fiscal austerity and monetary dogma. 
Britain needs a turnabout on nationalism and immigration. 
And European Union officials must abandon their obsession with driving all member countries toward an “ever-closer union” that many of their citizens do not want. 
Without simultaneous breakthroughs on all four fronts, it is hard to imagine progress on any of the separate aspects of the multi-crisis. 
For example, any easing of German-inspired austerity will require evidence of economic reform in France; but French reforms will succeed only if Germany agrees to more generous fiscal rules and supports monetary policies that benefit the eurozone’s weaker members. 
Similarly, Brexit could be averted or indefinitely delayed if the EU offered an extension of the negotiating period beyond March 2019 and suggested some modest concessions on immigration and welfare payments. 
But European leaders would consider offering such concessions only if they saw clear evidence that British voters were changing their minds about leaving the EU. 
Now consider the German voters who have turned against Chancellor Angela Merkel and her SPD coalition partners, mainly because they resent what they see as uncontrolled immigration and unjustified transfer payments to Greece. 
These voters will oppose the fiscal and monetary integration required to stabilize the eurozone if they think their money will be spent on subsidizing poor countries on Europe’s periphery that refuse to cooperate on refugees and fail to abide by EU laws. 
The only way to convince German voters that their money will not be misdirected would be to create separate political institutions and a separate budget for the eurozone. 
This is the proposal advanced by French President Emmanuel Macron and supported in principle by Merkel. 
But plans for such a two-track Europe can advance only if Merkel can overcome German nationalists who want to break up the single currency, and only if Macron can silence integrationist zealots in Brussels who want to force all EU countries to join the eurozone. 
At first sight, simultaneous progress on many fronts seems too much to hope for. 
After all, if the necessary breakthroughs in France, Germany, Britain, and Brussels were each a 50-50 coin-toss, the probability of all four coins landing “heads” would be only 6.25%. 
Fortunately, there are at least two reasons for dismissing such apparently logical scepticism. 
First, the political and economic decisions that leaders across Europe now face are anything but independent. 
What happens in Paris, London, and Brussels will depend crucially on the government program that Merkel negotiates with her eventual coalition partners in Berlin. 
And Germany’s coalition agreement will, in turn, depend on Macron’s diplomatic skills in advocating a distinct politico-economic identity for the eurozone. 
Equally important, the EU bureaucracy will have to embrace – enthusiastically – the concept of a two-track Europe. 
This means abandoning the assumption that all EU members are heading for the same destination, and an end to treating non-euro countries as second-class laggards (described condescendingly as “pre-ins”). 
Now, suppose that EU leaders recognized that the only feasible way to maintain European stability and progress would be by adopting the two-track or “concentric circles” model, with a more politically integrated eurozone surrounded by a looser economic confederation of non-euro countries. 
Under these circumstances, Britain would be likely to change its mind about Brexit. 
Failing that, Britain would spend several years in a transition limbo and would then almost certainly re-join Sweden, Denmark, Poland, Hungary, and the Czech Republic in the outer ring of EU countries that object to the pooling of sovereignty required by the euro. 
This outer orbit would also attract Norway and Switzerland through the irresistible pull of economic gravity. 
This points to the second reason to believe that EU leaders could achieve simultaneous political and economic breakthroughs across Europe. 
The necessary decisions in Paris, Berlin, London, and Brussels are not just a random coin toss. 
There are strong incentives for voters and political leaders in all democratic countries to take decisions that support economic prosperity and political stability, once it becomes obvious that all the alternatives are economically damaging or politically dangerous. 
This is the point that French voters arguably reached in April when they elected Macron, and a similar turning point is rapidly approaching in Britain, as the risks and contradictions of Brexit become ever clearer. 
All that remains is for Germany to recognize that its prosperity and security depends on a more integrated eurozone inside a more flexible EU. 

Europe Between Trump and Xi 
PARIS – The most recent World Trade Organization ministerial conference, held in December in Buenos Aires, Argentina, was a fiasco. 
Despite a limited agenda, the participants were unable to produce a joint statement. 
But not everyone was disappointed by that outcome: China maintained a diplomatic silence, while the United States seemed to celebrate the meeting’s failure. 
This is bad news for Europe, which was virtually alone in expressing its discontent. 
It is often pointed out that, in the face of US President Donald Trump’s blinkered protectionism, the European Union has an opportunity to assume a larger international leadership role, while strengthening its own position in global trade. 
The free-trade agreement recently signed with Japan will give the EU a clear advantage over the US in agriculture, and strengthening trade ties with Mexico could have a similar impact, as the US renegotiates the North American Free Trade Agreement. 
Some suggest that, to strengthen its position further, Europe should team up with China, which, despite its reticence at the WTO conference, has lately attempted to position itself as a champion of multilateralism. 
A Sino-European partnership could be a powerful force offsetting America’s negative impact on international trade and cooperation. 
Yet such a partnership is far from certain. 
Yes, Europe and China converge on a positive overall view of globalization and multilateralism. 
But whereas Europe supports a kind of “offensive multilateralism” that seeks to beef up existing institutions’ rules and enforcement mechanisms, China resists changes to existing standards, especially if they strengthen enforcement of rules that might constrain its ability to maximize its own advantages. 
Europe’s desire to force China to adhere to common rules aligns its interests more closely with the US, with which it shares many of the same grievances, from China’s continued subsidization of private enterprises to the persistence of barriers to market access. 
According to one recent study, market access barriers erected by China have taken a high toll on the growth of EU exports. 
But the US and the EU do not have the same vision for how to address these grievances. 
In order to limit abuse of WTO rules by China, Europe’s leaders want to be able to negotiate new, clearer rules, either through the framework of a bilateral investment agreement or through a plurilateral agreement on public procurement. 
Trump does not want to reform the system; he wants to sink it. 
In fact, with Trump seeking to use bilateral deals to secure reductions in America’s trade deficit, the possibility that the US will leave the WTO altogether – a nightmare scenario for the EU, which advocates shared norms over force – cannot be excluded. 
Trump’s predecessor, Barack Obama, had his own solution. 
New multilateral frameworks – the Trans-Pacific Partnership (TPP) with Asia and the Transatlantic Trade and Investment Partnership (TTIP) with the EU – would circumscribe China’s room for maneuver. 
As such frameworks brought about regulatory convergence, the US and the EU would be able to define the standards of the emerging new global economy, forcing China either to accept those standards or be left behind. 
But this project has now been fatally undermined. 
Obama’s effort to finalize both agreements before the end of his presidency, though understandable, bred serious concerns about hastiness. 
Europeans recognized that full regulatory convergence between the US and the EU would, in reality, take at least a decade. 
So, under pressure from their citizens, European leaders began to express concern about what the TTIP was lacking in terms of, say, environmental and sanitary regulations and transparency. 
Given their shared interest in regulatory convergence, particularly to strengthen their position vis-à-vis China, the US, and the EU will eventually have to resume cooperation toward that end. 
But, as long as Trump is in power, advocating bilateral reciprocity over multilateralism, such an effort will probably be impossible. 
Instead, Trump’s America will most likely continue to take advantage of its far-reaching commercial influence to secure strategic or political gains. 
On this front, Europe is at a significant disadvantage. 
The EU is, after all, not a state, and it does not speak on international matters with one voice. 
It is not out of the question that the Chinese, who speak the language of realpolitik fluently, would prefer to meet the ad hoc demands of the Americans over the multilateral conditions of the Europeans. 
In this context, the EU’s top priority should be to unify the positions of its member states, with the goal of overcoming the barriers erected by the US and creating shared systems for constraining China. 
But that is easier said than done. 
As it stands, many EU countries resist the introduction of any trade restrictions, whether owing to an excessive commitment to liberal economic ideals or fear of jeopardizing their own interests in China by, say, establishing an EU mechanism for managing foreign investment. 
The emergence of “illiberal” governments in Central and Eastern Europe complicates matters further for the EU. 
These governments have no interest in any form of multilateralism, as they have embraced a narrow view of their interests. 
They often seem fascinated by the logic of realpolitik espoused by Trump, Chinese President Xi Jinping, and Russian President Vladimir Putin. 
Moreover, these countries’ pursuit of their commercial interests could come at the expense of EU procurement rules. 
And they are not alone within the EU. 
Greece, for example, has accepted large amounts of Chinese investment. 
The EU then refused to mention China explicitly in a resolution on the conflict in the South China Sea. 
To be sure, European countries are not wrong to welcome Chinese investment. 
But China should be reciprocating, offering European investment in China a warmer welcome. 
That is why the EU and China should work to complete the bilateral investment treaty that they have been negotiating for years, with limited progress. 
Such a treaty should rely on reciprocal rules, including the dismantling of barriers to China’s market. 
French President Emmanuel Macron is trying to advance offensive multilateralism. 
But unless the EU as a whole embraces the cause, Europe – caught between China, which has a very conservative but outdated interpretation of multilateralism, and Trump, who wants to get rid of it – risks becoming a casualty. 

Europe’s Brexit Hangover 
NEW YORK – The market reaction to the Brexit shock has been mild compared to two other recent episodes of global financial volatility: the summer of 2015 (following fears of a Chinese hard landing) and the first two months of this year (following renewed worries about China, along with other global tail risks). 
The shock was regional rather than global, with the market impact concentrated in the United Kingdom and Europe; and the volatility lasted only about a week, compared to the previous two severe risk-off episodes, which lasted about two months and led to a sharp correction in US and global equity prices. 
Why such a mild, temporary shock? 
For starters, the UK accounts for just 3% of global GDP. 
By contrast, China (the world’s second-largest economy) accounts for 15% of world output and more than half of global growth. 
Moreover, the European Union’s post-Brexit show of unity, together with the result of the Spanish election, calmed fears that the EU or the eurozone would fall apart in short order. 
And the rapid government changeover in the UK has boosted hopes that the divorce negotiations with the EU, however bumpy, will lead to a settlement that maintains most trade links by combining substantial access to the single market with modest limits on migration. 
Most important, markets quickly priced in the conclusion that the Brexit shock would lead to greater dovishness among the world’s major central banks. 
Indeed, as in the two previous risk-off episodes, central-bank liquidity backstopped markets and economies. 
But the risk of European and global volatility may have been only briefly postponed. 
Leaving aside other global risks (including a slowdown in already-mediocre US growth, more fear of a Chinese hard landing, weakness in oil and commodity prices, and fragilities in key emerging markets), there is plenty of reason to worry about Europe and the eurozone. 
First, if the UK-EU divorce proceedings become protracted and acrimonious, growth and markets will suffer. 
And an ugly divorce may also lead Scotland and Northern Ireland to leave the UK. 
In that scenario, Catalonia may also push for independence from Spain. 
And without the UK, Denmark and Sweden, which aren’t planning to join the eurozone, may fear that they will become second-class members of the EU, thus leading them to consider leaving as well. 
Second, upcoming elections promise to be a political minefield. 
Austria will repeat its presidential election in September, the previous one having ended in a virtual tie, giving another chance to the far-right Freedom Party’s Norbert Hofer. 
The following month, Hungary will hold a referendum, initiated by Prime Minister Viktor Orbán, on overturning EU-mandated quotas on the resettlement of migrants. 
And, most important, Italy will hold a referendum on constitutional changes that, if rejected, could effectively jeopardize the country’s membership in the eurozone. 
Italy currently is the eurozone’s weakest link. 
Prime Minister Matteo Renzi’s government has become politically shakier, economic growth is anemic, the banks are in need of capital, and EU fiscal targets will be hard to achieve without triggering another recession. 
If Renzi fails – as is increasingly possible – the anti-euro Five Star Movement (which recently did well in municipal elections) could come to power as early as next year. 
Should that happen, the Grexit fears of 2015 would pale in comparison. 
Italy, the eurozone’s third-largest member, is too big to fail. 
But, with a public debt ten times larger than Greece’s, it is also too big to be saved. 
No EU program can backstop Italy’s €2 trillion ($2.2 trillion) of public debt (135% of GDP). 
Moreover, elections in France, Germany, and the Netherlands in 2017 create additional uncertainties as weak growth and high unemployment in most of Europe boost support for anti-euro, anti-immigrant, anti-Muslim, and anti-globalization populist parties of the right (in the eurozone core) and of the left (on the eurozone periphery). 
At the same time, Europe’s neighborhood is bad and getting worse. 
A revisionist Russia has become more assertive not just in Ukraine, but also in the Baltics and the Balkans. 
And the consequences of the continuing turmoil in the Middle East are at least twofold: renewed episodes of terrorism in France, Belgium, and Germany, which may over time dent business and consumer confidence; and a migration crisis that requires closer cooperation with Turkey, which itself has become unstable since the botched military coup. 
Until the coming round of elections is over, the EU is unlikely to take any steps to complete its unfinished monetary union by introducing more risk-sharing and accelerating structural reforms to encourage faster economic convergence. 
Given the current slow pace of reforms (and population aging), potential growth remains low, while actual growth is on a very moderate cyclical recovery that is now threatened by post-Brexit risks and uncertainties. 
At the same time, high deficits and debts, together with eurozone rules, constrain the use of fiscal policy to boost growth, while the European Central Bank may be reaching the limits of what even unconventional monetary policy can do to sustain the recovery. 
The eurozone and the EU are unlikely to disintegrate suddenly. 
Many of the risks they face are on a slow fuse. 
And disintegration can of course be avoided by a political vision that balances the need for greater integration with the desire for some degree of national autonomy and sovereignty over a range of issues. 
But finding ways to integrate that are democratic and politically acceptable is imperative. 
Muddling through has resulted in an unstable equilibrium that will make disintegration of the EU and the eurozone inevitable. 
Given the many risks Europe faces, a new vision is needed now. 

Europe by Degrees 
ROME -- A year ago, few people would have bet that the European Union, still reeling from the trauma of the Constitutional Treaty’s rejection in 2005, would be poised to ratify the new Reform Treaty, adopted in Lisbon last December. 
For some, the fact that the United Kingdom might ratify it even earlier than traditionally “pro-European” countries like Italy merely underscores the Treaty’s lack of new and bold initiatives to accelerate European unification. 
But they are wrong. 
To be sure, impatient dissatisfaction has been a driving force behind European integration since its initial years. 
But, as Robert Schuman wrote in his Declaration in 1950, Europe could not be built all at once. 
Likewise, Altiero Spinelli, another of the EU’s founding fathers, wrote late in life that without visionary Europeans there would be no Europe, but without pragmatic statesmen, the visionaries would have gotten nowhere. 
The Reform Treaty’s shortcomings are obvious. 
Abandoning the name “Constitution” was probably necessary to bring all member states on board. 
But not equally necessary is the enduring uncertainty about the common political platform upon which Europe’s voice in foreign policy will have to rely. 
Moreover, the Area of Freedom, Security, and Justice still requires unanimity for essential decisions in the fight against crime and terrorism and therefore, implying excruciating slowness. 
Nor does the Treaty do enough to strengthen coordination of Europe’s economic and budgetary policies. 
But it is equally obvious that, as the European Parliament’s Resolution of February 20 puts it, “the Treaty of Lisbon is a substantial improvement on the existing Treaties, which will bring more democratic accountability to the Union and enhance its decision making.” 
The adoption of EU legislation will be subject to a level of parliamentary scrutiny (both at the European and national levels) that exists in no other supranational or international structure. 
Moreover, agencies such as Europol and Eurojust will be similarly subject to greater parliamentary scrutiny, and the budgetary procedure will be simpler and more democratic. 
The EU Charter of Fundamental Rights will become legally binding and the judicial protection of citizens will be enhanced by facilitating their access to the European Court of Justice and by extending the Court’s jurisdiction. 
The Union’s capacity as a global actor will be enhanced by merging the High Representative with the Commissioner for External Relations and establishing a single diplomatic service. 
The list could continue, but we already have reason enough to conclude that getting the best out of the new Treaty will be the best that the EU and its member states can do. 
The first ingredients of a common collective identity have been injected into the EU’s enlarged membership, which is still marked by diverse positions, sensitivities, and expectations. 
Asking everyone to do more than what everyone is unanimously ratifying would undermine Europe’s fragile harmony. 
Nothing, however, prevents smaller groups of member states from aiming at bolder goals through separate agreements, if their mutual trust and similarities encourage them to do it. 
After all, this was how the Schengen Treaty – which later became part of the acquis communitaire (the body of EU law) – came into being. 
More recently, the Prun agreement has elevated police cooperation to police integration among the participating states. 
There is reason to hope that some of the EU’s member states will embark on this venture in fighting crime and terrorism, defense matters, or in financial and budgetary harmonization. 
In whatever area, a group of more deeply integrated member states would give the Union a noyau dur (a hard core) , which might be very helpful in strengthening the EU as a whole. 
But let them do it separately, and in the meantime let the Union be energized by the improvements that it has already adopted. 
Fifty years later, this is the lesson for us of the Schuman’s declaration. 

Europe’s Left Turns Right on Immigration 
BERLIN – Europe’s established left is facing the threat of extinction. 
In less than two years, the continent’s social-democratic parties have suffered historic losses in France, the Netherlands, Germany, and Italy. 
On a continent long defined by democratic competition between center-right and center-left parties, the collapse of the left could have far-reaching consequences, beyond particular party interests. 
Many factors underlie the left’s decline, including the dissolution of the traditional working class. 
But one of the most important reasons is as grim as it is simple: European voters are increasingly opposed to immigration, and do not trust the left to limit it. 
Faced with a sustained influx of refugees and migrants, primarily from the Middle East and Africa, European voters have transformed a series of recent elections into popular referenda on immigration. 
Right-wing populist movements have skillfully played on blue-collar voters’ fears by convincing them that traditional labor parties will allow immigrants to flow in virtually unchecked. 
In April, Hungarian Prime Minister Viktor Orbán won a landslide election victory after running a campaign that focused on the “threat” to “Christian values” supposedly posed by Muslim immigrants. 
Italy’s new anti-establishment coalition government was propelled to power by the popularity of the staunchly anti-immigrant League party, led by Matteo Salvini, who is now interior minister and deputy prime minister. 
In Slovenia, former Prime Minister Janez Janša’s right-wing opposition party secured just under 25% of the vote in this month’s parliamentary election, meaning that Janša will form the country’s next government. 
Echoing US President Donald Trump, Janša campaigned on an anti-immigrant “Slovenia first” platform. 
When right-wing populists first started gaining political traction, Europe’s center-left parties hoped that their traditional strengths would enable them to weather the challenge. 
To avoid unwittingly strengthening right-wing narratives, center-left campaigners attempted to shift public debate toward their ideological comfort zone: unemployment, inequality, and social justice. 
Germany’s Social Democratic Party (SPD) based its entire 2017 election campaign on the slogan, “It’s time for more justice.” 
Yet defeat after painful defeat has driven center-left parties to a stark realization: voters who are concerned primarily with immigration are not going to be won over with calls – however justified – for equality. 
As a result, center-left parties across Europe have begun to change course, with social democrats in several key countries changing long-held positions on migration. 
In Germany, the coalition government (comprising the SPD, the Christian Democratic Union, and the CDU’s Bavarian sister party, the Christian Social Union) is embroiled in a bitter fight over immigration that threatens the survival of the coalition. 
While the SPD aims for a European solution and rejects sealing Germany’s borders, party leader Andrea Nahles called for accelerated asylum procedures that would enable authorities to conclude asylum applications from safe third countries within one week. 
Last month, Nahles launched the debate within the SPD when, seemingly echoing right-wing rhetoric, she declared that Germany “cannot accept all.” 
Some in the SPD’s leadership and its youth wing were up in arms. 
Yet Nahles has doubled down on her stance, publicly endorsing a critical analysis, compiled by a board of independent observers, of last year’s election defeat. 
That report identified “the lack of a consistent social-democratic position” on migration issues as one of the party’s structural weaknesses. 
Austria’s Social Democratic Party has taken its shift on immigration further. 
The party leadership has presented a new platform, to be officially endorsed later this year, that formally redefines the party’s position as “pro-integration,” as opposed to pro-migration. 
While the platform does refer to the country’s “humanitarian responsibilities,” it also demands “functioning protection” of the EU’s external borders. 
Denmark’s social democrats are a step ahead of their Austrian counterparts: in preparation for next year’s elections, they have adopted a new position paper on immigration titled “Just and Realistic.” 
By establishing “reception centers” outside Europe to decide on asylum claims, the paper asserts, the flow of migrants into Denmark can be reduced. 
The paper also calls for stronger cooperation with the United Nations and a “Marshall Plan” for Africa that would presumably convince more migrants to stay home. 
This stance is largely mirrored by Sweden’s social democrats, as they attempt to cope with strong public support for the far-right, anti-immigrant Sweden Democrats. 
Prime Minister Stefan Löfven, who is campaigning for reelection in September, recently called his country’s traditionally open immigration policy “not sustainable.” 
His proposed policy, entitled “A Safe Migration Policy for a New Time,” would halve the number of refugees allowed into Sweden and prevent rejected asylum seekers from receiving social support – a position that pro-migration groups harshly criticize. 
The criticism highlights a key challenge. 
On one level, social democrats’ immigration shift is a necessary response to voter demand. 
Efforts to limit or manage migration are not necessarily based on racism or xenophobia. 
The key is to ensure that policy responses remain morally acceptable. 
At the same time, too drastic a change could be self-defeating for struggling center-left parties. 
They clearly cannot copy the crude nativist recipes of the radical right, which would not only be economically counterproductive, but would also fly in the face of progressive values, alienating cosmopolitan supporters. 
Instead, Europe’s center-left parties should strike a balance between national and international solidarity with a three-pronged strategy comprising effective limits on immigration, a focus on integration, and humanitarian efforts to ease large-scale human suffering. 
Such an approach would eschew incendiary rhetoric, and instead offer real, forward-thinking, and morally sustainable solutions that are not populist, but certainly can be popular. 
Canadian Prime Minister Justin Trudeau has embraced this approach, as has French President Emmanuel Macron. 
Struggling center-left parties across Europe should follow suit, recognizing that such a repositioning may well be the key to political survival. 

Payback Time in Schengen Land 
FRANKFURT – The long-held dream of a borderless Europe, which became reality in the mid-1990s, is fading fast. 
Italy is blocking a European Union decision to bribe Turkey to keep refugees from crossing over into Greece on their way to Germany, Sweden, or other northern European countries. 
In response, German Finance Minister Wolfgang Schäuble has called for solidarity, warning that otherwise the border guards might soon be back at their posts, beginning with the German-Austrian frontier. 
To be sure, the dissolution of the Schengen Agreement, which instituted passport-free travel within most of the EU starting in 1995, need not mark the end of the European project, at least not in principle. 
Economically, border controls act just like taxes; they distort activity, by increasing transaction costs and reducing cross-border flows of goods and services. 
Without them – and, more important, with a single currency – a market is more effective. 
That does not mean, of course, that the single market cannot work with border controls or multiple currencies. 
It simply means that such “renationalization” would carry enormous costs, in the form of substantially reduced productivity and significantly lower output. 
Given these costs, European Commission President Jean-Claude Juncker has rightly stressed that “killing” Schengen would undermine the EU’s foundational goal of “ever closer union” – an objective to which, admittedly, several EU members have signed up only reluctantly. 
The United Kingdom is the most vocal skeptic, but Poland, Hungary, Slovakia, and pretty much the rest of Eastern Europe have never been enthusiastic about shifting their focus from national prerogatives. 
The refugee crisis has thrown this discord into sharp relief. 
As a result, Europe’s densely knit network of interdependencies is beginning to unravel. 
The benevolent hegemon, which used to be the French-German couple, is missing. 
A focus on national (and in some places, like Catalonia and Scotland, regional) issues is gaining ground, in line with the incentives of policymakers, whose constituencies are national (or regional). 
Italian Prime Minister Matteo Renzi’s call for a quid pro quo – a loosening of the eurozone’s fiscal rules in exchange for accepting the deal with Turkey – is entirely understandable in this light. 
But it puts the EU on a slippery slope. 
The irony in all of this is that Germany, which was perceived as ruthless during the European sovereign (and private) debt crises, is now calling for solidarity. 
Supported by other northern European creditors, Germany enforced its fiscal principles relentlessly, despite the systemic consequences for those it was pressuring (Greece and Spain, for example, now have different governments). 
Whether the adjustment policies have been successful remains a subject of heated debate; what is not in doubt is that they produced many losers – most notably among the most vulnerable, who now largely perceive the EU-Germany consensus as threatening. 
Against this background, anti-establishment parties across Europe oppose policies that reflect this German-inspired approach. 
This explains, for example, the similarity of the economic platforms offered by the far left and far right in France. 
Even mainstream parties are under pressure to cater to this insurgent sentiment; defending EU policy proposals is a surefire way to lose an election. 
That is why, as Germany struggles to cope with some 1.5 million refugees, Schäuble’s call for solidarity is falling on barren ground. 
Everybody, beginning with France, is hiding. 
It’s payback time. 
Burden-sharing – that is, a “fair” allocation of refugees throughout the EU (to be hashed out politically) – appears to be a pipe dream. 
Economically, accommodating refugees will be a challenge for quite some time. 
But if one takes a longer view, absorbing the newcomers should be an opportunity – if it is appropriately handled. 
In the meantime, however, not only Germany, but also Sweden, the Netherlands, Austria, and others, are running up against what is deemed to be politically feasible. 
This implies that no EU-wide response can be expected, and thus that Schengen is probably doomed. 
This would be more than a symbolic loss for European citizens. 
And, of course, re-erecting national borders does nothing to address the underlying issue. 
Refugees would just be pushed back to Greece, the most fragile and vulnerable link in the chain. 
As uninspiring as this might sound, we must now consider the prospect of the end of the European Monetary Union and the EU as we have known it. 
The goal is not simply to highlight the lost opportunities associated with such an outcome; those would clearly be sizable, especially if the currency union had to be untied. 
The point is also to show that the minimal conditions for the EU and the eurozone to work in their current form are lacking. 
Foremost among these conditions is a shared diagnosis of the EU’s problems and a common philosophy. 
Renzi and Schäuble, for example, have strikingly contradictory views on crucial issues, from fiscal policy to the banking sector. 
Renzi criticizes the EU, while laying the blame for the consequences of new creditor bail-in regulations squarely at Germany’s door. 
For the same reasons, French President François Hollande puts internal security first (possibly in line with the preferences of his electorate), and honors fiscal rules inconsistently. 
It doesn’t help that applying German or EU proposals on refugee policy would not exactly strengthen his re-election chances in 2017. 
If EU member states were to pursue their enlightened self-interest, they would nurture ever closer union, with solidarity – fiscal and otherwise – between North and South. 
Instead, they are increasingly scapegoating Europe and embracing a national discourse. 
Once again, Europe seems to be sleepwalking into crisis. 
One hopes that it wakes up in a safer place than it has in the past. 

Europe Crosses the Rubicon 
The so-called “European Neighborhood Policy” has, so far, been a curious thing. 
There is much talk about it in the European Union, but little practical effect. 
It was meant as an alternative to the ever-increasing number of accession rounds, say, involving the countries in the southern Caucasus. 
But the war in Lebanon and its consequences have caused a sudden and fundamental change in the leisurely pursuit of this policy. 
The Lebanon War has served as a harsh reminder to the European Union that it has “strategic interests” – security interests first and foremost – and that, should it choose to ignore them, the price will be high. 
Moreover, the division of labor between the US and Europe isn’t functioning in the time-tested manner of old: the ongoing war in Iraq is gnawing at America’s military capabilities and resulted in a crisis of moral and political legitimacy of the US across the Arabic/Islamic world. 
With the decision of its member states to send several thousand soldiers to Lebanon to implement the UN cease-fire resolution 1701, the European Union has taken the most significant decision yet within its Neighborhood Policy. 
Can the EU in fact be able to emerge as a stabilizing political force in the most dangerous area of conflict within Europe’s immediate geopolitical neighborhood? 
After the Balkan Wars of the 1990’s, the Near and Middle East is at once the most dangerous and also – given security considerations – the most important neighboring region for the EU today. 
Why? 
Because the main threats to European security at the beginning of the 21st century stem from that region. 
The threats concentrated in the Middle East are diverse: regional conflicts, totalitarian religious ideologies, terrorism, nuclear armament programs, blockades to modernization, unstable regimes and hegemonic ambitions. 
If one asks what interests the EU and its member states have in this crisis-riddled region, the answer is, that certainly European energy and economic interests are at stake, as well as the vital interests of Europe’s partners and allies (Israel in particular). 
But first and foremost on the list are Europe’s. 
How the Middle East develops will determine the extent of the risks for, or even probable challenges to, Europe’s security. 
Success in containing, or indeed resolving, the conflict there will have overwhelmingly positive consequences for Europe’s security. 
The Middle East today is defined by three central conflicts: the Israeli-Arab conflict, Iraq, and Iran. 
The fusion of Iran’s nuclear program (and Iran’s hegemonic ambitions) with the situation in Iraq and with Hezbollah in Lebanon will lead to a “New Middle East” which, in all likelihood, will provoke a major confrontation. This will involve far more than just the usual regional actors and conflicts. 
The war in Lebanon has made it abundantly clear how far this dangerous process has already progressed. 
The mission in Lebanon is a high-risk one for the UN force, and for Europe in particular. 
The war did not bring forth a real decision. 
Neither Hezbollah nor Syria, let alone Iran, have any interest in the UN mission’s success. 
The Security Council resolution presupposes – in addition to separating the combatants – the enforcement of the internal and external sovereignty of Lebanon’s elected government of Lebanon, without saying how this is to be accomplished with a politically strengthened Hezbollah, militarily superior to the Lebanese forces. 
Any attempt at disarming Hezbollah by the UN force would mean a war with Hezbollah (and with Syria and Iran in the background) -- a task the UN force cannot accomplish. 
But were it to resign itself to mere observer status in Lebanon, the UN and Europe would lose all credibility. 
Moreover, it is likely that, within a few months, UN soldiers would once again find themselves between the firing lines of the conflicting parties. 
The mission therefore will have to walk the thin and risky line in pursuit of its robust mandate to stabilize the country. 
Failure will be a constant danger and the military risk will be high. 
Yet, in light of the situation there is no better alternative. 
In view of the risk to its troops, Europe will be compelled to influence and even proactively bring about strategic changes to the political environment in the entire Middle East. 
With its decision in favor of the mission in Lebanon, the EU crossed a military Rubicon. 
It must now back up its growing weight in the Middle East with political initiative. 
This must include three key elements: a negotiated solution for Syria; a resumption of negotiations between Israel and the Palestinians; and a common strategic understanding with the US of the political strategy of the West for the region (which addresses the region’s most dangerous conflict, Iran). 
This common understanding will be the pivotal challenge for the future of the transatlantic relationship. 
For Europe and its troops, the stakes in Lebanon are very high. 
But this is about vital European interests. 
War and chaos in the Middle East or just a moral or political vacuum will directly affect and upset the security of the EU and all its member states. 
Europe therefore had to act, though that decision was obviously difficult. 
The key question in the near future will be whether Europe actually has the military and political capabilities, the political staying power, and the common will to act in accordance with its core interests in the Middle East. 
We will see. 
In any case, one thing can already be said: Welcome to the real world. 

Why Deflation is Good News for Europe 
BRUSSELS – In today's global economy, there is no price as important as that of crude oil. 
More than 80 million barrels are produced (and consumed) daily, and a large part of that output is traded internationally. 
Thus, the sharp fall in the crude-oil price – from about $110 last year to around $60 today – is yielding hundreds of billions of dollars in savings for oil importers. 
For the European Union and the United States, the gain from that decline is worth about 2-3% of GDP. 
For Europe, the benefits of cheap oil might grow over time, because long-term gas-supply contracts are to a significant degree indexed to the oil price. 
This represents another advantage for Europe, where prices for natural gas were, until recently, several times higher than in the US, which had been benefiting from lower-cost shale energy. 
But many observers have argued that cheap oil also has a downside, because it exacerbates deflationary tendencies in the advanced countries, which already seem to be mired in a low-growth trap. 
The sharp fall in oil prices, according to this view, will make it even harder for these countries' central banks to achieve the 2% annual inflation rate that most have targeted in fulfilling their price-stability mandate. 
The eurozone, in particular, seems to be in danger, as prices are now falling for the first time since 2009. 
This deflation is bad, it is argued, because it makes it harder for debtors, especially in the troubled economies of the eurozone's periphery (Greece, Ireland, Italy, Portugal, and Spain), to pay what they owe. 
But this fear is unfounded, because it is based on a misunderstanding. 
What matters for debt-service capacity is the debtors' income, not the general price level. 
As oil prices fall, households' real (inflation-adjusted) income should rise, because they do not have to spend as much on fuel and heating. 
Lower oil prices make life easier, not harder, for highly indebted households in the US or the eurozone periphery. 
Falling consumer prices should thus be viewed as a good sign. 
Most manufacturing enterprises will also benefit from lower energy costs, improving their ability to service their debts. 
This, too, is particularly relevant in the eurozone periphery, where the non-financial sector accumulated too much debt during the credit boom that preceded the 2008 global financial crisis. 
Moreover, though most of the savings implied by lower energy costs might initially show up in higher profits, over time, competition will force companies to pass on some of these windfall gains in the form of lower prices or higher wages. 
This is another important consequence of cheap oil: lower prices make it more difficult to judge the point at which wage pressure becomes inflationary. 
Because wages can increase to a greater extent without fueling inflation, the US Federal Reserve Board might be inclined to delay hiking interest rates, which it is now widely expected to do this summer. 
Public finances should also benefit from the deflation engendered by lower oil prices. 
Government revenues depend on the value of domestic output, not only consumption. 
Though lower oil prices depress consumer prices, they should boost production and overall GDP. 
Absent large price changes for raw materials, the consumer price index evolves along with the GDP deflator (the price deflator for the entire economy). 
But that will not be true this year, because consumer prices are falling, whereas the GDP deflator (and nominal GDP) is still increasing. 
This should lead to solid government revenues, which is good news for highly indebted governments throughout the industrialized world, but particularly for the eurozone periphery. 
The fall in (consumer) prices that the eurozone currently is experiencing should thus be seen as a positive development for all energy importers. 
The eurozone periphery, in particular, can look forward to an ideal combination of low interest rates, a favorable euro exchange rate, and a boost in real incomes as a result of cheap oil. 
In a deflationary environment, lower oil prices appear to make it more difficult for the European Central Bank to achieve its target of an inflation rate close to 2%. 
In reality, lower oil prices represent a boon for Europe – especially for its most beleaguered nations. 

Overcoming Europe’s Twin Growth Challenges 
MUNICH – As economic recovery finally begins to take hold in Europe, the imperative for policymakers is to ensure that growth can be sustained far into the future. 
Fiscal and monetary stimulus may have been appropriate at the peak of the crisis, but they will do little to address the biggest threat to the continent’s long-term prospects: a toxic twosome of weak demographics and low investment. 
Even assuming a steady inflow of immigrants, the combined workforces of the 28 European Union countries are projected to shrink by 12-16 million people over the next 15 years, according to the OECD and the European Commission. 
A sharper rise in the number of newcomers could help ameliorate the situation; but higher immigration is not, on its own, an adequate solution to the EU economy’s long-term problems. 
Europe’s only hope for sustained growth is to boost productivity, so that it can derive more value from its shrinking workforce. 
The trouble is that it has been many years since the continent last saw significant productivity gains. 
In Western Europe, growth in labor productivity (output per hour worked) has been decelerating for decades. 
In the 1960s, labor productivity grew at a robust 4% annual rate, before slowing to 2% in the 1980s and dropping below 1% around the turn of the century. 
Today it crawls forward at about 0.5% a year. 
Meanwhile, total factor productivity, which takes into account technological innovation, has been stagnant. 
The EU desperately needs economic growth to enable its member states to sustain their social security and welfare systems as their societies get older – a challenge that other regions and countries are facing as well. 
But few confront Europe’s twin obstacles of anemic productivity growth and demographic decline. 
China, for example, is facing a similar demographic challenge, as its labor force shrinks and the number of retirees rises rapidly. 
But China’s labor productivity has been growing by 9% a year, on average, over the last decade. 
The decline in productivity growth in the EU is surprising, given the rapid onset of digitalization – often described as the industrial revolution of the twenty-first century. 
In fact, part of the perceived slowdown can be attributed to measurement issues: In Europe, as well as the United States, the technological changes being wrought by smartphones and the Internet simply are not showing up in the productivity data. 
Statisticians struggle, for example, to account for how consumers are benefiting from the increased quality and speed of delivery that often results from digitalization. 
Furthermore, in the digital age, many services are being provided free of charge, which means they are not being counted as consumption at all. 
Another factor that may be contributing to flat productivity is that many corporations run traditional physical business models parallel to new digital ones. 
Adding high-tech systems to traditional processes can temporarily increase costs and thus depress productivity, especially if the new and old businesses are not well connected. 
These issues should diminish with time; as that happens, part of the productivity lull should disappear. 
But not all of the slowdown in productivity growth can be attributed to the cumbersome transition to a new technological era. 
Even as the economy has started to recover, investment in Europe remains well below its level in 2008. 
Long-term economic health will depend, in large part, on whether investment recovers and by how much. 
And there are reasons for pessimism. 
Weak investment activity partly reflects a gloomy view of the European market. 
If workforces are stagnating or shrinking and growth is subdued, why spend on boosting output? 
Simply put, Europe’s problems have become intertwined. 
The continent needs productivity-enhancing investment in order to compensate for its shrinking workforce; but its demographic weakness is causing companies to hold back. 
Fortunately, there is much that can be done. 
A renewed push to integrate European markets for services, digital goods, capital markets, and energy would remove barriers to business and bring new incentives to invest. 
The Transatlantic Trade and Investment Partnership that the EU is currently negotiating with the US would also create a larger market, with less burdensome regulation and more competition. 
On a national level, reform drives like those carried out in Ireland, Portugal, and Spain could improve business conditions and competitiveness across the continent. 
Finally, all European countries could redouble their efforts to educate and train their residents for the digital era. 
Policymakers must not rest on the optimistic assumption that Europe’s economy will recover on its own. 
Rather, they should pursue policies that support investment, encourage innovation, and promote the development of skills. 
As workers and companies struggle to compete in a rapidly changing – and increasingly winner-take-all – global economy, the need for policies that will ensure long-term growth could not be more urgent. 

The Europe Question in 2016 
NEW YORK – At the cusp of the new year, we face a world in which geopolitical and geo-economic risks are multiplying. 
Most of the Middle East is ablaze, stoking speculation that a long Sunni-Shia war (like Europe’s Thirty Years’ War between Catholics and Protestants) could be at hand. 
China’s rise is fueling a wide range of territorial disputes in Asia and challenging America’s strategic leadership in the region. 
And Russia’s invasion of Ukraine has apparently become a semi-frozen conflict, but one that could reignite at any time. 
There is also the chance of another epidemic, as outbreaks of SARS, MERS, Ebola, and other infectious diseases have shown in recent years. 
Cyber-warfare is a looming threat as well, and non-state actors and groups are creating conflict and chaos from the Middle East to North and Sub-Saharan Africa. 
Last, but certainly not least, climate change is already causing significant damage, with extreme weather events becoming more frequent and lethal. 
Yet it is Europe that may turn out to be the ground zero of geopolitics in 2016. 
For starters, a Greek exit from the eurozone may have been only postponed, not prevented, as pension and other structural reforms put the country on a collision course with its European creditors. 
“Grexit,” in turn, could be the beginning of the end of the monetary union, as investors would wonder which member – possibly even a core country (for example, Finland) – will be the next to leave. 
If Grexit does occur, the United Kingdom’s exit from the EU may become more likely. 
Compared to a year ago, the probability of “Brexit” has increased, for several reasons. 
The recent terrorist attacks in Europe have made the UK even more isolationist, as has the migration crisis. 
Under Jeremy Corbyn’s leadership, Labour is more Euroskeptic. 
And Prime Minister David Cameron has painted himself into a corner by demanding EU reforms that even the Germans – who are sympathetic to the UK – cannot accept. 
To many in Britain, the EU looks like a sinking ship. 
If Brexit were to occur, other dominos would fall. 
Scotland might decide to leave the UK, leading to the breakup of Britain. 
This could inspire other separatist movements – perhaps starting in Catalonia – to push even more forcefully for independence. 
And the EU’s Nordic members may decide that with the UK gone, they, too, would be better off leaving. 
As for terrorism, the sheer number of homegrown jihadists means that the question for Europe is not whether another attack will occur, but when and where. 
And repeated attacks could sharply reduce business and consumer confidence and stall Europe’s fragile economic recovery. 
Those who argue that the migration crisis also poses an existential threat to Europe are right. 
But the issue is not the million newcomers entering Europe in 2015. 
It is the 20 million more who are displaced, desperate, and seeking to escape violence, civil war, state failure, desertification, and economic collapse in large parts of the Middle East and Africa. 
If Europe is unable to find a coordinated solution to this problem and enforce a common external border, the Schengen Agreement will collapse and internal borders between the EU member states will reappear. 
Meanwhile, austerity and reform fatigue on the eurozone periphery – and among non-eurozone EU members such as Hungary and Poland – is clashing with bailout fatigue in the core. 
Populist parties of the left and right – with their shared hostility to free trade, migration, Muslims, and globalization – are becoming more popular throughout Europe. 
Syriza is in power in Greece; a leftist coalition is in office in Portugal; and the Spanish election could lead to significant political and policy uncertainty. 
Virulent anti-migrant, anti-Muslim parties are becoming more popular in Europe’s core, including the Netherlands, Denmark, Finland, and Sweden. 
In France, the far-right National Front came close to winning power in several regions earlier this month, and its leader, Marine Le Pen, may do well in the 2017 presidential election. 
In Italy, moreover, Prime Minister Matteo Renzi is under attack by two anti-euro populist parties that have risen in opinion polls. 
And Chancellor Angela Merkel’s leadership is now under threat in Germany, following her courageous but controversial decision to allow almost a million asylum-seekers to enter the country. 
In short, the distance between what Europe needs and what Europeans want is growing, and that gap could spell deep trouble in 2016. 
The eurozone and the EU are facing multiple threats, all of which call for a collective response. 
But what we are seeing is its member states increasingly adopting a national approach, thus undermining the possibility of Europe-wide solutions (the migration crisis is a tragic case in point). 
Europe needs more cooperation, integration, risk sharing, and solidarity. 
Instead, Europeans appear to be embracing nationalism, balkanization, divergence, and disintegration. 

Europe or Anti-Europe? 
MILAN – A knowledgeable friend in Milan recently asked me the following question: “If an outside investor, say, from the United States, wanted to invest a substantial sum in the Italian economy, what would you advise?” 
I replied that, although there are many opportunities to invest in companies and sectors, the overall investment environment is complicated. 
I would recommend investing alongside a knowledgeable domestic partner, who can navigate the system, and spot partly hidden risks. 
Of course, the same advice applies to many other countries as well, such as China, India, and Brazil. 
But the eurozone is increasingly turning into a two-speed economic bloc, and the potential political ramifications of this trend are amplifying investors’ concerns. 
At a recent meeting of high-level investment advisers, one of the organizers asked everyone if they thought the euro would still exist in five years. 
Only one person out of 200 thought that it would not – a rather surprising collective assessment of the trending risks, given Europe’s current economic situation. 
Right now, Italy’s real (inflation-adjusted) GDP is roughly at its 2001 level. 
Spain is doing better, but its real GDP is still around where it was in 2008, just prior to the financial crisis. 
And Southern European countries, including France, have experienced extremely weak recoveries and stubbornly high unemployment – in excess of 10%, and much higher for people younger than 30. 
Sovereign debt levels, meanwhile, have approached or exceeded 100% of GDP (Italy’s is now at 135%), while both inflation and real growth – and thus nominal growth – remain low. 
This lingering debt overhang is limiting the ability to use fiscal measures to help restore robust growth. 
The competitiveness of eurozone economies’ tradable sectors varies widely, owing to divergences that emerged after the common currency was first launched. 
While the euro’s recent weakening will blunt the impact of some of these divergences, it will not eliminate them entirely. 
Germany will continue to run large surpluses; and countries where the ratio of unit labor costs to productivity is high will continue to generate insufficient growth from trade. 
Since the 2008 financial crisis, the conventional wisdom has been that a long, difficult recovery for eurozone economies will eventually lead to strong growth. 
But this narrative is losing credibility. 
Rather than slowly recovering, Europe seems to be trapped in a semi-permanent low-growth equilibrium. 
Eurozone countries’ social policies have blunted the distributional impact of job and income polarization fueled by globalization, automation, and digital technologies. 
But these countries (and, to be fair, many others) still must reckon with three consequential changes affecting the global economy since around the year 2000. 
First, and closest to home, the euro was introduced without complementary fiscal and regulatory unification. 
Second, China joined the World Trade Organization, and became more thoroughly integrated into global markets. 
And, third, digital technologies began to have an ever-larger impact on economic structures, jobs, and global supply chains, which significantly altered global employment patterns, and accelerated the pace of routine-job loss. 
Shortly thereafter, between 2003 and 2006, Germany implemented far-reaching reforms to improve structural flexibility and competitiveness. 
And, in 2005, the Multi-Fiber Arrangement lapsed. 
Without the MFA, which had underpinned quotas for textile and apparel exports since 1974, global textile manufacturing became heavily concentrated in China and, surprisingly, Bangladesh. 
In 2005 alone, China doubled its textile and apparel exports to the West. 
This development had a particularly adverse effect on Europe’s poorer regions and less competitive developing countries around the world. 
These changes created a growth-pattern imbalance across a wide range of countries. 
As many countries took measures to address shortfalls in aggregate demand, sovereign debt increased, and debt-fueled housing bubbles expanded. 
These growth patterns were unsustainable, and when they eventually broke down, underlying structural weaknesses were laid bare. 
Resistance to the current system is now growing. 
The United Kingdom’s Brexit referendum and Donald Trump’s election as US president both reflected public discontent with the distributional aspects of recent growth patterns. 
And rising support for populist, nationalist, and anti-euro parties could pose a serious threat to Europe as well, not least in large eurozone countries such as France and Italy. 
Whether or not these parties succeed at the ballot box in the immediate future, their emergence should cast doubt on overly sanguine views about the euro’s longevity. 
Anti-euro political forces are clearly making electoral inroads, and they will continue to gain ground as long as growth remains anemic and unemployment remains high. 
In the meantime, the EU will most likely not pursue substantial policy or institutional reforms in the near term, for fear that doing so could adversely affect the outcome of consequential elections this year in the Netherlands, France, Germany, and possibly Italy. 
Of course, an alternative view holds that Brexit, Trump’s election, and the rise of populist and nationalist parties will serve as a wake-up call, and spur Europe toward broader integration and growth-oriented policies. 
This would require EU policymakers to abandon the view that each country is solely responsible for getting its own house in order, while upholding EU fiscal, financial, and regulatory commitments. 
Upholding EU rules is no longer practical, because the current system imposes too many constraints and contains too few effective adjustment mechanisms. 
To be sure, fiscal, structural, and political reforms are sorely needed; but they will not be sufficient to solve Europe’s growth problem. 
The bitter irony in all of this is that eurozone countries have enormous growth potential across a wide variety of sectors. 
Far from being basket cases, they simply need the system’s constraints to be loosened. 
Will Europe’s future resemble a slow-motion train wreck, or will a new generation of younger leaders pivot toward deeper integration and inclusive growth? 
It is hard to say, and I, for one, would not dismiss either possibility. 
One thing seems clear: the status quo is unstable and cannot be sustained indefinitely. 
Absent a marked shift in policies and economic trajectory, the political circuit breakers will be tripped at some point, just as they have been in the US and the UK. 

Democracy Over Sovereignty in Europe 
MILAN – The future of the European Union may not officially be on the ballot in the upcoming elections in the Netherlands, France, Germany, and Italy, but the results will go a long way towards determining Europe’s fate. 
Anti-EU sentiment is more widespread than ever, as demonstrated by the feverish campaigns of right-wing populist insurgents like Geert Wilders in the Netherlands and Marine Le Pen in France. 
But there are also signs of support for revamping and reinventing the EU – a message being espoused by the likes of France’s Emmanuel Macron and Germany’s Martin Schulz. 
Any pro-EU campaign, to be convincing, must address the problems stemming from the euro. 
Adopted by 19 of the EU’s 28 member countries (27, after Brexit), the common currency has become a major source of disillusionment with European integration. 
Though the euro crisis, in its most acute form, is over, the eurozone remains a fragile construct. 
In the event of renewed volatility, doubt about its survival could easily return. 
At the root of the common currency’s fragility are flaws in the Maastricht Treaty framework, which dictates that eurozone members maintain a common monetary policy and individual fiscal policies that conform to shared fiscal rules. 
But the mere existence of fiscal rules has proved insufficient to guarantee compliance, and there is no enforcement mechanism at the EU level to ensure adequate fiscal discipline. 
Unless this changes, there will always be the risk that weaker members will accumulate unsustainable debts, forcing stronger members to choose between providing politically untenable transfers and allowing members to exit, creating instability that could bring down the entire project. 
A victory for pro-European forces in the coming elections could provide the opportunity – perhaps the last opportunity – to pursue the changes to the Maastricht Treaty that are needed. 
Those changes will not be easy to carry out. 
Europeans will need to accept a fundamental shift in the basis of the eurozone’s legitimacy, moving beyond a simple commitment to rules-based economic governance to accept the kind of discretionary approach taken by an authority with democratic legitimacy. 
Without political union, the adoption of a rules-based approach to governance is understandable. 
It aligns with the logic of central-bank independence: unelected policymakers are committed to a straightforward set of rules, such as targeting a particular inflation rate, against which they can be held accountable. 
But that logic hasn’t worked for the eurozone, where concrete rules have proved inadequate to prevent pressure for redistribution that voters do not support. 
Now that this has become apparent, some advocate a greater role for the market in enforcing discipline. 
Proposals for a new sovereign-lending framework that allows for orderly restructuring reflect this reasoning. 
One proposal calls for the European Stability Mechanism to adopt a system similar to that of the International Monetary Fund, in order to prevent lending to insolvent countries and force reprofiling or restructuring after a certain debt threshold is crossed. 
Such an approach would make the EU’s “no bailout” rule more credible and avoid placing an excessive burden on monetary policy. 
But it would be naive to believe that such a scheme would solve the problem. 
Fear of contagion would always be justified in a monetary union, where the externalities of a debt crisis in one country always risks infecting the rest of the union. 
Given this, a framework based exclusively on market mechanisms would be prone to instability. 
This is not to say that a market-driven debt-restructuring framework has no place in eurozone reform. 
It does, and so does a set of simple common rules. 
But, to support a shared fiscal stance and achieve a better mix of monetary and fiscal policy, a third component is needed: an independent federal fiscal authority focused on creating risk-sharing mechanisms. 
Such an authority would need a small budget and some discretionary power, in order to be able to adjust its approach in response to events. 
Of course, if such a system were perceived to be undermining member states’ sovereignty it would not be politically feasible. 
Its critics would need to be convinced of its democratic legitimacy. 
Without full political union, that could be achieved with an emphasis on transparency, independence, and a much larger role for the European Parliament, possibly in coordination with national parliaments. 
After all, the central issue facing Europe is not sovereignty, as the right-wing populists claim, but democracy. 
(With integrated markets, full national sovereignty is an illusion.) 
What Europe needs today is a treaty that expands democratic legitimacy at the EU level. 
Preserving national sovereignty based on institutions designed for the far less integrated European economy of the nineteenth century is a recipe for failure. 

Doubling Down on European Energy Efficiency 
BRUSSELS – At the COP21 conference in Paris last December, world leaders made a binding pledge to set national targets, including energy-efficiency benchmarks, for reducing greenhouse-gas emissions. 
Now, the European Commission is nearing a moment of truth: Will it set ambitious but attainable energy efficiency targets that will force individuals and industry to make real changes? Or will it bend to political pressure and set meaningless targets that will be reached anyway, with no any additional effort? 
The latter approach was taken in 2014, when European leaders agreed to improve energy efficiency by 27% before 2030. 
The European Council was applauded at the time for its leadership. 
Nobody bothered to mention that global energy efficiency was already likely to increase by around 35% on its own by 2030. 
The COP21 agreement has given Europe a second chance to set an example and become the global standard-bearer for energy efficiency. 
Environmentalists, business leaders, and academics are awaiting new targets from the European Commission, which will most likely be established in October, in a forthcoming revision to the Commission’s Energy Efficiency Directive. 
So, what would be a meaningful target? 
If European leaders are serious about their COP21 commitment, they should embrace a 70% reduction on 2010 consumption levels by 2030 – more than double the European Council’s 2014 target. 
A 70% reduction is ambitious, but not impossible. 
There is both an economic and an environmental case to be made for it. 
Economically, countries that reduce energy consumption also increase productivity, simply because using less energy costs less money. 
While implementing energy-efficiency measures may require heavy initial investments, these outlays will be offset by future productivity growth, which is the only way developed countries can sustainably improve living standards over time. 
The environmental argument for an ambitious target is not that we need to “save the Earth.” 
But we do need to save the climate in which humans have evolved and prospered. 
Energy efficiency around the world is increasing at roughly 1.5% per year, which is a welcome development and a sign that 30 years of forward-leaning environmental policies have had some effect. 
Global energy consumption, however, is rising at around 3% per year, implying that we’re still digging our hole deeper, rather than filling it in. 
Six of the world’s largest economies – China, the United States, Russia, India, Japan, and the European Union – remain the biggest polluters. 
But most growth today comes from developing countries that now participate in the global economy. 
Even if these countries make significant strides in reducing emissions, they will be the polluters of the future, at least in the near term. 
Globalization has increased life expectancy and improved living standards in many poor countries. 
But it also poses new environmental problems that will require ambitious solutions. 
Seen in this light, a 70% improvement in energy efficiency is the minimum Europe – and the world – can aim for to reach real sustainability at current levels of global growth. 
Fortunately, this is all within our grasp. 
A 2015 study published by Ecofys, Quintel Intelligence, and the Lisbon Council concluded that Europe already has the technologies available to double current energy-efficiency levels without sacrificing economic growth. 
These include heat pumps, smart grids, LED lighting, and energy-efficient household equipment. 
So why aren’t these technologies being implemented already? 
The reason isn’t that industry is holding Europe back; on the contrary, European industry’s environmental footprint has improved considerably in recent years. 
Rather, the principal energy consumer in Europe is individual households, where energy efficiency can be tripled in the coming years with the right political leadership, sufficient investment, and long-term commitment from Europeans themselves. 
This takes us back to the Energy Efficiency Directive, where this work should begin. 
The European Commission should set “moon-shot” standards that push us to higher achievements than we once thought possible. 
If Europe can double its energy efficiency by 2030, Europeans will look back and wonder how they ever lived differently. 

Europe’s Politics of Dystopia 
TOKYO – The recent victory of the conservative Law and Justice (PiS) party in Poland confirms a recent trend in Europe: the rise of illiberal state capitalism, led by populist right-wing authoritarians. 
Call it Putinomics in Russia, Órbanomics in Hungary, Erdoğanomics in Turkey, or a decade of Berlusconomics from which Italy is still recovering. 
Soon we will no doubt be seeing Kaczyńskinomics in Poland. 
All are variations on the same discordant theme: a nationalist leader comes to power when economic malaise gives way to chronic and secular stagnation. 
This elected authoritarian then starts to reduce political freedoms through tight-fisted control of the media, especially television. 
Then, he (so far, it has always been a man, though France’s Marine Le Pen would fit the pattern should she ever come to power) pursues an agenda opposing the European Union (when the country is a member) or other institutions of supra-national governance. 
He will also oppose free trade, globalization, immigration, and foreign direct investment, while favoring domestic workers and firms, particularly state-owned enterprises and private business and financial groups with ties to those in power. 
In some cases, outright nativist, racist parties support such government or provide an even deeper authoritarian and anti-democratic streak. 
To be sure, such forces are not yet in power in most of Europe. 
But they are becoming more popular nearly everywhere: Le Pen’s National Front in France, Matteo Salvini’s Lega Nord in Italy, and Nigel Farage’s United Kingdom Independence Party (UKIP) all view Russia’s illiberal state capitalism as a model and its president, Vladimir Putin, as a leader deserving of admiration and emulation. 
In Germany, the Netherlands, Finland, Denmark, Austria, and Sweden, too, the popularity of populist, anti-EU, anti-migrant right-wing parties is on the rise. 
Most of these parties tend to be socially conservative. 
But their economic policies – anti-market and fearful that liberal capitalism and globalization will erode national identity and sovereignty – have many elements in common with populist parties of the left, such as Syriza in Greece (before its capitulation to its creditors), Podemos in Spain, and Italy’s Five Star Movement. 
Indeed, just as many supporters of radical leftist parties in the 1930s made a U-turn and ended up supporting authoritarian parties of the right, the economic ideologies of today’s populist parties seem to converge in many ways. 
In the 1930s, economic stagnation and depression led to the rise of Hitler in Germany, Mussolini in Italy, and Franco in Spain (among other authoritarians). 
Today’s brand of illiberal leaders may not yet be as politically virulent as their 1930s predecessors. 
But their economic corporatism and autocratic style are similar. 
The reemergence of nationalist, nativist populism is not surprising: economic stagnation, high unemployment, rising inequality and poverty, lack of opportunity, and fears about migrants and minorities “stealing” jobs and incomes have given such forces a big boost. 
The backlash against globalization – and the freer movement of goods, services, capital, labor, and technology that comes with it – that has now emerged in many countries is also a boon to illiberal demagogues. 
If economic malaise becomes chronic, and employment and wages do not rise soon, populist parties may come closer to power in more European countries. 
Worse, the eurozone may again be at risk, with a Greek exit eventually causing a domino effect that eventually leads to the eurozone’s breakup. 
Or a British exit from the EU may trigger European dis-integration, with the additional risks posed by the fact that some countries (the UK, Spain, and Belgium) are at risk of breaking up themselves. 
In the 1930’s, the Great Depression brought to power authoritarian regimes in Europe and even Asia, eventually leading to World War II. 
Today’s resurgence of illiberal state capitalist regimes and leaders is nowhere close to inciting a war, because center-right and center-left governments still committed to liberal democracy, enlightened economic policies, and solid welfare systems still rule most of Europe. 
But the toxic brew of populism now gaining strength may yet open a Pandora’s box, unleashing unpredictable consequences. 
This rising tide of illiberalism makes avoiding a break-up of the eurozone or the EU ever more vital. 
But, to ensure this, macro and structural economic policies that boost aggregate demand, job creation and growth, reduce income and wealth inequality, provide economic opportunity to the young, and integrate rather than reject refugees and economic migrants will be needed. 
Only bold policies can halt Europe’s slide toward secular stagnation and nationalist populism. 
Timidity of the type witnessed in the past five years will only increase the risks. 
Failure to act decisively now will lead to the eventual failure of the peaceful, integrated, globalized, supra-national state that is the EU, and the rise of dystopian nationalist regimes. 
The contours of such places have been reflected in literary work such as George Orwell’s 1984, Aldous Huxley’s Brave New World, and Michel Houellebecq’s latest novel Submission. 
Let us hope that they remain confined to the printed page. 

Muzzled in the Name of Freedom 
NEW YORK – Acts of terror can inflict terrible damage. 
But they cannot destroy an open society. 
Only those who govern our democracies can do that, by shrinking our freedoms in freedom's name. 
Shinzo Abe, Japan's right-wing nationalist prime minister, does not need much encouragement to tighten up secrecy laws, give more powers to the police, or make it easier to use military force. 
The grisly executions of two Japanese citizens caught by Islamic State terrorists in Syria have provided precisely the encouragement that Abe needs to pursue such measures. 
But Japan has never been seen as a bastion of free speech, nor did it ever make great claims to be. 
France does. 
That is what the demonstration of solidarity in the face of last month's terrorist attacks in Paris was surely all about. 
France, of all countries, would avoid the trap that snared the other great Western republic claiming to be a beacon of freedom in the world. 
Fear of terrorist violence after the 9/11 attacks did more damage to freedom in the United States than the suicidal murder of thousands of its citizens. 
Because of that fear, Americans allow themselves to be spied on indiscriminately by their own government, and permit terrorism suspects to be tortured and locked up indefinitely without trial. 
France, like most other countries in the European Union, already has laws that ban hate speech. 
You cannot legally insult people on the grounds of their race, beliefs, or sexual orientation. 
And in France, as well as in some other countries, one can be prosecuted for denying the Holocaust and other historical genocides. 
President François Hollande, who is not a right-wing nationalist like Abe, now wants to strengthen those bans. 
He has proposed new laws that would make online entities like Google and Facebook responsible for any "hate speech" posted online by their users. 
Former EU heads of state have also backed a proposal from European Jewish leaders to criminalize in every EU country not just anti-Semitism and genocide-denial, but also "xenophobia" in general. 
Few people would wish to defend expressions of xenophobia or anti-Semitism. 
But is it really wise to use the law to ban opinions? 
First of all, such laws, if enacted, are unlikely to reduce the risk of terrorist acts. 
Banning the expression of opinions will not make them go away. 
They will continue to be expressed, more secretively perhaps, and as a result become even more toxic. 
And the social and political basis for terrorism, in the Middle East and elsewhere, will not vanish just because of a public ban on xenophobic speech. 
But there is a larger danger in using the law to police what people think. 
It can stifle public debate. 
That danger underlies the view, still operative in the US, that opinions, however obnoxious, should be freely expressible, so that they can be opposed by counter-arguments. 
It would be naive, of course, to believe that religious or political extremists are interested in an exchange of views. 
But inciting violence is banned in the US as well. 
The First Amendment of the Constitution does not protect freedom of expression when it can be shown to create a risk of imminent violence. 
Xenophobic views, or the denial of genocide, are repellent, but do not necessarily result in such a threat. 
In most societies, including the US, the public expression of such opinions is limited by a rough consensus on what is socially respectable. 
This consensus changes with time. 
It is up to editors, writers, politicians, and others who speak in public to shape it. 
Cartoonists, artists, bloggers, activists, and comedians sometimes like to challenge the consensus of respectability. 
Some of these challenges might cause outrage (that, after all, often is the point). 
But as long as they do not promote or threaten violence, it would do more harm than good to ban them by law. 
Allowing the government to decide which opinions are permissible is dangerous not just because it smothers debate, but also because governments can be arbitrary or self-serving. 
It would be useful in the current climate of fear to recall a famous hate-speech case in the US. 
In 1977, the American Nazi Party planned to stage a demonstration in Skokie, a suburb of Chicago with a large Jewish population. 
A local court, prompted by shocked and fearful public opinion, decided that the display of swastikas, distribution of leaflets, and the wearing of Nazi uniforms should be banned. 
Such a demonstration, it was quite plausibly argued, would be an insult to a community that included Holocaust survivors. 
But the ban was contested by the American Civil Liberties Union as an infringement of the First Amendment. 
The argument of the ACLU lawyers, most of whom were liberal Jews, was not based on any sympathy for Nazi symbols or views. 
Their argument was that if you allow the government to ban opinions you hate or despise, you weaken your right to contest a similar ban on views with which you might agree. 
Freedom of speech, in other words, should mean freedom of hateful speech, too, as long as it does not threaten or promote violence. 
Most European governments already take a stricter view of public insults than the US Constitution does. 
It would be a great mistake to add even more restrictions. 
Terrorist attacks are doing enough damage, in lives and property. 
There is no reason for governments to make things worse by tampering with their citizens' liberties. 

Europe’s Illiberal Establishment 
ATHENS – On March 25, Europe’s leaders convened in the birthplace of the “European project” to celebrate the 60th anniversary of the Treaty of Rome. 
But what exactly was there to celebrate? 
Were they reveling in Europe’s disintegration, which they now call “multi-speed” or “variable geometry” Europe? 
Or were they there to applaud their business-as-usual approach to every crisis – an approach that has fanned the flames of xenophobic nationalism throughout the European Union? 
Even dyed-in-the-wool Europhiles admitted that the Rome gathering felt more like a wake than a party. 
A few days later, British Prime Minister Theresa May sent her letter to the EU formally triggering the United Kingdom’s slow but irreversible exit. 
The liberal establishment in London and around the continent is aghast at how populism is tearing Europe apart. 
Like the Bourbons, they have learned nothing and forgotten nothing. 
Not once did they pause for critical self-reflection, and now they feign shock at the legitimacy gap and the anti-establishment passion that threatens the status quo and, consequently, their authority. 
Back in 2015, I often warned Greece’s creditors – the crème de la crème of the international liberal establishment (the International Monetary Fund, the European Commission, the European Central Bank, German and French officials, and so on) – that strangling our new government in its cradle was not in their interest. 
If our democratic, Europeanist, progressive challenge to permanent debt bondage were snuffed out, I told them, the deepening crisis would produce a xenophobic, illiberal, anti-European wave not only in Greece but across the continent. 
Like reckless giants, they did not heed the omens. 
Greece’s brief rebellion against permanent depression was ruthlessly suppressed in the summer of 2015. 
It was a very modern coup: EU institutions used banks, not tanks. 
Unlike the coups that overthrew Greece’s democracy in 1967 or Czechoslovakia’s Prague Spring a year later, the usurpers wore suits and sipped mineral water. 
The official version of these events was that the EU was obliged to intervene to force a wayward population back to the path of fiscal rectitude and structural reform. 
In reality, the coup leaders’ main concern was to avoid admitting what they had been doing since 2010: extending a generalized bankruptcy into the future by forcing Greece to accept new, European taxpayer-funded loans, conditional on ever-greater austerity that could only shrink Greek national income further. 
The only way to continue doing this in 2015 and beyond, however, was to push Greece deeper into insolvency. 
And that required crushing our Greek Spring. 
Interestingly, the surrender document forced upon Greece’s prime minister, and approved by Parliament, was phrased as if it had been written at the request of the Greek authorities. 
Like Czechoslovakia’s leaders in 1968, forced by the Kremlin to sign a letter inviting the Warsaw Pact to invade their country, the victim was required to pretend that it had requested its punishment. 
The EU was only responding kindly to that request. 
Greece experienced collectively the treatment Britain’s poor receive when they claim benefits at Job Centers, where they must accept responsibility for their humiliation by affirming condescending platitudes such as: “My only limitations are the ones I set for myself.” 
This punitive turn on the part of the European establishment was accompanied by the loss of all self-restraint. 
As Greece’s finance minister, in early 2015, I learned that the salaries of the Chair, CEO, and members of the board of a public institution (the Hellenic Financial Stability Facility [HFSF]) were stratospheric. 
To economize, but also to restore fairness, I announced a salary cut of around 40%, reflecting the average reduction in wages throughout Greece since the start of the crisis in 2010. 
The EU, usually so keen to shrink my ministry’s outlays on wages and pensions, did not exactly embrace my decision. 
The European Commission demanded that I reverse it: after all, these salaries went to functionaries selected by EU bureaucrats – people they considered their own. 
After the EU forced our government into submission, and following my resignation, those salaries were raised by up to 71% – the CEO’s annual pay was bumped to €220,000 ($235,000). 
In the same month, pensioners receiving €300 per month would have their monthly benefits cut by up to €100. 
Once upon a time, the liberal project’s defining feature was, in John F. Kennedy’s stirring words, the readiness to “pay any price, bear any burden, meet any hardship, support any friend, oppose any foe, in order to assure the survival and the success of liberty.” 
Even neoliberals, like Ronald Reagan and Margaret Thatcher, strove to win hearts and minds, to convince the working class that tax cuts and deregulation were in its interest. 
Alas, following Europe’s economic crisis, something other than liberalism, or even neoliberalism, has taken over our establishment, seemingly without anyone noticing. 
Europe now has a highly illiberal establishment that does not even try to win over the population. 
Greece was just the start. 
The repression of the Greek Spring in 2015 led the left-wing Podemos party to lose its momentum in Spain; no doubt many of its potential voters feared a fate similar to ours. 
And, having observed the EU’s callous disregard for democracy in Greece, Spain, and elsewhere, many supporters of Britain’s Labour Party went on to vote for Brexit, which in turn boosted Donald Trump, whose triumph in the United States filled the sails of xenophobic nationalists throughout Europe and the world. 
Now that the so-called liberal establishment is feeling the nationalist, bigoted backlash that its own illiberalism brought about, it is responding a little like the proverbial parricide who appeals to the court for leniency on the grounds that he is now an orphan. 
It is time to tell Europe’s elites that they have only themselves to blame. 
And it is time for progressives to join forces and reclaim European democracy from an establishment that has lost its way and endangered European unity. 

Inequality, Immigration, and Hypocrisy 
CAMBRIDGE – Europe’s migration crisis exposes a fundamental flaw, if not towering hypocrisy, in the ongoing debate about economic inequality. 
Wouldn’t a true progressive support equal opportunity for all people on the planet, rather than just for those of us lucky enough to have been born and raised in rich countries? 
Many thought leaders in advanced economies advocate an entitlement mentality. 
But the entitlement stops at the border: though they regard greater redistribution within individual countries as an absolute imperative, people who live in emerging markets or developing countries are left out. 
If current concerns about inequality were cast entirely in political terms, this inward-looking focus would be understandable; after all, citizens of poor countries cannot vote in rich ones. 
But the rhetoric of the inequality debate in rich countries betrays a moral certitude that conveniently ignores the billions of people elsewhere who are far worse off. 
One must not forget that even after a period of stagnation, the middle class in rich countries remains an upper class from a global perspective. 
Only about 15% of the world’s population lives in developed economies. 
Yet advanced countries still account for more than 40% of global consumption and resource depletion. 
Yes, higher taxes on the wealthy make sense as a way to alleviate inequality within a country. 
But that will not solve the problem of deep poverty in the developing world. 
Nor will it do to appeal to moral superiority to justify why someone born in the West enjoys so many advantages. 
Yes, sound political and social institutions are the bedrock of sustained economic growth; indeed, they are the sine qua non of all cases of successful development. 
But Europe’s long history of exploitative colonialism makes it hard to guess how Asian and African institutions would have evolved in a parallel universe where Europeans came only to trade, not to conquer. 
Many broad policy issues are distorted when viewed through a lens that focuses only on domestic inequality and ignores global inequality. 
Thomas Piketty’s Marxian claim that capitalism is failing because domestic inequality is rising has it exactly backwards. 
When one weights all of the world’s citizens equally, things look very different. 
In particular, the same forces of globalization that have contributed to stagnant middle-class wages in rich countries have lifted hundreds of millions of people out of poverty elsewhere. 
By many measures, global inequality has been reduced significantly over the past three decades, implying that capitalism has succeeded spectacularly. 
Capitalism has perhaps eroded rents that workers in advanced countries enjoy by virtue of where they were born. 
But it has done even more to help the world’s true middle-income workers in Asia and emerging markets. 
Allowing freer flows of people across borders would equalize opportunities even faster than trade, but resistance is fierce. 
Anti-immigration political parties have made large inroads in countries like France and the United Kingdom, and are a major force in many other countries as well. 
Of course, millions of desperate people who live in war zones and failed states have little choice but to seek asylum in rich countries, whatever the risk. 
Wars in Syria, Eritrea, Libya, and Mali have been a huge factor in driving the current surge of refugees seeking to reach Europe. 
Even if these countries were to stabilize, instability in other regions would most likely take their place. 
Economic pressures are another potent force for migration. 
Workers from poor countries welcome the opportunity to work in advanced countries, even at what seem like rock-bottom wages. 
Unfortunately, most of the debate in rich countries today, on both the left and the right, centers on how to keep other people out. 
That may be practical, but it certainly is not morally defensible. 
And migration pressure will increase markedly if global warming unfolds according to climatologists’ baseline predictions. 
As equatorial regions become too hot and arid to sustain agriculture, rising temperatures in the north will make agriculture more productive. 
Shifting weather patterns could then fuel migration to richer countries at levels that make today’s immigration crisis seem trivial, particularly given that poor countries and emerging markets typically are closer to the equator and in more vulnerable climates. 
With most rich countries’ capacity and tolerance for immigration already limited, it is hard to see how a new equilibrium for global population distribution will be reached peacefully. 
Resentment against the advanced economies, which account for a vastly disproportionate share of global pollution and commodity consumption, could boil over. 
As the world becomes richer, inequality inevitably will loom as a much larger issue relative to poverty, a point I first argued more than a decade ago. 
Regrettably, however, the inequality debate has focused so intensely on domestic inequality that the far larger issue of global inequality has been overshadowed. 
That is a pity, because there are many ways rich countries can make a difference. 
They can provide free online medical and education support, more development aid, debt write-downs, market access, and greater contributions to global security. 
The arrival of desperate boat people on Europe’s shores is a symptom of their failure to do so. 

Profiles in European Denial 
ATHENS – Europe’s establishment is luxuriating in two recent announcements that would have been momentous even if they were only partly accurate: The end of Greece’s debt crisis, and a Franco-German accord to redesign the eurozone. 
Unfortunately, both reports offer fresh proof of the European Union establishment’s remarkable talent for never missing an opportunity to miss an opportunity. 
The two announcements did not come in the same week by accident. 
The Greek debt implosion, back in 2010, was the ugly symptom of the eurozone’s design flaws, which is why it triggered a domino effect across the continent. 
Greece’s continuing insolvency reflects the deep disagreements within the Franco-German axis concerning eurozone redesign. 
While three French presidents and the same German chancellor were failing to agree on the institutional changes that would render the eurozone sustainable, Greece was asked to bleed quietly. 
In 2015, the Greeks staged a rebellion, which Europe’s establishment ruthlessly crushed. 
Neither Brexit nor the EU’s steady de-legitimation in the eyes of European voters managed to convince the establishment to change its ways. 
French President Emmanuel Macron’s election seemed the last hope for the new Berlin-Paris accord needed to prevent a suffocating Italy from triggering the next – this time lethal – domino effect. 
Under Macron, new, hopeful ideas were proposed: a common budget for the eurozone; a new safe debt instrument and quasi-federal tax-raising capacities; a common unemployment insurance fund; common bank deposit insurance and a common pot from which to recapitalize failing banks (thus providing the missing foundation of a real banking union). 
Moreover, a new investment fund would mobilize idle savings across Europe, without adding to the fiscal stress of member-states. 
And Macron’s government also seemed to adopt a proposal I made in 2015, when I was Greece’s finance minister, for restructuring public debt via GDP-indexing. 
That way, the size of Greece’s total public debt (and the speed of its repayment) would be linked to the size and growth rate of Greece’s nominal income. 
A year later, with Italy on a collision course with the EU, the Meseberg Summit between German Chancellor Angela Merkel and Macron delivered an agreement on eurozone reform. 
A few days later, the Eurogroup of eurozone finance ministers delivered its own “solution” to the Greek debt crisis. 
In a decent universe, these two announcements would herald the end of a lost decade for Europe and the beginning of an era of rebuilding so that Europeans may face, together, the challenges posed by US President Donald Trump and the next economic downturn. 
Alas, that is not the universe we inhabit. 
Even before the Meseberg Summit, Macron had diluted his proposals to the point of surrender. 
The common bank deposit insurance scheme and the recapitalization fund were pushed into an implausible future in which the eurozone periphery’s banks have to shed their bad loans before a proper banking union is forged. 
The common unemployment insurance scheme was not even discussed. 
Last but not least, a common debt instrument to underpin a eurozone budget amounting to 2-3% of eurozone aggregate income – the main prerequisite for a macroeconomically significant fiscal union – was unceremoniously consigned to the dustbin. 
Naturally, Merkel offered just enough to allow Macron to disguise his humiliation as a personal triumph. 
In front of an ecstatic press corps, they hailed the decision to create a eurozone budget in name, when in reality it is nothing more than a credit line from the European Stability Mechanism (ESM, the bailout fund that gave Greece its loans in 2015). 
They also agreed to an insubstantial “rainy day” fund, to be financed by member states and a fictional financial transactions and digital economy tax – a “compromise” that costs Merkel nothing, given that countries like the Netherlands and Ireland are likely to torpedo it. 
As for bank recapitalization, Macron and Merkel touted an ESM-funded scheme. 
But with all ESM decisions subject to German parliamentary approval, the German Bundestag would have veto power over the recapitalization of, say, an Italian bank. 
Italy’s new government is unlikely to buy into this. 
When bankers try to cover up bad loans on their books, they extend new loans to enable their insolvent borrowers to pretend to be servicing the original loan. 
When the new loan is exhausted, the client is allowed to suspend repayment for a few years, with interest accumulating. 
This keeps the net present value of their asset (the loan) constant while postponing the day of reckoning (when they have to confess to their regulator that the loan is unrecoverable). 
Since 2010, Greece’s creditors have been practicing this extend-and-pretend strategy as though they were training for an Olympic event. 
Instead of a courageous and therapeutic haircut, or the moderate GDP-indexing solution, the Eurogroup’s recent decision, proclaimed as the “end of the Greek debt crisis” boiled down to the apotheosis of this cynical practice. 
Technically speaking, the central pillar of the new debt agreement is a decade-long postponement of payments totaling €96.6 billion ($112.5 billion) that were due to begin in 2023. 
The Greek state has thus been offered easy repayments until 2033 in exchange for continuing harsh austerity ad infinitum (a primary budget surplus target of 3.5% of national income until 2022, and 2.2% during 2023-2060); impossible annual debt repayments from 2033 to 2060 (around 60% of the state’s tax revenues); and a debt-to-national income ratio above 230% by 2060 if the next global recession puts the plan’s over-ambitious growth targets out of reach, as it surely will. 
Any objective assessment of the Eurogroup’s recent deal on Greek public debt would conclude that it condemns Greece to permanent debt bondage. 
And an impartial observer of the Merkel-Macron Meseberg Summit would conclude that the eurozone remains as macroeconomically unsustainable as it was five years ago. 
And yet Europe’s establishment, oblivious to the Nationalist International preparing to devour the EU, is serving it appetizers. 

Europe in Reverse 
BERLIN – The legendary American investor Warren Buffet once said, “It’s when the tide goes out that you find out who has been swimming naked.” 
That particular piece of wisdom referred to the situation of companies in an economic crisis. But it can also be applied to countries and economies. 
In Europe, the situation is cause for growing concern, because the global economic crisis is relentlessly laying bare the European Union’s flaws and limitations. 
Indeed, what Europe lost, first and foremost, with the rejection of the constitutional treaty is now obvious: its faith in itself and its common future. 
Amid this worst crisis since 1929, America has opted for a truly new beginning with the election of Barack Obama, and is now in the process of reinventing itself. 
By contrast, each passing day seems to drive EU members further apart. 
Rather than reinventing itself, Europe, under the pressure of the crisis and its own internal contradictions, threatens to revert to the national egoism and protectionism of the past. 
Europe today has a common currency and the European Central Bank (ECB), which have proven to be bulwarks in defending monetary stability during the financial crisis. 
Any weakening of these two institutions would cause severe damage to common European interests. 
But EU member governments’ behavior during the past few months raises grave doubts about whether they see things this way. 
The longer the crisis continues, the more obvious it becomes that the common currency and the ECB alone are not enough to defend the Common Market and European integration. 
Without common economic and financial policies, coordinated at least between the members of the euro zone, the cohesion of the common currency and the EU – indeed, their very existence – are in unprecedented danger. 
To be sure, the crisis has placed a stranglehold on countries worldwide. 
But there are significant differences and economic imbalances within the EU and the euro zone, reflected, for example, by increasingly divergent interest rates. 
Confidence in Italy, Spain, Ireland, Portugal, and Greece is rapidly evaporating, while the stronger economies in northern Europe are doing better, although they are struggling, too. 
Should this continue, perhaps bringing a de facto end to the Maastricht criteria and rising national protectionism in the form of industrial subsidies, the euro will be seriously jeopardized. 
It is easy to imagine what the euro’s failure would mean for the EU as a whole: a disaster of historic proportions. 
Moreover, the new EU member states in Eastern Europe, which have neither the economic strength nor the political stability of long-term members, are now beginning to take a nosedive. 
Given the exposure of some euro-zone states such as Austria, this crisis will also affect the euro area directly. 
To wait and see is, therefore, the wrong strategy. 
There is no reason to believe that the current global economic crisis has bottomed out. 
So, assuming that it intensifies further, Europe will rapidly face a grim alternative: either the richer and more stable economies in the North – first and foremost Europe’s largest economy, Germany – will use their greater financial resources to help the weaker euro-zone economies, or the euro will be endangered, and with it the whole project of European integration. 
Why not, then, quickly introduce new instruments such as Eurobonds, or create an EU mechanism comparable to the IMF? 
Each would certainly be costly – particularly for Germany – and therefore would be anything but popular, but the alternatives are much costlier; indeed, they are not serious political options. 
Institutionally, there is no way around a “European economic government” or “enhanced economic coordination” (or whatever you want to call it), which in fact would be possible informally and thus without any treaty change. 
Unfortunately, it has become clear that the Franco-German engine, which is crucial to the EU acting in unison, is momentarily blocked. 
Their rhetoric suggests that France and Germany have a great deal in common, but the facts speak a completely different language. 
In nearly all strategic aspects of EU crisis management, Germany and France are blocking each other – although ironically, both are doing virtually the same thing. 
They are thinking first and foremost of themselves, not of Europe, which is thus effectively without leadership. 
The EU was and is institutionalized compromise, and must remain so now, in the midst of a global economic crisis. 
If Germany and France don’t quickly resolve their differences and find a joint strategic answer to the crisis, they will damage themselves and Europe as a whole. 
It must never be forgotten that the EU is a project designed for mutual economic progress. 
If this economic bond disappears, national interests will reassert themselves and rip the project apart. 
Europe today does not lack economic strength, but rather the political will to act in unison. 
Here is where Germany and France must lead the way. 

Europe in the IMF 
BRUSSELS – Europe’s leaders never tire of reminding their constituencies, almost like a mantra, that the major emerging-market countries are overturning the existing global economic order. 
But when it comes to recognizing that reality in the world’s international financial institutions, they adopt a different tune. 
This is particularly true of the eurozone. 
The eurozone as such has no representation in the international financial institutions. 
Instead, 12 eurozone countries are represented on the board of the International Monetary Fund via six different “constituencies,” or country groups. 
The two largest, Germany and France, have a constituency all their own. 
Ten other eurozone members are part of four other constituencies headed by Belgium, the Netherlands, Spain, and Italy. 
However, these four constituencies also contain more than 20 other countries, most of which are not even EU members. 
Together with the Scandinavian and British constituencies, there are thus eight EU representatives on the IMF’s executive board. 
Given that the IMF’s Articles of Agreement stipulate that there can be only 20 board members, this means that 40% of all the IMF’s executive directors from the EU, with one-third coming from the eurozone. 
The IMF is a prime example of the over-representation of Europeans in international fora. 
Counter-intuitively, however, the excessive number of Europeans actually diminishes Europe’s influence, because they usually defend national interests, which are often divergent. 
The net effect is that common European interests are not represented at all. 
Contrast this current condition of extended misery with the only sensible long-term solution: a pooling of IMF quotas by all eurozone countries. 
The eurozone would then have one constituency, or seat, on the Fund’s executive board, filled by a candidate nominated by the eurozone group of finance ministers. 
The European Central Bank could also, perhaps, be involved, nominating the deputy of the eurozone executive director at the Fund. 
In this way, Europe’s fiscal and monetary authorities would be forced to cooperate in shaping their input into IMF decisions. 
Many countries (including Germany) already follow this “double-headed” approach. 
The eurozone representative would be very influential, because he would represent an even larger quota than that of the US. 
Indeed, the US Treasury’s de facto dominance within the IMF would become a thing of the past. 
But, given the scant interest of European Union members in transferring further competences (and juicy international positions) to the EU level, the chances that this solution will prevail seem remote. 
Germany, in particular, feels that it has no reason to share its IMF representation with other, fiscally weaker eurozone members. 
And the French seem scared of contagion: once France agrees to a common eurozone seat at the IMF, others could cite it as a precedent to be applied to the United Nations Security Council, where France would then risk losing its permanent seat to a common EU representative. 
Until now, the rest of world could only grumble at Europe’s obstinate refusal to recognize its relative decline. 
Since no European country would agree to give up its seat on the IMF’s executive board, the only way out was to add more and more temporary seats for the dynamic and underrepresented emerging economies. 
Such a process, however, cannot go on forever, because with each increase in size, the IMF’s board becomes less effective. 
This is why the US has now decided to throw a cat among the European pigeons. 
The US (which has veto power) has now taken the stance that it will no longer approve the higher number of executive directors (24 at present). 
This has confronted the Europeans with a quandary: if they do not agree to give up some seats on the IMF board, some emerging countries, such as Argentina, Brazil, and perhaps even India, would lose theirs. 
The EU does not want to be held responsible for this. 
The pigeons are thus fighting among themselves over who should be sacrificed. 
Until now, it could be argued that the eurozone did not have a common fiscal agency that could represent common eurozone interests. 
But this has changed with the creation of a European rescue fund in the form of the European Financial Stability Facility (EFSF). 
Funding the next intra-eurozone rescue will be rather cumbersome and costly, because financial markets distrust complicated structures like the one set up to finance the EFSF. 
This suggests a golden opportunity for Europe to make a virtue of necessity by pooling its access to much-cheaper IMF funding. 
If, for example, Ireland (or Spain) needed emergency support, the other eurozone countries could simply agree to lend it their IMF quotas. 
The troubled country could then rapidly obtain a large IMF loan, given that the eurozone countries’ quotas total about €60 billion – and that IMF loans can easily reach multiples of the quota. 
Creditor countries like Germany would also gain, because they would not need to extend vast sums in guarantees to the EFSF while still safeguarding their interests within the EFSF’s existing structure. 
All eurozone members, then, have an interest in concentrating in a smaller number of constituencies, with the EFSF representing their collective interests within the IMF. 

Europe in Wonderland 
BERLIN – Europe and its national governments are basking in their new capacity to act – and not without reason. 
Who would have dared, even a few weeks ago, to predict that in the end it would be the divided Europeans, not the United States, who determined how to contain the global financial crisis? 
Serious crises are defining moments in history. 
To be sure, the US is in an interregnum until the election of a new president. 
Moreover, George W. Bush seems to be far weaker than any normal “lame duck” president, creating a global power vacuum that has been filled vigorously by French President Nicolas Sarkozy, who is also the current president of the European Council. 
Sarkozy already took on this role in the Georgia crisis; now he has reinforced it. 
By summoning the euro group, which so far includes 15 European Union members, the French presidency could rely on a politically functioning avant-garde group. 
Especially with regard to financial and currency issues, the EU has a strong institutional base – the euro as a common currency, the European Central Bank, and the binding budget and debt criteria of the Maastricht Treaty. 
Indeed, the current global financial crisis has demonstrated once more that the EU is strong where it has integrated its member states’ interests and weak where it has failed to do so. 
Of course, the crisis has not been overcome. 
We have gained time and can take a deep breath – no more and no less. 
When you are hanging over an abyss, as the global financial system has been in the past few weeks, then gaining solid ground, even if only temporarily, makes a big difference. 
However, beyond the mortgage market, other huge risks are lurking, especially in the US financial system: credit cards, car loans, and presumably a few other things. 
So there are good reasons to doubt that governments’ and central banks’ current actions will really redress the crisis. 
Parallel to this, the next tsunami is approaching, threatening to inundate the real economy. 
True, everybody is complaining about America’s speculative bubble, and they are right to do so. 
But the whole world economy – from China to Germany – benefited for decades from Americans’ debt-driven over-consumption. 
Machinery to China and everywhere in the world; 
Porsches, Mercedes, and BMWs to the US – that was Germany’s winning formula in this period. 
Thus, a dramatic decline in the real economy, following the collapse of the financial house of cards, will have serious consequences for Germany and the EU. 
The breakdown of the US engine of growth cannot, at least in the short term, be replaced by Asia and stimulation of China’s domestic economic activity. 
That means that the world economy is approaching a protracted deep recession. 
Even a global depression cannot be excluded in the face of this fundamental crisis. 
So far, thanks to the euro, the ECB, Gordon Brown, and Sarkozy, the EU has worked well in the world financial crisis. 
But the link between the global financial and economic crises will confront Europe with severe challenges – but also a big opportunity. 
Simply put, Europe’s nation states are too small to address a crisis of this dimension on their own. 
Only the EU can protect the interests of all Europeans – including those outside the euro zone and even outside the EU. 
But, while Europeans have created strong institutions with the euro and the ECB, they still lack an adequate political superstructure to confront the coming economic crisis. 
For many years, France has called for a European economic government for the euro zone, which Germany has so far rejected, for good reasons: France’s initiative was nothing but a hidden attack against EU members’ annual fiscal-deficit ceiling of 3% of GDP and worse, against the ECB’s independence. 
And the recent ill-conceived proposals of the French president on state ownership made things even worse in Berlin. 
But, given the global economic and financial crisis, the question now is whether Germany should abandon its resistance to a European economic government and, instead, lead the way toward creating it. 
After all, if the crisis in financial markets continues and combines with a dramatic slump in the real economy, the EU could quickly be at risk if it cannot respond politically. 
There is therefore an urgent need for macroeconomic and fiscal coordination at the EU level. 
This is all the more true because the European Commission is currently proving to be a near-total failure. 
An incompetent president of the Commission has had his term renewed for another five years as a reward for his innocuousness. 
Alas, this, too, is Europe. 
The German chancellor and her Minister of Finance must now quickly learn from their mistakes of recent weeks. 
To wait until events in Europe force them into line has turned out to be a bad strategy. 
It would be far better for the German government to take the bull by the horns by defining the principles of a European economic government in such a way that both countercyclical debt policy within the Maastricht framework and the ECB’s independence are preserved. 
This means not dividing Europe, but forming an active and inclusive avant garde. 

The Return of Industrial Strategy 
LONDON – Industrial policy is making a comeback in many advanced economies. 
Dismissed out of hand in the go-go 1980s as a contributor to the previous decade’s stagnation, it is increasingly viewed as a means to stem working-class voters’ defection to right-wing populist parties. 
But developing a modern and effective industrial strategy will be no easy feat. 
The European Union has been trying to define a consistent framework for addressing the topic since 2014, when it published an analysis of industrial policy’s advantages and disadvantages. 
The United Kingdom is further along, having released in January a green paper on building an industrial strategy. 
US President Donald Trump has also focused on industrial policy, though his version would presumably entail substantial state intervention and protectionist measures. 
Trump’s regressive vision, despite remaining short on details, already seems defective. 
But Europe’s approaches to industrial strategy show some promise, not least because they are likely to eschew the broad interventions of the past that emphasized “picking winners.” 
In the United Kingdom, for example, the government expects to focus instead on “targeted interventions” designed to create positive incentives, correct market failures, and address social, geographical, and sectoral imbalances. 
Clearly, political leaders have learned some important lessons from history. 
But serious problems remain. 
Europe’s governments seem to think that they can implement ad hoc policies that strengthen their “invisible hand” today, and that those policies will somehow end up fitting neatly into a coherent framework. 
That seems optimistic, at best. 
The UK’s new plan does not even pinpoint the strategy’s main objective. 
Is it to buttress GDP growth when the UK is no longer part of the European single market and customs union? 
Or is it to boost the British economy’s potential output (that is, to increase long-term trend growth)? 
The government’s plan mentions both objectives, but says little about how they will be balanced. 
UK leaders must recognize that, where the strategy is aimed at strengthening post-Brexit growth, it will probably have to be set in the context of higher tariffs vis-à-vis the EU, which would remain Britain’s main market. 
Such a strategy would also have to take into account the global competitiveness of British industry, and complement the country’s new independent trade policy. 
At the same time, the British government must not get so caught up in preserving short-term growth and employment amid Brexit that it loses sight of the need to boost long-term growth potential. 
Worryingly, however, the proposed strategy may over-emphasize ring-fencing the government’s own involvement in the economy. 
While governments are right to shy away from picking winners, they must remain active in other ways. 
Specifically, they must analyze which sectors and industries are more likely to contribute to long-term growth, and help to enable their success – potentially even in ways that imply real financial risks. 
For example, governments should consider large infrastructure investments that have positive externalities – say, shorter commuting times, with their economic and social benefits – and that may be too large or too risky for the private sector. 
This is particularly relevant where the government has access to a wider range of information than the private sector, strengthening its ability to optimize its investments. 
Another component that is missing from current discussion of industrial policy in Europe is a clear timeline. 
The reality is that a strategy developed today could take a generation to deliver results (think education reform). 
So an effective industrial strategy must establish not only an overall timeframe, but also important milestones along the way. 
In the UK’s case, those milestones should include shorter-term goals and outcomes associated with the Brexit process. 
After all, an effective modern industrial strategy requires a careful accounting of the assets and resources, including human capital, that the economy will need in the coming years. 
For the UK, such an accounting cannot be decoupled from Brexit. 
In particular, UK leaders must identify which resources are tied to Europe’s single market, how they can be replaced, and how long that process will take. 
The final critical element of an effective industrial strategy is the institutional framework on which it depends. 
The UK government acknowledges the importance of creating the right institutions to address regional disparities. 
But institutions must go beyond linking up sectors and regions to ensure transparency and accountability, especially in the relationship between the private and public sectors. 
With that in mind, British leaders should reflect on which of the necessary institutions are already in place and which need upgrading. 
It is important to resist the urge simply to shut down weak or inefficient institutions, and to consider, instead, how they can be reformed and strengthened. 
Major changes are coming to the British and European economies. 
Leaders must act now to define a comprehensive strategic vision that will enable them to cope with the challenges ahead. 
That vision must be bold and ambitious. 
Above all, it must be shared. 
At a time of intensifying polarization, that may well be the hardest part. 

Europe Has Lost its Way 
WASHINGTON, DC – Europe’s response to the strategic challenges it is facing – Russian aggression in Ukraine, refugees fleeing violence in the Middle East, disorder in North Africa – leaves the impression that its leaders have no idea what to do. 
And indeed, they may not – a reality that needs to be acknowledged, not papered over. 
Simply put, the European Union’s stagnant economy is conditioning its response to the external pressures it confronts; internal crisis has left EU leaders little room for maneuver. 
Fortunately, Europe has the means to address this crisis, if it can summon the wisdom and the political will. 
The origins of the EU’s problems lie in its response to the 2008 global financial crisis: two years of large-scale fiscal stimulus. 
While this did little for growth, it resulted in crippling public debt. 
Seven years later, EU output per person is no higher than it was at the start of the crisis. 
Meanwhile, average public debt has soared to 87% of GDP, leaving little space for policy flexibility or innovation. 
In hindsight, it is all too obvious what should have been done. 
Greece, which carried out the biggest fiscal stimulus, is the country whose economy has suffered the most damage. 
Its depression continues, whereas countries like Latvia, Lithuania, and Estonia, which carried out early, radical fiscal adjustments and liberalized their economies, are enjoying strong growth. 
Furthermore, the slow pace of European decision-making has compounded Greece’s troubles. 
When it comes to economic policy, a fast, faulty decision is often better than inaction. 
Instead of resolving the Greek financial crisis quickly, EU leaders allowed it to crowd out discussion of other issues for five long years. 
Meanwhile, Greece limped along, never taking the decisive measures that might have restored confidence. 
With its attention focused on macroeconomics, the EU neglected to take the measures that would have put economic growth back on track: freeing up markets, cutting spending (rather than raising taxes), and, above all, further developing its greatest asset, the single European market. 
Little has changed since Italian economists Alberto Alesina and Francesco Giavazzi noted, nearly a decade ago, that, “Without serious, deep, and comprehensive reforms, Europe will inexorably decline, both economically and politically.” 
They warned that, “Absent profound change, in 20 or 30 years the share of Europe [in world output] will be significantly lower than it is today, and, perhaps more important, its political influence will be much trimmed.” 
Indeed, a World Bank report on European growth in 2012 summed up the situation as follows: “Aging Europeans are being squeezed between innovative Americans and efficient Asians.” 
The chief culprits for Europe’s underperformance are well known: high taxes, too many and bad regulations, the absence of key markets, and high public expenditures. 
And there is only one reason why European governments spend so much: excessive social protection. 
As the World Bank observed, “Western European governments spend about 10% of GDP more than the United States, Canada, and Japan. 
The difference in social protection spending is 9% of GDP.” 
In order to fund this spending, revenues must be raised. 
And, because it is difficult to tax capital efficiently, Europe has imposed exorbitant levies on labor. 
Across the continent, but especially in southern Europe, taxes and strict labor-market regulations keep unemployment high, at 11% of the labor force, and dissuade Europeans from investing in their education. 
The natural consequences are too little employment, too little investment in sophisticated education, too little innovation, and minimal increases in productivity. 
Most striking is European backwardness in high-tech development and innovation. 
By almost any measure, most of Europe looks pitiable. 
Of the 50 best universities in the world, according to the Shanghai list and the Times Higher Education Supplement list, some 30 are American, six or seven are British, and only a handful are to be found in continental Europe. 
A half-dozen northern European countries can compete with the US when it comes to research and development spending and patents granted, but the south and east of Europe lag far behind. 
Meanwhile, the EU has yet to open its markets for business services and digital trade, on which the American economy thrives, even though services account for about 70% of GDP in most EU countries. 
In 2006, the European Commission issued a directive on the liberalization of trade in services, but major countries – particularly Germany – have refused to implement it. 
The absence of services and digital markets harms the development of a modern economy in Europe. 
It is not by chance that American giants like Apple, Amazon, and Google rule the world of high-tech. 
There is nothing inevitable about Europe’s malaise, just as there is nothing quintessentially European about having excessive social transfers. 
Serious European governments – from Ireland to Poland – have successfully addressed the problem. 
The rest of the EU should not only follow suit; they should also cut income and payroll taxes and liberalize their labor markets. 
Fundamental economic reforms are usually implemented only after a severe crisis, as was the case in Britain in the late 1970s, in Sweden and Finland in the early 1990s, and in Eastern Europe after the collapse of communism in 1989. 
The EU has wasted the opportunities afforded by the 2008 global financial crisis and the subsequent euro crisis. 
Rather than making the difficult changes that would enable strong recovery, Europe’s policymakers have weighed down the economy with more spending and debt. 
The EU will continue to flounder until it recognizes its mistakes and begins to carry out the reforms its economy needs. 
Only by putting the continent firmly back on the path of growth will Europe’s leaders be able to address the external challenges they now confront. 

Europe Is Blocking Russia 
Russia's political and strategic accommodation with the West continues apace. 
Day by day, relations with NATO grow stronger. 
The new orientation is irrevocable. 
But despite the price that President Putin is paying at home for his pro-Western policies--which are not nearly as popular in Russia as they are in the West--scant economic rewards, particularly from the European Union, have appeared. 
Europe, indeed, seems to be in no hurry to give Russia improved access to its markets. 
European Commission President Romano Prodi confirmed Russia's status as a "market economy" at last May's EU-Russia summit, a move that should have improved Russia's access to European markets. 
But it now seems unlikely that individual EU member states will approve this designation by September 18 th , which they must if it is to enter into force. 
Instead of opening the door, the EU seems determined to find covert ways to close its markets to Russian goods. 
Since May, the EU commission on trade policy has been preparing strict new rules to manage Russia's exports to the Union. 
These new regulations may turn the promise heralded by Russia being accorded "market economy status" into a mere formality that will not increase Russia's access to the EU market by a single iota. 
Among the tactics the EU is using to retard Russian trade are numerous antidumping investigations aimed at Russian companies. 
These probes, which have the effect of blocking exports from targeted firms, cost Russian businesses $1.3 billion a year in lost exports--a huge loss in an economy that is hurting as much as Russia is. 
The EU's trade regulators argue that they have the right--and the obligation--to initiate antidumping investigations if they suspect that a state, say, regulates prices for energy carriers in a way that subsidizes domestic firms. 
If they find Russia "guilty" of subsidizing its industry through low-cost energy, they can deem Russian goods as "dumped" and impose trade restrictions. 
This is a blatantly hypocritical stance, given the regulation of energy that goes on within the EU--say, in France. 
For Russia to prove that it does not use regulated energy prices as hidden industrial subsidies, it will have to make its case using international accounting standards. 
Or so the EU demands. 
But Russia's accounting standards--no surprise--have not yet reached international standards. 
Implementing such standards in Russia is beyond the capacity of most businesses, something that should be self-evident, given how new modern businesses practices are to the country. 
True, these EU requirements were not designed simply to frustrate Russia. 
They are applicable to all market economies that trade with it. 
But the EU is using its rules and investigative procedures in ways specifically aimed at Russian businesses. 
Besides, given the stories of rampant corruption in accounting practices in the West nowadays, the EU should be more understanding. 
The Enron and Worldcom scandals, after all, occurred in countries with long histories as market economies. 
Although it is beginning to wean companies off the practice, Russia does indeed sell energy cheaply to people and industries that became addicted to subsidized energy under socialism. 
Russia has also failed to establish international accounting standards across its economy. 
But Russia has repeatedly discussed the reasons for these problems with EU officials, and has pointed out the reforms now underway. 
Change cannot occur overnight. 
But even when all the reforms are enacted, Russian energy prices will remain cheaper than in Europe. 
This reflects Russia's natural advantage as an energy producer. 
The EU seems to want to penalize Russia for its natural wealth. 
We have rich reserves of gas and coal. 
We have the great resources of Siberia. 
We have hydroelectric power plants. 
We produce cheap electric energy. 
To force Russia to increase energy prices to EU levels is as ridiculous as making China sell rice to its people at world prices. 
The EU's emerging anti-Russian trade policy is not an antidumping policy; it is outright protectionism. 
Moreover, European companies are not weak. 
What, exactly, are they so afraid of? 
Russia is not strong enough to sink any part of the European market. 
Europe's national political leaders, who so often proclaim their joy at growing closeness to Russia, must halt the efforts of those in the EU Commission who seek to sabotage EU/Russia trade relations. 
Meanwhile, Russia must mobilize its own diplomats to make the case, publicly and privately in all the EU capitals, for greater access to EU markets. 
Europeans who want to develop relations with Russia and the majority of businessmen--European and Russian--with interests in greater trade must also be induced to lobby in favor of greater openness. 
All of this needs to be done fast, by September 18 th . 
Otherwise, Russians will come to view being accorded "market economy" status as just another broken promise on the part of the West. 


Europe is Working Longer 
France’s decision effectively abolishing its 35-hour workweek by allowing employers to increase working hours – and pay – marks a reversal of a decades-old trend. 
In the 1980’s and 1990’s, most European countries reduced working hours: Germany went from more than 40 to 38 per week, the UK from 40 to 37, Denmark from 39 to 37, and France from 40 to 35. 
Today, however, as Europeans struggle with high unemployment and stagnating living standards, they may have to work longer to cope with globalization. 
The French actions follow changes in Germany, where some recent wage settlements resulted in longer working times. 
The difference between the two countries is that, in Germany, working times were increased without compensating pay increases. 
Siemens was the forerunner, going from 35 to 40 hours per week. 
Bavaria’s government increased the workweek from 38.5 to 40 hours for older employees and to 42 hours for younger employees. 
When Daimler-Chrysler increased work hours from 35 to 40 hours in its research and development center, the dam broke and other bargaining agreements fell into line. 
Germany primarily reacted to low-wage competition from ex-communist countries. 
Currently, the average wage of the ten countries that joined the EU in May 2004 is about one-seventh of the West German wage level, and the Chinese wage is one twenty-fifth. 
Those differences are so huge that some people consider efforts to compete futile. 
But, as productivity is much higher in Germany, an effective reduction of hourly labor costs by uncompensated increases in working hours seems worth trying. 
This could be an example for other European countries. The next step for France could be unpaid increases in working times. 
Trade union opposition to extending working hours is based on the “lump-of-labor” theory. 
According to this view, there are no economic advantages of such a policy, because the total amount of labor in the economy is fixed. 
As a result, a 10% increase in working time will merely reduce employment by 10% percent. 
Despite its seeming plausibility, this view is wrong. 
Working longer for the same pay is a useful way of making Europe more competitive, and, when compared to reducing wages, it imposes a much lighter burden on workers and employees. 
Working longer will boost economic growth, for if people work longer, then so does capital. 
Except for where all 24 hours of the day are filled with shift work, increasing the daily working time of people extends daily capital utilization. 
Thus, a 10% increase in working time is the same as if the economy’s stock of productive capital were increased by 10%. 
There is a jump in wealth and an immediate production boom. 
The lump-of-labor theory assumes that working longer and employing more people is the same thing. 
But they are very different. 
Longer working time can be achieved nearly instantaneously, whereas employing more people is time consuming and expensive, as it typically requires new physical investment. 
Working longer is thus the ideal way to achieve growth and competitiveness. 
In fact, extending daily working times will, in the medium term, also result in higher employment, because it will increase productivity while labor costs remain constant. 
Some workers whose productivity was too low to cover their cost will now be hired, as firms will find it worthwhile to expand output above the level resulting from the increased working time itself by investing more capital and hiring more workers. 
Some fear that extending the workday will not produce more jobs because the resulting expansion of hours worked will reduce the capital-labor ratio. 
This would lower the marginal productivity of hours worked sufficiently to offset the positive effects of increasing the number of hours per worker. 
But, again, capital would also work longer. 
Because of the “capital utilization effect,” the capital-labor ratio would not, in fact, decline, and hence there would be no significant effect on the marginal productivity of hours worked. 
The theoretical effect on employment is unambiguously positive, because marginal workers will be more productive as they work longer. 
Would there be enough demand to absorb the additional output resulting from increasing the workday? 
Advocates of the lump-of-labor view say no. 
But as more goods are produced while the wage per worker is fixed, profits increase by exactly the same amount as the value of output does. 
Thus, in principle, the purchasing power for the extra output would be available. 
The entrepreneur might buy his wife a new fur coat or his workers a new production plant. 
If all firms work longer, most will experience more demand, and the average firm will face as much extra demand as it provides extra supply. 
True, some extra demand will go abroad, but so will some of the extra supply. 
A slight devaluation would solve any remaining problem with export demand. 
This could be an explicit devaluation or an implicit one due to a price reduction, made possible by the reduction in unit production costs resulting from the extra working time at constant pay. 
The argument that working longer destroys jobs and that we need technological progress in order to become more competitive and maintain employment is inherently inconsistent, because working longer is nearly the same as technological progress that makes capital and labor more productive. 
Either one or the other view is correct, but both cannot be true simultaneously. 
In any case, only the second interpretation is correct. 
The fear that extending the workday will damage employment is unfounded. 
It is a tried and true path towards growth, competitiveness and employment. 

A European Role in Palestine? 
LONDON – The international community’s attention in the Middle East nowadays is inevitably focused on the Islamic State’s military advances in Syria and Iraq, the failed states of Yemen and Libya, the activities of Islamic extremists everywhere, and the continuing efforts to complete a deal to contain Iran’s nuclear ambitions. 
Meanwhile, the oldest dispute in the region – the subject of a decades-long peace process that moves nowhere – continues to fester and worsen in Palestine and Israel. 
A report submitted earlier this month by the NGO Defense for Children International – Palestine (DCIP) to UN Secretary General Ban Ki-moon on the Palestine-Israel conflict’s toll on children in 2014 underscores some of the most damaging consequences of this state of affairs. 
Its reception also serves as a reminder of why we have made no progress toward peace. 
Last year, according to the DCIP report, 561 children were killed – 557 of them Palestinian, most as a result of Israel’s Operation Protective Edge in Gaza during the summer. 
In addition, almost 3,000 Palestinian children were injured during that 50-day conflict, with about 1,000 permanently disabled. 
The report also details the destruction of schools, the post-conflict mental health problems faced by the young, and the imprisonment of children. 
According to Ban, the number of Palestinian children killed in 2014 was higher than the numbers of child deaths in Syria and Darfur, and was exceeded only in Afghanistan and Iraq. 
The number of schools destroyed in Palestinian areas was the highest recorded anywhere. 
Not surprisingly, the UN’s special representative for children and armed conflict, Leila Zerrougui, recommended that Israel and its adversary in Gaza, Hamas (which has a grim record, too), should be placed on the UN’s annual list of states and groups that gravely violate children’s rights. 
But the United States put pressure on the Secretary-General to leave Israel off the list; 
Ban acceded, and decided to leave Hamas off the list as well. 
Israel, frequently lauded in the US Congress as America’s most dependable ally in the region, is a signatory to the UN Convention on the Rights of the Child. 
It is difficult to imagine that US Ambassador to the UN Samantha Power, who has a fine record on human-rights protection, had her heart in lobbying to whitewash Israel. 
Many Europeans will conclude that this is further evidence (if any was needed) that the US will always – and disastrously – protect Israel from the international and reputational consequences of its actions. 
But this is not enough. 
Israel and Palestine are trapped in a bloody cul-de-sac, which is catastrophic for Palestinians and increasingly dangerous for Israel’s prospects. 
As a group of eminent European politicians recently noted, a two-state peace deal could be lost, leaving Israel to face a stark choice: become a non-Jewish democracy or a Jewish non-democracy. 
This group, which included former presidents, prime ministers, foreign ministers, European Union commissioners and senior diplomats, sent a set of proposals to EU leaders in May. Europe, according to the group, should offset America’s evident withdrawal from the diplomatic process and play a serious role in reviving prospects for peace. 
At the heart of the proposals is EU support in the UN Security Council for a resolution that “either (1) calls for new negotiations and sets a mandatory deadline for the completion of an agreement to establish a two-state solution, or (2) creates a greater equivalence between the Israeli and Palestinian parties, including through recognition of a Palestinian state and strong support for Palestine accession to international treaties and organizations.” 
The call for such a resolution reflects the impact of Prime Minister Binyamin Netanyahu’s obnoxious behavior and the extremist views of several of his ministers, which have increased European countries’ sympathy for Palestinian statehood. 
There is also a growing clamor in the EU to enforce the correct labeling of products made in Israel’s West Bank settlements. 
These products are exported to Europe under bilateral trade agreements between the EU and Israel. 
But the settlements are not part of Israel under international law. 
Sooner or later, someone will take EU countries to court over this. 
The response to these sorts of proposals from Israel’s government has been depressingly predictable. 
First, Israeli spokesmen accuse Europeans of anti-Semitism – that hateful blot on Europe’s history. 
But there is a real danger in conflating criticism of Israeli intransigence and extremism with anti-Semitism. 
To say that it is anti-Semitic to condemn the killing and maiming of children in Gaza is to make a mockery of acts that really are anti-Semitic and that deserve to be condemned by every civilized person. 
Second, Israel repeats its claim that it has no potential partner for peace. 
In fact, Israel is in deep denial, which was reflected in Netanyahu’s contemptuous rejection of a two-state solution in his successful re-election campaign. 
The fact is that every situation in which a dominant power confronts those it condemns as terrorists sooner or later ends in negotiations. 
In Algeria, South Africa, and Northern Ireland, those in power invariably claimed that they had no partner for peace – until they made peace with the very “terrorists” they had spent decades vilifying. 
To put off talking makes violence increasingly difficult to end, which means that the sentiments that violence breeds become increasingly difficult to change. 
To secure peace, Israel will one day have to talk seriously to Hamas as well as Fatah and the PLO. 
There is no alternative. 
Until that happens, the children – the overwhelming majority of them Palestinian –will continue to suffer. 
How long will the rest of the world look the other way? 

Resolving Europe’s Banking Crisis in Italy 
LONDON – The European banking sector is crippled and highly fragmented. 
Though its problems are more acute for some countries and financial institutions, the sector runs on a level of profitability that is, on average, lower than its cost of equity and maintains a stock of non-performing loans and hard-to-value assets large enough to undermine its capitalization for years to come. 
Italy is a case in point. 
Not only is its dysfunctional banking sector undermining economic recovery and inhibiting investment; the sector’s troubles are the sharp end of a problem that affects the entire eurozone. 
By the spring of 2012, it had become clear that the European banking system was a critical weak point in the euro’s architecture. 
Common banking supervision, a centralized resolution framework, and a mutualized deposit-guarantee scheme were understood to be necessary pillars of the eurozone. 
It was thought that these measures would help in the short term to accelerate bank repair, and that they would end financial fragmentation, establish a level playing field, reduce the risk of future banking crises, and ultimately contain and share the costs of banking failures. 
But the road to hell is paved with good intentions. 
The European banking union, in its current state, is not only incomplete; its design flaws have made it a source of inaction and instability potentially worse than the ills it was intended to cure. 
The deposit-guarantee scheme, for example, shows no sign of progress, and the debates on the single resolution fund and its lack of a public backstop to deal with large-scale banking distress are going nowhere. 
Finally, the bail-in rules were introduced before banks could issue enough bail-in-able debt. 
These sequencing issues can and should be addressed over time. 
But there are far more troubling problems with the conceptual foundation of the banking union itself, in particular with its resolution framework. 
Since 2007, EU countries have provided in excess of €675 billion ($757 billion) in capital and repayable loans, along with €1.3 trillion in guarantees, to financial institutions in distress, so the desire to limit bailouts is understandable. 
This concern is all the more legitimate, given that bailouts have often hampered restructuring, resolution, and consolidation to preserve existing banking interests and practices, thereby delaying the necessary repair of balance sheets and zombifying the European banking system. 
To be sure, international experience shows that public resources are sometimes necessary to minimize costs and hasten consolidation. 
But the logic of isolated intervention ignores the interconnectedness of the system, whereby distress in one large institution often creates spillover effects that feed destabilizing system-wide runs. 
That is why successful interventions in Spain and Ireland were comprehensive and required large amounts of national and European resources to establish a “bad bank” and ensure a system-wide subsequent triage of assets, recapitalization, and consolidation. 
Although these programs’ comprehensive nature explains their success, neither the Banking Recovery and Resolution Directive nor the Single Resolution Board (SRB) are designed to put in place such systemic responses. 
In fact, the SRB even lacks the executive authority to implement its decisions, which are carried out by national authorities. 
It also lacks the ability to ensure that bank resolutions are accompanied by the necessary preventive steps in the rest of the banking system. 
In short, the European banking resolution framework has confiscated the tools for intervention from national authorities (which was the right thing to do), without recreating them at the European level. 
As a result, neither national governments nor European authorities are empowered to act. 
This leaves the Italian authorities with a limited set of options. 
A unilateral blanket bailout would stress the banking union, stretch public finances, and leave the Italian banking system with its structural weakness. 
Alternatively, they could also maintain the current piecemeal approach, which has essentially committed small amounts of public resources and forced the stronger banks to support the weaker ones. 
But this strategy cannot work for large institutions. 
A third option would be to confront the European banking union’s shortcomings by setting out a comprehensive plan to restructure, recapitalize, and consolidate the Italian banking system, thereby ending decades of poor governance and bad supervisory practices. 
This new approach would require, first, a substantial increase in the size of Atlante, the fund set up to recapitalize some of the weaker Italian banks, to enable it to play the standard role of asset triage of a “bad bank” for the entire banking sector. 
The need for further Italian public resources could be acceptable if the European Commission’s competition authority were to play a role in the governance of Atlante. 
Second, once freed of their non-performing loans, banks would need to undertake precautionary recapitalizations, including the bail-in of subordinated bondholders and the immediate compensation of retail investors. 
Then, all banks should be given a tight schedule to raise capital privately, in accordance with the single supervisor’s instructions, to levels that create a sufficient buffer to ensure their viability; banks that fail to meet this schedule should be resolved. 
Finally, and most important, deep reforms should be undertaken to facilitate a real shift in banks’ business models in order to restore their profitability. 
Such reforms should include dedicated redundancy schemes for bank employees (to facilitate consolidation), an overhaul of solvency law and court procedures (to redress repossession delays), and profound changes in corporate governance, particularly in the cooperative banking system. 
European authorities are unable to design such a plan, owing to the banking union’s fragmented and incomplete competencies. 
It is up to Italy to break the vicious cycle of inaction and take the bold steps needed to repair Italian banks (and avert a real crisis), which would also provide a blueprint for redressing the inadequacies of the European resolution framework. 
Italy needs to show that one can be both a firefighter and a builder. 

Europe’s Roadblocks to Long-Term Investment 
AMSTERDAM – One of the major challenges facing the European economy is the lack of liquidity in its capital markets. 
Since the 2008 global financial crisis, an enormous number of new rules have been put in place. 
In order to facilitate the long-term investment that Europe desperately needs, it would be wise to reassess the broader regulatory environment that has emerged over the past six years. 
With banks reluctant to make new loans, institutions such as pension funds are well placed to meet the desperate demand for capital. 
Indeed, the savings of workers who may not be retiring for several decades are particularly well suited for long-term investments. 
The trouble is that in many cases, rules and regulations intended to ensure financial markets’ stability impede the ability of pension funds and others to allocate savings smoothly and efficiently. 
The importance of proper regulations cannot be understated. 
When properly drafted and applied, they ensure financial stability, maintain (and, if necessary, restore) confidence in the markets, and facilitate long-term investment, helping citizens meet their future financial needs. 
But if regulations are not well tailored to the various types of market participants and to how markets actually work, they can choke off opportunities that would otherwise benefit investors and the economy. 
The new margin requirements for derivatives, introduced in order to reduce systemic risk, are one example of such a chokepoint. 
It might make sense to apply them to banks or hedge funds, but pension funds are highly creditworthy institutions that pose little or no systemic risk to financial markets. 
Forcing them to set aside assets for collateral purposes only drains capital that could be used for long-term-investment. 
Such investment involves a variety of products, market players, and jurisdictions, and, as a result, the effect of regulations can be difficult to see, much less quantify. 
For starters, the impact of rules and regulations can be direct or indirect. 
Rules that apply specifically to long-term-investment products or strategies can be classified as having a direct impact. 
Rules that apply to investors or their counterparts, competitive products, or complementary parts of the market can be described as having an indirect effect. 
A well-crafted regulatory framework minimizes the adverse consequences for long-term investment, while maximizing the positive effects. 
New regulations are constantly being introduced. It is important to analyze carefully whether the new regulations are actually needed and, if yes, to foresee and fill regulatory gaps with rules that ensure the smooth flow of savings to new and existing projects. 
For example, standardizing regulations relating to covered bonds, green bonds, and cross-border investment through real-estate trusts could encourage more long-term investment. 
In a more indirect way, a general regulatory push that increased the availability of projects suitable for long-term-investment and harmonized local insolvency regimes could also have a positive effect. 
Prominent examples of regulations with a direct negative impact include existing rules on securitization and proposed rules on asset-based capital charges. 
The indirect negative effects of such regulations on long-term investment are, by nature, more difficult to discern, but they can be just as harmful as the direct effects – especially if they leave investors with fewer funds available for long-term investment. 
Margin requirements for derivatives transactions have this effect, as do regulations that increase banking costs. 
These types of indirect negative effects have not been central to policy discussions concerning how to boost long-term investment. 
But they deserve careful consideration. 
It is crucial that we identify the full scope and scale of their impact on the allocation of capital. 
Otherwise, they risk offsetting the positive impact of investment-enhancing reforms. 
As legislators and regulators continue to shape the investment environment, it is important not only to monitor and evaluate the impact of each piece of additional regulation; the way rules interact with one another – and with new rules as they are introduced – must also be understood. 
Unnecessarily broad regulations should be avoided in favor of rules that are specifically tailored to the various participants in the market. 
Allowing long-term investors such as pension funds to provide the European economy with much-needed capital has the potential to provide huge benefits to future retirees, as well as to the broader economy. 
But that will not be possible unless, and until, the right regulatory environment is created. 

Europe Means Fair Play 
As Ukraine’s agonizing struggle for democracy continues, Europeans wonder if the politics of principle can ever eclipse the politics of power. 
Is it naive to believe that the world amounts to more than zero-sum thinking? 
Can Europe promote fair play in international affairs, or must it accept a new game of great power rivalry as inevitable and throw itself into the fray? 
Many Europeans see themselves as champions of global fair play. 
But Europe’s opinion of its integrity is not always shared. 
One example is Russia, which is skeptical about the EU’s intentions, most recently over Ukraine. 
That should not surprise us. 
The EU has expanded from six members to 25, with Bulgaria, Romania, Croatia, and Turkey waiting in the wings. 
Russia wants to know where the Union will stop. 
Does it plan to swallow Ukraine, Belarus, and the Caucasus? 
Most EU members view these as open questions, unlikely to be resolved soon. The Kremlin, however, seems to see in such vagueness a smokescreen hiding the Union’s true intentions, though the recent EU-Russia summit provided an opportunity to clear the air. 
In a sense, critics of the EU are right: the Union may be on a quest to reshape the world in its image. 
Nowadays, when the EU concludes agreements with non-EU countries, it includes all sorts of stiff requirements in areas like human rights, non-proliferation, readmission of migrants, and terrorism. 
To countries on the receiving end, these conditions can seem like a subtle form of power politics, with Europe trying to impose its values on the world. 
Indeed, for the EU some issues are non-negotiable, because they are pillars of the European model that we seek to share with the world. 
These issues include democracy and the rule of law, respect for human rights and the environment, non-proliferation of weapons of mass destruction, and the campaign against terrorism. 
Countries cannot expect economic and other benefits from the Union unless they meet its political standards. 
But are those standards really an imposition? 
It looks as if the principles of fair play are increasingly embraced outside of Europe. 
Consider Africa, where the African Union is taking a leading role in resolving conflicts on the continent and is increasingly determined to intervene to halt aggression and assure fair play for African minorities. 
Even if the results on the ground in Africa don’t yet look spectacular to outsiders, the change in attitude is real. 
Instead of playing the “Great Power Game” in Africa, the EU can support Africans’ own efforts and allow them to benefit from the Union’s experience. 
Europe’s belief in fair play for all reflects its self-interest, at least in some ways, because the world’s balance of power is changing. 
Consider the rise of China and India. The investment bank Goldman Sachs predicts that the dollar size of the Chinese economy will overtake that of Britain and Germany by 2007. 
India will pull ahead of France by 2020 and surpass Germany by 2023. 
As Asia’s economies race forward, so do its political ambitions. 
Asians want to assume greater responsibility in the world, and it is in Europe’s interest that they do, as long as they, too, respect the rules of fair play. 
A sense of fair play also matters within the Union. 
The larger the EU gets, the greater its need for coordinated and coherent policies, and the harder it becomes to rally all members around a common position. 
Call this the “paradox of enlargement.” 
The three largest member states – Britain, France, and Germany – have tended to respond to this paradox by pursuing closer trilateral cooperation. 
Of course, there’s nothing wrong with vanguard groups of members forging ahead – the recent diplomatic initiative concerning Iran’s nuclear program is a case in point. 
Indeed, every member state can be expected to cling to its right to pursue an independent foreign policy for the foreseeable future. 
However, to ensure that the European whole is greater than the sum of its parts, and to guarantee fairness to all Union members, all EU states must work within the parameters of EU policy, as they have in the case of Ukraine. 
When they do, their efforts strengthen the legitimacy and authority of both the member states and the Union. 
In a world of fair play, the flip side of rule making is compliance, and compliance may require enforcement, through economic sanctions and other non-military measures. As a last resort, the EU must even be prepared to rise to the military defense of the values and principles it believes are worth protecting. 
If Europe is not prepared to take up arms when it must, then its appeals for fair play will sound to the rest of the world like mere posturing. 
But if fair play is to be made global, European initiatives should be part of broader international efforts, involving both like-minded partners such as the United States and multilateral institutions. 
A divisive transatlantic rivalry offers no ethical or political basis for an enlightened European approach. 
On the contrary, fair play requires American power to back it up. 

The Migration Opportunity 
LONDON – In the last year, more than 4,000 men, women, and children have lost their lives attempting to cross the Mediterranean Sea from Africa to Europe. 
Their tragic deaths have done nothing to slow the human tide, which is swelling by the week, as smugglers on the coast become increasingly brazen and cruel. 
Thousands of migrants have been rescued from the frigid waters since the beginning of this year alone. 
Against this backdrop – and that of the fear sown by the terrorist attacks in Paris and Copenhagen – the European Union is set to develop a new – and critically important – agenda on migration. 
When EU commissioners gather to debate how to proceed, they must overcome the temptation to grasp at short-term, knee-jerk solutions, and instead develop a truly creative, comprehensive plan of action both at home and abroad. 
The last time Europe faced such a turning point on migration was in 2011, when the Arab Spring triggered a flood of new arrivals fleeing violence and chaos in North Africa. 
But the moment for bold actions – the creation of a Mediterranean Marshall Plan, for instance, or massive investments into immigrant integration – passed without being seized. 
Instead, the EU made a few bureaucratic tweaks to its asylum system and consumed itself with debates about non-issues, such as migrant “welfare cheats." 
In 2014, the EU's emergency funding for migration and asylum totaled a mere €25 million ($28 million) – a pathetic exercise in collective action, albeit one supplemented by funds from member states. 
Last fall, Italy's bold Mare Nostrum sea-rescue operation, which had saved thousands of lives, was replaced by a far feebler EU initiative that has struggled to carry out its mission. 
Adding to the problem is an imbalance of commitment and compassion within the EU itself. 
Sweden and Germany have taken in the majority of asylum seekers from Syria and elsewhere, while most other EU member states have admitted few or none. 
The UK, for example, offered just 90 resettlement spots for Syrian refugees last year. 
(By contrast, Turkey, Lebanon, and Jordan are spending billions of dollars to host nearly four million refugees.) 
Greece, Italy, and Malta have borne the brunt of the impact of accommodating new arrivals, with all of the financial, social, and political costs this entails. 
As a result, the ongoing tragedy in the Mediterranean is placing EU solidarity under serious strain. 
Continued inaction will not make the problem go away, nor will it benefit European leaders in their next domestic elections. 
“Cracking down on smugglers," the go-to solution for many in the EU, will take many years to have an impact, given the instability of many North African governments. 
Meanwhile, further destabilization of the Middle East – a very real prospect – could compromise the security of tens of millions of people who, under international law, would have a legitimate right to claim asylum. 
A better, more active approach is needed. 
The immediate necessary response is resource-intensive but operationally viable: a robust joint EU sea operation with an explicit rescue mandate. 
When asylum seekers reach European shores, the EU should take collective financial and administrative responsibility for processing and accommodating them, regardless of where they disembark. 
And it should take solidarity a step further when it comes to Syrians, equitably distributing the responsibility to host them across all member states. 
Meanwhile, in order to lighten smugglers' boats, the EU should commit to resettling many more than the 30,000 Syrian refugees it has pledged to accept thus far. 
A number closer to 250,000, at least, would seem fair – given the millions being sheltered by Lebanon, Turkey, and Jordan. 
Meanwhile, EU foreign ministers should intensify talks with African countries in order to establish new, legal, and safe means for those at risk who want to cross the Mediterranean. 
This could entail extending humanitarian, labor, and family-reunification visas, with applications processed overseas. 
The EU should consider longer-term goals, like creating a common Mediterranean market to allow North African economies to grow, eventually transforming the region into a destination for migrants rather than a transit zone. 
Most important, Europe needs to strengthen itself from the inside out. 
The continent is in desperate need of a dramatically different approach to diversity. 
The countries of the EU have two options: They can either make a vain attempt to revert to outdated, mono-ethnic models of statehood, or they can accept diversity with the realization that their national cultures will not only survive, but flourish. 
Doing so would in no way entail compromising any core European values. 
But it would require a commitment to respect all who adopt those values, regardless of their race or religion. 
Some see the Mediterranean as Europe's soft underbelly. 
But it is the failure to build stable, diverse societies that is the continent's true Achilles heel. 

Tackling Migration at the Source 
WASHINGTON, DC – For citizens of poor countries, migration often is a highly appealing option. 
The journey to a new country is often perilous, but it promises far greater economic opportunity: average per capita incomes in advanced economies can be more than 50 times higher (in terms of purchasing power parity) than those in the developing world. 
In many cases, migrants’ physical security improves as well. 
Yet, for recipient countries, immigration remains a contentious topic, with governments struggling to settle on policies that will enable their economies to reap the benefits and avoid incurring excessive costs. 
Immigration is a particularly salient topic of political debate in Europe and the United States. 
Even in Japan, which has largely closed its borders to migrants, the need to find ways to cope with rapid population aging has lately been stimulating discussion of the issue. 
In all of these countries, the debate tends to boil down to three basic positions. 
The first – espoused by a small minority, and lacking significant political support – is that immigration is fundamentally beneficial to an advanced country, as newcomers can mitigate demographic challenges and contribute to the economy’s skills base. 
The second position is precisely the opposite: immigration should be prevented by all available means. 
Proponents of this view often argue that migrants drive down wages, particularly at the lower end of the income distribution, undermining natives’ living standards. 
They also argue that migrants dilute the recipient country’s culture and traditions – a claim with an emotional pull that economists often underestimate. 
The third position falls somewhere between these extremes. 
It recognizes the potential benefits of some immigration, but calls for strict proficiency tests, to ensure that only migrants who can fill a skills gap in the recipient country are accepted. 
That way, immigration will improve the quality of supply in the labor market and boost firms’ competitiveness, without generating cultural pressures. 
Of course, this approach looks quite different from the perspective of migrants’ home countries, which lose not only valuable skilled labor, but also any resources invested in that labor, say, through the education system. 
While a country may benefit from its expatriates’ remittances, it is the migrants alone who secure the overall benefits of relocating. 
In any case, when advanced countries accept only a small number of skilled migrants, they do nothing to diminish the pressure that drives migration flows, which overwhelmingly comprise people who lack the new country’s required skills. 
And those pressures are powerful, as demonstrated by the tragic situation in the Mediterranean Sea, where more than a thousand refugees on the treacherous route from Africa to Europe died in the first four months of this year. 
If these pressures are allowed to persist, many migrants will ultimately make it to the developed world, one way or another. 
And while immigration liberals are right that migrants will help to ease demographic pressures in recipient countries, the prohibitionists are right that the newcomers will place considerable cultural stress on their new communities, particularly in Europe. 
This is why any solution to the migration challenge must focus on spurring development in migrants’ home countries. 
For Europe, the focus should be on Africa, the main source of migration flows. 
More rapid economic growth in Africa would, over time, greatly reduce the pressure that Europe faces. 
Africa’s long-term development will of course require greater political stability and peace; in the meantime, however, there are steps that Europe can take to help spur growth. 
While Africa has plenty of natural resources, it lacks the capital and knowhow needed to support a significant growth acceleration. 
Public resources are simply inadequate to supply the bulk of that capital. 
So, as has lately been recognized, investment must come from the private sector, as must critical skills and access to more developed markets. 
But tapping private investment requires the public sector to take some enabling steps, joined by the philanthropic sector, which also has significant resources to contribute. 
This is not to say that public investment and philanthropy should subsidize inherently unprofitable projects. 
On the contrary, that would leave everyone worse off in the long run. 
The goal should be to identify projects that, despite being economically profitable, are unattractive to private investors, owing to institutional and other barriers, and then work to remove those obstacles. 
One key barrier to private investment in Africa is risk. 
When the investment environment is considered uncertain, as is the case in most developing countries, investors demand a risk premium on virtually any project, even those with potentially high rates of return. 
Individual project risk is, after all, very difficult to measure in such a context. 
The public sector can help with risk-pooling measures such as carrying certain tranches of risk or providing insurance. 
Such risk pooling, accompanied by institution-building across all sectors (not just health and education), could go a long way toward boosting economic growth and development in Africa and elsewhere. 
The positive impact of this approach would be far-reaching – beginning with a reduction in migration pressure. 
The impact would be even greater if new investment targeted areas with the largest number of displaced persons and migrants-in-waiting, as proposed by a new “Commission on Forced Displacement”. 
Investment-driven growth is no substitute for conflict resolution and political stabilization; on the contrary, the former cannot be sustained without progress on the latter. 
But an economic boost could serve as an important source of much-needed hope – and the start of a virtuous circle of peace and prosperity. 


The Judgment of Aleppo 
PARIS – We must halt the massacre in Aleppo. 
Whatever the cost, we must stop the massive, random, indiscriminate bombings – and, worst of all, the discriminate ones aimed chiefly at civilians, humanitarian convoys, and hospitals – that the forces of Bashar al-Assad and Russia have resumed with a vengeance in and around what was once Syria’s most populous city. 
We must call a halt in the days (if not hours) ahead to the rain of steel, the cluster and phosphorus bombs, and the barrels of chlorine dropped from low-flying government helicopters on the last parts of Aleppo held by moderate rebels. 
The world, with the democracies out front, cannot fail to respond to the horrifying images, relayed by the few witnesses still there. 
Those images are of children’s shriveled, vitrified bodies; of the wounded whose limbs, for lack of drugs, have been amputated by desperate doctors who are soon massacred themselves; of women mown down by rocket fire, as in Sarajevo 24 years ago, while waiting in line to buy yogurt or bread; of volunteers struck down while digging through the rubble in search of survivors; of human beings drained of strength, surviving in filth and waste, saying goodbye to life. 
We must smother the columns of fire and smoke. 
We must dispel the clouds of flaming gas streaming from the murderers’ unprecedentedly sophisticated weapons. 
We must act because we can act. 
And we can act because those who are responsible for this carnage, for these war crimes, for an urbicide in which probable crimes against humanity are compounded by the destruction of sites of memory and culture that counted among the world’s vital heritage, are not hiding. 
They are standing in plain sight as they destroy Syria’s most cosmopolitan, wondrously alive city, doing nothing to hide their acts. 
We know who they are. 
I mean, of course, the regime in Damascus, which years ago we should have begun to deal with as we dealt with Muammar el-Qaddafi’s regime. 
I mean, too, the regime’s Iranian and, above all, Russian sponsors. 
For five years, they have systematically blocked every attempt at a resolution emanating from the United Nations. 
Russian planes have, in several well-documented instances, openly participated in Assad’s massive campaign against civilians. 
Indeed, the Kremlin appears increasingly determined to apply to Syria the policy practiced in Chechnya, namely to “kick into the crapper” those whom Foreign Minister Sergei Lavrov is again mendaciously labeling “terrorists.” 
Given these facts, there is no dilemma about whether it is necessary to act. 
But, because the United States adopted the position it did three years ago, after President Barack Obama chose not to punish Assad for using chemical weapons (a red line that Obama himself had drawn), I fear that the responsibility falls chiefly, if not exclusively, on Europe. 
It’s our choice. 
We in Europe can draw our own red line, warning Russia that, if the line is crossed, we will increase sanctions against it as a state henceforth held to be responsible for the crimes of its Syrian vassal. 
We can also immediately take the initiative to establish a forum for negotiation and pressure akin to the “Normandy format” that President François Hollande and Chancellor Angela Merkel successfully conceived two years ago to contain the war in Ukraine. 
In so acting, we can force the aggressor to come to terms. 
Or we can do nothing and acquiesce in another Sarajevo, as François Delattre, France’s ambassador to the United Nations, put it; we can run the risk of an Arab Guernica, with Russian aircraft in the role of the German Condor Legion over the skies of Republican Spain in 1936. 
In that case, we would not only reap dishonor, but also, to paraphrase Winston Churchill, raise to extreme levels all of our present dangers, starting with a dramatic increase in the tide of refugees, most of whom have fled Syria as a direct consequence of the world’s nonintervention. 
This is where we stand: Aleppo, besieged and in ruins, exhausted and abandoned by the world, yet defiant – dying with its boots on – is our shame, our crime of omission, our self-abasement, our capitulation in the face of brute force, our acceptance of the worst in humanity. 
Aleppo, which no longer cries out, is dying and cursing the West. 
And Europe, on the front line, risks its future and a part of its identity as the people it could not protect press at its borders, asking to be let in. 
Will Europe surrender, in Aleppo, what remains of its soul, or will it pull itself together, hold up its head, and do what it must? 
If Europe can’t or won’t answer that question, all of the other questions and crises it is facing may well become irrelevant. 

Europe Needs a Plan B 
NEW YORK – The European Union was brought into existence by what Karl Popper called piecemeal social engineering. 
A group of farsighted statesmen, inspired by the vision of a United States of Europe, recognized that this ideal could be approached only gradually, by setting limited objectives, mobilizing the political will needed to achieve them, and concluding treaties that required states to surrender only as much sovereignty as they could bear politically. 
That is how the post-war Coal and Steel Community was transformed into the EU – one step at a time, understanding that each step was incomplete and would require further steps in due course. 
The EU’s architects generated the necessary political will by drawing on the memory of World War II, the threat posed by the Soviet Union, and the economic benefits of greater integration. 
The process fed on its own success, and, as the Soviet Union crumbled, it received a powerful boost from the prospect of German reunification. 
Germany recognized that it could be reunified only in the context of greater European unification, and it was willing to pay the price. 
With the Germans helping to reconcile conflicting national interests by putting a little extra on the table, the process of European integration reached its apogee with the Maastricht Treaty and the introduction of the euro. 
But the euro was an incomplete currency: it had a central bank but no central treasury. 
Its architects were fully aware of this deficiency, but believed that when the need arose, the political will could be summoned to take the next step forward. 
That is not what happened, because the euro had other deficiencies of which its architects were unaware. 
They labored under the misconception that financial markets can correct their own excesses, so the rules were designed to rein in only public-sector excesses. 
And, even there, they relied too heavily on self-policing by sovereign states. 
But the excesses were mainly in the private sector, as interest-rate convergence generated economic divergence: lower interest rates in the weaker countries fueled housing bubbles, while the strongest country, Germany, had to tighten its belt in order to cope with the burden of reunification. 
Meanwhile, the financial sector was thoroughly compromised by the spread of unsound financial instruments and poor lending practices. 
With Germany’s reunification, the main impetus behind the integration process was removed, the financial crisis unleashed a process of disintegration. 
The decisive moment came after Lehman Brothers collapsed, and authorities had to guarantee that no other systemically important financial institution would be allowed to fail. 
German Chancellor Angela Merkel insisted that there should be no joint EU guarantee; each country would have to take care of its own institutions. 
That was the root cause of today’s euro crisis. 
The financial crisis forced sovereign states to substitute their own credit for the credit that had collapsed, and in Europe each state had to do so on its own, calling into question the creditworthiness of European government bonds. 
Risk premiums widened, and the eurozone was divided into creditor and debtor countries. 
Germany had changed course 180 degrees from the main driver of integration was to the main opponent of a “transfer union.” 
This created a two-speed Europe, with debtor countries sinking under the weight of their liabilities, and surplus countries forging ahead. 
As the largest creditor, Germany could dictate the terms of assistance, which were punitive and pushed debtor countries towards insolvency. 
Meanwhile, Germany benefited from the euro crisis, which depressed the exchange rate and boosted its competitiveness further. 
As integration has turned into disintegration, the role of the European political establishment has also reversed, from spearheading further unification to defending the status quo. 
As a result, anyone who considers the status quo undesirable, unacceptable, or unsustainable has had to take an anti-European stance. 
And, as heavily indebted countries are pushed towards insolvency, nationalist political parties – for example, Finland’s True Finns – have grown stronger, alongside more established counterparts elsewhere in Europe. 
Yet Europe’s political establishment continues to argue that there is no alternative to the status quo. 
Financial authorities resort to increasingly desperate measures in order to buy time. 
But time is working against them: two-speed Europe is driving member countries further apart. 
Greece is heading towards disorderly default and/or devaluation with incalculable consequences. 
If this seemingly inexorable process is to be arrested and reversed, both Greece and the eurozone must urgently adopt a Plan B. A Greek default may be inevitable, but it need not be disorderly. 
And, while some contagion will be unavoidable – whatever happens to Greece is likely to spread to Portugal, and Ireland’s financial position, too, could become unsustainable – the rest of the eurozone needs to be ring-fenced. 
That means strengthening the eurozone, which would probably require wider use of Eurobonds and a eurozone-wide deposit-insurance scheme of some kind. 
Generating the political will would require a Plan B for the EU itself. 
The European elite needs to revert to the principles that guided the Union’s creation, recognizing that our understanding of reality is inherently imperfect, and that perceptions are bound to be biased and institutions flawed. 
An open society does not treat prevailing arrangements as sacrosanct; it allows for alternatives when those arrangements fail. 
It should be possible to mobilize a pro-European silent majority behind the idea that when the status quo becomes untenable, we should look for a European solution rather than national ones. 
“True Europeans” ought to outnumber true Finns and other anti-Europeans in Germany and elsewhere. 

Europe’s Last Chance 
BERLIN – Most of Europe’s history has been marked by conflict. 
The American historian Robert Kagan wrote in 2003 that “Americans are from Mars and Europeans are from Venus”; but Europe was for centuries home to the Roman god of war, not the goddess of love. 
Venus found a home in Europe only after World War II, when many global governance institutions emerged, including the United Nations, the World Bank, and the Bretton Woods monetary system. 
During the Cold War, European countries all but lost their sovereignty to two new global superpowers, the United States and the Soviet Union. 
The two superpowers’ divided control was eventually relinquished, and the old European state system was replaced by the European Union, with its promise of eternal peace between EU member states, and between Europe and the larger world. 
The collapse of communism in Europe, followed by that of the Soviet Union in 1991, was described triumphantly in Europe and the United States as the “end of history” – the global triumph of liberal democracy and free-market capitalism. 
A few short decades later, in the annus horribilis of 2016, this all sounds quite naive. 
Instead of sustained peace and “ever-closer union,” Europeans are experiencing episodes of disorder and violence almost on a daily basis. 
These include the United Kingdom’s decision to leave the EU; a spate of terrorist attacks in Paris, Nice, Normandy, and elsewhere; renewed aggression by Russia; and a bloody failed coup in Turkey, followed by Turkish President Recep Tayyip Erdoğan’s crackdown on Turkish civil society, which has raised concerns about Turkey’s reliability as a partner to the West. 
Moreover, Europe’s refugee crisis, with asylum-seekers pouring in from the Middle East and North Africa, has yet to be resolved. 
The spillover effects of civil wars and military dictatorships in Europe’s neighborhood continue to threaten the continent, and the US seems to be tiring of its role as the universal guarantor of global security and order. 
These and other factors have led many Europeans to believe that the years of peace are over. 
One would think that this congeries of problems would prompt Europeans to strengthen the EU, in order to take control of the situation and mitigate the growing risks. 
Instead, many Europeans are following populist banners back toward the nationalism and isolationism of the nineteenth and early twentieth centuries. 
This doesn’t bode well for Europe. 
In the twenty-first century, the turn away from cooperation and integration amounts to burying one’s head in the sand and hoping the dangers will pass. 
And, in the meantime, the resurgence of xenophobia and outright racism is shredding the social fabric that Europe will need to prevent threats to peace and order. 
How did we get here? 
Looking back 26 years, we should admit that the disintegration of the Soviet Union – and with it, the end of the Cold War – was not the end of history, but rather the beginning of the Western liberal order’s denouement. 
In losing its existential enemy, the West lost the foil against which it declared its own moral superiority. 
The years 1989-1991 were the start of a historic transition away from the bipolar world of the post-World War II era toward today’s globalized world, a familiar place, but one that we still do not fully understand. 
One thing is clear: Political and economic power is shifting from the Atlantic to the Pacific, and away from Europe. 
This leaves many open questions: Which power (or powers) will shape this future world order? 
Will the transition be peaceful, and will the West survive it intact? 
What kind of new global-governance institutions will emerge? 
And what will become of the old Europe – and of transatlanticism – in a “Pacific era?” 
This might be Europe’s last chance to finish the project of unification. 
The historic window of opportunity that was opened during the period of Western liberal internationalism is quickly closing. 
If Europe misses its chance, it is no exaggeration to say that disaster awaits it. 
European politicians today present voters with a choice between modest pragmatism and blustery nationalism. 
But what Europe needs now is a third way: political leadership that can think creatively and act boldly for the long term. 
Otherwise, Europe is in for a rude awakening. 

Necessary Migrants 
BERLIN – How heartwarming it is to land in Germany, where football fans hold up banners welcoming refugees from the war-ravaged Middle East. 
Germany is the new Promised Land for the desperate and downtrodden, the survivors of war and pillage. 
Even the popular German tabloids, not normally of a do-gooding disposition, are promoting a willingness to help. 
While politicians in the United Kingdom and other countries wring their hands and explain why even a relatively minor influx of Syrians, Libyans, Iraqis, or Eritreans constitutes a lethal danger to the social fabric of their societies, “Mama Merkel” promised that Germany would not reject any genuine refugee. 
Some 800,000 refugees are expected to enter Germany this year, whereas British Prime Minister David Cameron is making a fuss about fewer than 30,000 asylum applications and warning darkly about “swarms of people” crossing the North Sea. 
And, unlike Merkel, Cameron was partly responsible for stoking one of the wars (Libya) that made life intolerable for millions. 
No wonder Merkel wants other European countries to take in more refugees under a mandatory quota system. 
In fact, despite its politicians’ anxious rhetoric, the United Kingdom is a more ethnically mixed, and in some ways more open, society than Germany. 
London is incomparably more cosmopolitan than Berlin or Frankfurt. 
And, on the whole, Britain has greatly benefited from immigration. 
Indeed, the National Health Service has warned that accepting fewer immigrants would be catastrophic, leaving British hospitals seriously understaffed. 
The mood in contemporary Germany may be exceptional. 
Taking in refugees, or any immigrants, has never been an easy political sell. 
In the late 1930s, when Jews in Germany and Austria were in mortal danger, few countries, including the wealthy United States, were prepared to take in more than a handful of refugees. 
Britain allowed about 10,000 Jewish children to come in 1939, at the very last minute, but only if they had local sponsors and left their parents behind. 
To say that the generous mood in Germany today has much to do with the murderous behavior of Germans in the past is not to make light of it. 
The Japanese, too, carry a burden of historical crimes, but their attitude to foreigners in distress is far less welcoming. 
Even though few Germans have any personal memories of the Third Reich, many still feel the need to prove that they have learned from their country’s history. 
But the almost exclusive focus by politicians and the media on the current refugee crisis conceals wider immigration issues. 
Images of miserable refugee families drifting in the sea, at the mercy of rapacious smugglers and gangsters, can easily inspire feelings of pity and compassion (and not just in Germany). 
Even Cameron has had to soften his tone, promising to accept a few thousand refugees, because he was moved “as a father” by the picture of a drowned Syrian boy. 
But most people crossing European borders to find work and build new lives are not refugees. When British officials said that it was “clearly disappointing” that about 300,000 more people came to Britain than left in 2014, they were not mainly talking about asylum-seekers. 
The majority of these newcomers are from other European Union countries, such as Poland, Romania, and Bulgaria. 
Some enter as students, and some come to find jobs. 
They do not come to save their lives, but to improve them. 
By lumping asylum-seekers together with economic migrants, the latter are discredited, as though they were trying to squeeze in under false pretenses. 
It is widely assumed that economic migrants, from inside or outside the EU, are mainly poor people out to live off the tax money of the relatively rich. 
In fact, most of them are not spongers. 
They want to work. 
The benefits to the host countries are easy to see: Economic migrants often work harder for less money than locals. 
This is not in everyone’s interest, to be sure: Pointing out the benefits of cheap labor will not persuade people whose wages might be undercut. 
It is, in any case, easier to appeal to compassion for refugees than to the acceptance of economic migrants. 
Even in Germany. 
In 2000, German Chancellor Gerhard Schröder wanted to issue work visas to about 20,000 foreign high-tech experts, many of them from India. 
Germany needed them badly, but Schröder met swift opposition. 
One politician coined the slogan “Kinder statt Inder” (children instead of Indians). 
But Germans, like many other rich countries’ citizens, are not producing enough children. 
These countries need immigrants with youthful energy and skills to fill jobs that locals, for whatever reason, are unable or unwilling to take. 
This does not mean that all borders must be opened to everyone. 
Merkel’s idea of quotas on refugees should be applied to economic migrants, too. 
So far, however, the EU has not come up with a coherent policy on migration. 
Citizens of the EU can move freely within the Union (Britain wants to stop this, too, though it is unlikely to succeed). 
But economic migration from non-EU countries, under carefully managed conditions, is both legitimate and imperative. 
This is not because the migrants deserve Europeans’ sympathy, but because Europe needs them. 
It will not be easy. 
Most people appear to be more easily swayed by emotions – which can lead them to mass murder or warm compassion, depending on the circumstances – than by the cool calculus of rational self-interest. 

Europe Needs Its Own Security Council 
The European Union seems determined to act like an ostrich, burying its head under mountains of foreign policy declarations. 
But while most EU governments pay lip service to the idea of creating a common foreign and security policy, they fail to address a key stumbling block - the fact that power, and the ability to project power, is distributed unequally across the member states. 
Far from acknowledging this reality, EU members - old and new, big and small - insist on having an equal say in foreign policy decisions. 
The EU's unanimity rule remains the preferred means for decision-making in this field, although some limited exceptions are discussed. 
True, consensus is important, because it provides credibility and legitimacy. 
But the reality is that some EU members are "more equal" than others, and the Union's more powerful members invariably resent external constraints. 
The same applies to other international organizations. 
Indeed, a root of the Bush administration's diminished interest in NATO can probably be found in the interventions of small countries in the military decisions - such as the choice of bombing targets - during the Kosovo War. 
The reality of who actually possesses power in Europe has given rise to movement toward the creation of a foreign policy "triumvirate" comprising France, Germany, and the United Kingdom - something the leaders of the three countries will invariably discuss when they meet later this week. 
In terms of population, GDP, commercial and diplomatic outreach, culture, and military clout, these countries indisputably form Europe's core. 
At times, this triumvirate acts to reinforce the EU's external influence. This happened when the British, French, and German foreign ministers journeyed to Iran last autumn, where they forged an agreement that would allow for international inspection of Iran's nuclear facilities. 
On other occasions, however, the three countries give the impression of being mainly interested in presenting themselves as an exclusive club, triggering resentment among their EU partners. 
The problem for the EU is thus to find a mechanism that recognizes the international heft of the three without antagonizing the rest of the Union. 
If Europeans want to take part in vital global decisions - as the EU security strategy outlined not long ago by Javier Solana argued - they must find a middle way between the unanimity rule and the reality of member states' actual power. 
Only by doing so can the Union achieve a more credible foreign and security policy and become a serious partner for the United States, its neighbors, and the rest of the world. 
A practical way forward here is to establish a "European Security Council" to operate as a steering committee between the EU Council (which will have an unwieldy 25 members after this May's expansion) and the future European Foreign Minister envisaged by the draft constitution. 
A suitable model for the ESC might be the UN Security Council, which allows concerted or joint action should agreement exist amongst its members. 
Otherwise, states retain their freedom to act individually. 
To make this body viable, realistic criteria must underpin its design. 
First, it must be small, with no more than, say, ten seats. 
Just a glance at an ordinary EU meeting room suffices to show that a council of 25-plus members is more talk show than decision-making body. 
Second, the three major EU member states - France, Germany, and the United Kingdom - should be granted permanent seats. 
The three would thus receive the status they strive for, within a larger structure and without acting as a self-appointed directoire . 
Representation of other EU member states in the ESC must take into account their population, economy, and military clout, which would allow an appropriate role and standing to such countries as Italy, Spain, and Poland. 
These and other EU members could rotate in the non-permanent seats. 
Other ESC members could enhance their participation by forming groups based on geographical proximity or political criteria (non-NATO EU members could share a seat). 
In a different regional context, for instance, Argentina and Brazil recently agreed to coordinate the latter's term as non-permanent member in the UN Security Council during 2004-2005. 
Finally, the European Commission should receive a seat. 
A European Security Council would act as a permanent advisory body for the future European Foreign Minister, contributing to building consensus inside and outside the Union. 
It would be ready to react rapidly in crisis situations, executing decisions that represent a common European viewpoint. 
The Foreign Minister and the European Security Council must be allowed to use all available European leverage to the fullest. 
The driving force behind this scheme is the need for political instruments to reflect current power realities. 
EU member states - even the most powerful - cannot deliver on global issues such as the fight against terrorism, political reconstruction of the Middle East, the fight against poverty, and protection of the environment unless they agree on basic principles for common action. 
Those principles must then be implemented effectively. 
It is overly optimistic to pretend that today's EU institutions can implement such principles, because they do not represent the prevailing power realities. 
If Europeans continue to build institutions that seek to satisfy all EU member states, they - individually and collectively - will be doomed to play a minor role on the global stage. 

Europe Needs Solidarity Over Cuba 
PRAGUE -- Five years ago, the European Union was on the verge of fulfilling one of the aspirations of the Velvet Revolutions that swept across Central and Eastern Europe by expanding from 15 to 25 members through the accession of several post-communist states. 
Yet, while the Berlin Wall and the Iron Curtain may have fallen into the dustbin of history, others vestiges of the Soviet era remain firmly in place. 
Certain areas of the world have been transformed for the better, even as others have been suspended in time to fend for themselves. 
One place that has not changed is Cuba, despite Fidel Castro’s decision to retire and hand the reigns of power over to his brother Raul. 
On March 18th five years ago, Castro’s government cracked down on the Varela Project and other civil society initiatives rather than risk allowing a spark of democratic reform to spread across Cuba as it had in the former Soviet bloc. 
The seventy five prisoners of conscience locked up were dissidents, independent journalists, leaders from civil society, and librarians, who had dared to speak the truth openly about what life is like in Cuba. 
Even though four prisoners have recently been released, fifty five of the seventy five remain incarcerated in deplorable conditions. 
In general, the only reason that any of these prisoners were freed was because of how seriously their health had deteriorated. 
Given how central the values of human rights, democracy and the rule of law are in Europe, we feel it is our obligation to speak out against such injustices continuing unchecked. 
Less than twenty years ago there were political prisoners on the EU’s borders who were denied the basic rights of freedom of speech and expression, lived in constant fear of being denounced and dreamed about enjoying what Europeans in the ‘West’ took for granted. 

Europe needs to make up its mind 
The celebrations to mark the 50th anniversary of the Treaty of Rome this month come at an opportune moment. 
For now is the time for the European Union to call an end to its self-imposed “reflection period” following the rejection of the European Constitution by the French and the Dutch, and make up its mind about the future. 
The reflection period has been mostly devoid of actual reflection, and Europe’s leaders have failed to offer Europe’s citizens any new, fundamental vision. 
So how should a “refounding” (Neubegründung) of Europe – as called for by German Chancellor Angela Merkel in her first parliamentary statement on European policy – be accomplished? 
In theory, there are three competing, fundamentally different visions of the EU’s future. 
Some still take the form of a “state of nation states.” 
These thinkers – often imprecisely called “Federalists” – refer to the Constitution as a necessary step towards a European federation. 
Such a federal state can be justified by claiming that the moral substance of traditional nation states has been deeply compromised by past belligerence, or as a practical preventive measure to keep the potential of new nationalist passions in check. 
Moreover, the British political scientist Glyn Morgan has argued that a robust concept of pan-European security also requires a pan-European state, and that it is irresponsible on the part of Europe’s elites to maintain a permanent position of strategic dependency on the United States. 
Related to this is the idea that only a strong EU can save the “European social model.” 
But the last few years have made clear the absence of majority support for a European federation by the states that make up Europe, a point underscored by the debate surrounding the failed Constitutional Treaty. 
In fact, many of the “federalist” arguments look dubious: in particular, there is no single European social model. 
The differences for instance between the Scandinavian countries, the Mediterranean countries, and the “liberal Atlantic countries” like Ireland and the UK are sometimes more pronounced than those between Europe as a whole and the US. 
In recent years, an alternative view of the EU that can be described as “supra-national multiculturalism” has taken root. 
This view entails a Union whose main function is to allow – and to maintain – diversity and difference. 
Instead of traditional homogeneous states, this Europe seeks to be a “Community of Difference,” a kind of “People of Others,” to borrow a phrase from the jurist Joseph Weiler. 
Tolerance becomes the cardinal European virtue in this vision, and the EU’s character as an entity with federal law but without federal statehood is viewed as a strength, not a weakness. 
The prophets of supra-national multiculturalism thus reject a federal democracy. 
What is feasible is, they believe, at best a so-called “demoi-cracy” -- that is, the rule not of one people or “demos,” but of many peoples or “demoi” who deliberately assure and seek to maintain their diversity. 
Elements of this vision sound attractive. 
It is questionable, though, how credible European heads of government are who promote such pan-European multiculturalism and at the same time emphatically denounce alleged “multiculturalist” illusions at home – as has by now become standard political rhetoric in almost all countries. 
The third vision is essentially no vision at all, but a justification of the Brussels bureaucracy as it currently exists. 
From this technocratic perspective, Brussels today maintains functions that even within nation states are often delegated to institutions that are not democratically elected. 
Central banks are the classic example. 
Those policy areas that citizens consider the most significant – in particular welfare and education – remain under the direction of member states. 
Consequently Brussels is no government to be, but a regulatory authority – and this often to the benefit of European consumers. 
This authority, the technocrats claim, in turn is part of a system of national and supra-national checks and balances which, while not resembling a national democracy, would reliably prevent despotism from taking root in Brussels. 
None of these three visions entirely misses the EU’s current reality or its future possibilities. 
The federation has become a distant prospect, but still receives homage in politicians’ speeches, as if a different end result was inconceivable. 
The demoi-crats win support because their vision tends to reinforce the status quo and leaves nearly all options open. 
The technocrats in turn see their position confirmed with every passing day that the alleged crisis of legitimacy fails to appear. 
But is there any kind of pan-European consensus on where Europe should go next, whether federal state, demoi-cracy or status quo? 
If the answer is no, adhering to a pragmatic approach to the Union as a kind of continuously expanding “Commonwealth” is the most honest alternative to any high-minded visions. 
The classic argument that the EU, like a bicycle, must always keep moving forward to avoid falling over, is simply not true: the reflection period may be frustrating for federalists, but it also proves that, even at a standstill, the EU continues. 
The Brussels elites are not likely to admit this fact without further ado: their rhetoric still oscillates between doom-and-gloom pessimism and a kind of pro-European PR that is concerned only with how best to “sell” the Union to Europe’s citizens. 
But PR won’t work unless there is a vision that ultimately sells itself. 

Why Europe Still Needs Cash 
FRANKFURT – Payment systems in Europe are facing upheaval. 
With the digital revolution offering ever-faster and more convenient means for settling transactions, cash seems to some to have no future. 
But to write off the role of banknotes and coins in the economy would be a mistake. 
Non-cash payment options have been proliferating in recent years. 
Credit cards, online transfers, and direct-debit payments are already well established. 
Now, smartphone-enabled digital-payment solutions and mobile wallets are also gaining ground. 
The emergence of potentially disruptive innovations like distributed ledger technologies indicate that further and possibly fundamental change may be on the horizon. 
Independent of these new and incipient options, there are a number of studies making the case to abolish cash. 
Advocates of a cashless society tend to fall into three distinct camps. 
The first camp, the alchemists, wants to overcome the restrictions that the zero lower bound (ZLB) imposes on monetary policy. 
The second, the law and order camp, wants to cancel the primary means of payment for illicit activities. 
And the third camp, the fintech (financial technology) alliance, anticipates major business opportunities arising from the elimination of the high storage, issuance, and handling costs of cash that the financial industry currently faces. 
But the arguments for going cashless do not withstand scrutiny. 
Start with the alchemists’ case. 
It is true that, in an environment of very low interest rates, the conduct of monetary policy becomes difficult. 
Yet experience has shown that the effective lower bound is different from the ZLB. 
Indeed, negative interest rates have worked, without triggering a flight to cash, especially when combined with outright asset purchases, long-term credit operations (including “fixed-rate full allotment” and “targeted” variants), and forward guidance. 
As such, negative interest rates should be understood as a specific non-standard monetary-policy instrument different from low interest rates. 
The law-and-order camp’s case for banning cash also wilts under scrutiny. 
By acting as a store of value and a means of payment, cash fulfills an important social function for many law-abiding citizens. 
Would anyone suggest forbidding private ownership of luxury cars or gems because criminals like them? 
Harming the decent majority in order to punish a misbehaving minority would be like cracking a nut with a sledgehammer – and breaking the table it is on in the process. 
Finally, the fintech alliance promises that, with its innovative digital-payment solutions, it can ease the conduct of financial transactions. 
Customers would no longer need to carry wads of cash or search for ATMs. 
But it is an open question whether the still highly fragmented digital-payment sector will help customers more than the companies offering the payment solutions. 
There is one more major problem with the arguments for a cashless society: most people, at least in the eurozone, don’t want it. 
According to an as-yet-unpublished European Central Bank survey of 65,000 eurozone residents, almost 80% of all point-of-sale transactions are conducted in cash; and, in terms of value, more than half of payments are made in cash. 
As is often the case in Europe, the differences among member states are pronounced: the share of cash transactions ranges from 42% in Finland to 92% in Malta. 
But, overall, the public’s commitment to cash remains strong – and is becoming stronger. 
In fact, growth in overall demand for cash is outpacing nominal GDP growth. 
In the last five years, the average annual growth rate of euro banknotes was 4.9% by value and 6.2% by piece. 
This rise includes denominations that are predominantly used for transactions, rather than for savings. 
These findings confirm the appropriateness of the ECB’s neutral stance on payments, which allows for both cash and cashless payments. 
This approach is based on four principles: technological safety, efficiency, technological neutrality, and freedom of choice for users of the respective means of payment. 
The ECB’s supreme objective is to ensure price stability. 
To support that objective, it supplies safe central-bank liquidity, in the form of both bank-held central-bank reserves and banknotes (the latter being the sole notes with the status of legal tender in the eurozone). 
If Europe were to abolish cash, it would cut off people’s only direct link to central-bank money. 
In a democracy, such a link helps to foster public acceptance of central-bank independence, by reinforcing the trust and support of the people in the conduct of effective monetary policymaking. 
The ECB will continue to provide banknotes. 
We will also facilitate the further development of an integrated, innovative, and competitive market for retail payment solutions in the eurozone. 
If, one day, cash is replaced by electronic means of payment, that decision should reflect the will of the people, not the force of lobby groups. 

Why Europe Backs Obama on Iran 
PARMA – Israeli Prime Minister Binyamin Netanyahu seems close to ordering a general mobilization of his country’s military, and Republicans in the United States are preparing for a ferocious battle with President Barack Obama’s administration, in the wake of the framework nuclear agreement with Iran. 
And yet the framework deal has been almost universally welcomed in Europe. 
What accounts for this disconnect within the West over a key regional and global threat? 
Several factors are at work. 
One, certainly, is that Europe – or, more precisely, the United Kingdom, Germany, and France – has been engaged in the talks with Iran for more than a decade. 
Even as former President George W. Bush branded Iran a part of an “axis of evil,” the key European Union members insisted that diplomacy was better than war. 
And, step by step, the European approach has been vindicated. 
Critical to that outcome, of course, was the US intelligence community’s reports that all the evidence pointed to Iran having long ago – in 2003 – abandoned concrete plans to develop a nuclear weapon. 
It is easy to see why the Iranians would have done so. 
So long as Saddam Hussein, who had launched a brutal eight-year war against Iran in the 1980s, and whom influential Westerners openly accused of seeking to acquire nuclear weapons, remained in power, the Iranian government’s plan to develop nuclear weapons followed a certain realist logic. 
Once the US military ousted Saddam’s regime in 2003, Iran’s most acute security threat vanished. 
Moreover, there has long been a tactical difference between US and European policies toward Iran’s nuclear program. 
At times, the US seemingly sought to eradicate any knowledge of nuclear technology from a country of which it is deeply suspicious, whereas the European approach was to seek reliable assurances that Iran would never develop a nuclear weapon. 
At the end of the day, the US recognized that any realistic policy needed European support, while Europeans saw preventing a rush to war by the US or Israel as a central policy objective. 
It should also be said that Europeans have never been overly impressed with America’s hardline approach toward that other charter member of the axis of evil, North Korea, and its nuclear ambitions. 
Refusing to negotiate with the North Korean regime, and imposing the most stringent sanctions on it, has not stopped it from either acquiring nuclear weapons or accelerating its development of both nuclear and missile technologies. 
Among the significant issues that need to be sorted out before the end-of-June deadline for reaching a final deal with Iran is to agree on the details of the gradual suspension, and eventual repeal, of economic and diplomatic sanctions against the country. 
While this will be the subject of a fierce political battle in the US, it is likely that the European Union will be far more willing to move ahead. 
Indeed, Europe has sound reasons to lift the restrictions on Iranian oil exports. 
Additional supplies of oil to global markets will keep prices down or depress them further. 
Apart from the economic gain for Europe’s economies, low oil prices yield important strategic benefits – particularly with respect to constraining Russian President Vladimir Putin’s revisionist ambitions in Ukraine and elsewhere. 
Needless to say, the US and Europe should stick to a common approach on the sanctions issue. 
But were a more militant policy approach by the Republican-controlled US Congress to prevail, America might well find that it loses the ally that makes the key difference for the sanctions’ success. 
Indeed, on this issue, the US might rapidly find itself isolated from all other global actors. 
Europe is certainly not naive about the nature of the Iranian regime. 
France, with its historically strong convictions on issues concerning nuclear proliferation, has taken a particularly firm stance during the talks. 
But Europe is also acutely aware of the consequences of the rapid increase in violent conflict and suffering in its immediate neighborhood; indeed, Europeans see those consequences daily in the flood of refugees trying to reach its shores. 
Another war in the Middle East is clearly not in its interest. 
Finally, Israel is a key factor underlying the differences between the US and Europe when it comes to Iran. 
Though Netanyahu’s shrill words still have an attentive audience in the US, most of Europe regards his position as being only a little short of ridiculous. 
Thus, it is nearly certain that, assuming a final agreement with Iran is reached in June, Europe’s backing for it will be unanimous – or close to it – and that it will be eager to support Obama in his battle with opponents of the deal at home. 
The framework agreement has vindicated Europe’s approach to resolving the nuclear dispute. 
The West has every reason to maintain that approach in the months ahead. 

Europe on Holiday 
Currently, the average number of hours worked per person aged 15 to 25 each year in France and Germany is about 50% lower than in the United States. 
Other European countries (for example, Italy and Spain) fall somewhere between these poles. 
Although some Americans always like to boast about their superior work ethic, this disparity in working hours between the US and Europe has not always existed. 
Indeed, until the mid-1970's, the number of hours worked on either side of the Atlantic was roughly the same. 
From the mid-1970's on, however, Americans continued working more or less the same number of hours, while Western Europeans began working less and less each year. 
If Western Europe needs an explanation as to why its rate of economic growth is lagging behind the US, it need look no further. 
The average number of working hours per person depends on a variety of factors: 
• the level of participation in the labor force; 
• the number of vacation days workers have; 
• the number of hours worked in a "normal" week, i.e., with no vacation. 
Virtually all the difference between the US on one side and France and Germany on the other are due to the first two factors, each with roughly equal weight. 
So, lower participation in the labor force explains half of the difference, and longer vacations for those who do work accounts for the other half. 
The importance of vacation time should come as no surprise to anyone who has experienced Europe's deserted cities in August, the three-week vacation "bridges" in April and May in France and Italy, the "rush hours" that take place every Friday at 2 PM in German cities, and crowded ski slopes in February due to winter school vacations. 
But knowing "how" Europeans work less is one thing; knowing "why" Europeans work less than Americans is another. 
One view is that Americans are perceived (and like to see themselves) as Calvinist workaholics, whereas Europeans like to think that they know how to enjoy life's pleasures. 
As a European working in the US, I admit that I do take many more vacations than my American colleagues. 
So there may be something in this "cultural" explanation. 
But why did this start around 1973? 
A second argument attributes the difference to income taxes, which, in fact, have increased significantly in Europe since the 1970's, while in the US income taxes fell from the early 1980's onward. 
Income taxes certainly must affect willingness to work. 
They may not change by much the number of hours worked by the main breadwinner in a family (typically a man), but they do influence the participation of women in the labor force. 
After all, why work, when your after-tax salary barely pays for childcare and household help? 
But even this is not a sufficient explanation, because studies of how the supply of labor responds to tax changes suggest that something else must explain the enormous gap between US and Europe, especially France and Germany. 
For the age group over 50, the structure of pension systems is clearly a major factor. 
It was and remains much more profitable to retire earlier in Europe than in the US. 
Why should a Frenchman or Italian in his early sixties work today, when in the 1990's he could have retired in his mid-fifties with 80% or more of his last working-age salary? 
For women, the retirement age in the mid-1990's was even lower. Public sector employees had even more advantages. 
Nor is that all. 
In the 1980's and 1990's, many European labor unions, in response to rising unemployment, adopted the policy of "work less, work all." 
In other words, they obtained shorter hours (i.e., more vacations) in order to keep employment up. 
The problem is that total compensation did not go down in proportion to the shorter hours, thus leading to an increase in pay per hour. 
Lower productivity and higher unit labor costs eroded firms' willingness to hire, leaving Europe with chronically higher unemployment than in the US. 
Today's debates about growth in Europe are full of buzz words like "knowledge-based society," "technological progress," and "investment in education." 
Europeans certainly need something to compensate for a short working life with many vacations. 
But much of this discussion is merely a form of "political correctness." 
It is more reassuring - and "feels better" - to tell Europeans that growth is sluggish because society is not sufficiently knowledge-based, rather than pointing to the trade-off between vacations and growth. 
Europeans tend to prefer vacations over growth. 
Personally, I love taking more and more vacations. 
But I cannot (and do not) then complain if my income does not grow faster and faster. 

The Inhumanity of Europe’s Refugee Policy 
MAASTRICHT – For the asylum seekers in the Moria refugee camp in Lesbos, Greece, the word “almost” has become a source of devastation. 
They almost made it. 
They are almost at the end of their brutal journey. 
As Aarash, a 27-year-old father of a young daughter and an MBA graduate from Kabul, Afghanistan, put it, “When all is said and done, we are only almost human.” 
And Europe only almost welcomes them. 
“Almost” causes unbearable despair to the asylum-seekers trapped on Lesbos and Samos, who have already endured the trauma of their journey and camp life. 
According to a report released in October by Doctors without Borders, nearly 50% of refugees on Samos experienced violence while passing through Turkey, and close to 25% had experienced violence since arriving in Greece. 
Officials undertaking vulnerability assessments at Moria are left asking not whether someone has been raped, but how brutally and how often. 
Against this background, it is unsurprising that residents suffer psychologically. 
Yet the waiting list for psychological treatment is over 500 names long, meaning that few will end up receiving any support at all. 
In the meantime, a small clinic run by the Greek nonprofit Emergency Response Center International in Moria confronts cases of self-harm daily, and suicide is not uncommon. 
The trauma specialist Paul Stevenson described a demoralization syndrome that he observed during his work at migrant detention centers on Nauru, off the Australian coast. 
Following a natural disaster, he says, the incidence of post-traumatic stress disorder is about 3%. 
After a terrorist attack, that figure rises to about 25%. 
In the case of torture and incarceration, it jumps to 50%, because that “is considered to be the most demoralizing situation” a person can experience. 
Psychological torture and incarceration are effectively what asylum-seekers in the Moria camp now face. 
Although they are permitted to come and go as they please, there are no alternative living spaces or food-distribution points. 
And conditions in the camp are characterized by cramped and inadequate facilities – an estimated 6,600 asylum-seekers are currently residing in a camp built for 3,000 – not to mention the constant threat of abuse. 
This situation contrasts sharply with the European Union’s narrative. 
A year after the European refugee crisis – or, more accurately, refugee-management crisis – peaked in the summer of 2015, the EU declared that the situation was under control. 
But, while it is true that fewer refugees were arriving on Europe’s shores, anyone who has been to Lesbos lately knows that the crisis is far from over. 
Analysts have likened the EU’s asylum and security policies in the Mediterranean since 2015 to the construction of a “fortress Europe.” 
If the EU is a fortress, Moria camp is its torture chamber, with nightmarish conditions that have been well documented. 
This is no longer a “refugee crisis” or even a “refugee-management crisis.” 
It is now a humanitarian crisis by design. 
Given the EU’s data and resources, this outcome can be viewed only as intentional. 
In fact, appalling conditions are being allowed to prevail in refugee camps, because authorities want to deter other asylum seekers – including some who arguably have no right to international protection – from trying to get in, and potentially even to impel some who have arrived to return home. 
Better camp conditions and allowing refugees to reach the Greek mainland, the logic goes, would contribute to another surge in crossings. 
Greece’s highest administrative court has called into question the legality of this containment policy, a result of the controversial EU-Turkey agreement. 
The Greek government, however, has defied the court’s ruling. 
It is a heartless, cynical strategy of reckless disregard for human dignity, justified by bigoted discourse and biased narratives. 
Are Europe’s citizens and leaders really prepared to abandon basic values like solidarity and empathy for a future of walls guarded by Libyan mercenaries, an arguably unlawful deal with Turkey, and unconscionable conditions for people seeking refuge from poverty and conflicts that Europe helped to create? 
Against all logic, and despite “almost” after “almost,” Moria camp residents remain hopeful that Europe will soon remember and abide by its commitments to upholding human rights. 
In the meantime, they demonstrate that it is often in inhumane conditions that humanity shines the brightest. 
New arrivals receive support from their communities, including lessons on survival in the camp’s demoralizing environment. 
The camp’s different ethnic communities often act together to ensure that compatriots who develop psychosis, for example, are among those who actually receive treatment. 
Waqi, despite incredible personal trauma experienced before and after her arrival in Greece, cares for the children of two families because their depressive parents cannot. 
It does not have to be this way. 
Many promising policies with the potential to create a safe and humane asylum process have been proposed. 
These include humanitarian visas, preference matching between host countries and asylum seekers, resettlement, and much stronger support for frontline countries. 
Advocating for such solutions may not be comfortable or politically popular. 
Developing and implementing new asylum policies that respect the rights and humanity of asylum-seekers will demand bold leadership. 
But the status quo is clearly unacceptable. 

Europe’s Refugee Problem, Then and Now 
NEW YORK – Earlier this spring, I drove to a beautiful spot on the southern bank of Lake Geneva. 
My destination was the Hotel Royale in Évian-les-Bains. 
It was there, in July 1938, that 32 nations met for a shameful discussion that has been virtually airbrushed from our memory. 
Convened by US President Franklin D. Roosevelt in response to the massive refugee crisis triggered by Hitler’s virulent anti-Semitism, the Évian conference was a catastrophe. 
And its disastrous outcome needs to be recalled in the light of Europe’s current migration crisis. 
The Évian conference was supposed to address the plight of hundreds of thousands of German and Austrian Jews who were desperate for refuge. 
Roosevelt believed that only a collective solution could meet the challenge. 
Hitler, too, hoped that other countries would accept them. 
In a speech in Königsberg that March, he jeered, “I can only hope and expect that the other world which has felt such deep sympathy for these criminals will be generous enough to transform this pity into practical aid. 
As far as I am concerned we are ready to place our luxury ships at the disposal of these countries for the transportation of these criminals.” 
He had already begun to expel Jews, including by placing them forcibly on ships and sending them to various destinations in the Mediterranean and across the Atlantic. 
But, throughout Europe, the refugees faced rejection. 
On June 6, 1938, as preparations for the conference were underway, the US State Department received a letter concerning 51 Austrian Jewish refugees stranded on a small boat in the international waters of the Danube. 
The writer recalled seeing: “the heartrending fate of 51 human beings driven from one frontier to the other. 
We have gained personal knowledge of the unspeakable misery that has innocently befallen 100,000 inhabitants of Austria.” 
And yet in Évian the following month, although many European delegations voiced eloquent dismay over the torment experienced by the Jews of Germany and Austria, they were unprepared to take concrete action. 
The outcome of the meeting was clear: Europe, North America, and Australia would not accept significant numbers of these refugees. 
In the verbatim record, two words were uttered repeatedly: “density” and “saturation.” 
The European countries were already beset with population “density” and had reached a point of “saturation” – in other words, there was simply no more room at the European inn. 
It was an absurd thing to say, of course, in 1938, given the size of Europe’s populations today. 
And it would be an equally ridiculous thing to say now, too. 
To be sure, the participants in Évian could not have foreseen the Holocaust, or that Europe was being drawn into another devastating war; nonetheless, their lack of moral conscience was breathtaking. 
Many of the countries that refused to take in suffering refugees were themselves, in due course, occupied and brutalized by the Nazis – and desperate for the compassion that they denied the Jews in July 1938. 
The Nazis must have reveled in the knowledge that their virulent anti-Semitism found an echo – sometimes not so faint – in the rest of Europe. 
They also came to realize that if expulsion was not possible, extermination eventually would be. 
Today, anti-Semitism, Islamophobia, racism, xenophobia, and anti-migrant sentiment are again rising across Europe, and we must stop now and reassess precisely where we are. 
A major British tabloid newspaper recently felt it acceptable to allow one of its columnists to call immigrants “cockroaches.” 
Rwanda’s Radio Télévision Libre des Mille Collines used the same word to describe Tutsis in the run-up to the 1994 genocide, as did Julius Streicher’s Nazi newspaper Der Stürmer to describe Jews. 
Political leaders across Europe regularly – and shamefully – blame migrants for their national woes. 
Attacking migrants or minorities – whether crudely, through language, or more subtly, through policy – is unacceptable everywhere, full stop. 
When words are formulated with the clear intention of causing harm and violence on national, racial or religious grounds, freedom of expression becomes incitement to hatred, which is prohibited by law. 
Countries that have ratified the International Covenant on Civil and Political Rights, which includes all European Union members, are bound to uphold it. 
And yet Europe’s current proposals on migration leave much to be desired. 
The continent needs to recall its past more sensitively, and be more generous to the desperate people crossing the Mediterranean. 
François Crépeau, the United Nations special rapporteur on the human rights of migrants, observed in a recent interview that Europe, Australia, and Canada could easily resettle one million Syrian refugees over the next five years, and they could add Eritreans to that list and extend this policy to seven years. 
So why is Europe proposing to accept a paltry 20,000-40,000 people annually for resettlement? 
To the European politician strongly opposed to migration, I suggest that the next time you need hospital treatment, take a look around you: many of the people caring for you have a migrant’s tale. 
And should you quench your thirst with the famous water drawn from Évian-les-Bains, you may wish to reflect on the craven failure of a conference that could have saved so many lives – and on what it can still teach us today. 

Europe's Refugee Opportunity 
ROME – Europe’s so-called refugee crisis should never have become an emergency. 
Accommodating one million asylum-seekers should not be a huge challenge for the European Union – an area with 500 million citizens that welcomes more than three million immigrants every year. 
Unfortunately, the lack of a coordinated response is transforming a manageable problem into an acute political crisis – one that, as German Chancellor Angela Merkel has rightly warned, could destroy the EU. 
Most EU member states are selfishly focusing on their own interests. 
This pits them against one another and has precipitated panic, putting refugees in even greater peril. 
A smart, comprehensive plan would calm the fears. 
Instead, Europe has preferred to search for scapegoats – and Greece is the latest to be targeted for blame. 
Greece has been accused of not doing enough to process and house refugees. 
And yet, even if the country were not crippled by economic crisis, it would be unreasonable to expect a single small country to bear the burden alone – especially in a year when more than 800,000 refugees are expected to pass through its territory. 
This is a European and global problem, not solely a Greek problem. 
There is plenty of blame to go around. 
In Greece, George Soros’s Open Society Foundations, acting in partnership with European Economic Area and Norway Grants, anticipated the problems that the lack of a serious European asylum policy would create. 
In 2013, the partnership established an organization, Solidarity Now, run by the cream of Greek civil society. 
Solidarity Now needs just €62 million ($67 million) to care for 15,000 of the 50,000 refugees who need to be housed in Greece next year. 
And yet, though the EU has promised to spend €500 million to help Greece manage the crisis, some member states have failed to pay their share. 
In addition to supporting Greece, the EU needs a comprehensive plan for managing the arrival of asylum-seekers in a safe, orderly way. 
That means operating beyond Europe’s borders, as, from the donors’ perspective, it is much less disruptive and expensive to maintain asylum-seekers close to their present locations. 
For starters, the EU should commit to absorbing at least 500,000 asylum-seekers a year, while working to convince the rest of the world to accept an equal number. 
A public commitment of this magnitude should help calm the disorderly scramble for Europe. 
Asylum-seekers provided with a clear status and promises of safety could be induced to wait in Turkey and other frontline countries, rather than risk a dangerous Mediterranean crossing. 
Second, formal gateways should be established, first in Turkey, and then in Lebanon, Jordan, Tunisia, and Morocco. 
Gateway countries would establish, in close cooperation with the United Nations Refugee Agency and the EU, processing centers to register asylum-seekers and assess their applications. 
Accepted asylum-seekers would then be placed in a queue and required to remain in the gateway country until an EU country accepts them. 
A safe, deliberate process of vetting refugees would quell security concerns in the aftermath of the Paris attacks. 
Gateway countries would have to improve reception, asylum, and integration standards. 
In exchange, these countries should be helped financially and provided with other incentives – for example, easier access to the EU for their citizens. 
Indeed, the EU should establish or expand programs that allow entry to non-asylum-seekers. 
Third, political, financial, and technical support must be provided to frontline countries. 
Turkey, Lebanon, and Jordan, which have borne most of the burden of the crisis, host more than four million Syrian refugees. 
Turkey says it has spent $7.8 billion to care for more than two million refugees; thus far, it has received only $415 million from others (though the EU has promised another €3 billion). 
Full support for refugees in frontline countries is estimated to cost at least €20 billion per year. 
The EU should commit at least half of this, with the balance coming from the rest of the international community. 
Special economic zones that benefit from preferred trade status with the EU and the United States should be created, in order to generate investment, economic opportunities, and jobs for refugees and locals alike. 
These zones should be established in both frontline and transit countries. 
Fourth, the EU needs a truly common asylum and border-guard system. 
The patchwork of 28 separate asylum systems is expensive and inefficient, and it produces wildly uneven results in terms of the reception, status determination, and integration of new arrivals. 
The EU should establish a single European Border Guard and a single Asylum and Migration Agency. 
Fifth, a global response to the crisis, coordinated by the UN, must accompany the EU’s plan. 
This would distribute the responsibility for addressing the refugee crisis over a larger number of states, while helping establish global standards for dealing with the challenge of forced migration. 
Finally, to finance the plan, the EU could use its AAA borrowing capacity to issue long-term bonds. 
The burden of servicing the bonds would be assigned to member states in inverse proportion to the number of asylum-seekers they accept. 
Those countries that can successfully integrate refugees would reap an economic advantage; already, the German economy is growing significantly faster as a result of its willingness to accept Syrian refugees. 
The ongoing exodus from Syria and other war-torn countries was long in the making, easy to foresee, and eminently manageable. 
Fear-mongering nativists are taking advantage of the lack of a coordinated response to peddle a vision that runs counter to the values upon which the EU was built. 
Their vision, if realized, would violate European law; already, it threatens to divide and destroy the EU. 
For this reason, it is all the more urgent that the EU backs a comprehensive strategy to end the panic and stop the unnecessary human suffering. 

Europe Must Confront America’s Extraterritorial Sanctions 
NEW YORK – Donald Trump’s renunciation of the Joint Comprehensive Plan of Action (JCPOA) with Iran and the reimposition of US sanctions on that country threaten global peace. 
Europe’s security depends on defending the agreement with Iran despite the US withdrawal. 
That, in turn, requires Europe, along with Russia, China, and other United Nations member states, to ensure that economic relations with Iran can develop. 
And that can happen only if Europe confronts, and ultimately overturns, America’s extraterritorial sanctions, which aim to deter trade and financial activities with Iran by non-US actors. 
The purpose of Trump’s move is clear and indeed explicit: to topple the Iranian regime. 
Given this folly, European citizens accurately sense that Europe’s security interests are no longer closely aligned with those of the United States. 
America’s bullying approach to Iran has been seconded – indeed championed – by two Middle Eastern allies of the United States, Israel and Saudi Arabia. 
Israel invokes US power to avoid having to make any compromises with the Palestinians. 
Saudi Arabia invokes US military power to contain its regional rival, Iran. 
Both are hoping for a direct US war with Iran. 
America’s previous efforts at regime change in the Middle East yielded horrendous results for the US and Europe (to say nothing of the disasters that befell the countries caught up in the US-provoked mayhem). 
Such “wars of choice” have been the major factor in the surge of migration to Europe from the Middle East and North Africa. 
Even when regime change has “succeeded,” as in Afghanistan, Iraq, and Libya, the aftermath has been violence and instability. 
And when regime change has failed, as in Syria, the result has been ongoing war. 
The humiliating failure of French President Emmanuel Macron, UK Prime Minister Theresa May, and German Chancellor Angela Merkel to convince Trump to remain in the JCPOA was predictable. 
The US decision reflects two converging forces: a deep-seated foreign-policy tendency – manifested by all recent US administrations – to seek hegemony in the Middle East, and Trump’s peculiar brand of psychopathy. 
Trump delights in embarrassing European leaders; their squirming is his triumph. 
Yet they are not powerless. 
The agreement with Iran can still be salvaged, precisely because it is a multilateral agreement, endorsed by the UN Security Council (Resolution 2231), not an agreement solely between the US and Iran. 
Indeed, under Article 25 of the UN Charter, all UN member states, including the US, are obligated to fulfill the JCPOA. 
Trump’s withdrawal of the US from the JCPOA is itself a violation of international law. 
The essence of the JCPOA and Resolution 2231 is Iran’s cessation of activities that could lead to the development of nuclear weapons. 
Strict compliance by Iran is linked to the normalization of international economic relations, including the lifting of UN-agreed sanctions. 
Even if the US now absents itself from the JCPOA, it has only two means to block the implementation of the agreement between Iran and the rest of the world. 
The first would be to foment war. 
This clearly is on the US agenda, especially with the neoconservative doyen John Bolton back in the White House as National Security Adviser. 
The world must steadfastly resist another ruinous US military adventure. 
Extraterritorial sanctions are the second way the US could kill the JCPOA. 
It is one thing for the US to decide that it will not trade with Iran. 
It is quite another for the US government to attempt to block trade with Iran by non-US parties. 
This is America’s intention; it is up to Europe and China to defeat it, in the interest of global peace, as well as in their own direct economic interest. 
In practical terms, the US will be able to enforce anti-Iran sanctions on companies operating in its domestic market, and most likely on subsidiaries of US firms operating abroad. 
Yet the US will try to go much further, by trying to block non-US companies from dealing with Iran. 
The US will probably succeed in clamping down on dollar-based transactions, as these are generally cleared through the US banking system. 
The real issue will come with non-US companies operating outside of the US and interacting with Iran via non-dollar currencies such as the euro and renminbi. 
The US will certainly try to punish such companies, whether by targeting their local subsidiaries, by trying to haul them into US courts, or by denying them access to the US market. 
Here is where the European Union must take a strong stand and move beyond begging Trump for “waivers” for specific European business deals, a process that would make European countries even more subservient to Trump’s whims. 
Europe should defend a firm and unequivocal “No” to US extraterritorial sanctions, notably on companies operating in non-dollar currencies. 
The EU should insist that extraterritorial sanctions violate international law (including the Resolution 2231 and therefore the UN Charter) and the rules of the World Trade Organization. 
They should recognize that acquiescence would be tantamount to handing the US a blank check to set the rules of war and peace beyond the UN Security Council, and the rules of global trade beyond the World Trade Organization. 
The EU should be prepared to use the WTO dispute resolution process against the US, and to bring its case to the UN Security Council and General Assembly. 
Where Europe is afraid to tread, China will surely swoop in to capitalize on business opportunities in Iran. 
And China would be right to do so. 
Europe’s biggest challenge is not legal or even geopolitical. 
It is psychological. 
European leaders act as if the US still cares about a trans-Atlantic alliance of shared interests, values, and approaches. 
Sadly, this is no longer the case. 
The US and Europe do still have many shared interests; but they have many divergent ones as well, especially when the US violates international law. 
Europe needs its own security policy, just as it needs its own trade and environmental policies. 
The showdown over the JCPOA is therefore a moment of truth. 
World peace depends on Europe’s defense of the UN Charter and the rules of international trade. 

Europe's Anchor of Stability 
FRANKFURT – At less than ten years old, the euro is by all measures a young currency. 
Yet it has become a reality of daily life for almost 320 million people in 15 European countries. 
In the wake of the euro’s performance during this year’s global financial crisis, even its strongest critics cannot deny that the euro is an astounding success. 
This past summer, millions of travelers avoided paying cumbersome and expensive charges to change their currency. 
But the advantage for trade and investment implied by the absence of foreign-exchange risks within the euro area is of greater economic importance. 
The common currency completes the single market for the euro area’s member states. 
Since 1999, members of the European Monetary Union (EMU) have experienced a number of severe exogenous shocks: the rise in the price of a barrel of oil from around $10 to $150; the collapse of equity markets after the dot-com bubble imploded; the spreading risk of terrorism after the September 11, 2001, and two wars. 
Starting last summer, the breakdown of the market for US sub-prime mortgages triggered turbulence in financial markets, with no end in sight. 
From past experience with national currencies, Europeans could have expected that any of these shocks would trigger a severe crisis in foreign-exchange markets. 
It is not difficult to imagine what would have happened during the recent financial-market crisis if the euro-area countries still had all their national currencies: immense speculation against some currencies, heavy interventions by central banks, and finally a collapse of the parity system. 
The years 1992-1993 witnessed a dramatic crisis in the European Exchange Rate System. 
Since that period the amount of capital ready to exploit any opportunity in foreign exchange markets has multiplied, which would make any comparable situation today much more dangerous. 
Indeed, the crisis of the early 1990’s put the status quo within the EU common market at risk. 
It is hard to believe that, with today’s vast capital flows, the single market would have survived a series of sharp and abrupt exchange-rate changes. 
Changes in exchange rates of the type seen in 1991-1992 have a strong impact on relative prices for goods traded between different countries. 
In countries that experienced strong currency appreciation, companies (and unions, for that matter) are exposed to a sudden and severe loss in competitiveness. 
Such firms undoubtedly start to clamor for protection against supposedly “unfair” conditions. 
True, the euro did not prevent risky investment decisions by European financial institutions or the consequences for financial markets of these decisions. 
But it was never intended to do that. 
Instead, the euro achieved what it was meant to achieve: the crisis was contained, because it could not inflict damage on foreign-exchange markets within the euro area. 
After the outbreak of turbulence in financial markets last year, the European Central Bank immediately provided ample liquidity to calm the situation, and has continued to do so ever since. 
At the same time, the ECB never lost sight of its main goal – maintaining price stability. 
Indeed, the ECB has successfully anchored inflation expectations right from the start at a level consistent with its definition of price stability. 
This achievement contrasts starkly with all the critical voices that warned against the experiment of European Monetary Union and even predicted its early failure. 
It was in the first weeks after the establishment of the ECB in June 1998 that I received a letter by the late Nobel Prize laureate Milton Friedman, who congratulated me on my appointment as member of the Executive Board – which he called “an impossible job.” 
He was convinced that monetary union in Europe was doomed to fail. 
Today, however, it is hard to find anybody who does not consider the euro a great success, and the ECB has been so sure-footed that people now take that success for granted. 
But this was not a matter of good luck. 
The fundamentals of the euro’s success are hard work, dedicated commitment to the common currency’s unique historical mission, and, not least, a well chosen monetary policy strategy. 
But this success is no reason for complacency. 
Major challenges lie ahead. 
In the context of weakening growth, the Stability and Growth Pact will face a severe new test. 
And, just as important, reforms aimed at ensuring greater flexibility of markets still lag behind what is needed to exploit fully the advantages of the single monetary policy. 

Europe’s Anti-Ideological Election 
PARIS – In each of the 27 states of the European Union, the campaign for the just concluded elections for the European Parliament occurred in an atmosphere of indifference, with voters, candidates, and the media focusing mostly on domestic issues. 
Perhaps for precisely this reason, the abstention rate (an average of 57%), was the highest since the first vote in 1979, while the composition of the Parliament, with its right-wing majority, underwent no significant changes. 
Following the 2004 elections, the European People’s Party (EPP), which regroups right and center right parties, held 288 MPs of the Parliament’s 785 seats. 
In 2009, it is still the first force in the new parliament, with 267 deputies out of a total of 736: the decrease in its membership is also due to the stated commitment of the British Conservatives and the Czech right party to defect from the EPP to create their own party, with a stronger right-wing line. 
That opens the way to the possible return for a second term of José Manuel Barroso as president of the Commission. 
This situation is paradoxical, as Europe is experiencing one of the worst economic crises in its history, with falling employment and living standards and rising worries about the future. 
One should have expected the right-wing to be punished in countries where they govern. 
But that threat did not materialize. 
The latest returns, indeed, show quite the opposite – in France, Italy, Poland, Denmark, and even Germany, where the CDU had won a large number of representatives in the 2004 elections. 
Where the right is in opposition, such as in Spain and Portugal, it has improved its position. 
On the other hand, the Socialist Party lost support almost everywhere, especially in countries – Spain, Portugal, Hungary, and the Netherlands – where it is in power. 
The European socialist party (ESP), which held 215 deputies in the old parliament, secured only 160 seats. 
In France and Denmark, where the Socialist Party is in opposition, it did no better. 
The only exception is Greece. 
In France, the Socialist Party is almost outnumbered by Europe Ecologie, a green coalition gathered by the charismatic Daniel Cohn-Bendit. 
The liberals remain the third force of the European parliament, with around 80 deputies, less than its previous 100 members. 
The Greens appear to be the main beneficiaries of the elections and become the forth force: they will get around 55 seats, a gain of more than 10 seats. 
Extreme parties also benefited from the elections, as well as some “eurosceptic” parties. 
In France, Jean-Marie Le Pen’s party has been substantially weakened, but in the Netherlands, the anti–Islam party led by Geert Wilders won 17% of the votes, and in Austria, Denmark, Hungary, Slovakia, and even in the UK the far right did better than expected. 
Indeed, the far-right British National Party won its first ever seat. 
But those worried about the rise of extremism in Europe should take some heart from the fact that there are many differences of views between these parties. 
The predominance of the right in the future European Parliament calls for some explanation. 
The main reason might be the poor fortunes of social-democratic parties, which now head only eight governments in the EU, despite their efforts since 2000 to minimize their waning influence within their traditional electorate – blue-collar workers and white-collar public-sector employees, middle managers, and civil servants. 
This is true for Northern Europe’s large social-democratic parties (Denmark and Sweden) but also for parties that attempted to “modernize” themselves by combining socialism and liberalism (the UK and Spain), and even for Europe’s more traditional socialist parties (Belgium and France), which, despite local successes, have found it difficult to re-gain national power. 
Meanwhile, those parties that intend to move left, such as die Linke in Germany, risk being overwhelmed by the radical anti-capitalist left. 
It all seems as if, in the face of a crisis that calls into question decades of finance– driven capitalism and the dominance of free-market ideology, and despite widespread expectations of a revival of the welfare state, the social-democratic ideal has failed to convince a majority of Europeans that it can provide effective solutions. 
When it comes to managing a deep and complex crisis, indeed, European voters tend to prefer the experience of conservative politicians. 
This is all the more remarkable at a time when right-wing governments embrace regulation and even state intervention – the cornerstones of leftist ideologies. 
At the same time, a request for transparency and a care for ecology are growing in the youngest generations across Europe, which explains the progress of the Green vote in many countries. 



Europe’s Blame Game 
The European Union’s leaders have just met to draw the lessons from the failed referenda on the Constitutional Treaty. 
But they need not search too far for culprits; indeed, they need only look in the mirror and confront the consequences of the dishonest game that the leaders of EU member states have played for too long. 
Over the years, those leaders hoped to reap the benefits of reform while avoiding the blame, so they routinely let EU officials based in Brussels take the political heat for unpopular but necessary measures. 
They then bitterly complained to their people about “Brussels bureaucrats” and their undemocratic ways. 
But these leaders forgot that their people might actually believe them. 
So, when the leaders of France and the Netherlands – pro-constitution to a fault – asked their people what they thought about the Union, they received a clear echo of their own message: the people did not like the reforms, and they did not like the “Brussels bureaucrats,” constitution or no constitution. 
Nowhere has this game of passing the blame been more visible than in the way EU governments have handled the deregulation of the product market. 
The rewards to be gained by deregulating product markets are very large. 
Breaking up monopolies often yields dramatically lower prices and thus higher living standards for consumers, because the same wage buys a lot more. 
Consider deregulation of telecommunications and airlines, which has ushered in competition from low-cost carriers of data and people. 
Deregulation also leads to economies of scale, lowering prices even further, as we all know when shopping at the hypermarket rather than the corner grocery store. 
But deregulation inevitably brings disruptions. 
Consumers gain, but some workers lose. 
Existing firms often have a hard time adapting. 
New, leaner firms take over. 
In the process, old firms go bankrupt, workers are laid off. 
Rents disappear, and think of the effects of airline deregulation on pilots’ salaries. 
Even if as many or more jobs are created as are destroyed, this does not eliminate the pain of those who find themselves unemployed. 
By any estimate, with a decent safety net for workers who lose their jobs, the benefits of deregulation far exceed the costs and the pain they cause. 
But this does not make governments’ political task much easier, because the benefits are diffuse: consumers paying less for airline tickets may not attribute it to deregulation. 
By contrast, the costs are localized: airline workers who risk losing their jobs are intensely aware of the connection between deregulation and layoffs. 
Of course, governments could try to explain why they pursue deregulation. 
But it is much easier for them to adopt a low profile, get the “Brussels bureaucrats” to do it, and then blame those Brussels officials, indeed the EU, for any and all of the pain. 
Or could it really be true that “Brussels” has overstepped its powers, forcing more deregulation than national governments wanted? 
This exonerating hypothesis does not hold water. 
The case of airline deregulation is again revealing. 
Twice in the last ten years, national governments have explicitly given the EU the authority to tighten constraints on their subsidies to failing airline companies. 
Governments did not have to cede these powers. 
But they did, and this did not prevent them for blaming “Brussels” strongly and loudly for these very constraints when their own national airlines got in trouble. 
Having triggered and then witnessed the “anti-Brussels” vote, what should European governments do? 
One piece of good news is that deregulation of product markets has been largely achieved, so there is less need to play the Brussels blame game. 
The main item on the agenda now is to design better social insurance, in order to minimize the pain from reallocation, be it from deregulation, technological progress, or globalization. 
Of course, some product-market deregulation remains necessary, especially in the service sector. 
The Bolkestein directive on services played badly, but there is no question that European consumers pay too much for many services. 
To take just one example, eliminating the monopoly that notaries public hold in countries like France and Italy would substantially decrease the costs of buying and selling homes, decrease the cost of housing, and make it less costly for workers to move to where the jobs are. 
European governments face three choices. 
They can try to stop product market reforms altogether and, by the same token, try to stop trade liberalization and globalization. 
So far, no government appears to have fallen to that temptation. 
They also can continue to play the blame game, letting the Union pursue reforms, while complaining about Brussels bureaucrats. 
But the anxiety now being felt across the EU shows the dangers of that strategy. 
Moreover, labor-market policies do not fall under the EU mandate, so national governments will be on their own, without the Brussels bureaucrats to blame. 
Finally, they can help “Brussels” define and design product-market reforms, and then sell those reforms, and the EU’s role in enacting them, to their voters. 
If Europe’s leaders are wise enough to choose this course, the fiasco of the French and Dutch referendums will prove to have been useful after all. 

Europe's Calamity 
It has happened. 
After France and the Netherlands rejected the European Constitutional Treaty, Ireland’s “No” vote is the second and probably decisive blow against a united and strong Europe. 
June 12, 2008, will have to be remembered as the day that made European history. 
No matter what desperate rescue efforts will be undertaken, they cannot hide the fact that the European Union has left the world stage as a serious foreign policy player for at least ten years (if not for much longer). 
This has happened at a time when the problems on the Balkans remain unresolved, America is experiencing a relative decline, Russia is regaining strength, Turkey’s domestic policy is taking a wrong turn, the Near East – the EU’s direct neighbor – threatens to explode, and the speed of China’s and India’s rise as emerging powers will define the global economy and politics of tomorrow. 
Poor Europe! 
With the Irish referendum, it has blindly and needlessly thrown itself into a political calamity. 
Certainly, the EU will continue to exist and its institutions will continue to function, for better or worse, on the foundation of the Treaty of Nice. 
But a proactive, strong Europe capable of determining its own fate will not be in the cards for quite some time. 
When respectable British media such as Financial Times warn against a renewed European psychodrama and instead call for working toward a “Europe of results,” this should be regarded rather as a bad joke than a serious alternative. 
Neither by cajoling nor by beating can a donkey be turned into a racehorse, unless one is secretly satisfied with the donkey. 
And that is exactly Europe’s core problem: several members do not want more than a donkey. 
Institutions, however, may be reformed if they no longer work, and this is exactly what the EU has been futilely trying to do for 20 years. 
After 1989, history has made EU enlargement indispensable, but, without institutional reform, a Europe of 27 member states will inevitably deliver ever worse – and, to its citizens, increasingly disappointing – results. 
What will be the consequences of the Irish referendum? 
1) A strong European foreign policy, badly needed given the current state of the world, was buried on June 12, for the time being. 
The nation states will have control over foreign policy once again. 
The same is true for the democratization of the EU and thus for its greater proximity to, and acceptance by, ordinary citizens. 
Given this point, the Irish decision is especially grotesque, because it rejected exactly what it called for. 
2) The EU will stagnate. 
The process of enlargement will either be delayed or stopped completely, because the EU can no longer admit new members on the basis of the “Nice constitution.” 
The price will first be paid in the Balkans, and then by Turkey. 
3) The EU’s smaller and mid-sized members, above all, will pay the price for the Irish decision when foreign policy becomes re-nationalized. 
They will lose influence. 
There is nothing really new in that if one only looks at the foreign policies of France and Great Britain. 
But the case of Germany is different. 
Germany has long seen its strategic interests from within the framework of an integrated EU. 
A long-term blockade of a strong EU will necessarily change this viewpoint. 
4) As an alternative to a large and strong EU, the German-French relationship will return to the fore. 
In the future, close cooperation between Germany and France will more than ever form the old and new center of gravity in a blocked EU. 
But, given the Treaty of Nice, this will lead to the EU’s internal disintegration and the formation of two camps: the EU of integration and the EU of the Common Market. 
Basically, the old European Economic Community and the old European Free Trade Agreement will de facto emerge anew within the framework of the EU. 
5) Within the wider EU, solidarity threatens to decline. 
Solidarity is not a one-way street. 
Ireland, one of the countries that benefited the most in material terms from the idea of European unification, has rejected this idea. 
Thus, negotiations on European financial transfers, the core of European solidarity, will be much tougher in the future than they were in the past (when they were already difficult enough). 
The poorer EU countries will suffer from this development. 
There is still a minuscule chance to avert the debacle if Ireland with its “No” vote remains isolated within the EU. 
Beyond that, however, we should seriously consider whether, within the framework of the Treaty of Nice and on the basis of the Common Market, all parties involved and Europe would be better off parting ways: members favoring political integration should move on, while those satisfied with the Common Market should stay behind. 
This formula worked with the Monetary Union. 
So why not with political integration? 
At any rate, comprehensive opt-outs are better than long-lasting blockades and disintegration of the European project. 

Europe’s Central Bank at Sea 
NEWPORT BEACH – Central bank purists are confused. 
How can the European Central Bank, a Germanic institution, now be in the business of buying government bonds issued by five of its 17 members? 
Why is this monetary authority acting like a fiscal agency? 
Isn’t the ECB supposed to be a politically independent and operationally autonomous institution committed to fighting inflation and safeguarding the currency? 
Well, yes and no. 
And that answer speaks to the disturbing realities of modern-day central banking (or, to be more exact, central banking in the post-bubble world of debt overhangs and sovereign-debt concerns). 
It also sheds light on the endgame now taking shape in a confused and unsettled eurozone. 
A sea-faring analogy simplifies some of the complexity. 
Imagine that a highly agile coast-guard vessel is called out to rescue a floundering boat. 
As the rescue is taking place, the vessel finds that it must also rescue two other, larger boats. 
It does so, but not before the captain receives assurances that a larger ship is coming to assist. 
As the crew of the now-burdened rescue vessel waits for relief, they are forced to deal with restless passengers. 
With the ocean getting rougher, the once-agile rescue vessel is now so overburdened that some officers are second-guessing the captain, who again calls for the larger ship to help. 
Unfortunately, this ship seems hostage to a confused sense of mission and a distinct lack of urgency. 
The overwhelming hope is that the larger ship will come and save the day. 
The fear is that it may not. 
And the question then becomes whether the crew of the struggling rescue vessel will decide that they can stabilize the situation only through a once-unthinkable action – throwing someone overboard to lighten the vessel and save the rest. 
In a nutshell, this is the ECB’s situation today. 
The outcome is both uncertain and highly consequential – for Europe, of course, but also for a global economy that is in the midst of a synchronized slowdown and operating with a weakened anchor, owing to America’s recent debt-ceiling debacle and the humiliating loss of its AAA sovereign credit rating. 
The ECB has already purchased almost a €100 billion of peripheral government bonds, and it is committed to buying a lot more. 
Less visibly, it has acquired many times the current volume in so-called “repo operations,” through which the ECB provides euros to struggling banks in a “temporary and reversible” exchange for the government bonds on their balance sheets. 
Clearly, back in 2009, the ECB did not make the controversial call that Greece was insolvent, not illiquid. 
My own sense is that it was able but unwilling, owing to its fear of collateral damage for the rest of the eurozone. 
It opted for delay in the hope that the eurozone’s most vulnerable members would reinforce their defenses against Greek contagion. 
In that sense, the ECB may have been too trusting. 
It believed that the peripheral economies would deliver serious fiscal austerity, notwithstanding their dreadful growth outlook and general lack of competitiveness. 
It also believed that the core countries would relieve the ECB burden of mounting bailout costs. 
But, even if the ECB has limitless patience, the rest of the world does not. 
Markets understand that the ECB cannot forever substitute for other government agencies, so they repeatedly call into question its bridging strategy. 
Without these other agencies’ help, the ECB’s unprecedented actions will end up being a bridge to nowhere. 
Whichever way you look at it, the ECB – and with it Europe – is being forced into an endgame with three once-improbable outcomes. 
That endgame will play out in weeks and months, not quarters and years. 
The first alternative is a disorderly breakup of the eurozone. 
Only chaos-lovers wish for such an outcome, but it is possible if core governments continue to hesitate in engaging their balance sheets; if peripheral governments abandon their fiscal-reform efforts; and/or if societies can no longer tolerate economic stagnation, high and rising unemployment, and budget austerity. 
The second is the one preferred by political scientists and European visionaries: greater fiscal union among the 17 eurozone members, or, in blunt terms, German willingness to do for the eurozone what it did for eastern Germany – namely, write large checks for years to come. 
In return, Germany would insist on economic-governance reforms that force other eurozone members to surrender some of their national fiscal prerogatives. 
The third alternative is the one embraced by several economists. 
It involves creating a smaller and more economically coherent eurozone, which would consist of core and near-core countries within a tighter fiscal union and more credible defenses against contagion. 
In the process, 2-3 peripheral economies would take a sabbatical from the euro, underwriting immediate economic uncertainty with access to a much wider range of instruments to deal with their debt overhangs and lack of competitiveness. 
Although the endgame is close, it is impossible to predict which alternative will prevail. 
That will depend on decisions taken by politicians with low approval ratings, noisy oppositions, and inadequate coordination. 
Moreover, implementation will likely prove far from automatic, thereby testing the resolve of governments and institutions. 
My sense is that politicians will opt for a weak variant of greater fiscal union, but that, ultimately they will fail to execute it for the eurozone as we know it today. 
After some considerable volatility, a smaller and more robust currency union will emerge; and, importantly, Europe will avoid the euro’s demise and a total breakdown of the eurozone. 
No matter how you view it, the coming endgame will be neither simple, nor orderly. 
Had the ECB known this at the start of Europe’s debt crisis, it might have resisted taking so many risks with its balance sheet and reputation. 
Then again, it probably could not have done otherwise – just as our once-agile rescue vessel never really had the choice of remaining safely in port. 

Europe's Coming Crisis with Turkey 
LONDON: By the end of the second week of December the European Union will finally have decided which countries will be asked to enter membership negotiations. 
Most people expect that invitations will go out to six countries (Cyprus, the Czech Republic, Estonia, Hungary, Poland and Slovenia), because this was the list recommended by the European Commission earlier this year. 
In Eastern Europe, the EU choice will no doubt be well received by the fortunate five. 
In the case of Cyprus, unfortunately, the EU commitment to negotiate now looks more and more like a lethal political detonator, with explosive but incalculable consequences for the future of the European Union, and major dangers for the political and security order in the Eastern Mediterranean. 
The problem is that the officially-recognised government of Cyprus does not really represent the whole island. 
Cyprus has long been divided between the Greek Cypriot majority in the south and the Turkish Cypriot minority in the north; it is thus in some sense a miniature of the larger and long-standing conflict between Greece and Turkey. 
But for the past two decades the division of Cyprus has been physical and military, ever since the Turkish government in 1974 sent troops to the north, and helped create a separate so-called Turkish Republic of Northern Cyprus (TRNC). 
As far as the United Nations is concerned, the Greek Cypriot government in the south is the sole internationally recognised government for the whole island; only Turkey recognises the existence of the government of the TRNC. 
But the fact remains that, in any negotiations with the European Union, the Greek Cypriot government will not be able to speak for the whole of Cyprus. 
So it is not really clear how these negotiations can take place, or what kind of treaty commitments the Cyprus government can realistically put its name to. 
Even worse beckons. The Turkish government is now threatening to turn the question of Cyprus into a major crisis over the relationship between Turkey and the European Union, or even perhaps between Turkey and Nato and the Western world in general. 
At the very least, the Turks have threatened that, if the EU opens negotiations with the existing Greek Cypriot government, then the government of Ankara will make the division of Cyprus permanent, by incorporating northern Cyprus into Turkey. 
Indeed, the Turks have made clear that the Cyprus question is really a sub-plot of the much larger question of the whole relationship between Turkey and Europe. 
Ever since Kemal Ataturk founded the republic of Turkey in 1923, in the troubled aftermath of the First World War and the collapse of the Ottoman Empire, the Turks have aspired and claimed to be part of Europe and the West. 
But this Turkish aspiration has not been reciprocated by the Europeans. 
When the Cold War was at its height, and the threat from Russia at its most extreme, the West seemed to welcome Turkey's advances. 
In 1952 Turkey (like Greece) became a member of Nato; in 1963 Turkey became an associated state of the European Community. 
In 1987, however, when Turkey applied for full membership of the European Community, the Commission gave it the thumbs down: Turkey was too poor and too populous (before the unification of Germany, it was bigger than any member state); its human rights record was unacceptable; and it was disqualified by its invasion of northern Cyprus in 1974. 
Now the Turks are saying that the Cyprus issue will put the question of Turkey's relationship with Europe and the West on the line. 
What they really want is a firm commitment by the Europeans to offer EU membership to Turkey. 
At present this seems inherently extremely unlikely, because the objections are just as serious today as when the Commission formulated them 10 years ago. 
If the EU goes ahead with membership negotiations with Cyprus, however, then the Turks in retaliation may block any enlargement of Nato into Eastern Europe. 
Some people even fear that the present war of words over Cyprus could lead to a shooting war in earnest between Greece and Turkey. 
Earlier this year the Greek-Cypriot government announced the purchase of S-300 anti-aircraft missiles from Russia. 
Since these missiles could in theory attack Turkish aircraft in Turkish airspace, the Turks in response have implied that their deployment might be a casus belli. 
It is not easy to see how a crisis can now be avoided, or how the European Union can get out of what is really a primitive and atavistic conflict between Greeks and Turks. 
Some experts argue that, even if the EU does open membership negotiations with the Greek-Cypriot government of Cyprus, as it is virtually bound to do, it must make clear that they cannot be completed without a settlement of the Cyprus question. 
No amount of finessing of the Cyprus question will dispose of the much larger question of Turkey's relationship to Europe. 
In the past 50 years Turkey used to be seen as an essential link in European security. 
But now the European Union's security, in the south-east Mediterranean, is in jeopardy to the fact that Turkey (a member of Nato) and Greece (a member of the EU and of Nato) are at daggers drawn. 

Europe’s Competitiveness Obsession 
BRUSSELS – The President of the European Central Bank is said to show at each meeting of the European Council a graph depicting the evolution of relative wage costs across the eurozone’s 16 member countries. 
This chart shows increasing divergences over the last ten years, with the countries now facing difficulties (Greece, Portugal, and Spain) having lost competitiveness by around 20% relative to Germany. 
In other words, since 1999, wage costs have increased by about 20% less in Germany than in southern Europe. 
The conclusion seems straightforward. 
The eurozone’s southern European members must reduce their wage costs to claw back the competitiveness that they have lost since adopting the common currency. 
Concern about such divergences has also reached the task force headed by European Union President Herman Van Rompuy, which is supposed to devise fundamental reforms to the rules for economic policy coordination within the EU. 
A key proposal from the task force’s first meeting was to develop competitiveness indicators, and then force member countries to take “remedial action” should the EU find large divergences. 
But this approach risks leading in the wrong direction. 
Competitiveness, which is usually measured in terms of unit labor costs, is a relative concept. 
One country’s gain is another’s loss. 
Restoring competitiveness in some member countries (Spain, Greece) would require others (Germany in the first instance) to accept deterioration in theirs. 
The adjustment might come about through wage increases in countries with lower labor costs, rather than cuts in countries where costs are too high. 
The official response to this is that no country should be forced to increase wages, and that everybody gains if structural reforms increase productivity. 
The latter is certainly true, but it does not solve the fundamental problem – that a country’s relative unit labor costs can decline only if another country’s rise. 
Even assuming that agreement can be found within the eurozone on how to allocate the desired gains and losses in competitiveness across countries, member countries are not centrally planned economies. 
There is little that government can do in a market economy to force down wages in the private sector. 
Governments can, of course, enforce public-sector wage cuts. 
This is being done on a large scale in Greece and Spain, for example. 
But there is little empirical evidence that public-sector wages have a significant impact on private-sector wage growth. 
So is higher productivity the way out? 
Even assuming that governments could identify and implement structural reforms that yielded quick productivity gains, it is not clear that higher productivity leads to increased competitiveness. 
In fact, across the EU, the opposite often is true. 
Some of the countries that achieved the highest growth in labor productivity also lost the most competitiveness (e.g. Ireland). 
How is this possible? 
After all, higher productivity should bring lower unit labor costs. 
But improvements in productivity are easily overwhelmed by changes in wages. 
While productivity growth usually is measured in fractions of a percentage point, wage increases have been much larger. 
So the real question is, What drives wages? 
Country-level data suggest that the largest wage increases over the last decade are generally associated with the strongest growth in domestic demand (e.g. Spain, Greece). 
Are wages driving demand, or vice versa? 
Most of the loss of competitiveness in southern Europe occurred once unemployment there had fallen significantly. 
The measured loss of competitiveness in southern Europe thus should not be ascribed to a lack of structural reforms or unreasonable trade unions, but rather booms in domestic demand, fueled mainly by the easy availability of cheap credit for consumption (Greece) and construction (Spain, Ireland). 
This excessive consumption and construction demand led to excess demand for labor, especially in protected sectors like services, thus driving up wage costs. 
If excessive domestic demand was the problem, the solution should now be on its way. 
International capital markets already have curtailed credit to these countries. 
The sharp fiscal retrenchment that has now started throughout southern Europe should contribute further to a sharp deceleration, if not outright fall, in domestic demand there. 
If labor markets are flexible, this should result in lower wages. 
Indeed, that is the key condition: labor-market flexibility on the way down as much as on the way up. 
Adjustment would be much easier, of course, if wages did not fall in Germany as well. 
But, given that unemployment is actually declining in Germany, which in the past has tended to increase wages (moderately), this is unlikely. 
The proposition that governments “must do something about competitiveness” risks leading to an excessively activist approach to economic policy coordination, with governments and EU institutions constantly trying to influence wage-setting in the private sector. 
This might work – at least partly – in the current crisis, but it will not be able to prevent future divergences in competitiveness if domestic demand diverges again. 
Structural reforms are always useful, but increasing productivity takes a long time and does not always translate into higher competitiveness. 
What is needed in southern Europe is acceptance that domestic demand must fall to a level that allows countries to live without further capital inflows. 
After that, it should be sufficient to allow labor markets to work until the system finds its new equilibrium. 

Europe’s Conscience Police 
The story of the rejection last autumn of my appointment to be a member of the European Commission is notorious. 
Nominated to the Commission by the Italian Government, I was compelled to withdraw because of some allegedly homophobic remarks I was said to have made before the European Parliament’s Committee on Civil Liberties, Justice, and Home Affairs. 
Now that the dust from that dispute has settled, and with a new Commission in place, it is time to ask what lessons can be drawn from this affair. 
The first lesson concerns the indispensability in politics of accurate information and reporting. 
Democracy works only if there is a fair reporting of the issues being debated. 
Of course, everyone is free to comment on and evaluate events as he or she pleases. 
But a high standard of fidelity to the truth is needed in the media; otherwise, debates become too distorted for citizens to evaluate correctly their meaning. 
Reporters are not entitled to so twist the facts as to reinvent them. 
In my case, the main charge against me was invented: I made no homophobic statement. 
Nor did I did introduce the issue of homosexuality into the debate over my appointment. 
My opponents did. 
I did not introduce the emotionally charged word “sin” and tie it to homosexuality in the debate. 
Once again, my foes did this. 
What I said, instead, was this: I might, as a practicing Roman Catholic who adheres to his Church’s teachings, think that homosexuality is a sin. 
This belief could not be construed to have any influence on my decisions, unless I also said and believed that homosexuality is also a crime. 
But I said nothing of the sort. 
A liberal society is a society in which people holding different moral opinions are bound together through a common rule of law. 
In the fields of both law and politics, I have consistently and clearly supported the principle of non-discrimination. 
The distinction that I was drawing in my testimony, between law and morals, was not accepted. 
Worse, it was turned into a caricature, and then declared false. 
Indeed, the committee entered in the sphere of moral conscience by stating that anyone who does not adhere to a positive moral evaluation of homosexuality is unfit to serve as a European commissioner. 
This means that anyone holding to the moral doctrines of most Christian churches should nowadays be considered a second-class citizen in the European Union. 
According to this principle, Konrad Adenauer, Robert Schuman, and Alcide de Gasperi – three of the EU’s founding fathers – would not measure up. 
What is wrong with the fact that a parliamentary committee passes a political judgment against a Commissioner for purely political reasons? 
The rejection of my nomination was, according to many, just another political battle: you win some, you lose some, but you cannot say that you have been unfairly discriminated against simply because you lost. 
But the European Commission is not accountable to the European Parliament in the same way that a national government is accountable to its parliament. 
The EU’s member governments name the members of the European Commission, and the Parliament lacks an explicit right to veto them. 
A hearing over a nomination to be a Commissioner before an EU parliamentary committee should simply examine whether the person is competent in the area he or she is to oversee on the Commission, and whether there are elements of moral indignity – i.e., such obvious moral failings as to be disqualifying. 
Now it seems that, according to the committee that rejected my nomination, adhering to the principles of most Christian churches is a cause for such a “moral” disqualification. 
The implication of this position is profound and shocking. 
If it were generally accepted, it would imply that the EU now holds official moral doctrines, and that allegiance to these doctrines is required in order to exercise the full right of citizens to serve in a public capacity. 
That implication is intolerable, and it will progressively weaken and divide the EU through a type of semi-official hostility to religious faith. 
Moreover, the demand for such an allegiance is a renunciation of one of the most important steps in Europe’s development. 
It has been roughly 300 years since religious people came to understand that being of a different faith, or being agnostic, did not disqualify one from public office. 
If the moral test that I endured stands, it means that Europe has come full circle: agnostics are no longer willing to accept that being religious – and having different moral views – should not bar someone from holding an official post. 
I hope that the European Parliament’s Committee on Civil Liberties, Justice, and Home Affairs will reconsider its behavior, and that the “Buttiglione affair” will remain only an ordinary political injustice against a single individual rather than the harbinger of second-class citizenship for religious believers. 
If, on the other hand, the European Parliament’s members follow through on the logic of my case – if my shunning becomes the basis for a consistent policy – the EU will be on its way to creating a kind of morality police and launching a modern-day inquisition, one that crassly violates both freedom of religion and freedom of conscience. 

Europe's Constitutional Future 
Last week, the President of the European Convention, Valery Giscard d'Estaing, submitted a so-called "skeleton" for a future Constitution of Europe. 
All the ingredients of a constitution - values, principles, the rights of citizens, the competencies of the Union and its constituent institutions, etc - were included. 
This document arose despite the fact that the Convention's mandate did not empower the delegates to produce a constitution. 
According to the Nice Declaration, which I drafted as one of the participating prime ministers, we were only to simplify and restructure the EU's basic treaties. 
As the C onvention worked, our mandate was transformed due to various pressures. 
These came from member countries, from civil society organizations, and from letters, documents, and email messages from across Europe. 
Democratic pressure changed our mandate. 
When even the Foreign Minister of Britain, a country happy with its centuries-old "unwritten constitution," claims himself eager to have a written European Constitution, something truly has changed! 
Yet, scholars such as Ralph Dahrendorf and Joseph Weiler suggest that a European constitution does not make sense because a democratic constitution presupposes a paramount common identity that is absent in an EU where individual national loyalties still prevail. 
Others, such as Robert Dahl, argue that democracy requires smaller communities based on shared interests and personal relations. 
For them, Europe may be too big to forge truly democratic institutions. 
Such theoretical objections must be set against the fact Europe already exists - indeed, decisions are made everyday on the European level which determine our lives. 
We may dislike it, but the EU is part of our system of government, like municipalities, regions, and nation-states. 
So the question is not whether Europe exists, but whether we are satisfied with the way it functions. 
If not, can we fix it, and is a constitution the way to do it? 
The first problem in need of a "constitutional" solution that is tackled is Europe's clear and unified identity. 
Not many people realize it, but because of the patchwork of treaties from which today's European institutions arose, "Europe" is not a unitary entity; indeed, the "European Union" and the "European Community" denote two different things. 
The Community is the set of institutions created in the 1950's to establish a common market. 
When we decided later to have a common foreign policy, and to cooperate in judicial and police matters, we invented the Union. 
The Union deals with foreign policy; the Community with economic integration. 
One consequence of this is that agreements with third countries that involve both foreign and economic matters require two distinct treaties: one for the Union, one for the Community. 
This confuses even trained foreign diplomats who negotiate with Europe. 
If it confuses them, how befuddling must it be for ordinary citizens? 
How can a European citizen really identify with Europe if no single "Europe" exists? 
Europe's indistinct legal identity has another deleterious impact. 
If the Community does something that affects someone's rights, he or she can go to court. 
But if the Union encroaches on your rights, access to a court may be closed because the Union happens to have no legal personality! 
The next problem to be tackled - again with constitutional implications - is the anonymous, bureaucratic nature of European legal acts. 
Criticizing institutions is as essential a part of democracy as protecting enumerated legal rights. 
But Europe's institutions are hard to criticize because they produce acts that ordinary people cannot name or understand. 
In national life, acts of parliaments are called "statutes" or "laws," and these usually have names that you can rally for and against. 
In the EU we have " regulations," "directives," "decisions," "general guidelines," "common strategies," "common actions," "common positions" - a myriad that only experts can comprehend. 
When a "directive" is issued, you don't know who is responsible; instead, they are known as, say, "Directive 17.62" (meaning that it is directive no. 17 issued in 1962). 
In Italy there is now a controversial statute that will change the rules of criminal procedure in ways that might prove helpful to eminent public figures. 
Well, the name of Senator Cirami is attached to that bill. 
By god, we can fight about "the law Cirami"! 
Would things be the same if the bill were called "Regulation 75"? 
Because Europe has so many bodies that legislate - the Council of Ministers, the Council for Agriculture, the Council for Industry, the Council for the Environment, etc. - we cannot know who is doing what and why. 
We need a single legislative council, a bicameral European Parliament, with one house representing member states, and the other the European electorate. 
In this simplified system, legislation will be called legislation, and executive regulations, as in most legal systems, will fill in the gaps in primary legislation. 
This is a system European citizens will understand. 
The draft constitutional document presented last week introduces small but significant changes that may empower Europe's citizens to both identify with and criticize Europe. 
It calls for a single, unified legal entity. 
Whether it is called European Union, United States of Europe, United Europe, or something else, it will also provide for a unitary, simplified system of normative acts that will introduce more transparency and accountability. 
The institutional structure envisaged by the proposed European Constitution should also reflect and help develop Europe's broader aspirations. 
Europe must be more than a vehicle of economic integration, which is almost accomplished anyway. 
At the simplest, we expect Europe to be fair. 
We expect our social model to be realized. 
We expect economic and social matters to be connected. 
We expect Europe to play a role for good in the world. 
Of course, roadblocks await. 
One of them is that more Europe cannot mean a centralized system. 
Democratic governments are too complicated for that. 
Getting the proper balance among European, national, regional, and local institutions will be a crucial challenge. 
But if the people are to ordain a Constitution for Europe, all of their ties and values will need to be respected by that Constitution. 

Europe’s Contested Neighborhood 
BRUSSELS – What is the most important source of disagreement today between Russia and the West? 
It is not the issues most often in the news – Iran or Afghanistan. 
It is Europe’s contested neighborhood – the future of those countries between the eastern border of NATO and the European Union and the western border of Russia. 
While the West and Russia still talk the talk of cooperative security in Europe, geopolitical competition for influence has been renewed in these regions. 
Russia today openly lays claim to a sphere of interest in its borderlands – in direct contradiction to commitments made under the Helsinki process. 
It has embraced policies and a military doctrine that labels NATO a threat and justifies the right to intervene in these countries. 
While packaged in smooth diplo-speak, Russian President Dmitri Medvedev’s new proposal for European security has the less-than-hidden goal of stopping and rolling back Western influence. 
Rather than moving into the twenty-first century, Russia seems determined to revert to nineteenth-century strategic thinking. 
With the Obama administration focused on Afghanistan and Iran, the Kremlin hopes that a West in need of its cooperation will acquiesce in its demands. 
And it is not only words. 
Eighteen months ago, a war took place in Europe between Russia and Georgia. 
It was a little war, but one that raised big questions. 
It was not fought over the future status of Georgia’s Russian-backed breakaway regions of Abkhazia and South Ossetia (though that source of conflict was a real one). 
Instead, the war’s root cause was Georgia’s desire to align itself with the West and Russia’s determination to stop it. 
Many diplomats would prefer to forget the Russo-Georgian war or sweep it under the rug. 
But none of the underlying tensions are resolved. 
There is no stable solution in sight for Abkhazia and South Ossetia. 
Russia has not abandoned the goal of breaking Georgia’s desire to go West. 
Instability and separatism are growing in the northern Caucasus, making the broader region more volatile. 
In late January, the Obama administration issued its first unequivocal reaffirmation of the strategy of democratic enlargement that has guided Western thinking since the collapse of the Iron Curtain two decades ago. 
Speaking in Paris, Secretary of State Hillary Clinton reminded us that NATO and EU enlargement created an unprecedented degree of stability and security in the eastern half of the continent, that Russia too had benefited from this stability, and that it was critical that Europe’s doors remain open to further enlargement. 
Clinton went on to reject as unnecessary Medvedev’s call to re-make current European security arrangements. 
NATO has also finally started engaging in defense planning and other forms of strategic reassurance for its allies in Central and Eastern Europe, which are unsettled by Russia’s new assertiveness. 
But what about those countries in between – countries like Ukraine and Georgia and the southern Caucasus? 
Ukraine has just elected as its president Viktor Yanukovych, who is unlikely to pursue a NATO integration agenda, and if follows through on his commitment to join a customs union with Russia, Belarus, and Kazakhstan, membership in the EU would be precluded. 
But that does not mean that tensions with Russia will automatically disappear. 
Yanukovych’s victory notwithstanding, Ukraine is a country that is becoming more European and gradually moving out of Russia’s orbit in its own chaotic way. 
Regardless of whether Georgians like or dislike Georgian President Mikhail Saakashvilli, they want to go West, too. 
So Russia’s attempts to bring these countries to heel are likely to continue and remain a bone of contention and conflict. 
And what is Western policy? 
In reality, the West today no longer has a grand strategy toward the East. 
The moral and strategic vision of the 1990’s has exhausted itself and come to a grinding halt after the shock of the Russo-Georgian war and the recent Ukrainian election. 
As welcome as Clinton’s recent clear words were on the need to defend the right of countries to decide their own fate, you don’t have to go very far in Europe to hear whispers that some kind of new “Finlandization” might be a reasonable compromise for countries like Ukraine and Georgia. 
It is time for the West to openly debate what its strategy is – and what it is not. 
Two decades ago, the West rejected “spheres of influence,” because Europe’s bloody history taught us that compelling nations to align themselves with others against their will was wrong and a recipe for future conflict. 
If we still believe that today, we need an updated moral and strategic vision for such countries, and to back it up with a real strategy. 
We need to be clear that Moscow has a right to security, but that it does not have the right to interfere in the affairs of its neighbors, to topple their governments, or to deny them their own foreign-policy aspirations. 
Barack Obama is right to try to reset relations with the Kremlin and engage a revisionist Russia. 
But we need to do so knowing what our strategy is on this key issue. 
As the United States and Russia close in on a new arms-control treaty, it is time to face the question of how we deal with Europe’s contested neighborhood. 

Europe’s Corner of Despair 
CHISINAU – Three floors of Moldova’s parliament building are a charred ruin. 
So is democracy in Moldova, a former Soviet republic that is now Europe’s poorest country. 
Of Moldova’s 3.5 million people at the time of independence, 15% have already left the country to seek better lives elsewhere. 
More than 63% of Moldova’s young people say they want out. 
In early April, a disputed election victory by Moldova’s ruling Communists triggered protests. 
Political opponents and disaffected people, many of them young and with few prospects of finding jobs, took to the streets. 
A violent few broke into the offices of the country’s president and its parliament building, which was set on fire. 
In response, the Communists blamed the violence on the opposition political parties, which it called “fascists,” and on Romania and Romanian irredentists in Moldova. 
The police cracked down on young people and took hundreds into custody. 
Several died, apparently from beatings. 
President Vladimir Voronin later granted the detainees amnesty. 
Nevertheless, many remain in detention and Voronin continues to hurl accusations at the opposition and Romania of organizing a coup d’état. 
Legal proceedings have been opened against opposition parties. 
Restoring stability and a fair democratic system to Moldova is important, first and foremost, because Moldovans deserve a government that is accountable. 
Stability is also important because the country borders on Romania, a European Union member state. 
The two countries share a language and culture, and, until Stalin separated them, were even part of the same state. 
A vocal minority of Moldova’s people believe that merging their country with Romania would put the country into the express lane to EU membership, with its generous financial perks and, perhaps most enticing of all, passports that would enable them to escape a no-hope economy to build lives elsewhere. 
Many Moldovans, indeed, already have Romanian passports so that they can travel and work in the EU. 
Some Romanian officials, including President Traian Basescu, have bandied about the idea of distributing Romanian passports to as many as a million Moldovan citizens, a quarter of the entire population. 
Of course, the Moldovan government balks at any attempt to lure away its citizens. 
The United States should do more to help bring stability to Moldova. 
Together with the EU, the US can help ensure a credible investigation of the post-election violence and complaints against the police. 
Amerca should be more energetic in demanding that the Moldovan authorities respect the rule of law, issue a roster of all detained persons, provide them access to lawyers and family members, and guarantee that they are not harassed. 
Opposition leaders and democracy watchdogs say Moldova’s election process was fundamentally flawed. 
The country’s broadcast media, especially its television stations, gave a disproportionate amount of air time to the ruling Communists during the election campaign. 
The Communists are alleged to have rigged the balloting by adding names to the voter rolls and reviving the dead for the day. 
In the long run, the US and EU should support civil society organizations in pressing Moldova’s government to guarantee more equitable distribution of television time, to stop police harassment of opposition political leaders and workers as well as journalists, to reform the police and end the ruling party’s abuse of state institutions, and to allow all political parties more opportunity to inspect election rolls and monitor polling stations. 
They should insist that opposition parties are included in a dialogue. 
The US can put weight behind its demands by placing conditions on its financial assistance to Moldova. 
The EU has even more leverage. 
Moldova is more dependent on the EU than any other former Soviet republic. 
More than half of the country’s trade is with the Union, and Moldova receives significant EU financial assistance. 
Most Moldovan emigrants work in the EU, and almost 75% of Moldova’s population support EU membership. 
Romania, too, should play its part and offer to sign a basic treaty and a border agreement with Moldova. 
The last thing impoverished Moldovans need is an autocratic, unaccountable government that lacks sufficient imagination to find a way to revive the country. 
And just about the last thing the EU needs is an influx of hundreds of thousands of migrants fleeing poverty, political repression, and despair in Moldova and other countries of the former Soviet Union. 

Europe’s Crisis of Leadership 
BRUSSELS – The global financial crisis has already highlighted both the strengths and the weaknesses of the European Union. 
Had it not been for the euro, the shock waves from the meltdown of September and October would have spread to the currency markets, creating tensions that would have set Europe’s political and economic integration back by decades, perhaps imperiling the whole project. 
Much less positively, EU member states have been slow to act in concert. 
At first it was the European Commission that drew criticism for its slowness in making proposals to rally national governments and their policymakers. 
Now it is the member states that are resisting the urgent need for a coordinated EU-wide policy response to the deepening crisis. 
The speed and the severity of the economic slowdown are far greater than any of the post-war downturns of the past 60 years. 
In Europe, we by and large failed to heed the warning signals of America’s sub-prime mortgage crisis when it erupted in the late summer of 2007, and thus were unprepared when the next phase of the crisis engulfed European banks, too. 
The lesson to be drawn is that the EU must move more quickly and with greater determination than has been the case so far. 
Throughout the EU, people are asking, “What is Europe doing to address the crisis?” 
The answer is “not nearly enough,” and the political price may be high at next summer’s European Parliament elections. 
The remaining weeks of 2008 will be crucial to Europe’s efforts to regain the initiative and to attempt to attenuate the effects of the crisis while also addressing unresolved problems on the EU reform agenda. 
As Trustees of Friends of Europe , we would urge the European institutions and EU political leaders to renew their efforts regarding both the Lisbon Treaty and the Lisbon Agenda. 
France’s EU Presidency has done much to improve coordination between member states’ responses to the financial crisis, and the European Commission has also begun to play the more active role that Friends of Europe called for on October 10. The challenge now is for the presidency and the Commission to give fresh political impetus to the EU’s stalled reform drive. 
The December 11-12 European Council should signal clearly the timetable envisaged for re-opening the Lisbon Treaty’s ratification process. 
Failure to do so would bring the risk of still greater political problems after next June’s European elections. 
The Lisbon Treaty is a step towards adapting the EU’s decision-making mechanisms to the twenty-first century and a membership of 27 or more countries. 
The global nature of the current crisis makes it plain that Europe must be able to decide quickly and coherently, or suffer adverse consequences. 
There seems little doubt that public opinion across the EU is increasingly drawing the same conclusions. 
The sovereign right of the Irish people to decide their own future is unchallengeable. 
But Ireland should also allow the EU’s other member states to proceed with the Lisbon Treaty if that is what they wish. 
Even if another referendum is to be held in Ireland, the Irish government should foresee a procedure that, irrespective of the outcome, allows other member states to implement the essential parts of the Lisbon treaty. 
The Commission now needs to take action to ensure that member states redouble their efforts with regard to the Lisbon Agenda for overhauling Europe’s global competitiveness. 
In 2000, the EU set a ten-year program of agreed reform targets, yet in many cases its member states have lacked the political will to implement them. 
Europe’s increasingly gloomy prospects make these reforms more necessary than ever. 



Europe's Defense Investment Gap 
Foreign policy disputes between Europe, France in particular, and the US are mounting, and not only over the Israeli-Palestinian bloodbath and the conduct of the anti-terrorism war. 
But Europe's criticisms, no matter how sound, will not be taken seriously by the US so long as the Continent continues to free-ride on America's defenses, something it has done for half-a-century. 
In a bellicose world, a credible voice in the international arena requires a creditable military capability and high-tech military technology. In both, Europe is lacking. 
America's irritation with some of its European allies - Tony Blair's UK being the noticeable exception - is understandable. 
In the current fiscal year, the US will spend an additional $50 billion on defense, raising its overall defense bill to $379 billion, more than 3% of GDP. 
This sum is, in fact, low by post-WWII standards. 
At the time of the Gulf War of 1991, US defense spending was 4.8% of GDP; it was far higher in the 1950s and 1960s. 
Europe's commitment to defense tells another story. 
Defense spending is 1.6% of GDP in Germany, 2% in Italy, and 1.5% in Spain; only France and the UK reach 3%. 
But confining discussion about defense commitment to the percent of GDP spent on the military is insufficient because there are economies of scale in defense spending. 
So one would expect that smaller countries will spend proportionally more on defense than larger ones. 
Instead, today America alone spends more than most of its NATO allies combined, and defense spending in the US is likely to increase even more in the years to come. 
Security and global influence are not the only benefits that come through military expenditure. 
About 10-15% of US military spending finances basic research and thus provides a powerful boost to America's high-tech research and development. 
The internet, based on thinking and spending made in the 1940's, and the silicon chip, developed in the 1970's, are both products of research funded by the Pentagon. 
The war in Afghanistan, which was truly revolutionary in the way it was conducted, proves how new information and communication technology can bring about success with a minimal number of men on the ground and minimal losses. 
The Russians fought for ten hard years over the same terrain in Afghanistan. 
Lacking comparable technology, they lost tens of thousands of men and were eventually defeated. 
At the beginning of the Afghan campaign many military "experts" feared that the US would face a similar fate. 
How wrong they were! 
Europe lags behind the US in R&D, and its stinginess over defense contributes mightily to a growing high tech "investment gap." 
Data concerning patents documents America's advantage: in the late 1990s 56% of all global patents in high-tech fields was granted to US applicants, only 11% to EU applicants. 
The connection between R&D and growth is too obvious to doubt that Europe's sluggish economies are a direct result of European backwardness at innovation - and that this in turn may reflect the absence of critical military spending to drive investments in research and development. 
The ongoing dispute between Europe and the US over the choice of the military transport plane -to be used to deploy the new 60,000 strong European Rapid Reaction Force - is symptomatic of Europe's problems. 
America would like Europe to opt for an aircraft built by Boeing and Lockheed Martin. 
Europe is divided: some countries, notably Italy, support the US; others, notably France and Germany, argue in favor of a European plane built by Airbus in a $15 billion publicly funded project. 
This is an issue on which Europe should stand up to the US. 
The EU should fund the Airbus project and make sure that an important fraction of the money goes into R&D to foster the growth of an industry that is one of the few European high-tech success stories. 
But where should the funds needed to pay for this huge investment come from? 
In recent weeks European defense ministers suggested that increases in military expenditures should be excluded from the budget constraints imposed by the Euro stability pact. 
The idea that a sharp increase in military spending in a (hopefully temporarily) bellicose world should be amortized with some deficits is consistent with sound economic policy, but only if the rest of the budget remains "lean." 
This is the case in America, where nobody really worries if increased military spending will create a temporary deficit. 
Not in Europe. 
An increase in military spending, in conjunction with an enforcement of the stability pact, should bring about a trimming of the non-defense budget: the public sector wage bill and a welfare state grown far beyond the goal of supporting the incomes of the poor, would of necessity need to be trimmed sharply. 
For half-a-century Europe has relied on the US for security, while spending its own money on a pricey welfare state. 
This can no longer continue - at least not if the EU is serious about playing a leading role in the world. 
This is not a pleasant message, but what happened in New York and Washington on September 11 th and what is happening in the Middle East is not pleasant either: Europe should realize that change is needed and act accordingly. 

Europe’s Flawed Banking Union 
PARIS – The European Union is now the proud owner of a Nobel Peace Prize. 
When the choice alighted on Barack Obama three years ago, the Norwegian Nobel Committee was criticized for honoring someone whose achievements were still to come. 
The Committee took that criticism to heart, and this time decorated an institution with a proud past, but a clouded future. 
The eurozone is distinct from the EU of course, but it is the Union’s most ambitious undertaking to date, and it is still struggling to equip itself with the structures needed to bolster a currency union. 
A common fiscal policy remains a distant dream, as does a genuine political union. 
But Europe’s policymakers claim to be making progress toward a so-called “banking union,” which means collective banking supervision, rather than a merger of banks themselves. 
In September, the European Commission announced a plan to make the European Central Bank the supervisor of all 6,000 of Europe’s banks. 
The reaction among national politicians, central banks, and banks themselves was not universally favorable. 
The Germans want the ECB to focus only on large systemic banks, and leave smaller savings banks (like those that invested heavily in subprime mortgages) to national authorities. 
The United Kingdom and Sweden argue that they cannot be made subservient to a central bank of which they are, at best, semi-detached members. 
The case for a pan-European supervisor is widely accepted, especially as the European Banking Authority (the EU’s banking regulator) proved feeble in carrying out financial stress tests: the first tests were so weak that even Spain’s now-bankrupt savings banks could pass with flying colors. 
Europe must break the vicious circle linking distressed sovereign borrowers with banks that are obliged, or at least encouraged, to buy their bonds, which in turn provide the funding for bank rescues. 
But the method chosen by the Commission to implement a banking union is fatally flawed. 
Moreover, according to a leaked opinion from the EU Council’s chief legal adviser, the proposed reform is illegal, because, according to the Financial Times (which received the leak), it goes “beyond the powers permitted under law to change governance rules at the European Central Bank.” 
Throughout the crisis, European leaders have tried to respond to the gaps in the monetary union without proposing a new treaty, because they fear that any new treaty proposing more centralization of authority in Brussels would be rejected, either by national parliaments or by voters in a referendum. 
So they have tried to proceed by intergovernmental agreement, or by using existing treaty provisions. 
In the case of the banking union, they plan to use Article 127(6) of the Lisbon Treaty which allows the European Council to grant authority to the ECB to perform specific tasks concerning “policies relating to the prudential supervision” of certain financial institutions in the Union. 
That is a thin legal basis for establishing a pan-European supervisor with direct responsibility for individual institutions, and it was clearly not intended for that purpose. 
Indeed, Germany agreed to the wording only on the understanding that the ECB could not be a direct supervisor. 
The consequences of choosing this inadequate, if expedient, route are serious. 
For starters, the existing treaty cannot be used to create a single European resolution authority, leaving an awkward interface between the ECB and national authorities. 
Nor can it be used to establish a European deposit protection scheme, which is arguably the most urgent requirement, to stem the outflow of deposits from southern European banks. 
There will also be potentially dangerous consequences for the ECB itself. 
The use of the Lisbon Treaty clause means that the ECB must be given these additional responsibilities. 
But it is impossible to create a separate bank-supervision entity within the ECB, as has been done in France, for example, with the Prudential Control Authority, or in the UK with the new Prudential Regulatory Authority, which has its own board and accountability arrangements within the Bank of England. 
The importance of these structures is that they insulate the central bank’s monetary-policy independence from corruption by the tighter accountability requirements that inevitably come with banking supervision. 
Because supervisors’ decisions affect individuals’ property rights – and their actions or omissions can put taxpayers on the hook to bail out banks – governments, parliaments, and the courts are bound to hold the watchdogs on a tight leash. 
That is why Germany’s Bundesbank, which always guarded its monetary-policy independence so assiduously, has once again found itself in the rejectionist camp, expressing severe doubts about the route that the Commission plans to take. 
This time, they are right. 
There are other serious issues, too. 
According to the Commission’s model, the European Banking Authority will remain in place, and is charged with producing a single rulebook for all 27 EU member states. 
But, while its work is carried out under the normal qualified majority voting system, the 17 eurozone countries will have a single supervisor, so will have a block vote. 
The Commission is trying to find ways to protect the rights of the non-eurozone countries. 
But the very complexity of what is proposed shows just how inadequate the scheme is. 
Non-Europeans, in particular, may find the entire topic impenetrably abstruse. 
But it illustrates a simple point: Europe is trying to achieve a stronger federal model that responds to the weaknesses revealed by the eurozone crisis. 
But it is doing so without addressing the crucial need to bring its citizens along. 
Indeed, the devices that the EU is adopting are designed specifically to avoid having to consult them. 
The proposed construction of a banking union reveals this fundamental flaw at the heart of the European project today. 
It is difficult to be optimistic about the success of an initiative built on such flimsy legal foundations, and lacking democratic legitimacy. 


Europe's Destabilizing Stability Pact 
Europe's Growth and Stability Pact is under threat as never before. 
Even European Commission President Romano Prodi now calls it "stupid." 
In many ways, he may not be wrong. 
Last summer, as soon as it became clear that Germany's mounting budget deficit might exceed the Stability Pact's ceiling, Chancellor Schröeder postponed a tax cut he had already announced rather than cut public spending. 
The French government, unwilling to cut its swollen public sector, is now thumbing its nose at the Stability Pact and its enforcers in the European Commission, saying that it has "different priorities" than those required by the pact. 
The question now is whether or not the Stability Pact can long survive the antagonism of the EU's two biggest economies. 
The Stability Pact emerged after a long period (part of the 1970s, all of the 1980s, and a good portion of the 1990s) during which many European countries lost control of their fiscal balances. 
The Stability Pact initially sought to force countries that wished to join European Monetary Union to bring their budgets closer into balance and to slash excess debt. 
Now, however, its built-in flaws are being revealed. 
The biggest problem concerns the fact that the Stability Pact focuses on a country's budget deficit, rather than on the component parts of government budgets: taxes and public spending. 
Europe's fiscal problems have their roots in governments that are too big and that require, in order to pay for their bloated size, levels of taxation which grossly interfere with the incentives individuals need to work harder, invest more, and run entrepreneurial risks. 
Setting a limit on a country's overall budget deficit - as the Stability Pact does - cannot correct this distortion. 
Between 1995 and 2002, notwithstanding the Stability Pact, total public spending in the euro area (net of interest and of capital spending) remained virtually unchanged: it amounted to 41% of the euro zone's GDP in 1995; it will amount to 40.7% of GDP this year. 
Meanwhile, gross government investment, already minuscule, contracted even further: from 2.7% to 2.4% of GDP. 
As a result of the Stability Pact, teeny differences in budget outcomes acquire a prominence in Europe's economic policy debate that is not only ridiculous on their face, but distract attention from Europe's real budgetary problems. 
Few people seem aware of the margin of error that exists when computing such numbers. 
It is not uncommon, say, for parliamentary discussions about a budget to turn on the question of whether or not such an such an action will lead to a deficit of 0.8 or 1.1% of GDP-blithely unconcerned that the difference between those numbers is well below the statistical margin of error. 
Futile debates of this type are a handy excuse for a country to avoid facing its real fiscal challenges: unsustainable pensions, unemployment benefits that discourage workers from looking for a new job, public sector wage bills unrelated to productivity. 
In addition to shifting Europe's focus from its real budget challenges, the Stability Pact is indiscriminate - ie, it treats both high and low-debt countries in the same way. 
Greece and Italy, whose total public debt exceeds 100% of annual GDP are treated in the same manner as Portugal, where the debt-to-GDP ratio is around 45%. 
Such equivalence neglects the reason why the Stability Pact was created in the first place - to compel the most heavily indebted governments to put their fiscal house in order. 
The third destabilizing factor built into the Stability Pact is the fact that it virtually invites governments to engage in creative, Enron-style accounting - ie, it encourages governments to cheat. 
Changing the composition of the public debt, for instance issuing consols rather than bonds that pay a coupon, is often sufficient to lower the official deficit by a few decimal points, and this is only one in a finance minister's large black bag of tricks. 
Europe desperately needs lower spending, especially on pensions and wages, and lower taxes. 
Clearly, the Stability Pact cannot deliver the incentives needed to achieve these goals. 
In fact, it may interfere with the one realistic way to reduce the size of government: cut taxes first, get European taxpayers accustomed to a lower burden, then create political incentives to reduce spending. 
By remaining obsessed about the first decimal point of a deficit, even in a time of prolonged stagnation, Ecofin (the Council of European finance ministers) misses both the point of its mission, restraining the most profligate of government debtors, and the big picture about bringing growth to Europe. 
In the end, if a European country, especially one of the EU's big four of Germany, France, Italy and the UK, wants to run a deficit that exceeds the strictures of the Stability Pact, it will do so with impunity, as France is doing now. 
Two years into the euro's life, the Stability Pact that underpins the currency serves only the purpose of beating up on small countries (remember what happened to Ireland, which has as virtuous a budget balance as any country in Europe but which dared lower taxes against the Stability Pact's rules?). 
It is time for a change in how the European Commission thinks, for less of an obsession with deficits and more attention to government spending. 

Europe’s Determination to Decline 
SÃO PAULO – In a heroic case of finding a silver lining in the bleakest of all situations, the European Union climate commissioner has concluded that the global economic crisis and recession actually provided a lucky break for everyone. 
Commissioner Connie Hedegaard says that the slowdown in economic activity will make it easier for the EU to achieve its 2020 goal of ensuring that greenhouse-gas emissions are 20% below their 1990 level. 
In fact, Hedegaard believes that cutting emissions has become so easy that European leaders should be more ambitious and unilaterally aim for a 30% reduction below the 1990 level – an idea that has won support from David Cameron’s new British government. 
This may seem like good news, but it is not, because there is a strong correlation between economic growth and carbon emissions. 
For almost all countries, higher emissions come from higher growth rates. 
And if you restrict carbon emissions without providing affordable alternative energy sources, GDP will falter. 
In other words, by advocating even deeper cuts in emissions, Hedegaard is, in effect, calling for an even deeper recession. 
It’s worth noting that even before its current economic difficulties, Europe was unable to keep up with the growth rates of the United States, not to mention the emerging economies of India and China. 
To stay in the game, the EU acknowledged a decade ago that it needed to become uniquely inventive. 
Hence, the European Council’s Lisbon Strategy of 2000, which centered around a pledge to increase general research-and-development spending by 50% over the following decade. 
Unfortunately, Europe has done no such thing; if anything, R&D spending has actually declined slightly since then. 
This is especially regrettable because R&D in green energy technologies is really the only viable long-term strategy for reducing fossil-fuel consumption without crippling the world economy. 
European politicians instead seem to have become increasingly committed to the notion that global warming is the world’s most urgent problem. 
Some conspiracy-minded commentators even suggest that this is related to Europe’s lack of competitiveness: instead of trying to keep up, they say, Europe has decided to find a way to slow everyone else down. 
One needn’t accept this Machiavellian view to recognize that trying to cut back on the use of fossil fuels in the absence of practical alternatives is a recipe for economic stagnation. 
This seems to be a driving factor behind China and India’s refusal to go along with Europe’s plans at last December’s global climate summit in Copenhagen. 
The German magazine Der Spiegel recently got hold of a tape of the final negotiating session. 
It is instructive to hear the baffled reactions of European leaders like Germany’s Angela Merkel, France’s Nicolas Sarkozy, and Britain’s Gordon Brown as their developing-country counterparts served notice of their refusal to consign their populations to continued poverty in order to solve a problem that the rich countries created. 
Attempts in 2010 to rekindle commitment to a global carbon-emission deal have failed. 
Both the outgoing head of the UN climate-change secretariat and Commissioner Hedegaard have admitted the obvious: a deal is extremely unlikely to be reached at the next major summit in Mexico at the end of the year. 
Nonetheless, Europe has continued to pursue its quixotic course, even without a global treaty on reducing carbon emissions. 
And make no mistake about it: the EU’s unilateral emission restrictions are not only economically destructive – likely to cost Europe an estimated $250 billion a year by 2020 – but are also astonishingly ineffective. 
Climate models uniformly show that that for all the economic havoc that such carbon cuts would likely wreak, they would have a negligible impact on global temperatures. 
The widely used RICE climate-economic model shows a miniscule drop of 0.05 degrees Centigrade over the next 90 years. 
Despite the huge outlay, the difference in climate by the end of the century would be practically indiscernible. 
Unfortunately, it seems as if Europe has decided that if it can’t lead the world in prosperity, it should try to lead the world in decline. 
By stubbornly pursuing an approach that has failed spectacularly in the past, Europe seems likely to consign itself to an ever-dwindling economic position in the world, with fewer jobs and less prosperity. 

Europe’s Distant Mirror? 
It is tempting for Europeans to project their own history onto Asia and to view current developments there as a mere repetition, if not an imitation, of what occurred in Europe. 
In fact, Asians themselves encourage this temptation, with the Association of Southeast Asian Nations (ASEAN) openly aiming to become increasingly like the European Union. 
In trying to decipher Asia’s diplomatic future, Europeans are confronted, so to speak, with an “embarrassment of riches.” 
Is Asia today replaying the balance of power games of late nineteenth-century Europe, with China in the role of Germany? 
Or is South Asia, through the growth of ASEAN, poised to one day become the Far Eastern equivalent of the EU? 
These comparisons are not neutral, and one may detect in the analogy between China today and nineteenth-century Germany an element of that guilty pleasure in others’ troubles that the Germans call “Schadenfreude.” 
Asia may be doing well economically now, according to this view, but just wait: rising nationalism, China’s appetite for power, and the rest of Asia’s desire to curb its ambitions will necessarily impede economic growth and restore the West’s global primacy. 
But this scenario does not correspond to reality. 
China at the beginning of the twenty-first century is not Bismarck’s newly unified Germany in the second half of the nineteenth century. 
The Chinese do not view themselves as a rising new power, but instead as Asia’s traditional power, now experiencing a renaissance. 
China, they believe, is regaining the status and prestige that it enjoyed until the end of the eighteenth century. 
As a result, unlike Wilhelmine Germany, the Chinese are not in a hurry to prove how strong and powerful they have become. 
In strategic terms, China is not a revisionist power, but instead a “satisfied,” status-quo power. 
The only exception to this, of course, would be a declaration of independence from Taiwan, which the Chinese would consider a casus belli. 
To be sure, the Chinese are indeed rearming – and even entering the military space race – but they are doing so at a pace and to a proportion that reflects their new economic prosperity. 
China’s fundamental priorities remain economic, reflecting its leaders’ belief that their regime’s long-term survival presupposes the continuation of rapid growth. 
For that, they need access to energy, but they are not about to engage in military or even diplomatic adventures. 
Nor are they set to become a benevolent, altruistic power, ready to use their new strength and reputation to improve the stability of the international system. 
Chinese cynicism and spontaneous selfishness, however, is now tempered by what they perceive as growing recognition of their unique status. 
The combination of respect and interest they see in the way the world now views China can only reinforce their sense of confidence. 
So why should they take unnecessary risks? 
The resounding success of the Africa-China summit, which was attended by more African leaders than purely African gatherings; the diplomatic rapprochement between India and Japan; and the democratic alliance in the making between India, Japan, and Australia can only be interpreted as signs of China’s newly regained position. 
Why would they jeopardize such real and symbolic gains with rash and untested moves? 
There is no Bismarck at the helm of Chinese diplomacy, but there is no impetuous Kaiser either: just relatively prudent and competent technocrats. 
In reality, what may threaten the stability of the region, and above all that of China, is not an excess of Chinese ambitions or a failure to democratize, but the Chinese regime’s inability to establish the rule of law. 
In 1978, China’s newly installed leader, Deng Xiaoping, viewed Singapore as living proof of the superiority of capitalism over communism. 
He remembered the impoverished backwater that Singapore was in the 1920’s, and now he saw the gleaming city that free enterprise – together with Lee Kwan Yew’s quasi-authoritarian leadership – had wrought. It was after visiting Singapore that Deng introduced “special economic zones” in southern China. 
But the rule of law, even Singapore-style, is far harder to implement than capitalism, and its absence represents the major obstacle to the establishment of an Asian community based on the EU model. 
Twenty years ago, one of the main obstacles to creating an Asian Union was Japan – Asia’s most advanced and successful country, but one that did not feel Asian. 
Moreover, the rest of Asia resented the Japanese for reveling in this difference. 
That resentment remains, sustained in part by historical grievances, but the Japanese have now come to perceive themselves as Asians, helped by their realization that the economic miracle that they initiated in the region has gone well beyond them. 
In Europe, transcending nationalism required not only two devastating world wars in the first half of the twentieth century, but also the prevalence of democratic regimes. 
The rule of law is the equivalent for Asia today of what democracy was for Europe yesterday. 
Without its gradual imposition, an Asian Union could at best remain only a pale and hollow copy of its European model. 



Europe's Dollar Envy 
Currencies can become the focus not just for commercial transactions, but for diplomatic and political wrangles. 
When this happens, commercial transactions become more difficult and subject to greater uncertainty. 
The politicization of money during the interwar depression was economically devastating. 
But there have been more recent occurrences of nasty currency wars. 
In the 1960's the international monetary order became the focus of a political tug-of-war. 
Each side had quite different theories and explanations of what was going on. 
The Europeans--in particular the French--complained about what General Charles de Gaulle termed the "exorbitant privilege" of the US dollar. 
The General and his monetary guru, Jacques Rueff, argued that the US used the dollar's status as the major reserve currency of the Bretton Woods fixed exchange-rate regime in order to run deficits and pay for its overseas military adventurism (at that time in Vietnam). 
France responded with calls for monetary reform that would end the peculiar role of the dollar and tried to revive the largely discredited gold standard. 
Europeans began a long discussion of the advantages of monetary union, achievement of which would allow them to look the dollar in the face. 
But from the American point of view, the international role of the dollar was a trap. 
Other countries could change their exchange rates, and in this way could maintain greater export competitiveness. 
The US government was powerless in the face of an undervalued yen, fueling the belief that the rest of the world was using the dollar to attack America's manufacturing base. 
The Nixon administration came to the conclusion that the only way to save the American economy was to engage in monetary unilateralism--a monetary expansion so dramatic that other countries would be forced into adjusting their exchange rates. 
These long-forgotten battles seem suddenly very immediate once again. 
The world no longer has a fixed exchange-rate regime, but the dollar remains the major reserve currency--a sort of floating Bretton Woods. 
For Americans the reserve role of the dollar is a potential threat, while for non-Americans it is yet another instance of an American neo-imperial quest for hegemony. 
In this decade, China has taken the place of 1960's Japan, holding its exchange rate down in order to push export growth. 
Consequently it is the target of US complaints about unfair competition, and of efforts to force an exchange-rate adjustment that would deter Americans from buying Chinese toys, appliances, and clothing. 
Manufacturers in the US have decided that Chinese-made bras constitute a threat to the American way of life. 
Meanwhile, Europeans (especially the French) complain about the big US deficits, and de Gaulle's argument that the rest of the world is paying for America's wars is in fashion again. 
Some Europeans suggest that Asian central banks should hold a greater part of their reserves in euros, an echo of the General's unsuccessful attempt to force America to its knees by selling dollars for gold. 
The 1960's ended in the breakdown of the "system," and in major financial turbulence, accompanied by an inflationary surge of commodity prices. 
Everyone was hurt, and America's role in world affairs was shaken. 
A similar collapse now is likely to have a rather different effect. 
The floating-rate system of today is stronger and the costs of adjustment differently distributed. 
Most Americans do not suffer greatly from the dollar's sharp fall, as foreign sellers have to make price adjustments for the US market. 
Asian economies are growing vigorously, and their central banks are building up claims on the US. 
They are likely to continue this policy, as the alternative would be a sudden setback to the competitiveness of their export sectors in the all-important US market. 
This gives the US a longer time to address a current account deficit that is in the long run unsustainable. 
The economically dynamic regions of the world--North America and Asia--are thus linked together in a pact that will ensure the continued centrality of the American dollar. 
Americans will continue to pile up debt because Asians want them to do that. 
To abrogate the pact would be against the interest of both parties. 
This is not American unilateralism, because it means working with Asia. 
But to Europeans, who are excluded from the pact, it looks like monetary and economic unilateralism. 
In the meantime, the rise of the euro against the dollar creates substantial European pain for manufacturing exporters. 
Europe, however, is unable to do much to gain relief. 
Indeed, Europe will be the major sufferer in the new currency clashes. 
Answers that were touted in the 1960's--revival of the gold standard, or the invention of a common European currency--do not appear to be very helpful any more. 
Having a single currency has turned out not to afford substantial protection. 
The old version of the European response--what psychologists might call "dollar envy"--will only become more acute. 
There will be appeals to the European Central Bank to expand the monetary base, as if imitating the dollar were the answer to all the industrial, structural, and demographic problems plaguing Europe. 
But a moment's reflection should remind us that Europe's problems are not amenable to currency manipulation. 
Protesting the new version of America's exorbitant monetary privilege should be seen for what it is: a way of compensating for a real European powerlessness. 
So dollar envy is here to stay, and it will become even greater as the greenback's international value melts away without any obviously bad effects on the people who print and use it. 

Europe’s English-Speaking Peoples 
The European Union has a single currency, but what about a single language? 
Since its inception, the EU has made each member state’s language one of its official tongues. 
Recently, even Irish, spoken at home by only a tiny minority, was granted full official status. 
Treating all EU languages on the same footing is a direct consequence of the formal equality of member states under the founding treaties. 
It is also a matter of democratic principle that laws are written in the language of every land where they apply. 
But the EU’s posture as a protector of linguistic diversity cannot hide the stampede toward English that is underway. 
The more languages, it seems, the more English. 
Yet, the European Commission still encourages young Europeans to learn as many different languages as possible. 
It would be politically lethal to acknowledge the real state of affairs, even if the official policy merely increases the chances that Europeans, after all their efforts, still may not understand each other. 
Such an outcome is unlikely, but only because Europe’s language problem is well on its way to solving itself. 
Throughout the EU, as in much of the world, from the Indian subcontinent to large parts of Africa, English increasingly functions as the language of international communication. 
To be sure, in EU institutions’ public and ceremonial meetings, interpretation and translation must be equally available, at least in principle, from every language into every other. 
Each day, hundreds of interpreters literally pay lip service to this lofty precept, and millions of pages are translated annually so that citizens may consult EU law in their own language. 
The EU initially invested heavily in the development of machine translation, but has essentially abandoned the project. 
As a result, translation and interpretation increasingly proceed in two steps, from a lesser-used language to half a dozen “relay” languages, and from those into other, smaller languages. 
This saves resources, but it also implies a considerable loss of meaning. 
Moreover, fewer languages are used in the EU’s smokeless backrooms when meetings are less formal and the participants not all that prestigious. 
When EU officials meet together or draft internal documents, they use only the “working languages”: French and, more often, English. 
German, the EU’s most widely spoken native language, hardly makes a dent. 
Representatives may demand interpretation into their home language, but a proposal to limit each country’s translation budget is likely to be accepted soon. 
The predominance of English is even more pronounced in communications among the EU’s citizens, where it is the first foreign language in all countries of the “old” Europe. 
Among the EU’s new members, English is rapidly replacing Russian as the most widely used foreign language. 
Indeed, nine out of ten schoolchildren in the EU now learn English. 
Roughly half as many learn French, a quarter German and an eighth Spanish, and these numbers are falling, despite the Commission’s efforts, because people tend to choose the foreign language that they believe is spoken and studied the most by others. 
The process resembles the selection of a standard in, say, consumer electronics. 
People tend to opt for the standard (VHS, Windows, DVD) that they believe will come out on top, and thus contribute to that victory. 
English now seems to have reached the point of no return in its accelerating global expansion, competing with national languages in such diverse fields as popular music, transport, the Internet, banking, cinema and television, science, and sports. 
But, while the presence and pressure of English has a striking impact on the vocabulary of the home language, it leaves the syntax, grammar, and pronunciation almost entirely unaffected. 
Unlike the indigenous languages that were pushed aside by the languages of the European colonizers, the official languages of the EU are “robust”: they are equipped with grammars, dictionaries, archives, libraries, and linguistics faculties. 
They have a centuries-old printed literature, and, above all, they are closely guarded by strong states. 
As a result, English will not so easily marginalize European languages, even after a large majority of the population has learned it. 
But English and national languages can co-exist only if the state protects the indigenous language and citizens do not allow English to take over all prestigious domains. 
The diversity of Europe is indeed innate, but its unity is yet to be achieved. 
The commitment to European integration requires a common vernacular, and that is English. 
The challenge for Europe is to use English as such an instrument, while avoiding submersion in American and British culture. 

Europe’s Federalism Debate Revived 
BRUSSELS – It is an old debate, but tensions within the euro area have revived it: can a monetary union survive without some form of fiscal federalism? 
This issue is of persistent concern for investors worldwide. 
Holders of European government bonds believed that they knew what they had bought. 
Sure, there was no such thing as a eurozone sovereign security. 
But German, French, Spanish, and even Greek bonds all carried roughly the same interest rate, so they were deemed equivalent. 
Investors now recognize that they did not really understand what these bonds represented – that is, the institutional construct behind the European currency. 
And if the global financial crisis has taught us anything, it is this: when you do not understand a financial product, you should not buy it. 
But if investors actually take that lesson to heart, the European crisis will be far from over. 
So, should Europe embrace fiscal federalism in order to strengthen the eurozone and restore investor confidence? 
The problem is that fiscal federalism means different things to different people. 
Americans think they know what it is: a central government with a large budget (about 20% of GDP), whose macroeconomic role is to carry out counter-cyclical spending and taxation, as most US states are constitutionally committed to some sort of balanced budget. 
This was clearly true in the case of the stimulus program launched in 2009, which included federal transfers to the states to sustain state-level fiscal spending. 
Similarly, when a state such as Michigan is hit by recession in its key economic sector (the auto industry), Washington collects less federal tax but maintains – if not increases – local spending, which partially offsets the shock to state income. 
Economically, therefore, the federal budget cushions regional shocks automatically through discretionary action and stabilizing transfers to the states. 
Politically, it embodies solidarity and thus helps cement the union. 
If this is what is meant by federalism, it is better for the European Union to forget about it. 
The EU budget amounts to about 1% of GDP, just one-fortieth of total public expenditure. 
No one, not even die-hard European integrationists, imagines that it can reach 5% of GDP (it is more likely to decrease). 
But even a 5%-of-GDP budget would be insufficient to play a meaningful macroeconomic role. 
A second solution is what can be called “distributive federalism.” 
The goal is not to absorb shocks but to reduce income gaps across regions. 
In Germany, tax revenues are redistributed between the Länder. 
This is another form of solidarity, which also exists in the EU, where regional development funds are allocated to poorer regions to foster catch-up growth. 
These transfers are significant for poor countries: about €300 per person for Greece and Portugal every year from 2000 to 2006. 
Europe, in this respect, is not qualitatively different from the US. 
These transfers have accelerated convergence when put to good use (for example, in several Spanish provinces), but have been ineffective when wasted (as in Greece). 
This feeds doubts about solidarity’s usefulness. 
Germans, who since reunification in 1990 know what they are talking about when it comes to such transfers, do not want to hear about a Europe where rich regions would permanently finance pockets of under-development. 
They are not alone in this. 
What, then? 
Conceptually, the eurozone must include solidarity with countries facing hardship, because this is what unites and gives strength to the whole – but without the heavy machinery of a federal budget or a permanent increase in transfers. 
It needs some sort of mutual insurance, or what could be termed “insurance-based federalism.” 
This is what inspired the decision taken in May to create the European Financial Stability Facility (EFSF), by which assistance can be provided, jointly with the International Monetary Fund, to partner countries in times of crisis. 
It is also what inspired the European Central Bank to launch an asset-purchase program, which has been used to buy Greek and Portuguese government bonds. 
But the uproar caused by these decisions reinforces, rather than dispels, doubts. 
In Germany, many consider the EFSF a breach of the fundamental principle that EU governments cannot be bailed-out by their partners. 
And the transformation of the central bank into a quasi-fiscal agent (because if Greek debt is restructured, the ECB will record losses) is regarded with horror, as it violates the separation between money and public finances. 
Instead, it is claimed, eurozone members should have been allowed to default. 
No matter that the public debt of the average US state is less than 0.5% of total US GDP, compared to 5% in the eurozone, which implies that the financial impact of a eurozone sovereign default would be much stronger. 
And no matter that there is no prohibition on the purchase of government bonds on the secondary market: the Rubicon has been crossed, and the Germans are nervous. 
So there is no agreement yet to make the EFSF permanent, and it has been designed to be as un-federal as possible. 
When it comes to ECB purchases of government bonds, no one understands exactly for how long and for what purpose the new weapon is to be used – which reduces its effectiveness. 
Meanwhile, proposals for pre-adoption assessment of national budgets by the EU have attracted criticism in France and elsewhere, which serves as a reminder of the distance there is between calls for coordination and actual acceptance of its implications. 
The Europeans have begun to assemble the bricks for a new building, but without having agreed on its size and design. 
For the time being, they rather give the impression to have thrown sandbags in disorder in an attempt to stop a wave. 
This may make skeptics the very people European policymakers wanted to convince. 
It is time to accept that those who finance EU governments through purchasing their bonds are entitled to ask inconvenient questions, and to expect clear answers. 

Europe’s Fight Against Terrorism 
Three years ago this month, international terrorism struck Europe. 
In simultaneous bomb attacks on trains in Madrid, Islamist terrorists killed 191 people and wounded over 2,000. 
Last month the suspects went on trial in a Spanish court. 
Violent extremists claiming to act in the name of Islam have hit many countries around the world, before and after the attacks on America of September 11, 2001. But the attacks in Madrid – and in London in July 2005 – showed that Europe is one of their prime targets, prompting European governments to respond by bolstering their defenses, including at the level of the European Union. 
In the past three years, security standards at European ports and airports have been strengthened, biometric passports have been introduced, and terrorist financing targeted. 
More than 2,000 terrorism suspects and those suspected of other major forms of crime have been arrested and extradited on the basis of a European Arrest Warrant. 
Similarly, European security and intelligence services have pooled resources in a common center for threat analysis in Brussels. 
Through Europol and Eurojust, European police forces and judicial authorities have intensified cooperation, and ministers are preparing to grant law enforcement agencies of other EU countries access to national databases of DNA and fingerprints. 
For the first time, security-related research figures prominently in the EU budget, with €1.4 billion earmarked for this purpose. 
European police and security agencies have prevented many terrorist attacks. 
But, while Europe’s defenses have been considerably strengthened, the threat of terrorism has not diminished. 
The risk of new attacks in Europe and worldwide is serious and will remain so for the foreseeable future. 
To face this global threat, international cooperation must be improved. 
In particular, Muslims and non-Muslims need to combine their efforts to defend the sanctity of human life. 
First, the world must work from common standards. 
Many countries still need to improve their defenses and implement the 16 counter-terrorism instruments established by the United Nations, including the convention against terrorist financing. 
Reducing the risk of terrorists obtaining weapons of mass destruction equally requires stronger international cooperation. 
To this end, the EU is working closely with its partners, from Morocco and Indonesia to Saudi-Arabia and other Gulf states. 
The EU will extend support to the African Union’s Center for Counter-Terrorism in Algiers. 
Cooperation with India, Pakistan, and Russia has also been strengthened, and the Union will continue to work closely with the US, Japan, and Australia. 
Second, more must be done to address the international conflicts that terrorists seek to exploit. 
Afghanistan remains a critical front-line state in the fight against terrorism. 
The Taliban must not be allowed to bomb Afghanistan back in time. 
The EU will increase its aid, notably in support of the Afghan police. 
Likewise, efforts to bring peace to the Middle East remain essential. 
While progress on the road to peace between Israel and the Palestinians would not by itself stop terrorism, it would deal a powerful blow to terrorist incitement and propaganda. 
Javier Solana, the EU High Representative for the Common Foreign and Security Policy, will continue to press for results. 
Third, we must counter the ideology of the terrorists. 
Very few Muslims want to live under a seventh century-style caliphate. 
They prefer to live in freedom and in parliamentary democracies. 
What unites Muslims and non-Muslims is a commitment to basic human rights. 
To respect and promote human rights is critical to winning the battle for hearts and minds, including in Europe. 
This means that governments need to practice what they preach. 
Detention without trial is counterproductive in the fight against terrorism. 
So is torture. 
To defeat the terrorists we must offer a vision of a more just and equitable world and act accordingly, at home and abroad. 
Ultimately, the values of liberty and justice are our best defense. 

Europe’s Financial Alchemy 
CHICAGO – It is universally recognized that a key factor underlying the 2007-2008 financial crisis was the diffusion of collateralized debt obligations (CDOs), the infamous special-purpose vehicles that transformed lower-rated debt into highly rated debt. 
As these structures lost popularity on Wall Street, however, they gained popularity on the other side of the Atlantic. 
After all, the European Financial Stability Facility (EFSF), created by the eurozone countries last May, is the largest CDO ever created. 
As with CDOs, the EFSF was marketed as a way to reduce risk. 
Unfortunately, the outcome could be similar: the entire banking system sent into a tailspin. 
CDOs are a form of financial alchemy: special-purpose vehicles that buy the financial equivalent of lead (low-rated mortgaged-backed securities) and finance themselves mostly with the financial equivalent of gold (highly sought-after AAA bonds). 
This transformation is based on one sound principle and two shaky ones. 
The sound principle is excess collateral. 
If there is $120 of collateral guaranteeing a $100 bond, the bond is safer, no doubt. 
How much safer, however, depends upon the returns on the pool of bonds that compose the CDO. 
The first shaky principle is that if the return on these bonds is highly correlated, so that they all default at the same time, overcollateralization is not much help. 
By contrast, if the returns are uncorrelated, it is extremely unlikely that they will all default at the same time, making overcollateralization sufficient to guarantee a safer return. 
Unfortunately, no precise mathematical model can determine correlation across securities, which is always an educated guess based mostly (sometimes entirely) on past behavior. 
Thus, the explosion of CDOs in the United States during the housing boom was predicated upon the shaky assumption that house prices never fall nationwide. 
The second shaky principle is that, in order to validate these instruments, issuers of CDOs relied on credit-rating agencies. 
Historically, these agencies had been reliable in predicting the risk of corporate defaults. 
Much of their credibility, however, depended on a fragile balance of power. 
Since each issuer represented a small fraction of their revenues, rating agencies were unwilling to compromise their reputation for the sake of any single issuer. 
The CDO market, however, was concentrated: six or seven issuers controlled most of the market, and this market ended up representing 50% of the entire revenues to be gained through ratings. 
All of a sudden, issuers had much more influence on the rating agencies, which, like any good seller, were ready to bend a little not to alienate important customers. 
As a result, the CDO market did not so much spread risk as it shifted and hid it. 
When the US housing market started to turn south, the biggest underwriters (such as Countrywide) did not go bankrupt right away, because they had sold the vast majority of their loans to the CDO market. 
Eventually, however, the uncertainty created by these CDOs nearly brought down the entire US banking system. 
Europe is following a similar path. 
The EFSF, created to assist countries facing “illiquidity,” is designed exactly like a CDO. 
The EFSF buys the bonds of the countries which find it difficult to finance themselves in the marketplace (for example, Ireland) and issues bonds that are AAA rated. 
How is this alchemy possible? 
Once again, it relies on overcollateralization, an assumption on the joint distribution of possible outcomes, and the inevitable seal of approval of the three major credit rating agencies. 
With the EFSF, the overcollateralization takes the form of guarantees by other eurozone countries. 
Among the major countries, however, only France and Germany have an AAA rating. 
How can a bond guaranteed in large part by countries such as Italy and Spain (likely candidates for a fiscal crisis) provide AAA status to Irish bonds? 
According to Standard and Poor’s, for example, “The rating on EFSF reflects our view that guarantees by ‘AAA’ rated sovereigns and freely available liquidity reserves invested in ‘AAA’ securities will, between them, cover all of EFSF’s liabilities.” 
But the value of the guarantees depends on the situation. 
As long as the only country to be rescued is Ireland, there is no problem. 
But if the EFSF has to guarantee Spain, would Germany really be willing to step in and use its taxpayers’ money to cover Spanish banks’ losses? 
And how compromised might French and German banks become – and thus how much more fiscal strain is in store for France and Germany? 
Here, too, no mathematical formula can help, because what we need to test is the reasonableness of our assumptions. 
This is why rating agencies’ opinions are so valuable. 
Unfortunately, one must wonder to what extent these ratings are distorted by the eurozone countries’ political power. 
Since the crisis, rating agencies have been under attack, and major regulation, which could severely affect their business, has been discussed on both sides of the Atlantic. 
Given this, how free are credit rating agencies to express their opinion on the very institutions that will regulate them? 
We will have to await the pricing of the credit-default swaps on EFSF debt, which will be issued in January, to see whether markets believe the ratings. 
Independent of this test, however, Germany seems to have squared the circle: it helped the countries in trouble, without coughing up (for the moment) any euros. 
As with CDOs, however, this might be a Pyrrhic victory. 
The EFSF has bought short-term gain in exchange for much larger losses if the situation deteriorates: a fiscal crisis in Spain could bring down the entire edifice. 
After the sub-prime mortgage crisis, politicians alleged that the market was short-sighted and irrational, and rushed to propose new regulations. 
While some of the criticism might have merit, what gives politicians the moral authority to criticize? 
After all, as the EFSF shows, their orientation can be more short term and irrational than the market’s, repeating the same mistakes because they seem not to have learned from them. 
The market’s verdict is likely to be uncompromising. 
As Oscar Wilde said: “Fool me once, shame on you; fool me twice, shame on me.” 

Europe's Financial Vulnerability 
VIENNA – The most notable innovations of the past two decades have been financial. 
Like technological innovation, financial innovation is concerned with the perpetual search for greater efficiency – in this case, reducing the cost of transferring funds from savers to investors. 
Cost reductions that represent a net benefit to society should be regarded favorably. 
But as the current financial crisis demonstrates, where financial innovation is designed to circumvent regulation or taxation, we need to be more circumspect. 
Sadly, the financial revolution has been mostly rent-seeking rather than welfare-enhancing in character. 
It has been based on eliminating, or at least reducing, two key elements of banking costs closely associated with prudential arrangements. 
One is the need for banks and other financial institutions to hold liquid reserves. 
The less liquid a bank’s assets, the greater the need for such reserves. 
But the yield on such reserves is small, so economizing on them is profitable. 
Last year’s Northern Rock debacle in the United Kingdom will long remain an example of how not to manage such risk. 
Moreover, increasing a bank’s leverage can be very profitable when returns on investments exceed the cost of funding. 
Reckless balance-sheet expansion in pursuit of profit is kept in check if financial companies adhere to statutory capital requirements, which mandate a capital-asset ratio of about 8%. 
But many have sought to ignore this restriction, to their cost: the Carlyle Capital Corporation, a subsidiary of the United States-based Carlyle Group, was leveraged up to 32 times – it held one dollar of capital for every 32 dollars of assets – before adverse market developments wiped out the company. 
Avoidance of prudential requirements is at the core of today’s financial crisis, exacerbated by the collapse of confidence in a system based on trust. 
This has exposed the fragility of the banking system, including quasi-banking institutions, as revealed by Bears Sterns, Lehman Brothers, and other US investment banks, and in Europe by Northern Rock, UBS, WestLB, and many more. 
Perhaps the most tragic aspect of this story is the exploitation of low-income families involved in the so-called sub-prime mortgage crisis, whereby variable-rate mortgages were offered to customers with a low credit rating. 
In fact, “variable rate” is a misnomer, since these mortgages’ artificially low initial interest rates were pre-programmed to include a big rate hike after a couple of years. 
Thereafter, rates would rise with market rates, but never fall when market rates declined. 
This structure could only have been devised to suck in as many customers as possible with scant regard for long-term consequences. 
With the property market booming, prospective capital gains promised untold wealth. 
And most mortgage holders probably expected to refinance their mortgages before their rising interest-rate trebled or quadrupled monthly repayments. 
Another hoped-for benefit was that capital gains could be converted into home equity loans, boosting homeowners’ living standards. 
The rude awakening came when property values began to decline. 
For those without an equity cushion, refinancing was not a possibility, and rising interest rates have led to default, foreclosure, and homelessness. 
Now we hear that sub-prime mortgage holders have only themselves to blame. 
No one talks of the bank manager, under pressure to sell “financial products” and eager to sign up customers, even if the products were not in a customer’s best interest. 
The banker did not question a bonus system that favors one year of super profits, followed by bankruptcy, over two years of moderate, but stable, results. 
It is astonishing that sub-prime mortgages and their like were repackaged and resold in securitized form. 
That these collateralized mortgage obligations (CMOs, or bonds backed by a pool of mortgages) found a ready market, both in the US and abroad, reflects failure on several fronts. 
The nature of these CMOs should have been apparent to risk managers. 
Any financially literate fund manager knows that risk and return are positively correlated. 
Any fund manager who claims to have been deluded by the apparently favorable risk-yield characteristics of CMOs or related credit instruments can be accused of having fallen for Milton Friedman’s “free lunch.” 
Risk models do not justify abandoning one’s natural sense of incredulity. 
In a world where capital is free to flow across international boundaries, the crisis in the US has spread to Europe. 
This is a new form of contagion, which transcends national boundaries and is amplified by an international crisis of confidence. 
This is why the global problem today is many times greater than the Savings & Loan crisis of the 1980’s and 1990’s, which cost American taxpayers an estimated $150 billion to clean up. 
Today, the global integration of financial markets means that problems can pop up anywhere, at any time. 
Central banks are currently attempting to plug one leak as the next appears. 
But if the financial system’s dykes collapse, we may be headed for a decade of severe deflation, rendering expansionary stimulus useless. 
When the US Federal Reserve was created in 1913, its most important function was to serve as a lender of last resort to troubled banks, providing emergency liquidity via the discount facility. 
The current crisis suggests that this is no longer enough. 
Central banks worldwide are being forced to act as market makers of last resort in securities markets. 
The signs are already visible. 
The European Central Bank has also failed to tackle local bubbles in Europe. 
The justification was that the ECB is concerned with inflation, not relative price adjustments. 
This means that monetary policy is geared towards the needs of large countries, like Germany, not to those of, say, Belgium. 
But, given the scale of the threat to Europe’s economy from a full-blown financial crisis, this apologia for inactivity has outlived its usefulness. 

Europe’s Financial Wasteland 
PARIS – “April is the cruelest month,” wrote T.S. Eliot at the beginning of his great poem, “The Waste Land.” 
But, if Eliot had been a professional investor who had observed European financial markets over the last few years, I am quite certain that his choice would have been August. 
In August 2007, the decision by BNP Paribas to close two of its hedge funds exposed to the subprime sector precipitated a liquidity crisis for all European banks during that summer. 
This year, BNP’s great rival, Société Générale, has been in the spotlight. 
Its stock fell by more than 14% in one day in mid-August, plumbing depths not seen for two and a half years. 
Rumors have swirled about a possible downgrade of France’s sovereign debt, accompanied by speculation about the consequences for French banks. 
Since the French, of all continental Europeans, most respect the convention that no useful work should be done in the month of August, this is harsh treatment for their bankers. 
They have not been slow to claim that they are being singled out unfairly. 
They have a point. 
France is not the epicenter of the eurozone crisis. 
There is much – too much – competition for that position. 
Greece was an early favorite in the race to claim it, but faced a stiff challenge for a time from Ireland. 
Portugal made a sprint towards the front, but is now falling back a little, with Spain and Italy moving up. 
France likes to think that it is at the back of the field, strolling leisurely in lockstep with Germany. 
The evolution of the crisis has, however, thrown European banks’ balance sheets into sharp focus. 
Eurozone governments have proven unwilling, or unable, to produce a solution that persuades markets that they are on top of the problem. 
It seems inevitable now that either the eurozone will have to contract, with parts of the uncompetitive periphery dropping out, at least for a time, or that member countries’ debts will have to be collectively guaranteed, which implies some form of fiscal union. 
Nothing less will persuade investors to go near debt issues from the eurozone’s fiscally challenged members. 
The political problem is that the second solution cannot yet be sold to German voters, let alone to nationalist fringe parties like France’s National Front and Finland’s True Finns. 
Perhaps it will be possible to persuade the Germans if the alternative is eurozone collapse, which would put the Deutschemark, or a Northern Euro, in the uncomfortable position that the Swiss franc occupies today – too strong for its own good. 
But things might have to get worse before the political mood swings. 
In the meantime, the European Council continues, as the Americans would put it, to “kick the can down the road.” 
Of course, the can is not in the road; it is in the banking parlors. 
EU banks are holding sovereign debt that clearly is not worth 100 cents on the euro. 
But even the financial “stress tests” conducted by regulators did not require the banks to acknowledge that inconvenient truth. 
Many eurozone banks have made far less progress in strengthening their capital adequacy and liquidity than have American and British banks since the financial crisis erupted. 
The disparities were exposed in the IMF’s last Global Financial Stability Report, published in April, which contains a striking analysis that shows the changes in tangible common equity over the last two years, and the degree to which banks are reliant on wholesale funding. 
One EU central banker described this to me as the “killer chart.” 
What it shows is that banks in the United States have increased their equity from about 5.5% to about 7.5%, and have reduced their reliance on wholesale funding from 30% to 25%. 
British banks have made less progress with tangible common equity, rising from just under 3% to a little over 4%, but they have significantly reduced their reliance on wholesale funding, from almost 45% in 2008 to less than 35% now. 
By contrast, eurozone banks have almost stood still on both indicators. 
Their capital has risen a little, but remains below that of banks in the United Kingdom (and well below that of US banks), and they continue to depend on the wholesale markets for almost 45% of their total funding. 
That is why continuing uncertainty about the integrity of the eurozone, and the value of its members’ sovereign debt, is proving so damaging to its banks. 
Will it be possible for them to rollover their market funding in these circumstances? 
Already, the Greeks and the other countries subject to special measures have been shut out of the wholesale markets, and are reliant almost entirely on the European Central Bank. 
Might that happen to banks elsewhere? 
In 2007-2008, the sins of the bankers were visited on the politicians; now the reverse is true. 
Perhaps there is a difference: the bankers’ sins were sins of commission, while the politicians’ sins – repeated failed efforts to produce a solution to match the scale of the problem – are sins of omission. 
But the consequences are equally grave. 
I have always assumed that the Germans would eventually recognize that their interests lie in preserving the eurozone intact. 
As Churchill said of the Americans, “you can always rely on them to do the right thing... once they have exhausted all possible alternatives.” 
The Germans have now almost run out of alternatives. 
If they do not do the right thing soon, there will be some banking casualties, and European governments will once again be obliged to put in public money. 
That will be just as unpopular as bailing out the Greeks, and probably much more expensive. 

Europe’s Free Riders 
In the United States, individual states that follow unsound fiscal policies face a penalty. 
Their bonds sell at a discount relative to those of better-managed individual states. 
The higher debt service they must pay serves – to some degree – as a form of discipline against the temptation to spend now and pay later. 
Of course, the discipline of the market is not perfect: the bond market does not “see” implicit future liabilities (like promised pension payments) to any great degree. 
Nevertheless, this enforced fiscal discipline, combined with individual states’ own internal budgetary procedures, has prevented a large scale state-level fiscal crisis from occurring in the US since the Great Depression. 
Let us now turn to Europe. 
Before the advent of the euro, there were many fiscal crises in individual nation-states in southern Europe, which produced waves of high inflation. 
But, with the single currency in place, the road to solving a fiscal crisis through inflation has been closed, as the European Central Bank (ECB) now stands watch over monetary policy. 
Nevertheless, even with nation-states no longer able to rely on inflation to solve their unbalanced finances, the single currency allows them to use the debt capacity properly belonging to other members of the European Union to extend their spending sprees and postpone political accountability for periods of laissez les bons temps roulés. 
To head off this possibility, the EU created the Stability and Growth Pact: government deficits had to be less than 3% of GDP. 
Last week, the government of Germany – once the most fiscally prudent and disciplined EU country – broke the pact’s rules for fiscal discipline for the fifth consecutive year, and did so without (much) apology. 
Finance Minister Peer Steinbrueck signaled that he expected the European Commission to apply some sanctions to Germany: the credibility of the pact would, he said, be at stake if no action were taken. 
Thus, Germany would not block sanctions this time, as it did two and a half years ago. 
But Steinbrueck also made it clear that he expects any sanctions in response to Germany’s predicted 3.4%-of-GDP fiscal deficit to be largely symbolic, not penalties that would cost its government or economy anything of significance. 
The Stability and Growth Pact is not – or is not yet – working anywhere near the way it was intended to work. 
What about market discipline? 
Is the German government’s willingness to issue more debt and run bigger deficits limited because the market recognizes and penalizes nation states that allow their fiscal positions to weaken? 
In a word, no. 
The interest rates on the euro-denominated sovereign debt of the twelve euro-zone governments are all very similar. 
So the market does not seem to care that countries have different potentials to generate exports to fund the financial flows needed for debt repayments, or different current and projected debt-to-GDP ratios. 
Willem Buiter of the University of Amsterdam and Anne Sibert of the University of London believe that it is the ECB’s willingness to, in effect, accept all euro-zone debt as collateral that has undermined the market’s willingness to be an enforcer of fiscal prudence. 
As long as the marginal piece of German debt is used as collateral for a short-term loan or as the centerpiece of a repurchase agreement to gain liquidity, its value is much more likely to be determined by the terms on which the ECB accepts it as collateral than by its fundamentals. 
The ECB’s treatment of all such debt as equally powerful sources of back-up liquidity now trumps any analysis of differences in long-term sovereign risk. 
In the long run, this is dangerous. 
Both market discipline and sound fiscal management are needed to create a reasonable chance of long-run price stability. 
Omit either a market penalty now for behavior that may become reckless or the institutional levers that give a voice to future generations, and you run grave risks – perhaps not today or tomorrow, but someday, and for the rest of your life. 
As time passes, the coming of the single currency and the way that the euro has been implemented is generating more and more unease. 
Policy as a whole over the entire euro zone is too deflationary. 
The necessary transfers are not being made to make the common currency bearable to regions that lose out and are already in recession when the ECB tightens policy. 
The institutional foundations of stable long-run fiscal policy are being eroded. 
And now, Buiter and Sibert argue convincingly, the ECB is giving the market less scope to reward the thrifty and penalize the profligate than it should. 
There is no movement of the soil yet, and there will not be for some time. 
But the ground under the euro may well begin to shift if things don’t change. 


Europe’s Global Mission 
Europe is in search of its identity. 
I believe it is easy to find: the European Union embodies the principle of open society, which could serve as a force for a global open society. 
Let me explain what I mean. 
The concept of an open society was first used by the French philosopher Henri Bergson in his book The Two Sources of Morality and Religion . 
One source, according to Bergson, is tribal and leads to a closed society whose members feel affinity for each other but fear or hostility towards others. 
The other source is universal, leading to an open society guided by universal human rights that protects and promotes the freedom of the individual. 
Karl Popper modified this scheme in his seminal book The Open Society and Its Enemies , published in 1944. 
Popper pointed out that an open society can be endangered by abstract, universal ideologies like communism and fascism. 
Because these ideologies’ claim to be in possession of the ultimate truth is bound to be false, they can be imposed on society only through repression and compulsion. 
By contrast, an open society accepts uncertainty, and it establishes laws and institutions that allow people with divergent views and interests to live together in peace. 
The EU embodies the principles of an open society to a remarkable extent. 
Although its guiding principles have not been enshrined in a constitution, even this may be appropriate to an open society because, as Popper argued, our imperfect understanding does not permit permanent and eternally valid definitions of social arrangements. 
The EU was brought into existence by a process of piecemeal social engineering – the method Popper considered appropriate to an open society – directed by a far-sighted, purposeful elite who recognized that perfection is unattainable. 
It proceeded step by step, setting limited objectives with limited timetables, knowing full well that each step would prove inadequate and require a further step. 
That step-by-step approach ground to a halt with the defeat of the European Constitution. 
The EU is left in an untenable position, with an enlarged membership of 27 states and a governing structure designed for six. 
The political will to keep the process moving forward has eroded. 
The memory of past wars has faded, and the threat posed by the Soviet Union has disappeared. 
Nationalist, xenophobic, and anti-Muslim sentiments are on the rise, aggravated by the failure to integrate immigrant communities. 
Unfortunately the disarray within the EU is part of a broader global turmoil. 
The United States used to be the dominant power and set the agenda for the world. 
But President George W. Bush’s war on terror undermined the basic principles of American democracy by expanding executive powers. 
It undermined the critical process that is at the heart of an open society by treating any criticism of the administration’s policies as unpatriotic, thereby allowing Bush to order the invasion of Iraq. 
Worse still, the war on terror was counterproductive. 
It increased the terrorist threat by creating innocent victims, while leading to a precipitous decline in American power and influence. 
As a result, the US is no longer in a position to set the world’s agenda. 
The EU cannot possibly take the place of the US as the world’s leader. 
But it can set an example, both within its own borders and beyond. 
The prospect of membership has been the most powerful tool in turning candidate countries into open societies. 
Although most of its citizens do not realize it, the EU serves as an inspiring example. 
All that is needed now is for Europe’s people to be inspired by the idea of the EU as the prototype of a global open society. 
What this means in principle can be stated concisely: the EU needs a common foreign policy. 
That is the one part of the European constitution that urgently needs to be rescued. 
In the meantime, the absence of institutional reform should not be allowed to serve as a pretext for inaction. 
The EU already possesses ample resources to make an impact on the world stage: 
Where Europe has adopted a common policy – such as on Iran – it has succeeded in persuading others, including the US, to change long-held positions. 
But all too often the EU fails to live up to its potential. 
For example, Europe has made little progress in formulating a common energy policy, leaving it increasingly dependent on Russia, which has not hesitated to exploit its bargaining position. 
Likewise, the EU has failed to give adequate support to Georgia, or to impose appropriate sanctions on Uzbekistan for last year’s massacre at Andijon. 
Nor has the European Neighborhood Policy gathered any momentum, while the EU’s treatment of Turkey is pushing an important ally in the wrong direction. 
There is also trouble brewing in some of the newly admitted member countries, such as Hungary and Poland, where the EU could play a more proactive role in promoting democratic stability. 
Needless to say, a common EU foreign policy should not be anti-American. 
Such a posture would be self-defeating, because it would reinforce the division of the international community that the Bush administration has initiated. 
But the EU can set an example of international cooperation that the US, under a different leadership – which is bound to come – would eventually emulate. 

Europe's Groucho Problem 
Groucho Marx once famously quipped that he did not want to join any club that would have him as a member. 
But in today's European Union, Groucho need not apply. 
The Union now does not want to accept anybody who applies for membership, because the countries queuing up to join are too big or too poor, or both. 
On May 1, the EU formally admits ten new members, eight from central Europe. 
All are far poorer than the EU average. 
Bulgaria, Romania, and possibly Croatia are supposed to join in 2007. 
By the end of this year, the EU is to decide whether to open membership talks with Turkey - a country that is not only poor and big, but Muslim. 
If the EU is to talk about membership with Turkey, there is no legitimate reason for keeping out my country, Ukraine? 
Current EU thinking, however, holds that Ukraine should be placed in the same framework as countries in North Africa and the Middle East. 
The EU's "Wider Europe" strategy does call for closer ties to Ukraine, and for allowing us increased access to the EU's "single market." 
But it does not view Ukraine as a candidate for EU membership, at least not in the foreseeable future. 
One reason for this is that the EU does not want to pick a fight with Russia, which still sees us as its close ally, natural business partner, and as members of an enlarging Russian-led economic zone. 
Indeed, last week Ukraine's parliament ratified a treaty creating "a single economic space" with Russia. 
But this supposed free-trade zone seems more like a recipe to enrich oligarchs and stifle competition, not promote trade. 
Of course, Russia won't look on happily if the EU tries to lure Ukraine. 
But membership in the EU does not mean estrangement from Russia. 
Besides, excluding Ukraine from eventual EU membership will encourage Russia's imperial ambitions. 
This will diminish Russia's chances of ever becoming a full democracy, for it can rule an empire only as a militarized state. 
It is the mark of a good club that people clamor to become members. 
An ever-larger EU including Ukraine would create a political unit with a huge population, furthering the Union's ambitions to be a global power. 
As the latest round of enlargement proves, the EU is very effective at molding the governance and behavior of would-be members. 
Preparations for EU entry strongly motivated the eight former communist Central European states to entrench or restore democratic institutions and market economies. 
The further Europe export its laws and values, the more it expands a zone committed to peaceful, democratic, and prosperous co-existence. 
A country equipped to join the EU is a country equipped to make its way in the world peacefully, if it chooses to do so. 
Europe needs such countries on its border. 
So far, the Union's actions have achieved the opposite. 
For example, three years ago Ukrainians crossed the border with Poland six million times. 
Most were small traders buying goods for resale at home, boosting the economy of eastern Poland, the poorest part of that country. 
Others worked cheaply in Poland as cleaners and building workers. 
As a step towards imposing EU border controls and visa rules, Poland began demanding visas from its neighbors. 
Crossings at Polish border stations quickly fell by over two thirds. 
Thus the new EU border with Ukraine is making its presence felt in the most negative way imaginable - by hurting business on both sides of the border. 
In the EU, only Poland seems to want Ukraine as a prosperous, stable, and accessible neighbor, not as a poor and rickety one with a dodgy democracy and even dodgier nuclear power stations. 
Poland worries that the more Ukraine is shut off from the Union, the more it will fall behind, economically and politically. 
But today's other EU members view the prospect of an ever-expanding Union to include Ukraine with fatalism and dread, for several reasons. 
The first, inevitably, is money. 
The EU redistributes billions of euros from rich to poor members: more poor members mean more claimants on that purse. 
A second is immigration. 
One of the Union's fundamental principles is that there should be freedom to move from one member country to another. 
But anti-immigration parties are gaining ground across western Europe; they could make huge political capital out of potential Ukrainian membership. 
There is also a feeling that a larger EU might simply be unable to function. 
Manufacturing plausible-sounding objections to Ukrainian membership is easy. 
We are not really European, we are too poor, we are too different. 
But the Union has consistently rejected the idea of insisting on a minimum income level for members. 
Its only serious economic demand - rightly so - is that members should have a "functioning market economy." 
As for whether we are European, I submit that Balzac would never have asked that question during the years he lived here. 
Where Europe, Russia, Ukraine, Moldova, and Belarus rub up against one another, an economic fault line is forming. 
What the EU does now to bridge this fault line will determine whether these countries westernize or stagnate. 
The dream of a Europe free and whole, from the Atlantic to the Urals, remains to be completed. 

Europe’s High Court Confronts Racism 
The European Court of Human Rights is hearing oral arguments in two of the most important cases in its history. 
As in Brown v. Board of Education , the case that ultimately broke the back of racial segregation in America half a century ago, the European Court is being asked to give meaning to the fundamental principle of equality. 
The resulting decisions could establish clear ground rules to guide future policy toward Europe’s increasingly numerous ethnic and religious minorities. 
The plaintiffs are members of Europe’s poorest and largest minority group – the Roma, or Gypsies, whose ancestors are believed to have migrated from India centuries ago. 
One case concerns 18 Roma children from the northeastern city of Ostrava in the Czech Republic who were placed in “special” schools for those deemed mentally deficient, where they receive a markedly inferior education. 
The children argue that such schools are a barrier to social and economic progress. 
Many Roma are sent to special schools even though they show no sign of mental disability. 
Few go on to finish high school or attend university. 
As a result, Roma unemployment rates in the Czech Republic, as in much of Europe, far exceed those for the rest of the population. 
Evidence before the Court indicates that, in some Czech communities, Roma children are 27 times more likely to be sent to special schools than non-Roma children. 
The plaintiffs suggest that this amounts to racial segregation. 
The government vigorously denies this. 
The Court’s hearing is set for March 1. 
The second case comes from Bulgaria. 
In 1996, military police shot and killed two Roma conscripts. 
The victims, who had recently absconded from a military construction crew, were known to be unarmed and not dangerous. 
The shooting, by automatic weapon fire, took place in broad daylight in a largely Roma neighborhood, where the grandmother of one of the victims lived. 
Immediately after the killing, a military police officer allegedly yelled at one of the town residents, “You damned Gypsies!” while pointing a gun at him. 
Last year, one panel of the Court found that both the shootings and a subsequent investigation that upheld their lawfulness were tainted by racial animus. 
At the request of the Bulgarian government, the Court’s Grand Chamber agreed to review the matter before the end of February. 
Though the facts of both cases are heart wrenching, their importance extends beyond the courtroom. 
At a time of rising concern about immigration, religious extremism, and ethnic violence, what must government do to secure the promise of equal opportunity for all? 
Over the past decade, the European Union has grown more ethnically diverse. 
Immigration to Spain, Italy, and Greece has surged, adding to longstanding immigrant populations in northern Europe and to the number of so-called “guest workers” in Austria, Germany, and Luxembourg. 
The most recent stage of EU enlargement last May added millions of Roma from the new member states of Central and Eastern Europe. 
Just as Europe’s ethnic makeup has been changing, so have its laws. 
In 2000, the EU’s executive arm – responding in part to the growing popularity of anti-immigrant and neo-Nazi political parties – enacted the most far-reaching anti-discrimination legislation in the world. 
To date, however, this legislation has lain dormant. 
In many countries, lawyers and judges lack familiarity with legal concepts of discrimination. 
Perhaps not surprisingly, acts of exclusion, segregation, and violence often go unpunished. 
The two cases soon to be heard in Strasbourg provide an opportunity to change this. 
A finding of discrimination would establish a landmark legal precedent, putting core values of non-discrimination and equal justice beyond dispute at a time when Europe’s politicians consider how best to absorb millions of new immigrants and minority members. 
Just as importantly, such a ruling would send a powerful signal that racism and xenophobia have no place in the new Europe. 
But perhaps the greatest significance of these cases lies in their very presence on the docket of Europe’s highest rights tribunal. 
A decade ago, few minority victims would have been inclined or able to seek legal remedies for discrimination. 
The success of some in having their claims heard is testimony to the growing power of law as a force for positive change in Europe. 

Europe's House Divided 
Travelling from Berlin to Riga, Latvia's capital, is an eye-opener, because you get to see much of what is going wrong in European integration nowadays, just months before a further 10 states join the European Union, bringing it up to 25 from the original 6. 
In Berlin before I left, Chancellor Gerhard Schroeder had just welcomed his French and British colleagues for an exchange of views on the state and future of the Union. 
They were, the chiefs of the three largest members of the EU declared, only advancing proposals; nothing could be further from their minds than to form a steering group to run the affairs of the enlarged Union, even if henceforth they would meet again at more or less regular intervals. 
If they really hoped to be believed, they should have listened to my interlocutors in the old city of Riga over the next few days. 
The three Baltic countries - Latvia, Estonia and Lithuania - will be among the smallest members when they join the Union on May 1, 2004, their total of 6 million people representing just 1.5% of the then EU's population. 
Yet in marked contrast to the smaller nations that half a century earlier had joined France, Italy and Germany in launching the Union's fore-runner, the European Economic Community, the new arrivals are digging in their heels, demanding equal rights. 
Although as small countries they have learnt that the big ones usually get their way, they deeply resented the Berlin meeting because they see in it an attempt to limit their rights in the club they are about to join. 
The attitudes of the EU's big and small countries suggests that European integration's basic bargain is no longer regarded as fair. 
Under that bargain, the bigger states accepted restraints on their power in order to increase the weight of the Union as a whole while the smaller ones realized that being part of the club gave them a chance they would not have otherwise, namely to participate in the shaping of common policies. 
Europe, once the continent of power clashes and balances, became a community of law where big and small follow common rules to reach common decisions. 
Now, as Berlin and Riga suggest, power is returning as the trump card. 
The authority of the big countries derives not from their European credentials but from their power ranking; the resentment of the smaller countries flows not from a different notion of integration but from their fear of losing out. 
What used to succeed as a win-win arrangement for big and small alike, now appears as a zero-sum game to many of them. 
There are explanations for this. 
In a Union of soon 25 members, it will be increasingly difficult to let everyone have a say and to generate consensus. 
On issues of foreign and security policy, moreover, agreement among the heavy-weights of the Union is essential for common action. 
Unless France, Britain and Germany agree, there is little chance the Union can act effectively on the international stage. 
At the same time, giving up sovereignty for the sake of integration is tough for the new members from Eastern Europe that only a decade ago wrested the right to govern themselves from Soviet control. 
Yet big and small alike must realize that their current disposition implies the slow suffocation of Europe's most exciting and successful experiment in bringing peace and prosperity to the old continent. 
To save it, the bigger ones will indeed have to take the lead. 
But instead of offering ready solutions for the rest to endorse, leadership will have to consist of working with the other members, patiently and discretely, so that all or at last most feel they are involved in formulating common positions. 
Only then will the smaller members feel adequately respected. 
Only then will all members again concentrate on getting things done for all instead of each of them on getting the most out of it for himself. 
There are many who believe that this kind of patient leadership is incompatible with a Union of 25. 
France and Germany, acting together, were able for many years to provide this sort of leadership, and this should be recalled. 
Whenever they came out with a proposal, the others gave them credit that it was in the interest of the Union as a whole; whenever there was a deadlock, the others looked for leadership from Paris and Bonn/Berlin to overcome it. 
In the past, German governments rightly took pride in being seen by the smaller members as their best partner, essential for the Franco-German leadership to work. 
Today, Germany has joined France in neglecting the smaller members for the sake of being recognized as one of the big boys. 
So the Franco-German couple has lost the credit it once enjoyed. 
Bringing in Britain is an admission of that fact. 
But because Britain remains lukewarm on European integration, the threesome can never serve as the motor for moving Europe forward. 
Even in an enlarged Union, only France and Germany can do that job, provided they make a determined effort to regain the trust of the other, mostly smaller members, old and new. 
While these expect little from an often indifferent France, they still, as the discussions in Riga suggest, would be disposed to putting their trust in Germany -- if only German governments once again show they care. 

Europe’s Interest in Closing Guantánamo 
BRUSSELS – For years, the European Union has called loudly for the closure of the Guantánamo Bay detention center. 
Now that US President Barack Obama has taken the decision to do so, the EU stands ready to provide political and practical support to the United States to help achieve that goal. 
We share President Obama’s assessment that “Guantánamo became a symbol that helped Al Qaeda recruit terrorists to its cause. 
Indeed, the existence of Guantánamo likely created more terrorists around the world than it ever detained.” 
We in the EU believe that it is our common interest with the US to prevent radicalization and recruitment to terrorism throughout the world. 
The primary responsibility for closing Guantánamo and re-settling detainees lies with the US. But Europeans want to help the US turn the page. 
That is why EU member states have already received their own nationals and former residents from Guantánamo. 
That is why France recently received an Algerian ex-detainee. 
And that is why several other EU countries are now considering receiving ex-detainees cleared for release, but who, for compelling reasons, cannot return to their countries of origin. 
We in the EU expect the US to do likewise; if it is safe to release these people in Europe, it is safe to do so in the US. 
More generally, we agree with Obama that “in the long run we...cannot keep...safe unless we enlist the power of our most fundamental values,” and that “we uphold our most cherished values not only because doing so is right, but because it strengthens [us] and keeps us safe.” 
The experience of European democracies confronted with a long-term terrorist threat shows that human rights and the rule of law are our strongest assets. 
That is why terrorists want to destroy them. 
The closure of Guantánamo must be accompanied by a fundamental review of the underlying policies that gave rise to its existence. 
Obama’s decisions to ban “enhanced interrogation” and end secret detention are important steps in the right direction. 
But more steps are needed. 
In particular, indefinite detention without trial needs to be addressed to avoid the recurrence of problems. 
Therefore, the review of detention, trial, transfer, and interrogation policies is of utmost importance. 
There must be no gaps in protection, whatever law is applicable. 
The EU will take up the Obama administration’s invitation to share its views with his Detention Policy Task Force on international law principles relevant to the fight against terrorism. 
We hope the US will change its “war on terror” paradigm and re-think its conception of a global armed conflict against Al Qaeda. 
No EU member has taken such an approach. 
There is an obvious difference between persons engaged in an armed conflict, as in Afghanistan and Iraq, and terrorist suspects arrested outside of armed conflict. 
A case-by-case approach is therefore necessary. 
We welcome the fact that the first former Guantánamo detainee is facing criminal charges in New York. 
The perpetrators of the Madrid and London bombings were prosecuted in ordinary criminal trials. 
One plotter in the attack of September 11, 2001, appeared before ordinary courts in Germany. 
In many EU member states, criminal law has been strengthened and is being used to prevent attacks. 
Membership of a terrorist organization, including those operating on foreign soil, training and recruiting people for terrorism, and promotion of terrorism have been made criminal offenses. 
The fight against international terrorism raises important legal questions. 
We are looking forward to continuing our productive dialogue with the US State Department Legal Adviser. 
The threat from Al Qaeda is global. 
The EU and US must work together to make Europe and America safe. 
By closing Guantánamo and addressing the underlying policy issues, the US is creating a much stronger foundation for close EU-US cooperation in counter-terrorism and the fight against international crime, one based on the rule of law and human rights. 
Together, the EU and the US will be in a better position jointly to promote justice, human rights and freedom around the world. 
This has been and remains the most sustainable way of preventing radicalization and recruitment to terrorism. 
Closing Guantánamo is not a gesture to win applause from Europeans. 
It is a necessary revision of policy that will make the US, Europe, and the world safer. 

Europe's Invisibles 
In a historic turnabout, the new German government of Chancellor Gerhard Schroeder is poised to offer citizenship to four million of its foreign (mostly Turkish) residents. 
Germany, of all European countries, by basing its citizenship laws on blood, has been Europe's most difficult place for foreigners to acquire citizenship. 
So does this move, taken with similar actions in France, bespeak a new European attitude towards immigrants? 
Should immigrants embrace the offer? 
History and present practices suggest they should think twice before doing so. 
Europe, once identified as "the West" as a whole, once held a noble vision of its mission: to deliver the fruits of the Enlightenment and the practice of democracy to the world. 
Born of the American and French Revolutions, that vision linked Europe to North America in a wider Atlantic civilization. 
Through Voltaire and Kant the idea of Europe was broadened to mean cosmopolitanism and the ideal of global citizenship. 
Not only were East European countries such as Russia not excluded, but the prospect was held out of a world community held together by the liberality of the Enlightenment. 
Today, as Western Europe unites behind its new currency, the euro, that inspirational is being progressively narrowed. 
The Cold War, of course, cut Europe in two. 
The European Union is now cutting off not just Eastern Europe but also the United States, seen now as one of Europe's main rivals. 
Europe now effectively means only "Western Europe", with member states of the EU policing their borders, both actually and conceptually, against aliens and the threat of aliens. 
Should Poland, Hungary and the Czech Republic be allowed in? 
Perhaps - but Serbia, Romania, Bulgaria are dubious; even more so the idea of Russia as part of this new Europe. 
Turkey is, of course, highly problematic. 
Europe, indeed, has resurrected some of the oldest and most exclusionary of its stigmas of isolation - not just those against Islam but also against the countries of Orthodox Christianity. 
None of this bodes well for Western Europe's 11 million non-European residents – many of them Muslims, making Islam the "second religion of Europe". 
In an earlier, larger idea of Europe, it might have made sense for such "outsiders" to pursue the strategy of inclusion, seeking national citizenship if not full assimilation into the national culture. 
Policies of "multiculturalism", despite scholarly acrobatics, held out a genuine promise of liberal, plural societies. 
All this now seems a pipe dream. 
More than ever, Europe insists on its integrity, its exclusiveness. 
It puts up invisible walls not just against the East, against Russia in particular, but also against the West, against America. 
Internally there is renewed stress on homogeneous national identities, with right-wing parties taking the lead but others following closely behind. 
Muslims have replaced Jews and Communists as "the others" of Europe - Europe's demons, threatening and malignant, as in the Middle Ages. 
What should immigrant communities do? 
One innovative response is to by-pass national citizenship altogether in pursuit of "transnational citizenship". 
Turks in Germany and North Africans in France have turned to international human rights organizations to make claims as persons, rather than as citizens of any particular nation-state. 
They assert the right to employment, to education, to health and to social security not as benefits conferred by the state but in their capacity as residents with human rights recognized by the international community and proclaimed in the United Nations' Universal Declaration of Human Rights. 
Turks in Germany, for instance, say they want to be neither Turkish nor German, neither pulled back into their culture nor pushed into a receiving a culture that rejects what they hold dear. 
They claim the right to define their identities from elements drawn from both cultures - religion, say, from one, language from another - and to add elements as they see fit, drawing on the rights created by international institutions. 
When, in demanding the right to have their children educated in Turkish, they proclaim that the "mother tongue is a human right", Germany's Turkish residents are not asserting some primordial identity but marking out a new, freely-chosen identity in the language of universal rights. 
In doing this they seek to crash through the gates of fortress Europe, refusing to be imprisoned by its narrow assumptions of national or European identity. 
They may wish to play a role in the politics of their countries of origin as well as in the politics of their host countries, where they are now permanent residents and so contribute to national economic and cultural life. 
And they may also wish to play a role on the wider world stage, as when they link up with fellow ethnics in international religious, cultural and labour organizations. 
It would be wrong to portray "transnational citizenship" today as anything more than a goal. 
The power of nation states remains strong, and immigrants must deal with them in their daily lives. 
So offers of citizenship, such as to Germany's long isolated Turkish residents, however delayed, should not be lightly spurned. 
But enough has already been said and done to indicate that this is not the only possible path; that the goal of transnational citizenship is not utterly unreal. 
In pursuing it, immigrants may also begin to free their longer-established fellow Europeans from their attachment to a fortress that, if taken to extremes, could well become a prison for all. 

Europe’s Iranian Dreamworld 
Weeks into the crisis triggered by Iran’s illegal capture of 15 British naval personnel, the European Union’s irresolute and contradictory approach is making matters worse. 
Faced with a country whose leader is bent on acquiring nuclear weapons, the EU’s leaders are simply dithering, fearing that the fire next door in Iraq could somehow spread. 
The latest crisis proves again that Iranian President Mahmoud Ahmadinejad cannot be trusted. 
Following the ambush of the UK forces, the Iranian authorities dissembled as to their exact location at the time of their abduction, which was subsequently proven by the UK government to have been in Iraqi territorial waters operating under the authority of UN resolutions and with the express consent of the Iraqi government. 
What Ahmedinejad appears to want are bargaining chips to secure the release of 6 Iranians who were aiding the Iraqi insurgency before being captured by the US. 
The EU’s reluctance to match America’s robust language on Iran is emboldening him. 
Ahmedinejad can sense an international community divided, and like his fellow pariah leader, North Korea’s Kim Jong-il, he is exploiting that division at every opportunity. 
The uniquely dangerous combination of a nuclear Iran, which seeks to inspire the Shia in the Gulf states to rise up against their Sunni masters, coupled with Ahmedinejad’s millenarian mysticism, poses an existential threat to Israel, which Ahmadinejad has threatened to “wipe off the map.” 
It also threatens to touch off a nuclear arms race in the Middle East. 
And, if Iran succeeds in acquiring long-range ballistic missiles, the security threat will become global. 
Indeed, the established concept of nuclear deterrence through “mutual assured destruction” (MAD), which kept the peace between the Soviet Union and NATO, may not apply with a ruler like Ahmadinejad, who believes in the sacred merits of martyrdom. 
MAD simply won’t work for a mad man who is guided by quasi-messianic certitude. 
Those who believe that Ahmedinejad is a bluffer and a buffoon who would pull back from the brink may be fundamentally misreading his psychology. 
It is past time for Europe’s leaders to grasp the reality of the situation. 
The possibility of degrading Iran’s nuclear weapons program through military action cannot be totally discounted, although it should of course be the last option and would be immensely risky even if militarily possible. 
Yet there is much more that EU leaders can do to undermine the regime economically. 
The EU’s trade significance for Iran is huge, accounting for 40% of Iran’s imports and a quarter of its exports. 
Economic links are historically strong and growing. 
Some two-thirds of Iranian industry, most of it state controlled, relies on German engineering exports, 65% of which in 2005 came with export credit insurance guarantees from the German government. 
Likewise, the European Investment Bank is providing $1billion to finance the construction of the Nabucco oil pipeline from Iran to Austria. 
If completed, the Nabucco pipeline will make Iran an indispensable EU energy partner. 
As an organ of the EU, the EIB should be pursuing an ethical investment policy. 
This is difficult to reconcile with lending to a country like Iran, which publicly executes individuals for sexual “deviance,” imprisons women who protest peacefully, and silences journalists who are critical of the regime. 
The EU needs to tell Iran that unless it releases the British hostages and moderates its nuclear ambitions, it will receive no export guarantees. 
Such a policy would stop trade between Iran and the EU in its tracks, and Ahmadinejad knows it. 
There are already signs of disquiet among more moderate Iranian policymakers, as Ahmadinejad’s economic mismanagement has begun to fuel higher inflation. 
A cut in export guarantees would put the Iranian economy – and Ahmedinejad – in real jeopardy. 
Individual companies, mindful of US sanctions on those who do business with the regime, can also help. 
For example, British Petroleum (BP), to its credit, has disinvested from Iran on ethical grounds, an example that other European firms should follow. 
The Iranian government’s contempt for the international community reflects its contempt for human rights and civilized norms. 
Yet Iranians’ hunger for change is clear. 
Despite repression, Iran’s civil society is well developed and sophisticated. 
The Ahmadinejad government’s popularity has plummeted, as evidenced by recent local election results. 
Europe’s political leaders need to recognize that now is the time to facilitate change in Iran by suspending export credit guarantees, stopping EIB financing, and speaking with a united voice. 
Wishing the problem away will only make it worse. 


Europe’s Italian Muse? 
ROME – The euro contagion triggered by Greece’s sovereign-debt crisis has now infected Italy. 
Silvio Berlusconi’s government, together with a fiscally conscious opposition, managed to secure – in only a few days – parliamentary approval of a package of measures worth more than €50 billion, in order to restore market confidence in the soundness of Italy’s economic fundamentals. 
In the absence of a strong and credible EU-wide commitment to stop the contagion, other eurozone countries hit by the sovereign-debt crisis have been following a similar script. 
But the financier George Soros is right: Europe needs a “Plan B.” 
The huge crisis now hitting the eurozone and the European Union must not be wasted. 
It must be used to move Europe farther along the road of integration, lest the Union begin to reverse course. 
When the euro was created, its architects were well aware that no monetary union in history had succeeded without the backing of a political union. 
Hopes nonetheless were pinned on the existence of a large, European-wide market and eurozone member states’ commitment to keeping fiscal deficits, public debt, and inflation under control. 
But several eurozone members did not keep their word, and the crisis engulfing their sovereign debt now endangers the survival of the eurozone as a whole. 
As coordination among sovereign states has plainly not worked, only two possibilities are left. 
One option is that eurozone members remain sovereign and claim back their monetary powers, which implies not only the death of the euro, but also a threat to the internal market and to the EU’s very existence. 
The other option is to cede more sovereignty to the EU, which implies not only the survival of the euro, but also, and perhaps more importantly, the birth of Europe’s political union. 
This choice is becoming clear for all to see. 
Both Jean Claude Trichet, the ECB president, and Jacques Attali, the founding president of the European Bank for Reconstruction and Development, have now called openly for the establishment of a European Ministry of Finance. 
The glacially technocratic and apolitical International Monetary Fund, in its latest report on the eurozone, goes as far as mentioning “political union and ex ante fiscal risk sharing” as conditions for any monetary union to work. 
But few people have thought through what a politically united Europe might look like. 
Most, indeed, implicitly assume a massive transfer of almost all functions of government from member states to the federal center, and thus the creation of a “European superstate.” 
We believe instead that a “Federation Lite,” with a budget limited to about 5% of Europe’s GDP (compared to almost half of GDP in most EU member countries), would enable a realistic political union. 
These resources, €600-700 billion, would replace and not add to national budgets, since they would accompany the transfer of some governmental functions. 
In some cases, this would also allow for economies of scale. 
Indeed, consider defense. 
A single standing EU army in lieu of Europe’s largely irrelevant and inefficient national armed forces, with a budget of around 1% of EU GDP – some €130 billion – would instantly become the world’s second leading military force, after the US, in terms of resources and, one would hope, capabilities. 
Assuming a flat rate of national contributions to the federal budget, Greece, for example, would shed 2-3 precious percentage points from its public deficit. 
In addition to defense and security, it would make sense to move other competencies to the federal level. 
Prime candidates are diplomacy and foreign policy (including development and humanitarian aid), immigration, border control, some infrastructural projects with European-wide network effects, large-scale research and development projects, and regional re-distribution. 
These functions of government, and a federal budget of this size, would, of course, require the equivalent of a finance minister. 
It would be well worth it: a critical mass of €600-700 billion would make macroeconomic stabilization and re-distribution possible when necessary, without the establishment of ad hoc mechanisms or, worse, the publicity and attention surrounding summit after summit called to decide the next package of aid to financially distressed countries. 
The term “transfer union” is now used, especially in Germany, as a pejorative synonym for federation. 
We agree that moving resources from one place to another cannot be the raison d’être of a political entity. 
Only specific governmental functions can. 
But when some of these functions are assigned to a federal level of government, one has the additional tool of being able to transfer resources to pay for these tasks. 
When this is necessary, states experiencing a boom should be taxed more than states experiencing a bust. 
This redistribution is purely routine in any federation, beginning with the United States, and the public pays little or no attention to it. 
New York’s government and people do not protest because Mississippi receives far more from the federal budget, relative to what it contributes, than New Yorkers do. 
Despite today’s problems, the eurozone is not only richer, but also economically sounder, than most other countries and regions. 
The main threat to the euro is precisely the eurozone’s lack of a modicum of political unity – a Federation Lite that makes solidarity possible, and even automatic, when it is needed. 
In this sense, the looming prospect of a full-blown Italian debt crisis could prove beneficial by focusing European minds. 
The words epluribus unum need not be included on euro notes and coins to recognize that the principle for which they stand – the political unification of Europe, no less than that of the US – is indispensable to the euro’s survival. 

Europe’s Katrina-in-Waiting 
As Europeans watched President Bush stumble over the death, destruction, and chaos wrought by Hurricane Katrina in New Orleans, some could not help patting themselves on the back and saying, “Thank God for our social solidarity.” 
True, no European country worth its salt would ever allow its citizens to fall into such dire poverty that they literally could not escape from their homes in the face of a natural disaster. 
And all Europeans – not only those on the left – were truly shocked and appalled by Katrina’s vivid demonstration that there apparently is no bottom for America’s poor. 
But this concern and sensibility is a little too self-congratulatory, for it allows Europeans to gloss over the very real problems they now have with their own vaunted social solidarity. 
For one thing, while Europe’s doctrine of social solidarity preaches fairness and equality, it masks an “insiders’ society” that is spectacularly unjust at the upper end of the income spectrum. 
Welfare-state elites typically get the best doctors, the best concert seats, the best flats in the best neighborhoods, and so on, because of Europe’s stubborn refusal to use prices and the market mechanism to allocate key goods and services. 
Outsiders find it difficult to compete when “who gets what” depends on knowing the right people. 
Surprisingly, the treatment of elites in Europe may not be all that different from America. 
America favors its elites by giving them tax cuts. 
Europe favors them by bumping them to the head of waiting lists and giving tax breaks to capital. 
Second, while the shame of New Orleans could never happen in Europe, European social solidarity nonetheless is failing lower-income groups by not sufficiently delivering to them the benefits of economic growth. 
This is perhaps the welfare state’s most glaring weakness. 
Though social solidarity and economic growth are by no means incompatible, Europeans – quite unwisely – have opted for an inefficient variety of the welfare state. 
“The labor market is the key,” says Bundesbank President Axel Weber, a Social Democrat recently appointed to his post by Gerhard Schroeder. “In Europe we need to have more flexible labor markets and more structural reforms.” 
But European social solidarity too often has pursued its objectives through economically costly direct interventions in labor markets rather than in more market-neutral ways. 
For example, in order to protect workers’ jobs, Europe’s welfare state has made it difficult for firms to fire them. 
But he who can’t be fired won’t be hired, and he who won’t be hired won’t quit. 
This means that the unemployed can’t find jobs (even though there is useful work for them to do), and that workers who have jobs will not move to potentially better ones. 
The inevitable result is persistent high unemployment and labor immobility. 
It doesn’t have to be this way. 
Social redistribution can be effected through fiscal measures rather than by direct intervention in the labor market. 
That’s how it was done in the early days of the welfare state. 
But as the “revolution of rising entitlements” took hold in the 1960’s and 1970’s, trade unions have adopted the position that labor is entitled not only to a job, but to a job in the region and firm of its choice. 
This version of the welfare state has proved devastating for Europe’s employment and economic growth. 
Finally, while Europe’s left may be boastfully proclaiming in Katrina’s wake, “Thank God for our social solidarity,” there is considerable doubt even about what “our” actually means. 
The homogeneity of Europe’s nation states is decreasing, with immigrants posing a growing challenge for social solidarity, while the European Union as a whole faces a similar dilemma: is a Dutchman in Amsterdam supposed to feel as much solidarity with a Greek in Athens as with a fellow Dutchman in Rotterdam? 
Which brings us back to Katrina. 
A lot has been said and written in the wake of the disaster about how little Americans seem to care for one another. 
And it certainly can’t be denied that it is hard to get people in New York, Maine, or Utah to spend enthusiastically on levees in New Orleans – at least until a horrific crisis occurs. 
But is it really so different in Europe? 
Will the Dutch enthusiastically finance public infrastructure in Greece? 
Will Greeks fund water control projects in the Netherlands? 
If one takes the EU as one’s term of reference, social solidarity between member states would appear to be not that different from social solidarity between American states. 
No doubt, the United States has very real – and growing – problems with the fairness of its income distribution. 
But Europeans should temper their criticism with the realization that Europe has similar problems of its own. 

Europe’s Latest Revolution 
STOCKHOLM – History often moves with small steps, but such steps sometimes turn out to have big implications. 
This New Year’s Eve, Sweden made history in a small way by ending the last rotating foreign and security policy presidency of the European Union. 
After years of rotation every six months, we handed the job over to the EU’s new permanent structures, established in Brussels in accordance with the Lisbon Treaty. 
What might look like a small step for mankind is certainly a giant leap for Europe. 
Those with a sense of history will also see the significance of Europe’s nation states, which not long ago fought each other continuously, now pooling their foreign policies in order to assert them more vigorously on the global stage. 
The years since the European revolutions of 1989 have been a period of extraordinary success for the rapidly evolving EU. 
The Union has expanded from only twelve members then to 27 today, and has brought stability and new prosperity to approximately 100 million people in the eastern and central parts of the Continent. 
The introduction of the euro by a number of them – Estonia is likely to follow shortly – has also been a remarkable success story. 
It is, to a large degree, the magnetism of the EU model that, during these two decades, transformed Europe from perhaps the world’s leading security problem to one of the most important global partners on virtually any issue. 
But what the future will bring is by no means predetermined. 
In essence, it boils down to whether Europe in the decades ahead will be seen as a model for the future or as a museum of the past. 
Decisions taken during the next few years will be crucial to determining the outcome. 
To be a model for the future, Europe’s governments and peoples must remain committed to an open Europe in an open world. 
In more practical terms, that means continuing to honor Article 49 of the Treaty of Rome, which keeps the door to membership open to any European country willing and able to share the EU’s values, interests, and policies. 
Approximately 150 million people in South-eastern Europe – the Western Balkans, Ukraine, and Turkey – aim at becoming EU citizens. 
Membership will obviously take time, but the accession process will drive modernization and democratic reform in a way that will strengthen all of Europe. 
A Europe that closes its door to those willing and able to enter will be a Europe that diminishes its own future. 
Equally important is a renewed commitment to economic reform in the EU itself. 
Economic success or failure in the decade up to 2020 will be another critical element in whether we are seen as a model or as a museum. 
This will require a more committed approach than that pursued under the so-called Lisbon Agenda during the past decade. 
It remains a shame that only two of the EU’s 27 countries have met the target of spending 2% of GDP on research and development. 
It is imperative that the EU build societies that are seen as global leaders in social, political, and technological innovation – all will be urgently needed in the transition to the low-carbon economy that is coming. 
An open Europe must also be fully committed to an open global economy. 
A sustainable globalization process is not only a paramount interest for Europe itself, but also the only way that we can continue to lift billions of people out of poverty and create better foundations for the rule of the law and global governance in countries still lacking in these respects. 
This will require a Europe able to build deep strategic relationships with all the key players in our increasingly multi-polar world. 
The year that has just passed has demonstrated – in the handling of the financial crisis and in trying to tackle climate change – both the need for and the difficulties of creating a new paradigm of global governance. 
Small elite bodies like the G-8 no longer work, but neither do mammoth meetings of the sort we saw in Copenhagen. 
The EU has cooperation and integration embedded in its very DNA. 
That is why it truly has the potential to be a model not only for its own region, but also globally. 
Few things will be needed more in the years to come. 
But, if we are to succeed, we must make the most of our new Lisbon institutions, maintain our commitment to an open Europe, accelerate reform of our economies, and take the lead in forging a new framework for global governance that supports a truly sustainable process of continued globalization. 
Nothing less will do. 

Europe’s Leisure Trap 
Black Friday in the United States traditionally is the day after Thanksgiving that signals the start of the holiday season sale. 
At daybreak, people line up before department stores to get the special “early bird” bargains. 
In Europe, black Saturday falls in the last weekend of July, when the French and other Europeans set off in droves for their Mediterranean holiday destinations, and highways get jammed with traffic. 
This contrast could serve as a metaphor for the difference in lifestyles on either side of the Atlantic. 
Americans work more hours per week and have less vacation time, but they have more money to spend. 
Not only does a higher percentage of American adults work, but they also work more hours per week and more weeks per year. 
In 2004, the French worked 28% fewer hours per person than Americans, and the Germans and Dutch each put in 25% fewer hours, and the money they earned was correspondingly lower—almost 30% less income per person than Americans received. 
According to the MIT economist Olivier Blanchard, Europeans simply enjoy leisure more than Americans do, even if it means that they have less money. 
In his view, this difference in attitude explains the income gap between Europe and the US. 
But not everybody agrees with Blanchard. 
Some economists point out that high tax rates in Europe make work less rewarding – and thus leisure more attractive. 
Other economists see Europe’s powerful labor unions as an important determinant in European attitudes towards work. 
After all, employees do not negotiate individually the length of the workweek. 
During past economic downturns, labor unions in Europe negotiated a reduced workweek or more vacation time with no reduction in wages. 
Moreover, Blanchard fails to note that the preference for leisure is not gender-neutral. 
The transatlantic difference in hours worked can be explained in part by comparing the labor input of European women to the input of American women. 
While American women work 36 hours per week on average, Dutch women put in only 24 hours per week, while German women work 30 hours. 
French women with a job work on average 34 hours per week, but the percentage of women who work outside the home in France is almost 20% lower than in the US. 
Are European females that much lazier than American females? 
The answer depends on whether one considers the time women in Europe spend on domestic work. 
The economists Ronald Schettkat and Richard Freeman have calculated that American women spend ten hours per week less on cooking, cleaning, and childcare than European women do. 
Instead of performing these household jobs themselves, Americans pay other people to do them. 
Americans eat more often in restaurants, make ample use of laundry, dry-cleaning, and shopping services, and hire nannies to take care of young infants. 
Indeed, in the US, one finds all kinds of personal services that do not exist on a similar scale in Europe. 
A manicure, carwash, or a massage is often only a stone’s throw from one’s home. Doorman buildings provide round-the-clock service to residents and dog-walkers look after pets during the workday. 
In New York City, one can get help during the weekends to prepare meals for the coming week, with a culinary expert to advise you on the recipes, buy the groceries, and do part of the cooking. 
In other words, American women work more hours and use the money they make to hire people to do the tasks that they can’t do because they’re working. 
By contrast, European women work less and have less money to spend on services. 
In their “free time,” European women are busy cleaning the house and looking after the children. 
On balance, therefore, European and American women work about the same amount of hours. 
Meanwhile, more wealth is created in the US than in Europe. 
After all, women professionals do not have to choose between a career and children, but can enjoy both. 
By spending part of their extra income on household jobs and personal services, American women limit their workload while creating demand for service jobs that wouldn’t exist otherwise. 
To put it inelegantly, two birds are killed with one stone. 
In Europe, no birds get killed at all. 
Highly educated European women who have children either stay at home or work part-time and get stuck in low-end jobs. 
They take care of the household and children themselves. 
Meanwhile, there are not enough service jobs in Europe to put everybody to work. 
The social benefits paid to the out-of-work increase the tax burden on labor income, which in turn discourages women from full-time work. 
The leisure trap thus keeps both the best educated and the least educated out of the workplace. 

Europe’s Market-Led Integration 
BERLIN – For two years now, one European summit after another has ended with assurances that – at long last – the necessary measures for containing the eurozone’s sovereign-debt crisis have been taken. 
Most were publicly portrayed as breakthroughs, though they were nothing of the sort. 
As a rule, it took about three days before markets caught on and the crisis entered another round. 
Because Europe’s political leaders have failed to manage the crisis effectively, the cost of ending it has risen. 
Indeed, an easily manageable financial crisis in Greece was allowed to grow into a life-threatening emergency for the states on the southern periphery of the European Union – and for the European project as a whole. 
This was statecraft at its worst, for which most of the blame can be laid at German Chancellor Angela Merkel’s door. 
Indeed, prior to the European summit in Brussels in December, the stock of trust in the European Council had become so depleted that no one seemed to take its decisions seriously. 
Of course, it could be that the United Kingdom’s veto of the summit’s proposed changes to the EU’s Lisbon Treaty drowned out all else, while further increasing distrust on the part of the public and financial markets of a divided Europe. 
But talk about an EU split is nonsense. 
No British prime minister could consent to a treaty change to create a fiscal union without having to call a referendum at home, the outcome of which would force the UK to withdraw from the EU. 
And no EU leader in his or her right mind could have any interest in that. 
The UK has every interest in ending the crisis and preserving a strong euro, just as Europeans on the continent need the British inside the EU. 
So it has been clear for months that a legally binding basis for moving toward a European fiscal union, while indispensible, could only take place outside the framework of the Lisbon Treaty, namely on an intergovernmental basis and as an EU-17 or EU-17+, as has just happened. 
Moreover, alarmist talk of a “split” overlooks the reality that the EU and the monetary union have long been moving at different speeds. 
The British veto, and the hullabaloo that it caused, is thus something that Europe could have done without, and Cameron will soon be sorry that he offered himself up as a hostage to his Euroskeptic backbenchers. 
Strengthening them will drastically weaken the UK’s influence in the EU. 
That is all the more true because the Brussels summit flung open the door to a fiscal union for the EU-17+. 
If a new treaty is negotiated by March 2012 and ratified in the following months, the EU will have taken a remarkable step forward – indeed, only one step away from a real political union, which will have to follow if Europe is to end the crisis for good. 
And yet confidence in the recent decisions taken in Brussels remains low, owing not only to dissipated trust and the fuss about the British veto, but also to the apparent absence of measures to intervene in the current crisis. 
But this, too, is a misconception. 
If one reads through the decisions taken in Brussels, one immediately notices that Germany and the EU’s other rich countries received all the stability mechanisms and guarantees that they had previously requested, leaving them no reason to continue to refuse crisis-intervention measures, including appropriate financial guarantees. 
The recent summit in Brussels opened the way to a fiscal union, including both a stability pact and – critically important – a liability pact. 
In Germany, none of this has yet registered at all. 
In the short term, the liability union is to be implemented by the European Central Bank, whose independence will once again be held up as sacred in Berlin, providing a European fig leaf for Germany’s domestic-policy priorities. 
From this point of view, Merkel should be grateful to Cameron for the distraction that he created in Brussels. 
And whom do we have to thank for all this European progress? 
Do we owe it to the wisdom of Europe’s political leaders, particular that of the “Merkozy” odd couple of Merkel and French President Nicolas Sarkozy? 
Unfortunately not: progress resulted almost exclusively from the pressure of the much-maligned financial markets. 
Just as former Italian Prime Minister Silvio Berlusconi was brought down not by political opponents, but by jittery investors, it was the markets, not European leaders, that opened the door to European fiscal and political union. 
That is no cause for celebration. 
On the contrary, it reflects European politicians’ lack of sufficient strategic vision and courage in dealing with the eurozone crisis – and also in regulating the markets. 

Europe’s Military Injustice 
LONDON – The cost of sending troops and military hardware around the world to provide security when and where it is needed is causing major financial headaches across Europe. 
Indeed, Europe’s finance ministries face a dilemma over how much of their stretched national budgets to allocate to the military; and European defense officials must somehow ensure that precious funding is spent in the most efficient manner. 
The problem is acute in Britain, not only because of our current troop deployments in Afghanistan and Iraq, but also because of the unfair systems by which NATO-led missions and military operations under the European Security and Defense Policy (ESDP) are financed. Under both systems, those who accept responsibility to take military action also take on the lion’s share of the financial burden. 
It is time our collective security alliances overhauled these inequitable funding methods and made sure that all member states pay a proportionate price for global security. 
It is no secret that Britain’s Ministry for Defense is facing a funding crisis. 
Despite British forces having been engaged in two major military operations since 2003, defense spending represents only 2.3% of GDP – the lowest since the 1930’s. 
As a share of total government spending, defense expenditure has fallen from 7.8% in 1998 to 6.1% in 2006. 
Owing to the ongoing operations in Iraq and Afghanistan, any future British government will inherit a military that is overstretched, undermanned, and working with worn-out equipment. 
The unfunded liability associated with this will total billions of pounds. 
Better military and financial burden-sharing within both NATO and the ESDP would not only benefit the United Kingdom, but would also help to alleviate some of the pressure on other national defense budgets in Europe. 
We must take full advantage of our organized security structures to ensure that the global security burden is shared in a fair and proportionate manner. 
To date, this has not happened. 
For NATO to work properly, its members must be prepared not only to supply troops and equipment for NATO-led military operations, but also to fund and sustain these operations until missions are completed. 
Instead, certain members now do a disproportionate amount of the fighting, funding, and dying. 
This is not sustainable. 
All NATO countries must understand that membership brings implicit and explicit responsibilities to ensure that their military forces have the capability to fight and win on the modern-day battlefield. 
They must recognize the need to create a sounder financial system for alliance operations. 
There is currently common funding for certain shared costs, such as headquarters, with contributions linked to the member states’ GDPs. 
But the amounts covered by common funding are only a small part of an operation’s total cost. 
All other expenses “lie where they fall”: the more troops and equipment a country contributes to a mission, the more it ends up paying. 
The cost to the UK for its contribution to the NATO operation in Afghanistan, for example, totals £3.1 billion – a heavy burden on British taxpayers. 
Because of the expeditionary nature of today’s military operations, that system is an anachronism. 
Yet fixing the problem is easier said than done. 
NATO has been trying for years – without success – to get its member states to spend the required 2% of GDP on defense. 
Compliance would mean an estimated $67 billion increase in Alliance-wide defense spending, or roughly the equivalent of adding another British or French defense budget – no panacea, but very helpful nonetheless. 
Last April, the leader of the UK’s opposition Conservative Party, David Cameron, explained why we should establish a real operational fund for NATO expeditionary missions, with every member state required to contribute. 
Doing so would provide some reimbursement to countries that currently carry an unduly large part of the burden. 
It would also offer potential funding to countries that might deploy forces but face short-term financial difficulties in meeting the cost. 
The new NATO operational fund would clearly be more equitable than today’s system, which penalizes proactive member states and rewards members that prefer to do nothing. 
Why should the few carry the many? 
Common security implies common commitment. 
Moreover, solving NATO’s burden-sharing problem is not enough. 
The European Union’s crisis management missions face similar issues when military forces are involved. 
EU civilian crisis management is funded directly from the Common Foreign and Security Policy budget. 
But, apart from the common costs of an operation (usually less than 8% of the total), the ESDP uses the same funding method as NATO, which means that the bulk of the money for both ESDP and NATO-led military operations comes out of the same defense pot in each member state. 
So there is no point in fixing one funding mechanism without simultaneously fixing the other. 
Interestingly, there was some discussion under the French presidency about reforming the so-called Athena Mechanism, which is the means used to determine the amount that each EU member state contributes to the common costs of a mission. 
Like the NATO common fund, EU contributions are largely based on GDP. The French also called for the “costs lie where they fall” concept to be abandoned in the name of financial solidarity. 
Any change made to the Athena Mechanism must include reforms to its rules and procedures. 
Currently, non-EU members of NATO that contribute troops to an operation cannot vote – or even be present at votes – when the Athena Special Committee sets the mission budget, even though their troops will fight and possibly die. 
This is discriminatory, undemocratic, and no way to treat important allies like Norway and Turkey. 
Collective security alliances are just that – collective. 
It is time that everyone contributed their fair share to the common good. 

Europe's Military Revolution 
BRUSSELS: Creating the euro – a revolutionary innovation in an EU whose nature is to evolve slowly, by fits and starts – provoked debate across the continent and beyond. 
Plans for a common EU defense policy, however, have thus far attracted less attention. 
No longer. 
Americans increasingly ask: “Why bother?” and point to the efficacy of NATO. 
Europeans often find such questions hard to answer, partly because there is no single answer. 
For believers in a more united Europe, closer cooperation on defense is self-evidently desirable. 
Others emphasize the pragmatic, pointing out that EU members can achieve far more in foreign/defense policy by working together than on their own. 
These pragmatists stress the growing number of external challenges – in the Balkans, Middle East, Africa or elsewhere – requiring a concerted response. 
A third argument, held by some French Gaullists and many EU left-wingers, says that Europe needs a common foreign and defense policy to resist American hegemony. 
This anti-American view, however, is not widely held. 
Supporters of a common EU foreign/defense policy see a Europe capable of looking after its own defense as a better partner for the US. 
Confusion and doubts arise now because of vagueness about the likely uses of the Rapid Reaction Force, a key step in developing these common policies. 
The Rapid Reaction Force, it is said, should be capable of fulfilling the so-called “Petersberg” tasks. 
Yet “peacemaking” (one of those tasks) could cover anything from Operation Alba – which in 1997 saw Italy lead a 6000-strong European force into Albania to suppress anarchy – to an attack on Sierra Leone rebels resisting UN peacekeepers, to Gulf War type conflicts. 
Because all EU governments know that, for the foreseeable future, Europe will be capable of only modest military operations there is no great value in defining now how the Rapid Reaction Force will be used. 
America should welcome the increasing weight and sense of responsibility for Europe as represented by the Rapid Reaction Force. 
True, America’s role in NATO – that ingenious device through which America retains, with Europe’s blessing, an institutionalized influence over the continent – would diminish. 
For NATO would become a framework in which two major powers, instead of one big and 18 smaller ones, coordinate policies and responses to crises. 
The gains here outweigh any inconvenience to America’s freedom to maneuver. 
Enhanced European capabilities would allow America to leave many instabilities in and around Europe in the care of its allies. 
Moreover, adding defense to the informal acquis that would-be EU members must endorse will reduce pressure on NATO to enlarge. 
An EU committed to its own defense, although not offering the same formal guarantees as NATO, offers candidate countries the prospect of belonging to a genuine security community. 
More fundamentally, creation of a Europe whole and free, but also united, is America’s greatest foreign policy success of the past half-century. 
To complete that objective, the EU must become a fully-fledged international actor. 
Thus the challenges posed to America by Europe’s common and defense policy are primarily psychological. 
In Europe, however, those challenges are matters of will and political leadership, which cannot come from committees. 
Here we propose a number of institutional and policy reforms, including: 
· Merging the jobs of Chris Patten, the external relations commissioner, and Javier Solana, the High Representative for foreign policy, so that the EU speaks with a single voice; 
· Giving the new Brussels�based Political and Security Committee higher status to draw together both the inter�governmental and Community sides of foreign policy; 
· Setting a Europe�wide target for national defense budgets, committing all member�states to spending at least 2% of GDP on defense, and 25% of their defense budgets on arms procurement and R&D 
· Creating a special EU defense budget, to finance common missions, capabilities and weapons programs; 
· Establishing a Monitoring Group of force planners, based within the Council of Ministers secretariat, to co�ordinate the peer group pressure that should encourage governments to improve their military capabilities. 
Authority to build coalitions, push governments to fulfill deadlines, generate support or take the blame for failure must come from that traditional source of leadership, the nation state. 
Because no single EU state can provide the dominant leadership America provided NATO during the Cold War, Britain, France, and Germany must assume this role in Europe. 
Were one of them to oppose common action, the cohesion and credibility of any EU undertaking would be destroyed. 
But if these three are determined to push ahead, they will represent the will of most, if not all, other EU members. 
Membership in this group of three entails, not the power to command, but the responsibility to lead. 
If these three fail to agree in a crisis, Europe will be opting out; if united on taking action, Europe will be committed. 
So Britain, France, and Germany must start thinking of the EU as a whole, carrying the greatest burden and taking the greatest risks. 
Their leadership will need to be informal, transparent, and inclusive. 
Unfortunately, at this moment, none is prepared for these unenviable, yet inevitable, tasks. 
But their commitment to Europe’s military revolution is bound to move them closer to fulfilling them. 

Europe’s Misguided “Growth Pessimists” 
Such is the deep pessimism in Europe about the economy that the better the economy does today, the worse people think it will do tomorrow. 
This year has been an excellent one for Europe’s economic growth. 
Yet instead of thinking that the momentum building in 2006 will carry forward and make 2007 an even better year, Europe’s gloomy experts are predicting a significant slowdown. 
For them, it seems out of the question that Europe can have two good years in a row. 
Of course, every year has its growth challenges, and 2007 will be no exception. 
What motivates – or frightens – the growth pessimists, in particular, are (1) higher European interest rates, (2) the slowing US economy, and (3) the increase in the German value-added tax (VAT) from 16% to 19% set for the beginning of the year. 
But they are wrong to be frightened by these factors. 
Fear over the growth effects of the European Central Bank’s 2006 rate increases is based on confusion between real and nominal interest rates. 
By the end of the year, European interest rates will have been raised 150 basis points (to 3.5%, from 2% in January). 
But European inflation is growing at approximately the same rate. 
This means that real interest rates – interest rates measured in terms of goods and services – have stayed the same. 
And it is the real interest rate – not the money rate – that counts for economic growth. 
Europe must ask itself: how can interest rates induce a slowdown in 2007 when real interest rates have hardly budged despite an economically healthy 2006? 
Moreover, because profits are high in Europe, likely future increases in real interest rates needed to ensure price stability easily can be financed out of profits without economic disruption. 
The truth of the matter is that interest rates – both nominal and real – are too low in Europe, not too high. 
As for the United States, plummeting gas prices – an extraordinary 25% decline in roughly one month – have increased consumer confidence and spending at a time when consumers were supposed to be in full retreat because of the housing market decline. 
Moreover, former Federal Reserve Chairman Alan Greenspan says the housing market correction is already almost over. 
Pessimistic Europeans are behind the curve. 
They are bracing for a 2007 US growth slowdown that already has taken place with little consequence for both the US and European economies. 
Of course, falling gas prices are occurring in Europe as well, and this will help take the sting out of the controversial VAT increase engineered by German Chancellor Angela Merkel. 
The German Chancellor has been lucky. 
The falling gas price and Germany’s high profits will “finance” the tax increase, which should prove little more than a speed bump for the German economy, at least if lower gas prices hold into the coming year. 
Indeed, the German government is slowly coming to realize that its pessimism about the economy has been misplaced, which is reflected in continuous “upward revisions” of growth forecasts throughout 2006. 
Recently, the government raised its growth forecasts for this year and next, from 1.6% to 2.3% for 2006, and from 1% to 1.4% for 2007. 
Expect further upward revisions as the government continues to be surprised by the economy’s ongoing strength. 
An important by-product of Europe’s good growth is that it is making the need for structural reform an urgent matter. 
The lack of structural reform of Europe’s labor markets, competitive practices, and so on means that European potential economic growth – its growth ceiling – is lower than it should be. 
With a low growth ceiling, strong economic performance generates inflationary pressures at a relatively early stage in the growth process. 
This makes it hard for Europe to enjoy an extended period of high growth without inflation. 
Premature inflationary pressures are a prime reason that both ECB presidents, the late Wim Duisenberg and now Jean-Claude Trichet, have consistently pressed for structural reform in their press conferences and speeches. 
It is the ECB, after all, that must fight the inflation caused by Europe’s lack of structural reform. 
Growth pessimists have a point if they are wary about Europe’s prospects for structural reform to raise the growth ceiling. 
Europe’s politicians simply refuse to take the lead on this all-important issue. 
They are wrong, however, about Europe’s prospects for achieving its restricted growth potential. 
Europe’s actual economic growth has been quite good and – thanks to low gas prices, low real interest rates, solid profits, and strong growth momentum – promises to get better before the ceiling is hit and inflationary pressures set in. 
Call me a “growth optimist”, but Europe looks poised for another good growth year in 2007. 

Provincial Europe 
BERLIN – Multitasking is not exactly the strong point of Europe’s current generation of leaders. 
They have rightly given the eurozone crisis – the central question bearing on the European Union’s future – top priority. 
But all other important issues – above all, a common foreign and security policy – have been almost completely ignored. 
And it is here – Europe’s external relations, an issue absolutely vital to the future of all EU citizens – that renationalization is rearing its ugly head again. 
Today, we can recognize the outlines of a post-American international (dis)order – not only its emerging structures, but also its risks, threats, and conflicts, all of which are intensifying. 
For Europe – and for the rest of the world – the financial crisis has proven to be an accelerant of far-reaching changes. 
In East Asia, the world’s most dynamic and dominant region in terms of future global economic development, confrontation is escalating between the key powers – China, Japan, South Korea, and Taiwan – over border issues, territorial claims, prestige, and unfinished historical business. 
Add to this the perennial crisis on the Korean peninsula and the Taiwan conflict, which could flare up again anytime. 
East Asia’s regional powers operate almost without any multilateral framework, a state of affairs comparable to that of Europe toward the end of the nineteenth century. 
Only the United States’s military and political presence ensures regional stability. 
Yet, at least in the medium term, that presence implies a significant risk of inciting a global confrontation between China and the US. 
Moreover, Russia – which extends to East Asia, but, owing to its economic and political weakness, has been a background player there – would certainly seek to benefit from this development. 
Europe, however, will play no part in the region, simply because any attempt to do so would place too much strain on its reach and resources. 
Yet, given Europe’s growing economic dependence on East Asia, its interests are massively engaged – a mismatch that could cause the EU considerable discomfort in the medium term. 
The same is true, to varying degrees, of Europe’s relationship with South Asia; but here the India-Pakistan conflict, a looming “post-American” Afghanistan in 2014, and uncertainty concerning Iran and the Persian Gulf have a direct security impact on the EU. 
This is where discomfort meets danger. 
Russia, under Vladimir Putin’s third presidency, has made its choice. 
Under the banner of a “Eurasian Union,” and relying on the renationalized oil and gas sectors as both a carrot and a stick, the Kremlin wants to tie as many of the former Soviet territories as possible to the Motherland. 
At the center of this policy is Ukraine, the linchpin of Europe’s post-Soviet order. 
Yet Putin is caught in a fundamental contradiction. 
His Great Russia policy requires economic strength, and therefore successful modernization of the country. 
But, to achieve this, he must encourage reforms that would lead to a strong middle class, which, as can already be seen in Russia’s big cities, opposes Putin’s clientilist “guided democracy” and the massive corruption that comes with it. 
Putin’s dilemma poses a real challenge for the EU and the US – but also an opportunity, if they choose significant long-term engagement. 
On both sides of the Atlantic, however, ignoring the issue seems to have been mistaken for a policy. 
That is a grave oversight, for it is clear that Russian foreign policy has again taken a provocative and confrontational turn. 
Russia remains a steadfast supporter of Syrian President Bashar al-Assad, and is not shying away from conflict with Turkey, or from forging a de facto alliance with Iran, in order to defend the Assad regime. 
Together with the war clouds hovering over the Iranian nuclear program, the failed Israeli-Palestinian peace process, and radical political change throughout the wider Middle East, the conflict in Syria shows that Europe’s southeast will continue to be a major security challenge. 
Yet, despite Russia’s ambitions for reshaping its neighborhood – and despite decreasing US involvement in the Middle East – Europe is hardly prepared to act. 
Clearly, the relationship between Turkey and the EU needs its own “reset.” 
Otherwise, both sides will find themselves among the losers. 
Turkey is currently confronting the limits of its possibilities, while the EU finds that it can do very little in this region without Turkey. 
And, to Europe’s immediate south, across the Mediterranean, new risks are emerging in the vastness of North Africa and the Sahara, including the threat of an Al Qaeda state in northern Mali. 
If one adds to this European sketch of global development the fact that, whatever the outcome of the US election, America will shift its strategic focus to East Asia (and otherwise mainly look after itself), nearly everything cries out for a robust EU foreign and security policy. 
Unfortunately, exactly the opposite is happening: here, too, renationalization is uppermost in the minds of Europe’s peoples and decision-makers. 
In Berlin, the question asked more and more often is, “What does this mean for Germany?” rather than, “What does this mean for Europe?” 
The same is true in other European capitals. 
But the wrong question leads to wrong answers, because Europe’s security interests can be defended only within a European and Western context, not at the national level. 
That is why it is high time for Europeans to abandon their provincialism, launch a common foreign policy worthy of the name, and finally start to invest properly in their future security. 

Europe's Modest Mission 
On May 1, ten new nations joined the European Union, pushing its membership up to 25. 
Two more countries, Romania and Bulgaria, are in the process of negotiating entry, and another, Turkey, is knocking at the door. 
But, beyond the celebrations of the most recent enlargement round and preparations for the next one, it is time to ask what effect the enlarged EU will have on world affairs? 
How should - and will - the other member states of the United Nations view this event? 
In order to understand the importance of what is happening, we must begin by ridding ourselves of the curse of our times. 
We are permanent - if consenting - victims of current events, of what is happening at any particular moment. 
Television shortens our horizons. 
No one thinks anymore about the long term. 
But it is only in the long term that the European project is really important. 
It is important for two reasons, one concerning its implications for peace and human rights, the other concerning its impact on commerce and development. 
The history of humanity is only around six thousand years old, and yet it includes some ten thousand wars. 
The European continent played a large part in this historical carnage - much greater, proportionally, than the rest of the world, given the time during which the European continent was in fact populated. 
But now we have in the EU an organic system that makes war virtually impossible on the European Continent and reconciles the peoples who live here. 
In 1945, the Germans and the French liked each other about as much as Serbs and Bosnians do today. 
But the Germans and French are now married within the Union. 
Europe is now poised for similar reconciliations elsewhere. 
For seven centuries, Hungary and Romania have been engaged in wars over territory and peoples. 
Hungary is now an EU member, and Romania is poised to join (though its membership is a bit delayed because of a lagging domestic reform process). 
Poland has known a thousand years of wars with its neighbors. 
Today, it is secure. 
The European venture is immense. 
The assurance given to the world that wars will no longer originate in Europe represents a formidable reversal of history. 
All these European states are not merely at peace with one another; they also all respect human rights. 
The other element of historic significance is the unified internal market of the extended European Union. 
It is a market with merciless rules in terms of competition, but also with principles and mechanisms of internal solidarity that commit the economically more developed members to help the less advanced countries to overcome their structural handicaps, and a common commercial and customs policy vis-à-vis the external world. 
The results of this "competitive solidarity" are huge. 
Ireland, Portugal, and Greece have experienced spectacular development; the poverty that bound them for generations has practically vanished. 
The ten new countries will now take the baton and begin to banish poverty. 
The EU is an exceptionally important precedent in another way. 
No great economic power in history has been born without force - until now. 
European law will be enough to impede any global giant - be it Japanese, European, or American - that might otherwise establish domination of the world in any sector of the world economy. 
Microsoft will no longer dominate control over the diffusion of knowledge in the world. 
But there is a price to be paid for this progress. 
The historical and strategic sensibilities of all the countries assembled in the new Europe are so different that they cannot have a common foreign policy. 
People kill each other in Somalia, Rwanda, ex-Yugoslavia, and the Middle East without Europe being able to do anything about it. 
Experience has spoken: we have to abandon today the dream of federal Europe as a counterpoint to the United States; the majority of Europeans don't want this. 
Far from being a single nation in the process of formation, Europe is only a space of proximity governed by democratic norms and a shared rule of law. 
But that is already a lot. 
While the mission of this space may not be enough to shift the balance in world affairs, it can help spread peace, respect for human rights, and efficient and respected rules governing global commerce. 
If one remains aware of this, and if one does not attempt to impose on the Union the disagreements that America's current leaders and policies incite, an obvious conclusion comes to mind. 
The area of peace that is Europe is bound to grow further in the future, first to Ex-Yugoslavia, then to Turkey, then one day to the Middle East and the Islamic world. 
In assuring peace and development, Europe will have served humanity well. 

Europe's Moment in Iraq Has Arrived 
The formal end of America's occupation of Iraq, with sovereignty transferred to an Iraqi government, provides Europe with a chance to play a serious role in determining the future of that vital nation. 
The European Union must get off the sidelines and act, both to assure that the transitional government holds elections and creates a viable Iraqi state, and to preserve Europe's own interests and values in the region. 
The total failure of the Bush administration's Iraq policy has opened the door for Europe to offer a serious alternative vision for Iraq's future. 
But what should European opponents of the war, having seen their worst fears confirmed, propose? 
Of course, it is tempting for Europe not to propose or do anything, and simply wait for the Iraqi crisis to sweep John Kerry into the White House and George Bush back to Texas. 
But America's misfortune - and Iraq's - is inimical to European interests. 
A policy of "the worse the better" is simply not acceptable: it mirrors the cynicism that the US administration is rightly criticized of adopting. 
The EU should present its own policy proposal in the context of the debate now taking place within the UN, and it should outline the conditions that the US would have to accept if it truly wants to find a way out of the crisis and ensure active European involvement. 
This requires that Europe's proposal be universally understood and embraced. 
Only a common European position - Britain included - has any chance of influencing the Bush administration. 
Those who believe that "preventive" war is the worst possible medicine should show that there has always been an alternative based on the principles and regional options that led them to oppose the military intervention in Iraq. 
That intervention exemplifies the failure of the "wounded beast" theory of diplomacy, according to which the US could do anything after the terrorist attacks of 2001, with the ends justifying the means. 
The senseless intervention in Iraq and the torture of prisoners in Guantánamo, Iraq, and Afghanistan follow the logic of this theory. 
But a policy based on arrogance cannot create conditions that support building democracy in Iraq or effectively combating terrorism. 
In the case of both policies, efficacy is synonymous with legitimacy, which is thus an essential condition for success. 
This was as true yesterday as it is today. 
To resolve the Iraqi crisis and to consolidate a democratic system effectively means that the neo-conservative vision of imposing democracy will have been defeated. 
Europe cannot once again remain passive in the face of an issue that is of such crucial importance for the international order, especially one that is in its own neighborhood. 
At the same time, however, Europe cannot become politically engaged without the right political conditions in place. 
If the EU accepts a merely cosmetic change in US policy, not only will it fail to contribute to resolving the crisis, but its actions and image will also be contaminated by the anti-Americanism that dominates the region. 
The first condition for European engagement, and the only guarantee of domestic legitimacy, is that the new transitional Iraqi government be politically independent of the US-led Coalition. 
Only this will ensure the support of the main Iraqi political forces. 
But this is also the hardest requirement to meet, because it means accepting the leadership of moderate Islamist parties and creating a consensus between the latter, the Kurdish parties and secular nationalists. 
Once domestic legitimacy has been achieved, international legitimacy can be generated by the UN's assumption of a truly leading role in managing all aspects of international support in Iraq (political, economic, and security related). 
The UN can begin to adopt this role by organizing an International Conference for Iraq that involves the Arab nations. 
There can be no meaningful reconstruction or appropriate conditions to hold elections without security (Europe already contributes €200 million annually to reconstruction). 
The US must remain militarily involved - although it is the problem there today, it must also be a vital part of the solution. 
But security cannot remain essentially in the hands of the Coalition. 
The US must ultimately accept an East Timor-style solution for Iraq. 
What does that mean? 
Initially, Australia guaranteed security in East Timor after its independence from Indonesia, and later accepted that it should continue to play a major role, but within a UN framework and under UN command. 
It is possible that Europe could build up a strong presence in Iraq, including a military presence, if a future democratically elected Iraqi government should request it. 
Finally, as stated repeatedly since the start of the war, there can be no success in Iraq without a strong Israeli-Palestinian peace initiative. 
A European plan for Iraq must call for international intervention to enforce the Geneva accords through a process along the lines of the Dayton Agreements that ended the Bosnian war. 
It remains to be seen whether the Bush administration, in the midst of an election, can be called to reason and persuaded that only a policy along the lines I have outlined stands a chance of stabilizing Iraq. 
If the Bush administration will not change course, that is all the more reason for Americans to change their president. 

Europe’s Moment of Decision 
BRUSSELS -- Is amnesia an integral part of politics? 
When it comes to the treaty to reform the Union’s institutions, which will be finalized in November, recent events suggest that amnesia does play a central role. 
Let’s examine the “illness” that leads certain EU leaders with questionable scruples to forget even the recent past. 
Busy with domestic political affairs, they do not hesitate to use Europe as a scapegoat to avoid breaking bad news to their fellow citizens. 
Some display separatist tendencies that worry, and frustrate, their electorates. 
No surprise, then, that many EU citizens refuse, or at least hesitate, to embrace the European cause. 
This form of political racketeering may win elections, but it sabotages any opportunity to experience, or to perceive, politics as a process that can contribute to global development. 
Consider Gordon Brown, Britain’s new prime minister, according to whom globalization strips the European project of any meaning, a form of political autism that in fact will prevent the EU from adapting to change and from being able to find solutions to globalization’s challenges. 
Fortunately, openly anti-European political programs are not the norm, at least not yet. 
In fact, if, on the eve of the 2009 European Parliament elections, the new Reform Treaty enters into force, each member country will be forced to clarify and justify its position. 
The Treaty will be essential not only to the proper functioning of Europe’s institutions, but also to their further “deepening” – something that many call for without necessarily really wanting to achieve. 
Thanks to “reinforced cooperation,” recalcitrant states will no longer hinder those seeking to make progress, and could even resort to an “opt-out” process and “liberate” themselves from the EU, perhaps by means of a referendum. 
Then there are those who believe that EU enlargement has prevented greater “deepening,” and who, with scant regard for the past or the future, argue that pursuing the latter requires abandoning the former. 
But who can reasonably claim to know what shape the EU will need to take to meet the challenges of the next 50 or 100 years? 
Already, issues like climate change and energy supply demonstrate the futility of isolated national action and the critical importance of both deepening and enlarging the EU. 
Having suffered from disruptions in oil and gas supplies following disputes between Russia and Ukraine and then Belarus, the EU’s members have finally understood that their survival depends on their capacity to diversify their energy sources. 
Further EU enlargement is undoubtedly in Turkey’s interest, and in Europe’s, too. 
In addition to the constructive role that Turkey could play, especially in the Middle East, its membership is vitally important in terms of energy. 
Moreover, admitting Turkey would demonstrate the EU’s political consistency, while representing a qualitative step forward in the European project. 
For politicians like French President Nicolas Sarkozy, such considerations may be meaningless. 
But what if Turkey were to abandon its European ambitions and align itself strategically with Russia or even Iran? 
The consequences for European security would be severe. 
Then there is Britain’s political leadership, for whom enlargement is a way to avoid deepening, and, indeed, to dissolve political Europe. 
While such ideas are not for everyone, certain Continental countries secretly prefer Britain’s disjointed scenarios, with some heads of governments even considering their countries’ commitments reversible. 
What, for example, should we make of Poland’s governing Kaczynski brothers? 
The quick-tempered twins took issue with the reform treaty’s proposed voting system for the Council of Ministers, and then stole the limelight from papacy with their own homophobic declarations, proclamations that seem to exclude any possibility of integrating the EU’s Charter of Rights into Poland’s domestic law. 
Russian President Vladimir Putin may be the only one who welcomes this desertion from Europe’s community of values. 
In this climate, Dutch Prime Minister Peter Balkenende, still bogged down in his country’s “no” vote on the EU’s draft constitutional treaty in 2005, has been seeking to win British, Czech, and Polish support for measures to make it possible to diminish the EU’s areas of responsibility. 
Indeed, he may not even object to ruining the EU’s entire legislative engine by granting national parliaments a veto. 
What we Europeans now need most of all is to embark on precisely the opposite course. 
Only by enlarging the scope of EU decision-making, backed by the commitment of equally responsible partners, can Europe meet the shared challenges of a common future. 

Europe’s Monetary Cordon Sanitaire 
WASHINGTON, DC – German Finance Minister Wolfgang Schäuble likes to criticize other governments, including that of the United States, for their “irresponsible” policies. 
Ironically, it is the German government’s loose talk that has brought Europe to the brink of another debt crisis. 
The Germans, responding to the understandable public backlash against taxpayer-financed bailouts for banks and indebted countries, are sensibly calling for mechanisms to permit “wider burden sharing” – meaning losses for creditors. 
Yet their new proposals, which bizarrely imply that defaults can happen only after mid-2013, defy the basic economics of debt defaults. 
The Germans should recall the last episode of widespread sovereign default – Latin America in the 1970’s. 
That experience showed that countries default when the costs are lower than the benefits. 
Recent German statements have pushed key European countries decisively closer to that point. 
The costs of default depend on how messy things become when payments stop. 
What are the legal difficulties? 
How long does default last before the country can reach an agreement with its creditors? 
How much more must it pay for access to debt markets later? 
The benefits of default are the savings on future payments by the government – especially payments to non-residents, who cannot vote. 
This obviously depends in part on the amount of debt outstanding, the interest rate, and the country’s growth prospects if it continues to pay. 
Countries that are near the point where “can’t pay” becomes “won’t pay” have high interest rates relative to benchmark “safe” debt issued by other governments, because even small shocks can shift the balance for decision-makers towards default. 
But these interest-rate spreads make the benefits of non-payment greater, so the same shocks can send a country quickly into default. 
Seen in these terms, it is clear why the German government’s proposed debt-restructuring mechanism immediately shifts weaker eurozone countries towards default. 
As Chancellor Angela Merkel and her colleagues promote their well-defined plan – which comes in addition to a plan for bridge financing while in default – the cost of default falls. 
Moreover, the benefits rise, because the restructuring clauses required for new debt, together with Germany’s highly visible efforts to avoid future government bailouts, raise the interest-rate spreads that weaker countries must pay today. 
Bond-market participants naturally turn now to calculating “recovery values” – what creditors will get if countries default today. 
For example, Greece’s debt stock, including required bridge financing under the IMF program, should peak at around 150% of GNP in 2014; much of this debt is external. 
If a country can support debt totaling 80% of GNP (a rough but reasonable rule of thumb), then we need approximately 50% “haircuts” on this existing and forthcoming debt (reducing it to 75% of its nominal value). 
However, of this 150% of GNP, at least half is or will be official in some form. 
If it is fully protected, as seems likely (the IMF always gets paid in full), then the haircut on private debt rises to an eye-popping 90%. 
And this leaves out government spending that may be needed for further recapitalization of Greek banks. 
For Ireland, too, sovereign debt, including bridge financing, will rise close to 150% of GNP by 2014, and is mostly external. 
But a sovereign default would require a much larger bank bailout than in Greece, potentially leaving private debt almost worthless if official debt has seniority. 
Total haircuts don’t happen historically – except in the wake of communist takeovers – but it is hard to imagine that private creditors won’t suffer huge losses in net present value. 
Given this, we should expect Greek debt yields to rise further, despite the current IMF program. 
Likewise, an IMF program for Ireland – which seems increasingly likely – will not bring down domestic bond yields and reopen credit markets to any kind of Irish borrower. 
If people start to think this way, Portugal, whose already high and growing debt is held largely by non-residents, becomes a candidate for default as well. 
In that case, it makes little sense to hold Spanish debt, either, which is also mostly external. 
Spain’s financial exposure to Portugal and its housing-led recession don’t help matters. 
And, if Spain is at serious risk of default, government solvency is at risk throughout the eurozone – except in Germany. Perhaps Italy can survive, because most of its debt is held domestically, which makes default less likely. 
But the size of Italy’s debt – and of Belgium’s – is worrisome. 
Given the vulnerability of so many eurozone countries, it appears that Merkel does not understand the immediate implications of her plan. 
The Germans and other Europeans insist that they will provide new official financing to insolvent countries, thus keeping current bondholders whole, while simultaneously creating a new regime after 2013 under which all this debt could be easily restructured. 
But, as European Central Bank President Jean-Claude Trichet likes to point out, market participants are good at thinking backwards: if they can see where a Ponzi-type scheme ends, everything unravels. 
In effect, the European Union and the ECB are now being forced to return with overly generous support to the weak countries – including buying up all their debt, if necessary. 
Otherwise, a liquidity run would create solvency problems for all the big eurozone debtors. 
Drastic action is needed to prevent European bond markets from drying up. 
Trichet has said repeatedly that current ECB interventions do not target interest rates. 
So the ECB should decide which countries are inherently solvent, and then protect them against a liquidity squeeze with new, scaled-up interventions that do target interest rates. 
At a minimum, the ECB will probably need to match the $1 trillion annual US rate of quantitative easing, and front-load much of it. 
The euro will fall, and Trichet will miss his inflation target. 

Europe’s Myopic Defense Cuts 
COPENHAGEN – All over Europe, budgets are being pared as a new age of austerity takes hold. 
Defense expenditures are proving to be the easiest of targets. 
Even Britain under the Tory David Cameron has joined the rush to slash defense spending. 
These cuts are coming at a time when European efforts to shoulder a fair share of the Western defense burden have been cast in doubt – not least in Afghanistan, where most European countries have limited their participation by insisting on a myriad of “caveats” that usually serve to keep their troops far from the most dangerous zones. 
Defense cuts are also happening at a time when Europe, for the first time in modern history, has been overtaken by Asia in terms of total defense spending. 
Western Europe’s long-held position as the world’s most important concentration of military power after the United States and Russia appears to be over. 
The US faces no serious challenge (not yet, at least) as the world’s dominant military power. 
After all, the US spends almost as much on its armed forced as the rest of the world combined. 
But the picture is changing with the rapid growth of China’s military expenditures. 
The official growth rate of China’s military expenditure – 15% per year over the last decade – has increased substantially, and there is much hidden military spending as well. 
Growing anxiety among China’s neighbors, particularly India, has led to remarkable increases in defense spending by other Asian powers as well. 
Cuts in European defense spending, moreover, are starting to cause serious tensions within the Atlantic Alliance. 
NATO is often described as a construction with two pillars and an architrave symbolizing the common values that form the basis of the alliance. 
But even during the Cold War, Americans often pointed out that the European pillar was lacking. 
Greater “burden-sharing” was a rote American demand. 
This debate may soon heat up again, now that the US, no less than Europe, is faced with grave budgetary problems. 
Indeed, in a time of austerity, US politicians might find it difficult to understand Europe’s willingness to cut defense budgets that already total far less than NATO’s official 2%-of-GDP target. 
Europe’s problem is not only a lack of military spending, but also poor effectiveness when it comes to the purpose of that spending: the use of force when and where necessary. 
Europe’s capability of deploying combat forces is simply too small relative to the number of men and women in uniform. 
It is often half-jokingly pointed out that the number of generals and admirals in some European countries (none mentioned, none forgotten) is glaringly disproportionate to the number of fighting troops. 
European military effectiveness is also curbed by different procurement policies, as those countries that produce military hardware prefer to keep orders at home. 
This is true of weaponry as well as logistical capabilities, where, despite immense efforts over the years to get more out of the shrinking funds, there is still great potential for integration and standardization. 
The defense treaties concluded recently by France and the United Kingdom appear to be a good example of what can be obtained through greater cooperation and integration – even though it is a strictly bilateral affair with no direct links to either NATO or the European Union. 
But the value of the new “Paris-London Entente” will be limited if both countries cut their defense expenditures so much that their combined strength remains at best unchanged. 
That Britain plans to fund construction of a new aircraft carrier, but not the planes to fly off of it, suggests that resources for the new entente will be sorely lacking. 
Still, French-British cooperation if it does take on real substance could be an inspiration to others, though the challenges to making the agreement viable are formidable. 
British “Tommies” have to learn to speak French, and French legionnaires will have to learn English – and the limits on the spirit of cooperation will no doubt be found at the entrance to every army, navy, and air force canteen. 
After all, can anyone imagine French sailors eating “spotted dick” or any other culinary peculiarity of the Royal Navy? 
Somewhat more promising is the possible invitation to India to participate in developing, alongside France, Germany, and Britain, the new joint Euro-fighter. 
India’s commitment to defense spending, and its desire to acquire advanced military production processes, may provide the kind of energy that Europe has been lacking. 
But with Germany’s Luftwaffe planning heavy cuts to its procurement of Euro-fighters, India may have second thoughts about taking part in the project. 
The kind of energy and commitment to defense spending that India represents needs to be injected into Europe, because European rhetoric about playing a strategic global role remains in high gear. 
But it seems ages since a Belgian foreign minister (as chairman of the EU Council of Ministers) declared at an ASEAN meeting in Singapore in 1993: There are now only two superpowers left, the US and Europe! 
If Europeans want their ambitions to be taken seriously, they must find ways to deal with the decline in Europe’s military power. 
Political leaders will have to tell their constituents that there are limits to how much military budgets can be cut, as the “peace dividend” from the Cold War’s end was digested long ago. 
Europeans may have to embrace new modes of cooperation among their national armed forces in order to put them to effective use. 

Europe’s Necessary Union 
BRUSSELS – The consequences of Europe’s debt crisis are all too present throughout much of the European Union, as distressed economies attempt to stabilize and grow at the same time. 
Notwithstanding the important decisions taken over the last couple of years, the reality is that we need to do more to tackle the challenges facing the eurozone. 
Reform and consolidation measures are being implemented across the EU. 
Joint financial backstops have been put in place. 
And the European Central Bank has consistently shown that it will stand by the euro. 
Yet experts and partners often underestimate our determination. 
All of the steps taken so far have resulted in more European integration, not less. 
It is true that sometimes decision-making in our democratic system takes time. 
But do not misjudge us: the negotiations are about the arrangements, not about the final outcome. 
There is sufficient political will in the EU to do whatever is necessary to protect the euro, because the future of the single currency will determine that of European integration. 
The additional measures that Europe needs must be firmly rooted in a commitment to deeper integration. 
High levels of sovereign debt, together with the behavior of parts of the financial sector, have amplified the crisis in the eurozone and raised important issues of confidence that now require a systemic answer. 
That is why we must complete the unfinished business of economic and monetary union – and why the European Commission has long argued for the creation of a banking union as an indispensable step toward that goal. 
The Commission’s upcoming proposals are part of a broader package leading to economic, fiscal, and political union that will redefine the boundaries of European integration. 
The crisis has starkly revealed the insufficiencies of existing banking supervision. 
We must go beyond cooperation and establish an EU-wide supervisory authority, particularly in the eurozone. 
The link between sovereign debt and bank debt has to be broken once and for all. 
We must end the vicious circle whereby the use of taxpayers’ funds – more than €4.5 trillion ($5.7 trillion) so far – to rescue banks weakens governments’ budgets, while increasingly risk-averse banks stop lending to businesses that need funds, undermining the economy further. 
Europe can stop this negative dynamic now with bold action. 
A single rulebook for financial services is being put in place for the single market. 
Building on this, a single European banking-supervision authority would open the way to direct recapitalization of banks through the European Stability Mechanism, as well as to common deposit insurance and a single resolution framework. 
On September 12, the Commission will present its proposals for a Single Banking Supervisory Mechanism based on three key principles: 
Single supervision: Within the eurozone, coordination between national supervisory bodies is no longer enough. 
Risks that emerge in one country can affect the entire currency area. 
Common banking supervision is needed for strengthening confidence among countries using common financial backstops. 
Credibility: The eurozone’s new banking-supervision mechanism will have the ECB at its heart. 
The choice of tasks to be entrusted to the ECB will ensure rigorous, high-quality, and equal prudential supervision of eurozone banks, thereby contributing decisively to maintaining confidence between the banks – and thus increasing financial stability throughout the eurozone. 
Close cooperation with national supervisors will be built into the framework. 
The ECB’s supervisory role will be fully separated from its monetary-policy responsibilities. 
In parallel, the European Banking Authority will continue to perform its existing tasks, namely developing the single rulebook for the entire single market and ensuring convergent supervisory practice throughout the EU. 
Broad coverage: All banks in the eurozone will be covered by the new European supervisory system. 
And we will need to bridge the gap between eurozone members and EU members that remain outside the monetary union, some of which may want to participate in the new supervisory mechanisms. 
The road that we have decided to follow will allow for swift action. 
The Single Banking Supervisory Mechanism does not require a treaty change and should be in place by January 2013. 
Common and more integrated supervision is the first step towards a banking union. 
Next, the Commission will build on our current proposals for deposit-guarantee schemes and bank resolution mechanisms to move toward a single resolution fund and a single resolution authority. 
Once these proposals are implemented, the banking union will be complete. 
Establishing a banking union by 2013 will not give Europe a magic wand with which to wave away the economic crisis overnight; but it is a major and crucial step to restoring the confidence of Europe’s citizens, international partners, and investors. 
It will ensure financial stability, increase transparency, make the banking sector accountable, and protect taxpayers’ money. 
Moreover, it is the start of something much bigger. 
Once again, I would like to stress that the eurozone is drawing lessons from the past and defining a way forward, not backwards, in terms of integration. 
That is good news not only for the euro, but also for the global economy. 

Europe’s Neo-Liberal Challenge 
For over 20 years I have argued that Western Europe’s high unemployment rates are unsustainable. 
At the end of the 1970’s, monetarists bet that only a transitory and modest increase in unemployment could rein in the creeping – and trotting – inflation of the industrial west, and that in retrospect the cost of returning to effective price stability would be judged worthwhile. 
In Britain and the United States, this monetarist bet turned out well. 
In Western Europe, it did not. 
Over the past 25 years in Europe, unemployment rose as monetary policy was tightened and interest rates were raised to fight inflation. 
But after inflation succumbed, unemployment did not fall – or not by much. 
If unemployment was not stuck quite at Great Depression levels, it remained high enough to make long-term joblessness or the fear of long-term joblessness a defining experience. 
Societies in which the official unemployment rate stands at 10% or more for generations are societies in which government economic management has failed. 
So, for 20 years it has seemed to me that Western Europe’s underlying political equilibrium – corporatist bargaining and ample social insurance, on the one hand, and tight monetary policies, on the other – must crack. 
Twin fears appear to be paralyzing European policymakers. 
Europe’s central bankers fear that their political masters will order them to loosen monetary policy, that the structural reforms needed to free up aggregate supply will not be forthcoming, and that the result will be a return to the inflation of the 1970’s. 
In short, they fear that all of the sacrifices made for price stability will have been in vain. 
West European politicians, for their part, fear the opposite outcome. 
They worry that even after undertaking structural reforms to reduce the attractiveness of unemployment benefits and increase the ability of workers to move to jobs and of firms to move to workers, central bankers will continue to insist on tight money. 
In short, they fear that, with no expansion of output or employment, the net effect will simply be an increase in poverty. 
Of course, these fears are accompanied by the hope that structural reforms and monetary expansion work in harmony, boosting employment and output without raising inflation by much. 
But the reality is that steps toward looser monetary policies are non-existent – especially with the fledgling European Central Bank anxious to establish its inflation-fighting credibility – and that steps toward structural reforms are half-hearted, hesitant, and small. 
For 20 years, I have been wrong: West European polities have remained stable despite the exclusion of a large proportion of citizens from meaningful participation in much of economic life. 
West European economies have continued to grow – albeit not as rapidly as they might have – despite bearing the heavy burden of the unemployed 10% or more of the labor force. 
Now, though, it looks like I may finally be right – or at least right to worry, if not to panic. 
The French rejected the European Union constitution, primarily – or so it appears – because further European integration, it is feared, must bring in its wake the huge costs and disruptions of neo-liberalism. 
It is one thing to back the “European project” when the idea is to bind Germany so tightly to France that never again will anybody think it worthwhile to wage a war over what language is spoken in Alsace-Lorraine. 
It is another when the European project means that French workers face competition from Polish plumbers, Romanian farmers, and Turkish shop clerks. 
In Germany, the electorate seems poised to eject Chancellor Gerhard Schroeder out of discontent with his tepid allegiance to the neo-liberal project. 
The problem is that the electorate will then get four years of rule by a chancellor, Angela Merkel, whose commitment to the neo-liberal project is almost as strong as mine. 
I think that Germany would be better off in a decade under more neo-liberal policies. 
But this does not seem to be what the German electorate wants, and this makes the complexion of German politics four years from now incalculable. 
Coupled with all this is northern European discontent with the central bankers, specifically with the ECB and the euro. 
It is not that the end of European Monetary Union is on the agenda; it is merely that people have begun thinking about possible low-probability futures in which the end of EMU might be placed on the agenda. 
That is enough to shake asset prices worldwide. 
Western Europe’s accomplishments since World War II are among the most heartening and impressive success stories in world history. 
Everyone should want today’s undivided Europe to build on these accomplishments, rather than for generations of high unemployment to jeopardize them. 
But this will require a shift in the ECB’s attitude. 
Europe needs a monetary policy that views aiding employment growth in northern Europe as more important than continental price stability. 
There will, after all be inflation in southern and eastern Europe – there must be, for as regions develop and industrialize their terms of trade must improve, and under a monetary union regional inflation is how this can happen. 
The ECB should not try to balance inflation in the south and east with deflation in the north in order to hit artificial continent-wide targets. 

Europe's Never-Ending Constitution 
On October 29, leaders of the European Union will gather in Rome to sign the Union's new Constitutional Treaty. 
Praise for the document's uniqueness will undoubtedly be heard, and in this they won't be boasting, because the EU Constitution is unlike any other constitution ever written. 
Most constitutions - including the American one - aspire to "freeze history," or to set up a lasting institutional order that will resist the winds of change. 
Indeed, a constitution is by its nature an attempt to "tame" history, to make it follow the laws of man rather than its own logic, including unwelcome contingencies and the whims of fate. 
By contrast, the EU Constitution is written with the unspoken understanding that the institutions it is setting up are transitory, that they are far from optimal, and that it would be desirable to change them right now if political realities allowed it. 
But the realities of politics in today's Europe do not allow for the sort of document the signatories really wanted to draft, so the constitution that they did write is designed to establish a process of evolutionary change that will motivate further improvements along the way - improvement that will, it is hoped, one day obliterate the very arrangements today's EU Constitution is setting up. 
Indeed, from the start, the architects of the Union's Constitutional Treaty never seriously expected that their draft would endure in the form in which they wrote it. 
Instead, they saw themselves as following Europe's long established pattern of step-by-step integration. 
This pattern began at the start of the 'European project' over half a century ago. 
Spillover effects from the original Coal and Steel Community of the 1950's led to the creation of the European Economic Community, then to the European Community, and finally to the creation of the Union. 
Each step led to progressively greater integration. 
Even milestone documents such as the Single European Act and the Treaties of Maastricht, Amsterdam, and Nice, were never envisaged as achieving the kind of permanence (or even semi-permanence) that we normally associate with a constitution. 
The same is true of developments like the Union's common foreign and security policy or Monetary Union, with its Euro and European Central Bank. 
No sooner did one intergovernmental conference produce a "settlement" than the wheels started turning to prepare for a successor conference and a successor settlement. 
This mechanism for the deliberately progressive construction of a unified polity out of nominally sovereign states is unprecedented in human history. 
When nations embark on a program of ever closer integration, the end result is always likely to look unfinished if they put aside - on an ongoing basis - any resolution of the ultimate destination. 
Indeed, the only thing that seemed clear from the start of the European integration process was that the states involved - along with whatever new partner states they might pick up along the way - would continue wheeling and dealing to construct their ever more integrated polity. 
As a result, every set of treaty amendments was the product of the type of untidy political haggling typical of intergovernmental decision-making. 
Indeed, even under the Constitutional Treaty, all states know that their partners have the express right to withdraw if they should ever become sufficiently disenchanted or come to look upon the EU as a bad bargain. 
But will the Union's new Constitutional Treaty put an end to this pattern of evolutionary constitution building? 
It may do so to some degree, but not nearly as much as if the treaty's architects had done more to separate constitutional matters, such as the Charter of Fundamental Rights and the competences of Union bodies and member states, from the stuff of everyday politics, like agricultural and fisheries policies or the technicalities of judicial cooperation in civil and criminal matters. 
A great opportunity to segregate what is permanent and durable (i.e., "constitutional") about the Union from what is impermanent and changeable (i.e., "political") was missed. 
With nothing set in concrete, Europe's constitutional process continue to rely not on any transcendent document, but on balancing political relations and calculations so that the whole thing does not fall apart. 
This process will probably carry the cost of prolonging the emergence of a single European political loyalty (if one ever does emerge). 
This will be considered tragic only for those who see a stable European federation as Europe's manifest destiny. 
For the rest of us, notwithstanding the Union's unprecedented eastward enlargement, the schisms that erupted over the Iraq war, and the other frictions that are bound to result from Europe's flexible, evolutionary approach to constitution-making, there is also a lot of hope in this extended struggle for self-definition. 
The recent collective sense across Europe of the urgency of being able to speak with one voice in external affairs may provide the next breeze, and enough glue, to keep the enterprise afloat. 

Europe's New Dawn 
Today in Rome, the heads of state and government of the EU's 25 member states will sign the Treaty establishing a Constitution for Europe. 
We have come a long way since the six founding members formed the European Economic Community back in March 1957 - also in Rome. 
After the Treaty is signed, it will go before the national parliaments for approval. 
So it is crucially important to understand why the Treaty deserves to be ratified. 
Simply put, it places the interests of Europe's citizens more than ever at the heart of the European Union's activities. 
It does so in four ways. 
First, the Constitutional Treaty guarantees that the Union's institutions will respect the fundamental rights of everyone within the EU. 
The "catalogue of fundamental rights" included in the Constitution is extensive, centering on respect for human dignity, freedom, and equality, and also on the principles of democracy and the rule of law. 
By enshrining them in the Constitution, these fundamental rights and principles become legally binding, and citizens will have greater scope for bringing appeals to the Court of Justice. 
In this respect, the EU leads the world in the protection of fundamental rights. 
Second, the Treaty makes the EU more democratic and brings government closer to Europe's citizens. 
The Union has no business interfering in matters that can be dealt with successfully at the local, regional, or national level. 
The EU's objectives are precisely those that countries are unable to achieve on their own, for example, a stronger economy and greater security. 
The Constitutional Treaty includes guarantees to ensure that the EU adheres to this principle strictly. 
National parliaments will be able to call a time-out if Brussels makes proposals that seem to interfere unnecessarily. 
Should one-third of national parliaments so wish, the European Commission will be required to reconsider a proposal. 
In addition, the Constitutional Treaty gives citizens the right to ask the European Commission to take action on a specific point. 
A citizens' initiative of this kind will require one million signatures, obtained in different countries. 
At the same time, the European Parliament will have far greater powers. 
It will have joint decision-making authority in many more areas, including the budget. 
As a result, European citizens' elected representatives will be better able to scrutinize the work of the Commission. 
Third, the Treaty makes the EU more open and more transparent. 
Citizens want powers to be clearly defined and decisions to be taken openly in a way that they can understand. 
Many people despair of finding their way through the maze of current EU treaties and their numerous amendments. 
Outside Brussels, few people can explain the "pillar" structure and the distinction between the Union and the Community. 
The Constitution consigns these complexities to history. 
It also gives people far greater access to official information, extending their right of access to documents from all institutions, organs, and bodies. 
Finally, the Treaty will make Europe more effective. 
This is essential if the issues that affect people's lives are to be tackled successfully. 
Two themes that people consider crucial are a stronger European economy (more jobs and more growth) and greater security (reducing cross-border crime). 
European countries are heavily reliant on each other in addressing these issues. 
People are counting on Europe to take action. 
But, because EU decisions often have to be taken unanimously, this can be difficult. 
Moreover, the means to work together effectively are often lacking. 
The Treaty introduces major improvements here, enabling us to work together more effectively to achieve our aims. 
In sum, the Constitutional Treaty firmly enshrines fundamental rights in law, and also makes the EU more democratic, more transparent, and more effective. 
This makes it a good deal for everyone - for people who expect more cooperation and more concrete results from the Union, but also for those concerned about excessive interference by Europe in questions that can be better dealt with by the member states themselves. 
Next year, we will celebrate 60 years of peace across a large part of Europe. 
Never before in our history have we enjoyed such a long period of concord, a period that has seen an enormous growth in prosperity. 
Democracy has taken root in almost every corner of Europe, and Europeans now have far greater freedom to live, work, and study where and how they wish. 
These achievements are largely due to European cooperation. 
The Constitutional Treaty is a reflection of our wish to continue in the same vein, to carry on working together. 
We want to reaffirm our commitment to a life without war and injustice, and to the freedom that we hold so dear. 
The Constitutional Treaty provides solid foundations for our shared future. 
Peace, security, and prosperity are as vulnerable as they are valuable. 
This Treaty makes them stronger. 
And that makes us stronger. 
The signing ceremony is therefore a message of hope. 
It is a new beginning. 

Europe’s New Donald Rumsfeld 
Russia’s Duma elections this December are almost certain to cement the power of forces loyal to Vladimir Putin. 
That outcome is likely to confirm Russia’s emergence as the most divisive issue in the European Union since Donald Rumsfeld split the continent into “old” and “new” Europe. 
In the 1990’s, EU members found it easy to agree on a common approach to Russia. 
They coalesced around a strategy of democratizing and westernizing a weak and indebted Russia. 
That policy is now in tatters. 
Soaring oil and gas prices have made Russia more powerful, less co-operative, and less interested in joining the West. 
Today, Europeans cannot even agree on the nature of the Russian regime, let alone what policy to adopt towards it. 
Part of the confusion lies in Putin’s skillful political positioning. 
On the one hand, he needs to maximize his control of the economy and society in order to raise wages and pensions and to keep opponents down, while nourishing the long-tail of patronage that keeps him in power. 
On the other hand, Moscow’s elite – who fear that their assets may be expropriated by a future government – wants to avoid international pariah status so that they can see out their sun-set years in the safety of the West if the need arises. 
A tightly knit group of political consultants has helped Putin resolve his conundrum. 
Rather than establish a dictatorship, they helped Putin use the trappings of liberal democracy to consolidate power. 
By establishing fake opposition political parties that are under the Kremlin’s thumb, creating pseudo pressure groups and organizations such as Nashi (“Ours”), and recasting the rule of law as an instrument of political power, Putin has tightened his control in a more effective and subtle way than many autocratic regimes. 
The possibility that he may run for prime minister in order to prolong his rule when his presidential mandate expires is a logical continuation of this approach. 
Though the EU has failed to change Russia during the Putin era, Russia has had a big impact on the EU. 
On energy, it is picking off individual EU member states and signing long-term deals that undermine the core principles of the EU’s common strategy. 
On Kosovo, Russia is blocking progress at the United Nations. 
In the Caucasus and Central Asia, the Kremlin has effectively shut the EU out of regions where it has an interest in promoting political reform, resolving conflicts, and forging energy partnerships. 
In Ukraine and Moldova, the Kremlin has worked hard, with some success, to blunt the appeal of Europe. 
In the eyes of some neighboring countries, Russia is emerging as an ideological alternative to the EU that offers a different approach to sovereignty, power, and world order. 
Whereas the European project is founded on the rule of law, Russia believes that when the balance of power changes, the laws should be changed to reflect it. 
Moreover, Russia is trying to build a relationship of “asymmetric interdependence” with the EU. 
While EU leaders believe that peace and stability is built through interdependence, Russia’s leaders are intent on creating a situation in which the EU needs Russia more than Russia needs the EU, particularly in the energy sector. 
Although Russia’s GDP is no bigger than that of Belgium and the Netherlands combined, and its military spending is a fraction of the EU’s, the Kremlin has consistently managed to get the better of the Union. 
The central problem is that Europeans have squandered their most powerful source of leverage: unity. 
Member states are divided between those that view Russia as a potential partner which can be drawn into the EU’s orbit through a process of “creeping integration,” and those that view Russia as a threat whose expansionism and contempt for democracy must be rolled back through a policy of “soft containment.” 
The last few years demonstrate that neither approach will work. 
The first approach risks giving Russia easy access to all the benefits of cooperation with the EU, without insisting that Russia abide by stable rules. 
Open hostility toward Russia, however, will make it hard for the EU to draw on Russia’s help to tackle a host of common problems - from environmental pollution and illegal migration, to nuclear proliferation and Kosovo’s final status. 
The EU urgently needs a new approach. 
Rather than attempt to democratize or contain Russia, the Union should settle on the more limited goal of turning Russia into a reliable partner, bound by the rule of law. 
A common approach will give the EU many powerful levers to ensure that Russia honors treaties and mutual agreements. 
At the diplomatic level, Europeans could threaten to deprive Russia of the prestige it draws from participating in G8 and EU-Russia Summits. 
They should also aim to strengthen democracy and the rule of law in the European neighborhood by tightening relations with countries such as Georgia and Ukraine. 
Economic leverage should be applied as well. 
Europeans should subject Russian investments in EU markets to greater scrutiny and use competition law to launch investigations into monopolistic practices and money laundering for existing investments. 
At the same time, EU members could target the interests of the individuals in the Kremlin elite by scrutinizing their purchases of Western assets, and even ban travel to the EU for human rights abusers. 
So long as the EU continues to sway between integration and containment, it will continue to appear to the Kremlin as weak and directionless. 
That, in turn, will merely encourage Russia to become even more assertive. 

Europe’s New Mission in Africa 
The EU’s military mission to ensure free and fair elections in the Democratic Republic of Congo (DRC) has shown what the European Security and Defense Policy (ESDP) can achieve in Africa. 
A contingent of roughly 2,500 troops from 22 countries went to the DRC in mid-2003 to support United Nations troops, and provided a rapid reaction force that snuffed out disorder in Kinshasa before it could erupt into full-blown mayhem. 
Three years later, Operation Artemis, a comparable EU mission in the eastern province of Ituri, again demonstrated Europe’s resolve to use its military capability to underpin a long-term peace process. 
For some people, raw military might is the only true measure of power. 
But the 16 EU military missions that have now been carried out in support of the ESDP have much more to commend them. 
Large parts of Africa need support, and Europe can and must lend a hand. 
Nor is the EU’s new style of political-military engagement in Africa a throwback to colonialism. 
True, many African countries currently suffer from instability, state failure, regional strife, violent internal political competition, and other assorted ills, including, massacres and large-scale brutality, civil war, massive movements of refugees, economic disruption, and environmental damage. 
Yet the big picture in Africa is not uniformly bleak. 
Some African countries are comparatively stable and prosperous, and the Continent possesses a youthful population that will soon top one billion people, abundant mineral reserves, and an inherent dynamism. 
At the same time, we in Europe cannot afford to dismiss Africa’s troubles as if they had no impact on our own societies. 
The European project has been built on values that we deem to be universal, and we must make a very real effort to uphold them, not only as a moral imperative, but also because it is in our strategic interest. 
The EU is by far the largest export market for African goods, and it also offers a home to large communities from almost every African country. Likewise, a large number of European citizens and dependents are scattered throughout Africa. 
In the early stages of a crisis, European intervention – through political and financial assistance, diplomatic intervention, and even military action – can prevent it from erupting into violence. 
Moreover, when a crisis is winding down and there are openings for moderating influences, outside intervention can prove instrumental in enforcing peace and bringing warring factions to the negotiating table. 
In countries that have experienced the horrors of civil war, the arrival of an effective military force from outside is generally welcomed, as was the case in both the 2003 and 2006 Congo operations. 
Just by virtue of being there, the force shows the goodwill and commitment of the nations that sent it, and, by projecting a sense of law and order, it provides valuable leverage for honest brokers trying to mediate a peace deal. 
Europe’s policy toward Africa may suffer shortcomings, but at least there is a policy, which is based on supporting African states and regional organizations like the African Union whenever practicable, necessary and, above all, requested. 
The ESDP takes into account the larger European policy, and aims to provide assistance in planning, training, and logistical support to missions and forces created by African states or groups of states. 
For example, the recent concept of “European reinforcement of African capabilities in prevention, crisis response and conflict resolution” (which is known as ‘Recamp’) openly calls for African ownership of this process. 
Europe has never claimed to have the means of redressing all the strategic imbalances that exist in Africa – nor does it have any intention of doing so. 
Yet, taken together, the EU countries possess a considerable array of assets, including the military capability needed to conduct decisive operations. 
Yet their most valuable asset is cultural: soldiers who are willing and able to interact with the local population, who are cautious in their use of lethal force, and who are ready to accept the many shades of gray that exist between conflicting parties. 
Nevertheless, European military capabilities are limited, requiring that European planners look for “minimal” options, with the drawback that smaller commitments generally require a long-term perspective. 
The ESDP has not functioned long enough to establish a clear track record. 
Yet our modest ongoing endeavors in Congo − a police advisory mission known as EUPOL and a defense reform mission called EUSEC − and in Sudan, where 60 Europeans are providing staff support to the African Union’s AMIS II mission in Darfur, offer grounds for hope. 
The EU’s members must above all recognize that Africa’s ills have to be dealt with by Africans. 
This is as much a matter of principle as of cold, strategic calculation, and it is here where the ESDP has much to offer: a long-term view, supported by a powerful economy with the assets needed to carry out humanitarian operations, conflict prevention, crisis management, and security support. 
Foremost among the ESDP’s advantages is Europe’s cultural knowledge and understanding of Africa. 
Today, former colonial powers have evolved significantly, just as have their former colonies. 
On both shores of the Mediterranean, generations have passed and new connections have been formed. 
It is the knowledge, understanding, and mutual respect that remain, and that are the cornerstones on which Europe’s policy for Africa must be built. 

Europe's New Model Economy 
CAMBRIDGE: The world's economists are scurrying about, trying to discover and explain the reasons for America's record boom. 
Despite eight years of growth, no signs of accelerating inflation are to be found in the US. 
Moreover, no one in America seems to care about traditional economics; its all the ‘new economy', internet or die. 
Traditional US investors are at a loss to explain why a company earnings are suddenly a poor way to predict what stocks will be hot and which likely to fail. 
Any company without a ".com" in its name or future seems doomed. 
Establish a new economy link and you are bound to soar, stick to the "old economy" ways and your stock is trash. 
Gurus of the old school claim that all this profitless prosperity cannot last; soon, if not very soon, the stock market will get back its senses. 
When that happens, the glamour of America's long boom will vanish, the notion of the "new economy" will be as forgotten as last year's fashions. 
There is now an entirely new angle to all this that is worth contemplating; namely that America is not so unique, that Europe is joining the new economy game. 
Perhaps only Europe's stock markets are the only ones participating yet, but that is a start. 
Why does Europe seem hesitant? 
The Euro is weak; it has none of the glamour hoped for at its launch last year. 
Besides, European governments remain defensive: no important labor market reforms nor initiatives aimed at deregulation are underway. 
True, Germany is putting on the books an important tax deal that will allow large financial institutions to sell-off their vast share holdings in the corporate sector without punitive capital gains taxes. 
But, at best, Europe's governments have only consented to allow rationalization in their banking industries and some cross border mergers. 
Despite these small steps from government, new economy stocks are becoming the big game on Europe's stock markets. 
This not only reflects the large number of mergers – within countries and cross border – of late, but increasingly reflects the new economy content of established businesses. 
Siemens is carving out a choice filet in the form of its semiconductor business to be offered as one of the largest European IPOs on record. 
Already it is oversubscribed and trading in the gray market at a triple the likely issue price. 
Not to be left out, other companies are looking at their business holdings to ask what can be carved out and sold off. 
Similarly, large financial institutions like Deutsche Bank, as they free up the huge pots of money now tied up in industrial holdings, are thinking of little else but participating in a US-style scene of venture capital, start-up financing and IPOs. 
So far all of this has been a sideshow focused on Germany's ‘Neumarkt', but it is becoming a general focus of attention. 
And not just in Germany, a country otherwise slow in freeing its economy. 
The new economy enjoys at least equal hype in Switzerland, Italy, Spain and France. 
Technology and the new economy are immensely popular across Europe because they provide a much better route to prosperity than waiting for government, unions, and bureaucrats to agree on restructuring the old economy. 
Indeed, it won't take long before European governments embrace the new economy's quintessential wealth creation and even claim credit. 
As European new economy stocks soar into the stratosphere, the rest of the world will eagerly join the game. 
Equity capital will come from the US and from the Far East to claim a piece of the action, which may be a replay for anyone that missed the show in the US or just wants to see it once more. 
Such robust stock market growth will drive up the Euro, increasing the returns of foreign investors over and above what they can get just from capital gains. 
That is exactly what happened in Japan last year; corporate restructuring was just the first pass in the revival of stocks. 
Then high technology and new economy became the buzz words in getting valuations higher than in the US. 
Of course, the value of the Yen soared too. 
This prospective stock market boom is heaven-sent for a European economy stuck in a rut. 
Europe has formidable wealth, but that wealth is sleeping; it has formidable human capital, but it is shackled from lack of initiative, counterproductive regulation, bureaucracy, and by insufficient profit motivation – call it a lack of greed. 
European leaders should embrace the liberation which will make their lives so much easier and Europe so much freer. 
Europe's new economy is coming on. 
The wealth it creates may shock governments enough to set the rest of Europe's economy free. 

Europe’s New Watershed 
COPENHAGEN: The people of Belgrade have presented Europe with another watershed moment. 
Shadows from a decade of Balkan wars may at last be lifting. 
Clear heads, clear sights, and – most important of all – clear public consent will be needed if Europe is to move forward. 
In this regard, it is important to draw the right conclusions from Denmark’s “No” vote in its recent referendum on whether or not to join the euro. 
The Danes are no more anti-European than anyone else. 
Xenophobia is no more widespread in Denmark than in other European countries. 
It was not just an unholy alliance between extreme left and extreme right, as some concluded, that defeated the euro. 
Denmark’s “No” must be regarded as a warning to Europe’s leaders – they should be far more careful when starting an open dialogue with their electorates on basic European issues, such as Europe’s role in assuring Balkan peace. Otherwise they might run into the same saddening surprise as their Danish colleagues, where 4 out of 5 members of Parliament voted “Yes” on a policy only supported by 47% of their constituents. 
My assertion that Danes are not anti-Europeans finds support in a recent Eurobarometer-poll: Voters in all EU-countries were asked if they regard enlargement of the Union with the applicant countries in Eastern and Central Europe as “a priority”. 
This was supported by close to 60% of Danes. 
Indeed, Denmark topped the list. 
In France and Germany support was a meagre 20%. 
Were other governments to follow Denmark’s example and call a referendum on the Euro, most would probably lose. 
Let me recall the situation in 1992, when a small majority of Danish voters (less than 1%) rejected the Treaty of Maastricht. 
President Mitterrand reacted by calling for a similar referendum in France in order to support the Treaty. 
Surprising almost everybody in France, the referendum came as close to a “No”, as Denmark had been close to a “Yes.” 
This time Danish voters once again rejected the advice of their political establishment. 
What went wrong in Denmark might happen in other countries as well. 
Danish political leaders failed to convince their constituencies that the Euro should be regarded as a positive element in the creation of a Europe whole and free. 
Economic arguments failed to win them over – the decline of the Euro vis-a-vis the Dollar obviously playing an important psychological role in this. 
But too little emphasis was put on the political arguments. 
The Economic Monetary Union was created before the Berlin Wall came down in 1989. 
As a new Europe began showing its face, the single currency was the bright creation of visionaries who saw the chance of making an even tighter relationship between European countries. 
Germany’s political leaders – the Kohl-Genscher-generation who had experienced the war – understood that a united Germany would represent such a concentration of economic strength in Europe that it would inevitably disturb political balances within the EU. 
So German leaders concluded that they had to share their country’s dominating position in monetary policies with others. 
As Hans Dietrich Genscher used to say in those days: “If you want to avoid a German Europe, you must create a European Germany.” 
It was a sacrifice, and was met with much resentment in German financial circles. 
They doubted the willingness and/or ability of other European countries to fight inflation. 
But the Germans did it. 
We all owe them for that. 
The Euro has experienced a hard but promising start. 
It should not come as a surprise that the Euro started to slide against the Dollar, considering the differences in economic performance between America and Europe. 
And it should not come as a surprise that the markets have tested the willingness of European political leaders to keep quiet where monetary affairs are concerned. 
Recent intervention and support from America and Japan showed that the Euro is here to stay and that the markets believe in its success. 
The common currency is but one step in bringing together a peaceful Europe. 
This is the key message, but it was not delivered successfully to the Danes. 
This is why the result of the Danish referendum should be taken as a warning that great efforts must be made to convince Europe’s citizens of the Euro’s political importance – and of the importance of enlarging the Union. 
Enlargement of the European Union eastward is the great challenge of the coming years. 
Of course, living standards are not as high in Eastern Europe as in the west, but the hope – for both applicant countries and those in the Balkans – must be that ongoing democratization and economic reform will mean eventual membership in the EU. 
Undoubtedly, expansion will provide the “older” democracies with new growth markets. 
The benefits of this will more than compensate for the economic costs of enlargement. 
But even stronger than this economic common-sense-argument is the political imperative: if we maintain a divided Europe, we will never reach the Europe of liberty and peace that was the original vision of the founding fathers that wrote The Treaty of Rome. 
The new democracies of Eastern and Central Europe and the Baltic countries are eager to participate in the EU. 
The brave crowds in Belgrade demonstrated the desire of Serbs to rejoin the family of Europe. 
All want to take part in the growth and solidarity of a Europe where democracy and respect are the ruling civic concepts, not brute military power. 
The Danes failed to link this with the role of the Euro. 
The events in Belgrade have provided another moment for that too-long-postponed debate on the larger goals of European integration to take place. 

Europe’s Next Move 
Ever since France and the Netherlands rejected the European Union’s proposed Constitutional Treaty, EU leaders have been busy pointing fingers at each other, or blaming French and Dutch citizens for misunderstanding the question they had been asked. 
But no amount of finger pointing can obscure the fact that, 50 years after the European Community’s creation, Europe badly needs a new political framework, if not a new project, to shore up its unity. 
To be sure, French and Dutch citizens did not respond to the question that they were supposed to answer. 
Their vote was a protest against globalization, a rejection of the contemporary world, with its distant and incomprehensible governing mechanisms. 
Like the anti-globalization movement, the new anti-Europeanism can be regarded as a demand for a “different world” – in this case, an “alter-Europeanism.” 
The two world wars and the Cold War shaped European integration as a project of peace, defense of the West’s fundamental values, and common economic prosperity. 
But the collapse of communism in 1989, and the chance to overcome the Continent’s historical divisions, now required a redefinition of the European project. 
The Treaties of Maastricht (1992) and Amsterdam (1997) created a new organizational structure for the EU and laid the foundations for political institutions equal to Europe’s economic power. 
The Treaty of Nice (2000) was result of a rather poor compromise. 
Declarations by German Chancellor Angela Merkel, whose country assumed the European Union’s rotating six-month presidency at the beginning of the year 2007, are unambiguous: the period of reflection, approved by the European Commission in 2005, has ended. 
The German presidency will seek to implement the Constitutional Treaty resolutions, and the Berlin Declaration of March 25, 2007 – timed to mark the fiftieth anniversary of the Treaty of Rome – will offer a vision of the EU’s future. 
The aim is to leave to Germany’s successors in the EU presidency – Slovenia, Portugal, and France – a roadmap for future reform. 
In the past, when politicians debated the EU’s future, they spoke of a definitive formula for European integration, as defined in a famous lecture in 2000 by German Foreign Minister Joschka Fischer. The accompanying intellectual debate, inaugurated by the philosophers Jürgen Habermas and Jacques Derrida, defined the nature of European identity, above all, against the foil of the United States, but also in terms of the challenges posed by globalization. 
A similar debate addressing key questions concerning the EU’s future should be launched now. 
First, how should relations between national and common European interests be defined? 
At issue is not only the allocation of competencies, but also the more fundamental matter of when to rely on national governments’ agreement and when to turn to common EU institutions, namely the European Commission and the European Parliament. 
The second question concerns the EU’s scope. 
Europe is a peculiar combination of geography and history, but the EU’s boundaries – and thus the prospects for its further enlargement – are determined as much by its capacity to integrate candidate countries as by these countries’ own adaptive abilities. 
After the accession of Bulgaria and Romania, the EU has 27 members, with Turkey and Croatia, but also the other Balkan states, as well as Ukraine and Georgia, waiting in line. 
Is enlargement the only effective policy for stabilization and peace, or can the EU’s “neighborhood policy,” falling short of full admission for some of the countries knocking at the door, become an instrument for supporting development and stabilization, much as the Marshall Plan once was for Western Europe? 
Third, instead of a futile theoretical debate over “liberal” versus “social” models of economic development, we need to compare the experiences of such countries as Great Britain, Sweden, Germany and France. 
Are their experiences mutually exclusive, or is convergence possible? 
Which policies in fact reduce unemployment? 
Which measures can ensure the EU’s global competitiveness? 
How can we narrow the existing differences in development and material welfare within Europe? 
Fourth, the EU’s aspiration for a common foreign and security policy must be addressed. 
The threats facing the world today are supranational, so counteracting them must be supranational, too. 
But this is impossible without a clear European identity – and thus a common interest to be asserted and defended. 
Only then will a common approach to pressing issues, such as energy supplies, be possible. 
Such questions could be the topic of a consultative referendum held simultaneously in all member states. 
Its results would allow the treaty to be presented in a simplified version for ratification by the nine member states that have still not done so. 
The EU would then gain both a political dimension and clear rules of procedure. 
The alternative is paralysis. 
If the EU continues to be governed under the Treaty of Nice, there will be no room for further political integration or enlargement. 
Nor do the current rules ensure the effective functioning of the Union’s institutions, as they exist now, while drafting a new constitutional treaty would probably require even more time than was needed for the current proposal. 
In these circumstances, pragmatism should prevail. 
Democracy may carry certain short-term costs, but they are always lower than the long-term damage that comes from a lack of popular participation. 
Only a new European debate that includes both Europe’s citizens and its institutions can combat “alter-Europeanism” effectively. 
The time may not be ripe for a true European constitution, but confronting, rather than evading, the fundamental issues that the EU faces could create a context for reviving the constitutional treaty and preparing the Union for the challenges of our time. 

Europe’s Next Single Market 
The current European Commission has made clear its commitment to reducing bureaucratic red tape by adopting an approach to regulation that keeps the number of laws we propose to an absolute minimum. 
We are serious about this. 
But our commitment to reducing the amount of legislation must be matched by an equal commitment to making what we have really count. 
This is a shared responsibility, and member states have to play their part. 
Until laws adopted in Brussels are enacted in national law and properly enforced, they remain paper tigers, entirely without teeth. 
Most laws adopted in Brussels allow a grace period – generally about two years – for member states to act. 
Member states set this deadline themselves, so it should be more than enough time. 
After that, there should be no excuses. 
Ten years ago, the gap between the number of single-market laws adopted in Brussels and those in force in the member states – known as the “transposition deficit” – stood at 6%. 
Faced with this poor record, in 2001 the European Council committed itself to achieving a target of no more than 1.5% at any given time. 
In the period since, we have had our ups and downs, but most member states have made a considerable effort to get their house in order. 
For the very first time, the average deficit has fallen below 1.5%, standing at 1.2%. 
What is more, all member states have made progress, with Denmark and Latvia – both five directives away from a perfect record – sharing first place. 
This is an important achievement, but it should not be taken as a signal to relax. 
On the contrary, we should ask whether the time has not come to set even more stringent targets. 
And it is also time to take a more detailed look at where we continue to fall short. 
When member states sign up to laws in Brussels, they accept an absolute obligation to be bound by them. 
When they fail to live up to their commitments, they fail in their duty to the consumers and businesses that stand to benefit. 
Nor should good overall results be permitted to mask problems in particular areas – public procurement, for example, which accounts for between 15% and 20% of Europe’s GDP. 
Opening up markets and applying European rules properly produces savings for governments and delivers better value for taxpayers’ money. 
I am, therefore, deeply disappointed that a package of measures adopted in this area in 2004 – aimed at simplifying and modernizing procedures – has not been transposed within the agreed deadline by several member states. 
I warn those that have not yet acted that I will take whatever steps are necessary to make them act. 
We cannot continue to commit ourselves to delivering a more competitive Europe while denying ourselves the means to achieve it. 
But reducing the transposition deficit, while important, is not the end of the game. 
Getting laws onto national statute books is one thing, ensuring they are properly applied and enforced is another. 
And while the story is good on transposition, it is less rosy when it comes to how things are working on the ground. 
Eight member states have managed to reduce the number of infringement cases taken against them by the Commission, but 17 have as many or more than they did this time last year. 
I appreciate that close cooperation and partnership with member states are required, and I am ready to work with them in whatever way I can to help them to transpose and apply EU law correctly. 
I prefer to avoid infringement cases, which are costly and time consuming. 
But member states should know by now that I am not a soft touch. 
My job is to ensure that the law is enforced without fear or favor, and that is what I will continue to do. 
The single market is one of the European Union’s greatest achievements. 
Removing barriers to the free movement of people, goods, services, and capital has brought greater prosperity to people across the Continent, hones our skills internally, and gives us weight internationally. 
When we made the big push for the single market 20 years ago, there were just 12 member states. 
Now there are 27. 
Europe is a very different place. 
We have also undergone a communications and technological revolution that has touched every aspect of our lives. 
While immense new opportunities have opened up for Europe's citizens and businesses, global competition for trade and investment has never been tougher. 
Later this year, the Commission will bring forward a review of the single market to ensure that Europe is ready for what lies ahead. 
This is an important opportunity for reform and renewal. 
A modern single market should reflect modern needs, and we should concentrate our efforts where they can have most effect. 
We need a set of priorities that responds to what people want and expect – jobs, growth, and security. 
To cope with rapid change, we need to be flexible when it comes to regulation. 
We need to accept that not everything can be run from the center, which means more trust and more partnership, but also more willingness to shoulder responsibility further down the line. 
Indeed, if we are to succeed in creating a single market that is open to the world, builds on its internal strengths, and is at the cutting edge when it comes to shaping the international environment, our efforts at the EU level have to be matched by efforts at the national level. 
I commend the member states for the efforts they have made, but we can all do better. 

Europe’s Next Steps 
Terrorism in London and the French and Dutch rejections of the European Union’s Constitutional Treaty have brought Euro-pessimism back into fashion. 
The failure of the June EU summit and the bitter clashes between Tony Blair and Jacques Chirac have even inspired some to proclaim the beginning of the end for Europe. 
They are wrong. 
Europe is neither dead nor dying. 
But recent events do spell the end of one version of European integration – the vision of an “ever closer union” producing a federal country that would become a new superpower. 
That vision, however, was not in the cards even before the recent setbacks. 
Once the original six core countries began to expand to include northern, southern, and, most recently, eastern European countries, the old federal vision was doomed. 
The constitution was designed to make a Europe of 25 members more efficient, not produce a strong federal state. 
Chirac’s rhetoric often includes references to a “multi-polar world” in which the United States is no longer the only superpower. 
A recent Pew poll found that many Europeans have lost their attraction to the US and would like Europe to play a larger role in world politics. 
But even if America has lost some of its attractive “soft power,” Europe’s post-industrial publics are not willing to pay the price – a doubling or tripling of defense spending as a share of GDP – to invest in the military power that would be required to balance its hard power. 
Even so, the picture for Europe is not as bleak as pessimists assume. 
Power in world politics today is distributed like a three-dimensional chess game that is played vertically as well as horizontally. 
On the top board of military relations among states, the US is the world’s only superpower with global reach. 
Europe or China are unlikely to overtake the Americans in the next two decades. 
Here the world is uni-polar. 
On the middle board of economic relations, the world is already multi-polar. 
This is the board where Europe acts as a union, and other countries like Japan and China play significant roles. 
The US cannot reach a trade agreement or settle anti-trust cases without the approval of the EU Commission. 
Just recently, after the World Trade Organization ruled in favor of a European complaint, the US Congress had to rewrite billions of dollars of tax legislation. 
This hardly fits the description of a uni-polar world. 
The bottom board includes transnational relations that cross borders outside the control of governments – everything from drugs to infectious diseases to climate change to transnational terrorism. 
On this board, power is distributed chaotically among non-state actors. 
No government can control outcomes without the cooperation of others. 
Here the US needs the help of Europeans, and it makes no sense to call this world uni-polar, either. 
On this bottom board, the degree of close civilian cooperation is also important, which is affected by a country’s attractiveness or soft power. 
Here European countries are well endowed, having overcome centuries of animosity and developing a large successful market. 
One danger of the recent setbacks is a halt to EU enlargement. 
At the Cold War’s end, East European countries did not try to form local alliances, as they did in the 1920’s, but looked toward Brussels as the magnet for their futures. 
Similarly, countries like Turkey and Ukraine have adjusted their policies because they are attracted to Europe. 
The loss of soft power implied by rejection of further enlargement would be a setback for Europe, the Balkans, and international stability. 
What will the EU do next? 
Some counsel retreating to the original six countries as an inner core that creates a federation within the larger union. 
This approach appeals to those who think that the French and Dutch referendums were a rejection of the British liberal economic model. 
But that diagnosis is suspect, because polls show that many who voted “non” were objecting to Chirac and/or to high rates of unemployment. 
Turning backward and inward to the original six EU members is unlikely to meet such concerns, and augurs poorly for the liberalization of labor markets that Europe’s economies need to get moving. 
A better path for the EU is to show that Europe still works. 
This means a compromise on a new budget that curtails some of the expenditure on the common agricultural policy and devotes funds to integrating the new members who joined last year. 
It also means carrying on with the important role that Europe plays in foreign policy such as attracting Serbia to reach agreement on the future status of Kosovo, or continuing efforts to persuade Iran to give up its plans for the enrichment of uranium. 
Equally important will be to press ahead with the Doha round of WTO trade talks, and to follow through with past commitments regarding aid to Africa. 
Eventually, after the dust has settled, it may be possible to reach inter-governmental agreements to tidy up some of the institutional arrangements that would have been settled if the new constitution had been approved. 
Such a practical, effective EU may not reach the lofty rhetorical aspirations beloved by politicians, but it will not be moribund. 
On the contrary, such a Europe has a lot to gain for itself as well as to contribute to the rest of the world. 

Europe’s Non-European Europeans 
Nation-states are built on ethnic and territorial unity, and their histories and political development are grounded in a sense of collective identity. 
Empires emerge when a national group considers its existence inside its territorial borders either risky or ineffective, and embarks on a forced expansion that is usually connected with large-scale violence. 
Western Europe found another route for its development only after WWII, when Hitlerism lay in the past but Stalinism posed a very present danger. 
Western European intellectuals realized that both nationalism and imperialism were unacceptable approaches to state-building, and that European stability required a union of nations that could and should expand, but that would never be transformed into an empire. 
Western Europe’s political elite was quick to adopt this position, and America’s “Euro-Atlantic” political thinking, together with the Marshall Plan, contributed to it decisively. 
The Treaty of Rome, together with the establishment of the Council of Europe, embodied a legal, economic, and political – but mostly a philosophical – breakthrough. 
A fundamental change occurred in Europe when the failure of Soviet communism opened up entirely new opportunities. 
But it is impossible to escape the feeling that Western Europeans and the Americans were eager to exchange their strategic Cold War perspective for one focused narrowly on trade and commerce. 
Those who were ready to consider cooperation with Mikhail Gorbachev’s Soviet Union in 1990 – the same year that the Charter of Paris aimed to establish a “Europe from Vancouver to Vladivostok” – had by 1992 begun to neglect Russia and the other former Soviet republics, with the exception of the Baltic states. 
Instead, the West chose to pursue only a tactical relationship with Russia’s post-Soviet bureaucracy. 
Western leaders lacked the nerve to engage with the Russian people in a spirit of full cooperation, and at the same time openly to condemn the new Russian state’s human rights violations. 
The West overlooked authoritarian tendencies as long as Russia’s problems were not exported. 
Many influential experts simply inverted the economic determinism that characterized the most primitive Marxists, and assumed that at some point European-style politics would develop spontaneously in Russia as a result of the implementation of free-market ideas. 
For the Soviet people, however, Europe and the West were characterized by their respect for the individual, intellectual freedom, and the dignity of human life; the ability to conduct business was secondary. 
The USSR collapsed not for economic reasons, but because the slight lifting of the Iron Curtain revealed a reality that stood in stark contrast to the idea that people were subordinate to the state. 
The European Union’s enlargement after 2004 marked the beginning of a fresh chapter in European history, but it did not illustrate a new pan-European strategy or a renewed sense of integration. 
For the first time since its founding in 1957, the EU was forced to consider how far Europe’s borders extend in terms of politics, economics, and culture. 
To be sure, Russia has always been historically separate from the Western European tradition and from the nation-state civilization that emerged after the Treaty of Westphalia of 1648. 
However, this division was far from absolute, and in the nineteenth century, Western Europe, Central Europe, and Russia were closely linked as a united cultural and economic space, which grew and developed despite religious diversity and political upheavals. 
Fedor Dostoyevsky noted that Russia needed Europe, and that Europe was the second Russian fatherland. 
But everything changed after the WWI and the Bolshevik revolution. 
The relationship between the EU and Russia today is fully pragmatic, based on Realpolitik and trade, which in turn eclipses the strategic perspective. 
But oil, gas, and metals are not the best way to build bridges between people. 
The sort of bridges we need require very different materials. 
Both Russian and Western European isolationists favor much the same harmful approach. 
Accustomed to authoritarianism and burdened by post-totalitarian complexes, the majority of Russians are nonetheless neither isolationist nor anti-Western. 
But passive isolationism, characterized by the idea that everything outside Russia is somehow abstract, is an integral part of the Russian mindset. 
This type of thinking creates very great dangers for Russia, and is just as dangerous for its immediate neighbors and for the West. 
Human rights, openness, and democratic values should be genuinely shared as a means to achieve a true partnership. 
In the modern milieu of government and corporate bureaucracies, it is difficult to speak in these terms. 
However, strategically, there is no way to avoid or sugarcoat the serious language that must be used in a dialogue between partners. 
There is still hope that Europe’s political future will not be one of risky “multipolarity,” but instead one of cooperation based on the shared values of freedom and justice. 

Europe's Obama Challenge 
PARIS – Will the year 2009 and the beginning of Barack Obama’s presidency mark the beginning of a new era in transatlantic relations, or will the old divisions linger, nurtured by the depth and gravity of the economic crisis? 
Will the crisis lead to nationalistic and selfish attitudes on both sides of the Atlantic, stymieing the long-awaited rapprochement, if not a full reconciliation? 
It is, of course, too early to tell. 
Even if the left wing of the European left – like the most liberal of America’s Democrats – voices concerns that Obama has selected a far too centrist cabinet, a classical form of anti-Americanism is bound to recede in Europe. 
It is very unlikely that Europeans will take to the streets to denounce the “essence” of the United States – what America is as much as what America does – as they did during the Bush era and even during the Clinton years. 
America’s image in Europe has changed profoundly since November 4, and the style of Obama’s diplomacy once he becomes president will probably confirm that change. 
Yet in the realm of transatlantic relations, as is true globally, it is unwise to expect too much from a single man, whatever his exceptional qualities. 
Fundamental problems remain, and new ones are likely to emerge. 
First, whatever the brutal style of the new Russia under Vladimir Putin and Dmitri Medvedev, the Soviet Union no longer exists and no longer constitutes the common threat that was the “glue” of the Alliance until 1989. 
Unless something very wrong happens, a new cold war is not about to start. 
Second, there is a continuing structural imbalance between the way Europe looks at America, i.e., with passion and concern, and the way America looks at Europe, i.e., with mild interest giving way to growing indifference. 
During the Cold War, Europe was America’s first line of defense. 
In the current global age, Asia, the Middle East, and even maybe Africa will constitute greater priorities for the US. 
Third, even if America under Obama praises and even practices multilateralism, Americans are far from ready to accept the reality of a multi-polar world. 
They may write about it conceptually, but its meaning – a world in which their country is only “primus inter pares” – has not really penetrated the national psyche. 
America’s internationalism remains grounded in the idea of American “exceptionalism” – a unique role and sense of mission. 
It is an approach to the world with which Europeans have great difficulty coming to terms. 
Even with Obama as president, they may be quick to denounce the combination of arrogance and hypocrisy that they see as linked to America’s view of her “special and unique mission.” 
Fourth, if US diplomacy changes in style and content, will Europe be ready to face the challenge when America calls for help? 
One early test is likely to be Afghanistan, when a smiling but firm Obama turns to Europe and says directly: “You have backed me in immense numbers. 
I thank you for it. 
But now I do not need your symbolic votes; I need your concrete support. 
I need the further engagement of your troops in Afghanistan!” 
I suspect that European leaders will not respond eagerly. 
Most are convinced that there is no military solution in Afghanistan and they know that public opinion, especially in time of great economic hardship, has no appetite for such operations. 
Europeans have a traditional tendency to denounce American military adventurism while relying on the US as their protector. 
Fifth, to these “old” problems one must add a new one: the likely impact on transatlantic relations of the worst financial crisis in decades. 
Protectionism in the classical sense of the term is unlikely. 
We have learned the lessons of 1929. 
But public subsidies to “national champions” may prove to be as destabilizing for the climate of international cooperation as tariff barriers were in the past. 
The temptation to “appease” suffering populations with populist, selfish measures may grow as the crisis deepens. 
Paradoxically, too, the “greening” of America – an America that discovers late but with passion its responsibility for the planet’s survival – may lead to a competitive transatlantic race for first prize in ecological good behavior. 
And one could multiply the subjects of possible tensions, from nuclear disarmament – too much for the French, too little for many others – to the best ways to deal with Iran, Russia, and China. 
The essential issue lies elsewhere. 
For Europe, the election of Barack Obama is a crucial test. 
Will Europe rise to the occasion and seize the opportunity created by America’s daring and exhilarating choice to prove to itself and to the world that the old continent can exist as a power and a united actor? 

Europe’s Opportunity in Hollande 
BRUSSELS – Rarely has an election resonated so widely across the European Union as the French presidential ballot has done. 
Rarely has a leadership change in one EU member state created expectations of a real policy shift. 
Remarkably, a new European demos and public sphere are emerging from the economic crisis. 
Europeans are recognizing how interdependent they are. 
One country’s failures can threaten the entire European economy, and can call into question the fruits of 60 years of integration. 
Peace, solidarity, and prosperity are not irreversible achievements; only 27 countries working together can guarantee them. 
François Hollande’s victory is a fresh chance for Europe. 
It should spell the end of a policy oriented exclusively towards austerity, which has paralyzed our economies and divided the EU. 
The new French president’s commitment to a European growth policy has brought hope to citizens, and should not alarm anyone – certainly not the financial markets. 
Hollande’s plans for a growth initiative fall on fertile ground, especially in the European Parliament, which has repeatedly called for such measures. 
I am delighted that this message is increasingly echoed by the political mainstream, including most recently by European Central Bank President Mario Draghi. 
Likewise, the European Commission is working on a “growth pact” to be discussed by EU leaders in June. 
Indeed, Europe needs a master plan to avoid a tailspin of recession, growing unemployment, and weakening banking systems. 
A new master plan for growth would not be about printing money. 
Fiscal discipline remains essential, as are deep structural reforms. 
The growth pact can be properly financed by new sources of revenue, such as a financial-transaction tax and joint project bonds for infrastructure investment, or by curbing tax evasion and tax fraud and eliminating tax havens, as well as by more efficient and intelligent use of structural funds. 
What is to be done? 
First, targeted investment should be given priority. 
The European Investment Bank would be a good vehicle – in addition to new project bonds – to boost spending on major infrastructure projects (for example, in the energy sector). 
The EIB could be given significantly more resources to boost its loan programs. 
In the longer-term, we should revisit the idea of joint Eurobonds. 
Channeling EU structural funds towards innovation is essential, given that spending on research and development is alarmingly low compared to our global partners. Fundamental reform of the Common Agricultural Policy should not remain a taboo. 
Indeed, the CAP is ensuring neither sustainable agriculture nor decent incomes for all farmers. 
Undoubtedly, tough negotiations lie ahead on this front, including with Hollande. 
Second, young people must be a top priority. 
Our responsibility here is twofold: to put growth back on track, but also to respond immediately to the human tragedy that has hit our youth. 
The eurozone’s unemployment rate, at 10.9%, is at its highest level since the euro was introduced, and young people everywhere, as the first to suffer the consequences of the crisis, are paying a disproportionally high price. 
Youth unemployment in Spain, for example, is above 50%. 
We cannot afford to sacrifice a generation, or, rather, risk creating a lost generation that could destroy Europe’s social fabric and stability. 
We need an immediate contingency plan: invest to finance job training, improve educational opportunities, and, crucially, create incentives for employers to hire young people. 
The ECB has been offering long-term loans to banks at a favorable rate. 
This money should be loaned out to small and medium-size enterprises, which are the lifeblood of Europe’s economy. 
The EU also needs common initiatives to replace piece-meal bilateral agreements on tax evasion and tax havens, which undermine the goal of a fair society. Third, member states should not cut the EU budget indiscriminately during negotiations on the Union's long-term spending plan for 2014-2020. 
If we are serious about a master plan for growth, we need to provide the necessary means. 
The EU budget is an investment vehicle that boosts economic growth and creates jobs. 
It finances crucial pan-EU transport and energy links. 
It helps to foster innovation and boost research and development. 
The EU budget leverages investment, allows for economies of scale, and cannot run a deficit. 
The EU’s lack of solidarity, imagination, courage, unity, and vision in recent years has made Europe a symbol of division for some, if not many. 
We cannot let this continue. 
Hollande’s election offers us a valuable opportunity to meet the challenges that the EU faces. 
Alternatively, we can allow growing poverty, fear, and anger to give rise to xenophobia and racism, and thus place at risk the EU’s greatest accomplishments. 
But let us be optimistic. 
It is not too late. 

Europe's Overdue Reformation 
War and its huge cost; the falling dollar; mounting trade and budget deficits; the chicanery that hollowed out companies like Enron and WorldCom; the bursting of the high-tech bubble: capitalism American-style is both under strain and under a cloud. 
From left to right, many European intellectuals think that the capitalist game as played by the US is passé. 
An active search is on for new models. 
Strong on rhetoric and fueled by a wave of anti-Americanism, that search is nonetheless thin on facts. 
Stories of corporate malfeasance do, of course, abound in the US. 
But it is facile to jump from individual corporate scandals to broad conclusions about the supposed rottenness of the American economy. 
A close look at productivity growth (output per hour worked) in the US and Europe shows that US capitalism remains as vital than ever. 
Having grown at an average annual rate of just 1.6% since the early 1970's, annual US productivity growth in the non-farm business sector has accelerated to an average of 2.6% in the seven years since 1995, with no sign of a slowdown. 
In 2002, productivity grew by 4.8% - an extraordinary result, because productivity normally falls during economic slowdowns. 
Now look at Europe. 
Annual productivity growth actually slackened in the second half of the1990's, from 2.5% to just 1.3% today. 
This productivity gap is often attributed to the "New Economy" that emerged in the late 1990's. True, many new technologies were developed and first applied in the US. 
But technology spreads rapidly: the same Windows or SAP programs are available in all countries, including Europe. 
So there must be other differences. 
Two candidates stand out: attitudes toward work and corporate governance. 
Six OECD countries do better than America in terms of output per hour worked: Norway, Belgium, France, Ireland, the Netherlands, and Germany. 
But the rankings change if you make output per capita (a better measure of a country's economic well-being) the standard: here the US comes first, and France and Germany drop, respectively, to 16th and 11th place. 
The reason for examining output per person rather than output per hour worked is simple: what determines a nation's wealth is how much each person works, and how many people work. 
This is where the US overtakes Europe: fewer people work in Europe than in the US, and those in Europe who do work don't work as much. 
Annual hours worked in the US are about 1800, about 1500 in France, and 1400 in Germany. 
One reason why Europeans work less is because they pay more taxes, and high taxes are necessary to support those who do not work - an obvious vicious circle. 
But something deeper is at work. 
Perhaps the Europeans are perfectly happy to work less and enjoy more free time, both in terms of having more vacations during their working age, and spending less time in the active labor force. 
This is a legitimate choice, but once made, Europeans should stop looking for scapegoats for slow growth. 
For the source of the problem is neither the European Central Bank, nor the Stability Pact. 
Europe grows less because it works less - and it should not be surprised if a number of so-called "developing countries" soon catch up with Europe in terms of income per capita. 
The availability of new technologies is a necessary, but by no means sufficient, condition to raise a country's standard of living, because there must also be companies that are able to make use of them. 
In the early 20th century, it took over twenty years for the electrical engine to transform the textile industry. 
New machines were available, but firms were not prepared to use them. 
To do so required a change in work practices and in the way firms were run. 
Unions opposed such change, but it also took time for bosses to understand that the way they ran their plants needed to change. 
The new economy arrived after a decade of deep transformation within US companies. 
During the 1980's, a wave of leveraged buyouts transformed US corporate culture, evidently making bosses more receptive to technological innovation. 
Not so in Europe, where the interests of a company's employees and their unions often come before those of its shareholders. 
Indeed, at one European newspaper, articles that arrived via e-mail were re-typed by typographers: the technology for transferring them electronically was available, but not the work rules to allow the paper to apply it. 
Unions are not the only culprits. 
Many European firms have complex ownership structures, with large shareholders whose interests often conflict with those of the company - hardly the best way to take sound business decisions. 
This is particularly true in finance and banking. 
Whatever the corporate horror stories in US banks, almost no European investment bank remains, and Germany is seriously considering a state-owned "bad bank" to bail out its all-powerful banking giants. 
If Europe wants to work less, it must be extraordinarily productive when it does work if it is to keep up with the hard-working Americans. 
That is why Europeans should hope that the wave of corporate restructuring and reformation, which many thought would follow inevitably in the wake of the creation of the single market, begins to crest across the Continent and change the way businesses are run. 

Europe's Pain, America's Gain 
Is economic recovery around the corner, as promised by the leaders of the G8, the group of the world's richest countries that held their annual meeting in Evian, France last week? 
Many economic stars are indeed aligned for recovery, both in the US and in Europe. 
Oil prices are coming down from their highs during the Iraq war and, under plausible scenarios, may be heading for a greater fall. 
Investors all over the world are emerging from their Brazil-Enron-Iraq jitters. 
The risk premium is falling, pushing stock prices higher and lowering yields on long-term bonds. 
Moreover, the overhang of excess capital that accumulated during the crazy high-tech boom of the 1990's has now been mostly worked out. 
Investment rates have been low for three years in a row. 
Now only a few sectors suffer from excess capital accumulation. 
Firms are ready to invest again. 
All good news. 
But there, alas, the similarities between Europe and America end. 
Monetary and fiscal policy are working at full throttle in the US, but are muzzled in Europe. 
In the US, Federal Reserve Chairman Alan Greenspan did his job in 2001 and 2002, aggressively cutting interest rates. 
When monetary policy could not do much more, the Bush administration took up the charge--and with relish. 
The US budget has gone from a surplus of 1.4% of GDP in 2000 to a forecast deficit of 4.6% in 2003, a 6% swing--of which about 5% is due to changes in policy rather than the weak economy. 
This may be fiscally irresponsible (together with the tax cuts put in place for the future, it surely is irresponsible), but in the short run, it provides an enormous boost to demand. 
In Europe, however, the European Central Bank (ECB) has been far more careful. 
True, as a new institution it has had to establish its credibility, but the result is a smaller, slower decrease in interest rates. 
Fiscal policy in Europe is constrained by the Stability and Growth Pact. 
The budget for the Euro area has gone from a surplus of 0.1% in 2000 to a forecast deficit of 2.4% for 2003, nearly all of it due to the weak economy, not to changes in fiscal policy. 
Governments tinker at the margin, cheating a bit, and get reprimanded by the European Commission in Brussels. 
In the best of scenarios, what will happen is likely to fall short of the major short-run fiscal expansion Europe needs. 
This would require Europe's governments to increase their deficits in the short run, while improving the long run outlook through serious pension reform. 
Some governments--most notably France and Germany--are trying to do the second. 
They should feel freer to do the first. 
America and Europe are not only following divergent economic policies, but their currencies are also diverging because the world is going through a major exchange-rate realignment. 
The dollar is depreciating, while the Euro is appreciating mightily. 
There is a deep and sad irony to the current depreciation of the dollar. 
The depreciation is the price America must pay for past sins--i.e., a huge current account deficit that foreign investors are no longer willing to finance, at least not at the size of 4% or more of US GDP. 
The irony is that this dollar adjustment is unambiguously good news for America, and unambiguously bad news for Europe: 
For the US, the dollar's fall means a boost to exports, and a further increase in demand, a further push for recovery. 
It also means a bit more inflation, but in today's world, a bit more inflation is good, not bad. 
For Europe, the rising Euro means lower competitiveness and further economic contraction. 
The effects are far from negligible: The best estimates are that a 10% appreciation of the Euro will bring a decrease in demand and output of 0.6% of GDP in the Euro area. 
So far, the Euro's appreciation is close to 30% from the lows of two years ago, and there is every reason to believe that even more strengthening is to come. 
The Euro is the only currency against which the dollar can depreciate. 
(The last thing Japan needs is an appreciation of the yen.) 
It will take more than what we have seen so far to return the US current account deficit to reasonable proportions. 
With contraction and Euro appreciation comes the specter of falling prices, with which Europe is already flirting. 
The Euro's appreciation may well be the tipping factor that triggers deflation. 
As the now ten-year-old Japanese slump tells us, once deflation and contraction have established themselves, standard policies stop working. 
Europe does not want to find itself in this position. 
So, the G8 leaders are half right. 
Between falling oil prices, aggressive fiscal and monetary policies, and the dollar's depreciation, it is hard to see what stands in the way of a strong recovery in the US. 
But this does not translate into recovery in Europe. 
In Europe, monetary caution, self-imposed fiscal constraints, and the Euro's appreciation all lead to clear dangers: deflation and a prolonged slump. 
This is not preordained; many fundamentals in Europe are right, and a simple change in mood may spur recovery. 
But this is the time for strong contingency plans. 
Sadly, I do not see them being prepared. 

Europe’s Paradoxical Parliament 
What do members of the European Parliament (MEPs) actually do? 
Most of the 375 million or so people eligible to vote in the European elections on June 4-7 probably have only a hazy idea, or none at all, which explains why voter turnout throughout the European Union is likely to be disastrously low. 
Thirty years ago, when the first elections to the parliament were held, almost two-thirds of the electorate voted, but over the years, participation has dropped steadily. 
This year it may be 30%. 
Europe’s politicians are by and large proud of the EU and the way it has both grown and deepened. 
But it is also the EU’s growing complexity that is at the root of voters’ waning enthusiasm, so their indifference is a matter for serious concern. 
The European elections are themselves curious and unsatisfactory; there are no obvious EU-wide issues that people can vote for or against, and, with the average MEP’s constituency numbering well over half a million people, the vote is not a test of personal popularity, either. 
In most parts of Europe, the elections will be an opportunity for protest votes on national issues. 
Paradoxically, though, great deal hangs on the elections’ outcome. 
The number of seats won by the socialists and centre-right parties is likely to influence the make-up of the next European Commission – and thus the EU’s political agenda until 2014. 
But you wouldn’t know this from the low level of media interest. 
Most journalists, like national electorates, have little understanding of the significant shift in Europe’s political decision-making over the last 20 years. 
They hang on to the outdated notion that their national parliaments make all key decisions, when in reality some four-fifths of the policies that determine Europe’s future are taken in Brussels and then rubber-stamped by national parliamentarians. 
A glance at any EU member state’s parliamentary calendar shows that lawmaking there is largely confined to domestic issues. 
The specialist MEPs, on the other hand, use their expertise and their steadily increasing powers to exert a good deal of influence on EU legislation. 
But this does not mean that the European Parliament is a “real” parliament. 
It can’t raise taxes, declare war, or sack a government (even though in theory it can dismiss all the members of the European Commission en masse, the so-called “nuclear option” that is unlikely ever to be used). 
More to the point, perhaps, the European Parliament doesn’t really work on the same basis of left-right politics as national parliaments do; it deals in practicalities more than ideologies. 
For all that, the European Parliament’s importance goes far beyond its members’ technical expertise on complex issues, or its usefulness as a democratic fig leaf for an EU decision-making process that is dominated by inter-governmental horse-trading. 
The parliament has been able to claw greater power for itself because it is the only mechanism Europe has for questioning and challenging EU policy proposals, and ironing out the sometimes clumsy and high-handed diktats of Brussels’ officialdom. 
Unfortunately, however, the European Parliament is fairly inept at selling itself to public opinion. 
A recent Gallup poll showed that 36% of people questioned in all 27 EU countries no longer trust the parliament, with the only consolation being that even more, 37%, now mistrust the European Commission. 
Of those who said they wouldn’t be voting in this year’s European elections, 64% cited “lack of information” as the reason, with 62% complaining that their vote “wouldn’t change anything.” 
This feeling of ignorance coupled with powerlessness is not entirely the European Parliament’s fault. 
The combination of high politics and grinding technical detail makes EU policymaking a much less interesting spectacle than national politics, and of course there’s the added problem that so many of the players are unknown foreigners. 
But, even when the parliament does make an effort to connect with voters, the ponderous bureaucratic culture of its permanent officials tends to spoil things. 
Last year, the parliament launched a lamentably amateurish Web-TV broadcasting service whose large budget was spent not on good programming but on doing everything in all the EU’s official languages. 
So what is to be done? 
Many of the 736 EU parliamentarians are unsung heroes who risk being seen more and more as a problem rather than a solution to the EU’s ills. 
Rather than tinkering, perhaps the EU should boldly create an American-style bicameral system by turning the parliament into a House of Representatives and electing a Senate to replace the Council of Ministers, with two senators per member state. 
But that is probably far too revolutionary for an EU that took 50 years to fashion today’s unsatisfactorily hybrid decision-making structures. 

Europe’s Power to Lead 
CAMBRIDGE -- At this year’s World Economic Forum in Davos, the buzz was about Asia’s growing power. 
One Asian analyst argued that by 2050, there will be three world powers: the United States, China, and India. 
He did not mention Europe, but underestimating Europe’s power is a mistake. 
Yes, Europe currently punches below its weight. 
It is fragmented, peaceful, and normative in a world of hard power, but part of the world is not about military power. 
The use of force among advanced industrial democracies is virtually unthinkable. 
In their relations with each other , such countries are all from Venus, to paraphrase Robert Kagan, and here Europe’s focus on law and institutions is an asset. 
As for other parts of the world, a recent Pew poll found that many Europeans would like Europe to play a larger role, but to balance American military power would require a doubling or tripling of defense spending, and few Europeans are interested in such an increase. 
Nevertheless, a smart strategy for Europe will require greater investments in hard power. 
The picture for Europe, however, is not as bleak as pessimists assume. 
Power is the ability to get the outcomes one wants, and the resources that produce such behavior depend upon the context. 
In functional terms, power is distributed like a three-dimensional chess game. 
On the top board are military relations among states, with the US the world’s only superpower with global reach. 
Here the world is uni-polar. 
On the middle board are economic relations, where the world is already multi-polar. 
Here, Europe acts as a union, and other countries like Japan and China play big roles. 
The US cannot reach a trade agreement or settle anti-trust cases without the approval of the EU. 
Or, to take another example, Europe was able to lead the drive to remove Paul Wolfowitz from the World Bank. 
The bottom chessboard includes transnational relations outside the control of governments – everything from drugs to infectious diseases to climate change to terrorism. 
On this board, power is chaotically distributed among non-state actors, and it makes no sense to call this world either uni-polar or multipolar. 
Here, close civilian cooperation is important, for which Europe is well endowed. 
European countries’ success in overcoming centuries of animosity, and the development of a large internal market, has given them a great deal of soft power. 
At the Cold War’s end, East European countries did not try to form local alliances, as they did in the 1920’s, but looked toward Brussels to secure their future. 
Similarly, countries like Turkey and Ukraine have adjusted their policies in response to their attraction to Europe. 
Recently, the US National Intelligence Council published four widely different scenarios for the world in 2020: Davos World, in which economic globalization continues, but with a more Asian face; 
Pax Americana, where the US continues to dominate the global order; 
New Caliphate, where Islamic religious identity challenges the dominance of western norms; and Cycle of Fear, in which non-state forces create shocks to security that produce Orwellian societies. 
Like any exercises in futurology, such scenarios have their limits, but they help us ask which three or four major political factors will help shape the outcome. 
The first is the rise of Asia. 
The big question will be China and its internal evolution. 
China has lifted 400 million people out of poverty since 1990, but another 400 million still live on less than $2 per day. 
Unlike India, China has not solved the problem of political participation. 
If China replaces its eroded communism with nationalism or ensure social cohesion, the result could be a more aggressive foreign policy and unwillingness to deal with issues like climate change. 
Or it may deal with its problems and become a “responsible stakeholder” in world politics. 
Europe can contribute significantly to China’s integration into global norms and institutions. 
In general, Europe and the US have more to fear from a weak China than they do from a wealthy China. 
Political Islam and how it develops will be the second factor. 
The struggle against extreme Islamist terrorism is not a “clash of civilizations,” but a civil war within Islam. 
A radical minority is using violence to impose a simplified and ideological version on a mainstream with more diverse views. 
While the largest number of Muslims live in Asia, they are influenced by the heart of this struggle in the Middle East, an area that has lagged behind the rest of the world in globalization, openness, institutions, and democratization. 
Here Europe’s economic might and soft power have a lot to contribute. 
More open trade, economic growth, education, development of civil society institutions, and gradual increases in political participation might help strengthen the mainstream over time, as could the way Muslims are treated in Europe and the US. 
Equally important will be whether Western policies toward the Middle East satisfy mainstream Muslims or reinforce the radicals’ narrative of a war against Islam. 
The third major determinant of which scenario prevails will be American power and how it is used. 
The US will remain the most powerful country in 2020, but, paradoxically, the strongest state since the days of Rome will be unable to protect its citizens acting alone. 
American military might is not adequate to deal with threats such as global pandemics, climate change, terrorism, and international crime. 
These issues require cooperation in the provision of global public goods and the soft power of attracting support. 
No part of the world shares more values or has a greater capacity to influence American attitudes and power than does Europe. 
That suggests that the fourth political determinant of the future will be the evolution of European policies and power. 

Europe's Public and the Anti-Terrorism War 
BERLIN: Chancellor Schröder's government coalition barely scraped through Germany's Bundestag to secure the support it needed to dispatch German soldiers to help in the campaign against international terrorism. 
No doubt special circumstances accompanied that vote, but the effort which the country's most respected and powerful politician expended in order to gain the backing of Germany's parliament (as well as his coalition partners, the Greens) should be a warning to other Western governments not to leave their publics behind as they engage in the tough, multi-year campaign against the planners and executors of international terrorism. 
In the first weeks after the attacks on the World Trade Center and the Pentagon governments all over Europe were certain of public support. 
That changed when the US bombing against the Taliban began; doubts over the wisdom of the US campaign combined with resentment at seeing a super-modern superpower pound away at a medieval country devastated by decades of war. 
These doubts were moderated somewhat as America's strategy began to produce results. 
But they are certain to resurface and grow as memories of September 11 th attacks fade and the effort to stamp out terrorism encounters new difficulties, setbacks and dilemmas and possibly requires risky military operations elsewhere. 
Maintaining public support within the US is no problem for America's leadership. 
Americans are both shocked and angered by the attack on their cherished invulnerability and are determined to pursue the perpetrators with every means at their disposal. 
President Bush has made this his top priority; for as long as he is in the White House, he will not waver in this pursuit and neither will his people. 
But to retain popular backing will be a problem in Western Europe, America's closest allies. 
Should they cease to support the US, the unique transatlantic partnership could disintegrate. 
A wounded America appreciated the spontaneous demonstrations of sympathy and solidarity that poured across the Atlantic after September 11 th . 
But this will turn into furious rejection if Europe were to sow doubt over what Americans now regard as the most dangerous - if not the only challenge - to the common security of the Atlantic community. 
European governments know this. 
After all, not only moral outrage but calculated self-interest led them on September 12 th to invoke, for the first time, Article V of the NATO Treaty. 
If they reiterate their expressions of ``unconditional solidarity'' and make their own armed forces available they do so not only to gain some degree of influence on American strategy beyond Afghanistan, but also to signal their determination to stand by the US in the most unequivocal manner possible. 
Yet this policy demands a commitment for the long haul. 
Unless it is explained and seen as an expression of national interest, it will strain domestic political support, even to the degree of endangering government coalitions like that of Mr. Schröder. 
Of all Europe's governments, only that of Prime Minister Tony Blair in Britain has developed a strategy that successfully combines solidarity for the US with retaining public support at home. 
Admittedly, going to war is much less an anathema for Britons than for continental Europeans. 
Yet Blair did not rely on this alone. 
From the start, he declared that the attacks on New York were directly aimed at his country. 
When he called on British forces it was thus for the common defense, not just to serve the US. 
He insisted on being consulted by the Bush administration on US plans, and when some in Washington thought aloud about taking on Iraq after Afghanistan, the Prime Minister registered a clear veto. 
All this signaled to allies abroad and citizens at home that Britain's cooperation should not be taken for granted, that it requires domestic approval. 
By contrast, continental leaders have done little to dispel the impression that they are acting in response to a US request and for a US cause. 
But their people rightly demand that government should not just serve the interests of others. 
If they wish to stay the course in the struggle against international terrorism, European leaders must take a leaf or two from Blair's book. 
For one, they have to emphasize that this is their own struggle, not just America's. 
For another, they will have to make their own, distinct contribution. 
They cannot simply wait for America to move, nor can they always seek to placate Washington's preferences. 
In short, they will have to make their own efforts to sustain the common effort. 
What this distinct contribution could be is not difficult to define. 
After all, only the ingrained habit of playing second fiddle to the US prevents EU members from clearly and loudly distancing themselves from Israel's repressive interferences on the West Bank and Gaza, even though such a stance would help strengthen the commitment of Arab states to the coalition against terrorism as well as provide a useful shove to American diplomacy. 
The same applies to a European effort to rebuild relations with Iran, or a joint initiative to invest in helping Russia to destroy its huge arsenal of antiquated nuclear and chemical munitions so as to avoid having these fall into the wrong hands. 
There is little except national inertia, complacency and opportunism that stands in the way of beginning to formulate and implement a distinct EU policy to bolster the coalition against terrorism. 
The present crisis exposes this pattern of European behavior as what it has always been - the luxury of looking backwards. 
Calls for pooling European efforts have been many, based on the conviction that only in this way can European governments play a more effective international role. 
All too often, however, these have been ignored or dismissed as impractical by those in power. 
They deserve a better hearing now that retaining the solidarity of their citizens has become an essential condition for European governments to maintain solidarity with America for the long struggle against international terrorism that lies ahead. 

Europe’s Racist Schools 
I am what many people call a “Gypsy.” 
I prefer the term “Roma.” 
There are more than 10 million of us across Europe. 
The vast majority of us live in Third World conditions – denied access to adequate housing, health care, and education. 
I was born in a provincial town in Bulgaria in the late 1960’s, when, like the rest of Eastern Europe, the country was under Communist rule. 
The Party recognized no ethnic minorities – we were all, formally, equal. 
Indeed, we were so equal that the government gave many of us new, Bulgarian names. 
One day, when I was a teenager named Husni, my name became Ivan. 
But we were not equal. 
Roma lived in segregated ghettos. 
We were second-class citizens. 
One of my clearest early childhood memories is of my father telling my younger sister and me, “Education is the key to success.” 
He said, “If you want to be accepted as equals by Gadje [non-Roma], you must be better educated than they are. 
This is not easy. 
But if you succeed, this will change not only your life but also the lives of many of your people.” 
Education is the only way out of the ghetto for many Roma. 
But in societies like Bulgaria, where racism is rampant, Roma have to fight for equal schooling. 
Most of the children I grew up with received an inferior education that did not train them for university or skilled jobs. 
They are either unemployed or working as unskilled laborers in Bulgaria or in the black market abroad. 
By contrast, in large part because of my father, I managed to complete high school, then medical school, and become a general practitioner. 
By the early 1990’s, Bulgaria had changed. 
The transition to democracy promised freedom and prosperity to all who had suffered in communism’s stranglehold. 
Yet the Roma found themselves losers of the democratic transformation. 
Their situation, always tenuous, dramatically worsened. 
Their poor schooling left them ill equipped for the new economy. 
The communist dogma was shattered, but so was the pretense that we were all equals in a homogenous society. 
The government allowed employment discrimination to go unchecked, leaving the majority of Roma without jobs, and communities were plunged deeper into poverty. 
I obtained a law degree to help advocate for members of my community. 
Today, I live and work in Brussels, where I lead an organization that advises the European Union and national governments on Roma-related policies. 
I support my family and have achieved fulfillment in my career. 
But I am an exception. 
It is because of the importance of education in making me an exception that I am so deeply troubled by a recent decision of the European Court of Human Rights. 
The case was brought by 18 Roma children from the city of Ostrava in the Czech Republic who had been assigned to special remedial schools for the “mentally deficient.” 
In Central and Eastern Europe, Roma are often unfairly placed in these special schools, which provide sub-par education that all but guarantees a life of poverty and manual labor. 
I served as one of the lawyers for the children. 
The evidence showed that more than half of the Roma children in Ostrava were placed in special schools, and that more than half of the population of special schools was Roma. 
All told, Roma children in Ostrava are more than 27 times more likely than non-Roma to be placed in such schools. 
This is not a unique situation. 
Far from it. 
The same disproportionate patterns of school assignment exist throughout much of Central and Eastern Europe. 
As a United Nations expert body has declared, this is racial segregation, plain and simple. 
But the Court was unmoved. 
Its judgment recognized that the claimants raised “a number of serious arguments,” and that the education system in Ostrava perpetuated racial segregation. 
But the Court ruled that, absent a showing of actual racial bias in the minds of testers and administrators – virtually impossible to prove – the pervasive reality of racial disadvantage was not unlawful. 
In what could have been a landmark victory that would open the doors of opportunity for Europe’s Roma, the Strasbourg Court instead chose to keep Roma locked out of a decent education. 
Its decision reverberates across the Continent – not just for the Roma, but for all who have a stake in promoting the values of tolerance and equality in a democratic Europe. 
Anyone who believes in the rights of all children to quality education should be troubled by a decision so myopic. 
For decades, racial segregation in European schools has stigmatized generations of Roma children as stupid and disabled. 
The Court’s decision allows this brutal and systematic violation of fundamental rights to continue. 
The Roma, and Europe, have suffered a great defeat. 

Europe’s Rising Global Role 
BRUSSELS – Twenty years after the fall of the Berlin Wall and the end of the Cold War, the contours of world order remain in the making. 
But two “mega-trends” seem clear: the broadest and deepest wave of globalization the world has ever seen, and the rise of new world players from Asia and elsewhere. 
We also hear ever-louder calls for more effective global coordination in meeting the great challenges of our times. 
As the Lisbon Treaty comes into force, the European Union is, I believe, uniquely suited to take on its leadership responsibilities. 
Asia and Europe have been well served by economic globalization. 
Asia’s dynamic economies supply the world, and its remarkable economic growth has lifted millions out of poverty and created major new opportunities for investment and prosperity. 
This has helped great nations such as China and India to assert themselves self-confidently as global powers. 
Europe has capitalized on globalization to consolidate its position as the world’s major economy and trader. 
But globalization also increases competition and exposes weaknesses. 
Workers globally fear for their jobs and feel by-passed by economic change. 
The economic crisis has exacerbated the perceived downside of globalization. 
As a result, our economic interdependence requires careful coordination, not just in the coming weeks, but, crucially, in the longer term. 
We need to revisit the structures of global governance, to ensure that they work better for people everywhere, and in the interests of both current and future generations. 
The EU has led the discussion within its own structures and taken it to wider international fora. 
We welcome the emerging economies’ call for reform of global institutions. 
Trade is a case in point. 
It is in the enlightened self-interest of us all not to give in to the temptations of protectionism. 
The economic crisis has made progress in the negotiations of the Doha Development Agenda in the World Trade Organization even more important. 
The WTO framework, to which the EU has always given priority, is increasingly recognized as being fundamental to our prosperity. 
It helps to anchor the global economy in an open, rules-based system based on international law. 
It is good to see the more proactive attitude of our Asian partners toward taking this process forward, but more needs to be done. 
Security is another challenge, with the world facing traditional and non-traditional threats. 
Many of our countries are targets of terrorism, which, eight years on from the attacks of September 11, 2001, we must recognize is down, but by no means out. 
There are fragile states to contend with, as well as the dangers of proliferation of weapons of mass destruction, authoritarian regimes, and the threat of extremism. 
Globalization has also thrown up non-traditional security challenges that do not respect national frontiers. 
Global pandemics can spread faster; a lack of secure and sustainable energy could push us into a worldwide recession; and climate change, beyond its environmental consequences, could have serious geopolitical and social repercussions. 
Multilateral engagement is essential for dealing with these threats. 
The EU has multilateralism in its DNA. 
Others, too, can benefit from its experience. 
Europeans are long-standing champions of the United Nations and international cooperation, and continually seek to ensure that stability, freedom, democracy, and justice prevail as cornerstones of international relations. 
The EU is also doing its share of the heavy lifting. 
It has nearly 100,000 peacekeepers, police, and combat troops on the ground in the world’s hot spots, helping to consolidate peace. 
At the political level, too, the EU is increasingly shouldering its share of the burden. 
An example was the EU mission to Moscow and Tbilisi by French President Nicolas Sarkozy and me. 
This allowed us to make concrete progress on implementation of the EU's six-point ceasefire plan between Russia and Georgia. 
Reaching agreement on climate change is an immediate priority for all of us. 
We can only tackle this if we work together. 
We all stand to suffer significantly from the effects of climate change, including increased droughts, floods, and other extreme weather conditions. 
The EU is facing up to its responsibilities as a major source of past emissions. 
It has set itself ambitious targets for the future and is taking the lead in seeking a comprehensive global agreement, including a very significant effort on funding. 
Climate change also represents a case study of how we can make a virtue out of a necessity, and an opportunity out of a threat. 
The development and use of green technologies can be new sources of growth. 
Building a sustainable European economy will help to ensure our peoples’ prosperity. 
It also shows how Europe can meet its objectives at home only with a proactive and global approach. 
It is this approach that underpins our external policy. 
We cannot meet the challenges faced by the EU effectively and successfully without a strong Europe in the world. 
Prosperity and growth, security and stability, and the long-term sustainability of our societies require the promotion of our interests and values abroad, and engagement with external threats and global challenges. 
The EU’s commitment to the multilateral system of global governance through the UN and other bodies is clear. 
We already speak with conviction and clarity on the major challenges that face us. 
The Lisbon Treaty allows us to achieve a greater coherence and gives us a much greater capacity to act. 
It will allow diplomacy, crisis management and an emerging European defense capability to be used hand in hand with more traditional policies, such as trade and development. 
It is often said that the EU's comparative advantage lies in its normative power, or the power of its values. 
I think this is right. 
In a post-crisis world, when people are looking for new ways to ensure their well-being, peace, and prosperity, the European experience has a great deal to offer. 

Europe’s Russia Question 
BRUSSELS – Friend or foe, or something uneasily in-between? 
That’s the question Europe is asking about Russia, and Russia about a newly aggressive Europe. 
President Vladimir Putin’s choice of Dmitri Medvedev, Chairman of Gazprom, the gas company with an emerging stranglehold on European energy supplies, only throws this question into an even starker light. 
Relations between Europe and Russia have been deteriorating for several years, but once manageable economic issues, including energy, are now being aggravated by much more volatile political differences. 
The risk is a climate of undisguised hostility, with potentially greater costs than during the nadir of the Cold War. 
The most obvious and imminent flashpoint is Kosovo. 
The likelihood is that early next year most of the European Union’s member nations will recognize the Albanian-majority enclave on Serbia’s southern edge as an independent state. 
This is certain to enflame not just Serbia, but also the Kremlin. 
Then there are rising tensions over plans by the United States to based a missile defense system in Poland and the Czech Republic, as well as the growing likelihood that further NATO enlargement will include Georgia, the increasingly prosperous neighbor with which Russia has fractious relations. 
Russia continues to fan secessionist flames there by encouraging the independence of Abkhazia and South Ossetia. 
Tempers are rising in both Russia and Europe, yet, paradoxically, when it comes to the major challenges they face, their interests are largely identical. 
Both are threatened by Islamic extremism and growing unrest. 
Both have much to lose if the Middle East erupts into fresh violence. 
And both face serious demographic problems, given shrinking and aging populations, as well as the challenge of Asia’s rising superpowers. 
The breakdown in relations has been gradual and undramatic – more a morose and resentful refusal to see each other’s point of view than a succession of rows. 
This owes much to the humiliations that Russia suffered when the end of communism forced its economy to its knees, and to Western short-sightedness about Russia’s fundamental strengths and resilience. 
The EU is as much to blame as the Kremlin. 
In the years since the collapse of the Soviet Union, neither EU nor European national policymakers have devised a coherent strategy setting out the relationship that Europe wants with the Russian Federation. 
Today, it is more important than ever that the EU, which now includes not only former Soviet satellites but countries that were part of the USSR, should create a strategic policy framework. 
This reflects not only worries about energy and shared security concerns, but also the need to head off any looming crisis in the Middle East that could plunge large parts of the world into turmoil, if not armed conflict. 
There, and in the volatile Caucasus, a significant improvement in Europe’s relations with Russia is crucial to defusing tensions. 
For its part, Europe needs to mount a charm offensive to persuade Putin and Medvedev that Russia’s real interest is in improving bilateral relations. 
Russia needs to collaborate on energy in ways that bring genuine security. 
In the Middle East, it needs to persuade Iran to hold in check the military elements of the nuclear program that Russia has made possible. 
None of this will be easy, not only because Europe’s relationship with Russia has grown so chilly, but also because Putin is understood to despise the EU as politically impotent. 
Russian leaders may have misinterpreted as a sign of weakness Europe’s representation at last month’s EU-Russia summit by two Portuguese politicians – European Commission president Jose Manuel Barroso and Prime Minister Jose Socrates, whose government currently holds the revolving EU presidency. 
Most telling in Russian eyes has been EU countries’ competition for oil and gas contracts, which has done much to convince the Kremlin that Europe is not a political force to be reckoned with. 
On the European side, engineering a new spirit of détente will be tough. 
There is widespread disapproval of Putin’s autocratic style and of his government’s human rights record. 
Extending an olive branch to Russia will have little or no voter appeal in most EU countries, and Putin’s efforts to retain power de facto if not de jure after Medvedev wins his likely victory next March are certain to make matters worse. 
The question, therefore, is whether Europe and Russia can establish a new framework for talking to one another. 
There are plenty of well-worn diplomatic paths, so it’s not structures that are lacking. 
What’s needed is a more positive frame of mind, and specific ideas about what to do. 

Europe’s Scientific Meltdown 
After World War II, most Europeans agreed that scientific research would not only boost their economies, but also deliver greater technological autonomy from the United States and act as a catalyst for social change. 
The British Royal Society advocated creating the German Max Planck Society on the ground that solidarity between international scientific communities could contribute to reconciling former enemies. 
As a result, big projects such as the European Centre for Nuclear Research (CERN), the European Space Agency (ESA), and the European Molecular Biology Organization (EMBO), were founded to help unite European research efforts in basic science. 
Today, however, European science is declining in almost all countries (Sweden, Finland, and Iceland are exceptions), wasting existing talent and losing attractiveness for young people. 
On average, a young European scientist working in the US receives 2.5 times more research support than in Europe. 
No surprise, then, that a brain drain has developed. 
Indeed, Europe has only five scientific researchers per 1000 inhabitants, compared to eight in the US and nine in Japan. 
Despite its strong scientific tradition, figures for Central Europe are even worse, and the cost of EU integration is likely to further shift priorities away from science and education. 
Shrinking budgets are also damaging established scientists. 
In the life sciences, for example, foundations find it hard to identify high-level Europeans for awards. 
This is not due to lower scientific quality, but to the higher levels of sustained support available to American group leaders to transform new ideas into discoveries. 
Massive military and health investments by the US government have generated a critical mass of research, which in turn attracts private funding – including from European companies, particularly in the pharmaceutical industry. 
Something similar can and does work in Europe. 
In Finland, for example, ten years of sustained public funding is now catalyzing private investments and fueling regular increases in R&D budgets. 
Edith Cresson, a former European Commissioner for Research, once said that, “funding directly nanotechnologies would have been more rewarding than creating CERN.” 
She was wrong: the complexity of modern science does not allow anyone, least of all bureaucrats, to predict where innovation will emerge. 
Public funding of basic research and industrial investments are both needed to achieve long-term technological development. 
Although most national funding agencies lack imagination when it comes to European cooperation, several institutions are aware of Europe’s deteriorating research and the handicaps European scientists face in competition with those in the US and Japan (and also, increasingly, India and China). 
At a meeting organized for November 2005 by the Collège de France, Nobel laureates, science historians, and managers of European universities and research facilities will stress the need for a new science policy, including in the social sciences and humanities, in the presence of ministers and European commissioners. 
Euroscience and the European Science Foundation have also made suggestions aimed at shoring up political will: 
· Establish a European Research Council. 
This initiative, originally presented by the Deutsche Forschungsgemeinschaft and the magazine Nature , proposes to create a pan-European funding agency to organize international competition in “hard” and “soft” basic science. 
Most national research organizations and the European Commission support the idea, but questions persist: who will provide the budget (at least €2 billion is needed, which is roughly half of the increase promised by EU governments to raise R&D to 3% of the GNP in 2010)? 
What mechanisms will ensure the Council’s autonomy, a key condition for basing research awards strictly on scientific quality? 
· Implement general European training schemes. 
Large facilities have trained a few generations of genuinely European scientists. 
But they cover only a small range of scientific disciplines; in most others, education is still overwhelmingly national. 
The Bologne protocol, which aims at harmonizing university training throughout Europe, could prove useful here. 
In parallel, European post-doctoral schemes need reappraisal. 
In the US, such schemes contribute to widespread dissemination of expertise, whereas European laboratories still use them as waiting lines without putting enough emphasis on multinational and multidisciplinary trajectories. 
· Give appropriate recognition, salaries, and autonomy to young scientists. 
Unfortunately, young scientists are largely viewed as a source of cheap manpower, deterring the best students from embracing scientific careers. 
The new Charter of Scientists now under discussion in the European Commission should improve the situation, by making flexible career tracks compatible with transferable social benefits. 
Europe needs proactive policies to meet the challenges of new research needs ­– and to take advantage of subsequent job opportunities – in areas like sustainable development, climate change, natural hazards, and public health. 
Creating an international pool of expertise could become an important asset for European universities, while enabling European industries to create new jobs. 
Europe’s science policies should also frame a new deal for developing countries. 
Today, scientific relations between developed and developing countries are unequal; important genetic discoveries based on Third World diseases provide neither appropriate credit to local scientists nor fair returns to the populations that made them possible. 
Moreover, the North-South gap in public health is a major threat to the future of mankind. 
Europe should seek to make science more user-friendly, both to its own researchers and would-be scientists and those in developing countries. 
Let us hope that Europe’s politicians have the foresight to meet these challenges before European science becomes irreversibly marginalized. 

Europe’s Second Chance in the Balkans 
Confronting the disintegration of Yugoslavia in 1991, former EU Council President Jacques Poos made his famous but now derided statement: “This is the hour of Europe… not the hour of the Americans.” 
What the EU learned from the subsequent four years of Balkan disasters under its management is now being tested by another major turning point and potential crisis – when and how Kosovo is to become independent. 
Once again, Europe’s role may well prove decisive. 
The decision on Kosovo may not imply the prospect of renewed large-scale conflict, but it does raise serious questions for Europe’s relations with Russia and the United States, as well as for stability throughout the Balkans. 
While the US has a major stake in the outcome, EU countries obviously have the most significant interests in the region, and perhaps this time they will assume a corresponding leadership role. 
For at least the next two months, the United Nations Security Council will debate a blueprint for Kosovo’s future, arduously worked out during a year of “negotiations” between the governments in Belgrade and Pristina by UN envoy and former Finnish president Martti Ahtisaari. 
The bluebrint provides for Kosovo’s “supervised independence,” maximum protection for Serb and other minorities, and a supervisory role for the EU. 
Ahtisaari’s proposal is an acknowledgement that no agreement between the parties is possible, and that there is no constructive alternative to Kosovo’s independence. 
Together with the US, the EU collectively has rallied around the Ahtisaari proposal. 
But individually, a number of European countries – Spain, Greece, Italy, Cyprus, Romania, Slovakia, and Austria – are skeptical or negative toward Kosovo independence, which raises profound questions about the EU’s resolve. 
Meanwhile, Serbian Prime Minister Vojislav Kostunica is waging a tireless and remarkably effective diplomatic campaign denouncing both Ahtisaari and his proposal. 
He has strengthened the position of many in Europe and elsewhere who are skeptical of challenging a country’s territorial integrity or who still claim to believe in a negotiated settlement. 
More worrisome is the current uncertainty about whether a shaky Europe will stand up to Russia, upon which Serbia depends to maintain sovereignty over Kosovo. 
So far, the Kremlin has resolutely stated that it will accept only a settlement agreed to by both parties, in effect endorsing Serbia’s position. 
While conveying the possibility of a veto, Russia’s current strategy is to delay a Security Council vote as long as possible by prompting a new fact-finding mission to Kosovo, which will most likely be followed by renewed insistence on another effort to negotiate a settlement. 
Serbia welcomes delay in the hope that this will stimulate violence by frustrated Kosovars, thereby increasing Europe’s opposition to independence and bolstering Serbia’s dedication to maintaining the status quo, or, as a last resort, to partitioning Kosovo. 
Some European countries apparently believe that they can maintain an EU consensus in support of Ahtisaari’s plan but allow Russian foot-dragging on the grounds that delay is not unreasonable and something better may turn up with additional negotiations. 
But, by adopting such a stance, they thwart their own envoy and may well stimulate the violence they profess to abhor. 
History offers little consolation. 
The EU’s handling of relations with Serbia in the past only encouraged intransigence. 
Instead of repeatedly making clear that Kosovo independence is an indispensable requirement for EU membership – so important to Serbia’s modernization and Balkan stability – EU leaders like Javier Solana laud Kostunica as a great democratic leader. 
They relentlessly but unsuccessfully pressured Montenegro’s leaders to remain in a dysfunctional union with Serbia, condoned Kostunica’s dubious 2006 referendum on a new constitution enshrining Kosovo as a part of Serbia, and weakened demands for Serbia’s cooperation with the International Criminal Tribunal in The Hague. 
Realizing Ahtisaari’s proposal will depend on EU solidarity and persistence, coupled with strong American support, to manage the vicissitudes of UN debate, lobby skeptical non-permanent Security Council members, such as Indonesia and South Africa, and persuade Russia to abstain rather than exercise its veto. 
Many believe that Russia will not risk its relations with Europe and the US, ultimately abstaining if Western countries hold firm. 
But Russia appears to be in a Gaullist mood, and has other outstanding issues causing friction with the US and Europe. 
Putin’s Russia is not Yeltsin’s Russia, when the West could simply shunt aside Russian concerns. 
Europe is vulnerable on many fronts, particularly in view of its dependence on Russian energy, while America’s weakened presidency has diminished US influence in Russia. 
If Russia does veto the Ahtisaari plan, the EU’s united facade will likely fracture, with many European countries refusing either to join the US in recognizing an independent Kosovo without the UN’s blessing or to send a supervisory mission there. 
That would open a new and tumultuous era in the Balkans, with more than Kosovo at stake. 
Indeed, with the UN and the Western alliance in disarray, the region could fall victim to further Russian policy mischief. 

Europe's Secular Mission 
Economics and politics have been uneasy allies in the process of European unification. 
From the moment Europe's coal and steel industries were merged in an effort to prevent future wars on the Continent, the "European project" has often relied on economic interests to propel itself forward. 
Now, however, new members mostly join for political and geo-strategic reasons. 
This change in motivation requires changes in how the Union thinks about itself, changes that go beyond the ideas now circulating at the convention drawing up an EU constitution. 
Of course, the economic prosperity that European unification has delivered undoubtedly lures new members, but the EU's attraction extends far beyond pocketbook issues. 
For the Union is also a huge area ruled by law, some concerning production and commercial exchange, but also others that establish and protect individual rights. 
Because of this, the EU's neighbors have felt magnetically attracted to this area of peace and prosperity. 
The first enlargement, in 1973, brought in Great Britain, Ireland, and Denmark, and was based mostly on economic considerations. 
But all successive waves of enlargement were motivated mostly, if not exclusively, by political reasons. 
Greece provides a good example. 
After the dictatorship of the colonels, Greece sought international rehabilitation through membership in the European Community, whose imprimatur in turn helped to consolidate the fragile new democratic regime. 
The modernizing transformation now taking place in Greece owes much to the country's EU membership. 
Much the same is true for Spain and Portugal. 
Rejected while they were still fascist dictatorships, their candidacies were accepted when their regimes changed. 
As with Greece, democratic consolidation was at stake. 
Indeed, from the economic point of view, entry into Europe, and having to compete with the powerful economies of Germany or France, was risky, but it was a necessary condition for securing their democracies. 
The inclusion of the next three next countries--Sweden, Finland, and Austria--posed fewer economic problems. 
They sought membership mostly for geostrategic reasons: to consolidate their security. 
Neutrality prevented them from becoming candidates so long as the Soviet Union existed. 
Once the Soviet Union's demise made it possible, they joined. 
The motivation of the candidates who will join in 2004 is analogous. 
Only Malta is a case in which the major interest in membership--access to the great common market--is economic. 
For Cyprus, membership is, above all, a means to unblock the stalemate between the island's Turkish and Greek communities. 
As for the eight countries recently freed from Soviet domination, their priority is democratic consolidation. 
The three Baltic states and Slovenia also want to entrench their recently revived national identities. 
To be sure, the EU's potential to induce economic dynamism, best seen in Ireland and Greece, attracts new members. 
But the Iraq crisis provided East European countries with an opportunity to confirm the absolute priority they place on strategic stability, which is why they put relations with the US ahead of worries about European political solidarity. 
So the following question arises. 
Although it is logical that all Europeans want to give a strong institutional basis to Europe's definitive and everlasting peace, and that we pragmatically unite our markets, these imperatives are insufficient to energize a Union with 25 members. 
A deeper shared purpose is needed. 
Right now, Europe has set its sight on political bonds that will be, for some time, impossible to establish. 
Our 25 nations have profoundly different historical experiences, geographical situations, and strategic sensibilities. 
So today's most hyped goal--conceiving and putting into practice a common foreign policy--seems too ambitious to succeed. 
One can bemoan this fact, but it is better to accommodate oneself to it and accept the notion that it will take decades for Europe to think in the same way on most issues, not least about relations with the US. 
But this does not take anything away from the extraordinary community constituted by the intellectual and cultural patrimony that unites Europeans around recognized and accepted values. 
It is here that Europe has a purpose it can rally around--a message that can resonate powerfully in a world riven by religious intolerance and fanaticism. 
Many of Europe's values--respect for human life, the desire to protect the weak and the oppressed, equal treatment of women, the commitment to the rule of law--arose in the course of a long history in which the influence of Christianity was very significant. 
But Europe also found a productive balance between church and state. 
In Europe, sovereignty belongs to the people and does not flow from a transcendent power. 
Liberty of thought is absolute, as is religious freedom. 
Women do not suffer some divinely mandated inferior status vis-à-vis men. 
Political representation must be pluralistic. 
Public powers should not depend or refer to any religious authority. 
All these values are accepted pillars of political and institutional stability in today's Europe, and command nearly unanimous agreement. 
They were extracted from the churches, not granted by them. 
This part of our patrimony comes from the Enlightenment, and grows out of the old struggle for the triumph of Reason. 
To deepen this set of our values, to test to what extent they are shared is the necessary condition for generating new values and for giving our Union the identity and cohesion that will one day permit us to propose Europe's secular values to the rest of the world. 

Europe’s Shaky Foundations 
BERLIN – Slowly, word is getting round – even in Germany – that the financial crisis could destroy the European unification project in its entirety, because it demonstrates, quite relentlessly, the weaknesses of the eurozone and its construction. 
Those weaknesses are less financial or economic than political. 
The Maastricht Treaty established a monetary union, but the political union that is an indispensable precondition for the common currency’s success remained a mere promise. 
The euro, and the countries that adopted it, are now paying the price. 
The eurozone now rests on the shaky basis of a confederation of states that are committed both to a monetary union and to retaining their fiscal sovereignty. 
At a time of crisis, that cannot work. 
At the beginning of the crisis, in 2007-2008, the eurozone’s fundamental flaws could have been corrected had Germany been willing to support a joint European crisis response. 
But German officials preferred to maintain national primacy – and thus a confederational approach to Europe. 
Throughout history, confederations have never really worked, because the question of sovereignty (and thus of power and legitimacy) remains unresolved. 
The United States is a case in point. 
After winning independence, the American colonies united loosely under the Articles of Confederation. 
But that arrangement failed financially and economically, and the US soon moved towards a full federation. 
Today, Europe – or, more precisely, the eurozone – faces an almost identical situation, except that the historical conditions for further integration are much more complex and difficult than they were in post-independence America. 
Europe has three choices. 
Muddling through as before would only escalate and prolong the crisis. 
Ending the monetary union would end the European project itself, and wreak unmanageable havoc. 
Finally, Europe could move forward to real economic and political integration – a step that today’s leaders lack the confidence to take, because they don’t believe that they have the necessary public support at home. 
Much, therefore, speaks for starting with a combination of the first and second options. 
Then, once the European project is halfway over the cliff, the federalist moment might arrive. 
But the operative word is “might”: a headlong plunge into the abyss might prove equally likely. 
Europe’s do-nothing approach to the crisis has already produced visibly adverse consequences. 
Elected officials’ passivity has stoked popular mistrust, which now threatens the European project. 
Indeed, the crisis is beginning to erode the very foundations – the Franco-German and transatlantic partnerships – of a post-war European order that has ensured a period of peace and prosperity without precedent in the history of the continent. 
Financial-market pressure has now reached France, and poses a danger that is far from over. 
If France is brought to its knees and Germany doesn’t stand by its partner unwaveringly and with everything that it has to offer, the European catastrophe will be complete. 
And that could happen sooner rather than later: France cannot and will not give up on the Mediterranean region, so the exit fantasies entertained by rich northern Europeans (Germans, above all) endanger the Franco-German pillar of European peace. 
Across the Atlantic, America’s fiscal crisis and weak economic growth will force it to reduce its global military commitments. 
Moreover, the US will orient itself increasingly towards the Pacific rather than the Atlantic. 
For Europeans, with our turbulent eastern and southern neighborhoods, this presents an additional security challenge for which we are materially and intellectually unprepared. 
Even today, Europe’s military weakness is working to undermine the transatlantic relationship. 
An additional threat to the transatlantic alliance arises from the emerging new world order. 
The coming years, indeed decades, will be characterized by an increasingly aggressive US-Chinese dualism as China becomes stronger and America’s weakness persists. 
While this rivalry will have a military component, as evidenced by China’s enormous military buildup, it will manifest itself primarily in terms of economic, political, and normative spheres of influence. 
East and Southeast Asia and the Pacific will play the central role here. 
But China will try to draw Europe into this new global game. 
Indeed, it has already begun to do so. 
The recent visits by Prime Minister Wen Jiabao to Europe’s crisis countries, to which he offered generous loans and assistance, made this strikingly clear. 
And America’s weakness, the growing dependence of European (especially German) exports on the Chinese market, and the enticements of the Far East more generally, will nurture a new and promising Eurasian perspective as Transatlanticism declines. 
European illusions about Asia will no longer be directed at Russia, which, apart from its natural resources, will simply have nothing to offer. 
No, this time, the temptation will spring from China, which well understands Europe’s significance in its emerging geopolitical contest with (and against) the US. 
As with Germany vis-à-vis France, here, too, Europe must stand unwaveringly by its transatlantic partner to avoid putting itself in great jeopardy. 
The two foundations of Europe’s seven decades of peace are cracking. 
Repairing them requires nothing less than pressing ahead, at long last, toward a strong, united Europe. 

Europe’s Short Vacation 
NEW YORK – Since last November, the European Central Bank, under its new president, Mario Draghi, has reduced its policy rates and undertaken two injections of more than €1 trillion of liquidity into the eurozone banking system. 
This led to a temporary reduction in the financial strains confronting the debt endangered countries on the eurozone’s periphery (Greece, Spain, Portugal, Italy, and Ireland), sharply lowered the risk of a liquidity run in the eurozone banking system, and cut financing costs for Italy and Spain from their unsustainable levels of last fall. 
At the same time, a technical default by Greece was avoided, and the country implemented a successful – if coercive – restructuring of its public debt. 
A new fiscal compact – and new governments in Greece, Italy, and Spain – spurred hope of credible commitment to austerity and structural reform. 
And the decision to combine the eurozone’s new bailout fund (the European Stability Mechanism) with the old one (the European Financial Stability Facility) significantly increased the size of the eurozone’s firewall. 
But the ensuing honeymoon with the markets turned out to be brief. 
Interest-rate spreads for Italy and Spain are widening again, while borrowing costs for Portugal and Greece remained high all along. 
And, inevitably, the recession on the eurozone’s periphery is deepening and moving to the core, namely France and Germany. 
Indeed, the recession will worsen throughout this year, for many reasons. 
First, front-loaded fiscal austerity – however necessary – is accelerating the contraction, as higher taxes and lower government spending and transfer payments reduce disposable income and aggregate demand. 
Moreover, as the recession deepens, resulting in even wider fiscal deficits, another round of austerity will be needed. 
And now, thanks to the fiscal compact, even the eurozone’s core will be forced into front-loaded recessionary austerity. 
Moreover, while über-competitive Germany can withstand a euro at – or even stronger than – $1.30, for the eurozone’s periphery, where unit labor costs rose 30-40% during the last decade, the value of the exchange rate would have to fall to parity with the US dollar to restore competitiveness and external balance. 
After all, with painful deleveraging – spending less and saving more to reduce debts – depressing domestic private and public demand, the only hope of restoring growth is an improvement in the trade balance, which requires a much weaker euro. 
Meanwhile, the credit crunch in the eurozone periphery is intensifying: thanks to the ECB long-term cheap loans, banks there don’t have a liquidity problem now, but they do have a massive capital shortage. 
Faced with the difficulty of meeting their 9% capital-ratio requirement, they will achieve the target by selling assets and contracting credit – not exactly an ideal scenario for economic recovery. 
To make matters worse, the eurozone depends on oil imports even more than the United States does, and oil prices are rising, even as the political and policy environment is deteriorating. 
France may elect a president who opposes the fiscal compact and whose policies may scare the bond markets. 
Elections in Greece – where the recession is turning into a depression – may give 40-50% of the popular vote to parties that favor immediate default and exit from the eurozone. 
Irish voters may reject the fiscal compact in a referendum. 
And there are signs of austerity and reform fatigue both in Spain and Italy, where demonstrations, strikes, and popular resentment against painful austerity are mounting. 
Even structural reforms that will eventually increase productivity growth can be recessionary in the short run. 
Increasing labor-market flexibility by reducing the costs of shedding workers will lead – in the short run – to more layoffs in the public and private sector, exacerbating the fall in incomes and demand. 
Finally, after a good start, the ECB has now placed on hold the additional monetary stimulus that the eurozone needs. 
Indeed, ECB officials are starting to worry aloud about the rise in inflation due to the oil shock. 
The trouble is that the eurozone has an austerity strategy but no growth strategy. 
And, without that, all it has is a recession strategy that makes austerity and reform self-defeating, because, if output continues to contract, deficit and debt ratios will continue to rise to unsustainable levels. 
Moreover, the social and political backlash eventually will become overwhelming. 
That is why interest-rate spreads in the eurozone periphery are widening again now. 
The peripheral countries suffer from severe stock and flow imbalances. 
The stock imbalances include large and rising public and private debt as a share of GDP. 
The flow imbalances include a deepening recession, massive loss of external competitiveness, and the large external deficits that markets are now unwilling to finance. 
Without a much easier monetary policy and a less front-loaded mode of fiscal austerity, the euro will not weaken, external competitiveness will not be restored, and the recession will deepen. 
And, without resumption of growth – not years down the line, but in 2012 – the stock and flow imbalances will become even more unsustainable. 
More eurozone countries will be forced to restructure their debts, and eventually some will decide to exit the monetary union. 

Europe’s Silent Pro-Treaty Majority 
At the European Union’s coming EU summit, debate will center on whether to go forward with a “mini” EU Constitutional Treaty. 
That debate is the result of the rejection of the draft treaty by French and Dutch voters in 2005. 
But those “no” votes have obscured the fact that 18 of the EU’s 27 member states have ratified the treaty. 
Luxembourg’s voters, for example, approved it by a 56.5% majority immediately after the Dutch and French no votes. 
Indeed, with two-thirds of member states and a majority of European citizens supporting the Treaty, it cannot simply be abandoned. 
At the same time, French and Dutch citizens’ voices cannot be ignored – all the more so because it is unimaginable that an identical text could be submitted to a second referendum in either country. 
Because all 27 states must ratify the Treaty, it therefore seems obvious that it cannot enter into force in its current form, and that the “yes” countries cannot push ahead with it unchanged. 
But it is equally impossible to start from scratch. 
So we must try to reconcile the “yes” and “no” countries if we are to overcome the crisis into which Europe has been plunged. 
And we need to do so quickly if the EU is to deliver on its citizens’ expectations. 
This is because Europe faces many complex challenges in a globalized world. 
In areas as diverse as employment and social inclusion, environmental protection and climate change, health, external and internal security, and the fight against illegal migration and poverty in the Third World, European citizens are demanding effective policies. 
It is also obvious that member states cannot solve these problems alone, but only through coordinated EU action and common policies. 
But to achieve these results, and thereby convince our citizens of the EU’s value, Europe’s decision-making capacity must be strengthened and democratized. 
This does not mean that enlarging the EU’s competencies should be the aim at any cost. 
In fact, the Constitutional Treaty defines more clearly which competencies should be shared between the EU and its member states, and how. 
It also reinforces the principle of subsidiarity by giving a stronger say to national parliaments. 
So the objective is not automatically “more Europe,” but rather a “better Europe” capable of acting effectively and more transparently in areas where collective action is clearly necessary. 
For all these reasons, the institutional reforms that are contained in the constitutional treaty are still urgently needed. 
If Europe is to fulfill its role as a major global actor, its scope cannot be limited to that of a large common market. 
It must be an integrated economic, political, and social force. 
In order to realize the full potential of the common market, the EU must adapt its economic governance to the challenges of globalization – research, technological development, and knowledge must be at the heart of the European economy, particularly given Europe’s efforts to be at the forefront of combating climate change. 
It also needs to speak with one voice on matters of foreign policy in order to play a more important international role in solving major conflicts and shaping a more peaceful and balanced world order. 
Finally, the EU needs to promote social cohesion while adapting Europe’s social model to globalization’s challenges. 
It is no exaggeration to say that a large majority of member states and their citizens has already expressed its wish for this vision of the EU by voting for the Constitutional Treaty. 
At a meeting convened by Spain and Luxembourg in Madrid in January to which all the “yes” countries were invited, this view was also supported by four other member states that are committed to the constitutional treaty. 
It may well be impossible to press ahead with the Treaty without any changes to the text. 
However, the Madrid meeting made clear that there is a consensus among these member states in favor of a Europe that can play a key role in our globalized world, and whose actions are based on the principles – effectiveness, transparency, and democracy – that inspire the European integration process. 
The solution to the impasse over Europe’s Constitutional Treaty certainly does not lie in the direction of diminishing its scope, and thus perhaps making it just an “ordinary” treaty. 
Minimalist solutions respond to neither the expectations of the citizens nor the requirements of a rapidly changing world. 
The answer is more likely to be found in the Treaty’s simplification, taking out those elements that are not absolutely necessary, and also enriching it in such areas as climate change. 
The EU’s German Presidency, which I know shares the “ambitious” view of the Treaty, is working hard on finding a way out of the deadlock at this month’s European Council. 
Those countries that have stepped forward as “friends of the Constitution” have also been making clear that the initiative they launched in Madrid will support the German Presidency’s efforts. 
If not all the EU’s members are ready to take this path, flexible solutions of the sort that have been a feature of European compromise in the past may be needed. 
By all means, let us try to preserve the solidarity of all 27 EU states. 
But those member states that are willing to move forward should not be prevented from doing so. 
Differentiation should not mean division, but rather progress at variable speeds. 

Europe’s Solidarity Imperative 
LONDON – When Mario Draghi, the president of the European Central Bank, publicly proclaimed that the ECB would do “whatever it takes” to ensure the future stability of the euro, the effect of his remarks was immediate and remarkable. 
Borrowing costs fell dramatically for the governments of Italy and Spain; stock markets rallied; and the recent decline in the external value of the euro was suddenly checked. 
It remains unclear how long-lasting the effects of Draghi’s intervention – or of the public support offered to him by German Chancellor Angela Merkel, French President François Hollande, and Italian premier Mario Monti – will prove to be. 
What we can say with certainty is that Draghi’s remarks and the reaction they evoked demonstrate that the fundamental problems of the eurozone are not primarily financial or economic; they are political, psychological, and institutional. 
International observers took such notice of Draghi’s commitment to do “whatever it takes” to save the euro because so many of them have come to doubt other leading European players’ commitment to do likewise. 
(Some of these doubts are, of course, politically or financially self-serving; a certain model of financial capitalism perceives the euro as a threat, and its adherents will do everything they can to bring about its demise.) 
But eurozone leaders’ inability to assuage doubt about their commitment to the euro after two and a half years of crisis suggests that the problem is deeply rooted. 
In their own defense, eurozone ministers point to the raft of reforms that they have introduced over the past 30 months, which will promote economic modernization, the restoration of sound government finances, and closer economic coordination. 
Unfortunately, these reforms have all too often served as displacement activity – worthwhile in themselves, but failing to answer unambiguously the question posed with increasing urgency by international markets: Are the eurozone’s largest and currently most prosperous members absolutely committed to its continuation? 
No one doubts that Germany and most other eurozone members would prefer the single currency to continue. 
Today’s uncertainty concerns whether this preference may be overridden by pressing considerations of national politics, or resentment at the slow pace of reform in certain eurozone countries. 
Indeed, a German proverb to the effect that “trust is good, but control is better” has been the basis of eurozone leaders’ policy since the developed world’s debt crisis engulfed the single currency’s system of governance. 
The implication is clear: trust between the members of the eurozone cannot be taken for granted, but must be earned and maintained. 
The limitations of this approach have now been revealed. 
While the eurozone’s richer countries have indeed done much to help their troubled neighbors, they have done so in an obtrusively conditional, transitional, and incremental fashion. 
At one level, it is entirely understandable that Germany and other eurozone countries should demand assurances that their resources will not be wasted. 
But this constant need for reassurance, for the limiting of risk and involvement to the minimum necessary, provokes a fear that at some point Germany and others will judge their partners’ assurances insufficient and the risks run in helping them intolerable. 
If that happens, the euro’s demise cannot be far behind. 
The Treaty of Rome, signed in 1957, represented a noble and ambitious departure in European history. 
Solidarity and predictability in international relations, based on common institutions and common interests, would ensure Europe’s prosperity and stability much more effectively than had the traditional balancing act of high-wire diplomacy, whose practitioners had too often crashed to the ground. 
The euro was founded in this spirit of solidarity, and its contribution to limiting economic and financial instability in Europe over the past five years should not be underestimated. 
The example of the 1930’s is a reminder of how much worse things might have been. 
Eurozone leaders’ temptation to revert to earlier, discredited models of European relationships was bearable for a time, but it has now reached the limit of its tolerability. 
My impression is that German public and political opinion is beginning to recognize the economic devastation for Europe and Germany implied by a euro breakup. 
German politicians bear the important democratic responsibility of reinforcing this realization and advocating the steps needed to avert a catastrophe. 
It can be no part of a well-functioning democracy for leaders to hide unwelcome truths from their electorates. 
It would be a delusion to imagine that the eurozone need only follow its current path to ensure the single currency’s future. 
If nothing else, that current path unacceptably accentuates the differences between member states in a way that is politically and economically unsustainable in the longer term. 
The philosophy of control and reciprocity that until now has characterized the eurozone’s approach to its crisis of governance needs to be replaced by one of solidarity and all that follows from it. 
This means a more balanced economic policy within the eurozone, an enhanced role for the ECB, a real banking and financial union, and a road map to partial and conditional mutualization of legacy debt. 
Eurozone leaders have spoken about all of these, but the time has come for unequivocal commitments and a realistic timetable for action. 
We are now perilously close to the moment when “muddling through” could give way to renewed crisis. 
So the Bundesbank’s self-righteous zeal in asserting that its responsibilities are somehow graver – and more binding – than those of other central banks is dangerously wrong-headed. 
“Nein” merely brings calamity closer. 
None of Europe’s financial problems would look remotely as challenging today if doubts about the eurozone’s future had been dispelled two years ago, and the reputational and financial costs would have been dramatically less than they have been in the past 30 months. 
In the long run, solidarity is cheaper for all involved, while its absence could become ruinously expensive in the foreseeable future. 

Europe's Solidarity under Siege 
Is the European Union's solidarity fracturing? 
After bruising enlargement negotiations and internal differences over Iraq, and with similar divisions surrounding the new EU constitution and the common European foreign and defense policy, one might well think just that. 
Public opinion polls also show a dramatic decline in support for enlargement within the current EU member states. 
Whether or not the crisis of European solidarity is real is a fundamental question, because the EU will not survive without solidarity, at least not as we know it. 
The sense of equality and solidarity is a necessary foundation of any democratic community. 
In the 1950's the British sociologist T. S. Marshall wrote about the progress of rights, from civil rights in the 18 th century, to political (democratic) rights in the 19 th century, to social rights in the 20 th century. 
These three dimensions--liberal, democratic and social--describe the modern European nation state. 
Solidarity played the most central role in the 20 th century. 
Indeed, it was the driving force behind the development of the European countries in the wake of World War II, and led to their transformation into "social states" emphasizing social security and a variety of welfare programs. 
We can measure this "institutionalized solidarity" in a nation state by the share of redistribution in its GDP. 
There is also another level of solidarity, which we can call universal or global solidarity. 
Its importance--reflected in various forms of international aid-- has been very limited until now. 
Its objective is not to ensure the equality of citizens' rights, but to guarantee minimum life conditions. 
Humanitarian interventions--much discussed in the 1990's--are another manifestation of this global solidarity. 
Between citizen solidarity at the nation-state level and humanitarian solidarity on the global level lies a third level of solidarity which is most interesting for Europeans--the EU level. 
In its early years the European Community was mainly concerned with peace, stability and democracy. 
But institutionalized solidarity has become increasingly important in European consolidation and intra-European redistribution played a key role in the modernization of Ireland, Spain, Portugal, and Greece. 
At the same time, the Zeitgeist has turned against the ideals of solidarity since the 1970's. 
Solidarity has lost ground against new demands of individual freedom, and even more against the imperative of economic efficiency, which became ever more pressing as a result of globalization. 
A "revolt of the middle classes" that increasingly refuse to pay for society's "underdogs" is accompanied by budgetary constraints that can also make solidarity seem a luxury. 
The demands of solidarity are even more difficult to sustain when they require inter-state redistribution. 
A refusal to carry the transfer costs associated with multinational states contributed to the "velvet divorce" between the Czech Republic and Slovakia and the dramatic breakdown of ex-Yugoslavia. 
Similar tensions exist in some West European countries (Belgium, Spain, Italy) as well. 
EU enlargement, with the prospect of increased cross-national redistribution, thus exposes particularly thorny issues of European solidarity. 
The promised annual EU payments to the candidate members are far below those made to current members. 
Poland, for example, will get about 67 euros per year per capita during 2004-2006, Hungary will receive 49 euros, and the Czech Republic will get just 29 euros. 
By contrast, Greece received 437 euros per capita in 2000, Ireland got 418 euros, and Portugal was paid 211 euros. 
To be sure, Europe, with its sluggish growth, feels less rich than in the past, when the earlier accession deals were negotiated. 
But the difference in treatment of the current candidate countries does not just reflect budgetary problems. 
The changing attitudes of citizens of the more developed member states and the weakening of the sense of obligation entailed by solidarity are also responsible (probably primarily so). 
The sense of solidarity between the candidate countries and current EU members is further weakened by the problem of external security. 
The accession states only recently regained their independence, and so retain a feeling of uncertainty as to their security. 
These jitters contributed to the support they gave to the US position on Iraq, which in turn provoked the irritation of some Western European leaders and the decline of public support in the member states for EU enlargement. 
Yet another potentially important source of fraying European solidarity is the changing architecture of the EU. 
Status differentiation is progressively replacing the model of equal rights and obligations of all member states. 
Ten years ago, Wolfgang Schäuble and Karl Lamers suggested the formation of a "core Europe," a group of countries that would speed up integration among themselves. 
Similar ideas, especially concerning security and foreign policy have proliferated ever since. 
Such a tendency can contribute to a further weakening of solidarity and deepening of intra-European divisions. 
The process of differentiation--inevitable to some extent, given the number and the diversity of member states--is also reinforced by the attitude of the new entrants. 
"Return to Europe" is no longer the battle cry of the new post-communist democracies. Public debates now focus on financial support from the EU and the status of individual nation states, rather than European destiny and common European projects. 
There are fears on both sides. 
This is understandable, given the scope of enlargement and the need for an internal transformation of the Union. 
But these fears and the atmosphere of suspicion must be overcome. 
Mutual trust must be reinforced. 
The constitutional debate in the next several months should focus on these major questions: why and how Europe's peoples want to live together. 
The concept of solidarity should obviously be central to this debate. 

Europe's Solidarity With Ukraine 
Many generations of Poles dreamt of the day when Europe's postwar division would be undone. 
Many generations of Ukrainians were also deprived of a right to their own country, language, and culture. 
What united prisoners of conscience in the 1960's, 1970's, and 1980's was the faith that one day their countries would find their place in a united Europe. 
For Poles, the dream was realized on May 1 with EU accession. 
For Ukraine, the situation is more uncertain, but momentous decisions about its future are also about to be made. 
In May, the European Union will specify the principles that will guide relations with its new neighbors. 
In June, a NATO summit will discuss prospects for Ukraine's entry into the alliance. 
And this autumn Ukraine's presidential election will determine the country's development for decades to come. 
At this crucial moment, we call on Europe to open itself toward Ukraine, a great European country whose needs and aspirations cannot be forgotten in the process of constructing the new Europe. 
Europe should go beyond defining its relationship with Ukraine as a neighbor: it should clearly state that Ukraine has a realistic chance of entry into NATO and the EU. 
Such a statement is essential to support democratic forces in Ukraine at a time when they stand a realistic chance of shaping Ukraine's future. 
Ukraine's ruling elite is brutally suppressing opposition, limiting freedom of speech, and curtailing economic liberty. 
The coming presidential election is thus a test that will answer several fundamental questions. 
Will Ukrainian society maintain its right to choose its representatives, or will a so-called "managed democracy" win out, with power transferred back and forth within small circles of oligarchic clans? 
Will a free market flourish, or will oligarchic capitalism serve the interests of the few? 
Will civil society thrive, or will Ukraine be a society of obedient subjects? 
Will the law serve all, or only the elites? 
The victory of the opposition in the parliamentary election of 2002 attests to the potential that may be unleashed with a victory by democratic forces in the presidential election. 
As a result of the policies initiated in 2000, and particularly the struggle against oligarchic omnipotence, Ukraine's economy has been growing for five years in a row. 
The parliamentary victory of the opposition also forced the reluctant authorities to declare Ukraine's readiness to enter NATO and the EU. 
To complete the process of democratic transformation, Ukraine needs a declaration by Europe affirming Ukraine's European and Euro-Atlantic prospects. 
Such a declaration would mean that Europe is not closing its doors on Ukraine, a country with a European cultural identity and a long tradition of struggle for democracy and human rights. 
It would be hard to overestimate the importance of such a declaration. 
The example of Poland and that of the other countries of Central Europe shows that the clear prospect of EU membership may be one of the engines of effective reforms and may significantly enhance the ability of local leaders to persuade their people to accept the need for reforms that are sometimes painful. 
More generally, discussions about the future of Europe should be permeated by a spirit of solidarity with respect to the states and nations that are not yet members and whose membership is not envisioned in the near future. 
Otherwise, the continent will again be divided into rich and poor, into peoples living under democracy and those subjected to authoritarian regimes. 
We do not want a new Iron Curtain on the Polish-Ukrainian border. 
In the years since it regained its independence, Ukraine has proved that it can play an important and constructive role in the region. 
In the early 1990's, Ukraine gave up its nuclear weapons. 
Since then, it has participated in UN and NATO peace missions, and it has settled its borders with all its neighbors. 
Independent Ukraine has been free of ethnic conflicts, even though there has been no shortage of attempts to incite them. 
In terms of its historical heritage, economic interest, and ethnic composition, Ukraine belongs to both Central and Eastern Europe. 
Its location on the Black Sea ties it to Southeast Europe, the Balkans, and the Caucasus, as well as Turkey. 
Ukraine has formed a regional association with Georgia, Uzbekistan, Azerbaijan, and Moldova, and its ambition is to play the role of a center of democracy and economic freedom in this huge area. 
Both Ukraine and Poland pay special attention to good neighborly relations with Russia. 
Strengthening Russian democracy is in the interest of Ukraine, Poland, and all of Europe. 
A democratic Ukraine, closely cooperating with Poland within the framework of the European community, will open new possibilities for developing and strengthening partnership with Russia. 
We are aware of the problems inherent in the creation of a European prospect for Ukraine. 
Integrating the ten new member countries that joined the EU on May 1 will demand tremendous effort on the part of the Union, as well as a fair division of the burdens. 
But this should not make us lose sight of other challenges. One of the most important is the fate of Ukraine, and the need to strengthen liberty and democracy there. 

Europe’s Sovereignty Crisis 
BERLIN – Finally, German Chancellor Angela Merkel has accepted a new form of European Union. 
More than ever, the EU must combine greater stability, financial transfers, and mutual solidarity if the entire European project is to be prevented from collapsing under the weight of the ongoing sovereign-debt crisis. 
For a long time, Merkel fought this new EU tooth and nail, because she knows how unpopular it is in Germany – and thus how politically dangerous it is to her electoral prospects. 
She wanted to defend the euro, but not to pay the price for doing so. 
That dream is at an end, thanks to the financial markets. 
The markets issued an ultimatum to Europe: either embrace more economic and financial integration on a federal basis, or face the collapse of the euro and thus the EU, including the Common Market. 
At the last moment, Merkel chose the sensible option. 
Had the European Council’s heads of state and government taken this foreseeable decision a year ago, the euro crisis would not have escalated to the extent that it has, the total bill would have been lower, and European leaders would have been rightly praised for a historic feat. 
But, as I said, back then Merkel did not dare to act. 
The agreement at the most recent European Council will be more expensive, both politically and financially. 
Despite doubling financial aid and lowering interest rates, the agreement will neither end the Greek debt crisis and that of other countries on the European periphery, nor stop the EU’s associated existential crisis. 
It will only buy time – and at a high cost. 
Further aid packages for Greece may seem impossible to avoid, because the losses imposed on Greek debt holders have been too modest. 
Other crisis countries in the eurozone have not been stabilized, because Germany – fearing a domestic political backlash – has not dared to embrace a community of liability by issuing Eurobonds, even if the European Financial Stability Facility’s new role means that virtually 90% of the path has already been traveled. 
Once again, there has been no success in boosting confidence in the face of the dynamics of this crisis. 
But the bail-in of private investors, much applauded in Germany, is of secondary importance, and is intended only for the German public and the MPs of the country’s government coalition; indeed, upon close inspection, it turns out that banks and insurance companies have made a decent profit. 
Their losses will remain minimal. 
Still, the single currency’s collapse was avoided, and French President Nicolas Sarkozy was right to laud the establishment of a “European Monetary Fund” as a real achievement. 
But this bold move has huge political consequences that have to be explained to the public, because the move toward establishing such a fund – and, with it, a European economic government – amounts to an EU political revolution in three acts. 
First, the two-speed Union, which has been a reality since the first rounds of enlargement, will divide into a vanguard (euro group) and a rearguard (the rest of the 27 EU members). 
This formalized division will fundamentally change the EU’s internal architecture. 
Under the umbrella of the enlarged EU, the old dividing lines between a German/French-led European Economic Community and a British/Scandinavian-led European Free Trade Association re-emerge. 
From now on, the euro states will determine the EU’s fate more than ever, owing to their common interests. 
Second, this jump into a monetary fund and economic government will lead to further massive losses of sovereignty for the member states, in favor of a European federal solution. 
For example, within the monetary union, national budget laws will be subject to a European supervisory body. 
Finally, it follows that in the future, Merkel and Sarkozy, in particular, will have to struggle a lot more than before for electoral majorities. 
Today, these majorities are less certain than ever. 
If the euro is to survive, genuine integration, with further transfers of sovereignty to the European level, will be unavoidable. 
This historic step cannot be taken through the bureaucratic backdoor, but only in the bright light of democratic politics. 
The EU’s further federalization enforces its further democratization. 
If the eurozone is to endure, a majority of its citizens, especially in Germany and France, must embrace the euro as their currency. 
This is not a technocratic issue, but a profoundly political and democratic one. 
To paraphrase Bill Clinton: “It’s the sovereignty, stupid!” 
Therefore, the first step must be to ensure a strong role for national parliaments in this process. 
In Germany, there has been a broad consensus for a stability union, but not for a transfer or liability union. 
This is particularly true for Merkel’s electorate. 
From now on, governments will have to fight for majorities supporting the euro. 
This is good, because only then will a reliable democratic consensus on Europe’s future be reached. 
The German chancellor and the French president will have to present their policies openly and fight for further integration and the single currency. 
The outcome will decide their fate and continuance in office. 
Whether they succeed is anything but certain, given the current state of European public opinion. 
But if they do not even try, their defeat – and that of Europe – is certain. 

Europe’s Stifled Celebration 
LONDON – This could have been a year of joy for Europe. 
The 20th anniversary of the fall of the Berlin Wall will be commemorated in November, and it has been five years since the European Union’s “Big Bang” enlargement. 
The Cold War division of Europe is well and truly over. 
But, instead of setting off fireworks, the EU finds itself under fire, as the global economic crisis confronts it with the greatest challenge it has seen since 1989. 
After years of strong growth and remarkable resilience, the Union’s new member states in the east are being hit hard by the economic turmoil that started in the west. 
Integration into the global economy, a crucial source of capital, stability, and innovation, has become a threat to many of these countries. 
This is true both of the region’s financial sectors and its real economies. 
But the tough question that has to be asked is whether the crisis could lead to the unraveling of European integration. 
There are four key issues that need to be tackled if we are to ensure that Europe emerges from this crisis strengthened. 
The first issue concerns the continuation of enlargement. 
The EU is an indisputable success, constituting the largest integrated economic area in the world and accounting for more than 30% of world GDP and around 17% of world trade. 
Even with this year’s marked contraction of some central and eastern European countries’ economies, their accession to the EU boosted its overall economic growth, with the European Commission estimating that GDP in the new member states increased by extra 1.75 percentage points in the period 2004-2009. 
For the pre-Big Bang EU-15, enlargement significantly contributed to their growth through investment opportunities and increased foreign demand: 7.5% of the older member states’ exports went to the newcomers in 2007, up from 4.7% in 1999. 
Indeed, by 2007, central and eastern Europe had become the second most important export destination for euro-zone countries. 
But EU membership has always been about more than economic integration and trade flows. 
The prospect of a “return to Europe,” as Václav Havel once put it, provided the backing for essential, if sometimes painful, economic, social, and political reforms. 
Today, EU membership is a more powerful incentive than ever for what the EU calls three “candidate countries” (Croatia, FYR Macedonia, and Turkey) and five “potential candidate countries” (Albania, Bosnia and Herzegovina, Kosovo under UN Security Council Resolution 1244, Montenegro, and Serbia). 
These countries are increasing their efforts to prepare for EU admission, and the EU must not shut its doors on them. 
On the contrary, it should finalize further enlargement: the economic crisis has clearly demonstrated that the EU cannot afford black holes on the map of Europe. 
The second key issue concerns the EU’s internal structure. 
The Lisbon Treaty offers a fundamental redesign of how the Union works, but, despite the pressing need to enhance EU institutions’ mobility and flexibility, it is still awaiting ratification. 
The economic crisis makes it more important than ever to introduce these reforms. 
Third, there is the euro. 
The 12 new member states that joined the EU in 2004 and 2007 committed themselves to its adoption, but with no set date. 
Expansion of the euro zone has therefore been slow, especially in central and eastern Europe, where to date only Slovenia (2007) and Slovakia (2009) have become members of the single currency. 
But the financial and economic crisis has demonstrated the benefits of euro membership. 
Ten years after the common currency’s introduction, the 16-member euro zone has the world’s second most important currency, accounting for more than a quarter of all central banks’ foreign-exchange reserves and having overtaken the dollar as the currency of choice for international bond issues. 
The euro’s increasingly important role brings stability, something that is never more important than in times of upheaval. 
The European Bank for Reconstruction and Development therefore encourages all new EU member states that have not yet started doing so to draft credible and convincing plans for euro-zone admission. 
But there must be no softening of the criteria for joining the euro. 
The final issue concerns European solidarity. 
EU enlargement brought greater prosperity, with living standards improving throughout the Union, particularly in the new member states. 
But many of the older member states also benefitted, and not only in economically measureable ways. 
The growing together of people, regions, and countries underpins the foundations on which Europe rests. 
The EU’s newcomers have adopted growth models that rely to varying degrees on foreign capital to finance domestic investment, and on banking systems that are largely owned by west European banks. 
It is a model that has served new and old member states well. 
Investors from the EU-15 committed €37.2 billion in central and eastern Europe in 2006, roughly double the €19.1 billion spent there in 2004. 
Over the past five years, foreign direct investment in the new member states topped the €100 billion mark. 
This process enabled western European companies and banks to expand into new markets with higher growth rates and, thereby satisfying pent-up demand and tapping unrealized potential. 
This has created jobs in central and eastern Europe, while boosting prosperity in the older member states. 
To turn our backs on these countries would have serious economic ramifications. 
The EU drew the right conclusions when it stressed that national bank rescue packages must not be designed in ways that starve subsidiaries, and also by doubling – to €50 billion – the crisis funds available to EU countries outside the euro zone. 
The EU must not stand aside when solidarity is needed. 
Today’s crisis offers an opportunity to show that the EU can provide stability, support, and solidarity. 
By taking the right steps now, the Union is laying the foundations that will enable it to emerge from today’s difficulties strengthened and more united. 

Europe’s Test in North Africa 
LONDON – Europe’s reaction to the historic revolutions in North Africa has vacillated between exhilaration and fear. 
The natural instinct to celebrate and support democratization across the Mediterranean has been tempered by concerns that the crisis will spill onto European shores. 
A few leaders have invoked the post-World War II Marshall Plan as a model for large-scale European development assistance for the region, the aim being to ensure the sustainability of a democratic transformation and generate long-term political and economic benefits for Europe. 
But the mainstream reaction has been much more fearful: media and politicians throughout the European Union are obsessing about the threat of waves of migrants reaching their borders. 
Such a threat should not be taken lightly. 
Already, the controversy over Tunisian migrants in Italy has started to fray the political underpinnings that allow free movement in the Schengen area. 
The war in Libya, meanwhile, could lead to many more thousands of civilians fleeing the violence and needing international protection. 
So far, nearly 400,000 people have filled refugee camps in Tunisia and Egypt, and an estimated 20,000 have reached Italy’s shores. 
Dealing with any surge of asylum seekers will require the EU to strengthen its capacity to offer temporary protection – and possibly to reconsider how its overall asylum system works. 
That the Union has been moving towards a common approach to border security, most visibly with the expansion of the Frontex border agency, will be of help here. 
But if Europe allows itself to be consumed by the short-term crisis, it risks squandering an extraordinary long-term opportunity. 
By using this moment strategically and wisely, the EU would have a chance to reframe its relationship with the southern Mediterranean (as it is being redubbed) to promote generational development and growth in ways that can address Europe’s interests, too. 
The best way to allay European fears and prevent uncontrolled migration is to establish positive incentives, and the practical means,for potential migrants to stay home – most significantly by creating jobs in the southern Mediterranean. 
After all, the vast majority of migrants leave home reluctantly. 
Yet, at the same time, as its baby boomers retire en masse in the coming decade, Europe will need workers at all skill levels. 
The southern Mediterranean can be the source of this labor, given its huge youth bulge. 
The trick will be to ensure that migrants are given the chance to acquire the skills that European employers need, and that they have the chance to move in a safe, legal, and orderly fashion. 
Policies that help train the next generation of North Africans, and allow them to circulate more freely between Europe and their home countries, are a much smarter solution than the current approach, which sustains illegal migration without meeting Europe's labor needs. 
This is an argument not for more migration, but for better migration – well thought out and planned. 
Of course, if Europe helps North Africa build sustainable, prosperous democracies, this would be the greatest long-term deterrent to illegal migration of all. 
It is worth recalling that 50 years ago, the largest immigrant populations in northern Europe hailed from Italy, Greece, Portugal, and Spain. 
As those countries prospered, the émigrés returned home: their countries eventually became engines of European growth, and major export markets for Germany, France, and other EU member states. 
The same arc of development can and should be limned for the southern Mediterranean. 
Fortunately, research on migration and development in recent years has helped foster a range of policy tools that Europe should be considering. 
Experts and policymakers have been devising many innovative programs, including low-cost remittances from migrants to their home countries, efforts to strengthen ties between diasporas and their homelands, and initiatives that help skilled migrants find proper employment, so that qualified surgeons are not driving taxis. 
In thinking about how to reframe the EU’s relationship with the southern Mediterranean, we should draw on these ideas as expansively as possible. 
In order to connect our societies in positive ways, we should seriously consider liberalizing trade regimes, opening new avenues for legal migration, and vastly expanding the number of students from the region who come to Europe for education and professional training. 
After all, it was the youth of North Africa, both at home and abroad, whose notions of freedom helped bring down dictators in Egypt and Tunisia. 
Their talents and energy should now be cultivated and harnessed to help rebuild their societies. 
Responding to the challenges and opportunities of this moment demands the creation of strong partnerships among states, international institutions, and non-governmental actors. 
Since its inception in 2006, the Global Forum on Migration and Development (GFMD) has provided a much-needed platform for dialogue among states and other stakeholders on issues related to migration and development. 
Its annual plenary sessions facilitate the exchange of experiences and good practices in a way that transcends traditional “North-South” conflicts. 
Among other changes that it has spurred, the GFMD has compelled governments to understand migration more holistically, and to develop a “whole of government” approach to addressing the opportunities and challenges that it poses. 
It also has highlighted the importance to development of protecting migrant rights and of fighting illegal migration. 
The Global Forum has done its job by generating and fostering ideas that can make migration benefit the development of countries of origin and destination. 
It is high time that these ideas are implemented. 

Europe’s Three Eastern Questions 
WASHINGTON, DC – Today, the European project is shaking. 
Of course, I am confident that the eurozone’s ongoing sovereign-debt crisis will be overcome, and that a more integrated and effective Europe will emerge. 
But, to get to that improved Europe, not only must the sovereign debt crisis be resolved; relations with three major countries to Europe’s east – Turkey, Russia, and Ukraine – will need to be put on more secure footing. 
I was of the generation in my country that lived through the transition from dictatorship to democracy four decades ago. 
For us, the European Union was a dream. 
Indeed, we used to quote Ortega y Gasset: “If Spain is the problem, Europe is the solution.” 
I continue to believe, very deeply, that Europe is the solution, particularly for societies that need to deepen – if not establish – a democratic tradition. 
Closer relations between Europe and Turkey, Russia, and Ukraine can deliver for them many of the same benefits that we in Spain always associated with Europe. 
Turkey is, of course, already a candidate for EU membership, but accession negotiations are moving very slowly, which is strategically unwise, because Turkey’s great authority in the wider Middle East is vitally important to Europe (and probably greater than its own). 
From Syria to all of the Arab Spring countries, Turkey’s influence is highly significant, and further cooperation with the EU can only prove beneficial. 
The EU has created a channel of communication with Turkey on political matters. 
But it has not resolved the relationship’s endgame. 
My passionate hope is that Turkey becomes an EU member, because a country that is Muslim, democratic, and overwhelmingly young could strengthen the Union in vital ways. 
The debate around Turkish membership is set to become hotter in the second half of this year, when Cyprus assumes the EU’s rotating presidency. 
Turkey, to be blunt, will not recognize today’s divided Cyprus as the sole representative of that island. 
Further complicating matters is the discovery of oil close to the Cypriot coast. 
Anyone planning to drill there will become embroiled in a major maritime dispute, with Cyprus claiming that the reserves lie within its territorial waters, and Turkey countering that Cyprus has no territorial waters, because Cyprus, at least for the Turks, does not exist. 
Russia has become a different type of complicating factor for Europe. 
Vladimir Putin, who has now returned to the presidency, may be the same person as before, but Russia has changed. 
The recent wave of protests in Moscow and throughout the country has exposed the limits of his power. 
I believe that Putin understands this, which is an important fact for future diplomacy. 
In the next few days, the formation of Russia’s new government will reveal much about power relations between conservatives and liberals. 
Notably, billions of dollars of public property are at stake, owing to a privatization plan designed by former President Dimitri Medvedev. 
Here, the EU has a framework – the Partnership for Modernization, negotiated with Medvedev – that could potentially be very positive. 
Russia’s accession to the World Trade Organization in 2011 should also help to ensure that it plays by international rules, as occurred with China when it joined the WTO. 
Russia’s adherence to the WTO’s legal framework should begin to make economic relations with it much more stable and predictable. 
Previously, Russia’s admission to the WTO had been blocked by Georgia, which lifted its veto last year after a feat of elegant diplomacy that established a border-control mechanism without recognizing the breakaway regions of South Ossetia and Abkhazia either as part of Georgia or as independent countries. 
That solution, while complicated, is a good outcome for the region. 
Given the scale of Ukraine’s current problems and dysfunction, an elegant solution may neither be available nor sufficient. 
Ukraine, with which I have been engaged since its independence, has been a great frustration to me. 
I was involved in the negotiations that helped to bring about a peaceful resolution of the Orange Revolution of 2004-2005. But subsequent infighting between the revolution’s leaders, Yulia Tymoshenko and Viktor Yushchenko, was so destructive that Viktor Yanukovych, whose efforts to manipulate the 2004 presidential election incited the revolution, is now President and Tymoshenko is in jail. 
For the EU, Ukraine continues to be a serious problem. 
A comprehensive free-trade and association agreement with the Union remains unsigned, owing to the incarceration of Tymoshenko and others. 
Fortunately, given the Union’s attraction for most ordinary Ukrainians, there is still hope that simple realism will persuade Yanukovych and Ukraine’s ruling elite to return to a path that would allow for the association agreement to be signed. 
Europe’s soft power has changed many things in many countries over the past two decades, spurring leaders and citizens to reform their economies and embrace or strengthen democratic values and institutions. 
It can continue to do so in Turkey, Russia, and Ukraine, or, through inattention and inaction, Europe could lose credibility, influence, and economic opportunities. 


Europe’s Ukrainian Linchpin 
BERLIN – Revolutions, it is said, almost always devour their children. 
Obviously, this is also true for the “color revolutions” – first in Georgia, and now in Ukraine, where President Viktor Yushchenko, the hero of the “Orange Revolution” in 2004, was voted out in the first round of presidential elections a few weeks ago, having received less than 6% of the vote. 
By that point, Ukraine’s springtime of freedom had already deteriorated into a very visible development standstill, owing to a mixture of incompetence and corruption that cried out for change. 
Regardless of which of the remaining candidates will be elected in the upcoming runoff – the incumbent Prime Minister Yuliya Tymoshenko or Viktor Yanukovych – the Orange Revolution will have come to an end. 
So it is worth looking back to the hopes that were linked to those wonderfully expectant days and nights on Maidan Square in the center of Kiev, and to Yushchenko’s electoral victory. 
It was a victory of democracy and independence over electoral fraud and naked power. 
But what happened in the winter of 2004/2005 was not only about the Ukrainian people’s democratic right to self-determination and their national independence, but also about the future of the European order as it had emerged from the Cold War’s end. 
At the time, Europe immediately understood the challenge and reacted effectively. 
The elections had to be repeated, and democracy won. 
Was this, in hindsight, all in vain? 
By no means! 
Although Ukraine is in big economic and social trouble, it should not be forgotten that it has, until today, been saved from the fate of becoming a “guided” democracy in the Russian mold. 
Independent media and freedom of speech have not been restricted in Ukraine, and elections since 2004 have been judged free and fair by both international observers and the parties themselves. 
All this cannot be taken for granted in Eastern Europe. 
Moreover, regardless of who wins the presidential runoff, fears about Ukraine’s independence will not, in contrast to 2004/2005, be an issue. 
This too, is a step forward that should not be underestimated. 
Frustrated by Ukraine’s immobilism and corruption, Europe has turned away from the country – a stance that could turn out to be a significant strategic mistake. 
Ukraine is one of the cornerstones on which the European order rests after the Cold War. 
Europe and Russia meet in Ukraine, and its fate will not only be a crucial factor in defining European security, but will also play a substantial role in future European-Russian relations. 
With an independent, democratic Ukraine, European-Russian relations will have a completely different, and much more positive, character than if its role were to fundamentally change and history be reversed. 
So the future of this big country is of great importance to Europe; in view of its own interests, therefore, Europe cannot afford an emotionally frustrated reaction. 
Rather, the opposite is needed: massive economic and political investment, and closer cooperation. 
Dealing with Ukraine will take patience and perseverance, but there is too much at stake to choose any other path. 
This means that, when considering a “new eastern policy,” the European Union must focus first and foremost on Ukraine. 
The EU’s eastern member states, in particular, must not lose their interest in Ukraine's future, otherwise the Union as a whole may soon do the same. 
Here, Germany and Poland will play a central role, for both belong to the EU’s six big member states and have the necessary strategic awareness of Ukraine’s importance for Europe. 
By contrast, the interests of France, the United Kingdom, Italy, and Spain don’t point in this direction. 
This was another lesson learned in 2004. 
Only if Germany and Poland, together with the smaller eastern member states, jointly advocate such an “eastern” and neighborhood policy towards Ukraine, will EU policy as a whole receive the necessary power and perseverance. 
Thus, whether Europe effectively pursues its own interests in Eastern Europe will depend on coordination between the governments in Berlin and Warsaw, and between them and the EU in Brussels and the other member states. 
Germany and Poland should also jointly make sure that Europe’s interest in an independent and democratic Ukraine is not directed against anyone — not just in Kiev, but also in Moscow. 
Germany ’s new foreign minister has spoken of trying to recreate the old “Weimar Triangle” of France, Germany, and Poland. 
That will not work, primarily because France shows little interest, and it is an idea whose time is past. 
But cooperation on Ukraine might eventually lead to the creation of a far more meaningful Germany-Poland-Russia triangle that could give a new stimulus to Europe’s eastern policy. 

Europe’s Uneven Growth Challenge 
A year ago, the euro zone’s most important challenge was anemic economic growth. 
But 2006 turned out to be a good year for growth in Europe, as surprising strength in exports sparked unexpected increases in domestic demand. 
Germany, the euro zone’s biggest economy, had a particularly dramatic turnaround, with annual GDP up by 2.7% in 2006, the highest rate since 2000. 
Not only has German resurgence raised overall growth in Europe, but it has also made growth less evenly balanced throughout the euro zone. This is because Germany is growing faster than the other large economies, France and Italy. 
Germany accomplished this feat by dramatically re-structuring its corporate sector. 
From 2001 to 2005, there was a “silent revolution” in Germany. 
While observers and commentators focused on the economy’s slow overall growth, behind the scenes, largely unnoticed, important changes were taking place. 
Without fanfare, German workers accepted longer hours without increases in pay. 
This allowed Germany to improve its competitive position in world markets vis-à-vis the other large euro-zone economies, where there were no productivity revolutions, silent or otherwise. 
It took some time for the silent revolution to show concrete results. 
But by 2006, both German exports and GDP were growing faster than in France and Italy. 
Before the introduction of the euro, the reform gap between Germany and its larger neighbors would have been no problem for Europe. 
The currencies of the reform laggards would have depreciated against that of Germany, and there might have been a supportive cut in interest rates as well. 
This is no longer possible. 
Superior German economic performance has bid up the euro and European interest rates to levels that, while comfortable for the Germans, put pressure on the euro zone’s laggards. 
The appropriate level of the euro for the Germans is too high for the French and Italians. 
The right interest rate for the French and Italians is too low for the Germans. 
For reform laggards like France, Italy, and Portugal, currency union with an increasingly competitive Germany is forcing an unwelcome choice between revving up their own reforms and permanent stagnation. 
This is no easy choice. 
Even with political will, revving up the reform process is a difficult task and takes time. 
Indeed, it took a motivated Germany four to five years to do it. 
But the prospect of permanent stagnation for countries like France, Italy, and Portugal is unacceptable. 
Chronic stagnation is too high a price to pay for adopting the euro. 
Naturally, politicians are reluctant to face up to choices between the unacceptable (permanent stagnation), the unthinkable (leaving the euro), and the hard-to-do (reform). 
So they are taking refuge in fantasy. 
In France, for example, all current presidential candidates hold out the unrealistic prospect of staying in the currency union but watering down the independence of the European Central Bank and its price stability mandate, increasing “consultation” between governments and the ECB, and manipulating the euro to France’s advantage. 
This is pure escapism. 
Approval of fundamental changes in the currency union must be agreed by all members, and so will not be forthcoming. 
Nor will ECB President Jean-Claude Trichet be intimidated by French pressure to pursue a softer monetary policy. 
Trichet is a tough guy with a long history of standing up to the French politicians. 
They couldn’t make him bend when, as Governor, he successfully defended the independence of the Bank of France, and they won’t make him bend now. 
At the January meeting of the ECB’s Governing Council, for example, Trichet virtually pre-announced that European interest rates would be increased in March just before the April French elections. 
The ECB President made it clear he will do his duty whatever the political pressure. 
The defining factor in Trichet’s sense of duty is the Maastricht Treaty, which clearly states the prime objective of Europe’s central bank to be the promotion of price stability. 
Some in France – and not just the left – want to change this. 
One idea making the rounds is for the European Parliament to define the ECB’s objectives, on the basis that it is democratically elected – as if the Maastricht Treaty did not result from a democratic process. 
This high-handed attempt to highjack the ECB and make it a servant of the European Parliament would mean chronically low European interest rates and a depreciated euro. 
France would be off the reform hook, of course, but at the expense of Germany, which would face unwanted inflationary pressures. 
This proposal illustrates how the reform gap, and the unbalanced growth that results from it, can debilitate the European fabric by setting one partner against the other. 
To protect European cohesion as well as improve their own economic situation, France and Italy must reform at a faster pace than Germany rather than just waiting for Germany to slow down. 
The hard-to-do is preferable to the unacceptable and the unthinkable. 
Still, there is little indication so far that the two reform laggards are up to the challenge. 

Europe's Unity in European Values 
Alongside the debate about the European Union constitution, a debate about European values has also developed. 
This debate is important not only for implanting meaning in the constitution, but will also determine the vitality and energy of the EU itself. 
The EU, being the product of several great religious and philosophical traditions, is a community of values. 
The ideas of the Greeks and Romans, Christianity, Judaism, humanism, and the Enlightenment have made us who we are. 
Dialogue with Islamic and Arabic cultures also helped form our identity. 
The pattern of our values has been woven over hundreds of years. 
Europe is the continent of Michelangelo and Montesquieu, but also of the guillotine and the gas chamber. 
Indeed, the bitter experience WWII taught Europeans how fundamental is the importance of shared values. 
In an impoverished, war-ravaged Europe, people yearned for peace, freedom, stability, and a new chance to prosper. 
The architects of European integration - Monnet, Schuman, Adenauer, De Gasperi, and others - understood that these ideals could be achieved only by combining and interweaving the practical interests of Europe's countries. 
They built their fragile house of peace on a foundation of coal and steel. 
The founders passed the torch on to the generation of Jacques Delors, Helmut Kohl, François Mitterrand, Václav Havel, Valéry Giscard d'Estaing, and others. They broadened and deepened European cooperation. 
Their leadership made it possible for Europe to make great strides towards its post-war ideals - peace, stability, and prosperity. 
We now stand at the threshold of a new phase of European cooperation. 
In late October, the EU's Constitutional Treaty will be signed. 
A new generation of politicians is ready to carry the torch onwards. 
But is the torch still burning bright? 
In the early 1950s, Jean Monnet wrote: "We are not forming a coalition of states. 
We are uniting people." 
Apparently not. 
As the Union races ahead, it seems that it has lost Europe's citizens along the way. 
Many are turning their backs on the whole project. 
They have trouble seeing what is common to Europe. 
They do not feel part of the great whole. 
Even in the new member states, enthusiasm for the European family of democracies is cooling. 
We have achieved a united Europe without uniting Europeans. 
Today's post-war generations, lacking direct memory of WWII, view Europe's great achievements - liberty, peace, and prosperity - as a given. 
The idea of Europe as a heritage and a mission does not mean much. 
But, without ideals, Europe's foundations will erode. 
The emphasis on pure self-interest increases this threat. 
My generation grew up with the image of Europe as an economic form of cooperation. 
Political motives behind European integration were overshadowed by the economic project. 
The result is an impression of Europe as a marketplace. 
A Europe of markets and money, not of man and morals, dominated the project. 
But without a moral foundation, there can be no free-market economy. 
Today, we are paying the price for not attending to Europe's shared values and common mission. 
Until Europeans know precisely what Europe stands for, what inspires and motivates us, the Union will not be able to take joint action in the world. 
The EU Constitution will make Europe more democratic and more transparent. 
It provides further guarantees that decisions will be taken by those closest to citizens, and it acknowledges the significance the values on which the Union rests: respect for human rights and dignity, liberty, democracy, equality, and the rule of law. These shared values are the glue that binds governments together in the recognition that clinging to pure self-interest is no longer reasonable when common concerns call for a common strategy. 
For what is the point of doing away with Europe's physical borders if borders between its citizens remain? 
How can Europeans be happy that the Iron Curtain is gone if individuals and groups across the Union barricade themselves behind private iron curtains? 
Indeed, fear, insecurity, and nationalism are again raising their heads. 
It is important for Europeans to reflect on that as they prepare for further rounds of enlargement and consider starting accession negotiations with Turkey. 
The preamble of the Constitution states that Europe is "united in its diversity." 
This may be the most concise statement of what makes Europe Europe. 
But the words "united in diversity" raise the question of where this unity lies. 
The answer lies in the values on which the Union is based. They are contained in three concepts: freedom, solidarity, and mutual respect. 
These three together make it possible for Europe to open its doors to a great diversity of peoples and at the same time to speak as a community of peoples prepared to take responsibility for one another. 
Making such a community a reality will not come about by believing that Europe's culture is better than others. 
We will make it a reality through dialogue and deep reflection about Europe's common values. 
Values must be the road that leads to what cannot be reached by markets and institutions alone - the accession of Europe's citizens to the European Union. 
Only by embracing their shared values can Europeans prevent their Union from becoming a spiritless machine. 
Together, Europeans must find what connects them, and derive new enthusiasm, new spirit from what they find - a spirit sorely needed to tackle the great issues of today. No country can address these issues along. 
After more than fifty years, Europe as a community of values remains as necessary as ever. 


Europe’s Vision Deficit 
PARIS – In the Western part of Europe – the part that former US Secretary of Defense Donald Rumsfeld maliciously labeled “Old Europe” – almost every government is in deep political trouble. 
The United Kingdom’s new coalition government may be the exception – for now. 
In the European Union’s big member states, the popularity ratings of leaders – Nicolas Sarkozy in France, Silvio Berlusconi in Italy, Angela Merkel in Germany, and José Luís Rodriguez Zapatero in Spain – hover around 25% or worse. 
Whether it is conservatives like Sarkozy, Christian Democrats like Merkel, right-wing populists like Berlusconi, or socialists like Zapatero, political affiliation appears to make no difference. 
If you hold office in Europe nowadays, you are in trouble. 
What has gone so wrong? 
The economic crisis seems to be the most obvious explanation, but perhaps too obvious. 
Two years ago, when shockwaves from the collapse of the US housing bubble crashed onto European shores, these political leaders reacted with apparent vigor, making themselves rather popular for a while. 
Paradoxically, the early stages of the financial crisis appeared to favor conservative and pro-market leaders – who seemed to be in a better position to save the economy – more than socialists. 
Today, this is no longer the case. 
Socialism is on the rise again across Europe, at least in opinion polls. 
And right-wing populism has become an electoral force to be reckoned with in France, Belgium, and the Netherlands. 
Economic stagnation has come to appear endless. 
Jobs are scarce, and the future looks bleak everywhere. 
The Greek crisis has cast a pall over the entire eurozone. 
The common currency is now looked at with suspicion. 
On the fringes of public opinion, some people are even muttering suggestions that their countries should revert to their ancient national currencies – which of course would only bring disaster in the form of an even more confusing state of affairs, as EU countries are indebted in euros. 
To quit the eurozone would only increase their level of indebtedness. 
What makes this desolate economic landscape even gloomier is the striking inability of European leaders to explain what has happened and is happening to their citizens. 
Indeed, I believe that it is here that the seminal reason for their plunging poll ratings lies. 
Europe’s leaders seem to lead nowhere, because they have no vision on which to draw. 
Consider the euro: no head of state or government has so far been able to present a coherent defense of the eurozone to counter the pervasive unease that now exists towards the common currency. 
Or public spending: all European leaders adamantly want to reduce government spending. 
But these same leaders, including that supposedly stern mistress of the budget Angela Merkel, were arguing less than two years ago that public spending would provide a “Keynesian” way out of the crisis. 
Why such a turnaround? 
The European public has discovered that the 2008-2009 fiscal stimulus programs, which were aimed at forestalling an even greater crisis, generated more debts than jobs. 
Politicians, however, hate to confess past errors. 
Thus, they appear unable to explain their new rationale for the spending cuts that they are now announcing. 
Europe’s leaders make things worse when they prove unable to connect isolated “reforms” – say, a lower public deficit – with any comprehensive vision of the economy. 
A good example is Sarkozy’s effort to raise France’s retirement age from 60 to 62. 
Trade unions are up in arms, which, after all, is their duty. 
The population at large just does not understand what links raising the retirement age with the crisis. 
The truth that politicians (David Cameron’s UK government excluded, at least for now) are reluctant to admit is that Western Europe’s current morass is distinct from the global US-made downturn. 
Old Europe has entered into a severe and intractable crisis of the welfare state as ordinary Europeans have come to know it. 
The generous retirement pensions, unemployment compensation, health coverage, and all kinds of social programs that make Western Europe a comfortable place to live were established when Europe’s economy and population were growing fast. 
Now, after one generation of economic and demographic stagnation, the welfare state can be financed only by issuing more public debt. 
Financial markets, awakened by the global crisis, will no longer support today’s Potemkin-like situation, in which welfare benefits have become a façade propped up by deficits. 
Political leadership at such a moment demands a Churchillian accent. 
It needs to be explained why the euro remains the best protection there is against inflation, the most dangerous social ill of all; why government stimulus will not work and never actually has delivered sustained growth; and why a new equilibrium between welfare and economic dynamism – based on less public debt and more private investment – must be established. 
Such a discourse, if clearly articulated, would be understood and could be endorsed by many, if not by all. 
At the very least, it would bring a sense of coherence to the actions of politicians, and those opposed to this search for a new European equilibrium – mostly Marxists and populists – would need to compete with a new vision of their own. 
Would such an articulate vision make Europe’s leaders more popular? 
Maybe, and maybe not, but they would almost certainly appear more legitimate, even in the eye of their adversaries. 

Europe’s Vision Free Leadership 
LONDON – The selection of Herman van Rompuy as President of the European Union’s Council of Ministers, and of Lady Catherine Ashton as the EU’s foreign policy chief, surely underlines the extent to which member states are in the driver’s seat in the EU. 
They manage its institutions in their own interest. 
The EU is no super-state striding bravely into a bright new dawn. 
French President Nicolas Sarkozy will not have to compete for the global limelight with any Brussels supremos. 
Germany will not be challenged to break out of its increasing introversion, no longer obliged to demonstrate its democratic post-war credentials by embracing the European cause at every turn. 
Britain can rest easy that its world role will remain the aspiring Jeeves of the White House. 
The best that could come from the appointment of Europe’s two new low-profile leaders is that it leads to better and more coherent management of the EU’s business. 
Van Rompuy will be able to offer a longer view than that of a six-month national presidency. 
Lady Ashton should be able to tie together the political and resource arms of Europe’s external policies. 
But it is not yet clear, whatever the Lisbon Treaty says, that Ashton has full control of either the EU external budget or of appointments to the new diplomatic service. 
She has a difficult hand to play, and can expect her elbow to be nudged regularly by EU Commission President José Manuel Barroso, who was the big winner in the carve-up of jobs. 
But foreign ministers will be deeply suspicious if they think that the Commission is taking over foreign policy. 
Past experience suggests that there are five guidelines to follow if we want a more effective European presence on the world stage whenever foreign and security policy are at the top of the agenda. 
First, we should dare to believe that what most suits Europe’s interests might also be best for our relationship with our closest ally, the United States. 
We should, for example, want to prevent the militarization of nuclear energy in Iran precisely because of our concern as Europeans, not because we are allies of the US. 
Second, our rhetoric about our role as America’s international partners for peace should not stray too far from reality. 
True, we tend to align ourselves these days more with Venus than Mars, something for which the rest of the world should be deeply grateful. 
But we take this a little too far. 
It is not just that Europe does not spend enough on hard power, but that what it does spend – about €200 billion – is spent badly. 
The EU needs common defense procurement and harmonization to acquire the helicopters, transport aircraft, battlefield communications equipment, and surveillance drones that are necessary for twenty-first-century operations. 
For reasons of history, morality, and security, Africa should be regarded as a particular European responsibility. 
We should deploy our aid, diplomacy, and peace-keeping capacity to support sustainable development, good governance, and regional collaboration on the continent. 
Third, where Europe has a serious internal policy, it is easier to establish a more serious external policy. 
The best example of this is energy policy and Russia, which wants a sphere of influence around its borders. 
Dealing with Russia has probably been the biggest failure in the attempt to make European foreign policy. 
To formulate such a policy requires us to frame a single energy policy. 
Lady Ashton will need to be firm in dealing with Russia and with member states who subordinate Europe to the commercial interests of their national energy companies. 
Fourth, European external policy is most effective the nearer it is to home. 
We are at our best in our own neighborhood – and at our worst, too. 
The greatest success of Europe’s external policy has been EU enlargement. 
This promoted and consolidated regime change without the use of weapons, thereby stabilizing the European continent. 
The job is not complete. 
The prospect of EU membership is at the heart of EU policy in the western Balkans, where we are starting to show (for example in Bosnia-Herzegovina) a dangerous disinclination to apply tough conditionality. 
We are committed to Ukraine’s “European vocation,” but not to its EU membership. 
Spot the difference! 
We undertook more than four decades ago to negotiate Turkish membership once that country became fully democratic with an open economy and respect for human rights and the rule of law. 
For Europe to turn down Turkey would be tantamount to writing ourselves out of any serious script in global affairs. 
We would be rejecting a country that is an important regional power, a significant NATO member, and a crucial energy hub. 
We would stand accused of burning, rather than building, bridges to the Islamic world. 
Unfortunately, van Rompuy, an author and poet, has spoken out against Turkish membership in far cruder terms than one would expect from a gentle haiku writer. 
My final guideline for policy is that Europe is not and will not become a superpower or super-state. 
Unlike the US, we do not matter everywhere. 
We do not require a policy on every problem and every place. 
But where the problem affects much else, and where the region is close to home, we should have a policy that consists of more than waiting to agree with whatever America decides that its policy should be, as, for example, in the Middle East. 
The present “no war-no peace” lull in the Middle East is not sustainable; nor is a one-state solution either possible or desirable. 
So what can we do to nudge things forward in a region where America is again engaged but not respected, and where Europe is neither? 
At the very least, we could set out our own policy, beginning with an effort to end the fragmentation of Palestine and Palestinians between the West Bank, Gaza, and East Jerusalem. 
Does it matter if Europe is not on the same page as the US? 
Frankly, no. 
Two weeks ago, when Obama had to choose between a meeting of ASEAN or the celebrations in Berlin marking the 20th anniversary of the fall of the Wall, he chose to go to Asia. 
Will Europe do enough to change his mind the next time there is such a choice? 
As things stand, we are in danger of making Europe politically irrelevant, a successful customs union with a Swissified foreign policy and a group of fractious, vision-free leaders. 

Europe’s Vital French Connection 
PARIS – In the debates raging over the future of the European Union and the eurozone, Germany always takes center stage. 
It has the largest economy, accounting for 28% of eurozone GDP and 25% of the eurozone’s population. 
It is running a current-account surplus that is now larger than China’s – indeed, the largest in the world in absolute value. 
And, while weighted majorities can overrule it on some issues, everyone acknowledges that little can be done in the eurozone unless Germany agrees. 
But the emphasis on Germany, though justified, should not lead to an underestimation of France’s critical role. 
France not only accounts for roughly 22% of eurozone GDP and 20% of its population – behind only Germany – but also has the healthiest demography in the eurozone, whereas the German population is projected to decline over the next decade. 
At the same time, France’s critical role reflects more than its size. 
Indeed, in terms of influencing outcomes in Europe, France is as important as Germany, for three reasons. 
First, France is an indispensable link between southern and northern Europe at a time of growing economic and financial division between creditors and debtors (a fissure that has begun to assume a cultural dimension). 
An active France can play a bridging role, leveraging its strong relationship with Germany (a friendship that is a pillar of the EU) and its proximity and cultural affinities to the Mediterranean. 
France is “southern” in its current-account deficit, but “northern” in its borrowing costs (slightly above Germany’s), owing partly to inflows of capital fleeing the south, as well as to modest but positive economic growth. 
Moreover, there is no perceived “re-denomination” risk affecting French assets, given markets’ confidence that France will retain the euro. 
So, while France faces huge economic challenges, its northern and southern features permit it to play a proactive role in the European project’s survival. 
French President François Hollande has already given a rather successful preview of this role, meeting German Chancellor Angela Merkel in Berlin on his first day in office, and, a month later, participating in a high-profile meeting with the Italian and Spanish prime ministers in Rome. 
Indeed, he took the lead in adding a “growth pact” to the “stability pact” that had been negotiated under Merkel’s leadership. 
Second, France, under its new center-left government, must demonstrate that the “European model” of a market economy coupled with strong social solidarity can be reformed and strengthened, rather than abandoned – not just in Europe’s more pragmatic north, but also in its more ideological south. 
French Socialists will not renounce their traditional commitments; nor should they. 
But they now have the opportunity to contribute to the European model’s renewal. 
Under Hollande, France’s Socialists favor achieving that renewal through a process of social dialogue that convinces rather than imposes, that focuses both on revenue measures and on boosting government efficiency, and that may adopt some of northern Europe’s more successful “flexicurity” policies, which combine greater labor-market flexibility with strong social protection. 
The reforms should also introduce much greater individual choice, permitting solutions to retirement, education, health, and lifestyle issues that can be more easily tailored to citizens’ specific circumstances and needs. 
The government of Hollande and Prime Minister Jean-Marc Ayrault has strong majorities at all executive and legislative levels, giving it a rare opportunity to act. 
If it can renew the European model at home, it will be able to project that success much more widely, particularly in southern Europe, in turn reinforcing confidence and belief in the EU, particularly among the young generation. 
The French center-left must lead in conceiving a vision for Europe in which solidarity and equity reinforce long-term economic strength. 
Finally, along with the United Kingdom among European countries, France retains more of a global role than Germany has yet acquired. 
While the United Nations Security Council is outdated in its structure, it still plays a crucial legitimizing role; and France, not Germany, is a member. 
In many other international organizations as well, France punches above its weight. 
Similarly, while France exports much less than Germany outside the EU, many large French enterprises rival Germany’s in global reach and technical know-how. 
And French is still a global language. 
In other words, France not only is a link between Europe’s north and south, but also contributes substantially to linking Europe to the rest of the world. 
Europe needs a renewed vision and effective policies to realize that vision. 
France’s Socialist-Green government can play a critical unifying role as Europeans confront their biggest challenge in decades. 
Its success will be highly consequential – not least for the political debate that will inform the outcome of Germany’s elections in 2013. 

Europe's War of Big and Small 
The debate on proposals for a new Constitution for the European Union, now entering its final stage in the so-called "European Convention," is turning into a power struggle between member states over rival visions of the future of the Union. 
In the past, the main axis of debate was usually been between federalists, who want a stronger EU, and inter-governmentalists, who want to preserve the member states' national autonomy. 
This remains true today. 
But the debate is now being distorted by a secondary struggle between the EU's large and small countries, with results that are sometimes paradoxical. 
The immediate issue is management of the EU Council of Ministers. 
At present, the Council meets under the Presidency of an individual member state for a period of six months, at the end of which the Presidency rotates to another member state. 
France and Germany argue that this rotational system is dysfunctional, partly because of discontinuity, and have proposed that the Council should appoint a full-time permanent President for a period of five years. 
Their proposal was categorically rejected in a joint submission by 16 existing or future member states, all of them small countries, who insisted that the principle of rotation must be retained, as a symbol of the equality of all member states. 
The stakes on this issue have now been raised two notches higher. 
Valéry Giscard d'Estaing, the President of the Convention, has formally endorsed the Franco-German proposal. 
The same day, the European Commission hit back with a strong criticism of the proposal, saying that it would create rival bureaucracies and a sense of confusion. 
The deep reason for this particular argument is the EU's looming enlargement, which will take the membership from 15 to 25 countries in May 2004. 
When the European enterprise started, there were three small and three large countries; but almost all the new members are small countries. 
So after enlargement there will be six large and 19 small member states. 
This re-balancing between the large and small member states is shifting some old assumptions in a number of paradoxical ways. 
In the past, small member states used to gravitate towards federalist positions, because they calculated that they needed strong central institutions to contain the power of the large member states (especially France). 
Today, by insisting on Presidential rotation and the equality of member states, whatever their size, the small countries are effectively adopting an inter-governmentalist position, because they fear that the real purpose of the Franco-German proposal is to ensure that the Council will remain under the leadership of a big member. 
There is, in fact, little doubt that is what France and Germany (and Britain) intend. 
So here is the second paradox: both large and small EU countries imagine that they can optimize their relative leverage by adopting inter-governmentalist positions. 
They cannot both be right. 
It is far too soon to draw hard and fast conclusions. 
The "Convention," though influential, is just a debating group; the real negotiations between governments will come later this year. 
We can have no idea in advance how a 25-member EU will really operate; practical realities will exert their influence on political chemistry. 
It is conceivable that the swarm of small new member states may revert to the traditional and logical predisposition towards federalism. 
But my personal hunch is that the Franco-German proposal is based on a fundamental error of judgment. 
To understand why, consider that their proposal for a permanent Council President was paired with a proposal that the Commission President--currently nominated by the Council of Ministers--should in future be elected by the European Parliament, and subsequently be endorsed by a majority vote of the Council of Ministers. 
If adopted, this innovation would confer much greater political legitimacy on the Commission President, as well as greater independence from the Council of Ministers (i.e., the member states). 
It is possible that the French thought that a permanent Council President would be an appropriately inter-governmental counter-weight to a super-legitimate integrationist Commission President. There are just two problems: first, an appointed President of the Council would have no particular legitimacy, he would be just another appointed official. 
Second, his ostensible task--representing the EU abroad--must depend on a degree of agreement between the member states on foreign policy that is now completely absent. 
On the contrary, even if a number of large member states talk up about a common foreign policy, they prove by their actions that they are determined to maintain their own national foreign policies. 
In the run-up to the Iraq war, many member states refused even to consult their colleagues. 
So even if the French and Germans get their way, the Council will have a President representing nobody but himself. 
Of course, the future is unpredictable. 
Even the British may learn to understand Europe, though no one should count on it. 
But we should not overlook the fact that the Convention has slipped in quite a number of proposals which are inherently federalist. 
These include the generalization of majority voting, enlargement of the European Parliament's role, the notion of public proceedings for the Council of Ministers (making it almost like a senate), the introduction of the possibility of withdrawal from the Union, and even the possibility of treaty ratification by majority. 
These ideas may go nowhere, at least not right away. 
But they reflect the fundamental reality that at every turning point, the EU has moved forward through more integration. 
On his return from the signature of the Amsterdam Treaty in 1997, Robin Cook, the British Foreign Secretary at the time, announced that "The federalists have been defeated." 
Don't bet on it. 

Europe’s Winners and Losers 
BERLIN – Rarely is a high-flying country brought back down to earth in a single night, but that is precisely what happened to Germany recently. 
In both football (soccer) and politics, the country had come to embody an unseemly mixture of arrogance and denial. 
It thought itself the measure of all things European, in terms of both the European championship and the European Union. 
In both cases, it was deceiving itself. 
The same night that Germany was thrashed by the Italians in the championship’s semi-finals, German Chancellor Angela Merkel ran up against the limits of her own powers at the eurozone leaders’ summit in Brussels. 
Germany’s political course since the beginning of the euro crisis two years ago had left it isolated, and she was no match for an alliance of Italy, Spain, and France. 
Indeed, she had no choice but to concede and agree to far-reaching changes to the EU’s new fiscal compact that will ease refinancing of the crisis countries and their banks. 
The German dogma of “no payments without counter-performance and control” was thus off the table, and the bargain struck in the early hours of the morning was exactly the opposite of what she had wanted. 
The fiscal compact had been reduced to a shambles even before Germany’s parliament, the Bundestag, approved it later that day. 
In terms of addressing the eurozone financial crisis, however, the agreement reached in Brussels was anything but a breakthrough, because it never transcended the logic of narrow crisis management. 
It offers no strategy for overcoming the crisis in the south of Europe, which means that the threat to the eurozone has not been removed. 
Politically, however, the agreement amounts to a small revolution, because it has shifted the balance of power within the eurozone: Germany is strong, but not strong enough to get away with isolating itself completely from Europe’s other major players. 
Decisions that go against Germany are possible. 
There was patent gloating about the German defeat everywhere, only thinly disguised behind strained expressions of solidarity. 
The full extent of the political damage that Germany’s bailout policy for the eurozone, with its austerity, mass unemployment, and economic depression, has caused in southern Europe remains to be seen. 
If Merkel had wanted the agreement reached in Brussels, the outcome would have marked the beginning of a fundamental revision of the eurozone’s crisis policy – and thus an expression of successful statesmanship. 
Instead, it is a full-blown defeat for Germany, linked to its firm denial that German policy has sharply reduced the country’s influence in the EU. 
Yet it clearly has: German influence within the European Central Bank has declined significantly; the German finance minister will not become head of the Eurogroup; and now we have the Brussels disaster! 
But Germany’s defeat, however widely celebrated, holds much cause for concern. 
First, not everything that Germany is arguing is wrong: the urgent need for medium-term fiscal consolidation and structural reforms to increase the crisis countries’ competitiveness will not go away. 
Equally important, however, is the reduction of economic imbalances and European policy coordination to enable growth. 
Second, political paranoia is rising on the German right: everybody supposedly just wants Germany’s money; our Anglo-Saxon partners' real aim is to weaken us; and the financial markets will not rest until Germany has invested all of its wealth and has thus endangered its economic success. 
Germany is being “betrayed to foreigners” by the opposition, and “good” productive capital is once again being opposed to “bad” speculative capital. 
In the opinion pages of some German newspapers, anti-capitalism is returning in a new form, which entails nothing less than a renunciation of Europe and even of the West. 
Of course, while the German right threatens to become more nationalistic, history will not repeat itself, because today’s Germany has changed, and so has its political environment. 
Still, an increasingly Euro-skeptic Germany in the heart of the EU could, given its great economic clout, seriously endanger the European integration process. 
And, while that would jeopardize Germany’s own interests, practical political action is not always rational, particularly in times of serious crisis. 
The same, incidentally, applies to France, except that the French, unlike the Germans, find it difficult to transfer political sovereignty, whereas for us Germans, it is all about the money. 
Both of these mental/political blocks are threatening the European project in equal measure. 
Indeed, if the result of the recent summit means that France and Germany will henceforth each forge alliances against the other, while hiding behind verbal expressions of solidarity, we might just as well forget about Europe. 
Without a functioning Franco-German axis, the European project cannot succeed. 
Both sides will have to decide whether or not they want Europe – that is, full economic and political integration. 
Economically, they must choose either joint liability and a transfer union or monetary re-nationalization. 
Politically, the choice is whether to empower a common government and parliament or return to full sovereignty. 
What we know for certain is that, just as one cannot be a little pregnant, the existing hybrid is not sustainable. 
Last November, Volker Kauder, the majority leader in the Bundestag, bragged that “suddenly Europe is speaking German.” 
He was wrong. 
Just as Spain (not Germany) remains the benchmark in European football, so Europe speaks broken English at best. 
From the standpoint of safeguarding the European project, that is all for the better. 

Europe’s New Year’s Irresolution 
BERLIN – Will the eurozone crisis end in 2013, or will it drag on throughout the year, and perhaps even deteriorate anew? 
This is likely to be not only the crucial question for the European Union’s further development, but also a key issue affecting the performance of the global economy. 
While the EU clearly needs internal reforms, two external political factors are central to its prospects this year. 
The first is America’s self-imposed fiscal cliff, which, if not avoided, could throw the United States into recession, with massive repercussions for the world economy, and thus for Europe. 
Second, a hot war in the Persian Gulf, in which Israel and/or the US confronts Iran over its nuclear program, would result in a sharp rise in global energy prices. 
Either scenario would greatly aggravate Europe’s crisis: soaring oil costs or another US recession would harm even the strong northern European economies, to say nothing of the already-depressed countries in Europe’s south. 
But, even then, the humanitarian consequences – especially in the case of another Middle East war – would most likely overshadow these scenarios’ impact on the European crisis. 
Indeed, Europe’s crisis only seems to be economic or financial in nature; in reality, it is political to the core, for it has revealed that Europe lacks two things: a political framework – that is, more statehood – for its monetary union, and the vision and leadership to create it. 
Since the eruption of the European crisis in 2009, the EU and the eurozone have experienced massive, unprecedented changes. 
Today, the eurozone is on its way toward implementing a banking union, probably followed by a fiscal union, which in turn will lead to a genuine political union that centralizes sovereignty over essential economic policymaking. 
But these developments have not come about as part of a strategy. 
Had there been no crisis, German Chancellor Angela Merkel and other national leaders in the EU would never have been prepared to take these steps. 
And this is not likely to change in 2013. 
Even today, with the eurozone’s essential players apparently convinced that they are out of the woods, national narrow-mindedness is experiencing a revival in the EU, and the desire for change seems to be slackening. 
In particular, Merkel wants to be re-elected in 2013, and appears content to leave Europe for later. 
Unfortunately, with the election set for September, that means that three-quarters of the year will be wasted. 
And, because another Merkel-led coalition seems to be more likely (at least from today’s vantage point) than a real change in government, post-election Germany, absent renewed pressure from the crisis, will remain wedded to the politics of small or tiny steps, leaving Europe treading water. 
As a result, developments in southern European will remain a key factor determining Europe’s course in 2013. 
The depression will continue, dimming prospects for economic growth throughout the EU and the eurozone. 
The gap between the rich north and the crisis-ridden south will widen, highlighting their contradictory interests and thus exacerbating Europe’s tendency toward separation, primarily between the north and the south, but also between the eurozone and the rest of the EU. 
The European Central Bank will serve as the eurozone’s center of power even more than it does today, because it is the monetary union’s only institution that can actually act. 
Though the ECB has absolutely nothing in common with the old Deutsche Bundesbank, the German public has not recognized this. 
But the fact that the ECB’s power is only a technocratic substitute for the eurozone’s missing democratic political institutions will remain a growing problem in 2013. 
This is also true, more generally, of German dominance of the EU. 
Should it continue without new institutional regulations that mutualize its role within the eurozone, 2013 will be a year of further disintegration. 
It will also be a year of destiny for France, whose government is keenly aware that, without painful reforms, the country might be doomed; the only question that remains is whether it can implement them. 
The answer will determine not only President François Hollande’s political future, but also the future of the EU, because, without a strong German-French tandem, Europe’s crisis cannot be overcome. 
Meanwhile, Europe’s negative political trends are reinforced by uncertainty in Britain about whether to remain in the EU, Italy’s upcoming general election, and aggressive nationalism in many member states. 
Given this, Europe’s condition is quite obviously far from being stabilized, despite some leading Europeans’ recent statements suggesting otherwise. 
Europe in 2013 will continue to need the pressure from the crisis in order to find a way to overcome it once and for all. 
Regardless of electoral outcomes in important EU member states, Europeans will remain unable to expect much from their political leaders, because opposition forces generally have little more to offer than the incumbents do. 
We should wish Europe a successful year, but it would be foolish to bet on it. 


Europe Should Dump Anti-Dumping 
Stockholm – Defending Europe’s economy against unfair international trade practices has long been a key element of the European Union’s external policies. 
It is almost an instinct among some politicians and business leaders that if competition is deemed unfair, the European Commission should marshal new trade defenses. 
But what are Europeans defending against, and what are “unfair” trade practices anyway? 
In the absence of international competition regulations to prevent predatory pricing and other anti-competitive activities, trade defenses are a second-best option. 
By far the most widely used instrument are anti-dumping duties aimed at imposing some restraint on companies that behave in an anti-competitive way. 
But, by increasing tariffs, prices also rise, which often means a welfare loss for society as a whole. 
This fact has long been ignored by firms seeking trade defence. 
What is new, however, is that the firms themselves might not gain from trade defense. 
The very word “defense” creates an image of a nation state that is commercially connected to the rest of the world only via traditional trade. 
For such a state, all imports would truly be foreign goods, and its trade defenses would consequently be directed only against foreign interests. 
But this is not true in today’s globalized world. 
Although we still have traditional trade, we also have foreign direct investment, offshoring, and outsourcing. 
We have global supply lines in which goods are developed in one country, manufactured in another, and assembled in a third. 
Capital and know-how flows across borders, so traditional bilateral trade flows have been replaced by a complex web of international commercial relations. 
This has major implications for trade defense. 
If your mobile phone was assembled in India, but developed and designed in Finland, is it an Indian or a Finnish product? 
When European corporations outsource labor-intensive manufacturing to low-cost countries but keep the rest of the production process in Europe, they greatly complicate matters for anyone trying to evaluate the economics of trade defense. 
To aim an anti-dumping measure against an Asian manufacturer may inflict most of the damage on a European producer. 
That happened in the October 2006 anti-dumping action against leather shoes, when the EU decided to impose anti-dumping tariffs against China and Vietnam. 
Sweden’s National Board of Trade conducted a case study of five European shoe producers in different countries and market segments to establish where the value added in their production processes was created. 
Although manufactured in China and Vietnam, shoes were designed, developed, and marketed in Europe. 
These largely intangible production processes before and after the physical manufacturing sometimes constituted 80% of the value added. 
In other words, shoes from China were 80% European! 
For less expensive shoes, with lower sums invested in the intangible parts of the production process, this figure was not as high, but still more than 50%. 
The anti-dumping measures imposed by the EU therefore hit European companies in an unintentional way. 
Sectors with a higher human capital content – electronic consumer goods, for example – have much higher R&D costs than the shoe sector, so manufacturing these goods on an assembly line in a low-cost country is probably not very costly in comparison to R&D and other intangible costs. 
For more advanced goods, the EU value added (if the intangible part of the production process is in Europe) is quite high. 
Imposing trade defense against such goods, even if legally warranted, is likely to create problems for globalized European companies. 
Many say that these problems are the price to be paid for ensuring that companies do not engage in anti-competitive behavior, or receive trade-distorting subsidies. 
But, even if the measures worked as supposed, the majority of trade defense measures are probably not directed against anti-competitive business practices. 
More often it is the politics of protectionism that are the crucial factor behind trade defenses. 
Anti-dumping measures are frequently used against products that are simply so cheap that they pose a threat to European producers, even though that is no more than fair competition. 
This raises a fundamental criticism Europe’s trade defense mechanisms. 
International trade is by definition a competition between companies on an uneven playing field. 
Some companies have easier access to capital, whereas their competitors cannot get access to finance at reasonable interest rates. 
Some have excellent infrastructure at their disposal, while their international competitors may have to contend with constant power cuts. 
Some must pay excessive taxes, while others operate out of tax havens. 
Some find it easy to recruit top-notch engineers, whereas for others enjoy an abundance of cheap labor. 
To create a completely level playing field in trade is impossible. 
Yet many politicians and business leaders are keen to focus on the differences they don’t like and would like to see “leveled.” 
In reality, what they don’t like is competition itself, and they fight it by deploying an instrument that can inflict even greater damage on themselves. 

Europe Should Step Up By Standing Down 
LONDON – Ten years on, the euro is a resounding success. 
A financial-market heavyweight, it now outperforms the dollar, the yen, and, until recently, the mighty Chinese yuan, while euro-denominated bond trading rivals the US market in size. 
But Europe should be doing better. 
It should act with greater imagination to unleash more genuine economic freedom and competition, stop championing national enterprises, and start giving the European Central Bank more support. 
Euro-zone policymakers should also seize the initiative in the world’s key economic clubs. 
In particular, members of Europe’s economic and monetary union should give up their seats in the G-7 and the International Monetary Fund. 
There may be some justification for each EMU state to be represented in the G-8, but not in the main economic organizations. 
If they volunteered to act collectively at these forums, Europe would free up much-needed space for other important countries at the top table of world economic discussions, which would foster greater respect for global policymakers. 
Internally, euro-zone “success” can best be measured by the yardstick of economic growth. 
Many commentators cite the wide disparities between euro-zone members’ growth rates as a sign of failure. 
But many other single-currency areas, including the US, display similar divergence. 
It should also be obvious that, in the absence of currency markets to act as a “valve” for economic and financial pressures, economic volatility may increase. 
In fact, euro-zone leaders should be less worried about variations in internal growth than about clear evidence of overall economic underperformance. 
While growth has been reasonably stable since EMU started, per capita GDP – probably the best measure of economic success available – shows that Europe has lagged other regions, even when the figures are adjusted for workforce size. 
It is also well known that European productivity is falling behind, too, probably due to the same factors that make Europe seem dull, cautious, and lacking in ambition when compared with many of its competitors. 
When it comes to internal competition policies, most European countries still think within the national “box.” 
For the euro to help lift European growth and productivity in any significant way, governments must allow – indeed, encourage – stronger competitive forces across the EMU area. 
In terms of external economic policy, European policymakers have done very little in response to the wholesale changes now underway in the world economy – beyond complaining about Chinese imports and Russia’s aggressive use of its commodities, and, most recently, becoming embarrassingly obsessed with so-called Sovereign Wealth Funds. 
This is a poor showing for countries that successfully confronted the challenges of creating the EU and monetary union. 
After all the diplomacy and effort that these epoch-making events required, European policymakers should be able to tackle reform of the IMF, the World Bank, the G-7, and the G-8. 
Yet all of these institutions still reflect the post-World War II status quo, which serves little purpose in today’s world. 
For example, why is there an international economic organization such as the G-7 without China, which is poised to overtake Germany as the world’s third largest economy and since 2000 has contributed almost as much to global economic activity as the entire euro zone? 
Most global economic issues today cannot be solved without policy steps in China. 
Indeed, how can the G-7 have the audacity to make repeated public comments about the currency of an outside country and hope for a positive response? 
It is almost farcical. 
Meanwhile, France, Germany, and Italy are all in the G-7, even though they share the same monetary policy and currency. 
It would be better if the ECB and the EU finance ministers adopted a common position ahead of G-7 meetings, then allowed their joint view to be represented by a single Council representative and the ECB’s president. 
Because ministers meet before each G-7 meeting, this would be an easy procedure to introduce. 
Indeed, a “financial G-6” may today make more sense than the current G-7, but that may no longer hold true tomorrow. 
In another 10 years, India may be in the top echelon of economic powers. 
Or Britain might have joined the euro, making its independent role redundant. 
Can Canada keep its place while Russia and Brazil are excluded? 
And what other economic giants are waiting in the wings? 
Clearly, therefore, we need to devise a system of membership for key international organizations that ensures that their structures are relevant but that is also flexible enough to allow members to come and go. 
One way forward would be to establish numerical guidelines – along the lines of the Maastricht Treaty – for conferring G-7 membership. 
Europe should lead by example – offering the world the benefit of its deep experience of financial diplomacy and volunteering to take the first steps forward. 
Given that Europe managed to construct EMU, the Maastricht Treaty, and the stability and growth pact that underlines the euro, it should be relatively easy for euro-zone experts to help devise a system for judging G-7 type membership. 
Unless European countries take the initiative on global financial institutional reform, it will remain a lost cause. 

Fiscal Austerity Versus European Society 
WASHINGTON, DC – Over the last five years, the eurozone has, without explicit popular consent, maintained a strict policy focus on fiscal austerity and structural reforms – despite serious social repercussions, not only in the Mediterranean periphery and Ireland, but even in a “core" European Union country like France. 
Unless eurozone leaders rethink their approach, the radical Syriza party's success in Greece's recent general election could turn out to be just one more step toward a future of social fragmentation and political instability in Europe. 
Or it could mark the beginning of a realistic and beneficial re-orientation of Europe's economic strategy. 
Of course, fiscal sustainability is vital to prevent a disruptive debt refinancing and inspire confidence among investors and consumers. 
But there is no denying that it is much easier to support fiscal austerity when one is wealthy enough not to rely on public services or be at serious risk of becoming mired in long-term unemployment. 
(The wealthy also remain largely in control of the media, the public discourse, and cross-border capital flows.) 
For the millions of workers – and especially young people – with no job prospects, fiscal sustainability simply cannot be the only priority. 
When unemployment benefits are slashed, they are the ones who suffer. 
And when budget cuts extend to education, it is their children who are unable to gain the skills they need to reach their future potential. 
Austerity-induced suffering is particularly extreme in Greece. 
Severe pension cuts are preventing the elderly from living out their lives with dignity. 
A large burden has been placed on those who actually pay their taxes, while many – often the wealthiest, who long ago stashed their money abroad – continue to evade their obligations. 
Health care has lapsed, with many cancer patients losing access to life-saving treatment. 
Suicides are on the rise. 
Yet Greece's creditors have continued to ignore these developments. 
This is clearly not sustainable – a point that former Director of the International Monetary Fund's Europe Department Reza Moghadam recognized when he recently called for writing off half of Greece's debt, provided an agreement can be reached on credible growth-enhancing structural reforms. 
Social sustainability is essential for long-term economic success. 
A country cannot prosper if its educational system lacks the resources and capacity to prepare its children to thrive in the digital economy. 
Likewise, a reform program cannot be implemented if inequality, poverty, and social frustration strengthen extremist political parties, such as Greece's overtly fascist Golden Dawn party or France's far-right, anti-Europe National Front, which now boasts 25% electoral support. 
When times are tough, immigrants and minorities become easy targets. 
As Joseph Stiglitz recently pointed out, it is unlikely that Hitler would have come to power in Germany if the unemployment rate was not 30% at the time. 
It does not help when some of those trapped in the poor ghettos surrounding major cities – however small a minority – become tempted by violence and fall prey to terrorist recruiters. 
Regardless of what today's corporate profit reports and stock indices may show, a country cannot achieve inclusive, sustainable success – in economic or human terms – if these fundamental social issues are not adequately addressed. 
Of course, fiscal caution cannot be abandoned; after all, if governments or the private sector were to spend borrowed or newly minted money freely, the result would simply be more crises, which would hurt the poor most. 
But social sustainability must be an integral part of a country's economic program, not an afterthought. 
The persistent tendency to pay lip service to social sustainability, while implementing economic programs focused on unrelenting austerity, is a leading cause of political instability in Europe. 
Though reform programs aimed at building viable macroeconomic frameworks remain essential, they must include strong provisions for countercyclical policies to offset the “paradox of thrift" (the tendency to save more during a recession, undermining economic growth). 
When aggregate demand falls short of aggregate supply, governments must increase public spending. 
Moreover, governments that are now focused narrowly on microeconomic issues need to devote the same level of attention and commitment to designing and implementing social policies that focus explicitly on ensuring the livelihoods, health, education, and housing of the most vulnerable segments of the population. 
And, using new technology to analyze large amounts of data, they should boost the efficiency of social programs, while encouraging the active participation of concerned citizens. 
The European Commission and the IMF have admitted their errors – not only the inaccurate macroeconomic forecasts on which the Greek program was based, but also the decision not to account for social sustainability – and have acknowledged that the program has not produced the expected results. 
Yet, for some reason, Greece's creditors refuse to negotiate with the new government (which enjoys strong domestic support) to develop a new program that incorporates debt relief, a lower fiscal surplus, and structural reforms that support growth and promote social cohesion. 
This must not continue. 
The last five years have underscored the challenge of achieving financial stability. 
But political and social stability have proved to be even more elusive. 
Policymakers must direct just as much effort and resources toward realizing social sustainability as they do toward getting the Basel III financial reforms right. 
Europe's future prosperity – and its global role – depends on it. 

Europe’s Surprising Tech Success 
BRUSSELS – Europe is often viewed as a digital laggard, running far behind the frontier-pushing United States and Asia. 
But appearances are deceiving. 
In fact, according to a new report by the London venture capital firm Atomico, European startups are now taking the lead in artificial intelligence, building new tech hubs, and drawing investment from traditional industrial stalwarts. 
Last year, a record-setting $13.6 billion was invested in Europe’s tech sector, compared with $2.8 billion in 2011. 
Gone are the days when Europe’s “tech” sector largely comprised consumer-oriented e-commerce businesses – often blatant knockoffs of successful US companies. 
Today, Europe is the home of real pioneering innovation, led by what Atomico calls “deep tech” – the kind of artificial intelligence developed by Google’s DeepMind. 
Deep tech accounted for $1.3 billion of European venture investments in 2015, delivered in 82 rounds, up from $289 million, delivered in 55 rounds, in 2011. 
Europe’s new tech hubs are emerging in unexpected places, far beyond the early hotspots of London, Berlin, and Stockholm. 
Atomico pinpoints Paris, Munich, Zurich, and Copenhagen as the cities to watch over the coming years. 
The French capital, Atomico points out, is already starting to challenge London and Berlin in terms of the number and volume of venture-capital-financed deals. 
Europe’s traditional industries are now awakening to tech. 
Two-thirds of Europe’s largest corporates by market capitalization have made a direct investment in a tech company. 
One-third of those companies have acquired a tech company since the beginning of 2015. 
Foreign firms are also rushing to take advantage of Europe’s tech talent. 
Google, Facebook, and Amazon have all announced major expansions of their European tech hubs. 
Transactions worth more than $88 billion took place last year – compared to just $3.3 billion in 2014 – including SoftBank’s purchase of the British semiconductor-design firm ARM and Qualcomm’s $47 billion purchase of NXP Semiconductors. 
Another study, by the Boston Consulting Group, points out that many small export-oriented European Union member countries – namely, the Benelux, Baltic, and Nordic countries – rank well above the US in so-called “e-intensity,” which covers IT infrastructure, Internet access, as well as businesses, consumer, and government engagement in Internet-related activities. 
These “digital frontrunners” generate about 8% of their GDP from the Internet, compared to 5% in Europe’s Big Five (Germany, France, Italy, Spain, and the United Kingdom). 
Digitization is expected to generate between 1.6 million and 2.3 million more jobs than it eliminates in these countries between 2015 and 2020. 
Of course, Europe’s tech sector still has its weaknesses, reflected in its failure so far to produce a tech giant to rival the behemoths of Silicon Valley. 
While European tech entrepreneurs find it as easy as their American counterparts to raise startup funds, US firms enjoy 14 times more later-stage capital. 
That funding gap would disappear, if European pension funds allocated just 0.6% more of their capital under management to venture investments. 
A related weakness is the lack of a true European single digital market. 
In the US or China, tech entrepreneurs gain immediate access to a massive market. 
In Europe, they still must navigate 28 different consumer markets and regulatory regimes. 
To be sure, the European Commission promised to create a single digital market two years ago, estimating that it could boost the EU economy by €415 billion ($448.5 billion) annually. 
But Hosuk Lee-Makiyama and Philippe Legrain of the Open Political Economy Network recently delivered a scathing assessment of the results. 
Europe’s “single digital market,” they argue, currently amounts “to a jumble of outdated, corporatist, counterproductive industrial policies that favor producers over consumers, big companies over small, traditional incumbents over digital startups, and EU firms over foreign ones.” 
Instead of liberalizing, the EU wants to regulate. 
For example, it is working to ban companies from refusing online sales (except for copyright reasons) or setting different prices on the basis of a customer’s home country. 
Other dangerous possibilities – such as an effort to regulate data ownership, access, and usability – lie on the horizon. 
Despite these risks, the overall trend in Europe’s tech sector is a positive one. 
A new appetite for risk seems to be sweeping the continent; 
Atomico reports that more than 85% of founders say it is “culturally acceptable” to start one’s own company. 
Add to that deep research talent – five of the top ten global computer science faculties are within the EU – and Europe’s start-up boom looks sustainable. 
Politically, too, there is reason for optimism. 
Europe’s digital frontrunners are beginning to organize into a potent force, with 16 small EU countries, from Denmark to Ireland and Estonia, having formed a pro-Internet group. 
Together, these countries have urged the EU to ban data-localization requirements. 
At a time when the US is pursuing protectionist, insular, and backward-looking policies, Europe is stepping up as an innovative and forward-looking economic force. 
Wouldn’t it be ironic if, as now seems likely, it is the supposedly backward EU that ended up leading the way in unlocking the Internet’s true economic potential? 

Europe’s Renminbi Romance 
ROME/MADRID – The Chinese are losing confidence in their currency. 
Faced with faltering economic growth, the People’s Bank of China has stepped up efforts to restore stability to the renminbi, using its vast foreign reserves to prop up its exchange rate and stem the flow of funds fleeing the country. 
The PBOC’s governor, Zhou Xiaochuan, has repeatedly stated that there is no basis for continued depreciation, but few in the country seem to be listening. 
In the last quarter of 2015 alone, the net capital outflow amounted to $367 billion. 
And yet crumbling confidence within China has not prevented the West – and Europe in particular – from doubling down on the currency. 
When the International Monetary Fund announced in December that the renminbi would join the US dollar, the British pound, the euro, and the Japanese yen in the currency basket underlying its unit of account, the Special Drawing Rights basket, the decision was clearly political. 
Few would argue that the renminbi meets the IMF’s criteria for inclusion in the SDR currency basket. 
It is not freely convertible, and access to it is limited both inside and outside China. 
Some foreign branches of Chinese banks offer renminbi-denominated deposit accounts, and qualified investors can purchase debt instruments pegged to the currency in mainland China. 
But the volume is capped. 
To be sure, the renminbi performs well in trade-related statistics. 
According to the financial network SWIFT, it is the second most used currency in trade finance, having overtaken the euro, and ranks fifth in terms of international payments. 
These figures are inflated, however, by transactions with Hong Kong, which accounts for roughly 70% of international trade payments settled in renminbi. 
Vanishingly few contracts are issued in renminbi; the dollar remains king in invoicing, with the euro a distant second. 
Even the shares of the Japanese yen and the British pound, though very small, are still higher than that of the renminbi. 
The IMF’s decision to add the Chinese currency to the SDR basket owes much to the decision by the United States to defer to Europe. 
The US had argued for years that the renminbi should be included in the SDR only if China opened its capital account, let its currency float freely, and had a more independent central bank. 
None of this has happened. 
But after China established the Asian Infrastructure Investment Bank with the support of Europe, the US agreed to drop its objections. 
After all, the SDR basket plays a minor role in global finance, and admitting the renminbi was seen as a small price to pay to keep China embedded in the Bretton Woods institutions. 
Europe’s investment in the renminbi, however, goes far beyond political symbolism. 
The continent’s leaders have been strong supporters of the internationalization of the renminbi and the efforts of reform-minded officials such as Zhou. 
The currency’s inclusion in the SDR, it is hoped, will encourage China to liberalize its capital account further. 
European governments and central banks are also actively working to make the renminbi a viable reserve currency, to increase trade with China. 
British Chancellor George Osborne has made it clear that he would like the City of London to be the most important offshore market for renminbi trading and services. 
It was no coincidence that during President Xi Jinping’s state visit to the United Kingdom in October 2015, China chose London to issue its first overseas renminbi sovereign debt. 
The rest of Europe is equally enthusiastic. 
Today, the continent is home to the largest number of renminbi bank clearings. 
Offshore renminbi hubs have emerged in Frankfurt, Paris, Milan, Luxemburg, Prague, and Zurich, and most of Europe’s central banks have added – or are considering adding – China’s currency to their portfolios. 
In October 2013, the PBOC and the European Central Bank signed a bilateral currency swap agreement for €45 billion ($50 billion), the largest ever for China outside of Asia. 
By propping up the renminbi as a reserve currency, Europe is hoping to support the liberalizers inside China and welcome the country to the core group of world powers that decide global monetary affairs. 
Unfortunately, however, it is doing so at a time when the renminbi is under speculative attack and the Chinese themselves are losing confidence. 
Europe’s efforts could succeed; but unless China makes its currency even more widely accessible and opens its market further, they are almost sure to fail. 



Europe Turns Right 
AMSTERDAM – Whatever happened to the good Europeans, those nice folks in small northern countries who liked to think of themselves as the world champions of liberty and tolerance? 
Of course, many liberal Europeans are still alive and well. 
But first in Denmark, then in the Netherlands, and now in Sweden, illiberal, populist parties stirring up fear of immigrants – specifically Muslim immigrants – have managed to gain enough power to set, or at least influence, their countries’ political agendas. 
These parties are not confined to Scandinavia and the Low Countries, but are part of a global wave of anger against political elites, who are blamed for all of the insecurities that come with global economics, the financial crisis, and living in more ethnically mixed societies. 
The psychology behind the Tea Party in the United States and the anti-immigrant parties in Europe is similar, even if their policies vary. 
Modern European populists don’t wear black shirts, or indulge in street violence. 
Their leaders are youngish men in sharp suits, who don’t use the language of race, but that of freedom and democracy. 
The Dutch Freedom Party (whose only member is its leader, Geert Wilders), the Danish People’s Party, led by Pia Kjaersgaard, and Jimmy Akesson’s Sweden Democrats claim to be the defenders of Western civilization against its main enemy: Islam. 
They talk about Western liberties, including freedom of speech, but Wilders wants to ban the Koran and the burqa, and a Danish member of parliament has called Islam “a plague upon Europe.” 
All three countries may soon be following the Danish model, in which the illiberal populist parties pledge their support without actually governing, thereby gaining power without responsibility. 
Denmark’s conservative government could not govern without the support of the People’s Party. 
Sweden’s recently re-elected moderate conservatives will have to rely on the Democrats to form a viable government. 
And Wilders has already received assurances from the conservative and Christian democratic parties that, in exchange for his support, the burqa will be banned in the Netherlands and immigration curbed. 
The influence of these slick new populists, waging their war on Islam, goes well beyond their countries’ borders. 
Nativism is on the rise all over the Western world, and Wilders, in particular, is a popular speaker at right-wing anti-Muslim gatherings in the US, Britain, and Germany. 
European populism focuses on Islam and immigration, but it may be mobilizing a wider rage against elites expressed by people who feel unrepresented, or fear being left behind economically. 
They share a feeling of being dispossessed by foreigners, of losing their sense of national, social, or religious belonging. 
Northern Europe’s political elites, largely social or Christian democrats, have often been dismissive of such fears, and their paternalism and condescension may be why the backlash in those liberal countries has been particularly fierce. 
The question is what to do about it. 
One possible solution is to let populist parties join the government if they get a sufficient number of votes. 
The idea of a Tea Party candidate becoming US president is alarming, to be sure, but European populists could only be part of coalition governments. 
True, Hitler’s Nazis took over Germany almost as soon as they were voted into power, but the new European right are not Nazis. 
They have not used violence, or broken any laws. 
Not yet. 
As long as this is so, why not give them real political responsibility? 
They would then not only have to prove their competence, but also moderate their attitudes. 
That is why the Danish model is probably the worst solution, for it requires no governing ability from the populists. 
As long as Wilders and his European counterparts stay out of government, they have no incentive to temper their illiberal rhetoric and stop stoking up hostility towards ethnic and religious minorities. 
That is what happened in the one European country that tried to bring its populists into government – Austria under Wolfgang Schüssel a decade ago. 
There, the populist Freedom Party splintered, as some opted to moderate their views in order to succeed in government. 
But the EU’s decision to impose a form of diplomatic limbo on Austria for Schüssel’s decision to include the Freedom Party in his governing coalition may discourage other conservatives from going this route. 
As a result, mainstream conservatives are more likely to compromise on principles that we have long taken for granted, such as civil equality and religious freedom. 
Indeed, fearful of the populists’ power, in or out of government, the response from mainstream conservatives – and even some social democrats – to their illiberal views has already been inexcusably soft. 
There are in fact plenty of ways to fight back, but not with outdated ideologies. 
Those who see the danger of a culture war with Muslims, or the hostile branding of minorities, should be able to influence opinion with practical arguments. 
It will no longer do merely to warn against racism, or promote multiculturalism. 
Instead, people must be convinced that without controlled immigration – and not just asylum for refugees – Europeans will be worse off. 
With falling birthrates, immigrants are needed to maintain European prosperity. 
At the same time, Europe’s economies should be less enmeshed in protective regulations, so that immigrants can find work more easily. 
Finally, the argument must be made more forcefully that it will be much harder to protect our societies against the revolutionary terrorism of radical Islam without the active support of all law-abiding Muslims. 
Europe will not be safer under politicians who claim that we are at war with Islam. 
On the contrary, their influence will make life not only less civilized, but a great deal more dangerous. 

Europe without Turkey 
AMSTERDAM – Most European citizens (for example, more than 60% in France and Germany) believe that Turkey should not become part of the European Union. 
There are various reasons for this opposition – some valid, some based on prejudice: Turkey is too big; 
Turkish migrant workers might swamp other members; Turkey has a shaky human rights record; 
Turkey oppresses the Kurds; 
Turkey hasn’t solved its problems with Greece over Cyprus. 
But the main reason is surely that Turkey, a mostly Muslim country, governed by a Muslim party, is viewed as too foreign. 
In the words of former French President Valéry Giscard d’Estaing, one of the authors of the EU Constitution, “Turkey is not a European country.” 
This is hard to take for members of the secular, Westernized Turkish elite, who have spent decades, if not longer, trying to prove their European bona fides. 
As one highly educated Turk, working for an international organization, put it to me recently: “We play football with them, sing songs with them on TV, do business with them, improved our human rights, and democratized our politics. 
We do everything they ask us to do, and still they don’t want us.” 
That’s right, said another Turk within earshot, a fluent English speaker who spent much time in London, worked for NGOs promoting human rights, and was jailed in the 1980’s for opposing the military regime: “I hate Europe. 
I’m not European, and who needs Europe, anyway?” 
Good question. 
While the Greek crisis is tearing at the seams of the eurozone, the Turkish economy is booming. 
To be sure, “Europe” was for many years a symbol, not just of wealth, but also of liberal politics, open societies, and human rights. And Turkish society has benefited greatly from its attempt – not yet perfect, not yet complete – to come up to European standards. 
But more and more Europeans are disillusioned with the Union. 
Far from being a model of democracy, the EU is associated with an arrogant, out-of-touch mandarinate that issues rules and edicts with paternalistic and highhanded disregard for ordinary citizens. And some of its new members – Romania, Bulgaria, and Hungary, for example – are not exactly paragons of open liberal democracy. 
So, if Europeans don’t even believe in their own union, why should Turkey wish to join it? 
In fact, the woman who protested that she hated Europe would still like very much to see Turkey in the EU. 
Her venom was that of a spurned lover. 
Members of Turkey’s secular, pro-European elite, governing almost continuously since Kemal Atatürk founded the republic in 1923, are now being squeezed from two directions. 
Obstructed by the EU, they are also being pushed from their positions of privilege by a new elite that is more provincial, more religious, and less liberal, but not necessarily less democratic – a cohort personified by the highly popular prime minister, Recep Tayyip Erdoğan. 
For these Westernized Turks, acceptance by the EU represents a lifeline against the currents of Islamic populism that Erdoğan represents. 
And they need encouragement, for Erdoğan’s Islamists may be democratic, but the secularists, on the whole, are more liberal. 
But the old privileged elite is not the only group in Turkey that stands to gain from being part of Europe. 
Minorities do well in empires, especially benevolent empires. 
Like the Catalans or the Scots, the Kurds in Turkey are in favor of EU membership, because it offers a refuge from their own country’s majority. 
The sheer size of Turkey, and its population, worries Europeans, with some reason. 
But this fear is probably exaggerated. 
Now that the Turkish economy is thriving, there will be less reason for poor Turks to seek work in other countries, let alone “swamp” them. 
And if the EU’s hugely expanded membership were to stand in the way of a future federal state, this might not be such a bad thing. 
In any case, the addition of Turkey would hardly make the crucial difference. 
From the perspective of the Western-minded Turks, the pride of European membership is perhaps less important than the pain of rejection. 
But the same goes for the Europeans. 
If the most Westernized, most modern, most democratic republic in the Islamic world were to be soured by anti-European resentment, this could not be a good outcome for the West – or, indeed, for the rest of the world. 
Turkey is in a good position to guide other Muslim countries in a more liberal-democratic direction. 
Moreover, with a real prospect of joining Europe, Turkey would be better placed to defuse actual and potential tensions between Europe and the Middle East. 
Without Turkey, EU involvement in the Middle East still looks like Western imperialism. 
The prospect of EU membership for Turkey would also dispel the outdated notion that Europe stands for Christendom. 
Christian religions certainly helped to shape European civilization. 
But not all European citizens are practicing Christians. 
Many are not Christians at all. 
If a large democracy, with a majority Muslim population, can join the EU, it will be easier to accept French, British, Dutch, or German Muslims as fellow Europeans, too. 
Those who believe that common interests and liberal institutions should define the EU would gain by this acceptance. 
Those who seek a European identity based on culture and faith will resist it. 
Alas, at this time of economic crisis, growing nationalism, and inward-looking populism, the chances of a Muslim country becoming a member of the EU are slim, to say the least. 
Such a process cannot be forced on people. 
To insist on it, against the wishes of most European citizens, would smack of precisely the kind of undemocratic paternalism that has turned many Europeans against the EU already. 
But the majority is not always right. And times might change. 
Then again, we might live to regret that times did not change fast enough. 

Are EU Troops on the Way? 
STOCKHOLM – Suddenly, the debate about creating a joint European Union army has gained real momentum. 
After French President Emmanuel Macron recently proposed the idea, US President Donald Trump disparaged it (in a tweet, of course), but German Chancellor Angela Merkel endorsed it (while urging caution). 
The issue came to the fore this month with the centennial of the end of World War I, which naturally focused Europeans’ attention on matters of war and peace. 
While touring WWI battlefields, Macron observed that “peace in Europe is precarious,” and that “we will not protect Europeans unless we decide to have a true European army.” 
The goal of establishing a European army dates back to the earliest stages of European integration after World War II. 
In 1954, the French parliament refused to ratify a treaty that would have established a European Defense Community and joint military force comprising West Germany, France, Italy, Belgium, the Netherlands, and Luxembourg. 
After that, the structures of integration that would eventually underpin today’s EU tended to be more economically oriented, and territorial defense was left to NATO and the US security umbrella. 
But over the last few decades, there has been more movement toward establishing a common EU foreign and security policy, and new structures and institutions have been developed with that goal in mind. 
Still, today’s discussion of European defense is truly novel. 
Until now, the EU has primarily fostered cooperation in the area of research and development, while various country groupings have worked to establish different defense and security capabilities. 
In the next seven-year budget, there will likely be substantial funding for such projects. 
Macron is right to think that the EU’s strategic environment has become increasingly fragile. 
Europeans today are confronted with a revanchist Russia, an assertive China, and a disruptive US. 
Although the US has expanded its military capabilities in Europe in recent years, it has previously regarded the continent primarily as a platform for operations in other theaters. 
And now that Trump has cast doubt on America’s commitment to defend Europe, renewed proposals for a European army should come as no surprise. 
Still, Europe is home to only three countries with a robust strategic culture: France, the United Kingdom, and Russia. 
All three have a deep-seated institutional understanding of geopolitical power dynamics and the use of military force. 
Indeed, Russia’s own program of military modernization suggests that it is becoming increasingly reliant on hard power to pursue its interests. 
Meanwhile, France has launched the European Intervention Initiative, a new framework uniting countries with real defense capabilities and a willingness to use them. 
Most important, this new grouping will include the UK even after it leaves the EU. 
That said, Macron’s vision of a European army under a central EU-level command will remain aspirational for the foreseeable future, for the simple reason that countries seldom give up their armies voluntarily. 
Nonetheless, it is worth considering Macron’s broader goal, which extends well beyond immediate concerns such as Trump and Brexit. 
In short, Macron is calling on Europe to develop a more coherent and autonomous strategy for pursuing its security and defense interests in the twenty-first century. 
Needless to say, this project will encounter many hurdles. 
Russia’s use of nuclear forces can be deterred only by those of the US. 
The French and the British don’t like to admit it, but their nuclear arsenals are simply insufficient, especially now that Russia is upgrading its own. 
Beyond nuclear deterrence, the US will also likely remain at the center of command, control, and intelligence when it comes to continent-wide operations. 
Moreover, Europeans will also have to resolve a number of internal tensions. 
Germany will insist that all new programs be housed within EU structures, while demanding parliamentary approval for all operations. 
But the British will no longer belong to the EU, and will remain skeptical of French talk of strategic autonomy, which could imply a weaker NATO. 
The same goes for eastern EU member states, which are even less willing to countenance a delinking from NATO or the US. 
Despite these difficulties, there is an emerging consensus on the need to restructure European defense. 
The ostensible impetus is the growing threat from Russia, China, and the broader Middle East. 
But the uncomfortable reality is that renewed interest in military integration also reflects the erosion of Europe’s strategic position as a result of Brexit and, in some respects, Trump. 
I expect that a French army – not a European one – will be marching down the Champs Elysée on Bastille Day for decades to come. 
But I also expect European countries to become more assertive in defense of their sovereignty, and to act collectively when it comes to security. 

Europe Under Siege? 
BRUSSELS – Many Europeans feel like their countries are under assault, as huge numbers of migrants flow across their borders. 
Whether they are being exposed to refugees firsthand, or just seeing images of them splashed across newspaper pages, Europeans are well aware of the vast numbers of desperate people trying to enter European Union territory by any means possible. 
But this awareness has yet to translate into a unified response. 
Tensions among member states seem to be rising, perhaps because the problem differs so greatly across countries. 
On a per capita basis, Sweden receives 15 times more asylum applications than the United Kingdom, where official policy toward refugees remains the most hostile. 
Germany has now become the main destination overall, receiving nearly 40% of the EU total; even on a per capita basis, this is several times more than the EU average. 
Of course, there are clear rules about how responsibility for refugees is delineated: according to the so-called Dublin Regulation, the first EU member state into which a refugee crosses is responsible for that person’s asylum application. 
But this is clearly problematic, as it puts the entire burden of refugees on the EU’s frontier countries. 
Though this may not have been a huge problem in the 1990s, when EU countries received, in all, only 300,000 asylum applications annually, it cannot work in a year when the total is expected to be triple that number. 
Smaller border countries like Hungary and Greece simply do not have the capacity to register and house hundreds of thousands of asylum-seekers. 
And larger countries like Italy have an incentive to overlook the large numbers of refugees landing on their shores, knowing that, if nothing is done, those refugees will likely head elsewhere (mainly to northern Europe). 
Germany, recognizing that the Dublin system is untenable, has now decided to process all asylum applications from Syrians, regardless of where they crossed into the EU. 
The decision was likely driven, at least partly, by how difficult it is, given the EU’s porous internal borders, to determine where a refugee first entered. 
A 2013 ruling by the European Court of Justice that Germany could not return an Iranian refugee to Greece (where the applicant was found “to face a real risk of being subjected to inhuman or degrading treatment”) probably heightened Germany’s sense of responsibility on this issue. 
Germany is the largest EU member country in terms of population and GDP; so, to some extent, it does make sense for it to take the lead. 
But Germany still accounts for less than one-fifth of the EU’s population, and less than one-quarter of its economy. 
In other words, not even Germany can handle all of Europe’s refugees today. 
A few months ago, the European Commission tried its hand at resolving this problem with a courageous proposal to distribute refugees across member states according to a simple equation that accounts for population and GDP. 
But the plan was rejected, with member states – particularly those with the fewest refugees – claiming that it represented an undue interference in domestic affairs. 
This has put the EU in its usual quandary: everybody recognizes that there is a problem, but a solution requires unanimity, which cannot be achieved, because each country defends only its own interests. 
The only way forward is to leave out the countries that are most averse to accepting immigrants, at least temporarily, and create a solution involving just those that are willing to share the burden. 
This may not seem “fair,” but, with more refugees landing on Europe’s borders every day, EU leaders cannot afford to delay action. 
But there is another dimension to the crisis that makes addressing it all the more complicated. 
The migrants are not all from conflict areas like Syria, and thus do not, according to international law, have a “right to asylum.” 
There are also plenty of economic migrants from, say, the poorer parts of the Balkans, hoping to escape poverty at home – and willing to misuse the asylum system in the process. 
Lodging an application, even one without any chance of being accepted, is appealing, because until it is rejected, the applicant receives basic housing, social services (including health care), and pocket money in an amount that may well exceed wages in his or her home country. 
Spending a few months in northern Europe while an asylum application is processed is far more attractive than going home to a job that pays a barely livable wage, or to no job at all. 
As the number of asylum-seekers increases, so does the time it takes to process their applications, making the system all the more tempting for economic migrants. 
And, indeed, close to half of all asylum-seekers in Germany now come from safe countries, like Serbia, Albania, or Macedonia. 
As Europe’s populists use such cases of “welfare tourism” to sow fear and anger among the European public, reaching an agreement to accommodate actual refugees becomes increasingly difficult. 
Against this background, the EU needs to take action on two fronts. 
First, member countries must urgently boost their capacity to deal with asylum applications, so that they can quickly identify those who deserve protection. 
Second, the EU needs to improve burden sharing – ideally among all countries, but perhaps among a smaller group at first – in providing shelter for those who gain asylum. 
International law – and basic morality – demands nothing less. 

A New Year’s Banking Union 
BRUSSELS – Five years after the outbreak of the financial crisis, Europe’s economic and political situation remains fragile. 
A mild recession is expected in Europe this year, and unemployment is on the rise. 
Beyond deficit reduction, we need to implement a €120 billion ($155 billion) European investment plan, and deepen the European Single Market to unleash its growth potential. 
But we also need other structural measures. 
The European Union must put an end to the negative feedback loop between individual member states and their national banking systems. 
Between 2008 and 2011, EU taxpayers granted banks €4.5 trillion in loans and guarantees. 
In some countries, the threat of bank recapitalization with public funds has resulted in a drop in market confidence and a huge rise in interest rates. 
The European Central Bank (ECB) has taken decisive action to break this vicious circle. 
Moreover, there is now a consensus that the 17 eurozone countries need a banking union to accompany their common currency. 
The European Commission has proposed a single rulebook for banks’ capital requirements; mutual support between national deposit guarantee schemes; and Europe-wide rules for resolving failing banks that place the main burden on bank shareholders and creditors, not on taxpayers. 
On June 29, European heads of state and government committed themselves to the creation of a single European supervisor for banks in the eurozone. 
This is good news for both financial stability and public finances: once the single supervisor is in place, supervision will be more credible and impartial, which is important for dealing with ailing banks and managing their return to viability. 
The European Commission also put forward a set of legislative proposals to establish the single supervisory mechanism and confer key supervisory tasks on the ECB. 
This proposal must now be amended and approved as soon as possible by the European Parliament and the Council of Ministers if we are to have a chance of activating the European Stability Mechanism (ESM) and proceeding with the other essential pillars of a banking union. 
Further work, however, is still needed in several areas: 
Entry into force in January 2013 would bring about supervision by the ECB of banks that have received or requested public funding. 
Only in July 2013 would all banks of major systemic importance be subject to ECB supervision. 
The remaining banks would be subject to the new mechanism at the start of 2014. 
Intense discussions are normal for such a high-stakes project. 
Countries like Germany, Finland, and the Netherlands are right to argue that rapid progress cannot come at the expense of the new supervisory structure’s quality. 
But EU countries have to stick to the commitment that they made in June and strike a deal in time for a gradual entry into force in January 2013. 

Turning Off the Dividend Spigot 
NEW YORK – European banks’ high litigation and restructuring costs have resulted in major losses on their books and abysmal stock-market performance. 
As the industry and European regulators now reflect on this dismal state of affairs and search for solutions, they should consider banks’ revenue distribution – including employee bonuses and shareholder dividends – as part of the problem. 
Revenue distribution is one primary reason for European banks’ capital shortfalls. 
To understand why, we should look back to October 2014, when the European Banking Authority began balance-sheet stress tests for the eurozone’s largest 123 banks and found a capital shortfall of €25 billion ($28 billion) in all of them. 
At the time, the EBA required the banks to devise plans to address their respective shortfalls within 6-9 months. 
Some banks took action and raised equity through rights issues, sometimes with substantial help from governments. 
But most banks mollified regulators by simply shedding riskier assets to improve their capital ratios. 
Needless to say, these efforts were ineffective, and European banks’ share prices have declined by 50%, on average, since the initial 2014 assessment. 
Banks that failed the stress test and didn’t take the result seriously are partly to blame, but so, too, are regulators who did not sufficiently hold the banks’ feet to the fire to improve their balance sheets, and who may have applied stress tests that were too weak to detect financial frailty. 
The EBA conducted another series of stress tests and reported the results in late July. 
This latest round looked at 51 banks and, contrary to previous tests, was not designed to identify capital shortfalls, but rather to provide “a common analytical framework to consistently compare and assess the resilience of large EU banks to adverse economic developments.” 
Regulators now suppose that the European banking sector is resilient to adverse shocks. 
On the same day as the EBA’s announcement, the worst performer, Italy’s Banca Monte dei Paschi di Siena, announced €5 billion ($5.6 billion) in new funding, pursuant to its €5.6 billion capital requirement. 
Still, market reaction to the announcement was negative (the EuroStoxx Banks index fell 7.5% in two days), most likely because the EBA did not include specific estimates of European banks’ capital shortfalls or outline a recapitalization plan. 
In a new paper investigating this market reaction, using United States capital-requirement rules, we calculate the total capital shortfall in all 51 participating banks to be €123 billion. 
Despite this large capital shortfall, 28 of the 34 publicly listed banks in the stress test paid out about €40 billion in dividends for 2015, meaning that they distributed, on average, over 60% of their earnings to shareholders. 
Dividend payments made by under-capitalized banks amount to a substantial wealth transfer from subordinated bondholders to shareholders, because it is bondholders who will suffer the losses in a crisis. 
Moreover, it is potentially a wealth transfer from taxpayers to private shareholders, because under new banking rules government bailouts are possible after bondholders have covered (bailed in) 8% of a bank’s equity and liabilities. 
By contrast, undercapitalized banks in the US are forced to halt all forms of capital distribution if they fail a stress test. 
Fortunately, following the 2016 round of stress tests, the EBA is now also considering this type of regulatory sanction. 
Thus, “competent authorities may also consider requesting changes to the institutions’ capital plan,” which “may take a number of forms such as potential restrictions on dividends required for a bank to maintain the agreed trajectory of its capital planning in the adverse scenario.” 
We estimate that if European regulators had adopted this approach and forced banks to stop paying dividends in 2010 – the start of the sovereign debt crisis in Europe – the retained equity could have paid for more than 50% of the 2016 capital shortfalls. 
The figure above shows our calculated capital shortfalls, using the EBA stress test’s “adverse scenario” losses and the cumulative dividends these banks have distributed since 2010. Dividends paid out by some banks, such as BNP Paribas and Barclays, actually exceed the current capital shortfalls, while at others – such as Deutsche Bank, Commerzbank, and Société Générale – capital shortfalls far exceed dividends that would have been retained. 
Nonetheless, our findings suggest a simple first step toward preventing bank capital erosion: stop banks with capital shortfalls from paying dividends (including internal dividends such as employee bonuses). 
Such a policy would not even require regulators to broach topics like capital issuance, bailouts, or bail-ins, and some banks have even already begun to suspend dividend payments. 
All that’s left now is for the European Central Bank to enforce this practice across the eurozone. 

The Eurozone’s Minsky Conundrum 
BRUSSELS – Stubbornly low inflation has the European Central Bank worried. 
But its response – essentially just more quantitative easing – could backfire, exacerbating imbalances and generating serious financial instability. 
As it stands, the headline consumer price index in the eurozone hovers around zero, and even core inflation remains below 1% – too far for comfort from the ECB’s target of around 2%. 
While a new round of weakness in global commodity prices earlier this year contributed to these figures, it does not explain the weakness in longer-term inflation expectations, which have improved little since March, when the ECB started its massive €60 billion ($66.3 billion) per month bond-buying program. 
But instead of rethinking its strategy, the ECB is considering doubling down: buying even more bonds and lowering its benchmark interest rate even further into negative territory. 
This would be a serious mistake. 
Easier credit conditions and lower interest rates are supposed to boost growth by stimulating investment and consumption demand. 
But in the core of the eurozone – countries like Germany and the Netherlands – credit has been plentiful, and interest rates have been close to zero for some time, so there was never much chance that bond purchases would have a significant impact there. 
And, indeed, the European Commission’s most recent economic forecast shows that spending in the core countries has not increased as a result of the ECB’s policies; Germany’s external surplus is actually increasing. 
Of course, in the highly indebted peripheral countries, there was room for interest rates to fall and for credit supply to grow – and they have, leading governments and households to increase their spending. 
While the asymmetrical impact of the ECB’s policy is appropriate in principle (because unemployment is much higher in the periphery), the reality is that a recovery supported by the least solvent economies is not sustainable. 
Back in 1986, Hyman Minsky warned about the longer-term dangers to financial stability if “Ponzi” borrowers – those who can service their debt only with new debt – become the main pillar of the economy. 
A zero-interest-rate environment is of course ideal for such borrowers, because there is nothing to provide an indication of solvency; borrowers can just roll over their debt. 
But it is bad for those with a strong asset position; by reducing their spending power, it spurs them to save even more. 
The standard response to Minsky’s concern – that the spenders can’t afford it and the savers aren’t spending – is that monetary policy should focus on ensuring price stability, while macroprudential policy aims to safeguard financial stability by limiting borrowing by highly indebted agents. 
But this approach does not work. 
If macroprudential policy limited additional credit to marginal borrowers effectively, monetary policy would have no impact on demand (as long as the most solvent agents refuse to spend more). 
This problem arose in the United States after the 2001 recession. 
Although the Federal Reserve kept interest rates low for a protracted period, the corporate sector did not increase its investment. 
The recovery was ultimately fueled by so-called “subprime” mortgages: home-purchase loans extended to borrowers with lower credit ratings. 
The result, as we know, was a mega-bubble that triggered the 2008 financial crisis. 
In the eurozone’s case, the risk is compounded by the ineffectiveness of its key macroprudential instrument, the Stability and Growth Pact, in limiting countries’ spending, as lower interest rates give debtor countries leeway to spend more. 
Public debt as a share of GDP is on the rise in Italy and Spain, even though both countries, with their eurozone partners, have committed to reducing the debt ratio. 
In fact, even without lower interest rates, the deficit limits that the Pact imposes have proved to be non-binding, exemplified by France’s flouting of them since 2009. 
In short, monetary policy is perpetuating the disequilibrium between creditor and debtor economies in the eurozone, and macroprudential policy is doing nothing to stop it. 
When interest rates normalize, this could generate serious financial instability. 
But – and this is the conundrum – the ECB has few options for stimulating demand among the eurozone’s more solvent agents, and thus supporting a sustainable recovery. 
In deciding its next move – whether to initiate more bond purchases, lower interest rates even further, or do both – the ECB must recognize that any positive impact on demand probably will be limited to the eurozone’s weaker economies – that is, the economies that can least afford it. 
This is a high-risk move, one that is probably not justified by the effort to bring price increases a few dozen basis points closer to the ECB’s target. 
A recovery has already begun in the eurozone. 
It should be left to run its course. 
An even more expansionary monetary-policy stance might strengthen the recovery marginally, but at the cost of increasing the eurozone’s already-dangerous imbalances. 

Europe’s Chimerical Capital-Markets Union 
LONDON – The eurozone's survival is in doubt again, as Greece demands debt forgiveness and an end to austerity – or else. 
But, though Europe's currency union is at risk, and its banking union remains at an early stage of development, the endlessly creative European Commission is embarking on another adventure: a so-called “capital-markets union." 
That “so-called" is appropriate, because the project, despite being only vaguely defined at this point, is most certainly not intended to create a single European capital market. 
Indeed, European Union leaders know better than to announce such an ambition, which would require a new treaty – no one is prepared to open up that can of worms. 
After all, European voters are in no mood to transfer more powers to Brussels. 
The capital-markets union actually began as a slogan, coined by one of EU Commission President Jean-Claude Juncker's acolytes. 
Now, the new financial markets commissioner, the United Kingdom's Lord Jonathan Hill, has been assigned the unenviable task of putting flesh on bare bones. 
The Commission's “Green Paper" consultation round on the subject produced more questions than answers. 
Think tanks, lobby groups, and national regulators have wasted no time in trying to influence Hill's efforts, and to head off any initiatives that might damage their interests. 
The Bank of England has argued that there should be no replication of the banking union grant of new powers to the European Central Bank at the expense of national central banks. 
The capital-markets union, the BOE argues, “does not require institutional change," so no super-regulator should be created. 
The Commission has accepted that conclusion for now, though one of Hill's aides has suggested that, “at some point…supervisory issues will pop up." 
In fact, establishing a European version of the US Securities and Exchange Commission is a longstanding aim of the Brussels Eurocracy – one that may be achieved one day, but not just yet. 
But before delving into institutional issues – a favorite topic of EU veterans – one should consider what problem the capital-markets union is supposed to solve. 
And here, there is considerable agreement. 
Most regulators and market participants agree that Europe's financial markets are dysfunctional. 
With banking assets amounting to roughly 300% of EU-wide GDP, compared to some 70% in the United States, large pools of savings are being left unused. 
Moreover, European companies receive an excessive 80% of their finance from banks and less than 20% from capital markets (the proportions are roughly reversed in the US). 
The need to redress that imbalance has become increasingly evident since the recent financial crisis, as banks' efforts to rebuild their capital bases (and meet stricter regulatory requirements) has led to credit rationing. 
Loosening that constraint on output growth would improve the European economy's resilience, encourage risk-taking, and promote dynamism. 
The overall aim of the capital-markets union is thus relatively straightforward. 
But achieving it is not – in no small part because Europe's heavy reliance on bank finance stems from structural and cultural factors. 
And the remedies that the Commission has suggested so far – for example, encouraging crowdfunding and standardizing the terms of securitization – appear unlikely to promote rapid growth in non-bank finance. 
Promoting a pan-European private placement market might help, as would aligning standards for covered bonds. 
But both strategies would face serious legal obstacles. 
Indeed, though Hill's modest initial agenda certainly would do no harm (and should be pursued as quickly as possible), any substantial measures beyond it would confront major roadblocks. 
For example, harmonizing insolvency regimes across the continent and reducing tax incentives that favor debt over equity, while entirely logical, strike at the heart of member states' remaining sovereignty, and thus will be extremely difficult to push forward. 
Some of the other ideas that Hill has floated, such as relaxing the capital standards for long-term investments, run counter to the EU solvency standards for insurers and pension funds that will be implemented next year. 
Some old nags have also been dragged out of the stables for another run around the course. 
“Streamlined" prospectuses and exemptions from some accounting standards for small companies have been tried before in individual countries – and have failed. 
Looser standards for issuers weaken protection for investors, and there is evidence that lax regulation of new issues may reduce investor demand for them, raising the cost of finance. 
Unless the political mood changes radically in Europe – an unlikely development – it would be unrealistic to expect the capital-markets union to be anywhere near as transformational as the banking union has been. 
It will be, at best, a small disturbance, in which few national sacred cows are slaughtered. 
What began as a slogan may turn out to be helpful. 
But a capital-markets union is highly unlikely to end Europe's love affair with its banks. 
The biggest impact on market structure will continue to come from ever-rising capital requirements, which will make bank credit more expensive and encourage borrowers to look elsewhere. 

Which Internet for Europe? 
BRUSSELS – When the European Commission announces its new digital strategy on May 6, it will face a decisive choice between two very different approaches to the Internet. 
Will it choose a forward-looking, market-driven path? 
Or will it opt for a defensive, backward-looking, insular retreat? 
First the good news: the high profile of the planned announcement shows that the continent’s leaders recognize that the Internet can no longer be shunted to the sidelines of European policymaking. 
It is central to economic performance and to modernizing Europe’s industrial base. 
Over the past five years, while Europe has grappled with its macroeconomic woes, the United States and Asia have raced ahead, reaping digital benefits. 
According to a recent study by Plum Consulting, information and communications technology (ICT) contributed nearly 1.6% to annual productivity growth in the US during this period – double its contribution in Europe. 
Perhaps that should come as no surprise, given that nearly 5% of US investment is spent on ICT, compared to 2% in Europe. 
“The difference is not because the Internet comprises a larger share of the economy in the US, but because the US has been better at using the Internet throughout the economy,” write Plum consultants Brian Williamson and Sam Wood. “Europe invests more than the US overall relative to GDP, but not in relation to the Internet and ICT.” 
The question facing European policymakers is how to close this gap. 
The best way forward would be to embrace the Internet, even where it is disruptive. 
In practice, this means cutting red tape so that all businesses can sell their goods and services across a common market of 500 million people. 
European companies today must navigate 28 sets of rules. 
It is little wonder that only 15% of consumers shop online across European borders. 
Europe’s focus should be on removing barriers and updating regulation to encourage more, not less, use of the Internet. 
This will require having the courage to face down those who would retreat behind national borders and protect existing business models. 
To benefit fully from the Internet, the EU should avoid favoring local businesses over global competitors, and all investment should be welcome, whether it comes from Stockholm, Seoul, or San Francisco. 
A regulatory regime that gave unfair advantages to local businesses would hurt consumers, hamper innovation, and damage competitiveness. 
European policymakers should also guarantee non-discriminatory wholesale access to communications networks, and that consumers and businesses have a range of choices for telecommunications and online services. 
Similarly, the EU should engage internationally to ensure that the Internet remains a key part of the global trading system. 
For example, it should complete negotiations with the US on an improved “Safe Harbor” framework for data transfers, thereby encouraging companies on both sides of the Atlantic to rely on transfers of commercial data. 
Unfortunately, ominous signs are pointing in the wrong direction. 
Europe’s two heavyweights, France and Germany, have been vocal in their determination to roll back digital progress. 
Recently, European Commissioner for Digital Economy and Society Günther Oettinger referred to the concept of net neutrality – in which all Internet traffic is treated equally, regardless of its nature or origins – as “Taliban-like” and called for a new levy on online services. 
German and French pressure has led to calls for beefed-up regulatory powers to rein in powerful, usually American platforms, such as Google and Facebook. 
The continent also seems poised to gut the important “one-stop shop” principle, which would have allowed companies to deal with the data protection authority in the country where they have their main European base. 
Meanwhile, protesters across Europe have called for a clampdown on Uber’s ride-sharing service and restrictions on Airbnb’s apartment-sharing service, and the French Senate is considering “search neutrality” obligations. 
All of these moves add up to an alarming and wrongheaded approach to the Internet. 
If Europe continues on this path, it risks missing out on the potential of the online economy. 
After all, it is European small businesses, not just American, that benefit from e-commerce platforms like eBay and Amazon and the advertising services of Google and Facebook. 
And European app developers, too, build businesses on mobile phone software. 
The Internet is not a game of winners or losers; everyone can win. 
Nor does it pit Europe against other regions. 
After all, Europe has almost as many billion-euro Internet firms as the US. 
The wisest choice for Europe would be to ensure that many more successful Internet firms emerge, by creating the best possible conditions for digital innovators. 

Europe’s Dog in the Nighttime 
BRUSSELS – The new European Commission headed by Jean-Claude Juncker is off to a rocky start. 
But one would not know it from reading the news headlines. 
As Sherlock Holmes understood, a dog that does not bark in the nighttime usually goes unnoticed. 
In Europe’s case, the European Union’s fiscal rules are at issue, and the Commission – in principle the EU’s watchdog – should bark loudly when they are flouted. 
Last month, howls seemed inevitable after two large EU countries, Italy and France, submitted budget plans for 2015 that clearly violated their governments’ vows of continued austerity. 
At first, the Commission dutifully rejected the two budgets as incompatible with the rules of the EU’s Stability and Growth Pact (SGP). 
But then something happened that was as “curious” as in Arthur Conan Doyle’s story. 
Within days, both countries offered mini-adjustments to their budgets, worth about 0.2% of GDP, and their finance ministers wrote to the Commission that their budgets should now be approved. 
The Commission did not react, leaving French and Italian leaders to claim that they, not Brussels bureaucrats, had the last word. 
In fact, the latest forecast reflects an even worse outcome for France and Italy this year than originally promised, with France’s deficit set to increase slightly for 2015 and Italy’s cyclically adjusted deficit expected to deteriorate. 
The Stability and Growth Pact prescribes an annual improvement of at least 0.5 % of GDP. 
The new Commission thus risks losing its authority from the very start of its mandate. 
Whether it does is a crucial question, because maintaining a high degree of credibility is essential to economic policymaking in the eurozone. 
To see why, it is worth recalling that the SGP’s original rules were judged “stupid” by one former Commission president (Romano Prodi), because the single-minded pursuit of a deficit below 3 % of GDP could be inappropriate during recessions. 
That argument was accepted, and the SGP was supposedly rendered more “intelligent” by, for example, permitting budget deficits to be adjusted for the economic cycle, adding medium-term objectives for expenditure, and introducing escape clauses. 
But the new rules obviously require a strong institution to interpret them, and whose judgment is accepted by everybody. 
Though checking whether a budget is below the SGP’s ceiling of 3% of GDP may be a straightforward matter, there can be reasonable disagreement about whether the business-cycle adjustment should be estimated at 0.5% or 0.8% of GDP, or whether a country is adhering to its medium-term expenditure objective. 
The Commission is supposed to have the last word, thereby ensuring the rules’ credibility and consistency – and it seems to have lost this fight in the first round. 
One could, of course, argue that the SGP should be scrapped, because austerity makes no sense when the eurozone faces the risk of deflation. 
But the Commission, not fiscally louche member countries, should be the one to decide that. 
The other problem for Europe is a dog that does bark, but for no reason. 
This is the case of the United Kingdom, which has been asked to pay an additional contribution to the EU budget of about €2 billion ($2.5 billion, which amounts to a rounding error of the UK’s own budget). 
The reason for this additional levy is that a few weeks ago the UK’s Office for National Statistics announced, proudly, that it had discovered that the country’s gross national income (GNI) had been much higher than previously assumed, not only in 2013, but also in all previous years. 
Including the revisions for the 2002-2012 period, the difference comes to about £350 billion ($560 billion). 
Because every EU member state is obliged to contribute about 1% of its GNI to the Union’s budget, the UK’s data revision had to lead to a back payment of billions of euros. 
But British Prime Minister David Cameron’s government has declared that it does not intend to pay money that “the European Commission was not expecting and does not need.” 
These two cases – the dog that should have barked but did not, and the dog that barked for no reason – threaten the EU’s fundamental workings, which are based on a clear rulebook enforced vigorously by a strong Commission. 
Juncker’s Commission risks losing its authority from the start if the rules can be bent or broken to accommodate the larger member states’ domestic political priorities. 
The Commission must regain political and intellectual leadership and make its choice: either explain why the SGP rules must be followed even now, in the face of deflation, or agree with those who argue that the current environment calls for a fiscal stimulus. 
It cannot avoid taking sides by insisting publicly on austerity rules but then acquiescing when member states break them. 
Leaders in member states have to play their part as well. 
Pandering to populists may be attractive in terms of short-term electoral gains, but the long-term cost in terms of credibility, both their own and that of the EU, will be very high. 

European Discrimination on Trial 
What good are Europe’s treaties aimed at ensuring the legal equality of all citizens when entire groups face systematic discrimination? 
That is the question that the European Court of Human Rights (ECHR) faces this week as its Grand Chamber, consisting of 17 judges, begins considering an appeal of an initial ruling that rejected claims of discrimination against the Roma by the Czech Republic’s education authorities. 
All European states are members of the Council of Europe, all have signed the European Convention on Human Rights, 39 of the 46 member states have adopted the Framework Convention for the Protection of National Minorities, and 14 have ratified Protocol 12 on the prohibition against discrimination. 
Nevertheless, the living conditions of many Roma remain appalling. 
Although recent reports published in 2006 by the European Union’s Monitoring Center on Racism and Xenophobia and the Council of Europe’s Human Rights Commissioner note some improvements, they indicate Roma living conditions have stagnated, if not deteriorated. 
Roma are still victims of discrimination in access to housing, employment, healthcare, and education, despite significant local efforts at the Council of Europe’s instigation and with its support. 
Discrimination in educational access is particularly important, given its profound effect on its victims’ life prospects. 
In the most extreme cases, the education system itself is segregated: isolated schools in remote camps; special classes for Roma children in mainstream schools; and an over-representation of Roma children in classes for children with learning difficulties. 
The EHCR was confronted with the third issue in the case D.H. and others vs. Czech Republic . 
The Court was referred to 18 cases of girls and boys who, between 1996 and 1999, were placed in special schools for children with learning difficulties, either directly or after a period of time in primary schools. 
The question was whether the children were victims of discrimination owing to their national minority status. 
The Czech government admitted that some of the special schools’ student bodies comprised 80% to 90% Roma children. 
However, if there was discrimination, it was not direct, because under Czech law, such a move could be decided only by a school headmaster based on the results of an intelligence test at an educational psychology counseling centre, and subject to the approval of the child’s parents or legal guardian. 
A difference in treatment is not discriminatory in itself. 
According to the case law of national supreme courts and the ECHR, discrimination exists only when people in a similar situation are treated differently. 
Yet national and international case law recognizes that a non-discriminatory measure in theory can be discriminatory in practice. 
So, in the current case, the alleged discrimination does not stem from the law itself, but from its effects, with the plaintiffs relying mainly on statistics showing the over-representation of Roma in special schools. 
Many other reports on the situation of Roma in the Czech Republic, including by the Council of Europe, are available. 
But, as the Court rightly noted, it should rule only on the cases to which it is referred, and should not make known its opinion on the Czech education system’s legitimacy, as choices concerning educational opportunities fall under the jurisdiction of states and therefore can vary accordingly. 
Working on this assumption and given the case it had to solve, an EHCR panel of seven judges ruled against the plaintiffs in February 2006, concluding that the law on special schools is not aimed specifically at Roma and does not apply only to them. 
According to the Court, the law’s legitimate purpose is to adapt teaching to the difficulties of a specific category of pupils, and psychological tests seem to be objective enough not to be suspected of racial bias. 
Moreover, the requirement of parents’ approval for placing children in special schools remains valid, while Roma children who were initially placed in those schools could have returned to mainstream schools later, and thus reintegrated into normal schooling. 
As well-founded as the Court’s reasoning may be, a feeling of unease persists. 
The statistics showing the enormous proportion of Roma children in those schools are hard to ignore, and the suspicion of discrimination is difficult to avoid. 
While laws have changed, mentalities do not always follow at the same pace, and we intuitively know that it is easy to get psychology to mean a lot of things. 
Indeed, before announcing its decision, the Court felt it necessary to state that while it did not conclude that the Convention had been violated, statistics still revealed “worrying figures, and the situation in general in the Czech Republic regarding Roma children’s education needs to be improved.” 
The Court’s president, Jean-Paul Costa, expressed a similar view, without questioning the legitimacy of the decision, although Judge Cabral Barreto wrote a dissenting opinion. 
Moreover, it is significant that the Court agreed, at the request of the parties, to refer the case on appeal to its Grand Chamber. 
According to Costa, rejecting the ruling in February 2006 would contradict previous case law. 
Will the Court, then, decide on the workings of the Czech education system itself? 
Or will it follow Judge Barreto, who calls for recognition of an obligation to adopt affirmative action policies aimed at benefiting Romanies? 
Whatever formula is adopted, it is certain that Roma children should be afforded the same opportunities as other children. 
It is this imperative that underlies the importance of the coming decision, for it provides an occasion for the Court to reassert the fundamental principle of non-discrimination that defines our democratic societies. 

The Power of a European Energy Union 
DUBLIN – One of the top priorities established by European Commission President Jean-Claude Juncker ahead of his election last summer was the creation of a European energy union. 
He was right to do so. 
Done properly, a more cohesive energy policy could achieve three strategic objectives simultaneously. 
By coordinating research and investment, encouraging conservation, and integrating energy markets, an energy union would help fight climate change, provide Europe with a much needed economic stimulus, and protect the continent from supply shocks, such as those caused by the crises in North Africa and Ukraine. 
Of course, the European Union's ability to act is dependent on the willingness of its member states; and, though some of the continent's leaders have championed the initiative, others have proved less enthusiastic. 
A crucial test of their collective resolve will be whether they are willing to support key infrastructure projects that deliver on all three objectives. 
One good example of such a project is the North Sea Countries' Offshore Grid Initiative, a proposal that would link offshore wind farms to a new regional grid, and allow countries to balance variable power supplies across borders. 
The idea – first advanced in a 2009 memorandum of understanding signed by nine EU member states and Norway – has enormous potential; by 2030, North Sea winds could provide Europe with 10% of its electricity – carbon-free. 
But if the project is to go forward, it urgently needs a political mandate. 
The integrated grid can be imagined as a large ring, connecting Norway with the United Kingdom, and then linking across the channel to France, Belgium, and Holland, before moving on to Germany and returning to Scandinavia. 
Its implementation would allow Europe to introduce a free-trade zone for renewable energy, reducing the need for storage and excess capacity to back up variable power supplies. 
Not only would the grid pay for itself; once in place, it would reduce the cost of new wind farms by some 30%, by providing them with an existing connection to energy markets. 
An interconnected energy system would make particular sense for the UK and Germany, which could use the one-hour time difference between them to smooth out the peaks and troughs in demand. 
Renewable energy production is by nature intermittent, and the sheer number of fluctuating power sources in Germany is already pushing its existing grid to the limit. 
Interconnection would also reduce the number of new onshore transmission lines the country needs. 
The German government has produced a policy paper outlining how a more integrated regional market might work. 
Last year, the UK matched Germany's investments in clean energy, spending some $15.2 billion on solar panels and wind farms. 
But Britain will need to do a lot more if it is to meet its climate targets. 
According to a parliamentary report, “the cost of developing such a supergrid could be very high...but it may bring a host of economic benefits – including tens of thousands of new jobs in the offshore renewable industry." 
A regional initiative would also allow Prime Minister David Cameron to accommodate opposition within his party to onshore renewable energy plants. 
Each of the individual countries involved in the project would benefit from its construction. 
Holland and Belgium need a cost-effective way to develop their own offshore resources. 
Denmark already benefits from an interconnected electricity market; and the lesson it has learned is that it makes sense to integrate even further. 
Norway would be able to sell its hydropower and secure a backup supply should climate change leave it running dry. 
Advances in cable technology would allow Ireland to link to France, providing an alternative route to European markets if the UK elects to remain outside the network. 
Juncker's €315 billion ($360 billion) investment plan, proposed in December, includes some €87 billion in interconnection projects. 
It would make sense to combine these into a single initiative, with common standards for technology, planning, and regulations. 
Doing so would lower the cost of capital on loans from the European Investment Bank and give a boost to European technology companies. 
The Baltic states are also planning their own offshore grid. 
But it is not just Northern Europe that could gain from such an approach. 
Europe's southeastern and Mediterranean countries could also benefit from sharing power. 
Most of the necessary legal and regulatory framework is already in place. 
There is no need for treaty changes or complex new legislation. 
All that is needed is political direction, so that the European Commission can establish the necessary governance structures. 
The strength of Europe's commitment to a true energy union will be revealed when the European Council meets on March 19. 
Among the decisions it will make will be whether to build these regional grids. 
If the EU and its member states reach an agreement, they could simultaneously boost their economies and improve their energy security. 
If not, they could end up buying the technology from China or the United States, which will be investing in their own grids in the coming years. 

European Expansion or Putin Expansion? 
WARSAW – One merit of the Berlin Wall was that it made obvious where Europe ended. 
But now the question of Europe’s borders has become a staple of debate in the European Union. 
Russian President Vladimir Putin’s recent threat to aim missiles at Ukraine highlights what is at stake in that debate’s outcome. 
The Wall’s collapse in 1989 forced European Commission officials to dust off atlases to find places about which they knew little and cared less. 
Leon Brittan, then a commissioner and supporter of enlargement, recalls that some officials and countries even hoped that the pre-1989 line could be held. 
They felt that enlargement even to the Scandinavian and Alpine countries was going too far. 
Only in 1993 did the EU officially recognize that membership for all the former Soviet bloc countries could be a long-term goal. 
Today, the debate about Europe’s frontiers is not confined to officials or think tanks. 
In mid-2005, voters in France and the Netherlands rejected the EU’s draft constitutional treaty, partly motivated by fear that enlargement was going too fast and too far. 
“We don’t want the Romanians deciding on how we should order our lives,” a Dutch professor complained. 
Many former Soviet Republics with EU aspirations have become victims of this loss of nerve, as have the Western Balkan countries. 
Lithuania, Latvia, and Estonia, which were annexed by the Soviet Union in 1940, slipped in under the wire in 2004. 
But they were small and contiguous to the EU. 
Ukraine is big, and Georgia is far away in the Caucasus. 
Then there is Belarus, whose ruler, Alexander Lukashenko, clings to authoritarian rule. 
Ukraine, a country of 47 million people, has seen itself as a prospective EU candidate since 2004, when the Orange Revolution forced the country’s rulers to respect election rules. 
Since then, another two free and fair national elections have been held. 
In contrast to Russia, Ukrainian politicians like President Viktor Yushchenko and Prime Minister Yuliya Tymoshenko have shown that they are keen to break with the communist past. 
Moreover, Ukraine’s business leaders, aware of the fate of Russia’s oligarchs under Putin, see EU membership as a way of legitimizing their wealth and fending off Russian rivals. 
Ukraine’s business barons want not only to develop their empires within the safety of a legitimate free-market framework, but also to invest in the EU. 
But, while Ukraine’s political elites have mastered the art of getting democratically elected, effective governance eludes them. 
Russian influence remains strong, especially in eastern Ukraine, and the state apparatus is weak. 
Ukraine needs the discipline of the accession process – and thus the promise of EU membership – if reforms are to be implemented effectively. 
Belarus is different. 
Most of its 10 million people are still so scared of the free market that they are ready to ignore democratic opposition to Lukashenko. 
That will hold true as long as cheap energy from Russia acts as a de facto economic subsidy. 
But that time is ending, with energy prices rising and the Belarusian economy facing shocks that could provoke unrest and pose a threat to Lukashenko. 
Lukashenko, sensing the danger, has been making overtures to the EU to counter what he sees as a growing rift with the Kremlin. 
And Belarus’s government has been exploring the possibility of securing oil supplies through Ukraine should Russia cut off supplies. 
But Lukashenko has given no sign that he is willing to democratize his regime, let alone release political prisoners. 
If the EU decides to leave in abeyance the possibility that Ukraine and Belarus might one day join, both will enter a political limbo that could threaten security on the EU’s eastern flank. 
The EU’s failure to encourage Ukraine’s European aspirations risks creating disillusion with the West. 
That would strengthen Russia’s position in Ukraine, where the Kremlin constantly encourages a return to Slavic roots and warns against flirting with a West that doesn’t want it. 
Should Lukashenko’s regime falter, the democratic opposition could be strengthened by the promise of EU support. 
Otherwise, it is just as likely that Russia would step in and use its proxies to install Putin-style authoritarianism. 
Since the USSR’s collapse, a new generation has come of age throughout the region. 
Young people in the EU’s new members feel themselves to be citizens of a prosperous and secure continent. 
In Poland last autumn, younger voters helped to replace a government whose incipient authoritarianism and xenophobic attitudes threatened to isolate their country. 
Further east, their contemporaries have also grown up in a post-Soviet world. 
In Ukraine’s Orange Revolution, it was mostly young people who rejected a return to the past. 
But as hopes of integration with the West wane, so a feeling of exclusion is growing. 
The danger is that this will fuel support among the young in Belarus and Ukraine for the authoritarian attitudes now ascendant in Putin’s Russia. 
At stake in the debate about EU enlargement into the post-Soviet east is whether Western values will take root in those countries or whether they will drift into a gray zone from which they will sooner or later challenge the values and democratic ways of “Europe.” 
The Dutch professor who fears that Romanians may start to order his life might reflect that Romania itself is changing as a result of EU membership. 
Refusing to countenance a fresh eastward enlargement means that, at some point, those countries that are outside the EU will start to threaten the values that he holds dear. 

European Financial Regulation’s Wrong Turn 
London – With the crisis in financial systems around the world reflecting massive regulatory failures, calls for more and better oversight abound. 
Such appeals were heard again at the G-20 meeting in Pittsburgh, and the European Union has just responded, unveiling a plan for a new pan-European watchdog. 
In a globalized financial system, striking the right balance between home and host country jurisdiction, and between national and supranational oversight, is crucial. 
Look at Europe. 
European financial institutions and markets cross national borders on an unprecedented scale, but national authorities still dominate regulation. 
Addressing the European problem may help us find solutions to the global challenge. 
The EU’s current model – the “single passport” with home-country regulation of financial institutions – has failed on an embarrassing scale. 
The Baltic economies are perhaps the most tragic victims, but the damage stretches across Central and Eastern Europe and down into the Balkans. 
After the devastating impact of the crisis on their economies, countries hosting Western banking subsidiaries and branches cannot be expected to accept the status quo . 
But the new European watchdogs are likely to fall far short of what is needed. 
The European Systemic Risk Council (ESCR) has only monitoring functions. 
The three new EU supervisory authorities for banks, insurance and securities markets will coordinate the existing system of national supervisors. 
They will have no enforcement powers and national governments are already finding ways to undermine their authority and (financial) capacity. 
It is high time to think about Plan B – what happens if these reforms do not deliver what is needed to protect the countries at the receiving end. 
The countries currently holding out – within Europe primarily the UK -- must be made to understand that the alternative to a EU-wide solution is a radical increase in host country regulation. 
This is even more likely in countries that do not face the same constraints on national solutions as members of the EU -- most prominent among them China or India, which only recently opened their borders to foreign direct investment in the financial sector. 
What is at stake is decades of financial integration in Europe. 
Unlike most other parts of the world, capital in Europe has flowed from rich to poor countries – essentially from West to East and South. 
Within Eastern Europe, capital has sought out the countries with the most rapid growth, following the overwhelming pattern in emerging markets. 
Overall, financial integration has greatly contributed to economic growth in Eastern Europe. 
Industries that depend heavily on external finance grew faster in countries with large capital inflows than in countries with more modest inflows. 
But the rapid expansion of credit brought about by foreign financial intermediaries using various channels (including direct lending, lending via banking subsidiaries, and lending via leasing subsidiaries) has fueled asset booms and heightened exposure to foreign-exchange risk. 
In the absence of effective regulation, financial integration has made the region vulnerable to a sudden and massive contraction of capital inflows. 
The options currently on the table leave the home-regulator principle largely intact. 
Yet this model has conspicuously failed to protect host countries against the systemic risk of excessive capital inflows. 
Giving increased powers to host countries over parent companies located outside their jurisdiction is problematic. 
Most host countries have limited resources to penetrate the complex structures of sprawling financial groups, and their powers to enforce regulation and supervision are limited. 
The EU’s proposed “college of supervisors,” even with the addition of a European “systemic risk board,” is only a partial solution, because it endorses the leadership of the home-country regulator and fails to address the potential conflict of interests between home-country and host-country regulators. 
Host countries could address their needs by adopting a radical solution that would unilaterally impose capital controls and other measures to protect their domestic markets. 
Of course, this could very well reverse much of what has been achieved in terms of financial integration. 
As an alternative, we propose a set of common standards for “effect-based jurisdiction.” 
That is, when the effects of a financial institution’s activities are sufficiently large, the country affected should be allowed to assume regulatory power, irrespective of the institution’s domicile. 
Such effect-based jurisdiction has a long tradition in both American and EU extraterritorial application of their respective anti-trust laws. 
It would allow host countries to impose restrictions on credit expansion, regardless of how a financial institution chooses to channel capital to its market, and would strengthen host countries’ rights to request information from home-country regulators. 
Within the EU, effect-based jurisdiction might raise concerns about the free mobility of capital. 
However, the EU Treaty recognizes public policy exceptions. 
Moreover, several EU directives acknowledge the interest of the country where financial transactions (such as life insurance contracts) are carried out by allocating to it jurisdiction over such transactions. 
The best way to protect cross-border banking and financial integration in Europe would be to establish an effective EU-wide regulator and supervisor, or, even better, a global institution that could monitor the home country-host country relationship. 
Without sufficient progress in that direction, however, host countries must be provided greater protection. 

Europe’s Gradualist Fallacy 
ATHENS – Europe is at the mercy of a common currency that not only was unnecessary for European integration, but that is actually undermining the European Union itself. So what should be done about a currency without a state to back it – or about the 19 European states without a currency that they control? 
The logical answer is either to dismantle the euro or to provide it with the federal state it needs. The problem is that the first solution would be hugely costly, while the second is not feasible in a political climate favoring the re-nationalization of sovereignty. 
Those who agree that the cost of dismantling the euro is too high to contemplate are being forced into a species of wishful thinking that is now very much in vogue, especially after the election of Emmanuel Macron to the French presidency. Their idea is that, somehow, by some unspecified means, Europe will find a way to move toward federation. 
Macron’s idea is to move beyond idle optimism by gaining German consent to turn the eurozone into a state-like entity – a federation-lite. In exchange for making French labor markets more Germanic, as well as reining in France’s budget deficit, Germany is being asked to agree in principle to a common budget, a common finance ministry, and a eurozone parliament to provide democratic legitimacy. 
Macron knows that such a federation would be macroeconomically insignificant, given the depth of the debt, banking, investment, and poverty crisis unfolding across the eurozone. But, in the spirit of the EU’s traditional gradualism, he thinks that such a move would be politically momentous and a decisive step toward a meaningful federation. 
“Once the Germans accept the principle, the economics will force them to accept the necessary magnitudes,” is how a French official put it to me recently. Such optimism may seem justified in light of proposals along those lines made in the past by none other than Wolfgang Schäuble, Germany’s finance minister. 
First, Chancellor Angela Merkel and Schäuble were not born yesterday. If Macron’s people imagine a federation-lite as an entering wedge for full-blown political integration, so will Merkel, Schäuble, and the reinvigorated Free Democrats (who will most likely join a coalition government with Merkel’s Christian Democrats after the September federal election). 
Second, in the unlikely event that Germany gives federation-lite the go-ahead, any change to the functioning of the eurozone would, undoubtedly, devour large portions of the reformers’ political capital. If it does not produce economic and social results that improve, rather than annul, the chances of a proper federation, as I suspect it will not, a political backlash could ensue, ending any prospect of a more substantial federation in the future. 
If I am right that Macron’s gradualism and his federation-lite will prove to be a failure foretold, what is the alternative? My answer is straightforward: Re-deploy existing European institutions to simulate a functioning federation in the four realms where the euro crisis is evolving: public debt, banking, investment, and social deprivation. 
Once these four sub-crises have been stabilized, hope will be restored, and the idea of Europe rehabilitated. Then – and only then – should we embark on the constitutional assembly process underpinning any agenda for constructing a full-fledged democratic federation. 
But how can we simulate a macroeconomically – and macro-sociologically – significant federation now, under the existing treaties and institutions? 
Imagine a press conference featuring the presidents of the European Council, the European Commission, the European Central Bank (ECB), and the European Investment Bank (EIB). They issue a joint declaration launching – as of tomorrow morning – four new initiatives requiring no treaty change or new institution. 
First, the EIB will embark on a large-scale green investment-led recovery program to the tune of 5% of eurozone income, funded entirely through issues of EIB bonds, which the ECB will purchase in secondary markets, if necessary, to keep their yields ultra-low. 
Second, the ECB will service (without buying) the Maastricht-compliant part (60% of GDP) of maturing eurozone sovereign bonds, by issuing its own ECB bonds. These bonds are to be redeemed by the member state whose debt has been partly serviced by the ECB at the very low yields that the ECB can secure. 
Third, failing banks will be de-nationalized. 
Fourth, all profits from the ECB’s bond purchases, along with any profits from its internal Target2 accounting system, will fund a eurozone-wide, US-style food-stamp program that provides for the basic nutritional needs of European families falling below some poverty threshold. 
Notice how one press conference suffices to announce to the world that the eurozone is about to simulate a political federation that uses existing institutions to restructure all public debt (without any haircuts), create a proper banking union, boost aggregate investment, and alleviate poverty on a continental scale. Notice also that this simulated federation can indeed be brought about tomorrow morning, without falling afoul of the existing EU treaties. 
The euro crisis resulted from the fallacy that a monetary union would evolve into a political union. 

Three Ways Ahead for the Eurozone 
WASHINGTON, DC – After a tumultuous year, politics seem to be stabilizing across Europe. 
Though the far-right Alternative für Deutschland (AfD) gained almost 13% of the vote in Germany’s recent federal election, it does not pose a serious threat to Chancellor Angela Merkel’s leadership. 
In France – the other pillar of the European project – President Emmanuel Macron can count on a solid parliamentary majority. 
And, despite the uncertainty surrounding the details of Brexit, there is little doubt that, whatever plans the European Union makes, it will be doing so without the United Kingdom as a member. 
So now the question is how the EU and, in particular, the eurozone, will move forward. 
There are three possibilities. 
The first option is a “more united union,” as described by European Commission President Jean-Claude Juncker in his state of the union address last month. 
Juncker’s vision rejects a multi-speed Europe, in favor of uniform steps by all EU members. 
This would mean, for starters, expanding the Schengen Area of border-free travel to include Bulgaria and Romania. 
Juncker also called for progress toward a European Social Standards Union embodying a shared understanding of welfare entitlement in the single market. 
As for the euro, Juncker stressed that it is meant to be the currency of the entire EU, not just select countries. 
With that in mind, the EU should pursue the creation of a full banking union, in which banking rules and supervision are consistent across all member states. 
The commissioner for economic and financial affairs should become a European finance minister, and the European Stabilization Mechanism should become the European Monetary Fund. 
A year ago, such “hardline” integrationism would have lacked credibility; after all, the UK would never stand for it. 
But, with Brexit apparently a sure thing, Juncker’s vision has gained some credibility. 
Nonetheless, Juncker’s “one-speed” approach to integration remains highly controversial. 
So Macron has set out his own ambitious vision for Europe, which echoes many of Juncker’s proposals, but seems to allow for more differentiation within the EU, at least in the medium term. 
For example, if Poland does not want to adopt the euro, it should not be forced to do so, and that decision should not prevent other eurozone countries from moving ahead with integration. 
That is why Macron wants a separate eurozone parliament, which would decide on matters that do not pertain to all members of the European Parliament. 
Differences in the level of integration countries pursued today would not prevent anyone – or everyone – from eventually joining the EU’s deeply integrated “core.” 
The third – and, it seems, most likely – way forward for the eurozone is business as usual. 
The economic crisis that long powered calls for more integration – and, in some cases, for more fragmentation – has subsided, with eurozone GDP growth now exceeding 2% and unemployment having declined significantly. 
Even Greece – the one country that remains, to some extent, in crisis mode – continues to muddle through. 
In this context, policymakers may well decide, as they have so many times before, to put ambitious eurozone reforms on the back burner, deciding that the reforms pursued during the crisis are sufficient. 
This would leave them more space to focus on other areas – such as energy, digital regulation, and migration – that in the current context may appear to require more urgent attention. 
If policymakers do go this route, there are serious risks. 
Yes, the eurozone is now functioning, and key reforms in other areas are important. 
But the monetary union retains a fundamental flaw: the absence of mechanisms capable of forestalling cost divergences across countries that have lost the ability to engage in exchange-rate adjustment. 
One such mechanism would be more labor mobility in services. 
But even if eurozone countries agreed to further labor-market liberalization, workers would face high cultural and linguistic barriers. 
In any case, without any such mechanism, the trends that culminated in the last economic crisis could well lead to another. 
After the experience of the crisis, if signs of growing cost divergences begin to emerge in the future, interest-rate differentials among eurozone countries will rise much faster than they did before the last crisis, providing an earlier warning signal. 
Yet, given that much of the debt overhang remains and much of the rescue ammunition has been spent, another shock could be devastating. 
As Martin Wolf reports, the economist Adam Lerrick proposes a scheme whereby the beneficiaries of sudden changes in interest-rate differentials would transfer half their gains into a “financing cost stabilization account,” to be paid back when the interest-rate shock subsides. 
But, like other eurozone reforms, such a scheme would have to be agreed among eurozone members. 
With Merkel still forming her new coalition government, it is impossible to say for certain what approach to integration Europe will take in the coming years. 
But, given the likelihood that her coalition will include the Euroskeptic Free Democrats and the pro-integration Greens, with her own Christian Democrats in between, rapid pursuit of ambitious integration objectives for the entire EU seems unlikely. 
A more realistic option is a multi-speed effort whereby the eurozone countries can move ahead, while others are allowed to wait. 
The outcome would not be perfect, but it would be better – much better – than the status quo. 

How to Renew the European Project 
BERLIN – The French presidential and legislative elections earlier this year have instilled new hope in the European integration project, by raising the prospect of deeper Franco-German cooperation. 
And yet some forms of cooperation, not least shared-liability schemes, would be a mistake. 
As long as member states have sovereignty over fiscal and economic policymaking, France and Germany should focus their efforts on making the eurozone itself more resilient. 
French President Emmanuel Macron has started to pursue urgently needed reforms to boost economic growth, and it is crucial that he succeeds in this effort. 
France is suffering from high structural unemployment and low potential growth, and its public finances are unsustainable in the medium term. 
Improving this state of affairs will require factor- and product-market reforms, together with deep reductions in public-sector deficits. 
From France’s standpoint, there is no better time than now to implement economic reforms. 
Although the eurozone is showing signs of a solid economic recovery, the European Central Bank is feeling increasing pressure to taper its ultra-expansionary monetary policies. 
Macron’s government thus has no time to lose, especially given that economic reforms can take time to deliver results, and the next elections are always just around the corner. 
In light of this small window of opportunity, the last thing France needs is more joint investment schemes, as some have proposed. 
Economic growth requires not just capital investments, but also a business environment where innovation is encouraged and rewarded. 
And at any rate, it wouldn’t make sense for France to rely on other member states for investments. 
How can France claim to have restored its past grandeur if it is asking for Germany’s help? 
Beyond implementing domestic reforms, France can still work with Germany to send a powerful message in support of European integration. 
But as both countries seek areas where they can cooperate, they must be careful to avoid policies that would threaten the eurozone’s long-term stability. 
Unfortunately, some proposals currently being discussed would do precisely that. 
For example, establishing a shared eurozone-level budget or unemployment-insurance regime would, at this stage, sow the seeds of future conflicts. 
It is inconceivable that national policymakers, seeing to their countries’ own interests, would prevent these arrangements from mutating into permanent asymmetric transfer schemes. 
To avoid distributional conflicts that would only poison the European project, any institutional reform that is proposed in the name of Franco-German cooperation should have to pass a strict sustainability test. 
European policymakers must ensure that there is congruence between the power to make decisions and the liabilities associated with any decisions that are made. 
It would be naive to think that member states will not offload the costs of their choices onto other member states if given the chance. 
And besides, there are many other areas where France and Germany can strengthen cooperation and give new momentum to European integration. 
To determine where to focus their efforts, French and German leaders should keep three related principles in mind. 
First, any joint endeavor must respect diversity. 
The central strength of the European project is that it unites its member states in pursuit of peace and prosperity. 
But this requires a rich reservoir of ideas, not a single, unified approach. 
The second principle is subsidiarity, which holds that decision-making should be decentralized whenever possible. 
This ensures that local and regional preferences are considered alongside the effects of eurozone-wide harmonization and economies of scale. 
The last principle is congruity, to ensure that decision-makers are accountable for the outcomes of their decisions. 
This means that as long as European electorates insist on retaining sovereignty over fiscal and economic policymaking, shared liability will be a pipe dream. 
With these principles in mind, France and Germany could take joint action on a variety of issues, such as climate change, the refugee crisis, and counter-terrorism. 
Coordinating efforts on these fronts would revitalize the integration process and contribute to Europe’s long-term stability and prosperity. 
On economic policy, France and Germany should look for ways to fortify the eurozone and complete the single market. 
The privilege that government debt enjoys under current banking regulations should be eliminated, and an independent banking regulator, separate from the European Central Bank, should be established within the eurozone. 
Beyond that, it is time to start phasing in a viable sovereign-insolvency scheme for the bloc. 
All of these initiatives could be implemented simultaneously with domestic reforms in France. 
But there is a risk that they will take a back seat to other proposals, such as shared-liability schemes. 
To avoid this pitfall, policymakers should consider the roots of the eurozone’s low growth potential, which is not a result of insufficient solidarity, but of individual member states abnegating their national responsibilities. 
Rather than provide a cure for these problems, shared liability would make them worse. 
Proponents believe that more shared liability could pave the way for individual responsibility. 
But that is an illusion. 
Once in place, a shared liability scheme would reduce the incentives to deliver on structural reforms. 
And among German voters, nothing could undermine support for the European project more than yet another set of broken promises. 

How Much Europe Do Europeans Need? 
BERLIN – In his final address to the European Parliament in 1995, then-French President François Mitterrand, whose failing health was evident to all, found the following indelible words to characterize Europe’s great scourge: “Le nationalisme, c’est la guerre!” 
Nationalism and war were the defining experiences of Mitterrand’s political career, and he was referring not only to the dreadful past – the first half of the twentieth century, with its two World Wars, dictatorships, and the Holocaust. 
He viewed nationalism as the greatest future threat to European peace, democracy, and security. 
Although nationalist war was tearing apart Yugoslavia at the time, few of those who listened to Mitterrand in Strasbourg that day could have imagined that, 21 years later, nationalism would be experiencing a Europe-wide revival. 
But nationalist politicians whose declared goal is to destroy Europe’s unity and peaceful integration have now won in major democratic elections and referenda. 
The United Kingdom’s decision in June to leave the European Union marked a momentary climax for resurgent nationalism, but one can also see it on the march in Hungary, Poland, and France, where Marine Le Pen and her far-right National Front have been gaining strength in the run-up to next year’s presidential election. 
How could it have come to this, given Europe’s first-hand experience with nationalism’s destructive power in the twentieth century, when it caused millions of deaths and devastated the entire continent? 
For starters, the 2008 financial crisis and ensuing global recession are widely, and justifiably, seen as a massive failure on the part of the “establishment.” 
Anti-elite sentiment continues to erode intra-European solidarity and mutual trust, and the EU has become mired in a prolonged bout of slow growth and high unemployment. 
Across the West, a general feeling of decline has taken hold, owing to the shift in global wealth and power toward Asia. 
The United States has withdrawn geopolitically, while Russia has revived its great-power ambitions to challenge Western hegemony and values. 
Worldwide, there is growing discontent with globalization, digitization, and free trade, accompanied by a slow shift toward protectionism. 
Europeans, in particular, seem to have forgotten that protectionism and nationalism are inextricably linked – one cannot be had without the other. 
Finally, there is a generalized fear of the unknown, as many countries confront issues relating to inflows of foreigners – whether refugees or migrants – and internal changes brought about by the increasing economic and political empowerment of women and minorities. 
These developments, which have coincided with the larger-scale transformations and ruptures in Europe that began in 1989, have triggered fears that establishment political parties and democratic institutions have failed to address. 
As always, when fear runs rampant in Europe, people seek salvation in nationalism, isolationism, ethnic homogeneity, and nostalgia – the “good old days,” when supposedly all was well in the world. 
Never mind that the bloody, chaotic past was anything but perfect. 
Nationalist leaders and their supporters today are living in a “post-empirical” reality, where the truth and experience have no purchase. 
All of this reflects a profound change in how Europeans see themselves. 
After two World Wars and during the Cold War, European integration was a no-brainer. 
But the shared understanding that unity delivers peace, prosperity, and democracy has been weakened over time by persistent crises, and it could now be lost completely unless it is reinforced by a forward-looking message. 
It is absurd to think that Europe’s historic nation-states are an answer to the globalized political, economic, and technological realities of the twenty-first century. 
If Europeans believe that, then they must be willing to pay the price for less integration, in the form of declining prospects and new dependencies. 
The most important global decisions in this century will not be made democratically in Europe, but unilaterally in China or elsewhere. 
Europe’s languages and cultures have a long history. 
But, lest we forget, its nation-states are a more recent development, especially outside of Western Europe. 
It would be a grave mistake to think that they represent Europe’s “end of history.” 
On the contrary, if the nation-state model wins out over integration, Europeans will pay a high price in this century. 
How European countries fare in the future is a question that can be answered only collectively, not on the basis of some individually defined national interest, as in the nineteenth century. 
Moreover, with Russia, Turkey, the Middle East, and Africa nearby, Europe lives in a difficult and challenging neighborhood. 
It does not enjoy the American luxury of having its security guaranteed by geography. 
Rather, its safety and prosperity must constantly be defended through politics, which is necessarily a joint effort. 
The central question for Europe’s future is how much power the EU needs in order to guarantee peace and security for its citizens. 
That, too, can be addressed only collectively. 
What is already clear is that Europeans will need not just more Europe, but also a different and more powerful Europe. 


Europe’s New Political Battle Lines 
PARIS – French President Emmanuel Macron has framed the European Parliament election in May 2019 as a battle not between the traditional right and left, but between populists and pro-European progressives like himself. 
Greek Prime Minister Alexis Tsipras recently adopted similar rhetoric, declaring that “all progressive, democratic, and pro-European forces have a duty to stand side by side on the same side of history.” 
Would such a fundamental Europe-wide political shift – much like the one in France that brought Macron to power last year – actually come to pass? 
The European People’s Party (EPP) on the right and the Progressive Alliance of Socialists and Democrats (S&D) on the left have long shared control of the European Parliament, where they have governed by compromise. 
But, over time, this has produced a kind of political homogenization in Europe, leading to mass abstentionism. 
Those who do vote increasingly choose anti-establishment parties that often espouse extreme views. 
As a result, whereas the EPP and S&D controlled 61% of the European Parliament in 2009, they won only 54% of the vote in 2014, meaning that the body was very nearly dominated by extremist parties. 
The 2019 election is likely to produce even more losses for the establishment parties, which are expected to win only 45% of seats. 
At this stage, it is doubtful that anyone would consider running a campaign on the basis of left-right divisions – not least because of deep rifts within the parties themselves. 
On the right, the EPP is divided between pro-European liberals and conservative Euroskeptics, despite endorsing Manfred Weber of Germany’s Christian Social Union as the EPP Spitzenkandidat. 
At the recent EPP Congress in Helsinki, European Council President Donald Tusk was explicit: breaching the rule of law is incompatible with belonging to the Christian Democrat family – a message obviously aimed at Hungarian Prime Minister Viktor Orbán. 
In the European Parliament, the EPP even voted in favor of invoking Article 7 of the Treaty of Lisbon against Hungary, a move that would impose sanctions in response to the Orbán government’s systematic violations of judicial independence, freedom of speech, and the rights of minorities and migrants. 
But the EPP’s vote was largely motivated by its desire to preserve its chances of remaining the largest EU party and ensuring that Weber becomes the next European Commission leader. 
More broadly, strong political pressure forced the EPP’s hand; under different circumstances, the party probably would have been happy to allow Orbán to continue breaching democratic norms unchecked, in order to preserve its own hegemony in the EU Parliament. 
But in refusing to clarify its position on Orbán or expel him, the EPP is taking an enormous risk. 
If the European Council chooses Weber as the next European Commission president, both social democrats and liberals in the European Parliament could refuse to vote for a candidate from a party that keeps Orbán in its ranks. 
That is why Macron, who has an interest in dividing the EPP and luring its liberal wing to join him, opposes the Spitzenkandidat system. 
There are three alternatives. 
First, the European Council could choose an EPP candidate who is less ambiguous on Hungary. 
Brexit chief negotiator Michel Barnier could be a serious substitute for Weber – probably the only one within the EPP. 
The second alternative would be to endorse the Dutch Labour Party’s Frans Timmermans, who took a very strong position against Orbán and is acceptable to German Chancellor Angela Merkel and EPP liberals. 
To be sure, Merkel might prefer Weber. 
But if the European Council is deadlocked, and the European Parliament opposes her choice, she could endorse another candidate. 
The decline of the S&D also makes it implausible that Weber could get their support. 
The third option could be a candidate endorsed by the Alliance of Liberals and Democrats for Europe (ALDE), such as Margrethe Vestager, the EU competition commissioner. 
Some observers argue that the Danish government will never propose Vestager as their candidate. 
But Macron, who strongly supports Vestager, could endorse her as the French candidate – an unprecedented move that would accelerate the Europeanization of continental politics. 
Overall, populist forces could well secure a majority in the European Parliament, though they will not operate as a unified force under a single political banner. 
In such a scenario, Macron would need to build political coalitions with either the EPP or the S&D, whose views largely align with his vision for EU – and, more important, eurozone – reform. 
In fact, like the rule of law, eurozone reform is a key fault line along which political alliances will be established. 
Macron is already marshaling support among center-right leaders in Spain and the Netherlands, who are more sympathetic to his vision for European integration. 
He has established a good rapport with Dutch Prime Minister Mark Rutte, even though Rutte opposes the eurozone reforms Macron advocates. 
Two other issues will likely shape the outcome of the European Parliament election. 
First, Europe’s leaders will have to address the need to reinforce the EU’s external frontiers, especially through the long-overdue deployment of a European border patrol. 
Such a proposal will undoubtedly rile nationalist populists, who will oppose the deployment of a European force, even as they rail against migration. 
Second, Europe’s leaders will need to commit to combating tax evasion and avoidance by major companies, especially the big tech firms. 
This is a high-stakes issue, as it will determine the capacity of states to remain fiscally solvent in increasingly digital economies. 
Some progress has already been made on this front, thanks largely to Vestager. 
But stronger action is needed, not least because EU countries continue to grant corporate tax abatements. 
And with Germany reconsidering its support for a French-backed plan to tax the revenue of large technology companies at the EU level, further progress is far from guaranteed. 
Perhaps Europe’s ongoing political realignment will enable the realization of Macron’s vision of a stronger, more integrated Europe. 
While recent challenges – not least Italy’s budget battle with the European Commission – indicate that such an outcome is far from assured, it remains the most credible counterweight to the rise of populism. 

Toward a More Democratic Europe? 
WASHINGTON, DC – A year ago, Emmanuel Macron’s decisive victory in the French presidential election, and his party’s subsequent success in legislative elections, caused many to breathe a sigh of relief. 
The rising tide of extremist populism in the West, it seemed, had finally turned. 
That has turned out not to be the case. 
But the stunning emergence of a populist majority government in Italy, a founding member of the European Union, does not necessarily spell disaster. 
True, populists’ growing strength is threatening traditional center-right and center-left parties and making it very difficult for EU-level governance, in its current form, to function. 
But what if populist movements’ continued electoral success helps to drive forward a broader political restructuring that ultimately strengthens European democracy? 
This reading is reinforced by the experience of Macron himself. 
Having never held elected office, Macron created a new party centered on himself, with support from both center-left and center-right voters. 
He seems to have restructured French politics in the process. 
Next year’s European Parliament election is likely to reveal more about the potential for such political restructuring. 
The European Parliament has never generated the same level of interest as other European institutions, such as the Commission, the Council, or even the Court of Justice. 
European parliamentary debates rarely make it far outside Brussels or Strasbourg, and voter turnout to fill the body’s seats has typically been low. 
Such facts have long been cited as evidence that the EU suffers from a democratic deficit, with citizens inadequately engaged with European-level governance. 
But as a series of crises have hit the EU – affecting most acutely Greece, Ireland, Portugal, Spain, and Italy – these dynamics have been changing. 
Gone are the days when Europeans quietly accepted the EU, despite some complaints. 
Now, the EU is at the center of domestic political debates, which increasingly include existential questions about the survival of the eurozone and the entire European project. 
This means that candidates in next year’s election are unlikely just to focus on domestic issues. 
While there will be some of that, there is likely also to be, for the first time, extensive discussion about Europe’s future and policies, especially in areas like migration, defense and security, energy and climate, and relations with major powers like the United States and Russia. 
After all, despite their differences, virtually every country in Europe is currently grappling with the question of how much Europe it wants, how open and optimistic it should be about new forms of technology-enabled globalization, and how much social solidarity is appropriate. 
These discussions – and thus the European Parliament that emerges next year – are unlikely to adhere to standard party lines. 
After all, sticking to traditional political groupings is highly difficult nowadays, as exemplified by Macron’s party – La République En Marche ! – which does not fit neatly into traditional ideological categories. 
Macron has put out feelers for a pan-European party. 
Though truly supranational politics in Europe remains uncharted terrain, it makes sense that a strongly pro-EU politician should be one of its pioneers. 
Right-wing populists, as nationalist and anti-European as they may be, also seem eager to support one another at the European level, taking advantage of their common platforms on most issues, particularly immigration, cultural identity, and trade. 
This will be more difficult for the far left, at least in France, which combines traditionally liberal views on immigration with protectionist economic policies that look at lot like those espoused by the populist right. 
Of course, the traditional center-right and center-left parties – which have lost a large share of the electorate over the last five years, particularly in Spain, Italy, France, and, to a lesser extent, Germany – will try to regain their own footing. 
The problem is that these parties seem outdated to many younger voters, regardless of their leaders’ age. 
If they are to succeed, they will need to provide an inspiring new platform that convincingly addresses the issues of the today – all while contending with new political forces. 
It is possible, however, that new political forces will in some cases absorb traditional center-right and center-left parties. 
In France, for example, Macron’s party could absorb the center-right Les Republicains, or it could shift further to the left, with a social solidarity program to accompany the liberal market measures it has already taken. 
The question is whether the party’s leaders think they can secure a simultaneous victory against Les Republicains and the center-left Socialists. 
Although the details remain unclear, a thorough restructuring of the European political scene – shaped largely by attitudes toward Europe – seems certain. 
If the European Parliament election next year helps to advance this restructuring, this may end up constituting a large step forward for democracy in Europe. 


Europe’s Double Opportunity 
WASHINGTON, DC – Europe has a decision to make. 
It can stand by as nationalism and authoritarianism flourish from the United States (with Donald Trump’s “America First” approach) to China (which is moving from a single-party system to a single-leader regime). 
Or it can lead a reinvigoration of democratic values and international cooperation, at a time when rapid technology-driven change demands major political, economic, and social reforms. 
Some view the rise of populism – mostly of the right-wing variety – in the European Union as a sign that, far from being ready to play a leadership role, the EU may be disintegrating. 
But the EU’s situation is much more complicated than the pessimists make it out to be – and not nearly as bleak. 
Last autumn, the Special Eurobarometer 467 survey showed that 75% of respondents viewed the EU positively. 
Though a majority of respondents think their children’s lives will be more difficult than theirs own, two-thirds believe that the EU offers hope for Europe’s youth – an increase of six percentage points from 2016. 
Young people seem to agree. 
The share of younger respondents (ages 15-39) who view the EU positively is particularly high. 
And, despite concerns about the EU’s “democratic deficit,” this cohort seems to appreciate the potential for political participation. 
Faith in the EU’s future was buoyed last May by the election of French President Emmanuel Macron. 
If Macron can secure Germany’s cooperation for his European reform program, the EU’s prospects will be strengthened further. 
While last September’s German federal election didn’t produce such a strongly pro-EU result – the far-right Alternative for Germany is now the largest opposition party, having secured nearly 13% of the vote – the main moderate parties still won the day, gaining more than 60% of the vote. 
Germany’s new coalition government is at least as pro-European as the one that preceded it, and a stronger Europe could be a fitting legacy for Chancellor Angela Merkel. 
Italy’s recent election – in which the anti-immigrant League party (with its electoral base in the north) and the left-leaning populist Five Star Movement (whose support is concentrated in the south) together won more than 50% of the vote – is more worrying. 
Yet, given the antagonism between the two parties, it is likely that a governing coalition that can last will include the pro-European Democratic Party. 
Ultimately, whatever barriers Italy, with its debt-laden economy, poses to greater EU integration are unlikely to be insurmountable, if France and Germany exercise decisive leadership. 
Of course, Brexit will not be easy on Europe. 
But, overall, Europe no longer appears to be a continent in crisis. 
Even in Greece, which has restored GDP growth, a majority of respondents now supports the EU. 
In this context, the EU may be facing two related opportunities. 
Internally, it can adopt reforms that boost institutional efficiency and advance integration. 
Externally, it can stand strongly for international cooperation, human rights, and open society. 
Europe must make progress on the first opportunity if it is to seize the second, and that means strengthening the eurozone. 
On this front, Macron has already offered ambitious proposals: a separate eurozone budget, a eurozone finance minister responsible for it, and a eurozone parliament (composed of members of the European Parliament and national parliamentarians) to hold the finance minister accountable. 
Before Germany’s new coalition government was formed, a Franco-German working group was established to consider Macron’s proposals. 
Now that Merkel’s new administration is in place, we will find out how far Germany is willing to go in supporting greater eurozone cohesion. 
In the short run, it seems unlikely that the new government will support Macron’s proposals in their current form. 
But it may back the completion of the banking union and some mechanism for greater coordination of eurozone economic policies. 
In the longer run, some of Macron’s reforms should be possible, especially if the eurozone countries are allowed to move forward without unanimous approval from all 27 EU member countries. 
Such changes – along with more military and intelligence cooperation – will imbue the European project with a new dynamism, spurring more enthusiasm, not to mention a greater sense of security, among Europe’s citizens. 
A more integrated and secure EU would be well positioned to assert itself more effectively on the international stage. 
With the European Single Market still boasting a larger GDP than China or the US, the EU can act as the third “pole” in a new world order. 
Its model of economic openness, social cohesion, and strong institutions can provide an alternative to the isolationist and nationalist tendencies that are threatening global cooperation. 
And make no mistake: in areas such as trade, climate change, financial-sector regulation, competition policy, and cyber security, international cooperation remains critical. 
And it will become indispensable as advances in artificial intelligence and biotechnology raise thorny ethical issues that can be addressed effectively only at the international level. 
The liberal world order that arose from the ruins of World War II to help prevent future catastrophes is facing its most difficult test yet. 
We must reaffirm the importance of internationalism, openness, and democracy in this new digital age, while adapting our policies and rules to new realities. 
Europe, with its unique experience of creating a democratic model of supranational governance, should lead the way. 
The world – especially its young people – is counting on it. 

European Security in the Trump Era 
MUNICH – At last year’s Munich Security Conference, the mood of fear and apprehension among European security officials was palpable. 
Three years earlier, Russia had annexed Crimea and launched incursions into Eastern Ukraine. 
And in the previous year, a narrow majority of British voters had decided to take their country out of the European Union, and Americans had elected a president who was critical of NATO and openly admired Russian President Vladimir Putin. 
Still, the West has so far survived the age of Donald Trump. 
And, despite the ongoing confusion over Brexit and German leaders’ difficulty in forming a new government, the EU seems to have bounced back. 
Most member states’ economies are doing well, and French President Emmanuel Macron’s administration is breathing new life into the European idea. 
Although the Trump administration has continued to send mixed signals about its willingness to uphold American commitments, the US has nonetheless delivered on former President Barack Obama’s pledge to strengthen NATO’s military posture in the Baltics and Poland. 
And in the run-up to a NATO summit later this year, the US has indicated that it will do even more to ensure the territorial integrity of Baltic and Scandinavian member states. 
Moreover, fears that Trump might try to forge a new Yalta-style agreement with the Kremlin – in which Eastern European countries would be abandoned to their fate – have all but disappeared. 
If anything, the greater concern now is that US-Russian relations are becoming increasingly acrimonious, even irrationally so. 
Russia, meanwhile, seems eager to disengage its military from an intractable situation in Syria, where it has so far played its cards right. 
The same cannot be said for Ukraine, where the Kremlin has learned that invasions are not a good way to make friends. 
By alienating that country for generations to come, Russia has suffered a geopolitical setback of historic proportions. 
Sooner or later, Russia will want to cut its losses and disengage from Eastern Ukraine, too. 
It has already floated the idea of a limited United Nations peacekeeping operation there. 
And while Russia has not yet expressed a willingness to cede control of the Ukraine-Russia border, nor made progress in talks with the US, Putin surely knows that the status quo is unsustainable. 
Does all of this mean that the fears of a year ago have dissipated? 
Far from it. 
The strategic shocks of recent years have left deep and lasting wounds, and pushed Europe into new and uncharted waters. 
A decade ago, EU leaders talked confidently about projecting stability abroad. 
Today, their priority is to prevent instability from spilling over into Europe. 
At the same time, there is a growing awareness that while the US is still the main guarantor of European security, it might not be forever. 
Even if some of the rhetoric accompanying proposals for an EU defense union has been vastly overblown, the bloc’s leaders are right to focus more on defense and security issues than they have in the past. 
Whether it is through “defense industrial policies” or something else, the EU needs to develop its capacity to marshal joint responses to future hard-power threats. 
This is true even if the Kremlin has come to regret its actions in 2014, which led to Western military forces being deployed on its borders. 
After all, Russia is still holding on to Crimea, where it has long maintained key military bases. 
And, apart from Russia, Europe is surrounded by ongoing conflicts. 
Tensions are increasing from the Indus to the Nile and across North Africa, where any turmoil will have an immediate impact on European security. 
As Europeans well know, there is no way to build a wall in the Mediterranean. 
Moreover, it is worrying that the Trump administration hardly ever talks about upholding the post-war liberal international order. 
Instead, it views the world as a zero-sum strategic competition in which the US should look out only for itself. 
Unfortunately, in a world without common institutions to restrain sovereign states from escalating conflicts with one another, the risks of all-out war will increase substantially. 
To be sure, the US says that it is stepping up its commitment to European security. 
But, given China’s growing military might and the strategic importance of the Asia-Pacific region, the US will have no choice but to pivot to the East. 
In fact, despite all of Trump’s complaints about America’s oversized contribution to NATO, the US already directs the bulk of its military spending to the Asia-Pacific region. 
So, while the immediate fears of 2017 have subsided, and some sense of normality has returned, Europeans can no longer avoid taking responsibility for their own defense. 
Even after Trump is long gone, soft power will not suffice in a world of hard-power conflicts. 

How Europe Should Deal With Trump 
MUNICH – Donald Trump’s presidency poses a stress test for Europe, for transatlantic relations, and for the world as a whole. 
Indeed, in many ways, Trump’s “America first” policy is defined by its opposition to the internationalist US foreign policy of the past eight decades. 
For starters, Trump says that he trusts German Chancellor Angela Merkel and Russian President Vladimir Putin equally. 
Does that imply that the United States will pursue a policy of equidistance between the EU and the Kremlin? 
It is not an idle question. 
Trump has made it obvious that established partnerships, alliances, rules, and protocols mean little to him. 
In his tweets, he rants about the media, attacks independent judges, targets individuals and companies, and belittles international organizations. 
But even if the US under Trump is an unattractive ally for Europe, writing off the US as a European partner – which some in Europe would like to do sooner rather than later – would be a mistake. 
For one thing, Europe must not ignore the majority of Americans who didn’t vote for Trump. 
The commitment of America’s civil society and the response of its judiciary show Europeans that the US they know and hold in high regard is no pushover. 
Instead of turning away from the US, we should cooperate with Americans who remain committed to preserving the transatlantic community of values. 
This includes members of the new administration who have voiced their clear support for the transatlantic partnership and continuity, to say nothing of Trump’s opponents – Democrats and Republicans alike – in Congress. 
Moreover, those who favor cutting ties seem to believe that there are partners all over the world just lining up to defend the liberal global order together with Europe. 
The EU might agree with China that a new era of protectionism would be harmful. 
But beyond that, they have little common ground. 
In the long term, the liberal global order will endure only if supported by both pillars of the transatlantic partnership. 
Finally, calls for Europe to become a strategic counterweight to the US are purely aspirational; in reality, no such option exists. 
In the short and medium term, Europeans cannot do without the US security guarantee. 
As a result, we must work to convince the new administration of the importance of a united and peaceful Europe. 
Nonetheless, the mere speculation about decoupling European security from the US is giving rise to uncertainty, reflected in the emerging debate about a European – or even German – nuclear bomb. 
It’s a sham debate, because it assumes what must be questioned: Is it really in Europeans’ interest to cut the cord proactively now, before we have even been presented with any concrete US decisions that directly affect us? 
Europe’s only good option is to engage with the US administration as closely as possible – which doesn’t mean playing down deeply worrying statements made by Trump. 
When Vice President Mike Pence, Secretary of Defense James Mattis, and a number of US senators and House members visit the Munich Security Conference this weekend, European delegates must make their expectations vis-à-vis the US administration very clear to them. 
Engaging and influencing is the kind of realpolitik that is necessary now, even if many Europeans may not like the idea. 
This means communicating, with utmost clarity, that the breach of vital European interests would bring about a major transatlantic crisis. 
The worst-case scenario for Europe is a US administration that pursues policies – for example, active support for right-wing populists – aimed at bringing about the disintegration of the EU. 
It is equally important to ensure that any deal between Russia and the US does not come at Europe’s expense. 
As for the nuclear agreement with Iran, the Trump administration must be made aware that Europe will not go along with any new sanctions if the US withdraws from the deal unilaterally. 
Europe can and should assert itself economically as well. 
If Trump really wants to introduce a kind of origin-based tax to promote US-made goods, the EU could threaten to do the same. 
Whether the issue is import taxes or the future of Western sanctions against Russia, it is helpful to remember the simple fact that Europe remains America’s most important market. 
America’s trade volume with the EU is roughly 37 times higher than that with Russia, with huge mutual direct investments locking in the transatlantic partners’ interdependence. 
Even if Trump rejects such considerations, he should think twice about how far he wants to push Europe. 
At a certain point, anti-Trump election campaigns in Europe would probably be very successful; he will hardly be able to accomplish his plans without strong and close partners in Europe – and certainly not if he acts against Europe. 
But, clearly, Europe must now focus on itself. 
We do need to do more to bolster our own security. 
While significant change is on the way, including increased integration of Europe’s armed forces, the road toward a well-functioning European defense union is long. 
And, in light of the precarious global situation, Germany, in particular, must increase its efforts in foreign and defense policy and development aid. 
The EU’s cohesion and its internal and external security cannot be achieved at zero cost. 
Avoiding budget deficits, as Germany is now seeking to do, will be of no benefit to future generations if the price is the erosion of the main foundation of our prosperity: a peaceful and prosperous Europe. 
Instead of waiting in fear of Trump’s next tweet, we Europeans should lay the foundations for a Europe that is strong, capable of taking action, and committed to Western values. 
From this position, we can assert our key interests vis-à-vis the US with confidence. 
That is the best response Europe can give. 

European Social Democracy’s Powerless Power 
At first glance, European social democracy appears to be in crisis. 
Gordon Brown’s slump in the United Kingdom; the brutal shock of Spain’s economic downturn; the difficulties of renewing Socialist leadership in France; the collapse of the center-left coalition in Italy; and severe infighting within Germany’s SPD: all point to social democracy’s seeming inability to seize the opportunity – which the current financial crisis should present – to exert greater influence. 
But the simultaneous occurrence and high visibility of these problems is less significant than they appear. 
Mistakes or clumsiness in governance are not exclusive to the left: Belgium is paralyzed by the threat of break-up, Austria is still looking to cement an unlikely conservative coalition, Poland is struggling to find a steady balance for its numerous reactionary impulses, and the French president is hitting record lows in terms of popularity. 
Two factors help to explain current European uncertainties. 
First, there is the economic and financial crisis that we are only slowly overcoming. 
Second, there is the way in which the media are covering it. 
The combination of the two is, I believe, behind the feeling of powerlessness that is now affecting the whole of Europe, and that may appear to characterize social democracy in particular. 
In reporting on the crisis, the media have placed too much emphasis on finance alone, and have paid insufficient attention to the marked slowing of economic growth. 
But it is the economic slowdown that renders all developed countries less resistant to the financial shocks resulting from the sub-prime problem and from the mixed loan packages that are then used to dilute the risks attached to sub-prime debt. 
Indeed, the combination of banking uncertainties, slower growth, and the heightened risk of underemployment and casual labor creates the political weakness now visible in the UK, Spain, Italy, and elsewhere. 
Herein lies a real ideological problem. 
The second half of the twentieth century witnessed the victory of the market economy over the administered economy. 
The left, which had previously looked to Marx, lost its bearings. 
Even social democracy, which, particularly in Scandinavia, was an excellent regulator of capitalism, found itself muted in the controversy between Keynesians and monetarists, and, throughout the developed world, the monetarists won. 
Today’s accepted wisdom is that markets are optimally balanced whatever their state, meaning that no government intervention or regulation would be efficient or desirable. 
The current crisis is severe punishment for that immense intellectual error. 
Not only is the decline of previously accepted social and financial regulations reflected in the relative, but important, drop in wage income as a percentage of GDP – and therefore consumer spending – in all developed countries in the last thirty years, but also the deliberate abolition of controls allows the banking sector to do as it pleases. 
Still, to judge from most media coverage, the parallel sub-prime and packaged loan crises, which are paralyzing global finance, are entirely attributable to banks’ “immorality,” and are in no way due to systemic failure. 
Simply put, deregulation, privatization, reduced public services, and refocusing corporate management on earnings – all this suits too many people. 
As a result, the political battle to reintroduce a sense of general interest – of rules and balance – will be long and hard. 
What is also clear, even if it is not as well recognized, is that this battle will be primarily intellectual in nature: legitimacy must be given back to the notion of having certain ground rules and public regulatory bodies. 
This should be the task for social democrats – but that is where the shoe pinches. 
We social democrats can no longer fight such battles, because the problem is not only ideological, but also cultural. 
The media are no longer a commentator, but a participant that has hijacked politics with imagery. 
Either by accident or design, the media choose only those battles that offer the finest spectacles: clashes of personalities, violence and repression, struggles over national identity, and disputes about moral and sexual attitudes. 
For the contemporary media, technical controversies about policy hold no interest, because the audience for them is limited. 
For example, in preparation for its next congress, the French Socialist Party has succumbed to this reality. 
We already know that there will be media fireworks, but there will be little talk of economic regulation. 
The case of Spain – where a competent and respected government is bearing the full brunt of a financial crisis that began elsewhere – is identical. 
Instead of focusing on the crisis alone, it is fidgeting in the face of the media. 
Anything that threatens government stability sells newspapers and advertising space, while complicating any resolution of the underlying problems. 
Quite simply, a system in which the media behave this way places not only the economy, but also democracy, at risk. 

Europe’s Reality Check 
BERLIN – Until a few weeks ago, Europeans believed they lived in a kind of sanctuary, insulated from the world’s current conflicts. 
Certainly, the news and images of drowned migrants were dreadful; but the tragedy occurring south of Italy, Greece, and Malta, seemed a long way off. 
Syria’s brutal civil war, which has been raging for years, seemed even farther away. 
Syrian President Bashar al-Assad deployed poison gas and later barrel bombs filled with nails and metal fragments against his rebellious population. 
And those who escaped Assad’s henchmen found themselves confronted by the terror of the Islamic State. 
Hundreds of thousands were killed, and millions of Syrians have fled, with most living in camps in Jordan, Lebanon, or Turkey for years, in appalling conditions and with no hope of improvement. 
So, sometime this summer, when the last glimmer of hope of a return to Syria disappeared and an alternative to Assad and the Islamic State no longer seemed realistic, these people started heading toward Europe, which seemed to promise a future of peace, freedom, and security. 
The refugees came via Turkey, Greece, and the Balkan states, or across the Mediterranean to escape similar chaos in Eritrea, Libya, Somalia, and Sudan. 
In August, thousands of refugees became stranded at Budapest’s Keleti train station for days on end when Hungary’s vexed and incompetent government deliberately allowed the situation to escalate. 
Eventually, thousands of men, women, and children – and even old and disabled people – started to make their way on foot toward the Austrian border. 
At this point Europe, witnessing an exodus of biblical proportions, could no longer ignore the challenge and the consequences of the crises in its neighboring region. 
Europe was now directly confronted with the harsh realities from which it had appeared to be a sanctuary. 
Europe was, no surprise, unprepared. 
The European Union lacked the civilian, diplomatic, and military tools needed to contain, let alone resolve, the crises and conflicts in its neighborhood. 
And, once the migrants headed for Europe, the EU’s common asylum policy failed, because the so-called Dublin III agreement provided no effective mechanism to distribute asylum-seekers among all members states after their initial registration in EU border states (in particular Greece and Italy). 
Italian Prime Minister Matteo Renzi’s call for European solidarity went unheeded. 
When thousands of refugees arrived in Budapest on their way to Germany and Scandinavia, a humanitarian disaster loomed, and German Chancellor Angela Merkel had to choose: either take in the refugees or risk further escalation of the crisis in Budapest. 
Germany probably could not have stood idly by even for another two days. 
Merkel took the brave and correct decision to let the refugees enter Germany. 
For this, she deserves wholehearted respect and full support, all the more so in view of the icy response of many within her own party. 
But Merkel was not alone in embodying humane values at this decisive moment. 
Civil-society groups in Germany, Austria, and elsewhere mobilized to a hitherto unseen extent to meet – together with the public authorities – the enormous challenge posed by the influx. 
Without the public’s active empathy, the authorities would never have managed. 
With the support of such ad hoc coalitions, Europe should do whatever it takes to ensure the refugees’ successful integration. 
The influx launched during the “refugee summer” will change Germany and Europe. 
The EU will be able to address the challenge – and seize the opportunity – of integrating the newcomers only together and in the spirit of European solidarity. 
Should unity crumble in this crisis, the consequences for all parties involved – especially the refugees – will be grave. 
First and foremost, a new, effective system for securing Europe’s external borders must be established as quickly as possible. 
This includes a joint procedure for judging asylum claims and a mechanism to distribute the refugees among EU countries fairly. 
Moreover, if the EU wants to maintain its core values, including the abolition of internal borders, it will need to focus on stabilizing its Middle Eastern, North African, and Eastern European neighbors with money, commitment, and all its hard and soft power. 
A united approach will be crucial. 
But Europe should avoid the kind of dismal realpolitik that would betray its core values elsewhere. 
It would be a grave mistake, for example, to sell out Ukraine’s interests and lift the sanctions imposed on Russia out of the mistaken belief that the Kremlin’s assistance is needed in Syria. 
Cooperation with Russia, however useful and advisable, must not come at the expense of third parties and Western interests and unity. 
Attempting to redeem past mistakes is not advisable when it means making even bigger ones. 
To be sure, there is a risk that the refugee crisis will strengthen nationalist and populist parties in EU member states. 
But the renationalization of politics within the EU gained traction long before the summer of 2015, and it is not a result of the refugee crisis. 
At its heart lies a fundamental conflict over Europe’s future: back to a continent of nation-states, or forward to a community of shared values? 
Convinced Europeans will need to marshal all their strength – and muster all their nerve – in the times ahead. 

Europe’s Lapse of Reason 
NEW YORK – At long last, the United States is showing signs of recovery from the crisis that erupted at the end of President George W. Bush’s administration, when the near-implosion of its financial system sent shock waves around the world. 
But it is not a strong recovery; at best, the gap between where the economy would have been and where it is today is not widening. 
If it is closing, it is doing so very slowly; the damage wrought by the crisis appears to be long term. 
Then again, it could be worse. 
Across the Atlantic, there are few signs of even a modest US-style recovery: The gap between where Europe is and where it would have been in the absence of the crisis continues to grow. 
In most European Union countries, per capita GDP is less than it was before the crisis. 
A lost half-decade is quickly turning into a whole one. 
Behind the cold statistics, lives are being ruined, dreams are being dashed, and families are falling apart (or not being formed) as stagnation – depression in some places – runs on year after year. 
The EU has highly talented, highly educated people. 
Its member countries have strong legal frameworks and well-functioning societies. 
Before the crisis, most even had well-functioning economies. 
In some places, productivity per hour – or the rate of its growth – was among the highest in the world. 
But Europe is not a victim. 
Yes, America mismanaged its economy; but, no, the US did not somehow manage to impose the brunt of the global fallout on Europe. 
The EU’s malaise is self-inflicted, owing to an unprecedented succession of bad economic decisions, beginning with the creation of the euro. 
Though intended to unite Europe, in the end the euro has divided it; and, in the absence of the political will to create the institutions that would enable a single currency to work, the damage is not being undone. 
The current mess stems partly from adherence to a long-discredited belief in well-functioning markets without imperfections of information and competition. 
Hubris has also played a role. 
How else to explain the fact that, year after year, European officials’ forecasts of their policies’ consequences have been consistently wrong? 
These forecasts have been wrong not because EU countries failed to implement the prescribed policies, but because the models upon which those policies relied were so badly flawed. 
In Greece, for example, measures intended to lower the debt burden have in fact left the country more burdened than it was in 2010: the debt-to-GDP ratio has increased, owing to the bruising impact of fiscal austerity on output. 
At least the International Monetary Fund has owned up to these intellectual and policy failures. 
Europe’s leaders remain convinced that structural reform must be their top priority. 
But the problems they point to were apparent in the years before the crisis, and they were not stopping growth then. 
What Europe needs more than structural reform within member countries is reform of the structure of the eurozone itself, and a reversal of austerity policies, which have failed time and again to reignite economic growth. 
Those who thought that the euro could not survive have been repeatedly proven wrong. 
But the critics have been right about one thing: unless the structure of the eurozone is reformed, and austerity reversed, Europe will not recover. 
The drama in Europe is far from over. 
One of the EU’s strengths is the vitality of its democracies. 
But the euro took away from citizens – especially in the crisis countries – any say over their economic destiny. 
Repeatedly, voters have thrown out incumbents, dissatisfied with the direction of the economy – only to have the new government continue on the same course dictated from Brussels, Frankfurt, and Berlin. 
But for how long can this continue? 
And how will voters react? 
Throughout Europe, we have seen the alarming growth of extreme nationalist parties, running counter to the Enlightenment values that have made Europe so successful. 
In some places, large separatist movements are rising. 
Now Greece is posing yet another test for Europe. 
The decline in the Greek economy since the start of the crisis is in many ways worse than that which confronted America during the Great Depression of the 1930s. 
Youth unemployment is over 50%. 
Prime Minister Antonis Samaras’s government has failed, and now, owing to the parliament’s inability to choose a new Greek president, an early general election will be held on January 25. 
The left opposition Syriza party, which is committed to renegotiating the terms of Greece’s EU bailout, is ahead in opinion polls. 
If Syriza wins but does not take power, a principal reason will be fear of how the EU will respond. 
Fear is not the noblest of emotions, and it will not give rise to the kind of national consensus that Greece needs in order to move forward. 
The issue is not Greece. 
It is Europe. 
If Europe does not change its ways – if it does not reform the eurozone and repeal austerity – a popular backlash will become inevitable. 
Greece may stay the course this time. 
But this economic madness cannot continue forever. 
Democracy will not permit it. 
But how much more pain will Europe have to endure before reason is restored? 

E Pluribus Europe? 
BRUSSELS – The European Union’s economic crises of the last half-decade have fueled the emergence of a deep divide between the northern creditor countries and the southern debtors. 
Now Europe’s migrant crisis is creating an east-west divide between the countries that are welcoming toward the ongoing influx of refugees, and those who want to do little, or nothing, to help. 
Add to that growing political divisions within member countries, and one must ask: Is the EU coming unglued? 
The creditor/debtor split was thrown into sharp relief this summer, during the negotiations over Greece’s third bailout agreement. 
Germany, the leading proponent of austerity and the most influential creditor, was accused of insufficient flexibility and solidarity; 
Greece, for its part, was lambasted for failing to implement the reforms that it promised the first two times it was bailed out. 
(It was France, neither entirely “north” nor entirely “south,” that ended up playing a vital role in facilitating the deal.) 
Germany is now trying to lead the way in the migrant crisis as well, but this time by its generosity. 
Chancellor Angela Merkel has pledged to take in more than 800,000 refugees just this year. 
Welcoming crowds have lined streets and filled train stations in German cities, offering drinks, food, and clothing to the exhausted refugees, many of whom have walked hundreds of miles and risked their lives to get to safety. 
Whereas Merkel declared forcefully that Islam was also a religion of Germany, some in Eastern Europe have declared that they will welcome only a small number of refugees – and only if they are Christian. 
Such bigotry plays directly into the hands of Islamist extremists worldwide. 
The refugee crisis is all the more challenging in view of EU member countries’ internal political fragmentation. 
While those on the left support cautious acceptance of refugees, the further one moves to the right, the more negative the attitude becomes. 
Even the Christian Social Union, the Bavarian sister party to Merkel’s Christian Democratic Union, has proved a reluctant partner in this area. 
Yet another divide lies between the United Kingdom and the rest of the EU. 
Given the UK’s role, alongside France, as the key force in European defense and a significant authority in world affairs, particularly with regard to climate- and development-related issues, the prospect of a genuine split should be a source of serious concern for the EU. 
These divisions have created deep doubts about the dream of ever-closer union in Europe, underpinned by a shared system of governance that allows for more effective decision-making. 
Likewise, they are not conducive to implementation of the reforms that are needed to spur economic growth. 
Yet it is still too early to write off progress toward increased European integration. 
In fact, when it comes to EU cohesion, more cleavages are probably better than a single divide. 
When economic considerations alone were dominating the debate, austerity-obsessed northern Europe, oblivious to any Keynesian considerations, and struggling southern Europe, desperately in need of fiscal room to make demand-boosting, job-creating structural reforms politically feasible, were at loggerheads. 
The situation became so heated that some respected observers even proposed creating a “northern euro” for the region around Germany, and a “southern euro” in the Mediterranean (where France would fit was unclear). 
In such a eurozone, the European Central Bank would have to split, and the northern euro would appreciate. 
Exchange-rate uncertainty would reappear, not only between the two euros, but also, before long, within the “northern” and “southern” zones, owing to the collapse of confidence in the very idea of a currency union. 
Within the northern bloc, Germany would play an even more outsize role than it does now, a situation that would likely generate new tensions. 
Similarly, a clear division between a refugee-friendly west and a closed east would effectively end the Schengen Agreement, because the political disagreement would harden into a physical barrier blocking the free movement of people within the EU. 
Such a split would be as damaging to Europe’s cohesion as a divided eurozone. 
But what if countries that are on opposite sides of one cleavage are on the same side of another? 
Germany, Italy, Spain, and Sweden may agree on the immigration issue, while Greece, France, Italy, and Portugal agree on eurozone macroeconomic policies. 
France, Poland, and the UK may be willing to spend more on defense, while Germany remains more pacifist. 
And Germany, the Scandinavian countries, and the UK may be at the forefront of the fight against climate change. 
Moreover, the Europe-wide political “families” of Christian Democrats, Social Democrats, and so on could be allies on some policies and opponents on others, transcending national or regional borders, and moving toward pan-European politics, with the European Parliament increasing its democratic debate and oversight functions. 
A Europe where countries do not fit neatly into one category or another, and where flexible coalitions emerge on various issues, probably has a greater chance of progressing than one divided simply between north and south or east and west. 
Of course, there remains the challenge of strengthening institutions so that they can manage this diversity and reconcile it with political effectiveness. 
Here, greater scope for weighted and double-majority voting is crucial. 
But, for truly democratic societies, the challenge of reconciling divergent interests never goes away. 

Europe’s Barbarians Inside the Gate 
BERLIN – I am on a two-week European tour at a time that could make one either very pessimistic or constructively optimistic about Europe’s prospects. 
First the bad news: Paris is somber, if not depressed, after the appalling terrorist attacks earlier this month. 
France’s economic growth remains anemic, the unemployed and many Muslims are disaffected, and Marine Le Pen’s far-right National Front is likely to do well in the upcoming regional elections. 
In Brussels, which was semi-deserted and in lockdown, owing to the risk of terrorist attacks, the European Union institutions have yet to devise a unified strategy to manage the influx of migrants and refugees, much less address the instability and violence in the EU’s immediate neighborhood. 
Outside the eurozone, in London, there is concern about negative financial and economic spillover effects from the monetary union. 
And the migration crisis and recent terrorist attacks mean that a referendum on continued EU membership – likely to be held next year – could lead the United Kingdom to withdraw. 
This would probably be followed by the breakup of the UK itself, as “Brexit” would lead the Scots to declare independence. 
In Berlin, meanwhile, German Chancellor Angela Merkel’s leadership is coming under growing pressure. 
Her decision to keep Greece in the eurozone, her courageous but unpopular choice to allow in a million refugees, the Volkswagen scandal, and flagging economic growth (owing to the slowdown of China and emerging markets) have exposed her to criticism even from her own party. 
Frankfurt is a divided city, policy-wise: the Bundesbank opposes quantitative easing and negative policy rates, while the European Central Bank is ready to do more. 
But Germany’s thrifty savers – households, banks, and insurance companies – are furious about ECB policies that tax them (and others in the eurozone core) to subsidize the eurozone periphery’s alleged reckless spenders and debtors. 
In this environment, the full economic, banking, fiscal, and political union that a stable monetary union eventually requires is not viable: The eurozone core opposes more risk sharing, solidarity, and faster integration. 
And populist parties of the right and left – anti-EU, anti-euro, anti-migrant, anti-trade, and anti-market – are becoming stronger throughout Europe. 
But of all the problems Europe faces, it is the migration crisis that could become existential. 
In the Middle East, North Africa, and the region stretching from the Sahel to the Horn of Africa, there are about 20 million displaced people; civil wars, widespread violence, and failed states are becoming the norm. 
If Europe has trouble absorbing a million refugees, how will it eventually handle 20 million? 
Unless Europe can defend its external borders, the Schengen agreement will collapse and internal borders will return, ending freedom of movement – a key principle of European integration – within most of the EU. 
But the solution proposed by some – close the gates to refugees – would merely worsen the problem, by destabilizing countries like Turkey, Lebanon, and Jordan, which have already absorbed millions. 
And paying off Turkey and others to keep the refugees would be both costly and unsustainable. 
And the problems of the greater Middle East (including Afghanistan and Pakistan) and Africa cannot be resolved by military and diplomatic means alone. 
The economic factors driving these (and other) conflicts will worsen: global climate change is accelerating desertification and depleting water resources, with disastrous effects on agriculture and other economic activity that then trigger violence across ethnic, religious, social, and other cleavages. 
Nothing short of a massive, Marshall Plan-style outlay of financial resources, especially to rebuild the Middle East, will ensure long-term stability. 
Will Europe be able and willing to pay its share of it? 
If economic solutions aren’t found, eventually these regions’ conflicts will destabilize Europe, as millions more desperate, hopeless people eventually become radicalized and blame the West for their misery. 
Even with an unlikely wall around Europe, many would find a way in – and some would terrorize Europe for decades to come. 
That’s why some commentators, inflaming the tensions, speak of barbarians at the gates and compare Europe’s situation to the beginning of the end of the Roman Empire. 
But Europe is not doomed to collapse. 
The crises that it now confronts could lead to greater solidarity, more risk sharing, and further institutional integration. 
Germany could absorb more refugees (though not at the rate of a million per year). 
France and Germany could provide and pay for military intervention against the Islamic State. 
All of Europe and the rest of the world – the US, the rich Gulf States – could provide massive amounts of money for refugee support and eventually funds to rebuild failed states and provide economic opportunity to hundreds of millions of Muslims and Africans. 
This would be expensive fiscally for Europe and the world – and current fiscal targets would have to be bent appropriately in the eurozone and globally. 
But the alternative is global chaos, if not, as Pope Francis has warned, the beginning of World War III. 
And there is light at the end of the tunnel for the eurozone. 
A cyclical recovery is underway, supported by monetary easing for years to come and increasingly flexible fiscal rules. 
More risk sharing will start in the banking sector (with EU-wide deposit insurance up next), and eventually more ambitious proposals for a fiscal union will be adopted. 
Structural reforms – however slowly – will continue and gradually increase potential and actual growth. 
The pattern in Europe has been that crises lead – however slowly – to more integration and risk sharing. 
Today, with risks to the survival of both the eurozone (starting with Greece) and the EU itself (starting with Brexit), it will take enlightened European leaders to sustain the trend toward deeper unification. 
In a world of existing and rising great powers (the US, China, and India) and weaker revisionist powers (such as Russia and Iran), a divided Europe is a geopolitical dwarf. 
Fortunately, enlightened leaders in Berlin – and there are more than a few of them, despite perceptions to the contrary – know that Germany’s future depends on a strong and more integrated Europe. 
They, together with wiser European leaders elsewhere, understand that this will require the appropriate forms of solidarity, including a unified foreign policy that can address the problems in Europe’s neighborhood. 
But solidarity begins at home. 
And that means beating back the populists and nationalist barbarians within by supporting aggregate demand and pro-growth reforms that ensure a more resilient recovery of jobs and incomes. 

Europe’s Leadership Crisis 
BRUSSELS – The European Union’s list of crises keeps growing. 
But, beyond the United Kingdom’s “Brexit” vote to leave the bloc, Poland’s constitutional-court imbroglio, Russian expansionism, migrants and refugees, and resurgent nationalism, the greatest threat to the EU comes from within: a crisis of political leadership is paralyzing its institutions. 
As if to prove the point, EU member states’ leaders (with the exception of UK Prime Minister Theresa May) met recently in Bratislava, Slovakia, in an attempt to demonstrate solidarity, and to kick-start the post-Brexit reform process. 
The attendees made some progress toward creating a European Defense Union, which should be welcomed, and toward admitting that the EU’s current organizational framework is unsustainable; but there was scant talk of meaningful institutional or economic reform. 
Meanwhile, Italian Prime Minister Matteo Renzi’s refusal, at the close of the summit, to appear onstage with French President François Hollande and German Chancellor Angela Merkel all but confirmed fears that rudderless leadership is fueling institutional dysfunction. 
A summit that was supposed to be a display of unity revealed only further division. 
EU leaders must take responsibility for this latest failure. 
For starters, they must stop issuing empty declarations. 
The EU’s institutional impotence is apparent, especially to its enemies. 
So now it faces a stark choice: a leap forward toward unification or inevitable disintegration. 
Few Europeans want to make that choice. 
Many politicians are afraid of paying a high domestic political price for pursuing an agenda of EU reform. 
They argue that pushing for further integration in the current political climate is reckless, and that the EU should focus on doing less, better. 
But that is a false trade-off. 
The EU could build a more integrated economic-governance model to increase investment and create jobs, while at the same time streamlining its operations to address common complaints about red tape and dysfunction. 
Few European leaders seem to understand that the real risk to the EU – and to their own political futures – is the status quo. 
And with populist movements across Europe pummeling traditional parties in the polls, the window for delivering real change is quickly closing. 
It does not have to be this way. 
Too many leaders are paying lip service to domestic nationalists and populists, mistakenly thinking that this will preserve their domestic poll ratings, when they should be showing genuine leadership and fighting for the common good. 
Upcoming national elections in France and Germany will be bellwethers for the future of European leadership. 
In recent German state elections, Merkel’s Christian Democratic Union and its government partner, the Social Democratic Party, experienced notable losses, which could mean that Germany’s grand coalition is at risk ahead of next year’s election. 
Meanwhile, support for the far-rightAlternative for Germany (AfD) continues to grow. 
Merkel has two choices: She can move to the right, as former French President Nicolas Sarkozy has done in his latest bid for the French presidency, or she can fight to hold the center by addressing the AfD’s simplistic arguments head on. 
The choice is clear: Merkel should stand and fight, while also advancing an alternative vision for modernizing the EU. 
Defeating populism will require leaders to acknowledge the people left behind as a result of globalization, but also to dispel the myth that there is a quick fix, or that globalization can simply be reversed. 
Contrary to populist arguments, protectionism will not reduce youth unemployment or income inequality. 
If EU countries reject trade deals currently under discussion, including the Transatlantic Trade and Investment Partnership and the Comprehensive Economic and Trade Agreement, the EU’s share of world trade will decrease, and the European economy will suffer for it. 
Likewise, if the eurozone fails to integrate further by strengthening its economic-governance structures, Europe’s ongoing financial crisis will only continue, impeding social mobility and undermining social justice. 
It is time for EU leaders to make these arguments more effectively. 
Across the West, the 2008 financial crisis triggered a political fight that is still in progress. 
It has changed from a battle for accountability and reform to a clash between visions of open and closed societies, between a global consensus and policies still operating at the national, local, or even tribal level. 
If the EU is going to quell the revolt against globalization, free trade, and open societies, it will need more leaders and fewer managers. 
European leaders, frankly, should know better than to blame EU institutions, hypothetical trade deals, and refugees for their own failures to tackle unemployment and reduce inequality. 
The EU’s current crisis-management playbook is running out of pages. 
We in Europe can either put our heads in the sand while the European project slowly dies, or we can use this crisis to start a new project of renewal and reform. 
Here, too, the right choice is clear: EU leaders should offer Europeans a new social contract, based on the understanding that people’s legitimate fears about globalization should be met with a collective, progressive European response. 
The EU has been a major force behind globalization, and only the EU has the power to help manage the consequences. 
European leaders must explain to their voters why nationalism cannot. 

Can the EU Survive Populism? 
BRUSSELS – Another year, another threat to the European Union’s survival. 
The good news is that the greatest disruption of 2016, Britain’s vote to exit the EU, appears manageable. 
The bad news is that both France and Italy face the prospect of a populist political takeover this year. 
Either outcome could well spell the end of the EU. 
The EU has lately become a prime target for populists. 
The phenomenon first took hold in Greece, when the left-wing Syriza party came to power in January 2015. 
But Syriza was not trying to pull Greece out of the EU; rather, it wanted a better deal with the country’s creditors, who had imposed devastating austerity measures on Greek citizens. 
Syriza’s approach largely reflected the will of the people. 
In a June 2015 referendum, voters overwhelmingly rejected a deal proposed by Greece’s creditors that would have meant even more austerity. 
Yet the government’s acceptance of a largely unchanged deal just a few days later received broad support. 
Greek voters understood that better terms were not worth losing eurozone membership. 
To be sure, not everyone considered EU membership to be worth the sacrifice. 
But there was an air of practicality in popular criticism of the EU, which largely focused on what the EU did, especially in the economic sphere. 
That is why such criticism has been loudest in the countries that were hit the hardest by the euro crisis, or that faced austerity, or, more recently, that felt left behind by trade agreements. 
That is no longer the case. 
Right-wing populism has gained traction in strong economies (Austria) and in countries where the benefits of EU membership are palpable (Hungary and Poland). 
In France, there was never any EU-imposed austerity; even European Commission President Jean-Claude Juncker admitted that the EU’s budget rules cannot actually be imposed on France, “because it is France.” 
Now, populists are focused not on what the EU does, but what it represents. 
Instead of asking whether the EU is making people richer or poorer, populists are focused on a more fundamental and powerful question: “Who are we?” 
At a time of large-scale immigration, this shift is not surprising. 
Societies that have long defined themselves according to shared background and culture now must struggle with the implications of multiculturalism. 
That is why most observers of populist parties, especially of right-wing parties, have focused on attitudes toward foreigners and minorities. 
With the shift toward identity politics – a terrain that is not particularly amenable to compromise – has come a shift in attitudes toward democratic institutions. 
Populist leaders operate on the assumption that the will of the “people” – as defined by the populist – should not be institutionally constrained. 
This controverts the fundamental premise of liberal democracy: that the power of the majority must be limited, not least to protect minorities, electoral and otherwise. 
Limits on the power of the majority of the moment are typically achieved through what Americans call “checks and balances,” which include, for example, an independent judiciary and super-majority requirements to alter fundamental elements of the political system. 
And such limits usually work, at least for the most part. 
In the United Kingdom, for example, three High Court judges ruled that only Parliament – not the government – can trigger Article 50 of the Treaty of Lisbon, the formal process for leaving the EU. 
But populist politicians chafe under such constraints. 
Hungarian Prime Minister Viktor Orbán has not only openly stated his preference for an “illiberal” democracy; he has worked to dismantle checks on his government’s power. 
The same goes for Poland’s populist government, whose de facto leader, Jarosław Kaczyński, doesn’t even hold a formal position in the administration. 
Given their contempt for independent institutions, it is not hard to see why populists oppose the EU, which is, in a sense, the quintessential liberal democracy: governed by impersonal rules, rather than by the majority of the moment, with most decisions requiring either a super-majority or unanimity. 
For populists, the EU represents significant added constraints that are even harder to push past than domestic checks. 
That makes it a problem. 
In another sense, however, the EU suffers from insufficient democracy: as populist leaders routinely point out, its leaders in Brussels are unelected. 
(Populists use similar arguments to deny the legitimacy of, say, national courts.) 
The reality, of course, is that democratically elected governments and parliaments install EU leaders and bureaucrats (and independent judges) precisely to place limits on the majority of the moment and future governments. 
But populists reframe their followers’ understanding of this system, by declaring that such officials are part of the “elite,” selected by their fellow elites to frustrate the will of the people. 
There is little that mainstream politicians, much less EU officials, can do to counter this narrative. 
Some national politicians succumb to popular pressure, adopting the rhetoric – and even the program – of their populist adversaries. 
But the EU can do no such thing, without effectively hastening its own demise. 
When the problem was what the EU did, there was a possible solution: the EU could change tack on economic issues. 
And, indeed, the Commission has de facto abandoned austerity. 
Likewise, the EU’s new trade deal with Canada, signed in October, was concluded only after working out elaborate compromises. 
But the EU cannot change what it represents. 
It cannot accept, much less advance, the notion that checks and balances are obstacles to progress, or that foreigners threaten the European way of life. 
It cannot offer the kinds of radical, impossible, or illiberal solutions that populists use to win support. 
The EU must remain a bulwark of liberal democracy, with all of its unsexy yet necessary rules and procedures. 
In the current environment, this lumbering embodiment of a multi-level democracy and open economy cannot compete with populists’ lofty promises. 
When populists fail to deliver, however, it is back to the EU that the public will run. 
One only hopes that there will still be an EU waiting for them. 

The EU’s Seven-Year Budget Itch 
PARIS – It’s theater season in the European Union. 
The play, called budget negotiations, is performed every seven years. 
It pits the EU’s spenders against its savers, donors against receivers, and reformers against conservatives. 
After the actors have exhausted themselves with bluffs, bullying, blackmail, and betrayal, everybody agrees on minimal changes. 
Each government claims victory and EU public spending is set in stone until the next performance. 
Drama aside, however, watching the negotiation of the multiannual financial framework, as it is called, is a deeply depressing experience. 
All countries view it from the perspective of net balances – how much they receive, less how much they pay – without regard for the intrinsic value of spending. 
And, because wasting money at home is regarded as better than usefully spending it elsewhere, the composition of expenditures bears no relation to the EU’s stated priorities. 
In 2003, the Sapir report on Europe’s economic system called the EU budget a historical relic. 
Things haven’t improved much since then. 
Theater season opened on February 23, when EU leaders held their first talks on the 2021-2027 framework. 
Optimists hope that it will end before the European Parliament election in June 2019. 
Realists expect it to last until the actors run out of time – that is, the end of 2020. 
Seasoned European observers play down the significance of the show. 
They note that it is not primarily money, but regulatory policies – governing competition, subsidies, consumer protection, financial safety, or trade – that define the EU. 
Its budget represents about 2% of total public spending in the EU, and it has actually decreased over time, from 1.25% of GDP in the 1990s to about 1% in the current period. 
The US federal budget, by contrast, amounts to 20% of GDP. 
So why bother with a budget that remains small and misused? 
The EU has bigger problems to solve, critics say. 
But this time, there are four reasons why the discussions matter, and why complacency would be misplaced. 
The first is Brexit. 
Because the United Kingdom was a net contributor, it will leave a €15 billion ($18.5 billion) funding gap and force the EU to decide whether to substitute missing revenues or to cut spending. 
Adding to the drama, the misers’ bloc to which Britain belonged has fractured, with Germany indicating a willingness to be generous, while the Netherlands and Sweden are adamant they will not contribute a penny more. 
Second, there is a growing gulf between money and politics. 
Poland’s net receipts from the EU amount to €10 billion annually, making it the leading beneficiary of the EU budget. 
But the Polish government’s priorities, and even values, are increasingly at odds with those of the EU. 
It opposes taking in asylum-seekers, it faces a European Commission-initiated procedure for threatening the independence of the judiciary, and it has shocked Europe with a law criminalizing allegations concerning Poles’ complicity in the Holocaust. 
These actions have led German Chancellor Angela Merkel to suggest that conditionality be imposed for access to EU funds. 
This potentially explosive discussion can be avoided only if the EU is willing to shut up and pay, as some in Poland (and also in Hungary) demand. 
In that case, however, the EU would risk a different explosion. 
After all, for how long will citizens in the rest of Europe be willing to open their wallets only to be slapped in the face? 
The third reason this theater season is so important is that Europe’s strategic environment calls for new priorities. 
From Ukraine to the Middle East, Libya, and the Sahel, the EU’s immediate neighborhood is either unstable or in turmoil. 
Meanwhile, the United States no longer provides the reliable shield to which Europeans had grown accustomed. 
The EU grew up in a world where it could safely concentrate on its own prosperity. 
That world is gone. 
What we are facing is a redefinition of EU public goods, and this must entail deep budgetary consequences. 
The European Commission has bravely put some numbers on the table. 
It proposes to spend about €3-4 billion per year more on border security and a still-modest €5 billion per year on defense, as well as increases for research, innovation, and the Erasmus program. 
It also envisages annual spending cuts for regional aid and agriculture that could reach €30 billion. 
Numbers, at this stage, merely flag issues. 
But the Commission’s boldness is justified. 
Regional policy and agriculture comprise nearly three-fourths of the EU budget, and both are questionable. 
Regional policy fueled eurozone booms in the pre-crisis years, but provided little help to struggling countries afterwards. 
And it is not granular enough to address the consequences of trade opening for local communities. 
The Common Agricultural Policy is increasingly ill-suited to guide the transformation of a much more diverse EU farm sector. 
To recalibrate them and thereby finance new priorities would be fully justified. 
The last reason why budget issues matter this time around is that French President Emmanuel Macron has opened a new discussion about establishing a specific eurozone budget. 
The prime justification for creating one is not that certain public goods should be reserved to the EU’s eurozone members, but that a common fiscal instrument would cushion country-specific shocks and complement the European Central Bank’s monetary policy when facing common shocks. 
Whereas the EU budget performs no significant macroeconomic role in cross-country stabilization or in aggregate terms, as it does not record surpluses or deficits, the opposite would be expected from a eurozone budget. 
There is no agreement yet on the contours of such a budget, especially as Germany is wary of creating a channel for cross-country transfers and joint borrowing. 
But this does not mean that the discussion has no future. 
If the EU27 prove unable to agree on sensible reforms of their budget, the eurozone’s 19 members (which include neither Poland nor Hungary) could gradually move toward creating their own. 
The EU budget would eventually morph into it, or become a small relic. 
Understandably, citizens do not care much about the EU budget, especially if they do not directly benefit from it. 
But they do care about the new challenges Europe must confront, its ability to cope with them, and its willingness to devote resources to financing its priorities. 
The outcome of the budget discussion will tell Europeans what the EU is really up to. 
That is why this year’s theater season is not to be missed. 

The European Union’s Dublin Conundrum 
BRUSSELS – Tensions over immigration continue to dominate European politics. 
In Italy, Interior Minister Matteo Salvini, a populist firebrand, is monopolizing the public’s attention with almost daily outbursts against immigrants. 
Likewise, Salvini’s German counterpart, Horst Seehofer, created a crisis in the governing coalition in order to secure new measures against asylum seekers trying to enter Germany from Austria. 
With their countries having been left to fight illegal immigration on their own, Salvini and Seehofer claim, they must focus on national, not European, solutions. 
They are wrong. 
The truth is that the European Union has been instrumental in reducing the flows of irregular arrivals, which have declined considerably since the massive influx of Syrian refugees, via Greece and Hungary, in 2015. 
Thanks to the agreement that the EU reached with Turkey in March 2016, very few people are now crossing into Greece. 
Likewise, the number of arrivals in Italy is a mere fraction of the total just last year. 
Overall, illegal crossings into the EU have been reduced to about 100,000 annually, compared to the estimated more than one million who arrived in 2015. 
Given the EU’s population of over 500 million, that number is eminently manageable. 
Nonetheless, politicians continue to exploit the migration issue, with some highly visible arrivals – in particular, the large number of migrants who have been rescued off the coast of Libya – keeping the issue in the news. 
The real issue that needs to be resolved, however, is which country should be responsible for those who have already entered EU territory. 
The EU’s failure to answer this question in a way that satisfies all sides is now threatening the survival of the Schengen Area of border-free travel. 
On paper, the EU has clear rules on the matter: under the so-called Dublin Regulation, the first EU country that asylum seekers enter is responsible for examining their applications. 
But countries with external borders, such as Greece and Italy, naturally complain that this puts an unfair burden on them. 
Asylum seekers themselves also resist this rule. 
Given unfavorable labor-market conditions in southern border countries, many make a beeline for northern Europe to apply for asylum. 
That is why Germany, which has no external border, receives more asylum applications than Italy. 
Many such cases have already been registered on the EU asylum database EURODAC. 
According to the Dublin Regulation, Germany has the right to ask other member states to “take charge” (the legal term) of these cases. 
But there are many exceptions to the first-country-of-arrival rule. 
For example, if an asylum seeker already has family in a different country (in this case, Germany), that country may be responsible for processing the application. 
Or if an asylum seeker manages to leave the country of arrival for three months, the initial application can be withdrawn and a new one submitted in a different EU member state. 
These exceptions give asylum seekers ample room to contest Dublin transfers in court. 
Moreover, national authorities have a strong incentive to object to incoming transfer requests on formal or substantive grounds, while trying to send abroad as many as possible. 
About 160,000 “take charge” requests were lodged in 2017, though only about 20,000 were actually implemented. 
These factors, together with discrepancies among EU member states’ legal systems and administrative procedures, have largely nullified the Dublin Regulation. 
It was this reality that lay at the root of recent tensions within Germany’s coalition government. 
Of more than 60,000 take-charge requests lodged by German authorities in 2017 under the Dublin Regulation, fewer than 15% were actually implemented, resulting in just 7,100 transfers to other member states. 
Yet in 2016, Germany implemented close to 30% of the 27,000 incoming requests it received, meaning that it took charge of about 8,700 people. 
Germany has thus become a net recipient of Dublin transfers, despite lacking an external border. 
Given this, Seehofer wants to prevent asylum seekers who have been registered elsewhere on EURODAC from ever entering Germany. 
But he is far from alone in his frustration: the upshot of the gulf between legal principles and reality is that no member state is satisfied with the current system. 
While border countries continue to insist that the Dublin Regulation is unfair to them, northern countries complain that it is not being implemented properly. 
An asylum system in which more than a dozen national bureaucracies try to pass applicants around like hot potatoes cannot work. 
The European Asylum Support Office (EASO) should be made responsible for interpreting the rules for assigning refugees – deciding, for example, which country is responsible when member states disagree in individual cases. 
Providing financial incentives for accepting refugees – say, a lump sum for each one – would also help. 
These two measures will not satisfy the populists. 
Opposition to refugees and migrants – and even demonization of them and their supporters – is their political bread and butter. 
But strengthening EASO and boosting financial support should go some way toward alleviating today’s tensions, at least until a radical reform of Europe’s asylum system can be contemplated. 

Europeanizing Europe 
BERLIN – The eurozone is at the center of the global financial crisis, because only there, in the realm of the second most important currency after the dollar, does the crisis hit a weak “structure” rather than a state with real power. 
It is a structure that is squandering the trust of citizens and markets in its ability to resolve conflicts – while pushing the international financial system to the brink of disaster. 
In other words, the financial crisis now reflects a political crisis of the eurozone – one that calls into question the very existence of the European project as a whole. 
If Europe’s monetary union fails, not much of the common market, or of European institutions and treaties, will be left. 
We would have to write off six decades of successful European integration, with unknown consequences. 
This failure would coincide with the emergence of a new world order, as two centuries of Western predominance come to an end. 
Power and wealth are shifting towards East Asian and other emerging countries, while America will be preoccupied with its own problems and turning from the Atlantic towards the Pacific. 
If Europeans don’t address their interests now, no one will do it for them. 
If Europe today does not become the agent of its own destiny, it will become the object of new world powers. 
The cause of the European crisis is not three decades of neo-liberalism. 
Nor is it the result of the collapse of a speculation-fueled asset bubble, the violation of the Maastricht criteria, ballooning debt, or greedy banks. 
As important as all of these factors are, Europe’s problem is not what happened, but what did not happen: the creation of a common European government. 
At the beginning of the 1990’s, when the majority of the European Union’s member states decided to form a monetary union with a common currency and a central bank, the idea of a central government lacked support. 
As a result, that phase of the monetary union’s construction was postponed, leaving an impressive edifice that lacked a strong foundation to ensure stability in times of crisis. 
Monetary sovereignty was made a common cause; but the power needed to exercise it remained in national capitals. 
It was believed at the time that formalized rules – imposing mandatory limits on deficits, debt, and inflation – would be enough. 
But this foundation of rules turned out to be an illusion: principles always need the support of power; otherwise they cannot stand the test of reality. 
The eurozone, a confederation of sovereign states with a common currency and common principles and mechanisms, is now failing that test. 
Unable to respond decisively to a crisis, the eurozone is losing the confidence that is any currency’s most important asset. 
Unless political power in Europe is Europeanized, with the current confederation evolving into a federation, the eurozone – and the EU as a whole – will disintegrate. 
The political, economic, and financial costs of renationalization would be enormous; an EU collapse is feared around the world for good reason. 
By contrast, if the currency union’s political deficit is addressed now, first by establishing a fiscal union (a common budget and common liabilities), a real political federation will be possible. 
And let us be clear: anything less than a United States of Europe will not be powerful enough to prevent the looming disaster. 
Like it or not, the eurozone will have to act as the EU’s avant-garde, because the EU as a whole, with its 27 member states, will be neither willing nor able to accelerate political unification. 
Unfortunately, unanimous support for the necessary EU treaty changes simply could not be secured. 
So, what should be done? 
Europeans made decisive progress on integration outside the scope of the EU treaties (but very much in the European spirit) when they agreed to open their borders with the so-called Schengen Agreement (today a part of the EU treaties). 
Drawing on that successful experience, the eurozone should avoid the EU’s original sin of creating a supra-national structure that lacked democratic legitimization. 
The eurozone needs a government, which, as things stand at the moment, can consist only of the respective heads of state and government – a development that has already started. 
And, because there can be no fiscal union without a common budget policy, nothing can be decided without the national parliaments. 
This means that a “European Chamber,” comprising national parliaments’ leaders, is indispensable. 
Initially, such a chamber could be an advisory body, with the national parliaments maintaining their competencies; later, on the basis of an intergovernmental treaty, it must become a real parliamentary control and decision-making body, made up of national parliaments’ delegated members. 
Of course, because a treaty of this kind would mean extensive transfer of sovereignty to European intergovernmental institutions, it would need direct popular legitimization through referendums in all member states, including (and especially) Germany. 
None of this addresses important questions, such as common policies to ensure economic stability and promote growth. 
But, if we have learned anything from the current crisis, it is that such issues cannot even be framed unless and until the eurozone has a reliable institutional framework, with a sturdy foundation consisting of a real government, effective parliamentary control, and genuine democratic legitimization. 

Mixed Signals from the Eurozone 
BRUSSELS – What does the eurozone’s future hold? 
It depends where you look. 
Some economic indicators suggest that things are looking up for the common currency’s survival; for example, employment has returned to its pre-crisis peak, and per capita GDP growth exceeded that of the United States last year. 
At the same time, political risks seem to be increasing, despite the improvements in Europe’s economy. 
The evidence of an increasing risk of a eurozone breakup comes from three different indicators. 
But closer examination of those indicators suggests that, while the longer-term risks remain substantial, the short-term risks are rather low. 
One widely used indicator is based on Sentix surveys of market participants, which show a strong increase in the proportion who believe that the eurozone will break up soon (over the next 12 months). 
And this time it is not Greece that is driving the result, but France and Italy. 
Of course, Greece is in difficulty again. 
But, according to the Sentix indicator, the perceived likelihood of “Grexit” remains, despite a recent surge, well below its previous peaks. 
By contrast, the perceived likelihood of “Frexit” and “Italexit” are at 8% and 14%, both much higher than even at the peak of the eurozone crisis earlier in the decade. 
The balances among national central banks within the eurozone constitute another widely used indicator of the probability of a breakup. 
These so-called TARGET2 balances are often taken as a sign of capital flight: investors in countries at risk of abandoning the euro might be tempted to transfer their funds to Germany. 
That way, these investors would benefit if their country left the currency union, because balances with a German bank presumably would remain in euro, or in rock-solid “neue Deutsche Mark” should the eurozone break up. 
But this line of reasoning does not seem to explain recent developments, because the TARGET2 balances are not correlated with the euro breakup probabilities as measured by the Sentix surveys. 
For example, the TARGET2 balance of the Bank of Greece has actually improved slightly in recent months, and that of the Bank of France has remained close to zero (with a small recovery just as the probability of a victory by the anti-European presidential candidate Marine Le Pen has increased). 
True, the balances of Spain and Italy are now again nearing €400 billion ($423 billion) in net liabilities, a level last reached at the peak of the euro crisis, before ECB President Mario Draghi promised in July 2012 that the European Central Bank would do “whatever it takes” to save the euro. 
But the increase in the negative balance for Spain is difficult to reconcile with the country’s robust economic data and the absence of any significant anti-euro political force. 
The only country for which the Sentix indicator is correlated with TARGET2 balances is Italy. 
The ECB’s explanation of the increase in TARGET2 imbalances – that it is mainly an indirect consequence of the ECB’s own vast bond-purchase program – thus seems much more reasonable than attributing it to capital flight. 
And, in fact, these imbalances began growing again with the onset of the bond buying, long before the recent bout of political instability. 
The third indicator of renewed eurozone tensions is probably the most reliable, because it is based on where people put their money. 
This is the so-called “spread”: the difference between the yield of, say, French, Italian, or Spanish bonds relative to those issued by Germany. 
And the spread has increased sharply in recent months. 
But this indicator is also not consistent with the focus on France’s presidential election this spring, or on Italy’s general election (which must be held by early next year) as somehow determining the fate of the euro. 
After all, the widely quoted spread refers to the difference in yields on ten-year bonds. 
A spread of 180 basis points for Italy, for example, means that the Italian government is paying 1.8% more than the German government, but only for ten-year bonds. 
If one were to take the forthcoming elections as the proper time horizon, one should look at 1-2-year maturities. 
But for these shorter-term investment horizons, the spreads are much lower: close to zero for France and a few dozen basis points for Italy and Spain. 
Thus, there seems to be little reason to fear for the euro’s survival in the near term. 
Small short-term spreads belie the focus on the forthcoming elections in France (and those in Italy), which supposedly imply a concrete short-run danger of a breakup. 
Likewise, while the accumulated TARGET2 imbalances would indeed create a problem in case of a euro breakup, they do not constitute an independent indicator of capital flight. 
But all is not well, either. 
Persistent longer-term yield differentials suggest that market participants have some doubts about the euro’s long-term survival. 
Speculation about election outcomes in the immediate future is more fascinating than discussions about eurozone reforms. 
After the votes are counted, however, policymakers will no longer have any excuse not to address the fundamental longer-term issues of how to run a common currency with such diverse members. 

Eurozone Chutzpah and the IMF 
LONDON – Eurozone policymakers and politicians are in no doubt: they have done their part to support the currency union’s struggling members by increasing the size of its rescue fund, the European Stability Mechanism (ESM). 
Now it is time for the rest of the world – that is, the International Monetary Fund – to step up and put additional funds on the table, and European finance ministers are making that case at the IMF/World Bank meetings in Washington 
European officials, in other words, take for granted that the IMF should support the eurozone, as if the rest of the world had some kind of duty to do so. 
In reality, even if eurozone governments could agree on a much larger increase in the ESM’s size, there are compelling reasons why the IMF should refrain from offering any further support. & & & 
Europe’s leaders cannot decide if the eurozone is a federation akin to the United States or a group of independent states. 
They frequently compare the eurozone favorably to other developed economies. 
Eurozone members as a whole, they argue, have a lower budget deficit than the US and the United Kingdom, and a similar level of public debt. 
Unlike the US and the UK, the eurozone in aggregate is running a current-account surplus (it is, as policymakers like to say, living “within its means”). 
And they express considerable pride in the euro’s growing role as an international reserve currency, as well as resolve to do whatever it takes to defend the currency union’s integrity. 
And yet the same policymakers believe that the rest of the world should bail out the eurozone. 
When it suits them, the euro is no longer the currency of a highly successful and integrated economy, but a currency shared by a collection of sovereign creditor and debtor countries, and the IMF thus has a responsibility to support the debtor members. 
That is an odd position to take, to say the least. 
Imagine that the US federal government decided that it no longer wanted to support Mississippi and demanded support for that poor southern state from the IMF. 
The rest of the world – led by the eurozone governments – would rightly turn their backs. 
Similarly, the IMF is not expected to help India – whose per capita GDP is less than a tenth of eurozone levels – to finance the poverty-stricken states of Bihar and Uttar Pradesh. 
The eurozone wants it both ways. 
Its debtors and creditors are all members of the same, wealthy currency union, whose current-account surplus with the rest of the world means that it is a net exporter of capital (that is, domestic savings exceed domestic investment). 
Moreover, the eurozone’s strategy for dealing with the crisis implicitly relies on a rising surplus: member states with current-account deficits are under pressure to close them, but creditor countries face no pressure to reduce their surpluses. 
So, a region that is essentially pursuing a mercantilist strategy now wants the rest of the world to finance it. 
Many European leaders believe that the rest of the world owes the eurozone a bailout because the currency union is just an innocent bystander. 
Despite being well run and fundamentally more stable than other economies, the markets (or “speculators”) are making it impossible for the eurozone’s struggling members to achieve the necessary adjustments. 
So the eurozone deserves protection from international forces intent on destroying it. 
This rationale highlights the core of the problem: the eurozone is institutionally incomplete, and eurozone policymakers continue to blame investors for pointing this out. 
In every currency union, there are creditor and debtor regions. 
Just as it is the responsibility of creditor regions in the world’s other currency unions to support the debtor regions (which they do through a variety of means), it is up to the eurozone’s creditor regions to underpin its debtor regions’ solvency. 
This requires debt mutualization, fiscal transfers between member states, and, of course, federal institutions to give all of this legitimacy. 
A second reason given by eurozone policymakers to justify their demand for more IMF support is basically a form of blackmail: the global consequences of a further eurozone crisis would be so grave that the IMF has no choice but to do whatever it can to prevent it. 
Much poorer countries, and those routinely criticized by eurozone policymakers for their indebtedness (such as the US and the UK), should provide support to a wealthy creditor in order to prevent it from inflicting incalculable damage on the global economy. 
This is akin to making the rest of the world an offer that it can’t refuse. 
The rest of the world has no moral responsibility to support the eurozone, and it should resist European leaders’ efforts to extort that support, which would be tantamount to covert support for its creditor countries. 
That would be an unjustified use of IMF resources, and would further confirm the suspicion among the world's emerging economies that the IMF is in thrall to Western interests. 
The IMF should stick to supporting countries with temporary external-financing problems; a wealthy creditor region that refuses to address its institutional contradictions is not a deserving case. 
If eurozone governments are unwilling to build the federal institutions needed to stabilize the eurozone, they should either assemble a big enough rescue fund themselves, or accept that the single currency is unworkable in its current form. 

The Government the Eurozone Deserves 
ATHENS – Will Greece’s troubles destroy Europe’s currency union, or reveal how it should be saved? 
The recent controversial bailout deal – likened by some to the 1919 Versailles Treaty, with Greece in the role of Germany – offers the latest twist in the eurozone’s existential saga. 
The deal has caused a split in Syriza, Greece’s leftist governing party; opened a rift between Germany’s Chancellor Angela Merkel and her uncompromisingly tough finance minister, Wolfgang Schäuble; and spurred an effort by France to reassert itself within the Franco-German axis that has always been the “motor” of European integration. 
Meanwhile, many of North America’s Keynesian economists, such as Nobel laureates Paul Krugman and Joseph Stiglitz, sympathize with Greece’s anti-austerity stance. 
Other economists, mainly in Europe, argue that Germany must assume a political role befitting its economic preeminence and must accept sovereignty-sharing (and burden-sharing) arrangements to ensure the monetary union’s cohesion and sustainability. 
Humiliating a small country and rendering it a virtual protectorate does not serve Europe’s long-term interest. 
Yet this is what is at stake. 
Greece signed the deal after facing an explicit invitation from Schäuble to leave the eurozone – supposedly temporarily – and adopt a new currency. 
Germany’s stance marked the first open challenge by a leading European power to the notion that the monetary union is irrevocable. 
As the French, instinctively sympathetic to the anti-austerity argument and conscious of their increasingly junior role in the Franco-German partnership, were quick to notice, the German stance also signaled a potential shift from a “European Germany” to a “German Europe.” 
It hardly helped that the negotiations between Greece and its creditors produced a growing mistrust in the competence and intentions of Syriza. 
Devious and erratic negotiating tactics, coupled with secret schemes to prepare – as part of a “Plan B” – for an exit from the euro, undermined the government’s trustworthiness, leading even Paul Krugman to admit: “I may have overestimated the competence of the Greek government.” 
Yet, however complicated the blame game, some lessons can be drawn to guide future policy. 
When fiscal misbehavior by Greece, a country representing no more than 2% of the eurozone’s GDP, poses serious dangers for the survival of the currency union, something is clearly amiss. 
But does the remedy lie in tougher measures – such as heavier penalties or even eviction – to enforce the eurozone’s rules, or do the rules need to be adjusted to accommodate members’ varying circumstances? 
So far, enforcement has failed, owing to flaws in the eurozone’s foundations. 
First, fiscal and external-account balances are to be kept in check in order to ensure financial stability and sustain the common currency. 
Second, removing imbalances is the responsibility of national governments within the context of a rescue regime arranged by supranational authorities – the European Commission and the European Central Bank – in cooperation with the European Council, which in turn represents national governments. 
The Greek saga shows that this system cannot control destabilizing imbalances quickly enough to ward off major crises. 
Imbalances are not solely the result of irresponsible policies. 
They may reflect deeper weaknesses in economic structures, such as a lack of competitiveness or institutional shortcomings. 
If Germany insists on national responsibility, it may find that enforcing the rules will have to be ever harsher, eventually leading to such social and political upheaval that the entire euro-edifice collapses. 
The alternative is to embrace a “transfer union” that ensures a better balance between solidarity and responsibility. 
The United States embodies such a solution, ensuring an integrated pattern of development throughout the country. 
The eurozone must strengthen its fiscal structures enough to respond to overall economic conditions while taking into account the differing circumstances of each member country. 
These stronger structures should permit limited resource transfers among eurozone countries, either to carry out countercyclical policy or to supplement investment spending, particularly in economic and social infrastructure. 
But this must inevitably involve the creation of a separate eurozone budget, transferring competences from national to supranational authorities. 
Common taxation and Eurobonds should form part of the new fiscal structure, and the European Stability Mechanism should include a debt redemption fund large enough to resolve sovereign-debt crises. 
At the same time, the banking union, established by the EU in the wake of the 2007-2008 global financial crisis, should be strengthened by enlarging the capital base of the Single Resolution Fund and establishing a common deposit guarantee scheme. 
All of this presupposes that the powers of the EU’s supranational institutions, the European Parliament and the European Commission, will be significantly augmented. 
The Commission should become a proper government, with a popularly elected president. 
A European finance ministry should be created, and its head should preside over the Eurogroup (which convenes the finance ministers of eurozone member states). 
A special Assembly of the European Parliament, comprising the eurozone members, should have powers – on the model of a national parliament – to legislate and control the executive. 
These proposals will provoke plenty of criticism – and not just from Euroskeptics. 
But a move toward fiscal and political integration is the price that Europe – beginning with the eurozone – must pay to maintain its unity and global relevance. 
The alternative is inconsistent (if not arbitrary) enforcement of the current rules, inducing divisiveness among member states and eventual fragmentation. 

A Dramatic Comeback for Europe 
LONDON – The Dutch are famous for building dykes that hold back the tides and storms sweeping across the Atlantic. 
Have the Dutch now done it again, holding back the wave of populist politics that seemed to be threatening Europe after last year’s Brexit referendum and Donald Trump’s victory in the United States? 
The unexpectedly weak performance of Geert Wilders’ Freedom Party (PVV) in the Dutch election on March 15 seems to suggest this. 
Despite predictions running as high as 25% of the popular vote for Wilders, the PVV gained only 13%. 
If voters in France’s upcoming presidential election prove closer to the Dutch than to Americans and Britons in their susceptibility to xenophobia and protectionism, their decision will have global implications for politics, economics, and the ideology of global capitalism. 
A swing back to the center in continental Europe would strongly suggest that the unexpected victories for populist and anti-globalization movements in the US and Britain were not primarily a response to unemployment and disappointing economic performance since the financial crisis, mass migration, or the threat of Islamist terrorism. 
This conclusion follows from the fact that France has suffered from much higher unemployment and a longer post-crisis recession than either the US or Britain, as well as experiencing more problems with terrorism and Islamic militancy. 
If German voters in the autumn follow the French and Dutch in moving back toward the political center, immigration will also be discredited as the root cause of populism. 
After all, Germany has experienced a much larger influx of foreigners than Britain or the US. 
Instead, populism will look more like an Anglo-Saxon phenomenon, motivated less by immigration and economic policy than by conservative cultural attitudes among Trump and Brexit voters and the unusual demographic alliances pitting old against young, rural against urban, and university graduates against less educated voters in the US and Britain. 
The economic implications will also be far-reaching if the center holds in Europe. 
The European Union is a bigger trading partner than the US for most emerging economies. 
And the euro is the only real alternative to the dollar as an international currency. 
So the EU’s continuing commitment to a philosophy of open trade, globalization, and carbon reduction could be sufficient to prevent a paradigm shift toward protectionism and climate-change denial that seemed almost inevitable with Trump’s election. 
Such a change in global leadership would require a dramatic improvement in Europe’s economic performance. 
Fortunately, that outcome can be expected if voters reject populist politics in France and Germany. 
The EU has suffered a prolonged economic slump since the 2008 financial crisis, largely because the German government vetoed the kind of monetary and fiscal stimulus that helped to pull the US out of recession in 2010. 
Germany’s veto on US-style quantitative easing was also the main reason for the near-collapse of the single currency in 2012. 
But a dramatic change to European policy and economic conditions occurred in March 2015, when the European Central Bank belatedly launched a bond-buying program similar to America’s, but on a far larger scale. 
By purchasing almost three times the total net issuance of eurozone bonds, the ECB effectively circumvented eurozone rules and began to monetize Europe’s government deficits, as well as creating a mutual support system between strong economies such as Germany and weaker ones like Italy and Spain. 
The ECB’s actions quickly reversed the fragmentation of the European banking system and eliminated fears of a euro breakup. 
The immediate result was an upsurge in confidence among both businesses and consumers. 
By last summer, most of Europe was already enjoying a decent recovery, when renewed fears of disintegration, this time caused by politics, not finance, suddenly overwhelmed the improvement in economic conditions. 
Brexit and Trump created an expectation that Europe would be the next domino to fall to populism in the looming Dutch, French, and German elections. 
Of course, this possibility still cannot be dismissed, which is why international investors remain cautious about Europe. 
But if the populist victories that worry investors do not in fact happen, a surge of business and consumer confidence will send waves of investment flowing into the eurozone. 
The key event will be the final round of the French election on May 7. 
If this results in a victory for Emmanuel Macron, the centrist front-runner, France will embark on a path leading to at least a modicum of economic reforms. 
That, in turn, will create a much more cooperative relationship between France and Germany. 
Both main candidates for German Chancellor are eager to rebuild post-Brexit Europe by strengthening the Franco-German axis – and the start of a French reform process would reassure German voters that their government, by easing EU austerity, would not merely be pouring money into a bottomless pit. 
This brings us to the ideological implications if centrist forces win and economic recovery accelerates in Europe this year. 
In the immediate aftermath of the global financial crisis, the European “social market” model of capitalism seemed like a logical alternative to the Thatcher-Reagan market fundamentalism that had broken down after 30 years of global dominance. 
Indeed, President Barack Obama moved the US toward greater government activism in macroeconomic management, financial regulation, environmental policy, and health care. 
Paradoxically, however, Europe moved in the opposite direction. 
Under German pressure, the EU became the last bastion of monetarism, fiscal austerity, and the “disciplining” role of financial markets. 
The result was the near-fatal euro crisis of 2010-2012. 
If this year’s elections result in a centrist French president and a revival of Franco-German cooperation, the EU’s unexpected infatuation with market fundamentalism will probably end. 
Europe will enjoy a better, more sustainable, and socially inclusive economic recovery than the US under Trump. 
If this happens, the rest of the world may again start to see the EU as a source of inspiration and a model. 


Emerging Europe’s Deleveraging Dilemma 
LONDON – Serbia’s Tigar Corporation, a privatized automobile tire and tube maker, was a poster child for corporate makeovers in transition economies. 
Then eurozone deleveraging kicked in, and now the child in the poster is in serious trouble. 
When Tigar sold its tire division to France’s Michelin, it invested the entire proceeds in new businesses. 
Perhaps capital expenditures were overly ambitious, but they triggered rapid export growth, and more than 2,000 jobs were created in the small town of Pirot to manufacture boots for European fishermen and New York City firemen, as well as technical rubber products. 
Expansion was, for lack of other options, financed largely through short-term loans. 
Many banks in Serbia and other transition countries in Europe rely heavily on funding from their eurozone parent institutions. 
But, since the onset of the global financial crisis, eurozone-based banks’ subsidiaries in emerging Europe have been reducing their exposure to the region. 
In 2009-2010, the European Bank Coordination Initiative – known informally as the “Vienna Initiative” – helped to avert a systemic crisis in developing Europe by stopping foreign-owned parent banks from staging a catastrophic stampede to the exits. 
But, in the second half of 2011, the eurozone-based parent banks that dominate emerging Europe’s banking sector came under renewed pressure to deleverage. 
Many are now radically changing their business models to reduce risk. 
Over the last year, funding corresponding to 4% of the region’s GDP – and, in some countries, as much as 15% of GDP – has been withdrawn. 
Bank subsidiaries will increasingly have to finance local lending with local deposits and other local funding. 
Without disputing the need for some deleveraging, a new incarnation of the Vienna Initiative – Vienna 2.0 – seeks to make the process orderly. 
After all, excessive and chaotic deleveraging by lenders to emerging Europe – and the ensuing credit crunch – would destabilize this economically and institutionally fragile region. 
For Tigar, deleveraging has meant that banks that had pursued its business only a couple of years ago have suddenly cut lending – even though the company never missed a debt payment. 
Previous loans came due, while cash-flow needs grew. 
Despite its good operating margins, growing markets, and prime international clients, the company experienced a drop in liquidity, requiring serious balance-sheet restructuring. 
Tigar will make it; but many promising companies that lack its solid financial footing will not. 
Of course, after several years of unfettered credit expansion, some retrenchment was necessary and desirable, and Tigar probably overextended itself. 
But several factors – most of them unrelated to the region – are pressuring banks to pursue faster-than-optimal deleveraging. 
For starters, the Basel III package of global banking reforms and the European Union’s corresponding Capital Requirements Directive IV rule create disincentives for cross-border financing. 
To be sure, they will help to prevent banks from using instruments resembling collateralized debt obligations (which banks use to repackage individual loans for placement on secondary markets) to reduce their exposure. 
But the new regulation also seriously penalizes subsidiary financing in new EU member and accession countries. 
Indeed, in many countries, bank guarantees can be issued only on the basis of local subsidiary equity, without support from the parent’s balance sheet. 
Furthermore, collateral – especially real-estate assets – will continue to be downgraded. 
Poor 2012 corporate financial results will further undermine credit ratings. 
Fewer and fewer companies will meet basic risk criteria. 
While governments might offer attractive liquidity facilities, banks will be unable to on-lend the funds. 
And spillover effects from Greece will continue to affect Balkan and other emerging European banking markets. 
Indeed, several Western financial groups are considering partial or complete exits from the region – without any clear strategic replacement in sight. 
The potential systemic crisis threatens to accelerate deleveraging further, with serious consequences for emerging Europe. 
That is why the Vienna Initiative must become an effective “voice” for the host countries in the Europe-wide debate on debt resolution and banking union. 
Every effort must be made to prevent the creation of new barriers within Europe’s financial system. 
Some progress has been made toward safeguarding emerging Europe’s banking system. 
The European Investment Bank, the World Bank, and the European Bank for Reconstruction and Development have agreed on a new Joint Action Plan, including investment totaling €30 billion ($39 billion) over the next two years, as well as policy advice, to support economic recovery and sustained growth in the region. 
They must now deliver. 
The European Commission and multilateral lenders should help to facilitate ongoing structural change in the banking sector, including bank acquisitions and balance-sheet restructuring for viable export-driven companies. 
In exchange, private banks must live up to their collective responsibility to smooth the deleveraging process and limit the systemic impact of their actions. 
Under these conditions, deleveraging could put emerging Europe on a more sustainable growth path. 

Democratizing the Eurozone 
ATHENS – Like Macbeth, policymakers tend to commit new sins to cover up their old misdemeanors. 
And political systems prove their worth by how quickly they put an end to their officials’ serial, mutually reinforcing, policy mistakes. 
Judged by this standard, the eurozone, comprising 19 established democracies, lags behind the largest non-democratic economy in the world. 
Following the onset of the recession that followed the 2008 global financial crisis, China’s policymakers spent seven years replacing waning demand for their country’s net exports with a homegrown investment bubble, inflated by local governments’ aggressive land sales. 
And when the moment of reckoning came this summer, China’s leaders spent $200 billion of hard-earned foreign reserves to play King Canute trying to hold back the tide of a stock-market rout. 
Compared to the European Union, however, the Chinese government’s effort to correct its errors – by eventually allowing interest rates and stock values to slide – seems like a paragon of speed and efficiency. 
Indeed, the failed Greek “fiscal consolidation and reform program,” and the way the EU’s leaders have clung to it despite five years of evidence that the program cannot possibly succeed, is symptomatic of a broader European governance failure, one with deep historical roots. 
In the early 1990s, the traumatic breakdown of the European Exchange Rate Mechanism only strengthened the resolve of EU leaders to prop it up. 
The more the scheme was exposed as unsustainable, the more doggedly officials clung to it – and the more optimistic their narratives. 
The Greek “program” is just another incarnation of Europe’s rose-tinted policy inertia. 
The last five years of economic policymaking in the eurozone have been a remarkable comedy of errors. 
The list of policy mistakes is almost endless: interest-rate hikes by the European Central Bank in July 2008 and again in April 2011; imposing the harshest austerity on the economies facing the worst slump; authoritative treatises advocating beggar-thy-neighbor competitive internal devaluations; and a banking union that lacks an appropriate deposit-insurance scheme. 
How can European policymakers get away with it? 
After all, their political impunity stands in sharp contrast not only to the United States, where officials are at least accountable to Congress, but also to China, where one might be excused for thinking that officials are less accountable than their European counterparts. 
The answer lies in the fragmented and deliberately informal nature of Europe’s monetary union. 
Chinese officials may not be answerable to a democratically elected parliament or congress; but government officials do have a unitary body – the seven-member standing committee of the Politburo – to which they must account for their failures. 
The eurozone, on the other hand, is governed by the officially unofficial Eurogroup, which comprises the member states’ finance ministers plus representatives of the ECB and, when discussing “economic programs in which it is involved,” the International Monetary Fund. 
Only very recently, as a result of the Greek government’s intense negotiations with its creditors, did Europe’s citizens realize that the world’s largest economy, the eurozone, is run by a body that lacks written rules of procedure, debates crucial matters “confidentially” (and without minutes being taken), and is not obliged to answer to any elected body, not even the European Parliament. 
It would be a mistake to think of the standoff between the Greek government and the Eurogroup as a clash between Greece’s left and Europe’s conservative mainstream. 
Our “Athens Spring” was about something more profound: the right of a small European country to challenge a failed policy that was wrecking the prospects of a generation (or two), not only in Greece, but elsewhere in Europe as well. 
The Athens Spring was crushed for reasons that had nothing to do with the Greek government’s left-wing politics. 
Time after time, the EU rejected and denigrated common-sense policies. 
Exhibit A is the two sides’ positions on tax policy. 
As Greece’s finance minister, I proposed a rate reduction for sales tax, income tax, and corporation tax, in order to broaden the tax base, increase revenues, and give Greece’s broken economy a boost. 
No follower of Ronald Reagan would quarrel with my plan. 
The EU, on the other hand, demanded – and imposed – increases in all three tax rates. 
So, if Greece’s tussle with its European creditors was not a left-right standoff, what was it? 
The American economist Clarence Ayres once wrote, as if describing EU officials: “They pay reality the compliment of imputing it to ceremonial status, but they do so for the purpose of validating status, not that of achieving technological efficiency.” 
And they get away with it because the eurozone’s decision-makers are not obliged to answer to any sovereign body. 
It is incumbent upon those of us who wish to improve Europe’s efficiency, and lessen its gross injustices, to work toward re-politicizing the eurozone as a first step toward democratizing it. 
After all, doesn’t Europe deserve a government that is at least more accountable than that of communist China? 

Put Up or Shut Up 
NEW YORK – In public policy, peace talks, election campaigns, or corporate strategy, laying out intentions, promises, and commitments is never enough. 
It is merely a first step toward a desired end – and entirely meaningless unless the second, third, and all subsequent necessary steps are taken. 
Moreover, taking the first step starts the clock on others' trust and confidence that the next steps will in fact be taken, or else risks creating the false impression that the failure to achieve a particular goal reflects mistaken (or irrelevant) intentions, not inadequate execution. 
We can see examples of this virtually everywhere we look. 
Consider the European Central Bank's announcement in January that it would implement quantitative easing. 
At the time, many leaders seemed to think that the ECB's move would be enough: Announcement made, money printed, economies back on track. 
Unfortunately, that is not how monetary policy works: QE will not be enough, and no one should be naive about that. 
In order to get economies back on track, QE is a useful step, but only as part of a larger package of measures. 
In the absence of other economic reforms, QE on its own cannot effect the changes needed to kick-start growth. 
And if the reforms are not implemented and growth fails to materialize, politicians are likely to blame QE, not their own failure to take all the other steps that must follow it on the path of economic recovery. 
Now consider free speech. 
Following the massacre at the satirical magazine Charlie Hebdo in Paris last month, world leaders dashed to the scene, locked arms, and marched in support of freedom of expression as a bedrock principle of civilized societies. 
The natural next step for many of them should have been to return home and immediately implement that principle. 
Instead, they returned home. 
True, Egypt's military regime – whose foreign minister, Sameh Shoukry, raised eyebrows when he appeared near the head of the march in Paris – released the Al Jazeera journalist Peter Greste from prison, and has since freed two other journalists, Mohamed Fahmy and Baher Mohamed, on bail. 
But where is the regime's renunciation of the authority to have imprisoned them in the first place? 
In another arena, peace negotiations, the recent ceasefire agreement in Ukraine is but the latest attempt to end the war between the country's government and Russian-backed separatists that has been raging for much of the past year in the eastern Donbas region. 
Throughout the fighting, attempts to stop the killing have come and gone, and the war's innocent victims – not to mention much of the international community – have grown weary and cynical. 
The most effective peace agreements are part and parcel of a peace process. 
The first step – signing the agreement – represents the parties' commitment to take the necessary subsequent steps. 
Everyone walks away knowing exactly what they are supposed to do, what to expect others to do, and what the consequences will be if they do not. 
When agreements fail, it is usually not because of what they contain, but because of what is missing, or because of what the signatories do despite what they have agreed. 
A roadmap to peace is useful only if everyone follows it. 
Otherwise, the goal is lost. 
Election campaigns are the example par excellence of the phenomenon, and the world is now entering another “Season of the First Step." 
At least seven general elections will be held in European Union member countries this year (and France will hold regional elections in March). 
Greece has already voted (electing a government that so far seems unable to move beyond intentions and commitments), and the coming months will bring elections in Estonia, Finland, the United Kingdom, Denmark, Portugal, Poland, and Spain. 
Add to this the US presidential election next year – preceded by a campaign that has already started – and we can expect a lot of promises floating around. 
As voters in these countries are inundated with good intentions, ringing assurances, and solemn commitments, they will expect parties and candidates to follow through if they are elected. 
Certainly, parties and candidates attempt to persuade voters on the basis of their track records (and by impugning their opponents' track records). 
If they do not follow through on their intentions, promises, and commitments, access to information and instant communication is such that empty promises simply will no longer persuade most people. 
Companies campaign, too. 
They send their leaders before law-making bodies to express contrition for grave malfeasance and promise future good behavior. 
And yet the headlines are as filled as ever with stories of unethical, if not outright criminal, corporate behavior. 
Unfortunately, too many corporate leaders persist in viewing the world as “us" versus “them," rather than attempting to understand why, in the absence of vigorous action, no one trusts them. 
Beginnings are vital; but they are just that. 
There is no easy solution for the eurozone economy, for Greece, for Ukraine, or for any of the other major challenges we face today. 
But unless protagonists are sure that announcements, campaign promises, and peace agreements will give rise to clear, purposeful action, they should think twice before opening their mouths. 

The Eurozone Island of Stability 
BRUSSELS – Market volatility has surged lately, apparently vindicating those who have warned of lofty equity valuations. 
But, even as the US stock market suffered one of its worst weeks since the financial crisis, the eurozone’s public-debt market has remained relatively stable, with risk spreads – which have usually increased amid market volatility – scarcely changing, even for the peripheral eurozone countries. 
The eurozone owes its ostensible immunity from financial-market gyrations to major improvements in the peripheral economies’ fundamentals: growth has picked up, and unemployment, though still high, is declining rapidly. 
The question is whether these improvements are stable enough to ensure the eurozone’s continued resilience. 
Here, the key concern is that the current recovery is too dependent on low interest rates: if borrowing costs rise, the periphery’s debtor countries would suffer. 
But it is no longer accurate to view the economies of the periphery as weak debtors. 
Indeed, with the exception of Greece, they are all now running current-account surpluses, meaning that far from depending on capital inflows, they are repaying their foreign debt. 
And, yes, this includes Italy, which, despite its high public debt, is running a current-account surplus at the aggregate level. 
In the past, Italy’s external deficits and surpluses were of roughly similar size, meaning that the country is not a net debtor. 
Because its net international investment position is balanced, a generalized interest-rate hike would not necessarily be bad for the country. 
The government would face higher debt-service costs, but citizens would earn more on their savings. 
Spain and Portugal, by contrast, would probably suffer, owing to their still-considerable external debts. 
Nonetheless, if interest-rate hikes are aligned with accelerating global growth, even these countries might not be much worse off, because growth will help them to service their foreign debts. 
But the implications of today’s constellation of current-account balances extend beyond shorter-term interest-rate considerations. 
If the situation persists for a few more years, the eurozone might get to a point where it consists only of creditor countries, some with a large net foreign asset position (Germany and the Netherlands) and others (the peripheral countries) with a small positive external position. 
This would have important political consequences. 
For starters, the conflicts of interests within such a eurozone might be much less acute than those that emerged during the crisis a decade ago, when creditor countries were obliged to bail out the debtors, which in turn felt squeezed by forced austerity. 
More broadly, the relative power of the creditor countries – particularly Germany – will be diminished. 
The concerns expressed by some observers, such as George Soros, that the eurozone will remain a two-tier club, in which the creditors impose their conditions on the debtors, thus seem exaggerated. 
But that does not mean that this new dynamic is risk-free. 
If former debtors, facing diminished pressure from major creditors or risk premia, adopted less prudent fiscal policies, their public debt would continue to accumulate. 
Against that background, the next crisis might be very different from the last one. 
When the last eurozone crisis began, large capital flows into the periphery were generating inflationary pressures; resources were shifting away from exports; and government revenues appeared to be strong. 
Then the capital inflows abruptly reversed, which demanded a decline in domestic wages and prices, relative to the eurozone average, in order to shift resources back toward exports. 
In most countries, government revenues fell, as domestic activities, such as construction, contracted much faster than exports increased. 
As a result, the peripheral economies fell into a deep recession. 
Making matters worse, because an export-led recovery yields less revenue – value-added taxes are rebated on exports, but collected on imports – seemingly strong government finances quickly turned into large deficits. 
In Greece’s case, the problem was compounded by the fact that, during the boom years, the large fiscal deficits had been financed entirely by capital inflows. 
When these flows stopped, the bottom fell out of public finances. 
Today, eurozone countries are not subject to large capital inflows, so a crisis would not cause them to face external disequilibrium. 
They would not need a large downward adjustment in wages and prices, and government revenues would remain relatively stable. 
If risk premia increase, it would be a result of creditors’ doubts about a government’s ability to finance itself in the long run, owing to a downward revision of growth expectations or a domestic political stalemate in which taxpayers oppose bondholders. 
Domestic bondholders might be the first to recognize potential risks, spurring escalating capital flight. 
In these circumstances, a loan from the European Stability Mechanism – the eurozone’s bailout fund – would merely provide fuel for even higher outflows. 
Yet transforming the ESM into a “European Monetary Fund” is currently one of the main issues in the debate about eurozone governance reforms. 
The implicit role model is the International Monetary Fund, which has made its reputation by addressing the fallout from sudden capital-flow reversals. 
Again, that is not the type of crisis that today’s less inflow-dependent eurozone is likely to experience. 
Instead of trying to copy the IMF, Europe’s leaders should be focused on strengthening the resilience of the financial system, so that it can provide a safety valve for whatever pressures inevitably arise from the build-up of excessive public debt in some eurozone countries. 
If a crisis does occur, the ESM’s resources could perhaps be used to prevent contagion within the eurozone financial system, rather than to provide loans to countries with deep-seated domestic problems. 
After a decade of struggles, the eurozone is an island of relative stability in a turbulent sea. 
To ensure that it stays that way, its leaders must remember a fundamental truth: no predominantly domestic problem will ever be resolved by a loan or transfer of resources from abroad. 

Sustaining the Unsustainable Eurozone 
ATHENS – When the eurozone was established, its creators envisioned gradual progress toward an “optimal currency area,” characterized by fiscal integration, the free movement of labor, and political union. 
But this process has not occurred, and, as the interminable Greek crisis has shown, the eurozone remains rife with structural weaknesses and extremely vulnerable to internal shocks. 
This is clearly not sustainable. 
Despite efforts to promote fiscal-policy coordination, eurozone members’ budgets still fall under the purview of separate national authorities, and northern Europeans continue to oppose transfers from more to less prosperous countries beyond the very limited allowance of the European Union’s regional funds. 
Moreover, labor mobility is severely constrained by linguistic and cultural barriers, as well as administrative bottlenecks. 
And “ever-closer” political union has ceased to attract public support – if it ever did – and is thus not feasible today. 
A growing number of commentators – and no longer only in the Anglo-Saxon world – question the monetary union’s viability. 
Some encourage Greece to exit the eurozone, believing that a more restricted and homogeneous currency union would be stronger and easier to unite. 
Others consider a Greek exit to be just the start of the inevitable unraveling of a scheme that does not serve the purpose for which it was created. 
The eurozone has so far managed to prove the doomsayers wrong. 
By sheer force of political will, compromise after compromise has been reached, thereby sustaining a historic project that is not, in its current state, sustainable. 
The need to maintain this commitment to European unity, and overcome the economic difficulties that arise, is reinforced by new geopolitical challenges. 
Most notably, Russia’s perceived ambition of recapturing its Soviet-era influence is challenging the rules-based order that was established after World War II, and a surge in religious and political extremism is threatening democratic and liberal values. 
But the economic difficulties are bound to continue, fostering doubts about the currency union’s future – doubts that could become self-fulfilling by undermining the euro’s ability to function properly. 
Already, economic pressures have fueled anti-European sentiment in Spain, Italy, and even France; if allowed to continue, such sentiment could culminate in secession, with devastating consequences for the eurozone and Europe as a whole. 
The first step in such a process would probably be the eurozone’s division into sub-areas, comprising countries of relatively equal resilience. 
As it becomes increasingly difficult to pursue coherent fiscal and monetary policies, the risk of the eurozone’s complete dissolution would grow. 
Greece’s exit could shorten this timeline considerably. 
Though such a scenario was inconceivable five years ago, when the Greek crisis first erupted, the term “Grexit” entered the European lexicon soon after, when the crisis reached a new peak. 
But European leaders seemed to recognize the implications of allowing a country – even small, crisis-stricken Greece – to exit the eurozone. 
That is why, this year, a series of Eurogroup meetings were held with the avowed purpose of averting such an outcome. 
The problem is that Europeans have become so accustomed to muddling through that long-term solutions seem all but impossible. 
Indeed, in recent years, eurozone authorities have introduced several policies for fighting financial crises – including government-backed rescue funds, a partial banking union, tougher fiscal controls, and a role for the European Central Bank as lender of last resort. 
But most of these policies – with the possible exception of the banking union – are aimed at managing default risk, not eliminating this risk’s root causes. 
It is time to recover the capacity, displayed by the EU’s founders, to look ahead and pursue a dream of a better future. 
Specifically, eurozone leaders must introduce a mechanism for fiscal transfers from stronger to weaker economies. 
In a currency union, individual economies cannot alter their exchange rates to account for changes in relative competitiveness. 
The resulting price stickiness tends to delay macroeconomic stabilization and structural adjustment, leading to rising debt and unemployment in weaker economies. 
Without free labor mobility, fiscal transfers are the eurozone’s only option to ease debt repayment and, by stimulating economic activity, boost employment. 
Establishing such a mechanism will not be easy, as it requires a resource that is in short supply in Europe today: trust. 
Indeed, the north and south have struggled to overcome cultural differences and unequal economic conditions, preventing them from viewing the situation from each other’s perspective. 
Binding the union closer together could prove critical to building such trust. 
One strategy that combines rationality with the gradualism needed to overcome political resistance would be to increase the EU budget steadily, so that it can ultimately play a macroeconomic role, promoting stability and reinforcing cohesion within the eurozone. 
It is a tough sell, but also a vital one. 

Moving on From the Euro 
SAINT-PIERRE-D’ENTREMONT, FRANCE – European Monetary Union was never a good idea. 
I remember my surprise when, as a young assistant professor, I realized that I was opposed to the Maastricht Treaty. 
I believed then – and still do – that European integration is a very good thing. 
But the textbook economics I was teaching showed how damaging EMU could be in the absence of European fiscal and political union. 
Nothing that has happened since has convinced me that the textbook was excessively pessimistic. 
On the contrary: it was far too optimistic. 
Life is strewn with banana skins, and when you step on one you need to be able to adjust. 
But the monetary union itself turned out to be a gigantic banana skin, inducing capital flows that pushed up costs around the European periphery. 
And adjustment – that is, currency devaluation – was not an option. 
Furthermore, most textbooks of the time ignored the financial sector; thus, they ignored the fact that capital flows to the periphery would be channeled via banks, and that when the capital stopped flowing, bank crises would strain peripheral members’ public finances. 
This, in turn, would further erode banks’ balance sheets and constrain credit creation – the sovereign-bank doom loop that we have heard so much about in recent years. 
And no textbooks predicted that European cooperation would impose pro-cyclical austerity on crisis-struck countries, creating depressions that in some cases have rivaled those of the 1930s. 
It has been obvious for some years that the “actually existing EMU” has been a costly failure, both economically and politically. 
Trust in European institutions has collapsed, and political parties skeptical not just of the euro, but of the entire European project, are on the rise. 
And yet most economists, even those who were never keen on EMU in the first place, have been reluctant to make the argument that the time has come to abandon a failed experiment. 
A famous article by Barry Eichengreen pointed out that an anticipated EMU breakup would lead to the “mother of all financial crises.” 
It is hard to disagree with him. 
That is why economists of all stripes, whether or not they supported the introduction of the common currency, have spent the last five years developing and promoting a package of institutional reforms and policy changes that would make the eurozone less dysfunctional. 
In the short run, the eurozone needs much looser monetary and fiscal policy. 
It also needs a higher inflation target (to reduce the need for nominal wage and price reductions); debt relief, where appropriate; a proper banking union with an adequate, centralized fiscal backstop; and a “safe” eurozone asset that national banks could hold, thereby breaking the sovereign-bank doom loop. 
Unfortunately, economists have not argued strongly for a proper fiscal union. 
Even those who consider it economically necessary censor themselves, because they believe it to be politically impossible. 
The problem is that silence has narrowed the frontier of political possibility even further, so that more modest proposals have fallen by the wayside as well. 
Five years on, the eurozone still lacks a proper banking union, or even, as Greece demonstrated, a proper lender of last resort. Moreover, a higher inflation target remains unthinkable, and the German government argues that defaults on sovereign debt are illegal within the eurozone. 
Pro-cyclical fiscal adjustment is still the order of the day. 
The European Central Bank’s belated embrace of quantitative easing was a welcome step forward, but policymakers’ enormously destructive decision to shut down a member state’s banking system – for what appears to be political reasons – is a far larger step backward. 
And no one is talking about real fiscal and political union, even though no one can imagine European Monetary Union surviving under the status quo. 
Meanwhile, the political damage is ongoing: not all protest parties are as pro-European as Greece’s ruling Syriza. 
And domestic politics is being distorted by the inability of centrist politicians to address voters’ concerns about the eurozone’s economic policies and its democratic deficit. 
To do so, it is feared, would give implicit support to the skeptics, which is taboo. 
Thus, in France, Socialist President François Hollande channels Jean-Baptiste Say, arguing that supply creates its own demand, while the far-right National Front’s Marine Le Pen gets to quote Paul Krugman and Joseph Stiglitz approvingly. 
No wonder that working-class voters are turning to her party. 
A victory for the National Front in 2017 or 2022, which is no longer unthinkable, would destroy the European project. 
Citizens of smaller eurozone member states will have noted the brutal way the ECB was politicized to achieve Germany’s goals in Greece, and the conclusion that the eurozone is a dangerous “union” for small countries will seem inescapable. 
If centrist parties remain on the sidelines, rather than protesting what has happened, the political extremists will gain further valuable territory. 
As for economists like me, who have balked at advocating an end to the failed euro experiment and favored reform, perhaps it is time to admit defeat and move on. 
If only anti-Europeans oppose EMU, the EU baby could end up being thrown out with the euro bathwater. 
An end to the euro would indeed provoke an immense crisis. 
But ask yourself this: Do you really think the euro will be around in its present form a century from now? 
If not it will end, and the timing of that end will never be “right.” 
Better, then, to get on with it before more damage is done. 

The Eurozone’s False Recovery 
LONDON – At first glance, the eurozone economy seems like it might finally be on the mend. 
Stock markets are rallying. 
Consumer confidence has picked up. 
Lower oil prices, a cheaper euro, and quantitative easing by the European Central Bank are all expected to boost growth. 
ECB President Mario Draghi claims that “a sustained recovery is taking hold,” while policymakers in Berlin and Brussels latch onto signs of life in Spain and Ireland as proof that their bitter prescription of fiscal consolidation and structural reforms worked as advertised. 
On closer inspection, however, it becomes clear that the improvement is modest, probably temporary, and not the result of the policies promoted by Germany. 
True, according to some estimates, the eurozone economy may now be growing at an annual rate of 1.6%, up from 0.9% in the year to the fourth quarter of 2014. 
But that is far slower than in the United States and Britain. 
With the eurozone economy 2% smaller than it was seven years ago, “recovery” does not feel like the right word – especially as the relief is unlikely to last. 
For starters, the one-off boost from lower oil prices is already being unwound. 
After dropping by more than half between mid-June and mid-January, oil prices in euros have since bounced back by a third, partly owing to the euro’s sharp depreciation, which is making imports generally more expensive. 
The effect of that on households’ budgets and companies’ costs is hardly cause for celebration. 
Policymakers are counting on a more competitive currency to stimulate growth. 
But they are likely to be disappointed. 
With eurozone exports increasingly reliant on global supply chains, a cheaper currency provides less of a boost than before. 
Exporters may also choose to pocket any gains, rather than seek to expand market share. 
In 2014, exports from the eurozone amounted to nearly €2 trillion ($2.6 trillion at the time) – more than those from China. 
Given patchy global demand, rapid export growth will be difficult to achieve. 
In any case, with exports accounting for only one-fifth of the eurozone’s €10 trillion economy, they are unlikely to spur a strong recovery while domestic demand remains weak. 
According to the ECB’s model, the euro’s 10% depreciation over the past year (in real, trade-weighted terms) may lift growth this year by a mere 0.2%. 
The benefits of quantitative easing are also likely to prove ephemeral. 
The decline in governments’ borrowing costs is unlikely to boost growth much, as European Union rules preclude fiscal expansion. 
Overall, the eurozone’s fiscal stance is set to be broadly neutral this year, according to the European Commission, albeit with further squeezes in Ireland, France, and Italy. 
Quantitative easing does improve funding conditions for the few eurozone companies large enough to tap capital markets. 
But, even in the US and Britain, where capital markets play a much larger role in corporate finance, asset-price inflation did little to encourage consumers to spend or companies to invest. 
On the contrary, investment in a weak real economy has been far less attractive than the prospect of earning easy money from financial engineering. 
Most businesses in the eurozone rely on bank finance, and while credit conditions have improved somewhat, lending is flat (and continues to fall in southern Europe). 
As long as zombie banks are weighed down with bad loans, that is unlikely to change much. 
Nor can the small uptick in the eurozone’s growth, much less the relatively rapid expansion in Spain and Ireland, be attributed to the German recipe of fiscal consolidation and measures to increase export competitiveness. 
Indeed, nothing could be further from the truth. 
Spain is hardly an example of a successful fiscal adjustment. 
On the contrary, its recovery coincided with the easing of the extreme austerity imposed in 2011-13, which has encouraged households to spend more, despite stagnant wages. 
Even so, its economy remains 5.7% smaller than it was seven years ago. 
A whopping 23.7% of Spaniards – and one in two young people – are unemployed, while many more have dropped out of the labor force altogether. 
Meanwhile, Spain’s budget deficit was 5.7% of GDP last year, the highest in the EU. 
Its rapidly rising public debt is set to top 100% of GDP this year. 
As the country heads toward an election later this year, the European Commission has sanctioned the widening of its structural deficit. 
Rather than flourishing as a result of austerity, Spain is in many ways getting a free pass. 
Nor does Ireland – the fastest-growing EU economy last year – confirm the appropriateness of Germany’s policy prescriptions. 
Ireland, after all, is a tiny, highly open economy whose booming export sector is benefiting from existing strengths – including low business taxes, a skilled workforce, and a flexible economy – and favorable external conditions, especially the strong recovery in its main markets, the US and Britain. 
Even so, the economy is smaller than it was before the crisis, the unemployment rate is in double digits, domestic demand remains depressed, and the €64 billion bank-bailout bill unjustly imposed on 2.2 million Irish taxpayers still looms large. 
The eurozone economy is set to do a bit better in 2015, but not because of the policies demanded by Germany. 
And it is likely to be a temporary bounce, not the start of a sustained recovery. 
To overcome its balance-sheet recession, the eurozone needs to clean up its banks, reduce the crushing overhang of mostly private debt, redress the huge shortfall in investment, eliminate barriers to enterprise, and tackle the deflationary drag of German mercantilism. 
And that is why the eurozone will not escape its problems anytime soon. 

Signs of Life in the Eurozone 
NEW YORK – The latest economic data from the eurozone suggest that recovery may be at hand. 
What is driving the upturn? 
What obstacles does it face? 
And what can be done to sustain it? 
The immediate causes of recovery are not difficult to discern. 
Last year, the eurozone was on the verge of a double-dip recession. 
When it recently fell into technical deflation, the European Central Bank finally pulled the trigger on aggressive easing and launched a combination of quantitative easing (including sovereign-bond purchases) and negative policy rates. 
The financial impact was immediate: in anticipation of monetary easing, and after it began, the euro fell sharply, bond yields in the eurozone’s core and periphery fell to very low levels, and stock markets started to rally robustly. 
This, together with the sharp fall in oil prices, boosted economic growth. 
Other factors are helping, too. 
The ECB’s easing of credit is effectively subsidizing bank lending. 
The fiscal drag from austerity will be smaller this year, as the European Commission becomes more lenient. 
And the start of a banking union also helps; following the latest stress tests and asset quality review, banks have greater liquidity and more capital to lend to the private sector. 
As a result of these factors, eurozone growth has resumed, and eurozone equities have recently outperformed US equities. 
The weakening of the euro and the ECB’s aggressive measures may even stop the deflationary pressure later this year. 
But a more robust and sustained recovery still faces many challenges. 
For starters, political risks could derail progress. 
Greece, one hopes, will remain in the eurozone. 
But the difficult negotiations between the Syriza-led government and the “troika” (the ECB, the European Commission, and the International Monetary Fund) could cause an unintended accident – call it a “Grexident” – if an agreement on funding the country is not reached in the next few weeks. 
Moreover, Podemos, a leftist party in the Syriza mold, could come to power in Spain. 
Populist anti-euro parties of the right and the left are challenging Italian Prime Minister Matteo Renzi. 
And Marine Le Pen of the far-right National Front is polling well ahead of the 2017 French presidential election. 
Slow job creation and income growth may continue to fuel the populist backlash against austerity and reform. 
Even the ECB estimates that the eurozone unemployment rate will still be 9.9% in 2017 – well above the 7.2% average prior to the global financial crisis seven years ago. 
And austerity and reform fatigue in the eurozone periphery has been matched by bailout fatigue in the core, boosting support for a range of anti-euro parties in Germany, the Netherlands, and Finland. 
A second obstacle to sustained recovery is the eurozone’s bad neighborhood. 
Russia is becoming more assertive and aggressive in Ukraine, the Baltics, and even the Balkans (while sanctions against Russia have hurt many European economies). 
And the Middle East is burning just next door: the recent terrorist attacks in Paris and Copenhagen, and against foreign tourists in Tunisia, remind Europe that hundreds of homegrown jihadists could return from fighting in Syria, Iraq, or elsewhere and launch further attacks. 
Third, while ECB policies keep borrowing costs lower, private and public debt in the periphery countries, as a share of GDP, is high and still rising, because the denominator of the debt ratio – nominal GDP – is barely increasing. 
Thus, debt sustainability will remain an issue for these economies over the medium term. 
Fourth, fiscal policy remains contractionary, because Germany continues to reject a growing chorus of advice that it should undertake a short-term stimulus. 
Thus, higher German spending will not offset the impact of additional austerity in the periphery or the significant shortfall expected for the three-year, €300 billion ($325 billion) investment plan unveiled by European Commission President Jean-Claude Juncker. 
Fifth, structural reforms are still occurring at a snail’s pace, holding back potential growth. 
And, while structural reforms are necessary, some measures – for example, labor-market liberalization and pension overhauls – may boost the eurozone’s savings rate and thus weaken aggregate demand further (as occurred in Germany following its structural reforms a decade ago). 
Finally, Europe’s monetary union remains incomplete. 
Its long-term viability requires the development over time of a full banking union, fiscal union, economic union, and eventually political union. 
But the process of further European integration has stalled. 
If the eurozone unemployment rate is still too high by the end of 2016, annual inflation remains well below the ECB’s 2% target, and fiscal policies and structural reforms exert a short-term drag on economic growth, the only game in town may be continued quantitative easing. 
But the ongoing weakness of the euro – fed by such policies – is fueling growth in the eurozone’s current-account surplus. 
Indeed, as the euro weakens, the periphery countries’ external accounts have swung from deficit to balance and, increasingly, to surplus. 
Germany and the eurozone core were already running large surpluses; in the absence of policies to boost domestic demand, those surpluses have simply risen further. 
Thus, the ECB’s monetary policy will take on an increasingly beggar-thy-neighbor cast, leading to trade and currency tensions with the United States and other trade partners. 
To avoid this outcome, Germany needs to adopt policies – fiscal stimulus, higher spending on infrastructure and public investment, and more rapid wage growth – that would boost domestic spending and reduce the country’s external surplus. 
Unless, and until, Germany moves in this direction, no one should bet the farm on a more robust and sustained eurozone recovery. 

Taking Eurozone Growth Seriously 
LONDON – I have been out of the world of international finance and economic forecasting for more than four years, but much of what I learned during my 30 years working full-time in the field still influences how I view the world. 
One lesson was to measure an entity’s economic and financial performance by how it compares both to the entity’s underlying potential and the market’s valuation of its performance. 
Applying this approach to the major economies gives rise to some surprising observations – and possibilities. 
For starters, contrary to popular belief, world growth hasn’t been especially disappointing so far this decade. 
From 2010 to 2016, global output rose at an average annual rate of 3.4%, according to the International Monetary Fund. 
That may be lower than the 2000-2010 average, but it is higher than the growth rate in the 1980s and 1990s – decades that are not typically viewed as economically disappointing. 
A breakdown of particular countries’ performance offers further insights. 
Despite significant political trauma, the United States and the United Kingdom have performed as expected. 
China, India, and Japan have also grown close to their potential. 
In a rare occurrence, no major economy has dramatically outperformed its potential. 
Three economies have, however, genuinely disappointed: Brazil, Russia, and the eurozone. 
Could that mean that many observers, including me, overestimated these economies’ potential? 
Or does it reflect extenuating circumstances? 
If it is the latter, one must ask whether, contrary to prevailing expectations, new developments or shifts in any or all three of these economies might surprise us on the upside for the rest of the decade. 
When it comes to the eurozone, embracing the idea that economic growth may be about to take off might be enough, at least until recently, to earn one a referral to a mental-health specialist. 
But, in my old life, I would be encouraging my analysts to spend more time considering just that possibility, because, on the off-chance that this crackpot notion were true, there would be some serious money to be made in today’s generously valued markets. 
And, in fact, the prospect of a growth pickup in the eurozone might be only partly insane. 
Cyclically, the eurozone is currently doing well both by its own standards and relative to others. 
In the first quarter of this year, the eurozone grew more strongly than the US or the UK, and most of the eurozone’s larger countries have been showing stronger relative growth for some time. 
Nonetheless, the eurozone’s long-term structural outlook remains uninspiring. 
The prospects for the two key drivers of long-term growth – the size and growth of the working-age population and productivity – look grim for the eurozone’s largest countries, even Germany, the one economy that most acknowledge is, from a cyclical perspective, doing just fine. 
But – to indulge further that outlandish notion of an impending eurozone growth surge – what if something changes significantly to strengthen those growth drivers? 
With refugees – many of them young – continuing to pour into Europe from troubled parts of the Middle East and Africa, that may not be an altogether fanciful prospect. 
Of course, tapping the potential of refugees requires assimilating them to European societies and economies – a challenge that has many Europeans justifiably worried. 
But, if that need were met, it would certainly mitigate Europe’s mounting demographic challenge, especially in Germany and Italy. 
There is also the possibility that new developments will bring about a more constructive policy approach. 
Most eurozone members’ fiscal positions have undergone considerable, though often unnoticed, improvement in recent years – so much so that the eurozone-wide fiscal deficit is now less than 3% of GDP, much better than the US or the UK. 
Moreover, soaring tax receipts in some parts of the eurozone – notably Germany – are feeding almost embarrassingly large fiscal surpluses. 
Could now be the moment to push for an ambitious Franco-German-led stimulus effort? 
If France’s new president, Emmanuel Macron, manages to obtain sufficient backing in the National Assembly in the June election, perhaps he could do something about reducing France’s structural government spending, while pursuing tax cuts and improved labor-market flexibility. 
Labor-market reform, in particular, could be crucial, not just for France itself, but also to convince German Chancellor Angela Merkel, if she is returned to power this September, to move toward greater fiscal integration, including the creation of a eurozone finance minister, which Macron advocates. 
Much of this is probably a long shot, but nowhere near as long as it was just a few months ago. 
And, given market valuations, it is much more interesting to explore such possibilities than it is to focus on many of the other issues that analysts obsess about. 
Carrying the scenario further, one could even dream up an optimistic outlook for the UK’s trade balance, with a highly competitive exchange rate significantly improving demand in its major market, the eurozone. 
That could more than compensate for the challenges that arise from the end of single-market access. 
With this, the fantasy may have jumped the shark. 
But you never know. 

Europe’s Misguided Investment Mania 
BRUSSELS – The mantra in Brussels and throughout Europe nowadays is that investment holds the key to economic recovery. 
The lynchpin of the new European Commission’s economic strategy is its recently unveiled plan to increase investment by €315 billion ($390 billion) over the next three years. 
But the Commission’s proposal is misguided, both in terms of its emphasis on investment and its proposed financing structure. 
The Commission’s plan, the signature initiative of President Jean-Claude Juncker at the start of his term, comes as no surprise. 
With the eurozone stuck in a seemingly never-ending recession, the idea that growth-enhancing investment is crucial for a sustainable recovery has become deeply entrenched in public discourse. 
The underlying assumption is that more investment is always better, because it increases the capital stock and thus output. 
This is not necessarily the case in Europe at the moment. 
European Union authorities (and many others) argue that Europe – particularly the eurozone – suffers from an “investment gap.” 
The smoking gun is supposedly the €400 billion annual shortfall relative to 2007. 
But the comparison is misleading, because 2007 was the peak of a credit bubble that led to a lot of wasteful investment. 
The Commission recognizes this in its supporting documentation for the Juncker package, in which it argues that the pre-credit-boom years should be used as the benchmark for desirable investment levels today. 
According to that measure, the investment gap is only half as large. 
Unfortunately, even the pre-boom years are not a good guide for today’s European economy, because something fundamental has changed more quickly than is typically recognized: Europe’s demographic trends. 
The eurozone’s working-age population had been growing until 2005, but it will fall from 2015 onward. 
Given that productivity has not been picking up, fewer workers mean significantly lower potential growth rates. 
And a lower growth rate implies that less investment is needed to maintain the capital/output ratio. 
If the eurozone maintained its investment rate at the level of the pre-boom years, there would soon be much more capital relative to the size of the economy. 
One might be tempted to say: So what? 
More capital is always good. 
An ever-increasing capital stock relative to output, however, means ever-lower returns to capital and thus ever more non-performing loans in the banking sector over time. 
Given the weak state of Europe’s banking system, accumulating too much capital is not a luxury that the EU can afford. 
Even setting aside the question of whether more is always better, what can the Juncker plan do to have a positive short-run impact on aggregate investment? 
Academic research on the determinants of investment has generally concluded that the key variable is growth (or expectations of growth), and that interest rates play at most a secondary role. 
One immediate implication of this, of course, is that monetary policy is unlikely to have a strong impact on investment. 
Indeed, the market signal is clear: At present, there is no shortage of funding available in most of the EU. 
The countries on the eurozone periphery, where credit might still be scarce, account for less than one-quarter of Europe’s economy. 
So a lack of funding is not the reason that investment remains weak. 
The Juncker plan is supposed to unlock, with €21 billion in EU funding, projects worth 15 times as much (€315 billion). 
That sounds far-fetched. 
Europe’s banking system already has more than €1 trillion in capital. 
The addition of €21 billion, in the form of guarantees from the EU budget, is unlikely to have a significant impact on banks’ willingness to finance investment. 
The Juncker plan targets, in particular, infrastructure projects, which are often riskier than other investments. 
But these risks usually are not financial; they reflect potential political and regulatory barriers at the national level. 
These problems cannot be solved by a guarantee from the EU budget (which in any case could not be larger than 1/15th of the value of the project). 
The reason why there still is no good interconnection between the Spanish and French power grids is not a lack of financing, but the unwillingness of monopolies on both sides of the border to open their markets. 
Many rail and road projects are also proceeding slowly, owing to local opposition, not a lack of financing. 
These are the real barriers to infrastructure investment in Europe. 
Large European companies can easily obtain financing at near-zero interest rates. 
Calling for more investment is superficially always attractive. 
But there are fundamental reasons to believe that the eurozone’s investment rate will remain permanently depressed. 
The often-invoked investment gap is mostly a result of wishful thinking, and the remaining barriers to investment have little to do with a lack of financing. 
Economic performance in the United States and the United Kingdom holds an important lesson for the eurozone. 
Both economies’ recoveries have been driven largely by a pickup in consumption on the back of stronger household balance sheets, especially in the US. 
The revival of investment has followed the resumption of consumption growth. 
If European policymakers are serious about economic recovery, they should focus on consumption, not investment. 

The Eurozone Needs More than QE 
CAMBRIDGE – Although the European Central Bank has launched a larger-than-expected program of quantitative easing (QE), even its advocates fear that it may not be enough to boost real incomes, reduce unemployment, and lower governments’ debt-to-GDP ratios. 
They are right to be afraid. 
But first the good news: anticipation of QE has already accelerated the decline of the euro’s international value. 
The weaker euro will stimulate eurozone countries’ exports – roughly half of which go to external markets – and thus will raise eurozone GDP. 
The euro’s depreciation will also raise import prices and therefore the overall rate of inflation, moving the eurozone further away from deflation. 
Unfortunately, that may not be enough. 
The success of QE in the United States reflected initial conditions that were very different from what we now see in Europe. 
Indeed, eurozone countries should not relax their reform efforts on the assumption that ECB bond purchases will solve their problems. 
But even if these countries cannot overcome the political barriers to implementing structural changes to labor and product markets that could improve productivity and competitiveness, they can enact policies that can increase aggregate demand. 
To be sure, the major eurozone countries’ large national debts preclude using traditional Keynesian policies – increased spending or reduced taxes – to raise demand through increased budget deficits. 
But eurozone governments can change the structure of taxes in ways that stimulate private spending without reducing net revenue or increasing fiscal deficits. 
First, though, consider why QE’s ability to stimulate growth and employment in the US does not imply that it will succeed in the eurozone. 
QE’s effect on demand in the US reflected the financial-market conditions that prevailed when the Federal Reserve began its large-scale asset purchases in 2008. 
At that time, the interest rate on ten-year Treasury bonds was close to 4%. 
The Fed’s aggressive program of bond-buying and its commitment to keep short-term interest rates low for a prolonged period drove the long-term rate down to about 1.5%. 
The sharp fall in long-term rates induced investors to buy equities, driving up share prices. 
Low mortgage interest rates also spurred a recovery in house prices. 
In 2013, the broad Standard and Poor’s index of equity prices rose by 30%. 
The combination of higher equity and house prices raised households’ net worth in 2013 by $10 trillion, equivalent to about 60% of that year’s GDP. 
That, in turn, led to a rise in consumer spending, prompting businesses to increase production and hiring, which meant more incomes and therefore even more consumer spending. 
As a result, real (inflation-adjusted) GDP growth accelerated to 4% in the second half of 2013. 
After a weather-related pause in the first quarter of 2014, GDP continued to grow at an annual rate of more than 4%. 
Thus, QE’s success in the US reflected the Fed’s ability to drive down long-term interest rates. 
In contrast, long-term interest rates in the eurozone are already extremely low, with ten-year bond rates at about 50 basis points in Germany and France and only 150 basis points in Italy and Spain. 
So the key mechanism that worked in the US will not work in the eurozone. 
Driving down the euro’s dollar exchange rate from its $1.15 level (where it was before the adoption of QE) to parity or even lower will help, but it probably will not be enough. 
But, fortunately, QE is not the only tool at policymakers’ disposal. 
Any eurozone country can modify its tax rules to stimulate business investment, home building, and consumer spending without increasing its fiscal deficit, and without requiring permission from the European Commission. 
Consider the goal of stimulating business investment. 
Tax credits or accelerated depreciation lower firms’ cost of investing and therefore raise the after-tax return on investment. 
The resulting revenue loss could be offset by raising the corporate tax rate. 
Similarly, demand for new homes could be increased by allowing homeowners to deduct mortgage interest payments (as they do in the US), or by giving a tax credit for mortgage interest payments. 
A temporary tax credit for home purchases would accelerate home building, encouraging more in the near term and less in the future. 
Here, the revenue loss could be offset by an increase in the personal tax rate. 
A commitment to raise the rate of value-added tax by two percentage points annually for the next five years would encourage earlier buying to get ahead of future price increases. 
The reduction in real incomes caused by the VAT increase could be offset by a combination of reduced personal income taxes, reduced payroll taxes, and increased transfers. 
Though eurozone members cannot adjust their interest rates or their exchange rates, they can alter their tax rules to stimulate spending and demand, with the appropriate policy possibly differing from country to country. 
It is now up to national political leaders to recognize that QE is not enough – and to start thinking about what else should be done to stimulate spending and demand. 

Europe’s Doom Loop in Reverse 
BRUSSELS – During the 2011-2012 euro crisis, the currency area became mired in a “doom loop,” in which weak banks in financially distressed countries rationed credit, causing a recession that intensified pressure on government finances, which were already burdened by the need to cover banks’ losses. 
But such self-reinforcing spirals can also operate in the opposite direction. 
Understanding these dynamics may be the key to determining the eurozone’s relative strength today. 
In a doom loop, the expectations of default drive up risk premia until the economy reaches the brink of collapse, even if the underlying problems could be managed over time. 
At a certain point, when the gulf between financial-market pessimism and economic reality becomes too large, the market becomes ready for a reversal. 
This was the case for the eurozone during the summer of 2012. 
European Central Bank President Mario Draghi’s pledge to do “whatever it takes” to prevent the euro from disintegrating reassured markets so effectively because investors’ fear was largely based, to paraphrase US President Franklin D. Roosevelt, on “fear itself.” 
Draghi’s intervention marked the start of a new cycle: the doom loop reversed, and became a benign credit cycle in which lower risk premia allowed both banks and governments to refinance at lower rates, making more credit available to the economy and thereby fueling a recovery that increased government revenue. 
Governments in most of the eurozone countries that had previously been stuck in the doom loop were able to stabilize public finances without further expenditure cuts. 
But this positive credit cycle is less visible than the doom loop, because it takes a lot less time to cut the number of borrowers and push the economy into a recession than to foster a recovery when credit becomes available again. 
Even if over-stretched borrowers can spend and invest, they most likely won’t do so right away. 
But, given time, easier credit conditions rarely fail to generate a recovery. 
The ECB’s vast program of quantitative easing (QE), initiated in March 2015, reinforced the virtuous cycle. 
But the truth is that the doom loop had been reversed long before QE began. 
In any case, the common definition of that program – the large-scale purchase of government bonds by the ECB – is inaccurate. 
The ECB General Council makes the key decisions, but its policy is executed mostly by national central banks (NCBs). 
Normally, all NCBs in the euro system undertake the same operations, and the results are pooled. 
But, when it comes to QE, each NCB buys only the bonds of its own government on its own account. 
The Banca d’Italia has bought only Italian government bonds, and the Bundesbank only German Bunds. 
NCBs are part of their respective countries’ larger public sectors, and eventually transfer all of the profits or losses from these transactions back to their own government. 
So when they purchase long-term government bonds, they are acting like a subsidiary of a large corporation buying the debt of its parent company (issuing short-term liabilities to itself). 
In short, the eurozone’s QE program amounts essentially to a massive asset-liability management exercise, in which (national) public debt is reshuffled from one part of the public sector (governments) to another part (the national central bank). 
While the sums involved are very large – a total of about €2 trillion ($2.44 trillion) so far – the real impact is minor. 
Of course, the ECB claims that the QE program contributed decisively to the recovery. 
But the fact is that there has been little change in interest rates or risk spreads since the bond purchases started. 
This indicates that the end of QE – which is likely to come later this year – will not mean the end of the recovery. 
And, given that financial markets know that QE will end, they have already priced in that expectation. 
But can today’s benign credit cycle last much longer? 
There may be some reason for concern; after all, the eurozone experienced a similar self-reinforcing cycle of easy credit, growth, and little pressure on government finances before the global financial crisis of 2007-2008. 
But it seems unlikely that the current cycle will lead to similar excesses and end in a similar bust, because the growth pattern in the peripheral eurozone countries has changed considerably. 
During the pre-crisis credit boom, growth in countries like Spain and Portugal was based largely on domestic demand, financed by capital inflows. 
In Italy, domestic demand was less exuberant, but foreign capital was still needed at the margin to finance a large public debt. 
So when capital inflows suddenly stopped, these economies were thrown into crisis. 
Today, however, growth in these countries is based mainly on exports, while domestic demand remains subdued. 
Moreover, these countries are maintaining current-account surpluses while their growth rates rise; in other words, far from relying on fickle capital inflows, they are repaying their external debt. 
This new, more robust growth model could be sustained until the remaining unemployment is absorbed. 
No financial cycle lasts forever. 
But the one driving today’s recovery in the eurozone, including the peripheral countries that were hardest hit by the crisis, may be set to persist for a while yet. 

The Eurozone’s Hidden Strength 
BRUSSELS – For years, the eurozone has been perceived as a disaster area, with discussions of the monetary union’s future often centered on a possible breakup. 
When the British voted to leave the European Union last year, they were driven partly by the perception of the eurozone as a dysfunctional – and perhaps unsalvageable – project. 
Yet, lately, the eurozone has become the darling of financial markets – and for good reason. 
The discovery of the eurozone’s latent strength was long overdue. 
Indeed, the eurozone has been recovering from the crisis of 2011-2012 for several years. 
On a per capita basis, its economic growth now outpaces that of the United States. 
The unemployment rate is also declining – more slowly than in the US, to be sure, but that partly reflects a divergence in labor-force participation trends. 
Whereas labor-force participation in the eurozone is on the rise, it has been declining in the US since around 2000. 
The departure of Americans from the job market reflects what economists call the “discouraged worker” phenomenon. 
And, indeed, the trend has accelerated since the recession of 2009. 
In principle, declining labor-force participation should be a problem in the eurozone, too, given the prolonged period of very high unemployment that many European workers have faced. 
But, in the last five years, 2.5 million people in the eurozone have actually joined the labor force, as five million jobs were created, reducing the overall decline in unemployment by half. 
Moreover, the eurozone recovery has been sustained, somewhat unexpectedly, even in the absence of continuous fiscal stimulus. 
The heated discussions about austerity of recent years have been misplaced, with both critics and official cheerleaders overestimating the amount of austerity applied. 
The average cyclically adjusted fiscal deficit has been roughly constant since 2014, at around 1% of GDP. 
Of course, large differences in the fiscal position of individual member states remain. 
But this is to be expected in such a diverse monetary union. 
The truth is that even France, often considered a weak performer, has deficit and debt levels comparable to those of the US. 
A comparison with the US, as well as with Japan, also undercuts the common perception that the eurozone’s fiscal rules, including the (in)famous Stability and Growth Pact and the 2012 “fiscal compact,” have been irrelevant. 
True, no country has been officially reprimanded for excessive deficits or debts. 
But the clamor over rule breaches at the margin has overshadowed the broad underlying trend toward sound public finances that the fiscal rules have fostered. 
All of this suggests that the “soft austerity” pursued in many eurozone countries may have been the right choice after all. 
To be sure, one should not overestimate the eurozone’s long-term economic strength. 
While the average growth rate might remain above 2% for the next few years, as the remaining unemployed are absorbed and the long-term trend of older workers rejoining the labor market continues, the pool of unused labor will eventually be exhausted. 
Once the eurozone has reached the so-called “Lewis turning point” – when surplus labor is depleted and wages start to rise – growth rates will fall to a level that better reflects demographic dynamics. 
And those dynamics aren’t particular desirable: the eurozone’s working-age population is set to decline by about half a percentage point per year over the next decade at least. 
Yet, even then, the eurozone’s per capita growth rate is unlikely to be much lower than that of the US, because the difference in their productivity growth rates is now minor. 
In this sense, the eurozone’s future may look more like Japan’s present, characterized by headline annual growth of a little over 1% and stubbornly low inflation, but per capita income growth similar to that of the US or Europe. 
Fortunately for the eurozone, it will enter this period of high employment and slow growth on sound footing – thanks, in part, to that controversial austerity. 
By contrast, both the US and Japan are facing full employment with fiscal deficits higher than 3% of GDP – about 2-3 percentage points higher than those of the eurozone. 
The US and Japan also have heavier debt burdens: the debt-to-GDP ratio stands at 107% in the US and more than 200% in Japan, compared to 90% in the eurozone. 
There is evidence that in the wake of a financial crisis, when monetary policy becomes ineffective – for example, because nominal interest rates are at the zero bound – deficit spending can have an unusually strong stabilizing impact. 
But there remains a key unresolved issue: once financial markets have normalized, will maintaining a deficit for a long time provide continuous stimulus? 
The fact that the eurozone’s recovery is now catching up with that of the US, despite its lack of any continuing stimulus, suggests that the answer is no. 
Indeed, the experience of the eurozone suggests that while concerted fiscal stimulus can make a difference during an acute recession, withdrawing that stimulus when it is no longer vital is preferable to maintaining it indefinitely. 
With austerity – that is, reducing the deficit, once the recession has ended – recovery might take longer to become consolidated; but once it is, economic performance is even more stable, because the government’s accounts are in a sustainable position. 
John Maynard Keynes famously said, “In the long run, we are all dead.” 
That may be true, on a long enough timeline. 
But it is no excuse to dismiss longer-term considerations. 
In fact, for the eurozone, the long run seems to have arrived – and the economy is still alive and kicking. 

The Eurozone Must Reform or Die 
OXFORD – With the election of a reform-minded centrist president in France and the re-election of German Chancellor Angela Merkel seeming ever more likely, is there hope for the stalled single-currency project in Europe? 
Perhaps, but another decade of slow growth, punctuated by periodic debt-related convulsions, still looks more likely. 
With a determined move toward fiscal and banking union, things could be much better. 
But, in the absence of policies to strengthen stability and sustainability, the chances of an eventual collapse are much greater. 
True, in the near term, there is much reason for optimism. 
Over the past year, the eurozone has been enjoying a solid cyclical recovery, outperforming expectations more than any other major advanced economy. 
And make no mistake: the election of Emmanuel Macron is a landmark event, raising hopes that France will re-energize its economy sufficiently to become a full and equal partner to Germany in eurozone governance. 
Macron and his economic team are full of promising ideas, and he will have a huge majority in the National Assembly to implement them (though it will help if the Germans give him leeway on budget deficits in exchange for reform). 
In Spain, too, economic reform is translating into stronger long-term growth. 
But all is not well. 
Greece is still barely growing, after experiencing one of the worst recessions in history, although those who blame this on German austerity clearly have not looked at the numbers: with encouragement from left-leaning US economists, Greece mismanaged perhaps the softest bailout package in modern history. 
Italy has done far better than Greece, but that is a backhanded compliment; real income is actually lower than a decade ago (albeit it is hard to know for sure, given the country’s vast underground economy). 
For southern Europe as a whole, the single currency has proved to be a golden cage, forcing greater fiscal and monetary rectitude but removing the exchange rate as a critical cushion against unexpected shocks. 
Indeed, part of the reason the United Kingdom’s economy has held up well (so far) since last year’s Brexit referendum is that the pound fell sharply, boosting competitiveness. 
The UK, of course, famously (and wisely) opted out of the single currency even as it is now moving (not so wisely) to withdraw from the European Union and the single market entirely. 
It is now fairly obvious that the euro was not necessary to the success of the EU, and instead has proved a massive impediment, as many economists on this side of the Atlantic had predicted. 
Eurocrats have long likened European integration to riding a bicycle: one must keep moving forward or fall down. 
If so, the premature adoption of the single currency is best thought of as a detour through thick, wet cement. 
Ironically, by far the main reason why euro adoption was originally so popular in Southern Europe was that back in the 1980s and 1990s, ordinary people longed for the price stability Germans enjoyed with their Deutsche Mark. 
But, while the euro has been accompanied by a dramatic eurozone wide fall in inflation, most other countries have managed to bring down inflation without it. 
Far more important to the achievement of price stability has been the advent of the modern independent central bank, a device that has helped dramatically reduce inflation levels worldwide. 
Yes, a few places, such as Venezuela, still have triple-digit price growth, but they are now rarities. 
It is very likely that if, instead of joining the euro, Italy and Spain had simply granted their central banks more autonomy, they, too, would have low inflation today. 
Greece is admittedly a less obvious case; but, considering that many poor African countries have been able to keep inflation well within single digits, one can presume that Greece would have managed as well. 
Indeed, if Southern European countries had kept their own currencies, they might never have dug as big a debt hole, and would have had the option of partial default through inflation. 
The question now is how to maneuver the EU out of the wet cement. 
Although many European politicians are loath to admit it, the status quo is probably not sustainable; eventually, there must be either significantly greater fiscal integration or a chaotic break-up. 
It is astonishingly naive to think the euro will not face further real-life stress tests over the next 5-10 years, if not sooner. 
If the status quo is ultimately unsustainable, why are markets so supremely calm, with ten-year Italian government bonds yielding less than two percentage points more than Germany’s? 
Perhaps the small spread reflects investors’ belief that outright bailouts are eventually coming, however much German politicians protest to the contrary. 
European Central Bank purchases of periphery countries’ debt already constitute an implicit subsidy, and discussion of Eurobonds is heating up with Macron’s victory. 
Or perhaps investors are gambling that the South has walked too far into the cement to get out. 
Germany will just keep squeezing their budgets in order to ensure that its banks are repaid. 
Either way, eurozone leaders would be better off taking action now, rather than waiting for the single currency’s next moment of truth. 
How long today’s optimism lasts is for Macron and Merkel to decide. 

Europe’s Reform Opportunity 
BRUSSELS – The eurozone crisis is far less dangerous now than during its peak years of 2010-2013. 
Growth has picked up across the European Union, and five million jobs were created between 2014 and 2017. 
But the EU banking union remains incomplete, Greece and the Italian banking sector are facing challenges, and the aftershocks of the euro crisis could still undermine the EU’s stability – or even threaten the common currency. 
Barring the worst-case scenario of populist victories in the French election this May and the German election this September, European leaders should seize the opportunity later this year to pursue more ambitious, but pragmatic, reforms. 
As a first step, policymakers will need to acknowledge that they still lack effective policy-coordination tools. 
Although the European Semester created a broad framework for coordination, it has failed to effectively improve competitiveness, growth, or employment across all EU countries. 
At the same time, investment remains too low throughout the eurozone, and especially in countries that need to stage the largest recoveries. 
The “Juncker Plan” for targeted EU-wide investments can be a part of the solution, but it will not be enough. 
To be sure, these economic problems will require solutions at the national level; but they have also been perpetuated by common policymaking failures. 
For example, approved eurozone reforms have been implemented far too slowly; and additional structural reforms are not in the pipeline. 
There is also significant policy divergence among EU member states, because some do not trust others to fulfill their individual obligations. 
One camp, led by Germany and the Netherlands, believes that national governments are obliged, first and foremost, to deliver on agreed reforms, while respecting commonly agreed rules. 
France and Southern European countries, by contrast, argue that governments need more flexibility to decide on fiscal and structural reforms, and that governments with greater fiscal leeway should help to address current imbalances by increasing their public expenditures. 
Because national governments are politically accountable to their own citizens, they often lack incentive to increase cooperation at the EU level. 
This disconnect is now hampering further Economic and Monetary Union (EMU) reforms. 
Following up on its recent White Paper on the Future of Europe, the European Commission, for its part, intends to offer additional proposals for EMU reform in the first half of 2017. 
One hopes that it will furnish an ambitious agenda. 
It is clear that the eurozone will need far better coordination to ensure its long-term sustainability. 
Toward that end, European leaders need to take a pragmatic first step to rebuild the trust needed for more substantial policy innovations in the future. 
The initiative must come from France and Germany, the monetary union’s two largest economies, while also involving other euro countries. 
After their elections this year, France and Germany should issue a joint proposal that reflects concerns about collective responsibility, individual flexibility, and EU solidarity. 
For starters, a Franco-German proposal should allow for more fiscal flexibility, but within a strict framework. 
The EMU should have a “golden rule” for public and social investment, with a clear definition of such projects and a mechanism for assessing their validity. 
In exchange for greater flexibility on public and social spending, fiscal rules should be applied more strictly to all remaining expenditures, and should include the use of sanctions when necessary. 
Second, the proposal should call for contractual reform-and-investment agreements (RIAs) between individual member states and the European Council, approved by national parliaments and based on country-specific recommendations that are agreed to as part of the European Semester. 
This initiative would acknowledge that boosting growth requires investment, but that funding should be conditioned on demonstrated action. 
RIAs would instill discipline alongside solidarity, by focusing on reforms yielding a high growth dividend that will benefit all eurozone countries. 
Finally, fiscal capacity will be needed to underpin RIAs with eurozone countries that lack the budgetary space to spur growth on their own. 
The European Stability Mechanism could potentially provide such funds, starting with a limited amount and expanding the scope if the initiative is successful. 
A Franco-German reform package that includes these proposals would improve eurozone economic and policy convergence and cohesiveness. 
With a stronger EMU, the EU could remain open, while also providing more protection for its citizens. 
Moreover, this plan leaves significant decision-making power at the national level – even as it encourages intra-eurozone cooperation – and builds on existing governance provisions. 
This plan would constitute a substantive first step toward more fundamental reforms at a later time. 
But it will depend on favorable, pro-European election outcomes in France and Germany, and on European leaders’ willingness to compromise and take calculated short-term risks. 
Shoring up the project of European integration will require a comprehensive political deal. 
But European leaders must not miss their upcoming chance to start putting integration back on track. 
Otherwise, the eurozone’s current weaknesses will undermine the sustainability of the EMU itself, by generating uncontrollable costs that all EU countries will have to pay. 

Can Eurozone Reform Help Contain Trump? 
BRUSSELS – US President Donald Trump is using economic warfare to pursue his foreign-policy objectives. 
In August, his administration announced that it would double tariffs on steel and aluminum imports from Turkey, in order to pressure the Turkish authorities to release an American pastor detained for two years on espionage charges. 
At the beginning of next month, the United States will also ratchet up unilateral sanctions against Iran. 
The Trump administration knows that a key source of US economic leverage is the dollar’s role as the world’s dominant reserve currency. 
Countering America’s disproportionate power to destabilize the global economy thus requires reducing the share of international trade conducted in dollars. 
Can the euro serve as a credible alternative? 
The euro is the world’s second-leading currency, but it still lags far behind the US dollar. 
Two-thirds of all loans issued by local banks in foreign currencies are denominated in dollars, compared to just 20% in euros. 
Similar proportions apply to global foreign-exchange reserves. 
European Commission President Jean-Claude Juncker is eager to change this. 
Last month, he declared it “absurd” that “Europe pays for 80% of its energy import bill – worth €300 billion a year – in US dollars,” even though only about 2% of the EU’s energy imports come from the US. 
He then called for the euro to become “the instrument of a new, more sovereign Europe,” and promised to “present initiatives to strengthen the international role of the euro.” 
Juncker is not alone among European leaders in recognizing how powerful a tool the single currency can be when it comes to projecting power. 
German Foreign Minister Heiko Maas has proposed that the European Union establish its own international payments system. 
But these proposals, while ambitious, may overlook what is really needed to elevate the euro’s status. 
If the euro’s role in international trade increased, so would foreign companies’ holdings of euro-denominated assets and the total volume of euro-denominated loans. 
More global trade in euros could lead foreign banking systems to become heavily exposed to the currency. 
That means that, in the event of a crisis, the European Central Bank would have to take action, much as the US Federal Reserve has done in the past. 
During the 2008 global financial crisis, the Fed served as de facto global lender of last resort, agreeing to unsecured swap lines not only with reserve-currency central banks like the ECB and the Swiss National Bank, but also with emerging economies like Mexico and Brazil. 
The goal was to stabilize the global economy, but the liquidity also helped to prevent domestic disturbances from foreign sales of dollar assets and to stop foreign banks from scrambling to buy dollars. 
The ECB adopted a much more restrictive approach. 
In late 2008, it began to provide euros to the central banks of Hungary, Latvia, and Poland, but required them to put up euro-denominated securities as collateral. 
The ECB wanted to guard its balance sheet against unsecured exposure to Hungarian forint or Polish złoty. 
But these countries held too few eligible securities to obtain enough euros under the ECB’s initial terms. 
It took another year for the ECB, under pressure from Austria and other countries, to establish proper swap lines against foreign-currency collateral with the Hungarian and Polish central banks. 
Even now, the ECB will provide euro liquidity only to countries considered systemically relevant for the eurozone. 
This risk-averse approach contrasts with that of the Fed and, more tellingly, with that of the People’s Bank of China, which in recent years has established an extensive network of swap lines to promote the renminbi’s use in trade – and thus its standing as an international currency. 
If Juncker’s vision is to be realized, the ECB will have to abandon this parochial mindset and adopt a Fed-style role as international lender of last resort. 
Yet it remains unclear whether the ECB actually would be willing to leave part of its balance sheet exposed to the fate of non-eurozone countries. 
The ECB has good reason to be cautious: it lacks a political counterpart akin to the Fed’s US Treasury Secretary. 
With no eurozone finance minister with whom to coordinate in times of crisis, a decision by the ECB to help third countries – even EU countries – could be met with strong resistance. 
The ECB’s reluctance to establish a swap line with Hungary may be a case in point: Hungary was already distancing itself from the EU. 
Eventually, the ECB did resolve to do “whatever it takes” to save the euro. 
But if European leaders want to advance Juncker’s vision of strengthening EU sovereignty by boosting the euro’s international role, they cannot rely on the ECB to repeat that approach, without proper institutional support. 
Instead, eurozone leaders should complete the reforms of the currency union’s architecture and provide a political counterpart to the ECB that would support centralized monetary policy. 
This is the best initial response to Trump’s economic attacks. 
Anything else would be putting the cart before the horse – yet again. 

A New Approach to Eurozone Sovereign Debt 
ATHENS – Greece’s public debt has been put back on Europe’s agenda. 
Indeed, this was perhaps the Greek government’s main achievement during its agonizing five-month standoff with its creditors. 
After years of “extend and pretend,” today almost everyone agrees that debt restructuring is essential. 
Most important, this is true not just for Greece. 
In February, I presented to the Eurogroup (which convenes the finance ministers of eurozone member states) a menu of options, including GDP-indexed bonds, which Charles Goodhart recently endorsed in the Financial Times, perpetual bonds to settle the legacy debt on the European Central Bank’s books, and so forth. 
One hopes that the ground is now better prepared for such proposals to take root, before Greece sinks further into the quicksand of insolvency. 
But the more interesting question is what all of this means for the eurozone as a whole. 
The prescient calls from Joseph Stiglitz, Jeffrey Sachs, and many others for a different approach to sovereign debt in general need to be modified to fit the particular characteristics of the eurozone’s crisis. 
The eurozone is unique among currency areas: Its central bank lacks a state to support its decisions, while its member states lack a central bank to support them in difficult times. 
Europe’s leaders have tried to fill this institutional lacuna with complex, non-credible rules that often fail to bind, and that, despite this failure, end up suffocating member states in need. 
One such rule is the Maastricht Treaty’s cap on member states’ public debt at 60% of GDP. 
Another is the treaty’s “no bailout” clause. 
Most member states, including Germany, have violated the first rule, surreptitiously or not, while for several the second rule has been overwhelmed by expensive financing packages. 
The problem with debt restructuring in the eurozone is that it is essential and, at the same time, inconsistent with the implicit constitution underpinning the monetary union. 
When economics clashes with an institution’s rules, policymakers must either find creative ways to amend the rules or watch their creation collapse. 
Here, then, is an idea (part of A Modest Proposal for Resolving the Euro Crisis, co-authored by Stuart Holland, and James K. Galbraith) aimed at re-calibrating the rules, enhancing their spirit, and addressing the underlying economic problem. 
In brief, the ECB could announce tomorrow morning that, henceforth, it will undertake a debt-conversion program for any member state that wishes to participate. 
The ECB will service (as opposed to purchase) a portion of every maturing government bond corresponding to the percentage of the member state’s public debt that is allowed by the Maastricht rules. 
Thus, in the case of member states with debt-to-GDP ratios of, say, 120% and 90%, the ECB would service, respectively, 50% and 66.7% of every maturing government bond. 
To fund these redemptions on behalf of some member states, the ECB would issue bonds in its own name, guaranteed solely by the ECB, but repaid, in full, by the member state. 
Upon the issue of such an ECB bond, the ECB would simultaneously open a debit account for the member state on whose behalf it issued the bond. 
The member state would then be legally obliged to make deposits into that account to cover the ECB bonds’ coupons and principal. 
Moreover, the member state’s liability to the ECB would enjoy super-seniority status and be insured by the European Stability Mechanism against the risk of a hard default. 
Such a debt-conversion program would offer five benefits. 
For starters, unlike the ECB’s current quantitative easing, it would involve no debt monetization. 
Thus, it would run no risk of inflating asset price bubbles. 
Second, the program would cause a large drop in the eurozone’s aggregate interest payments. 
The Maastricht-compliant part of its members’ sovereign debt would be restructured with longer maturities (equal to the maturity of the ECB bonds) and at the ultra-low interest rates that only the ECB can fetch in international capital markets. 
Third, Germany’s long-term interest rates would be unaffected, because Germany would neither be guaranteeing the debt-conversion scheme nor backing the ECB’s bond issues. 
Fourth, the spirit of the Maastricht rule on public debt would be reinforced, and moral hazard would be reduced. 
After all, the program would boost significantly the interest-rate spread between Maastricht-compliant debt and the debt that remains in the member states’ hands (which they previously were not permitted to accumulate). 
Finally, GDP-indexed bonds and other tools for dealing sensibly with unsustainable debt could be applied exclusively to member states’ debt not covered by the program and in line with international best practices for sovereign-debt management. 
The obvious solution to the euro crisis would be a federal solution. 
But federation has been made less, not more, likely by a crisis that tragically set one proud nation against another. 
Indeed, any political union that the Eurogroup would endorse today would be disciplinarian and ineffective. 
Meanwhile, the debt restructuring for which the eurozone – not just Greece – is crying out is unlikely to be politically acceptable in the current climate. 
But there are ways in which debt could be sensibly restructured without any cost to taxpayers and in a manner that brings Europeans closer together. 
One such step is the debt-conversion program proposed here. 
Taking it would help to heal Europe’s wounds and clear the ground for the debate that the European Union needs about the kind of political union that Europeans deserve. 

The Eurozone is Still Vulnerable 
BRUSSELS – Despite recently experiencing an overall economic uptick, the eurozone remains fragile and uninsured against the risk of another crisis. 
And a major reason is that it is still vulnerable to asymmetric boom-and-bust cycles. 
Simply put, while all eurozone members can benefit during good times, some suffer far more than others during busts. 
This means that whenever the next crisis hits, safety-conscious investors will flee from fiscally weak countries toward fiscally strong ones that have a proven track record of generating economic growth. 
When the economic calculus reverses, we can expect to experience a sense of déjà vu. 
Each country’s gain will entail another country’s loss, which will undermine inter-eurozone cooperation and fuel political tensions. 
The effects will likely reverberate through each country’s domestic politics, strengthening forces that favor disintegration. 
To be sure, reforms that were implemented in response to the last crisis have improved the situation at the aggregate level; but they have not resolved the eurozone’s fundamental asymmetry. 
Underlying fiscal positions still vary from one country to another, despite all the efforts to achieve fiscal convergence through top-down rules. 
Likewise, Europe’s financial-sector reforms in recent years, while significant, have not provided an adequate solution to the problem. 
The European banking union has now partly muted one of the primary channels – domestic banks – through which public debt piled up during the last crisis. 
Financial supervision has been placed at the EU level, rather than being delegated to national authorities. 
And government bailouts have been replaced with creditor bail-ins, at least when the latter does not threaten financial stability. 
But none of this will avert the need for public bailouts when the next crisis hits, out of fear that financial contagion will amplify the initial market reaction. 
At the same time, Europe’s new crisis-management tools have obvious limitations. 
With a lending capacity of only €500 billion ($535 billion), the European Stability Mechanism (ESM) will likely not make much of a difference in the next crisis. 
An alternative option would be to activate the European Central Bank’s “outright monetary transactions” program, in which the ECB would purchase eurozone member states’ bonds in secondary markets. 
But the OMT, announced in September 2012 but never applied, would be politically difficult to implement. 
And because, like the ESM, it is conditional, it would do nothing to alleviate the tension between creditors and debtors. 
In fact, even a second round of the ECB’s Public Sector Purchase Program would not solve Europe’s asymmetry problem. 
Because the ECB, together with national central banks, buys government bonds in proportion to each country’s share of ECB capital, the PSPP cannot privilege the countries that are under stress. 
High-debt countries are limited in their ability to pursue proactive fiscal-stimulus policies. 
During the peak of the last crisis, some countries had to spend over 5% of their GDP just paying interest on their outstanding debt. 
And even after the market turmoil ended, and the PSPP brought interest rates down, high-debt countries last year still spent an average of around 3-4% of their GDP on interest payments. 
Most of these countries are far from being insolvent. 
But their debt is like a straightjacket, limiting their capacity to deliver economic growth in good times, and posing a liability in times of crisis. 
A formal debt restructuring is often offered as an alternative to ineffective supranational and national fiscal frameworks. 
In this scenario, market supervision would replace political supervision. 
But, because some countries are still clearly more vulnerable than others, introducing a debt-restructuring program now would scare investors away from those countries, thereby doing more harm than good. 
In the short term, policymakers should explore other avenues for solving the public-debt overhang. 
The PSPP, as it is currently constructed, allows repatriation of interest on bonds purchased by the ECB and national central banks. 
But interest savings are modest, because the ECB is formally limited from buying more than a certain amount of each country’s government debt. 
Lifting this limit would permit the existing framework to be used in the future to alleviate some countries’ fiscal burdens. 
Meanwhile, the ECB would need to play a different and more distant role than it has. 
And independent authorities – such as the European Commission or even an entirely new institution – would need to ensure that savings were put to productive use in each country. 

The Threat That Will Save Europe 
BRUSSELS – For the European Union, 2015 was another year of fundamental challenges. 
Two key elements of European integration – the euro and border-free travel within the Schengen Area – were placed under severe strain. 
And neither is in the clear. 
Nonetheless, one development in 2015 offers reason to hope that EU leaders will move beyond “muddling through” to implement bolder solutions in 2016: The threat of expulsion gained credibility. 
The global economic crisis that began in 2008 exposed the deep flaws in Europe’s monetary union, though it took the near-death experience of the euro crisis of 2010-2012 to force Europe’s leaders to act, by creating a large fund to help struggling countries and establishing a banking union. 
Even so, more than three years later, that union – which entails supervision by the European Central Bank and the beginnings of a fund for restructuring failing banks, but lacks a common system for deposit insurance – is far from perfect. 
Despite its flaws, the banking union helped to keep financial markets calm in the first half of 2015, even as Greece’s new government, led by Prime Minister Alexis Tsipras, challenged a basic feature of Europe’s approach to national financial crises: that recipients of support must engage in belt-tightening. 
In a July referendum, Greek voters delivered the outcome for which Tsipras campaigned, soundly rejecting the conditions – including strict austerity – which Greece’s creditors had demanded in exchange for a new bailout. 
A few weeks later, everything changed. 
Tsipras accepted a bailout program that was, in some ways, even tougher than the one that voters had rejected. 
An overwhelming majority of voters and members of parliament supported the move. 
What triggered this about-face is obvious: After the referendum, German Finance Minister Wolfgang Schäuble suggested that Greece should be offered a “holiday” from the euro – a thinly veiled warning that exclusion from the eurozone was on the table. 
Clearly, the threat worked. 
The potential implications of this threat are disputed. 
Some interpret it to mean that the eurozone has de facto become a fixed exchange-rate system, where exit might actually be preferable for a struggling country and its more competitive partners. 
If this is the case, the eurozone’s days are numbered. 
It might be more accurate, however, to view this Greek episode as proof of the eurozone’s resilience, underpinned by its still-powerful allure. 
Even in the face of a GDP contraction larger than that of the United States during the Great Depression of the 1930s, Greece preferred continued membership in the eurozone to a return to the drachma, which would have freed up some additional tools for regaining competitiveness and imposed asubstantial haircut on creditors. 
If the latter interpretation is correct, Europe’s monetary union, though still deeply flawed, has become more cohesive. 
If eurozone membership cannot be taken for granted, if countries that do not abide by the common rules can simply be kicked out, countries will try harder to hold onto it. 
The problems within the Schengen Area illustrate a similar evolution. 
Like the eurozone, the Schengen Area is an incomplete structure, because it abolished internal borders without creating a common mechanism for policing the external border. 
Until recently, this failing did not pose an acute problem, because dictatorial regimes in the Middle East and Africa controlled the migratory pressure resulting from wars and failing economies. 
But the recent surge in migration to Europe, driven largely by Syria’s intensifying civil war, has brought Schengen’s shortcomings to the fore. 
By last summer, countries along the Balkan route – first Greece, then Hungary and Slovenia – buckled under the pressure of hundreds of thousands of refugees attempting to make their way to safety. 
Europe’s initial response was incoherent, with different EU member states taking radically different approaches to the influx. 
Still, checks are being reinstituted at an increasing number of internal borders – most recently, on Denmark’s border with Germany. 
To many, Schengen appears to be in tatters. 
But the reinstatement of some border controls is merely a temporary measure. 
Like the capital controls in Greece (and, until recently, in Cyprus), the purpose is to stem the crisis while better mechanisms are implemented. 
Moreover, internal border controls remain the exception, not the rule. 
The Schengen countries know that reviving full controls across all internal borders would be extremely costly, forcing them to divert significant resources away from the primary objective of fighting crime and terrorism. 
That is why their leaders remain committed to preserving open internal borders, while maintaining a stronger external border – even if that means, as has been made clear to Greece, revoking the Schengen membership of a country deemed incapable of doing its part. 
Both the eurozone and the Schengen Area have survived the tough tests they have faced for one reason: They bring practical, tangible benefits to their members. 
Economists call this “revealed preference.” 
The value added from European integration now extends beyond EU membership to include participation in sub-groups like the eurozone or the Schengen Area that have a more direct and tangible impact on daily life and key policy choices. 
In the real world, declarations of lofty principles mean a lot less than concrete actions. 
And the concrete actions of the last year – notably, the warning that countries that do not follow the rules will be left out – suggest that 2016 will bring more progress, however piecemeal, toward a stronger eurozone and a real political union. 

Money for Nothing 
BRUSSELS – The developed world seems to be moving toward a long-term zero-interest-rate environment. 
Though the United States, the United Kingdom, Japan, and the eurozone have kept central-bank policy rates at zero for several years already, the perception that this was a temporary aberration meant that medium- to long-term rates remained substantial. 
But this may be changing, especially in the eurozone. 
Strictly speaking, zero rates are observed only for nominal, medium-term debt that is perceived to be riskless. 
But, throughout the eurozone, rates are close to zero – and negative for a substantial share of government debt – and are expected to remain low for quite some time. 
In Germany, for example, interest rates on public debt up to five years will be negative, and only slightly positive beyond that, producing a weighted average of zero. 
Clearly, Japan’s near-zero interest-rate environment is no longer unique. 
To be sure, the European Central Bank’s large-scale bond-buying program could be suppressing interest rates temporarily, and, once the purchases are halted next year, they will rise again. 
But investors do not seem to think so. 
Indeed, Germany’s 30-year bund yield is less than 0.7%, indicating that they expect ultra-low rates for a very long time. 
And many issuers are extending the maturity structure of their obligations to lock in current rates, which cannot go much lower (but could potentially increase a lot). 
In any case, the eurozone seems stuck with near-zero rates at increasingly long maturities. 
What does this actually mean for its investors and debtors? 
Here, one must consider not only the nominal interest rate, but also the real (inflation-adjusted) interest rate. 
A very low – or even negative – nominal interest rate could produce a positive real return for a saver, if prices fall sufficiently. 
In fact, Japanese savers have been benefiting from this phenomenon for more than a decade, reaping higher real returns than their counterparts in the US, even though Japan’s near-zero nominal interest rates are much lower than America’s. 
Nonetheless, nominal rates do matter. 
When they are negligible, they flatter profit statements, while balance-sheet problems slowly accumulate. 
Given that balance-sheet accounting is conducted according to a curious mix of nominal and market values, it can be opaque and easy to manipulate. 
If prices – and thus average debt-service capacity – fall, the real burden of the debt increases. 
But this becomes apparent only when the debt has to be refinanced or interest rates increase. 
In an environment of zero or near-zero interest rates, creditors have an incentive to “extend and pretend” – that is, roll over their maturing debt, so that they can keep their problems hidden for longer. 
Because the debt can be refinanced at such low rates, rollover risk is very low, allowing debtors who would be considered insolvent under normal circumstances to carry on much longer than they otherwise could. 
After all, if debt can be rolled over forever at zero rates, it does not really matter – and nobody can be considered insolvent. 
The debt becomes de facto perpetual. 
Japan’s experience illustrates this phenomenon perfectly. 
At more than 200% of GDP, the government’s mountain of debt seems unconquerable. 
But that debt costs only 1-2% of GDP to service, allowing Japan to remain solvent. 
Likewise, Greece can now manage its public-debt burden, which stands at about 175% of GDP, thanks to the ultra-low interest rates and long maturities (longer than those on Japan’s debt) granted by its European partners. 
In short, with low enough interest rates, any debt-to-GDP ratio is manageable. 
That is why, in the current interest-rate environment, the Maastricht Treaty’s requirement limiting public debt to 60% of GDP is meaningless – and why the so-called “fiscal compact” requiring countries to make continued progress toward that level should be reconsidered. 
In fact, near-zero interest rates undermine the very notion of a “debt overhang” in countries like Greece, Ireland, Portugal, and Spain. 
While these countries did accumulate a huge volume of debt during the credit boom that went bust in 2008, the cost of debt service is now too low to have the impact – reducing incomes, preventing a return to growth, and generating uncertainty among investors – that one would normally expect. 
Today, these countries can simply refinance their obligations at longer maturities. 
Countries’ debts undoubtedly play a vital role in the global financial system. 
But, in a zero interest-rate environment, that role must be reevaluated. 

Evading Tax Evasion 
ALESSANDRIA, ITALY – Tax evasion is a global scourge. 
The “black” economy has, by some estimates, reached 10% of GDP in advanced countries and can top 70% in developing countries. 
And it is getting worse. 
Tax evasion is usually confronted in two ways: audits and harsh sanctions. 
But, as the rising tide of tax evasion suggests, these mechanisms amount only to a cat game of and mouse problem – and the mice, it seems, are winning. 
As tax evasion becomes more pervasive, whole networks to help hide incomes have appeared, making it far less likely that those who break the law are punished. 
Moreover, because more people are evading taxes, tax administrations are under increasing pressure to become more lenient or to accept bribes. 
One strategy for weakening ties among potential evaders is to introduce various conflicts of interests. 
For example, value-added tax is designed to encourage firms to procure invoices for their inputs in order to reduce their own tax outlays. 
But the results often fall short of the potential benefits, because VAT has helped inspire tax evaders to create even stronger networks that can hide an entire chain of transactions. 
The Chinese have devised a novel solution. 
To encourage customers to request official receipts as proof of payment, some local tax authorities issue a type of receipt that doubles as a lottery ticket. 
The receipts can be used as scratch cards to win small amounts of cash, but they also serve as lottery tickets for winning larger amounts. 
To prevent forgery, businesses must purchase special, patented machines for printing these receipts. 
Records of the printed receipts are automatically transmitted to the tax authorities and are used to calculate taxes. 
Similar systems are in use in Taiwan and Latin America. 
Another way to reward consumers for combating tax evasion is to offer subsidies. 
Some developing countries have introduced a far-reaching VAT refund system for consumers who collect official receipts. 
Northern Cyprus, like Turkey, offers a 2.5 percentage point refund on VAT, compared to the standard VAT rate of 13%. 
But such systems are burdened by large administration and compliance costs. 
The process of collecting and verifying claims is time-consuming, and the net benefit for taxpayers is low. 
Moreover, the method is vulnerable to illicit practices, such as collecting receipts issued to foreigners and students, who cannot claim their own refunds. 
Monetary subsidies to consumption are also often granted in developed countries for a variety of purposes, not least of which is fighting tax evasion. 
One such subsidy is permitting deduction of a fixed percentage of certain expenses from income tax. 
In Italy, expenditures for home improvements have been partly deductible for the past ten years, mainly to improve tax compliance by firms in the housing sector. 
New regulations have recently been introduced with the specific aim of cracking down on moonlighting. 
Under the 2007 financial law, those who claim the home improvement deduction must supply an invoice from the building contractor, which must specify the cost for labor. 
In terms of reducing tax evasion, the results have been mixed. 
The bulk of claims for the subsidy come from northern Italy, which is usually considered less prone to tax evasion to begin with. 
While some cases of illegitimate claims are under investigation, there is no black market for receipts; fraud seems to arise mainly through falsified invoices. 
While econometric studies are not available, raw data show an increase in reported income and in the number of firms and official workers. 
However, taxable income in the sector is still growing at a slower rate than gross income as measured by national accounts. 
When tax evasion is extremely common, taxpayers are likely to experience high transaction and psychological costs in resorting to tax auditors to enforce the issuing of receipts. 
But if consumers bear the brunt of costs for reporting violations to the authorities, subsidies may induce them to seek out vendors willing to offer legal transactions. 
Yet these efforts are also costly. 
Whenever a firm chooses to evade, it becomes increasingly difficult to find a vendor willing to engage in legal transactions. 
When alternatives become difficult to find, the compensation requested for accepting an illegal transaction falls. 
As typically happens in these cases, once a critical mass of tax evasion is reached, it can jump to much larger values. 
This process might also explain why, although many reward systems have proven successful at the beginning, their benefits quickly fade. 
Of course, there is a risk that subsidies and lotteries may diminish the moral motivation of citizens to obey tax laws, because compliance becomes conditional on some form of compensation. 
But if lotteries, subsidies, and other devices fail to control tax evasion, the Chinese have another method: the death penalty. 

Even the Sheriff Upholds the Law 
For some time now America has appeared to be intent on discarding the basic ordering instrument of relations between states - international treaties and the institutions that watch over them. 
The Anti-Ballistic Missile (ABM) treaty with the former Soviet Union banning missile defense has been cancelled. 
A protocol seeking to supervise the prohibition of biological weapons production has been rejected. 
The Kyoto Protocol on climate change has been declared unacceptable to the US. 
The Nuclear Test Ban Treaty - negotiated with major US involvement - has been dismissed. 
The project of an international court of justice is ridiculed and resented. 
Indeed, when Russia demanded that agreed limitations on nuclear strategic warheads be defined in a document binding both Moscow and Washington, the US balked, preferring a vague declaration of principle instead. 
International covenants, the Bush Administration conveyed, are maybe all right for lesser powers - but they are an unacceptable restriction on the freedom of action of the world's only superpower. 
It is not only America's enduring willingness to use her unique power in ways generally benign to international stability that should put fears over this trend to rest; nor the other familiar phenomenon that American administrations tend to start off with ideology before they arrive at pragmatism. 
We are not witnessing a Copernican revision of the orbits of global diplomacy. 
For, although a world without treaties and institutions would hurt most other countries more, it would hurt the mighty US as well. 
The Guantanamo experience on how to treat Taliban and Al-Qaida fighters is a clear case in point. 
In the past, the Geneva Convention prescribed how regular prisoners of war and members of irregular military forces should be treated when apprehended: they are not to be dealt with as criminals. 
At first, US Secretary of Defense Donald Rumsfeld declared this international agreement inapplicable. 
Soon, however, the Pentagon's language lost its sharp edge: the problem did not really exist as the captives would be released soon anyway, and were treated well anyway. 
Finally, President Bush announced that Taliban fighters but not Al Qaida terrorists would enjoy the Geneva Convention's protections. 
The reason for this reversal is obvious: if the US puts the Geneva Convention in doubt, American soldiers, if taken prisoner, could lose their protections. 
Once the US claims the right of redefining or dismissing international treaties as it pleases, it can scarcely blame others if they do so as well. 
Because it is so fragile, international law depends on the support of the most powerful participants in international affairs; if their commitment is in doubt, it will not be upheld. 
But the ability of powerful nations to exercise their international influence also depends on international law being upheld. 
For its military power, America depends on no one; for its influence in the world, however, the US continues to depend on the acceptance of other, lesser countries. 
Were the US to opt out of international law, the strongest symbol for a more equitable international system, it would progressively lose influence. 
That is the lesson of Guantanamo. 
It is also the reason why the rest of the world need not worry. 
The US is going through one of its phases of redefining the world, which usually ends with helping the world work. 
American uneasiness about the prevailing body of international law dealing with conflicts is not entirely frivolous. 
Given the new challenges of gobalized insecurity caused, at least in part, by the privatization of force, there is now an urgent task to develop international norms that are relevant to today's conditions. 
Merely to insist, as some legal purists want, on the sanctity of existing agreements, is not enough; if they were adequate for past international requirements, this does not mean they are viable in a time when non-state actors are muscling into an arena hitherto monopolized by states. 
So there may be a case for re-examining the Geneva Convention just as there is for looking afresh at the project to establish a permanent international criminal court. 
Since America persists in rejecting the present court proposal (which has not yet entered into force), European governments, instead of sticking to it with equal obduracy, would do better to suggest an ad hoc international court to deal with Al Qaida-type culprits, perhaps attached to the Hague Tribunal now sitting in judgment over the war criminals of the Balkan Wars. 
Creating such a court would demonstrate that acts of international terrorism are an affront to the international community as a whole, not merely to the US. 
It could also help the Bush Administration to come up with a more convincing procedure than the one presently envisaged for honoring the President's vow to bring the perpetrators of September 11 th to justice. 
International agreements and international law are so essential for coexistence on this crowded globe that not even the most powerful nation can do without them. 
Even in politics it is foolish to oppose logic, and the simple logic of international agreements is that if one party does not honor them, neither will others. 
In the debate over the Guantanamo Bay prisoners and the Geneva Convention America's realists have, once again, won out over America's ideologues. 
As if to confirm that the lesson has sunk in, Secretary of State Colin Powell has just informed Russia that the US is ready, after all, to enter a binding treaty on the reduction of nuclear weapons. 

Ever Closer Union or Common Market? 
BERLIN – At stake in the United Kingdom’s upcoming referendum on whether to remain a member of the European Union is the nature of the EU itself. 
The UK wants a different kind of Europe than the one that the EU currently represents. 
Its preference is a Europe that essentially consists solely of a common market. 
Even though Britain has long been able to opt out of the euro and much else (and thus is not forced in any way to participate in the process of deepening Europe’s political union), this is the ideological essence of the controversy. 
It is a question that transcends the UK’s “Brexit” debate. 
The growing strength of euroskeptic forces in many EU member states has raised the same issue on the continent, where many believe that the goal of a political union might overburden member states’ citizens and should be abandoned. 
Like the British, many Continental Europeans are asking whether transnational regulation by Brussels-based institutions and a political union are actually necessary. 
Wouldn’t a loose association of sovereign nation-states, sharing the hard economic core of a continental common market – the British model – be enough? 
Why bother with all that complicated integration involving the Schengen Agreement, a monetary union, and EU regulations, which in the end don’t work properly and only weaken the member states’ global competitiveness? 
Looking at European postwar history, it becomes clear that this debate has been with us almost from the very beginning. 
The UK’s focus in the 1950’s and 1960’s was still mainly on the Commonwealth. 
The European integration process – aimed at overcoming Franco-German enmity and reconciling West Germany’s industrial potential with European stability (and thus, under the US and NATO security umbrella, excluding the recurrence of war in Europe) – was marginal to its concerns. 
After the Treaty of Rome in 1957 established the European Economic Community (EEC), the European Free Trade Association was established under British leadership a few years later. 
EFTA’s aims were a straightforward customs union and a common market, and it was designed from the outset to compete with the EEC, particularly in northern Europe and among the neutral countries. 
But it never caught on. 
The reason EFTA failed to take hold is instructive: It was based only on economic interests and pursued no further idea. 
EFTA had no soul, and that absence rendered it unable to compete with the incipient EU. 
Of course, economic interests have been paramount in sustaining the EU’s progress; but the idea of uniting Europe clearly transcended mere economic unification. 
It was and still is about overcoming European fragmentation via an integration process beginning with the economy and ending in political integration. 
Winston Churchill knew that, as can be seen in his 1946 Zurich speech – well worth reading today – in which he called for a “United States of Europe.” 
The EU is Europe’s main historical project. 
It has attempted, so far successfully, to learn from centuries of seemingly unending wars, by building a new pan-European system of states that is no longer based on a balance of power alone, but also on overcoming national rivalries by institutionalizing common interests and shared values. 
The EU has achieved great things, and this should not be forgotten amid its current crises. 
The British error is to assume that one goal, a common market for Europe, can be had without the other, greater political integration, over the long term. 
In order to function, a common market requires a substantial delegation of sovereignty and extensive European regulation. 
In fact, the EU can ignore neither the nation-states nor the common institutions and policies without putting itself at risk. 
Both are its cornerstones. 
The EU was characterized by this duality from the very beginning: a confederation with strong integrated federal elements and institutions. 
Whoever questions this duality calls the entire system into question, all the more so given that the EU’s current status quo is anything but conducive to enduring stability. 
The EU will achieve that only when it has taken the critical step toward a genuine federation. 
This is why the majority of EU member states must never abandon the aim of an “ever closer union.” 
The UK doesn’t share this aim, and it doesn’t have to share it. 
But the future of the EU hinges on pursuing it. 
Everything else is a question of pragmatic compromises, for which a good deal of leeway exists. 

Evil Personified 
COLLEGE STATION, TEXAS – Equating war with individual evil has become ubiquitous – if not universal – in contemporary international politics. 
Wars are fights against evil tyrants and the illegitimate governments they control. 
Such rhetoric makes wars easier to justify, easier to wage, and easier to support, especially for elected leaders who must respond directly to swings in public opinion. 
Such language works equally well for any society in today’s media-obsessed age. 
Little wonder, then, that political leaders consistently personalize international conflicts. 
Alas, such commonplace language also makes wars harder to avoid, harder to end, and arguably more deadly. 
The rhetoric of personified evil is easily seen through American examples, but is hardly a uniquely American phenomenon. 
Chinese leaders blame Taiwanese leaders for cross-straits tensions, and blame the Dalai Lama for all that ails Tibet. 
So, too, have protestors around the world made George W. Bush resemble Hitler, and mullahs throughout the Islamic world ritualistically harangue US presidents as earthly Satans, simultaneously noting their basic affection for the American people. Recent American leaders, for their part, find it nearly impossible to deploy military force without first employing such rhetoric as both mantra and crutch. 
The most famous example came in 1917. 
Woodrow Wilson, asking for a declaration of war against Germany, said, “We have no quarrel with the German people. 
We have no feeling toward them but one of sympathy and friendship. 
It was not upon their impulse that their Government acted in entering this war.” 
Only the Kaiser and his evil henchmen were to blame. 
In 1990, George H.W. Bush made the same plea: “We have no quarrel with the Iraqi people.” 
His son said the same thing in 2003, adding, “they are the daily victims of Saddam Hussein’s oppression.” 
George W. Bush had earlier noted that Americans “had no quarrel with the people of Afghanistan,” only with Al Queda and their Taliban supporters. 
He even employed this phrase in his final State of the Union address in 2008, saying that “Our message to the people of Iran is clear: We have no quarrel with you….Our message to the leaders of Iran is also clear: Verifiably suspend your nuclear enrichment, so negotiations can begin.” 
Every American president since Wilson has, at least once while in office, uttered the phrase “have no quarrel with” a foreign enemy. 
Such statements are typically made only days, sometimes hours, before the first American bombs fall. 
Bill Clinton promised on the eve of the bombing of Serbia that “I cannot emphasize too strongly that the United States has no quarrel with the Serbian people.” 
Barack Obama promised from the campaign trail that “We have no quarrel with the Iranian people. 
They know that President Ahmadinejad is reckless, irresponsible, and inattentive to their day-to-day needs.” 
Presidents employ such language for good reason. 
They know their public, a self-styled melting pot of peoples, would rather fight dictators than brothers and cousins abroad. 
Indeed, Wilson’s initial formulation grew from a demographic and political quandary. 
More than one-third of Americans in 1917 could trace their heritage back to Germany and its allies. 
Wilson could not implore his people to “kill the Krauts,” as British or French leaders frequently did, because so many of Wilson’s soldiers were, by ethnicity at least, Krauts themselves. 
He instead rhetorically transformed American soldiers from fratricidal killers into liberators of their ancient fatherland. 
Only when foreign enemies looked different from what Americans conceived themselves to be could presidents wage war against a people as a whole. 
Thus, Franklin Roosevelt could simultaneously urge Americans to keep the world from being “dominated by Hitler and Mussolini ,” even as he told them that “we are now in the midst of a war against Japan .” 
The war in Europe was a war to liberate oppressed peoples from tyrants. 
The war in the Pacific was a race war. 
Such politically expedient language has a strategic downside. 
First, once you pin blame for a conflict on a single individual, a Saddam Hussein or Kim Jong Il, it is difficult to see a solution to international conflict that does not result from the tyrant’s downfall. 
Imagine Bush parlaying with Saddam Hussein in 2005 or 2006, if war had never come again to Iraq, after having called him this generation’s Hitler. 
More troubling is the identification of conflict with a single human source, which obscures the more systemic and insidious nature of international conflict. 
Again, imagine if recent history had gone differently, and Saddam had in fact taken the Bush administration’s eleventh-hour offer of exile rather than war. 
Or if the initial attempt made on Saddam’s life in the war’s first hours had been successful. 
If Iraq indeed had weapons of mass destruction, as Bush believed, Hussein’s departure would have left such weapons in the hands of…whom exactly? 
Equating war with a solitary tyrant thus imposes strategic limitations for policymakers. 
It also leads, paradoxically, to a greater number of civilian deaths. 
Bombs aimed at foreign dictators or their security apparatus almost invariably kill individuals far from the corridors of power. 
Their deaths are easier to stomach, and to justify, so long as airmen and soldiers, and the public watching at home, believe the violence was at least directed against evil incarnate. 
Such rhetoric clearly works. 
It is global in nature. 
But it also helps make the world a more dangerous place by obscuring the real reasons for war, and by allowing peoples around the world to justify violence and conflict not as a means to an end, but rather as a holy mission of liberation, freedom, and the eradication of tyranny. 

Evolution on the Menu 
EDINBURGH – While some diet books might suggest otherwise, nature has been very accommodating in its meal plan for Homo sapiens. 
Whereas other great apes, like gorillas and orangutans, are vegetarian (though some chimpanzees will eat monkey), evolution has made humans “omnivores” and left most culinary decisions up to us. 
So, when did evolution enable humans to eat meat? 
Two sources – our species’ family tree and the fossil record – offer clues. 
The branches of the human family tree converge as they descend toward the root, revealing common ancestors where branches join. 
The shared ancestor of humans and chimps lived some five million years ago, and, while we do not know for certain what that ancestor ate, the best guess is that it was mainly, if not exclusively, vegetarian. 
If five million years ago is the earliest date that human ancestors could have opted for a diet that included meat, what is the latest date by which this might have happened? 
One answer to that question can be gleaned from the skeletal remains of “Lucy,” a pre-human fossil ancestor of humans, discovered in 1974. 
Lucy belonged to a species called Australopithecus afarensis, which lived in East Africa between 3-4 million years ago and is thought to have been the immediate ancestor of our genus, Homo. 
The first evidence that Lucy’s species might have eaten meat came in 2009, when researchers excavating a site in Ethiopia unearthed two 3.39-million-year-old fossilized animal bones scored with markings made with a stone blade. 
The marks were interpreted to mean that the animals had been slaughtered, but skeptics questioned why no butcher’s “blades” were found in the vicinity. 
Then, five years later, the missing evidence showed up at another site in East Africa where, 3.3 million years ago, some creature was making flaked stone tools for the apparent purpose of butchery. 
This date is too early for that creature to have belonged to a species of Homo, so it must have been an ancestor. 
The most likely candidate is Australopithecus afarensis, and if Lucy was no vegetarian, then her descendants – us – have very likely always been omnivores. 
Evolution may have equipped humans with the ability to eat meat, but it left us with plenty of latitude to decide how much, if any at all. 
A more inflexible evolutionary legacy involves our relationship with milk. 
Mother’s milk may be the only food that humans were biologically programmed to consume. 
And yet two-thirds of adults worldwide cannot drink liquid milk, because they are intolerant to lactose, a sugar that is found almost exclusively in milk. 
The explanation for this intolerance is that the gene that codes for the production of an enzyme called lactase, which enables babies to digest the lactose, is normally switched off in late childhood. 
There are two solutions to this problem. 
The first, invented by farmers in Anatolia about 10,000 years ago, is to allow bacteria to consume the lactose, turning milk into curd, cheese, and yoghurt. 
That is why a lactose-sensitive person can comfortably digest these dairy products. 
The second solution was provided by evolution. 
About 7,000 years ago, a genetic mutation arose among farmers in Central Europe that prevented the lactase gene from being switched off in childhood. 
People carrying this mutation are able to drink liquid milk safely throughout their lives, without the unpleasant side effects that lactose-intolerant individuals suffer. 
This mutation was a great advantage to those who inherited it, and carriers multiplied among farmers as they swept into Northern Europe, creating one of the fastest-spreading evolutionary event humans have ever experienced. 
Today, some 90% of Northern Europeans, and a similar percentage of North Americans who trace their ancestry to Europe, are lactose-tolerant. 
Other mutations with the same effect have evolved independently in parts of Africa, South Asia, and the Middle East. 
The human diet is unique among animals because we are ubiquitous and eat whatever is at hand. 
In fact, humans consume thousands of animal varieties and some 7,000 plant species. 
But while everything we eat has an evolutionary dimension, this rarely contains any prohibitions – as meat and milk illustrate in different ways. 
Simply put, choice may be the biggest factor shaping human diets. 
Biology provides the potential in our cuisine, but it is culture that writes the menu. 

What Makes a Human? 
ST ANDREWS, SCOTLAND – Last month, moviegoers flocked to theaters to see War for the Planet of the Apes, in which an army of retrovirus-modified primates wage war against humanity. 
Chimpanzees on horseback, machine-gun-wielding gorillas, and scholarly orangutans undoubtedly make for good theater. 
But could anything like this ever happen in real life? 
In Planet of the Apes, Pierre Boulle’s 1963 novel upon which the films are based, space traveler Ulysse Mérou is stranded on a terrifying planet ruled by gorillas, orangutans, and chimpanzees who have copied their former human masters’ language, culture, and technology. 
The humans, meanwhile, have degenerated into brutal and unsophisticated beasts. 
Much of the sinister realism in Planet of the Apes stems from Boulle’s impressive attention to scientific detail and knowledge of research into animal behavior at that time. 
His book tapped into the still-popular notion that animals such as chimpanzees and dolphins have complex but covert communication systems that humans cannot even fathom. 
Many people would prefer to think that all those “arrogant” scientists who have concluded that animals cannot talk have simply failed to decode animals’ calls. 
But Boulle’s book is decidedly a work of fiction, because apes here on Earth could never actually acquire human culture solely through imitation. 
In reality, complex culture requires underlying biological capabilities that are fashioned over long periods of evolution. 
Chimpanzees simply do not have the vocal control or physiology to produce speech. 
Moreover, modern apes could not be made highly intelligent even with brain-enhancing drugs. 
And although microbes can change behavior – such as when rabies renders its host violent and aggressive – they could never bestow language upon a species. 
We know this because animal communication has been investigated extensively for more than a century, and the scientific evidence yields few hints of truly complex communication faculties in non-human species. 
For example, in the 1940s, researchers raised a chimpanzee named Viki in their home. 
But Viki learned just four words – “mama,” “papa,” “cup,” and “up” – which was more than could be said for an earlier experiment in which a chimpanzee and a human child were reared together. 
That exercise had to be abandoned after the chimpanzee failed to learn a single word, and the child actually started imitating chimpanzee sounds. 
In the following decades, studies teaching apes sign language generated much excitement. 
And yet virtually all linguists would agree that the apes in these experiments had not produced language. 
They could memorize the meanings of signs, but they could not learn the rules of grammar. 
Tellingly, utterances by “talking” apes proved to be exceedingly egocentric. 
When equipped with the means to talk, apes’ communications are limited to expressions of desire such as “Gimme food.” 
The longest recorded statement of any “talking” ape, by a chimpanzee named Nim Chimpsky, was, “Give orange me give eat orange me eat orange give me eat orange give me you.” 
It turns out that chimpanzees, bonobos, and gorillas make for poor conversationalists. 
By contrast, within months of uttering their first words, two-year-old children can produce complex, grammatically correct, and topically diverse sentences comprising verbs, nouns, prepositions, and determiners. 
They can do so because human minds have evolved to comprehend and produce language. 
Many scholars believe that language emerged from the use of meaningful signs. 
Our ancestors were immersed in a symbol-rich world, and this generated evolutionary feedback favoring the neural structures that enable us to manipulate symbols efficiently. 
The syntax in human language today was made possible by our ancestors’ long use of symbolic proto-languages. 
Genes and culture coevolved to reorganize the human brain. 
The same is true of warfare, which is much more than just scaled-up aggression. 
In war, complex institutions dictate strict behavioral codes and individual roles that facilitate cooperation. 
Research suggests that this level of cooperation could not evolve in a species that lacked a complex culture and such features as institutionalized punishment and socially sanctioned retaliation. 
Most of these norms are not obvious, and thus have to be inculcated, usually during youth. 
But even among apes that are proficient imitators, there is little compelling evidence that behaviors are actively taught. 
When apes do cooperate, it is largely to help relatives. 
The scale of human cooperation, which involves huge numbers of unrelated individuals working together, is unprecedented largely because it is built upon learned and socially transmitted norms. 
There is now extensive evidence that our ancestors’ cultural activities changed the human brain through natural selection, which then further enhanced our cultural capabilities in recurring cycles. 
For instance, milk-drinking began with early Neolithic humans, who were consequently exposed to strong selection favoring genes that break down energy-rich lactose. 
This genetic-cultural coevolution explains why many of us with pastoralist ancestors are lactose tolerant. 
It is little wonder that Boulle put such an emphasis on imitation. 
Humans are descended from a long line of imitators, who mimicked each other’s fear responses to identify predators and avoid danger. 
Today, this is reflected in empathy and other forms of emotional contagion that make movies a heartfelt experience. 
Without these traits, we would all watch movies like sociopaths, equally unmoved by a murder or a kiss. 
It was also through imitation that our forebears learned how to butcher carcasses, build fires, and make digging tools, spears, and fishing hooks. 
These and countless other skills left us supremely adapted to decipher others’ movements, and reproduce them with our own muscles, tendons, and joints. 
Eons later, today’s movie stars demonstrate the same aptitude when imitating the movements of other primates, with a precision that no other species can match. 
Human culture, having evolved over millennia, is not something that another species can easily pick up. 
We can rest assured that there will be no inter-primate war on Earth. 
For that to happen, another species would have to undergo a similarly prolonged evolutionary journey. 
And the only real warmongering ape on the planet seems hell-bent on preventing that. 

Evolution’s New Frontiers 
MISHIMA – Recent breakthroughs in our understanding of molecular mechanisms have revolutionized many fields of biology, including cell biology and developmental biology. 
So it is no surprise that these advances are providing valuable insights into the field of evolutionary biology as well, including evidence supporting the nearly neutral theory of molecular evolution that I developed in 1973. 
As is typical in science, each new discovery in evolutionary biology raises as many questions as it answers. 
Indeed, my field is now going through one of the most dynamic periods in its 150-year history. 
For roughly a century after the publication of Charles Darwin’s On the Origin of Species, scientists believed that genetic mutations were governed by a process similar to that described by the father of natural selection. 
The idea was that individuals with superior genetic variants would be more likely to survive, reproduce, and pass on their genes than those without them. 
As a result, harmful mutations would quickly die out. 
Beneficial ones would spread until the entire species carried them. 
Evolutionary changes, including morphological ones, were thought to be the result of the accumulation and distribution of beneficial mutations, and the genetic makeup of populations was believed to be close to homogeneous, with only a few rare, random mutations creating differences between one individual and another. 
That view was challenged by the discovery of DNA. 
As it became possible to analyze an individual’s genetic makeup, it become apparent that there was much more variation within populations than prevailing evolutionary theory predicted. 
Indeed, individuals could have similar traits but very different gene sequences. 
This appeared to contradict the principles of natural selection. 
One of the first attempts to square the theory with the evidence was proposed by my late colleague Motoo Kimura, who posited the existence of neutral mutations – gene variants that are neither advantageous nor harmful to an individual, and therefore not influenced by natural selection. 
Kimura examined the rate of evolutionary change of proteins and proposed the neutral theory of molecular evolution in 1968. 
His theory – which held that evolutionary changes at the molecular level are caused not by natural selection, but by random genetic drift – provided a good explanation for the genetic variation that researchers had discovered. 
Kimura’s theory was simple and elegant, but the classification of mutations into the distinct classes – beneficial, neutral, or harmful – seemed too simple to me. My own work showed that borderline mutations, those with very small positive or negative effects, could be very important in driving evolutionary changes. 
This insight was the basis of the nearly neutral theory of molecular evolution. 
The explosion of data on genomes and population genetics in the twenty-first century has not only lent new support to my 42-year-old theory; it has also uncovered broad new areas of research. 
Our knowledge of the structure and function of proteins, for example, has been greatly expanded through the discovery of dynamic folding processes. 
These are thought to provide flexibility in how proteins function, in a way that may be connected to nearly-neutral mutations. 
Among the most interesting challenges in evolutionary biology is the attempt to identify the molecular mechanisms of gene expression that drive morphological evolution. 
The field is in the process of gaining a better understanding of a host of complex systems within individual cells. 
These molecular-level systems are at the heart of epigenetics – the study of changes in genetic function that cannot be explained by differences in DNA sequences. 
Epigenetics is crucial for comprehending the link between the genetic composition, or genotype, and the traits we can actually observe. 
In higher organisms – such as humans – epigenetic processes are controlled by chromatin, a complex of macromolecules inside cells consisting of DNA, protein, and RNA. 
The way chromatin works is, in turn, shaped by genetic and environmental factors, making their functioning difficult to grasp. 
These rapidly evolving, highly variable macromolecules are well worth studying, however, as they may be the cause of some human diseases. 
Another factor in the relationship between genetic composition and observable traits is the way that proteins can sometimes be modified. 
For example, protein enzymes can be turned on and off, thereby altering their function and activity. 
This process, like other forms of genetic expression, seems to be driven by a combination of innate and environmental factors. 
No single mechanism, it seems, can be studied in isolation; at a very basic level, factors like selection, drift, and epigenetics work together and become inseparable. 
The deeper we dive into what we once thought were straight-forward evolutionary processes, the more wondrous and complex they are revealed to be. 

Exchange Rate Disorder 
NEW YORK – Two troubling features of the ongoing economic recovery are the depressed nature of world trade and the early revival of international global payment imbalances. 
Estimates by the International Monetary Fund and the United Nations indicate that the volume of international trade in 2010 will still be 7% to 8% below its 2008 peak, while many or most countries, including industrial nations, are seeking to boost their current accounts. 
Indeed, if we believe the IMF’s projections, the world economy’s accumulated current-account surpluses would increase by almost $1 trillion between 2009 and 2012! 
This is, of course, impossible, as surpluses and deficits must be in balance for the world economy as a whole. 
It simply reflects the recessionary (or deflationary) force of weak global demand hanging over the world economy. 
Under these conditions, export-led growth by major economies is a threat to the world economy. 
This is true for China, Germany (as French Finance Minister Christine Lagarde has consistently reminded her neighbor), Japan, and the United States. 
Countries running surpluses must adopt expansionary policies and appreciate their currencies. 
More broadly, to the extent that major emerging-market countries will continue to lead the global recovery, they should reduce their current-account surpluses or even generate deficits to help, through increased imports, spread the benefits of their growth worldwide. 
But, while that implies that emerging-market currencies must strengthen, disorderly appreciations would do more harm than good. 
To use an American saying, it might mean throwing out the baby (economic growth) with the bathwater (exchange rate appreciation). 
Consider China, which accounts for the largest share by far of world trade among emerging economies. 
Real appreciation of the renminbi is necessary for a balanced world economic recovery. 
But disorderly appreciation may seriously affect China’s economic growth by disrupting its export industries, which would generate major adverse effects on all of East Asia. 
China needs a major internal restructuring from exports and investments, its two engines of growth in past decades, to personal and government consumption (education, health, and social protection in the latter case). 
But this restructuring will tend to reduce, not increase, import demand, as exports and investment are much more import-intensive than consumption. 
Moreover, a sharp appreciation of the renminbi could risk domestic deflation and a financial crisis. 
Chinese authorities certainly seem to have that interpretation of the roots of Japan’s malaise in mind as they seek to avoid rapid revaluation. 
The only desirable scenario, therefore, is a Chinese economy that transmits its stimulus to the rest of the world mainly through rising imports generated by rapid economic growth (i.e., the income effect on import demand), rather than by exchange-rate appreciation (the substitution effect). 
This requires maintaining rapid growth while undertaking a major but necessarily gradual domestic restructuring, for which a smooth appreciation is much better suited. 
Now consider other major emerging markets. 
Here currency appreciation is already taking place, pushed by massive capital inflows since the second quarter of 2009, and in some cases it can already be said to be excessive (for example, in Brazil). 
These countries can, of course, resist upward pressure on their currencies by accumulating foreign-exchange reserves, like they did before the global financial crisis. 
The result is, of course, paradoxical: private funds that flow into these countries are recycled into US Treasury securities via investment of accumulated reserves. 
Why should emerging-market countries’ central banks undertake this peculiar financial intermediation, which represents a major cost, as the yield of private funds is higher than that of reserves? 
The implication here is that relying on free movement of capital to achieve exchange-rate appreciation and current-account deficits may generate a myriad of problems, including slower economic growth and the threat of asset bubbles and financial crises of their own. 
So, a more orderly way to induce current-account deficits without risking disruption of emerging economies’ growth should be considered. 
One solution (already advocated by some, including me, and adopted to some extent by a few countries) is broader use of capital-account regulations. 
Surprisingly, however, this issue has been entirely absent from current global debates on financial reform. 
Fortunately, the IMF opened the door to discussion of this issue in a recent staff position paper. 
Equally important, a desirable global scenario is possibly one in which most developing countries run current-account deficits. 
But this requires major reforms in the global financial system to reduce the vulnerabilities that such deficits generated in the past, and that were reflected in major financial crises in the developing world. 
These past crises gave rise to a form of “self-insurance” among developing countries through reserve accumulation. 
This helped many of them weather the recent storm, but it also contributed to global payments imbalances. 
Recent IMF reforms are just a step in the direction of trying to create better financial instruments to help these countries. 
It is essential, in particular, to create reliable large-scale financing for developing countries during crises, through a mix of counter-cyclical issuance of SDRs and emergency financing without onerous conditions. 

Exhausted Italy 
Italy is facing perhaps its most important elections since 1948, when voters confirmed the emergence of Italy’s new republic from the wreckage of Mussolini’s fascist regime. 
On April 9-10, Italians must choose between Prime Minister Silvio Berlusconi’s center-right government and the center-left bloc headed by Romano Prodi. 
But neither man seems the sort of decisive figure that overcoming Italy’s bleak economic predicament demands. 
Italy’s economic malaise is obvious. 
Cumulative economic growth over the past five years was the slowest in the euro zone – 3.2%, compared to an average of 7.8% – with two years of stagnation. 
Per capita GDP, too, has fallen below the euro-zone average. 
Employment has increased, but labor productivity has remained flat and total factor productivity has declined. 
Combined with strong real exchange-rate appreciation, this has led to a dramatic loss of competitiveness and weakening exports. 
Indeed, the only growth sector seems to be books about Italy’s decline. 
Berlusconi claims that statistics are unreliable, for they conceal a much rosier reality for today’s well-off Italians. 
Other members of the government admit more soberly that Italy faces serious problems, but they lay the blame on factors beyond their control: a series of global economic shocks, a slow-down in continental Europe, the admission of China to the World Trade Organization, and the role of the euro. 
But such explanations are unconvincing. 
The global shocks affected all European countries alike, as did the entry of China (and other Asian countries) into the WTO, but French exports, for example, suffered much less, while German exports actually increased. 
True, European growth was dragged down by meager growth in Germany, but Italy grew marginally less than Germany. 
Finally, while the euro has put a stop to competitive devaluations, it also provided Italy with a sizeable benefit: a reduction by 6% of GDP in interest payments on the huge public debt accumulated in the 1990’s. 
It would be unfair, however, to blame the Berlusconi government alone for this dismal performance. 
Italy’s growth has been slower than Europe’s, with weakening exports, for the past decade, because the country was ill prepared to adjust to the global revolution in information technology and the changing pattern of world trade. 
Its infrastructure, both material and intellectual, was poorer, and its economic structure was unfit for the new challenges, owing both to firm size and their specialization in traditional sectors, as well as low levels of education and R&D. 
Yet the Berlusconi government did next to nothing to address these deficiencies, despite being the first government in Italy’s history to survive a full five-year electoral term. 
With an unassailable parliamentary majority, it could have undertaken coherent supply-side reforms, even at the risk of some initial unpopularity. 
A couple of reforms were belatedly enacted: timid intervention on pensions and a further increase in labor-market flexibility. 
But nothing was done to deregulate product markets or to give proper incentives to restructuring, while privatization came to a halt. 
Instead, the government chose old-style Keynesian policy: moderate tax cuts to increase disposable income and an increase in current expenditure. 
Between 2001 and 2005, current non-interest expenditure rose by 2% of GDP, revenues fell by 0.5% of GDP, and the general government deficit rose by 1% of GDP. 
Worse, the surplus fell from 3.2% to 0.5% of GDP, and fell even allowing for the business cycle. 
As a result, the debt-to-GDP ratio declined only modestly until 2004 and rose again – to more than 106% – in 2005. 
The weak fiscal position will severely constrain whatever government comes to power. 
The center-left’s ponderous electoral program proposes a cut of five percentage points in payroll taxes, but it is not clear where the required €10 billion will come from to pay for this. 
The idea of increasing the low (12.5%) withholding tax on capital gains met with accusations that Prodi intends to expropriate wealth. 
But the right’s slim manifesto includes its own unaffordable promises, such as cuts in property taxes and increases in low-level pensions. 
Italian voters are perplexed. 
In 2001, Berlusconi signed a “contract with the Italians” containing promises that have gone unfulfilled. 
He has always fancied himself as a savior, convinced that he alone can fix the country. 
So he finds it unconceivable that anybody can feel otherwise or even that rules should stand in his way. 
Hence his government’s efforts to pass laws changing judicial procedures, or to consolidate the duopoly of public (government-controlled) television stations and his own, or to concoct a bizarre new electoral law favorable to his coalition. 
But voters’ frustration with Berlusconi is not necessarily good news for Prodi and the left. 
Opinion polls reveal that trust in all politicians and political parties has reached the lowest level ever. 
Italy has endured a sad and degrading electoral campaign, one that has generated a lot of heat, but little light. 
One hopes that whoever wins buckles down to the serious work that Italy so desperately needs. 

R.I.P. Brexit? 
LONDON – British Prime Minister Theresa May’s plan to withdraw her country from the European Union in an orderly fashion is collapsing. 
Though she has survived a no-confidence vote, in January the House of Commons will almost certainly reject the exit deal she negotiated with EU leaders. 
In order to avoid a chaotic “no-deal” Brexit, her government will have to ask the EU for an extension on the departure date, or withdraw its “intention to leave” notification, at least temporarily. 
Either way, the next step would be to hold a second referendum with the option of a so-called exit from Brexit, which would reverse the 2016 decision to leave. 
Voters could still decide to back May’s deal, opt for a “Norway-style” arrangement, or crash out of the EU with no deal. 
But recent polling suggests that the choice of remaining in the EU would win the day. 
How did a country with 400 years of constitutional governance and a culture of political compromise end up here? 
Most commentators point to the seemingly insoluble problem of the Irish border. 
Under the 1998 Good Friday Agreement, which put an end to decades of violent hostility between Protestants and Catholics in Northern Ireland, Britain agreed to permit the free movement of persons, goods, and some services across the border with the Republic of Ireland. 
A binding international treaty with no provision for exit, the Good Friday Agreement was signed under the assumption that both Britain and Ireland would remain in the EU indefinitely. 
May’s deal with the EU includes a “backstop” that would prevent the reintroduction of a hard border between Northern Ireland and the Irish Republic in the absence of a formal post-Brexit trade deal. 
The problem is that well over 100 members of May’s own party have rejected the backstop outright and will vote against her deal for that reason alone, making it dead on arrival. 
But the Irish backstop is, in fact, a side issue. 
Even if there were no Irish problem, an orderly Brexit would have been impossible within the two years allotted to the UK under Article 50 of the Treaty of Lisbon. 
As I pointed out in October, British manufacturing supply chains are so deeply integrated with those of continental Europe that they could not survive the sudden establishment of customs and other checks on the British border. 
Britain’s automotive, aerospace, and precision-instruments industries would be decimated. 
To be sure, many non-European countries export large volumes of industrial goods to the EU. 
But, unlike British goods, these generally cross the EU border only once. 
The same would hold true for Britain’s goods only afterthe country disentangles itself from the web of European supply chains. 
That task alone would be comparable to the restructuring of post-communist countries following the collapse of the Council for Mutual Economic Assistance (Comecon, the Soviet-era trade bloc). 
Completing it could well take five or more years. 
After the 2016 referendum, May’s government should have had an adult discussion about the shape Brexit would take, rather than simply declaring, “Brexit means Brexit.” 
Scenarios in which the UK could remain in the single market, the customs union, or both were on offer from the EU. 
The government also should have done far more to apprise the business community of its plans. 
Moreover, if the intention was always to leave both the single market and the customs union, retaining only a free-trade agreement with Europe, the government should have made clear that it would need an “implementation period” of at least five years to do this in an orderly manner. 
During this time it would be bound by European laws – including its obligation to pay around £13 billion ($16.4 billion) per year to the EU budget. 
May should not have invoked Article 50 until all of these decisions had been made, communicated to the relevant parties, and agreed upon at least in principle. 
One reason May’s government ended up taking the exact opposite approach is that neither senior politicians nor bureaucrats understood the degree to which the British economy is intertwined with Europe. 
The fact that a quick Brexit into a free-trade agreement is logistically impossible seems to have been totally lost on them. 
But the bigger problem was that a balanced consideration of possible options would have laid bare the lie upon which the “Leave” campaign was based. 
The idea that Britain could secure a “bespoke deal” and maintain “frictionless” access to the single market while pursuing its own trade accords elsewhere was always a fantasy. 
Fearing the political consequences of acknowledging this basic truth, May adopted a completely unrealistic negotiating strategy, hoping that “some kind of Brexit” would happen before the British public realized it had been duped. 
Today, just three months before the departure date, this deeply deceitful démarche has disintegrated before May’s eyes – as well it should. 

Exit the Political Wife 
NEW YORK – France’s new president, François Hollande, is not married to his partner, the glamorous political journalist Valerie Trierweiler, and no one seems to care. 
Germany’s president, Joachim Gauck, is not married to his partner, the journalist Daniela Schadt, and no one seems to care. 
Andrew Cuomo, the governor of New York, is not married to his partner, the domesticity guru Sandra Lee, and no one seems to care. 
The list could easily be continued. 
Is the adoring political spouse – so much a part of the political landscape that she has her own iconography, from knit suits to the dreamy upward gaze at her man – receding into the past? 
It is true that in America, at least, hay can still be made from the role of political wife. 
President Barack Obama may have experienced his first major dip in the polls – and his first real slide with women voters – when a partisan supporter, Hilary Rosen, said that Republican presidential candidate Mitt Romney’s wife, Ann Romney, had never worked a day in her life. 
But the response to Rosen’s remark underscored the relative absence of the usual heightened scrutiny of the political wife’s hair and clothes, profession and cookie recipe. 
It was only 20 years ago that, during Bill Clinton’s first presidential campaign, his wife Hillary’s career – that is, the fact that she had one of her own – sparked wild and vituperative debate. 
There was even her absurd “bake-off” against First Lady Barbara Bush, in which she had to produce her own cookie recipe in order to appease a lingering cultural demand for domesticity in the role. 
Those days now seem like another age. 
In America in this election cycle, as in Europe, headlines are absent that in the past would have raised questions about an unmarried female partner, a working woman, a woman with a life of her own. 
So, what accounts for the sudden disappearance of the adoring political wife? 
The role achieved its apotheosis with someone who, perhaps not coincidentally, was trained as an actress. 
Nancy Reagan codified the misty-eyed gaze at the rugged man, the demure demurrals, and the aggregation of power behind the throne, while claiming, in interviews, interest in nothing more serious than the White House’s latest china patterns. 
“I don’t talk about political matters,” she famously said. “That’s not my department.” 
It is not surprising that this role has recently vanished. 
For starters, recent events have made it highly unappealing to any woman who has any alternative to assuming it. 
In recent years, the role of the traditional spouse has been, most visibly, to stand by (or not) while some excruciatingly embarrassing foible or betrayal by one’s husband is publicly aired in mortifying detail. 
What woman would want to risk that role – one that has become increasingly likely in an age when surveillance by political opponents has become increasingly sophisticated and extensive? 
Smart women may be unwilling to marry high-profile political men these days, owing to the tremendous potential downside. 
Other domestic arrangements might be easier than taking the matrimonial plunge, with its prospect of thankless exposure in the event of a scandal. 
Another reason for the not-necessarily-married and not-necessarily-full-time political spouse has to do with simple generational change: the role of adoring wife that Nancy Reagan perfected is a time-consuming profession. 
Most men who are ready to seize the reins of national power will be with women of their own generation, who are likely to have plenty to do on their own trajectory. 
We do have Clinton (as fraught and self-involved as her journey around these issues was) and Cherie Blair to thank for clearing away the cultural detritus. 
In a way, voters may find this evolution reassuring: when every male politician had to be equipped with a smart but underemployed full-time adoring wife, there was reason to be uneasy about the unseen influence of an unelected adviser hovering around cabinet meetings. 
But when a political leader’s partner is a full-time journalist – or a full-time lifestyle guru – one’s fears of a power behind the throne diminish: the woman, presumably, is too busy to meddle excessively in affairs of state. 
Finally, what smart contemporary woman wants to take on a one-step-down role? 
It is taxing to spend all of one’s time making one’s husband look good, and it is demeaning to have to feign a lack of interest in issues that doubtless were part of the attraction to one another in the first place. 
If the traditional political wife is vanishing, it is voters’ own fault: we set it up to be a thankless and infantilizing position. 
Why should we expect our leaders’ partners to perform, on a massive public stage, social roles that we no longer accept in our own lives? 
The adoring political wife was always more caricature than character. 
Now, fortunately, she can finally retire. 

Exiting from Democracy? 
Both President George W. Bush and Prime Minister Tony Blair urgently need a plausible exit strategy from Iraq. 
That they want to get out, now that their reasons for the war have so dramatically collapsed and domestic support is fading, is beyond doubt. 
But neither wants to leave in ignominy, with their last man dramatically lifted of an embassy rooftop by helicopter. 
Both Bush and Blair want to leave Iraq, if not with a victory, then at least with some sense of "mission accomplished." 
Judging from their recent statements, the scenario that they are concocting is simple. 
In January, there will be elections in Iraq. 
The resulting government will then ask the occupation troops to leave, say, within a year. 
Withdrawal will begin next spring. 
While that scenario is simple, reality is not. 
The first nagging question is this: will there actually be elections next January? 
Prime Minister Iyad Allawi assures the world that there will be, and President Bush echoes his words. 
More neutral observers - and indeed, the daily news bulletins about bombings and hostage taking and "insurgents" - cast doubt on that prospect. 
The probability of Iraqi elections being held this coming January must be lower than 50%, and we can be certain that these will not be free and fair elections throughout the entire country. 
Indeed, Iraq no longer deserves to be described as a united country. It has now joined the growing list of the world's failed states and can at best be described as a potential federation of three states plus the unruly city of Baghdad. 
Without elections, the Coalition is in trouble. 
What other exit strategy can it devise? 
Above all, however, Iraq is in trouble. 
What other way forward is there for that unhappy former country? 
The answer need not be all despair. 
It may be that rethinking strategy in the light of new facts will open a way forward. 
After all, it might be the case that national elections in a place groping for a democratic future are not the best first step on the road to a liberal order. 
This is notably the case where entrenched groups - Kurds, Shiites, Sunnis - compete for central power. 
Elections, in such a case, may not even be wise at all - indeed, they may prove to be counterproductive. 
History suggests that elections do not create democracies. 
They confirm that the conditions for a democratic order are present. 
Thus, they are not the first step in the process of democratisation, but the last step in a preparatory phase in which at least two conditions have been created. 
The first condition is a settled territorial arrangement. 
In "tribal" societies, this is not easy to bring about. 
Bosnia's experience reveals why this is so. 
However much one may favor multiethnic nation-states, once such a construction has failed, it is imperative to listen to popular sentiment. 
Viable units will emerge that are less than ideal but at least capable of creating legitimate government - meaning a government that is both effective and acceptable. 
It would be disastrous to destroy the emergent Iraqi-Kurdish entity in the name of an abstract and no-longer existent greater Iraq. 
Anyone who experienced occupied Germany after World War II, as I did, remembers that the first postwar elections held there were local and regional. 
In fact, they established what are now the Länder of the Federal Republic of Germany. 
The second condition that must be satisfied before elections can be credible is security. 
Initially, this may be an issue for the military. 
But peace and quiet based on tanks and the threat of air strikes cannot be enough. 
Security requires not just troops, but laws and their enforcement. 
What one might call "the liberal order" requires at least two institutional ingredients. 
One is democracy, including elections and governments held to account by parliaments and ultimately the people. 
The other is the rule of law. 
Lord Ashdown, the High Representative of a coalition of countries in Bosnia-Herzegovina, has set a good example of how the rule of law can be established. 
It requires persons of great courage to become judges, and strong authorities to enforce their judgments. 
But it can be done. 
In a Muslim country, such a strategy would, moreover, provide protection against hijacking of the law by religious fanatics. 
It would establish what might be called the "Turkish solution." 
Turkey's Prime Minister Recep Tayyip Erdogan has taken up this very challenge, first set by his great predecessor Kemal Atatürk nearly a century ago. 
Perhaps what Iraq needs most is not a ballot box, but an Atatürk. 
Such a strategy would be less simple than merely holding highly imperfect elections. 
It would make the exit of occupation forces more complex and perhaps more drawn-out. 
It would, however, have a more lasting impact on democratic development than a dubious process by which a limited number of people go to the polls to elect an ineffectual central government. 
Such a strategy might even lead to an outcome about which those who want Iraq to join a free world can genuinely say: mission accomplished. 

Exiting International Justice 
I recently took part in a conference in Belgrade entitled “Dealing with the Past in ex-Yugoslavia.” 
Although the rest of postcommunist Europe confronted such questions a decade ago, the Balkan wars of the 1990’s left both perpetrators and victims stuck in a time warp of justice delayed. 
As the conference’s participants made their way into Belgrade’s Hyatt Hotel, an angry band of mostly older protesters bearing posters that read, “Free Milosevic” greeted them. 
In a flurry of media and security, they confronted Carla Del Ponte, chief prosecutor at the International Criminal Tribunal for former Yugoslavia (ICTY) in The Hague. 
Del Ponte is pressing Serbia’s government to cooperate in the still unresolved cases of Radovan Karadzic and Ratko Mladic, who ordered, implemented, and oversaw the massacre of 7,000 Muslim men and boys at Srebrenica in 1995. 
The protesters are not unrepresentative of Serb opinion. 
Almost a decade after the start of the ICTY’s work, debate still rages over responsibility for war crimes, with little agreement on even the most basic facts of the conflicts in Bosnia, Croatia, and Kosovo. 
Serbian Prime Minister (then President) Vojislav Kostunica’s attempt in 2001 to set up a truth commission was doomed from the outset by allegations of bias, and was disbanded within a year. 
The ICTY is also in trouble. 
To be sure, Milosevic is on trial in The Hague for war crimes, crimes against humanity, and genocide. 
But comparisons to the post-WWII Nuremberg tribunal have worn thin: as the proceedings drag on, observers wonder why it has taken so long to establish criminal liability. 
After all, at Nuremberg, the top rung of the Third Reich was tried and convicted within months. 
By contrast, Milosevic has taken advantage of the ICTY’s procedures to delay his trial, while challenging its jurisdiction and legitimacy. 
This plays well back home, where indicted war criminals are still touted as war heroes. 
Indeed, Serbia’s last presidential election became something of a referendum on Milosevic – and hence on Serbia’s relations with the West and the wider world. 
The pro-Milosevic candidate, Tomislav Nikolic, lost, but he received 46% of the vote. 
Despite his campaign promises, Serbia’s President Boris Tadic has so far failed to cooperate with the ICTY by assisting in turning over Mladic (Karadzic is probably not in Serbia), who would surely testify against Milosevic. 
One understands his trepidation: the first post-Milosevic prime minister, Zoran Djindjic, cooperated with the tribunal, and paid for it with his life. 
Such foot-dragging exposes the ICTY’s fundamental weakness: unlike the Nuremberg tribunal, the international community convened it during, not after, a war. 
Without full control of either the evidence or the accused, the ICTY lacked from the outset the legitimacy and authority of “victors’ justice.” 
This continues to impede the case against Milosevic, raising questions about whether there is sufficient proof directly linking him to the policy of genocidal ethnic cleansing, although this is likely to be less problematic since the charges against him turn not on “command responsibility,” but instead on the ICTY’s charter principles of individual responsibility. 
These implicitly authorize prosecution of those responsible for a “joint criminal enterprise,” thus linking liability for criminal behavior such as deportations and removals to other foreseeable atrocities. 
But time is running out. The ICTY must wrap up new indictments this year, and disband by 2008. 
It enters this end game facing diminished resources and waning political will within the international community. 
What will be the Tribunal’s legacy? 
From the start, the ICTY’s aims were ambitious, having been launched under the UN Security Council’s peacemaking powers. 
If this meant that the Tribunal was intended to deter further violence, then it failed, at least in the short run. 
After all, atrocities – including the Srebrenica massacre – continued after the ICTY began operating. 
What about ethnic reconciliation? 
The ICTY’s first chief prosecutor, Richard Goldstone, called for condemnation of ethnic persecution in order to enable all sides to transcend identity politics and move towards a more liberal political order. 
Individual accountability would somehow break the chain of ethnic identity and communal vengeance. 
But fostering ethnic reconciliation is a tall order for any court, and the ICTY hasn’t yet delivered. 
A liberal political order implies a rule of law that recognizes precedents and analogical thinking. 
But many Serbs hold on to their sense of historical exceptionalism and unique suffering. 
Indeed, the coincidence of the NATO bombing in 1999 with the indictment of Milosevic helped convert both events into “attacks on the Serbian people.” 
Historical denial is no less evident in Croatia, where the polarities of blame and suffering have simply been reversed. 
There, too, the ICTY will not be missed. 
So the talk nowadays is of the right “exit strategy” from international justice. 
When the ICTY closes its doors, where should its unfinished cases go? 
Del Ponte has called for “new partnerships for justice.” 
That sounds fine, but what, realistically, are the choices? 
Can the ICTY’s investigations and indictments really be turned over to national courts? 
So far, the picture is not promising: the few domestic trials in the region continue to reflect the fractious politics and pervasive ethnic bias that surround them. 
As in many parts of the world, it may be several generations before the region’s crimes can be worked through. 
The ICTY’s responsibility should be to forge and disseminate a record that limits the possibility of historical denial. 

Exiting the Middle East Labyrinth 
BERLIN – Two years have passed since Barack Obama was elected President of the United States. 
Much to his credit – and in contrast to his immediate predecessor – Obama tried, from his first day in office, to work towards a resolution of the conflict between Israelis and Palestinians. 
Two years on, are good intentions the best that Obama’s new policy has to offer? 
After all, nothing of value has in fact resulted from them. 
Even worse, given that Obama’s effort to enforce a permanent moratorium on new settlement construction in the West Bank has failed, is that direct negotiations between the conflicting parties have run aground. 
Good intentions count for little in life – and for less in politics. 
What matters, first and foremost, are results. 
President George W. Bush believed that he needed to take account of only one half of America’s dual role in the Middle East, namely the alliance with Israel. 
He had no time for the second US role, that of pivotal peace mediator between Israelis and Palestinians, during his entire eight-year presidency. 
All his initiatives were intended only to pacify the international public. 
We all know where that led. 
From the start, Obama wanted to do things differently, pursuing an active Middle East policy. 
But the results so far are not very different from those under Bush. 
In both cases, standstill triumphed over progress. 
Given this, and both sides’ intransigence, many would withdraw and try to forget the conflict altogether. 
But it isn’t as simple as that, because a continuation of the conflict (which is what “forgetting about it” would boil down to) would not only prolong what is a tragedy for both Palestinians and Israelis, but would also be too dangerous for the region. 
Most ominously, the window of opportunity for a two-state solution could close for good, because realities on the ground will no longer allow it. 
For Israelis, this would mean permanent occupation of East Jerusalem and the West Bank, and thus reckoning with an Arab majority, which would erode the foundations of their state – democracy and the rule of law – and thus its legitimacy. 
Such a development is the greatest threat that Israel faces in the medium term, which makes a two-state solution vital to its own interests. 
Of course, from Israeli leaders’ perspective, the status quo, with its absence of terror and missile strikes, is anything but negative. 
But it won’t last. 
Moreover, the country’s strategic situation is deteriorating with each passing year, because the global redistribution of power and influence from the West to the East can only weaken Israel’s position. 
For the Palestinians, the situation is oppressive, and for Gaza it is an outright humanitarian disaster. 
They are internally divided between Fatah and Hamas, under Israeli occupation in East Jerusalem and the West Bank, isolated from the outside world in Gaza, hopeless in the region’s refugee camps, and rebuffed by their Arab neighbors. 
In these circumstances, the loss of a two-state perspective would be a recipe for further indignities and deepening misery. 
But, if Israelis and Palestinians share a vital interest in a two-state solution, they have very different interests, and therefore mean very different things when referring to the same issues. 
For Israel, security is the top priority; for Palestinians, what matters most is an end to Israeli occupation. 
Israel cannot afford a second Gaza in the West Bank and East Jerusalem; for the Palestinians, a state with an ongoing Israeli military presence would be worthless. 
Perhaps Obama’s central error was that an important but minor matter – stopping new settlements – was given central significance. 
An indefinite building freeze would lead to the immediate end of Israeli Prime Minister Binyamin Netanyahu’s coalition government in Jerusalem, without giving Israel or Netanyahu anything tangible in return. 
It should have been clear that Netanyahu would not extend the freeze. 
The crucial question that the US must ask both Netanyahu and Palestinian President Mahmoud Abbas is whether they would be willing – here and now – to negotiate in earnest about the final status. 
If so, a way out of the seemingly irresolvable conflict between Israeli security and Palestinian statehood would open. 
The formula could run as follows: a comprehensive agreement about the final status now (taking into account all open questions, including East Jerusalem as the capital of Palestine); implementation of the agreement in pre-defined steps over a longer period of time; and monitoring of the process via a mechanism based on the presence on the ground of a third party (led by the US).This would give Palestinians a guarantee of their state’s borders, its capital, and the Israeli occupation’s pre-defined endpoint. 
They could use the time, with international help, to build up effective state institutions, address economic development, and heal the rift between West Bank and Gaza. 
On this new and permanent basis, they may find a solution for the Palestinian refugees and advance the cause of reconciliation between Fatah and Hamas. 
Israel would have a guarantee that its security would not be endangered by a final-status agreement and the establishment of a Palestinian state, and that its withdrawal from the Palestinian territories would be gradual, over several years, and monitored on the ground by a third party. 
The country would then have clear, internationally recognized borders, enabling it to end permanently the conflict with its Arab neighbors. 
While the situation in the Middle East currently looks hopeless, a new attempt that focuses on the essential points, not on minor ones, deserves support. 
The alternative is the loss of the two-state solution and the perpetuation of a terrible – and terribly perilous – conflict. 

Exorcising Musharraf's Ghost 
CAMBRIDGE – Following its recent free elections, Pakistan is rebounding politically. 
But the euphoria that came with the end of the Musharraf era is wearing off, as the new government faces stark choices. 
Unlike Iraq and Afghanistan, democracy is not new to this 60-year-old state, but ethnic cleavages, weak institutions, and religious extremism in the North are perennially destabilizing. 
And, while the new government settles in and establishes its priorities, the West, especially the United States, must reassess the impact of its past dealings with Pakistan. 
Pakistan’s new prime minister, Yousaf Gilani, is a seasoned politician and, more importantly, has Sufi family roots, which is a good omen because of the Sufi tradition of tolerance. 
Gilani unequivocally declared in his inaugural address that fighting terrorism is a top priority, and his first decision was to release from house arrest judges deposed by Musharraf. 
The respite from the horrendous spate of suicide bombings since the new government assumed power is similarly heartening. 
But the honeymoon period is coming to an end. 
Already, in Gilani’s hometown of Multan, rioters attacked government offices and banks to protest electricity disruptions. 
A couple of well-known opposition politicians, a chief minister and a federal cabinet minister of the previous pro-Musharraf government, were publicly thrashed, raising doubts about government control over law and order in the country. 
So far, Musharraf has accepted his diminishing stature quietly – though he has few other options. 
The new political leadership, both inside and outside the parliament, has been carefully avoiding a head-on collision with the president. 
Interestingly, in the midst of the political transition, Musharraf embarked on a week-long visit to China to lobby for construction of an oil and gas pipeline between China and the Persian Gulf that would be routed through Pakistan. 
The deeper question raised by this proposal is whether Musharraf meant to convey a message to the US that Pakistan’s priorities were shifting. 
The revival of democratic politics in Pakistan will undoubtedly effect Pakistan-US relations. 
Pakistan’s military links with America appear to remain on a sound footing, so the strategic alliance with the US is likely to continue, perhaps with some nuanced differences over how to fight the “war on terror.” 
But Pakistani politicians are bound to be influenced by domestic public opinion, which is generally critical of US policies. 
Nevertheless, long-term US interests in the region will be better served if Pakistan’s democratic forces successfully establish themselves. 
A proposal in the US Senate to increase development and education aid to Pakistan could help in winning the hearts and minds. 
Meanwhile, President George W. Bush has said that “if another September 11-style attack is being planned, it probably is being plotted in Pakistan and not Afghanistan.” 
Whether this American intelligence assessment is based on credible information is unknown. 
American election-year politics may also be behind this assertion. 
But it is significant that Bush decided to voice this view during Pakistan’s political transition. 
Pakistan must take this view seriously, regardless of Bush’s motivations. 
The new government should quickly devise a policy to deal with terrorism. 
Recent months have seen dozens of suicide bombings and other terrorist activities – the price of Pakistan’s own past blunders, as well as those of the West. 
Afghanistan is a prime example, as is the failure to settle the Kashmir imbroglio with India. 
Both failures have strengthened domestic terrorist groups. 
Pakistan’s government appears to be preparing to talk to some of the extremists in the tribal areas, introduce political reforms, and redouble development efforts. 
But reference to “talks” makes the West uncomfortable. 
American officials have likened this strategy to negotiating with terrorists, and point to a previous round of negotiations that did nothing to stop violence in the tribal areas. 
But the new leadership wants to distinguish between al-Qaeda terrorists and religious conservatives and disillusioned Pashtun youth within Pakistan. 
After all, the victory of the secular Awami National Party (ANP) in Pakistan’s North-West Frontier Province is a strong indication that people there have rejected religious political forces and violence. 
This window of opportunity can be expanded through dialogue and reconciliation with those who are ready to disavow extremism and militancy. 
The new Pakistani government needs to explain this to the West in order to keep its support. 
The US, meanwhile, should end direct military strikes in the area, even if these are conducted with the knowledge and cooperation of Pakistan’s military. 
Force has never worked with the Pashtun tribes, and there is no evidence that this has changed. 
There are real signs that the new government is considered a credible partner in the tribal areas. 
It needs to be given time to find a way out of the endless cycle of violence. 

Exorcising the Last Balkan Ghosts 
The next few weeks will see the resolution, one way or another, of the last territorial issues remaining in the Balkans, where the wars of the 1990’s ended with NATO interventions in Bosnia (1995) and Kosovo (1999). 
Even with peace, major problems were left unresolved. 
Bosnia was divided between a Muslim-Croat federation and a Serb republic, with little authority vested in the central government and a large international military – and eventually civilian – presence needed to hold it together. 
Kosovo was left as a United Nations protectorate whose “final status” was uncertain. 
These unresolved issues are now returning: prompted by Serbia’s government, Bosnia’s Serb leadership is contemplating secession, even as its Muslim leadership tries to increase central control. 
And Kosovo’s Albanian population is clamoring for independence, while Serbia tries to postpone a decision by blocking action in the Security Council. 
There is a real risk of renewed violence, though perhaps not on the scale of the 1990’s. If the current negotiations on Kosovo’s status fail, Albanian extremists will seek to expel the more than 100,000 Serbs who live there. 
Similarly, any move by Bosnia’s Serb Republic to secede could incite instability there. 
Serbia, which traded violent nationalism for nonviolent nationalism when Slobodan Milosevic was overthrown eight years ago, has done all it can to impede resolution of these issues, with strong support from Vladimir Putin’s Russia. 
Serbia wants as much independence as possible for the Serb Republic, while asserting its own sovereignty over Kosovo. 
Serbs governed only by Serbs on their own territory is still Serbia’s goal. 
The United States and the European Union are committed to a different vision: democratic transition and integration of all of the Balkans into NATO and eventually the EU. 
But they have been reluctant to impose conditions on Serbia, for fear of bringing even more radical nationalists to power. 
The US allowed Serbia into NATO’s Partnership for Peace, despite Serbia’s refusal to extradite General Ratko Mladic, the Bosnian Serbs’ military leader in the 1990’s, to The Hague to face war crimes charges. 
The EU has negotiated and initialed (but not yet signed) a Stabilization and Association Agreement with Serbia, despite its recalcitrance in the Kosovo negotiations and meddling in Bosnia. 
But appeasement has failed. 
The US and the EU must use the strong hand that they still hold to ensure that their vision prevails, bringing lasting peace to a region that has repeatedly dragged great powers into conflict. 
This requires, above all, a stiff warning to Serbia that it can no longer prevent Bosnia and Kosovo from moving towards Europe. 
If for now a democratic Serbia prefers radical nationalism and alignment with Russia to membership in the EU and NATO, so be it. 
No vital US interests are at stake, and Serbia will soon recognize its mistake. 
The EU should be relieved not to admit such a Serbia. 
At the same time, the US and the EU, acting together, must get serious in Bosnia and Kosovo. 
In Bosnia, any further moves to undermine the essential compromise reached in the 1995 Dayton agreement should be met with the full powers of Bosnia’s “high representative,” who has recently negotiated an agreement that will strengthen the country’s fragile governing structure. 
Bosnia’s leading Serb and Muslim politicians are playing with fire because they know the fire department is standing by. 
It is time to take away their matches. 
In Kosovo, now that a last-ditch round of negotiations has concluded with a report to the UN Secretary General, the US and the EU should agree to recognize Kosovo’s independence, provided the Kosovars agree to implement the plan submitted by Finnish mediator Marti Ahtisaari. 
The Ahtisaari plan provides ample protection for Serbs and an international presence in Kosovo – which the US and the EU will need to deploy even without a new Security Council resolution – to ensure implementation. 
Ironically, Serbia’s resistance to the Ahtisaari plan undermines protection for Kosovo’s Serbs and increases the risk that they will be mistreated. 
American officials are fond of pointing out that the US has repeatedly intervened to protect Muslims from war and dictatorship. 
But this claim will be devalued if the so far successful international interventions in Bosnia or Kosovo end in tragedy. 
A satisfactory outcome in both places is within reach. 
To achieve it, the US and the EU must ensure that Serbia is blocked from making trouble, Kosovo becomes independent, and Bosnia stays united. 

Expansion and Democracy in Europe 
Europe is poised on the rim of two nearly revolutionary undertakings: eastward expansion and the possibility of a draft constitution for the European Union. 
Both should be treated as inextricably linked. 
I support EU-enlargement. 
It is an historical necessity. 
However, expansion must go hand-in-hand with institutional reforms that improve both the EU's capacity to act and its democratic legitimacy. 
Since communism's fall, the nations of Central and Eastern Europe have undergone exhilarating yet wrenching transitions. 
The biggest danger posed by that rather abrupt and harsh process of transformation is that, in trying to become open, a society risks disintegrating in the effort. 
This may happen when old structures are swept away, and are not replaced with new ones in a prudent way. 
Open societies demand reliable institutions, and these cannot be created overnight. 
Making that difficult passage from closed to open society was a necessary step for the states of Central and Eastern Europe to become candidate members and - perhaps soon - full members of the EU. 
Enormous effort was expended by them - something not fully understood by current EU members - to accomplish their domestic transformations and so adapt themselves to the incredibly extensive acquis of the Union. 
But the EU still must prove to the countries seeking to join it that the Union is a truly open, democratic society of the type they have struggled to make of themselves. 
That question has practical implications, for if the EU is to manifest itself as a free and open society it must assure its ability to function both effectively and efficiently when expansion takes place. 
Here is where the constitutional assembly underway in Brussels can and must link enlargement with reform of the Union, for enlargement must also be used to strengthen the transparency and democratic legitimacy of the EU. 
The Council of Nice in 2000 sought to restructure the Union for the time when enlargement will double its membership to 27. 
But the Nice meeting failed miserably. 
An important step not taken was to end the principle of unanimity that rules decisionmaking in the EU Council of Ministers, and replacing it with a system of qualified-majority voting. 
So long as unanimity remains, the more countries that take part in decisionmaking, the bigger the danger of a single veto blocking action. 
Reform of the structures and working procedures of the EU Commission is also an urgent need. 
Because of the system of collegiality, the sheer number of commissioners even now strains the Commission's decisionmaking capacity. 
If, in future, every country continues to send at least one commissioner to Brussels, the process will grind to a crawl, if not a halt. 
Better to radically reduce the size of the Commission, and to either tie countries into regional packages for Commission representation or rotate membership every few years among countries. 
But the most important question of EU democracy is this: a nation can vote its government out of office when it is not satisfied, but this is not possible in the EU. 
The Commission cannot be voted out of office because it was never actually voted into office. 
The European parliament is also not yet a real parliament, with control of the purse and oversight of the executive. 
Both must change. 
The European parliament must exercise effective democratic control on the European level. 
It must receive full sovereignty over EU budget-making and the right to sign-off on all decisions taken by a qualified majority in the Council. 
As to the EU's executive, the Commission, or at least its president, must be elected - in the long-term it may be elected directly by European citizens, and in the interim, at least by members of the European parliament. 
The Nice conference failed because the EU's national leaders could not, or would not, reach beyond their immediate national interests to take a pan-European perspective. 
But the Union's capacity to act as a union is now a pre-condition to securing each European country's national interests. 
If the events of September 11 th have taught us anything, they have shown that purely national answers to vital questions are either unavailable or unviable. 
As the Union reforms itself internally to strengthen its democratic character and become a truly open society, it must not close itself off from those outside it. 
At the very moment when today's candidate countries strive for EU membership, EU enlargement is feared by those states that are unlikely to join the Union for the foreseeable future. 
After the current round of enlargement is completed, the EU's eastern border will likely run to the east of the Baltic states, Poland, Slovakia, Hungary and Romania, with Russia, Belarus, Ukraine and Moldova on the other side. 
The Union must see to it that this border is not a new wall dividing Europe, and that the zone of stability and prosperity it has created for its members spreads to the EU's eastern neighbors as well. 
Membership in the EU should not be the determining factor in European statecraft. 
Our shared European values should matter most. 
The EU's ability to create peace and stability - not to mention economic prosperity - is unique in modern history. 
Indeed, the current state of the world shows how necessary a common European foreign and security policy is. 
Today there is not too much America - as some maintain - but too little Europe. 
The challenge facing the delegates at the Brussels convention is nothing less than creating an open, democratic, and yes, greater, Europe. 

Expansion is Solidarity 
Nowadays it is often alleged that the European Union’s sense of solidarity was put in jeopardy, if not shattered outright, by its enlargement to take in the countries of central and eastern Europe. 
As Bulgaria and Romania come closer to membership, and with accession talks with Turkey and Croatia set to begin, it has become increasingly important to challenge that view. 
The values and interests of the EU’s newest member states coincide in most ways with those of the 15 earlier members. 
It is, of course, true that enlargement has fundamentally changed the Union and given rise to new problems and policy concerns. 
But the new member states in central and eastern Europe are deeply embedded in the economic, social, and cultural development of our Continent. 
The ties that bind us together were frayed by forty years of Soviet domination, but this did not fundamentally change these states’ European character. 
My country, Poland, has always had deep cultural ties to other European countries, especially France. 
We participated in all the major developments in European music, literature, and film (think of Andrzej Wajda’s films from the Solidarity era, such as “Danton,” which were French co-productions). 
Even in sport, East Europeans have long been integrated with the rest of Europe. 
Indeed, before World War I the German national football team consisted entirely of players with Polish names. 
But, above all, there is a deep sense among Poles, Hungarians, Czechs, and others, that they are Europeans. 
This is the very meaning of the word “solidarity,” as defined in the Oxford English Dictionary: “unity resulting from feelings and sympathies.” 
Solidarity, in the sense of unity resulting from common interests, also clearly exists within both the original EU-15 and the enlarged Union. 
The exceptions prove the rule. 
The EU’s disunity over the war in Iraq should not overshadow its member states’ agreement on almost all other great questions of international affairs. 
In economic matters, disagreements on, say, a single EU regulation should not be allowed to mask the fact that no member state, new or old, has ever contested the internal market. 
Finally, the enlargement process itself is also manifestly a symbol of European social, civic, and cultural unity. 
The fact that it provoked debate and dispute does not detract from the conviction shared by old and new member states that they had an obligation to rebuild the Continent after 40 years of division. 
But there are concerns that, if not fundamentally divisive, are worrying. 
Should we fear the fact that Europe is no longer a purely Jewish/Christian and white continent? 
Will EU citizens whose origins are in other continents and whose religion is Hindu or Islam, Sikh or Buddhist, be able to identify with “European” values and culture? 
Will they be able to feel European, like the Poles or the Czechs have always felt? 
These questions apply most pointedly – indeed, they cannot be avoided – in the case of Turkey’s possible accession to the EU. 
Is European integration animated by respect for another’s values? 
Is it about sharing them or about contributing to them? 
These are obviously knotty questions. 
They are particularly difficult if we see culture as the cement of Europe’s future. 
All European countries probably believed at the outset that non-European newcomers could be assimilated in the same way that Polish immigrants were assimilated into Germany’s Ruhr region in the nineteenth century. 
That this has not happened, at least on a large scale, is not to say that it cannot happen at all. 
Look at the growing number of prominent citizens of Turkish origin in Germany. 
Consider the many second generation Indian and Pakistani Britons who are now seen in business suits carrying laptop computers and flying around the world. 
But Europeans must admit that these individuals represent a small minority. 
Many immigrant groups in Europe find themselves flung back on their own communities by the impossibility of social and economic integration. 
The constant threat of terrorism has made this isolation even more dramatic for the Europe’s Islamic populations. 
The EU cannot simply proclaim “solidarity” as a core value and then do nothing to foster it among those who feel marginalized. 
They, too, must be allowed to feel those ties of “unity resulting from feelings and sympathy.” 
European solidarity cannot and will not survive their neglect. 

Why Aren’t US Bond Investors Panicking? 
LONDON – As US President Donald Trump ratchets up his trade war with China and the Federal Reserve Board increases US interest rates, the prospects for the world economy and financial markets, so bright just a few months ago, appear to be darkening. 
Stock markets around the world have fallen back toward their February lows, business confidence has weakened in Europe and much of Asia, and policymakers worldwide are making nervous noises. 
Are these events the beginning of the end of the global economic expansion, or is the recent market turbulence just a false alarm? 
Last month, I highlighted three indicators – the oil price, long-term US interest rates, and the dollar’s exchange rate – suggesting that global conditions would remain benign. 
Economists may warn that the combination of Trump’s protectionism, big tax cuts, and uncontrolled government borrowing, coming at a time when the US economy is already near full employment, will ultimately fuel inflationary pressure. 
But financial markets simply do not believe this message. 
And since the financial turbulence of early February, the message from the biggest and most important financial market – for US government bonds – has become even more reassuring. 
Despite the Fed’s decision to raise short-term interest rates, and to signal more rate hikes than expected for 2019, interest rates on US ten-year bonds have fallen to levels well below their February peak. 
Thirty-year interest rates are now below their 2017 peak of around 3.25%. 
These interest-rate movements imply that bond investors are less worried today about inflation and economic overheating than they were before Trump’s tax cuts, protectionist measures, and the shift from budget consolidation to aggressive fiscal expansion. 
The fact that bond investors seem unworried about inflation or overheating does not mean that Trump’s protectionism and fiscal profligacy are harmless. 
Financial markets are sometimes catastrophically wrong, as they were before the 2007-08 financial crisis. 
But the US bond market is more than just an indicator of financial opinion. 
The long-term interest rates set in bond markets have so much impact on business conditions that changes in investors’ views can influence economic reality almost as much as vice versa. 
At present, investors’ views and economic reality are completely at odds. 
Long-term interest rates of around 3% come nowhere near pricing in the Fed’s inflation target of 2% plus the real economic growth of 2-3% that was likely to be achieved even before the Trump administration’s big fiscal stimulus. 
In fact, both economic analysis and decades of past experience suggest that long-term interest rates tend to fluctuate around the rate of nominal GDP growth. 
This rule of thumb implies 30-year rates in the 4-5% range. 
And if Trump’s efforts to boost economic growth toward 4% were taken seriously, long-term interest rates should logically rise to 6% or above. 
Sooner or later, the gap between bond yields and nominal GDP growth will presumably close. 
Either growth will weaken dramatically, as implied by bond-market expectations, or interest rates will rise dramatically, because bond-market expectations turn out to be completely wrong. 
And yet neither of these things will necessarily happen in the next year or two. 
GDP growth is unlikely to weaken, given the big fiscal stimulus, very high business confidence, and strong growth in personal incomes resulting from rapid job growth. 
But what about bond yields? 
If the US economy continues growing as expected, is it not inevitable that long-term interest rates will surge to much higher levels, knocking the highly leveraged US, and ultimately the entire world economy, off its current path of strong and stable growth? 
This seems unlikely, at least in the year ahead, for several related reasons. 
First and foremost, the belief in a “new normal” of anemic growth and low inflation is deeply embedded among investors and central bankers. 
After spending the decade since the financial crisis obsessing about secular stagnation and falling prices, investors and Federal Reserve officials will require many months or even years of consistent and incontrovertible evidence of inflation and higher growth to be convinced that deflationary conditions have genuinely reversed. 
Even when investors accept the intellectual case for much higher bond yields, regulatory impositions on banks and pension funds, together with quantitative easing in Japan and Europe and other forms of financial repression, will ensure continuing demand for government bonds at prices far above any reasonable estimate of fundamental values. 
The distorted pricing cause by regulatory pressures is amplified by a kind of conditioned response among bond investors. 
As inflation and interest rates have fallen steadily over the past 30 years, bond investors have been consistently rewarded for treating every temporary uptick in interest rates as a buying opportunity. 
This experience has created a Pavlovian reflex to “buy on dips” that can be broken only by many months or perhaps even years of negative experience. 
This reflex has been strongly apparent in the past two months. 
Whenever stock markets have fallen sharply, as they did in early February and again after Trump announced his trade sanctions on China, the bond-buying instinct became irresistible, bond prices rallied, and the resulting reductions in long-term interest rates stabilized stock markets. 
At some point, the bond market’s Pavlovian behavior will stop, and long-term interest rates will move much higher. 
But until this happens, investors’ unshakable belief that low inflation is a permanent feature of economic reality will allow the US government to pursue increasingly inflationary policies. 
And the bizarrely low long-term interest rates set by complacent bond markets will provide a safety net for global financial markets – at least until complacency proves to be unsustainable. 

Russia’s Nonprofit Spies 
LONDON – Nothing so riles Western opinion about Russia today as its law on foreign agents. 
Enacted in July 2012, the law requires all non-commercial organizations (NCOs) engaged in (undefined) “political activities” to register with the Ministry of Justice as “carrying functions of a foreign agent.” 
A follow-up measure in 2015, the Undesirable Organizations law, required any such NCO to identify itself publicly as a “foreign agent.” 
The wording is peculiar and significant. 
What, after all, are the “functions of a foreign agent,” in common parlance, except to serve the interests of a foreign power? 
Indeed, Russia’s law effectively prevents NCOs not under state control from carrying out any activities in the country. 
Certainly, the designation puts them beyond the reach of the Russian funding which might get them removed from the registry. 
They are not only foreign: they are infiltrators and traitors! 
Some groups have gone into voluntary liquidation; others have been suppressed for not complying with regulations; and still others are in exile. 
Prominent victims have been the Sakharov Center, the Memorial Center for Human Rights, and the Moscow School of Civic Education. 
Having fended off an earlier attempt to stigmatize it as a “foreign agent,” the European University at St. Petersburg now faces closure for trivial technical violations – a favorite bureaucratic tactic. 
The vendetta against independent groups with foreign ties brings Russia no benefits and damages its international reputation. 
One can try to understand it at three levels. 
First, the 2012 law was a direct response to the large public demonstrations that began the previous year in Moscow, St. Petersburg, and other Russian cities to protest Vladimir Putin’s decision to stand for a third term as president, his election, and his inauguration. 
In his only election speech, on February 23, 2012, Putin, recalling Russia’s victory over Napoleon in 1812, warned against foreign interference in the country’s internal affairs. 
This was a clear reference to Ukraine’s 2004 Orange Revolution, allegedly organized and bankrolled by the CIA, which overthrew Viktor Yanukovych, Moscow’s preferred presidential candidate. 
The 2015 law followed the previous year’s Maidan uprising in Kyiv, which succeeded in deposing Yanukovych a second time. 
Fear of the Russian state’s disintegration, a legacy of empire, is never far from its rulers’ thoughts. 
It is the principal barrier to the development of democratic politics. 
It is a legacy still mired in the murky world of “front organizations”: real “foreign agents,” apparently independent and devoted to worthy causes, but secretly controlled from abroad. 
The Russians know all about them, because the Soviets routinely established them as a clandestine foreign-policy tool. 
The “front” would be a collection of respectable, often unsuspecting academics and cultural and sports figures; the “rear” would be controlled by the KGB. 
The organization’s output would be sympathetic to, or at least not critical of, the Soviet viewpoint. 
The CIA responded in kind. 
The Congress for Cultural Freedom, founded in 1950, was one of its many “fronts,” which funded well-known literary and political journals such as Encounter in the United Kingdom, as well as helping dissident intellectuals behind the Iron Curtain. 
How much influence these “fronts” actually had on events is hard to know. 
To those addicted to conspiracy theories, they are an essential part of the secret history of the Cold War. 
And today’s print and electronic media provide new scope to “frontism.” 
With a sufficiently vivid imagination, one can see the long arm of Putin in the appointment of George Osborne as editor of London’s Evening Standard, owned by the Russian oligarch Alexander Lebedev. 
But suspicion of the foreign has much deeper roots in Russia. 
Anyone struggling to learn the Russian language soon runs up against its extraordinary opaqueness. 
Russians’ cultural genome (DNA) evolved in a peasant milieu, in which property was held, and life lived, in common. 
(Soviet communism, for all its imported Western inputs, was rooted in the traditional idea of collective property.) 
Relationships were governed not by legal norms, but by informal understandings and a clear distinction between those inside and outside the common mentality. 
Traditionally a closed society, Russians love or hate, explained filmmaker Andrei Konchalovsky in 2015; they do not respect. 
The Westernization started by Peter the Great in the eighteenth century was a forced growth –a graft, not a transplant. 
Without Peter, writes Konchalovsky, there would have been no Pushkin, Tchaikovsky, or Tolstoy, but only Pimen, Feofan Grek, and Andrei Rublev. 
But it did not shift the center of gravity of Russian civilization, which remained collective and slavophile, not individualistic and Western. 
The West gave Russia its dissidents and its missiles, but not its meaning. 
Putin understands this very well. 
Occasionally, his speech lapses into the slang of the prison, or tyurma, the epitome of the closed society. 
It is too much to expect a repeal of the foreign agent law. 
But Russia could make a cost-free concession, by limiting the registration of “foreign agents” to NCOs that receive more than 50% of their funding from non-Russian sources. 
This would unlock domestic funding, enabling such groups to operate in Russia. 
And the West could offer a cost-free concession of its own – such as the removal of some Russians from the list of those barred from traveling to Europe or the United States. 
With global peace and prosperity partly hinging on a stable Western-Russian relationship, is it too much to ask for such small, paranoia-reducing steps? 

Living With Populism 
MADRID – “We must educate our masters,” Robert Lowe, a British statesman, told colleagues after the passage of the Second Reform Act of 1867, a law that added over a million voters to the Parliamentary Register. 
For Lowe, an educated populace was the best means to secure participatory governance in Britain. 
But 150 years later, the educated “masters” of liberal democracy have apparently learned little. 
Lowe, one may assume, would not be impressed with the populist trends pulling the wool over their eyes. 
As the United Kingdom’s Brexit referendum and the election of Donald Trump as President of the United States demonstrated, voters are too easily fooled by prejudice and false promises. 
Critical thought is increasingly dismissed as an elitist endeavor, while unaccountable social media, “fake news,” and “alternative facts” dominate public discussion. 
In an environment of ignorance, populist politicians make willing prey of those who feel ignored. 
But because those politicians are so appealing to so many, they, no less than easily swayed voters, must be scrutinized. 
The question is whether a brand of politics that threatens liberal democracy can also be reformulated to save it. 
There are two types of populists today: the exploitative and the enlightened. 
Trump represents the former. 
With an administration full of Goldman Sachs alumni, and an agenda that promises tax cuts for the super-rich while privatizing Medicare and education, Trump is bound to disappoint the white working class that won him the White House. 
Automation, not trade, is responsible for the decline of manufacturing jobs. 
Natural gas, not environmental regulation, has fueled the demise of the US coal industry. 
But Trump’s rise was not just about the economy. 
It was also about turning a nativist American identity against minorities and immigrants. 
For demagogues, playing on peoples’ emotions is always more effective than appealing to their “common sense,” as George Orwell explained in his review of Hitler’s Mein Kampf. 
This is as true for Trump in the US as it is for right-wing populists like Marine Le Pen in France, Frauke Petry in Germany, and Geert Wilders in the Netherlands. 
Democracies, however, can also produce a more enlightened type of populism, such as that offered by US Senator Bernie Sanders. 
Had he become the Democratic Party’s nominee for president (rather than Hilary Clinton), and had he assumed the US presidency, his promise to upend the American socioeconomic order and implant a Scandinavian-style social democracy might have enraged large swaths of the electorate. 
Congress probably would have derailed the entire list of noble goals that comprised his platform – single-payer health care, free college for all, campaign-finance reform, and breaking up big banks – as unbearably costly, if not “un-American.” 
Nonetheless, Sanders could have led America closer toward Lyndon B. Johnson’s vision of a Great Society without poverty or racial discrimination. 
He surely would have respected the separation of powers, and would not have tainted the presidency with daily bacchanals of lies and narcissism. 
Sanders’ moral compass and public spirit counsel humility, a trait vital to restraining the impulsive instincts of the world’s most powerful officeholder. 
Sanders’ benign form of populism was not just a way to achieve power; it was an enlightened drive for moral and social improvement. 
His rejection by the Democratic Party establishment spared America a unique election contest between too diametrically opposed brands of populism. 
If Hannah Arendt was right about the “morbid force of attraction” that “contempt for moral standards” has for the mass mentality, the angry “masters” might have still voted Trump. 
Nonetheless, winning popular contests – whether the Brexit referendum in the UK, elections in Western democracies, or even the plebiscite on the peace agreement with the Revolutionary Armed Forces of Colombia (FARC) – requires a nod to populist politics. 
Lambasting the established system, even when the candidate is part of it, is now the norm. 
The choice for voters seems to be whether to side with purveyors of exploitative ideas or enlightened leadership. 
Trump’s perpetual anti-establishment campaign shows that, even as president, he intends to cultivate an outsider image. 
It is the classic form of exploitative leadership. 
In this respect, he and Israeli Prime Minister Binyamin Netanyahu have much in common. 
Throughout his 11-year tenure, Netanyahu has maintained his onslaught on the supposed hegemony of the Labor Party establishment and the mainstream media. 
But not even enlightened populists are free from the risks of duplicity; they, too, are frequently forced to betray their voters. 
Prior to the election that brought him to power, another Israeli prime minister, Yitzhak Rabin, said that, “the leader who would give the order to withdraw from the Golan Heights, even in exchange for peace, must be out of his mind.” 
Yet, once in office, Rabin initiated talks aimed at securing peace with Syria in exchange for Israel’s withdrawal from the strategic heights. 
Western democracy seems trapped in a conundrum. 
The system falters when voters cannot make informed decisions based on candidates’ platforms. 
In the long run, the solution is to educate the “masters” and respond to their concerns with facts – as Lowe advocated a century and a half ago. 
In the meantime, enlightened populism may be the best option. 
Wherever democracy is practiced, voters’ lack of information and expertise cannot be allowed to give rise to leaders and policies that weaken democracy itself. 

Populism’s Corrupt Core 
NEW YORK – Populist electoral victories around the world in recent years have led many to conclude that liberal democracy is under assault. 
But the arrest this week of Malaysia’s former prime minister on corruption charges is one of several signs suggesting that widespread predictions of the global demise of liberal democracy are premature. 
The implication of the doom-and-gloom view is that liberal democracy’s defenders cannot reclaim the moral high ground until they have reexamined their own political and economic assumptions. 
Yet it is a mistake to think that the rise of autocrats is all about ideology, or that it represents a widespread rejection of democracy, liberalism, or human and civil rights. 
Today’s elected demagogues are motivated not so much by principle as by power and greed – they are in it for themselves, their families, and their cronies. 
Restoring balance to our off-kilter world requires that we expose the rank corruption at the heart of the new illiberalism. 
In Hungary, Prime Minister Viktor Orbán’s friends and family members have grown rich on government loans and public contracts. 
In Orbán’s hometown of Felcsút, one crony has overseen the construction of a soccer stadium that seats 4,000 people, even though the total population of the town is just 1,600. 
Whereas “corruption before 2010 was rather a dysfunction of the system,” notes the watchdog group Transparency International, “Today, it’s a part of the system.” 
In Turkey in 2014, people close to President Recep Tayyip Erdoğan, including several senior members of his ruling Justice and Development Party (AKP), were implicated in a money-laundering scheme that purportedly sought to bypass US-led sanctions on Iran. 
The scandal led to the resignation of four cabinet ministers, and to the release of audio recordings in which Erdoğan allegedly can be heard telling his son to dispose of millions of dollars of ill-gotten funds. 
But Erdoğan dismissed the allegations as a set-up, and Turkish prosecutors eventually quashed the case. 
In Malaysia, former Prime Minister Najib Razak and his associates now stand accused of pillaging more than $4.5 billion from 1MDB, a government investment fund. 
According to the US Department of Justice, the pilfered money was used to purchase high-end real estate in Manhattan, mansions in Los Angeles, paintings by Monet and Van Gogh, a corporate jet, a yacht, and other luxury goods. 
And in the United States, of course, questions continue to swirl around the private interests of President Donald Trump and his family, and how they may bear on his behavior in office. 
The irony is that anger over corruption played a critical role in fueling the current wave of populist autocrats. 
So, to defend liberal democracy, we must reclaim the anti-corruption mantle. 
By redistributing stolen assets from political and corporate thieves and their legal and financial enablers, anti-corruption campaigns do not just hold the powerful to account. 
They can also address inequality – and thus the widespread frustration that populists have exploited. 
But fighting corruption also means shining a spotlight on – and prosecuting – those who threaten, kill, or otherwise thwart journalists working to expose abuses of power. 
Freedom of expression and other fundamental rights are not elitist luxuries, as authoritarians claim. 
They are indispensable for safeguarding free societies. 
Moreover, a concerted campaign against corruption could serve as a unifying force in countries with deep political divisions. 
While a majoritarian government can ride roughshod over the interests of minorities, corrupt regimes steal from everyone. 
That is why corruption has provoked mass protests from Bucharest to Brasilia over the past year. 
To be sure, those in power can turn anti-corruption campaigns into a political tool. 
In China, President Xi Jinping has made deft use of anti-corruption purges to eliminate political adversaries and secure near-absolute power. 
But this is all the more reason for proponents of liberal democracy to redouble their own efforts to combat violations of the public trust. 
Fortunately, those efforts already have a strong track record. 
In the US, four decades of increasingly robust prosecutions under the Foreign Corrupt Practices Act have punished misconduct around the world and recovered billions of dollars in stolen assets. 
And despite Trump’s own long-standing criticisms of the FCPA, he has yet to blunt its enforcement activities (though that may yet happen). 
Likewise, in France, prosecutors recently charged a former president and a leading business tycoon with large-scale corruption in Africa. 
In the United Kingdom, the government has just adopted rules requiring that all British overseas territories – notorious havens for dark money – publicly list the real owners of registered companies by the end of 2020. 
And in Spain, the long-ruling Partido Popular recently lost a no-confidence vote following a criminal investigation of financial malfeasance that sent its treasurer to prison. 
But despite these signs of progress, more action is needed. 
Anti-corruption enforcement remains uneven across different jurisdictions. 
To address transnational financial transactions, we must build stronger international networks of prosecutors and investigators. 
At the same time, more governments should follow the UK’s example, by ending the practice of “beneficial ownership” by secret third parties. 
Owners of some of the most expensive apartments in New York City have gone to great effort – much of it legal – to keep their identities hidden, by registering through trusts, limited liability companies, or other entities. 
More broadly, public and private donors should bolster their support for civil-society organizations and independent media. 
These institutions can track and expose corruption, explain how it implicates powerful political figures, and push state actors to sanction those responsible. 
Reining in corruption will not be easy, given that many economies are dependent on investment flows linked to criminal activity. 
But the consequences of doing nothing are clear. 
Corruption is a primary driver of populism and the retreat from liberal values. 
So the next time someone asks you what happened to liberal democracy, tell them to follow the money. 

How Corruption Fuels Climate Change 
LONDON, BERLIN – Anti-corruption campaigners achieved a number of crucial victories in 2016, not least by ensuring accountability for one of Big Oil’s most crooked deals: the acquisition of Nigerian offshore oil block OPL 245 in 2011 by Royal Dutch Shell and Eni, Italy’s largest corporation. 
Last December, Nigeria’s Economic and Financial Crimes Commission indicted some of the Nigerians involved, and Italian prosecutors then concluded their own investigation, bringing the executives and the companies responsible for the deal closer to standing trial. 
Several months earlier, in June 2016, the US Securities and Exchange Commission published a rule, under Section 1504 of the 2010 Dodd-Frank Act, requiring oil, gas, and mining companies to disclose all payments made to governments on a project-by-project basis. 
If the SEC had issued its rule earlier, Shell and Eni most likely would not have gone ahead with the OPL 245 deal, because they would have had to disclose their payment. 
But opposition from the oil industry delayed the rule, so the companies were able to conceal their payment. 
Last year also marked the first time in millions of years that the concentration of CO2 in the atmosphere reached 400 parts per million (ppm). 
While the Paris climate agreement was hailed as a major success when it was concluded in December 2015, many signatories have displayed a remarkable lack of ambition in upholding their carbon-reduction commitments. 
To understand why is to see the sheer extent to which our systems of government have been captured by the corrupting influence of vested interests. 
The story of OPL 245 began in 1998, when the Nigerian dictator Sani Abacha awarded the block to Malabu Oil and Gas, which was secretly owned by Dan Etete, Abacha’s own oil minister. 
Thus, Etete had essentially given OPL 245 to himself. 
But after the Abacha regime fell, the block was taken from Malabu and awarded to Shell. 
This triggered a series of legal battles between Malabu, Shell, and the Nigerian government that ended only with the corrupt Shell-Eni deal in 2011. 
Public documents show that the $1.1 billion that Shell and Eni paid to the Nigerian government for the deal was, in reality, being paid to Malabu. 
Both companies knew that this payment method, through an account created by J.P. Morgan in London, was in breach of the Nigerian constitution, and that the funds would end up in private hands. 
Eni claims that it investigated the deal and found “no evidence of corrupt conduct in relation to the transaction.” 
Shell, for its part, says that it only paid the Nigerian government, and that it does “not agree with the premise behind various public statements made by Global Witness about Shell companies in relation to OPL 245.” 
But Italian prosecutors have now requested a trial for several senior Eni executives – including the current CEO, Claudio Descalzi, and his predecessor – as well as Etete and several others; and they are pursuing separate charges against four senior Shell executives. 
Whether or not these prosecutions succeed, for now we can no longer celebrate the SEC’s disclosure rule, or the United States’ renewed support in creating a global standard of transparency for the extractive industries. 
With Donald Trump’s presidency and a Republican-controlled Congress, the SEC rule was immediately vacated under the Congressional Review Act, an obscure law that had been used only once before. 
Trump’s frequently racist and misogynist campaign promised to “drain the swamp” of corruption in Washington politics. 
But congressional Republicans’ decision to scrap the SEC rule, which Trump quickly signed into law, was an act of pure cynicism that helps perpetuate the “corrupt” system that Trump claims he ran against. 
After the oil and gas industry failed to block Section 1504 through legal action, it appealed to its friends in Congress for help. 
And the arguments used by its congressional proxies would be risible had the consequences not been so tragic. 
Senator James Inhofe, a notorious climate-change denier who has received more than $3 million in campaign contributions from the fossil-fuel industry, led the charge: the disclosure rule was an imposition from the Obama era that would be too costly to implement and add needless bureaucratic red tape. 
No mention was made of the costs borne by citizens when their national wealth is sold off through dirty deals, or by investors when corruption leads to prosecutions and massive fines. 
To fulfill the Paris agreement, efforts to combat corruption and climate change must go hand in hand. 
Corruption, in the widest sense of the word, is the glue that holds the “system” together, that ensures that moneyed and powerful interests are free from rules that are meant to hold them in check. 
It is why governments that pledged to make large reductions in greenhouse-gas emissions have been unable to meet their commitments. 
Shell, Exxon, and most other major oil and gas companies knew decades ago that their products were fueling climate change. 
But instead of acting on that knowledge, and changing their business model, they embarked on a massive campaign to deceive the public and lure policymakers into complacency. 
Not surprisingly, Shell is one of 47 major hydrocarbon producers now being investigated by the Filipino government for its role in contributing to human-rights violations stemming from climate change. 
To sustain progress in the fight against climate change and corruption, environmental and anti-corruption movements will have to work together, and play to their respective strengths. 
If nothing else, Trump’s election, and the possibility of more populist victories in Europe this year, have given us a wake-up call. 

Hurricanes at the Ballot Box 
SINGAPORE – Hurricane Florence, which smashed into the southeastern United States last week, is the latest in a string of extreme weather events that has raised expectations for disaster preparedness. 
With big storms occurring more frequently, authorities worldwide are responding with upgraded early-warning systems, better evacuation plans, and more aggressive sheltering strategies. 
But the day is fast approaching when fires, droughts, and storms exacerbated by global warming will dwarf our ability to respond. 
The case for reducing carbon dioxide emissions – and slowing the rate of anthropogenic warming – grows stronger with every new catastrophe. 
The solution is clear: we must elect leaders who will take climate change seriously. 
In the US, the next opportunity to do that will be the midterm congressional elections in November. 
Three decades have passed since former NASA scientist James Hansen first warned “with a high degree of confidence” that human activity was making the planet hotter. 
And yet, because too few people heeded his warnings then, everyone is paying a price now. 
In the first nine months of 2018, the world has experienced a lifetime’s worth of “historic” weather events – from drought-fueled forest fires in the American West, Greece, and Sweden, to floods in Hawaii, southern India, and elsewhere in South Asia. 
As Florence was tearing through the Carolinas, Typhoon Mangkhut was swamping the Philippines and southern China. 
While Hansen’s warnings came when climate science was in its infancy, scientists today have connected the dots among CO2 emissions, climate change, and severe weather. 
For example, researchers have linked global warming to extreme heat waves – such as the ones recently experienced in California, China, Japan, and South Korea. 
Data have also tied the severity of hurricanes in the southern US to warmer waters in the Gulf of Mexico. 
Hurricane Harvey, which hit Texas and other areas in 2017, brought 50 inches of rain in some places. 
To be sure, disaster planning still saves lives. 
In Houston, authorities were ready for Harvey in part because of lessons learned from Hurricane Katrina, which devastated New Orleans in 2005. 
That storm caused 1,833 deaths, while at least 88 were killed during Harvey. 
The impact of lessons learned in India is even more striking. 
In October 2013, residents of Odisha state were alerted early to the arrival of Cyclone Phailin. 
By the time the storm made landfall, many people had already evacuated. 
Although Phailin did claim 45 lives, a storm of similar magnitude that hit the same region 14 years earlier killed 10,000 people. 
Still, emergency management efforts will struggle to keep pace with the havoc wrought by climate change, owing to a dangerous disconnect between knowledge and action, even as the scientific evidence piles up. 
For example, many economic advisers still consider climate-change solutions to be anti-growth rather than pro-growth – despite the fact that low-carbon solutions create new investment opportunities and jobs. 
Policymakers are equally reluctant to champion meaningful changes – like carbon taxes or the elimination of fossil-fuel subsidies. 
Leaders in most countries consider the status quo to be politically safer. 
Even weather reports on television typically fail to mention climate change as an underlying cause of severe meteorological events. 
But the gap is most glaring at the policy level, particularly in the US. 
With the international response to climate change at a critical juncture, the Trump administration is putting the US economy on a path to higher CO2 emissions by reversing emissions limits for coal-fired power plants, encouraging higher fossil-fuel production, and rolling back support for wind and solar power. 
None of this makes economic sense. 
To make matters worse, the White House’s proposed cuts to the National Weather Service and its loosening of environmental and zoning regulations will further impede disaster management. 
As the world’s largest CO2 emitter per capita, the US has a unique responsibility to help solve the climate-change challenge. 
So do American voters. 
When they go to the polls in November, they must consider the candidates’ policies toward climate change. 
While domestic issues might be uppermost in voters’ minds, Harvey, Florence, and other extreme weather events have made global warming a local issue and placed it squarely on the ballot. 

Extreme Weather and Global Growth 
CAMBRIDGE – Until recently, the usual thinking among macroeconomists has been that short-term weather fluctuations don’t matter much for economic activity. 
Construction hiring may be stronger than usual in a March when the weather is unseasonably mild, but there will be payback in April and May. 
If heavy rains discourage people from shopping in August, they will just spend more in September. 
But recent economic research, bolstered by an exceptionally strong El Niño – a complex global climactic event marked by exceptionally warm Pacific Ocean water off the coast of Ecuador and Peru – has prompted a rethink of this view. 
Extreme weather certainly throws a ringer into key short-term macroeconomic statistics. 
It can add or subtract 100,000 jobs to monthly US employment, the single most-watched economic statistic in the world, and generally thought to be one of the most accurate. 
The impact of El Niño-related weather events like the one this year (known more precisely as “El Niño Southern Oscillation” events) can be especially large because of their global reach. 
Recent research from the International Monetary Fund suggests that countries such as Australia, India, Indonesia, Japan, and South Africa suffer adversely in El Niño years (often due to droughts), whereas some regions, including the United States, Canada, and Europe, can benefit. 
California, for example, which has been experiencing years of severe drought, is finally getting rain. 
Generally, but not always, El Niño events tend to be inflationary, in part because low crop yields lead to higher prices. 
After two crazy winters in Boston, where I live, it would be hard to convince people that weather doesn’t matter. 
Last year, the city experienced the largest snow accumulation on record. 
Eventually, there was no longer any place to put it: four-lane highways narrowed to two lanes, and two-lane roads to one. 
Roofs collapsed and “ice dams” building up from gutters caused severe flooding. 
Public transport closed, and many people couldn’t get to their jobs. 
It was a slow-motion natural catastrophe that lasted for months. 
The US as a whole did not have a winter as extreme as New England’s in the first part of 2015, and the effects of the weather on the country’s overall economy were subdued. 
True, New York City had some significant snowfalls; but no one would have paid much attention had the mayor been more competent in getting the streets plowed. 
Eastern Canada suffered much more, with severe winter weather playing a role (along with lower commodity prices) in the country’s mini-recession in the first half of the year. 
This year’s winter is the polar opposite of last year’s. 
It was 68º Fahrenheit (20º Celsius) at Boston’s Logan Airport the day before Christmas, and the first speck of snow didn’t come until just before New Year’s Day. 
Trees and plants, sensing spring, started to blossom; birds were just as confused. 
Last winter Boston was something of an anomaly. 
This year, thanks in part to El Niño, weird weather is the new normal. 
From Russia to Switzerland, temperatures have been elevated by 4-5º Celsius, and the weather patterns look set to remain highly unusual in 2016. 
The effect on developing countries is of particular concern, because many are already reeling from the negative impact of China’s slowdown on commodity prices, and because drought conditions could lead to severe crop shortfalls. 
The last severe El Niño, in 1997-1998, which some called the “El Niño of the Century,” represented a huge setback for many developing countries. 
The economic effects of El Niño events are almost as complex as the underlying weather phenomenon itself and therefore are difficult to predict. 
When we look back on 2016, however, it is quite possible that El Niño will be regarded as one of the major drivers of economic performance in many key countries, with Zimbabwe and South Africa facing drought and food crises, and Indonesia struggling with forest fires. 
In the American Midwest, there has lately been massive flooding. 
There is a long history of weather having a profound impact on civil strife as well. 
Economist Emily Oster has argued that the biggest spikes in witch burnings in the Middle Ages, in which hundreds of thousands (mostly women) were killed, came during periods of economic deprivation and apparently weather-related food shortages. 
Some have traced the roots of the civil war in Syria to droughts that led to severe crop failure and forced a mass inflow of farmers to the cities. 
On a more mundane level (but highly consequential economically), the warm weather in the US may very well cloud the job numbers the Federal Reserve uses in deciding when to raise interest rates. 
It is true that employment data are already seasonally adjusted to allow for normal weather differences in temperate zones; construction is always higher during spring than winter. 
But standard seasonal adjustments do not account for major weather deviations. 
Overall, the evidence from past El Niños suggests that the current massive one is likely to leave a significant footprint on global growth, helping support economic recovery in the US and Europe, while putting even more pressure on already weak emerging markets. 
It is not yet global warming, but it is already a very significant event economically – and perhaps just a taste of what is to come. 

The Politics of Historicide 
NEW YORK – In a world of disarray, the Middle East stands apart. 
The post-World War I order is unraveling in much of the region. 
The people of Syria, Iraq, Yemen, and Libya have paid an enormous price. 
But it is not just the present and future of the region that has been affected. 
An additional casualty of today’s violence is the past. 
The Islamic State (ISIS) has made a point of destroying things it deems insufficiently Islamic. 
The most dramatic example was the magnificent Temple of Bal in Palmyra, Syria. 
As I write this, the city of Mosul in northern Iraq is being liberated, after more than two years of ISIS control. 
It will not come soon enough to save the many sculptures already destroyed, libraries burned, or tombs pillaged. 
To be sure, destruction of cultural artifacts is not limited to the Middle East. 
In 2001, the world watched in horror as the Taliban blew up the large statues of Buddha in Bamiyan. 
More recently, radical Islamists destroyed tombs and manuscripts in Timbuktu. 
But ISIS is carrying out destruction on an unprecedented scale. 
Taking aim at the past is not new. 
Alexander the Great destroyed much of what is now called Persepolis more than 2,000 years ago. 
The religious wars that ravaged Europe over the centuries took their toll on churches, icons, and paintings. 
Stalin, Hitler, and Mao did their best to destroy buildings and works of art associated with cultures and ideas viewed as dangerous. 
A half-century ago the Khmer Rouge destroyed temples and monuments across Cambodia. 
In fact, what might best be described as “historicide” is as understandable as it is perverse. 
Leaders wishing to mold a society around a new and different set of ideas, loyalties, and forms of behavior first need to destroy adults’ existing identities and prevent the transmission of these identities to children. 
Destroying the symbols and expressions of these identities and the ideas they embody, the revolutionaries believe, is a prerequisite to building a new society, culture, and/or polity. 
For this reason, preserving and protecting the past is essential for those who want to ensure that today’s dangerous zealots do not succeed. 
Museums and libraries are invaluable not only because they house and display objects of beauty, but also because they protect the heritage, values, ideas, and narratives that make us who we are and help us transmit that knowledge to those who come after us. 
The principal response of governments to historicide has been to ban traffic in stolen art and artifacts. 
This is desirable for many reasons, including the fact that those who destroy cultural sites, and enslave and kill innocent men, women, and children, acquire the resources they need in part from the sale of looted treasures. 
The 1954 Hague Convention calls on states not to target cultural sites and to refrain from using them for military purposes, such as establishing combat positions, housing soldiers, or storing weapons. 
The goal is straightforward: to protect and preserve the past. 
Alas, one should not exaggerate the significance of such international agreements. 
They apply only to governments that have chosen to be a party to them. 
There is no penalty for ignoring the 1954 Convention, as both Iraq and Syria have done, or for withdrawing from it, and it does not cover non-state actors (such as ISIS). 
Moreover, there is no mechanism for action in the event that a party to the Convention or anyone else acts in ways that the Convention seeks to prevent. 
The hard and sad truth is that there is much less in the way of international community than the frequent invocation of the term suggests. 
Indeed, a world that is unwilling to fulfill its responsibility to protect people, as has been shown most recently in Syria, is unlikely to come together on behalf of statues, manuscripts, and paintings. 
There is no substitute for stopping those who would destroy cultural property before they do it. 
In the case of today’s principal threats to the past, this means discouraging young people from choosing radical paths, slowing the flow of recruits and resources to extremist groups, persuading governments to assign police and military units to protect valued sites, and, when possible, attacking terrorists before they strike. 
If a government is the source of the threat to cultural sites, sanctions may be a more appropriate tool. 
Indicting, prosecuting, convicting, and jailing those who carry out such destruction might prove to be a deterrent to others – similar to what is required to stop violence against persons. 
Until then, historicide will remain both a threat and, as we have seen, a reality. 
The past will be in jeopardy. 
In that sense, it is no different from the present and the future. 

Exuberant Brazil 
Brazil’s stock market, as measured by the inflation-corrected Bovespa index, has more than quadrupled in value since President Luis Inácio Lula da Silva’s first election victory in October 2002, and is now at almost twice the peak achieved in 2000. 
In comparison, the inflation-corrected Shanghai Composite only doubled during this period, while the American stock market, as measured by the inflation-corrected Standard and Poor’s 500, increased only 50%. 
Indeed, the United States has never experienced a fourfold increase in stock prices in less than five years, even during the late 1990’s bubble. 
Given that Lula is an avowed leftist who counts Hugo Chávez and Fidel Castro among his friends, Brazil’s performance is all the more surprising. 
How could he manage to preside over such a spectacular stock-market boom? Are Brazilians too exuberant? 
Might it be time for foreign investors to pull their money out? 
Stock-market movements are certainly hard to explain, but there are reasons to believe that Brazilians might be rationally exuberant. 
Corporate earnings in Brazil have gone up roughly as fast as stock prices. 
With the price/earnings ratio remaining stable and moderate, the stock-market boom does not appear to reflect merely investor psychology. 
On the contrary, the real question is why the increase in stock prices has not outpaced growth in corporate earnings. 
After all, in the 1990’s, the US stock-market surge (as in many countries) was fueled by record-high price/earnings ratios. 
In 1998, the price-earnings ratio in the US was 24, compared to a historical average of around 15. 
By contrast, the run-up in stock prices in Brazil started from a very different point, with the price-earnings ration as low as six in 1998. 
When a stock-market boom reaches historic proportions, a story always develops to rationalize it. 
The news media typically present reasons to justify the view that the economy has entered a “new era.” 
Sometimes the stories are mere fabrications to validate market optimism, as with the 1990’s boom. 
But, at other times, the stories seem more solid. 
Lula has called this a “magic moment” for the Brazilian economy. 
While such words merit caution, economy fundamentals bear them out. 
The currency, the real, has been strengthening steadily, to nearly twice its value against the US dollar in October 2002, when Lula was first elected. 
Inflation and interest rates are falling, the country is running a trade surplus, foreign investment is flowing in at a high rate, and the government has more than paid off its debts to foreigners, becoming a net creditor to the rest of the world. 
So stock investors seem to be recognizing Brazil’s economic vitality, carefully watching corporate earnings rise, and running with them. 
After being lone believers through 2002, Brazilian stock market participants are now finding that investors from all over the world want to join the party. 
Nevertheless, given corruption scandals involving prominent government figures that have come to light over the past few years, it is natural to wonder why the stock market has remained so strong. 
Why haven’t the stories of corruption caused a crisis, as similar scandals did in Korea and Malaysia during the Asian financial crisis in 1997-98? 
Indeed, while the scandals have shaken the government, Lula was overwhelmingly reelected last year, and investors continue to pour money into the stock market. 
One reason is that the corruption scandals have provided an opportunity for investors to see Brazilian freedom of speech and democracy in action. 
Newspapers and television commentators have been relentless in reporting the scandals, helping to prove to Brazilians and foreign investors alike that the political system is sufficiently stable to withstand open criticism. 
Lula remains popular with Brazilians because his populist rhetoric shows real sympathy with the less affluent, and with foreign investors because he has always tempered his radicalism to accommodate economic reality. 
He recently criticized Bolivian President Evo Morales’s threats to seize foreign assets for his failure in this regard: “Radicalism is incompatible with the common sense needed from someone who governs.” 
That combination of philosophical radicalism and economic pragmatism has proven to be a perfect formula for Brazil’s progress. 
Granted, the future is unknown; we have no crystal ball to predict the Bovespa’s likely path. 
But, for me, the story is far more convincing than the one told during the 1990’s stock-market boom. 

ExxonMobil’s Dangerous Business Strategy 
NEW YORK – ExxonMobil’s current business strategy is a danger to its shareholders and the world. 
We were reminded of this once again in a report of the National Petroleum Council’s Arctic Committee, chaired by ExxonMobil CEO Rex Tillerson. 
The report calls on the US government to proceed with Arctic drilling for oil and gas – without mentioning the consequences for climate change. 
While other oil companies are starting to speak straightforwardly about climate change, ExxonMobil’s business model continues to deny reality. 
That approach is not only morally wrong; it is also doomed financially. 
The year 2014 was the hottest on instrument record, a grim reminder of the planetary stakes of this year’s global climate negotiations, which will culminate in Paris in December. 
The world’s governments have agreed to keep human-induced warming to below 2º Celsius (3.6º Fahrenheit). 
Yet the current trajectory implies warming far beyond this limit, possibly 4-6º Celsius by the end of this century. 
The answer, of course, is to shift from fossil fuels to low-carbon energy like wind and solar power, and to electric vehicles powered by low-carbon electricity. 
Many of the world’s biggest oil firms are beginning to acknowledge this truth. 
Companies like Total, ENI, Statoil, and Shell are advocating for a carbon price (such as a tax or permit system) to hasten the transition to low-carbon energy and are beginning to prepare internally for it. 
Shell has stepped up its investments in carbon capture and sequestration (CCS) technology, to test whether fossil-fuel use can be made safe by capturing the CO2 that would otherwise go into the atmosphere. 
This is not to say that all is agreed with these companies; they have promised to state their climate positions and policies in advance of this year’s climate summit. 
Yet at least they are talking about climate change and beginning to face up to the new long-term market conditions. 
ExxonMobil, alas, is different. 
The company’s management, blinded by its own vast political power, behaves with a willful disregard for changing global realities. 
It lives in a cocoon of Washington lobbyists and political advisers who have convinced the company’s leaders that because the US Senate is currently in Republican hands, the business risks of climate change have somehow been nullified, and that the world will not change without or despite them. 
At the same time, ExxonMobil is not some marginal actor in the planetary drama. 
It is one of the central protagonists. 
According to a 2013 study, ExxonMobil ranks second among the world’s companies, just behind Chevron, in total contributions of CO2 emissions. 
Indeed, the study finds that this single company has contributed more than 3% of the world’s total emissions since the start of the fossil-fuel age! 
So what does ExxonMobil say about the new climate realities? 
How does it reconcile its corporate policies with planetary needs? 
Unfortunately, the company basically ducks the issue. 
When asked by independent analysts such as Carbon Tracker how it plans to square its relentless oil drilling with the planetary limits on fossil-fuel use necessary to stay below the 2º climate-change threshold, it ignores the limits. 
It blithely believes that the world’s governments simply will not honor their commitments (or that it can lobby its way out of fulfilling them). 
And so we come to the recent Arctic report. 
The Department of Energy asked the National Petroleum Council, an industry group, for its advice on Arctic drilling. 
What it received from Tillerson’s committee is an exercise in misdirection. 
The development of the Arctic’s oil and gas resources would contribute to warming far above the 2º limit. 
The Arctic itself is warming far faster than the planetary average, potentially causing massive, global-scale climate disruptions – which may include the extreme weather patterns recently observed in the US mid-latitudes. 
For these reasons, the best recent science, including an important study published in Nature this year, provides a clear and unequivocal message: Keep the Arctic oil in the ground and beneath the deep seas; there is no safe place in the climate system for it. 
The world has more than enough oil and gas reserves already; we now need to shift to low-carbon energy, stranding much of the proven reserves, rather than developing them and further threatening the planet. 
As the Nature study puts it: “Development of resources in the Arctic and any increase in unconventional oil production are incommensurate with efforts to limit average global warming to 2º C.” 
This would have been a fitting topic for the National Petroleum Council’s Arctic study. 
But the report never takes up the issue of whether Arctic oil and gas resources are compatible with climate safety. 
ExxonMobil’s brazenness should be deeply troubling for its shareholders. 
The company’s management is planning to spend vast sums – perhaps tens of billions of dollars – to develop Arctic oil and gas reserves that cannot safely be used. 
Just as the global shift toward renewable energy has already contributed to a massive drop in oil prices, climate policies that will be adopted in future years will render new Arctic drilling a huge waste of resources. 
Pension funds, universities, insurance pools, and sovereign wealth funds worldwide are grappling with the increasing risks, both moral and financial, of owning shares in oil, gas, and coal companies. 
As Lisa Sachs and I recently explained, responsible investors must urgently query these companies about their business plans to comply with the 2º limit on warming. 
Business plans that include investments in the Arctic, the ultra-deep sea, and the oil sands of Canada have no place in a climate-safe world. 
ExxonMobil’s investors must urgently query the company’s management on a business strategy that contradicts global needs and policy agreements. 
If ExxonMobil persists in its dangerous business strategy, the company’s investors should quickly conclude that the time has come to pull up stakes and move on. 

Big Oil, Big Tobacco, Big Lies 
BOSTON – Over the last few years, a growing number of people have been taking a hard look at what is happening to our planet – historic droughts, rising sea levels, massive floods – and acknowledging, finally, that human activity is propelling rapid climate change. But guess what? 
Exxon (now ExxonMobil) had an inkling of this as early as 1978. 
By the early 1980s, Exxon scientists had much more than an inkling. 
They not only understood the science behind climate change, but also recognized the company’s own outsize role in driving the phenomenon. 
Recognizing the potential effects as “catastrophic” for a significant portion of the population, they urged Exxon’s top executives to take action. 
Instead, the executives buried the truth. 
There may be a silver lining to this infuriating story: the recent investigation that exposed Exxon’s deceit could end up catalyzing the action needed to address the looming climate crisis. 
After all, similar revelations about the tobacco industry – what the major cigarette companies knew and when they knew it – transformed the public-health landscape. 
In 1996, a series of lawsuits forced tobacco companies to release millions of internal documents, which confirmed what public-health advocates and policymakers had long suspected: as early as the 1950s, the industry knew that nicotine was addictive and that cigarettes caused cancer. 
But, to protect its own interests, Big Tobacco deliberately misled the public, doing everything possible to cast doubt on scientific findings that it knew to be accurate. 
Such tactics enabled the industry to delay, for more than 50 years, regulation that could have saved millions of lives annually. 
After the revelations, however, it was clear that the tobacco industry was a malevolent force that did not belong in the policymaking process. 
With Big Tobacco out of the picture, and armed with evidence of the real effects of tobacco consumption, health advocates were finally able to compel their governments to act. 
In 2003, world leaders agreed to the Framework Convention on Tobacco Control (FCTC), negotiated under the auspices of the World Health Organization. 
Today, the treaty covers 90% of the world’s population and has contributed to a significant decline in sales for global tobacco corporations. 
Over time, it will save hundreds of millions of lives (and save governments’ health-care budgets huge sums). 
Big Oil, it is now clear, has been following Big Tobacco’s playbook. 
In 1997, almost two decades after it began studying climate change, it quashed its research, claiming that climate science was “far from clear” and thus that it did not “support mandated cuts in energy use.” 
Beyond suppressing its own findings, ExxonMobil (and its peers) funded and promoted junk science and attacked scientists who warned of the impending climate disaster. 
The fossil-fuel companies’ approach was so effective that the media are only now beginning to recognize the leading role the industry played in creating – almost out of whole cloth – the so-called “climate debate.” 
But perhaps Big Oil’s biggest success was diminishing the political will to implement appropriate regulation. 
Even after the international community adopted the United Nations Framework Convention on Climate Change (UNFCCC) in 1992, the fossil-fuel industry managed to block meaningful progress – to the point that, if serious action is not taken soon, the entire process could unravel. 
In Europe, Royal Dutch Shell’s lobbying so diluted the European Union’s efforts that there are now no binding targets for renewables or energy efficiency for individual countries. 
The company even sent a letter to the European Commission’s president claiming that “gas is good for Europe.” Shell and other oil companies are now promising to work as “advisers” to national governments on how to deal with climate change. 
Just as the tobacco files drove the tobacco industry out of policymaking processes, the Exxon investigation should compel world leaders to eliminate the fossil-fuel industry from efforts to solve the climate crisis. 
After all, no policy can succeed if those who shape it are betting on its failure. 
The turning point for tobacco-related public-health policy came when the industry’s depravity became indisputable. 
Now, that moment has come for the climate movement. 
We cannot simply hope that the fossil-fuel industry will change its ways. 
As an alliance of human-rights groups, environmental activists, and corporate-accountability advocates already is demanding, we must kick the industry out of the policymaking process altogether. 
Exxon’s scientists were right: the effects of climate change on many communities are catastrophic. 
With so many lives at stake – and such clear evidence of the threat – Big Oil, like Big Tobacco before it, should be treated for what it is: Big Trouble. 

Eyeball to Eyeball at the Top of the World 
NEW DELHI ­– When a foreign minister goes out of his way to assure reporters that there is no tension on his country’s borders with a powerful neighbor, the logical tendency is to wonder whether “the lady doth protest too much.” 
After all, you don’t hear Canada’s foreign minister denying tension on his country’s American frontier, because the truth of that proposition is self-evident. 
The claim by Indian Foreign Minister Pranab Mukherjee on a June visit to Beijing that the Sino-Indian border is tension-free has prompted cynical observers to assume the opposite. 
They are right to do so. 
The last six months have witnessed a proliferation of incidents along the 2,520-mile (4,057-kilometer) Sino-Indian frontier. 
Nearly a hundred have been recorded, including no fewer than 65 incursions by China’s People’s Liberation Army in just one sector – the evocatively-named Finger Area, a 2.1-square-kilometer salient in the Indian state of Sikkim, which shares a 206-kilometer border with Tibet. 
While India seeks to downplay such reports, one incident that did make it into the Indian press occurred inside the “Line of Actual Control” (LAC) on the western sector of the border at Demchok, in India’s Ladakh district. 
A mixed civilian-military team investigating reports of Chinese incursions were, on May 16, threatened and forced to retreat by a PLA formation in three armored vehicles. 
The Chinese soldiers allegedly assumed firing positions, leading the Indians to withdraw in order not to provoke a shooting match. 
The previous month, there were reports of an armed Chinese probe 12 kilometers into the north-eastern Indian state of Arunachal Pradesh. 
Intensified Chinese patrolling has been observed at Demchok and Pangong Tso in Ladakh, and in the West Kameng district of Arunachal Pradesh, a state to which the Chinese Ambassador in New Delhi went so far as to lay claim in a media interview. 
With China having established four new airbases in Tibet and three in its southern provinces bordering India, the Indian Air Force is reportedly augmenting its own presence near the Chinese border by deploying two squadrons of Sukhoi-30MKI fighters. 
What is going on? 
Are China and India bracing for war? 
Fears of imminent major hostilities are clearly overblown. 
China, with the Olympics looming, is unlikely to initiate a clash, and India has no desire to provoke its neighbor, which humiliated it in a brutal border war in 1962 that left China in possession of 23,200 square kilometers of Indian territory. 
At the same time, China has taken pains to remind India that it still claims a further 92,000 square kilometers, mainly in Arunachal Pradesh. 
It doesn’t help that the two countries share the longest disputed frontier in the world, since the LAC has never been formally delineated in a manner accepted by both sides. 
India’s borders were defined by British imperial administrators in 1913 – the MacMahon Line, which China rejects (though it accepts that line as its frontier with Burma, which was then part of British India). 
With the LAC coming into being in the wake of China’s victory in 1962, the situation is even more unclear. 
Whenever troops from either side build roads, construct or repair bunkers and other fortifications, or conduct patrols close to the LAC, tensions can flare. 
When the two sides are anxious to avoid provoking each other, such activities are kept to a minimum, but it would seem that China has taken a conscious decision in recent months to keep the Indians on their toes. 
The reasons are not hard to identify. 
China’s recent troubles over Tibet have brought with them unwelcome reminders of India’s hospitality to the Dalai Lama and his government-in-exile. 
The fact that Tawang, the birthplace of the sixth Dalai Lama and a major monastery of Tibetan Buddhism, lies in Arunachal, deprives China of a vital asset in its attempts to assert total control over Tibet. 
Reminding India of China’s claims is therefore all the more urgent for China. 
Foreign Minister Mukherjee was treated rudely on his recent visit, with Premier Wen Jiabao cancelling a previously-scheduled appointment and the Governor of Sichuan Province failing to show up to receive a donation of Indian humanitarian aid for China’s earthquake victims. 
At his meeting with his Chinese counterpart, Yang Jiechi, Mukherjee was told what his hosts thought of the Dalai Lama’s activities and statements in India, and was reminded that the border incidents reflected different perceptions of where the border lies. 
The Chinese demanded a resumption of talks on the unsettled border, though there seems little prospect of either side making new concessions. 
Behind the unpleasantness may lie a broader strategic calculation. 
With the end of the Cold War, China had two options concerning India: to regard it as a natural ally, together with Russia, in building up an alternative to American dominance in the region, or to identify it as a potential adversary. 
The recent emergence of a United States-India partnership appears to have convinced China’s rulers that India has become an instrument for the “containment” of China. 
Such a perception may have been reinforced by India’s frequent military exercises with the US, Japan, and Australia and its cultivation of former Soviet Central Asia (including the establishment of a military base in Tajikistan). 
Moreover, India has attempted to establish strategic ties with countries that China sees as falling within its own sphere of influence (from Mongolia to Vietnam, including direct competition over Myanmar). 
So the Sino-Indian frontier is unlikely to remain quiet. 
Needling an eager-to-please India on its troubled northern borders helps China to keep India guessing about its intentions, exposes the giant democracy’s vulnerabilities in an election year, and cuts a potential strategic rival down to size. 
Look for China to provoke more incidents once the Olympics are over. 

Eyes Wide Shut on Global Warming 
The Kyoto Treaty on controlling climate change was, as Harvard professor Rob Stavins puts it, “too little, too fast.” 
On one hand, because it covered only those countries projected to emit roughly half of the world’s greenhouse-gas emissions by mid-century, it was not an effective long-run safeguard against the dangers of global warming. 
On the other hand, because it required significant and expensive short-run cuts in emissions by industrial countries, it threatened to impose large immediate costs on the American, European, and Japanese economies. 
In short, the Kyoto agreement meant lots of short-term pain for little long-run gain. 
The European Union and American economists in the Clinton administration argued for passage of the Kyoto Treaty only by creating models for something that wasn’t the Kyoto Treaty. 
They projected that developing countries would enter the Kyoto framework at some point, and would trade their rights to emit CO2 and other greenhouse gases to the United States and Europe in return for development aid. 
But, all these years later, I have yet to meet anyone who knows what they are talking about who is prepared to defend Kyoto as a substantive global public policy. ”It was a way of getting the ball rolling,” on climate change, say some. ”It was a way of waking up the world to the seriousness of the problem,” say others. 
Under neither of these interpretations can those who negotiated and signed the Kyoto Treaty be said to have served the world well. 
Of course, the world has been served a lot worse since. 
President George W. Bush sided with his vice president, Dick Cheney, in denying that a global-warming problem even exists (his treasury secretary, Paul O’Neill, and his administrator of the Environmental Protection Agency, Christine Whitman, disagreed). 
This has probably cost the world a decade of wasted time in developing a policy to deal with the problem, particularly given that intentional inaction is likely to continue until Bush’s term is finished. 
But the political cards will be reshuffled, and there will be a new deal on global warming, when America next elects a president in November 2008. 
By 2009, the US may have a State Department willing to speak up again. 
Unless we are extraordinarily fortunate and learn that climatologists have overlooked some enormously important channels of carbon sequestration, the models predicting global warming will still be grimly accurate in 2009. 
When the time comes to revisit international policies on global warming, two things should happen. 
First, the world’s industrial core must create incentives for the developing world to industrialize along an environmentally-friendly, C02- and CH4-light, path. 
Slow growth of greenhouse-gas emissions in rapidly-growing economies must be accompanied by credible promises to deliver massive amounts of assistance in the mighty tasks of industrialization, education, and urbanization that China, India, Mexico, Brazil, and many other developing countries face. 
Second, the world’s industrial core must create incentives for its energy industries to undertake the investments in new technologies that will move us by mid-century to an economic structure that is light on carbon emissions and heavy on carbon sequestration. 
Providing the proper incentives for effective research and development will not be easy. 
Public programs work less well when the best route to the goal – in this case, the most promising post-carbon energy technologies – is uncertain. 
Private R&D is difficult to encourage when investors suspect that success would lead the fruits of their work to be taken by some form of eminent domain and used throughout the world with little compensation. 
The world could continue to close its eyes to global warming and hope for the best: a slightly warmer climate that produces as many winners (on the Siberian, Northern European, and Canadian prairies) as losers (in already-hot regions that become hotter and dryer), and that the Gulf Stream continues warming Europe, the monsoons are not disrupted, and that the Ganges delta is not drowned by stronger typhoons. 
Or perhaps we are hoping that the “we” whose interests are taken into account when important decisions are made will not be the “we” who are among the big losers. 
Perhaps we will continue to close our eyes. 
But our chances of ensuring a more sustainable world would be higher if we had not allowed ourselves to be blinded for the past decade by the combination of the public-relations stunt known as the Kyoto Treaty and the idiocy-as-usual known as the Bush administration. 

Facebook and the Future of Online Privacy 
NEW YORK – Chris Hughes, a co-founder of Facebook, recently noted that the public scrutiny of Facebook is “very much overdue,” declaring that “it’s shocking to me that they didn’t have to answer more of these questions earlier on.” 
Leaders in the information technology sector, especially in Europe, have been warning of the abuses by Facebook (and other portals) for years. 
Their insights and practical recommendations are especially urgent now. 
Facebook CEO Mark Zuckerberg’s testimony before the US Senate did little to shore up public confidence in a company that traffics in its users’ personal data. 
The most telling moment of testimony came when Illinois Senator Richard Durbin asked whether Zuckerberg would be comfortable sharing the name of his hotel and the people he had messaged that week, exactly the kind of data tracked and used by Facebook. 
Zuckerberg replied that he would not be comfortable providing the information. 
“I think that may be what this is all about,” Durbin said. “Your right to privacy." 
Critics of Facebook have been making this point for years. 
Stefano Quintarelli, one of Europe’s top IT experts and a leading advocate for online privacy (and, until recently, a member of the Italian Parliament), has been a persistent and prophetic critic of Facebook’s abuse of its market position and misuse of online personal data. 
He has long championed a powerful idea: that each of us should retain control of our online profile, which should be readily transferable across portals. 
If we decide we don’t like Facebook, we should be able to shift to a competitor without losing the links to contacts who remain on Facebook. 
For Quintarelli, Cambridge Analytica’s abuse of data acquired from Facebook was an inevitable consequence of Facebook’s irresponsible business model. 
Facebook has now acknowledged that Cambridge Analytica is not alone in having exploited personal profiles acquired from Facebook. 
In personal communications with me, Quintarelli says that the European Union’s General Data Protection Regulation, which takes effect on May 25, following six years of preparation and debate, “can serve as guidance in some aspects.” 
Under the GDPR, he notes, “non-compliant organizations can face heavy fines, up to 4% of their revenues. 
Had the GDPR already been in place, Facebook, in order to avoid such fines, would have had to notify the authorities of the data leak as soon as the company became aware of it, well in advance of the last US election.” 
Quintarelli emphasizes that, “Effective competition is a powerful tool to increase and defend biodiversity in the digital space.” 
And here, the GDPR should help, because it “introduces the concept of profile portability, whereby a user can move her profile from one service provider to another, like we do when porting our telephone profile – the mobile phone number – from one operator to another.” 
But “this form of ownership of one’s own profile data,” Quintarelli continues, “is certainly not enough.” 
Just as important is “interconnection: the operator to which we port our profile should be interconnected to the source operator so that we don’t lose contact with our online friends. 
This is possible today thanks to technologies like IPFS and Solid, developed by the web inventor Tim Berners-Lee.” 
Sarah Spiekermann, a professor at the Vienna University of Economics and Business (WU), and Chair of its Institute for Management Information Systems, is another pioneer of online privacy who has long warned about the type of abuses seen with Facebook. 
Spiekermann, a global authority on the trafficking of our online identities for purposes of targeted advertising, political propaganda, public and private surveillance, or other nefarious purposes, emphasizes the need to crack down on “personal data markets.” 
“Ever since the World Economic Forum started to discuss personal data as a new asset class in 2011,” she told me, “personal data markets have thrived on the idea that personal data might be the ‘new oil’ of the digital economy as well as – so it seems – of politics.” 
As a result, “more than a thousand companies are now involved in a digital information value chain that harvests data from any online activity and delivers targeted content to online or mobile users within roughly 36 seconds of their entry into the digital realm.” 
Nor is it “just Facebook and Google, Apple or Amazon that harvest and use our data for any purpose one might think of,” Spiekermann says. “‘Data management platforms’ such as those operated by Acxiom or Oracle BlueKai possess thousands of personal attributes and socio-psychological profiles about hundreds of millions of users.” 
While Spiekermann thinks “personal data markets and the use of the data within them should be forbidden in their current form,” she thinks the GDPR “is a good motivator for companies around the world to question their personal data sharing practices.” 
She also notes that “a rich ecosystem of privacy-friendly online services is starting to be up and running.” 
A study by a class of WU graduate students “benchmarked the data collection practices of our top online services (such as Google, Facebook or Apple) and compared them to their new privacy-friendly competitors.” 
The study, she says, “gives everyone a chance to switch services on the spot.” 
Facebook’s immense lobbying power has so far mostly fended off the practical ideas of Quintarelli, Spiekermann, and their fellow campaigners. 
The recent scandal, however, has opened the public’s eyes to the threat that inaction poses to democracy itself. 
The EU has taken the lead in responding, thanks to its new privacy standards and proposed greater taxation of Facebook and other peddlers of online personal data. 
Yet more is needed and feasible. 
Quintarelli, Spiekermann, and their fellow champions of online ethics offer us a practical path to an Internet that is transparent, fair, democratic, and respectful of personal rights. 


Facing the Deflationary Threat 
Many central bankers are like the proverbial general who plans to fight the last war. 
But unlike backward-looking military strategy, flawed monetary policies produce inevitable damage, not merely worrisome risks. 
Despite having conquered inflation, central bankers continue to fight it and as a result may fail to confront the latest economic menace - global deflation . 
Falling prices have paralyzed Japan's economy for a decade. 
China and Hong Kong have seen prices plummet recently too. 
As the world's richest nations gather in Canada for the annual G-7 jamboree, their leaders should ask if the US and Europe face a similar fate. 
Deflation should not be hard to check, with sound policy. 
Some argue that rapid productivity gains from new technology, increased competition due to globalization, and the rise of internet-based electronic commerce created a world in which firms must steadily lower prices. 
But this thinking is based on a fallacy. 
Clearly, economic forces other than a country's monetary policy determine the relative prices that different goods and services should have - and which they eventually do have, regardless of monetary policy. 
These forces do not determine the absolute price (in dollars, say) of any good. 
The absolute price of any good is determined by monetary policy, in a way largely independent of the structure of relative prices. 
The only exception is when monetary policy is conducted in a manner that focuses on the prices of particular goods rather than on stabilization of a broad price index. 
For example, the US experienced chronic deflation at the 19 th century's end. 
This was due to developments - such as the growing number of nations on the gold standard - that required the market price of gold to increase relative to prices of goods and services generally. 
Demand for gold increased, while supply was relatively constant. 
Relative price changes could have occurred in two ways: either the dollar price of gold could have increased or the dollar prices of all other goods and services could decrease. 
America's commitment to a rapid return to the gold standard prevented an increase in the dollar price of gold, so deflation ensued. 
Much the same thing happens today. 
Hong Kong's declining attractiveness as a business center helped push down prices of locally produced goods and services relative to the prices of goods sold overseas. 
Again, relative prices could change either through an increase in the HK dollar price of internationally traded goods or through decreases in the HK dollar prices of local goods. 
Since Hong Kong's currency board prevents inflation in HK dollar prices, the HK dollar prices of local goods must fall. 
This would be unnecessary if Hong Kong adopted a monetary policy aimed at stabilizing a broad price index like the kind of policy pursued in the US, the euro zone, and most of the world. 
But can central banks stabilize a falling price index as effectively as a rising one? 
Some economists argue that once deflation sets in, central banks are powerless because nominal interest rates cannot be pushed below zero. 
In a deflationary environment, this means that real interest rates - that are all that matter for economic stimulus - can not be pushed as low as might be necessary to boost demand and stem downward pressure on prices. 
The Bank of Japan's overnight interest rate has been essentially zero since 1999, but prices still fall. 
Yet even in Japan, monetary policy could stimulate spending. 
Effective central banking is mostly a matter of managing expectations; for it is expectations regarding future policy, rather than the current level of overnight rates, that mainly determines long-term rates, other asset prices, and the exchange rate - and hence spending and pricing decisions. 
When current overnight rates can no longer be lowered, it is vital that a central bank credibly signal its intention to maintain looser policy in the future, when it will have more room to maneuver. 
For years the Bank of Japan (BOJ) failed to provide signals of this kind. 
It was more concerned with posing as an inflation-fighter. 
This misbegotten strategy culminated in the Bank's decision in August 2000 to abandon the zero interest-rate policy at the first signs of economic recovery, effectively declaring that it would not use monetary policy to bring about negative real rates after expectations of inflation returned. 
The BOJ changed course a year ago when it committed to maintaining low interest rates until deflation ends. 
This was a timid but helpful initial step in the right direction. 
But an explicit price-level target would help more. 
Such a commitment would create definite inflation expectations (albeit not of continuing inflation). 
More importantly, to the extent that deflation continues, it would also automatically create greater expectations of inflation - and thus greater stimulus. 
In the US, the Federal Reserve has paid much more attention to managing expectations, resulting in an effective monetary policy. 
Indeed, financial markets end up doing much of the Fed's work for it. 
With clear and predictable communication of this sort, the risk that the Fed would be unable to free the US economy from a deflationary slump is much lower - and so is the risk that it would ever have to fight that battle. 
Other G-7 leaders might profit by seeking to apply this lesson more broadly. 

Facing up to the Islamist Challenge 
Our traditional understanding of Muslim communities assumes that when Islam arrives in an area, it becomes deeply rooted in the population and culture, producing powerful local variations. 
A Muslim community in the United Arab Emirates is very different from one in Nigeria, and both are very different from Islam in Indonesia. 
Recent developments in Russia, however, constitute a stark challenge to this understanding - which explains President Vladimir Putin's bold decision to support the US-led war on terrorism following the September 11 th attacks. 
The scenario is the same within Muslim communities throughout Russia. 
Young activists arrive in a particular area, typically from Arab countries. 
They know how to work with local law enforcement agencies, and initially their activities are limited to gathering information aimed at discrediting the current local religious leaders - whose average age is over 70 - and working skillfully with local media to ensure that this defamatory information is publicized. 
The religious community then convenes, removes its old leaders, with the young challengers taking over. 
The new leaders proceed on the assumption that they need not - and indeed should not - adapt to national or cultural distinctions among Muslims, for their goal is Islamic unification, not differentiation. 
They send their most promising local supporters abroad - not necessarily to Arab countries, but also to France, England, and the US - to be trained to carry out the same work, whether it is in the Volga region (home to 40% of Russia's Muslims) or elsewhere. 
Participation in these networks convinces new recruits that they are part of a globally integrated organization. 
Operating these networks costs money. 
Indeed, notwithstanding the conventional wisdom that the main post-Cold War division pits the poor South against the rich North, the ferment within Islam suggests a struggle between rich and rich. 
Elites in Saudi Arabia and other Persian Gulf states have the financial clout of the most advanced countries, yet not a single Arab state has a seat in the Security Council or is a member of the G-7. 
To the extent that such international councils of power exclude representatives of the Islamic world, a portion of this would-be Muslim counter-elite will seek to challenge the system, finding no shortage of ideologically committed proxies. 
So efforts at Islamic unification are at most only indirectly the result of relative economic backwardness. 
Rather, greater mobility, enlarged markets, and increased access to information have made traditional borders increasingly porous, and a more globalized world has led to the emergence of political actors seeking to gain a greater say in international councils. 
The steady growth of network communities, linked together by a religious identity that transcends the hierarchical organization of nations and states, reflects this emerging new reality. 
The theological and political implications of this integral thrust within Islam are very different from those associated with the emergence of Protestantism in Christianity. 
Yet there are some obvious similarities as well. 
For example, both share a religious concern with bringing the individual into direct contact with God, and both entail a radical challenge to foreign domination in the temporal world. 
However, whereas the Protestant Reformation underpinned a sea change in ethics that spurred the growth of capitalism and liberal democracy, the focus for Islamic unifiers is the establishment of a greater collective presence. 
While the Reformation was supported by national elites seeking to throw off Roman hegemony, integralist Islam seeks to unify the community of believers by liberating it from the Western-imposed model of separate Muslim nation states. 
As with Protestantism, new developments within Islam cannot be simply banned. 
Fortunately, it is not too late to avoid recourse to repression. 
So far, Muslims in Russia have not been actively involved in political life, with the glaring exception of certain localities, such as Chechnya. 
For the most part, they are still mainly concerned with the transition of religious authority within their communities. 
This process implies that political mobilization is inevitable, facilitated by the fragmenting of Russian society and the weakness of Russia's national identity. 
Our task is therefore not only to bolster the authority of federal legislation throughout Russia - a key goal from the outset of President Putin's administration - but to find and publicize strategies by which Muslims can preserve their identity without taking to arms. 
This is an effort that requires international cooperation, for it cannot be achieved in one country alone. 
We must examine the political culture and behavior of Muslims in Europe, China, India, the US, and other countries. 
Two distinct parts of this problem exist. 
On the one hand, we confront a radical terrorist element which cannot be engaged constructively. 
On the other, the ideological struggle with integralist Islam can be won only by displaying a more solid and stronger identity. 
The organizers of the September 11 th attacks clearly anticipated retaliation, evidently hoping that an indiscriminate response would strengthen integralist tendencies worldwide. 
President Bush's rhetorical slip about a ``crusade'' against terrorism was one such response. 
Excessive civilian deaths in Afghanistan - or, for that matter, in Chechnya - are even more damaging. 
This brings us to the issue of common values. 
President Putin's decision to support the US military's use of bases in Central Asia was a risky step domestically. 
Russian politicians urged him to haggle, arguing that President Bush would give him anything: money, debt forgiveness, and technology. 
Yet President Putin refused on the grounds that cooperation is both in keeping with Russia's interests and morally correct. 
We must now take this collaboration a step further. 
If we are to win Muslim hearts and minds and undercut Islam's integralist threat, we must recognize that defending national security cannot come at the price of ignoring human rights and freedoms. 

The Second Nuclear Age 
NEW HAVEN – North Korea’s launch of a long-range missile in mid-December was followed by a flurry of global condemnation that was almost comical in its predictability and impotence. 
But the launch underscored a larger reality that can no longer be ignored: the world has entered a second nuclear age. 
The atomic bomb has returned for a second act, a post-Cold War encore. 
This larger pattern needs to be understood if it is to be managed. 
The contours of the second nuclear age are still taking shape. 
But the next few years will be especially perilous, because newness itself creates dangers as rules and red lines are redefined. 
This took at least ten years in the first nuclear age, and this time may be no different. 
In the Middle East, South Asia, and East Asia, old rivalries now unfold in a nuclear context. 
This has already changed military postures across the Middle East. 
Part of the Israeli nuclear arsenal is being shifted to sea, with atomic warheads on diesel submarines, to prevent their being targeted in a surprise attack. 
Israel also is launching a new generation of satellites to provide early warning of other countries’ preparations for missile strikes. 
If Iran’s mobile missiles disperse, Israel wants to know about it immediately. 
Thus, the old problem of Arab-Israeli peace is now seen in the new context of an Iranian nuclear threat. 
The two problems are linked. 
How would Israel respond to rocket attacks from Gaza, Lebanon, or Egypt if it simultaneously faced the threat of nuclear attack by Iran? 
What would the United States and Israel do if Iran carried its threat to the point of evacuating its cities, or placing missiles in its own cities to ensure that any attack on them would cause massive collateral damage? 
Pakistan has doubled the size of its nuclear arsenal in the last five years. 
Its armed forces are set to field new tactical nuclear weapons – short-range battlefield weapons. 
India has deployed a nuclear triad – bombers, missiles, and submarines – and in 2012 tested an intercontinental ballistic missile, giving it the ability to hit Beijing and Shanghai. 
India almost certainly has a multiple warhead (known as a MIRV), in development, and has also launched satellites to aid its targeting of Pakistan’s forces. 
In East Asia, North Korea has gone nuclear and is set to add a whole new class of uranium bombs to its arsenal. 
It has rehearsed quick missile salvos, showing that it could launch attacks on South Korea and Japan before any counter-strike could be landed. 
China, too, is shifting its nuclear forces to mobile missiles and submarines. 
These weapons can be put on alert in a way that would be highly visible to US satellites and the global media. 
Thus, the Chinese can easily “nuclearize” a crisis with the US or anyone else. 
They do not have to detonate a nuclear weapon, but only alert adversaries to the dramatic increase in the political stakes and dangers of a showdown. 
Russia, not wanting to be left out of the act, has recently staged the largest nuclear exercises in decades to remind everyone that it remains a serious nuclear player, too. 
These individual developments are troubling. 
But they cannot be understood in isolation from the larger multipolar system of major powers that is forming. 
To a great extent, this is a nuclear multipolar system: possessing nuclear weapons contributes to a country’s global status as a major power. 
To see this, consider the following question: When was the last time that the US or anyone else seriously proposed that India sign the Nuclear Non-Proliferation Treaty (NPT) – that is, that India give up the Bomb. 
Given America’s economic problems and looming defense cuts, as well as growing Chinese power, there is no longer even a remote possibility that this demand will be made. 
India has become an accepted, legitimate member of the nuclear club, the fiction of the NPT notwithstanding. 
It is even less likely that China or Russia would disarm for the sake of a nuclear-free world. 
But the most urgent problem stems from the breakdown of major countries’ one-time nuclear monopoly and the empowerment of smaller countries like North Korea, Pakistan, Israel, and, quite possibly, Iran. 
A new set of rules for diplomacy, military strategy, and arms control is needed to stabilize this emerging nuclear order. 
Pretending that it does not exist is not a strategy. 

Behind Greece’s Deadly Fires 
ATHENS – A biblical calamity befell Attica last Monday. 
I saw its first sign in the late morning at Athens airport, where I was seeing off my daughter to Australia. 
A strong whiff of burning wood caused me to look up to the sky, where a whitish-yellow sun beckoned, surrounded by the telltale eclipse-like daytime darkness that only thick, sky-high smoke can cause. 
By the early evening, the news began cascading in. 
Many of our friends’ and some of our relatives’ houses in East Attica were destroyed. 
Forest fires had run amok, spreading toward the heavily built-up coastline, cutting the settlement of Mati and the town of Rafina off from Athens and forcing residents to flee toward the sea. 
I first learned of casualties when told of the plight of activists belonging to our political movement, DiEM25. 
The flames destroyed their house in Mati, along with every other house on their street; but at least they escaped with their lives. 
Barely. 
Their next-door neighbors perished; when their corpses were discovered the next morning, they were crouched together, their three-year-old girl in the middle of a heartbreaking huddle. 
And the ominous news continued to stream in. 
A friend and her husband, whose house is in smithereens, are missing. 
A cousin, whose house sits on a cliff by the sea, had to jump 70 meters into the rocky waters below as his house burned down; fortunately, he was rescued by fishermen. 
But 26 other people, who had come very close to the same coastline, succumbed to the smoke and flames before they could reach the water. 
As I write, the official death toll stands at 81, with an indeterminate number of people missing. 
Words fail me. 
Why did it happen? 
A dry winter had produced large quantities of parched forest and bush, which, on a day when temperatures reached 39ºCelsius (102º Fahrenheit) and winds gusted at 130 kilometers (80 miles) per hour, fueled the conflagration. 
But on this, our Black Monday, the weather conspired with the chronic failures of Greece’s state and society to turn a wildfire into a lethal inferno. 
Greece’s post-war economic model relied on anarchic, unplanned real-estate development anywhere and everywhere (including ravines and pine forests). 
That has left us, like any developing country, vulnerable to deadly forest fires in the summer and flash floods in winter (just last winter, 20 people died in houses built on the bed of an ancient creek). 
That collective failure is, naturally, aided and abetted by the Greek state’s perpetual lack of preparedness: its failure to clear fields and forests of accumulated kindling during the winter and spring, for example, or to establish and maintain emergency escape routes for residents. 
Then there are the usual crimes of oligarchy, such as the illegal enclosure of the coast around seaside villas for the purpose of privatizing the beach. 
Eyewitnesses I spoke to said that many died or were badly injured struggling against the barbed wire that the rich had put between them and the sea. 
And, last but not least, there is also humanity’s collective guilt. 
This catastrophe demonstrates nothing if not the manner in which rapid climate change is turbocharging the natural phenomena that punish our human foibles. 
As is often the case when forest fires ravage Greece, the government hinted at arson. 
While I cannot rule out the possibility of foul play, I am unconvinced. 
Greek governments have traditionally found it convenient to blame profiteers, arsonists, terrorists, and even foreign agents. 
With such incendiary claims dominating the news, officials avoid having to admit their lack of preparedness and their failure to adopt and enforce appropriate laws and safety regulations. 
What role did austerity and Greece’s ongoing Great Depression play in the ineffectiveness of the response? 
Fire departments, citizens’ protection agencies, ambulance services, and hospitals are terribly understaffed. 
While the fires would not have been stopped if we had three times the number of fire brigade workers and firefighting airplanes, a country suffering a decade-long diminution of its public services, its communities, and its morale can scarcely be expected to prepare itself well for a calamity made worse by climate change. 
Journalists ask me whether the European Union is helping. 
The reality is that we had destructive fires before and after joining the EU and swapping the drachma for the euro. 
The EU played no role in helping us fight the flames, a task not in its remit, and it cannot be held responsible for the fires or for 70 years of Greek society’s abuse of the natural environment. 
But it is unquestionable that over the past decade the Troika of Greece’s official creditors – the European Commission, the European Central Bank, and the International Monetary Fund – has actively deprived the Greek state of the resources and capabilities it needs in such situations. 
Might, therefore, this not be the moment (the same journalists ask) for Athens to rebel and demand the end of austerity and of spending cuts that are detrimental to Greece’s survival? 
Of course! 
Every moment is a good moment to confront the Troika over the straitjacket of inane austerity and misanthropic social policies that have created a permanent humanitarian crisis in Greece. 
Over the course of a decade, we have lost many more people to the tragedy caused by the EU establishment than to any flood or forest fire. 
More than 20,000 people have committed suicide since 2011, while one in ten working-age Greeks have emigrated because of the economic depression the EU has imposed on Greece. 
I expect crocodile tears to be shed in Brussels over our fire victims, and similarly hypocritical posturing by the Greek government. 
But I do not expect any reversal of the organized misanthropy afflicting Greece just because nearly 100 died in a single day. 
Unless and until progressives across Europe get organized, accept local responsibility, and band together to apply pressure at the EU level, nothing will change, except a further strengthening of proudly misanthropic political forces like Greece’s Golden Dawn, Italy’s Lega, Germany’s Christian Social Union and Alternative für Deutschland, Sebastian Kurz’s Austrian government, and the Polish-Hungarian illiberal nexus. 
In this context, Greece’s forest fires are a tragic reminder of our collective responsibility as Europeans. 

Fads, Frenzies, and Finance 
Barcelona – The financial crisis, credit crunch, and ensuing economic downturn have severely damaged the credibility of financial markets, institutions, and traders. 
More and more people are claiming that markets are characterized by irrationality, bubbles, fads, and frenzies, and that economic actors are driven by behavioral biases. 
George Soros’s recent book on the credit crisis is a good example of this line of thinking. 
He even suggests that established financial theory is obsolete. 
His view, in essence, means that the current financial crisis is the final proof that markets do not process information efficiently. 
If this is true, we are closer to John Maynard Keynes’s view of the market as a casino than to Friedrich von Hayek’s view of it as a marvelous mechanism for processing dispersed information. 
For example, the recent spike in oil prices would have been driven by an irrational frenzy in futures markets. 
Market operators would have miscalculated systematically, been overconfident about their information, and overreacted to news. 
I believe, however, that there is another explanation for these phenomena, which is based on rational calculation and information processing by institutions and traders. 
The problems we see in the financial markets have very much to do with lack of good information, misaligned incentives, and, in fact, rational responses to the environment. 
When information is scarce and unevenly distributed, prices may well depart from the reality of fundamentals. 
We see this when new technologies arrive on the scene. 
The Internet bubble is the most recent example, but a similar phenomenon occurred with the construction of railways more than a century ago. 
It can be argued that the sophisticated loan packages created by banks in recent years are, likewise, a new and unknown product, so information and experience to aid pricing has been scarce and dispersed. 
In such circumstances, prices may well move far from the fundamentals as assessed by a hypothetical collective wisdom that would pool all information in the market. 
Trading on the momentum of price movements may then become a rational activity that becomes self-fulfilling, as investors decide to “ride the bubble” while it lasts. 
The bubble is inflated further by the asymmetry between those who bet that prices will rise and buy, and those who forecast a fall, but stay out because to sell short is too costly. 
This means that important and relatively persistent departures of prices from fundamental values are possible, and even likely, when information is dispersed – but that a correction to align them with reality will always follow. 
Eventually, stock prices do reflect the fundamentals of the economy. 
This explains why the market can look like Keynes’s casino in the short term and like Hayek’s marvel in the long term. 
So how does this explain the overexposure of many institutions to sub-prime mortgage risk and the collapse of the interbank market? 
Were banks that chose to securitize sub-prime loans instead of keeping them on their balance sheets behaving irrationally? 
Again, informational asymmetries and misaligned incentives are at the heart of what happened. 
Keeping those loans on the books would have meant that a bank would have had to incur a large capital adequacy provision and monitor the loans’ performance, at a cost to itself. 
Securitization avoided such costs and placed the new product advantageously – with the complicity of rating agencies, which stood to profit from investors’ inexperience and lack of information. 
Executives collected generous bonuses, and equity holders were protected by limited liability. 
A probable cause of the collapse of the interbank market is precisely informational failure. 
This is a well-known phenomenon; indeed the study of the market for automotive “lemons” won George Akerlof the Nobel Prize. 
Banks still don’t trust each other, since each wonders how many skeletons the other has in its closet. 
There is no irrationality here. 
The debate over the irrationality of financial markets is no mere academic argument. 
If we believe that economic actors are irrational, then we will enact paternalistic policies aimed at controlling behavior or bailing out failed agents and institutions, which could be self-defeating and even dangerous. 
This may include restrictions on investments by institutions and individuals and intrusive regulation that limits, or dictates, their conduct in the market. 
The calls to curb speculation in derivatives markets or short sales have this flavor. 
If, on the other hand, we believe that economic actors will respond rationally to incentives and information, then we can usefully reform regulatory frameworks with well-targeted measures, including restrictions on off-balance sheet vehicles, tougher disclosure requirements, and controls on rating agencies’ conflicts of interests. 

Failing states in Central America 
When the US Defence Department produced a report in December in which it named Mexico as one as one of two countries (along with Pakistan) at risk of rapidly becoming a failed state there was a predictable rejection of its findings in many quarters. 
In fact, the authors may have got their analysis right, just for the wrong country. 
Head further south to Central America – Guatemala in particular – and the failed state paradigm may be far more applicable. 
Considering the apparent progress made by democracy in the region since the 1990’s, this assessment may seem a little harsh. 
But dig a little closer to look at the quality of democracy, above all in the condition of state institutions such as the judiciary and the police, and the picture becomes less rosy. 
Ironically, it is Mexico’s hardline strategy against the drug cartels on its own territory which is making the situation worse; gangs are seeking the relative sanctuary of Central America as a base for their operations. 
The evidence from Guatemala is particularly worrying. 
Some 80% of Latin American cocaine reaching the US passes through the country at some point. 
President Álvaro Colom in February claimed that 40% of the 6,200 murders recorded in 2008 were linked to drug-related violence. 
Investigators from the US and Guatemala believe that the two biggest Mexican cartels, the Sinaloa and Gulf gangs, are spreading their tentacles across various departments; the Gulf cartel’s notorious armed wing, Los Zetas, is held responsible for a spate of massacres in the country in the past year. 
Many economists believe that a major reason for the quetzal’s strength against the dollar in recent years has been the amount of drug money laundered through the Guatemalan financial system. 
Compared with the strong-arm tactics employed by his Mexican counterpart Felipe Calderón, Colom seems resigned to defeat. 
Comments in January that the country was helpless against an ‘avalanche’ of drug-trafficking from the north were aimed at securing international support, but do little to inspire confidence in his leadership. 
The sad truth is that he may well be right: the national police (PNC) are notoriously corrupt, understaffed and inefficient, as much a part of the problem as the drug gangs themselves. 
Moreover, the armed forces have become a shadow of their former self, and still have human rights legacies hanging over them from the country’s bitter civil war. 
Even if the PNC were to convert itself overnight into the world’s most effective crime-fighting machine, it would still be unlikely to have a significant immediate impact. 
Without an overhaul of the entire judicial system, any government measures or societal pressure are not going to make much of a difference. 
This is true as much as for the rest of Central America – with the general exception of Costa Rica and Panama – as it is for Guatemala alone. 
Evidence from El Salvador would appear to bear this point out: the Salvadoran police are widely regarded as stronger and more efficient, but crime rates remain roughly on a par with Guatemala. 
In both countries, impunity is the key: in Guatemala only 4% (at most) of all crimes, and less than 2% of murders, result in a criminal conviction. 
The condition of the Central American judiciary is at the heart of the prospect of state failure. 
Already weak and inefficient, prone to corruption, politicisation, lack of co-ordination between departments, and outright intimidation of its officials, judicial systems across the isthmus have been an easy target for organised crime. 
Guatemala has been the most obvious victim so far, but Honduras also suffers all the similar conditions to be the next in line. 
Bringing the judicial system and other key state institutions to their knees is the main aim of the drug cartels. 
Being in virtual control of large swathes of Central American territory and being able to act with relative impunity are ultimately very good for business. 
The US may view its war on drugs in Mexico and Colombia as partially successful; the danger is that Central America does not have those countries’ institutional resilience, leaving the way open for new fronts to be opened. 
Quite aside from the terrible human and institutional impact, this situation also undermines the long-term economic strategies of Central American governments. 
For better or for worse, democracy in the region has been accompanied by policies of economic liberalisation and efforts to attract foreign investment, culminating in the signing of the Central American Free Trade Agreement with the US in 2005. 
While foreign companies have not been deliberately targeted, regular headlines of new killings hardly present a positive international image. 
On-the-surface political stability and favourable investment laws may be in place, but in the absence of an effective judiciary or reliable security forces, committing capital to promising projects becomes that much more difficult. 
Significant improvements to this situation will be hard won. 
Central American politicians’ habitual tough talk on violent crime has paid few dividends in practice; it makes little impact on drug cartels, whose resources often far outweigh those of the local police or army. 
Attention will inevitably be focused on the US to provide more material and technical support to the security forces; drips of funding for Central America under the term of the Mérida Initiative agreed with Mexico are welcome, but likely to be insufficient in the grand scheme of things. 
Meanwhile, the economic downturn is doing its bit to help the gangs’ cause: jobs will dry up, poverty will increase and the government’s ability to provide basic welfare and social services will be tested, making a life of crime all the more attractive and rewarding. 
The possible implications of this Catch-22 are troubling to say the least. 

Failing the Syria Test 
MADRID – On October 2nd in Istanbul, Syria’s disparate opposition movements gave the go-ahead for the formation of a “Syrian National Council.” 
This is the most important step yet taken by the fragmented forces that have been trying since May to lead a peaceful uprising against President Bashar al-Assad’s regime. 
The Council’s formation boosted the morale of those who have been demanding stronger and more unified representation. 
But a mere two days after its creation, the embryonic Council suffered its first big setback. 
France, the United Kingdom, Germany, and Portugal, in collaboration with the United States, presented a draft resolution before the United Nations Security Council seeking to condemn repression in Syria and put an end to the use of force against civilians. 
The draft was a sugarcoated version of a previous text, proposed last June. 
This one contained nebulous terms such as “specific measures” or “other options.” 
It stressed the sovereignty, independence, and territorial integrity of Syria, and emphasized the need to resolve the current crisis peacefully, by means of an inclusive political process – and called for a national dialogue led from within the country. 
The draft called for a 30-day period to study the options, up from 15 days in the earlier draft. 
The object was plain: to gain a Russian, and consequently, a Chinese abstention. 
But Russia and China vetoed the proposal anyway, and only nine members of the Security Council voted in favor, with Brazil, India, South Africa, and Lebanon abstaining. 
There are three key implications of the Security Council’s vote. 
First, violence will increase. 
Since the protests erupted last March, there have been an estimated 2,700 deaths, more than 10,000 people displaced to Turkey, and thousands more arrested. 
The Assad government does not hesitate to fire on civilians, lay siege to cities, or shut off their electricity and water. 
And a few days ago, it was reported that some 10,000 Syrian soldiers had defected, with several hundred joining rival movements such as the Free Syrian Army and the Free Officers Movement. 
Unless some international protection arrives, a movement that began peacefully risks entering a new and dangerous phase. 
Second, there will be grave consequences for regional security. 
Syria is a strategic hinge in the Middle East. 
It has been one of the countries most hostile toward Israel, mainly through its support of Hamas, Iran, and Hezbollah. 
Chaos in Syria would threaten Lebanon’s stability and alter Iran’s geopolitical influence in the region. 
Iraq, governed by Shia political forces, also keeps close tabs on Syria’s evolution, as does Turkey, which, until fairly recently, considered Syria a keystone of its regional policy. 
Finally, the Security Council vote exposed a clear division within the international community. 
Among the BRICS – Brazil, Russia, India, China, and South Africa, all of which happen to be on the Security Council currently – two vetoed and the rest abstained (along with Lebanon, for obvious reasons). 
In the case of the resolution on military intervention in Libya, the BRICS decided "to let" Col. Muammar el-Qaddafi be overthrown. 
Not so with Syria, where none aligned itself with the positions supported by the European Union and the US. 
The Security Council’s composition wouldn’t be substantially different if an “ideal” distribution of seats were to be achieved. 
So the fact that no agreement has been reached on Syria forces us to reflect on the future difficulties that we will face in managing global security. 
Of course, there is no “one size fits all” model for intervention, but that does not justify evading our “responsibility to protect” – a fine concept promoted by former UN Secretary-General Kofi Annan and adopted by all UN member states in 2005. 
Support for the resolution would have weakened Assad’s position, as it would have revealed him as isolated from his traditional allies, Russia and China. 
It would also have shown the international community to be unanimous in its rejection of repression and committed to protecting the Syrian people (though the draft made no mention of military intervention). 
The sanctions adopted by the EU and the US against Assad’s regime are not enough. 
But, unless further measures are channeled through – and thus legitimized by – the Security Council, other alternatives are limited. 
In recent years, with countries such as China, India, and Brazil taking their rightful place on the international scene, the G-7 has given way to the G-20. 
Likewise, an ambitious reform of the International Monetary Fund was adopted in 2010 to reflect changes in the global distribution of power. 
But this change in global governance must not be limited to economic policymaking. 
After all, globalization has brought many overall benefits, but also less friendly aspects, such as the ones dealing with global security. 
Despite our growing interconnectedness, the UN Security Council has not yet been unable to achieve sufficient consensus to resolve pressing matters such as Syria. 
Nobody ever said that the road to stronger global governance would be straight or simple to navigate. 
But there are no detours: without effective structures of power and a genuine commitment from all players, the future does not look promising for global stability and prosperity. 

The Win-Win Fantasy of Liberal Democracy 
WASHINGTON, DC – Few analysts expected Britons to vote to exit the European Union or Americans to choose Donald Trump as their next president. 
Yet it did not take long for a consensus explanation of these miscalculations to emerge. 
When it comes to such complex and consequential developments, however, we should beware of facile reasoning. 
The current consensus blames the “elites” – in academia, media, and business – for becoming so caught up in their relatively cosmopolitan and connected world that they failed to listen carefully to less educated and connected groups. 
Because the latter groups are those that have benefited the least from globalization, they were the most likely to reject supranational institutions (in the case of Brexit) or establishment candidates (in the case of Trump). 
Ignoring them was, in many ways, an obvious mistake. 
There is considerable merit to this view. 
“Group think” regularly afflicts today’s financial and intellectual elite, including pollsters, who often have similar educational backgrounds, work together, read the same media, and congregate at the same conferences and events, from Davos to Aspen. 
Members of this crowd tend to believe that they have absorbed the great lessons of history. 
They tend to decry racism and even milder forms of ethnocentrism, and are unlikely to reject feminism. 
Though these groups are not paragons of diversity, there is a widespread recognition of diversity’s value, and the dominance of men, at least, is beginning to decline. 
The other common denominator of this group is wealth. 
While not all members of this group are multimillionaires, they do tend to have the education and skills needed to reap the benefits of economic globalization. 
As a result, they did not generally recognize rising inequality, particularly in the US, as a major problem until recently (though, to be sure, many of the wealthiest elites have engaged in an unprecedented amount of philanthropy). 
It is clear that the cosmopolitan elites who are making consequential decisions in critical sectors, from business and finance to politics, must pay more attention to the grievances of the less fortunate, the less educated, and the less connected. 
Rather than congregating with like-minded people in silos, they must create platforms that connect people of more diverse backgrounds and circumstances – including those whose experiences with globalization are very different. 
Such platforms would help to address the fragmentation of public debate. 
Yet ideological “bubbles” are not the only problem. 
For one thing, the elites have failed not only to predict recent populist victories, but also to anticipate that the decidedly non-populist François Fillon would win the French center-right Republicans’ presidential primary by a wide margin. 
Clearly, ignorance of working-class anger is not the only factor jamming their political radars. 
Of course, it is comforting to believe that, if only the facts were better known and people could discuss them more dispassionately, voters would become more unified and politics more constructive. 
But, even with better, more fact-based discourse, people’s interests will diverge. 
Those who voted for Brexit or Trump did not simply fail to understand the true benefits of globalization; they currently lack the skills or opportunities to secure a piece of the pie. 
Beyond communication, therefore, lies a genuine need for redistributive policies, which are fundamentally not win-win. 
The main beneficiaries of free trade and technological change must actively compensate the losers through taxation, subsidies, and employment support. 
Similarly, the assumption that the liberal-democratic West is largely consistent in its economic and geopolitical interests is fundamentally flawed. 
The truth is that the traditional Western powers, despite having plenty in common, diverge in many areas, from energy policy – Europe is far more dependent on hydrocarbons than the US – to security. 
In this context, simply communicating better and agreeing on the facts will not be enough to facilitate agreement on cooperation. 
Negotiations will be needed, with both sides sacrificing something. 
Both of these issues point to a broader flaw in the Western worldview: the belief in win-win solutions. 
In fact, liberal democracy, in both its center-right and center-left incarnations, is underpinned by the belief that such solutions (the most important one being peace) can benefit a “society” – or, indeed, humanity as a whole – in the long run. 
Democracy negotiates the twists and turns and manages the short-run sacrifices. 
But, in the end, everyone benefits. 
Of course, failure to secure win-win solutions often results in lose-lose situations. 
In the first half of the last century, it was widely believed that failing to conquer agricultural space would condemn countries to starvation. 
Today, similar arguments are made about energy. 
The reality is more complicated. 
For economies to secure the “win” of inclusive growth, the very rich may well have to submit to a form of regulation and taxation, including international rules, that cost them substantial wealth in the long run. 
While that would not turn the wealthy into losers (they would still be wealthy), one cannot deny that they would incur a loss. 
What the liberal-democratic approach does get right is that there is virtually always room for compromise. 
While not everyone will go home feeling like a true winner, individuals and countries are better off working together and striking deals than they would be if they appropriated and guarded limited space and resources by all available means. 
The costs of modern conflicts, including domestic political deadlock, are too large, to the point that even the winners end up losing. 
In the wake of recent miscalculations, we must recalibrate our political radars – and that means accounting for all potential sources of interference, not just those that fit a neat narrative. 
Here, the fundamental difference in the worldview of liberal or social democrats and hardline ideologues, whether nationalist or otherwise, may be the most consequential. 
The former should acknowledge medium-term win-lose situations, but maintain their long-term faith in gradual democratic change at home, while working to uphold international peace. 

Fair Contracts for Poor Countries 
A number of countries in Latin America, Africa, Eastern Europe, and elsewhere are abrogating or renegotiating contracts with multinational enterprises (MNEs), and others are likely to follow suit. 
The costs can be high. 
Governments may get better terms, but they may also become embroiled in international investment disputes and discourage other investors. 
For companies, renegotiations mean uncertainty and possible interruptions of production and revenue. 
Significant shifts in power (typically as a result of changes in commodity prices) and ideology, or changes in the economics of projects, can lead to renegotiations, especially when it comes to large investments in natural resources and infrastructure. 
But often the reason is that the host country considers a contract to be unfair. 
While “fairness” may well be in the eyes of the beholder, in some cases, the host country may not have had the expertise required to negotiate the best possible deal – a frequent situation when MNEs negotiate with the least developed countries (the world’s 50 poorest countries, most of them in sub-Saharan Africa). 
Mittal’s 2005 deal with Liberia (renegotiated last year) and various contracts with Congo probably fall at least partly into this category, as do some deals in ex-Soviet countries. 
Suppose a $500 million petroleum or copper contract needs to be negotiated. 
This will most likely involve a leading MNE, which can field a negotiating team that includes world-class lawyers, geologists, and financial analysts who understand, for example, the trade-offs between taxes and royalties and can put them in appropriate language. 
The host country, on the other hand, simply cannot match such a team. 
Perhaps it does not even know what to ask for. 
The resulting contract is all the more problematic because it is likely to involve one of the host country’s few important resources, which can generate more predictable (and probably higher) revenues than official development assistance – and over a long period of time. 
So, even without corruption, it is not surprising when a future government demands that the contract be renegotiated. 
Clearly, the playing field with MNEs should be leveled. 
In theory, the host country could hire its own international experts to assist it in negotiations. 
But poor countries typically lack the funds needed to pay such a team’s fees. 
Nor do the World Bank and regional development banks have the in-house expertise – or, as a rule, the funds – to provide technical assistance. 
But what if MNEs provided the funds? 
Obviously, MNEs want the best possible deal for themselves; but they also want durable contracts that won’t be repudiated by the next government. 
So they have an interest in negotiating a fair deal, and one that is seen to be fair. 
Besides, in large deals, the negotiating team’s costs are relatively small (or they could be reimbursed out of the project’s revenue stream). 
But, even if a company embraces this approach, problems abound. 
How can it be implemented without looking like bribery (in case the company gives the funds directly to the government)? 
And how can companies prevent some of the funds from being misused (say, if the government hires a third-rate team)? 
Here is a proposal: an Investment Contract Aid Facility (ICAF) under the umbrella of a well-respected organization. 
The ICAF would function like an escrow account into which the firm pays the funds required for the host country to hire a negotiating team. 
The escrow account manager then invites the country to select a team, suggesting what skills are required and perhaps even providing a roster of experts. 
The country would be free to choose its own team, but the escrow account manager, aided by an international advisory board of expert volunteers, would need to agree that it is, in fact, world-class. 
One could even include a capacity-building element by adding to the team one or two local negotiators. 
The result should be a contract that is as fair as possible under the given circumstances – and perceived as such. 
It would be enough for a handful of CEOs and prime ministers to say that they are prepared to consider using such a Facility on a case-by case basis. 
While this would not end the abrogation or renegotiation of contracts, it would eliminate one important reason them, benefiting countries and companies alike. 

The Arc of Climate Justice 
ISLAMABAD – It is a painful irony of climate change that those least responsible for the problem are often the most exposed to its ravages. 
And if any country can claim to be the victim of this climate injustice, it is Pakistan. 
As world leaders prepare to meet at the United Nations Climate Change Conference in Paris, the country is reeling from the aftereffects of devastating floods that damaged buildings, destroyed crops, swept away bridges, and killed 238 people. 
Such weather-related tragedies are not new to Pakistan; what’s different is their frequency and ferocity. 
Deadly floods have become a yearly occurrence; in 2010, record-breaking rains killed nearly 2,000 people and drove millions from their homes. 
Even as Pakistan fights one of the world’s most pitched battles against terrorism, increasingly violent weather is pushing up the cost of food and clean water, threatening energy supplies, undermining the economy, and posing a potent and costly security threat. 
There is little doubt that the country’s climatic woes are caused, at least in part, by the greenhouse-gas emissions that industrialized countries have pumped into the air since the beginning of the Industrial Revolution. 
Even today, Pakistan produces less than 1% of the world’s emissions. 
Meanwhile, Pakistan is consistently ranked among the countries that are most vulnerable to the harmful effects of climate change, owing to its demographics, geography, and natural climatic conditions. 
From 1994 to 2013, climate change cost Pakistan an average of $4 billion a year. 
By comparison, in 2012, terrorism in Pakistan resulted in losses of roughly $1 billion. When the country isn’t suffering from floods, it is subject to water shortages, ranking as one of the most water-stressed in the world, according to the Asian Development Bank. 
And climate change is compounding both problems, wearing away at the glaciers and snowpack that serve as natural regulators of water flow, even as increased erosion caused by flooding contributes to the siltation of major reservoirs. 
Meanwhile, rising temperatures are increasing the likelihood of pests and crop diseases, jeopardizing agricultural productivity and subjecting the population to increasingly frequent heatwaves. 
Rising sea levels are increasing the salinity of coastal areas, damaging mangroves, and threatening fish species’ breeding grounds. 
And higher ocean temperatures are leading to more frequent and dangerous cyclones, endangering the country’s coast. 
The outlook for the future is no less alarming: worsening water stress, increased flash flooding, and the depletion of the country’s water reservoirs. 
By 2040, projections indicate that an average rise in temperatures of 0.5º Celsius could destroy 8-10% of Pakistan’s crops. 
This burden must not be left for Pakistan to carry alone. 
Thus far, progress at international climate-change talks has been incremental at best. 
Fossil-fuel lobbies, reluctant governments in industrialized countries, and disengaged electorates have delayed and obstructed the emergence of a robust agreement to reduce global greenhouse-gas emissions. 
But while expectations of a breakthrough in the fight against climate change in Paris are optimistic, a push for equitable distribution of the costs of global warming must be made. 
Despite an increase in funding for climate adaptation and mitigation in the developing world, Pakistan’s share has remained tiny, relative to the disasters it has suffered in the last five years alone. 
By 2050, the average annual cost of climate-change adaptation in Pakistan will be $6-14 billion, according to the UN Framework Convention on Climate Change. 
Mitigation will run another $17 billion per year. 
As climate change continues to take its terrible toll, Pakistan cannot allow the billions of dollars in damages it suffers at the hands of the world’s largest polluters to go uncompensated. 
Whatever the ultimate agreement in Paris, climate negotiators must ensure that the accrued losses resulting from global emissions are borne fairly and do not remain the sole burden of those suffering the greatest harm. 
As one of the world’s smaller polluters, Pakistan is well within its rights in seeking resources and funds to cope with the impact of problems for which it is not responsible. 
So are many other countries. 
Our demand for a binding international mechanism to distribute the burden of climate change – a mechanism to ensure climate justice – must not go unheeded in Paris. 

Making Journalism Great Again 
OXFORD – In the debate over the future of journalism, “fake news” has taken center stage, with storylines featuring a ranting American president, Russian communication “bots,” and betrayal and subterfuge competing for public attention. 
But in an era of diminishing profits and shrinking audiences, is fake news really the biggest threat that traditional media face? 
In a news environment increasingly prone to hyperventilation, it can be difficult to separate fact from fabricated or deliberately skewed content shared via social media. 
The proliferation of “bots” – computer programs that automatically spread disinformation – has blurred these lines further. 
And as the methods of manipulation multiply, the problem is only likely to worsen. 
And yet the near-constant focus on fake news has distracted many in the industry from more serious challenges confronting professional journalism. 
The erosion of business models and growing dependence on third-party digital distributors – like Facebook and Google – have handcuffed news organizations and cut deeply into their profits. 
Worse, audiences no longer trust the information presented to them. 
This suggests that the problem is bigger than fake news. 
In fact, large, traditional, or legacy media organizations still trump social media as trusted sources. 
As the Reuters Institute for the Study of Journalism’s Digital News Report 2017 revealed, 40% of news consumers say that established media organizations – The New York Times, for example – accurately differentiate fact from fiction. 
For social media, this share is only 24%. 
But this also means that 60% of news consumers regard the legacy media as being careless with facts. 
That statistic alone should be a cause for grave concern to everyone in the industry. 
According to the report – which surveyed some 70,000 Internet users in 36 countries – 29% of respondents said they were avoiding news altogether. 
For many, this was either because producers’ preference for negative stories put them in a bad mood, or because they viewed the reporting as politically slanted and therefore untrustworthy. 
Without trust, there is no audience; and without an audience, there is no business. 
If the survey’s results are representative of broader trends, one of the world’s most important pillars of democracy – a free and open press – is in jeopardy. 
Perhaps this should come as no surprise. 
In the digital era, trust deficits have affected most major institutions, from political parties and big companies to religious organizations and universities. 
This could be a sign of a more informed and critical citizenry; or, more likely, it could be a response to feeling overwhelmed by choice and powerless in a complex world. 
But what has changed for news organizations is that, thanks to social media, they no longer have a monopoly on holding the powerful to account. 
On the contrary, they have come to be identified with the powerful – part of a media-business-political elite divorced from the concerns of ordinary people. 
Having become a target of popular anger, journalism will need to “disrupt” itself to regain credibility and restore audiences’ trust. 
To this end, media organizations should take at least six steps. 
For starters, news outlets must set their own agendas, rather than wasting resources on pursuing someone else’s. 
The international investigation that led to the Panama Papers and the Paradise Papers are brilliant examples of journalism that is relevant and interesting – two fundamental criteria that all reporting should meet. 
Second, reporters have a responsibility to their audiences to analyze what powerful actors are doing, rather than what they are saying. 
As the Washington Post’s media columnist Margaret Sullivan recently observed, coverage of US President Donald Trump has focused narrowly on his words, at the expense of his policy. 
Third, the media must become better listeners. 
Journalists’ distinction between “reporting” and “reporting on the ground” highlights the reality that a sizable proportion of newsroom staff never leave their desks. 
Journalists don’t necessarily do this by choice; many are glued to their screens because their companies lack resources, or force them to follow and report on twitter feeds. 
In a sense, reporters’ behavior is merely a symptom of an editorial pathology. 
Fourth, news organizations must engage audiences – talking to them, not down to them. 
Very often, the news cycle is driven by assumptions about what viewers or readers might like, rather than what they actually want. 
Diversity in a newsroom is vital to broadening the relevance of its coverage. 
Fifth, in the rush to experiment with new forms of storytelling, some media companies are forgetting their mission. 
News outlets should forego expensive, flashy projects if they do little to further audiences’ understanding of a story. 
Finally, rebuilding trust will require a new definition of news itself. 
When audiences feel overwhelmed by information and complexity, the response can be to tune out. 
The media must give people a reason to tune back in. 
(One example: positive news is dramatically undervalued in today’s media environment.) 
If traditional media outlets allow themselves to be defined by the fake-news debate, they, too, will be overwhelmed. 
So long as social media companies optimize for advertising revenue, their algorithms will tend to reward the extremes, and news organizations will waste valuable resources battling disinformation. 
A better approach would be to make news less boring. 
Reputable media companies have always sought to capitalize on facts: the scoop, the exclusive interview, the probing investigation. 
Truth, like trust, is a commodity. 
The future of the industry depends on getting better at producing it. 

Free Speech and Fake News 
PRINCETON – About a week before the United States presidential election last November, someone posted on Twitter that Hillary Clinton was at the center of a pedophilia ring. 
The rumor spread through social media, and a right-wing talk show host named Alex Jones repeatedly stated that she was involved in child abuse and that her campaign chairman, John Podesta, took part in satanic rituals. 
In a YouTube video (since removed), Jones referred to “all the children Hillary Clinton has personally murdered and chopped up and raped.” 
The video, posted four days before the election, was watched more than 400,000 times. 
Emails released by WikiLeaks showed that Podesta sometimes dined at a Washington, DC, pizza restaurant called Comet Ping Pong. 
Apparently for that reason the child-sex-ring accusations focused on the pizza restaurant and used the hashtag #pizzagate. 
The allegations were frequently retweeted by bots – programs designed to spread certain types of messages – contributing to the impression that many people were taking “Pizzagate” seriously. 
The story, amazingly, was also retweeted by General Michael Flynn, who is soon to be President-elect Donald Trump’s national security adviser. 
Even after Trump’s election – and despite debunking by the New York Times and the Washington Post – the story continued to spread. 
Comet Ping Pong was harassed by constant, abusive, and often threatening phone calls. 
When the manager approached the DC police, he was told the rumors were constitutionally protected speech. 
Edgar Welch, a Christian who has Bible verses tattooed on his back, was one of Jones’s listeners. 
On December 4, he drove 350 miles from his home in North Carolina to Comet Ping Pong, armed with an assault rifle, a revolver, and a knife. 
He allowed guests and staff to leave while he searched for enslaved children supposedly hidden in tunnels. 
He fired his rifle at least once, to open a locked door. 
After finding no children, he surrendered to police. 
Fake news – “active misinformation” that is packaged to look as if it comes from a serious news site – is a threat to democratic institutions. 
There have been less absurd examples, including a fake report of a nuclear threat by Israel’s defense minister that misled his Pakistani counterpart into retweeting the report and warning Israel that Pakistan, too, is a nuclear power. 
President Barack Obama acknowledged the danger to democratic freedoms when speaking to the press in Germany shortly after the US election. 
Whether or not fake news cost Clinton the presidency, it plainly could cause a candidate to lose an election and upset international relations. 
It is also contrary to one of the fundamental premises on which democracy rests: that voters can make informed choices between contending candidates. 
The First Amendment to the US Constitution states that. 
“Congress shall make no law… abridging the freedom of speech, or of the press…” By 1919, the Supreme Court’s interpretation of those words had led to the doctrine that Congress could prohibit speech only if it posed “a clear and present danger” of serious harm. 
That position was further refined in what is perhaps the greatest defense of freedom of speech by an American judge: Louis Brandeis’s concurring opinion in the 1927 case of Whitney v. California. 
Brandeis described freedom of speech and assembly as “functions essential to effective democracy.” 
He appealed to “courageous, self-reliant men, with confidence in the power of free and fearless reasoning applied through the processes of popular government.” 
On that basis, for speech to pose a clear and present danger that could justify prohibiting it, the harm the speech would cause must be so imminent that it could preclude any opportunity to discuss fully what had been said. 
If, Brandeis insisted, there is “time to expose through discussion the falsehood and fallacies, to avert the evil by the processes of education, the remedy to be applied is more speech, not enforced silence.” 
Today, it is difficult to have so much confidence in the power of “free and fearless reasoning,” especially if it is supposed to be “applied through the processes of popular government” – which presumably requires that it influence elections. 
Similarly, Brandeis’s belief that “more speech, not enforced silence” is the remedy for “falsehood and fallacies” looks naïve, especially if applied in an election campaign. 
What, though, is the alternative? 
What Jones said about Clinton is surely defamation, and she could bring a civil suit against him; but that would be costly and time-consuming, most likely taking years to move through the courts. 
In any case, civil defamation lawsuits are effective only against those who have the assets to pay whatever damages are awarded. 
What about criminal libel? 
In the United Kingdom, “defamatory libel” was for many centuries a criminal offense, but it fell into disuse and was abolished in 2010. 
In the US, criminal libel is not a federal offense. 
It continues to be a crime in some states, but few cases are brought. 
A report in 2015 by A. Jay Wagner and Anthony L. Fargo for the International Press Institute describes many of the recent cases as “petty” and regards the civil libel law as a better recourse for “personal grievances.” 
The report concludes that criminal libel has become “redundant and unnecessary.” 
Recent examples of fake news suggest that Wagner and Fargo’s conclusion was premature. 
To accuse, during an election campaign, a US presidential candidate of personally murdering children is not petty, and civil libel law provides no adequate remedy. 
In the Internet age, is it time for the legal pendulum to swing back toward the offense of criminal libel? 

Fake News and Biased News 
TOKYO – Interviews are always tricky. 
If an unscrupulous interviewer is looking for a particular answer or claim, they have the power to edit, manipulate, or even rewrite their subject’s words to that end. 
That is why I have long taken pains to check carefully quotations attributed to me by the media. 
But, when it comes to television or radio interviews, it seemed to me that such distortions would be more difficult to pull off. 
I was wrong. 
Not long ago, representatives from a Japanese television program associated with a liberal-leaning newspaper requested an interview with me to discuss Prime Minister Shinzo Abe’s economic-reform strategy, known as “Abenomics.” 
I was interviewed for about an hour, with my answers to be included in an episode centered on a panel discussion held in the studio. 
The result was not what I expected. 
To be sure, I wasn’t entirely shocked to find that the panelists denied the recent achievements of Abenomics and espoused the strange view that monetary policy cannot boost an economy, and yet can suddenly cause hyperinflation. 
Such claims have persisted, despite the ongoing monetary-policy-driven, low-inflation recoveries in the United States, Europe, and Japan. 
But the distortion of my own words was significant. 
In my interview, I highlighted the successes of Abenomics. 
And I argued that a strong labor market and rising business profits would be among Abenomics’ enduring legacies, even if Abe’s administration faced political challenges. 
The program included just two minutes of my interview, emphasizing the part about the potential political challenges, rather than Abenomics’ great successes. 
In recent years, much attention has been devoted to “fake news” – outright disinformation that spreads widely, often through social media or other online platforms. 
But my recent experience highlighted another danger: biased news, in which strategic edits surreptitiously advance the views of a journalist, editor, or broadcaster. 
Such reporting, which may be delivered even by traditional news organizations, can be very damaging, not least for political leaders. 
Without a doubt, Abe’s political standing has been vulnerable to the effects of biased journalism. 
For example, several months ago, Abe was addressing a crowd gathered in Akihabara, a district of Tokyo. 
A number of attendees, in a clear attempt to sabotage his speech, booed and heckled relentlessly. 
Eventually, Abe shouted, “I am not addressing a crowd shouting like you!” 
The next day, his words were reported widely; the behavior of the crowd, however, was not, leaving readers with the impression that their prime minister had, completely unprompted, yelled coarsely at Japanese citizens. 
Similar distortions characterized accounts of hearings in Japan’s Diet to investigate allegations, originally made by former Vice Minister of Education and Science Kihei Maekawa, that Abe rigged the decision-making process behind the opening of a new veterinary department at a university run by a close friend of his. 
Not only did Abe himself deny the accusations; 
Tatsuo Hatta, formerly of Osaka University, and Moriyuki Kato, former Governor of Ehime Prefecture, testified that the process had been conducted fairly and lawfully. 
Yet many media organizations, including two leading newspapers, Asahi and Mainichi, continued to report on the supposed scandal – leaving out the testimony of Hatta and Kato, while providing an extensive account of Maekawa’s accusations. 
Such biased reporting can easily turn voters against a leader. 
Fortunately for Japan, its voters have not been duped. 
Abe just scored a landslide victory in the general election on October 22, easily returning his ruling coalition to power. 
In the United States, by contrast, biased news stories, especially on social media, appear to be having a powerful effect on voters, and have propelled political polarization to unprecedented levels. 
This is particularly true with regard to President Donald Trump, who has repeatedly attacked the media – often wrongly, to be sure – for its coverage of his administration. 
Trump, who has been known to disseminate problematic news himself, is no innocent victim of media bias. 
But the state of US politics today does highlight the need for voters everywhere to have access to complete and objective accounts of what is happening in their country and the world. 
Only then will they be truly empowered, as a democratic system requires, to make informed choices about their collective future. 

Six Features of the Disinformation Age 
MENLO PARK, CALIFORNIA – Concern about the proliferation of disinformation, misinformation, and propaganda has reached the point where many governments are proposing new legislation. 
But the solutions on offer reflect an inadequate understanding of the problem – and could have negative unintended consequences. 
This past June, Germany’s parliament adopted a law that includes a provision for fines of up to €50 million ($59 million) on popular sites like Facebook and YouTube, if they fail to remove “obviously illegal” content, such as hate speech and incitements to violence, within 24 hours. 
Singapore has announced plans to introduce similar legislation next year to tackle “fake news.” 
In July, the US Congress approved sweeping sanctions against Russia, partly in response to its alleged sponsorship of disinformation campaigns aiming to influence US elections. 
Dialogue between the US Congress and Facebook, Twitter, and Google has intensified in the last few weeks, as clear evidence of campaign-ad purchases by Russian entities has emerged. 
Such action is vital if we are to break the vicious circle of disinformation and political polarization that undermines democracies’ ability to function. 
But while these legislative interventions all target digital platforms, they often fail to account for at least six ways in which today’s disinformation and propaganda differ from yesterday’s. 
First, there is the democratization of information creation and distribution. 
As Rand Waltzman, formerly of the Defense Advanced Research Projects Agency, recently noted, any individual or group can now communicate with – and thereby influence – large numbers of others online. 
This has its benefits, but it also carries serious risks – beginning with the loss of journalistic standards of excellence, like those typically enforced within established media organizations. 
Without traditional institutional media gatekeepers, political discourse is no longer based on a common set of facts. 
The second feature of the digital information age – a direct byproduct of democratization – is information socialization. 
Rather than receiving our information directly from institutional gatekeepers, who, despite often-flawed execution, were fundamentally committed to meeting editorial standards, today we acquire it via peer-to-peer sharing. 
Such peer networks may elevate content based on factors like clicks or engagement among friends, rather than accuracy or importance. 
Moreover, information that is filtered through networks of friends can result in an echo chamber of news that reinforces one’s own biases (though there is considerable uncertainty about how serious a problem this represents). 
It also means that people who otherwise might consume news in moderation are being inundated with political polemic and debate, including extreme positions and falsehoods, which heighten the risk of misinforming or polarizing wider swaths of the public. 
The third element of today’s information landscape is atomization – the divorce of individual news stories from brand or source. 
Previously, readers could easily distinguish between non-credible sources, like the colorful and sensational tabloids in the checkout line at the supermarket, and credible ones, such as longstanding local or national newspapers. 
Now, by contrast, an article shared by a friend or family member from The New York Times may not look all that different than one from a conspiracy theorist’s blog. 
And, as a recent study from the American Press Institute found, the original source of an article matters less to readers than who in their network shares the link. 
The fourth element that must inform the fight against disinformation is anonymity in information creation and distribution. 
Online news often lacks not only a brand, but also a byline. 
This obscures potential conflicts of interest, creates plausible deniability for state actors intervening in foreign information environments, and creates fertile ground for bots to thrive. 
One 2015 study found that bots generate around 50% of all web traffic, with as many as 50 million Twitter users and 137 million Facebook users exhibiting non-human behaviors. 
Of course there are “good” bots, say, providing customer service or real-time weather updates. 
But there are also plenty of bad actors “gaming” online information systems to promote extreme views and inaccurate information, lending them the appearance of mainstream popularity and acceptance. 
Fifth, today’s information environment is characterized by personalization. 
Unlike their print, radio, or even television counterparts, Internet content creators can A/B test and adapt micro-targeted messages in real-time. 
“By leveraging automated emotional manipulation alongside swarms of bots, Facebook dark posts, A/B testing, and fake news networks,” according to a recent exposé, groups like Cambridge Analytica can create personalized, adaptive, and ultimately addictive propaganda. 
Donald Trump’s campaign was measuring responses to 40-50,000 variants of ads every day, then tailoring and targeting their messaging accordingly. 
The final element separating today’s information ecosystem from that of the past, as Stanford law professor Nate Persily has observed, is sovereignty. 
Unlike television, print, and radio, social-media platforms like Facebook or Twitter are self-regulating – and are not very good at it. 
Despite the US campaign-ad controversies of the last few weeks, neither platform has yet consulted leading experts, instead seeking to solve problems in-house. 
It was not until mid-September that Facebook even agreed to disclose information about political campaign ads; it still refuses to offer data on other forms of disinformation. 
It is this lack of data that is undermining responses to the proliferation of disinformation and propaganda, not to mention the political polarization and tribalism that they fuel. 
Facebook is the chief culprit: with an average of 1.32 billion daily active users, its impact is massive, yet the company refuses to give outside researchers access to the information needed to understand the most fundamental questions at the intersection of the Internet and politics. 
(Twitter does share data with researchers, but it remains an exception.) 
We are living in a brave new world of disinformation. 
As long as only its purveyors have the data we need to understand it, the responses we craft will remain inadequate. 
And, to the extent that they are poorly targeted, they may even end up doing more harm than good. 

Is Fake News Here to Stay? 
CAMBRIDGE – The term “fake news” has become an epithet that US President Donald Trump attaches to any unfavorable story. 
But it is also an analytical term that describes deliberate disinformation presented in the form of a conventional news report. 
The problem is not completely novel. 
In 1925, Harper’s Magazine published an article about the dangers of “fake news.” 
But today two-thirds of American adults get some of their news from social media, which rest on a business model that lends itself to outside manipulation and where algorithms can easily be gamed for profit or malign purposes. 
Whether amateur, criminal, or governmental, many organizations – both domestic and foreign – are skilled at reverse engineering how tech platforms parse information. 
To give Russia credit, it was one of the first governments to understand how to weaponize social media and to use America’s own companies against it. 
Overwhelmed with the sheer volume of information available online, people find it difficult to know what to focus on. 
Attention, rather than information, becomes the scarce resource to capture. 
Big data and artificial intelligence allow micro-targeting of communication so that the information people receive is limited to a “filter bubble” of the like-minded. 
The “free” services offered by social media are based on a profit model in which users’ information and attention are actually the products, which are sold to advertisers. 
Algorithms are designed to learn what keeps users engaged so that they can be served more ads and produce more revenue. 
Emotions such as outrage stimulate engagement, and news that is outrageous but false has been shown to engage more viewers than accurate news. 
One study found that such falsehoods on Twitter were 70% more likely to be retweeted than accurate news. 
Likewise, a study of demonstrations in Germany earlier this year found that YouTube’s algorithm systematically directed users toward extremist content because that was where the “clicks” and revenue were greatest. 
Fact checking by conventional news media is often unable to keep up, and sometimes can even be counterproductive by drawing more attention to the falsehood. 
By its nature, the social-media profit model can be weaponized by states and non-state actors alike. 
Recently, Facebook has been under heavy criticism for its cavalier record on protecting users’ privacy. 
CEO Mark Zuckerberg admitted that in 2016, Facebook was “not prepared for the coordinated information operations we regularly face.” 
The company had, however, “learned a lot since then and have developed sophisticated systems that combine technology and people to prevent election interference on our services.” 
Such efforts include automated programs to find and remove fake accounts; featuring Facebook pages that spread disinformation less prominently than in the past; issuing a transparency report on the number of false accounts removed; verifying the nationality of those who place political advertisements; hiring 10,000 additional people to work on security; and improving coordination with law enforcement and other companies to address suspicious activity. 
But the problem is not solved. 
An arms race will continue between the social media companies and the states and non-state actors who invest in ways to exploit their systems. 
Technological solutions like artificial intelligence are not a silver bullet. 
Because it is often more sensational and outrageous, fake news travels farther and faster than real news. 
False information on Twitter is retweeted by many more people and far more rapidly than true information, and repeating it, even in a fact-checking context, may increase an individual’s likelihood of accepting it as true. 
In preparing for the 2016 US presidential election, the Internet Research Agency in St. Petersburg, Russia, spent more than a year creating dozens of social media accounts masquerading as local American news outlets. 
Sometimes the reports favored a candidate, but often they were designed simply to give an impression of chaos and disgust with democracy, and to suppress voter turnout. 
When Congress passed the Communications Decency Act in 1996, then-infant social media companies were treated as neutral telecoms providers that enabled customers to interact with one other. 
But this model is clearly outdated. 
Under political pressure, the major companies have begun to police their networks more carefully and take down obvious fakes, including those propagated by botnets. 
But imposing limits on free speech, protected by the First Amendment of the US Constitution, raises difficult practical problems. 
While machines and non-US actors have no First Amendment rights (and private companies are not bound by the First Amendment in any case), abhorrent domestic groups and individuals do, and they can serve as intermediaries for foreign influencers. 
In any case, the damage done by foreign actors may be less than the damage we do to ourselves. 
The problem of fake news and foreign impersonation of real news sources is difficult to resolve because it involves trade-offs among our important values. 
The social media companies, wary of coming under attack for censorship, want to avoid regulation by legislators who criticize them for both sins of omission and commission. 
Experience from European elections suggests that investigative journalism and alerting the public in advance can help inoculate voters against disinformation campaigns. 
But the battle with fake news is likely to remain a cat-and-mouse game between its purveyors and the companies whose platforms they exploit. 
It will become part of the background noise of elections everywhere. 
Constant vigilance will be the price of protecting our democracies. 

The Protocols of Donald J. Trump 
LONDON – It is an odd quirk in the history of logic that the blameless Cretans should have given their name to the famous “liar paradox.” 
The Cretan Epimenides is supposed to have said: “All Cretans are liars.” 
If Epimenides was lying, he was telling the truth – and thus was lying. 
Something similar can be said of US President Donald Trump: Even when he’s telling the truth, many assume he is lying – and thus being true to himself. 
His trolling is notorious. 
For years, he claimed, with no evidence other than unnamed sources that he called “extremely credible,” that Barack Obama’s birth certificate was fraudulent. 
During the Republican primary, he linked his opponent Senator Ted Cruz’s father to John F. Kennedy’s assassination. 
He has promoted the quack idea that vaccines cause autism, and has masterfully deployed the suggestio falsi – for example, his insinuation that climate change is a Chinese hoax designed to cripple the American economy. 
There has always been a thriving market for fake information, forgeries, hoaxes, and conspiracy theories. 
“History is a distillation of rumor,” wrote Thomas Carlyle in the nineteenth century. 
Sellers of fakery manufacture information for money or for political profit; there are always eager buyers among the credulous, prurient, or vindictive. 
And gossip is always entertaining. 
Modern history provides us with some famous examples. 
The Zinoviev letter, a forgery implicating Britain’s Labour Party in Kremlin-led Communist sedition, was published by the Daily Mail four days before the United Kingdom’s general election in 1924, dashing Labour’s chances. 
Perhaps the most famous such forgery was The Protocols of the Elders of Zion. 
Possibly manufactured for money, The Protocols purported to be evidence of a Jewish plan for world domination. 
Its key passage reads: “[…] we shall so wear down the Goyim that they will be compelled to offer us an international power that by its position will enable us without any violence gradually to absorb all the State forces of the world and to form a Super-Government.” 
Circulated by the Czarist secret police in the early 1900s to justify the regime’s anti-Jewish pogroms, it became the foundation of the anti-Semitic literature of the first half of the twentieth century, with horrendous consequences. 
So what is new? 
The attention being paid to fake information today arises from the hugely expanded speed with which digitally manufactured information travels around the world. 
In the past, one had to be able to hoodwink more or less reputable news outlets to plant fake stories. 
Now misinformation can go viral through social media, like a modern Black Death. 
The important question is how this will affect democracy. 
Will the unprecedented ease of access to information liberate people from thought control, or will it strengthen it to such an extent that democracy simply drowns in a sea of manipulation? 
Optimists and pessimists both have good arguments. 
“Knowledge is power,” say the optimists. 
It seems to follow that the more information made available, the more knowledgeable voters will be, and therefore the more able to hold leaders to account. 
But information, the pessimists point out, is not knowledge. 
Information has to be structured to become knowledge. 
Institutions like schools, universities, newspapers, and political parties have been our traditional structuring devices. 
But digital technology is institutionally naked. 
It provides no structuring mechanism, and therefore no control on the spread of knowledge-free opinion. 
Social media have undoubtedly played a part in the rise of the populist politics that thrives in such an environment. 
Left-wing populists, like Jeremy Corbyn in the UK, Bernie Sanders in the US, and Jean-Luc Mélenchon in France, received a significant boost from social media’s ability to bypass traditional news outlets. 
Right-wing populists, like Trump, Marine Le Pen in France, and Geert Wilders in the Netherlands, benefited in exactly the same way. 
Both sides accuse long-established media outlets of “faking” news. 
Perhaps the market for news will eventually find its own equilibrium between truth and falsehood. 
A fraction of the population will always be willing buyers of fake news; but the majority will learn to distinguish between trustworthy and unreliable sources. 
But if the spread of misinformation is thought of as a virus, there is no natural equilibrium to be had, short of catastrophe. 
So it has to be checked by inoculation. 
Few trust politicians, who often have a vested interest in false information, to do the job. 
One answer is independent agencies along the lines of the consumer watchdog Which? 
There are a number of websites now devoted to fact checking and debunking putative news stories. 
One of the best known, Snopes.com, was launched in 1994 as a project to check the accuracy of urban legends. 
Facebook is now attempting to flag fake news stories by noting that they have been “disputed by third-party fact checkers.” 
Worthy though these attempts are, they suffer from an inherent weakness: they still place responsibility on readers to check whether a news story is true. 
But we are all liable to seek information that confirms our beliefs and ignore information that challenges them. 
Facts will not be checked by those whose beliefs depend on not checking them. 
There are no easy answers. 
Obviously, education in critical thinking, and especially in social sciences such as economics, is necessary. 
But will that be sufficient to counter the massive increase in the ability to spread fake information? 
Democracy depends both on the right to free speech and the right to know. 
We may have no alternative but to strike a new balance between the two. 

The Coming Wave of Oil Refugees 
NAIROBI – The idea that oil wealth can be a curse is an old one – and it should need no explaining. 
Every few decades, energy prices rise to the heavens, kicking off a scramble for new sources of oil. 
Then supply eventually outpaces demand, and prices suddenly crash to Earth. 
The harder and more abrupt the fall, the greater the social and geopolitical impact. 
The last great oil bust occurred in the 1980s – and it changed the world. 
As a young man working in the Texas oil patch in the spring of 1980, I watched prices for the US benchmark crude rise as high as $45 a barrel – $138 in today’s dollars. 
By 1988, oil was selling for less than $9 a barrel, having lost half its value in 1986 alone. 
Drivers benefited as gasoline prices plummeted. 
Elsewhere, however, the effects were catastrophic – nowhere more so than in the Soviet Union, whose economy was heavily dependent on petroleum exports. 
The country’s growth rate fell to a third of its level in the 1970s. 
As the Soviet Union weakened, social unrest grew, culminating in the 1989 fall of the Berlin Wall and the collapse of communism throughout Central and Eastern Europe. 
Two years later, the Soviet Union itself was no more. 
Similarly, today’s plunging oil prices will benefit a few. 
Motorists, once again, will be happy; but the pain will be earth-shaking for many others. 
Never mind the inevitable turmoil in global financial markets or the collapse of shale-oil production in the United States and what it implies for energy independence. 
The real risk lies in countries that are heavily dependent on oil. 
As in the old Soviet Union, the prospects for social disintegration are huge. 
Sub-Saharan Africa will certainly be one epicenter of the oil crunch. 
Nigeria, its largest economy, could be knocked to its knees. 
Oil production is stalling, and unemployment is expected to skyrocket. 
Already, investors are rethinking billions of dollars in financial commitments. 
President Muhammadu Buhari, elected in March 2015, has promised to stamp out corruption, rein in the free-spending elite, and expand public services to the very poor, a massive proportion of the country’s population. 
That now looks impossible. 
As recently as a year ago, Angola, Africa’s second largest oil producer, was the darling of global investors. 
The expatriate workers staffing Luanda’s office towers and occupying its fancy residential neighborhoods complained that it was the most expensive city in the world. 
Today, Angola’s economy is grinding to a halt. 
Construction companies cannot pay their workers. 
The cash-strapped government is slashing the subsidies that large numbers of Angolans depend on, fueling popular anger and a sense that the petro-boom enriched only the elite, leaving everyone else worse off. 
As young people call for political change from a president who has been in power since 1979, the government has launched a crackdown on dissent. 
On the other side of the continent, Kenya and Uganda are watching their hopes of becoming oil exporters evaporate. 
As long as prices remain low, new discoveries will stay in the ground. 
And yet the money borrowed for infrastructure investment still must be repaid – even if the oil revenues earmarked for that purpose never materialize. 
Funding for social programs in both countries is already stretched. 
Ordinary people are already angry at a kleptocratic elite that siphons off public money. 
What will happen when, in a few years, a huge and growing chunk of the national budget must be dedicated to paying foreign debt instead of funding education or health care? 
The view from North Africa is equally bleak. 
Two years ago, Egypt believed that major discoveries of offshore natural gas would defuse its dangerous youth bomb, the powder keg that fueled the Arab Spring in 2011. 
No longer. 
And to make matters worse, Saudi Arabia, which for years has funneled money to the Egyptian government, is facing its own economic jitters. 
Today, the Kingdom is contemplating what was once unthinkable: cutting Egypt off. 
Meanwhile, next door, Libya is primed to explode. 
A half-decade of civil war has left an impoverished population fighting over the country’s dwindling oil revenues. 
Food and medicine are in short supply as warlords struggle for the remnants of Libya’s national wealth. 
These countries are not only dependent on oil exports; they also rely heavily on imports. 
As revenues dry up and exchange rates plunge, the cost of living will skyrocket, exacerbating social and political tensions. 
Europe is already struggling to accommodate refugees from the Middle East and Afghanistan. 
Nigeria, Egypt, Angola, and Kenya are among Africa’s most populated countries. 
Imagine what would happen if they imploded and their disenfranchised, angry, and impoverished residents all started moving north. 

The False Narrative of Realpolitik 
GENEVA – In an era of divisive social media and partisan “fake news,” the notion that “actions speak louder than words” is no longer true. 
As we are rediscovering, words are both powerful and problematic, particularly in the context of geopolitics. 
The recent United Nations General Assembly meeting in New York offered the latest reminder that in diplomacy, words still matter. 
Much attention has been drawn to US President Donald Trump’s remark that the United States “will have no choice but to totally destroy North Korea” should the Democratic People’s Republic of Korea (DPRK) threaten it or its allies. 
In fact, most military experts agree that a kinetic war on the Korean Peninsula would annihilate the DPRK, and quite possibly South Korea along with it. 
But other parts of Trump’s UN speech, especially its passages about national interests and sovereignty, require further reflection. 
Trump makes no secret of his desire to “put America first,” and he reiterated that pledge at the UN dais. 
But he also urged other leaders to put their countries first, too. 
“To overcome the perils of the present and to achieve the promise of the future, we must begin with the wisdom of the past,” he said. “Our success depends on a coalition of strong and independent nations that embrace their sovereignty to promote security, prosperity, and peace for themselves and for the world.” 
One could infer, and many have, that such statements signal a revival of US devotion to Realpolitik in world affairs. 
As the historian John Bew observed in his 2016 history of the term, the pendulum swing was to be expected: “Our foreign policy debates follow cycles, in which policymakers declare themselves more idealistic, or more realistic.” 
But Bew’s survey also reminds us that the singular pursuit of national interests – the type of worldview championed by Trump – is not Realpolitik at all if it is uncoupled from a transformative idea or normative purpose. 
Severing moral concerns from global affairs would only weaken the US and all who emulate it. 
The concept of Realpolitik emerged from the mixed outcomes of the European revolutions of 1848, when Germany’s future unification had many possible permutations, but the larger political goal – an international order comprising strong nation-states – was nonetheless clear. 
But in the wake of Trump’s “America First” doctrine, the challenge for the world today is to discern what the purpose of political realism has become. 
One answer was shared at the World Economic Forum’s (WEF) annual meeting in Davos earlier this year. 
There, Chinese President Xi Jinping offered a robust defense of globalization and emphasized his view that in pursuing national agendas, countries should place objectives “in the broader context” and “refrain from pursuing their own interests at the expense of others.” 
If leaders of the world’s two most powerful countries differ fundamentally in their approach to international relations, what are the prospects for strengthening cooperation globally? 
History is replete with examples of conflicts stemming from a rising power challenging the influence and interests of an incumbent. 
During the Peloponnesian War, according to the Greek historian Thucydides, “It was the rise of Athens and the fear that this instilled in Sparta that made war inevitable.” 
How China and the US avoid what Harvard’s Graham Allison has termed the “Thucydides Trap” is of great concern to the world, as is ensuring that geostrategic disputes elsewhere don’t lead to violence. 
As Stanford biologist Robert Sapolsky has argued, behavioral dichotomies that might seem inevitable and crucial one minute can, under the right circumstances, “evaporate in an instant.” 
For Sapolsky, “contact theory,” which was developed in the 1950s by psychologist Gordon Allport, can foster reconciliation among rivals, and help bridge the “us-them” divide. 
“Contact,” whether between kids at a summer camp or negotiators around a table, can lead to greater understanding if engagement is lengthy and on neutral territory, outcome-oriented, informal, personal, and avoids anxiety or competition. 
What is said during these engagements is crucial. 
As the Nobel laureate economist Robert J. Shiller has noted, stories, whether true or not, are drivers of major decisions, especially economic choices. 
In his study of “narrative economics,” Shiller highlights the effects that “viral” stories can have on the global economy. 
He points out that people’s choices and assessments of current events are partly based on the stories they have heard about past events. 
For example, the 2007-2009 global financial crisis is called the “Great Recession” because the traumatic tales of the Great Depression persist in our collective memory. 
Words and narratives affect international affairs in similar ways. 
Narratives that have emerged in response to – or as a result of – national, regional, and global divisions are often structured by an “us-them” dichotomy. 
But these national narratives, as appealing as they may be to some, must not be confused with Realpolitik,as they remain bereft of the innovation, inspiration, and idealism needed for transformational change. 
Stories that seek to preserve the singular benefits of global integration, while limiting shared obligations, may in fact go “viral” domestically, because citizens yearn for responsive leadership that addresses local and national concerns. 
But a shared identity and collective purpose remains elusive, despite the fact that we are living in an age of social networks. 
That fact alone cannot absolve governments of their regional and global responsibilities. 
The political, economic, and social fractures that have emerged must not foster intolerance, indecision, or inaction. 
That is why next year’s WEF annual meeting will seek to rededicate leaders to the development of a shared narrative, one that strengthens cooperation for this generation and every generation to come. 

Famine and Hope in the Horn of Africa 
NAIROBI – Yet again, famine stalks the Horn of Africa. 
More than ten million people are fighting for survival, mainly pastoralist communities in the hyper-arid regions of Somalia, Ethiopia, and northern Kenya. 
Every day brings news of more deaths and massive inflows of starving people into refugee camps in Kenya, across the border from Somalia. 
The immediate cause of this disaster is clear: the rains have failed for two years running in the dry regions of East Africa. 
These are places where water is so scarce year after year that crop production is marginal at best. 
Millions of households, with tens of millions of nomadic or semi-nomadic people, tend camels, sheep, goats, and other livestock, which they move large distances to reach rain-fed pasturelands. 
When the rains fail, the grasses shrivel, the livestock die, and communities face starvation. 
Pastoralism has long been a harrowing existence in the Horn of Africa. 
The location of life-supporting pasturelands is determined by the unstable and largely unpredictable rains, rather than by political boundaries. 
Yet we live in an era when political boundaries, not the lives of nomadic pastoralists, are sacrosanct. 
These boundaries, together with growing populations of sedentary farmers, have hemmed in pastoralist communities. 
The political boundaries exist as a legacy of the colonial era, not as the result of cultural realities and economic needs. 
Somalia, for example, contains only a part of the Somali-speaking pastoralist population, with large numbers living across the border in Kenya and Ethiopia. 
As a result, the Ethiopian-Somalia border has been war-torn for decades. 
A massive drought this year was not exactly predictable, but the risk of famine was easily foreseeable. 
Indeed, two years ago, in a meeting with US President Barack Obama, I described the vulnerability of the African drylands. 
When the rains fail there, wars begin. 
I showed Obama a map from my book Common Wealth, which depicts the overlap of dryland climates and conflict zones. 
I noted to him that the region urgently requires a development strategy, not a military approach. 
Obama responded that the US Congress would not support a major development effort for the drylands. 
“Find me another 100 votes in Congress,” he said. 
I don’t know whether Obama’s leadership might have found those votes, but I do know that the US has not mustered the national effort to respond effectively to the Horn of Africa’s needs. 
The US is far too focused on expensive and failed military approaches in the drylands – whether in Afghanistan, Pakistan, Yemen, or Somalia – to pay heed to long-term economic development strategies aimed at addressing the root causes of these countries’ ongoing crises. 
This year’s drought came at a time of political and economic turmoil in both the US and Europe. 
America’s distorted political system gives the rich everything they want in the form of tax cuts, while slashing programs for the poor. 
There is no interest in Washington, DC, in addressing the needs of America’s poor, much less the needs of the world’s poor. 
In Europe, the global financial crisis of 2008 left a legacy of deep political and economic crisis in the weaker economies of Southern Europe. 
This crisis absorbed almost all of the European Union’s political attention this summer, even as famine in Africa has worsened. 
The unfolding disaster in the Horn of Africa will not solve itself, and four factors make the situation potentially explosive. 
First, long-term human-induced climate change seems to be bringing more droughts and climate instability. 
The US and Europe are not only failing to respond to the African drought; they have probably contributed to it through their greenhouse-gas emissions. 
Second, fertility rates and population growth in the Horn of Africa continue to be extremely high, even as children perish in the famine. 
Unless and until widespread family planning and modern contraceptive services are established, expanding populations in the Horn of Africa will crash against a harsher future climate. 
Third, the region is already living in extreme poverty, so adverse shocks push it toward calamity. 
And, finally, regional politics is highly unstable, leaving the Horn extremely vulnerable to conflict. 
But there is still realistic hope. 
The Millennium Villages Project, which I have the honor of helping to lead, has demonstrated that pastoralist communities can be empowered through targeted investments in livestock management, veterinary care, business development, mobile health clinics, boarding schools, and local infrastructure such as safe water points, off-grid electricity, and mobile telephony. 
Cutting-edge technologies, together with strong community leadership, can unlock long-term sustainable development. 
The countries of the Horn of Africa are now stepping forward to help themselves through this approach. 
Six countries in the region with large dryland zones – Ethiopia, Somalia, Kenya, Uganda, Djibouti, and South Sudan – have joined together in a Drylands Initiative to use best practices and cutting-edge technologies to support their pastoralist communities’ effort to escape the scourges of extreme poverty and famine. 
Many companies, such as Ericsson, Airtel, Novartis, and Sumitomo Chemical, are participating in this effort by making their technologies available to impoverished pastoralist communities. 
A new regional partnership is starting to take hold, beginning with the affected communities and their national governments. 
Several countries in the Arabian Peninsula, just across the Red Sea from the Horn, are also showing an encouraging readiness to deploy their oil earnings for emergency relief and long-term development. 
The Islamic Development Bank, representing the 57 members of the Organization of Islamic Cooperation, is also showing leadership. 
Through this new partnership of communities, governments, businesses, and academia, the current crisis could yet mark the start of regional recovery and development. 


Farewell to Development’s Old Divides 
NEW YORK -- The notion of a divide between the rich north and the poor and developing south has long been a central concept among economists and policymakers. 
From 1950 to 1980, the north accounted for almost 80% of global GDP but only 22% of its population, and the south accounted for the remainder of global population and 20% global income. 
But the north-south divide is now obsolete. 
The dynamic process of globalization has resulted in unprecedented levels of growth and interdependence. 
However, while this has blurred the old division, new ones have emerged, splintering today’s world into four inter-connected tiers. 
The first tier comprises the affluent countries, notably the United States, European nations, Australia, and Japan – with a combined population of around one billion and per capita incomes ranging from $79,000 (Luxembourg) to $16,000 (Republic of Korea). 
For the past 50 years, these affluent countries have dominated the global economy, producing four-fifths of its economic output. 
However, in recent years, a new set of economies has emerged that is contesting the affluent countries’ economic dominance. 
These emerging economies – call them the Globalizers – constitute a second tier of about 30 poor and middle-income countries (including China and India), with per capita GDP growth rates of 3.5% or more, and a total population of 3.2 billion, or roughly 50% of the world’s population. 
These countries have experienced unprecedented levels of sustained economic growth that may well enable them to replace the “Affluents” as engines of the world economy. 
The Globalizers are a large and diverse group of countries – in size, geography, culture, and history – that have learned how to integrate optimally with, and leverage, the global economy to catalyze their development. 
A third tier is made up of roughly 50 middle-income countries with a combined population of 1.1 billion. 
They are also home to many of the world’s critical natural resources, possessing around 60% of proven oil reserves. 
But these “Rentiers” have not been able to translate the rents of their natural resource wealth into sustained economic growth. 
The fourth tier comprises countries that are lagging behind – the world’s poorest economies, with more than a billion people. 
They continue to stagnate or decline economically. 
Mostly located in sub-Saharan Africa, these “Laggards” are largely isolated from the global economy, and they face crucial development challenges. 
This emerging four-tier world presents three key challenges. 
First, we need to increase our efforts to ensure that the Laggards are no longer left behind. 
This requires policy changes as well as more generous and more effective aid. 
If one considers the issue of aid flows, one finds that though development aid rose in 2005 to $107 billion, most of the increase was geared towards “special circumstances,” such as debt forgiveness and for Iraq and Afghanistan. 
The sad truth is that development aid to Africa has decreased from $49 per person in 1980 to $38 per person in 2005. 
The true development needs of Laggard countries and other parts of the world are not being met, despite the rhetoric of scaling up aid. 
Second, the old powers need to accommodate the rise of Globalizer economies – particularly China and India – by reforming our international order. 
The Affluents will continue to be major global players, but as the Globalizers’ relative economic power rises, they will demand a greater role in international affairs. 
Most Affluents seem unprepared for this change, but such demands will need to be accommodated. 
Finally, while the Globalizers have lifted millions of people out of poverty and reduced global inequality, this has not resulted in a more equal world, because star economies like India and China are experiencing a rise in domestic inequity. 
Whether it is coastal versus inland or rural versus urban, these countries must tackle the widening disparities, because high inequality may well threaten their very ability to continue growing as they have. 
If we are to create a more equitable world, then traditional levers of development such as trade, investment, aid, and migration need to be scaled up comprehensively and coherently, and global institutions must be reformed. 
This would improve our ability to address global challenges and better our prospects for building a more equitable world. 
Otherwise, we might bid farewell to old development divides only to welcome new ones. 

Farewell to the Neo-Classical Revolution 
LONDON – The looming bankruptcy of Lehman Brothers, and the forced sale of Merrill Lynch, two of the greatest names in finance, mark the end of an era. 
But what will come next? 
Cycles of economic fashion are as old as business cycles, and are usually caused by deep business disturbances. 
“Liberal” cycles are followed by “conservative” cycles, which give way to new “liberal” cycles, and so on. 
Liberal cycles are characterized by government intervention and conservative cycles by government retreat. 
A long liberal cycle stretched from the 1930’s to the 1970’s, followed by a conservative cycle of economic deregulation, which now seems to have run its course. 
With the nationalization of America’s two giant mortgage banks, Fannie Mae and Freddie Mac, following the nationalization earlier this year of Britain’s Northern Rock, governments have started stepping in again to prevent market meltdowns. 
The heady days of conservative economics are over – for now. 
Each cycle of regulation and de-regulation is triggered by economic crisis. 
The last liberal cycle, associated with President Franklin Roosevelt’s New Deal and the economist John Maynard Keynes, was triggered by the Great Depression, though it took World War II’s massive government spending to get it properly going. 
During the three-decade-long Keynesian era, governments in the capitalist world managed and regulated their economies to maintain full employment and moderate business fluctuations. 
The new conservative cycle was triggered by the inflation of the 1970’s, which seemed to be a product of Keynesian policies. 
The economic guru of that era, Milton Friedman, claimed that the deliberate pursuit of full employment was bound to fuel inflation. 
Governments should concentrate on keeping money “sound” and leave the economy to look after itself. 
The “new classical economics,” as it became known, taught that, in the absence of egregious government interference, economies would gravitate naturally to full employment, greater innovation, and higher growth rates. 
The current crisis of the conservative cycle reflects the massive build-up of bad debt that became apparent with the sub-prime crisis, which started in June 2007 and has now spread to the whole credit market, sinking Lehman Brothers. 
“Think of an inverted pyramid,” writes investment banker Charles Morris. 
“The more claims are piled on top of real output, the more wobbly the pyramid becomes.” 
When the pyramid starts crumbling, government – that is, taxpayers – must step in to refinance the banking system, revive mortgage markets, and prevent economic collapse. 
But once government intervenes on this scale, it usually stays for a long time. 
At issue here is the oldest unresolved dilemma in economics: are market economies “naturally” stable or do they need to be stabilized by policy? 
Keynes emphasized the flimsiness of the expectations on which economic activity in decentralized markets is based. 
The future is inherently uncertain, and therefore investor psychology is fickle. 
“The practice of calmness, of immobility, of certainty and security, suddenly breaks down,” Keynes wrote. 
“New fears and hopes will, without warning, take charge of human conduct.” 
This is a classic description of the “herd behavior” that George Soros has identified as financial markets’ dominant feature. 
It is the government’s job to stabilize expectations. 
The neo-classical revolution believed that markets were much more cyclically stable than Keynes believed, that the risks in all market transactions can be known in advance, and that prices will therefore always reflect objective probabilities. 
Such market optimism led to de-regulation of financial markets in the 1980’s and 1990’s, and the subsequent explosion of financial innovation which made it “safe” to borrow larger and larger sums of money on the back of predictably rising assets. 
The just-collapsed credit bubble, fueled by so-called special investment vehicles, derivatives, collateralized debt obligations, and phony triple-A ratings, was built on the illusions of mathematical modeling. 
Liberal cycles, the historian Arthur Schlesinger thought, succumb to the corruption of power, conservative cycles to the corruption of money. 
Both have their characteristic benefits and costs. 
But if we look at the historical record, the liberal regime of the 1950’s and 1960’s was more successful than the conservative regime that followed. 
Outside China and India, whose economic potential was unleashed by market economics, economic growth was faster and much more stable in the Keynesian golden age than in the age of Friedman; its fruits were more equitably distributed; social cohesion and moral habits better maintained. 
These are serious benefits to weigh against some business sluggishness. 
History, of course, never repeats itself exactly. 
Circuit-breakers are in place nowadays to prevent a 1929-style slide into disaster. 
But when the financial system, left to its own devices, seizes up, as it now has, we are clearly in for a new round of regulation. 
Industry will be left free, but finance will be brought under control. 
The cycles in economic fashion show how far economics is from being a science. 
One cannot think of any natural science in which orthodoxy swings between two poles. 
What gives economics the appearance of a science is that its propositions can be expressed mathematically by abstracting from many decisive characteristics of the real world. 
The classical economics of the 1920’s abstracted from the problem of unemployment by assuming that it did not exist. 
Keynesian economics, in turn, abstracted from the problem of official incompetence and corruption by assuming that governments were run by omniscient, benevolent experts. 
Today’s “new classical economics” abstracted from the problem of uncertainty by assuming that it could be reduced to measurable (or hedgeable) risk. 
A few geniuses aside, economists frame their assumptions to suit existing states of affairs, and then invest them with an aura of permanent truth. 
They are intellectual butlers, serving the interests of those in power, not vigilant observers of shifting reality. 
Their systems trap them in orthodoxy. 
When events, for whatever reason, coincide with their theorems, the orthodoxy that they espouse enjoys its moment of glory. 
When events shift, it becomes obsolete. 
As Charles Morris wrote: “Intellectuals are reliable lagging indicators, near-infallible guides to what used to be true.” 

Farewell to the Revolution? 
“The FARC are finished, no matter how many men and weapons they may still have.” 
Former Salvadoran guerrilla leader Joaquín Villalobos’ lapidary conclusion about the Colombian narco-guerrilla movement is worthy of consideration, given his unmatched insight into Latin America’s armed, revolutionary left. So is the almost tearful acknowledgement by Venezuelan President Hugo Chávez’s ideological guru, Heinz Dieterich, that “Chávez’s speech on the FARC (calling on it to abandon armed struggle and free its hostages) is the equivalent of unconditional surrender to Washington’s hemispheric ambition.” 
However hasty these judgments may end up being, it certainly seems that the region’s oldest and last political-military organization is, at long last, on the brink of defeat. 
Colombian President Alvaro Uribe’s strategy of “democratic security” appears to have paid off, supported by the United States-financed Plan Colombia, as well as by much plain good luck, such as finding thousands of incriminating computer files three months ago in an attack on a FARC camp in Ecuador. 
If events in the next few months confirm the FARC’s demise, Latin America would finally be rid of one of its main scourges over the past half-century. 
At least since December 1956, when Fidel and Raúl Castro, together with a young Argentine doctor, later known as Che Guevara, sailed from Mexico’s port of Tuxpan to Cuba and into history, the region has seen innumerable attempts by small left-wing revolutionary groups to take power through armed uprisings. 
They have all invoked heroic precedents from the nineteenth and early twentieth centuries, as well as the impossibility of proceeding otherwise under brutal right-wing dictatorships, such as Batista’s in Cuba, Somoza’s in Nicaragua, and military-oligarchic complexes in Guatemala, El Salvador, Bolivia, Argentina, Peru, Uruguay, and elsewhere – including Colombia. 
In many of these cases, they were right: without recourse to guns and bullets, nothing in their countries would ever have changed. 
They achieved only three successes: Cuba, in 1959; Nicaragua, in 1979; and El Salvador, where, by 1992, they fought the US and the local army to a stalemate, bringing peace and growing prosperity to their country. 
Everywhere else, for whatever reason – misguided strategies, tactical mistakes, erroneous theories, US intervention, etc. – they faced only defeat, repression, and futility. 
By the early 1990’s, it became increasingly evident that the armed struggle for power in Latin American was winding down. 
Only a few groups remained: the Shining Path in Peru, the Manuel Rodríguez Patriotic Front in Chile, for a brief time the Zapatistas in Chiapas, Mexico, and the FARC in Colombia. 
Democratic transitions throughout the hemisphere had made guerrilla warfare unjustifiable: as Che foretold in his La Guerra de Guerrillas in 1962, wherever the trappings (or, one might add, the realities) of democratic rule prevailed, taking up arms was pointless. 
In country after country, the guerrillas were defeated, pacified, brought into the democratic process, or rendered irrelevant. 
By the end of the twentieth century, only the FARC endured, together with a smattering of splinter groups in Mexico. 
So if Villalobos and Dieterich are right about the FARC’s imminent collapse, it would be a veritable milestone for the region, and a vindication of a strategy – Uribe’s – of which many of us were wary. 
That strategy has rightly been criticized for human rights violations, but it seems to have proved successful. 
This is no minor matter for the hemisphere, for Colombia, and for Uribe. 
Nonetheless, three major problems remain. 
First, despite high desertion rates, the death of three of their seven leaders, and Chávez’s apparent decision to forsake them (at least for now), the FARC have proved remarkably resilient over the past 40 years. 
Yes, they are divided, unpopular, and devoid of international representation, but the ups and downs of guerrilla warfare are well known; the only truly dead guerrilla fighter is one who is buried. 
Second, it would seem highly risky to conclude that one speech by Chávez is tantamount to a fundamental affirmation of principle. 
To be sure, Chávez is absolutely crucial to FARC’s survival, given its current, undoubtedly weakened condition. 
But, having met Chávez personally a dozen times, it appears naïve, at least to me, to attribute great significance or conviction to anything he says – moderate, hard left, or in between. 
He may well have opted for a minor tactical “correction,” only to wait to fight another day. 
Finally, supposing Uribe is on the verge of victory, what should he do with it? 
Many have advocated negotiating pacification with the late FARC leader Manuel Marulanda’s successors. 
But, without any notion of power-sharing, this is easier said than done. 
After all, the 1992 Chapultepec Peace Agreements, which ended the Salvadoran civil war, were signed more than two years after it became obvious that neither side could win. 
And this occurred thanks to skillful United Nations involvement, led by Alvaro de Soto; the talent of sophisticated FMLN leaders like Villalobos and chief negotiator Salvador Samayoa; strong pressure from the US and its point-man, Bernard Aronson; and Salvadoran President Alfredo Christiani’s undeniable courage and vision. 
Few of these ingredients exist in today’s Colombia. 
So perhaps Villalobos should be a bit more cautious, and Dieterich a bit less forlorn. 

Farewell to the Shadow Shoguns 
TOKYO – It’s déjà vu all over again in Japan. 
Despite a landslide electoral victory for his Democratic Party of Japan (DPJ) last September, Japanese Prime Minister Yukio Hatoyama resigned only 262 days after taking office. 
Sadly, abrupt changes of prime minister are practically an annual event in Japan nowadays, as Hatoyama’s resignation marks the fourth sudden transfer of power to a new leader in the past four years. 
While in opposition, the DPJ bashed the Liberal Democratic Party (LDP) for flipping through leader after leader. 
With the DPJ now doing the same thing, the Japanese public is flabbergasted, and people are beginning to ask if there is something rotten in their political system. 
Hatoyama’s inept handling of key national security issues played a key role in his undoing. 
He alienated his Social Democratic Party (SDP) allies by opting – after months of dithering – to honor an agreement with the United States ensuring the future of the Futenma Airbase on Okinawa. 
Having promised to shut the base in the campaign, and having also pushed for its removal while in office, Hatoyama’s reversal forced the Socialists to exit the coalition. 
The SDP had promised that the base would leave Japan. 
Not only did Hatoyama lose a key coalition partner, but the man who put him in the premiership has also been forced out. 
DPJ Secretary General Ichiro Ozawa – the party’s shadowy power broker – resigned from his post simultaneously with Hatoyama. 
Ozawa’s aspiration to make the next election the grand finale of his political career by cementing the DPJ as a party of government now seems in jeopardy. 
The Hatoyama government’s floundering was not confined to the issue of the US base on Okinawa. 
Indeed, it also grossly neglected to deal with an outbreak of foot-and-mouth disease in Miyazaki Prefecture, allowing the disease to spread out of control. 
Instead of overseeing the government’s management of the outbreak, Hirotaka Akamatsu, the minister of agriculture, forestry, and fishing, took a long trip to Cuba to meet Raúl Castro – a very strange decision given strained US-Japan relations. 
That trip further cemented the notion that the Hatoyama government was at root anti-American in the mindless way that former South Korean President Roh Moo-hyun was. 
Having lost all support within his own party, Hatoyama had no choice but to resign. 
Forcing Ozawa to step down with him can perhaps be said to be Hatoyama’s only meaningful decision as prime minister, for Ozawa’s departure from the political scene – if it sticks – is the far more important event. 
In the past, Ozawa was the LDP’s youngest Secretary General. 
A protégé of former Prime Minister Kakuei Tanaka, an infamous LDP kingpin, Ozawa’s political methods epitomized the worst aspects of the LDP’s old factional plutocracy. 
But in 1993, having failed to gain control of the party, he bolted, along with 45 other Diet members to create the Shinsei Party, supposedly to press for electoral reform. 
With Japanese voters becoming supportive of new parties after decades of LDP rule, Shinsei gained tremendous traction and drove forward the creation of the first non-LDP coalition government since the mid-1950’s. But, as the LDP retained the most seats in the upper house, it soon forged a coalition with its long-time rivals, the Social Democrats, forcing Ozawa back into opposition. 
In 1999, Ozawa seized control of the DPJ, which Hatoyama and Naoto Kan, the new prime minister, had founded. 
It took ten years to make a DPJ government possible, and only by forging a coalition with the Social Democrats. 
By shattering that coalition, Hatoyama destroyed the governing majority Ozawa had worked so cunningly to construct. 
With Ozawa gone, not only does the DPJ now have an opportunity to renew itself, but so does the LDP. 
The danger in Japan’s game of prime-ministerial musical chairs is that this political wrangling diverts attention from the serious problems facing today’s Asia. 
Tensions on the Korean Peninsula are now as high as at any time in decades, and China is engaged in a massive military build-up. 
Japan should be seeking to make a difference in securing stability in Asia, not playing sterile political games. 
The rest of Asia might be content to sit back and watch the spectacle of Japan’s myopic politics if Japan’s inability to work to help stabilize the region did not matter so much. 
That Japan had nothing to offer Thailand in its moment of turmoil is testimony to how irrelevant Hatoyama’s leadership had made the country. 
As a former finance minister, deputy prime minister, and the product of a grass-roots civil-society movement, Prime Minister Kan has his work cut out for him, particularly as it is rumored that Ozawa intends to topple him in the autumn. 
The likely ongoing instability within the DPJ makes it all the more important that the LDP seriously reform itself. 
Although Ozawa retains considerable influence and so may be able to exercise his will on the DPJ, this must not be allowed to happen. 
For the politics of Tanaka and Ozawa produced an enfeeblement of Japan’s elected leaders in favor of behind-the-scenes party bosses. 
Of course, serious leaders like former prime ministers Yasahiro Nakasone and Junichiro Koizumi were able to overcome this “shadow shogun” system over the years, but no democracy can depend on great leaders being elected every time there is a vote. 
Ozawa’s fall can – but may not – return Japanese politics to where it belongs: in the hands of its elected leaders. 

Who Will Suffer Most from Climate Change? 
SEATTLE – A few years ago, Melinda and I visited with a group of rice farmers in Bihar, India, one of the most flood-prone regions of the country. 
All of them were extremely poor and depended on the rice they grew to feed and support their families. 
When the monsoon rains arrived each year, the rivers would swell, threatening to flood their farms and ruin their crops. 
Still, they were willing to bet everything on the chance that their farm would be spared. 
It was a gamble they often lost. 
Their crops ruined, they would flee to the cities in search of odd jobs to feed their families. 
By the next year, however, they would return – often poorer than when they left – ready to plant again. 
Our visit was a powerful reminder that for the world’s poorest farmers, life is a high-wire act – without safety nets. 
They don’t have access to improved seeds, fertilizer, irrigation systems, and other beneficial technologies, as farmers in rich countries do – and no crop insurance, either, to protect themselves against losses. 
Just one stroke of bad fortune – a drought, a flood, or an illness – is enough for them to tumble deeper into poverty and hunger. 
Now, climate change is set to add a fresh layer of risk to their lives. 
Rising temperatures in the decades ahead will lead to major disruptions in agriculture, particularly in tropical zones. 
Crops won’t grow because of too little rain or too much rain. 
Pests will thrive in the warmer climate and destroy crops. 
Farmers in wealthier countries will experience changes, too. 
But they have the tools and supports to manage these risks. 
The world’s poorest farmers show up for work each day for the most part empty-handed. 
That’s why of all the people who will suffer from climate change, they are likely to suffer the most. 
Poor farmers will feel the sting of these changes at the same time the world needs their help to feed a growing population. 
By 2050, global food demand is expected to increase by 60%. 
Declining harvests would strain the global food system, increasing hunger and eroding the tremendous progress the world has made against poverty over the last half-century. 
I’m optimistic that we can avoid the worst impacts of climate change and feed the world – if we act now. 
There’s an urgent need for governments to invest in new clean-energy innovations that will dramatically reduce greenhouse-gas emissions and halt rising temperatures. 
At the same time, we need to recognize that it’s already too late to stop all of the impacts of hotter temperatures. 
Even if the world discovered a cheap, clean energy source next week, it would take time for it to kick its fossil fuel-powered habits and shift to a carbon-free future. 
That’s why it’s critical for the world to invest in efforts to help the poorest adapt. 
Many of the tools they’ll need are quite basic – things that they need anyway to grow more food and earn more income: access to financing, better seeds, fertilizer, training, and markets where they can sell what they grow. 
Other tools are new and tailored to the demands of a changing climate. 
The Gates Foundation and its partners have worked together to develop new varieties of seeds that grow even during times of drought or flooding. 
The rice farmers I met in Bihar, for instance, are now growing a new variety of flood-tolerant rice – nicknamed “scuba” rice – that can survive two weeks underwater. 
They are already prepared if shifts in the weather pattern bring more flooding to their region. 
Other rice varieties are being developed that can withstand drought, heat, cold, and soil problems like high salt contamination. 
All of these efforts have the power to transform lives. 
It’s quite common to see these farmers double or triple their harvests and their incomes when they have access to the advances farmers in the rich world take for granted. 
This new prosperity allows them to improve their diets, invest in their farms, and send their children to school. 
It also pulls their lives back from the razor’s edge, giving them a sense of security even if they have a bad harvest. 
There will also be threats from climate change that we can’t foresee. 
To be prepared, the world needs to accelerate research into seeds and supports for smallholder farmers. 
One of the most exciting innovations to help farmers is satellite technology. 
In Africa, researchers are using satellite images to create detailed soil maps, which can inform farmers about what varieties will thrive on their land. 
Still, a better seed or a new technology can’t transform the lives of farming families until it’s in their hands. 
A number of organizations, including a non-profit group called One Acre Fund, are finding ways to ensure that farmers take advantage of these solutions. 
One Acre Fund works closely with more than 200,000 African farmers, providing access to financing, tools, and training. 
By 2020, they aim to reach one million farmers. 
In this year’s Annual Letter, Melinda and I made a bet that Africa will be able to feed itself in the next 15 years. 
Even with the risks of climate change, that’s a bet I stand by. 
Yes, poor farmers have it tough. 
Their lives are puzzles with so many pieces to get right – from planting the right seeds and using the correct fertilizer to getting training and having a place to sell their harvest. 
If just one piece falls out of place, their lives can fall apart. 
I know the world has what it takes to help put those pieces in place for both the challenges they face today and the ones they’ll face tomorrow. 
Most importantly, I know the farmers do, too. 

When Agricultural Workers Go Hungry 
GENEVA – Food is a powerful storyteller. 
Our diet signals whether we cook at home, shop locally, prefer inexpensive dishes, or even think about what we eat. 
But the consumer side of mealtime is just one of food’s many plot lines. 
Food has backstories, too, none more unsavory than this one: agricultural workers – the people who make dinner possible – are also the most likely to go to bed hungry. 
Every day, some 1.1 billion people – one-third of the global workforce – go to work at the world’s farms. 
And, every night, many of them return home – having suffered countless violations of their human rights – without enough money to feed themselves or their families. 
Farm work is one of the only professions in which national legal protections are regularly ignored. 
Minimum wage standards endorsed by the International Labor Organization (ILO), and adopted by many industries around the world, remain either unenforced in the agriculture sector or do not extend to informal farm workers. 
But, because migrant labor makes up the bulk of the agricultural workforce, this gap in coverage has become a canyon. 
In rural parts of developing countries, 80% of farm workers earn less than $1.25 per day, trapping them in poverty. 
Additionally, piece-rate pay schemes force workers to spend hours in extreme weather to meet demanding quotas. 
Worst of all, those working on unethical farms do so at high risk. 
According to the ILO, dangerous machinery, long working hours, and exposure to toxic pesticides makes farm work one of the world’s deadliest jobs; more than 170,000 agricultural workers are killed every year on unsafe farms, twice the mortality rate of any other industry. 
And yet, agricultural work is typically excluded from occupational health and safety rules in most countries. 
Even in the United States, there is no federal law mandating that employers give farm workers breaks for water and shade, even though heatstroke remains a leading cause of work-related farm deaths in the US. 
The recent death of Fabián Tomasi, an Argentine farm worker and critic of the agrochemical industry in his country, was a reminder of the hazards of industrialized agriculture. 
While companies like Monsanto argue that pesticides are necessary to ensure food security, the consequences of chemical exposure to workers like Tomasi – whose body was left twisted and mangled after years of handling chemicals without protection – reveal the human cost of their use. 
Even in developed countries, acute pesticide poisoning affects one in every 5,000 agricultural workers, and countless more employees are exposed to toxins on a daily basis. 
Unfortunately, few agricultural workers are in a position to advocate for their rights. 
Seasonal and rural workers lack access to collective bargaining, and undocumented migrant workers avoid unions for fear that employers will retaliate by calling the immigration authorities. 
Moreover, basic benefits such as social security, health care, and workers’ compensation are typically nonexistent. 
Exempt from much workplace regulation, this is an industry that can afford to put cost-savings and profits above the wellbeing of employees. 
It is time for us to stop passively sticking a fork into what lands on our plates, and use our purchasing power to resist paying the cheapest price for food. 
Holding people accountable for mistreating farm workers will be challenging, but not impossible. 
We can begin by calling on governments to spend more time protecting farm workers than investigating their immigration status. 
Of course, for this to be possible, we need more information about where our food comes from. 
Nowadays, we tend to rely on informational labels and certifications to tell us that. 
But the story they tell is fragmented, incomplete, and at times even misleading. 
We need to take the extra steps to learn the full story. 
This means moving beyond voluntary labels declaring that food is produced fairly and humanely to demand mandatory labels that expose non-compliance with these norms. 
Worldwide, some 821 million people are undernourished – a figure that continues to increase. 
This is a tragedy; no one anywhere should have their rights, including the right to food, violated; yet that is exactly what so many farm workers and food-chain workers endure every day. 
Fighting for their rights has always been difficult, but if we continue the battle, the story of the global food system may lose some of its bitterness. 
You can learn more about the work of the Special Rapporteur, and access her official report on agricultural workers and the right to food at Hilalelver.org. 

Killer Farms 
CAMBRIDGE – On April 3, the United Kingdom announced a ban on the sale of ivory that is “one of the toughest in the world.” 
By restricting the ivory trade, the UK joined other countries – including China and the United States – in using market deterrents to discourage poaching and shield an endangered species from extinction. 
As British Environment Secretary Michael Gove put it in the announcement, the goal is to “protect elephants for future generations.” 
These are, to be sure, laudable gestures in the service of a noble goal. 
But ending ivory sales alone will not reverse declines in elephant populations. 
In fact, the biggest threat facing these and many other species is a far more ordinary human pursuit: farming. 
Throughout the developing world, farmers are expanding areas of cultivation in an endless quest for fertile soil. 
In the process, critical wildlife habitats are being destroyed at an alarming rate. 
According to the Food and Agriculture Organization of the United Nations (FAO), if current trends hold, by 2050 the world’s arable land will increase by some 70 million hectares, and much of the new farmland will be on areas that are currently forested. 
The risk is greatest in South America and Sub-Saharan Africa, where population growth and food demand will hit tropical woodlands particularly hard. 
Poverty is at the root of this ecological crisis, but poor farming practices perpetuate the cycle of hunger and habitat loss. 
In Africa, for example, persistently low crop yields – often just 20% of global averages – are tied to low seed quality, the unavailability of fertilizers, and a lack of irrigation. 
As soil health declines and output drops, many farmers see no option but to look for new land to cultivate. 
Fortunately, there is a way to end this vicious cycle. 
Research shows that better farming practices and technology can increase agricultural productivity while reducing habitat loss and protecting wildlife. 
This approach, known as “sustainable intensification,” aims to boost the output of existing farmland using techniques such as integrated crop management and advanced pest control. 
If applied widely, sustainable intensification could even reduce the total amount of land currently under cultivation. 
This is not an impossible goal. 
Over the last 25 years, farmers in more than 20 countries around the world improved food security while maintaining or increasing forest cover. 
According to one study, between 1965 and 2004, farmers in developing countries who planted high-quality seeds were able to reduce farmland by almost 30 million hectares – an area roughly the size of Italy. 
These gains could be extended further if smallholder farmers had access to modern equipment, better data collection and analysis, and more financing. 
Critics argue that increasing the productivity of smallholder farms could backfire, especially if it encouraged poor farmers to expand their acreage in the hope of increasing profits. 
To avoid this outcome, intensification strategies must be accompanied by strong conservation planning. 
At the same time, however, farmers in developing countries cannot simply be asked to stop using non-farm resources adjacent to their fields. 
Many people in poor communities rely on woodland products for fuel and construction materials, and government policies that prohibit use of these resources without offering adequate alternatives will likely fail. 
Rather, the ideal conservation approach in developing countries would link agricultural and economic support to strict limits on farmland expansion. 
That is far from being the case today. 
Around the world, billions of dollars are invested annually to address environmental degradation and poverty; many of the 17 UN Sustainable Development Goals are linked in some way to these two concerns. 
And yet, most programs designed to tackle these issues operate in isolation. 
This is a mistake: solutions to food insecurity and habitat loss must be better integrated if either challenge is ever to be solved. 
No one doubts that well-meaning policies like ivory bans can lessen the ecological impact of human activity. 
But, at the moment, farming – the activity most responsible for damaging the health of many species – is failing to attract the policymaking attention that it deserves. 
Until that changes, government strategies to protect wildlife “for future generations” will very likely come up short. 

The Courage to Normalize Monetary Policy 
NEW HAVEN – Three cheers for central banks! 
That may sound strange coming from someone who has long been critical of the world’s monetary authorities. 
But I applaud the US Federal Reserve’s long-overdue commitment to the normalization of its policy rate and balance sheet. 
I say the same for the Bank of England, and for the European Central Bank’s grudging nod in the same direction. 
The risk, however, is that these moves may be too little too late. 
Central banks’ unconventional monetary policies – namely, zero interest rates and massive asset purchases – were put in place in the depths of the 2008-2009 financial crisis. 
It was an emergency operation, to say the least. 
With their traditional policy tools all but exhausted, the authorities had to be exceptionally creative in confronting the collapse in financial markets and a looming implosion of the real economy. 
Central banks, it seemed, had no choice but to opt for the massive liquidity injections known as “quantitative easing.” 
This strategy did arrest the free-fall in markets. 
But it did little to spur meaningful economic recovery. 
The G7 economies (the United States, Japan, Canada, Germany, the United Kingdom, France, and Italy) have collectively grown at just a 1.8% average annual rate over the 2010-2017 post-crisis period. 
That is far short of the 3.2% average rebound recorded over comparable eight-year intervals during the two recoveries of the 1980s and the 1990s. 
Unfortunately, central bankers misread the efficacy of their post-2008 policy actions. 
They acted as if the strategy that helped end the crisis could achieve the same traction in fostering a cyclical rebound in the real economy. 
In fact, they doubled down on the cocktail of zero policy rates and balance-sheet expansion. 
And what a bet it was. 
According to the Bank for International Settlements, central banks’ combined asset holdings in the major advanced economies (the US, the eurozone, and Japan) expanded by $8.3 trillion over the past nine years, from $4.6 trillion in 2008 to $12.9 trillion in early 2017. 
Yet this massive balance-sheet expansion has had little to show for it. 
Over the same nine-year period, nominal GDP in these economies increased by just $2.1 trillion. 
That implies a $6.2 trillion injection of excess liquidity – the difference between the growth in central bank assets and nominal GDP – that was not absorbed by the real economy and has, instead been sloshing around in global financial markets, distorting asset prices across the risk spectrum. 
Normalization is all about a long-overdue unwinding of those distortions. 
Fully ten years after the onset of the Great Financial Crisis, it seems more than appropriate to move the levers of monetary policy off their emergency settings. 
A world in recovery – no matter how anemic that recovery may be – does not require a crisis-like approach to monetary policy. 
Monetary authorities have only grudgingly accepted this. 
Today’s generation of central bankers is almost religious in its commitment to inflation targeting – even in today’s inflationless world. 
While the pendulum has swung from squeezing out excess inflation to avoiding deflation, price stability remains the sine qua non in central banking circles. 
Inflation fixations are not easy to break. 
I can personally attest to that. 
As a staff economist at the Fed in the 1970s, I witnessed first-hand the birth of the Great Inflation – and the role played by inept central banking in creating it. 
For years, if not decades, after that experience, I was convinced that renewed inflation was just around the corner. 
Today’s generation of central bankers has dug in its heels at the opposite end of the inflation spectrum. 
Wedded to a “Phillips curve” mentality conditioned by the presumed tradeoff between economic slack and inflation, central bankers remain steadfast in their view that an accommodative policy bias is appropriate as long as inflation falls short of their targets. 
This is today’s biggest risk. 
Normalization should not be viewed as an inflation-dependent operation. 
Below-target inflation is not an excuse for a long and drawn-out normalization. 
In order to rebuild the policy arsenal for the inevitable next crisis or recession, a prompt and methodical restoration of monetary policy to pre-crisis settings is far preferable. 
A failure to do this was, in fact, precisely the problem during the last pre-crisis period, in the early 2000s. 
The Fed committed the most egregious error of all. 
In the aftermath of the bursting of the dotcom bubble in early 2000, and with fears of a Japan scenario weighing heavily on the policy debate, it opted for an incremental normalization strategy – raising its policy rate 17 times in small moves of 25 basis points over a 24-month period from mid-2004 to mid-2006. 
Yet it was precisely during that period when increasingly frothy financial markets were sowing the seeds of the disaster that was shortly to follow. 
In the current period, the Fed has outlined a strategy that does not achieve balance-sheet normalization until 2022-2023 at the earliest – 2.5-3 times as long as the ill-designed campaign of the mid-2000s. 
In today’s frothy markets, that’s asking for trouble. 
In the interest of financial stability, there is a compelling argument for much speedier normalization – completing the task in as little as half the time the Fed is currently suggesting. 
Independent central banks were not designed to win popularity contests. 
Paul Volcker knew that when he led the charge against raging inflation in the early 1980s. 
But the approach taken by his successors, Alan Greenspan and Ben Bernanke, was very different – allowing financial markets and an increasingly asset-dependent economy to take charge of the Fed. 
For Janet Yellen – or her successor – it will take courage to forge a different path. 
With more than $6 trillion of excess liquidity still sloshing around in global financial markets, that courage cannot be found soon enough. 

Fat Chance 
ATLANTA – We are, supposedly, in the midst of an obesity epidemic. 
Everyone is getting fatter. 
Children are fatter than their parents. 
Epidemics caused by fat are now manifest: Type 2 diabetes, increased rates of heart and cardiovascular disease, and notably more cancers, such as breast cancer. 
This “globesity” epidemic is seen in poor countries as well as in wealthy ones. 
But are people really so unhealthily fat? 
Certainly there are morbidly obese people, whose weight puts their lives at risk. 
Consider the British jailer Daniel Lambert (1770-1809), who stood 5’1” (155 centimeters) tall and weighed 739 lbs (335 kilos), yet neither drank nor ate “more than one dish at a meal.” 
At his death, Lambert was remembered as a man of great “temperance.” 
In other words, he was deemed to be healthy and happy. 
The problem today seems to be that we have demonized “fat,” even among people who are labeled “overweight” rather that “obese.” 
Indeed, we have lowered the boundary for “overweight” to include people considered “normal” a generation ago. 
And we have deemed fat the major public health risk in our world and fat people the cause of a range of social problems, from placing stress on health-care systems to posing a risk to their own families. 
Several causes of – some of them contradictory – obesity have been identified. 
Some point to a shift in the “quality of life”: we live longer, have less physically stressful occupations, and have easier access to more food. 
Moreover, we have abundant access to “bad” or “fast” cheap food and an absence of opportunities for physical activity in areas of extreme poverty: this is the “obesity of poverty” argument – that is, poverty is a contributory factor in morbid weight gain. 
Others argue that our individual psychological makeup is at fault: we depend on food as a means of manipulating our environment. 
On this assumption, obesity is simply on a continuum of eating disorders with anorexia nervosa, which has been defined as a mental illness. 
But eating too much food is also an addiction, which nowadays is likewise usually understood in medical terms – as a genetic pathological predisposition in an individual or group. 
Then again, obesity is sometimes viewed as a genetically predetermined “normal” predisposition, understood in terms of an evolutionary biological drive to accumulate body fat in order to prevent starvation in times of famine. 
This is the “ob-gen” argument, first put forth in a 1994 paper by Yiying Zhang and her colleagues on the genetics of obesity in mice, which concluded by extrapolating their findings to human beings. 
Being obese can also be caused by disruption of normal growth caused by pathological changes – ranging from tumors to aging (which is also understood as pathological) – in the endocrine system. 
The older we become, the fatter we get, no matter what we eat – though this seems to conflict with the ob-gen argument that we need to get fat to avoid starvation. 
On this view, an aging population means a fatter population in the United States, China, Japan, and much of Europe. 
Finally, obesity can be the result of infection by an agent that makes us get fat. 
Today, this agent is the adenovirus 36 (Ad–36), which stimulates the growth and reproduction of fat cells, as well as causing immature fat cells to mature more quickly, at least in chickens. 
Of course, in a “real” human being any number of these causes – social, psychological, or genetic – may be at work. 
But all define the obese as an object for intervention. 
The model in public health is smoking, though the list of overlapping and contradictory causes implies greater deference to factors beyond our control. 
As St. Augustine put it: “In the midst of these temptations I struggle daily against greed for food and drink. 
This is not an evil which I can decide once and for all to repudiate and never to embrace again, as I was able to do with fornication.” 
So, are we getting too fat? 
What does “too fat” mean in terms of individual happiness and health? 
Why are we (if, indeed, we are) getting fatter? 
If there is a public health question here, it may well be a series of problems rooted in a faulty assumption: the growth of girth and its absolute relationship to ill health. 
This is not to say that there are no health problems associated with fat, but we have created a moral panic about the impact of increased weight on society, on the family, and on our happiness. 
To see a world-wide epidemic of fat caused by a conspiracy of fast-food producers and our genes strikes one as weird: but the dieting culture relies on the sense that we must control this epidemic. 
Each age, culture, and tradition defines what is an unacceptable body weight – unhealthy, ugly, or corrupt. 
We must understand this as a process of creating ideal or normal bodies – those bodies that we desire to inhabit, but almost certainly will not. 

Fatah’s Status Quo Congress 
HERZLIYA – The Sixth Fatah Congress, held recently in Bethlehem, was an important event for the future of the Arab-Israeli conflict and for the Palestinian movement. 
But a careful look at the results of the Congress’s elections to Fatah’s Central Committee yields a picture that is quite different from what many will conclude about the meeting. 
The Congress seemed to demonstrate three main points: Fatah has moved toward peace with Israel; it has adopted democratic procedures; and a new generation, or even a specific group called the Young Guard, has assumed leadership. 
But this interpretation is in large part wrong. 
In terms of its approach to peace, the new Central Committee is roughly the same as the old one. 
Of the 18 elected members (Palestinian Authority leader Mahmoud Abbas will appoint four more later), no more than two (Nabil Shaath and Muhammad Shtayyeh) are really moderate. 
At least four (Muhammad al-Ghuneim, Salim al-Zanoun, Abbas Zaki, and Nasser Kidra) are hardliners, and most of the rest follow pretty much the traditional Fatah line. 
As for democracy, while the Congress was certainly a step forward from the past (when Fatah leader Yasir Arafat could handpick Fatah’s leadership), real limits remain. 
Depending on one’s definition, Abbas chose between one-third and one-half of the delegates. 
The majority of the Central Committee, not surprisingly, are Abbas’s close associates and supporters. 
The fact that only one out of 18 members will be from the Hamas-ruled Gaza Strip, which contains about half of all the Palestinians that Fatah governs, also skews the results. 
But there is one aspect of this election so dangerous that it might outweigh everything else. 
The candidate who came in first, with two-thirds of the vote, was Abd al-Mahir Ghuneim, who is increasingly being spoken of as Abbas’s successor. 
Ghuneim is an unrepentant hardliner and an open opponent of the Oslo agreement, much less of a negotiated peace agreement with Israel. 
If he becomes Fatah’s leader (and hence leader of the PA and the PLO as well), any compromise with Israel would become unimaginable. 
What about the transfer of power to a new generation? 
This is accurate in purely chronological terms – old leaders inevitably get older, after all. 
Yet, while almost all the old members of the committee were not reelected, at least 15 of the 22 members will be old-style leaders (presuming Abbas will appoint such people to the four seats that he controls). 
Many of the newly elected members, moreover, are veteran Fatah bureaucrats. 
The most interesting additions to the Central Committee are three younger men, though they have played leading roles in the organization for 20 years or more. 
Marwan Barghouti, the leader of Fatah’s grassroots group on the West Bank, is now in an Israeli prison for organizing the bloody uprising that began in 2000, and for direct involvement in planning the killings of many Israeli civilians. 
While some will point to Barghouti’s election as a victory for the younger generation, not one of his followers will join him. 
The other two younger men, Muhammad Dahlan and Jibril Rajoub, built political bases of their own as commanders of security forces in the Gaza Strip and on the West Bank, respectively. 
But Rajoub has many enemies, and Dahlan was responsible for Fatah���s humiliating defeat by Hamas in the fight that led to the expulsion of Fatah from Gaza. 
In addition, all three of the younger men are rivals, not allies. 
In other words, there is no unified Young Guard. 
Indeed, far from being an electoral revolution, only two of those elected – Barghouti and Muhammad Shtayyeh, who has headed PECDAR, the Palestinian agency that promotes transparency and economic development – can be considered at all critical of the Fatah establishment. 
But, while the election did not usher in a leadership eager for peace with Israel and a Palestinian state achieved by compromise, nor was it a prelude to a renewal of violence. 
There are several individuals in the new leadership who have many Israeli contacts, and who can pick up a phone and call or be called by their Israeli counterparts. 
It is also extremely important that most of Fatah’s new leaders have a strong distaste for Hamas, which makes rapprochement between the two groups unlikely. 
Still, if Ghuneim takes over as the PA’s and Fatah’s leader, which could happen next year, a breakdown of negotiations with Israel and a new round of fighting would not be surprising. 
The other interesting new face, though he has no chance of becoming a major leader, is Shtayyeh. 
A successful businessman, he could become an ombudsman and whistle-blower, which would be a real innovation. 
But, while it will be interesting to see whether he speaks out or is shut up, one shouldn’t read too much into his election: he finished last among those elected, beating by a single vote Tayib Abu Rahman, one of Arafat’s most trusted lieutenants and an old-school hardliner. 
There is a wide range of views in the new Palestinian leadership. 
This is neither a group that will make peace with Israel nor one that will ally itself with Hamas. 

Fatwas.com 
Beheadings online, fatwas online: the subterranean world of Islam’s radical fringe can be found on countless Internet sites. 
These technologically sophisticated fanatics are able to reach a wide audience. 
But that audience exists because of the deep dissatisfaction and anger of so many young Muslims everywhere. 
The Internet has brought together a worldwide community of the alienated and the embittered. 
The West thinks that this anger is a sign of some clash of civilizations: “us” against “them,” which implies that only one side can win. 
But the anger of young Muslims results primarily from revulsion at their corrupt leaders, and the subservience of these rulers to the United States. 
It is a bitterness rooted, in other words, in material causes, not in some fanatical, irrational, and anti-democratic sentiment whose adherents must either be re-educated or crushed. 
The problem starts at the top of Muslim societies, not with the disaffected at the bottom. 
Muslim rulers have mostly failed to satisfy the needs of their populations. 
At the same time, in much of the Muslim world, authoritarian regimes typically attempt to control and propagate exclusionary forms of Islamic dogma. 
For many years, these regimes – whether the Shia of Iran or the Wahhabis in Saudi Arabia – succeeded in suppressing pluralism and individuality. 
But, as their regimes increasingly came to be seen as politically illegitimate, their model of Islam was also discredited. 
So the disappointed and disaffected search for an Islam that meets their expectations. 
For the many Web sites that attract these disaffected people, it helps that no central authority exists today for the Muslim umma (the world community of Islam). 
By humiliating, degrading, and outlawing any Islamic tendency that disagreed with the prevailing dogma, authoritarian regimes did not eliminate pluralism, but merely sent it underground. 
Today’s technology allows that underground to speak and meet. 
In the face of repression, Internet Islam appears to speak with authentic authority. 
But Islam has traditionally always been pluralistic and tolerant of differences. 
The Caliph Ali Ibn Abi Talib said, “Our strength lies in our differences.” 
For over a thousand years, under Mecca’s traditional rulers, the Hashemite descendants of the Prophet Muhammad, all sects debated and exchanged knowledge in the Great Mosque. 
Indeed, prior to Saudi/Wahhabi rule in 1932, Mecca was cosmopolitan and open. 
Adherents of the four Sunni schools of thought, as well as the Shia, the Zaydis, the Ismaelis, etc., and those of different origins and races – Indians, Central Asians, Persians, Moroccans, Africans, and Turks – all recognized their differences but could identify with the one source, the Koran. 
But the Wahhabis tried to appropriate Mecca for their own version of Islam, and to export their exclusionary doctrine. 
For a while they succeeded. 
Today, however, we are witnessing the failure of the Wahhabi project to monopolize Islam. 
Fatwas of the type issued by the highest Wahhabi cleric, Bin Baz, such as the notorious one before the first Gulf War declaring the Earth to be flat, have, unsurprisingly, lost their authority and credibility. 
Ignorance, combined with the wider corruption and hypocrisy of the regime, emptied these religious rulings of meaning. 
What has followed is the hijacking of Islam by radical angry men raised on Wahhabi dogma but disillusioned with the world they inherited. 
Fatwas promulgated after Bin Baz are almost always horrendous in their intolerance and virulence, and certainly appear backward and anti-modernist. 
They clash not only with the West, but with the golden age of Islam, when Muslim astronomers, mathematicians, physicians, philosophers, and poets flourished. 
Although the Internet appears to be renewing Islamic pluralism, today’s online fatwas are non-negotiable orders, not a call for fresh creativity. 
Hundreds of websites now compete to be the new Mecca, the place where all devout Muslims turn for guidance. 
The most extreme preach the ideas of Al Qaeda and their ideological brethren. 
These include the haunting celebration of a young man’s imminent martyrdom by suicide bombing, while other websites, although less violent, have widened the scope of sin to include learning English, studying science, and giving women access to the Internet without a male guardian present. 
Fatwas online harbor animosity not only towards the West, but also toward other Muslims. 
Wahhabi clerics, for example, call for jihad against the Shia “heretics” promising the rewards of heaven. 
Most of these fatwas have a violent streak that the Saudi establishment is quick to dismiss as belonging to the Middle Ages. 
The fact is, however, that these fanatics are a modern phenomenon, a creation of the Muslim world’s failed political systems, and a stark reminder of the price of long years of repression. 
Far from disappearing, the repressed are returning from underground in grotesque forms to haunt the world they grew up in. 
No matter how much their countries’ rulers try to disown them, they cannot escape their creation. 
Globalization and technology have given the disaffected a new homeland to profess Islam as they see it. 
In that Internet world, no authority has the ability to silence or satisfy them. 

The $4.3 Billion Shrug 
LONDON – In November, the United Kingdom’s Financial Conduct Authority (FCA) announced a settlement in which six banks would be fined a total of $4.3 billion for manipulating the foreign-exchange market. 
And yet share prices barely reacted. 
Why? 
The nefarious practices and management failings uncovered during the yearlong investigation that led to the fines were shocking. 
Semi-literate email and chat-room exchanges among venal traders revealed brazen conspiracies to rig the afternoon exchange-rate “fix” for profit and personal gain. 
Senior managers were so disengaged that they allowed their employees to act like vulgar, overpaid children. 
Using nicknames like “the three musketeers” and “the A-team,” they did whatever they liked, at an enormous cost to their institutions. 
But, despite the huge FCA fine, no top executive was forced to fall on his or her sword, and investors did little more than shrug. 
One reason, of course, is that the settlement was known to be coming; only the details of the offenses and the scale of the fines were news. 
The more important reason, though, is that even $4.3 billion is small change when compared to the total fines and litigation costs incurred by the major banks over the last five years. 
Morgan Stanley analysts estimate that the top 22 banks in the United States and Europe have been forced to pay $230 billion since 2009 – more than 50 times the cost of the FCA settlement. 
This is over and above the heavy losses that banks incurred from bad lending and overambitious financial engineering. 
American banks have incurred more than half of these massive penalties. 
The European bill amounts to just over $100 billion – roughly half of which was paid by the top seven British banks. 
But the numbers tell only part of the story. 
In the US, the penalties have been dominated by fines for sales of misleadingly marketed mortgage-backed securities, often to the two government supported entities Fannie Mae and Freddie Mac. 
The banks, it would be fair to say, do not wholly accept regulators’ arguments about that, but they have bitten their tongues and paid up. 
(US regulators have also imposed high penalties on foreign banks for breaches of American sanctions policies in relation to Iran.) 
In the UK, by contrast, the biggest penalties have come in the form of compensation payments made to individual mortgage borrowers who were sold Payment Protection Insurance. 
The regulators maintain that much of this insurance was worthless to borrowers and was mis-sold. 
The banks believe that some of the claimants whom they are being forced to pay are unworthy, but they have nonetheless coughed up the money. 
That unhappy episode has cost British banks $37 billion so far, with more to come – most likely another $5 billion or so. 
The Morgan Stanley analysis suggests that we can expect another $70 billion in fines and litigation costs over the next two years from already identified errors and omissions. 
And new episodes could emerge; two years ago, no one anticipated the fallout from the manipulation of the foreign-exchange markets. 
The irony here – not lost on the major banks’ finance directors – is that as fast as banks add capital from rights issues and retained earnings to meet the demands of prudential regulators, the funds are drained away by conduct regulators. 
The scale of the penalties is now large enough to have a substantial impact on banks’ balance sheets, delay the restoration of their health, and constrain their lending capacity. 
Some of the money, especially in the UK, has gone back to individual customers. 
But more has gone to the regulators themselves and onward to national governments. 
In the UK, fines once helped defray the regulator’s costs: bad actors reduced the fees charged to the good ones, creating a positive feedback loop. 
Today, the payments have become so large that the government has seized them and channeled revenues exceeding the regulator’s enforcement costs to veterans’ charities. 
In the US, the end recipients are less clear; indeed, they are undisclosed. 
Charles Calomiris of Columbia University has challenged what he calls “a real subversion of the fiscal process” as funds are raised and spent in non-transparent ways. 
The most important question, however, is whether fines on this scale serve as useful deterrents. 
Clearly, the post-crisis period has revealed unacceptable behavior in many institutions. 
It will be some time before we know whether large fines on corporations, paid principally by their shareholders, contribute to keeping the system honest. 
But that seems unlikely when banks and investors seem punch-drunk, barely reacting to regulators’ blows. 
The reputational impact of each new settlement is modest, despite the escalation in the level of fines imposed. 
The FCA has just announced a review of its pricing policies. 
“This is not a penalties race,” according to Georgina Philippou, the authority’s enforcement strategy director. 
Whether the current approach serves as an effective deterrent is a question that should be widely debated. 
Senior bank managers and regulators have a common interest in developing a more effective system – one that punishes the guilty and creates the right incentives for the future. 

Fear and Freedom on the Internet 
Earlier this month it was reported that, at the request of China’s rulers, Microsoft shut down the Web site of a Chinese blogger that was maintained on a Microsoft service called MSN Spaces. 
The blogger, Zhao Jing, had been reporting on a strike by journalists at The Beijing News that followed the dismissal of the newspaper’s independent-minded editor. 
Microsoft’s action raises a key question: can the Internet really be a force for freedom that repressive governments cannot control as easily as newspapers, radio, and television? 
Ironically, Microsoft’s founder and chairman, Bill Gates, has been an enthusiastic advocate of this view. 
Just last October, he said: “There’s really no way to, in a broad sense, repress information today, and I think that’s a wonderful advance we can all feel good about….[T]his is a medium of total openness and total freedom, and that’s what makes it so special.” 
Despite these sentiments, Microsoft is helping the Chinese authorities to repress information as best they can. 
A Microsoft spokeswoman was reported as saying that the corporation has blocked “many sites” in China, and it has been known for several months that Microsoft’s blog tool in China filters words like “democracy” and “human rights” from blog titles. 
Microsoft’s defense is that it must “comply with local and global laws.” But the MSN Spaces sites are maintained on servers in the United States. 
The relevant local laws would therefore seem to be those of the US, and Zhao Jing’s discussion of the Beijing journalists’ strike does not violate any of them. 
Nor are there any global laws that prevent Chinese people from discussing events that their government would prefer them not to discuss. 
TheNew York Times, for example, is free to publish its report on the strike, even though it operates a Web site that anyone with unfettered Internet access can read. 
If the Chinese government does not want its citizens to read a foreign newspaper,then it is up to them to figure out how to block access to it. 
The newspaper is under no obligation to do it for them. 
So Microsoft’s defense misfires. 
We can only guess at the company’s real reason for taking down the Web site, but fear of repercussions against its commercial interests in China seems likely to have been an important factor. 
To be sure, a corporation can and should place limits on the use of its services. The absolutist line – let complete freedom of expression prevail – crumbles in the face of uncomfortable examples. 
According to Gates, Microsoft might prevent the use of its services to spread instructions about making nuclear bombs, to send pro-Nazi statements into Germany, where such material is illegal, and to propagate child pornography. 
But how relevant are such examples? 
In his classic defense of freedom of expression, On Liberty, John Stuart Mill argued that the most important reason for freedom of expression is to promote competition between the widest possible range of ideas, and that unfettered debate is the best way to test them. 
For the government to protect ideas from criticism is to turn them into a lifeless and rigid dogma, regardless of whether they are true. 
If we agree with Mill, then only one of Gates’s examples falls into the category of expression that should be protected. 
Recipes for making nuclear bombs are techniques, not ideas. 
Nor is child pornography the expression of ideas. 
We may therefore restrict both of them without running afoul of Mill’s argument. (On the other hand, an essay arguing that there is nothing wrong with adults taking a sexual interest in children, and that such conduct should be permitted, expresses ideas, and thus should not be censored, no matter how poisonous we may consider them.) 
The most difficult of Gates’s three examples is that of pro-Nazi statements on a Web site aimed at Germany. 
It is easy to understand why Germany would wish to prohibit such statements. 
Several countries’ laws proscribe incitement of racial hatred, which can be justified, consistently with Mill’s defense of liberty, if such laws really focus narrowly on incitement of hatred rather than on suppressing arguments, bad as they may be, that appeal to people’s intellectual capacities. 
A defender of suppression of Nazi ideas might argue that have already been tried, and have failed – in the most horrendous manner imaginable – to produce a better society. 
Nevertheless, the best possible sign that Germany has overcome its Nazi past would be to focus its laws specifically on incitement to racial hatred, rather than on Nazism as such. 
In any case, China’s crackdown on straightforward reporting and discussion of events taking place in that country is not the suppression of a discredited political ideology, but of open and informed political debate. 
If Bill Gates really believes that the Internet should be a liberating force, he should ensure that Microsoft does not do the dirty work of China’s government. 

Fear and Loathing in Europe 
Two far-right parties, the Austrian Freedom Party and the Movement for Austria’s Future, won 29% of the vote in the latest Austrian general election, double their total in the 2006 election. 
Both parties share the same attitudes toward immigrants, especially Muslims, and the European Union: a mixture of fear and loathing. 
Since the two parties’ leaders, Heinz-Christian Strache and Jörg Haider, despise each other, there is little chance of a far-right coalition taking power. 
Nonetheless, this is Adolf Hitler’s native land, where Jews were once forced to scrub Vienna’s streets with toothbrushes before being deported and killed, so the result is disturbing. 
But how disturbing? 
That 29% is about 15% more than populist right-wing parties get in very good years (for them) in other European countries. 
Strache, the leader of the Freedom Party, wants the government to create a new ministry to manage the deportation of immigrants. 
Muslims are openly disparaged. 
Haider once praised the employment practices of Hitler’s Third Reich. 
Inevitably, the new rightists bring back memories of storm troopers and race laws. 
Yet, to see the rise of the Austrian right as a revival of Nazism is a mistake. 
Neither party advocates violence, even if some of their rhetoric might inspire it. 
Voters for the far right may be motivated less by ideology than by anxieties and resentments that are felt in many European countries, including ones with no Nazi tradition, such as The Netherlands and Denmark. 
In Denmark, the hard-right Danish People’s Party, with 25 parliamentary seats, is the country’s third largest party. 
Dutch populists, such as Rita Verdonk or Geert Wilders, who is driven by a paranoid fear of “Islamization,” are putting the traditional political elites – a combination of liberals, social democrats, and Christian democrats – under severe pressure. 
This is precisely the point. 
The biggest resentment among right-wing voters in European countries is reserved for political elites, who, in the opinion of many, have been governing for too long in cozy coalitions, which appear to exist chiefly to protect vested interests. 
In Austria, even liberals admit that an endless succession of social democratic and Christian democratic governments has clogged the political system’s arteries, making it difficult for smaller parties to penetrate what is seen as a bastion of political privilege. 
The same is true in The Netherlands, which has been governed for decades by the same middle-of-the-road parties, led by benevolent but rather paternalistic figures, whose views about “multiculturalism,” “tolerance,” and “Europe,” were, until recently, rarely challenged. 
Expressions of nationalism in postwar European democracies were always tolerated in soccer stadiums, not in public life. 
Skepticism about European unity was routinely denounced as bigotry, or even a form of racism. 
Attachment to national feeling was further undermined by governments’ habit of blaming unpopular policies on European Union bureaucrats, who are increasingly seen as yet another bunch of self-satisfied, privileged, and unaccountable elitists. 
This is linked to resentment of immigrants. 
When the offspring of manual workers imported from countries such as Turkey and Morocco in the 1960’s began to form large Muslim minorities in European cities, tensions rose in working-class neighborhoods. 
Complaints about crime and unfamiliar customs were often dismissed by liberal elites as “racism.” 
People simply had to learn to be tolerant. 
None of this was necessarily wrong. 
Tolerance, European unity, distrust of nationalism, and vigilance against racism are laudable goals. 
But promoting these aims without discussion, let alone criticism, resulted in a backlash. 
When the Dutch, the French, and the Irish voted against the European constitution, they were expressing distrust of their political elites. 
And populists who promise to restore national sovereignty by rejecting “Europe,” fighting “Islamization,” and kicking out immigrants are exploiting this distrust. 
The rhetoric of xenophobia and chauvinism is unpleasant, and, in a country with Austria’s past, even alarming. 
But the new populism is not yet undemocratic, or even anti-democratic. 
The phrase most often heard in Austria among voters of the right-wing parties is “fresh air.” 
People say they voted for Haider and Strache to break the stranglehold of the ruling parties. 
This is not an illegitimate motivation. 
If people are anxious about their national identities, the sovereignty of their governments, the demographic and social complexion of their societies, such fears are best voiced in the political arena. 
As long as people express their concerns, however distasteful to liberal ears, by votes, not violence, democracy will not be seriously harmed. 
Running against the political elite is, of course, the essence of populism everywhere. 
American presidential candidates pretend to run against “Washington” even when they are the sons of former presidents. 
Real damage is done when people lose confidence, not only in the elites, but in the system itself. 
This has not yet happened in Europe, not even in Austria. 
There is no need for liberal, traditional parties, in a fit of panic, to battle the right by pandering to the same resentments. 
But those resentments should be taken seriously in political debates. 
That way, the dangers of popular antipathies will be contained. 
Instead of damaging democracy, the rise of the right, by challenging the corruption of vested interests, might actually turn out to strengthen it. 

Fear and Loathing in Russia and Georgia 
Mikhail Saakashvili's victory in Georgia's presidential election was the predictable culmination of November's "Revolution of the Roses," which forced Eduard Shevardnadze to step down after more than a decade in power. 
A more complicated question is what Georgia's northern neighbor, Russia, should expect from the new power triumvirate of Saakashvili, Nino Burdzhanadze, and Zurab Zhvania. 
Despite Russia's post-Soviet malaise, it has influenced Georgia's internal development at virtually every turn--including Shevardnadze's resignation, which was mediated by Russian Foreign Minister Igor Ivanov--so how it perceives Georgia's new leaders is of crucial geopolitical significance. 
The three Georgian leaders declare bilateral relations a high priority, and in Russia, too, there is widespread hope that their victory will help repair ties between the two countries. 
But there is also concern about the previous occasional anti-Russian statements of this new generation of leaders, and fear that President Saakashvili might launch a military campaign to bring the breakaway republics of Abkhazia and South Ossetia back under Tbilisi's rule. 
As Russia's arch-nationalist Vladimir Zhirinovsky put it, "At least Shevardnadze was still our man," while the new leaders "will flood Abkhazia and South Ossetia with blood." 
Although most Russians do not share this view, Russia is obviously concerned with the security threat that it faces from the South Caucasus--a threat that escalated sharply during Shevardnadze's rule. 
Most alarmingly, Chechen rebels enjoyed considerable freedom of operation in Georgia, creating supply bases on its territory and receiving medical help in Georgian hospitals before slipping back into Russia. 
This support was clearly sanctioned at the highest levels of Georgia's government. 
The Chechen separatists' leader, Aslan Maskhadov, maintained a mission directly next door to the Ministry of Internal Affairs in Tbilisi, and various government bodies had direct contacts with Chechen field commanders operating in Georgia. 
In the fall of 2001, for example, Georgian security officials provided transportation for the Chechen field commander Ruslan Gelaev from the Pankisi Gorge to Abkhazia. 
Georgia's new leaders have opposed such cooperation with the Chechen rebels. 
So it is to be hoped that they will take Russia's security concerns seriously, possibly providing partnership in controlling Georgian roads leading into Chechnya. 
For too long, these roads have served as arteries for international terrorism, conveying fighters and financing into Russia from the Arab world and other countries. 
But Saakashvili and his allies are all young. 
Do they have enough experience to guide the country towards political stability and economic prosperity? 
Their desire to preserve and reestablish Georgian territorial integrity by asserting renewed control over Abkhazia and South Ossetia is understandable, but can they accomplish this goal as peacefully as they won their revolution? 
Despite frequent accusations to the contrary, Georgia's viability as an independent state is very much in Russia's interests. 
Talk of re-establishing the Soviet Union or at least absorbing Abkhazia and South Ossetia has always been politically marginal. 
But the fact remains that both Abkhaz and South Ossetian leaders have occasionally approached Russia with annexation requests. 
Georgia's current economic collapse provides little incentive for either of these self-proclaimed independent republics to support reunification. 
Similarly, Georgia's inability to manage relations with its only autonomous republic, Adzharia, doesn't inspire much confidence. 
The Adzhar people consider themselves Georgians, but still have frequent squabbles with the central government, so how could ethnically distinct Abkhazia and South Ossetia feel assured that their relations with Georgia would work out any better? 
President Saakashvili seems to understand the necessity of reviving Georgia's moribund economy, which requires, first and foremost, political stability. 
But he is unlikely to refrain from accusing Russia of stoking tensions with Abkhazia and South Ossetia. 
Russia was once blamed for arranging earthquakes in Georgia, so it would be difficult to resist accusing it of support for anti-Georgian separatists. 
This allegation is as baseless as the temptation to make it is strong. 
Simply put, it would be suicidal for Russia, having itself just stepped back from the brink of territorial disintegration, to build its strength on the collapse of its neighbor. 
On the contrary, Russia's profound interest in Georgia's reconstruction has led to a substantial increase in bilateral aid--more than any package ever offered by the West--in the form of enlarged electricity supplies and monetary assistance, which Russian President Vladimir Putin recently put at $2 billion annually. 
Indeed, the Saakashvili administration might complain about Russian meddling, but it is unlikely to try to remove Georgia from Russia's economic orbit. 
The Baku-Tbilisi-Ceyhan oil pipeline--which will bypass Russia when it is completed--cannot re-define the country's economic strategy to the extent that Shevardnadze had sought. 
Instead, Georgia's long-term economic success will depend on exports to the Russian market: neither Georgian wine nor Georgian fruit is needed in the United States or Italy. 
Shevardnadze's emphasis on the BTC pipeline also clearly reflects Georgia's pro-Western strategic orientation. 
That, too, is unlikely to change under Saakashvili. 
On the other hand, this should become less of a burden on bilateral relations as Russia itself moves closer to NATO, the US, and the European Union. 
Let there be no mistake: Georgia's new leaders face daunting economic, political, and constitutional challenges in the years ahead. 
But Russia wishes them success. 
For if they can overcome these challenges quickly, thoroughly, and peacefully, the election of Mikhail Saakashvili will be good news not only for Georgia, but for Russia as well. 

Fear and Loathing in the First World 
Within the last few years, people throughout the world's most advanced economies have become acutely worried about the economic prowess of China, India, and other emerging countries with large low-wage populations. 
They fear for their own jobs and for their children's future in a world where they must compete alongside the world's poorest. 
Those fears are testing political leaders in the world's richest countries. 
Newspaper stories are an indicator of this rising concern. 
I searched the Lexis-Nexis database of English-language newspaper stories around the world that contained all three of the words "outsourcing," "jobs," and "India." 
In 1999, Lexis-Nexis produced only 39 stories; by 2003, there were 749 stories. 
In the first six months of 2004, there were already 1208 stories. 
The results were much the same when I searched "outsourcing," "jobs", and "China." 
I found similar growth in the use of these three terms together when I searched in French, German, Italian, and Spanish: 90% of the stories were in 2003 and 2004. 
Why this explosion of concern? 
After all, advanced countries have been losing manufacturing jobs to less developed countries for more than fifty years. 
One reason is that the expanding development and use of new information technology, notably cell phones and the Internet, shrinks the world and makes competition from abroad more plausible. 
In fact, new technologies are probably the most important reason why globalization is advancing at a rapid pace. 
Cell phones and the Internet link the minds of many people in different countries effortlessly and efficiently, encouraging trade in intellectual creations. 
At the same time, the new information technology makes us more aware that the kinds of jobs that are migrating to India and China are high-quality jobs, the jobs for educated and skilled people. 
Over the last fifty years, people in advanced countries have increasingly sought university education and specialized training to protect them from an unforgiving labor market. 
Now First-Worlders are uncertain whether even this will protect their economic status. 
Increased fear of competition from emerging countries is also a natural consequence of the collapse of the speculative bubble in equities in 2000; stock markets in some countries fell to less than half their peak value. 
Once we saw our exaggerated hopes for our investments failing, we began to consider our other sources of income and wealth, only to confront the worldwide economic slowdown that began in 2001. Increased economic anxiety has, unsurprisingly, fueled increasing unease about foreign competition. 
Earlier this year, I surveyed people who recently bought homes in four American cities. 
My questionnaire asked: "Do you worry that your (or your household's) ability to earn as much income in future years as you expect might be in danger because of changes in the economy (someone in China competing for your job, a computer replacing your job, etc.)?" 
Of 442 respondents, 11% answered, "Yes, I worry a lot," 36% replied, "Yes, I worry a little," and 52% said, "No, I don't worry at all." 
Thus, while most respondents said they were not worried, nearly half expressed some worry. 
I asked this question of recent homebuyers on the theory that fear of job loss might help explain the remarkable boom in home prices in the US (as well as many other advanced countries). 
After all, people who fear losing their jobs may seek greater economic security by investing in real property in their own wealthy country, bidding up prices in the process. 
My survey's results lend some support to this theory. 
Although 81% of the respondents said fear of job loss had no effect on their decision to buy a house, of those who said it did, the number who said it encouraged home purchase outnumbered those who said it discouraged home purchase by a margin of two to one. 
Growing fear of foreign competition ought to explain a lot of things in the future. 
People used to feel insulated from economic problems that occurred beyond their country's borders. 
No more. 
Fear of competition from abroad is now fundamental, and will change the political process in advanced and relatively advanced emerging countries throughout the world. 
It helps explain the rise of protectionism, and the failure of the WTO trade talks in Cancun last September to improve emerging countries' access to advanced-country markets. 
As a professor, I find that my students often ask me for career advice with a different tone than in the past. 
What I hear is a fundamental lack of confidence that they will do well in any chosen career. 
They want to figure out how they can compete with Chinese or Indian workers who have the same, or better, education. 
Despite bravado about American superiority, the students themselves do not seem to feel superior, and wonder if they will be living emerging-country lives of their own in coming years. 
This sudden fear of emerging countries presents a major dilemma. 
The fear is real and visceral, and politicians ignore it at their peril. 
Its further increase could lead to counterproductive protectionist measures. 
We must not let this happen. 
The emerging countries are doing nothing more blameworthy than working towards their place as equals alongside advanced countries. 
It is morally and practically vital that they succeed. 

The Fear Factor in Global Markets 
CAMBRIDGE – The phenomenal market volatility of the past year owes much to genuine risks and uncertainties about factors such as Chinese growth, European banks, and the oil glut. 
For the first two months of this year, many investors were panicked that even the United States, the world’s most comforting growth story, was about to fall into recession. 
Indeed, among the experts who participate in the Wall Street Journal’s monthly poll, 21% believed a recession was around the corner. 
I won’t deny that there are risks. 
A big enough hit to China’s growth or to Europe’s financial system could certainly tip the global economy from slow growth to recession. 
An even more frightening thought is that by this time next year, the US presidency may have turned into a reality television show. 
Yet, from a macroeconomic perspective, the fundamentals are just not that bad. 
Employment numbers have been strong, consumer confidence is solid, and the oil sector is just not large enough relative to GDP for the price collapse to bring the US economy to its knees. 
In fact, the most under-appreciated driver of market sentiment right now is fear of another huge crisis. 
There are some parallels between today’s unease and market sentiment in the decade after World War II. 
In both cases, there was outsize demand for safe assets. 
(Of course, financial repression also played a big role after the war, with governments stuffing debt down private investors’ throats at below-market interest rates.) 
Even a full decade after World War II, when the famous economist John Kenneth Galbraith opined that the world might experience another depression, markets went into a tizzy. 
People still remembered how the US stock market had fallen 90% during the early years of the Great Depression. 
Back in the 1950s, it was not hard to imagine that things might go wrong again. 
After all, the world had just navigated through a series of catastrophes, including two world wars, a global influenza epidemic, and of course the Depression itself. 
Sixty years ago, the specter of atomic war also seemed all too real. 
People today need no reminding about how far and how fast equity markets can fall. 
After the 2008 financial crisis, US stocks fell by more than 50%. 
Equity markets in some other countries fell significantly more: Iceland’s, for example, plummeted by over 90%. 
No wonder that once the recent market drop hit 20%, many people wondered how much worse it could get – and whether fears of a new recession could become a self-fulfilling prophecy. 
The idea is that investors become so worried about a recession, and that stocks drop so far, that bearish sentiment feeds back into the real economy through much lower spending, bringing on the feared downturn. 
They might be right, even if the markets overrate their own influence on the real economy. 
On the other hand, the fact that the US has managed to move forward despite global headwinds suggests that domestic demand is robust. 
But this doesn’t seem to impress markets. 
Even those investors who remain cautiously optimistic about the US economy worry that the US Federal Reserve will view growth as a reason to continue raising interest rates, creating huge problems for emerging economies. 
There are other explanations for volatility besides fear, of course. 
The simplest is that things really are that bad. 
Maybe the individual risks aren’t of the same order of magnitude as in the 1950s, but there are more of them, and markets are starting from a much more inflated position. 
Moreover, financial globalization has profoundly deepened interlinkages, magnifying the transmission of shocks. 
There are large pockets of fragility and weakness in world debt markets, with current monetary easing covering up deep-rooted problems beneath the surface. 
Some have pointed to a lack of liquidity in leading markets as driving the massive price fluctuations; in a thin market, a small change in demand or supply can sometimes require a big shift in prices to restore equilibrium. 
The most convincing explanation, though, is still that markets are afraid that when external risks do emerge, politicians and policymakers will be ineffective in confronting them. 
Of all the weaknesses revealed by the financial crisis, policy paralysis has been the most profound. 
Some say that governments did not do enough to stoke demand. 
Although that is true, it is not the whole story. 
The biggest problem burdening the world today is most countries’ abject failure to implement structural reforms. 
With productivity growth at least temporarily stuck in low gear, and global population in long-term decline, the supply side, not lack of demand, is the real constraint in advanced economies. 
In the long run, it is supply factors that determine a country’s growth. And if countries cannot manage deep structural reform after a crisis, it is hard to see how it will happen. 
Running the government like a reality TV show, with one eye always on the ratings, is not going to do the job. 

Fear of Finance 
Fear of finance is on the march. 
Distrust of highly paid people who work behind computer screens doing something that doesn’t look like productive work is everywhere. 
Paper shufflers are doing better than producers; speculators are doing better than managers; traders are doing better than entrepreneurs; arbitrageurs are doing better than accumulators; the clever are doing better than the solid; and behind all of it, the financial market is more powerful than the state. 
Common opinion suggests that this state of affairs is unjust. 
As Franklin D. Roosevelt put it, we must cast down the “money changers” from their “high seats in the temple of our civilization.” 
We must “restore the ancient truths” that growing, making, managing, and inventing things should have higher status, more honor, and greater rewards than whatever it is that financiers do. 
Of course, there is a lot to fear in modern global finance. 
Its scale is staggering: more than $4 trillion of mergers and acquisitions this year, with tradable and (theoretically) liquid financial assets reaching perhaps $160 trillion by the end of this year, all in a world where annual global GDP is perhaps $50 trillion. 
The McKinsey Global Institute recently estimated that world financial assets today are more than three times world GDP – triple the ratio in 1980 (and up from only two-thirds of world GDP after World War II). 
And then there are the numbers that sound very large and are hard to interpret: $300 trillion in “derivative” securities; $3 trillion managed by 12,000 global “hedge funds”; $1.2 trillion a year in “private equity.” 
But important things are created in our modern global financial system, both positive and negative. 
Consider the $4 trillion of mergers and acquisitions this year, as companies acquire and spin off branches and divisions in the hope of gaining synergies or market power or better management. 
Owners who sell these assets will gain roughly $800 billion relative to the pre-merger value of their assets. 
The shareholders of the companies that buy will lose roughly $300 billion in market value, as markets interpret the acquisition as a signal that managers are exuberant and uncontrolled empire-builders rather than flinty-eyed trustees maximizing payouts to investors. 
This $300 billion is a tax that shareholders of growing companies think is worth paying (or perhaps cannot find a way to avoid paying) for energetic corporate executives. 
Where does the net gain of roughly $500 billion in global market value come from? We don’t know. 
Some of it is a destructive transfer from consumers to shareholders as corporations gain more monopoly power, some of it is an improvement in efficiency from better management and more appropriately scaled operations, and some of it is overpayment by those who become irrationally exuberant when companies get their names in the news. 
If each of these factors accounts for one-third of the net gain, several conclusions follow. 
First, once we look outside transfers within the financial sector, the total global effects of this chunk of finance is a gain of perhaps $340 billion in increased real shareholder value from higher expected future profits. 
A loss of $170 billion can be attributed to future real wages, for households will find themselves paying higher margins to companies with more market power. 
The net gain is thus $170 billion of added social value in 2007, which is 0.3% of world GDP, equal to the average product of seven million workers. 
In one sense, we should be grateful for our hard-working M&A technicians, well-paid as they are: it is important that businesses with lousy managements or that operate inefficiently be under pressure from those who may do better, and can raise the money to attempt to do so. 
We cannot rely on shareholder democracy as our only system of corporate control. 
The second conclusion is that the gross gains – fees, trading profits, and capital gains to the winners (perhaps $800 billion from this year’s M&A’s) – greatly exceed the perhaps $170 billion in net gains. 
Governments have a very important educational, admonitory, and regulatory role to play: people should know the risks and probabilities, for they may wind up among losers of the other $630 billion. 
So far there is little sign that they do. 
Finally, finance has long had an interest in stable monopolies and oligopolies with high profit margins, while the public has an interest in competitive markets with low margins. 
The more skeptical you are of the ability of government-run antitrust policy to offset the monopoly power-increasing effects of M&A’s, the more you should seek other sources of countervailing power – which means progressive income taxation – to offset any upward leap in income inequality. 
Eighteenth-century physiocrats believed that only the farmer was productive, and that everyone else was somehow cheating the farmers out of their fair share. 
Twentieth-century Marxists thought the same thing about factory workers. 
Both were wrong. 
Let us regulate our financial markets so that outsiders who invest are not sheared. 
But let us not make the mistake of fearing finance too much. 

Fearless Financial Markets 
A number of thoughtful observers – like Citigroup’s Robert Rubin, Harvard’s Larry Summers, and The Financial Times’s Martin Wolf – have expressed puzzlement in recent months about financial markets’ perceptions of risk. 
While markets have judged today’s world – especially the dollar and securities linked to it – to have low risk when viewed in historical perspective, geopolitical risks in fact appear to be large. 
Wolf, for example, argues that financial markets have adopted a head-in-the-sand focus on the “long run of small gains,” ignoring the “occasional calamity” in advance, while losses will be attributed after the fact to “unforeseeable bad luck.” 
But if an investor today did wish to insure against geopolitical catastrophe, how would he or she do so? 
In the generation before World War I, the safe assets were thought to be the debt of governments tied to the gold standard, which supposedly offered protection against the inflationary populist viruses that afflicted countries like Mexico, France, or the United States. 
But investors in British government debt faced huge losses when Britain’s commitment to World War I produced inflation, and investors in Czarist bonds papered their bathrooms with them after the October Revolution. 
After the inflations of World War I, a prudent investor might have thought gold – easily assessable, portable, and real – an attractive asset. 
But gold is stagnant, while capital is productive. 
In any case, American gold holders found their wealth involuntarily transformed into paper dollars by the Roosevelt administration at the nadir of the Great Depression. 
Following World War II, investments in the US seemed safer than any alternative. 
But, in the 1970’s, investors in American stocks and long-term bonds lost half their principal, and even investors in short-term American debt were down by 20% in real terms by the end of the decade. 
Investors fearing geopolitical catastrophe might cope to some degree by raising their consumption spending. 
But there is a limit to this option. 
Those who fear geopolitical catastrophe will sell assets, putting downward pressure on their value, only if there are other, safer assets that they see that they can buy. 
As Harvard’s Robert Barro has recently pointed out, fear of a general or unpredictable catastrophe – even one that spares a subset of assets that cannot be specified in advance – will not affect relative asset prices, because investors have no motive to sell or buy any particular asset. 
According to Barro, the consequences of enhanced fear of a general or unpredictable catastrophe depend on how it affects the global pool of savings. 
Fear as much as institutional blockages may be the source of what is either a global savings glut or a global investment shortfall, depending on how you view it. 
If people are risk-averse enough that increased fear of the future causes them to save more, rising global uncertainty will raise bond and stock prices, and lower interest rates and dividend and earnings yields. 
Creating new assets for investors to hold costs resources, and the greater the demand for such assets the higher the marginal cost of creating them. 
This may be the situation that the world financial system is in now. 
The principal fear, at least in the circles in which I move, is of a sudden unwinding of “global imbalances”: a rapid and destabilizing end to America’s very large trade deficit and to Asia’s very large trade surplus. 
In such a global financial crisis, if the Federal Reserve accommodates inflation and accelerates devaluation in order to prevent collapsing employment in formerly foreign capital-financed sectors from spiraling into a depression, American debt will be among the worst affected assets? 
But if the Fed refuses to accommodate inflation produced by a dollar collapse and accepts a depression in the belief that the long-run benefits of maintaining its credibility as a guarantor of price stability will come before we are all dead, American equities will suffer. 
Chinese property values and manufacturing assets would also be vulnerable, as the US abandons its role as importer of last resort and China’s coastal-export development strategy turns out to be a dead end. 
Don’t get me wrong: somewhat more than half my brain agrees with Rubin, Summers, Wolf, and company. 
The principal risk I see today is that being borne by investors in dollar-denominated debt – and I don’t believe they are charging a fair price for what they are doing. 
But a quarter of my brain wonders how investors should attempt to insure against the lowest tail of the economic-political distribution, and that quarter of my brain cannot see which way somebody hoping to insure against that risk should jump. 

Eurozone Budgets Under the Spotlight 
DUBLIN – Bond markets are notoriously fickle, often driven by sentiment rather than rigorous macroeconomic analysis, and, as the 2008 global financial crisis demonstrated, they are far from infallible. 
They can also be particularly unreliable when assessing an economy’s long-term prospects. 
Though interest rates across the European Union are at historic lows, government debt in the eurozone could come under severe pressure should bond markets re-evaluate the riskiness of sovereign borrowers. 
That is a consideration that should weigh heavily on indebted governments as they submit their budgets for scrutiny to the European Commission. 
It is not just bond traders who can be swayed by irrational exuberance (or its opposite). 
The verdicts of rating agencies on asset quality can also be flawed. 
Too often, the raters seem content to follow rather than lead sentiment. 
Like the proverbial bus driver fixated on what is happening in his rear view mirror rather than watching what is in front of him, too many bond analysts focus on historical economic data as the key determinant of future performance. 
It is against this background that the budget plans submitted by eurozone governments on October 15 will have to be assessed. 
This requirement of the eurozone’s Stability and Growth Pact, specified by Article 126 of the Treaty on the Functioning of the European Union, applies to member states that fail to meet their commitments to bring their budget deficits below 3% of GDP. 
The main source of concern is that the low interest rates at which most European governments can currently borrow are not likely to last. 
There are two reasons for this. 
First, sovereign bonds held by banks are treated as risk-free assets under EU rules for calculating banks’ solvency and capital-adequacy levels. 
This is a risky assumption, because it implies that no European government will ever fail to repay the bond in full, with all interest due, and on time. 
But the debt levels of some European countries relative to their income raise serious questions about whether their bonds really are risk-free. 
And, assuming that there is no surge in inflation or economic growth, the danger of default cannot be so easily dismissed. 
Second, with low interest rates causing vast sums of money to chase so few opportunities for decent yields, it is understandable that investors have turned to government bonds, thereby driving down yields still further. 
But this situation cannot last forever; if the flow of funds slows, or alternative, higher-yielding assets become available, demand for government bonds could drop markedly. 
At that point, interest rates on sovereign debt would have to rise to sustain governments’ borrowing levels. 
This is not a far-fetched scenario, and its realization would play havoc with the budgets of many indebted eurozone member states. 
Therefore, in assessing member states’ draft budgets, governments and the Commission would be foolish to assume that low interest rates on government bonds will be around for the foreseeable future. 
If investors do decide that government bond yields are no longer worth the investment, sovereign borrowers’ options may be limited. 
They might be able to defy the European Commission, but they would be hard-pressed to resist the views of the bond markets. 
After all, the world’s financial centers are not only susceptible to bouts of irrationality; they are also less likely to be swayed by the sort of political rhetoric that might find some sympathy within the Commission or among ministerial colleagues in the EU Council. 
Moreover, the market’s change of heart can occur very quickly and without warning, giving governments little if any time to make the necessary fiscal adjustments. 
But that is less likely to happen if the EU system for coordinating the 18 eurozone members’ budget policies (the so-called Two Pack and Six Pack) is seen to be respected – especially by the larger countries, such as France and Italy. 
On the other hand, if the system is defied, or reinterpreted in a way that alters its intended meaning, bond markets could once again become nervous. 
Ireland knows better than most countries the difficulties that can arise from having to borrow to fund services or repay maturing debts. 

The Fed’s Gamble on Surplus Labor 
LONDON – In recent weeks, the US Federal Reserve has buoyed markets by adopting a more gradual approach to policy normalization. 
Fed Chair Janet Yellen’s most recent public remarks, in late March, were more dovish than anticipated. 
And, at its last meeting, the Fed suggested that it would pursue two, rather than four, quarter-point interest-rate hikes in 2016. 
In response, investors have sold the US dollar and bid up equity prices and US Treasuries, and commodities and emerging-market assets have surged. 
At first glance, these developments are curious. 
For one thing, the Fed’s decision appears to be at odds with signs that US inflation is accelerating. 
If, as some have suggested, the Fed is responding to fears about global growth, it would not make sense that risk assets – above all commodities and emerging markets – are rallying. 
But there is a logical thread that explains these apparent inconsistencies, one that centers on a potentially high-stakes Fed gamble. 
Before we get to that wager, it is worth considering other proposed explanations for the market rally. 
The first centers on monetary easing by the European Central Bank and the Bank of Japan. 
But negative interest rates and flat yield curves harm banks’ earnings; links between extraordinary monetary policies and growth or inflation remain tenuous; and surely monetary policy is subject to diminishing returns by now. 
Another view focuses on OPEC countries’ oil-supply restraint, claiming that it is helping to support oil prices and thus high-cost producers in North America. 
But this logic rests more on correlation than causation. 
OPEC has not decided to cut production, and only a handful of its members have agreed to freeze output. 
A genuine reduction in global excess supply awaits a decline in output, as existing wells, deprived of capital investment, run dry. 
A more plausible explanation for improved market performance is waning pessimism. 
Fears of recession in the United States, the United Kingdom, or Germany – countries with full employment and rising real household incomes – were always a bit odd. 
So was the notion that financial-market gyrations would have the atypical impact of significantly denting household or corporate spending. 
And in China – a country that may be experiencing slowing GDP growth, but is nowhere near recession – rising household income and consumption are helping to offset the decline in fixed-asset investment. 
This brings us back to the Fed and its gamble. 
Policymakers’ change of heart likely arose from a re-think about slack in the US economy, especially in the labor market. 
Indeed, in her recent remarks, Yellen noted that the labor-force participation rate had “turned up” and that “room for improvement” remained. 
If the Fed now believes that the economy has greater capacity for above-trend expansion without generating much inflation, it can, to paraphrase John Lennon, “give growth a chance.” 
Faster growth and slower policy tightening are great news for asset prices. 
A gentler Fed also means less risk of dollar appreciation – an unambiguous benefit for commodity markets and dollar-indebted emerging economies. 
Finally, a stable dollar takes pressure off the renminbi, which should slow outflows of “hot” capital from China, removing another source of risk from the global financial system. 
Given these implication, it is little wonder that markets turned up. 
But with US core inflation on the rise, the Fed is taking a big risk. 
After all, the core consumer-price index is already at 2.3%, led by 3.1% inflation in services (both figures are up by more than half of a percentage point year on year). 
Housing inflation, which comprises about a quarter of the CPI index, has also accelerated, to 3.2%. 
And price growth in health-care services, which had slowed in recent years, has jumped to 3.9%, double the rate recorded a year ago. 
The Fed prefers to watch core “private consumption expenditure” inflation, which stands at a more subdued 1.7%. 
PCE goods prices are still falling, and services prices are rising just 2.1%, roughly unchanged over the past year. 
But the focal point for the Fed is the labor market. 
According to a March report, the civilian participation rate has increased by half a percentage point from its September 2015 lows, and now stands at 63%. 
The same survey indicates that nearly six million Americans, who are not currently in the labor force, want to work. 
Another six million are working part-time for economic reasons. 
In part, low levels of US labor-force participation reflect structural factors. 
Nearly every sub-category – by gender, education level, age cohort, or race – has been declining in the US since 2000. 
Yet labor supply is typically also cyclical, picking up as the economy improves and job opportunities arise. 
Until now, that cyclical pattern has been absent in the post-crisis “new normal.” 
What might an increasingly elastic labor supply mean for Fed policy? 
The answer depends on how much surplus labor is available. 
Suppose it is 1.5 million workers – a conservative figure that would still leave the civilian employment-to-population ratio well below its post-war peak. 
At plausible rates of US job creation, it would take 12-18 months to absorb those new entrants. 
That labor influx would dampen wage and price pressures, allowing the Fed to proceed gradually with interest-rate normalization. 
The bigger the pool of available labor, the longer the Fed can go slow. 
This recalls former Fed Chair Alan Greenspan’s experiment in the late 1990s, when he let the US economy boom, on the hunch – which proved to be right – that productivity was accelerating. 
Might Yellen be willing to make a similar wager on labor supply? 
For now, the politics of populist discontent – from Donald Trump’s presidential campaign to the potential of a British exit from the European Union – are capturing the world’s attention. 
But the US employment and inflation reports are the real sources of clues about the future. 
It is there that one should look for the factors most likely to drive the biggest wagers – for policy and for markets alike. 

The Fed Versus Price Stability 
SAN FRANCISCO – There is a big difference between the Federal Reserve’s mandate to maintain “stable prices” – as enunciated in the Federal Reserve Act – and the Fed’s self-selected target of 2% annual inflation. 
So how is it that policymakers have managed to substitute the latter for the former? 
The term “stable prices” is self-explanatory: a bundle of goods will cost the same ten, 50, or even 100 years from now. 
By contrast, if a country experiences 2% inflation over a ten-year period, the same items that $100 can buy today will cost $122 at the end of the decade. 
After 100 years, the price tag will be a whopping $724. 
In her recent Congressional testimony, Fed Chair Janet Yellen referred several times to the mandate of maintaining “stable prices”; but she mentioned the Fed’s 2% inflation objective twice as often. 
“US inflation continues to run below the Committee’s 2% objective,” she said, and the current “high degree of policy accommodation remains appropriate to foster further improvement in labor market conditions and to promote a return of inflation toward 2% over the medium term.” 
Does the Fed really want to increase annual inflation to 2%, such that the price level of the country will increase by more than 700% over the next century? 
Is that what Congress had in mind when it tasked the Fed with achieving “stable prices”? 
Former Fed Chairman Alan Greenspan knew that it did not. 
On July 2, 1996, at a meeting of the Federal Open Market Committee (FOMC), which was devoted to extensive discussion of the appropriate inflation target for the Fed, Greenspan posed a simple question: “Are we talking about price stability or are we talking about zero inflation?” he asked. 
“As we all know, those are two separate things.” 
The discussion quickly turned to the difficulty of measuring inflation accurately and the need to build in a “safety cushion” to avoid deflation. 
According to Greenspan, “Price stability is that state in which expected changes in the general price level do not effectively alter business and household decisions.” 
Yellen, then a Fed governor, was not satisfied: “Could you please put a number on that?” she asked. 
Greenspan did: “I would say that number is zero, if inflation is properly measured,” he replied. 
At the time of that FOMC meeting, the consumer price index was increasing at about 3% per year. 
Most of the discussion focused on whether the Fed should slow annual price growth to 2% or even lower, thereby consolidating the gains made in the difficult fight against inflation that policymakers had waged for the previous 15 years. 
Greenspan summarized the consensus: “...we have now all agreed on 2%...” 
Thus, the Fed’s 2% inflation objective was born. 
During the ensuing discussion, several FOMC members argued that the inflation rate might be reduced to less than 2%, but nobody argued that inflation should be pushed higher if a lower, but still positive, rate was achieved. 
Following the discussion, Greenspan exhorted the FOMC members to keep the discussion of the inflation target secret. 
“I will tell you that if the 2% inflation figure gets out of this room,” he warned, “it is going to create more problems for us than I think any of you might anticipate.” 
The official minutes of the meeting make no reference to the entire discussion of the inflation target, which took up several hours, and the FOMC never formally announced its 2% target for annual inflation until Chairman Ben Bernanke, Yellen’s predecessor, finally did so in 2012. 
The 2% inflation target now is at the forefront of FOMC decision-making. 
For example, while annual inflation stood at 0.8% in December 2014, the minutes of the January 2015 FOMC meeting refer several times to the Committee’s need to make “progress toward its objectives of maximum employment and 2% inflation” by maintaining a highly accommodative policy stance. 
Increasing the rate of inflation is now the stated objective of Fed policy. 
Congress did not give the Fed a mandate to pursue that goal. 
The Federal Reserve Act is explicit: the Fed should achieve “price stability” for the US currency, along with moderate interest rates and maximum employment. 
As long as inflation is somewhere between zero and 2%, the Fed should declare victory and leave it at that. 

Emerging Markets After the Fed Hikes Rates 
NEW YORK – The prospect that the US Federal Reserve will start exiting zero policy rates later this year has fueled growing fear of renewed volatility in emerging economies’ currency, bond, and stock markets. 
The concern is understandable: When the Fed signaled in 2013 that the end of its quantitative-easing (QE) policy was forthcoming, the resulting “taper tantrum” sent shock waves through many emerging countries’ financial markets and economies. 
Indeed, rising interest rates in the United States and the ensuing likely rise in the value of the dollar could, it is feared, wreak havoc among emerging markets’ governments, financial institutions, corporations, and even households. 
Because all have borrowed trillions of dollars in the last few years, they will now face an increase in the real local-currency value of these debts, while rising US rates will push emerging markets’ domestic interest rates higher, thus increasing debt-service costs further. 
But, although the prospect of the Fed raising interest rates is likely to create significant turbulence in emerging countries’ financial markets, the risk of outright crises and distress is more limited. 
For starters, whereas the 2013 taper tantrum caught markets by surprise, the Fed’s intention to hike rates this year, clearly stated over many months, will not. 
Moreover, the Fed is likely to start raising rates later and more slowly than in previous cycles, responding gradually to signs that US economic growth is robust enough to sustain higher borrowing costs. 
This stronger growth will benefit emerging markets that export goods and services to the US. 
Another reason not to panic is that, compared to 2013, when policy rates were low in many fragile emerging economies, central banks already have tightened their monetary policy significantly. 
With policy rates at or close to double-digit levels in many of those economies, the authorities are not behind the curve the way they were in 2013. Loose fiscal and credit policies have been tightened as well, reducing large current-account and fiscal deficits. 
And, compared to 2013, when currencies, equities, commodity, and bond prices were too high, a correction has already occurred in most emerging markets, limiting the need for further major adjustment when the Fed moves. 
Above all, most emerging markets are financially more sound today than they were a decade or two ago, when financial fragilities led to currency, banking, and sovereign-debt crises. 
Most now have flexible exchange rates, which leave them less vulnerable to a disruptive collapse of currency pegs, as well as ample reserves to shield them against a run on their currencies, government debt, and bank deposits. 
Most also have a relatively smaller share of dollar debt relative to local-currency debt than they did a decade ago, which will limit the increase in their debt burden when the currency depreciates. 
Their financial systems are typically more sound as well, with more capital and liquidity than when they experienced banking crises. 
And, with a few exceptions, most do not suffer from solvency problems; although private and public debts have been rising rapidly in recent years, they have done so from relatively low levels. 
In fact, serious financial problems in several emerging economies – particularly oil and commodity producers exposed to the slowdown in China – are unrelated to what the Fed does. 
Brazil, which will experience recession and high inflation this year, complained when the Fed launched QE and then when it stopped QE. 
Its problems are mostly self-inflicted – the result of loose monetary, fiscal, and credit policies, all of which must now be tightened, during President Dilma Roussef’s first administration. 
Russia’s troubles, too, do not reflect the impact of Fed policies. 
Its economy is suffering as a result of the fall in oil prices and international sanctions imposed following its invasion of Ukraine – a war that will now force Ukraine to restructure its foreign debt, which the war, severe recession, and currency depreciation have rendered unsustainable. 
Likewise, Venezuela was running large fiscal deficits and tolerating high inflation even when oil prices were above $100 a barrel; at current prices, it may have to default on its public debt, unless China decides to bail out the country. 
Similarly, some of the economic and financial stresses faced by South Africa, Argentina, and Turkey are the result of poor policies and domestic political uncertainties, not Fed action. 
In short, the Fed’s exit from zero policy rates will cause serious problems for those emerging market economies that have large internal and external borrowing needs, large stocks of dollar-denominated debt, and macroeconomic and policy fragilities. 
China’s economic slowdown, together with the end of the commodity super-cycle, will create additional headwinds for emerging economies, most of which have not implemented the structural reforms needed to boost their potential growth. 
But, again, these problems are self-inflicted, and many emerging economies do have stronger macro and structural fundamentals, which will give them greater resilience when the Fed starts hiking rates. 
When it does, some will suffer more than others; but, with a few exceptions lacking systemic importance, widespread distress and crises need not occur. 

The Fed’s Dollar Distraction 
CAMBRIDGE – In its September policy statement, the US Federal Reserve took into consideration – in a major way – the impact of global economic developments on the United States, and thus on US monetary policy. 
Indeed, the Fed decided to delay raising interest rates partly because US policymakers expect dollar appreciation, by lowering import prices, to undermine their ability to meet their 2% inflation target. 
In reality, while currency movements can have a significant impact on inflation in other countries, dollar movements have rarely had a meaningful or durable impact on prices in the US. 
The difference, of course, lies in the US dollar’s dominant role in the invoicing of international trade: prices are set in dollars. 
Just as the dollar is often the unit of account in debt contracts, even when neither the borrower nor the lender is a US entity, the dollar’s share in invoicing for international trade is around 4.5 times America’s share of world imports, and three times its share of world exports. 
The prices of some 93% of US imports are set in dollars. 
In this environment, the pass-through of dollar movements into non-fuel US import prices is one of the lowest in the world, in both the short term (one quarter out) and the longer term (two years out), for three key reasons. 
First, international trade contracts are renegotiated infrequently, which means that dollar prices are “sticky” for an extended period – around ten months – despite fluctuations in the exchange rate. 
Second, because most exporters also import intermediate inputs that are priced in dollars, exchange-rate fluctuations have a limited impact on their costs and thus on their incentive to change dollar prices. 
And, third, exporters who wish to preserve their share in world markets – where prices are largely denominated in dollars – choose to keep their dollar prices stable, to avoid falling victim to idiosyncratic exchange-rate movements. 
What little impact import price shocks have on US inflation is highly transitory, with most of the effect tapering off after just two quarters. 
A sharp 10% appreciation of the US dollar, for example, would reduce inflation for non-fuel imports by 4.4% cumulatively over the next 2-3 quarters, but would have only a negligible impact on inflation after that point. 
If one accounts for consumer goods expenditure on imports, that 10% appreciation would lower inflation, as measured by the consumer price index (CPI), by just 0.5 percentage points in the first two quarters. 
And that is likely to be an upper bound, because it assumes that US retailers will pass through to consumers the full amount of any increase in import prices. 
In practice, they are more likely to increase retail markups and lower cost pass-through. 
The estimated price pass-through for imported manufactured goods, which would better represent what enters the consumption bundle, is even lower than that for all non-fuel imports. 
Although these factors insulate the US from the inflationary pressures stemming from exchange-rate fluctuations, they increase the vulnerability of other countries, especially emerging economies. 
Because the dollar prices of most of these countries’ imports are not very responsive to exchange-rate movements, the pass-through of those movements into import prices denominated in their home currencies is close to 100%. 
The impact of exchange-rate movements on inflation in most countries is thus 3-4 times larger than in the US. 
A 10% depreciation of the Turkish lira, for example, would raise cumulative CPI inflation by 1.65-2.03 percentage points, over two years, all else being equal. 
Despite this imbalance, the US dollar’s dominance as an invoicing currency is unlikely to change anytime soon – not least because bringing about a shift would require coordination among a huge number of exporters and importers worldwide. 
The euro might seem like a strong contender, given the volume of trade among eurozone countries; but, outside Europe, the currency is not used nearly as widely as the dollar. 
In deciding when to normalize interest rates, the Fed has placed considerable weight on the weakness of inflation, and its global underpinnings. 
But while it is true that some global developments – especially falling commodity prices, and perhaps also slowing emerging-economy growth and rising financial volatility – may push down inflation, dollar appreciation will not, at least not in any meaningful way. 
A stronger dollar thus is not a legitimate reason to delay the normalization of US interest rates. 

America’s Risky Recovery 
CAMBRIDGE – The United States’ economy is approaching full employment and may already be there. 
But America’s favorable employment trend is accompanied by a substantial increase in financial-sector risks, owing to the excessively easy monetary policy that was used to achieve the current economic recovery. 
The overall unemployment rate is down to just 5.5%, and the unemployment rate among college graduates is just 2.5%. 
The increase in inflation that usually occurs when the economy reaches such employment levels has been temporarily postponed by the decline in the price of oil and by the 20% rise in the value of the dollar. 
The stronger dollar not only lowers the cost of imports, but also puts downward pressure on the prices of domestic products that compete with imports. 
Inflation is likely to begin rising in the year ahead. 
The return to full employment reflects the Federal Reserve’s strategy of “unconventional monetary policy” – the combination of massive purchases of long-term assets known as quantitative easing and its promise to keep short-term interest rates close to zero. 
The low level of all interest rates that resulted from this policy drove investors to buy equities and to increase the prices of owner-occupied homes. 
As a result, the net worth of American households rose by $10 trillion in 2013, leading to increases in consumer spending and business investment. 
After a very slow initial recovery, real GDP began growing at annual rates of more than 4% in the second half of 2013. 
Consumer spending and business investment continued at that rate in 2014 (except for the first quarter, owing to the weather-related effects of an exceptionally harsh winter). 
That strong growth raised employment and brought the economy to full employment. 
But the Fed’s unconventional monetary policies have also created dangerous risks to the financial sector and the economy as a whole. 
The very low interest rates that now prevail have driven investors to take excessive risks in order to achieve a higher current yield on their portfolios, often to meet return obligations set by pension and insurance contracts. 
This reaching for yield has driven up the prices of all long-term bonds to unsustainable levels, narrowed credit spreads on corporate bonds and emerging-market debt, raised the relative prices of commercial real estate, and pushed up the stock market’s price-earnings ratio to more than 25% higher than its historic average. 
The low-interest-rate environment has also caused lenders to take extra risks in order to sustain profits. 
Banks and other lenders are extending credit to lower-quality borrowers, to borrowers with large quantities of existing debt, and as loans with fewer conditions on borrowers (so-called “covenant-lite loans”). 
Moreover, low interest rates have created a new problem: liquidity mismatch. 
Favorable borrowing costs have fueled an enormous increase in the issuance of corporate bonds, many of which are held in bond mutual funds or exchange-traded funds (ETFs). 
These funds’ investors believe – correctly – that they have complete liquidity. 
They can demand cash on a day’s notice. 
But, in that case, the mutual funds and ETFs have to sell those corporate bonds. It is not clear who the buyers will be, especially since the 2010 Dodd-Frank financial-reform legislation restricted what banks can do and increased their capital requirements, which has raised the cost of holding bonds. 
Although there is talk about offsetting these risks with macroprudential policies, no such policies exist in the US, except for the increased capital requirements that have been imposed on commercial banks. 
There are no policies to reduce risks in shadow banks, insurance companies, or mutual funds. 
So that is the situation that the Fed now faces as it considers “normalizing” monetary policy. 
Some members of the Federal Open Market Committee (FOMC, the Fed’s policymaking body) therefore fear that raising the short-term federal funds rate will trigger a substantial rise in longer-term rates, creating losses for investors and lenders, with adverse effects on the economy. 
Others fear that, even without such financial shocks, the economy’s current strong performance will not continue when interest rates are raised. 
And still other FOMC members want to hold down interest rates in order to drive the unemployment rate even lower, despite the prospects of accelerating inflation and further financial-sector risks. 
But, in the end, the FOMC members must recognize that they cannot postpone the increase in interest rates indefinitely, and that once they begin to raise the rates, they must get the real (inflation-adjusted) federal funds rate to 2% relatively quickly. 
My own best guess is that they will start to raise rates in September, and that the federal funds rate will reach 3% by some point in 2017. 

How the Fed Just Reduced Inequality 
NEW YORK – The US Federal Reserve has finally done it, raising interest rates for the first time in almost a decade. 
The ramifications for interest-rate spreads, emerging-market equities, and housing demand, among much else, are the subject of widespread debate. 
But, as markets learn to cope with a less accommodative monetary policy, there could be an important silver lining, which most people have ignored. 
Income and wealth inequality in the United States has grown steadily since the global financial crisis erupted in 2008, but monetary-policy normalization could mark the beginning of the end of this trend. 
Indeed, it should serve to accelerate its reversal. 
Consider a few dismal statistics reflecting the current state of affairs. 
Real (inflation-adjusted) median household income in the US is about the same as in 1979. 
A recent study by the Pew Research Center noted that Americans earned 4% less income in 2014 than they did in 2000, and for the first time in more than 40 years, middle-class Americans no longer constitute a majority of the population. 
America’s 20 wealthiest people now own more wealth than the bottom half of the entire population The wealth gap between America’s high-income group and everyone else has never been more extreme; rich households account for more than one in five of the entire US population. 
Strikingly, one hour north of Wall Street, in Bridgeport, Connecticut, the Gini coefficient – a standard measurement of income distribution and inequality – is worse than in Zimbabwe. 
Ironically, this trend was exacerbated by the policy response to the financial crisis. 
While the recession of 2007-2008 caused higher-income groups to suffer more than lower-income groups (because the former tend to derive relatively more of their income from more volatile sources of capital income, as opposed to labor income), the opposite has been true since 2009. 
Since then, about 95% of all income gains have gone to the top 1%. 
The causes of rising income and wealth inequality are multiple and nuanced; but the unintended consequences of the recent unprecedented period of ultra-loose monetary policy deserves a chunk of the blame. 
Negative real interest rates and quantitative easing have enforced financial repression on holders of cash, hurting savers, while broadly boosting prices of riskier financial assets, most commonly held by the rich. 
When there is no yield in fixed income, even the most conservative pension funds pile into risk assets, driving prices higher and higher. 
Corporations have benefited massively from these stimulus measures, but at the expense of the working population. 
Profit margins have expanded to record highs as companies have cut costs, delayed infrastructure investments, borrowed at ultra-low rates, and taken advantage of weak labor markets to avoid raising wages. 
But are we now on the verge of a trend reversal? 
The S&P 500 has rallied 150% since its 2009 lows, and valuations look rich given weakening growth dynamics (the Shiller price/earnings ratio stands at 26, compared to 15 in 2009). 
Against this backdrop, the wealthiest Americans are unlikely to enjoy substantial further profits from their financial investments in the near term. 
At the same time, we should see meaningful upward pressure on wages for the first time in many years. 
The unemployment rate has dropped to 5%, just above the Fed’s current median estimate for the non-accelerating inflation rate of unemployment (NAIRU). 
While the true NAIRU level is probably lower, and we are likely witnessing a secular decline in the workforce participation rate, the US labor market should still tighten in 2016. 
Indeed, the number of those “not in the labor force, currently want a job” category dropped 416,000, to just above 5.6 million, in November; historically, this kind of change has been closely associated with rising wage pressure. 
And the average hourly wages for all employees on private non-farm payrolls posted an annual increase of 2.5% in October, the biggest since 2009. 
As the Fed slowly raises interest rates, those middle-class families holding their hard-earned savings at the bank will finally start realizing some return on their deposits. 
The long-term effects should not be underestimated, given the helpful impact of compound savings. 
During the last tightening cycle between 2004 and 2006, households’ interest income rose 29%. 
Although this time, the gains presumably will be smaller and slower to arrive, owing to the likely pace and extent of Fed tightening, interest paid on savings will move household income in the right direction: up. 
Of course, a multitude of political reforms, each with potential positive implications for welfare, could reduce the extent of inequality further. 
But the barriers to such measures – say, to make the tax system more progressive – are well known, especially against the backdrop of a presidential election campaign. 
This means that an increase in real wages for workers will have the most immediate impact, even if the downside is lower profit margins for corporate America. 
The Fed’s decision to raise rates is a historic moment for financial markets and is already ushering in a period of increased volatility for asset prices worldwide. 
Although this may be challenging for investors, we should take comfort in the implications for the real economy. 
The social contract in the US has frayed badly, and this is likely to play an important role in the upcoming presidential election, as voters express anger that the American Dream is increasingly out of reach. 
No economic recovery can sustain itself without rising wages and higher consumer spending power. 
The Fed may have just signaled that the beginning of this necessary dynamic, perhaps the key inflection point of the inequality trend, is finally here. 
And it may also have done its part to speed its arrival. 

Would Higher Interest Rates Boost US Growth? 
BERKELEY – Blackstone CEO Tony James recently published a column in the Financial Times titled “To revive America’s economy, raise interest rates.” 
This is a very bad idea. 
Let us imagine that we have been transported to a parallel universe, one where the US Federal Reserve has not held interest rates at or near zero. 
Instead, this Fed has gradually raised interest rates for the past six years, and the federal funds rate is now 400 basis points higher than it currently is. 
Before looking at what this alternate-universe economy would look like, let us review what has happened in the real world. 
In the fourth quarter of 2015, households, businesses, and foreign investors saved $940 billion in the United States. Of that amount, $185 billion was invested in newly issued government bonds, and the other $755 billion flowed into interest- and dividend-paying savings vehicles such as loans, corporate bonds, and new equity issues, which in turn added to the US private sector’s productive-capital stock. 
In our hypothetical scenario, $755 billion in new savings vehicles would not have been created in the fourth quarter of 2015 to fund investment. 
With higher interest rates, that $755 billion could still have been as high as $735 billion, or it could have dropped to as low as $700 billion. In any case, we know that it would have been lower, and that the liquidity balances that support spending would have been deprived of $20-55 billion. 
Perhaps James only talks to firms that do not rationalize their investment plans when interest rates rise; but many firms certainly do. 
For example, interest rates play a major role in the construction business, especially on the coasts, where real-estate values are especially sensitive to financing costs and available cash flows. 
Increased financing costs and reduced liquidity can also dampen consumer-goods purchases and prevent small businesses from expanding. 
The Fed could respond by adding to the economy’s cash stock, but then interest rates would fall, and we would be exactly where we are now. 
On the other hand, if the Fed maintained the higher federal funds rate, financial flows would be diverted away from productive investment and into idle cash balances, spending would decrease, and the economy would enter a new recession. 
At this point, James would object that this is not what he wanted at all. 
He would have expected the confidence fairy to show up and spur production and demand across all economic sectors, so that businesses still would have created $755 billion in new savings vehicles, aside from government bonds, in the fourth quarter of 2015. 
With the confidence fairy’s arrival, everything would indeed be fine: the economy would be stable and close to full employment, interest rates would be higher, and the negative effects of abnormally low interest rates that James lists would all disappear. 
According to James, these effects include “companies substituting capital for labor to an unnatural degree”; economic hardship for “the elderly and others who depend on income-producing investments”; higher retirement-savings requirements; “systemic risks” in the financial system as investors buy “esoteric assets” to “grasp for higher returns”; and lower bank profitability from lending. 
But these problems would not be averted by the Fed independently raising interest rates. 
Rather, businesses must create savings vehicles and make investments, to which the Fed can then respond by allowing interest rates to rise, in order to head off excess demand and high inflation. 
The Federal Open Market Committee cannot dictate this process from the Eccles Building in Washington, DC. 
But the Fed has now tried to induce the creation of more savings vehicles, in part through $3 trillion in purchases of long-term securities. 
The Fed has removed an annual $30 billion in duration risk from private-sector balance sheets – which bond issuers previously had to pay savers to bear – and that freed-up risk-bearing capacity has presumably been used to fund risky investment projects. 
But surely James would agree that financial organizations that assess and bear duration risk are not necessarily competent to judge other risky ventures. 
If we want more savings vehicles to push up interest rates in loanable-funds markets, so that the Fed can then increase the federal funds rate, there is an obvious solution: the government itself should create savings vehicles. 
For example, a government-sponsored infrastructure bank could start borrowing $100 billion every quarter to finance infrastructure projects. 
With that, concerns about abnormally low interest rates would be a thing of the past. 
In the meantime, the Fed should certainly not take the lead in raising interest rates when there is no evidence of excess supply in savings vehicles. 
To do so would be akin to building a half-mile landing strip in the Pacific Ocean in 1944, and thinking that cargo-bearing B-17s would suddenly start to land. 

Why the Fed Buried Monetarism 
LONDON – The US Federal Reserve’s decision to delay an increase in interest rates should have come as no surprise to anyone who has been paying attention to Fed Chair Janet Yellen’s comments. 
The Fed’s decision merely confirmed that it is not indifferent to international financial stress, and that its risk-management approach remains strongly biased in favor of “lower for longer.” 
So why did the markets and media behave as if the Fed’s action (or, more precisely, inaction) was unexpected? 
What really shocked the markets was not the Fed’s decision to maintain zero interest rates for a few more months, but the statement that accompanied it. 
The Fed revealed that it was entirely unconcerned about the risks of higher inflation and was eager to push unemployment below what most economists regard as its “natural” rate of around 5%. 
It is this relationship – between inflation and unemployment – that lies at the heart of all controversies about monetary policy and central banking. 
And almost all modern economic models, including those used by the Fed, are based on the monetarist theory of interest rates pioneered by Milton Friedman in his 1967 presidential address to the American Economic Association. 
Friedman’s theory asserted that inflation would automatically accelerate without limit once unemployment fell below a minimum safe level, which he described as the “natural” unemployment rate. 
In Friedman’s original work, the natural unemployment rate was a purely theoretical conjecture, founded on an assumption described as “rational expectations,” even though it ran counter to any normal definition of rational behavior. 
The theory’s publication at a time of worldwide alarm about double-digit inflation offered central bankers exactly the pretext they needed for desperately unpopular actions. 
By dramatically increasing interest rates to fight inflation, policymakers broke the power of organized labor, while avoiding blame for the mass unemployment that monetary austerity was bound to produce. 
A few years later, Friedman’s “natural” rate was replaced with the less value-laden and more erudite-sounding “non-accelerating inflation rate of unemployment” (NAIRU). 
But the basic idea was always the same. 
If monetary policy is used to try to push unemployment below some pre-determined level, inflation will accelerate without limit and destroy jobs. 
A monetary policy aiming for sub-NAIRU unemployment must therefore be avoided at all costs. 
A more extreme version of the theory asserts that there is no lasting tradeoff between inflation and unemployment. 
All efforts to stimulate job creation or economic growth with easy money will merely boost price growth, offsetting any effect on unemployment. 
Monetary policy must therefore focus solely on hitting inflation targets, and central bankers should be exonerated of any blame for unemployment. 
The monetarist theory that justified narrowing central banks’ responsibilities to inflation targeting had very little empirical backing when Friedman proposed it. 
Since then, it has been refuted both by political experience and statistical testing. 
Monetary policy, far from being dissipated in rising prices, as the theory predicted, turned out to have a much greater impact on unemployment than on inflation, especially in the past 20 years. 
But, despite empirical refutation, the ideological attractiveness of monetarism, supported by the supposed authority of “rational” expectations, proved overwhelming. 
As a result, the purely inflation-oriented approach to monetary policy gained total dominance in both central banking and academic economics. 
That brings us back to recent financial events. 
The inflation-targeting models used by the Fed (and other central banks and official institutions like the International Monetary Fund) all assume the existence of some pre-determined limit to non-inflationary unemployment. 
The Fed’s latest model estimates this NAIRU to be 4.9-5.2%. 
And that is why so many economists and market participants were shocked by Yellen’s apparent complacency. 
With US unemployment now at 5.1%, standard monetary theory dictates that interest rates must be raised urgently. 
Otherwise, either a disastrous inflationary blowout will inevitably follow, or the body of economic theory that has dominated a generation of policy and academic thinking since Friedman’s paper on “rational” expectations and “natural” unemployment will turn out to be completely wrong. 
What, then, should we conclude from the Fed’s decision not to raise interest rates? 
One possible conclusion is banal. 
Because the NAIRU is a purely theoretical construct, the Fed’s economists can simply change their estimates of this magic number. 
In fact, the Fed has already cut its NAIRU estimate three times in the past two years. 
But there may be a deeper reason for the Fed’s forbearance. 
To judge by Yellen’s recent speeches, the Fed may no longer believe in any version of the “natural” unemployment rate. 
Friedman’s assumptions of ever-accelerating inflation and irrationally “rational” expectations that lead to single-minded targeting of price stability remain embedded in official economic models like some Biblical creation myth. 
But the Fed, along with almost all other central banks, appears to have lost faith in that story. 
Instead, central bankers now seem to be implicitly (and perhaps even unconsciously) returning to pre-monetarist views: tradeoffs between inflation and unemployment are real and can last for many years. 
Monetary policy should gradually recalibrate the balance between these two economic indicators as the business cycle proceeds. 
When inflation is low, the top priority should be to reduce unemployment to the lowest possible level; and there is no compelling reason for monetary policy to restrain job creation or GDP growth until excessive inflation becomes an imminent danger. 
This does not imply permanent near-zero US interest rates. 
The Fed will almost certainly start raising rates in December, but monetary tightening will be much slower than in previous economic cycles, and it will be motivated by concerns about financial stability, not inflation. 
As a result, fears – bordering on panic in some emerging markets – about the impact of Fed tightening on global economic conditions will probably prove unjustified. 
The bad news is that the vast majority of market analysts, still clinging to the old monetarist framework, will accuse the Fed of “falling behind the curve” by letting US unemployment decline too far and failing to anticipate the threat of rising inflation. 
The Fed should simply ignore such atavistic protests, as it rightly did last week. 

The Fed’s Communication Breakdown 
CAMBRIDGE – Nothing describes the United States Federal Reserve’s current communication policy better than the old saying that a camel is a horse designed by committee. 
Various members of the Fed’s policy-setting Federal Open Markets Committee (FOMC) have called the decision to keep the base rate unchanged “data-dependent.” 
That sounds helpful until you realize that each of them seems to have a different interpretation of “data-dependent,” to the point that its meaning seems to be “gut personal instinct.” 
In other words, the Fed’s communication strategy is a mess, and cleaning it up is far more important than the exact timing of the FOMC’s decision to exit near-zero interest rates. 
After all, even after the Fed does finally make the “gigantic” leap from an effective federal funds rate of 0.13% (where it is now) to 0.25% (where is likely headed soon), the market will still want to know what the strategy is after that. 
And I fear that we will continue to have no idea. 
To be fair, deciding what to do is a very tough call, and economists are deeply divided on the matter. 
The International Monetary Fund has weighed in forcefully, calling on the Fed to wait longer before raising rates. 
And yet central bankers in the very emerging markets that the IMF is supposedly protecting have been sending an equally forceful message: Get on with it; the uncertainty is killing us. 
Personally, I would probably err on the side of waiting longer and accept the very high risk that, when inflation does rise, it will do so briskly, requiring a steeper path of interest-rate hikes later. 
But if the Fed goes that route, it needs to say clearly that it is deliberately risking an inflation overshoot. 
The case for waiting is that we really have no idea of what the equilibrium real (inflation-adjusted) policy interest rate is right now, and as such, need a clear signal on price growth before moving. 
But only a foaming polemicist would deny that there is also a case for hiking rates sooner, as long as the Fed doesn’t throw random noise into the market by continuing to send spectacularly mixed signals about its beliefs and objectives. 
After all, the US economy is at or near full employment, and domestic demand is growing solidly. 
While the Fed tries to look past transitory fluctuations in commodity prices, it will be hard to ignore rising consumer inflation as the huge drop of the past year – particularly in energy prices – stabilizes or even reverses. 
Indeed, any standard decision rule used by central banks by now dictates that a hike is long overdue. 
But let’s not make the basic mistake of equating “higher interest rate” with “high interest.” 
To say that 0.25%, or even 1%, is high in this environment is pure hyperbole. 
And while one shouldn’t overstate the risks of sustained ultra-low rates to financial stability, it is also wrong to dismiss them entirely. 
With the decision about raising rates such a close call, one would think that the Fed would be inclined to do it this year, given that the chair and vice chair have pretty much told the market for months that this will happen. 
The real reason for not hiking by the end of the year is public relations. 
Let’s suppose the Fed raises interest rates to 0.25 basis points at its December meeting, trying its best to send a soothing message to markets. 
The most likely outcome is that all will be fine, and the Fed doesn’t really care if a modest equity-price correction ensues. 
No, the real risk is that, if the Fed starts hiking, it will be blamed for absolutely every bad thing that happens in the economy for the next six months to a year, which will happen to coincide with the heart of a US presidential election campaign. 
One small hike and the Fed owns every bad outcome, no matter what the real cause. 
The Fed of course understands that pretty much everyone dislikes interest-rate hikes and almost always likes rate cuts. 
Any central banker will tell you that he or she gets 99 requests for interest-rate cuts for every request for a hike, almost regardless of the situation. 
The best defense against these pressures is to operate according to utterly unambiguous criteria. 
Instead, however good its intentions, the net effect of too much Fed speak has been vagueness and uncertainty. 
So what should the Fed do? 
My choice would be to have it explain the case for waiting more forthrightly: “Getting off the zero bound is hard, we want to see inflation over 3% to be absolutely sure, and then we will move with reasonable speed to normalize.” 
But I also could live with, “We are worried that if we wait too long, we will have to tighten too hard and too fast.” 
Throwing out the rulebook made sense in the aftermath of the 2008 financial crisis. 
It doesn’t anymore. 
And today’s lack of clarity has become a major contributor to market volatility – the last place the Fed should want to be. 
It’s wrong to vilify the Fed for hiking, and it’s wrong to vilify it for not hiking; if it is such a close call, it probably doesn’t matter so much. 
But, at this critical point, it is fair to ask the Fed for a much clearer message about what its strategy is, and what this implies for the future. 
If Fed Chair Janet Yellen has to assert her will over the FOMC for a while, so be it. 
Somebody on the committee has to lead the camel to water. 

In Defense of the Fed 
NEW HAVEN – I have not been a fan of the policies of the US Federal Reserve for many years. 
Despite great personal fondness for my first employer, and appreciation of all that working there gave me in terms of professional training and intellectual stimulation, the Fed had lost its way. 
From bubble to bubble, from crisis to crisis, there were increasingly compelling reasons to question the Fed’s stewardship of the US economy. 
That now appears to be changing. 
Notwithstanding howls of protest from market participants and rumored unconstitutional threats from an unhinged US president, the Fed should be congratulated for its steadfast commitment to policy “normalization.” 
It is finally confronting the beast that former Fed Chairman Alan Greenspan unleashed over 30 years ago: the “Greenspan put” that provided asymmetric support to financial markets by easing policy aggressively during periods of market distress while condoning froth during upswings. 
Since the October 19, 1987 stock-market crash, investors have learned to count on the Fed’s unfailing support, which was justified as being consistent with what is widely viewed as the anchor of its dual mandate: price stability. 
With inflation as measured by the Consumer Price Index averaging a mandate-compliant 2.1% in the 20-year period ending in 2017, the Fed was, in effect, liberated to go for growth. 
And so it did. 
But the problem with the growth gambit is that it was built on the quicksand of an increasingly asset-dependent and ultimately bubble- and crisis-prone US economy. 
Greenspan, as a market-focused disciple of Ayn Rand, set this trap. 
Drawing comfort from his tactical successes in addressing the 1987 crash, he upped the ante in the late 1990s, arguing that the dot-com bubble reflected a new paradigm of productivity-led growth in the US. 
Then, in the early 2000s, he committed a far more serious blunder, insisting that a credit-fueled housing bubble, inflated by “innovative” financial products, posed no threat to the US economy’s fundamentals. 
As one error compounded the other, the asset-dependent economy took on a life of its own. 
As the Fed’s leadership passed to Ben Bernanke in 2006, market-friendly monetary policy entered an even braver new era. 
The bursting of the Greenspan housing bubble triggered a financial crisis and recession the likes of which had not been seen since the 1930s. 
As an academic expert on the Great Depression, Bernanke had argued that the Fed was to blame back then. 
As Fed Chair, he quickly put his theories to the test as America stared into another abyss. 
Alas, there was a serious complication: with interest rates already low, the Fed had little leeway to ease monetary policy with traditional tools. 
So it had to invent a new tool: liquidity injections from its balance sheet through unprecedented asset purchases. 
The experiment, now known as quantitative easing, was a success – or so we thought. 
But the Fed mistakenly believed that what worked for markets in distress would also spur meaningful recovery in the real economy. 
It raised the stakes with additional rounds of quantitative easing, QE2 and QE3, but real GDP growth remained stuck at around 2% from 2010 through 2017 — half the norm of past recoveries. 
Moreover, just as it did when the dot-com bubble burst in 2000, the Fed kept monetary policy highly accommodative well into the post-crisis expansion. 
In both cases, when the Fed finally began to normalize, it did so slowly, thereby continuing to fuel market froth. 
Here, too, the Fed’s tactics owe their origins to Bernanke’s academic work. 
With his colleague Mark Gertler of NYU, he argued that while monetary policy was far too blunt an instrument to prevent asset-bubbles, the Fed’s tools were far more effective in cleaning up the mess after they burst. 
And what a mess there was! 
As Fed governor in the early 2000s, Bernanke maintained that this approach was needed to avoid the pitfalls of Japanese-like deflation. 
Greenspan concurred with his famous “mission accomplished” speech in 2004. 
And as Fed Chair in the late 2000s, Bernanke doubled down on this strategy. 
For financial markets, this was nirvana. 
The Fed had investors’ backs on the downside and, with inflation under control, would do little to constrain the upside. 
The resulting “wealth effects” of asset appreciation became an important source of growth in the real economy. 
Not only was there the psychological boost that comes from feeling richer, but also the realization of capital gains from an equity bubble and the direct extraction of wealth from the housing bubble through a profusion of secondary mortgages and home equity loans. 
And, of course, in the early 2000s, the Fed’s easy-money bias spawned a monstrous credit bubble, which subsidized the leveraged monetization of housing-market froth. 
And so it went, from bubble to bubble. 
The more the real economy became dependent on the asset economy, the tougher it became for the Fed to break the daisy chain. 
Until now. 
Predictably, the current equity market rout has left many aghast that the Fed would dare continue its current normalization campaign. 
That criticism is ill-founded. 
It’s not that the Fed is simply replenishing its arsenal for the next downturn. 
The subtext of normalization is that economic fundamentals, not market-friendly monetary policy, will finally determine asset values. 
The Fed, it is to be hoped, is finally coming clean on the perils of asset-dependent growth and the long string of financial bubbles that has done great damage to the US economy over the past 20 years. 
Just as Paul Volcker had the courage to tackle the Great Inflation, Jerome Powell may well be remembered for taking an equally courageous stand against the insidious perils of the Asset Economy. 
It is great to be a fan of the Fed again. 

Federalism and Progressive Resistance in America 
BERKELEY – The year 2016 was one of ascendant populism in the United States, the United Kingdom, and many other developed countries. 
With income stagnation, faltering economic opportunities, and a loss of faith in progress fueling widespread discontent, voters backed candidates who promised to return power to the “people” and to shake up systems that mainstream political leaders had “rigged” in favor of a corrupt “elite.” 
In the US, growing ethnic diversity, smoldering racial tensions, and changing social mores added fuel to the electoral fire. 
In the US, long-term erosion of trust in the federal government culminated in Donald Trump’s victory in November’s presidential election: even though President Barack Obama enjoyed high public approval, only 19% of Americans trusted the federal government to do what is right. 
Given traditional Republican priorities, reflected in President-elect Trump’s cabinet choices, federal government programs (with the notable exception of the military) are likely to be slashed. 
Ironically, spending cuts for health, education and training, and the environment, along with large regressive personal and business tax reductions, will further enrich the “elite” while undermining programs that benefit the majority of households. 
But the major social and economic challenges addressed by federal programs will not disappear. 
The responsibility to deal with them will merely fall more heavily on state and local governments, which will have to tackle them in innovative ways. 
Indeed, the answer to Trumpism is “progressive federalism”: the pursuit of progressive policy goals using the substantial authority delegated to subnational governments in the US federal system. 
Annual Gallup polls continue to show that a majority of Americans trust their state governments (62%) and their local governments (71%) to handle problems. 
A 2014 Pew study found that while only 25% of respondents were satisfied with the direction of national policy, 60% were satisfied with governance in their own communities. 
And the US Constitution allows individual states to function as what Judge Brandeis called laboratories of democracy by experimenting with innovative policies without putting the rest of the country at risk. 
There is a long and rich history of successful experiments. 
State and local governments were leaders in establishing public primary and secondary education systems, as well as state colleges and universities. 
California, Wyoming, and other states allowed women to vote – an example that encouraged passage of the Nineteenth Amendment (enfranchising all adult women). 
Welfare-to-work programs in Michigan and Wisconsin served as the model for federal welfare reform under President Bill Clinton, and Obamacare is based on Massachusetts’ health-care system, introduced under Republican Governor Mitt Romney. 
Likewise, from 2000 to 2014, by enacting a variety of energy policies – from broad climate action plans to mandated renewable-energy standards – 33 states cut carbon dioxide emissions while expanding their economies. 
More recently, some states have introduced cap-and-trade systems to put a price on carbon, and many are already on track to meet Obama’s Clean Power Plan targets. 
Half of all US states have now legalized marijuana in some form, with eight embracing full legalization. 
Three states have implemented laws offering paid family leave, with a fourth on the way. 
Nineteen states rang in 2017 with increases in their minimum wage. 
The list goes on. 
Successful examples of progressive federalism can be seen in a wide variety of areas, including health care, prison reform, higher education and job training, entrepreneurship, worker protection and benefits in the “gig economy”, and pay-for-success government contracts. 
Cooperation, collaboration, and compromise – between private and public actors, for-profit and non-profit organizations, and Republicans and Democrats – are essential features in all of them. 
They also underpin the myriad examples of policy innovation and civic engagement at the local level described by James Fallows in a recent article and upcoming book. 
To promote state and local policy innovation, the federal government often assumes the role of venture capitalist, providing measurable goals and incentives, rather than dictating solutions. 
Obama championed this approach through statewide competitions like the Department of Education’s Race to the Top program, through federal “social innovation grants” to support state and local governments, and through the Medicaid expansion program. 
Vice President-elect Mike Pence is proud of the Medicaid expansion he led as Governor of Indiana – though, as of October 2016, 19 states, mainly in the South and Midwest, had opted not to participate, thereby denying health insurance to more than 2.5 million low-income people. 
With the world’s sixth-largest economy, a population of nearly 40 million that looks like the future of America, and a united and responsible Democratic government, California is a model of what progressive federalism can accomplish. 
It has led the way in expanding rights for women, farmworkers, immigrants, and sexual minorities, among others. 
Similarly, it has been at the vanguard of environmental protection and efforts to combat climate change – from setting tough standards for energy consumption and auto emissions (adopted as federal law in 2016), to pioneering a carbon-pricing system. 
Governor Jerry Brown recently promised that if the Trump administration cuts federal funding for satellites needed to collect climate data, California would “launch its own damn satellite.” 
California can also be a leader of progressive resistance or “uncooperative federalism,” by refusing to carry out federal policies that it opposes. 
Many cities in California and the state itself already act as “sanctuary jurisdictions,” which protect undocumented immigrants from deportation by limiting cooperation with federal authorities. 
By law, immigration enforcement is the federal government’s responsibility; in practice, it lacks adequate resources. 
The massive spending and personnel cuts promised by Trump will exacerbate the shortfall, forcing the federal government to rely even more on state and local authorities to do much of the work. 
Signaling its opposition, the California legislature recently introduced for consideration new bills to finance legal services for immigrants fighting deportation and to ban the use of state and local resources for immigration enforcement on constitutional grounds. 
Trump has already threatened to cut federal funding to sanctuary jurisdictions. 
But such pressure tactics have been rendered more difficult by a recent Supreme Court decision limiting the use of conditional spending by the federal government to “coerce” state officials into implementing federal policies. 
We may remember 2016 as the year populism returned to power in the US. 
But it may also be remembered as the start of a new era of progressive federalism and resistance, championed by state and local governments trusted by their citizens to help improve their lives and communities. 




Female Genital Mutilation Mutilates Us All 
On December 10th, women from around the world will gather at the European Parliament to fight against Female Genital Mutilation. 
According to the World Health Organization, some 130 million women have, over the last few years, suffered from genital mutilation in some form. 
In reality, those figures are probably even worse, because illegalities are almost always underestimated. 
Female genital mutilation, according to the WHO, consists of the "removal of all or part of the external female genital organs." 
It is a painful procedure carried out in unsafe ways by old women who are seeking to initiate girls into womanhood, and, more concretely, into a life that will be an unending chain of physical pain and social marginalization. 
Indeed, genital mutilation makes a woman's experience of sex, that taboo of taboos, into a painful, humiliating, punitive procedure. 
Over the last 80 years, women in democratic societies have struggled to be recognized and treated as citizens endowed with equal rights. 
The right to own property, vote, work, divorce, the right to choose whether or not to have children have been secured only through political struggle. 
All these civil victories for women contributed mightily to the advancement of social life and have been instrumental in initiating comprehensive social reforms that have transformed Western societies. 
In these epochal battles, women's fiercest enemy has been tradition, and its staunch ally: religion. 
With the help of information, education and mass participation, women and men, have defeated ignorance and the violence that goes with it hand-in-hand. 
The fight against female genital mutilation is not a replay of the West's 'battle of the sexes' circa the 1960s; rather, it is a struggle against the fear of unknown enemies; against fear of change and the opportunities and contexts that arrive in the wake of change. 
Throughout the world, from sub-Saharan Africa to the Arab peninsula, from certain regions of the Far East to expatriate communities in Europe, the United States, Canada, Australia, and New Zealand, women are reacting against their being genitally, socially, civilly, and politically mutilated. 
In other words, they react to their being considered and treated like some "unknown other." 
Networks of local practitioners, non-governmental organizations and politicians are collaborating to confront the issue of female genital mutilation at a national level and to publicize it. 
There are ongoing efforts in Africa and elsewhere to internationalize a campaign that seeks to bring to galvanize public awareness of the dark fact that, in many countries, women remain mere commodities at the disposal of tradition. 
Today, most of the African, Arab, and Asian countries blighted by the custom female genital mutilation are nonetheless signatories of the international conventions that condemn this practice, particularly the international Convention on the Elimination of Discrimination Against Women and the international Convention on the Rights of the Child. 
Most of these countries also support a series of UN resolutions that call for eliminating female genital mutilation. 
But all these commendable efforts have failed to counter the phenomenon. 
So the issue is not good words and public promises, it is one of securing the political will necessary to stamp out the practice. 
Female genital mutilation is a crime with real victims, but who are the criminals? 
Should we incarcerate all women who carry out these mutilations on their fellow women? 
Should we imprison mothers because they are willingly sacrifice their daughters' physical integrity on the altar of tradition? 
Should we impose sanctions on countries that do not make the practice unlawful? 
Should we patrol remote African villages with groups of human rights activists? 
Tradition can only be countered by creativity. 
We need to find ways to address the lack of a real freedom of expression for women in so many societies and, at the same, time to redress damage done to those victimized by female genital mutilation. 
In doing so, we must be aware that the solution to genital mutilation of women cannot be limited to this issue alone. 
In fact, it needs to be part of a more comprehensive effort aiming at empowering and giving civil rights to women - 50% of the people that live in societies where the practice is carried out. 
Such a concerted action must go beyond the sacrosanct effort of providing the old women who practice female genital mutilation with another job or in finding symbolic or ritualistic substitutes to the act of cutting off a woman's clitoris. 
We need to reach into politics, because there will be no freedom for African, Arab, or Asian women without the advent of political democracy in their countries. 
Here is the challenge that confronts those who live in countries where female genital mutilation is not routinely practiced but who care about the fate of women around the world. 
Failure to recognize the political aspect of the issue will insure defeat and the continuance of a violent practice that abuses millions of women each year. 
Over the last few years, I have had the chance to meet hundreds of individuals and groups in places where the practice exists. 
Those people made the fight against female genital mutilation a priority in their lives. 
Their courage, expertise, dedication and resolve is encouraging, but we must not leave them to fight their fight alone. 
In Brussels on December 11th, eminent personalities from Africa and all over the world will launch an appeal open to signatures to internationalize their struggle. 
Those who want to join the Stop Female Genital Mutilation campaign carried out by AIDOS (Italian Association of Women for Development), TAMWA (Tanzania Media Women's Association), and No Peace Without Justice can sign the petition by visiting www.stopfgm.org . 
In allowing so many lives to be blighted through genital mutilation, we degrade ourselves and our world. 

Feminism and the Male Brain 
NEW YORK – North Americans of my generation grew up with the 1970’s children’s record “Free to Be...You and Me,” on which Rosey Grier, an immense former football star, sang “It’s Alright to Cry.” 
The message: girls could be tough, and boys were allowed not to be. 
For almost 40 years, that era’s Western feminist critique of rigid sex-role stereotyping has prevailed. 
In many ways, it has eroded or even eliminated the kind of arbitrary constraints that turned peaceable boys into aggressive men and stuck ambitious girls in low-paying jobs. 
Feminists understandably have often shied away from scientific evidence that challenges this critique of sex roles. 
After all, because biology-based arguments about gender difference have historically been used to justify women’s subjugation, women have been reluctant to concede any innate difference, lest it be used against them. 
But, in view of recent scientific discoveries, has feminist resistance to accepting any signs of innate gender difference only created new biases? 
The feminist critique, for example, has totally remade elementary-level education, where female decision-makers prevail: the construction of male hierarchies in the schoolyard is often redirected nowadays for fear of “bullying,” with boys and girls alike expected to “share” and “process” their emotions. 
But many educators have begun to argue that such intervention in what may be a hardwired aspect of “boy-ness” can lead to boys’ academic underperformance relative to girls, and to more frequent diagnoses of behavioral problems, attention deficit disorder, and so on. 
And education is just the beginning. 
An entire academic discipline emerged out of the wholesale critique of the male tendency to create hierarchy, engage in territoriality, and be drawn to conflict. 
When I was in college, the feminist solution to “patriarchy” was an imagined world without hierarchy, where people verbalized all day long and created emotional bonds. 
This critique of “masculinity” also dramatically affected intimate relationships: women were encouraged to express their dissatisfaction with men’s refusal to “share” their inner lives. 
Women complained of not being heard, of men disappearing after work to tinker in the garage or zone out in front of the TV. 
But, however heartfelt, such complaints assumed that men choose all of their behavior. 
Now a spate of scientific analyses, based on brain imaging technology and new anthropological and evolutionary discoveries, suggests that we may have had our heads in the sand, and that we must be willing to grapple with what seem to be at least some genuine, measurable differences between the sexes. 
The most famous of these studies, anthropologist Helen Fisher’s The Anatomy of Love , explains the evolutionary impetus for human tendencies in courtship, marriage, adultery, divorce, and childrearing. 
Some of her findings are provocative: it seems, for example, that we are hard-wired for serial monogamy and must work very hard to maintain pair-bonds; that highly orgasmic women enjoy an evolutionary advantage; and that flirtation among primates closely resembles the way young men and women in a bar show their sexual interest today. 
Moreover, in her description of our evolution, Fisher notes that males who could tolerate long periods of silence (waiting for animals while in hunt mode) survived to pass on their genes, thus genetically selecting to prefer “space.” 
By contrast, females survived best by bonding with others and building community, since such groups were needed to gather roots, nuts, and berries, while caring for small children. 
Reading Fisher, one is more inclined to leave boys alone to challenge one another and test their environment, and to accept that, as she puts it, nature designed men and women to collaborate for survival. 
“Collaboration” implies free will and choice; even primate males do not succeed by dominating or controlling females. 
In her analysis, it serves everyone for men and women to share their sometimes different but often complementary strengths – a conclusion that seems reassuring, not oppressive. 
What Could He Be Thinking? , by Michael Gurian, a consultant in the field of neurobiology, takes this set of insights further. 
Gurian argues that men’s brains can actually feel invaded and overwhelmed by too much verbal processing of emotion, so that men’s need to zone out or do something mechanical rather than emote is often not a rejection of their spouses, but a neural need. 
Gurian even posits that the male brain actually can’t “see” dust or laundry piling up as the female brain often can, which explains why men and women tend to perform household tasks in different ways. 
Men often can’t hear women’s lower tones, and their brains, unlike women’s, have a “rest” state (he actually is sometimes thinking about “nothing”!). 
Moreover, Gurian argues that men tend to rear children differently from women for similarly neurological reasons, encouraging more risk-taking and independence and with less awareness of the details of their nurture. 
One can see the advantages to children of having both parenting styles. 
He urges women to try side-by-side activities, not only face-to-face verbalization, to experience closeness with their mates. 
Somehow, all this is liberating rather than infuriating. 
So much that enrages women, or leads them to feel rejected or unheard, may not reflect men’s conscious neglect or even sexism, but simply their brains’ wiring! 
According to Gurian, if women accept these biological differences and work around them in relationships, men respond with great appreciation and devotion (often expressed nonverbally). 
Women who have embraced these findings report that relations with the men in their lives become much smoother and, paradoxically, more intimate. 
None of this means that men and women should not try to adjust to each other's wishes, ask for shared responsibility with housework, or expect to be “heard.” 
But it may mean we can understand each other a bit better and be more patient as we seek communication. 
Nor does recent scientific research imply that men (or women) are superior, much less justify invidious discrimination. 
But it does suggest that a more pluralistic society, open to all kinds of difference, can learn, work, and love better. 


Fictional Sovereignties 
LONDON – A year ago, tiny Georgia tried to regain control over its breakaway enclave of South Ossetia. 
The Russians quickly expelled the Georgian army, to almost universal opprobrium from the West. 
South Ossetia, together with Abkhazia (combined population 300,000), promptly declared their “independence,” creating two new fictional sovereignties, and acquiring in the process all the official trappings of statehood: national heroes, colorful uniforms, anthems, flags, frontier posts, military forces, presidents, parliaments, and, most important, new opportunities for smuggling and corruption. 
So far, only Russia and Nicaragua recognize the independence of Abkhazia and South Ossetia. 
Russian recognition was widely seen as retaliation for Western recognition of Kosovo (population two million), the breakaway province of Serbia, earlier last year. 
A thousand miles to the west of Georgia is Moldova (population 3.5 million), which lies between Romania and Ukraine. 
Annexed by Tsarist Russia in 1812, joined to Romania in 1918, and re-annexed by the Soviet Union in 1940, it seized its independence from Moscow in 1991. 
It is a member of the United Nations, the Council of Europe, the World Trade Organization, the Organization for Security and Cooperation in Europe, and various other prestigious international bodies. 
Moldova’s main claim to fame is King Stephen the Great, who defeated the Ottomans in a great fifteenth century battle. 
It also produces rather good wine. An enduring memory from my own recent visit to its capital Chisinau is the election poster of a local politician called Lupu, who holds a pair of spectacles to his eyes, whether to suggest visions or wisdom isn’t clear. 
To get to Moldova from Odessa (now in Ukraine) one must drive through the self-proclaimed “republic” of Transdniestria (population 700,000), a sliver of land on the north shore of the Dniester river. 
A clump of peeling buildings, rusting wire, and a filthy lavatory mark the start of Transdniestrian sovereignty. 
Progress through this squalid, but well manned, frontier post involved the stamping of lots of documents and a liberal scattering of bribes, a process repeated on leaving the “republic.” 
A shadowy mafia-style company, Sheriff, owns most of the economy. 
It is said to have close links to the president and his family. 
It has built a giant football stadium in the capital, Tiraspol, which seems to be some kind of symbol of Transdniestrian virility. 
Unrecognized by the rest of the world, Transdniestrian “independence” is secured by a Russian garrison. 
The world’s population is about six billion. 
Suppose it was divided into independent political units of two million people each. 
That would mean 3,000 micro-states, each refusing to accept any sovereignty superior to its own. Of course, this would be a recipe for global anarchy. 
Yet the trend over the past century has been towards a continuous increase in the number of small states, mainly owing to nationalist revolts against multi-national empires: the latest bout of state creation followed the disintegration of the USSR. 
Even long-established states like the United Kingdom now have strong separatist movements. 
In its political life, the world has been regressing to a form of tribalism, even as its economic life has become increasingly globalized. 
The equation of state with nation is the arch-heresy of our time. 
A “nation” is, at root, an ethno-linguistic – occasionally religious – entity, and because it is through language and liturgy that culture is transmitted, each nation will have its own distinctive cultural history, available for use and misuse, invention and discovery. 
The state, however, is a political construction, designed to keep the peace in an economically viable territory. 
There are simply too many “nations,” actual or potential, to form the basis of a world system of states, not least because so many of them, having been jumbled up for centuries, cannot now be disentangled. 
Micro-states can never be made small enough to satisfy their advocates’ exalted standards of cultural integrity. 
So the unraveling of multi-national states is a false path. 
The way forward lies in democratic forms of federalism, which can preserve sufficient central authority for the purposes of statehood, while respecting local and regional cultures. 
Today’s upsurge of micro-nationalism is not just a consequence of the revolt against empires: it is also a revolt against globalization. 
There is widespread resistance to the idea that the chief function of modern states is to slot their peoples into a global market dominated by the imperatives of efficiency and cheapness, heedless of the damage to non-economic activities. 
This feeling is strengthened when the global economy turns out to be a global casino. 
National assertion is a way of combating impersonal forces and remote authorities. 
Globalization promises too much in terms of welfare gains, particularly to developing countries, to be abandoned. 
But the lesson from the current crisis is that we will have to develop styles of global economic governance to manage, regulate, and mitigate the creative, but often disruptive forces unleashed by the global market. 
In the absence of an actual world government, this can be done only through cooperation among states. The fewer “sovereigns” there are, the easier it will be to secure the necessary cooperation. 
The Bretton Woods Agreement of 1944, which laid the institutional foundation for the post-war World War II economy, was made possible because the United States and Britain called the shots. 
When objections were raised to Cuba being put on the drafting committee, Harry Dexter White, the American representative, remarked that Cuba’s function was to provide cigars. 
Such a cavalier attitude to the demands of lesser powers to be heard is no longer possible. 
But all this means is that the facades will have to be more subtle and the fictions more elaborate. 
Provided we do not deceive ourselves about where real power lies, let presidents and parliaments be three a penny if that is what makes people feel good about themselves. 

Fiddling at the Fire 
PARIS – Financial markets have rallied since July on the hope that the global economic and geopolitical outlook will not worsen, or, if it does, that central banks stand ready to backstop economies and markets with additional rounds of liquidity provision and quantitative easing. 
So, not only has good – or better-than-expected – economic news boosted the markets, but even bad news has been good news, because it increases the probability that central-banking firefighters like US Federal Reserve Chairman Ben Bernanke and European Central Bank President Mario Draghi will douse the markets with buckets of cash. 
But markets that rise on both good and bad news are not stable markets. 
“Risk-off” episodes, in which investor sentiment sours, are likely to return if economic news worsens and confidence in policymakers’ effectiveness drops. 
In the eurozone, euphoria followed the ECB’s decision to provide support with potentially unlimited purchases of distressed countries’ bonds. 
But the move is not a game changer; it only buys time for policymakers to implement the tough measures needed to resolve the crisis. 
And the policy challenges are daunting: the eurozone’s recession is deepening as front-loaded fiscal consolidation and severe credit rationing continues. 
And, as eurozone banks and public-debt markets become increasingly balkanized, establishing a banking union, a fiscal union, and an economic union while pursuing macroeconomic policies that restore growth, external balance, and competitiveness will be extremely difficult. 
Even the ECB’s support is not obvious. 
Monetary hawks – the Bundesbank and several other core central banks – who were worried about a new open-ended ECB mandate pushed successfully for strict and effective conditionality for countries benefiting from the bond purchases. 
As a result, they can pull the plug on the program if its stringent criteria are not met. 
Moreover, Greece could exit the eurozone in 2013, before Spain and Italy are successfully ring-fenced; 
Spain – like Greece – is spiraling into depression, and may need a full-scale bailout by the “troika” (the ECB, the European Commission, and the International Monetary Fund). 
Meanwhile, austerity fatigue in the eurozone periphery is increasingly clashing with bailout fatigue in the core. 
Small wonder, then, that Germany, politically unable to vote on more bailout resources, has outsourced that job to the ECB, the only institution that can bypass democratically elected parliaments. 
But, again, liquidity provision alone – without policies to restore growth soon – would merely delay, not prevent, the breakup of the monetary union, ultimately taking down the economic/trade union and leading to the destruction of the single market. 
In the United States, the latest economic data – including a weak labor market – confirm that growth is anemic, with output in the second half of 2012 unlikely to be significantly stronger than the 1.6% annual gain recorded in January-June. 
And, given America’s political polarization and policy gridlock, we can expect more fights on the budget and the debt ceiling, another rating downgrade, and no agreement on a path toward medium-term fiscal consolidation and sustainability – regardless of whether President Barack Obama is reelected in November. 
On the contrary, we should expect agreement only on the path of least political resistance: avoidance of tough fiscal choices until the bond vigilantes eventually wake up, spike long rates, and force fiscal adjustment on the political system. 
In China, a hard economic landing looks increasingly likely as the investment bubble deflates and net exports shrink. 
Meanwhile, the reforms necessary to reduce savings and increase private consumption are being delayed. 
As in Europe and the US, the worst will be avoided in 2012 only by kicking the can down the road with more monetary, fiscal, and credit stimulus. 
But a hard landing becomes more likely in 2013, as the stimulus fades, non-performing loans rise, the investment bust accelerates, and the problem of rolling over the debts of provincial governments and their special investment vehicles can no longer be papered over. 
And, given a new leadership’s caution as it establishes its power, reforms will occur at a snail’s pace, making social and political unrest more likely. 
Meanwhile, Brazil, India, Russia, and other emerging economies are playing the same game. 
Many have not adjusted as advanced economies’ weakness reduces the room for export-led growth; and many delayed structural reforms needed to boost private-sector development and productivity growth, while embracing a model of state capitalism that will soon reveal its limits. 
So the recent slowdown of growth in emerging markets is not just cyclical, owing to weak growth or outright recession in advanced economies; it is also structural. 
Similar dithering is apparent at the geopolitical level as well. 
The major global powers are still trying negotiations and sanctions to induce Iran to abandon its efforts to develop nuclear weapons. 
But Iran is playing for time and hoping to reach a zone of immunity. 
By 2013, an Israel that – rightly or wrongly – perceives Iran’s nuclear program to be an existential threat, and/or the US, which has rejected containment of a nuclear Iran, may decide to strike, leading to a war and a massive spike in oil prices. 
Ineffective governments with weak leadership are at the root of the problem. 
In democracies, repeated elections lead to short-term policy choices. 
In autocracies like China and Russia, leaders resist the radical reforms that would reduce the power of entrenched lobbies and interests, thereby fueling social unrest as resentment against corruption and rent-seeking boils over into protest. 
But, as everyone kicks the can down the road, the can is getting heavier and, in the major emerging markets and advanced economies alike, is approaching a brick wall. 
Policymakers can either crash into that wall, or they can show the leadership and vision needed to dismantle it safely. 

The Soccer Mafia 
NEW YORK – The only surprise about the arrest of seven FIFA officials in a Swiss hotel in the early morning of May 27 is that it happened at all. 
Most people assumed that these pampered men in expensive suits, governing the world’s soccer federation, were beyond the reach of the law. 
Whatever rumors flew or reports were made on bribes, kickbacks, vote-rigging, and other dodgy practices, FIFA President Joseph “Sepp” Blatter and his colleagues and associates always seemed to emerge without a scratch. 
So far, 14 men, including nine current or former FIFA executives (but not Blatter), have been charged with a range of fraud and corruption offenses in the United States, where prosecutors accuse them, among other things, of pocketing $150 million in bribes and kickbacks. 
And Swiss federal prosecutors are looking into shady deals behind the decisions to award the World Cup competitions in 2018 and 2022 to Russia and Qatar, respectively. 
There is, of course, a long tradition of racketeering in professional sports. 
American mobsters have had a major interest in boxing, for example. 
Even the once gentlemanly game of cricket has been tainted by the infiltration of gambling networks and other crooked dealers. 
FIFA is just the richest, most powerful, most global milk cow of all. 
Some have likened FIFA to the Mafia, and Blatter, born in a small Swiss village, has been called “Don Blatterone.” 
This is not entirely fair. 
So far as we know, no murder contracts have ever been issued from FIFA’s head office in Zürich. 
But the organization’s secrecy, its intimidation of the rivals to those who run it, and its reliance on favors, bribes, and called debts do show disturbing parallels to the world of organized crime. 
One could, of course, choose to see FIFA as a dysfunctional organization, rather than a criminal enterprise. 
But even in this more charitable scenario, much of the malfeasance is a direct result of the federation’s total lack of transparency. 
The entire operation is run by a close-knit group of men (women play no part in this murky business), all of whom are beholden to the boss. 
This did not start under Blatter. 
It was his predecessor, the sinister Brazilian João Havelange, who turned FIFA into a corrupt and vastly rich empire by incorporating more and more developing countries, whose votes for the bosses were bought with all manner of lucrative marketing and media deals. 
Huge amounts of corporate money from Coca-Cola and Adidas went sloshing through the system, all the way to the roomy pockets of Third World potentates and, allegedly, of Havelange himself. 
Coke was the main sponsor of the 1978 World Cup in Argentina, ruled in those days by a brutal military junta. 
Blatter is not quite as uncouth as Havelange. 
Unlike the Brazilian, he does not openly associate with mobsters. 
But his power, too, relies on the votes of countries outside Western Europe, and their loyalty, too, is secured by the promise of TV rights and commercial franchises. 
In the case of Qatar, this meant the right to stage the World Cup in an utterly unsuitable climate, in stadiums hastily built under terrible conditions by underpaid foreign workers with few rights. 
Complaints from slightly more fastidious Europeans are often met with accusations of neo-colonialist attitudes or even racism. 
Indeed, this is what makes Blatter a typical man of our times. 
He is a ruthless operator who presents himself as the champion of the developing world, protecting the interests of Africans, Asians, Arabs, and South Americans against the arrogant West. 
Things have changed since the days when venal men from poor countries were paid off to further Western political or commercial interests. 
This still occurs, of course. 
But the really big money now, more often than not, is made outside the West, in China, the Persian Gulf, and even Russia. 
Western businessmen, architects, artists, university presidents, and museum directors – or anyone who needs large amounts of cash to fund their expensive projects – now have to deal with non-Western autocrats. 
So do democratically elected politicians, of course. 
And some – think of Tony Blair – turn it into a post-government career. 
Pandering to authoritarian regimes and opaque business interests is not a wholesome enterprise. 
The contemporary alliance of Western interests – in the arts and higher education no less than in sports – with rich, undemocratic powers involves compromises that might easily damage established reputations. 
One way to deflect the attention is to borrow the old anti-imperialist rhetoric of the left. 
Dealing with despots and shady tycoons is no longer venal, but noble. 
Selling the franchise of a university or a museum to a Gulf state, building yet another enormous stadium in China, or making a fortune out of soccer favors to Russia or Qatar is progressive, anti-racist, and a triumph of global fraternity and universal values. 
This is the most irritating aspect of Blatter’s FIFA. 
The corruption, the vote-buying, the absurd thirst of soccer bosses for international prestige, the puffed-out chests festooned with medals and decorations – all of that is par for the course. 
It is the hypocrisy that rankles. 
To lament the shift in global power and influence away from the heartlands of Europe and the US is useless. 
And we cannot accurately predict this shift’s political consequences. 
But if the sorry story of FIFA is any indication, we can be sure that, whatever forms government might take, money still rules. 

Back to Disease-Fighting Basics 
LONDON – Combating antimicrobial resistance will require groundbreaking technological solutions. 
To prevent superbugs from claiming an estimated ten million lives a year by 2050, we will need to invent new types of antimicrobial drugs and develop rapid diagnostic tests to avoid unnecessary treatment and cut our massive overuse of antibiotics. 
And yet, as important as these high-tech contributions may be, they are only partial fixes. 
To tackle the problem permanently, the only option is to prevent infections from occurring in the first place – with improved hygiene, sanitation, and disease surveillance. 
Indeed, only by focusing on these areas will we lower the demand for new drugs over the long term. 
Indeed, in the nineteenth century, long before modern drugs were available, major Western cities tackled diseases by seeking to prevent infections. 
And this approach remains the best solution for large cities with growing populations. 
Consider London in the 1850s: Living conditions for the poor were grim. 
Male life expectancy was 40 years. 
Diseases like cholera and tuberculosis were rife, and there was no way to treat them. 
In September 1854, a cholera outbreak devastated the city’s impoverished, central Soho district, killing 500 people in just ten days. 
Enter John Snow, a pioneering physician who had intuited that cholera was spread not through the air, as conventional wisdom held, but through water. 
Snow monitored the progress of the Soho outbreak in unprecedented detail, mapping each case. 
His research convinced him that the source of the outbreak was a shared water pump in the heart of the district. 
And once the pump’s handle was removed, the pace of the outbreak slowed dramatically. 
Several of Snow’s methods are directly applicable to the modern problem of antimicrobial resistance. 
For starters, his effort demonstrated the efficacy of using data to understand a public health crisis. 
His mapping and statistical analysis helped identify the epicenter of the outbreak and thus its root cause. 
Snow’s emphasis on using data to guide his intervention is a principle that institutions like the Bill & Melinda Gates Foundation insist upon today. 
The recent Ebola outbreak in West Africa demonstrated, in tragic fashion, the importance of good data. 
The epidemic spread most dramatically in areas where basic infrastructure and surveillance systems had broken down. 
As a result, even after Ebola had been declared a public health emergency and funding had been made available, it remained difficult for many weeks to direct resources where they were most needed. 
Worryingly, as the latest paper from my Review on Antimicrobial Resistance warns, there is no globally coordinated system of surveillance to monitor the emergence and spread of superbugs around the world. 
Fundamental gaps remain in how data are gathered and shared, even in the world’s richest countries. 
The result is a series of enormous blind spots that deprive us of the key insights and early warnings that we need to mount an effective response. 
Snow’s other major contribution was to identify the central role that water plays in spreading diseases like cholera, leading authorities in Europe to invest in the development of sewage and sanitation systems. 
Decades before the discovery of cures like penicillin, there was no alternative but to invest in prevention to beat infectious diseases and protect growing urban populations. 
This infrastructure-building was spectacularly successful: The last urban cholera outbreak in Western Europe occurred in 1892, and by the time World War I broke out, communicable diseases had ceased to be the leading cause of death across much of the continent. 
As antimicrobial drugs became more widely available, however, the focus moved away from preventive measures. 
This has not only had dire implications for urban dwellers forced to live in unsanitary conditions; it has also contributed to rising drug resistance. 
Today, inadequate access to safe water and sanitation is one of the leading causes of diarrheal illness – a major killer and the reason that hundreds of millions of people take antibiotic treatments each year. 
Most of this consumption is unnecessary, however, as the cause of diarrhea is usually viral; taking antibiotics in these cases only contributes to the development of resistant bacteria. 
Estimates provided to my team suggest that in India, Nigeria, Brazil, and Indonesia alone, nearly a half-billion cases of diarrhea are treated each year with antibiotics. 
Were these four countries to provide their citizens with universal access to clean water and sanitation, this consumption could be reduced by at least 60%. 
Such infrastructure is costly, and all countries face tough budgetary choices. 
But it is one of the best value-for-money investments a middle-income country can make. 
When one controls for income, increasing a population’s access to sanitation by 50% is correlated with more than nine years of additional life expectancy. 
John Snow would have been pleased. 
One of his most significant contributions to the field of health care – the judicious use of data – is confirming the importance of another: investment in hygiene and sanitation. 
Sometimes those who study history are blessed to repeat it. 

Fight Balkan Terrorism Now 
Slobodan Milosevic's trial in the Hague is a timely reminder of just how devastating terroristic violence can be. 
President Bush may or may not have been careless in portraying Iraq, Iran and North Korea as an ``axis of evil,'' but he was correct in pointing out the many hidden links in the global terrorist chain. 
Within that chain Balkan terrorism remains a small but vital link, one which has continued to flourish right under the eyes of NATO and the UN. 
Osama bin Laden established his presence in the region through a series of so-called ``humanitarian" organizations in Bosnia and Albania sometime around 1994. 
Some of the fighters in Bosnia, Kosovo and Macedonia during the Balkan wars included mujahedeen from many countries who had trained in Afghanistan. 
Local terrorist centers were also important. 
Indeed, in Albania terrorists were trained on the property of former Albanian President Sali Berisha near the town of Tropoje. 
Beyond this powerful hint of local support for terrorists, there was an economic infrastructure. 
Two tons of heroin per month passed from Asia to Europe through Kosovo during the rule of Slobodan Milosevic. 
Instead of diminishing since Milosevic's fall, drug smuggling has increased. 
Last year, five tons of heroin was smuggled through the lands now overseen by the United Nations and NATO. 
Interpol says that Albanian gangs now control 70% of heroin trafficking in Germany, Austria, Switzerland and Scandinavia. 
Cooperation over the last few years between the UN Interim Administration Mission in Kosovo (UNMIK), the NATO-led multinational Kosova Force (KFOR), and local governments - boosted by the arrival of a democratic government in Serbia - has cut down the number of terrorist attacks in Southern Serbia and Macedonia. 
Yet this cooperation has failed to stymie the fusion of terrorist and criminal activity. 
Indeed, due to the wealth of terrorist groups engaged in drug dealing, Erhard Busek, the Coordinator of the EU's Stability Pact for the former Yugoslavia, thinks that the chance of peace in Macedonia will be a mere 50% once this winter's snows thaw. 
Calm will not return to the Balkans so long as the UN and NATO fail to destroy extremism's base in Kosovo. 
For the criminal/terrorist heart of the supposedly disbanded Kosovo Liberation Army continues to fortify its power and to expand into Macedonia, Southern Serbia and Montenegro. 
Some less careful commanders of the KLA even talk about the 100,000 Albanians in Greece as an ultimate target for their irredentist goals. 
The goal of a ``Greater Albania,'' has not been forgotten. 
Instead of suppressing the terrorists, they have been treated as part of the solution to instability in the Balkans. 
NATO Secretary General Lord Robertson did call Albanian terrorists in Macedonia ``a bunch of murderous thugs,'' yet those same thugs were holding public press conferences in Pristina under the noses of UNMIK or KFOR. 
So solicitous of the terrorists' desires are some countries that America's representative to the Organization for Security and Cooperation in Europe (OSCE) conducted negotiations with Macedonian politicians and terrorist commanders not in Skopje or Tetovo but in Prizren, a Kosovar city where they are influential. 
Over the last few years Kosovo has been ethnically cleansed of a quarter of a million people. 
One hundred churches and monasteries have been razed. 
Ethnically motivated murders are less common of late, but this cannot be deemed a success so long as Kosovo's non-Albanians remain isolated in enclaves protected by KFOR. 
Recent elections have confirmed the general aversion to violence of the local population. 
But elections are a democratic instrument only if all parties accept their results. 
Real power in Kosovo, however, remains in the hands of those with kalashnikovs. 
The international forces in Kosovo are strong enough to cut the Balkan link in the global terrorist chain. If the will is sufficient, that is. 
The Balkan traffickers in drugs, arms, women, and refugees - the underground criminal trades that fund the terrorists - can be closed down. 
But to do this, the international bodies that control Kosovo must dissolve any organization that relies on violence. 
Known criminals should not sit in Kosovo's Parliament, but in prison. 
The worst of them don't belong in Kosovo's government but on trial with Milosevic in the Hague. 
Fearful of challenging the armed terrorists, the international bodies that govern Kosovo prefer to appease them. 
Frustrated international administrators, indeed, have forced Albania's political parties to form a coalition. 
This, however, may result in eviscerating the power of Dr. Ibrahim Rugova, finally confirmed as President earlier this month, while the extremist's parties transformed from the Kosovo Liberation Army are admitted into government. 
The goal behind the bombing of Yugoslavia, of Security Council resolution 1244 and today's provisional constitutional framework for Kosovo, was the creation of the pre-conditions for the democratic development of a multiethnic society. 
As this remains the only worthwhile and workable goal, the only viable solution to Kosovo's future is a coalition of moderate Albanians and the parties of Kosovo's ethnic minorities. 
But pragmatic cynics have been arguing for three years that such a solution is impossible. 
By appeasing the terrorists in this way, the most powerful states in the world give a green light to terrorists not only in the Balkans but all over the world. 
Kosovo is a territory far smaller than Afghanistan. 
If the world fails to eliminate terrorists from politics in Kosovo, what hope does it have of defeating terrorism elsewhere? 
So, before the anti-terror campaign seeks other terrorist bases to destroy, it should eliminate terror in a place where the UN itself is ruling. 
If not, the UN, NATO and the European Union will discredit themselves as well as the humanitarian values they use to justify their ``humanitarian'' interventions. 

Fighting Biopiracy 
OTTAWA– In April 1999 Larry Proctor, a United States citizen and owner of a seed company, won a patent at the US Patent and Trademark Office (USPTO), claiming a Mexican yellow bean. 
The patent conferred Proctor exclusive rights over a bean variety he called “Enola.” 
That decision is one of the most outrageous examples of biopiracy in the history of intellectual property systems. 
The bean for which Proctor was granted a patent is a farmers’ variety, originally from Mexico and in the public domain for centuries. 
The bean is consumed throughout Mexico and by Mexicans and Mexican-Americans in the US who know it by the names Mayocoba, Canario, or Peruano. 
Although the bean variety existed in publicly available seed collections, it took ten years, hundreds of thousands of dollars, massive protest by farmers and civil society, the intervention of international agencies, and five consecutive legal decisions before the USPTO finally annulled the patent in July 2009. 
By then, Proctor had exercised a complete monopoly over the production, distribution, and marketing of the bean for more than half of the patent’s lifespan. 
The story began in 1994, when Proctor purchased a bag of beans in Mexico. 
He planted the beans, selected seeds from the same plants, and planted them again, repeating the procedure two more times. 
In late 1996, after barely two years, he stated that he had invented a “unique” variety, and applied for a patent. 
As soon as Proctor was awarded the patent, he sued two importers of the yellow beans, demanding that they pay royalties. 
Although the importers knew that Proctor’s invention was ludicrous (because they had been importing the bean from Mexico for years), they had no choice but to accept the patent’s legality, causing 22,000 Mexican farmers and their families to lose 90% of their export incomes in just the first year. 
In January 2000, the Action Group on Erosion, Technology and Concentration (ETC Group, then known as RAFI) published the first denunciation of the Enola patent as technically invalid and morally unacceptable. 
To obtain a patent, an applicant must demonstrate that an invention meets three criteria: newness, non-obviousness (that there is an inventive step), and utility (the invention does what it claims to do). 
In the case of the Enola bean, there was nothing at all new: the yellow bean is the result of centuries of collective work and ingenuity on the part of Mexican farmers and indigenous peoples. 
Moreover, the bean was incorporated into public collections held by INIFAP, the Mexican national agricultural research institute. 
ETC Group took the case to the Center for Tropical Agriculture (CIAT) in Cali, Colombia. 
CIAT is one of the international centers of the Consultative Group on International Agricultural Research (CGIAR). 
The CGIAR system maintains more than 600,000 samples of crop varieties in gene banks, mostly collected from peasant fields. 
Acknowledging this, CGIAR signed a Trust Agreement with the United Nations Food and Agriculture Organization (FAO) in 1994, pledging to keep the seeds in their collections free of any intellectual property claims. 
Joachim Voss, then CIAT’s director, confirmed that the yellow beans were present in CIAT’s gene bank, and that they had originated in Mexico. 
At the end of 2000, CIAT, supported by the FAO, requested that the USPTO re-examine the patent. 
Geneticists then performed genetic fingerprinting on the yellow beans, and concluded that Proctor’s Enola bean was identical to the Mexican beans covered by the Trust Agreement. 
Meanwhile, in 2001, taking advantage of the USPTO’s slow response, Proctor sued 16 small seed companies in Colorado for patent-infringement. 
Only in December 2003 did the USPTO announce its first “non-final” rejection of the patent. 
Proctor appealed, and the USPTO issues its final rejection of the patent in April 2005. 
But that was not the end of the Enola bean issue. 
Proctor requested that the patent examination be continued, submitting additional patent claims and even changing his lawyers several times (allowing more bureaucratic delay). 
In total, the patent was rejected and appealed four times within a decade, until the US Court of Appeals rejected it for the fifth time this summer. 
For more than a decade, a single patent owner disrupted the bean market in the US and Mexico. 
Importers stopped importing not only the yellow bean, but also other Mexican beans, fearing lawsuits. 
Although the patent was eventually rescinded, the Enola case shows how the intellectual property system facilitates the monopolization of public and collective resources, favoring those who can pay expensive lawyers’ fees. 
The Enola patent was wrong from the outset, yet it remained enforceable for half its life, despite the active efforts of international institutions, governments, and civil-society organizations. 
It may be tempting to dismiss the Enola patent as an aberration, but there are hundreds of examples of such biopiracy. 
Mexican beans, South Asian basmati rice, Bolivian quinoa, Amazonian ayahuasca, Indian chickpeas, Peruvian nuña beans, Andean maca – all have been subject to predatory intellectual property claims. 
The Enola controversy is a stark illustration of the danger of patenting life, and the power of patents to block agricultural imports, disrupt or destroy developing countries’ export markets, hijack staple food crops that are the cultural heritage of millennia, plunder collective knowledge, and threaten food security. 
The Enola case demonstrates that being right is not enough: small farmers, indigenous people, and the poor can’t out-last a decade of lawsuits and monopoly. 
Undoubtedly, international institutions and countries in the global South have far more urgent goals than to spend resources suing greedy companies. 
It is high time to question the very existence of an intellectual property system that privileges monopoly ownership over the common good. 

Cancer’s Dangerous Mythology 
GENEVA – This year, World Cancer Day will focus on dispelling damaging myths about the disease. 
The theme – illustrated in the tagline “Cancer – Did you know?” – offers an opportunity to reflect on cancer’s true consequences and enhance global prevention and treatment efforts. 
One prevailing myth is that cancer is primarily a developed-country problem. 
But, while it is true that cancer is pervasive in wealthy countries, people in the world’s poorest countries lose more years of life to the disease. 
As medical advances and technological developments have helped cancer patients in high-income countries to live longer – to the extent that some forms of cancer have effectively become chronic conditions – those in low-income countries continue to die young. 
Besides being unjust, this is deeply tragic. 
Having eluded killers like malaria and AIDS, one should not then be killed prematurely by cancer – especially a form of cancer that could have been prevented with something as simple and as affordable as a vaccine. 
The often-overlooked link between vaccines and cancer highlights a second common misconception: fate alone (and perhaps smoking) determines who gets cancer. 
In fact, one in six cancer cases worldwide is caused by a known infectious agent, with the proportion rising to one-third in some countries in Sub-Saharan Africa. 
The four main culprits are hepatitis B and C (hepB and hepC), human papillomavirus (HPV), and Helicobacter pylori, which are collectively responsible for 1.9 million cases of liver, cervical, and gastric cancer annually. 
Cervical cancer now kills more women than childbirth, claiming a life every two minutes. 
Of the 275,000 women who die of cervical cancer annually, 85% live in the world’s poorest countries. 
After all, cervical cancer tends to target the most vulnerable in particular, such as women infected with HIV. 
If left unchecked, the number of cervical cancer deaths is set to rise to 430,000 annually by 2030. 
Then there is hepB, which is over 50 times more infectious than HIV and often passed from mother to child before or shortly after birth, increasing the likelihood of liver cancer later in life. 
An estimated two billion people alive today have been infected with hepB, while 350 million people are chronically infected. 
Of these, roughly one-quarter will die from hepB-related liver cancer or cirrhosis (a consequence of chronic liver disease). 
The good news is that powerful tools are available to avert many of these deaths. 
Existing HPV vaccines can prevent up to 70% of cervical cancer cases, and new vaccines are in the pipeline that will improve this record further. 
Likewise, hepB vaccines are 95% effective at preventing infection and its chronic consequences. 
Vaccines protecting against Helicobacter pylori and hepC are in development (although the latter is proving particularly challenging). 
Even an Epstein-Barr virus vaccine, which would protect against some kinds of lymphoma, is achieving promising results. 
But paying for and delivering these vaccines to the most vulnerable citizens of low-income countries poses a significant challenge. 
Although the World Health Organization (WHO) has recommended including the hepB vaccine in routine immunization since 1992, its high price initially hindered its uptake in some developing countries. 
More recently, the same problem threatened to hinder the adoption of HPV vaccines. 
But the GAVI Alliance intervened to ensure that this is no longer a concern with hepB, and it is unlikely to occur with HPV. 
Since its launch in 2000, the GAVI Alliance has sought to increase access to life-saving vaccines for the world’s poorest children. 
In partnership with the World Bank, the WHO, UNICEF, and the Bill & Melinda Gates Foundation, it has used innovative financing tools to raise funds for global immunization programs, while working with industry to lower the prices of vaccines. 
By including the hepB vaccine as part of a pentavalent (five in one) vaccine, the Alliance has already facilitated its delivery to children in 70 countries as part of routine immunizations. 
The Alliance is now working to make the HPV vaccine available to more than 30 million of the world’s poorest women and girls by 2020; as part of this effort, and coinciding with World Cancer Day, it has launched demonstration programs in eight developing countries. 
A growing body of evidence shows that vaccines’ benefits extend beyond preventing illness and death. 
They have also been found to aid infants’ cognitive development and children’s educational attainment, thus boosting countries’ economic-growth potential. 
In the fight against cancer, medical advances can shave precious percentage points off of mortality rates, which implies that improved access to vaccines can have a massive impact, slashing the number of future cases in developing countries for just a few dollars per dose. 
People in rich countries are undoubtedly familiar with the maxim that prevention is better than cure. 
But, given the ready availability of vaccines in developed countries, the focus of prevention efforts has shifted to changing cancer-causing lifestyles. 
Meanwhile, people in developing countries lack access to simple and effective tools for preventing several of the most common cancers. 
Improving access to vaccines is crucial to addressing this global inequity and reducing the widening gap between rich and poor. 
This requires, first and foremost, dispelling the myth that one cannot “catch” cancer. 

Climate Change on the Menu 
VITERBO, ITALY – When we think about winning the fight against climate change, most people concentrate on reducing greenhouse-gas emissions from cars, trucks, and other machines powered by fossil fuels. 
But while these emissions sources are certainly worthy of our attention, another culprit receives far less than it deserves: our food. 
Farm and food sustainability are important pieces of the climate-change puzzle, but at the moment, climate-sustainable diets are not on the menu. 
In the developing world, some 821 million people currently suffer from hunger. 
Meanwhile, rich countries waste enough food every year to feed 750 million people. 
Here is where the connection between food and climate change comes in: as people climb out of poverty – as many are – they demand more meat and dairy. 
This trend has grave implications for agriculture’s ecological footprint. 
Animals consume more food than they produce. 
Cows release large volumes of heat-trapping methane. 
And clearing land for pasture releases carbon dioxide at a staggering rate. 
If the beef and dairy industries were a country, it would be the world’s third-largest emitter of greenhouse gases, behind only the United States and China. 
Fortunately, there is a solution: eat less meat and more fruit and vegetables. 
Reducing red meat consumption to twice per week would reduce global farmland by three-quarters – an area equivalent in size to the US, China, the European Union, and Australia combined. 
Doing so would also make nutritional sense. 
At the moment, livestock farming uses about 80% of the planet’s farmland but produces just 18% of our calories. 
Worst of all, animal farming is a threat to our water supply; according to the Stockholm International Water Institute, the world could run out of fresh water by 2050 unless people reduce their consumption of animal products to just 5% of their daily calorie requirements. 
Something must change, and fast; celebrities certainly understand this. 
Climate guru and former US Vice President Al Gore, who comes from a family of cattle ranchers, is now vegan, as is his former boss, US President Bill Clinton. 
Tennis stars Serena and Venus Williams, pop singer Beyoncé, and many others are also reducing their meat consumption. 
Meanwhile, schools all over the world are adopting “Meat Free Mondays” to teach students about sustainability. 
Even McDonald’s has begun offering McVegan burgers in Scandinavia, apparently to rave reviews. 
A recent study published by the Economist Intelligence Unit and the Barilla Center for Food and Nutrition Foundation (BCFN) found that official policies toward sustainable food and food waste are also changing. 
In 2016, for example, France became the first country in the world to prohibit grocery stores from wasting food. 
Italy has adopted a similar law. 
Apartment dwellers in Denmark, where Prime Minister Lars Løkke Rasmussen has put food waste on the political agenda, throw out 25% less food than they did five years ago. 
The SU-Eatable Life project, a three-year European Commission initiative that I am leading in partnership with BCFN – aims to demonstrate that dietary changes can have a significant ecological effect. 
Data show that by eating less meat and wasting less food, European consumers could reduce water consumption by two million cubic meters and lower CO2 emissions by about 5,300 tons every year. 
So, what can each of us do to support these efforts? 
For starters, we should consume more vegetables and grains, which would be good for the planet’s health and our own. 
A 2017 French study found that vegetarians are often healthier than meat eaters because they eat a more varied diet and consume fewer calories. 
We should eat according to the BCFN’s Double Food and Environmental Pyramid, which recommends foods that are high in nutritional value and less damaging to the environment; plant-based proteins are the best. 
In fact, in a world dominated by vegans, agricultural greenhouse-gas emissions would be 70% lower than they are today. 
That would be a welcome mouthful indeed. 

When Fighting Fake News Aids Censorship 
WASHINGTON, DC – Many media analysts have rightly identified the dangers posed by “fake news,” but often overlook what the phenomenon means for journalists themselves. 
Not only has the term become a shorthand way to malign an entire industry; autocrats are invoking it as an excuse to jail reporters and justify censorship, often on trumped-up charges of supporting terrorism. 
Around the world, the number of honest journalists jailed for publishing fake or fictitious news is at an all-time high of at least 21. 
As non-democratic leaders increasingly use the “fake news” backlash to clamp down on independent media, that number is likely to climb. 
The United States, once a world leader in defending free speech, has retreated from this role. 
President Donald Trump’s Twitter tirades about “fake news” have given autocratic regimes an example by which to justify their own media crackdowns. 
In December, China’s state-run People’s Daily newspaper posted tweets and a Facebook post welcoming Trump’s fake news mantra, noting that it “speaks to a larger truth about Western media.” 
This followed the Egyptian government’s praise for the Trump administration in February 2017, when the country’s foreign ministry criticized Western journalists for their coverage of global terrorism. 
And in January 2017, Turkish President Recep Tayyip Erdoğan praised Trump for berating a CNN reporter during a live news conference. 
Erdoğan, who criticized the network for its coverage of pro-democracy protests in Turkey in 2013, said that Trump had put the journalist “in his place.” 
Trump returned the compliment when he met Erdoğan a few months later. 
Praising his counterpart for being an ally in the fight against terrorism, Trump made no mention of Erdoğan’s own dismal record on press freedom. 
It is no accident that these three countries have been quickest to embrace Trump’s “fake news” trope. 
China, Egypt, and Turkey jailed more than half of the world’s journalists in 2017, continuing a trend from the previous year. 
The international community’s silence in the face of these governments’ attacks on independent media seems to have been interpreted as consent. 
In Turkey, the world’s top jailer of journalists two years in a row, the erosion of free speech has been particularly swift. 
Since a failed coup attempt in 2016, Turkey’s courts have processed some 46,000 cases involving people accused of insulting the president, the nation, or its institutions. 
Each of the 73 journalists currently behind bars is being investigated for, or charged with, anti-state crimes. 
The most common charge against reporters is belonging to, aiding, or propagandizing for an alleged terrorist organization. 
Vaguely worded laws that conflate reporting about terrorism with supporting it provide cover for regimes intent on preventing unfavorable news coverage. 
For example, attempting to write about the Kurdistan Workers’ Party (PKK) in Turkey, the Muslim Brotherhood in Egypt, or Uighurs in China can quickly land reporters in jail for harboring terrorist sympathies. 
Nearly three-quarters of the 262 journalists in prison around the world are being held on anti-state charges, according to the Committee to Protect Journalists’ most recent survey. 
Even when journalists aren’t arrested, autocrats are increasingly invoking the claim of “fake news” to discredit legitimate reporting. 
And here, ironically, efforts by some Western governments to sanitize social media of fake or violent material have played into the autocrats’ hands. 
While the goals of these cleansing efforts – to prevent the type of electoral interference that Russia has perfected, for example – are laudable, an unintended consequence has been censorship of honest journalists reporting on real stories in some of the world’s most dangerous places. 
Consider what happened last year to video coverage of the civil war in Syria. 
In an effort to rein in extremist content, YouTube removed hundreds of videos related to the conflict, including many posted by Shaam News Network, Qasioun News Agency, and Idlib Media Center – all independent news outlets documenting the disaster. 
Similarly, Facebook closed accounts of individuals and organizations that were using the platform to document violence against Muslim Rohingya in Myanmar, a crisis that the United Nations has called a “textbook example of ethnic cleansing.” 
Facebook said it acted in response to violations of the platform’s “community standards.” 
And in Egypt and Syria, Twitter has blocked citizen journalists from reporting on human-rights abuses, according to journalists whose accounts have been closed. 
Twitter’s censors have even hit the heart of Europe; in January, a German satire magazine was blocked from the platform after the Bundestag enacted legislation imposing fines of up to €50 million ($61 million) on social media firms that fail to remove illegal content in a timely manner. 
Other European countries are considering similar measures to compel Internet companies to battle misinformation and extremism. 
Laws meant to curb hate speech, violence, or “fake news” may be well intentioned, but their implementation has been sloppy, with few mechanisms to ensure accountability, transparency, or reversibility. 
Governments are outsourcing censorship to the private sector, where maximizing shareholder value, not upholding journalistic freedom, drives decision-making. 
Leaders of the world’s democracies must resist the illiberal assault on independent news organizations, and that means rethinking loosely crafted content laws that are vulnerable to abuse. 
A free, vibrant media is vital to the functioning of a healthy society, and misinformation can undermine it. 
But official remedies that end up silencing those reporting the news are worse than the disease. 

 

Fighting Terror Among the Believers 
The flames of Islamic fundamentalism are not confined to the Middle East and Central Asia. 
Indonesia is increasingly in the news because of its large Muslim population, the rise of fundamentalist rhetoric, and purported connections to international terrorism. 
The emergence of violent Muslim vigilante groups employing jihadist rhetoric and mobilizing followers for jihad is one of the most conspicuous new phenomena in Indonesian Islam. 
The bomb blasts that rocked Kuta, Bali near midnight last October 12th profoundly effected almost every aspect of Indonesian life. 
After years of official denial, that horrifying incident triggered awareness that terrorism does exist in Indonesia and that Indonesia's home grown fanatics are connected to a global terrorist network. 
Soon after the Bali bomb conspiracy was uncovered, earlier explosions that rocked various parts of the country were reexamined. 
Not all of them were definitively connected, but the renewed investigations revealed ties between a number of disparate terrorist groups. 
The perpetrators of these bomb blasts are now understood to belong to linked, hard-line Islamist organizations. 
Recently, the International Crisis Group, a Brussels-based NGO, revealed the links between Islamist radicalism in Indonesia, and international terrorism. 
The document, "Al-Qaeda In Southeast Asia: The Case Of The "Ngruki Network," is an exhaustive review of reliable public data, and identifies a handful of individuals with possible direct or indirect links with Al-Qaeda. 
The good news, however, is that the ICG finds no evidence of an extensive Al-Qaeda network in Indonesia. 
The evidence of international penetration of Indonesian radical groups is quite limited. 
Nevertheless, Indonesians would be mistaken in thinking that they have nothing to fear. 
The ICG report was narrowly conceived and intended to focus on a single issue, namely the evidence for an Al-Qaeda presence in Indonesia. 
Some important questions remain. 
Is radical Islamism ratcheting up its influence in post-Suharto Indonesia? 
Are elements within the military continuing to support radical Islamist militias opportunistically, as they began to do in recent years? 
Are elements of the political elite appealing to radical Islamist sentiment, as a way of leveraging their power? 
Are moderate Islamic intellectuals facing increasing criticism and challenge? 
Unfortunately, the answer to all these questions is yes. 
The stakes for Indonesia are high. 
When the United States declared war against terrorism, Bush administration officials characterized Indonesia as a strategic partner in the struggle against terrorism. 
Paul Wolfowitz, Deputy Secretary of Defense and former US Ambassador to Indonesia, said that the US must bring new seriousness to helping Indonesia in its quest to secure a stable democracy and prosperous economy. 
But Indonesia can do so only if it demonstrates an unrelenting commitment to anti-terrorist policies. 
Foreign investment is already at its nadir, due to the lingering political crisis following the fall of the Suharto dictatorship, and to doubts about the soundness of the country's institutional and legal capacity. 
Backtracking on official resolve to fight terrorism would hardly convince international business to start investing in Indonesia again. 
The authorities have natural allies in the large, moderate Muslim organisations, especially the Nahdhatul Ulama and the Muhammadiyah, that lead Indonesian civil society. 
These groups are fed up with how radicals have smeared Islam in Indonesia, and they are beginning to work together to challenge the extremists head on. 
This is not to say that they agree with the American critique of Indonesian policy. 
But these two prominent, national membership organizations may succeed in dampening Islamic militancy where the government, afraid of waging the battle it must fight, has failed dismally. 
The real conflict ignited by the terrorist attacks is not between Islam and an American-led, Judeo-Christian "crusade." 
The greater challenge is the ongoing struggle within the worldwide Islamic community, the Ummah, between moderate, progressive Muslims on the one hand and fundamentalist extremists on the other. 
This battle for the hearts and minds of believers will be fought on two fronts: the first is theological and educational, while the second concerns socioeconomic issues and the civil society agenda. 
In both cases the experiences of Indonesia will be critical. 
In essence, extremism and fundamentalism can be countered only from within the faith. 
No amount of American intervention will turn the tide against bigotry and ignorance. 
In fact, too much meddling by Westerners could radicalize the community even more. 
Moderate believers must look to examples such as Indonesia, where Islam has encountered and interacted with new and alien forces. 
In Indonesia (and to a lesser extent Malaysia), science and technology, commerce and modern management as well as the all-important challenges of democracy, human rights, and gender equality are being tackled head-on in authentic terms of Muslim discourse. 
Finally, moderate Muslims must explore Indonesia's vibrant and indigenous Islamic traditions. 
The country's rich vein of Islamic scholarship has embraced new ideas and sought to interpret the Koran in a manner that reveals its compatibility with democracy, human rights, gender equality and social justice. 
Indonesians have the tools to thwart radicals' efforts to usurp Islam. 
The fight will not be easy, but it can be won. 

Fighting Terrorism Democratically 
Bombings in London and Turkey have brought to the fore the old ideas that authoritarian regimes are better equipped than democracies to combat terrorism, and that such attacks are the price we pay for liberty. 
For some, that is a price worth paying; for others, the costs seem too high. 
But a look at the record shows that democracies possess more effective weapons to fight terror than do authoritarian regimes. 
Indeed, it is when democracies abandon their ethics and fail to resist the authoritarian temptation that they become weaker. 
Of course, the logic behind calls to restrict our freedoms has a simplistic appeal: extremists use our freedoms to commit their crimes, so preventing the abuse of freedom requires curtailing freedom’s scope. 
The mistake, however, is to assume that open societies are more permissive and vulnerable to terrorism than those who live under authoritarian regimes. 
One need only look at today’s Russia, or recall Algeria in the 1990’s. 
True, democracy and the rule of law provide no foolproof security guarantee. 
But such a guarantee is a mirage anyway, whereas respect for basic freedoms and due process when repressing terrorism is a powerful instrument to isolate extremists and diminish their legitimacy in the eyes of those that might identify with their cause. 
It is because Britain is a democracy that respects the rule of law that it has been able to mobilize vast sectors of its Muslim community. 
By contrast, authoritarian regimes’ repression of civilians, and their non-differentiation between civilians and killers, provides extremists with fertile recruiting conditions by discrediting the government in the eyes of a significant part of its population. 
An undifferentiated approach towards political Islamism that fails to distinguish between those who reject violence and those who resort to terror only facilitates the extremists’ work, for they emerge as champions of causes that do not reflect their true goals. 
Russia provides conclusive evidence of the impotence of authoritarian violence and disregard for the rule of law. 
President Vladimir Putin undertook a scorched-earth policy in Chechnya, driving many Chechen nationalists straight into the extremists’ arms. 
Terrorist attacks on Russia did not cease or decline. 
Indeed, recall the terrorism in Beslan in September 2004, in which a single attack on a school killed over 330 people. 
Iraq also is demonstrating the limits of illegitimate violence when combating terrorism. 
The Bush administration now seems to realize this. 
It would be a mistake to believe that the deaths of thousands of civilians, along with arbitrary imprisonment and torture, do not contribute to the spread of terror in Iraq. 
After all, torture victims are the best possible advertisement for terrorist recruitment. 
When it comes to fighting terrorism, moreover, democracies are more effective both politically and operationally, particularly in terms of their intelligence services. 
Intelligence forces in authoritarian states are either highly centralized or tend to become autonomous power centers. 
In either case, they are subject to no public scrutiny and accountability. 
As a result, they lose their ability over time to evaluate critically their own actions and errors. 
Intelligence services in democratic contexts usually have oversight mechanisms that serve to limit abuses of power, and to guarantee effective action by punishing top officials that fail to do their jobs properly. 
In the United States, a powerful bi-partisan Senate committee directly monitors the intelligence services. 
Its report on the inability of the intelligence services, notably the CIA and the FBI, to prevent the September 11, 2001, terrorist attacks also contained a series of recommendations for restructuring these services to render them more effective. 
Europe’s response to terror requires, first and foremost, strengthening its intelligence services so that they can detect and dismantle terrorist cells while respecting basic rights and due process. 
It also requires greater coordination among all the European Union’s member states and their allies and partners. 
At the same time, the rule-of-law approach to fighting terrorism must be a pillar of European cooperation with third countries, namely with those of the Mediterranean, or with Pakistan, thereby contributing to a security culture that is conducive to democratization. 
Deepening democracy in turn means allowing full civic participation, including non-violent Islamic groups. 
The right to public speech and peaceful assembly must be defended for those who feel marginalized and indignant at what they – and most Europeans – view as injustices committed against the Palestinians, the Chechens, and the Iraqis. 
Last, but not least, combating identity-based extremism calls for a greater capacity to integrate all those who live within the EU. 
The response to terrorism should be to reaffirm the value of the rule of law over arbitrary repression, and of the diversity that is the hallmark of Europe’s cities, particularly London and Paris, but increasingly many others across the Union. 
We cannot – indeed, must not – cede to terror by building walls around and within our societies. 
The best response to intolerant extremism is to cultivate an open and pluralistic society that treats all those who live within its borders as full citizens. 
Europe turned diversity into one of its constitutional traits, and this is why it has had such an impact on the world. 
Protecting that essence is the best way to honor the memory of the victims of terror, be they from London, Sharm el-Sheik, Madrid, Casablanca, or New York. 

Fighting the "New" Terrorism 
As the US presidential heats up, critics argue that President George W. Bush's war in Iraq has made the problem of combating terrorism worse. 
It is a serious charge, because the world needs a broader strategy against terrorism. 
Terrorism is nothing new, nor is it a single enemy. 
It is a longstanding method of conflict frequently defined as deliberate attack on the innocent with the objective of spreading fear. 
The attacks on New York and Washington of 2001 were dramatic escalations of an age-old phenomenon. 
Terrorism today, however, is different from what it was in the past. 
Nowadays, instruments of mass destruction are smaller, cheaper, and more readily available. 
Cellular phones were used as timers in the attacks in Madrid last March. 
Hijacking an airplane is relatively inexpensive. 
Finally, the information revolution provides inexpensive means of communication and organization that allow groups once restricted to local and national police jurisdictions to become global. 
Al Qaeda is said to have established a network in fifty or more countries. 
Changes have also occurred in the motivation and organization of terrorist groups. 
Terrorists in the mid-20th century tended to have relatively well-defined political objectives, which were often ill-served by mass murder. 
Governments supported many covertly. 
Toward the century's end, radical groups grew on the fringes of several religions. 
Most numerous were the tens of thousands of young Muslims who fought against the Soviet occupation of Afghanistan, where they were trained in a wide range of techniques and many were recruited to organizations with an extreme view of the religious obligation of jihad . 
These technological and ideological trends increased both the lethality and the difficulty of managing terrorism. 
Because of the unprecedented scale of Al Qaeda's attacks, the focus is properly on Islamic extremists. 
But it would be a mistake to limit our concern solely to Islamic terrorists, for that would ignore the way that technology is putting into the hands of deviant groups and individuals' destructive capabilities that were once limited primarily to governments and armies. 
Deviant individuals and groups exist in all human societies, and they are now empowered in ways that were once unthinkable. 
Think, for example of Timothy McVeigh, who bombed the federal building in Oklahoma City in 1995, or the Aum Shinrykio cult that released poison gas in the Tokyo subway system the same year. 
Lethality has been increasing. 
In the 1970's, the Palestinian attack on Israeli athletes at the Munich Olympics and attacks by groups like the Red Brigades galvanized world attention at the cost of dozens of lives. 
In the l980's, the worst terrorist incident killed 300 people. 
The attacks on America of September 2001 cost several thousand lives. 
This escalation occurred without using weapons of mass destruction. 
If one imagines a deviant group in some society gaining access to biological or nuclear materials, it is possible terrorists could destroy millions of lives. 
To kill so many people in the 20th century, a Hitler or Stalin required the apparatus of a totalitarian government. 
It is now easy to envisage extremist groups and individuals killing millions without government help 
Politics has plagued efforts to agree on a common definition of terrorism at the United Nations. 
Some skeptics argue that one man's terrorist is another man's freedom fighter, and that treating suppression of terrorism as a global public good is thus merely the hypocrisy of the powerful trying to disarm the weak. 
That need not be the case. 
Not all struggles for national liberation turn to deliberate killing of innocents. 
Deliberate killing of non-combatants (in war or not) is condemned by most major religions, including Islam. 
Such behavior is unacceptable whether it is carried out by the powerful or the weak. 
While any definition of terrorism has problems at the margins, the core of terrorism is clear enough to permit efforts to de-legitimize it. 
Indeed, many countries are parties to UN conventions that commit them to combating aspects of terrorist behavior, even though the UN has not agreed on a single formal definition. 
Today, some states harbor terrorists in order to attack their enemies or because they are too weak to control powerful groups. 
If a campaign to suppress terrorism is based on broad coalitions that focus on de-legitimizing attacks on innocent non-combatants, it has some prospect of success. 
Indeed, one lesson of the efforts since 2001 is that there is no way to avoid broad cooperation. 
In that sense, the metaphor of war - with its emphasis on military force is - misleading. 
The metaphor of war was understandable in the aftermath of the 2001 attacks, but creates as many problems as it solves. 
How long will the war last and how does it relate to civil liberties and alliances? 
Bombing is not an option for fighting terrorist cells in Hamburg, Singapore, or Detroit. 
Only close civilian cooperation in intelligence sharing, police work across borders, tracing financial flows, and working to pre-clear cargo manifests and passenger lists can cope with such a threat. 
Countries cooperate out of self-interest, but a country's soft or attractive power, not only its military might, affects the degree of cooperation. 
That is why critics argue that Bush's policy in Iraq was a mistake. 
It squandered American soft power, diverted attention from Afghanistan and Al Qaeda, and created a danger that Iraq may become a haven for terrorists. 
But critics of Bush at home and abroad must also realize that, notwithstanding past mistakes, pursuing a common strategy is essential, because terrorism is here to stay. 

Fighting the Aids Pandemic 
CAMBRIDGE: After a wasted decade, the world is rousing itself against the AIDS pandemic sweeping through the world’s poorest countries, especially in Africa and South-Asia. 
The pandemic has claimed 19 million lives, and created 13 million orphans. 
34 million more people live with the HIV virus that causes AIDS; virtually all are marked for early death. 
While first identified in the US in the early 1980s, Aids is now concentrated in poor countries: 25 million people suffer from it in Africa; 6 million more in Asia. 
In parts of Southern Africa more than 20% of adults are afflicted. 
Poor countries suffer more than rich countries for multiple reasons. 
Poverty leads to lower comprehension of the disease, with individuals less likely to protect themselves by using condoms. 
Poverty makes medical treatment expensive, so poor people with AIDS often hide their disease because there is no point in having tests if treatment doesn’t follow. 
Poverty also induces husbands to work away from home as migrant laborers, creating an environment in which sex with multiple partners is more likely. 
Poverty also renders women powerless to reject unwanted sexual advances from men who may infect them. 
Even the biology of the disease may be different. 
HIV/AIDS may be more readily transmitted in Sub-Saharan Africa because of the prevalence of other diseases, especially other sexually transmitted diseases, that facilitate the transmission of HIV. 
The genetic characteristics of HIV in Southern Africa are also different from HIV in America and Europe. 
Some scientists believe Africa’s genetic sub-type is more easily transmitted. 
HIV/AIDS is the greatest pandemic in modern history. 
Because it is concentrated in poor countries, it seems, the world has shrugged. 
The World Bank provides only a few millions dollars, not the billions needed to combat the disease in Africa. 
It’s almost as if China possessed a cure for the bubonic plague in the 14th century, but decided to stand by and watch as Europe succumbed to the Black Death. 
It is time to shift from inaction to urgent combat against the pandemic, backed by billions of dollars in assistance from rich countries. 
While no overall action plan exists yet, the outlines of such a plan have taken shape. 
A proper plan of action should have three components: prevention, treatment, and new research and development towards medical approaches to controlling the disease. 
Prevention is mostly the responsibility of poor countries. 
Their leaders should speak out publicly and repeatedly against the disease, helping educate their people about how to reduce risky behavior. 
Special programs to induce prostitutes to use condoms have helped to reverse the epidemic in Thailand; similar approaches are needed in Africa. 
Rich countries must provide urgent funding for medical treatment of those with HIV/AIDS. 
This includes: funds to stop the transmission of AIDS from mothers to infants; funds to help fight infections such as tuberculosis that accompany AIDS; and with good program design, even funds for anti-retroviral therapies. 
With specially designed, low-cost combinations of drugs, and with the drugs provided to the poorest countries at the lowest possible production costs, it may be possible to extend ARV therapies to even very poor countries at an acceptable price. 
The third step must be an expanded program of research and development into new and more effective approaches to controlling the disease. 
The most promising answer for the long term is a vaccine to protect against the disease. 
Recent breakthroughs in basic science give hope that a vaccine can be developed within a decade, if the billions of dollars of research and development funds are mobilized by both public and private sectors. 
A full-fledged fight against AIDS in Africa might require support from rich countries of around $5 billion per year for this three-pronged strategy of prevention, treatment, and research. 
Perhaps $4 billion is needed for prevention and care, and $1 billion for research specifically directed at the disease in Sub-Saharan Africa (in addition to more general AIDS research already underway). $5 billion amounts to a mere $5 per person per year, since there are 1 billion people living in rich countries that can donate. 
At such a modest cost, and with the stakes so high, it is hard to imagine the world failing to act decisively. 
At the G-8 summit in Japan last week, rich-country leaders pledged action. 
They agreed to convene in Japan by the end of the year to chart a practical plan of action. 
For the sake of humanity, let us insist that rhetoric is turned into real financial support to organize efforts to save millions of lives in the poorest countries. 

Fighting the French Exception 
Europe's attention nowadays is rightly focused on enlargement and on the constitution that is currently being worked out between the EU's member states. 
But the outcome of several Gallic skirmishes with the European Commission will be no less important in determining the fate of the new and enlarged Europe. 
France has unilaterally chosen to ignore the Stability and Growth Pact by running a predicted deficit well above the 3% of GDP limit. 
The French like to acclaim the rational rigour of their thinking, but where budgets are concerned, Descartes is out and obfuscation is in. 
France was among the leading critics of Ireland, when, in 2000, the Irish government reduced its budget surplus, which then stood at 4% of GDP, by a mere 0.5%. 
Other countries have violated the Stability Pact, but France is the first to do it with smirking, open defiance. 
None of this should surprise anyone. 
France is simply applying to EU rules its engrained habit of viewing its own culture as exceptional. 
For example, France consistently vetoes reforms of the EU Common Agricultural Policy. 
As even children know, the CAP is a handsome and totally undeserved present to wealthy European (especially French) farmers at the expense of the struggling farmers of developing countries and EU consumers. 
France is also trying to return to old policies of bailing out unprofitable private companies on the verge of collapse with taxpayers' money. 
The EU Commissioner for Competition Policy, Mario Monti, cannot loose this battle: he needs the support of those who believe in markets and equal treatment for all. 
Here the story is simple. 
The French government plans to bail out Alstom, a company that developed a number of high-tech products, including the TGV, the French fast train, but recently went into bankruptcy. 
The French government claims that it will never back down from its plan to rescue Alstom, a plan with all the familiar dirigiste motivations: maintaining employment, protecting investors, etc. 
In addition, since Alstom is a high tech firm, the French government plays the research and development card, arguing that investment in R&D is good for growth. 
Saving Alstom by nationalizing the company is obviously wrong. 
The company consists of many different parts, some profitable, others bankrupt: the obvious thing to do is to break it up. 
The profitable parts, such as the TGV, will easily find buyers; the unprofitable plants should be closed. 
French taxpayers' money is better spent on temporary benefits for displaced workers than on subsidies to keep an unprofitable plant alive. 
It is important that the European Commission not allow France to carve out special rules for itself in competition policy, as it appears to be doing with its budget deficits. 
The Commission must strike down public aid to private companies in France as it strikes such subsidies down in any other EU member state. 
The Commission has already achieved some success on this front, notably forcing Germany to cancel government guarantees on public banks. 
Alstom in particular and France in general should not be an exception and should be held to the same standards. 
If the Commission fails to act, the EU will look even more like a playground for French public servants. 
France has already taken a leading role in EU foreign policy, with Foreign Minister Dominique de Villepin looking and acting more and more like the foreign minister of Europe. 
At the same time France violates key rules of common economic policy and public aid to private companies. 
Will the European Commission lose what remains of its credibility and end up looking like a minor Parisian arrondissment ? 
A defeat on Alstom would have profound consequences in Europe--and not only for competition policy. 

Fighting Words and False Promises 
For almost five years, the â€œwar on terrorâ€ has proved to be a false metaphor that has led to counterproductive and self-defeating policies. 
A misleading figure of speech has been applied literally to unleash a real war on several fronts, including Iraq, Gaza, Lebanon, Afghanistan, and Somalia. 
Thousands of innocent civilians have been killed, enraging millions around the world. 
Yet al-Qaeda has not been subdued, as was shown by the recent plot to blow up United States-bound commercial flights from London. 
That plot, which could have claimed more victims than the 9/11 attacks, was foiled by the vigilance of the British intelligence authorities. 
Clearly, it wonâ€™t be the last. 
Unfortunately, the American public accepted uncritically the war metaphor as the obvious response to 9/11. 
Indeed, even now, when it is widely admitted that the invasion of Iraq was a blunder, the â€œwar on terrorâ€ remains the frame into which American policy has to fit. 
Most Democratic politicians, too, subscribe to it for fear of being branded as weak on defense. 
But continuing support for the war on terror makes it no less self-defeating. 
By its very nature, war creates innocent victims, and this even more likely when it is waged against terrorists, because terrorists tend to keep their whereabouts hidden. 
The deaths, injuries, and humiliation of civilians generate rage and resentment among their families and communities, in turn fueling support for terrorists. 
Moreover, terrorism is an abstraction that lumps together all political movements that use terrorist tactics. 
Al-Qaeda, Hamas, Hezbollah, and the Sunni insurrection and the Mahdi army in Iraq are very different forces, but President George W. Bushâ€™s global war on terror prevents us from differentiating between them and dealing with them accordingly. 
It inhibits much-needed negotiations with Iran and Syria, because they are states that support terrorist groups. 
At the same time, as the British have shown, groups like al-Qaeda are best dealt with by good intelligence. 
The war on terrorâ€™s emphasis on military action merely increases the terrorist threat and makes the task of the intelligence agencies more difficult. 
Osama bin Laden and Ayman al-Zawahiri are still at large, and we need to focus on finding them if we are to prevent attacks like the one foiled in England. 
Finally, the war on terror drives a wedge between â€œusâ€ and â€œthem.â€ We are innocent victims; they are perpetrators. 
While we seem not to notice that we also become perpetrators in the process, much of the rest of the world does notice â€“ a gap in perception that has severely weakened Americaâ€™s international credibility and standing. 
Taken together, these factors ensure that the war on terror cannot be won. 
On the contrary, an endless war waged against an unseen enemy is doing great damage not only to our authority and prestige in the world, but also to our own society. 
It has led to a dangerous extension of executive powers, tarnished our adherence to universal human rights, and inhibited the critical process that is at the heart of an open society. 
It has also cost a lot of money. 
Most importantly, the war on terror has diverted attention from other urgent tasks that require American leadership, such as finishing the job that we correctly began in Afghanistan, addressing the looming global energy crisis, and dealing with nuclear proliferation. 
With American influence at low ebb, the world is in danger of sliding into a vicious cycle of escalating violence. 
We can escape it only if we Americans repudiate the war on terror as a false metaphor. 
If we persevere on our current course, the situation will continue to deteriorate. 
It is not our will that is being tested, but our understanding of reality. 
It is painful to admit that our predicaments are brought about by our own misconceptions. 
But not admitting it is bound to prove even more painful in the long run. 
The strength of an open society lies in its ability to recognize and correct its mistakes. 
That is the test that now confronts us. 

Can Fillon Beat Le Pen? 
CAMBRIDGE – In the French Republican party’s presidential primary on Sunday, François Fillon soundly defeated frontrunner Alain Juppé, winning close to 67% of the votes. 
Two weeks ago, a landslide victory for the apparent underdog seemed out of the question. 
It had long been expected that Juppé, the mayor of Bordeaux and a former prime minister under President Jacques Chirac, would beat the other frontrunner, former President Nicolas Sarkozy, in a second-round runoff. 
Instead, Fillon, a former prime minister under Sarkozy, emerged from the first round with a commanding lead, winning 44% of the vote. 
The outcome was a humiliating one for Sarkozy, who received just a little over 20% support, and effectively ended his political career. 
For many observers, the vote invoked the specter of June’s Brexit referendum and US President-elect Donald Trump’s victory earlier this month. 
Opinion polls placing Fillon as a distant third were proven wrong, partly because many voters seem to have made up their minds just days before the vote. 
Social media were also credited, again, with playing a key role. 
In the last debates before the vote, Fillon presented himself as a credible alternative to Juppé and Sarkozy. 
With incumbent President François Hollande’s approval ratings below 5% – the lowest ever for a French president – the big question now is whether Fillon can beat far-right National Front leader Marine Le Pen in the second round of the presidential election in May 2017. 
Juppé was seen as a sufficiently “soft” candidate, who would provide an alternative to Le Pen for left-wing voters. 
Fillon, however, is much further to the right than Juppé, which means that left-wing voters might not see much difference between him and Le Pen, and could demand that a center-left third candidate enter the fray. 
One contender is the centrist Emmanuel Macron, who says he will run but refuses to stand in the Socialist Party primary this January. 
Without major-party backing beyond his own En Marche! movement, however, Macron is unlikely to be able to muster the support needed to win the presidency (he currently has just 14% support). 
And, as a banker-turned-reformist economy minister under Hollande, Macron is an ideal target for Le Pen’s anti-elitist, anti-European rhetoric. 
Beyond Macron, the left is struggling to put forward a credible candidate. 
Holland’s reelection chances are dismal; his loyal prime minister, Manuel Valls, is expected to announce his own candidacy this week, but is polling only marginally better than Hollande, at 9%. 
That leaves only the far-left Jean-Luc Mélenchon (13%) and the photogenic but waffling Arnaud Montebourg, whom Macron succeeded as economy minister. 
If no leftist candidate makes it to the second round, voters on the left could cast their votes for “Republican unity,” as they did in 2002, when they handed Chirac a landslide victory over Le Pen’s father, Jean-Marie Le Pen. 
Leftist voters would have preferred Juppé, and will likely tolerate Fillon, but they comprised only 15% of total voters in the first round of the Republican primary, so they may not have the same impact in 2017 as they did in 2002. 
Fillon’s political base is dominated by provincial, retired Catholic men, who turned out in force for both rounds of the primaries. 
Fillon’s supporters seem to be united in their opposition to gay marriage, and Fillon, as an avowed Catholic, was the most socially conservative candidate on offer. 
While Fillon does not want to revoke same-sex couples’ legal right to marry, he opposes granting them the right to adopt children. 
Geographically, Fillon won almost everywhere outside of Juppé’s Bordeaux bastion, including the southern Mediterranean Provence-Alpes-Côte d’Azur (PACA) region, which was originally Sarkozy’s strongest base of support. 
But PACA is also the National Front’s stronghold, which means that Fillon will have to distinguish himself from Le Pen as a right-wing candidate, lest voters decide they would prefer the original to the copy. 
There are a few areas where Fillon and Le Pen differ. 
For starters, Florian Philippot, one of Le Pen’s deputies, is openly gay, and Le Pen has been careful not to take a strong position on social issues. 
Fillon is also an economic liberal – and is often characterized as a French Margaret Thatcher – whereas Le Pen is a protectionist. 
And while Fillon wants to reduce the French civil service by 500,000, Le Pen favors a strong state. 
Finally, Le Pen opposes France’s membership in the European Union and wants to return to the franc, while Fillon would prefer to delegate power back to national assemblies. 
Heading into the election campaign, Fillon may run on a pro-European platform, as evidenced by his pivot during the second-round debates, when he suggested that he favors forming a eurozone government. 
Unlike Trump and the United Kingdom’s “Leave” campaign, the National Front already has a predictable core constituency, amounting to about one-quarter of the electorate. 
Its coalition of the old French far right and disaffected working-class voters will not arrive unannounced or defy expectations, as happened in the US and the UK. 
Fillon, for his part, can probably muster the same level of support, and he may even be able to skim votes from Le Pen, given that around 8% of primary voters described themselves as National Front backers. 
What’s more, political Catholicism still appeals to many French voters, and the Church itself wants to lure Catholics away from the National Front and back into its more traditionally conservative fold. 
Meanwhile, a number of far-right organizations supported Fillon’s candidacy during the primaries, owing to his strong support for laws that would ban the burkini, a full-body bathing suit worn by Muslim women. 
Given the current political field, Fillon will most likely face Le Pen in the presidential election’s second round next May. 
Polling after Fillon’s victory put his support at 26%, with Le Pen backed by 24% of respondents. 
Fillon, however, is projected to win the second round with 67% of the vote. 
We have been here before, and that second-round projection is based on “Republican unity,” which might not hold. 
Left-wing voters, put off by Fillon’s liberal economics and social conservatism, might stay home. 
Given pollsters’ massive predictive failures elsewhere this year, no one should count on them to turn out until the votes themselves are counted. 

Final Thoughts on Secular Stagnation 
CAMBRIDGE – Joseph Stiglitz, Roger Farmer, and I are now and have long been in agreement on what are probably the most important points. 
The “New Keynesian” paradigm that sees business cycles as arising from temporary rigidities in wages and prices is insufficient to account for events like the Great Depression and the Great Recession. 
Too little was done in the aftermath of the financial crisis a decade ago to stimulate aggregate demand. 
A more equal income distribution operates to increase aggregate demand. 
Substantially stronger financial regulation than was in place before 2008 needs to be adopted to minimize the risks of future crises. 
I continue to have disagreements with Stiglitz on the record of policy advice, and with both Stiglitz and Farmer on some points of theory regarding secular stagnation. 
Starting with the policy record, Stiglitz is right to assert that economists should not be expected to agree on issues of political feasibility. 
They should, however, be able to agree on what texts say. 
The New York Times commentary that Stiglitz proudly cites calls for a stimulus of “at least $600 billion to $1 trillion over two years.” 
The Obama administration called for and received stimulus totaling some $800 billion, a figure well within Stiglitz’s range, despite being politically constrained by the necessity of Congressional approval. 
So I’m not sure what he is claiming. 
Stiglitz asserts that the study Fannie Mae hired him to write in 2002 said only that its lending practices at that time were safe. 
That is not how I read it. 
It speaks to ten-year default probabilities of less than one in 500,000; notes that even if the analysis is off by an order of magnitude, any risks to government are very modest; and appeals to the regulatory system in place at the time to minimize that their model missed risks. 
He makes arguments against the Congressional Budget Office, the Department of the Treasury, and the Federal Reserve, all of which had suggested – based on the same information available to Stiglitz when he wrote his paper – that implicit guarantees to Fannie Mae were potentially costly. 
I am not sure what point Joe is making with respect to derivatives. 
I was clear in my article to which he is responding that I wish we had not supported the 2000 legislation. 
But I also noted that there is no reason to think that, in the absence of the legislation, the Commodity Futures Trading Commission under the Bush administration would have asserted sweeping new authority over derivatives and pointed to the legal certainty problem that career lawyers thought was important to address. 
What about secular stagnation theory? 
Stiglitz and I agree that Alvin Hansen’s prediction was not borne out after World War II because of a combination of expansionary policy and structural changes in the economy. 
This was my point five years ago in renewing the idea of secular stagnation – to suggest that the economy as it was in 2013 required some combination of fiscal expansion and structural change to sustain full employment. 
My discussions of secular stagnation have all emphasized a variety of structural factors, including inequality, high profit shares, changes in relative prices, and global saving patterns. 
Where does Stiglitz disagree? 
Farmer, in his thoughtful commentary, argues that models of the type he has pioneered in recent years are the right way to think about chronically excessive unemployment and that, with the right microfoundations, one can conclude that fiscal policies are ineffective. 
I think his modeling approach may well prove very fruitful, and I wish I understood it better. 
But, for now, I find the empirical evidence, international comparisons, time-series studies, and studies of local variation within the United States compelling in suggesting that fiscal policy works. 
I do think, however, that Farmer’s views on the use of monetary policy to stabilize asset prices deserve serious consideration. 
Finally, I hope Stiglitz will respond positively to my repeated suggestions that we debate these matters in person at Columbia or Harvard or some other suitable venue. 
We can all agree that the stakes in a better understanding of the lessons of macroeconomic history, and in avoiding future events like those of the last decade, are very high. 

Finally Some Good Political News from Russia and Ukraine 
CAMBRIDGE: Amazing but true: there is, at long last, good political news from Russia and Ukraine. 
Both countries held elections recently (for President in Ukraine, and parliament in Russia); both produced centrist governments. 
Even more remarkable, for the first time, the executive branch in each country is poised to find parliamentary support for its governmental program. 
This could be the beginning of effective democratic rule for the first time in these countries. 
Democratic rule, in turn, could give a decisive boost to true economic reform. 
We must acknowledge, of course, that the political situation in both countries remains far from ideal. 
Both the Presidential elections in Ukraine and the Parliamentary elections in Russia were not quite fair and free. 
In both countries, the presidential administrations used their heavy muscle to dominate television, thereby limiting the ability of opposition candidates to make their case to the public. 
Ukraine’s President Leonid Kuchma won re-election despite the misery of a decade of economic paralysis and widespread corruption. 
President Boris Yeltsin’s favored parties won strong support in the Duma in large part because of the popularity of the brutal war that Russia is waging in Chechnya. 
The good news, nonetheless, dominates the bad news. 
Immediately after the elections, an interesting thing happened in both countries. 
In Ukraine, a newly re-elected President Kuchma had to nominate a new Prime Minister for approval by the parliament. 
He first re-nominated the existing, lackluster Prime Minister, who was justifiably voted down by the Parliament. 
The President then put forward for Prime Minister an impressive reformer, Central Bank Governor Viktor Yushchenko. 
Remarkably, Yushchenko won strong backing in the parliament, receiving confirmation by a vote of 296 deputies out of 450 members. 
Yushchenko immediately declared his intention to pursue privatization, land reform, and a consolidation of bloated state finances. 
The omens are good. 
In Russia, Prime Minister Vladimir Putin, though a dour and tough-talking state security officer and former spy in East Germany, who has masterminded the renewed Chechen war, was also impressive in democratic politics following the Duma elections. 
Immediately after the Duma elections, in which the two main Kremlin-backed parties in combination far exceeded the communist party vote, Prime Minister Putin went to the Duma to forge a parliamentary majority for the government’s program. 
This was a deft move, and a promising one for future reforms, especially since many of the leading economic reformers are working closely with Putin. 
This utterly normal scene of a Prime Minister winning Parliamentary support is actually extraordinary in the context of Russia and Ukraine. 
In both countries, the President and executive branch (headed by a Prime Minister selected by the President) have basically waged war with Parliament during most of the post-Soviet era since 1991. 
Both countries adopted mixed Presidential – Parliamentary systems, with strong presidential roles. 
Such systems are always complicated (look at the tensions that affected France at various points of so-called “cohabitation,” when President and Parliament were headed by different parties), but the systems were especially problematic in post-Soviet Russia and Ukraine, where democratic traditions were non-existent. 
In both countries, the Parliaments were hostile to the Presidents, and the Presidents tried to ride roughshod over the Parliaments, ruling by decree and essentially ignoring hostile parliaments. 
In both countries, ongoing Presidential – Parliamentary feuding led to utter political stalemate for years, and even to violent confrontation in Russia in October 1993. 
In all this, the West played an unhelpful role. 
The International Monetary Fund would ride into Kiev or Moscow, negotiate with the Government over the terms of a loan, and then expect the Government to impose the IMF’s conditions on the Parliament. 
The IMF’s idea, of course, was to strengthen the hand of the reformers, but the IMF’s crude way of imposing its conditions more often led to backlash by the parliament, and to a degeneration of the democratic process. 
Governments treated their parliaments as potential barriers to IMF plans, and therefore as nuisances to be evaded, not places to create coalitions of national political support. 
Both countries now may be grasping for a democratic way out of crisis, but both still face high hurdles. 
The Ukrainian Government is broke, and will most likely have to default, or to reschedule its foreign debts, or to borrow new funds to repay the old, in 2000. 
The West should certainly not force Ukraine into an intense and destabilizing austerity program in a misguided attempt to collect on debt service. 
Russia is not only strapped for cash but also at war, and war can always unleash demons, and has already unleashed terrible violence and massive civilian death. 
In addition, Russia will also face new and crucial Presidential elections next summer. 
In both Russia and Ukraine, the West should back off from imposing programs made in Washington, and should certainly refrain from demanding excessive and self-defeating austerity. 
Instead, the West should encourage governments to work with their parliaments to find their way towards more representative rule. 
History has shown that legitimate, democratic governments can do wonders in pushing tough and needed social and economic reforms. 

Finance Agonistes 
LONDON – For at least a quarter-century, the financial sector has grown far more rapidly than the economy as a whole, both in developed and in most developing countries. 
The ratio of total financial assets (stocks, bonds, and bank deposits) to GDP in the United Kingdom was about 100% in 1980, while by 2006 it had risen to around 440%. 
In China, financial assets went from being virtually non-existent to well over 300% of GDP during this period. 
As the size of the financial industry grew, so, too, did its profitability. 
The share of total profits of companies in the United States represented by financial firms rocketed from 10% in 1980 to 40% in 2006. 
Against that background, it is not surprising that pay in the financial sector soared. 
The City of London, lower Manhattan, and a few other centers became money machines that made investment bankers, hedge-fund managers, and private equity folk immoderately wealthy. 
University leaders like me spent much of our time persuading them to recycle a portion of their gains to their old schools. 
For the last two years, things have been different. 
Many financial firms have shrunk their balance sheets dramatically, and of course some have gone out of business altogether. 
Leverage is down sharply. 
Investment banks with leverage of more than 30 times their capital in early 2007 are now down to little more than ten times. 
Trading volumes are down, as is bank lending, and there have been major layoffs in financial centers around the globe. 
Is this a short-term phenomenon, and will we see an early return to rapid financial-sector growth as soon as the world economy recovers? 
Already the market is full of rumors that guaranteed bonuses are returning, that hedge funds are making double-digit returns, and that activity is reviving in the private equity market. 
Are these harbingers of a robust recovery for the financial sector, or just urban myths? 
There is no certain answer to that question, but perhaps economic history can offer some clues. 
A recent analysis by Andy Haldane of the Bank of England of long-term returns on UK financial sector equities suggests that the last 25 years have been very unusual. 
Suppose you had placed a long-term bet on financial equities in 1900, along with a short bet on general equities – in effect a gamble on whether the UK financial sector would outperform the market. 
For the first 85 years, this would have been a very uninteresting gamble, generating an average return of only around 2% a year. 
But the period from 1986 to 2006 was radically different. 
During those two decades, your annual average return would have been more than 16%. 
As Haldane puts it, “banking became the goose laying the golden eggs.” 
Indeed, there is no period in recent UK financial history that bears any comparison to those jamboree decades. 
If you had unwound your bet three years ago, you would now be sitting pretty – as long as you had gone into cash, of course – because the period since 2006 has undone most of these gains. 
So if you had held your bank stocks up to the end of last year, over 110 years your investment would have yielded an annual average return of less than 3%, still broadly a break-even strategy. 
Why was this 20-year experience so unusual, with returns so much higher than at any time in the last century? 
The most straightforward answer seems to be leverage. 
Banks geared up dramatically, in a competitive race to generate higher returns. 
Haldane describes this as resorting to the roulette wheel. 
Perhaps that analogy is rather insulting to those who play roulette. 
Indeed, the phrase “casino banking” tends to ignore the fact that casinos have a rather good handle on their returns. 
They are typically very astute at risk management, unlike many of the banks that dramatically increased their leverage – and thus their risks – during the last 20 years. 
The conclusions that we might draw for the future depend heavily on how central banks and regulators react to the crisis. 
At present, financial firms are learning the lessons for themselves, reducing leverage and hoarding capital and cash, whereas the authorities are trying to persuade banks to expand lending – precisely the strategy that led to the current crisis. 
Of course, we know that a different approach will be needed in the longer run. 
In effect, the authorities are following the approach first outlined by St. Augustine. 
They would like banks to be “chaste,” but not yet. 
But when growth does return, leverage will be far more tightly constrained than it was before. 
Regulators are already talking about imposing leverage ratios, as well as limits on risk-weighted assets. 
If they follow through, as I expect, there will be no return to the strategies of the last two decades. 
In that case, finance will no longer be an industry that systematically outpaces the rest of the economy. 
There will be winners and losers, of course, but systematic sectoral out-performance looks unlikely. 
What that will mean for financial-sector pay is a slightly more complex question, to which I will return. 

Financing the Climate-Change Transition 
POTSDAM, PARIS, ZURICH – Unless the world reduces greenhouse-gas emissions rapidly, humanity is likely to enter an era of unprecedented climate risks. 
Devastating extreme-weather events are already increasing in frequency, but much of the worst climate-related damage, such as a sustained rise in sea levels, will be recognized only once it is too late to act. 
Clearly, the climate system’s time horizon does not align well with the world’s much shorter political and economic cycles. 
Listed companies report on a quarterly basis, and recent regulatory changes, such as those mandating increased use of mark-to-market accounting, limit long-term thinking. 
Governments usually have legislative cycles of no more than four years, and they must also respond to immediate developments. 
Yet stabilizing the climate requires sustained and consistent action over an extended period. 
AXA and UBS, together with the Potsdam Institute for Climate Impact Research, CDP (formerly the Carbon Disclosure Project), and the EU’s Climate-KIC (Knowledge and Information Community) recently organized a conference in Berlin. 
There, they discussed with leading experts in green investments and fossil-fuel divestment how financial intermediaries can help to address climate risks. 
The financial industry’s active involvement is urgently needed. 
In the Paris climate agreement reached last December, countries worldwide agreed to limit global warming to well below 2° Celsius, thereby defining the track on which the world must progress rapidly. 
Over the next 15 years, an estimated $93 trillion will be needed for investments in low-carbon infrastructure. 
Government funding alone cannot meet this demand, so the financial sector must help fill the gap. 
By redirecting capital flows toward proactive efforts to mitigate and adapt to climate change, financial institutions can protect client assets from global climate risks, and from the economic risks that will attend a warming planet. 
They are also demonstrating their social responsibility for the wellbeing of future generations. 
But financing change requires changing finance. 
And this process is already underway. 
Development institutions such as the World Bank are reconsidering their investment policies. 
And, in the private sector, there is growing enthusiasm for “green” bonds, loans, indices, and infrastructure investments. 
Still, as the European Commission notes, less than 1% of institutional assets worldwide are invested in environmentally friendly infrastructure assets. 
Given historically low interest rates and the general lack of attractive investment options, this is an ideal moment to tap into investors’ growing appetite for green financial products. 
Many large financial institutions have recently joined a global initiative promoting fossil-fuel divestment. 
Research findings indicate that global CO2 emissions must be restricted to less than one trillion metric tons between 2010 and the end of the century to comply with the Paris agreement and limit global warming to below 2°C. This means that most available coal, oil, and gas reserves must stay in the ground. 
As a result, investments in fossil-fuel energy sources will continue to lose value over time, eventually becoming stranded. 
Thus, the financial sector’s revaluation of such holdings not only helps to stabilize the climate, but also better protects its clients’ investments, and, by preventing the creation of a “carbon bubble,” helps to stabilize economies. 
But selling off these holdings will not suffice; the freed-up assets must also be redirected to more sustainable businesses. 
For financial institutions and investors to do their part, they urgently need a better understanding of the relevant climate-related investment risks, which the Financial Stability Board (FSB) has divided into three categories: physical, transitional, and liability. 
Informed investment decisions will require sound, scientifically grounded data and uniform standards to assess these risks, and to quantify opportunities against them. 
Effective disclosure will hence be a key part of any new framework. 
An FSB taskforce – comprising representatives from banks, insurers, institutional investors, rating agencies, consultants, and auditors – is currently shaping voluntary standards, so that companies provide consistent and comparable climate-related financial disclosures to their stakeholders, whether investors or lenders. 
This will also allow companies to gain valuable insights into their own potential for change, reflecting a time-honored principle: what gets measured, gets managed. 
This is no easy task. 
For example, carbon footprints on their own will not steer investments in the right direction. 
Instead of identifying the champions of environmentally friendly solutions, these figures merely reveal which companies currently emit the most greenhouse gases. 
Meaningful disclosure standards must take account of sector-specific information and the impact on business strategies of the transition toward a low-carbon economy. 
All the governments that signed the Paris agreement can now be expected to adopt a range of measures to enable them to implement their de-carbonization strategies. 
In this context, carbon pricing will be an essential part of the policy toolbox. 
Some governments have already taken steps to promote the development of green products, via tax or market incentives. 
Overall, such changes to legal frameworks must support, not impede, the private financial sector’s efforts to tackle climate change. 
Financing the infrastructure projects that are too expensive for some national governments to finance on their own, but that are essential to the transformation of our energy system – such as wind farms and long-distance power lines – will require a new class of global infrastructure bonds. 
In the past, governments have encouraged investment in government bonds. 
Now, in order to increase private investment in building up clean infrastructure, investor-protection measures and dispute-resolution mechanisms must be considered. 
The financial sector is ready to spearhead the shift to sustainability. 
When Germany takes over the G20 presidency next year, it will have the opportunity to convince its partners to create an adequate framework to encourage change in the financial sector that ensures a smooth adjustment to a low-carbon economy. 
For both public and private actors, the time to act is now. 

A Climate-Friendly Financial System 
BEIJING/FRANKFURT – The climate conference now underway in Katowice, Poland, has been billed as the most consequential since the 2015 summit, which produced the Paris climate agreement. 
Amid unprecedented public concern over the threat posed by climate change – fueled by an alarming recent report by the United Nations Intergovernmental Panel on Climate Change (IPCC), not to mention devastating natural disasters around the world – negotiators are seeking to establish a set of rules for meeting the Paris commitments. 
But, as is so often the case, success will depend on finance. 
The world’s advanced economies have made major financial commitments in previous climate negotiations. 
Yet it is far from certain that they will fulfill their promises, beginning with the provision of $100 billion annually to developing countries by 2020. 
According to the UN Framework Convention on Climate Change’s Standing Committee on Finance (SCF), public finance from developed to developing countries to support climate-change mitigation and adaptation amounted to $57 billion in 2016. When taking account of private finance mobilized by public support, flows reached over $70 billion in 2016. 
However, that is a small fraction of the $2.4 trillion that the world needs to invest in clean energy every year between now and 2035 to keep global temperatures within 1.5°C of pre-industrial levels, as calculated by the IPCC. 
Whether rich countries honor climate financing commitments made in previous negotiations, and the degree to which developing countries can accept flexibility in how financial flows are measured, will be key to advancing the climate talks at this critical time. 
But, above all, climate risk and consideration of long-term sustainability will need to be embedded in the world’s financial system – from banks, asset owners, and managers to insurance companies and the capital markets that facilitate financial actors’ transactions. 
The good news is that the world is already moving in this direction, thanks partly to the Task Force on Climate-related Financial Disclosures, formed in 2015 by the Financial Stability Board and the G20 Sustainable Finance Study Group. 
Already, the task force has done much to encourage financial institutions and companies to understand, assess, and disclose the extent of the climate risks they face. 
These frameworks and tools are gaining traction and inspiring concrete actions. 
The China-United Kingdom Green Finance Taskforce, for example, has established a group of British and Chinese financial institutions to pilot TCFD reporting. 
It has also developed a set of “Green Investment Principles” to promote low-carbon investments in the region comprising China’s Belt and Road Initiative. 
Then there is Climate Action 100+, an investor-led initiative that seeks to motivate companies to achieve the Paris agreement’s goals by improving corporate governance on climate change, curbing emissions, and strengthening climate-related financial disclosures. 
So far, 310 investors with more than $32 trillion in assets under management have signed on to the initiative. 
While market-based initiatives are important drivers of innovation, governments and regulators also have a crucial role to play in activating green finance and ensuring that climate risks are measured and reported accurately. 
Here, steps taken by the European Union and China to steer finance toward low-carbon assets stand out. 
The EU’s Action Plan for a greener and cleaner economy has spurred an ambitious agenda to advance the transition to a sustainable financial system. 
Draft regulations are designed to encourage financial actors to assess and disclose sustainability risk, while moving toward the establishment of common standards to promote the financial instruments – such as green bonds – that can help direct funding to environment-friendly projects and companies. 
EU finance ministers have also just agreed to begin requiring banks to disclose environmental, social, and governance (ESG) risks within three years. 
As for China, in 2016 the State Council announced a set of comprehensive guidelines for green finance, and the central bank and some local governments have introduced monetary and fiscal incentives for green loans and bonds. 
Moreover, the Asset Management Association of the China Securities Regulatory Commission recently released green investment guidelines for the asset-management industry, calling for ESG considerations to be integrated into institutional investors’ decision-making. 
The CSRC has also announced a plan to require all listed companies to disclose environmental information by 2020. 
At the international level, there is the Central Banks and Supervisors Network for Greening the Financial System. 
Created at the end of last year, the NGFS brings together financial regulators and central banks from 21 countries – including France, China, and Germany – that recognize the threat to financial stability posed by climate change, and the need to assess and manage that risk, in part through prudential supervision. 
A central element of such risk management is for banks and investors to shift their portfolios away from high-emitting companies and projects, toward low-carbon assets. 
As the IPCC’s recent report makes plain, avoiding the worst effects of climate change will require action on an unprecedented scale – starting immediately. 
Policymakers in national capitals must ensure that both public and private financial flows align with the climate agenda, and that the right conditions are created to make the global financial sector the facilitator of, rather than a barrier to, a low-carbon future. 

The Political Consequences of Financial Crises 
LONDON – I may not be the only finance professor who, when setting essay topics for his or her students, has resorted to a question along the following lines: “In your view, was the global financial crisis caused primarily by too much government intervention in financial markets, or by too little?” 
When confronted with this either/or question, my most recent class split three ways. 
Roughly a third, mesmerized by the meretricious appeal of the Efficient Market Hypothesis, argued that governments were the original sinners. 
Their ill-conceived interventions – notably the US-backed mortgage underwriters Fannie Mae and Freddie Mac, as well as the Community Reinvestment Act – distorted market incentives. 
Some even embraced the argument of the US libertarian Ron Paul, blaming the very existence of the Federal Reserve as a lender of last resort. 
Another third, at the opposite end of the political spectrum, saw former Fed Chairman Alan Greenspan as the villain. 
It was Greenspan’s notorious reluctance to intervene in financial markets, even when leverage was growing dramatically and asset prices seemed to have lost touch with reality, that created the problem. 
More broadly, Western governments, with their light-touch approach to regulation, allowed markets to career out of control in the early years of this century. 
The remaining third tried to have it both ways, arguing that governments intervened too much in some areas, and too little in others. 
Avoiding the question as put is not a sound test-taking strategy; but the students may have been onto something. 
Now that the crisis is seven years behind us, how have governments and voters in Europe and North America answered this important question? 
Have they shown, by their actions, that they think financial markets need tighter controls or that, on the contrary, the state should repudiate bailouts and leave financial firms to face the full consequences of their own mistakes? 
From their rhetoric and regulatory policies, it would appear that most governments have ended up in the third, fence-sitting camp. 
Yes, they have implemented a plethora of detailed controls, scrutinizing banks’ books with unprecedented intensity and insisting on approving cash distributions, the appointment of key directors, and even job descriptions for board members. 
But they have ruled out any future government or central-bank support for ailing financial institutions. 
Banks must now produce “living wills” showing how they can be wound down without the authorities’ support. 
The government will wash its hands of them if they run into trouble: the era of “too big to fail” is over. 
Perhaps this two-track approach was inevitable, though it would be good to know the desired end-point. 
Is it a system in which market discipline again dominates, or will regulators sit on the shoulders of management for the foreseeable future? 
But what have voters concluded? 
In the first wave of post-crisis elections, the message was clear in one sense, and clouded in another. 
Whichever government was in power when the crisis hit, whether left or right, was booted out and replaced by a government of the opposite political persuasion. 
That was not universally true – see Germany’s Angela Merkel – but it certainly was true in the United States, the United Kingdom, France, and elsewhere. 
France moved from right to left, and the UK went from left to right. 
But voters’ verdict on their governments was more or less identical: things went wrong on your watch, so out you go. 
But now we can see a more consistent trend developing. 
Three German economists, Manuel Funke, Moritz Schularik, and Christoph Trebesch, have just produced a fascinating assessment based on more than 800 elections in Western countries over the last 150 years, the results of which they mapped against 100 financial crises. 
Their headline conclusion is stark: “politics takes a hard right turn following financial crises. 
On average, far-right votes increase by about a third in the five years following systemic banking distress.” 
The Great Depression of the 1930s, which followed the Wall Street crash of 1929, is the most obvious and worrying example that comes to mind, but the trend can be observed even in the Scandinavian countries, following banking crises there in the early 1990s. 
So seeking to explain, say, the rise of the National Front in France in terms of President François Hollande’s personal and political unpopularity is not sensible. 
There are greater forces at work than his exotic private life and inability to connect with voters. 
The second major conclusion that Funke, Schularik, and Trebesch draw is that governing becomes harder after financial crises, for two reasons. 
The rise of the far right lies alongside a political landscape that is typically fragmented, with more parties, and a lower share of the vote going to the governing party, whether of the left or the right. 
So decisive legislative action becomes more challenging. 
At the same time, a surge of extra-parliamentary mobilization occurs: more and longer strikes and more and larger demonstrations. 
Control of the streets by government is not as secure. 
The average number of anti-government demonstrations triples, the frequency of violent riots doubles, and general strikes increase by at least a third. 
Greece has boosted those numbers recently. 
The only comforting conclusion that the three economists reach is that these effects gradually peter out. 
The data tell us that after five years, the worst is over. 
That does not seem to be the way things are moving now in Europe, if we look at France’s recent election scare, not to mention Finland and Poland, where right-wing populists have now come to power. 
Maybe the answer is that the clock starts ticking on the five years when the crisis is fully over, which is not yet true in Europe. 
So politics seems set to remain a difficult trade for some time. 
And the bankers and financiers who are widely blamed for the crisis will remain in the sin bin for a while yet, until voters’ expectations of economic and financial stability are more consistently satisfied. 

The Makings of a 2020 Recession and Financial Crisis 
NEW YORK – As we mark the decennial of the collapse of Lehman Brothers, there are still ongoing debates about the causes and consequences of the financial crisis, and whether the lessons needed to prepare for the next one have been absorbed. 
But looking ahead, the more relevant question is what actually will trigger the next global recession and crisis, and when. 
The current global expansion will likely continue into next year, given that the US is running large fiscal deficits, China is pursuing loose fiscal and credit policies, and Europe remains on a recovery path. 
But by 2020, the conditions will be ripe for a financial crisis, followed by a global recession. 
There are 10 reasons for this. 
First, the fiscal-stimulus policies that are currently pushing the annual US growth rate above its 2% potential are unsustainable. 
By 2020, the stimulus will run out, and a modest fiscal drag will pull growth from 3% to slightly below 2%. 
Second, because the stimulus was poorly timed, the US economy is now overheating, and inflation is rising above target. 
The US Federal Reserve will thus continue to raise the federal funds rate from its current 2% to at least 3.5% by 2020, and that will likely push up short- and long-term interest rates as well as the US dollar. 
Meanwhile, inflation is also increasing in other key economies, and rising oil prices are contributing additional inflationary pressures. 
That means the other major central banks will follow the Fed toward monetary-policy normalization, which will reduce global liquidity and put upward pressure on interest rates. 
Third, the Trump administration’s trade disputes with China, Europe, Mexico, Canada, and others will almost certainly escalate, leading to slower growth and higher inflation. 
Fourth, other US policies will continue to add stagflationary pressure, prompting the Fed to raise interest rates higher still. 
The administration is restricting inward/outward investment and technology transfers, which will disrupt supply chains. 
It is restricting the immigrants who are needed to maintain growth as the US population ages. 
It is discouraging investments in the green economy. 
And it has no infrastructure policy to address supply-side bottlenecks. 
Fifth, growth in the rest of the world will likely slow down – more so as other countries will see fit to retaliate against US protectionism. 
China must slow its growth to deal with overcapacity and excessive leverage; otherwise a hard landing will be triggered. 
And already-fragile emerging markets will continue to feel the pinch from protectionism and tightening monetary conditions in the US. 
Sixth, Europe, too, will experience slower growth, owing to monetary-policy tightening and trade frictions. 
Moreover, populist policies in countries such as Italy may lead to an unsustainable debt dynamic within the eurozone. 
The still-unresolved “doom loop” between governments and banks holding public debt will amplify the existential problems of an incomplete monetary union with inadequate risk-sharing. 
Under these conditions, another global downturn could prompt Italy and other countries to exit the eurozone altogether. 
Seventh, US and global equity markets are frothy. 
Price-to-earnings ratios in the US are 50% above the historic average, private-equity valuations have become excessive, and government bonds are too expensive, given their low yields and negative term premia. 
And high-yield credit is also becoming increasingly expensive now that the US corporate-leverage rate has reached historic highs. 
Moreover, the leverage in many emerging markets and some advanced economies is clearly excessive. 
Commercial and residential real estate is far too expensive in many parts of the world. 
The emerging-market correction in equities, commodities, and fixed-income holdings will continue as global storm clouds gather. 
And as forward-looking investors start anticipating a growth slowdown in 2020, markets will reprice risky assets by 2019. 
Eighth, once a correction occurs, the risk of illiquidity and fire sales/undershooting will become more severe. 
There are reduced market-making and warehousing activities by broker-dealers. 
Excessive high-frequency/algorithmic trading will raise the likelihood of “flash crashes.” 
And fixed-income instruments have become more concentrated in open-ended exchange-traded and dedicated credit funds. 
In the case of a risk-off, emerging markets and advanced-economy financial sectors with massive dollar-denominated liabilities will no longer have access to the Fed as a lender of last resort. 
With inflation rising and policy normalization underway, the backstop that central banks provided during the post-crisis years can no longer be counted on. 
Ninth, Trump was already attacking the Fed when the growth rate was recently 4%. 
Just think about how he will behave in the 2020 election year, when growth likely will have fallen below 1% and job losses emerge. 
The temptation for Trump to “wag the dog” by manufacturing a foreign-policy crisis will be high, especially if the Democrats retake the House of Representatives this year. 
Since Trump has already started a trade war with China and wouldn’t dare attack nuclear-armed North Korea, his last best target would be Iran. 
By provoking a military confrontation with that country, he would trigger a stagflationary geopolitical shock not unlike the oil-price spikes of 1973, 1979, and 1990. 
Needless to say, that would make the oncoming global recession even more severe. 
Finally, once the perfect storm outlined above occurs, the policy tools for addressing it will be sorely lacking. 
The space for fiscal stimulus is already limited by massive public debt. 
The possibility for more unconventional monetary policies will be limited by bloated balance sheets and the lack of headroom to cut policy rates. 
And financial-sector bailouts will be intolerable in countries with resurgent populist movements and near-insolvent governments. 
In the US specifically, lawmakers have constrained the ability of the Fed to provide liquidity to non-bank and foreign financial institutions with dollar-denominated liabilities. 
And in Europe, the rise of populist parties is making it harder to pursue EU-level reforms and create the institutions necessary to combat the next financial crisis and downturn. 
Unlike in 2008, when governments had the policy tools needed to prevent a free fall, the policymakers who must confront the next downturn will have their hands tied while overall debt levels are higher than during the previous crisis. 
When it comes, the next crisis and recession could be even more severe and prolonged than the last. 

A Crisis Playbook for Big Tech 
OXFORD – The predictions were wrong: the global economy didn’t collapse after the 2008 financial crisis. 
Buoyed by taxpayer-financed bailouts, banks recovered and business at most institutions stabilized. 
But if there is one lingering casualty of that era, it is the erosion of public trust in the financial sector. 
Ten years after the crisis began, Main Street still has little faith in Wall Street. 
A similar crisis of confidence plagues the technology industry today. 
As executives at Facebook and Cambridge Analytica rationalize their companies’ use and abuse of personal data, trust in technology firms is approaching a tipping point. 
“Big Tech” can still salvage its reputation, but its most powerful companies will need to change fundamentally how they operate. 
And to do that, they must avoid the mistakes that nearly crippled the financial sector a decade ago. 
Five key lessons from the financial crisis should guide decision-making in the tech sector today. 
First, consumer illiteracy can be costly. 
Shortly before the housing bubble burst, many investors realized they had no understanding of the products they were buying; some didn’t even know they were buying anything. 
Financial journalism contributed to this atmosphere of ignorance by focusing only on the potential gains, and ignoring the risks. 
People engage with technology in similar ways. 
Companies, governments, and businesses happily plug their entire operations into platforms they cannot control. 
Doubt, if it does arise, is usually subdued, because the technology is too convenient to abandon. 
But, just like perilous financial products, the only way to mitigate the risks of new technologies is to be fully educated about what could go wrong. 
The second lesson is that hidden costs add up. 
Before the financial crisis, many customers were sold products with undisclosed fees and financial add-ons that became massive liabilities. 
Today, more investors recognize that higher returns imply higher risk, but in the technology business, hidden costs continue to entrap unsuspecting consumers. 
Some of these costs are social – like being pressured by advertisers to buy products. 
And others are more tangible, like giving away personal data in exchange for access to a service. 
Third, inequitable pay and incentive structures are bad for business. 
Much has been written about the extraordinary bonuses paid to investment bankers during the height of the financial crisis. 
But the CEOs of Silicon Valley are no Robin Hoods, either. 
Tech entrepreneurs might tell their investors they want to change the world, but many are intoxicated by the idea that the world will be better when they sell their business to the highest bidder. 
Fourth, businesses that are male-dominated take more unnecessary risks. 
When the history of the financial crisis was being written, many argued that greater gender diversity would have mitigated the damage. 
In 2010, two years after the collapse of Lehman Brothers, Christine Lagarde, then-France’s finance minister, quipped that the crisis would have been less painful if “Lehman Sisters” had been managing the store. 
The same logic applies to the tech sector today. 
Finally, as we learned a decade ago, the global economy is deeply interconnected; no bank was too big to fail or to be rescued. 
This is true for the largest technology companies as well. 
The collapse of Amazon or Google – however invulnerable they may seem – would have devastating ripple effects. 
While many argue that it would be unwise to regulate technology firms with a view to concerns over censorship and access to knowledge, these companies, like their financial-sector counterparts, have grown too big to be left to their own devices. 
In the decade since the financial crisis erupted, structural changes have helped stabilize the banking and financial-services industry. 
Regulations have increased transparency and improved consumer awareness. 
But the old dynamics, power structures, and bloated pay scales have largely survived. 
As a result, the sector’s reputation remains in tatters. 
For the technology industry to avoid a similar fate, its leaders must increase consumers’ literacy about the products they offer – and the potential dangers they hold. 
CEOs must support regulation, increase workplace diversity, and make compensation and incentive structures more equitable. 
Above all, tech leaders should avoid the mistakes made by other industries navigating crisis. 
And no industry offers a more relevant case study than the one that almost took down the global economy. 

A Financial Early-Warning System 
NEW YORK – Recent market volatility – in emerging and developed economies alike – is showing once again how badly ratings agencies and investors can err in assessing countries’ economic and financial vulnerabilities. 
Ratings agencies wait too long to spot risks and downgrade countries, while investors behave like herds, often ignoring the build-up of risk for too long, before shifting gears abruptly and causing exaggerated market swings. 
Given the nature of market turmoil, an early-warning system for financial tsunamis may be difficult to create; but the world needs one today more than ever. 
Few people foresaw the subprime crisis of 2008, the risk of default in the eurozone, or the current turbulence in financial markets worldwide. 
Fingers have been pointed at politicians, banks, and supranational institutions. 
But ratings agencies and analysts who misjudged the repayment ability of debtors – including governments – have gotten off too lightly. 
In principle, credit ratings are based on statistical models of past defaults; in practice, however, with few national defaults having actually occurred, sovereign ratings are often a subjective affair. 
Analysts at ratings agencies follow developments in the country for which they are responsible and, when necessary, travel there to review the situation. 
This process means that ratings are often backward-looking, downgrades occur too late, and countries are typically rerated based on when analysts visit, rather than when fundamentals change. 
Moreover, ratings agencies lack the tools to track consistently vital factors such as changes in social inclusion, the country’s ability to innovate, and private-sector balance-sheet risk. 
And yet sovereign ratings matter tremendously. 
For many investors, credit ratings dictate where and how much they can invest. 
Ratings affect how much banks are willing to lend, and how much developing countries – and their citizens – must pay to borrow. 
They inform corporations’ decisions regarding whom to do business with, and on what terms. 
Given the problems with ratings agencies, investors and regulators recognize the need for a different approach. 
Investors have tried to identify good alternatives – and have largely failed. 
Assessments of risk such as sovereign interest-rate spreads and credit default swaps react (and often over-react) fast; but, because they reflect only the market’s understanding of risk, they are not a systematic mechanism for uncovering hidden risks and avoiding crises. 
Indeed, the recent sudden rise in market volatility suggests that they are as bad as rating agencies at detecting the early warning signs of trouble. 
Regulators, meanwhile, are now starting to require banks to develop their own internal ratings processes. 
The problem is that few institutions have the tools and expertise to do this alone. 
A comprehensive assessment of a country’s macro investment risk requires looking systematically at the stocks and flows of the national account to capture all dangers, including risk in the financial system and the real economy, as well as wider risk issues. 
As we have seen in recent crises, private risk taking and debt are socialized when a crisis occurs. 
So, even when public deficits and debt are low before a crisis, they can rise sharply after one erupts. 
Governments that looked fiscally sound suddenly appear insolvent. 
Using 200 quantitative variables and factors to score 174 countries on a quarterly basis, we have identified a number of countries where investors are missing risks – and opportunities. 
China is a perfect example. 
The country’s home developers, local governments, and state-owned enterprises are severely over-indebted. 
China has the balance-sheet strength to bail them out, but the authorities would then face a choice: embrace reform or rely once again on leverage to stimulate the economy. 
Even if China continues on the latter course, it will fail to achieve its growth targets and will look more fragile over time. 
Brazil should have been downgraded below investment grade last year, as the economy struggled with a widening fiscal deficit, a growing economy-wide debt burden, and a weak and worsening business environment. 
The corruption scandal at energy giant Petrobras is finally causing ratings agencies to reassess Brazil, but the move comes too late, and their downgrades probably will not be sufficient to reflect the true risk. 
Other emerging markets also look fragile and at risk of an eventual downgrade. 
In the eurozone, shadow ratings already signaled red flags in the late 2000s in Greece and the other countries of the periphery. 
More recently, Ireland and Spain may deserve to be upgraded, following fiscal consolidation and reforms. 
Greece, however, remains a basket case. 
Even with substantial reform to improve its growth potential, Greece will never be able to repay its sovereign debt and needs substantial relief. 
An assessment of sovereign risk that is systematic and data-driven could help to spot the risks that changing global headwinds imply. 
To that extent, it provides exactly what the world needs now: an approach that removes the need to rely on the ad hoc and slow-moving approach of ratings agencies and the noisy and volatile signals coming from markets. 

Financial Gain, Economic Pain 
NEW YORK – In the past three months, global asset prices have rebounded sharply: stock prices have increased by more than 30% in advanced economies, and by much more in most emerging markets. 
Prices of commodities – oil, energy, and minerals – have soared; corporate credit spreads (the difference between the yield of corporate and government bonds) have narrowed dramatically, as government-bond yields have increased sharply; volatility (the “fear gauge”) has fallen; and the dollar has weakened, as demand for safe dollar assets has abated. 
But is the recovery of asset prices driven by economic fundamentals? 
Is it sustainable? 
Is the recovery in stock prices another bear-market rally or the beginning of a bullish trend? 
While economic data suggests that improvement in fundamentals has occurred - the risk of a near depression has been reduced; the prospects of the global recession bottoming out by year end are increasing; and risk sentiment is improving - it is equally clear that other, less sustainable factors are also playing a role. 
Moreover, the sharp rise in some asset prices threatens the recovery of a global economy that has not yet hit bottom. 
Indeed, many risks of a downward market correction remain. 
First, confidence and risk aversion are fickle, and bouts of renewed volatility may occur if macroeconomic and financial data were to surprise on the downside – as they may if a near-term and robust global recovery (which many people expect) does not materialize. 
Second, extremely loose monetary policies (zero interest rates, quantitative easing, new credit facilities, emissions of government bonds, and purchases of illiquid and risky private assets), together with the huge sums spent to stabilize the financial system, may be causing a new liquidity-driven asset bubble in financial and commodity markets. 
For example, Chinese state-owned enterprises that gained access to huge amounts of easy money and credit are buying equities and stockpiling commodities well beyond their productive needs. 
The risk of a correction in the face of disappointing macroeconomic fundamentals is clear. 
Indeed, recent data from the United States and other advanced economies suggest that the recession may last through the end of the year. 
Worse, the recovery is likely to be anemic and sub-par – well below potential for a couple of years, if not longer – as the burden of debts and leverage of the private sector combine with rising public sector debts to limit the ability of households, financial firms, and corporations to lend, borrow, spend, consume, and invest. 
This more challenging scenario of anemic recovery undermines hopes for a V-shaped recovery, as low growth and deflationary pressures constrain earnings and profit margins, and as unemployment rates above 10% in most advanced economies cause financial shocks to re-emerge, owing to mounting losses for banks’ and financial institutions’ portfolios of loans and toxic assets. 
At the same time, financial crises in a number of emerging markets could prove contagious, placing additional stress on global financial markets. 
The increase in some asset prices may, moreover, lead to a W-shaped double-dip recession. 
In particular, thanks to massive liquidity, energy prices are now rising too high too soon. 
The role that high oil prices played in the summer of 2008 in tipping the global economy into recession should not be underestimated. 
Oil above $140 a barrel was the last straw – coming on top of the housing busts and financial shocks – for the global economy, as it represented a massive supply shock for the US, Europe, Japan, China and other net importers of oil. 
Meanwhile, rising fiscal deficits in most economies are now pushing up the yields of long-term government bonds. 
Some of the rise in long rates is a necessary correction, as investors are now pricing a global recovery. 
But some of this increase is driven by more worrisome factors: the effects of large budget deficits and debt on sovereign risk, and thus on real interest rates; and concerns that the incentive to monetize these large deficits will lead to high inflation after the global economy recovers in 2010-11 and deflationary forces abate. 
The crowding out of private demand, owing to higher government-bond yields – and the ensuing increase in mortgage rates and other private yields – could, in turn, endanger the recovery. 
As a result, one cannot rule out that by late 2010 or 2011, a perfect storm of oil above $100 a barrel, rising government-bond yields, and tax increases (as governments seek to avoid debt-refinancing risks) may lead to a renewed growth slowdown, if not an outright double-dip recession. 
The recent recovery of asset prices from their March lows is in part justified by fundamentals, as the risks of global financial meltdown and depression have fallen and confidence has improved. 
But much of the rise is not justified, as it is driven by excessively optimistic expectations of a rapid recovery of growth towards its potential level, and by a liquidity bubble that is raising oil prices and equities too fast too soon. 
A negative oil shock, together with rising government-bond yields – could clip the recovery’s wings and lead to a significant further downturn in asset prices and in the real economy. 

Financial History’s False Lessons 
TOULOUSE – If history punishes those who fail to learn from it, financial history does its punishing with a sadistic twist – it also punishes those who learn from it too enthusiastically. 
Time and again, financial crises have reflected the weaknesses of regulatory systems founded on the lessons learned from previous crises. 
Today’s crisis is no exception; nor will the next one be. 
The post-war system of financial regulation was founded on three supposed lessons from the 1930’s. 
First, we thought that the main reason why banks fail is that depositors panic, not that the main reason depositors panic is that banks are in danger of failing. 
Like the view that running away from lions provokes them to eat you, there is a grain of truth in the view that banks fail because depositors panic. 
But it is a small grain, and one on which the average uninsured depositor, like the average tourist in a game park, would be ill-advised to rely. 
In fact, many panics happen for a good reason. 
Even in the 1930’s, most banks failed as a result of bad management and illegal activity, as is true today. 
Second, we thought that the depositors prone to panic would always be small depositors – households and small firms – rather than corporations or professional investors. 
We now know that this is wrong, but there was never any serious reason to believe it. 
If large corporations (and other banks) have deposits that they expect to be able to claim on short notice, and if they know that not all such deposits can be withdrawn at the same time, then suspicion that a bank might fail gives them as much reason to rush to the exit as households have. 
If bank failures typically reflect real underlying problems, sensitive professional investors can be expected to react quickly when any whiff of panic is in the air. 
Lending between banks, as well as deposits placed by large corporations, increased spectacularly in the years leading up to the crisis. 
This is particularly true of the repo markets, which provide the equivalent services for professional investors – banks and large corporations – that ordinary bank deposits provide for individuals and small firms. 
Until the financial reforms adopted since the crisis, this “shadow” banking system operated outside the regulatory regime that applied to traditional deposit-taking banks. 
Indeed, shadow banking would not have grown so fast had that regime not been devised with the apparent lessons of the 1930’s in mind. 
But the shadow system’s failure after the collapse of Lehman Brothers was no less a bank run just because professional investors were involved. 
In this case, unlike in the 1930’s, banks stopped trusting each other before the rest of us realized that it was time to stop trusting banks. 
The third false lesson is that if we could only maintain confidence in the financial system (and by extension the wider economic system), the system itself could be trusted to survive and prosper. 
This led to real alarm among policymakers whenever a threat to confidence appeared (as when the dot-com bubble burst at the end of the 1990’s). 
The dot-com bubble wasn't a threat to the banking system as such, but rather a threat to aggregate demand. 
But few people dared ask tough questions when confidence picked up again, as when a housing bubble was inflated on the rubble of collapsed technology stocks. 
The idea that something that was good for confidence might lead to danger for the banking system was too strange to be believable. 
The lesson that confidence-building measures averted a crash in 2000 was precisely the lesson that the financial system did not need to learn. 
Why were we all taken in by the idea that we could make ourselves collectively richer by selling each other overpriced equities and houses? 
We were collectively irrational, but that is no explanation. 
We need to know why some forms of collective irrationality gain a stronger grip on us than others. 
An intriguing clue comes from research in neuroscience that explains why it is impossible to tickle yourself. 
Tickling appears to be caused by unexpected sensations on certain areas of the skin. 
Because the brain of a person trying to tickle herself anticipates the sensations that will be caused by her fingers – a process performed within the cerebellum – the sensation no longer tickles. 
You can, however, succeed in tickling yourself through an intermediary – a machine, for instance, that translates the movements of your fingers into sensations on the skin by a method indirect enough for the cerebellum to be unable to anticipate them. 
Although the conscious part of your brain knows that the tickling sensation comes from you and isn’t “really” unexpected, the cerebellum doesn’t get it, and the tickling works. 
Tickling yourself is as futile as trying to make yourself richer by writing yourself a check – or selling yourself your house for twice its current market price. 
It isn’t much better if you and a friend write each other checks, or sell each other houses. 
For a few years we managed to circumvent that part of our brains that told us we couldn’t tickle ourselves to greater wealth. 
Perhaps ordinary citizens always knew that when they sold houses for real gains, ultimately they were profiting at someone else’s expense. 
It was only economists, who studied the lessons of previous crises, who fell for the idea that no one would lose out. 
Today’s policymakers, reasoning from the 1930’s, appear to believe that creating confidence is somehow different from creating good reasons to be confident. 
The recent “stress tests” of European banks were blatantly designed as a confidence-building measure rather than a genuine exploration of possible systemic weaknesses – failing, for instance, to include the possibility of default on Greek sovereign debt. 
That, of course, is like testing your home’s fire extinguishers against burglars. 
Positive results will persuade only those who have learned well the lessons of the 1930’s – and then failed to forget them. 

Financial Hypocrisy 
This year marks the tenth anniversary of the East Asia crisis, which began in Thailand on July 2, 1997, and spread to Indonesia in October and to Korea in December. 
Eventually, it became a global financial crisis, embroiling Russia and Latin American countries, such as Brazil, and unleashing forces that played out over the ensuing years: Argentina in 2001 may be counted as among its victims. 
There were many other innocent victims, including countries that had not even engaged in the international capital flows that were at the root of the crisis. 
Indeed, Laos was among the worst-affected countries. 
Though every crisis eventually ends, no one knew at the time how broad, deep, and long the ensuing recessions and depressions would be. 
It was the worst global crisis since the Great Depression. 
As the World Bank’s chief economist and senior vice president, I was in the middle of the conflagration and the debates about its causes and the appropriate policy responses. 
This summer and fall, I revisited many of the affected countries, including Malaysia, Laos, Thailand, and Indonesia. 
It is heartwarming to see their recovery. 
These countries are now growing at 5% or 6% or more – not quite as fast as in the days of the East Asia miracle, but far more rapidly than many thought possible in the aftermath of the crisis. 
Many countries changed their policies, but in directions markedly different from the reforms that the IMF had urged. 
The poor were among those who bore the biggest burden of the crisis, as wages plummeted and unemployment soared. 
As countries emerged, many placed a new emphasis on “harmony,” in an effort to redress the growing divide between rich and poor, urban and rural. 
They gave greater weight to investments in people, launching innovative initiatives to bring health care and access to finance to more of their citizens, and creating social funds to help develop local communities. 
Looking back at the crisis a decade later, we can see more clearly how wrong the diagnosis, prescription, and prognosis of the IMF and United States Treasury were. 
The fundamental problem was premature capital market liberalization. 
It is therefore ironic to see the US Treasury Secretary once again pushing for capital market liberalization in India – one of the two major developing countries (along with China) to emerge unscathed from the 1997 crisis. 
It is no accident that these countries that had not fully liberalized their capital markets have done so well. 
Subsequent research by the IMF has confirmed what every serious study had shown: capital market liberalization brings instability, but not necessarily growth. 
(India and China have, by the same token, been the fastest-growing economies.) 
Of course, Wall Street (whose interests the US Treasury represents) profits from capital market liberalization: they make money as capital flows in, as it flows out, and in the restructuring that occurs in the resulting havoc. 
In South Korea, the IMF urged the sale of the country’s banks to American investors, even though Koreans had managed their own economy impressively for four decades, with higher growth, more stability, and without the systemic scandals that have marked US financial markets with such frequency. 
In some cases, US firms bought the banks, held on to them until Korea recovered, and then resold them, reaping billions in capital gains. 
In its rush to have westerners buy the banks, the IMF forgot one detail: to ensure that South Korea could recapture at least a fraction of those gains through taxation. 
Whether US investors had greater expertise in banking in emerging markets may be debatable; that they had greater expertise in tax avoidance is not. 
The contrast between the IMF/US Treasury advice to East Asia and what has happened in the current sub-prime debacle is glaring. 
East Asian countries were told to raise their interest rates, in some cases to 25%, 40%, or higher, causing a rash of defaults. 
In the current crisis, the US Federal Reserve and the European Central Bank cut interest rates. 
Similarly, the countries caught up in the East Asia crisis were lectured on the need for greater transparency and better regulation. 
But lack of transparency played a central role in this past summer’s credit crunch; toxic mortgages were sliced and diced, spread around the world, packaged with better products, and hidden away as collateral, so no one could be sure who was holding what. 
And there is now a chorus of caution about new regulations, which supposedly might hamper financial markets (including their exploitation of uninformed borrowers, which lay at the root of the problem.) 
Finally, despite all the warnings about moral hazard, Western banks have been partly bailed out of their bad investments. 
Following the 1997 crisis, there was a consensus that fundamental reform of the global financial architecture were needed. 
But, while the current system may lead to unnecessary instability, and impose huge costs on developing countries, it serves some interests well. 
It is not surprising, then, that ten years later, there has been no fundamental reform. 
Nor, therefore, is it surprising that the world is once again facing a period of global financial instability, with uncertain outcomes for the world’s economies. 

A Banker’s Revolution 
KUALA LUMPUR – Financial regulators are generally known for taking a measured and cautious approach to change. 
But in the developing world, that reputation is being turned upside down. 
In some of the world’s poorest countries, central bankers have proved willing to make bold decisions – embracing innovative approaches in their quest to broaden participation in the formal financial system, increase financial stability, and put their countries on the path to inclusive, sustainable economic growth. 
Increasing financial inclusion requires fundamentally rethinking how a country’s financial system is structured and operates. 
It also frequently necessitates the use of instruments outside of the central bankers’ traditional toolkit. 
In Kenya, for instance, officials altered the regulatory framework to allow for the growth of mobile money. 
In Malaysia, the central bank took a lead role in raising the public’s level of financial literacy. 
And in the Philippines, the Bangko Sentral ng Pilipinas helped double the number of access points where consumers could obtain financial services, supporting the opening of 517 micro-banking offices, many of them in municipalities with no traditional bank branches. 
Likewise, in 2011, the Bank of Tanzania made a specific commitment to increase financial inclusion under the Alliance for Financial Inclusion’s Maya Declaration, a commitment by policymakers in the developing world to unlock the social and economic potential of the poor. 
The result was dramatic and vastly exceeded expectations. 
Tanzania reached its goal of providing 50% of its adult citizens with access to banking a year ahead of schedule, making the country a global leader in digital financial services. 
As in neighboring Kenya, the game changer was the widespread adoption of mobile money. 
“It may sound maverick,” said Benno Ndulu, the bank’s governor. 
“But we must let innovation run ahead of regulation.” 
While East Africa is blazing the trail when it comes to electronic money, other parts of the world are adopting different innovative approaches. 
Last year in Colombia, Congress passed a law creating a new type of financial institution called a Specialized Electronic Deposit and Payment Institution. 
While not technically banks, these institutions are able to accept customer deposits and payments electronically through mobile phones or at licensed locations like a post office. 
The effort is part of a larger national strategy, launched in 2014, to provide 76% of adults with financial access and 56% with active savings accounts by the end of 2016. 
And in the Pacific region, Fiji, Papua New Guinea, Samoa, Solomon Islands, Timor-Leste, Tonga, and Vanuatu have banded together to create the Pacific Islands Regional Initiative (PIRI), which will enable every Pacific Island state, even those without a central bank, to share knowledge on improving access, quality, and usage of financial services in geographically challenging environments. 
Each of these efforts started as a country-led initiative, born of particular challenges and designed to meet the specific needs of the local population. 
But the accumulation of experience is proving invaluable. 
As lessons are shared and successes provide inspiration for others, the impact is becoming exponential, with even the smallest countries demonstrating that they have a significant contribution to make. 
Meanwhile, as central banks change how they operate, retail banks are responding with new ways of doing business. 
Kenya’s Equity Bank has grown enormously by explicitly targeting the financially excluded; in just six years, it has expanded from a half-million customers to almost six million. 
Telecommunication companies are also pioneering new services. 
Tigo, for example, now serves more than 56 million customers in 14 countries in Latin America and Africa with products such as cross-border mobile payments and cashless services for sales agents. 
As with any period of great change, it is not easy to see what lies ahead. 
As Stephen Kehoe, Head of Global Financial Inclusion at Visa, recently noted, “The last seven years provide absolutely no indication of what the next seven years will be.” 
What is clear, however, is that there still remains much to be done – and that the opportunities are nearly limitless. 
Bringing the world’s two billion unbanked people out of the shadows and into the mainstream financial system will require new partnerships among regulators, the private sector, non-profits, regional bodies, and international organizations. 
That may seem like a tall order, but filling it would help build a brighter future for everyone. 

Financial Inclusion and Beyond 
CAMBRIDGE – Because traditional financial services are not designed for small depositors and borrowers, several non-traditional models have been able to scale up rapidly in this untapped market. 
But, without a strategic policy roadmap to guide further financial-technology (fintech) development, these new “connector” models will remain limited in terms of the services they can provide. 
In Kenya, the success of M-Pesa, a mobile payments app, has been nothing short of transformational. 
It took PayPal two NASDAQ listings and almost two decades operating in the world’s largest economy to reach 188 million active customers and $282 billion in annual payments. Although M-Pesa has been operating for less than a decade in a much lower-income market, it had nearly 17 million active users conducting more than $50 billion in cashless transactions last year. 
Similarly, bKash now dominates the payments system in Bangladesh to such a degree that “bKashing” has become common Bengali parlance, just as “Xeroxing,” “Hoovering,” and “Googling” are in English. 
Other models, such as Microensure and Bima, have also gained ground, offering micro-insurance solutions in emerging countries. 
Jan Dhan Yojana, a high-priority Indian federal-government program that provides access to the banking sector for the poor, has enabled 250 million new bank accounts to be opened in less than two years. 
New fintech products will have to clear several hurdles to move beyond just improving access to financial services. 
Services fostering financial-inclusion must deliver a high volume of low-value output, which means they often have to rely on partnerships to meet certain consumer demands. 
Problems arise when these partners have their own constraints or different priorities. 
For example, Microensure and Bima have made insurance solutions available to millions of people; but their services ultimately depend on independent insurers to allocate capital and underwrite insurance policies. 
Likewise, while there are green shoots of insurance-industry growth in regions like Sub-Saharan Africa, global insurers must constantly adapt to regulatory changes in their primary or home markets, and it is unclear if they have the capacity to expand meaningfully into low-income countries. 
Or consider M-Pesa itself. 
Four years ago, it formed a partnership with the Commercial Bank of Africa to add a lending tool, M-Shwari, to its suite of products. 
It has since opened more loan accounts than any Kenyan bank. 
But such accounts still number less than a quarter of active M-Pesa users, and M-Shwari still supports only small 30-day loans. 
M-Shwari is not a core part of either partner’s business. 
Nor is it the only product of its kind on the market. 
The most recent competitor to challenge M-Pesa is mVisa, a partnership between Visa Inc. and two other Kenyan banks. 
With $400 million in 2016 revenues at stake, Safaricom – M-Pesa’s parent company – will likely focus on defending its core offering before it tries to introduce new products. 
In Safaricom’s current list of new product priorities to expand financial inclusion, saving-and-loan products are ranked almost last. 
Unfettered innovation and entrepreneurship are necessary for connecting the poor to the formal financial system; but, from a policy and development perspective, we need to shift our efforts toward improving the larger ecosystem to realize new fintech products’ full potential. 
For example, M-Pesa’s cashless transactions are underpinned by cash contributed by its customers, which is held in trust at any given time. 
Interest income from these funds is currently disbursed through the M-Pesa Foundation. 
With a carefully constructed system, this money could be put to even greater productive use. 
India’s Jan Dhan Yojana program has mobilized an estimated $6 billion from newly acquired customers, which could be used to provide additional tailored products. 
Emerging fintech services can take a lesson from the Chinese e-commerce company Alibaba, which was quick in leveraging its payments platform, Alipay. 
After Alibaba launched its money market fund, Yu’e Bao, in June 2013, it began reinvesting its Alipay customers’ unproductive micro-deposits. 
By the end of 2015, the Yu’e Bao fund manager was overseeing $165 billion in assets and had converted Alipay’s millions of small, financially unsophisticated savers into investors collecting respectable returns. 
To develop its platform, Alibaba relied on big data to manage the fund’s unique liquidity dynamics; and it benefited from China’s unsettled regulatory framework, though this could change in the future. 
The Chinese context may be unique; and, indeed, there are growing concerns about risks inherent in the Yu’e Bao model. 
But regulators and fintech firms should take note of examples like Alipay to develop rational strategic possibilities for this emerging sector. 
Most important, they should remember that access to finance is not an end in itself, but a means to improve one’s lot. 
A recent Indian Express investigation revealed what can happen when access to financial services is provided in a vacuum. 
The paper found several instances where officials at Indian public-sector banks were depositing one rupee into customer accounts without customers’ knowledge. 
These officials were apparently under pressure to reduce the number of zero-balance accounts, all of which, it turns out, were related to the Jan Dhan Yojana program. 
Similar chicanery, we now know, was a routine practice at the US bank Wells Fargo. 
The difference is that customers at the bottom of the pyramid have few banking alternatives. 
Financial-services access is a much needed start, but it must lead somewhere. 

Banking on the Unbanked 
TORONTO – In a sea of gloomy news, one bright headline appears on the horizon. 
The World Bank’s latest figures on individuals’ bank accounts, to be released next spring, are expected to show that the number of people holding accounts at banks or other formal financial institutions has grown. 
The last time the World Bank published its Global Findex report, in April 2015, an estimated 700 million adults, mainly in developing countries, had obtained access to financial services during the previous three years. 
That amounted to an increase of more than 21% in the global number of “banked” individuals. 
Because broader access to financial services helps to create a path out of poverty, any increase in this metric is a positive sign for human development. 
But my organization won’t be declaring victory when the new report comes out. 
No matter what the World Bank data show, universal financial inclusion for the world’s poorest remains a distant goal. 
At the moment, some two billion adults remain excluded from formal financial services. 
Excessive documentation requirements, high account fees, limited access to bank branches, and the perception that financial institutions are “only for the rich” are among the most persistent obstacles to overcome. 
At the Mastercard Foundation, we are committed to helping to remove these barriers for the world’s poorest. 
This month in Accra, Ghana, we convened the fifth annual Symposium on Financial Inclusion, bringing together hundreds of financial services providers, policymakers, academics, and development experts to examine how to broaden and deepen financial inclusion. 
We have been hosting this global conference since 2013, and each year, a familiar concern emerges: financial institutions could do more to focus on the needs of their poorest clients. 
Because banks often do not consider the behaviors and aspirations of poor customers, they do not always offer the products and services the poor need. 
If the industry’s priorities changed, barriers to inclusion would fall. 
Reversing this trend should be easier than it is. 
After all, when people prosper, so do banks. 
Poor people tend to save more money when they can access bank accounts or make mobile payments. 
With savings comes increased overall prosperity. 
Children do better in school when parents can easily pay fees. 
Women become more empowered to start businesses. 
Poor households can better cope with adverse shocks like crop failure, illness, or natural disaster. 
The positive economic knock-on effects are obvious. 
With bank accounts, budding entrepreneurs can establish their creditworthiness and tap responsible, formal lenders. 
And with capital, small enterprises can grow into larger businesses, employing others, especially young people. 
Technology has helped close the gap in recent years. 
The success of digital payment platforms, such as the M-Pesa mobile app in Kenya, demonstrates how quickly vulnerable clients will take up and use inexpensive products and services if they are designed with users’ needs in mind. 
Moreover, financial technology firms in Africa and Asia are finding innovative ways to analyze data generated by poor people’s activities, and using that data to design and deliver better banking services. 
Non-traditional approaches are also emerging, such as reaching the unbanked poor via small, independent businesses that they already use and trust. 
But much of the onus for inclusion will remain on financial institutions. 
One argument I often hear is that the financial services sector is risk-averse. 
Given banks’ fiduciary obligations to their customers, this is not an entirely bad trait. 
Yet banks and other financial institutions should realize that risk protection is perfectly compatible with service to poor customers. 
By ignoring poor people’s needs, financial institutions are overlooking a massive potential market. 
To reach hundreds of millions of new clients, the world’s financial institutions need only walk a metaphorical mile in the shoes of a poor person. 
They would then see that no one should be excluded because of inaccurate, outdated, or unfair assumptions. 
Today, more people than ever are benefiting from access to modern and responsible financial services. 
No doubt, next year’s World Bank data will indicate even greater gains. 
But to achieve a world where no one is excluded, the industry must place the needs of poor clients at the center of its business strategies. 
Only then will the good news about financial inclusion become great. 

A Hacker’s Market? 
NEW YORK – Never in the history of written communication could 140 characters have the impact that they can have now. 
Two weeks ago, after gaining access to the Associated Press’s main Twitter account (@AP), the Syrian Electronic Army (SEA) posted a fake tweet reporting two explosions in the White House and the injury of President Barack Obama. 
Within seconds, US financial markets dropped by about 1%. 
Minutes later, Twitter was abuzz with refutations. 
Reporters at the White House tweeted that they felt no explosion, and AP reporters and the AP Politics Twitter account announced that @AP had been hacked. 
At his afternoon briefing, White House press secretary Jay Carney confirmed that Obama was indeed unharmed. 
Financial markets returned to their pre-hoax level. 
The @AP Twitter hoax represents systemic risk that cannot be eliminated, for it arises from the interaction of highly integrated financial markets and increasingly democratized news delivery. 
Given strong incentives for malicious parties to perpetrate such hoaxes, we should expect to see an increase in incidents. 
Financial markets are vulnerable to manipulation, because they are not in the business of evaluating the truth. 
Trading often favors first movers, so being fast but wrong can still be profitable. 
Imagine that a sophisticated trading firm has invested significant resources to develop an algorithm that quickly evaluates the potential market impact of news, and then automatically sends orders to trade based on that predicted impact. 
When that algorithm parses a tweet from the AP containing important keywords (explosion, White House, and Obama), it will send orders to sell with the expectation that the market will drop as others – first, slower algorithms, then even slower humans – start to process the same news. 
The first mover is happy to make such trades without verifying that the news is true. 
If it is true, the market will stay down or continue dropping, and the first mover will profit from the sales that it has made. 
If the story is a hoax, the market will probably return to its earlier, fairly valued level, and the first mover will break even on its sales, and possibly profit from any position purchased as a hedge when the market was down. 
The first mover’s algorithm worked, regardless of the story’s veracity. 
The likely losers in the @AP Twitter hoax were later movers who did not react quickly to the news, but reacted instead to the market’s movement. 
These late movers were also likely to have been sophisticated electronic or institutional traders; some were probably using arbitrage-based strategies that relied on the futures market for a calculation of the fair price. 
The market’s vulnerability to hoax stories is thus difficult to eliminate, for it is inherent in its structure. 
It cannot be regulated away or fixed by technology or surveillance. 
Even if markets moved more slowly, there would still be a first mover who responded before such a news story was revealed as a hoax. 
This dynamic is similar to that of an asset bubble, albeit faster. 
In a bubble, valuations are based on collectively evaluated evidence, and those who enter the market earliest often benefit. 
Whether evaluating an assumption about the rise of house prices or whether a news story is true, the market does not provide a definitive answer instantaneously. 
If protecting against hoaxes is not the market’s purview, can news agencies or new media entities like Twitter prevent such deception? 
To be sure, they have suffered reputational damage from this fiasco and will likely try to improve. 
But their efforts will not be enough. 
Twitter’s vulnerabilities were technically understood before this event, and the service was already moving toward a more sophisticated authentication model (a password paired with a one-time key from a text message or other device). 
Twitter will likely implement this soon. 
It should also consider adding an optional “two-key” system, in which an independent signoff from a separate account is required before a proposed tweet is broadcast. 
But, while such measures would increase the difficulty of hacking the system, no technological fix can make it impenetrable. 
What about the AP’s vulnerabilities? 
Attackers launched a “phishing” attempt against the AP’s emails shortly before the hoax tweet was sent. 
Phishing attacks, in which an employee is duped into sending a password to a third party or clicking an untrusted link that installs malicious software, represent a hybrid of cultural and technological failures. 
As attackers become more sophisticated, they send better-crafted emails, sometimes impersonating trusted sources that lure unwary users. 
Crafting a culture of security is difficult and often at odds with the dynamic and decentralized work environment of a fast-moving newsroom. 
As technologies change, so must awareness of vulnerabilities, and this awareness must be disseminated through means other than corporate memos that are disconnected from day-to-day business realities. 
Empirically, few firms get this right: America’s National Public Radio and the BBC were both recently hacked by the SEA, while McDonald’s and Burger King recently had their Twitter accounts compromised. 
The proliferation of security lapses means that people are more likely to shrug their shoulders than to cast the first stone at a company that is breached. 
Finally, the AP is unlikely to face financial penalties for this mistake. 
A lawsuit for losses stemming from the hoaxed tweet would face nearly insurmountable obstacles. 
Because few mechanisms can prevent the proliferation of hoaxed tweets, and given the high-profile response that successful hackers can expect, Twitter will remain a vehicle of malicious hoaxes, even as technological barriers make attacks more challenging. 
Indeed, the SEC recently approved the use of social media like Facebook and Twitter for publicly traded companies’ disclosures to investors. 
Imagine what might happen if @BP_America tweets: “#Explosion reported at Gulf well. 
Details to follow.” 
The incentives to try to hack such accounts are obvious: not only significant publicity for hackers, but highly lucrative profit opportunities from the almost inevitable stock-market movements that will result. 
On Twitter, as elsewhere, caveat emptor. 

Whistling Past the Geopolitical Graveyard 
NEW YORK – With Emmanuel Macron’s defeat of the right-wing populist Marine Le Pen in the French presidential election, the European Union and the euro have dodged a bullet. 
But geopolitical risks are continuing to proliferate. 
The populist backlash against globalization in the West will not be stilled by Macron’s victory, and could still lead to protectionism, trade wars, and sharp restrictions to migration. 
If the forces of disintegration take hold, the United Kingdom’s withdrawal from the EU could eventually lead to a breakup of the EU – Macron or no Macron. 
At the same time, Russia has maintained its aggressive behavior in the Baltics, the Balkans, Ukraine, and Syria. 
The Middle East still contains multiple near-failed states, such as Iraq, Yemen, Libya, and Lebanon. 
And the Sunni-Shia proxy wars between Saudi Arabia and Iran show no sign of ending. 
In Asia, US or North Korean brinkmanship could precipitate a military conflict on the Korean Peninsula. 
And China is continuing to engage in – and in some cases escalating – its territorial disputes with regional neighbors. 
Despite these geopolitical risks, global financial markets have reached new heights. 
So it is worth asking if investors are underestimating the potential for one or more of these conflicts to trigger a more serious crisis, and what it would take to shock them out of their complacency if they are. 
There are many explanations for why markets may be ignoring geopolitical risks. 
For starters, even with much of the Middle East burning, there have been no oil-supply shocks or embargos, and the shale-gas revolution in the United States has increased the supply of low-cost energy. 
During previous Middle East conflicts – such as the 1973 Yom Kippur War, Iran’s Islamic Revolution in 1979, and Iraq’s invasion of Kuwait in 1990 – oil-supply shocks caused global stagflation and sharp stock-market corrections. 
A second explanation is that investors are extrapolating from previous shocks, such as the attacks of September 11, 2001, when policymakers saved the day by backstopping the economy and financial markets with strong monetary and fiscal policy easing. 
These policies turned post-shock market corrections into buying opportunities, because the fall in asset prices was reversed in a matter of days or weeks. 
Third, the countries that actually have experienced localized asset-market shocks – such as Russia and Ukraine after Russia’s annexation of Crimea and incursion into Eastern Ukraine in 2014 – are not large enough economically to affect US or global financial markets. 
Similarly, even as the UK pursues a “hard Brexit,” it still only accounts for around 2% of global GDP. 
A fourth explanation is that the world has so far been spared from the tail risks associated with today’s geopolitical conflagrations. 
There has not yet been a direct military conflict between any major powers, nor have the EU or eurozone collapsed. 
US President Donald Trump’s more radical, populist policies have been partly contained. 
And China’s economy has not yet suffered from a hard landing, which would create sociopolitical instability. 
Moreover, markets have trouble pricing such “black swan” events: “unknown unknowns” that are unlikely, but extremely costly. 
For example, the market couldn’t have predicted 9/11. 
And even if investors think that another major terrorist attack will come, they cannot know when. 
A confrontation between the US and North Korea could also turn into a black swan event, but this is a possibility that markets have happily ignored. 
One reason is that, notwithstanding Trump’s bluster, the US has very few realistic military options: North Korea could use conventional weapons to wipe out Seoul and its surroundings, where almost half of South Korea’s population lives, were the US to strike. 
Investors may be assuming that even if a limited military exchange occurred, it would not escalate into a full-fledged war, and policy loosening could soften the blow on the economy and financial markets. 
In this scenario, as with 9/11, the initial market correction would end up being a buying opportunity. 
But there are other possible scenarios, some of which could turn out to be black swans. 
Given the risks associated with direct military action, the US is now alleged to be using cyber weapons to eliminate the North Korean nuclear threat against the US mainland. 
This may explain why so many of North Korea’s missile tests have failed in recent months. 
But how will North Korea react to being militarily decapitated? 
One answer is that it could launch a cyber attack of its own. 
North Korea’s cyber-warfare capabilities are considered to be just a notch below those of Russia and China, and the world got an early glimpse of them in 2014 when it hacked into Sony Pictures. 
A major North Korean cyber attack could disable or destroy parts of the US’s critical infrastructure, and cause massive economic and financial damage. 
That remains a risk even if the US can sabotage North Korea’s entire industrial system and infrastructure. 
Or, faced with disruption of its missile program and regime, North Korea could go low-tech, by sending a ship with a dirty bomb into the ports of Los Angeles or New York. 
An attack of this kind would most likely be very hard to monitor or stop. 
So, while investors may be right to discount the risk of a conventional military conflict between the US and North Korea, they also may be underestimating the threat of a true black swan event, such as a disruptive cyberwar between the two countries or a dirty bomb attack against the US. 
Would an escalation on the Korean Peninsula be an opportunity to “buy the dip,” or would it mark the beginning of a massive market meltdown? 
It is well known that markets can price the “risks” associated with a normal distribution of events that can be statistically estimated and measured. 
But they have more trouble grappling with “Knightian uncertainty”: risk that cannot be calculated in probabilistic terms. 

The Private Sector and the SDGs 
WASHINGTON, DC – Achieving the ambitious global Sustainable Development Goals (SDGs) – which include ending poverty, improving global health, ensuring universal education, and mitigating climate change by 2030 – will cost a lot of money. 
The total will be far more than governments can make available, and the gap cannot be closed by official development assistance, now at $132 billion per year. 
The private sector, as well as updated financial markets, will be essential. 
Until recently, international organizations and governments had relatively well-defined roles in the global development and sustainability agenda, whereas the private sector’s participation in the process was often viewed through the lens of its contributions to economic growth, job creation, and tax revenue. 
That must now change, with the private sector taking on a broader, more integrated role in the development agenda. 
The private sector can become a financier, shifting trillions of dollars of capital toward developing economies. 
And it can play an important role as an implementer, translating profits into sustained economic growth, social inclusion, and environmental protection. 
The principles underpinning such measures are anchored in SDG target 12.6, which encourages “companies, especially large and transnational companies, to adopt sustainable practices and to integrate sustainability information into their reporting cycle.” 
Financial and asset-management institutions can provide positive incentives to such companies – those that incorporate sustainability, long-term thinking, and environmental, social, and governance (ESG) performance criteria in core business models – by allocating assets accordingly. 
Such a move would go a long way toward promoting long-term progress on the SDGs. 
Fortunately, many companies already fit this description. 
A 2016 survey of CEOs, conducted by the United Nations Global Compact and Accenture showed that many business leaders already view solving “societal challenges as a core element in the search for competitive advantage.” 
And almost half of all CEOs surveyed believe that “business will be the single most important actor in delivering the SDGs.” 
According to a recent report published by Moody’s, interest in investments relating to climate change and sustainable development by institutional investors has grown rapidly in recent years. 
Now, institutional investors with long histories of ESG investments, such as the California Public Employees’ Retirement System (CalPERS), are being joined by a growing number of their peers. 
Some are even opting to divest from any company with exposure to industries or business practices that present sustainability challenges. 
This trend toward sustainable investment will undoubtedly accelerate. 
But, even without the agreement, the appeal of such investments stands: evidence indicates that integration of ESG considerations – when implemented intelligently and measured and reported transparently – could help investments outperform expectations, for both companies and investors. 
Add to that financial-market incentives, and huge amounts of capital could be attracted to ESG investments. 
Nonetheless, significant challenges remain, including uncertain performance expectations and evolving disclosure regimes. 
Despite innovation in the financial products channeling ESG investment, the supply of ESG instruments, such as green bonds, remains insufficient. 
Another challenge relates to data. 
Good data on ESG investment are indispensable, as they enable investors and companies to determine whether their outlays in this area will promote or impede the achievement of the SDGs. 
To this end, we need to develop a robust, transparent reporting framework that allows companies to report on financial and non-financial performance. 
That framework must also support the private sector and investors in their effort to combine profit maximization with the pursuit of long-term economic, social, and environmental objectives. 
Integrated corporate reporting and disclosure of material ESG information can facilitate the creation of an efficient financial system that advances sustainable economic growth, while supporting achievement of the SDGs. 
The development of such an integrated reporting framework currently is being led by a few national and international organizations, such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and the International Integrated Reporting Council (IIRC). 
Their main objectives are to enable companies and organizations to set sustainability targets and key performance indicators; to monitor, prepare, and disclose comparative data measuring their economic and ESG performance; and to integrate sustainable production and consumption practices in company business strategies and models. 
Global awareness of this topic is growing. 
Recently, Mark Carney, Governor of the Bank of England and Chairman of the G20’s Financial Stability Board, and Michael Bloomberg, a former New York City mayor and CEO of Bloomberg LP, issued an announcement regarding market data on climate. 
Given the magnitude of the task, however, it is important also to ensure effective coordination and harmonization of these efforts with the relevant standard-setters, regulators, and professional organizations. 
The US Securities and Exchange Commission, for one, is already discussing these issues, as it analyzes options to respond to investor and business needs regarding ESG. 
New ESG reporting frameworks can help to attract billions of dollars from institutional investors to support the effort to achieve the SDGs. 
But that is only one example of how the public and private sectors can work together to identify opportunities to advance the SDGs. 
If we take advantage of these possibilities, public-private cooperation can enable millions of people to lift themselves out of poverty and help to build a more peaceful, prosperous, and secure world. 

Financial Panic and the Law of Unintended Conseque 
CAMBRIDGE: One oft-repeated lesson of public policy is the Law of Unintended Consequences. 
A policy is adopted to "fix" one problem, only to create another problem, sometimes one much worse than the original. 
The closer you examine the financial crises that hit East Asia, Eastern Europe, and Latin America over the past two years, the more these events look to be almost definitive proof of the Law of Unintended Consequences. 
Although each regional crisis has been blamed on mismanagement by governments in the developing world, much of the blame -- perhaps most -- actually lies in the advanced countries. 
More precisely, banking regulation in the advanced countries may have precipitated financial crisis across the developing and postcommunist world. 
The essence of the recent financial crisis is that international bank loans flew into the "emerging markets" during the years 1993-96, only to flee these same markets in 1997 and after. 
Countries like Russia, or Indonesia, Korea, and Thailand in East Asia, or Brazil and Peru in Latin America, were able to borrow on easy conditions in the mid-1990s, but then faced a panicked withdrawal of loans in the past two years. 
The reversal of bank lending is staggering. 
According to recent data prepared by the investment bank J. P. Morgan, international banks lent the 25 main emerging markets a total of $100 billion in net loans (that is, loans minus repayments) in 1995, $121 billion in 1996, and $46 billion in 1997, only to demand net repayments of $95 billion in 1998. 
In emerging Asia, the swing was the worst: from $81 billion in loans 1996 to $84 billion in net repayments in 1998. 
Look beneath the surface and you find that these big swings were the result of two related factors. 
First, most international bank lending was very short term. 
Around two-thirds of the loans that went into Asia, for example, were for a period of less than one year, often for less than one month. 
Second, international banks panicked in 1997. 
They decided that they had to get out of emerging markets as fast as possible because all other banks were getting out. 
Nobody wanted to be last one in these countries, because they knew that the countries would be forced into default when all other banks tried to leave at the same time. 
Since the loans that had been offered were so short term, they could be pulled out nearly all at once. 
Why, then, were the bank loans so short term -- and therefore so prone to panic? 
Here is where unintended consequences played a huge role. 
Under international banking regulations prepared by the Bank for International Settlements (BIS), the club of central banks based in Basle, Switzerland, banks must maintain adequate bank capital. 
In particular, bank assets (mainly the loans by banks) can not be more than 12.5 times the bank capital. 
In the way that bank assets are counted, however, accounting regulations allow for banks to lend four times as much in short-term loans to other banks as in long-term loans. 
Thus, supposedly benign accounting regulations actually encouraged banks to multiply their short-term lending, and to cut back on their long-term lending. 
These regulations seem to make sense for an individual bank. 
Short-term inter-bank loans are seemingly less risky than long-term lending. 
But when the entire international system becomes entwined with an excessive amount of short-term inter-bank lending, the world economy becomes subject to financial panic. 
Therefore, what makes sense for one bank (to lend short term) becomes risky for the entire world system. 
When the East Asian financial crisis broke out in mid-1997, the advanced countries and the International Monetary Fund were quick to blame the victims -- the borrowing countries. 
They said that the borrowers had behaved badly, when the real problem was that the international system had created a veritable "house of cards," in which a mountain of short-term inter-bank loans could suddenly be reversed, causing economic collapse in debtor countries. 
Even today, the world's bias toward short-term cross-border lending has not been addressed by Washington or by Basle, and the victims of this crisis continue to receive the brunt of the blame. 
A final word to the victims. 
Even before the international system is fixed, a measure of self-help is possible. 
Countries should limit their exposure to short-term international bank loans so that they are less vulnerable to wild swings of international lending. 

Financial Re-Regulation and Democracy 
NEW YORK – It has taken almost two years since the collapse of Lehman Brothers, and more than three years since the beginning of the global recession brought on by the financial sector’s misdeeds for the United States and Europe finally to reform financial regulation. 
Perhaps we should celebrate the regulatory victories in both Europe and the United States. 
After all, there is almost universal agreement that the crisis the world is facing today – and is likely to continue to face for years – is a result of the excesses of the deregulation movement begun under Margaret Thatcher and Ronald Reagan 30 years ago. 
Unfettered markets are neither efficient nor stable. 
But the battle – and even the victory – has left a bitter taste. 
Most of those responsible for the mistakes – whether at the US Federal Reserve, the US Treasury, Britain’s Bank of England and Financial Services Authority, the European Commission and European Central Bank, or in individual banks, have not owned up to their failures. 
Banks that wreaked havoc on the global economy have resisted doing what needs to be done. 
Worse still, they have received support from the Fed, which one might have expected to adopt a more cautious stance, given the scale of its past mistakes and the extent to which it is evident that it reflects the interests of the banks that it was supposed to regulate. 
This is important not just as a matter of history and accountability: much is being left up to regulators. 
And that leaves open the question: can we trust them? 
To me, the answer is an unambiguous no, which is why we need to “hard-wire” more of the regulatory framework. 
The usual approach – delegating responsibility to regulators to work out the details – will not suffice. 
And thatraises another question: whom can we trust? 
On complex economic matters, trust had been vested in bankers (after all, if they make so much money, they obviously know something!) and in regulators, who often (but not always) came from the markets. 
But the events of recent years have shown that bankers can make megabucks, even as they undermine the economy and impose massive losses on their own firms. 
Bankers have also shown themselves to be “ethically challenged.” 
A court of law will decide whether Goldman Sachs’ behavior – betting against products that it created – was illegal. 
But the court of public opinion has already rendered its verdict on the far more relevant question of the ethics of that behavior. 
That Goldman’s CEO saw himself as doing “God’s work” as his firm sold short products that it created, or disseminated scurrilous rumors about a country where it was serving as an “adviser,” suggests a parallel universe, with different mores and values. 
As always, the “devil is in the details,” and financial-sector lobbyists have labored hard to make sure that the new regulations’ details work to their employers’ benefit. 
As a result, it will likely be a long time before we can assess the success of whatever law the US Congress ultimately enacts. 
But the criteria for judgment are clear: the new law must curb the practices that jeopardized the entire global economy, and reorient the financial system towards its proper tasks – managing risk, allocating capital, providing credit (especially to small- and medium-sized enterprises), and operating an efficient payments system. 
We should toast the likely successes: some form of financial-product safety commission will be established; more derivative trading will move to exchanges and clearing houses from the shadows of the murky “bespoke” market; and some of the worst mortgage practices will be restricted. 
Moreover, it looks likely that the outrageous fees charged for every debit transaction – a kind of tax that goes not for any public purpose but to fill the banks’ coffers – will be curtailed. 
But the likely failures are equally noteworthy: the problem of too-big-to-fail banks is now worse than it was before the crisis. 
Increased resolution authority will help, but only a little: in the last crisis, US government “blinked,” failed to use the powers that it had, and needlessly bailed out shareholders and bondholders – all because it feared that doing otherwise would lead to economic trauma. 
As long as there are banks that are too big to fail, government will most likely “blink” again. 
It is no surprise that the big banks succeeded in stopping some essential reforms; what was a surprise was a provision in the US Senate’s bill that banned government-insured entities from underwriting risky derivatives. 
Such government-insured underwriting distorts the market, giving big banks a competitive advantage, not necessarily because they are more efficient, but because they are “too big to fail.” 
The Fed’s defense of the big banks – that it is important for borrowers to be able to hedge their risks – reveals the extent to which it has been captured. 
The legislation was not intended to ban derivatives, but only to bar implicit government guarantees, subsidized by taxpayers (remember the $180 billion AIG bailout?), which are not a natural or inevitable byproduct of lending. 
There are many ways of curbing big banks’ excesses. 
A strong version of the so-called Volcker Rule (designed to force government-insured banks to return to their core mission of lending) might work. 
But the US government would be remiss to leave things as they are. 
The Senate bill’s provision on derivatives is a good litmus test: the Obama administration and the Fed, in opposing these restrictions, have clearly lined up on the side of big banks. 
If effective restrictions on the derivatives business of government-insured banks (whether actually insured, or effectively insured because they are too big to fail) survive in the final version of the bill, the general interest might indeed prevail over special interests, and democratic forces over moneyed lobbyists. 
But if, as most pundits predict, these restrictions are deleted, it will be a sad day for democracy – and a sadder day for prospects for meaningful financial reform. 

Fighting the Next Global Financial Crisis 
NEW HAVEN – What do people mean when they criticize generals for “fighting the last war”? 
It’s not that generals ever think they will face the same weapon systems and the same battlefields. 
They certainly know better. 
The error, to the extent that the generals make it, must operate at a more subtle level. 
Generals are sometimes slow to get around to developing plans and ordnance for those new weapon systems and battlefields. 
And, just as important, they sometimes assume that the public psychology and narratives that influence their soldiers' morale are the same as in the last war. 
That is also true for regulators whose job is to prevent financial crises. 
For the same reasons, they may be slow to change in response to new situations. 
They tend to adapt only gradually to changing public psychology. 
The need for regulation depends on public perceptions of the last crisis, and, as George Akerlof and I argued in Animal Spirits, these perceptions depend heavily on changing popular narratives. 
The latest progress reports from the Financial Stability Board (FSB) in Basel outline definite improvements in stability-enhancing financial regulations in 24 of the world’s largest economies. 
Their “Dashboard” tabulates progress in 14 different regulatory areas. 
For example, the FSB gives high marks for all 24 countries in implementing the Basel III risk-based capital requirements. 
But the situation is not altogether reassuring. 
These risk-based capital requirements may not be high enough, as Anat Admati and Martin Hellwig argued in their influential book The Bankers New Clothes. 
And there has been much less progress in a dozen other regulatory areas that the FSB tabulates. 
Consider, for example, regulations regarding money market funds, which, according to the FSB, only a few countries have developed since 2008. 
Money market funds are an alternative to banks for storing one’s money, offering somewhat higher interest rates, but without the insurance that protects bank deposits in many countries. 
As with bank deposits, investors can take their money out at any time. 
And, like bank deposits, the funds are potentially subject to a run if a large number of people try to withdraw their money at the same time. 
On September 16, 2008, a few days after the run on the US bank Washington Mutual began and the day after the Lehman Brothers bankruptcy was announced, a major United States money market fund, Reserve Primary Fund, which had invested in Lehman debt, was in serious trouble. 
With assets totaling less than it owed to investors, the fund seemed to be on the verge of a run. 
As panic rose among the public, the federal government, fearing a major run on other money market funds, guaranteed all such funds for one year, starting September 19, 2008. 
The reason why this run was so alarming as to require unprecedented government support stems from the narratives underlying it. 
In fact, the Reserve Primary Fund did not lose everything. 
It merely “broke the buck,” meaning that it couldn’t pay one dollar for a dollar on the books; but it could still pay $0.97. 
So why a crisis? 
After all, bank depositors regularly lose more when unexpected inflation erodes their savings’ real purchasing power (only the nominal value of those deposits is insured). 
But the narratives don’t focus on that. 
The loss of real value due to inflation hasn’t been a prominent theme of the public narrative in the US for decades, because sustained price stability has caused people to forget about it. 
But they hadn’t forgotten about the Great Depression of the 1930s, even though most people alive today weren’t alive then. 
In 2008, the Great Depression narrative was being recycled everywhere, with all its colorful stories of financial panic and angry crowds forming around closed banks. 
Moreover, trusted authorities had seemed to say again and again that such events were historically remote and could not happen again. 
In the 2008 angry zeitgeist, the public reaction to a relatively minor event took on stunning proportions. 
It took almost six years after the crisis for the US Securities and Exchange Commission to reduce money market funds’ vulnerability, by requiring in 2014 a “floating NAV” (net asset value), which means that prime money market funds no longer promise to pay out a dollar for a dollar’s nominal value. 
They will pay out whatever the depositor’s share in the accounts is. 
This does not insure the funds’ investors against losses. 
Yet this plausibly will help prevent runs because it means sudden withdrawals by some won’t damage the accounts of others who did not withdraw. 
The international regulatory framework has changed for the better since 2008, but no such changes can anticipate all the kinds of change in narratives that underlie public animal spirits. 
Regulators could have imposed a floating NAV decades ago; they didn’t because they didn’t foresee a narrative that would make money market funds unstable. 
Regulatory authorities could not have been expected to predict the sudden public attention to the newly discovered risk of runs on nonbank financial companies. 
As long as we have an economic system that produces growth by rewarding inspired actors and investors, we will face the risk that adverse talk and stories can suddenly and temporarily overwhelm the inspiration. 
Regulators must counter the risks implied by structures that are intrinsically destabilizing, as the money market funds were. 
But the most urgent regulations will always be time- and context-specific, because narratives change. 
And how these narratives resonate with the public may once again reveal chinks in our financial armor. 

Is Financial Repression Here to Stay? 
LONDON – There are several definitions of financial repression – and the repressors and the repressed tend to see things differently. 
But what financial repression usually involves is keeping interest rates below their natural market level, to the benefit of borrowers at the expense of savers. 
The borrowers are often governments, and in many emerging economies the state has funded its extravagances by paying bank depositors derisory rates of interest. 
But in the last seven years, since central banks in developed countries pushed down their base rates almost to zero, we have seen a First-World version of financial repression. 
A recent research report from the insurer Swiss Re describes who has won and lost as a result, and questions the sustainability of the policies pursued by institutions such as the United States Federal Reserve, the European Central Bank, and the Bank of England. 
The report’s argument is that while the stated motivation for ultra-loose monetary policy might be to guard against deflation and promote economic growth at a time when demand is weak, low interest rates also help governments fund their debt very cheaply. 
Moreover, as we enter the eighth year of aggressive easing, unintended consequences are starting to appear – notably asset-price bubbles, increasing economic inequality (as wealthier investors able to hold equities benefit at the expense of small savers), and the risk of higher inflation in the future. 
The jury may be out on the last point, but the first two are well established. 
Many countries now have over-heated property and equity markets; in the US, the S&P 500 index since 2009 has closely tracked the expansion of the Fed’s balance sheet. 
As a result, price-earnings (P/E) ratios, which reflect investors’ enthusiasm for equities, are now high by historical standards (Swiss Re has a Financial Market Excess index, which has returned to its 2007 level). 
Moreover, according to the Swiss Re report, “monetary policy and central bank asset purchases have aggravated economic inequality via equity price inflation.” 
The top 1% of US households have enjoyed a 50% gain in their financial wealth, while the bottom 90% have registered only a 12% profit. 
The bottom 20% have probably not benefited at all. 
Not surprisingly, central banks do not like this argument. 
Fed Chair Janet Yellen insists that years of near-zero interest rates and quantitative easing were not intended to make it easier for the US government to fund its deficit. 
She argues that focusing on asset prices ignores the role – helpful for all income groups – of the Fed’s monetary policy in maintaining growth and thus warding off the threat of a wholesale depression. 
But central banks accept that their policies have led to distortions in financial markets. 
For example, institutional investors, especially insurance companies and pension funds, have suffered badly. 
They are major holders of fixed-interest securities, and their investment income has fallen sharply. 
The returns they can provide to investors and pensioners have similarly fallen. 
Logically, therefore, individuals need to save much more to guarantee their income in retirement. 
That in itself may have a depressing effect on the economy, partly offsetting the monetary stimulus. 
Indeed, it may be one reason why highly expansionary policies by the Fed and other central banks have taken so long to generate growth. 
A further distortion stems from the prudential regulation adopted in reaction to the global financial crisis. 
The imposition of higher capital requirements on riskier investments has pushed financial institutions into holding government debt, which in turn means that they have less money available to lend for productive investment. 
Most countries have yet to see investment recover to pre-crisis levels. 
On this analysis, a return to “normal” interest rates cannot come soon enough. 
The alternative is further financial repression and, with it, low investment, rising economic and social tensions, and the emergence of a generation of impoverished pensioners. 
Like Monty Python’s city-terrorizing “Hell’s Grannies,” tomorrow’s elderly will surely make their voices heard. 
But can we really expect the old normal – positive long-term interest rates on government bonds – to return? 
Maybe it is unreasonable for investors to expect positive rates on safe assets in the future. 
Perhaps we should expect to pay central banks and governments to keep our money safe, with positive returns offered only in return for some element of risk. 
One reason is that investment may never reach its previous levels. 
If a service-based economy simply has less need for expensive fixed capital, why should we expect a return to the days when business investment was a strong component of demand? 
Apps are cheap. 
Furthermore, excess savings could be more than just a cyclical phenomenon. 
Individuals may have come to value future consumption, in retirement, over current consumption – the reverse of the traditional relationship. 
We are beginning to appreciate that in our productive years we must work harder, because our retirement years will be longer and healthier, and the income support provided by our governments and employers will be far less generous than they used to be. 
In other words, it is rational to save more now. 
In the long run, such a brave new world might not be an intolerable place. 
But the transition from here to there will be very challenging for financial firms, be they banks, asset managers or, particularly, insurers. 
The types of products that the latter offer to their customers will need to change, and the mix of assets in which they invest will be different, too. 
The question for regulators is whether, in responding to the financial crisis, they have created perverse incentives that are working against a recovery in long-term private-sector investment. 

The Financial Sector’s Climate Imperative 
PARIS – In the decade since the global financial crisis, mechanisms to boost the financial system’s resilience have been widely discussed. 
But while some progress has been made, the largely piecemeal approach that has been pursued may yet prove inadequate to support long-term financial stability. 
And a waning bull market means that the day of reckoning may not be far off. 
It is impossible to say when the next crisis will erupt, let alone how long it will last or how damaging it will be. 
But there is no doubt that the risks we face merit a more holistic approach, much like what was called for immediately after the 2008 crisis (though those calls lost steam as markets recovered). 
This means agreeing on and implementing a new vision for governing the global economy; assessing it rigorously and adjusting it as needed; and ensuring full accountability for every stakeholder. 
This vision must comprehend profound and ongoing changes, from increasingly concentrated market power to increasingly automated decision-making. 
It must also consider China’s rise, which demands that China be incorporated more fully into governance bodies, which will have far-reaching implications, especially as the country emerges as a less benevolent global actor. 
Furthermore, this vision must contend with rising nationalism and isolationism, exemplified by US President Donald Trump’s “America First” approach and his trade war with China. 
And it must recognize that the effectiveness of macroeconomic tools – both monetary and fiscal – is more limited today than in 2008. 
Finally, this new vision must reflect a clear decision about the extent to which we are committed to addressing climate and sustainability challenges. 
Despite the 2015 Paris climate agreement, which changed the paradigm in which we talk about climate change, world leaders have remained reluctant to do what is needed to make a real difference. 
We cannot continue to deceive ourselves by touting lofty goals while working only at the margins. 
If we are serious about building resilience, we need to press ahead with tough systemic changes that address how we produce and consume energy and finance our economies. 
This will require effective leadership. 
But, while collaboration among governments has helped drive some climate action, growing fragmentation within the international community has made the limits of this approach clear. 
A more effective strategy may be to establish a coalition of civil societies and major financial and non-financial institutions to lead progress toward shared goals. 
Such progress will demand, among other things, vastly improved accounting and reporting, together with smart regulatory reforms. 
Moreover, it will require that market participants put in place appropriate incentives and mandates to consider sustainability and climate action in decision-making. 
These can – and, in some cases, already do – include adjusted bonus schemes for managers, relevant monitoring requirements, and environmental labeling on consumer packaging. 
Reputational factors, and even the soft-power influence of local governments, which are increasingly concerned with environmental risk, can also play a role in motivating companies to pursue a green transformation. 
The financial sector, in particular, lacks the right incentives to contribute to addressing the climate challenge, because financial institutions’ decision-making is guided primarily – even exclusively – by monetary profit-seeking. 
This is short-sighted and untenable. 
Financial institutions need new incentives to reshape their operations, including their investments. 
For example, portfolio managers could have their bonuses partly tied to their investments’ performance on climate metrics. 
These changes need not undermine economic growth. 
On the contrary, many climate solutions – such as the shift toward renewable energy – help to generate jobs, and can even increase corporate profitability. 
In fact, replacing outdated and polluting infrastructure with modern and efficient alternatives represents one of the key investment opportunities of the century. 
But this is about much more than profits. 
As the Intergovernmental Panel on Climate Change warned in its recent report, the world’s current trajectory is leading to environmental devastation. 
Already, natural disasters are becoming more frequent and intense. 
As extreme weather events continue to multiply, large-scale destruction, migration, and conflict will become endemic. 
We are at a pivotal moment in history, and we will need to muster the bravery and conviction needed to undertake strong action. 
We must not only implement solutions, but also test and refine them regularly – not after a decade – guided by clear, evidence-based objectives and measures. 
Only then can we ensure that not just our financial systems, but all of the structures that underpin global stability are sufficiently resilient. 
To paraphrase Winston Churchill, we are faced with a choice between destruction and the status quo. 
If we choose the latter, we will have the former. 

The Spider of Finance 
LONDON – The global system of financial regulation is extraordinarily complex. 
Partly for that reason, it is little understood. 
In order to explain it to my students at Sciences Po in Paris, I have devised a kind of wiring diagram that shows the connections among the different bodies responsible for the various components of oversight. 
It makes a circuit board look straightforward. 
Many people show some spark of recognition at the mention of the Basel Committee on Banking Supervision, which sets capital standards for banks. 
They may also have heard of the Bank for International Settlements, the central banks’ central bank, in which the Basel Committee sits. 
And the International Organization of Securities Commissions (IOSCO), which sets standards for exchanges and securities regulators, has name recognition in some quarters. 
But when you get to the International Association of Insurance Supervisors, brows furrow. 
There are many other groupings. 
The International Accounting Standards Board does roughly what you might expect, though the Americans, while members, do not in fact use its standards – which are now confusingly called International Financial Reporting Standards. 
But the IASB has spawned other committees to oversee auditing. 
There is even – reminiscent of Hermann Hesse’s last novel, The Glass Bead Game – an international body that audits the bodies that audit the auditors. 
The Financial Action Task Force sounds dynamic, like a rapid-response team one might send to a troubled country. 
In fact, it is the part of the OECD that monitors the implementation of anti-money-laundering standards. 
Why it is part of the OECD when its remit is global is a mystery few can explain. 
This elaborate architecture (and there is a lot more) was assembled piecemeal in the 1980s and 1990s. 
Until the Asian financial crisis, it was a web without a spider at its center. 
When Hans Tietmeyer, a former head of the Bundesbank, was asked by G-7 finance ministers to review its effectiveness, he recommended a new spider, known as the Financial Stability Forum (FSF), which would examine the financial system as a whole and try to identify vulnerabilities that might cause future trouble. 
I was a member of the FSF for five years. 
I confess that I am rather afraid of spiders, but even an arachnophobe like me found little reason to be worried. The FSF was not a scary creature, and the individual regulators, national and international, were largely left to their own devices, with all of the unhappy consequences with which we have become acquainted. 
Before 2007, there was little political interest in tougher global standards, and individual countries resisted the idea that an international body might interfere in their sovereign right to oversee an unsound banking system. 
So when the next crisis hit, the FSF was found wanting, and in 2009 the G-20 governments decided that a tougher model was needed – the Financial Stability Board. 
The FSB has now been in operation for five years, and is currently working on some new proposals to deal with too-big-to-fail banks, which will be on the menu of the forthcoming G-20 meeting in Brisbane (along with surf and turf, Pavlovas, and other Australian delicacies). 
There is not (yet) an international group that audits the FSB’s effectiveness. 
But if there were, what would it say about the FSB’s performance so far, under the leadership of Mario Draghi and then of Mark Carney, each of whom did the job in his spare time, while running important central banks? 
On the asset side of the balance sheet, the auditors would be bound to note that the Board has done much useful work. 
Its regular reports to the G-20 pull together the diverse strands of regulation in a clear and comprehensible way. 
There is no better source of information. 
They would also record that pressure from the FSB has accelerated the work of sectoral regulators. 
The second Basel accord took more than a decade to conclude; Basel 3 was drawn up in little more than 24 months (though implementation is taking quite long). 
The performance of the IOSCO and the IAIS has similarly been sharpened by the need to report progress through the FSB. 
The Board has also issued some valuable warnings in its so-called “vulnerabilities” assessments. 
It has pointed to emerging tensions in the system, without falling into the trap of forecasting ten of the next three crises. 
And its peer review mechanism is prodding individual countries to strengthen their regulatory institutions. 
Nonetheless, a frank assessment would acknowledge that this spider has so far caught few flies. 
To switch animal metaphors, it is a watchdog without teeth. 
It can neither instruct the other regulators what to do (or not do) nor force member countries to comply with new regulations. 
Indeed, the entire edifice of global financial regulation is built on a “best endeavors” basis. 
The FSB’s charter, revised in 2012, says that signatories are subject to no legal obligations whatsoever. 
Unlike the World Trade Organization, for example, no international treaty underpins the FSB, which means that countries cannot be sanctioned for failing to implement the standards to which they are ostensibly committed. 
So a fair verdict would be that the FSB has done no more and no less than what its political masters have been prepared to allow it to do. 
There is no political will to create a body that could genuinely police international standards and prevent countries from engaging in competitive deregulation – and prevent banks from engaging in regulatory arbitrage. 
It seems that we must await the next crisis for that resolve to emerge. 
In the meantime, the FSB, with all of its weaknesses, is the best we have. 

The Harm of Regulatory Disharmony 
LONDON – In the alphabet soup of institutions involved in the regulation of global financial markets, the FMLC – the Financial Markets Law Committee – is not very prominent. 
Given that it is based only in London, having grown out of an initiative by the Bank of England 20 years ago, and that most of its members are lawyers, most banks have not even heard of it (though some of them are represented on its Council). 
But the services provided by the FMLC have never been more necessary. 
The FMLC’s mission is to identify and propose solutions to issues of legal uncertainty in financial markets that might create risks in the future. 
As a recent FMLC paper showed, the wave of new regulations implemented since the global financial crisis – many of which were poorly planned or inconsistent across countries – has left a jumbled landscape of legal uncertainties. 
Consider banks’ capital requirements. 
The Basel 3 Accord, adherence to which increased the liquidity of all banks and decreased their leverage, is viewed as a firm standard in some parts of the world. 
But, in others, it is regarded as a minimum to which additional rules may be added. 
Such “super-equivalence” or, more colloquially, “gold-plating” creates inconsistencies across jurisdictions, thereby facilitating regulatory arbitrage. 
Likewise, the European Union, in contrast to the United States, regards the leverage ratio as a supervisory optional extra, known as a “Pillar 2 measure” (which permits supervisors to add additional capital buffers to address a particular bank’s idiosyncratic risks). 
And, though both the US and the EU prohibit proprietary trading, they each define it differently. 
There are also inconsistencies between the US and the EU in derivatives-market reform, which the Financial Stability Board has warned could undermine the objectives, set out by the G-20, of greater standardization of contracts and enhanced transparency. 
And, whereas the Basel standards continue to refer extensively to credit ratings as the basis for assessing the creditworthiness of borrowers, the Dodd-Frank Act in the US moves away from reliance on ratings. 
Such differences – and the FMLC Council lists many more – reflect a dangerous shift in the world’s approach to regulation. 
The early post-crisis enthusiasm for new, globally agreed regulatory standards has given way to a range of national initiatives, driven by domestic political agendas, with little regard for cross-border compatibility. 
More problematic, the peer-review procedures that have been introduced so far will do little, if anything, to resolve the problem. 
Nor do the memoranda of understanding drawn up by national financial regulators offer hope of salvation. 
According to the FMLC paper, “they are usually the subject of interpretative disagreement, are not legally binding, do not benefit from any binding dispute-resolution mechanisms, and do not prevent national authorities from acting unilaterally.” 
So what can be done? 
The FMLC makes four important recommendations. 
First, the Financial Stability Board should help to reduce avoidable inconsistencies across countries by propagating a set of high-level principles to which all member countries would be expected to conform when introducing new regulations. 
Indeed, the need for such principles should have been recognized in 2009, when the wave of re-regulation began. 
Second, to address existing regulatory conflicts, the FMLC recommends establishing a “conflict of regulation” framework to determine which legal regime – that of a global firm’s home country or that of its local subsidiary’s host country – has jurisdiction in a specific cross-border dispute. 
The alternative of relying on a third-party multilateral organization to act as mediator in such disputes, the report explains, has little support from G-20 countries. 
Third, the FMLC proposes expanding the Financial Stability Board’s mandate. 
That body, which emerged from the old Financial Stability Forum in 2009 with few powers and no formal status, has only recently become a separate legal entity. 
Strengthening its powers – to include, for example, the establishment of principles for addressing cross-border legal inconsistencies – could go a long way toward addressing the problems raised by regulatory disparities. 
Finally, the FMLC calls for the establishment of a permanent G-20 secretariat to improve continuity and coordination across G-20 presidencies. 
As it stands, political priorities are constantly in flux, with individual dossiers losing their centrality, and even vanishing, from year to year. 
Regulatory uncertainty may not seem like the most exciting topic, which is probably why the FMLC report has attracted so little attention. 
But, as the 2008 global financial crisis starkly demonstrated, it can render markets dysfunctional, with ambiguity about different regulators’ responsibilities making it difficult, even impossible, to address the problems caused by failing firms. 
(Former US Treasury Secretary Tim Geithner’s crisis memoir makes that point painfully clear.) 
When I chaired the United Kingdom’s regulatory body, the Financial Services Authority, I believed in the idea that lawyers should be on tap, not on top. 
But they should always be heard. 
The FMLC’s influential lawyers have spoken. 
The world should listen. 

Europe’s Dysfunctional Growth Compact 
BRUSSELS – Recently, a €10 billion ($13 billion) shortfall in this year’s European Union budget came to light. 
As a result, the EU cannot reimburse member states for recent unexpected expenditures, including emergency outlays, such as aid to Italian earthquake victims, and spending aimed at boosting economic growth and employment, such as the accelerated absorption of unused Structural and Cohesion Funds. 
Member states have refused the European Commission’s request for extra contributions to cover the shortfall, causing talks over next year’s budget to collapse. 
Meanwhile, negotiations over the 2014-2020 Multiannual Financial Framework (MFF), the central-planning instrument for the use of EU funds, have broken down, owing to disagreement over key issues, including the size of the budget and the composition of expenditure. 
The decision has been postponed until early next year. 
The situation has highlighted the ambiguity surrounding the EU budget’s role in European integration. 
While all EU leaders have advocated using the budget to stimulate economic growth, little action is being taken. 
This raises doubts about the so-called “growth compact” launched by the European Council in June, particularly about the political commitment to mobilize €120 billion quickly by reallocating unused Structural and Cohesion Funds and increasing the European Investment Bank’s lending capacity. 
Indeed, although European governments have agreed to encourage faster absorption of EU funds in crisis countries, they have refused to pay into the EU budget to enable the funds’ disbursement. 
This contradiction signals that national interests continue to prevail in EU budget negotiations, which are often exploited for domestic political gain in member states. 
Unless a mechanism is introduced that facilitates the rapid disbursement of EU funds, thus insulating the budget from destructive politicization, these funds cannot be used to stimulate growth in times of crisis. 
Not all member states contribute equally to the EU budget; some are net contributors, while others are net beneficiaries. 
At the end of EU-financed investment projects – payments for which are agreed and executed in the annual budget framework – the money is transferred to the beneficiary. 
Cash to net beneficiaries is paid in by net contributors. 
One country’s inflow of EU money is thus another country’s outflow – and these are grants, not loans. 
As a result, agreement every seven years on overall expenditures is inadequate to preclude conflict on annual budgets. 
Nonetheless, steps can be taken to prevent political deadlock in budget negotiations, while increasing the budget’s flexibility so that it can be used to stimulate growth. 
For example, some leveraging of the budget could be allowed, although this would spark controversy, given that EU treaties require that the budget remains balanced at all times. 
But the EU budget has already enabled an indirect form of leveraging: the European Commission’s use of implicit budget guarantees to raise capital on financial markets. 
These funds are used to provide financial assistance to non-eurozone EU countries through the Medium-Term Financial Assistance Facility, to eurozone countries through the now-expired European Financial Stabilization Mechanism, and to partner third countries. 
Between the MTFA, the EFSM, and payments to third countries, the total exposure this year is €70.5 billion. 
Some borrowing over the seven-year MFF period may be possible, while upholding the medium-term objective of a balanced budget. 
Such leveraging of the EU budget would complement the recently established European Stabilization Mechanism (the successor to the EFSM) and the MTFA. 
Countries receiving assistance should be given the option of applying for an anticipated disbursement of EU funds. 
Following a request by a member state, the Commission would be entitled to borrow on capital markets under the implicit EU budget guarantee, with the maximum amount determined by the size of the country’s unused (pre-allocated) Structural and Cohesion Funds. 
The capital would be repaid in annual installments as the funds become available through the EU budget, while the national co-financing rate would apply to interest payments. 
This framework would reduce incentives for using annual EU budget negotiations to advance political agendas. 
Net contributors would be locked into a relationship with the markets – a convincing creditor. 
At the same time, imposing conditionality on this kind of disbursement would enhance legitimacy, as opposed to the current framework, in which beneficiaries seek entitlements. 
Indeed, all EU countries – not just eurozone members – would benefit from such a framework. 
Such an initiative could co-exist with European Council President Herman Van Rompuy’s proposal to create a risk-sharing mechanism only for eurozone countries. 
The revamped growth compact would more effectively allocate European resources and increase the flexibility of permanent transfers from rich to poor countries – provided that the money is used for productive investment. 
Van Rompuy’s budget would also help to stabilize the eurozone in the event that asymmetric shocks require temporary transfers from unaffected to crisis-stricken countries. 
In fact, the two instruments may well be complementary in eurozone countries. 
Crises are typically associated with a drop not only in actual growth, but also in a country’s growth potential, owing to deferred investment. 
A risk-sharing facility could limit the decline in actual growth after a crisis, while prompt EU-financed investment would prevent a country from shifting to a lower growth path. 

Financing International Cooperation 
NEW YORK – Today, the provision of public goods and services at the global and regional level is dangerously inadequate. 
The United Nations system, the European Union, and other multilateral organizations are under great stress, because their budgets are inadequate to meet their responsibilities. 
While a few free-market ideologues may still argue that profit-motivated corporations should run the world without governments, experience proves otherwise. 
Governments are essential to provide universal access to vital services such as health and education; infrastructure such as highways, railways, and the power grid; and funding for scientific research and early-stage technology. 
Governments are also needed to tax the rich and transfer income to the poor. 
Otherwise our societies will become dangerously unequal, unjust, and unstable – as is occurring in the US today. 
Governments in successful high-income countries collect at least 25% of the national income in taxes to carry out these functions. 
In the world’s most successful economies, notably the social democracies of Northern Europe, governments tax around 50% of the national income. 
They use these revenues for three vital functions: public services, public investments, and transfer payments from rich to poor. 
These three public functions are urgently needed beyond the national level. 
Groups of neighboring countries – such as the EU and the African Union (AU) – need public services, public investments, and transfer payments that cut across national borders, and that often involve dozens of countries simultaneously. 
Regional groups need adequate regional budgets to carry out their vital functions. 
In the same way, the UN as a whole needs an adequate budget to finance global efforts to fight climate change, protect the oceans, end extreme poverty, resist nuclear proliferation, and stop local conflicts through the UN Security Council before they become global disasters. 
The EU, AU, and other regional groups should be building regional power grids based on renewable energy (such as wind, solar, and hydro power) instead of fossil fuels. 
These groups should also be transferring funds from the richest to the poorest regions to eliminate pockets of persistent poverty. 
And they should be protecting nature across borders and investing much more in science and technology to take advantage of the digital revolution. 
Yet the budget resources available for such multilateral cooperation are a pittance. 
While many EU member states tax at least 25% of national income for public spending at the national and local levels, the funding available for the EU-wide budget is just 1% of the member countries’ combined income. 
Some additional funding is available through the European Investment Bank, but this is for investment projects that can be funded on a market basis. 
The reason for the underfunding is obvious. 
Taxes are under the jurisdiction of national and local governments, which jealously guard their tax prerogatives. 
The national governments agreed to transfer only 1% of national income to Brussels for EU-wide purposes. 
The result is an EU with very big aspirations and a very small operating budget. 
Still worse, the nationalists in Europe (such as the United Kingdom’s Brexiteers) claim that the EU budget is too large, not woefully small. 
No country could hold itself together on just 1% of the national income. 
And it may happen that the EU, too, will be unable to maintain itself on such a tiny budget. 
EU-wide public services, investments, and transfers are a tiny fraction of what is needed to have a truly effective union. 
The situation is even more dire at the global level. 
The UN’s regular budget is a mere $2.7 billion per year, or just 0.003% of the world’s $90 trillion total income. 
Its total annual revenue, including additional contributions of member states for peacekeeping and humanitarian operations, is around $50 billion, or 0.06% of the world income – a fraction of the real need. 
UN member states rightly adopt bold measures such as the Sustainable Development Goals and the Paris Climate Agreement, yet lack the financial means to implement them. 
Even though the UN budget is small, the US government routinely attacks the institution for being bloated and too expensive. 
The US pays around 22% of the annual $2.7 billion regular budget, or some $600 million each year, but this is less than $2 per American! 
Adding in peacekeeping and other payments, the total annual US contribution per year comes to around $10 billion, or roughly $30 per capita. 
By being so miserly, the US does itself a disservice. 
The ultimate costs to the US, and the world, of chronic under-investment in global needs could run into the tens of trillions of dollars. 
In addition to payments through the UN, high-income countries make direct payments to poorer countries in the form of official development assistance. 
Combined net ODA totals around $150 billion each year, or just 0.31% of the income of the donor countries, compared with the long-promised 0.7% of income for ODA. 
Because these global transfers are so small, extreme poverty persists in a world of plenty. 
And long-standing pledges by rich countries to provide poor countries with at least $100 billion per year in climate-related financing are still unfulfilled. 
The world must get serious about matching multilateral money with multilateral needs. 
The EU should quickly double the EU budget to 2% of EU income, and more over time. 
Likewise, the world should devote at least 2% of world income to global public goods and services to end extreme poverty, fight climate change, protect nature, save millions of destitute people from premature deaths, ensure schooling for all children, and uphold peace through the UN. 
The time has come to think about new global taxes – on corporate incomes, offshore accounts, international financial transactions, billionaires’ net wealth, and pollution – to pay for an interconnected world under stress. 
With creativity, cooperation, and foresight, we can mobilize new revenues to turn our great global wealth into sustainable wellbeing for all. 

Financing the Fight against Climate Change 
COPENHAGEN – It is now generally agreed that the developed countries will have to make a substantial financial contribution to enable the developing world to deal with climate change. 
Funds are needed to invest in new low-carbon energy sources, reforestation and protection of rain forests, land-use changes, and adaptation and mitigation. 
But there is no similar agreement on where the money will come from. 
The developed countries are reluctant to make additional financial commitments. 
They have just experienced a significant jump in their national debts, and they still need to stimulate their domestic economies. 
This colors their attitudes. 
It looks like they will be able to cobble together a “fast-start” fund of $10 billion a year for the next few years, but more does not fit into their national budgets. 
This is unlikely to satisfy the developing countries. 
I believe that this amount could be at least doubled and assured for a longer time span. 
Developed countries’ governments are laboring under the misapprehension that funding must come from their national budgets. 
But that is not the case. 
They have the money already. 
It is lying idle in their reserve accounts at the International Monetary Fund. 
Spending it would not add to any country’s fiscal deficit. 
All they need to do is to tap into it. 
In September 2009, the IMF distributed to its members $283 billion worth of Special Drawing Rights, an arcane financial instrument, but one that essentially constitutes additional foreign exchange. 
They can be used only by converting them into one of four currencies, at which point they begin to carry interest at those currencies’ combined treasury-bill rate. 
At present, the interest rate is less than 0.5%. 
Of the $283 billion worth of recently distributed SDRs, more than $150 billion went to the 15 largest developed economies. 
These SDRs will sit largely untouched in the reserve accounts of these countries, which don't really need any additional reserves. 
I propose that the developed countries – in addition to establishing a fast-start fund of $10 billion a year – band together and lend $100 billion dollars worth of these SDRs for 25 years to a special green fund serving the developing world. 
The fund would jump-start forestry, land-use, and agricultural projects – areas that offer the greatest scope for reducing or mitigating carbon emissions, and that could produce substantial returns from carbon markets. 
The returns such projects could generate go beyond addressing carbon emissions. 
Returns from land-use projects, for example, could also include the potential to create more sustainable rural livelihoods, enable higher and more resilient agricultural yields, and generate rural employment. 
This is a simple and practical idea, and there is a precedent for it. 
The United Kingdom and France each recently lent $2 billion worth of SDRs to a special fund at the IMF to support concessionary lending to the poorest countries. 
At that point, the IMF assumed responsibility for the principal and interest on the SDRs. 
The same could be done in this case. 
I further propose that member countries agree to use the IMF's gold reserves to guarantee the interest payments and repayment of the principal. 
The IMF owns a lot of gold – more than 100 million ounces – and it is on the books at historical cost. 
Thus, at current market prices, it is worth more than $100 billion over its book value. 
It has already been designated to be used for the benefit of the least developed countries. 
The proposed green fund would meet this requirement. 
This means that the developed countries that lend the SDRs would incur no interest expense and no responsibility for repayment. 
There are some serious technical problems involved in offsetting the interest income against the interest expense, particularly in the United States, but the net effect would be a wash. 
These technical difficulties stood in the way of previous attempts to put the SDRs to practical use, but they do not apply to the proposed green fund. 
There are three powerful arguments in favor of this proposal. 
First, the green fund could be self-financing or even profitable; very little of the IMF’s gold, if any, would actually be used. 
Second, the projects will earn a return only if developed countries cooperate in setting up the right type of carbon markets. 
Establishing a green fund would be an implicit pledge to do so by putting the gold reserves of the IMF at risk. 
Finally, this money would be available now, jump-starting carbon-saving projects. 
For all these reasons, the developing countries ought to embrace my proposal. 

Financing the Green Economy 
ADDIS ABABA – At the climate-change summit in Copenhagen last December, political leaders expressed a strong will to urgently combat global warming. 
As we approach the next climate-change summit in Cancún, Mexico, this December, the international community must deliver concrete results and move forward to address the challenge. 
Finance is a key ingredient of the global response to climate change. 
In this regard, at the Copenhagen summit developed countries committed themselves to the goal of jointly mobilizing $100 billion annually by 2020 to address the needs of developing countries. 
These funds would be transferred to developing countries in the context of meaningful – and transparently implemented – mitigation measures taken on their behalf. United Nations Secretary-General Ban Ki-moon’s High-level Advisory Group on Climate Finance (AGF), which we chaired, was established to identify practical proposals for how developed countries can mobilize this level of climate financing by 2020. 
The 21-member group included heads of state and ministers from both developed and developing countries, representatives from international organizations, experts on public finance and development, and leaders from the private sector. 
Admittedly, the current global economic environment has placed public finances in many developed countries under extreme pressure. 
Nevertheless, the AGF’s report concludes that reaching the goal of raising $100 billion a year by 2020, while challenging, is feasible. 
It will require a mix of new public sources, a scaling-up of existing public sources, and increased private flows. 
Among the AGF’s conclusions, which we have presented to the UN Secretary-General, there are some important messages: 
First, a carbon price in the range of $20-25 per ton of CO2 by 2020 is key to mobilizing climate finance at this level. 
Carbon prices expand the potential for both public and private financing by raising public revenue and creating private-sector demand for emission reductions. 
Second, new public mechanisms can mobilize tens of billions of dollars annually, an important step towards the $100-billion goal. 
Examples include the auctioning of emissions allowances, carbon taxes, and the pricing of emissions from international transport. 
Policy instruments based on carbon pricing are particularly attractive, because they raise revenue for adaptation to climate change in developing countries while creating incentives for mitigation in developed countries. 
Third, international private investment flows are essential. 
It is the private sector that will finance most low-carbon, sustainable growth. 
Public funding should help leverage climate-friendly private investments. 
The multilateral development banks, in close collaboration with the UN system, can play a significant multiplier role in this regard. 
Several sources of financing for adaptation and mitigation efforts in developing countries could be made operational relatively quickly. 
We need to make progress on establishing the Copenhagen Green Climate Fund, including, possibly, regional and thematic vehicles, such as an Africa Green Fund. 

Financing Health and Education for All 
NEW YORK – In 2015, around 5.9 million children under the age of five, almost all in developing countries, died from easily preventable or treatable causes. 
And up to 200 million young children and adolescents do not attend primary or secondary school, owing to poverty, including 110 million through the lower-secondary level, according to a recent estimate. 
In both cases, massive suffering could be ended with a modest amount of global funding. 
Children in poor countries die from causes – such as unsafe childbirth, vaccine-preventable diseases, infections such as malaria for which low-cost treatments exist, and nutritional deficiencies – that have been almost totally eliminated in the rich countries. 
In a moral world, we would devote our utmost effort to end such deaths. 
In fact, the world has made a half-hearted effort. 
Deaths of young children have fallen to slightly under half the 12.7 million recorded in 1990, thanks to additional global funding for disease control, channeled through new institutions such as the Global Fund to Fight AIDS, Tuberculosis, and Malaria. 
When I first recommended such a fund in 2000, skeptics said that more money would not save lives. 
Yet the Global Fund proved the doubters wrong: More money prevented millions of deaths from AIDS, TB, and malaria. 
It was well used. 
The reason that child deaths fell to 5.9 million, rather to near zero, is that the world gave only about half the funding necessary. 
While most countries can cover their health needs with their own budgets, the poorest countries cannot. 
They need about $50 billion per year of global help to close the financing gap. 
Current global aid for health runs at about $25 billion per year. 
While these numbers are only approximate, we need roughly an additional $25 billion per year to help prevent up to six million deaths per year. 
It’s hard to imagine a better bargain. 
Similar calculations help us to estimate the global funding needed to enable all children to complete at least a high-school education. 
UNESCO recently calculated the global education “financing gap” to cover the incremental costs – of classrooms, teachers, and supplies – of universal completion of secondary school at roughly $39 billion. 
With current global funding for education at around $10-15 billion per year, the gap is again roughly $25 billion, similar to health care. 
And, as with health care, such increased global funding could effectively flow through a new Global Fund for Education. 
Thus, an extra $50 billion or so per year could help ensure that children everywhere have access to basic health care and schooling. 
The world’s governments have already adopted these two objectives – universal health care and universal quality education – in the new Sustainable Development Goals. 
An extra $50 billion per year is not hard to find. 
One option targets my own country, the United States, which currently gives only around 0.17% of gross national income for development aid, or roughly one-quarter of the international target of 0.7% of GNI for development assistance. 
Sweden, Denmark, Norway, the Netherlands, Luxembourg, and the United Kingdom each give at least 0.7% of GNI; the US can and should do so as well. 
If it did, that extra 0.53% of GNI would add roughly $90 billion per year of global funding. 
The US currently spends around 5% of GDP, or roughly $900 billion per year, on military-related spending (for the Pentagon, the CIA, veterans, and others). 
It could and should transfer at least $90 billion of that to development aid. 
Such a shift in focus from war to development would greatly bolster US and global security; the recent US wars in North Africa and the Middle East have cost trillions of dollars and yet have weakened, not strengthened, national security. 
A second option would tax the global rich, who often hide their money in tax havens in the Caribbean and elsewhere. 
Many of these tax havens are UK overseas territories. 
Most are closely connected with Wall Street and the City of London. 
The US and British governments have protected the tax havens mainly because the rich people who put their money there also put their money into campaign contributions or into hiring politicians’ family members. 
The tax havens should be called upon to impose a small tax on their deposits, which total at least $21 trillion. 
The rich countries could enforce such a tax by threatening to cut off noncompliant havens’ access to global financial markets. 
Of course, the havens should also ensure transparency and crack down on tax evasion and corporate secrecy. 
Even a deposit tax as low as 0.25% per year on $21 trillion of deposits would raise around $50 billion per year. 
Both solutions would be feasible and relatively straightforward to implement. 
They would underpin the new global commitments contained in the SDGs. 
At the recent Astana Economic Forum, Kazakhstan’s President Nursultan Nazarbayev wisely called for some way to tax offshore deposits to fund global health and education. 
Other world leaders should rally to his call to action. 
Our world is immensely wealthy and could easily finance a healthy start in life for every child on the planet through global funds for health and education. 
A small shift of funds from wasteful US military spending, or a very small levy on tax havens’ deposits – or similar measures to make the super-rich pay their way – could quickly and dramatically improve poor children’s life chances and make the world vastly fairer, safer, and more productive. 
There is no excuse for delay. 

Education Saved My Life 
NEW YORK – My family was murdered before I could tie my shoes. 
As a young boy in Sierra Leone, years that should have been playful and carefree were spent fighting in someone else’s war. 
For me, childhood was a nightmare; escape always seemed impossible. 
But when the war officially ended, in 2002, I began finding ways to recover. 
One of the most important has been an opportunity I couldn’t have imagined as an angry, illiterate, nine-year-old soldier: school. 
I am living proof of the transformative power of education. 
Thanks to hard work and lots of good fortune, I managed to graduate from high school and then university. 
Now, in just a few months, I will begin graduate classes at the Fordham University School of Law, an unimaginable destination for most of the former child soldiers in my country. 
And yet, throughout my brief educational journey, one question has always nagged me: why did luck play such a crucial role? 
After all, education is supposed to be a universal human right. 
If only it were that simple. 
Today, more than 260 million children are out of school, and over 500 million boys and girls who do attend are not receiving a quality education, as the International Commission on Financing Global Education Opportunity discovered. 
By 2030, more than half of the world’s school-age children – some 800 million kids – will lack the basic skills needed to thrive or secure a job in the workplace of the future. 
Addressing this requires money. 
But while education may be the best investment a government can make to ensure a better future for its people, education financing worldwide is far too low. 
In fact, education accounts for just 10% of total international development aid, down from 13% a decade ago. 
To put this in perspective, developing countries receive just $10 per child annually in global education support, barely enough to cover the cost of a single textbook. 
In an age of self-driving cars and smart refrigerators, this dearth of funding is simply unacceptable. 
Over the past few years, I have advocated on behalf of three global education initiatives – the International Commission on Financing Global Education Opportunity (Education Commission), the Global Partnership for Education (GPE), and the Education Cannot Wait fund (ECW). 
I have done so eagerly, because these organizations are working collectively toward the same goal: to raise funds to make quality education for every child, everywhere, more than a matter of luck. 
One of the best ways to do this is by supporting the International Finance Facility for Education, an initiative spearheaded by the Education Commission that could unlock the greatest global investment in education ever recorded. 
Young people around the world understand what’s at stake. 
Earlier this month, Global Youth Ambassadors, representing their peers in nearly 80 countries, presented a petition signed by more than 1.5 million children to United Nations Secretary-General António Guterres calling for the UN to support the finance facility. 
By leveraging roughly $2 billion in donor guarantees, the finance facility aims to make $10 billion in grant and concessional funding available to countries that need it most. 
If adopted widely, the program could make it possible for developing countries to provide quality education to millions more children, including refugees, young girls, and former child soldiers like me. 
Politicians often say that young people are the leaders of tomorrow. 
That’s true; we are. 
But platitudes not backed by financial support are meaningless. 
Simply put, the world must unite to fund quality education for everyone. 
The International Finance Facility for Education – which is already backed by the World Bank, regional development banks, GPE, ECW, and numerous UN agencies – is among the best ways to make that happen. 
Twenty years ago, law school was an impossible dream for me. 
Today, thanks to hard work, global support, and much good fortune, my future is brighter than it has ever been. 
But my story should not be an exception. 
To ensure that others can gain a quality education and follow the path that has opened up to me, we must remove luck from the equation. 

Finding the Keys to National Prosperity 
NEW YORK – In many of history’s most successful economic reforms, clever countries have learned from the policy successes of others, adapting them to local conditions. 
In the long history of economic development, eighteenth-century Britain learned from Holland; early nineteenth-century Prussia learned from Britain and France; mid-nineteenth-century Meiji Japan learned from Germany; post-World War II Europe learned from the United States; and Deng Xiaoping’s China learned from Japan. 
Through a process of institutional borrowing and creative adaptation, successful economic institutions and cutting-edge technologies spread around the world, and thereby boost global growth. 
Today, too, there are some great opportunities for this kind of “policy arbitrage,” if more countries would only take the time to learn from other countries’ successes. 
For example, while many countries are facing a jobs crisis, one part of the capitalist world is doing just fine: northern Europe, including Germany, the Netherlands, and Scandinavia. 
Germany’s unemployment rate this past summer was around 5.5%, and its youth unemployment rate was around 8% – remarkably low compared with many other high-income economies. 
How do northern Europeans do it? 
All of them use active labor market policies, including flex time, school-to-work apprenticeships (especially Germany), and extensive job training and matching. 
Likewise, in an age of chronic budget crises, Germany, Sweden, and Switzerland run near-balanced budgets. 
All three rely on budget rules that call for cyclically adjusted budget balance. 
And all three take a basic precaution to keep their entitlement spending under control: a retirement age of at least 65. 
This keeps costs much lower than in France, and Greece, for example, where the retirement age is 60 or below, and where pension outlays are soaring as a result. 
In an age of rising health-care costs, most high-income countries – Canada, the European Union’s Western economies, and Japan – manage to keep their total health-care costs below 12% of GDP, with excellent health outcomes, while the US spends nearly 18% of GDP, yet with decidedly mediocre health outcomes. 
And, America’s is the only for-profit health system of the entire bunch. 
A new report by the US Institute of Medicine has found that America’s for-profit system squanders around $750 billion, or 5% of GDP, on waste, fraud, duplication, and bureaucracy. 
In an age of soaring oil costs, a few countries have made a real difference in energy efficiency. 
The OECD countries, on average, use 160 kilograms of oil-equivalent energy for every $1,000 of GDP (measured at purchasing power parity). 
But, in energy-efficient Switzerland, energy use is just 100 kg per $1,000 of GDP, and in Demark it is just 110 kg, compared with 190 kg in the US. 
In an age of climate change, several countries are demonstrating how to move to a low-carbon economy. 
On average, the rich countries emit 2.3 kg of CO2 for every kg of oil-equivalent unit of energy. 
But France emits just 1.4 kg, owing to its enormous success in deploying safe, low-cost nuclear energy. 
Sweden, with its hydropower, is even lower, at 0.9 kg. And, while Germany is abandoning domestic production of nuclear energy for political reasons, we can bet that it will nonetheless continue to import electricity from France’s nuclear plants. 
In an age of intense technological competition, countries that combine public and private research and development (R&D) financing are outpacing the rest. 
The US continues to excel, with huge recent breakthroughs in Mars exploration and genomics, though it is now imperiling that excellence through budget cuts. 
Meanwhile, Sweden and South Korea are now excelling economically on the basis of R&D spending of around 3.5% of GDP, while Israel’s R&D outlays stand at a remarkable 4.7% of GDP. 
In an age of rising inequality, at least some countries have narrowed their wealth and income gaps. 
Brazil is the recent pacesetter, markedly expanding public education and systematically attacking remaining pockets of poverty through targeted transfer programs. 
As a result, income inequality in Brazil is declining. 
And, in an age of pervasive anxiety, Bhutan is asking deep questions about the meaning and nature of happiness itself. 
In search of a more balanced society that combines economic prosperity, social cohesion, and environmental sustainability, Bhutan famously pursues Gross National Happiness rather than Gross National Product. 
Many other countries – including the United Kingdom – are now following Bhutan’s lead in surveying their citizenry about life satisfaction. 
The countries highest on the ladder of life satisfaction are Denmark, Finland, and Norway. 
Yet there is hope for those at lower latitudes as well. 
Tropical Costa Rica also ranks near the top of the happiness league. 
What we can say is that all of the happiest countries emphasize equality, solidarity, democratic accountability, environmental sustainability, and strong public institutions. 
So here is one model economy: German labor-market policies, Swedish pensions, French low-carbon energy, Canadian health care, Swiss energy efficiency, American scientific curiosity, Brazilian anti-poverty programs, and Costa Rican tropical happiness. 
Of course, back in the real world, most countries will not achieve such bliss anytime soon. 
But, by opening our eyes to policy successes abroad, we would surely speed the path to national improvement in countries around the world. 

Finding the Policy Exit 
NEW YORK – There is a general consensus that the massive monetary easing, fiscal stimulus, and support of the financial system undertaken by governments and central banks around the world prevented the deep recession of 2008-2009 from devolving into Great Depression II. 
Policymakers were able to avoid a depression because they had learned from the policy mistakes made during the Great Depression of the 1930’s and Japan’s near depression of the 1990’s. 
As a result, policy debates have shifted to arguments about what the recovery will look like: V-shaped (rapid return to potential growth), U-shaped (slow and anemic growth), or even W-shaped (a double-dip). 
During the global economic free fall between the fall of 2008 and the spring of 2009, an L-shaped economic and financial Armageddon was still firmly in the mix of plausible scenarios. 
The crucial policy issue ahead, however, is how to time and sequence the exit strategy from this massive monetary and fiscal easing. 
Clearly, the current fiscal path being pursued in most advanced economies – the reliance of the United States, the euro zone, the United Kingdom, Japan, and others on very large budget deficits and rapid accumulation of public debt – is unsustainable. 
These large fiscal deficits have been partly monetized by central banks, which in many countries have pushed their interest rates down to 0% (in the case of Sweden to even below zero), and sharply increased the monetary base through unconventional quantitative and credit easing. 
In the US, for example, the monetary base more than doubled in a year. 
If not reversed, this combination of very loose fiscal and monetary policy will at some point lead to a fiscal crisis and runaway inflation, together with another dangerous asset and credit bubble. 
So the key emerging issue for policymakers is to decide when to mop up the excess liquidity and normalize policy rates – and when to raise taxes and cut government spending (and in which combination). 
The biggest policy risk is that the exit strategy from monetary and fiscal easing is somehow botched, because policymakers are damned if they do and damned if they don’t. 
If they have built up large, monetized fiscal deficits, they should raise taxes, reduce spending, and mop up excess liquidity sooner rather than later. 
The problem is that most economies are now barely bottoming out, so reversing the fiscal and monetary stimulus too soon – before private demand has recovered more robustly – could tip these economies back into deflation and recession. 
Japan made that mistake in 1998-2000, just as the US did in 1937-1939. 
But, if governments maintain large budget deficits and continue to monetize them as they have been doing, at some point – after the current deflationary forces become more subdued – bond markets will revolt. 
When that happens, inflationary expectations will mount, long-term government bond yields will rise, mortgage rates and private market rates will increase, and one would end up with stagflation (inflation and recession). 
So how should we square the policy circle? 
First, different countries have different capacities to sustain public debt, depending on their initial deficit levels, existing debt burden, payment history, and policy credibility. 
Smaller economies – like some in Europe – that have large deficits, growing public debt, and banks that are too big to fail and too big to be saved may need fiscal adjustment sooner to avoid failed auctions, rating downgrades, and the risk of a public-finance crisis. 
Second, if policymakers credibly commit – soon – to raise taxes and reduce public spending (especially entitlement spending), say, in 2011 and beyond, when the economic recovery is more resilient, the gain in markets’ confidence would allow a looser fiscal policy to support recovery in the short run. 
Third, monetary policy authorities should specify the criteria that they will use to decide when to reverse quantitative easing, and when and how fast to normalize policy rates. 
Even if monetary easing is phased out later rather than sooner – when the economic recovery is more robust – markets and investors need clarity in advance on the parameters that will determine the timing and speed of the exit. 
Avoiding another asset and credit bubble from arising by including the price of assets like housing in the determination of monetary policy is also important. 
Getting the exit strategy right is crucial: serious policy mistakes would significantly heighten the threat of a double-dip recession. 
Moreover, the risk of such a policy mistake is high, because the political economy of countries like the US may lead officials to postpone tough choices about unsustainable fiscal deficits. 
In particular, the temptation for governments to use inflation to reduce the real value of public and private debts may become overwhelming. 
In countries where asking a legislature for tax increases and spending cuts is politically difficult, monetization of deficits and eventual inflation may become the path of least resistance. 

Firebombing the Messenger in Armenia 
Late last month, while putting the finishing touches on the next edition of our newspaper, Haykakan Zhamanak (The Armenian Times), we heard an explosion outside our office. 
Staff members rushed to find my car on fire. 
That explosion was not unanticipated – nor was the announcement by Armenia’s police that the car had caught fire due to technical problems. 
But the real problem is censorship, for the explosion was but the latest offensive in Armenia’s hidden war against the press. 
For us the battle for press freedom began in 1999, soon after founding our newspaper, then named Oragir (Diary). 
It made an instant impact, but not in the way we hoped. 
Throughout 1999 there were more court cases against Oragir than against all other Armenian media combined since independence in 1991. 
In one case, the prosecutor’s office brought criminal charges against me as editor-in-chief: I was accused of slandering an Armenian political figure and of insulting a state official. 
As a result, the court sentenced me to one year in prison. 
By a lucky twist, however, on the day the court ruled, Lord Russell Johnston, Chairman of the Parliamentary Assembly of the Council of Europe, was in Armenia. 
Lord Johnston expressed his opinion about my case in his talks with the authorities, which then decided not to send me to prison. 
I remained free, only to be monitored by the police. 
A second trial against our newspaper had worse consequences: a $25,000 fine (a huge sum here) based on allegations that we had damaged the reputation of the Mika Armenia Company, controlled by the so-called Karabakh clan that helps rule Armenia. 
The court’s verdict was based on falsified documents. 
Following the verdict, bailiffs confiscated our equipment, prohibited the publishing house from printing our newspaper, and, most importantly, seized our business bank accounts, rendering us unable to pay the fine. 
These events were initiated by a court wrangle with Serzh Sargsyan, then the Minister of National Security and Internal Affairs. 
We demanded an apology for his impugning our paper’s reputation; he accused of us of libel. 
These manipulations worked: Oragir was closed down, which forced us to appear under the name Haykakan Zhamanak . 
When my time under police supervision ended, the prosecutor’s office quickly brought a new criminal case of slander against me. 
This time, Armenia’s chief of civil aviation had sued me. 
Investigations lasted several months, before pressure from international organizations and public opinion forced the prosecutor to drop the charges. 
Later, after his dismissal from his post, that same civil aviation chief confessed that Armenian President Robert Kocharyan had advised him to file his lawsuit. 
At a press conference just hours after my car exploded, I announced my suspicion that the explosion had been organized by Gagik Tsarukyan, an MP nicknamed “Dodi Gago” (“dod” means stupid in Armenian) and one of the country’s richest men and a close friend of the president’s family. 
Many Armenians believe that Tsarukyan has carte blanche to do whatever he wants, when he wants. 
Indeed, he even gets to write his own history. 
For although Gagik Tsarukyan was convicted of a sexual crime in the Soviet era, two years ago Armenia’s courts exonerated him by vacating the decision of the Soviet court. 
Indeed, there is something of a taboo on writing about Tsarukyan, and with good reason: not only is he rich, but also he controls an army of obedient skinheads. 
Armenia frequently sees skinheads attacking reporters covering opposition rallies and once severely beating a leading opposition politician. 
Five years ago, Tsarukyan himself led his thugs in a break-in at our office, taking my staff hostage for several hours. 
Recently, after reading some unflattering articles about him in our paper, Tsarukyan tried to invite me to a meeting. 
I refused. 
Armenia’s paramount oligarch fumed. 
He promised to punish me, and that he would act the next time Haykakan Zhamanak criticized any well-known person. 
The car explosion occurred the day after we rebuked Armenia’s Police Chief. 
None of us are surprised that the police are unwilling to investigate my car’s explosion. 
They began to do so only ten days later, when the fire brigade stated that the fire was likely the result of an explosion incited by “outside interference.” 
Such harassment is the everyday stuff of journalism in what Vladimir Putin calls the “post-Soviet space.” 
Armenia may have adopted in 1995 a new Constitution with fine phrases about freedom of speech, but both the petty harassments and the mortal threats of the Soviet era remain. 
Of course, we never believed that press freedom would come easily. 
We understood from the start that we would have to fight for it everyday. 
But we never imagined the terrifying lengths to which the state – working hand-in-hand with the new oligarchic rich – would go to defeat our cause. 
We will not be defeated. 
An incinerated car is a small price to pay in the battle for freedom. 

Firewalls to Freedom 
NEW YORK – Even the most cold-hearted realists would agree that the failure of Communist censorship played a role in the collapse of the Iron Curtain: Voice of America, the fax machine, rock ‘n’ roll, and the lure of Western capitalism helped to win over the people of the Soviet Bloc. 
Today, similar hopes are often vested in the Internet, with high expectations that the wealth of online information might trigger the same kind of censorship failure in contemporary authoritarian states that we saw in Eastern Europe – and with the same results. 
Such expectations are not entirely unfounded, because most Internet censorship systems are not perfect. 
But, while anybody with a little know-how can figure out how to circumvent, say, the “Great Firewall of China,” Internet filtering is only one layer of Chinese Internet censorship. 
It is also supplemented by an increasingly sophisticated system of manipulation and spin. 
While the blocking of foreign Web sites was eased during the Olympics, deletion of politically sensitive content from Chinese blogs and chat rooms continued unabated throughout 2008. 
Now, a new crackdown against “vulgar” Internet content is being used to clean up politically sensitive writings – including discussion of Charter 08 , a pro-democracy treatise signed by thousands of Chinese who discovered it online. 
Contrary to Western expectations, most of this domestic Internet censorship is carried out not by the government's Internet police, but by Chinese Web hosting companies, which are being held legally responsible for what their users publish. 
Indeed, the Chinese Internet is evolving and adapting in ways that shore up the regime’s legitimacy. 
Hundreds of thousands of people are employed as freelance Web commentators, working to spin discussions in chat rooms and on blogs in a more patriotic, pro-government direction. 
Nationalistic young people, proud of China’s newfound global economic and political power, gladly volunteer their time to show off their patriotism on the Internet. 
Meanwhile, China is looking to Russia, which may have invented an entirely new model of controlling the Internet without recourse to censorship. 
Having established full control of traditional media, the Kremlin is now moving full-speed into the virtual world. 
The authorities’ strategy is not new: establish tight control over the leading publishing platforms and fill them with propaganda and spin to shape online public opinion. 
The fate of LiveJournal – the most influential blogging platform in Russia, which is often used to express dissent and protest against the government – is one unfortunate example. 
In less than three years, this popular online resource has been transformed from a respectable American start-up to a shady Moscow-based enterprise, co-owned by the Kremlin’s favorite oligarchs. 
Government propaganda abounds, too, generated by new media operators like Konstantin Rykov, a 29-year-old Duma deputy and the founder of New Media Stars, the Kremlin’s favorite Internet firm. 
Whenever manipulation efforts fail, cyber-attacks offer yet another powerful tool to crack down on dissent without triggering public accusations of formal censorship. 
This is what happened to a Georgian (known by the screen name cyxymu) who used his blog on LiveJournal to criticize how both governments handled last summer’s war. 
A series of cyber-attacks followed, and was so devastating that the entire service – with its millions of other blogs – crashed, forcing LiveJournal administrators to delete his account temporarily. 
As contemporary authoritarian regimes learn how to manage and engineer information flows, we must understand that promoting and protecting free speech in places like China and Russia is not a simple matter of “tearing down the wall.” 
Given these governments’ complex strategies for regulating what their citizens do online – ranging from establishing effective control of private media and telecoms businesses to allowing people to blow off steam without going too far – we should be more realistic about the true extent of the Internet’s transformational potential. 

First Things First: Americans, or Ethics? 
In explaining why he was abandoning the Kyoto accord on global warming, President Bush said: “We will not do anything that harms our economy, because first things first are the people who live in America.” 
Those remarks should not have surprised anyone who followed the American election. 
In the second presidential debate, George W. Bush was asked what how he would use America's global power and influence. 
He said that he would use it to benefit all Americans. 
These remarks would not have surprised anyone who studied the speeches of the President's father. 
The first President Bush said much the same thing almost a decade ago, at the 1992 “Earth Summit” in Rio de Janeiro. 
When representatives of developing nations asked Bush senior to put the over-consumption of resources by the developed countries, especially the US, on the agenda he said that “the American life-style is not up for negotiation” - no matter what, or so it seemed to his audience, the costs to others might be. 
But it is not only the Bush administrations that put the interests of Americans first. 
In the Balkans, the Clinton-Gore administration made it clear that it was not prepared to risk the life of a single American in order to reduce the risk of civilian casualties. 
Observing this, Timothy Garton Ash wrote: “It is a perverted moral code that will allow a million innocent civilians of another race to be made destitute because you are not prepared to risk the life of a single professional soldier of your own.” 
In Kosovo restricting intervention to aerial bombardment made this strategy a total success: NATO forces suffered not a single casualty in combat, but approximately 300 Kosovar, 209 Serb and 3 Chinese civilians were killed. 
This approach to the duties of a national leader, stated bluntly and honestly, forces us to consider a fundamental ethical issue. 
To what extent should political leaders see their role narrowly, in terms of promoting the interests of their citizens, and to what extent should they be concerned with the welfare of people everywhere? 
Mr Romano Prodi, President of the EU Commission, and a former Prime Minister of Italy, responded to President's Bush's most recent statement by saying that “If one wants to be a world leader, one must know how to look after the entire earth and not only American industry.” 
But the question is not only one for those who aspire to be world leaders. 
The leaders of smaller nations must also consider, in contexts like global warming, trade pacts, foreign aid and the treatment of refugees, to what extent they are prepared to consider the interests of "outsiders”. 
As Ash suggests, there is a strong ethical case for saying that it is wrong for leaders to give absolute priority to the interests of their own citizens. 
The value of the life of an innocent human being does not vary according to nationality. 
Even the Bush Administration put the lives of millions of HIV-infected Africans ahead of the economic interests of American pharmaceutical corporations when it reaffirmed former President Clinton=s executive order saying that the US would not prevent African nations licensing their own manufacturers to produce cheap copies of drugs that could save the lives of their citizens, even though American companies held the patents on those drugs. 
If American interests always come first, that decision - which was the right decision - would be difficult to explain. 
But, it might be said, the abstract ethical idea that all humans are entitled to equal consideration cannot govern the way we look at the duties of a political leader. 
Just as parents are expected to provide for the interests of their own children, rather than for the interests of strangers, in accepting the office of president of the United States, George W. Bush assumed a specific role that makes it his duty to protect and further the interests of Americans. 
Other countries have their leaders, who have similar roles in respect to the interests of their fellow-citizens. 
There is no world political community. 
So long as that situation prevails, we must have nation-states and the leaders of those nation-states must give preference to the interests of their citizens. 
There is some truth in this. 
Without it, unless electors suddenly to turn into altruists of a kind never before seen on a large scale, democracy could not function. 
American voters would not elect a president who gave no more weight to their interests than to the interests of people living in other countries. 
Perhaps, given the global nature of the problems we now face, this is an argument for a federalist world, rather than one divided into sovereign nation-states. 
But as long as that remains a lofty idea without political substance, our leaders will feel that they must give some degree of priority to the interests of their own citizens. 
"Some degree", however, does not mean absolute priority. 
Parents may give preference to their children, but if buying new toys for your children comes at the cost of the lives of other children, that cannot be defended. 
Abandoning the Kyoto accord, many believe, will threaten the lives of tens or hundreds of millions of people living in countries too poor to protect them from the consequences of climate change and rising sea levels. 
That is why Europeans, and people in many other countries are incensed at the casual way in which America’s President assumed that “first things first are the people who live in America.” 
It may be defensible for President Bush to give some preference to the economic interests of Americans, but to put them above the life-and-death interests of millions of human beings goes beyond what any ethical approach can justify. 

An Agenda for Global Fiscal Activism 
LONDON – Two important events loom on the calendar this month: the United States’ presidential election on November 8, and British Chancellor of the Exchequer Philip Hammond’s first Autumn Statement on November 23. 
Obviously, the latter will not be as significant an event as the former, but it nonetheless will have important consequences beyond the United Kingdom. 
So far this year, economics has had to compete with more emotional issues, such as personal attacks in the US election, and UK voters’ decision to leave the European Union. 
But in both the US and the UK – and not only there – we can expect to hear more about active fiscal policies, especially with respect to infrastructure. 
In the communiqué released after September’s G20 summit, the group’s leaders repeatedly mentioned steps to boost world growth through infrastructure investment, and argued for more coordination among monetary, fiscal, and structural policies. 
Although recent data from the US and China – and surprisingly also from the eurozone and the UK – suggest that GDP growth in the fourth quarter could improve upon the sluggish performance earlier in the year, a strong case can still be made for fresh policies to strengthen the world economy. 
After recently leading the UK’s Review on Antimicrobial Resistance (AMR), and having thought long and hard about educational initiatives, I believe that it is time for a more adventurous response to both long-term and cyclical challenges, especially for developing countries. 
And reading Jeffrey D. Sachs’s recent commentary, “The Case for Sustainable Investment,” only strengthens my conviction that policymakers and key development-finance institutions have a huge opportunity. 
Fiscal activism need not stop at infrastructure. 
In the Review on AMR, we showed that global GDP could suffer a $100 trillion loss over the next 34 years if we do not make certain public-health interventions between now and 2050. 
Those interventions would cost around $40 billion over a decade, which is to say that the investment needed to prevent $100 trillion in lost growth costs less than 0.1% of current global GDP. 
As an astute investor friend pointed out to me, this would be the equivalent of a 2,500% return. 
Investments in health and education are crucial for the developing world’s long-term prospects. 
As someone closely associated with the BRICS countries (Brazil, Russia, India, China, and South Africa), it seems obvious to me that the New Development Bank (NDB) – or the BRICS Development Bank, as it was formerly known – can and should help these and other emerging economies cooperate in both areas. 
The Review on AMR concluded that ten million annual deaths will be attributable to drug-resistant infections by 2050, and that drug-resistant strains of tuberculosis could cause one-quarter of them. 
It seems only reasonable that the NDB should announce steps to support pharmaceutical research into new TB treatments and vaccines, particularly for drug-resistant strains, given that TB is especially prevalent in the BRICS. 
And, beyond the BRICS, the other low-income countries that the NDB is trying to help will suffer even more without a proactive approach. 
Similarly, many people in the BRICS and low-income countries do not have access to quality primary education, so the case for a major spending boost in this area should be clear. 
Sachs makes the same point, and former British Prime Minister Gordon Brown, who is now United Nations Special Envoy for Global Education, has called for more creative financing methods and social enterprise in this sector. 
The NDB, the World Bank, the International Finance Corporation, and the Asian Infrastructure Investment Bank should all be considering the activist fiscal-policy course developed countries are now charting for themselves. 
And they should take it further, because the policy imperatives they face are ultimately all interrelated. 
In the West, the turn toward fiscal activism reflects widespread recognition that monetary activism has outlived its usefulness, at least at the margin. 
To be sure, central banks technically should do whatever it takes to meet their inflation targets; but excessive quantitative easing has imposed high costs, and seems to have favored the few at the expense of the many. 
With monetary activism past its sell-by date, an active fiscal policy that includes stronger infrastructure spending is one of the only remaining options. 
But it is not a free lunch, as many of its promoters often suggest, because policymakers cannot ignore the high levels of government debt across much of the developed world. 
It will be interesting to see how Hammond navigates the path toward higher infrastructure spending, while sticking to the Conservative Party’s platform of fiscal responsibility. 
And in the US, if we look beyond the fog of election-season opprobrium, it appears that both sides are in favor of more infrastructure spending. 
That being the case, the next US administration (regardless of who wins), together with a new UK leadership struggling to demonstrate its post-Brexit “openness,” should extend fiscal activism beyond domestic infrastructure to global development more generally. 
For example, with proper support, the World Bank could create new investment vehicles such as AMR or global-education bonds, which would support future development and salvage future global growth that may otherwise be lost. 
The US and the UK both need to show that they can move beyond their highly sensitive – and, frankly, narrow-minded – domestic political issues. 
And they should remember that without the export markets that the BRICS and other emerging countries represent, all attempts to rebalance their economies will be in vain. 

Fiscal Apocalypse Now 
As support for President George W. Bush in the United States has crumbled over the past year, perhaps the most surprising element is the revolt of economists and observers of economic policy. 
Last week, Peggy Noonan, a speechwriter for both President Reagan and the first President Bush declared in the Wall Street Journal that had she known what George W. Bush’s fiscal policy would be, she would have voted for Al Gore in the 2000 presidential election. 
“If I’d thought [that George W. Bush] was a big-spending Rockefeller Republican.... 
I wouldn’t have voted for him...,” Noonan wrote. 
Bush “did present himself as a conservative...[and] conservatism is hostile, for reasons ranging from the abstract and philosophical to the concrete and practical, to high spending and high taxing....” 
And then she falls into near-complete despair: “Mr. Bush will never have to run again, and he is in a position to come forward and make the case, even if only rhetorically, to slow and cut spending. 
He has not. 
And there’s no sign he will...” 
Noonan is not quite correct. 
George W. Bush presented himself not as a normal conservative, but as something he called a “compassionate conservative,” thus preserving a certain amount of ambiguity. 
Some focused on the “conservative”: they expected the Bush administration’s fiscal policy to keep a tight rein on spending and to eliminate many programs in order to finance significant tax cuts. 
Others focused on the “compassionate”: they expected Bush’s fiscal policy largely to eschew tax cuts and to adopt largely Democratic spending priorities, including expanded federal aid to education and a prescription drug benefit, thereby showing that Republicans could run a more cost-effective version of the social-welfare state. 
Still others interpreted “compassionate conservatism,” as the commentator Andrew Sullivan put it, as a “smokescreen...necessary for any vaguely successful retrenchment of government power in an insatiable entitlement state.” 
They expected tax cuts to be followed by a fangs-bared attack on social-welfare spending once deficits reemerged. 
As a result, in 2000 and 2001 nobody was really sure of the Bush administration’s policy direction. 
Was it traditional fiscal conservativism? 
Was it to do what Democrats do, but do it better? 
Was it to “starve the beast” by pumping up government debt to the point that social programs would have to be cut? 
The first two priorities, if well designed and well implemented, are certainly honorable goals for a government to pursue. 
The third is less honorable, and likely to fail: it relies on the dangerously weak premise that the party in power’s political adversaries will be more public-spirited and less ruthless when they return to government. 
Of course, conservatives and Republicans could hope that their own favorite policy priorities would emerge as the administration’s preferred strategy. 
Or they could be content with whichever of the three strategies that they expected to see, agreeing that, in any case, fiscal policy was always going to be much better than it would have been under Democratic rule. 
But then a strange thing happened: the Bush administration did not order any of the three options that were thought to be on the menu. 
It chose something different entirely: big tax cuts, yes, but tax cuts that were badly designed from a genuine supply-side perspective aimed at boosting growth, as well as Democratic domestic spending priorities, but very badly implemented. 
Moreover, the Bush administration combined its policies with an extraordinary reluctance to veto anything coming out of Congress, and, after the year or two that it took for this to become obvious, an inability to restrain Congress at all. 
What emerged was neither traditional fiscal conservatism nor Democratic policies without Democrats nor starve-the–beast populism, but something that has no name. 
An exchange between two characters in a scene from the movie “Apocalypse Now” captures an anti-ethic that characterizes the Bush administration’s policies as well: 
Willard: “They told me that you had gone totally insane, and that your methods were unsound.” 
Kurtz: “Are my methods unsound?” 
Willard: “I don’t see any method at all, sir.” 
It is not that Republicans and conservatives think that the Bush administration has adopted the wrong method, but that they don’t see any method at all that has driven them into their (late) fiscal-policy revolt. 
And that is why so many of them now wish that they had had a different candidate to vote for back in 2000. 

Fiscal Follies in America and Beyond 
Those of us who know that long-run fiscal imbalances are likely to end in disaster – high inflation, deep recession, financial crisis, or all three – scratch our heads in bemusement at the priorities of George W. Bush and his administration. 
The Social Security “crisis” that he wants to spend his political capital on “resolving” ranks no higher than third among America’s fiscal problems in urgency and seriousness – and at a time when these problems have grown into a profound threat to global economic stability. 
America’s gravest fiscal problem is the short- and medium-run deficit between tax revenues and spending. 
This deficit is entirely of Bush’s own creation, having enacted – and now seeking to extend – tax cuts that are not cuts at all, because they merely shift the burden of fiscal consolidation onto future generations. 
The second most serious problem is the looming long-term explosion in the costs of America’s health care programs. 
This is also partly Bush’s doing, or, rather, not doing, as his first-term policy on health spending was to do virtually nothing to encourage efficiency and cost containment. 
Instead, he enacted a Medicare drug benefit that promises to spend enormous amounts of money for surprisingly little in the way of better health care. 
Surely a more competent administration would be worried about addressing these more severe and urgent fiscal problems. 
Let’s pretend that the United States had such a government. 
What would it do? 
Dealing with the short- and medium-run deficit would be fairly straightforward: decide how large a share of GDP the federal government should take up, set spending at that level, and set taxes so that the budget is balanced (or so that the debt-to-GDP ratio is not growing) over the business cycle. 
Determine whether, overall, you would rather have in the medium term a federal government that spends, say, 16%, 20%, or 24% of GDP – and on what. 
What is not straightforward is how to address the imminent explosion of health-care costs. 
In fact, projections of rapidly rising Medicare and Medicaid spending in the US – and similarly rapidly-rising governmental health care expenditures elsewhere in the developed world – are not so such a problem to be solved as the side effects of an opportunity to be grasped. 
The opportunity stems from the fact that our doctors and nurses, our pharmacists and drug researchers, our biologists and biochemists are learning to do wonderful things. 
Many of these things are, and will be, expensive. 
Many of them will also be desirable: longer, healthier, and higher quality lives as we learn more about the details of human biology. 
Federal health-care spending will grow very rapidly over the next two generations because the things that health care money will be spent on will be increasingly wonderful, and increasingly valued. 
But it will be difficult to grasp fully this opportunity. 
It is highly likely that desired health expenditures will be enormous for some things and trivial for others. This calls for insurance. 
The problem is that private insurance markets do not work well when the buyer knows much more about what is being insured than the seller. 
Obviously, one’s health is an area in which private information can be very private indeed. 
This is, of course, why state-run health-care systems came into being. 
But replacing private insurance with public insurance has its own problems: consider the parlous circumstances in which Britain’s National Health System finds itself, the result of generations of politically driven underinvestment in health care. 
Moreover, the overall level of spending is likely to be large. 
That means that without (and even with) state-run health-care systems, the rich will be able to afford more and better care than the poor. 
To what extent do we accept a world where the non-rich die in situations in which the rich would live? 
To what extent do we hold on to our belief that when it comes to saving lives, medical care should be distributed on the basis of patients’ needs, not their wealth? 
Where and how would we tax the resources to put real weight behind egalitarian principles? 
Sharply rising health-care costs will probably confront governments throughout the developed world with the biggest economic policy issues they will face over the next two generations. 
The Bush administration has yet to realize this, but other governments are not thinking hard enough, either. 
At best, they are seeking ways to keep health-care spending from rising, as though the genie of medical progress can be forced back into the bottle. 
Instead, governments should embrace the promise of wonderful innovations in health care, and ask how fast spending should rise, and how that rise should be financed. 

The Promise of Fiscal Money 
ATHENS – Western capitalism has few sacred cows left. 
It is time to question one of them: the independence of central banks from elected governments. 
The rationale for entrusting monetary policy fully to central banks is well understood: politicians, overly tempted during the electoral cycle to create more money, pose a threat to economic stability. 
While progressives have always protested that central banks can never be truly independent, because their autonomy from elected officials increases their dependence on the financiers they are meant to keep in check, the argument in favor of removing monetary policy from democratic politics has prevailed since the 1970s. 
Setting aside the political controversy, central bank independence is predicated on an economic axiom: that money and debt (or credit) are strictly separable. 
Debt – for example, a government or corporate bond that is bought and sold for a price that is a function of inflation and default risk – can be traded domestically. 
Money, on the other hand, cannot default and is a means, rather than an object, of exchange (the currency market notwithstanding). 
But this axiom no longer holds. 
With the rise of financialization, commercial banks have become increasingly reliant on one another for short-term loans, mostly backed by government bonds, to finance their daily operations. 
This liquidity acquires familiar properties: used as a means of exchange and as a store of value, it becomes a form of money. 
And there’s the rub: as banks issue more inter-bank money, the financial system requires more government bonds to back the increase. 
The growing inter-bank money supply fuels demand for government debt, in a never-ending cycle that generates tides of liquidity over which central banks have little control. 
In this brave new financial world, central banks’ independence is becoming meaningless, because the money they create represents a shrinking share of the total money supply. 
With the rise of inter-bank money, backed mostly by government debt, fiscal policy has become an essential factor in determining the quantity of actual money lubricating modern capitalism. 
Indeed, the more independent a central bank is, the greater the role of fiscal policy in determining the quantity of money in an economy. 
For example, in the eurozone, Germany’s tight fiscal policy is creating a shortage of bunds (German government bonds), which is limiting both the European Central Bank’s capacity to implement its quantitative easing policy and commercial banks’ ability to produce more inter-bank money. 
Money and government debt are now so intertwined that the analytical basis for central bank autonomy has disappeared. 
Of course, any attempt to bring treasuries and central banks back under one roof would expose politicians to accusations of trying to get their grubby hands on the levers of monetary policy. 
But another response to the new reality is available: Leave central banks alone, but give governments a greater say in domestic money creation – and, indeed, greater independence from the central bank – by establishing a parallel payments system based on fiscal money or, more precisely, money backed by future taxes. 
How would fiscal money work? 
For starters, it would “live” on the tax authority’s digital platform, using the existing tax file numbers of individuals and companies. 
Anyone with a tax file number (TFN) in some country receives a free account linked to their TFN. 
Individuals and firms will then be able to add credit to their TFN-linked account by transferring money from their normal bank account, in the same way that they do today to pay their taxes. 
And they will do so well in advance of tax payments because the state guarantees to extinguish in, say, a year €1,080 ($1,289) of the tax owed for every €1,000 transferred today – an effective annual interest rate of 8% payable to those willing to pay their taxes a year early. 
In practice, once, say, €1,000 has been transferred to one’s TFN-linked account, a personal identification number (the familiar PIN) is issued, which can be used either to transfer the €1,000 credit to someone else’s TFN-linked account or to pay taxes in the future. 
These time-stamped future tax euros, or fiscal euros, can be held for a year until maturity or be used to make payments to other taxpayers. 
Smartphone apps and even government-issued cards (doubling as, say, social security ID) will make the transactions easy, fast, and virtually indistinguishable from other transactions involving central bank money. 
In this closed payments system, as fiscal money approaches maturity, taxpayers not in possession of that vintage will fuel rising demand for it. 
To ensure the system’s viability, the Treasury would control the total supply of fiscal money, using the effective interest rate to guarantee that the nominal value of the total supply never exceeds a percentage of national income, or of aggregate taxes, agreed by the legislature. 
To ensure full transparency, and thus trust, a blockchain algorithm, designed and supervised by an independent national authority, could settle transactions in fiscal money. 
The advantages of fiscal money are legion. 
It would provide a source of liquidity for governments, bypassing the bond markets. 
It would limit the extent to which government borrowing fuels inter-bank money creation, or at least force financiers to tie up some of their inter-bank money in the closed, domestic fiscal money system, thereby minimizing shocks from sudden capital flight. 
And, by competing with the banks’ payment system, it would reduce the cost of fees customers currently pay. 
Indeed, owing to the blockchain technology, fiscal money constitutes a fully transparent, transaction-cost-free, public payment system monitored jointly by every citizen (and non-citizen) who participates in it. 
Fiscal money is politically attractive as well. 
Governments could use any slack in money supply to top up the FTN-linked accounts of families in need, or to pay for public works, making it appealing to progressives. 
And conservatives should be encouraged by a system that promises significant tax relief for those who help the government create fiscal money, without impinging on the central bank’s role in setting interest rates. 
The potential transnational advantages of fiscal money are also significant. 
For example, fiscal money would have helped Greece resist our creditors’ encroachments in 2015, and it was at the heart of my plan for dealing with a predatory bank holiday enforced by the ECB at the end of that June. 
Today, it would give Italy, France, and other eurozone members much needed fiscal space, and possibly provide a foundation for a revamped eurozone with interlocking domestic fiscal euros, rather than parallel currencies, playing a stabilizing macroeconomic role. 
And then, perhaps, it could become the basis for a New Bretton Woods, functioning like an overarching clearing union of many different fiscal money systems. 

A Balance-Sheet Approach to Fiscal Policy 
WASHINGTON, DC – Everyone is talking about debt, citing huge nominal figures that strongly affect public-policy debates worldwide. 
But all debt is not created equal. 
For starters, when it comes to public debt, there is a big difference between the gross and net figures. 
While Japan’s gross public debt, for example, is a massive 246% of GDP, the net figure, accounting for intra-government debts, is 127% of GDP. 
Moreover, what should really matter about a country’s public-debt burden is the expected annual cost of servicing it. 
As Daniel Gros recently pointed out, debt that can be rolled over indefinitely at zero interest rates is no debt at all. 
This is an extreme example; but the closer a fixed interest rate gets to zero, and the longer the maturity becomes, the lower the burden of the stock of debt. 
Although Greece’s public debt amounts to about 175% of GDP, low interest rates – which are fixed for a large proportion of it – and long maturities mean that it may be more manageable than it seems. 
Greece’s ratio of public-debt service to GDP is similar to that of Portugal, or even Italy. 
Indeed, that is why the latest deal with Greece, which entails even more bailout funds, could work, as long as the country is accorded the debt reprofiling that it needs to reverse the decline of its GDP, reduces its primary surpluses, and pursues balance-sheet-strengthening reforms. 
Such considerations underscore why it is a mistake to focus only on annual budgets, without adequate regard for the long-term balance-sheet implications of how borrowed money is used. 
This narrow, short-term focus differs from the approach taken for publicly traded companies, for which the strength of the balance sheet and the economy’s potential are emphasized, alongside annual income statements. 
Imagine, for example, that Germany borrows at a 1% fixed real interest rate with a ten-year maturity and invests the proceeds in repairing domestic transport infrastructure. 
These investments bring a modest real financial rate of return of 4% through fees, tolls, and, in the longer run, tax revenues (stemming from an increase in GDP). 
Such investments would directly strengthen Germany’s public-sector balance sheet. 
This does not even take into account social returns, accrued through reduced traffic congestion and cleaner air. 
Beyond infrastructure, spending to improve education – specifically to ensure that the next generation receives the skills they need to contribute to the twenty-first-century economy – would also result in faster GDP growth. 
And it, too, would likely yield significant social returns. 
For governments with access to today’s extremely low – and often negative – real interest rates, it may seem like a no-brainer to borrow and invest more in projects with long-term benefits. 
Doing so would strengthen their balance sheets, crowd in the private sector, and generate employment. 
But balance-sheet calculations are rarely at the center of political debate. 
To be sure, some progress is being made toward bringing longer-term considerations into annual budget rules. 
Bodies like the European Commission increasingly distinguish between the structural and cyclical components of a budget deficit, and thus consider potential output, which increases with investment, in their calculations. 
But this is only a small step in the right direction. 
For a long-term balance-sheet approach to gain traction, politicians will have to drop the ideological biases that are distorting fiscal policy. 
Proponents of austerity currently use nominal debt figures to scare voters, even in countries with record-low interest rates and large private-sector profits that are not being channeled toward investment. 
To counter their arguments, opinion-makers should emphasize the expected long-term returns on incremental public investment, not with ideological arguments, but with concrete examples from various sectors in the recent past that have had reasonably good rate of returns. 
Of course, as the economist Charles Wyplosz has explained, debt sustainability analysis is inherently uncertain. 
But some needs can reasonably be anticipated. 
Amid massive unmet demand for new climate-compatible infrastructure and for workers with modern skillsets, any semi-competent government should be able to demonstrate the likelihood of significant real returns on incremental investment. 
In many countries, one could realistically expect a 4% average return on at least one percentage point of GDP worth of incremental investment. 
If the marginal real interest rate is 1%, an increase in public investment would actually reduce future indebtedness. 
Of course, it is possible for too large of an increase to put pressure on real interest rates, thereby crowding out potential private investment. 
If there is significant exchange-rate risk, such as in non-reserve currency countries, that, too, should be taken into account. 
Current fiscal-policy debates should not focus on simplistic headline numbers. 
To strengthen public accounts, both conservatives and progressives should start promoting a long-term balance-sheet-oriented approach to policymaking, ensuring that the debates are based on relevant data. 
Otherwise, the wrong policies – and, with them, anemic GDP growth and sluggish job creation – will continue to prevail. 

Europe’s Fiscal Wormhole 
BRUSSELS – The International Monetary Fund now estimates a 30% risk of deflation in the eurozone, and growth figures within the monetary union continue to disappoint. 
But policymakers seem trapped in a cat’s cradle of economic, political, and legal constraints that is preventing effective action. 
The fulfillment of policy rules appears to be impossible without growth, but growth appears to be impossible without breaking the rules. 
German Finance Minister Wolfgang Schäuble is politically committed to outdoing his country’s tough domestic fiscal framework to secure what he calls a “black zero” budget. 
The French government is working to regain credibility on reform promises made in exchange for delays on fiscal adjustment, and Italy, with one of the highest debt burdens in the eurozone, has little room to use fiscal policy. 
Meanwhile, the European Central Bank is constrained by doubts about the legality of its “outright monetary transactions” (OMT) scheme – sovereign-bond purchases that could result in a redistributive fiscal policy. 
With all of the rules pointing toward recession, how can Europe boost recovery? 
A two-year €400 billion ($510 billion) public-investment program, financed with European Investment Bank bonds, would be the best way to overcome Europe’s current impasse. 
Borrowing by the EIB has no implications in terms of European fiscal rules. 
It is recorded neither as new debt nor as a deficit for any of the member states, which means that new government spending could be funded without affecting national fiscal performance. 
Thus, some of the investment spending currently planned at the national level could be financed via European borrowing to relieve national budgets. 
Such an indirect way of dealing with strict rules would also be easier than starting long and wearying negotiations on changes to the fiscal framework. 
The EIB is worried that such a scheme could come at the cost of its triple-A rating. 
Indeed, though it can currently borrow at 1.6% on a long maturity, it has used its recent capital-raising exercise to reduce leverage rather than substantially increase its loan portfolio, as would be warranted at a time of retrenchment in private lending. 
In any case, a rating change would hardly affect funding costs in the current low-yield environment, as lower-rated sovereigns have demonstrated. 
In addition, the ECB could purchase EIB bonds on secondary markets, which would help to keep funding costs low – or even reduce them. 
More important, purchases of EIB bonds would enable the ECB to undertake quantitative easing without triggering the degree of controversy implied by intervening in 18 separate sovereign-bond markets, where concerns that ECB purchases would affect the relative pricing of sovereigns are very real. 
Already, €200 billion of EIB bonds are available. 
Adding €400 billion would increase the pool substantially. 
Together with asset-backed securities, covered bonds, and corporate bonds, €1 trillion of assets – the threshold widely thought to make quantitative easing by the ECB credible – would be available for purchase. 
A central question, of course, concerns the type of government spending that should qualify as investment spending, and which European investment projects should be supported. 
It will be impossible to define new and sensible European projects worth €200 billion per year. 
Common projects such as the European energy union will need more time to be precisely defined. 
As a result, the bulk of investment now will have to come from national policymakers. 
In part, this means that existing infrastructure projects that are supposed to be financed from national budgets could be funded by the EIB. 
By removing some of the burden from national budgets, the current decline in public investment could be reversed. 
Some of the new resources could also be used to allow for budget consolidation in France without pro-cyclical cuts. 
France could get this helping hand in complying with the fiscal rules in exchange for serious and necessary structural reforms, as could Italy, where EIB-funded bonds would provide a much-needed growth stimulus without new government commitments. 
In Germany, the freed-up resources could be used to accelerate existing investment projects while still meeting its black-zero pledge. 
Similar arrangements could be found for the other eurozone countries. 
To prevent the misuse of money, the European Commission should vet all national investment projects. 
More broadly, the program would be an important step toward establishing the eurozone’s missing fiscal union. 
That goal will be reached more quickly once the benefits of achieving it are apparent to all. 

Fishy Conservation Efforts 
NAIROBI – If you happen to be a salamander known as the Iranian Kaiser spotted newt, chances are that things may be looking up. 
Governments at the recent meeting in Doha of the Convention on International Trade in Endangered Species (CITES) voted for a trade ban on Iranian Kaisers, alongside tougher protection for a host of land-living creatures. 
But if you are a blue-fin tuna of the western Atlantic stock, your mood will be decidedly more pessimistic. 
It is a similar story for several species of shark, including the oceanic white-tip, scalloped hammerhead, and the great and spiny dogfish. 
Despite strong scientific evidence showing sharp declines in the populations of all three, every proposal for tougher trade controls on these marine species – along with more than 30 species of coral – failed to secure the necessary two-thirds majority. 
In the case of the western Atlantic stock of blue-fin tuna, several countries argued that the existing management body – the International Commission for the Conservation of Atlantic Tunas (ICCAT) – is best placed to manage the stock. 
Others who proposed tougher trade rules were not convinced – and with good reason. 
Stocks of this highly prized fish have declined by up to 80% since the dawn of industrialized fishing, and this has been on ICCAT’s watch. 
In the case of sharks and rays, a recent survey indicates that close to one-third of the 64 ocean-living species are on the verge of extinction. 
Their decline is linked to over-exploitation of other once-common species. 
For example, spiny dogfish is partly substituting for cod in many European fish-and-chip shops. 
Sharks, too, are suffering from rapidly rising demand for shark-fin soup, which is considered a delicacy in many parts of Asia. 
But saving endangered and near-endangered species is not just about conservation; it is also about defending millions of people’s livelihoods, which depend on healthy oceans. 
Today’s marine environment is truly under siege. 
When the explorer John Cabot sailed off the coast of Newfoundland more than 500 years ago, vast shoals of cod slowed down his ships; crews could lower buckets over the side and fill them with fish. 
By 1992, however, over-fishing had forced the total closure of this once highly productive fishery, and, despite all efforts, Newfoundland’s Grand Banks has never recovered. 
Similarly, over-fishing of sharks in the Caribbean has triggered a rise in octopus and a drastic drop in spiny lobsters and scallops – two major sources of revenue for neighboring coastal communities. 
The outcome at CITES has brought into sharp relief increasing tensions between industrial and environmental interests, as if these were diametrically opposed. 
Surely a twenty-first-century fisherman does not want to see the basis of his or her living degraded and destroyed, nor does a modern conservationist want to ring-fence the environment and stop people from making a living. 
So if governments want existing agreements to rule the waves, they must start acting on the sobering science and real-world numbers. 
For example, with respect to sharks, existing sanctions against “finning” under Regional Fisheries Management Organizations should be enforced, backed up by an independent system of on-board observers to ensure that trawlers comply. 
Moreover, an international action plan for sharks, including a ceiling on catches, should be created. 
And proper fishing methods that catch only target species should be used, with others caught accidentally as so-called by-catch returned to the sea alive. 
Where fisheries agreements are not succeeding, conservation agreements must be tried and applied. 
After all, these are not competing regulatory regimes, but complimentary ones. 
In the case of the western Atlantic blue-fin tuna, the ball is now firmly back in ICCAT’s court. 
Governments that support the ICCAT option must now prove that it is up to the job. 
They have three years to do so, before CITES next meets in Thailand. 
If there is no dramatic action and improvement, governments should instead give CITES, as a well established conservation and trade agreement, a chance to reverse the species’ current plight. 
Blue-fin tuna is heading for commercial, if not outright, extinction, as are a host of other economically and ecologically important marine species. 
They are swimming in the last-chance lagoon. 
But so, too, could be the organizations that have presided over a breathtaking collapse of so many fisheries and left a once-bountiful marine environment – and the lives and livelihoods of many fishermen – damaged and degraded in their wake. 

Five Imperatives for the G-20 
NEW YORK – The world’s economies are becoming more interdependent than ever, but economic nationalism, protectionism, and beggar-thy-neighbor attitudes are threatening the bonds of trust and cooperation that a truly globalized economy requires. 
To prevent another recession or worse, the leaders of the 20 wealthiest nations must take aggressive action at the semi-annual G-20 summit in Seoul to develop a broad agenda for more balanced, equitable, and sustainable global growth – and to oversee its strict implementation. 
Five principles should guide their thinking. 
First, although differences on trade and economic policy must be addressed, short-sighted self-interest must be countered actively. 
Excessive surpluses in some countries and excessive debt in others, fueled by undervalued currencies and runaway government spending, respectively, must be curbed. 
Countries must commit not to withhold exports of key natural resources for political reasons, and to doing all they can to maintain and promote open markets based on principles of reciprocity and long-term sustainability. 
To make this happen, all major players must remain committed to free trade within the context of a fair and equitable global system, and they must communicate this commitment respectfully, forcefully, and repeatedly to their own publics. 
As the two most significant global trading powers, the United States and China, especially, must fight tendencies in their own countries to raise hidden barriers or take inappropriate retaliatory action designed to placate domestic public opinion. 
All economies must address the domestic dislocations that can accompany the freeing up of markets. 
Second, much stronger efforts must be made to move forward with multilateral trade agreements, particularly by completing the Doha Round of trade negotiations. 
Although the proliferation of bilateral trade agreements around the world is a positive development, the global economy will suffer enormously if these deals end up coming at the expense of comprehensive agreements, which can do exponentially more to foster global growth. 
Third, in the context of an increasingly interdependent global economy, all countries’ monetary and fiscal policies must be better coordinated. 
The G-20 must do far more to harmonize economic and trade policies across countries and continents to catalyze global growth. 
Unnecessary barriers to cross-border capital flows and direct cross-border investment must be eliminated as economies become stronger. 
Likewise, we must move far more quickly towards market-driven currency valuations around the world – and towards addressing the massive indebtedness of many developed countries. 
The G-20 can also play a stronger role in enhancing the skills of regulators in a globally interconnected environment, and should develop a mutually agreed regulatory framework for evolving financial markets. 
Fourth, far more must to be done to unlock the tremendous human and economic potential of the world’s 1.4 billion people living in dire poverty and without meaningful opportunity. 
Nine million children die each year before reaching their fifth birthday; 69 million school-age children are not in school; 884 million people have no access to safe drinking water; and 2.6 billion lack access to basic sanitation. 
Educating and empowering poor and disadvantaged groups around the world, including women, is not only a moral imperative, it is also one of the best investments in long-term, sustainable growth that world leaders can possibly make. 
G-20 nations must take the lead in making this happen. 
Finally, innovation must be promoted as a long-term generator of growth. 
This requires encouraging more effective investments in education and research and development, increasing intellectual property protections, and promoting new international collaborative efforts to help address common challenges in energy, environmental protection, health care, and other areas. 
The October 23 statement of principles released by G-20 finance ministers makes many of the right noises on some of these issues. 
But the ministers’ words will ring hollow if, as with similar statements made at prior G-20 summits in London and Toronto, member states do not translate them into action. 
With America less able to play the leading role in managing the world economy, in some ways responsibility has now shifted to the G-20, with the US and China in the forefront, to set a course of collaboration and coordination, in word and in deed, that can guide global economic growth for the twenty-first century. 
If G-20 leaders fail to accept that responsibility, and instead choose the path of economic nationalism, the future could look bleak. 


 

 

Fixing Fixed-Investment Incentives 
LONDON – Back in February, I noted that the global economy at the end of 2016 was in a stronger cyclical position than most people had expected, given the political upheavals of the previous 12 months. 
That upward momentum carried through to the first quarter of 2017. 
According to the latest “nowcast”-type indicators, world GDP growth is exceeding 4% – perhaps the strongest performance seen since before the 2008 financial crisis. 
Still, some observers – and not just chronic pessimists – have countered that the evidence remains anecdotal, and that it is impossible to predict how long the current economic moment will last. 
Indeed, there have been other periods in the long post-2008 recovery when growth returned, only to peter out quickly and become sluggish again. 
To bolster long-term economic growth, business investment will have to increase. 
Unfortunately, this is easier said than done. 
In Western economies in particular, non-residential fixed investment is precisely the factor that was missing in previous, short-lived cycles of acceleration. 
No one can say for sure why non-residential business investment has failed to recover in recent years. 
But I suspect that the slightly pessimistic conventional wisdom on this question is wrong. 
The conventional argument asserts that wary CEOs have come to see long-term risks as “just not worth it.” 
The many uncertainties they face include concerns about excessive regulation, burdensome corporate taxation, high debt levels, erratic policymaking, the political backlash against globalization, and doubts that consumer spending outside (or even within) the United States will last. 
A less pessimistic view holds that, after 2008, it became inevitable that the global economy would unhitch itself from the US consumer engine and adjust to the rise of emerging consumer economies, not least China. 
When that happens, we can all live happily ever after. 
I tend to side with this less pessimistic crowd. 
As I pointed out in March, China’s economy did surprisingly well in the first quarter of 2017, and that seems to be the case in the second quarter as well. 
In fact, China’s latest monthly data show signs of economic acceleration, especially in consumption. 
And it was evident in the first-quarter data that Chinese consumers are becoming an increasingly important driver of economic growth. 
When confronted with the numbers, pessimists respond by insisting that China’s recent strong economic performance is only temporary – a product of yet more unsustainable stimulus. 
And even if growth does last, they argue, the Chinese authorities will not allow Western businesses – or even Chinese businesses, according to ultra-pessimists – to benefit from it. 
But whether or not the pessimists turn out to be right about China, it is odd that business investment remains tepid even during times when the engine of global growth is located elsewhere, such as in the US or Europe (Germany in particular). 
During my time as the head of the British government’s Review on Antimicrobial Resistance, I had to develop a better understanding of the pharmaceutical industry, and I learned that there is something to be said for microeconomic forces – and for basic common sense. 
Consider the future, which always has been uncertain and always will be. 
And yet the biggest economic busts have happened when businesses were not uncertain enough – when they were sure that the future would be rosy. 
An overabundance of certainty might explain the 2000-2001 dot-com bubble, and many others. 
But if, thanks to the increased availability of so much information (including different viewpoints and opinions), we now know that the future is always uncertain, the behavior of Western businesses (and many in the emerging world) is eminently logical, especially given the current workings of the financial system. 
Why would business leaders invest in an uncertain world, rather than paying dividends to demanding (but generally risk-averse) investors, or buying back some of their companies’ own shares (thereby improving the price/earnings ratio and, better yet, increasing their own remuneration)? 
At the end of the day, the CEOs and the most aggressive investors are all happy with this approach. 
Unfortunately, the same cannot be said for the company’s employees, past and present, who reap no benefits in their paychecks or pensions (which are actually being eroded by the low yields on government bonds across Western countries). 
It is past time for our elected governments to change the rules of the game. 
For starters, that means updating the tax code to make debt issuance far less attractive, especially when the proceeds are being used to buy back shares. 
At a minimum, it should be harder to buy back shares than to issue true dividend payments. 
That way, at least all shareholders, not just senior-executive insiders, will benefit. 
Furthermore, those same executives should not be remunerated on the basis of short-term price-to-equity targets. 
More investors should be demanding that the incentives change to reflect true measures of long-term performance. 
To its credit, the Norwegian Sovereign Wealth Fund recently spoke out in favor of such changes. 
Other large institutional investors and policymakers should follow suit, to give the corporate world a nudge. 
If we change the incentives, we just might finally see business investment make a comeback. 

Fixing Afghanistan’s Flawed Peace Process 
OXFORD – In February, Afghan President Ashraf Ghani offered the Taliban unconditional talks to negotiate a political settlement. 
To support the process, the United States also initiated direct talks with the Taliban, which the Taliban had been demanding. 
The Taliban has since responded by intensifying its campaign of violence, killing hundreds of civilians, including ten candidates in the recent parliamentary election and their supporters. 
The Taliban has also refused to talk to the Afghan government. 
An overwhelming majority of Afghans wants a negotiated end to the conflict. 
But the current strategy to achieve a political settlement is failing, because it neglects key Afghan institutions, excludes ordinary citizens from the process, and rewards the Taliban’s campaign of violence. 
If these flaws remain unaddressed, attempts to engage the Taliban may deepen Afghanistan’s political fragility and further weaken the state. 
The Afghan and US governments need to be pragmatic and adopt a longer-term perspective in their search for a political settlement, and not focus only on immediate concerns. 
The current approach has encouraged violence. 
Neither the Afghan government nor the US insisted on the suspension of Taliban attacks as a minimal condition for engaging them in talks. 
As a result, each round of the talks has become an opportunity for the Taliban to commit more violence as they seek to strengthen their bargaining position. 
The emergence of a parallel state is yet another challenge. 
The Afghan government has contributed to its emergence by providing the Taliban’s leaders with diplomatic privilege. 
Far from helping the Taliban to promote peace in Afghanistan, diplomatic status has enabled its leaders to interact with foreign actors to advance their cause and build international legitimacy, especially through the group’s office in Qatar. 
This parallel state has access to income from narcotics and extortion and has gained de facto recognition from countries near and far. 
And Ghani, who during his term as finance minister in 2002-2004 strongly opposed the establishment of a parallel public sector for aid delivery, is now neglecting the threat posed by the Taliban’s parallel state in Afghanistan. 
There have been positive gains. 
No one in 2002 would have imagined the extent to which the country has been transformed since then. 
A dedicated, well-educated new generation has emerged, and women’s participation in political and social life has increased significantly. 
The resilience of ordinary Afghan citizens in defying terrorism at the local and national levels has been extraordinary. 
Nowhere was this more evident than in widespread defiance of the Taliban’s campaign of violence and intimidation, intended to prevent people from voting during the recent parliamentary election. 
But while the international community in general, and the US in particular, have supported progress in Afghanistan, the Afghan government has not harnessed this extraordinary resilience by including citizens or establishing a consensual process as part of its strategy for a political settlement. 
By contrast, the recent political settlement between Colombia’s government and the FARC guerrillas allowed Colombian citizens to have a say through a referendum in 2016. 
While Colombia’s citizens did not approve the final deal on the first try, it made them a major actor in the process. 
Afghanistan is not yet at that advanced stage. 
But any framework for a legitimate political settlement will need to have minimal input from ordinary Afghan citizens, and currently there is no platform for their voices to be heard. 
Political consultation with strongmen and influential politicians in Kabul is no substitute for recognizing the legitimate interests and concerns of ordinary citizens, who have suffered enormously from violence for decades. 
This deficiency is evident in the Afghan government’s newly established High Advisory Board for Peace, which includes no representatives of young people or civil society and has a mandate that overlaps with that of the existing High Peace Council. 
Peace is possible in Afghanistan. 
But the Afghan government and the US need to be realistic about the process and the outcome. 
A political settlement of a protracted conflict requires sophisticated and balanced consideration of the interests and concerns of all the relevant actors. 
Ordinary citizens need to own and support the outcome, which requires that the settlement reduce violence and, above all, enable the state to maintain civil order. 
Opting for political expediency in the service of unrealistic expectations will only place Afghanistan’s future in greater peril. 
To succeed, the effort to reach a settlement with the Taliban must be pursued alongside long-term institution-building initiatives and development policies in ways that unite citizens and strengthen the state and key institutions on which future stability depends. 

Fixing America’s Broken Housing Market 
NEW YORK – A sure sign of a dysfunctional market economy is the persistence of unemployment. 
In the United States today, one out of six workers who would like a full-time job can’t find one. It is an economy with huge unmet needs and yet vast idle resources. 
The housing market is another US anomaly: there are hundreds of thousands of homeless people (more than 1.5 million Americans spent at least one night in a shelter in 2009), while hundreds of thousands of houses sit vacant. 
Indeed, the foreclosure rate is increasing. 
Two million Americans lost their homes in 2008, and 2.8 million more in 2009, but the numbers are expected to be even higher in 2010. Our financial markets performed dismally – well-performing, “rational” markets do not lend to people who cannot or will not repay – and yet those running these markets were rewarded as if they were financial geniuses. 
None of this is news. 
What is news is the Obama administration’s reluctant and belated recognition that its efforts to get the housing and mortgage markets working again have largely failed. 
Curiously, there is a growing consensus on both the left and the right that the government will have to continue propping up the housing market for the foreseeable future. 
This stance is perplexing and possibly dangerous. 
It is perplexing because in conventional analyses of which activities should be in the public domain, running the national mortgage market is never mentioned. 
Mastering the specific information related to assessing creditworthiness and monitoring the performance of loans is precisely the kind of thing at which the private sector is supposed to excel. 
It is, however, an understandable position: both US political parties supported policies that encouraged excessive investment in housing and excessive leverage, while free-market ideology dissuaded regulators from intervening to stop reckless lending. 
If the government were to walk away now, real-estate prices would fall even further, banks would come under even greater financial stress, and the economy’s short-run prospects would become bleaker. 
But that is precisely why a government-managed mortgage market is dangerous. 
Distorted interest rates, official guarantees, and tax subsidies encourage continued investment in real estate, when what the economy needs is investment in, say, technology and clean energy. 
Moreover, continuing investment in real estate makes it all the more difficult to wean the economy off its real-estate addiction, and the real-estate market off its addiction to government support. 
Supporting further real-estate investment would make the sector’s value even more dependent on government policies, ensuring that future policymakers face greater political pressure from interests groups like real-estate developers and bonds holders. 
Current US policy is befuddled, to say the least. 
The Federal Reserve Board is no longer the lender of last resort, but the lender of first resort. 
Credit risk in the mortgage market is being assumed by the government, and market risk by the Fed. 
No one should be surprised at what has now happened: the private market has essentially disappeared. 
The government has announced that these measures, which work (if they do work) by lowering interest rates, are temporary. 
But that means that when intervention comes to an end, interest rates will rise – and any holder of mortgage-backed bonds would experience a capital loss – potentially a large one. 
No private party would buy such an asset. 
By contrast, the Fed doesn’t have to recognize the loss; while free-market advocates might talk about the virtues of market pricing and “price discovery,” the Fed can pretend that nothing has happened. 
With the government assuming credit risk, mortgages become as safe as government bonds of comparable maturity. 
Hence, the Fed’s intervention in the housing market is really an intervention in the government bond market; the purported “switch” from buying mortgages to buying government bonds is of little significance. 
The Fed is engaged in the difficult task of trying to set not just the short-term interest rate, but longer-term rates as well. 
Resuscitating the housing market is all the more difficult for two reasons. 
First, the banks that used to do conventional mortgage lending are in bad financial shape. 
Second, the securitization model is badly broken and not likely to be replaced anytime soon. 
Unfortunately, neither the Obama administration nor the Fed seems willing to face these realities. 
Securitization – putting large numbers of mortgages together to be sold to pension funds and investors around the world – worked only because there were rating agencies that were trusted to ensure that mortgage loans were given to people who would repay them. 
Today, no one will or should trust the rating agencies, or the investment banks that purveyed flawed products (sometimes designing them to lose money). 
In short, government policies to support the housing market not only have failed to fix the problem, but are prolonging the deleveraging process and creating the conditions for Japanese-style malaise. 
Avoiding this dismal “new normal” will be difficult, but there are alternative policies with far better prospects of returning the US and the global economy to prosperity. 
Corporations have learned how to take bad news in stride, write down losses, and move on, but our governments have not. 
For one out of four US mortgages, the debt exceeds the home’s value. 
Evictions merely create more homeless people and more vacant homes. 
What is needed is a quick write-down of the value of the mortgages. 
Banks will have to recognize the losses and, if necessary, find the additional capital to meet reserve requirements. 
This, of course, will be painful for banks, but their pain will be nothing in comparison to the suffering they have inflicted on people throughout the rest of the global economy. 

Returning to Investment 
GENEVA – At the G20 summit last month in Hangzhou, China, world leaders outlined an ambitious plan for a “new era of global growth.” 
But they left out a key ingredient: fixing the investment climate. 
Conventional wisdom holds that, through efficient financial markets, household savings will flow to companies that can best put the money to productive use. 
But in many developing countries, easier access to finance – owing to unrestricted cross-border capital flows and financial-market deregulation – still has not led to more financing for long-term investments, particularly in manufacturing. 
Investment decisions depend on a variety of complex factors and contingencies, and a mix of public and private finance is crucial for bringing new projects to fruition. 
In East Asia, which has experienced rapid growth and development in recent years, policymakers have not only allowed, but encouraged, higher corporate profits, so long as they are channeled into productive investments. 
As a result, as much as four-fifths of large East Asian companies’ investment spending is funded from retained earnings, while publicly owned financial institutions have helped maintain the pace of investment-led growth. 
An imbalance between profits and investment is a major reason for today’s tepid growth in developed and developing countries alike; unless it is addressed, the result could be a wider crisis of legitimacy for corporate governance and economic management. 
In developed economies, corporate profitability has been steadily rising, partly owing to “shareholder-primacy” strategies that focus on short-term decision-making, cost-cutting measures, and other forms of financial engineering encouraged by institutional investors. 
To varying degrees, conventional “retain-and-invest” strategies are being replaced by “downsize-and-distribute” strategies, whereby profits are spent on increased dividends, stock buybacks, and mergers and acquisitions. 
In developing economies, global financial flows have most visibly contributed to macroeconomic shocks that fuel economic uncertainty, which shortens corporations’ investment-planning horizon. 
More recently, one can also see developing-economy companies pursuing the same corporate-governance strategies as firms in developed countries. 
Judging by non-financial firms’ balance sheets, investment-to-profit ratios decreased from 1995 to 2014, with especially steep declines in Brazil, Malaysia, South Korea, and Turkey. 
Large public corporations are less common in most developing economies than they are in developed economies; but for those firms that do regularly distribute dividends in developing economies, payouts to shareholders have been increasing, even when profitability has remained roughly the same. 
Such firms are also accumulating financial assets – sometimes faster than they are accumulating corporate debt – which suggests that they lack profitable long-term investment opportunities and portfolio-investment options in liberalized financial markets. 
It would be premature to suggest that the relationship between profits and investments has broken down in the developing world. 
But, as corporate profitability has risen across the board, investment trends everywhere (with the exception of China and India) have been weak, which was true even before the 2008 global financial crisis. 
Meanwhile, financialization continues to disrupt macroeconomic stability worldwide. 
For example, developed economies’ quantitative easing programs have contributed to excess liquidity – and thus to the recent corporate-debt explosion in emerging economies. 
Across a sample of these economies, non-financial corporations’ dollar-denominated debt rose by 40%, on average, from 2010 to 2014; from 2007 to 2015, their debt-service ratios also soared by 40%. 
These numbers suggest a systemic banking crisis in the making. 
Moreover, debt-fueled investment has been concentrated in highly cyclical natural-resources-based sectors that do not contribute to inclusive and sustainable growth. 
In fact, just seven sectors – oil and gas, electricity, construction, industrial commodities, real estate, telecommunications, and mining – account for more than two-thirds of the total increase in both debt and investment. 
This suggests that easy access to cheap money and debt financing have not favored the high-tech sectors that contribute the most to productivity growth. 
To reverse these trends, we must first reverse the trend in emerging economies toward highly financialized corporate strategies. 
This will require changes in corporate governance generally, and in non-financial corporations’ incentive structures, including preferential tax treatment for retained profits and equity finance, and special depreciation allowances for reinvested profits. 
Beyond corporate governance, we must restore balance to the profit-investment relationship through institutional as well as public-policy initiatives, and with proactive industrial policies. 
This will require reforming and deepening the banking system to ensure enough lending capacity for long-term investments, including for small- and medium-sized enterprises. 
As for the macroeconomic environment, governments can improve conditions through public investment, particularly in infrastructure, which will augment productivity and add to private-sector profitability. 
Lastly, the international community should vigorously pursue efforts to police tax avoidance and capital flight, both of which erode states’ revenue base. 
Long-term investment in productive assets is essential to ensuring the sustained growth that developing economies need. 
But they won’t achieve it by maintaining an environment that encourages short-term strategies. 

Fixing Europe's Stability Pact 
Europe's Stability Pact - which underpins the euro by setting fixed constraints on the size of budget deficits for euro members - is in trouble. 
The European Union's leading country, Germany, failed to meet its commitments to its EU partners concerning its deficit. 
Furthermore, it used its political muscle to block the early warning about its deficit that the EU Commission had mandated by the terms of the Stability Pact. 
Now France is making waves. 
The EU's reluctant number two country has served unofficial notice that it, too, does not plan to abide by its deficit-reduction promises. 
This comes one year after tiny Ireland received an official warning about its fiscal policies, even though Ireland's budget was in surplus, and mightily so. 
So, four years after it was signed, the Stability Pact seems to be in shambles. 
Indeed, Europe is now rife with talk about junking it, as well as with discussions about how to fix it. 
Rightly so: the Pact is ill-conceived and its implementation ill-designed. 
Not only is the Pact's fixed 3% limit for the ratio of budget deficit to GDP arbitrary, but it also ignores the fact that when an economy slows, deficits increase automatically. 
Recognizing this fact, the Pact's architects made things worse by adopting two misguided `solutions'. 
They introduced a safety clause allowing a country to suspend the deficit ceiling in case of serious recession, but they went on to define a serious recession in such a way as to make such a suspension implausible in practice. 
Mindful that normal slowdowns could lead to a breach of the ceiling, they decreed that a normal deficit is a zero deficit. 
Accordingly, each year, every county is required to submit a budget that projects two years ahead which demonstrates how its budget will be balanced in that time. 
Germany's commitment for 2002 was made in early 2001 when its economy was growing at a reasonable pace. 
The unanticipated slowdown made it impossible for Germany to meet the target. 
Finance Minister Hans Eichel decided, reasonably, not to worsen conditions by adopting a contractionary fiscal policy. 
The Commission, seeking to project itself as the protector of the Pact, sought to issue a warning. 
But that decision had to be taken by real-life politicians, the Council of Finance Ministers. 
No one on the Council wanted to upset Germany, for all of them recognized that the same problem could one day confront them. No warning was issued. 
France's case is different. 
During elections, politicians invariably make promises, including those of tax cuts. 
In a country with crushing rates of taxation, this is not only smart politics, but it is also good economics, provided spending is cut. 
But France is also a country where everyone enjoys some publicly-funded privilege, so cuts are a political "no-no." 
Thus France cannot meet the Pact's deficit target. 
The Commission expresses outrage, but France is skilled at challenging the EU's rules of common behavior. 
Political scheming is guaranteed. 
Economists and cynics are not surprised. 
The Pact's objective - to enforce fiscal discipline in countries that share the same currency - is worthy. 
But having lost control of their national monetary policies, euro member countries retain only one macroeconomic instrument, fiscal policy. 
The challenge, therefore, is to combine long-run discipline with short-run flexibility. 
Like promising to go on a diet just before a big party, this challenge is not easily met. 
The Stability Pact is too crude and technocratic: a 3% deficit target enforced by Brussels bureaucrats cannot bind real-life politicians. 
A solution must be found elsewhere. 
Fortunately, we need not look far. 
Monetary policy faces a similar challenge. 
It needs to deliver price stability in the long run while being flexible enough in the short run to deal with business cycles. 
Over the last decade, monetary policy has been a true success story. 
Everywhere the recipe is roughly the same: delegate policy to a group of competent people - the central bank - by making them formally independent from political pressure and providing them with a clear, explicit mandate. 
Knowing that any slippage today will need to be dealt with tomorrow, they exercise their best judgment. 
This has been a spectacular improvement over the monetary rules of the past. 
The same approach should work for fiscal policy. 
Some, of course, may fear a loss of democratic accountability. 
It is essential to realize that fiscal policy fulfills two very different tasks. 
The first task is structural and redistributive: it concerns the size of the budget and its detailed structure on both the spending and revenue sides. 
Decisions on such issues cannot be delegated; they must remain in the hands of elected governments and be subject to parliamentary approval and oversight. 
The second task is macroeconomic: it is about setting the budget balance to deal with cyclical fluctuations. 
That task does not differ from monetary policy and can be delegated to an independent body. 
So what Europe must to do is clear. 
Each country should regain full control of its fiscal policy but delegate its macroeconomic component, decisions about deficits or surpluses, to an independent Fiscal Policy Committee given the long-run mandate of stabilizing, or in some countries reducing, the size of the public debt. 
In order to guarantee the outcome, the statutes of such committees and their mandates ought to be agreed upon by all euro members. 
No more Brussels interference, no more arbitrary rules, no more political judgments-- just plain common sense. 

Fixing the Food Chain 
COPENHAGEN – The global food system is in disarray. 
Four years ago, a 30-year trend of decreasing food prices rapidly reversed course. 
Grain prices have more than doubled since 2004, and prices for most other foods have increased significantly. 
Add unsustainable management of natural resources, emerging negative effects of climate change, and sharply rising prices for fertilizers and energy, and we are faced with the most severe global food crisis since the early 1970’s. 
Dramatic price hikes reflect several factors: adverse weather in key food production areas, rapid increase in demand for meats and dairy products, higher oil prices, draw-downs of food stocks, greater use of food commodities for bio-fuel, and failure to invest in rural infrastructure, research and technology, and other public goods needed to facilitate agricultural growth in developing countries. 
The skyrocketing cost of food has resulted in more starvation among the poor, reduced purchasing power among the non-poor, and food riots in more than 30 countries. 
The key lesson to learn is that insufficient investment in science and inappropriate government policies lead to food crises. 
To avoid these shortcomings in the future, the world’s farmers and food processors must be helped to produce more food to meet increasing demand fueled by growth in world population and incomes. 
Moreover, they must produce more with less land and water, at reasonable prices, and without damaging natural resources or worsening climate change. 
But are governments getting the message? 
I believe so. 
Hunger is not a new phenomenon, but as long as the rural poor endure it in silence, as they have for a long time, governments can comfortably ignore it. 
Food riots by urban populations, on the other hand, threaten what governments care about the most: their legitimacy. 
Developing countries invest only slightly more that 0.5% of the value of their agricultural production in agricultural research. 
That is grossly inadequate. An increase to 2% is warranted. 
This would still be less than what high-income countries invest in agricultural research. 
Modern science should focus on sustainable increases in land and water productivity, management of production risks caused by droughts, floods, pests, and on mitigation and adaption to climate change. 
Drought-tolerant and pest-resistant crop varieties, disease-resistant livestock, and high-yield agricultural production systems that use less water and capture nitrogen from the air are but a few examples of the kind of technologies needed. 
More research is also needed to improve the nutritional quality of staple foods by fortifying them with iron, vitamin A, and zinc to help solve widespread micronutrient deficiencies. 
We must also strengthen food safety from production to consumption, including improvements in our understanding of the interaction between the food system and human health, particularly zoonotic diseases and the effects of pesticides. 
Research to identify alternative energy sources to stop the conversion of maize, soybeans, oil palm, and other foods to bio-fuel should become another high priority. 
Most of the people at risk of hunger and malnutrition live in rural areas. 
They need access to roads, markets, appropriate institutions and technology, primary health care, and education if they are to escape poverty and hunger and produce more food for an increasing world population. 
Both public and private investments are needed to provide such access. 
Government action is needed to make markets work in developing countries and to give farmers and market agents access to appropriate technology and knowledge. 
Unfortunately, rapidly falling food prices during the 30-year period since the food crisis of the early 1970’s gave governments a convenient excuse for doing little or nothing. 
Public policy is needed in many other areas, including legislation to incorporate environmental costs into food prices, thereby encouraging sustainable production, as well as incentives and regulations to promote more efficient water use. 
National and international bio-safety regimes should be implemented to guide the development, application, and trade of modern technology and genetically modified food. 
Government subsidies that increase the use of food commodities such as maize, soybeans, and palm oil for bio-fuel should be discontinued. 
International institutions are needed to regulate globalization and ensure trade competition. 
Trade-distorting agricultural policies, including those in the United States, the European Union, and Japan, should be eliminated. 
While poverty reduction is the best way to reduce fertility rates, access to reproductive health care is critically important for helping families limit the number of children they have to the number they desire. 

Fixing the IMF and the World Bank 
CAMBRIDGE: As usual, the IMF and World Bank congratulated themselves at their annual meeting in Washington, just concluded. 
Beneath the self-congratulation, however, was the widespread feeling that both institutions are failing badly, and need fundamental reform. 
Some reforms – if only partial – are already in sight. 
Poor countries received a commitment for much deeper debt cancellation. 
President Clinton, indeed, announced 100% cancellation of debts owed to the U.S. by the poorest countries. 
The IMF also promised it would care more about poverty (!). 
And rich countries agreed to meet more regularly with the poorer countries in a new group called the G-20: which includes eight rich countries, ten developing countries (mainly the big ones, such as Brazil, China, India, and South Africa), plus a representative of the IMF/World Bank and one from the European Union. 
The main order of business of the G-20, which will meet at the level of finance ministers in Berlin in December, should be the fundamental repair of international institutions. 
Most of these institutions are doing the wrong job, and all of them need fixing. 
Take the IMF. 
It mangled and mishandled Russia very badly. 
It has performed poorly in Africa for twenty years (admitted, in effect, by its "new" willingness to focus on poverty). 
It failed to stop financial crises in world markets, which have been worse than ever in the past three years. 
Moreover, though it takes credit for "recovery" in East Asia, the truth is that Asia's collapse in 1997 had a great deal to do with IMF mismanagement in the first place, since the IMF helped to stoke financial panic. 
The IMF should be given little credit for renewed economic growth in East Asia, since East Asia grew for decades without much IMF help! 
The real lesson about the IMF is simple. 
The IMF is trying to run much of the world, and of course it can't do that effectively. 
It has programs in more than 60 countries, and virtually dictates economic policies (or tries to) in these countries. 
This is an impossible and foolish task. 
The IMF has no special expertise in the transition societies of the former communist world, or in African economic development. 
It has failed miserably in those places. 
It is time that the IMF returns to its basic and needed function: monitoring the international monetary system, and perhaps making a few emergency loans. 
There should be five IMF programs per year, not fifty. 
The situation with the World Bank is no better. 
It, too, is trying to run the world, or at least the poorest part of the world. 
It, too, is remarkably overextended. 
No single institution can hope to define the "right" strategy for economic development. 
Yes, all countries need vigorous private-sector led growth as well as social programs, but there are many ways to reach those goals. 
And much of World Bank project lending can be done by the private sector. 
The World Bank should be cut back sharply – to focus on the generation of systematic data; to support new scientific efforts directed at poor-country problems (like the development of vaccines for malaria); and to study long-term global issues, like man-made climate change. 
Perhaps the country lending activities of the World Bank should be almost completely eliminated, with the private sector, and the regional development banks such as the Asian Development Bank and Inter-American Development Bank, picking up the slack. 
Other institutions, to the contrary, need a boost in their budgets and their international roles. 
This applies to institutions charged with international public health – like the World Health Organization, UNICEF, and the United Nations AIDS Program. 
Similarly, the United Nations Development Program, which monitors basic human development conditions around the world, needs an increased mandate. 
In any event, these are the kinds of issues that the G-20 should urgently explore. 
When the G-20 meets later this Fall, it should therefore demand an independent and thorough review of the IMF and the World Bank, as well as other international agencies. 
The review should be led by independent experts from developing and developed countries. 
This review panel should be encouraged to make very bold recommendations. 
We need international institutions that work. 
Without a fundamental fix-up of the IMF and World Bank and other key institutions, the cause of international development will continue to suffer. 

Fixing the Innovation Supply Chain 
CAMBRIDGE – As a graduate student at MIT, I had the opportunity to work with Professors Robert Langer and Ram Sasisekharan in an environment rife with innovative thinking. 
We asked what could be possible, and were driven to pursue revolutionary technologies that were widely considered impossible. 
This experience instilled in me a simple but powerful credo: think big. 
Innovation is difficult. 
If one is willing to traverse the boundary of the unknown, one should pursue the course that promises the greatest potential impact. 
In exploring a wide range of subjects – energy, agriculture, medicine, and more – one approach has, in my experience, emerged as the most effective: begin with the end in mind. 
By identifying the problems and envisioning the preferred solution, one can define the set of constraints into which technological innovation fits, and establish a clear, albeit often difficult, path to its realization. 
A fundamental requirement of this approach is an open mind, unconstrained by the subject’s idiosyncratic dogma. 
Those who are immersed in a field have an established view of what is possible, based on some combination of previous successes, citation bias, current limits of knowledge, and truth – and it is often difficult to distinguish these sources. 
But the newcomer asking the most basic questions begins to notice logical inconsistencies, from which the real constraints on solutions and technological limits arise. 
Breakthroughs lie at the intersection of technological possibility and market pull. 
An understanding of these forces enables innovators to optimize the direction of invention. 
With well-defined constraints, a clear path for developing innovative technologies – one that accounts for both the known and the unknown – can be planned. 
This unconventional approach has consistently produced groundbreaking technologies that, if successfully implemented, revolutionize a field. 
What might be more interesting, however, is the response that such progress often elicits: “This seems so obvious. 
Why hasn’t someone done it before?” 
Early in my career, this reaction troubled me; it made me wonder whether I had, in fact, overlooked something obvious. 
But, as my experience with entrepreneurial innovation has grown, I have realized that the response is rooted in the fact that most people are trapped in a specific doctrine, which obscures the innovative solutions that lie beyond its borders. 
Companies exhibit similar behavior when it comes to acquiring innovative technologies, adhering to ineffective, restrictive processes, despite an ostensibly obvious alternative: the efficient systems that manufacturers use to secure inputs for production. 
In order to establish a clear, low-risk path to producing their goods at a predictable (and profitable) cost, companies employ teams dedicated to securing the relevant supply chains, controlling inventory, managing the production process, and so on – from the point of origin to the point of consumption. 
In many cases, this involves maintaining relationships with a dedicated network of suppliers, with which producers share detailed product specifications. 
Doing so ensures that producers get exactly what they need, and that suppliers are able to deliver the correct inputs. 
The result is a well-defined, highly productive, and mutually beneficial working relationship. 
By contrast, the innovation supply chain (the process by which companies obtain and/or develop future products and improve on their current products) tends to be characterized by inefficiency, ambiguity, and competition. 
And, in many cases, no supply chain is in place. 
Most pharmaceutical companies, for example, lack effective innovation supply chains. 
But only about 15% of the drugs that the US Food and Drug Administration has approved recently were developed by the same company that markets and sells them, meaning that many major pharmaceutical companies depend on the innovation ecosystem to advance their products. 
Drug companies often lament that the firms from which they are sourcing innovations do not perform clinical trials to their specifications, forcing them to repeat the work. 
Nevertheless, they are reticent about providing such specifications in advance – even when innovators request them – perhaps to protect their market position or internal efforts. 
Moreover, the same companies compete directly in the supply of innovative technologies. 
The result is a broken supply chain. 
Just as individual innovators must challenge conventional wisdom, companies must replace the established approach to the innovation supply chain with one that more closely resembles how they create and maintain a manufacturing supply chain. 
If market incumbents are willing to share “innovation specifications” (which should not be confused with innovation methods), they can develop an effective network of innovation suppliers, thereby increasing the reliability of the product-development engine. 
And, as with effective manufacturing supply chains, the supplier and the purchaser must build a reciprocal relationship, in which they do not compete with each other, practically or economically, in the specific activities that they are performing. 
An efficient supply chain can transform innovation on both the individual and industry levels. 
Indeed, a common approach – defining key market needs, coupling them with solution constraints, and pushing the boundaries of current thinking – applies to all kinds of innovation. 
With an innovation ecosystem organized along these lines, “obvious” advances could occur significantly faster. 
How obvious is that? 

Helping Refugees Together 
LONDON – This year is likely to be the most momentous for refugee protection and migration since the signing of the Geneva Convention in 1951. 
Depending on the choices we make, we will either help create more open societies, based on greater international cooperation, or we will abet authoritarian governments and their nationalist agendas. 
So we must treat this issue with exceptional urgency and seriousness of purpose. 
The refugee and migration crises in the Mediterranean, Asia, Africa, and Central America have led to widespread and appalling human suffering. 
The significance of this can hardly be overstated, for the world’s failure to help its most vulnerable people reflects an extraordinary breakdown of morality in the international community. 
We are at risk of losing our collective understanding of why the multilateral system and international cooperation matter. 
When we refuse to protect those facing persecution, we not only endanger them; we subvert our principles of civil liberty and put our own freedom at risk. 
Last year, we were offered literally a million reminders that the system of refugee protection was failing. 
Each asylum-seeker bravely crossing the Mediterranean was telling us that something was wrong in countries of first asylum. 
How could we have allowed Jordan, Lebanon, and Turkey to bear the burden of hosting almost five million refugees with negligible backing from the rest of the world? 
It costs at least $3,000 a year to provide a refugee with a decent level of support; the international community provided just a small fraction of this. 
When the cracks in the protection system became gaping holes, refugees voted with their feet. 
Then, in a panicked effort to deter arrivals, the European Union – the birthplace of the international protection system – jeopardized its tradition of human rights and the basic standards of asylum law. 
The signal this sends to frontline countries – that they need not fully respect the rules of protection – could be devastating. 
In the misguided belief that safeguarding sovereignty means acting unilaterally, governments have resisted an international approach to migration. 
But as events in the Mediterranean have starkly demonstrated, this approach is self-defeating. 
It leads to paper-tiger sovereignty, undermines the credibility of democratic governments and the multilateral system, and empowers smugglers and authoritarian populists. 
We must bring this downward spiral to a halt. 
A systemic global crisis demands a systemic global response. 
By the time world leaders meet in September at the United Nations Summit on Addressing Large Movements of Refugees and Migrants, the global community must acknowledge what went wrong – and agree on how to fix it. 
Rather than shifting the burden, we need to start sharing responsibility. 
The smartest way to safeguard national sovereignty is to minimize the risks migrants face when trying to reach safety, and to maximize the means at their disposal to build productive lives. 
Accomplishing this require three things. 
First, we must use the political momentum around the refugee issue to generate commitments to specific improvements in the international protection system and to reduce the vulnerability of all migrants. 
It is simply unacceptable that just ten countries are forced to bear the lion’s share of the burden, that 86% of refugees reside in the developing world, and that fewer than 100,000 per year are resettled. 
Supporting refugees is not optional, and we cannot allow responsibility to be defined merely by proximity to a crisis. 
We must no longer go from year to year, crisis to crisis, begging for pledges (which all too often go unfulfilled). 
We should calculate what it costs to support forced migrants and the countries that host them – as if we were preparing a family budget – and then collectively contribute the necessary funding within the context of a long-term plan. 
We also must expand our capacity to host refugees through resettlement and other legal pathways – such as student, work, and family reunification visas. 
Second, strengthening the international protection system requires us to rethink the very idea of our responsibility toward refugees. 
We can no longer afford to treat them as deadweight in permanent camps. 
Instead, we must help them become active, contributing members of our communities. 
Our model must be based on refugees’ full inclusion, as soon as possible, in labor markets and schools. 
And we must vow never to hold children in detention. 
Finally, the UN system must develop greater capacity to address migration and provide migrants with a stronger voice at the global level. 
Only then will we be able to agree on a set of commitments to reduce the risks that all migrants face, ensuring rescue at sea, offering safe pathways to relocation, and providing legal identities. 
The degree of public and political attention that refugees and migration are receiving this year is not likely to be repeated in my lifetime or in that of the next generation. 
The condition of many humans – not to mention the human condition itself – will improve or worsen depending on how we use this opportunity. 

Flawed International Justice for Sudan 
Those who follow events in Darfur closely know very well that Sudan’s President Omar Hassan al-Bashir leads a group of political and military leaders responsible for the serious and large-scale crimes against Sudanese citizens that the country’s military forces, with the assistance of paramilitary groups and militias, commit every day in the region. 
These citizens are guilty only of belonging to the three tribes (Fur, Masalit, and Zaghawa) that spawned the rebels who took up arms against the government a few years ago. 
Any step designed to hold Sudan’s leaders accountable for their crimes is therefore most welcome. 
Nevertheless, the decision of Luis Moreno-Ocampo, the Prosecutor of the International Criminal Court, to request an arrest warrant against al-Bashir is puzzling, for three reasons. 
First, if Moreno-Ocampo intended to pursue the goal of having al-Bashir arrested, he might have issued a sealed request and asked the ICC’s judges to issue a sealed arrest warrant, to be made public only once al-Bashir traveled abroad. 
The Court’s jurisdiction over the crimes in Darfur has been established pursuant to a binding decision of the United Nations Security Council, which means that even states that are not parties to the ICC statute must execute the Court’s orders and warrants. 
Having instead made the request for a warrant public, al-Bashir – assuming the judges uphold the request – can simply refrain from traveling abroad and thus avoid arrest. 
Second, Moreno-Ocampo has inexplicably decided to indict only Sudan’s president and not also the other members of the political and military leadership that together with him have planned, ordered, and organized the massive crimes in Darfur. 
If Hitler had been alive in October 1945, the 21 indictees who were in fact tried at Nuremberg would not have been let off the hook. 
Finally, one fails to understand why Moreno-Ocampo has aimed so high and accused al-Bashir of the “crime of crimes,” genocide, instead of filing charges that are more appropriate and easier to prosecute, such as war crimes (bombing of civilians) and crimes against humanity (extermination, forcible transfer of people, massive murders, rape, etc.). 
True, genocide has become a magic word, and people think that its mere evocation triggers the strong outrage of the world community and perforce sets in motion UN intervention. 
But this is not so. 
Moreover, strict conditions must be met to prove genocide. 
In particular, the victims must form an ethnic, religious, racial, or national group, and the perpetrator must entertain “genocidal intent,” namely the will to destroy the group as such, in whole or in part. 
For example, one kills ten Kurds not because they are obnoxious or because the perpetrator has strong feelings against each of them taken individually, but only because they are Kurds; by killing those ten persons he intends to contribute to the destruction of the group as such. 
In the case of Darfur, according to Moreno-Ocampo, each of the three tribes does constitute an ethnic group; although they speak the same language as the majority (Arabic) and embrace the same religion (Islam) and their skin is the same color, they constitute distinct ethnic groups because each tribe also speaks a dialect and lives in a particular area. 
Under this standard, the inhabitants of many European regions – for example, Sicilians, who, in addition to the official language, also speak a dialect and live in a particular area – should be regarded as distinct “ethnic groups.” 
Furthermore, Moreno-Ocampo has inferred al-Bashir’s genocidal intent from a set of facts and conduct that in his view amount to a clear indication of such intent. 
However, according to the international case law, one can prove by inference a defendant’s state of mind only if the inference is the only reasonable one that can be drawn based on the evidence. 
In the case of Darfur, it would seem more reasonable to infer from the evidence the intent to commit crimes against humanity (extermination, etc.), rather than the intent to annihilate ethnic groups in whole or in part. 
The arrest warrant, assuming that the ICC issues it, seems unlikely to produce the extra-judicial effects – the political and moral delegitimization of the accused – that sometimes follow. 
This happened in the case of former Bosnian Serb leader Radovan Karadzic, who, although never arrested, has been removed both from power and the international arena as a result of his indictment in 1995. 
Instead, Moreno-Ocampo’s request may have negative political repercussions by creating much disarray in international relations. 
It may harden the Sudanese government’s position, endanger the survival of the peace-keeping forces in Darfur, and even induce al-Bashir to take revenge by stopping or making even more difficult the flow of international humanitarian assistance to the two million displaced persons in Darfur. 
On top of that, Moreno-Ocampo’s request might further alienate the Great Powers (China, Russia, and the United States) that are currently hostile to the ICC. 

Missing Growth Multipliers 
PRINCETON – In April 2010, when the global economy was beginning to recover from the shock of the 2008-2009 financial crisis, the International Monetary Fund’s World Economic Outlook predicted that global GDP growth would exceed 4% in 2010, with a steady annual growth rate of 4.5% maintained through 2015. 
But the forecast proved to be far too optimistic. 
In fact, global growth has decelerated. 
In its most recent WEO, the IMF forecasts global GDP to grow by only 3.3% in 2012, and by 3.6% in 2013. 
Moreover, the downgrading of growth prospects is remarkably widespread. 
The forecast errors have three potential sources: failure to recognize the time needed for economic recovery after a financial crisis; underestimation of the “fiscal multipliers” (the size of output loss owing to fiscal austerity); and neglect of the “world-trade multiplier” (the tendency for countries to drag each other down as their economies contract). 
For the most part, the severity and implications of the financial crisis were judged well. 
Lessons from the October 2008 WEO, which analyzed recoveries after systemic financial stress, were incorporated into subsequent forecasts. 
As a result, predictions for the United States – where household deleveraging continues to constrain economic growth – have fallen short only modestly. 
The April 2010 report forecast a US growth rate of roughly 2.5% annually in 2012-2013; current projections put the rate a little higher than 2%. 
By contrast, the fiscal multiplier was seriously underestimated – as the WEO has now recognized. 
Consequently, forecasts for the United Kingdom – where financial-sector stresses largely resembled those in the US – have been significantly less accurate. 
The April 2010 WEO forecast a UK annual growth rate of nearly 3% in 2012-2013; instead, GDP is likely to contract this year and increase by roughly 1% next year. 
Much of this costly divergence from the earlier projections can be attributed to the benign view of fiscal consolidation that UK authorities and the IMF shared. 
Likewise, the eurozone’s heavily indebted economies (Greece, Ireland, Italy, Portugal, and Spain) have performed considerably worse than projected, owing to significant spending cuts and tax hikes. 
For example, Portugal’s GDP was expected to grow by 1% this year; in fact, it will contract by a stunning 3%. 
The European Commission’s claim that this slowdown reflects high sovereign-default risk, rather than fiscal consolidation, is belied by the UK, where the sovereign risk is deemed by markets to be virtually nonexistent. 
The world-trade multiplier, though less widely recognized, helps to explain why the growth deceleration has been so widespread and persistent. 
When a country’s economic growth slows, it imports less from other countries, thereby reducing those countries’ growth rates, and causing them, too, to reduce imports. 
The eurozone has been at the epicenter of this contractionary force on global growth. 
Since eurozone countries trade extensively with each other and the rest of the world, their slowdowns have contributed significantly to a decrease in global trade, in turn undermining global growth. 
In particular, as European imports from East Asia have fallen, East Asian economies’ growth is down sharply from last year and the 2010 forecast – and, predictably, growth in their imports from the rest of the world has lost momentum. 
Global trade has steadily weakened, with almost no increase in the last six months. 
The once-popular notion, built into growth forecasts, that exports would provide an escape route from the crisis was never credible. 
That notion has now been turned on its head: as economic growth has stalled, falling import demand from trade partners has caused economic woes to spread and deepen. 
The impact of slowing global trade is most apparent for Germany, which was not burdened with excessive household or corporate debt, and enjoyed a favorable fiscal position. 
To escape the crisis, Germany used rapid export growth – especially to meet voracious Chinese demand. 
Although growth was expected to slow subsequently, it was forecast at roughly 2% in 2012-2013. 
But, as Chinese growth has decelerated – owing partly to decreased exports to Europe – the German GDP forecast has been halved. 
And, given that this year’s growth has largely already occurred, Germany’s economy has now plateaued – and could even be contracting. 
In good times, the trade generated by a country’s growth bolsters global growth. 
But, in times of crisis, the trade spillovers have the opposite effect. 
As the global economy has become increasingly interconnected, these trade multipliers have increased. 
Indeed, while less ominous and dramatic than financial contagion, trade spillovers profoundly influence global growth prospects. 
Failure to recognize their impact implies that export – and, in turn, growth – projections will continue to miss the mark. 
The projected increase in global growth next year will likely not happen. 
On the contrary, policy errors and delays in individual countries will seriously damage economies worldwide. 

The Elusive Benefits of Flexible Exchange Rates 
CAMBRIDGE – In 1953, Milton Friedman published an essay called “The Case for Flexible Exchange Rates,” arguing that they cushion an economy from internal and external shocks by bringing about just the right price changes required to keep the economy at full employment. 
But after almost half-a-century of floating exchange rates, the reality is more complicated than that. 
To understand Friedman’s logic, consider a scenario in which productivity in the United States rises. 
In an efficient system, this should reduce the price of US goods relative to those of the rest of the world, with US exports becoming cheaper than imports. 
As America’s terms of trade (the ratio of export prices to import prices) deteriorate, demand is shifted toward US goods, keeping the economy at full employment. 
If prices are “sticky” (in the producer’s currency), however, a potential hitch emerges. 
Say the prices of US imports from Japan are sticky in Japanese yen and the prices of US exports to Japan are sticky in dollars. 
The terms of trade will thus remain unchanged, as long as the exchange rate does as well. 
Here is where a floating exchange rate comes in. 
By enabling monetary expansion, and thus causing the US dollar to depreciate, the logic goes, a floating exchange rate allows the prices of US exports to decline relative to its imports. 
The result is the desired deterioration of the producer’s terms of trade and the maintenance of full employment. 
But this line of reasoning assumes that a country’s terms of trade move in lockstep with its exchange rate. 
And that, as history over a quarter-century has shown, does not seem to be the case. 
In a recent paper, the International Monetary Fund’s Emine Boz, Princeton’s Mikkel Plagborg-Møller, and I construct bilateral export- and import-price indices for 2,500 country pairs, covering 91% of world trade for the period 1989-2015. 
We exclude the prices of commodities (oil, copper, and other such goods that are traded on an exchange), as these prices are not sticky. 
As it turns out, there is no evidence that the terms of trade and the exchange rate move in tandem. 
On the contrary, a 1% depreciation in the bilateral exchange rate is associated with only a 0.1% depreciation in the bilateral terms of trade in the year of the depreciation. 
The origin of this disconnect – which Camila Casas, Federico Diez, Pierre-Olivier Gourinchas, and I describe in a 2016 paper – seems to be that, for the vast majority of internationally traded goods, prices are sticky in dollars, not in the producer’s currency, as Friedman’s reasoning required. 
Consider the case of the US and Japan. 
Almost 100% of US exports to Japan are priced in dollars, meaning that they, as in Friedman’s version, are sticky in dollars. 
But 80% of US imports from Japan are invoiced in dollars, meaning that those prices, too, are sticky in dollars, rather than in Japanese yen. 
As a result, the terms of trade change very little, even if the exchange rate fluctuates. 
This means that, even if the US dollar depreciates, it does not become more expensive for US importers to buy Japanese goods, so there is limited incentive to switch from Japanese to US goods. 
A weaker dollar thus has limited impact on US imports. 
Likewise, a weaker yen does little to spur Japanese exports to the US, because the dollar price of those exports remains roughly constant. 
This phenomenon applies even to trade transactions that do not include the US. 
As I documented in a 2015 paper, the share of world imports invoiced in US dollars is 4.7 times larger than the share of world imports involving the US. 
For world exports, that figure is 3.1. 
This “dominant currency paradigm” lies at the root of the terms-of-trade disconnect. 
In fact, we document that global trade prices and volumes are driven by the dollar exchange rate, rather than the exchange rate between the two trading partners’ currencies. 
So fluctuations in the price and quantity of India’s imports from China, for example, depend on the rupee-dollar exchange rate, rather than the rupee-renminbi exchange rate. 
The strength of the US dollar is thus a key predictor of aggregate trade volume and consumer/producer price inflation worldwide. 
Friedman was right about one thing: flexible exchange rates do provide valuable monetary-policy independence. 
But, in a dollar-dominated trade environment, their ability to support full employment is severely limited. 

From Economic Analysis to Inclusive Growth 
WASHINGTON, DC – Most economies are seeking a recipe for inclusive economic growth, whereby high rates of investment, rapid innovation, and strong GDP gains are pursued alongside measures to reduce income inequality. 
Conservatives insist that growth requires low taxes and incentives such as flexible labor markets to encourage entrepreneurship. 
But reducing inequality requires higher levels of government spending and taxation (except when government is pursuing deficit spending to stimulate a depressed economy). 
The Scandinavian economic model is often invoked to bridge this gap. 
The Danish “flexicurity” system, in particular, has historically delivered solid economic performance alongside low inequality. 
Leading economists such as Philippe Aghion have published excellent analyses of how this model could balance growth, equality, and overall satisfaction of citizens elsewhere in the world. 
These economists argue that labor markets with few restrictions on hiring and firing, low taxes on entrepreneurship, and generous incentives for innovation are compatible with a relatively equal income distribution, high social spending by government, and equalizing social policies such as universal free education. 
This model has sustained an ongoing debate in Europe, one that is now relevant in the United States, because Donald Trump’s new administration has promised to help globalization’s “losers” while improving innovation and growth. 
But in the US, it is far more difficult, politically, to argue for generous public spending on education, health care, and financial security for retirees, because doing so always raises the specter of high taxes. 
An inclusive growth model would seem to have to square the policy circle. 
It would have to increase substantially public spending, particularly on education, unemployment benefits and training, and health. 
It is useful to look at the numbers from the oft-cited Danish and Swedish examples. 
Generally speaking, these countries have excellent economic indicators. 
Although GDP growth is not higher than in the US, most people share a high standard of living, and surveys show that Scandinavians (particularly Danes) are some of the happiest people in the world. 
But, as the following chart shows, these countries also have some of the highest government spending- and taxation-to-GDP ratios in the OECD. 
Hypothetically, if the US adopted Denmark’s universal free education policy, but kept its tax-to-GDP ratio unchanged, its fiscal deficit would exceed 6% of GDP. 
The US has run deficits that high only during World War II and the Great Recession of 2008-2009, when a huge stimulus package was implemented to spur recovery. 
So, just providing universal free education in the US would run the country’s deficit up to the highest level ever recorded in normal times. 
In the context of this comparison, it would seem that the circle cannot be squared without a major macroeconomic shift. 
Scandinavian countries are smaller and can more efficiently collect revenues and administer public services. 
But even if the US approached this efficiency – a difficult feat in such a large and diverse country – social solidarity still would demand high effective taxes, as it does in Denmark and Sweden. 
Another crucial component of the Scandinavian model is labor-market flexibility. 
On the OECD “Employment Protection Legislation” index, the US scores a 1.2 on a 0-5 scale, where zero indicates full flexibility. 
Meanwhile, France and Germany come in at 2.8, Italy at 2.9, and Denmark and Sweden at 2.3 and 2.5, respectively. 
This shows that, though Scandinavian labor markets are more flexible than elsewhere in continental Europe, the US labor market is far more flexible – and provides less security – than any of them. 
Such broad static accounting suggests that we should proceed cautiously in applying lessons from the Scandinavian model to large countries like the US. 
Then again, to assess a model’s long-term impact on citizens’ welfare, we would need a more dynamic analysis over the course of at least a decade. 
Only then could we gauge how strongly investment and innovation would respond to incentives, how much free universal education would cost in the medium term, or how demographic structures would affect different social policies. 
Economic analysis alone cannot settle the political debate between right and left. 
What it can do is help to narrow and focus that debate. 
The key is for participants on both sides to be more explicit about the values and objectives they believe that society should pursue, and to quantify their assumptions about how dynamic performance will respond to particular incentives. 
Only then can a democracy choose effectively between potential paths. 
Good economic analysis can enable “constructive populists” to debate the “post-fact, fanciful populists” who seem to be on the rise, with a realistic alternative discourse – one that is transparent and based on credible expectations of economic policies and outcomes. 
In other words, economic analysis can facilitate good choices; it cannot make them. 

Floating Currencies are the Only Way 
NEW HAVEN: Asia’s leaders have finished their meeting in Kuala Lumpur with all sorts of promises. 
It is to be hoped that all have concluded, in the wake of a year of crisis, that fixed but adjustable exchange rates are a bad idea. 
The only viable regimes, indeed, in our globalized financial world are floating exchange rates and irretrievably fixed rates. 
Most developing, emerging, and transition economies should henceforth have currencies with floating rates. 
East Asia’s victims of currency crises were, like most other nations, on fixed rates - pegged to the dollar, other major hard currencies, or baskets of currencies. 
The central bank promised to redeem its own currency on demand by any holders, foreign or domestic, in prescribed amounts of hard currencies. 
Often these pegs were ranges rather than precise values, and in many cases the midpoint of the bracket moved over time at a prescribed speed. 
These pegged rates were not immutable. 
Central banks could adjust them or abandon them at any time, violating their solemn promises. 
Naturally, market participants speculate on these possibilities. 
Worse, they speculate on what other currency holders will think. 
This is the inherent source of the system’s instability. 
Although everyone seems surprised when currency crises occur, they are not surprising and happen at one time or another to almost all fixed-exchange-rate currencies. 
Recently, they have hit European countries (the United Kingdom, Italy, Spain, Sweden, Finland), Latin America (notably Mexico in 1994), Russia and other transition economies, as well as Asia’s tigers. 
Since 1973 exchange rates among the world’s three major currencies - the dollar, D-mark, and yen - have floated in free currency markets without crises. 
A recent example is the gradual 50% depreciation of the yen against the dollar. 
Japan's macroeconomic stagnation, of which the fall in the market value of the yen is one symptom, is a disaster, but it is not a currency crisis like those of its neighbors. 
Floating rates worked for the Big Three currencies, forestalling traumatic crises for other currencies too. 
Of course, currency values go up and down, people speculate on them, and often the fluctuations are quite unpleasant for the economies affected. 
But the trauma of a discrete regime change, a default of solemn official commitments, and the bandwagon momentum these events generate are avoided by the use of floating rates. 
Foreign lenders who underestimated the risk of short-term loans to Indonesia and Korea would have charged higher risk premiums in a floating-rate world. 
Those sources of distrust in Asian economic and financial prospects, some fundamental and some speculative, that triggered the Asian crises would likewise have pushed down the exchange rates had they been floating, but surely not nearly as far as they plunged in the free fall following the collapse of fixed rates. 
What explains the prevalence of fixed-rate regimes outside the hard currency countries? 
Through most of the period since 1945, fixed rates were protected by capital controls and exchange restrictions. 
The IMF sought to make currencies convertible in commercial transactions but tolerated regulations of capital account transactions. 
Lately, economies at all stages of development were pressured by the world financial establishments - national and international, official and private -- to liberalize financial markets and make their currencies fully convertible. 
In many ways these developments were advantageous, but they made currencies more vulnerable and fixed exchange rates more problematic. 
Yet the same authorities pressing for financial integration maintained the pressure for fixed exchange rates. 
A fixed rate was seen as a "nominal anchor" against inflation, forcing disciplined monetary and fiscal policies. 
Success in maintaining a fixed rate was touted as an attraction to foreign investors. 
Today these arguments ring hollow. 
Recent short-term bank lending from Tokyo, New York, Frankfurt, and London to East Asian banks and businesses are an example of how financial integration and deregulation made fixed exchange rates vulnerable. 
Such loans would have been unacceptable in a floating rate regime, because they threatened to move the exchange rate too far for the health of the economies. 
Even with floating rates central banks will need hard currency reserves, and will at times need to use them in currency markets. 
Such interventions are called "dirty floating," but they are an essential tool of monetary policy. 
Every dollar of the short-term debt of, say, a Korean bank is a claim on the Korean central bank's dollar reserves, a claim whose origins are beyond the central bank's control. 
In the East Asian currency crises, the tough macro policies required by the IMF and the U.S. Treasury were intended to restore the confidence of international lenders and investors. 
They failed to do so, and indeed the precipitous recessions that ensued had the opposite effect. 
These countries had not been guilty of irresponsible and inflationary fiscal and monetary policies, for which austerity is the natural punishment and cure. 
If the region’s currencies were overvalued, inviting speculation on devaluations, it was more the fault of Japan's stagnation and the depreciation of the yen than of their own policies. 
Structural reforms, to root out corruption and "crony capitalism," were doubtless overdue. 
But these conditions were not new. 
They had long existed with remarkable economic progress and with stable currencies. 
How could they suddenly be the cause of currency panic? 
Whatever the exchange rate regime, fixed or floating, which a country adopts it is surely unwise to promote or even allow net import of foreign capital in such transient liquid form as developing markets have done over the course of this decade. 
Governments and central banks should use their powers to steer the import of foreign capital into direct fixed investment, equity, and to a limited extent long-term hard-currency debt. 

Fast-Tracking Climate Action 
BONN – Last December in Paris, world leaders came together to agree on a set of goals and pathways for decarbonizing the global economy and increasing our capacity to adapt to climate change. 
It was a landmark achievement, but it was just the beginning. 
Every country – with the support of cities, the private sector, and citizens – must now move swiftly to fulfill its promises and bring climate change under control. 
The need for urgent, concerted action cannot be emphasized enough. 
Any delay will cause negative consequences to continue to accumulate. 
This will not only cause tremendous suffering, especially to the world’s most vulnerable people; it will reverberate for decades to come, making the key goal of keeping the increase in global temperature below 2º Celsius (relative to pre-industrial levels) increasingly costly. 
The rapid progress that is needed will require major reductions in carbon dioxide emissions, achieved through increased investment in the development and expansion of cleaner and more efficient energy. 
At the same time, efforts to conserve and expand carbon “sinks” – that is, the forests, wetlands, grasslands, mangroves, and sea grasses that absorb much of the CO2 being emitted – are crucial. 
But even under the most optimistic scenarios, it will take time to engineer a global shift away from fossil fuels toward renewable energies and to restore the world’s badly depleted ecological infrastructure. 
That is why it is important to pursue measures to reduce short-lived climate pollutants (SLCPs), which also cause climate change. 
These include black carbon or soot (the primary component of particulate matter that is also a major and growing health concern); hydrofluorocarbons (HFCs), used most commonly in refrigeration; and methane and tropospheric (or ground-level) ozone. 
Pound for pound, these “super pollutants” cause much more warming than CO2. 
Indeed, the warming impact of soot is about 900 times greater than that of carbon, and the impact of methane is about 28 times greater; many of the HFCs have a warming impact that is about 2,000 times more powerful than that of CO2. 
The problems caused by SLCPs extend beyond climate change. 
Black carbon and tropospheric ozone pollution are traditional air pollutants, which together kill nearly seven million people a year and destroy hundreds of millions of tons of food crops. 
The United Nations Environment Programme’s Climate and Clean Air Coalition to Reduce Short-Lived Climate Pollutants estimates that fast action to reduce SLCPs, especially methane and black carbon, has the potential to slow down the warming expected by 2050 by as much as 0.5º Celsius. 
Moreover, it could save over two million lives annually, while preventing the loss of more than 30 million tons of crops per year. 
There is reason to hope that we can reap these benefits. 
Under the Paris agreement, individual countries are to achieve emissions reductions according to their own nationally determined contributions. 
More than a dozen countries have included SLCPs in their national climate action plans. 
Furthermore, the Climate and Clean Air Coalition is working with its 50 member countries, as well as the World Bank and World Health Organization, to cut the super pollutants. 
But, to be successful, efforts must go above and beyond the Paris agreement. 
Fortunately, progress is being made here, too. 
Already, measures to mitigate HFC production and consumption are being pursued through the Montreal Protocol on protecting the ozone layer. 
Governments opened formal negotiations last November, and are aiming to reach agreement by the end of this year. 
This builds on an impressive phase-out of older chemicals, such as chlorofluorocarbons and others, that has averted the equivalent of 135 billion tons of CO2 from entering the atmosphere, while accelerating the recovery of the ozone layer. 
Of course, the reduction of SLCPs should not come at the expense of efforts to cut CO2 emissions. 
On the contrary, the world can and must reduce both simultaneously. 
And, indeed, efforts to reduce CO2 emissions are also occurring outside the Paris agreement framework. 
The International Civil Aviation Organization is working to reduce emissions from air travel, having reached a preliminary agreement on the subject just a few weeks ago. 
The International Maritime Organization is pursuing similar goals for shipping. 
Warming from any climate pollutant is dangerous and sets in motion a series of potentially irreversible effects, including the continued rise of sea levels, destruction of forests, depletion of Arctic sea ice and glaciers in Greenland and the Tibetan Plateau, and melting of permafrost. 
Making matters worse, these effects can reinforce one another, tipping the world into a vicious cycle that becomes ever more difficult to escape. 
But if we act fast, harvesting fresh momentum on HFCs under sister agreements like Montreal and a growing array of cooperative coalitions, we can avoid disaster and ensure long-term economic development, including by supporting progress toward achieving the Sustainable Development Goals. 
Simply put, the rate of action on all climate-related emissions will determine our success in eradicating poverty and will shape the world our descendants will inherit. 
With governments preparing to sign the Paris agreement on April 22, there has never been a better opportunity to press ahead toward a brighter, cleaner, more prosperous future. 

Follow the Euro 
CAMBRIDGE: Now that the Euro has arrived, so what? It is useful to review what it can be expected to do. 
It is also interesting to ask what new risks, opportunities or ideas it offers emerging markets in Latin America or Eastern Europe. 
First a negative: the claims of the great gains to be made from transparency, competition, and efficiency are overstated. 
Price discrepancies in Europe reflect two facts: like politics, all prices are local. Second, price discrepancies do have a lot to do with limited retail competition and a long tradition of anti-competitive practices. 
Of course, there will be gains in transactions costs from a single money. But that must wait until the money is actually there, a few years from now. 
Another negative: will the Euro help unemployment? 
Per se, the Euro does very little to create jobs or reduce unemployment. 
True, more financial stability on the periphery and as a result somewhat higher growth must be expected and that brings limited help. 
The central fact is that higher growth and substantial dismantling of supply side obstacles to job creation and job acceptance are the real cure. 
Here is something the Euro will do: reinforce financial deregulation (national and cross border) in Europe to create a broad and deep capital market. 
Europe comes from a dinky and segmented national, bank-based financial structure. It is on the way to a US-style capital market where households hold funds and companies issue paper and stocks, intermediation margins are small and governance significant. 
European companies will benefit from the transformation, the most significant supply side influence we will see. 
Financial deregulation introduces the possibility of talking advantage of financial technology. 
Second, financial deregulation and internal market measures open a much larger scope for cross border transactions. 
Lastly, the Euro crowns these developments by adding huge scale, lowering the cost of capital and that helps growth for the wider range of users. 
Next some good news: one payoff on the Euro is the macroeconomic disarmament of the periphery - Italy and Spain, even France. 
Common money makes these regions safe for investors, reflected in lower interest rates and higher growth; risk premiums are compressed because these countries no longer have central banks or exchange rates to fiddle. 
Macroeconomics is gone as far as local initiative is concerned and that is a good thing in a world where whenever the Banca d’Italia practices "independent monetary policy", investors can’t run fast enough. 
In this respect, the Euro is a thoroughly modern institution, well-adapted to a highly integrated and trigger-happy international capital market. 
A non-issue: inspired by their anti-market attitudes Germany and France are searching for a new international architecture to limit exchange rate fluctuations, blaming the latter for the last year’s instability. 
But forget about fixing North-Atlantic exchange rates and the Yen. 
Whatever European socialists say, there is no control-freak US government in sight, thus fixing of rates is not about to happen. 
What is left for the periphery? 
A more integrating Europe and marginally better growth performance - good news but not enough to write home about. 
The real lesson for the periphery is surely this: in anything but mega-countries, nationally managed monies are passe. 
There is no more room for amateur central banks trying to exploit what they perceive as a residual domestic money illusion. 
Having a national money is expensive - that is why Italy and France surrendered theirs. 
It offers little flexibility and year after year an interest cost is paid for what is the illusion of independence. 
Mexico or Poland cannot cut their rates below the US or Germany; they would be lucky to get so low. 
Monetary sovereignty nowadays means only the right to bad money. 
How can the periphery get out of the self-inflicted historical curse of a central bank and a national money. 
Do what Argentina did, or Italy. Give up the national money and create a hard link to a world class currency. 
A hard link means a currency board, no less. 
Brazil thinks it can get by announcing that it will never devalue and nobody believes it - real interest rates are 30% because devaluation is just around the corner. 
In Eastern Europe where there is a desperate wish to be part of the European Union and the first world, the politics are now easy - Europe has done it, join the crowd, peg the Euro with your currency board. 
In Latin America, forget about the unending promises of no more devaluations, abandon the mess and move to the dollar. 
Citizens at home, and the world capital markets, can look and do choose across borders, which is inconsistent with national financial independence. 
Saying that the central bank is doing better nowadays - as in Mexico or Poland - is no argument to settle for higher risks. 
Getting a really good money is worth using political capital, that is the real lesson from the Euro. 
And the periphery can get there in no time. 
Lets just accept that and move from there to a 21st century agenda of hard money and better economic performance for everyone. 


The Secret Sex Lives of Crop Plants 
ABERYSTWYTH – Scientists estimate that there are more than 400,000 species of plants on earth, at least half of which are edible for humans. 
Indeed, it is entirely possible that we are capable of eating 300,000 plant species. 
And yet we consume just a tiny fraction of that. 
Homo sapiens, the most cosmopolitan of species, one that thrives by virtue of being a generalist, eats only about 200 plant species. 
Remarkably, a mere three crops – maize, rice, and wheat – account for more than half of the calories and proteins that we derive from plants. 
Strangely, there have been few attempts to explain why we consume so few of the species that are possible to eat. 
Taste is not the answer. Nor is nutritional value. 
The plants we eat have been enhanced by generations of selection, in which farmers have favored those with the most palatability, the greatest nutritional value, and the highest yield. 
As much as one might hate broccoli, it is likely to be far tastier than most of the 300,000 alternatives. 
Wild plants taste like wild plants because they still are wild plants. 
But why is that? 
In Guns, Germs, and Steel, the geographer and science writer Jared Diamond argues that the explanation for our limited menu lies within the plants themselves. 
Diamond argues that when agriculture was still in its infancy, our ancestors were remarkably efficient at identifying the very few species that were suitable for domestication – by which Diamond means not being poisonous. 
The logic seems impeccable, and it is true that the vast majority of the planet’s 400,000 plant species do contain chemical defenses (poisons) to defend themselves from grazing herbivores. 
But, unfortunately for Diamond’s theory, many of our most important crops are also stuffed full of toxins, to the extent that if they were introduced today, they would most likely be banned for human consumption. 
Examples include the tomato, its relative the potato, and many other root crops, such as cassava, which contains cyanide; taro, which is full of oxalates; and yams, which produce defense chemicals that mimic female hormones. 
Indeed, many of the plants we love to grow and eat, including chilies, mustard, horseradish, and wasabi, are attractive precisely because they are packed with potentially harmful chemicals. 
What distinguishes food crops from other plants has nothing to do with taste, nutrition, or whether they contain poisons. 
The plants we eat are atypical because of their particularly dull sex lives. 
Many biologists believe that the reason there are so many species of flowering plants is that each has become dependent on a unique species of insects that coevolved to pollinate it. 
In other words, these are plants with elaborate sex lives. 
The more unusual the mechanism of insect pollination, the greater the genetic separation among plant populations becomes, almost as if they had evolved on different islands. 
This explains why there are roughly 25,000 orchid species. 
Orchids are the kinky exhibitionists of the botanical world. 
Many of them have extremely elaborate flowers that have evolved to trick male bees or wasps into trying to copulate with them, thereby ensuring that they are regularly pollinated. 
This explains why we don’t farm orchids for food. 
Seducing bees and wasps might work well for a few individual flowers, but it would never work on an agricultural scale. 
There would never be enough male wasps to pollinate an entire crop; and if there were, they would soon tire or wise up. 
Furthermore, because wasps are not found everywhere, an orchid crop could never be pollinated outside its original range. 
Most food crops, by contrast, can be pollinated by different types of insects. 
They can be successfully cultivated around the world, using whatever insects are available to pollinate them. 
The most common crops of all – wheat, maize, and rice – are grasses that rely on the wind for pollination. 
Others, such as potatoes and yams, are spread vegetatively and are rarely propagated from seed at all, while some crops that would naturally be insect pollinated, such as oilseed rape, become wind pollinated when they are grown on an industrial scale. 
A more adventurous plant diet is possible. 
But it would have to accommodate the quirky sex lives of what we include in it. 

Food Fight 
Europe's parliament has passed stringent new rules for genetically modified food, raising American objections. 
Noëlle Lenoir , the new French Minister for Europe, dissects the issues involved. 
The adage that "you are what you eat" holds two meanings. 
It admonishes us to maintain a healthy, nutritious diet. 
It also reminds us that food forms an integral part of our cultural, religious, or regional identities, because what we eat and how we produce our foods are deeply rooted in our histories and traditions. 
Indeed, the peculiarities of national cuisine provide some of our most descriptive nicknames for one another. 
To the English, we French will forever be "frogs" because we eat frogs's legs, as the Germans will always be "krauts" because of their love of sauerkraut. 
The evolution of European attitudes toward genetically modified foods and plants reflects just such a dual concern with health and identity. 
Since April 1990, when the EU Parliament, with no significant opposition, adopted the first two directives on the use and release of genetically modified organisms (GMOs), public opinion has grown increasingly suspicious and hostile. 
What incited such fierce sensitivity about GM foods? 
Seven years ago, the President of the European Commission requested the European Group on Ethics in Science and New Technologies (of which I was a member) to examine the "ethical aspects of the labeling of foods derived from modern biotechnology." 
Our opinion, released in May 1995, deemed food safety a fundamental ethical imperative and called for barring the commercialization of questionable products. 
It also argued that labeling GM foods is required in accordance with consumers' right to make informed choices about what they eat. 
The opinion also included the following remark: " modern biotechnology, as a technique used in food production, cannot be regarded in itself as ethical or unethical ." 
It seemed to me a trivial and harmless dictum. 
Yet when the opinion was released, I provoked a general outcry by quoting it to the assembled journalists. 
I realized at once that opposition to GM crops and foods has as much to do with social and political values as with concerns about health and safety. 
A candid international dialogue is indispensable to a better understanding of Europe's differences with the US and other parts of the world concerning GMOs. 
Such discussions might help negotiators settle ongoing disputes over the "Codex Alimentarius" (global food standards set by the World Health Organization and the UN Food and Agriculture Organization), the EU regulation on labeling and tracing genetically modified organisms, and the application of World Trade Organization rules. 
Two questions, in particular, merit attention. 
First, why are Europeans more reluctant than Americans to embrace biotechnology? 
Second, why must GMOs be addressed as a global issue? 
In contrast to the US, information on GMOs in Europe emphasizes risk rather than benefits (in particular, reduced use of pesticides and insecticides). 
For example, national advisory bodies in the UK, the Netherlands, and France recently insisted on additional regulatory measures for GMOs intended to prevent adverse side effects--for example, allergic reactions--on consumers' health. 
Americans find it difficult to understand why Europeans insist on such restrictions, and accuse the EU of practicing bio-trade protectionism. 
Europeans are undoubtedly more pessimistic than Americans about progress in general, and recent events merely seem to have reinforced this stance. 
Having faced successive contamination crises in recent years--first BSE and then hoof and mouth disease--we feel particularly insecure about food. 
Nor is this fear limited to consumers. 
Farmers across Europe are anxious about the future of agriculture in a globalized world. 
Americans, including farmers, are more accustomed to paying for innovative technologies and products--a disposition reflected in a recent US Supreme Court decision that extended the scope of patents on plants. 
In Europe, agriculture and intellectual property are more often at odds. 
Europeans consumers' growing awareness of their rights and farmers' increasing fear of dependence on multinational companies are symptoms of a deeper concern about values and priorities: the type of environment we want, the role of biodiversity, our tolerance for risk, and the price we are prepared to pay for regulation. 
Outside Europe, the GM green revolution holds more stark implications. 
Eight hundred million people worldwide are chronically malnourished. 
Are GMOs a blessing or a curse for these people and the farmers among them? 
I am inclined to believe that the problem of malnutrition in poor countries has little to do with technology or development as such. 
As the Nobel laureate economist Amartya Sen compellingly argues, hunger is not caused by a scarcity of food, but by a scarcity of democracy. 
Even so, once the political causes of famine and malnutrition in developing countries are resolved, the use of modern biotechnology in agriculture and food production could potentially make an immense contribution to social welfare and economic advancement. 
However, we must first address the political factors that underlie most misunderstandings between America and Europe. 
Above all, we must reckon with the rise of ecological awareness, which in Europe is reflected in the formation and strength of Green parties, and which nurtures anti-globalization sentiments. 
In Europe and beyond, GMOs became emblematic of the powerful economic fears that globalization inspires. 
In country after country--France, Britain, Germany, New Zealand, and elsewhere--farmers and ecologists jointly oppose, and sometimes sabotage, trials of GM crops. 
Hostility to GMOs is symbolic of broader opposition to the encroachment of market forces that are perceived to be creating a world in which money rules with nary a consideration for historical traditions, cultural identities, and social needs. 
Whatever the truth in this perception, it is little wonder--and perhaps fitting--that a fight about the future of food should form a key battleground in a fight about who we are. 

Food for All 
BRUSSELS – What should the G-20 do to prepare us to confront food crises, now and in the future? 
World Bank President Robert Zoellick recently listed nine measures that the G-20 should adopt under its current French presidency. 
These range from improving information about grain stocks and developing better weather-forecasting methods to strengthening social safety nets for the poor and helping small farmers benefit from tenders from humanitarian purchasers such as the World Food Program. 
Although welcome, these measures tackle only the symptoms of the global food system’s weaknesses, leaving the root causes of crises untouched. 
They may mitigate the consequences of peak prices, but they are inadequate to avoiding the recurrence of shocks, which can be accomplished if the G-20 acts on eight priorities. 
First, the G-20 should support countries’ ability to feed themselves. 
Since the early 1990’s, many poor countries’ food bills have soared five- or six-fold, owing not only to population growth, but also to their focus on export-led agriculture. 
A lack of investment in agriculture that feeds local communities makes these countries vulnerable to international price shocks, as well as to exchange-rate volatility. 
Mozambique, for example, imports 60% of its wheat consumption, and Egypt imports 50% of its food supplies. 
Rising prices directly affect these countries’ ability to feed themselves at an acceptable cost. 
This trend must be reversed by allowing developing countries to support their farmers and, where domestic supply is sufficient, protect them from dumping by foreign producers. 
Second, food reserves should be established, not only for humanitarian supplies in disaster-prone, infrastructure-poor areas, as Zoellick proposes, but also as a means to support stable revenues for agricultural producers and ensure affordable food for the poor. 
If managed in ways that are transparent and participatory, and if countries combine their efforts regionally, food reserves can be an effective way to boost sellers’ market power and counteract speculation by traders, thereby limiting price volatility. 
Third, financial speculation should be limited as well. 
While not a cause of price volatility, speculation on derivatives of essential food commodities significantly worsens it. 
Such speculation was enabled by massive deregulation of commodities-derivative markets that began in 2000 – and that now must be reversed. 
The major economies should ensure that such derivatives are restricted as far as possible to qualified and knowledgeable investors who trade on the basis of expectations regarding market fundamentals, rather than mainly or only for short-term speculative gain. 
Fourth, many cash-strapped developing countries fear that social safety nets, once put in place, may become fiscally unsustainable, owing to a sudden loss of export revenue, poor harvests, or sharp increases in prices for food imports. 
The international community can help overcome this reticence by establishing a global reinsurance mechanism. 
If premiums were paid in part by the country seeking insurance and matched by donor contributions, countries would have a powerful incentive to implement robust social-protection programs. 
Fifth, farmers’ organizations need support. 
One major reason why the majority of the hungry are among those who depend on small-scale farming is that they are insufficiently organized. 
By forming cooperatives, they can move up the value chain into the processing, packaging, and marketing of their produce. 
They can improve their bargaining position, both for input purchases and for the sale of their crops. 
And they can become an important political constituency, so that decisions made about them are not made without them. 
Sixth, we must protect access to land. 
Each year, an area greater than France’s farmland is ceded to foreign investors or governments. 
This land grab, which is occurring mostly in Sub-Saharan Africa, constitutes a major threat to the future food security of the populations concerned. 
Whatever gains in agricultural production result from these investments will benefit foreign markets, not local communities. 
The G-20 could call for a moratorium on these large-scale investments until an agreement on appropriate ground rules is reached. 
Seventh, the transition to sustainable agriculture must be completed. 
Weather-related events are a major cause of price volatility on agricultural markets. 
In the future, climate change can be expected to cause more supply shocks. 
And agriculture is also a major culprit in climate change, responsible for 33% of all greenhouse-gas emissions if deforestation for cultivation and pastures is included in the tally. 
We need agricultural systems that are more resilient to climate change, and that can contribute to mitigating it. 
Agro-ecology points to solutions, but strong support from governments is needed to scale up existing best practices. 
Finally, we need to defend the human right to food. 
People are hungry not because too little food is being produced, but because their rights are violated with impunity. 
Victims of hunger must be allowed to access remedies when their authorities fail to take effective measures against food insecurity. 
Governments must guarantee a living wage, adequate health care, and safe conditions for the world’s 450 million agricultural workers by enforcing the conventions on labor rights in rural areas, subject to independent monitoring. 
Hunger is a political question, not just a technical problem. 
We need markets, of course, but we also need a vision for the future that goes beyond short-term fixes. 
The global food system will always need firefighters. 
But what we need more urgently are architects to design a more fire-resistant system. 


Food for Thought on GM Crops 
COPENHAGEN – As the world continues to debate the impact of climate-change while seeking a new global treaty to prevent it, Kenya has endured a prolonged drought followed by heavy flooding. 
Maize plants have withered, hitting poor rural families hard. 
People are starving, and many of those who survive are grossly malnourished. 
There is hope: next year, the Kenyan authorities will begin testing maize varieties that they hope will provide high yields and prove more resistant to drought. 
But why did farmers in Kenya and other African countries not have access to drought-resistant crop varieties before catastrophe struck? 
One reason is that such crops rely on research tools used in molecular biology, including genetic engineering. 
African governments have been told that genetic engineering is dangerous, with many Europeans and their national governments – as well as transnational NGOs such as Greenpeace – determined to stay away from it. 
Unfortunately, Kenya’s government listened and did not permit their farmers to grow genetically modified (GM) maize, even though it has been approved, sown, harvested, and eaten by both humans and animals in South Africa, Argentina, Brazil, the United States, and other countries for many years. 
Although Kenya has a well-functioning and well-funded agricultural research system, the government has not even permitted field tests of GM crop varieties. 
Molecular biology has provided excellent tools to address health, environmental, and food problems such as those seen in Kenya. 
The question is whether decision-makers are prepared to use them. 
Obviously, most EU countries’ governments are not. 
But why are developing-country governments dragging their feet? 
Are the risks so high that they justify the suffering that could have been avoided? 
GM foods have now been on the market in the US for more than 12 years. 
Most of the food consumed by Americans is either genetically modified or exposed to genetic modification somewhere in the production process. 
There is no evidence of even a single case of illness or death as a result – in the US or anywhere else where GM foods are consumed. 
Similarly, GM feed has not resulted in any illness or death in animals. 
And no environmental damage has been detected. 
It is unusual that a new technology has no negative side effects. 
Just think of all the deaths that the wheel has caused, not to mention the side effects of much of the medicine we take. 
What, then, is the danger of GM foods? 
Opponents of genetic engineering in food and agriculture have several arguments, none of which appears to be valid. 
First, “genetic engineering cannot solve the hunger and food insecurity problem.” 
This is correct: GM foods cannot singlehandedly solve the problem, but they can be an important part of the solution. 
A second argument is that “we do not know enough about the effects and side effects.” 
Since some of the groups opposing GM organisms destroy the field trials that could give us more knowledge, a more pertinent argument might be that many opponents do not want us to know more. 
Third, “we should not play God.” 
But if God gave us brains, it was so that we should use them to ensure a balance between people and nature to help eliminate hunger and protect the environment. 
Fourth, pollen from GM crops may “contaminate” organically produced food. 
This, of course, would be an issue only with open pollinating plants, and only if the definition of “organically produced” excludes GM, something that is difficult to justify, since genes are as organic as anything. 
Lastly, some argue that if farmers are permitted to sow GM varieties, they become dependent on large seed producers such as Monsanto, which have patent protection – and thus a monopoly – on the seed. 
But private corporations undertake only about half of all agricultural research, whether or not it involves genetic engineering. 
The other half is done by public research systems using public funds. 
Results from such research would not be subject to private-sector monopoly power. 
The fact that virtually all US maize and soybean farmers, and all papaya farmers, use GM seed indicates that it is good business for them. 
Similarly, a large share of farmers – most of them smallholders – in Argentina, Brazil, South Africa, China, India, and other countries, prefer GM seed because they make more money from the resulting crops. 
Large reductions in the use of insecticides cut costs for growers of GM varieties, while providing an important health and ecological benefit. 
But maybe those who oppose private seed corporations are really against capitalism and the market economy rather than GM seed. 
If so, they should choose an issue for their campaign that would be less damaging to the poor and hungry in developing countries. 
The global food crisis of 2007-2008 was a warning of what the future may hold in store if we continue with business as usual, including misplaced opposition to the use of modern science in food and agriculture. 
European and developing-country governments urgently need to reverse their current adverse position on GM organisms in order to help ensure sustainable food security for all. 
Such a reversal would reduce hunger, poverty, and malnutrition; help protect our planet’s natural resources; and slow the emission of greenhouse gases from agriculture. 
All that is needed is political will. 

Food or Fuel? 
When United Nations Secretary General Ban Ki-moon recently visited Antarctica, he was impressed by the melting ice he saw there. 
Then he was in Brazil, where he was impressed by the country’s use of bio-fuel to power a quarter of its automotive traffic. 
Oil pressed from rapeseed can be used as diesel fuel, and maize or sugar beets can yield ethanol to replace gasoline. 
The UN and many countries officially share the view that bio-fuel is one option in fighting climate change. 
The United States generously subsidizes production of ethanol from maize, with output there currently growing 12% annually and almost 10% worldwide. 
EU countries subsidized bio-fuels production with €3.7 billion in 2006, and intend to cover 8% of their motor fuels from biological sources by 2015 and 20% by 2020. 
The Kyoto Protocol allows countries to meet their target reductions of CO2 emissions by substituting bio-fuels for fossil fuels. 
But is it really a wise and ethically acceptable strategy to burn food rather than eat it? 
If we allow food to be used to produce bio-fuels, food prices will be linked to the oil price, as the head of the German farmers association happily announced. 
Indeed, food prices are currently increasing in Europe, because more and more farmland is being used for bio-fuels instead of for food production. 
This is not sustainable. 
The so-called tortilla crisis, which led to protests in Mexico City in January, foreshadows what we can expect. 
The price of maize, half of which is imported from the US, more than doubled in a year, primarily because of production of bio-ethanol. 
Mexico tried to solve the problem by imposing a state-administered price ceiling for maize tortillas, combined with duty-free maize imports. 
The problem is that advocates of reducing the greenhouse effect by promoting bio-fuels production have not made clear where the land will come from. 
In principle, there are only three ways to procure it: by withdrawing it from food or fodder production, from the production of natural materials – particularly wood – or from nature. 
The perversity of the first alternative is obvious: there is no surplus food production in the world. 
Whoever wishes to grow bio-fuels on land that was previously used for food production must recognize that this would increase food prices, harming the poorest of the poor. 
Similarly, to cultivate bio-fuels on land that would otherwise be used to produce sustainable construction materials would drive up the prices of these materials and encourage their substitution by non-sustainable materials like concrete and steel. 
This may be unobjectionable on ethical and social-policy grounds, but it certainly would not help the environment. 
Wood stores carbon, owing to photosynthesis. 
The larger the stocks of wood on earth, in the form of living trees or wooden construction material in buildings, the less CO2 there is in the atmosphere and the cooler the earth remains. 
So, taking land for the production of bio-fuels from forests means speeding up global warming, because bio-fuel crops store much less carbon than trees. 
To be sure, in addition to the negative storage effect, there might be a positive effect on the world climate insofar as bio-fuels may replace fossil fuels for combustion processes. 
But this assumes that the oil sheikhs will extract less oil because there is more bio-fuel. 
If they don’t, the positive effect will vanish. 
World market prices of fossil fuels will simply be lower than they otherwise would be such that total consumption of fossil and bio-fuels rises by the extra production of bio-fuel. 
The remaining alternative is to use land that has not previously been used commercially. 
But such land is usually wooded. 
The substitution of forests by maize, rape, and other oilseed cultivation reduces the stock of biomass and likewise leads to an increase in the concentration of CO2 in the atmosphere. 
Brazil has cleared huge areas of its jungle in order to produce the bio-ethanol that impressed the Secretary General. 
By doing so, the country has done a great disservice to the cause of fighting climate change. 
Indeed, every year, the world loses forest area the size of Ireland. 
The effect on the atmosphere is equivalent to 18% of annual CO2 emissions, more than from the world’s entire transport sector. 
Deforestation must be reversed, not accelerated. 
It makes no sense to use land in whatever form to produce bio fuels. 
Only producing bio-fuels without the use of additional land is justifiable in terms of environmental and social policy. 
This would mean using agricultural and other waste, which would otherwise rot and produce nearly equal amounts of CO2 and methane, an even more dangerous greenhouse gas. 
That option should be supported. 
But official encouragement of production of bio-fuels on land that would have been used for other purposes must stop. 


We Need a Food Revolution 
LONDON – In 1984, I gathered the most successful musicians of the time to form a “supergroup” called Band Aid to raise money for famine relief in Ethiopia. 
The next year, an even larger grouping was formed for Live Aid, a major benefit concert and music-based fundraising initiative that continues to this day. 
At last month’s International Forum on Food and Nutrition, held by the Barilla Foundation, the enduring – and increasingly urgent – need for efforts to strengthen food security could not be more obvious. 
The fate of the Easter Islanders illustrates the world’s current problem. 
Sometime in the twelfth century, a group of Polynesians found their way to a remote volcanic island where dense forests provided food, animals, and the tools and materials to build hundreds of complex and mysterious stone sculptures. 
But, little by little, the people destroyed those forests, ultimately committing social, cultural, and physical suicide. 
Today, in relative terms, we collectively have only a small swath of forest left – and we are rapidly destroying it. 
We are running out of land to farm, and the desert is spreading. 
The food we produce is often wasted, while almost a billion people do not have enough to eat – a reality that leaves many with little choice except to migrate. 
Most media coverage focuses on refugees fleeing armed conflict (think Syria) or migrants seeking better economic opportunities than they have at home (think Nigeria or Pakistan). 
But the link between food scarcity and migration is stronger than it might seem to those who are not among the hungry. 
For example, the Arab Spring uprisings of 2010-2011, which produced a massive wave of refugees, were triggered by a rise in wheat prices, which led to widespread bread riots that morphed into broader political revolutions. 
In fact, many armed conflicts, and the mass displacement they cause, can be traced back to food insecurity. 
While the poor South starves, the rich North gorges. 
More than two billion of us are overweight, puffed up by low-energy sugars and mass-produced processed foods rich in fat. 
According to the Food and Agriculture Organization of the United Nations, just one-quarter of the food we throw out or squander each year would be enough to feed 870 million hungry people. 
Worldwide, one-third of all crops are wasted. 
Like the Easter Islanders of the past, we are setting ourselves up for self-annihilation. 
Moreover, human-driven climate change threatens to intensify existing pressures affecting food supply and migration. 
In a report published last December, the European Commission’s European Political Strategy Center predicted that ever-more frequent droughts and floods will “dwarf all other drivers of migration,” with as many as one billion people displaced globally by 2050. 
Even the lowest estimate of 25 million climate-change migrants, the report warns, “would dwarf the current levels of new refugees and internally displaced persons.” 
To be sure, some steps are being taken to address food waste and scarcity. 
For example, this year, the European Commission proposed cuts in farm subsidies, which contribute to overproduction. 
But this approach – framed in terms of “evolution,” rather than the “revolution” that is needed – is not even remotely adequate. 
The European Union’s common agricultural policy has long been highly problematic. 
The CAP authorized tax money to be spent on growing surplus food, which was then warehoused (at further cost) and ultimately destroyed (at still further cost). 
The system has improved somewhat over the years, but not nearly enough. 
The farm bill in the United States – the federal government’s primary agricultural and food policy tool – is similarly wasteful. 
What is needed is not just a politically tolerable adjustment to existing policies, but rather root-and-branch reform that emphasizes real results. 
Unfortunately, it is not clear whether there are any politicians up to the task, whether in the erratic and polarized US or in the ineffectual European Parliament and Commission. 
The time to step up was yesterday; the time to adopt a new approach is now. 
We can discuss the United Nations Sustainable Development Goals – which include targets like “halving per capita global food waste at the retail and consumer level, and reducing food losses along production and supply chains by 2030” – until we are blue in the face. 
What matters are well-designed, effective, and comprehensive policies, implemented in a sustained manner. 
And those are nowhere to be found. 
The Earth is 45 million centuries old, but our century is unique, because it is the first in which a species could destroy the entire basis of its own existence. 
Yet we latter-day Easter Islanders seem unaware of this existential threat, preferring to build statues rather than sustainable systems for survival. 
Will we acknowledge our predicament only when our land becomes a desert, when our health systems collapse under the strain, when even the wealthy are facing food shortages, when freshwater becomes scarce, and when our national shorelines are breached? 
By then, it will be too late, and our fate will be sealed. 
The greatest threat to our planet is the belief that someone else will save it. 
Each of us must recognize the seriousness of our situation and demand real action to change it. 
That means you. 

Feeding a Flawed Society 
STANFORD/BERKELEY – Virtually everyone in the scientific community agrees that ensuring sufficient food supplies for a surging human population, which is set to grow by 2.4 billion by mid-century, will require serious work. 
Indeed, we have not even succeeded at providing enough food for today’s population of 7.3 billion: Nearly 800 million people currently are starving or hungry, and another couple billion do not get enough micronutrients. 
But there is no such consensus about how to address the food-security problem. 
The scientific community is split between two main approaches: “tinker with agricultural details” (TAD) and “mend societal fundamentals” (MSF). 
While the former approach has support from a clear majority, the latter is more convincing. 
To be sure, the TAD camp has identified many important problems with current food production and distribution systems, and addressing them could indeed improve food security. 
Yields could be increased by developing better crop varieties. 
Water, fertilizer, and pesticides should be used more efficiently. 
Maintaining tropical forests and other relatively natural ecosystems would preserve critical ecosystem services, especially soil fertility, pollination, pest control, and climate amelioration. 
The trend toward rising meat consumption should be reversed. 
Stricter regulation of fisheries and ocean pollution would maintain the supply of marine protein essential to many people. 
Waste in food production and distribution should be reduced. 
And people should be educated to choose more sustainable and nutritious foods. 
Achieving these goals, TAD supporters recognize, would require policymakers to give food security high political and fiscal priority, in order to support the needed research and action. 
Responsibility for launching programs to distribute food more equitably would also fall to governments. 
But the TAD approach is incomplete. 
Not only would its short-term goals be extremely difficult to achieve without more fundamental societal changes; even if they were attained, they would probably prove inadequate in the medium term, and certainly in the long term. 
To see why, let us suppose that, in 2050, the TAD goals have all been reached. 
More food is available, thanks to higher agricultural yields and waste-reducing improvements in storage and distribution. 
Improved environmental policies mean that most of today’s forests are still standing and no-fishing zones are widely established and enforced. 
Ecosystems are becoming stronger, with many corals and plankton evolving to survive in warmer, more acidic water. 
Add an uptick in vegetarianism, and it appears that the global temperature rise could be limited to 3º Celsius. 
As a result, the world could avoid famines by mid-century. 
But, in a human population of 9.7 billion, hunger and malnutrition would be proportionately the same as they are in today’s population of 7.3 billion. 
In other words, even with such an extraordinary and unlikely combination of accomplishments and good luck, our food-security predicament would still be with us. 
The reason is simple: Our societies and economies are based on the flawed assumption that perpetual growth is possible on a finite planet. 
To ensure global food security – not to mention other fundamental human rights – for all, we need to recognize our limitations, in terms of both social and biophysical factors, and do whatever it takes to ensure that we do not exceed them. 
Based on this conviction, the MSF approach demands that governments take steps to empower women in all areas of society, and ensure that all sexually active people have access to modern birth control, with women free to have an abortion, if they so choose. 
At the same time, governments must address inequality of wealth, and thus of food, not least by curbing corporate dominance. 
Short of bringing the global population down to sustainable levels, MSF reforms are the world’s only hope. 
But, as it stands, implementing them seems unlikely. 
The United States, the country that consumes the most, is moving in the opposite direction: women are struggling to hold onto their reproductive rights, wealth distribution is becoming increasingly skewed, and corporations are becoming even more powerful. 
If this trend continues, in 2050, governance systems will be even more poorly equipped to deal with the fundamental problems of perpetual population and consumption growth or wealth inequality. 
As environments deteriorate from climate change, toxification, and loss of biodiversity and ecosystem services, people will have less time and energy for governance reform aimed at reducing inequality or preserving the environment. 
As a result, those in power will feel less pressure to arrange systems to provide food to those who need it most. 
The social-biophysical system is replete with chicken-and-egg subsystems. 
Given that there is no obvious single vulnerable point in the system to initiate change, governments must address a range of issues simultaneously. 
Key starting points include purging politics of “big money”; introducing a more progressive tax system that effectively caps the income of the extremely wealthy; ensuring that policymakers have a basic level of scientific understanding; and strengthening women’s rights, including access to free contraception. 
Just as social and environmental problems can be mutually reinforcing, so can actions aimed at strengthening our social and environmental fundamentals. 
Only by focusing on these fundamentals, rather than merely tinkering with the details of food production, can intrinsic systemic linkages work to the advantage of future generations. 

The Nuclear Illusion 
GENEVA – As delegates from 189 countries gather to prepare for the next Nuclear Non-Proliferation Treaty (NPT) Review Conference, due in 2015, I am reminded of my first official briefing, as a young Australian minister back in the early 1980’s, on United States nuclear strategy. 
It was given to me, in the bowels of the Pentagon, by a man with a white dust jacket and a pointer who looked uncannily like Woody Allen. 
He did not have much to say about the countless real human beings who would be vaporized, crushed, baked, boiled, or irradiated to death if a nuclear war ever erupted. 
The language was disengaged and technical – all about throw-weights, survivability, counterforce, and countervalue targets. 
But it was a dazzling account of the logic of nuclear deterrence and the mechanics of mutually assured destruction, which both the US and Soviet Union applied throughout the Cold War. 
Thirty years later, our world is not one in which the governments in Moscow or Washington are likely to hurl swarms of nuclear missiles at each other (if it ever was). 
Nor is it a world in which China or the US would conceivably ever intentionally start a nuclear war against the other. 
Even for India and Pakistan, the risk of misjudgment or miscalculation is much greater than that of deliberate nuclear warmongering. 
And, for North Korea – or Iran, should it ever build nuclear weapons – the risk of the regime initiating a nuclear attack is negligible, given that doing so would result in its certain (non-nuclear) incineration. 
Not many delegates here in Geneva, even from the nuclear-armed states, would disagree with any of these assessments. 
But it is extraordinary how much of the disembodied calculus of my Woody Allen-lookalike still prevails in today’s nuclear policymaking. 
Russia worries that its nuclear-tipped missiles, based largely in static locations, might be destroyed on the ground by a preemptive strike by long-range US missiles, and its retaliatory punch weakened by US ballistic missile defense. 
Though it can paint no scenario in which this would ever occur, it not only drags its heels on further arms-reduction talks, but insists on keeping a thousand or so of its strategic nuclear weapons on launch-within-minutes alert status. 
Not surprisingly, the US refuses to de-alert its own nuclear missiles if Russia will not. 
So nearly 2,000 weapons of mass destruction still face each other on high alert, maximizing the prospect of a catastrophe through human or system error or cyber sabotage. 
This deterrence logic produces a snowball effect. 
With Russia and the US holding 18,000 of the world’s current stockpile of 19,000 nuclear weapons, it is proving impossible to persuade any of the other nuclear-armed states to reduce their own (much smaller) arsenals until the Big Two make further drastic cuts to theirs. 
China shares Russia’s concerns about US conventional and missile-defense superiority, and is increasing and modernizing its estimated 240-weapon stockpile. 
With China taking that course, India – outside the NPT but with 100 weapons of its own – feels the need to add to its own arsenal. 
And Pakistan then becomes even more determined to try to keep ahead of India. 
The truth is that none of the nuclear-armed states, inside or outside the NPT, pays anything more than lip service to the ultimate elimination of nuclear weapons. 
The continued seductive power of the Cold War logic and language of nuclear deterrence is the primary reason, though for some states it is clear that the testosterone factor – perceived status and prestige – also plays a role. 
The uplifting pro-disarmament rhetoric of US President Barack Obama remains just that. 
No nuclear-armed state will set a timetable for a major reduction in the number of nuclear weapons, let alone their abolition. 
The size of their arsenals, their fissile material stocks, their force-modernization plans, their stated doctrine, and their known deployment practices all point in the same direction. 
All foresee indefinite retention of their nuclear weapons, and a continuing role for them in their security policies. 
The implications of this stance are profoundly troubling. 
Concern about states in the Middle East and Northeast Asia joining the nuclear club is as high as it has ever been. 
But the foot-dragging by the nuclear states on disarmament is making it increasingly difficult to add necessary new muscle to the global non-proliferation regime. 
This was obvious at the last NPT Review Conference in 2010, when efforts to mandate stronger safeguards, strengthen compliance and enforcement mechanisms, and inject new life into the control of fissile-material production all went nowhere. 
And that sentiment is alive and well in Geneva this week. 
Of course, it is irrational for those whose ultimate objective is a nuclear-weapons-free world to support anything but the strongest non-proliferation measures. 
But bloody-mindedness is a natural and inevitable reaction when leaders see double standards – “my security concerns justify nuclear weapons, but yours do not” – at work on this scale. 
Progress toward achieving a safer and saner world requires all of the nuclear-armed states to break out of their Cold War mindset, rethink the strategic utility of nuclear deterrence in current conditions, and recalibrate the huge risks implied by retaining their arsenals. 
It is time for them to recognize that in today’s world, nuclear weapons are the problem, not the solution. 

Football and Philosophy 
Gooooal!!! 
Heavenly bliss, or hellish pain, depending on which team has scored: ours, or theirs. 
How can the trajectory of a ball cause so much pain or bliss? 
For weeks I have sat at my television watching the World Cup. My wife threatens me with divorce and other disciplinary measures. 
What is the source of this attraction, this magic? 
The world of play is our permanent Garden of Eden. 
At any moment we may step from our real world into the freedom, innocence, and bliss of play. Football and the Garden of Eden? 
What do they have to do with each other? 
Each delineates a sacred sphere of freedom and order, innocence, spirituality and justice from our everyday world of chaos, bondage, injustice and guilt. 
The chessboard, the tennis court, the soccer field: within their boundaries we feel free because here it is we who make the rules and are not subjected to the iron laws of the outside world. 
We feel innocent too, because the world of play is also a world of innocence: a Garden of Eden before the Fall. 
Here we can be childishly selfish, we can gratify our thirst for success, power and domination - all without guilt. 
In the world of play freedom is generated, paradoxically, by restrictions. 
In soccer, the basic rule is simple: the ball is to be moved, from the central point, into one of the goals. 
If the ball would roll from the center point straight into one of the goals, its track would be, or would seem to be, strictly determined and the whole thing would be boring. 
To generate freedom, rules put obstacles in the way of the ball and complicate its movement. 
First, two teams of eleven players are put on the field with the task of getting the ball into the goal. 
Second, they are told to get the ball into opposite goals. 
With twenty-two players with their own wills and skills, with various movements of confrontation and cooperation, the number of possible combinations is increased almost ad infinitum. 
After this only one additional factor is needed to create a real world of happy surprises, freedom and bliss: the ball. 
Balls are among the most important "freedom generators" in our lives. 
A ball is freedom embodied. 
It may bounce in any direction. 
It seems to have its "own will." 
It is an object and, nevertheless, it seems to be free. 
By introducing the factor of chance and unpredictability into the game, the ball transforms a bitter and down-to-earth human fight into an epiphany of spirituality and freedom. 
In its brisk movements chance and human will interact, dance, and somersault with each other. 
The ball flashes to and fro in happy irresponsibility - between human will and chance, freedom and limitation, success and failure, hope and the loss of hope - to bounce back into the world of hope in the next moment. 
It has its own universe. 
It moves in the sphere of the sacred. 
But that sacred does not exist without the profane. 
The football field is marked off and opposed to the surrounding world. 
The experience and the sacred ceremony remain incomplete if tension between the field and the grandstand is missing. 
The clean emerald field and freedom of the game must be opposed by the howling mob in the darkness of the stands, burning red torches and jerking between ecstatic joy and hellish misery. 
In our everyday lives, reason and passions are mixed. 
Soccer (like some other games) separates, and opposes to each other, these two realms. 
All passions, emotions and instincts are pushed over to the side of the spectators. 
They rage and love, prance and explode, and finally reach a catharsis (if their team wins) or to descend into hell (if their team loses ). 
At the same time, they watch, perceive, and experience the freedom of Apollonian or Platonic spirituality of the game going on in the field. 
Yes, players move in a world of spirituality. 
They act according to clear, sacred rules. 
While in play, they are supposed to act as pure rational beings who leave behind their everyday passions and emotions, personal wishes or fears. 
They move in the world of pure morality and justice. 
The player's world is one of justice and total impartiality; of a perfect equality of opportunity, which is never achieved in our everyday lives. 
Even advantages deriving from the direction of the wind are balanced. 
The two teams change sides at the half. 
When and where do we, the privileged and the underprivileged, change sides in the real world? 
Players, too, are not supposed to break the rules. 
If they do, they are punished and, if they relapse, excluded from play. 
They are expelled from the sphere of spirituality and we see them disappearing into the chilly Hades of the locker room. 
The real expulsion from Paradise comes only if the sanctity of play is profaned, if the spell is broken: by players falling out of their angelic roles and starting a fight in the field; by a cheating referee; by people realizing that a match is rigged; by spectators invading the field. 
Such events do lasting damage to people and to the community. 
It is a bitter shock to realize the fragility of our world of freedom, spirituality, and dignity and awaken again (as we will when the Cup winner is decided) in our less hospitable everyday world. 

Football is War 
NEW YORK – The flags are already flying, from Holland to Argentina, from Cameroon to Japan. 
Soon the drums will be beating, the trumpets blowing. 
Colors will be unfurled, and battle cries will sound. 
It’s that time again: the World Cup is upon us. 
The late Rinus Michels, also known as “the General,” coach of the Dutch team that narrowly lost to Germany in the 1974 final, famously said, “Football is war.” 
When the Dutch had their revenge in 1988 and beat Germany to go on to become European champions, more people danced in the streets in Holland than on the day that the real war ended in May 1945. 
On one occasion, in 1969, a football match between Honduras and El Salvador actually led to military conflict, known as the Soccer War. 
Tensions between the two countries were already high. 
But then fans of the Honduras team were set upon, and even worse, the Honduran national anthem was insulted, and the country’s white and blue flag defiled. 
Of course, soccer wars are rare (indeed, I can’t think of another example), but the notion that international sporting competitions inevitably inspire warm fraternity – an idea advanced by Baron de Coubertin, founder of the modern Olympic games – is a romantic fiction. 
The violence of British football hooligans, for example, reflects a peculiar nostalgia for war. 
Life in peaceful times can be dull, and British glory seems a long way in the past. 
Football is an opportunity to experience the thrill of combat, without risking much more than a few broken bones. 
Even when football doesn’t lead to actual bloodshed, it inspires strong emotions – primitive and tribal – evoking the days when warriors donned facial paint and jumped up and down in war dances, hollering like apes. 
The nature of the game encourages this: the speed, the collective aggression. 
Tennis does not create frenzy on a national scale. 
Not even boxing does, except on very rare occasions, such as when Joe Louis, the “Brown Bomber,” beat Max Schmeling, the Nazi favorite, in 1938. 
After all, these forms of combat are between two individuals, not two tribes. 
Arthur Koestler was right when he said that there is nationalism, and there is football nationalism – and that the latter is the more deeply felt. 
Koestler himself, born in Budapest but a proud British citizen, remained a Hungarian football nationalist all his life. 
It helps to have traditional enemies, old hurts, and humiliations that need to be redressed, if only symbolically. 
It would be hard for Americans, who are neither very good at soccer, nor cursed by great historical hatreds, to share the joy of the Dutch, say, when the Germans were defeated in 1988, or that of the Koreans when they defeat Japan. 
Perhaps the best example of this type of sporting nationalism was not a football game, but the world ice hockey final in 1969, when Czechoslovakia beat the Soviet Union just one year after Soviet tanks rolled into Prague. 
The Czech players pointed their hockey sticks at the Russians like guns, and their victory provoked anti-Soviet riots back home. 
Clearly, then, whatever de Coubertin might have hoped, cosmopolitanism and cross-cultural brotherhood comes less naturally to human beings than the raw emotions of the tribe. 
The tribe can be a club, a clan, or a nation. 
Before World War II, football clubs often had an ethnic or religious component: Tottenham Hotspur in London was “Jewish,” while Arsenal was “Irish.” 
Vestiges of these markings remain: Ajax of Amsterdam is still taunted by provincial opponents as the “Jew club.” 
And the Glasgow clubs, Celtic and Rangers, are still divided by religious affiliation, Celtic being Catholic and Rangers Protestant. 
But a common race or religion is not essential. 
The French football heroes who won the World Cup in 1998 included men of African and Arab origin, and they were proud of it. 
Most successful modern football clubs are as mixed as Benetton advertisements, with coaches and players from all over the globe, but this seems to have done nothing to diminish the enthusiasm of local supporters. 
In some countries, football is the only thing that knits together disparate people, Shia and Sunnis in Iraq, or Muslims and Christians in Sudan. 
Of course, most right-thinking people are a bit like de Coubertin. 
Tribal emotions are embarrassing, and dangerous when given free reign. 
After World War II, for obvious reasons, the expression of nationalist emotions was virtually taboo in Europe (not least in Germany). 
We had all become good Europeans, and nationalism was for racists. 
And yet, since Koestler was right, these emotions could not simply be crushed. 
They had to find some outlet, and football provided it. 
The football stadium became a kind of reservation where taboos on tribal frenzy and even racial antagonism could be relaxed, but only up to a point: when the taunting of Ajax supporters as rotten Jews degenerated into actual violence, sometimes accompanied by a collective hiss, mimicking escaping gas, the city authorities decided to step in. 
Some games have had to be played without the presence of rival supporters. 
Not all football games are fraught with negative feeling and violence. 
This year’s World Cup might well be a festival of brotherhood and peace. 
Few people even care anymore when Germany wins. 
But the fact that sport can unleash primitive emotions is not a reason to condemn it. 
Since such feelings cannot simply be wished away, it is better to allow for their ritual expression, just as fears of death, violence, and decay find expression in religion or bull fighting. 
Even though some football games have provoked violence, and in one case even a war, they might have served the positive purpose of containing our more savage impulses by deflecting them onto a mere sport. 
So let the games begin, and may the best team win. 
Which is Holland, of course, the country of my birth. 

Football Nationalism 
AMSTERDAM -- The late Arthur Koestler, born in Budapest, resident of many countries, and writer in several languages, once said that there is nationalism, and there is football nationalism. 
The feelings inspired by the latter are by far the stronger. 
Koestler himself, a proud and loyal British citizen, remained a lifelong Hungarian soccer nationalist. 
It is hard for Americans, whose “world series” are essentially domestic affairs, to understand the emotions engendered in European citizens when their nations compete for the European soccer championship every four years. 
For several weeks this summer, the stadiums in Austria and Switzerland, not to mention the streets of European capitals, from Madrid to Moscow, were given to an orgy of flag-waving, anthem-singing, drum-beating patriotism. 
Spain’s victory was one of the rare occasions that Catalonians, Castillians, Basques, and Andalusians erupted together in an explosion of patriotic delight. 
Football, more than most sports, lends itself to tribal feelings: the collective effort, the team colors, the speed, the physical aggression. 
As a famous Dutch soccer coach once said, not in jest: “Soccer is war.” 
It was not supposed to be like this. 
After two world wars, displays of national fervor became more or less taboo in Europe. 
Nationalism was blamed for almost destroying the old continent twice in the 20th century. 
The kind of exalted patriotism, especially when combined with warrior pride, that is still entirely normal in the United States, was for a long time associated with mass slaughter. 
The English, who escaped occupation by a hostile power, and still believe they won World War II alone (well, with a little help from the Yanks), still have a militaristic streak. 
They are exceptional. 
Hence, perhaps, the notorious belligerence of English soccer fans. 
And yet, even as nationalistic emotions were suppressed in polite society all over Europe, the soccer stadiums remained stubbornly in the pre-WWII world. 
Just as killing continues to be celebrated in ritualized form in Spanish bull rings, illicit tribal feelings are given full vent in the soccer arenas. 
These feelings can be festive, even carnival-like, as they were in Euro 2008. 
But they can contain something darker, more aggressive, too, especially when sporting combat is loaded with historical memory. 
Games between Holland and Germany, for example, or Germany and Poland, tended, until very recently, to be reenactments of the war; either – and most commonly – as melancholy replays of wartime defeat, or as sweet revenge. 
When Holland beat Germany in the semi-finals of the 1988 European Championship, it was as though justice finally had been done. 
More Dutch people turned out in the streets of Amsterdam for a night and day of celebration than when the country was actually liberated in May, 1945. 
(Sometimes football history gets mixed up with “real” history; the defeat of a superior Dutch team by Germany in the World Cup final of 1974 also needed to be redressed.) 
The tribal feelings of Germans were considered, for obvious reasons, to be particularly toxic after Hitler’s Reich, which is why German flag-waving, until recently, was exercised with a slight air of shame-faced restraint that was entirely absent in surrounding countries. 
Yet Germans, too, are unable to suppress such feelings. 
Older Germans can still remember their famous victory over a superb Hungarian team in 1954. 
It was the first time since their ruinous wartime defeat that Germans were able to feel proud of themselves. 
Here was a victory they could celebrate. 
After years of guilt and deprivation, the Germans were back, as it were. 
Like everything else, forms of patriotism change over time. 
Reasons for national pride are varied. 
When France won the World Cup in 1998, the French liked to point out the ethnic diversity of their team. 
Their main star, Zinédine Zidane, was of Algerian stock. 
Others had ancestral roots in various parts of Africa. 
The multi-ethnic nature of the 1998 champion was widely touted as a mark, not of a long and often bloody colonial past, but of national superiority born from the tolerance of the French Enlightenment and the fraternity of the French Revolution. 
In fact, the French were harbingers of a kind. For something profound is changing in Europe, slowly, painfully, but surely. 
If ethnic diversity is more and more common in national sides, it is even more marked in clubs. 
Clubs, too, often used to command tribal loyalty along ethnic or religious lines, depending on their location in large industrial cities: Irish clubs versus Jewish clubs in London, for example, or Protestants versus Catholics in Glasgow. 
Who would have predicted thirty years ago that British soccer fans would have cheered for a London team full of Africans, Latin Americans, and Spaniards, coached by a Frenchman? 
Or that the national English team would be managed by an Italian? 
But ethnic and cultural diversity is not all that has changed the face of European football. 
I have never seen such harmony between the supporters of different nations as in this year’s championship. 
Perhaps it was due to the absence of England, whose fans include the last bands of amateur warriors. 
But the peaceful, carnival spirit that prevailed, the flying of Turkish and German flags side by side in German streets, when the two nations met in the semi-finals, the joint Spanish-German celebrations after the final, all this suggests something fresh. 
Not that national feeling is dying, even as a new European spirit is being born. But at the very least national identities in Europe are no longer quite so colored by memories of war. 
No one much minds any more when Germany wins, as it so often does. 
The Germans are now much too nice for that. 
Yet I have to admit that I still could not suppress a tiny, keenly felt pleasure when Germany lost to Spain. 
Perhaps because Spain played more beautiful football. 
Or perhaps it just shows my age. 


For an International Trial of Saddam Hussein 
Now that Saddam Hussein has been captured, the world's attention has turned to his trial. 
Should Saddam be tried by Iraqis in Iraq, or should he face an international tribunal? 
The forthcoming conference on democracy, human rights and the role of the International Criminal Court in Yemen on January 10-12 will provide a forum to debate these questions. 
It is, of course, certain that Saddam Hussein will not escape trial for the extra-judicial, extra-legal and summary executions, torture, and systematic persecution of hundreds of thousands of Iraqis that marked his decades of murderous misrule. 
However, the aim of his trial should be not only to bring to justice the dictator and his accomplices, but also to foster national reconciliation through the affirmation by Iraqis of universal principles such as non-discrimination, fairness, and transparency. 
For years, Iraq has only known the brutal laws of force and intimidation. 
If judging Saddam Hussein and his regime is to become a cornerstone in the building of a free, democratic, and reconciled Iraq, then the US, as the leader of the coalition that ousted him, should do everything in its power to pursue this opportunity and set a very high standard of justice. 
President George W. Bush has stated that he would "work with Iraqis to develop a way to try [Saddam Hussein] that will withstand international scrutiny." 
The best way to address that scrutiny and avoid accusations of "victor's justice" is to involve other international players in the exercise. 
To address the systematic violations of the laws of war and the crimes against humanity committed in the former Yugoslavia, in the Great Lakes Region of Africa, or in Sierra Leone and Cambodia, the international community, with the involvement of the United Nations, set up international and internationalized courts. 
These institutions have finally established the principle that major violations of human rights and dignity are of universal concern and that the international community should actively participate in the quest for justice and reparation for victims. 
While no one doubts the willingness of Iraqi judges to try their former "head of state" in a national court, the novelty of such an effort and its political implications suggest some type of international participation for the sake of competence and, most of all, impartiality. 
Over the last ten years, the international community has established special or ad hoc tribunals, with international participation in those situations where local institutions could not ensure due process of law or fair trials. 
Iraq presents another such situation. 
Thirty years of brutal dictatorship have destroyed the very concept of justice in Iraq. 
For justice must mean more than the cries of "Death to Saddam" that now echo in some quarters around the world. 
It is important that the US take the lead in this crucial aspect of state-building. 
It should reach out to the UN in an exercise similar to those that , without providing for capital punishment , have brought to justice Slobodan Milosevic and the leaders responsible for the Rwandan genocide--and that tomorrow might bring to the dock Liberia's Charles Taylor and dozens of Khmer Rouge leaders. 
An added benefit of internationalization would perhaps be to make clear to the current American Administration that withholding endorsement of the International Criminal Court is fundamentally against its own interests. 
It could also facilitate the process of internationalizing the burden of rebuilding Iraq, which cannot be shouldered entirely by the US and its allies. 
The preconditions for the enjoyment of civil and political rights cannot be built overnight. 
Before elections can be freely and fairly held, huge efforts must be made to establish a truly open society in which all individuals and groups can express their political opinions. 
Establishing a system of justice that protects these rights is indispensable; otherwise, there will never be a durable and lasting peace in Iraq. 
An internationalized court in Iraq for the prosecution of crimes against humanity would contribute to the development of a national justice system that will actually deliver justice for all Iraqis, and will thus assist the already encouraging efforts of the Iraqi Governing Council towards democracy. 

For Global Growth and Stability, Mobilize the Reserves 
If wars, as Clemenceau famously said, are too important to be left to generals, development is too important to be left to finance ministers, central bankers, the IMF and World Bank. 
Next month's gathering on ``Finance for Development'' in Monterrey, Mexico is a perfect opportunity for other concerned players, including presidents and prime ministers, to assert their interests. 
The international community has agreed on a set of modest goals for global development - reducing poverty and illiteracy and improving health. 
But this requires a substantial increase in assistance at a time when the paltry levels of aid provided by rich countries continue to fall. 
The US, the world's richest country, is the stingiest. 
As long as the world's (economically) advanced countries maintain this attitude, innovative approaches to financing economic development - and global public goods more generally - need to be tested. 
One idea receiving attention is a new form of global money akin to the IMF's Special Drawing Rights (SDRs). 
SDRs are a kind of global money, issued by the IMF, which countries agree to accept and exchange for dollars or other hard currencies. 
The underlying idea is simple: every year, countries around the world set aside reserves as insurance against contingencies such as an abrupt downturn in foreign lenders' sentiment or a collapse of export prices. 
As a result, some global income sits around rather than financing investments that poor countries need. 
The amounts held in reserves are huge - roughly $1.6 trillion worldwide. 
Countries like to keep their reserves growing in tandem with growth in imports and other foreign liabilities. 
If these liabilities grow by 10% annually, countries need to set aside an additional $160 billion. 
Countries hold these reserves in a variety of forms, including gold and US Treasury bills. 
While America benefits from increased demand for its Treasury bills (which reduces borrowing costs), developing countries receive a return of just 2% - essentially zero in real terms. 
Investments at home may offer much higher returns, but forgoing them is the price developing countries pay for a safe hedge against the pitfalls of global capitalism. 
Instead of holding their reserves in dollars, a new form of global money - ``global greenbacks'' - could be issued which countries could hold in reserve. 
The money would be given to developing countries to finance their development programs as well as global public goods like environmental projects, health initiatives, humanitarian assistance, and so on. 
There are a variety of institutional arrangements by which these global greenbacks could be issued. 
The IMF (responsible for issuing SDRs) could issue them, or a new institution could be created to decide on quantity and allocations. 
A new institutional arrangement might entail the creation of a set of trust funds - say, for education or health, or the environment - with competition among countries for projects helping to promote these objectives. 
For countries that receive less than the amount that they need to put into reserves, the new ``global money'' would go into the reserves, freeing dollars that these countries would otherwise set aside. 
Countries that receive more than they must put into reserves could exchange the new money for conventional currencies. 
Eventually, all the new money will wend its way into reserves, which in effect represent a commitment by countries to help each other in times of trouble. 
A country with reserves of the new global money could exchange it for hard currencies to sustain needed food imports or other goods. 
There is another major advantage. 
The arithmetic of global trade implies that the sum of all trade deficits equals the sum of all trade surpluses. 
If some countries, say, Japan and China, insist on running huge surpluses year after year, then other countries must run deficits. 
The deficits are as much the fault of the surplus countries as they are of the deficit countries. 
Now, trade deficits are like hot potatoes. 
Nobody wants them, so they get passed around. 
If one country gets rid of its deficit, it must show up elsewhere. 
Uncertainty about whether these deficits can be financed is one reason why the world economy, under current arrangements, faced a succession of crises in recent years. 
Issuing the new global money would reduce this uncertainty. 
If a developing country's trade deficit is offset by assistance through a grant of the new global money, its overall financial position will be secure. 
Of course, even with this assistance, countries that mismanage their economies will face problems; the proposal is not a panacea to the world's problems. 
Nor would this scheme be inflationary. 
Global greenbacks would offset the deflationary bias in today's arrangements that results from the fact that part of the income set aside as reserves never gets translated into global aggregate demand. 
Relative to global income - some $40 trillion - the magnitude of monetary growth would be minuscule. 
Relative to today's levels of spending on official development assistance and global public goods, however, the amounts are enormous. 
The scheme also provides regular funding, not currently available, to finance global public goods. 
Commitment to participate in the program would, presumably, be long term. 
Implementing the scheme will not require the support of every major developed country. 
This is important because the US might oppose any plan that undermines demand for Treasury bills (and thus its guaranteed access to low-cost financing). 
But if most advanced countries were to recognize this new form of global money, they could put pressure on holdouts by limiting their holdings of non-participant currencies and treasury bills in their reserves. 
Innumerable details must be worked out before a global money scheme could be put into practice, and changes will not occur overnight. 
But the Monterrey meeting provides an opportunity for such ideas to be discussed and vetted. 
This much is clear: addressing the plight of the world's poorest countries and providing the global public goods needed in this age of globalization requires us to explore innovative ways of raising the necessary financing. 
What makes the global greenback proposal attractive is that it provides the funds poor countries need while contributing to global economic growth, stability, and equity. 

For Turkey, For Europe 
Turkey is now, finally, negotiating with the European Commission the terms of its possible membership in the European Union. 
But whether “possible” becomes “eventual” remains very much an open question. 
Indeed, completing the negotiations is likely to prove as difficult as the decision to start them. 
Recall that Turkey made its first application to join in 1959, and that since 1963, the European Economic Community, the forerunner to today’s EU, responded with a delaying tactic: a request for a customs agreement. 
At the same time, having never had to take “no” for an answer – and after receiving a series of nods and winks that hinted that membership might one day come – Turkey’s expectation of eventual EU integration became increasingly palpable. 
But ordinary Europeans have begun looking at maps, and the geography that they see cannot be denied: 95% of Turkey’s territory and 80% of its population is in Asia. 
As a result, the fierce and lively debate – in Turkey and much more emphatically in the EU – about whether Turkey really belongs to Europe has continued, despite the start of negotiations. 
Of course, the question of Turkey’s European identity cannot be answered with geography lessons. 
At least half of the body of Greek theater and philosophy was produced in Asia Minor. 
The first Christian evangelization trips of Saint Peter and Saint Paul were to Turkey. 
Later, Ottoman Turkey was for centuries considered a part of the “concert of Europe,” proving indispensable in defining and securing the strategic balance among the European continent’s Great Powers. 
Yet this historical evidence is not enough to unite European sentiment in favor of Turkey’s EU membership. 
On the contrary, “the Turkish Question” will be resolved on the basis of the current political preoccupations and concerns for the future. 
Fortunately, that choice was not settled prematurely and peremptorily: the process that will lead to a final decision was merely allowed to start with the opening of negotiations. 
Membership talks can’t help but be long and arduous, if only because adopting the acquis communautaire (the body of EU law) requires that Turkey integrate around 10,000 pages of texts into its legislation. 
However, all this now seems to have a serious chance of succeeding. 
And yet Turkey scares countless Europeans. 
With 67 million people today, and a population that will reach 80 million in 20 years and 100 million in 2050, Turkey is bound to become the most populous of all European nations. 
It is also a very poor Muslim country. 
To be sure, a few countries in Europe, mainly Germany and Austria, have welcomed strong inflows of Turkish immigration. 
But the immigrants have been mostly poor peasants from Anatolia, whose integration has proven to be difficult. 
By contrast, Turkey’s large, secular intellectual community, whose cultural background is European, and from which the Turkish state recruits most of its executives, has remained in Istanbul and Ankara. 
Europe, then, is frightened by the prospect of more immigration by Turks who find it almost impossible to assimilate. 
For the moment, such immigration has almost stopped, owing to rapid economic growth – indeed, the fastest in Europe – in recent years, which is absorbing the country’s available labor and has thus stemmed the flow of emigrants. 
Yet the fear remains that membership in the Union will unleash a new human tide. 
Economic fears are not the only concern for EU citizens. 
Turkey was the theater of exceptional violence in the twentieth century: its participation in WWI fueled hatred and gigantic massacres, with the genocide of the Armenians the last vicious spasm of the Ottoman Empire’s brutal demise. 
Moreover, while Kemal Ataturk restored Turkish national pride by creating the secular Turkish republic, his legacy is mixed, for it includes both Turkey’s strong attraction to the West and a militarization of public life. 
The latter explains much of the repressive attitude towards free speech and independent opinion that has characterized much of Turkish public life – a straitjacket that has left little room for real negotiations with Turkey’s restless Kurds or for resolving the division of Cyprus. 
But Turkey’s EU aspirations mean that it is now being forced to demilitarize its democracy and to find negotiated and peaceful agreements with all its neighbors and future partners – Armenians, Kurds, and Cypriots. 
Thus, if Europe manages to overcome its fears and hesitations and open itself to a powerful Muslim state, it will consolidate peace in one of the world’s most dangerous regions. 
Indeed, by integrating Turkey, Europe would show that it is not a Christian club, that the supposed “clash of civilizations” need not be fatal, and that the European project, born out of a desire for reconciliation and the need to promote development, can spread its benefits far beyond the Western half of Europe. 
In opening itself to Turkey, the EU would finally begin to play its proper role in confronting today’s most daunting political challenges. 

For Whom America’s Bell Tolls 
These days the Chairman of President Bush’s Council of Economic Advisers, Ben Bernanke, likes to talk about a “global savings glut” that has produced astonishingly low real interest rates around the world. 
But that is the wrong way to look at it. 
America certainly does not have a savings glut. 
Its savings rate has been distressingly low for decades. 
Then the Bush administration’s reckless fiscal policy pushed it lower. 
Falling interest rates in recent years pushed up real estate prices and allowed America’s upper middle class to treat their houses as enormous ATM’s, lowering savings still more. 
America has a savings deficiency, not a glut. 
And the rest of the world? 
A global savings glut would suggest that rebalancing the world economy requires policies to boost America’s savings rate and to increase non-US households’ consumption. 
But what the world economy is facing is not a savings glut, but an investment deficiency. 
Divide the world into three zones: the United States, China, and all the rest. 
Since the mid-1990’s, the net current-account surplus of “all the rest” has risen by an amount that one Federal Reserve Bank economist has put at $450 billion a year, not because savings rates have increased, but because investment rates have fallen. 
Declining investment rates in Japan, the newly-industrializing Asian economies, and Latin America, in that order of importance, have fueled the flood of savings into US government bonds, US mortgage-backed securities, and US equity-backed loans – the capital-account equivalent of America’s enormous trade deficit. 
The investment deficiency in Asia relative to rates of a decade ago amounts to an annual shortfall of $400 billion a year, with the decline in investment in Japan – a consequence of more than a decade of economic stagnation ­– accounting for more than half of the total. 
Moreover, investment rates in the newly industrialized economies of Asia have never recovered to their pre-1997-8 crisis levels, and investment rates in the rest of Asia outside China have fallen off as well. 
This would seem to call for a very different set of policies to rebalance the world economy. 
Yes, the US needs tax increases to move the federal budget into surplus and policies to boost private savings. 
But the world also needs policies to boost investment in Asia, Latin America, the Middle East, and Africa. 
And here we face a difficulty. 
People like me who have been cheerleaders for international integration in trade and finance, as well as for reductions in tariffs and other barriers, have cited three benefits: 
· Maximizing economic – and also social and cultural – contact between rich and poor nations is the best way we can think of to aid the flow of knowledge about technology and organization, which is the last best hope for rapid world development. 
· Lower trade barriers will make locating production in the poor low-wage parts of the world irresistible to those who have access to finance. 
· Freer capital flows will give poor countries precisely this access, as the greed of investors in rich country leads them to venture into poor regions where capital is scarce. 
The first reason still holds true. 
Maximizing economic, social, and cultural contact between rich and poor remains both the best way to aid the flow of knowledge and the last best hope for rapid world development. 
But the second and third reasons look shaky. 
Those with access to finance appear to be capable of resisting the urge to locate production in poor low-wage parts of the world (China aside). 
Rather than leading rich-country savers to invest their money in poor countries out of greed, liberalization of capital flows has led poor-country savers to park their money in rich countries out of fear – fear of political instability, macreconomic disturbances, and deficient institutions (especially those that protect the rights of bondholders and minority shareholders). 
Something may well happen in the next several years to radically boost America’s savings rate by making US households feel suddenly poor: tax increases, a real estate crash, rapidly-rising import prices caused by a plummeting dollar, a deep recession, or more than one of the above. 
It would be nice to believe that when the tide of dollar-denominated securities ebbs, the flows of finance currently directed at America will smoothly shift course and boost investment in Asia. 
But don’t count on it, especially considering the share of marginal investment in Asia that is aimed, one way or another, at exporting to the American market. 
Those outside America, especially in Asia, should regard the unstable state of the US macro-economy with grave concern. 
As the seventeenth-century poet John Donne put it, “Ask not for whom the bell tolls – it tolls for thee.” 

Putting FDI on the G20 Agenda 
NEW YORK – While much of the world’s attention is focused on the economic damage being wrought by US President Donald Trump’s trade wars, global trade’s twin – foreign direct investment – has largely been neglected. 
And yet, with FDI flows valued at $1.43 trillion in 2017 – on top of the $28 trillion already invested – how these flows are managed matters. 
International investment has become an important source of external finance for many countries; for developing economies, in particular, FDI can exceed official development assistance by wide margins. 
But if FDI is to contribute meaningfully to economic growth and sustainable development, existing flows must increase even more. 
For that to happen, international investment policies need better coordination, and we believe that the G20 is the best forum to facilitate this process. 
The current FDI framework – a muddled mess of more than 3,000 agreements – is insufficient to attract the level of investment needed to meet the United Nations’ Sustainable Development Goals for the year 2030. 
For example, some of the world’s largest economies are encouraging domestic firms to “re-shore” their operations and invest more at home. 
Many countries are also tightening controls on inward FDI; applying stricter screening measures to mergers and acquisitions; and demanding reciprocal market access in return for investment. 
Moreover, an increase in the number of disputes being filed by foreign investors against host countries has challenged efforts to improve dispute-settlement mechanisms, as some countries withdraw from global arbitration forums altogether. 
If these trends are not reversed, the result could be declines in FDI flows, and perhaps even the emergence of “investment wars” stemming from the over-politicization of foreign investment approvals. 
Yet, increased investment flows obviously are needed to meet global development goals; what is less clear is how to bring them about. 
Unlike the global trading system, the international investment regime does not currently have a multilateral organization to facilitate rule-making, monitor policy developments, or adjudicate disputes. 
But one can be built, and the G20 is the most sensible place to start. 
At the very least, the G20 can offer the appropriate level of guidance to help advance FDI policy. 
The G20’s members already account for two-thirds of global outward FDI flows. Moreover, they participate in most investment treaties, and include both developed and developing countries. 
Not only is the G20 an important venue for policy dialogue and coordination; it is also well suited to lead on efforts to address key international investment issues. 
To be sure, this is not a new idea. 
For example, during China’s G20 presidency in 2016, the G20 adopted the “Guiding Principles for Global Investment Policymaking.” 
This set of nine concepts was designed to foster an open, transparent, and conducive policy environment for investment, while promoting coherence between national and international rules. 
Still, as we argued in a recent policy brief for the G20’s T20 think-tank, work on this issue has only just begun. 
In fact, at least three additional steps need to be taken if efforts to improve the international investment regime are to succeed. 
First, the G20 should call on other international groupings to conduct analyses of their investment policies to ensure alignment with the bloc’s nine principles. 
When gaps are identified, strategies for plugging them must be developed. 
Furthermore, to promote compliance and knowledge-sharing – and to chart a course for the negotiation of future agreements – the G20 should facilitate a peer-learning network that links interested governments and regulators. 
Second, the G20 should encourage the United Nations Commission on International Trade Law (UNCITRAL) and the International Center for Settlement of Investment Disputes (ICSID) to intensify efforts to reform their own dispute-settlement mechanisms. 
Because dispute resolution is key to any successful investment regime, the process for resolving disagreements must be beyond reproach. 
To make certain that it is, the G20 should track progress by requesting regular updates from UNCITRAL and ICSID. 
Lastly, the G20 should support the World Trade Organization’s discussions on investment facilitation. 
More precisely, the G20 should stress that future agreements need to be compatible with the “most-favored-nation” principle while prioritizing sustainable FDI over other forms of foreign investment. 
The G20 can play a leading role in overcoming the deficiencies that plague the international investment regime. 
To do this, however, current and future G20 presidencies must provide a home for discussions about action-oriented policymaking. 
International investment can avoid the type of tensions currently enveloping global trade, but only if the rules of the game receive the attention they need. 

Whose QE Was it, Anyway? 
CAMBRIDGE – Between 1913 (when the United States Federal Reserve was founded) and the latter part of the 1980s, it would be fair to say that the Fed was the only game in town when it came to purchases of US Treasury securities by central banks. 
During that era, the Fed owned anywhere between 12% and 30% of US marketable Treasury securities outstanding (see figure), with the post-World War II peak coming as the Fed tried to prop up the sagging US economy following the first spike in oil prices in 1973. 
We no longer live in that US-centric world, where the Fed was the only game in town and changes in its monetary policy powerfully influenced liquidity conditions at home and to a large extent globally. 
Years before the global financial crisis – and before the term “QE” (quantitative easing) became an established fixture of the financial lexicon – foreign central banks’ ownership of US Treasuries began to catch up with, and then overtake, the Fed’s share. 
The purchase of US Treasuries by foreign central banks really took off in 2003, years before the first round of quantitative easing, or “QE1,” was launched in late 2008. 
The charge of the foreign central banks – let’s call it “QE0” – was led by the People’s Bank of China. 
By 2006 (the peak of the US housing bubble), foreign official institutions held about one-third of the stock of US Treasuries outstanding, approximately twice the amount held by the Fed. 
On the eve of the Fed’s QE1, that share stood at around 40%. 
Spanning a decade (2003-2013), QE0 was the most sustained and uninterrupted surge in central banks’ purchases of Treasuries on record. 
It is difficult to determine the extent to which the Fed’s QE1 during the crisis owed its success in bringing interest rates down to the fact that it was being reinforced by what foreign central banks worldwide – notably in Asia – were doing simultaneously. 
It is instructive, however, that the Fed’s next two policy installments, QE2 and QE3, were not matched by large foreign purchases and appeared to have only modest effects in financial markets. 
After the turmoil of the 2008 crisis subsided, a variety of indices of financial conditions displayed comparatively low levels of volatility (by historic standards) through the spring of 2013. 
But that spring bloom of stability soon faded. 
A combination of falling oil and primary commodity prices, an over-ripe business cycle, and the Fed’s announcement of its intent to start “tapering” its asset purchases brought the decade-long boom in many emerging markets to an end. 
Since then, growth in these economies has slowed markedly, their stock markets have slumped, capital outflows have escalated, and many of their currencies have crashed. 
In tandem with this grim turn of events, numerous emerging-market central banks reversed course and began selling US Treasuries. 
We would not know about these sales, however, from the Fed’s quarterly report of the Financial Accounts of the US: Around the time official sales commenced, the Fed stopped reporting US Treasuries held by foreign official institutions (a series of data that had been available since 1945). 
The report now shows only the aggregate figure, which combines central bank holdings with those of the private sector. 
Fortunately, the US Treasury still publishes the information. 
As of the end of 2015, the share of Treasuries held by foreign central banks is more than 1.5 times what the Fed holds. 
But this figure is significantly down from its peak and, with capital outflows from China and elsewhere showing little signs of abating, is now trending lower. 
The fitful and disorderly unwinding of QE0 is most likely overwhelming the effects of reassurances by Fed officials that they will maintain a large balance sheet. 
Indeed, tighter liquidity conditions and increased volatility in financial markets are the byproduct of the reversal in the long cycle of foreign purchases. 
The unwinding of QE0 does not necessarily imply a decline in the rest of the world’s appetite for US Treasuries. 
In times of financial turbulence, US Treasuries have historically been a safe haven for private flight capital. 
But the change in ownership taking place now does carry implications for financial stability. 
The change from the steady (and often predictable) purchases of the foreign central banks of the 2003-2013 era to the less predictable hands of private investors, who are more sensitive to changes in rates of return, is likely to be the signature of this stage of the global cycle. 

Forget Inflation 
MUNICH – To paraphrase Winston Churchill, never have so many billions of dollars been pumped out by so many governments and central banks. 
The United States government is pumping $789 billion into its economy, Europe $255 billion, and China $587 billion. 
The US Federal Reserve increased its stock of base money in 2008 by 97%, the European Central Bank by 37%. 
The Federal funds rate in the US is practically zero, and the European Central Bank’s main refinancing rate, already at an all-time low of 2%, will likely fall further in the coming months. 
The Fed has given ordinary banks direct access to its credit facilities, and the ECB no longer rations the supply of base money, instead providing as much liquidity as banks demand. 
Since last October, Western countries’ rescue packages for banks have reached about $4.3 trillion. 
Many now fear that these huge infusions of cash will make inflation inevitable. 
In Germany, which suffered from hyper-inflation in 1923, there is widespread fear that people will again lose their savings and need to start from scratch. 
Other countries share this concern, if to a lesser extent. 
But these fears are not well founded. 
True, the stock of liquidity is rising rapidly. But it is rising because the private sector is hoarding money rather than spending it. 
By providing extra liquidity, central banks merely reduce the amount of money withdrawn from expenditure on goods and services, which mitigates, but does not reverse, the negative demand shock that hit the world economy. 
This is a trivial but important point that follows from the theory of supply and demand. 
Think of the oil market, for example. 
It is impossible to infer solely from an increase in the volume of transactions how the price of oil will change. 
The price will fall if the increase resulted from growth in supply, and it will rise if the increase resulted from growth in demand. 
With the increase in the aggregate stock of money balances, things are basically the same. 
If this increase resulted from an increase in supply, the value of money will go down, which means inflation. 
But if it resulted from an increase in demand, the value of money will increase, which means deflation. 
Obviously, the latter risk is more relevant in today’s conditions. 
If the underlying price trend is added to this, it is easily understandable why inflation rates are currently coming down everywhere. 
In the US, the annual inflation rate fell from 5.6% in July 2008 to 0.1% in December 2008, and in Europe from 4.4% in July 2008 to 2.2% in January 2009. 
At the moment, no country is truly suffering deflation, but that may change as the crisis deepens. 
Germany, with its notoriously low inflation rate, may be among the first countries to experience declining prices. 
The most recent data show that the price index in January was up by only 0.9% year on year. 
This deflationary tendency will create serious economic problems, which do not necessarily result from deflation as such, but may stem from a natural resistance to deflation. 
In each country, a number of prices are rigid, because sellers resist selling cheaper, as low productivity gains and wage defense by unions leave no margin for lower prices. 
Thus, deflationary pressure will to some extent result in downward quantity adjustments, which will deepen the real crisis. 
Moreover, even if prices on average exhibit some downward flexibility, deflation necessarily increases the real rate of interest, given that nominal interest rates cannot fall below zero. 
The result is an increase in the cost of capital to firms, which lowers investment and exacerbates the crisis. 
This would be a particular problem for the US, where the Fed allowed the Federal funds rate to approach zero in January 2009. 
The only plausible inflationary scenario presupposes that when economies recover, central banks do not raise interest rates sufficiently in the coming boom, keeping too much of the current liquidity in the market. 
Such a scenario is not impossible. 
This is the policy Italians pursued for decades in the pre-euro days, and the Fed might one day feel that it should adopt such a stance. 
But the ECB, whose only mandate is to maintain price stability, cannot pursue this policy without fundamental changes in legislation. 
Moreover, this scenario cannot take place before the slump has turned into a boom. 
So, for the time being, the risk of inflation simply does not exist. 
Japan provides good lessons about where the true risks are, as it has been suffering from deflation or near-deflation for 14 years. 
Since 1991, Japan has been mired in what Harvard economist Alvin Hansen, a contemporary of Keynes, once described as “secular stagnation.” 
Ever since Japan’s banking crisis began in 1990, the country has been in a liquidity trap, with central bank rates close to zero, and from 1998 to 2005 the price level declined by more than 4%. 
Japanese governments have tried to overcome the slump with Hansen’s recipes, issuing one Keynesian program of deficit spending after the other and pushing the debt-to-GDP ratio from 64% in 1991 to 171% in 2008. 
But all of that helped only a little. 
Japan is still stagnating. 
Not inflation, but a Japanese-type period of deflationary pressure with ever increasing public debt is the real risk that the world will be facing for years to come. 

Forging a European Worldview 
WARSAW – Some complain that the European Union lacks a “worldview.” 
In fact, the EU’s problem is that it has too many of them. 
Europeans’ common experiences and interests mean that they should have a shared view on global issues. 
But the sad reality is that political, social, and economic pressures tend to push EU members and citizens in opposing directions; shared histories, it seems, are an insufficient basis for shared policies. 
Nevertheless, the more pragmatic Europe’s policies are, the greater the chances of success, not least when it comes to global issues. 
Europeans have a shared appraisal of many of the world’s problems, and often put forward common methods and strategies for coping with them. 
For example, on climate change, immigration, and development aid, there is growing consensus, as there is on energy policy and the further development of the European Security Strategy. 
Agreement in these areas is not merely a reflection of some lowest common denominators; in each area, Europe has contributed important added value at a global level. 
Indeed, Europe’s community of attitudes is becoming synonymous with solutions to world problems. 
After all, climate change, energy security, and demographic challenges have been part of the European discourse for many years; now that discourse is starting to be shared by other parts of the world. 
The global financial and economic crisis may also be a catalyst for promoting Europe’s vision of a new world order. 
The EU vision of a capitalist economy harnessed to social progress and subject to regulation, rather than laissez-faire, is growing in influence. 
New economic powers like China, India, and Brazil must find their own ways of addressing social injustice and encouraging equal opportunity for all, and the European model looks increasingly attractive to them. 
Yet many differences still separate societies within the EU. 
There are divergent views on many vital global problems. 
And although these differences may grow smaller with time, they occasionally take on an alarmingly clear-cut form, as in the case of the United States-led invasion of Iraq. 
It is nevertheless comforting that Europe’s differences on global issues have not had an excessive impact on the EU’s internal dynamics. 
The war in Iraq did not delay the Union’s “big bang” enlargement, and was not the reason for the failure of referenda in France and the Netherlands on the Constitutional and Lisbon treaties. 
And Europe does need to develop structures and decision-making processes that limit conflicts of interest by offering compromise solutions. 
This is the crux of the Lisbon Treaty, which is designed to usher in new institutions and mechanisms aimed at creating more politically cohesive EU external policies. 
Transferring more areas of responsibility, such as foreign aid and development policies, to EU institutions helps the Union to adapt to new international realities by underpinning its growing importance as Europe’s decision-making center. 
Shaping a shared vision of the world should start with Europe’s immediate neighborhood. 
The enlargement of NATO and the EU has embraced a dozen or so states in Central and Eastern Europe and in the western Balkans. 
But, despite these achievements, European integration is far from complete, and it will remain so until all European countries can follow the same development path. 
This failing was the key reason for the Balkan tragedy of the 1990’s. Fortunately, the time for armed conflict in that region appears to have come to a definitive end, now that the Balkan states are on the path to NATO and EU membership. 
But Eastern Europe, especially Ukraine and Moldova, also must be treated as a region of special importance. 
Ukraine’s population of 46 million means it is far too big and important to be left out of any vision of Europe’s future. 
Yet the EU’s strategy towards Ukraine has been ambiguous and obscure. 
The Orange Revolution’s reform drive has been slowed or even halted by domestic political and economic crises, but also by the Union’s perceived indifference to Ukraine’s fate. 
EU leaders lament Ukraine’s political divisions and slow pace of reform, and the country’s leaders need to address these criticisms. 
But lack of progress also reflects the EU’s failure to embrace Ukraine. 
Reform of a country’s political and economic institutions and its accession to the EU and NATO usually go hand in hand, because the prospect of membership makes painful decisions electorally acceptable. 
In short, it is unrealistic of the EU to expect European outcomes from countries like Ukraine and Moldova without making a full commitment to them. 
Fortunately, that approach is changing. 
The Gas Memorandum signed earlier this year between the EU and Ukraine on the extension and exploitation of Ukrainian gas pipelines is a perfect example; in return for political support and for funding of the extension of its pipelines, Ukraine has agreed to adopt EU rules governing management and access to the gas transmission line. 
Ukraine also agreed to implement the relevant EU energy directives as part of its membership of the European Energy Community. 
It is a first step towards Ukraine’s eventual full integration into the EU Single Market. 
The EU’s current lack of unanimity on many world issues, as well as continental issues such as Ukraine, is no reason for despair. 
The trick for the Union is to develop shared solutions and to take joint foreign-policy actions, even when various EU governments see things differently. 

Forging Asia’s Missing Links 
MANILA – China’s government has just announced that Premier Wen Jiabao will be the main speaker at the 2009 Boao Forum for Asia, where the roster of leaders expected to participate is a virtual Who’s Who of the continent: President Asif Ali Zardari of Pakistan, President Nursultan Nazarbayev of Kazakhstan, President Faure Gnassingbe of Togo, Prime Minister S. Bayar of Mongolia, Prime Minister Thein Sein of Myanmar, Prime Minister Nguyen Tan Dung of Vietnam, Prime Minister John Key of New Zealand, and Kopsak Saphawasu, Deputy Prime Minister of Thailand. 
Such meetings are vital for Asia, because the continent lacks the dense institutional infrastructure that Europe has built up over the past five decades. 
This year’s Boao Forum has become even more important because of the cancellation of the East Asia summit due to the action of violent protestors. 
Multinational companies increasingly treat Asia as a single economic space, at least as far as production is concerned. 
This, of course, does not mean that Asia is, or is becoming, a single market, but rather that is now something of a tight-knit pan-national supply chain. 
But, although Asia is becoming more like Europe in terms of economic integration, political and diplomatic integration lags behind. 
So, because Asia lacks such institutional arrangements, personal diplomacy of the type that the Boao Forum represents, like the annual global winter gathering at Davos, remains vitally important. 
Indeed, it was at last year’s Boao Forum that Chinese President Hu Jintao began to express public optimism about the positive trends in Mainland China-Taiwan relations. 
That rapprochement was possible because Taiwan’s then newly elected vice president was given permission by China to attend the forum, where he was able to meet informally with President Hu. 
Last February, I headed a 40-member trade delegation to Taipei. 
That mission’s highlight was my dialogue with Taiwanese President Ma Ying-jeou, who stressed the importance of connecting Taiwan to the China-ASEAN Free Trade Area (CAFTA) in the light of warmer relations developing between the Mainland and Taiwan. 
At this time of economic turmoil around the world, increasing Taiwan’s formal economic links with China and its regional partners can only benefit everyone involved, because an inevitable side-effect will be a lessening of tension. 
Unfortunately, some analysts suggest that a Taiwan-ASEAN Free Trade Agreement of the likes of CAFTA may not yet be possible, so, in the interim, President Ma’s administration is striving to achieve separate free-trade agreements with various ASEAN members. 
Understandably, the opposition Democratic Progressive Party (DPP) has taken the stand that Taiwan should seek closer ties with ASEAN countries rather than depend too much on Mainland China, but Ma does not see the two efforts as being mutually exclusive. 
From a wider perspective, Ma and I exchanged views on the synergy of an emerging “Central East Asia Growth Polygon” (CEAGPOL) consisting of the Philippines, Taiwan, Hong Kong, Macau, and the Mainland Chinese provinces of Guangdong and Fujian – plus, eventually, Hainan, Okinawa, and Guam/Marianas. 
With goodwill on all sides, real advantages can materialize from building up this informal grouping, as it is a gateway to the huge markets of Southeast and Northeast Asia. 
An economic bonus of such an effort for the entire region would come from the opening of direct flights and sea transport across the Taiwan Strait. 
CEAGPOL could even become a building block for a Northeast Asian version of ASEAN – an “Association of Northeast Asian Nations.” 
As a result of historical suspicion between China, Japan, and Korea, Northeast Asia’s economic heavyweights are the world’s last remaining regional bloc that still lacks an inter-governmental organization of the likes of ASEAN. 
The European Union is even more instructive, because centuries of war, culminating in the two World Wars of the twentieth century, inspired, rather than deterred, European economic, political and security integration. 
At this time of worldwide uncertainty, Asia-Pacific leaders must redouble their efforts to exploit their partnerships and strategic combinations in order to foster stability and growth. 
The easing of tensions between China and Taiwan can, perhaps, set a tone for all of Northeast Asia. 
At the 30th anniversary of the “Message to Compatriots in Taiwan” last January, President Hu offered six proposals to improve relations: 
1. Abandon the Taiwan independence movement; 
2. Stop confrontation and reach peaceful agreements; 
3. Increase military contacts/exchanges; 
4. Discuss Taiwan’s participation in international organizations under the “One China” umbrella; 
5. Establish a Comprehensive Economic Cooperation Agreement (CECA); and 
6. Promote China’s traditional civilization with strengthened spiritual ties. 
There is now real hope that talks along these lines can succeed. 
But there is a major obstacle to easing tensions: the proposed $6.5 billion sale by the United States to Taiwan of 30 Apache attack helicopters and 330 Patriot missiles. 
China-US talks on defense cooperation had earlier stalled because of such arms negotiations. 
They have since been restarted, an olive branch sent to the Obama administration by China’s government. 
All three parties involved will need to tread with care to make certain that the thaw in China-Taiwan relations is not set back by this proposed arms deal. 
For, if Asia is to begin to build the type of dense institutional infrastructure that has brought Europe peace and prosperity, the flashpoint between China and Taiwan will need to be transformed into a foundation stone of regional cooperation. 

Forging Syria’s Opposition 
TEL AVIV – Syria’s crisis is now a year old, with close to 10,000 people, mostly civilians, dead and no end in sight. 
The country is at a stalemate: the opposition is unable to topple President Bashar al-Assad’s regime, and Assad’s forces are unable to quash the resistance. 
Both sides are adamant: the opposition is determined to bring down a regime that it views as illegitimate, sectarian, corrupt, tyrannical, and stained with blood, while the regime’s hard-line core believes that by persevering it will ultimately silence the opposition, whereas any concession would jeopardize its very existence. 
Its downfall, they believe, would mean dispossession and death for the regime’s leadership and for a large part of the minority Alawite community from which it is drawn. 
Assad and his cohorts are encouraged by the world’s failure to respond effectively to their brutal suppression of the revolt in Homs, and have proceeded to inflict vicious punishment on its survivors as a warning to opponents elsewhere. 
This may cow some of Syria’s civilian population in the short term, but it will serve only to exacerbate popular rage, and thus to increase the prospect of a bloody reckoning with Assad and his cronies down the line. 
Today’s brutal stalemate is likely to continue for some time. 
Diplomatic and humanitarian missions led by former United Nations Secretary-General Kofi Annan and current UN Under-Secretary-General for Humanitarian Affairs Valerie Amos seem as ineffective as earlier efforts by the international community and the Arab League to mitigate the conflict or to facilitate a political solution. 
To be sure, the authorities have suffered some defections, with the most significant coming soon after the violence in Homs reached its peak, when the deputy energy minister resigned and joined the opposition. 
But, while defections have occurred among the officer corps as well, the regime has maintained its basic cohesiveness. 
The army, the security apparatus, and the Alawite community are still solidly supportive. 
A large part of the Syrian population – the middle class in Damascus and Aleppo, the Christians, and other minorities – are passive or sitting on the fence, worried that the alternative to the status quo is chaos, civil war, and possibly a radical Islamist takeover. 
And Russia and China continue to provide diplomatic cover, with Iran sending material support. 
Life in Damascus, despite increasing shortages, seems almost normal. 
The regime’s foes, on the other hand, seem undeterred by the killings, continuing to stage protests across Syria. 
Armed opposition is spreading, albeit slowly. 
The Western countries, Turkey, and most of the Arab world are incensed by the brutal killing and destruction, and pressure to intervene and stiffen international sanctions is building. 
But regional and international pressure on Assad has been ineffective. 
While the Arab League seemed to act decisively last November when it suspended Syria’s membership, the military-observer mission that it sent to Syria was a farce. 
Turkey’s initiatives have lost steam, and the United States and its European allies are merely going through the diplomatic motions; in practice, their efforts imply little serious impact on the regime. 
America and the West claim that they cannot act significantly without a UN mandate, which Russia and China are denying them by vetoing anti-Syrian resolutions in the Security Council. 
But the truth is that governments in Washington, London, Paris, and elsewhere could do much more without a Security Council resolution. 
Perhaps most strikingly, while some governments have closed their embassies in Damascus (citing safety considerations), there has been no systematic severing of diplomatic relations with Syria. 
Indeed, there has been no stoppage of flights to and from the country, or any other measures that could tilt the population of Damascus and Aleppo against the regime and bring the crisis to an end. 
This ambivalence can largely be explained by Western and Arab concern with the weakness and opacity of the Syrian opposition’s political leadership. 
There is a dramatic discrepancy between the courage and tenacity of the demonstrators and fighters in Homs, Idlib, and Deraa, and the Syrian National Front, whose people and factions have failed to formulate a coherent political program, build an identity, and obtain name and face recognition. 
Western policymakers and those in the Gulf ask themselves what Syria would look like the day after Assad is toppled. 
This was starkly illustrated in the second week of March, when US defense officials vented their frustration with the Syrian opposition in several press briefings. 
The regime has been effective in exploiting that uncertainty by spreading the fear of an Egyptian scenario, in which the weakness of secular activists leads to a takeover by the Muslim Brothers and jihadis. 
In fact, it is difficult to separate cause from effect. 
Recognizing the opposition as the legitimate government of Syria, as was done in Libya, would give Assad’s foes a boost, but, so far, they lack the gravitas that such a bold measure would require. 
The opposition must build itself as a credible and attractive alternative to the Assad regime, and the regime’s international and regional critics must assist in that process. 
Assad’s regime is doomed. 
It has no legitimacy, and it is bound to fall. 
But that could take a long time – and come at an alarming cost. 
The alternative is an effective opposition that enjoys unambiguous support by the key regional and international actors. 

Forward to Putinism 
MOSCOW-NIZHNY NOVGOROD-NOVOSIBIRSK: “Forward to Communism!” 
That slogan defined, and cynically mocked, the do-nothing Brezhnev era of stagnation. 
Today, Russia is racked by a sense of déjà�vu for those times. 
Under Yeltsin, despite the chaos of flawed markets and an even more flawed democracy, there was a sense that things were moving forward. 
Now many Russians have no idea where they are moving forward or backward or, indeed, if they are moving at all. 
President Putin’s restoration of the old Soviet national anthem was the first recent hint that Russians are marching back to the future. 
Although Putin did have the decency to change the words, he retained the Soviet spirit - “great Russia united forever.” 
Then the Federal Service Bureau, formerly the KGB, celebrated the anniversary of the founding of its foreign service branch - ie, the spies - a reverie attended by a certain former employee named Putin. 
This was followed by a shareholders meeting of the RAO UES (United Energy Systems), Russia’s electricity giant, now headed by the reformer turned oligarch, Anatoly Chubais. 
The meeting was meant as a sign of Russia’s new business friendly climate, but the banner hanging over the hall - “Long Live the 80th Anniversary of Vladimir Lenin’s GOELRO Plan” - mocked that intent. 
GOELRO’s (State Organization for the Reconstruction and Development of the Soviet People’s Economy) slogan was “Socialism means Soviet rule plus electrification of the country.” 
Chubais’s plan is similar to the GOELRO one, but instead of national socialization, it calls for obligatory national marketization. 
If a region can’t pay for its electricity, people will be cut off and left without heating. 
For most of this enormous country, with its 135 million people and 11 time zones, such signs of the past and the promised business future are regarded as skeptically as proclamations about record harvests under Brezhnev. 
All of these are seen as Kremlin games, hypothetical and hypocritical, bearing little relation to reality. 
Everyone, to some degree, has nostalgia for the past, some bleary idea of how the past can (rather than cannot) work in the future. 
But Russia’s people, after 10 years of Yeltsin’s anarchic freedoms, are too jaundiced to take any slogan seriously - whether from the Soviet past or from the management consultant’s hymn book. 
Russians no longer care about slogans and symbols because paying bills and feeding their families doesn’t leave time for indoctrination and ideology. 
Perhaps this is something the West should have realized about the Soviet economy all along. 
Propaganda and indoctrination are time consuming and inefficient. 
You can’t produce if you are chanting slogans or spying on friends. 
At the end of a day digging coal, teaching children, or waiting tables, Russians now want reasonable services, a logical tax system, and regular paychecks. 
Whatever anthem, old or new or none at all, under which these things appear will be deemed suitable, and maybe even be sung. 
Of course, many hope that someone will explain to Chubais that national marketization works best when supported by functioning social institutions and a social safety net. 
Few have any real hopes of that. 
Recently I traveled in distant regions of Russia, where I grasped the enormous disconnect between the center (Moscow) and Russia’s periphery, between rulers and ruled. 
That disconnect is nothing new; there have always been Tsars and serfs, Politburo commissars and proletariat. 
That postcommunist Boris Yeltsin, however, although he sometimes declared allegiance to a hazy collective sense of Rossiyane (citizens of Russia), deprived – or freed, it’s a matter of opinion – Russians of all collective life; both the real life of shared hardship and the imaginary half-life of communist solidarity. 
Today everyone deals with life and hardship individually (a new word in our everyday vocabulary) regardless of any Kremlin desire to make life uniform. 
Indeed, even Russian uniformity is different nowadays. 
In Novgorod I saw LukOil (one of Russia’s big private oil companies) petrol stations. 
I saw them in Moscow too; then in Novosibirsk. 
They are uniform: red and white, brightly lit, clean and businesslike. 
What makes a market economy a market economy, I thought, is the fact that you can always find a Texaco or a BP, Elf or Statoil petrol station, or a Seven Eleven store in Alaska, South Carolina or Tokyo. 
When LukOil stations look the same in central Moscow and remote Siberia, it means something new and, yes, revolutionary. 
For in this uniformity Russia has the hope of becoming a “normal” country, a place where the uniformity of slogans is replaced by uniform commercial services. 
Of course, highbrows everywhere object to this “McDonaldization” of life, arguing that commercial sameness is the death of culture and individuality. 
In Western Europe, Japan, and the United States, places where individuality lost its novelty long ago and where the managerial spirit and mass commerce flourish, this sameness may be something to debate. 
In Russia, however, a couple of thousand shining LukOil stations are not threats but are, instead, harbingers. 
They are a new type of individuality here, the individuality of the entrepreneur/survivor against the tyranny of the socialist crowd. 
To critics of this, I offer one more sign. 
On my way to Novosibirk airport at 5a.m. on a morning when the temperature read minus 48 Celsius (minus 118 Fahrenheit) I saw a brightly-lit wooden hut. 
Pizzeria Venezia proclaimed a sign with a carving of a gondola. 
Globalization and someone’s vague idea – no, dream – of la dolce vita had reached the depths of Russia. 
If Putinism means that, perhaps Russia is moving forward after all. 

Exposing Climate Change Obstruction 
STANFORD – Twenty-five years after the adoption of the UN Framework Convention on Climate Change on May 9, 1992, the world has yet to implement a treaty that effectively addresses global warming. 
Now, following President Donald Trump’s withdrawal of the United States from the Paris climate agreement, it is time to investigate more deeply the forces driving delay. 
Throughout the 1990s, the American Petroleum Institute (API) – the largest oil and gas trade association and lobbying group in the US – repeatedly relied on economic models created by two economists, Paul Bernstein and W. David Montgomery, to argue that pro-climate policies would be devastatingly expensive. 
API successfully lobbied for delaying measures to address climate change solutions, using Bernstein and Montgomery’s projections to claim that job losses and economic costs would outweigh environmental benefits. 
These arguments were used in 1991, to torpedo the idea of carbon dioxide controls; in 1993, against the Clinton administration’s proposed BTU tax (an energy surcharge that would have taxed sources based on their heat and carbon content); in 1996, against the goals of the UN Conference of Parties in Geneva (COP2); in 1997, against the goals of the UN Conference of Parties in Kyoto (COP3); and in 1998, against the Kyoto Protocol’s implementation. 
The API’s lobbying plan was repetitive. 
It also worked. 
The oil and gas industry portrayed the reports it commissioned from Bernstein, who once worked at the Hawaiian Electric Company, and Montgomery, a former deputy assistant secretary for policy in the US Department of Energy, as factual, independent, and products of genuine economic debate. 
In the run-up to the 1997 meeting in Kyoto, Japan, for example, the oil company Mobil claimed in an advertisement placed in The Wall Street Journal and The New York Times that “the cost of limiting emissions could range from $200 to $580 per ton of carbon,” based on “a study just issued by Charles River Associates.” 
Mobil didn’t name who wrote the CRA report (Bernstein and Montgomery were the first two authors) or who funded it (API). 
Mobil’s message was misleading, but was the analysis that Bernstein and Montgomery authored truly flawed? 
Consider this: they ignored the negative costs of climate change, and suggested that clean energy would never be price competitive with fossil fuels, which is simply not true. 
They assumed the result that they claimed to show. 
The oil and gas industry was richly rewarded for abusing the public trust. 
Americans eventually elected a president, George W. Bush, who bought the industry’s claims and pulled the US out of the Kyoto Protocol. 
Sixteen years later, Trump stood in the White House Rose Garden and announced, with equal sophistry, that the Paris climate agreement would devastate the US economy and cost America some 2.7 million jobs, mostly in the construction industry, by 2025. 
That accounting, Trump said last month, was “according to the National Economic Research Associates.” 
In case you’re wondering, the first two authors of the report Trump cited – just published in March – are Bernstein and Montgomery. 
This time, they were hired by the American Council for Capital Formation, a Washington, DC-based think tank and lobbying group with a history of commissioning deeply flawed work used to challenge climate policy. 
Throughout the 1990s, the oil and gas industry and its allies perfected the art of blocking America’s support for key global climate-change initiatives. 
The maestros, it appears, are back, and their repertoire hasn’t changed. 
It never had to. 
In addition to commissioning studies claiming that climate policies would hurt the US economy, the industry also consistently claimed that efforts to address global warming would be uniquely harmful to the US, would not reduce the risks of climate change, and would prevent poverty alleviation. 
All three of these additional arguments also appear in Trump’s announcement on the Paris accord. 
When a tortoise is sitting on a post, you know it didn’t get there by itself. 
The reappearance of the same four arguments developed a quarter-century ago by an industry that benefits from delaying climate policies – arguments used with great success precisely because their origin and true purpose were hidden from the public – looks a lot like the tortoise’s four wiggling feet. 
If history rhymes, here’s what we may expect in the months ahead: industry-sponsored economic “studies,” flashy online content, think tank reports, and polished front groups posing as grassroots organizations. 
These are time-tested components of the strategy used by the fossil fuel industry and others to block, obstruct, and control climate policy. 
We must not let the industry continue to obstruct climate policy. 
That means following the money that funds the pseudo-science of delay, and exposing the co-opted scholars who feed false images of debate to the public. 
The same arguments – and people – used by the fossil fuel industry to block climate policies decades ago are back. 
For the sake of humanity, we must not let them succeed again. 

Fossil Fuel Follies 
BERLIN – If the world is to avoid climate catastrophe, it will have to forego burning almost 90% of proven coal reserves, plus one-third of oil and half of natural-gas reserves. 
But instead of implementing policies aimed at realizing that objective, governments continue not only to subsidize the fossil-fuel industry, but also to use scarce public resources to find new reserves. 
That has to change – and fast. 
In an effort to help spur that change, the Heinrich Böll Foundation and Friends of the Earth International have aggregated key data about the coal industry in the just-released Coal Atlas. 
The figures are striking. 
According to the International Monetary Fund, post-tax subsidies for coal (including environmental damage) reached 3.9 % of global GDP this year. 
G-20 governments are estimated to spend $88 billion per year on exploration subsidies for new fossil fuels. 
And a recent report by the Natural Resources Defense Council, Oil Change International, and the World Wide Fund for Nature revealed that from 2007 to 2014, governments channeled more than $73 billion – or over $9 billion per year – of public money toward coal projects. 
Leading the way were Japan ($20 billion), China (around $15 billion), South Korea ($7 billion), and Germany ($6.8 billion). 
This public investment augments already-substantial commercial funding for the coal sector. 
In 2013, 92 leading banks provided at least €66 billion ($71 billion) – over four times more than in 2005. 
All of this has gone to buttress an industry that produces a massive share of global emissions – and seems dead set on continuing to do so. 
Since 1988, just 35 coal producers, both private and state-owned, have contributed one-third of total CO2 emissions. 
The damage their products are causing is no secret. 
And yet coal and other fossil-fuel companies have refused to adjust their business models. 
Instead, they have actively worked to block efforts to mitigate climate change at the national and international levels, including by funding climate-change deniers and lobbying against renewable-energy targets and successful instruments like feed-in tariffs. 
Meanwhile, the coal industry argues that it plays an indispensable role in tackling “energy poverty” – that is, the lack of access to modern non-polluting forms of power, primarily electricity. 
It is true that energy poverty is a huge problem, affecting some 1.2 billion people worldwide. 
For farmers, who must rely on pumped water to irrigate their crops, this means lower efficiency and productivity. 
For households, which must burn firewood, cow dung, and kerosene to cook, it means indoor air pollution that can cause respiratory disease. 
For schoolchildren, poor lighting after dark means lost learning opportunities. 
But coal is not the solution. 
Just the health consequences of coal production and combustion are staggering. 
In 2013, Coal workers pneumoconiosis (“black lung disease”) resulted in more than 25,000 deaths globally. 
In the European Union, coal combustion is responsible for 18,200 premature deaths and 8,500 new cases of chronic bronchitis per year. 
In China, an estimated 250,000 people die prematurely because of coal combustion. 
The physical toll carries large economic costs as well, from lost working days to pressure on health-care systems. 
Climate change, too, will impose enormous costs, even if strong mitigation and adaptation measures are taken. 
For the 48 least-developed countries, the costs of coal will soon amount to an estimated $50 billion per year. 
Far from receiving subsidies, the fossil-fuel industry should be paying for climate change. 
After all, just last year, the top two fossil-fuel companies – Chevron and ExxonMobil – together pulled in more than $50 billion in profits. 
If the world is to have any chance of capping the increase in global surface temperature at 2° Celsius above pre-industrial levels, without being forced to employ dangerous and risky technologies like Carbon Dioxide Capture and Storage or geo-engineering, its energy system must be transformed. 
First and foremost, world leaders must commit to phasing out fossil fuels, with the explicit goal of leaving 90% of proven coal reserves, one-third of oil reserves, and half of gas reserves in the ground. 
They must also end public subsidies for coal as soon as possible, within the next few years, while ensuring that poor and vulnerable communities do not suffer from an increase in energy prices. 
Moreover, governments worldwide must hold coal and other fossil-fuel producers accountable for the damage their products have caused, including through a levy on fossil-fuel extraction to fund the Warsaw Mechanism on Loss and Damage under the United Nations Framework Convention on Climate Change. 
Existing international law – in particular, the “polluter pays” principle, the “no-harm” rule, and the right to compensation – supports such a system. 
Finally, to address energy poverty, world leaders must scale up funding for decentralized renewable-energy projects, including through a globally funded feed-in tariff for renewable energy mini-grids in developing countries. 
The fossil-fuel industry’s success in safeguarding its own interests has come at the expense of the health of our planet and its people. 
It is time to reform our perverse global energy system – beginning by resolving to leave coal and other fossil fuels where they are. 

Storm Warning for the Fossil-Fuel Industry 
LONDON – This has been a year of extreme weather events, from the “Beast from the East” that froze much of the United Kingdom in March to Hurricane Florence on the US East Coast and Typhoon Mangkhut in the Philippines. 
Scientists generally hesitate to say that any particular natural disaster is the result of climate change, but the overall intensity of storms certainly appears to be linked to the accumulation of human-generated greenhouse gases (GHGs) in the atmosphere. 
But in the minds of many, assigning blame need not wait for full scientific certainty. 
There are tens of millions of people whose lives have been severely affected by natural disasters, and perhaps billions who have noticed changing weather patterns in recent years. 
Like a growing share of politicians and most of the media, many of these people are becoming convinced that our reliance on fossil fuels is one of the underlying causes. 
The fossil-fuel industry is a legitimate target for criticism, given that its products account for the bulk of annual GHG emissions. 
“Big Oil” firms, in particular, have been hit by a number of actions relating to their role in climate change. 
In addition to protests at their sites in recent years, they have faced shareholder resolutions demanding a shift toward renewable energy sources, divestment campaigns, and a growing number of climate-related lawsuits, particularly in the United States. 
Yet, if anything, the political siege of the fossil-fuel industry has only just begun. 
Even if extreme weather events do not turn out to be as frightening as climate scientists predict, the public will most likely increasingly direct its ire at the industry whenever there is a major hurricane, flood, typhoon, heat wave, or freezing spell. 
Moreover, as awareness of climate change spreads, politicians and the public will need a simple and easy target to blame. 
To be sure, one could point the finger at the billions of consumers who drive gasoline-powered cars and rely on fossil fuels to heat and light their homes. 
But any politician hoping to win an election would be foolish to blame the voters. 
In practice, this means that fossil-fuel firms – particularly those headquartered in OECD countries – will have to navigate an intensely contested operating environment in the coming years. 
In terms of shareholder value, managing social and political challenges will be no less important than finding and producing hydrocarbons. 
Nowadays, much of the shareholder activism against the industry focuses on the extent to which firms’ hydrocarbon reserves ultimately may prove commercially nonviable as the world shifts away from fossil fuels. 
But in the near term, the political backlash against the industry will pose a bigger threat to valuations than will “stranded assets.” 
That backlash could come in a variety of forms. 
Divestment campaigns are likely to gain steam and attract larger shareholders. 
Climate-related lawsuits could begin to extend further beyond the US, ultimately leading to multi-billion-dollar damage awards, as in the cases against Big Tobacco. 
Protest movements to disrupt on-shore operations could become routine. 
And governments could decide to impose moratoriums on new hydrocarbon development, or to levy punitive taxes on fossil-fuel firms. 
In fact, the government of New Zealand recently banned all future offshore oil and gas exploration – a move that other countries ultimately may follow. 
Why should anyone shed tears for Big Oil and its investors? 
After all, many of the political pressures described here are helpful for tackling climate change, which requires reducing our reliance on fossil fuels and accelerating the shift to renewable energies. 
Still, an unthinking backlash against fossil-fuel firms could also have some perverse effects. 
Politicians may use it to deflect attention from the slow pace of national energy policy reform. 
In most countries, such reform is urgently needed to meet climate targets. 
Also, even in a scenario in which the average global temperature increase is kept within 2° Celsius of pre-industrial levels (the upper limit under the 2015 Paris climate agreement), fossil fuels will still need to be produced. 
Like a giant supertanker, the global energy system cannot be turned around on a dime. 
The shift away from fossil fuels will take many years, during which oil, gas, and coal will remain in demand. 
In light of these realities, one risk of the intensified political backlash against fossil-fuel firms is that the industry could be pushed into the shadows. 
Instead of shrinking in size or focusing on a transition to renewables, the industry might shift production to private rather than publicly listed firms. 
Or production could migrate to less transparent firms in non-OECD countries. 
In either case, these corporate entities will be less susceptible to pressure from progressive activists and socially focused investors. 
Less scrupulous producers will be happy to keep exploring and extracting with abandon, because they will feel even less obliged than the distrusted bosses of Big Oil and Big Coal to demonstrate that they are helping to reduce GHG emissions. 
As the movement to tackle climate change continues to shape its strategy for the years ahead, this is one risk that it must keep in mind. 

Financing Climate Safety 
NEW YORK – The purpose of the global financial system is to allocate the world’s savings to their most productive uses. 
When the system works properly, these savings are channeled into investments that raise living standards; when it malfunctions, as in recent years, savings are channeled into real-estate bubbles and environmentally harmful projects, including those that exacerbate human-induced climate change. 
The year 2015 will be a turning point in the effort to create a global financial system that contributes to climate safety rather than climate ruin. 
In July, the world’s governments will meet in Addis Ababa to hammer out a new framework for global finance. 
The meeting’s goal will be to facilitate a financial system that supports sustainable development, meaning economic growth that is socially inclusive and environmentally sound. 
Five months later, in Paris, the world’s governments will sign a new global agreement to control human-induced climate change and channel funds toward climate-safe energy, building on the progress achieved earlier this month in negotiations in Lima, Peru. 
There, too, finance will loom large. 
The basics are clear. 
Climate safety requires that all countries shift their energy systems away from coal, oil, and gas, toward wind, solar, geothermal, and other low-carbon sources. 
We should also test the feasibility of large-scale carbon capture and sequestration (CCS), which might enable the safe, long-term use of at least some fossil fuels. 
Instead, the global financial system has continued to pump hundreds of billions of dollars per year into exploring and developing new fossil-fuel reserves, while directing very little toward CCS. 
Many investments in new fossil-fuel reserves will lose money – lots of it – owing to the recent fall in world oil prices. 
And many of the fossil-fuel reserves that companies are currently developing will eventually be “stranded” (left in the ground) as part of new global climate policies. 
The simple fact is that the world has far more fossil-fuel resources than can be safely burned, given the realities of human-induced climate change. 
Though market signals are not yet very clear, this year’s more successful investors were those who sold their fossil-fuel holdings, thereby avoiding the oil-price crash. 
Perhaps they were just lucky this year, but their divestment decision makes long-term sense, because it correctly anticipates the future policy shift away from fossil fuels and toward low-carbon energy. 
Several major pension funds and foundations in the United States and Europe have recently made the move. 
They have wisely heeded the words of the former CEO of oil giant BP, Lord Browne, who recently noted that climate change poses an “existential threat” to the oil industry. 
More governments around the world are now introducing carbon pricing to reflect the high social costs inherent in the continued use of fossil fuels. 
Every ton of carbon dioxide that is emitted into the atmosphere by burning coal, oil, or gas adds to long-term global warming, and therefore to the long-term costs that society will incur through droughts, floods, heat waves, extreme storms, and rising sea levels. 
While these future costs cannot be predicted with precision, recent estimates put the current social cost of each added ton of atmospheric CO2 at $10-100, with the US government using a middle-range estimate of about $40 per ton to guide energy regulation. 
Some countries, like Norway and Sweden, long ago introduced a tax on CO2 emissions to reflect a social cost of $100 per ton, or even higher. 
Many private companies, including major oil firms, have also recently introduced an internal accounting cost of carbon emissions to guide their decisions regarding fossil-fuel investments. 
Doing so enables companies to anticipate the financial consequences of future government regulations and taxation. 
As more countries and companies introduce carbon pricing, the internal accounting cost of carbon emissions will rise, investments in fossil fuels will become less attractive, and investments in low-carbon energy systems will become more appealing. 
The market signals of CO2 taxation (or the cost of CO2 emission permits) will help investors and money managers steer clear of new fossil-fuel investments. 
Carbon taxes also offer governments a crucial source of revenue for future investment in low-carbon energy. 
With international oil prices dropping – by a whopping $40 per barrel since the summer – this is an ideal moment for governments to introduce carbon pricing. 
Rather than let the consumer price of oil fall by that amount, governments should put a carbon tax in place. 
Consumers would still come out ahead. 
Because each barrel of oil emits roughly 0.3 tons of CO2, a carbon tax of, say, $40 per ton of CO2 implies an oil tax of just $12 per barrel. 
And, because oil prices have declined by more than triple the tax, consumers would continue to pay much less than they did just a few months ago. 
Moreover, new revenues from carbon taxes would be a boon for governments. 
High-income countries have promised to help low-income countries invest in climate safety, both in terms of low-carbon energy and resilience against climate shocks. 
Specifically, they have promised $100 billion in climate-related financing per year, starting in 2020, up from around $25-30 billion this year. 
New revenues from a CO2 tax would provide an ideal way to honor that pledge. 
The math is simple. 
High-income countries emitted around 18 billion tons of CO2 this year – roughly half of all global emissions. 
If these countries earmarked just $2 per ton of CO2 for global financing organizations like the new Green Climate Fund and the regional development banks, they would transfer around $36 billion per year. 
By using part of that money to mobilize private-sector financing, the full $100 billion of climate financing could be reached. 
Both Big Oil and Big Finance have made major mistakes in recent years, channeling funds into socially destructive investments. 
In 2015, these two powerful industries, and the world as a whole, can start to put things right. 
We have within our reach the makings of a new global financial system that directs savings where they are urgently needed: sustainable development and climate safety, for ourselves and for future generations. 

The Responsible Investor’s Guide to Climate Change 
NEW YORK – Around the world, institutional investors – including pension funds, insurance companies, philanthropic endowments, and universities – are grappling with the question of whether to divest from oil, gas, and coal companies. 
The reason, of course, is climate change: unless fossil-fuel consumption is cut sharply – and phased out entirely by around 2070, in favor of zero-carbon energy such as solar power – the world will suffer unacceptable risks from human-induced global warming. 
How should responsible investors behave in the face of these unprecedented risks? 
Divestment is indeed one answer, for several reasons. 
One is simple self-interest: the fossil-fuel industry will be a bad investment in a world that is shifting decisively to renewables. 
(Though there will be exceptions; for example, fossil-fuel development in the poorest countries will continue even after cutbacks are demanded in the rich countries, in order to advance poverty reduction.) 
Moreover, divestment would help accelerate that shift, by starving the industry of investment capital – or at least raising the cost of capital to firms that are carrying out irresponsible oil, gas, and coal exploration and development, despite the urgent need to cut back. 
Though no single institutional investor can make a significant difference, hundreds of large investors holding trillions of dollars of assets certainly can. 
Indeed, divestment by leading investors sends a powerful message to the world that climate change is far too dangerous to accept further delays in the transition to a low-carbon future. 
Divestment is not the only way to send such a message, but it is a potentially powerful one. 
Finally, investors may divest for moral reasons. 
Many investors do not want to be associated with an industry responsible for potential global calamity, and especially with companies that throw their money and influence against meaningful action to combat climate change. 
For similar reasons, many investors do not want handgun manufacturers or tobacco companies in their portfolios. 
Yet there is also an ethically responsible and practical alternative to divestment that can help steer fossil-fuel companies toward the low-carbon future. 
As active, engaged shareholders, institutional investors can use their ownership (and, in the case of large investors, their public voice) to help persuade companies to adopt climate-safe policies. 
American universities are on the front line of this debate, pushed by their students, who are young enough to face the brunt of climate change in the coming decades. 
The students are right to be frustrated that most university endowments have so far been passive on the issue, neither divesting nor engaging as active investors. 
For example, Harvard University President Drew Gilpin Faust sharply rejected divestment in 2013; the purpose of Harvard’s endowment, she argued, is to finance the university’s academic activities. 
Though she did say that Harvard would be an active and responsible shareholder, she offered no details about what such engagement might look like. 
Harvard and many other universities (including our own, Columbia University) have long been committed to acting as responsible investors. 
Several have committees that advise university trustees on environmental, social, and governance (ESG) issues in their portfolio, most commonly when proxy votes in support of ESG proposals are to be held. 
Yet few so far have applied the ESG principles to their endowment’s fossil-fuel holdings. 
Despite Faust’s rejection of divestment, Harvard and other universities have long accepted the principle that divestment is the correct choice in certain circumstances. 
In 1990, Harvard divested completely from tobacco companies. 
Harvard’s president at the time, Derek Bok, said that the university’s decision “was motivated by a desire not to be associated as a shareholder with companies engaged in significant sales of products that create a substantial and unjustified risk of harm to other human beings.” 
Many other universities, including Columbia, have done the same. 
Today’s students make cogent arguments that the case for fossil-fuel divestment looks similar to the case for tobacco divestment. 
Both represent massive risks to human wellbeing. 
Before divesting from tobacco companies, Harvard wrote to them, requesting that they address the ethical issues involved in selling tobacco and their adherence to World Health Organization guidelines. 
The companies either were unresponsive or challenged the evidence that smoking was linked to disease. 
Similarly, in deciding whether to divest, responsible investors like universities should ask four key questions of the oil, gas, and coal companies in their portfolio: 
• Has the company publicly and clearly subscribed to the internationally agreed goal of limiting global warming to 2º Celsius above pre-industrial levels, and to the limits on global carbon-dioxide emissions needed to meet that goal? 
• Will the company pledge to leave business groups that lobby against effective climate policies to achieve the 2º limit? 
• Will the company agree to end any exploration and development of unconventional reserves (for example, in the Arctic and much of the Canadian oil sands) that science has shown to be inconsistent with the 2º limit? 
• Can the company demonstrate that it remains a good investment, despite the transition to low-carbon energy sources and technologies (for example, by demonstrating its own plans to make such a transition or highlighting its contributions to poverty reduction)? 
If companies can give convincing answers to these four questions, they may indeed remain part of the portfolio, and responsible investors can work with them as part of the climate solution, rather than concluding that they are part of the problem and parting ways. 
For those companies that duck the questions, including by claiming that the world will not in fact enforce the 2º limit, divestment would make sense on both financial and ethical grounds, as such companies are clearly not prepared to contribute to creating a low-carbon economy. 
Of course, the need for climate action does not stop with investors; sustainable consumption and production practices by businesses and individuals must be part of the solution as well. 
The transition to a safe, low-carbon future requires all parts of society to act responsibly and with foresight. 
As leaders in education, research, and problem solving, universities have a unique responsibility and opportunity to lead, including as responsible and ethical investors. 

Climate Leadership Means Ending Fossil-Fuel Production 
VANCOUVER/BERLIN – The end of the fossil-fuel era is on the horizon. 
With renewables like solar and wind consistently outperforming expectations, growth in electric vehicles far exceeding projections, and governments worldwide acknowledging the urgency of tackling climate change, the writing is on the wall. 
And yet somehow, the question central to it all is not being seriously addressed: what is the plan for weaning ourselves off oil, coal, and gas? 
That question is becoming increasingly urgent, because governments around the world, from Argentina to Canada to Norway, are supporting plans to continue producing fossil fuels and explore for more. 
These governments claim that new fossil-fuel projects are consistent with their commitments under the Paris climate agreement, despite the fact that burning even the fossil fuels in already-existing reserves would push global temperatures higher than 2°C above pre-industrial levels – and thus far beyond the threshold established in that accord. 
It is a startling display of cognitive dissonance. 
The reality is that limiting fossil-fuel production today is essential to avoid continued entrenchment of energy infrastructure and political dynamics that will make shifting away from fossil fuels later more difficult and expensive. 
Important questions about equity will arise: Who gets to sell the last barrel of oil? 
Who pays for the transition to renewables? 
And who compensates affected communities and workers? 
But, ultimately, these questions must be addressed, within a broader context of climate justice. 
Climate change has been called the moral challenge of our age. 
This year alone, the world has faced unprecedented floods, hurricanes, wildfires, and droughts on virtually every continent. 
Yet the real storm is yet to come. 
If we are to avoid its most devastating impacts, phasing out coal – climate killer number one – will not be enough. 
A safe climate future requires ending the age of Big Oil. 
The good news is that social change is not a gradual, linear process. 
Rather, it often happens in waves, characterized by “tipping point” moments brought on by the confluence of technological progress, financial incentives, political leadership, policy change, and, most important, social mobilization. 
We seem to be closing in on just such a moment. 
For starters, technology is advancing faster than anyone thought possible. 
Twenty years ago, when we started working on climate issues, we sent faxes, made phone calls from landlines, and developed photos taken on 35mm film in darkrooms. 
Another 20 years from now, we will be living in a world that is powered by the sun, the waves, and the wind. 
Moreover, popular opposition to fossil-fuel development is mounting, generating political pressure and financial and legal risks. 
Ordinary people everywhere have been working hard to halt projects inconsistent with a climate-safe future, whether by protesting against the Dakota Access Pipeline in the United States or the Kinder Morgan Trans Mountain Pipeline System in Canada; by joining the blockade by “kayactivists” of drilling rigs in the Arctic; or by using local referenda to stop oil and mining projects in Colombia. 
Recently, over 450 organizations from more than 70 countries signed the Lofoten Declaration, which explicitly calls for the managed decline of the fossil-fuel sector. 
The declaration demands leadership from those who can afford it, a just transition for those affected, and support for countries that face the most significant challenges. 
Wealthy countries should lead the way. 
Norway, for example, is not just one of the world’s richest countries; it is also the seventh-largest exporter of carbon dioxide emissions, and it continues to permit exploration and development of new oil and gas fields. 
Proposed and prospective new projects could increase the amount of emissions Norway enables by 150%. 
If Norway is to fulfill its proclaimed role as a leader in international climate discussions, its government must work actively to reduce production, while supporting affected workers and communities during the transition. 
Canada, another wealthy country that considers itself a climate leader yet continues to pursue new oil and gas projects, should do the same. 
Some countries are already moving in the right direction. 
French President Emmanuel Macron has introduced a bill to phase out all oil and gas exploration and production in France and its overseas territories by 2040; the Scottish government has banned fracking altogether; and Costa Rica now produces the vast majority of its electricity without oil. 
But the real work is yet to come, with countries not only canceling plans for new fossil-fuel infrastructure, but also winding down existing systems. 
A fossil-free economy can happen by design or by default. 
If we build it purposefully, we can address issues of equity and human rights, ensuring that the transition is fair and smooth, and that new energy infrastructure is ecologically sound and democratically controlled. 
If we allow it simply to happen on its own, many jurisdictions will be stuck with pipelines to nowhere, half-built mega-mines, and stranded assets that weaken the economy and contribute to political polarization and social unrest. 
There is only one sensible option. 
Citizens around the world are championing a vision of a better future – a future in which communities, not corporations, manage their natural resources and ecosystems as commons, and people consume less, create less toxic plastic waste, and enjoy a generally healthier environment. 
It is up to our political leaders to deliver that vision. 
They should be working actively to engineer a just and smart shift to a future free of fossil fuels, not making that future harder and more expensive to achieve. 
(The authors wish to thank Hannah McKinnon of Oil Change International for her help with this commentary.) 

The Foundations of Greece’s Failed Economy 
NEW YORK – Too many politicians and economists blame austerity – urged by Greece’s creditors – for the collapse of the Greek economy. 
But the data show neither marked austerity by historical standards nor government cutbacks severe enough to explain the huge job losses. 
What the data do show are economic ills rooted in the values and beliefs of Greek society. 
Greece’s public sector is rife with clientelism (to gain votes) and cronyism (to gain favors) – far more so than in other parts of Europe. 
Maximum pensions for public employees relative to wages are nearly twice as high as in Spain; the government favors business elites with tax-free status; and some state employees draw their salaries without actually turning up for work. 
There are serious ills in the private sector, too – notably, the pervasive influence of vested interests and the country’s business and political elites. 
Profits as a share of business income in Greece are a whopping 46%, according to the latest available data. 
Italy came in second at 42%, with France third, at 41%. 
(Germany’s share is 39%; the United States’, 35%; and the United Kingdom’s, 32%.) 
Insiders receive subsidies and contracts, and outsiders find it hard to break in. 
Astoundingly, young Greek entrepreneurs reportedly fear to incorporate their firms in Greece, lest others use false documents to take away their companies. 
According to the World Bank, Greece is one of the hardest places in Europe to start a business. 
The result is that competition for market share is weak and there are few firms with new ideas. 
This stunted system springs from Greece’s corporatist values, which emphasize social protection, solidarity instead of competition, and discomfort with uncontrolled change. 
These values may well be beneficial for family life; but, even with the best of intentions, they are a recipe for a static economy and stultified careers. 
Indeed, Greece’s labor productivity (GDP per worker) is only 72% of the level in the UK and Italy, and a mere 57.7% of that in Germany. 
And surveys indicate that mean life satisfaction in Greece is far below that found in the wealthiest EU countries (the EU15). 
Contrary to claims by the Greek government, corporatism impoverishes the less advantaged. 
EU data on poverty rates in 2010 put Greece at 21.4% – far higher than the mean EU15 rate of 16.7%. 
To be sure, Greece saw productivity gains after World War II – but mostly from increases in education and capital per worker, which can go only so far. 
Two important sources of broad prosperity are blocked by Greece’s system. 
One is an abundance of entrepreneurs engaged in detecting and exploiting new economic opportunities. 
Without them, Greece does a poor job of adjusting to changing circumstances (an imperative emphasized by Friedrich Hayek). 
Greece’s much-lauded shipowners, for example, were too slow to adapt to containerization, and thus lost their market share. 
The other source of broad prosperity is an abundance of business people engaged in conceiving and creating new products and processes – often termed “indigenous innovation.” 
Here, Greece lacks the necessary dynamism: venture capital investment flows are smaller, relative to GDP, in Greece than in any other EU country. 
So Greece’s economy has scant ability to create sustained productivity growth and high human satisfaction. 
Some economists believe that these structural considerations have nothing to do with Greece’s current crisis. 
In fact, a structuralist perspective illuminates what went wrong – and why. 
For several years, Greece drew on the EU’s aptly named “structural funds” and on loans from German and French banks to finance a wide array of highly labor-intensive projects. 
Employment and incomes soared, and savings piled up. 
When that capital inflow stopped, asset prices in Greece fell, and so did demand for labor in the capital-goods sector. 
Moreover, with household wealth having far outstripped wage rates, the supply of labor diminished. 
Thus, Greece went from boom to outright slump. 
The structuralist perspective also explains why recovery has been slow. 
With competition weak, entrepreneurs did not rush to hire the unemployed. 
When recovery began, political unrest last fall nipped confidence in the bud. 
The truth is that Greece needs more than just debt restructuring or even debt relief. 
If young Greeks are to have a future in their own country, they and their elders need to develop the attitudes and institutions that constitute an inclusive modern economy – which means shedding their corporatist values. 
Europe, for its part, must think beyond the necessary reforms of Greece’s pension system, tax regime, and collective-bargaining arrangements. 
While Greece has reached the heights of corporatism, Italy and France are not far behind – and not far behind them is Germany. 
All of Europe, not just Greece, must rethink its economic philosophy. 

Four Essential Steps to the Copenhagen Agreement 
NEW YORK – The United Nations Climate Change Conference in Copenhagen this year will be the moment in history when humanity can rise to the challenge and decisively deal with the issue. 
It is beyond the shadow of a doubt that greenhouse gas emissions must be radically reduced to prevent climate change from sliding into climate chaos. 
In 2007, in Bali, the 192 Parties of the UN Framework Convention on Climate Change committed themselves to launching negotiations on strengthened action against climate change. 
This process is to culminate in an ambitious negotiated outcome at the end of 2009, which needs to enter into force before January 2013. 
This leaves just nine months to conclude one of the most complicated international negotiating processes in the world today. 
Last year, negotiators developed a better understanding of what they want from the different aspects of the action plan they agreed in Bali, and they gathered ideas and proposals. 
The political process has now reached a phase at which areas of convergence are emerging. 
These areas will form the basis of an initial draft agreement, to be presented in Bonn in June. 
In order to enter into force around the world before 2013, the Copenhagen agreement must meet the political requirements of all participating countries. 
For this to happen, clarity on four key political points is needed this year. 
First, clarity is needed on ambitious, legally binding emission-reduction targets for industrialized countries. 
Without such targets, the international community will not take the necessary action to address climate change, and developing countries will not have confidence that industrialized countries are willing to take the lead on solving a problem that they caused. 
There are some positive signals in this direction. 
For example, the European Union has agreed to a climate and energy package with which it will be able to reach its target of a 20% emission reduction over 1990 levels by 2020 (30% if other industrialized countries follow suit. within the United States, President Barack Obama has indicated his intention to achieve an 80% reduction of greenhouse gas emissions by 2050, and to return US emissions to 1990 levels by 2020. 
Other countries, such as Russia and Japan, will announce their mid-term targets in the course of this year. 
Second, clarity is essential on the extent to which major developing countries can undertake nationally appropriate mitigation actions beyond what they are already doing. 
For many industrialized countries, particularly the US, it will be very difficult to conclude an agreement unless their citizens see that major developing countries are also willing to engage further. 
A number of developing countries, such as China, India, Brazil, and South Africa, have already developed national climate change or energy strategies that indicate the extent to which they feel that they are able, given their economic constraints, to address the issue. 
Many developing countries are coming forward with ideas for further nationally appropriate mitigation measures that they could take. 
Third, clarity is essential on financing. 
The magnitude of action by developing countries will largely depend on the effective delivery of finance and clean technology through international cooperative action. 
We need to know how significant financial resources will be generated to help developing countries both limit the growth of their emissions and adapt to the effects of climate change. 
Some interesting ideas have been floated. 
For example, industrialized countries have suggested auctioning emission rights and using part of the revenue for international cooperation – something that Germany is already doing. 
The concept also features in the Liebermann-Warner bill, an example of draft legislation on climate change for the US. 
Norway has put forward a proposal to monetize a portion of industrialized countries’ emissions budgets, generating revenue for international cooperation. 
Emissions trading and market-based mechanisms will continue to play a role. 
However, the Bali action plan addresses the need for developing countries to adopt nationally appropriate mitigation actions. 
Because the carbon market cannot be the sole instrument, government-to-government cooperation will be needed as well. 
Finally, clarity is essential on the governance structure under the convention. 
If significant financial resources are to be generated for mitigation and adaptation, developing countries will want a representative say in how that money is to be allocated and spent. 
The governance structures have to function according to democratic principles, founded on equity. 
Many other important concerns will feature in this year’s intense negotiations. 
But clarity in these four areas will be essential for success at Copenhagen. 

The Winning International NGO 
MELBOURNE – It has long been clear that many non-state actors have more influence on international policymaking than a great many sovereign states. 
No one doubts the impact that major multinational corporations and terrorist organizations can have, for better or worse. 
But the role of a number of international non-governmental organizations (INGOs) has been more significant than is generally recognized, and what makes the best of them tick is worth exploring. 
According to current estimates, there are some 40,000 NGOs operating internationally, with the overwhelming majority focusing primarily on health, education, welfare, economics, industry, energy, the environment, human rights, social policy, and governance- and development-related issues. 
A much smaller number – a few hundred at best – work primarily on peace and security issues, though some primarily human rights-focused organizations like Human Rights Watch and Amnesty International are influential here. 
Those that seek to influence foreign-policy outcomes can be typecast, perhaps unkindly, as “thinkers,” “talkers,” or “doers.” 
In other words, they tend to be pure think tanks, research institutions, or policy forums (like London’s Chatham House, the Council on Foreign Relations in New York, or the Brookings Institution in Washington, DC); overwhelmingly campaign-focused advocacy organizations (like Human Rights Watch, Enough, Kony 2012, or Global Zero); or field-based, on-the-ground operational organizations engaged in activities like mediation, capacity-building, and confidence-building (like Search for Common Ground, the Community of Sant’Egidio, or Independent Diplomat). 
The organization with which I was longest and most closely associated, the International Crisis Group (ICG), is an unusual combination of all three categories. 
It is field-based in a way that most operational organizations are, but that think tanks and advocacy organizations are not. 
It focuses, as policy-oriented think tanks do, on analyzing complex conflicts and potential conflicts around the world and identifying workable solutions. 
It campaigns for the adoption of these solutions, but less at the grassroots and more by direct access to high-level policymakers. 
Measuring INGOs’ impact on policy outcomes is more an art than a science. 
The most successful, like Human Rights Watch, Amnesty International, and the ICG, have high visibility among policymakers, and produce analysis and argument that – whether publicly acknowledged or not – regularly becomes part of the currency of debate. 
Their perceived ability to make a difference is usually reflected in their capacity to raise funds, whether from governments or the private sector. 
What does it take for organizations like these to become and remain successful? 
My own experience, as both a government insider and INGO outsider, has been mostly in the area of peace and security, but I think the lessons are generalizable. 
Four criteria seem to be essential: 
First, INGOs must add value, meeting a need that is not currently being met well or at all. 
The primary unmet need seen by the founders of the ICG, for example, was to compensate for governments’ growing incapacity, for both security and budgetary reasons, to develop an accurate picture of what was happening on the ground in conflict zones. 
Open-source reporting and commentary by the media were not doing much to fill the gaps, because resource shortages, particularly in the quality print media, have long been dumbing down international coverage of sensitive and difficult situations. 
Second, successful INGOs are marked by the clarity of their mission. 
The most successful tend to be those that find a clear niche and stick to it. 
When Amnesty International broadened its focus from traditional political and civil rights to the whole range of economic, social, and cultural rights, it seemed for quite some time to lose direction and impact. 
The most insidious temptation to muddy an INGO’s mission occurs when money is potentially available for some project that is not part of its core business, and for which it does not have readily available internal expertise. 
In such cases, diversion and dilution of resources and loss of focus is the inevitable result. 
Third, INGOs require real independence. 
Any INGO in the business of giving advice must be scrupulous about being – and being perceived as – immune from influence by vested interests. 
Some organizations, like Human Rights Watch, solve the problem by refusing to accept any government funding. 
The ICG doesn’t do that, but it has always been absolutely insistent on saying whatever has needed to be said, and in practice governments have been remarkably tolerant of specific criticism, provided it is well-supported and well-argued. 
The final criterion that a successful INGO must meet in order to be taken seriously, at least by government policymakers, is total professionalism. 
If you want to meet governments on their home ground, you have to provide a product that, in terms of the depth and accuracy of its research and the style of its presentation, the best of them are accustomed to and demand. 
And your management – of finance, personnel, and governance – has to be sustained at the level of global best practices. 
The best INGOs develop strong reputations quickly, sustain them indefinitely, and exercise real influence on policymaking. 
But they operate in a highly competitive environment, and will be on a fast track to losing their way if they come to be seen as no longer meeting real needs, remaining sharply focused, or being uncompromising in maintaining their independence and professionalism. 

Four Steps to US Fiscal Health 
WASHINGTON, DC – The United States has a significant budget deficit, likely to be $1.3 trillion (10% of GDP) this year, and the long-term forecasts are worrying. 
According to the Congressional Budget Office (CBO, the leading nonpartisan experts), Social Security, together with Medicare, Medicaid, and other health-care programs, will grow to consume almost all tax revenues by 2035. 
The US can finance these deficits in the short term – in fact, interest rates on US Treasuries have recently fallen to record low levels. 
But if there is no serious effort at fiscal consolidation, serious trouble lies ahead, both for the US and for the world economy. 
Thus, the US urgently needs to begin making four serious changes. 
The first is comprehensive tax reform aimed at aligning tax policy with desirable economic incentives. 
In particular, the US should consider introducing a value-added tax (VAT), widely used in other industrialized countries. 
By levying a tax on consumption at each stage of the production chain, America could reduce the overconsumption that helped feed the recent credit bubble, encouraging savings and investment instead. 
To be sure, a simple VAT is regressive, though it can be made progressive by combining it with a partial rebate or by exempting necessities. 
Moreover, the US should look hard at tax breaks that act like hidden spending programs. 
One place to start is the tax deduction for interest payments on home mortgages. 
The deduction is currently available on mortgages of up to $1 million, this forming a key component of America’s excessive incentives to buy houses – a policy eschewed by most other industrialized countries. 
The second change is carbon pricing, either by auctioning emissions allocations or by taxing carbon directly, at rates that start low and rise over the coming decades. 
Given large potential revenues – in 2008, the CBO estimated that one proposal would yield $145 billion in 2012 and more in subsequent years – it would make sense to dedicate a portion to cushioning the impact of higher energy prices on the poor, while applying the rest to the fiscal balance. 
Opponents argue that carbon pricing would hurt economic growth. 
But a recent study commissioned by The Economistfound that a carbon tax would increase both government revenue and economic output – primarily by replacing existing, inefficient energy subsidies. 
The third change is a tax on the financial sector, in the form of a Financial Activities Tax on profits and remuneration at big banks that enjoy implicit government guarantees. 
The International Monetary Fund estimates that this form of value-added tax could bring in between 0.5 and one percentage point of GDP in revenue. 
Such a tax, moreover, would aim to eliminate the funding advantage that large banks enjoy over their smaller competitors, while limiting the incentive for big banks to become even bigger. 
As the IMF argues, if applied across the G-20, a Financial Activities Tax would help constrain the worst features of the financial system and reduce the competitive distortions created by the megabanks. 
Finally, there is the issue of entitlement spending, which is mainly an issue of health-care costs. 
According to the CBO’s alternative fiscal scenario, growth in Social Security is comparatively modest, from 4.8% of GDP in 2010 to 6.2% in 2035. 
A relatively small change in the parameters of this program could lower its future costs, as was done in the 1980’s. 
At the same time, however, the relative cost of Medicare, Medicaid, and other health care programs will more than double, from 4.5% to 10.9% of GDP. 
There are two ways to reduce the government’s health-care outlays: reduce the amount of health care the government buys, or reduce the cost of health care. 
The simplest solution is to mandate that the government buy less health care – by raising the eligibility age for Medicare, capping benefits for high-income beneficiaries, and so on. 
The problem with this approach is that Medicare is not particularly generous to begin with. 
If the eligibility age were to increase, responsibility for health care for many people would simply be dumped back onto their employers, resulting in higher health-care costs for all working people. 
A better solution is to figure out how to reduce health-care costs. 
This year’s health-care reform legislation, the Affordable Care Act (ACA), is a starting point. 
According to CBO data, the ACA will reduce the long-term fiscal deficit by two percentage points of GDP per year. 
A top priority should be to preserve and expand its cost-cutting provisions. 
Another obvious step to consider is to phase out the tax exclusion for employer-sponsored health plans, which would not only increase revenue, but also end the distorting effects of employer subsidization of health care. 
But efforts to tackle health-care costs continue to be hampered by widespread reluctance to tackle sensitive issues, as epitomized by the “death panel” tempest of a year ago. 
Reshaping the US health-care system to focus on successful outcomes and quality of life, rather than on employing the newest and most expensive technology, is a challenge for which no one yet has a proven solution. 
It remains, more than any other single factor, the key to long-term fiscal sustainability. 

Four Ways Out 
BERKELEY – When an economy falls into a depression, governments can try four things to return employment to its normal level and production to its “potential” level. 
Call them fiscal policy, credit policy, monetary policy, and inflation. 
Inflation is the most straightforward to explain: the government prints up lots of banknotes, and spends them. 
The extra cash in the economy raises prices. 
As prices rise, people don’t want to hold cash in their pockets or their bank accounts – its value is melting away every day – so they step up the pace at which they spend, trying to get their wealth out of depreciating cash and into real assets that are worth something. 
This spending pulls people out of unemployment and into jobs, and pushes capacity utilization up to normal and production up to “potential” levels. 
But sane people would rather avoid inflation. 
It is a very dangerous expedient, one that undermines standards of value, renders economic calculation virtually impossible, and redistributes wealth at random. 
As John Maynard Keynes put it, “there is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. 
The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose…” But governments will resort to inflation before they will allow another Great Depression – we just would very much rather not go there, if there is any alternative way to restore employment and production. 
The standard way to fight incipient depressions is through monetary policy. 
When employment and output threaten to decline, the central bank buys up government bonds for immediate cash, thus shortening the duration of the safe assets that investors hold. 
With fewer safe, money-yielding assets in the financial market, the price of safe wealth rises. 
This makes it more worthwhile for businesses to invest in expanding their capacity, thus trading away cash they could distribute to their shareholders today for a better market position that will allow them to reward their shareholders in the future. 
This boost in future-oriented spending today pulls people out of unemployment and pushes up capacity utilization. 
The problem with monetary policy is that, in responding to today’s crisis, the world’s central banks have bought so many safe government bonds for so much cash that the price of safe wealth in the near future is absolutely flat – the nominal interest rate on government securities is zero. 
Monetary policy cannot make safe wealth in the future any more valuable. 
And this is too bad, for if we could prevent a depression with monetary policy alone, we would do so, as it is the policy tool for macroeconomic stabilization that we know best and that carries the least risk of disruptive side effects. 
The third tool is credit policy. 
We would like to boost spending immediately by getting businesses to invest not only in projects that trade safe cash now for safe profits in the future, but also in those that are risky or uncertain. 
But few businesses are currently able to raise money to do so. 
Risky projects are at a steep discount today, because the private-sector financial market’s risk tolerance has collapsed. 
No one is willing to buy assets and take on additional uncertainty, because everyone fears that somebody else knows more than they do – namely, that anyone would be a fool to buy. 
Although the world’s central banks and finance ministries have been devising many ingenious and innovative policies to stimulate credit, so far they have not had much success. 
This brings us to the fourth tool: fiscal policy. 
Have the government borrow and spend, thereby pulling people out of unemployment and pushing up capacity utilization to normal levels. 
There are drawbacks: the subsequent deadweight loss of financing all the extra government debt that has been incurred, and the fear that too rapid a run-up in debt may discourage private investors from building physical assets, which form the tax base for the future governments that will have to amortize the extra debt. 
But when you have only two tools left, neither of which is perfect for the job, the rational thing is to try both – credit policy and fiscal policy – at the same time. 
That is what the Obama administration is attempting to do right now. 

Shaping the Fourth Industrial Revolution 
GENEVA – Of the myriad challenges the world faces today, perhaps the most overwhelming is how to shape the Fourth Industrial Revolution that began at the turn of the century. 
New technologies and approaches are merging the physical, digital, and biological worlds in ways that will fundamentally transform humankind. 
The extent to which that transformation is positive will depend on how we navigate the risks and opportunities that arise along the way. 
The Fourth Industrial Revolution builds on the Third Industrial Revolution, also known as the Digital Revolution, which entailed the proliferation of computers and the automation of record keeping; but the new wave of transformation differs from its predecessors in a few key ways. 
First, innovations can be developed and diffused faster than ever. 
Second, falling marginal production costs and the rise of platforms that aggregate and concentrate activity in multiple sectors augment returns to scale. 
Third, this global revolution will affect – and be shaped by – all countries, and have a systems-level impact in many areas. 
The Fourth Industrial Revolution has the potential to empower individuals and communities, as it creates new opportunities for economic, social, and personal development. 
But it also could lead to the marginalization of some groups, exacerbate inequality, create new security risks, and undermine human relationships. 
If we are to seize the opportunities, and avoid the pitfalls, of the Fourth Industrial Revolution, we must consider carefully the questions that it raises. 
We must rethink our ideas about economic and social development, value creation, privacy and ownership, and even individual identity. 
We must address, individually and collectively, moral and ethical issues raised by cutting-edge research in artificial intelligence and biotechnology, which will enable significant life extension, designer babies, and memory extraction. 
And we must adapt to new approaches to meeting people and nurturing relationships. 
The scale of the challenge should not be underestimated. 
The Fourth Industrial Revolution could lead to forms of human augmentation that cause us to question the very nature of human existence – and even sooner than one might imagine. 
Consider the impact that mobile technology has already made on our lives and relationships. 
As the novelty of wearable tech gives way to necessity – and, later, as wearable tech becomes embedded tech – will we be deprived of the chance to pause, reflect, and engage in meaningful, substantive conversations? 
How will our inner lives and ties to those around us change? 
These are weighty questions, about which debate will probably intensify in the coming years. 
Of course, technology is not an exogenous force over which humans have no control. 
We are not constrained by a binary choice between acceptance and rejection. 
Rather, the decisions we make every day as citizens, consumers, and investors guide technological progress. 
The more we think about those decisions, the more we examine ourselves and the social models on which we depend, the better our chances are of shaping the revolution in a way that advances our common objectives and upholds our values. 
In this effort, new forms of collaboration and governance, accompanied by a positive shared narrative, will be essential. 
To this end, three key steps are needed. 
First, we must continue to raise awareness and understanding of the issues at stake. 
Decision-making cannot occur in isolation. 
We need an inclusive approach that brings together top minds from all over the world, from both the public and private sectors. 
Second, we must develop comprehensive, constructive narratives about how the Fourth Industrial Revolution should develop. 
For example, we should ensure that values and ethics are at the heart of our individual and collective behaviors, including in capital and financial markets. 
We must move beyond tolerance and respect to genuine care and compassion, with empowerment and inclusiveness becoming guiding principles of our actions. 
Third, we must move to restructure our economic, social, and political systems. 
It is clear that our current governance structures and dominant models of wealth creation are not equipped to meet current or, more important, future needs. 
What is needed now is not small-scale adjustments or marginal reforms, but comprehensive and innovative systemic transformation. 
How the Fourth Industrial Revolution progresses will come down to people, culture, and values. 
New technologies, however remarkable they might seem, are fundamentally just tools made by people for people. 
We must keep this in mind, and ensure that innovation and technology continue to put people first, propelling us toward sustainable and inclusive development. 
Once we get there, we can go even further. 
I firmly believe that the new technology age, if shaped in a responsive and responsible way, could catalyze a new cultural renaissance that will create the sense that we are part of something much larger than ourselves – a true global civilization. 
The Fourth Industrial Revolution can compromise humanity’s traditional sources of meaning – work, community, family, and identity – or it can lift humanity into a new collective and moral consciousness based on a sense of shared destiny. 
The choice is ours. 

Mastering the Fourth Industrial Revolution 
LONDON – Technological innovation has long triggered diametrically opposed reactions: awe of new possibilities for some; for others, fear of disruptive change. 
But most of us don’t even realize what is happening. 
We take change for granted. 
Human ingenuity is far too little recognized or appreciated, particularly in financial markets. 
Investors obsess about more pedestrian concerns: fears about a hard landing in China, the repercussions of falling oil prices, and the risk that some shock could tip a fragile world economy into renewed recession or deflation. 
Obviously, worries about global demand conditions are not unfounded – surely the last thing the world economy needs now is renewed stress. 
Yet, for all our angst about excessive debt and policy inadequacy, nothing is as important as human ingenuity for delivering improved living standards and investment opportunities. 
Indeed, the advent of new technologies holds out the promise of a Fourth Industrial Revolution, the theme of this year’s World Economic Forum meeting in Davos. 
The First Industrial Revolution was based on the steam engine. 
James Watt’s invention, introduced around 1775, powered the nineteenth-century expansion of industry from its origins in England to Europe and the United States. 
The Second Industrial Revolution, from the last third of the nineteenth century to the outbreak of World War I, was powered by developments in electricity, transportation, chemicals, steel, and (especially) mass production and consumption. 
Industrialization spread even further – to Japan after the Meiji Restoration and deep into Russia, which was booming at the outset of World War I. The Third Industrial Revolution arrived at the end of the last century with the manufacture and diffusion of information technology. 
The promise of a Fourth Industrial Revolution consists in advances in robotics, the Internet of Things, big data, mobile telephony, and 3D printing. 
According to one estimate, the successful adoption of these new technologies could boost global productivity by as much as the personal computer and the Internet did during the late 1990s. 
For investors, the fourth revolution offers opportunities for vast profits, akin to those delivered by its predecessors. 
Already, early movers in fourth-generation technologies command eye-popping valuations. 
New eras of rising investment, productivity, and living standards are not just possible; they are probable, recurring with increasing frequency. 
And they are the result of human ingenuity. 
But new eras require more than basic science or garage-based entrepreneurial wizardry. 
To be transformative, technology must be adopted and diffused into everyday life. 
This is easier said than done. 
At the very outset of industrialization, Watt struggled financially and did not successfully commercialize his steam engine until he formed a partnership with the English manufacturer Matthew Boulton. 
More important, history suggests that enthusiasm – in macro and market terms – can run ahead of reality. 
One does not have to be a “productivity pessimist” (arguing, for example, that the indoor toilet was the last great human invention) to acknowledge that many new technologies deliver less than promised or reward investors only with long lags. 
It is worth remembering that early steam power predated Boulton and Watt by nearly a century, and that it took more than a half-century for their invention to overtake conventional water-mill power as the mainstay of nineteenth-century industrial production. 
Volta first discovered electricity cells in 1800, but it took another eight decades to introduce direct current as a means of power transmission. 
Likewise, ENIAC, the first electronic computer, was developed in secret during World War II. 
Computing power and usage grew exponentially over the ensuing decades of the twentieth century; but even as late as the 1980s, the Nobel laureate economist Robert Solow could quip that the computer age was “everywhere but in the productivity statistics.” 
For investors, this consideration holds important implications – among them, the need to be patient and to resist the temptation to overpay early. 
Initially, identifying losers (who remembers Wang Computers?) may be as important as picking winners. 
It is also important to understand how technology can transform seemingly unrelated industries. 
The advent of computing power enabled “big box” retailers in the US – Walmart, Staples, Home Depot, and others – to supplant both mom-and-pop stores and the established retail chains of the 1950s and 1960s. 
Computational power, together with advances in the logistics of transportation, storage, and delivery, enabled retailing on hitherto unimaginable economies of scale. 
Yet today, these same big-box giants are under siege from online retailing, which promises even greater economies of scale and logistical efficiencies, undercutting even the most efficient brick-and-mortar operations. 
Ingenuity it is. 
But, to paraphrase Joseph Schumpeter, it is also destructive. 
In today’s parlance, we speak of “disruptive technologies.” 
But no-one should be gulled by jargon: New ways of producing things often kill off old industries and jobs before the full benefits of the successor mode of production are realized. 
A certain degree of violence inevitably accompanies human progress. 
That is why the executives gathering in Davos this month are discussing how to “master” the Fourth Industrial Revolution. 
For all the awe-inspiring promises of technological advance, theirs is an apt concern. 

Leading the Middle East Into the Future 
SAN FRANCISCO – New technologies are emerging so rapidly that societies in the Middle East are now having trouble coping with their impact. 
By affecting everything from the nature of work to what it means to be human, technological changes could prove overwhelming if we do not collaborate to understand and manage them. 
Around the globe, entire industries are being redefined and created from scratch, owing to groundbreaking developments in artificial intelligence, robotics, the Internet of Things, autonomous vehicles, 3D printing, nanotechnology, biotechnology, materials science, energy storage, and quantum computing. 
We at the World Economic Forum have dubbed this wave of innovation the “Fourth Industrial Revolution,” because it is fundamentally changing the way we live, work, and relate to one another. And these changes will be felt as much in Cairo, Dubai, and Riyadh as in New York, Frankfurt, and Hong Kong. 
New technologies such as the steam engine and the cotton mill launched the First Industrial Revolution, which was accompanied by historic sociopolitical developments such as urbanization, mass education, and mechanized agriculture. 
Thanks to electrification and mass production, the Second Industrial Revolution introduced entirely new social models and forms of work. 
And with the advent of digital technology and instant telecommunications, the Third Industrial Revolution, playing out over the past five decades, has connected the planet and shrunk time and space. 
The Fourth Industrial Revolution will be no less transformative: individual technologies will be influential, but changes in our social and economic systems will do far more to shape our future lives. 
At this stage, there is no consensus on such basic issues as personal-data ownership, infrastructure security, and new disruptive businesses’ rights and responsibilities. 
What is needed is a conceptual framework to help businesses, governments, and individuals anticipate the radical technology-driven shifts – in business models, ethics, and social issues – on the horizon. 
To ensure the future prosperity of the Middle East, its governments and citizens must ask themselves if new technologies are being designed and adapted to meet real social needs, or if they are simply ushering in change for its own sake. 
More generally, we must focus not just on technological progress and economic productivity, but also on how these forces are affecting people, communities, and the environment. 
As the Fourth Industrial Revolution continues, four principles should guide the region’s policies and their implementation. 
For starters, focus should be placed on systems rather than on any individual technology; only by observing how divergent technological, social, and economic forces interact with one another can any country’s leaders and citizens determine and predict how business, society, and economics may change. 
Second, there must be push back against the common fatalistic view that progress is predetermined. 
Communities and individuals should be educated and empowered to master technologies for truly productive purposes, rather than being mastered by them for someone else’s ends. 
If we fail to harness new technologies for ourselves, we will have surrendered our personal and collective agency, leaving little reason for optimism. 
Third, we should design new technologies and systems with the future in mind, rather than blindly accepting change as it comes. 
Integrating transformative technologies into our social and economic systems will require close collaboration between stakeholders in government, industry, and civil society. 
Otherwise, our future will be decided by default circumstances instead of our own collective judgment. 
Finally, social and ethical considerations are not a bug to overcome or override; the region’s shared values should be a central feature of all new technologies. 
If technologies are being used in ways that exacerbate poverty, discrimination, or environmental degradation, they have not been optimized for the future that the people of the Middle East want to build. 
Investments in new technologies are justifiable only if they contribute to a safer, more integrated world. 
No single stakeholder can address all of the Fourth Industrial Revolution’s social and economic challenges, not even government. 
The business community, for its part, must create an environment in which technologies are developed and deployed safely, and with social considerations in mind. 
Governments, too, must be actively engaged in how innovations are introduced to society. 
Policymakers should maintain close collaboration with the technologists and entrepreneurs leading the revolution, lest they fall behind. 
And all of us, as individuals, must stay informed so that we can understand and take action on new issues that emerge from the complex interplay between technology and society. 
The Fourth Industrial Revolution will usher in systemic changes that demand collaborative engagement. As the countries of the Middle East adapt their economies to the impact of new technology, they will need to consider new ways of working together across public and private spheres. 
Because the pace of change will only continue to accelerate, transparency must become greater for all stakeholders, so that every part of society can weigh the risks and rewards of each new development. 
We live in an age of complexity, and sound leadership in the Middle East, as everywhere around the world, calls for a wholesale shift in how we think about collaborative engagement for the future. 
If we are to avoid the dystopian outcomes that technology can easily produce, we must collectively envision the future that we want to create. 

Fragile and Unbalanced in 2012 
NEW YORK – The outlook for the global economy in 2012 is clear, but it isn’t pretty: recession in Europe, anemic growth at best in the United States, and a sharp slowdown in China and in most emerging-market economies. 
Asian economies are exposed to China. 
Latin America is exposed to lower commodity prices (as both China and the advanced economies slow). 
Central and Eastern Europe are exposed to the eurozone. 
And turmoil in the Middle East is causing serious economic risks – both there and elsewhere – as geopolitical risk remains high and thus high oil prices will constrain global growth. 
At this point, a eurozone recession is certain. 
While its depth and length cannot be predicted, a continued credit crunch, sovereign-debt problems, lack of competitiveness, and fiscal austerity imply a serious downturn. 
The US – growing at a snail’s pace since 2010 – faces considerable downside risks from the eurozone crisis. 
It must also contend with significant fiscal drag, ongoing deleveraging in the household sector (amid weak job creation, stagnant incomes, and persistent downward pressure on real estate and financial wealth), rising inequality, and political gridlock. 
Elsewhere among the major advanced economies, the United Kingdom is double dipping, as front-loaded fiscal consolidation and eurozone exposure undermine growth. 
In Japan, the post-earthquake recovery will fizzle out as weak governments fail to implement structural reforms. 
Meanwhile, flaws in China’s growth model are becoming obvious. 
Falling property prices are starting a chain reaction that will have a negative effect on developers, investment, and government revenue. 
The construction boom is starting to stall, just as net exports have become a drag on growth, owing to weakening US and especially eurozone demand. 
Having sought to cool the property market by reining in runaway prices, Chinese leaders will be hard put to restart growth. 
They are not alone. 
On the policy side, the US, Europe, and Japan, too, have been postponing the serious economic, fiscal, and financial reforms that are needed to restore sustainable and balanced growth. 
Private- and public-sector deleveraging in the advanced economies has barely begun, with balance sheets of households, banks and financial institutions, and local and central governments still strained. 
Only the high-grade corporate sector has improved. 
But, with so many persistent tail risks and global uncertainties weighing on final demand, and with excess capacity remaining high, owing to past over-investment in real estate in many countries and China’s surge in manufacturing investment in recent years, these companies’ capital spending and hiring have remained muted. 
Rising inequality – owing partly to job-slashing corporate restructuring – is reducing aggregate demand further, because households, poorer individuals, and labor-income earners have a higher marginal propensity to spend than corporations, richer households, and capital-income earners. 
Moreover, as inequality fuels popular protest around the world, social and political instability could pose an additional risk to economic performance. 
At the same time, key current-account imbalances – between the US and China (and other emerging-market economies), and within the eurozone between the core and the periphery – remain large. 
Orderly adjustment requires lower domestic demand in over-spending countries with large current-account deficits and lower trade surpluses in over-saving countries via nominal and real currency appreciation. 
To maintain growth, over-spending countries need nominal and real depreciation to improve trade balances, while surplus countries need to boost domestic demand, especially consumption. 
But this adjustment of relative prices via currency movements is stalled, because surplus countries are resisting exchange-rate appreciation in favor of imposing recessionary deflation on deficit countries. 
The ensuing currency battles are being fought on several fronts: foreign-exchange intervention, quantitative easing, and capital controls on inflows. 
And, with global growth weakening further in 2012, those battles could escalate into trade wars. 
Finally, policymakers are running out of options. 
Currency devaluation is a zero-sum game, because not all countries can depreciate and improve net exports at the same time. 
Monetary policy will be eased as inflation becomes a non-issue in advanced economies (and a lesser issue in emerging markets). 
But monetary policy is increasingly ineffective in advanced economies, where the problems stem from insolvency – and thus creditworthiness – rather than liquidity. 
Meanwhile, fiscal policy is constrained by the rise of deficits and debts, bond vigilantes, and new fiscal rules in Europe. 
Backstopping and bailing out financial institutions is politically unpopular, while near-insolvent governments don’t have the money to do so. 
And, politically, the promise of the G-20 has given way to the reality of the G-0: weak governments find it increasingly difficult to implement international policy coordination, as the worldviews, goals, and interests of advanced economies and emerging markets come into conflict. 
As a result, dealing with stock imbalances – the large debts of households, financial institutions, and governments – by papering over solvency problems with financing and liquidity may eventually give way to painful and possibly disorderly restructurings. 
Likewise, addressing weak competitiveness and current-account imbalances requires currency adjustments that may eventually lead some members to exit the eurozone. 
Restoring robust growth is difficult enough without the ever-present specter of deleveraging and a severe shortage of policy ammunition. 
But that is the challenge that a fragile and unbalanced global economy faces in 2012. 
To paraphrase Bette Davis in All About Eve, “Fasten your seatbelts, it’s going to be a bumpy year!” 

François Hollande Meets the World 
PARIS – When François Hollande, fresh from his election as France’s next president, was asked by a journalist which language he would use when he meets US President Barack Obama for the first time, his answer was revealing. 
“I speak English more fluently than the former president,” the Socialist leader insisted, referring to the outgoing Nicolas Sarkozy. “But a French president must speak French!” 
In proclaiming his mastery of the lingua franca of global affairs, Hollande was asserting himself as a modern statesman, while also suggesting that France will remain as influential as possible on the international scene. 
Indeed, he was proclaiming his commitment to internationalism and multilateralism. 
In order to remain a country that punches above its weight diplomatically, it is in France’s interest to operate through international organizations rather than to rely on bilateral relationships. 
Hollande is also aware that, for historical and cultural reasons, France’s international role must be different from that of other countries. 
In his book Changer de destin (Changing Destiny), published in February, he affirms that France’s message will continue to be a universal one – a stance reminiscent of the birth in 1789 of the French Republic, which, like the United States, was originally conceived as the triumph of liberty and democracy. 
Unlike in France, however, the word “socialist” is an epithet for most Americans. 
But this could be a source of strength for Hollande, who, as a new leader with no foreign-policy experience, will have to prove his ability through action. 
And here, Obama, in particular, will soon understand that Hollande has no intention of bringing sweeping change. 
On the contrary, his intention will be to appear as a reliable and unsurprising partner. 
Hollande is unlikely to be less friendly with America than was Sarkozy, regarded by many as France’s most pro-US president. 
Hollande supported the military intervention in Libya in 2011, and has joined the condemnation of Syrian President Bashar al-Assad’s regime. 
One of his close political allies recently declared that should the United Nations Security Council approve military intervention in Syria, France “could envision” participating in that effort. 
Hollande also supports a tough line on Iran and, regarding the Israeli-Palestinian conflict, his book indicates that he subscribes to the “Clinton parameters” – two states with secure borders and a status for Jerusalem that is acceptable to both sides. 
With regard to relations between France and the Arab world, one can be certain that Hollande would agree with the pro-engagement thrust of Obama’s 2009 Cairo speech. 
Last but not least, Hollande is not likely to call into question Sarkozy’s decision in 2009 to reintegrate France into NATO’s military command. 
That decision remains controversial in France, including among Socialists, but Hollande is well aware of the weaknesses of a European defense policy that simply cannot compete with NATO. 
Nevertheless, at the NATO Summit in Chicago at the end of May, Hollande will confirm his pledge to withdraw French troops from Afghanistan by the end of 2012, two years ahead of the NATO timetable (though he recognizes the need to negotiate the practical details). 
This will be an important test of Hollande’s ability to deal effectively with allies. 
The second test of his ability to negotiate with other leaders will be within Europe. 
One of the highest-flying proposals of his electoral platform was a call for renegotiation of the European Union’s new “fiscal pact,” endorsed by all member states with the exception of the United Kingdom and the Czech Republic. 
Inspired by German Chancellor Angela Merkel, approval of the pact was a precondition for Germany’s participation in the financial rescue plan for Greece and the other distressed eurozone countries. 
Hollande’s proposal was initially regarded as lèse-majesté against Germany. 
Now all European leaders – from Mario Monti in Italy to Mariano Rajoy in Spain and Elio Di Rupo in Belgium – agree on the need to revive the European economy. 
So do Mario Draghi, the president of the European Central Bank, Jose Manuel Barroso, the president of the European Commission, EU Council President Herman Van Rompuy, and, indeed, Merkel herself. 
Merkel and Hollande will discuss the main question – how to spur economic growth without increasing public debt – on May 15 in Berlin. 
While Merkel opposes Hollande’s proposal to create Eurobonds with a view to financing industrial projects, they cannot afford to waste time in reassuring jittery markets with a message of cohesion. 
Merkel has already welcomed Hollande’s ideas for a growth plan for Europe. 
Hollande, too, will have to make concessions. 
For the French, as for all Europeans, the EU is not a foreign entity, and its decisions are an integral part of domestic policies. 
In this regard, Hollande has a chance to succeed on the international scene as a truly pro-European leader. 
Only a stronger Europe will ensure fair trade with emerging countries, especially China. 
Only a stronger Europe will at last implement the principle of reciprocity in order to protect European businesses and prevent them from relocating, which has been the main cause of unemployment. 
In a recent interview, Hollande declared that, “France is not just any European country, and its president is not just any world leader.” 
The French are happy to hear that. 
But that affirmation also represents Hollande’s main challenge: ensuring that this remains true in the context of twenty-first-century globalization. 

François Hollande’s Wrong Idea of France 
LONDON – France’s new president, François Hollande, has achieved a remarkable series of political victories – at home and in Europe – since his election in May. 
Unfortunately, his streak of success will inevitably call forth an economic reckoning that will shock France’s apparently unsuspecting citizens and doom the French elite’s approach to the “construction of Europe.” 
Since winning the presidency, Hollande has won a parliamentary majority and pushed Germany toward accepting joint liability for eurozone countries’ debts. 
But forebodings of crisis have become widespread in French business and economic circles. 
But the real danger – which even Hollande’s sternest critics may be underestimating – is not so much his individual policy failings (serious though they may be) as his approach to the twin challenges posed by France’s economic imbalances and the eurozone crisis. 
On each front separately, he might manage to muddle through; together, they look likely to cement France’s loss of competitiveness. 
Declining competitiveness is best captured in a single indicator: unit labor costs, which measure the average cost of labor per unit of output. 
In a monetary union, discrepancies in wage growth relative to productivity gains – that is, unit labor costs – will result in a chronic accumulation of trade surpluses or deficits. 
Since the euro’s introduction, unit labor costs have risen dramatically faster in France than they have in Germany. 
According to Eurostat data published in April 2011, the hourly labor cost in France was €34.2, compared to €30.1 in Germany – and nearly 20% higher than the eurozone average of €27.6. 
France’s current-account deficit has risen to more than 2% of GDP, even as its economic growth has ground to a halt. 
The high cost of employing workers in France is due not so much to wages and benefits as it is to payroll taxes levied on employers. 
The entire French political class has long delighted in taxing labor to finance the country’s generous welfare provisions, thus avoiding excessively high taxation of individuals’ income and consumption – though that is about to come to an end as Hollande intends to slap a 75% tax on incomes above €1 million. 
This is a version of the fallacy that taxing companies (“capital”) spares ordinary people (“workers”). 
Of course, such taxes on firms are always passed on to households – usually through straightforward price hikes, and, in France, also through unemployment. 
High tax rates on labor – together with rigid regulation of hiring and firing – make employers extremely reluctant to recruit workers. 
As a result, France has had chronic long-term unemployment – forecast to reach 10.5% by 2013 – for many years. 
Hollande’s predecessor, Nicolas Sarkozy, tried to address this problem. 
He exempted voluntary overtime pay from employment tax and shifted some of the burden of labor taxation onto consumption (via a hike in VAT). 
But Hollande quickly reversed both of these reforms. 
The repeal of the tax break on overtime reflects another economic fallacy to which French Socialist politicians are deeply attached: the “lump of labor” notion that underlay the most disastrous of their economic policies – the 35-hour workweek, introduced in 2000. The idea behind the policy is that demand for labor is a constant, and that this fixed number of aggregate working hours required by employers to meet final demand can be spread more evenly among workers to reduce unemployment. 
Such measures, designed to create jobs by freeing up work hours, are futile at best, and are often detrimental. 
French Socialists should recall their school physics lesson about communicating vessels: when a homogeneous liquid is poured into a set of connected containers, it settles at the same level in all of them, regardless of their shape and volume. 
Generating more “liquid” (jobs) requires not discouraging the entrepreneurs on whose activities sustainable job creation ultimately depends. 
The effect of fiscal and regulatory pressure on employment is to encourage French firms to invest and hire outside France. 
Hollande’s apologists praise his gradualist and consensual approach to addressing the economy’s structural distortions. 
They argue that his penchant for setting up consultative commissions is the best way to forge the consensus required for structural reform, whereas Sarkozy’s combative style was counterproductive. 
Even banishing skepticism and assuming that Hollande could over time persuade his supporters to embrace competitiveness-boosting policies, the eurozone crisis is denying France the time that such gradualism requires. 
A simple, effective way to buy time would be to abandon the euro and restore competitiveness through a devalued national currency. 
But this expedient is incompatible with mainstream French politicians’ devotion to the “European project,” which amounts to a projection of French soft power; indeed, building Europe lies at the heart of the French establishment’s version of what Charles de Gaulle used to call “a certain idea of France.” 
For mainstream French politicians, renouncing the European project to buy the time required to restore competitiveness is as unthinkable as is the logical alternative: an all-out push for full European political union. 
This would reestablish monetary sovereignty and create a normal central bank (like the Federal Reserve or the Bank of England) at the European level. 
But it would also mean abandoning France’s republic in favor of a federal European government – anathema to that “certain idea of France.” 
The combination of gradualism (on the most generous interpretation) in domestic economic reform and the paralyzing effect of the eurozone crisis will lead to a massive shock. 
Remaining in a currency union with the much more competitive German economy will require wrenching and rapid reforms, for which Hollande’s tepid approach will fail to prepare the complacent French. 
The result will be even more support than was seen in last April’s presidential election for extremist political parties that reject both Europe and competitive market capitalism. 

France à la Sarkozy 
Eight months into his presidency, is Nicolas Sarkozy delivering the “rupture” from 30 years of French immobility that he promised? 
Dubbed the “hyper-president” by bewildered media, he has launched a vast number of reforms, many of which were once considered political suicide. 
He has targeted many areas – including universities, the judiciary, foreign policy, immigration, taxation, and the environment – but it is the economy that will prove to be the make-or-break issue. 
Sarkozy’s slogan “work more to earn more” has won him considerable support. 
The crucial test will be his ability to reform the labor market, whose rigidities are widely seen as the main cause of France’s relatively poor economic performance, with an unemployment rate that has never dipped below 8% over the last 25 years. 
While the government has begun many projects, with few exceptions, including tax breaks for the wealthy, most are still in the making. 
The most important concern public employment, pensions, labor legislation, and the length of the workweek, all of which generate fierce resistance. 
The main reason for the slow pace – noting that previous presidents had no pace at all – is a 2005 law that requires that all measures affecting the labor market first be negotiated in good faith with the trade unions. 
Naturally, the unions impede negotiations as much as possible. 
As a result, France is likely soon to surpass Sweden as the world’s highest public spender. 
All French finance ministers lament that they had very little room for cutting costs, given the scope of entitlements, particularly civil servants’ salaries and pensions. 
With half of all current civil servants set to retire over the next ten years, Sarkozy has pledged to replace only one of every two. 
In 2007, the attrition rate was one out of three – short of the pledge, but a sharp reversal from previous decades, in which the ranks of civil servants grew significantly faster than private-sector employment. 
Sarkozy believes that he has a popular mandate to push his labor-market reforms through parliament, where he controls a large majority. 
By contrast, the unions argue that they have “social legitimacy,” a claim that may surprise many outside France, but that holds considerable sway in a country where large-scale demonstrations or drawn-out strikes are interpreted as a valid representation of popular will. 
From the outset, both sides expected a defining fight, which occurred last November, after the government decided to align the retirement age in the public sector with that of the private sector. 
When President Jacques Chirac’s first government attempted such a reform in 1995, railroad workers, who can retire at age 50 or 55, spearheaded the resistance. 
After nearly three weeks of complete stoppage of trains, the government caved in, and soon thereafter lost a general election. 
The 1995 strike became an icon of “social legitimacy,” instilling fear in all succeeding governments. 
But this time around, the unions caved in after nine days, largely because the reform had been explained and promised to the public during the presidential campaign. 
Democratic legitimacy won a major battle over social legitimacy. 
This opens the way to more and deeper reforms. 
A law restricting transport strikes took effect on January 1, and Sarkozy intends to break the 35-hour workweek, albeit indirectly. 
Instead of repealing the law, overtime work is to become easy and relatively cheap. 
He is also preparing to raise the retirement age to 61, from 60. 
Even more provocative are the next steps: a plan to revamp the standard work contract and to require that all workers be invited to vote after eight days of a strike. 
Indeed, probably the most fundamental measure is to transform radically the way trade unions operate. 
Their role is currently codified by a post-1945 law that gives them enormous influence, even though their membership has dwindled to a mere 8% of employees. 
The plan, yet to be fully articulated, is to make them accountable to all workers, not just to their membership – another way of promoting democratic legitimacy, but this time at the heart of the social system. 
One reason why Sarkozy could succeed where previous governments have never dreamt to venture, aside from his popular mandate for reform, is a “win-win” strategy, whereby victory for reform implies substantial compensation. 
For example, Sarkozy has promised that half of the savings from the reduction in public employment will go to higher pay – possibly based on merit, another red line for the trade unions. 
But Sarkozy is not quite turning France, long a country hostile to supply-side reform, into what many would consider a normal economy. 
While he has the right instincts concerning labor markets, he is very French on other issues. 
He is a staunch advocate of industrial policies, which will lead him into sharp confrontation with the European Commission and many of his colleagues. 
He also harbors a deep distrust of financial markets and often advocates more regulation, and sees the strong euro as a threat to French industry and the result of speculation, which has already provoked serious clashes with the European Central Bank. 
On all these issues, much of the decision-making power has been transferred to the European Union, which dramatically reduces Sarkozy’s room for maneuver. 
But France will hold the EU’s rotating presidency in the second half of 2008. 
Nobody’s perfect, least of all Sarkozy, so we should expect some infuriating initiatives. 

France, Enemy of Europe? 
France under President Jacques Chirac is quickly becoming united Europe's biggest nightmare. 
It is bad enough Mr. Chirac is splitting Europe with the promotion of his so-called "multi-polar" foreign policy. 
Now France's blatant flaunting of the EU's Stability Pact, which caps deficit spending at 3% of GDP, is speeding Europe to an important crossroads that threatens to undermine both European monetary union and the euro itself. 
The EU's smaller countries, in particular, are furious with France over its stubborn refusal to play by the EU's deficit spending rules. 
They see French defiance as more than just a narrow issue over fiscal numbers. 
"It concerns whether the big countries are willing to sacrifice any measure of national sovereignty for the European good," said one influential ECB official. 
"The Germans at least are trying to rein in their deficits," the official went on. "But the French simply do not care." 
The act precipitating the current crisis is France's decision to go ahead with the cut in the personal income tax Chirac promised during his election campaign of last year. 
The tax cut will put France's fiscal deficit over the 3% limit three years in a row--at an estimated 4.5% of GDP for 2004--because it will not be financed by offsetting cuts in public expenditure. 
Of course, some believe an income tax cut is precisely what the French economy needs. 
Perhaps. 
But as attractive as an income tax cut may look on narrow nationalistic grounds, there is more than just the French national interest to be considered. 
For if France can get away with its flagrant violation of the Stability Pact rules, others will follow the French lead. 
An orgy of deficit spending throughout the euro-zone economy is certain to result, as welfare state pressure groups in individual member states attempt to make up for prior restraint. 
This will cause many to have second thoughts about European monetary union. 
After all, who wants a monetary union that bloats the welfare state and is an engine for inflation? 
Moreover, once the constraints on deficit spending are off, a major incentive for badly needed structural reform in Europe will be removed. 
Europe's politicians will be tempted to simply jack up the fiscal deficit to boost domestic incomes rather than undergo politically painful but necessary rationalization. 
Structural stagflation--high inflation and low economic growth--will result. 
The EU Commission must act now or face a possible revolt from the smaller countries. 
Sweden's rejection of the euro already has sounded the alarm. 
Hitting the French with a hefty fine--the penalty provided by the Stability Pact--is not a good idea. 
Under its current rules, three big countries (France, Germany, and Italy) could--and probably would--block the sanction. 
Even if the penalty were imposed, the French would not pay. 
France's occupation of the Netherlands during the so-called French Period at the turn of the 19th century suggests a better alternative. 
France then imposed a penalty tax on the province of Zeeland for running a sizeable fiscal deficit. 
When the Zeelanders refused to pay, the French responded by centralizing what had been until that point a rather de-centralized Dutch fiscal system. 
What worked then may work now. 
Centralization of the public finances of member states, though a radical step, may be the only answer to the problem of recalcitrant countries like France that refuse to play by the budget rules. 
After all, the Stability Pact exists in the first place because Europe lacks a common fiscal policy. 
The issue of how much of a double standard the EU's smaller countries are willing to accept has been brought to a head by President Chirac's blatant flaunting of the Stability Pact rules. 
By rejecting the euro, Sweden, itself a small country, made it clear that it didn't want to be part of a Europe that discriminated against small countries. 
What will it take, one wonders, before others among the smaller member countries follow suit? 


France and Germany Must Act in Iraq 
Next week, President Bush, President Chirac, and Chancellor Schroeder will meet on the cliffs of Normandy to mark the 60th anniversary of the D-Day invasions that led to the liberation of Europe. 
They should also seize the moment to liberate themselves from the bitterness that has divided the Atlantic Alliance over the Iraq War, argue Pierre Lellouche and Christoph Bertram. 
When the United States launched the war against Saddam Hussein's Iraq, France and Germany rightly warned that the invasion could well end up worsening instability in the Middle East and increase the threat of radical Islamic terror. 
But now that America and its coalition have proven themselves to be incapable of bringing stability to Iraq on their own, the French and German governments can no longer rest and smugly say, "I told you so," as the situation deteriorates even further. 
Both governments must now become seriously and fully engaged in what must now be a united Western effort. 
Of course, it would be best for everyone - France and Germany included - if the current US-led coalition were to succeed and Iraq could turn into a pillar of Middle East stability and modernization. 
Yet, however desirable this outcome, it is no longer likely (if it ever was). 
Internal stability and economic recovery continue to be elusive, with the specter of civil war hovering ever closer. 
A divided Iraq at war with itself would be a disaster for the region, for America's international credibility and authority, and for transatlantic relations. 
In an already fragile region, a major Arab country like Iraq would most likely prompt interventions by its nervous neighbors - of which there is no shortage - if it turns into a failed state. 
Instead of the rule of law, there would be the law of the mafia, of terrorist groups, and of tribal militias. 
Many of them are already in place. 
Instead of moving toward modernization and development, the region would be confirmed as a cockpit for conflict, a threat to itself and to the world beyond. 
Were the US forced to withdraw in failure, Islamic terrorist groups would claim a historic victory, promising more bloodshed for the West. 
Moreover, America might also once again retreat bitterly into isolationism, blaming her failure on the UN and on disloyal European allies. 
So the stakes are high in Iraq, for Europeans no less than for Americans. 
That is why it is time that even those who have been most skeptical about US policy in Iraq start to do something about it. 
Both Jacques Chirac and Gerhard Schroeder have repeatedly pronounced that what happens in Iraq is a strategic challenge to their countries. 
Yet their actions in response to this insight have been modest. 
The recent turmoil in Iraq has, on the contrary, strengthened those in both capitals who argue that there is now even less reason to get involved on the ground. 
At the very least, France and Germany are demanding that the Bush administration openly admit to its failure and the need for help. 
Yet not only is such a demand naïve, with the Bush team battling for re-election, it is not at all certain that most of America's European allies would heed a US call for solidarity if one were issued. 
Confronting the threat that an unsettled Iraq poses to Europe and to the transatlantic relationship implies stopping these tactical games. 
The passing of authority in Iraq from the US-led coalition to an Iraqi government and the need for a much stronger UN role now offers the chance and imposes the need for everyone to stop posturing and get serious. 
For their part, EU governments should provide the UN - on whose involvement in Iraq they have long insisted - with the protective force it needs to prepare nation-wide elections in Iraq later in the year, and ask others to join. 
A UN staff protected by US marines simply cannot do that job. 
With the consent of both the US and Iraq's new leadership, EU governments should also offer to organize an international conference uniting all those with a stake in Iraqi stability, including Iraq's neighbors, to work out a strategy and commit resources in order to save Iraq from slipping into protracted turmoil. 
If Europe is to act, France and Germany must lead. 
Precisely because they opposed the war, they are now the only countries that can restore Europe's unity of action in promoting stability. 
France professes to bearing a special responsibility for international order, but so does Germany; only a few weeks ago, Chancellor Schroeder based his claim to a permanent German seat in the UN Security Council on Germany's readiness to shoulder such responsibilities. 
Of all the crisis regions in the world today, instability in Iraq constitutes the greatest challenge to international order. 
But France and Germany can also block European responsibility for international order and for solidarity with a US facing possible defeat in Iraq. 
The decision is theirs. 
It is time for both to realize that the consequences of inaction will be no less severe for the region than for the Atlantic relationship. 

The Battle of the Burkini 
LONDON – There has been a lot of fuss lately about the handful of Muslim women who choose to bathe on French beaches wearing a special garment that covers the head (not the face), and much of the body. 
That garment – the so-called burkini – was invented in 2004 by an Australian-Lebanese woman named Aheda Zanetti, with the goal of enabling even the strictest Muslim women to swim or play sports in public. 
Little did Zanetti know that her creation would generate a national controversy. 
The imbroglio started when mayors in several southern French seaside towns banned burkinis on their beaches. 
A grotesque photograph soon appeared in newspapers around the world of three armed French policemen forcing a woman to undress on a beach in Nice. 
Though the ban has now been invalidated by France’s highest court, it is still enforced in several seaside resorts. 
And, indeed, the controversy is far from over. 
Former French President Nicolas Sarkozy, who is now running for a new term, recently called the burkini a “provocation,” while Lionnel Luca, the mayor of Villeneuve-Loubet, spoke of “rampant Islamization.” 
The equally outraged Prime Minister Manuel Valls has called bare breasts a symbol of French republican liberty. 
After all, he concluded, wasn’t Marianne, the female symbol of the French Republic, usually depicted with her breasts exposed? 
There is little doubt that Sarkozy’s opposition to the burkini is entirely opportunistic. 
The controversy represents yet another opportunity to stoke prejudice against an unpopular minority, in the hope of siphoning votes from the far-right National Front’s Marine Le Pen in the 2017 election. 
But, in a tradition that spans centuries of European missionary zeal, his opportunism has been cloaked in moral terms: “We don’t imprison women behind fabric.” 
Sarkozy would have us believe that the ban on burkinis is really meant to liberate Muslim women from primitive restrictions imposed by authoritarian Muslim men, just as British colonial rulers once liberated Indian Hindu widows from being burned alive to accompany their spouses in death. 
This reflects a broader tendency, which has been gaining traction since the end of the last century, to couch anti-Muslim rhetoric in the language of human rights, as though equal rights for women or gays were ancient Western customs that must be defended against alien religious bigotry. 
In Valls’s version of history, public nudity is a cherished French tradition and a sign of freedom. 
To be fully French, it seems, women must, like Marianne, bare their breasts. 
Yet, in the nineteenth century, when Marianne became a symbol of the French Republic, nudity was acceptable only in an idealized form, in paintings or sculptures of Greek deities and other mythical heroines. 
It was fine to gaze at the breasts of a painted nude Marianne or Venus; but for a real, living woman to expose even part of her ankle was considered highly improper. 
Of course, nowadays, these attitudes are rare in the Western world. 
So even though Valls’s version of history is skewed, one might argue that European Muslims who insist that women of their faith should be covered up are out of step – especially given that women sometimes have little choice in the matter. 
Indeed, in some immigrant areas, Muslim women feel obliged to cover their heads, lest Muslim men see them as prostitutes, who may be molested with impunity. 
But this is not always the case. 
Some Muslim women actually choose to wear a hijab and, in rare cases, a burkini. 
The question is whether the state should be determining what citizens should or should not wear. 
The French republican answer is that people may wear whatever they like in private, but must conform to secular rules in public. 
In recent years, however, those rules have been applied more strictly to Muslims than to members of any other faith. 
I have not heard of policemen forcing orthodox Jewish women to bare their heads by ripping off their wigs. 
Well, some might argue, orthodox Jews are not responsible for massacres in the name of their religion. 
And that is true. 
But the assumption that women in burkinis are all potential terrorists is farfetched. 
A woman lying on a beach in a body-covering swimsuit is probably the least likely person to start shooting or bombing. 
As for the argument that Muslim women need the state to free them from Muslim men who force them to wrap their heads in scarves or cover up their bodies, the question is whether this is worth depriving other women of their choice to appear in public in these ways. 
I am inclined to doubt that it is. 
The best way to help women escape from domestic authoritarianism is to encourage them to lead public lives as well, in schools, in offices, and on beaches. 
It is better for a woman to be educated in a headscarf than not to be educated at all. 
For certain public functions, it is perfectly legitimate to ask people to show their faces. 
Some jobs come with certain dress codes. 
Private companies can insist on their own rules; there is no need for national legislation. 
The excessive imposition of conformity by the state can actually have the opposite effect than what is intended. 
Forcing people to adhere to a common identity fosters a rebellious insistence on difference. 
It is no good telling people named Fatima or Mohammed that they are French and must adhere to the norms laid down by Sarkozy or Valls, if they are not treated as equals by people called Nicolas or Marianne. 
Wearing a headscarf, beard, or bodysuit can be a harmless way for humiliated people to defend their pride. 
Take away that pride, and defensiveness can swiftly become less harmless. 

Sustaining Europe’s Security Trio 
BERLIN – Despite the tensions generated by Brexit, the leaders of France, Germany, and the United Kingdom have stood together in disputes between the European Union and the United States. 
If their unity can be sustained, Europe’s “big three” (E3) will serve the EU very well in a tumultuous future. 
French President Emmanuel Macron, German Chancellor Angela Merkel, and UK Prime Minister Theresa May seem to have read from the same script regarding US President Donald Trump’s withdrawal from the Iran nuclear deal and his rejection of the final communiqué of the G7 summit in June. 
They all disapprove of Trump’s decisions to move the US embassy in Israel to Jerusalem and to withdraw the US from the United Nations Human Rights Council. 
And they have all criticized his escalating trade war with China. 
This unity is not merely rhetorical. 
The UK has lately supported EU integration projects concerning foreign and security policy – much more so than before the Brexit referendum. 
This includes the decision to establish new headquarters for military training missions – which many view as the nucleus for a potential European military – in Africa. 
Britain had long resisted this initiative. 
The catalyst for the UK’s change of course, it seems, is Trump. 
There is significant evidence suggesting that Trump views the EU and some of its member states as adversaries, rather than allies. 
While the US will remain the most important ally of the EU and NATO’s European members, it is no longer the most reliable one. 
This shift has dashed hopes in the UK that post-Brexit Britain would be able to capitalize on its “special relationship” with the US, and it has highlighted for the EU the urgency of increasing its own strategic autonomy. 
While the North Atlantic alliance will remain critical to European security, the EU now seeks to build the capacity to define its own strategic priorities and, if needed, act upon them, whether alone or with partners. 
Achieving this objective, defined in the EU’s 2016 “Global Strategy,” will be much easier with the UK on board. 
The fact is that the EU and the UK have more international clout together than separately. 
The UK has significant diplomatic experience, international influence, and military and economic resources that can be brought to bear on joint ventures, just as the EU’s backing can provide a major boost to UK policies on the world stage. 
This applies to démarches regarding major actors like China or Russia, sanctions regimes, international agreements, and strategic programs like Galileo, the European satellite navigation system. 
How exactly a post-Brexit UK can be institutionally associated with common EU decisions on foreign policy, security, and defense will have to be determined in the exit agreement. 
But it is possible to create a format that gives the UK a voice, not a veto. 
In the meantime, no decisions should be taken that would prevent or undermine the UK’s post-Brexit coordination with EU foreign-policy positions, actions, and instruments. 
Moreover, steps can and should be taken today to strengthen ties between the EU and the UK. 
Here, collaboration among the E3, in particular, is crucial. 
The E3 has already proved its potential. 
It initiated negotiations with Iran over its nuclear program as early as 2003, and became the nucleus of the E3-plus-3 (China, Russia, and the US), which – along with the European Union – concluded the Joint Comprehensive Plan of Action (JCPOA) with Iran in 2015. 
In the wake of Trump’s decision to withdraw the US from the JCPOA, the E3 – together with the EU’s High Representative for Foreign Affairs and Security Policy – will prove integral to saving it, and to developing more wide-ranging solutions for dealing with Iran. 
But the E3 has an important role to play in other areas, too, including the conflicts in Syria and Yemen, the ongoing Israel-Palestine dispute, instability in North Africa, and maritime security in the Mediterranean, the Indian Ocean, and the South China Sea. 
Depending on the issue, other relevant EU member states – such as Italy, Poland, or Spain – will have to join the E3 in developing policies or negotiating agreements. 
E3 initiatives should always be coordinated with the EU’s high representative, in order to take full advantage of the bloc’s legitimacy and resources. 
More frequent and visible strategic coordination among the E3 would support the ability of the EU and the UK to reap the benefits of mutual cooperation. 
It may also serve as a foundation for a pragmatic Brexit agreement that maintains close cooperation between the UK and the EU on foreign and security policy. 
Whether the EU likes it or not, a credible joint initiative by France, Germany, and the UK would have a greater impact on the likes of Iran, Russia, China, or even the US than a common EU position emanating from a debate in the EU’s Political and Security Committee. 
Fostering deeper E3 collaboration, of the kind that has been seen recently, must remain at the top of the EU’s foreign-policy agenda before and after Brexit. 
The fact that France, Germany, and the UK will all be members of the UN Security Council for the 2019-2020 period – France and the UK as permanent members, and Germany as an elected member – will add heft to cooperative action among them. 
Moreover, close collaboration within the Security Council could help to structure EU-UK foreign-policy coordination in the immediate post-Brexit transition period. 

A Progressive Political Alliance for Europe 
WASHINGTON, DC – In less than three weeks, we will know who will be the next president of the United States. 
What kind of partner that president finds in Europe will depend substantially on the outcome of two elections in 2017: France’s presidential election in early May and Germany’s federal election by the end of October. 
Of course, the United Kingdom’s exit from the European Union will have an impact on the future shape of Europe. 
The “hard Brexit” option that has gotten a lot of attention lately – particularly since British Prime Minister Theresa May announced her intention to focus on limiting immigration, even if it means losing access to the single market – would by itself change the way Europe functions. 
As French Prime Minister Manuel Valls recently wrote, the key question facing Europe’s leaders is whether to “give up and leave the European project to a slow but certain death” or to “transform the EU.” 
Such a transformation would be no easy feat. 
It would require not only a new institutional vision for Europe, but also a major political restructuring, not least in France and Germany. 
A viable institutional vision, which I described well before the Brexit vote, is to establish “two Europes in one.” 
The eurozone countries would form a more deeply integrated “Europe A,” while another group of countries would comprise a more diverse and loosely connected “Europe B.” 
The two Europes would be strongly linked, with some arrangements differing among the various members of Europe B. Together, the two Europes would be part of the post-Brexit “continental partnership,” which might eventually even replace the EU altogether. 
It is a somewhat radical vision, one that can be fulfilled only if political forces are willing to embrace it, not least in France and Germany. 
Each country’s political leadership would need to be guided – indeed, energized – by the objective of saving “Europe.” 
Specifically, that means pursuing an economic policy that balances competitive markets and social solidarity, with substantial space for local diversity. 
In both France and Germany, such a political dynamic would depend on an alliance of center-right and center-left pro-Europe forces – one that could overcome and ultimately dissipate each camp’s more extremist elements, thereby ensuring that anti-European political tendencies cannot block progress. 
To give a concrete – and provocative – example of what such a realignment might look like in France: a center-right President Alain Juppé could cooperate with a Prime Minister Emmanuel Macron trying to develop a “beyond the past” young center-left movement. 
As for Germany, the center-right Christian Democratic Union (CDU) is, on the whole, insufficiently pro-European. 
Internally, it is limited by a conservative wing defined by views that are not compatible with long-term progress in Europe. 
Externally, it is limited by the far-right Alternative for Germany (AfD), which has lately grown in popularity. 
In this context, even if Chancellor Angela Merkel’s CDU does emerge with the most votes next year, it will need help to build a new Europe, with more joint responsibilities for countries in Europe A and flexible arrangements with countries in Europe B. Specifically, the pro-European elements of the CDU must work with allies on the left – namely, most of the Social Democrats and the Greens. 
Such an informal coalition has often allowed pro-Merkel projects to win support in Parliament, despite opposition from right-wing elements of the CDU. 
But, to save Europe, it must become deeper and more reliable, with common goals dominating a shared agenda. 
The need for a realignment of political forces is not unique to France and Germany. 
There is a broad need for reformist and realistic globalizers to join forces to take on populist movements seeking to twist nostalgia into extreme nationalism, built almost exclusively on identity politics. 
The world has changed substantially in recent decades, and Europe is no exception. 
It makes little sense to expect the old alignments to be able to respond adequately to today’s policy needs or political dynamics. 
Consider how difficult it has been for Spain to find a new majority – a two-year-long process that has yet to end. 
Against this background, a political reshuffling is almost inevitable; the party shifts and conflicts that have characterized the ongoing US presidential election exemplify this. 
But that reshuffling could lead to a number of outcomes. 
To secure a positive, open, and prosperous future for Europe, it is critical that the forces that come out on top are those that recognize the huge benefits of politically and economically open societies, as well as the need for national and global public policies to promote more inclusion. 
But even if progressive center-right and center-left forces manage to overcome their backward-looking counterparts, it will not be enough. 
The traditional political structure always risks being taken hostage or outflanked by identity-focused populists. 
That is why forward-thinking political groups must overcome their differences in a more structural manner to advance a new institutional vision of Europe. 
Such a deep political restructuring aimed at building new progressive majorities will be difficult, and it will not happen overnight. 
But it is Europe’s only option. 
Without it, “Europe” will die, and the assault on economic openness and democratic values will continue to gain traction around the world – with potentially devastating consequences. 

Europe’s Hard-Core Problem 
PRINCETON – President Emmanuel Macron’s election in France and the likely continuation of Angela Merkel’s chancellorship in Germany are dramatically at odds with developments in the rest of Europe, which has become increasingly unstable and unpredictable. 
One wonders if the European Union’s hard Franco-German core is becoming too hard for the rest of the bloc. 
If so, those who dream of “ever closer” European integration may have to settle for a modestly enlarged Franco-German axis. 
Europe today is being torn apart by centrifugal forces, including Catalonia’s secessionist movement and the more muted push for autonomy in the Italian regions of Lombardy and Veneto. 
Right-wing populism is in power in Hungary and Poland, and may now be resurgent in Austria, too. 
Left-wing populists govern in Greece, and centrist populism seems to be coming to the Czech Republic, where the mogul Andrej Babiš is on track to be the country’s next prime minister. 
Obviously, the EU is producing a bitter backlash from voters across the political spectrum, as the name of Babiš’s triumphant party, “Action of Dissatisfied Citizens,” would suggest. 
But what is not obvious is the root cause of that dissatisfaction. 
It is often said that populism is an inevitable response from globalization’s victims. 
But this claim is belied by strong economic performance in the Czech Republic, Hungary, and Poland. 
And it doesn’t explain why the Catalan crisis erupted just as Spain was staging a strong economic recovery, or why Greece remains vulnerable. 
Meanwhile, another favorite culprit, refugee inflows, has a compelling alibi: there are actually very few asylum-seekers in the countries spearheading attacks on the EU’s migration policies. 
To identify the root of European discontent, we need to examine the long-held expectation that leadership in Europe must always come from the Franco-German partnership, which was the primary driver of European integration for decades. 
In the post-war period, French President Charles de Gaulle worked closely with West German Chancellor Konrad Adenauer, and this carried through until the 1990s, when François Mitterrand and Helmut Kohl forged a close friendship. 
Owing to this history, it was long assumed that if France and Germany agree on something, the rest of Europe should simply fall into line. 
But during the eurozone debt crisis, which began in late 2009, power started to shift away from France, and toward Germany, and many in Europe began to regard both as bullies. 
In opinion surveys, French and Germans now rank low in other Europeans’ assessments of trustworthiness. 
Merkel, to be sure, has been polarizing. 
Before September 2015, many Europeans believed her to be too devoted to an austerity regime that had intensified the euro crisis. 
Then, she led Europe’s humanitarian response to the refugee crisis, earning praise from former critics but condemnation by populists and other anti-EU nationalists, particularly in the United Kingdom, France, and Central Europe. 
Now, populists blame her for not just refugees, but for terrorism, too. 
Similarly, Macron has not done himself any favors in Central and Eastern Europe. 
His criticism of the Posted Workers Directive – which allows workers from the region to undercut Western European wages and avoid payroll taxes – has made him as much a villain as Merkel in some countries. 
During the euro crisis, many Greek, Italian, and Spanish politicians saw France as a counterweight to Germany. 
They thought that France could temper Germany’s austerity push and advocate for higher public-sector investments. 
But this was an illusion, and a misreading of France’s role in the Franco-German partnership. 
According to the traditional division of labor, France provides security and the means for Europe to project power abroad; and Germany oversees finance and economics at home. 
When Europe was confronted with a security challenge after Russia’s 2014 annexation of Crimea, the Franco-German engine ran rather efficiently. 
But the EU’s critics do not like the idea of coordinated foreign policies any more than they liked the idea of fiscal and monetary discipline being imposed in the middle of a recession. 
Still, even as the Franco-German partnership has drawn fire, it has also gained salience, owing to the UK’s decision to leave the EU. 
Before the 2016 Brexit referendum, many on the EU’s periphery saw the UK as a barrier to French dirigisme and German power grabs. 
Now, the UK is at the mercy of Germany and France as it negotiates its exit. 
The press photographs of British Prime Minister Theresa May’s visit to Brussels on October 20 were telling, because they recalled the moment when, at an EU summit in November 2011, Merkel and former French President Nicolas Sarkozy rolled their eyes at Italian Prime Minister Silvio Berlusconi. 
Within a couple of weeks, Berlusconi was out of government. 
Looking forward, France and Germany urgently need to develop a shared vision that transcends their own national politics and embraces genuine EU-level reform. 
There is already some agreement on the need for defense coordination and tax harmonization. 
But that is not enough. 
France and Germany still need to address many questions with respect to fiscal centralization, sovereign-debt restructuring, and other fundamental issues. 
And regardless of whether France and Germany agree on any given issue, all policy areas need to be opened up to a bargaining process that includes all other EU member states. 
The rest of Europe needs to feel as though it has a seat at the table. 
This could be accomplished with EU-level candidate lists for the European Parliament, as Macron recently proposed; or with formal mechanisms to engage Europe’s regions and cities, so that the European Council is not reserved exclusively for member states. 
Ultimately, the EU can still develop, but only if it frees itself from narrow French and German priorities. 
What Europe needs now is not a hard core, but a hard think. 

Europe’s Bretton Woods Moment 
PRINCETON – After years of paralysis during the debt crisis that began in 2009, the European Union seems to have regained some momentum. 
In France last year, Emmanuel Macron and his La République En Marche ! won the presidency and a strong parliamentary majority. 
And in Germany, after much delay, the center-left Social Democrats are currently voting on a new coalition agreement with the center-right Christian Democratic Union and its Bavarian sister party, the Christian Social Union. 
The hope now is for renewed Franco-German cooperation and a new Élysée Treaty, updating the historic 1963 agreement negotiated by German Chancellor Konrad Adenauer and French President Charles de Gaulle. 
A new arrangement might involve more spending at the EU level and overcoming old German taboos against a “transfer union.” 
But, to have the desired effect, the Franco-German vision for Europe must be fresh and bold enough to capture the popular imagination. 
Many Europeans are fed up with technocratic fixes negotiated behind the scenes and empty invocations of universal ideals. 
People need ideals, but they also need sensible, concrete measures. 
Consider some of the grand bargains of the past, not just in 1963, but in the immediate aftermath of World War II, when liberal-democratic systems were fundamentally reconceived. 
The world ended up not just with new institutions, but also with a new way of thinking about social, political, and economic interconnectedness. 
For Europe, the historical lesson is that a genuinely concerted effort to address institutional and philosophical imperatives is indeed possible. 
One promising proposal contained in the German coalition agreement is for a new European Monetary Fund (EMF), to be overseen by the European Parliament. 
An EMF could represent a significant improvement on the EU’s current intergovernmental financial-bailout institution, the European Stability Mechanism. 
Moreover, it might provide a model for other parts of the world. 
In fact, similar efforts to link regional-cooperation mechanisms to global financial institutions are already underway in Asia, through the Chiang Mai currency-swap initiative and the Asian Infrastructure Investment Bank. 
Europe, for its part, has long been fixated on Bretton Woods, the 1944 conference in New Hampshire that, among other things, created the International Monetary Fund and a rules-based international monetary system of fixed but adjustable exchange rates. 
Ever since the breakdown of the so-called Bretton Woods system in the early 1970s, France and Germany have been trying to find a European-level equivalent. 
For example, a 1978 initiative by French President Valéry Giscard d’Estaing and German Chancellor Helmut Schmidt led to the creation of a European Monetary System with fixed but adjustable exchange rates, and provided for the establishment of an IMF-style European Monetary Fund within two years. 
But that incarnation of the EMF was stillborn, owing to opposition from the German Bundesbank. 
And when the idea was revived again during the financial turmoil of the early 1990s and in the early stages of the euro crisis, it gained no more political traction than it did in the late 1970s. 
Still, it is worth looking back to the Bretton Woods conference, which responded to the interwar backlash against globalization by treating poverty, autarky, and war as causally interlinked phenomena. 
The post-war project of enlightened internationalism allowed multiple countries to align their interests as economic agents, and integrated states and markets. 
The new system was undoubtedly based on high-minded idealism, but it was an idealism that corresponded to concrete and realistic – even cynical – measures and institutions. 
For every country other than the United States, the post-war settlement was in fact sugar coating on the bitter pill of dollar hegemony, which favored American companies and workers. 
And within the US, Bretton Woods was sugar coating on the bitter pill of internationalism, for which distaste lingered from the interwar period of “America first” isolationism. 
The question now is whether a similar settlement can address contemporary concerns about the legitimacy of European-level political processes. 
One often-overlooked feature of the original Bretton Woods architecture is that it tried to link economic and political interests with security interests. 
In 1944-1945, the five largest shareholders of the IMF and the World Bank – the US, the Soviet Union, the United Kingdom, China, and France – were the same countries that would end up with permanent seats on the United Nations Security Council. 
Yet, after the communist revolution in China and the Soviet Union’s failure to ratify the Bretton Woods Agreement, the IMF and the World Bank went in a different direction. 
The Soviet Union and the People’s Republic of China were excluded (at least initially in the case of China), and the security aspect of the post-war settlement never materialized. 
Now is the time for Europe to revive it, and to create a model of interconnectedness for the rest of the world to follow. 
Over the last eight years, most proposals to deal with the euro crisis have been arcane and overly wonky, appealing only to technocrats and insiders, while leaving the broader public mystified. 
What is needed now is a grand bargain to link economics and the big security issues of a world that is being upended by the likes of Russian President Vladimir Putin and US President Donald Trump. 
More to the point, Europe’s heads of state need to devise a settlement that breaks down the conceptual silos between economic issues – which are mistakenly treated as zero-sum battles for resources – and defense, which is widely recognized as a shared concern. 
It is time to bring back the comprehensive thinking of 1944-1945, which emphasized collective goods over narrow interests. 

France Goes to Hollande 
PARIS – France has now conducted its ninth presidential election under direct universal suffrage. 
And, for the first time in 17 years, after three consecutive defeats, the left – embodied in the Socialist candidate, François Hollande – will return to Élysée Palace. 
Indeed, the first implication of this unquestionably significant election is that it confirms a return to stability. 
France is the largest country in Europe to have so much trouble finding its balance. 
Its revolution in 1789 initiated a long period of profound instability, featuring two empires, three monarchies, and five republics. 
The French have gone through 13 constitutions in less than 200 years. 
At 54 years old, the current Fifth Republic is the second longest-lasting regime since the revolution. 
At times, there has been talk of a Sixth Republic, which would address limited but real concerns and difficulties. 
But voter turnout in the latest presidential election (80% in the first round, and 81% in the second round) leaves no doubt: our current system is strong, and we French are attached to it. 
But the primary importance of the election result is the left’s return to power for only the second time in 31 years. 
In fact, when François Mitterand was elected in 1981, the left had been out of power since 1957. 
Back then, the Communist Party was still powerful, and maintained close ties with the Soviet Union. 
The prospect that the Party could come to power in an electoral alliance with the Socialists struck fear in opponents. 
The Socialists, for their part, had not yet shed their intellectual skin. 
Mitterand’s political program was a hymn to economic planning, and the free market was still, for him, synonymous with oppression. 
Today, there is no longer international communism, or, for that matter, French communism. 
We remember having seen the left govern without drama. 
Its two passages to power – ten years under Mitterand and five years with Prime Minister Lionel Jospin – forced the left to reconcile with reality. 
France’s international reputation was not damaged, and, at home, the left’s performance, especially concerning unemployment, compared well with that of other governments. 
So, there will be no panic this time. 
On the contrary, the left’s return to power appears to be an entirely normal, almost trivial, example of alternation in government. 
In fact, Hollande’s victory was underpinned not by a leftward shift among the electorate, but by voters’ rejection of Nicolas Sarkozy. 
Indeed, the result represents a stunning and historic defeat: during the Fifth Republic, three sitting presidents – Charles de Gaulle, Mitterrand, and Jacques Chirac – have been reelected after their first term in office. 
Only Valéry Giscard d’Estaing, weakened by the long decline of Gaullism, was not. 
The rejection of Sarkozy is very different; above all, it is a matter of style. 
There remains a type of royalism among the French, and our constitution has many features of an elective monarchy. 
With his over-familiarity, simplicity, and occasional vulgarity, Sarkozy undermined the dignity of his sacred function. 
This was not forgiven, and was judged more severely than the shortcomings of his presidential record, which was not significantly worse than that of his predecessors. 
Moreover, in substantive terms, Sarkozy’s tax policies, in particular, favored the upper classes and the wealthy. 
So a powerful combination of social and economic anger emerged, particularly given the perception that the excessive greed of financiers and bankers was the primary cause of the crisis that erupted in 2008, and that still menaces us today. 
A social and political correction was necessary, and it has occurred with a vengeance unique to France. 
But the state’s coffers are dangerously depleted, and France now finds itself among the many countries whose debt burden compromises the eurozone’s existence. 
Thus, it is now subject to the discourse of economic orthodoxy, which, in insisting that all debts be paid to the penny, ignores that public spending is also an engine of growth. 
Just how much will actually have to be repaid? 
With Germany as the primary exponent of orthodoxy, the debate has raged on. 
But now we see that austerity has plunged Greece, Portugal, and especially Spain and Italy deeply into recession. 
The president of the European Central Bank, as well as the International Monetary Fund, acknowledge the gravity of the problem. 
But what happens if we refuse to accept Germany’s position? 
The victory of Hollande, who has said that he wants to “renegotiate” the European Union’s new, German-backed “fiscal compact,” will weigh heavily in this debate. 
Furthermore, the Socialists now control not only the presidency and the government, but also a majority in the Senate, all of the regional presidencies, 55% of the country’s departments, and most major cities’ town halls. 
In less than two months, they may control a majority of the National Assembly as well, implying a concentration of power that has never before been seen in modern France. 
The Socialists can govern without limits, so it is up to them to govern well. 
It is this uncertainty that hovers over the future of France, if not that of Europe. 

France in Search of Europe 
With its ten new members, the European Union comprises 25 countries and 453 million citizens. 
In light of the fact that during the past millennium the EU’s members fought countless wars with each other, and that for forty five years a cold war split the continent into two hostile blocs, today’s Europe is a success of monumental historical significance. 
Indeed, the EU represents many things simultaneously. 
First, it is a guarantee of peace: war is now technically impossible between the Union’s interlinked member countries. 
Moreover, the EU is a majestic instrument for international reconciliation. 
The Germans and the French, who 60 years ago loved each other about as much as Serbs and Bosnians do today, are now a married couple. 
Catholics and Protestants in Ireland were killing each other for a century, but now that they are in the EU, they have recognized the idiocy of their conflict and the inevitability of reconciliation. 
Hungarians and Romanians, after nine centuries of hatred and wars, are embarking on the same process. 
Greece has just decided to support the opening of negotiations for Turkey’s entry into the EU in the next twelve years. 
The Union has also been a bearer of prosperity, because it is an effective mechanism for lagging members to surmount long-standing barriers to development. 
Ireland and Greece, once the two poorest countries of Europe have surged economically, with Greece coming close to the European average and Ireland having already taken its place among the richest. 
It is for these reasons that countries outside the EU want to join. 
In less than two years, this will become a reality for Bulgaria and Romania, while negotiations are beginning with Croatia and Turkey. 
There is also talk about membership for Serbia and Ukraine. 
For each of these countries, membership will mean a stable peace with its neighbors and reconciliation at home, as well as accelerated economic growth. 
All of this entails a certain amount of instability, particularly if expansion is driven by negotiations among governments, rather than by democratic choices. 
The project of the new European Constitution was devised to remedy this problem. 
And, lo and behold, France, which is scheduled to ratify the Constitution by a referendum on May 29, gives the impression of wanting to vote against it. 
If it does, the result will be an earthquake. 
Although every member nation has played its part in integrating Europe, France has without doubt been the country that provided most of the ideas and master builders. 
So what is going on? 
In France, as elsewhere in Europe, there have always existed unbridled nationalists, the “sovereignists” who say no to Europe in the name of defending the nation. 
But whether they belong to the extreme right or the communist left, they represent barely 20% of the electorate. 
Over and above that, two factors explain the bizarre phenomenon captured by recent opinion polls in France. 
The first is that the French have accounts to settle with their president and the government. 
Jacques Chirac was re-elected president with 82% of the vote because of the menace from the extreme right. 
According to all evidence, half of his votes came from the left. 
But Chirac acted as if his mandate had been unequivocal and put in place one of the most conservative governments France has seen for half a century. 
“Let’s make the poor pay” is his fiscal order of the day. 
It smacks of usurpation and is inciting many of the French to vote their anger. 
The other factor is that France, like the rest of the world, suffers from an ill-managed form of globalization. 
As a result, France suffers from growing inequality, high and still-rising unemployment, constant corporate restructurings entailing layoffs, threats to public services and social welfare programs, and a general feeling of insecurity. 
The world has undergone massive economic deregulation, prescribed by the monetarist doctrine supported by the conservative forces dominant in the developed countries of North America, Europe, and the Far East. 
This economic tsunami has come to us from the United States – there is nothing in it for Europe, but the right-wing forces in all our countries, which have coalesced into the majority that governs Europe, have rallied to its support. 
It is the desire to reject this state of affairs that, above all else, explains the “No” many French people want to shout. 
But to do so would be a big mistake. 
Only Europe as a whole, focused politically on the idea of better regulation, is big enough to block the neo-liberal tsunami. 
But it needs great doctrinal clarity, a firm political will, and a constitution. 
Indeed, rejection of the EU Constitution is a sure way to kill European dynamism and weaken Europe’s ability to defend itself. 
The debate in France is still raging, and nothing is yet lost. 
The French people still have time to pull themselves together – and opinion polls suggest that they are beginning to do it. 
Europe deserves it. 

France Is Back In Europe, But On What Terms? 
When Nicolas Sarkozy became President of France, he declared that his country was back in mainstream Europe. 
Since then, Sarkozy has thrown himself into the European political fray. 
His energy – combined with the negotiating talents of German Chancellor Angela Merkel – overcame antagonism toward the new reform treaty that EU leaders just ratified in Lisbon, putting the European Union back on its feet after two years of crippling indecision. 
But this triumph marked only a partial return by France to the European fold. 
The French must now resolve their own ambiguous attitudes about Europe, which have affected national policies for decades. 
For half a century, France has mixed two radically different approaches to Europe. 
Some French see the EU as a community where national interests inexorably converge. 
At the other extreme is the Gaullist belief that the EU is nothing more than a “power multiplier” for France to defend its own national interests. 
Rather than using Europe to project French ideas across the continent, France needs to develop a culture of genuine power-sharing and compromise. 
Such a sea change would have profound implications for French policies across a broad spectrum, from internal EU issues and economics to foreign policy and Europe’s role in the world. 
Consider the French executive. 
The president and government ministers treat Europe as their political preserve. 
Yet the prime minister never attends EU meetings and the foreign minister systematically leaves internal EU decisions to a junior secretary of state or a diplomatic representative. 
Meanwhile, other ministers circumvent government instructions to get from Brussels what has been refused in Paris. 
Clearly, a better EU policymaking system needs to be found. 
For a start, the French parliament must be given a greater role and government ministers must drop their habit of blaming Brussels whenever they want to introduce unpopular economic or social reforms. 
Sarkozy is particularly eager for France to be heard on economic policy. 
His election victory relied heavily on his plans to reform the labor market and to promote work and innovation. 
But if France is to be taken seriously by the rest of Europe, Sarkozy will have to deliver more than just growth and jobs. 
He will need to demonstrate that France no longer treats Europe as a scapegoat for its own economic troubles – a ploy that merely marginalizes France in economic debates. 
Thus, polemics against the European Central Bank’s independence and the damaging effect of “the high euro” will have to stop. 
France’s financial credentials also will have to improve if ministers’ views on EU monetary issues are to be taken seriously. 
For years, France has funded some of the highest public spending in Europe through budget deficits, despite its commitment to balance the books as part of the EU’s Stability and Growth Pact. 
Many EU members fear that Sarkozy’s government will again break French budget promises, as his demands for growth-boosting tax cuts imply pushing back the deadline for eliminating France’s deficit until 2012. 
Similarly, French prudence will be under scrutiny during discussions of a new European financial framework, which will test France’s capacity to view EU budgets as something other than a means of redistributing EU cash, particularly to farmers. 
The Common Agricultural Policy still accounts for more than 40% of Community expenditure, even though the farm sector accounts for only 2% of employment. 
As for global security, it is clear that EU countries can exert international influence only when they speak with one voice. 
France must sort out its relations with NATO and the role it intends to play in transatlantic forums. 
This means dropping anti-American rhetoric and talk about “European power,” which is meaningless for the majority of EU states. 
French and German disagreements with the United States in 2003 generated deep divisions in the EU. 
But recent changes in political leadership in the Britain, France, and Germany, together with the arrival of a new US administration in early 2009, could improve transatlantic cooperation. 
Next, France and the EU must find a new model for dealing with Russia. 
Here, the Union is confronted with a dilemma. 
Does it consider Russia a powerful partner or a hostile neighbor? 
If France wants to take the lead on EU relations with Moscow, it must become far more sensitive to eastern and central European fears about Russia. 
French politicians underestimate the negative impact they have in these countries when they repeatedly refer to a Paris-Berlin-Moscow axis and criticize “excessive” enthusiasm for the transatlantic alliance. 
Sarkozy will need to take all this into account if he wants France to play a full part in shaping the EU’s future. 
France’s elites need to own up to the mistakes of the past and find better ways to confront today’s challenges. 
Ordinary French people also have much to consider: our attitudes toward the market, our relations with the rest of Europe, and our views about the world beyond the EU’s borders. 
If we come to terms with today’s complex realities, France could be back in Europe. 

France is Not Working 
France’s chronic malaise is marked by periodic explosions of protest. 
The two most recent episodes – the rioting and arson in French cities last autumn and the successful student campaign earlier this year against a new law governing young labor-market entrants – seem to have little in common. 
But their unifying thread is youth, unemployment, and uncertainty about the future, as well as the suffocating state paternalism that underlies the wider malaise itself. 
Take, for example, the desirable goal of job security. 
French governments have sought it in the only way they know – by ever more regulation. 
Unsurprisingly, rules that make it difficult to fire established workers discourage employers from hiring new ones. 
Insiders enjoy lavish protections, while entry barriers to the millions left outside are insurmountable. 
As a result, unemployment is averaging 10% this decade and has not been below 8% for 20 years. 
And, while the overall level of unemployment has remained stable – albeit at a shockingly high level – the unemployment rate among young men (in the 16-24 age group) jumped from 15.3% in 1990 to 21.4% in 2005. 
France’s benevolent paternalism penalizes the young beyond the labor market as well. 
On paper, wealth redistribution through high taxes and state transfers, reflecting Republican ideals of equality and social cohesion ( fraternité ), has brought good results. 
Unlike most other OECD countries, where inequalities have increased over the last 30 years, in France pre-tax income inequality decreased slightly, or at worst remained stable, from 1970 to 2000. 
But this aggregate stability masks shifts in income distribution that have favored older age cohorts. 
Those around retirement age (51-65) saw their share in total income rise by three percentage points in the last ten years, while younger groups, particularly those aged 18-25, lost ground, with their income share falling by five percentage points. 
By 1995, relative poverty was increasing sharply for young adults, while the opposite trend occurred among the elderly. 
In 1970, a quarter of all pensioners lived in poverty; today, the figure is only 4%. 
Joblessness is the main cause of poverty, and the best protection against it is earned income, for which even France’s generous welfare payments are an inadequate substitute. 
Moreover, the high payroll taxes needed to finance these benefits constitute another deterrent to hiring, as does the high minimum wage, which tends to price unskilled labor above its potential productivity. 
The relatively generous dole and the prospect of high taxes once in work merely reduces the incentive to take low-paid jobs. 
As a result, 40% of all transfers go to poor but able-bodied people of working age. 
The full extent of the French system’s pathology becomes fully clear in the light of successive governments’ attempts at reform, with piecemeal measures the norm – and thus proving counter-productive on balance, or failing altogether. 
Minimum-wage increases, for example, counteract income-tax credits and lower payroll taxes aimed at encouraging youth employment. 
The unspoken premise is that there must be no losers, not even in the short term. 
The logical answer would be to reduce equally the degree of job security enjoyed by the entire labor force. 
But no French government in recent decades has been remotely strong enough to face down opposition – often involving illegal action that goes unpunished – to any reduction in entrenched privileges. 
Perhaps the only way out of France’s current impasse is the no-less traditional French route of revolution. 
According to this view, the system is unreformable, and real change will be possible only after it finally collapses, perhaps owing to fiscal weakness, since the combination of deficit-financed transfers, low growth, and low labor-market participation may prove unsustainable. 
After all, whatever the deeper causes of the French Revolution of 1789, the immediate trigger was a public-finance crisis. 
The social strains of high unemployment – especially among young people – may force decisive change even before any fiscal meltdown. 
But evolutionary progress is always preferable to revolutionary upheaval, and, despite all the difficulties of genuine incremental reform, the prospects are not absolutely hopeless. 
This is clear from the remarkable recent experience of “Sciences Po,” one of the elite grandes écoles in the center of Paris. 
An ostensibly meritocratic competitive admission system to the grandes écoles is in fact monopolized by the socially privileged, who accounted for 81% of students admitted to Sciences Po in 1998 (compared to the roughly 60% of students at Oxford and Cambridge who come from fee-paying private schools). 
The head of Sciences Po, Richard Descoings, implemented a program of positive discrimination that favors disadvantaged candidates, such as those from immigrant suburbs and rural areas, and charges increased fees to wealthier students. 
Descoings faced strong – and often cogent ­– opposition. 
But the dynamic of all reform is clinched when even weighty arguments succumb to the urgency of change. 
For France as a whole, the long-term cost of withholding tough medicine will ultimately be much higher than the short-term pain of reforming the country’s fiscally unsustainable and spiritually impoverishing welfare state. 
Young people in France will rediscover trust and hope when they can be shown a world where fairness consists not just in egalitarian and unconditional redistribution, but also in hard work and good behavior. 
Change for the better will be founded on the basic conviction that one should get what one deserves and deserve what one gets. 

Transparency’s Diminishing Returns 
PARIS – Transparency was a central theme in the 2017 French presidential election. 
Even before François Fillon of the conservative Les Républicains was reported to have paid his wife public funds for unperformed tasks, the eventual victor, Emmanuel Macron, had made transparency a central issue of his campaign. 
It is thus ironic that four of Macron’s 15 initially selected cabinet members – including one of the president’s closest advisers – have been forced to resign following reports of alleged misconduct or misuse of public funds, even before any judicial ruling. 
A freshly appointed member of France’s Constitutional Council has also been forced to resign as well, after news reports alleging that he had employed his daughter in a fake job while serving in the Senate. 
The French media have continued to investigate other potential scandals. 
But, for the time being, the recent series of mishaps seems to have ended. 
In accordance with his campaign promise, Macron has signed new government ethics rules into law. 
Under the “Act to Reestablish Confidence in Public Action,” public officials face a raft of new restrictions. 
They may no longer employ family members on their staff. 
They have been stripped of their lump-sum allowance for professional fees. 
And they are barred from using a “parliamentary reserve fund” to finance local initiatives. 
Of course, Macron’s ethics law is hardly the first of its kind. 
In 1988, new transparency rules were enacted in response to a series of political scandals the previous year. 
The 1988 reforms established France’s system of publicly funded political parties, and required all elected members of the National Assembly to provide full financial disclosure to a newly created commission. 
Then, in 2013, after a high-level minister was found to have stashed funds in an overseas bank account, another ethics law was enacted, requiring that members of the government publicly disclose their investments and assets. 
A new High Authority for Transparency in Public Life was given far-reaching powers to audit and publish public officials’ disclosures, issue rulings on misconduct and conflicts of interest, and refer violations to the solicitor general’s office. 
In 2017, the High Authority, for the first time, published all presidential candidates’ asset-disclosure forms on its website. 
But, more important, it postponed the new government’s appointment by a day so that it could vet the incoming ministerial candidates. 
And yet this process still somehow cleared the four ministers who had to resign soon after taking office. 
Of course, such checks exist in most democratic countries, not least the United States, where the US Senate performs due diligence on most of the president’s appointments. 
And in many Western countries, there has been significant progress over the past few decades to improve governmental and institutional transparency, ensure competitive bidding for government contracts, and so forth. 
It is widely understood that democratic citizens have a right to access governmental and administrative documents, and to be informed of the reasons behind decisions that affect them. 
These norms are in keeping with the principle of sound governance embodied in the European Union’s Charter of Fundamental Rights. 
In France, the most recent example of this shift toward greater transparency relates to Brigitte Macron. 
After public outcry at the possibility that she would acquire the legal status of French “First Lady,” the Macron administration published on the Elysée website a “Charter of Transparency Concerning the Wife of the Head of State,” confirming that she will receive no compensation or budget of her own. 
It was no accident that this document included the magic word: transparency. 
Prior to this, a number of other steps were taken to strengthen transparency in public life: enacting new anti-corruption rules, eliminating patronage in government contracts or civil-servant jobs, and making ongoing debates more open to the public. 
These efforts, it is hoped, will boost public confidence in French institutions. 
And yet polls show nothing of the kind. 
On the contrary, the French public has continued to demand even greater accountability from those in power. 
One reason is that emerging digital media, and the race for scoops among news organizations, investigative journalists, increasingly active NGOs, are providing a constant stream of reasons for mistrust. 
More broadly, citizens who struggle to make ends meet have become increasingly resentful and suspicious of those perceived to be privileged, moneyed elites – especially politicians. 
At the same time, the automatic tax audits and asset-disclosure requirements that have been in place since 2016 have been expanded to apply to a greater number of civil servants; and the definition of “conflict of interest” has been stretched ever further. 
These embodiments of public suspicion do not betoken a healthy political climate. 
To be sure, stricter transparency requirements have improved democratic practices across many Western countries in recent decades. 
But defending personal privacy is still a valid objective, and maintaining secrecy in some domains, such as national security, diplomacy, and human rights, is essential. 
Striking a balance between the conflicting imperatives of transparency and privacy will never be easy, especially when the political landscape is tilting toward ever-greater accountability. 
But decision-makers in any democracy have the crucial, albeit thankless, job of doing precisely that. 

The Coming French Revolution 
PARIS – In a few weeks, France will elect its next president. 
Given the French executive’s considerable powers, including the authority to dissolve the National Assembly, the presidential election, held every five years, is France’s most important. 
But the stakes are higher than ever this time. 
The two frontrunners are the far-right National Front’s Marine Le Pen and Emmanuel Macron, who served as economy minister under Socialist President François Hollande, but is running as an independent. 
If, as expected, Le Pen and Macron face off in the election’s second round on May 7, it will be a political watershed for France: the first time in 60 years that the main parties of the left and the right are not represented in the second round. 
France has not endured such political turmoil since 1958, when, in the midst of the Algerian War, General Charles de Gaulle came to power and crafted the Constitution of the Fifth Republic. 
That shift, like any great political rupture, was driven by a combination of deep underlying dynamics and the particular circumstances of the moment. 
Today is no different. 
First, the underlying dynamic: the rise, as in most developed countries nowadays, of popular mistrust of elites, feelings of disempowerment, fear of economic globalization and immigration, and anxiety over downward social mobility and growing inequality. 
These sentiments – together with the French state’s historical role in fostering national identity and economic growth – have contributed to a surge in support for the National Front. 
Le Pen’s nationalist, xenophobic message and populist economic policies resemble those of the far-left candidate Jean-Luc Mélenchon. 
Although support for the National Front has been growing for more than a decade, the party has so far been kept out of power by France’s two-round electoral system, which enables voters to unite against it in the second round. 
And, given the National Front’s inability to make alliances, power has remained in the hands of the main parties of the left and the right, even as France has moved toward a tripartite political system. 
Now, Macron is taking advantage of current circumstances to blow up the tripartite system. 
Macron’s great insight, which few initially recognized, was that the right-left divide was blocking progress, and that the presidential election amounted to a golden opportunity to move beyond it, without the help of an organized political movement. 
At a time when the French people are increasingly rejecting the traditional party system, Macron’s initial weakness quickly became his strength. 
It helped that, as Macron himself recognized, both the right and the left have fragmented in recent years. 
This is particularly true on the left, where a clear division has emerged between a reformist current, led by former Prime Minister Manuel Valls, and traditionalists, represented by the Socialist Party candidate, Benoît Hamon. 
The Socialists’ problems are compounded by the existence of a radical left working actively to eliminate them, much as Spain’s left-wing Podemos party has sought to replace the Socialist Workers’ Party there. 
The source of the mainstream right’s travails is less clear. 
Its forces remain generally united on economic and social issues. 
In fact, until a few months ago, its presidential candidate, the Republicans’ François Fillon, was expected to lead the pack in the first round by a wide margin. 
But a scandal over his personal conduct (he allegedly paid his wife and children for non-existent jobs while he was a member of parliament) damaged his candidacy – probably fatally. 
Whatever the reason for the right’s decline, Macron has benefited substantially from it, as well as from the rifts afflicting the left. 
Now, there is a real chance the young independent could be elected president on May 7, upending the Fifth Republic’s political system. 
But an electoral victory is just a first step. 
To govern in France’s hybrid presidential-parliamentary system, Macron would need to secure a majority in the National Assembly. 
This opens the possibility of two scenarios. 
In the first scenario, Macron quickly gains a parliamentary majority, as French voters seek to reinforce his mandate in June’s National Assembly election. 
This is conceivable, but not certain: it is here where the lack of an organized political movement on the ground remains a weakness for Macron. 
That is why the June election could give rise to the second scenario: cohabitation with a parliamentary coalition comprising a small right-wing faction, a large centrist faction, and a hopelessly divided left-wing faction. 
Such a development would be familiar in many European countries. 
But in France, where republicanism gave rise to the left-right ideological spectrum that shapes politics throughout the West today, it would be a genuine revolution – one that could spell the end of the Socialist Party. 
Given the symbolic power of the left-right divide, France’s voters and political leaders alike have long tended to frame virtually all of the country’s problems in ideological terms. 
The public and its politicians have little experience with government based on broad coalition agreements. 
This partly explains why the political system becomes gridlocked, sometimes making reforms difficult to implement, and why Macron’s message, which includes clear reform plans, is so unusual for France. 
If Le Pen somehow comes out on top, French politics – not to mention the European Union – will be turned upside. 
But even the ostensibly moderate Macron represents, in his own way, a truly radical stance. 
With both candidates likely to make it to the second round, France is on the verge of a political revolution, regardless of who wins. 

France’s Model of Resilience to Terror 
PARIS – In a recent tweetstorm, US President Donald Trump shared anti-Muslim smears from the extreme-right hate group Britain First, thus reminding us of the deep divisions and fears that terrorism has injected into Western democracies. 
But not everyone responds to terrorist attacks with the atavism of Trump or Britain First. 
Take France, where on November 13, 2015, Islamic State (ISIS) militants carried out terror attacks on the Bataclan concert hall and other sites in Paris. 
Although 130 people were murdered – more than in any other episode of violence against civilians in France since World War II – France’s commemoration of the second anniversary was extremely subdued. 
French authorities, it seems, wanted to avoid reawakening the painful trauma of the event. 
That trauma is a very real fact of life for the families who lost a loved one, and are permanently devastated, and for the survivors, whose experience has received little attention. 
Much of the news coverage accompanying this anniversary showed that for most victims, even those who were not physically harmed, relearning “the next life” is an everyday ordeal. 
Since the attacks, their relationship with their surroundings has been upset. 
Sleep disorders, hallucinations, and depressive syndromes are common. 
Entire lives have been transformed. 
In a November survey published in Le Monde, many victims reported an inability to return to work. 
And with each new attack, in France or elsewhere, the trauma is reawakened. 
“Life goes on,” writes one survivor. 
“But what life?” 
On the other hand, French society has proved resilient. 
After the Paris attacks, the French quickly showed that they would not give up their way of life, nor would they give in to the temptation of civil war. 
There have been no significant outbursts against the country’s Muslim population. 
The state of emergency that former President François Hollande declared immediately after the attacks allowed French authorities to ensure public order, by detaining suspects, conducting home searches, and closing certain places of worship. 
Human-rights groups criticized some of these measures as violations of civil liberties; but, for the most part, they were applied smoothly. 
On November 1, 2017, many of the same state-of-emergency measures, with some adjustments, were codified in law. 
Despite some expected protests, the new anti-terrorism legislation enjoys wide support among the French, who seem willing to accept certain limitations to personal freedoms in the name of collective security. 
Another consequence of the attacks is that international cooperation among security services has strengthened, new technologies have been adopted, and video surveillance has been implemented more widely. 
Earlier this year, French President Emmanuel Macron established a specialized counter-terror task force at the Élysée Palace. 
And, over time, armed soldiers – some of whom have been targets of new attacks – have become a familiar presence on French streets. 
Still, a majority of French citizens remain deeply concerned about the threat of terrorism not just from abroad, but from people living in France, often with French citizenship. 
And similar fears about homegrown extremism can be observed in many other European countries. 
In recent years, some of those drawn to Islamist-inspired extremism have carried out attacks with rudimentary instruments, from cars and delivery trucks to kitchen knives. 
Although violent extremists are an ultra-minority in the Muslim population, their actions have fueled a growing distrust in French society. 
Worse still, the successful military campaign against ISIS raises new fears about violent extremists returning from Syria. 
Already, more than 250 people, including nearly 60 children, have returned to France. 
More often than not, they are picked up by law enforcement and brought to justice. 
Yet dealing with returning women and children has become another controversy in itself. 
And, in addition to the known militants, law-enforcement agencies must monitor thousands of other suspects. 
This state of affairs inevitably affects French attitudes toward receiving migrants and refugees, most of whom come from predominantly Muslim countries. 
It also has a profound impact on the unspoken but constant debate in France about the place of Muslims in French society. 
While visible expressions of Islam have long been a source of controversy in France – owing to the country’s political and colonial history, conception of national identity, and cultural and legal secularism – similar debates are also playing out in Germany, the Netherlands, and other European countries. 
In the two years since the ISIS attacks in Paris, France has readied itself to face the terrorist threat. 
But the political consensus about how to tackle terrorism, which prevailed after the January 2015 attacks on Charlie Hebdo and the Hypercacher kosher supermarket, has eroded. 
Some now want to dismiss terrorism as a feature of everyday life, as if extremist violence posed a danger similar to traffic accidents, alcohol, or disease. 
These arguments will likely fall flat in France. 
Even if the threat of terrorism will always exist, resilience must not become resignation. 
If there is another serious attack, the French will undoubtedly hold their leaders accountable for failing to protect them. 
And if elected officials have failed to take necessary precautions or demonstrated a sense of resignation, voters will let them know at the ballot box. 
For proof, look no further than the success of right-wing parties in the last German and Austrian elections. 

France Revived 
Nicolas Sarkozy won the French presidential election in May in part because he attracted a substantial portion of the far right’s supporters to his conservative banner. 
Indeed, the Front National’s popular support has fallen from around 15% to 10%, weakening the FN tremendously and strengthening the traditional French right. 
Sarkozy succeeded by embracing themes of national identity and immigration. 
As a result, many regarded his campaign as very right-leaning. 
In France and across Europe, people expected an extremely conservative government, akin to US President George W. Bush’s administration. 
This was a mistake. 
Sarkozy’s embrace of the theme that France’s national identity has come under threat, which he linked to immigration, is not enough to make him an American style neo-conservative. 
He has chosen to demonstrate this most clearly in the field of foreign policy. 
Sarkozy formed his government in the knowledge that French foreign policy has long been consensual. 
So he gave the reins of the key foreign policy arms of the French government to left-wing politicians. 
Bernard Kouchner, a Socialist, is Minister for Foreign Affairs, having formerly been a Socialist Minister of Humanitarian Affairs and Deputy Minister of Health. 
Another leftist, Jean-Pierre Jouyet, is in charge of European affairs. 
Jean-Marie Bockel, the Socialist mayor of Mulhouse, is Minister for Cooperation and Relations with the Francophone world. 
And Socialists have also been brought into other parts of Sarkozy’s government. 
Fadela Amara, the manager of an NGO that defends women’s right, is a secretary of state for city management. 
Sarkozy’s second important initiative was to re-energize the European project. 
After the failure in 2005 of the draft European constitution, it was far from obvious that negotiations that would yield only partial progress in improving the European Union’s decision-making mechanisms was the right way to proceed. 
After all, there was no immediate emergency, and everybody would have understood if Sarkozy had waited another two or three years before risking his reputation on reviving the idea of a European constitution. 
But Sarkozy took the risk. 
And he succeeded in convincing other European leaders to embrace the “simplified treaty” that he called for. 
Of course, the treaty’s final text is not yet written, but success does seem possible, which would not only improve the mechanics of the EU, but would also send a signal to Euroskeptics, mainly the British and the Poles. 
France has not given up its demand for a “political” Europe that is more than merely a single market. 
Sarkozy’s third initiative came when the head of the International Monetary Fund resigned. 
Typically, that job is given to a European. 
Sarkozy surprised everyone by offering the position to a French Socialist, Dominique Strauss-Kahn, a man with real competence who enjoys widespread respect. 
Strauss-Kahn’s nomination was also an effective strike in terms of French domestic politics, as it promised to weaken the Socialists’ opposition. 
But, more importantly, Sarkozy’s choice of Strauss-Kahn is a crucial stand in today’s global economic debates. 
Sarkozy is announcing that he is an economic “regulator,” not a global liberal convinced that today’s balance of market forces is optimal, and thus that no intervention is needed. 
The fourth initiative also concerned foreign affairs: the freeing of the six Bulgarian nurses imprisoned in Libya on false charges of infecting children deliberately with HIV/AIDS. 
Intense negotiations with Libya, particularly by Europe, had been going on for more than a year, but were not successful, because Libya’s ruler, Colonel Khadafi, did not trust his interlocutors. 
Sarkozy understood that. 
Choosing his wife as a negotiator helped to unblock the case. 
Moreover, Sarkozy is seeking to intensify cooperation for development in the whole Mediterranean area. 
He began with a presidential trip to Algiers, then to Tripoli, followed by ministerial trips to Beirut. 
Assuring development of this region will be a long and difficult challenge, but one that needed to be embraced. 
The government’s preparation to take the lead in international talks on climate change is another sign that Sarkozy intends to revive France as a global force. 
After the relative lifelessness of President Jacques Chirac’s final years office, dynamism has returned to French foreign policy. 
That is a welcome development, and not only for France, because Sarkozy’s activism also promises to boost Europe’s political influence around the world. 

France’s Fourth Moment 
KYIV – Since World War II’s end, France has consistently risen to the challenge of restructuring Europe in times of crisis. 
In doing so, France became the catalyst not only for building European unity, but also for creating the prosperity that marked Europe’s post-war decades – a prosperity now under threat because of the global financial and economic crisis. 
If we are to see a stronger Europe emerge from today’s challenges, visionary French leadership is needed again. 
The first moment when decisive French leadership began to unify Europe came when Robert Schuman and Konrad Adenauer created the European Coal and Steel Community. 
By rooting the then West Germany in the political, economic, and social fabric of the West, that step heralded the start of Germany’s rebirth and economic miracle. 
The second time that France consolidated Europe’s internal architecture came in 1983, during the debates over the stationing of American cruise and Pershing missiles in Germany to counter the deployment of SS20 missiles by the Soviet Union. 
France’s resolve to stand with Germany helped prevent Germany from drifting into a dangerous neutrality that would have shaken the European community to its core. 
The third moment came after the Berlin Wall fell, and it was feared that an enlarged Germany might destabilize Europe. 
After initially trying to delay reunification, France embraced it, in exchange for Germany’s reaffirming its commitment to European unity and Franco-German leadership of the European community. 
As a result, Germany bound itself to the idea of “ever closer union” even more definitively by pledging to join the common European currency, the euro. 
It is now urgent that the insights that have animated Franco-German relations be applied to all of Central and Eastern Europe. 
Only by securing the European identity of this entire region, and by anchoring the growing Russo-German relationship in a European context, can the European Union continue on its path of stability and prosperity. 
Only by reinforcing open trading and financial relations across Europe can we hope to subdue today’s crisis. 
For it is in no European country’s interest, or in the interest of the EU as a whole, that Central and Eastern Europe feel that they have been cast adrift or that Germany and Russia fixate on each other in this time of crisis. 
As with Germany in the 1950’s, the nature of Russia’s links with its immediate neighbors is turning out to be the defining factor in shaping the country’s international image. 
Many observers regard these relations as a signal not just to the region, but to the rest of the world, of the sort of power that Russia wishes to be. 
The issue is partly one of “internationalism” itself. 
In contrast to Europe – with its close-knit network of multilateral organizations through which states formulate and conduct much of their foreign policies – Russia is not accustomed to intensively cooperative international procedures. 
But keeping Russia at arm’s length from Europe has only strengthened the sense of isolation that many Russians feel, tempting them to define the country’s interests in ways that are irreconcilable with those of Europe. 
It has also heightened Russia’s desire to construct a special, bilateral Russo-German relationship heedless of the context of the EU. 
European history during the past 60 years makes clear that the most promising approach to meeting the challenge of national reconciliation and stability is not to focus on specific contingencies, but to establish procedures that encourage orderly change. 
A singular vision has always animated this process: animosity between neighbors must not be allowed to fester, and the rule of law must reign not just within countries, but also between them. 
To believe that such a vision can work for Russia, Ukraine, and Europe is not wishful thinking, but rests on the successful experience of France and Germany in promoting amity. 
Indeed, the existence or absence of a framework of cooperation often determines whether a dispute mutates into a crisis. 
Such cooperative frameworks seek to reconcile national independence with regional interdependence, focusing political leaders’ minds on prosperity for their people rather than on gaining unilateral advantages that ultimately impoverish and unsettle everyone. 
The first lesson of European unity is that times of crisis must draw the continent closer together, not divide it through protectionism, competitive devaluations, and expulsions of immigrants. 
Similarly, the euro must not be allowed to become an Iron Curtain that consigns non-members to a high-risk zone where investors dare not venture. 
For Ukraine, Europe can help by embracing the free-trade agreement that we are now negotiating. 
Coupled with our successful membership in the World Trade Organization, Ukraine would stand to benefit when world and European trade begins to recover. 
Europe can also consider using various stabilization funds to help our economy through the crisis that we are all enduring. 
I do not ask for these things out of a narrow concern for my country’s health. 
Just as the US Federal Reserve has engaged in credit and currency swaps with Brazil, Mexico, Singapore, and South Korea and other countries to ease their access to the dollars they need, the European Central Bank must offer such swap arrangements to Europe’s non-euro countries in order for trade and production processes to continue. 
Yes, these are dark times, and all politicians want to protect their voters. 
But Europe’s greatest postwar leaders understood that keeping the wider view of Europe in mind is the best way to achieve this goal. 
As at so many times before, now – with all of our economies in peril – is a moment for decisive French leadership. 

France’s Ghetto Economy 
The youngsters who are ravaging France realize that they don’t have a future. 
That is why they are burning cars. 
But how many French politicians realize that their beloved “social model” is partly to blame? 
Poor second-generation immigrants in France have no economic prospects for two main reasons. 
First, the economy is growing far too slowly. 
As in most of continental Europe, economic performance has been enormously disappointing over the last two decades. 
But France managed to do even worse than its neighbors. 
During the period from 1980 to 2000, only two OECD countries, Germany and Greece, recorded slower growth in income per capita than France. 
But Germany had to go endure the huge costs and trauma of re-unification with East Germany. 
Greece was hurt by the wars in the Balkans. 
What’s France’s excuse? 
Second, whatever growth there is in France does not trickle down to the poor. 
Many young second-generation immigrants are virtually excluded from the labor market. 
Average unemployment has been stuck at around 10% for several years – one of the highest rates in the OECD. 
But the unemployment rate is more than double among the young. 
And it reaches 40% and over amongst those who drop out of school in the banlieues, which have become no-go zones of hopelessness. 
Unemployment is high and concentrated amongst French minorities because of specific labor-market institutions. 
France has strict hiring and firing regulations that make it costly to dismiss workers and thus reduce job creation. 
Those with a job are protected, those without one are hurt. 
Moreover, salaries cannot fall below a legislated minimum wage, which is so high that the least productive and least skilled workers remain shut out of the labor market. 
Wages are set in centralized negotiations by monopolistic unions, and apply throughout the economy. 
But the unions don’t care if the sons and daughters of immigrants living in ghettos have no opportunity of even starting a working life. 
These French social institutions are designed with a purpose: to protect the French labor market’s “insiders.” 
Regular workers enjoy secure and well-paid jobs, with much leisure time and little stress, particularly in the public sector. 
The poor minorities that remain excluded are provided with some social assistance. 
But too little is done to integrate them into society and increase their opportunities. 
The economic harm done by this corporatist social model is aggravated by widespread state intervention in all parts of the economy. 
Services are sheltered from competition, hindering both productivity growth and job creation in these sectors. 
Government intervention distorts the prices, leading to inefficient allocation of resources in areas such as healthcare, education, and agriculture. 
French civil servants, convinced that they can spot profit opportunities better than the market, engage in a proactive industrial policy with a variety of tools, including the retention of minority or controlling stakes in a number of large enterprises. 
All of this results in an economy that grows too little, where the weakest are condemned to a life of exclusion and are deprived of any opportunity for upward mobility. 
Why has France fallen into this trap? 
Not only the myopic pursuit of insiders’ economic interests is to blame. 
France is also burdened by strongly held ideological convictions. 
According to opinion polls collected in many countries by the World Value Surveys in 1999-2000, the French on average fear income inequality much more than citizens of other industrial countries. 
Compared to other countries at about the same level of development, France stands out as being highly suspicious of the benefits of competition (only Belgium fares slightly worse in this regard). 
French political institutions also bear heavy responsibility. 
France is a stable democracy, and large majorities in Parliament often support its governments. 
But this stability comes at the expense of change. 
Barriers to entry into the French political elite are exceptionally high. 
The current president, Jacques Chirac, was elected 10 years ago; he was already in government in 1969. His predecessor, Francois Mitterand, was elected president for the first time in 1981, and made his first appearance in government in 1956. 
France is also a heavily centralized State, were most civil servants are recruited from a close circle of policy advisers to the top politicians, often educated at the same institution. 
Little wonder that change occurs so seldom in France. 
To be sure, the corporatist welfare state is not the only causes of today’s Gallic intifada. 
Violent riots by immigrants and ethnic minorities have taken place in other countries as well, from London to Los Angeles. 
But, ultimately, the best way to address them and prevent their resurgence is to make sure that economic opportunities are available to those who are determined to try. 
Social assistance with no hope of individual improvement is not enough. 
It is time that France starts questioning its economic model. 
In a recent statement about the burning suburbs, Chirac declared: “We will have to draw all the lessons from this crisis, when the time comes and order has been restored, and with a lot of courage and lucidity.” 
But those lessons imply reforms that are more far-reaching than Chirac is ever likely to envisage. 

France’s Identity Politics 
One big surprise of the current presidential campaign in France is how “national identity” has surged to the forefront of the political debate. 
During the 1995 presidential campaign, the main issues were unemployment and social divisions. 
In 2002, the priority was security. 
But the three main candidates this time around – Nicolas Sarkozy, Ségolène Royal, and François Bayrou – have given an entirely different shape to this campaign. 
Sarkozy, for example, proposes to establish a ministry of immigration and national identity. 
Likewise, while Royal carefully maintains the distinction between nation and nationalism, she is drifting away from the Socialist Party’s old embrace of The Internationale , instead defending La Marseillaise and suggesting that all citizens should display a French flag on the National Day. 
Bayrou criticizes the “nationalist obsession” of his competitors, but he supports abrogating the jus soli (the right to obtain French nationality by birth) for people from the French island of Mayotte, owing to massive inflows of pregnant women to the island. 
For his part, the far-right leader, Jean-Marie Le Pen, says that he is very happy with this evolution. 
Indeed, the debate over national identity is nothing new. 
The problem is that French identity has always been made up of contradictory and sometimes adversarial elements, such as France’s Catholic and secular traditions, its revolutionary ideology and conservative inclinations, and the cultural outlooks of its rural and working-class citizens. 
The historian Ernest Renan, who pondered about national identity after France’s 1871 defeat in the Franco-Prussian War, has defined the nation as a “soul” made up of two parts. 
One part, the “rich inheritance of memories,” is rooted in the past, while the other, related to the present and opening the way to the future, consists in the common will of citizens to build their public life together. 
Renan gave priority to this will for a common life over any ethnic definition and set the French idea of the nation in direct contrast to the almost racial notion of people (Volk) that dominates the German tradition. 
In this view, national identity, is a “spiritual concept” based on a common history and set of values. 
Some of these values are rooted in a kind of secular Christianity, and others in the Enlightenment’s revolutionary beliefs about human rights, equality, the French language, secular schooling, and the idea that the state is responsible for the common interest and application of republican principles. 
It is this view of national identity – one that transcends race, color, origin and religion – that is now disputed. 
The identity crisis now roiling France is fueled by the conjunction of many factors: globalization, which produces uncertainty, the European Union, which curtails the freedom of national leaders, American strategic dominance, which has reduced France’s position in the world, and the rising Asian powers. 
This represents a serious challenge to thinkers who sometimes ridicule the idea of the nation itself, arguing that we now inhabit a “post-national” world. 
For them, national identity should be abandoned in favor of a European identity, even if the feeling of belonging to Europe is not deeply held among the peoples of the EU. 
Instead, the link between identity and immigration, an old refrain of the far right, remains strong, and the issue has grown more heated because of France’s inability to develop an effective policy to integrate immigrants from Africa. 
Making matters worse, while religion and culture have traditionally been restricted to the personal sphere in France, some religious demands have intruded into public life, as demonstrated by the disputes over Muslim girls’ wearing of veils in schools. 
The problem of the link between national identity and cultural pluralism is now surfacing in nearly the same way in the United Kingdom, Holland, and Denmark – countries that, contrary to France, long ago chose a policy of multiculturalism. 
In the United States, a country of huge immigration, communities can bring together a strong cultural identity and a deeply engrained patriotism. 
It has been the same in France, which has been built by successive waves of immigrants. 
But, contrary to the US, integration in France is not based on assimilation, but on a desire to promote homogeneity – the nation unified as “one and indivisible.” 
Today, in a world changed by globalization, France must face the difficult challenge posed by its new immigrants: maintaining the principles at the core of French identity while meeting the desire of some of its new citizens to maintain their own identity, which may in fact oppose some of those principles. 
Today’s debate over national identity arises from this tension, so it’s not surprising that it has become a central issue of the presidential campaign. 
But what is at stake in that debate are values that not only built France, but that also have built and will continue to build Europe. 


France’s Path Not Taken 
The new president of France, be it Nicolas Sarkozy or Ségolène Royal, will face a tough challenge when it comes to putting the French economy back on its feet. 
While the world economy is booming for the fourth consecutive year, with a historically unprecedented growth rate of about 5%, the French economy is limping. 
In 2006, it grew by only 2.2%, while growth rates of only 2.1% and 1.9% can be expected for 2007 and 2008, respectively, according to a recent forecast by the German Economic Research Institutes. 
This is significantly below the average of the old EU countries for these three years – 2.7%, 2.6%, and 2.4%, respectively. 
France is currently one of Europe’s laggards, only slightly ahead of Italy and Portugal. 
Even Germany is performing better. 
With a growth rate of 2.7%, the German economy clawed its way back to the average of the old EU countries in 2006, and it can be expected to grow at 2.4% in 2007 and 2008, far faster than France. 
France’s meager growth is surprising. 
Until recently, the economy was doing fairly well, outperforming many EU countries. 
While Germany grew by only 14% in the ten years from 1995 to 2005, ranking as Europe’s “vice-laggard” next to Italy, France grew by 23.6%, which was nearly the old EU countries’ average of 24.3%. 
In 2001, France’s gross national income per capita overtook that of Germany, and is now 4% higher. 
And yet recent growth figures seem to have reversed this trend for the time being. 
French employment data has been worrisome for even longer. 
In 2006, France’s unemployment rate was 9.4%, a full percentage point higher than Germany’s. 
By 2008, the French rate can be expected to decline only to 8.2%, while German unemployment is anticipated to fall to 6.3%. 
A similar pattern holds for public debt. 
While Germany has resolved its debt problem insofar as it no longer violates the European Union’s Stability and Growth Pact and can be expected to have a balanced budget in 2008, the forecasts for France imply deficits of 2.6% and 2.3% of GDP for this year and 2008. 
If the boom in the world economy falters, France will again violate the Stability and Growth Pact, as it did in 2002, 2003, and 2004. 
Why are France and Germany behaving so differently during this global boom? 
Among the potential explanations, the dissimilar specializations of each country stand out. 
While France has specialized in consumer goods such as food and pharmaceutical products, Germany is a leading exporter of investment goods. 
As the current boom in the world economy is largely fueled by investment demand rather consumption demand, only Germany profits from it to full measure. 
Germany is the tool-shop of the world, with 450 world market leaders in niche products and another 500 companies in the top-three category. 
Fifteen of the world’s 20 biggest trade fairs (measured by indoor exhibition space) are held in Germany, and the country tops the list in world commodity exports. 
Small wonder, then, that Germany’s economy rockets when the world’s demand for capital goods soars. 
True, Germany has its share of problems. 
The country is gradually turning into an industrial bazaar that is relocating its workbench to low-wage ex-communist countries. 
This is one of the reasons why the boom of 2006 was incapable of creating additional jobs in German manufacturing; why Germany still has the OECD’s highest unemployment among low-skilled workers; and why aggregate full-time employment has not yet returned to its level in 2000. 
The French economy could be slightly more stable in the medium term insofar as it seems to have more solid internal sectors. 
But Germany definitely is partaking more of the current boom than France does. 
Perhaps one French mistake was to neglect its small and medium-size firms and specialize too much on state-controlled mega-companies. 
Airbus, Renault, Crédit Lyonnais, and Alstom are well-known examples of a mistaken industrial policy that has wasted French taxpayers’ money – and that is partly connected with the name Sarkozy. 
The true problem for France is the huge chunk of state-owned companies that go through the motions without being particularly successful in the market. 
In France, 25% of dependent employees work in the government sector, compared with 19% in the old EU and 12% in Germany. 
The French government share in GDP is 54%, while Germany’s is only 47%. 
In France, more than 7% of voters cast their ballots for Trotskyite and Communist candidates in the first round of the presidential election, while the Socialists, who received 27% of the votes, are much more left-leaning than Germany’s Social Democrats. 
Dirigiste attitudes are more popular in France than in most other European countries. 
To the extent that these attitudes may have led to a political system in which small and medium-size firms find it difficult to flourish, they may have contributed to France’s problems. 
It remains to be seen whether the new French president will be able to embark on a more promising course. 
The odds are not good. 
Royal will do nothing to increase the flexibility of the French labor market so as to facilitate structural change and enable new firms to be created, while Sarkozy is likely to continue to support France’s lumbering giants, as he as done so frequently in the past. 
Sound policy aimed at reviving the economy seems beyond the grasp of both candidates. 

France’s Presidential Reality Show 
The Socialists’ anointment of Ségolène Royal’s as their presidential candidate is an important step on the road to the Fifth Republic’s eighth presidential election, which is set for April 22, 2007, with a second-round runoff two weeks later. 
All candidates should be known by the end of January – the deadline for printing the ballots. 
So, by that point, France’s four main political parties, two on the left and two on the right, must prepare their party manifestoes and choose candidates. 
That, at least, is how the system is supposed to work in theory. 
In practice, while the official campaign is supposed to last only two months (long enough in a democracy, in which candidates have to endure an unrelenting media barrage), the jockeying of potential candidates, together with the media’s appetite for a horse race, helped kick off the real campaign nearly a year and a half ago. 
So today’s public debates have a somewhat surreal character, because the programs on which the candidates will stake their campaigns are still not developed. 
In their absence, personality and style, not political programs, have proven decisive. 
I am not sure this is good for democracy, but that’s the way it is. 
Two such stylish personalities have so far commandeered the public opinion polls, and appear destined to meet in the second round. 
On the right is Nicolas Sarkozy, the interior minister (and briefly the economy minister), whose political rise took place within the grab-bag framework of the Union for a Popular Movement (UMP). 
The UMP is the political heir of Gaullism, but its ideological inconsistency is legendary – and reflected in party name changes every eight to ten years. 
Sarkozy is philosophically a conservative, but an ultra-liberal on economic issues, making him totally foreign to the Gaullist tradition. 
Preaching privatization and social repression, he has placed himself to the right of the right, hoping to take back the votes that the mainstream right has been losing to Jean-Marie Le Pen’s “fascistoid” National Front for the past 20 years. 
Sarkozy imposed himself on the Gaullist movement against the will of President Jacques Chirac; indeed, he snatched the presidency of the UMP despite Chirac’s active opposition. 
Much of the public likes his raw language and harsh criticism of the rest of the right, notably of Prime Minister Dominique de Villepin, but above all of Chirac. 
He knows nothing about international affairs, but no one seems to hold it against him. 
On the left, Royal, the Socialist president of the region of Poitou-Charentes, has scant government experience, serving brief stints as environment minister, family minister, and education minister. 
The anger of the Socialist Party’s barons at Royal’s rise was amusing to observe. 
She has yet to deal with the major problems of the day – financial instability, Europe’s sluggish growth, the Middle East – and she cannot avoid them during her campaign. 
But, full of elegance and charm, and treating social problems with good sense and energy, she has topped public opinion polls for over a year. 
So Sarkozy and Royal are universally expected to be the two leading candidates heading into the “High Noon” encounter of the second round. 
But, judging from the past, this is not how French politics works. 
Ever since de Gaulle, all candidates for the French presidency who started too early have lost. 
Poher, Chaban-Delmas, Barre, Balladur, and I were picked out by the media and treated as candidates for more than two years before the election, whether declared or not, and we were all eventually beaten. 
My own feeling is that the bombardment by the media is of such violence that the credibility of a candidate cannot endure for more than a few weeks. 
Overexposure hurts. 
So in this bizarre dance, where the big parties and important candidates know that it is better to start later, the real beneficiaries of today’s media circus are the candidates without any real chance of winning: a fascist, another extreme rightist, a communist, two Trotskyites, and a few other marginal personalities. 
They are candidates only in order to benefit from two years of free publicity. 
But those minor candidates underscore a deeper problem. 
To be elected President of France, one needs more than charisma, a good program, and a strong political party. 
One also must avoid the fragmentation that doomed the left in 2002, when none of its six candidates qualified for the second round, leaving Jacques Chirac, who had received 19% of the vote in the first round – a record low for a final winner ­– to defeat Jean-Marie Le Pen in the runoff with 82% of the vote. 
The most openly conservative French government of the past decade was essentially elected by the left. 
A repeat of this scenario seems possible: on the left, outside of the Socialist Party, there are already four announced candidates, and a fifth is likely. 
On the right, Chirac’s antagonism toward Sarkozy makes it that another candidate will appear at some point, either Michele Alliot-Marie, the defense minister, or Chirac himself. 
At this point, the main point to remember is that all of France’s last seven presidential elections have sprung a surprise. 
The final result was never discernible in the polls more than six weeks in advance. 
So, for the moment, the election is too far off to know or predict anything with certainty. 
What we hear is idle speculation. 
But at least the media are doing brisk business, and we are being entertained. 

France’s Royal Visage 
Ségolenè Royal has surged to the front of the pack of Socialists who aim to succeed Jacques Chirac as President of France. 
Nobody would have bet a single euro on such a prospect a few months ago. 
Until recently, Royal – who now is merely the head of one France’s 22 regional governments – was best known as the non-married partner of François Hollande, the Socialist Party leader. 
Yet, according to the polls, she is the only left-leaning candidate who looks able to defeat Nicolas Sarkozy, the current Interior Minister and odds-on favorite to be the center-right’s standard bearer in the presidential election next May. 
How did Royal rise so far and so fast? 
One reason is that she is the only fresh face among those Socialists vying for the party nomination. 
Laurent Fabius, Martine Aubry, Dominique Strauss-Kahn, Jack Lang, and even Hollande are all former senior ministers who neutralized each other, while Lionel Jospin, the former Prime Minister, decided to put an end to his political career after his defeat in 2002. 
Each of them has strengths and weaknesses, but none seems able to challenge Sarkozy. 
Indeed, confronted with her lead, both Jospin and Hollande have dropped out of the race. 
So there was a vacuum to fill, accompanied by a strong desire among the party faithful for revival. 
Royal’s chief virtue is that she has not taken part in the numerous internal battles that infuriate socialist militants and voters, and her lack of direct association with the party’s leadership has enabled her to avoid blame for its mistakes. 
That is why, far from being a disadvantage, her peripheral position is one of her main assets. 
She has slim and politically minor ministerial experience – Environment Minister in 1992-1993, Deputy Minister for Secondary Education in 1997-2000, and Minister for Family Affairs in 2000-2002 – and has drawn attention mainly for her work on subjects related to daily problems, such as kids’ TV programs and mistreatment in schools. 
But, while other politicians do not regard these matters as politically important, they mean a lot to most ordinary citizens. 
That is why people tend to view her as a sincere politician, rather than one concerned only about personal ambition. 
On security issues and education, Royal differs from the classical left, being something of a hardliner. 
This, too, is an advantage in a country where security is the top priority for most people nowadays. 
A mother of four children who proclaims to believe in traditional family values, she is attractive to right-wing voters, while her non-matrimonial relationship with Hollande makes her seem a quintessentially modern woman. 
Moreover, being a woman is a great asset. 
When disturbed by a question, she usually replies, “Would you have asked the same question to a man?” 
Ever since Laurent Fabius took a hit in the polls when he mocked her candidacy by asking, “Who will mind the children?”, her opponents have feared appearing misogynous when attacking her, and when they do criticize her, she immediately assumes the pose of innocent victim, unfairly bashed by schoolboy bullies. 
As a political tactician, she has also been innovative, organizing her campaign on the Internet with a plan to write her program from the responses of users. 
Her motto, “My program is yours,” could prove popular with citizens who, as in many other democracies, do not trust their political elite. 
Even though, like the majority of France’s political class, she was educated at Ecole Nationale d’Administration (ENA), she spurns the language and habits of this elite factory. 
Last but not least, she is attractive. 
Photos of her in a swimming suit, taken by paparazzi during the summer, triggered much discussion across France. 
But the game is not over. 
The Socialist will decide on November 17th who will be their candidate. 
Trailing her in opinion polls, the other contenders cite her lack of credibility on economic policy and international relations. 
No one knows her opinion on the Middle East, terrorism, nuclear deterrence, and international security. 
During the recent Lebanon war, she called for Bill Clinton’s intervention – an insufficient answer for many people. 
Royal’s lack of program has been her strength, but it could yet be her undoing. 
Eventually, she will be obliged to abandon her studied ambiguity, and she will probably pay a price for doing so. 
Few voters will support someone whose political program is based only on education and defense of the family. 
Some Socialists fear that, once nominated, she would not be able to confront Sarkozy in direct debates. 
Moreover, opinion polls in France are fickle omens. 
Since 1981, no poll favorite has won the presidency. 
According to the polls, Valéry Giscard d’Estaing, not François Mitterrand, should have been elected in 1981. 
In 1988, just months before the election, Raymond Barre (a former Prime Minister) was the arch-favorite, but did not even qualify for the second-round run-off. 
A few weeks before the election in 1995, Jacques Chirac looked so weak that a journalist bluntly asked him on live TV whether it would not be better for him to give up. 
And Jospin was considered the only possible winner in 2002, before finishing third, behind Chirac and Jean-Marie Le Pen. 
But Royal is confident in her fate. 
She is far from being a weak contender, and she is a fast learner with a strong campaign team. 
If she can strengthen her program on foreign policy, she may yet open a new chapter in French political history. 

France’s Third Man 
Should we be watching the French presidential campaign with admiration or alarm? 
Or perhaps a bit of both? 
It is undeniably a great “show” with all the ingredients of a Hollywood blockbuster, including a surprising plot twist: the emergence of a “Third Man,” François Bayrou. 
Even if his victory remains unlikely, Bayrou must now be taken seriously. 
First and foremost, he has found in Ségolène Royal and Nicolas Sarkozy two remarkable spokespersons for his candidacy. 
The more Royal returns to the “classics” of the Socialist Party, and the more Sarkozy openly courts the extreme right, the more Bayrou’s popularity rises. 
Indeed, persistent doubts among the French about Royal’s competence and Sarkozy’s character are the primary reasons for his dramatic rise in public opinion polls, from 7% support at the start of the campaign to 22% now. 
The second reason for Bayrou’s spectacular rise has less to do with personalities and more with France’s national mood. 
The very reason that led a majority of the French to say “no” to the referendum on the European Union’s draft Constitutional Treaty in May 2005 may lead them to vote for Bayrou, the most pro-European of all candidates. 
Why this paradox? 
A vote that meant saying “no” to the Constitutional Treaty in 2005 now means saying “no” to the leaders of the French left and right. 
In the 2002 presidential election, frustration with the system fueled strong support for the extremes, with Jean-Marie Le Pen, the leader of the far right, qualifying for the second-round runoff. 
In 2007, by contrast – and this constitutes real progress – a large segment of the French population is expressing its frustration with the system by being tempted to vote for the “extreme center,” i.e., Bayrou. 
Bayrou has been in politics for a long time, including as a presidential candidate in 2002. 
But, while his record as education minister is far from impressive, he has successfully reinvented his image in the last few months, becoming the “new man” of French politics. 
He looks more reassuring than Sarkozy and sounds more competent than Royal. 
This would not be enough for Bayrou in ordinary times, but today, on both sides of the political divide, opponents of the main candidates seem ready to join forces with him and betray their respective camps. 
What makes Bayrou potentially so strong is the fact that widespread reservations about the two leading candidates are influencing the calculus of militants and politicians alike. 
On the conservative side, Jacques Chirac now officially supports Sarkozy, but he may also secretly encourage his most loyal supporters to vote for Bayrou, even if there is no love lost between the two men. 
On the left, the social democratic wing of the Socialist party, which backed Dominique Strauss-Kahn against Royal, may be tempted to align with Bayrou, too, owing to the prospect of a post-electoral alliance between the center left and the center right. 
That said, surveys of the electorate demonstrate that a large proportion is still undecided, particularly among Bayrou’s supporters. 
So it is too early to say whether Bayrou can reach the second round. 
But if he does, he is likely to prove irresistible. 
A Bayrou victory, which is unlikely but not impossible, would constitute a triple revolution. 
It would lead first to the end of the Socialist Party created by François Mitterrand. 
Following Lionel Jospin’s humiliating defeat in 2002, the Socialists simply would not survive a second consecutive failure to reach the second round. 
Moreover, a Bayrou victory could signify the end of the conservative party created by Chirac, as well as of Charles de Gaulle’s Fifth Republic. 
But de Gaulle’s legacy would most likely be snuffed out gently, with nostalgia for both Mitterrand and Chirac possibly proving very tempting for a people disaffected with the political system but desiring to be reassured. 
France wants the illusion of change, but is continuity what she truly desires?. 
Finally, while this election was expected to usher in a new generation of politicians, few were prepared to anticipate the peaceful political tsunami that a Bayrou victory would bring. 
Yet that would be the outcome if the attraction towards the center proves to be as irresistible for significant segments of the Socialists and conservative parties as it now seems . 
France is a marvelously paradoxical country, so the search for novelty, if not modernity, could lead to the reinvention of the Fourth Republic, a parliamentary regime characterized by its weaknesses and instability. 
That will depend in part on whether the perception of Sarkozy as a risky candidate will prove greater than the very real institutional risk represented by Bayrou. 
There is maybe less of a French presence in the world today than there was twelve years ago when Jacques Chirac came to power, especially since the rejection of the Constitutional Treaty in 2005. 
But the world’s interest in the French presidential campaign is greater than ever, and can be compared only with the attention generated by Mitterrand’s election in 1981. 
Much may change in the few weeks left before the first round of the presidential vote. 
But the campaign has now become a question of numbers: will the Third Man bury the Fifth Republic? 

France's Threat to European Unity 
At the end of the EU summit in Brussels on Monday--a meeting held to bridge the growing schism over the Union's policy on Iraq--French President Jacques Chirac committed a diplomatic blunder that rivaled US Defense Secretary Donald Rumsfeld's snide remarks about "old and new Europe." 
Chirac chided EU candidate countries for behaving irresponsibly when they expressed support for America's effort to disarm Iraq with the use of force if need be. 
The French president spoke of "infantilism" on the part of the candidate countries and said that they should have consulted first with the EU or else remained silent. 
He also suggested that those countries were putting their chances of joining the EU in jeopardy. 
But it is the EU itself that has been jeopardized by Chirac's outburst. 
Many people in the candidate countries have long been convinced that their countries won't be admitted to the EU as equals. Their objections range from lower farm subsidies for the candidate countries to the new decision-making mechanism in the EU that was adopted at the Nice summit two years ago. 
Many people view that mechanism as being intended to strengthen the power of the EU's big members to the detriment of small countries. 
Public opinion in some candidate countries was ambivalent about the EU even before Chirac's remarks. 
Now, anti-EU attitudes could well become stronger. 
Even stalwart supporters of EU membership may feel that their countries are not being treated as equals if they are bullied for holding a different opinion than bigger members. 
At any rate, Chirac has handed Euroskeptics new ammunition with which to target the "no" vote ahead of EU membership referenda in the candidate countries later this year. 
France and Germany fail to grasp that the candidate countries' support for the US is not aimed against "old Europe." 
It is simply an expression of gratitude to the US for helping to bring down Communism and, more recently, for pressing ahead with NATO enlargement--despite objections from Russia--at a time when the EU was hopelessly dragging its feet with regard to its own enlargement. 
Small states in the middle of Europe that have been victims of aggression throughout their history should not be blamed for believing that the US remains the only real guarantor of their security. The EU, despite much talking, has not come close to developing a common defense policy. 
Nor should France and Germany regard support for the US in the candidate countries as tantamount to approval of a war against Iraq or any other country. 
Indeed, public opinion in all candidate countries is against a military action in Iraq. 
The candidate countries have simply shown loyalty to the US at a time when the US needs them. 
Perhaps more to the point, they feel that as long as a European security system is not in place, they may yet need the US to defend their security and independence. 
The candidate countries are caught between a rock and a hard place. 
If they refuse to express support for the US, on whom they rely for their security, the Americans will regard them as disloyal. 
When they implicitly refused to support the anti-American stances of France and Germany in the current crisis, they were seen as disloyal to the EU. 
But acknowledging the East Europeans' dilemma is in no way to forgive Chirac's arrogant blow against the unity of the Continent as a whole. 
The most offensive--and dangerous--aspect of his statement was its equation of the EU with France and Germany. 
He did not attack Great Britain, Spain, or Italy for their pro-American stance as he did for the East Europeans, which made his remarks sound all the more jarring to the ears of people in the candidate countries. 
Even so, he seemed to be telling them that France and Germany come first, ahead of all other current members, to say nothing of the candidate countries. 
Chirac's remarks highlight the EU's distance from its ideal of equality for all of its members. 
Indeed, his broadside may effectively kill some of the reforms, currently being discussed at the EU Convention, which aim to streamline decision-making within the EU by creating institutions that would, in effect, give more power to countries with bigger populations. 
Such reforms can work only if the big member states do not succumb to the temptation to use these mechanisms to bypass or ride roughshod over the interests of the small countries. 
Chirac's outburst is so damaging to European unity precisely because it undermines this most fundamental kernel of trust. 

France Says “No” To Chirac, Not to Europe 
Voting No on the EU Constitution would not constitute a French No to Europe, as some believe; it would merely be a vote of no confidence in Chirac’s presidency. 
Anything that diminishes Chirac – who has weakened the EU by pushing a protectionist, corporate state model for Europe, and telling the new smaller members to “shut up” when they disagreed with him – must be considered good news for Europe and European integration. 
So those desiring a stronger integrated EU should be rooting for a French No, knowing full well that some voting No would be doing the right thing for the wrong reasons. 
Even before the May referendum, there have been indications that France’s ability to mold the European Union to its interests has been waning. 
Just recently, Romanian president Traian Barescu signed the Treaty to join the European Union. 
In the period preceding the signing, however, French foreign minister Michel Barnier chastised him for lacking a “European reflex”. 
The reason? 
Barescu plans to align Romania with Anglo Saxon liberal economic policies, and wants a special relationship with Great Britain and the United States to improve security in the Black Sea region. 
Rather than buckling to France’s will, the Romanian president warned French leaders to stop lecturing his country. 
This is Europe’s future. 
Even those with close historical ties to France, like Romania, are standing up to France, because Chirac and his colleagues do not offer them the type of “European reflex” they want and need. 
The Netherlands—a traditionally pro-European country—also may vote No on the Constitution in its own referendum (which takes place after the French one) --not only as a protest against the conservative and moralistic policies of the Balkenende government, but as a rejection of a corporatist Europe dominated by French and German interests. 
The corporate state simply has not delivered the goods in continental Europe, and polls are showing voters may take it out on the proposed Constitution. 
Certainly the Yes camp is concerned, with some arguing a French No will stall EU enlargement and sink the euro. 
“What prospects would there be for constructive talks with Turkey, or progress towards entry of the Balkan states if the French electorate turned its back on the EU?” asks Philip Stephens in The Financial Times . 
True enough. 
But a “No” will not mean the French electorate has turned its back on Europe. 
What’s at stake is not enlargement, but whether enlargement takes a more corporatist or market-based form. 
Wolfgang Munchau of The Financial Times thinks French rejection of the EU constitution could sink the euro. 
“Without the prospect of eventual political union on the basis of some constitutional treaty,” writes Munchau, “a single currency was always difficult to justify and it might turn out more difficult to sustain….Without the politics, the euro is not nearly as attractive.” 
But French rejection of the Constitution does not imply political fragmentation of the EU. 
If the Constitution is not ratified, the Treaty of Nice becomes the Union’s operative document. 
There is no reason whatsoever why the EU should fall into chaos – and the euro wilt – now under the Treaty of Nice when it did not do so before. 
The truth is that not only will the euro survive a No vote; it will prosper. 
Britain’s liberal economic principles are more conducive to European economic growth and prosperity than France’s protectionist, corporate state ones. 
The market realizes this. 
With the polls forecasting a No vote, the euro remains strong in the currency markets. 
Finally, not only will a French No serve to marginalize Chirac in Europe, but it will also help undermine the Franco-German alliance that has served France, Germany and Europe so badly in recent years. 
Europe, in fact, might be on the verge of a major political re-alignment if the French vote No and Tony Blair wins big in the forthcoming UK election. 
With Chirac down and Blair up, an Anglo Saxon-German alliance might well replace the present Franco-German one. 
That would be progress indeed. 

Good Crop, Bad Crop 
NAIROBI – Kenya’s ban on imports of genetically modified (GM) crops reflects a troubling trend in a country traditionally seen as an agricultural innovator. 
The move also represents a giant leap backward for a continent that often struggles to ensure its own food security. 
A rational, scientific approach must triumph over prejudice, fear, and speculation. 
And Kenya can lead the way. 
GM crops (also called genetically engineered or biotechnology crops) have repeatedly been proven to be safe, and are used successfully to boost agricultural productivity worldwide. 
But bureaucracy, propaganda, and misinformation are preventing millions of African farmers, including in Kenya, from accessing a technology that can improve livelihoods and help to redress food shortages. 
More than one million Kenyans currently rely on food aid as a result of the country’s cereal shortfall. 
The country’s Famine Early Warning Systems Network notes that already-high maize prices will continue to rise until the end of the year, further straining food security and economic performance. 
As Kenya struggles to feed its people and stabilize its economy, GM technology should be a welcome means to increase yields and incomes, benefiting farmers, consumers, and the environment. 
The few African countries that do grow GM crops have reaped significant rewards. 
The introduction of GM maize, soybean, and cotton in South Africa, for example, helped raise farmers’ incomes by more than $1 billion from 1998 to 2012. 
This was largely the result of GM maize varieties, which increased annual yields by 32%, and now represent nearly 90% of the country’s maize crop. 
Indeed, despite soaring output, South Africa still cannot export enough maize to keep pace with global demand. 
Similarly, Burkina Faso’s farmers now grow a GM cotton variety that naturally resists a destructive insect, and thus requires less expensive pesticides. 
The switch from traditional cotton to the GM variety has helped increase yields by more than 18%, earning farmers $61 more per hectare and raising $1.2 billion in agricultural revenues in 2013 alone. 
As an agricultural technology pioneer, Kenya’s farmers would undoubtedly enjoy similar returns. 
Three-quarters of Kenya’s food is grown by small-scale farmers – the type that produce more than 90% of the world’s GM crops. 
Kenyans are already expected to benefit enormously from new GM varieties, such as insect-resistant maize, that are being developed by local scientists. 
Moreover, Kenya is one of the few African countries with a robust regulatory framework that can review and approve new crop varieties. 
Kenya’s 2009 Biosafety Act established the National Biosafety Authority (NBA), one of the first such bodies on the continent. 
Yet, despite early advances in the field, Kenya’s battle for GM crops has been unnecessarily political. 
In 2012, the cabinet banned GM crop imports without even consulting the NBA, a decision based on a widely denounced, and since-retracted, study that falsely linked GM foods with cancer. 
More recently, Kenya’s government appointed a special taskforce to investigate biotechnology. 
Its findings have not yet been made public, but anti-GM comments by the taskforce’s chair suggest further confusion on the issue, threatening to leave farmers, scientists, and the public in limbo at a time when GM crops are most needed. 
A clear opportunity to feed the population is being squandered as a result of politics and bureaucracy, and Kenya, unfortunately, is not alone in Africa in this regard. 
Badly needed biosafety legislation in Nigeria and Uganda, for example, has already been delayed. 
Much of the problem lies with a small group of anti-GM activists who object to the technology on “moral” grounds. 
They typically claim that GM crops are unsafe – a view flatly rejected by the scientific community over the last two decades. 
The World Health Organization has also confirmed that “no effects on human health have been shown as a result of the consumption of such foods.” 
Indeed, every new GM crop variety must meet rigorous health, environmental, and efficacy standards. 
Although perhaps well intentioned, these activists, together with a few misinformed policymakers, are setting back agricultural technology and productivity across Africa. 
To be sure, GM crops are no panacea, but they are an important tool in achieving food security and economic prosperity. 
That is why decisions about the health and safety of new crop varieties should be based on scientific evidence, not driven by political wrangling and baseless “moral” arguments. 
By taking an evidence-based approach to policymaking, Kenya’s authorities can improve millions of lives at home and set an invaluable precedent for the whole continent. 

The Coming Franco-German Bust-Up 
BERLIN – The politics of Brexit is descending into chaos. 
The European Union is fragmenting into northern, southern, eastern, and western tribes. 
And now the Franco-German marriage at the center of the European project is in danger of falling apart. 
In May 2017, when German Chancellor Angela Merkel and newly elected French President Emmanuel Macron met for the first time, many hoped for a renewal of vows. 
Crowds of pro-European well-wishers urged them on. 
Macron, the fresh-faced reformer, seemed to have a Midas-like political touch. 
And Merkel was at the height of her power on the international stage, having been deemed the new “leader of the free world,” supplanting the “very stable genius” in the White House, Donald Trump. 
Quoting the German author Hermann Hesse, Merkel observed that, “There is magic in every beginning,” but added a caveat: “The magic lasts only when there are results.” 
Eighteen months later, the magic most certainly has not lasted. 
Merkel has now handed over the leadership of the Christian Democratic Union (CDU) and will not seek another term as chancellor. 
And Macron, far from walking on water, has been trying not to drown in a sea of yellow-vested protesters. 
As both leaders’ political stars have waned, so, too, have the prospects for a renewed Franco-German relationship. 
Just when Macron was placing his hopes in Merkel’s power to lead at the European level, her grip on domestic power was slipping. 
After the German federal election in September 2017, Merkel struggled for six months to form a government. 
She did not want to form a minority government, and the remaining opposition parties didn’t particularly want to govern with her. 
But the real damage to Merkel’s power came from within. 
Leading politicians in the CDU’s Bavarian sister party, the Christian Social Union (CSU), have attacked Merkel’s decision to welcome Syrian refugees in 2015, and even cozied up to some of her sworn enemies, not least Hungarian Prime Minister Viktor Orbán, Austrian Chancellor Sebastian Kurz, and Matteo Salvini, the Italian deputy prime minister and interior minister. 
These populists and their CSU sympathizers have used immigration as a wedge issue to attack Merkel. 
Macron, meanwhile, has sought to make French renewal synonymous with European renewal. 
Since coming to power, he has pursued a new grand bargain with Germany. 
In exchange for France finally getting a grip on its finances and reforming its public sector and labor market, Germany would back Macron’s proposals to deepen EU and eurozone integration, including a joint eurozone budget, an EU finance ministry, and more unified foreign and defense policies. 
Though Merkel recently agreed to a joint budget in principle, many in France now suspect that Macron has been duped. 
Early in his presidency, he introduced a series of unpopular measures, slashing the wealth tax and cutting social benefits. 
More recently, he rolled out a fuel-tax increase to keep this year’s deficit below 3% of GDP, in the process unleashing the sea of yellow vests now laying siege to his administration. 
In response, Germany has offered Macron essentially nothing. 
It has dragged its feet on completing a banking union and introducing eurozone investment bonds, and has paid only lip service to the idea of a joint budget. 
Even on defense policy, which could serve as a stand-in for meaningful economic reforms, Germany has put up resistance, watering down EU proposals for an “avant-garde” grouping and balking at Macron’s proposed European Intervention Initiative (EI2). 
The next few months will almost certainly deliver more disappointments for Macron, and possibly even a Franco-German bust-up. 
After all, at a recent meeting of EU finance ministers, Germany struck yet another blow against Macron by watering down his proposal for a new digital tax on tech giants such as Google and Facebook. 
Though the proposal had broad support, the Germans worried that the US would retaliate against their auto industry. 
Moreover, there is speculation that the Bundeswehr will replace its outdated Tornado fighter planes with American F-35s instead of a European-made equivalent. 
With the German Air Force already indicating that the F-35 is its preferred choice, Airbus CEO Dirk Hoke recently warned that, “As soon as Germany becomes a F-35 nation, all cooperation with France on combat jet issues will die.” 
France and Germany are falling out just when anti-European forces are coming together. 
With an eye toward the European Parliament election in May, Orbán and Salvini are actively working to create a populist federation that includes both the anti-austerity left and the anti-immigrant right. 
Their goal is to capture at least a third of parliamentary seats, as well as a blocking minority on the European Council. 
The Euroskeptics’ main opponents are not politicians in their own countries, but rather Macron and Merkel. 
And the problem for Macron and Merkel is that they cannot necessarily count on French and German voters to support them in leading EU reforms. 
Indeed, far from seeing Merkel as a brake on deeper integration, many Germans regard her as overly pro-European. 
As for Macron, he may be the most pro-European French president in decades, but he could find himself in the position of having to run against EU budget rules that are standing in the way of his domestic reforms. 
The danger now is that Macron and Merkel will be lured into singing along to Salvini and Orbán’s tune. 
Their task is to avoid that trap and find a way to reinvent the political center, before it is too late. 

“Zombie” Apocalypse in the West? 
CAMBRIDGE – François Fillon, a discreet and loyal former prime minister under former President Nicolas Sarkozy, is now the right-wing Republicans’ official nominee for the French presidential election this spring. 
In the party’s primary last November, early polling had predicted a win for Alain Juppé, a prime minister under Sarkozy’s predecessor, Jacques Chirac, and had put Fillon a distant third behind Sarkozy himself (who was seeking to stage a political comeback). 
When Fillon pulled out a surprise victory, many observers began to compare him to Donald Trump. 
Fillon is a soft-spoken, reserved, and deeply devout Roman Catholic who lives in a small castle in his native province of Sarthe. 
He exhibits none of the brashness, vulgarity, and self-adoration currently emanating from Trump Tower in New York. 
But Fillon’s supporters have three things in common with Trump’s: rejection of liberal identity politics; opposition to “expertise” as a decisive component of politics and policymaking; and anxiety about loss of power and status in a country they once dominated. 
Fillon’s success can be traced back to 2013, when thousands of demonstrators nationwide took to the streets to protest against a law legalizing same-sex marriage – “Marriage for all” – which President François Hollande’s justice minister, Christiane Taubira, had introduced in the National Assembly. 
The “Manif pour tous” (“March for all”) was the first time in many years that French Catholics had come together specifically as Catholics to demonstrate against the government. 
The law ultimately passed, and no one is proposing that it be repealed. 
Instead, Fillon wants to make it harder for same-sex couples to adopt children. 
Still, the march had a massive turnout that surprised even its participants; it set the stage for Fillon to win the primary – and, judging by current polls, to become the next French president. 
The march brought together Catholics of all ages, including many families, and some of its younger leaders have since founded a successor movement called Common Sense. 
Their aim is to defend the traditional family, and to ensure a strong state within a reformed European Union, wherein the member states would repatriate certain powers. 
The name alludes not to Thomas Paine’s famous 1776 pamphlet, but to the capacity of “normal” people to judge what is right for themselves, without having to rely on experts – a message with strong Catholic undertones. 
Common Sense’s followers often refer to Antonio Gramsci’s theory of “cultural war” – according to which values are inherently in conflict and must be fought over – overlooking the irony of invoking an Italian Marxist to defend Catholicism. 
While the march was meant to be nonpartisan and independent, Common Sense was specifically created as a part of the right-wing political apparatus under the Republicans’ predecessor, the Union for a Popular Movement. 
This mutually beneficial arrangement reenergized the party and furnished the movement with a larger platform. 
Common Sense emerged under Sarkozy’s watch, but it also affiliated with political leaders such as Fillon, whose position on religion was closely aligned with its own. 
The way Fillon tells it, he prepared for the primaries by spending two years touring the country and asking the French people what they wanted. 
He then developed a dual program based on mass deregulation to liberate the economy and the defense of Catholic values, which explains his sympathy for Russian President Vladimir Putin, whom he sees as a defender of Christians in the Middle East. 
Common Sense has been a key interlocutor in creating this program, and its members repaid Fillon handsomely with massive turnout in the primary. 
When the “March for all” began, some commentators derided the protestors as “zombie Catholics.” 
But much like Trump’s “basket of deplorables,” who wore pins embracing the nickname Hillary Clinton had bestowed on them, the mostly middle-class “zombie Catholics” started dressing the part, which only added to their allure. 
When asked why they had taken to the streets, the protesters said they were defending their Catholic identity. 
Although France is officially secular, with church and state legally separated since 1905, French Catholicism has remained a dominant force, and many national holidays are in fact Christian. 
French Catholics now feel as though their historically privileged position is under attack – by the rise of Islam and Islamist-inspired terrorist attacks, and by legislation that has increasingly challenged their way of life. 
For many conservative Catholics, same-sex marriage was a tipping point, while left-wing Catholics find themselves being crowded out by the right. 
French politics has no analogue to America’s alt-right milieu – with its conspiracy theories, talk shows, online trolling, and fake news – that fueled Trump’s campaign. 
But Fillon’s supporters, too, reject multiculturalism and have responded to their status anxiety by dismissing expertise. 
With France becoming less Catholic and the US becoming more diverse, their “zombie” armies’ political power will decay; but, as Trump’s election and Fillon’s political ascendance have shown, they cannot be written off just yet. 

The Circular Revolution 
DAVOS – In the sixteenth century, the astronomer Nicolaus Copernicus made a profound discovery: the sun, not the earth, was at the center of the known universe. 
At the time, many denounced Copernicus’s insight as heresy against established Christian doctrine; eventually, of course, the Copernican Revolution paved the way toward a new, scientific worldview and enhanced human prosperity. 
Today, the world needs a similar paradigm shift. 
But this time it is the prevailing economic model that must be transformed. 
By 2030, the global middle class will total nearly five billion people, all of whom will expect the same kinds of opportunities and comforts that wealthy populations have long enjoyed. 
This will put increasing strain on the environment and deplete the world’s stock of resources. 
The problem is that the world has long maintained a myopic focus on producing and consuming goods as cheaply as possible. 
The result is a linear economy based on the rapid use, disposal, and replacement of goods. 
Sustaining the current model would require unlimited, easily accessible resources and infinite space for waste – something that clearly is not possible. 
Indeed, the consequences of our disposable economy – skyrocketing CO2 emissions, unmanageable waste streams, and the increasing difficulty of extracting resources, to name a few – are already apparent. 
To find a sustainable alternative, one need only look to nature, where nothing is wasted. 
Forests, for example, are completely efficient systems, with species’ lifecycles occurring in perfect harmony with the seasons. 
This underpins levels of resilience and longevity that economic systems should strive to emulate. 
Just as ecosystems reuse everything in an efficient and purposeful cycle, a “circular” economic system would ensure that products were designed to be part of a value network, within which the reuse and refurbishment of products, components, and materials would ensure the continual re-exploitation of resources. 
Of course, building a circular economy would require a fundamental restructuring of global value chains. 
Instead of selling products, businesses would retain ownership, selling the use of the goods they make as a service. 
Selling a product’s benefits instead of the product itself would create a powerful incentive for producers to design for longevity, repeated reuse, and eventual recycling, which would enable them to optimize their use of resources. 
This requires a new generation of materials, as well as innovative development and production processes. 
It also demands new business models, a redefined concept of legal ownership and use, new public-tendering rules, and novel financing strategies. 
Finally, a circular economy calls for adaptive logistics and a leadership culture that embraces the new system and rewards progress toward establishing it. 
Beyond the moral imperative, there is a strong financial argument in favor of the transition to a circular economy – namely, the promise of over $1 trillion in business opportunities. 
This includes material savings, increased productivity, new jobs, and possibly new product and business categories. 
But businesses cannot transform the economy alone. 
In order to shift firms’ emphasis from minimizing initial costs to maximizing total value, while ensuring the protection of people’s health and well-being, governments should change their tendering processes by implementing requirements for circularity, thereby helping to drive demand for new solutions. 
At the same time, consumers must be open to using products that they do not own. 
Because the circular economy is inherently systemic, it can succeed only if all stakeholders co-design, co-create, and co-own products and services. 
With this in mind, my company is redesigning its products and considering how to capture their residual value. 
At the same time, it is shifting from a transaction- to a relationship-based business model – one that entails closer cooperation with customers and suppliers. 
And it is changing its corporate culture to emphasize long-term solutions. 
None of these changes is easy to implement, but all of them are necessary. 
Like all major transitions in human history, the shift from a linear to a circular economy will be a tumultuous one. 
It will feature pioneers and naysayers, victories and setbacks. 
But, if businesses, governments, and consumers each do their part, the Circular Revolution will put the global economy on a path of sustainable long-term growth – and, 500 years from now, people will look back at it as a revolution of Copernican proportions. 

A Concert of Indo-Pacific Democracies 
TOKYO – On his week-long tour of Asia, US Vice President Mike Pence has been promoting a vision of a “free and open” Indo-Pacific region, characterized by unimpeded trade flows, freedom of navigation, and respect for the rule of law, national sovereignty, and existing frontiers. 
The question is whether this vision of an Indo-Pacific free of “authoritarianism and aggression” is achievable. 
One country that seems willing to contribute to realizing this vision is Japan. 
In fact, Japanese Prime Minister Shinzo Abe is the originator of the “free and open Indo-Pacific” concept that lies at the heart of President Donald Trump’s new strategy, the successor to Barack Obama’s unhinged “pivot” to Asia. 
Having historically punched above its weight internationally, Japan is responding to China’s muscular rise by strengthening its own position in the region. 
Taking advantage of its considerable assets – the world’s third-largest economy, substantial high-tech skills, and a military that has recently been freed of some legal and constitutional constraints – Japan is boosting its geopolitical clout. 
Japan’s world-class navy has already begun operating far beyond the country’s waters in order to establish its position in the region. 
For example, in order to challenge China’s claims in the South China Sea, a Japanese submarine and three destroyers carried out naval drills there in September. 
“Japan’s willingness to participate in Asian security,” former US Defense Secretary Ash Carter recently said, “makes it an increasingly important player in the region.” 
But creating a free and open Indo-Pacific is not the job of one country alone. 
Establishing the stable balance of power needed to realize Pence’s vision will require all of the region’s major democracies – from Japan and India to Indonesia and Australia – to come together. 
The good news is that Abe seems to recognize the importance of cooperation among Asia’s democratic powers. 
For example, in discussing the natural alliance between the region’s richest democracy and its largest one, he declared: “A strong India benefits Japan, and a strong Japan benefits India.” 
With that in mind, Abe and his Indian counterpart, Narendra Modi, recently held a summit that opened the way for a military logistics pact that would give each country’s armed forces access to the other’s bases. 
Beyond instituting a joint “two plus two” dialogue among the countries’ foreign and defense ministers, Abe and Modi agreed to deepen naval and maritime-security cooperation and collaborate on projects in third countries, including Myanmar, Bangladesh, and Sri Lanka, to enhance strategic connectivity in the Indo-Pacific. 
At the summit, Japan and India devised a new motto for the bilateral relationship: “Shared security, shared prosperity, and shared destiny.” 
The comfort and camaraderie shown by Abe and Modi during their meeting, held at Abe’s private vacation home near Mount Fuji, stood in stark contrast to the stony expressions and somber handshakes on display when, just two days earlier, Abe had met Chinese President Xi Jinping in Beijing. 
Cooperation between India and Japan builds on, among other things, the trilateral India-Japan-US “Malabar” naval exercises. 
Malabar has become an important component of the effort to defend freedom of navigation and overflight in the Indo-Pacific region, through which two-thirds of global trade travels. 
If India signed a military logistics agreement with Japan, as it has with the US, the Indian navy would be better able to expand its footprint to the western Pacific, while enabling Japan to project its naval power in the Indian Ocean. 
Fortunately, relations among the Indo-Pacific’s four key maritime democracies – Australia, India, Japan, and the US – are stronger than ever, characterized by high-level linkages and intelligence-sharing. 
These countries should institutionalize their “quad” initiative, with the India-Japan dyad forming the cornerstone of efforts to pursue wider collaboration in the region. 
But such collaboration will face considerable obstacles. 
For starters, the relationship between Japan and America’s other closest East Asian ally, South Korea, continues to be held hostage by history. 
The issue of “comfort women,” Korean women who were coerced into providing sexual services to Japanese troops during World War II, has long been particularly contentious. 
A 2015 agreement, endorsed by Abe and former South Korean President Park Geun-hye, claimed to resolve the issue “irreversibly”: Japan offered its apology and one billion yen ($8.8 million) for a fund created to help the victims. 
But, earlier this year, Park’s successor, Moon Jae-in, rejected the deal, arguing that it did not adequately serve the victims or the public. 
More recently, South Korea’s Supreme Court ordered a major Japanese steelmaker to compensate the “victims of forced labor” during Japan’s colonial rule of Korea, even though a 1965 bilateral agreement was supposed to have settled “completely and finally” all such claims. 
The rancorous relationship between Japan and South Korea plays directly into China’s hands. 
While South Korea obviously should not disregard its history, it should find a way to move past its colonial subjugation and form new, mutually beneficial relationships with Japan, much as India, Taiwan, the Philippines, and Indonesia have done with their former colonizers. 
Another potential impediment to a concert of Indo-Pacific democracies is domestic instability in key countries. 
In strategically located Sri Lanka, for example, President Maithripala Sirisena has ousted Prime Minister Ranil Wickremesinghe (despite the latter’s parliamentary majority) and called a snap election, even though the constitution does not give him the power to do either. 
A weakening of the country’s democracy could have strategic ramifications for an economically integrated but politically divided Indo-Pacific. 
Nonetheless, the deepening relationship between Japan and India serves the goal of forestalling the emergence of a China-centric Asia. 
If Japan and India – after China, the region’s most influential countries – can leverage their relationship to generate progress toward a broader concert of democracies in the region, the vision of a free and open Indo-Pacific may be achievable after all. 


The Free-Market Case Against Tax Competition 
LONDON – The global race to cut corporate tax rates accelerated in 2018. 
According to the OECD’s latest annual review of tax policies across developed economies, the average rate of taxation on corporate profits has fallen from 32.5% in 2000 to below 24% today. 
This trend is understandable. 
With private-sector investment remaining stubbornly weak, governments are desperate to hold on to whatever piece of the pie they can. 
It is better to tax firms lightly and keep them in your jurisdiction than it is to forego that revenue entirely. 
After all, other things being equal, firms that are considering building a new factory or other facility will be attracted to countries with a more preferable tax regime. 
Likewise, firms facing a higher corporate tax rate in one country may decide to move their operations elsewhere. 
Or, rather than transferring personnel and disrupting supply chains, they may find a way to register profits in a lower-tax jurisdiction – typically by moving some head office functions there. 
To many economic liberals and traditional conservatives, such “tax competition” is a good thing, because it is assumed that lower taxes will unleash market forces, thereby fueling innovation and growth. 
Moreover, advocates of this view don’t think that governments should be taxing business in the first place. 
Because a tax on corporate profits reduces the amount of money that a firm has to invest or raise wages, they regard it as a levy on a firm’s employees rather than its owners. 
But tax competition should concern economic liberals. 
Not only does it strengthen monopolistic trends and erode fair and transparent competition among firms; it also deprives governments of the money needed to sustain the public goods – education, health care, infrastructure, the rule of law – upon which firms rely. 
And there is little evidence that the corporate-tax burden actually does fall on employees rather than on capital. 
The nonpartisan US Congressional Budget Office and the Institute for Taxation and Economic Policy, among others, have demonstrated clearly that over 80% of the impact of corporate taxation falls on shareholders, not workers. 
Still, market liberals would argue that corporate taxes “distort” behavior and hamper wealth creation. 
But this is simplistic, at best. 
For starters, tax competition among jurisdictions is quite different from competition among firms in the market. 
When governments try to attract investment with subsidies, tax holidays, special exemptions, and accelerated depreciation schedules, they create distortions that undermine comparative advantage. 
Firms will be more focused on wrangling the best financial incentives than on investing in areas with the highest potential productivity gains, and economic dynamism will suffer as a result. 
Moreover, tax competition drives market concentration and monopolization, because it tilts the playing field in favor of incumbent multinational corporations, and against smaller potential competitors. 
Larger firms have the resources to exploit tax havens for profit-sharing and tax avoidance, whereas small- and medium-sized companies generally do not. 
It is little wonder that multinationals have managed to reduce their tax burdens at a much faster rate than smaller firms in recent years. 
Tax competition encourages free-riding on public goods, while eroding governments’ capacity to provide such goods. 
Like individuals, firms are not wholly responsible for their own success. 
They would be nothing without access to a healthy, educated workforce, public infrastructure, and legal systems that enforce contracts, patents, and intellectual property. 
In fact, government spending on public goods is probably more economically efficient than lower taxes. 
Corporations are already sitting on a sizeable cash surplus; but, rather than invest in workers, equipment, or research and development, they have been buying back their own shares. 
In the United States, this practice has accelerated since the enactment of corporate tax cuts in December 2017. 
Finally, corporate profits sometimes stem from rent-seeking and other valueless activities that absolutely should be taxed. 
There is reason to doubt that a great deal of commercial activity – gambling, selling and advertising alcohol, financial speculation, and so forth – generates any net economic benefits at all. 
At best, many corporations are profiting from “distributional” activities that extract existing wealth from the economy. 
But even those that do create real value by providing new or improved goods and services still only benefit a subset of society. 
In any case, these firms should be taxed to pay for public goods. 
Ultimately, governments will have to harmonize elements of their tax systems if they ever want to get ahead of these economically destructive trends. 
A deal between the European Union and the US could open the way for a broader international tax regime. 
But with transatlantic relations at their lowest point in decades, the prospect of that happening any time soon is remote. 
In the meantime, tax competition will continue to erode market competition, while denuding governments of the money needed to invest in the public goods needed to ensure firms’ profitability over the long term. 

Is the Press Too Free? 
LONDON – The poisoning of Russian double agent Sergei Skripal and his daughter Yulia at an Italian restaurant in Salisbury has driven an important story off the front pages of the British press. 
Earlier this month, the former actor and comedian John Ford revealed that for 15 years, from 1995 to 2010, he was employed by Rupert Murdoch’s Sunday Times newspaper to hack and blag his way into the private affairs of dozens of prominent people, including then-Prime Minister Gordon Brown. 
Discussing the techniques he used, Ford said: “I did their phones, I did their mobiles, I did their bank accounts, I stole their rubbish.” 
Some of the most prominent names in British journalism are likely to be tarnished by this and other revelations of illegality and wrongdoing. 
The basic plot goes back to the foundation of the free press with the abolition of licensing in 1695. 
To fulfill what has been seen since then as its distinctive purpose – holding power to account – a free press needs information. 
We expect a free press to investigate the exercise of power and bring abuses to light. 
In this context, one inevitably recalls the exposure of Watergate, which brought down President Richard Nixon in 1974. 
But actual scandals are not necessary for the press to do its job. 
The very existence of a free press is a constraint on government. 
It is not the only one: the rule of law, enforced by an independent judiciary, and competitive elections held at regular intervals are no less important. 
Together, they form a three-legged stool: take one, and the other two collapse. 
We continue to view the press as our defender against an over-mighty state, despite politicians’ often-craven performance in the face of media pressure. 
This is because we have no proper theory of private power. 
The liberal argument is both simple and simplistic: the state is dangerous precisely because it is a monopolist. 
Because it controls the means of coercion and levies compulsory taxes, its dark doings need to be exposed by fearless investigative journalism. 
Newspapers, by contrast, are not monopolists. 
They lack any power of compulsion, so there is no need to guard against the abuse of press power. 
It does not exist. 
But while a press monopoly in its pure form does not exist, oligopoly prevails in most countries. 
If, as economists claim, the public good emerges from the invisible hand of the market, the market for news is quite visible – and visibly concentrated. 
Eight companies own Britain’s 12 national newspapers, and four proprietors account for more than 80% of all copies sold. 
In 2013, two men, Murdoch and Lord Rothermere, owned 52% of online and print news publications in the United Kingdom. 
Were it not for the success of the press in rendering its own power invisible, we would never rely on self-regulation alone to keep the press honest. 
Efforts to bind the British press to a standard of “decent” journalism have been tried – and failed – repeatedly. 
There have been six commissions of inquiry in the UK since 1945. 
Each one, established after some egregious abuse, has recommended that “steps be taken” to protect privacy; and each time, the government has backed down. 
There are two main reasons for this. 
First, no politician wants to turn the press against him: Tony Blair’s wooing of Murdoch, owner the Sun, the Times, and the Sunday Times, is legendary, as was its pay-off. 
The Murdoch press backed Labour in Blair’s three election victories in 1997, 2001, and 2005. 
The other reason is more sinister: newspapers have “dirt” on politicians, which they are willing to use to protect their interests. 
In 1989, following pressure from Parliament, the government commissioned David Calcutt to chair a committee to “consider what measures (whether legislative or otherwise) are needed to give further protection to individual privacy from the activities of the press and improve recourse against the press for the individual citizen.” 
Calcutt’s key recommendation was to replace the moribund Press Council with a Press Complaints Commission (PCC), which was duly created. 
In 1993, however, Calcutt described the PCC as “a body set up by the industry, financed by the industry, dominated by the industry, and operating a code of practice devised by the industry and which is over-favorable to the industry.” 
He recommended its replacement by a statutory Press Complaints Tribunal. 
The government refused to act. 
In March 2011, a Joint Committee of Parliament reported that “the current system of self-regulation is broken and needs fixing.” 
Because the PCC “was not equipped to deal with systemic and illegal invasions of privacy,” the committee set out proposals for a reformed regulator. 
The same year, following criminal prosecutions for telephone hacking which led to the closure of Murdoch’s News of the World, then-Prime Minister David Cameron appointed Lord Justice Brian Leveson to head an inquiry into “the culture, practices and ethics of the press; their relationship with the police; the failure of the current system of regulation; the contacts made, and discussions had, between national newspapers and politicians; why previous warnings about press misconduct were not heeded; and the issue of cross-media ownership.” 
Leveson tackled his remit – to make recommendations for a new, more effective way of regulating the press – with “one simple question: who guards the guardians?” 
The first part of the Leveson Report, published in 2012, recommended an industry regulator whose independence from the newspapers and government alike was to be assured by a Press Recognition Panel, set up under a Royal Charter. 
To preempt what they called “state control,” the newspaper proprietors set up an Independent Press Standards Organization (IPSO), accountable to no one but itself. 
True to previous form, the government then gave up, overruling the opinion of Leveson himself that further inquiry was needed to establish the “extent of unlawful or improper conduct by newspapers, including corrupt payments to the police.” 
Indeed, Leveson doubted whether the IPSO is sufficiently different from its predecessor, the PCC, to have resulted in any “real difference in behavior” at all. 
Although some British press outlets are uniquely vicious, striking the right balance between the public’s need to know and individuals’ right to privacy is a general problem, and must be continually addressed in the light of changing technology and practices. 
The media are still needed to protect us against abuses of state power; but we need the state to protect us from abuses of media power. 

Free Speech, Muhammad, and the Holocaust 
The timing of Austria’s conviction and imprisonment of David Irving for denying the Holocaust could not have been worse. 
Coming after the deaths of at least 30 people in Syria, Lebanon, Afghanistan, Libya, Nigeria, and other Islamic countries during protests against cartoons ridiculing Muhammad, the Irving verdict makes a mockery of the claim that in democratic countries, freedom of expression is a basic right. 
We cannot consistently hold that cartoonists have a right to mock religious figures but that it should be a criminal offense to deny the existence of the Holocaust. I believe that we should stand behind freedom of speech. 
And that means that David Irving should be freed. 
Before you accuse me of failing to understand the sensitivities of victims of the Holocaust, or the nature of Austrian anti-Semitism, I should say that I am the son of Austrian Jews. 
My parents escaped Austria in time, but my grandparents did not. 
All four of my grandparents were deported to ghettos in Poland and Czechoslovakia. 
Two of them were sent to Lodz, in Poland, and then probably murdered with carbon monoxide at the extermination camp at Chelmno. 
One fell ill and died in the overcrowded and underfed ghetto at Theresienstadt. 
My maternal grandmother was the only survivor. 
So I have no sympathy for David Irving’s absurd denial of the Holocaust – which he now claims was a mistake. 
I support efforts to prevent any return to Nazism in Austria or anywhere else. 
But how is the cause of truth served by prohibiting Holocaust denial? 
If there are still people crazy enough to deny that the Holocaust occurred, will they be persuaded by imprisoning people who express that view? 
On the contrary, they will be more likely to think that people are being imprisoned for expressing views cannot be refuted by evidence and argument alone. 
In his classic defense of freedom of speech in, On Liberty, John Stuart Mill wrote that if a view is not “fully, frequently, and fearlessly discussed,” it will become “a dead dogma, not a living truth.” 
The existence of the Holocaust should remain a living truth, and those who are skeptical about the enormity of the Nazi atrocities should be confronted with the evidence for it. 
In the aftermath of World War II, when the Austrian republic was struggling to establish itself as a democracy, it was reasonable, as a temporary emergency measure, for Austrian democrats to suppress Nazi ideas and propaganda. 
But that danger is long past. 
Austria is a democracy and a member of the European Union. 
Despite the occasional resurgence of anti-immigrant and even racist views – an occurrence that is, lamentably, not limited to countries with a fascist past − there is no longer a serious threat of any return to Nazism in Austria. 
By contrast, freedom of speech is essential to democratic regimes, and it must include the freedom to say what everyone else believes to be false, and even what many people find offensive. 
We must be free to deny the existence of God, and to criticize the teachings of Jesus, Moses, Muhammad, and Buddha, as reported in texts that millions of people regard as sacred. 
Without that freedom, human progress will always run up against a basic roadblock. 
Article 10 of the European Convention on Human Rights and Fundamental Freedoms states: “Everyone has the right to freedom of expression. 
This right shall include freedom to hold opinions and to receive and impart information and ideas without interference by public authority and regardless of frontiers.” 
To be consistent with that clear statement – and without the vague qualifications of Article 11, which threaten to render it meaningless – Austria should repeal its law against Holocaust denial. 
Other European nations with similar laws – for example, Germany, France, Italy, and Poland – should do the same, while maintaining or strengthening their efforts to inform their citizens about the reality of the Holocaust and why the racist ideology that led to it should be rejected. 
Laws against incitement to racial, religious, or ethnic hatred, in circumstances where that incitement is intended to – or can reasonably be foreseen to – lead to violence or other criminal acts, are different, and are compatible with maintaining freedom to express any views at all. 
Only when David Irving has been freed will it be possible for Europeans to turn to the Islamic protesters and say: “We apply the principle of freedom of expression even-handedly, whether it offends Moslems, Christians, Jews, or anyone else.” 

Fighting Anti-Semitism Requires Free Speech 
PARIS – The populist surge across the West has brought with it, no surprise, a rising tide of anti-Semitism. 
In the United Kingdom, the Labour party is bedeviled by charges that its leader, Jeremy Corbyn, tolerates anti-Semitic comments among his hard-left supporters. 
In Hungary, a key component of recently re-elected Prime Minister Viktor Orbán’s campaign was a barely disguised anti-Semitic attack against the philanthropist George Soros. 
In France, anti-Semitism comes from two directions: the far-right National Front and certain sections of the country’s large Muslim community. 
And the means by which France is combating its anti-Semitic outbursts could well prove to be a useful model for other countries to follow. 
For starters, the French social contract is based on the peaceful coexistence of different religions, none of which can be sponsored by the state. 
At the same time, the rule of law necessarily takes priority over any specific religious precept. 
So, for example, regardless of whether there are imams who recommend or tolerate female circumcision, the ritual cutting of girls’ genitals is a crime, punishable by up to 20 years in prison. 
Likewise, polygamy is illegal in France. 
So, even if an immigrant comes from a country where such practices are permitted, French courts will not recognize his marriage to more than one wife. 
Nor will they recognize any challenges to gender equality, even those based on religious beliefs. 
Under France’s constitutional system of secularism (laïcité), religion is confined to the personal and private sphere. 
To borrow from the French poet Louis Aragon, this ensures mutual respect between those who believe in the hereafter and those who do not (“Celui qui croyait au Ciel / Celui qui n’y croyait pas”). 
Thus, in many French schools, teachers avoid mentioning religion whenever possible. 
These fundamental principles have guaranteed peaceful religious coexistence since the end of World War II, despite the trauma of the war years and the large influx of Muslims that followed the Algerian War. 
Sadly, these principles are now being threatened, not so much by the National Front and other populists (whose leaders have been prosecuted for anti-Semitic musings and Holocaust denial), but by the growing influence of radical and hardline interpretations of Islam. 
This influence is felt not just in particular communities, but throughout French political and civil society, owing to the rise of advocacy and activist organizations with obscure origins and funding, some of which promote the establishment of Sharia law. 
For those wielding this influence, the goal is to create a culture of victimization among French young people of Arab origin. 
The hope is that they will embrace the Palestinian cause and, in the most extreme cases, exact revenge on Israelis or on Jews in France. 
It is little wonder, then, that anti-Semitic incidents in France have dramatically increased in recent years, leading French President Emmanuel Macron to declare that anti-Zionism is “a reinvented form of anti-Semitism.” 
The most recent victim of anti-Semitic violence was Mireille Knoll, an 85-year-old Holocaust survivor who was murdered on March 23, allegedly by a young neighbor she had often welcomed into her home. 
According to French investigators, the man reportedly shouted “Allahu Akbar” while viciously killing her. 
After the murder, thousands of people took to the streets in Paris to mourn and express their anger. 
For most of those marching, it was yet another sad reminder of the 2012 attack on a Jewish school in Toulouse, the 2015 massacres at the offices of the satirical newspaper Charlie Hebdo and at a kosher grocery, and many other similar incidents. 
Meanwhile, those stoking anger over the Israeli-Palestinian conflict have launched a campaign of intimidation against anyone who would dare to identify the sources of today’s anti-Semitism. 
Consider the case of Georges Bensoussan, a highly regarded historian and author of the 2012 book Jews in Arab Countries. 
In a 2015 radio appearance, Bensoussan referred to a 2014 survey which found that French Muslims were 2-3 times more likely to harbor anti-Jewish sentiments than French people generally, and surmised that such views are learned at home. 
Soon thereafter, the Collective Against Islamophobia in France and the International League Against Racism and Anti-Semitism filed separate legal complaints against Bensoussan, accusing him of inciting racial hatred. 
Bensoussan was cleared of any criminal wrongdoing in March 2017, but the entire episode was reminiscent of the 2007 prosecution of Charlie Hebdo cartoonists for their depiction of the Prophet Muhammad. 
In these and many other cases, intellectuals and artists who have long fought against racism have found themselves accused of it. 
So far, the formal legal challenges brought against critics of Islam have failed, because French courts and tribunals have seen through the false accusations of racism. 
But the strategy of intimidation could always score a victory in the future. 
To ensure that no voice is wrongly silenced, French democratic institutions must continue to defend free speech, the most precious of all human rights – and the one most necessary to overcome hate in all its many guises. 

Free Speech on Trial 
Not so long ago, there was jubilation that the free world and its values had prevailed in the Cold War. 
When the Communist empire collapsed, some even announced that the victory of liberty and democracy implied the “end of history.” 
But history never bowed out; at most, it only took a decade-long intermission, with its next act heralded by the terrorist attacks in the United States in September 2001. 
And here the plot has thickened. 
Instead of rejoicing in the liberal order, those of us who have the pleasure of living under it have had to struggle to keep it intact and strong. 
Since 9/11, more and more freedoms are being restricted in the name of defending liberty. 
New visa requirements and other obstacles to travel, more intimate data collected by governments, and the presence of video cameras everywhere – at once benign and intrusive – remind one more of George Orwell’s Big Brother than of John Stuart Mill’s On Liberty. 
Britain is not the only country where ancient rights of habeas corpus, of the inviolability of the person, are to be restricted by new legislation that, for example, extends the permissible length of detention without charge. 
Now, even the fundamental right of a liberal order, free speech, is under pressure. 
Some restrictions are understandable legacies of the past, but must nevertheless be re-examined. 
In Austria, the historian David Irving was arrested recently because he has denied that the Holocaust happened. 
In the prison library, however, Irving found two of the books he had written that had led to his arrest! 
In Berlin, there is much concern about the possible desecration of the Holocaust Memorial, although its author, the American architect Peter Eisenmann, takes a relaxed view of what is said and done about his creation. 
Other restrictions of free speech have more recent triggers. 
In the Netherlands, the shock that arose over the killing of the film maker Theo van Gogh runs deep and has led to demands for legislation against hate speech. 
In Britain, proposed legislation concerning incitement to religious hatred and terrorism has led to emotional parliamentary debates – and to doubts about the liberal credentials of Tony Blair’s government. 
Can such demands for restricting free speech ever be legitimate? 
The first and principled answer must surely be no. 
All freedoms can be abused by liberty’s enemies, but in the case of speech, the risk posed by restricting freedom is surely greater. 
Moreover, the benefits of tolerating free speech outweigh the harm of abusing it. 
Indeed, the Nobel laureate economist Amartya Sen has demonstrated that free speech even helps mitigate seemingly natural catastrophes like famines, because it reveals the ways in which a few haves exploit the many have-nots. 
As the watchdog organization Transparency International reminds us, corruption exposed is in many cases corruption prevented. 
These practical consequences are above and beyond the liberating effect of allowing the “marketplace of ideas,” rather than state authorities, to judge people’s expressed views. 
Are there really no exceptions to this rule? 
The classic example comes to mind of the man who shouts “Fire!” in a crowded theatre. 
In the resulting panic, people may be hurt or even killed. 
Nowadays, we worry about incitement ­– using free speech to provoke violence. 
I do not know how many Islamic leaders preach murder and mayhem in mosques and help recruit suicide bombers from among their congregants; but even if it is only a handful, they pose a question that must be answered. 
That answer must be given carefully. 
For free societies to flourish, the boundaries of free speech should always be widened rather than narrowed. 
In my view, Holocaust denial should not be outlawed, in contrast to the demand for all, or any, Jews to be killed. 
Similarly, attacks against the West in mosques, however vicious, should not be banned, in contrast to open encouragement to join suicide death squads. 
What about the mere praise of “martyrs” who have died while murdering others? 
The boundary between implicit and explicit incitement is not easily drawn, but, again, it should be wider rather than narrower. 
Free speech is immensely precious, and so is the dignity and integrity of humans. 
Both require active and alert citizens who engage what they do not like rather than calling for the state to clamp down on it. 
Direct incitement to violence is regarded – as it should be ­– as an unacceptable abuse of free speech; but much that is disagreeable about the David Irving’s and the hate preachers does not fall into this category. 
Their rants should be rejected with argument, not with police and prisons. 

Free the Regulators 
Corporate accounting scandals - indeed, the economic history of the last decade - demonstrate that global financial markets need politically independent regulatory agencies. 
The succession of financial crises that stained the 1990s had many and varied causes, but dysfunctional regulatory arrangements usually aggravated the effects. 
Each crisis exposed weak and ineffective legal frameworks (often deliberately maintained by politicians), inadequate and dispersed supervision, and forbearance policies that only an industry lobbyist could love. 
Until recently, the independence of financial regulators and supervisors received only marginal attention. 
This is surprising, given that the case for central bank independence has been well established since the late 1980s. 
Over the past 15 years, as many central banks became legally independent from government influence, the results in terms of lower price inflation have become undeniable. 
Few now challenge the importance of central bank independence for achieving monetary stability. 
Independence for financial sector regulators is as important as independence for central banks, and for many of the same reasons. 
Just as an independent central bank helps the private sector take long-term decisions based on a clear and stable set of rules, so an independent financial sector regulator can ensure that the rules of the regulatory game are applied consistently over time. 
If bankers know in advance that insolvent banks will be closed, and that lobbying to keep them open will not work, they will take fewer risks and the likelihood of their activities giving rise to a full-blown banking crisis will be reduced. 
But when politicians become directly involved in regulation, ad hoc decisions often result, and powerful or well-connected bankers often discover that the rules, as if by magic, do not apply to them. 
It was much the same story when politicians were directly involved in setting interest rates, with similarly disappointing results in terms of the consistency of decisions and the record in combating inflation. 
Monetary and financial stability are two sides of the same coin and must reinforce each other, so their supervisory agencies need a similar degree of independence. 
However, independence for regulatory agencies should not mean the absence of any democratic oversight whatsoever. 
One reason that greater independence for regulators in general has been unpopular with politicians is the legitimate fear that independent state agencies could turn into an uncontrolled fourth branch of government. 
This concern is especially strong in the case of financial regulators. 
In every developed economy, the financial sector plays a central role, and its regulators wield power unmatched by most other supervisory agencies. 
When intervening in financial institutions or revoking licenses, they are authorized to bring the coercive power of the state to bear against private citizens and capital. 
To prevent abuse of these far-reaching powers, their exercise needs to be balanced by routine accountability. 
These two attributes of supervisory agencies - political independence and political accountability - are often presented as zero-sum choices: more of one necessarily means less of the other. 
But the opposite is true. 
Independence boosts the effectiveness of market supervision only when accompanied by accountability. 
Central banks increasingly realize that no matter how much legal independence they have, their credibility with investors requires transparent monetary policy and effective communication with politicians and the wider public. 
Accountability entails a proper legal basis, clear objectives, well defined relationships between the executive, legislative and judicial branches of government, clear procedures for appointment and dismissal of chief executives, override mechanisms, budgetary accountability rules, and rules supporting transparency. 
Even after the crises of the 1990s, institutional arrangements in many countries still fail to establish these conditions. 
Moreover, the independence of bank supervision typically lags behind central bank independence, and the overall regulatory framework for other financial services, notably insurance, is often even weaker. 
The trend in many countries towards unification of supervisory functions should be regarded as a golden opportunity to strengthen as well as to harmonize regulatory arrangements throughout their financial sectors. 
The broader political environment, too, needs to be conducive to effective independence. 
Often, the independence of central banks and regulatory agencies exists only on paper. 
Vested political interests in the financial system remain strong in many parts of the world and the immediate political cost of overriding regulators is low. 
To the extent that this remains the case, countries will treat financial stability as a secondary interest - just as they treated inflation when monetary policy was subject to direct government intervention. 
In the long-term, financial stability, no less than price stability, requires independent and accountable regulators and supervisors. 

Free Tilly – and all Circus Animals 
MELBOURNE – Last month, at the Sea World amusement park in Florida, a whale grabbed a trainer, Dawn Brancheau, pulled her underwater, and thrashed about with her. 
By the time rescuers arrived, Brancheau was dead. 
The death of the trainer is a tragedy, and one can only have sympathy for her family. 
But the incident raises broader questions: was the attack deliberate? 
Did the whale, an orca named Tilikum and nicknamed Tilly, act out of stress at being held captive in a sterile concrete tank? 
Was he tired of being forced to perform to amuse the crowds? 
Is it right to keep such large animals in close confinement? 
Tilly had been involved in two previous human deaths. 
In one episode, a trainer fell into the pool and Tilly and two other whales drowned him. 
In another, a man who appears to have gotten into the enclosure at night, when Sea World was closed, was found dead in the pool with Tilly. 
An autopsy showed that he had a bite mark. 
One of Tilly’s offspring, sold to an amusement park in Spain, has also killed a trainer, as have orcas in other parks. 
Richard Ellis, a marine conservationist at the American Museum of Natural History, believes that orcas are smart and would not do such a thing purely on impulse. 
“This was premeditated,” he told The Associated Press. 
We will never know exactly what was going on in Tilly’s mind, but we do know that he has been in captivity since he was about two years old – he was captured off the coast of Iceland in 1983. Orcas are social mammals, and he would have been living with his mother and other relatives in a pod. 
It is reasonable to suppose that the sudden separation was traumatic for Tilly. 
Moreover, the degree of confinement in an aquarium is extreme, for no tank, no matter how large, can come close to meeting the needs of animals who spend their lives in social groups swimming long distances in the ocean. 
Joyce Tischler, of the Animal Legal Defense Fund, described keeping a six-ton orca in Sea World’s tanks as akin to keeping a human in a bathtub for his entire life. 
David Phillips, director of the International Marine Mammal Project for the Earth Island Institute, which led the efforts to rehabilitate the orca Keiko – made famous by the movie Free Willy – said “Orcas deserve a better fate than living in cramped pools.” 
But if we are pointing the finger at Sea World for what it does to its captive animals, we should also look more broadly at the way we confine performing animals. 
In most countries, it is possible to visit zoos and see bored animals pacing back and forth in cages, with nothing to do but wait for the next meal. 
Circuses are even worse places for animals. 
Their living conditions are deplorable, especially in traveling circuses where cages have to be small so that they can go on the road. 
Training animals to perform tricks often involves starvation and cruelty. 
Undercover investigations have repeatedly shown animals being beaten and given electric shocks. 
Several countries – among them Austria, Costa Rica, Denmark, Finland, India, Israel, and Sweden – ban or severely restrict the use of wild animals in circuses. 
In Brazil, a movement to ban wild animals from circuses started after hungry lions managed to grab and devour a small boy. 
Several major cities and many local governments around the world do not permit circuses with wild animals. 
Last year, Bolivia became the first country to ban all animals, wild or domestic, from circuses. 
That decision followed an undercover investigation by Animal Defenders International, which exposed shocking abuse of circus animals. 
Now the British government is holding a public online consultation on the use of animals in circuses. 
Many hope it will be a first step towards a ban. 
Attempts to defend amusement parks and circuses on the grounds that they “educate” people about animals should not be taken seriously. 
Such enterprises are part of the commercial entertainment industry. 
The most important lesson they teach impressionable young minds is that it is acceptable to keep animals in captivity for human amusement. 
That is the opposite of the ethical attitude to animals that we should be seeking to impart to children. 
Nor should we be swayed by the argument that circuses provide employment. 
The human slave trade also provided employment, but that was no argument for perpetuating it. 
In any case, in many countries that have restrictions or bans on circuses with animals, human-only circuses have flourished. 
There is no excuse for keeping wild animals in amusement parks or circuses. 
Until our governments take action, we should avoid supporting places where captive wild animals perform for our amusement. 
If the public will not pay to see them, the businesses that profit from keeping animals captive will not be able to continue. 
When our children ask us to take them to the circus, we should find out if the circus uses wild animals. 
If it does, we should explain to our children why we will not take them there, and offer to take them to a circus that does not. 

Free Trade, Free Labor, Free Growth 
ADELAIDE – Protectionist sentiment and fear of globalization are on the rise. 
In the United States, presidential candidates appeal to anxious voters by blaming the North American Free Trade Agreement (NAFTA) for the erosion of the country’s manufacturing base. 
Liberal trade initiatives have run into trouble in Congress, while new trade barriers have been mooted for products flooding in from China. 
Things are no better in Europe. 
France has dealt the Doha round of World Trade Organization (WTO) negotiations a blow by rejecting the outline deal on agriculture. 
European Commission President José Manuel Barroso believes that protectionist pressures are increasing. 
When the Doha trade round was launched shortly after September 11, 2001, there was plenty of international goodwill. 
But disenchantment with globalization – and, in some regions, fear of immigration– has since set in. 
A recent Financial Times/Harris poll in the US, Germany, France, the United Kingdom, Italy, and Spain found people nearly three times more likely to say that globalization is negative than positive. 
Free trade would lead to an overwhelming boost to welfare everywhere, but especially in the developing world. 
Grasping these benefits is potentially one of this generation’s greatest challenges. 
Increased negative sentiment could have the worst possible result: not just Doha’s failure, but also the raising of trade and immigration barriers. 
These barriers remain largely because further liberalization would redistribute jobs, income, and wealth in ways that governments fear would reduce their chances of remaining in power – and their own wealth in countries where corruption is rife. 
The greatest hope is thus getting the Doha round back on track. 
But there is a big difference between a low-quality result and one that is more comprehensive. 
If little more is achieved than phasing out farm export subsidies and a modest reduction in agricultural domestic support, our analysis shows that developing countries as a group would gain nothing, while high-income countries would gain just US$18 billion per year by 2015. 
By contrast, if developing countries cut their tariffs by the same proportion as high-income countries, and services and investment were also liberalized, the global annual gains could climb as high as US$120 billion, with US$17 billion going to the world’s poorest countries. 
Moreover, the long-term impact of free trade is huge. 
Recast as after calculating the net present value of the stream of future benefits, a realistic Doha outcome could increase global income by more than $3000 billion per year, $2500 billion of which would go to the developing world. 
In addition, the experiences of successful reformers like Korea, China, India, and Chile suggest that trade liberalization immediately boosts annual economic growth rates by several percentage points for many years. 
Eliminating subsidies and trade barriers would mean that resources could be used more efficiently, so there would be more scope to reduce inequality and poverty, social tensions, environmental degradation, malnutrition, and disease. 
There would, of course, be costs. 
Firms and workers would need to adjust as reform forces some industries to downsize or close and allows others to expand. 
In addition, there are social costs to consider. 
Yet the benefits of a successful Doha round are between 45 and 440 times higher than these costs. 
This is clearly an extremely sound investment. 
An “alternative” to Doha, whereby other high-income countries would follow the European Union’s offer of duty-free access to products from Least-Developed Countries (LDCs) and African, Caribbean, and Pacific (ACP) small countries, would involve only a tiny fraction of global gains from trade reform. 
Moreover, it may well hurt other poor countries – thereby worsening inequality – by encouraging resources to be allocated to activities that become uncompetitive following the next World Trade Organization agreement. 
If trade liberalization in goods and services proves too politically difficult to achieve in this decade, the benefits of liberalizing international labor flows is worth contemplating – not least because otherwise illegal migration is likely to increase. 
Historical experience shows that migration is the fastest way to bring about a convergence in living standards. 
We examined the costs and benefits of an expansion in international migration over a 25-year period, amounting to a 3% boost in host countries’ labor forces by 2025. 
The costs would include one-off expenses to migrants: transport, obtaining visas and permits, and finding housing, schooling, and employment, as well as the emotional cost of separation from family. 
There are also one-off costs to host-country governments, such as processing applications and providing initial help with housing and welfare. 
These costs have been estimated at between $14,000 and $42,000 per worker and family (shared equally by migrants and host governments). 
The global net benefit of the increased flow of migrants for 25 years is between $13 trillion and $39 trillion – close to the median estimated gains from the Doha round. 
The benefits are between 28 and 220 times higher than the costs. 
Even if freeing up immigration multilaterally seems too difficult to include as part of a Doha round agreement, individual countries could do so unilaterally with the stroke of a pen. 
The economic logic is compelling: removing trade and migration barriers would be an exceptionally wise investment. 
The real hurdle is getting this message across to politicians and voters. 

 

Free Trade Breakdown 
COPENHAGEN – Last month, the Doha negotiations, promising freer trade, broke down, ostensibly over a small technicality in safeguard rules. 
In reality, the talks collapsed because nobody – not Europe, not the United States, China, India, or the other main developing countries – was willing to take the political short-term hit by offending inefficient farmers and coddled domestic industries in order to create greater long-term benefits for virtually everyone. 
And they broke down because we really don’t care. 
After a few exasperated editorials, the world has pretty much dropped the subject and gone back to its usual concerns. 
This is foolish. 
Establishing significantly freer trade would help the world combat almost all of its biggest problems. 
For an astonishingly low cost, we could improve education and health conditions, make the poorest people richer, and help everybody become better able to tackle the future. 
We have known for centuries that free trade almost always benefits both parties. 
The economist David Ricardo pointed out in 1817 that both Great Britain and Portugal would benefit if they exploited their comparative advantages. 
Portugal could produce wine cheaply, whereas Great Britain could produce cloth much more cheaply than wine. 
By selling cloth and buying wine, Great Britain obtains more of both, as does Portugal. 
The same holds true today, when countries, doing what they do best, produce more and exchange it for more of all other goods. 
Yet today, with international trade talks stalled and protectionist rhetoric rising, we are instead moving toward building bigger trade barriers. 
These barriers are supported by deep-pocketed, self-serving corporations and lobby groups, and defended by politicians who are scared that the redistribution of jobs, income, and wealth resulting from freer trade will reduce their chances of remaining in power. 
When the Doha trade round was launched shortly after September 11, 2001, there was plenty of international goodwill. 
But a recent Financial Times/Harris poll in the US, Germany, France, the United Kingdom, Italy, and Spain found people nearly three times more likely to say that globalization is negative than positive. 
Recently, the Copenhagen Consensus project gathered some of the world’s leading economists to decide how to do the most good for the planet in a world of finite resources. 
The panel – including five Nobel laureates – found that one of the single best actions the planet could take would be completing the Doha negotiations. 
They based their conclusions on new research for the Copenhagen Consensus project by Australian economist Kym Anderson. 
Anderson showed that if developing countries cut their tariffs by the same proportion as high-income countries, and services and investment were also liberalized, the annual global gains could climb to $120 billion, with $17 billion going to the world's poorest countries by 2015. 
This is a respectable sum, and certainly a benefit that the international community should try to achieve. 
But what we often fail to realize is that the story only starts here. 
As economies open up, as countries do what they do best, competition and innovation drive up rates of growth. 
More competition means that previously sheltered companies must shape up and become more productive, innovating simply to survive. 
Having more open economies allows more trade in innovation, so that new companies can almost instantly use smart ideas from around the globe. 
Instead of every closed market having to re-invent the wheel, once is enough to get everyone’s economy going. 
This means that over time, the advantage of moving toward freer trade grows dramatically bigger: the $120 billion benefit in 2015 grows to many trillions of dollars of annual benefits by the end of the century. 
And the benefits would increasingly accrue to the developing world, which would achieve the biggest boosts to growth rates. 
We have seen three very visible cases of such growth boosts in three different decades. 
South Korea liberalized trade in 1965, Chile in 1974, and India in 1991; all saw annual growth rates increase by several percentage points thereafter. 
If we recast these benefits as annual installments, a realistic Doha outcome could increase global income by more than $3 trillion every year throughout this century. 
And about $2.5 trillion annually would go to today’s developing countries every year, or $500 a year on average for each individual in the third world, almost half of whom now survive on less than $2 a day. 
There would, of course, be costs. 
Freer trade would force some industries to downsize or close, although more industries would expand, and for some people and communities, the transition would be difficult. 
Yet the overall benefits of a successful Doha Round would likely be hundreds of times greater than these costs. 
It is interesting to contrast global skepticism about free trade with support for expensive, inefficient methods to combat global warming. 
Many argue that we should act, even if such action will have no benefit for the next decades, because it will help lessen the impact of global warming by the century’s end. 
But free trade also promises few benefits now and huge benefits in the future. 
Moreover, if we could stop global warming (which we can’t), the benefit for future generations would be one-tenth or less of the benefit of freer trade (which we certainly can achieve). 
Still, there are few celebrity campaigners calling on politicians to sort out the Doha Round. 
Global fear about free trade leaves the planet at risk of missing out on the extraordinary benefits that it offers. 
Free trade is good not only for big corporations, or for job growth. 
It is simply good. 

The Real Problem with Free Trade 
NEW DELHI – For most critics of globalization, trade is the villain, responsible for deepening inequality and rising economic insecurity among workers. 
This is the logic driving support for US President Donald Trump’s escalating tariffs. 
Why, then, does the message resonate far beyond the United States, and even the advanced economies, to include workers in many of the developing countries that are typically portrayed as globalization’s main beneficiaries? 
Free trade is hardly the only – or even primary – source of inequality and insecurity worldwide. 
Surprisingly, one enduring problem that provokes far less popular backlash is that finance continues to dominate the world economy, generating substantial instability and mounting risks like those that led to the 2008 global financial crisis. 
Moreover, some countries continue to pursue fiscal austerity, instead of consolidating their budgets by, say, addressing large-scale tax avoidance and evasion by major companies and wealthy individuals. And labor-saving innovations continue to be developed and deployed, producing “technological unemployment” among some groups. 
Some argue that free trade is being demonized simply because people do not understand what is in their own best interest. 
But that is both patronizing and simplistic. 
Even if free trade is ultimately broadly beneficial, the fact remains that as trade has become freer, inequality has worsened. 
One major reason for this is that current global rules have enabled a few large firms to capture an ever-larger share of the value-added from trade. 
Specifically, the proliferation of global value chains has enabled powerful multinational firms to control the design, production, and distribution of traded goods and services, even as various segments are outsourced to smaller firms far from final markets. 
These firms often benefit from intellectual-property monopolies, reinforced by free-trade agreements designed to strengthen corporate power. 
These enable them to collect massive economic rents, especially at the pre-production (including design) and post-production (marketing and branding) stages, where the most value-added and profit is generated. 
Meanwhile, increasingly intense competition in the production phase drives down prices, so that the actual producers, whether employers or workers, receive diminishing shares of the value pie. 
The upshot of this system is that many developing countries that should have benefited from the globalization of value chains have remained confined to low-productivity activities that yield only limited economic value and do not even foster wider technological upgrading. 
The forthcoming Trade and Development Report 2018 by the United Nations Conference on Trade and Development (UNCTAD) captures how top firms have steadily increased their share of total exports, and now dominate global trade. 
Ironically, this trend has intensified since the 2008 global financial crisis, which cast a spotlight on the disproportionate market power of the few and the outsize gains going to the top 1% of the income distribution. 
UNCTAD’s research also shows that, for both developed and developing countries, integration into global value chains correlates with declining shares of domestic value-added in exports. 
The share of actual production in domestic value-added has also declined, as has the share of the remaining value-added accrued by labor. 
One potential driver of the latter trend is that, by drastically enlarging the global labor supply, the economic integration of countries with large populations like China and India has increased the bargaining power of capital relative to labor. 
The only significant exception to these trends is China, which has designed industrial policies specifically to increase the share of domestic value-added and to improve workers’ conditions. 
Ironically, it is these measures, which have helped offset some of the negative effects of free trade, that Trump has condemned in his pursuit of policies that will do little to protect workers. 
But the implications of allowing a few global corporations to wield such vast market power extend further. 
For one thing, such concentrated economic power makes it more difficult for countries to industrialize, because local companies cannot expect to compete with established multinationals. 
For another, it prevents developing countries from reaping the full benefits of rising commodity prices, though they gain no protection from price downturns. 
The ability of large corporations to underprice natural resources also encourages excessive extraction, pollution, and environmental degradation – outcomes that they disingenuously present as the “price of development.” 
Consumers also suffer. 
Yes, major multinationals can offer low prices. 
But their massive market power leaves consumers at their mercy in every sphere, from manufacturing to financial services to digital technologies. 
The more power these companies have, the more they can accrue, as they use their influence to shape regulatory systems, economic policies, and even tax regimes. 
The result is a weakened state that serves the interests of the few, rather than protecting the many. 
Those who claim that redistribution can adequately address this problem must address the fact that the “losers” of free trade have so far received little, if any, compensation. 
Globalization’s detractors are right that free trade has created serious imbalances. 
But a trade war completely misses the point. 
The problem is not that free trade has led to too much global competition, but rather that it has enabled a few companies to secure monopolies or near-monopolies. 
This has given rise to massive inequalities, blatant rent-seeking, and predatory behavior. 
Only by addressing these trends can the benefits of trade be increased and equitably shared. 

Free Trade in an Age of Terror 
The war on terror appears to be causing a surge in protectionism. 
Some anti-terrorist warriors are so worked up about immigrants that they want to build a wall along the entire United States-Mexican border. 
They also are fighting the proposed takeover of US ports by a Dubai company, because they fear terrorists could gain vital intelligence from the investments. 
In Europe, the movement to stop inflows of migrants from Muslim countries is extremely popular. 
These developments do not constitute more protectionism in the usual meaning of the term, where private interests subvert the public good, as when farmers charge higher prices because competitive imports are restricted. 
National security concerns are not foolish. 
While a nation has a clear interest in the benefits of free and open trade, it also has a vital interest in its citizens’ safety. 
National security versus globalization is not an either-or issue though they sometimes come into conflict with each other, so balancing them is the key to successful policy. 
US President George W. Bush, for example, is seeking balance on the immigration issue by proposing to restrict, but not eliminate, guest worker entry. 
His proposal – which lies somewhere between the extremes of building a wall on the US-Mexican frontier and open borders on the other – is the right approach when guest workers could be disguised terrorists. 
Naturally, the greater the terrorist threat on the border, the more restrictive the policy should be. 
Compensating for the expected diminution of guest workers on the global stage is a likely increase in outsourcing, which provides an alternative and potentially more attractive way to import labor services when globalization is tainted by terrorism. 
Like guest workers, outsourcing imports labor services, but the foreign workers stay in their own backyards. 
Either the desired service is performed from abroad – telemarketing, for example – or the work is sent abroad for processing and later imported to the home country (in Europe, more and more industrial work is being outsourced from West to East). 
Outsourcing keeps terrorists – and other foreigners who would get expensive welfare subsidies – at bay without sacrificing the benefits of globalization. 
Bush may be right on guest workers, but his controversial proposal to have a Dubai-based company run six US ports is a big mistake. 
In a safer world, the deal would go unnoticed – and rightfully so. 
But American public opinion, worried about the threat of terrorism, seems set against the takeover. 
Free traders are dismayed. 
They take popular opposition to the deal as a sign that America’s commitment to an open economy may be waning. 
But, after the terrorist attacks of September 2001, is it “frenzy” for Americans to demand greater public safety and national security from their elected officials? 
In this age of terrorism, doctrines like free trade must be re-defined to include the public’s interest in “goods” like safety as well as more conventional goods like televisions and autos. 
Otherwise, such doctrines lose their relevance. 
The transfer of potentially strategic information about ports into foreign and perhaps unfriendly hands clearly carries with it national security risks. 
It is futile for the Bush administration to deny it. 
Even the US Coast Guard could not rule out that the company’s assets could be used for terrorist operations. 
Banning the takeover, on the other hand, would mean less efficient management of the ports, since the Dubai-based company is considered a better manager than the current one. 
This would mean a loss for the US, because, sooner or later, some of the efficiency gains achieved by the Dubai firm would be passed on to US ports in the form of higher lease payments. 
This case requires balancing national security risks with the efficiency gains from better management. 
Experts argue that the probability of a terrorist attack because of the Dubai takeover is small. 
Should the damage inflicted by a terrorist attack also be small, there would be no problem. 
But the damage inflicted by an attack might be tremendous, because ports are thought to be one of the few ways terrorists might smuggle nuclear weapons into the US. 
Because of this, Americans can’t afford to take even the minutest of chances with their ports – the consequences of error being too staggering to contemplate. 
The American public understands this, even if their president does not. 
Free traders should not be dismayed. 
Rather than being protectionism in the usual sense, saying no to the Dubai takeover would reflect the desire to maximize the public interest more broadly and properly defined. 
This is the opposite to protectionism. 

Too Late to Compensate Free Trade’s Losers 
CAMBRIDGE – It appears that a new consensus has taken hold these days among the world’s business and policy elites about how to address the anti-globalization backlash that populists such as Donald Trump have so ably exploited. 
Gone are the confident assertions that globalization benefits everyone: we must, the elites now concede, accept that globalization produces both winners and losers. 
But the correct response is not to halt or reverse globalization; it is to ensure that the losers are compensated. 
The new consensus is stated succinctly by Nouriel Roubini: the backlash against globalization “can be contained and managed through policies that compensate workers for its collateral damage and costs,” he argues. “Only by enacting such policies will globalization’s losers begin to think that they may eventually join the ranks of its winners.” 
This argument seems to make eminent sense, both economically and politically. 
Economists have long known that trade liberalization causes income redistribution and absolute losses for some groups, even as it enlarges a country’s overall economic pie. 
Therefore, trade deals unambiguously enhance national wellbeing only to the extent that winners compensate losers. 
Compensation also ensures support for trade openness from broader constituencies and should be good politics. 
Prior to the welfare state, the tension between openness and redistribution was resolved either by large-scale emigration of workers or by re-imposing trade protection, especially in agriculture. 
With the rise of the welfare state, the constraint became less binding, allowing for more trade liberalization. 
Today the advanced countries that are the most exposed to the international economy are also those where safety nets and social insurance programs – welfare states – are the most extensive. 
Research in Europe has shown that losers from globalization within countries tend to favor more active social programs and labor-market interventions. 
If opposition to trade has not become politically salient in Europe today, it is partly because such social protections remain strong there, despite having weakened in recent years. 
It is not an exaggeration to say that the welfare state and the open economy have been flip sides of the same coin during much of the twentieth century. 
Compared to most European countries, the United States was a latecomer to globalization. 
Until recently, its large domestic market and relative geographical insulation provided considerable protection from imports, especially from low-wage countries. 
It also traditionally had a weak welfare state. 
When the US began opening itself up to imports from Mexico, China, and other developing countries in the 1980s, one might have expected it to go the European route. 
Instead, under the sway of Reaganite and market-fundamentalist ideas, the US went in an opposite direction. 
As Larry Mishel, president of the Economic Policy Institute, puts it, “ignoring the losers was deliberate.” 
In 1981, the “trade adjustment assistance (TAA) program was one of the first things Reagan attacked, cutting its weekly compensation payments.” 
The damage continued under subsequent, Democratic administrations. 
In Mishel’s words, “if free-traders had actually cared about the working class, they could have supported a full range of policies to support robust wage growth: full employment, collective bargaining, high labor standards, a robust minimum wage, and so on.” 
And all of this could have been done “before administering ‘shocks’ by expanding trade with low-wage countries.” 
Could the US now reverse course, and follow the newly emergent conventional wisdom? 
Back in 2007, political scientist Ken Scheve and economist Matt Slaughter called for “a New Deal for globalization” in the US, one that would link “engagement with the world economy to a substantial redistribution of income.” 
In the US, they argued, this would mean adopting a much more progressive federal tax system. 
Slaughter had served in a Republican administration, under President George W. Bush. 
It is an indication of how polarized the US political climate has become that it is impossible to imagine similar proposals coming out of Republican circles these days. 
The effort by Trump and his Congressional allies to emasculate former President Barack Obama’s signature health-insurance program reflected Republicans’ commitment to scaling back, not expanding, social protections. 
Today’s consensus concerning the need to compensate globalization’s losers presumes that the winners are motivated by enlightened self-interest – that they believe buy-in from the losers is essential to maintain economic openness. 
Trump’s presidency has revealed an alternative perspective: globalization, at least as currently construed, tilts the balance of political power toward those with the skills and assets to benefit from openness, undermining whatever organized influence the losers might have had in the first place. 
Inchoate discontent about globalization, Trump has shown, can easily be channeled to serve an altogether different agenda, more in line with elites’ interests. 
The politics of compensation is always subject to a problem that economists call “time inconsistency.” 
Before a new policy – say, a trade agreement – is adopted, beneficiaries have an incentive to promise compensation. 
Once the policy is in place, they have little interest in following through, either because reversal is costly all around or because the underlying balance of power shifts toward them. 
The time for compensation has come and gone. 
Even if compensation was a viable approach two decades ago, it no longer serves as a practical response to globalization’s adverse effects. 
To bring the losers along, we will need to consider changing the rules of globalization itself. 

Free Trade or Freebies for the Powerful? 
As the United States Congress begins to debate the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA), a titanic struggle between the forces of free trade and protectionism promises to unfold. 
But that debate should not be allowed to mask the truth behind this treaty: the DR-CAFTA is more a pleading of special interests than a free-trade deal. 
It manages simultaneously to fleece the people of six poor countries and to put US workers in harm’s way. 
To be sure, expanded trade holds great promise for promoting development and democracy. 
But the trade rules inscribed in DR-CAFTA promote profits for a few at the expense of the well being of the many. 
Ironically, the pact even limits market competition to protect powerful special interests, undercutting the core principles of free trade. 
Consider pharmaceuticals. 
For American drug companies, this agreement extends the time period during which brand-name pharmaceuticals have exclusive access to markets, postponing the entry of generic drugs and thus limiting competition. 
For Central Americans, the cost of drugs will soar, straining budgets and gutting health care. 
The result may be a death sentence for many. 
In agriculture, small farmers would be placed on a collision course with US agro-business and their heavily subsidized farm exports. 
The US exported paddy rice, for example, at a price almost 20% lower than the cost of production in 2003, making it impossible for Central Americans to compete. 
As for labor rights, the agreement makes a devil’s bargain: it opens trade while locking in a status quo that is appalling. 
Workers face everything from rampant discrimination against older people (those over 35) to physical abuse, lack of bathroom breaks, no overtime pay, and poverty wages. 
In principle, workers can seek remedies by joining a union and bargaining collectively. 
But this option is all but foreclosed, because union membership or organizing can lead to dismissal, blacklisting, violence, or worse. 
In Guatemala, the largest economy, less than 3% of workers are unionized and their unions are marginal. 
The DR-CAFTA pays lip service to international labor standards as enshrined in the International Labor Organization’s core labor rights, but promptly throws them overboard. 
Instead, countries are committed only to enforcing their own labor laws, which often seem designed to prevent workers from joining a union. 
Moreover, enforcement of the rights that do exist is trapped somewhere between ineptitude and corruption. 
As if this were not bad enough, the agreement jettisons everything we’ve learned over the last 30 years or so about international pressure and labor law reform. 
The stronger provisions of previous trade agreements, such as the Generalized System of Preferences (GSP) and the Caribbean Basin Initiative (CBI), have been dumped. 
Although trade with Central America represents only about 1.5% of total US trade, the outcome of the debate on DR-CAFTA will shape US trade policy – which sets the tone for other rich countries’ stance in trade talks – for years to come. 
A trade agreement such as this puts US and Central American workers in the same labor market. 
If the whip is cracked in Tegucigalpa today, workers in Charlotte will feel it tomorrow. 
If Salvadorans’ wages are squeezed, they won’t be buying many products made in Los Angeles — unless, of course, they wind up moving there. 
The anemic labor standards enshrined in this agreement encourage firms to compete by taking the low road, a route that puts them on a collision course with China’s rock-bottom wages. 
They could just as easily take the high road: much evidence indicates that workers who are rewarded rather than victimized can contribute to greater competitiveness for firms in the long run. 
It is hypocritical to promote democracy and then sign a trade agreement that denies workers the basic democratic right to organize and join unions. 
Without this right, elections may not add up to democracy. 
The checks and balances that unions provide are essential in the workplace, but they are even more important in sustaining fledgling democratic regimes. 
The issue is not free trade versus protectionism, but “smart trade” versus “polarizing trade.” 
Smart trade creates balanced development, while polarizing trade rewards a small circle of winners at the expense of the many. 
Smart trade requires two key provisions: core labor rights, backed up by tough enforcement, and a development fund targeting infrastructure and education to boost competitiveness. 
DR-CAFTA does neither. 
Instead, it condemns Central America to carry its dismal past far into the future. 
Rejecting it opens the possibility for freer markets and faster income growth in Central America, as well as healthier democracies. 

Free Trade with a Human Face 
MEXICO CITY – Although many Americans believe immigration is a domestic issue that should be excluded from talks with other governments, this is not a view held by other nations – or by the United States. 
Indeed, the US negotiated its first immigration deal in 1907, maintained for more than two decades a controversial treaty with Mexico covering immigration, and has kept up immigration talks and deals even with Fidel Castro since the early 1960’s. 
For many Latin American nations, not just Mexico, immigration is the single most important issue in their relations with the US. 
The Caribbean islands all have a similarly high proportion of their citizens residing in the US and depend as much as Mexico on remittances. 
The same is true for much of Central America. 
And no part of South America is exempt from this pattern. 
So almost all of Latin America is deeply affected by the current immigration climate in the US, and would benefit greatly from the type of comprehensive immigration reform that both John McCain and Barack Obama have supported. 
The Bush administration’s regrettable decision to build fences along the US-Mexico border, raid workplaces and housing sites, detain and deport foreigners without papers, is viewed in Latin America as being hypocritical and offensive. 
The issue is all the more painful and disappointing since most Latin American foreign ministries know full well that these attitudes are pure politics, nothing more. 
Everyone knows what viable immigration reform in the US will entail: tightening security at the border, but also including gates in the walls currently being built; legalizing, with expeditious and sensible fines and conditions, the 15 million or so foreigners present in the US illegally; and establishing a migrant or temporary worker program that allows a sufficient number of foreigners to satisfy the growing needs of the US economy, with paths both to regular visits home and to US permanent residence. 
A second component is political will and timing. 
Bush had it right at the beginning: his willingness to negotiate an immigration agreement with Mexico at the start of his term was probably the only way to get it done. 
Moving quickly is probably the only way the next president can succeed on this front as well. 
If immigration is to become a less heated issue, the US must address the needs of Latin America’s economies. 
Here, one of the key challenges facing the next US administration lies in the existing and pending free-trade agreements between the US and Latin America. 
If John McCain is elected, tinkering with or overhauling NAFTA, CAFTA, and free-trade deals with Chile and Peru, as Barack Obama has proposed, will be unlikely. 
But, given the likelihood that Democrats will retain their majorities in the US Congress, even McCain would need to modify the agreement with Colombia in order to get it passed. 
The pressure to include similar provisions in the other deals would then grow. 
If recession drags on and Americans continue to blame trade agreements – erroneously – for growing unemployment, falling wages, and yawning inequality, opposition to these deals will grow. 
Instead of waiting for the pressure to mount, the next president would do well to preempt it with an ambitious agenda on free-trade reform that would benefit everyone. 
In this respect, the US could learn from the European Union. American trade agreements have been faulted for limiting themselves to trade. 
The response has always been: the US is not Europe, nor is it in the business of nation-building or reconstruction. 
But this is exactly what it did, successfully, with the post-1945 Marshall Plan and, unsuccessfully, with Iraq and Afghanistan today. 
First, clear and explicit human rights and democracy clauses should be included, along the lines of similar clauses in the Mexican and Chilean Economic Association treaties with the EU. 
Second, more specific provisions on labor, the environment, gender equality, and indigenous rights are needed, as well as anti-trust, regulatory, and judicial reform provisions, for reasons both of principle and political expediency. 
Although there have been enormous improvements in most of these areas, there remains a huge agenda, particularly with regard to breaking up or regulating monopolies – public, private, commercial, trade union-based – that plague nearly every country in the region. 
These revised agreements should include bold, enlightened provisions for infrastructure and “social-cohesion” funds, since these can make the difference between muddling through and true success. 
Free-trade advocates should not view Obama’s demand that these deals be revisited as a mistake, but rather as an opportunity to improve and deepen them; 
McCain’s supporters should not see the incorporation of all of the aforementioned inclusions as “European nonsense,” but rather as a way to narrow the gap between the agreements’ promise and their actual results. 
Improving Mexican and Central American infrastructure, education, and rule of law, or improving Colombian and Peruvian drug-enforcement efforts and respect for labor laws and human rights, are all in America’s interest, and-free trade agreements can help rather than harm such efforts. 
If the US and Latin America can face up to the challenges of trade and immigration together, the next US president may leave a weightier mark on the hemispheric relationship than any American leader in three generations. 

Freedom, Not Democracy, For Russia 
Twenty years ago this month, Mikhail Gorbachev began his policies of perestroika and glasnost, which led to the end of the Cold War. 
Now, however, a new chill has entered relations between Russia and the West. 
President Vladimir Putin is frequently criticized for taking Russia in the wrong direction. 
The very people who in 2000 called Putin a man they could do business with are having second thoughts. 
People once fascinated by Putin now publicly rebuke him. 
Putin is shooting back, accusing the West of trying to weaken and dismember Russia. 
As politicians in the West compare him to Mugabe or Mussolini, Putin’s Kremlin aides invoke the Munich appeasers who tried to push Hitler eastward. 
Putin himself once blamed the West for trying to channel Muslim radicalism toward Russia. 
Why this sharp change in tone? 
Initially, most nations exiting from Communism reached out, almost instinctively, to their immediate pre-Communist period. 
The Baltic states revived their constitutions of the 1930’s, the Armenians and the Azeris revived their political parties of the late 1910’s, and Eastern Europe, with the exception of East Germany, which reunited with the Federal Republic, suddenly became once again Mitteleuropa. 
This revival of the past was a big worry for West Europeans and Americans, who feared the re-emergence of historical enmities and tensions, which did indeed come to the fore in the former Yugoslavia. 
These fears underpinned the dual enlargement of NATO and the European Union. 
Russia, for its part, also went backwards, to tsarism. 
Initially, this was not obvious to all. 
Boris Yeltsin was friendly to the West, tolerated open debate, and appointed a few individuals as oligarchs. 
He was given the benefit of the doubt, and his anti-Communism was elevated to a surrogate of democracy. 
Russia was doubtless freer than ever before, in virtually all respects, good and bad. 
But the picture Russia presented to others and to itself was massively distorted. 
Parliament was lively, but essentially powerless. 
The electronic media were routinely critical of the authorities, but were owned by a handful of people and depended on their owners’ taste, interests, and fate. 
Yeltsin’s handover of power to Putin, like a king with his dauphin, tells us more about his regime than almost anything else. 
Putin’s regime is openly tsarist. 
His Duma is much like the Duma of Nicholas II, docile and acquiescent. 
His governors are also like Nicholas’s; many are governor-generals. 
The capitalism now being practiced is dependent on the authorities, and plays no independent role in politics. 
Of course, this does not mean that there is no difference between the Russia of Vladimir Putin and Nicholas Romanov. 
What it means is that Russia is back on its historical path of development, back at the point where things started to go wrong. 
The domestic situation, the global environment, and the historical memory of its people all militate against Russia being bound to relive its own tragic history. 
But Russia is like Western Europe, in the sense that it will have to advance in stages. 
It is not like Central Europe, which could leapfrog over some of them by jumping on the NATO/EU springboard. 
This means that we need to be more careful in using the language of democracy when talking about Russia. 
Democracy almost everywhere has been a fairly late child of capitalism, for it requires a self-conscious middle class to take root and flourish. 
This can only be produced by successful and sustained capitalist development. 
Russia is generating it, but the process will take time. 
Meanwhile, politics belongs to the elites. 
If Russia is to move forward, its high and mighty must agree about who owns what, who makes the rules, and how to change the rules. 
Rather than calling for democracy, this calls for a genuine constitutional rule of law. 
In other words, the task is to turn tsarist Russia into a version of the Kaiser’s Germany. 
This won’t be easy, but there are good reasons for optimism. 
With so much being written about Putin’s Russia, the rest of the country is often overlooked. 
Putin’s Russia is essentially about the Kremlin and the bureaucracy. 
They are dominant, no doubt, but they are not Russia in its entirety. 
The millions of consumers exercising their right to choose in the rapidly growing supermarket chains; the planeloads of business travelers converging on London, Zurich, and Frankfurt daily; the holiday-makers who, having lost the Crimea, have rediscovered the Mediterranean – all are part of a Russia beyond Putin’s Russia, one that will grow and develop even when Putin is history. 
So Russia’s current agenda must be more about freedom than democracy. 
Even now, Russia, though undemocratic, is largely free. 
What it needs is to institutionalize that freedom by building a modern state to replace the antiquated tsarist system. 
It also needs a modern civil society to consolidate its multi-ethnic post-imperial population. 
This calls for a kind of liberalism that is now lacking in Russia, one that stands for freedom, reform, and the nation-state. 
Neither the government nor the current opposition possesses it, which means that Russians must look beyond Putin’s Russia. 
As for the West, it is fruitless to try to bring Putin and his team back to democracy, where Russia does not belong, or to punish Russia with sanctions, which won’t work. 
The West must recognize where Russia stands on history’s timeline and not seek to wish this away. 
The political gap can be narrowed only by indigenous capitalist development. 
In the meantime, America and Europe should base their policies toward Russia on mutual interests, not the expectation of mutual values. 

Freedom, Security, and Terrorism 
America currently finds itself in the midst of a confused search for a central principle around which to organize its foreign and defense policies. 
For almost a half-century, until the collapse of the Soviet system in the early 1990's, containing communism was the core doctrine guiding US national security policies. The ``war on terrorism'' has come to serve as a handy substitute. 
But it fails to provide a solid (or particularly admirable) foundation upon which to base America's role in the world in the 21 st century. 
The search for a new grand strategy, or at the very least a new organizing principle, is confounded by the revolutionary times in which we live--an unprecedented era of several simultaneous revolutions, all of which are epic and historic. 
Globalization is internationalizing markets, finance, and commerce, while the information revolution is changing the way we work, learn, and communicate. 
Both revolutions are benefiting the developed, Western world but further dividing the ``haves'' from the ``have-nots,'' in this case those without finished products, services, or resources to trade or without access to new technologies. 
They are also contributing to a third revolution, the erosion of the sovereignty--and thus the authority--of the nation state. 
The failure of states, especially those artificially constructed by great powers after wars or cobbled together by older colonial powers, is becoming a serious international issue and promises to remain so. 
As the authority of the state erodes, the fourth, and potentially most dangerous, revolution emerges: the transformation of war and the changing nature of conflict. 
This is the revolution that arrived at America's doorstep on September 11, 2001. 
There were, of course, many warnings. 
The first attack on the World Trade Center itself occurred in 1993. 
Then came the bombings of the US barracks in Saudi Arabia in 1996, the US embassies in Kenya and Tanzania in 1998, and the USS Cole in 2000. 
On September 15, 1999, the US Commission on National Security for the 21 st Century issued a report entitled ``New World Coming.'' 
Its first conclusion was that: ``The United States will be attacked by terrorists using weapons of mass destruction, and Americans will lose their lives on American soil, possibly in large numbers.'' 
The same Commission, on which I served, urged the new President, George W. Bush, on January 31, 2001, to prepare the nation for these attacks by consolidating dispersed federal government agencies into a new national homeland security agency. 
Our warnings and recommendations were not heeded. 
Three thousand people died in the first terrorist attack in America in the new century. 
Everyone agrees that others will follow. 
Many experts believe that, two years later, the US has still not begun to take the urgent steps necessary to defend itself against further attacks. 
Even the tradeoff of liberty and security has been little discussed relative to its importance. 
This is probably because most of those inconvenienced by preliminary counter-terrorism measures in the US are Arab-Americans, while the broader American community has not been bothered. 
But the US is, and prides itself on being, an advanced liberal democracy where individual liberties are guaranteed by a written constitution and bill of rights, and whose freedoms are protected by an independent judiciary established as an equal third branch of government. 
America's legal community, and some in the wider society, are beginning to awake to the complex issues confronting the US as it seeks to protect itself from outside attacks for the first time since 1812. 
Should the national government be able to monitor the computer and telephonic communications of citizens and residents? 
Should suspects be placed under surveillance because they belong to a particular religious or ethnic community? 
Should due process--including habeas corpus , the right to counsel, and the right to trial by jury--be suspended for ``enemy combatants'' or others who are simply suspects? 
These and other questions go to the very nature of democracy and the values of the American Republic. 
They will not become any easier to answer over time. 
Indeed, they threaten to become much more frequent and troubling. 
One of the great issues for democratic societies in the New World of the early 21 st century is achieving a proper balance between security and liberty. 
Err too far on the side of liberty and the society is open to attack. 
But creating a high-security state hands terrorists a victory by choking democratic freedom. 
Policymakers with the wisdom of Solomon, of whom there are precious few, are required. 
In this search for the right balance, democracy knows no boundaries. 
The US might learn from the experience of other nations and share its experience with them. 
Freedom belongs to no particular nation or system. 
It is a universal good that all must seek. 
Whether threatened by fascism, communism, terrorism, or any other form of fanaticism, freedom must defend itself in ways that do not become self-destructive. 
In this age of profound and multiple revolutions, perhaps the greatest revolution will involve the invention of new ways to make democratic freedoms survive and flourish. 

Why Freedom of Assembly Still Matters 
PRINCETON – It is now common knowledge that many democracies around the world are under pressure. 
But mounting threats to a particularly important democratic right have not received nearly enough attention. 
Through various means, governments are making it harder for citizens to assemble and protest. 
New restrictions on the right to assemble often come with innocuous-sounding justifications such as “public safety.” 
In the United States, the Trump administration has asserted a prerogative to recover cleaning fees after demonstrations, effectively allowing the government to charge protesters for exercising their constitutional right. 
And in an even more blatant effort to curtail public dissent, the administration has tried to bar assemblies from 80% of the sidewalks around the White House. 
Similarly, in Hungary, Prime Minister Viktor Orbán recently had legislation passed which makes it more difficult to demonstrate near private residences and national monuments, citing the potential of protests to “disturb the ordinary flow of traffic.” 
The authorities also want to ban demonstrations on state occasions. 
With vague justifications, the government can now make street demonstrations virtually impossible. 
Some might not think that hollowing out the right of assembly is as serious as other threats to democracy, not least partisan gerrymandering and voter suppression. 
After all, given the seemingly boundless possibilities to assemble virtually, the availability of physical space can appear less important. 
In fact, protests in streets and public squares are essential to democratic life. 
The right to assemble freely emerged from the right to petition kings. 
Historically, it has always been subject to more prior restraints than has speech. 
Even in many well-functioning democracies, public authorities try to keep crowds away from official government buildings. 
In the US, for example, demonstrators could not assemble close to Congress until the early 1970s, when the Supreme Court finally rejected the argument that Capitol Hill was an especially dignified space deserving of refuge from the unwashed masses. 
Yet, to this day, politically vocal crowds are routinely portrayed as uncontrollable mobs. 
For a recent example of this, consider how Bernard Kerik, a former New York City police commissioner , accused those protesting against Brett Kavanaugh’s confirmation to the Supreme Court of hindering “the orderly functioning of public institutions.” 
Still, is protesting outside particular public buildings really necessary? 
The Internet may not be the unalloyed democratizing force that many first thought it was, but it nevertheless opens up vast possibilities for “assembly” and expressing dissent online. 
Consider Emma González, a previously unknown Florida teenager who “assembled” two times more Twitter followers than the National Rifle Association almost overnight. 
By following an eloquent survivor of the Parkland massacre, 1.66 million Twitter users have signaled their support for stronger gun-control regulations, and their opposition to the US gun lobby. 
Nonetheless, assembly in physical space fulfills functions for democracy that online activity, however permanent or passionate, simply cannot. 
In 2011, when then-US Representative Barney Frank asked why Occupy Wall Street protesters “think that simply being in a physical place does much,” an appropriate answer would have been: “Actually, occupying public spaces can accomplish a great deal, depending on who the occupiers are and how many they number.” 
Hence, the civil rights marchers in the US during the 1950s and 1960s often evoked the “meaning of our numbers.” 
The sheer “mass” of citizens who were willing to come out – often at the risk of physical harm – lent credence to the cause. 
This may sound very basic, but, as Trump’s obsession with his relatively small inauguration crowd shows, size still matters. 
“The meaning of our numbers” also applies in virtual space. 
But, given the prevalence of bots and troll farms, one can never be sure of what the numbers on social media actually signify. 
Moreover, an agglomeration of people online is not visible in the way that an assembly of individual citizens is. 
True, Trump and other populists often try to discredit bona fide protests by claiming that they are stocked with “crisis actors” or “paid activists.” 
But there is no evidence of this; and once protests reach a certain size, such claims are likely to become highly implausible in the eyes of most citizens. 
To be sure, elections empirically demonstrate support for particular politicians, parties, and even policies. 
But, usually, elections do not register the intensity of that support. 
Mobilizing on streets and squares can send an important signal about a constituency’s commitment to a specific cause. 
While González’s Twitter followership is impressive, what really matters is that more than one million citizens actually spent time, energy, and money to participate in the “March for Our Lives” that she and other students organized earlier this year. 
Joining a rally can be risky in countries like Turkey, where democracy is already under severe threat. 
In physical space, one puts one’s body on the line. 
And given the power and widespread use of modern surveillance technology, one also makes oneself identifiable to the government. 
Yet it is precisely these dangers that make public protest more powerful than, say, anonymous online activism. 
Being together in physical space can create a sense of collective capacity. 
Talking and acting in concert with others in a visible, mutually reinforcing way is central to the democratic experience. 
Thus, in addition to signaling a movement’s goals to the wider public, physical gatherings can have a transformative effect on the participants themselves. 
Lastly, in physical space, action can speak as loudly as words in demonstrating new political and social possibilities. 
As the social scientist Zeynep Tufekci has shown, demonstrations and occupations today often include pop-up public libraries to celebrate an idea of voluntary cooperation based on equality. 
Freedom of assembly is not reducible to free speech or freedom of association. 
It is a distinct and powerful form of democratic action. 
Those concerned about threats to democracy today should pay heed to the threat against physical gatherings. 
The right of assembly deserves more consideration – and more protection – than it has been getting. 

Freedom of Religion or Freedom of Speech? 
PRINCETON – Last month, the United Nations Human Rights Council adopted a resolution condemning “defamation of religion” as a human rights violation. 
According to the text of the resolution, “Defamation of religion is a serious affront to human dignity” that leads to “a restriction on the freedom of [religions’] adherents.” 
The resolution was originally proposed by the 56-nation Organization of the Islamic Conference (OIC), and was put to the Human Rights Council by Pakistan. 
It supports that it was aimed at such things as the derogatory cartoons of the prophet Mohammad published in a Danish newspaper three years ago. 
Germany opposed the resolution. 
Speaking on behalf of the European Union, a German spokesperson rejected the concept of “defamation of religion” as not valid in a human rights context, because human rights belonged to individuals, not to institutions or religions. 
Many non-government organizations, both secular and religious, also opposed the resolution. 
Ronald Lauder, president of the World Jewish Congress, said that that body saw the resolution as weakening “the rights of individuals to express their views.” 
This seems like a sound argument. 
While attempts to stir up hatred against adherents of a religion, or to incite violence against them, may legitimately be suppressed, criticism of religion as such should not be. 
The resolution is non-binding, but if nations were to enact laws putting it into effect, there can be no doubt that it would interfere with freedom of expression. 
For a start, what counts as “defamation of religion” is contested. 
For example, the OIC said in its statement that “Islam is frequently and wrongly associated with human rights violations and terrorism.” 
Are those associations wrong? 
If the OIC wishes to change many people’s perception that Islam violates human rights, suppressing freedom of speech is hardly the best way to go about it. 
The way to change such a perception would be to marshal evidence against it, and to make the case that human rights – including the rights of women – are as well protected in Islamic countries as they are in non-Islamic countries. 
To demonstrate that it is wrong to associate Islam with terrorism, the OIC might begin to compile statistics on the religious affiliations of those who engage in terrorism. 
By contrast, suppressing the freedom of speech of Islam’s critics merely gives rise to the suspicion that evidence and sound argument cannot show their arguments to be mistaken. 
Coincidentally, in the same week that Germany and the World Jewish Congress rejected the idea that defamation of religion is an affront to human dignity, and upheld the right to freedom of expression, Germany’s highest court issued its ruling on a case brought by a Jewish organization, and two Jewish individuals. 
The court ruled against the right of the United States-based animal rights group People for the Ethical Treatment of Animals to exhibit posters that juxtapose photographs of victims of the Holocaust with photographs of animals in factory farms and at slaughterhouses. 
The posters bear the heading: “To Animals, All People are Nazis” – a line from the Polish-born Jewish writer Isaac Bashevis Singer. 
According to the court, Germany’s laws on freedom of speech did not protect PETA’s campaign, because to make “the fate of the victims of the Holocaust appear banal and trivial” was an offense against human dignity. 
PETA was, of course, not arguing that Holocaust victims’ fate was banal or trivial. 
On the contrary, it was using the Holocaust – which we would all agree was utterly horrific – to suggest, as Isaac Bashevis Singer did, that there are parallels between the way the Nazis treated Jews and the way we treat animals. 
The conclusion PETA wants us to reach is that both the Holocaust and the mass confinement and slaughter of animals are horrific. 
A free society should be open to discussing such a claim. 
Irrespective of the merits of PETA’s campaign, however, those who stood up for free speech at the UN Human Rights Council should be able to see that the fact that some forms of speech cause offense is not sufficient reason to censor them. 
If PETA is not allowed to state its case against our abuse of animals in the way that they judge best, because doing so might offend some people, then criticism of religion could also be prohibited on the same grounds. 
If, on the other hand, a religion’s adherents have no right to protection against criticism of their religion, then, even in Germany, Holocaust victims and their descendants (I am one) should not be protected against advertising campaigns that, though not intended to incite hatred or violence, may cause them offense. 

Freeze the Settlement Freeze 
RAMALLAH – Israeli Prime Minister Benjamin Netanyahu’s decision to approve new Jewish settlements on the eve of a possible settlement freeze is the latest round in a cycle that has been repeated so many times over the past 40 years that it would seem mundane if it were not so dangerous. 
The cycle goes something like this: American or international pressure mounts on Israel to stop settlement activities in the occupied territories. 
Israeli settlers and their supporters then gather even more energy to expand onto more Palestinian land, build more exclusively Jewish settlements, and destroy more Arab homes before the so-called “freeze” comes into effect. 
The peace process, not surprisingly, becomes a joke while this happens. 
Eventually, world pressure subsides and the freeze fails to materialize. 
In the end, more Jewish settlements appear. 
Indeed, the great paradox of this cycle is that more settlements are built during times of negotiations than during times of conflict. 
This pattern can be traced to 1967. 
Israelis understand that the only reality in politics is the reality on the ground. 
So long as Israeli soldiers control the occupied territories, the idea of a settlement freeze will not take root. 
In fact, the demand for a settlement freeze is nothing more than a call to arms to a wide group of Israelis and their supporters to go and build on stolen Palestinian land. 
When Egyptian President Anwar Sadat was preparing for his historic visit to Jerusalem, a group of settlers created the settlement of Elon Moreh near Nablus, the most populated West Bank city. 
When former United States Secretary of State James Baker began his shuttle diplomacy for peace, his ultimately unsuccessful efforts actually resulted in more settlements, with a new one started just hours before he was due to arrive for talks. 
Baker postponed his visit and later vented his frustrations to the US Senate Committee on Appropriations. 
He resented “being greeted” every time he came to the Middle East with yet “another settlement.” 
Baker’s efforts eventually led to the Madrid peace conference in 1991, but that, too, failed to resolve the conflict. 
And, while Palestinians and Israelis did reach a secret agreement a few years later that was publicly declared at a White House ceremony, construction of Jewish settlements didn’t stop. 
In fact, since the 1993 Oslo Accords the number of Jewish settlers in the occupied territories has doubled. 
The creation of new settlements has often been accompanied by hostile media reporting – even within Israel – as well as international condemnation, yet the settlement train has not stopped. 
It continued to race ahead even during the days when Israel’s government rotated between Likud’s Yitzhak Shamir and Labor’s Shimon Peres between 1984 and 1990. 
The Shamir government would be defeated at the polls, and the incoming Labor government would declare a freeze on all settlement construction, even on buildings that had already been started. 
But, despite the decrees, ways were found to continue building, to absorb new residents, and to increase the settler population. 
For the US, the settlements have proven to be an equal-opportunity obstacle, obstructing both Republican and Democratic diplomacy. 
The Clinton administration attempted to put brakes on then-Prime Minister Netanyahu’s efforts to construct a new settlement near Bethlehem. 
After a short hiatus, construction resumed. 
The Bush-Cheney Administration, the most pro-Israeli in memory, fared no better. 
Today, Har Homa, built on Jabal Abu Ghnaim with the aim of cutting off Bethlehem from Jerusalem, is home to 19,000 settlers. 
This cycle has become so bizarre and confusing that Palestinians are not sure whether they should hope for continued tensions with Israel (which usually means no new settlements) or for continued negotiations (which usually provide cover for building settlements). 
On January 5, 2007, the day Prime Minister Ehud Olmert met with US Secretary of State Condoleezza Rice to discuss a new round of talks, the Israeli Construction and Housing Ministry issued a tender for the construction of more units in Ma’ale Adumim, an exclusively Jewish settlement in the occupied West Bank. 
Of course, whenever the Israelis defy the world over the settlements, as is now once again happening, US and other officials “denounce” and “regret” the decision. 
But, at the end of the day, despite these few statements and perhaps even a UN resolution of opposition, the pattern established over the past 40 years is clear: the decision stands. 
Jeff Aronson, a senior researcher at the Washington-based Foundation for Middle East Peace, concludes that Israeli leaders will continue to be able to fool their American counterparts on this issue. 
Some Israeli right-wing leaders like Menachem Begin, Shamir, and Netanyahu trumpet their settlement achievements. 
Others, including Yitzhak Rabin, Ehud Barak, and Ehud Olmert “talked left and built right.” 
Palestinians are caught in a Catch-22: if they insist on a settlement freeze, Israel preemptively begins to build new settlements. 
Unless and until Israel pays a heavy price for its illegal activities in the occupied territories, it is hard to imagine a successful peace process taking shape. 



The Second Year of Europe 
NEW YORK – More than four decades ago, US National Security Adviser Henry Kissinger declared 1973 to be “The Year of Europe.” 
His aim was to highlight the need to modernize the Atlantic relationship and, more specifically, the need for America’s European allies to do more with the United States in the Middle East and against the Soviet Union in Europe. 
Kissinger would be the first to admit that the Europeans did not take up his challenge. 
Nevertheless, we again face a year of Europe. 
This time, though, the impetus is coming less from a frustrated US government than from within Europe itself. 
The stakes are as high as they were in 1973, if not higher. 
Russia shows no sign of withdrawing from Crimea or stopping its efforts to destabilize eastern Ukraine. 
There is genuine concern Russia might employ similar tactics against one or more of the small NATO countries on its border. 
Refugees have added to Europe’s strain, as has terrorism inspired by events in the Middle East or carried out by attackers from the region. 
Brexit, the United Kingdom’s exit from the European Union, has now formally begun; what remains to be resolved are its timing and terms, which will determine its impact on the UK’s economic and political future and on others contemplating withdrawal from the EU. 
Greece and a number of other countries in southern Europe continue to be burdened by high unemployment, growing debt, and a persistent gap between what governments are being asked to do and what they can afford. 
But of all the challenges confronting the EU, France’s upcoming presidential election holds the most significance for Europe’s future, and perhaps for that of the world. 
Polls indicate that any of the four candidates could emerge as the eventual winner. 
What makes this uncertainty different and truly consequential is that two of the four, National Front leader Marine Le Pen and far-left leader Jean-Luc Mélenchon, support policies far outside the French and European mainstream. 
If either wins the second-round run-off on May 7, it could mean the end of French membership in both the EU and NATO, raising existential questions for both organizations – and for all of Europe. 
Such scenarios were unimaginable until only recently. 
For decades, Europe has constituted the world’s most successful, stable, and predictable region, a place where history seemed to have all but ended. 
The goal of making the continent peaceful, whole, and free had largely been realized. 
But dramatic change has come to Europe. 
One factor is the willingness and ability shown by Vladimir Putin’s Russia to use military force, economic coercion, and cyber manipulation to advance its agenda. 
But an even greater challenge to modern Europe comes from its own politicians, who increasingly question the value of the EU, the heir to the European Economic Community established in 1957 by the Treaty of Rome. 
The rationale behind Europe’s six-decade-long integration process – often called the “European project” – was always clear. 
Western Europe, and above all Germany and France, had to be unified to such a point that war, which had so often characterized the continent’s past, would become unthinkable. 
This has been achieved, as has considerable economic progress. 
But, along the way, the European project lost its hold on Europe’s citizens. 
The EU’s institutions became too distant, too elitist, and too strong, not taking into account the national identities to which Europeans remained attached. 
The ill-advised creation of a monetary union without a fiscal counterpart made matters worse. 
The bureaucrats had overreached. 
The rise of populist, nationalist candidates on both the left and the right in France and elsewhere in Europe is the result. 
And even if one of the two establishment candidates prevails in France, much will remain uncertain. 
The immediate crisis will have passed, but the long-term challenge will remain. 
It is apparent that the EU needs to be rethought. 
It needs to move away from “one size fits all” to something more flexible. 
There also needs to be a rebalancing of power away from Brussels, the seat of most EU institutions, toward the national capitals. 
Governments need to do more to create the prerequisites of faster economic growth while enhancing workers’ ability to contend with the inevitable elimination of many existing jobs as a result of technological innovation. 
Germany, whether led by its current chancellor or her principal opponent after its general election in September, will need to take the lead here. 
Europeans, appropriately enough, will mostly determine Europe’s future. 
But the Trump administration also has a role to play. 
Trump’s shortsighted support for Brexit and other exits from the EU must end; a divided, weaker, and distracted Europe will not be a good partner in NATO. 
It may be true that Asia is more likely than Europe to shape the history of the twenty-first century. 
But the lesson of the last century should not be lost: what happens in Europe can and will affect global stability and prosperity. 


Reinventing the French People 
PARIS – “It is accomplished…” In the years when I listened to music nonstop, the passage marked by those words was for me one of the most intriguing in Bach’s St. John Passion. 
In a plaintive soprano accompanied by a cello’s lament, lingering between song and silence, the memory came back to me on Monday morning, the day after the second round of France’s parliamentary election. 
The event that has been accomplished, of course, is President Emmanuel Macron’s plan to obtain a majority in the National Assembly. 
But, whether we like it or not, there is more to the event than that. 
Another accomplishment was the record-high abstention rate: 57% of French voters disdained the rare and precious privilege of voting, a privilege invented several centuries ago by men who believed in deliberation, reason, and enlightenment. 
Inevitably, we will hear commentary about an electorate exhausted from a dramatic year in which France’s political foundations shifted and its traditional points of reference were obscured. 
We will be told about the inner wisdom of a nation that already knew the outcome and wished, without saying so, to avoid the appearance of an excessive victory. 
Blame will be placed on the weather, the bridges, the media, the bitterness of spurned leaders, and the unknown quantities represented by the new faces of the president’s army of candidates. 
But I do not believe that these anecdotal responses will hold up for long. 
I cannot avoid hearing, in the deafening silence of the millions who abstained, the dissonant note one always detects in victorious fanfares. 
One never knows, at first, whether it is just a false note, the sound of things falling and continuing to roll briefly before finally coming to a stop, or a real clunker, a more jarring interruption, the herald of a real crisis. 
And we cannot rule out that Sunday’s most salient statistic (that 57%!) signifies not only the last gasp of the supine corpses that had been yesterday’s political apparatus (and that may rise again to become tomorrow’s populist parties). 
It could also reflect a process of dereliction, desertion, and dispersal; one that affects, beyond the vote, the idea that the French hold of themselves, an idea that suddenly appears phantasmagoric. 
Hobbes warned us. 
“The people” is always an artifact. 
Given the unsociable sociability of human beings, driven by their appetites and passions, the process by which it is fashioned is both brazen and fragile. 
And, in the real world, it is the social contract, with its institutions and procedures, its modes of deliberation, delegation, and mediation, and, in particular, its votes, that stands behind the noble invention of a “people” and accounts for the fact that those who comprise it occasionally take a break from tearing each other limb from limb. 
I cannot help but wonder, in the aftermath of France’s “Abstention Sunday,” whether the sound we hear is not the seizing up of this splendid, subtle machine. 
I wonder, too, if we are not nearing the end of a process of dissolution that now threatens to turn the abstraction of “the people” irreversibly into a fiction, one nearly impossible to imagine (let alone put a face to) and even more difficult to believe. 
I wonder if the satisfaction of being a people – as invented by the first Europeans and Americans, reinvented by the French celebrants of national unity on July 14, 1790, and celebrated by the French historian and poet Michelet – is not becoming a thing of the past. 
That would seem to leave us to choose between two stances. 
We can accommodate ourselves to this irreality and Macron’s newly installed representatives, so preternaturally smooth and remote as to suggest that they might have been elected while Leviathan was sleeping. 
Or we can rely on Facebook and Twitter to restore a semblance of will and sovereignty to what used to be called the people, by technical means that enable real-time responses to instant referenda. 
But there is another alternative: to detect in the prospect of answers without questions and choices, without deliberation or even thought, a path that will lead eventually only to more inhumanity, owing to the urges that may at any moment take hold of a people that senses itself withering away. 
In that case, we could gird ourselves with intelligence, reason, and courage; return in force to the political arena; and, inspired by the Enlightenment’s legacy, recast in today’s language the theorems of representative democracy, a political system that remains (and will long remain) without peer. 
We must reassemble what is falling apart and drifting away like icebergs. 
We must close the wound from which flows the lifeblood of a fragmented society. 
In short, we the people must refound ourselves on the rubble of a smoldering world that trembles beneath our feet. 
Such is the true revolution toward which Macron and his parliamentary majority will have to work in France. 
The task is immense, historic, and ultimately meta-political. 
No single individual, nor several, nor even an overwhelming majority can accomplish it. 
What will be needed is the general will – no longer just individual or collective, but truly general – of the Republic of France. 
And then, as in Bach’s St. John Passion, in which the lamentation that “It is accomplished” is followed by strings of Resurrection, it will become possible once again to discern in France’s politics the traces of French history – and the path to France’s future. 

Another Strange French Disaster 
PARIS – The “hunger games” aspect of this French election cycle began on the left. 
President François Hollande was brought down by his own Socialist Party. 
Hollande’s prime minister, Manuel Valls, became the second course at the cannibals’ banquet. 
By then, the corpse of one of France’s two major parties, no longer merely supine, had reached an advanced state of decomposition. 
Now, at the very moment when one might expect a presidential candidate to tell the nation what he thinks of Donald Trump, Vladimir Putin, and Islamic radicals, the Socialist candidate, the wan Benoît Hamon, finds nothing better to talk about than legal marijuana, red sludge, and endocrine disruptors. 
On the right, the disaster is just now cresting. 
Early on, former president Nicolas Sarkozy was eliminated. 
Former Prime Minister Alain Juppé, after being crowned virtual president for much of last year, was toppled by those who had adored him. 
And, in the wake of the scandal surrounding François Fillon, the Republican nominee and the man who defeated him, Juppé lost his nerve and on March 6 definitively quit the race. 
Fillon, once the clear frontrunner, the choice of four million primary voters, has now brought forth the spectacle of a party of mutineers trying to nudge him out of the race. 
Schemes, evasions, calculations, and bargains multiply, all based on polls interpreted by the modern equivalents of Roman haruspices. 
Another corpse. 
Enter the investigating magistrates, who obviously are playing their rightful role in hearing evidence about a fake jobs scandal involving Fillon’s wife and children. 
Their integrity, however, will not be impugned by a gentle reminder that they, too, are human beings, susceptible to human passions and resentments; that the considerable power they wield tends, as all power does, to reach as far as it can; and that, as a consequence, they have become fully enmeshed in a campaign from which, invoking Montesquieu, they should strive scrupulously to hold themselves at a distance. 
But we, citizens and voters – each and every one of us – are the worst part of this entire picture. 
Our new and strange relationship to politics, as evidenced by the current circumstances, can be summed up in three terms. 
Cancan. 
Or, more accurately, can’t-can’t: the griping we do upon the Wednesday appearance of the new Le Canard Enchaîné, the satirical weekly whose insurrectionary humor, once fodder for the loose cannons of the left and right, is becoming the everyday language of politics. 
There was a time when reading the newspaper was, according to Hegel, the philosopher’s morning prayer. 
Now reading that particular newspaper feeds the electorate’s insatiable appetite for ridicule. 
With what sardonic anticipation French readers await the latest on the base doings of our elected officials and their rivals! 
With what greedy delectation do we devour our weekly dose of corruption, rot, and scandal! 
And what bleak disappointment we feel, what sudden loss of interest in life, when, by chance, there is nothing new to report. 
Ought we not bear in mind, with the poet Stéphane Mallarmé, that when we amuse ourselves thus and become so inebriated with scandal, we “yawn gloomily toward a dark demise.” 
Spectacle. 
In lieu of judgment, we get ceaseless and frivolous commentary on the thousand and one twists and turns of the electoral contest. 
Once, the news media covered sports as if it were politics. 
Now political commentary resembles sports coverage. 
“Game analysis” has become the paradigm of political narrative. 
And, in the venerable country said by Marx to be the political nation par excellence, politics is becoming a subspecies of soccer, with its teams, fans, referees, and high scorers. 
Is it any surprise that at the height of the Fillon affair, the right-wing bosses and their phantom coaches turned (doctrinal and stylistic differences be damned!) to their benchwarmers, who were supposed to be waiting to enter the game? 
Likewise, one wonders whether Fillon’s loyalists see in him anything more than his stamina, his ability to take a beating, or the figure he cut when, after being knocked flat on his back, he got up as if returning to an unfinished fight. 
Equality. 
Eagerness for it was, once, the noblest of passions; there was, in that passion, the dream of cultivating the body politic and, in so doing, dignifying politics. 
And I agree with the philosopher Jean-Claude Milner who, in his recent book, Relire la Révolution, takes on the Anatole France of The Gods Are Athirst. 
Far from simply offering the people their daily ration of blood, Robespierre also tried, in his way, to check the descent of the masses into a vengeful mob and to save what could be saved of the balances inherent in republican hierarchy. 
There is none of that in today’s brand of egalitarianism – nothing but a mob inching ever closer to its moment of ultimate power while promoting an equality not of common interest but of complaints, indignities, grudges, and corruption. 
And, among the fragmented, distraught children of the Enlightenment, among the zombie heirs of Rousseau fibrillating between aggressiveness, blindness, and despair, equality is no longer a task but a taint, a sort of dark shroud, a halo of resentment and hatred to which our common tongue is tied as to a buoy in a tide. 
Another disaster. 
Another delusion. 
From redemptive egalitarianism to equal-opportunity grousing and score-settling, we have hiked the path that leads a society from life to death. 
Frightening as it sounds, that is where France finds itself: not in a mere crisis, but in the last stages of what the great anti-Nazi historian Marc Bloch called, in 1940, his nation’s “strange defeat.” 
We confront not a lone tree of iniquity, but rather a vast forest of murky words, dangerous and lunatic in their debasement. 
And, lying in wait, guided by the Eumenides (the Greek deities of vengeance whose name is synonymous with fury as well as justice), a figure is taking shape as if, in classical terms, in fulfillment of a dreadful fate: Marine Le Pen. 

The French Exception? 
PARIS – More than ever, the French economy is at the center of the global debate about how far one can push the limits of state size and control in a capitalist democracy. 
To those on the left, France’s generous benefits and strong trade unions provide a formula for a more inclusive welfare state. 
To those on the right, France’s oversized and intrusive government offers only a blueprint for secular decline. 
For the moment, the right looks right. 
Once nearly the economic equal of Germany, France has fallen well behind over the past decade, with per capita GDP now about 10% lower. 
France may punch above its weight politically, but it punches far below its weight economically. 
Whenever someone proposes turning the eurozone into a transfer union, as France’s economy minister, Emmanuel Macron, recently did, the presumption is that Germany will carry everyone else on its shoulders. 
But why should only Germany have that responsibility? 
France’s economy is roughly three-quarters the size of Germany’s. 
Persuading the Germans that the French are willing and able to pay their fair share could make room for a lot of necessary compromises that until now have seemed impossible. 
For now, few people feel confident about France’s economic future. 
The good news is that France is not quite as French as it pretends to be. 
Yes, there is a 35-hour workweek, but companies can negotiate around the limit by offering to pay more for overtime. 
The effective workweek for most workers is perhaps closer to 39 hours. 
Yes, France has sought to limit the car service Uber, whose business model has arguably been one of the most transformative and important advances of the decade. 
But, while this is a triumph for taxi unions and a tragedy for passengers and Uber drivers, France has also started focusing on nurturing small, high-potential technology companies. 
The French government is no longer placing all its bets on big, state-led projects, as it did in the 1970s heyday of massive investment in high-speed trains and Airbus. 
President François Hollande has given Macron wide berth to try to implement desperately needed structural reforms of labor and product markets. 
Of course, it remains to be seen just how much political support such market-oriented policies can sustain. 
Progressive economists love the French government for spending a staggering 57% of GDP, compared to government expenditures of 44% of GDP for Germany. 
And it must be acknowledged that the French government provides excellent value in some key areas. 
France’s health service justly receives much better reviews than the United Kingdom’s. 
French citizens might pay a lot of taxes and suffer a high degree of regulation, but at least they get something in return. 
Still, France’s supersize government is hardly a source of unalloyed dynamism. 
And indeed, one suspects that France’s GDP and productivity measures are flattered by the fact that, for lack of market prices, statisticians blindly assume that citizens get one dollar of value for each dollar spent on government, which might be an overstatement. 
Worryingly, it is not clear how well France’s culture of inclusiveness can ever extend to immigrants. 
The same strict firing laws and high levels of minimum wages that are intended to protect native French workers from globalization make it much more difficult for newcomers to land jobs. 
Yet virtually every study of global inequality suggests that gains from allowing greater labor mobility dwarf gains from redistributing income among natives. 
By contrast, the more liberal labor laws in the United States and the United Kingdom ensure more opportunities for outsiders. 
The center of Paris and other French cities may be grand, but many immigrants from North Africa and elsewhere live in squalid ghettos on the outskirts. 
Although the precise rate of unemployment for particular ethnic groups is not known (French law precludes collecting data by ethnic classification), anecdotal evidence suggests much higher levels of joblessness for immigrants and their descendants. 
True, the government provides generous welfare benefits; but this alone does not produce inclusiveness. 
Strong popular support for Marine Le Pen’s anti-immigration National Front party, together with French recalcitrance about accepting migrants escaping the war in Syria, indicates the problems with applying the French model in diverse societies. 
Another obstacle to applying the French model elsewhere is that France enjoys certain unique advantages that are arguably critical to its success. 
Elite French managers are widely considered among the best in the world, and are frequently selected to head major international corporations. 
Corruption is certainly a problem, but significantly less so than in most of the eurozone’s south. (The Italian state is also large and intrusive, but it does not produce the high-quality public services that the French government does.) 
Lastly, France arguably has one of the world’s most favorable natural environments, with fertile soil and an exceptionally temperate climate. 
A healthy French economy would do wonders to help lift the eurozone out of its malaise. 
It could also provide an example to countries everywhere of how inclusive capitalism can work. 
But that assumes that the government will embrace the structural reforms that France’s economy so desperately needs. 

Friedman Completed Keynes 
The most famous and influential American economist of the past century died in November. 
Milton Friedman was not the most famous and influential economist in the world -- that honor belongs to John Maynard Keynes. 
But Milton Friedman ran a close second. 
From one perspective, Milton Friedman was the star pupil of, successor to, and completer of Keynes’s work. 
Keynes, in his General Theory of Employment, Interest and Money , set out the framework that nearly all macroeconomists use today. 
That framework is based on spending and demand, the determinants of the components of spending, the liquidity-preference theory of short-run interest rates, and the requirement that government make strategic but powerful interventions in the economy to keep it on an even keel and avoid extremes of depression and manic excess. 
As Friedman said, “We are all Keynesians now.” 
But Keynes’s theory was incomplete: his was a theory of employment, interest, and money. 
It was not a theory of prices. 
To Keynes’s framework, Friedman added a theory of prices and inflation, based on the idea of the natural rate of unemployment and the limits of government policy in stabilizing the economy around its long-run growth trend – limits beyond which intervention would trigger uncontrollable and destructive inflation. 
Moreover, Friedman corrected Keynes’s framework in one very important respect. 
The experience of the Great Depression led Keynes and his more orthodox successors to greatly underestimate the role and influence of monetary policy. 
Friedman, in a 30-year campaign starting with his and Anna J. Schwartz’s A Monetary History of the United States , restored the balance. 
As Friedman also said, “and none of us are Keynesian.” 
From another perspective, Friedman was the arch-opponent and enemy of Keynes and his successors. 
Friedman and Keynes both agreed that successful macroeconomic management was necessary - that the private economy on its own might well be subject to unbearable instability ­and that strategic, powerful, but limited economic intervention by the government was necessary to maintain stability. 
But, while for Keynes, the key was to keep the sum of government spending and private investment stable, for Friedman the key was to keep the money supply -- the amount of purchasing power in readily spendable form in the hands of businesses and households-- stable. 
A relatively minor, technical difference in means, you might say. 
A difference of opinion that rested on different judgments about how the world works, which could (and ultimately was) resolved by empirical research, you might say. 
And you would be half right. 
For this difference in means, tactics, and empirical judgments rested on top of deep gulf in Keynes’s and Friedman’s moral philosophy. 
Keynes saw himself as the enemy of laissez-faire and an advocate of public management. 
Clever government officials of goodwill, he thought, could design economic institutions that would be superior to the market -- or could at least tweak the market with taxes, subsidies, and regulations to produce superior outcomes. 
It was simply not the case, Keynes argued, that the private incentives of those active in the marketplace were aligned with the public good. 
Technocracy was Keynes’s faith: skilled experts designing and fine-tuning institutions out of the goodness of their hearts to make possible general prosperity -- as Keynes, indeed, did at Bretton Woods where the World Bank and IMF were created. 
Friedman disagreed vociferously. 
In his view, it usually was the case that private market interests were aligned with the public good: episodes of important and significant market failure were the exception, rather than the rule, and laissez-faire was a good first approximation. 
Moreover, Friedman believed that even when private interests were not aligned with public interests, that government could not be relied on to fix the problem. 
Government failures, Friedman argued, were greater and more terrible than market failures. 
Governments were corrupt. 
Governments were inept. 
The kinds of people who staffed governments were the kinds of people who liked ordering others around. 
At the same time, Friedman believed that even when the market equilibrium was not the utilitarian social-welfare optimum, and even when government could be used to improve matters from a utilitarian point of view, there was still an additional value in letting human freedom have the widest berth possible. 
There was, Friedman believed, something intrinsically bad about government commanding and ordering people about -- even if the government did know what it was doing. 
I do not know whether Keynes or Friedman was more right in their deep orientation. 
But I do think that the tension between their two views has been a very valuable driving force for human progress over the past hundred years. 

From Carbon Insolvency to Climate Dividends 
BERLIN – Limiting global warming to 2°C above pre-industrial levels is absolutely crucial, says the G-8 and most of the world’s best climatologists. 
If this is to be more than lip service, the consequences will be radical. 
For starters, until 2050, only a total of around 700 gigatons of carbon dioxide can be emitted into the atmosphere. 
At the current rate of emissions, this “budget” will be exhausted in 20 years; if emissions increase as expected, the world will become carbon “insolvent” even sooner. 
So reducing CO2 and other greenhouse gas emissions must begin as quickly as possible. 
Wasting any more time will cause costs to skyrocket and render the 2° limit obsolete. 
The rich North cannot continue as before, emerging industrial countries must leave the old industrial-based path to prosperity, and the rest of the world may not even embark upon it. 
Yet the negotiations on emissions limits with each of the 192 signatory countries in the run-up to the Copenhagen Summit in December 2009 have so far given no indication of so radical a change. 
A global climate deal must be simpler, fairer, and more flexible than is today’s Kyoto Protocol. 
To achieve this, the Global Change Council of Germany (WGBU) suggests that a budget formula be adopted. 
The idea is that, in the future, all states will be allocated a national per-capita emissions budget that links three core elements of a fair global climate deal: the major industrial countries’ historical responsibility, individual countries’ current performance capacity, and global provision for the survival of mankind. 
The task is immense. 
On a global level, quick and comprehensive de-carbonization of the world economy is necessary. 
All countries must reduce their use of fossil fuels and switch to renewable energy sources as soon and as much as possible. 
But, since the OECD-countries (led by the United States and Australia) will soon overrun their carbon budgets even after far-reaching emissions reductions, they must cooperate with developing countries that still have budget surpluses. 
Breaking the Gordian knot of climate negotiations requires offering technology and financial transfers in exchange for the ability to overrun a national budget. 
A responsible global climate policy thus entails a fundamental change of international relations, and making the necessary institutional innovations in global governance requires courage. 
Until now, the wealth of nations has been based upon the combustion of coal, gas, and oil. 
But, if the 2°C target is taken seriously, the twenty-first century will see countries that are not so far down the path of carbonization (such as large parts of Africa), or that leave it in time (such as India and Pakistan), able to become wealthy by helping societies that must de-carbonize rapidly. 
For the moment, all this is still utopian. 
In its current state, cap-and-trade schemes to reduce emissions are far from being fair and effective; a major improvement would include establishing a Central Climate Bank to register and supervise the transfer of emissions credits. 
This bank would also ensure that emissions trading did not run counter to the goal of remaining within the entire global budget, for example via the complete sale of unused emissions credits by individual developing countries at the beginning of the contract period. 
In order to achieve this, the Central Climate Bank must have the power to do its job. 
That, in turn, implies that it is accountable and that it has democratic legitimacy – something fundamentally lacking in multilateral agencies such as the World Bank. 
Additional changes to global governance will also be needed. 
These changes include the consolidation of face-to-face negotiations between old and new world powers (the US, the European Union, and China) and developing and emerging countries, including new regional powers like Mexico, Egypt, Turkey, and Indonesia. 
In this framework, the old G-7/8 can no longer function as a hegemonic center, but rather as a kind of broker and preparatory body. 
Simultaneously, within a variable architecture of negotiation, there must be links to the numerous conference institutions of the United Nations, as well as to political-economic regional associations such as the EU, Mercosur, or the African Union. 
This flexible (and, alas, fragile) architecture of multi-level negotiation can function only as long as it is oriented towards clear moral bases for negotiation, has sufficient democratic legitimacy, and is supported in national and local arenas of action. 
Global leaders will find it significantly easier to steer towards big cooperation targets if they are supported by visions of the future within civil society. 
A low-carbon society is not a crisis scenario, but rather the realistic vision of liberation from the path of expensive and risky over-development. 
In 1963, when the world narrowly escaped nuclear catastrophe, the physicist Max Born wrote: “World peace in a world that has grown smaller is no longer a Utopia, but rather a necessity, a condition for the survival of mankind.” 
Those words have never been truer. 

From Central Bank to Central Planning? 
BERKELEY – For more than 170 years, it has been accepted doctrine that markets are not to be trusted when there is a liquidity squeeze. 
When the prices of even safe assets fall and interest rates climb to sky-high levels because traders and financiers collectively want more liquid assets than currently exist, it is simply not safe to let the market sort things out. 
At such a time, central banks must step in and set the price of liquidity at a reasonable level – make it a centrally-planned and administered price – rather than let it swing free in response to private-sector supply and demand. 
This is the doctrine of “lender-of-last-resort.” 
For more than half that time – say, 85 years – it has been accepted doctrine that markets are also not to be trusted even in normal times, lest doing so lead to a liquidity squeeze or to an inflationary bubble. 
So, central banks must set the price of liquidity in the market day in and day out. 
According to the followers of Knut Wicksell, the central bank must keep the market rate of interest near the natural rate of interest. 
No, said the followers of John Maynard Keynes, it must offset swings in business animal spirits in order to stabilize aggregate demand. 
On the contrary, said the followers of Milton Friedman, it must keep the velocity-adjusted rate of growth of the money stock stable. 
In fact, if you do any one of these things, you have done them all, for they are three ways of describing what is at bottom the same task and the same reality. 
Thus, as social democracy, government guideposts, and centralized planning waxed and waned elsewhere in the economy, social democracy in short-term finance went from strength to strength. 
First, central banks suspended the rules of the free market in liquidity squeezes. 
Then they set the price of liquidity as an administered price in normal times. 
Then they freed themselves of all but the lightest contact with their political masters: they became independent technocrats, a monetary priesthood that spoke in Delphic terms obscure to mere mortals. 
The justification for this system was that it seemed to work well – or at least less badly than central banking that blindly adhered to the gold standard or no central banking at all. This island of central planning in the midst of the market economy was a strange and puzzling feature – all the more so because so few remarked how strange it was. 
There were no calls for a five-percent-growth-of-kilowatt-hours rule as there were calls for a five-percent-growth-of-M2 rule. There was no Federal Automobile Board to set the price of vehicles the way the Federal Reserve Board set the price of federal funds. 
But now it appears that, despite all this, we still have not had enough central planning in finance. For, even as the central banking authority administered the price of liquidity, the price of risk was left to the tender mercies of the market. 
And it is the price of risk that is the source of our current distress. 
It is not that the world economy faces a liquidity squeeze. 
Far from it: two-year United States Treasury notes with a face value of $1,000 will get you $998 in cash – the lowest liquidity price since the Great Depression and Japan in the 1990’s. 
Yet the risk premia on non-Treasury assets have soared to barely believable heights: the annual interest-rate premium for holding a CD issued by a private bank now stands at five percentage points. 
And it is this rise in risk premia that threatens to send the global economy into a deep recession, and turn the financial markets from a spectacle of schadenfreude into a malign source of unemployment and idle factories worldwide. 
The US Federal Reserve, the US Treasury, the European Central Bank, the Bank of England, and other public financial regulatory entities are being pushed toward a further expansion of their roles. 
The Treasury and Federal Reserve are adding preferred stock to the balance sheets of the US mortgage giants Fannie Mae and FHLBC and the insurance giant AIG in the hope of shoring up their capital cushions and lowering their borrowing costs so that they can buy more mortgages. 
The Treasury has asked for authority to purchase $700 billion of mortgages to get them off of the private sector's books. 
Expanding the demand and reducing the supply of these risky assets is a way of manipulating their price. 
The Fed and the Treasury are walking down a road that ends with making the price of risk in financial markets, along with the price of liquidity, an administered price. 
This was how central banking got started in the first place: letting the market and the market alone determine the price of liquidity was judged too costly for the businessmen who voted and the workers who could overthrow governments. 
Now it looks as though letting the market alone determine the price of risk is similarly being judged too costly for today’s voters and campaign contributors to bear. 

From Christian Democracy to Muslim Democracy? 
BUDAPEST – This summer, Turkey’s ruling Justice and Development Party (AKP) narrowly escaped being banned by the country’s constitutional court. 
State prosecutors alleged that the party was trying to “Islamicize” the country and ultimately introduce theocracy. 
Not only did AKP supporters celebrate after the decision, but those in the West who view it as a prototype “Muslim Democratic” party also breathed a sigh of relief. 
The clear model for a moderately religious party – one committed to the rules of the democratic game – are the Christian Democratic parties of Western Europe and, to a lesser extent, Latin America. 
Yet opponents of the idea of “Muslim democracy” argue that European Catholics only turned to democracy under orders from the Vatican, and that since Muslims do not have anything like a Church hierarchy, Christian Democracy is an irrelevant example. 
But history shows that political entrepreneurs and liberalizing Catholic intellectuals were crucial to the creation of Christian Democracy. 
This suggests that Muslim reformers, given the right circumstances, might be similarly capable of bringing about Muslim democracy. 
Christian Democratic parties first emerged in Belgium and Germany toward the end of the nineteenth century as narrowly focused Catholic interest groups. 
The Vatican initially regarded them with suspicion, perceiving parties participating in elections and parliamentary horse-trading as signs of “modernism.” 
A breakthrough came with the Italian Popular Party’s founding in 1919. 
Its leader, Don Luigi Sturzo, wanted it to appeal to tutti i liberi e forti – all free and strong men. 
The Vatican, having prohibited Italian Catholics from participating in the political life of newly united Italy for almost sixty years, lifted its ban. 
But Mussolini soon outlawed the Popolari ; in any event, the Vatican had had a strained relationship with the party and appeared more comfortable supporting pro-Catholic authoritarian regimes in countries like Austria and Portugal. 
But while Christian Democracy got nowhere politically between the World Wars, momentous changes were initiated in Catholic thought. 
In particular, the French Catholic thinker Jacques Maritain developed arguments as to why Christians should embrace democracy and human rights. 
During the 1920’s, Maritain was close to the far-right Action Française . 
But the Pope condemned the movement in 1926 for essentially being a group of faithless Catholics more interested in authoritarian nationalism than Christianity. 
Maritain accepted the Pope’s verdict and began a remarkable ideological journey toward democracy. 
He criticized France’s attempts to appear as a modern crusader, incurring the wrath of Catholics in the United States in particular. 
More importantly, he began to recast some of Aristotle’s teachings and medieval natural law doctrines to arrive at a conception of human rights. 
He also drew on the philosophy of “personalism,” which was highly fashionable in the 1930’s, as it sought a middle way between individualist liberalism and communitarian socialism, and insisted that “persons” always had a spiritual dimension that materialistic liberalism supposedly failed to acknowledge. 
After the fall of France, Maritain decided to remain in the US, where he happened to find himself after a lecture tour (the Gestapo searched his house outside Paris in vain). 
He authored pamphlets on the reconciliation of Christianity and democracy, which Allied bombers dropped over Europe, and he never tired of stressing that the Christian origins of America’s flourishing democracy had influenced him. 
Maritain also insisted that Christians, while they should take into account religious precepts, had to act as citizens first. 
Acceptance of pluralism and tolerance were thus central to his vision and forbade any one-to-one translation of religion into political life. 
He was in fact rather skeptical of exclusively Christian parties. 
Maritain participated in the drafting of the United Nations Declaration of Human Rights, and the Second Vatican Council eventually approved many of the ideas that he had been propounding since the 1930’s. 
He also influenced the Christian Democratic parties that governed after 1945 in Germany, Italy, the Benelux countries, and, to a lesser extent, France, and which consolidated not only democracy, but also built strong welfare states in line with Catholic social doctrine. 
While still emphasizing family values and traditional morality, they lost the whiff of incense that had clung to the Christian Democratic parties at the beginning of the century – by the 1970’s, they even began to stress that one didn’t have to be a believer to join. 
Maritain’s example disproves the claim that the analogy between Christian and Muslim democracy fails. 
It wasn’t the Vatican that took the lead in creating Christian Democracy – it was innovative philosophers like Maritain (who never served in the Church hierarchy, though he was briefly French ambassador to the Vatican) and political entrepreneurs like Sturzo (a simple Sicilian priest). 
Of course, Muslim democracy will not be brought about by intellectuals alone. 
After all, Christian Democracy’s success is also explained by its strongly anti-communist stance during the Cold War – and, in Italy, by the benefits of widespread corruption. 
Nevertheless, some body of thought that makes democracy attractive for believers – and reassures non-believers that the faithful have accepted pluralism – had to be available. 
True, some of the philosophies used in the European Catholic transition to democracy – such as personalism – were rather nebulous, although it was probably their vagueness that helped to bring as many believers as possible on board. 

From Community to Security in Asia 
MANILA – Visitors are often catalysts for change. 
Barack Obama’s just concluded visit to Asia may be no different, for his trip left Asia and its leaders wondering just what sort of regional community they are building. 
The modern sense of building a pan-Asian community began with the traumatic East Asian financial and economic crisis of 1997, when all the countries of the Asia-Pacific region learned the hard way that national reforms and protections could turn out to be woefully inadequate. 
Soon afterwards, a consensus formed among many Asian leaders that broader cooperation and coordination was needed. 
Even during that 1997 crisis, this lesson was already being recognized, for the members of the Asia-Pacific Economic Community (APEC) remained committed to trade liberalization, one of the key forces that helped restart growth in Asia’s economies. 
Indeed, the APEC Economic Leaders’ Meeting in 1997 designated 15 major sectors – including automobiles, chemicals, energy assets, and environmental measures – for early liberalization. 
Looking back at Asia’s economic growth over the past 12 years, it is clear that liberalization of trade and investment paid off. 
Realizing that economics cannot be neatly separated from politics, APEC soon began to include security issues in its agenda. 
In 2002, APEC’s leaders launched the STAR initiative, establishing a “Secure Trade Area in the APEC Region.” 
STAR safeguards the flow of goods and people through measures that secure ships, aviation, and travelers – thereby enhancing cross-border security, customs networking, and protection of corporate supply chains. 
This was followed, in 2003–2004, by heightening security cooperation through the Counter-Terrorism Task Force, as well as the Asian Development Bank’s Trade and Financial Security Initiative. 
These initiatives have undoubtedly deepened Asia’s sense of community. 
But now that community must confront its greatest challenge: the rise of China. 
As China grows mightier economically and politically, how can long-term stability in the Asia-Pacific be ensured? 
I believe that a shift from Pax Americana to Pax Asia-Pacifica could be the answer. 
Just as the nations of Western Europe exploited the Cold War stalemate to build the European Union, Asia must exploit the common interests that the United States, Japan, China, India, South Korea, Russia, Australia, New Zealand, and all the Southeast Asian countries have in securing a peaceful and stable Asia-Pacific. 
Under the Cold War “balance of terror,” Western Europe organized an economic, political, and cultural community that has now brought about a modern era of “perpetual peace” on that continent. 
APEC members, too, should use the existing umbrella of Pax Americana to accelerate economic, security, and political integration before new rivalries emerge to thwart their efforts. 
Many of the instruments for greater integration already exist. 
There is, to start, the Association of Southeast Asian Nations (ASEAN). 
But larger groupings – “ASEAN plus China” and a future “ASEAN plus Japan, South Korea, and India” – are being negotiated. 
Among the political tasks these broader groups are beginning to broach are strategies to defeat terrorism without alienating the region’s large, indigenous Muslim population. 
Somehow, too, Asia’s leaders must manage the pace of globalization. 
Just as Southeast Asia’s peasant rebellions of the 1930’s were a reaction to the breakdown of an earlier episode of globalization, so Islamism in Asia is a response to our new secularist/consumerist societies. 
Across Asia, APEC is playing the central role in creating a Pax Asia-Pacifica. 
Unlike Pax Americana, which has been imposed by US military force, this will be a peace among virtual equals. 
The new Asia-Pacific security architecture should emanate from cooperation based not on a “balance of power” but on burden-sharing to bring about a “balance of mutual benefit.” 
Clearly, Pax Asia-Pacifica must be built on an unswerving commitment to peace among APEC's most powerful countries – the US, China, and Japan. 
A productive Chinese contribution would demonstrate its commitment to being a responsible stakeholder in the wider world community. 
Japan, too, must play an active role in security and peace-keeping. 
A crucial factor in ensuring Pax Asia-Pacifica is the synergistic relationship between China and Japan. 
In the interest of regional peace, both major powers must stop letting historical resentments obstruct a more harmonious and prosperous future for the Asia-Pacific region. 
Once these political shifts begin, APEC can begin to transform itself into an Asia-Pacific Community for Economic Cooperation and Security. 
The strategic test will be for regional organizations – such as APEC – to ensure that the spirit of cooperation always outweighs the member states’ competitive impulses. 
European nations recognized this a half-century ago, and Asia’s countries must make that same, self-restricting choice now. 
Whatever our shared endeavors, Asians must take care that they are undertaken through shared responsibilities, shared burdens, shared values, and shared benefits. 
Only in this way will Asia achieve a higher quality of life and greater security for all its peoples. 

America’s Trouble with China 
WASHINGTON, DC – Xi Jinping, China’s newly anointed president, made his first visit to the United States in May 1980. 
He was a 27-year-old junior officer accompanying Geng Biao, then a vice premier and China’s leading military official. 
Geng had been my host the previous January, when I was the first US defense secretary to visit China, acting as an interlocutor for President Jimmy Carter’s administration. 
Americans had little reason to notice Xi back then, but his superiors clearly saw his potential. 
In the ensuing 32 years, Xi’s stature rose, along with China’s economic and military strength. 
His cohort’s ascent to the summit of power marks the retirement of the last generation of leaders designated by Deng Xiaoping (though they retain influence). 
Despite China’s greater weight in world affairs, Xi faces internal strains that make China more fragile than is generally understood. 
China’s export-led economic model has reached its limits, and the transition to domestic-led growth is intensifying internal frictions. 
Managing unrest through repression is more difficult than in the past, as rapid urbanization, economic reform, and social change roils a country of 1.3 billion people. 
Ethnic conflicts in outlying regions will also test Xi’s political control. 
China’s foreign policy is another cause for concern – especially for the US. 
History teaches us that rising powers inevitably compete with status quo leading powers, and that this conflict often leads to war. 
For now, the large bilateral trade imbalance has exacerbated US-China tensions, and can be safely reduced only by changes in behavior on both sides – or, unsafely, though a dangerous crisis-driven correction. 
More immediately, China’s territorial claims – particularly in the South China Sea, but also regarding its border with India – and its efforts to expand its influence over neighboring countries will force the US to navigate two overarching risks. 
The first is confrontation, which could occur directly or as a result of the US being drawn into conflicts between China and its neighbors. 
The other risk is that Japan, South Korea, Vietnam, the Philippines, Thailand, or Myanmar could fall into China’s strategic orbit. 
Many of these countries will look to the US as a strategic counterweight should China seek to assert local dominance. 
But some may conclude that it is safer to steer closer to China than away from it, because their economies depend so strongly on Chinese trade. 
As recent events in the East and South China Seas show, China sometimes attempts to strong-arm its neighbors. 
The US will need to defend its allies and interests by pushing back, but with actions modulated to limit Chinese concerns. 
One way to do this is to understand China’s motives. 
China’s drive for economic and political leadership in East Asia, and its increased military capability there, is inevitable. 
But the world can be confident that the US will remain stronger, wealthier, and more influential in global affairs than China even in 2030. 
That argues against American overreaction, which could fuel the kind of self-reinforcing downward spiral in bilateral relations that occurred between Great Britain and Germany prior to the conflagrations of the first half of the twentieth century. 
Perhaps the best way to avoid confrontation is to cooperate on shared external threats, most notably nuclear proliferation, global climate change, and Islamic extremism. 
But getting to 2030 without a major confrontation will be a major achievement. 
While the US is likely to maintain the upper hand in terms of military power for at least another 15-20 years, asymmetric warfare could undercut America’s advantage should China engage in cyber-attacks on US electronic and satellite systems, along with attacks on infrastructure. 
In response to China’s capability to project power many hundreds of miles from its borders, the US (as I have suggested for the last 25 years) should develop a long-range bomber capable of penetrating sophisticated defenses and delivering great force. 
As US security interests shift to the Pacific, Americans now rely on increasingly vulnerable forward land bases and carrier fleets with tactical aircraft that have a combat radius of 300-500 miles (482-805 kilometers). 
But a long-range bomber would be more cost-effective than standoff bombers with cruise missiles, and, unlike shorter-range tactical bombers, its bases would be invulnerable to attack. 
That said, America’s most serious challenge right now is to get the US economy and its governance in order. 
I believe that it can do that. 
But, unless and until it does, thereby giving President Barack Obama a firm basis from which to engage Xi on issues requiring international statesmanship, the prospect of trouble between the US and China will continue to grow. 

From Constitutional Crisis to European Crisis 
Since the shock of the French and Dutch “no” votes against the European Union’s proposed Constitutional Treaty, events have followed their inevitable course, but more rapidly than expected. 
The French “no” was a massive blow to the political credibility of French President Jacques Chirac. 
So he did what French Presidents usually do in such circumstances: rather than admit that French voters might be right, he sacked Prime Minister Jean-Pierre Raffarin as a scapegoat, replacing him with his protégé Dominique de Villepin, who has never held an elective office. 
Opinions differ as to the reasons for France’s rejection of the Constitutional Treaty. 
But most analyses suggest that it was directed against high unemployment, magnified by the perceived threat to jobs from the new Central and Eastern European EU members. 
Naturally, Chirac immediately reaffirmed his faith in the French economic model. 
The most undeniable implication of the French vote has been to raise a large question mark over the future of the EU’s traditional integration project. 
Rather than admit any such thing, Chirac hurried to meet German Chancellor Gerhard Schröder, so that they could jointly reaffirm their traditional alliance as the spiritual leaders of this European project, in the hope that the Constitutional Treaty might yet be rescued. 
Neither of them have been able to say how this should be done. 
The British government tried to wriggle out of taking sides on the implications of the French and Dutch votes by saying that it would suspend its own plans for a referendum, but not cancel it outright. 
But if the government thought that this mid-way position would finesse its European predicament by appeasing the large anti-European majority in the UK without gratuitously offending the EU’s other members, it was quickly disabused. 
One consequence of last year’s enlargement is that it is forcing a far-reaching re-negotiation of all aspects of the EU budget. 
Most of the ten new members are much poorer than the old members, and are thus much less able or willing to pay large financial contributions. 
They expect to be net financial beneficiaries, which would help them modernize. 
But the old member states that have hitherto benefited most from the budget – poorer countries like Spain, Greece, and Portugal – want the budget to be expanded, so that they can continue to receive money. 
Old member states that have traditionally contributed most, like Germany and the Netherlands, want to keep the budget as small as possible. 
Given this looming negotiation between old and new – and between rich and poor – and because Chirac has no cunning proposal for resurrecting the EU Constitution, he has sought and found a second scapegoat: Britain has, for over 20 years, benefited from a large rebate in its outsized contribution to the EU budget. 
By design the EU Common Agricultural Policy (CAP) gives large financial benefits to countries with large farming sectors, like France, but imposes financial penalties on countries with small farming sectors, like Britain. 
This inequity long rankled in Britain. 
In 1984, Margaret Thatcher demanded and got a large rebate in the British net contribution, which this year is worth roughly €5bn. 
Ever since, this concession has been resented by other member states. 
Last week, Chirac decided to raise the stakes in the European crisis by going on the offensive against Britain. 
The time has come, he said, for “our English friends” to understand that they have to make a gesture of solidarity, and renounce the rebate negotiated by Thatcher. 
The British government’s first reflex was to reject any suggestion that the British rebate is open to discussion: it was justified in 1984, and it is justified today. 
But Tony Blair has now gone on the counter-offensive, raising the stakes himself. 
Britain, he says, might be prepared to put the British rebate on the table, but only if the French are prepared to remove the reasons for it by means of a radical renegotiation of EU farm policy. 
From a narrowly British perspective, this might seem a shrewd and reasonable posture for defending British interests. 
But, by picking up Chirac’s challenge, Blair has allowed himself to be drawn away from the general European dilemma (what to do about the Constitutional Treaty) – for which Britain is not to blame – to a specific policy problem (the CAP’s finances) on which Britain is isolated. 
Coming from anyone else, Blair’s proposal to re-think the CAP might seem reasonable; indeed, over the years, the EU has tried (slowly) to reform its defects. 
Unfortunately, in eight years of power, Tony Blair reinforced the widespread impression in the rest of the EU, that the UK is irremediably skeptical about European integration. 
His proposal will thus be seen for what it is, a counter-attack on a founding policy of the European project. 
The danger is that this week’s EU summit will not be devoted to finding a solution to the dilemma of the French and Dutch “no” votes, but instead will be turned into a confrontation between Britain and the rest about the budget. 
This would be a pity for Europe and for Britain. 
It would underscore the depth of the chasm between leaders who are seeking to advance the cause of European political integration but are out of touch with their electorates, and the British, who do not like European political integration at all. 

From Copenhagen to Copenhagen 
This week the EU's 15 Heads of state and government from the current Member States and the leaders of the 13 candidate countries meet in Copenhagen. 
We meet with a clear task--to decide on enlargement of the EU. 
We will finish a process that began almost ten years ago at another Summit in Copenhagen. 
In 1993, the EU took the first step towards integrating the new democracies of Central and Eastern Europe into the EU. 
Now we are ready to conclude negotiations with the first new Member States. 
From "Copenhagen to Copenhagen" has thus been the motto of the Danish EU Presidency. 
It is the expression of a contribution to a vision of a unique project and process, and of Denmark's ambition to accomplish a task that has been placed in our hands. 
EU enlargement is the greatest political task of our generation. 
It is a challenge and an opportunity reaching beyond the present day. 
It marks the end of the tragedy of the division of Europe that marred the 20th century, and provides a gateway to a common future for our peoples, in freedom, peace and prosperity. 
The 20th century was a tragedy for Europe. 
Before the First World War, our Continent was characterized by optimism, self-confidence and faith in the future. 
These values were lost in the Great War, and we never really recovered the optimism and faith in the future that preceded it. 
Two horrible world wars tore our Continent apart. 
The mayhem of the Second World War was followed by more than 40 years of Communist dictatorship in Central and Eastern Europe. 
For nearly half a century, we lived with an unnatural division of Europe. 
Now, at long last, we can close one of the darkest and most bloodstained chapters in Europe's history. 
EU enlargement marks the beginning of a new era. 
It can give Europe both the dynamism and the drive to create the foundation of a new European consciousness. 
It is the key to the future of Europe. 
In the Convention on the future of the EU, member states and candidate countries are already discussing how to organize the EU in the years ahead. 
It is important that we secure efficient institutions and decision procedures. 
This is necessary in order to develop our internal market and economies, create new jobs, promote sustainable growth, and strengthen our competitiveness. 
It is a prerequisite for the EU to be able to play a strong and positive role internationally, promoting peace, sustainable development, free trade, and good governance. 
Together we shall build this common future, and to move toward this goal, the discussions in Copenhagen will focus on three questions. 
First, we will complete negotiations with up to ten countries: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia. 
This is a realistic ambition. 
But all involved--both candidate countries and current member states--must show the necessary flexibility in the final round of negotiations. 
The second question is how to continue the negotiations with Bulgaria and Romania. 
These two countries are not yet ready for membership. 
At the Summit in Brussels in October, we decided to support these two countries in their efforts to achieve EU membership in 2007. 
In Copenhagen we will make concrete decisions on how we may strengthen their preparations for membership. 
The Commission has presented a very reasonable proposal for how this can be done. 
I expect that we can find reach agreement on this basis. 
The third question relates to Turkey, with which accession negotiations have not yet begun. 
The expectations of the new Turkish government--and of the Turkish people--are high. 
At the same time, however, it is the assessment of the Commission that Turkey is still not yet ready to initiate accession negotiations. 
It must first fulfill the clear political criteria defined by the EU in Copenhagen ten years ago. 
In Copenhagen this time around, we will make decisions on the next stage of Turkey's candidacy. 
We must find a balanced answer reflecting both the present situation and the potential for development in Turkey. 
As a candidate country, Turkey will, of course, be treated like all other candidate countries, and it will be important to send a clear signal to the Turkish people confirming their belief in the perspective of membership and a future based on Western and European values. 
Europe's leaders meet in Copenhagen this week to unite our continent in peaceful cooperation. 
What generations of Europeans have dreamt of is at long last within reach. 
Leaders from both member states and candidate countries face a historic decision. 
After ten years of preparation the time has come to make the final crucial decisions on enlargement. 

From de Gaulle to Putin 
PARIS – Fifty years ago, General Charles de Gaulle seized power in France in what was, in essence, a legal coup d’etat. 
True, the General had been called upon and elected by the floundering French Parliament. 
But pressure from the French army, and rebellion in Algeria, did not give Parliament much of a choice. 
The ailing French republic’s political leaders hoped that de Gaulle could end the Algerian war, yet keep Algeria French. 
De Gaulle’s agenda was very different: he wanted to rewrite the Constitution and to found a new “Fifth Republic” for France. 
The war in Algeria was, for de Gaulle, but another symptom of a dysfunctional state, an analysis that went back to his own experiences in 1940, when the French government proved unable to resist invasion by Hitler’s Germany. 
Only a strong leader, de Gaulle thought, could have avoided defeat. 
In his memoirs, de Gaulle stated his preference for restoring the monarchy after the Liberation. 
But public opinion was not prepared for that, and the heirs to the French crown were not up to the task. 
The alternative was an elected monarch: the Fifth Republic’s Constitution, ratified 50 years ago this week, was crafted around that central principle. 
What de Gaulle despised about the Fourth Republic was what he dubbed the “regime of the parties,” which put their own interests above the national interest. 
Only a king or an elected monarch could incarnate the national interest. 
Remarkable propagandist that he was, de Gaulle convinced the French that the Fourth Republic was a disaster – a canard that has remained common wisdom ever since. 
But de Gaulle’s vision of government resonated with the convictions of many French and, above all, with many public intellectuals. 
The French have seldom been enamored of democracy. 
The philosophers who were the intellectual fathers of the 1789 revolution longed not for democracy, but for enlightened despotism, which is what many French still look for when they elect a president. 
Democracy from a French perspective looks too American. 
The French are thus more ready to believe in the cultural diversity of nations than in the universality of democracy. 
This explains why French governments of both right and left tend to support despotism in countries where it seems “natural.” 
Despots in Arab countries, China, and Russia do not shock the French. 
Indeed, no French president would ever think of exporting democracy. 
As former President Jacques Chirac said: to impose democracy in Arab countries means that you despise their cultural differences. 
As de Gaulle wished, the French president has powers without equal in any other Western democracy. 
Montesquieu’s idea of a separation of governmental powers plays no role in France. 
Parliament is weak, the judiciary is under executive control, the media is kept under surveillance, and there is no constitutional guarantee of free speech. 
The president’s powers are limited only by accident, when a majority in parliament happens to be against him: this happened to both the socialist François Mitterrand and the conservative Jacques Chirac. 
Each had to “cohabit” for a time with a hostile parliament. 
Military and foreign affairs – what the French system deems the president’s “reserve domain” – are always in the president’s personal control. 
But when president and parliament are controlled by the same party – Nicolas Sarkozy’s current situation – the “reserved domain” knows, in practice, no limit. 
Despite this huge concentration of powers in the presidency, or perhaps because of it, the Fifth Republic has failed to perform better than more democratic Western regimes. 
The French state budget is chronically ill-managed, running deficits on par with Italy. 
Many grandiose Gaullist economic projects – from the Concorde supersonic airplane to a national computer industry – failed. 
Most public-sector industries have been near bankruptcy until saved by competition and privatization. 
France’s elected monarchs have few reasons to be proud of their supposedly efficient state. 
The exception may be the military and the diplomatic service: following de Gaulle’s lead, all French presidents have financed the military generously. 
The Gaullist tradition has also been maintained by an independent diplomatic corps that tends towards “non-alliance with allies” and is often perceived as perfidious and arrogant. 
Indeed, through much of the Cold War, de Gaulle appeared to want to avoid having to choose sides between the United States and the Soviet Union. 
Valéry Giscard d’Estaing had the best relations with East European communist leaders among all Western leaders. 
Chirac vociferously opposed the war in Iraq. 
Sarkozy nowadays acts more in harmony with the US, NATO, and the European Union, but does so because he wants to be a world leader. 
But the real problem with the Fifth Republic might be its influence beyond France. 
Following de Gaulle’s lead, elective monarchy or enlightened despotism is now perceived as a legitimate alternative to parliamentary democracy or US-style separation of powers. 
Most of Latin America, except for Brazil and Chile, are elective monarchies, a modernized version of the old caudillo tradition. 
Russia, after a brief attempt at democracy under Boris Yeltsin, has reverted to a form of unenlightened despotism under Vladimir Putin. 
It holds elections, but more as a nod to modernity than to represent the people’s will. 
Like the Mona Lisa in the Louvre, the French Revolution’s clarion call for universal rights can be admired only from behind bullet-proof glass, and it is definitely too precious to be exported. 

From Depression to Freedom 
Clinical depression affects roughly one in four people at some point in their lives. 
It is a severe and prolonged state of mind in which normal sadness grows into a painful state of hopelessness, listlessness, lack of motivation, and fatigue. 
But, however well defined, clinical depression is many things to many people, varying from mild to severe. 
Mild depression can result in brooding on negative aspects of self or others, feeling resentful, irritable or angry much of the time, feeling sorry for oneself, and needing constant reassurance from someone. 
It can also result in various physical complaints that do not seem to be caused by any physical illness. 
As depression worsens, feelings of extreme sadness and hopelessness combine with low self-esteem, guilt, memory loss, and concentration difficulties to bring about a severely painful state of mind. 
To make things worse, there may be a change in basic bodily functions. 
The usual daily rhythms seem to go wrong: can’t sleep, or sleep too much, can’t eat, or eat too much. 
Enthusiasm for what are usually enjoyable activities fades. 
Sometimes, there is even a feeling that life is not worth living and that one would be better off dead. 
The most commonly used treatment for major depression is antidepressant medication. 
It is relatively cheap, and it is easy for family practitioners, who treat the majority of depressed people, to prescribe. 
However, when the episode has passed, and medication ceases, depression tends to return, and at least 50% of those who experienced an initial episode of depression find that depression comes back, despite appearing to have made a full recovery. 
After a second or third episode, the risk of recurrence rises to 80-90%. 
Early onset depression (before 20 years of age) is particularly associated with a significantly higher risk of relapse and recurrence. 
For those who have been suicidal in the past, any depressed mood is likely to be accompanied by a return of suicidal thinking. 
The problem with viewing antidepressants as the main method for preventing recurrence is that many people do not want to stay on medication for indefinite periods, and when the medication stops, the risk of becoming depressed again returns. 
Finding new ways of helping people stay well after depression demands an understanding of why depression keeps returning. 
During a period of crisis in which someone becomes depressed and suicidal, an association is learned between the various symptoms (low mood, physical pain, suicidal tendencies, and so on). 
This means that when the negative mood returns, for any reason, it will tend to trigger all the other symptoms – a process called “cognitive reactivity”). 
The discovery that the link between negative moods and negative thoughts remains ready to be reactivated even when people feel well is hugely important: it means that preventing future crises depends on learning how to keep mild upsets from spiraling out of control. 
Research has shown that combining the ancient practice of meditation with modern psychotherapies can accomplish this. 
Based on Jon Kabat Zinn’s Stress Reduction program at the University of Massachusetts Medical Center, Mindfulness-based Cognitive Therapy (MBCT) combines modern cognitive behavioral therapy with meditation practices to help people become more aware of the present moment, including getting in touch with moment-to-moment changes in the mind and body (see www.mbct.co.uk). 
In weekly classes (the atmosphere is that of a class, rather than a therapy group), and by listening to CD’s or tapes at home during the week, participants learn the practice of mindfulness meditation. 
The classes also include basic education about our moods, and several exercises from cognitive therapy that show the links between thinking and feeling and how participants can best look after themselves when a crisis threatens to overwhelm them. 
The MBCT approach helps participants in the classes to see more clearly the patterns of the mind and to learn how to recognize when their mood is starting to sink. 
It helps break the normal link between negative mood and negative thinking. 
Participants develop the capacity to allow distressing moods, thoughts, and sensations to come and go, without having to battle with them. 
They find that they can stay in touch with the present moment without having to ruminate about the past or worry about the future. 
Thus, they come to see with greater clarity and conviction how to approach moment-by-moment experience skillfully, taking more pleasure in the good things that often go unnoticed or unappreciated while dealing more effectively with the difficulties encountered, whether real or imagined. 
Two controlled clinical trials have demonstrated that MBCT can reduce the likelihood of relapse by about 40-50% in people who have suffered three or more previous episodes of depression. 
As a result of such findings, MBCT has now been included in the British government’s national guidelines for treating recurrent major depression. 
But this implies a redefinition of treatment itself. 
As our understanding of depression grows and we see that it is a recurring problem, the emphasis is shifting from cure to prevention. 
Mindfulness-based approaches have already proven that they will play an enormously important role in this. 


From Financial Meltdown to Global Depression? 
NEW YORK – The rich world’s financial system is headed towards meltdown. 
Stock markets have been falling most days, money markets and credit markets have shut down as their interest-rate spreads skyrocket, and it is still too early to tell whether the raft of measures adopted by the United States and Europe will stem the bleeding on a sustained basis. 
A generalized run on the banking system has been a source of fear for the first time in seven decades, while the shadow banking system – broker-dealers, non-bank mortgage lenders, structured investment vehicles and conduits, hedge funds, money market funds, and private equity firms – are at risk of a run on their short-term liabilities. 
On the real economic side, all the advanced economies – representing 55% of global GDP – entered a recession even before the massive financial shocks that started in late summer. 
So we now have recession, a severe financial crisis, and a severe banking crisis in the advanced economies. 
Emerging markets were initially tied to this distress only when foreign investors began pulling out their money. 
Then panic spread to credit markets, money markets, and currency markets, highlighting the vulnerabilities of many developing countries’ financial systems and corporate sectors, which had experienced credit booms and had borrowed short and in foreign currencies. 
Countries with large current-account deficits and/or large fiscal deficits and with large short-term foreign currency liabilities have been the most fragile. 
But even the better-performing ones – like Brazil, Russia, India, and China – are now at risk of a hard landing. 
Many emerging markets are now at risk of a severe financial crisis. 
The crisis was caused by the largest leveraged asset bubble and credit bubble in history. 
Leveraging and bubbles were not limited to America���s housing market, but also characterized housing markets in other countries. 
Moreover, beyond the housing market, excessive borrowing by financial institutions and some segments of the corporate and public sectors occurred in many economies. 
As a result, a housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble, and a hedge funds bubble are all now bursting simultaneously. 
The delusion that economic contraction in the US and other advanced economies would be short and shallow – a V-shaped six-month recession – has been replaced by certainty that this will be a long and protracted U-shaped recession, possibly lasting at least two years in the US and close to two years in most of the rest of the world. 
And, given the rising risk of a global systemic financial meltdown, the prospect of a decade-long L-shaped recession – like the one experienced by Japan after the collapse of its real estate and equity bubble – cannot be ruled out. 
Indeed, the growing disconnect between increasingly aggressive policy actions and strains in the financial market is scary. 
When Bear Stearns’ creditors were bailed out to the tune of $30 billion in March, the rally in equity, money, and credit markets lasted eight weeks. 
When the US Treasury announced a bailout of mortgage giants Fannie Mae and Freddie Mac in July, the rally lasted just four weeks. 
When the $200 billion rescue of these firms was undertaken and their $6 trillion in liabilities taken over by the US government, the rally lasted one day. 
Until the recent US and European measures were announced, there were no rallies at all. 
When AIG was bailed out to the tune of $85 billion, the market fell 5%. 
Then, when the $700 billion US rescue package was approved, markets fell another 7% in two days. 
As authorities in the US and abroad took ever more radical policy steps from October 6-9, stock, credit, and money markets fell further, day after day. 
Do the recent measures go far enough? 
When policy actions don’t provide real relief to market participants, you know that you are one step away from a systemic collapse of the financial and corporate sectors. 
A vicious circle of deleveraging, plummeting asset prices, and margin calls is underway. 
So we cannot rule out a systemic failure and global depression. 
As we have seen in recent days, it will take a big change in economic policy and very radical, coordinated action among all advanced and emerging-market economies to avoid disaster. This includes: 
• another rapid round of interest-rate cuts of at least 150 basis points on average globally; 
• a temporary blanket guarantee of all deposits while insolvent financial institutions that must be shut down are distinguished from distressed but solvent institutions that must be partially nationalized and given injections of public capital; 
• a rapid reduction of insolvent households’ debt burden, preceded by a temporary freeze on all foreclosures; 
• massive and unlimited provision of liquidity to solvent financial institutions; 
• public provision of credit to the solvent parts of the corporate sector in order to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses; 
• a massive direct government fiscal stimulus that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower-income households, and provision of grants to cash-strapped local governments; 
• an agreement between creditor countries running current-account surpluses and debtor countries running current-account deficits to maintain an orderly financing of deficits and a recycling of creditors’ surpluses to avoid disorderly adjustment of such imbalances. 
Anything short of these radical and coordinated actions may lead to a market crash, a global financial meltdown, and worldwide depression. 
The measures adopted by the US and Europe are a start. 
Now they must finish the job. 

From Financial to Democratic Crisis in Asia 
JAKARTA: Political crisis has replaced financial crisis in Southeast Asia. 
President Estrada of the Philippines, who never mastered his office, was removed in a bloodless coup aided by mob rule. 
Now Indonesia’s President Wahid faces possible impeachment; so, too, may Taiwan’s president. 
Thailand’s new prime minister assumed office surrounded by scandal, Malaysia’s politics seem more unsettled than at any time in twenty years. 
Southeast Asia’s boom years are gone, but this is not to say that they have vanished forever, for the causes of this instability are not hidden. 
Today’s political turbulence, indeed, has the same roots as yesterday’s financial storms: inadequate, unsound, and unformed institutions. 
Unless these institutional gaps are addressed, Asian societies will not get back on track. 
Of course, finance and democracy are not twins. 
Yet parallels exist: without the checks and balances of sound domestic institutions, the global winds of political liberalization unsettle former authoritarian regimes, much as economic globalization wrecked havoc on weak financial institutions. 
Indeed, important lessons can be drawn from Asia’s economic crisis of 1997-98 for today’s political tumult. 
The irony of Asia’s economic crisis was that it struck the “miracle” economies that maintained sound macroeconomic policies and carried out far-reaching financial liberalization. 
What went wrong? 
Some analysts proclaim that liberalization was “inappropriate” or “disorderly.” 
Something similar to this complaint is now made by critics who say that countries like Indonesia and the Philippines are too sprawling and undisciplined to adopt democracy. 
The trouble in the 1990s arose out of an unexpected confluence of vulnerable domestic financial systems and volatile international capital movements brought about by the globalization of financial markets. 
Rapid globalization, however, came about only in part through technological advances. 
Another crucial factor was the notion – proved too simplistic in the event – that free capital movements can just replace capital controls. 
For a country to benefit from free international capital movements, however, it must have, inter alia, sound and strong financial institutions to prevent panic movements of capital and withstand systemic shocks if such movements occur. 
The simplistic equation of financial liberalization with financial deregulation was at the root of Asia’s crisis. 
Thailand, for instance, established the Bangkok International Banking Facilities in the hope of becoming a regional financial center, despite the fact that local financial institutions were ill-prepared to handle massive flows of capital. 
Nor are institutions the same as laws on paper. 
In comparison with Thailand, Indonesia had an adequate provision of prudential rules and regulations. 
But it lacked effective legal and accounting systems, so those rules and regulations could not be properly enforced. 
The case of Korea is equally instructive. 
By 1997, Korea had “liberalized” its financial markets by eliminating government credit allocation and management of commercial banks. 
But financial sector reform made it possible for the chaebols, the large conglomerates that dominate Korea’s economy, to increase their control over non-bank financial institutions. 
Reform thus strengthened the chaebols’ internal capital market and weakened the banks’ role as monitors of corporate behavior. 
Similarly, in the Philippines, financial liberalization, by and large, benefited large family-owned corporations, increasing their monopoly power by easing access to bank credit. 
Southeast Asian policymakers are not the only people responsible for paying insufficient attention to establishing institutions necessary for a free-market financial system and the neglect of the danger of regulatory capture. 
The West and international institutions also played a pervasive role by promoting the so-called Washington Consensus that defined economic orthodoxy in the decade preceding Asia’s crisis, which has continued ever since. 
“The pictorial symbol” of the Washington Consensus, quipped C. Fred Bergsten, “was the colonial posture assumed by the Managing Director of the IMF as the President of Indonesia....signed his diktat.” 
Much as the Washington Consensus focused on financial liberalization, deregulation, free capital movements, privatization, and stable macroeconomic policy as the keys to development, today’s political consensus is on free elections and the political empowerment of the hitherto oppressed, without sufficient attention being paid to the institutional underpinnings of democracy, such as a functioning judicial system, an infrastructure of political parties, and other constitutional arrangements. 
The effects may be equally sobering. 
The economic Washington consensus took for granted the presence of institutions necessary for functioning free-markets or assumed that once government intervention was removed such institutions would emerge. 
What actually followed, as countries embarked on financial liberalization, was an institutional vacuum that, when combined with volatile international capital movements, incited crisis. 
Today, liberalization of the political system, without strengthening its ability to absorb the shocks of political struggle, seems to incite instability, too. 
The lessons of Asia’s financial crisis and its current political crisis seem clear: in economics, removing government intervention without establishing needed institutional preconditions may deliver crisis, not growth; in politics, credible institutions to check and balance each other are as vital to democratic stability as the ballot box. 
Here a hopeful sign in today’s political travails is found in the potent role played by Southeast Asia’s once tame press in reporting corruption scandals. 
For independent media is a vital institutional check far too often absent across the Pacific. 
Other powerful institutions, however, must take root for democracy to function properly. 

From Global Imbalances to Effective Global Governance 
STANFORD, CALIFORNIA – The current credit crisis has led to scaled-back projections for growth around the world. 
Governments and central banks are responding to damaged balance sheets and credit lockups in an attempt to limit extreme harm to their economies outside the financial sector. 
In the United States, the financial sector is undergoing a high-speed but permanent structural transformation, the effects of which could be severe for developing countries’ economic growth. 
Indeed, these countries are already experiencing large relative price increases for food and oil, a food emergency for the poor, and higher rates of inflation induced by commodity price shifts. 
While rapid growth in developing countries has been an important factor in the rising commodity prices, much of this is beyond their control. 
For the past two years, my colleagues and I on the Growth Commission have sought to learn how 13 developing countries managed to record growth rates averaging 7% or more for 25 years or longer. 
In The Growth Report , published in May, we tried to understand why most developing countries fell far short of this achievement, and explored how they might emulate the fast growers. 
Sustained high growth is enabled by and requires engagement with the global economy that goes beyond simply being able to produce for a potentially massive export market. 
It also involves, crucially, importing an essential intangible asset: knowledge. 
Economies can learn faster than they can invent, so less developed countries can achieve much faster growth than was experienced by today’s industrialized countries when they were becoming wealthy. 
Because of the importance of the global economy, the destiny of developing countries is not entirely in the hands of their leaders, workforces, and entrepreneurs. 
Today, there are potential adverse global trends and challenges, many of which are relatively new developments that the 13 high-growth cases did not face. 
The most immediate is financial distress emanating mainly, but not exclusively, from the US and spilling out to hit all sectors of the global economy. 
This was and is the result of an asset bubble fueled by excessive leverage and by the massive transparency issues associated with complex securities and derivatives that were supposed to spread risk, but instead mainly increased the systemic risk already present with excess debt. 
Much has become clear. 
First, extreme financial distress can bring down the real economy, with a shortage of credit being the most potent channel. 
Second, the current regulatory structure is not adequate to ensure stability in the US economy. 
America’s light, incomplete, and fragmented pattern of regulation will not survive, and it will not be used as a model in other parts of the world. 
Third, contributing factors included low interest rates, compressed risk spreads, and global imbalances that accommodated low savings in the US, consumption in excess of output, and a mounting trade deficit. 
Absent the willingness of large developing countries to run trade surpluses and high savings rates relative to investment, the asset bubble in the US – leading to a rise in domestic consumption and a fall in the savings rate – would have triggered inflation and higher interest rates. 
That would have put a partial brake on growth in asset prices, raised savings, reduced investment, and probably lowered the trade deficit. 
But the automatic stabilizers that normally kick in did not. 
In general, automatic stabilizers may not kick in across the global economy, which means that policies need to be coordinated. 
Fourth, regulatory structures will need to be rebuilt, and this will require a global effort. 
Absent international coordination, the opportunities for destructive regulatory competition will defeat regulatory reform. 
Finally, both the interdependence and global risk that are evident in this crisis will and probably should cause countries to adopt policies with respect to financial structures that provide for some insulation from external shocks, even if such policies impose a cost. 
The interdependencies in the global economy (in areas as diverse as financial markets, product safety, infectious diseases, natural resource dependency, and global warming) have outrun our collective capacity to manage them and coordinate policy responses. 
Restoring that balance will take time, leadership, a shift in attitudes, and creativity. 
In the interim, the mismatch creates risks for everyone, including developing countries. 
It creates skepticism about whether the net benefits of openness are positive, and uncertainty about what adaptations are needed in the regulation of free markets to achieve a reasonable balance between their benefits and risks. 
Influential developing countries share a joint responsibility with the G-8 for the stability of the global financial and economic systems. 
But they currently have limited channels for discharging that responsibility and influencing global policies. 
In addition, collectively we must do a better job of anticipating problems rather than being in reactive mode in the face of crises. 
The global economy and its increasing openness made it possible for three billion people to enjoy the fruits of growth in the postwar period. 
It may also provide an economic springboard for another two billion people to fulfill their aspirations in the coming decades. 
But openness brings risks, many unanticipated and most under-managed. 
People are skeptical for understandable reasons, and in the case of the credit crisis, angry. 
Openness needs protecting and the best way to protect it is to manage the areas of growing interdependence effectively, pragmatically and inclusively. 

From Great Game to Grand Bargain 
LAHORE – The “Great Game” is no fun anymore. 
Nineteenth-century British imperialists used that term to describe the British-Russian struggle for mastery in Afghanistan and Central Asia. 
More than a century later, the game continues. 
But now, the number of players has exploded, those living on the chessboard have become players, and the intensity of the violence and the threats that it produces affect the entire globe. 
Afghanistan has been at war for three decades, and that war is spreading to Pakistan and beyond. 
A time-out needs to be called so that the players, including President-elect Barack Obama, can negotiate a new bargain for the region. 
Securing Afghanistan and its region will require an international presence for many years. 
Building up Afghanistan’s security forces is at most a stopgap measure, as the country cannot sustain forces of the size that it now needs. 
Only a regional and global agreement to place Afghanistan’s stability above other objectives can make long-term stability possible by enabling Afghanistan to survive with security forces that it can afford. 
Such agreement, however, will require political and diplomatic initiatives both inside and outside of the country. 
In Afghanistan, the United States and NATO must make clear that they are at war with al-Qaeda and those who support its global objectives, but have no objection if either the Afghan or Pakistani government negotiates with insurgents who renounce ties to Osama bin Laden. 
In exchange for such guarantees, international forces could largely withdraw, leaving a force to secure a political agreement and to train Afghan security forces. 
But a political settlement within Afghanistan cannot succeed without a regional grand bargain. 
The first Great Game was resolved a century ago by making Afghanistan a buffer state in which outsiders did not interfere. 
Today, however, Afghanistan is the scene not only of the War on Terror, but also of longstanding Afghan-Pakistani disputes, the India-Pakistan conflict, domestic struggles in Pakistan, US-Iranian antagonism, Russian concerns about NATO, Sunni-Shia rivalry, and struggles over regional energy infrastructure. 
These conflicts will continue as long as the US treats stabilizing Afghanistan as subordinate to other goals, accompanied by all the risks entailed by terrorist resurgence and a regional security crisis. 
This is why Obama must adopt a bold diplomatic initiative that encompasses the entire region and help resolve longstanding disputes between Afghanistan’s neighbors. 
Such an initiative must include a comprehensive regional aid and development package. 
In addition, the US must rebalance its regional posture by reducing its dependence on Pakistan’s military. 
Obama will need firmly to support Pakistan’s fragile elected government as it tries to gain control over the army and intelligence apparatus and thus reverse decades of support for militants. 
Dialogue with Iran and Russia over common interests in Afghanistan – both helped the US in 2001 – would place more pressure on Pakistan. 
At the same time, the US and other powers with a stake in Afghanistan must seek to reduce Indian activities in Afghanistan that Pakistan sees as threatening, or, if those policies are not threatening, assure greater transparency for them. 
This objective requires more than “pressuring” Pakistan. 
The Pakistani security establishment believes that it faces a US-Indian-Afghan alliance aimed at undermining Pakistani influence in Afghanistan and even dismembering the Pakistani state. 
Civilian leaders evaluate Pakistan’s national interests differently, but they, too, cannot be indifferent to Pakistan’s chronic sense of insecurity. 
Pakistan does not have border agreements with either India, with whom it disputes the incorporation of Kashmir, or Afghanistan, which has never explicitly recognized the Durand Line, the frontier between Pakistan and Afghanistan. 
Pakistan also claims that the Northern Alliance, part of the anti-Taliban resistance in Afghanistan, is working with India from within Afghanistan’s security services. 
And the US-India nuclear deal effectively recognizes India’s legitimacy as a nuclear power while continuing to treat Pakistan, with its record of proliferation, as a pariah. 
Pressure will not work if Pakistan’s leaders believe that their country’s survival is at stake. 
Instead, the new US administration should help to create a broad multilateral framework for the region, one aimed at building a genuine consensus on the goal of achieving Afghan stability by addressing the legitimate sources of Pakistan’s insecurity while strengthening opposition to disruptive Pakistani behavior. 
A first step could be establishing a contact group for the region, authorized by the United Nations Security Council. 
This contact group could promote dialogue between India and Pakistan about their respective interests in Afghanistan and about finding a solution to the Kashmir dispute; seek a long-term political strategy from the Pakistani government for the future of the tribal agencies; move Afghanistan and Pakistan toward discussions on frontier issues, and promote a regional plan for economic development and integration. 
China, the largest investor in both Pakistan and Afghanistan, could help finance projects of common interest. 
A successful initiative will require exploratory talks and an evolving road map. 

From Hubris to Nemesis in the EU 
Paris – The European Union’s Lisbon treaty was initially greeted with enthusiasm, pride, and even hubris. 
It promised a more realistic and reasonable way forward than the ill-fated constitutional treaty that it replaced, and many of its supporters also hoped that a central feature of its predecessor – the notion of “constitutional patriotism” – was still alive. 
But the Lisbon treaty has instead brought chaos to the Union. 
What went wrong? 
Constitutional patriotism, a concept developed by two German philosophers, Dolf Sternberger and Karl Jaspers, was intended to replace the nationalism that had been discredited in Germany by the country’s Nazi past. 
Similarly, as the EU evolved into a federal state, its loyal citizens would reject nationalism based on ethnic affinities and instead identify with the democratic principles of the federation’s constitution. 
This fantasy was unambiguously rejected by Irish voters, so it seems fitting to remind ourselves that the ancient Greeks, who gave the word “hubris” to the western world, saw it as a portent of tragedy leading to downfall, or “nemesis.” 
Did the ambitions of the Lisbon treaty’s designers condemn it to failure? 
And, indeed, has it really failed? 
After all, European integration may meet obstacles, but it is still moving forward. 
As France’s Robert Schuman, one of the EU’s founding fathers, said in 1950, “Europe will neither happen in one go, nor as a whole construct: it will happen through concrete achievements, first by creating a de facto solidarity.” 
Many thought that this solidarity had been achieved in October 2004, with the signing of the Nice treaty, which outlined an EU constitution. 
But only 18 member states then approved it, before France and the Netherlands rejected it in referenda and the seven other member states then halted the ratification process. 
Faced with this situation, the European Council had only two choices. 
First, it could stick with the Nice treaty as the basis of the Union’s operation. 
But that admission of failure would have weakened the political dynamic of the European project and severely constrained its scope for the future. 
The second option was to search for a compromise – the Lisbon treaty. 
It bears repeating that the Lisbon treaty constitutes real, if modest, progress for the European project. 
Under its terms, the European Council’s presidency would have far greater stability; in place of the current six-month rotating presidency, a European political leader who could command the necessary support would be elected to serve as President for two and a half years. 
Council decisions that now require unanimity would be taken by majority vote. 
The EU’s “high representative” would straddle the European Commission and the European Council to look after foreign affairs and security, and the European Parliament would have more power. 
Over and above these considerable advances, the treaty aims to make the EU more democratic. 
A group of citizens would be able to “invite” the European Commission to propose new legislation. 
National parliaments would be given a say in EU lawmaking, as the treaty recognizes the roles of parliaments in the “adequate workings of the Union.” 
Yet, despite its undeniable importance and its contribution to the EU’s development, the Lisbon treaty is far from being the key to everything. 
Instead, it is a simplified treaty replete with protocols, dispensations, and opt-out causes. 
Former Belgian Prime Minister Guy Verhofstadt was right when he spoke of the treaty as a set of “footnotes.” 
Meanwhile, with the Lisbon treaty blocked and no institutional step forward in sight, the underlying question remains: What type of Europe do we want? 
The Lisbon treaty is content with clearing pathways rather than creating new horizons. 
It mainly gives member states’ leaders the responsibility of implementing various EU advances, and sketches only tantalizing glimpses of Europe’s full potential. 
It doesn’t condemn the EU, but as French President Nicolas Sarkozy likes to say, it doesn’t save it, either. 
The member states’ political authority remains the motor of European policymaking, with all that this implies in terms of coordination, compromise, and negotiation. 
It is now up to the EU’s political leadership to move quickly and take firm grasp of the achievements that initially gave birth to the Lisbon treaty. 
A charter of fundamental rights has, for example, been integrated into the treaty; but, unless the member states bring it to life, it will certainly fail to yield concrete results. 
Fair rather than free competition in trade is proposed, but what does this mean if member states are not able to reach consensus on how to make it happen? 
A final point worth emphasizing is that the Lisbon treaty moves away from many of the ideas that could serve as the foundations of a European federal super-state. 
The disappearance from the treaty of such terms as “constitution” and “minister of foreign affairs” clearly show that the constitutional treaty’s ambitions have been scaled back. 
To move forward without Ireland by establishing a new Union with only 26 countries is legally impossible. 
But starting a new cycle of institutional negotiations also seems improbable. 
Europe’s citizens are tired of these recurrent discussions – since 1995, there have been treaties of Amsterdam, Nice, Rome, and Lisbon, none of which has entirely succeeded. 
Some believe that we will ultimately find a compromise, some ruse to make the Irish succumb, that gives the EU a treaty. 
But it will all take time, and if the new arrangement lacks a qualified majority vote, fails to reform the Commission, and includes an opt-out on the charter of fundamental rights, it will not resolve the EU’s essential problems or its estrangement from European public opinion. 

From Kafka to Gorbachev 
NEW YORK – On August 2, 1914, Franz Kafka wrote in his diary: “Germany has declared war against Russia. 
In the afternoon, swimming.” 
Kafka, the reclusive and visionary Central European writer, gave his name to the twentieth century. 
Seventy-five years had to pass after Kafka’s swim before Central and Eastern Europe would return to the broader European civilization. 
A Kafkaesque pause, some might say. 
Central and Eastern Europe was never only a place of right and left dictatorships, of ethnocentrism and xenophobia, of perpetual and frozen conflicts, as some now caricature it. 
It was also the birthplace of a spiritual heritage, of thinkers and artists, of a specific mode of creativity and search for meaning beyond pragmatic negotiations with daily life. 
In 1989 the region’s peoples brought with them in their “return to Europe” their diversity and richness; their vivacity, mysteries, and memories; and their old and new aspirations. 
And they brought the lesson that moving from a closed society to an open one is both possible and extremely difficult. 
As Thomas Mann once wrote: “Freedom is more complicated than power.” 
Freedom changes the frame and substance of choice, and of individual and collective responsibility. 
It highlights the contrast between initiative and apathy, enterprise and obedience, competition and total dependence on a state that embodies a kind of unshakable fate. 
Just as slavery must be learned, step-by-step, in order to survive its terror and tricks, so freedom must be learned in order to face its risks and opportunities. 
At that fluid border between old and new people craved most what they had never had: freedom of thought and expression, information, the tools to debate and define their own happiness. 
The fall of the Berlin Wall and German reunification, surprisingly accepted by Mikhail Gorbachev, meant immediate and direct support in reconstructing East Germany’s institutions and economy. 
Yet, even in Germany, the situation was far from ideal, with many “Ossies” frustrated by their seeming second-class status, and many “Wessies” resenting the financial burden of annexation. 
Elsewhere, change proved far more complicated. 
Many of the new post-communist societies – consumed with revenge, resentment, and raw struggles for power and status – became breeding grounds for aggressive nationalism. 
Ethnocentricism, xenophobia, and anti-Semitism flourished, together with corruption, nepotism, hypocrisy, and opportunism. 
The post-communist turmoil led to the dismemberment of the Soviet Union and the breakup of Czechoslovakia, fueled Yugoslavia’s wars and ethnic atrocities, and brought forth authoritarian rule and imperial revanchism in Russia. 
In this chaotic freedom, suddenly revealed secrets destroyed families and friendships and a common sense of togetherness; it shattered social stability, as insecure or falsified as that was. 
Sometimes it even replaced the old hypocrisy and opportunism with new ones as many former officials and secret-police employees thrived. 
Public debates across Eastern Europe soon started to exhibit a fierce confrontation between two different hidden memories: the memory of the Holocaust and that of the communist terror and crimes. 
A stupid competition arose between two nightmares, the Holocaust and the Gulag, totalitarian Nazism and totalitarian communism. 
Unavoidably, old-new clichés emerged. 
In Romania, some leading intellectuals publicly condemned the so-called “Jewish monopoly of suffering” – part of an “international conspiracy” that had reached, once again, the territory between the Danube and the Carpathians. 
In the notorious Walser Debate of 1998 in Germany about the “unbearable” way Germans had been portrayed after the Holocaust, I proposed that every country should complement its monuments of heroism with monuments of shame to recall the wrong done to other countries, other peoples, and also to its own people. 
A decade later, that proposal still seems meaningful. 
Would not monuments to shame be as instructive, if not more so, than monuments to heroism? 
While admission to the European Union appeared to draw a line under the post-communist period (at least in Central and Eastern Europe), the rupture of 1989 did not mark the beginning of an era of perfect cooperation by the people and for the people. 
But that did not stop some from proclaiming that the triumph of liberal capitalism meant the end of ideological struggle – and thus of History. 
It requires a large reserve of imagination, optimism, or plain stupidity to believe that one’s fellow human beings will ever live beyond history and ideology. 
As the religious terrorists of September 11, 2001, proved, the human story and mankind’s history go on, as before, through ideas and conflicts, through projects of absolute happiness, through cruelty and disasters, revolutions and revivals. 
And liberal capitalism itself – with its mediocre political leaders and cartoonish public discourse – has become a poor advertisement for the Absolute Idea. 
Indeed, some now wonder if the recent financial crisis has done to liberal capitalism what the fall of the Berlin Wall did to communism. 
There is an unnerving similarity between many economists’ naive premise of a perfectly rational market and the “dialectical materialism” of scientific socialism. 
By hijacking “rationality” in the belief that human behavior can be predicted (and thus potentially controlled), today’s arrogant General Staff of economists, bankers, and bureaucrats have compromised not only themselves, but the basic notion of freedom. 
We have no real alternative to the market, just as we have no real alternative to freedom. 
None of the defects or shortcomings of market economies are as bad as the remedies ranged against them. 
But, just as every act of individual and collective freedom threatened “real socialism,” so we must acknowledge that human freedom – the emancipation of creativity – means the end of certainty. 
This uncertainty does not weaken liberal capitalism – on the contrary, it is the system’s primary source of strength. 
But it does extend to what economists’ can know about human behavior and the market. 
In this regard, the most important lesson of 1989 and its aftermath is that society’s evolution can never be perfectly prophesied. 
Despite great difficulties and tensions, today’s post-communist capitalism is still better than the degenerate and tyrannical “real socialism” of yesterday. 

From Karl Popper to Karl Rove – and Back 
NEW YORK -- In his novel 1984 , George Orwell chillingly described a totalitarian regime in which all communica­tion is controlled by a Ministry of Truth and dissidents are persecuted by political police. 
The United States remains a democracy governed by a constitution and the rule of law, with pluralistic media, yet there are disturbing signs that the propaganda methods Orwell described have taken root here. 
Indeed, techniques of deception have undergone enormous improvements since Orwell’s time. 
Many of these techniques were developed in connection with the advertising and marketing of commercial products and services, and then adapted to politics. 
Their distinguishing fea­ture is that they can be bought for money. 
More recently, cogni­tive science has helped to make the techniques of deception even more effective, giving rise to political professionals who concentrate only on “get­ting results.” 
These professionals take pride in their ac­complishments, and may even enjoy the respect of an American public that admires success no matter how it is achieved. 
That fact casts doubt on Karl Popper’s concept of open society, which is based on the recognition that, while perfect knowledge is unattainable, we can gain a better understanding of reality by engaging in critical thinking. 
Popper failed to recognize that in democratic politics, gathering public support takes prece­dence over the pursuit of truth. 
In other areas, such as science and industry, the impulse to impose one’s views on the world encounters the resistance of external reality. 
But in politics the electorate’s perception of reality can be easily manipulated. 
As a result, political discourse, even in democratic societies, does not necessarily lead to a better understanding of reality. 
The reason democratic politics leads to manipulation is that politicians do not aspire to tell the truth. 
They want to win elections, and the best way to do that is to skew reality to their own benefit. 
This insight should lead us not to abandon the concept of open society, but to revise and reaffirm the case for it. 
We must abandon Popper’s tacit assumption that political discourse aims at a better understanding of reality and reintroduce it as an explicit requirement. 
The separation of powers, free speech, and free elections alone cannot ensure open society; a strong commitment to the pursuit of truth is also required. 
We need to introduce new ground rules for political discourse. 
These cannot be identi­cal to scientific method, but they should be similar in character, enshrining the pursuit of truth as the criteria on which political views are to be judged. 
Politicians will respect, rather than manipulate, reality only if the public cares about the truth and punishes politicians when it catches them in deliber­ate deception. 
And the public should care about the truth because deception misleads people in choosing their representatives, distorts policy choices, undermines ac­countability, and destroys trust in democracy. 
Recent history provides convincing evidence that policies based on a misrepresenting reality backfire. 
The Bush administration’s response to the terrorist attacks of September 11, 2001 – declaring a War on Terror and treating criticism as unpatriotic – succeeded in gathering public support, yet the results were the exact opposite to what the Bush administration intended, both for itself and the United States. 
The practical difficulty is in recognizing when political profes­sionals are distorting reality. 
There is an important role here for the media, the political elite, and the educational system, which must all act as watchdogs. 
In addition, the public needs to be inoculated against the various tech­niques of deception. 
The most ef­fective techniques operate at the subconscious level. 
When emotions can be aroused by methods that bypass consciousness, the public is left largely defenseless. 
But if the public is made aware of the various techniques, it is likely to reject them. 
One influential technique – which Republican pollster Frank Luntz says that he learned from 1984 - simply reverses meanings and turns reality on its head. 
Thus, Fox News calls itself “fair and balanced,” and Karl Rove and his acolytes turn their opponents’ strongest traits into their Achilles’ heels, using insinuations and lies to portray the opponents’ achievements as phony. 
That is how insinuations of cowardice and foul play helped defeat two highly decorated Vietnam War veterans, Senator Max Cleland in 2002, and John Kerry in 2004, while Bush and Vice President Dick Cheney – both of whom avoided military service ­– were portrayed as true patriots. 
Another technique is transference: accusing opponents of having motives or using methods that characterize the accuser himself. 
For example, David Horowitz, who accuses me of being “the Lenin of the anti-American conspiracy,” is a former Trotskyite for whom opponents are never adversaries to be debated, but rather enemies to be crushed. 
The American public has proven remarkably susceptible to the manipulation of truth, which increasingly dominates the country’s political discourse. 
Indeed, a whole net­work of publications, some of which manage to parade as mainstream media, is devoted to the task. 
Yet I believe that it is possible to inoculate the public against false arguments by arousing resent­ment against Orwellian Newspeak. 
What is needed is a concerted effort to iden­tify the techniques of manipulation – and to name and shame those who use them. 
Now is an ideal time to begin that effort. 
Americans are now awakening, as if from a bad dream. 
What we have learned from recent years’ experience – what we should have known all along – is that the supremacy of critical thought in political dis­course cannot be taken for granted. 
It can be ensured only by an electorate that respects reality and punishes politicians who lie or engage in other forms of deception. 


From Lady Di to Michelle Obama 
NEW YORK– In one week, Michelle Obama sat for a formal White House portrait, dressed in somber, tailored clothes; posed for a snazzy People magazine cover, dressed in a slightly down-market, hot-pink lace outfit that showed plenty of skin; let the national media know that the First Family would be getting its new puppy from a rescue shelter; and had her press office mention casually that “secretaries and policy makers” had been invited for popcorn and movies at the White House. 
That same week, in the midst of the worst economic crisis since the 1930’s, a national poll found that support for President Barack Obama was remarkably high, with respondents consistently saying that he “cares about people like me.” 
These two phenomena are closely related. 
Almost from her first appearance in the public eye, Michelle Obama has used clothing, etiquette, and such cues as where she shops and entertains to send out a subtle but radical message to American voters and to the world. 
For the first time since the days of Andrew Jackson, the White House is aggressively “democratizing” the highest office in the land, and symbolically inviting in the common man – and now the common woman. 
In other words, Mrs. Obama is managing to set herself up, unprecedentedly, as the “people’s First Lady.” 
She has carefully studied not only Jackie Kennedy – a comparison obvious from her sheath dresses, boat collars, and page-boy haircut – but also the triumphs and failures of that other glamorous but underestimated stealth radical, Princess Diana. 
Princess Di’s legacy in generating iconography that opened the way to tremendous social change is grossly underappreciated. 
In her brief lifetime, she was often lauded for qualities (her beauty and style) that were secondary to her life’s work, and derided for other aspects of her character (her emotionality and chaotic personal life) that were equally beside the point. 
As a result, few people noticed how genuinely, powerfully transformative her agenda was, how well she had thought it out, and how audaciously she sought to manage it. 
Without a formal education, Diana self-consciously set about pushing open the doors of an encrusted monarchy, challenging the sanctities of a long-established class structure, and affirming the value and immediacy of a Britain that was more diverse and socially mobile than ever before. 
Sometimes her efforts were heavy-handed, as when she embraced AIDS victims physically as a metaphor for social inclusion; sometimes they backfired, as when her shared intimacies with servants provided fodder for a flood of posthumous tell-all books. 
But, again and again, by showing up for Elton John and not just for the ballet, or by taking her sons away from the hunting preserve of Balmoral to careen down a waterslide at a tacky amusement park, she told ordinary Britons that their world was as important as any other. 
She told them that she wanted to know them, and that she wanted her sons to know them, too. 
It was this radical popularizing/democratizing mission –�not her knowledge of her former husband’s secrets or her later intimate relationship with a Muslim – that made her such a threat to the British establishment. 
And she was successful: she taught leaders that they would have to invite the people in – and treat them with basic respect – if they were to maintain their position. 
So, what Michelle Obama is doing is not trivial. 
It was not an earth-shattering policy revelation when she astutely followed reports of Sarah Palin’s $150,000 wardrobe by remarking casually on a late-night talk show that she was wearing a chain-store brand, and that “you can get lots of cute things online.” But it was nonetheless a powerful statement, especially to women, that said: I am not Nancy Reagan, dressed in Galliano, living in a gated community; 
I am not Mrs. Clinton, disregarding such things because I must argue major cases or run states; I am you – busy, on a budget, overworked, shrewd, cute, clever, finding a way. 
Likewise, her invitations to the White House are being used for populist messaging. 
Who came over to watch the White House chef with Mrs. Obama? 
Local cooking school students. 
Who sang at a White House event? 
Local public high school students. 
Again, “secretaries and policy makers,” not “policy makers and secretaries,” are coming over for film night. 
She is deliberately, coolly signaling that secretaries are just as good and important as policy makers, if not more so. 
This is a guest list that says to an anxious electorate: I respect you, wherever you are on the socioeconomic scale. 
Many White House speechwriters have used that rhetoric, but almost no First Ladies have walked the talk and passed the popcorn. 
When I worked on messaging for Al Gore’s 2000 presidential campaign, I often argued with white, older, affluent, male advisers who cared intensely about what was said in the elite media but ignored the popular venues to which most Americans pay attention. 
They had learned nothing from the right, whose candidates knew how powerful the right colors, clothing, imagery, and even lighting can be, and how strongly personal narratives – Ronald Reagan in riding boots, or George W. Bush in a flight suit – resonate with voters. 
Meanwhile, the nerdy, wonky left kept issuing data points, policy summaries, and white papers –�and generally, since Clinton, kept losing – until a young couple showed up and understood that Americans don’t just read; they watch. 
You can tell the nation more about your values by saying where you will seek a dog for your daughters than you can through reams of unread position papers. 
At a time of crisis, the Obamas are sending a powerful message, and Mrs. Obama, as the female archetype who has picked up Princess Di’s dropped baton, is instrumental in crafting it: no matter who you are, how stressed, how broke, there is, figuratively speaking, a seat in the White House with your name on it. 


From Neoliberalism to No Liberalism? 
WASHINGTON, DC – The era of free-market capitalism launched in the 1980’s by Margaret Thatcher and Ronald Reagan – often called “neoliberalism” by its opponents – is over. 
This ideological wave has crashed with the ongoing financial market crisis, but its decline was a long time coming. 
In the last few years, while American leaders continued to ride the neoliberal wave, much of the rest of the world was already standing on the shore. 
Disenchantment with “neoliberal,” pro-market ideas began in developing countries that had once been their ardent admirers. 
Latin American countries that embraced free-market policies in the 1990’s rejected them in the mid-2000’s, as a new wave of left-leaning leaders came to power. 
Russia, which adopted market-oriented reforms in the 1990’s, moved to a managed form of state capitalism in the 2000’s with “oligarchs” forced to submit to state control. 
As a result, the United States, the European Commission, and the multilateral development banks have become increasingly isolated in their efforts to advance free-market thought and policies worldwide. 
The deepening financial crisis weakens their position further. 
After all, how can the US or the Western multilateral institutions advocate bank privatization now? 
The decline of free-market orthodoxy in the rest of the world was caused by two factors: its failures as an approach to economic policy and the decline of US prestige and “soft power.” 
“Neoliberalism” grew in popularity as a result of its successes in jump-starting economic growth in the US, the United Kingdom, and some developing countries in the 1980’s and 1990’s. 
However, its weaknesses also became apparent during the mid- to late-1990’s. 
The attempt to implant free-market philosophy in Russia, for instance, proved catastrophic. 
Whereas the Russian experience clearly demonstrated the importance of strong state institutions in regulating a market economy, the free-market model’s fierce ideological opposition to a large state role in the economy offered a poor guide to building them. 
After some successes, most notably in Chile, “neoliberal” advice in Latin America also failed, most dramatically in the case of Argentina’s currency board, but most damagingly by increasing inequality, which worsened the continent’s central political-economic problem. 
In Brazil, President Luiz Inácio Lula da Silva showed that significant departures from free-market prescriptions worked better. 
Worldwide, most of the high-growth countries of the 1990’s and 2000’s broke with free-market orthodoxy by maintaining a stronger state hand in the economy. 
Belief in “neoliberalism” also was based on the success of the US economy, which for much of the 1990’s seemed to demonstrate the superiority of free markets. 
But the rapid decline of US prestige and “soft power” during the 2000’s sowed doubt outside the US. 
As the global agenda shifted to concerns about global warming, inequality, and the stability of the international system, the US no longer seemed to be a shining example, but rather an immovable obstacle on many of these issues. 
America’s elites turned a blind eye to these developments, rejecting all criticism, together with the crude anti-Americanism with which it was often expressed. 
Today, the story is different. 
A massive reassessment is finally in progress, with US elites now recognizing that market capitalism is in crisis, and that the world will not blindly follow their lead. 
But that leaves some large questions unresolved. 
If “neoliberalism” has failed, what comes next? 
And what must the US do to regain its stature and influence in the international economy? 
As New York and London lose their undisputed claim to being the world’s financial capitals, the rising centers of the global economy will gain an increasing say in international economic policy. 
Most, if not all, are located in countries that have a stronger tradition of state involvement in the economy. 
Jeffrey Garten, the dean of Yale’s School of Management, got it right when he labeled this the era of “state capitalism.” 
The state is on its way back as an economic player – not least in the US. 
But is that a good thing? 
While many critics will be tempted to celebrate the end of “neoliberalism,” it remains to be seen whether or not what succeeds it represents an improvement. 
Various forms of statism have been tried before; all have been found lacking. 
After all, while “neoliberalism” was criticized as technocratic and elitist, it was nonetheless a form of liberalism, and it was also consistent with the spread of democratic governance worldwide. 
The new era may not be so propitious for political liberties. 
As rising authoritarian powers, China or Russia, for example, have no reason to use their growing international influence to promote democracy; on the contrary, they increasingly counterbalance the efforts of Western countries to promote political liberty. 
As statist models of economic development become more appealing, democratic governance will become less so. 
Nor is it clear that “state capitalism” can generate the same degree of innovation and entrepreneurship as the liberal models did in their prime. 
In order to redeem the liberal project, American and European leaders will need to reformulate it in such a way that it can provide convincing solutions to problems such as environmental degradation and economic inequality. 
This will be no easy task, and one that may be far from policymakers’ minds as they grapple with the current crisis. 
But, unless they do, the emphasis on economic and political freedom that lies at the heart of liberalism may not survive. 

From Oil to Information 
Sheikh Yamani, Saudi Arabia’s former oil minister and a founding architect of OPEC, once said, “The stone age came to an end not for a lack of stones, and the oil age will end, but not for a lack of oil.” 
Humans stopped using stone because bronze and iron were superior materials. 
But will we really stop using oil when other energy technologies similarly provide superior benefits? 
The threat of depleting the world’s scarce energy resources has maintained a powerful hold on popular thinking ever since the oil shocks of the 1970’s. 
Nor is our fear limited to oil. 
For example, the classic 1972 bestseller Limits to Growth predicted that the world would run out of gold in 1981, silver and mercury in 1985, and zinc in 1990. 
We have the benefit of hindsight today, but even now most discussions of the issue are predicated on the logic of Limits to Growth . 
Moreover, the issue is not merely that we have not run out of natural resources. 
The American economist Julian Simon allegedly issued a challenge in 1980 to a group of environmentalists, saying that if scarcity were to be measured in terms of higher prices, they should invest in stocks of any raw metal. 
The environmentalists put their money on chromium, copper, nickel, tin, and tungsten, and picked a time frame of 10 years. 
By September 1990, each of the metals had dropped in price: chromium by 5%, tin by a whopping 74%. 
The doom-mongers lost. 
More importantly, they could not have won even if they had invested in petroleum, foodstuffs, sugar, coffee, cotton, wool, minerals, or phosphates: all of these commodities had become cheaper. 
Today, oil is the most important and valuable internationally traded commodity, and its significance to our civilization is underscored by the recurrent worry that we are running out of it. 
However, statistical estimates of its depletion hide much more than they reveal. 
A typical oilfield yields only 20% of the reservoir, with close to 63% remaining buried in the earth even when the most advanced technologies are used. 
Moreover, economists contend that energy consumption per capita is declining, owing to more efficient use. 
Fuel efficiencies in the automotive sector have increased by more than 60% in the past three decades, while overall wealth produced per unit of energy has doubled during the same period. 
But, whereas metal prices have fallen, oil prices are reaching record highs. 
The reason is simple: metal usage has been substituted by many alternatives, but most still require petroleum products as inputs, and decades-long efforts to develop sufficient alternative energy sources have yielded little success. 
So, if oil substitutes are not easily available, modern societies should focus on the sources of demand, most of which is attributable to the transport sector. 
Indeed, more than 80% of modern societies’ consumption of energy generated by oil, either in the form of electricity or fuel, is used to move commuters. 
Is all of this oil consumption really necessary? 
With the rising contribution of services to global GDP, now is the time to reassess the need for travel to work. 
Service-sector workers commute daily, only to be present in an environment that has no economic need for them, for they are facilitating information exchange far more than exchange of physical goods. 
Do we really need to bring together so many people for so little gain and at such a high cost? 
The cost is not merely in terms of natural resources, which should be sustained and passed on to future generations, not exhausted by our own. 
The rise in the amount of time spent commuting is a drag on both national productivity and the quality of life in modern cities. 
A survey conducted in the Indian city of Mumbai revealed that railway commuters’ average daily journey was 22 kilometers, while rapid urbanization there and in much of the developing world is only likely to increase the length of commutes. 
Likewise, passenger air transport is dominated by business travel. 
But, given the high-speed data transmission capacities of current telecommunications and information technology, it is now possible to reduce business travel significantly. 
Whereas the outsourcing phenomenon is attenuating the need for labor migration, domestic migration can be limited further by the use of home offices, which can eventually reduce stress on real estate, public transport networks, roads, and airports. 
Indeed, human travel in general should become increasingly limited to tourism and pleasure trips. 
We now have the technological infrastructure to bring most job-related information to workers while allowing them to collaborate closely. 
This requires a lifestyle change – one that governments should begin encouraging employers and workers to embrace. 
If they do, the age of oil will not end. 
But the age of worrying about it just might. 

From Olympia to Impasse 
PARIS – “Do not mix sports and politics!” 
That defiant cry from China’s rulers to the threat of a boycott of this summer’s Beijing Olympic Games does not stand the test of reality. 
Sport and politics have always been closely linked. 
Obvious examples abound. 
The 1936 Berlin Olympics were dominated as much by Nazi propaganda as by the athletic events. 
During the Cold War, “ping pong diplomacy” helped revive official relations between China and the United States. 
In 1990, Germany fielded a single Olympic team before the country reunified. 
To claim that politics and sports can be any more separated in today’s media age than they were in the past is especially naïve. 
The Olympics were awarded to Beijing for a mixture of economic and political reasons, and China wanted the Games for the same reasons. 
The current tension between China and (mostly) Western public opinion on the eve of the Beijing Olympics is the result of incompetence, hypocrisy, and legitimate but potentially counterproductive indignation. 
China’s incompetence in its treatment of the crisis in Tibet should come as no surprise. 
The Chinese regime is, quite simply, a victim of its inability to reform itself. 
China saw in the Olympics a symbolic opportunity to consolidate and celebrate its new status in the world. 
Caught by surprise in Tibet, and by the virulence and popularity of what they described as “anti-Chinese” sentiments, China’s rulers have resorted to the traditional tools of authoritarian regimes, turning their citizens’ deep nationalism and sense of humiliation against Western critics. 
The Chinese today sound almost as stunned by the supposed mistreatment of the Olympic torch in London, Paris, and San Francisco as Americans were back in 2001: “Why do they hate us so much?” “What have we done to them?” 
Self-isolated from global political realities and incapable of grasping the meaning of “civil society,” the Chinese regime encourages its public in expressions of defiance of all who fail to “respect China,” which only reinforces negative reactions. 
But the West’s hypocrisy nearly matches the Chinese regime’s incompetence. 
The moment the international community “bestowed” the Olympics on China, the West demonstrated how little consideration it actually gives to human rights and democracy. 
The idea that the Chinese regime would quickly reform the country into an open, moderate, and benevolent giant was either a fraud, a gigantic misperception, or wishful thinking. 
The dilemma posed by China for democratic regimes is understandable. 
Caught between their desperate need for finance and markets and their need to respond to their citizens’ sentiments, they oscillate between condemnation and reassurance of China, struggling to find a coherent path that defends the West’s principles without damaging its economic interests. 
Now the West believes that it has found a “third way” by threatening to boycott the Olympics’ opening ceremony, but not the Games themselves. 
Thus, the Chinese people, the world’s athletes, and a planet hungry for “bread and circuses ” will not be deprived, and China’s rulers will not “get away with murder” in their contempt for human rights and international public opinion. 
The problem is that such a choice requires governments’ absolute determination to stand by their words. 
The power of indignation is a necessary component of a transparent and interdependent world that has lost the privilege of ignorance. 
But selective responses to the actions of dictatorships can be problematic and counterproductive. 
China, for both good and bad, is a status-quo power that does not want to rock the boat of the international system – a power largely satisfied with its new status, but one that does not want to see its regime transformed, especially through external pressures. 
Let us have no illusions: no “conditions” imposed from outside will bring about the “China we deserve” in the way, after World War II, we got the “Germany we deserved” through a process of integration and reconciliation. 


From Payer to Player in the Middle East 
The European Union’s policy in the Middle East is the litmus test of its common foreign and security policy. 
Many Europeans share this belief, but, as the EU considers entering the fray of Middle East peace talks, it must respond to former Israeli Prime Minister Ariel Sharon’s jibe that in the region “you are payers, not players.” 
Yet Europe’s potential contribution should not be underestimated. 
Europe’s financial contribution to the Middle East has been consistent and impressive. 
Between 1995 and 1999, it spent roughly €3.4 billion in the region, to which the European Investment Bank added a further €4.8 billion in loans. 
From 2000 to 2006, Europe spent another €5.35 billion, and the EIB approved €6.4 billion in loans. 
This year, the European Commission has committed €320 million in Palestine alone. 
So much for the role of payer. 
But has Europe’s financial aid brought peace any closer? 
The Palestinian Authority has received more aid per capita than did post-war Europe under the Marshall Plan, yet the politics of the Israeli-Palestinian conflict have foiled hopes of a broader Euro-Mediterranean framework that, through dialogue and investment, would bring tangible improvements to the lives of millions. 
Yet it is starkly obvious that peace in the Middle East will not be born out of projects. 
Rather, it will emerge from a concept that addresses existential needs. 
A stability charter to address people’s concerns in terms of land ownership, the economy, demography, and supra-national cooperation must form the core of future dialogue and investment. 
For peace to take root, long-term regional interests must overcome national agendas. 
It is this vital multilateral ethos that Europe must champion. 
I believe that a stability pact for the region could help to match what was achieved a decade ago in the Balkans. 
An enforced template of international law is essential – one with which all state and non-state actors must comply. 
Violators of international law must be made aware that the Middle East is subject to the same norms as other regions, and that the principles of democracy belong as much to its people as to those of more politically developed nations. 
The Middle East urgently needs support in creating a regional stability charter to encompass codes of conduct, goals for regional cooperation, and the mechanisms of a regional cohesion fund to tackle underdevelopment and fund new infrastructure. 
The complementarities between countries rich in human resources and oil-producing states should be harnessed, while energy-derived investment must be diverted from the old markets of the West to the Gulf’s troubled hinterland. 
The ultimate result would be an interdependent Middle East that fosters stability and nurtures growth. 
For to end friction and suffering the crisis-ridden Middle East needs more than troops – a reality that has been recognized in previous conflicts around the World. 
The Helsinki Process that emerged out of the tensions of the Cold War addressed basic security, economic, and social concerns. 
It held that Europe’s peoples could not be divided in terms of human dignity. 
Recognition of cultural rights and humanitarian norms underpinned the activities of brave individuals like Václav Havel who knew that a better future was not only possible but essential. 
In all conflicts, human rights are among the first casualties, and in the Middle East the degradation of human dignity has now undone international conventions agreed over several generations. 
We should look to the Helsinki Process to show us how to retrieve what has been lost. 
With today’s emphasis on military action in the so-called “war on terror,” the need for a conference to discuss security and military affairs, combined with a stability charter, has become urgent. 
A regional agenda must be created to help identify priorities, based on a three-pronged strategy that includes energy and water policy, arms control, and debt reduction. 
Europe’s contributions to the Middle East have been great. 
Funding from the EU and from member states has helped to alleviate suffering, while compassionate community-building efforts by European individuals and organizations have highlighted the true closeness of all who share a common Mediterranean history. 
It is vital that Europe’s experience, commitment, and heritage of hope be framed in a vision for the Middle East that becomes a model for its future. 

From People Power to Putin Power 
As I attended a small but dignified memorial ceremony in Paris last week in honor of the Russian journalist Anna Politkovskaya – a woman “brave beyond limits,” in the words of her French editor – I was reminded of another posthumous tribute I participated in nearly 17 years ago in Moscow. 
Unlike Politkovskaya, the great scientist and human right activist Andrei Sakharov had not been murdered, and the tribute given to him then looked like the celebration of a new era. 
A new page was being turned, one that was full of uncertainty but also of hope that Russia was on its way to becoming a “normal country.” 
It is this page that has been probably fully closed with the assassination of Politkovskaya. 
What the small crowd of intellectuals gathered in Paris was mourning was their hope for a different Russia. 
We were burying the collective dream of intellectuals and democrats for a Russia where freedom and the rule of law would, after a long and cold Soviet winter, take root and bloom. 
The portraits of Politkovskaya, like a multitude of mirrors, were calling us back to a much darker reality. 
The dream was over. 
It had, most likely, never been realizable. 
What we are witnessing today is a totally different story. 
Russia is literally buying its way back into the international system as a preeminent actor, one that is regaining power and clout by replacing nuclear weapons with oil and gas and substituting greed for fear. 
The balance of terror of the Soviet era has given way to unilateral energy dependency in favor of Russia. 
With their enormous cash flow, Russian billionaires are buying sumptuous properties all over the world, and Russia is buying prominent Germans like the former Chancellor, Gerhard Schroeder, if not the support of Germany as such. 
Whatever the enormous differences that may separate them, post-communist Russia and fundamentalist Iran have much in common. 
Energy wealth gives them a sense of unique opportunity, the conviction that time is playing in their favor, and that they can now redress the humiliations they have suffered from the outside world. 
It is as if they were combining the Arab/Islamic world’s culture of humiliation and Asia’s culture of hope. 
Both are marked by a defiant nationalism, and both feel irresistible, all the more so because they sense that the United States is in decline as a result of the quagmire in Iraq, if not in Afghanistan as well. 
Of course, the differences between Russia and Iran are enormous. 
The Iranian regime is highly ideological and animated by an open passion to destroy Israel. 
It does not enjoy the massive backing of its society, except when it comes to national pride and the quest for nuclear status. 
Russia’s regime, by contrast, is animated by money, not ideology. 
In its quest to rebuild Russia’s geopolitical power and influence, Presdient Vladimir Putin has the support of the immense majority of the population. 
His motto, “Get rich and keep quiet,” sounds like Guizot’s priorities in mid-nineteenth century France, even if it is “seasoned” with a strong touch of imperial pride. 
As long as the oil money keeps flowing, most Russians will express no nostalgia for the democratic opening of the Yeltsin years, with its accompanying combination of chaos, corruption, international weakness, and disrespect for the state. 
Are Russians so different from us in the western democratic world, or is democracy a luxury that only old, stable, prosperous, and satisfied societies can afford? 
In their quest for post-Soviet stability, Russians seem to have found reassurance in Putin. 
He does not match Peter the Great in physical stature, but he has proven to be a gifted politician, capable of grasping, then controlling, the mood of the Russian people. 
For a majority of Russian citizens, economic prosperity and televised entertainment have become the modern equivalent of the panem et circenses formula of Roman times. 
The war in Chechnya may contribute to the moral corruption of Russia as a whole, to its frightening descent into a culture of violence. 
But it is also feeding a patriotic emotion – a popular longing for the restoration of Russia’s imperial status and prestige – that Putin’s regime has shrewdly exploited. 
Meanwhile, ordinary Russians have gained little. 
The multiplication of assassinations of political opponents and economic rivals, the mafia practice of contract murders, cannot be seen as signs of a regained stability. 
Nor can the Putin regime’s manipulation of popular xenophobia against citizens of the former Soviet empire, such as Georgians. 
Russia may have recovered its status as a strong power, but is it a respected, or even a happy one? 
Russia is rich, but Russians, at least most of them, remain poor, with a life expectancy that is closer to Africa than to Western Europe. 
Eventually, they will have to recognize that modern nations cannot live by power alone. 

From Prague Spring to Velvet Revolution 
WARSAW – What was the Prague Spring, or the events of 1968 more generally? 
Their meaning, it seems, has become more, not less, debatable with the passage of time. 
My generation was forged by protests and police truncheons, by the hopes generated not only by the Prague Spring, but also by the Polish student movement that March, the Paris events of May, and the first signs of Russian democracy voiced in the early books of Sakharov and Solzhenitsyn. 
For those of us imprisoned in Poland, the Prague Spring was a harbinger of hope. 
Even Poland’s communist newspapers, read behind bars, somehow conveyed news of the great changes taking place in our neighbor to the south. 
So I remember my shock when I learned about the Soviet invasion of Czechoslovakia in August, and the trauma that lingered long after. 
On the tenth anniversary of that invasion, Václav Havel, Jacek Kuron, and I, along with other dissidents, met on the Czech-Polish border. 
There is a photograph of that occasion: future presidents, ministers, and parliamentarians who were at that time pursued by the police like common criminals. 
These encounters were an extension of the climate of the Prague Spring. 
We all felt that we were creating something new, something that might, one day, turn out to be an important component of democracy in our countries. 
And so it was. 
In August 1989, I proposed in the Polish Diet a draft resolution apologizing to the Czechs and Slovaks for Polish involvement in the 1968 invasion. 
I felt that a historical circle was being closed: the ideas of the Polish March and the Prague Spring, the ideas of our mountain meetings, were becoming political facts. 
Three months later, the Velvet Revolution began in Prague. 
The main difference between the Prague Spring and the Velvet Revolution was that the former was mostly the work of Communist Party members and others who wanted to bring about “socialism with a human face.” 
As a result, some people nowadays dismiss the Prague Spring as a power struggle between communists. 
But there were many roads to – and through – communism, and many of them converged with national traditions. 
Indeed, communism was attractive for many reasons, including the idea of universal justice and humanized social relations; a response to the great spiritual crisis after World War I and, later, to the Nazis’ genocide; and the conviction that Western dominance of the world was nearing its end. 
Finally, in a world divided by Yalta, communism was, for some, the only realistic choice for central Europe. 
In Czechoslovakia in 1968, communist reformers appealed to democratic ideals that were deeply rooted in the country’s pre-World War II past. 
Alexander Dubcek, the leader of the Czechoslovak communists and the symbol of the Prague Spring, personified hope for democratic evolution, real pluralism, and a peaceful way to a state governed by law and respectful of human rights. 
By contrast, in Poland, which had witnessed its own tentative opening in the March student movement, a nationalist-authoritarian faction exploited all that was intolerant and ignorant in Polish tradition, employing xenophobia and anti-intellectual rhetoric. 
Polish Interior Minister Mieczyslaw Moczar, the leader of the nationalist faction, combined communist rhetoric with a language proper to fascist movements in order to mobilize the masses against the “cosmopolitan-liberal intelligentsia.” 
The Polish freedom movement of 1968 lost its confrontation with police violence; the Prague Spring was crushed by the armies of five Warsaw Pact members. 
But in both countries, 1968 gave birth to a new political consciousness. 
The Polish and Czech opposition movements that emerged only a few years later had their roots in the events of 1968. 
The Prague Spring was provoked by a crisis in the Communist Party, but the claim that it was merely a result of political squabbles among Party members falsifies history and rejects a significant fragment of the national heritage. 
Attitudes towards communism were always a controversial subject for the anticommunist opposition. 
Some rejected communism in all its forms. 
The majority though, in one way or another, had some contact with communism, through intellectual fascination, participation in state institutions, or the cold conviction that only by accepting the reality of life under communism could one do something useful for one’s country. 
These people, “tainted by communism,” constituted the majority of the participants in all revolts against the communist dictatorships. 
There was, however, another, category of people: the “careful and untainted,” who absented themselves from the world of politics. 
They hated communism, but, convinced that the system could not be reformed, they avoided the democratic opposition. 
While others took risks or sat in jails, they functioned in official and legal structures. 
One should not blame anyone today for such behavior. 
But it is surprising when these people accuse participants in the Prague Spring and the democratic opposition of links with communism. 
Communism was obviously an instrument of Soviet domination over conquered societies, but it was also a modus vivendi for large parts of these nations under the conditions in which they were obliged to live. 
Imre Nagy, the leader of the Hungarian revolt in 1956, and Dubcek became parts of their national legends, which belies the claim that communism was exclusively a foreign imposition. 
The Prague Spring appealed to elementary values: freedom, pluralism, tolerance, sovereignty, and rejection of the dictates of communist orthodoxy. 
When I recall these events after 40 years, I see not only revolt, but also the great illusion that it might be possible to outfox the Kremlin and painlessly move society from communism to democracy. 
This belief was naïve, but it also underpinned a national awakening in which the potential for freedom found its voice. 

 

From Resource Curse to Blessing 
KAMPALA – New discoveries of natural resources in several African countries – including Ghana, Uganda, Tanzania, and Mozambique – raise an important question: Will these windfalls be a blessing that brings prosperity and hope, or a political and economic curse, as has been the case in so many countries? 
On average, resource-rich countries have done even more poorly than countries without resources. 
They have grown more slowly, and with greater inequality – just the opposite of what one would expect. 
After all, taxing natural resources at high rates will not cause them to disappear, which means that countries whose major source of revenue is natural resources can use them to finance education, health care, development, and redistribution. 
A large literature in economics and political science has developed to explain this “resource curse,”and civil-society groups (such as Revenue Watch and the Extractive Industries Transparency Initiative) have been established to try to counter it. 
Three of the curse’s economic ingredients are well known: 
Moreover, resource-rich countries often do not pursue sustainable growth strategies. 
They fail to recognize that if they do not reinvest their resource wealth into productive investments above ground, they are actually becoming poorer. 
Political dysfunction exacerbates the problem, as conflict over access to resource rents gives rise to corrupt and undemocratic governments. 
There are well known antidotes to each of these problems: a low exchange rate, a stabilization fund, careful investment of resource revenues (including in the country’s people), a ban on borrowing, and transparency (so citizens can at least see the money coming in and going out). 
But there is a growing consensus that these measures, while necessary, are insufficient. 
Newly enriched countries need to take several more steps in order to increase the likelihood of a “resource blessing.” 
First, these countries must do more to ensure that their citizens get the full value of the resources. 
There is an unavoidable conflict of interest between (usually foreign) natural-resource companies and host countries: the former want to minimize what they pay, while the latter need to maximize it. 
Well designed, competitive, transparent auctions can generate much more revenue than sweetheart deals. 
Contracts, too, should be transparent, and should ensure that if prices soar – as they have repeatedly – the windfall gain does not go only to the company. 
Unfortunately, many countries have already signed bad contracts that give a disproportionate share of the resources’ value to private foreign companies. 
But there is a simple answer: renegotiate; if that is impossible, impose a windfall-profit tax. 
All over the world, countries have been doing this. 
Of course, natural-resource companies will push back, emphasize the sanctity of contracts, and threaten to leave. 
But the outcome is typically otherwise. 
A fair renegotiation can be the basis of a better long-term relationship. 
Botswana's renegotiations of such contracts laid the foundations of its remarkable growth for the last four decades. 
Moreover, it is not only developing countries, such as Bolivia and Venezuela, that renegotiate; developed countries like Israel and Australia have done so as well. 
Even the United States has imposed a windfall-profits tax. 
Equally important, the money gained through natural resources must be used to promote development. 
The old colonial powers regarded Africa simply as a place from which to extract resources. 
Some of the new purchasers have a similar attitude. 
Infrastructure (roads, railroads, and ports) has been built with one goal in mind: getting the resources out of the country at as low a price as possible, with no effort to process the resources in the country, let alone to develop local industries based on them. 
Real development requires exploring all possible linkages: training local workers, developing small and medium-size enterprises to provide inputs for mining operations and oil and gas companies, domestic processing, and integrating the natural resources into the country’s economic structure. 
Of course, today, these countries may not have a comparative advantage in many of these activities, and some will argue that countries should stick to their strengths. 
From this perspective, these countries’ comparative advantage is having other countries exploit their resources. 
That is wrong. 
What matters is dynamic comparative advantage, or comparative advantage in the long run, which can be shaped. 
Forty years ago, South Korea had a comparative advantage in growing rice. 
Had it stuck to that strength, it would not be the industrial giant that it is today. 
It might be the world’s most efficient rice grower, but it would still be poor. 
Companies will tell Ghana, Uganda, Tanzania, and Mozambique to act quickly, but there is good reason for them to move more deliberately. 
The resources will not disappear, and commodity prices have been rising. 
In the meantime, these countries can put in place the institutions, policies, and laws needed to ensure that the resources benefit all of their citizens. 
Resources should be a blessing, not a curse. 
They can be, but it will not happen on its own. 
And it will not happen easily. 

From Rome to Moscow 
One of the late Pope John Paul II’s unfulfilled dreams was to visit Moscow and forge a rapprochement with the Orthodox Church. 
But, although he was invited to Moscow by Russia’s three most recent presidents – Vladimir Putin, Boris Yeltsin, and Mikhail Gorbachev – opposition to the visit by Orthodox Patriarch Alexi prevented the Pope from making the journey before he died. 
Will Pope Benedict XVI achieve the breakthrough that his friend and predecessor failed to realize? 
Despite the recent return to Russia of the icon of Our Lady of Kazan that once hung in John Paul’s bedroom, relations between the Vatican and the Patriarchate remain strained. 
So Putin, who usually seems omnipotent, remains wary of issuing an invitation to Pope Benedict. 
That wariness is reinforced by a new political factor: a defense of Orthodoxy has become a pillar of the national idea on which Putin seeks to base the legitimacy of his regime. 
This is one reason why Putin was one of the few leading heads of state to miss attending Pope John Paul’s funeral. 
Although the Orthodox Church did send a delegation, immediately after the funeral Patriarch Alexi warned that the disagreements between the two branches of Christianity go much deeper than the former Pope’s Polish nationality, which was always a particular sore spot for Russian Orthodox Slavs. 
Russians saw John Paul’s Polish nationality as linking him to a long history of perceived oppression of Russian Orthodoxy. 
No less a figure than Alexander Pushkin wrote in 1836 that “Orthodoxy has always been persecuted by Catholic fanaticism….Their missionaries cursed the Orthodox Church, with hypocrisy and threats tried to recruit into Catholicism not only ordinary people but Orthodox priests as well.” 
Those Russians who continue to view the Catholic Church as a threat regularly quote these lines. 
Pope Benedict, being from Germany, a predominantly Protestant country, does not carry the weight of this bitter history. 
Perhaps this is one reason why Alexi responded positively to Benedict’s first speech urging reconciliation, saying that he hopes that this will improve “Orthodox-Catholic relations on the post-Soviet territory.” 
This positive spirit can be nurtured by Russia’s government, which usually has cordial relations with the Vatican. 
Indeed, Russian Foreign Minister Sergei Lavrov has many projects for which he thinks the Vatican can be of help, particularly in advancing the cause of reconciliation and creating a “partnership between civilizations.” 
Recently, another key Vatican figure, Cardinal Walter Casper, the head of the Council for Christian Unity, called for a Catholic-Orthodox high level meeting that would address unifying both branches of Christianity. 
Cardinal Casper is well regarded in Russia for being the man who returned Our Lady of Kazan to its homeland. 
In his public speeches, Casper more than once suggested that the Vatican considers Christian unification its main goal, and – most important from the Orthodox perspective -- that “unity does not have to mean sameness.” 
The fact that Pope Benedict and Cardinal Casper are both Germans is important, because Russian-German relations are perhaps warmer now than they have ever been. 
Putin, in particular, is at home in the German language, having spent many years in East Germany during his days as a KGB agent. 
Moreover, unlike Pope John Paul II, who, as a Pole, always saw communist Russia as an oppressor, Benedict carries the German sense of guilt stemming from the country’s Nazi past and its brutal invasion of Russia. 
In both Rome and Moscow, there is growing hope that a road to Christian unity can be built, but it is increasingly clear that the road can be completed only by passing through Berlin. 

From Shock Therapy to Sleep Therapy 
If the 1990’s was the era of economic shock therapy, the present decade may be remembered for economic reform paralysis. 
Although the reasons for gridlock differ across countries, the bottom line is that few politicians anywhere are having much success in limbering up their economies. 
The problem is not just in emerging markets such as Indonesia, Mexico, and Brazil, where an ascendant left has failed to find a viable alternative to the much reviled “Washington Consensus” of economic liberalization. 
One sees the same phenomenon across many rich countries as well. 
In a remarkable coincidence of timing, Japanese Prime Minister Junichiro Koizumi and German Chancellor Gerhard Schroeder called for early elections in the hope of energizing reform. 
In Germany, the most urgent needs are for tax and labor-market reform. 
In Japan, the Koizumi government wants to privatize the behemoth postal service, whose giant financial arm is wrapped like a python around the country’s banking system. 
Even in the United States, one of the few places where economic liberalization is not a dirty word, President George W. Bush has his own frustrations. 
Despite a huge investment of time and energy, he has failed to marshal even his own troops in support of a relatively modest proposal to stave off collapse of the nation’s old-age insurance program. 
Indeed, Bush’s popularity has taken a beating over pension reform. 
Some people ascribe the global collapse of reform efforts to a peculiarly ineffective collection of leaders. 
This view is nonsense, and besides, if the public is so unhappy with its leaders’ performance, why does it keep electing and re-electing them? 
No, the problems run deeper. 
The fact is that people everywhere are having trouble coming to terms with the rapid changes resulting from technology and globalization. 
For, although globalization spins off a lot more winners than losers, many people are worried, and worried people press their leaders to slow things down. 
You can tell Americans and Europeans that they should rejoice over the boundless cheap goods and cheap credit that trade with Asia has supplied. 
But all their politicians seem to worry about is how some farmer or textile worker may lose their job. 
You can tell Latin Americans or Africans that Asia’s unquenchable thirst for natural resources will keep pushing up the prices of their commodity and agricultural exports in perpetuity, turning wheat fields into gold mines. 
But all their politicians seem to want to worry about is protecting doomed domestic manufacturers against low-wage Asian competition. 
Outgoing US Federal Reserve chairman Alan Greenspan preaches flexibility as a way of dealing with globalization. 
At some level, of course, he is right. 
Today’s world is one of fast-changing currents, where a region flourishes one day, and the next its factories collapse economically as if hit by hurricane Katrina. 
If change is inevitable, we must make our economies more flexible and prepare to live with the consequences. 
There is no other way. 
So why doesn’t the public accept this need for flexibility, which, in the end, is what market-based economic liberalization is all about? 
The problem is that most people are not thrilled to live in a world of blindingly fast change. 
Most people are creatures of habit; they crave predictability. 
German workers who make high-end machine tools are proud of their craft, and they don’t want to be told that the same work can be done for much less in Poland and Slovakia. 
Clothing makers in Italy have long been the envy of the world. 
These craftsmen don’t want to be told that they should start retraining as tour guides to service the inevitable horde of middle-income Chinese tourists, as that country takes over high-end light manufacturing like tailoring. 
With such resistance to change, it is no wonder that so many political leaders try to lull their subjects to sleep, hoping that when everyone wakes up, it will all have proven a dream. 
Asia, of course, is different. 
China is developing at a dizzying pace. 
Whole cities are rising out of desert sands overnight. 
China is building more roads, airports, and bridges every five years than Europe and the US combined build in 20. 
With a long history of cataclysmic, often violent change, Chinese society is perhaps more adaptable than most. 
In India, which is said to have “a strong consensus for weak reform,” things are moving far more slowly – but always forward. 
Whereas India is not yet nearly the factor in global trade that China has become, its 1.2 billion people are pushing inexorably onto the scene. 
Will today’s reform paralysis outside Asia continue? 
Will the political winds shift to reinvigorate economic liberalization, with politicians reminiscent of Britain’s Margaret Thatcher or the US’s Ronald Reagan coming to the fore, breathing the fire of change? 
Will politicians finally tell their citizens that if their economies continue to sleep, they may not wake up? 
I believe that in most countries, the era of sleep therapy will come to an early end. 
But I fear that change might cause a global economic crisis resulting from, say, an ugly unwinding of extravagant US borrowing trends. 
Only then may people start waking up and voting for politicians who insist on re-energizing economic reform. 

From Solidarity to Freedom 
Although the rise 25 years ago of Solidarity, the first independent civic movement in the former Soviet empire, had huge political consequences, Solidarity was, primarily, neither a political movement nor a labor union. 
First and foremost, Solidarity was a cry of dignity. 
We simply had reached the end of our endurance with the omnipresent and all-powerful communist apparatchiks who ruled in our workplaces, neighborhoods, even places of rest. 
Writers, journalists, and artists could no longer stand the heavy-handed censorship and supervision. 
In factories as well, Party bureaucrats wanted to know everything and decide everything. 
Every civic initiative, every activity of any kind was subject to ideological evaluation and control. 
All who were tempted to disobey were certain to be “taken care of” by the secret police. 
Last winter, I saw a similar cry for dignity in Ukraine. 
Those hundreds of thousands of people who camped for weeks on the freezing streets of Kiev did so because they were demanding their dignity. 
Both the Polish and the Ukrainian experiences have convinced me that the will to live in dignity is the most powerful engine of human action, an engine that is capable of overcoming even the greatest fear. 
But the desire for dignity is not enough to secure it. 
Something else is needed as well. 
Second, Solidarity was a social movement. 
This meant that Solidarity – ostensibly a labor union – became a home for people from all social groups and classes in Poland: workers and intellectuals, engineers and artists, doctors and patients. 
Some passionately discussed economic reform, others talked about developing culture, while still others planned to reform education and the scientific establishment or assure the defense of the environment. 
Solidarity created a public space for all of these discussions, while protecting us all against the party apparatus. 
But Solidarity was still something more. 
It was a Polish version of the ancient Greek agora, a meeting place of all citizens, a locus of a free conversation about our communal and individual future, about all kinds of problems and their solutions. 
We did not yet have a free state, but we already had something more important than that: a free civil society engaged in discussing the common condition of its members. 
The society embraced by Solidarity counted 10 million members; indeed, 10 million real citizens. 
But even that was not enough to achieve the final victory over the party and police apparatus of the state. 
Third, Solidarity was an institution; indeed, a unique one given the conditions under which we lived, and it is to its special institutional form that we owe our ultimate victory. 
Between the organizational structure of Solidarity and the official state and party organizations there was what might be called a “gap between civilizations.” 
Against the authoritarian and hierarchical structures of the regime, we raised a decentralized institution, a huge organism striving to achieve consensus about its aims and the methods of action. 
It was an institution committed to respecting the integrity of all individuals and all other institutions. 
This may not be extraordinary in old democratic communities; but in our authoritarian environment, it was strikingly new. 
And only such a new institutional structure could respond to that deep cry for dignity. 
So what is left of all this today? 
To be sure, Solidarity achieved a stunning political success. 
Poland is a free country, a member of NATO and of the EU, while the Soviet Union is no more. 
But recent history has not been kind to the victors. 
The leaders of the democratic revolutions in Eastern Europe quickly faded in the new environment. 
Democratic elections brought out new and savvier politicians, often from among those who were part of the old regime. 
More strikingly, some of our hopes for a new social order also crashed against the rocks of the new rules of the game. 
True, Poland’s democratic institutions, despite their flaws, function rather well. 
Economic growth has been impressive, and life is definitely getting better. 
But the vibrancy of civil society, the sense of common purpose, the universal manifestations of social solidarity that our union stood for in its time – all these things are largely gone. 
The union itself is a shell of its own former self, a partisan and mostly right-wing movement of workers buffeted by the new economic reality. 
Most notably, the unifying character of Solidarity gave way to social divisions and, among many of Poland’s people, a large dose of alienation from both politics and civic engagements. 
Is this what normalcy always means? 
Do heady times of struggle always give way to a somewhat deflating taste of victory? 
Am I merely a veteran wistfully reminiscing about the old days of struggle? 
Perhaps. 
But I am not a nostalgic type. 
I know that we have come a long way, and I do not want to go back. 
But was it really inevitable that so much solidarity had to escape our Solidarity? 


Global Capital Heads for the Frontier 
PRINCETON – So-called “frontier market economies" are the latest fad in investment circles. 
Though these low-income countries – including Bangladesh and Vietnam in Asia, Honduras and Bolivia in Latin America, and Kenya and Ghana in Africa – have small, undeveloped financial markets, they are growing rapidly and are expected to become the emerging economies of the future. 
In the last four years, inflows of private capital into frontier economies have been nearly 50% higher (relative to GDP) than flows into emerging market economies. 
Whether that should be cheered or lamented is a question that has become a kind of Rorschach test for economic analysts and policymakers. 
We now know that the promise of free capital mobility has not been redeemed. 
By and large, the surge in capital inflows has boosted consumption rather than investment in recipient countries, exacerbating economic volatility and making painful financial crises more frequent. 
Rather than exerting discipline, global financial markets have increased the availability of debt, thereby weakening profligate governments' budget constraints and over-extended banks' balance sheets. 
The best argument for free capital mobility remains the one made nearly two decades ago by Stanley Fischer, then the International Monetary Fund's number two official and now Vice Chair of the US Federal Reserve. 
Though Fischer recognized the perils of free-flowing capital, he argued that the solution was not to maintain capital controls, but to undertake the reforms required to mitigate the dangers. 
Fischer made this argument at a time when the IMF was actively seeking to enshrine capital-account liberalization in its charter. 
But then the world witnessed financial crises in Asia, Brazil, Argentina, Russia, Turkey, and eventually Europe and America. 
To its credit, the Fund has since softened its line on capital controls. 
In 2010, it issued a note that recognized capital controls as part of the arsenal of policy tools used to combat financial instability. 
Nonetheless, at the IMF and in advanced countries, the prevailing view remains that capital controls are a last resort – to be used only after conventional macroeconomic and financial policies have been exhausted. 
Free capital mobility continues to be the ultimate goal, even if some countries may have to take their time getting there. 
There are two problems with this view. 
First, as advocates of capital mobility tirelessly point out, countries must fulfill a long list of prerequisites before they can benefit from financial globalization. 
These include the protection of property rights, effective contract enforcement, eradication of corruption, enhanced transparency and financial information, sound corporate governance, monetary and fiscal stability, debt sustainability, market-determined exchange rates, high-quality financial regulation, and prudential supervision. 
In other words, a policy aimed at enabling growth in developing countries requires first-world institutions before it can work. 
Worse, the list is not only long; it is also open ended. 
As the advanced countries' experience with the global financial crisis has demonstrated, even the most sophisticated regulatory and supervisory systems are far from being failsafe. 
Thus, demanding that developing countries build the kind of institutions that will render capital flows safe not only puts the cart before the horse; it is also a fool's errand. 
Caution dictates a more pragmatic approach, one that recognizes a permanent role for capital controls alongside other regulatory and prudential tools. 
The second problem concerns the possibility that capital inflows may be harmful to growth, even if we leave aside concerns about financial fragility. 
Advocates of capital mobility assume that poor economies have lots of profitable investment opportunities that are not being exploited because of a shortage of investible funds. 
Let capital come in, they argue, and investment and growth will take off. 
But many developing countries are constrained by a lack of investment demand, not a shortage of domestic saving. 
The social return on investment may be high, but private returns are low, owing to externalities, high taxes, poor institutions, or any of a wide array of other factors. 
Capital inflows in economies that suffer from low investment demand fuel consumption, not capital accumulation. 
They also fuel exchange-rate appreciation, which aggravates the investment shortage. 
The profitability of tradable industries – those most likely to suffer from appropriability problems – takes a hit, and investment demand falls further. 
In these economies, capital inflows may well retard growth rather than stimulate it. 
Such concerns have led emerging economies to experiment with a variety of capital controls. 
In principle, frontier market economies can learn much from this experience. 
As the Johns Hopkins University economist Olivier Jeanne pointed out at a recent IMF conference organized to spur such learning, the capital-flow measures that have become fashionable of late do not work very well. 
That is not because they fail to affect the quantity or composition of flows, but because such effects are quite small. 
As Brazil, Colombia, South Korea, and others have learned, limited controls that target specific markets such as bonds or short-term bank lending do not have a significant impact on key outcomes – the exchange rate, monetary independence, or domestic financial stability. 
The implication is that capital controls may need to be blunt and comprehensive, rather than surgical and targeted, to be truly effective. 
Capital controls by themselves are no panacea, and they often create worse problems, such as corruption or a delay in needed reforms, than they solve. 
But this is no different from any other area of government action. 
We live in a second-best world where policy action is almost always partial (and partially effective), and well-intentioned reforms in one area may backfire in the presence of distortions elsewhere in the system. 
In such a world, treating capital controls as the last resort, always and everywhere, has little rationale; indeed, it merely fetishizes financial globalization. 
The world needs case-by-case, hardheaded pragmatism, recognizing that capital controls sometimes deserve a prominent place. 

Fukushima, Europe's Nuclear Test 
MADRID – Seen from Europe, the irrationality of the political and media discourse over nuclear energy has, if anything, increased and intensified in the year since the meltdown at Japan’s Fukushima Daiichi power plant. 
Yet a dispassionate assessment of nuclear energy’s place in the world remains as necessary as it is challenging. 
Europeans should not pontificate on nuclear-energy policy as if our opinion mattered worldwide, but we do. 
On the other hand, Europe does have a qualified responsibility in the area of security, where we still can promote an international regulatory and institutional framework that would discipline states and bring about greater transparency where global risks like nuclear power are concerned. 
Europe is equally responsible for advancing research on more secure technologies, particularly a fourth generation of nuclear-reactor technology. 
We Europeans cannot afford the luxury of dismantling a high-value-added industrial sector in which we still have a real comparative advantage. 
In Europe, Fukushima prompted a media blitz of gloom and doom over nuclear energy. 
The German magazine Der Spiegel heralded the “9/11 of the nuclear industry” and “the end of the nuclear era,” while Spain’s leading newspaper El Pais preached that supporting “this energy [was] irrational,” and that “China has put a brake on its nuclear ambitions.” 
But reality has proven such assessments to be both biased and hopelessly wrong. 
True, a few countries – Belgium, Italy, Germany, and Switzerland, with Peru the only non- European country to join the trend – formally declared their intention to phase out or avoid nuclear energy. 
These decisions affect a total of 26 reactors, while 61 reactors are under construction around the world, with another 156 projected and 343 under official consideration. 
If these plans are realized, the number of functioning reactors, currently 437, will double. 
But, more interestingly, the nuclear boom is not global: Brazil is at the forefront in Latin America, while the fastest development is occurring in Asia, mostly in China and India. 
If we compare this geographical distribution with a global snapshot of nuclear sites prior to the Three Mile Island nuclear meltdown in the United States in 1979, a striking correlation emerges between countries’ nuclear-energy policy and their geopolitical standing and economic vigor. 
Whereas the appetite for reactors in the 1970’s reflected the international heft of the Soviet Union, and principally that of the geopolitical West – Japan, the US, and Europe – today the center of gravity has shifted irrevocably to the East, where nuclear energy has become a “gateway to a prosperous future,” in the telling words of a November 2011 commentary in The Hindu. 
Indeed, US President Barack Obama, evidently agreeing with that view, has boldly bet that loan guarantees and research into creating small modular reactors will reconfirm America’s global position at the forefront of civilian nuclear technology and its relevance in the new global order. 
Energy is, of course, the bloodline of any society, reflected in the correlation between energy demand and income. 
In this respect, nuclear energy’s advantages, particularly its reliability and predictable costs, stand out. 
The International Energy Agency’s 2010 World Energy Outlook foresees a rise in global energy demand of 40% by 2030 – an unforgiving reality that is most tangibly felt in developing countries, particularly in Asia. 
So expansion of nuclear energy is, and will continue to be, a fact. 
To act responsibly, Europeans should be working to enhance international security standards for nuclear power, not opting out of the game. 
The real lesson of Fukushima is that state controls are necessary but not sufficient to ensure nuclear safety. 
Unfortunately, a proposal last year at the International Atomic Energy Agency aimed at launching an effective international control system on safety and security of nuclear power worldwide blatantly failed with the acquiescence of the European Union. 
Worse still, with European backing, the IAEA’s budget, already a paltry €300 million, has been cut by almost 10%. 
In this context, an initiative to mandate random IAEA inspections of 10% of the world’s operating reactors within three years was watered down, again with the EU’s active support, on the grounds that responsibility for security and inspections should rest primarily with member states. 
Only a slim provision that made joint inspections with the IAEA voluntary made it into the final agreement. 
As for the EU itself, the debate and final formulation of the March 2011 “voluntary” stress tests, accurately called “stormy” by Polish Prime Minister Donald Tusk, revealed a bewildering array of deficiencies and weaknesses. 
Perhaps the most striking contradiction in Europe’s nuclear discourse is the discrepancy between the seeming effort to boost economic growth and employment, and the flippancy of member states in abandoning the nuclear industry, which depends on the design, engineering, and command-and-control skills that underlie Europe’s comparative advantage in the industry. 
One heartening exception is a recent agreement between the United Kingdom and France to forge a manufacturing alliance between Rolls Royce and Areva in nuclear technology. 
But they should not be alone. 
Is it reasonable that Europe’s countries give up a niche of prosperity on ideological grounds that are irrelevant from a global perspective? 
The rise of nuclear power in Europe paralleled its post-war economic prowess. 
It coincided with the peak of the West’s belief in its soaring economic strength and perpetual global ascendancy. 
Today, with Europe increasingly seen as the sick man of the world’s economy, even the whole continent’s renunciation of nuclear energy would have little to no reverberation on the world stage. 
Dictating the direction of the policy discourse is no longer Europe’s role. 
Behaving responsibly is. 

The Lost Donkeys of Science 
CAMBRIDGE – The biblical story of Saul finding his kingdom by chance while searching for his father’s lost donkeys offers an important lesson for scientists. 
Instead of defining our research objectives narrowly, we must open our minds to completely different and more exciting discoveries that may be lurking at the periphery of our field of view. 
Arno Penzias and Robert Wilson made such an unexpected discovery in 1965, when their attempts to reduce the noise in their state-of-the-art radio antenna led them to discern the cosmic microwave background. 
They noticed a noise floor, which turned out to be the radiation left over from the Big Bang. 
This watershed discovery, which fundamentally changed our view of the universe, was made at Bell Labs – not at a premier research university. 
Assembling new data is essential to scientific progress. 
Data play the important role of guiding scientists toward new discoveries and solutions, as well as to new puzzles that need to be solved, thereby keeping the scientific process honest and dynamic. 
Extended periods without new data facilitate – indeed, foster – the unrestrained growth of speculative-theory bubbles. 
Even failures to explain puzzling data are essential to the scientific process, with the challenges that data pose encouraging creative individuals to develop new ways of thinking about physical reality. 
Over extended periods of time – decades or longer – a data-driven culture without programmatic reins offers such extensive benefits that profit-oriented businesses often choose to support it. 
Most famously, Bell Labs recognized the virtues of such a culture in the 1930s-1970s, assembling a collection of creative physicists to whom it gave unadulterated freedom. 
This ethos produced some of the twentieth century’s most important discoveries in science and technology, including the foundations of radio astronomy in 1932 and the invention of the transistor in 1947. 
Bell Labs scientists also developed information theory in 1948, solar cells in 1954, lasers in 1958, the first communications satellites in 1962, charged-coupled devices in 1969, and fiber-optic networks in 1976. 
Without patience and foresight, Bell Labs could not have reaped the tremendous long-term benefits of these breakthroughs. 
In science, as in any complicated and creative endeavor, uniform opinions and approaches will always prove sterile. 
The coexistence of disparate ideas cultivates competition and progress. 
Of course, it is difficult to know which exploratory path will bear fruit, and there is no shortage of novel scientific ideas that were proven wrong. 
Failure should thus be accepted as a natural ingredient in a culture of innovation. 
The fact is that high-risk research, just like high-risk capital investments in the business world, has the potential to be more profitable than safer approaches. 
If even one non-mainstream idea bears fruit, it could transform our view of reality and justify all of those heterodox hypotheses that do not. 
Albert Einstein, for example, did not foresee the importance of his innovative theory of gravity to the development of precise GPS navigation systems. 
Similarly, Christopher Columbus, funded by the Spanish crown, sailed westward to find a new trade route to the East Indies, but discovered the “New World” instead. 
His financial backers clearly benefited from his unexpected discovery, as he claimed parts of America for the Spanish Empire. 
The lesson is clear: while it is important to justify flagship scientific missions by what we expect to find, funding should be based mainly on their potential to lead to unexpected discoveries. 
This is not to say that agenda-driven projects do not also lead to important breakthroughs. 
The recent discovery of the Higgs boson was the culmination of a programmatic experimental effort to confirm a theoretical idea, proposed in the 1960s, that lies at the foundation of the standard model of particle physics. 
Though the discovery was anticipated, the future advances that it will enable are unforeseeable. 
It would not be prudent for agencies to allocate all of their funding to high-risk research. 
But they should allocate a small fraction – say, 20% – of their resources to research that is not tied to specific goals. 
Such a funding scheme is essential for promoting breakthroughs in the long run, because it encourages researchers to take on risky projects with fundamentally unpredictable outcomes but potentially high gains. 
Most important, it would give individuals the freedom to respond to unexpected insights as they arise, rather than compelling them to follow a prescribed agenda. 
This approach demands an understanding that progress will not be steady over time, because discoveries rest on extensive preparatory work. 
It is thus inappropriate to measure success based on the contemporaneous level of allocated resources. 
Lost resources (time and money) should never be a concern in a culture that is not tied to a specific programmatic agenda, because an unexpected discovery could be far more valuable in the long term than these lost resources. 
The advice Saul received from Samuel, who crowned him King after their chance meeting, is appropriate: “As for the donkeys you lost three days ago, do not worry about them...” 

Funding a Global Health Fund 
NEW YORK – World leaders will come together at the United Nations in September in order to accelerate progress towards the Millennium Development Goals (MDGs). 
Three of the eight MDGs involve bringing primary health services to the entire world’s population. 
A small amount of global funding, if well directed, could save millions of lives each year. 
The key step is to expand the Global Fund to Fight AIDS, Tuberculosis, and Malaria into a Global Health Fund. 
The Global Fund was created in 2002 to help the world battle those three killer diseases, and its accomplishments have been spectacular, making it arguably the most successful innovation in foreign assistance of the past decade. 
As a result of Global Fund programs, an estimated 2.5 million people are on antiretroviral AIDS therapy. 
No fewer than eight million people have been cured of TB. 
And more than 100 million long-lasting insecticide-treated bed nets have been distributed in the fight against malaria. 
In total, studies suggest that Global Fund programs have saved five million lives. 
The Global Fund’s remarkable successes result from its operational procedures. 
Disease-specific committees, called the Country Coordination Mechanism (CCM), are constituted in each developing country. 
Each CCM is chaired by the national government, but incorporates input from non-government organizations to formulate national-scale, disease-specific plans for submission to the Global Fund. 
Once the Global Fund receives these plans, they are sent to a Technical Review Panel (TRP) to check that the plans are scientifically sound and feasible. 
If the TRP approves, the plan is sent to the Board of the Global Fund, which then votes to approve financing. 
Once the program gets underway, the Global Fund follows the implementation of the program, undertaking audits, monitoring, and evaluation. 
Since 2002, the Global Fund has approved around $19 billion in total funding. 
There are two huge challenges now facing the Global Fund, and especially the donor countries that support it. 
The first is lack of financing. 
The Global Fund has been so successful that countries are submitting increasingly ambitious programs for consideration. 
Unfortunately, the Global Fund is already in a state of fiscal crisis. 
It needs around $6 billion per year in the next three years to cover expansion of programs for the three diseases, but it has only around $3 billion per year from donor countries. 
Unless this is corrected, millions of people will die unnecessarily. 
The second challenge is to broaden the Global Fund’s mandate. 
So far, the Global Fund has addressed MDG 6, which is focused on the control of specific killer diseases. 
Yet control of these three diseases inevitably involves improvement of basic health services – community health workers, local clinics, referral hospitals, emergency transport, drug logistics – that play a fundamental role in achieving MDG 4 (reduction of child mortality) and MDG 5 (reduction of maternal mortality). 
All three health MDGs are interconnected; all are feasible with an appropriate scaling up of primary health services. 
The obvious step to address MDGs 4 and 5 is to explicitly expand the Global Fund’s financing mandate. 
Many programs, such as those in the Millennium Villages project, already show that a scaling up of primary health systems at the village level can play a decisive role in reducing child and maternal mortality. 
Expanding the Global Fund’s mandate to include financing for training and deployment of community health workers, construction and operation of local health facilities, and other components of primary health systems could ensure the development of these local systems. 
Many countries – including France, Japan, Norway, the United Kingdom, and the United States – have recently recognized the need to move beyond the financing of control of AIDS, TB, and malaria to financing improvements in primary health systems more generally. 
But they seem to view the issue of health-system financing as an either-or choice: scale up control of AIDS, TB, and malaria, or scale up financing of primary health systems. 
The truth, of course, is that both are needed, and both are affordable. 
The annual cost of specific disease control in the next three years is perhaps $6 billion, and another $6 billion per year for health-system expansion. 
The total, $12 billion per year for an expanded Global Fund, might seem unrealistically large compared to the $3 billion per year spent now. 
But total annual funding of $12 billion is really very modest, representing around 0.033% (three cents per $100) of the donor countries’ GNP. 
This is a tiny sum, which could be easily mobilized if donor countries were serious. 
US President Barack Obama has been outspoken in support of scaling up primary health services, yet the specific budget proposals from his administration are not yet satisfactory. 
The worst of it is that the Obama administration’s budget for the 2011 provides just $1 billion per year to the Global Fund. 
This small sum is unworthy of US leadership. 
If the US would expand its annual support to the Global Fund to around $4 billion per year, it would likely induce the rest of the world’s donors to put in $8 billion per year, keeping the US share at around one-third of total funding. 
To raise these extra amounts, the Obama administration could levy an excess-profit tax on Wall Street to make up the budget gap. 

Africa’s Future Depends on Improving Education 
LAGOS – It is time for an entrepreneurial and knowledge revolution in Africa. 
Only a properly educated workforce and entrepreneurial class will have the skills and drive to thrive as new technologies change the nature of work, leisure, the environment, and society – and to tackle our continent’s most pressing challenges. 
Many people in Africa and beyond share this view. 
When French President Emmanuel Macron visited Nigeria in July 2018, he offered a bold prediction: if Africa’s youngest entrepreneurs worked hard and innovated, he said, they would change their countries and transform the world. 
Similarly, when Facebook’s Mark Zuckerberg visited a Co-Creation Hub in Lagos in 2016, he was impressed by the “energy” of the country’s youthful innovators – the social entrepreneurs, tech companies, and investors who are collaborating to solve some of Nigeria’s toughest challenges. 
But that energy can go only so far without education. 
Indeed, while Macron and Zuckerberg are right to be inspired by Africa’s youth, the entrepreneurial and knowledge revolution that is needed to ensure a prosperous future for the continent can happen only if there is also an education revolution. 
Simply put, we need to get all of Africa’s children in school, so that the next generation of entrepreneurs has the skills it needs to succeed. 
Africa faces huge challenges in reforming its education sector. 
While access to education has expanded dramatically over the last 25 years, and more boys and girls are in classrooms than ever before, many young people are still not learning what they need to thrive now and in the future. 
If current trends continue, by 2050 some one-third of Africa’s one billion young people will lack basic proficiency in math, reading, and other subjects. 
Millions will be unemployable and unproductive. 
Today’s educational shortcomings weaken Africa’s development capacity. 
According to the World Economic Forum, Africa needs another one million university-trained researchers to tackle its most pressing health, energy, and development challenges. 
But educating those scientists and potential entrepreneurs is an uphill battle. 
Technology has transformed the modern workplace, but curricula, modes of learning and instruction, and teacher quality all continue to lag. 
Even good schools exhibit a gap between the skills students need – like critical thinking and problem solving – and what they are being taught. 
Unless such shortcomings are addressed, Africa’s future workforce will be unable to lead the type of change many are expecting. 
To be sure, Africa is not facing this challenge alone. 
According to a 2016 report by the International Commission on Financing Global Education Opportunity (the Education Commission), where I serve as a commissioner, by 2030, more than 800 million children – half the world’s school-age population – will graduate or drop out of school without the skills to secure a decent job. 
This is a global learning crisis, and it demands a global solution. 
One of the biggest obstacles to improving education quality is financing. 
Today, only 10% of official development assistance funds education programs in poor countries. 
Clearly, that share needs to increase. 
But even an increase in international funding levels would not be enough to ensure that every child in every school was learning. 
To accomplish that, we need new approaches to supporting education and new mechanisms to solicit and deliver financing. 
For several years, I have joined colleagues from around the world in government, civil society, and the private sector to help the Education Commission study funding solutions. 
Our big, innovative idea is to create an International Finance Facility for Education (IFFEd), which pools donor funds to make it easier to secure loans from multilateral institutions like the World Bank and the African Development Bank. 
It also seeks to help lower-middle-income countries access credit at favorable rates and avoid the debt trap of high-interest loans. 
Ultimately, by leveraging $2 billion in donor guarantees, the IFFEd will make $10 billion in grants and concessional funding available to the some of the world’s most challenged countries. 
But change needs to start at home. 
The facility will succeed only if African countries increase their domestic spending on education. 
On average, the poorest countries spend just 3% of their national budgets on schooling, while middle-income countries spend an average of 4%. 
Our data indicate that those figures will need to increase to 5-6% to make a lasting difference. 
While investments in physical infrastructure like roads and railways are critical, investments in young minds are equally important. 
It costs about $400 a year to educate a school-age child in Africa. 
That is a fortune for a poor family struggling to make ends meet. 
But for governments in Africa and around the world, it is a small price to pay to train the creators of future prosperity. 
After all, as Nelson Mandela famously said, “Education is the most powerful weapon which you can use to change the world.” 

Furnace Cities 
COPENHAGEN -- It’s possible to see, right now, what global warming will eventually do to the planet. 
To peek into the future, all we have to do is go to Beijing, Athens, Tokyo, or, in fact, just about any city on Earth. 
Most of the world’s urban areas have already experienced far more dramatic temperature hikes over the past few decades than the 2.6°C increase expected from global warming over the next hundred years. 
It’s simple enough to understand. 
On a hot day in New York, locals sprawl out on the grass fields of Central Park, not on asphalt parking lots or concrete sidewalks. 
Bricks, concrete, and asphalt – the building blocks from which cities are made – absorb much more heat from the sun than vegetation does in the countryside. 
Across an entire city, there’s much more tarmac than there is grass. 
So the air above the city heats up. 
This effect, called an “urban heat island,” was discovered in London in the early 1800’s. 
Today, the fastest-growing cities are in Asia. 
Beijing is roughly 10°C hotter than the nearby countryside in the daytime and 5.5°C warmer at night. 
There are even more dramatic increases in Tokyo. 
In August, temperatures there climbed 12.5oC above the surrounding countryside, reaching 40oC – a scorching heat that affected not only the downtown area, but also covered some 8,000 square kilometers. 
Looking at a fast-growing city like Houston, Texas, we can see the real effect of the urban heat island. 
Over the last 12 years, Houston grew by 20%, or 300,000 inhabitants. 
During that time, the night time temperature increased about 0.8°C. Over a hundred-year period, that would translate to a whopping 7°C increase. 
But, while celebrity activists warn about the impending doom posed by climate change, a more realistic view is offered by these cities’ ability to cope. 
Despite dramatic increases over the past 50 or 100 years, these cities have not come tumbling down. 
Even as temperatures have risen, heat-related deaths have decreased, owing to improved health care, access to medical facilities, and air-conditioning. 
We have far more money and much greater technological ability to adapt than our forebears ever did. 
Of course, cities also will be hit by temperature increases from CO2, in addition to further warming from urban heat islands. 
But we have an opportunity to act. 
Unlike our forebears, who did very little or nothing about urban heat islands, we are in a good position to tackle many of their effects. 
While celebrity activists focus entirely on cutting CO2, we could do much more – and at much lower cost – if we addressed urban heat islands. 
Simple solutions can make a vast difference to temperatures. 
Cities are hotter than the land around them because they are drier. 
They lack moist green spaces and have drainage systems that efficiently remove water. 
In London, the air around the River Thames is cooler than it is a few blocks away in built-up areas. 
If we plant trees and build water features, we won’t just beautify our surroundings, but we’ll also cool things down – by upwards of 8°C, according to climate models. 
Moreover, although it may seem almost comically straightforward, one of the best temperature-reducing approaches is very simple: paint things white. 
Cities have a lot of black asphalt and dark, heat-absorbing structures. 
By increasing reflection and shade, a great deal of heat build-up can be avoided. 
Paint most of a city and you could lower the temperature by 10°C. 
These options are simple, obvious, and cost-effective. 
Consider Los Angeles. 
Re-roofing most of the city’s five million homes in lighter colors, painting a quarter of the roads and planting 11 million trees would have a one-time cost of about $1 billion. 
Each year after that, this would lower air conditioning costs by about $170 million and provide $360 million in smog-reduction benefits. 
And it would lower LA temperatures by about 3°C – or about the temperature increase envisioned for the rest of this century. 
Compare that to the $180 billion cost of implementing the Kyoto Protocol, which will have virtually no effect. 
At the moment, we don’t hear much about the smartest choices when it comes to addressing global warming. 
That needs to change. We do get to choose which future we want. 


What Future for Global Leadership? 
PRINCETON – With global leadership now in question, the G20’s upcoming summit in Hamburg on July 7-8 could be the group’s tensest meeting ever. 
The summit process long pre-dates the G20’s founding in 1999. 
It was originally designed, in the 1970s, to align major economies’ domestic policies, thereby reducing uncertainty. 
But domestic politics have now created a new type of uncertainty. 
Whereas the international community isolated Russia at the G20 Brisbane summit in 2014, the United States has isolated itself in 2017. 
After making a blustering appearance at the G7 Taormina summit this past May, US President Donald Trump announced that he was withdrawing the US from the 2015 Paris climate agreement. 
In response, European G7 leaders, with the notable exception of British Prime Minister Theresa May, have signed a declaration condemning Trump’s position. 
After serving as the main architects of the United Nations system and the post-1945 international order, the US and the United Kingdom now seem intent on reversing that legacy. 
Since Trump’s election and the Brexit referendum last year, both countries have embarked on an inconsistent and highly contested political path away from openness and multilateralism. 
Their trajectories, while erratic, have been remarkably similar. 
Indeed, many saw the Brexit referendum as a precursor to Trump’s election. 
Like the “Leave” campaign, Trump has tapped into voters’ fears about immigration. 
And, like May’s post-referendum government, Trump’s administration has floundered in office. 
In both cases, a poorly conceived campaign has caught up to the victors. 
And as the winners have started to look like losers, the left-wing populism of more authentic politicians such as Senator Bernie Sanders in the US and Labour Party leader Jeremy Corbyn in the UK has become increasingly popular. 
The Trump and May governments also share striking similarities in international outlook. 
Both want to renegotiate international deals, such as trade treaties or, in the British case, the relationship with Europe. 
But the basis for such renegotiation is as unclear as it is contradictory. 
As American and British workers have come to associate globalization with job losses and inequality, they have demanded more protection. 
But protectionism usually comes at a high cost to consumers, and especially to low earners. 
In fact, a great deal of statistical evidence suggests that lower-income groups tend to benefit the most from trade liberalization. 
Against this backdrop, any effort to change existing arrangements will probably entail striking narrow deals and severely penalizing select imports. 
The risk is that retaliatory measures by other countries will trigger a vicious circle of protectionism and deglobalization. 
In the post-war period, countries became increasingly linked through government and administrative agencies, multinational corporations, and financial institutions, all of which created an environment that was conducive to cooperation. 
Today, however, the mechanisms of globalization are already being eroded. 
Professional bureaucracies – not least the US Foreign Service – are being cut back. 
Corporations and media outlets are routinely admonished to be more patriotic. 
Finance is being segmented and renationalized. 
And soft-power institutions such as Hollywood and universities are now mired in culture wars. 
American and British universities have long topped world rankings, and regard themselves as global institutions with a global responsibility. 
The president of Harvard University, Drew Faust, often enthuses about her institution’s international role; and Princeton University recently changed its motto from “In the nation’s service and the service of all nations” to “In the nation’s service and the service of humanity.” 
But, in recent years, cosmopolitanism and global outreach have provoked a backlash. 
Consider May’s memorable words before the Conservative Party Conference last October: “If you believe you’re a citizen of the world, you’re a citizen of nowhere. 
You don’t understand what the very word ‘citizenship’ means.” 
With the post-war spirit of universality in retreat, the old globalization will need new leadership and a new approach to multilateralism and soft power. 
This realization has, inevitably, led China and Europe – specifically, Germany – to see themselves as the new defenders of the global order. 
In fact, China and Germany are increasingly aligned on many key issues. 
Both have reaffirmed their commitment to reducing carbon dioxide emissions under the Paris accord, and both object to Trump’s obstructive crusade on behalf of the coal industry. There is also a clear Chinese-German alliance forming to oppose trade protectionism. 
Recently, after Chinese President Xi Jinping described protectionism as akin to “locking oneself in a dark room,” German Chancellor Angela Merkel praised his words as “very memorable.” 
Now that Germany’s G20 presidency is underway, German leaders have been exploring how their country might promote globalization in America’s stead. 
But Germany is simply too small to act as a hegemon, and its position within the eurozone is still being strained by the legacy of the 2008 financial crisis. 
China, too, would encounter obstacles in pursuit of global leadership. 
Its financial sector is still relatively underdeveloped and prone to crises. 
Its large infrastructure initiative, One Belt, One Road, will create new dependency problems and exacerbate existing rivalries in Asia. 
And, finally, the prospect of Chinese leadership will raise fears about the fate of democracy. 
At the heart of anti-globalization critiques in rich countries has been a call for more democracy, not less. 
To be sure, some of the ingredients for a new form of global leadership are there: China has great universities that are rapidly improving; and Germany has a strong democracy, built on federal principles and anchored in a vision of European integration. 
But without every ingredient, the recipe will not be complete. 
The American century was based on strong domestic institutions, shared values, and a vibrant cultural life. 
Globalization based on economic logic alone will never work. 

Preventing the Next Eurozone Crisis Starts Now 
PARIS – European leaders have devoted scant attention to the future of the eurozone since July 2012, when Mario Draghi, the European Central Bank’s president, famously committed to do “whatever it takes” to save the common currency. 
For more than four years, they have essentially subcontracted the eurozone’s stability and integrity to the central bankers. 
But, while the ECB has performed the job skillfully, this quiet, convenient arrangement is coming to an end, because no central bank can solve political or constitutional conundrums. 
Europe’s heads of state and government would be wise to start over and consider options for the eurozone’s future, rather than letting circumstances decide for them. 
So far, Europe’s leaders have had little appetite for such a discussion. 
In June 2015, they only paid lip service to a report on the euro’s future by the presidents of the various European institutions. 
A few weeks later, the issue briefly returned to the agenda when eurozone leaders spent a long late-July night arguing about whether to kick out Greece; but their stated intention to follow up and address underlying problems was short-lived. 
Finally, plans to respond to the Brexit shock by strengthening the eurozone were quickly ditched, owing to fear that reform would prove too divisive. 
The issue, however, has not gone away. 
Although the monetary anesthetics administered by the ECB have reduced market tensions, nervousness has reemerged in the run-up to the Italian constitutional referendum on December 4. 
By end-November spreads between Italian and German ten-year bunds reached 200 basis points, a level not seen since 2014. 
The worrying state of several Italian banks is one reason for the mounting concern. 
Brexit, and the election of a US president who advocates Americanism instead of globalism and dismisses the EU, adds the risk that voters, rather than markets, will call into question European monetary integration. Anti-euro political parties are on the rise in all major eurozone countries except Spain. 
On the economic front, the eurozone has much unfinished business. 
The banking union, launched in June 2012 to sever the interdependence of banks and states, has made good progress but is not yet complete. 
Competitiveness gaps between eurozone members have diminished, and external imbalances within it have abated, but largely thanks to the compression of domestic demand in Southern Europe; saving flows from North to South have not resumed. 
Unemployment gaps remain wide. 
The eurozone still lacks a common fiscal mechanism as well, and Germany has flatly rejected the European Commission’s recent attempt to promote a “positive stance” in countries with room to boost spending. 
Of course, when the next recession hits, fiscal stability is likely to be in dangerously short supply. 
Finally, the governance of the eurozone remains excessively cumbersome and technocratic. 
Most ministers, not to mention legislators, appear to have become lost in a procedural morass. 
This unsatisfactory equilibrium may or may not last, depending on political or financial risks – or, most likely, the interaction between them. 
So the question now is how to hold a fruitful discussion to map out possible responses. 
The obstacles are twofold: First, there is no longer any momentum toward “more Europe”; on the contrary, a combination of skepticism about Europe and reluctance concerning potential transfers constitutes a major stumbling block. 
And, second, views about the nature and root causes of the euro crisis differ across countries. 
Given the dearth of political capital to spend on European responses, and disagreement on what the problem is and how to solve it, governments’ excess of caution is hardly surprising. 
Both obstacles can be overcome. 
For starters, discussion of the eurozone’s future should not be framed as necessarily leading to further integration. 
The goal should be to make the eurozone work, which may imply giving more powers to the center in some fields, but also less in others. 
Fiscal responsibility, for example, should not be reduced to centralized enforcement of a common regime. 
It is possible to design a policy framework that embodies a more decentralized approach, empowering national institutions to monitor budgetary behavior and overall fiscal sustainability. 
In fact, some steps in this direction have already been taken. 
Going further would imply making governments individually responsible for their misconduct – in other words, making partial debt restructuring possible within the eurozone. 
Such an approach would raise significant difficulties, if only because transiting to such a regime would be a hazardous journey; but options of this sort should be part of the discussion. 
To overcome the second obstacle, the discussion should not start by addressing the legacy problems. 
Distributing a burden between creditors and debtors is inevitably acrimonious, because it is a purely zero-sum game. 
The history of international financial relations demonstrates that such discussions are inevitably delayed and necessarily adversarial when they take place. 
So the issue should not be addressed first. 
The seemingly realistic option of starting with immediate problems before addressing longer-term issues is only superficially attractive. 
In reality, discussions should start with the features of the permanent regime to be established in the longer run. 
Participants should explore logically coherent options until they determine if they can agree on a blueprint. 
It is only when agreement on a blueprint for the future has been reached that the path toward realizing it should be discussed. 
There are no quick fixes to the eurozone’s problems. 
But one thing is clear: the lack of genuine discussion on possible futures is a serious cause for concern. 
Silence is not always golden; for the sake of Europe’s future, the hush surrounding the common currency should be broken as soon as possible. 

Work in an Automated Future 
LONDON – Disruptive technologies are now dictating our future, as new innovations increasingly blur the lines between physical, digital, and biological realms. 
Robots are already in our operating rooms and fast-food restaurants; we can now use 3D imaging and stem-cell extraction to grow human bones from a patient’s own cells; and 3D printing is creating a circular economy in which we can use and then reuse raw materials. 
This tsunami of technological innovation will continue to change profoundly how we live and work, and how our societies operate. 
In what is now called the Fourth Industrial Revolution, technologies that are coming of age – including robotics, nanotechnology, virtual reality, 3D printing, the Internet of Things, artificial intelligence, and advanced biology – will converge. 
And as these technologies continue to be developed and widely adopted, they will bring about radical shifts in all disciplines, industries, and economies, and in the way that individuals, companies, and societies produce, distribute, consume, and dispose of goods and services. 
These developments have provoked anxious questions about what role humans will play in a technology-driven world. 
A 2013 University of Oxford study estimates that close to half of all jobs in the United States could be lost to automation over the next two decades. 
On the other hand, economists such as Boston University’s James Bessen argue that automation often goes hand in hand with the creation of new jobs. 
So which is it – new jobs or massive structural unemployment? 
At this point, we can be certain that the Fourth Industrial Revolution will have a disruptive impact on employment, but no one can yet predict the scale of change. 
So, before we swallow all of the bad news, we should look at history, which suggests that technological change more often affects the nature of work, rather than the opportunity to participate in work itself. 
The First Industrial Revolution moved British manufacturing from people’s homes into factories, and marked the beginning of hierarchical organization. 
This change was often violent, as the famous early-nineteenth-century Luddite riots in England demonstrated. 
To find work, people were forced to move from rural areas to industrial centers, and it was during this period that the first labor movements emerged. 
The Second Industrial Revolution ushered in electrification, large-scale production, and new transportation and communication networks, and created new professions such as engineering, banking, and teaching. 
This is when middle classes emerged and began to demand new social policies and an increased role for government. 
During the Third Industrial Revolution, modes of production were further automated by electronics and by information and communication technology, with many human jobs moving from manufacturing into services. 
When automated teller machines (ATMs) arrived in the 1970s, it was initially assumed that they would be a disaster for workers in retail banking. 
And yet the number of bank branch jobs actually increased over time as costs fell. 
The nature of the job had changed: it became less transactional and more focused on customer service. 
Disruption accompanied each previous industrial revolution, and the fourth will be no different. 
But if we keep in mind the lessons of history, we can manage the change. 
For starters, we need to focus on skills, and not just on the specific jobs that will appear or disappear. 
If we determine which skill sets we will need, we can educate and train the human workforce to leverage all of the new opportunities that technology creates. 
Human-resources departments, educational institutions, and governments should lead the charge on this effort. 
Second, past experience has repeatedly shown that disadvantaged classes must be protected; workers who are vulnerable to being displaced by technology must have the time and means to adjust. 
As we saw in 2016, there can be far-reaching consequences when vast inequalities of opportunities and outcomes lead people to believe that they have no future. 
Last but not least, to ensure that the Fourth Industrial Revolution translates into economic growth and bears fruit for all, we must work together to create new regulatory ecosystems. 
Governments will have a crucial role to play, but business and civil-society leaders will also need to collaborate with governments to determine the appropriate regulations and standards for new technologies and industries. 
I am under no illusions that this will be easy. 
Politics, not technology, will determine the pace of change, and implementing the necessary reforms will be hard, slow work, particularly in democracies. 
It will require a mix of forward-looking policymaking, agile regulatory frameworks, and, above all, effective partnerships across organizational and national boundaries. 
A good model to keep in mind is Denmark’s “flexicurity” system, in which a flexible labor market is paired with a strong social safety net that includes training and re-skilling services for all citizens. 
Technology may be advancing rapidly, but it will not cause time itself to collapse. 
The momentous – indeed, revolutionary – changes ahead will take place over many decades, not as a big bang. 
Individuals, companies, and societies do have time to adjust; but there is no time for delay. 
Creating a future in which all can benefit must start now. 

Confronting the Coming Liquidity Crisis 
SAO PAULO – This month, G-20 leaders will meet in Antalya, Turkey, for their tenth summit since the 2007 global financial crisis. 
But, despite all of these meetings – high-profile events involving top decision-makers from the world’s most influential economies – no real progress has been made toward reforming the international financial architecture. 
Indeed, the group has not seriously engaged with the subject since the 2010 summit in Seoul. 
Put simply, the G-20 is failing in its primary and original purpose of enhancing global financial and monetary stability. 
A big part of the problem is that the G-20 agenda has become increasingly congested over the years. 
At a time of looming financial upheaval, the G-20 must stop attempting to tackle a broad array of issues simultaneously – a goal that has proved impossible – and go back to basics. 
The United States Federal Reserve is now preparing to raise interest rates, which it has kept near zero since the crisis. 
While monetary-policy tightening may be necessary, it risks triggering a serious liquidity crisis in developing countries, with a major impact on economic growth and development. 
That is why, at this month’s G-20 summit, participants must focus on providing a credible institutional backstop for the difficult times ahead. 
Specifically, the G-20 should move to empower the International Monetary Fund, both by pushing it to do more with its existing powers and by championing institutional reform. 
Raghuram Rajan, the governor of India’s central bank, emphasized this at the recent annual meetings of the IMF and the World Bank in Lima, Peru, when he called for the Fund to build a sustainable global safety net to help countries in future liquidity crisis. 
The necessary institutional arrangement already exists: the IMF’s Special Drawing Rights (SDR) department. 
Within this department, official entities can exchange SDRs – the IMF’s own international reserve asset – for other currencies. 
Moreover, the IMF can designate a country with a strong balance-of-payments position to provide the liquidity that another member needs. 
Through this so-called “designation mechanism” – which has never been used – the IMF can ensure certainty of access to global currencies in times of crisis. 
Of course, if the IMF’s SDR department is to become a global liquidity hub capable of mitigating future crises, reform is vital. 
Ideally, major powers would support efforts to strengthen the IMF. 
But the US has so far been unwilling to do so, with domestic partisan politics spurring Congress to block the relevant reforms. 
While the G-20 should not give up on IMF-strengthening reforms, it should hedge its bets. 
Specifically, it should work with a “coalition of the willing” – including the major emerging economies, concerned advanced countries, and other developing countries – to create an institutional mechanism with which to respond effectively to the next global liquidity crisis. 
One obvious option would be to replicate the institutional design of the SDR department by incorporating it in an agreement among the coalition countries. 
The Bank for International Settlements, which was the counterparty in currency swaps under the Bretton Woods par value system in the 1960s, could be the manager of this system. 
This approach undoubtedly has major shortcomings. 
Indeed, the key advantage of the IMF’s SDR department – that it is a quasi-universal and government-driven system whereby currencies are exchanged with reliable “collateral” (the SDR) – would be lost. 
But the perfect should not be made the enemy of the good. 
As long as an ideal system is out of reach, an imperfect option will have to do. 
With the risk of a liquidity crisis intensifying, and the existing international financial architecture ill-equipped to respond to such a crisis, doing nothing is not an option. 
In recent years, the international financial system has become increasingly fragmented, exemplified in the proliferation of bilateral and multilateral currency-swap arrangements. 
For example, the Chiang Mai Initiative Multilateralization involves the ASEAN countries, plus China, Japan, and South Korea. 
And the Contingent Reserve Arrangement (CRA) was created by the BRICS countries (Brazil, China, India, Russia, and South Africa). 
Swap contracts involve pre-committed resources, which are not transferred to an international organization with a specific institutional mission. 
Instead, foreign-exchange reserves – that is, liquidity in currencies accepted for international payments – are held in national agencies until a swap’s activation. 
This means that there is no guarantee that, in the event of a crisis, a central bank will actually provide the swap line it has pledged, at least not without attaching political strings. 
In the CRA, for example, members can opt out of providing support – and can request early repayment if a balance-of-payments need arises. 
Clearly, the world’s ever-expanding network of currency-swap arrangements is far from a reliable mechanism for responding to crisis. 
This is particularly problematic for the emerging economies, which are especially vulnerable now. 
Turkey, which currently holds the G-20 presidency, and China, which will take over next year, should have plenty of motivation to demand action to create safeguards against today’s liquidity risks. 
Beyond urging the US to approve IMF governance reforms, both countries should be hard at work building a coalition of the willing and designing an effective crisis-response mechanism. 
So far, Turkey seems to be falling short, promoting an overcrowded and ineffective agenda. 
One hopes that its leaders come to their senses fast, so that the upcoming summit can produce the results that past summits have failed to provide – and that the world needs more than ever. 

Inclusive Growth and Global Justice 
ANKARA – As France and the world mourn the terrorist slaughter of innocents in Paris, the leaders of the G-20 are meeting in Antalya, Turkey. 
Terror will now vault to the top of the long list of pressing issues that will be discussed. 
The G-20, whose members account for about 85% of the world economy, has an important responsibility to respond to challenges that affect the lives and prosperity of millions of people around the world. 
It cannot risk falling into complacency and inaction, whether regarding terrorism or the fragile state of the world’s economy. 
Since Turkey assumed the presidency of the G-20 in December 2014, our approach toward ensuring inclusive and robust growth through collective action has enjoyed the support of the organization’s members. 
This effort has been built on three pillars: decisive implementation of past commitments, boosting investments as a powerful driver of the global economy, and promotion of inclusiveness so that the benefits of growth are shared by all. 
When it comes to implementation, great strides have been made. 
By promoting sound macroeconomic and fiscal policies and implementing solid, structural reforms, we have made significant progress toward our objective of expanding the G-20’s collective GDP by 2.1% by 2018. 
The global financial system is now more resilient than it has ever been. 
Financial capacities are being rebuilt, and new growth targets are being met. 
But there remains much more to be done. 
G-20 members should expedite efforts to deliver on their commitments to boost productivity and eliminate structural bottlenecks to investment, competition, trade, and jobs. 
We must also cement the fundamental reforms to the global financial system that the G-20 has delivered over the past seven years. 
Our focus on investment – a key driver of growth, jobs, and development – is also beginning to pay off. 
There is a huge investment gap in the global economy, both in advanced and developing countries. 
That is why we need developed-country strategies that bring together concrete policy actions and commitments to improve the investment ecosystem, support small and-medium-size enterprises, and promote the construction of efficient, high-quality infrastructure. 
If the G-20 members fully implement their commitments under these strategies, their collective GDP is expected to increase by another 1%. 
Economic growth must be strong and sustainable; but, above all, it must be inclusive. 
Inequality is rising in many G-20 countries; in some cases, it has reached historic highs. 
This is a dangerous development, one that can retard growth, threaten the cohesion of societies, and jeopardize people’s wellbeing. 
It is imperative that the G-20 tackle inequality head on and demonstrate its determination to ensure that all of its member countries’ citizens enjoy the fruits of economic growth. 
Reducing unemployment is central to the fight against inequality. 
There are about 100 million jobless people in the G-20, and another 200 million young people who are neither working nor studying. 
Significantly reducing youth unemployment is one of the G-20’s most important commitments. 
Inclusiveness cannot stop at the borders of the G-20. 
We must work to ensure that the benefits of growth and prosperity are shared by people all over the world. 
In Antalya, we will discuss how we can align our efforts with the new 2030 Agenda for Sustainable Development and increase our engagement with low-income, developing countries. 
As politics and economics are increasingly intertwined, the G-20 must also work together to confront our era’s geopolitical challenges. 
This year is an important one in the fight against climate change. 
We must send a strong political message from Antalya in support of a successful outcome at the United Nations Climate Change Conference that takes place in Paris from November 30 to December 11. 
Meanwhile, the terror attacks in Paris have brutally reminded us, once again, that global challenges – such as terrorism, the war in Syria, and the refugee crisis – require truly global responses. 
The G-20 is an ideal forum in which to address them. 
The Syrian civil war – now well into its fourth year – must be brought to an end, and a fair and sustainable political transition must be ensured. 
The conflict and the brutal state terrorism of Syrian President Bashar al-Assad’s regime is not only the cause of terrible suffering in Syria and the death of more than 360,000 people; it is also the root of the refugee crisis and the emergence of Daesh – a threat to all countries. 
Turkey is a member of the coalition against Daesh, and we are seeking to degrade and destroy this terrorist menace in our country and beyond our borders. 
At the same time, we must not allow ourselves to forget the plight of those fleeing the brutality of the Assad regime and Daesh. 
The international community that shuddered at the photograph of Alan Kurdi, the three-year-old Syrian toddler who was found dead on a Turkish beach, must be made to remember that many more like him are dying every day in the cold waters of the Mediterranean and the Aegean. 
Turkey is currently hosting some 2.2 million Syrian refugees, and we have spent more than $8 billion over the last three years caring for them. 
The international community must agree on a mechanism that ensures that the burden is fairly shared. 
Finally, it is important to note that Turkey continues to confront the threat of the Kurdistan Workers’ Party (PKK), an organization listed as a terrorist group by both the United States and the European Union. 
Turkey has implemented a large number of reforms and made major investments to the benefit of our Kurdish citizens. 
And yet the PKK has refused to disarm, instead amassing weapons and attacking civilian and security targets across the country. 
As we continue to fight the scourge of terrorism in our country, we call on all countries not only to mourn the dead in Paris, but to reject terrorism in all of its forms. 
The G-20 Summit in Antalya will address these and other major issues confronting the world. 
Whether the subject is economics, finance, climate change, or politics, the guiding principle must be equality and justice for all. 

G-8 Movie Night 
Many people rightly regard the annual G-8 (Group of Eight) presidential summit as the closest thing we have to a functioning world government. 
So it is a shame that these meetings tend to be so scripted and dull, with so little room for the informality needed to make genuine progress on tough issues involving world peace and prosperity. 
True, this year is a bit better thanks to having Russia’s Vladimir Putin as host; there is simply too much tension between him and his Western counterparts to keep all emotions under wraps. 
But if these meetings are ever to be really effective, we need a change in format to spice things up. 
I have a suggestion. 
Why not have George W. Bush, Putin, and the other leaders share a G-8 movie night, and then discuss their reactions over drinks afterwards? 
That should get a conversation going! 
Of course, there is the question of which movie to pick. 
This year, the clear first choice has to be the 1963 James Bond spy thriller “From Russia with Love.” 
The name itself makes it a winner, and the presidents can enjoy watching the fireworks between suave British spy Bond (Sean Connery) and his fetching Russian KGB counterpart Tatiana (Daniela Bianchi). 
In case you are worried that the Bond-Tatiana affair would spark too many off-color remarks from the collective eminences, the presence of German Chancellor Angela Merkel should keep things under control. 
Perhaps after a couple drinks, Putin might spill the beans on whether, as a real-world KGB agent, he ever directed any remotely similar operation. 
And Bush, while of course having no such experience of his own, could retell some of his father’s stories when he was the head of the CIA in the 1970’s. 
Not to be left out, Europeans could use the film’s romantic shots of Istanbul to open up about whether Turkey will ever join their club. 
There are countless other possibilities. 
It would be a bit awkward, but the esteemed guests could also view “An Inconvenient Truth,” narrated by Al Gore, the man Bush narrowly defeated in the 2000 US presidential election. 
Gore’s deeply earnest film plots the relentless, and potentially disastrous, warming of the earth during the industrial era. 
He attributes, debatably, the entire problem to higher carbon emissions from cars, power plants, etc. 
Gore’s film would give the Europeans, always in danger of being marginalized at these meetings, the chance to boast about how they, unlike the Americans and Russians, are already doing their part by heavily taxing gas consumption. 
Bush’s reaction is less predictable. 
On the one hand, his new star Treasury Secretary, Hank Paulson, the former chairman of Goldman Sachs, has long been deeply committed to environmental causes. 
Paulson’s appointment presumably shows that Bush is far more concerned about environmental issues than is commonly believed. 
But, on the other hand, some of Bush’s more intemperate Republican colleagues might have told him that global warming will lift ocean levels to the point where many of the coastal “blue” states, which tend to vote for the opposition Democrats, will be washed away, leaving only “red” Republican states in the center of the country. 
Putin’s position on global warming would be less ambivalent. 
With his country so totally – indeed, embarrassingly – dependent on oil and gas revenues, he is hardly likely to want to spark a big push towards energy conservation. 
One could go on forever with possible films, but clearly G-8 movie night might rekindle life in the organization’s moribund framework, and keep it going for many years to come. 
And there are so many other advantages. 
Consider the dubious results from the G-8 summit in Gleneagles, Scotland, in 2005. 
Desperate to capture some of the star power of the rock star-driven campaign to reduce poor countries’ debt, the leaders agreed to forgive Third World debt that no one ever expected to be repaid. 
Rather than making really substantive improvements in the quantity and quality of aid delivery, not to mention finding a path towards better governance in Africa, they chose a desperate plea for photo ops with Bono and Angelina Jolie. 
With a movie night, there would be a ready-made excuse for inviting glitterati to attend G-8 events to help spark discussions. 
Don’t we all want to know how Bond (oops, I mean Sean Connery) would deal with Iran or North Korea? 
To be sure, there could be glitches. 
What if Russia were to inadvertently use a copy of the film that was pirated, as one imagines is true of most copies floating around in Russia? 
That would hardly look good given all the bashing China takes for not enforcing intellectual property rights more vigorously. 
Or what if, after a few years, the whole thing devolves into an empty exercise in political correctness? 
Still, I say let’s give G-8 movie night a chance. 
It would certainly be more entertaining that the current framework, and, who knows, it might even inspire better policy. 

G-8 Summit and Climate Change 
Two years ago, the G8 Summit in Gleneagles, Scotland promised to advance a clean development agenda and mobilize financial support for greener growth in the key emerging market economies. 
This year’s meeting, in Heiligendamm, Germany, must deliver on that promise. 
Since Gleneagles, a critical mass of public support to act decisively on climate change has developed. 
Some say a tipping point has occurred. 
The science and the economics of climate change has come closer as a result of the overwhelming scientific evidence in the studies of the Intergovernmental Panel on Climate Change (IPCC) and Sir Nicholas Stern’s Report for the UK government on the costs of action and inaction. 
Around the world expert officials, the business community, concerned citizens, and responsive governments are coming together to find common solutions to a global problem that may be the single most important issue we face as a global community. 
In Heiligendamm, the G-8 leaders, together with representatives of major emerging economies (Brazil, Mexico, China, India, and South Africa, who have a critical stake in energy consumption to continue to generate economic growth), will discuss a comprehensive approach encompassing a set of energy options, from energy efficiency and renewable energy, to clean coal, carbon capture and storage, and carbon sequestration. 
They also have a chance to advance the use of market mechanisms to do two things: mitigate climate change, and, at the same time, create incentives for expanded use of clean energy. 
An important way to achieve both objectives is by expanding carbon markets. 
Carbon finance is an effective vehicle for channeling funds for climate-friendly investments, including to the developing world. 
Last year alone the size of the world carbon market tripled to over $30 billion, of which about 20 percent went to projects in the developing world. 
By one estimate, with a long term, predictable, and equitable post-2012 global regulatory framework for curbing greenhouse gas emissions (when the Kyoto protocol expires), carbon markets could develop exponentially and deliver financial flows to developing countries of anywhere between $20 and $120 billion dollars/year. 
The funds are sorely needed. 
The World Bank calculations show that developing countries need an annual investment of about $165 billion through 2030 just to supply electricity to their people. 
Of this sum, only about half is readily identifiable. 
On top of this $80 billion gap, developing countries will need another $30 billion per year to reduce their greenhouse gas emissions from the power sector alone and get on a low-carbon development path, and $10-40 billion dollars more per year to adapt to the already inevitable impact of climate change . 
A G8 commitment to the global carbon market will foster long-term financing beyond 2012. 
Such carbon finance can also tackle deforestation, which represents about 20% of the global CO2 emissions causing climate change. 
A forest carbon facility can reward forest conservation as a means of protecting the climate while also preserving ecosystems and generating income for poor communities in developing countries. 
The World Bank is keen to work with partners to experiment with such a facility for avoided deforestation. 
An expanded carbon market can help pay for a transformation to a low carbon economy, but it won’t be enough. 
Like other new markets, it will take time to mature and reach out to places with weaker market institutions. 
German Chancellor Angela Merkel has said that rich countries need to take the lead because only then will the less developed economies follow, and she is right. 
The United Kingdom recently announced a new £800 million Environmental Transformation Fund International Window. 
Japan’s Prime Minister Shinzo Abe said his country is ready to look into the possibility of creating a new financial mechanism, with substantial funds for the relatively long- term, to help developing countries halt global warming. 
These are the types of climate change leadership that the world needs. 
Mobilizing large scale financing for clean investments today and over the next 5-10 years is critical because this is when developing countries will essentially “lock-in” carbon emissions for the next 50 years. 
If we can help them get on a low carbon path, we will have taken a giant step forward in preserving and protecting our planet while enabling them to reduce poverty and offer their citizens a better future. 
The meeting in Heiligendamm can advance the commitments made at Gleneagles two years ago and bring the world closer to a more sustainable future. 

A Volvo Moment for Antimicrobial Resistance 
LONDON – Last week, Volvo issued an inspiring announcement: it will no longer produce gasoline- or diesel-fueled cars after 2019. 
Volvo executives may be anticipating that traditional vehicles will be less profitable in the future. 
But whatever their motive, their decision has resonated widely. 
Within 24 hours, French President Emmanuel Macron announced that France would prohibit the sale of gasoline- and diesel-fueled cars by 2040. 
Volvo’s decision confirms that things are changing for the auto industry, and it sends a positive message in the fight against climate change. 
But, more important, it demonstrates that people and organizations are still capable of taking big, bold steps to solve major challenges. 
Among the many global problems today, the fight against antimicrobial resistance (AMR) desperately needs a similar breakthrough commitment. 
For advocates, AMR’s appearance on the G20’s agenda last year, at the group’s summit in Hangzhou, China, represented a major triumph. 
But G20 leaders’ 2016 statement on AMR was not as bold as it could have been, because they did not want to set the bar too high. 
They knew that Germany, an enthusiastic champion in the fight against AMR, would be chairing the G20 this year, and could be expected to bring bold proposals to the table. 
In the run-up to this year’s G20 summit in Hamburg, I started to worry that Germany would fall short of these expectations. 
But, if anything, Germany under-promised and over-delivered. 
The lengthy communiqué issued at the end of the Hamburg summit includes a statement on AMR that is bolder than I would have expected. 
Not only have G20 leaders reaffirmed their previous support for efforts by the World Health Organization, the Food and Agricultural Organization of the United Nations, and the Organization for Animal Health to tackle AMR. 
They have also taken important steps in three crucial areas: agricultural usage, diagnostics, and the market for new useful drugs. 
There are clear opportunities for breakthrough commitments in each of these three areas. 
In agriculture, G20 countries have promised to restrict the use of antibiotics outside of veterinary medicine. 
That alone is a big step forward, given that, in big countries such as the United States, and possibly China and India, antibiotics are now used more for growth promotion in agriculture than for fighting infections in humans. 
The European Union has prohibited this practice for a decade now, but its policy has not spread globally because vested interests in major food-producing countries have stood in the way. 
Still, countries such as the US and Brazil could now have their own “Volvo moments”: policymakers simply need to tell food producers what will and will not be allowed. 
And the private sector, too, needs to show leadership on this front. 
Food producers and retailers should follow in the footsteps of the Devon-based bacon producer that recently committed to using only antibiotic-free pigs. 
Will Walmart, Asda, Tesco, and others now do the same? 
To win the war against AMR, we must stop doling out antibiotics like sweets. 
To that end, we will need new technologies and other measures to change how antibiotics are prescribed and administered. 
For example, in the Review on AMR, which I chaired, we urged developed countries to require, by 2020, that certain diagnostic tests be conducted before antibiotics can be prescribed. 
By enacting such a policy, any developed country can now establish itself as a global leader. 
So, too, can companies that commit to providing the necessary diagnostic technology at an affordable price, or pharmaceutical companies that support such technologies as a complement to new gram-negative antibiotics, which will have to be set at a higher price to discourage overuse. 
Which pharmaceutical company will be the Volvo or Tesla of its industry? 
If one company takes the lead on developing new drugs to respond to antibiotic-resistant pathogens that the WHO has identified as urgent priorities, it will free others from their conventional strait jackets, and force them to stop thinking so narrowly about quarterly returns. 
In the Review on AMR, we recommended 27 interventions that could solve the AMR crisis for a generation. 
So far this decade, however, three US-based pharmaceutical manufacturers have already spent more money buying back their own shares than would be needed to see those interventions through. 
Pharmaceutical companies have essentially become balance-sheet managers first, and drug makers second. 
Someone needs to flip that model on its head. 
The Review also proposed market-entry rewards to encourage innovation. 
If the major pharmaceutical producers were to make meaningful investments in antibiotics research, they could vastly improve the current environment for developing new drugs. 
The G20’s proposed “R&D Collaboration Hub” will, one hopes, help in this effort. 
Only when the industry comes together will AMR go the way of the gasoline- and diesel-powered car. 

The G20’s Time for Climate Leadership 
PARIS – At the start of 2016, the United States was well positioned to lead the global fight against climate change. 
As the chair of the G20 for 2017, German Chancellor Angela Merkel had been counting on the US to help drive a deep transformation in the global economy. 
And even after Donald Trump won the US presidential election, Merkel gave him the benefit of the doubt, hoping against hope that the US might still play a leading role in reducing global greenhouse-gas emissions. 
But at Merkel and Trump’s first in-person meeting, no substantive statements were issued, and their body language made the prospect of future dialogue appear dim. 
Trump’s slogan “America first” seems to mean “America alone.” 
By reversing his predecessor’s policies to reduce CO2 emissions, Trump is rolling back the new model of cooperative global governance embodied in the 2015 Paris climate agreement. 
The countries that signed on to that accord committed themselves to sharing the risks and benefits of a global economic and technological transformation. 
Trump’s climate-change policy does not bode well for US citizens – many of whom are now mobilizing resistance to his administration – or the world. 
But the rest of the world will still develop low-carbon, resilient systems. 
Private- and public-sector players across the developed and developing worlds are making the coming economic shift all but inevitable, and their agendas will not change simply because the US has a capricious new administration. 
China, India, the European Union, and many African and Latin American countries are still adopting clean-energy systems. 
As long as this is the case, businesses, local governments, and other stakeholders will continue to pursue low-carbon strategies. 
To be sure, Trump’s policies might introduce new dangers and costs, domestically and worldwide; but he will not succeed in prolonging the fossil-fuel era. 
Still, an effective US exit from the Paris agreement is a menacing development. 
The absence of such an important player from the fight against climate change could undermine new forms of multilateralism, even if it reinvigorates climate activism as global public opinion turns against the US. 
More immediately, the Trump administration has introduced significant financial risks that could impede efforts to address climate change. 
Trump’s proposed budget would place restrictions on federal funding for clean-energy development and climate research. 
Likewise, his recent executive orders will minimize the financial costs of US businesses’ carbon footprint, by changing how the “social cost of carbon” is calculated. 
And his administration has already insisted that language about climate change be omitted from a joint statement issued by G20 finance ministers. 
These are all unwise decisions that pose serious risks to the US economy, and to global stability, as United Nations Secretary-General António Guterres recently pointed out. 
The US financial system plays a leading role in the world economy, and Trump wants to take us all back to a time when investors and the general public did not account for climate-change risks when making financial decisions. 
Since 2008, the regulatory approach taken by the US and the G20 has been geared toward increasing transparency and improving our understanding of possible systemic risks to the global financial system, not least those associated with climate change and fossil-fuel dependency. 
Developing more stringent transparency rules and better risk-assessment tools has been a top priority for the financial community itself. 
Implementing these new rules and tools can accelerate the overall trend in divestment from fossil fuels, ensure a smooth transition to a more resilient, clean-energy economy, and provide confidence and clarity for long-term investors. 
Given the heightened financial risks associated with climate change, resisting Trump’s executive order to roll back Wall Street transparency regulations should be a top priority. 
The fact that Warren Buffet and the asset-management firm Black Rock have warned about the investment risks of climate change suggests that the battle is not yet lost. 
Creating the G20 was a good idea. 
Now, it must confront its biggest challenge. 
It is up to Merkel and other G20 leaders to overcome US (and Saudi) resistance and stay the course on climate action. 
They can count as allies some of the world’s large institutional investors, who seem to agree on the need for a transitional framework of self-regulation. 
It is incumbent upon other world leaders to devise a coherent response to Trump, and to continue establishing a new development paradigm that is compatible across different financial systems. 
At the same time, the EU – which is celebrating the 60th anniversary of the Treaty of Rome this year – now has a chance to think about the future that it wants to build. 
These are difficult times, to be sure; but we can still decide what kind of world we want to live in. 

The G20 Embraces Green Finance 
BEIJING – The G20’s finance ministers and central-bank governors have begun to undertake a stunning shift in mindset. 
They have become increasingly convinced that “green finance” – financing environmentally sustainable growth – should be at the center of economic-development strategies. 
Such an idea, until recently confined to a fringe of academics and policymakers, is potentially one of the most important new “truths” of the twenty-first century. 
The conventional economic-development model viewed environmental protection as a “luxury good” that societies could afford only after they became rich. 
Such thinking explains why the dramatic growth in global income, 80-fold in real terms during the last century, has been accompanied by a decline, according to the United Nations Environment Programme, in natural capital in 127 of 140 countries. 
But natural capital is not just an abstract concept; it supports lives, livelihoods, and societal wellbeing. 
The environmental destruction that our activities are wreaking – greenhouse-gas emissions add energy to the Earth system at a rate equivalent to the detonation of four nuclear bombs every second – has concrete consequences, which are already being borne by millions of people. 
Since 2008, an average of 26.4 million people have been displaced from their homes by natural disasters each year – equivalent to almost one person every second. 
One-third of the world’s arable land is now jeopardized by land degradation, which causes economic losses of $6.3-10.6 trillion per year. 
And 21 of the world’s 37 largest aquifers have passed their sustainability tipping point. 
The downsides of the conventional approach to economic development, which favors income and employment over environmental protection, are particularly apparent in China. 
By some measures – in particular, per capita income and GDP growth – China’s development process has been an extraordinary success. 
But it has also brought lethal levels of air pollution and extensive contamination and depletion of land and water. 
The good news is that Chinese leaders now seem to recognize that they must safeguard the environment before China achieves high-income status. 
Indeed, they have moved to the forefront of the green-finance movement. 
To be sure, the challenge facing China is monumental. 
Success will require an estimated $600 billion in investment each year, in areas including environmental remediation and protection, renewable energies and energy efficiency, and sustainable transportation systems. 
Given that less than 15% of that finance will come from public sources, China will also have to retool its financial system to support private investment. 
But China is already taking concrete steps in the right direction. 
On August 30, President Xi Jinping presided over a decision by the Central Leading Group for Comprehensively Deepening Reforms to transform China’s financial system to facilitate green investment. 
The so-called “guidelines for establishing a green finance system” adopted at the meeting represent the world’s first attempt at an integrated policy package to promote an ambitious shift toward a green economy. 
According to the guidelines, China will have to develop a wide range of new financial instruments, including green credit, green development funds, green bonds, green equity index products, green insurance, and carbon finance. 
It must also introduce a host of specific policies, regulations, and incentives, including innovative use of the central bank’s relending operations, interest subsidies, and guarantees. 
And it must establish a national-level Green Development Fund, much like the United Kingdom’s Green Investment Bank. 
How this process unfolds in China will hold important lessons for others seeking to build more sustainable economies. 
But some governments are not hesitating to make their own way. 
From the City of London’s Green Finance Initiative to Indonesia’s Sustainable Finance Roadmap, innovative policy packages are emerging at an accelerating pace. 
Moreover, many of the world’s stock exchanges have committed to requiring listed companies to report on their sustainable development risks. 
And a coalition of banking regulators has emerged to explore how to advance green credit. 
Details vary by country, but the goal is a common one: to align capital markets with the financing needs of an inclusive, sustainable economy. 
The G20’s agenda, which aims to promote strong, sustainable, and balanced economic growth, should now be updated to reflect this shared goal, with green finance becoming a key component of the G20’s business. 
This week’s summit in China is the ideal place to start. 

The G20’s Harmony Without Trump 
MEDELLÍN – O Freunde, nicht diese Töne! 
(Oh friends, not these sounds!), proclaimed the baritone in the stirring performance of Beethoven’s Ninth Symphony to the G20 leaders in Hamburg last Friday evening. 
That soul-stirring phrase, the opening line of “Ode to Joy,” Beethoven’s appeal to universal brotherhood, was the perfect message to the global leaders sitting in the concert hall’s balcony. 
The G20 President, German Chancellor Angela Merkel, actually made remarkable headway in channeling Beethoven’s spirit. 
This G20 summit, of course, was the first with Donald Trump as US President. 
The summit’s discordant tones, echoed in the stormy sections of Beethoven’s symphony, emanated entirely from the United States. 
Trump has no use for appeals to brotherly love. 
He traffics in ethnic and religious divisiveness, hostility to neighbors (insisting again at the summit that the US will build a wall on the Mexican border and that Mexico will pay for it), and Manichean images of a Western civilization vulnerable to collapse at the hands of radical Islam, rather than at the height of unimaginable wealth and technological prowess. 
While the conductor led the orchestra in a breathtaking performance, the true maestro of the evening was Merkel. 
What a stroke of genius to bring the G20 leaders to Hamburg’s spectacular new Elbphilharmonie concert hall, itself a triumph of architectural vision, to be inspired by perhaps the greatest musical work of universal culture, with its message of world harmony. 
The concert itself offered layer upon layer of significance. 
The Germany of Beethoven has been reborn on the ashes of the Germany of Hitler. 
Germany today is a globally admired, peace-loving, war-abhorring, democratic, prosperous, innovative, and cooperative country. 
At the same time, Beethoven’s genius belongs not only to his native Germany, or even to the West, but to all of humanity. 
His scoring of Schiller’s poetic ode reflects the truly global aspirations of the Enlightenment. 
Yes, the Enlightenment was a European phenomenon; but it was utterly aware of the entire world and of the dangers of particularism and chauvinism. 
In Germany, it was imbued with Immanuel Kant’s vision of “perpetual peace,” grounded in the “categorical imperative” to act according to maxims that can be made into a universal law, rather than according to personal whims and narrow self-interest. 
Trump’s “America First” is a brazen affront to Kantian ethics and a threat to peace. 
His break with the rest of the world on the Paris climate agreement is his most chilling act of naked self-interest so far. 
Its origin lies in the aim of a few US companies – led by Koch Industries, Continental Resources, Peabody Energy, ExxonMobil, Chevron, and a few others – to maximize profits from gas and oil fracking, deep-sea drilling, and continued coal mining and use, the climate consequences be damned. 
These fossil-fuel companies have financed the campaigns of the Republican representatives and senators who called on Trump to withdraw from the Paris accord. 
They, and the Republican politicians on their payroll, are prepared to sacrifice the wellbeing of fellow Americans, even their own families, not to mention the rest of the world and future generations. 
Greed über alles. 
The question ahead of the G20 summit was therefore clear: Would other countries follow the US in recklessly putting self-interest above the common good? 
Rumors were flying. 
The New York Times ran a curtain raiser suggesting that Trump might succeed in pulling Russia, Saudi Arabia, Turkey, and even Indonesia into a petrostate coalition to weaken or overturn the Paris agreement. 
For this reason, the future of global cooperation was at stake in Hamburg. 
It had taken many years – by one plausible accounting a full generation since the 1992 Rio Earth Summit – to reach the Paris climate agreement, unanimously adopted by all 193 UN member states in December 2015. 
Could the US oil lobby, with their political lackeys in tow, send the world back to square one? 
Merkel proved once again to be a bulwark of reason and efficiency. 
She did not panic, raise her voice, or make demands. 
But she made clear where she, Germany, and Europe stood. 
Following the G7 meeting in late May, she lamented that Europe could no longer fully rely on the US. 
Behind the scenes, she and the highly professional Germany diplomatic corps worked overtime to secure consensus – minus America – at the G20. 
As the G20 leaders headed to the concert on Friday, their Sherpas stayed behind to debate the final text. 
Would Russia, Saudi Arabia, and others play Trump’s game? 
When the communiqué appeared, diplomats and climate activists around the world breathed a sigh of relief. 
All other G20 countries had resisted the US ploy. 
The communiqué was simple, accurate, and reassuring on climate change: “The Leaders of the other G20 members state that the Paris Agreement is irreversible….We reaffirm our strong commitment to the Paris Agreement, moving swiftly towards its full implementation…” 
The communiqué does contain a paragraph of Trump doublespeak. 
The US affirmed “its strong commitment to an approach that lowers emissions while supporting economic growth and improving energy security needs,” and would “work closely with other countries to help them access and use fossil fuels more cleanly and efficiently and help deploy renewable and other clean energy sources.” 
As a teenager might say, “Whatever.” 
On several other global issues, a full consensus was reached. 
The G20 reaffirmed that “international trade and investment are important engines of growth, productivity, innovation, job creation, and development.” 
All G20 leaders recommitted their countries to universal health coverage (another clear message to Trump, Senate Majority Leader Mitch McConnell, and House Speaker Paul Ryan), and to strengthening health systems. 
They reiterated their commitment to sustainable development and to the UN Sustainable Development Goals. 
When the concert ended, the G20 leaders and the rest of the theater rose to their feet in a prolonged standing ovation. 
The curtain call truly belonged to Beethoven, Kant, and Merkel. 

The Age of Megaprojects 
WASHINGTON, DC – We seem to be entering a new age of megaprojects, as countries, in particular those of the G-20, mobilize the private sector to invest heavily in multi-million (if not multi-billion or multi-trillion) dollar infrastructure initiatives, such as pipelines, dams, water and electricity systems, and road networks. 
Already, spending on megaprojects amounts to some $6-9 trillion a year, roughly 8% of global GDP, making this the “biggest investment boom in human history.” 
And geopolitics, the pursuit of economic growth, the quest for new markets, and the search for natural resources is driving even more funding into large-scale infrastructure projects. 
On the cusp of this potentially unprecedented explosion in such projects, world leaders and lenders appear relatively oblivious to the costly lessons of the past. 
To be sure, investments in infrastructure can serve real needs, helping meet an expected surge in the demand for food, water, and energy. 
But, unless the explosion in megaprojects is carefully redirected and managed, the effort is likely to be counterproductive and unsustainable. 
Without democratic controls, investors may privatize gains and socialize losses, while locking in carbon-intensive and other environmentally and socially damaging approaches. 
To begin with, there is the issue of cost effectiveness. 
Rather than adopting a “small is beautiful” or a “bigger is better” philosophy, countries must build “appropriate scale” infrastructure suited to its purposes. 
Bent Flyvbjerg, a professor at the University of Oxford specialized in program management and planning, studied 70 years of data to conclude that there is an “iron law of megaprojects”: they are almost invariably “over budget, over time, over and over again.” 
They are also, he adds, subject to the “survival of the unfittest,” with the worst projects getting built, instead of the best. 
This risk is augmented by the fact that these megaprojects are driven largely by geopolitics – not careful economics. 
From 2000 to 2014, as global GDP more than doubled to $75 trillion, the G-7 countries’ share of the world economy dropped from 65% to 45%. 
As the international arena adjusts to this rebalancing, the United States has begun to worry that its hegemony will be challenged by new players and institutions, such as the China-led Asian Infrastructure Investment Bank. 
In reaction, the Western-led institutions, such as the World Bank and the Asian Development Bank, are aggressively expanding their infrastructure investment operations, and are openly calling for a paradigm shift. 
The G-20, too, is accelerating the launch of megaprojects, in the hope of boosting global growth rates by at least 2% by 2018. 
The OECD estimates that an additional $70 trillion in infrastructure will be needed by 2030 – an average expenditure of a little more than $4.5 trillion per year. 
By comparison, it would take an estimated $2-3 trillion per year to meet the Sustainable Development Goals. 
Clearly, with megaprojects, the potential for waste, corruption, and the buildup of unsustainable public debts is high. 
The second issue that must be considered is planetary boundaries. 
In a March 2015 letter to the G-20, a group of scientists, environmentalists, and opinion leaders warned that ramping up investment in megaprojects risks irreversible and catastrophic damage to the environment. 
“Each year, we are already consuming about one-and-a-half planets’ worth of resources,” the authors explained. 
“Infrastructure choices need to be made to alleviate rather than exacerbate this situation.” 
Similarly, the Intergovernmental Panel on Climate Change cautions that “infrastructure developments and long-lived products that lock societies into greenhouse-gas-intensive emissions pathways may be difficult or very costly to change.” 
And, indeed, the G-20 has put in place few social, environmental, or climate-related criteria for the “wish list” of mega-projects that each member country will submit to its summit in Turkey in November. 
The third potential problem with megaprojects is their reliance on public-private partnerships. 
As part of the renewed focus on large-scale investments, the World Bank, the International Monetary Fund, and other multilateral lenders have launched an effort to reengineer development finance by, among other things, creating new asset classes of social and economic infrastructure to attract private investment. 
“We need to tap into the trillions of dollars held by institutional investors… and direct those assets into projects,” said World Bank Group President Jim Yong Kim. 
By using public money to offset risk, the institutions hope to attract long-term institutional investors – including mutual funds, insurance companies, pension funds, and sovereign-wealth funds – who together control an estimated $93 trillion in assets. 
Their hope is that tapping this huge pool of capital will enable them to scale-up infrastructure and transform development finance in ways that would have been previously unimaginable. 
The trouble is that public-private partnerships are required to provide a competitive return on investment. 
As result, according to researchers at the London School of Economics, they “are not regarded as an appropriate instrument for [information technology] projects, or where social concerns place a constraint on the user charges that might make a project interesting for the private sector.” 
Private investors seek to sustain the rate of return on their investments through guaranteed revenue streams and by ensuring that laws and regulations (including environmental and social requirements) do not cut into their profits. 
The risk is that the quest for profit will undermine the public good. 
Finally, the rules governing long-term investment do not effectively incorporate long-term environmental and social related risks, as emphasized by trade unions and the United Nations Environment Program. 
Pooling infrastructure investments in portfolios or turning development sectors into asset classes could privatize gains and socialize losses on a massive scale. 
This dynamic can increase levels of inequality and undermine democracy, owing to the lack of leverage that governments – much less citizens – may have over institutional investors. 
In general, trade rules and agreements compound these problems by putting the interests of investors over those of ordinary citizens. 
Left unexamined, the push toward megaprojects risks – in the words of the authors of the letter to the G-20 – “doubling down on a dangerous vision.” 
It is critical that we ensure that any transformation of development finance be crafted in a way that upholds human rights and protects the earth. 

The G20’s Misguided Globalism 
HAMBURG – This year’s G20 summit in Hamburg promises to be among the more interesting in recent years. 
For one thing, US President Donald Trump, who treats multilateralism and international cooperation with cherished disdain, will be attending for the first time. 
Trump comes to Hamburg having already walked out of one of the key commitments from last year’s summit – to join the Paris climate agreement “as soon as possible.” 
And he will not have much enthusiasm for these meetings’ habitual exhortation to foreswear protectionism or provide greater assistance to refugees. 
Moreover, the Hamburg summit follows two G20 annual meetings in authoritarian countries – Turkey in 2015 and China in 2016 – where protests could be stifled. 
This year’s summit promises to be an occasion for raucous street demonstrations, directed against not only Trump, but also Turkey’s Recep Tayyip Erdoğan and Russia’s Vladimir Putin. 
The G20 has its origins in two ideas, one relevant and important, the other false and distracting. 
The relevant and important idea is that developing and emerging market economies such as Brazil, India, Indonesia, South Africa, and China have become too significant to be excluded from discussions about global governance. 
While the G7 has not been replaced – its last summit was held in May in Sicily – G20 meetings are an occasion to expand and broaden the dialogue. 
The G20 was created in 1999, in the wake of the Asian financial crisis. 
Developed countries initially treated it as an outreach forum, where they would help developing economies raise financial and monetary management to the developed world’s standards. 
Over time, developing countries found their own voice and have played a larger role in crafting the group’s agenda. 
In any case, the 2008 global financial crisis emanating from the United States, and the subsequent eurozone debacle, made a mockery of the idea that developed countries had much useful knowledge to impart on these matters. 
The second, less useful idea underpinning the G20 is that solving the pressing problems of the world economy requires ever more intense cooperation and coordination at the global level. 
The analogy frequently invoked is that the world economy is a “global commons”: either all countries do their share to contribute to its upkeep, or they will all suffer the consequences. 
This rings true and certainly applies to some areas. 
Addressing climate change, to take a key problem, does indeed require collective action. 
Cutting carbon dioxide emissions is a true global public good, because every country, left to its own devices, would rather free ride on others’ cuts while doing very little at home. 
Similarly, infectious diseases that travel across borders require global investments in early-warning systems, monitoring, and prevention. 
Here, too, individual countries have little incentive to contribute to those investments and every incentive for free riding on others’ contributions. 
It is a small step from such arguments to consider the G20’s bread-and-butter economic issues – financial stability, macroeconomic management, trade policies, structural reform – in the same vein. 
But the global-commons logic largely breaks down with such economic problems. 
Consider the topic that will be on all G20 leaders’ minds in Hamburg (except for Trump’s, of course): the threat of rising trade protectionism. 
A new report from Global Trade Alert warns that the G20 has failed to live up to its previous pledges on this issue. 
So far, Trump’s bark has been worse than his bite on trade. 
Nonetheless, the report argues, the thousands of protectionist measures that still impede US exports in other countries may well give Trump the excuse he needs to increase barriers of his own. 
Yet the failure to maintain open trade policies is not really a failure of global cooperation or a result of insufficient global spirit. 
It is essentially a failure of domestic policy. 
When we economists teach the principle of comparative advantage and the gains from trade, we explain that free trade expands the home country’s economic pie. 
We trade not to confer benefits on other countries, but to enhance our own citizens’ economic opportunities. 
Responding to other countries’ protectionism by erecting barriers of our own amounts to shooting ourselves in the foot. 
True, trade agreements have not brought benefits to a large number of Americans; many workers and communities have been hurt. 
But the skewed and unbalanced trade deals that produced these results were not imposed on the US by other countries. 
They were what powerful US corporate and financial interests – the same ones that support Trump – demanded and managed to obtain. 
The failure to compensate the losers was not the result of inadequate global cooperation, either; it was a deliberate domestic policy choice. 
The same goes for financial regulation, macroeconomic stability or growth-promoting structural reforms. 
When governments misbehave in these areas, they may produce adverse spillovers for other countries. 
But it is their own citizens who pay the greatest price. 
Exhortations at G20 summits will not fix any of these problems. 
If we want to avoid misguided protectionism, or to benefit from better economic management in general, we need to start by putting our own national houses in order. 
Worse still, the knee-jerk globalism that suffuses G20 meetings feeds into the populists’ narrative. 
It provides justification for Trump and like-minded leaders to deflect attention from their own policies and lay the blame on others. 
It is because other countries break the rules and take advantage of us, they can say, that our people suffer. 
Globalism-as-solution is easily transformed into globalism-as-scapegoat. 
The reality, as a latter-day Caesar might put it, is that the fault is not in our trade partners, but in ourselves. 

A G20 Refugee Agenda 
DHAKA – Every day, an average of some 34,000 people are forced to flee natural or man-made disasters. 
In the last six months alone, more than 2,000 lives have been lost in the Mediterranean; over the last weekend in June, 12,600 migrants arrived in Italy by sea. 
Financial and political pressures are overwhelming the countries in the Middle East, Africa, and Europe that are on the receiving end of this human wave. 
Unfortunately, in many cases, help is not on the way. 
The scale of forced migration today has revealed troubling flaws in the organizations intended to serve as the last line of defense. 
Weak mandates, insufficient funding, disorganized structures, and the absence of a global governance system have weakened intergovernmental agencies’ ability to act with authority in the name of the most vulnerable. 
As I argue in Germany this week, G20 leaders meeting in Hamburg on July 7-8 have an opportunity to reshape the migration governance system with proactive protection policies that would enhance people’s trust in international leadership. 
Although past summits have produced little more than talking points, the prospect for action is better this time, given that the talks will be held in Europe, where the impact of the migration crisis has been deeply felt. 
At the moment, an alphabet soup of nonprofit and multilateral agencies tackles elements of the challenge. 
These include independent groups like Refugees International (IR) and Médecins Sans Frontières (MSF). 
Even the World Trade Organization (WTO) plays a role in managing economic migration. 
But at the intergovernmental level, the two most important players – the Office of the United Nations High Commissioner for Refugees (UNHCR), and the International Organization for Migration (IOM) – are also under the greatest strain. 
For the UNHCR, the challenges are systemic. 
For starters, it lacks broad enforcement powers, and must rely on government cooperation, which is not always guaranteed in conflict zones – or forthcoming from neighboring states. 
Countries that ratified the 1951 Refugee Convention have never fully adhered to it in practice, which limits the UNHCR’s ability to act. 
UNHCR interventions fail when countries are uncooperative, as we saw with Haitian and Cuban migrations to the United States in recent decades. 
But the UNHCR also suffers from internal shortcomings. 
Its communication with refugees on the ground is inconsistent. 
While an increase in UNHCR protection officers would help, it is equally important that the agency get its facts straight. 
For example, when host countries move to repatriate refugee populations forcibly, without informing the UNHCR, the agency itself looks unreliable, if not incompetent. 
The UNHCR, as currently conceived is not the independent, nonpartisan agency it claims to be. 
Heavily dependent on donors and host governments to launch relief operations, it is beholden to their interests and does not always have the political support it needs to get the job done. 
The other major multilateral migration agency, the IOM, assists in the return of migrants, asylum seekers, refugees, and the internally displaced to their place of origin, or to other countries or regions that have agreed to accept them. 
But, like the UNHCR, governance issues plague the IOM. 
In particular, the IOM lacks a mechanism to evaluate whether national governments are using coercion – banned under international law – to repatriate or relocate refugees. 
Nor does the IOM have the capacity to assess the safety of areas to which refugees are returning. 
Millions of people benefit from IOM-sponsored programs and projects, but prior to joining the UN structure as a “related organization” in September 2016, the IOM had no formal mandate to protect the rights of migrants. 
And even as a UN-related entity, the IOM suffers a mismatch between its broad mission and its meager budget and staff. 
It has been held to a “zero growth” standard in recent years, even as demand for its programs has increased. 
And, because its work is largely project-based, with member states funding specific activities, its role in mitigating refugee crises is largely reliant on individual members’ preferences and priorities. 
As key guardians of the world’s refugees, these two organizations must adapt to today’s challenges. 
Proactive policies on interagency coordination and financial burden sharing are essential. 
Elements of the Refugee Convention, like language on asylum policies, also should be updated to reflect current realities, and both agencies need to develop holistic and consistent policies on refugee advocacy and protection. 
To this end, the member states of both organizations should support their continued integration within the UN structure, which would give them more tools to influence the causes, not just the effects, of forced displacement. 
These are just a few of the governance upgrades that I have recommended for the G20. 
Both the UNHCR and the IOM could benefit from stronger multilateral support, and the G20 is uniquely poised to offer it. 
If we cannot end war, famine, corruption, or poverty, then the next best solution is to improve the organizations helping those who flee them. 

A Plutocrats Summit? 
BRISBANE – At an official dinner in Washington, DC, ahead of November’s G-20 Summit in Brisbane, Australia-born media mogul Rupert Murdoch lectured ministers on the dangers of socialism and big government. 
A fervent opponent of Australia’s carbon price, and a battle-hardened opponent of US President Barack Obama, Murdoch lauded the virtues of austerity and minimal regulation, and railed against the corrosive effects of social safety nets. 
The ministers were in Washington to attend the Annual Meetings of the International Monetary Fund and the World Bank, where they attempted to thrash out differences and establish common ground before the upcoming summit. 
The tone set by Murdoch, however, suggests that a consensus on sustainable, inclusive growth will be hard to achieve. 
Murdoch’s comments are in keeping with views expressed by his friend, Australian Prime Minister Tony Abbott, and Abbott’s current administration. 
In January, for example, Abbott informed a startled Davos conference that the global financial crisis was caused not by unregulated global markets, but rather by too much governance. 
This was certainly news to the finance ministers who had spent the past few years struggling with the toxic fallout from financial-sector excess. 
Viewed in the context of such comments, one can better understand Australia’s refusal to put issues of climate change and inclusive prosperity on the Brisbane agenda. 
Of course, stimulating global growth is a big enough challenge in itself, even without considering inclusiveness or environmental sustainability. 
The IMF’s gloomy growth forecasts attest to that. 
And many policymakers view Australia’s G-20 chairmanship as an opportunity to re-energize and refine the group’s mission to boost global growth, create jobs, and raise living standards. 
G-20 finance ministers have already decided on a 2% target for annual growth through 2018, and are sifting through more than 900 proposals for structural reforms in order to achieve this. 
What reforms G-20 members propose in Brisbane, and how serious they will be about implementing them, remains to be seen. 
The bigger challenge, though, is hitting those growth targets in a sustainable and inclusive way. 
If structural reforms are not done right, the Brisbane Summit will come to be regarded as a failure. 
Structural reforms, in which certain interests are sacrificed for the greater good, will always be controversial and difficult to execute. 
But when such reforms involve sacrifices by ordinary citizens and benefit society’s most privileged groups, political gridlock and instability invariably follow. 
Over the past two years, academics, regulators, economists, and financial institutions have all linked the secular stagnation in demand with greater income inequality. 
It is ironic that, at a time when many in the developing world are entering, or aspire to enter, the emerging middle class, wealth in much of the developed world is becoming more concentrated at the top. 
Indeed, inequality of outcomes both in emerging and advanced economies has increased within and across generations. 
Australia’s refusal to discuss inclusive growth in Brisbane may please plutocrats like Murdoch, but talk of unregulated markets, lower taxes, and the removal of social safety nets strongly indicates that the summit will offer no substantive policies aimed at reducing inequality. 
With just days to go until the Brisbane meeting, the G-20 is ignoring the main long-term threats to the global economy. 
As the Bank of England’s Governor Mark Carney (who I assume also heard Murdoch’s lecture) remarked earlier this year, “[U]nchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself.” 
IMF Managing Director Christine Lagarde recently put it more starkly, noting that the world’s 85 richest people control more wealth than the world’s 3.5 billion poorest people, and that this degree of inequality is casting a dark shadow over the global economy. 
Inequality is not a fringe issue. 
Combating its rise is essential to achieving sustainable economic growth and political stability. 
The G-20’s real power is to highlight such challenges and generate informed debate on the issues as a prelude to action. 
The question now is which leader in Brisbane, if any, will grab the global megaphone and speak out. 

Realizing the Potential of China’s G20 Presidency 
NEW YORK – In the run-up to this September’s G20 summit in Hangzhou, China, there has been much talk about strengthening global macroeconomic cooperation and reforming the international monetary system. 
While this is far from the first time these topics have come up – in 2011, for example, France pushed for monetary reform, but was waylaid by the eurozone crisis – the time may be ripe for genuine progress. 
Today’s global economy is plagued by uncertainty. 
Inconsistent data have lately raised questions about the strength of the United States’ economy. 
When it comes to Japan, the data are even more erratic. 
The European Union faces not only a still-weak recovery, but also the possibility of losing the United Kingdom as a member. 
The emerging world, meanwhile, is experiencing a sharp economic slowdown. 
China, in particular, poses a significant risk, with many fearing that its downturn will be more severe than initially anticipated. 
This has spurred many to move their capital out of the country, generating strong downward pressure on the renminbi. 
This highlights another source of uncertainty today: exchange rates. 
From the euro’s decline in 2014-2015 to the US dollar’s decline after the Federal Reserve signaled a postponement of its rate increases to the British pound’s recent drop, spurred by uncertainty surrounding the recent referendum on EU membership, major currencies have been all over the map in recent years. 
Some have even mooted suspicions of competitive devaluation. 
At a time when a policy change in one country reverberates throughout the global economy, stronger cooperation could be vital to enhancing overall stability. 
And, indeed, to some extent, world leaders have already recognized this imperative. 
Since the global financial crisis erupted in 2008, many initiatives aimed at boosting macroeconomic cooperation have been undertaken. 
For example, the G20 launched the Mutual Assessment Process, whereby member countries are evaluated on the basis of agreed indicators. 
The International Monetary Fund’s surveillance of macroeconomic policies has also been enhanced, with the implementation of a new set of multilateral surveillance tools that focus on major economies. 
These reforms, it has been said, make for the most elaborate system of multilateral macroeconomic cooperation in history. 
And yet the G20 still finds it extremely difficult to fulfill its objective, agreed in 2009, to “act together to generate strong, sustainable, and balanced global growth.” 
Among the most notable obstacles has been the inability to compel some surplus economies to pursue growth-stimulating policies, which would compensate for the recessionary effects of adjustment in the deficit countries. 
This failure is perhaps most pronounced within the eurozone, where Germany and the Netherlands have failed to reduce their surpluses, even as the deficit economies have undergone massive adjustments. 
As a result, the eurozone has gone from having an overall deficit in 2008 to being a major surplus region – a shock that has subtracted about 1% from global demand. 
Macroeconomic cooperation clearly must be made more effective. 
But, as recent exchange-rate volatility has shown, even that will not be enough to stabilize the global economy. 
Monetary reform is also needed. 
Such reform must include a reconsideration of the US dollar’s outsize role in shaping the international monetary system. 
In an increasingly multipolar world, would it not be more appropriate to build a multicurrency system and make greater use of the only global currency that has ever been created: the IMF’s Special Drawing Rights (SDRs)? 
Establishing the SDR as the leading global reserve currency would have far-reaching benefits. 
It would allow all countries – not just major economic powers – to enjoy “seigniorage,” or the profits brought by money creation. 
Moreover, as the IMF economist Jacques Polak suggested long ago, the IMF could finance its programs by creating SDRs, eliminating the cumbersome negotiations required to secure credits or raise member quotas. 
And SDRs could support development; for example, they could be allocated in a larger proportion to developing countries, which have greater demand for foreign-exchange reserves. 
China’s G20 leadership could be the impetus the group needs to initiate this shift. 
Zhou Xiaochuan, Governor of the People’s Bank of China, was among the first to question the dollar’s role, some seven years ago, and China has been working steadily to internationalize the renminbi. 
That effort reached a milestone in 2015, when the IMF Board agreed to add the renminbi to the basket of currencies that determines the SDR’s value. 
Beyond the push to use SDRs more actively in IMF programs, governments could issue SDR-denominated bonds. 
Moreover, private banks could increase their use of this monetary unit, just as some European banks used the so-called European Currency Unit, helping to pave the way for the euro. 
The G20’s China summit represents an important opportunity to improve macroeconomic cooperation and launch major reforms of the global monetary system. 
For the sake of balanced growth in developed and developing countries alike, it must not be squandered. 

A Debt Agenda for the G7 
CAMBRIDGE – On May 26-27, the heads of the Group of Seven leading industrial countries will gather in Japan to discuss common security and economic problems. 
A major common problem that deserves their attention is the unsustainable increase in the major developed countries’ national debt. 
Failure to address the explosion of government borrowing will have adverse effects on the global economy and on debt-burdened countries themselves. 
The problem is bad and getting worse almost everywhere. 
In the United States, the Congressional Budget Office estimates that the federal government debt doubled over the past decade, from 36% of GDP to 74% of GDP. 
It also predicts that, under favorable economic assumptions and with no new programs to increase spending or reduce revenue, the debt ratio ten years from now will be 86% of GDP. 
Even more worrying, the annual deficit ratio will double in the next decade to 4.9% of GDP, putting the debt on track to exceed 100% of GDP. 
The situation in Japan is worse, with gross debt at more than 200% of GDP. 
Japan’s current annual deficit of 6% of GDP implies that the debt ratio will continue to rise rapidly unless action is taken. 
Conditions differ among the eurozone countries. 
But three of the European Union’s four largest economies – France, Italy, and the United Kingdom – all have large debts and annual deficits that point to even higher debt ratios in the future. 
A rising level of national debt absorbs funds that would otherwise be available to finance productivity-enhancing business investment. 
Businesses now fear that the increasing deficits will lead to higher taxes, further discouraging investment. 
That is a worrying prospect for everyone. 
When interest rates rise, as surely they must, the cost of servicing the debt will require higher taxes, hurting economic incentives and weakening economic activity. 
And the persistence of large deficits reduces the room that governments have to increase spending when there is an economic downturn or a threat to national security. 
Reducing deficits is obviously a task for those responsible for tax revenue and public spending: governments and legislatures. 
But central banks also play a role, affecting the problem in two ways. 
Low-interest-rate policies in advanced countries are depressing the current size of budget deficits, but at the cost of reducing pressure on political leaders to address future deficits and encouraging voters to favor more spending programs and larger tax cuts. 
Central banks can help by announcing clearly that interest rates will rise substantially in the future, making it more expensive for governments to borrow and to roll over existing debt. 
Reducing annual deficits requires either increased tax revenue or decreased outlays. 
Raising marginal tax rates is both politically unpopular and economically damaging. 
In the US, there is scope to raise revenue without increasing tax rates, by limiting so-called tax expenditures – the forms of spending that are built into the tax rules rather than appropriated annually by Congress. 
For example, an American who buys an electric car receives a $7,000 tax reduction. 
Larger tax expenditures in the US include the deduction for mortgage interest and the exclusion from taxable income of employer-paid health-insurance premiums. 
Although eliminating any of these major tax expenditures might be politically impossible, limiting the amount by which a taxpayer could reduce his or her tax liability by using these provisions could raise substantial revenue. 
So I do my best to persuade my Republican friends in Congress that reducing the revenue loss from tax expenditures is really a way to cut government spending even though the deficit reduction appears on the revenue side of the budget. 
The good news is that a relatively small reduction in annual deficits can put an economy on a path to a much lower debt-to-GDP ratio. 
For the US, cutting the deficit from the projected 4.9% of GDP to 3% of GDP would cause the debt ratio to drop toward 60%. 
The same is true elsewhere. 
The long-run debt-to-GDP ratio is equal to the ratio of the annual budget deficit to the annual rate of growth of nominal GDP. 
With 4% nominal GDP growth, a budget deficit of 2% would bring the long-term debt ratio down to 50%. 
That should be the goal for which all of the G7 countries aim. 


The Cost of Child Marriage 
NEW YORK – The human costs of child marriage are well known; around the world, child brides are, on average, less educated, poorer, and more prone to sexual violence than women who marry later in life. 
But when the economic impact of child marriage is added to this grim tally, the bill is truly staggering. 
According to the International Center for Research on Women and the World Bank, ending the practice of child marriage would save billions of dollars in annual welfare expenditures, resulting in global savings of more than $4 trillion by 2030. 
Simply put, the world cannot afford to allow child marriage to continue. 
Many governments have already recognized this. 
In Indonesia, for example, where the economic impact of child marriage is negatively affecting long-term growth forecasts, President Joko Widodo has vowed to outlaw the practice, a significant pledge in a country where 14% of girls are married before their 18th birthday. 
But in most countries where child marriage is prevalent, change is not occurring fast enough. 
While strategies have been discussed from Bangladesh to Zambia, funding for programs proven to reduce rates of child marriage – such as improving girls’ access to health care, education, and job training – remains inadequate. 
If ending child marriage is ever to be more than a political talking point, holistic strategies must be backed by financial commitments. 
To be sure, the child-marriage challenge is immense. 
Today, roughly one in five girls worldwide is married or in an informal union before they turn 18, and most of these girls will become mothers before they reach adulthood. 
In Niger, which has the world’s highest rate of child marriage, 76% of girls are married before they can vote. 
And wherever child marriage occurs, girls often have little say in the decision. 
The good news is that there has never been a better time to tackle this global problem. 
With the economic costs of child marriage now clear, governments in the developing world are beginning to address the issue with more urgency. 
To tip the scales, however, rich countries must be enlisted in the fight, and the next opportunity for them to engage is fast approaching. 
On May 31, G7 finance and development ministers will hold the first of a series of meetings in Canada to discuss how economic growth can be more equitably shared. 
These meetings will pave the way for broader discussions next week, when Canadian Prime Minister Justin Trudeau hosts the full G7 summit. 
Trudeau has already vowed to make gender equality a key theme at this year’s meeting, and we certainly welcome his focus. 
But we also recognize that unless G7 ministers match their words with dedicated funding, the summit’s lofty pledges will fall short – and children everywhere will continue to suffer the injustice of early marriage. 
Ending child marriage will require ambition, creativity, and money. 
But that is just a start; targeted solutions are essential. 
While education is critical to girls’ futures, simply building schools and paying teachers will not be enough. 
To be fully empowered, girls need access to safe, quality education that gives them the confidence and skills to succeed. 
Achieving that will require long-term engagement. 
If the world’s richest countries were to make this issue a high priority, the payoffs would be significant. 
For example, the World Bank estimates that if Niger could ban child marriage, it would realize annual welfare savings in the vicinity of $1.7 billion. Bangladesh could generate an additional $4.8 billion in annual earnings and productivity, and welfare savings in Nigeria would total $7.6 billion. 
Governments are starting to make strides in reducing rates of child marriage; in fact, the number of girls married as children each year is declining. 
Unfortunately, change is happening too slowly. 
If the world does not dramatically accelerate progress and scale up investments, rapid population growth will reverse current gains, and the number of child brides will grow once more. 
Girls can change the world, but at the moment, circumstances beyond their control are limiting their potential. 
When G7 ministers meet this week and next, one theme they will discuss is “investing in growth that works for everyone.” 
From our perspective, the best way to translate that goal into reality is by addressing a social ill that generates huge costs – and not just for girls. 

The G-7’s Sustainability Mission 
FRANKFURT – In six months, representatives from countries around the world will gather in Paris in an effort to reach a global accord to fight climate change. 
When the G-7’s leaders meet next week in Germany, they should use the occasion to take the first steps toward avoiding the most dangerous consequences of global warming. 
With the world’s safety and prosperity at stake, the question is not whether or when to begin the transition to a low-carbon economy, but how to manage the effort. 
In 2014, investments in clean energy reached a new high of $310 billion, after two years of decline. That is good news, but it is still far short of the $1.1 trillion per year that the International Energy Agency (IEA) estimates is needed in the low-carbon energy sector. 
In the meantime, some $950 billion was invested in oil, gas, and coal in 2013 – a figure that has doubled in real terms since 2000. 
The value of an investment is based largely on the perception of how risky it is. 
Investment will not shift decisively toward greener sources of energy unless and until portfolio managers begin to account for the risks of dangerous climate change. 
Investors also need to consider “carbon bubbles,” the overvaluation of fossil-fuel companies based on the assumption that they will be able to continue burning the world’s reserves until depletion. 
Until recently, traditional forms of energy production have had the advantage of being based on established and mature industries. 
But the tides are shifting. 
Sovereign wealth funds and institutional and private investors are increasingly recognizing that climate change will undermine their returns, and that governments eventually will begin to address the problem. 
Likewise, the Bank of England is undertaking important work on the risk that assets like coal or oil reserves could be “stranded” by policy changes intended to limit dangerous climate change. 
And the G-20 finance ministers recently requested that the Financial Stability Board undertake a broad assessment of climate-related risks and opportunities. 
The G-7 countries should clearly signal that they are serious about the low-carbon transition, and the most effective way to do that would be to support a global goal of cutting net greenhouse-gas emissions to zero by 2050. 
In addition, governments and regulators can take concrete steps to stimulate private-sector investment in cleaner forms of energy. 
For starters, governments should take the equivalent of the Hippocratic oath and pledge to do no active harm to the planet. 
The New Climate Economy Report, released by the Global Commission on the Economy and Climate, on which I serve, underlines the importance of phasing out fossil-fuel subsidies and questions the wisdom of allowing export credit agencies to finance coal projects. 
Governments must set themselves a firm four-year deadline to end fossil-fuel subsidies and redirect funding to areas like green infrastructure projects and development assistance. 
Second, governments must lead by example. 
High-level meetings in Addis Ababa and Paris later this year offer the opportunity to create synergies between the fight against climate change and financing for development and infrastructure. 
Governments should also encourage public pension funds to invest responsibly, especially when it comes to the climate. More, too, could be done to support the market for green bonds, including by issuing green government bonds. 
Third, governments must create policy frameworks that foster low-carbon investments. 
Putting a price on carbon is critical. 
The slow but steady progress that countries are making toward this goal is encouraging. 
In the meantime, governments should use a shadow carbon price and carbon discount rate in their decision-making processes. 
In addition, governments and regulators should adopt policies ensuring sustainable financial-sector practices, including annual reporting by companies and investors on environmental, social, and governance issues and due diligence and risk models regarding environmental hazards. 
Consideration of the possibility of stranded assets must be systematically expanded. 
Finally, policymakers should foster partnerships and new instruments that nudge the economy toward low-carbon alternatives. 
Development banks, for example, can help leverage private-sector investment. 
And new institutions like the Asian Infrastructure Investment Bank are in a position to make sustainability a core mandate. 
Managing the transition from an economy based on fossil fuels to one based on low-carbon alternatives will not be easy. 
But that is why it is essential to begin today. 
It is time for the G-7 to recognize its responsibility and lead the world toward a sustainable future. 

The Irrelevant Seven 
BERLIN – The latest G-7 summit, in the beautiful Alpine setting of Garmisch-Partenkirchen in Germany, has come and gone. 
No longer the G-8, owing to Russia’s suspension, the forum is again composed exclusively of traditional Western powers. 
At a time when the emergence of large, densely populated economic powerhouses like Brazil, China, India, and Indonesia is challenging Western dominance, many believe that the current international system is due for an overhaul. 
In fact, a new world order is almost certain to emerge – and very soon. 
The shape it takes will be determined by two key phenomena: globalization and digitization. 
Globalization is enabling economies that are not yet fully industrialized to reap the benefits of industrialization and become integrated into global markets – a trend that has redefined the global division of labor and transformed value chains. 
The revolution in digital communication technology has underpinned this shift. 
Of course, the impact of digitization extends beyond economics; it has broken down many cultural barriers, giving ordinary citizens in even remote regions access to information and ideas from all over the world. 
As globalization-enabled economic development continues to raise incomes, this cultural integration will undoubtedly lead to broader political participation, especially among an increasingly large – and increasingly demanding – middle class. 
Already, this trend is complicating governments’ efforts at domestic monitoring and control. 
In terms of the global economic balance of power, however, the impact of globalization and digitization remains difficult to predict. 
While these trends have undoubtedly fueled the economic rise of some developing countries, the West – especially the US – retains a technological and innovative edge. 
Indeed, America’s technological lead – together with its enormous capital assets and dynamic business culture, exemplified in Silicon Valley – could ultimately reinforce its global standing. 
But, with major emerging economies like China and India working hard to foster innovation, while still benefiting from technological catch-up, it is also possible that continued globalization and digitization will propel continued “de-Westernization” of the international order. 
Only time will tell whether these countries will successfully challenge the established powers. 
Even if the US – and, to some extent, Western Europe – does retain a competitive edge, it is unlikely to retain the kind of global geopolitical control that it has had since World War II and, especially, since the Soviet Union’s collapse left it as the world’s sole superpower. 
In fact, even though the US remains dominant in military, political, economic, technological, and cultural terms, its global hegemony already seems to have slipped away. 
The reality is that America’s global geopolitical supremacy did not last long at all. 
After becoming overstretched in a series of unwinnable wars against much weaker – and yet irrepressible – opponents, the US was forced to turn inward. 
The power vacuums that it left behind have produced regional crises – most notably, in the Middle East, Ukraine, and the South and East China Seas – and have contributed to a wider shift toward instability and disorder. 
The question now is what will replace Pax Americana. 
One possibility is a return to the kind of decentralized order that existed before the Industrial Revolution. 
At that time, China and India were the world’s largest economies, a status that they will regain in this century. 
When they do, they might join the traditional powers – the US and Europe, as well as Russia – to create a sort of “pentarchy” resembling the European balance-of-power system of the nineteenth century. 
But there are serious questions about most of these countries’ capacity to assume global leadership roles. 
With the European Union facing unprecedented challenges and crisis, it is impossible to predict its future. 
Russia’s future is even more uncertain; so far, it has been unable to rid itself of the phantom pains over its lost empire, much less arrest the deterioration of its society and economy. 
India has the potential to play an important role internationally, but it has a long way to go before it is stable and prosperous enough to do so. 
That leaves only the US and China. 
Many have predicted the emergence of a new bipolar world order, or even a new Cold War, with China replacing the Soviet Union as America’s rival. 
But this, too, seems unlikely, if only because, in today’s interconnected world, the US and China cannot allow conflict and competition to obscure their common interests. 
As it stands, China is financing America’s public debt, and, in a sense, subsidizing its global authority. 
And China could not have achieved rapid economic growth and modernization without access to US markets. 
Simply put, the US and China depend on each other. 
That will go a long way toward mitigating the risks that a new global power’s emergence inevitably generates. 
Against this background, it seems likely that the new world order will resemble the bipolar order of the Cold War – but only on the surface. 
Underneath, it will be characterized by engagement and mutual accommodation, in the name of shared interests. 
The G-7 represents a dying order. 
It is time to prepare for the G-2. 

Gambler’s Ruin 
San Francisco – From Adam Smith (1776) until 1950 or so, capital was considered by economists to be absolutely essential for economic growth. 
You also needed a few good basic institutions. 
“Security of property and tolerable administration of justice,” as Smith put it. 
If these fundamental institutions were right, then landlords, merchants, and manufacturers would invest and improve. 
In investing and improving, they would add to the capital stock: “In all countries where there is a tolerable security [of property], every man of common understanding will endeavor to employ whatever [capital] stock he can command, in procuring either present enjoyment or future profit... 
A man must be perfectly crazy, who, where there is a tolerable security, does not employ all the stock which he commands, whether it be his own, or borrowed of other people...” 
A larger capital stock would mean thicker markets, a finer division of labor, and a more productive economy. 
A highly productive society based on a sophisticated division of labor was how you secured “the wealth of nations.” 
Reverse the process, however, and you get the poverty of nations, which Smith believed he saw in the Asia of his time. 
For Smith and his successors over the first 175 years, any episode of sustained economic growth overwhelmingly required investment capital. 
We economists were by and large capital boosters, and our magic formula for economic development was saving, investment, thrift, and wealth accumulation. 
The last and fullest expression of this line of thought comes at the end of the 1950’s with W.W. Rostow’s book The Stages of Economic Growth . 
Then Robert Solow and Moses Abramovitz challenged this near-consensus. 
They calculated that 75% to 80% of economic growth did not come from increasing the capital-output ratio – at least not if the private marginal product of capital was taken as an indicator of the social marginal product. 
Instead, the keys to growth and development appeared to lie beyond an increase in capital intensity as measured by capital-output ratios: skills, education, technology broadly understood, and improvements in organizational management. 
Yet capital continued to be seen as necessary, if not sufficient. 
In the framework developed by the development economist Dani Rodrik, a shortage of capital can be a binding “growth constraint”: the place where “the biggest bang for the [policy] reform buck can be obtained.” 
And even when other factors constrain growth more, they cannot be changed without changing the shape and form of the economy’s capital stock. 
Indeed, high investment serves as a sign that other binding constraints to growth are absent, implying prosperity and that things are going right. 
The problem is that for poor economies, raising the capital needed to relax binding growth constraints is difficult. 
That’s why the world took the neo-liberal bet in the 1990’s: international capital mobility would come to the rescue by relaxing capital constraints where they were binding, and by reducing the scope for corruption and rent-seeking, which was often a more significant binding growth constraint. 
The hope was that, like the pre-1913 era of British overseas investment, which financed a huge amount of industrialization in the resource-rich, temperate periphery of the world economy, net capital outflows from the industrial core would finance much late twentieth and twenty-first century industrialization. 
But we all know the outcome: while international capital flows soared, the large net flow of capital from rich to poor countries simply never materialized. 
In fact, the principal outcome was an enormous flow of capital from the periphery to the rich core. 
For most of the past generation, and looking into the future, the message of the market is that the benefits of international capital mobility do not include a relaxation of the capital constraint, and thus an acceleration of growth in the global periphery. 
The reason is not that the periphery offers an attractive labor force from which capital profits, but rather that the core – especially the United States – offers a form of protection for capital against unanticipated political disturbances. 
But even though net international capital flows are going the wrong way, there are still substantial gross capital flows outward from the world economy’s core to its periphery. 
And we can hope that these capital flows will carry with them the institutions and managerial expertise that have made the core so wealthy. 
Nevertheless, a dispassionate observer might point out that for someone with limited resources and opportunities for policy reform to keep betting double-or-nothing on neo-liberalism is a strategy that has a well-deserved name: “Gambler’s Ruin.” 

Gambling with the Planet 
DUBAI – The consequences of the Japanese earthquake – especially the ongoing crisis at the Fukushima nuclear power plant – resonate grimly for observers of the American financial crash that precipitated the Great Recession. 
Both events provide stark lessons about risks, and about how badly markets and societies can manage them. 
Of course, in one sense, there is no comparison between the tragedy of the earthquake – which has left more than 25,000 people dead or missing – and the financial crisis, to which no such acute physical suffering can be attributed. 
But when it comes to the nuclear meltdown at Fukushima, there is a common theme in the two events. 
Experts in both the nuclear and finance industries assured us that new technology had all but eliminated the risk of catastrophe. 
Events proved them wrong: not only did the risks exist, but their consequences were so enormous that they easily erased all the supposed benefits of the systems that industry leaders promoted. 
Before the Great Recession, America’s economic gurus – from the head of the Federal Reserve to the titans of finance – boasted that we had learned to master risk. 
“Innovative” financial instruments such as derivatives and credit-default swaps enabled the distribution of risk throughout the economy. 
We now know that they deluded not only the rest of society, but even themselves. 
These wizards of finance, it turned out, didn’t understand the intricacies of risk, let alone the dangers posed by “fat-tail distributions”– a statistical term for rare events with huge consequences, sometimes called “black swans.” 
Events that were supposed to happen once in a century – or even once in the lifetime of the universe – seemed to happen every ten years. 
Worse, not only was the frequency of these events vastly underestimated; so was the astronomical damage they would cause – something like the meltdowns that keep dogging the nuclear industry. 
Research in economics and psychology helps us understand why we do such a bad job in managing these risks. 
We have little empirical basis for judging rare events, so it is difficult to arrive at good estimates. 
In such circumstances, more than wishful thinking can come into play: we might have few incentives to think hard at all. 
On the contrary, when others bear the costs of mistakes, the incentives favor self-delusion. 
A system that socializes losses and privatizes gains is doomed to mismanage risk. 
Indeed, the entire financial sector was rife with agency problems and externalities. 
Ratings agencies had incentives to give good ratings to the high-risk securities produced by the investment banks that were paying them. 
Mortgage originators bore no consequences for their irresponsibility, and even those who engaged in predatory lending or created and marketed securities that were designed to lose did so in ways that insulated them from civil and criminal prosecution. 
This brings us to the next question: are there other “black swan” events waiting to happen? 
Unfortunately, some of the really big risks that we face today are most likely not even rare events. 
The good news is that such risks can be controlled at little or no cost. 
The bad news is that doing so faces strong political opposition – for there are people who profit from the status quo. 
We have seen two of the big risks in recent years, but have done little to bring them under control. 
By some accounts, how the last crisis was managed may have increased the risk of a future financial meltdown. 
Too-big-to fail banks, and the markets in which they participate, now know that they can expect to be bailed out if they get into trouble. 
As a result of this “moral hazard,” these banks can borrow on favorable terms, giving them a competitive advantage based not on superior performance but on political strength. 
While some of the excesses in risk-taking have been curbed, predatory lending and unregulated trading in obscure over-the-counter derivatives continue. 
Incentive structures that encourage excess risk-taking remain virtually unchanged. 
So, too, while Germany has shut down its older nuclear reactors, in the US and elsewhere, even plants that have the same flawed design as Fukushima continue to operate. 
The nuclear industry’s very existence is dependent on hidden public subsidies – costs borne by society in the event of nuclear disaster, as well as the costs of the still-unmanaged disposal of nuclear waste. 
So much for unfettered capitalism! 
For the planet, there is one more risk, which, like the other two, is almost a certainty: global warming and climate change. 
If there were other planets to which we could move at low cost in the event of the almost certain outcome predicted by scientists, one could argue that this is a risk worth taking. 
But there aren’t, so it isn’t. 
The costs of reducing emissions pale in comparison to the possible risks the world faces. 
And that is true even if we rule out the nuclear option (the costs of which were always underestimated). 
To be sure, coal and oil companies would suffer, and big polluting countries – like the US – would obviously pay a higher price than those with a less profligate lifestyle. 
In the end, those gambling in Las Vegas lose more than they gain. 
As a society, we are gambling – with our big banks, with our nuclear power facilities, with our planet. 
As in Las Vegas, the lucky few – the bankers that put our economy at risk and the owners of energy companies that put our planet at risk – may walk off with a mint. 
But on average and almost certainly, we as a society, like all gamblers, will lose. 
That, unfortunately, is a lesson of Japan’s disaster that we continue to ignore at our peril. 

The Emancipation Gap in Arab Education 
PARIS – Discussion of education in the Arab world has focused only rarely on the role of schooling in changing social and political mores. 
This is unfortunate, because educated citizens of Arab countries tend to be much less emancipated politically and socially, on average, than their peers in other parts of the world. 
If Arab societies are ever to become more open and economically dynamic, their education systems will have to embrace and promote values appropriate to that goal. 
The gap is reflected in the World Value Survey (WVS), a global opinion poll that allows for the comparison of a broad range of values in different countries. 
Recently, the WVS surveyed 12 Arab countries – Jordan, Egypt, Palestine, Lebanon, Iraq, Morocco, Algeria, Tunisia, Qatar, Yemen, Kuwait, and Libya – along with 47 non-Arab countries. 
The results allow us for the first time to compare the residents of a sizable share of the Arab world to citizens elsewhere. 
The WVS measures four revealing political and social values: support for democracy, readiness for civic engagement, obedience to authority, and support for patriarchal values that underpin discrimination against women. 
As a typical country becomes richer, more educated, and more politically open, support for democracy and readiness for civic engagement rise, and obedience to authority and support for patriarchal values fall. 
The data, however, reveal that Arab countries lag behind countries at similar levels of development. 
Arabs have a lower preference for democracy (with a gap of 11%), are less civically active (a gap of 8%), respect authority more (by 11%), and embrace patriarchal values much more strongly (by a whopping 30%). 
Two characteristics of the Arab world could explain this: its predominantly Muslim population and the autocratic governments that have ruled much of the region for the past 50 years. 
According to the WVS, religiosity does indeed promote conservatism, but not more so in Arab countries than in the rest of the world. 
Still, given that Arabs’ religiosity score is about double that of people elsewhere, this factor does partly explain the region’s conservatism. 
But what is more interesting is the role that education plays – or does not play – in promoting social and political openness in the Arab world. 
The biggest differences between Arab countries and the rest of the world can be found among the educated. 
Consider preference for democracy. 
On that measure, the gap between Arabs and non-Arabs with a university degree is 14%, while the gap between those with secondary degrees is only 5%. 
And similar effects can be seen for the other three values. 
Education, it seems, has a weaker effect on social values in Arab countries than elsewhere – by a factor of about three. 
Thus, those seeking to foster openness in the Arab world should focus not on the impact of Islam, but on the education to which the region’s residents are exposed. 
Indeed, one likely explanation of the observed gap in social values is that education is being deliberately used as a tool of indoctrination, with the purpose of consolidating autocratic governments. 
Indeed, with the introduction of mass education in the 1960s, education in the Arab world was placed in the service of top-down nationalist projects. 
Then, in the 1970s, after state-led modernization pushes had failed and governments had become increasingly repressive, education policies were infused with conservative, religious values – first in order to fight leftist opposition groups, and later to compete with Islamic groups on their own terrain. 
A review of the pedagogical literature on the region’s education systems reveals the extent to which they have been designed for indoctrination. 
Most of them are characterized by rote learning, disregard for analytical capabilities, an exaggerated focus on religious subjects and values, the discouragement of self-expression in favor of conformism, and students’ lack of involvement in community affairs. 
These features are all geared to promote obedience and discourage the questioning of authority. 
It may seem paradoxical that secular regimes were responsible for Islamicizing education. 
But it makes sense if it is recognized as an attempt to exploit local cultural characteristics to reinforce the indoctrination effort (as has been done in China). 
Blaming local culture, which societies largely inherit, is not constructive. 
Recognizing that autocratic regimes purposefully neutralize the modernizing potential of education for the sake of their survival offers a road forward. 
Unfortunately for the Arab world, it is a rather narrow road. 
Elites will not willingly reform education if doing so puts their survival at risk. 
Civil-society activists will need to fight to change the values underpinning their education systems, by encouraging civic engagement, inculcating democratic principles, supporting gender equality, and promoting diversity and pluralism. 
Only by ensuring that these values take root in every school will they grow strong enough to change the course of Arab societies. 

A Responsibility to Protect Iraqis? 
CANBERRA – Only one possible justification – moral, political, or military – exists for renewed Western or other external military intervention in Iraq: meeting the international responsibility to protect victims, or potential victims, of mass atrocity crimes – genocide, ethnic cleansing, other crimes against humanity, or major war crimes. 
Shia and other non-Sunnis in the path of the marauding ISIS (Islamic State in Iraq and Syria) – a group whose ideology and behavior are too extreme even for Al Qaeda to stomach – have plenty of reason to fear such atrocities. 
Ugly executions of military and other captives have undoubtedly occurred in Mosul, Tikrit, and other cities seized by ISIS. 
But, based on the evidence currently available, it would be premature to conclude that violence against the defenseless has already occurred – or is imminent – on the scale necessary to justify outside military intervention. 
Though pundits have been wrong about almost everything so far in this round of violence, the best current assessment of the overall military situation is that the acute phase of the crisis is past. 
The mobilization of Shia militias means that the nightmare scenario, the fall of Baghdad, is unlikely, despite the virtual collapse of the Iraqi army. 
According to this view, a protracted civil war can be expected, with the most probable long-term outcome being a permanent partition along ethno-sectarian fault lines. 
In this scenario, the Kurds would control the north, the Sunnis would rule in the west and center, and the Shia would hold power in Baghdad and the south. 
It is difficult to make a case for military intervention to prop up the current government and try to enable it to re-establish authority over the entire country. 
Nouri al-Maliki, the Shia prime minister, has been brutal, corrupt, and outrageously sectarian – deeply embarrassing his supporters in the United States and sometimes even his patrons in Iran. 
Taking his side in an inter-communal civil war, even if it aided the much-needed US rapprochement with Iran, would simply add fuel to the Middle East cauldron. 
Things might be different if al-Maliki could be persuaded to step down in favor of a broad-based Shia-Sunni-Kurdish administration, determined to govern inclusively and create an effective, non-political national army. 
Massive diplomatic effort certainly should be mobilized to achieve this goal. 
But this project has failed in the past, and the domestic leadership needed to ensure its success is nowhere to be seen. 
Even if such an optimal political outcome were achieved, it is difficult to see what value could be added by external military intervention intended to destroy ISIS as a militant Sunni force. 
Maybe the limited advisory and technical support now on offer from the US would be of some use. 
But, beyond that, air strikes require targets – elusive when no armies are on the move – and all too often they produce innocent civilian casualties. 
And even 150,000 pairs of foreign boots on the ground were insufficient to stabilize the country after the horribly ill-judged US-led military intervention in 2003. 
None of this means that an external military option should be ruled out in the event of mass atrocity crimes occurring – or being imminently feared – at the hands of ISIS or anyone else. 
In 2005, 150 heads of state and government at the United Nations unanimously supported an international responsibility to protect (“R2P”) at-risk populations, which in extreme cases could take the form of Security Council-authorized military intervention, as happened in 2011 in response to the behavior of Muammar el-Qaddafi’s regime in Libya. 
Disagreement about the use of that mandate to pursue regime change, rather than only protection of civilians, paralyzed the Security Council in the face of similar atrocities in Syria. 
But international support for basic R2P principles remains strong, with the Council itself continuing to use “responsibility to protect” terminology in its resolutions and statements (26 times, at last count, since Libya). 
It is not impossible to envisage a consensus re-emerging should a sufficiently horrifying new atrocity occur in Iraq. 
Of course, no such intervention will, or should, be approved in practice unless it is seen as satisfying several moral or prudential criteria, which, though not yet adopted by the UN as formal benchmarks, have been the subject of much international debate and acceptance over the last decade. 
Those criteria are that the atrocities occurring or feared are sufficiently serious to justify, prima facie, a military response; that the response has a primarily humanitarian motive; that no lesser response is likely to be effective in halting or averting the harm; that the proposed response is proportional to the threat; and that the intervention will actually be effective, doing more good than harm. 
These criteria, particularly the last, will always be difficult to satisfy. 
But, should an obvious case for action arise in Iraq, we should not be so consumed by the desire not to repeat the misguided intervention in 2003, that we fail – as we did in Cambodia, Rwanda, Bosnia, and so often elsewhere – to respond as our common humanity demands. 


The Right Iraqi Intervention 
CANBERRA – US President Barack Obama deserves unconditional support for his decision to use military force to protect the persecuted Yezidi minority from threatened genocide by marauding Islamic State (IS) militants in northern Iraq. 
The United States’ action is completely consistent with the principles of the international responsibility to protect (R2P) people at risk of mass-atrocity crimes, which was embraced unanimously by the United Nations General Assembly in 2005. 
The US military intervention touches all of R2P’s bases of legality, legitimacy, and likely effectiveness in meeting its immediate objectives. 
In contrast to the original military intervention in Iraq – which touched none of these bases – the current US action, though lacking Security Council authorization, is being taken at the request of the Iraqi government, so there is no question of a breach of international law. 
And it would clearly seem to satisfy the moral or prudential criteria for the use of military force, which, though not yet formally adopted by the United Nations or anyone else, have been the subject of much international debate and acceptance over the last decade. 
The criteria of legitimacy are that the atrocities occurring or feared are sufficiently serious to justify, prima facie, a military response; that the response has a primarily humanitarian motive; that no lesser response is likely to be effective in halting or averting the harm; that the proposed response is proportional to the threat; and that the intervention will do more good than harm. 
The available evidence is that the many thousands of men, women, and children who have sought refuge in the Sinjar mountain range of northern Iraq are indeed at risk. 
They face death not only from starvation and exposure, but also from genocidal slaughter by the rapidly advancing IS forces, who regard the Yazidis as apostates and have already perpetrated atrocities unrivaled in their savagery. 
The US motive in mobilizing air power to protect them is unquestionably humanitarian. 
It is clear that no lesser measures will be sufficient, and the only question about proportionality that arises is whether the air strikes and supply drops will do too little, rather than too much, to address the emergency. 
Unlike the US-led invasion of Iraq in 2003, it cannot be argued that external military intervention will be likely to cause more harm than good. 
It should be at least as effective in protecting the Yezidis (and Kurds and others in nearby Erbil) as was the intervention in Libya in 2011 to stop the threatened massacre by Muammar el-Qaddafi’s forces of the people of Benghazi. 
Whether it will contribute to reversing the major gains already made by IS forces in northern Iraq, and to re-establishing the territorial integrity of the Iraqi state, is a different question. 
As the Obama administration has made clear, that will depend, above all, on whether the disastrously divisive leadership of Nouri al-Maliki, Iraq’s Shia prime minister, gives way to a more inclusive regime, and whether, in that context, the ineffectual Iraqi army can regroup and rally. 
Though some conservative American voices are already calling for more to be done, no compelling case can be made in the US, Europe, or my own country for sacrificing further blood and treasure in an effort to prop up a regime so demonstrably unable and unwilling to help itself hold the country together. 
As I have argued previously, the only possible justification – moral, political, or military – for renewed external military intervention in Iraq is to meet the international responsibility to protect victims, or potential victims, of mass atrocities. 
It is a little frustrating to those of us who have worked to embed R2P principles in international policy and practice that US leaders remain reluctant to use that terminology – a reluctance that partly reflects the perceived domestic political risk in relying on anything that comes from the UN. 
But it would be churlish to complain when, as here, Obama talks of “upholding international norms,” and in practice moves to do exactly what the R2P norm requires. 
There are also, of course, American voices – like that of the foreign-policy realist Stephen Walt – arguing for less to be done, on the ground that US interests are insufficiently engaged to justify any military intervention, however limited. 
But this is to adopt a narrowly traditional view of the national interest – focusing only on direct security and economic advantage – and to ignore a third dimension, reputational advantage, which increasingly determines the extent to which countries respect and relate to one another. 
It is in every country’s national interest to be – and to be seen as – a good international citizen. 
There can be no better demonstration of good international citizenship than a country’s willingness to act when it has the capacity to prevent or avert a mass atrocity crime. 
Obama has recently been criticized, in the context of his attitude toward the Palestinian-Israeli peace process, as being “cerebral in part of the world that’s looking for the visceral.” 
His response to the plight of the Yezidis in Iraq has been both cerebral and visceral, and both America and the world are better for it. 

Sorry is the Hardest Word 
CANBERRA – Apologies, or the lack of them, have been back in the news, raising questions again about how useful they are in resolving international problems. 
The efficacy of timely and sincere apologies in defusing personal tensions cannot be doubted. 
Is the same true for diplomacy? 
In some recent cases, the issue has been not much more than an irritating sideshow, as when Afghan President Hamid Karzai demanded an apology from the United States late last year for causing unintended civilian deaths – at the price, bizarrely, of allowing the Americans to continue defending him and his country (the US understandably refused). 
But in other cases, the stakes have become very high indeed. 
Bilateral relations between Indonesia and Australia since last November have become more frigid than they have been in decades, owing to President Susilo Bambang Yudhoyono’s very real anger at Australia’s refusal to offer an apology for tapping his private telephone (and his wife’s). 
And Japanese Prime Minister Shinzo Abe’s visit in December to the Yasukuni Shrine, which honors Japan’s war dead – including, since 1978, its most serious convicted war criminals – has re-opened long-festering wounds among Japan’s neighbors, who perceive a lack of sincere contrition for waging aggressive war and committing wartime atrocities. 
It has certainly added tension to Japan’s already-fraught standoff with China over their competing claims to the Senkaku/Diaoyu Islands in the East China Sea. 
In the case of Indonesia’s reaction to former US intelligence contractor Edward J. Snowden’s revelations of Australian spying on its first family, a personal apology from Prime Minister Tony Abbott would have made all the difference. 
He had merely to follow the playbook of President Barack Obama’s response to German Chancellor Angela Merkel when the US was similarly caught out. 
Had he coupled this with a simple promise to “review our collection processes and priorities,” there might even have been no need to pledge explicitly, as the US now has, to end all monitoring of “the leaders of our close friends and allies.” 
I was in Jakarta at the time, and formed that judgment after speaking to very senior officials, and I advised the Australian government accordingly. 
But the government took the view that when it comes to intelligence matters, apologies are for wimps. 
With elections looming in Indonesia, and nationalist sentiment there strong, Australia will be paying the diplomatic price for a long time unless it changes course. 
The case of Japan is more complex. 
Under strong international pressure in the 1980’s and 1990’s – to which I hope I contributed as Australia’s foreign minister – a series of powerful apologies were in fact offered. 
Notable among them was then-Chief Cabinet Secretary Yohei Kono’s statement in 1993 on the issue of Korea’s “comfort women,” and Prime Minister Tomiichi Murayama’s expression, on the 50th anniversary of the end of the World War II, of “deep remorse” and “heartfelt apology.” 
There has been no subsequent outright disavowal of these apologies; indeed, this month Foreign Minister Fumio Kishida said that Abe’s cabinet members “have never denied” the Kono and Murayama statements. 
But, save for a gracious acceptance by South Korea’s then-President Kim Dae-jung in 1998, Japan’s apologies simply have not resonated much in the region, because they have regularly been accompanied by apparent side-stepping or backsliding. 
Japan’s Diet, for example, failed to endorse Murayama’s statement in 1995, agreeing only to express “a deep feeling of remorse” (and even then 241 MPs abstained). 
Above all, there have been Japanese leaders’ recurring pilgrimages to Yasukuni. 
The shrine not only records war criminals in its “Book of Souls”; it also contains the Yushukan museum, where Japan’s conquests in the 1930’s and 1940’s are glorified as “just wars fought for survival and self-defense” or for the “liberation of Asia.” 
Certainly some of the outraged reaction by Japan’s neighbors is of questionable sincerity. 
South Koreans have often failed to acknowledge the number and intensity of statements about comfort women (who were forced to provide sexual services to Japanese soldiers) and the amount of compensation on offer. 
China, for its part, periodically mobilizes nationalist sentiment to divert attention from internal problems, and partly encouraged Abe’s recent assertiveness by declaring an Air Defense Identification Zone beyond its acknowledged national airspace in the East China Sea – a move that, while not illegal, was certainly provocative. 
But Japan could and should have done much more to give real substance to its apologies, as the Germans have done. 
At least since 1970, Germany has taken a comprehensive and credible approach to atoning for its Nazi past, fully acknowledging its horrors in school curricula, graphically commemorating them in museums, monuments, and ceremonies, and employing official discourse that has been unfailingly contrite. 
Harvard’s Ezra Vogel, while not sparing China from his prescriptions, recently mapped some strategies by which Japan could defuse historical issues. 
Vogel recommends a full and objective official account of the suffering Japan’s military aggression caused, lengthening the time that students must devote to modern Japanese history, and including regional reactions and criticism in that study. 
Diplomats can learn from examples of transformative national apologies. 
The reconciliation of indigenous and white Australians was hugely advanced by Prime Minister Paul Keating’s Redfern speech in 1992, in which he declared: “We committed the murders. 
We took the children from their mothers. 
We practiced discrimination and exclusion. 
It was our ignorance and our prejudice...” 
Likewise, former Prime Minister Kevin Rudd offered a strong apology in 2008 to the “stolen generations” of Aboriginal children taken from their families by welfare officers. 
There are many situations in which apologies are not necessary, because both sides agree to move on. 
And “non-apology apologies” – for example, “I’m sorry if you feel I have offended you” – are often worse than nothing, although they are a familiar diplomatic stock-in-trade of which I, too, have been guilty of using. 
It is also conceivable that genuine apologies may be counterproductive, because they trigger a backlash from local extremists, which may in turn fuel even more flames on the other side. 
I would, however, resist the conclusion that Japan’s apologies have been a net negative in this respect. 
These arguments will continue. 
But it is difficult to believe that when a wrong has been done, a sincere apology will not have some restorative impact. 
In public, as in private life, honest apologies are a powerful tool, and should be used less nervously and more often. 

Cambodia’s Violent Peace 
CANBERRA – Cambodia’s government has been getting away with murder. 
Not the kind of genocidal slaughter conducted by the Khmer Rouge in the 1970’s. 
Nor the scale of killing that has been roiling Syria, or that has put Ukraine, Venezuela, Thailand, and Bangladesh in the global headlines of late. 
But murder nonetheless, with Cambodian citizens deliberately targeted by their country’s security forces. 
On January 3, five striking garment workers were shot dead in Phnom Penh while peacefully demanding a minimum livable wage. 
Many others were severely injured by gunfire and beatings. 
More than 20 have been detained without trial. 
This followed deadly violence against unarmed demonstrators protesting last year’s deeply flawed national election, won, yet again, by Prime Minister Hun Sen’s ruling Cambodian People’s Party, which has dominated political life for more than three decades. 
The recent killings repeat a pattern of political violence that has recurred all too often at crucial moments in Cambodia’s history – even after the 1991 Paris Peace Agreements, which were intended to bring not only peace, but also democracy and human-rights protection to the country’s long-suffering people. 
No country in the world deserved all three more, ravaged as it was for two decades by massive United States bombing, civil war, a genocidal reign of terror by the Khmer Rouge, invasion by Vietnam, and more civil war – with some two million dead as a result. 
Hopes were high that Cambodia had been set on a transformative path by the success of the United Nations peace plan, the huge peacekeeping operation that followed, and the remarkably peaceful election of 1993 (in all of which Australia played a leading role during my time as Foreign Minister). 
In some respects, those hopes have been realized. 
The Khmer Rouge did wither away, and with it the lingering threat of renewed civil war. 
The Cambodian economy – strongly supported in recent years by aid and investment from China – has grown steadily (though it lags behind most of its regional neighbors, and concerns about corruption and political instability are preventing it from reaching its full potential). 
But Cambodia’s record on democracy and human rights since the Paris Peace Agreements has not been a good one. 
A grenade attack on an opposition rally led by Sam Rainsy in March 1997 killed 16 people and injured more than a hundred. 
That July, after an uneasy period of sharing power with Prince Norodom Ranariddh’s royalist party, Hun Sen launched a bloody coup in which his opponents were exiled, arrested, tortured, and in some cases summarily executed. 
Neither episode generated much international reaction: Hun Sen still had enough political capital from his fight against the Khmer Rouge and his cooperative role in the peace process, while Sam Rainsy was regarded as deeply flawed, and the royalist leadership as feckless. 
Cambodia-fatigue among policymakers also played a role. 
At the time, I wanted to believe that these reverses would be temporary, and there were too many like me. 
Since then, while preserving a democratic façade, Hun Sen has ruled, for all practical purposes, as an autocrat, showing scant regard for rights of free expression and association – and resorting to violent repression whenever he has deemed it necessary to preserve his and his party’s position. 
This has been accompanied by staggering levels of corruption, with Cambodia ranked 160th by Transparency International, out of 175 countries. 
There are stories, unverifiable but plausible, that 20 or more of Hun Sen’s closest associates have each amassed more than $1 billion through misappropriation of state assets, illegal economic activity, and favoritism in state procurement and contracting. 
There has also been political patronage bordering on parody, with one recent count putting the government’s size at 244 ministers and secretaries of state. 
For far too long, Hun Sen and his colleagues have been getting away with violence, human-rights abuses, corruption, and media and electoral manipulation without serious internal or external challenge. 
But things are beginning to change. 
A credible new opposition party – the Cambodia National Rescue Party – has emerged under Sam Rainsy (who looks a little more like a national leader now than just a monochromatic anti-Vietnamese crusader), gaining significant popular support. 
A large number of social-media-savvy young voters have been turning out in the streets demanding a change of government. 
Internationally, too, some pressure has been building, but not enough. 
Ed Royce, Chairman of the US House Foreign Affairs Committee, has called on Hun Sen to resign; condemnatory resolutions have been passed in a number of parliaments; and many states entered criticisms of one kind or another into the record when the UN Human Rights Council reviewed Cambodia’s human-rights record in Geneva a few weeks ago. 
But the tone of too many of these statements has been muted. 
Australia’s statements have been typical – falling over backward to avoid giving offense, and too anxious to balance criticism with praise. 
Officials are “concerned” about “recent disproportionate violence against protesters” but “welcome the Government’s stated commitment to undertake electoral reforms.” 
Australia’s new foreign minister, Julie Bishop, has talked, as foreign ministers often do, of the need to avoid unproductive “megaphone diplomacy” and to “engage, not enrage” her counterparts. 
But, it seems that no robust critique was delivered when she met privately with Hun Sen in Phnom Penh on February 22 – even though Australia’s high standing in Cambodia (not least owing to its historical role in the peace process) means that its voice certainly would have been listened to. 
There is a place for quiet diplomacy that relies on genuine engagement to encourage significant behavioral change. 
But when states behave badly enough for long enough, loud megaphones can also be in order. 
I know Hun Sen and worked well with him in the past. 
I have resisted strong public criticism until now, because I thought there was hope for both him and his government. 
But their behavior has now moved beyond the civilized pale. 
It is time for Cambodia’s political leaders to be named, shamed, investigated, and sanctioned by the international community. 

Abe’s Asian Gambit 
CANBERRA – With the world producing more history than most of us can consume right now, it is easy to lose sight of recent developments that could have even greater consequences for long-term peace and stability than recent alarming events in eastern Ukraine, Gaza, and Syria-Iraq. 
The outcome of the nuclear negotiations with Iran, the change of leadership in India and Indonesia – two of the world’s three largest democracies – and the re-energizing of the BRICS group of major non-Western states (Brazil, Russia, India, China, and South Africa) may all be such game-changers. 
But Japan’s international muscle-flexing under Prime Minister Shinzo Abe may be even more significant. 
Unless it is very carefully managed by all concerned, including the United States and Japan’s other closest Asia-Pacific allies, Abe’s makeover of Japanese foreign policy could undermine the fragile power balances that have so far kept the Sino-American rivalry in check. 
Japan is right to be concerned about China’s new regional assertiveness, and Abe’s recent diplomatic push to strengthen Japan’s relations in Southeast Asia, and with Australia and India, is understandable in that context. 
Nor is it inherently unreasonable – despite opposition at home and abroad – for his government to seek to reinterpret Article 9 of Japan’s “peace constitution” to permit wider engagement in collective self-defense operations and military cooperation with allies and partners. 
But the risks in all of this must be openly acknowledged. 
Opposition to any perceived revival of Japanese militarism is hard-wired in Northeast Asia. 
Abe is an intensely conservative nationalist, still deeply reluctant to accept the extent of Japan’s World War II guilt (even when acknowledging, as he did in Australia recently, “the horrors of the past century’s history” and offering gracious condolences for “the many souls who lost their lives”). 
His refusal to rule out future visits to the Yasukuni Shrine, with its war-glorifying Yushukan Museum alongside, fuels hardline skepticism in China. 
It also makes common cause with South Korea much more difficult, and heightens the risk of maritime territorial disputes becoming explosive. 
Less noticed, but possibly more important in the long term, have been Japan’s efforts to reshape regional security arrangements, which for many years have had three key elements. 
First, there have been the hub-and-spoke alliances of the US with Japan, South Korea, and Australia (and more loosely with Singapore, Thailand, and the Philippines). 
These alliances are accepted and well understood, if not loved, by China. 
Second, there are national defense efforts, encouraged by the US, increasingly aimed at greater self-reliance in the event that China’s rise becomes a military threat. 
This, too, has been accepted reasonably calmly, if not always quietly, by China, and has not undermined the continuing growth in bilateral economic relationships that every country in the region is developing with China. 
Finally, there have been multilateral security dialogues – the ASEAN Regional Forum and now the East Asia Summit the most prominent among them – designed to be vehicles for confidence building, and conflict prevention and management. 
These mechanisms have so far promised more than they have delivered, though not for want of continuing efforts to give them more clout. 
For all of the hype that has accompanied the US “pivot” to Asia – announced by President Barack Obama in the Australian Parliament in November 2011 – the delicate balances involved in this basic architecture have changed little for decades. 
But now Japan, with overt support from Australia in particular, seems determined to change the balance by establishing, as a counterweight to China, a much denser alliance-type relationship with selected partners. 
Abe spoke repeatedly in the Australian Parliament earlier this month of Japan’s new “special relationship” with Australia – terminology normally associated only with the strongest of alliance partnerships – and followed his address by signing an agreement for the transfer of defense equipment and technology. 
Australian Prime Minister Tony Abbott, who earlier this year described Japan as both our “best friend in Asia” and a “strong ally,” has warmly embraced the “special relationship” language. 
He consummated the love-in by expressing his admiration for “the skill and sense of honor” of the Japanese submariners who died attacking Sydney Harbor in 1942, while saying of Japan’s waging of aggressive war and wartime atrocities only that “we disagreed with what they did.” 
We have not yet seen any renewed attempt to re-establish the “Quadrilateral Security Dialogue,” comprising Japan, Australia, the US, and India, which conducted joint military exercises in 2007 and was seen by China as a hostile containment enterprise. 
But it is not hard to imagine that this is still very much on Abe’s wish list. 
The dangers should not be exaggerated. 
But, with strategic competition between the US and China as delicately poised as it is, and with the economic interests of Australia, Japan, and many others in the region bound up just as intensely with China as their security interests are with the US, rocking the boat carries serious risks. 
Countries like ours should take a clear stand when China overreaches externally (as it has in the South China Sea with its indefensible “nine-dashed line” asserting historical rights with no known justification in international law). 
The same applies when China does not behave like a good international citizen on the UN Security Council, or should it commit egregious human-rights violations at home. 
But we should be cautious about moving beyond taking stands to taking sides in the region to a greater extent than has been the norm for decades. 
Kishore Mahbubani has argued recently that we need to recognize that in China, as elsewhere, a significant internal contest between hard- and softer-liners is taking place. 
To the extent that this is the case, it is smart policy for every state in the region to speak and act in a way that helps the doves and gives no encouragement to the hawks. 

MH370’s Beacon of Hope 
MELBOURNE – The harrowing mystery of Malaysia Airlines Flight 370, which disappeared on March 8 with 239 people aboard, may be at least partly resolved within a matter of days. 
Underwater search vehicles are homing in on an area just a few kilometers wide in the vastness of the southern Indian Ocean, some 2,000 kilometers northwest of Perth. 
This is where the Boeing 777-200 is likely to have run out of fuel and crashed, according to the analysis by the UK company Inmarsat and British aviation experts of hourly signals sent automatically from the aircraft to Inmarsat’s orbiting space vehicle. 
More promising still, it is where signals, assumed to have come from the locator beacons attached to the aircraft’s “black box” flight recorders, were picked up on April 5 and over the following days by an American “pinger locator” being towed by an Australian navy vessel, the Ocean Shield. 
The Australian defense authorities now coordinating the search still say that to discover wreckage probably lying 4.5 kilometers (2.8 miles) deep, on so remote a seabed, will be like “finding a needle in a haystack.” And any subsequent recovery operation will obviously still be a huge challenge. 
During the early days of the search, almost everything that could go wrong did – from overlooked or misunderstood data to poor communication and uncoordinated and misallocated resources – as attention remained focused on the aircraft’s scheduled route from Kuala Lumpur to Beijing. 
And there were huge frustrations even when the search shifted to the Indian Ocean, as massive naval and air resources failed to find any trace of relevant surface debris. 
But, whatever the past frustrations, and possibly even bigger disappointments yet to come, the bigger and much more significant story of the search for MH370 is what has gone right. 
Simply put, it has been a magnificent demonstration of how response to human tragedy can unite rather than divide, reinforcing the impulse to cooperate rather than confront. 
And it has testified to the good sense of those who have been arguing for years, in a variety of Asian and wider global contexts, that maritime search, rescue, and disaster relief is an ideal place to start in creating confidence building mechanisms aimed at laying the foundations for conflict prevention and resolution. 
The search has involved unprecedented international cooperation, first in the South China Sea and then in the Indian Ocean, from a total of 26 countries. 
What is extraordinary is that many of these countries (like China, Japan, the Philippines, Malaysia, South Korea, and Vietnam) have been at one another’s throats over territorial and other disputes, while others (not least China and the US) are abidingly suspicious of each other’s geopolitical motives and intentions. 
Australia’s close cooperation throughout the search with China – whose citizens comprised nearly two-thirds of those aboard the ill-fated flight, and whose naval and air resources have been unceasingly devoted to the common effort – has borne immediate fruit: a highly successful visit earlier this month by Prime Minister Tony Abbott. 
An important trade deal advanced, and no issue was made of the new Abbott government’s embarrassingly fulsome embrace of US leadership in the region, and its rookie mistake in describing Japan as “our best friend in Asia” (the right formula in these cases being “We have no better friend than…”). 
It’s a reach, but tempting, to suggest that Australia’s long-term security might even be better guaranteed by spending a few million dollars on towed pinger locators and unmanned Bluefin-21 mini-submarines, with their sonars and cameras, and some serious naval infrastructure to support them, rather than the $20-40 billion currently being contemplated to renew and extend Australia’s aging combat-submarine fleet. 
It is not quite as naive as it may seem to think that the peace and security of the whole Indo-Pacific region, not to mention other equally volatile parts of the world, might be better advanced by devoting far more resources and effort to common security strategies rather than traditional military ones. 
Finding security with others, rather than against them, and concentrating on cooperative approaches to achieving global and regional public goods, seems more productive than giving free rein to crude nationalist sentiment and planning ever more sophisticated and expensive ways to destroy one another. 
The search for MH370 has shown in microcosm how much there is to be gained through peaceful cooperation. 
It should also help focus our attention on just how much there is to be lost in today’s world – a world that is far more interdependent than the one that exploded in 1914 – if we fail to apply these lessons to our broader international relationships. 
The world is a much safer and saner place when states search for and find common ground on which to work together. 

Five Reasons Why the Sky Is Not Falling 
BUDAPEST – When it comes to geopolitics, there is always a market for gloom. 
Business has been booming in this respect lately, with The Economist, Foreign Affairs, and many less exalted journals full of claims that the global order is crumbling, America’s ability (and willingness) to save it is in terminal decline, and the prospect of avoiding major conflict in the decade ahead is illusory. 
Plenty of recent events – along with the ghosts of 1914 and 1939 – have boosted the reputations, royalties, and revenues of today’s doomsayers. 
There is Russia’s adventurism in Ukraine; China’s territorial assertiveness – and Japan’s new push-back nationalism – in East Asia; continuing catastrophe in Syria and disarray in the wider Middle East; the resurgence of atrocity crimes in South Sudan, Nigeria, and elsewhere in Africa; and anxiety about renewed communal strife in India after Hindu nationalist Narendra Modi’s stunning election victory. 
But, though global political conditions are hardly as good as they could be – they never are – there are plenty of grounds for thinking that they are not nearly as bad as so many are claiming. 
Here are the five most important reasons not to lose as much sleep as some pundits say you should. 
First, Cold War II is not at hand. 
Russia and China dislike the United States’ claim to global leadership, enjoy tweaking its tail whenever they can, want greater regional influence, and (like the US itself) periodically turn their back on cooperative multilateralism. 
But they are deeply integrated into the existing global order, and have neither the ideological drive, economic interest, physical capacity, nor allied support to challenge it. 
They want greater influence in international institutions, not to overturn them. 
Second, the decline in US power and influence relative to China and other rising powers is natural, inevitable, and not a cause for alarm among those long reliant on America’s protection and support. 
It is inconceivable that the US could have maintained forever the unipolar dominance of the early post-Cold War years, when it accounted for close to 30% of global GDP and half of the world’s military expenditure. 
Others were bound to play catch-up. 
The reality is that, in absolute terms, US economic and military power is still enormous, and that it has – and will have for the foreseeable future – far more allies, friends, and influence than any of its competitors. 
What matters is how it now chooses to exercise that power. 
As I heard Bill Clinton say privately, shortly after his presidency, that choice should not be “to try to stay top dog on the global block in perpetuity, but to create a world in which we are comfortable living when we are no longer top dog on the global block.” 
Third, while rising powers’ ambition for more space and influence is a given, it is not remotely inevitable that this quest must take a military form. 
Everyone has too much to lose. 
The world’s major powers are far more interdependent financially and in terms of supply chains than they were in 1914 – the year of misguided optimism that pessimists love to cite – and the cumulative horrors of the twentieth century have fundamentally changed the normative environment. 
Bellicisme – the notion that war is noble, and can be purifying and cleansing – is dead beyond redemption. 
Fourth, the decline of reliance on military power to solve geopolitical problems is not a sign that wimps are in charge, but that adults are. 
US credibility is not at risk, for either its allies or foes, when it makes carefully calibrated choices about the balance of risk and return in using such force in particular cases. 
The recurring criticism directed at President Barack Obama for not following through on his threat to attack Syria if it used chemical weapons completely misses the point. 
The object was to stop these weapons from being used by the Assad regime, and diplomacy – backed by the threat of force – appears to have achieved just that (although there have been recent reports, unconfirmed but worrying, of both rebel use and regime backsliding). 
Of course military force needs to be kept in the toolbox, to respond to states that wage aggressive war, like Iraq in 1991. 
Military capability is also needed to meet the global responsibility to protect citizens at risk of genocide and other mass-atrocity crimes if no lesser option is available and if intervening will do more good than harm, as would have been the case in Rwanda in 1994. 
But if the cowboy days of George W. Bush are over, that is to be applauded, not lamented. 
Fifth, the international system has been responding to geopolitical challenges more effectively than is generally acknowledged. 
Despite the meltdown in their relationship over Crimea, the US and Russia have continued to work together to negotiate a diplomatic solution to the Iran nuclear issue, and (with China) develop collective Security Council responses to successive crises in Africa. 
In almost every area of major power rivalry, potentially volatile issues are compartmentalized, while cooperation elsewhere continues. 
No policymaker can be complacent. 
There is no end in sight to the Syrian nightmare, the respite in eastern Ukraine may be proving temporary, and in Sino-Japanese relations cool heads remain in short supply. Nor is there any shortage of other issues and systemic improvements, not least nuclear-arms reduction, on which to work. 
But alarmist pessimism is self-reinforcing, defeatist, and needs to be contested. 
There is plenty of reason to believe that, where it matters most, we have learned enormously from the mistakes of the past. 
If we can stay calm and levelheaded, the worst of them will not be repeated. 

Mandela for the Ages 
MELBOURNE – Without Nelson Mandela, South Africa’s apartheid nightmare eventually would have come to an end. 
Its enforcers were beyond the civilized pale, and the world’s patience with them had run out. 
But, without Mandela’s towering moral and political leadership, the transition would have been long, ugly, and bloody beyond measure. 
One Afrikaner leader, F.W. De Klerk, came to understand – late, but not too late – what the times demanded, and he thoroughly deserved to share the 1993 Nobel Peace Prize with Mandela. 
But it was Madiba – the tribal name by which South Africans of every caste and color now affectionately call him – who made the crucial difference. 
I was lucky enough, as Australia’s foreign minister at the time, to be one of the first foreign officials to greet him after his release from prison in February 1990 – just a few days later, in Lusaka, where he had flown to meet his African National Congress colleagues in exile. 
Approaching the meeting, I was excited but nervous. 
Could the reality of the man possibly match my expectations? 
Mandela had long been my personal hero, from my student days in the 1960’s, when – like so many others of my generation – I was an anti-apartheid activist. 
We knew that the risks we ran of being roughed up or arrested while demonstrating against visiting Springbok rugby teams were entirely trivial compared to the risks that he and his colleagues had been prepared to face. 
We could recite by heart the last words of his 1964 Rivonia Trial speech, one of the most thrilling affirmations of the human spirit ever uttered: “a free society…is an ideal which I hope to live for and to achieve. 
But if needs be, it is an ideal for which I am prepared to die.” 
But how much of that dignity and idealism could possibly have survived the ordeal of 27 years in prison, most of that time on Robben Island in the South Atlantic? 
I need not have worried. 
Like so many others before and since, I was captivated from the first moment by Mandela’s huge, luminescent smile, by his unending charm and grace, and by the lucid intelligence with which he discussed his country’s transition problems. 
But, above all, there was his extraordinary, almost unbelievable, lack of bitterness toward his Afrikaner jailers. 
Mandela was, in fact, as keen to talk to me as I was to meet him. 
He wanted to thank Australia for the very significant role our country had played in sustaining the pressure for change, particularly under Bob Hawke’s government, and in leading the global charge for financial sanctions on the apartheid regime. 
So, sitting face to face across the Zambian president’s dining table, it was just the two of us, for an hour or more, chatting away comfortably about everything from United Nations sanctions to the end of the Cold War to our children’s careers. 
Of all the meetings with all the leaders and other international figures around the world that I have had during all my years in public life, there is no question about which one gave me the most joy. 
Mandela is simply the most impressive and decent human being I have ever met, or am ever likely to meet. 
This was an impression, moreover, that did not fade with familiarity. 
We met a number of times in the years that followed, on his visits to Australia and in South Africa – at his home in Soweto – and on one memorable occasion when I accompanied him to the opening match of the 1995 Rugby World Cup, at Newlands Stadium in Cape Town. 
More than 50,000 South Africans – Afrikaners almost to a man, with hardly a black face in sight – were there to see their country play mine. 
And, as their new president walked out onto the ground to greet the players, every single one of them seemed to bellow in enchanted union “Man-del-a! 
Man-del-a!” 
If Mandela’s leadership can be argued, as I think it can, to have been of a once-in-a-century quality, the opportunity to experience it first-hand was a once-in-a-lifetime privilege. 
When it comes to national leadership at a time of fragility and transition, so much seems to depend on the luck of the draw. 
Will a country find itself with a Milošević or a Mugabe; an Atatürk or an Arafat; a Rabin who can see and seize the moment, and change course, or someone who never will? 
South Africa was lucky – almost miraculously so – to have had Nelson Mandela. 
His memory will be cherished for as long as history continues to be written. 

The Limits to Fighting the Islamic State 
CANBERRA – There is a long history of misconceived and over-reaching foreign military intervention in the Middle East, and it is to be hoped that US President Barack Obama’s decision to wage war against the Islamic State will not prove to be another. 
No terrorist group more richly deserves to be destroyed outright than these marauding, genocidal jihadists. 
But as the US-led mission is currently conceived and described, it is not clear whether its objectives are achievable at acceptable costs in terms of time, money, and lives. 
The basic problem is that the Islamic State’s territorial gains are being approached from three completely different perspectives, demanding three different types of operational responses. 
There is the humanitarian mission to protect civilian populations in Iraq and Syria from mass-atrocity crimes. 
There is the need to protect other states’ citizens from Islamic State terrorism. 
And there is the desire to restore states’ integrity and stability in the region. 
Obama’s rhetoric, and that of his most enthusiastic partner so far, Australia’s Prime Minister Tony Abbott, has wobbled between the first two objectives and hinted at the third, creating hopes and expectations that all three will be effectively pursued. 
But only the humanitarian mission has any realistic chance of being delivered through the four-part strategy now on the table: air strikes against Islamic State forces; training, intelligence, and equipment for Iraqi and Kurdish military forces and Syria’s non-extremist opposition; intensified international counterterrorism efforts; and humanitarian assistance to displaced civilians. 
It is obvious that Western-led military operations cannot by themselves re-establish the territorial integrity of Iraq or Syria, or restore wider regional stability. 
Military intervention may help to hold the line against Iraq’s further disintegration and the spread of the Islamic State cancer into countries like Jordan. 
But if 150,000 US troops could not stabilize Iraq in the absence of an inclusive and competent government, the limited measures on offer now simply will not suffice. 
And we should know by now that any Western military intervention with overtly political, rather than clearly humanitarian, objectives runs a real risk of inflaming sectarian sentiment. 
Things might be different if the US and other key players could simultaneously embark on a broad regional stabilization enterprise, but there are too many competing agendas to make this realistic for the foreseeable future. 
The Sunni-Shia rivalry means that Saudi Arabia and the Gulf countries will concede no meaningful role to Iran. 
Nor will the West acknowledge Iran’s centrality to any multilateral process, for fear of losing negotiating leverage with respect to Iran’s nuclear program. 
Few are willing to accept that Syria’s President Bashar al-Assad, despite his abominable record, now almost certainly must be part of the solution. 
And the open sore of the Israel-Palestine conflict plays into every other rivalry. 
The counter-terrorism objective is more inherently plausible than that of political stabilization, and domestic politics in the US, Australia, and elsewhere probably require the prominence that it has received from Western leaders. 
To the extent that their breeding ground can be destroyed, as Al Qaeda’s was in Afghanistan, there will be fewer newly minted terrorists to worry about. 
But it is difficult to believe that a military campaign of the kind now contemplated, even with substantial support from Arab countries, can achieve that objective any time soon, or at an acceptable cost, in both Iraq and in the Islamic State’s Syrian havens. 
The real burden will have to be borne, as now, by effective international cooperation in intelligence and policing. 
The competence of Iraqi and Kurdish ground forces – crucial if territory is to be taken and held – will take time to build up, and may never be achievable with the so-called moderate forces within Syria. 
Airstrikes anywhere risk civilian casualties – and thus the possibility of inflaming the very sentiments one is trying to counter. 
Moreover, airstrikes in Syria without the government’s consent or Security Council authorization will be manifestly in breach of the United Nations Charter. 
The prospect of Islamic State-inspired terrorist attacks in the US are not remotely real or imminent enough to justify reliance on the self-defense exception. 
Hearts and minds matter in counterterrorism, and they become harder to win whenever the US and its supporters embark upon military action clearly in breach of international law. 
The slow buy-in so far of Arab states to Obama’s campaign attests to the nervousness that many of them feel on all of these grounds. 
By far the most defensible rationale for military action is – and has been from the outset – the humanitarian objective: the responsibility to protect populations at risk of genocide, ethnic cleansing, and other major crimes against humanity and war crimes. 
I have argued that all of the conditions necessary in this context have been satisfied, and this will continue to be the case so long as the Islamic State maintains its horrifying modus operandi. 
Operating within this framework, US and coalition forces would clearly be entitled to disrupt, degrade, and seek to destroy the Islamic State’s capability in a way that would also serve the counter-terrorist objective. 
But the primary objective for intervention would remain unequivocally humanitarian, and as such would be much less susceptible to anti-Western blowback than any other mission. 
There may even be considerable international tolerance for some carefully defined and limited action in Syria in the event of an obvious imminent humanitarian threat. 
If the campaign against the Islamic State is defined and conducted with humanitarian protection as its primary and overwhelming objective, it should succeed not only in stopping further atrocities, but also in making large inroads into curbing the wider terrorist threat at its source. 
If the West strays from that primary goal, the enterprise is likely to end in tears, like so many others in the Middle East. 

Protecting Civilians Responsibly 
BEIJING – Would China ever be willing to host an international policy discussion about the conditions that would legitimize invading another country to stop genocide or other mass-atrocity crimes from being committed within its borders? 
Given China’s long history of antagonism to “interference in internal affairs” in general, and to “humanitarian intervention” in particular, and in view of its contribution to the UN Security Council’s long paralysis over much less coercive measures in Syria, you would be in good company if you answered, “No.” 
But you would be wrong. 
I have just been at a two-day meeting in Beijing that wrestled with just this topic. 
The meeting, hosted by the foreign ministry’s think tank, the China Institute of International Studies, brought together specialist scholars and practitioners from China and the other BRICS countries (Brazil, Russia, India, and South Africa). 
And this month, the Russian Foreign Ministry’s Diplomatic Academy will host a conference in Moscow, with local and international experts discussing the same subject. 
Both meetings are, to my knowledge, the first of their kind. 
The fact that they are happening at all – and, if my Beijing experience is any guide, in a constructive, problem-solving spirit – is an encouraging development. 
Although no outcome was formally agreed or made public, several themes emerged from the Beijing meeting. 
Taken together, they offer reason for confidence that it may be possible to recreate international consensus, so long missing in Syria, about how to deal with the hardest mass-atrocity cases. 
First, there was widespread acceptance that the “Responsibility to Protect” (R2P) doctrine, unanimously agreed by the United Nations General Assembly in 2005, is here to stay. 
R2P recognizes that sovereign states have a responsibility to protect their people from genocide, ethnic cleansing, crimes against humanity, and war crimes; that other states have a responsibility to assist them to do so; and that if a state is “manifestly failing” to protect its people, the wider international community has a responsibility to step in with “timely and decisive action,” which might in an extreme case include military action if approved by the UN Security Council. 
True, some Chinese scholars remain inclined to argue that the entire R2P enterprise – particularly its sanction of military action in exceptional cases– is just “old neo-interventionist wine in a new bottle.” 
But this did not appear to be a majority sentiment, nor did it stop anyone from engaging in lively discussion of how the R2P doctrine could be most effectively implemented in practice. 
Second, there was widespread agreement about what had caused the breakdown of consensus in the Security Council concerning how to respond to events in Syria (at least until the use of chemical weapons in August proved to be a game changer). 
The cause was not an attempt by the global South to revive outdated notions of unlimited sovereignty; rather, it was a reaction to the perceived overreach of the NATO-led military intervention in Libya in 2011. 
The Security Council’s three Western permanent members – France, the United Kingdom, and the United States (the P3) – had sought and been given a limited mandate to protect civilians, specifically invoking R2P. 
But they were perceived as then ruthlessly pursuing full-scale regime change, without securing any further agreement from the Council. 
If the P3 (now often privately, and rather more acerbically, described as FUKUS) were going to take a mile after being given an inch, then no more inches would be offered. 
Third, and most important, there was widespread agreement about how consensus within the Security Council on the hardest cases might be recreated. 
The idea was that R2P should be “enriched” by the acceptance of a complementary principle, called “Responsible Protection.” 
Floated by the Chinese scholar Ruan Zongze in a journal article last year, and evidently the subject of much internal discussion since, Responsible Protection builds upon “Responsibility While Protecting,” an approach earlier proposed by Brazil that has already gained some traction at the UN. 
The core elements of Responsible Protection, as articulated by Chinese participants in the Beijing debate, won strong support around the table. 
Tough criteria – specifically, legitimate intention, last resort, proportionality, and balance of consequences – should be clearly satisfied before any military mandate is granted, with every effort made to exhaust diplomatic solutions before more robust alternatives are embraced. 
There should be better methods of supervision and accountability to ensure that the “protection” objective remains at the heart of any response. 
And the primary emphasis of the entire R2P enterprise should continue to be prevention of mass-atrocity crimes – both their occurrence and their recurrence. 
Some in the P3 and elsewhere will see all of this as a mere spoiling operation with a more sophisticated face. 
But they will do so at their peril. 
The idea of Responsible Protection – like the Brazilian initiative that preceded it – reflects genuinely and widely felt concerns. 
If not addressed, they will make Security Council resolutions in support of military action in R2P cases almost impossible to obtain in the future. 
It remains to be seen whether China – and the other BRICS countries – will now move to champion the idea of Responsible Protection in a formal way. 
If they do, it should not be viewed as a rearguard action designed to undermine the R2P norm, but rather an effort to assume co-ownership of it. 
In terms of getting serious about saying “never again” to mass-atrocity crimes, that is about as positive a development as anyone could hope for. 

Buying into Bitcoin 
LONDON – The Internet currency Bitcoin is surrounded by uncertainty. 
Is it a speculative bubble? 
Is it really as anonymous as its proponents claim? 
Can one actually use it to purchase the legendary White Widow strain of marijuana, or to hire a hit man? 
These are certainly interesting questions, but they are diverting attention from far more important discussions about Bitcoin’s potential to drive financial-sector innovation. 
Bitcoin is so innovative, in fact, that beyond breaking the conventions of currency, it has even transcended partisan ideologies. 
Indeed, the Nobel laureate economist Paul Krugman and US Tea Party icon Ron Paul are diametrically opposed on virtually every issue but Bitcoin (both deeply dislike it). 
And yet Bitcoin’s opponents should be asking how the groundbreaking ideas that underlie it could be applied to reforming the global financial system. 
Although the 2008 financial crisis exposed profound institutional shortcomings, the response – including heightened regulatory safeguards like the 2010 Dodd-Frank Act in the United States and the Basel III banking standards – has failed to bring about the needed transformation. 
Likewise, protest movements like Occupy Wall Street, aimed at raising awareness of – and ultimately reforming – the culture of finance, have delivered mixed results. 
But the fact is that no one – except perhaps the small coterie of financial insiders who have benefited enormously from taxpayer-financed bailouts – should be satisfied with the current system, not least because another crisis, most likely accompanied by more bank bailouts, can reasonably be expected in the not-so-distant future. 
While the exact timing of the next meltdown cannot be known, one thing is certain: consideration of what kind of financial system would best serve the world in the twenty-first century would be incomplete without Bitcoin. 
After all, the technology behind it could not only help to reduce systemic risk by creating safeguards shielding the payments system from useful but unpredictable financial activities; it could also play an important role in bolstering much-needed economic growth. 
Financial institutions essentially act as matchmakers, linking investors, borrowers, and savers, and recording what people own and owe. 
In exchange for these services, financial professionals are compensated very generously. 
So, to ask whether bankers’ massive paychecks are fair is really to ask how much value is created by financial matchmaking – a question to which there is no simple answer. 
What is clear is that, by allowing a greater proportion of an economy’s wealth to be channeled toward investment and other productive economic activities, a more efficient financial-services industry boosts economic growth. 
In other words, the financial-services industry can be viewed as a kind of tax on the rest of the economy. 
And, given the high costs of financial systems that are antiquated, costly, and inefficient – in London, for example, paper checks must physically be sent from one bank to another, meaning that it takes 5-6 days for the funds to be transferred – the smaller the financial system, the better off everyone else will be. 
The inefficiency of the world’s financial system is not simply a result of obsolete rules and structures; profit-seeking is also a major factor. 
While British authorities recently announced that the transfer of physical checks would be abolished, a two-day check-clearing delay will remain. 
Given that scanned images of checks could easily be processed electronically almost instantaneously, the enduring delay can be explained only by “float” – that is, the interest earned by holding onto money for as long as possible. 
Float is just one of the many ways the financial-services industry extracts resources from the economy. 
The 3-5% charge levied by credit-card companies works out to several hundred billion dollars in annual profits for companies like Visa and MasterCard. 
Fees for wire transfers and for exchanging currency can quickly climb to 10% or more per transaction, with interruptions and complex procedures making such services even more costly. 
But there is reason for hope. 
With the innovations pioneered by Bitcoin, the fees, delays, and other inefficiencies that serve to line the pockets of those in the financial-services industry can largely be eliminated. 
Ahead of US Senate hearings last November, former Federal Reserve Chairman Ben Bernanke wrote a letter to senators saying that Bitcoin may “hold long-term promise, particularly if the innovations promote a faster, more secure, and more efficient payment system.” 
As if on cue, the US retail giant Target was hacked – another episode in a long string of major financial-data heists. 
Bitcoin, with its capacity for anonymity, could certainly help to make the global financial system more secure, saving consumers and businesses significant inconvenience and expense. 
At the same time, it offers an alternative store of value, and its use as a medium of exchange is steadily growing. 
But perhaps the most exciting innovation offered by Bitcoin is the “blockchain” – peer-to-peer software that keeps a record of all transactions and a tally of who owns what. 
The blockchain essentially serves the “ledger” function that banks do today, but at a fraction of the cost to consumers and businesses. 
Powered by an open-source algorithm and maintained by anyone who chooses to download the free software, Bitcoin marks a return to a community-based approach to money and banking, with financial services more closely connected to the people who use them. 
Large, monolithic third-party managers like today’s “too big to fail” banks would be cut out. 
Indeed, with software like the blockchain powering a new financial architecture, “the people” would effectively become the bank. 
Bitcoin and its ecosystem are still maturing, and only time will tell if current price levels reflect a speculative bubble. 
But the innovations pioneered by Bitcoin can – and therefore should – play a transformative role in building a safer, less expensive, and more effective financial system. 

Promises to Keep in 2016 
DAVOS – We live in extraordinary times. 
Each day seems to bring fresh headlines about an unfolding crisis – whether it is migration, economic volatility, security, or climate change. 
One factor common to all these complex and unprecedented challenges is poverty; so eliminating it will make overcoming them significantly easier. 
There is good reason for optimism about progress on reducing inequity. 
Since the turn of the century, remarkable strides have been taken toward a world in which every person has the chance to lead a healthy, productive life. 
Maternal deaths have almost halved; child mortality and malaria deaths have halved; extreme poverty has more than halved. 
And last year, the world signed up to finish the job. 
The centerpiece of the Global Goals to which the United Nations’ 193 countries agreed in September is to end poverty in all its forms everywhere by 2030. 
We are confident that this is not only possible, but that we will see major breakthroughs along the way, which will provide unprecedented opportunities to people in poor countries. 
Indeed, we think their lives will improve faster in the next 15 years than at any other time in history – and that their lives will improve more than anyone else’s. 
But while progress is possible, it is not inevitable. 
Success will require political will, global cooperation, and human ingenuity – a message we are taking into our various meetings and engagements at the World Economic Forum in Davos this week. 
For our part, the Bill & Melinda Gates Foundation will focus on the areas of greatest need and take risks that others can’t or won’t. 
This year, we are concentrating our efforts in three broad areas. 
First, we will continue to support the institutions that helped get us to where we are now. 
Since 2002, the Global Fund to Fight AIDS, Tuberculosis and Malaria has unlocked an unprecedented wealth of human and financial resources to combat infectious diseases that disproportionately affect the poorest. 
By providing medicines, training doctors and nurses, and building stronger health-care systems, the Global Fund has so far helped save 17 million lives. 
That is some achievement. 
And the Fund’s pledge conference later this year will be another opportunity to help build a better world. 
We need to make the most of it – not only to help save up to eight million more lives, but also to support health systems in low-income countries and thereby reduce the risk of future health crises. 
Similarly, since the start of the decade, nearly four million more people are alive today because they were immunized against infectious diseases, thanks in large part to the work of Gavi, the Vaccine Alliance. 
In the next five years, Gavi and its partners are positioned to immunize another 300 million people, helping millions more children and young people survive and thrive – and thereby boosting developing-country economies. 
Second, women and girls will be at the heart of our endeavors. 
By any measure, the world is a better place for women and girls than ever before. 
But it’s still not nearly good enough. 
They need better access to health care, especially family-planning services; expanded economic opportunities; and more decision-making power over their own lives (which in turn requires greater social participation and public leadership). 
Empowering women and girls to transform their lives is one of the smartest investments we can make. 
Improving their health and wellbeing, ensuring they get a good education, and unleashing their economic potential are fundamental to building more prosperous communities and countries. 
But we need to improve our understanding of how best to empower women to succeed. 
And in order to overcome centuries of gender inequity, we need more momentum behind this agenda. 
The Women Deliver conference in May is the next global opportunity to push for more action and for donors to demonstrate their commitment. 
Third, we will invest in innovation. 
Scientific and technological advances – from new vaccines and hardier crops to much cheaper smartphones and tablets – are among the greatest drivers of poverty reduction. 
In just the last few weeks, the world has shown that it is prepared to spend more to find new ways to provide reliable, affordable, clean energy sources. 
This is one of the most important ways to help poor people cope with climate change. 
Meanwhile, innovations in health care have already brought the world close to wiping out polio, and we expect to see dramatic results from a new triple drug therapy that could eradicate elephantiasis, which affects 120 million people. 
But the hard truth is that current funding for research and development to address the health needs of the world’s poorest people is insufficient. 
And the tools and technologies we have now aren’t enough to get us to where we need to be. 
If we want to achieve the targets established by the Global Goals for maternal health, child health, and infectious disease, we will have to double R&D funding by 2020. 
That is why we must ensure that R&D is on the agenda at the G7 summit in Japan in May, with a focus on developing and deploying products that both save lives and dramatically improve the economic prospects of the poorest. 
Sustained support for institutions like the Global Fund and Gavi, for the empowerment of women and girls, and for innovation is crucial to accelerating progress for the world’s poorest people. 
But much more can and should be done. 
The world must unite behind all efforts to eradicate poverty as a vital first step toward overcoming the many other challenges – from migration to terrorism – that we face today. 
The daily headlines all too often reflect the gap between today’s world and a world without poverty. 
But what the headlines don’t reveal is all the ways life is already getting better for those in greatest need. 
If we keep our promises to them, it will be front-page news. 

The Grand Global Health Convergence 
SAN FRANCISCO – The world is at a unique historical inflection point. 
By making today’s medicines, vaccines, and other health tools universally available – and by stepping up research efforts to develop tomorrow’s health tools – we could close the health gap between wealthy and poor countries within a generation. 
By 2035, we could achieve a “grand convergence” in global health, reducing preventable maternal and child deaths, including those caused by infectious diseases, to unprecedentedly low levels worldwide. 
What it will take is a coordinated, future-oriented investment strategy. 
A group of 25 global health and economics experts (including us) recently came together to develop such a strategy. 
In a year-long process, the group identified the tools, systems, and financing that would be needed to achieve global health convergence, and produced Global Health 2035 – an ambitious investment blueprint that would save millions of lives and bolster human welfare, productivity, and economic growth. 
With aggressively scaled-up health investments, ten million lives could be saved annually, beginning in 2035. 
And the economic payoff would be enormous: every dollar invested in low- and middle-income countries (LMICs) to achieve this grand convergence would return $9-20. 
Success will require a global commitment to ensuring that everyone can access today’s powerful health technologies and services, like childhood vaccines, treatment for HIV/AIDS and tuberculosis, and prenatal care for pregnant women. 
It will also require increased funding for the development and delivery of new health tools to redress the conditions that disproportionately kill women and children in LMICs. 
To this end, one of the central features of the convergence strategy is family planning. 
As it stands, more than 220 million women worldwide lack access to modern contraception – an inexcusable situation, given that scaling up family planning would be remarkably simple and inexpensive. 
And the benefits would be vast. 
For starters, improved access to contraception would prevent an estimated one-third of all maternal deaths, and would have a particularly large impact among those facing the highest risk. 
These include 15-19-year-old women in poor countries, who currently have the least access to contraception, and women who have multiple pregnancies in quick succession, by allowing them to space out their pregnancies. 
By reducing the rate of unwanted pregnancies, family planning also decreases the number of deaths from unsafe abortions. 
This is not only good for mothers. 
Reducing high-risk pregnancies, curbing unwanted pregnancies, and spacing out births have been shown to decrease newborn and child death rates. 
The Guttmacher Institute estimates that fully meeting women’s need for contraception would prevent 600,000 newborn deaths and 500,000 child deaths annually. 
Moreover, cutting birth rates, which are very high in many LMICs, would help to reduce the strain on these countries’ health-care systems by diminishing the costs of maternal and newborn care and immunization. At the same time, it would facilitate social change that fuels increased productivity and output. 
According to a study coordinated by the World Health Organization, the economic return from scaling up contraception in 27 countries with very high birth rates, such as Afghanistan and Chad, would exceed 8% of GDP from now until 2035. 
So, how much would it cost to ensure universal access to modern medicine and health services? 
Global Health 2035 puts the total at an additional $70 billion dollars annually, with $1 billion of this increase allocated to family planning alone. 
But most of the costs can ultimately be covered by LMICs themselves. 
In fact, the total bill for global health convergence amounts to less than 1% of the additional GDP that these countries are expected to generate in the next two decades. 
In other words, public investment of less than 1% of GDP could avert a massive ten million deaths each year. 
Innovative partnerships aimed at reducing costs can diminish this burden even more. 
A group of donor governments, foundations, the United Nations, and private-sector actors recently came together to reduce the price of a long-lasting contraceptive implant (Levonorgestrel) from $18 to $8.50 per unit in more than 50 LMICs. 
The international community must play a major role in achieving convergence. 
Specifically, it must increase investment in research and development for the diseases that affect the poor, like childhood pneumonia and diarrhea, which kill around two million children every year. 
And direct financial assistance to LMICs – for example, to fund family-planning programs and combat malaria and HIV/AIDS – will be required for years to come. 
The opportunity to achieve a grand convergence in global health outcomes is within reach. 
We need only to convince ourselves to grasp it. 

LGBT at Work 
DAVOS – When Apple CEO Tim Cook announced last year that he is gay, I was inundated by emails and telephone messages from executives around the world. 
As an “out” executive at Ernst & Young (EY), everyone seemed to want to know what I thought this meant for lesbian, gay, bisexual, and transgender (LGBT) inclusion on a global scale. 
Apple, after all, resides in fifth place on the Fortune 500 list of the world’s largest companies. 
Was this the end of the “lavender ceiling”? 
In his Bloomberg Businessweek article, Cook describes how being gay has affected him: “I’m proud to be gay, and I consider being gay among the greatest gifts God has given me. 
Being gay has given me a deeper understanding of what it means to be in the minority and provided a window into the challenges that people in other minority groups deal with every day.” 
My own experience of being “different” is multifaceted. 
Like Cook, being in the minority informed my propensity to be an inclusive leader. 
Unlike Cook, in addition to being closeted, I was a woman and an introvert, and my politics tended to differ from those of my peers in my heavily male, extrovert-dominated profession. 
Since coming out in 2011, I have been publicly truer to myself and more authentic with others. 
That has made me a better leader. 
And being out in a leadership position in a global organization has provided me a platform to talk openly on a wide range of issues. 
There is no question about it: Cook’s announcement was a huge step forward. 
And international organizations have made considerable progress in LGBT inclusion by relying on external and employee networks and non-discrimination policies. 
But most of today’s available statistics reflect progress in Europe and the United States. 
According to a recent study by the women’s advocacy organization Catalyst, 62% of Fortune 500 companies now offer health insurance to domestic partners, while 87% of Fortune 500 companies – and 94 of the top 100 – have non-discrimination policies that include sexual orientation. 
By contrast, Todd Sears, founder of Out Leadership, an advocacy group for LGBT employees, estimates that 90% of LGBT workers in Asia are closeted. 
In 78 countries, including Uganda and Nigeria, being gay is still illegal. 
Singapore recently upheld its stringent anti-homosexuality law. 
In Russia, on the same day Cook made his announcement, a memorial to Apple founder Steve Jobs was dismantled, ostensibly to comply with a law prohibiting “gay propaganda.” 
Even in the US, where members of the same sex can marry in 35 states (as I did in New York last April), in 29 states it is still legal to fire someone solely on the basis of their sexual orientation. 
In 34 states, it is legal to fire a transgender employee. 
That said, multinational companies can take several steps to further their LGBT inclusion strategies on a global scale. 
For starters, they can strengthen the “ally effect.” 
Research conducted by the Center for Talent Innovation shows that allies – people who support LGBT colleagues or work as advocates – play a decisive role in creating an inclusive community. 
In fact, 24% of the LGBT workers surveyed attribute their decision to come out professionally to their network of allies. 
Employers can create networks that invite straight colleagues to support their LGBT co-workers and sponsor LGBT individuals and groups. 
Likewise, senior executives being visibly out makes a huge difference. 
Cook is a great example. 
LGBT employees are 85% more likely to be out at companies where senior executives are out (24% versus 13%). 
At EY, our LGBT leadership participated in the “It Gets Better” video project in 2011, sharing stories for the benefit of at-risk LGBT youth. 
I took advantage of the opportunity, and, with the full support of EY’s leadership, officially came out. 
I not only talked openly about my own experiences; 
I also shared how my organization’s philosophy played an important role in my decision. 
That leads to a more general point: The more people hear, see, and know about what is going on in an organization, the more quickly cultural change takes place. 
Speaking up is an important part of that, because people not only listen to what is said, but also notice what passes without being challenged. 
Too often, when an organization does not correct a misstatement, it is taken as agreement. 
Customized solutions also help. 
Companies should meet with LGBT groups at other organizations, both locally and globally, and implement policies from the more progressive regions in which they do business (say, Europe and the US). 
But one size does not fit all. 
Strategies work best when they are tailored to fit the requirements of specific conditions, such as geographic locations, business unit type, or department function. 
Finally, companies should continue to facilitate an inclusive workplace for everyone, not just LGBT employees. 
That means shifting from a culture of diversity, with its implicit focus on “them,” to an inclusiveness-centered culture of “us.” 
Cook and I share many of the same attitudes about our LGBT identity. 
And I find that his announcement accords with my own experience: “[Being gay has] made me more empathetic, which has led to a richer life. 
It’s been tough and uncomfortable at times, but it has given me the confidence to be myself, to follow my own path, and to rise above adversity and bigotry.” 
The lavender ceiling has been cracked, but there is nowhere in the world today where inclusiveness has been fully achieved. 

Gaza and the Failure of Deterrence 
Every day in the Gaza Strip, strategic deterrence – the inhibition of attack by a fear of punishment backed up by superior military power – is being put to the test. 
The escalating spiral of violence by Israel and Gazan militants indicates not only that deterrence is failing, but also that its effectiveness depends on adherence to fundamental standards of morality. 
Some security strategists and just war theorists argue that there may be nothing morally objectionable about deterrence in cases where the lives and welfare of a civilian population are not directly affected. 
The threat of retaliation that underpins its strategic effectiveness remains implicit and hypothetical. 
However, when deterrence becomes indistinguishable from collective punishment – barred under international law by Article 33 of the Fourth Geneva Convention – it is far less likely to achieve its intended result. 
Israel, which withdrew unilaterally to the periphery of Gaza in September 2005, has been seeking to prevent Palestinian resistance fighters from lobbing rockets into its territory. 
Shortly after redeploying to the borders of Gaza, Israel severely restricted ties between Gaza and the West Bank, as well as the movement of goods in or out of Gaza. 
When a pro-Hamas parliament was elected in a free and fair election in January 2006, the United States and Israel led a campaign to prevent all banks, including Arab and Islamic banks, from dealing with the new government. 
Israel has consistently rejected Hamas’s repeated offers of a cease-fire agreement in exchange for the lifting of the siege on Gaza. 
Public opinion polls carried out by the Dialog company and published in the Israeli daily Haaretz have shown that 64% of Israelis support an official dialogue with Hamas. 
But the Israeli government and army refuse, calling Hamas “terrorists” in order to deny them legitimacy, despite previously reaching understandings in southern Lebanon with Hezbollah, which they also consider a “terrorist organization.” 
The Israelis seem to believe that their only option is to tighten the screws on Gaza. 
In the name of deterrence, movement of people and goods has been almost entirely restricted. 
Yet the Palestinian resistance has responded with more rocket attacks. 
Israeli assassination campaigns against militants have merely led to further escalation on the Palestinian side. Indeed, every time Israel’s deterrence efforts fail to produce the desired result, it ratchets up the siege in the hope that this will deliver some kind of knockout punch. 
The result has been a clear case of collective punishment in one of the most densely populated places on earth, with 3,823 persons per square kilometer. 
Upon visiting Gaza, John Dugard, the United Nations’ Special Rapporteur on Human Rights, said that “Gaza is a prison and Israel seems to have thrown away the key.” 
In January, for example, Israelis began using its monopoly on fuel supplies to punish Palestinians, a decision condemned the following month by Human Rights Watch. 
Joe Stork, Human Rights Watch’s Middle East director, rejected Israel’s justification of the fuel cuts as a way to force Palestinian armed groups to stop their rocket and suicide attacks. 
According to Stork, “the cuts are seriously affecting civilians who have nothing to do with these armed groups, and that violates a fundamental principle of the laws of war.” 
Likewise, following the Israeli air strikes on Gaza in early March that killed more than 100 Palestinians, UN Secretary General Ban Ki-moon was moved to “condemn the disproportionate and excessive use of force that has killed and injured so many civilians, including children.” 
Notwithstanding the UN Secretary General’s statement, Israel claimed self-defense, as the air strikes followed a rocket attack from Gaza that killed an Israeli civilian in the border town of Sderot. 
However, in his book Crimes of War , Michael Byers, a Duke University law professor, argues that the use of force in self-defense “must not be unreasonable or excessive,” and with regard to anticipatory action, the necessity must be “instant, overwhelming, leaving no choice of means, and no moment of deliberation.” 
In fact, Israel persistently conflates self-defense and deterrence, while employing collective punishment to advance its strategic aims. 
This conception of deterrence failed in Lebanon in 2006, with Israel forced to accept a UN-sponsored cease-fire agreement, and it is no more likely to succeed in Gaza. 
Indeed, opinion polls conducted in Gaza show a spike in support for Hamas after every Israeli escalation. 
The international community must act quickly to force the Israelis to abandon its deterrence strategy and instead work on reaching an understanding that can result in a cessation of attacks by both sides. 
Only such an understanding can permit a start to the groundwork needed for a political resolution that can permanently end both the siege of Gaza and the occupation of Palestinian lands. 

Gaza’s Crushed Childhoods 
AMMAN -- Ayman is a soft-spoken 14-year-old boy in Jabalia City, Gaza. 
His family is poor, and his parents have already sold almost all their furniture to pay for food and schooling for their children. 
Recently, after collecting a government food handout, Ayman’s father, who has been unemployed since March 2006, had to sell the milk to pay for the journey back home. 
Ayman works very hard in school and dreams of a future career. 
But, with 47 students in his cramped classroom and double shifts the norm, his learning environment is very stressful. 
Home is no refuge: the recent incursion into Jabalia was 200 meters from where Ayman lives. 
The shooting and shelling so terrorized his five-year-old sister that she still wakes up screaming at night. 
Ayman’s experience is all too familiar in Gaza’s crowded, crippled neighborhoods, where those who are least to blame for the troubles are suffering the most. 
Indeed, among Gaza’s 840,000 children – of which 588,000 are refugees – Ayman’s story is luckier than many. 
Since the recent escalation of violence that began last month, at least 33 Palestinian boys and girls have been killed and many more injured or maimed – caught in the crossfire, shot in their living rooms, or struck by explosions in their own backyards. 
On February 28, four children playing soccer were hit by a missile, which dismembered them so completely their own families could not identify their bodies. 
Ayman, his siblings, and all Gaza’s children are finding their lives diminished each day – a cruel, slow suffocation of their spirit and their dreams. 
Instead of enjoying expanding horizons, they are trapped in a virtual prison, where things that every child should be able to take for granted are instead being taken away: the right to play, to go to school, to have enough to eat, to have light to study by at night, and to feel safe in their own homes. 
The weight of one of the world’s longest-running conflicts is resting on their thin shoulders, crushing their childhood and inflicting psychological scars that may never heal. 
Palestinians were once reputed to be among the best-educated people in the Middle East; today, after years of violence, isolation, and poverty, their proud tradition of educational excellence has been shattered. 
Almost 2,000 children in Gaza have dropped out of school in the last five months. 
Those who remain must share tattered textbooks and do without crucial resources. 
The January 2008 semester exams at schools in Gaza operated by the United Nations Relief and Works Agency for Palestine Refugees in the Near East (UNRWA) found 50-60% failure rates in mathematics and a 40% failure rate in Arabic – the children’s native language. 
Despite this, Ayman insists, “I want to be an educated person. 
I want to be an engineer to build my country.” 
Let the world recall that Gaza’s crisis is a manmade disaster. 
And let the world take note that conditions are worse today than at any time since the occupation began. 
Seventy-nine percent of Gaza’s households live in poverty; eight out of ten depend on food assistance. 

Gaza Shrugs 
GAZA CITY – Palestinian President Mahmoud Abbas has now personally presented Palestine’s bid for full United Nations membership to UN Secretary-General Ban Ki-Moon. 
What remains to be seen is whether Hamas, which has controlled the Gaza Strip since June 2007, will eventually support this initiative by its bitter rival, Abbas’s West Bank-based Palestinian Authority. 
The failure for more than a year to make any progress in negotiations with Israel has convinced Abbas and his colleagues to pursue the UN option. 
And Israel’s continuing settlement construction on the West Bank has sharpened their sense that negotiations would not be productive, whereas the raft of UN resolutions supporting a two-state solution could now be put to the test. 
Moreover, it is widely believed that the Arab Spring has encouraged the Palestinian leadership to seek to change the rules of the game. 
Arabs throughout the region, though preoccupied with domestic affairs, are nonetheless pressing a new generation of leaders to support the Palestinian cause more actively. 
The collapse of Hosni Mubarak’s regime in Egypt, the subsequent departure of the Israeli ambassador from Cairo, the political upheaval in Syria, and the expulsion of the Israeli ambassador from Ankara are causing great uncertainty in Israeli leadership circles. 
Israel is more isolated regionally and internationally than ever, owing to Israeli Prime Minister Binyamin Netanyahu diplomatic failures. 
Abbas, whose bid is supported unanimously by the Arab and most Islamic countries, is convinced that the Arabs will stand with the Palestinians, regardless of the consequences. 
More than 120 countries are believed to support the Palestinian bid for statehood. 
But the Palestinians must secure the approval of the UN Security Council and the support of two-thirds of the UN General Assembly in order to gain full official recognition. 
The US has threatened to veto the resolution in the Security Council, and the US Congress has threatened to suspend American aid to the Palestinian Authority. 
Members of the European Union are still divided and continue to hope for a compromise and other options. 
Israel has denounced the Palestinian strategy as a unilateral initiative, and has threatened the Palestinians with severe reprisals. 
Israeli Foreign Minister Avigdor Lieberman suggested canceling the Oslo Accords, signed with the Palestine Liberation Organization in September 1993, which provided the basis for the creation of the Palestinian Authority in 1994. 
Israel is also considering a suspension of transfers of Palestinian tax and customs revenues, and has threatened to annex parts of the West Bank. 
At the same time, Hamas suspects that Abbas’s effort to gain UN recognition is intended to impose pressure on Netanyahu to revive peace negotiations on the basis of the 1967 borders, a position that Hamas rejects. 
Hamas believes that if Israel were to come under pressure and, for example, freeze settlement construction, Abbas’s position would be strengthened. 
Hamas slammed Abbas’s speech at the UN and his bid for statehood, because it relinquishes 78% of historic Palestine and endangers Palestinian refugees’ right of return. 
Meanwhile, the significance of the reconciliation agreement signed last May by Hamas and Fatah, the secular nationalist movement that controls the Palestinian Authority, remains uncertain. 
While some commentators were hopeful that the agreement meant that Hamas would give its tacit support to Abbas’s negotiating strategy, this is doubtful. 
Indeed, Hamas is convinced that any success for Abbas and the Palestinian Authority will further discredit its rule and increase its isolation in besieged Gaza. 
Hamas’s support for Palestinian statehood within the 1967 borders would convey at least indirect recognition of Israel. 
Yet Hamas continues to reject territorial concessions, insisting that all of historic Palestine must be under Muslim jurisdiction. 
The Palestinians in the Gaza Strip, suffering for more than four years from siege and isolation, are apathetic to the UN bid. 
They already feel alienated from the state-building efforts on the West Bank by Salam Fayyad’s government. 
Poverty and unemployment have left them frustrated and desperate, and the slowdown in implementing the Hamas-Fatah reconciliation agreement gives them little hope of meaningful change. 
If Palestine does achieve full UN membership, Palestinians recognize that it will be little more than symbolic. 
After all, more than 100 countries already recognized Palestine after Yasser Arafat declared the establishment of a state on November 15, 1988. 
Moreover, Palestinians are not convinced that UN recognition will change their daily lives as long as the international community takes no action to end the Israeli occupation on the West Bank and the siege and blockade of Gaza. 
However, the Palestinian bid at the UN will internationalize the Palestinian-Israeli conflict and discredit US mediating leverage. 
As always, the Palestinian-Israeli conflict stands perched between diplomacy and violence. 
It remains for the US, working with Israel and the international community, to break this logjam and press forward toward a settlement. 
But the ultimate failure of Abbas’s diplomatic strategy – the absence of tangible benefits even if it succeeds – will damage what is left of his credibility among the Palestinians and strengthen Hamas’s political clout. 

Gaza Then and Now 
When the Gaza Strip was plunged into darkness last week as a result of the Israeli fuel blockade, many people around the world were surprised. 
But the optimism produced by the Annapolis peace process, which included President George W. Bush’s promise of an agreement in 2008 to create a Palestinian state, was clearly unrealistic. 
Gaza is usually viewed in terms of Hamas’s overwhelming support there, but the reality is much different. 
Opinion polls conducted in Gaza by the Near East Consulting Group in late November 2007 indicated 74% popular support for a peace agreement with Israel. 
Only 15% would vote for Hamas MP’s or a Hamas presidential candidate, compared to 55% for Fatah candidates. 
The Annapolis-inspired peace process received 81% support. 
Like many territories in the region, Gaza has had a long history of foreign occupation, extending to ancient times. 
In 1949, the Arab-Israeli war ended with an armistice agreement that divided Palestine into three parts, each under separate political control. 
Israel encompassed more than 77% of the territory, Jordan was left to rule East Jerusalem and the West Bank, and Egypt took control of Gaza. 
The Palestinian Arab state envisioned by the United Nations’ 1947 partition plan, which was to include Gaza, was never established. 
Economic development in the Gaza Strip was limited under Egyptian rule, and the region suffered the burden of absorbing Palestinian refugees fleeing the fighting in the southern part of mandatory Palestine, which would later become Israel. 
Palestinians’ access to Egypt was restricted, and much of Gaza’s largely unskilled workforce was dependent on the UN Relief Works Administration, which built and maintained the local refugee camps. 
The 1967 war placed all of mandatory Palestine (as well as Sinai and the Golan) under Israeli military occupation. 
Nevertheless, although one-third of the West Bank was closed to Palestinians to make room for a few thousand Jewish settlers, only 10% of its largely rural population were refugees, many owned their land, and a variety of jobs was available. 
By contrast, 70% of the Gaza population comprised refugees, who lived in difficult conditions in scores of refugee camps and were largely dependent on work in Israel. 
At one time, more than 150,000 Gazans crossed the Erez checkpoint daily. 
Gaza’s poverty was fertile ground for Islamic radicalism. 
Sheikh Ahmad Yasin, a paraplegic refugee from the village of Jora (now on Israel’s southern coast), worked quietly to build a grass-root movement with the tacit assent of the Israeli army, which sought to encourage an alternative to the PLO. 
But, with the 1987 uprising (Intifada), Yasin’s supporters announced the creation of the Islamic Resistance Movement. 
Better known by its Arabic acronym, HAMAS, Yasin’s group competed with the secular PLO groups by staging amateurish attacks on Jewish settlers and kidnapping Israeli soldiers. 
While the 1987 Intifada brought about the Oslo process and the return of the PLO leadership, it failed to produce a real economy in Gaza. 
The flow of money to the new Palestinian Authority was evident mostly in high-rise buildings, which the PA built to deal with overcrowding. 
Non-PA groups like Hamas acquired their own weapons mostly by buying them from Israeli soldiers or on the Israeli black market. 
Later, after the Israelis withdrew from Gaza, weapons, ammunition, and cash were smuggled through tunnels from Sinai. 
During the second Palestinian Intifada, which erupted in 2000, Hamas used its weapons and explosives to attack Israelis and create their own small protectorate. 
But the more that Hamas and others attacked Israelis, the more the Israelis tightened the siege on Gaza. 
The number of Gazan workers in Israel was reduced to a few hundred, and rising unemployment and poverty empowered armed factions, gangs, and warlords – a development that intensified after Hamas’s electoral victory in 2006, which resulted in an international siege that cut off public servants’ salaries overnight. 
As a largely refugee population, most Gazans had weak social roots. 
Those with a university education left to work in either the West Bank or the Gulf States, while Gaza’s armed groups became a magnet for most young people – the only job they understood and which gave them power. 
Armed men joined Fatah, Hamas, or other groups and sub-groups, and clans like the Dugmush family (which kidnapped the BBC journalist Alan Johnston) boasted a few hundred members willing to kill for pay. 
Clearly, the false trappings of a state provided as part of the Oslo peace process have resulted in little tangible change for Palestinians. 
They got an elected president (who for a while was trapped in his headquarters), a parliament and government (whose MPs and ministers are not guaranteed passage from Gaza to the West Bank), and passports (whose numbers must be entered into Israeli computers). 
What they did not get was real sovereignty, without which it is difficult to imagine any improvement. 
Gaza’s history, and evaporating support for Hamas there, suggest that integrating Gazans into mainstream Palestinian life would not be difficult. 
But it also suggests that maintaining the current siege would merely punish a peace-loving population while strengthening the grip of its worst elements on society and public life. 

GDP Fetishism 
NEW YORK – Striving to revive the world economy while simultaneously responding to the global climate crisis has raised a knotty question: are statistics giving us the right “signals” about what to do? 
In our performance-oriented world, measurement issues have taken on increased importance: what we measure affects what we do. 
If we have poor measures, what we strive to do (say, increase GDP) may actually contribute to a worsening of living standards. 
We may also be confronted with false choices, seeing trade-offs between output and environmental protection that don’t exist. 
By contrast, a better measure of economic performance might show that steps taken to improve the environment are good for the economy. 
Eighteen months ago, French President Nicolas Sarkozy established an international Commission on the Measurement of Economic Performance and Social Progress, owing to his dissatisfaction – and that of many others – with the current state of statistical information about the economy and society. 
On September 14, the Commission will issue its long-awaited report. 
The big question concerns whether GDP provides a good measure of living standards. 
In many cases, GDP statistics seem to suggest that the economy is doing far better than most citizens’ own perceptions. 
Moreover, the focus on GDP creates conflicts: political leaders are told to maximize it, but citizens also demand that attention be paid to enhancing security, reducing air, water, and noise pollution, and so forth – all of which might lower GDP growth. 
The fact that GDP may be a poor measure of well-being, or even of market activity, has, of course, long been recognized. 
But changes in society and the economy may have heightened the problems, at the same time that advances in economics and statistical techniques may have provided opportunities to improve our metrics. 
For example, while GDP is supposed to measure the value of output of goods and services, in one key sector – government – we typically have no way of doing it, so we often measure the output simply by the inputs. 
If government spends more – even if inefficiently – output goes up. 
In the last 60 y ears, the share of government output in GDP has increased from 21.4% to 38.6% in the US, from 27.6% to 52.7% in France, from 34.2% to 47.6% in the United Kingdom, and from 30.4% to 44.0% in Germany. 
So what was a relatively minor problem has now become a major one. 
Likewise, quality improvements – say, better cars rather than just more cars – account for much of the increase in GDP nowadays. 
But assessing quality improvements is difficult. 
Health care exemplifies this problem: much of medicine is publicly provided, and much of the advances are in quality. 
The same problems in making comparisons over time apply to comparisons across countries. 
The United States spends more on health care than any other country (both per capita and as a percentage of income), but gets poorer outcomes. 
Part of the difference between GDP per capita in the US and some European countries may thus be a result of the way we measure things. 
Another marked change in most societies is an increase in inequality. 
This means that there is increasing disparity between average (mean) income and the median income (that of the “typical” person, whose income lies in the middle of the distribution of all incomes). 
If a few bankers get much richer, average income can go up, even as most individuals’ incomes are declining. 
So GDP per capita statistics may not reflect what is happening to most citizens. 
We use market prices to value goods and services. 
But now, even those with the most faith in markets question reliance on market prices, as they argue against mark-to-market valuations. 
The pre-crisis profits of banks – one-third of all corporate profits – appear to have been a mirage. 
This realization casts a new light not only on our measures of performance, but also on the inferences we make. 
Before the crisis, when US growth (using standard GDP measures) seemed so much stronger than that of Europe, many Europeans argued that Europe should adopt US-style capitalism. 
Of course, anyone who wanted to could have seen American households’ growing indebtedness, which would have gone a long way toward correcting the false impression of success given by the GDP statistic. 
Recent methodological advances have enabled us to assess better what contributes to citizens’ sense of well-being, and to gather the data needed to make such assessments on a regular basis. 
These studies, for instance, verify and quantify what should be obvious: the loss of a job has a greater impact than can be accounted for just by the loss of income. 
They also demonstrate the importance of social connectedness. 
Any good measure of how well we are doing must also take account of sustainability. 
Just as a firm needs to measure the depreciation of its capital, so, too, our national accounts need to reflect the depletion of natural resources and the degradation of our environment. 
Statistical frameworks are intended to summarize what is going on in our complex society in a few easily interpretable numbers. 
It should have been obvious that one couldn’t reduce everything to a single number, GDP. 
The report by the Commission on the Measurement of Economic Performance and Social Progress will, one hopes, lead to a better understanding of the uses, and abuses, of that statistic. 
The report should also provide guidance for creating a broader set of indicators that more accurately capture both well-being and sustainability; and it should provide impetus for improving the ability of GDP and related statistics to assess the performance of the economy and society. 
Such reforms will help us direct our efforts (and resources) in ways that lead to improvement in both. 

A National Security Blind Spot 
WASHINGTON, DC – Erin Saltman saw a disturbing trend. 
For months, the senior counter-extremism researcher at the Institute for Strategic Dialogue had obsessively tracked the profiles of more than 130 Western women who had joined the Islamic State (ISIS). 
Saltman and her team noticed that instead of journeying through Turkey to reach ISIS headquarters in Syria, the women were heading straight to Libya. 
Because women’s roles within ISIS are related mostly to reproduction and consolidating territory, Saltman was able to deduce the reason: “ISIS wasn’t just looking to have combat forces in Libya, but also to build statehood there,” she explained. “We flagged and highlighted that before security forces were aware of it.” 
To Saltman, investing time and money to think about the differences between men’s and women’s movement in ISIS wasn’t “about gender equality. 
It was about having a better grasp on the security issues at hand.” 
It’s a radical idea. 
Considering the divergent ways men and women might act, think, or respond is not just ticking a politically correct box. 
It can actually help us craft better policy and identify emerging threats. 
Yet many policymakers in the United States and around the world still don’t seem able to grasp that examining the behavior of women and men alike can improve their analysis and their proposed measures. 
New America recently conducted unprecedented research to find out whether and how, after nearly two decades of research, data, and advocacy has crystallized the crucial linkage between gender and national security, US officials consider it when formulating policy. 
The short answer is: they mostly don’t. 
That’s akin to a nearsighted person choosing to forgo glasses when surveying a new landscape. 
Ignoring the impact that gender differences have on policy effectiveness is reckless and risky. 
Many countries, including the US, pay lip service. 
Nearly 80 countries have adopted a National Action Plan to implement United Nations Security Council Resolution 1325, which sets forth a blueprint for engaging women in all aspects of security policy. 
But action plans have not translated into active consideration of the gender-differentiated effects of policies. 
According to our research, policymakers think they are overcoming their gender blind spot because more women are sitting around the table. 
Including more women on decision-making teams, it is assumed, will automatically integrate gender considerations into policy. 
That assumption has yet to be proved. 
Quite the contrary. 
Consider Germany’s refugee and immigration policies. 
Although Germany has a National Action Plan, is 11th on the Global Gender Gap Index (which ranks countries on levels of gender equality), and has a strong female chancellor and its first-ever female defense minister, it still failed at first to consider how its policy might have different effects on men and women. 
For example, most government refugee shelters didn’t provide gender-exclusive toilets and showers – a disaster for women from conservative Islamic backgrounds. 
Likewise, the intensive language program the government required for migrants didn’t account for women’s inability to attend class without childcare. 
Ultimately, such failures made those policies less effective for the entire population, and could lead to long-term security consequences for Germany. 
Our interviews also suggest that some policymakers still regard gender-blindness positively: not thinking about the possible gender-specific effects of policies, they believe, contributes to an atmosphere of greater gender equality. 
But decades of research have shown that inclusion and equality should not mean ignoring differences between underrepresented groups. 
“The consequence of policy is often the same for men and women,” one respondent told our research partners at POLITICO Focus. “Hearing myself say that gives me pause. 
I have no idea what that conclusion is actually based on — am I just regurgitating the company line?” 
In fact, the consequence of policy often isn’t the same for men and women, in part because they tend to have unequal access to opportunities and resources. 
But policymakers often claim an absence of data about different impacts, particularly data that can be mapped onto national security objectives. 
“It’s difficult to break things down by gender impact,” one person said. “Human rights and aid organizations are better at this; our [national security] tools aren’t that granular. 
And oftentimes, you’re measuring success anecdotally when it comes to things like gender and education data.” 
But plenty of research cements the gender and security connection. 
Data2X, WomanStats, and Inclusive Security are just a few of the many organizations that have made it their mission to gather in global databases this kind of gender-differentiated data and research, providing irrefutable and empirical proof that women’s status is inextricably linked to state power, stability, corruption, prosperity, and many other indicators. 
In other words, weak, unstable, corrupt, and poor states are states where women’s status is low. 
Most policymakers would draw the conclusion that strengthening and cleaning up government and promoting economic growth will improve the status of women. 
But what if the causal arrows run in the opposite direction? 
Unlike our policymakers, ISIS is not waiting for more data. 
It actively exploits gender inequality to aid recruitment and operations. 
In societies where women are treated like second-class citizens, ISIS has an easier time recruiting women with its quasi-female empowerment propaganda, like one image that shows a woman clad in a burqa with the words “Covered girl...because I’m worth it.” 
Once women have committed, they may be able to avoid suspicion and pass through security checkpoints more easily; security officials and policymakers still overwhelmingly view women exclusively as non-threatening victims of violent conflicts. 
International policymakers need to think about gender, too, in the fight against ISIS – and across all other national-security and foreign-policy contexts. 
It is certainly important to have women at the table. 
But it is equally important that all policymakers discuss the women who aren’t there and never will be. 

The Right Diet for Gender Equality 
COPENHAGEN – During the last century, the battle to secure equality for women and girls has been fought in the classroom, in the voting booth, and in the boardrooms of Fortune 500 companies. 
But if gender inequality is ever to be abolished, we can no longer afford to neglect one of its major causes and consequences: malnutrition. 
Right now, a staggering 1.6 billion people worldwide suffer from anemia, a condition strongly connected to iron deficiency – and one of the symptoms of a global nutrition crisis that disproportionally affects women. 
Indeed, anemia afflicts twice as many women as men – nearly one in three women and girls worldwide – and contributes to one-fifth of all maternal deaths. 
In 2012, the World Health Assembly endorsed a target to reduce the rate of anemia by 50% by 2025. 
But, at the current rate of progress, this target will not be reached until 2124. 
Despite hard-won gains for women, we remain a century behind schedule on an issue that is key to their health and development – and to that of their children. 
But there is hope. 
If we invest in better nutrition now, we can ensure a brighter future for girls and women everywhere – for the next hundred years and beyond. 
We can no longer treat gender discrimination and malnutrition as separate issues. 
The two are inextricably linked; they reinforce each another in a pattern that touches women at every stage of their lives. 
Malnutrition – in all of its forms – is both a cause and an effect of the profound power imbalance between men and women. 
Gender inequality begins in the womb. 
Every year, 16 million adolescent girls give birth, most in low- and middle-income countries. 
If a mother lives in an area where stunting rates are high and she is in her mid-teens, her child is more likely to be stunted – and thus more susceptible to disease and largely irreversible cognitive underdevelopment, adversely affecting their ability to benefit from education and reach their full potential. 
These children will usually go on to earn less, which increases their likelihood of living in poverty, being malnourished, and, as a result, facing a higher risk of developing chronic diseases such as diabetes and hypertension later in life. 
And, given the societal and economic biases against women in most countries, these early life circumstances place girls at an even more severe disadvantage. 
The cycle then repeats itself; these disempowered and malnourished women give birth to stunted babies, perpetuating the cycle of inequality. 
To improve nutrition outcomes for girls and women, we need to scale up proven nutrition interventions and ensure that other development programs take nutrition into account. 
It is critical, for example, that we promote early and immediate breastfeeding – an incredibly powerful tool against both stunting and obesity. 
Development policies and programs must also take gender imbalances into consideration. 
Social protection programs that improve women’s control of income transfers, for example, are linked to better nutrition outcomes for them and their families. 
In many countries, women eat last in the family, reducing their chances of getting the right nutrition. 
Maternity and breastfeeding provisions are also weak, making it difficult for women to nurse their children. 
Behavior-change programs, communication, and role modeling can all be helpful in weakening the grip of harmful social norms concerning nutrition and gender. 
Accomplishing this will require a blueprint for political action. 
On June 14, the 2016 Global Nutrition Report will launch globally. 
The report aims to assess progress, improve accountability for meeting global commitments, and recommend actions for government and key stakeholders to end all forms of malnutrition by 2030. 
The conversation must begin today. 
This week, the Women Deliver 2016 Conference – the largest meeting of girls’ and women’s advocates in a decade – is taking place in Copenhagen. 
More than 5,000 global leaders, policymakers, and advocates from 150 countries are convening to discuss, among other issues, how to break the cycle of poverty and gender inequality that undermines women’s health. 
The call for action to sever the link between nutrition and gender inequality must be loud enough to echo around the world. 
We must eliminate all factors that perpetuate gender inequality. 
And that starts with better nutrition for all. 
The next century of progress depends on it. 

Closing the Political Gender Gap 
WASHINGTON, DC – A record number of American women are running for elected office in 2018, many of them motivated by outrage over US President Donald Trump’s policies and attitudes. 
But running is not winning, and outrage alone cannot produce the kind of steady progress needed to achieve political equality. 
To produce a substantial increase in the number of women in Congress, changes that run deeper than the current electoral “pink wave” will be needed. 
With only 19.3% female representation in the House of Representatives and 23% in the Senate, the United States currently ranks 103rd in the world in terms of women’s representation in national legislatures. 
To improve its record, the US should look to countries with greater gender parity. 
At the top of that list is Rwanda, where women make up 61.3% of the lower house and 38.5% of the upper house. 
In 2003, the country adopted a new constitution that reserves 30% of parliamentary seats for women and requires political parties to ensure that women hold at least 30% of elected internal positions. 
France is one of 49 other countries that also have statutory quotas or reserved seats for women. 
Such quotas may, however, be unnecessary. 
In seven of the top ten countries for female representation, political parties have voluntarily implemented their own rules on the matter. 
Globally, over 100 political parties in 53 countries have voluntary measures in place to increase the number of women candidates and party officials. 
But, legislated or not, quotas can be controversial. 
Some claim that they are undemocratic. 
There is no doubt that they are a blunt instrument. 
Can we do better? 
A more nuanced approach would focus on eliminating the underlying, interconnected barriers that women face in getting nominated for elected office and conducting successful campaigns. 
Such obstacles include the election system itself (women fare better under proportional representation than they do in first-past-the-post systems based on single-member districts); lack of access to financing; weaker professional networks; and outside responsibilities that make it harder to take on punishing and unpredictable working conditions. 
Overcoming such structural barriers requires a comprehensive strategy for supporting women candidates. 
One of the most powerful tools is money. 
In many countries, the cost of campaigning is becoming prohibitively high for most aspirants, regardless of gender. 
But women seem to have it worse than men. 
In a 2008 survey of 292 parliamentarians around the world, the Inter-Parliamentary Union found that female MPs viewed lack of finance as a more significant deterrent to entering politics than their male counterparts did. 
This problem is particularly pronounced in the US, where parties and candidates can spend almost unlimited amounts to get elected. 
Wealthy candidates (usually men) finance their own campaigns, with some women, such as Nancy Pelosi and Dianne Feinstein, relying on their husbands’ fortunes. 
Overall, this system disadvantages women. 
Fortunately, some countries are introducing innovative measures to address this problem. 
In Georgia, for example, political parties that include at least 30% of each gender on their electoral lists receive a 30% supplement from the state budget. 
Similarly, in Ireland, political parties lose 50% of their state funding if their candidate pool includes less than 30% of either gender. 
Beyond financing constraints, women face high social and cultural barriers to political participation. 
In particular, greater care obligations, reinforced by public perceptions of a “woman’s role,” severely undermine women’s ability to run for public office. 
These issues are difficult to address directly. 
One step that could help would be for male politicians to assume more care responsibilities, thereby making the playing field more level, while demonstrating that family is a high priority for everyone. 
Likewise, new mothers should be able to bring their children to work. 
In 2015, a photo of Argentinian MP Victoria Donda Pérez breastfeeding while taking part in a parliamentary hearing went viral, as it demonstrated the commitment, capabilities, and challenges of working mothers. 
Such challenges were exemplified by the experience of Madeleine Henfling, a member of Germany’s Thuringia state parliament, who last month was barred from entering the legislative chamber with her six-week-old baby. 
Concrete policies should also be put in place to support working parents, by giving them more flexibility to meet family responsibilities. 
That is why the United Kingdom’s House of Commons is considering introducing proxy voting, as part of a broader effort to give members – male and female – parental leave. 
Women may also benefit from targeted training. 
UN Women’s recent Political Academy in Tunisia trained women candidates on local governance, the missions and roles of municipal councils, and media relations. 
Some may one day follow in the footsteps of Souad Abderrahim, who was elected the first woman mayor of Tunis with the support of the Islamist Ennahda Movement. 
Some leaders have made powerful statements in support of greater female participation in government. 
In 2015, Canadian Prime Minister Justin Trudeau gave his country its first cabinet with an equal number of men and women. 
His Spanish counterpart Pedro Sánchez has gone a step further, appointing a cabinet where women outnumber men. 
Political parties, which serve as gatekeepers for aspirants to public office, also have significant power to find creative ways to support women candidates. 
Nigeria’s two main parties, for example, will waive or reduce non-refundable nomination fees for the 2019 general election. 
One Cambodian party provides women candidates with basic campaign resources, including clothing and a bicycle. 
In past Canadian elections, political parties have reimbursed women candidates for child-care and travel expenses, and provided subsidies to women seeking nomination in constituencies where a male incumbent is retiring. 
The New Democratic Party and Liberal Party have endeavored to have women candidates run for “winnable” open seats. 
There is no one-size-fits-all solution to gender inequality in politics. 
But there is plenty that can – and should – be done to ensure that women’s voices are heard. 

Training for Gender Equality 
MUSCAT – For centuries, women around the world have struggled for even the most basic rights. 
The fight for equality has been an uphill climb – one that is far from over. 
This is certainly the case in the Middle East, where the challenges women face are typically rooted in social norms, cultural systems, and religious doctrine, and can be enshrined in law. 
In some Middle Eastern countries, women may not travel, work, or register to vote without permission from a man in her family. 
Even if it is not explicitly prohibited, joining the workforce is often very difficult for women, not least because of widespread resistance among the men who dominate these societies. 
Any woman who has sought to apply for a job knows just how vehement that opposition can be. 
The result of these norms and structures is that women in the Middle East are often subject to discrimination, isolation, and frustration. 
They are unable to participate freely in their societies or contribute to their countries’ economic development. 
But the world is changing fast. 
At a time of ever-deepening interconnectedness, people are more aware than ever of what is possible, and more motivated than ever to seek reforms – whether educational, economic, or political – that improve their lives. 
So which reforms are needed to advance gender equality? 
A central area of focus must be education. 
First and foremost, schools give girls the knowledge they need to fulfill their potential in the future. 
But it is also vital to instill in both girls and boys an understanding of the need for social and economic equality, to reflect the fundamental equality of opportunity that all deserve. 
Advancing gender equality also requires changes to policies and regulations. 
Beyond ensuring equal rights under the law, countries should work to boost the representation of women in politics and government. 
Women need to know that they can reach positions of genuine authority, even in domains from which they have historically been excluded – and they need encouragement to get there. 
The same is true for the economy. 
Women need opportunities and support to develop and run their own businesses, to innovate, and to become financially independent. 
This would benefit not only women, but also their families, communities, and the economy as a whole. 
Even women who do not own or run businesses would have much to offer, if given the chance to enter the workforce and earn their own living. 
To this end, training is crucial. 
Women need access to guidance, workshops, and longer-term training programs that prepare them to participate in the labor market, while ensuring that they know – and can defend – their rights. 
An important initiative that could provide a useful model for such efforts is the Springboard Women’s Development Programme, developed by the British Council. 
The program aims to give women the confidence and capabilities they need to make a better life for themselves, both professionally and personally; to expand their role and influence in public life; and to help support open, stable, and inclusive societies across the Middle East and North Africa. 
The key to the program’s success is its focus on empowering women to fulfill their potential. 
It helps participants explore and develop their abilities, and then apply them in practical settings, such as acquiring funding to start or expand their own businesses. 
It also prepares women to confront – and overcome – the obstacles they will inevitably face as they gain independence and influence. 
Delivered by a network of licensed trainers, the Springboard Women’s Development Programme has already been used by over 230,000 women in more than 40 countries. 
In just four years, the program has trained more than 700 women in my country, Oman, through the Ministry of Education. 
And many more women are clamoring to participate. 
Achieving gender equality in the Middle East will be a long process, requiring fundamental educational, social, and economic reforms. 
But giving women the right training now can kick-start the process, enabling half the population finally to reach their potential – to the benefit of all. 

Gender Equality and Earth's Future 
NEW YORK – Twenty years ago, the adoption by 189 governments of the Beijing Declaration and Platform for Action marked a turning point in the history of women's rights. 
This progressive blueprint remains a powerful source of inspiration in the effort to realize equal opportunities for women and girls. 
But while much progress has been made in the intervening decades, much more remains to be done to ensure that women and children are guaranteed healthy lives, education, and full social inclusion. 
In just 42 countries do women hold more than 30% of seats in the national legislature, and girls still do not have the same educational opportunities as boys in Sub-Saharan Africa, Oceania, and western Asia. 
Gender equality is not just the concern of half of the world's population; it is a human right, a concern for us all, because no society can develop – economically, politically, or socially – when half of its population is marginalized. 
We must leave no one behind. 
This is a year of global action. 
Governments will adopt a new set of Sustainable Development Goals, work together to draft a meaningful climate agreement, and craft a framework to provide the financial resources needed to deliver on a global sustainable development agenda. 
Those participating would be wise to remember that inclusive sustainable development can be realized only when all human rights – including gender equality – are protected, respected, and fulfilled. 
The three of us – each from different continents – support these international processes. 
We share a common motivation for our work: protecting our planet for our children and grandchildren, and ensuring the development of a world where all people – regardless of their gender, race, religion, age, disability, or sexual orientation – have an equal opportunity to achieve their aspirations. 
It is critical that we continue to engage men and boys actively in the fight against gender-based discrimination and violence. 
We have an opportunity to secure a better future and raise a new generation of girls and boys who respect one another and work together to protect the rights of all people. 
The implications of not providing girls with equal voices, choices, and opportunities affect not just their lives, but the future of the planet. 
Efforts to promote inclusive sustainable development and fight climate change are inextricably linked. 
If we care about development, we must care about the consequences our greenhouse-gas emissions are having around the world. 
And if we do not take urgent action, we will irreparably damage the natural systems on which life depends. 
This is not a threat that we can set aside until we have eradicated poverty worldwide. 
Nor is it a problem that we can leave to future generations to address. 
Left unchecked, climate change – along with other unsustainable patterns of development – could wipe out the gains of recent decades. 
All countries – developed and developing – have a role to play in ensuring a stable world for our children. 
Women are among those most vulnerable to the impacts of unsustainable practices and climate change, because they often have no independent income or land rights. 
In many countries, women are responsible for the provision of water and food for their families. 
And when the usual sources of these resources are disrupted, women are forced to travel farther and spend more time working for less return. 
Scarcity requires them to make difficult choices like pulling children out of school or deciding which family member can afford to skip a meal. 
In many homes around the world, women are at the heart of the household's nexus of water, food, and energy – and thus often know firsthand about the challenges and potential solutions in these areas. 
In our conversations with women around the world, we hear about their struggles, but also their ideas, many of which, if applied, could facilitate change. 
Women are the most convincing advocates for the solutions that they need, so they should be at the forefront of decision-making on sustainable development and climate-change mitigation. 
Over the coming weeks, during the 59th session of the Commission on the Status of Women in New York, the international community will take stock of the progress that has been made toward achieving what was pledged 20 years ago in Beijing and assess where more efforts are needed. 
This year will be crucial. 
With the Financing for Development conference in July, the Special Summit on Sustainable Development Goals in September, and the UN Climate Change Conference in December, we have the opportunity to integrate gender equality and women's empowerment fully into the effort to promote sustainable development and fight climate change. 
The three of us wake up every morning thinking about how to make this happen. 
Everyone should. 
We call on all women and men to join us in making their voices heard loudly and in seizing this opportunity for a just and equitable future for all. 

Gender and the Arab City 
BEIRUT – One of the top priorities for the United Nations Sustainable Development Agenda is to make cities “inclusive, safe, resilient, and sustainable.” 
City leaders can take a simple step that would go long a way toward achieving this goal: putting the needs of women and girls at the center of the urban planning process. 
By 2030, the majority of the world’s population will live in urban areas. 
And yet, while increased urbanization – and the economic access, mobility, and greater autonomy that accompanies it – will generate new opportunities for women, ensuring gender equality will also become more difficult. 
This concern is especially relevant to the Arab world. 
In many Arab communities, urban space is, by default, male space. 
Men act as if they “own” the street, which is reflected in how they walk and how they treat women in public. 
In many Arab cities, as is true elsewhere, men are also far more likely than women to litter, reinforcing the perception that men consider public spaces to be their personal property. 
The irony is that the Arab “street” has long been a stage for feminist progress. 
Even before Arab women raised their voices during the 2011 Arab Spring, urban spaces played host to feminist protests and served as a political barometer for the rest of society. 
But urban feminism is not widely studied by city planners in the Arab world. 
Awareness of how public space in Arab cities is gendered is rare, and little information has been collected on how women affect – or are affected by – planning decisions. 
Without a deeper understanding of the socio-spatial needs of Arab women, the region’s streets will remain the domain of men. 
While sexual harassment is common in Arab cities, attention to gendered urban space is not only about safety. 
Although many women in Arab cities do risk verbal and physical abuse when they are in public, they must also contend with issues like poor sanitation, limited access to toilets and clean water, and little privacy. 
Marginalized groups – like migrants, ethnic and religious minorities, young girls, elderly women, and the disabled – are particularly vulnerable to discrimination. 
Solutions, therefore, must consider the full range of social and cultural challenges that prevent women and girls from moving freely in urban settings. 
To help cities in the Arab region progress toward greater inclusivity, governments should focus on four key reforms. 
For starters, city planners should cooperate with women’s groups to conduct safety audits and map high-risk areas. 
By analyzing crime data, for example, planners could determine where to focus improvements such as better lighting and additional policing. 
When women’s organizations are involved in these types of decisions, cities become safer for women, which in turn improves their access to social, economic, cultural, and political opportunities. 
Next, education systems must be reconfigured to encourage more women and girls to pursue careers in architecture, planning, and urban design. 
In most Arab cities, planning processes are inaccessible to much of the population; they are even less accessible to women. 
To change the patriarchal status quo, we must encourage more young women to enter these fields, and to design modern spaces that are sensitive to women’s needs. 
Third, cities need standardized methods for measuring women’s rights in urban environments. 
One way to achieve this would be to establish scoring systems created by and for women; surveys could include questions about legal frameworks, engagement in urban planning decision-making, public transportation habits, and views on housing, recreation, and safety. 
Finally, urban planners must rethink how they fill public spaces. 
Consider, for example, historic statues; in many cities, only men are lionized in bronze. 
Why not women? 
If gender equality was a criterion in commissioning public art, young women and men would grow up knowing that their city was a place where everyone is honored, protected, and respected. 
Urban planning is never gender-neutral, and leaders in Arab cities, in particular, must work hard to account for all residents’ views and desires. 
For women and girls, requirements include safe streets, well-maintained public facilities, and gender-specific amenities – such as nursing rooms for mothers. 
In a truly safe city, everyone’s rights are considered, everyone can access public spaces, and everyone is involved in the planning process. 
If planners consistently applied such principles to their work, the Arab city would naturally become a catalyst for female empowerment. 
And when cities become engines of opportunity for women, everyone benefits. 

The Perils of Planned Extinctions 
HONOLULU – A cynical move is underway to promote a new, powerful, and troubling technology known as “gene drives” for use in conservation. 
This is not just your everyday genetic modification, known as “GMO”; it is a radical new technology, which creates “mutagenic chain reactions” that can reshape living systems in unimaginable ways. 
Gene drives represent the next frontier of genetic engineering, synthetic biology, and gene editing. 
The technology overrides the standard rules of genetic inheritance, ensuring that a particular trait, delivered by humans into an organism’s DNA using advanced gene-editing technology, spreads to all subsequent generations, thereby altering the future of the entire species. 
It is a biological tool with unprecedented power. 
Yet, instead of taking time to consider fully the relevant ethical, ecological, and social issues, many are aggressively promoting gene-drive technology for use in conservation. 
One proposal aims to protect native birds on Hawaii’s Kauai Island by using gene drives to reduce the population of a species of mosquito that carries avian malaria. 
Another plan, championed by a conservation consortium that includes US and Australian government agencies, would eradicate invasive, bird-harming mice on particular islands by introducing altered mice that prevent them from producing female offspring. 
Creating the “daughterless mouse” would be the first step toward so-called Genetic Biocontrol of Invasive Rodents (GBIRd), designed to cause deliberate extinctions of “pest” species like rats, in order to save “favored” species, such as endangered birds. 
The assumption underlying these proposals seems to be that humans have the knowledge, capabilities, and prudence to control nature. 
The idea that we can – and should – use human-driven extinction to address human-caused extinction is appalling. 
I am not alone in my concern. 
At the ongoing International Union for the Conservation of Nature (IUCN) World Conservation Congress in Hawaii, a group of leading conservationists and scientists issued an open letter, entitled “A Call for Conservation with a Conscience,” demanding a halt to the use of gene drives in conservation. 
I am one of the signatories, along with the environmental icon David Suzuki, physicist Fritjof Capra, the Indigenous Environmental Network’s Tom Goldtooth, and organic pioneer Nell Newman. 
The discussions that have begun at the IUCN congress will continue at the United Nations Convention on Biological Diversity in Mexico this December, when global leaders must consider a proposed global moratorium on gene drives. 
Such discussions reflect demands by civil-society leaders for a more thorough consideration of the scientific, moral, and legal issues concerning the use of gene drives. 
As I see it, we are simply not asking the right questions. 
Our technological prowess is largely viewed through the lens of engineering, and engineers tend to focus on one question: “Does it work?” 
But, as Angelika Hilbeck, President of the European Network of Scientists for Social and Environmental Responsibility (ENSSER) argues, a better question would be: “What else does it do?” 
When it comes to the GBIRd project, for example, one might ask whether the “daughterless mouse” could escape the specific ecosystem into which it has been introduced, just as GMO crops and farmed salmon do, and what would happen if it did. 
As for the mosquitos in Hawaii, one might ask how reducing their numbers would affect the endangered hoary bat species. 
Ensuring that these kinds of questions are taken into account will be no easy feat. 
As a lawyer experienced in US government regulations, I can confidently say that the existing regulatory framework is utterly incapable of assessing and governing gene-drive technology. 
Making matters worse, the media have consistently failed to educate the public about the risks raised by genetic technologies. 
Few people understand that, as MIT science historian Lily Kay explains, genetic engineering was deliberately developed and promoted as a tool for biological and social control. 
Those driving that process were aiming to fulfill a perceived mandate for “science-based social intervention.” 
Powerful tools like genetic modification and, especially, gene-drive technology spark the imagination of anyone with an agenda, from the military (which could use them to make game-changing bio-weapons) to well-intentioned health advocates (which could use them to help eradicate certain deadly diseases). 
They certainly appeal to the hero narrative that so many of my fellow environmentalists favor. 
But the fact is that we have not created the intellectual infrastructure to address the fundamental challenges that gene drives – not to mention other powerful technologies – raise. 
And now we are supposed to suspend our critical faculties and trust the techno-elites’ promise to use gene drives responsibly in the service of seemingly positive environmental goals. 
No open public discussion is needed, apparently. 
But why should we blindly believe that everything is under control? 
In my view, the focus on using gene-drive technology for conservation is a ruse to gain public acceptance and regulatory cover. 
Why expose something to public scrutiny and possible restraints when you can usher it in through the back door by pretending it will do some good? 
The risks are too obvious for gene-drive advocates to risk talking about them. 
In my 20-plus years of researching and reporting on transgenic technologies, I thought I had seen the worst of the false promises and hype that they engender. 
But gene drives are unlike anything we have witnessed, and amount to the ultimate test of our self-control. 
Can we really trust science to guide us, or do we recklessly throw in our lot with technological “silver bullets” as the way forward? 
Fortunately, we still have a choice. 
The fact that gene drives can change the basic relationship between humanity and the natural world is both a challenge and an opportunity. 
We can do now what we should have done a long time ago, with regard to both nuclear and transgenic technologies: start paying more attention to the dangers of human ingenuity – and more respect to the genius of nature. 

Belly-Up Brazil? 
SAO PAULO – After years of impressive growth, Brazil’s economic prospects appear increasingly dim. 
Since the World Cup ended in July, economic activity has plummeted, inflationary pressures have intensified, and consumer and business confidence have collapsed, leading many economists to slash their growth forecasts for this year. 
So just how sick is Brazil’s economy, and how will its malaise affect the outcome of the presidential election in October? 
At first glance, Brazil’s weak growth appears ephemeral, and President Dilma Rousseff should be well positioned to win a second term. 
Over the last 12 years, her Worker’s Party (PT) has delivered the country’s strongest per capita GDP growth in more than three decades; reduced income inequality with an extensive system of social transfers that reaches one-third of Brazilian households; and reduced formal unemployment to a record-low 4.5%. 
But even a cursory look at recent economic data reveals that Brazil’s growth model may well be hitting a stagflationary wall. 
In fact, Brazil most likely experienced a technical recession during the first half of this year. 
And annual growth during Rousseff’s presidency has probably averaged less than 2% – the slowest for any Brazilian president since the 1980s, when the country began its transition from hyperinflationary basket case and serial defaulter to stable and increasingly prosperous middle-income economy. 
Moreover, had the government not cut taxes and delayed much-needed increases in gasoline and electricity prices, average annual inflation would stand at 7.5% – a level not reached in decades. 
In services, where the government has taken no measures to suppress inflation, the rate exceeds 9%. 
Dig deeper, and one finds that the economy’s foundations are plagued with fragilities and imbalances. 
Though overall economic activity is weak, the current-account deficit has reached a 12-year high of 3.5% of GDP. 
Industrial production is 7% below its pre-crisis peak in 2008. 
This, together with the decline in manufactured goods as a share of total exports, from 54% a decade ago to 37% today, points to a substantial loss of competitiveness. 
Even the economy’s apparent strengths – a thriving service sector and low unemployment – rest on unsustainable credit policies. 
Of course, rapid credit growth is a natural consequence of declining real interest rates. 
But, in Brazil, lending by state-owned banks has outpaced that of private banks significantly since 2008, meaning that lending at deeply subsidized rates has largely driven the increase in bank credit, to 58% of GDP (roughly double the rate eight years ago). 
Against this background, Brazil is preparing for its most important presidential election since its transition from dictatorship to democracy in 1985 – and the polls do not bode well for Rousseff. 
Despite higher incomes and lower inequality, 70% of Brazilians have expressed a desire for change. 
This is not surprising, in view of the street protests that erupted last year over the poor quality of public services and rising prices. 
But is Rousseff’s government entirely to blame? 
The short answer is no. 
While Rousseff’s government is largely responsible for the recent bout of cyclical weakness and social upheaval, Brazil’s problems are rooted in a broader unwillingness to shake off the yoke of policies adopted during more than two decades of military rule. 
The 1994 Plano Real, a macroeconomic stabilization program, together with subsequent structural reforms, enabled Brazil finally to quash inflation and ride a wave of cheap global liquidity and surging Chinese demand for commodities. 
As the government attempted to direct these gains toward wealth redistribution, public expenditure rose and the social-benefits system – underpinned by so-called “acquired rights” – became increasingly rigid. 
Brazil needs a new growth model, based on four key elements: tighter fiscal policy, looser monetary policy, a reduced role for state-owned banks in credit provision, and measures to lower Brazil’s astronomical private lending costs. 
The next government, whether of the left or the right, will also face the unenviable task of reforming the acquired-rights system to make social benefits more flexible and affordable. 
Its approach will determine whether Brazil goes the way of Venezuela, which is currently mired in stagflation, or Chile, widely regarded as Latin America’s best-run economy. 
Given the protections afforded to acquired rights, the process of rooting out economic distortions and restoring Brazil’s finances to a stable equilibrium will require a lengthy process of constitutional reform. 
And, though the transition will undoubtedly be painful, it is essential to Brazil’s future economic growth and development. 
Whether or not the next government can do what is needed will depend on its ability to unify the electorate and a disparate group of regionally focused political parties. 
But, first, it must reject the temptingly easy – but ultimately damaging – route of raising taxes and doubling down on redistributive policies. 
That path leads to Venezuela – and to a far less stable and prosperous Latin America. 

China’s Bad Dream 
LONDON – Since his first address as China’s president last year, Xi Jinping has been espousing the so-called “Chinese Dream” of national rejuvenation and individual self-improvement. 
But the imperative of addressing the unprecedented amount of debt that China has accumulated in recent years is testing Xi’s resolve – and his government is blinking. 
The Chinese government’s uncertain ability – or willingness – to rein in debt is apparent in its contradictory commitment to implement major structural reforms while maintaining 7.5% annual GDP growth. 
Given that China owes much of its recent growth to debt-financed investment – often in projects like infrastructure and housing, meant to support the Chinese Dream – any effort to get credit growth under control is likely to cause a hard landing. 
This prospect is already prompting the authorities to delay critical reforms. 
To be sure, China’s debt/GDP ratio, reaching 250% this month, remains significantly lower than that of most developed economies. 
The problem is that China’s stock of private credit would normally be associated with a per capita GDP of around $25,000 – almost four times the country’s current level. 
There are strong parallels between China’s current predicament and the investment boom that Japan experienced in the 1980s. 
Like China today, Japan had a high personal savings rate, which enabled investors to rely heavily on traditional, domestically financed bank loans. 
Moreover, deep financial linkages among sectors amplified the potential fallout of financial risk. 
And Japan’s external position was strong, just as China’s is now. 
Another similarity is the accumulation of debt within the corporate sector. 
Corporate leverage in China rose from 2.4 times equity in 2007 to 3.5 times last year – well above American and European levels. 
Nearly half of this debt matures within one year, even though much of it is being used to finance multi-year infrastructure projects. 
Making matters worse, much of the new credit has originated in the shadow-banking sector at high interest rates, causing borrowers’ repayment capacity to become overstretched. 
One in five listed corporations carries gross leverage of more than eight times equity and earns less than two times interest coverage, weakening considerably these companies’ resilience to growth shocks. 
To be sure, China’s situation is more extreme than Japan’s. 
At its peak, Japanese investment stood at 33% of GDP, compared to 47% in China. 
This is a substantial difference, especially considering that China’s per capita GDP amounts to only 19% of Japan’s at its highest level, and that its debt has already reached 60% of Japan’s. 
Moreover, the accumulation of debt in China – 71 percentage points of GDP over the last five years – has been far sharper than in Japan, where the debt level grew by only 16 percentage points over the five-year period before its bust. 
That is all the more reason to believe that Japan’s experience can provide important insight into the risks that China faces. 
After Japan’s bubble burst, annual GDP growth, which averaged 5.8% in the four years preceding the bust, plummeted to 0.9% for the next four years. 
With bad debt left to fester on banks’ balance sheets, growth vanished and deflation set in. 
While private debt as a share of GDP stabilized, public debt increased by 50% in the five years after the bust. 
The collapse of China’s credit bubble would likely cause annual GDP growth to drop to 1-2%, on average, for the subsequent four years, assuming a 2% annual decline in capital expenditure and a still-respectable consumption-growth rate of 3-5%. 
Consolidated public-sector debt would rise to 100% of GDP. 
This is a relatively modest prediction. 
Without automatic stabilizers or a strong financial-stability framework underpinned by deposit insurance, coping with the downside risks of the potentially destabilizing financial reforms that the government is pursuing will be difficult enough; a credit shock could prove disastrous. 
China’s debt tipping point is to be found in its massive real-estate bubble. 
According to the investment bank UBS, new urban housing supply has far exceeded marginal underlying demand from urban population growth. Indeed, almost half of the formal increase is not an increase at all, but merely recognition of rural workers who have been living and working in cities for some time. 
The impact of a sharp decline in real-estate prices would be far-reaching. 
After all, property collateral is the bedrock of the Chinese financial system, with estimates of banks’ direct and indirect exposure to real estate ranging from 66% to 89% of GDP. 
Complicating matters further is the government’s lack of options for stabilizing property markets. 
In fact, a key part of the problem is that China’s response to cyclical weakness always entails more housing construction. 
China’s lack of automatic stabilizers places the tension between reform objectives and growth imperatives in sharp relief. 
The only way for the government to shore up growth in the short run is to pursue more debt-driven stimulus, as it did earlier this year. 
But this will also cause China’s debt burden to continue to grow, with bad debt increasingly crowding out good credit. 
If China’s leaders continue to choose debt-fueled growth over reform, they will only delay, and possibly prolong, the inevitable slowdown. 
That would turn Xi’s Chinese Dream into a more elusive prospect. 

Genetics' Information Revolution 
Unlocking the secrets of the human genome would be impossible without the computerized manipulation of massive amounts of data, including the majority of the three billion chemical units that comprise our own species' genetic blueprint. 
But what this "bioinformatics" revolution has provided, above all, is stark confirmation of the evolutionary basis of all life on Earth. 
Sequence data, whether from proteins or nucleic acids, are well suited to computer processing because they are easily digitized and broken down into their constituent units. 
Simple computer programs can compare two or more strings of these units and evaluate degrees of similarity, search huge databases to match new sequences against known ones, and cluster groups of sequences in the form of a family tree. 
The implications of research on the first proteins to be studied almost half a century ago were profound. 
These sequences were all rather small--insulin has only about 50 amino acids, depending on the species--but the variation between species was clear. 
My own interest began with one of these simple molecules 40 years ago, when I was a postdoctoral student in Sweden. 
Fibrinopeptides are short sequences that are relatively easy to purify and have the virtue of changing significantly from species to species. 
As a result, we were able to show a strong correspondence between the fossil record and most of the changes that were observed in the fibrinopeptide sequences. 
So it was obviously possible to interpret the evolutionary past in terms of existing genetic sequences. 
But advances in computing were indispensable to further progress. 
In 1965, Robert Ledley began the first real sequence database, the Atlas of Protein Sequence and Structure. 
In 1967, researchers produced a genetic tree of a score of animals and fungi that had virtually the same branching order as would have been drawn by a classical biologist, even though their computer was utterly ignorant of the comparative anatomy, paleontology, embryology, and other non-molecular attributes of these creatures. 
Finally, in 1970 a splendid computer innovation enabled the proper alignment of amino acid sequences (which is vital to all subsequent data management). 
The interpretation of sequencing data then developed along two dimensions. 
First, there was a natural interest in the relationships between organisms. 
The assumption was that random changes occur along all limbs of a genetic tree, but depending on the protein, only some small fraction survives. 
If these survival rates were constant, then distances separating existing sequences could be calculated. 
A second kind of comparison focused on so-called paralogous proteins, which are descended from a common ancestor within the same creature as a result of gene duplications. 
Both types of comparison showed that new proteins come from old ones, just as evolutionary theory would predict. 
Duplications of parts of a DNA genome occur constantly in all organisms, mainly as a result of random breakage and reunion events. 
Most of these duplicated segments are doomed to oblivion, because any proteins their genes produce are redundant. 
Occasionally, however, a slightly modified gene product proves adaptively advantageous, and a new protein is born. 
Often its function is very similar to the old one, but occasionally a drastic change occurs. 
Then, in 1978, DNA sequencing came into wide use. 
Almost immediately, a flood of fresh genetic information overwhelmed the existing protein sequence database. 
A second storehouse, GenBank, was established, but initially it concentrated exclusively on DNA sequences. 
And yet the interesting information resided in the translated DNA sequences, that is, their protein equivalents. 
It was one of those rare moments of opportunity when an amateur could compete with professionals. 
So I began my own database, mostly using translated DNA sequences; 
I called it NEWAT (New Atlas). 
Armed with a very primitive computer and some very simple programs written by an undergraduate student, we began matching every new sequence against all previously reported sequences and found many wholly unexpected relationships. 
By the time the Human Genome Initiative was launched at the end of the 1980's, the amount of data was no longer the limiting factor in the development of new knowledge; suddenly, managing it was. 
Many scientists were skeptical about the human genome project. 
The human genome, they pointed out, contained a hundred times more amino acid sequences than the existing databases. 
So how would the genes be identified? 
How can you match up something that's never been found? 
But every gene in a genome is not an entirely new construct, and not all protein sequences are possible--otherwise, the number of different sequences would be vastly greater than the number of atoms in the Universe. 
Only a miniscule fraction of possible sequences has ever occurred, through duplication, multiplication, and modification of a small starter set of genes. 
As a result, most genes are related to other genes. 
I was confident that bioinformatics would enable us to identify all genes merely by sequence inspection. 
But after the completion of the first dozen microbial genomes, about half the genes remained unidentified--a level that has persisted through the first hundred genomes to be completed, including the human genome. 
Even one of the most studied organisms, E. coli , has an abundance of genes whose function has never been found. 
Still, the benefits of deciphering genomes have been tremendous. 
The promises of quick medical applications may have been over-stated. 
But the inherent value is immeasurable: the ability to grasp who we are, where we came from, and what genes we humans have in common with the rest of the living world. 


Harnessing the Genomics Revolution 
CAMBRIDGE – Just 13 years after the successful completion of the Human Genome Project, the power of genomics applications to spur innovation is already becoming apparent. 
Indeed, though the genomics revolution is just getting underway, it is becoming a transformative agent in the global economy – one that promises to bring far-reaching social and environmental benefits. 
In the United States alone, the $3.8 billion in public funds invested in the Human Genome Project has already generated close to $1 trillion in economic returns and more than 300,000 jobs. 
According to the OECD, genomics will become a central component of many economic sectors, including health care, the environment, agriculture, animal health, biotechnology, alternative energy, forensics, justice, and security. 
With the pace of innovation continuing to accelerate, this prediction will likely be fulfilled even sooner than anticipated. 
The area where genomics-driven innovations have attracted the most attention is health. 
Rapid progress toward truly “personalized medicine” is occurring, with patients’ DNA profiles being translated into more individualized, predictive, and preventive medical care. 
Already, studies to identify genes associated with common diseases – including some that represent significant health, economic, and social burdens, such as cancer, diabetes, cardiovascular disease, and obesity – are beginning to enable doctors to use patient DNA information to inform clinical care. 
And researchers are identifying genetic variations that influence the effects of drugs, allowing safer and more effective administration of medication to manage pain and treat some cancers, as well as cardiovascular and psychiatric diseases. 
Taking these developments a step further, the Precision Medicine Initiative, launched in the US last year, is pursuing innovative trials of targeted drugs for adult and pediatric cancers, introducing customized combination therapies, and honing its understanding of drug resistance. 
In the longer term, the project aims to create a research cohort of more than a million volunteers whose shared genetic data, biological samples, and lifestyle information will form the foundation for precision medicine in a large number of human diseases. 
But health care is far from the only area influenced by the genomics-driven revolution. 
There have been game-changing developments in other fields as well, many with proven potential to help address global challenges, such as ensuring food security and safeguarding the environment in the face of a rapidly growing global population, expected to reach 9.6 billion in 35 years. 
Selection of high-value traits using genomics is giving farmers, and the food industry in general, the tools to produce more and better foods. 
Rice crops in Southeast Asia, for example, can now be flood-resistant. Beef, dairy, and swine herds produce higher output. 
The burgeoning fishery and aquaculture sector is benefiting from species with better yields and greater resistance to disease and stress. 
Moreover, by providing detailed information on biodiversity and the interactions within ecosystems, genomics is driving the development of innovative environmental-protection strategies. 
Forests are a prime example. 
By broadening our understanding of commercially valuable traits, such as insect resistance, wood quality, growth rates, and adaptation to climate change, genomics has helped to improve the sustainability of tree breeding and forest management. 
Canadian and Chinese researchers are also using genomic analysis of the microbial communities living in hydrocarbon deposits to develop new bioprocesses that will make oil and gas extraction greener, by enhancing resource recovery, reducing water and energy use, and minimizing greenhouse-gas emissions. 
The promise of genomics is seemingly limitless. 
But if that promise is to be fulfilled, major challenges must be overcome. 
In health care, in particular, we need to continue generating solid evidence of the value of moving personalized medicine into routine practice. 
Furthermore, rigorous economic analyses are needed to guide policies on health-care coverage and reimbursement. 
Above all, important questions surrounding patient privacy, technology access, reporting of incidental findings, discrimination, and counseling must be answered, so that thoughtful and forward-looking public policies can be devised. 
To this end, mechanisms to ensure broad public discussion and participation must be strengthened. 
Even at this early stage, it is clear that genomics is set to transform science and technology and sustain a wave of far-reaching innovation. 
Now is the time for countries and regions to embrace genomics research and technologies, and to start translating them into effective solutions to major global, regional, and local challenges. 

The Geography of Elections 
PARIS – In many countries, where you live tends to be an accurate predictor of what or whom you are voting for. 
This was most evident in the maps of the electoral geography of voting for “Leave” and “Remain” in the United Kingdom’s June referendum on European Union membership. 
A similar pattern can be found in the distribution of votes in the 2012 US presidential election or in French support for Marine Le Pen’s National Front in the 2015 regional elections. 
It is very likely to be found in the United States’ upcoming presidential election. 
Many citizens live in places where a large share of their neighbors vote the same way they do. 
This voting geography is indicative of a deep economic, social, and educational divide. 
Affluent cities, where university graduates concentrate, tend to vote for internationally-minded, often center-left candidates, while lower middle-class and working-class districts tend to vote for trade-adverse candidates, often from the nationalist right. 
It is no accident that mayors from the center-left govern New York, London, Paris, and Berlin, whereas smaller, struggling cities tend to prefer hard-right politicians. 
Regional or local voting patterns are as old as democracy. 
What is new is a growing correlation of spatial, social, and political polarization that is turning fellow citizens into near-strangers. 
As Enrico Moretti of the University of California at Berkeley emphasized in his book The New Geography of Jobs, the salience of this new divide is unmistakable: university graduates account for half of the total population in the most affluent US metropolitan areas, but are four times less numerous in worse-off areas. 
Economic shocks tend to exacerbate this political divide. 
Those who happen to live and work in traditional manufacturing districts caught in the turmoil of globalization are multiple losers: their jobs, their housing wealth, and the fortunes of their children and relatives are all highly correlated. 
In fascinating new research, MIT’s David Autor and his co-authors have explored the political consequences. 
They find that US districts where the economy was severely hit by Chinese exports have responded by replacing moderate representatives with more radical politicians – either from the left or the right. 
Globalization, therefore, has resulted in both economic and political polarization. 
For too long, governments have neglected this divide. 
Some put faith in trickle-down economics, others in a monetary-policy-driven revival of growth and employment, and still others in fiscal redistribution. 
But these solutions have delivered little respite. 
Evidence speaks against the naive hope that prosperity will eventually reach all areas. 
Modern economic development relies heavily on interactions, which in turn require a high density of firms, skills, and innovators. 
It puts a premium on agglomeration, which is why larger cities tend to thrive, while smaller cities struggle. 
Once an area has started losing skills and firms, there is little hope that the trend will naturally reverse. 
Being without a job can quickly become the new normal. 
Aggregate demand expansion hardly alleviates the pain. 
Even if it remains true that a rising tide lifts all boats, it does not do so in an even way. 
For those who feel left out, stronger national growth often means even more prosperity and dynamism in the better-off cities, and little, if any, gain for themselves – hence a sharper, even more unbearable divide. 
Growth itself has become divisive. 
And whereas fiscal transfers help counter inequality and fight poverty, they do little to repair the social fabric. 
Furthermore, their long-term sustainability is increasingly in doubt. 
In her inaugural address, British Prime Minister Theresa May committed herself to a “unionist” approach to the country’s economic and social woes. 
US presidential candidates have also rediscovered the strength of the demand for national and social cohesion. 
Similar concerns will no doubt be raised in the coming French presidential campaign. 
Yet, if the ends are clear, politicians are often clueless about the means. 
In the US presidential campaign, trade protection is fashionable again. 
But, while import restrictions may alleviate the pain of some manufacturing districts, they will not prevent companies from relocating where growth opportunities are the strongest. 
They will not protect workers from technological change. 
And they will not recreate yesterday’s development patterns. 
Most prominently in the UK, but elsewhere as well, economic migration is increasingly being called into question. 
But here, too, while restricting the entry of Eastern European workers may alleviate wage competition or stem the rise in housing prices, it will not change the relative fate of small and big cities. 
Rather than claiming the opposite, politicians should acknowledge that there are no quick fixes to the uneven geography of modern economic development. 
Inconvenient as it may be, the rise of the metropolis is a fact – one that should not be resisted, because it is not a zero-sum game. 
Big cities do yield aggregate economic benefits. 
What public policy must do is ensure that economic agglomeration does not threaten equality of opportunity. 
Governments cannot decide where companies locate; but it is their responsibility to ensure that, although where you live affects your income, where you were born does not determine your future. 
In other words, public policy has a major responsibility in limiting the correlation between geography and social mobility. 
As Raj Chetty of Stanford and others have shown, this is far from being the case in the US, and similar patterns can be observed in other countries. 
Infrastructure can help. 
Efficient transportation, quality health services, and broadband Internet access can help smaller cities attract investment in sectors that do not rely on agglomeration effects. 
Back-office services, for example, may have an advantage in being located where office space and housing are cheap. 
Finally, there is a case for limiting the selfishness of better-off areas. 
The distribution of competences between national and subnational levels, as well as the structure of taxation, was defined in a very different environment. 
To mitigate the geo-economic divide, they may have to be rethought fundamentally. 

The Global Economy Confronts Four Geopolitical Risks 
CAMBRIDGE – The end of the year is a good time to consider the risks that lie ahead of us. 
There are of course important economic risks, including the mispricing of assets caused by a decade of ultra-low interest rates, the shifts in demand caused by the Chinese economy’s changing structure, and European economies’ persistent weakness. 
But the main longer-term risks are geopolitical, stemming from four sources: Russia, China, the Middle East, and cyberspace. 
Although the Soviet Union no longer exists, Russia remains a formidable nuclear power, with the ability to project force anywhere in the world. 
Russia is also economically weak because of its dependence on oil revenue at a time when prices are down dramatically. 
President Vladimir Putin has already warned Russians that they face austerity, because the government will no longer be able to afford the transfer benefits that it provided in recent years. 
The geopolitical danger arises from Putin’s growing reliance on military action abroad – in Ukraine and now in Syria – to maintain his popularity at home, using the domestic media (now almost entirely under Kremlin control) to extol Russia’s global importance. 
Russia also uses its gas exports to Western Europe and Turkey as an economic weapon, although Turkey’s recent decision to source gas from Israel shows the limits of this strategy. 
As Putin responds to this and other challenges, Russia will remain a source of substantial uncertainty for the rest of the world. 
China is still a poor country, with per capita GDP at roughly a quarter of the US level (on the basis of purchasing power parity). 
But, because its population is four times larger, its total GDP is equal to America’s (in PPP terms). 
And it is total GDP that determines a country’s ability to spend on military power, to provide a strategically significant market for other countries’ exports, and to offer aid to other parts of the world. 
China is doing all of these things on a scale commensurate with its GDP. 
Looking ahead, even with the more moderate growth rates projected for the future, China’s GDP will grow more rapidly than that of the US or Europe. 
China is now expanding its strategic reach. 
It is asserting maritime claims in the East and South China Seas that conflict with claims by other countries in the region (including Japan, the Philippines, and Vietnam). 
In particular, China is relying on the so-called “nine-dash line” (originally created by Taiwan in 1947) to justify its claim to most of the South China Sea, where it has created artificial islands and asserted sovereignty over their surrounding waters. 
The US characterizes China’s policy as “anti-access area denial”: an effort to keep the US Navy far from the Chinese mainland and therefore from the coasts of America’s allies in the region. 
China also is expanding its geopolitical influence through initiatives like the Asian Infrastructure Investment Bank, aid programs in Africa, and its “One Belt, One Road” plan to establish maritime and territorial links through the Indian Ocean and Central Asia, extending all the way to Europe. 
The current Chinese political leadership wants a peaceful and cooperative relationship with the US and other Western countries. 
But, looking to the future, the challenge for the US and its allies will be to deter future generations of Chinese leaders from adopting policies that threaten the West. 
In the Middle East, much of the world’s focus has been on the threat posed by ISIS to civilian populations everywhere – including Europe and the United States. 
But the bigger issue in the region is the conflict between Shia and Sunni Muslims, a divide that has persisted for more than a thousand years. 
For most of that time, and in most places, the Shia have faced discrimination – and often lethal violence – at the hands of Sunnis. 
Thus, Saudi Arabia and other Sunni-ruled Gulf states view Iran, the region’s Shia power, as their strategic nemesis. 
Saudi Arabia, in particular, fears that Iran wants to settle old scores and attempt to shift custodianship of Islam’s holy sites in Mecca and Medina to Shia control. 
A conflict between Saudi Arabia and Iran would also be a fight over the vast oil riches of the Arabia Peninsula and the enormous financial wealth of small Sunni states like Kuwait and Qatar. 
The final source of risk, cyberspace, may soon overshadow all the rest, because borders and armies cannot limit it. 
The threats include denial-of-service attacks on banks and other institutions; unauthorized access to personal records from banks, insurance companies, and government agencies; and industrial espionage. 
Indeed, widespread theft of technology from US companies led to a recent agreement between China and the US that neither government will assist in stealing technology to benefit its country’s firms. 
These are important issues, but not nearly as serious as the threat that malware poses to critical infrastructure – electricity grids, air traffic systems, oil pipelines, water supplies, financial platforms, and so on. 
Recent cases of malware use have been attributed to China, Iran, Russia, and North Korea. 
But states need not be involved at all: Individuals and non-state actors could deploy malware simply by hiring the needed talent in the international underground marketplace. 
Cyber weapons are relatively cheap (and thus widely accessible) and capable of reaching anywhere in the world. 
They are the future weapons of choice for attacking or blackmailing an adversary. 
And we still lack the ability to block such attacks or to identify unambiguously their sources. 
These four sources of risk constitute an unusually serious set of geopolitical challenges. 
By highlighting them, I don’t mean to downplay the importance of other issues – US monetary policy, weak commodity prices, debt crises, and the like – that are likely to affect the global economy in the year ahead. 
What’s special about the threats emanating from Russia, China, the Middle East, and cyberspace is that they will persist and threaten our economic future for years to come. 

Good Riddance to 2018 
MADRID – Sadly, 2018 will not be remembered as a year of political and diplomatic success. 
Though the international order had already begun to erode in 2017, the global political environment became downright chaotic, combustible, and hostile this year. 
That is no coincidence, as these are perhaps the three adjectives that best describe the United States under President Donald Trump. 
Since January 2018, when the Trump administration announced tariffs on imported solar panels and washing machines, the year has been marked by an escalating “trade war,” waged primarily – but not exclusively – by the US against China. 
The ongoing tariff disputes have seriously undermined the World Trade Organization and deepened mutual distrust in Sino-American relations. 
For its part, China this year eliminated presidential term limits, raising fears that President Xi Jinping’s so-called new era will end the period of collective leadership ushered in by Deng Xiaoping’s reforms, which were themselves a corrective to Mao’s cult of personality. 
This move could also herald a further deviation from Deng’s trademark foreign-policy restraint. 
Similarly, Russian President Vladimir Putin was reelected in March, to no one’s surprise. 
Under Putin, Russia has been re-emerging as a geopolitical force. 
And yet, its economy is essentially stagnant, owing in part to its excessive dependence on hydrocarbons. 
In the absence of growth, Putin has relied on foreign policy to shore up his domestic popularity. 
For example, Putin’s campaign press secretary welcomed the British government’s response to the nerve-agent attack on Sergei and Yulia Skripal, because it may have mobilized Putin’s supporters in the run-up to the presidential election. 
And the Kremlin’s recent decision to blockade Ukrainian ports in the Sea of Azov may also have been designed to boost Putin’s domestic approval rating, among other goals. 
The danger now is that both the US and Russia will cease to implement the 1987 Intermediate-Range Nuclear Forces Treaty, posing a new and acute threat to Europe in particular. 
Meanwhile, the Middle East has continued to serve as a battlefield for some of the world’s most violent conflicts. 
Though the Islamic State (ISIS) has continued to lose ground, it is far from defeated – contrary to what Trump has claimed – and the death toll in Syria’s civil war continues to climb. 
Likewise, the humanitarian calamity in Yemen has deepened, though negotiations that ran aground in 2016 have at least resumed and made some progress. 
In Afghanistan, what is widely regarded as the longest-running war in US history continues, and it is estimated that the Taliban now controls more territory than at any time since their government was overthrown in 2001. 
Despite some recent developments in the aforementioned conflicts, the underpinnings of the Trump administration’s general strategy in the Middle East remained intact in 2018. 
The US has reaffirmed its support for the axis of Israel, Saudi Arabia, and the United Arab Emirates, which it regards as a bulwark against Iran. 
In May, the Trump administration moved the US embassy in Israel to Jerusalem. 
That same month, it abandoned the 2015 Iran nuclear deal and announced an abusive re-imposition of extraterritorial sanctions, which reflects the increasing weaponization of the US dollar. 
Moreover, by siding with the Saudi government over his own intelligence agencies in the murder of journalist Jamal Khashoggi in October, Trump has made clear that opposing Iran and purchasing US arms is one of the quickest ways to his heart. 
The result of his broad approach to the Middle East has been to empower military hardliners throughout the region. 
In fact, Israel and Iran this year engaged in their first-ever direct military encounter. 
Trump has also contributed, in one way or another, to the advance of populism around the world in 2018. 
In Latin America, Mexican President Andrés Manuel López Obrador (AMLO) and Brazilian President-elect Jair Bolsonaro have shown that “populism” can encompass diverse ideologies. 
While both claim to speak for “the people” against “the elites,” the leftist AMLO was elected partly as a rebuke to Trump, whereas Bolsonaro embraces a Trump-like brand of right-wing nationalism, and enjoys the support of many Brazilian elites. 
The Russian philosopher Aleksandr Dugin, often regarded as one of the Kremlin’s main ideologues, argues that “populism should unite right-wing values with socialism, social justice, and anti-capitalism.” 
This “integral populism,” he believes, is perfectly illustrated by Italy’s current governing coalition, which comprises the anti-establishment Five Star Movement and the nationalist League party. 
In October, Italy’s government instigated a conflict with the European Union (which has fortunately subsided) by proposing a budget that defied EU fiscal rules. 
Italy’s leaders justified their policies in the name of an outdated interpretation of “sovereignty,” one similar to that of the United Kingdom’s Brexiteers, whose haphazardness has left the UK’s future shrouded in uncertainty. 
There were a few positive developments in 2018. 
Certainly, the easing of tensions between the US and North Korea, and the even deeper rapprochement between North and South Korea, should be welcomed. 
Much credit belongs to South Korean President Moon Jae-in, who used the occasion of the Winter Olympics in Pyeongchang to reach out to North Korean leader Kim Jong-un. 
Trump’s subsequent turn toward diplomacy – which led to his historic summit with Kim – should also be applauded, though his administration has yet to achieve anything more than symbolic progress toward denuclearization of the Korean Peninsula. 
The result of the US midterm elections was also good news. 
Democratic control of the House of Representatives means that, from January 2019, there will be more checks on Trump’s policies. 
And there have been welcome developments in the Republican-controlled Senate, where a recent resolution condemning Saudi Crown Prince Mohammed bin Salman for the murder of Khashoggi, and another to end US support for the Saudi campaign in Yemen, passed with bipartisan support. 
In Europe, the prospects for 2019 will depend primarily on three factors: Brexit, German Chancellor Angela Merkel and French President Emmanuel Macron’s push for EU reform, and the European Parliament election in May. 
In each case, one hopes that the supporters of democracy, the rule of law, European integration, and multilateralism will prevail. 
Those who oppose these principles have had a rather good year. 
But they would be mistaken to think that those who uphold them have lost the will – and the ability – to cultivate a spirit of cooperation and harmony. 

Last Man Standing 
LONDON – Much of modern geopolitics seems to be following the plot from Game of Thrones, with many countries under so much political and economic stress that their only hope is that their rivals collapse before they do. 
So their governments cling to power while exploiting rivals’ internal weaknesses. 
Russian President Vladimir Putin is the prime example. 
His recent campaigns in Syria and Ukraine may look like the actions of a geopolitical buccaneer. 
But the root of his adventurism is domestic weakness. 
Russia’s annexation of Crimea, for example, was in large part an attempt to provide Putin’s regime with renewed legitimacy following a winter of discontent, during which demonstrators took to the streets to protest his return to the presidency. 
Rival powers – most notably the United States and the European Union – have introduced sanctions in the hope of widening cracks in the Russian elite, exploiting the fact that Putin has not diversified his economy away from oil and gas. 
Putin, in turn, is hoping that Russia’s economy stays afloat long enough for Ukraine to collapse. 
To hasten that process, the Kremlin has left no lever of destabilization unpulled: It has launched military incursions, manipulated Ukraine’s politics, used energy blackmail, and engaged in information warfare. 
Putin believes that the EU suffers from the same flaws as the former Soviet Union, regarding it as a utopian, multinational project that will crumble under the weight of its contradictions. 
Here, too, the Kremlin has done its best to help the process along, by supporting far-right parties throughout the EU. 
Putin seems to be hoping that if the United Kingdom votes for “Brexit” and the National Front’s Marine Le Pen is elected President of France, the EU will lose its ability to maintain the sanctions. 
He hasn’t stopped with Europe. 
After Turkish forces shot down a Russian warplane near its border with Syria in November, Putin adopted a series of measures designed to destabilize Turkey from within. 
He imposed economic sanctions, spread rumors of corruption in President Recep Tayyip Erdoğan’s inner circle, invited the leader of a Kurdish party to Moscow, and allegedly sent arms to the militant Kurdistan Workers’ Party (PKK). 
The political scientist Ivan Krastev believes that “Putin seems to have dug in for a long-term policy of sapping Turkey’s economy and undermining Erdoğan politically.” 
Elsewhere in the Middle East, Saudi Arabia’s monarchy and Iran’s theocracy are in a race for survival. 
The Iranian economy is a wreck after years of international sanctions, and the government has not yet managed to take advantage of the nuclear deal it struck with the US to rebuild it. 
But it has managed to rally public support by posing as a leader of the world’s Shia Muslims and undermining Saudi Arabia in Iraq, Syria, Bahrain, and Yemen. 
Predicting the collapse of the House of Saud has become a mainstay of Middle East commentary. 
But Saudi Arabia is betting that it can keep oil prices low enough for long enough to destabilize Iran and put the US shale-energy industry out of business. 
The Saudi oil minister, Ali al-Naimi, has said that he will not cut production even if prices hit $20 a barrel. 
“If the price falls, it falls,” he said. “Others will be harmed greatly before we feel any pain.” 
Farther east, the Chinese juggernaut is beginning to stumble. 
The analyst Minxin Pei speculates that the Chinese Communist Party’s rule may be about to come to an end. 
“Growth is slowing,” he writes. “The party is in disarray, because the rules it has established to limit internecine political warfare have collapsed…. 
Middle-class acquiescence is beginning to erode because of environmental degradation, poor services, inequality, and corruption.” 
China’s rulers, for their part, are betting that they can survive a sharp economic slowdown and that the country will outgrow the US, changing the balance of power in Asia. 
One reason for President Xi Jinping’s optimism is the dire state of US politics. 
For years, Congress has been gridlocked on domestic reforms, and now the world is contemplating the consequences of a victory by Donald Trump in November’s presidential election. 
Chinese nationalists hope that the decline of America’s relative power in East Asia will cause it to pull back, as it has from other regions, including the Middle East and Europe. 
An article published last month in China’s People’s Daily speculated that a Trump administration would snub key Asian allies such as Japan and South Korea, allowing China to become the dominant military power in the Pacific. 
Even if Hillary Clinton wins the election, they think that the American public has lost its appetite for internationalism and that the country will turn its back on free trade and foreign intervention. 
Trying to undercut a rival – even at the risk of harming oneself – is a familiar tactic in the world of business, where firms engage in price wars, hoping their competitors will go bust first and exit the industry. 
But it has been less common in geopolitics. 
In his 1992 book The End of History and the Last Man, Francis Fukuyama argued that the world had reached the end of socioeconomic development. 
Liberal democracy, he concluded, was the “last man,” the end point of this development. 
He could not have been more wrong. 
Today, the world’s great powers are no longer claiming to be the last man; all they can do is hope to be the last man standing. 

The Return of Geopolitics to Europe 
BERLIN – With Russia’s military invasion and annexation of Crimea, and the subsequent war in eastern Ukraine, President Vladimir Putin has made it abundantly clear that he has no intention of respecting the inviolability of borders and the primacy of international legal norms. 
It is time for Europeans to end their wishful thinking of a continental order determined by the rule of law. 
The world, unfortunately, isn’t like that. 
It is much harder, and power rules. 
Russia’s military intervention in Syria and Europe’s refugee crisis underscore this point. 
Europe must recognize that if it doesn’t take care of its geopolitical interests, sooner or later crises in its neighboring regions will arrive on its doorstep. 
Unlike the United States, Europe is not a continental island insulated by oceans. 
It is the western end of the giant Eurasian land mass. 
Eastern Europe, the Middle East, and North Africa are its direct neighbors, and this unstable neighborhood poses the greatest security risks to Europe in the twenty-first century. 
How should Europe deal with a Russia that is again pursuing great-power politics and making almost the same mistakes as the Soviet Union, which similarly relied on authoritarianism to try to reconcile the ambitions of a military superpower with the reality of a moderately developed and scarcely modernized economy? 
Russia is Europe’s neighbor, which means a modus vivendi is essential. 
At the same time, Russia’s geopolitical ambitions makes it a continual threat to Europe’s security. 
For that reason, a strong transatlantic relationship remains indispensable for Europe, as is the revival of its own deterrence capabilities. 
In the short term, the relationship with Russia will probably be dominated by efforts to end the war in eastern Ukraine, safeguard NATO territory in the east, and prevent the crisis from expanding toward the southwest and the Balkans. 
Beyond the current crisis, however, a much more fundamental strategic challenge is emerging. 
Europe is currently pursuing a policy vis-à-vis China – the emerging world power of the twenty-first century – that is based on an unrealistic and inconsistent mix of concern for human rights and for corporate profits. 
Here, too, Europe must demonstrate much greater awareness of the geopolitical risks and its own best interests. 
China, located at the eastern end of Eurasia, is planning to reopen the continental Silk Road through Central Asia and Russia in the direction of Europe. 
The pragmatic explanation for this gigantic strategic project (with an investment volume of about $3 trillion) is the need to develop western China, which has so far benefited little from the coastal regions’ economic success. 
In reality, however, the project is of paramount importance mostly in geopolitical terms: China, a land power, wants to challenge the potential economic and political influence of the US, a naval power, in Eurasia. 
In practical terms, China’s Silk Road project will create a strategic alternative to Western transatlantic structures, with Russia either accepting a role as a permanent junior partner or risking serious conflict with China in Central Asia. 
But the choice of an Eastern or Western orientation is not in Europe’s interest. 
On the contrary, such a choice would tear Europe apart both politically and economically. 
Europe, which is most closely tied to America in normative and economic terms, needs the transatlantic security guarantee. 
That is why, in dealing with Russia, the European Union should pursue a course of steadfast adherence to its principles and to NATO. 
Yet it simultaneously needs good relations with China and cannot block the Silk Road project. 
So, in dealing with China, Europe must be clear about its interests, which will require a high degree of unity. 
Meanwhile, the refugee crisis highlights the paramount importance for Europe of the Balkan Peninsula (including Greece), which is the land bridge to the Near and Middle East. 
Turkey is even more important for European interests in this regard. 
European leaders gravely miscalculated at the start of Turkey’s EU accession talks, believing that close ties would make the Middle East’s conflicts Europe’s problem. 
As current experience shows, in the absence of firm ties with Turkey, Europe’s influence in the region and beyond – from the Black Sea to Central Asia – is practically zero. 
Domestic developments in Turkey under President Recep Tayyip Erdoğan and the renewed militarization of the Kurdish question make a political approach anything but easy. 
But Europe has no alternatives (and not only because of the refugees). 
This is all the more true given that Russia’s emergence in Syria and the Kremlin’s de facto alliance with Iran are once again pushing Turkey toward Europe and the West, which means that there is a real chance for a new start. 
Nonetheless, the potential for European influence in the Middle East remains low, and the region will remain dangerous in the long term. 
Indeed, Europe should avoid taking sides in the conflict between Shia and Sunnis or between Iran and Saudi Arabia. 
Instead, Europe’s interests would be best served by pursuing a course of strategic ambiguity. 
That is not true, however, in the eastern Mediterranean. 
Indeed, the entire Mediterranean region, including the strategically located North African coast, plays a crucial role in Europe’s security calculations. 
The choice is between a mare nostrum or a region of instability and insecurity. 
In the same vein, the EU’s Africa policy must finally abandon post-colonial thought patterns in favor of the pursuit of Europe’s own interests. 
The priorities must be the stabilization of North Africa, humanitarian aid, and long-term support for political, economic, and social progress. 
And closer ties should include opportunities for legal migration to Europe. 
The return of geopolitics means that the fundamental choice facing Europe in the twenty-first century will be between self-determination and external domination. 
How Europe addresses this question will determine not only its own fate, but also that of the West. 

The World George H.W. Bush Made 
CAMBRIDGE – I have worked for four US presidents, Democrats and Republicans alike, and perhaps the most important thing I have learned along the way is that little of what we call history is inevitable. 
What happens in this world is the result of what people choose to do and choose not to do when presented with challenges and opportunities. 
George H.W. Bush, the 41st president of the United States, was presented with more than his share of challenges and opportunities, and the record is clear: he left the country and the world considerably better off than he found them. 
I worked for and often with Bush for all four years of his presidency. 
I was the National Security Council member responsible for overseeing the development and execution of policy toward the Middle East, the Persian Gulf, and Afghanistan, India, and Pakistan. 
I was also brought into a good many other policy deliberations. 
Bush was kind, decent, fair, open-minded, considerate, lacking in prejudice, modest, principled, and loyal. 
He valued public service and saw himself as simply the latest in the long line of US presidents, another temporary occupant of the Oval Office and custodian of American democracy. 
His foreign policy achievements were many and significant, starting with the ending of the Cold War. 
To be sure, that it ended when it did had a great deal to do with four decades of concerted Western effort in every region of the world, the defeat of the Soviets in Afghanistan, the deep-seated flaws within the Soviet system, and the words and deeds of Mikhail Gorbachev. 
But none of this meant that the Cold War was preordained to end quickly or peacefully. 
It did, in part, because Bush was sensitive to Gorbachev’s and later Boris Yeltsin’s predicament and avoided making a difficult situation humiliating. 
He was careful not to gloat or to indulge in the rhetoric of triumphalism. 
He was widely criticized for this restraint, but he managed not to trigger just the sort of nationalist reaction that we are now seeing in Russia. 
He also got what he wanted. 
No one should confuse Bush’s caution with timidity. 
He overcame the reluctance, and at times objections, of many of his European counterparts and fostered Germany’s unification – and brought it about within NATO. 
This was statecraft at its finest. 
Bush’s other great foreign policy achievement was the Gulf War. 
He viewed Saddam Hussein’s invasion and conquest of Kuwait as a threat not just to the region’s critical oil supplies, but also to the emerging post-Cold War world. 
Bush feared that if this act of war went unanswered, it would encourage further mayhem. 
Days into the crisis, Bush declared that Saddam’s aggression would not stand. 
He then marshaled an unprecedented international coalition that backed sanctions and the threat of force, sent a half-million US troops halfway around the world to join hundreds of thousands from other countries, and, when diplomacy failed to bring about a complete and unconditional Iraqi withdrawal, liberated Kuwait in a matter of weeks with remarkably few US and coalition casualties. 
It was a textbook case of how multilateralism could work. 
Two other points are worth noting here. 
First, Congress was reluctant to act on Saddam’s aggression. 
The vote in the Senate authorizing military action nearly failed. 
Bush, however, was prepared to order what became Operation Desert Storm even without congressional approval, given that he already had international law and the United Nations Security Council on his side. 
He was that determined and that principled. 
Second, Bush refused to allow himself to get caught up in events. 
The mission was to liberate Kuwait, not Iraq. 
Fully aware of what happened some four decades earlier when the US and UN forces expanded their strategic objective in Korea and tried to unify the peninsula by force, Bush resisted pressures to expand the war’s aims. 
He worried about losing the trust of world leaders he had brought along and the loss of life that would likely result. 
He also wanted to keep Arab governments on his side to improve prospects for the Middle East peace effort that was to begin in Madrid less than a year later. 
Again, he was strong enough to stand up to the mood of the moment. 
None of this is to say that Bush always got it right. 
The end of the Gulf War was messy, as Saddam managed to hang onto power in Iraq with a brutal crackdown on Kurds in the north and Shi’a in the south. 
A year later, the Bush administration was slow to respond to violence in the Balkans. 
It might have done more to help Russia in its early post-Soviet days. 
Overall, however, the administration’s foreign policy record compares favorably with that of any other modern US president or, for that matter, any other contemporary world leader. 
One last thing. 
Bush assembled what was arguably the best national security team the US has ever had. 
Brent Scowcroft was the gold standard in national security advisers. 
James Baker was arguably the most successful secretary of state since Henry Kissinger. 
And with them were Colin Powell, Dick Cheney, Robert Gates, Larry Eagleburger, William Webster, and others of standing and experience. 
All of which brings us back to George H.W. Bush. 
He chose the people. 
He set the tone and the expectations. 
He listened. 
He insisted on a formal process. 
And he led. 
If, as the saying goes, a fish rots from the head, it also flourishes because of the head. 
The US flourished as a result of the many contributions of its 41st president. 
Many people around the world benefited as well. 
We owe him our collective thanks. 
May his well-deserved rest be peaceful. 


Empowering Europe’s Roma 
BUDAPEST – Across Europe, millions are suffering from unemployment and the prospect of a long period of economic stagnation. 
But no group has been harder hit than the Roma. 
There are more than ten million Roma living in Europe, mostly concentrated in the Balkans and in the European Union’s newest member states, especially Romania, Bulgaria, Slovakia, and Hungary. 
What is truly shocking is that their living conditions have actually deteriorated since many of them became EU citizens. 
At the same time, the majority population’s attitude has become more hostile almost everywhere in Europe. 
The two trends are mutually reinforcing: marginalization breeds contempt, and vice versa. 
The only escape from this trap is investment in education, which would pay enormous social dividends. 
Consider, for example, that Roma represent more than 20% of new entrants into the labor force in the above-mentioned countries. 
The good news is that we know how to prepare Roma children to be productive members of society. 
My foundations have been active in educating Roma for more than 25 years. 
Over that period, we have educated a small cohort of young Roma who retain their identity and yet can break the hostile stereotypes held by those with whom they interact. 
Together with the World Bank, we established the Roma Education Fund in 2005. 
The REF is ready to help national education authorities across the EU improve their performance in educating Roma children. 
Indeed, its programs currently reach more than 100,000 students each year, including more than 1,600 university students who receive scholarships. 
But these numbers are woefully inadequate relative to the magnitude of the problem. 
Half of the Roma are of school age, and the population is growing faster than the capacity of the REF. 
The Fund’s annual budget is only €12 million ($16.3 million), of which my foundations cover nearly half, and we find it difficult to secure additional funds. 
That is unacceptable. 
The programs developed by the REF ought to be scaled up by governments, with the help of the EU, and made available to all Roma children in Europe. 
The European Commission has played a very helpful role through its structural funds, which cover up to 80% of the additional costs involved in integrating the Roma. 
Unfortunately, the remaining 20% is difficult to mobilize, owing to widespread anti-Roma sentiment throughout Europe. 
To break the negative stereotypes, Roma children must be educated to celebrate and take pride in their Roma heritage. 
That is what the REF has done. 
As it is, educated Roma do not fit the stereotypes, so they can easily blend into the majority population, but the majority’s hostility remains. 
If the approach developed by the REF were generally adopted, it would go a long way toward breaking the stereotypes. 
But education is not enough. 
The Roma must also be able to find employment. 
A lasting solution requires Europe to build a Roma working class. 
Here the private sector also has a role to play. 
Experts from the European Commission and from my foundations are developing a demonstration project to make private-sector internships available to Roma youth enrolled in vocational schools. 
Romania already has a similar program for the majority population, and Minister of Education Remus Pricopie has pledged to open it up to the Roma. 
I urge other governments to take similar steps. 
Let’s be honest: There is a Roma problem in Europe, and it is getting worse. 
But both the problem and its worsening reflect a toxic combination of deep-seated hostility and persistent neglect. 
In fact, Europe’s educated Roma are proving every day that the problem is eminently solvable. 
But solving it will take more than a generation, and Europe cannot afford to wait for economic recovery. 
On the contrary, given the increase in its Roma population, Europe’s long-term prosperity depends on reversing current trends – and getting started right away. 

The World Economy’s Shifting Challenges 
NEW YORK – As 2013 comes to a close, efforts to revive growth in the world’s most influential economies – with the exception of the eurozone – are having a beneficial effect worldwide. 
All of the looming problems for the global economy are political in character. 
After 25 years of stagnation, Japan is attempting to reinvigorate its economy by engaging in quantitative easing on an unprecedented scale. 
It is a risky experiment: faster growth could drive up interest rates, making debt-servicing costs unsustainable. 
But Prime Minister Shinzo Abe would rather take that risk than condemn Japan to a slow death. 
And, judging from the public’s enthusiastic support, so would ordinary Japanese. 
By contrast, the European Union is heading toward the type of long-lasting stagnation from which Japan is desperate to escape. 
The stakes are high: Nation-states can survive a lost decade or more; but the EU, an incomplete association of nation-states, could easily be destroyed by it. 
The euro’s design – which was modeled on the Deutsche Mark – has a fatal flaw. 
Creating a common central bank without a common treasury means that government debts are denominated in a currency that no single member country controls, making them subject to the risk of default. 
As a consequence of the crash of 2008, several member countries became over indebted, and risk premia made the eurozone’s division into creditor and debtor countries permanent. 
This defect could have been corrected by replacing individual countries’ bonds with Eurobonds. 
Unfortunately, German Chancellor Angela Merkel, reflecting the radical change that Germans’ attitudes toward European integration have undergone, ruled that out. 
Prior to reunification, Germany was the main motor of integration; now, weighed down by reunification’s costs, German taxpayers are determined to avoid becoming European debtors’ deep pocket. 
After the crash of 2008, Merkel insisted that each country should look after its own financial institutions and government debts should be paid in full. 
Without realizing it, Germany is repeating the tragic error of the French after World War I. Prime Minister Aristide Briand’s insistence on reparations led to the rise of Hitler; Angela Merkel’s policies are giving rise to extremist movements in the rest of Europe. 
The current arrangements governing the euro are here to stay, because Germany will always do the bare minimum to preserve the common currency – and because the markets and the European authorities would punish any other country that challenged these arrangements. 
Nonetheless, the acute phase of the financial crisis is now over. 
The European financial authorities have tacitly recognized that austerity is counterproductive and have stopped imposing additional fiscal constraints. 
This has given the debtor countries some breathing room, and, even in the absence of any growth prospects, financial markets have stabilized. 
Future crises will be political in origin. 
Indeed, this is already apparent, because the EU has become so inward-looking that it cannot adequately respond to external threats, be they in Syria or Ukraine. 
But the outlook is far from hopeless; the revival of a threat from Russia may reverse the prevailing trend toward European disintegration. 
As a result, the crisis has transformed the EU from the “fantastic object” that inspired enthusiasm into something radically different. 
What was meant to be a voluntary association of equal states that sacrificed part of their sovereignty for the common good – the embodiment of the principles of an open society – has now been transformed by the euro crisis into a relationship between creditor and debtor countries that is neither voluntary nor equal. 
Indeed, the euro could destroy the EU altogether. 
In contrast to Europe, the United States is emerging as the developed world’s strongest economy. 
Shale energy has given the US an important competitive advantage in manufacturing in general and in petrochemicals in particular. 
The banking and household sectors have made some progress in deleveraging. 
Quantitative easing has boosted asset values. 
And the housing market has improved, with construction lowering unemployment. 
The fiscal drag exerted by sequestration is also about to expire. 
More surprising, the polarization of American politics shows signs of reversing. 
The two-party system worked reasonably well for two centuries, because both parties had to compete for the middle ground in general elections. 
Then the Republican Party was captured by a coalition of religious and market fundamentalists, later reinforced by neo-conservatives, that moved it to a far-right extreme. 
The Democrats tried to catch up in order to capture the middle ground, and both parties colluded in gerrymandering Congressional districts. 
As a consequence, activist-dominated party primaries took precedence over general elections. 
That completed the polarization of American politics. 
Eventually, the Republican Party’s Tea Party wing overplayed its hand. 
After the recent debacle of the government shutdown, what remains of the Republican establishment has begun fighting back, and this should lead to a revival of the two-party system. 
The major uncertainty facing the world today is not the euro but the future direction of China. 
The growth model responsible for its rapid rise has run out of steam. 
That model depended on financial repression of the household sector, in order to drive the growth of exports and investments. 
As a result, the household sector has now shrunk to 35% of GDP, and its forced savings are no longer sufficient to finance the current growth model. 
This has led to an exponential rise in the use of various forms of debt financing. 
There are some eerie resemblances with the financial conditions that prevailed in the US in the years preceding the crash of 2008. 
But there is a significant difference, too. 
In the US, financial markets tend to dominate politics; in China, the state owns the banks and the bulk of the economy, and the Communist Party controls the state-owned enterprises. 
Aware of the dangers, the People’s Bank of China took steps starting in 2012 to curb the growth of debt; but when the slowdown started to cause real distress in the economy, the Party asserted its supremacy. 
In July 2013, the leadership ordered the steel industry to restart the furnaces and the PBOC to ease credit. 
The economy turned around on a dime. 
In November, the Third Plenum of the 18th Central Committee announced far-reaching reforms. 
These developments are largely responsible for the recent improvement in the global outlook. 
The Chinese leadership was right to give precedence to economic growth over structural reforms, because structural reforms, when combined with fiscal austerity, push economies into a deflationary tailspin. 
But there is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years. 
How and when this contradiction will be resolved will have profound consequences for China and the world. 
A successful transition in China will most likely entail political as well as economic reforms, while failure would undermine still-widespread trust in the country’s political leadership, resulting in repression at home and military confrontation abroad. 
The other great unresolved problem is the absence of proper global governance. 
The lack of agreement among the United Nations Security Council’s five permanent members is exacerbating humanitarian catastrophes in countries like Syria – not to mention allowing global warming to proceed largely unhindered. 
But, in contrast to the Chinese conundrum, which will come to a head in the next few years, the absence of global governance may continue indefinitely. 

Europe’s Ukrainian Lifeline 
NEW YORK – Last weekend’s European Parliament election and presidential election in Ukraine produced sharply contrasting results. 
Europe’s voters expressed their dissatisfaction with the way that the European Union currently functions, while Ukraine’s people demonstrated their desire for association with the EU. 
European leaders and citizens should take this opportunity to consider what that means – and how helping Ukraine can also help Europe. 
The EU was originally conceived to be an ever-closer association of sovereign states willing to pool a gradually increasing share of their sovereignty for the common good. 
It was a bold experiment in international governance and the rule of law, aimed at replacing nationalism and the use of force. 
Unfortunately the euro crisis transformed the EU into something radically different: a relationship of creditors and debtors in which the creditor countries impose conditions that perpetuate their dominance. 
Given low turnout for the European Parliament election, and if support for Italian Prime Minister Matteo Renzi were added to the anti-EU vote on the left and the right, it could be argued that the majority of citizens are opposed to current conditions. 
Meanwhile, just as Europe’s bold experiment in international governance is faltering, Russia is emerging as a dangerous rival to the EU, one that has global geopolitical ambitions and is willing to use force. 
Putin is exploiting an ethnic national ideology (and support from the Orthodox Church) to bolster his regime. 
Indeed, speaking on the Russian radio program Direct Line last month, he extolled the genetic virtues of the Russian people. 
The annexation of Crimea has made him popular at home, and his effort to weaken America’s global dominance, in part by seeking an alliance with China, has resonated favorably in the rest of the world. 
But the Putin regime’s self-interest is at odds with Russia’s strategic interests; Russia would benefit more from closer cooperation with the EU and the United States. 
And resorting to repression in Russia and Ukraine is directly counterproductive. 
The Russian economy is weakening, despite the high price of oil, owing to the flight of capital and talent. 
Using violence in Kyiv’s Maidan has led to the birth of a new Ukraine that is determined not to become part of a new Russian empire. 
The success of the new Ukraine would constitute an existential threat to Putin’s rule in Russia. 
That is why he has tried so hard to destabilize Ukraine by fostering self-declared separatist republics in eastern Ukraine. 
With the Donbas region’s largest employer mobilizing protests against the separatists, Putin’s plan may not work, and he is now likely to accept the results of the presidential election, thereby avoiding additional sanctions. 
But Russia is likely to seek other avenues to destabilize the new Ukraine, which should not be too difficult, given that the security forces, having served the corrupt regime of former President Viktor Yanukovych, are demoralized and not necessarily loyal to the new leadership. 
All of this has happened very fast and very recently. 
Both the EU and the US are preoccupied with their internal problems and remain largely unaware of the geopolitical and ideological threat that Putin’s Russia poses. 
How should they respond? 
The first task is to counteract Russia’s efforts to destabilize Ukraine. 
With the EU’s “fiscal compact” and other rules limiting the scope of government assistance, innovative thinking is needed. 
The single most effective measure would be to offer free political risk insurance to those who invest in or do business with Ukraine. 
This would keep the economy running, despite the political turmoil, and it would signal to Ukrainians that the EU and the US – governments and private investors alike – are committed to them. 
Businesses would flock to a newly open and promising market if they were fully compensated for losses caused by political events beyond their control. 
Political risk insurance may sound too complex to deploy quickly. 
In fact, insurance of this type already exists. 
Private insurers and reinsurers like Germany’s Euler Hermes have offered it for years. 
So have government institutions, like the World Bank’s Multilateral Investment Guarantee Agency and the US government’s Overseas Private Investment Corporation. 
They must, however, charge substantial premiums to cover the cost of reinsurance. 
Faced with high premiums, most businesses would simply opt to wait on the sidelines until the storm passed. 
That is why the governments concerned must take over the reinsurance function and use their agencies only to administer the insurance policies. 
They could guarantee the losses in the same way as they underwrite the World Bank: each government would provide a modest pro-rata capital infusion and commit the rest in the form of callable capital that would be available if and when losses are actually paid out. 
The EU would have to modify the fiscal compact to exempt the callable capital and allow actual losses to be amortized over a number of years. 
Guarantees of this kind have a peculiar feature: the more convincing they are, the less likely they are to be invoked; the reinsurance is likely to turn out to be largely costless. 
The World Bank is a living example. 
By acting promptly and convincingly, the EU could save Ukraine – and itself. 
What I propose for Ukraine could also be implemented at home. 
As long as there are so many productive resources lying idle, it would make sense to exempt from the fiscal compact investments that would eventually pay for themselves. 
Renzi, for one, is advocating precisely this course of action. 
Putin plans to turn Crimea into a showcase by lavishing more than €50 billion on it in the next few years. 
With European support, Ukraine could compare favorably. 
And, if such an initiative marks the beginning of a growth policy that Europe so badly needs, by saving Ukraine Europe would also be saving itself. 

Angela Merkel’s Pyrrhic Victory 
BUDAPEST – As far as Germany is concerned, the drama of the euro crisis is over. 
The subject was barely discussed in the country’s recent election campaign. 
Chancellor Angela Merkel did what was necessary to ensure the euro’s survival, and she did so at the least possible cost to Germany – a feat that earned her the support of pro-European Germans as well as those who trust her to protect German interests. 
Not surprisingly, she won re-election resoundingly. 
But it was a Pyrrhic victory. 
The eurozone status quo is neither tolerable nor stable. 
Mainstream economists would call it an inferior equilibrium; I call it a nightmare – one that is inflicting tremendous pain and suffering that could be easily avoided if the misconceptions and taboos that sustain it were dispelled. 
The problem is that the debtor countries feel all the pain, while the creditors impose the misconceptions and taboos. 
One example is Eurobonds, which Merkel has declared taboo. 
Yet they are the obvious solution to the root cause of the euro crisis, which is that joining the euro exposed member countries’ government bonds to the risk of default. 
Normally, developed countries never default, because they can always print money. 
But, by ceding that authority to an independent central bank, the eurozone’s members put themselves in the position of a developing country that has borrowed in foreign currency. 
Neither the authorities nor the markets recognized this prior to the crisis, attesting to the fallibility of both. 
When the euro was introduced, the authorities actually declared member states’ government bonds to be riskless. 
Commercial banks could hold them without setting aside any capital reserves, and the European Central Bank (ECB) accepted them on equal terms at its discount window. 
This created a perverse incentive for commercial banks to buy the weaker governments’ debt in order to earn what eventually became just a few basis points, as interest-rate differentials converged to practically zero. 
But interest-rate convergence caused economic divergence. 
The weaker countries enjoyed real-estate, consumption, and investment booms, while Germany, weighed down by the fiscal burden of reunification, had to adopt austerity and implement structural reforms. 
That was the origin of the euro crisis, but it was not recognized at the time – and is not properly understood even today. 
Converting all outstanding government bonds – with the exception of Greece’s – into Eurobonds would be by far the best remedy. 
It would require no transfer payments, because each country would remain responsible for servicing its own debt. 
And it would impose stricter market discipline on debtor countries than they currently face, because they could issue Eurobonds only to refinance maturing ones; any additional borrowing would have to be in their own name, and markets would impose penalty rates for excessive borrowing. 
Yet Eurobonds would substantially reduce the heavily indebted countries’ borrowing costs and go a long way to reestablishing a level playing field in the eurozone. 
Germany’s credit rating would not be endangered, because Eurobonds would compare favorably with bonds issued by other major countries. 
Eurobonds would not cure disparities in competitiveness; eurozone countries would still need to undertake their own structural reforms. 
But they would remedy the euro’s main design flaw. 
All the alternatives are inferior: they either involve transfer payments, perpetuate an uneven playing field, or both. 
And yet, owing to Merkel’s opposition, Eurobonds cannot even be considered. 
Greece, too, is a victim of its creditors’ misconceptions and taboos. 
Everyone knows that it can never pay back its debt, most of which is held by the official sector: the ECB, eurozone member states, or the International Monetary Fund. 
After undergoing a lot of pain and suffering, Greece is close to posting a primary budget surplus. 
If the official sector could forgo repayment as long as Greece meets the conditions imposed by the Troika (the ECB, the European Commission, and the IMF), private capital would return and the economy could recover rapidly. 
I can testify from personal experience that investors would flock to Greece once the debt overhang was removed. 
But the official sector cannot write down its debt, because that would violate a number of taboos, particularly for the ECB. 
Germany would do well to remember that it has benefited from debt write-downs three times in its history. 
The Dawes Plan of 1924 sought to stagger Germany’s reparations payments for World War I. The Young Plan of 1929 reduced the sum that Germany owed in reparations and gave the country much more time to pay. 
The post-World War II Marshall Plan provided debt relief as well. 
French insistence on harsh reparations payments after World War I clearly prepared the ground for the rise of Hitler. 
The rise of Greece’s neo-fascist Golden Dawn is a similar phenomenon. 
These two examples justify my description of the euro crisis as a nightmare. 
Only Germany can end it, because, as the country with the highest credit rating and largest and strongest economy by far, it is in charge. 
Germany, mindful of its recent history, does not want to be cast in the role of a hegemonic power; the current situation is not the result of some evil German plot. 
Still, Germany cannot escape the responsibilities and liabilities that go with that role. 
It must learn to act as a benign hegemon. 
Doing so would earn Germany the lasting gratitude of the countries that are currently subordinated to it, just as the Marshall Plan earned the United States the lasting gratitude of Europe. 
Failure to seize this moment would, I believe, lead to the disintegration and eventual collapse of the European Union. 
Of course, many countries have lived through nightmares and survived. 
But the EU is not a country; it is an incomplete association of sovereign states that will not survive a decade or more of stagnation. 
That is not in Germany’s interest, and it would leave Europeans worse off than they were when they embarked on the EU project. 
Making a U-turn is never easy for political leaders, but elections do provide an opportunity for a policy change. 
The best way to make one would be for Merkel’s next government to appoint an independent expert commission to evaluate the alternatives, without regard to the prevailing taboos. 

George W. Bush and America's Neglected Hemisphere 
When the NATO Allies gather in Istanbul, much of the talk will concern the divisions between America and Europe over Iraq. 
But Europe is not alone in its estrangement from the United States under President George W. Bush's leadership. 
Among the vast list of unforeseen consequences springing from the US fiasco in Iraq is the vital fact that, across Latin America, anti-Americanism is on the rise and is rapidly generating myriad grim effects on the region's politics. 
The parallel with Europe does not end there. 
Before the Bush administration, various American presidents worked hard to change the US relationship with Latin America from one of hegemon and dominated states to something like the relations that exist with the European allies. 
All of that is now gravely at risk - a dangerous turn of events. 
Complete estrangement from the US in Latin America will not only harm hemispheric relations, but may discredit broader ideas that are closely associated with the US. 
Many of these pernicious side effects can already be perceived. 
The first, and deepest, consequence consists in plummeting prestige of and respect for the US and the Bush administration in Latin American public opinion. 
This was not the case at the beginning of Bush's term as president. 
On the contrary, many capitals south of the Rio Grande had high expectations for the team that moved into the White House in 2001. After all, during his first nine months in office, Bush declared that he would devote tremendous attention to the hemisphere, and his actions seemed to back up his rhetoric. 
He visited Mexico before any other country, renewed Temporary Protection Status for Central American immigrants, maintained President Bill Clinton's waiver of certain trade restrictions on countries and companies doing business with Cuba, and gave new impetus to the negotiations to create a Free Trade Area of the Americas. 
Iraq changed all of this. 
The invasion, the absence of any weapons of mass destruction or any link between Saddam Hussein and Al Qaeda, the pictures of Iraqi civilian casualties, and the subsequent scenes of humiliating mistreatment or torture of Iraqi prisoners and detainees have all contributed to a wide, deep, and probably lasting collapse of sympathy for the US in the region. 
This can be measured in public opinion polls, in newspaper editorials, congressional resolutions, summit declarations, and street demonstrations. 
A second effect follows directly from the first. 
At least rhetorically speaking, government parties or leaders with a strong anti-US tilt are gaining ground, from Mexico City's Mayor Andrés Manuel López Obrador to the Frente Amplio party in Uruguay, from Schaddick Handal in the old FMLN in El Salvador to Evo Morales in Bolivia, not to mention governments like Hugo Chávez's in Venezuela and Nestor Kirchner's in Argentina. 
These anti-US forces are not all necessarily left wing; they are, however, stridently critical of the US. 
In all likelihood, they will become more vociferous and vituperative before they mellow, because public opinion seems to be rewarding stances and tones such as theirs. 
America's friends in Latin America are feeling the fire of this anti-American wrath. 
They are finding themselves forced to shift their own rhetoric and attitude in order to dampen their defense of policies viewed as pro-American or US-inspired, and to stiffen their resistance to Washington's demands and desires. 
In many cases, American demands and desires are contrary to Latin interests, and should be resisted. 
But in other cases, opposition to America's preferences is wrought by public sentiment and goes against the instincts of leaders who know better. 
The Bush's administration has brought all of this upon itself. 
It could have either avoided a monumental mistake, as Iraq has now proved to be, or it could have brought the United Nations on board from the outset, ensuring that military action, and the subsequent occupation and reconstruction of the country, would have broad multilateral support. 
At worst, the Bush administration could have acted alone, but with sufficient force, skill, and diligence - and with the appropriate and imperative respect for human rights and international law - to get the job done quickly. 
Instead, the Bush administration, for reasons that are increasingly perplexing, went at it alone. 
Moreover, it did so without an endgame strategy, and with a level of force so "underwhelming" that it made the outrageous behavior at the Abu Ghraib prison almost inevitable. 
By so doing, Bush's team left America's friends in Latin America - no less than in Europe and elsewhere - in a hapless situation: rightly unable and unwilling to support the US march of folly, and understandably reluctant to poison hemispheric relations in general with the type of strident criticism that local public opinion demands. 

Europe’s Middle East Mission 
LONDON – America’s gradual withdrawal from the Middle East puts increasing pressure on Europe to help foster peace in the region. 
With complex and heated wars threatening to bring about the collapse of states like Syria and Iraq, and the long-simmering conflict between Israel and Palestine seemingly as far from resolution as ever, it is almost easier to ask what Europe should avoid than what it should do. 
The starting point must be a simple, fundamental principle: Europe should not take sides. 
Allowing preconceptions or emotional reactions to overshadow facts could make the situation much more dangerous. 
Consider sectarian struggle between Sunni and Shia Muslims – now the prime mover of events in the Middle East. 
Fueled by religious rhetoric and a bloody history, the conflict engenders a degree of passion and irrationality that is difficult to moderate. 
As has been said: “Where the fires of faith are burning, the goddess of reason tiptoes silently out of the room.” 
Likewise, when it comes to the Israel-Palestine conflict, Europe must recognize that both sides are hypersensitive. 
If they are faced with criticism that they deem unfair, they will resort to the kind of truculence and bitterness that has long thwarted efforts to reach an agreement. 
At least two-thirds of Israelis, recognizing the benefits that lasting peace would bring to the region, would prefer a two-state solution. 
But the same majority fears that the Palestinians – with the split leadership of a relatively moderate Fatah under Palestinian Authority President Mahmoud Abbas and a Gaza administration under the implacable, terror-supporting leadership of Hamas – are not ready for a conventional peace and good neighborly relations. 
Making matters worse, concessions on either side appear to leave no impression on the other. 
On the contrary, they are usually met with lethal provocations that push any agreement even further away. 
Palestine’s response to Israel’s release in December of 26 political prisoners – the third batch from a total of 104 detainees that Israeli Prime Minister Binyamin Netanyahu pledged to release when the peace talks were revived last summer – is a case in point. 
Many of the prisoners had committed heinous acts of terror. 
For example, Juma Ibrahim Juma Adam and Mahmoud Salam Saliman Abu Karbish firebombed a civilian bus, killing a pregnant woman, three of her preschool-age children, and the Israeli soldier who tried to save them. 
Yet Abbas received them upon their release, praising them as heroes of the Palestinian people and examples for Palestinian youth. 
In this fragile context, EU threats to halt business with Israeli companies present in the country’s West Bank settlements are problematic, as are academic and scientific boycotts against Israel. 
Indeed, such moves would be dangerously close to favoring Palestine – a sure-fire way to turn Israel against cooperation. 
Of course, given the role that the continual expansion of Israeli settlements in occupied Palestine has played in hampering progress toward peace, it merits a more thorough and sober examination by all relevant parties – especially Israel. 
This requires, first and foremost, an understanding of the issue’s scale. 
During previous rounds of negotiations, the Palestinian Authority agreed, in principle, to exchange up to 1.9% of West Bank land for Israeli territory. 
This means that Israel would be able to annex some settlements adjacent to its border, while giving up only a small share of its land – an exchange to which it should be open when serious negotiations are underway. 
The good news is that Tzipi Livni, Israel’s main negotiator, recently stated that Israel would not claim isolated settlements on Arab land. 
Through all of this, Europe must present itself as an unbiased mediator. 
If negotiators on both sides view it as a credible broker of a lasting and balanced agreement, they may be more receptive to each other’s concessions. 
The same is true of religious conflicts throughout the Middle East. 
Instead of getting sucked into historical enmities and impassioned disputes, Europe must be resolved to fight implacably against all forms of jihadism, while consistently supporting progress toward conflict resolution. 
This does not apply only to diplomats; the European media also have a critical role to play. 
New and traditional outlets alike must ensure that they portray the facts accurately and dispassionately, in order to foster a constructive, fair-minded discussion. 
Those directly involved in the Middle East’s myriad conflicts do not need any help generating heat. 

Georgia on Europe’s Mind 
The era in which Europe could rely on America to wage war, make peace, and establish democracy in its own backyard is over. 
With European Union enlargement, and as the recent Russian gas crisis demonstrated, that backyard now includes not just Ukraine, but Georgia as well. 
Indeed, as in Ukraine, Georgia is undergoing a test of democracy that Europe cannot afford to ignore. 
Georgia was the first post-Soviet country to stage a “color revolution,” and thus to demonstrate, with dignity and maturity, its people’s choice for democracy and European values. 
The European Union flags that have flown on all Georgian public buildings since then signal a natural attachment, as old as the history of a country that, for the ancient Greeks, was an integral part of the world as it was then known. 
Prometheus, Medea, the Amazons and, in neighboring Armenia, Noah’s Ark – the Europe of our myths starts here. 
With its history, culture, and traditions – including its critical, independent, and even rebellious spirit within the former Soviet Union – Georgia would seem to be an ideal candidate for successful democratization. 
So it is all the more worrisome that democratization there is foundering. 
Everything seemed to have started well enough. 
Political reforms, privatization, anti-corruption measures, a search for new leaders untainted by compromise with the former regime, and implementation of a pro-European foreign policy met no resistance. 
But the totalitarian mindset has since resurfaced in leaders who, with their claim to represent the will of the majority, appropriate more and more power. 
Like the ancient Greeks’ Hydra, Georgia’s political elite never ceases to die and be reborn. 
The same people and governing methods that the “Rose Revolution” of November 2003 sought to defeat have reemerged at the center of power by using their personal networks, which extend outside Georgia’s borders, as well as their tremendous wealth and finely honed skills at political scheming and manipulation. 
This bears little in common with the essence of democracy, which consists not merely in ballot boxes, but in the separation of powers. 
The government meddles in the affairs of the parliament, which in turn seeks to micro-manage the government – including, in my case, the nomination of ambassadors and their daily routines! 
Finally, and more seriously, the judiciary is not yet independent, undermining the rule of law and thus deterring badly needed private investment. 
Georgia’s democracy exists in its head, but not yet in its body: citizens still spurn politics as a dirty pursuit, abandoning the ground to those who should have been retired long ago. 
But the hope of democracy remains strongly rooted in Georgia’s people, civic organizations, and media. 
Now is the time for Europe to ensure that this hope is not extinguished. 
The US has already done as much as it can to support political stability in Georgia since independence. 
To be sure, stability was not always identified with democracy during the rule of Eduard Shevardnadze, the former Soviet Union foreign minister who was ousted as our president by the Rose Revolution. 
But Americans invested generously in the survival of democratic ideas and leaders. 
Although the foundation backed by the financier George Soros did not fabricate the Rose Revolution, as Russian nationalists claim, it certainly nurtured, encouraged, and supported democracy’s preconditions. 
But, to help consolidate its democracy, Georgia now requires support of a different nature, which Europe is better equipped to offer. 
The models for the balance of powers, the functioning of the judiciary, and local democracy must be inspired by European forms, which are closer to Georgian reality than Anglo-Saxon models of the American type. 
Europe’s rejection of this challenge would betray its fundamental duties in a place – small, Mediterranean, flexible, with old historical traditions – where democracy stands a much greater chance of success than in Ukraine, which is both huge and still very Soviet-minded, not to mention Central Asia. 
Indeed, refusal to support Georgia’s struggling democracy would most likely postpone democratic progress in Ukraine, Belarus, even in Russia itself. 
This clearly raises the stakes. 
Russia, while never renouncing its imperial dreams and instruments of domination, was nonetheless coming to terms with the inevitability of democracy, at least on its margins. 
But this hesitant acceptance of a certain normality in its relations with its neighbors has always been vulnerable to a sudden eruption of Russia’s famously irrational “derzhava” – an aggressive ethos that glorifies the state and asserts its strength by pouncing on weakness. 
This is the key to understanding the recent Russian gas crisis. 
Just as surely, any sign of a retreat from democracy in Georgia and other post-Soviet states will merely fuel Russia’s neo-imperial ambitions. 
It is Europe’s responsibility to convince Russia that there is no hope of a return to the past. 
Europe must assume this role not only to ensure the future independence of its energy supply, but also to demonstrate that European values of freedom, democracy, and justice between peoples have real force. 
To succeed, Europe must equip itself with the necessary instruments: a large semi-public foundation to promote Europe and support political reform, a university to train future executives of nascent democracies, a police force, and an army of judges and magistrates to breathe life into the models that we want to emulate. 
Above all, Europe needs conviction. 
If Europe today cannot convince itself that it has a vital interest in its neighbors’ future, who will believe in Europe tomorrow? 

Georgia Splits the Kremlin 
MOSCOW – Dmitry Medvedev inherited the post of President of the Russian Federation from Vladimir Putin, and while Putin moved down the pecking order to become Prime Minister, speculation has abounded from the start of Medvedev’s presidency about an eventual split between Russia’s two highest leaders. 
The first days of the conflict in Georgia crushed this hypothesis. 
Indeed, Putin and Medvedev have worked in perfect tandem with respect to Georgia, cooperating and skillfully performing their different roles, with Putin cast in the lead role of the menacing god of a Russian reckoning, and Medvedev in the supporting role of a possible humanitarian peacemaker. 
But the Georgia crisis revealed a new strategic force in the Kremlin that opposes both Putin and Medvedev. 
We still cannot name its players, but we are aware of its interests and impact on events in the same way that astronomers discern a new but invisible planet by recording its impact on known and visible objects in space. 
One indication that something new is affecting Russian policy is provided by those loyal Kremlin pundits who are known for their gift of unmistakably guessing their masters’ changing moods. 
One after another, they have appeared on television and radio to denounce “provokers,” whom they dare not name, for “planning the incursion of Russian troops all the way to Tbilisi and the establishment there of a pro-Russian government.” 
Another indirect indication of an ongoing struggle is the uncertain behavior of the Russian military in Georgia, which apparently is the result of contradictory orders from the Kremlin. 
While the Russian army seems not to have engaged in any active measures since reaching its current positions, it pointedly remains within a half-hour of Tbilisi. 
The line in the sand that President George W. Bush drew on the night of August 11, warning against Russian air strikes on Tbilisi’s airport and shortly thereafter sending Secretary of State Condoleezza Rice to visit Tbilisi, provoked a split in the Kremlin. 
The split divides those who are and are not concerned about the fate of Russian elites’ vast personal holdings in the West. 
I call these camps, respectively, Russia’s global and national kleptocrats. 
Both sides firmly agree that there is nothing that the “weakened and cowardly West” can do to restrain Russia, a nuclear and petroleum superpower, beyond financial retribution against those Russian rulers with vast assets abroad. 
But the national kleptocrats seem to believe that they can live without overseas assets, or without educating their children and maintaining residences in the West. 
Instead, they are content to own properties in elite residential areas around Moscow and in Russia, such as Rublyovka, Valday, and Krasnaya Polyana. 
Both Putin and Medvedev (and their television propagandists) currently reflect the views and goals of the global kleptocrats. 
Neither leader wants to capture Tbilisi. 
Putin, of course, would have been glad to see Georgian President Mikheil Saakashvili, his sworn enemy, put in a cage. 
But other, more down to-earth considerations are more important to him. 
That said, Putin is keeping his options open to join the national plutocrats, in case their position dramatically strengthens. 
If he crosses over to their side, he could even become their leader and triumphantly return to the throne that he formally abandoned only recently. 
While no one yet knows the national plutocrats’ names, I believe that they are new, influential players in or associated with the Kremlin, and that they have now become bold enough to challenge both Putin and Medvedev. 
Russia’s military chiefs, for whom it is psychologically difficult to be ordered by politicians to abruptly end a large-scale and successful military operation, are their natural allies. 
I cannot predict who will win this growing confrontation. 
But even if the global kleptocrats sustain their more “moderate” position on Georgia, theirs could be a Pyrrhic victory. 
Every day and every hour, by means of their own propaganda, these globally minded kleptocrats, are setting the path to power for the nationalists. 
In order to justify their authoritarian rule and camouflage from the Russian public their massive theft of the country’s resources, the global kleptocrats have already convinced ordinary Russians that they are surrounded by ruthless enemies who are trying to dismember and destroy Russia. 
Now it is becoming increasingly difficult for them to explain why their wives and children are buying palaces in the capitals of countries that are supposedly Russia’s sworn enemies. 
By contrast, the national kleptocrats’ position is more consistent. 
They are not constrained by huge assets in the hated West. 
It would not be difficult for them to convince ordinary Russians, who have already been primed by today’s xenophobic propaganda, that Tbilisi, Sevastopol, Astana, and Tallinn belong to Russia and should be taken by force. 
Putin once said that “the greatest geopolitical catastrophe of the twentieth century was the fall of the Soviet Union.” 
The national kleptocrats may soon start calling for its reversal, and they are in an increasingly strong position to do so. 

Germany’s Hour 
LONDON – Who runs the European Union? 
On the eve of Germany’s general election, that is a very timely question. 
One standard reply is, “The EU’s member states” – all 28 of them. 
Another is, “The European Commission.” 
But Paul Lever, a former British ambassador to Germany, offers a more pointed answer: Berlin Rules is the title of his new book, in which he writes, “Modern Germany has shown that politics can achieve what used to require war.” 
Germany is the EU’s most populous state and its economic powerhouse, accounting for over 20% of the bloc’s GDP. 
Determining why Germany has been so economically successful appears to be elusive. 
But three unique features of its so-called Rhineland model stand out. 
First, Germany has preserved its manufacturing capacity much better than other advanced economies have. 
Manufacturing still accounts for 23% of the German economy, compared to 12% in the United States and 10% in the United Kingdom. 
And manufacturing employs 19% of the German workforce, as opposed to 10% in the US and 9% in the UK. 
Germany’s success in retaining its industrial base contradicts rich countries’ standard practice of outsourcing manufacturing to locations with lower labor costs. 
But Germany has never accepted the static theory of comparative advantage on which this practice is based. 
True to the legacy of Friedrich List, the father of German economics, who wrote in 1841, “the power of producing wealth is therefore infinitely more important than wealth itself,” Germany has retained its manufacturing edge through a relentless commitment to process innovation, backed by a network of research institutes. 
Its export-led growth has given it the benefit of increasing returns to scale. 
The second feature of the German model is its “social market economy,” best reflected in its unique system of industrial “co-determination.” 
Alone among the major advanced economies, Germany practices “stakeholder capitalism.” 
All companies are required by law to have works councils. 
Indeed, large companies are run by two boards: a management board and a supervisory board, divided equally between shareholders and employee representatives, which take strategic decisions. 
The resistance to offshoring is therefore much stronger than elsewhere, as is a willingness to restrain wage costs. 
Finally, there is Germany’s firm commitment to price stability. 
Germany needed no lessons from Milton Friedman on the evils of inflation. 
They were already hard-wired into its most famous post-war institution, the Bundesbank. 
Lever suggests that it was as much the memory of the currency collapse of 1945-1948 as of the hyperinflation of the 1920s that drove home this lesson. 
Likewise, an aversion to public deficits mirrors the population’s resistance to private indebtedness. 
Institutionally, the EU has become Germany writ large. 
The Commission, the European Parliament, European Council, and the European Court of Justice mirror the decentralized structure of Germany itself. 
The EU’s gospel of “subsidiarity” reflects the division of powers between Germany’s federal government and states (Länder). 
Germany ensures that Germans fill the leading positions in EU bodies. 
The EU rules through its institutions, but the German government rules those institutions. 
Yet talk of “hegemony,” or even “leadership,” is taboo in Germany – a reticence that stems from Germans’ determination not to remind people of their country’s dark past. 
But denying leadership while exercising it means that no discussion of Germany’s responsibilities is possible. 
And this inflicts costs – especially economic costs – on other EU member states. 
Germany has created a system of rules that entrenches its competitive advantage. 
The single currency rules out devaluation within the eurozone. 
It also ensures that the euro is worth less than a purely German currency would be. 
The EU’s recent Treaty on Fiscal Union – the successor to the Growth and Stability Pact – prescribes binding legal commitments to balanced budgets and modest national debt, backed by supervision and sanctions. 
This precludes deficit finance to boost growth. 
And Germany’s insistence that non-wage costs be equivalent throughout the EU is less a device for enhancing Germany’s competitiveness than for reducing others’. 
The EU, especially the 19-member eurozone, thus functions as a vast home base for Germany, from which it can launch its assault on foreign markets. 
And that base is strong. 
Germany exports to the EU 30% more than it imports from it, and runs one of the world’s largest current-account surpluses. 
This is a benign rather than a brutal hegemony. 
But at its heart lies a massive contradiction. 
National accounts must balance. 
A surplus in one part of Europe means a deficit in another. 
The eurozone was established without a fiscal transfer mechanism to succor members of the family who get into trouble; the European Central Bank is prohibited from acting as lender of last resort to the banking system; and the Commission’s proposal for Eurobonds – collectively guaranteed national bond issues – has foundered on Germany’s objection that it would bear most of the liability. 
Germany has been willing to provide emergency finance to debt-strapped eurozone members like Greece on the condition that they “put their houses in order” – cut social spending, sell off state assets, and take other steps to make themselves more competitive. 
The Germans see no reason to take measures to reduce their own super-competitiveness. 
What can be done to achieve a more symmetric adjustment between Europe’s creditors and debtors? 
Barring a fiscal transfer mechanism, John Maynard Keynes’s 1941 plan for an International Clearing Union might be adapted for the eurozone. 
Member countries’ central banks would hold their residual euro balances in accounts with a European Clearing Bank. 
Pressure would be simultaneously placed on creditor and debtor countries to balance their accounts, by charging rising interest rates on persistent imbalances. 
An EU clearing union would be a less visible intrusion on German national interests than a fiscal transfer union would be. 
The essential point, though, is that for the eurozone to work, the strong must be prepared to show solidarity with the weak. 
Without some mechanism to realize that, the EU will limp from crisis to crisis – probably shedding members along the way. 

Is Germany Unbalanced or Unhinged? 
HAMBURG – For US President Donald Trump, the measure of a country’s economic strength is its current-account balance – its exports of goods and services minus its imports. 
This idea is of course the worst kind of economic nonsense. 
It underpins the doctrine known as mercantilism, which comprises a hoary set of beliefs discredited more than two centuries ago. 
Mercantilism suggests, among other things, that Germany is the world’s strongest economy, because it has the largest current-account surplus. 
In 2016, Germany ran a current-account surplus of roughly €270 billion ($297 billion), or 8.6% of GDP, making it an obvious target of Trump’s ire. 
And its bilateral trade surplus of $65 billion with the United States presumably makes it an even more irresistible target. 
Never mind that, as a member of the eurozone, Germany has no exchange rate to manipulate. 
Forget that Germany is relatively open to US exports, or that its policymakers are subject to the European Union’s anti-subsidy regulations. 
Ignore the fact that bilateral balances are irrelevant for welfare when countries run surpluses with some trade partners and deficits with others. 
All that matters for Trump is that he has his scapegoat. 
Back in the real world, the explanation for Germany’s external surplus is not that it manipulates its currency or discriminates against imports, but that it saves more than it invests. 
The correspondence of savings minus investment with exports minus imports is not an economic theory; it’s an accounting identity. 
Germans collectively spend less than they produce, and the difference necessarily shows up as net exports. 
Germany has a high savings rate for good reason. 
Its population is aging more rapidly than most. 
Its sensible people are sensibly saving for retirement. 
They are accumulating assets now so they can de-accumulate them later, when old-age dependency ratios are higher. 
This is why the advice German leaders receive from White House advisers and even from some German economists – that Germany would be better off abandoning the euro and letting its currency appreciate – makes little sense. 
Changing the exchange rate would not diminish the incentive for Germans to save. 
Moreover, allowing the exchange rate to appreciate would discourage investment in capital-intensive traded-goods sectors. 
To be sure, a stronger currency might increase investment in services by raising the relative price of nontraded goods. 
But the incentive to invest in services would have to be boosted massively, given that the sector is not capital intensive, to offset lower investment in export industries. 
Better than fiddling with the currency would be to address saving and investment directly. 
Here is where the two principal parties vying in Germany’s upcoming election differ. 
Chancellor Angela Merkel’s Christian Democrats suggest cutting taxes. 
This makes sense insofar as the German government is a massive net saver; the 2016 budget surplus was €23.7 billion, a record high. 
The problem is that there is no guarantee that German households, being voracious savers themselves, will spend the additional income. 
Extending investment tax credits to German firms might be more effective in boosting spending, but doing so would be politically problematic in a country where labor’s share of national income is already declining. 
Martin Schulz’s Social Democrats, on the other hand, favor raising public spending, by investing in infrastructure in particular. 
In the current European environment of near-zero interest rates, there’s little risk that additional public investment will crowd out private investment. 
And Germany has massive unmet needs in health care, education, and communication and transportation infrastructure. 
Some will object that infrastructure and public services are nontraded goods, so more spending on them won’t boost imports or narrow the current-account balance. 
But if the government, in a fully employed economy, redirects resources toward the production of nontraded goods, households and firms will have to find other ways of satisfying their demand for tradables. 
The only sure way of doing that is by purchasing additional imports, spending on which will inevitably increase. 
The question, ultimately, is why Germany should seek to reduce its current-account surplus. 
One answer is to get out of Trump’s sights. 
A better answer, offered by the International Monetary Fund, is that doing so would be good for a world economy in which investment is in short supply, as evidenced by record-low interest rates. 
It would be good for Southern Europe, which needs to export more, but can only do so if someone else, like the largest Northern European economy, imports more. 
Most of all, more investment in infrastructure, health, and education would be good for Germany itself. 
Well-targeted public investment can raise productivity and boost living standards, ameliorate concerns about inequality, and address Germany’s economic weaknesses. 
For example, there are exactly zero German universities in the top 50 globally. 
More public funds would make a difference. 
“The world’s strongest economy” can do better. 

The Limits of German Guilt 
MUNICH – This month marks the 50th anniversary of the establishment of diplomatic relations between Germany and Israel. 
The bilateral relationship, born in the wake of the Nazis’ annihilation of European Jewry, has developed into a solid one. 
But fading memories of the Holocaust among younger Germans, together with Israel’s declining international standing, have lately challenged the official discourse about “special” ties between the two countries. 
David Ben-Gurion, Israel’s founding father and the architect of Israel’s reconciliation with Germany, was a pragmatist through and through. 
He knew that forging a partnership with Germany, which included reparations that would help boost Israel’s capabilities, could go a long way toward securing Israel’s survival. 
Of course, the reparations – which began in 1952 – served Germany’s interests, too. The best way to regain international legitimacy after World War II was to atone publicly for the atrocities committed by the Nazis, and reconcile with the world’s Jewish population. 
But the case for establishing full diplomatic relations was not so clear. 
Fearing that such a move would undermine its relationships with Arab countries, and thus its objective of maintaining an impartial Middle East policy, Chancellor Ludwig Erhard’s government resisted Israeli pressure to establish full ties until 1965. 
Even then, German policy in the Middle East continued to reflect a domestic consensus that Germany’s responsibility for Israel’s security must be balanced with an effort to remain neutral in the region’s affairs. 
Still, over the last half-century, the bilateral relationship has become a formidable one. 
Germany is Israel’s largest trading partner in Europe, and its third-largest overall, after the United States and China. 
Moreover, Germany has been among Israel’s most reliable allies, exemplified by its role as a major arms supplier. 
Chancellor Angela Merkel has emerged as a staunch defender of the country, exemplified in a 2008 address to the Knesset (Israel’s parliament), in which she identified Israel’s security as an essential feature of Germany’s Staatsraison. 
But Germany also appears to be increasingly uneasy about having to continue supporting Israel even when its policies are clearly reproachable. 
Seventy years after the liberation of Auschwitz, can the bilateral relationship withstand the rising tide of anti-Israel sentiment in Europe? 
History has its ironies. 
Post-war Germany could regain international legitimacy only through reconciliation with the Jewish people. 
Today, it is Israel’s legitimacy that is being challenged in international institutions and Western public opinion for its mistreatment of the Palestinians. 
The role reversal has been remarkable. 
Both Jews and Germans emerged from WWII as defeated and crippled peoples, but the Jews had the moral high ground, while the Germans very much did not. 
Yet, in a global opinion poll conducted in 2013 by the BBC World Service, Israel ranked as one of the least popular countries – just above North Korea, Pakistan, and Iran – whereas Germany emerged as the most popular. 
But the extent of this inversion is best exemplified in the increasing prevalence of obscene comparisons between Israel’s policies toward Palestine and the Nazis’ treatment of the Jews. 
A study conducted by the Bertelsmann Foundation in January showed that 35% of Germans have no problem making that connection. 
In what might presage a shift in the bilateral relationship, the poll also revealed that 58% of Germans believe that the past should be consigned to history, and 62% disapprove of Israel’s policies today. 
Of course, Germany’s eagerness to discharge the burden of history is not new. 
Back in 1998, the renowned intellectual Martin Walser publicly attacked the pervasiveness of Auschwitz in Germany’s remembrance culture, declaring that the Holocaust had become a “moral cudgel” with which to intimidate all Germans and keep them “in a perpetual state of guilt.” 
Walser’s stance amounted to a desperate call to allow his country to shape a new national identity – one that reflected its resolute repudiation of fascism and adoption of democracy, rather than its highly regrettable (and regretted) history. 
And it drew a standing ovation from all but one of the 1,200 illustrious members of the audience in Frankfurt’s Pauluskirche, where Walser was being awarded the German Booksellers Association Peace Prize. 
The lone exception was Ignatz Bubis, the head of Germany’s Jewish community. 
As Israel’s policies have become increasingly indefensible, the Germans’ will to shape national policy independent of Holocaust guilt has grown even stronger. 
The poem “What Must Be Said,” written in 2012 by the late Nobel laureate Günter Grass, may be frivolous and cliché-laden, but it is no less revealing of the growing fatigue of German society with the paralyzing memory of the Holocaust. 
Not only did Grass define Israel as “a threat to world peace”; he also noted that he had remained silent for so long simply because he believed that his own origins, “tarnished by a stain that can never be removed,” denied him the right to speak the truth. 
Like Grass, Germans – especially the younger generations, who feel further removed from the events of WWII – are increasingly abandoning the notion that they owe it to Israel to remain its silent, steadfast supporters. 
Indeed, as Israel’s right-wing government moves to bury the two-state solution for good, Germans are joining other Europeans in vocally opposing Israeli policy in Palestine. 
Simply put, historic guilt is no longer adequate to compel Germany to support Israel’s wrongheaded policies – especially when those policies are victimizing another group, the Palestinians. 
Israel’s current leaders should take note. 

Free Speech in the Filter Age 
OXFORD – Germany’s Network Enforcement Act – according to which social-media platforms like Facebook and YouTube could be fined €50 million ($63 million) for every “obviously illegal” post within 24 hours of receiving a notification – has been controversial from the start. 
After it entered fully into effect in January, there was a tremendous outcry, with critics from all over the political map arguing that it was an enticement to censorship. 
Government was relinquishing its powers to private interests, they protested. 
So, is this the beginning of the end of free speech in Germany? 
Of course not. 
To be sure, Germany’s Netzwerkdurchsetzungsgesetz (or NetzDG) is the strictest regulation of its kind in a Europe that is growing increasingly annoyed with America’s powerful social-media companies. 
And critics do have some valid points about the law’s weaknesses. 
But the possibilities for free expression will remain abundant, even if some posts are deleted mistakenly. 
The truth is that the law sends an important message: democracies won’t stay silent while their citizens are exposed to hateful and violent speech and images – content that, as we know, can spur real-life hate and violence. 
Refusing to protect the public, especially the most vulnerable, from dangerous content in the name of “free speech” actually serves the interests of those who are already privileged, beginning with the powerful companies that drive the dissemination of information. 
Speech has always been filtered. 
In democratic societies, everyone has the right to express themselves within the boundaries of the law, but no one has ever been guaranteed an audience. 
To have an impact, citizens have always needed to appeal to – or bypass – the “gatekeepers” who decide which causes and ideas are relevant and worth amplifying, whether through the media, political institutions, or protest. 
The same is true today, except that the gatekeepers are the algorithms that automatically filter and rank all contributions. 
Of course, algorithms can be programmed any way companies like, meaning that they may place a premium on qualities shared by professional journalists: credibility, intelligence, and coherence. 
But today’s social-media platforms are far more likely to prioritize potential for advertising revenue above all else. 
So the noisiest are often rewarded with a megaphone, while less polarizing, less privileged voices are drowned out, even if they are providing the smart and nuanced perspectives that can truly enrich public discussions. 
If the algorithm doesn’t do the job of silencing less privileged voices, online trolls often step in, directing hateful and threatening speech at whomever they choose. 
Women and minorities are particularly likely to be victims of online harassment, but anyone may be targeted. 
The German blogger Richard Gutjahr, for example, became the object of conspiracy theories and the target of intense harassment after being present at two terrorist attacks within two weeks of each other. 
Victims of online harassment often respond with self-censorship, and many, with their sense of security and even self-worth eroded, remove themselves from social media altogether. 
In this sense, by offering blanket protections in the name of “free speech,” countries actually privilege hate speech. 
But why should a victim’s rights count less than those of their bullies? 
In a democracy, the rights of the many cannot come at the expense of the rights of the few. 
In the age of algorithms, government must, more than ever, ensure the protection of vulnerable voices, even erring on victims’ side at times. 
If already-vulnerable people are besieged by mobs of extremists and aggressors, it is entirely understandable that they will fear speaking up. 
If that happens, “free speech” is dead. 
Not all NetzDG critics dispute this assessment: some agree that the speech of the vulnerable does need extra protection. 
But they argue that the necessary protections are already in place. 
After all, severe insult and incitement to hatred and violence are prohibited, and perpetrators can be prosecuted. 
French President Emmanuel Macron, for example, favors focusing on strengthening the judicial system’s ability to deal with hate speech and misinformation. 
But, in the digital age, speed is decisive. 
The technology is instant, and online posts can be shared widely within minutes. 
Democratic institutions move rather slowly – much too slowly for police and the courts to be effective in fighting trolls and online hate. 
And many victims are not in any position to hire a high-quality lawyer, as Gutjahr did. 
Relying on the state’s most cumbersome institutions alone is not an effective strategy for protecting free speech on today’s digital communication networks. 
Hate speech and other kinds of dangerous and illegal content must be attacked at the source. 
On one hand, there is a need for increased media literacy on the part of consumers, who need to be taught, from a young age, about the real-world consequences of online hate speech. 
On the other hand – and this is what the NetzDG attempts to ensure – social-media platforms must ensure that their products are designed in ways that encourage responsible use. 
But this is no quick fix. 
On the contrary, it demands a fundamental rethink of business models that facilitate and even reward hate speech. 
Firms cannot be allowed to profit from damaging content, while shrugging off responsibility for its consequences. 
Instead, they must revise their algorithms more effectively and scrupulously to flag content that humans should monitor and assess, while entrenching in all of their business decisions an awareness of their responsibility in the fight for truly free speech. 
This may contradict the straightforward business logic of doing whatever maximizes profit and shareholder value. 
But it is, without a doubt, what is best for society. 
The German government is right to push companies in the proper direction. 

German Reunification and the New Europe 
PARIS – I began writing this column shortly after a remarkable anniversary. 
October 3, 1990, was the effective date for the implementation of a stunning decision taken barely a month earlier. 
On August 23, East Germany’s House of Representatives, the Volkskammer, voted for unilateral adherence by the East German Länder to West Germany’s Constitution. 
Article 23 of the West German Basic Law permitted this, but neither West Germany’s government nor its Parliament had been consulted! 
Reunification terms were subsequently defined in a Treaty signed in Berlin on August 31, 1990, and ratified by both the East and West German parliaments on September 20. 
The Peace Treaty between the two German states and the four victorious Allies was signed in Moscow on the same day, and reunification was officially proclaimed on October 3. 
These events, accomplished by three actors, shook the world – and changed it forever. 
The first actor was Mikhail Gorbachev, who approved the act – the opening of the border between Austria and Hungary – that triggered the chain of events leading to reunification. 
And it was Gorbachev who proclaimed that Soviet forces would not intervene to support troubled communist regimes against the will of their people – a declaration aimed directly at East Germany. 
The second key figure was West German Chancellor Helmut Kohl, who rushed into the opened breach, overriding his Allies’ caution, while the third actor was the East German people, who rushed into the streets, regardless of the risks, to demonstrate and push reunification forward. 
These events had a profound impact on relations between Germany and its allies. 
The United States, Great Britain, and France all seemed to think that everything was happening too fast, that international security was at risk should the new Germany not confirm its membership in NATO (which Germany finally did). 
But for a few months, there were fears that Russia would demand Germany’s withdrawal from the Alliance as a condition of its agreement to reunification. 
While the US masked its doubts, Great Britain and France were less at ease. 
British Prime Minister Margaret Thatcher limited herself to worried public statements, but French President François Mitterrand felt it necessary to improvise a visit to East Berlin, against the opinion of his Foreign Ministry and despite the French people’s great enthusiasm for German reunification. 
Mitterrand hoped to slow the process and to link negotiations to some international guarantees. 
His effort was a fiasco, remembered in Berlin to this day. 
The motive of Mitterrand’s “mission” was to determine what precautions could or should be taken against the potential vagaries of this powerful but unpredictable people. 
The response was eventually enshrined in the Maastricht Treaty, which extended the European Union’s competences to foreign affairs and judicial matters, making them partly supranational. 
Great Britain and Denmark, however, insisted that these new competences be exercised on intergovernmental grounds only, not by the European Commission, and thus only through consensus. 
France did not vote, so Great Britain and Denmark won by default. 
Europe would take common action related to foreign affairs only on unanimous grounds. 
Political Europe was stillborn at the moment of greatest potential. 
This was a major disappointment for Germany, particularly as it could no longer count on France, its main ally in Europe. 
In Germany itself, failure to achieve a politically integrated federal Europe baffled pro-integration political forces and dented the war generation’s moral authority. 
The New Germany and its post-war generation felt tempted to recover a reunified, yet lonely, German identity, one with influence in Europe and worldwide. 
As a result, reunified Germany naturally fell back on its old sphere of dominance, Eastern Europe. 
But Germany’s leaders were uneasy with these changes. 
In September 1994, two MPs from the majority Christian Democratic Union published a political statement on Europe, questioning its future, particularly the prospect of federalism. 
A dismal silence greeted its publication, which left Germany’s pro-European establishment isolated and dispirited. 
Indeed, in May 2000, Joschka Fischer, the ex-leader of the Green Party and German Foreign Minister, gave a long speech about the necessity of European integration. 
The question about European federalism was posed to all member states, and none answered. 
France, obviously in the limelight, remained silent, again leaving Germany to feel abandoned by its partners. 
A process of erosion, catalyzed by British diplomacy, was under way. 
It succeeded. 
The prospect of genuine European integration on foreign affairs and defense issues was denied time and again, at each step of the successive negotiations for the Treaties of Amsterdam, Nice, the aborted constitutional project, and Lisbon. 
Time passed, generations changed. 
In today’s Germany, because no one with decisive power in business, finance, or government experienced the war, the European project is no longer viewed as conditioning Europe’s collective future. 
These new leaders envision Europe only as a trade regime. 
Meanwhile, German diplomacy is actively reconstructing the country’s economic and cultural spheres of influence, and not only in Eastern Europe. 
The impact of this lost European perspective became clear in the autumn of 2008 when, in the aftermath of the sub-prime crisis and the failure of Lehman Brothers, Chancellor Angela Merkel’s first impulse was nationalistic and wholly anti-European. 
There would be no common European plan to address the crisis, and no call for public funds. 
Germany would protect its banks’depositors on its own and through private means. 
Only the sheer gravity of the situation brought Germany back within the European realm for the subsequent G-20 meeting. 
Twenty years after reunification was completed, Germany has become one of the world’s great democracies. 
Many wish that it were also more European in its outlook and behavior. 
But Germany does not bear the main responsibility for killing off the vision of political Europe. 

Germany is Not Volkswagen 
MUNICH – The Volkswagen scandal has raised questions about the German model of production. 
If the success of the company’s diesel-powered vehicles was due in part to fraudulent efforts to conceal the amount of harmful pollutants they emitted, will similar revelations at other companies call into questions the country’s transformation from “the sick man of Europe” to an export-driven economic powerhouse? 
Fortunately, the answer is almost certainly no. 
Germany’s competitive advantage has less to do with chicanery than with how its firms are structured and the culture in which they operate. 
Germany’s leading car company is an exception to the manufacturing rules that have driven the country’s success, not an example of them. 
Indeed, Germany’s success is frequently cited as a model that other countries should emulate, and rightly so. 
Since the beginning of the century, the country has grown to become one of the world’s leading exporters, outstripping all other major European countries. 
From 2000 to 2013, Germany’s exports grew by 154%, compared to 127% for Spain, 98% for the United Kingdom, 79% for France, and 72% for Italy. 
The leading explanation for Germany’s impressive recent export performance is wage restraint. 
But, as a comparison with Spain reveals, faster wage growth elsewhere cannot be the entire story. 
To be sure, from 2000 to 2008, German wages increased by 19%, compared to 48% in Spain. 
But after the 2009 financial crisis, the roles were reversed. 
From 2009 to 2013, German nominal wages increased by more than 14%, compared to 4% in Spain. 
And yet, despite the more rapid rise in German wages, the country’s exports rebounded faster than Spain’s – or those of any other European Union country. 
The most important factor behind Germany’s success is that the structure of its firms improves the quality of their products. 
German exporters are organized in a way that is less hierarchical and more decentralized than other European firms. 
This gives them several advantages. 
Decentralization enables employees at lower levels of the corporate hierarchy to devise and implement new ideas. 
As these employees are often closer to customers than those higher up, their collective knowledge about what the market is demanding is an important source of value. 
Tapping this knowledge allows Germany to compete on quality, not price. 
Indeed, if wage restraint were the main factor in Germany’s success, it would be hard pressed to outperform French, Italian, British, and Spanish exporters, who compete mainly on price by offshoring production to low-wage countries. 
Instead, the German focus on quality allows its firms to charge higher prices and gain new customers. 
When exporters are asked to rank their products relative to a market average, 40% of German exporters classify their goods as top quality, while only 10% of French exporters do so. 
Decentralized management has helped German exporters triple their share of the global market for top-quality goods compared to those firms that did not reorganize. 
Indeed, when I studied the top 1% of German exporters – the country’s export superstars – I found that they more than doubled their share of the world export market when they opted to decentralize their organizations. 
This focus on quality could explain why German exports rebounded quickly after 2009, despite the rise in nominal wages. 
Quality makes exporters less vulnerable to changes in price – including those driven by rising wages. 
By contrast, those countries in which firms compete on price may have felt more pressure to move production abroad as domestic wages rose. 
Germany’s relative insensitivity to rising costs could also explain why its government is comfortable with a strong euro, whereas France and Italy have been calling on the European Central Bank to weaken the currency. 
Volkswagen, it turns out, took a different approach from that of most other German firms. 
Rather than decentralizing power, CEO Martin Winterkorn sat at the head of a centralized, command-and-control organization in which he acted as a patriarch. 
His desire to take the company to the very top of the global car industry, surpassing Toyota, put enormous strain on his managers to deliver growth. 
The result – a decision to cheat on emissions tests – says less about Germany’s culture of manufacturing than about rot at the car company, beginning at the very top. 
According to the World Value Survey, Germany is a high-trust society, in which citizens have confidence in one another’s behavior and act accordingly. 
Indeed, the lesson of the Volkswagen scandal is that this culture may be necessary for its export model to work. 
French and Italian exporters that introduced decentralized management did not increase their share of the global market for top-quality goods. 
The likely reason is that providing division managers with greater autonomy not only frees them up to respond to market demands; it also allows them to put their own career interests above the wellbeing of the firm. 
If Germany is to maintain its economic dominance, it will have to do something far harder than keeping wages in check or restructuring hierarchies. 
It will have to ensure that the culture of integrity underlying its success remains unchanged by the pressures of global competition. 

Germany, Europe, and Russia 
European unity is indivisible. 
When one nation is intimidated or ostracized, all are not free. 
Every aspect of our shared culture, if not the last century of shared suffering, confirms that for us. 
So a prime objective of the European Union is to promote stability and security through a dynamic structure of economic and political inter-dependence in which all nations have a vested interest. 
But such a structure is lacking today between the EU and Russia, to the detriment of all the countries that lie between them. 
Thus it is vitally important that Germany has made this a central issue for its EU presidency, which is just beginning. 
With high prices for crude oil and natural gas bloating its coffers, Russia is once again aggressively confronting the small and still relatively weak states that fled the eroding Soviet empire 15 years ago. 
Given the residual economic and institutional ties born of the Soviet era, Russia’s external influence in this region remains enormous. 
But Russia is also now extending its grasp of energy markets beyond those of its immediate neighbors. 
Europe’s relationship with Russia is too important for it to be developed in an ad hoc fashion through bilateral arrangements. 
Today is Europe’s moment of maximum flexibility; as dependence on Russian energy supplies grows, the EU’s leverage weakens. 
So Europe’s strategy cannot be to take the historically well-trodden path of least resistance. 
Unfortunately, in the aftermath of the Cold War, it has often been assumed that Russia’s hostile intentions have disappeared, and foreign policy toward Russia has been conducted as if traditional diplomatic considerations no longer apply. 
But, of course, they do apply. 
Encouraging economic and political reform are important objectives, but they can never serve as a substitute for a serious effort to contain Russia’s deep-seated expansionism. 
To be sure, Russia has legitimate security interests in what has been called its “near abroad.” 
But Europe’s stability and commitment to economic growth across the continent require that these interests be satisfied without economic pressure or unilateral intervention. 
A viable Russia policy for Europe must recognize Europe’s growing dependence on Russian energy resources. 
To proceed otherwise would discount the most important question: the reliability of Russia as an energy supplier. 
Despite controlling the world’s largest gas reserves, Russia’s state-owned monopoly Gazprom is not producing enough for an economy growing at 6% a year. 
Gazprom’s three largest fields, which account for three-quarters of its output, are in decline. 
This domestic shortage means that Gazprom is unable to increase supply to Europe, at least in the short term, unless it can buy gas at below-market rates from its Eastern European and Central Asian neighbors and in turn sell it to its European customers at market prices. 
At the same time, Russia wants to cater to other markets, notably along its eastern frontier. 
The problem is not a lack of reserves, but Gazprom’s investment strategy. 
In recent years, the company has spent vigorously on everything but developing its reserves. 
It has built or is building pipelines to Turkey and Germany, taken over an oil company, and sought footholds in European distribution markets. 
Instead of investing in discovering oil, Gazprom has become the biggest media group in Russia. 
All this is done in the name of creating and supporting a national energy champion which also serves as a foreign policy arm of the Kremlin. 
Meanwhile, with investment in Gazprom’s core activity – production – steadily declining, a crisis is looming, one that requires the stewardship and steady hand of the EU. 
Gazprom’s ambitions for gaining control of pipeline and energy transport infrastructure must be slowed, which requires allowing independent producers to prosper. 
Indeed, independent producers already account for 20% of domestic gas sales in Russia. 
To boost their output and allow them direct access to European markets will require market-based incentives. 
Europe can help by insisting that Russia participate in the European Energy Charter, which calls for Gazprom to grant its production competitors access to Russian pipelines, and for all disputes to be settled by international arbitration. 
European competition policy, which successfully brought giant companies like Microsoft into line to promote competition, could help to turn Gazprom into a normal competitor, too. 
Europe’s leaders should engage in frank discussions about where European and Russian interests converge or differ, and these discussions should include regional neighbors that are both producer and transit nations, like my own country, Ukraine. 
Moscow will understand a policy based on mutual respect for each other’s interests better than simple appeals to goodwill and friendship. 
Russia should be welcome in institutions and agreements that foster cooperation, with reciprocal rights and responsibilities. 
Russian reform will be impeded, not nurtured, by turning a blind eye to political and economic aggression. 
The hard-fought independence of the former Soviet republics must not be tacitly traded away in acquiescence to Russia’s desire for regional hegemony. 
Russia’s leaders are entitled to the world’s understanding as they struggle to overcome generations of Soviet misrule. 
But they are not entitled to the sphere of influence that Russian tsars and commissars coveted for 300 years. 
If Russia is to be a serious partner for Europe, it must be ready to accept the obligations of stability along with the benefits. 
If Europe is to ensure its prosperity and energy security, it must demand nothing less. 

Germany’s Bland Grand Coalition 
MUNICH – Germany’s Social Democrats (SPD), the Christian Democratic Union, and the CDU’s Bavarian sister party, the Christian Social Union (CSU), have agreed to pursue another “grand coalition” government, and have published a 28-page agreement outlining their proposed policy agenda. 
The agreement comes months after an election in which the SPD and CDU/CSU advanced rather different economic-policy views. 
Whereas the SPD has focused on the need for more redistribution and public spending, the CDU/CSU has promised “tax cuts for all” and a more restrictive refugee policy. 
The question now is whether a coalition comprising such ideologically divergent forces can truly prepare Germany for the challenges that await it. 
In the months and years ahead, German policymakers will need to manage the transition into the digital era, in order to preserve the country’s competitiveness. 
They must also stabilize the welfare state at a time of rapid population aging. 
And they must develop a rational migration policy. 
On top of this full domestic agenda, many are looking to Germany to keep the European Union together. 
As many commentators have pointed out, Germany’s new government will benefit from a budget surplus, because the booming economy, coupled with peculiarities of the German tax code, has boosted government revenues over the last four years. 
Even by pursuing the balanced-budget policy described in its provisional coalition agreement, the government will have room either for more spending or tax cuts amounting to €46 billion ($56 billion) – around 0.3% of GDP – over four years. 
According to the coalition agreement, €36 billion of the surplus will be allocated to various outlays such as transfers to families, higher agricultural and regional subsidies, housing-construction incentives, roads and related infrastructure, universities and school buildings, and even the military. 
That leaves just €10 billion for tax cuts, which will take the form of reductions in the solidarity surcharge (Solidaritätszuschlag), a special income tax that was introduced in 1991 to finance German reunification. 
The grand coalition envisions abolishing this tax for everyone except the top 10% of earners, who generate more than half of the revenue from it. 
But when one considers the effects of “bracket creep,” the outlook for taxpayers worsens. 
Unlike most other developed countries, Germany’s tax system lacks an automatic adjustment mechanism to prevent inflation from pushing households into higher tax brackets. 
And while discretionary adjustments do take place, they hardly provide full compensation to countless households that end up paying more tax than they should. 
In fact, at the current rate of bracket creep, Germany’s tax revenues will increase by roughly €50 billion over the next four years. 
Halving the solidarity surcharge no earlier than 2021 will come nowhere close to offsetting that. 
All told, nobody is particularly enthusiastic about the coalition agreement, including the SPD. 
Despite the coalition agreement’s emphasis on spending, the SPD fears that participating in another grand coalition will further damage its public standing, and drive more of its voters into the arms of the radical left or the far-right Alternative für Deutschland (AfD). 
For others, the problem is not politics, but the agenda itself: for all of its specific provisions, it achieves very little. 
When spread over four years, an additional €2 billion spent on defense, €600 million on universities, and €4 billion on housing will make little difference. 
And while the coalition’s plan also promises higher contributions to the EU budget and more spending on the mothers’ pension and low-income households, it does not specify how those increases will be reconciled with a balanced budget. 
More fundamentally, the agenda lacks ambition and direction. 
It neither provides significant relief to the middle class through tax cuts, nor allocates adequate investment for research, infrastructure, or education. 
And it makes no mention of corporate taxation, even though rate cuts in the United States, and planned cuts in France and the United Kingdom, will inevitably lure investment and jobs away from Germany. 
A truly bold policy agenda would require the new government to focus on specific priorities and accept that not everyone can get what they want. 
Rather than tweaking the margins in a futile attempt to please everyone, the government would set its sights on deeper structural reforms, to lay the foundation for future growth and stability. 
For example, Germany spends billions of euros every year on green-energy subsidies. 
But as the provisional coalition agreement acknowledges, Germany will likely fall short of its target for reducing carbon dioxide emissions by 2020, suggesting that these subsidies have not worked. 
Fundamental reforms in this area could make Germany’s climate policies both cheaper and more effective. 
But doing that would require the government to abandon its ideological position and challenge powerful interest groups. 
Nevertheless, the coalition agreement does include some promising ideas. 
For example, it proposes a program to attract skilled workers, and to align Germany’s immigration policies with its economic interests. 
And although the new government should attach conditions to Germany’s larger EU budget contribution, in order to prevent wasteful spending, its clear commitment to the EU should be welcomed. 
There is still time for the coalition partners to revise their program. 
Surely, they should want to do more than use the current economic upswing to provide piddling handouts to various constituencies (except those paying the most in taxes, of course). 
Now is the time to start preparing Germany for its future challenges. 

Freeing German Democracy 
BERLIN – The spectacle surrounding the recent talks to form a new coalition government in Germany is a bellwether of voter discontent. 
The power games, pork barreling, and compromises that have been reached without public debate all underscore the disconnect between Germany’s mainstream parties and the electorate – driving voters directly into the hands of populists. 
As a result, Germany’s political fringe is blossoming. 
The far-right Alternative für Deutschland and the left-wing Die Linke hold a combined total of about a quarter of the Bundestag’s seats. 
The emerging grand coalition – which includes the conservative Christian Democratic Union (CDU), its Bavarian sister party the Christian Social Union (CSU), and the left-leaning Social Democratic Party (SPD) – holds just over 50%, making it significantly less grand than in the previous two governments. 
The AfD, in particular, can’t believe its luck. 
The party – which is, at best, only partly loyal to democracy – appears set to become the largest opposition group in the Bundestag. 
For a party that did not even qualify for parliamentary representation until last September’s election, such a prominent position was beyond their wildest dreams. 
Should the grand coalition take the helm, as expected, the parliament of affluent and economically stable Germany would confront the same type of divisiveness that, by shifting power to the fringes and shrinking the political center, has weakened democracy in other countries. 
This has already occurred in the United States, where the emergence of more extreme voices has undermined cooperation between Republicans and Democrats, as well as in the United Kingdom, the Netherlands, and Belgium. 
This is not to say that the Bundestag will suddenly become as dysfunctional as today’s US Congress. 
But the seeds of democratic paralysis are being planted. 
In some ways, this situation has been a long time coming. 
Under previous grand coalitions, the Bundestag has served less as a platform for open discussion of diverse views and preferred outcomes than as a machine for passing laws. 
The emerging coalition’s 167-page agreement, which spells out in striking detail the future government’s agenda, indicates that the authorities’ focus during the next four years will, once again, be confined to enacting previously agreed policies, not on promoting deliberation and reflection on public issues. 
This closed-door policy has deepened the divide between the political class and voters. 
As for what is driving it, there are two culprits: the rise of coalition agreements and the changing party system. 
A coalition agreement spelling out some of the main items for the upcoming legislative period was used first by the CDU and the Free Democratic Party (FDP) in the early 1960s. 
A coalition committee was established to ensure that the agreed measures made it through parliament. 
Over time, however, such agreements became increasingly detailed and complex; what had been a road map became a contract. 
The coalition committee, meanwhile, became increasingly powerful behind the scenes. 
These developments, though controversial, were never fully challenged; on the contrary, they became de rigueur for legislative politics in Germany, causing the Bundestag to shift focus from conducting open debate to enacting previously agreed decisions. 
Until a few years ago, this shift in focus for the Bundestag was not particularly problematic. 
But the main political parties have lately been losing their foothold in local communities, with the CDU/CSU and the SPD now relying on significantly lower membership. 
As a result, their decisions have become increasingly detached from the will of the people. 
The CDU and CSU leadership, not bound by a party vote, have already signaled their acceptance of the coalition pact. 
But one hopes that SPD members reject the agreement on which they are now voting (the postal ballot closes on March 2). 
A failed agreement would probably bring greater political instability, but it would ultimately strengthen German democracy. 
If the agreement fails, Germany might hold a fresh election – a risky option, to be sure, as recent polls indicate that the AfD could win an even larger share of the vote, while support for the CDU and the SPD could decline. 
Alternatively, Chancellor Angela Merkel could lead a minority government – the first in the Federal Republic’s nearly 70-year history – which would have to submit every policy proposal for parliamentary debate, with the risk of being blocked. 
Under a minority government, every debate could lead to the government’s fall. 
Yet this could work well for many less controversial proposals, while creating a new tradition of shifting, rather than fixed, coalitions. 
Over time, such an arrangement could bring significant advantages, even institutional innovations, with the potential to challenge the stifling practice of coalition agreements and closed-door committees to enforce them. 
German democracy is being strangled by strict coalition contracts. 
In order to allow it to breathe, while closing the gap between the political class and the electorate, Germans must focus on creating more open and flexible legislative agendas that require genuine debate, out in the open, in the Bundestag. 

The Politics of Germany’s External Surplus 
MUNICH – The debate about global macroeconomic imbalances is increasingly focusing on Germany’s current-account surplus and economic policy. 
Despite the vitality of the German economic engine, and the role it plays in fueling growth and maintaining stability in the eurozone, criticism of the country’s massive external surplus is mounting. 
As the Economist put it recently, Germany “saves too much and spends too little,” making it “an awkward defender of free trade.” 
So what is Germany to do? 
The answer depends on whether economics, or politics, is guiding the decision-making. 
The current criticism, which provided what one observer called an “uneasy ambiance” at this month’s G20 summit in Hamburg, focuses on two claims. 
First, Germany is hurting itself by exporting too much and investing too little at home. 
Second, Germany withholds demand from the rest of the world, in particular the US. 
If Germany contributed more to global spending, according to this view, the economic recovery from the 2008 financial crisis would have been stronger. 
But the truth is, there is no compelling economic reason for Germany to do anything differently. 
If Germany has any reason to change course, it is primarily for political reasons. 
The first criticism – that Germany’s domestic spending has not kept pace with its investment needs – is a myth. 
Exposés about poorly built buildings and crumbling bridges are offered as evidence that thrift has overtaken reason. 
But the numbers tell a different story. 
From 2001 to 2005, for example, Germany’s average current-account surplus was 2.4% of GDP, and average domestic investment was just under 20% of GDP. 
During the five-year period that ended in 2016, the surplus climbed to 7.3% of GDP, but investment remained constant at 20%. 
(Germany’s domestic spending was significantly higher in the 1990s, but that was largely the result of German reunification, and was not sustainable.) 
The surplus has surged for one reason: prudence. 
Germany faces the prospect of a fiscal crisis as its population ages and its workforce shrinks. 
It needs to prepare for a projected decline in pension contributions and growth in health-care costs. 
Whereas the public-sector deficit was 3% of GDP in the early 2000s, Germany runs a small surplus today, which is a perfectly reasonable reaction, as is the increase in private retirement savings. 
At the moment, it makes more sense to invest the additional savings abroad, because population aging in Germany limits the potential for useful investment at home, and other markets are growing faster. 
Critics’ second point, that Germany is stingy with its global purchasing, is more complicated. 
Germany certainly could help struggling eurozone economies if it bought more of their goods and services. 
But more imports and a lower surplus would also drive up interest rates, which is bad for highly indebted countries. 
In fiscal policy, as in national security, it is perfectly normal for a country to place its own interests ahead of others. 
But the global pressure might nonetheless move German Chancellor Angela Merkel for at least three reasons – all of them political, not economic. 
First, Germany has a strong interest in international cooperation in many areas, from immigration to energy security. 
Making concessions on macroeconomic policy could lead to cooperation in other fields. 
For Merkel, a “Germany first” approach, akin to US President Donald Trump’s “America First” strategy, would be counterproductive. 
Second, debtors rarely look upon their creditors with sympathy. 
Germany’s creditor position vis-à-vis other countries may lead to political conflicts, because the debtors have incentives to avoid repayment. 
Third, the European Union’s Macroeconomic Imbalances Procedure, established to prevent destabilizing economic policies by individual member states, requires countries with a current-account surplus above 6% of GDP to make adjustments. 
Germany can hardly expect other countries to comply with EU rules if it ignores them itself. 
Whether Merkel chooses to act remains to be seen, but there are plenty of options if she does. 
For example, Germany could try to stimulate domestic consumption through more rapid wage increases. 
But, aside from the minimum wage, the government does not set pay scales. 
And while raising the minimum wage would boost income for those who have jobs, it could also increase unemployment. 
As a result, overall consumption might even decline. 
Another option would be to increase public spending in military procurement and infrastructure, though military procurement is a long-term process, and more infrastructure investment would be difficult at a time when the construction industry is running at full capacity. 
It would probably be easier to boost corporate investment, such as by introducing accelerated depreciation, tax credits to promote research and development, and more generous loss-offset provisions. 
Indeed, boosting domestic private investment through corporate tax reform seems the best option. 
But, in terms of addressing global macroeconomic imbalances, Germany’s critics will be disappointed by such measures. 
Germany represents 4.4% of global GDP. 
So a reduction in its external surplus, even by as much as 2.5 percentage points from the current level of 8.5% of GDP, would have a minimal impact on the global economy. 
An increase in demand equal to 2.5% of German GDP would boost global demand by just 0.1%. 
The world would lose a scapegoat for its economic difficulties. 
Little else would change. 

Germany’s Grave New World 
BERLIN – The outcome of Germany’s federal election on Sunday was unexpected and disturbing, at least by German standards. 
The two main parties, the Social Democrats (SPD) and the Christian Democratic Union (CDU), along with its Bavarian sister party, the Christian Social Union (CSU), were punished at the ballot box, after having governed as a grand coalition under Chancellor Angela Merkel for the past four years. 
The SPD’s performance was its worst in any federal election since the Federal Republic’s first, in 1949. 
Similarly, the CDU/CSU alliance turned in its second-worst showing since 1949, and the CSU suffered the worst federal-election loss in its history. 
This is particularly important, given that Bavaria will hold state-level elections next year. 
All told, the election was a landslide against Merkel’s grand coalition. 
And, to a large extent, it can be seen as a protest vote against Merkel herself. 
Internationally, she is appreciated as an effective stateswoman and the guarantor of stability and moral authority in the West. 
But at home, that is clearly no longer the case. 
Merkel’s greatest mistake in this election was to rely on the same defensive strategy that she used in the last two elections, when she won resoundingly. 
She seems to have assumed that avoiding controversy and keeping quiet about the key issues confronting Europe would work once again. 
This showed poor judgment, given the 2015 refugee crisis and its implications for Germany, to say nothing of the rise of the far-right Alternative for Germany (AfD), which captured around 13% of the vote. 
Many Germans have been wondering what lies ahead for their country, and for German national identity. 
Merkel did not provide sufficient answers to these questions. 
And while she remained silent, populists such as AfD Vice Chairman Alexander Gauland filled the airwaves with loud appeals to ethnic and nationalist nostalgia. 
Indeed, the big winner in this election was the AfD, whose members include neo-Nazis and other extremists. 
The party’s success is a disgrace for Germany. 
After 72 years, the far right is back in the Bundestag – and with the third-strongest bloc. 
And the AfD is now the second-largest party in the Länder (federal states) comprising the former East Germany. 
Germany is not the only European country where right-wing populists have made electoral gains in recent years. 
But nowhere is the resurgence of the far right more disconcerting than in Germany, owing to its particular history. 
To prevent the right from doing irreparable damage to German democracy, the parties that still stand for democratic values must take seriously their responsibility to form a new government. 
Merkel will almost certainly remain chancellor in the next government. 
As CDU and CSU members debate the matter in the coming days, they will find no credible or equally popular alternative to her. 
Electoral losses or not, you can’t overthrow your chancellor without having a convincing replacement waiting in the wings. 
Merkel is lucky: the knives haven’t come out yet; and even if they do, they probably won’t draw blood – at least for now. 
Another unexpected outcome of the election is that the SPD’s leaders are now arguing for joining the opposition – as if participation in the government were a curse to be avoided at all costs. 
This will make the process of forming the next government long and painstaking, which is unusual in German politics. 
With the SPD refusing to participate in a grand coalition, the only mathematically viable option that remains is a “Jamaica” alliance – named for Jamaica’s black, yellow, and green flag – comprising the CDU/CSU, the liberal Free Democrats, and the Greens. 
But getting there will not be easy: while the parties will not have much trouble arriving at the necessary policy compromises, they differ markedly in governing mentality and leadership style. 
Moreover, the domestic political calendar will most likely prolong the coalition talks. 
Party leaders will posture and try to save face in the eyes of their constituencies, and not much will happen until after the state elections in Lower Saxony on October 15. 
And even then, a new government will not be formed quickly. 
The only alternatives to a Jamaica coalition are a CDU/CSU minority government or a new election next spring, which would probably only strengthen the AfD’s position. 
Both outcomes would be bad for Germany, which is widely perceived – and relied on – as an anchor of stability in Europe. 
That means the future of German democracy and European stability will depend on whether reason prevails among the remaining smaller parties. 
The Jamaica parties have a responsibility to get behind Merkel, and to compromise as necessary to form a government. 
Their leaders, one hopes, will be smart enough to work together in good faith, rather than seeking only narrow partisan advantage. 
They can start by making security, economic reform, and ecological and digital modernization the three pillars of a new kind of coalition. 
As for Merkel, failing to form a stable majority government would probably spell the end of her chancellorship. 
And, more broadly, it could usher in a new period of political chaos. 
No one should wish that on Germany – or on Europe. 

Germany’s Weimar Ghosts 
PRINCETON – Germany’s election result presents an odd paradox. 
Chancellor Angela Merkel’s Christian Democratic Union is unquestionably the strongest party, and a new government without it is unthinkable. 
But both the CDU and its previous coalition partner, the Social Democrats (SPD), did poorly. 
Many SPD leaders’ initial reaction to their party’s 20.4% showing (down from 25.7% in 2013) has been to embrace a stint in the opposition. 
That response – a flight from power – was characteristic of politics in interwar Germany’s short-lived democratic experiment, the Weimar Republic. 
Since the beginning of the Federal Republic, in 1949, one question has always haunted German politics: Could the Weimar experience be repeated, with the radical right triumphing again? 
Now that an extremist party, the Alternative für Deutschland (AfD), has won seats in the Bundestag for the first time since World War II, the question has stepped out of the shadows. 
There are some obvious Weimar parallels. 
In Weimar, even in the relatively stable years of the mid- and late 1920s, before the onset of the Great Depression, parties were punished by voters when they participated in government, and rewarded when they styled themselves as alternative or protest parties. 
Between 1924 and 1928, the moderate right was in a coalition government, and then suffered massively; after 1928, the SPD was similarly punished for joining a coalition. 
Then came the depression, and the same mechanism applied even more forcefully: it was political suicide to support the government – or, as the increasingly radical opposition called it, the system. 
The result was a flight from responsibility, with voters punishing the politicians who remained ever more severely. 
If there is room for optimism about the German election result, it lies in the outcome’s closeness to the European norm. 
The AfD vote, at 13%, is almost the same share that the populist Geert Wilders won in the Netherlands in April, in an election that was widely seen as a defeat for radical populism. 
It is clear that an overwhelming majority of Germans do not support the AfD, whose fortunes could soon fade, owing to a probable split in its leadership. 
In fact, it is hard to see a basis for the AfD’s continued growth. 
In many industrialized countries, elections are often treated as a simple reflection of the state of the economy. 
And this is especially true in Germany. 
Voters in the home of the postwar Wirtschaftswunder (economic miracle) are proud that they have the eurozone’s strongest economy, which is prospering. 
Employment is at record levels. 
Visitors to Munich’s Oktoberfest come in greater numbers, drink more, and eat more, but are less violent and commit fewer crimes. 
Even the eurozone as a whole is in a surprisingly strong recovery. 
But governments are like people: after a long time in one position, they run out of ideas. 
At the end of 2016, Merkel looked tired, and a new SPD leader, Martin Schulz, benefited from a short-lived burst of support in opinion polls. 
But when it turned out that Schulz had no new ideas, either, enthusiasm gave way to disenchantment. 
The government coalition’s poor showing seems to be a clear reflection of widespread frustration with leaders who have nothing new to offer. 
And the election result will make a new coalition difficult to form. 
The most plausible – in fact the only – real alternative to a CDU-SPD grand coalition would be a larger grouping involving both the liberal Free Democrats (FDP) and the Greens (a so-called Jamaica coalition, because the parties’ colors are those of the Jamaican flag). 
It is often said that Merkel would have liked a CDU-Green coalition alone, as she has moved very close to the Greens’ agenda in many areas since announcing a rapid exit from nuclear energy after Japan’s 2011 Fukushima disaster. 
But a Jamaica coalition will be difficult to negotiate, because the FDP is much more conservative on many economic issues, especially fiscal transfers to the rest of the eurozone. 
But a Jamaica coalition is not out of the question – and it could mean new policies for Germany. 
Whereas the FDP’s political profile is much closer to classic market liberalism, over the past ten years the Greens have become more receptive to market mechanisms as the best way of realizing their environmental agenda. 
A new coalition is a way of showing how a new start in German politics could operate. 
And that new start would extend to Europe, with closer Franco-German cooperation, in particular, based on acceptance of a greater role not only for the market, but also for reformed European institutions that monitor and supervise market processes. 
There are many areas – security issues, military cooperation, tackling the immediate needs of refugees – where a common European effort is needed. 
Germany cannot break out of the Weimar trap by thinking solely in German terms. 
The answer to political uncertainty is to stabilize the European and international systems. 
That was the final lesson of Weimar politics: it was when the international order had disintegrated that the gains from domestic cooperation looked meager and the cost of radical rhetoric dropped. 
Only a stable Europe can keep the ghosts of the past at bay. 

Waiting for Germany 
BERLIN – More than a decade after the 2008 financial crisis, the European Union is still stagnating politically. 
But the EU must be strengthened if the project of European integration is to succeed. 
Otherwise, the forces of the new nationalism will continue their assault on democracy, the rule of law, and the bloc’s other defining values. 
The main reason that Europe remains at an impasse is Germany. 
For years after 2008, when the EU was confronting slow growth and mounting economic crises, Germany insisted that it could not move the European project forward alone, and that it would have to wait for France. 
Then, in the spring of 2017, Emmanuel Macron was elected to the French presidency on the promise that he would push for EU-level reforms and modernize the French economy. 
But just when France was coming back on board, Germany was approaching its September 2017 general election, which resulted in significant losses for Chancellor Angela Merkel’s Christian Democratic Union and led to a months-long effort to form a new government. 
In the same month that Germany voted, Macron delivered an impressive speech at the Sorbonne, in which he proposed specific reforms to stabilize the eurozone, create a common border-protection system, and establish a joint European defense initiative. 
At the time, Macron’s proposals received an icy response in Germany; seven months later, Germany still hasn’t offered any of its own. 
Instead, Germany has remained silent on the question of Europe’s future, and has indicated that its primary concern is its own money. 
The bean counters in the Bundestag’s budget committee, it seems, have hijacked Germany’s European policy. 
In the past, that policy was spearheaded by chancellors who understood the historic significance of European integration. 
Yet today, Merkel seems to have allowed the CDU’s backbenchers – and those of its Bavarian sister party, the Christian Social Union (CSU) – to shackle her in the lead-up to any negotiations over EU-level reforms. 
Squandering the opportunity offered by Macron – which will not come again – would be the height of political folly and historical blindness. 
The transatlantic system’s two founding powers are in the process of bidding that system goodbye. 
The United Kingdom has opted to leave the EU, effective next spring. 
And the United States under President Donald Trump has questioned its transatlantic security guarantee and now is undermining the global trade system upon which Europe – and particularly Germany – has relied since the 1950s. 
The threat of a Western denouement is shaking the economic and security pillars of European stability. 
China has emerged as a global power capable of pulling the world economy’s center of gravity away from the Atlantic and toward the Asia-Pacific region. 
Europeans now face the prospect of being left behind by both the US and China, not only geopolitically, but also in the key economic sector of the twenty-first century: artificial intelligence. 
Europe also faces more immediate threats closer to home. 
Russian President Vladimir Putin is once again testing Eastern Europe’s borders by military means. 
Turkish President Recep Tayyip Erdoğan is taking his country further away from NATO and the West, while abandoning democracy and the rule of law. 
And the entire Middle East could slide into a prolonged crisis, fueling more migration to Europe. 
The war in Syria shows just how weak Europe has become. 
Other than serving as a destination for refugees, the EU has become irrelevant in Syria. 
Worse still, those formulating Germany’s foreign policy seem to believe that there is no military solution there, and that only Russia can bring an end to the war. 
This argument overlooks the fact that a military solution is now within Syrian President Bashar al-Assad’s grasp, thanks to the support he has received from Russia and Iran. 
It also overlooks the fact that Russia is in no position to stop the larger regional conflict, even if it wanted to. 
After all, Iran is not simply going to give up its land bridge to the Mediterranean Sea, and Israel is not going to accept the presence of Iranian Revolutionary Guards and missiles in Syria. 
In fact, the risk of a conflict between Israel and Iran in Syria and Lebanon now looms large. 
These developments pose new challenges for Europe. 
On one hand, the EU needs to forestall a nuclear arms race in the region, not least by protecting the 2015 Iran nuclear deal, which Trump is now threatening to kill. 
On the other hand, the EU has an association agreement with – and historical responsibilities toward – Israel, so it cannot remain neutral or turn a blind eye to Iran’s hegemonic ambitions in the region. 
With the exception of France and the UK (for now), the EU and its member states are decidedly unprepared for these risks. 
And that applies particularly to Germany, where the military has languished under years of austerity. 
The post-war US security guarantee allowed Germany to take a long break from thinking about strategic threats. 
But now that Trump has called into question America’s commitments to its allies, Germany can no longer count on such a favorable division of labor. 
In financial matters, Germany regularly accuses other eurozone countries of not sticking to the rules and adhering to agreed austerity policies. 
In security matters, however, these accusations are coming back to haunt it. 
The era of free-riding is ending, and without the US, Germany’s only other source of defense is a stronger Europe, which certainly can’t be had for free. 
Nobody expects Germany to adopt Macron’s proposals wholesale. 
But at a time when the foundations of the global order are shifting at Europe’s expense, marginal reforms will not suffice, and Germany has neither set out its own vision of a stronger Europe, nor shown a willingness to take action and make the necessary investments. 
Europe and the West need a Franco-German response equal to that once provided by François Mitterrand and Helmut Kohl, and by Charles de Gaulle and Konrad Adenauer before them. 
And they need it now. 
History will not stand still. 

The Battle for Germany’s Soul 
STOCKHOLM – One year after the death of former German Chancellor Helmut Kohl, the country he led for 16 years seems to be struggling with whether or not to follow his legacy. 
For Kohl, Germany’s history and central position in Europe meant that it must never pursue national greatness as an end in itself. 
To his mind, the country with more neighbors than any other country on the continent should not throw its weight around. 
Rather, it should uphold an idea of Europe in which all countries, large and small, feel equally secure. 
But since the start of the refugee crisis in the fall of 2015, Kohl’s vision of Europe has been under attack. 
While Chancellor Angela Merkel has continued to press for cooperative migration and refugee policies within the European Union, a growing chorus of voices in Germany is advocating unilateral action that would most likely come at the expense of other EU member states. 
On the surface, the debate consuming Germany nowadays is about whether to turn away asylum seekers who have already been registered in other EU countries, as the federal interior minister, Horst Seehofer of the Christian Social Union (CSU), has advocated. 
But at a deeper level, the question for Germany is whether it should go it alone or continue to seek common European solutions. 
In this new age of identity politics, the dispute over immigration has become a battle for Germany’s soul. 
Last September, the Alternative für Deutschland (AfD) became the first far-right party since the 1960s to enter the German Bundestag. 
Then, after the formation of the current grand coalition government, the AfD became the main opposition party. 
And now it is pushing the CSU further to the right in the lead-up to Bavaria’s regional election this October. 
These developments in Germany are in keeping with trends across Europe, where nationalist and populist parties have made electoral gains by rejecting EU-level solutions and calling for closed borders. 
In Italy, the nationalist League party appears to be calling the shots in its new governing coalition with the populist Five Star Movement. 
And in Austria, the far-right Freedom Party is exerting its influence on migration policies as a member of the governing coalition. 
If one were to listen to these parties’ rhetoric, one might think that refugees and migrants are pouring into Europe unhindered. 
But while the Balkans did become a highway for asylum seekers fleeing Syria for Germany and Sweden in 2015 and 2016, that route was effectively closed down when Turkey agreed to host refugees in exchange for EU financial aid. 
And though the refugee situation in the Central Mediterranean continues to make headlines, the number of migrants crossing from North Africa has actually declined sharply over the past year. 
Still, immigration has remained a hot-button issue across Europe, owing to the shock of the initial refugee crisis, which still reverberates in voters’ minds. 
Politics is about perceptions, not raw numbers. 
And populist and nationalist parties have managed to paint a picture of a Europe under siege. 
In the current political environment, if Germany were to send refugees back to Austria, then Austria would almost certainly send them back to Italy. 
But that would take the EU back to the same situation that it was in before, when asylum seekers were not being registered on arrival in Italy, and when it was all the more difficult to turn them back at other borders. 
Inevitably, the situation would degenerate into a volatile mess, with EU member states pitted against one another, and populists commanding center stage. 
Kohl’s Germany, by contrast, would consider the European dimension of its policies and shape them accordingly. 
It would not simply dump its national problems on its smaller neighbors, because it would recognize that their security is synonymous with its own. 
The attack on Kohl’s vision by nationalist forces could have ramifications well beyond the immigration debate. 
At stake is not just Germany’s role in Europe, but also the future of European integration. 
A Germany that abandons Kohl’s legacy would suddenly become a source of deep uncertainty, rather than a bastion of stability at the center of Europe. 
With the West already under attack by the likes of Russian President Vladimir Putin and US President Donald Trump, that is the last thing Europe needs. 
To be sure, the immediate crisis will most likely be resolved through a series of imperfect compromises – both at the EU level and within Germany’s governing coalition. 
That, after all, is often how the EU works, as in the case of the Greek sovereign-debt crisis. 
The matter is unlikely to end there. 
German wavering on Kohl’s legacy is a trend that is larger than any single issue. 
But how the refugee debate plays out in the coming weeks will reveal much about Germany’s future direction – and about the future of Europe. 

Germany’s Great European Heist 
NEW YORK – Two mantras guide German thinking about eurozone integration: responsibilities and control must be aligned (so no mutualization of risk without shared jurisdiction); and legacy risks must be settled before any pooling of risks among euro members takes place. 
Since 2010, these two refrains have shaped the entire discussion of how to shore up the euro, and they largely account for the anemic progress being made on the creation of a European banking union. 
Germany is ready to embark on a common future, its leaders say, but only if Europe starts from a clean slate. 
At first sight, that proposition seems reasonable enough. 
But to understand its full implications, try applying the same logic to another policy field: security and defense. 
What if France applied Germany’s approach to eurozone integration to the question of mutualizing defense commitments? 
What if the French were to insist, as an absolute precondition for further security cooperation, that Germany not only increase its defense budget immediately, but also make good on its accumulated backlog in defense spending from recent decades? 
Germany has not always been a free rider on other people’s defense spending. 
West Germany was a reliable player in NATO’s Cold War system of burden sharing, and the Bundeswehr in the 1980s was a capable force. 
For better or worse, it stood in the tradition of German armies since the Kaiserreich. 
National service was the norm. 
Defense spending ran at 3% of GDP. 
Then came the fall of the Berlin Wall in 1989. 
Germany embraced the peace dividend with a vengeance. 
Reductions in Germany’s armed forces and disavowal of weapons of mass destruction were written into the treaties that reunified Germany. 
But demilitarization also reflected societal shifts. 
Something in the political culture of the Federal Republic had changed. 
More and more young men chose civilian over military service. 
In 2011, conscription was suspended. 
As a practical matter, that decision probably should have come sooner. 
Today’s best-functioning militaries are professional, not conscripted. 
But, in Germany, no positive image of the Bundeswehr’s new role emerged from the end of the Cold War model. 
Morale and functional capacity collapsed along with spending. 
At NATO meeting after NATO meeting, Germany would commit to spending 2% of its GDP on defense. 
It never delivered. 
Spending slumped toward 1% of GDP, with the majority going to salaries and pensions. 
The latest NATO data show German spending on defense equipment and on research and development running at only 0.17% of GDP in 2017, compared to 0.42% in France and 0.47% in the UK. 
Germany’s dearth of military investment has created a daunting gap between its defense capacity and that of the rest of Europe. 
Only a fraction of Germany’s weapons and military vehicles are operational. 
On Europe’s eastern border, only nine of the 44 tanks promised for the Bundeswehr unit that is supposed to anchor NATO’s 5,000-strong rapid-reaction force in the Baltics next year are fit for use. 
The unit also lacks other equipment essential for the mission, such as tents, winter clothing, night vision equipment, and body armor. 
For the German left, which opposes the use of hard power, there is no reason to lament this lack of resources. 
But the gutting of the Bundeswehr also disables Germany’s ability to exercise soft power. 
In 2014, Germany’s humanitarian team to deliver assistance to Ebola-stricken Liberia was stranded in the Canary Islands. 
The German Navy’s large supply ships – those most useful for refugee rescue operations in the Mediterranean – will be out of commission for 18 months, owing to a lack of spare parts. 
If the Bundeswehr’s guns don’t work, its frigates are in dry dock, and its logistical capacity is zero; what other commitments might the French taxpayer be taking on? 
By agreeing, year after year, to the mutualization of defense costs, what sort of incentives is France providing to Germany to undertake reform? 
If the French were to apply a simple spending rule, they would find that since 1990 they had cumulatively spent 30% of GDP more than Germany on defense. 
If what the Germans are most interested in is France’s nuclear deterrence, the costs over the same period total approximately 4.5-5 % of French GDP. 
So the legacy issues are considerable. 
Furthermore, given Germany’s ingrained post-military habits, backsliding is to be expected. 
What is French President Emmanuel Macron to make of the German budget announced earlier this month, which shows a marginal increase in defense spending but not enough to meet the NATO target, let alone to close past deficits? 
German Chancellor Angela Merkel’s new grand coalition government may not look like a reliable security partner, but does that mean France should hold out until Germany has made good on its legacy defense debt before considering defense investments and mutualization in Europe? 
Europe’s need to develop a twenty-first century security strategy is urgent, not only because Donald Trump’s America is unreliable, but also because humanitarian emergencies demand it. 
It must develop a shared culture and build democratic governance to decide on the deployment of its defense forces. 
That will involve deep cultural and political adjustments on all sides. 
Both Germany’s habit of free riding and France’s tendency toward trigger-happy postcolonial forays will have to be debated. 
These issues are at the heart of developing a European sovereign, backed by democratic institutions and decision-making processes that enable the common use of force. 
But Europe cannot start from some imaginary tabula rasa. 
It must start from the place to which history has brought it. 
The quid pro quo that France should demand for cooperation on security policy is that Germany recognizes the same reality with regard to economic policy. 
Here, too, the past must be taken as given. 
Starting positions are unequal and incentive structures are imperfect. 
But Europe must agree to move forward together nonetheless, or risk being torn apart. 

A Test for Europe’s German Anchor 
BERLIN – The outcome of Germany’s federal election holds a crucial lesson for the European Union: even the country that has been the EU’s bedrock of stability amid crisis is not immune to political fragmentation and polarization. 
Although Chancellor Angela Merkel will almost certainly gain a fourth term, her new government is likely to be considerably weaker than the three that preceded it. 
The Bundestag now counts six factions, compared to four in the previous electoral term. 
Merkel’s center-right Christian Democratic Union took 33% of the vote, its worst result since 1949, though still enough to give the CDU the most seats in parliament. 
The center-left Social Democrats (SPD) – Germany’s second-largest political party, and a part of Merkel’s last governing coalition – also hit a post-war low, receiving just 20.5% of the vote. 
Meanwhile, the populist Alternative für Deutschland (AfD) won 12.6%, making this anti-euro, pro-Russia, and staunchly xenophobic party the first far-right party to enter the Bundestag in almost 60 years. 
And the SPD has thrown in the towel, vowing to spend the coming electoral term in opposition. 
In this context, Germany is likely to be ruled by a so-called Jamaica coalition, named for the colors of the parties – the CDU, the Greens, and the Free Democrats (FDP) – that would comprise it. 
But such a coalition will be unruly, owing to the parties’ heterogeneous foreign-policy positions. 
Similarly, the SPD-led opposition will be beset by deep divisions. 
Indeed, it is unlikely to cooperate on any issue at all with its fellow opposition party, the AfD. 
The SPD shares almost no values with the AfD, which has already declared that its main goal will be to hound the other parties with populist and nationalist bombast. 
As a result, decades-old parliamentary norms of decorum and collegiality are in jeopardy. 
Given the Bundestag’s central role in shaping Germany’s EU policy, this could weaken the capacity of Merkel’s government to provide the kind of leadership Europe now needs. 
To be sure, there is some good news. 
The victory of Merkel’s CDU, however weak, implies elements of continuity on which to build. 
Merkel’s prompt decision to take responsibility for forming a viable coalition government means that her commitment to preserving the EU and her staunch defense of democracy and Western values will continue to guide German policymaking. 
Moderation, stability, and international openness will remain Germany’s watchwords, no matter how much ugly rhetoric the AfD spews. 
But, in terms of action on international challenges, Germany’s partners will have to be patient. 
In particular, though Merkel is expected to cooperate closely with France’s pro-European president, Emmanuel Macron, to forge a new model of EU integration for the post-Brexit age, she is unlikely to do so right away. 
The formation of a coalition alone – in particular, a conservative-liberal-green coalition – will likely take months. 
Next month’s state election in Lower Saxony, where the AfD secured significant support, adds another element of uncertainty to the mix. 
Even after that election, compromise may not come easily. 
The Bavaria-based Christian Social Union (CSU) – the CDU’s sister party – will face a state election next autumn. 
Feeling the hot breath of the AfD on its neck, the CSU has already sharpened its criticism of Merkel’s immigration policy, and is likely to try to push the chancellor further to the right in the coming year. 
Perhaps the stickiest issue for the coalition parties will be the eurozone. 
The stances of the FDP and the Greens are opposed on this front, particularly when it comes to joint crisis management, mutual insurance mechanisms, and fiscal tools. 
But this struggle to find common ground may prove useful for the wider EU, as its leaders attempt to strike a balance between the responsibility of member governments and the eurozone-wide institutions that the monetary union needs to function effectively. 
It may turn out to be easier for Germany’s coalition parties – not to mention the French and German governments – to forge a new framework for bilateral and European security cooperation. 
Polls show that concerns about terrorism and internal security outweigh fears over immigration. 
If those pressing issues are addressed at the European level, as Merkel suggested in her victory statement, support for Europe could end up winning back the discontented voters who cast their ballots for the AfD. 
Whatever government emerges in Germany in the weeks ahead, its leaders will need to devote more effort to explaining their policy choices to citizens and international partners alike. 
With the AfD in the Bundestag, the German public will be exposed to more radical positions on foreign affairs – from EU leadership to relations with Russia – than have been heard in over a generation. 
While Germany’s center has held, its consensus is about to be tested. 

Germany Will Lose if Macron Fails 
FRANKFURT – When Emmanuel Macron won the French presidential election, many Germans breathed a loud sigh of relief. 
A pro-European centrist had soundly defeated a far-right populist, the National Front’s Marine Le Pen. 
But if the nationalist threat to Europe is truly to be contained, Germany will have to work with Macron to address the economic challenges that have driven so many voters to reject the European Union. 
This will not be easy. 
In fact, within a couple of days of the election, core planks of Macron’s economic platform were already under attack in Germany. 
For starters, his proposed reforms of eurozone governance have been met with substantial criticism. 
Macron’s campaign manifesto embraced the idea of more eurozone federalism, characterized by a shared budget for eurozone public goods, administered by a eurozone economics and finance minister and accountable to a eurozone parliament. 
It also called for greater coordination of tax regimes and border controls, stronger protection of the integrity of the internal market, and, in view of the rising threat of protectionism in the United States, a “made in Europe” procurement policy. 
An attempt at re-opening the debate about Eurobonds, or the partial mutualization of eurozone public-sector liabilities, was viewed as a pie-in-the-sky suggestion, mostly just a distraction. 
And, incidentally, it appears nowhere in Macron’s platform. 
Far more disturbing to German pundits and policymakers is Macron’s desire for Germany to make use of its fiscal capacity to boost domestic demand, thereby reducing its massive current-account surplus. 
These are not new ideas: the European Commission, the International Monetary Fund, Macron’s predecessors, and economists throughout Europe have advanced them often. 
And, just as predictably, Germany’s government has roundly rejected them, relying on reasoning that, like its counter-arguments, is well rehearsed. 
For the most part, German economists and officials believe that economic policy should focus almost exclusively on the supply side, diagnosing and addressing structural problems. 
And German officials also regularly suggest that their economy is already performing at close to its supply-determined limits. 
In fact, far from viewing the current-account surplus as a policy problem, the German government sees it as a reflection of the underlying competitiveness of German firms. 
It is the benign upshot of responsible labor unions, which allow for appropriate firm-level wage flexibility. 
The accumulation of foreign assets is a logical corollary of these surpluses, not to mention an imperative for an aging society. 
Indeed, German policymakers view as essential a reduction of Germany’s debt-to-GDP ratio toward the 60% ceiling set by European rules. 
When, if not in good times, does one have the chance to save? 
This stance does not align particularly smoothly with Macron’s economic program. 
While Macron’s program includes significant proposals for addressing supply-side issues with the French economy, it also favors output stabilization and, more important, increased spending in areas like public infrastructure, digitization, and clean energy to boost potential growth. 
Despite Macron’s decisive victory, he faces an uphill battle implementing his economic agenda. 
Even if the National Assembly, to be elected in June, endorses his reform program, street-level resistance will be no less fierce than it has been over the last few years. 
Germany, however, has good reason to support Macron’s supply- and demand-side reforms. 
After all, France and Germany are deeply interdependent, meaning that Germany has a stake in Macron’s fate. 
While it is true that the German government cannot (fortunately) fine-tune wages, it could, out of sheer self-interest, provide for its future by investing more in its human and social capital – including schools, from kindergartens to universities, and infrastructure like roads, bridges, and bandwidth. 
This approach would reduce the private user cost of capital, thereby making private investment more attractive. 
It would also create domestic real assets, reducing Germany’s exposure to foreign credit risk. 
A lower current-account surplus implies a more sustainable net-financial-liability position for Germany’s partners. 
If Germany and Macron don’t find common ground, the costs to both will be massive. 
No malicious external actor is imposing populism on Europe; it has emerged organically, fueled by real and widespread grievances. 
While those grievances are not exclusively economic, the geography of populism does fit that of the EU’s economic malaise: too many Europeans have been losing out for too long. 
So, if Macron fails to deliver on his promises, a Euroskeptic like Le Pen could well win France’s next election. 
To avoid this outcome, Macron must be firmer than his predecessors in pursuing difficult but ultimately beneficial policies. 
He might take a page from former German Chancellor Gerhard Schröder’s playbook. 
In 2003, Schröder prioritized reforms over rigorous obedience to the EU’s Stability and Growth Pact. 
Additional fiscal leeway was needed to smooth the economy’s adjustment to the bold labor-market reforms that he was introducing. 
The decision to prioritize reforms over obstinate rule-following proved to be a good one. 
Now is Macron’s Schröderian moment. 
He, too, appears to have opted for reasoned pragmatism over the blind implementation of rigid rules (which cannot make sense under any circumstances). 
Fortunately, policy principles are not written in stone, not even in Germany. 
Recall that the German government adamantly rejected the eurozone banking union and the European Stability Mechanism, both of which were ultimately launched (though some say it was too little, too late). 
Europe is experiencing a seismic shift, with its political system being undermined from within (and becoming vulnerable to Russian pressure from without). 
Fear of the “other” and perceptions of trade as a zero-sum game are taking hold. 
These circumstances call for bold and committed action, not only by France, but also by Germany, which, ultimately, has the most to lose. 

Europe’s Franco-German Dream Team 
PARIS – When the International Monetary Fund lowered its global growth forecast for 2014 and 2015 from 3.7% and 3.9%, respectively, to 3.3% and 3.8%, it cited the eurozone’s increasingly gloomy prospects, including significantly slower growth in Germany, as a leading cause. 
After all, the eurozone still accounts for about 13% of world output at market prices – about the same as China. 
Europe’s economic struggles are reflected in its political situation, with many European electorates now mired in a sense of hopelessness and sliding toward ideological extremes. 
But a forthcoming report by two highly respected economists – Jean Pisani-Ferry, the French government’s Commissioner-General for Policy Planning, and Henrik Enderlein, a key leader of a reformist group of German economists – will propose a way forward. 
The task facing Pisani-Ferry and Enderlein is to create a new reform strategy for Europe’s two largest economies, focusing on structural reforms in France and increased investment in Germany. The hope is that the report, which will be made public on December 1, will provide a breakthrough that can revive, at long last, the eurozone’s growth engine. 
The paper was commissioned a few days after the IMF’s Annual Meetings last month, at a gathering of the French finance and economy ministers, Michel Sapin and Emmanuel Macron, and their German counterparts, Wolfgang Schäuble and Sigmar Gabriel. 
Though the meeting produced no concrete policy action – as the French daily Le Monde put it, “nothing was asked for, and nothing was obtained” – it could signal the beginning of more effective Franco-German cooperation, guided by the Pisani-Ferry/Enderlein report. 
Such cooperation could not come at a better time. 
A couple of weeks after the project was initiated, France and Italy submitted revised annual budgets to the European Commission, in which they demanded more fiscal room for maneuver. 
The Commission now has until the end of this month to determine whether France has pursued reform diligently enough to avoid penalties for breaking its pledge to cut its budget deficit to less than 3% of GDP by next year. 
An effective reform strategy would have to balance the need for budget restraint and macroeconomic stability with growth-enhancing policies. 
When it comes to the latter, European Central Bank President Mario Draghi’s proposals in August – expanded monetary easing, structural reforms (particularly in France and Italy), and some fiscal expansion by countries like Germany – provide a useful framework to be supplemented with concrete measures. 
The ECB governing council has already agreed, in principle, to use the first of these policy tools. 
But monetary expansion alone will be inadequate to lift the eurozone out of stagnation. 
Moreover, many of the structural reforms that are currently being considered or implemented, despite boosting growth in the long term, can have short-term contractionary effects. 
This is particularly true of greater labor-market flexibility, a key asset for long-term growth that can lead to a short-term increase in unemployment. 
That is why a more expansionary fiscal stance is also vital, with Germany leading the way in deploying increased public investment to “crowd in” private investment and boost competitiveness. 
The IMF’s recent World Economic Outlook describes the success of this approach in recessionary environments. 
Given that Germany and even France can borrow at record-low interest rates, any reasonably well-designed investment program will strengthen the public sector’s balance sheet. 
And, with the eurozone running a current-account surplus of nearly $350 billion – which the euro’s recent decline will bolster further – there is no risk of a eurozone-wide balance-of-payments crisis. 
The key is confidence. 
Germany must trust that its agreement to loosen the eurozone’s fiscal belt will not lead to a slowdown of structural reforms, and countries like France need to know that excessive austerity will not exacerbate the impact of politically difficult structural reforms in the short run. 
In this sense, top-level political support, voiced in a way that elicits the approval of Europe’s citizens, will be crucial. 
Gabriel and Macron must lead the charge, backed by Sapin and Schäuble. 
Crucially, German Chancellor Angela Merkel and French Prime Minister Manuel Valls – not to mention the new Commission – must also step in to offer genuine support for the project. 
Waning confidence is a eurozone-wide problem, but the Franco-German relationship lies at its core. 
And, as experience has shown, Germany and France can have a major impact when they work together. 
The power of that relationship is what the Pisani-Ferry/Enderlein initiative represents – and what could, with sufficient political support, revitalize Europe. 

Germany, the G20, and Inclusive Globalization 
BERLIN – Globalization is getting increasingly bad press in the West nowadays. 
Populist movements allege that it does not benefit the average citizen very much, if at all. 
Instead, they tout protectionism and unilateralism. 
National policies, whether with respect to trade or financial regulation, are seen as the surest way to restore national greatness. 
But this populist agenda is based on the deeply flawed premise that international cooperation and international trade are zero-sum games, producing only winners and losers. 
In fact, cooperation and trade can deliver benefits to all countries. 
For many years now, they have increased global security and certainly global prosperity, with hundreds of millions of people lifted out of poverty, both in the developed and the developing world. 
To be sure, globalization needs rules and a recognized framework to ensure that it benefits everybody, delivering sustained and inclusive economic growth. 
As with national legislation, it is a framework that requires constant adjustments. 
But to abandon it altogether and retreat from globalization is the wrong answer. 
On the contrary, we should be seeking ways to deepen and broaden international economic cooperation. 
In my view, the G20 is the best forum for increased and inclusive cooperation. 
Of course, the G20 is not perfect, but it is the best institution we now have for achieving a form of globalization that works for everyone. 
Through it, the world’s main industrialized and emerging countries have worked together toward constructing a shared global order that can deliver increasing prosperity. 
Indeed, the G20 is the political backbone of the global financial architecture that secures open markets, orderly capital flows, and a safety net for countries in difficulty. 
The G20 has achieved much in recent years, including better coordination on financial regulation and international taxation. 
And, as the country that holds the G20 presidency this year, Germany is committed to continuing the important work begun under our most recent predecessors in China and Turkey. 
For example, more needs to be done to strengthen the global economy’s resilience against sudden shocks. 
So one of the G20’s top priorities this year will be our work to prevent a recurrence of a global financial and economic crisis like that of 2008-2009, which stemmed from a myopic, debt-based growth model. 
But, in order to tackle the gulf between the richest and the poorest countries, we need to go beyond the G20. 
In particular, the G20 – indeed the entire world – must reach out to Africa at this critical moment in the continent’s development. 
Beyond the moral question of raising Africans’ living standards, the continent’s development is crucial to reducing geopolitical risks. 
But investment in Africa is still low, depriving people in African countries of opportunities to improve their lives. 
For these reasons, the G20 during the German presidency is working to intensify its partnership with Africa. 
A central pillar of this effort is the “Compact with Africa,” which provides a framework for supporting private investment, including in infrastructure. 
We propose that, with the G20’s political backing, African governments, international organizations, and bilateral partners prepare comprehensive, country-specific investment compacts to encourage private-sector investment. 
Each country is to implement a bespoke package of measures to decrease its investment risks. 
Essentially, the Compact with Africa is a contribution to implementing the African Union’s Agenda 2063 blueprint for economic development. 
That AU agenda provides guidance for improving macroeconomic, business, and financial frameworks across the continent. 
While the Compact with Africa is open to all African countries, five have already committed to pioneering this new approach: the finance ministers of Côte d’Ivoire, Morocco, Rwanda, Senegal, and Tunisia want to work on compacts and have expressed this in writing. 
I have invited them to attend the G20 Finance Ministers and Central Bank Governors meeting on March 17-18 in Baden-Baden. 
At that meeting, my G20 peers and I will offer these countries an international platform to present their plans. 
We want to discuss with them, and the heads of the African Development Bank, the World Bank, and the International Monetary Fund, what the elements of country-specific investment compacts could be. 
Afterwards, these five countries, together with international organizations and bilateral partners, will select the specific measures and instruments to be included in each individual investment compact. 
The G20 will provide high political visibility, helping to raise investors’ awareness of these changes. 
I am confident that significant progress can be achieved when all partners involved work together closely and on an equal footing. 
International cooperation is the only way to achieve strong, sustainable, balanced, and inclusive global growth. 
Germany is committed to do its best as an honest broker within the G20 and beyond to ensure that globalization truly does benefit all. 

Is Germany Catching Trump’s Tax Disease? 
BERLIN – After months of negotiations, another grand coalition government – comprising Chancellor Angela Merkel’s Christian Democratic Union (CDU) and a grudging Social Democratic Party (SPD) – is taking shape in Germany. 
But the new government seems likely to miss the opportunity afforded by Germany’s strong economic and financial situation to pursue much-needed reforms. 
In fact, the fiscal policies that Germany’s emerging government is discussing bear a remarkable resemblance to those of US President Donald Trump, whose tax plan, most economists agree, will bring limited short-term benefits to a few, but huge long-term costs to many more. 
Indeed, the incipient German government is discussing cutting taxes for corporations and the rich, while raising spending on public consumption, especially public pensions. 
In the United States, Trump has convinced many of his lower-income supporters that his tax plan will benefit them, not just his wealthy cohorts. 
A similar feat has been accomplished in Germany, with some powerful lobby groups persuading middle-class voters that they will benefit from a tax cut. 
These groups claim, for example, that raising the income threshold for the top marginal tax rate will help middle-income voters, even though the top marginal tax rate is now levied on just 7% of German employees. 
Similarly, the plan to abolish the tax surcharge on higher incomes (Solidaritätszuschlag), introduced after reunification in the early 1990s, would benefit almost exclusively the top 30% of earners. 
This is all the more problematic because the top 30% of earners in Germany are already subject to a lower tax rate than 20 years ago, even though their wealth has increased. 
The bottom 70% largely pay much more in direct and indirect taxes, despite often having lower incomes. 
The arguments for cutting corporate taxes are similarly flawed. 
Like Trump, German politicians and lobby groups claim that domestic firms need a tax cut in order to stay competitive internationally. 
Yet Germany’s export companies are undeniably very competitive, and have largely managed to increase their global market share since the 1990s. 
Moreover, corporate profits have reached record highs in recent years, and while corporate taxes in Germany remain relatively high compared to other countries, they were reduced significantly in the 2000s. 
Beyond having only limited economic benefits, the proposed tax cuts in Germany – like Trump’s in the US – represent a huge strain on public finances in the long run. 
While Germany’s public sector currently boasts a surplus of about 1.3% of GDP, that is largely the result of good luck, not good policy: without low interest rates and a strong labor market, the federal budget would be in deficit. 
Yet demographic shifts mean that contingent liabilities for public pensions and health care in Germany will rise sharply over the next decades. 
Covering these costs will require taxes to be increased substantially and/or for spending to be reduced – precisely the opposite of what the CDU/SPD government is promising. 
This does not mean that Germany’s government should not contemplate any tax reductions or spending increases. 
But, in order to ensure that such changes have the maximum positive impact, without hurting younger generations, they must be designed fundamentally differently. 
Arguably, Germany’s biggest economic weakness today is low private investment. 
With the German corporate sector having run up massive profits for more than a decade, the resources are certainly available. 
Yet overregulation, heavy bureaucratic burdens, policy uncertainty, poor digital and transport infrastructure, and, in some industries, a lack of skilled workers, are currently impeding investment by companies in new and existing capacity. 
The government need not address all obstacles to investment and innovation at once. 
At the very least, it should create tax incentives for research and development, as well as for equity investments. 
It should also design provisions to support small and medium-size enterprises, while fighting tax evasion among big firms. 
Moreover, Germany’s government should use its fiscal space to invest in education, in particular in pre-schools and primary schools. 
And it should invest in developing an internationally competitive digital infrastructure and a social security system that ensures labor-force participation and lowers long-term unemployment. 
In many ways, Germany’s economy is thriving. 
But that is no reason for the government to waste its sizable fiscal surplus on economically useless tax cuts and spending increases. 
On the contrary, the surplus creates an important opportunity to tackle the long-run challenges that Germany faces – an opportunity that Merkel’s next government must not waste. 

Germany’s Coming Silver Age 
MUNICH – Record levels of migration to Germany over the last two years have called into question the country’s demographic projections. 
But Germany’s rapid shift to a more favorable profile is not a reason to postpone politically painful policy decisions about retirement and pensions. 
At the beginning of this century, forecasts that were considered reliable predicted that Germany would lose more than ten million inhabitants by 2050, owing to declining immigration and a low average birth rate. 
Today, population projections are significantly brighter. 
According to the government’s latest calculations, Germany’s population could remain above 80 million until 2060, and the reduction in the labor supply might not be as drastic as was previously feared. 
Demographic forecasts needed to be corrected significantly, because the number of immigrants to Germany has fluctuated wildly and unpredictably, as opposed to emigration from Germany, which has remained relatively stable. 
During high-immigration periods – such as in the early 1990s, after the collapse of the Soviet Union, or in the wake of the mid-1990s Balkan wars – population projections were fairly optimistic, because it was assumed that net migration would remain relatively high in the future as well. 
Instead, immigration to Germany fell drastically after the turn of the century, because the country’s weak economic growth and rising unemployment until 2005 deterred would-be newcomers. 
To account for this reduction in net immigration, forecasters also lowered their estimates for the future, and thus underestimated the decade of population growth that began after 2005. 
Alongside immigration, birth rates and average life expectancy also factor into population growth. 
In 2015, the fertility rate in Germany rose for the first time in 30 years, to 1.5 children per woman – probably owing to more focused family support and a strengthening economy, which reduced the financial risks of starting a family. 
The current fertility rate is expected to remain relatively stable into the future. 
But it is worth remembering that nobody foresaw the baby boom of the 1950s and 1960s or the dramatic fertility-rate decline in the 1970s. 
Average life expectancy is similarly hard to pin down. 
In recent decades, it has consistently risen faster than demographers expected, which makes one wonder if longevity – and thus the size of the future retirement-age population – is being systematically underestimated. 
As a rule, population forecasts start with static or period life tables that capture average life expectancy under the existing circumstances at any given time. 
But generation life tables, which are used to determine retrospectively how old a given age group has become, usually show a much higher average life expectancy than period life tables. 
For example, German women born in 1910 would have had a life expectancy of 50.7 years at that time. 
But, looking back, they ended up living 58.8 years on average, even as they endured two world wars. 
By this logic, a woman born in 2009 should have already had an average life expectancy of more than 88 years; but current population estimates do not foresee that average life expectancy for newborns until 2060. 
This shows that population estimates have relatively high margins of error. 
Contrary to what is assumed in many economic-growth models, demography is not a purely exogenous variable. 
Rather, it is susceptible to change as a result of economic development and other factors. 
If Germany sustains its current level of economic growth in the coming decades, all three drivers of population growth – immigration, fertility, and average life expectancy – could rise, and the population would remain relatively constant. 
In this scenario, if Germany can integrate immigrants into the labor market and increase older workers’ labor-participation rate, it would be in a better position to finance existing social-welfare programs. 
But we must not forget the one “constant” in all demographic forecasts: the aging of the population. 
Right now, baby boomers are still economically active, and will remain so for some time. 
But, by 2035, they will have retired, and Germany will have more than 21 million inhabitants over the age of 67; half of them will be over 80 by 2050. 
And if longevity rises faster than is currently expected, this age group will be even larger. 
Germany cannot expect to see a sustained, moderate shrinking of its retirement-age population until after 2060. 
Thus, proposals to water down previously implemented pension reforms, in light of rising immigration and healthy economic growth, are more than negligent. 
Germany should be using the current aging pause to ensure its social systems’ long-term sustainability, create age-appropriate jobs, and adapt housing and infrastructure to the needs of an aging society. 
In addition, Germany should have an active population policy to manage the three drivers of population growth, especially immigration. 
In the past two years, net migration was heavily influenced by the influx of asylum-seekers. 
The number of people who will need protection in the coming years or decades remains to be seen, and will depend on whether crises in the Middle East can be resolved, and on European and Germany’s own efforts to secure external borders and craft a comprehensive asylum policy. 
Given these variables, the degree to which migration is affected by asylum-seekers will not be easy to predict or control. 
By contrast, economically motivated immigration from countries outside of the European Union can be managed at the national level. 
So, German policymakers should be giving more consideration to the role of domestic requirements in immigration law. 
Now more than ever, they need to recognize that population growth is a policy objective that they can help to shape. 

Lessons from Germany for Integrating Refugees 
DAVOS – Governments around the world are facing a huge challenge. 
The number of international migrants has surged in recent years, reaching 244 million in 2015 – a 41% increase from 2000. 
With that total including 20 million refugees, preventing a humanitarian nightmare demands swift and responsible integration into host societies. 
The logistical challenge of doing so is placing mounting pressure on the countries facing the largest influxes. 
Germany, which received about 1.1 million people in 2015, knows this pressure all too well. 
Yet Germany has not buckled. 
On the contrary, it has handled the pressure exceedingly well, proving that through sustained collaboration among governments, business, and civil society, countries can develop effective approaches to meeting the needs of refugees and the countries that receive them. 
To succeed, each country must ensure that it has the capabilities, resources, and structures in place to manage refugees’ needs efficiently. 
Sound management and coordination among transit and destination countries can enable governments, businesses, NGOs, and aid agencies to address more effectively the challenges that will inevitably arise along the way. 
At the same time, to ensure that actors in transit and host countries actually provide what the refugees need, the challenges that arise must be viewed from the refugees’ perspective. 
Fortunately, the needed cooperation and commitment seems to be emerging. 
From my own vantage point in Germany, I’ve seen growing numbers of businesses seize the opportunity to tackle logistical and humanitarian challenges, offering services that help refugees rebuild their lives, while sharing the costs of infrastructure, technology, health care, training, education, and more. 
In particular, about 100 German businesses, including some that are household names, have joined the Wir Zusammen (We Together) initiative, which aims to help integrate new arrivals. 
To date, the initiative has secured internships for some 1,800 refugees and apprenticeships for another 300. 
My own firm, PwC Germany, offers a free ten-week language and vocational training course for refugees when they first arrive – the most critical period for them. 
Many refugees are prohibited from working during their first three months in a new host country, and lack access to public integration programs until their asylum application is approved. 
Thanks to our initiative and others like it, refugees can use this time to prepare to enter the job market, by gaining valuable skills, not to mention a certified assessment of their occupational aptitude. 
Such initiatives help not just the refugees, but also businesses – and, in turn, Germany’s economy. 
Companies that are not afraid of language barriers and cultural differences early in the integration process are rewarded with the chance to train and hire people who are highly motivated and often highly skilled. 
For companies facing skills shortages, this should be particularly tempting. 
Manufacturing, health care, and nursing are likely to benefit the most from the growth in the labor pool. 
Germany’s experience holds important lessons for other countries attempting to resettle refugees. 
One of the most useful and readily applicable is that the refugee journey is best managed in four distinct phases. 
The transit phase. 
The refugee has escaped from a country where life has become unsustainable, whether because of conflict or a lack of economic opportunities, but has yet to arrive in the host country. 
This is the most insecure phase, during which refugees have no safe haven. 
They are vulnerable not only to the elements, but also to smugglers, traffickers, and other criminals seeking to take advantage of their vulnerability. 
The arrival phase. 
Refugees find some semblance of safety, as they are given temporary shelter and support. 
During this phase, they can register with their current host country and apply for asylum in the protective country of their choice. 
Protection, settlement, and integration. 
Once in their country of choice, refugees receive protection and support, while they await the assessment of their asylum applications. 
If accepted, they are provided with housing and integrated into communities through work and education programs. 
It is during this stage that businesses can make the biggest contribution. 
Indeed, I strongly believe that integration works best when linked to practical training and concrete professional opportunities. 
The repatriation phase. 
If a refugee’s application for asylum is refused, he or she is returned to the country of origin. 
In the longer term, repatriation can occur even with refugees who secure asylum, if the circumstances in their home country change and it becomes safe to return. 
In every phase, many parallel tasks require capabilities and resourcing. 
As we have seen in Germany, business can play a major role in supporting national and local governments, thereby helping the refugees, themselves, and the wider economy. 
In that sense, the refugee crisis really is a valuable opportunity. 
For refugees’ sake – and our own – we should not squander it. 

Will Europe Let Germany Lead? 
BERLIN – The United Kingdom’s Brexit vote, Italian Prime Minister Matteo Renzi’s referendum defeat and subsequent resignation, and Donald Trump’s election as President of the United States have created a power vacuum in the West, and in Europe. 
At a time when Europe needs to make important collective economic and foreign-policy decisions, domestic issues are preoccupying larger European Union member states such as France, the UK, Spain, and Italy. 
Consequently, there is growing pressure on German Chancellor Angela Merkel and her government to step up and lead. 
But while Germany wants to show leadership, it needs European partners who are willing to engage and compromise. 
Germany’s critics are right to say that it could be more open to other member states’ policy proposals, but many of the complaints leveled against Germany have been unfair – and often self-serving. 
For example, the German government has been accused of shunning European solidarity in response to the 2008 financial crisis. 
But, while German measures have sometimes come too late, or been ill-conceived – such as its “temporary Grexit” proposal – Germany’s government has also agreed to numerous bailout programs, the creation of the European Stability Mechanism, and an EU banking union. 
What’s more, Germany has borne the largest financial burden. 
Germany has also been criticized for not agreeing to underwrite Eurobonds, and for opposing a transfer union. 
But these arguments have not always been made in good faith: member states such as France want to share risk without ceding sufficient sovereignty over economic policymaking. 
Germany’s government and citizens are more open than most to the deeper integration required to make the euro sustainable, including fiscal union. 
But, to achieve that, all partners need to move forward, in terms of sharing policy sovereignty and risk. 
A third complaint made against Germany is that it engages in beggar-thy-neighbor behavior, by pursuing restrictive fiscal policies that have created an excessive current-account surplus of close to 9% of GDP. 
This has indeed been a mistake. 
But it is Germany’s problem, first and foremost. 
While Germany has a large investment gap that hurts domestic productivity and growth, it is not the main culprit behind tepid growth, high unemployment, low competitiveness, and other economic ills elsewhere in Europe. 
Admittedly, many German policymakers have been misguided in their obsession with fiscal austerity, and with their criticism of the European Central Bank’s monetary-policy approach. 
But they are justifiably frustrated with the slow pace of economic reform across the EU. 
Overall, Germans are deeply pro-European, and the German government has done more for Europe than it is given credit for. 
Leadership mistakes are easy to identify and criticize in retrospect. 
A more constructive exercise is to judge decisions in the context of the information that was available at the time they were made, and to apply past lessons to future choices. 
With the benefit of hindsight, the German government – indeed, any government – would have acted differently with respect to the Greek debt crisis, fiscal policy, the Brexit referendum, and so forth. 
So, a fairer benchmark for German leadership is other large European governments’ own track records. 
Would Europe really be better off today if Germany’s government had followed the paths taken by its French, British, or Italian counterparts in recent years? 
Even if Merkel was late in responding to the crises in Italy and Greece, she has also shown extraordinary tolerance, open-mindedness, and foresight. 
In two key areas – addressing the refugee crisis and confronting Russian aggression – her government has shown more European solidarity than most other member states. 
Moreover, Merkel demonstrated sound leadership in her response to Trump’s victory. 
She congratulated him, and offered him a close working relationship, but only on the basis of “common values” such as “democracy, freedom, as well as respect for the rule of law and the dignity of each and every person.” 
She is also the most important, and the most sympathetic, partner for the UK government in the upcoming Brexit negotiations. 
Merkel’s approval rating remains the envy of other European leaders, and she could be the last well-grounded, non-populist head of government among the larger Western countries. 
Italy’s December 4 constitutional-reform referendum may have been the final wake-up call for Europe to get its act together in order to address social divisions, political extremism, and deepening economic and political crises. 
The German government should learn from its past mistakes, while continuing to step up as a leader for Europe. 
But it can’t do it alone. 
Other EU governments should stop bashing Germany as a way to deflect attention from their own failings. 
In recent years, their attacks have gone too far, and have been counterproductive. 
Germany needs its partners to come to the table, and to engage in a constructive dialogue about concrete solutions to Europe’s deepening crisis. 

Germany’s Dangerous Obsession 
PARIS – As Germany’s Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU), seek to form an unprecedented “Jamaica coalition” with the liberal Free Democrats (FDP) and the Greens, the rest of Europe anxiously awaits the government program that will result from their negotiations. 
The stakes are high for Europe, because these are not ordinary times. 
The rise of economic nationalism, growing security threats, and the ongoing refugee crisis have made collective responses more necessary. 
China is becoming increasingly assertive, and US President Donald Trump’s administration has made clear its disdain for the European Union and its suspicions of Germany’s economic strength. 
At home, the EU’s rationale is being tested by Brexit, and by the defiant governments of Poland and Hungary – two countries that, as Constanze Stelzenmüller of the Brookings Institution recently noted, are enjoying the benefits of EU membership and ignoring the corresponding obligations. 
In this context, Emmanuel Macron’s election to the French presidency in May was a relief for Germany. 
Yet Macron has put Germany in the uncomfortable position of having to respond to his proposals for EU-level reforms. 
By calling for a common EU defense fund, tax harmonization, and a joint eurozone budget, Macron is upending the European status quo. 
The question now is whether Europe’s largest and most prosperous country will provide the leadership these trying times demand. 
Each party in the coalition talks brings a very different perspective to the table. 
On European matters, Chancellor Angela Merkel’s CDU, which has been in power for 12 consecutive years, will bring continuity. 
But the more conservative CSU is being pulled to the right by competition from the populist Alternative für Deutschland (AfD). 
As for the other two parties, the FDP has adopted a tough line toward Europe. 
Its leaders have suggested that Greece should leave the euro, and that the EU mechanism for bailing out struggling countries should be dismantled. 
The Greens, on the other hand, are keen on deepening European integration; but that is not their first priority, and they are the smallest party at the table. 
Ultimately, the new government’s program will likely reflect the suspicion that other EU member states want to solve their problems with German money rather than domestic reforms. 
German politicians and opinion makers assess virtually every proposal for EU-level reform through this distributional prism. 
Schemes that are not intended to result in structural transfers are routinely dissected to confirm that they will not become cash dispensers for other EU members. 
For example, Germans regard a joint budget not as a way to finance public goods such as research or infrastructure, but as a device to compel Germany to cover other countries’ expenses. 
Similarly, common unemployment insurance is regarded as a scheme to make Germans pay for unemployed Spanish or French workers. 
And a deposit-guarantee program for banks is seen as a way to force prudent German depositors to pay for non-performing loans in Italy. 
To be sure, each of these concerns may be legitimate. 
All proposals certainly should be scrutinized to ensure that they will not be abused or introduce moral hazard. 
European solidarity is not a one-way street. 
But, at the same time, German leaders must recognize that their exclusive focus on distributional effects is poisonous. 
They should recall the moment, in 1979, when British Prime Minister Margaret Thatcher marched into a European summit and said, “I want my money back.” 
The same logic was on display nearly 40 years later during the Brexit campaign, when “Leave” politicians falsely claimed that withdrawing from the EU would bring “money back” to the National Health Service. 
Why has Gemrany become obsessed with the fear of paying too much? 
The EU budget contains much to criticize, but it hardly treats Germany unfairly. 
Germany may be the largest net contributor, but that is because it has the largest economy. 
As a proportion of national income, countries like Belgium, France, and the Netherlands also contribute a meaningful share of their net income. 
German fears that the European Stability Mechanism serves as a channel for hidden transfers are similarly unfounded. 
Yes, the ESM benefits from low borrowing costs, which are essentially passed on to borrowing countries. 
If Greece cannot repay its debt, ESM shareholders will suffer a loss; and that risk is not priced into the interest rate Greece pays. 
But, so far, the ESM has continuously posted profits, and any loss it does suffer will be spread among all shareholders – including, for example, Italy. 
The ESM is a far cry from a subsidy machine financed by the German taxpayer. 
Some in Germany also decry the so-called Target2 balances, which record bilateral surpluses and deficits of national central banks vis-à-vis the European Central Bank. 
The University of Munich’s Hans-Werner Sinn, for example, argues that the Target system has become a conduit for hidden operations to benefit debtor countries in southern Europe. 
True, in September, the Bundesbank had a net surplus of €878 billion ($1.2 trillion) vis-à-vis the ECB, whereas Italy and Spain ran deficits of €432 billion and €373 billion, respectively. 
These positions reflect the degree to which official flows are still substituting for private flows. 
But, again, this arrangement has not cost Germany a single euro. 
On the contrary, the Target system is essentially a collective insurance scheme: if a national central bank were to default, the loss would be shared among all ECB shareholders. 
The system thus allows German exporters to continue to sell their products in southern Europe, because it guarantees that they will be paid. 
The claim that Germany loses from this is simply false. 
It will always be in a political party’s interest to respond to the electorate’s fears. 
But politicians also have a duty to let voters know when their fears are excessive or unfounded. 
Europe needs a Germany that will veto half-baked proposals. 
But it also needs a Germany that can overcome its narrow obsessions and provide leadership. 
With the current coalition talks, German leaders have an opportunity to assess new global developments that will have far-reaching implications for Europe and Germany alike. 
They must decide whether it is riskier to do nothing, or to take the initiative. 
No one is expecting a Damascene conversion. 
But one hopes for a government that will be more forthcoming in offering solutions. 

While Germany Slept 
BERLIN – Few people outside Germany are familiar with the caricature of themselves that many Germans hold in their minds. 
Far from the aggressive bully of twentieth-century war propaganda, the perfectionist engineer of Madison Avenue car advertisements, or the rule-following know-it-all of the silver screen, the German many picture today is a sleepy-headed character clad in nightgown and cap. 
Sometimes clutching a candle, this German cuts a naïve, forlorn figure, bewildered by the surrounding world. 
This figure is not new. 
On the contrary, referred to as “Der deutsche Michel” or “the German Michel,” it was popularized in the nineteenth century as a character whose limited perspective causes him to shun great ideas, eschew change, and aspire only to a decent, quiet, and comfortable life. 
But Michel has now made a comeback. 
And who can blame him? 
Germany now boasts a booming economy, near full employment, rising wages, and content unions. 
The financial crisis is long forgotten, public budgets are under control; and the 2015 influx of migrants has been relatively well managed. 
What bad news there is – industrial scandals (like that at Volkswagen), airline bankruptcies, endlessly delayed infrastructure projects – does little to dampen the general sense of safety and wellbeing enjoyed by Germany’s Michels. 
The only real threat, it seems, is the world outside Germany’s borders. 
In this sense, last autumn’s election campaign was perfectly suited to Germany’s Michels. 
“A land where we live well and happily,” the campaign slogan of Chancellor Angela Merkel’s Christian Democratic Union (CDU), resonated with them, as did the rather provincial and mostly empty messages of rival parties. 
With the exception of the right-wing populist Alternative für Deutschland (AfD), the parties displayed a rote civility and drowsy acceptance of consensus that pacified the electorate. 
After the election, the real politicking began, but even then, pains were taken to obscure those activities from Germany’s Michels. 
Indeed, though party officials had been in place for some time, they waited until the votes were cast before putting their cards on the table, and even then did so behind closed doors. 
Even the leaks from these closed-door coalition talks were so well managed that they created the illusion that the “Sondierungsgespräche” – that is, the preparatory talks among party officials – were politically rather harmless. 
But Germany’s political class, like its ordinary Michels, are in denial. 
The soporific federal elections, the breakdown of coalition talks among the CDU, its Bavarian sister party the Christian Social Union (CSU), the Greens, and the Free Democrats (FDP), and the timid dance between the CDU and the Social Democratic Party (SPD) since then all point to a serious deficit in German politics. 
The truth is that the various party platforms, meant to inform the electorate and provide a basis for coalition talks, reveal a shocking lack of imagination and paucity of new ideas. 
Second-order issues are presented as red lines, with largely technical questions – for example, about refugee family reunions, a new health insurance scheme no one asked for (Bürgerversicherung), or the role of the federal government in funding education – taking center stage. 
Considering the state of Europe and the world – and the hopes many outsiders are pinning on German leadership – these issues seem rather marginal. 
But the real problem is that they are distracting from larger issues relating to, say, the euro, security and defense, migration, infrastructure, and taxation. 
Lacking any forward-looking political visions, German politics has degenerated to tactical plays being carried out by established players. 
The CDU, in a War of the Roses with the CSU, can live neither with or without Merkel, while the SPD is unsure of itself and fears further political decline. 
None of this bodes well for a country whose parliament has already been diminished, after these three parties, during their eight years forming a coalition government, marginalized the opposition and failed to build up new leadership cadres. 
Coalition agreements in Germany have always been elaborate documents of a quasi-contractual nature. 
But there is a growing tendency to plan out four years of governing, with leaders then using legislative periods not to debate laws, but rather to enact previously agreed policies. 
Moreover, no major reform has been successfully implemented in Germany since the 2000s, when Chancellor Gerhard Schröder pushed through labor-market reforms. 
No forward-looking reforms of the caliber of Schröder’s Agenda 2010 were even attempted under Merkel in over a decade. 
The CDU/CSU and the SPD are now pursuing a grand coalition that would keep Germany roughly on the same path it has taken during the last eight years. 
The 28-page agreement that will allow formal coalition talks to proceed is overly detailed, technocratic, unambitious, and lacks vision. 
It is thus unsurprising that, though CDU/CSU and SPD negotiators have touted the deal as a breakthrough, many, especially in the SPD, are unhappy with the outcome, with some calling for renegotiation. 
The SPD now faces a choice: at its special party congress this weekend, its leaders must decide whether to join yet another grand coalition government that promises more of the same, or move into opposition, probably triggering new elections. 
But there is another option, which many have ignored: a CDU-led minority government, with Merkel as chancellor. 
Freed of stifling coalition agreements with a reluctant SPD or a coldly calculating FDP, Merkel could choose her cabinet based on competence and vision, rather than party politics. 
She could even appoint ministers from other parties. 
Most important, Merkel could finally tackle the important issues that have fallen by the wayside in recent years, to which the current coalition agreement pays only lip service. 
This means cooperating with French President Emmanuel Macron to move the European project forward; modernizing Germany’s public administration system; preparing the labor force for digitization; and tackling immigration issues. 
Parliament is integral to success on any of these fronts. 
Mainstream parties must embrace the kind of open and constructive debate that nurtured parliamentary democracy in the Federal Republic’s early years, rather than remaining focused on political tactics. 
Michel may prefer the modest policy initiatives and incrementalism that have characterized Merkel’s chancellorships. 
But a minority government forced to muster coalitions of the willing to address the critical issues confronting Germany and Europe could escape the constraints of Michel’s expectations, freeing German politics from party tacticians and enabling real and much-needed reform. 
In other words, the modicum of political insecurity Germany faces today may well be just what the country needs to give rise to new ideas and voices, and a better future. 

Germany’s Economic Road Ahead 
MUNICH – The next German government will face economic-policy challenges in five key areas: digitalization and automation, demographic change, globalization, climate change, and European integration. 
With respect to digitalization, Germany tends to fluctuate between excessive enthusiasm for expanding fiber-optic networks and fear of the impact of new, largely unregulated business models, such as those underpinning avatars of the “sharing economy” like Uber and Airbnb. 
But German policymakers must not respond to such sentiments with kneejerk reactions. 
Rolling out a nationwide fiber-optic network, rather than simply servicing the locales that are most in need, would be both expensive and inefficient. 
And politicians should focus their regulatory efforts on ensuring that sensible digital business models and private investment are not obstructed. 
With digitalization also comes automation and robotization, which many fear will lead to job losses. 
Consequently, one now regularly encounters proposals for an unconditional universal basic income (UBI), to be paid for, perhaps, with a tax on robots. 
But such a response would be a terrible mistake – a capitulation to the challenges that we face. 
Instead of making a large swath of the population dependent on transfers earned by others, Germany’s leaders should ensure that all workers receive the training needed to pursue opportunities in the labor market of the future. 
As it happens, Germany’s aging population and declining workforce will create labor shortages in the years ahead. 
But instead of seizing the opportunity in front of them, German policymakers have been busy worrying about the elimination of skilled labor altogether. 
These fears make no sense. 
In 1900, 38% of the labor force in Germany worked in agriculture; in 2000, only 2% did. 
And yet the full-scale automation of agriculture did not lead to mass unemployment. 
Germany’s demographic transformation will have significant implications for the country’s public finances, and especially for its social-insurance system. 
But in the recent federal election campaign, both of Germany’s main political parties ruled out proposals to raise the retirement age to 70, even though there are good reasons for doing precisely that. 
Raising the retirement age to shore up a statutory pension scheme is often denounced as unfair, because people with physically demanding jobs, such as nurses and manual laborers, cannot be expected to work until they are 70. 
But that is a problem that should be addressed through higher wages and disability insurance, not with pension insurance. 
And besides, early retirement can still be made an option, as long as it is marked down accordingly. 
Globalization – whether it takes the form of migration or flows of trade, capital, and data – poses an equally large challenge, even though it has been a boon to Germany in recent decades. 
Generally speaking, globalization implies a narrower scope for national policy. 
And this is particularly true for Germany, because it has signed on to international agreements brokered by the European Union as a whole. 
Growing cross-border mobility has put Germany under severe competitive pressure. 
Germany wants to attract companies and investment, but it also wants to create as many high-paying jobs as possible. 
Germany thus benefits from immigrants with above-average qualifications, because they will earn enough to pay more in taxes than they receive in state benefits. 
To bring in capital and high-skill immigrants, Germany needs to keep taxes low. 
But this limits its ability to use taxation as a mechanism for redistribution. 
For now, Germany can still finance its welfare state. 
But with such a globalized economy, it cannot count on subsidies funded by general tax revenues to offset future shortfalls in its social-security system. 
More to the point, Germany cannot indefinitely keep taxes low while offering generous social transfers to lower-skill workers; eventually, its welfare system would collapse. 
And the government should work with other countries and within the EU to ensure that immigration is not motivated by a desire for welfare benefits. 
To remain competitive, Germany needs to change how it taxes investment and innovation. 
French President Emmanuel Macron’s government has announced plans to abolish France’s wealth tax and significantly reduce its corporate-tax rate. 
The governments of Sweden, the United Kingdom, and the United States have also announced plans to cut taxes. 
The German government, whether it likes it or not, cannot escape the effects of global tax competition. 
But as it looks for ways to improve its tax regime, it must not allow certain sectors – not least those with heavily digitalized business models – to evade taxation entirely. 
Climate change is another facet of globalization, because here, too, there is nothing that Germany can do by itself to halt global warming. 
Rather, the government must work with its European partners to forge global climate agreements, while enacting measures to mitigate the effects of climate change at home. 
But as Germany pursues its emissions reductions, it should keep an eye on cost-effectiveness, because no climate agenda can succeed without social acceptance. 
Viewed from this perspective, selective interventions, such as a proposed ban on internal combustion engines after 2030, would thus be counterproductive. 
A far better approach would be to include road traffic in the emissions-metering system under the Paris climate agreement, because this would allow emissions cuts to be made at the lowest possible cost. 
The last major challenge for Germany’s next government is its policy toward Europe. 
Germany needs the EU to surmount its current crisis, deepen the internal market, and develop a common defense and security policy, so that it can reap the benefits of European integration. 
Joint arms procurement and closer operational cooperation would yield significant efficiency gains, and reduce the burden on EU member states’ budgets. 
Moreover, the European Monetary Union is in desperate need of reform. 
Instead of waiting for the next crisis to erupt, Germany should see to it that European banks hold fewer domestic government bonds. 
In cases where individual member states have incurred too much debt, private creditors – not taxpayers of other countries – should bear the burden of debt restructuring. 

The Chimera of Franco-German Reform 
CAMBRIDGE – An abiding truth in the United States is that all politics is local. 
Apparently, the same wisdom can be applied (to some extent) to the European Union, whose agenda ultimately depends on key member states’ national politics. 
This is particularly true with respect to eurozone institutions, which almost everyone agrees are in urgent need of reform. 
Indeed, shoring up the eurozone was the common thread in major speeches by European Commission President Jean-Claude Juncker and French President Emmanuel Macron last month. 
In his State of the Union address, Juncker boldly outlined his ambitious vision for Europe’s future. 
He called on the EU to complete its banking union, establish a European finance ministry (fully integrated into the Commission), and expand the EU-level budget. 
Macron, in a speech at the Sorbonne, touched on issues ranging from defense and security to eurozone reform and Europe’s political divides. 
But he left much unsaid. 
And, in line with his role as a national leader, his was an inter-governmental, not a community perspective. 
Still, both speeches were clearly intended to frame the political debate now underway in Germany, where Chancellor Angela Merkel’s Christian Democratic Union (CDU) is trying to form a new coalition government. 
Many observers had hoped that Germany’s recent federal election would open a “window of opportunity” for EU-level reforms. 
But it is now starting to look like that window has already closed. 
The fate of any EU agenda – whether Juncker’s or Macron’s – rests with Merkel, who is unlikely to make any significant political moves. 
Indeed, bold action of the type Juncker and Macron have proposed would not just be uncharacteristic for Merkel; it would also require her to invest all of her remaining political capital. 
Throughout her career, Merkel has always behaved, not unreasonably, as if her main goal was to be reelected. 
And because the CDU would prefer to dominate a government – and if possible, govern without coalition partners – it has always sought to win a majority by appealing to German voters in the middle of the political spectrum. 
Merkel has a keen sense of where the middle is, and how and when it might shift. 
Accordingly, she often adopts her competitors’ ideas. 
While in office, she has established a minimum wage, lowered the retirement age to 63 (for those with 45 years of contributions), and legalized same-sex marriage – policies that are anathema to traditional conservatism, but that now have broad popular support. 
As the American economist Harold Hotelling explained in 1929, those competing for the middle have an “undue tendency … to imitate each other.” 
Accordingly, the CDU and its main competitor, the Social Democrats (SPD), have become increasingly indistinguishable. 
And, as a corollary, smaller parties seeking an electoral foothold have had to target political minorities, many of whom have strongly held preferences and beliefs. 
Because the CDU and the SPD lost support in the recent election, with the latter deciding to spend the coming electoral term in the opposition, Merkel will need to form a coalition with such parties. 
But no mainstream German party, let alone Merkel’s, would govern with the third-largest faction in the Bundestag, Alternative for Germany (AfD), a far-right anti-EU party that garnered 13% of the vote. 
That leaves the Free Democrats (FDP), who are liberal in a European sense, but also frustrated with the eurozone’s malaise. 
Giving voice to German “transfer fatigue”, the FDP is adamantly opposed to any arrangement that transfers German money to underperforming member states. 
During the campaign, the FDP thus drew a red line against furnishing the EU with a fiscal capacity, under any guise. 
Two other FDP proposals – a sovereign-debt-restructuring mechanism, to force creditors to take responsibility for their decisions, and temporary withdrawal from the common currency for over-indebted member states – could further complicate matters for eurozone reformers. 
The FDP’s ideas have broad support in Germany and among German economists (and are shared by a number of other European economists). 
And they are consistent with positions taken by the German Ministry of Finance under the previous government. 
But policies that might work in a perfect world of efficient and resilient financial markets could be dangerous if applied in highly imperfect real-world markets. 
As we saw a decade ago, financial institutions operating in an environment of uncertainty can become fragile and collapse, imposing high costs on society. 
The idea of a temporary exit from the euro is particularly ill-advised. 
If that option were formalized, markets would price it in, and member states without deep capital markets would pay a premium. 
Their interest rates would be structurally higher. 
And under volatile conditions, they are prone to face runs from fickle institutional investors, wary of rolling over their credit lines. 
The FDP campaigned on an exit option, and its leaders, having been out of parliament for four years, will not want to risk their credibility by backing away from it now. 
And besides, some deputies in the CDU, and many in its Bavarian sister party, the Christian Social Union, are sympathetic to the FDP’s positions. 
The third likely member in Merkel’s new coalition, the Greens, would hardly be able to counterbalance these internal forces. 
Another problem is that neither Juncker nor Macron has offered much in the way of detail. 
The actual design of a future eurozone budget – and the types of expenditure it would include – is still unclear. 
So, too, is the process for holding a eurozone finance minister accountable and ensuring his or her democratic legitimacy. 
It is also not evident how much national sovereignty would be lost, in the name of a shared fiscal capacity. 
Sorting out these questions will require a level of political entrepreneurship unlike anything Merkel has ever shown. 
To join in Macron’s European project, she would have to assume an entirely new role and expose herself to substantial political risks. 
Germany would have to take the initiative: rather than rejecting proposals, it would have to offer its own. 
Such behavior can hardly be expected from a government that, beholden to the median German voter, plays it safe. 
The German political center has been shifting, and it is heading in a different direction than Juncker and Macron. 
As a result, the eurozone’s institutional design will likely remain incomplete. 

Germany’s Dangerous Nuclear Flirtation 
BERLIN – As in a game of chess, there are geopolitical moves through which a country can – unwittingly – checkmate itself. 
Opening a debate on German nuclear weapons would be such a move. 
Yet this is exactly what some Germans have recently proposed. 
Supporters of a nuclear-armed Germany contend that NATO’s nuclear umbrella has lost all credibility because of statements made by US President Donald Trump. 
There are at least three good reasons why considering a nuclear option would be foolhardy for Germany. 
For starters, Germany has repeatedly renounced it, first in 1969 by signing (and later ratifying) the Treaty on the Non-Proliferation of Nuclear Weapons (NPT), and then in 1990 by signing the so-called Two Plus Four Treaty, which paved the way for German reunification. 
Casting doubt on these commitments would severely damage Germany’s reputation and reliability worldwide. 
Germany would call into question the credibility of NATO’s nuclear deterrence, and thus the alliance itself, along with the entire nuclear non-proliferation regime. 
It is worth noting that since its creation in 1949, NATO has been one of the world’s most successful instruments of proliferation prevention. 
Not a single NATO member state – apart from the United States, the United Kingdom, and France – has found it necessary to acquire nuclear weapons of its own. 
If Germany were now to break out of its non-nuclear power status, what would keep Turkey or Poland, for instance, from following suit? 
Germany as a gravedigger of the international non-proliferation regime – who could want that? 
Second, a German nuclear bomb would damage the strategic environment in Europe – to Germany’s disadvantage. 
Russia would interpret German steps toward a nuclear arsenal as a direct threat to its own national security and would likely adopt military countermeasures. 
That, in turn, would make it even harder to pursue the vision of a pan-European order of peace and security, a core foreign-policy goal of all German governments since that of Konrad Adenauer. 
Moreover, a German nuclear ambition might jeopardize the delicate balance of power in Europe – including between Germany and France, for example – with incalculable consequences for the long-term cohesion of the European Union. 
Finally, it is not hard to predict that the pursuit of nuclear weapons would draw significant public opposition, especially given that such a move would be a complete about-face for German Chancellor Angela Merkel’s government, which, just a few years ago, moved to phase out nuclear energy altogether. 
It is difficult to imagine a greater fiasco for German foreign and security policy than proposing a nuclear strategy and then failing to obtain parliamentary approval. 
There are smarter long-term ways to bolster Europe’s nuclear defense than introducing a German bomb. 
For example, France might be willing to consider playing an extended nuclear-deterrence role, along with the roles of the US and the United Kingdom within NATO. 
While this would require a fundamental reorientation and Europeanization of France’s nuclear strategy, Germany and other European partners could offer financial contributions to such an initiative, in the context of a future European defense union with a nuclear component. 
But these are, at best, long-term options. 
In short, no matter what Trump says, Germany will remain dependent on the US nuclear umbrella for the foreseeable future. 
The best way to maintain NATO’s credibility and be taken seriously by the US is to work seriously toward the alliance’s 2%-of-GDP target for defense spending and to invest more heavily in conventional military capabilities, not to satisfy US demands, but to protect our own security and defense interests. 
But this is not simply about spending more; it is about spending more intelligently, particularly by pooling and sharing capabilities, and by systematic joint procurement with France and other European partners, including through the recently established EU Defense Fund. 
None of this will work if Germany will not start defining military strategy, security, and defense as top political priorities. 
Only then will the Bundestag be able to give the Bundeswehr – often referred to as a “parliamentary army” – what it needs to do its job. 
The alternative – considering the development of nuclear weapons – would be a game-losing move. 

Germany’s Strange Turn Against Trade 
BERLIN – The window of opportunity to complete the Transatlantic Trade and Investment Partnership (TTIP) between the United States and the European Union is closing quickly. 
National elections will be held this year and next in the US, France, and Germany, and the campaigns will play out in an environment that is increasingly hostile to international agreements in any form. 
The biggest risk might come from the least likely source: Germany, an export powerhouse. 
As it stands, some 70% of Germans citizens oppose the TTIP, almost twice the average in other European countries. 
They overwhelmingly believe that Germany will not benefit economically, that lower-skill workers’ wages will suffer, that large corporations will gain power at the expense of consumers, that data and environmental protection will be compromised, and that citizens’ rights will be undermined. 
But a slew of studies have proved all of these claims to be overblown or outright wrong. 
In fact, Germany – whose economic progress since the end of World War II has been driven by its consistent openness to international trade and economic integration, and which remains one of Europe’s most open and trade-dependent economies – would be among the main beneficiaries of the TTIP. 
It is projected that the TTIP would raise annual per capita income in Germany by 1-3%, or €300-1,000 per year by 2035. 
Moreover, with nearly 50% of German jobs linked, directly or indirectly, to the tradable sector, the deal would also help protect employment. 
And, by boosting the ability of the US and Europe to set global business standards, German firms’ international competitiveness would rise. 
Not every individual or company stands to gain from the TTIP, but the net effect on Germany’s economy and citizens would be clearly positive. 
Why, then, do so many in Germany oppose the deal? 
One reason is that Germany’s apparent economic success has increased aversion to change. 
The country not only endured the global financial crisis of 2008-2009 and the European sovereign debt crisis; it has actually thrived in recent years, experiencing robust GDP growth and impressive wage gains. 
The unemployment rate has been halved since 2005, reaching a record low of 4.6% today, and its current-account surplus has soared to a staggering 8% of GDP. 
The sense of being Europe’s economic superstar has generated policy inertia, bringing the country almost to a complete standstill on economic reforms. 
While most other Europeans are desperately looking for any opportunity to pull their country out of crisis, Germans see little reason to meddle with an ostensibly prosperous status quo. 
Unfortunately for Germany, its current path is not as smooth and secure as people like to think. 
In fact, since its lost decade as the “sick man of Europe” in the 2000s, Germany has caught up with other advanced economies in only some areas. 
It still has one of the lowest rates of public and private investment among OECD countries, and will be hit harder than most by a dramatic demographic shift over the next decade. 
Beyond providing an immediate economic boost, the TTIP would help Germany weather the longer-term challenges it faces. 
Germany’s opposition to the TTIP also reflects the recent surge in populist and nationalist sentiment in much of the Western world. 
The appeal of such forces is particularly pronounced in the EU, owing to the popular perception that European integration has weakened national sovereignty and left citizens subject to decision-making by unelected technocrats. 
The last thing many Europeans want is yet another set of supra-national rules, formulated behind closed doors, governing their economies. 
This sentiment is especially acute for Germans, who remain bitter at, as they perceive it, having been Europe’s paymaster during the crisis. 
Some now fear that the TTIP is just another trick, intended to take advantage of Germany’s economic strength and generosity. 
Overcoming this fear will be no easy feat. 
A third reason for Germany’s opposition to the TTIP is that the country is already engaged in a battle for wealth redistribution. 
Germany currently has the highest inequality in private wealth in the eurozone, and it has experienced a sharp increase in wage inequality over the last two decades. 
In fact, many Germans anticipate a further increase in inequality. 
Not only is the minimum wage widely circumvented; some politicians have capitalized on fears of the current influx of refugees to win votes, claiming that openness to foreigners will only make inequality worse. 
Compounding Germans’ disillusionment is the sense – shared by many in Europe and elsewhere – that the system is “rigged.” 
Volkswagen managers received huge bonuses this year, despite the global scandal caused by the company’s years-long effort to evade emissions standards. 
And the release of the Panama Papers has revealed how the wealthiest avoid paying taxes. 
Claims that the TTIP would benefit primarily the wealthy have thus struck a chord with labor unions and others. 
A trade-dependent economy has much to gain from freer trade, especially with a market as large as the US. 
Germany should be using its political clout to push its European counterparts to seal the deal. 
Instead, with the popularity of the country’s two largest political parties, the Christian Democratic Union and the Social Democrats, falling fast, Germany’s leaders are unlikely to push an unpopular deal. 
That is bad news for everyone – especially Germans. 

The German Rules Trap 
PARIS – Europe has a new German problem. 
Unlike in the past, it stems neither from hegemonic ambitions nor from the sort of weakness that might tempt aggression. 
Instead, it is rooted in Germany’s abdication of any sense of shared responsibility for Europe, despite boasting as robust an economy as it has had since 1945. 
The result of Germany’s approach – “do as we do, or leave us alone” – is inertia, at a moment when Europe desperately needs momentum. 
For a long time, Europe was at the center of German concerns. 
In 1994, for example, Wolfgang Schäuble – then parliamentary leader of the Christian Democratic Union, and now President of the Bundestag – and his CDU colleague Karl Lamers wrote a paper calling for the EU’s “core” countries, including France, to move swiftly toward closer integration, including political union. 
France resisted German pressure because it was extremely suspicious of political federalism. 
Then-president François Mitterrand did not want to move beyond the Maastricht framework. 
After the 2010 eurozone crisis, the debate shifted toward structural reforms. 
France advocated for more economic integration, but Germany conditioned any discussion of the eurozone’s future on French structural reforms. 
President François Hollande agreed in principle to that trade-off, but lacked the time and political support to implement it. 
Today, however, France is finally undertaking Germany’s long-expected domestic reforms – and pressing for change at the EU level. 
French President Emmanuel Macron wants to create not a federal Europe – nobody is proposing that – but a sovereign EU capable of resisting the pressure of figures like US President Donald Trump, Russia’s Vladimir Putin, China’s Xi Jinping, and Turkey’s Recep Tayyip Erdoğan. 
Unfortunately, Germany is once more resisting French proposals. 
Though Chancellor Angela Merkel often lavishes Macron with praise for his courage and policy goals, she seems reluctant to agree to any action to strengthen the EU. 
German leaders concede that French reforms are good for France, but now argue that eurozone reform is a separate issue. 
Although disappointing, this stance is not unexpected. 
Merkel is politically weakened, and German public opinion remains deeply influenced by the false narrative that the country is Europe’s paymaster. 
Schäuble, a former euro federalist, has scaled back his ambitions dramatically. 
While he still dreams of a European Monetary Fund, it would only resemble a solidarity mechanism. 
Its main purpose would be to monitor and punish fiscally lax states for the purpose of reducing further the European Commission’s budgetary oversight responsibilities. 
The truth is that Germany aspires to live in a minimalist Europe that lacks any political union, but is tied to intergovernmental disciplinary mechanisms designed by its most prosperous countries. 
In other words, Germany wants to eliminate from the EU all traces of community spirit, and the politics that go with it, and replace them with an austere idyll of rigid rules. 
And current events in Italy are reinforcing the position of German hardliners. 
It is probably no coincidence that three days after the new Italian government revealed its economic plan – which, if implemented, will blow up the eurozone – 154 German economists published a manifesto strongly opposing any substantial eurozone reform. 
But this stance also reflects the so-called ordoliberal principles that underpin German thought and that shape Germany’s understanding of the eurozone crisis. 
Along with the Netherlands and the Baltic states, Germany blames that crisis on some member states’ budgetary imprudence and insufficient monitoring of private debt, and thus refuses to examine properly the eurozone’s systemic problems. 
Eight years later, Europeans still embrace divergent narratives about the crisis. 
How can we expect them to move toward the future if they strongly disagree on the past? 
To acknowledge that the eurozone can function only on a foundation of solidarity and interdependence would be to engage in precisely the kind of thinking that German ordoliberals have always rejected. 
They see the national economy as the sum of microeconomic decisions, and a supranational economy as the sum of national economies. 
For them, solidarity is founded on consistent management. 
This reasoning leads to three lines of argument that preclude basic strategic analysis. 
First, Germany embraces the self-serving fiction that it owes nothing to others for its prosperity. 
Yet we know very well how much Germany’s economy depends on European demand, and how much it benefits from the undervaluation of the “German euro” (whereas the “Italian euro,” for example, suffers from overvaluation). 
Germany also gains the most from European Central Bank policy. 
As the German economist Marcel Fratzscher recently tweeted, “The unbearable cynicism of some German politicians and economists: they attack ECB policy, yet Germany’s government is its biggest beneficiary – €294 billion in interest savings since 2007. 
Compare that to risks assumed in the crisis, and it is an excellent deal for Germany.” 
Second, Germany insists that any slowdown should be met with greater discipline and tighter austerity, not countercyclical policies. 
According to German leaders, no matter how severe the effects of that approach may be, they are simply the price of redemption after committing the sin of accumulating excessive debt. 
Finally, Germany is convinced that, in a market economy, the state’s responsibility is to set rules, not to steer the choices of economic actors. 
In fact, a recent report from the Kiel Institute for the World Economy portrays Germany’s enormous current-account surplus as a reality that policymakers cannot change, and that thus must be accommodated. 
This ignores the fact, highlighted by a recent study by Guntram B. Wolff, that Germany’s current-account surplus is the result not of aging households’ frenzied desire to save more, but of underinvestment by businesses seeking to resist wage pressure. 
This presents France with a serious challenge. 
One option for overcoming German obstinacy would be to pursue a series of small compromises. 
But, as some critical German observers, such as the Financial Times’ Wolfgang Münchau, have pointed out, this could lead to minimal and even illusory concessions. 
The alternative would be a showdown that brings the debate to the European public. 
Perhaps this is what Macron was trying to initiate at Aix-la-Chapelle earlier this month, as he collected from Merkel the Charlemagne Prize for his pro-European efforts. 
Such a confrontation need not block progress on other issues, such as border security, investments in industries of the future, taxation of US tech giants, and the defense of multilateralism. 
European integration owes much to France’s Robert Schuman and Germany’s Helmut Kohl, both of whom prioritized strategic European interests (through the European Steel and Coal Community and the eurozone, respectively) over the pursuit of immediate national advantage. 
Today, Macron is prepared to establish himself as a similar leader, but he needs a reliable German partner willing to challenge ordoliberal rigor in the name of Europe-wide prosperity. 
Unfortunately, it is not at all clear that he has such a partner in Merkel. 

Germany's Backward Reforms 
CAMBRIDGE: A successful economy needs quite a bit of competition and flexibility. 
Yet attractive as they sound, competition and flexibility have their enemies. 
Competition means that a society has economic winners and losers, and everyone feels pressure to perform; flexibility means that the status quo is not written in stone. 
Indeed, the status quo can be thrown out the window at any time. 
The US has embraced flexibility and competition with a vengeance. 
The payoffs are seen in soaring employment, a decade-long stock market boom, and rapid rates of innovation and productivity improvements. 
For some observers, however, today’s slowdown in America puts those payoffs in doubt. 
But this eagerness to declare the American model bankrupt is dead wrong. 
Look at the European model: cling to the status quo, don't make waves, workers councils, Mitbestimmung, unions, and masses of well-paid unemployed people. 
Clever leftish governments parley with an oh-so-comfortable public, one far from demanding revolution. 
Europe's poor showing on the supply side is not a lack of performance, indeed, it is a political choice. 
Make no mistake: Europe is rich and content; Europe would not have it any other way. 
Consider the extraordinary example of the German labor market. 
The French 35 hour work week, introduced a few years ago, was a political success. 
The Dutch, who pioneered initiatives on the part-time work front, also gained political praise for their efforts. 
So why not try something of this sort in Germany, Social Democrat politicians asked? 
In a recent report, the Berlin DIW (German Institute for Economic Research) drew on a socio-economic survey to ask German employees what were their preferred working hours. 
They found that of the 31 million German workers questioned, 30% want fewer (but pay-adjusted) working hours, but that 26% want to work longer hours. 
Important differences exist between men and women, East and West Germans, and full-time and part-time workers. Neverthelesss, the fact is that many part-time workers want to work more, and many full-time workers want to work less. 
So why not, they asked, create a legal bridge to allow this to happen? (See a table at the bottom of the text.) 
This is what German legislators concocted: workers who have been with a firm for more than 6 months can demand reduced hours. 
(Remember, firing workers comes at an exorbitant cost and with extensive room for legal challenges.) 
Workers who hold part-time positions in a firm but want a full-time job, have a legal right to fill such a position when a job opens up. 
The only apparent limitation is for cases in which serious operational considerations, or the working preferences of other part-time workers, stand in the way. 
As economics, this is lunacy. 
Rather than focusing on how to make firms better able to compete internationally, and so generate jobs, growth and prosperity, this supposed reform institutionalizes even more complications, moves matters one more step away from what an economy should look like. 
In the US, unions are largely irrelevant and decentralized deal making between firms and workers is the rule. 
Anyone who wants to work can work. 
Businesses can fire or hire workers largely at will and there are no significant costs to massively trimming the payroll (as we are now seeing with German-owned Chrysler). 
The only important restraints on this managerial freedom are concerns about worker morale and its impact on productivity, profits and stock valuation. 
The European scene could not be more different. 
It is almost as if business is the last thing you have to take into consideration where workers are concerned. 
Rich countries like Germany can afford to pile more and more indirect taxes on business, and erect more and more obstacles to the efficient operation of business for a long time. 
But even Germany can't afford to expand the socialist stranglehold of labor on what is supposed to be a capitalist economy, for one day worker use and abuse of the political system will cannibalize economic substance. 
What follows then? 
A German children’s fairy tale - a Schlaraffenland? 
A land where nobody works, and where your desires fall like manna from heaven? 
A fairy tale indeed. 
Many Europeans still seem to believe that economics is a fairy tale, that you can legislate your wishes. 
But in the future, aging Europe, who will pay for the unemployed when so many people are on pensions? 
Who will finance the workers' paradise then? 
Japan found to its dismay that two decades of dreadful economic policies resulted in a cumulative bankruptcy of government and the nation’s finances. 
Germany is working hard to accomplish that same destruction via the labor market. 
Moreover, Germany is not alone. 
France is not much different and Italy is even worse. 
Europe’s governments have wasted the last decade of boom, a time when serious reforms could have been embraced with relatively little pain. 
Now, either painful reform or slow decline will need to be embraced, because in the real economy, happy endings are earned by sound policies. 

Germany’s Drift from Europe 
BERLIN – “What’s the matter with Germany?,” people on both sides of the Atlantic are asking with increasing frequency. 
In Berlin, however, nobody seems to understand the question. 
Doubts about Germany’s role have much to do with the current economic and financial crisis, and also with the weakness of the European Union and its institutions. 
Ever since the referendum failures of both the European constitution and the Lisbon treaty, the EU has been flying on autopilot, run by its bureaucrats. 
With 27 members and no reform of its institutions and procedures, EU processes have become harrowingly inefficient. 
Crises are also always moments of truth, because they relentlessly expose both the strengths and weaknesses of all the players involved. 
For that reason, Europe now requires leadership not from a weak EU Commission or from any other European institutions, but from the capitals of its major member countries. 
As always, when serious economic and financial matters are at stake, people look to Germany, the EU’s largest economy. 
But what they see confounds them, because Germany is openly refusing to lead. 
True, Germany has been hit hard – very hard – by the economic crisis. 
But its economy is nonetheless stronger than ever after the challenges of reunification and the necessary reform of the country’s labor market and welfare systems. 
What amazes our neighbors and partners – and increasingly causes distrust – is that ever since the beginning of the global meltdown last September, the German government has focused almost exclusively on national crisis management, rebuffing any and all attempts at a European approach. 
Add to this the palpable tensions in Franco-German relations, the blocking of a common EU gas market, close strategic cooperation with Vladimir Putin’s Russia, etc., and the worries about Germany multiply. 
It’s not just that there is fear in Berlin that any European solution would be much more expensive for Germany and take a lot longer; this new form of German euroskepticism also shows a fundamental change of attitude amongst the overwhelming majority of Germany’s political and economic elite. 
The change is evident by asking a single question: would it still be possible today to give up the D-Mark and introduce the euro as a common currency? 
The answer is a resounding no. 
Regardless of whether it’s Chancellor Angela Merkel or Foreign Minister Frank Steinmeier, this answer reverberates across the political spectrum, and it is held irrespective of which parties or people form the government. 
Following the changing of the guard after the end of Germany’s red/green coalition, a fundamental shift in attitude has gradually taken place. 
Europe today is no longer seen as the key project in German politics in which people are willing to invest an essential part of their political capital – and thus of their own future. 
Rather, 20 years after the fall of the Berlin wall, the reunited Germany is beginning to realize that it can also act alone. 
The problem, of course, is that this is a huge misapprehension. 
Germany’s relationship with Europe is seen as a functional one by nearly all the democratic parties. 
But, while Europe no doubt remains important for asserting both common and national interests, it is no longer a project of the future. 
The German perspective is thus shifting in the direction of that of France and the United Kingdom: the EU is increasingly seen as a framework and precondition for asserting national interests, rather than as an aim in itself. 
The reasons for this profound change are obvious: the reunification and the historical resolution of the hitherto open “German question”; the failure of the EU constitution and thus of the European vision; the institutional weakness of an expanded 27-member EU; and the increasing inefficiency and slowness of EU institutions. 
So will Germany revert to nationalism? 
All political players in Berlin reject this charge with great indignation. 
Indeed, there is no strategy or master plan whatsoever for a return to nationalism. 
The fundamental change in Germany’s European policy is simply happening – the result of a process that could almost be termed “organic.” 
As such, this does not makes the drift in German policy – which manifests itself, for example, in a refusal to lead in the present crisis – any better. 
It is a strategic illusion of the large member states that they can defend their own status without this stolid entity called Europe. 
After all, can Germany really afford to let the EU’s enlargement into Eastern Europe fail? 
Can it afford a life-threatening crisis of the euro, a common market endangered by growing protectionism, or Russia pushing into the EU’s Eastern neighborhood? 
Can it really conduct an independent national policy in the Middle East and Africa, or play an effective role in resolving global issues, from addressing climate change to building a new financial order? 
To ask these questions – and many more – is to answer them: only a strong, substantially more integrated EU can manage all this. 
But this EU will have a future only if its member governments and peoples are willing to invest a substantial part of their political success and their national interests. 
And this applies above all, as it did in the past, to Germany, in the heart of the continent, with the EU’s largest population and economy, and, last but not least, with its difficult past. 

Germany's Economic Malaise 
A month before his re-election last month, Chancellor Gerhard Schröder seemed a certain loser. 
People resented his failure to keep his promise from 1998 to reduce unemployment. 
Now, with Schröder back in power, it's Germany's economy that seems the certain loser. 
Chancellor Schröder's job, as everyone now recognizes, was saved by floods in eastern Germany and his opportunistic crusade against America's Iraq policy. 
Each allowed him to preen successfully as a crisis manager. 
But the price of switching the terms of the debate away from economics is that the Chancellor now lacks a mandate to undertake serious labor market and other reforms. 
Indeed, Mr. Schröder committed himself strongly to trade union demands during his campaign. 
At the beginning of his first term, Schröder appeared to be a modern social democrat who understood business. 
When he ousted his first finance minister, Oskar Lafontaine, Germans became optimistic about reform and an economic upswing. 
Those hopes have vanished. 
Germany's vital small and medium-size businesses--the famous "mittelstand"--has not only lost its dynamism, but investment in this sector is grinding to a halt. 
Together with today's weak consumer demand, this is a recipe for economic malaise. 
Equally troubling, Schröder embraced the misguided reform proposals put forward by the "Hartz Commission," a panel of representatives from industrial and trade union interest groups. 
Its proposals are based on the illusion that a key factor in German unemployment is an ineffective labor market bureaucracy that fails to match those searching for jobs with the many jobs on offer. 
In reality, German unemployment is primarily a problem of a lack of jobs for low-skilled workers. 
Germany's welfare system effectively creates a minimum wage for the low skilled that is so far above the market price that it effectively prices such workers out of jobs. 
Implementing the "Hartz Reforms" has now become a primary government commitment that will distract attention and political will from the reforms that are really needed, namely an overhaul of Germany's social support system. 
Making Germany's economic prospects even gloomier is a looming round of tax hikes. 
An increase in gasoline taxes is set for January 2003. 
Income tax relief due in 2003 has been postponed. 
Post-election talk abounds about higher wealth taxes, business taxes, and an increase in value-added tax--precisely the opposite of what Germany's economy needs. 
Tax hikes will not solve the government's fiscal problems, because weakening growth ultimately means less tax revenues. 
Finance Minister Eichel's policy is bound to become as erratic as the fiscal policies pursued by the last Kohl government. 
Efforts to find new revenues will chase spending cuts that in recent years have led to a decline in public-sector investment and education spending and a shift in responsibility for welfare spending from the federal to local governments. 
Eichel's commitment to balancing the budget is certainly important, but balancing the budget is no substitute for a medium and long-term strategic perspective for fiscal policy that promotes sustainable growth and recognizes the need to invest in Germany's ailing education system. 
In many German schools today the youngest teachers are well beyond their mid-forties, while universities find it increasingly hard to attract young researchers and faculty. 
Europe's experience over the past 10 years teaches that fiscal consolidation must be supported by growth-friendly tax and spending policies. 
Both spending and taxes must be used to strengthen the incentives to work, invest, and innovate. 
Even if Schröder wants to push for reform, his political position will make such efforts difficult. 
His thin majority in the lower house of the Bundestag faces an upper house dominated by the opposition Christian Democratic Union/Christian Social Union (CDU/CSU). 
So any proposal will be subject to tricky negotiations and the need to cater to the special interests of länder governments, further reducing the prospect of serious reforms being undertaken. 
This last point has broader implications. 
Germany's political center, where elections are won and lost, remains undefined and unstable concerning policy priorities. 
So long as the campaign's focus was on economics, Schröder's government was a clear loser. 
When the focus shifted to flood relief and foreign affairs, a majority in the center embraced Schröder's disregard of international commitments and alliances. 
This suggests that a majority of Germans still do not yet perceive economic weakness as more important than other, more short-term issues. 
It also signals, correctly, that both main opposition parties did not appreciate the implications of Schröder's victory in 1998. 
For much too long, they saw it as an unhappy accident to be corrected at the first opportunity. 
So neither the CDU/CSU nor their liberal allies, the Free Democrats, offered convincing policy prescriptions for dealing with Germany's economic problems. 
Indeed, Edmund Stoiber's economic policies as premier of Bavaria were (and are) no less interventionist than those of Schröder. 
The opposition's main campaign claim was a suggestion that the right is more competent than the left in managing the economy. 
But this was merely rhetoric. 
The right's lack of clear alternative policies made it easy for voters to turn back to the Chancellor when he decided not to talk about the economy. 
The next four years will challenge both the government and opposition. 
Chancellor Schröder will be confronted by the need finally to address Germany's real economic problems. 
The CDU/CSU and the FDP will be forced to present convincing alternatives to Schröder's policies. 
Until one side or the other acts decisively, Germany will remain economically weak and politically unpredictable. 

Germany’s Europe Deficit 
BERLIN -- Germany used to be at the heart of European integration. 
Its statesmen used to assert that Germany had no independent foreign policy, only a European policy. 
After the fall of the Berlin Wall, its leaders realized that German reunification was possible only in the context of a united Europe, and they were willing to make some sacrifices to secure European acceptance. 
Germans would contribute a little more and take a little less than others, thereby facilitating agreement. 
Those days are over. 
The euro is in crisis, and Germany is the main protagonist. 
Germans don’t feel so rich anymore, so they don’t want to continue serving as the deep pocket for the rest of Europe. 
This change in attitude is understandable, but it has brought the European integration process to a halt. 
By design, the euro was an incomplete currency at its launch. 
The Maastricht Treaty established a monetary union without a political union – a central bank, but no central treasury. 
When it came to sovereign credit, euro zone members were on their own. 
This fact was obscured until recently by the European Central Bank’s willingness to accept the sovereign debt of all eurozone members on equal terms at its discount window. 
As a result, they all could borrow at practically the same interest rate as Germany. 
The banks were happy to earn a few extra pennies on supposedly risk-free assets and loaded up their balance sheets with the weaker countries’ government debt. 
The first sign of trouble came after the collapse of Lehman Brothers in September 2008, when the European Union’s finance ministers decided, at an emergency meeting in Paris that October, to provide a virtual guarantee that no other systemically important financial institution would be allowed to default. 
But German Chancellor Angela Merkel opposed a joint EU-wide guarantee; each country had to take care of its own banks. 
At first, financial markets were so impressed by the guarantee that they hardly noticed the difference. 
Capital fled from the countries that were not in a position to offer similar guarantees, but interest-rate differentials within the eurozone remained minimal. 
That was when countries in Eastern Europe, notably Hungary and the Baltic States, got into trouble and had to be rescued. 
It was only this year, when financial markets started to worry about the accumulation of sovereign debt, that interest-rate differentials began to widen. 
Greece became the center of attention when its new government revealed that its predecessors had lied about the size of the 2009 budget deficit. 
European authorities were slow to react, because eurozone members held radically different views. 
France and other countries were willing to show solidarity, but Germany, traumatized twice in the twentieth century by runaway prices, was allergic to any buildup of inflationary pressures. 
(Indeed, when Germany agreed to adopt the euro, it insisted on strong safeguards to maintain the new currency’s value, and its Constitutional Court has reaffirmed the Maastricht Treaty’s prohibition of bailouts.) 
Moreover, German politicians, facing a general election in September 2009, procrastinated. 
The Greek crisis festered and spread to other deficit countries. 
When European leaders finally acted, they had to provide a much larger rescue package than would have been necessary had they moved earlier. 
Moreover, in order to reassure the markets, the authorities felt obliged to create the €750 billion European Financial Stabilization Fund, with €500 billion from the member states and €250 billion from the IMF. 
But the markets have not been reassured, because Germany dictated the Fund’s terms and made them somewhat punitive. 
Moreover, investors correctly recognize that cutting deficits at a time of high unemployment will merely increase unemployment, making fiscal consolidation that much harder. 
Even if the budget targets could be met, it is difficult to see how these countries could regain competitiveness and revive growth. 
In the absence of exchange-rate depreciation, the adjustment process will depress wages and prices, raising the specter of deflation. 
The policies currently being imposed on the eurozone directly contradict the lessons learned from the Great Depression of the 1930’s, and risk pushing Europe into a period of prolonged stagnation or worse. 
That, in turn, would generate discontent and social unrest. 
In a worst case scenario, the EU could be paralyzed or destroyed by the rise of xenophobic and nationalist extremism. 
If that were to happen, Germany would bear a major share of the responsibility. 
Germany cannot be blamed for wanting a strong currency and a balanced budget, but as the strongest and most creditworthy country, it is unwittingly imposing its deflationary policies on the rest of the eurozone. 
The German public is unlikely to recognize the harm German policies are doing to the rest of Europe because, the way the euro works, deflation will serve to make Germany more competitive on world markets, while pushing the weaker countries further into depression and increasing the burden of their debt. 
Germans should consider the following thought experiment: withdrawal from the euro. 
The restored Deutsche Mark would soar, the euro would plummet. 
The rest of Europe would become competitive and could grow its way out of its difficulties but Germany would find out how painful it can be to have an overvalued currency. 
Its trade balance would turn negative, and there would be widespread unemployment. 
Banks would suffer severe losses on exchange rates and require large injections of public funds. 
But the government would find it politically more acceptable to rescue German banks than Greece or Spain. 
And there would be other compensations; German pensioners could retire to Spain and live like kings, helping Spanish real estate to recover. 
Of course, this is purely hypothetical because if Germany were to leave the euro the political consequences would be unthinkable. 
But the thought experiment may be useful in preventing the unthinkable from actually happening. 

Germany’s Fiscal Follies 
PRINCETON – All over the world, public-sector deficits are exploding. 
Governments face massive costs rescuing banks and businesses hit by the financial and economic crisis. 
There is a universal consensus that Keynesian stimulus is needed. 
At the same time, policymakers are looking more and more nervously for an “exit strategy.” 
They know that they cannot run deficits forever, but they do not want to say when the painful exit should begin. 
Germany is different, not because it is not spending now, but in how it talks about the future. 
The German government has taken a peculiarly aggressive line in attacking deficits and in trying to lay down a firm exit strategy. 
Chancellor Angela Merkel has criticized the United States Federal Reserve and the Bank of England for “quantitative easing,” which has in practice allowed the central bank to monetize many types of government and non-government debt. 
The German government also successfully passed a constitutional law requiring the government deficit to be capped at 0.35% of GDP in 2016 and eliminated by 2020. 
Both the attacks on excessively easy central banks and the effort to limit government debt are enormously popular in Germany. 
But they have been widely condemned by economists worldwide (including in Germany) as nonsense. 
Merkel is not the first German politician to adopt a hardline stance on monetary policy and debt – nor is she the first to face a torrent of international criticism. 
In the late 1970’s, when the world was facing a mixture of stagnant growth and inflation, Chancellor Helmut Schmidt insistently told British, French, and American leaders that their deficits were wrong and dangerous. 
He believed that the solution to stagflation “was that those with deficits should get rid of them.” 
His fellow leaders began to think Schmidt arrogant. 
The most obvious explanation for the German peculiarity is an obsession with the lessons of German history, particularly the two episodes of runaway inflation in the twentieth century, in which holders of monetary assets were expropriated. 
The Great Inflation of the early 1920’s, which culminated in a hyper-inflation in which prices changed several times daily, destroyed the middle classes and bred the political instability that eventually opened the way to Hitler’s rise. 
Hitler repeatedly promised that he would use any means to fight inflation, but his militarism also led to the expropriation of savings. 
Even though only quite old people have personally experienced even the second of these episodes of monetary destruction, their political resonance is still acute. 
Germany’s mass circulation Bild Zeitung warned in a headline in March 2009 of inflation at a time when all price signals pointed in the opposite direction. 
Merkel has acute political antennae, and her response struck a deep chord with popular sentiment. 
A second rationale for Germany’s policy is demographic. 
Budget limitation appeals not just to the old, but is especially attractive to young people, who worry that they will be made to pay the costs of caring for an increasingly elderly and dependent population. 
There is a third explanation for Germany’s particular stance. 
With governments around the world (including Germany’s) accumulating unprecedented levels of peacetime debt, markets are worrying about sustainability. 
Some crisis-prone countries such as Latvia are already unable to sell any more debt. 
But even large and stable countries such as Britain and the US are finding auctions of government paper increasingly problematic. 
Big investors, particularly Asian countries’ reserve funds, are increasingly nervous. 
A cast-iron mechanism to ensure that the debt build-up does not continue forever is appealing as a way of withstanding increasingly fraught competition for funding. 
Germany will look like a better credit risk, thereby allowing it to fund its current budget deficits more easily and cheaply. 
There is obviously some element of bluff in legislating balanced budgets. 
Extravagant promises to behave better at some future point are not completely credible, although they often have a short-term impact. 
In 1985, the US Congress passed the Gramm-Rudman Act, which provided for automatic spending cuts in the case of deficits. 
It was ruled unconstitutional, but it began a process of budget consolidation. 
The European Union’s Maastricht criteria, which cap deficits at 3% of GDP, belong in the same category: a measure that could be relaxed as the political pressure changed, but which did help initially in reducing deficits and borrowing costs. 
The real problem with the German measure is not so much our lack of knowledge about what the world will look like in 2016 or 2020 as it is that Germany is politically and economically bound to European integration, and thus tied to states with very different budgetary perspectives and priorities. 
As a result, it makes little sense for Germany to compete to have more solid budgets than its neighbors: all European countries have tied themselves together. 
When Germans tie their hands with constitutional budget laws, they are in effect untying their neighbors’. 
Europe’s monetary unification of the 1990’s was supposed to be accompanied by fiscal convergence and harmonization. 
When budgets move in different directions, pressures shift to regional policy (to redistribute income) and to monetary policy (to boost growth). 

Germany’s Five Election Unknowns 
On September 18, Germany will hold an election that contains at least five unknowns. 
If it were an equation, it would be impossible to solve. 
Fortunately, politics is not mathematics – though, unfortunately, this means that there are no clear solutions. 
Indeed, even in the opaque terms of contemporary politics, the German case is particularly vexing. 
The first unknown is why the election is taking place at all. 
Chancellor Gerhard Schröder had another fifteen months to go before the end of the electoral term, and it seemed that he had no difficulty mobilizing his admittedly slender majority in parliament. 
To be sure, the big issues that the Federal President listed when he dissolved the Bundestag are real. 
The fiscal position is, by German standards, unacceptable, and public debt at current levels is contrary to the European Union’s Stability and Growth Pact and a burden on future generations. 
Demographic developments alone require major reforms of social policy. 
Moreover, the institutions of the federal system do not permit decisions to be made either expeditiously or clearly. 
None of this is new, nor will it be changed by an election. 
So it is not obvious to many people why they are voting. 
The second unknown concerns what, exactly, separates the major parties in this contest. 
The Social Democrats (SPD) and the Christian Democrats (CDU) are both committed to the “social market economy,” to the essentials of corporatist economic management, to maintaining the entitlements of the welfare state, and to the EU and NATO. 
True, the campaign has brought out nuances that may turn out to be important. Schröder’s SPD uses the word “social” a little more emphatically than it did in the last seven years. 
The opposition CDU leader, Angela Merkel, has linked its program to the ambitious ideas of an outsider, former Constitutional Court judge Paul Kirchhof, seeking a dramatic simplification of the tax system. 
In international affairs, Merkel is more skeptical about European enlargement, notably to include Turkey, than Schröder. 
Merkel, an East German by background, is also more cautious in her approach to Russia. 
But these are nuances, not fundamental differences. 
The third unknown is the performance of the Left Party, a new formation positioned to the left of the SPD and built on East Germany’s ex-communist PDS, with the addition of a significant number of dissident Social Democrats in the West who proclaim themselves to be defenders of the welfare state. 
The Left Party is led by two talk show politicians, Gregor Gysi, the former PDS leader, and Oskar Lafontaine, the ex-leader of the SPD, who do not have much more in common than a record of political failure and a talent for populist speeches. 
But this clearly appeals to those who feel that they have been neglected and forgotten. 
The popular vote for this party – which could be 10% – may well determine what kind of coalition is formed after the election. 
The fourth unknown is therefore what the next government will actually do. 
It will clearly be a government without the new Left Party. 
It will also be a government without the Greens, who continue to have a devoted, if limited, clientele, but are now regarded by many as a luxury that Germany can no longer afford. 
This leaves two possibilities: a coalition between the CDU, its Bavarian sister party, the Christian Social Union, and the liberal Free Democrats, or a grand coalition between the SPD and the CDU. 
The latter is what most Germans want; the former is what they are most likely to get. 
But most people doubt whether it even makes a difference, and they are probably right. 
There is a widespread desire for change, including a change of government, but there is an equally widespread belief that nothing momentous will happen. 
This underscores the final, and deepest, unknown concerning the upcoming election: who will put a confused and directionless Germany back on a road to initiative and growth? 
Who will make Germany an engine of Europe again rather than a gloomy passenger? 
What Germany needs is, in fact, fairly clear. 
It needs to accept that globalization is above all an opportunity, one that must be grasped by confident, innovative, and entrepreneurial people. 
Germans need to understand again – as they did so well after 1945 – that their future lies in their own hands, as citizens, rather than in the power of some remote State. 
Above all, Germany must appreciate that the changes it needs are improvements that would guarantee its future security. 
Perhaps what it requires most is a touch of Margaret Thatcher’s policies of the 1980’s, combined with Tony Blair’s rhetoric of today. 
But it remains to be seen whether, or when, that might be on offer. 

Germany’s Five Shocks 
Over the last decade, Germany has been the slowest growing economy in the European Union, and Europe has been the slowest growing continent in the world. 
From 1995 to 2005, Germany will have grown by only 14.6%, while the old EU on average will have grown by 24%, the US by 39.9%, and the world economy by 45.6%. 
Why has Germany performed so badly? 
One theory, endorsed by the head of Germany’s ruling Social Democratic Party, Franz Müntefering, is that Germany is already where the others still want to be. 
Slow German growth, he maintains, is a sign of natural convergence. 
But this theory is not convincing. 
Germany has recently been overtaken in terms of per capita income by several EU countries, including Ireland, the UK, the Netherlands, and France, and is still growing more slowly than all of them. 
Another, more plausible theory is that over the past fifteen years there have been various external challenges or shocks that have hit the country simultaneously. 
Rigid as it was, with an extensive welfare system and an over-regulated labor market, Germany was unable to react to these shocks and ran into trouble. 
This theory recalls that of the British historian Arnold Toynbee, according to which empires collapse because they are unable to react to external challenges. 
The first shock was intensified globalization, which brought a lot of new low-wage competition. 
Although globalization is a gradual process, it gained momentum when China decided to play the game. 
China is ten times the size of Japan, and Japan was not easy to deal with, either. 
German precision instruments and optical equipment, for example, lost their competitive edge when Japan entered the game. 
The second shock was EU integration, including the northern and southern enlargements. 
The dismantling of the EU’s internal borders boosted each country’s market size and brought about the predicted economies of scale. 
But this helped Europe’s small countries more than the big ones, and it implied more competition for Germany, Europe’s biggest economy. 
Think of Nokia, the mobile phone maker. 
Due to the economies of scale that the common market made possible, Nokia was able to exploit its inventions fully, while Germany’s Siemens recently decided to give up on the mobile phone market. 
The third shock was the euro, which has induced a rapid convergence of long-term interest rates, which in some countries had been five to seven percentage points above the German level. 
Freed from exchange-rate risk, international investors no longer demanded a risk premium from these countries and were willing to provide funds to all of them under the same favorable conditions that previously had been reserved for Germany. 
This is good for Europe, because it helps improve the allocation of capital and stimulates growth by transporting German savings to the remote and previously disadvantaged regions of the euro zone. 
But it is of doubtful benefit to German workers who also would have liked to cooperate with that capital. 
The fourth shock was eastern EU enlargement, which has brought extraordinary chances for trade and investment in the east, but has also brought massive low-wage competition. 
On average, wage costs in the ten countries that joined the EU in 2004 are only 14% of the West German level. 
Low-wage competition has led to substantial outsourcing and off-shoring activities that have kept German firms competitive by reducing their demand for domestic labor. 
As neither Germany’s unions nor its welfare state would accept falling wages, the result was higher unemployment and slower growth. 
The fifth shock was German unification, which is a failure in economic terms. 
GDP per working-age person in East Germany had been 61% of the West German level in 1996, but it is now only 59%. 
The slow growth of the eastern part of the country has pulled down the Germany-wide average, while the enormous demand for public funds in the east has increased public debt. 
The weak fiscal position has in turn undermined investors’ confidence, with obvious implications for economic growth. 
All five shocks constitute historical developments that are good for the world as a whole, but problematic for Germany. 
In order for the country to meet the challenges and to continue to grow, it would have to make its labor markets flexible. 
Only if wages adjust downward to accommodate the new international environment can German workers become competitive again, so that the country returns to a higher employment level, exploiting its human capital up to the capacity constraint. 
The new government that voters will most likely elect in September will be confronted with the difficult task of confronting Germans with reality and pushing through the necessary reforms. 
Only then will we know whether Germany can meet the Toynbeean challenge it is facing. 

Germany’s Labor Pains 
Germany is a country with very few strikes. 
Whereas the average number of working days lost due to strikes from 2000 to 2004 amounted to 234 per 1,000 employees in Spain, 171 in Canada, and 101 in France, only 3.5 days were lost in Germany. 
In the OECD’s strike statistics, Germany ranks third from the bottom, ahead of only Poland, with 1.6 lost days, and Japan, with 0.4. 
So Germans are all the more disturbed that the train drivers’ union, the GDL, has voted for a nation-wide strike that will paralyze the country. 
The recently signed wage agreement for all railway employees, negotiated by the rival unions Transnet and GDBA, did not go far enough for the GDL, which is now holding out for a 31% wage hikes. 
The strike has been temporarily stopped by a court order, leaving time for negotiations, but the danger remains great because talks have reached an impasse. 
If the GDL gets a higher wage settlement than achieved in the general wage agreement for all railway workers, the general agreement will become invalid – an outcome that the railway management cannot accept under any conditions. 
More importantly, a strike could introduce a paradigm shift in the German labor market for two reasons. 
First, other privatized state-owned operations, especially postal and telecommunication services, could follow suit. 
Formerly, these operations could rely on the fact that employees were permanent civil servants (Beamte), a German anomaly. 
While German permanent civil servants cannot be fired, nor are they allowed to strike. 
The status of permanent civil servant, marked by a special reciprocal obligation of loyalty, was created by the Prussian state in order to fill strategically important positions with people who could be fully trusted. 
Train drivers were the paramount examples of this credo. 
With the privatization of Germany’s railway, which will shortly be concluded with its listing on the stock market, these civil servants will disappear. 
Today, 40% of German train drivers are still permanent civil servants who have been leased from the state by the privatized railway. 
But the remaining train drivers’ right to strike is sufficient to threaten Germany with chaos in the transport system. 
The threatened strike is also significant because it marks a departure from the German system of industry-wide unions, which negotiate for all employees within an industry regardless of their occupation. 
The alternative is unions for individual trades within an industry, which usually are aggressive negotiators and tend to demand far more than is economically feasible. 
Such unions are common in Anglo-Saxon countries. 
They were responsible to a great extent for Britain’s economic decline in the 1960’s and 1970’s. 
Not until Margaret Thatcher broke their power was the country able to breathe freely and renew itself. 
There is an economic explanation for why unions based on individual trades are detrimental. 
Such unions act as monopolies that offer complementary goods. 
Because the customer is only interested in the total price that he must pay for all goods in a bundle, and since the amount of the purchased units of this bundle is dependent only on the total price, individual sellers are encouraged to ask for particularly high prices. 
If they raise their prices, they receive the full financial gain, while any loss implied by a decline in demand is distributed among all sellers. 
For this reason, the total price that emerges is higher than would have been chosen by a monopoly seller who represents all producers together and who takes into consideration all the mutual disadvantages from any decline in demand. 
A monopoly is poison for a market economy, because it increases prices and decreases volume. 
Even more poisonous is a chain of monopolies offering complementary goods. 
It increases prices and decreases volumes even more than one comprehensive monopoly incorporating all suppliers in that chain would have done. 
This insight can be applied directly to the problem of unions. 
As a comprehensive monopoly, an industry-wide union achieves higher wages than would be possible under conditions of competition, i. e. without any unions, and consequently increases unemployment. 
But unions based on trades, which operate largely independently of one another, achieve even higher wages and create even more unemployment – so much so that employees as a whole are much worse off than they would be if an industry-wide union represented them. 
The German train drivers’ wage demands demonstrate that the privatization of former state-owned operations carries considerable risks for Germany’s labor market, because how those demands are resolved will determine whether Germany will move in the direction of unions based on trades. 
If it does, Germany’s ranking in international strike statistics will rise considerably. 



Germany’s Same Old Election 
BERLIN – Germany’s current parliamentary election campaign looks like a front-running contender for the title of the most boring in the history of the Federal Republic. 
The predominant response among commentators to the sole television debate between Chancellor Angela Merkel and her challenger, Foreign Minister Frank-Walter Steinmeier, held two weeks before the election, was a collective yawn – all the more remarkable considering the historical events that overshadow this election. 
Twenty years ago, the Berlin Wall came down, triggering a seismic shift that moved the borders of the old Federal Republic and of Western Europe as a whole, hundreds of miles to the east. 
The vast Soviet empire exited the historical stage without a single shot being fired. 
This anniversary should have provided ample reason for a heated debate about the successes and failures of German reunification and for offering a vision for Germany and Europe for the next 20 years. 
Former German Chancellor Helmut Schmidt once quipped that politicians who have a vision should go and have their eyes checked. 
That warning made sense in the 1970’s, when even young parliamentarians in his Social Democratic Party dreamed of revolution. 
But Schmidt would never have imagined that there would come a day when there would be no politician in search of a vision check. 
Likewise, in the fall of 2008, the threat of financial Armageddon brought not just Germany but the whole world to the brink of disaster. 
The worst has been mitigated and obscured in the wealthy countries by running up unprecedented levels of debt, but any moderately streetwise person knows that the next generation – and even the one after that – will be paying for the excesses of the investment bankers. 
One cannot help but marvel at how discreetly this topic is being dealt with by Merkel and Steinmeier. 
Ask the party strategists and they will tell you that the financial crisis is a topic for losers; voters want to hear something positive. 
The electorate is experiencing the greatest slump since 1929 like a bad dream that is half over – and politicians don’t want to wake them up. 
The so-called “autonomous” violent left-wing radicals in Berlin-Kreuzberg enjoy themselves by torching luxury cars, but not a single bank window has been smashed in Germany. 
Nor has a single criminal financier-gambler, who misled the financial regulators with fudged figures, been brought to justice. 
On the contrary, these bankrupts are filing lawsuits to get the million-dollar bonuses to which they feel entitled. 
Quite a few of them are already back at the table gambling away with the taxpayer’s money and peddling their new “financial products”; they know that when the next crash comes, the taxpayer will have no choice but to bail them out again. 
Only some stalwarts timidly point to the inflammatory question posed by Mack the Knife in Berthold Brecht’s Threepenny Opera: “What is a bank robbery compared to the founding of a bank? 
What is a pick-lock compared to a debenture share?” 
But this slogan is from the 1920’s and seems like a nostalgic reminder of past turmoil that one prefers to see on the stage. 
The greatest miracle in the 2009 election campaign is the resurgence of the Liberal Democrats (FDP). 
In fact, the German political landscape needs nothing more than a truly liberal party, in the US sense of the word “liberal” – a champion of the cause of individual freedom. 
Unfortunately, under the far-too-long leadership of Guido Westerwelle, the FDP has degenerated into a party notable for defending the freedom only of a few privileged individuals: bankers and businessmen. 
Just a year ago, the FDP fervently adhered to the religion of the American neo-cons, according to which markets regulate themselves. 
So it vigorously opposed all of the half-hearted attempts to regulate the financial sector. 
As late as this past May, the FDP defended the ownership rights of US billionaire Christopher Flowers, a major stockholder in the failed German bank Hypo Real Estate, which was saved from oblivion by state guarantees worth more than €100 billion of taxpayers’ money. 
Nevertheless, at a time when finance is under a cloud, the party that defends the freedom of the financial gamblers over the freedom of the individual is winning favor with the electorate like no other. 
The FDP can count on about 13-14% of the vote, which means that it may be able to join with Merkel’s Christian Democratic Union to form a government. 
I cannot explain this dynamic. 
I do not believe in Karl Marx’s iron laws of history. 
Yet one historical law does seem to apply: in an immense economic crisis, the voters stick with the people whose economic competence they have traditionally trusted – that is, the very people who led them to ruin. 
But there is an exception to every rule. 
In this case, it is the former PDS, the successor party to the former East Germany’s ruling party, the SED. 
Dissidents in the GDR translated those three letters as “ P ractically t he S ame.” 
This party, now using the presumptuous name “The Left,” has gained a foothold in West Germany with its impossible promises of higher pensions, a minimum hourly wage of €10, huge public investment schemes, and zero unemployment – in short, exactly the kind of socialist paradise that failed in East Germany. 
And, of course, The Left, which still counts large numbers of former Stasi personnel among its members, also calls for a reassessment of East Germany itself; many party veterans object to the term “dictatorship” for this phase of their lives. 
So, besides the FDP, this party, too, is profiting from the mainstream political parties’ half-hearted handling of the global economic crisis. 
The only “winner” when Germans vote on September 27 will most likely be the “party” of non-voters. 
I do not sympathize with this group, but I do understand that non-voters expect only one thing of Germany’s political parties these days: “practically the same” 

Germany’s Zero Hour 
The 8th of May always brings back memories of 1945, because for me the end of the war in Europe really was a zero hour. 
When the first Soviet soldiers came up our little street in the Western suburbs of Berlin, we knew that the great slaughter was coming to an end. 
My father who had been in the resistance would come back from Brandenburg prison. 
I no longer needed to hide as I had done after my release from a Gestapo camp at the beginning of February. 
Somehow a new life would begin. 
First, however, was the chaos. 
The Nazis were gone, and the occupation powers had not yet set up any kind of administration. 
We all went looting the local shops; 
I still have the slim volumes of romantic poetry which my 16-year-old self took from a bookshop. 
The occupation troops went on a rampage. 
Food was hard to find. 
My father was taken from prison and transported straight to central Berlin, where he was told to set up the office for Berlin’s energy supply, a task that had to be done literally from nothing. 
There was no power, no transport, no organised life of any kind for a period. 
Was it defeat or liberation? 
For Germans this question was not easily answered, though clearly our family was liberated in every sense. 
The question then was this: liberated for what? 
Where do we go from here? 
“You must help,” my mother said to me. So I offered my services to the local Soviet authority and helped distribute basic foodstuffs to a small number of outlets in our district of Zehlendorf. 
Five weeks later, however, I was back at school. 
I carried a special pass as a “victim of fascism,” but others showed their Iron Cross which they had got for late military action. 
Some were refugees from the East, many had their homes destroyed in air raids, almost all grieved for lost loved ones. 
Yet the zero hour did not last. 
It is almost unbelievable, but three years later the liberalising policies that followed a currency reform set in motion what came to be known as Germany’s economic miracle. 
To be precise: this is how West Germany’s economic miracle began. 
The German example shows just how different occupation powers can be. 
In the Soviet zone of occupation, progress was slow and above all coupled with a new enslavement. 
Even concentration camps like Buchenwald changed their guards and inmates but remained in use. 
The Western powers in Germany, on the other hand, pursued, after a short period of non-fraternisation, a policy of controlled empowerment. 
Within a year of the end of the war there were indigenous administrations, within two years elections. 
Democracy was not just preached but practised, and it could build on German traditions. 
All this, to be sure, was not just benevolence on the part of the occupying powers. 
It was also a result of the incipient Cold War, and the desire of both sides to consolidate “their” part of Germany. 
Even so, there are lessons to be learned from the process. 
Two of these deserve to be mentioned. 
One is economic and has to do with the Marshall Plan. 
It is perhaps regrettable but nonetheless real that democracy finds roots more easily if economic conditions improve. 
Such improvement requires above all self-help, the actions of individuals who will not accept the misery of the zero hour for long. 
Such self-help can be encouraged by policies (which is what Ludwig Erhard, the father of the “social market economy” did in Germany), but some starting capital helps. 
This is where the Marshall Plan of American support became crucial. 
Similarly, the European Union has helped, and continues to help the postcommunist countries on their way. 
The other lesson is moral, and it is more difficult. 
The Nuremberg trials exposed the guilt of the Nazi leaders beyond doubt, if indeed any such doubt was left in people’s minds. 
While these were important, however, Germany did not begin its arduous path away from zero hour with concern for the past. 
Indeed, the Adenauer years after 1949 were described by many as years of “restoration” because too many minor Nazi figures had remained in their jobs. 
In some ways, the country simply ignored their past and moved forward. 
Years later when a market economy and political democracy were established, Germany did turn toward “coping with the past”, and did so very effectively. 
Germany’s Nazi past is uniquely horrible, so comparisons with other countries with blighted histories are misleading. 
Still, in its own way Poland has followed a similar path after 1989: first the new, then the attempt to come to terms with the past. 
On balance this is a better method of dealing with a nation’s zero hour than doing things the other way round. 
In Europe then, the 8th of May 2005 is an occasion to look back in sorrow and anger. 
It is also an occasion to look forward with pride in the achievements of recent decades and therefore for hope. 

What’s the Matter With Germany? 
ROME – Italy may be the “sick man of Europe” today, but it is not the only country in need of medicine. 
On the contrary, even the mighty Germany seems to be coming down with something. 
Italy is, to be sure, in dire straits. 
Over the last two decades, annual GDP growth has averaged just 0.46%, and government debt has risen steadily, totaling more than 130% of GDP today. 
Unemployment has remained persistently high, investment is plummeting, and the banking sector is deeply troubled. 
Equally concerning, the number of women of child-bearing age has fallen by nearly two million since the fall of the Berlin Wall in 1989. And the share of active workers with a university education remains at levels barely comparable with other advanced economies. 
Given all of this, it should come as no shock that Italy and crisis-plagued Greece are the eurozone’s weakest performers in terms of per capita GDP growth over the last three years. 
What is surprising is that Germany is the third-weakest performer. 
Germany is fiscally sound, with a large accumulation of surplus savings. 
It is also highly competitive in unit-labor-cost terms, enjoys its highest-ever labor participation rates, and benefits from a steady inflow of skilled labor from other parts of Europe. 
But the fact is that Germany’s average annual per capita GDP growth of 0.51% since 2014 puts it far behind other core eurozone countries – namely, Austria, Belgium, Finland, and the Netherlands. 
Even France, where per capita growth barely exceeds that of Italy, slightly outperforms Germany. 
How is it possible that economies as different as Germany and Italy have such similar per capita growth performance? 
To some extent, the explanation might seem obvious. 
Germany is much closer to potential growth than Italy and even the United States, which struggled more than Germany to escape the Great Recession. 
But the more recent recovery in other advanced countries should, if anything, have boosted potential growth in export-driven Germany. 
Likewise, migration could affect per capita GDP growth. 
Germany has received 2.7 million new residents, net of outflows, over the last five years, nearly a million of whom are refugees. 
The latter provide an obvious Keynesian boost, but don’t add much to potential output. 
Yet the migrant flows into Germany are not exactly anomalous. 
The country had experienced similarly strong net inflows at other times in the last three decades, without such adverse effects on per capita GDP growth. 
On the contrary, in many cases, migrants into Germany, particularly the young and skilled among them, have contributed to potential output. 
The real culprit behind Germany’s low per capita GDP growth must be sought elsewhere. 
According to the Bank for International Settlements, German banks’ claims on other eurozone countries – including Austria, France, Ireland, Italy, the Netherlands, Portugal, and Spain – have fallen by over $200 billion, in aggregate, since the peak of the debt crisis in mid-2012. 
Claims on Italy are down to pre-euro levels, and claims on Spain are nearing that benchmark. 
Germany has even been disinvesting from core eurozone economies. 
German banks’ quiet move toward disintegration contrasts sharply with the behavior of banks based in France, Italy, Spain, and the Netherlands, all of which have resumed European financial integration by stabilizing and often increasing their exposure in other countries. 
These divergent trends, rather than generic capital flight, explain part of the growing imbalances in the Target 2 eurozone payment system. 
Why are German banks the only ones backtracking on integration? 
One possible reason is that domestic financial authorities, skeptical about the euro’s future, have instructed banks to cut their exposure to the rest of the eurozone. 
Another is that German banks are experiencing a slow-burn malaise that European regulators have yet to recognize fully. 
Their cost-base is, after all, the highest in the advanced world, yet their profitability is among the lowest, despite their negligible burden of bad loans. 
Nonetheless, such skittishness is puzzling. 
Around half of the German banking system is publicly owned, and thus enjoys an implicit government guarantee. 
In fact, German banks received €239 billion ($253 billion) in state aid between 2009 and 2015. 
In any case, German banks’ withdrawal from Europe cannot possibly be good for confidence, investment, or a dynamic service sector. 
And, indeed, investment in Germany last year was more than five percentage points below its 1999 levels as a share of GDP, even though gross national savings have climbed to the highest levels since the International Monetary Fund data series began in 1980. 
German officials usually explain away this huge drop by citing the parsimony of an aging society. 
But demographic challenges – which are tomorrow’s constraints on potential output – should inspire reforms in entitlements and education, not suppression of today’s demand. 
And that is where the real issue lies: no EU country, with the possible exception of France, has implemented so few reforms over the last decade as Germany. 
That lack of reform is starting to show. 
Wary banks and low investment must have played a role since 2012 in what looks like Germany’s slowest stretch of growth in total factor productivity in three decades. 
Relying largely on exports – that is, other countries’ demand – may have distracted the German government from some of its own domestic responsibilities. 
But it is in the interest of all of Europe – and Italy, in particular – that the continent’s largest economy become even stronger. 
To be sure, the productivity slowdown is far from unique to Germany. 
But unless Germany addresses the roots of that slowdown at home, it risks taking a huge hit, in the event that its currency is sharply revalued, in the form of lower exports and damage to its already-weak banking sector, resulting from deflation and negative long-term interest rates. 
Italy’s illness is far more acute than Germany’s, but both are potentially serious. 
Both are in need of immediate treatment. 

The End of German Hegemony 
BRUSSELS – Without anyone quite noticing, Europe’s internal balance of power has been shifting. 
Germany’s dominant position, which has seemed absolute since the 2008 financial crisis, is gradually weakening – with far-reaching implications for the European Union. 
Of course, from a soft-power perspective, the mere fact that people believe Germany is strong bolsters the country’s status and strategic position. 
But it will not be long before people begin to notice that the main driver of that perception – that Germany’s economy continued to grow, while most other eurozone economies experienced a prolonged recession – represents an exceptional circumstance, one that will soon disappear. 
In 12 of the last 20 years, Germany’s growth rate been lower than the average of the other three large eurozone countries (France, Italy, and Spain). 
Although German growth surged ahead during the post-crisis period, as the graph shows, the International Monetary Fund predicts that it will fall back below that three-country average – and far below the eurozone average, which includes the smaller high-growth countries of Central and Eastern Europe – within five years. 
To be sure, Germany still has some apparent advantages. 
But a closer examination shows that they are not quite as positive as they seem. 
For starters, Germany is close to full employment – in sharp contrast to the double-digit unemployment rates that prevail in much of the eurozone. 
But the combination of full employment and low growth rates actually points to an underlying problem: very slow productivity growth. 
Add to that a shrinking pool of workers capable of meeting the needs of Germany’s labor market – the country’s population is aging, and the arriving refugees lack the needed skills – and the German economy seems set for a protracted period of sluggish performance. 
Another apparent advantage is Germany’s large financial reserves, which not only cushioned it from the crisis, but also conferred upon it considerable political sway. 
Indeed, because German funds were indispensable in bailing out the eurozone’s deeply stressed periphery, the country became central to all efforts to address the crisis. 
Germany’s consent was needed to create Europe’s “banking union,” which entailed the transfer of supervisory powers to the European Central Bank and the creation of a common fund to resolve failing banks. 
And German resistance contributed to a delay in the ECB’s intervention in bond markets; when the ECB finally did launch its bond-buying program, it did so with Germany’s tacit approval. 
But now that interest rates are at zero, Germany’s large savings are no longer doing it much good. 
And with the financial storm having largely abated, Germany lacks new opportunities to demonstrate its political clout, both within and outside the eurozone. 
Indeed, whereas Germany, owing to its deep involvement in Central and Eastern European economies, was a key player in the Minsk agreements that were meant to end the conflict in Ukraine, it has little influence in the Middle Eastern countries that are occupying the world’s attention today. 
While many have highlighted Germany’s political leadership in the refugee crisis, the reality is that being thrust into the front line of that crisis, without having much influence over the factors that are driving it, is placing considerable strain on the country. 
Germany is now, for the first time, in the position of having to ask its EU partners for solidarity, as it cannot absorb all the newcomers alone. 
As usual, however, perceptions are lagging behind reality, which means that Germany is still widely viewed as the eurozone’s most powerful force. 
But, as the global business cycle accelerates Germany’s return to the “old normal,” the power shift within Europe will become increasingly difficult to ignore. 
Germany, which exports a large volume of investment goods, benefited more than other eurozone member countries from the investment boom in China and other emerging economies. 
But emerging-economy growth is now slowing considerably, including in China, where demand is shifting from investment toward consumption. 
This tends to undermine German growth and benefit southern European countries, which export more consumer goods. 
The ongoing shift in Europe’s economic and political power dynamics is likely to have a major impact on the EU’s functioning – and especially that of the eurozone. 
For example, without a strong Germany to enforce the eurozone’s fiscal strictures and urge the implementation of difficult but necessary structural reforms, countries may lose their motivation to do what is needed to ensure fairness and stability in the long term. 
If inflation remains low, the ECB might feel freer to pursue further rounds of monetary stimulus, undermining fiscal objectives further. 
In short, we may be headed toward a less “Germanic” economic policy in the eurozone. 
While that might enhance the EU’s popularity in the periphery, it could increase resistance to EU membership in Germany – a country that, despite its waning economic strength, remains an important piece of the integration puzzle. 

Germany’s Socialism of Fools 
BERLIN – If opinion polls counted as elections, large parts of Germany would already be governed by the far right. 
In several eastern German states, the Alternative für Deutschland (AfD) has established itself as the strongest political force. 
Almost everywhere else in the country, the party currently ranks second – on par or just ahead of the struggling Social Democrats (SPD) and behind only Chancellor Angela Merkel’s Christian Democrats (CDU). 
In coming weeks, matters could get even worse. 
In regional elections in Bavaria on October 14 and in Hesse two weeks later, the AfD is poised to enter the two last remaining regional parliaments without far-right representation. 
Concerns about immigration continue to fuel this surge. 
In the eastern city of Chemnitz, recent anti-foreigner riots and pro-tolerance rallies provided a stark reminder of how divided the German public remains on migration. 
But it would be a dangerous miscalculation to regard the AfD as a xenophobic, single-issue party. 
The AfD has always been a political chameleon, cleverly exploiting mismanaged issues. 
This arc of anger began during the euro crisis, proceeded to migration after the summer of 2015, and most recently discovered integration and Islam as wedge issues to boost support. 
With each turn, the party widened its appeal. 
Now, it seems to have another target in its sights: liberal economics and a vulgar ethno-socialism. 
This turn to “social justice” issues is counterintuitive. 
The AfD was born in 2013 as a euro-critical “party of professors,” many of them economic liberals, and neoliberalism remains part of their offspring’s DNA. 
To this day, the party’s official statements promote free trade, increased competition, a lower tax rate, and austerity in southern Europe. 
But what worked for the one-time professors’ party is unlikely to pave the AfD’s path to power. 
For many blue-collar voters, particularly in eastern Germany, neoliberalism is a non-starter. 
Recognizing this, the AfD leadership has recently started to shed the pro-business baptism gown that the party has long outgrown. 
The goal is to establish the AfD as a new mass party, or Volkspartei, which could prove a mortal threat to what is left of the SPD, as well as to Germany’s wider political system. 
In Bavaria and Hesse, the AfD’s campaign already reflects this change. 
Calling for higher pensions and improved medical services in rural areas, and criticizing high rents, the party aims to “be social without turning red,” as one campaign slogan puts it. 
And the AfD leader in Brandenburg, Andreas Kalbitz, recently announced that the party plans to focus on “social justice” in upcoming elections in three eastern German states next year. 
The driving forces behind a more “socialist” AfD can be found in Germany’s east, where firebrand party leaders like Björn Höcke of Thuringia have long called for “a party of patriotism and solidarity.” 
For many, that is a thinly veiled bow to National Socialism. 
Höcke and Jürgen Pohl, an AfD Bundestag member, recently put forward some of the program’s key ingredients, which include higher pensions and inclusion of the self-employed in the state-run pension funds – policies that would focus on ethnic Germans. 
The AfD will hold a special party convention early next year to formalize programmatic changes and establish a unified position on social issues. 
The explicit aim, according to Höcke, is to combine “identity and solidarity” in order to reject “neoliberalism and its history of failure.” 
While a heated internal debate can be expected, the Höcke wing currently seems to have the wind at its back. 
At the federal level, an AfD majority is highly unlikely as long as the German economy is booming. 
But a much stronger far right is a near-certainty. 
Combining anti-establishment rhetoric on cultural and economic issues has worked remarkably well for right-wing populist parties elsewhere, and the question for many German observers is not whether this formula will work in Germany, but how well. 
The polls are not reassuring. 
A study presented last week by the Bertelsmann Foundation, an independent think tank, stresses that issues such as income distribution or affordable housing can effectively act as “bridges” between the extreme right and voters at the political center. 
Up to 30.4% of German voters are open to AfD positions, according to the study. 
In view of this potential, much will depend on how Germany’s center responds. 
One idea is that a division of labor between the CDU and the SPD could diffuse the current challenge. 
The CDU could recapture AfD voters by strengthening its conservative positions on cultural and identity questions. 
The SPD, by contrast, would move to the left on social and economic issues, stressing equality, solidarity, and justice, and thus closing the ideological gap that is empowering the AfD. 
But this will be difficult to do for the CDU and the SPD. 
Locked in an unpopular grand coalition, such an ideological realignment would make finding common ground in the government increasingly challenging and could well result in an early federal election. 
And such an outcome would only further strengthen the AfD. 

Germany’s Misunderstood Trade Surplus 
BERLIN – Now that Germany’s current-account surplus has reached a record €270 billion ($285 billion), or close to 8.7% of GDP, the ongoing debate about its economic model has intensified. 
Eurozone politicians and Donald Trump’s administration in the United States are each blaming the other for the economic imbalance; and all are blaming the euro. 
Trump’s administration, for its part, has attacked Germany for exporting too much, and accused it of manipulating the euro. 
In fact, Germany’s trade surplus has little to do with the euro; which has become a convenient scapegoat – a stand-in for other policy mistakes. 
Many Germans view the latest wave of criticism as a sign that others are merely envious of their country’s success, and they have angrily refuted arguments that Germany has tried to gain an unfair competitive advantage. 
Germany, they point out, does not engage in price dumping or direct export promotion, and its leaders do not target the euro. 
On the contrary, prior to adopting the common currency, Germany had for decades pursued a strong-Deutsche Mark policy, because it wanted to encourage domestic exporters to maintain competitiveness through innovation, rather than reliance on the exchange rate. 
This was the central feature of Germany’s economic model after World War II, and the main reason its long Wirtschaftswunder (“economic miracle”) could be sustained. 
The criticism of Germany’s trade surplus suffers from three fallacies. 
For starters, many of the critics seem to believe that Germany’s trade balance can be systematically manipulated with the exchange rate. 
But, owing to the integration of global value chains, industrial exports now comprise many imported inputs, which means that the effect of exchange-rate movements on domestic prices and the trade balance has decreased substantially over time. 
In fact, Germany’s bilateral trade surplus with the US has barely changed, despite substantial swings in the euro-dollar exchange rate – which was as high as €1:$1.60 in 2011, and as low as €1:$1.04 more recently. 
Germany owes its export success not to currency manipulation, but to its strong market position and the pricing power of its highly specialized manufacturing champions. 
A second fallacy is the belief that politicians and central banks can actually set exchange rates. 
In most advanced economies, the exchange rate cannot simply be decreed; rather, it is endogenously determined by the underlying real economy and the state of the financial system. 
Currency markets are too deep for direct intervention to be worth the risk, as the Swiss National Bank discovered a few years ago when it tried to stem the franc’s appreciation. 
The US Treasury abandoned currency-market interventions in the 1990s; and the European Central Bank has tried to intervene only once, very briefly in 2000. 
Accusations that the US Federal Reserve and the ECB have pursued unconventional policy measures to weaken their respective currencies miss the fact that exchange-rate movements have only a limited, short-lived effect on domestic inflation, exports, and growth. 
Both central banks are guided by their mandates, not by an implicit or explicit exchange-rate objective. 
A third fallacy – which one often encounters on the German side of the debate – is the belief that a country’s current-account balance reflects the competitiveness of its exports. 
In reality, a country’s external balance is determined by its preferences and its intertemporal saving and investment decisions. 
Fundamentals such as Germany’s demographics alone probably account for only about three percentage points – or one-third – of its current-account surplus. 
As these three fallacies show, the debate over Germany’s external surplus should not be about the euro exchange rate or German exports. 
The euro is not too weak, and German exports are not too high. 
Rather, the problem is that Germany’s imports are too low, owing to its huge investment gap. 
Germany has one of the lowest public-investment rates in the industrialized world. 
Its municipalities, which are responsible for half of all public investment, currently have unrealized investment projects worth €136 billion, or 4.5% of GDP; 
Germany’s school buildings alone need another €35 billion for repairs. 
Meanwhile, private investment in Germany’s aging capital stock has been weakened by many German companies’ desire to invest abroad. 
The gap is the result of policy failures – namely protectionist policies in the non-tradable services sector. 
The International Monetary Fund, the European Commission, and the OECD have long tried to convince Germany to deregulate services, curtail vested interests, and improve competition. 
But, as it stands, wages, productivity, and investment remain high in the German export sector, and low in the non-tradable services sector. 
The international debate about Germany’s current account should thus focus on measures to liberalize the country’s services and remove other barriers to investment. 
To that end, Germany should improve its digital and transportation infrastructure; strengthen market mechanisms to encourage more renewable-energy development; address its shortage of skilled labor; change its tax system to strengthen incentives to invest; and reform its regulations to reduce uncertainty. 
Germany is an increasingly important political and economic power in Europe and on the world stage. 
But, until now, the debate about Germany’s current-account surplus has been counterproductive. 
Criticism of Germany’s export prowess, and accusations of currency manipulation, are just as wrong-headed as Germany’s own defense of its excessive surplus. 
Ultimately, Germany can serve everyone’s best interests – including its own – by reducing its surplus, and thus the harmful economic imbalances that lie just beneath the surface. 


Schäuble’s Gathering Storm 
ATHENS – Europe’s crisis is poised to enter its most dangerous phase. 
After forcing Greece to accept another “extend-and-pretend” bailout agreement, fresh battle lines are being drawn. 
And, with the refugee influx exposing the damage caused by divergent economic prospects and sky-high youth unemployment in Europe’s periphery, the ramifications are ominous, as recent statements by three European politicians – Italian Prime Minister Matteo Renzi, French Economy Minister Emmanuel Macron, and German Finance Minister Wolfgang Schäuble – have made clear. 
Renzi has come close to demolishing, at least rhetorically, the fiscal rules that Germany has defended for so long. 
In a remarkable act of defiance, he threatened that if the European Commission rejected Italy’s national budget, he would re-submit it without change. 
This was not the first time Renzi had alienated Germany’s leaders. 
And it was no accident that his statement followed a months-long effort by his own finance minister, Pier Carlo Padoan, to demonstrate Italy’s commitment to the eurozone’s German-backed “rules.” 
Renzi understands that adherence to German-inspired parsimony is leading Italy’s economy and public finances into deeper stagnation, accompanied by further deterioration of the debt-to-GDP ratio. 
A consummate politician, Renzi knows that this is a short path to electoral disaster. 
Macron is very different from Renzi in both style and substance. 
A banker-turned-politician, he is President François Hollande’s only minister who combines a serious understanding of France’s and Europe’s macroeconomic challenges with a reputation in Germany as a reformer and skillful interlocutor. 
So when he speaks of an impending religious war in Europe, between the Calvinist German-dominated northeast and the largely Catholic periphery, it is time to take notice. 
Schäuble’s recent statements about the European economy’s current trajectory similarly highlight Europe’s cul-de-sac. 
For years, Schäuble has played a long game to realize his vision of the optimal architecture Europe can achieve within the political and cultural constraints that he takes as given. 
The “Schäuble plan,” as I have dubbed it, calls for a limited political union to support the euro. 
In brief, Schäuble favors a formalized Eurogroup (composed of the eurozone’s finance ministers), presided over by a president who wields veto power – legitimized by a Euro Chamber comprising parliamentarians from the eurozone member states – over national budgets. 
In exchange for forfeiting control over their budgets, Schäuble offers France and Italy – the primary targets of his plan – the promise of a small eurozone-wide common budget that would partly fund unemployment and deposit-insurance schemes. 
Such a disciplinarian, minimalist political union does not go down well in France, where elites have always resisted forfeiting sovereignty. 
While politicians like Macron have moved a long way toward accepting the need to transfer powers over national budgets to the “center,” they fear that Schäuble’s plan asks too much and offers too little: severe limits on France’s fiscal space and a macroeconomically insignificant common budget. 
But even if Macron could persuade Hollande to accept Schäuble’s plan, it is not clear whether German Chancellor Angela Merkel would consent to it. 
Schäuble’s ideas have so far failed to persuade her or, indeed, the Bundesbank (which, through its president, Jens Weidmann, has been hugely negative toward any degree of fiscal mutualization, even the limited version that Schäuble is willing to trade for control over the French and Italian budgets). 
Caught between a reluctant German chancellor and an indisposed France, Schäuble imagined that the turbulence caused by a Greek exit from the eurozone would help persuade the French, as well as his cabinet colleagues, of his plan’s necessity. 
Now, while waiting for the current Greek “program” to collapse under the weight of its inherent contradictions, Germany’s finance ministry is preparing for the battles ahead. 
In September, Schäuble distributed to his Eurogroup colleagues an outline of three proposals for preventing a new euro crisis. 
First, eurozone government bonds should include clauses that make it easy to “bail in” bondholders. 
Second, the European Central Bank’s rules ought to be altered to prevent commercial banks from counting such bonds as ultra-safe, liquid assets. 
And, third, Europe should ditch the idea of common deposit insurance, replacing it with a commitment to let banks fail when they no longer fulfill the ECB’s collateral rules. 
Implementing these proposals in, say, 1999, might have limited the gush of capital to the periphery immediately following the single currency’s introduction. 
Alas, in 2015, given the eurozone members’ legacy public debts and banking losses, such a scheme would cause a deeper recession in the periphery and almost certainly lead to the monetary union’s breakup. 
Exasperated by Schäuble’s backtracking from his own plan for political union, Macron recently vented his frustration: “The Calvinists want to make others pay until the end of their life,” he complained. “They want reforms with no contributions toward any solidarity.” 
The most troubling aspect of Renzi’s and Macron’s statements is the hopelessness they convey. 
Renzi’s defiance of fiscal rules that push Italy further into an avoidable debt-deflationary spiral is understandable; but, in the absence of proposals for alternative rules, it leads nowhere. 
Macron’s difficulty is that there seems to be no set of painful reforms that he can offer Schäuble to persuade the German government to accept the degree of surplus recycling necessary to stabilize France and the eurozone. 
Meanwhile, Germany’s commitment to “rules” that are incompatible with the eurozone’s survival undermines those French and Italian politicians who were, until recently, hoping for an alliance with Europe’s largest economy. 
Some, like Renzi, respond with acts of blind rebellion. 
Others, like Macron, are beginning gloomily to accept that the eurozone’s current institutional framework and policy mix will ultimately lead either to a formal breakup or to a death by a thousand cuts, in the form of continued economic divergence. 
The silver lining in the gathering storm cloud is that minimalist proposals for political union, like Schäuble’s plan, are losing ground. 
Nothing short of macroeconomically significant institutional reforms will stabilize Europe. 
And only a pan-European democratic alliance of citizens can generate the groundswell needed for such reforms to take root. 

Germany’s Golden Opportunity 
BERLIN – The German economy appears unstoppable. 
Output is expected to grow by more than 2% this year, and wages by 3%, with the current-account surplus set to reach a towering 8.4% of GDP. 
Unemployment has been halved over the last decade, and now stands at an all-time low. 
German exporters remain highly innovative and competitive. 
And the government is recording a sizeable budget surplus. 
While the rest of Europe remains mired in crisis and self-doubt, Germany’s future seems bright and secure. 
But appearances can be deceiving. 
In fact, today’s rosy macroeconomic data tell only part of the story. 
Since the euro was established in 1999, Germany’s productivity growth has been no more than average among European countries, real wages have declined for half the workforce, and annual GDP growth has averaged a disappointing 1.2%. 
A key reason for this lackluster performance is Germany’s notoriously paltry investment rate, which is among the lowest in the OECD. 
The result is deteriorating infrastructure, including roads, bridges, and schools. 
This, together with an inadequate regulatory and business environment, has raised concerns among companies; since 1999, the largest German multinationals have doubled their employee headcounts abroad, while cutting jobs at home. 
In their 2013 coalition agreement, the Christian Democratic Union and the Social Democrats set a goal of raising public and private investment by 3% of GDP, or €90 billion ($100.8 billion) annually, to reach the OECD average. 
Although this is not a particularly ambitious objective – after all, Germany’s current-account surplus at the time amounted to 7.8% GDP – achieving it is vital to the country’s continued prosperity. 
Last August, the German government appointed a 21-member committee of experts (including the three authors) from business, labor unions, finance, and academia to determine how to achieve the target. 
Last month, the committee presented its ten-point action plan, which, despite disagreement on taxes and private financing of public investment, reflects an unusually broad consensus. 
For starters, the action plan calls for limiting the impact on public investment of the pressure to consolidate the government budget. 
The plan does not challenge the constitutional debt brake that forbids the federal government from running structural deficits above 0.35% of GDP. 
But it does recommend a legally binding commitment to keep investment levels at least as high as the rate of depreciation of state assets, and to use unexpected budget surpluses, first and foremost, for increased public investment. 
In order to support local investment, the expert committee proposes creating a “national investment pact” to enable municipalities to increase investment by at least €15 billion over the next three years. 
And it recommends establishing a public advisory institution to help municipalities realize their investment projects, of which there is currently a €118 billion backlog. 
The most controversial issue, within the committee and in Germany, relates to financing infrastructure via public-private partnerships, a seemingly promising solution that nonetheless has proved to be far from a panacea. 
To strike an effective balance, the action plan proposes two publicly owned investment funds – one raising money from institutional investors, and the other from individuals. The public projects financed by the funds would provide sufficient efficiency gains to attract private financing. 
As for purely private-sector investment, the committee recommends a focus on developing the sectors that will dominate tomorrow’s economy. 
As it stands, Germany is strong in traditional industrial sectors, but has fallen behind its competitors in Asia and the United States in terms of investment in research and development. 
To catch up, R&D spending should be raised from less than 3% to at least 3.5% of GDP. 
Nowhere is the need to overcome financing bottlenecks more apparent than with Germany’s Energiewende (energy transition). 
To succeed, more than €30 billion, or 1% of GDP, will have to be invested annually in network infrastructure, renewable-energy generation, combined heat and power systems, and storage technologies in the coming decades. 
While some of these funds will come from public budgets, the vast majority will have to be provided by the private sector. 
Moreover, bringing Germany’s digital infrastructure, especially its broadband networks, up to international standards will require significant investment, which an improved regulatory framework could help to encourage. 
Regulatory reform is also needed to strengthen support for startup companies – an area in which Germany is notoriously weak, reflected in the difficulties such companies face in obtaining venture capital. 
A substantial increase in private investment is necessary not just for Germany; it is critical to Europe’s recovery from its ongoing crisis. 
Given Germany’s relative economic strength, it has a special responsibility to help foster investment throughout Europe, including by promoting European-level reforms of transport and energy, supporting incentives for innovation, and backing digital modernization. 
The expert committee supports EU Commission President Jean-Claude Juncker’s plan to channel some €300 billion of private-sector money toward infrastructure, and proposes that if the scheme is successful, it should be transformed into a permanent European investment mechanism. 
This would require more funding in the long run for the European Fund for Strategic Investments, to which the German government should contribute directly. 
Germany’s combination of strong growth, low unemployment, favorable financing conditions, and large budget surpluses present it with a golden opportunity. 
With increased investment in infrastructure, not to mention a competitive education system and more investment-friendly business conditions, it can place its economy on a stronger footing for the future, and help pull Europe out of its malaise. 
We now have a plan; all that is needed is the will to implement it. 

Germany’s Four Neins 
BERLIN – Germany’s stance toward Europe has become one of rejection and disengagement. 
Its policymakers deny the eurozone’s crisis-ridden countries a more active fiscal policy; refuse to support a European investment agenda to generate demand and growth; have declared a fiscal surplus, rather than faster potential growth, as their primary domestic goal; and have begun turning against the European Central Bank (ECB) in the struggle against deflation and a credit crunch. 
On all four counts, Germany is wrong. 
To be sure, Germany is justified in rejecting narrow-minded calls by France and Italy for unconditional fiscal expansion. 
After all, fiscal stimulus can work only if it supports private investment and is accompanied by much more ambitious structural reforms – the kind of reforms that France and Italy are currently resisting. 
But Germany has all of the leverage it needs to implement the stability-oriented reforms that it wants for Europe. 
For starters, Germany, together with the European Commission, can compel France to pursue deeper reforms in exchange for more time to consolidate its deficit. 
Germany cannot, however, indulge its obsession with supply-side reforms without also pursuing growth-enhancing policies. 
As Germany knows from its own experience in the early 2000s, the benefits of supply-side reforms – namely, improved competitiveness and higher long-term growth rates – take a long time to emerge. 
Time is a luxury that Europe does not have. 
With every month that the economy loses productive capacity, the likelihood of stagnation and deflation rises. 
The key to ending the European crisis is a stimulus plan that addresses deficiencies on both the supply and demand sides. 
That is why Germany’s refusal to help find a way to finance the proposed European investment agenda – which, for a limited time, would fund productive private investment – is a mistake. 
Equally problematic is Germany’s focus on maintaining a fiscal surplus. 
With projections for German GDP growth this year and next revised downward by more than 0.6 percentage points in the last few months, the government could be forced to initiate a pro-cyclical fiscal policy to achieve its goal, inducing even lower growth at home and throughout the eurozone. 
Given that the German economy’s output gap remains negative, the government should be implementing expansionary fiscal policy that targets the country’s infrastructure weaknesses. 
In this sense, Finance Minister Wolfgang Schäuble’s plan to spend an additional €10 billion ($12.5 billion) on public investment in 2016-2018 is a step in the right direction. 
But, at just 0.1% of Germany’s annual GDP, Schäuble’s scheme looks more like an attempt to quiet criticism from the rest of Europe than a genuine policy shift. 
Germany’s fourth policy mistake is its apparent withdrawal of support for the ECB. 
Over the last seven years, the ECB’s actions have helped Germany’s economy and taxpayers as much as those of its neighbors. 
Moreover, the claim that the ECB’s purchases of asset-backed securities amount to “toxic loans” that transfer risk to German taxpayers is unfounded; after all, there have been almost no defaults since 2008. 
Germany’s leaders need to recognize this – and to defend the ECB publicly from baseless fear mongering. 
Failure to do so may reflect an effort to forestall the rise of the far-right anti-European political forces, particularly the Alternative for Germany. 
But this strategy merely plays into the party’s hands. 
If Germany refuses to take a more reasoned approach, it risks undermining the ECB’s credibility, thereby reducing the effectiveness of its measures. 
If that happens, the ECB may well be compelled to initiate large-scale purchases of eurozone government bonds through its so-called “outright monetary transactions” scheme – a plan that many German policymakers and economists staunchly oppose. 
The German government can use its considerable leverage to compel France and Italy to pursue the structural reforms that both countries need, while allowing a growth-friendly demand stimulus to lift the threat of deflation hanging over the eurozone. 
And it has the authority to bolster the ECB’s credibility and thus its efforts to ensure future price stability and prevent financial contagion. 
Europe needs a grand bargain, involving close coordination on structural reforms and fiscal and monetary policy. 
Germany’s relative economic and political stability, far from enabling it to disengage from such efforts, makes it among the most important protagonists in their development and implementation. 
The question is whether Germany’s leaders will recognize this before Europe’s economy falls into an even deeper slump. 


Getting Corruption Right 
NEW YORK – I just returned from India, where I was lecturing to the Indian Parliament in the same hall where US President Barack Obama had recently spoken. 
The country was racked by scandal. 
A gigantic, ministerial-level scam in the mobile-telephone sector had siphoned off many billions of dollars to a corrupt politician. 
But several of the MPs had also been taken aback on discovering that when Obama spoke to them, he read from an “invisible” teleprompter. 
This had misled his audience into thinking that he was speaking extemporaneously, a skill that is highly regarded in India. 
Both episodes were seen as a form of corruption: one involved money, the other deception. 
The two transgressions are obviously not equal in moral turpitude. 
But the Obama episode illustrates an important cross-cultural difference in assessing how corrupt a society is. 
Transparency International and occasionally the World Bank like to rank countries by their degree of corruption, with the media then ceaselessly citing where each country stands. 
But cultural differences between countries undermine the legitimacy of such rankings – which are, after all, based on surveys of the public. 
What Obama was doing was a common enough practice in the United States (though one might expect better from an orator of his ability); it was not so in India, where such a technique is, indeed, regarded as reprehensible. 
India certainly has corruption, like almost every other country. 
But India also has a culture in which people commonly assume that everyone in public life is corrupt unless they prove otherwise. 
Even a blind man will tell Transparency International: “I saw him take a bribe with my own eyes.” 
Indeed, a distinguished Indian bureaucrat, a man of unimpeachable character, once told me that his mother had told him: “I believe you are not corrupt only because you are my son!” 
So, if you ask Indians whether their governance is marked by widespread corruption, they will answer with gusto: yes! 
But their exuberance biases India’s global ranking relative to more empirically minded countries. 
A similar bias arises from the occasional tendency to view political patronage elsewhere as being more corrupt than the same practices at home. 
For example, when the East Asian financial crisis broke out, there followed a systematic attempt to pin the blame on the affected countries: “crony capitalism” allegedly had somehow crippled their economies! 
In other words, the acquaintances and benefactors of the East Asian leaders were “cronies,” whereas those of US leaders were “friends”? 
In fact, it was clear that the culprits were the International Monetary Fund and the US Treasury, which had encouraged a shift to capital-account convertibility without understanding that the case for free capital flows was not symmetrical with the case for free trade. 
But where substantial corruption can unambiguously be found, as it often can, one must recognize that it is not a cultural given. 
On the contrary, often it is the result of policies that have fed it. 
India in the 1950’s had a civil service, and a political class, that were the envy of the world. 
If that seems shocking today, the loss of virtue must be traced to the all-pervasive “permit raj,” with its licensing requirements to import, produce, and invest, which grew to gargantuan proportions. 
High-level bureaucrats quickly discovered that licenses could be bartered for favors, while politicians saw in the system the means to help important financial backers. 
Once the system had taken root, corruption percolated downward, from senior bureaucrats and politicians, who could be bribed do what they were not supposed to do, to lower-level bureaucrats, who would not do what there were supposed to do unless bribed. 
Clerks would not bring out files, or get you your birth certificate or land title, unless you greased their palms. 
But if policies can create corruption, it is equally true that the cost of corruption will vary with the specific policies. 
The cost of corruption has been particularly high in India and Indonesia, where policies created monopolies that earned scarcity rents, which were then allocated to officials’ family members. 
Such “rent-creating” corruption is quite expensive and corrosive of growth. 
By contrast, in China, the corruption has largely been of the “profit-sharing” variety, whereby family members are given a stake in the enterprise so that their earnings increase as profits increase – a type of corruption that promotes growth. 
In the long run, of course, both types of corruption are corrosive of the respect and trust that good governance requires, which can undermine economic performance in its own right. 
But that does not absolve us of the responsibility to define corruption properly – and to acknowledge obvious and important cultural differences in how it is understood. 

Getting Governance Right 
CAMBRIDGE – Economists used to tell governments to fix their policies. 
Now they tell them to fix their institutions. 
Their new reform agenda covers a long list of objectives, including reducing corruption, improving the rule of law, increasing the accountability and effectiveness of public institutions, and enhancing the access and voice of citizens. 
Real and sustainable change is supposedly possible only by transforming the “rules of the game” – the manner in which governments operate and relate to the private sector. 
Good governance is, of course, essential insofar as it provides households with greater clarity and investors with greater assurance that they can secure a return on their efforts. 
Placing emphasis on governance also has the apparent virtue of helping to shift the focus of reform toward inherently desirable objectives. 
Traditional recommendations like free trade, competitive exchange rates, and sound fiscal policy are worthwhile only to the extent that they achieve other desirable objectives, such as faster economic growth, lower poverty, and improved equity. 
By contrast, the intrinsic importance of the rule of law, transparency, voice, accountability, or effective government is obvious. 
We might even say that good governance is development itself. 
Unfortunately, much of the discussion surrounding governance reforms fails to make a distinction between governance-as-an-end and governance-as-a means. 
The result is muddled thinking and inappropriate strategies for reform. 
Economists and aid agencies would be more useful if they turned their attention to what one might call “governance writ small.” 
This requires moving away from the broad governance agenda and focusing on reforms of specific institutions in order to target binding constraints on growth. 
Poor countries suffer from a multitude of growth constraints, and effective reforms address the most binding among them. 
Poor governance may, in general, be the binding constraint in Zimbabwe and a few other countries, but it was not in China, Vietnam, or Cambodia – countries that are growing rapidly despite poor governance – and it most surely is not in Ethiopia, South Africa, El Salvador, Mexico, or Brazil. 
As a rule, broad governance reform is neither necessary nor sufficient for growth. 
It is not necessary, because what really works in practice is removing successive binding constraints, whether they are supply incentives in agriculture, infrastructure bottlenecks, or high credit costs. 
It is not sufficient, because sustaining the fruits of governance reform without accompanying growth is difficult. 
As desirable as the rule of law and similar reforms may be in the long run and for development in general, they rarely deserve priority as part of a growth strategy. 
Governance writ small focuses instead on those institutional arrangements that can best relax the constraints on growth. 
Suppose, for example, that we identify macroeconomic instability as the binding constraint in a particular economy. 
In a previous era, an economic adviser might have recommended specific fiscal and monetary policies – a reduction in fiscal expenditures or a ceiling on credit – geared at restoring macroeconomic balances. 
Today, that adviser would supplement these recommendations with others that are much more institutional in nature and fundamentally about governance. 
So he or she might advocate making the central bank independent in order to reduce political meddling, and changing the framework for managing fiscal policy – setting up fiscal rules, for example, or allowing only an up-or-down legislative vote on budget proposals. 
Macroeconomic policy is an area in which economists have done a lot of thinking about institutional prerequisites. 
The same is true in a few other areas, such as education policy and telecom regulation. 
But in other areas, such as trade, employment, or industrial policies, prevailing thinking is either naïve or non-existent. 
That is a pity, because economists’ understanding of the substantive issues, professional obsession with incentives, and attention to unanticipated consequences give them a natural advantage in designing institutional arrangements to further the objectives in question while minimizing behavioral distortions. 
Designing appropriate institutional arrangements also requires both local knowledge and creativity. 
What works in one setting is unlikely to work in another. 
While import liberalization works fine for integrating with the world economy when import-competing interests are not powerful and the currency is unlikely to become overvalued, export subsidies or special economic zones will work far better in other circumstances. 
Similarly, central bank independence may be a great idea when monetary instability is the binding constraint, but it will backfire where the real challenge is poor competitiveness. 
Unfortunately, the type of institutional reform promoted by, among others, the World Bank, IMF, and the World Trade Organization is biased toward a best-practice model, which presumes that a set of universally appropriate institutional arrangements can be determined and views convergence towards them as being inherently desirable. 
But best-practice institutions are, by definition, non-contextual and cannot take local complications into account. 
Insofar as they narrow rather than expand the menu of available institutional choices, they serve the cause of good governance badly. 
Good governance is good in and of itself. 
It can also be good for growth when it is targeted at binding constraints. 

Getting Latin America Unstuck 
One of the world economy's biggest puzzles is Latin America's poor performance. 
Since the early 1980's, Latin America has been stuck, with per capita incomes growing slowly (if at all) in most of the region, and with one big crisis following another. 
Many policies have been tried, especially trade liberalization, privatization of inefficient state enterprises, and budgetary reforms. 
Yet something is holding Latin America back. 
The lack of vigorous growth is all the more bewildering in view of Latin America's many advantages and social successes. 
Natural resources are plentiful, with vast amounts of fertile land. 
Health conditions are reasonably good, and all Latin American countries have made headway against illiteracy, with most reaching 90% adult literacy or higher. 
Moreover, fertility rates have fallen sharply, to a point where populations in many countries will probably level off in coming decades. 
Women's status has improved, and girls enjoy equal access to education, with even higher enrollment rates than boys in many countries. 
Latin America may be known for its "macho" culture, but women increasingly participate in the labor force and attain prominent political and social positions. 
Latin America boasts still other long-term advantages. 
Most people live near the coasts, with good access to international trade, and most live in cities - another advantage for growth. 
Indeed, the region is not poor by international standards, but rather stuck in the middle-income range between the world's poorest places and the high-income countries of North America, Europe, and East Asia. 
What, then, accounts for the puzzling lack of real growth over the past 25 years? 
I blame two unsolved, but solvable, problems. 
The first has been around for centuries: the social divisions that trace their origins back to the European conquest over Native Americans in the sixteenth century. 
More than most places, Latin America was born in violent conquest. 
Europeans subdued Amerindian populations and also brought in massive numbers of slaves from Africa, especially to the Caribbean basin and Brazil. 
Societies became racially and ethnically complex, as the European, Amerindian, and African populations intermarried, but the long-term trend of European dominance, indigenous and Afro-American subservience, and entrenched poverty became a scar on Latin American societies. 
Even today, income inequality in Latin America is among the highest in the world, reflecting the old patterns of ethnic and racial division. 
Income inequality casts a long shadow. 
The rich have long fought against taxation needed to increase investment in the education and health of the poor, perpetuating deep social divisions and leaving many people without the health and skills that global competitiveness requires. 
The situation today is improving in some places - such as Brazil - which augurs well for the future. 
In other places - for example, Guatemala and parts of the Andean region - social divisions remain fraught with violence and distrust. 
Beyond this, a basic failure of economic strategy has been largely overlooked, one that is reflected in a major difference between public policy discussions in Latin America and Asia. 
In Asia, public debate is about technology: how can Asia catch up? 
Asian governments relentlessly act to raise the scientific and technological capacities of their economies. 
In Latin America, the global technological revolution is much less discussed, and national policies to promote science and technology are rarely given prominence. 
The result is that Latin America has failed to benefit adequately from the global technological revolutions. 
Asian developing countries are now producers of computers, semiconductors, pharmaceuticals, and software. 
By contrast, even Latin America's star performer, Chile, remains largely a resource-based export economy, with a heavy concentration in copper and agricultural exports. 
These sectors are technologically sophisticated, but form a narrow base for long-term development. 
The situation is far from hopeless. 
Brazil has demonstrated the ability to be a technological export power. 
It has succeeded, notably, in exporting airplanes and many consumer durable goods. 
Mexico, too, has begun to mobilize significant technological prowess. 
Argentina, Chile, and other countries could become high-tech agricultural producers, in the forefront of agro-biotechnology for example, if they put their minds to it. 
Still, Latin American countries have not yet tried to foster a technological revolution, certainly not with the focus, skill, commitment, and financing that Asian countries have shown. 
Such a push could play a major role in jump-starting economic growth. 
Such a policy would entail committing to a major increase in spending on research and development, as Asian developing countries have done. 
Latin American countries should aim to increase spending to around 2% of GNP (from 0.5% currently), partly through public support for laboratories and universities and partly through incentives for private-sector R&D. They should roll out the red carpet for high-tech multinational firms, just as Asia has done. 
They should also increase their focus on scientific and technological training and encourage a higher proportion of students to go on to university education. 
Government stipends for tuition and for new and enlarged universities can play a big role, as can investment in computers and information technology in schools and communities. 
The social agenda and the technology agenda are not independent of each other. Both call upon Latin American societies to invest more in their people, so that Latin Americans can join the cutting edge of global productivity. 
If these investments reach all parts of Latin America, rich and poor, the region's prospects will brighten enormously. 

Getting Migration Governance Right 
DHAKA – At last year’s United Nations General Assembly summit, world leaders promised to cooperate on ensuring safe, orderly, regular, and responsible migration. 
This year, they need to do more to realize that pledge. 
UN member states have acknowledged migration’s many benefits, including its role in stabilizing global labor markets, spreading knowledge and ideas, creating diasporas that spur increased trade and investment, and sustaining economies worldwide through remittances, which pay for family members’ health care, education, and housing back home. 
But these benefits are easily squandered if, as we’ve seen recently with crises in the Mediterranean Sea, the Andaman Sea, the Central American corridor, the Sahel, and the Horn of Africa, migration is not governed responsibly and cooperatively. 
More than 4,300 migrants have died this year trying to reach their destinations. 
In the Mediterranean Sea alone, 3,200 people have perished, and in the Andaman Sea, just east of the Bay of Bengal, thousands of migrants have been stranded on boats with nowhere to land, or have been held hostage by their traffickers. 
Against this backdrop, UN member governments should acknowledge the gap between the ideals they espoused last year and the harsh realities many migrants and refugees continue to face today. 
World leaders can rectify this at this month’s General Assembly meeting – and specifically at today’s unprecedented summit on migration and refugees. 
World leaders should first renew their commitment to stronger global governance of migration, and agree to hold a first-ever intergovernmental conference in 2018 to focus exclusively on creating a new global compact on migration, as UN Secretary-General Ban Ki-moon proposed earlier this year. 
The mere possibility that UN member states may settle on a new global compact is a significant development. 
For far too long, the international community has struggled to govern migration effectively. 
Without global-governance institutions and legal frameworks to guide international cooperation, most countries must resort to unilateral management of their own migration flows. 
When states fail to govern migration effectively, they create a vacuum that is filled by unscrupulous actors: smugglers, traffickers, and organized-crime. 
Meanwhile, countries, migrants, and host communities all lose out as they bear the costs of migration without realizing its benefits. 
The UN currently is falling short of providing effective support to member states, migrants, and the societies that host them. 
Its member governments need to agree on universal principles to establish an international framework for dealing with migration, and the UN itself should make governance of migration one of its central missions, rather than scattering the task across different agencies. 
Fortunately, the International Organization for Migration will join the UN system today. 
The IOM is expected to play a leading role in making migration governance more coherent and efficient. 
My own country, Bangladesh, initiated the idea of a global compact specifically to improve migration governance. 
As the current Chair of the Global Forum on Migration and Development, Bangladesh is committed to ensuring that the lessons learned inform the global compact. 
But, to avoid entering into new agreements that merely re-state or re-negotiate existing commitments, world leaders must act now to lay the institutional and legal groundwork for operationalizing previous proposals and make further progress. 
International cooperation on migration should be founded on existing intergovernmental agreements, such as the 2030 Agenda for Sustainable Development, the 2015 Addis Ababa Action Agenda, the 2015 Sendai Framework for Disaster Risk Reduction, and the 2013 Declaration of High-level Dialogue on International Migration and Development. 
Migration is a multidimensional issue; it requires a comprehensive approach that also respects existing national laws and regulations. 
Policymakers should maximize migration’s economic benefits; facilitate legal channels so that migrants don’t choose illegal alternatives; reduce barriers for employment and remittances; manage irregular migration flows; and protect migrants’ safety, especially in war zones or when migration reaches crisis levels, as it has this year. 
Countries and nongovernmental organizations must remain vigilant against exploitation of migrants, and governments should share responsibility for accommodating refugees. 
And, to keep up with rapidly changing geopolitical conditions, the international community should consider new partnerships in addressing migration and large movements of people. 
Finally, effective migration governance requires institutional and legal frameworks that can reconcile sometimes-conflicting considerations. 
For example, countries’ national interest in maintaining their sovereignty, controlling their borders, and enforcing their domestic laws must be balanced against migrants’ human rights, their legitimate desire to improve their lives, and societies’ need for immigrants and increased diversity. 
By addressing all of these concerns together, the international community can uphold the principle of shared prosperity through shared responsibility, which is at the heart of the UN’s 2030 sustainable development agenda. 
The time has come to set the world on a new path of constructive cooperation, instead of populists’ preferred path of destructive unilateralism. 
We need only recognize that migration benefits us all to maximize the gains and minimize the pain. 

 

Getting Past the American Election 
The pundits have now weighed in mightily in interpreting the American presidential election. 
Did the outcome - together with Republican gains in the Congress - represent an endorsement of Bush's positions? 
Has the American electorate swung to the right? 
Are Americans now more concerned about "values?" 
Like price in economics, a single electoral choice compresses a lot of information. It is a summary of whether, taking everything into account, a citizen prefers one candidate to another. 
A host of surveys is required to figure out what it really means, for the United States - and for the world. 
This much is clear, however: there is little confidence in Bush's economic policies. 
The typical American family knows that it is worse off today than it was four years ago, and appears unconvinced that the tax cuts targeted at upper-income Americans brought the benefits heralded by the Bush administration. 
But while Bush was not held back four years ago by the lack of a popular mandate in pushing his agenda, he may be emboldened by the seeming ringing endorsement to push even harder - such as making the tax cuts permanent and partially privatizing social security. 
If adopted, these measures will further compound America's fiscal mess. 
To the rest of the world, these are America's problems. 
Yes, the soaring deficits may contribute somewhat to international financial instability. 
Real interest rates may rise, as America borrows more and more. 
If declining confidence in US fiscal policy leads to a weaker dollar, Europe and Asia may find it more difficult to export, and if the deficits prove a drag on the American economy, global growth may stall. 
But for much of the rest of the world, the real concern is American unilateralism. 
An interconnected world needs cooperation and collective action. 
Historically, the US has exercised enormous leadership in a world committed to the proposition that no state should dictate collective decisions. 
Unfortunately, over the past four years, America's president has lost the credibility necessary to exercise that leadership. 
Even if the 59 million votes cast for Bush represented a ringing endorsement of his Iraq policy, it would not restore America's international credibility. 
I believe most Americans reject Bush's unilateralism no less than his administration's economic policies. 
Before the invasion of Iraq, they wanted America to go to the UN, and today they recognize that America alone cannot maintain order in the Middle East. 
Even if Iraq is to bear more of the cost of its own reconstruction, there will have to be debt forgiveness, and this too requires international cooperation. 
Those who voted for Bush may not be as outraged by American involvement in torture, or the misleading information about Iraq's weapons of mass destruction and connections with Al Qaeda, as those abroad. 
But they do not want America alone to shoulder the burdens of international peace, and they are gradually coming to the realization that leadership and cooperation do not come automatically, simply because America is the only superpower. 
Some worry whether Bush will use his electoral mandate to engage in more ventures. 
As he himself put it, "I earned capital in the campaign … and now I intend to spend it." 
Had the Iraq venture been more successful, these worries would have been justified. 
There is little secret that there were discussions concerning Iran. 
But the doctrine of preemptive war has been badly tarnished, and I remain hopeful that Congress and the American people have learned a painful lesson. 
Peace will not quickly be restored to Iraq, and it is hard to conceive of opening up a major new front, when America can hardly manage what it has already undertaken. 
Others will, of course, have to continue to bear the costs of the mistaken and mismanaged adventure in Iraq. 
Instability in the Middle East will continue to limit oil supplies, discouraging the expansion of production. 
High oil prices will dampen global growth in the remainder of 2004 and into 2005. 
In the short run, the only response is more conservation, and America's allies should put pressure on America to conserve. 
(Another reason stems from recent reports concerning the rapid melting of the polar ice cap, which seem to reconfirm worries about global warming.) 
Presidents do make a difference, but every president operates within constraints. 
The good news is that the constraints that Bush and the American government will face in the next four years will almost surely limit the damage they will cause. 
The rhetoric and posturing, the lack of commitment to human rights or democratic processes, may be - and should be - upsetting, but there will be far more bark than bite. 
While America may continue on a path of unilateralism, other countries' stance will make a difference. 
Some suggest that the US constitution provided fewer constraints on the president in the conduct of foreign policy, because the requisite checks and balances were to be provided by the powers of the time - Britain and France. 
Today, with the US as the only superpower, it is even more important for countries to stand up and express their views - and to stick by them even when pressured. 
Some worry that this will worsen relations with the US. 
But long-term relationships are based on friendship and respect; coherent, well-argued positions will earn that respect. 
Today, many Americans, especially the young, feel far more respect for the countries that recognized the lack of evidence of Iraqi weapons of mass destruction than for those whose leaders repeated the American distortions. 
It may be unfortunate that Realpolitik is the order of the day, but it is, so others must learn to play the same game. Standing up for multilateralism and international rule of law may not only be the morally right thing to do; it is also in the interests of America's allies and, ultimately, America itself. 

Getting Practical in Controlling Malaria 
Many international assistance programs fail because they are badly designed and/or too complicated. 
The result is that the poor don’t get the help they need, and taxpayers in rich countries lose confidence in the use of their aid funds. 
A case in point has been malaria control. 
If rich countries adopt simpler and more practical strategies to help Africa fight malaria, they can save millions of Africans while building enthusiastic support among their citizens. 
Malaria is a killer disease transmitted by a specific species of mosquitoes. 
It depends on warm temperatures, and thus is largely a tropical malady. 
Africa turns out to be especially unlucky, because it has a combination of high temperatures and the mosquitos that are likely to transmit the disease. 
As a result, Africa accounts for 90% of all malaria deaths in the world – including roughly two million children per year. 
Yet even in Africa, Malaria is largely preventable and completely treatable at low cost. 
Up until now, there has been far too little malaria control. 
Prevention is best accomplished by modern anti-malaria bed nets, which are treated with insecticide. 
These nets cover people while they sleep, and repel or kill the mosquitoes, which tend to bite during the night. 
The nets reduce the number of bites, and the amount of illness, but they do not eliminate them. 
If people get bitten despite the nets, they require treatment within a few hours of the onset of symptoms. 
There are two major obstacles to solving the malaria problem. 
First, Africa’s poor cannot afford insecticide-treated bed nets and the correct medicines. 
Many end up taking cheap medicines that are not effective because the malaria parasite has developed resistance to them. 
Second, African villagers lack access to cars or trucks, so they have to walk several miles to reach a clinic. 
An infected child is often dead or comatose by the time a mother reaches a clinic. 
If rich-country governments thought practically about malaria and recognized that it is a full-scale emergency, they could support simple and practical solutions: bed nets and timely access to medicine. 
Rich countries would buy bed nets from companies that produce them and work with African governments to distribute them free of charge to every African household. 
And they would work with African governments to ensure that the correct medicines are available for quick use within each village. 
There are one billion people living in rich donor countries, and the total cost of comprehensive malaria control in Africa – giving bed nets at no cost to all Africans, and providing the right medicines within every village – is around $2.5 billion per year, or just $2.50 per citizen of the rich countries. 
But the rich countries have instead adopted failed strategies. 
Rather than giving away bed nets, rich-country organizations like the United States Agency for International Development try to sell them to the extreme poor, albeit at heavily discounted prices. 
This policy reflects a shortsighted ambition to promote markets rather than the direct and over-riding goals of saving lives and removing bottlenecks to long-term economic development. 
The tragic result has been extremely low use of nets throughout most of Africa, since impoverished people lack the purchasing power to buy nets. 
Second, donor governments have failed to promote simple ways to ensure the availability of medicines in villages across the continent. 
Rather than shipping medicines to each country on the basis of estimated needs, donor agencies have set up a complicated purchasing system that has led to years of delay in getting medicines to the villages. 
The pharmaceutical industry, led by Novartis, has been way ahead of donor agencies. 
Novartis has agreed to make these medicines available at the cost of production. 
But, despite Novartis’s large production capacity, donor agencies have failed to order, buy, and ship the medicines in the required amounts. 
Malaria control now faces a period of increasing urgency, as well as renewed hope. 
Malaria is spreading, and new scientific evidence indicates that people infected with HIV are more likely to transmit it to others when they are also infected with malaria. 
But there is also a growing realization that malaria is a disaster that must be addressed. 
US President George W. Bush has launched an important new initiative to help 15 African countries to control malaria, and hosted an unprecedented White House summit in December to rally private-sector support. 
Similarly, the Chinese government, the World Bank, and the Islamic Development Bank have recently announced plans to scale up their contributions to the fight against malaria. 
A major new citizens’ initiative called Malaria No More is raising private funds to distribute anti-malaria nets. 
People across Africa have shown that they are ready to mobilize their efforts if we offer practical means to help them. 
The world’s safety, including the safety of people living in rich countries, depends on the global community’s ability to prove that it will come to the aid of all who are in desperate need. 
Aid can work wonders if it is practical and directed to those in need. 
Malaria control can demonstrate this world-saving lesson once again. 

Getting Serious About Global Poverty 
Institutions and governments, like people, make bold resolutions at the beginning of every year. 
But, for the millions who face the crushing burden of poverty, mere proclamations that help is on the way are not enough to create jobs or foster development. 
This year, the international community must move decisively from pledges to action in the effort to reduce poverty. 
What will this require? 
In 2005, the international community renewed its commitments to help the poorest countries meet the United Nations’ Millennium Development Goals (MDG’s), which aim to halve poverty by 2015. These commitments include significant increases in debt relief and aid. 
While there has been progress on implementing debt-relief measures, the international community must follow through on the other part of its pledge, by delivering increased aid and promoting its better use. 
Multilateral lenders have long understood the importance of debt relief to poverty reduction. 
Indeed, the joint IMF-World Bank Heavily Indebted Poor Countries (HIPC) Initiative was launched in 1996 to coordinate efforts by multilateral organizations and governments to reduce poor countries’ debt burdens to sustainable levels. 
So far, the results are encouraging. 
Before the HIPC Initiative, eligible countries spent, on average, slightly more on debt service than on health and education combined. 
Now, debt in the 28 countries for which relief has been approved has declined by an average of two-thirds, while their expenditures on health, education, and other social services have risen to almost four times the amount of debt-service payments. 
In 2005, the international community went further, agreeing on the Multilateral Debt Relief Initiative (MDRI), which will write off 100% of many poor countries’ debts to the IMF, the World Bank, and the African Development Bank. 
As a result, just this past December, the IMF approved immediate, full relief for 19 countries – including 13 in Africa, four in Latin America, and two in Asia – on all outstanding debt to the Fund disbursed before January 1, 2005. Other countries are eligible, and the IMF is helping these states make rapid progress to qualify, with total debt relief expected to be more than $5 billion. 
As with the HIPC Initiative of which it is a part, the MDRI will do more than reduce debt: it will free up resources that can be devoted to poverty reduction and economic development. 
In 2006, for example, Zambia will see its debt fall by almost 10% of GDP, leaving more resources available for development. 
Similarly, Guyana will have its debt reduced by more than 8% of GDP. 
The level of debt relief will be even greater once the World Bank and the African Development Bank finalize their own programs in the months ahead. 
Nevertheless, the debt relief now being implemented will only provide a small part of the assistance, both financial and technical, that low-income countries need to meet the MDG’s. 
If they are to be met, donors must also deliver on their commitments for significant increases in aid. 
The IMF has long called on donors to meet the internationally accepted target for overseas development assistance of 0.7% of GDP. 
Some donors have now promised to do so, though only over time; others are not ready to go that far, but have promised more aid than they currently give. 
The international community must show that it will follow through on these promises. 
Donors must provide the help that developing countries urgently need. 
At the same time, we must ensure that low-income countries use debt relief and aid efficiently. 
One priority is to ensure that large, new infusions of aid do not produce unintended economic outcomes, such as rapid currency appreciation or inflation, which would make recipient countries’ exports less competitive. 
Another priority is to ensure that low-income countries that are striving to meet the MDG’s, and which have large financing requirements, avoid a new spiral of indebtedness. 
The gains from MDRI debt relief will amount to precious little if low-income countries emerge from their debt burdens only to start the cycle anew by amassing fresh debt. 
But recipient countries must complement donor efforts, and continue to do their part as well, by maintaining a track record of reform and sound macroeconomic policies, and by making the best possible use of the higher levels of assistance. 
Outside efforts can help reduce poverty, but it is, ultimately, the efforts of low-income countries themselves to sustain strong economic performance, improve governance, and develop stable and effective institutions that will have the most important impact on reducing poverty. 
Low-income countries can also improve their prospects by strengthening their fiscal management, fostering private-sector development, and liberalizing trade. 
If we keep our promises, 2006 can be a year of hope for those who have little else than the dream of a better life. 

Getting Serious in Russia's War on Terror 
Russia's decision to spend an extra 157 billion rubles (over $5 billion) to fight terrorism is a more impressive response than all the Kremlin's recent tough talk, including President Vladimir Putin's demand that more power be centralized in his hands. 
Indeed, after the hostage crisis in the Dubrovka Theater in Moscow in 2002, the same sort of harsh words flowed, but no extra money was spent. 
These new billions do seem to demonstrate renewed government resolve, but is throwing money at the war on terror enough? 
The Kremlin refuses to publicly admit that today's terrorism has its roots predominantly in the Chechen war, which is now metastasizing throughout the Northern Caucasus. 
Chechen fighters and their supporters demonstrate almost daily that the war continues, and countless bold pronouncements, like newly elected Chechen president Alu Alkhanov's recent assertion that "effective measures" have been found to combat terror, look like mere bloviation. 
According to Finance Minister Aleksei Kudrin, huge amounts of money are needed to resolve the Chechen problem. 
But financial inflows into Chechnya are often more destabilizing than helpful. 
President Akhmat Kadyrov, the murdered Chechen president, was right to suggest that 80% of this money ends up in the pockets of Moscow and regional firms who benefit from the Chechen conflict continuing. 
So neither money nor military power alone can end the bloodshed, and diplomacy with the less militant Chechen leader Aslan Maskhadov seems unlikely, for three reasons. 
First, contacts between Maskhadov and a few Russian politicians haven't - at least as of yet - influenced the Kremlin's position. 
Second, the subject for negotiations is unclear, because Putin has ruled out Chechen independence, and surrender by the separatists is just as unlikely. 
Third, even if negotiations with less militant Chechens occur and succeed, terrorism will continue under the leadership of the religious fanatic Shamil Basaev. 
The result of all this is spreading hopelessness. 
The thirst for vengeance after the Beslan school massacre makes confrontation between Chechens and Ingushis increasingly possible. 
Chechnya's neighboring republic, Dagestan, is witnessing increasing confrontations between radical and traditional Islamic groups, something now also seen in Kabardino-Balkaria. 
Unless the Russian state develops a viable policy, fast, all of these areas threaten to become safe havens for terrorists. 
What Russia needs is a political response to terror that takes into account its international dimension. 
In the last four years, radical Islam has established itself in the Northern Caucasus. 
This doesn't mean that all local Muslims have become jihadis. 
In fact, the latter are a tiny minority. 
But they are energetic, mobilized, and experienced fighters. 
These people increasingly identify themselves with the global jihad, and have forged firm links with Muslim radicals in the Middle East, Southern Asia and Europe. 
Russia must now follow America's lead in how to fight terror. 
Since the attacks of September 2001, the United States has managed to avoid further attacks on its land. 
True, the news coming from Iraq is horrible, but the US is fighting a full-blown war in Iraq; it is not engaged in a counterterrorist operation. 
Russia's power structures, like those of America, must now be readied to conduct a very long struggle, entirely different from the old Soviet KGB way of suppressing dissent. 
Russia's security forces need to learn to be pro-active, because the terrorists consistently seek to perfect their deadly methods. 
The fight against terror turns on who will strike first; so far, the terrorists have been faster and more professional than the Russian state. 
To conduct this struggle effectively, Russia must abandon two hoary stereotypes: that all terrorists are bandits, and that they somehow are acting under some Western intelligence supervision to weaken Russia. 
The base of world terrorism consists of daring fanatics who believe in a sacred, fiery destiny. 
Osama bin Laden doesn't work for money and wants to destroy the entire West, not weaken Russia in particular. 
But the greatest obstacle that must be confronted if Russia is to wage war on terror effectively is the rampant corruption in the security forces. 
It is well known, for example, that Basaev's fanatical killers paid off Russian militia to enter Budeonovsk in 1995 and kill hospital patients. 
Yet nothing has been done to root out this tool of terror. 
It is all too easy to reduce the fight against terrorism to tightening the political screws, to a strengthening of Putin's power, to restricting the movement of people within the country. 
But none of these measures will frighten extremists in the Northern Caucasus or their al Qaeda allies. 
The Kremlin must know this already. 
Even Putin's predictable presidential rhetoric reveals a desire to initiate a real fight against terrorism. 
But waging a serious war requires a serious reorganization of Russia's power structures, which will be very painful. 
Despite Putin's so far unsuccessful fight against terrorism, his popularity remains high, so he has the political capital to make tough internal reforms. 
But he must act now, for public support can be no substitute for resolute and effective action. 

Getting to "Yes" with Iran 
There is a wise American saying: “If you are in a hole, stop digging.” 
The six governments that are currently considering the next steps to prevent Iran from developing a nuclear bomb – the five permanent members of the UN Security Council and Germany – should heed that advice. 
Otherwise, they could end up without any handle on the Iranian nuclear program, and only one – useless – option left, a military strike. 
Yet the six governments seem determined to continue with what has been their strategy so far. 
Their condition for negotiating with Iran is a prior halt of its nuclear enrichment activities. 
Only in exchange for Iran’s permanent renunciation of enrichment will they provide major rewards – from lifting all sanctions and trade restrictions to security guarantees. 
This strategy has not worked and will not work. 
Under the nuclear Non-Proliferation Treaty (NPT) of which Iran is still a member, countries are entitled to engage in enriching uranium for civilian purposes, and Iran claims that this is all it wants. 
True, Iran’s total halt of its enrichment program would be welcome, not least because its government has hidden these activities for almost two decades from Treaty inspectors, suggesting other than purely civilian motives. 
But the issue of enrichment has been blown up into such a symbol of national sovereignty in Iran that no government there, not only the current Achmadinejad administration, will climb down. 
Indeed, when the UN Security Council formally demanded a stop to the enrichment program and imposed mild sanctions last December, Iran’s defiant answer was to increase enrichment activity. 
So what to do now? 
The Bush administration, predictably, is pushing for new and tougher sanctions, based on an implied warning in the earlier UN Resolution, and arguing, as it did in the run-up to the invasion in Iraq, that the UN’s credibility is at stake. 
But the only real test of UN credibility in this conflict is whether it can succeed in restricting Iran as much as possible to a purely civilian nuclear program. 
If the Security Council fails to agree on new sanctions – which is likely, given Chinese and Russian objections – it would be exposed as a paper tiger. 
If, on the other hand, it works out a consensus on more economic and possibly even military punishment, the UN’s credibility would depend on whether these moves produce Iranian compliance. 
That, however, is unlikely. 
Tougher economic sanctions will not force Iran to comply; instead, sanctions will merely hit this oil- and gas-rich country’s trading partners. 
More threats will only push the international community further along the spiral of escalation and, possibly, into military action. 
There are those in Bush’s entourage who would like nothing better. 
While even a major air attack would fall short of destroying all of Iran’s nuclear installations and, moreover, leave the technical know-how intact, it might at least slow down the program for a while and serve as a warning to other potential proliferators. 
But it is a foolhardy gamble. 
Today, Iran declares that it wants to observe the NPT, and that has no intention of building a nuclear bomb. 
After a military attack by the United States, both promises would be history. 
If the six governments want to avoid the escalation spiral and curb the proliferation dynamic, they need to change strategy and objective. 
Instead of making a halt to uranium enrichment the be-all and end-all of their effort, their central objective should be to subject the Iranian activities to as much verification as possible: if Iran wants to enrich, so be it, but it must accept intrusive international inspections. 
This is a bargain that the Iranians themselves have repeatedly hinted at. 
The Six have refused because verification cannot provide an absolute guarantee against the diversion of some enriched uranium to military use. 
But as the superpowers learned in the Cold War, the absence of airtight verification does not render inspections useless. 
They would still submit the Iranian program to greater restrictions than is the case today. 
And such an agreement would open the way to a wider agreement between Iran and the West for cooperation and regional stability. 
That is why the Six should stop digging a deeper hole. 
Instead of formulating new sanctions for the UN Security Council, they should use the next few months to explore confidentially what level of restrictions combined with verification Iran would consider in exchange for undisputed enrichment. 
By all means, the Six should keep the option of more biting resolutions as an inducement to Iranian compromise. 
But those who now call on the Security Council to issue rapid condemnations of Iran’s behavior should keep two things in mind: they are unlikely to have any effect, and the US has already used such resolutions as a pretext for launching military action on its own. 

Getting to Yes With Iran 
WASHINGTON, DC – With the release of America’s National Intelligence Estimate, according to which Iran has suspended its nuclear weapons program, the prospect of military confrontation with the Bush administration dimmed. 
But months later, it is clear that the danger is not past, because Iran has not renounced the production of nuclear weapons, which its enriched uranium could eventually be used to fuel. 
All parties need to find a formula to resolve the issue before it again threatens to erupt into conflict. 
Western diplomacy in recent years has focused on Iranian President Mahmoud Ahmedinejad as the key to resolving the crisis. 
But this approach is a blind alley. 
Let us recall the fate of Ahmedinejad’s two immediate predecessors. 
Muhammad Khatami (1997-2005) tried to implement dramatic political reform, while Akbar Hashemi Rafsanjani (1989-97) tried to open the Iranian economy to the West. 
Both failed, because Iran’s presidents do not run the country. 
A solution to the nuclear dilemma – or any other problem in Iran’s foreign relations – is in the hands of the Supreme Leader, Ayatollah Ali Khamenei. 
Among his responsibilities, Khamenei serves as commander-in-chief of the military, controls the intelligence services, and appoints directors of the national media. 
His appointees effectively control most ministries and Iran’s major cities. 
In diplomacy, Khamenei tends to operate in a clever but recognizable fashion. 
He sends different diplomats into negotiations with contradictory instructions. 
Each claims to be acting with the Supreme Leader’s full authority, but ultimately are unable to make commitments because they have little idea of what Khamenei wants to do. 
After a time, they are removed, and a new set of representatives is dispatched. 
In order to dominate decision-making, Khamenei prefers weak presidents. Ahmedinejad is no different. 
His political base has faded, owing to Iran’s deepening economic crisis, which has been intensified by the conflict with the West over the nuclear issue. 
His support in the parliamentary election next March seems particularly weak, which will no doubt please Western observers. 
But the election results will not matter: parliament, too, has little influence over Iran’s foreign policy. 
Some Western diplomats recognize the Supreme Leader’s role. 
In practice, however, Western diplomacy tends to ignore Khamenei, who sabotages any effort to get around him as the final arbiter of Iranian policy. 
This might partly explain why Khamenei has been mistrustful of negotiations with the West. 
Westerners don’t seem to understand who is in charge. 
Indeed, some analysts argue that former President Bill Clinton’s efforts to achieve a breakthrough with Iran failed because they were addressed to Iran’s presidents. 
The West should learn from the example of Russian President Vladimir Putin, who did not travel to Iran until he was allowed a direct meeting with Khamenei, during which Putin is reported to have made a proposal to end the nuclear stand-off. 
There has been no answer yet, though there does seem to be some recent movement between Russia and Iran on the provision of nuclear fuel for Iran’s controversial reactors. 
To be sure, Khamenei is reluctant to meet with non-Muslim foreign leaders. 
But that shouldn’t stop the West from reaching out to him directly, or pressing him to publicly appoint the representatives who negotiate with the West. 
One American politician who understands how to work with the Iranian power structure is former Congressman Lee Hamilton, now head of the Woodrow Wilson Center. 
When Wilson Center researcher Haleh Esfandiari was arrested in Iran, Hamilton wrote to Khamenei, pleading for her release on humanitarian grounds. 
Khamenei responded – reportedly the first time he answered an American – and Esfandiari was released in a matter of days. 
Khamenei would be hard-pressed to ignore a direct invitation from the US to negotiate on Iran’s most vital concerns. 
His clear priority is the Islamic Republic’s survival, not the fate of particular Iranian politicians. 
While Ahmedinejad’s apocalyptic vision makes it difficult for westerners to deal with him, Khamenei does not want to stumble into a military confrontation with the West, which would destabilize Iran and possibly lead to the regime’s downfall. 
To resolve outstanding issues with Iran, the West should be dealing with the only person powerful enough to make deals and deliver concessions. 
That person is Khamenei, not Ahmedinejad. 

Reinventing the Inter-Korean Relationship 
SEOUL – On February 12, 2013, North Korea carried out its third nuclear test in the run-up to the inauguration of a new administration – my own – in the South. 
Around that time, the Presidential Transition Committee adopted the “Trust-Building Process on the Korean Peninsula” as a key policy of the new administration. 
Though the North’s nuclear test created pressure to revise the trust-building process, I made it clear that I would stay the course. 
Indeed, since its conception, the trust-building process has taken into account possible military provocations from North Korea, and is intended specifically to break the vicious cycle of provocations followed by compromise and rewards to placate tensions. 
The trust-building process was formulated to overcome the limitations of both appeasement and hardline policies: while the former depended entirely on the North’s tenuous good faith, the latter implied only relentless pressure. 
The trust-building process, based on the strength of formidable deterrence, is intended to build sustainable peace on the Korean Peninsula by making North Korea pay dearly for its aggressive acts while ensuring opportunities for change and assistance if it is willing to become a responsible member of the international community. 
Since the launch of my administration, North Korea has escalated its military threats and bellicose rhetoric against the South. 
In April 2013, the North took the extreme step of unilaterally barring South Korean workers from entering the Gaesong Industrial Complex, a symbol of inter-Korean exchanges and cooperation, and withdrawing all of its own workers. 
Following the shutdown of the Gaesong facility, some suggested that the North be offered, through back-channel contacts, incentives to improve inter-Korean relations. 
But, aware that such contacts with the North had produced many adverse effects in the past, I opted for an open and transparent proposal for dialogue. 
I repeatedly emphasized to North Korea that trust can be built only by cooperating on small but meaningful projects and abiding by our promises – and calling attention to problematic behaviors – along the way. 
I have also explained to the international community the credibility and necessity of anchoring our policy in the trust-building process, securing support from many countries. 
North Korea finally came to the dialogue in mid-July, and a month later agreed to normalize the operation of the Gaesong Industrial Complex in a constructive manner. 
As follow-up measures, a secretariat for the joint management of the complex was established, and government officials from the two Koreas began daily meetings. 
It was a small but significant step forward, considering that inter-Korean dialogue has been virtually non-existent over the past five years, and that tensions stoked by the North reached a peak in the early days of my administration. 
But there is still a long way to go to full normalization of the Gaesong facility, not to mention inter-Korean relations. 
The North remains lukewarm on the follow-up dialogue for passage of workers, communication, and customs clearance, all of which are essential. 
Furthermore, North Korea unilaterally canceled the reunion of separated families only a few days before the agreed date, breaking the hearts of those who had long been eagerly awaiting it. 
North Korea then resumed its slander and threats against us. 
Following the recent purge of Jang Song-thaek, known as the North’s “second man,” the political situation on the peninsula has spurred further concern among Koreans and the international community, serving as a reminder of how unpredictable the current situation is – and thus how difficult it has become to develop inter-Korean relations. 
For the past ten months, my government has sought to abide by international norms in implementing its North Korea policy, while trying to meet people’s expectations. 
We will stick to these fundamental principles and set the following priorities for future North Korea policies. 
First, we will pave the way to peace and unification on the Korean Peninsula. 
My government will maintain a strong deterrent capability, because airtight security constitutes the foundation of genuine peace. 
From this point, the government will strive to forge sustainable peace through dialogue, exchanges, and cooperation, in order to achieve unification and improve the quality of life of all Koreans. 
Korea will also work to consolidate cooperation with the international community in this process. 
Unification is certainly a matter for the Korean people to decide, but it should be achieved with the support of neighboring countries, ensuring that unification benefits all parties in the region. 
Second, the government will endeavor to upgrade the trust-building process. 
To chip away at the deep-rooted suspicion between the two Koreas, we will work to strengthen inter-Korean dialogue and discuss matters prudentially while keeping promises on what is agreed. 
My government will devise various measures to expand the scope of South-North dialogue and cooperation. 
And we will continue providing humanitarian assistance to the North, as well as maintaining efforts to hold reunions of separated families and to resolve the issue of prisoners of war and abductees who have been kept in the North. 
In addition, we will increase the transparency of our North Korea policies. 
Of course, considering the nature of inter-Korean relations, not all matters can be disclosed in full detail. 
But providing as much accurate information as possible to the public is the best way to ensure firm popular support for these policies and their effective implementation. 
Third, Korea will seek denuclearization of the North as a means to pursue joint progress on the Korean Peninsula and across Northeast Asia. 
Indeed, inter-Korean relations can properly progress when the North forswears nuclear development and joins the South in a partnership based on mutual confidence. 
If the North shows a firm commitment to denuclearization and takes practical steps to this end, we will take the lead in securing the international community’s support for active assistance in the North’s economic development. 
Furthermore, we will endeavor to help the peninsula progress together with our neighbors in the Northeast Asian region. 
North Korea has recently shown interest in setting up special economic development zones. 
But no country including South Korea would invest in the North if it persists in nuclear development. 
If North Korea truly cares for its people, it must give up the unrealistic twin goals of nuclearization and economic development. 
Instead, it must abide by international norms and behave predictably if it is to get along with its neighbors and become a credible partner. 
Bringing North Korea in from the cold is important to our foreign policy in a broader context as well. 
That is why I have proposed the Eurasian Initiative, which envisions connecting the Eurasian continent’s divided logistics networks and removing obstacles that hinder exchanges to make the continent a viable single entity. Furthermore, it is linked to my plan for peace and cooperation in Northeast Asia. 
To make this Initiative succeed, the Korean Peninsula must be the first to dismantle the wall of distrust, for it is the gateway that links Eurasia and the Pacific. 
The project to build a World Peace Park in the DMZ (demilitarized zone) that divides the Korean Peninsula could be a starting point. 
From here, the countries of the Continent and the Ocean together with the two Koreas must build trust and promote cooperation, and disseminate such practices to other areas. 
As such, the Korean Peninsula would be able to cast off its old role as a stumbling block and revive itself as a stepping-stone for peace in Eurasia and Northeast Asia. 

The Promise of Telemedicine 
ACCRA/BASEL – In low- and middle-income countries, insufficient access to medical care undermines health outcomes and disadvantages entire generations. 
But, in some of the world’s hardest-to-reach communities, technology is revolutionizing patients’ engagement with modern medicine. 
In a remote corner of Ghana, one “telemedicine” program illustrates just how effective digital care can be when coverage is extended to those on the medical margins. 
In 2011, our organizations launched Ghana’s first telemedicine pilot program, with the goal of creating a model for national expansion. 
Starting in the country’s Amansie West District in the Ashanti Region, about 330 kilometers (200 miles) northwest of the capital, Accra, we sought to improve the quality of care in isolated areas, reduce transport times to hospitals, and lower patient costs. 
The program, designed in collaboration with global telecommunications providers, universities, and NGOs, initially covered 30 rural communities, and connected some 35,000 people to health-care professionals through a staffed call center. 
By linking these communities to a communications hub, nurses, doctors, and specialists were digitally available 24 hours a day, offering immediate support to patients and community-based health workers (CHWs). 
Today, we are pleased to report that the program succeeded beyond our most optimistic expectations. 
Five years after launch, the number of patient referrals to clinics fell 31% in the pilot area, while more than half of the program’s consultations were resolved by phone. 
Each referral that was avoided saved patients, on average, 110 Ghanaian cedis ($25), and the high success rate of closed cases reduced waiting times in clinics. 
We have heard many stories of patients whose lives were affected by this digital-health innovation; one in particular sticks with us. 
Not long after the program began, a young woman named Debora, who was under the care of a local health worker, began bleeding uncontrollably during childbirth. 
Unable to treat her patient, and with no access to an ambulance, the health worker faced a choice. She could either send Debora to a distant hospital by taxi – an arduous journey over rutted roads – or she could pick up the phone. 
After connecting with the regional telemedicine center, a doctor coached the caregiver through Debora’s treatment, and in the process, very likely saved her life. 
Buoyed by similar stories, in 2016, the Ghana Health Service began expanding telemedicine access to other parts of the country. 
That work was completed last month, and today, six call centers staffed by hundreds of medical professionals are in operation, bringing affordable medical expertise to an estimated six million people. 
With this commitment, Ghana is making a bold statement: telemedicine holds the key to expanding universal health coverage, a primary objective of the UN Sustainable Development Goals that Ghana hopes to meet by 2020, ten years ahead of the target date. 
But, most exciting of all, Ghana’s program offers a blueprint for how other developing countries can expand their own health-care access. 
In developed countries, too, telemedicine is revolutionizing how patients interact with medical professionals. 
In the United States, surgeons virtually connect to hospitals to advise on treatment. 
In Europe, doctors link up with patients by phone and email to advise on immediate and long-term care. 
And across Africa, NGOs like Doctors Without Borders use telemedicine to connect difficult-to-treat patients to specialists in distant countries. 
For any telemedicine program, multisector collaboration is crucial. 
In Ghana, our organizations partnered with entities like Columbia University, the Millennium Promise Alliance, Ericsson, and Airtel, combining local and international knowledge about health-care innovation with the ability to take on financial risk. 
In turn, the Ghana Health Service, the Ministry of Health, the National Health Insurance Authority, and the Ministry of Communications expanded the pilot program, and built telemedicine into the Ministry of Health’s national e-health strategy. 
Eventually, the new program could expand beyond basic triage support to offer consultations in disease management, mental health, and other services. 
Ghanaians should be proud of the telemedicine program they have built. 
Not only is it one of the region’s most comprehensive health-care initiatives; it is also an example of what can be accomplished through health partnerships. 
In any country, prosperity begins with access to quality health care, and Ghana now has in place a highly effective approach to providing it. 

Ghettoizing Identity 
PARIS – Once, as I picked up the Nobel laureate economist Amartya Sen at his hotel, the receptionist asked me if I was his driver. 
After hesitating, I nodded yes. 
Among my various identities that day, that of driver was the most obvious to her. 
This sense of multiple identities is something that Sen himself highlighted mischievously in his book Identity and Violence : “The same person can be, for example, a British citizen, of Malaysian origin, with Chinese racial characteristics, a stockbroker, a non-vegetarian, an asthmatic, a linguist, a bodybuilder, a poet, an opponent of abortion, a bird-watcher, an astrologer, and one who believes that God invented Darwin to test the gullible.” 
Only a minimum of introspection shows that our difficulty in answering the question, Who am I?, arises from the complexity we face in distinguishing between our many identities and understanding their architecture. 
Who am I, indeed, and why should I accept people reducing me and the richness of my identity to only one of its dimensions? 
Yet such reductionism lies behind one of today’s dominant concepts, multiculturalism, according to which one of our identities must prevail above all others, serving as the sole criterion for organizing society into distinct groups. 
Nowadays, we are often told that there are only two ways for people to integrate into a society: the “British” model of cultural pluralism, and the “French” model, based on acceptance of Republican values and, above all, the concept of equality. 
According to the conventional wisdom, Britain’s social model is based on coexistence between different communities, with each continuing to observe its conventions and customs while respecting the country’s laws – an informal federation of communities. 
But that common wisdom is grossly mistaken, because British law grants immigrants from all the Commonwealth countries something extraordinary: the right to vote in British elections, even national ones. 
Citizens know by experience that democracy does not consist in universal suffrage alone, but also requires a public sphere that is equally open to all. 
In the United Kingdom, a large group of immigrants thus share with native Britons the right to participate in public debates on all matters of general interest, whether local or national. 
Because fundamental equality is granted in this way, the British system manages to cope better than others do with a greater expression of distinctive identities. 
Nowadays, however, Britain’s government itself seems to be forgetting the bedrock conditions of this British model by trying to satisfy the desire of particular communities’ for public recognition by officially promoting things like state-subsidized denominational schools. 
According to Sen, this is regrettable because it leads to people giving one of their identities – religious, say, or cultural – priority over all others at a time when it is essential that children broaden their intellectual horizons. 
By embracing the kind of separatism that such schools represent, the British are now saying, “This is your identity and you can have nothing else.” 
That approach amounts to communitarianism, not multiculturalism. 
In the last few years, the “French model” has also been subjected to misinterpretation, due to confusion about its basis – genuine inclusion in the life of society, which means genuine equality in terms of access to public services, the social welfare system, schools and universities, employment, and so on. 
Republicanism grants each individual, regardless of his or her other identities equal rights in order to achieve universal equality. 
It does not deny distinctive identities and gives each the right to express itself within the private sphere. 
The temptation of communitarianism, which the French have debated for at least a decade, comes from the wish to turn the failure of genuine equality into something positive. 
It offers integration by default within the differentiated space of various communities – a sort of imprisonment by civilization, Sen would say. 
But you cannot dress up failure in the clothes of success. 
As long as urban areas are socially and economically deprived, communitarianism will only serve to mask the violation of the principle of equality. 
Social groups are then measured in terms of their “ethnic” or “racial” differences. 
Because the social conditions of the “French model” have been so neglected, the model is now a living contradiction of its core principle: equality. 
To reverse the trend, French republicanism must, like English multiculturalism, contradict itself in order to fulfil itself. 
The French must recognize that equality before the law is a core principle, but a weak one; it needs to be complemented by a stricter vision of how to achieve equality. 
This vision should make republican efforts proportional to the importance of people’s handicap in order to free them from the burden of their initial conditions. 
Genuine equality in the public sphere – which differs according to the values and history of each country – implies a minimal level of acceptance of a country’s history and values. 
Sen says that what is being accepted here should be thought of as national identity. 
But this identity must be open. 
It is an identity we share by living together and by what we have in common, whatever the differences between our multiples identities. 
The great British novelist Joseph Conrad, born Józef Teodor Konrad Korzeniowski to Polish parents in Russian-ruled Ukraine, said that words are the biggest enemy of reality. 
The appeal of “national identity” must not be turned into a collective smokescreen behind which inclusion becomes a disembodied dream coexisting with the communitarianism that is now emerging from its failure. 

When Leaders Won’t Leave 
DUBLIN – The spectacular rise and fall of Carlos Ghosn, “Le Cost Killer” who saved Nissan after 1999 and built a powerful partnership of the Japanese carmaker, its big French shareholder, Renault, and Japan’s Mitsubishi Motors, resembles a Kabuki play, with the Japanese powers-that-be asserting themselves in the end. 
But Ghosn’s downfall is really more like a classic Greek tragedy, with contemporary German elements. 
This is a story of Hubris meeting Nemesis. 
And the best parallel to Ghosn is German Chancellor Angela Merkel. 
Even superstar managers or political leaders risk disaster if they overestimate their power and outstay their welcome. 
That is what Merkel has done by remaining in office for 13 years, making her the longest-serving chancellor since Helmut Kohl held the post, from 1982 to 1998. 
Within recent memory, Merkel was seen, rightly or wrongly, in heroic terms for her role in stabilizing the euro single currency. 
But when she leaves office, probably in the next few months, she will cut a much-diminished, perhaps even humiliated figure. 
At least her fate looks to be better than that of Ghosn, who was arrested in Tokyo when he landed there in a private jet, and now faces accusations that he misappropriated company funds and paid himself millions of dollars in hidden compensation. 
Whatever facts eventually emerge, the Brazilian-Lebanese-French executive’s career, which included 18 years running Nissan and 13 years running Renault, has come to an abrupt end. 
Ghosn’s arrest holds many lessons. 
One is the newly prominent role of whistle-blowers in Japan’s corporate sector. 
As in the 2011 accounting scandal involving Olympus Corporation, Ghosn’s alleged misconduct was revealed to the company’s management by an inside source. 
Another lesson, however, is that big Japanese firms’ auditing and other corporate-governance safeguards remain weak. 
If Ghosn truly has been hiding his real income from Nissan’s published accounts, there must have been collaborators in the company’s finance department, and such practices ought to have been identified by auditors and investigated by independent directors. 
Such a sudden, belated disclosure of executive malpractice casts a dark shadow over the entire firm. 
That shadow extends to the claim that corporate governance in Japan has been improving substantially, following reforms encouraged by Prime Minister Shinzo Abe’s government. 
And yet that failure may be overlooked thanks to a further feature of this tale, evident after the arrest when the man who had been Ghosn’s co-CEO, Hiroto Saikawa, brutally ejected him: Japanese managers have reasserted their traditional solidarity at the firm in an effort to shift the balance of power in the Nissan-Renault-Mitsubishi Motors alliance away from Renault and back toward Nissan. 
This shift risks destabilizing the alliance, but Nissan managers appear to regard that as preferable to being subsumed in a de facto merger – which is what the stories emerging in Tokyo suggest Ghosn was plotting. 
Renault currently owns a 43% stake in Nissan, while Nissan holds 15% of Renault and 34% of Mitsubishi Motors. 
Crossholdings of that sort are common practice in Japanese business, but full ownership may well have looked like a more sustainable long-term model to Ghosn and to Renault. 
The main moral of this tragic tale, however, does not stem from a struggle between Japanese and European practices, much less from a pay squabble and dodgy corporate practices. 
It is that unless you own a company, you had better not think you can stay at the top of it forever. 
Ghosn had remained chairman of Nissan after he stood down as co-CEO last year, and he evidently believed he could still call the shots. 
Managing your succession is a key task for any leader, one that must not be left until it is too late. 
He failed to do this, in part by failing actually to leave. 
That is also what, if you take her literally, Merkel is doing now. 
In October, she announced that she would not stand in December for re-election as leader of the Christian Democratic Union, but claimed she would stay on as Chancellor until 2021. 
Yet as soon as her successor as party leader is chosen, the drums will begin beating for her immediate retirement – especially if the victor turns out to be her old rival, Friedrich Merz. 
She would do far better to pre-empt that pressure by taking the initiative in announcing her own departure in December. 
It is too late for her to alter her legacy, which will always be dominated by her controversial decision in 2015 to throw open Germany’s borders to more than a million asylum-seekers from Syria and other Middle Eastern countries. 
Her last chance to influence what historians write about her will be to choose the moment and manner of her exit from the political stage. 
Ghosn, by contrast, can now affect his legacy only through what his lawyers can prove in whatever trial eventually takes place. 
If only he had bowed out a lot sooner, handing over the reins gracefully and completely, his story would have remained one of great achievement. 
And a lot less damage would have been done to the companies he once served so well. 

The Post-Russian World Order 
BRUSSELS – Russia’s intervention in Ukraine and the ensuing Crimea crisis is wrongly seen as the start of Cold War II. 
But, while the fallout from Russian President Vladimir Putin’s defiance of international law and public opinion will be very different from that of the Soviet Union’s long campaign to defeat capitalism, the geopolitical ripple effects are certain to be just as far-reaching, if not more so. 
Russia is set to sideline itself from the global economy, and by doing so it will usher in a new era in international relations. 
International sanctions will be only the first consequence. 
Markets and banks penalize uncertainty, so the Russian economy will progressively be cut off from international trade and investment and consigned to a future of slow or no growth. 
That is Russia’s own funeral, of course. 
The wider consequences will be a shake-up of international politics and of governments’ attempts to address common problems, ranging from global governance to climate change. 
The result may even be positive, with events in Ukraine unexpectedly opening the way to a significant realignment of fast-emerging countries whose twenty-first-century roles will be decisive. 
The first result of the West’s standoff with Russia is that it spells the end of the BRICS. 
For a decade or more, the grouping of Brazil, Russia, India, China, and recently South Africa has been a major feature of world politics, challenging the might and influence of industrialized Europe and America. 
But, with Russia set to become a pariah, either pushed out of or withdrawing from global markets and multilateral forums, the days of BRICS summits and institutions, such as the group’s embryonic development bank, appear to be numbered. 
The BRICS may not be formally dissolved, but it is hard to imagine that the other four members would be willing to place their own positions in a globalized economy at risk by being drawn into Russia’s quarrel with the world. 
Bit by bit, the idea that the group represents a coherent voice in world affairs will be quietly buried. 
A maverick Russia, bent on pursuing assertive foreign policies and creating a “Eurasian Union” trade bloc, poses obvious dangers. 
The more important outcome, though, will be how Russia’s former BRICS partners realign with other major emerging economies in the G-20. 
Cue the arrival on the world stage of MIKTA – a new group made up of Mexico, Indonesia, (South) Korea, Turkey, and Australia. 
These countries’ foreign ministers plan to meet soon in Mexico to discuss a joint agenda on global governance issues. 
When they first met under the MIKTA banner on the fringes of last September’s United Nations General Assembly, the initiative seemed little more than a club for countries that for one reason or another did not qualify for BRICS membership but fell short of major-power status. 
Russia’s self-inflicted difficulties will change all of that. 
With the BRICS alliance set to be transformed almost overnight into something of a very different character, the way is cleared for a much larger grouping of countries that share many of the same concerns. 
What the MIKTA countries share are rapid economic growth and increasing influence outside of their own borders. 
They have development problems, but they are also models of economic dynamism and innovation with a substantial stake in the way post-WWII global institutions and rules should be reshaped. 
Many of their challenges and ambitions dovetail with those of the BICS (the BRICS, minus Russia). 
In the alphabet soup of international politics, a nine-member jawbreaker like BICSMIKTA might eventually prove too unwieldy to be workable. 
The bottom line, though, is that Russia’s coming absence from the multilateral scene will be a catalyst for new thinking on global challenges. 
A key question is whether that will revive the G-20 or destroy it. 
It seems clear that Russia’s membership in the G-8 will soon be revoked, and that the group will revert to its origins as the G-7, comprising the United States, Canada, Japan, Germany, France, the United Kingdom, and Italy, plus the European Union. 
But where that will leave the G-20 – including Russia’s continuing participation in it – is much less clear. 
The G-20 has been a somewhat disappointing mechanism for tackling global issues, and the idea of bringing emerging economic giants into the same forum as the leading industrialized ones has yet to pay off in terms of measurable achievements. 
What is clear is that in today’s increasingly interdependent world, Putin’s distancing of Russia from so much of the international community looks self-defeating. 
A generation after the collapse of communism, Russia’s economy and its people’s living standards have started to recover. 
But its fast-shrinking population, and its reliance on energy and commodity exports, makes that recovery very fragile. 
The Kremlin will soon discover that it is far more vulnerable to outside developments than it has so far acknowledged. 

An Economic Roadmap for India 
NEW DELHI – India’s incoming prime minister, Narendra Modi, has promised to turn his country’s sluggish economy around. 
When asked recently about his reform plans, Modi responded that his roadmap was simply that “Our GDP should grow.” 
This seems like an obvious goal, but in recent years India appears to have been losing sight of it. 
What will it take to return the Indian economy to sustainable growth? 
We believe that the following five simple facts about the Indian economy hold the key. 
First, India is a “young” emerging market. 
This means that sustaining a high rate of economic growth for the next five years can come about without making dramatic changes to India’s institutions. 
A country’s output depends on its inputs, namely its labor force and capital stock, and on the efficiency with which it uses them. 
When the capital stock – including infrastructure – is deficient, investing in it is one of the quickest ways to generate growth (as long as finance is available). 
This is the “low-hanging fruit” that Modi should go after right away. 
It is a much more difficult and gradual process to increase the efficiency of resource use and the skill level of the labor force. 
Second, the service sector has been the primary driver of economic growth in the last few decades. 
Industry’s share of value added is stuck at 25%, and the share of micro and small enterprises in manufacturing employment in India is 84%, compared to 25% in China. 
This is anachronistic for a country at India’s level of development. 
The fact that India has moved from an agricultural economy to a service-driven economy with almost no growth in industry is not a virtue; it is an outcome of policies that have hampered manufacturing and mining. 
With production costs rising in China, international buyers are looking for alternative sourcing destinations for manufactured products. 
If India, with its large labor force, is to seize this opportunity, it must nurture its industrial sector. 
Third, India’s rank in the World Bank’s “Ease of doing business index” fell from 116th out of 189 countries in 2006 to 134th in 2013 – clear evidence of stalled reforms. 
The new government needs to reverse this trend and improve the environment for doing business. 
There is a large constituency of domestic and international investors who will respond positively and rapidly to any steady improvement in India’s institutional environment, which should be an ongoing process. 
Here, again, it is not as if large, comprehensive reforms are required. 
Significant improvement could be achieved by rule changes to accelerate approval of business permits and environmental clearances, simplify labor regulations, and fill judicial vacancies. 
All of this is well known; what is needed now is the will to undertake such reforms and a mechanism for oversight and accountability to ensure that the bureaucracy implements them quickly and effectively. 
Fourth, in recent years the lack of fiscal discipline has been costly for the Indian economy, as excessive demand arising from large deficits translated into stubbornly high inflation and was partly responsible for large current-account deficits. 
Fiscal discipline should be a priority, not an afterthought. 
An emerging market requires a strong commitment to keeping fiscal deficits in check. 
New budget legislation, along the lines of the Fiscal Responsibility Act of 2003, but with more teeth, needs to be instituted. 
Lastly, improving the quantity and quality of education and healthcare through partnerships with the private and non-profit sector and researchers is essential to sustain growth beyond the next five years. 
The new government should promote researcher-policymaker partnerships to design and evaluate innovative programs to solve knotty policy challenges like improving learning outcomes and boosting preventive health care. 
India is fortunate to have thought leaders in almost every sector who could help unleash such innovation in partnership with the civil service. 
Just as there is a chief economic adviser in the finance ministry, why not have a technocratic chief education adviser or a chief health adviser to work with the education and health secretaries? 
Will a Modi government be able to deliver on these fronts? 
Modi has certainly championed economic growth, and he constantly points to his success in building roads and ensuring power supply as Chief Minister in his home state of Gujarat. 
The BJP manifesto proposes to pursue “minimal government and maximum governance.” 
It is refreshing to encounter this acknowledgment that government might sometimes be the problem. 
But replicating Modi’s success in Gujarat at the national level and confronting other development challenges will require cooperation from state governments, which is uncertain at best. 
After all, any attempt to change rules and laws (such as labor legislation) that benefit established interest groups invites opposition. 
What India’s economy needs has been evident for years; the challenge for the new government is to find a way to get it done. 

Scaling Up Water Sustainability 
NEW YORK – Since 2000, when the United Nations Millennium Development Goals (MDGs) were adopted, the global community has rightly focused significant attention on providing access to basic water and sanitation services. 
From 1990 to 2010, more than two billion people gained access to improved water sources. 
As the United Nations prepares to adopt so-called Sustainable Development Goals (SDGs) as the post-2015 successor to the MDGs, the high-stakes business of large-scale water infrastructure should be placed front and center. 
The conventional wisdom has been that improved access to water depends on digging wells, adopting community-based solutions, and focusing aid programs on reaching more people. 
But these important measures are only one part of a much larger – and more capital-intensive – strategy. 
According to a recent report by UNICEF and the World Health Organization on their joint monitoring program for water supply and sanitation, more than 1.2 billion of those who gained access to water from 1990 to 2008 had it piped to their premises. 
This number dwarfs the impact of the “small-scale” sources – from dug wells to rainwater harvesting – that many believe have done the most to solve the problem. 
In fact, the number of those who gained access to water was higher in the decade preceding adoption of the MDGs. 
India and China accounted for the vast majority of those gains, as both countries enjoyed rapid economic growth in the 1990’s and were able to lift large numbers of people out of poverty. 
As these examples suggest, countries have been most successful at delivering water services when they can rely on their own economic growth to bridge the gap in water-infrastructure costs. 
But the gap is widening. 
The 2013 World Economic Forum Global Risks report identified “water supply crises” as the biggest “societal risk” to global prosperity. 
According to some estimates, meeting the needs of a growing global economy will require the world to begin devoting at least $1 trillion annually to water infrastructure within the next 20 years – roughly double the level of annual spending today. 
Addressing this development challenge will require new thinking, innovation, and action in areas such as sustainable hydropower, efficient agriculture, and access to safe drinking water for cities. 
The first step should be ensuring that the natural infrastructure – the rivers, aquifers, and wetlands that determine the quantity, reliability, and quality of our water – can continue to function. 
In many cases, this is by far the most cost-effective option to ensure long-term water sustainability. 
Several countries around the world – from Colombia and Mexico to China and the United States – have begun investing along these lines. 
They are showing that we can improve outcomes by planning our engineered infrastructure in a way that is compatible with the survival and health of river basins and watersheds. 
Of course, even if only 10% of total investment in water resources were committed to cost-effective natural infrastructure – the same proportion that, for example, New York City devotes to protecting its own natural infrastructure, the reservoirs of the Catskills – we would still need to find about $100 billion per year. 
Mobilizing capital at that scale requires allocating the right risks to the right investors. 
Not surprisingly, the capital available for investments with a limited track record, uncertain future cash flows, and untested regulatory frameworks is extremely scarce. 
The key to scaling up investment in natural infrastructure will be to ensure that at every successive stage of growth, there is a sufficient amount of capital available to support the risks involved. 
Achieving this goal will require the right blend of public, private, and philanthropic capital. 
Public-sector capital has traditionally been the “risk taker of last resort,” underwriting large-scale projects and paying for much of the existing water infrastructure. 
But, given credit constraints, many public institutions will be unable to underwrite the development and deployment of new solutions, particularly those that need to establish their track record at scale without a guaranteed revenue source. 
Private capital – particularly the large amounts of private savings stored in middle-income countries – could, in principle, single-handedly underwrite new combinations of natural and engineered infrastructure solutions. 
But private capital would face significant opportunity costs, and investors are unlikely to opt for vehicles with which they have limited experience. 
That leaves philanthropic capital – whether from private or public sources – as a key component of early-stage investment. 
Philanthropy has an important role to play in bearing the risks involved while natural-infrastructure solutions establish the track record needed to tap larger sources of public and private capital. 
While small-scale solutions, such as dug wells, will remain an important part of efforts to ensure water security, a truly sustainable water-management path – particularly in the fast-developing countries of Latin America, Asia, and Africa – will require hundreds of billions of dollars in infrastructure investment. 
The process of formulating the SDGs offers an ideal opportunity to begin describing such a path. 


Giving the Well-Performing State Its Due 
MADRID – The triumph of democracy and market-based economics – the “End of History,” as the American political philosopher Francis Fukuyama famously called it – which was proclaimed to be inevitable with the fall of the Berlin Wall, soon proved to be little more than a mirage. 
However, following China’s intellectual pirouette to maintain one-party rule while embracing the capitalist credo, history’s interpreters shifted their focus to the economy: not everybody would be free and elect their government, but capitalist prosperity would hold sway worldwide. 
Now, however, the economic tumult shaking Europe, the erosion of the middle class in the West, and the growing social inequalities worldwide are undermining capitalism’s claim to universal triumph. 
Hard questions are being asked: Is capitalism as we know it doomed? 
Is the market no longer able to generate prosperity? 
Is China’s brand of state capitalism an alternative and potentially victorious paradigm? 
The pervasive soul-searching prompted by such questions has nurtured a growing recognition that capitalism’s success depends not only on macroeconomic policy or economic indicators. 
It rests on a bedrock of good governance and the rule of law – in other words, a well-performing state. 
The West overlooked the fundamental importance of this while it was fighting communism. 
The standard bearers of the Cold War were not just the United States and the Soviet Union, but, in ideological terms, the individual and the collectivity. 
When competing in newly independent or developing countries, this ideological opposition became Manichean, fostering a fierce suspicion, if not outright rejection, of rival principles. 
As a result, strengthening state institutions was too often seen in the West as communist subterfuge, while the Soviet bloc viewed the slightest notion of individual freedom and responsibility as a stalking horse for capitalist counter-revolution. 
Leading economists have long argued that the West’s greater reliance on markets resulted in faster and more robust economic growth. 
But viewing the state and the market in terms of their inherent conflict no longer reflects reality (if it ever did). 
Indeed, it is increasingly obvious that the threat to capitalism today emanates not from the state’s presence, but rather from its absence or inadequate performance. 
Consider recent events in Argentina, which is facing certain economic losses as anxious investors have second thoughts about the country in the aftermath of the government’s nationalization of energy giant YPF. 
That response is only logical, as investors seek the security of a well-functioning legal system to protect them from capricious political decisions. 
Mexico provides further proof that the market alone is not enough. 
An efficient judiciary and effective policing are necessary for capitalism to thrive. 
In Brazil, the government is daring, for the first time, to address the lawlessness of the overcrowded favelas that ring the country’s large cities. 
Or consider Ghana’s prosperity and how, like Brazil’s, it is going hand in hand with improved governance. 
At the opposite extreme, Venezuelan President Hugo Chávez’s undermining of his country’s institutions, prodding it onto a narco-state trajectory, places Venezuela alongside Haiti as an exception to Latin America’s recent economic success. 
More generally, the world’s thriving countries are those with strong and effective institutions, backed by legal frameworks that guarantee the rule of law. 
Latin America and Africa are not the only examples that prove the point. 
The European Union’s internal problems, and its ongoing sovereign-debt crisis, are clearly linked to the weakness of its institutions, and, on Europe’s periphery, it still confronts feckless democracies. 
Indeed, on Europe’s doorstep, the show trial and imprisonment of former Ukrainian Prime Minister Yulia Tymoshenko is jeopardizing her country’s international economic standing. 
In particular, President Viktor Yanukovych’s contempt for the rule of law has put Ukraine’s relations with the European Union in cold storage, with a comprehensive free-trade and association agreement on hold pending the release of Tymoshenko and other political prisoners. 
Meanwhile, political trials in Egypt are attracting international attention and deterring foreign investment. 
In Asia, China is exposing the fallacy of looking at state capitalism as a competing alternative to liberal capitalism. 
Approaching them as alternatives is, in fact, little more than an intellectual remnant of the Cold War, much like the concept of “state capitalism” itself. 
With its remarkable ability to adapt, China is making strides to accommodate the rising power of its markets and people. 
In the process, officials are acknowledging the importance of good governance, as demonstrated by recent efforts to justify the purge and investigation of Bo Xilai as an example of the Communist Party “safeguarding the rule of law.” 
Adam Smith, that icon of market theory, argued that wealth is created when public institutions enable the “invisible hand” of the market to align interests. 
The Cold War distorted that wisdom. 
In a world free of that era’s ideological constraints, it is time to say loud and clear that the future of capitalism is linked to effective governance and the rule of law, and thus to the consolidation of well-functioning states. 

Giving Till it Heals 
In my new book The End of Poverty , I show how extreme poverty can be ended by 2025, but only if the rich world follows through on its promise to help the poorest countries. 
In order to thrive, and to foster the private-sector investment needed for long-term growth, an economy requires functioning health and education systems, investments in soil nutrients and water management, and basic infrastructure such as electricity and motorized transport. 
Yet the poorest countries, even well governed ones, lack the resources to finance these investments. 
Lack of adequate foreign assistance is one of the greatest disgraces on our planet, and the United States has been the biggest laggard of all. 
It is urgent that the US wake up to global realities, and that it follow through on its commitments. 
The most famous single promise by the rich countries has been to provide aid to the poorest countries equal to at least 0.7% of their GNP. 
The commitment began 44 years ago, in 1961, when the United Nations General Assembly adopted the objective that foreign assistance should increase significantly, “so as to reach as soon as possible approximately 1% of the combined national incomes of the economically advanced countries.” 
At the time, foreign assistance was about 0.5% of rich-country income. 
Despite the promises, aid continued to decline. 
By the early 1990’s, official development assistance was still around 0.33% of donor GNP, and by the early 2000’s, it had declined to around 0.22% of GNP. 
Now it is roughly 0.25% of GNP. 
But the long-term decline in the ratio of aid to GNP did not stop the rich world from promising time and again to reach 0.7% of GNP, including at the Rio Earth Summit in 1992 and the Copenhagen Summit on Social Development in 1995. 
At the start of the new millennium, the world’s leaders got together to adopt the Millennium Development Goals, the global commitment to halve extreme poverty by 2015. 
To implement these commitments, world leaders, including US President George W. Bush, met again in Monterrey, Mexico, to adopt the Monterrey Consensus on how to achieve the breakthrough from poverty. 
The personal presence of Bush is notable, because the rich countries once again adopted the target of 0.7% of GNP, with the US being a signatory. 
The US government often declares these days that it is not bound by any “arbitrary” numerical target such as 0.7% of GNP. 
Top officials even declare that the US never signed on to such a goal. 
Yet the US and other countries did sign the Monterrey Consensus urging “developed countries that have not done so to make concrete efforts towards the target of 0.7% of Gross National Product as official development assistance.” 
It could hardly be more clear. 
Alas, the US has shown absolutely no “concrete efforts” towards keeping this commitment. 
In fact, US official development assistance amounts to just 0.15% of America’s GNP, which is less than one-fourth the global target. 
This contrasts with the 4% of GNP that the US spends on its military, roughly $500 billion this year. 
So the US spends around thirty times more on the military than it does on peaceful development aid for the poorest countries. 
From a global point of view, there are currently five countries that have reached 0.7% of GNP in aid: Denmark, Luxembourg, the Netherlands, Norway, and Sweden. 
Six more countries, all in Europe, have recently set a timetable to reach 0.7% of GNP by the year 2015. 
They are Belgium, Finland, France, Ireland, Spain, and the United Kingdom. 
UN Secretary-General Kofi Annan, in his report in advance of the UN summit of world leaders in September 2005, has called on all donor countries to reach at least 0.5% of GNP in aid by 2009, and 0.7% by 2015. 
He also noted that countries like Germany and Japan that aspire to permanent UN Security Council membership have a particular responsibility of global stewardship in reaching the target. 
Sadly, the ideological mouthpieces for the super-rich in the US, especially the editorial page of The Wall Street Journal , remain bitterly opposed to foreign aid, even if it’s just 70 cents per hundred dollars of income! 
In criticizing my book, a Wall Street Journal review said that I was calling for “Giving Till it Hurts.” 
But there is a limit to greed. 
I am quite sure that The Wall Street Journal does not really represent the interests or views of many or even most of American rich people, including the millionaires and billionaires whose contributions to aid could make a huge difference for the lives of millions of people. 
Many remarkable philanthropists, such as Bill Gates, are already leading the way. 
I believe that few wealthy people would refuse to contribute a small portion of their huge wealth for the chance to save the lives of millions of people each year and help the poorest countries get the first foot on the ladder of economic development. 
They will know that they would not only save lives, but also contribute to a much safer and more prosperous world. 
Instead of worrying that 70 cents per $100 is giving till it hurts, our slogan in the rich countries should be “Giving Till it Heals.” 

Global Action for Global Recovery 
WASHINGTON, DC – The global economy has entered a dangerous new phase. 
There is a path to sustained recovery, but it is narrowing. 
To navigate it, we need strong political will around the world – leadership over brinksmanship, cooperation over competition, and action over reaction. 
One of the main problems today is too much debt in the global financial system – among sovereigns, banks, and households, and especially among the advanced economies. 
This is denting confidence and holding back spending, investment, and job creation. 
These countries face a weak and bumpy recovery, with unacceptably high unemployment. 
The eurozone debt crisis has worsened, and financial strains are rising. 
Political indecision in some quarters is making matters worse. 
Social tensions bubbling beneath the surface could well add fuel to the crisis of confidence. 
In these circumstances, we need collective action for global recovery along four main policy lines: repair, reform, rebalancing, and rebuilding. 
First, repair. 
Before doing anything else, we must relieve some of the balance-sheet pressures – on sovereigns, households, and banks – that risk smothering the recovery. 
Advanced countries need credible medium-term plans to stabilize and reduce public debt. 
But consolidating too quickly can hurt the recovery and worsen job prospects. 
There is a solution. 
Credible measures that deliver and anchor savings in the medium term will help create space to accommodate growth today – by allowing a slower pace of consolidation. 
Of course, the precise path is different for each country, as some are under market pressure and have no choice, while others have more space. 
It is also important to relieve pressure on household and banks. 
With respect to the United States, I welcome President Barack Obama’s recent proposals to address growth and employment; actions like more aggressive principal-reduction programs or helping homeowners to take advantage of low-interest rates would also help. 
And, in Europe, the sovereigns must address firmly their financing problems through credible fiscal consolidation. 
In addition, to support growth, banks must have sufficient capital buffers. 
The second issue is reform, with the financial sector a high priority. 
On the positive side, we have broad agreement on higher-quality capital and liquidity standards with appropriate phase-in arrangements. 
But substantial gaps remain and must be addressed through international cooperation in order to avoid regulatory arbitrage. 
I would also include the social dimension under the reform banner – particularly the need to identify and nurture sources of growth capable of generating sufficient jobs. 
This is especially important for the young. 
The third target of collective action, rebalancing, has two meanings. 
First, it means shifting demand back to the private sector when it is strong enough to carry the load. 
That hasn’t happened yet. 
Rebalancing also involves a global demand switch from external-deficit countries to those running large current-account surpluses. 
With lower spending and higher savings in the advanced economies, key emerging markets must take up the slack and start providing the demand needed to power the global recovery. 
But this rebalancing, too, has not happened sufficiently, and if the advanced economies succumb to recession, nobody will escape. 
The fourth policy imperative is rebuilding. 
Many countries, including those with low income levels, need to rebuild their economic defenses – for example, by strengthening their budget positions – to protect themselves against future storms. 
This will also help to provide the space for growth-enhancing public investment and important social safety nets. 
In these circumstances, the International Monetary Fund – with its 187 member countries – is uniquely positioned to foster collective action. 
Our policy advice can help shine a light on the pressing issues of the day – growth, core vulnerabilities, and interconnectedness. 
Our lending can provide breathing space for countries in difficulty. 
And, looking beyond the crisis horizon, the IMF can also help construct a safer and more stable international financial system. 
This is no time for half-measures or muddling through. 
If we seize the moment, we can navigate our way out of this crisis and restore strong, sustainable, and balanced global growth. 
But we need to act quickly – and together. 

The Global Age of Complexity 
NEW YORK – Every century, it seems, has its “age.” 
The Renaissance, from a philosophical perspective, has been called the Age of Adventure. 
The seventeenth-century Age of Reason was followed by the Age of Enlightenment. 
The nineteenth and twentieth centuries were ages of ideology and analysis, respectively. 
As for the twenty-first century, I would argue that it is the Age of Complexity. 
On the one hand, science and technology have progressed to the point that humans can create life and, through ultra-advanced genome-editing technologies, even engineer new species. 
Futurologist Yuval Noah Harari anticipates the imminent rise of Homo deus: a species of humanity that can “play god” by manipulating nature in myriad ways, including delaying and ultimately even conquering death. 
Most of the technological trends identified by the US Department of Defense as crucial in the coming years were unheard of just 30 years ago. 
On the other hand, much of humanity is besieged by feelings of helplessness and frustration, owing to the challenges we seem unable to resolve, from pollution and climate change to unrelenting radicalism and terrorism. 
Economic inequality – reinforced by job losses from automation, deeply entrenched social orders, and damaging political power dynamics – has contributed substantially to this sense of powerlessness. 
At a time when our power of creation, matched by our power of destruction, has reached unprecedented levels – when one weapons launch could change the course of history – the development of a more equitable and effective system could not be more urgent. 
In this new age of complexity, we need a new paradigm for thinking about the world, and thus for guiding our efforts to advance peace and prosperity. 
A prevailing worldview has always been essential to shaping human destiny. 
Alexander the Great would not have conquered most of the known world of his time without the influence of his philosopher-teacher Aristotle. 
And he was not unique: behind every great empire has been a great philosopher or historian whose worldview imbued the imperial drive with legitimacy and even sacred significance. 
(Were history written by the victims, not the victors, empire-building would look a lot less glorious.) 
As we move to develop a new worldview to guide our future, we must embrace a truly global perspective. 
In the past, analysis of the evolution of humanity’s worldview has tended to focus on the West, following the European and, later, American progression from exploration, colonization, and empire-building, to industrialization, the diffusion of market relations, and technological innovation. 
In the twenty-first century, however, this narrative is being revised. 
The global economic crisis that originated in the United States in 2007 exposed the fragility of the advanced-country model, giving rise to a new, more multipolar worldview, in which the emerging economies, led by China, India, and Russia, have increasingly challenged the status quo. 
Meanwhile, the challenges countries are facing have become increasingly interconnected, with global mega-trends, from climate change to financialization, playing out beyond the purview of individual governments. 
As the physicist-turned-ecologist Fritjof Capra and the chemist Pier Luigi Luisi remarked in their 2014 book The Systems View of Life, “the major problems of our time are systemic problems – all interconnected and interdependent.” 
Accordingly, “they require systemic solutions.” 
In this context, the world needs a more holistic worldview that accepts the pluralism and diversity – in terms of geography, tradition, and governance models – that reflect and reinforce the complexity of today’s global trends. 
Such an approach must recognize not just the need for countries to work together to shape the world, but also the limits of our ability to shape it at all. 
Humanity has long operated within a paradigm of determinism; we believe we can predict and manipulate outcomes. 
But we have not discovered any natural laws or equations that explain how life evolved into its current state, much less indicate how it will evolve in the future. 
Determinism has run its course, and must be replaced by a paradigm in which uncertainty is accepted as an irreducible fact of life. 
In the natural sciences, this is already happening. 
Quantum mechanics, general relativity, and uncertainty have been accepted as the way forward in physics and mathematics. 
In biology and neuroscience, there is a growing acceptance that life emerges through cognition (self-awareness and self-generation) and changes constantly, meaning that there is no “prestatable becoming,” in the words of the biologist Stuart Kauffman. 
Yet in the social sciences – from economics to politics – this transition has yet to take place. 
Economics continues to operate in a largely linear manner, guided by the deterministic eighteenth-century Newtonian framework. 
But simple mechanistic theories cannot deal with living, complex, and often quantum systems. 
Indeed, the reductionist logic, based on simplistic assumptions, that dominates economics today is at best incomplete, and potentially fundamentally wrong. 
Similarly, in politics, we continue to struggle to reach systemic solutions, not least because we often cannot agree on the nature of the complex problem we face. 
This partly reflects the global nature of today’s challenges and the diversity of perspectives that therefore must be reconciled. 
More fundamentally, it reflects the fact that humans are not always rational – a fact that a new “complexity economics” would do more to acknowledge. 
More broadly, a new “complexity worldview” must appreciate that human behavior is driven by everything from politics and economics to culture and psychology – even by technology itself. 
In an age of complexity, the institutions we build and sustain demand a system-minded approach that evolves alongside the rapidly progressing natural sciences. 

The Threat To Global Banking Standards 
LONDON – The financial crisis of 2008 gave a big boost to the global standard-setters. 
Suddenly, the Basel Committee (which sets the standards for international banking supervision) was leading the financial news. 
Dinner parties in Manhattan and Kensington were consumed with the finer points of Basel II and the evils of procyclical capital requirements. 
Governments that had been suspicious of international interference were eager for tougher global rules to prevent banking crises from spilling across borders and infecting others, like bouts of Asian flu. 
The concrete consequences of this enthusiasm were the creation of the Financial Stability Board (FSB), born out of the ashes of the Financial Stability Forum, at the G20’s London summit in April 2009, and inclusion of representatives of all G20 members among the key rule makers in Basel and elsewhere. 
The G7’s domination gave way to the hope that broader membership would produce more comprehensive buy-in and stronger political support for increasing the banking system’s capital. 
All this change has worked, up to a point. 
The Basel III regulations, for example, more than doubled the capital an individual bank should hold, and enhanced the quality of that capital. 
The system looks somewhat safer as a result. 
But now there are dangerous signs that the commitment to stronger global standards – indeed, to any common standards – may be on the wane. 
Many predicted this trend, but for the wrong reason. 
Skeptics warned that it would be far harder to reach agreement among 20 or more countries than it had been among the dozen pre-crisis Basel Committee members (mainly European countries, with only the US, Canada, and Japan representing the world beyond). 
In practice, that has not turned out to be a major problem. 
Basel III was agreed far more quickly than Basel II was. 
Political pressure from finance ministers, expressed through the FSB, proved effective. 
In fact, recent tensions have been more old-fashioned, pitting the US against the eurozone, with the UK and others stuck in between. 
The US has been pressing for tighter controls on banks’ internal models, and for a limit on how much a bank’s models can reduce its assets on a risk-weighted basis. 
Agreement on these so-called output floors has so far proved impossible. 
The Europeans argue that their banks’ corporate lending is inherently less risky. 
After all, EU banks lend more to higher-rated large companies, which access US capital markets, rather than borrowing from banks. 
They also hold more low-risk mortgages on their balance sheets, in the absence of a European equivalent of Fannie Mae and Freddie Mac (America’s two quasi-public mortgage banks), which hoovered up securitized US mortgages. 
At its meeting in Santiago, Chile, in November, the Basel Committee conspicuously failed to agree on a solution, and kicked the issue upstairs to the committee of Governors and Heads of Supervision, which will try again in January. 
They will probably find a way to thread this particular needle. 
But the future for global standards looks more uncertain than it has for some time. 
Since the 2008 crisis, many countries, while ostensibly supporting the development of tighter global rules, have been taking other measures to protect their own financial systems. 
The collapse of Lehman Brothers and others showed, in former Bank of England Governor Mervyn King’s memorable phrase, that big banks are “global in life, but national in death.” 
In other words, when a global bank crashes, the host-country regulators must pick up the local pieces. 
That’s why requirements to establish local subsidiaries, with local capital, have been adopted. 
Gone are the days when banks could set up branches all over the planet, with support from the parent’s balance sheet. 
Subsidiarization is now the rule. 
And, looking ahead, we can see that the two biggest players in the FSB and Basel have other preoccupations. 
Donald Trump’s incoming US administration has already signaled its suspicion of foreign entanglements and international commitments. 
Making America great again is not likely to involve new enthusiasm for more intrusive rules made in Basel. 
Those who advocate rolling back much of the 2010 Dodd-Frank financial-reform legislation, in favor of a higher leverage ratio, as promoted in a bill advanced by Representative Jeb Hensarling, envisage a “Made in the USA” version of banking regulation. 
But, while the idea has some merit, it would not sit easily within the current Basel framework. 
Europe faces other worries. 
Regulators there are now keenly focused on the implications of Brexit, which will require complex arrangements to manage a new relationship between London and the eurozone. 
The top priority for the European Central Bank must be to preserve the integrity of the EU banking union, which is under pressure from both Brexit and the crisis gripping Italy’s banks. 
Against this background, it will be a challenge to retain the primacy of global standards and to secure continued buy-in to the Basel process. 
The Bank for International Settlements’ new general manager, Agustín Carstens, a former governor of Mexico’s central bank, will have a key role to play, as will whoever replaces Mark Carney (the current Governor of the Bank of England) next year as Chairman of the FSB. 
It is likely, too, that there will soon be a new Chair of the Basel Committee itself. 
Stefan Ingves of Sweden is due to step down next June. 
These three new leaders will need all of their diplomatic skills to navigate treacherous political waters. 
The stakes are high. 
If the commitment to global standards wanes, everyone will suffer in the long run. 
Countries will impose incompatible local requirements, which will reduce the efficiency of capital utilization and make the system less robust in the event of renewed financial instability. 

Putting Public Health on the Map 
SEATTLE – Twenty-five years ago, the state of public health for large populations was like that of a doctor trying to treat a patient without a proper diagnosis. 
The diseases and injuries that cut lives short and caused widespread suffering were not rigorously tracked. 
Back then, well-meaning advocates for different diseases published death tolls that helped them make the case for funding and attention. 
But when all the claims were added up, the total was many times greater than the number of people who actually died in a given year. 
And even when policymakers had accurate data, it usually included only causes of death, not the illnesses that afflicted the living. 
To address this problem, Alan Lopez and I launched the Global Burden of Disease project (GBD) in 1990. Decision-makers need information about the world’s biggest health threats and how they have changed over time, across age groups, and by sex, so they can ensure that everyone has the opportunity to live the longest, healthiest life possible. 
By ensuring that each death is counted just once, and by providing comprehensive statistics on the causes of ill health, the GBD can compare the impact of cancer to that of lower back pain or depression. 
It also enables comparison of health-care performance among countries. 
GBD’s 1990 study and subsequent revisions raised the bar for population health measurement, providing decision-makers with more reliable and useful information. 
It also opened the international development community’s eyes to the importance of overlooked afflictions, such as mental illness and road injuries. 
Donors such as the World Bank and the Bill & Melinda Gates Foundation use GBD data to guide their investments, and more than 30 countries have conducted their own burden-of-disease studies. 
Countries such as Australia, Botswana, China, Mexico, Norway, Rwanda, Saudi Arabia, and the United Kingdom are using GBD findings to inform health policies. 
In China, the results of the GBD project, launched at a policy summit in 2013, raised awareness about the deadly impact of air pollution on the country’s population. 
Those findings helped shape the Chinese government’s efforts to curb the negative effects of pollution on health, and Chinese researchers are now key members of the global collaborative effort. 
In Rwanda, when the GBD study revealed that indoor air pollution from cooking with solid fuel was a leading cause of death, the government launched a program to distribute one million clean stoves to the most vulnerable households. 
Rwandan scientists and officials from the Ministry of Health – including the minister herself – are important contributors to the GBD. 
Today, the GBD is constantly improving, thanks to the efforts of more than 1,300 collaborators in 114 countries. 
These collaborators improve the models on which the project is built, vet the study results, contribute new data sets, and communicate the results to media outlets, educational institutions, and decision-makers. 
The latest GBD study revealed that another disease seldom discussed in international development circles, lower back and neck pain, is the fourth largest cause of health loss globally. 
It also highlighted the rapid pace of epidemiological transition in middle-income countries and the persistence of communicable, maternal, newborn, and nutritional disorders in Sub-Saharan Africa. 
But the GBD could do more to inform policy debates and spur action to improve health if it were able to provide more detailed breakdowns of data. 
Policymakers are accountable, first and foremost, to their constituents, whose unique needs they must meet. 
Estimates of local disease burdens will be essential for combating afflictions like Ebola, checking the rising toll of non-communicable diseases in middle-income countries, and meeting the Sustainable Development Goals relating to maternal and child health in Sub-Saharan Africa. 
To help decision-makers make better use of their data, the Institute for Health Metrics and Evaluation, which I head, is creating geospatial maps of disease burdens with a groundbreaking level of resolution. 
Creating these maps is possible thanks to methods developed by the Malaria Atlas Project, which has produced a better spatial understanding of malaria than we have for any pathogen. 
Geospatial maps can pinpoint areas that are making outstanding progress, allowing us to identify communities that have done things differently from their neighbors. 
These case studies can empower communities to replicate one another’s successes. 
One example is Cali, Colombia, which drove down homicide rates in the 1990s after the city’s mayor, Rodrigo Guerrero, tightened alcohol restrictions, introduced community-development programs in the most impoverished neighborhoods, and imposed temporary gun bans in public places. 
The mayor of Colombia’s capital, Bogota, learned about the program in Cali and implemented similar measures, which have helped reduce homicides steadily in the city. 
Since then, Guerrero has worked with the Inter-American Development Bank to develop programs that help other Latin American countries reduce violence in their communities. 
In 2014, Guerrero won the Roux Prize for his use of data to improve health, further elevating awareness of his work. 
Geospatial mapping will help us identify more Rodrigo Guerreros and champion their achievements. 
As the international community comes together to agree on the tools needed to finance and monitor progress toward the MDGs’ successor framework, the Sustainable Development Goals, geospatial mapping will be critical for tracking progress and indicating where course corrections might be needed. 
We are far beyond where we were in 1990 in terms of health measurement. 
With focused effort and further innovation, we can make even more progress in the next 25 years to help the world make the most of our collective health investments. 


The Climate Fight’s Next Turning Point 
PARIS – Next month, the Global Climate Action Summit – one of the largest international gatherings on climate change the world has seen – will be held in San Francisco. 
The event, whose theme is “Take Ambition to the Next Level,” aims to serve as a launchpad for accelerated action that will enable the world to meet the goals set by the 2015 Paris climate agreement. 
It is a golden opportunity to make progress in the effort to combat global warming, but it can be seized only with the involvement of all stakeholders. 
With the Paris climate agreement, the international community agreed to limit the rise in average global temperature to 2° Celsius – and ideally 1.5°C – above pre-industrial levels. 
To that end, national governments were tasked with developing their own climate-action plans, called Nationally Determined Contributions (NDCs). 
But national governments cannot do it alone. 
Everyone – including those at all levels of government, as well as business leaders, investors, and civil society – must contribute. 
This calls for a new form of inclusive multilateralism – one that can also be applied to achieving the Sustainable Development Goals, which complement the Paris agreement’s commitments. 
It is a tall order, but there is plenty of reason for optimism. 
There is unprecedented global momentum to build a low-carbon, climate-secure future, characterized by a dynamic green economy, a thriving society, and a healthy environment. 
Globally, renewable power accounted for 70% of net additions to power-generating capacity in 2017, according to the Renewables 2018 Global Status Report. 
Moreover, as part of the Under2 Coalition, over 200 states, regions, and local authorities have committed to cut their greenhouse-gas emissions by at least 80% below 1990 levels by 2050. 
Urban centers are also proving their capacity for climate innovation and leadership. 
New York City has mandated the retrofitting of 14,500 of the city’s most polluting buildings. 
Shenzhen has become the first city in the world with a fully electric bus fleet. 
Curitiba, Brazil, has introduced a new model of urban food production. 
And Oslo has created a climate budget to guide financial decision-making. 
At the business level, more than 700 companies with a total market capitalization of over $16 trillion have made far-reaching climate commitments, according to the We Mean Business Coalition. 
And 289 investors, holding nearly $30 trillion in assets, have signed on to Climate 100+, a five-year initiative to engage with the world’s largest corporate greenhouse-gas emitters to improve governance on climate change, curb emissions, and strengthen climate-related financial disclosures. 
As a result, global green bond issuance could reach $300 billion this year. 
Yet we are far from being in the clear. 
Scientists agree that global carbon dioxide emissions must reach a turning point in 2020 if we are to achieve carbon neutrality (with emissions low enough to be safely absorbed by forests, soils, and other natural systems) by mid-century. 
So far, nearly 50 countries have or may have reached their emissions peaks, and more may soon join their ranks. 
This is progress, but it is not enough. 
In fact, greenhouse gases in the atmosphere are still accumulating at a rate that will soon take us well above the 1.5°C threshold, beyond which some of the worst effects of climate change cannot be staved off. Extreme weather already is becoming more common, as exemplified by record-high temperatures worldwide this year. 
On current trends, average global temperatures could well rise by 3°C, imperiling vital natural systems like coral reefs, rainforests, and the polar regions. 
All relevant stakeholders need to strengthen their climate commitments. 
To kick-start that process, the Global Climate Action Summit and its partners have issued a wide array of new challenges, including zero-waste goals in cities, a target of 500 companies adopting science-based targets, and initiatives to accelerate uptake of zero-emission vehicles. 
Such efforts would not just protect our environment; they would also boost our economies. 
A recent report by the New Climate Economy suggests that, in transportation alone, a low-carbon transition would create 23 million jobs worldwide annually. 
Perhaps more important, a show of climate-action ambition from leaders across sectors would likely inspire national governments to increase their own NDCs ahead of this December’s United Nations Climate Change Conference in Poland, where governments will finalize the implementation guidelines of the Paris agreement. 
Acting alone can be difficult. 
Acting in concert can inspire and enable all participants to do more. 
And if we are to leave a healthy planet to future generations, more is what we need. 

International Cooperation 2.0 
OXFORD – After decades of serving as the backbone of a rules-based global order, the United States, under President Donald Trump, is touting an “America First” agenda that extols narrow economic nationalism and distrust of international institutions and agreements. 
But a new type of international cooperation may be emerging – one that works around Trump. 
To be sure, as the Trump administration continues to repudiate long-established patterns of cooperation, the risk to global stability is becoming increasingly acute. 
For example, at the World Economic Forum’s annual meeting in Davos last month, US Secretary of the Treasury Steven Mnuchin spoke positively about a weaker dollar as a way to boost US trade. 
For a country that relies on foreign demand for strong dollars and Treasuries to finance its rapidly expanding deficit, this is a foolhardy perspective. 
Moreover, it amounts to a betrayal of the longstanding US commitment to uphold a rules-based monetary system that discourages competitive currency devaluation. 
In foreign policy, US Secretary of State Rex Tillerson has endorsed the revival of the Monroe Doctrine – the nineteenth-century assertion of US primacy in the Western Hemisphere that aimed to keep out European competitors – in Central and South America, in order to curb China’s growing influence. 
Tillerson’s nostalgia for 1823 was not shared south of the border, where, as one Mexican commentator pointed out, the Monroe Doctrine “served to justify gringo interventions,” and where China’s increasing engagement is viewed as a counterweight to the US. 
The Trump administration has also unveiled a new, more aggressive nuclear policy. 
Its Nuclear Posture Review proposes using nuclear strikes in response to non-nuclear threats, and deploying new “low-yield” nuclear devices that would deliver by submarine a nuclear bomb equivalent in power to those that destroyed Hiroshima and Nagasaki in 1945. 
This policy – aimed, according to Defense Secretary James Mattis, at convincing adversaries that “they have nothing to gain and everything to lose from the use of nuclear weapons” – amounts to a reversal of 40 years of US leadership on reducing nuclear stockpiles and encouraging non-proliferation. 
Unsurprisingly, other countries are quickly losing faith in the US as a stable partner, much less a reliable leader. 
According to a Gallup poll, trust in US leadership across 134 countries has dropped from a median of 48% in 2016 to 30% in 2018, plummeting by 40 points (or more) in Canada, Portugal, Belgium, and Norway. 
Meanwhile, disapproval of US leadership has surged by 15 points, to a median score of 43%, compared with 36% for Russia, 30% for China, and 25% for Germany. 
As faith in America’s international leadership declines, so may countries’ commitment to cooperation – trends that could culminate in an economic race to the bottom or even violent conflict. 
After all, a country is unlikely to play by the rules if it does not believe that its opponents will do the same. 
Japan, for example, will more likely refrain from devaluing its exchange rate if it believes that the US will also refrain. 
Of course, some of the Trump administration’s declarations might turn out to be mere bluster. 
During President Ronald Reagan’s first term in the early 1980s, he also questioned the international monetary order; took a tougher line on Latin America; and expressed doubts about nuclear deterrence (preferring the idea of nuclear superiority). 
But, by his second term, Reagan had come to embrace international cooperation. 
At that time, however, US leadership was virtually guaranteed, given that the only other global superpower – the Soviet Union – was in sclerotic decline. 
That is not the case today. 
But that does not mean that international cooperation is doomed. 
In his 1984 book After Hegemony, the American scholar Robert Keohane argued that international cooperation could continue, even without US global dominance. 
Keohane’s core insight was that the creation of institutions like the International Monetary Fund, the World Health Organization, and even ad hoc institutions like the G20 may require a clear leader, but running them may not. 
Indeed, thanks to such institutions, the burden of leadership is now lighter. 
If governments seek to benefit from rules-based systems, such as those governing global trade, they can do so through existing multilateral institutions. 
This enables a more diverse array of governments to assume leadership in different areas. 
In January 2017, after Trump announced that the US was withdrawing from the Trans-Pacific Partnership – the ambitious US-led initiative to create a massive trade and investment bloc encompassing 12 Pacific Rim countries – many assumed that the TPP’s days were numbered. 
But a year later, the remaining 11 countries announced that they would be moving forward, based on the so-called Comprehensive and Progressive Agreement for the TPP. 
Likewise, after Trump announced last June that the US would withdraw from the Paris climate agreement, many observers feared the worst. 
By the end of last year, every other country in the world had become a signatory to the agreement. 
Moreover, 15 US states formed the US Climate Alliance, which is committed to upholding the objectives of the Paris agreement. 
Finally, Trump’s public questioning of NATO, the US-led security alliance, has spurred Europeans to forge ahead with their own common security plans. 
The US, fearing that it could be sidelined, has now raised objections to these moves. 
That is not surprising. 
The form of international cooperation that is now beginning to emerge promises to reflect more diverse views and interests, with countries adjusting their policies based on a variety of international considerations, not just the preferences and interests of the US. 
The result could be new cooperative coalitions, along with updated global institutions. 
As for the US, the Trump administration may well find that “America First” really does mean “America Alone.” 

Is It Time for Global Money? 
NEW YORK – Today’s world is more economically and financially integrated than at any time since the latter half of the nineteenth century. 
But policymaking – particularly central banking – remains anachronistically national and parochial. 
Isn’t it time to re-think the global monetary (non)system? 
In particular, wouldn’t a single global central bank and a world currency make more sense than our confusing, inefficient, and outdated assemblage of national monetary policies and currencies? 
Technology is now reaching the point where a common digital currency, enabled by near-universal mobile phone adoption, certainly makes this possible. 
And however farfetched a global currency may sound, recall that before World War I, ditching the gold standard seemed equally implausible. 
The current system is both risky and inefficient. 
Different monies are not only a nuisance for tourists who arrive home with pockets full of unspendable foreign coins. 
Global firms waste time and resources on largely futile efforts to hedge currency risk (benefiting only the banks that act as middlemen). 
The benefits of ridding the world of national currencies would be enormous. 
In one fell swoop, the risk of currency wars, and the harm they can inflict on the world economy, would be eliminated. 
Pricing would be more transparent, and consumers could spot anomalies (from their phones) and shop for the best deals. 
And, by eliminating foreign-exchange transactions and hedging costs, a single currency would reinvigorate stalled world trade and improve the efficiency of global capital allocation. 
In short, the current state of affairs is the by-product of the superseded era of the nation-state. 
Globalization has shrunk the dimensions of the world economy, and the time for a world central bank has arrived. 
Dream on. 
A single world currency is in fact neither likely nor desirable. 
Central banks, while ideally independent from political influence, are nonetheless accountable to the body politic. 
They owe their legitimacy to the political process that created them, rooted in the will of the citizenry they were established to serve (and from which they derive their authority). 
The history of central banking, though comparatively brief, suggests that democratically derived legitimacy is possible only at the level of the nation-state. 
At the supra-national level, legitimacy remains highly questionable, as the experience of the eurozone amply demonstrates. 
Only if the European Union’s sovereignty eclipses, by democratic choice, that of the nation-states that comprise it will the European Central Bank have the legitimacy it requires to remain the eurozone’s sole monetary authority. 
But the same political legitimacy cannot be imagined for any transatlantic or trans-Pacific monetary authority, much less a global one. 
Treaties between countries can harmonize rules governing commerce and other areas. 
But they cannot transfer sovereignty over an institution as powerful as a central bank or a symbol as compelling as paper money. 
Central banks’ legitimacy matters most when the stakes are highest. 
Everyday monetary-policy decisions are, to put it mildly, unlikely to excite the passions of the masses. 
The same cannot be said of the less frequent need (one hopes) for the monetary authority to act as lender of last resort to commercial banks and even to the government. 
As we have witnessed in recent years, such interventions can be the difference between financial chaos and collapse and mere retrenchment and recession. 
And only central banks, with their ability to create freely their own liabilities, can play this role. 
Yet the tough decisions that central banks must make in such circumstances – preventing destabilizing runs versus encouraging moral hazard – are simultaneously technocratic and political. 
Above all, the legitimacy of their decisions is rooted in law, which itself is the expression of democratic will. 
Bail out one bank and not another? 
Purchase sovereign debt but not state or commonwealth (for example, Puerto Rican) debt? 
Though deciding such questions at a supranational level is not theoretically impossible, it is utterly impractical in the modern era. 
Legitimacy, not technology, is the currency of central banks. 
But the fact that a single global central bank and currency would fail spectacularly (regardless of how strong the economic case for it may be) does not absolve policymakers of their responsibility to address the challenges posed by a fragmented global monetary system. 
And that means bolstering global multilateral institutions. 
The International Monetary Fund’s role as independent arbiter of sound macroeconomic policy and guardian against competitive currency devaluation ought to be strengthened. 
Finance ministers and central bankers in large economies should underscore, in a common protocol, their commitment to market-determined exchange rates. 
And, as Raghuram Rajan, the governor of the Reserve Bank of India, recently suggested, the IMF should backstop emerging economies that might face liquidity crises as a result of the normalization of US monetary policy. 
Likewise, a more globalized world requires a commitment from all actors to improve infrastructure, in order to ensure the efficient flow of resources throughout the world economy. 
To this end, the World Bank’s capital base in its International Bank for Reconstruction and Development should be increased along the lines of the requested $253 billion, to help fund emerging economies’ investments in highways, airports, and much else. 
Multilateral support for infrastructure investment is not the only way global trade can be revived under the current monetary arrangements. 
As was amply demonstrated in the last seven decades, reducing tariffs and non-tariff barriers would also help – above all in agriculture and services, as envisaged by the Doha Round. 
Global financial stability, too, can be strengthened within the existing framework. 
All that is required is harmonized, transparent, and easy-to-understand regulation and supervision. 
For today’s international monetary system, the perfect – an unattainable single central bank and currency – should not be made the enemy of the good. 
Working within our existing means, it is surely possible to improve our policy tools and boost global growth and prosperity. 

The Debt Dilemma 
LONDON/WASHINGTON, DC – Greece’s divisive negotiations with the EU have placed debt back at the center of debates about economic growth and stability. 
But Greece is not the only country struggling to repay its existing debt, much less dampen borrowing. 
Its fraught negotiations with its creditors should spur other countries to take action to address their own debt overhangs. 
Since the global financial crisis erupted in 2008, the world’s debt has risen by $57 trillion, exceeding GDP growth. 
Government debt has increased by $25 trillion, with the advanced economies accounting for $19 trillion – a direct result of severe recession, fiscal-stimulus programs, and bank bailouts. 
While American households have reduced their debt considerably (mainly through mortgage defaults), household debt in many other countries has continued to grow rapidly. 
In all major economies, the debt-to-GDP ratio (including both public and private debt) is higher today than it was in 2007. 
Much of this debt accumulation was driven by efforts to support economic growth in the face of deflationary headwinds after the 2008 crisis. 
That was especially so in China, which, together with other developing economies, accounts for nearly half of the debt incurred since 2008. 
To be sure, debt itself is not bad. 
But excessive reliance on debt creates the risk of financial crises, which undermine growth. 
Given this, the world needs to find both less credit-intensive routes to growth and ways to eliminate existing debt burdens. 
To help limit future debt accumulation, countries have three options. 
First, they can employ countercyclical macroprudential measures to dampen credit cycles and prevent excessive borrowing. 
For example, stricter loan-to-value-ratio limits and higher capital requirements for banks could slow credit growth when housing or commercial real-estate markets are overheating. 
Yet precisely the opposite approach is now being taken in the United States, where some first-time homebuyers have now been given access to 97% loan-to-value mortgages. 
A second strategy for curbing the buildup of debt could be to introduce mortgage contracts that enable more risk sharing between borrowers and lenders, essentially acting as debt/equity hybrids. 
As the Great Recession grimly illustrated, when a period of soaring real-estate valuations and rising household debt is followed by a period of falling prices, and households attempt to deleverage, the results can be catastrophic. 
The talent for financial innovation that produced harmful new home-mortgage options before the crash should now be harnessed to develop more flexible mortgages that help borrowers avoid default. 
One example is “shared responsibility” mortgages, in which payments are reduced under certain circumstances, such as when home prices dip below the borrower’s purchase price. 
In exchange for this flexibility, the lender receives a share of any capital gain that is realized when the home is sold. 
Similarly, the continuous-workout mortgage adjusts payments and terms in specific cases, such as job loss. 
A third option for limiting debt accumulation is to reconsider tax rules that favor debt. 
In many countries, interest accrued on a mortgage remains tax deductible. 
Though phasing out this policy is politically contentious, some countries – such as the United Kingdom in the 1980s – have managed to do so. 
Similarly, it would be difficult – but not impossible – to reduce the incentives, created by almost all countries’ tax regimes, for corporate leverage. 
Governments must also work to reduce existing debt – and the deficient global demand to which it contributes. 
It is simply not feasible for the most highly leveraged governments to grow their way out of debt. 
Nor can austerity alone suffice, as it would require countries to make such large fiscal adjustments – 5% of GDP, in Spain’s case – that citizens would likely resist them, as the Greeks have done. 
A more effective approach would employ a broader range of tools, including debt restructuring. 
In some countries, sales of public assets and the levying of one-off wealth taxes would also be helpful. 
Investors, analysts, and other commentators, for their part, must take a more nuanced view of governments’ true debt liabilities. 
Much of the sovereign-debt accumulation of recent years has been enabled by quantitative easing, with central banks making large-scale purchases of government bonds. 
The US Federal Reserve, the Bank of England, and the Bank of Japan now own 16%, 24%, and 22%, respectively, of all bonds outstanding. 
Given that central banks are owned by the government, and that interest paid on outstanding bonds is remitted back to the national treasury, these government bonds are fundamentally different from those owned by other creditors. 
Focusing on “net” government debt (which excludes intra-government debt holdings, such as the bonds owned by central banks) is a more effective approach to assessing and ensuring the sustainability of public debt. 
The global economic crisis laid bare the challenge of debt reduction – and the risks that excessive indebtedness raises. 
Yet the crisis also intensified government and household dependence on leverage, causing debt levels to continue to rise – a trend that, left unchecked, will lead to more crises in the future. 
It is time to redirect financial innovation toward developing new tools and approaches to address these challenges. 
Only then can the world economy move onto a sustainable growth path. 

Global Disaster Recovery 
PALO ALTO – With the global economy mired in recession and financial crisis, policymakers everywhere have launched a series of monetary, financial, and fiscal responses. 
Nevertheless, economies continue to contract, unemployment to rise, and wealth to decline. 
Countries’ policy responses have ranged from modest to immense. 
China has undertaken a 6%-of-GDP stimulus package aimed (mostly) at infrastructure; the United States has enacted a two-year $800 billion spending and tax rebate package. 
The Federal Reserve and the Bank of England lowered short-term interest-rate targets to near zero and are adopting “quantitative easing” – i.e., continuous infusions of money. 
Despite all this, massive excess bank reserves remain unlent. 
During Japan’s “lost decade,” the Bank of Japan mostly bought Japanese government bonds, whereas the Fed is trying to reopen secondary markets for securitized private lending (which in the US is as important as bank lending), buying mortgage-backed securities and consumer and business loans, as well as U.S. Treasury bonds. 
The Bank of England is buying UK government bonds (“gilts”). 
The European Central Bank, reflecting a strong inflation concern, has responded more slowly. 
The US government is now insuring, lending or spending over $10 trillion from guaranteeing money market funds to the AIG bailout to the Fed’s swap lines supporting foreign central banks. 
Analogous guarantees and bank bailouts have occurred in the other major economies (the ECB does not play this role for Europe; national governments do). 
The fiscal response – tax cuts and spending increases – has varied considerably, being somewhat more tepid in debt-averse Europe than in the US and China. 
The US is hectoring Europe for more fiscal stimulus, while the Europeans pressure the US for greater and more globally coordinated financial regulation. 
Will near-zero interest rates, financial-sector bailouts, and fiscal stimulus work? 
What else could be done? 
As for fiscal measures, the empirical evidence suggests that three-quarters of consumption is based on longer-term economic prospects, not short-run disposable income. 
Thus, temporary tax rebates are mostly saved, not spent. 
Targeting liquidity-constrained people, especially the unemployed, is a bit more effective, as well as humane. 
Some claim that infrastructure spending creates a big Keynesian “multiplier,” a bigger increase in incomes than the initial spending (estimates range up to about 1.5 times the initial increase in spending). 
But infrastructure spending is usually slow – and almost always driven heavily by parochial political considerations. 
Japan’s annual 15-20 trillion yen infrastructure-intensive stimulus didn’t prevent its lost decade. 
Nor did American government spending end the Great Depression (unemployment was still over 15% in 1939, a decade after the depression’s onset). 
A more effective stimulus would speed up spending that needs to be done anyway. Or cut taxes to change the marginal calculus of firms on layoffs and consumers on spending – for example, by suspending the payroll tax on firms and workers for a year or suspending part or all of the sales tax or national value-added tax. 
Better yet would be permanent rate reductions and controls on future spending. 
But governments should be wary of expensive fiscal stimulus. 
It is likely to yield little cushion for employment and income per dollar spent, while servicing the large debt accumulation will impede long-run growth, either by forcing substantial future tax increases or spending cuts, or by forcing central banks to inflate. 
Indeed, China frets over the safety of the US Treasury bonds that it holds. 
In theory, enough quantitative easing implies future inflation, motivating people to buy big-ticket items, like cars and appliances, now to avoid the run-up in prices later. 
(In practice, it is an experiment.) 
High and rising inflation creates great costs and is difficult to reverse. 
After mitigating the downturn, central bankers must withdraw the immense infusion of liquidity before inflation takes off, a tricky maneuver. 
The bottom line, though, is that better policies can at best mitigate the economic consequences of this horrible recession. 
We will not get out of this mess completely any time soon. 
Sometimes, strong recoveries follow recessions, but recovery following financial crises is always immensely painful, time-consuming, and traumatic. 
The economists Ken Rogoff and Carmen Reinhart have argued that the major financial crises of the last century typically lasted a half-decade or longer. 
In many of the previous banking crises, it was a country or a region that was hit hard (Argentina, Japan, etc.). 
This time, virtually every economy is suffering substantially and the banking crisis is global. 
Policymakers will continue to throw whatever ammunition they can find at the problem, but it will take time for the deleveraging from the boom to run its course. 
At times of serious economic distress, policymakers thrash about seeking solutions, and some people lose confidence in the economic system itself. 
Indeed, in the Great Depression of the 1930’s, it was common for Western intellectuals to turn to communism and central planning as a hoped-for panacea. 
Some never returned from that intellectual journey, despite the collapse of communism. 
There is, of course, no case for going back to socialism and central planning. 
Once off government lifelines, we will need a better-regulated financial system. 
Any financial institution that is too big or too interconnected to fail, or could quickly become so, must be closely regulated and monitored for risk and capital adequacy in real time, or be broken up into smaller firms. 

A Global Strategy for Disaster Risk 
SENDAI – Current disaster-risk levels are alarming. 
The cost of damage to commercial and residential buildings worldwide is averaging $314 billion each year, with the private sector bearing as much as 85% of that price tag. 
At the same time, a new United Nations report shows that annual investments in disaster-risk reduction of $6 billion can result in savings of up to $360 billion. 
Hundreds of business executives, aware of the dramatic costs – and potential benefits – at stake, are now preparing to attend a UN conference on disaster-risk reduction in Sendai, Japan. 
A decade ago, when the last such gathering was held, the private sector was scarcely represented. 
This time, companies and entrepreneurs will be there in full force to explore a range of valuable opportunities. 
The Tohoku region of Japan, where the meeting will take place, is a vivid reminder of how a disaster's economic impact reverberates far beyond its epicenter. 
Devastated four years ago by the Great East Japan Earthquake and tsunami, Japan's automobile production was cut by nearly half. 
The financial damage did not stop at the country's borders; as a direct result of the slowdown in Japan, automobile production dropped by some 20% in Thailand, 50% in China, and 70% in India. 
The risks inherent in globalized production carry great rewards for those who know how to manage them properly. 
That is why major businesses such as PricewaterHouseCoopers, Hindustan Construction Corporation, AbzeSolar, Swiss Re, AECOM, AXA Group, IBM, and others – spanning many sectors and encompassing all regions – are engaging with UN experts to improve global strategies for disaster-risk management and reduction. 
This level of business engagement bodes well for pioneering a new planet-friendly and people-sensitive approach to global prosperity. 
Indeed, the disaster-risk reduction conference in Sendai is the first in a series of major international gatherings this year. 
Beyond Sendai, world leaders will convene in Addis Ababa in July to discuss financing for development, in New York in September to adopt a new development agenda, and in Paris in December to reach a meaningful climate-change agreement. 
Taken together, these meetings promise to generate transformative action that can set the world on a safer, more prosperous, and more sustainable path. 
Sustainability starts in Sendai for three major reasons. 
First, by its very nature, disaster-risk reduction requires forward planning. 
Second, investment in this area advances both sustainable development and climate action. 
And, third, helping those who are most vulnerable to disasters is the ideal starting point for the effort to aid all people by establishing universal targets for development and climate change. 
Over the last 12 months, thousands of lives were saved in India, the Philippines, and elsewhere by improved weather forecasting, early-warning systems, and evacuation plans. 
Advances in risk reduction that safeguard development gains and business investments must match this progress in disaster preparedness, and we must make wise choices that create greater opportunities in the future. 
For example, experts estimate that 60% of the land that will be urbanized by 2030 has not yet been developed. 
Enterprises that factor disaster risk into their construction plans will avert the much higher costs of retrofitting later. 
More broadly, over the next 15 years, the world will make major investments in urban infrastructure, energy, and agriculture. 
If this spending is directed toward low-carbon goods, technologies, and services, we will be on our way to creating more resilient societies. 
More and more industries appreciate this. 
At the Climate Summit that I convened last September at the UN in New York, financial institutions, commercial and national banks, insurance companies, and pension funds vowed to mobilize more than $200 billion by the end of this year for action to address climate change. 
They envisioned a host of new initiatives, including issuing so-called green bonds and shifting assets to clean-energy portfolios. 
In a particularly important move, the insurance industry, representing $30 trillion in assets and investments, committed to creating a Climate Risk Investment Framework for industry-wide adoption by the end of the year. 
It is time to stop addressing development and humanitarian emergencies separately. 
Disaster-risk reduction lies at the nexus of development assistance, which seeks to advance better living conditions, and humanitarian aid, which begins after a disaster hits. 
Starting our international calendar with the Sendai meeting on disaster-risk reduction sends a clear signal that the world is ready to integrate its strategies. 
I have seen the human toll of disasters – from earthquakes in China and Haiti to floods in Pakistan and Bangladesh to Superstorm Sandy, which affected the Caribbean and North America, even inundating the lower floors of the UN facilities in New York. 
When business, civil society, and government team up to help countries withstand disasters, they save lives, boost stability, and create opportunities that enable markets and people alike to flourish. 
Sustainable profits. 
Sustainable livelihoods. 
Sustainable development. 

Preempting the Next Pandemic 
SYRACUSE – Recent disease outbreaks, like Ebola and Zika, have demonstrated the need to anticipate pandemics and contain them before they emerge. 
But the sheer diversity, resilience, and transmissibility of deadly diseases have also highlighted, in the starkest of terms, just how difficult containment and prevention can be. 
One threat to our preparedness is our connectedness. 
It was thanks to easy international travel that in recent years the dengue, chikungunya, and Zika viruses were all able to hitch a ride from east to west, causing massive outbreaks in the Americas and Caribbean. 
Another threat is more mundane: failing to agree about money. 
Whatever the reason, the fact is that as long as humans fail to organize a collective and comprehensive defense, infectious diseases will continue to wreak havoc – with disastrous consequences. 
Building an effective prevention and containment strategy – being bio-prepared – is the best way to reduce the threat of a global contagion. 
Preparedness requires coordination among agencies and funders to build networks that enable quick deployment of and access to vaccines, drugs, and protocols that limit a disease’s transmission. 
Simply stated, preparing for the next pandemic means not only building global capacity, but also paying for it. 
That’s the idea, at least. 
The reality of bio-preparedness is far more complicated. 
For starters, the absence of dedicated funding is impeding implementation of long-term prevention strategies in many countries; a new World Bank report finds that only six countries, including the United States, have taken the threat seriously. 
Meanwhile, public health officials in many parts of the world struggle to respond to disease outbreaks, owing to a dearth of labs and clinics. 
And many funding agencies, including governments and NGOs, typically offer only one-year commitments, which rules out long-term planning. 
For years, scientists, physicians, and civil-society actors have voiced concern over the lack of reliable, meaningful, and institutionalized investment in pandemic preparedness. 
These pleas have come, frustratingly, as military funding to thwart bio-attacks, consciously mounted by human actors, has remained robust. 
But while purposeful and nefarious infectious-disease outbreaks could do massive damage, they remain relatively unlikely. 
Naturally occurring outbreaks, by contrast, occur regularly and are far more costly, even if they lack the sensational “fear factor” of bioterrorism. 
Not that long ago, those of us engaged in the prevention of infectious-disease outbreaks felt more secure about the availability of the resources required to prepare. 
But in many places, budgets are stagnating, or even declining. 
This is astonishingly shortsighted, given the relative costs of prevention versus response. 
For example, what would it have cost to build the clinical and laboratory infrastructure and provide the training needed to identify and prevent the recent Ebola outbreak in West Africa? 
Precise figures are elusive, but I have no doubt it would have been less than the billions of dollars spent on containment. 
Preparedness pays. 
It is not only the lack of funding that is raising alarms; so are restrictions on how available funds can be used. 
It is not uncommon for a grant to be restricted to specific activities, leaving major gaps in a program’s capacity to meet its objectives. 
A funder may, for example, allow the renovation of an existing lab but not the construction of a new one; or funds may support the purchase of a diagnostic machine but not the training of those required to operate it. 
In many developing countries, communities do not even have the physical buildings in which to test, monitor, or store dangerous pathogens. 
Myopic funding that overlooks key elements of the big picture is money poorly spent. 
Add to these challenges the difficulty of paying staff or ensuring reliable electricity and other essential services, and it becomes clear that preparing for disease outbreaks requires broad engagement with the international aid community. 
But at the moment, onerous spending rules and weak financial commitments are tying the hands of those working to prevent the next serious disease outbreak. 
The number of obstacles faced by scientists and public health experts in the race to contain deadly infectious diseases is staggering. 
To overcome them, we need to redefine how we think about preparedness, moving from a reactive position to a more proactive approach. 
Money earmarked for preparedness must be allocated at levels sufficient to have the required impact. 
Limitations on how it can be spent should be loosened. 
Funding sources must be opened to allow for multi-year commitments. 
Health-care providers and first responders must receive proper training. 
And long-term solutions such as establishing and connecting bio-surveillance systems should be expanded and strengthened, to enable public-health professionals around the world to track and report human and animal diseases and plan defenses together. 
Public health is an essential element of global security. 
Failing to invest appropriately in prevention of infectious-disease outbreaks puts all of us at risk, whenever or wherever the next one occurs. 

Global Economic Cooperation or Bust 
According to estimates by the United Nations, the global economy expanded by 3.8% last year, continuing the strong performance recorded since 2003. Led by China and India, developing countries were prominent among the best performing economies, expanding by 6.5% on average in 2006. 
But can this apparently benign pattern of global growth be sustained, particularly since growth has been accompanied by ever-widening global financial imbalances? 
Average annual growth in the least developed countries, many in Africa, reached almost 7% last year. 
The world’s largest economy, the United States, expanded by 3.2 %, and growth also recovered in previously sluggish Japan and Europe. 
These trends are remarkable in light of the shocks from the surge in oil prices, the wars in Afghanistan and Iraq, international terrorism, and the breakdown of multilateral trade negotiations. 
Strong economic performance reflects strong domestic demand in the US, owing to low borrowing costs and rising asset prices. 
This lifted manufactured exports around the world and kept inflation down, which in turn boosted demand for energy and raw materials from the developing world, pushing up commodity prices and benefiting many poor countries. 
The savings generated in East Asia and the major oil exporters have increased global liquidity, helping to finance the US current account deficit, which has now reached unprecedented levels. 
But the outlook for 2007 is for weakening global economic growth. 
The UN’s World Economic Situation and Prospects 2007 cautions that a weaker housing market will undermine US growth. 
Consequently, global economic expansion will slow, as no other major country is set to take over as the main engine of growth. 
With slowing world economic growth, US financing needs could cause a drop in investors’ confidence in the future of US-based assets, precipitating a sharp dollar depreciation. 
The UN report observes that national economic policies and existing multilateral settings are not designed to mitigate effectively the risk of a global slowdown or to address global imbalances. 
In Europe and Japan, for example, monetary and fiscal policies have been tightening in response to domestic concerns, further slowing the world economy. 
The build-up of official reserves in East Asia and other developing countries will provide them with extra means to deal with possible external shocks. 
However, it has also limited the expansion of domestic demand and import growth, exacerbating rather than redressing the global imbalances. 
Of course, no single government can bear all the costs of the policies needed to correct today’s global imbalances. 
But an internationally agreed set of policies could help reduce the risk of weaker growth in the major economies, maintain confidence in the stability of international financial markets, and avoid a hard landing for the dollar. 
This would require, for instance, stimulating growth in Europe, Asia, and the major oil exporters in order to offset the contractionary effect on the world economy of adjustment in the US, which should include more restrictive fiscal policies, less private consumption, and higher domestic savings to reduce its external deficit. 
Exchange rates should be realigned in a coordinated fashion to stimulate exports from deficit countries and import demand from surplus countries. 
This is not just a matter of revaluing the Chinese currency, as argued by some US policymakers, but requires gradual adjustment of most major currencies against the dollar in conjunction with concerted fiscal and monetary policy adjustments in the rest of the world. 
Existing platforms, such as the G-8 summits, are unsuitable to achieve this course of action, mainly because key players from the developing world are not included. 
The multilateral surveillance mechanisms launched last year by the IMF are a step in the right direction, but only if they become part of an institutionalized multilateral mechanism of surveillance and policy coordination. 
To be credible as a mediator of this mechanism, the IMF itself would need reform, including a substantial change of voting power to bring the influence of developing countries in line with the weight they carry nowadays in the global economy. 
Modest steps in that direction were taken during the IMF meetings in Singapore last September. 
Such a new platform should also be used to work towards structural reform of the international monetary system aimed at reducing its excessive reliance on the US dollar as a reserve currency. 
Such reforms should work towards developing a multilaterally agreed multi-currency reserve system or even, in the longer term, a world currency based on the Special Drawing Rights issued by the IMF. 
The mere possibility of an imminent hard landing for the dollar – and with it, for the US and world economy – should be alarming enough to mobilize concerted action. 
Coordination will surely deliver more satisfactory outcomes than what any one country can achieve on its own. 

The Global Economy’s Surprising Resilience 
LONDON – Disconcerting political developments in the United States and the United Kingdom might lead one to conclude that an already challenged world economy will struggle even more in the near term. 
But as we continue into 2017, the cyclical evidence actually suggests otherwise. 
Since my days as Chief Economist at Goldman Sachs, I have kept an eye on six indicators from around the world that, taken together, provide a reliable snapshot of what the global economy will look like for the next six months. 
Right now, all six indicators show more promise than they have for some time, and only one of them has fallen slightly from a recent high. 
The first indicator is weekly unemployment claims in the US, from which one can gauge the overall strength of the US economy. 
Economists are rightly trained to treat unemployment as a lagging indicator, but these data can also be useful in forecasting the near future. 
US jobless claims are always up to date, because they are produced weekly, and statistical evidence suggests that they are a leading indicator for US equity prices. 
As of last week, jobless claims remained rather low, as they have for some time, which bodes well for US stock markets. 
Similarly, the Institute for Supply Management Manufacturing Index provides a pretty good preview of the US economy for the next 3-6 months, even though manufacturing comprises a relatively small share of GDP. 
Like the latest jobless claims, the ISM’s numbers are currently giving cause for optimism. 
A third indicator is a subcomponent of the same ISM survey: manufacturers’ new orders and inventories. 
Currently, new orders are increasing and inventories are low, which suggests that businesses will have to produce more in the coming months to satisfy those orders. 
Looking beyond the US, a fourth indicator is the ratio of Chinese retail spending relative to industrial production (adjusted for inflation). 
These figures give us a glimpse of both cyclical trends and China’s structural rebalancing away from exports and toward domestic consumption. 
This will arguably be one of the most important indicators for both China and the rest of the global economy for years to come. 
The ratio of Chinese monthly retail sales to industrial production, while erratic, has been slowly trending higher since 2008, and there appears to have been another uptick in consumption recently. 
This is why I am less worried than others about frequently cited risks confronting the Chinese economy. 
Chinese consumer spending has remained strong despite the slowdown in industrial output and investment and the government’s efforts to constrain spending on luxury goods. 
Some might object that Chinese data cannot be trusted. 
But I do not see why the data on one side of the ratio would be any more or less reliable than data on the other side. 
Why would Chinese officials fiddle with consumption data while allowing the industrial-output figures to register a decline. 
In any case, we have to work with what we have. 
A fifth indicator is South Korean trade data, which is consistently reported on the first day of each month after trades occur – faster than any other country. 
South Korea has an open economy and trading partners around the world, including the US, China, Japan, and the European Union, so one can extrapolate from its trade data to draw conclusions about the state of global trade. 
After trending down in recent years, South Korean trade since November has shown signs of recovering, notably in terms of export growth; and in January, it bounced back significantly. 
To be sure, this finding is at odds with all of the eulogies for globalization that one hears these days, and Donald Trump’s decidedly protectionist administration in the US could now send global trade into a long retreat. 
But South Korea’s recent data suggest that globalization still has some life left in it, and that 2017 is off to a decent start. 
In fact, barring the worst-case scenario under Trump, it is possible that the slowdown in global trade in recent years will turn out to be a temporary phenomenon. 
It may have been a singular occurrence that reflected a variety of factors, including the euro crisis; continued economic weakness in many European countries; the sharp decline in commodity prices; dramatic slowdowns in Brazil, Russia, and other emerging economies; and tighter regulations for international banks, which might have hindered trade finance. 
The last key indicator is the monthly Ifo Business Climate Index in Germany, which contains useful cyclical data for Europe overall, owing to Germany’s centrality in the continent’s economy. 
The Ifo survey has reported positive results in recent months, although the data were more promising in December than in January. 
Taken together, these six indicators suggest to me that the global economy might now be growing at a rate of more than 4%. 
This is the fastest growth in a number of years – although the last decade’s average growth rate of 3.3% was barely lower than the rate in the previous decade – and close to the pace of the previous two decades before that. 
At the same time, the six indicators cannot tell us anything about what will happen after the next few months. 
It is an open question whether global economic growth will remain strong, strengthen further, or start to weaken. 
It has been interesting to watch growth accelerate in the face of shocks such as the UK’s Brexit referendum and Trump’s election. 
And yet it is unclear why this is happening. 
Some might say the trend is a result of policy decisions in the US and the UK, but far more would probably say that it is happening despite those decisions. 
Unfortunately, there are no indicators that provide an answer to this question – only time will tell. 

Three Scenarios for the Global Economy 
NEW YORK – For the last few years, the global economy has been oscillating between periods of acceleration (when growth is positive and strengthening) and periods of deceleration (when growth is positive but weakening). 
After over a year of acceleration, is the world headed toward another slowdown, or will the recovery persist? 
The current upswing in growth and equity markets has been going strong since the summer of 2016. 
Despite a brief hiccup after the Brexit vote, the acceleration endured not just Donald Trump’s election as US president, but also the heightening policy uncertainty and geopolitical chaos that he has generated. 
In response to this apparent resilience, the International Monetary Fund, which in recent years had characterized global growth as the “new mediocre,” recently upgraded its World Economic Outlook. 
Will the recent growth spurt continue over the next few years? 
Or is the world experiencing a temporary cyclical upswing that will soon be subdued by new tail risks, like those that have triggered other slowdowns in recent years? 
It is enough to recall the summer of 2015 and early 2016, when investor fears of a Chinese hard landing, an excessively fast exit from zero policy rates by the US Federal Reserve, a stall in US GDP growth, and low oil prices conspired to undercut growth. 
One can envision three possible scenarios for the global economy in the next three years or so. 
In the bullish scenario, the world’s four largest, systemically important economies – China, the eurozone, Japan, and the United States – implement structural reforms that boost potential growth and address financial vulnerabilities. 
By ensuring that the cyclical upswing is associated with stronger potential and actual growth, such efforts would produce robust GDP growth, low but moderately rising inflation, and relative financial stability for many more years. 
US and global equity markets would reach new heights, justified by stronger fundamentals. 
In the bearish scenario, the opposite happens: the world’s major economies fail to implement structural reforms that boost potential growth. 
Rather than using this month’s National Congress of the Communist Party as a catalyst for reform, China kicks the can down the road, continuing on a path of excessive leverage and overcapacity. 
The eurozone fails to achieve greater integration, while political constraints limit national policymakers’ ability to implement growth-enhancing structural reforms. 
And Japan remains stuck on its low-growth trajectory, as supply-side reforms and trade liberalization – the third “arrow” of Prime Minister Shinzo Abe’s economic strategy – fizzle out. 
As for the US, the Trump administration, in this scenario, continues to pursue a policy approach – including a tax cut that overwhelmingly favors the rich, trade protectionism, and migration restrictions – that may well reduce potential growth. 
Excessive fiscal stimulus leads to runaway deficits and debt, which results in higher interest rates and a stronger dollar, further weakening growth. 
Trigger-happy Trump could even end up in a military conflict with North Korea – and, later, Iran – diminishing America’s economic prospects further. 
In this scenario, the lack of reform in major economies will leave the cyclical upswing constrained by low trend growth. 
If potential growth remains low, easy monetary and credit policies could eventually lead to goods and/or asset inflation, eventually causing an economic slowdown – and possibly an outright recession and financial crisis – when asset bubbles burst or inflation rises. 
The third – and, in my view, most likely – scenario lies somewhere between the first two. 
The cyclical upswing, in both growth and equity markets, continues for a while, driven by the remaining tailwinds. 
Yet, while major economies pursue some structural reforms to improve potential growth, the pace of change is much slower, and its scope more modest, than is needed to maximize potential. 
In China, this muddle-through scenario means doing just enough to avoid a hard landing, but not enough to achieve a truly soft one; with financial vulnerabilities left unaddressed, distress becomes all but inevitable over time. 
In the eurozone, this scenario would entail only nominal progress toward greater integration, with Germany’s continued rejection of true risk-sharing or fiscal union weakening incentives for struggling member countries to undertake tough reforms. 
In Japan, an increasingly ineffective Abe administration would implement minimal reforms, leaving potential growth stuck below 1%. 
In the US, Trump’s presidency would remain volatile and ineffective, with a growing number of Americans realizing that, despite his populist pretense, Trump is merely a plutocrat protecting the interests of the rich. 
Inequality rises; the middle class stagnates; wages barely grow; and consumption and growth remain anemic, at barely close to 2%. 
But the risks of muddling through extend far beyond mediocre economic performance. 
This scenario represents not a stable equilibrium, but an unstable disequilibrium, vulnerable to economic, financial, and geopolitical shocks. 
When such shocks eventually emerge, the economy will be tipped into a slowdown or, if the shock is large enough, even recession and financial crisis. 
In other words, if the world does simply muddle through, as seems likely, it could, within three or four years, face a more bearish outlook. 
The lesson is clear: either political leaders and policymakers demonstrate the leadership needed to secure a better medium-term outlook, or downside risks will materialize before long – and do serious damage to the global economy. 

The Global Economy’s Marshmallow Test 
NEW YORK – The world economy is experiencing a turbulent start to 2016. 
Stock markets are plummeting; emerging economies are reeling in response to the sharp decline in commodities prices; refugee inflows are further destabilizing Europe; China’s growth has slowed markedly in response to a capital-flow reversal and an overvalued currency; and the US is in political paralysis. 
A few central bankers struggle to keep the world economy upright. 
To escape this mess, four principles should guide the way. 
First, global economic progress depends on high global saving and investment. 
Second, saving and investment flows should be viewed as global, not national. 
Third, full employment depends on high investment rates that match high saving rates. 
Fourth, high private investments by business depend on high public investments in infrastructure and human capital. 
Let’s consider each. 
First, our global goal should be economic progress, meaning better living conditions worldwide. 
Indeed, that goal has been enshrined in the new Sustainable Development Goals adopted last September by all 193 members of the United Nations. 
Progress depends on a high rate of global investment: building the skills, technology, and physical capital stock to propel standards of living higher. 
In economic development, as in life, there’s no free lunch: Without high rates of investment in know-how, skills, machinery, and sustainable infrastructure, productivity tends to decline (mainly through depreciation), dragging down living standards. 
High investment rates in turn depend on high saving rates. 
A famous psychological experiment found that young children who could resist the immediate temptation to eat a marshmallow, and thereby gain two marshmallows in the future, were likelier to thrive as adults than those who couldn’t. 
Likewise, societies that defer instant consumption in order to save and invest for the future will enjoy higher future incomes and greater retirement security. 
(When American economists advise China to boost consumption and cut saving, they are merely peddling the bad habits of American culture, which saves and invests far too little for America’s future.) 
Second, saving and investment flows are global. 
A country such as China, with a high saving rate that exceeds local investment needs, can support investment in other parts of the world that save less, notably low-income Africa and Asia. 
China’s population is aging rapidly, and Chinese households are saving for retirement. 
The Chinese know that their household financial assets, rather than numerous children or government social security, will be the main source of their financial security. 
Low-income Africa and Asia, on the other hand, are both capital-poor and very young. 
They can borrow from China’s high savers to finance a massive and rapid build-up of education, skills, and infrastructure to underpin their own future economic prosperity. 
Third, a high global saving rate does not automatically translate into a high investment rate; unless properly directed, it can cause underspending and unemployment instead. 
Money put into banks and other financial intermediaries (such as pension and insurance funds) can finance productive activities or short-term speculation (for example, consumer loans and real estate). 
Great bankers of the past like J.P. Morgan built industries like rail and steel. 
Today’s money managers, by contrast, tend to resemble gamblers or even fraudsters like Charles Ponzi. 
Fourth, today’s investments with high social returns – such as low-carbon energy, smart power grids for cities, and information-based health systems – depend on public-private partnerships, in which public investment and public policies help to spur private investment. 
This has long been the case: Railroad networks, aviation, automobiles, semiconductors, satellites, GPS, hydraulic fracturing, nuclear power, genomics, and the Internet would not exist but for such partnerships (typically, but not only, starting with the military). 
Our global problem today is that the world’s financial intermediaries are not properly steering long-term saving into long-term investments. 
The problem is compounded by the fact that most governments (the US is a stark case) are chronically underinvesting in long-term education, skill training, and infrastructure. 
Private investment is falling short mainly because of the shortfall of complementary public investment. 
Shortsighted macroeconomists say the world is under-consuming; in fact, it is underinvesting. 
The result is inadequate global demand (global investments falling short of global saving at full employment) and highly volatile short-term capital flows to finance consumption and real estate. 
Such short-term flows are subject to abrupt reversals of size and direction. 
The 1997 Asian financial crisis followed a sudden stop of capital inflows to Asia, and global short-term lending suddenly dried up after Lehman Brothers collapsed in September 2008, causing the Great Recession. 
Now China is facing the same problem, with inflows having abruptly given way to outflows. 
The mainstream macroeconomic advice to China – boost domestic consumption and overvalue the renminbi to cut exports – fails the marshmallow test. 
It encourages overconsumption, underinvestment, and rising unemployment in a rapidly aging society, and in a world that can make tremendous use of China’s high saving and industrial capacity. 
The right policy is to channel China’s high saving to increased investments in infrastructure and skills in low-income Africa and Asia. 
China’s new Asian Infrastructure Investment Bank (AIIB) and its One Belt, One Road initiative to establish modern transport and communications links throughout the region are steps in the right direction. 
These programs will keep China’s factories operating at high capacity to produce the investment goods needed for rapid growth in today’s low-income countries. 
China’s currency should be allowed to depreciate so that China’s capital-goods exports to Africa and Asia are more affordable. 
More generally, governments should expand the role of national and multilateral development banks (including the regional development banks for Asia, Africa, the Americas, and the Islamic countries) to channel long-term saving from pension funds, insurance funds, and commercial banks into long-term public and private investments in twenty-first-century industries and infrastructure. 
Central banks and hedge funds cannot produce long-term economic growth and financial stability. 
Only long-term investments, both public and private, can lift the world economy out of its current instability and slow growth. 

The Economic Consequences of Drug Resistance 
LONDON – When British Prime Minister David Cameron asked me in July to lead an effort to find solutions to the growing global problem of antimicrobial resistance, my first question was: “What is that?” 
I soon learned that, as bacteria and parasites develop resistance to existing drugs, like antibiotics and antimalarial medications, the world is at risk of losing its battle against infectious diseases. 
So my next question was: “Why me? 
Don’t you need a scientist?” 
It turns out that the problem of rising antimicrobial resistance is as much about economics as it is about science or medicine. 
Left unchecked, it will kill millions of people every year, and have serious adverse economic consequences for the world. 
For developing economies, including most of the BRIC (Brazil, Russia, India, and China) and MINT (Mexico, Indonesia, Nigeria, and Turkey) countries, the risk is particularly large. 
Recent research, by an independent review on antimicrobial resistance, which I chair, has modeled the phenomenon’s likely impact on the world economy. 
It suggests that if we fail to address antimicrobial resistance, the problem will grow worse. 
By 2020, if we allow resistance to rise by 40%, global GDP will be 0.5% smaller than it otherwise would have been. 
By 2030, it will be 1.4% smaller. 
By 2050, the economic shortfall will reach 3%. 
The accumulated loss of global output over the next 35 years will total $100 trillion – more than one and a half times annual world GDP today. 
Already, 60,000 people die every year from causes related to antimicrobial resistance in the United States and Europe – some ten times the worldwide death toll from the ongoing Ebola crisis. 
By 2050, if the problem is allowed to continue to grow, antimicrobial resistance will kill more than ten million people per year. 
That is more than the number of people who currently die of cancer, and greater than the number of deaths from diabetes, lung cancer, road traffic accidents, diarrhoeal disease, and HIV combined. 
The economic costs from the resulting panic, including a collapse of travel and trade, could be devastating. 
Rising rates of antimicrobial resistance will have a particularly severe impact on India, Indonesia, and Nigeria (as well as the rest of Sub-Saharan Africa). 
Countries like China and Brazil, which have been successful in reducing malaria rates, could see their hard work undermined by an increase in resistance to antimalarial drugs. 
The research we commissioned was based on the limited data available. 
It does not take into account the damage from drug-resistant illnesses outside of hospitals or the impact of escalating healthcare costs. 
Nor does it include the drop in living standards from the loss of life-enhancing treatments – for example, knee or hip replacements, cancer treatment, and caesarean sections – that rely on antibiotics to prevent infections. 
The broad-brush research we conducted shows that such treatments – many of which would not be possible without effective antibiotics – add around 4% of benefit in terms of GDP. 
One of my goals is to persuade policymakers at the United Nations to agree to a set of rules and policies to stop the growth of antimicrobial resistance. 
In addition to highlighting the scale of the problem, the review is seeking to find ways to reduce drug resistance and to stimulate the production of new antibiotics to compensate for the loss of those that are now or will become ineffective. 
Some solutions to reduce resistance will require cutting-edge technology. 
We must encourage policymakers to support the development of the best diagnostics. 
Quicker, more accurate diagnoses will curb the current overreliance on antibiotics – a key requirement for combating resistance. 
We also must develop tools to identify and halt outbreaks of resistant diseases at an early stage. 
Data provided by diagnostic devices could be a potent weapon in containing these outbreaks. 
Other solutions are low tech, requiring little more than common sense. 
We need to start washing our hands thoroughly and often. 
We need to stop demanding antibiotics from our doctors. 
And, when antibiotics are called for, we need to finish the prescribed course. 
As we try to prevent resistance to existing drugs, we will also need to examine the impact of antibiotics in agriculture. 
Developing new antibiotics is a challenge, because pharmaceutical companies seem to need incentives to conduct the required research. 
The review will study whether market incentives can be changed. 
If they cannot, more dramatic alternatives to boost early innovation by university labs and small companies could be sought, perhaps through a targeted fund. 
As the review research shows, the stakes of inaction on antimicrobial resistance are high. 
Now is the time to search for bold, clear, and practical long-term solutions. 

The Global Economy’s Uncertain Future 
LONDON – At the start of 2018, most of the world economy was experiencing a synchronized cyclical recovery that seemed to herald a longer period of sustainable growth and an end to the decade-long hangover from the 2008 slump. 
Despite the shock of Brexit, storm clouds over the Middle East and Korean Peninsula, and US President Donald Trump’s unpredictable behavior, rising investment and wages, alongside falling rates of unemployment, appeared to be in the offing. 
Yet, as I warned in January, “the global mood [had] shifted from fear about political risks to obliviousness, even though many such risks still loom large.” 
Moreover, while my preferred global indicators were all looking up, I worried about whether that would continue after the first half of 2018, given foreseeable complications such as monetary-policy tightening across advanced economies, especially in the US. 
Lo and behold, we are now halfway through 2018, and some of those same indicators are no longer looking quite so rosy. 
While the US Institute for Supply Management’s June Purchasing Managers’ Index (PMI) remains very strong, other comparable surveys around the world are not nearly as robust as they were six months ago. 
Most important, business activity has slowed in both China and Europe. 
Another key indicator is South Korea’s trade data, which is published monthly and before that of any other country. 
On July 1, we learned that South Korean exports had fallen year-on-year in June 2018. 
Whereas 2017 was a record-setting year for the country’s nominal export strength, 2018 has ushered in several months of decelerating performance. 
Ironically, this slump coincides with improved relations with North Korea, while the strong performance last year occurred in spite of nuclear brinkmanship on the Korean Peninsula. 
The weakening of South Korean exports calls for careful follow-up analysis, both of other major economies’ trade data and of South Korea’s July data, when it is published on August 1. 
Given the worrying escalation of Trump’s import tariffs and the retaliatory measures being pursued by China, the European Union, and others, one should not be surprised if the weakening of global trade persists. 
That said, one also should not assume that falling trade numbers are a direct result of tariffs. 
We do not yet have a full regional breakdown of export performance. 
But from the data that are available for the first 20 days of June, we can see that South Korean exports to the US and China were actually rather strong; the weakness was in exports to Association of Southeast Asian Nations countries and the Middle East. 
If this remains the case, there is less reason to worry that the strong global-trade performance over the past 12-18 months is being thrown into reverse. 
After all, we are in a decade in which the world economy is dominated by activity in the US and China. 
According to my calculations, 85% of the growth of nominal GDP worldwide since 2010 is due to these two countries, with the US accounting for 35% and China accounting for 50%. 
So, as long as China and the US are doing fine, the global economy can be expected to sustain annual output growth of around 3.4%. 
As for the rest of the world, economic indicators from this time last year through early 2018 seemed to suggest that many previously weak performers were finally on the mend. 
In nominal dollar terms, Brazil, the EU, Japan, and Russia all experienced slight declines since 2010, but showed signs of improvement in 2017. 
For example, at this time last year, the EU looked as though it was on the cusp of a robust, widespread cyclical recovery. 
But that no longer seems to be the case. 
Key economies such as France and Germany have experienced a slowdown, perhaps owing to fears of a global trade war. 
And, of course, the plodding Brexit negotiations, Italy’s new anti-establishment government, and an intra-EU political crisis over immigration have all created more economic uncertainty. 
The immigration crisis, in particular, could have severe consequences both for German Chancellor Angela Merkel’s government and for EU cohesion. 
To be sure, Europe’s economic softening could prove temporary, and PMIs for eurozone countries did strengthen somewhat in June, following a couple of months of marked decline. 
But it would be foolhardy to rule out the worst. 
Still, as we have seen, the sustainability of global growth depends largely on the US and China. 
Obviously, if these two economic giants are going to start trading blows with tit-for-tat tariffs, both will lose – and so will the world economy. 
For the US, where consumption accounts for around 70% of GDP, positive international trade and a stable, friendly investment climate are essential for sustainable growth. 
One hopes that someone close to Trump can turn him around before his policies derail the world’s long-awaited recovery. 

The Global Recovery’s Downside Risks 
NEW YORK – For the past two years, the global economy has been growing, but it has swung between periods of rapid expansion and deceleration. 
During this period, two episodes, in particular, caused US and global equity prices to fall by about 10%. 
Is a pattern emerging, or is a fitful global recovery set to stabilize? 
The first episode came in August/September 2015, when many observers feared that China’s economy could be headed for a hard landing. 
The second episode, in January/February 2016, also stemmed from concerns about China. 
But investors were also increasingly worried about stalling US growth, collapsing oil and commodity prices, rapid interest-rate hikes by the US Federal Reserve, and unconventional negative-rate monetary policies in Europe and Japan. 
Each deceleration episode lasted for about two months, at which point the correction in equity prices began to reverse. 
Investors’ fears were not borne out, and central banks began to ease their monetary policies; or, in the case of the Fed, put rate hikes on hold. 
As a third example, one could cite the period following the United Kingdom’s Brexit referendum in June 2016. 
But that episode was more short-lived, and it did not cause a global slowdown, owing to the small size of the UK economy and monetary easing at the time. 
In fact, in the months before US President Donald Trump’s election last November, the global economy actually entered a new period of expansion – albeit one in which advanced and emerging-market economies’ potential growth remained low. 
We may still be living in what the International Monetary Fund calls the “new mediocre” – or what the Chinese call the “new normal” – of low potential growth. 
And yet economic activity has started to pick up in the US, Europe and the eurozone, Japan, and key emerging markets. 
Owing to new stimulus measures, China’s growth rate has stabilized. 
And emerging markets such as India, other Asian countries, and even Russia and Brazil – which experienced recessions between 2014 and 2016 – are all doing better. 
So, even before the US presidential election had inspired “Trump trades,” a “reflation trade” had signaled a new phase of modest global expansion. 
Recent economic data from around the world suggest that growth could now accelerate. 
And yet one cannot rule out the possibility that the current expansion will turn into another global slowdown – if not an outright stall – if some downside risks materialize. 
For example, markets have clearly been too bullish on Trump. 
The US president will not be able to pass any of the radical growth policies he has proposed; and any policy changes that he does make will have a limited impact. 
Contrary to what the administration’s budget projections claim, annual economic growth in the US has almost no chance of accelerating from 2% to 3%. 
At the same time, markets have underestimated the risks of Trump’s policy proposals. 
For example, the administration could still pursue protectionist measures that would precipitate a trade war, and it has already imposed migration restrictions that will likely reduce growth, by eroding the labor supply. 
Moreover, Trump might continue to engage in corporatist micromanagement, which would disrupt the private sector’s investment, employment, production, and pricing decisions. 
And his fiscal-policy proposals would provide excessive stimulus to an economy that is already close to full employment. 
This would force the Fed to raise interest rates even faster, which would derail the US’s recovery, by increasing long-term borrowing costs and strengthening the dollar. 
Indeed, Trump has introduced such profound fiscal uncertainty that the Fed could make a mistake in its own policymaking. 
If it does not increase rates fast enough, inflation might balloon out of control. 
The Fed would then have to hike rates rapidly to catch up at the risk of triggering a recession. 
A related risk is that increasing rates too slowly could lead to an asset-price bubble and all the dangers – frozen credit markets, soaring unemployment, plummeting consumption, and more – implied by its inevitable deflation. 
The current Fed chair, Janet Yellen, is unlikely to make a mistake. 
But over the course of the next year, Trump will have the option of appointing five, and possibly six, new members to the Fed’s seven-member Board of Governors. 
If he chooses poorly, the risk of serious policy errors will increase substantially. 
Markets are also underestimating today’s geopolitical risks, many of which stem from Trump’s confused and risky foreign policies. 
Indeed, the global economy could be destabilized by any number of scenarios involving the US. 
A military confrontation between the US and North Korea now seems plausible. 
So, too, does a diplomatic or military conflict between the US and Iran that results in an oil-supply shock; or a trade war between the US and China that escalates into a larger geopolitical conflict. 
But Trump is not the only global risk. 
China has resorted to a fresh round of credit-fueled fixed investment to stabilize its growth rate. 
That means that it will have to deal with more toxic assets, debt, leverage, and overcapacity in the medium term. 
And because growth and economic stability will top the agenda at the Chinese Communist Party’s National Congress later this year, discussions about how to rebalance growth and implement structural reforms will take a back seat. 
But if China does not jumpstart structural reforms and contain its debt explosion by next year, the risk of a hard landing will return. 
Elsewhere, the recent Dutch and French election results (and favorable expectations for the German election this September) have reduced the risk that populists will come to power in Europe. 
But the EU and eurozone are still in an economic slough. 
And market fears of a disintegrating eurozone will return if the anti-euro Five Star Movement comes to power in Italy’s next election, which could be held early this fall. 
In the next year, a more robust and persistent global recovery will depend largely on whether policymakers avoid mistakes that could derail it. 
At least we know where those mistakes are most likely to be made. 

The Global Economy’s Fundamental Weakness 
GENEVA – When Lehman Brothers declared bankruptcy ten years ago, it suddenly became unclear who owed what to whom, who couldn’t pay their debts, and who would go down next. 
The result was that interbank credit markets froze, Wall Street panicked, and businesses went under, not just in the United States but around the world. 
With politicians struggling to respond to the crisis, economic pundits were left wondering whether the “Great Moderation” of low business-cycle volatility since the 1980s was turning into another Great Depression. 
In hindsight, the complacency in the run-up to the crisis was clearly unconscionable. 
And yet little has changed in its aftermath. 
To be sure, we are told that the financial system is simpler, safer, and fairer. 
But the banks that benefited from public money are now bigger than ever; opaque financial instruments are once again de rigueur; and bankers’ bonus pools are overflowing. 
At the same time, un- or under-regulated “shadow banking” has grown into a $160 trillion business. 
That is twice the size of the global economy. 
Thanks to the trillions of dollars of liquidity that major central banks have pumped in to the global economy over the past decade, asset markets have rebounded, company mergers have gone into overdrive, and stock buybacks have become a benchmark of managerial acumen. 
By contrast, the real economy has spluttered along through ephemeral bouts of optimism and intermittent talk of downside risks. 
And while policymakers tell themselves that high stock prices and exports will boost average incomes, the fact is that most of the gains have already been captured by those at the very top of the pyramid. 
These trends point to an even larger danger: a loss of trust in the system. 
Adam Smith recognized long ago that perceptions of rigging will eventually undermine the legitimacy of any rules-based system. 
The sense that those who caused the crisis not only got away with it, but also profited from it has been a growing source of discontent since 2008, weakening public trust in the political institutions that bind citizens, communities, and countries together. 
During the synchronized global upswing last year, many in the economic establishment spoke too soon when they began to forecast sunnier times. 
With the exception of the US, recent growth estimates have fallen short of previous projections, and some economies have even slowed. 
While China and India remain on track, the number of emerging economies under financial stress has increased. 
As the major central banks talk up monetary-policy normalization, the threats of capital flight and currency depreciation are keeping these countries’ policymakers up at night. 
The main problem is not just that growth is tepid, but that it is driven largely by debt. 
By early 2018, the volume of global debt had risen to nearly $250 trillion – three times higher than annual global output – from $142 trillion a decade earlier. 
Emerging markets’ share of the global debt stock rose from 7% in 2007 to 26% in 2017, and credit to non-financial corporations in these countries increased from 56% of GDP in 2008 to 105% in 2017. 
Moreover, the negative consequences of tightening monetary conditions in developed countries will likely become more severe, given the disconnect between asset bubbles and recoveries in the real economy. 
While stock markets are booming, wages have remained stuck. 
And despite the post-crisis debt expansion, the ratio of investment-to-GDP has been falling in the advanced economies and plateauing in most developing countries. 
There is a very big “known unknown” hanging over this fragile state of affairs. 
US President Donald Trump’s trade war will neither reduce America’s trade deficit nor turn back the technological clock on China. 
What it will do is fuel global uncertainty if tit-for-tat responses escalate. 
Even worse, this is occurring just when confidence in the global economy is beginning to falter. 
For those countries that are already threatened by heightened financial instability, the collateral damage from a disruption to the global trading system would be significant and unavoidable. 
Yet, contrary to conventional wisdom, this is not the beginning of the end of the postwar liberal order. 
After all, the unraveling of that order started long ago, with the rise of footloose capital, the abandonment of full employment as a policy goal, the delinking of wages from productivity, and the intertwining of corporate and political power. 
In this context, trade wars are best understood as a symptom of unhealthy hyper-globalization. 
By the same token, emerging economies are not the problem. 
China’s determination to assert its right to economic development has been greeted with a sense of disquiet, if not outright hostility, in many Western capitals. 
But China has drawn from the same standard playbook that developed countries used when they climbed the economic ladder. 
In fact, China’s success is exactly what was envisioned at the 1947 United Nations Conference on Trade and Employment in Havana, where the international community laid the groundwork for what would become the global trading system. 
The difference in discourse between then and now attests to how far the current multilateral order has moved from its original aims. 
At first, the Lehman crisis did trigger a revival of the post-war multilateral spirit; but it proved fleeting. 
The tragedy of our times is that just when bolder cooperation is needed to address the inequities of hyper-globalization, the drums of “free trade” have drowned out the voices of those calling for a restoration of trust, fairness, and justice in the system. 
Without trust, there can be no cooperation. 

Good Times at Last? 
LONDON – In February 2017, I wrote an optimistic commentary called “The Global Economy’s Surprising Resilience.” 
The piece came as a surprise to those who saw only bleak prospects for Western countries, not least the United States, where US President Donald Trump had just been inaugurated. 
Now, nearly a year later, my three decades of experience in global financial markets leads me to believe that the economic situation is not quite as straightforward. 
On the positive side, the half-dozen cyclical indicators I listed last February remain strong, and some have even strengthened further. 
One key indicator is South Korea’s monthly trade data. 
The country’s exports grew by 15.8% in 2017, the largest increase since 1956, when it began reporting these data. 
Moreover, export growth occurred even as Trump threatened to withdraw from the US-Korea Free Trade Agreement and stoked tensions with North Korea – a powerful rebuke to those who have predicted retrenchment of global trade. 
As I suspected a year ago, the slowdown in global trade in past years probably stemmed from the euro crisis and falling commodity prices, and would thus prove temporary. 
Now that those two events are behind us, global trade appears to have picked up. 
Of course, much will depend on whether trade momentum can be maintained. 
Although South Korea’s export performance in December was impressive, it fell slightly short of forecasters’ expectations. 
We will have to wait and see if it remains strong in 2018. 
Another key cyclical indicator is reflected in monthly Purchasing Managers’ Index (PMI) surveys for manufacturing and services, which include underlying sub-indices for inventories and sales. 
Here, the news is remarkable: PMI survey results in many countries around the world are the strongest they have been in years. 
That includes the US, where I have found the Institute of Supply Management’s manufacturing index to be consistently accurate and indicative of underlying realities. 
It also includes the eurozone, where PMI-survey data have reached their highest levels since before 2000. 
Even the United Kingdom’s monthly PMI surveys are showing momentum, though not as much as in other Western countries, most likely owing to the Brexit effect. 
If the global economic environment continues to improve, the UK might luck out in its timing for withdrawing from the European Union, notwithstanding the growth-weakening effects that Brexit will surely have. 
Crucially, key indicators for China are looking good, too, particularly in terms of long-term growth in services and domestic consumption. 
I continue to believe that these two factors will prove immensely consequential not just for China, but for the rest of the world as well. 
Many countries want to export more than just commodities and manufacturing inputs to China, and companies around the world are jockeying for access to China’s massive domestic market. 
All told, forecasts projecting global GDP growth of 4% or more for 2018 seem credible. 
I would not be surprised to see sell-side forecasters lifting their numbers even further in the next two months. 
The International Monetary Fund almost certainly will at its annual spring meeting, if not sooner. 
So, what’s not to like in the global economic picture for 2018? 
For starters, as a veteran of financial markets, I am usually wary of a strong consensus. 
While many oft-cited concerns in 2017 turned out to be unwarranted, that doesn’t mean economic risks have disappeared. 
In contrast to a year ago, people are increasingly acknowledging that the global economy is stronger than they had thought. 
But if growth continues to accelerate, the US Federal Reserve might end up hiking interest rates more than markets anticipated. 
And the other major central banks, particularly the People’s Bank of China, the European Central Bank, and the Bank of Japan, might reverse their exceptionally loose monetary policies. 
To be sure, if the global economy is truly returning to relatively high and stable growth, monetary-policy tightening need not be harmful – and may even be less harmful than waiting for stronger evidence of inflation to emerge. 
Nevertheless, the world’s major economies have enjoyed remarkably generous monetary policies for a decade – and for far longer in Japan’s case. 
At the end of the day, no one really knows what the consequences of higher interest rates will be. 
For my part, I suspect that productivity growth will accelerate in a number of places, which would justify monetary-policy adjustments and make rising interest rates more tolerable. 
But that is just a hunch, based on my reading of tentative wage and productivity data in the UK and the US, among other places. 
One final concern is that, while not having gone full circle, the global mood has shifted from fear about political risks to obliviousness, even though many such risks still loom large. 
The potential fallout from poor US leadership in the Middle East and on the Korean Peninsula cannot be ignored; nor can the long-term challenges still confronting Europe. 
I have long believed that, at least for financial investors, it is better for everyone to be worried about everything than for a small minority to be worried on everyone else’s behalf. 
Still, and more important, as long as financial conditions don’t tighten excessively as a result of today’s cyclical strengthening, global economic performance for the rest of this decade could end up being more robust than anyone would have imagined just a few years ago. 

An Unstable Economic Order? 
LAGUNA BEACH – The retreat of the advanced economies from the global economy – and, in the case of the United Kingdom, from regional trading arrangements – has received a lot of attention lately. 
At a time when the global economy’s underlying structures are under strain, this could have far-reaching consequences. 
Whether by choice or necessity, the vast majority of the world’s economies are part of a multilateral system that gives their counterparts in the advanced world – especially the United States and Europe – enormous privileges. 
Three stand out. 
First, because they issue the world’s main reserve currencies, the advanced economies get to exchange bits of paper that they printed for goods and services produced by others. 
Second, for most global investors, these economies’ bonds are a quasi-automatic component of portfolio allocations, so their governments’ budget deficits are financed in part by other countries’ savings. 
The advanced economies’ final key advantage is voting power and representation. 
They command either veto power or a blocking minority in the Bretton Woods institutions (the International Monetary Fund and the World Bank), which gives them a disproportionate influence on the rules and practices that govern the international economic and monetary system. 
And, given their historical dominance of these organizations, their nationals are de facto assured the top positions. 
These privileges don’t come for free – at least they shouldn’t. 
In exchange, the advanced economies are supposed to fulfill certain responsibilities that help ensure the system’s functioning and stability. 
But recent developments have cast doubts on whether the advanced economies are able to hold up their end of this bargain. 
Perhaps the most obvious example is the 2008 global financial crisis. 
The result of excessive risk-taking and lax regulation in the advanced economies, the financial system’s near-meltdown disrupted global trade, threw millions into unemployment, and almost tipped the world into a multi-year depression. 
But there have been other lapses, too. 
For example, political obstacles to comprehensive economic policymaking in many advanced economies have undermined the implementation of structural reforms and responsive fiscal policies in recent years, holding back business investment, undermining productivity growth, worsening inequality, and threatening future potential growth. 
Such economic lapses have contributed to the emergence of anti-establishment political movements that are looking to change – or are already changing – long-established cross-border trade relations, including those within the European Union and the North American Free Trade Agreement (NAFTA). 
Meanwhile, a prolonged and excessive reliance on monetary policy, including direct central-bank involvement in market activities, has distorted asset prices and contributed to resource misallocation. 
And the advanced economies – particularly Europe – have shown little appetite for reforming outdated elements of governance and representation at the international financial institutions, despite major changes in the global economy. 
The result of all this is a multilateral system that is less effective, less collaborative, less trusted, and more vulnerable to ad hoc tinkering. 
Against this background, it should not be surprising that globalization and regionalization no longer command the degree of support they once did – or that some rising political movements on both sides of the Atlantic are condemning both concepts to win more support for their own causes. 
It is not yet clear whether this is a temporary and reversible phenomenon or the beginning of a protracted challenge to the functioning of the global economy. 
What is clear is that it is affecting two important relationships. 
The first is the relationship between small and large economies. 
For a long time, small, well-managed, and open economies were the leading beneficiaries of the Bretton Woods system and, more generally, of multilateralism. 
Their size not only made them crave access to outside markets; it also made other market actors more willing to integrate them into regional pacts, owing to their limited displacement potential. 
Membership in effective international institutions brought these countries into consequential global policy discussions, while their own capabilities allowed them to exploit opportunities in cross-border production and consumption chains. 
But, at a time of surging nationalism, these small and open economies, however well managed, are likely to suffer. 
Their trading relationships are less stable; the trade pacts on which they depend are vulnerable; and their participation in global policy discussions is less assured. 
The second relationship is that between the Bretton Woods institutions and parallel institutional arrangements. 
For example, while they pale in significance to, say, the World Bank, China-led institutions have proved appealing to a growing number of countries; most US allies have joined the Asian Infrastructure Investment Bank, despite American opposition. 
Similarly, bilateral payment agreements – which, not long ago, most countries would have opposed via the IMF, owing to their inconsistency with multilateralism – are proliferating. 
The concern is that these alternative approaches could undermine, rather than reinforce, a predictable and beneficial rules-based system of cross-border interactions. 
The Bretton Woods organizations, instituted after World War II to maintain stability, risk losing their influence, and the countries with the clout to bolster them seem unwilling at this stage to press ahead boldly with the needed reforms. 
If these tendencies continue, developing countries will probably suffer the most; but they won’t be alone. 
In the short term, the world economy would face slower economic growth and the risk of greater financial instability. 
In the longer term, it would confront the threat of systemic fragmentation and proliferating trade wars. 

Out of Ammunition to Combat Recession? 
STANFORD – Economic forecasts for 2017 project continued frailty in the global economy, and subpar growth for most countries and regions. 
Obvious economic problems include Europe’s weak banks, China’s distorted property market, political uncertainty in the West, historically high private and public debt – 225% of GDP, according to the International Monetary Fund – and the reluctance of heavily indebted Greece and Portugal to comply with IMF programs. 
Additional global economic risks, such as a major oil-market disruption that could drive prices up, are not as obvious, and thus receive less attention. 
Economists call such events “shocks” precisely because they come unexpectedly and can have far-reaching consequences. 
Unprecedented long-term monetary stimulus and massive spikes in public-debt burdens have left governments poorly equipped to manage the next economic downturn when – not if – it arrives. 
The next recession probably will not be as bad as the last one, but advanced economies will be far better prepared for it if they undergo gradual monetary-policy normalization and fiscal consolidation in the meantime. 
With respect to monetary policy, the United States’ unemployment rate, at around 5%, is close to what most economists consider full employment, and the Federal Reserve is widely expected to raise its target interest rate again in December. 
But the Fed is moving at a very slow pace. 
The European Central Bank will likely extend its bond-purchasing program; but it has reason to question the results of its quantitative-easing policy, given that eurozone unemployment still averages around 10%, indicating a sizeable output gap. 
Meanwhile, the Japanese economy continues to limp along, with the Bank of Japan now “managing the yield curve” in yet another attempt to raise inflation and growth from their current low levels. 
In terms of fiscal policy, most advanced economies’ public finances are suffering because policymakers have failed to implement sufficient supply-side structural reforms to control public-pension growth, reform growth-inhibiting taxes, and liberalize labor markets. 
These fiscal-policy failures have put too much of the burden on central banks, even though growth would more likely accelerate with productivity-enhancing supply-side measures. 
Lately, the economists who are most influential with left-leaning politicians seem hopeful that growth, employment, and incomes will rise if policymakers embrace massive new deficit-financed spending to create demand for goods and services. 
They argue that with borrowing costs so low, deficit spending is virtually free, and we need not worry about high debt levels. 
But this argument ignores the typically large gap between what economists devise and what politicians promise, and what public-spending programs actually deliver. 
As ECB President Mario Draghi has put it, “There aren’t many public investments with a high rate of return.” 
Governments should certainly cut taxes and fund initiatives that pass rigorous cost-benefit tests; but broad new spending programs usually do not yield a significant or immediate economic boost. 
For starters, spending generally occurs well into the future, when economic conditions are projected to be better. 
As President Barack Obama, referring to his signature 2009 stimulus bill, eventually admitted, “the shovels weren’t ready.” 
Similarly, Japan has attempted government spending stimulus for decades, with little to show for it in terms of overall economic growth. 
To be sure, large deficits can be benign or even desirable during recessions and wars, or when used to finance productive public investments; and in a deep, long-lasting downturn, with interest rates at or near zero, a well-timed, sensible fiscal response can theoretically help in the short term. 
But studies show that the multiplier effect of government spending – when it may increase GDP by more than the expenditure – shrinks rapidly after a few quarters, and then turns negative. 
In fact, the multiplier effect can even be negative during economic expansions when central banks maintain zero-interest rates and households expect taxes to rise when interest rates do. 
Because new government purchases can devolve into counterproductive political boondoggles that spur little economic growth, another proposal one often hears is to expand government transfer payments. 
Leaving aside the fact that transfer payments are already fiscally unsustainable in most countries (because they were adopted and expanded under better economic and demographic conditions), could they lift the economy? 
A recent study addresses this very question. 
According to former Obama administration Chief Economist Christina Romer and David Romer of the University of California, Berkeley, even permanent transfer-payment increases provide stimulus for only a few months, and the effect does not spread to employment. 
The study concludes that the benefits from transfers are “much less persistent, and much smaller overall, than those of tax changes.” 
In economies where stimulus programs are carefully vetted and can be implemented quickly, any temporary government spending should be coupled with gradual fiscal consolidation, to minimize economic risk and long-term costs. 
As history and theory indicate, this fiscal consolidation should happen through reduced future spending growth, especially on transfer payments. 
Economic policymakers should heed this lesson so that they can gradually re-arm themselves; otherwise, they could be left with no firepower when they most need it. 

The West’s Broken Promises on Education Aid 
NEW YORK – The Global Partnership for Education, a worthy and capable initiative to promote education in 65 low-income countries, is having what the jargon of development assistance calls a “replenishment round,” meaning that it is asking donor governments to refill its coffers. 
Yet the fact that the GPE is begging for mere crumbs – a mere $1 billion per year – exposes the charade of Western governments’ commitment to the global Education for All agenda. 
The United States and the European Union have never cared that much about that agenda. 
When it comes to disease, they have at times been willing to invest to slow or stop epidemics like AIDS, malaria, and Ebola, both to save lives and to prevent the diseases from coming to their own countries. 
But when it comes to education, many countries in the West are more interested in building walls and detention camps than schools. 
The GPE does excellent work promoting primary education around the world. 
Donor countries, all of which long ago signed on to Education for All, should be clamoring to help one of the world’s most effective organizations to achieve that goal. 
Yet generous donors are few and far between. 
This reality extends back to imperial times. 
When most of Africa and much of Asia were under European rule, the colonizers invested little in basic education. 
As late as 1950, according to United Nations data, illiteracy was pervasive in Europe’s African and Asian colonies. 
At the time of independence from Britain, India’s illiteracy rate stood at 80-85%, roughly the same as Indonesia’s illiteracy rate at the time of independence from the Netherlands. 
In French West Africa, the illiteracy rate in 1950 stood at 95-99%. 
After independence, African and Asian countries pursued massive and largely successful initiatives to raise basic education and literacy. 
Yet, far from seizing this opportunity to make up for lost time, Europe and the US have provided consistently meager assistance for primary and secondary education, even as they have made high-profile commitments such as Education for All and Sustainable Development Goal 4, which calls for universal access to pre-primary through secondary school. 
Consider the grim data on development aid for education, which has stagnated for years – and actually declined between 2010 and 2015. 
According to the most recent OECD data, total donor aid for primary and secondary education in Africa amounted to just $1.3 billion in 2016. 
To put that figure in perspective, the US Pentagon budget is roughly $2 billion per day. 
With around 420 million African kids of school age, total aid amounted to roughly $3 per child per year. 
It’s not as if Western governments don’t know that far more is needed. 
Several detailed recent calculations provide credible estimates of how much external financing developing countries will need to achieve SDG 4. 
A UNESCO study puts the total at $39.5 billion per year. 
A report by the International Commission on Financing Education Opportunity, led by former UK Prime Minister Gordon Brown, similarly put developing countries’ external financing needs at tens of billions of dollars per year. 
Here is the reason why aid is needed. 
A year of education in Africa requires at least $300 per student. 
(Note that the rich countries spend several thousand dollars per student per year.) 
With Africa’s school-age population accounting for roughly one-third of the total, the per capita financing requirement is about $100. 
Yet for a typical African country, that’s about 10% of per capita national income – far more than the education budget can cover. 
External aid can and should cover the financing gap so that all children can attend school. 
That’s not happening. 
Annual spending per school-aged child in Sub-Saharan Africa is roughly one-third of the minimum needed. 
As a result, most kids don’t come anywhere close to finishing secondary school. 
They are forced to drop out early, because there are no openings in public schools and tuition for private school is far too high for most families. 
Girls are especially likely to leave school early, though parents know that all of their children need and deserve a quality education. 
Without the skills that a secondary education provides, the children who leave school early are condemned to poverty. 
Many eventually try to migrate to Europe in desperate search of a livelihood. 
Some drown on the way; others are caught by European patrols and returned to Africa. 
So now comes the GPE’s replenishment round, scheduled for early February in Senegal. 
The GPE should be receiving at least $10 billion a year (about four days’ military spending by the NATO countries) to put Africa on a path toward universal secondary education. 
Instead, the GPE is reportedly still begging donors for less than $1 billion per year to cover GPE programs all over the world. 
Instead of actually solving the education crisis, rich-country leaders go from speech to speech, meeting to meeting, proclaiming their ardent love of education for all. 
Across Africa, political, religious, and civil-society leaders are doing what they can. 
Ghana has recently announced free upper-secondary education for all, setting the pace for the continent. 
As African countries struggle to fund their ambitious commitments, new partners, including private companies and high-net-worth individuals, should step forward to help them. 
Traditional donors, for their part, have decades of lost time to make up for. 
The quest for education will not be stopped, but history will judge harshly those who turn their backs on children in need. 

A Networked Solution to Education Reform 
WASHINGTON, DC – Around the world, some 250 million children are unable to attend school, and many who do have access to a classroom are not learning the skills they need to succeed in life. 
And, despite a growing consensus about the systemic nature of the challenges affecting education, there is less agreement about how to address those systemic challenges. 
Yet 2018 is shaping up to be a promising year for global efforts to improve educational access and quality. 
One reason is the emergence of so-called peer action networks, which facilitate knowledge-sharing globally and encourage continuous improvement locally. 
Such networks, if organized properly, could offer a partial solution to the systemic challenges affecting education. 
There are numerous peer groups tackling some of the planet’s most difficult problems, but two that are associated with our organizations are worth highlighting. 
One is the Joint Learning Network for Universal Health Coverage (JLN), a community of practitioners and policymakers from 30 countries supported by Results for Development and other development partners. 
The other is the Asia Society’s Global Cities Education Network (GCEN), which facilitates improvements in urban education systems throughout North America and Asia. 
Each of these international peer networks has produced local results. 
For example, in 2016, Denver Public Schools in Colorado – a GCEN member – created the CareerConnect program, which provides workplace-based learning opportunities for students. 
The program draws on lessons from vocational education systems in Hong Kong, Melbourne, and Singapore – all GCEN member cities – as well as Switzerland, to help graduates prepare for life after high school. 
Similarly, the JLN has made significant progress helping developing countries move toward universal health coverage. 
Network support has enabled members to navigate technical roadblocks and secure political support at home. 
Adapting the JLN model to support officials of national education ministries could produce comparable gains in education in many countries. 
Both of these networks offer a global platform for local practitioners to devise solutions and drive innovation. 
And both are organized around five principles that we believe successful peer groups – in education or any sector – should strive to incorporate into their own work. 
First, networks bring together leaders who are facing similar issues in varying contexts. 
International peer action networks are most effective when they are cross-cultural; we have found that connecting disparate groups that are working toward similar goals often produces unexpected solutions that are more robust. 
Second, the “peer” component of these networks is strongly emphasized. 
Members are equally empowered to set priorities and contribute to discussions. 
Networked learning is most successful when participants feel a sense of ownership with respect to outcomes. 
Third, membership includes those with the authority and the ability to influence change. 
For example, many challenges at the national or city level in education planning require both political and technical solutions. 
For a network to be effective, policymakers and practitioners must work in concert to find solutions to shared challenges. 
Fourth, the JLN and the GCEN are committed to measuring collective and individual progress. 
While gauging success in education can be difficult, especially across contexts, peer action networks must be oriented toward achieving results, and that means measuring their effectiveness. 
Moreover, accountability metrics should be derived from systems that members are already using at home. 
Finally, these networks strive to be sustainable. 
To drive large-scale and lasting change through a network in any sector, but especially in global education, requires consistent vision, staffing, and financial resources. 
Peer group participants cannot simultaneously work as policymakers or practitioners and collaboratively run a network organization. 
Budgeting for central teams to manage the technical support to members and operations of the network is critical to success. 
Unfortunately, very little education funding is currently set aside for investments in new learning networks. 
Increasing investment in peer action networks could help to bolster leadership and implementation capacity – critical to expand learning opportunities around the world, a key objective of the United Nations Sustainable Development Goals. 
There are no easy solutions to providing high-quality education to every child on the planet. 
However, as the growth in peer action networks demonstrates, global education leaders are not in this struggle alone. 
When like-minded policymakers and practitioners share ideas and collaborate on solutions, the world’s educational challenges become a little less daunting. 

Time for a Global Financial Makeover 
NEW YORK – In 2015, United Nations member states came together and committed to achieving a comprehensive and universal set of 17 Sustainable Development Goals (SDGs) spanning all dimensions of economic and social development. 
Investment will be indispensable to achieving the SDGs, which aim to eliminate poverty, end hunger, combat climate change, build resilient infrastructure, and promote inclusive and sustainable economic growth. 
Yet, three years on, we still have not done nearly enough to leverage our financial systems in pursuit of the SDGs. 
The UN, in coordination with almost 60 agencies and international institutions, recently published an assessment of the world’s progress toward changing financing, policies, and regulations to achieve the SDGs. 
It finds that, despite positive momentum on sustainable investment, the goals will not be met unless we shift the entire financial system toward long-term investment horizons, and make sustainability a central concern. 
Without a long-term perspective, certain risks, especially those associated with climate change, will not be priced into private investment decisions. 
Global financial flows are vast, yet the quality of investment matters. 
Currently, short-term investment patterns are driving capital-market and exchange-rate volatility, and significantly raising the costs and risks of sustainable investment, particularly for developing countries. 
If we create incentives to steer the flow of financing toward long-term infrastructure projects like bridges, roads, and water and sewage systems, we would be making a major contribution to both development and stability. 
And those investment projects must be more environmentally and socially sustainable. 
Because today’s investments, particularly in energy systems, will lock in development paths for decades to come, more must be done to ensure that investments now, and in the future, do not undermine our efforts to address climate change. 
Moreover, as with all economic policies, gender equality needs to become a central consideration. 
Transforming finance will not be easy. 
Today’s capital markets are highly oriented toward short-termism, as evidenced by capital-flow volatility and the short holding period of stocks in some developed markets, which has fallen from an average of eight years in the 1960s to eight months today. 
And while long-term institutional investors hold around $80 trillion in assets, with about half of these representing long-term liabilities, nearly 75% are held in liquid instruments, whereas just 3% are in infrastructure. 
The same tendency is prevalent in the real economy. 
In 2016, S&P 500 companies spent more than 100% of their earnings on dividends and share buybacks, which boost stock prices in the short run, rather than raising long-term value through investment. 
A February 2017 McKinsey Global Institute survey found that 87% of corporate executives and directors feel “pressured to demonstrate strong financial performance within two years or less,” while 65% say that “short-term pressure has increased over the past five years.” 
Moreover, 55% said they would delay investments in projects with positive returns in order to hit quarterly balance-sheet targets. 
Shifting investors from short-termism toward long-term thinking is a prerequisite for achieving all of our economic, social, and environmental goals. 
But the private sector will not make this transition by itself. 
Policymakers must step in and provide leadership. 
Markets do not operate fairly and in the public interest without well-considered and well-enforced rules set by governments. 
Aside from public investment, this is one of the state’s most essential functions. 
Specifically, transforming global finance will require changes in prudential regulations, capital requirements, investment-firm culture, and executive compensation, which will require new and more appropriate longer-term benchmarks. 
Reforms to accounting practices, especially for illiquid investments, will also be necessary, for example, to reduce the short-term bias introduced by mark-to-market accounting. 
And institutional investors must adopt a broader interpretation of fiduciary duty, which should focus on the long term and incorporate all factors that have a material impact on returns, be they financial, environmental, social, or governance-related. 
With 12 years to go, it may seem like the world has plenty of time to make progress toward the SDGs. 
But the UN’s past experiences with goal-oriented initiatives show that it is important to take decisive action early on in the process. 
Making matters worse, escalating geopolitical and trade tensions threaten to set us back, rather than take us forward. 
Such disagreements must not stand in the way of reaching the SDGs and building a sustainable future. 
Above all, that future needs to be financed. 
Though many public and private institutions at various levels of international finance have already started to change, the overall financial system has yet to experience the sort of transformation that is needed. 
We have all agreed on what we need to do; now we must do it. 

Global Finance and Global Warming 
NEW DELHI/LONDON – Since 2008, when the global financial crisis nearly brought down the world economy, financial reform has been among the top items on policymakers’ agendas. 
But, as leaders move from fixing the problems of the past to positioning the financial system for the future, they must also grapple with new threats to its stability, particularly those stemming from climate change. 
That is why a growing number of governments, regulators, standard-setters, and market actors are starting to incorporate rules concerning sustainability into the financial system. 
In Brazil, the central bank views the integration of environmental and social factors into risk management as a way to strengthen resilience. 
And in countries like Singapore and South Africa, companies listed on the stock market are obligated to disclose their environmental and social performance, a requirement that investors and regulators increasingly view as essential to the efficient functioning of financial markets. 
Initiatives like these might once have been regarded as part of a peripheral “green” niche. 
Today, they are considered central to the operation of the financial system. 
In Bangladesh, the central bank’s efforts to support economic development include low-cost refinancing for banks lending to projects that meet goals for renewables, energy efficiency, or waste management. 
In the United Kingdom, the Bank of England is currently evaluating the implications of climate change for the insurance sector as part of its core mandate to oversee the safety and soundness of financial institutions. 
In China, annual investment in green industry could reach $320 billion in the next five years, with the government able to provide only 10-15% of the total. 
In order to prevent a funding shortfall, the People’s Bank of China has recently produced a report with the United Nations Environment Programme (UNEP) setting out a comprehensive set of recommendations for establishing China’s “green financial system.” 
In India, the Federation of Indian Chambers of Commerce and Industry has established a new “green bond” working group to explore how the country’s debt markets can respond to the challenge of financing smart infrastructure. 
And recent regulatory changes hold out considerable potential for listed investment trusts to deploy capital for clean energy. 
So far, such measures affect only a small fraction of the $305 trillion in assets held by banks, investors, financial institutions, and individuals in the global financial system. 
But they are set to be applied more broadly as financiers and regulators alike recognize the full consequences of environmental dislocation. 
Those consequences already are severe. 
In 116 of 140 countries assessed by UNEP, the stock of natural capital that underpins value creation is in decline. 
The human and economic costs of continued high-carbon growth include severe health impacts, growing disruption to infrastructure, and water and food security, as well as increasing market volatility, most notably in developing countries. 
This damage will become worse, with risks becoming unmanageable if emissions of greenhouse gases are not reduced to net zero levels between 2055 and 2070. 
As the threat from climate change becomes more evident, financing the response to its impact will become increasingly important. 
Developed countries have committed to mobilize $100 billion in annual financial flows to developing countries by 2020, but much more is needed. 
Above all, it is essential to place the financing challenge posed by climate change within the broader context of the green economy and sustainable development. 
The task for those charged with governing the financial system is to enable the orderly transition from high- to low-carbon investments and from vulnerable to resilient assets. 
According to the New Climate Economy initiative, $89 trillion will be spent on global infrastructure investment by 2030 – with an additional $4.1 trillion needed to make it low-carbon and resilient. 
To mobilize the required capital, policymakers will need to harness the power of the financial system. 
The scope of risk management will need to be expanded, so that long-term sustainability and risks from climate change are included in prudential rules for banking, insurance, and investment. 
New “green banks” can help to bring in funding from debt and equity markets. 
Transparency will have to be improved, through better corporate reporting and enhanced disclosure from financial institutions. 
And financial professionals’ skills and incentives will have to be retooled and revised to reflect these new priorities. 
Promising avenues for international cooperation are now opening up. 
For example, the G-20 finance ministers and central bank governors have just asked the Financial Stability Board to explore how the financial sector could address climate issues. 
Actions such as these will not only strengthen climate security; they will also contribute to a more efficient, effective, and resilient financial system. 

Global Finance’s Supply-Chain Revolution 
HONG KONG – In March 2011, the catastrophic earthquake, tsunami, and nuclear disaster that hit Japan halted production of key components on which many global supply chains depend. 
The sudden disruption of these essential materials from the production process forced a reassessment of how these supply chains function. 
But such vulnerabilities are not confined to the manufacturing sector. 
The finance industry, too, has suffered its own near “supply chain” meltdown in recent times. 
The failure of Lehman Brothers in 2008 not only roiled global financial markets, but also brought global trade practically to a standstill as wholesale banks refused to fund each other for fear of counterparty failure. 
The simple banking system of the past, one based on retail savings being concentrated in order to fund the credit needs of borrowers, had evolved into a highly complex – and global – supply chain with knock-on risks of disruption comparable to those seen in Japan last spring. 
Financial supply chains and those in the manufacturing sector share three key features – architecture, feedback mechanisms, and processes – and their robustness and efficiency depend upon how these components interact. 
In today’s financial architecture, as with other supply chains, interdependent networks tend to concentrate in powerful hubs. 
For example, just two financial centers, London and New York, dominate international finance, and only 22 players conduct 90% of all global foreign-exchange trading. 
Such concentration is very efficient, but it also contributes to greater systemic risks, because, if the leading hubs fail, the whole system can collapse. 
Open feedback mechanisms ensure a supply chain’s ability to respond to a changing environment, but, in the case of financial supply chains, feedback mechanisms can amplify shocks until the whole system blows up. 
The Lehman Brothers collapse triggered just such an explosion, with the financial system saved only by government bailouts. 
Finally, the processes within supply chains, and the feedback interactions between them, can make the system greater or smaller than the sum of its parts. 
Since a complex network comprises linkages between many sub-networks, individual inefficiencies or weaknesses can have an impact on the viability of the whole. 
Like manufacturing supply chains in the wake of the Japanese disruption, financial supply chains face formidable pressures to re-engineer and adapt as the global economic balance shifts towards emerging markets. 
As that happens, billions of consumers will enter these countries’ middle classes, new social networks will evolve, and climate change will become a growing factor in global commerce. 
In addition, major regulatory reforms will impose new and higher costs on the financial sector. 
Banks and other institutions are also under pressure to devise new financial products that can help the real sector to manage more complex risks and enable investment in areas such as green technology and infrastructure for developing economies. 
Moreover, global financial stability now depends upon greater cooperation at the international level, with tighter enforcement of rules at the national level. 
It is also clear that emerging markets are searching for alternative growth models that are green and sustainable. 
Their financial sectors will have to operate very differently from the current model, which is driven by consumption. 
In a world in which both consumption and finance must grow more slowly to cope with global resource and environmental constraints, what role can finance play in reducing addictive consumption, funded by unsustainable leverage? 
And, given that financial institutions will have to monitor and manage risk in a radically different manner, both for themselves and their customers, what is the role of distribution in a world where consumption, savings, and investment will accelerate in volatility? 
Financial “production” is currently a top-down process. 
Instruments are designed in such a way that their sales generate more profits for financial engineers than for end users. 
But the rise of interactive social networking has made financial innovation more bottom-up. 
Millions of bank customers using mobile phones can provide immediate feedback on which products and services they like or dislike. 
In the future, client-service and transaction-management systems will receive more input from customers more frequently, so that product design is shaped interactively. 
The current strategy in the financial sector drives excessive competition by increasing market share at rivals’ expense, often breaking trust with customers for the sake of short-term gains. 
Yet the financial sector has, in previous eras, proven that it can operate as a public good by providing trustworthy, efficient services. 
The winning financial supply chains of the future will instill confidence that they offer safe, stable, and efficient services to the most clients. 
Innovation in the last century focused on processes, products, and services. 
Today, the financial sector needs innovation of a higher order, involving business models, strategy, and management approaches that restore trust in finance. 
Just as Steve Jobs of Apple transformed the computer industry through lifestyle products and highly reliable, user-friendly, and “cool” services, financial institutions will have to introduce new value chains that create confidence by adapting to the growing needs of new markets. 
Given such profound changes, financial leaders should think about how to orchestrate a new financial supply chain – the “killer app” for our still new century. 

2008 Revisited? 
NEW YORK – The question I am asked most often nowadays is this: Are we back to 2008 and another global financial crisis and recession? 
My answer is a straightforward no, but that the recent episode of global financial market turmoil is likely to be more serious than any period of volatility and risk-off behavior since 2009. 
This is because there are now at least seven sources of global tail risk, as opposed to the single factors – the eurozone crisis, the Federal Reserve “taper tantrum,” a possible Greek exit from the eurozone, and a hard economic landing in China – that have fueled volatility in recent years. 
First, worries about a hard landing in China and its likely impact on the stock market and the value of the renminbi have returned with a vengeance. 
While China is more likely to have a bumpy landing than a hard one, investors’ concerns have yet to be laid to rest, owing to the ongoing growth slowdown and continued capital flight. 
Second, emerging markets are in serious trouble. 
They face global headwinds (China’s slowdown, the end of the commodity super cycle, the Fed’s exit from zero policy rates). 
Many are running macro imbalances, such as twin current account and fiscal deficits, and confront rising inflation and slowing growth. 
Most have not implemented structural reforms to boost sagging potential growth. 
And currency weakness increases the real value of trillions of dollars of debt built up in the last decade. 
Third, the Fed probably erred in exiting its zero-interest-rate policy in December. 
Weaker growth, lower inflation (owing to a further decline in oil prices), and tighter financial conditions (via a stronger dollar, a corrected stock market, and wider credit spreads) now threaten US growth and inflation expectations. 
Fourth, many simmering geopolitical risks are coming to a boil. 
Perhaps the most immediate source of uncertainty is the prospect of a long-term cold war – punctuated by proxy conflicts – between the Middle East’s regional powers, particularly Sunni Saudi Arabia and Shia Iran. 
Fifth, the decline in oil prices is triggering falls in US and global equities and spikes in credit spreads. 
This may now signal weak global demand – rather than rising supply – as growth in China, emerging markets, and the US slows. 
Weak oil prices also damage US energy producers, which comprise a large share of the US stock market, and impose credit losses and potential defaults on net energy exporting economies, their sovereigns, state-owned enterprises, and energy firms. 
As regulations restrict market makers from providing liquidity and absorbing market volatility, every fundamental shock becomes more severe in terms of risk-asset price corrections. 
Sixth, global banks are challenged by lower returns, owing to the new regulations put in place since 2008, the rise of financial technology that threatens to disrupt their already-challenged business models, the growing use of negative policy rates, rising credit losses on bad assets (energy, commodities, emerging markets, fragile European corporate borrowers), and the movement in Europe to “bail in” banks’ creditors, rather than bail them out with now-restricted state aid. 
Finally, the European Union and the eurozone could be ground zero of global financial turmoil this year. 
European banks are challenged. 
The migration crisis could lead to the end of the Schengen Agreement, and (together with other domestic troubles) to the end of German Chancellor Angela Merkel’s government. 
Moreover, Britain’s exit from the EU is becoming more likely. 
With the Greek government and its creditors once again on a collision course, the risk of Greece’s exit may return. 
Populist parties of the right and the left are gaining strength throughout Europe. 
Thus, Europe increasingly risks disintegration. 
To top it all off, its neighborhood is unsafe, with wars raging not only in the Middle East, but also – despite repeated attempts by the EU to broker peace – in Ukraine, while Russia is becoming more aggressive on Europe’s borders, from the Baltics to the Balkans. 
In the past, tail risks were more occasional, growth scares turned out to be just that, and the policy response was strong and effective, thereby keeping risk-off episodes brief and restoring asset prices to their previous highs (if not taking them even higher). 
Today, there are seven sources of potential global tail risk, and the global economy is moving from an anemic expansion (positive growth that accelerates) to a slowdown (positive growth that decelerates), which will lead to further reduction in the price of risky assets (equities, commodities, credit) worldwide. 
At the same time, the policies that stopped and reversed the doom loop between the real economy and risk assets are running out of steam. 
The policy mix is suboptimal, owing to excessive reliance on monetary rather than fiscal policy. 
Indeed, monetary policies are becoming increasingly unconventional, reflected in the move by several central banks to negative real policy rates; and such unconventional policies risk doing more harm than good as they hurt the profitability of banks and other financial firms. 
Two dismal months for financial markets may give way in March to a relief rally for assets such as global equities, as some key central banks (the People’s Bank of China, the European Central Bank, and the Bank of Japan) ease more, while others (the Fed and the Bank of England) will remain on hold for longer. 
But repeated eruptions from some of the seven sources of global tail risk will make the rest of this year – unlike the previous seven – a bad one for risky assets and anemic for global growth. 

The Global Financial System’s Weakened Defenses 
ZURICH – Eighty-five years ago this month, Credit-Anstalt, by far the largest bank in Austria, collapsed. 
By that July, banks in Egypt, Germany, Hungary, Latvia, Poland, Romania, and Turkey had experienced runs. 
A banking panic hit the United States in August, though the sources of that panic may have been domestic. 
In September, banks in the United Kingdom experienced large withdrawals. 
The parallels to the 2008 collapse of the US investment bank Lehman Brothers are strong – and crucial for understanding today’s financial risks. 
For starters, neither the collapse of Credit-Anstalt nor that of Lehman Brothers caused all of the global financial tumult that ensued. 
Those collapses and the subsequent problems were symptoms of the same disease: a weak banking system. 
In Austria in 1931, the problem was rooted in the breakup of the Austro-Hungarian Empire after World War I, hyperinflation in the early 1920s, and banks’ excessive exposure to the industrial sector. 
By the time Credit-Anstalt collapsed, the world had been in deep recession for two years, banking systems in a number of countries had become fragile, and tensions were easily transmitted across national borders, with the gold standard exacerbating financial vulnerability by constraining central banks’ ability to act. 
Similarly, in 2008, the entire financial system was overextended, owing to a combination of weak internal risk management and inadequate government regulation and supervision. 
Lehman Brothers was simply the weakest link in a long chain of brittle financial firms. 
Could a crisis like those triggered by the Credit-Anstalt and the Lehman Brothers collapse happen today? 
One is tempted to say no. 
After all, the global economy and the financial system appear to be on the mend; risk-taking in the private sector has been reduced; and huge, though burdensome, regulatory improvements have been undertaken. 
Taken together, these developments surely make for a stable financial system. 
The problem with this reasoning is that financial crises tend to reveal fault lines that were not visible before. 
Indeed, the financial sector manages the risks that it recognizes, not necessarily all the risks that it runs. 
And it is easy to overestimate the crisis-preventing power of the new regulatory environment, which is analogous to a new highway: It is technically safer than a country road, but it also attracts more cars that are traveling at much higher speeds, so traffic accidents continue. 
Unable to rule out a new crisis, how well are we equipped to cope with one? 
The short answer is: not very. 
In fact, if a financial crisis were to occur today, its consequences for the real economy might be even more severe than in the past. 
Of course, because central banks now recognize that their responsibilities extend beyond stabilizing prices to include the prevention and management of financial tensions, they would undoubtedly be quick to respond to any shock with a battery of market operations. 
But, in the event of a crisis, the tools available to central banks to prevent deflation and a collapse of the real economy are severely constrained, especially today. 
In the early twentieth century, central banks could all devalue their currencies against gold, thereby raising the price level and escaping debt deflation. 
And, indeed, nine countries, including the UK, did exactly that in 1931, with another eight countries, including the US, following suit over the next five years. 
Today, however, currency depreciation is a zero-sum game. 
Without the joint-depreciation option, central banks responded to the 2008 crisis with interest-rate cuts that were unprecedented in scope, size, and speed, as well as massive purchases of long-term securities (so-called quantitative easing, or QE). 
And those efforts were effective. 
But interest rates remain extremely low, and are even negative in some countries, and QE has been taken close to its limits, with public support for the policy waning. 
As a result, these tools’ ability to cushion an economy against further shocks is severely constrained. 
While forward guidance by central banks has also helped, it, too, is unlikely to be able to provide an effective buffer against a new shock. 
None of this is to say that another global financial crisis is necessarily imminent. 
On the contrary, economies worldwide are making progress in recovering from the 2008 disaster, and the US Federal Reserve’s tightening of policy last December signals that the global interest-rate cycle is moving into the next phase. 
This is good news. 
But the danger of another financial crisis should not be ruled out. 
Indeed, given that the capacity of central banks to cope with a financial shock will remain woefully limited for years to come, it should be taken very seriously. 
The risks of complacency are simply too great. 


What Role for Global Governance? 
WASHINGTON, DC – Can global governance solve most of our economic problems? 
Or does it too often promise more than it can deliver, and divert attention from more practical reforms that national governments should implement? 
In a recent commentary, Harvard University economist Dani Rodrik thoughtfully argues the latter. 
Is he right? 
To be sure, national policy has a more direct effect – good or bad – on a country’s citizens. 
But we cannot ignore the global effects of bad national policies, the most obvious examples noted by Rodrik being greenhouse-gas emissions and infectious diseases. 
People in the “country of origin” may pay a price, but so will the rest of us. 
“Globalization” has been a catchword for decades, and the need for global governance has admittedly been exaggerated in recent years, especially by those on the center left. 
This has led to calls for new alternatives, such as “responsible nationalism” or “inter-governmental” – as opposed to supranational – decision-making in the European Union. 
Such proposals make for a healthy debate. 
For example, we should reevaluate the current system for deciding trade agreements, which have become more about regulatory and investment issues than about eliminating import tariffs or other import barriers. 
It is no surprise that even some free-trade supporters object to agreements that allow trade groups to insert language granting multinational corporations undue market power at the expense of consumer protection. 
Still, the push for stronger global governance in recent years has not happened in a vacuum. 
Countries have undoubtedly become more economically and socially interdependent, owing to trade, travel, and telecommunications, not to mention multinational corporate structures and international financial flows. 
Global intercourse is broader, faster, and more ubiquitous than ever before. 
Globalization may occasionally hit speed bumps, such as the current slowdown in world trade; but the underlying technological changes driving interconnectivity will only continue to bring people and countries closer together. 
Ultimately, this is for the best, because the major challenges we face today are global in nature. 
Efforts to mitigate the effects of climate change will require consistent global coordination. 
Even local initiatives, which are increasingly important for addressing the problem, must fit into a framework of converging global policies and obligations. 
Otherwise, people will not feel as though they are making a difference or contributing to a shared goal, and others will not feel pressure to do anything at all. 
Another global challenge is taxation, which requires international coordination to stanch rampant avoidance and evasion. 
The problem is not just individual “tax havens”; there is also a need to capture corporate profits that companies’ move internationally with complex devices such as “transfer pricing” and “tax-base shifting” to minimize their tax bill. 
Disparate tax rules among different countries have resulted in close to a zero-sum game for national governments, which are forced to pursue beggar-thy-neighbor policies to secure a bigger slice of a shrinking pie. 
Under the current system, countries have strong incentives to offer ever-greater tax advantages to companies operating within their borders, even though they stand just as strong a chance of being undercut by another country as companies shift their declared profits from one jurisdiction to another. 
In most cases, companies are not doing anything illegal by taking advantage of this fragmented system. 
But if countries are serious about reducing inequality and funding pensions and health care for their citizens, they will have to cooperate in global-governance efforts to prioritize fair taxation. 
Climate change and taxation are just two issues requiring global coordination, but the list goes on. 
The monetary policies of large reserve-currency central banks such as the United States Federal Reserve can have far-reaching spillover effects, as can self-destructive exchange-rate policies or regulations on cross-border financial flows. 
In most of these cases, the damage runs downstream from large countries to smaller countries; however, if enough small countries are affected, the aggregate damage can flow back to the larger economies themselves, as we’ve seen in the European debt crisis. 
Given the scale of these challenges, we have no choice but to cooperate internationally and strengthen global and regional institutions and frameworks such as the International Monetary Fund, the EU, and the G20, which will meet in Hangzhou, China, next month. 
But global governance is not an either/or proposition. 
When national or local policies are sufficient to address a problem, then they should be pursued. 
Indeed, the principle of subsidiarity – whereby decision-making should occur at the most local level possible – is crucial to flexible, functioning global governance. 
The presence of global-governance frameworks should never become an excuse for national or local inaction. 
Public policy is a multi-level and multi-channel effort with local, national, regional, and global dimensions. 
Ideally, policy debates should acknowledge this reality. 
We also must acknowledge the urgency of shoring up faith in global governance from another perspective. 
Across the US, Asia, Europe, and the Middle East, a resurgence of identity politics and xenophobic nationalism threatens to reprise the great tragedies of the twentieth century. 
Against this backdrop, stressing the existence and needs of a global community is necessary not only for economic reasons, but also to help ensure a peaceful world. 

The False Economic Promise of Global Governance 
CAMBRIDGE – Global governance is the mantra of our era’s elite. 
The surge in cross-border flows of goods, services, capital, and information produced by technological innovation and market liberalization has made the world’s countries too interconnected, their argument goes, for any country to be able to solve its economic problems on its own. 
We need global rules, global agreements, global institutions. 
This claim is so widely accepted today that challenging it may seem like arguing that the sun revolves around the earth. 
Yet what may be true for truly global problems such as climate change or health pandemics is not true when it comes to most economic issues. 
Contrary to what we often hear, the world economy is not a global commons. 
Global governance can do only limited good – and it occasionally does some damage. 
What makes, say, climate change a problem that requires global cooperation is that the planet has a single climate system. 
It makes no difference where greenhouse gases are emitted. 
So national restrictions on carbon emissions provide no or little benefit at home. 
By contrast, good economic policies – including openness – benefit the domestic economy first and foremost, and the price of bad economic policies is primarily paid domestically as well. 
Individual countries’ economic fortunes are determined largely by what happens at home rather than abroad. 
If economic openness is desirable, it is because such policies are in a country’s own self-interest – not because it helps others. 
Openness and other good policies that contribute to economic stability worldwide rely on self-interest, not on global spirit. 
Sometimes domestic economic advantage comes at the expense of other countries. 
This is the case of so-called beggar-thy-neighbor policies. 
The purest illustration occurs when a dominant supplier of a natural resource, such as oil, restricts supply on world markets to drive up world prices. 
The exporter’s gain is the rest of the world’s loss. 
A similar mechanism underpins “optimum tariffs,” whereby a large country manipulates its terms of trade by placing restrictions on its imports. 
In such instances, there is a clear argument for global rules that limit or prohibit the use of such policies. 
But the vast majority of the issues in world trade and finance that preoccupy policymakers are not of this kind. 
Consider, for example, Europe’s agricultural subsidies and ban on genetically modified organisms, the abuse of antidumping rules in the United States, or inadequate protection of investors’ rights in developing countries. 
These are essentially “beggar thyself” policies. 
Their economic costs are borne primarily at home, even though they may produce adverse effects for others as well. 
For example, economists generally agree that agricultural subsidies are inefficient and that the benefits to European farmers come at large costs to everyone else in Europe, in the form of high prices, high taxes, or both. 
Such policies are deployed not to extract advantages from other countries, but because other competing domestic objectives – distributional, administrative, or related to public health – dominate economy-wide motives. 
The same is true of poor banking regulations or macroeconomic policies that aggravate the business cycle and generate financial instability. 
As the 2008 global financial crisis showed, the implications beyond a country’s own borders can be momentous. 
But if US regulators fell asleep on the job, it was not because their economy benefited while everyone else paid the price. 
The US economy was among those that suffered most. 
Perhaps the biggest policy letdown of our day is the failure of governments in advanced democracies to address rising inequality. 
This, too, has its roots in domestic politics – financial and business elites’ grip on the policymaking process and the narratives they have spun about the limits of redistributive policies. 
To be sure, global tax havens are an example of beggar-thy-neighbor policies. 
But powerful countries such as the US and European Union members could have done much on their own to limit tax evasion – and the race to the bottom in corporate taxation – if they so desired. 
So the problems of our day have little to do with a lack of global cooperation. 
They are domestic in nature and cannot be fixed by rule making through international institutions, which are easily overwhelmed by the same vested interests that undermine domestic policy. 
Too often, global governance is another name for the pursuit of these interests’ global agenda, which is why it ends up mainly furthering globalization and harmonizing domestic economic policies. 
An alternative agenda for global governance would focus on improving how democracies function at home, without prejudging what the policy outputs ought to be. 
This would be a democracy-enhancing rather than globalization-enhancing model of global governance. 
What I have in mind is the creation of global norms and procedural requirements designed to enhance the quality of domestic policymaking. 
Global disciplines pertaining to transparency, broad representation, accountability, and use of scientific or economic evidence in domestic proceedings – without constraining the end result – are examples of such requirements. 
Global institutions already use disciplines of this type to some extent. 
For example, the World Trade Organization’s Agreement on Application of Sanitary and Phytosanitary Measures (the SPS Agreement) explicitly requires the use of scientific evidence when health concerns are at issue for imported goods. 
Procedural rules of this kind can be used much more extensively and to greater effect to improve domestic decision-making. 
Anti-dumping rules can also be improved by requiring that consumer and producer interests that would be adversely affected by import duties take part in domestic proceedings. 
Subsidy rules can be improved by requiring economic cost-benefit analyses that incorporate potential consequences for both static and dynamic efficiency. 
Problems rooted in failures of domestic deliberation can be solved only through improved democratic decision-making. 
Global governance can make only a very limited contribution here – and only if it focuses on enhancing domestic decision-making rather than constraining it. 
Otherwise, the goal of global governance embodies a yearning for technocratic solutions that override and undercut public deliberation. 

The Global Growth Funk 
NEW YORK – The International Monetary Fund and others have recently revised downward their forecasts for global growth – yet again. 
Little wonder: The world economy has few bright spots – and many that are dimming rapidly. 
Among advanced economies, the United States has just experienced two quarters of growth averaging 1%. 
Further monetary easing has boosted a cyclical recovery in the eurozone, though potential growth in most countries remains well below 1%. 
In Japan, “Abenomics” is running out of steam, with the economy slowing since mid-2015 and now close to recession. 
In the United Kingdom, uncertainty surrounding the June referendum on continued European Union membership is leading firms to keep hiring and capital spending on hold. 
And other advanced economies – such as Canada, Australia, Norway – face headwinds from low commodity prices. 
Things are not much better in most emerging economies. 
Among the five BRICS countries, two (Brazil and Russia) are in recession, one (South Africa) is barely growing, another (China) is experiencing a sharp structural slowdown, and India is doing well only because – in the words of its central bank governor, Raghuram Rajan – in the kingdom of the blind, the one-eyed man is king. 
Many other emerging markets have slowed since 2013 as well, owing to weak external conditions, economic fragility (stemming from loose monetary, fiscal, and credit policies in the good years), and, often, a move away from market-oriented reforms and toward variants of state capitalism. 
Worse, potential growth has also fallen in both advanced and emerging economies. 
For starters, high levels of private and public debt are constraining spending – especially growth-enhancing capital spending, which fell (as a share of GDP) after the global financial crisis and has not recovered to pre-crisis levels. 
That falloff in investment implies slower productivity growth, while aging populations in developed countries – and now in an increasing number of emerging markets (for example, China, Russia, and Korea) – reduce the labor input in production. 
The rise in income and wealth inequality exacerbates the global saving glut (which is the counterpart of the global investment slump). 
As income is redistributed from labor to capital, it flows from those who have a higher marginal propensity to spend (low- and middle-income households) to those who have a higher marginal propensity to save (high-income households and corporations). 
Moreover, a protracted cyclical slump can lead to lower trend growth. 
Economists call this “hysteresis”: Long-term unemployment erodes workers’ skills and human capital; and, because innovation is embedded in new capital goods, low investment leads to permanently lower productivity growth. 
Finally, with so many factors dragging down potential growth, structural reforms are needed to boost potential growth. 
But such reforms are occurring at suboptimal rates in both advanced and emerging economies, because all of the costs and dislocations are frontloaded, while the benefits occur over the medium and long term. 
This gives opponents of reform a political advantage. 
Meanwhile, actual growth remains below the diminished potential. 
A painful deleveraging process implies that private and public spending need to fall, and that savings must rise, to reduce high deficits and debts. 
This process started in the US after the housing bust, then spread to Europe, and is now ongoing in emerging markets that spent the last decade on a borrowing binge. 
At the same time, the policy mix has not been ideal. 
With most advanced economies pivoting too quickly to fiscal retrenchment, the burden of reviving growth was placed almost entirely on unconventional monetary policies, which have diminishing returns (if not counter-productive effects). 
Asymmetric adjustment between debtor and creditor economies has also undermined growth. 
The former, having overspent and under-saved, had to spend less and save more when markets forced them to do so, whereas the latter were not forced to spend more and save less. 
This exacerbated the global savings glut and global investment slump. 
Finally, hysteresis further weakened actual growth. 
A cyclical slump reduced potential growth, and the reduction in potential growth prospects led to further cyclical weakness, as spending declines when expectations are revised downward. 
There are no politically easy solutions to the global economy’s current quandary. 
Unsustainably high debt should be reduced in a rapid and orderly fashion, to avoid a long and protracted (often a decade or longer) deleveraging process. 
But orderly debt-reduction mechanisms are not available for sovereign countries and are politically difficult to implement within countries for households, firms, and financial institutions. 
Likewise, structural and market-oriented reforms are necessary to boost potential growth. 
But, given the timing of costs and benefits, such measures are especially unpopular if an economy is already in a slump. 
It will be no less difficult to leave behind unconventional monetary policies, as the US Federal Reserve recently suggested by signaling that it will normalize policy interest rates more slowly than expected. 
Meanwhile, fiscal policy – especially productive public investment that boosts both the demand and supply sides – remains hostage to high debts and misguided austerity, even in countries with the financial capacity to undertake a slower consolidation. 
Thus, for the time being, we are likely to remain in what the IMF calls the “new mediocre,” Larry Summers calls “secular stagnation,” and the Chinese call the “new normal.” 
But make no mistake: There is nothing normal or healthy about economic performance that is increasing inequality and, in many countries, leading to a populist backlash – both on the right and the left – against trade, globalization, migration, technological innovation, and market-oriented policies. 

Growing Out of Populism? 
CAMBRIDGE – After nine dreary years of downgrading their GDP forecasts, macroeconomic policymakers around the world are shaking their heads in disbelief: Despite a populist-propelled wave of political tumult, global growth is actually set to outperform expectations in 2017. 
It’s not just American exceptionalism. 
Although US growth is very strong, Europe has been outperforming expectations by more. 
There is even happy news for emerging markets, which are still bracing for US Federal Reserve interest-rate hikes but have gained a better backdrop against which to adjust. 
The broad story behind the global reflation is easy enough to understand. 
Deep, systemic financial crises lead to deep, prolonged recessions. 
As Carmen Reinhart and I predicted a decade ago (and as numerous other scholars have since corroborated using our data), periods of 6-8 years of very slow growth are not at all unusual in such circumstances. 
True, many problems remain, including weak banks in Europe, over-leveraged local governments in China, and needlessly complicated financial regulation in the United States. 
Nonetheless, the seeds of a sustained period of more solid growth have been planted. 
But will the populist tide surging across the advanced economies drown the accelerating recovery? 
Or will the recovery stifle leaders who confidently espouse seductively simple solutions to genuinely complex problems? 
With the International Monetary Fund/World Bank meetings coming up later this month in Washington, DC, leading central bankers and finance ministers will have ringside seats at Ground Zero. 
Who can doubt that US President Donald Trump will make a Twitter punching bag out of any of them who dares criticize his administration’s planned retreat from open trade and leadership in multilateral financial institutions? 
Before then, Trump will host Chinese President Xi Jinping at Mar-a-Lago, his “winter White House.” 
It is hard to overstate how much rides on the Sino-US relationship, and how damaging it would be if the two sides could not find a way to work together constructively. 
The Trump administration believes that it has the bargaining tools to recalibrate the relationship to America’s advantage, including a tariff on Chinese imports or even selectively defaulting on the more than $1 trillion the US owes to China. 
But a tariff would eventually be overturned by the World Trade Organization, and a default on US debt would be even more reckless. 
If Trump can persuade China to open up its economy more to US exports, and to help rein in North Korea, he will have achieved something. 
But if his plan is for the US to retreat unilaterally from global trade, the outcome is likely to hurt many US workers for the benefit of a few. 
The threat to globalism seems to have waned in Europe, with populist candidates having lost elections in Austria, the Netherlands, and now Germany. 
But a populist turn in upcoming elections in either France or Italy could still tear apart the European Union, causing massive collateral damage to the rest of the world. 
French Presidential candidate Marine Le Pen wants to kill off the EU because, she says, “the people of Europe do not want it anymore.” 
And while opinion polls have the pro-EU Emmanuel Macron beating Le Pen decisively in the election’s second-round runoff on May 7, it is hard to be confident in the outcome of a two-person race, especially given Russian President Vladimir Putin’s support for Le Pen. 
Given the unpredictability of an angry electorate, and Russia’s proven capacity to manipulate news and social media, it would be folly to think that Macron is a lock. 
Italy’s election is not for another year, but the situation is even worse. 
There, populist candidate Beppe Grillo is leading polls and is expected to pull in about a third of the popular vote. 
Like Le Pen, Grillo wants to pull the plug on the euro. 
And, while it is hard to imagine a more chaotic event for the global economy, it is also hard to know the way forward for Italy, where per capita income has actually fallen slightly during the euro era. 
With flat population growth and swelling debt (over 140% of GDP), Italy’s economic prospects appear bleak. 
Though most economists still think exiting the euro would be profoundly self-destructive, a growing number have come to believe that the euro will never work for Italy, and that the sooner it leaves the better. 
Many emerging-market countries are dealing with populists of their own, or in the case of Poland, Hungary, and Turkey, with populists who have already turned into autocrats. 
Fortunately, a patient Fed, a resilient (for now) China, and a growing Europe and US will help most emerging economies. 
The outlook for global growth is improving, and, with sensible policies, the next several years could be quite a bit better than the last – certainly for advanced economies, and perhaps for most others as well. 
But populism remains a wildcard, and only if growth picks up fast enough is it likely to be kept out of play. 

A Year of Successes in Global Health 
BANGKOK – In the field of human development, the year that just ended was better than many predicted it would be. 
A decade after the Great Recession began, economic recovery continued in 2017, and progress was made on issues like poverty, education, and global warming. 
But perhaps the most significant achievements of the last 12 months were in global health. 
I count 18 unique successes in 2017, many of which will help sow the seeds of progress for the months and years ahead. 
The first notable success occurred early in the year, when a Guinness World Record was set for the most donations of medication made during a 24-hour period. 
On January 30, more than 207 million drug doses were donated to treat neglected tropical diseases including guinea-worm disease, leprosy, and trachoma. 
This extraordinary feat was made possible by the Bill & Melinda Gates Foundation, and by pharmaceutical firms including Bayer, Novartis, Pfizer, and my company, Sanofi Pasteur. 
India’s elimination of active trachoma was another milestone, as it marked an important turning point in the global fight against a leading infectious cause of blindness. 
Last year, trachoma was also eliminated in Mexico, Cambodia, and the Lao People’s Democratic Republic. 
A third key health trend in 2017 was further progress toward the elimination of human onchocerciasis, which causes blindness, impaired vision, and skin infections. 
Fourth on my list is a dramatic drop in the number of guinea-worm disease infections. 
A mere 26 cases were recorded worldwide in 2017, down from 3.5 million cases in 1986. 
Efforts to eradicate leprosy earned the fifth spot on my list, while vaccine advances in general were sixth. 
Highlights included a new typhoid vaccine, shown to improve protection for infants and young children, and a new shingles vaccine. 
Number seven is the dramatic progress made in eliminating measles. 
Four countries – Bhutan, the Maldives, New Zealand, and the United Kingdom – were all declared measles-free last year. 
The war on Zika is number eight on my list of health achievements in 2017. 
Thanks to coordinated global efforts, most people in Latin America and the Caribbean are now immune to the mosquito-borne virus, and experts believe transmission will continue to slow. 
Number nine is polio eradication. 
Fewer than 20 new cases were reported globally, a 99% reduction since 1988. 
Although the year ended with reports of cases in Pakistan, health experts remain optimistic that polio can be fully eradicated in 2018. 
Rounding out my top ten was the creation of the Coalition for Epidemic Preparedness Innovations (CEPI), which was established to develop vaccines for infectious disease threats. 
Launched with nearly $600 million in funding from Germany, Japan, Norway, the UK charity Wellcome Trust, and the Bill & Melinda Gates Foundation, CEPI aims to reduce sharply the time it takes to develop and produce vaccines. 
Huge gains in disease control and prevention were made last year, and the next few items on my list (11 through 16) reflect progress on specific illnesses. 
For example, rates of premature death fell for non-communicable diseases like cardiovascular disease, cancer, diabetes, and chronic respiratory conditions. 
Another highlight was the historic approval of a sophisticated cancer treatment, CAR T-cell therapy, which uses a patient’s own immune cells to attack tumors. 
Improvements were also made in treating HIV. 
Clinical trials for an HIV vaccine started at the end of 2017, while doctors in South Africa reported curing a young boy of the disease after he received treatments as an infant. 
These and other initiatives give new hope to the many who are still suffering from this chronic condition. 
Advances in treating gonorrhea, a common sexually transmitted infection that has become increasingly resistant to antibiotics, are also worthy of mention. 
Wrapping up my list of disease-specific gains of 2017 is the renewed commitment made by global health ministers to eradicate tuberculosis by 2030. 
The final two successes are reminders of how much work remains. 
In August, the fast food giant McDonald’s unveiled a Global Vision for Antimicrobial Stewardship in Food Animals. 
Although recognition of the food industry’s ethical responsibilities for public health is to be welcomed, the pledge also represents a cautionary note about how closely connected food and health really are. 
Finally, rounding out my list was the historic Universal Health Coverage Forum held in Tokyo, where global leaders gathered to discuss how to improve health-care access. 
The World Bank and the WHO note that half of the world’s population still cannot obtain essential health services. 
I therefore count the December meeting as a “success” not for its achievements, but because it was a reminder to the international community that improving health-care access remains a long-term endeavor. 
As the global health community resets its annual clock – and I begin cataloguing the big health stories of 2018 – we should take a moment to reflect on the 12 months recently ended. 
Even in a mediocre year, the global health community saved millions of lives. 
Imagine what we will achieve in an extraordinary year. 

Bringing Gender Equality to Global Public Health 
NEW YORK – Over the past few decades, the international community has tasked itself with achieving a wide range of social and environmental objectives, many of which are enshrined in the United Nations Sustainable Development Goals (SDG) for 2030. 
We have advocated for many of these goals, as well as similar efforts that preceded the SDGs, because we believe that such collective projects are necessary to create the type of world we want for our children and grandchildren. 
But we have also come to realize that far too many efforts to fulfill global commitments lack the meaningful reporting mechanisms needed to succeed. 
If we are serious about translating lofty pronouncements into real progress for people and the planet, this will have to change. 
Consider public health, an issue that affects everyone. 
The global agenda in this area determines the norms and standards that shape how public and private actors promote health, prevent disease, and administer care. 
It encompasses research initiatives and global public goods such as vaccines and emergency-preparedness programs for epidemic outbreaks. 
And it brings people together to work toward providing universal health coverage and ensuring everyone’s right to health. 
In the SDG framework, the separate issues of gender and health are intertwined, because gender itself is a major driver of health outcomes. 
Gender can influence whether one smokes tobacco, exercises regularly, or has access to nutritious food. 
And given that over 75% of the health workforce worldwide is female, it also often determines who will care for you when you are sick. 
For decades, the global health community has paid lip service to the critical role of unequal power relations, particularly relating to gender, in determining health outcomes. 
At this point, one might expect to see a high degree of gender equality in the health sector. 
But a recent report by the advocacy and accountability group Global Health 50/50 shows otherwise. 
In fact, the report, which reviewed 140 organizations working in the global health sector, makes for disturbing reading. 
Many of these organizations are falling embarrassingly short on addressing gender disparities. 
Half of the organizations’ strategies do not include a specific commitment to gender equality; and while a third do focus on the health of women and girls, they make no mention of gendered risks. 
The situation is even worse for men and boys, who, regardless of country, can expect to live shorter, unhealthier lives than their female peers. 
According to the Global Health 50/50 report, only a third of organizations take a gendered approach to the health needs of the whole population, and no organizations target men and boys specifically. 
Moreover, only 43% of the organizations that were surveyed have specific measures in place to support women’s careers in public health, despite the overwhelmingly female composition of the health workforce. 
It should come as no surprise that the majority of these organizations are run by men. 
Across the full sample, 80% of board chairs and 69% of chief executives are male. 
For us, one of the report’s more dismaying findings is that two-thirds of the organizations do not disaggregate data by sex. 
Without data, transparency, and adequate reporting on gender disparities, there can be no progress toward gender equality. 
Still, the report’s findings are not all negative. 
The Swedish International Development Cooperation Agency, the Bangladesh-based organization BRAC, Save the Children International, and The Global Fund to Fight AIDS, Tuberculosis, and Malaria are among a dozen or so organizations that perform well across the board. 
What they have in common are committed leaders who have taken proactive steps to ensure progress. 
The successful organizations have all adopted clear policies and roadmaps for driving organizational change. 
They have established systems of accountability, including measures to ensure that gender competence is included in job descriptions and staff performance evaluations. 
And they have created flexible work environments, featuring parental leave and other family-oriented policies. 
Looking ahead, we hope to see all global health organizations adopt concrete measures to address the shortcomings identified in the Global Health 50/50 report. 
Failing that, we would recommend that next year’s report also rank the organizations in question, to make clear which of them are still falling behind. 
Women once had to fight for the right to vote, and we are now fighting for paid parental leave and equal pay. 
But we must go further, by also advocating for accountability and gender equality in the sphere of global public health. 

Hope for Global Health in 2017 
HONG KONG – Looking back on 2016, there may not seem to be much to celebrate. 
In terms of global health alone, the year appeared to be one of unrelenting tragedy. 
Beyond stories of hospitals in conflict zones being bombed, the Zika virus emerged as a growing threat. 
There was also the proliferation of antibiotic-resistant microbes, or “superbugs,” the continued revival of yellow fever, and the reemergence of polio in Nigeria, which had previously been declared polio-free. 
Hopes for a respiratory syncytial virus vaccine were dashed. 
And in Europe, the incidence of alcohol-related deaths increased. 
But, buried among all of the bad stories, there were some inspiring developments in global health in 2016. 
The first took place in Tanzania and Mozambique, where African giant pouched rats, which had previously been trained by the Belgian NGO APOPO to detect landmines, were repurposed to help in the fight against tuberculosis (TB). 
The rats undergo a thorough training process, in which they are introduced to various stimuli, shown how to interact with people, and taught to detect TB in samples of sputum (mucus that is coughed up from the lower airways). 
The rats can detect TB with almost 100% accuracy, though they cannot distinguish between normal and drug-resistant strains. 
A second positive development was the creation of the Coalition for Epidemic Preparedness Innovations (CEPI). 
The emergence of infectious diseases (like Ebola, chikungunya, Zika, and, previously, SARS, swine flu, and MERS) typically highlights the inadequate capacity of public-health systems to build up defenses quickly. 
CEPI aims to change this. 
Its members – which come from international organizations, governments, industry, public and philanthropic R&D funders, academia, NGOs, and civil-society groups – will work to develop new vaccines that can prevent emerging infectious diseases from becoming epidemics. 
The third positive development of 2016 was the progress made in combating malaria. 
Deaths from malaria have been on the decline for years. 
In Africa, which faces the world’s highest malaria mortality rates, the number of victims dropped from more than 800,000 per year in 2000 to roughly 400,000 last year. 
Moreover, European drug regulators approved the first licensed human vaccine against malaria – RTS,S, or Mosquirix – in 2015, after nearly three decades of research and development. 
It will not necessarily be smooth sailing from here: researchers have noticed that the vaccine’s effect weakens over time, and it is only 4% effective over a seven-year period. 
But the vaccine remains a major breakthrough. 
Reflecting its lifesaving potential, the World Health Organization has secured funding for an initial trial phase; beginning in 2018, the WHO will roll out RTS,S in pilot programs that would test its real-world efficacy in Sub-Saharan Africa. 
There is more good news on the vaccine front: a herpes vaccine for shingles has been developed. 
Shingles, a viral disease characterized by a painful skin rash with blisters, is caused by the reactivation of the chickenpox virus within a person’s body. 
If the rash involves the eye, vision loss may occur. 
Some people develop ongoing nerve pain, which can last for months or even years. 
The new vaccine is significantly more effective than the one that is currently available, which reduces the risk of contracting shingles by only about 50%. 
Dengue fever, too, is now vaccine-preventable. 
Dengue, ranked by the World Health Organization (WHO) as the world’s most significant and fastest-growing mosquito-borne viral disease, causes nearly 50 million infections every year. 
But, in 2016, the first – and, currently, the only – dengue vaccine, Dengvaxia, was approved in 12 countries. 
Dengvaxia has received endorsements from key medical societies, at the national and regional levels. 
The recommendations are consistent with the WHO’s position paper recommending that countries with a high burden of disease consider the introduction of the vaccine as part of an integrated dengue-management program. 
As if that were not enough, we now have an Ebola vaccine, too. 
An experimental vaccine tested on humans has been shown to provide 100% protection against the disease. 
Though no regulatory authority has approved it yet, it is viewed as so powerful that an emergency stockpile of 300,000 doses has been created for use in the event of another outbreak. 
Diseases for which we do not have vaccines have also been beaten back. 
For example, HIV infections and deaths have stabilized, despite rapid population growth in Africa. 
This is a testament to the tremendous effort that has been made to fight the HIV/AIDS epidemic, through prevention, education, and treatment programs. 
To maintain progress against the epidemic, the global health community must sustain these efforts. 
Furthermore, the Americas are now almost free of river blindness, a parasitic infection spread by black flies that causes itching and, in severe cases, vision loss. 
Guatemala has been declared free of the disease, meaning that, in the Americas, only one remote area in the Amazon remains affected. 
We are also one step closer to eliminating lymphatic filariasis, also known as elephantiasis. 
Caused by the filarial worm, elephantiasis is a parasitic infection that can cause horrific swelling of the legs and scrotum. 
This year, Cambodia, the Cook Islands, Niue, and Vanuatu received acknowledgement from the WHO for having eliminated lymphatic filariasis as a public-health problem. 
Also on the brink of eradication is guinea worm, a nasty tropical parasite that spreads via contaminated water. 
According to the Carter Center, one of the organizations leading the effort to eradicate guinea worm, there were around two dozen cases in the first ten months of 2016. 
Guinea worm is now on a path to becoming the second human disease ever to be eradicated. 
As we begin 2017, it is important to recognize the public-health victories that we have achieved. 
However bad things may seem and however heartbreaking the hurdles are, there are plenty of reasons to remain hopeful – and to keep working for a better, healthier future. 

Global Imbalances without Tears 
CAMBRIDGE – Doctors have long known that it is not just how much you eat, but what you eat, that contributes to or diminishes your health. 
Likewise, economists have long noted that for countries gorging on capital inflows, there is a big difference between debt instruments and equity-like investments, including both stocks and foreign direct investment. 
So, with policymakers and pundits railing against sustained oversized trade imbalances, we need to recognize that the real problems are rooted in excessive concentrations of debt. 
If G-20 governments stood back and asked themselves how to channel a much larger share of the imbalances into equity-like instruments, the global financial system that emerged just might be a lot more robust than the crisis-prone system that we have now. 
Unfortunately, we are very far from the idealized world in which financial markets efficiently share risk. 
Of the roughly $200 trillion in global financial assets today, almost three-quarters are in some kind of debt instrument, including bank loans, corporate bonds, and government securities. 
The derivatives market certainly helps spread risk more widely than this superficial calculation implies, but the basic point stands. 
Certainly, there are some good economic reasons why lenders have such an insatiable appetite for debt. 
Imperfect information and difficulties in monitoring firms pose significant obstacles to idealized risk-sharing instruments. 
But policy-induced distortions also play an enormous role. 
Many countries’ tax systems hugely favor debt over equity. 
The housing boom in the United States might never have reached the proportions that it did if homeowners had been unable to treat interest payments on home loans as a tax deduction. 
Corporations are allowed to deduct interest payments on bonds, but stock dividends are effectively taxed at the both the corporate and the individual level. 
Central banks and finance ministries are also complicit, since debt gets bailed out far more aggressively than equity does. 
But, contrary to populist rhetoric, it is not just rich, well-connected bondholders who get bailed out. 
Many small savers place their savings in so-called money-market funds that pay a premium over ordinary federally insured deposits. 
Shouldn’t they expect to face risk? 
Yet a critical moment in the crisis came when, shortly after the mid-September 2008 collapse of Lehman Brothers, a money-market fund “broke the buck” and couldn’t pay 100 cents on the dollar. 
Of course, it was bailed out along with all the other money-market funds. 
I am not advocating a return to the early Middle Ages, when Church usury laws forbade interest on loans. 
Back then, financial-market participants had to devise fantastic schemes and contortions to disguise interest payments. 
Yet today the pendulum has arguably swung too far in the opposite direction. 
Perhaps scholars who argue that Islamic financial systems’ prohibition on interest generates massive inefficiencies ought to be looking at these systems for positive ideas that Western policymakers might adopt. 
Unfortunately, overcoming the deeply ingrained debt bias in rich-world financial systems will not be easy. 
In the US, for example, no politician is anxious to say that home-mortgage deductions should be eliminated, or that dividend payments should be tax-free. 
Likewise, developing countries should accelerate the pace of economic reform, and equity markets in too many emerging economies are like the Wild West, with unclear rules and lax enforcement. 
Worse still, even as the G-20 talks about finding a “fix” for global imbalances, some of the policy changes that its members have adopted are arguably exacerbating them. 
For example, we now have a super-size International Monetary Fund, whose lending capacity has been tripled, to roughly $750 billion. Europe has similarly expanded its regional bailout facility. 
These funds may prove to be an effective short-term salve, but, over the long run, they will likely fuel moral-hazard problems, and potentially plant the seeds of deeper crises in the future. 
A better approach would be to create a mechanism for orchestrating orderly sovereign default, both to minimize damage when crises do occur, and to discourage lenders from assuming that taxpayers’ money will solve all major problems. 
The IMF proposed exactly such a mechanism in 2001, and a similar idea has been discussed more recently for the eurozone. 
Unfortunately, however, ideas for debt-restructuring mechanisms remain just that: purely theoretical constructs. 
In the meantime, the IMF and the G-20 can help by finding better ways to assess the vulnerability of each country’s financial structure – no easy task, given governments’ immense cleverness when it comes to cooking their books. 
Policymakers can also help find ways to reduce barriers to the development of stock markets, and to advance ideas for new kinds of state-contingent bonds, such as the GDP-linked bonds that Yale’s Robert Shiller has proposed. 
(Shiller bonds, in theory, pay more when a country’s economy is growing and less when it is in recession.) 
Of course, even if the composition of international capital flows can be changed, there are still many good reasons to try to reduce global imbalances. 
An asset diet rich in equities and direct investment and low in debt cannot substitute for other elements of fiscal and financial health. 
But our current unwholesome asset diet is an important component of risk, one that has received far too little attention in the policy debate. 

The Global Impact of a Chinese Recession 
CAMBRIDGE – When China finally has its inevitable growth recession – which will almost surely be amplified by a financial crisis, given the economy’s massive leverage – how will the rest of world be affected? 
With US President Donald Trump’s trade war hitting China just as growth was already slowing, this is no idle question. 
Typical estimates, for example those embodied in the International Monetary Fund’s assessments of country risk, suggest that an economic slowdown in China will hurt everyone. 
But the acute pain, according to the IMF, will be more regionally concentrated and confined than would be the case for a deep recession in the United States. 
Unfortunately, this might be wishful thinking. 
First, the effect on international capital markets could be vastly greater than Chinese capital market linkages would suggest. 
However jittery global investors may be about prospects for profit growth, a hit to Chinese growth would make things a lot worse. 
Although it is true that the US is still by far the biggest importer of final consumption goods (a large share of Chinese manufacturing imports are intermediate goods that end up being embodied in exports to the US and Europe), foreign firms nonetheless still enjoy huge profits on sales in China. 
Investors today are also concerned about rising interest rates, which not only put a damper on consumption and investment, but also reduce the market value of companies (particularly tech firms) whose valuations depend heavily on profit growth far in the future. 
A Chinese recession could again make the situation worse. 
I appreciate the usual Keynesian thinking that if any economy anywhere slows, this lowers world aggregate demand, and therefore puts downward pressure on global interest rates. 
But modern thinking is more nuanced. 
High Asian saving rates over the past two decades have been a significant factor in the low overall level of real (inflation-adjusted) interest rates in both the United States and Europe, thanks to the fact that underdeveloped Asian capital markets simply cannot constructively absorb the surplus savings. 
Former US Federal Reserve chair Ben Bernanke famously characterized this much-studied phenomenon as a key component of the “global savings glut.” 
Thus, instead of leading to lower global real interest rates, a Chinese slowdown that spreads across Asia could paradoxically lead to higher interest rates elsewhere – especially if a second Asian financial crisis leads to a sharp draw-down of central bank reserves. 
Thus, for global capital markets, a Chinese recession could easily prove to be a double whammy. 
As bad as a slowdown in exports to China would be for many countries, a significant rise in global interest rates would be much worse. 
Eurozone leaders, particularly German Chancellor Angela Merkel, get less credit than they deserve for holding together the politically and economically fragile single currency against steep economic and political odds. 
But their task would have been well-nigh impossible but for the ultra-low global interest rates that have allowed politically paralyzed eurozone officials to skirt needed debt write-downs and restructurings in the periphery. 
When the advanced countries had their financial crisis a decade ago, emerging markets recovered relatively quickly, thanks to low debt levels and strong commodity prices. 
Today, however, debt levels have risen significantly, and a sharp rise in global real interest rates would almost certainly extend today’s brewing crises beyond the handful of countries (including Argentina and Turkey) that have already been hit. 
Nor is the US immune. 
For the moment, the US can finance its trillion-dollar deficits at relatively low cost. 
But the relatively short-term duration of its borrowing – under four years if one integrates the Treasury and Federal Reserve balance sheets – means that a rise in interest rates would soon cause debt service to crowd out needed expenditures in other areas. 
At the same time, Trump’s trade war also threatens to undermine the US economy’s dynamism. 
Its somewhat arbitrary and politically driven nature makes it at least as harmful to US growth as the regulations Trump has so proudly eliminated. 
Those who assumed that Trump’s stance on trade was mostly campaign bluster should be worried. 
The good news is that trade negotiations often seem intractable until the eleventh hour. 
The US and China could reach an agreement before Trump’s punitive tariffs go into effect on January 1. 
Such an agreement, one hopes, would reflect a maturing of China’s attitude toward intellectual property rights – akin to what occurred in the US during the late nineteenth century. 
(In America’s high growth years, US entrepreneurs often thought little of pilfering patented inventions from the United Kingdom.) 
A recession in China, amplified by a financial crisis, would constitute the third leg of the debt supercycle that began in the US in 2008 and moved to Europe in 2010. 
Up to this point, the Chinese authorities have done a remarkable job in postponing the inevitable slowdown. 
Unfortunately, when the downturn arrives, the world is likely to discover that China’s economy matters even more than most people thought. 

Who Should Lead International Institutions? 
OXFORD – The United Nations is seeking a new secretary-general. 
The World Bank presidency is up for grabs. 
The World Health Organization needs a new head. 
The same goes for several other international organizations. 
At a time when conflicts of interest among the United States and its allies, together with the rise of China and Russia, are undermining global cooperation, the question of who fills these vacancies could not be more important. 
In the past, the process of selecting the right candidate has reflected rivalries among countries and popularity contests played out among governments, NGOs, and the media. 
This was clearly never the best approach. 
But, with a hegemonic United States willing and able to hold international institutions together, cooperation remained viable. 
Today, the unpredictable statements of US presidential candidate Donald Trump and the more isolationist vision that he is encouraging among his supporters has the rest of the world nervous about the changing nature of America’s role in the world. 
And America’s allies in Europe are not exactly at their most stable, owing to a combination of deep-rooted economic challenges, the United Kingdom’s looming exit from the European Union, and surging support for populist political forces in many countries. 
Moreover, the US and its allies are not only unwilling to underpin global cooperation, they lack the capacity even to try. 
The International Monetary Fund’s recent World Economic Outlook reports that the US and its allies will account for just 39% of global output in 2020, down sharply from 64% today, with the US share falling from 22% to 15%. 
For the international institutions, this means that communication, compromise, and consensus are more important than ever – and not just among countries. 
Given strong anti-establishment and even nationalist sentiment in many countries, international institutions must also be more open with – and responsive to – the global public that they are supposed to serve. 
All of this demands a more meritocratic and unbiased approach to filling the top positions at the international institutions. 
To assess the candidates fairly and effectively, five key criteria should be used. 
First, candidates should have a proven ability not just to define a mission, but also to take on the more challenging task of mobilizing a broad coalition of stakeholders to achieve it. 
UN Secretary-General Ban Ki-moon, for example, had little trouble identifying critical issues, from specific humanitarian crises in countries like Haiti, Myanmar, and Pakistan to broader challenges like climate change and global poverty. 
But his success in spurring countries to work together to address those issues is dubious. 
Second, leaders must be able to persuade countries to fund their organizations. 
Former African Development Bank President Donald P. Kaberuka convinced countries to double their contributions during his tenure; during the same cycle, the World Bank’s resources were increased by just one-third. 
But it is not just a matter of getting more money. 
Organizations need to focus on expanding their core resources, which are not tied to any specific task, rather than drawing more discretionary or earmarked resources. 
Otherwise, they risk becoming hired hands for a few pet projects, rather than critical platforms for broad cooperation. 
Unfortunately, in recent years, discretionary funding has largely taken over, and now accounts for more than 90% of resources in several agencies. 
The International Organization for Migration, the importance of which has been underscored by the ongoing refugee crisis, relies entirely on discretionary funding. 
To change this, international organizations need leaders who are convincing salespeople, which means that they must be widely perceived as genuine and trustworthy. 
The third criterion for effective leadership of an international institution is strong, results-oriented management. 
Successful candidates should already have experience leading an organization that performed well, achieving the results they set out to achieve. 
There should be evidence that the candidate can translate a vision into a plan, with clear benchmarks against which progress can be measured. 
The current slates of candidates is wanting in this regard. 
This can have far-reaching consequences. 
World Bank President Jim Yong Kim has faced substantial criticism for his handling of his flagship initiative: an internal restructuring. 
That process has dragged on for four years, and many staff members claim that it is undermining the efficiency of lending operations. 
While it is difficult to assess these claims reliably, a leaked internal survey of the organization’s employees indicates, at the very least, that the management culture needs improvement. 
This is closely related to the fourth criterion: hiring (and retaining) the right staff. 
No leader can do everything alone, so choosing a high-quality team is crucial. 
If those working at the organization are unhappy, recruiting the most talented and motivated people will be nearly impossible. 
Beyond creating an open, challenging, and supportive culture – reflected in internal surveys that are shared publicly (not leaked) – the leaders of international organizations must resist pressure from member countries to hire particular senior officials, who are not necessarily the highest-performing candidates. 
Moreover, they must be willing and able to identify and remove inherited senior managers who are not up to standard. 
The key words must be meritocracy and morale. 
The final criterion for effective leadership of an international organization concerns accountability. 
In the last couple of decades, heads of the IMF, the World Bank, and the UNHCR Refugee Agency have left office under a cloud of suspicion. 
Some leaders have lately established far stricter codes of conduct; it is up to the new ones to ensure that they are being enforced. 
Welcoming independent evaluation – and disclosing the results – is essential. 
The world needs strong international institutions more than ever. 
And strong institutions need outstanding leaders who can build consensus among increasingly bad-tempered governments, while attracting sufficient resources and mobilizing talented people to get the job done. 
This is no time to compromise for short-term political expediency. 

Global Justice and Military Intervention 
MELBOURNE – The world has watched in horror as Libya’s Colonel Muammar el-Qaddafi uses his military to attack protesters opposed to his rule, killing hundreds or possibly thousands of unarmed civilians. Many of his own men have refused to fire on their own people, instead defecting to the rebels or flying their planes to nearby Malta, so Qaddafi has called in mercenaries from neighboring countries who are more willing to obey his orders. 
World leaders were quick to condemn Qaddafi’s actions. 
On February 26, the United Nations Security Council voted unanimously to impose an arms embargo on Libya, urge member nations to freeze assets owned by Qaddafi and his family, and refer the regime’s violence to the International Criminal Court for possible prosecution of those responsible. 
This is the first time that the Security Council has unanimously referred a situation involving human rights violations to the International Criminal Court, and it is remarkable that countries that are not members of the Court – including the United States, Russia, and China – nevertheless supported the referral. 
The resolution can thus be seen as another incremental step towards the establishment of a global system of justice able to punish those who commit gross violations of human rights, regardless of their political or legal status in their own country. 
Yet, in another way, the Security Council resolution was a disappointment. 
The situation in Libya became a test of how seriously the international community takes the idea of a responsibility to protect people from their rulers. 
The idea is an old one, but its modern form is rooted in the tragic failure to intervene in the Rwandan genocide in 1994. 
A subsequent UN inquiry concluded that as few as 2,500 properly trained military personnel could have prevented the massacre of 800,000 Tutsis. 
Former US President Bill Clinton has said that the mistake he most regrets making during his presidency was his failure to push for intervention in Rwanda. 
Kofi Annan, who was then UN Under-Secretary-General for Peace-Keeping Operations, described the situation at the UN at the time as a “terrible and humiliating” paralysis. 
When Annan became Secretary-General, he urged the development of principles that would indicate when it is justifiable for the international community to intervene to prevent gross violations of human rights. 
In response, Canada’s government established an International Commission on Intervention and State Sovereignty, which recommended that military intervention could be justified, as an extraordinary measure, where large-scale loss of life is occurring or imminent, owing to deliberate state action or the state’s refusal or failure to act. 
These principles were endorsed by the UN General Assembly at its special World Summit in 2005 and discussed again in 2009, with an overwhelming majority of states supporting them. 
The principle fits the situation in Libya today. 
Yet the Security Council resolution contains no mention of the possibility of military intervention – not even the imposition of a no-fly zone over Libya to prevent Qaddafi from using planes to attack protesters. 
One body with a special concern to transform the idea of the responsibility to protect into a cause for action is the Global Center for the Responsibility to Protect, at the City University of New York. 
It has called on UN members to uphold their 2005 commitments and put the responsibility to protect into action in Libya. 
It urges consideration of a range of measures, several of which were covered by the Security Council resolution, but also including a no-fly zone. 
In addition to arguing that the responsibility to protect can justify military intervention, the International Commission on Intervention and State Sovereignty recommended a set of precautionary principles. 
For example, military intervention should be a last resort, and the consequences of action should not be likely to be worse than the consequences of inaction. 
Whether these precautionary principles are satisfied in Libya requires expert judgment of the specifics of the situation. 
No one wants another drawn-out war like those in Iraq and Afghanistan. 
But Libya is not Iraq or Afghanistan – its population is only about one-fifth of either country’s, and there is a strong popular movement for a democratic form of government. 
Assuming that foreign military forces rapidly overwhelmed Qaddafi’s troops, they would soon be able to withdraw and leave the Libyan people to decide their own future. 
At the time of writing, it is arguable that other sanctions or threats, short of military intervention, would be sufficient to deter more widespread bloodshed. 
Perhaps the rebels and the sanctions can overthrow Qaddafi unaided, without great loss of life. 
It is also unclear whether military intervention would cause more deaths than it prevented. 
But these are questions that the international community needs to ask, and that the Security Council should have been discussing, so that the principle of the responsibility to protect – and its possible implications for military action – become part of our understanding of the requirements of international law and global ethics. 

Global Macroeconomic Cooperation 
NEW YORK – The world has yet to achieve the macroeconomic policy coordination that will be needed to restore economic growth following the Great Crash of 2008. 
In much of the world, consumers are now cutting their spending in response to a fall in their wealth and a fear of unemployment. 
The overwhelming force behind the current collapse of jobs, output, and trade flows, is even more important than the financial panic that followed Lehman Brothers’ default in September 2008. 
There is, of course, no return to the situation that preceded the Great Crash. 
The worldwide financial bubble cannot and should not be recreated. 
But if the world cooperates effectively, the decline in consumer demand can be offset by a valuable increase in investment spending to address the most critical needs on the planet: sustainable energy, safe water and sanitation, a reduction of pollution, improved public health, and increased food production for the poor. 
The United States, Europe, and Asia have all experienced a collapse of wealth due to the fall of stock markets and housing prices. 
There is not yet an authoritative measurement of the wealth decline and of how it is distributed worldwide, but it is probably around $15 trillion lower than the peak in the US, and perhaps $10 trillion lower in both Europe and Asia. 
A combined wealth decline of around $25 trillion would be roughly 60% of one year’s global income. 
The decline in US wealth as a share of the US economy is even larger, around 100% of annual income, and perhaps 70% of annual income in Europe and Asia. 
The usual assumption is that household consumption falls by around $0.05 for each $1 decline in household wealth. 
This would mean a direct negative shock to household spending in the US of around 5% of national income, and of around 3.5% in Europe and Asia. 
The size of this downturn is so large that unemployment will rise sharply in all major regions of the world economy, perhaps reaching 9-10% in the US. 
Households will gradually save enough to restore their wealth, and household consumption will gradually recover as well. 
Yet this will occur too slowly to prevent a rapid rise in unemployment and a massive shortfall of production relative to potential output. 
The world therefore needs to stimulate other kinds of spending. 
One powerful way to boost the world economy and to help meet future needs is to increase spending on key infrastructure projects, mainly directed at transportation (roads, ports, rail, and mass transit), sustainable energy (wind, solar, geothermal, carbon-capture and sequestration, and long-distance power transmission grids), pollution control, and water and sanitation. 
There is a strong case for global cooperation to increase these public investments in the developing economies, and especially in the world’s poorest regions. 
These regions, including Sub-Saharan Africa and Central Asia, are suffering harshly from the global crisis, owing to falling export earnings, remittances, and capital inflows. 
Poor regions are also suffering from climate changes such as more frequent droughts, caused by rich countries’ greenhouse-gas emissions. 
At the same time, impoverished countries have huge needs for infrastructure, especially roads, rail, renewable energy, water and sanitation, and for improved current delivery of vital life-saving services, including health care and support for food production. 
The G-20, which comprises the world’s largest economies, offers the natural setting for global policy coordination. 
The next G-20 meeting in London in early April is a crucial opportunity for timely action. 
The leading economies – especially the US, European Union, and Japan – should establish new programs to finance infrastructure investments in low-income countries. 
The new lending should be at least $100 billion per year, directed towards developing countries. 
The new financing would include direct loans from rich countries’ export-credit agencies to enable poor countries to borrow long term (for example, 40 years) to build roads, power grids, renewable energy generation, ports, fiber optic networks, and water and sanitation systems. 
The G-20 should also increase the lending capacity of the World Bank, the African Development Bank, and other international financial institutions. 
Japan, with a surplus of saving, a strong currency, massive foreign exchange reserves, and factories without domestic orders, should take the lead in providing this funding for infrastructure. 
Moreover, Japan can boost its own economy and those of the poorest countries by directing its own industrial production to the infrastructure needs of the developing world. 
Cooperation can turn the sharp and frightening decline in worldwide consumption spending into a global opportunity to invest more in the world’s future well being. 
By directing resources away from rich countries’ consumption to developing countries’ investment needs, the world can achieve a “triple” victory. 
Higher investment and social spending in poor countries will stimulate the entire world economy, spur economic development, and promote environmental sustainability through investments in renewable energy, efficient water use, and sustainable agriculture. 

Global Malaise in 2006? 
The almighty American consumer had another banner year in 2005, helping sustain global economic growth, albeit at a slower pace than in 2004. 
As in recent years, he consumed at or above his income level, and the United States as a whole spent well beyond its means, borrowing from the rest of the world at a feverish pace in 2005 – more than $2 billion a day. 
A year ago, most pundits argued that this was unsustainable. 
It evidently was sustainable, at least for one more year. 
But it nonetheless remains true that whatever is unsustainable will not be sustained, which creates great risks for the US and global economy in 2006. 
Two economic surprises prolonged the good times in 2005. 
First, while the US Federal Reserve continued hiking short-term interest rates, long-terms rates did not increase in tandem, which allowed housing prices to continue rising. 
This was centrally important to sustaining global growth, for the performance of world’s largest economy has been fueled by real estate in recent years, with individuals refinancing their mortgages and spending some of the proceeds, and with high prices leading to more construction. 
But this is unlikely to continue. 
Long-term interest rates almost certainly will eventually start to rise – and “eventually” increasingly looks like next year. 
If so, Americans will have to spend more money on debt service, leaving them with less to spend on consumption of goods and services. 
Moreover, real estate prices will most likely stop rising rapidly – indeed, they may even decline. 
As a result, refinancing of mortgages will grind to a halt, leaving no money to draw out of housing to sustain Americans’ consumption binge. 
On both accounts, aggregate demand will decline. 
Is it possible that the cash-rich corporate sector will more than make up for the slack by increasing investment? 
There may well be some increase in gross investment, as obsolete equipment and software are replaced. 
But there also is some evidence that innovation is slowing – perhaps the result of reduced investment in research in the past five years. 
In any case, even if firms are cash-rich, they do not typically expand investment during periods when consumption is slowing. 
Uncertainties about the economy are likely to insert an element of caution into companies’ investment decisions. 
In short, it is more likely that moderating investment will exacerbate the consumer slowdown than that an acceleration of investment will offset it. 
But this is not the only reason for bleaker prospects for America and the world in 2006. 
The second surprise in 2005 was that while oil prices increased far more than expected, the economic dampening effect seemed somewhat muted in most places, at least until the last part of the year. 
Because of higher oil prices, for example, America’s spending on oil imports has increased by roughly $50 billion a year – money that otherwise would have been spent mostly on goods made in America. 
For most of 2005, Americans behaved as if they didn’t really believe that oil prices would remain high, at least for a while. 
This is less startling than it may appear: econometric studies suggest that it takes a year to two before the full effects of oil-price increases are felt. 
Now, with futures markets predicting that oil will be $50 to $60 a barrel for the next two years, demand for gas-guzzlers has evaporated, taking with it the prospects for America’s auto companies, whose corporate strategies have bet on low oil prices and America’s love affair with the SUV. 
High oil prices are set to dampen economic performance in the rest of the world as well, although growth prospects look better than in the US. 
China’s growth continues to astound the world; indeed, new GDP data suggest that its economy is 20% larger than previously thought. 
Moreover, China’s surging growth will echo throughout much of Asia, including (in somewhat muted form) in Japan. 
Europe continues to be a mixed picture, with the European Central Bank almost perversely raising interest rates even as Europe’s economy needs further stimulation to ensure its recovery. 
As if that were not bad enough, Germany’s new government is promising to raise taxes. 
Fiscal rectitude in the right place and the right time is to be commended; but this is the wrong place and the wrong time – and Germany’s recovery prospects will be dampened. 
The main risk in 2006 is that America’s long-brewing problems come to a head globally: investors, finally taking heed of the large structural fiscal deficit, the yawning trade gap, and the high level of household indebtedness, may pull money out of the US in a panic. 
Alternatively, rising interest rates and a downturn in the real estate market could so weaken consumer demand that the economy slips into recession, squeezing exporters in other countries that depend on the US market. 
In either case, the US government, hamstrung by already-wide deficits, may feel powerless to respond with countercyclical fiscal policy. 
With confidence in Bush’s economic management almost as low as confidence in his management of the Iraq war, there is every reason to worry that should one of these crises emerge, it will not be well managed. 
But it is more likely that 2006 will just be another year of malaise: China’s significance within the global economy is still not large enough to offset weaknesses in the rest of the world. 
America, too, will manage to muddle through again – leaving even higher levels of debt for the future. 
In short, 2006 will be marked by mounting uncertainty about prospects for global economic growth, even as the distribution of the fruits of that growth remain dismally predictable. 
In America, at least, 2006 is likely to be another year in which stagnant real wages freeze, or even erode, the living standards of those in the middle. 
And, everywhere, it is likely to be another year in which the gap between the haves and the have-nots will widen. 

A Global Marshall Plan 
ROME – Despite ongoing efforts to catalyze global development cooperation, there have been significant obstacles to progress in recent years. 
Fortunately, with major international meetings set for the second half of 2015, world leaders have an important opportunity to overcome them. 
Such a turnaround has happened before. 
At the turn of the century, international negotiations on economic development had also come to a grinding halt. 
The Seattle ministerial of the World Trade Organization ended without decision, and after two decades of the Washington Consensus, developing countries were frustrated at the US-led international financial institutions. 
Negotiations for the inaugural United Nations Financing for Development (FfD) conference in Monterrey, Mexico, seemed to be headed nowhere. 
Then, on September 11, 2001, the United States was hit with major terrorist attacks – a tragic development that somehow catalyzed progress. 
World leaders agreed to begin the Doha Development Round to ensure that trade negotiations would serve developing countries’ development aspirations. 
And the 2002 Monterrey FfD conference produced major breakthroughs on foreign and domestic investment, foreign debt, international cooperation, trade, and systemic governance issues. 
Of course, tragedy is not needed to kick-start progress. 
This year’s major global meetings – the Conference on Financing for Development in July, the meeting at the United Nations to adopt Sustainable Development Goals in September, and the UN Climate Change Conference in Paris in December – should be sufficient. 
And the efforts that have gone into preparing for these meetings suggest that there is a will to move forward. 
But the right program is key. 
The world needs a well-designed and far-reaching strategy to stimulate industrialization, modeled after the European Recovery Program – the American initiative that enabled Europe to rebuild after World War II. 
The Marshall Plan, as it is better known, entailed a massive infusion of US aid to support national development efforts in Europe, and is still viewed by many Europeans as America’s finest hour. 
The Marshall Plan’s impact was felt far beyond Europe’s borders, developing over the following decade into what is probably the most successful economic-development assistance project in human history. 
Similar policies were introduced in Northeast Asia following the establishment of the People’s Republic of China and the Korean War. 
Of course, there was a political motivation behind the Marshall Plan’s expansion. 
By creating a cordon sanitaire of wealthy countries from Western Europe to Northeast Asia, the US hoped to contain the spread of communism at the start of the Cold War. 
Developing countries that did not serve the same political ends were left out. 
At its core, however, the Marshall Plan was an economic strategy – and a sound one at that. 
Crucially, it represented a complete reversal of its predecessor, the Morgenthau Plan, which focused on de-industrialization – with poor results. 
The plan’s aim – articulated by Treasury Secretary Henry Morgenthau, Jr., in his 1945 book Germany is Our Problem – was to convert Germany into a “principally agricultural and pastoral” country, in order to prevent its involvement in any new wars. 
By late 1946, however, economic hardship and unemployment in Germany spurred former US President Herbert Hoover to visit the country on a fact-finding mission. 
Hoover’s third report of March 18, 1947, called the notion that Germany could be reduced to a pastoral state an “illusion,” which could not be achieved without exterminating or moving 25,000,000 people out of the country. 
The only alternative was re-industrialization. 
Less than three months later, Secretary of State George Marshall made his landmark speech at Harvard University announcing the policy reversal. 
Germany and the rest of Europe were to be re-industrialized, he stated, including through heavy-handed state interventions, such as high duties, quotas, and import prohibitions. 
Free trade would be possible only after reconstruction, when European countries could compete in international markets. 
Marshall made three other important points in his short speech. 
First, in noting the role that the breakdown of trade between urban and rural areas played in Germany’s economic slowdown, he recalled a centuries-old European economic insight: all wealthy countries have cities with a manufacturing sector. 
“The remedy,” Marshall explained, “lies in…restoring the confidence of the European people,” so that “the manufacturer and the farmer” would be “able and willing to exchange their products for currencies, the continuing value of which is not open to question.” 
Second, Marshall argued that participatory institutions emerge from economic progress, not the other way around – the opposite of today’s conventional wisdom. 
As he put it, the policy’s “purpose should be the revival of a working economy in the world, so as to permit the emergence of political and social conditions in which free institutions can exist.” 
Third, Marshall emphasized that aid should be comprehensive and strategic, in order to foster real progress and development. 
“Such assistance,” he declared, “must not be on a piecemeal basis as various crises develop. 
Any assistance that this government may render in the future should provide a cure, rather than a mere palliative.” 
Marshall’s vision offers important lessons for world leaders seeking to accelerate development today, beginning with the need to reverse the effects of the Washington Consensus on developing and transition economies – effects that resemble those of the Morgenthau Plan. 
Some countries – including large economies like China and India, which have long protected domestic industry – have been in a better position to benefit from economic globalization. 
Others have experienced a decline in economic growth and real per capita income, as their industry and agricultural capacity have fallen, especially over the last two decades of the last century. 
It is time to increase poor economies’ productive capacity and purchasing power, as occurred in Europe in the decade after Marshall’s speech. 
Marshall’s insight that such shared economic development is the only way to create a lasting peace remains as true as ever. 

A Normative Approach to Preventing Cyberwarfare 
CAMBRIDGE – A series of episodes in recent years – including Russia’s cyber interventions to skew the United States’ 2016 presidential election toward Donald Trump, the anonymous cyber-attacks that disrupted Ukraine’s electricity system in 2015, and the “Stuxnet” virus that destroyed a thousand Iranian centrifuges – has fueled growing concern about conflict in cyberspace. 
At last month’s Munich Security Conference, Dutch Foreign Minister Bert Koenders announced the formation of a new non-governmental Global Commission on the Stability of Cyberspace to supplement the UN Group of Governmental Experts (GGE). 
The GGE’s reports in 2010, 2013, and 2015 helped to set the negotiating agenda for cybersecurity, and the most recent identified a set of norms that have been endorsed by the UN General Assembly. 
But, despite this initial success, the GGE has limitations. 
The participants are technically advisers to the UN Secretary-General rather than fully empowered national negotiators. 
Although the number of participants has increased from the original 15 to 25, most countries do not have a voice. 
But there is a larger question lurking behind the GGE: Can norms really limit state behavior? 
Most experts agree that a global cyberspace treaty currently would be politically impossible (though Russia and China have made such proposals at the UN). 
But, beyond formal treaties, normative constraints on states also include codes of conduct, conventional state practices, and widely shared expectations of proper behavior among a group (which create a common law). 
In scope, these constraints can vary from global, to plurilateral, to bilateral. 
So what can history tell us about the effectiveness of normative policy instruments? 
In the decade after Hiroshima, tactical nuclear weapons were widely regarded as “normal” weapons, and the US military incorporated nuclear artillery, atomic land mines, and nuclear anti-aircraft weapons into its deployed forces. 
In 1954 and 1955, the Chairman of the Joint Chiefs of Staff told President Dwight Eisenhower that the defense of Dien Bien Phu in Vietnam and of offshore islands near Taiwan would require the use of nuclear weapons (Eisenhower rejected the advice). 
Over time, the development of an informal norm of non-use of nuclear weapons changed this. 
The Nobel laureate economist Thomas Schelling argued that the development of the norm of non-use of nuclear weapons was one of the most important aspects of arms control over the past 70 years, and it has had an inhibiting effect on decision-makers. 
But for new nuclear states like North Korea, one cannot be sure that the costs of violating the taboo would be perceived as outweighing the benefits. 
Similarly, a taboo against using poisonous gases in warfare developed after World War I, and the 1925 Geneva Protocol prohibited the use of chemical and biological weapons. 
Two treaties in the 1970s prohibited the production and stockpiling of such weapons, creating a cost not only for their use, but also for their very possession. 
Verification provisions for the Biological Weapons Convention are weak (merely reporting to the UN Security Council), and such taboos did not prevent the Soviet Union from continuing to possess and develop biological weapons in the 1970s. 
Similarly, the Chemical Weapons Convention did not stop either Saddam Hussein or Bashar al-Assad from using chemical weapons against their own citizens. 
Nonetheless, both treaties have shaped how others perceive such actions. 
Such perceptions contributed to the justification of the invasion of Iraq in 2003 and to the international dismantling of most Syrian weapons in 2014. 
With 173 countries having ratified the Biological Warfare Convention, states that wish to develop such weapons must do so secretly, and face widespread international condemnation if evidence of their activities becomes known. 
Normative taboos may also become relevant in the cyber realm, though here the difference between a weapon and a non-weapon depends on intent, and it would be difficult to forbid – and impossible to prohibit reliably – the design, possession, or even implantation for espionage of particular computer programs. 
In that sense, efforts to prevent cyber conflict cannot be like the nuclear arms control that developed during the Cold War, which involved elaborate treaties and detailed verification protocols. 
A more fruitful approach to normative controls on cyberwarfare may be to establish a taboo not against weapons but against targets. 
The US has promoted the view that the Law of Armed Conflict (LOAC), which prohibit deliberate attacks on civilians, applies in cyberspace. 
Accordingly, the US has proposed that, rather than pledging “no first use” of cyber weapons, countries should pledge not to use cyber weapons against civilian facilities in peacetime. 
This approach to norms has been adopted by the GGE. 
The taboo would be reinforced by confidence-building measures such as promises of forensic assistance and non-interference with the workings of Computer Security Incident Response Teams (CSIRTs). 
The GGE report of July 2015 focused on restraining attacks on certain civilian targets, rather than proscribing particular code. 
At the September 2015 summit between US President Barack Obama and Chinese President Xi Jinping, the two leaders agreed to establish an expert commission to study the GGE proposal. 
Subsequently, the GGE report was endorsed by the leaders of the G20 and referred to the UN General Assembly. 
The attack on the Ukrainian power system occurred in December 2015, shortly after the submission of the GGE report, and in 2016, Russia did not treat the US election process as protected civilian infrastructure. 
The development of normative controls on cyber weapons remains a slow – and, at this point, incomplete – process. 

The Global Obesity Threat 
LONDON/MELBOURNE – In 2010, humanity passed an important milestone. 
According to the Global Burden of Disease Study, published in the British medical journal The Lancet, obesity became a bigger public-health problem than hunger. 
Today, according to the latest edition of the study, more than 2.1 billion people – nearly 30% of the global population – are overweight or obese. 
That is nearly two and a half times the number of adults and children who are undernourished. 
Obesity is responsible for about 5% of deaths worldwide. 
This crisis is not just a pressing health concern; it is also a threat to the global economy. 
The total economic impact of obesity is about $2 trillion a year, or 2.8% of world GDP – roughly equivalent to the economic damage caused by smoking or armed violence, war, and terrorism, according to new research by the McKinsey Global Institute (MGI). 
And the problem is likely to worsen. 
If the current trend continues, almost half of the world’s adult population will be overweight or obese by 2030. 
As World Health Organization (WHO) Director-General Margaret Chan has noted, “Not one single country has managed to turn around its obesity epidemic in all age groups.” 
According to the OECD, from 2000 to 2013, the prevalence of obesity increased by at least 0.5% per year in 130 of the 196 countries for which data were collected. 
This global epidemic is not confined to advanced countries. 
As emerging economies climb out of poverty, their citizens are becoming fatter. 
More than 60% of the world’s obese people live in developing countries, where rapid industrialization and urbanization are boosting incomes and therefore calorie intake. 
In India and China, the prevalence of obesity in cities is 3-4 times the rate in rural areas. 
Indeed, the evidence suggests that developing countries are especially vulnerable to the epidemic. 
Obesity rates tend to explode in countries where food was once scarce and suddenly becomes plentiful. 
In the mid-twentieth century, for example, a boom in phosphate mining transformed the Micronesian island state of Nauru from a land of food shortages and starvation to the world’s leader in obesity and type-2 diabetes. 
In 2005, according to the WHO, 94% of men and 93% of women in Nauru were overweight, and more than 70% of the population was obese. 
To make matters worse, in countries with limited public-health services, the cost of health care falls directly on the afflicted households. 
As a result, obesity can lock in poverty and perpetuate inequality. 
Through a review of 500 intervention trials around the world, MGI has identified 74 potential interventions that could be used to address obesity. 
These include subsidized school meals, urban design that encourages walking, better nutritional labeling, restrictions on the advertising of high-calorie food and drinks, and fiscal measures. 
Education concerning the risks of obesity is important, as is taking personal responsibility for one’s health, fitness, and weight. 
But all the evidence shows that relying on knowledge about obesity and willpower is not enough to offset the evolutionary instinct to overeat. 
These effects are compounded by lifestyles that require little or no physical activity. 
People need help, and that means changing the environmental forces shaping their decisions – by, say, reducing standard portion sizes, altering marketing practices, and designing cities and educational establishments to make it easier for people to exercise or be active. 
MGI was able to collect enough data on 44 of the 74 potential interventions to develop an initial assessment of their impact if they were scaled up to a national level. 
If the United Kingdom, for example, were to deploy all 44 interventions, it could rein in obesity rates and help roughly 20% of its overweight and obese population return to a healthy weight within 5-10 years. 
Over the long term, savings from reduced health-care spending and gains from higher productivity could outweigh the investment needed to deliver interventions. 
In the UK, reversing obesity trends could save the National Health Service about $1.2 billion a year. 
For many countries, tackling obesity will require a national – if not global – effort. 
Only a coherent, sustained portfolio of initiatives, implemented on a large scale, will be effective. 
No single entity – government, retailers, consumer-goods companies, restaurants, employers, media organizations, educators, health-care providers, or individuals – can address obesity on its own. 
We do not yet have all the answers when it comes to the best way to tackle obesity. 
But the rapid rise in obesity rates around the world creates a strong case for experimenting with interventions, to see what works. 
Today, investment in obesity research worldwide amounts to some $4 billion a year – just 0.2% of the estimated social costs of obesity. 
We can – and must – do more. 

Welcome to the Twenty-First Century 
BERLIN – The start of 2016 has been anything but calm. 
Falling equity prices in China have destabilized markets worldwide. 
Emerging economies seem to have stalled. 
The price of oil has plunged, pushing petroleum producers into crisis. 
North Korea is flexing its nuclear muscles. 
And in Europe, the ongoing refugee crisis is fomenting a toxic tide of nationalism, which threatens to tear the European Union apart. 
Add to this Russia’s neo-imperial ambitions and the threat of Islamic terrorism, and comets streaking across the sky may be the only thing missing from a picture of a year shaping up to be one of prophetic doom. 
Wherever one looks, chaos seems to be ascendant. 
The international order forged in the fires of the twentieth century seems to be disappearing, and we have not had even the faintest glimpse of what will replace it. 
It is not difficult to put names to the challenges we face: globalization, digitization, climate change, and so forth. 
What is not clear is the context in which the response will come – if at all. 
In which political structures, by whose initiative, and under which rules will these questions be negotiated – or, if negotiation proves impossible, fought over? 
Political and economic order – particularly on a global scale – does not simply arise from peaceful consensus or an unchallenged claim by the most powerful. 
It has always been the result of a struggle for domination – often brutal, bloody, and long – between or among rival powers. 
Only through conflict are the new pillars, institutions, and players of a new order established. 
The liberal Western order in place since the end of World War II was based on the global hegemony of the United States. 
As the only true global power, it was dominant not only in the realm of hard military power (as well as economically and financially), but in nearly all dimensions of soft power (for example, culture, language, mass media, technology, and fashion). 
Today, the Pax Americana that ensured a large degree of global stability has begun to fray – most notably in the Middle East and on the Korean Peninsula. 
The US may still be the world’s strongest power, but it is no longer able or willing to play the role of the world’s policeman or make the sacrifices needed to guarantee order. 
Indeed, in a globalized world, with ever closer integration in terms of communication, technology, and – as we have recently seen – the movement of people, the centers of power are diluted and dispersed; by its very nature, a globalized world eludes the imposition of twentieth-century order. 
And yet, while a new global order may inevitably emerge, its foundations are not yet indiscernible. 
A Chinese-led order seems unlikely. 
China will remain self-absorbed, focused on internal stability and development, and its ambitions are likely to be narrowed to control of its immediate neighborhood and the surrounding seas. 
Furthermore, China lacks, in nearly every respect, the soft power that would be indispensable if it were to try to become a force for global order. 
Nor are these times of turbulent transition likely to end in the emergence of a second Pax Americana. 
Despite America’s technological dominance, there would be too much resistance by regional powers and potential counter-alliances. 
In fact, the main challenge of the coming years is likely to be managing America’s declining influence. 
There is no framework for the retirement of a hegemon. 
While a dominant power can be brought down through a struggle for domination, voluntary retreat is not an option, because the resulting power vacuum would endanger the stability of the entire system. 
Indeed, overseeing the end of Pax Americana is likely to dominate the tenure of America’s next president – whoever that might be. 
For Europe, this raises an equally difficult question. 
Will the decline of Pax Americana, which has served for seven decades as a guarantor of Europe’s internal liberal order, unavoidably lead to crisis, if not conflict? 
Rising neo-nationalism across the continent seems to point toward such a scenario, with appalling implications. 
The bleak prospect of European suicide is no longer unthinkable. 
What will happen if German Chancellor Angela Merkel is brought down by her refugee policy, if the United Kingdom leaves the European Union, or if the French populist Marine Le Pen captures the presidency? 
A plunge into the abyss is the most dangerous outcome imaginable, if not the likeliest. 
Suicide, of course, can be prevented. 
But those who are happily chiseling away at Merkel’s position, the UK’s European identity, and France’s Enlightenment values threaten to undermine the ledge on which we’re all standing. 

 

Global Risk and Reward in 2011 
NEW YORK – The outlook for the global economy in 2011 is, partly, for a persistence of the trends established in 2010. 
These are: an anemic, below-trend, U-shaped recovery in advanced economies, as firms and households continue to repair their balance sheets; a stronger, V-shaped recovery in emerging-market countries, owing to stronger macroeconomic, financial, and policy fundamentals. 
That adds up to close to 4% annual growth for the global economy, with advanced economies growing at around 2% and emerging-market countries growing at about 6%. 
But there are downside and upside risks to this scenario. 
On the downside, one of the most important risks is further financial contagion in Europe if the eurozone’s problems spread – as seems likely – to Portugal, Spain, and Belgium. 
Given the current level of official resources at the disposal of the International Monetary Fund and the European Union, Spain now seems too big to fail yet too big to be bailed out. 
The United States represents another downside risk for global growth. 
In 2011, the US faces a likely double dip in the housing market, high unemployment and weak job creation, a persistent credit crunch, gaping budgetary holes at the state and local level, and steeper borrowing costs as a result of the federal government’s lack of fiscal consolidation. 
Moreover, credit growth on both sides of the Atlantic will be restrained, as many financial institutions in the US and Europe maintain a risk-averse stance toward lending. 
In China and other emerging-market economies, delays in policy tightening could fuel a rise in inflation that forces a tougher clampdown later, with China, in particular, risking a hard landing. 
There is also a risk that capital inflows to emerging markets will be mismanaged, thus fueling credit and asset bubbles. 
Moreover, further increases in oil, energy, and commodity prices could lead to negative terms of trade and a reduction in real disposable income in net commodity-importing countries, while adding to inflationary pressures in emerging markets. 
Moreover, currency tensions will remain high. 
Countries with large current-account deficits need nominal and real depreciation (to sustain growth via net exports while ongoing private- and public-sector deleveraging keeps domestic demand weak), whereas surplus countries (especially emerging markets) are using currency intervention to resist nominal appreciation and sterilized intervention to combat real appreciation. 
This is forcing deficit countries into real exchange-rate adjustments via deflation – and thus a rising burden of public and private debt that may lead to disorderly defaults. 
Furthermore, several major geopolitical risks loom, including military confrontation between North and South Korea and the lingering possibility that Israel – or even the US – might use military force to counter Iran’s nuclear weapons program. 
There are also the political and economic turmoil in Pakistan and the risk of a rise in cyber-attacks – for example, in retaliation for criminal proceedings against WikiLeaks. 
In the US, slower private-sector deleveraging – given the fiscal stimulus from the extension of unemployment benefits for 13 months, the payroll-tax cut, and maintenance of current income-tax rates for another two years – could lull policymakers into assuming that relatively large fiscal and current-account imbalances can continue indefinitely. 
This could generate financial strains over the medium term – and protectionist pressures in the short term. 
Finally, in the face of political opposition to fiscal consolidation, especially in the US, there is a risk that the path of least resistance becomes continued monetization of fiscal deficits. 
Eventually (once the slack in goods and labor markets is reduced), this would push inflation expectations – and yield curves – higher. 
But there are also several upside risks. 
The US corporate sector is strong and very profitable, owing to massive labor shedding, creating scope for increased capital spending and hiring to contribute to more robust and above-trend GDP growth in 2011. 
Similarly, the eurozone, driven by Germany, could lurch toward greater economic and political union (especially some form of fiscal union), thus containing the problems of its periphery. 
Meanwhile, growth in Germany and the eurozone “core” may further accelerate given the strength of emerging markets, which may show even greater resilience, underpinning more rapid global expansion. 
The attenuation of downside risks and pleasant surprises in developed and emerging economies could lead to a further increase in demand for risky assets (equities and credit), which would reinforce economic recovery via wealth effects and lower borrowing costs. 
Positive feedback from consumption to production, employment, and income generation – both within countries and across countries via trade channels – could further accelerate the pace of global growth, particularly if monetary policies in most advanced economies remain looser than expected, supporting asset reflation and thus demand and growth. 
Indeed, after four years (2007-2010) of either recession or sub-par recovery, the process of balance-sheet repair – while not completed yet – is underway, and may result in less saving and more spending to boost growth in advanced economies. 
The damage from the financial crisis is still ongoing, but stronger growth can heal many wounds, especially debt-driven wounds. 
So far, the downside and upside risks for the world economy are balanced. 
But if sound government policies in advanced and major emerging economies contain the downside risks that are more prevalent in the first half of this year – which derive from political and policy uncertainty – a more resilient global economic recovery could take hold in the second half of 2011 and into 2012. 


The Garment Industry’s Technology Challenge 
COLOMBO – For many years, discussion of the global garment industry has been dominated by the following question: Where were your clothes made, and by whom? 
But today, there is a more relevant question: How were your clothes made, and by what? 
What you wear is going high-tech, whether you know it or not. 
After decades of labor-intensive production by workers in the Global South, artificial intelligence (AI) and robotics are replacing humans on the factory floor. 
But, while these shifts will bring new benefits to consumers – such as faster delivery and custom clothing – they will come with costs. 
Changes to the garment industry’s business model are threatening the livelihoods of millions of people in low- and middle-income countries, and how these economies adapt will have far-reaching implications. 
Today, more than half of the world’s textile exports, and about 70% of its ready-made apparel exports, come from developing economies. 
In Asia, some 43 million people are employed in the garment, textile, and footwear industries, with women accounting for three-quarters of the workforce. 
From China to Bangladesh, textile and apparel manufacturing has facilitated female empowerment and lifted entire generations out of poverty. 
Simply put, the end of these jobs would be devastating. 
But keeping them will not be easy. 
To understand what businesses in the Global South are up against, consider the competition they face. 
For example, last year the online retailer Amazon was granted a patent in the United States for an “on demand” apparel manufacturing system that can customize orders and optimize production from anywhere, for less. 
The company has already won permitting approval for its first production plant, which will be in Norristown, Pennsylvania. 
These moves come two years after Amazon announced its own clothing line. 
And, with futuristic inventions like AI analysis of fashion trends and even a “blended-reality” mirror to dress online shoppers virtually, Amazon’s engagement in – and influence on – the clothing business will only deepen. 
In many ways, these innovations will be good for the textile and apparel industry. 
Not only will they make shopping more fun; they will also increase production efficiency and lower costs. 
Major brands will eventually be able to respond more quickly to consumer tastes while keeping inventories low and limiting the production of excess clothing. 
In fact, it may be only a matter of time before high street fashion brands swap the “made in” labels from developing countries for “Made by Amazon Manufacturing Services.” 
The trouble is, all of these changes will mean fewer jobs for many people. 
As factories face closure, communities will lose income and economies will teeter. 
The question now is what policymakers should do about it. 
For many industries, navigating what the World Economic Forum’s Klaus Schwab has called the Fourth Industrial Revolution means regulating technology. 
But in the textile and apparel trade, that alone will not solve the problem. 
Instead, the industry must adopt a more human-centric, globally conscious approach to business. 
New technologies should be evaluated with human costs in mind – measured in terms of lost incomes, shattered livelihoods, and uprooted families. 
Moreover, technology companies must do better at collaborating with apparel manufacturers to manage future platforms. 
As traditional factory jobs evolve, technology-servicing roles will become more important. 
Just as sewing machines break and need calibration, so, too, will the apparel printers and packaging systems of the future. 
Finally, to help ease the transition from manual to modern manufacturing, businesses and governments must begin improving current employees’ tech literacy. 
If today’s workforces are to remain relevant in the economies of tomorrow, employees will need the skills to contribute. 
And yet, to make any of this possible, leaders in developing countries must come to terms with a hard truth: large pools of cheap labor are no longer a strategic advantage in the global economy. 
Industrial reinvention is urgently needed. 
Governments should advocate for trade agreements that cushion the impact when manufacturing jobs are lost, while laying the groundwork for the transition to more tech-heavy industries. 
From factory floors to government offices, bold measures are needed if the Global South is to remain relevant to the global garment industry. 
Change is not coming to the world of apparel manufacturing; it is already here. 

The Post-Crisis Crises 
NEW YORK – In the shadow of the euro crisis and America’s fiscal cliff, it is easy to ignore the global economy’s long-term problems. 
But, while we focus on immediate concerns, they continue to fester, and we overlook them at our peril. 
The most serious is global warming. 
While the global economy’s weak performance has led to a corresponding slowdown in the increase in carbon emissions, it amounts to only a short respite. 
And we are far behind the curve: Because we have been so slow to respond to climate change, achieving the targeted limit of a two-degree (centigrade) rise in global temperature, will require sharp reductions in emissions in the future. 
Some suggest that, given the economic slowdown, we should put global warming on the backburner. 
On the contrary, retrofitting the global economy for climate change would help to restore aggregate demand and growth. 
At the same time, the pace of technological progress and globalization necessitates rapid structural changes in both developed and developing countries alike. 
Such changes can be traumatic, and markets often do not handle them well. 
Just as the Great Depression arose in part from the difficulties in moving from a rural, agrarian economy to an urban, manufacturing one, so today’s problems arise partly from the need to move from manufacturing to services. 
New firms must be created, and modern financial markets are better at speculation and exploitation than they are at providing funds for new enterprises, especially small and medium-size companies. 
Moreover, making the transition requires investments in human capital that individuals often cannot afford. 
Among the services that people want are health and education, two sectors in which government naturally plays an important role (owing to inherent market imperfections in these sectors and concerns about equity). 
Before the 2008 crisis, there was much talk of global imbalances, and the need for the trade-surplus countries, like Germany and China, to increase their consumption. 
That issue has not gone away; indeed, Germany’s failure to address its chronic external surplus is part and parcel of the euro crisis. 
China’s surplus, as a percentage of GDP, has fallen, but the long-term implications have yet to play out. 
America’s overall trade deficit will not disappear without an increase in domestic savings and a more fundamental change in global monetary arrangements. 
The former would exacerbate the country’s slowdown, and neither change is in the cards. 
As China increases its consumption, it will not necessarily buy more goods from the United States. 
In fact, it is more likely to increase consumption of non-traded goods – like health care and education – resulting in profound disturbances to the global supply chain, especially in countries that had been supplying the inputs to China’s manufacturing exporters. 
Finally, there is a worldwide crisis in inequality. 
The problem is not only that the top income groups are getting a larger share of the economic pie, but also that those in the middle are not sharing in economic growth, while in many countries poverty is increasing. 
In the US, equality of opportunity has been exposed as a myth. 
While the Great Recession has exacerbated these trends, they were apparent long before its onset. 
Indeed, I (and others) have argued that growing inequality is one of the reasons for the economic slowdown, and is partly a consequence of the global economy’s deep, ongoing structural changes. 
An economic and political system that does not deliver for most citizens is one that is not sustainable in the long run. 
Eventually, faith in democracy and the market economy will erode, and the legitimacy of existing institutions and arrangements will be called into question. 
The good news is that the gap between the emerging and advanced countries has narrowed greatly in the last three decades. 
Nonetheless, hundreds of millions of people remain in poverty, and there has been only a little progress in reducing the gap between the least developed countries and the rest. 
Here, unfair trade agreements – including the persistence of unjustifiable agricultural subsidies, which depress the prices upon which the income of many of the poorest depend – have played a role. 
The developed countries have not lived up to their promise in Doha in November 2001 to create a pro-development trade regime, or to their pledge at the G-8 summit in Gleneagles in 2005 to provide significantly more assistance to the poorest countries. 
The market will not, on its own, solve any of these problems. 
Global warming is a quintessential “public goods” problem. 
To make the structural transitions that the world needs, we need governments to take a more active role – at a time when demands for cutbacks are increasing in Europe and the US. 
As we struggle with today’s crises, we should be asking whether we are responding in ways that exacerbate our long-term problems. 
The path marked out by the deficit hawks and austerity advocates both weakens the economy today and undermines future prospects. 
The irony is that, with insufficient aggregate demand the major source of global weakness today, there is an alternative: invest in our future, in ways that help us to address simultaneously the problems of global warming, global inequality and poverty, and the necessity of structural change. 

Where Has Global Warming Gone? 
SEATTLE – For the last quarter of the twentieth century, the average temperature at the surface of the earth edged inexorably upward. 
Then, to the surprise even of scientists, it stopped. 
The concentration of carbon dioxide in the earth’s atmosphere continued to rise; indeed, it is higher today than it has been for centuries. 
And yet, for the last 15 years, according to the conventional way of measuring global warming, the planet does not seem to have become any hotter. 
What explains this unexpected turn of events, and what does it mean for future climate policy? 
The pause in the rise of surface temperatures is real. 
It can be observed in surveys of the surface of the sea and in satellite measurements of the troposphere. 
But the reason it has occurred is not that our greenhouse-gas emissions are no longer changing the earth’s climate; it is that surface temperature is a poor metric for human-induced warming. 
Indeed, what scientists have figured out is that, instead of warming the surface, the excess heat that is being generated has gone to the deeper oceans. 
This calls into question some of the international strategies for combating climate change that are currently being negotiated, such as those aimed at preventing the global temperature at the earth’s surface from rising more than 2º Celsius above the pre-industrial average. 
Scientists probably did not adequately convey to the public that their projections for future warming are based on models that account only for the so-called “forced response” in global mean surface temperatures – that is, the change caused by greenhouse-gas emissions. 
But what is observed at the surface includes unforced, or natural, variations, such as the El Niño and La Niña fluctuations from year to year, and the 60-70 year cycle from the fluctuations of the Great Ocean Conveyor Belt in the Atlantic. 
In fact, this cycle is now thought to bury heat deep in the oceans periodically. 
And, because it existed even before humans put significant carbon into the atmosphere, it is likely natural. 
Given the oceans’ massive heat-storage capacity, determining how much of the warming remains at the surface over the course of decades is a very difficult task. 
Though the challenge is beginning to be appreciated, current projections of the dreaded two-degree warming have yet to take into account variable ocean cycles. 
To be sure, surface temperatures remain important. 
They are a better measure of the threats posed by climate change than heat sequestered underwater. 
But some of the threats that scientists (and economists) deduce from the surface temperature also reflect natural climate change, and thus cannot be mitigated through the reduction of CO2 emissions. 
The total amount of heat contained in oceans responds to changes in emissions, and is therefore a better metric for measuring such responses. 
Indeed, it has continued to warm as expected, even as the surface temperature has stopped rising. 
The oceans’ heat content is measured by a network of more than 3,000 free-drifting robotic floats spread out across the world’s waters, where they routinely dive 2,000 meters beneath the surface. 
The temperature they measure is transmitted to orbiting satellites and made available online to anyone in near-real time. 
For ease of interpretation, the oceans’ heat content can easily be converted to a mean temperature after dividing by a constant. 
In time, models could demonstrate how to relate this new global metric to emissions’ regional climate impact. 
The intensive scientific search for an explanation for the pause in global warming at the earth’s surface has led to a better understanding of the complex functioning of the climate. 
It confirms the long-held theory that the earth has an energy budget that is affected by radiative perturbations at the top of the atmosphere, though partitioning that energy between the surface and the deeper oceans has been difficult. 
Nobody knows how long the current pause will last. 
Nonetheless, at some point, the natural cycles will shift; the oceans will cease to absorb the bulk of the planet’s warming; and surface temperatures will begin to climb again. 
When they do, we can expect the increase to resume the rapid pace observed during the late twentieth century, when surface temperature rose by about 0.17 degrees Celsius every ten years. 
In the meantime, whether the overall risk to our environment has been reduced by the pause remains an open question. 
Some argue that what went down will eventually come back up. 
The sloshing back and forth of warm and cold waters – El Niño and La Niña – in the shallow layer of the equatorial Pacific Ocean will continue to produce fluctuations in surface temperatures every year. 
Over longer periods, however, the risk that the heat currently stored in the deep ocean will resurface is remote. 
One thing is clear. 
Monitoring surface temperatures does not give us an accurate enough representation of human-induced global warming. 
As long as we lack a clear understanding of the relationship between our cumulative greenhouse-gas emissions and the temperature of the earth, it will remain difficult to assess the potential for damage related to climate change caused by humans – or develop the right strategies to minimize it. 

From the Front Lines of Climate Change 
MANILA/SAN JOSÉ – On April 22, dignitaries representing no fewer than 175 parties signed the global climate change agreement concluded in Paris in December, setting a record for the adoption of an international accord. 
The show of support is heartening. It provides hope that the momentum that led to the breakthrough deal in December remains undiminished. 
But securing an agreement in Paris was just the first step on a long road towards protecting the global climate and the world’s most vulnerable countries. 
The signing ceremony was the second. 
Next comes the ratification process; 55 countries, representing at least 55% of global emissions, will need to ratify the agreement to enable it to enter into force. 
The good news is that the process is already underway. 
In February, Fiji became the first nation to ratify the treaty, followed by three other small island states. 
All four are members of the Climate Vulnerable Forum, a group of 43 countries – including Costa Rica and the Philippines, which we represent – on the front lines of climate change. 
Members of the forum fought tirelessly for an agreement in Paris, and we will do everything within our power to speed up its entry into force. 
The Paris agreement offers the world its best hope of slowing and ultimately stopping changes to our climate. 
Left unchecked, global warming will threaten the health and safety of our people, damage the ecosystems on which we all depend, and – through rising sea levels – put the very existence of some countries in jeopardy. 
And yet, if the battle against climate change is to be won, the Paris agreement will not be sufficient. 
The voluntary emission-reduction commitments contained in the so-called Intended Nationally Determined Contributions (INDCs), submitted by 187 countries by the end of the talks, will not be enough to prevent dangerous climate change. 
And for those countries that are most vulnerable to the harmful effects of global warming, far more needs to be done if catastrophic effects are to be avoided. 
Early calculations have suggested that if all of the INDCs were fully implemented, average global temperatures would still rise by the end of the century to 2.7 degrees Celsius above pre-industrial levels. 
That is considerably beyond the already dangerous ceiling of two degrees set in Copenhagen in 2009 and included in the Paris agreement. 
New research, from Climate Interactive and MIT Sloan, suggests that temperatures could rise even higher – by 3.5 degrees Celsius. 
The Climate Vulnerable Forum has long argued that even two degrees of warming risks creating unbearable conditions for some countries. 
That is why it has fought to limit the rise in temperature to 1.5 degrees – an ambition that was included, thanks to the forum’s efforts, in the Paris agreement. 
That seemingly small difference matters. 
As the latest research shows, it would have a dramatic and measurable impact on extreme weather events, water availability, crop yields, coral-reef degradation, and sea-level rise. 
And it will be the most vulnerable people – rural women, the sick, the old, and the very young – who are most at risk. 
For the world’s most vulnerable countries, limiting the temperature rise to 1.5 degrees is not just an aspiration; it is a matter of survival. 
The goal is an ambitious one. 
But vulnerable developing countries are committed to helping achieve it. 
The V-20 group of finance ministers of vulnerable nations recently committed to introducing carbon-pricing mechanisms across 43 markets within ten years. 
We have also pledged to improve financial accounting, so that the costs of climate change and the benefits of climate action are incorporated into economic policymaking. 
Costa Rica has just approved a law promoting electric trains, and legislators are debating a bill to provide incentives for electric vehicles and buses. 
Such initiatives are more commonly associated with advanced economies than with developing countries. 
And the rich world does have a moral obligation to move first and faster – with policies, technologies, and finance – to reduce the emissions that cause global warming. 
But we also recognize that developing countries have a responsibility to act and that doing so can generate immense economic, social, and public health advantages for their citizens. 
We cannot succeed on our own; this much is certain. 
The Climate Vulnerable Forum represents a tiny share of global emissions. 
We need the industrialized countries and the giants of the developing world to redouble their efforts to reduce their emissions, so that global warming can be limited to 1.5 degrees. 
Only then can disaster be averted. 

Global Warming’s Cheap, Effective Solution 
COPENHAGEN – Global warming will mean that more people die from the heat. 
There will be a rise in sea levels, more malaria, starvation, and poverty. 
Concern has been great, but humanity has done very little that will actually prevent these outcomes. 
Carbon emissions have kept increasing, despite repeated promises of cuts. 
We all have a stake in ensuring that climate change is stopped. 
We turned to climate scientists to inform us about the problem of global warming. 
Now we need to turn to climate economists to enlighten us about the benefits, costs, and possible outcomes from different responses to this challenge. 
World leaders are meeting in Copenhagen this December to forge a new pact to tackle global warming. 
Should they continue with plans to make carbon-cutting promises that are unlikely to be fulfilled? 
Should they instead delay reductions for 20 years? 
What could be achieved by planting more trees, cutting methane, or reducing black soot emissions? 
Is it sensible to focus on a technological solution to warming? 
Or should we just adapt to a warmer world? 
Much of the current policy debate remains focused on cutting carbon, but there are many ways to go about repairing the global climate. 
Our choices will result in different outcomes and different costs. 
The optimal combination of solutions will create the biggest impact for the least money. 
A groundbreaking paper by economists Eric Bickel and Lee Lane is one of the first – and certainly the most comprehensive – study of the costs and benefits of climate engineering. 
Deliberately manipulating the earth’s climate seems like something from science fiction. 
But as President Barack Obama’s science adviser, John Holdren, has said it has “got to be looked at,” and many prominent scientists agree. 
Bickel and Lane offer compelling evidence that a tiny investment in climate engineering might be able to reduce as much of global warming’s effects as trillions of dollars spent on carbon emission reductions. 
Climate engineering has the advantage of speed. 
There is a significant delay between carbon cuts and any temperature drop – even halving global emissions by mid-century would barely be measurable by the end of the century. 
Making green energy cheap and prevalent will also take a long time. 
Consider that electrification of the global economy is still incomplete after more than a century of effort. 
Many methods of atmospheric engineering have been proposed. 
Solar radiation management appears to be one of the most hopeful. 
Atmospheric greenhouse gases allow sunlight to pass through but absorb heat and radiate some down to the earth’s surface. 
All else being equal, higher concentrations will warm the planet. 
Solar radiation management would bounce a little sunlight back into space. 
Reflecting just 1-2% of the total sunlight that strikes the earth could offset as much warming as that caused by doubling preindustrial levels of greenhouse gases. 
When Mount Pinatubo erupted in 1991, about a million tons of sulfur dioxide was pumped into the stratosphere, reacting with water to form a hazy layer that spread around the globe, and – by scattering and absorbing incoming sunlight – cooled the earth’s surface for almost two years. 
We could mimic this effect through stratospheric aerosol insertion – essentially launching material like sulfur dioxide or soot into the stratosphere. 
Another promising approach is marine cloud whitening, which sprays seawater droplets into marine clouds to make them reflect more sunlight. 
This augments the natural process, where sea salt from the oceans provides water vapor with the cloud condensation nuclei. 
It is remarkable to consider that we could cancel out this century’s global warming with 1,900 unmanned ships spraying seawater mist into the air to thicken clouds. 
The total cost would be about $9 billion, and the benefits of preventing the temperature increase would add up to about $20 trillion. 
That is the equivalent of doing about $2000 worth of good with every dollar spent. 
Many of the risks of climate engineering have been overstated. 
Marine cloud whitening would not lead to permanent atmospheric changes, and could be used only when needed. 
Turning seawater into clouds is a natural process. 
The biggest challenge is public perception. 
Many environmental lobbyists oppose even researching climate engineering. 
This is startling, given the manifold benefits. 
If we care most about avoiding warmer temperatures, it seems that we should be elated that this simple, cost-effective approach shows so much promise. 
Climate engineering could remain a back-up option in case of necessity. 
Or we could put it on the agenda today. 
In either case, there is a commanding case for its serious consideration. 
We are on track to being the generation that wasted decades bickering over carbon-emission cuts and failed to stop the harmful effects of warming. 
That would be a shameful legacy – one that could be avoided by re-thinking climate policy. 

Global Warming’s Dirty Secret 
Last week, the European Union declared that it had practically saved the planet. 
With European Commission President Jose Manuel Barroso claiming that Europe will lead the way on climate change, the EU has promised to cut CO2 emissions by 20% below 1990-levels by 2020. 
Of course, with the EU already having promised an 8% cut by next year in the Kyoto Protocol, this new target seems slightly less ambitious. 
Moreover, in continuing the fundamental problems besetting the crippled Kyoto Protocol, the EU has essentially gone and made a worse deal. 
Man-made climate change is, of course, real, and constitutes a serious problem. 
Yet the current cut-emissions-now-before-it-is-too-late mindset neglects the fact that the world has no sensible short-term solutions. 
This seems to be why we focus on feel-good approaches like the Kyoto Protocol, whose fundamental problem has always been that it is simultaneously impossibly ambitious, environmentally inconsequential, and inordinately expensive. 
It required such big reductions that only few countries could live up to it. 
Some countries, like the United States and Australia, chose to opt out of its stringent demands; others, like Canada, Japan, and a raft of European states, pay lip service to its requirements but will essentially miss its targets. 
Yet, even if everyone had participated and continued to stick to Kyoto’s ever more stringent commitments, it would have had virtually no environmental effect. 
The treaty’s effect on temperature would be immeasurable by mid-century and only postpone warming by five years in 2100. 
Nonetheless, the cost would have been anything but trivial – an estimated $180 billion per year. 
With its high-pitched rhetoric, you would be forgiven for believing that the EU has now single-handedly taken the major step towards solving the problem. 
Barroso calls the agreement “historic,” Tony Blair extols its “groundbreaking, bold, ambitious targets,” and German Chancellor Angela Merkel even ventured that the promises “can avoid what could well be a human calamity.” 
But nobody sees fit to reveal the agreement’s dirty little secret: it will do next to no good, and again at very high cost. 
According to one well-established and peer-reviewed model, the effect of the EU cutting emissions by 20% will postpone warming in 2100 by just two years, yet the cost will be about $90 billion annually. 
It will be costly, because Europe is a costly place to cut CO2, and it will be inconsequential, because the EU will account for only about 6% of all emissions in the twenty-first century. 
So the new treaty will be an even less efficient use of our resources than the old Kyoto Protocol. 
It is important to learn from the past. 
We have often been promised dramatic cuts in CO2 emissions far into the future, only to see the promises vanish when we got there. 
In Rio de Janeiro in 1992, the West promised to stabilize emissions, but overshot by 12%. 
In Kyoto, we were promised a 7% reduction in world emissions, but will probably achieve only 0.4%. 
Of course, those promises were made by politicians who in all likelihood will no longer be in office when the time comes to fulfil them. 
We will not be able to solve global warming over the next decades, but only the next half or full century. 
We need to find a viable, long-term strategy that is smart, equitable, and doesn’t require inordinate sacrifice for trivial benefits. 
Fortunately, there is such a strategy: research and development. 
Investing in R&D of non-carbon-emitting energy technologies would leave future generations able to make serious and yet economically feasible and advantageous cuts. 
A new global warming treaty should mandate spending 0.05% of GDP on R&D in the future. 
It would be much cheaper, yet do much more good in the long run. 
The EU’s new global warming agreement may help win elections for leaders faced with voters scared by the prospect of climate change. 
But it will do virtually no good, at high cost, and – as with many other lofty promises from the EU – it will carry a high probability of failure. 
Let us hope that the rest of the world will keep its cool and propose a better, cheaper, and more effective solution for the future. 

Global Warming’s Misunderstood Victims 
BAMAKO, MALI – Media organizations in wealthy countries regularly send forth reporters to find “victims of global warming.” 
In dispatches from the Pacific Islands, Bangladesh, or Ethiopia, journalists warn of impending calamity. 
Global warming is the most horrific challenge facing these regions, we are told. 
Its resolution is vital. 
But seldom do we hear from the local people who are said to be in danger. 
These people are not voiceless; we just pay no attention to what they say. 
The Copenhagen Consensus Center set out to ask people in global-warming hot spots about their fears and hopes. 
In Mojo, central Ethiopia, our researchers met Tadese Denkue, a 68-year-old former soldier with no regular income. 
“I never know when I will be able to buy myself some food,” he said. “I only know that I suffer a lot. 
This is not a decent life.” 
Tadese has never heard of global warming. 
When it is explained to him, he is dismissive. 
He has more immediate concerns: “The first thing I need is food, and then a job.” 
Tadese is suffering from his second bout of malaria this year. 
He has lost count of how many times he has contracted the disease. 
Our researcher accompanies him to a free clinic. 
The electricity is not working. 
A doctor admits that most patients are sent home without testing or treatment: the clinic has run out of medicine. 
The threat of more malaria has been used to argue for drastic carbon cuts. 
Warmer, wetter weather will improve conditions for the malaria parasite. 
Most estimates suggest that global warming will put 3% more of the earth’s population at risk of catching malaria by 2100. 
The most efficient, global carbon cuts – designed to keep temperature increases under two degrees Celsius – would cost $40 trillion a year by 2100, according to research by Richard Tol for the Copenhagen Consensus Center. 
In the best-case scenario, this expenditure would reduce the at-risk population by only 3%. 
In comparison, spending $3 billion annually on mosquito nets, environmentally safe indoor DDT sprays, and subsidies for effective new combination therapies could halve the total number of those infected within one decade. 
For the money it takes to save one life with carbon cuts, smarter policies could save 78,000 lives. 
Of course, malaria is far from the only reason we worry about global warming. 
Twenty kilometers from Mojo, our researcher met Desi Koricho and her eight-month-old son, Michel. 
Every two weeks, Desi walks four hours to take Michel to the health center. 
After two months of malnutrition treatment, Michel has grown a lot but remains half the normal size of a baby his age. 
Michel is not Desi’s biological child. 
She took him in after his father committed suicide and he was abandoned. 
Desi likely suffers from undiagnosed malnutrition herself. 
It is rife here. 
There are no roads, electricity, or other infrastructure. 
Conditions are cramped and unhygienic. 
“We need everything,” Desi says. 
Solving the malnutrition challenge would be a good start. 
Campaigners across Europe and the US use the threat of starvation to argue for drastic carbon cuts. 
For most regions, weather changes will increase agricultural productivity. 
Cruelly, this is not the case for parts of Africa that are already suffering from hunger. 
But, as with malaria, all of the evidence shows that direct policies are much more effective than carbon cuts. 
One effective, under-appreciated intervention is providing micro-nutrients to those who lack them. 
Providing Vitamin A and zinc to 80% of the 140 million or so undernourished children in the world would require a commitment of just $60 million annually. 
For $286 million, we could get iron and iodine to more than 2.5 billion people. 
The choice is stark: for a few hundred million dollars, we could help almost half of humanity now. 
Compare this to the investments to tackle climate change – $40 trillion annually by the end of the century – which would save a hundred times fewer starving people (and in 90 years!). 
For every person saved from malnutrition through climate policies, the same money could have saved half a million people from micronutrient malnutrition through direct policies. 
Some argue that the choice between spending money on carbon cuts and on direct policies is unfair. 
But it is a basic fact that no dollar can be spent twice. 
Rich countries and donors have limited budgets and attention spans. 
If we spend vast amounts of money on carbon cuts in the mistaken belief that we are stopping malaria and reducing malnutrition, we are less likely to put aside money for the direct policies that would help today. 
Indeed, for every dollar spent on strong climate policies, we will likely do about $0.02 of good for the future. 
If we spent the same dollar on simple policies to help malnutrition or malaria now, we could do $20 or more good – 1000 times better, when all impacts are taken into account. 
On Mount Kilimanjaro in Tanzania – where the effects of global warming can already be felt – our researcher encountered 28-year-old Rehema Ibrahim. 
Rehema was divorced by her husband and disowned by her family after she failed to produce children. 
To find out if she was the cause of the infertility, she started sleeping with other men. 
She is now HIV-positive, an outcast in a terribly poor society. 
Rehema has noticed changes in the weather. 
She says that the snow and ice have been melting. 
She knows what our researcher means by “global warming.” 
But, she says: “The issues I am experiencing have greater priority. 
The HIV and the problems it is causing are greater than the [receding] ice.” 
Campaigners for carbon-emission reductions regularly highlight the melting snow and ice of Mount Kilimanjaro. 
But we need to pay as much attention to the people living in the mountain’s shadow. 

Global Warming’s Technology Deficit 
COPENHAGEN – Our current approach to solving global warming will not work. 
It is flawed economically, because carbon taxes will cost a fortune and do little, and it is flawed politically, because negotiations to reduce CO2 emissions will become ever more fraught and divisive. 
And even if you disagree on both counts, the current approach is also flawed technologically. 
Many countries are now setting ambitious carbon-cutting goals ahead of global negotiations in Copenhagen this December to replace the Kyoto Protocol. 
Let us imagine that the world ultimately agrees on an ambitious target. 
Say we decide to reduce CO2 emissions by three-quarters by 2100 while maintaining reasonable growth. 
Herein lies the technological problem: to meet this goal, non-carbon-based sources of energy would have to be an astounding 2.5 times greater in 2100 than the level of total global energy consumption was in 2000. 
These figures were calculated by economists Chris Green and Isabel Galiana of McGill University. 
Their research shows that confronting global warming effectively requires nothing short of a technological revolution. 
We are not taking this challenge seriously. 
If we continue on our current path, technological development will be nowhere near significant enough to make non-carbon-based energy sources competitive with fossil fuels on price and effectiveness. 
In Copenhagen this December, the focus will be on how much carbon to cut, rather than on how to do so. 
Little or no consideration will be given to whether the means of cutting emissions are sufficient to achieve the goals. 
Politicians will base their decisions on global warming models that simply assume that technological breakthroughs will happen by themselves. 
This faith is sadly – and dangerously – misplaced. 
Green and Galiana examine the state of non-carbon-based energy today – nuclear, wind, solar, geothermal, etc. – and find that, taken together, alternative energy sources would get us less than halfway toward a path of stable carbon emissions by 2050, and only a tiny fraction of the way toward stabilization by 2100. 
We need many, many times more non-carbon-based energy than is currently produced. 
Yet the needed technology will not be ready in terms of scalability or stability. 
In many cases, there is still a need for the most basic research and development. 
We are not even close to getting this revolution started. 
Current technology is so inefficient that – to take just one example – if we were serious about wind power, we would have to blanket most countries with wind turbines to generate enough energy for everybody, and we would still have the massive problem of storage: we don’t know what to do when the wind doesn’t blow. 
Policymakers should abandon fraught carbon-reduction negotiations, and instead make agreements to invest in research and development to get this technology to the level where it needs to be. 
Not only would this have a much greater chance of actually addressing climate change, but it would also have a much greater chance of political success. 
The biggest emitters of the twenty-first century, including India and China, are unwilling to sign up to tough, costly emission targets. 
They would be much more likely to embrace a cheaper, smarter, and more beneficial path of innovation. 
Today’s politicians focus narrowly on how high a carbon tax should be to stop people from using fossil fuels. 
That is the wrong question. 
The market alone is an ineffective way to stimulate research and development into uncertain technology, and a high carbon tax will simply hurt growth if alternatives are not ready. In other words, we will all be worse off. 
Green and Galiana propose limiting carbon pricing initially to a low tax (say, $5.00 a ton) to finance energy research and development. 
Over time, they argue, the tax should be allowed to rise slowly to encourage the deployment of effective, affordable technology alternatives. 
Investing about $100 billion annually in non-carbon-based energy research would mean that we could essentially fix climate change on the century scale. 
Green and Galiana calculate the benefits – from reduced warming and greater prosperity – and conservatively conclude that for every dollar spent this approach would avoid about $11 of climate damage. 
Compare this to other analyses showing that strong and immediate carbon cuts would be expensive, yet achieve as little as $0.02 of avoided climate damage. 
If we continue implementing policies to reduce emissions in the short term without any focus on developing the technology to achieve this, there is only one possible outcome: virtually no climate impact, but a significant dent in global economic growth, with more people in poverty, and the planet in a worse place than it could be. 

Global Warnings 
You know how you are told to give your kids organic food because pesticides will give them cancer? 
Well, it’s technically true that there is a link between the chemicals and illness, but the risk is miniscule in any well-regulated country. 
There is another threat that you haven’t been told much about. 
One of the best ways to avoid cancer is to eat lots of fruit and vegetables. 
Organic items are 10% or 20% more expensive than regular produce, so most of us naturally buy less when we “go organic.” 
If you reduce your child’s intake of fruits and vegetables by just 0.03 grams a day (that’s the equivalent of half a grain of rice) when you opt for more expensive organic produce, the total risk of cancer goes up, not down. 
Omit buying just one apple every 20 years because you have gone organic, and your child is worse off. 
My intention isn’t to scare people away from organic food. 
But we should hear both sides of any story. 
Consider a tale that has made the covers of some of the world’s biggest magazines and newspapers: the plight of the polar bear. 
We are told that global warming will wipe out this majestic creature. We are not told, however, that over the past 40 years – while temperatures have risen – the global polar bear population has increased from 5,000 to 25,000. 
Campaigners and the media claim that we should cut our CO2 emissions to save the polar bear. 
Well, then, let’s do the math. 
Let’s imagine that every country in the world – including the United States and Australia – were to sign the Kyoto Protocol and cut its CO2 emissions for the rest of this century. 
Looking at the best-studied polar bear population of 1,000 bears, in the West Hudson Bay, how many polar bears would we save in a year? 
Ten? 
Twenty? 
A hundred? 
Actually, we would save less than one-tenth of a polar bear. 
If we really do care about saving polar bears, we could do something much simpler and more effective: ban hunting them. 
Each year, 49 bears are shot in the West Hudson Bay alone. 
So why don’t we stop killing 49 bears a year before we commit trillions of dollars to do hundreds of times less good? 
From the promotion of organic food to declarations of the polar bear’s imminent demise, the media pelt us with a constant barrage of one-sided warnings. 
The list of urgent concerns is topped by global warming, but also includes terrorism, pesticides, and the loss of biodiversity – and seems to have virtually no end. 
All the while, we know of the terrible conditions that still face the majority of the world’s population, with more than a billion poor, two billion without electricity, and three billion without clean drinking water and sanitation. 
Much of my work is to make sense of all these global warnings. 
I try to put them in perspective and figure out which ones really should concern us, and when we should act on them. 
Perhaps surprisingly, not everything of concern should be dealt with immediately. 
If we don’t have a good way to fix a problem, it might be better to focus on something else first. 
After all, when you don’t know where your next meal is coming from, it’s hard to worry about what global temperatures will be 100 years from now. 
Things have improved immensely in both the developing and developed worlds. 
In the last 100 years, scientists have won many of the most important battles against infectious diseases, to the extent that poverty is now the main reason for a lack of treatment. 
Global average life expectancy in 1900 was 30 years; today, it is 68 years. 
Food has become more plentiful and affordable, especially in the developing world, where calorie availability has increased by 40% per person over the past 40 years, while food prices have more than halved. 
Consequently, the proportion of hungry in the Third World has dropped from 50% in 1950 to less than 17% today, while worldwide incomes have increased more than three-fold. 
Perhaps most importantly, all of these positive trends are expected to continue. 
The United Nations estimates that average life expectancy will reach 75 years by the middle of the century, and that the proportion of those going hungry will drop below 4%. 
By the close of the century, incomes will have increased six-fold in industrialized countries and 12-fold in developing countries, making the average person in the developing world richer in 2100 than the average American or European is today. 
The number of poor will drop from a billion to less than five million. 
None of this means we should stop worrying about the future. 
But it does mean that we can quit panicking and start thinking calmly to ensure that we focus on the right issues. 
Global alarm bells might cause pangs of guilt for wealthy Westerners, but they don’t give us an adequate understanding of what’s going on. 
We all need to hear both sides of the story. 


Grappling With Globalization 4.0 
GENEVA – After World War II, the international community came together to build a shared future. 
Now, it must do so again. 
Owing to the slow and uneven recovery in the decade since the global financial crisis, a substantial part of society has become disaffected and embittered, not only with politics and politicians, but also with globalization and the entire economic system it underpins. 
In an era of widespread insecurity and frustration, populism has become increasingly attractive as an alternative to the status quo. 
But populist discourse elides – and often confounds – the substantive distinctions between two concepts: globalization and globalism. 
Globalization is a phenomenon driven by technology and the movement of ideas, people, and goods. 
Globalism is an ideology that prioritizes the neoliberal global order over national interests. 
Nobody can deny that we are living in a globalized world. 
But whether all of our policies should be “globalist” is highly debatable. 
After all, this moment of crisis has raised important questions about our global-governance architecture. 
With more and more voters demanding to “take back control” from “global forces,” the challenge is to restore sovereignty in a world that requires cooperation. 
Rather than closing off economies through protectionism and nationalist politics, we must forge a new social compact between citizens and their leaders, so that everyone feels secure enough at home to remain open to the world at large. 
Failing that, the ongoing disintegration of our social fabric could ultimately lead to the collapse of democracy. 
Moreover, the challenges associated with the Fourth Industrial Revolution (4IR) are coinciding with the rapid emergence of ecological constraints, the advent of an increasingly multipolar international order, and rising inequality. 
These integrated developments are ushering in a new era of globalization. 
Whether it will improve the human condition will depend on whether corporate, local, national, and international governance can adapt in time. 
Meanwhile, a new framework for global public-private cooperation has been taking shape. 
Public-private cooperation is about harnessing the private sector and open markets to drive economic growth for the public good, with environmental sustainability and social inclusiveness always in mind. 
But to determine the public good, we first must identify the root causes of inequality. 
For example, while open markets and increased competition certainly produce winners and losers in the international arena, they may be having an even more pronounced effect on inequality at the national level. 
Moreover, the growing divide between the precariat and the privileged is being reinforced by 4IR business models, which often derive rents from owning capital or intellectual property. 
Closing that divide requires us to recognize that we are living in a new type of innovation-driven economy, and that new global norms, standards, policies, and conventions are needed to safeguard the public trust. 
The new economy has already disrupted and recombined countless industries, and dislocated millions of workers. 
It is dematerializing production, by increasing the knowledge intensity of value creation. 
It is heightening competition within domestic product, capital, and labor markets, as well as among countries adopting different trade and investment strategies. 
And it is fueling distrust, particularly of technology companies and their stewardship of our data. 
The unprecedented pace of technological change means that our systems of health, transportation, communication, production, distribution, and energy – just to name a few – will be completely transformed. 
Managing that change will require not just new frameworks for national and multinational cooperation, but also a new model of education, complete with targeted programs for teaching workers new skills. 
With advances in robotics and artificial intelligence in the context of aging societies, we will have to move from a narrative of production and consumption toward one of sharing and caring. 
Globalization 4.0 has only just begun, but we are already vastly underprepared for it. 
Clinging to an outdated mindset and tinkering with our existing processes and institutions will not do. 
Rather, we need to redesign them from the ground up, so that we can capitalize on the new opportunities that await us, while avoiding the kind of disruptions that we are witnessing today. 
As we develop a new approach to the new economy, we must remember that we are not playing a zero-sum game. 
This is not a matter of free trade or protectionism, technology or jobs, immigration or protecting citizens, and growth or equality. 
Those are all false dichotomies, which we can avoid by developing policies that favor “and” over “or,” allowing all sets of interests to be pursued in parallel. 
To be sure, pessimists will argue that political conditions are standing in the way of a productive global dialogue about Globalization 4.0 and the new economy. 
But realists will use the current moment to explore the gaps in the present system, and to identify the requirements for a future approach. 
And optimists will hold out hope that future-oriented stakeholders will create a community of shared interest and, ultimately, shared purpose. 
The changes that are underway today are not isolated to a particular country, industry, or issue. 
They are universal, and thus require a global response. 
Failing to adopt a new cooperative approach would be a tragedy for humankind. 
To draft a blueprint for a shared global-governance architecture, we must avoid becoming mired in the current moment of crisis management. 
Specifically, this task will require two things of the international community: wider engagement and heightened imagination. 
The engagement of all stakeholders in sustained dialogue will be crucial, as will the imagination to think systemically, and beyond one’s own short-term institutional and national considerations. 
These will be the two organizing principles of the World Economic Forum’s upcoming Annual Meeting in Davos-Klosters, which will convene under the theme of “Globalization 4.0: Shaping a New Architecture in the Age of the Fourth Industrial Revolution”. 
Ready or not, a new world is upon us. 

Globalization and Anti-Americanism 
Anti-American sentiments are rising around the world. 
American Democrats say that President Bush's policies have squandered America's attractiveness. 
Republicans reply that America is bound to be resented because of its size and its association with globalization. 
Anti-Americanism, they say, will persist because some people see America as a cultural threat. 
I believe that such views lack historical perspective. 
Contrary to conventional wisdom, globalization is not homogenizing and Americanizing the cultures of the world. 
Although the United States is at the forefront of the current information revolution, which is creating many similarities in social and cultural habits (such as television viewing or Internet use) that are attributed to Americanization, correlation is not causation. 
To see why, imagine a country that introduced computers and communications at a rapid rate in a world in which America did not exist. 
You would still expect major social and cultural changes from such modernization. 
Of course, because the US exists and is at the forefront of the information revolution, there is a degree of Americanization, but that is likely to diminish over the course of the twenty-first century as technology spreads and local cultures modernize in their own ways. 
Historical proof that globalization does not necessarily mean homogenization can be seen in Japan, a country that deliberately isolated itself from earlier waves of globalization. 
In the middle of the nineteenth century, Japan became the first Asian country to embrace globalization, and to borrow successfully from the world without losing its uniqueness. 
During the Meiji Restoration, Japan searched broadly for tools and innovations that would allow it to become a major power rather than a victim of Western imperialism. 
It sent young people to the West for education. 
Its delegations scoured the world for ideas in science, technology, and industry. 
In the political realm, Meiji reformers were well aware of Anglo-American ideas and institutions, but deliberately turned to German models because they were deemed more suitable to a country with an emperor. 
The lesson that Japan teaches the rest of the world is not simply that an Asian country can compete, but that after a century and a half of globalization, it is possible to adapt while preserving a unique culture. 
More fundamentally, the image of a homogenizing America reflects a mistakenly static view of culture. 
Efforts to portray local cultures as unchanging often reflect reactionary political strategies rather than descriptions of reality. 
As the Peruvian writer Mario Vargas Llosa has put it, those who argue in favor of cultural identity and against globalization, betray a stagnant attitude towards culture that is not borne out by historical fact. 
Do we know of any cultures that have remained unchanged through time? 
To find any of them one has to travel to the small, primitive, magico-religious communities made up of people… who due to their primitive condition, become progressively more vulnerable to exploitation and extermination. 
Vibrant cultures are constantly changing and borrowing from other cultures - and that borrowing is not always from the US. 
For example, many more countries turned to Canada than to America as an example for framing constitutions in the aftermath of the Cold War. 
Globalization is also a two-edged sword. 
In some areas, there is not only a backlash against American cultural imports, but an effort to change American culture itself. 
Capital punishment may now be supported by a majority of Americans, but the death penalty is regarded as an egregious violation of human rights across Europe - indeed, across much of the world. 
American environmental attitudes toward climate change or genetic modification of food bring similar criticism. 
More subtly, America's openness to immigration both enriches and changes American culture. 
Finally, globalization and the information revolution may reinforce rather than reduce cultural diversity. 
Some French commentators express fear that in a world of Internet global marketing, there will no longer be room for a culture that cherishes hundreds of different types of cheese. 
But on the contrary, the Internet allows dispersed customers to come together in a way that encourages niche markets, including hundreds of Web sites dedicated only to cheese. 
The Internet also allows people to establish a more diverse set of political communities. 
The use of the Welsh language in Britain and Gaelic in Ireland is greater today than fifty years ago. 
Britain, Belgium, and Spain, among others in Europe, have devolved more power to local regions. 
The global information age may strengthen rather than weaken local cultures. 
Economic and social globalization does produce superficial similarities in T-shirt logos and soft drink brands, but an underlying cultural diversity will remain. 
American culture is now prominent, and it contributes to America's attractiveness - its "soft power" - in many, but not all, areas. 
At the same time, immigrants, ideas, and events outside America's borders are changing American culture within the borders of the US. 
As globalization spreads technical capabilities, and information technology allows broader participation in global communications, American economic and cultural preponderance may diminish. 
A little less dominance may mean a little less anxiety about Americanization, fewer complaints about American arrogance, and less intensity in the anti-American backlash. 
The US may have less control in the future, but it may find itself living in a world somewhat more congenial to its basic values of democracy, free markets, individual liberties, and human rights. 


Global Solutions for Globalization’s Problems 
OXFORD – The last few decades of globalization and innovation have resulted in the most rapid progress that the world has ever known. 
Poverty has been reduced. 
Life expectancy has increased. 
Wealth has been created at a scale that our ancestors could not have imagined. 
But the news is not all good. 
In fact, the achievements brought about by globalization are now under threat. 
The world has simultaneously benefited from globalization and failed to manage the inherent complications resulting from the increased integration of our societies, our economies, and the infrastructure of modern life. 
As a result, we have become dangerously exposed to systemic risks that transcend borders. 
These threats spill across national boundaries and cross the traditional divides between industries and organizations. 
An integrated financial system propagates economic crises. 
International air travel spreads pandemics. 
Interconnected computers provide rich hunting grounds for cybercriminals. 
Middle Eastern jihadis use the Internet to recruit young Europeans. 
Living standards rise – and greenhouse-gas emissions follow, accelerating climate change. 
As a byproduct of globalization, crises that once burned locally and then quickly flamed out now risk sparking international conflagrations. 
A pandemic, flood, or cyber attack in the City of London or Wall Street could send the entire world into a financial tailspin. 
If the progress that globalization has delivered is to be sustained, countries must accept shared responsibility for managing the risks that it has engendered. 
National governments – whether powerful, like the United States and China, or weak, like Iraq and Liberia – are unable to address these cascading and complex challenges on their own. 
Only a small fraction of the risks arising from globalization require a truly global response. 
But, by definition, these risks transcend the nation-state; thus, coordinated action is required to address them effectively. 
The nature of the response needs to be tailored to the threat. 
In the case of pandemics, the key is to support countries where outbreaks occur and help those most at risk of infection. 
Widespread dangers, such as climate change or a new financial crisis, can require the cooperation of dozens of countries and a broad range of institutions. 
In nearly every case, an international effort is needed. 
An important characteristic of the risks of a globalized world is that they often become more serious over time. 
As a result, the speed at which they are identified, along with the effectiveness of the response, can determine whether an isolated event becomes a global threat. 
One need only look at the rise of the Islamic State, the outbreak of Ebola, the fight against climate change, or the financial contagion of 2008 to see what happens when a danger remains unidentified for too long or a coordinated response is missing or mismanaged. 
And yet, just as the need for robust regional and international institutions is at its greatest, support for them is waning. 
A growing number of citizens in Europe, North America, and the Middle East blame globalization for unemployment, rising inequality, pandemics, and terrorism. 
Because of these risks, they regard increased integration, openness, and innovation as more of a threat than an opportunity. 
This creates a vicious circle. 
The concerns of the electorate are reflected in rapidly growing support for political parties that advocate increased protectionism, reductions in immigration, and greater national control over the marketplace. 
As a result, governments across Europe, North America, Asia, and Oceania are becoming more parochial in their concerns, starving international agencies and regional organizations of the funding, credibility, and leadership capabilities needed to mount a proper response to the challenges of globalization. 
In the short term, countries may be able to duck their global responsibilities, but the threat posed by events beyond their borders cannot be kept at bay forever. 
Unaddressed, the endemic dangers of a globalized world will continue to grow. 
In confronting dangers such as the Islamic State, Ebola, financial crisis, climate change, or rising inequality, short-term political expediency must be overcome – or the entire world will come to regret it. 

Globalization and the Beautiful Game 
Cambridge – How does globalization reshape wealth and opportunity around the world? 
Is it mainly a force for good, enabling poor nations to lift themselves up from poverty by taking part in global markets? 
Or does it create vast opportunities only for a small minority? 
To answer these questions, look no farther than soccer. 
Ever since European clubs loosened restrictions on the number of foreign players, the game has become truly global. 
African players, in particular, have become ubiquitous, supplementing the usual retinue of Brazilians and Argentines. 
Indeed, the foreign presence in soccer surpasses anything that we see in other areas of international commerce. 
Arsenal, which currently leads the English Premier League, fields 11 starters who typically do not include a single British player. 
Indeed, all the English players for the four English clubs that recently advanced to the final 8 of the UEFA Champions’ League would hardly be enough to field a single team. 
There is little doubt that foreign players enhance the quality of play in the European club championships. 
Europe’s soccer scene would not be half as exciting without strikers such as Cote d’Ivoire’s Didier Drogba (Chelsea) or Cameroon’s Samuel Eto’o (Barcelona). 
The benefits to African talent are easy to see, too. 
African players are able to earn much more money by marketing their skills in Europe – not just the top clubs in the Premiership or the Spanish Primera Liga, but the countless nouveau-riche clubs in Russia, Ukraine, or Turkey. 
To be sure, soccer players’ international mobility has increased the earnings gap between stars such as Drogba and Eto’o and their compatriots back home. 
This is part and parcel of globalization: enhanced global economic opportunities lead to wider disparities between those who have the skill or luck to take advantage of them and those who do not. 
This kind of inequality is not necessarily a bad thing. 
It makes some people better off without making others worse off. 
But soccer enthusiasts care about country as well as club, and here the consequences of the global mobility of talent are not as straightforward. 
Many fear that the quality of national teams is harmed by the availability of foreign players. 
Why invest in developing local talent if you can hire it from abroad? 
England once again provides an apt illustration. 
Many blame the country’s failure to qualify for this summer’s European championship on the preponderance of foreign players in English club teams. 
There is also a broader backlash under way. 
Sepp Blatter, the president of FIFA, soccer’s global governing body, has been pushing a plan to limit to five the number of foreign players that club teams would be allowed to have on the field. 
The impact of soccer globalization on African countries appears to be just the opposite. 
On the one hand, it has increased the quality of many African national teams relative to European national teams, with countries such as Cameroon and Cote d’Ivoire now fielding teams that include some of the top players in European clubs. 
On the other hand, globalization probably has reduced the quality of Africa’s domestic leagues relative to European leagues. 
If you are a resident of Yaoundé, the decline in the quality of domestic play may not be a big deal if you can afford a cable connection that allows you to tune in to the English Premier League. 
But otherwise, you are entitled to feel that globalization has left you out in the cold. 
The 2008 Africa Cup of Nations, held in Ghana during January and February, revealed the two-way interdependence that soccer globalization has created. 
Many European clubs were left without their star players, who were recalled to national-team duty. 
For their part, African players grumbled that their absence from Europe reduced their commercial opportunities during a crucial period of league play. 
But the most important lesson revealed by the Africa Cup is that successful nations are those that combine globalization’s opportunities with strong domestic foundations. 
For the winner of the cup was not Cameroon or Cote d’Ivoire or any of the other African teams loaded with star players from European leagues, but Egypt, which fielded only four players (out of 23) who play in Europe. 
By contrast, Cameroon, which Egypt defeated in the final, featured just a single player from a domestic club, and 20 from European clubs. 
Few Egyptian players would have been familiar to Europeans who watched that game, but Egypt played much better and deserved to win. 
Nor was it a fluke: Egypt is consistently the most successful national team in the Africa Cup tournament, winning it five times previously. 
The lesson is not that embracing globalized soccer is a bad thing. 
If that were the key to Egypt’s success, Sudan, which has no players in Europe, would have done well. 
Instead, Sudan (along with Benin) was the tournament’s least successful team, losing all three games that it played. 
The real lesson is that taking full advantage of globalization requires developing domestic capabilities along with international links. 
What makes the difference for Egypt is that it has a strong domestic league, which fosters depth of talent and coherence as a national team. 
So it is with globalization’s champions in other arenas. 

 

Globalization and the United Nations 
After the disastrous month of September, when terrorist attacks and retaliation contributed to storm clouds over the global economy, November demonstrated the resilience of globalization. 
The global economic downturn has led most of the world to rally together, not only in the hunt for the terrorists, but in reinforcing global cooperation. 
Several events in November give hope for a stronger international community, with consequent economic benefits. 
First, more than 100 countries assembled in Marrakech, Morocco, to complete a unique UN agreement to limit global climate change. 
These countries agreed to reduce their emissions of greenhouse gases in order to slow the process of global warming. 
Yes, the US is not yet a party to the agreement - even though America is the world's biggest single contributor to greenhouse gas emissions. 
Yet the fact that the world could agree despite the absence of the US may prove promising. 
No single country, even the largest economy in the world, can stop the cooperation of others. 
Sometime soon, the US is likely to rejoin these international discussions. 
Second, the world community welcomed China as a member of the World Trade Organization. 
For hundreds of years, China held itself aloof from the world economy. 
Then, in the middle of the 19 th century, China suffered at the hands of European imperial powers, which gained technological and industrial superiority over China, using this to force trading concessions from the Ching Dynasty. 
For more than a century after that, China was in turmoil. 
Only 20 years ago did China decide to rejoin the world trading system. 
This month's entry of China into the WTO is a major step in that process. 
China has now rejoined the world community as a cooperative, stable, and powerful sovereign nation, which will be one of the leading trading countries in the years ahead. 
Third, more than 140 nations agreed in Doha, Qatar to launch a new round of trade negotiations. 
After years of global protests about free trade, the world's nations chose trade over protectionism. 
Importantly, developing countries achieved several breakthroughs in the new trade agenda. 
Poor countries won concessions on access to essential medicines; and they pressed for, and received, promises that rich countries would address protectionist policies in several areas. 
Fourth, the war in Afghanistan has not only proceeded rapidly on the ground, but has led to a diplomatic breakthrough as well. 
The UN will play a central role in the reconstruction of a working government in that country, and in coordinating humanitarian assistance for the Afghan people. 
The growing role of the UN in this process puts the seal of international law and diplomacy over the global struggle against terrorism, and helps to reassure many countries that this is a true international effort, not just the US acting alone. 
While these seem to be a grab-bag of achievements, they point to a single message: the world community is finding new ways to cooperate, even against a backdrop of terrorism and global recession. 
The growing role of international institutions under the UN umbrella provides greater confidence that disputes can be addressed peacefully and even sensibly, with significant inputs of scientific expertise as in the Climate Change treaty. 
No country wants to be outside of this global process. 
China's membership in the WTO is sure to be followed by Russia's membership in the coming years. 
Academic scholars and political observers debate whether globalization is a real phenomenon or a slogan; whether globalization is beneficial or harmful; and whether globalization is a fragile process that could be reversed or a robust process likely to gather force in the coming years. 
My view is that globalization is a powerful and generally positive force. 
It offers countries the gains from increased international trade, faster diffusion of technologies to mutual benefit, and hopes for less cross-country violence and conflict. 
The agreements in November suggest that most of the world shares such hopes, and is ready to commit political resources into the success of the process. 
Of course globalization requires international governance and rules. 
It cannot be a game of rich against poor. 
It cannot function without international law and international institutions. 
Therefore the preeminence of UN institutions in so many events in November is notable. 
The UN has shown its value in global environmental management, international trade, state building and reconstruction, and humanitarian assistance. 
UN agencies will have a critical role to play in future years in helping Africa's impoverished countries (and those elsewhere) to derive larger benefits from globalization. 
This month, in short, has been a fitting prelude to the happy occasion on December 13 th when UN Secretary General Kofi Annan and the United Nations organization itself share this year's Nobel Peace Prize in Oslo, Norway. 
The prize is a fitting measure of the role that the UN now plays and must continue to play in promoting a successful and peaceful globalization. 

The Globalization Backlash Paradox 
NEW DELHI – Most economists wax eloquent about the benefits of “real” global integration – that is, virtually uninhibited cross-border flows of goods, labor, and technology. 
They are less certain when it comes to global financial integration, especially short-term flows of so-called hot money. 
Yet today’s anti-globalization backlash is focused largely on real integration – and almost entirely spares its financial counterpart. 
The backlash against real integration has, most recently, spurred US President Donald Trump’s administration to resort to unilateral trade protectionism, targeting China in particular. 
In both the United States and Europe, barriers against migration are being raised. 
Many governments are moving to impose new taxes on technology companies deemed to be too large or influential. 
In this context, the absence of even a whiff of protest against financial integration is strange. 
After all, financial flows have regularly wreaked havoc on rich and poor economies alike over the last 40 years. 
And that damage is no secret: institutions like the International Monetary Fund have highlighted it, adding caveats to their previously unfettered support for financial openness. 
The lack of resistance to financial integration may reflect the salience of the problem – or, perhaps more accurately, the narrative. 
When it comes to real global integration, it is easy to identify perpetrators and victims; with financial integration, it is not. 
Consider free trade. 
While it is beneficial overall, its adverse distributional effects are undeniable, and it is easy to say who gets hurt (for example, advanced-country workers in lower-value-added industries like steel) and who is doing the damage (developing countries that can produce and export the relevant good more cheaply). 
The losers may be a minority, but they can band together to amplify their voice and maximize their bargaining power, especially if they are geographically concentrated. 
With a clear target, their outrage acquires force and legitimacy. 
Likewise, migration brings both major gains and, in the eyes of many, significant losses. 
Apparent losers may include domestic workers who are (or believe they are) affected by competition from migrants, or citizens who feel that their way of life or even identity is being threatened. 
It does not matter whether these claims are empirically true; they fit into a clear and compelling narrative, in which immigrants are portrayed as villains. 
Such a narrative, as we have seen, is a very effective mobilization tool in the hands of cynical politicians. 
Of course, financial crises – such as those in Latin America in the early 1980s, in East Asia in the late 1990s, in Eastern Europe in the late 2000s, and in Europe in the 2010s – also have clear victims: those who lose their jobs, houses, or retirement savings. 
But it is not nearly as easy to apportion blame. 
In the past – going back to the Middle Ages, in fact – the finger has often been pointed at banks. 
But the sources of today’s “hot money” flows are not readily identifiable. 
Hedge funds, mutual funds, asset-management companies, pension funds, and sovereign wealth funds operate from all across the globe, in legitimate jurisdictions and in what W. Somerset Maugham once described as “sunny places for shady people.” 
Even if the lenders could be readily identified, they could not be assigned all of the blame. 
Financial transactions always involve borrowers as well, and, unlike laid-off steel workers, defaulting borrowers (individuals or countries) are rarely innocent victims. 
In many cases, large borrowers have obtained their loans by deceiving the lenders or using political connections, as former Indonesian President Suharto’s cronies famously did. 
While salient narratives featuring specific and readily identifiable villains make real integration – despite its tangible overall benefits – difficult to sustain, the absence of comparable narratives is allowing financial integration to continue unabated. 
This places the world on track for a lot less of the good kind of integration, and more of the questionable kind. 
Altering this trajectory calls for two types of response. 
To support real integration, policymakers must create ambitious – even radically so – social safety nets that protect the inevitable losers, while highlighting the overall benefits that such integration affords. 
Actions against perpetrators – for example, firms and countries that brazenly steal intellectual property – may also be needed, despite the potential costs. 
Meanwhile, policymakers will need to do a better job of managing financial integration – a task that may be all the more challenging, because no political constituency is really demanding it. 
Given finance’s nebulous, almost phantom-like nature, which eludes easy narrative-building, the task of taming it will be difficult. 
But tame it we must. 

How Can We Retain the Benefits of Globalization? 
ROME – In the last few years, for many people and their leaders, globalization has become a scourge to be purged in favor of greater protectionism and unilateralism. 
This represents a sharp departure from the recent past, when globalization was widely regarded as a positive force. 
What changed, and why? 
Key components of globalization include greater cross-border mobility of goods, labor, and capital, each of which promises significant overall benefits for economies. 
Free trade enables countries to capitalize on their comparative advantages, boosting all participants’ economic performance and prospects. 
Migration can inject diversity and dynamism into, say, an aging society, while helping to reduce poverty in source countries, such as through remittances. 
And foreign direct investment (FDI) can create employment, spur research and development, generate tax revenues, and enhance competition. 
The problem is that these benefits are not necessarily broadly shared. 
For example, migration can put wage pressure on lower-skill workers in destination countries. 
By enabling companies to move operations to lower-wage markets, the elimination of trade barriers can have a similar effect. 
Even cross-border investment has its downsides, as domestic players may struggle to compete with foreigners. 
Such factors have contributed to rising inequality in many countries. 
In the United States, for example, lower-skill workers in the Rust Belt – the manufacturing region stretching from Michigan to eastern Pennsylvania – have faced decades of stagnant wages, while high-skill workers in finance and technology – Wall Street and Silicon Valley – have enjoyed soaring compensation. 
While economic openness boosts economies as a whole, there is an obvious need to ensure that the benefits are more equitably distributed or, at least, that some groups are not inordinately hurt by it. 
Many economists argue that the key to success on this front is to adopt redistributive policies, typically via the tax system. 
But such policies are very difficult, if not impossible, politically. 
That lesson has been learned by many a progressive politician, including US Senator Bernie Sanders, who tried and failed to secure the Democratic nomination for the 2016 US presidential election on a platform that focused on addressing people’s frustrations with the increasingly unequal status quo, largely through redistribution. 
More politically effective, but economically and socially damaging, is the approach of populists like US President Donald Trump, who offer simplistic explanations that play on voters’ fears and frustrations (for example, by blaming immigrants or countries with trade surpluses) while pretending that there are easy fixes (say, erecting walls and import barriers). 
Trump blamed the struggles of Rust Belt workers on international competition. 
But that is only part of the story: technological displacement has played a larger role, though this has often been ignored, not least because it is harder to demonize. 
Meanwhile, the Trump administration has pursued extreme and morally unconscionable anti-immigration policies, such as the recently reversed policy of separating migrant children from their families at the southern border with Mexico. 
Similarly, in many European countries, the backlash against globalization has translated into virulent opposition to migration, not to mention increased resistance to European integration. 
Voters in Austria, Hungary, and Italy have elected politicians who campaigned explicitly against immigration. 
In the United Kingdom, the 2016 Brexit referendum partly reflected a rejection of the free movement of people within the European Union. 
By encouraging unilateralism, and to some extent even authoritarianism, the backlash against globalization threatens not only to prevent countries from reaping the economic benefits of openness, but also to undermine the structures of international cooperation that have supported nearly three-quarters of a century of relative peace since World War II. 
Reversing this trend will require, of course, the unequivocal rejection of policies that flout democratic values and repudiation of the leaders who advocate and implement them. 
But it will also demand efforts to address globalization’s real negative effects – beginning with an excessively unequal income distribution. 
Here, measures like a carbon price or a “Tobin tax” on international financial transactions could help. 
In my country, Japan, Prime Minister Shinzo Abe’s administration may need to consider direct wage hikes. 
Today’s globalized world is far from perfect. 
But protectionist and isolationist policies will only make things worse, especially if they are used as an excuse to deny basic human rights to immigrants, among others. 
Balanced policies aimed at reaping the benefits of openness – and ensuring that those benefits are broadly shared – may not be the most politically expedient option today; but they would do economies and societies a lot of good tomorrow. 

When Globalization Goes Digital 
WASHINGTON, DC – American voters are angry. 
But while the ill effects of globalization top their list of grievances, nobody is well served when complex economic issues are reduced to bumper-sticker slogans – as they have been thus far in the presidential campaign. 
It is unfair to dismiss concerns about globalization as unfounded. 
America deserves to have an honest debate about its effects. 
In order to yield constructive solutions, however, all sides will need to concede some inconvenient truths – and to recognize that globalization is not the same phenomenon it was 20 years ago. 
Protectionists fail to see how the United States’ eroding industrial base is compatible with the principle that globalization boosts growth. 
But the evidence supporting that principle is too substantial to ignore. 
Recent research by the McKinsey Global Institute (MGI) echoes the findings of other academics: global flows of goods, foreign direct investment, and data have increased global GDP by roughly 10% compared to what it would have been had those flows never occurred. 
The extra value provided by globalization amounted to $7.8 trillion in 2014 alone. 
And yet, the shuttered factories dotting America’s Midwestern “Rust Belt” are real. 
Even as globalization generates aggregate growth, it produces winners and losers. 
Exposing local industries to international competition spurs efficiency and innovation, but the resulting creative destruction exacts a substantial toll on families and communities. 
Economists and policymakers alike are guilty of glossing over these distributional consequences. 
Countries that engage in free trade will find new channels for growth in the long run, the thinking goes, and workers who lose their jobs in one industry will find employment in another. 
In the real world, however, this process is messy and protracted. 
Workers in a shrinking industry may need entirely new skills to find jobs in other sectors, and they may have to pack up their families and pull up deep roots to pursue these opportunities. 
It has taken a popular backlash against free trade for policymakers and the media to acknowledge the extent of this disruption. 
That backlash should not have come as a surprise. 
Traditional labor-market policies and training systems have not been equal to the task of dealing with the large-scale changes caused by the twin forces of globalization and automation. 
The US needs concrete proposals for supporting workers caught up in structural transitions – and a willingness to consider fresh approaches, such as wage insurance. 
Contrary to campaign rhetoric, simple protectionism would harm consumers. 
A recent study by the US President’s Council of Economic Advisers found that middle-class Americans gain more than a quarter of their purchasing power from trade. 
In any event, imposing tariffs on foreign goods will not bring back lost manufacturing jobs. 
It is time to change the parameters of the debate and recognize that globalization has become an entirely different animal: The global goods trade has flattened for a variety of reasons, including plummeting commodity prices, sluggishness in many major economies, and a trend toward producing goods closer to the point of consumption. 
Cross-border flows of data, by contrast, have grown by a factor of 45 during the past decade, and now generate a greater economic impact than flows of traditional manufactured goods. 
Digitization is changing everything: the nature of the goods changing hands, the universe of potential suppliers and customers, the method of delivery, and the capital and scale required to operate globally. 
It also means that globalization is no longer exclusively the domain of Fortune 500 firms. 
Companies interacting with their foreign operations, suppliers, and customers account for a large and growing share of global Internet traffic. 
Already half of the world’s traded services are digitized, and 12% of the global goods trade is conducted via international e-commerce. 
E-commerce marketplaces such as Alibaba, Amazon, and eBay are turning millions of small enterprises into exporters. 
This remains an enormous untapped opportunity for the US, where fewer than 1% of companies export – a far lower share than in any other advanced economy. 
Despite all the anti-trade rhetoric, it is crucial that Americans bear in mind that most of the world’s customers are overseas. 
Fast-growing emerging economies will be the biggest sources of consumption growth in the years ahead. 
This would be the worst possible moment to erect barriers. 
The new digital landscape is still taking shape, and countries have an opportunity to redefine their comparative advantages. 
The US may have lost out as the world chased low labor costs; but it operates from a position of strength in a world defined by digital globalization. 
There is real value in the seamless movement of innovation, information, goods, services, and – yes – people. 
As the US struggles to jump-start its economy, it cannot afford to seal itself off from an important source of growth. 
US policymakers must take a nuanced, clear-eyed view of globalization, one that addresses its downsides more effectively, not only when it comes to lost jobs at home, but also when it comes to its trading partners’ labor and environmental standards. 
Above all, the US needs to stop retrying the past – and start focusing on how it can compete in the next era of globalization. 

Global Politics for a Globalized Economy 
WASHINGTON, DC – From the end of World War II to the mid-2010s, economic globalization progressed relentlessly through expanded trade, proliferating capital flows, faster (and cheaper) communication, and, to a lesser extent, human migration. 
Yet, even as these linkages have deepened and multiplied, the global economy has remained fundamentally a collection of national economies, each embedded in national politics. 
This is now changing. 
In the democratic countries that have built the market capitalism that dominates the world today, the building blocks of the economy – taxation, public spending, and regulatory frameworks – are enacted by the legislature and interpreted by the legal system. 
This lends legitimacy to them and the economic activities they facilitate. 
But a shift is occurring: global markets already are more important than national markets for small and medium-size countries, and they are approaching that status for large economies. 
In less than a decade, it will be the huge world market, rather than national markets, that allocates capital, finance, and skilled labor. 
Many firms will be truly multinational, with headquarters located in one place (probably where tax liabilities can be minimized), production and sales happening largely elsewhere, and managers and workers sourced from all over the world. 
The emergence of such a truly global capitalism – a process that, to be sure, is far from complete – means that markets will no longer be embedded in the politics or regulatory systems of various nation-states. 
If they are to produce desirable outcomes, they will need to be embedded more deeply in – and regulated more effectively by – global institutions. 
Of course, international economic institutions – from the International Monetary Fund and World Bank to the economic bodies of the United Nations and the World Trade Organization – already exist and have long served as platforms for member states to adopt shared rules. 
The IMF and the WTO, in particular, have acquired some real regulatory authority in macroeconomic and trade policy, respectively. 
Domestic politics were largely eschewed in establishing and sustaining these international institutions. 
Though treasuries, central banks, and trade ministries – especially of the advanced countries – acted politically, they did so with very little public debate. 
Even today, the average citizen in the United States, France, or India knows little about what the WTO actually does. 
In other words, the emergence of a global market is not embedded in any legitimacy-conferring political process. 
Multilateral institutions are thus viewed as elitist, making them a political target. 
This is reminiscent of the European Union’s “democratic deficit,” which has fueled resistance to further integration. 
In fact, resistance to global capitalism is also rampant and rising. 
In particular, US President Donald Trump espouses a kind of “go-it-alone” neo-nationalism. 
Far from deepening multilateral structures, he wants to dismantle them, dislodging the global market from the regulatory institutions in which it is already only weakly embedded. 
At both the national and international levels, Trump believes that the less regulation, the better. 
The EU, meanwhile, pursues the opposite line. 
Despite the internal challenges it faces, it continues to try to regulate markets beyond national borders. 
This year alone, the European Commission has imposed over €5 billion ($5.8 billion) in fines on Alphabet Inc., Google’s parent company, and Qualcomm for breaching antitrust restrictions. 
And with its General Data Protection Regulation, the EU has sought to tighten restrictions on the use, sharing, and control of personal data. 
Because the EU has such a large market, such actions have a far-reaching impact. 
But when it comes to setting truly international standards, the EU obviously falls short. 
This has become all the more true with figures like Trump actively working against its efforts and espousing deregulation at a time when the level of global economic interconnectedness demands just the opposite. 
Allowing major multinational companies, which are already reaping massive profits and crowding smaller players out of entire industries, to avoid paying much tax does far-reaching damage, not least by exacerbating inequality and weakening public budgets. 
But such firms can be regulated effectively only through multilateral cooperation. 
Likewise, the only way to make any headway on combating the effects of climate change is for all countries to work together. 
The realities of today’s global economy demand that we make multilateral institutions work. 
That means not only increasing the clout of existing institutions – here, reform is a prerequisite – but also establishing new institutions, such as a Global Competition Authority. 
None of this will be possible without a real global political debate. 
Of course, the emergence of a global politics has far-reaching potential implications for traditional ideas about democracy, not to mention national sovereignty. 
At the same time, however, allowing the global market to function without adapted regulation, enacted by legitimate and effective international institutions, would amount to abandoning the essence of democracy. 
The challenge ahead has been presented by Harvard economist Dani Rodrik in the form of a trilemma: when it comes to democracy, national sovereignty, and globalization, we can have any two, but never all three. 
Rodrik advocates less globalization and more democracy. 
Nationalists like Trump prefer strengthening the nation-state, in ways that could weaken both democracy and globalization, at least in the longer term. 
In the medium term, however, further globalization seems unavoidable, meaning that it is the nation-state, and national politics, that must be constrained. 
One way to lend legitimacy to the new global politics would be to ensure that it is grounded at the local level. 
This will require local political leaders to adopt a narrative that explains how global problems impact their constituents. 
Climate change is a successful example of this form of localized global politics. 
Whatever institutional arrangements are chosen, ensuring that a new global politics strengthens, rather than undermines, democracy is the central political challenge of the twenty-first century. 
We can no longer afford to shy away from it. 

Rethinking Robin Hood 
MADRID – International development aid is based on the Robin Hood principle: take from the rich and give to the poor. 
National development agencies, multilateral organizations, and NGOs currently transfer more than $135 billion a year from rich countries to poor countries with this idea in mind. 
A more formal term for the Robin Hood principle is “cosmopolitan prioritarianism,” an ethical rule that says we should think of everyone in the world in the same way, no matter where they live, and then focus help where it helps the most. 
Those who have less have priority over those who have more. 
This philosophy implicitly or explicitly guides the aid for economic development, aid for health, and aid for humanitarian emergencies. 
On its face, cosmopolitan prioritarianism makes sense. 
People in poor countries have needs that are more pressing, and price levels are much lower in poor countries, so that a dollar or euro goes twice or three times further than it does at home. 
Spending at home is not only more expensive, but it also goes to those who are already well off (at least relatively, judged by global standards), and so does less good. 
I have thought about and tried to measure global poverty for many years, and this guide has always seemed broadly right. 
But I currently find myself feeling increasingly unsure about it. 
Both facts and ethics pose problems. 
Huge strides have undoubtedly been made in reducing global poverty, more through growth and globalization than through aid from abroad. 
The number of poor people has fallen in the past 40 years from more than two billion to just under one billion – a remarkable feat, given the increase in world population and the long-term slowing of global economic growth, especially since 2008. 
While impressive and wholly welcome, poverty reduction has not come without a cost. 
The globalization that has rescued so many in poor countries has harmed some people in rich countries, as factories and jobs migrated to where labor is cheaper. 
This seemed to be an ethically acceptable price to pay, because those who were losing were already so much wealthier (and healthier) than those who were gaining. 
A long-standing cause of discomfort is that those of us who make these judgments are not exactly well placed to assess the costs. 
Like many in academia and in the development industry, I am among globalization’s greatest beneficiaries – those who are able to sell our services in markets that are larger and richer than our parents could have dreamed of. 
Globalization is less splendid for those who not only don’t reap its benefits, but suffer from its impact. 
We have long known that less-educated and lower-income Americans, for example, have seen little economic gain for four decades, and that the bottom end of the US labor market can be a brutal environment. 
But just how badly are these Americans suffering from globalization? 
Are they much better off than the Asians now working in the factories that used to be in their hometowns? 
Most undoubtedly are. 
But several million Americans – black, white, and Hispanic – now live in households with per capita income of less than $2 a day, essentially the same standard that the World Bank uses to define destitution-level poverty in India or Africa. 
Finding shelter in the United States on that income is so difficult that $2-a-day poverty is almost certainly much worse in the US than $2-a-day poverty in India or Africa. 
Beyond that, America’s much-vaunted equality of opportunity is under threat. 
Towns and cities that have lost their factories to globalization have also lost their tax base and find it hard to maintain quality schools – the escape route for the next generation. 
Elite schools recruit the wealthy to pay their bills, and court minorities to redress centuries of discrimination; but this no doubt fosters resentment among the white working class, whose kids find no place in this brave new world. 
My own work with Anne Case reveals more signs of distress. 
We have documented a rising tide of “deaths of despair” among white non-Hispanics – from suicide, alcohol abuse, and accidental overdoses of prescription and illegal drugs. 
Overall death rates in the US were higher in 2015 than 2014, and life expectancy has fallen. 
We can argue about the measurement of material living standards, whether inflation is overstated and the rise in living standards understated, or whether schools are really that bad everywhere. 
But deaths are hard to explain away. 
Perhaps it is not so clear that the greatest needs are on the other side of the world. 
Citizenship comes with a set of rights and responsibilities that we do not share with those in other countries. 
Yet the “cosmopolitan” part of the ethical guideline ignores any special obligations we have toward our fellow citizens. 
We can think about these rights and obligations as a kind of mutual insurance contract: We refuse to tolerate certain kinds of inequality for our fellow citizens, and each of us has a responsibility to help – and a right to expect help – in the face of collective threats. 
These responsibilities do not invalidate or override our responsibilities to those who are suffering elsewhere in the world, but they do mean that if we judge only by material need, we risk leaving out important considerations. 
When citizens believe that the elite care more about those across the ocean than those across the train tracks, insurance has broken down, we divide into factions, and those who are left behind become angry and disillusioned with a politics that no longer serves them. 
We may not agree with the remedies that they seek, but we ignore their real grievances at their peril and ours. 

Globalization Marches On 
LONDON – In a recent symposium in the Financial Times on globalization’s prospects in 2011, the columnist Gideon Rachman observed that, “When Barack Obama visited India recently, the US President warned his hosts that the debate about globalization has reopened in the West,” and that “a backlash…is forming…and growing in advanced economies.” 
But Rachman’s alarmism is misplaced. 
The fear of globalization in the West is nothing new. 
Articulate intellectuals and groups such as labor unions and environmental organizations in the advanced economies have voiced anti-globalization fears and sentiments for at least a quarter-century. 
The fear of globalization, however, began historically in the East, not the West. 
After World War II, the West dismantled barriers to trade and investment flows, and worked to eliminate exchange controls and move to currency convertibility. 
What was sometimes called the liberal international economic order was the order of the day, and it was embraced by public opinion as well. 
By contrast, the East generally embraced the fearful view that, as the Chilean sociologist Oswaldo Sunkel put it, integration into the international economy would lead to disintegration of the national economy. 
Many intellectuals shared this dark anti-globalization vision, and policymakers in much of the East were not far behind. 
Indeed, the West accepted the view that globalization would result (as with trade) in mutual gain, embracing what I called in 1997 the notion of “benign neglect.” 
In the case of foreign investment and aid flows, the West went further, viewing them as being motivated by altruism, or “benign intent,” whereas the East regarded globalization in a world of poor and rich nations as implying “malign impact.” 
In some analyses, malign impact turned into a more sinister “malign intent.” 
Thus, foreign aid was regarded as a plot to trap poor nations in a neo-colonial embrace. 
What happened next was what I have called an “ironic reversal.” 
As the benefits of globalization became manifest, and the damage wrought by autarkic policies also became evident, policymakers in the East began to appreciate that their anti-globalization stance had been a mistake. 
But then fear of globalization moved to the West. 
The East had feared that it could not gain from trade with the West, which had superior infrastructure and human capital; now, the West had come to fear that it would lose from trade with the East, which had abundant, cheap labor. 
The longstanding stagnation in wages for unskilled labor was attributed to low-cost, labor-intensive imports, ignoring the corollary that Western workers’ consumption of labor-intensive Asian goods offset the effect on real wages. 
To take another example, the East worried about a “brain drain” of professionals to the West, where opportunities seemed to be more plentiful. 
Today, the West is witnessing anti-globalization opposition from members of professional groups, who fear the loss of their jobs to foreign counterparts. 
Rudyard Kipling famously wrote in “The Ballad of East and West”: “Oh, East is East, and West is West, and never the twain shall meet.” 
Given the ironic reversal of globalization fears, Kipling is still right: convergence has continued to elude East and West. 
The current crisis did not create the debate about globalization now heard in the West; it only made it slightly more salient. 
Yet the crisis may be tilting Western policy outcomes in favor of globalization. 
For example, on trade, there has been a remarkable commitment to efforts – largely successful – to avoid significant backsliding into protectionism. 
Moreover, the G-20 leaders have continued to express the need to conclude the Doha Round of multilateral trade-liberalization negotiations. 
There are also initiatives such as the appointment by the governments of Britain, Germany, Indonesia, and Turkey of a High-Level Expert Trade Group, with Peter Sutherland, former Director General of GATT and the WTO, and myself as co-chairs. 
The four governments will report at this year’s World Economic Forum in Davos on how to conclude Doha this year. 
In other words, Kipling could yet be proved wrong. 
A reversal in the West is possible, perhaps even likely. 
So the current crisis may thus, accidentally, establish a pro-globalization consensus that spans East and West. 

Globalization Means Westernization 
MUNICH: Does globalization produce a world of democracies? 
The easy answer is a resounding "No." 
It does, however, increase the costs for autocratic regimes of not having accountable political systems. 
In this respect globalization implies, like it or not, Westernization. 
This is far different from the old liberal idea that trade and contact with totalitrian regimes begets democracy, sooner or later - an idea on display during President Clinton’s visit to China earlier this summer. 
No doubt he hoped, as do many in the West, indeed in China itself, that the visit would catalyze change in the Middle Kingdom, opening up the one-party regime and introducing Chinese societies to the values of the democratic West. 
If these hopes are likely to be disappointed, it is not for lack on trying by America’s charismatic president. 
It is simply because the relationship between economic ties and democratic change are more complex. 
True, trade makes any country in the age of globalization, whatever its political ideology, more dependent on all the players in the world wide marketplace. 
Even if China’s leadership wanted to, it could no longer clock its subjects from contact with Western goods, markets, ideas. 
To deduce from this, however, as Western leaders do whenever they visit places like China, Cuba, and Iran, eager businessmen in tow, that somehow greater economic interdependence will automatically encourage political reforms in their host country is reminiscent of the naiveté which gripped many in the West during the days of "Detente." 
Back then, contacts with the old USSR and its satellites were believed to promote major domestic change. 
But autocratic regimes, we learned through the disappointments of detente, are unusually well equipped to stifle yearnings for freedom among their populace. 
More recent evidence that the state of the economy and of the political system can be disjointed is found in Asia today. 
The financial crisis gripping that region is just one year old and likely to get older. 
There are many causes for this, but the most widely recognized reason for why the crisis erupted and why it refuses to die down is this: Asian countries, while opening their economic systems, kept their political structures closed. 
They were active participants on international markets, attracted foreign capital, were integrated for all intents into the globalized world. 
Yet while their economies blossomed, power remained opaque, screened by personal loyalties, secret deals, corrupt practices. 
Economic openness and political accountability clearly can coexist without much difficulty. 
Perhaps, as Asia’s spectacular growth prior to the crisis indicated, this combination may even have contributed to the region’s economic success, at least for a while. 
It is, after all, not so long ago that the "Asian model" was widely celebrated as the wave of the future. 
The problem with the "Asian model," we now know, is that it is not very resilient in crisis. 
Those Asian countries which had earlier opened their political structures in accordance with their economic ones, Singapore, Taiwan, the Philippines, fared much better in the current turbulence. 
In other words: sustained economic success in the globalized world does not automatically lead to democracy nor does it depend on democracy - but it does depend on a political system able to avoid and weather financial and economic, not to mention political, crisis. 
For many of its emotional critics, globalization just means Americanization - the invasion of American mass products and mass culture. 
But that is neither unavoidable nor permanent. 
Who knows, tomorrow products from countries other than America may command the allegiance of global customers. 
The decisive impact of globalization lies elsewhere: it gives a crisis bonus to countries with transparent and accountable political structures. 
Financial crisis are inevitable in the global marketplace. 
Markets are imperfect controllers of their own fate as are all human endeavors, particularly those based on speculation and greed. 
International control mechanisms of sufficient authority to police global financial markets are not in place today, with not be around for some time, and will remain imperfect even then. 
Countries have to create their own safeguards to protect themselves against the kinds of upheaval that is shaking Asia. 
This means to make sure that political power is controlled and political processes transparent. 
Such may not yet be democracy. 
It is Westernization. 
It is possible, of course, to prosper without Westernization, so despots need not despair. 
Their hold on power is not imperiled by economic success. 
The global market does not impose Westernization. 
But when global markets get out of control, the penalty for not Westernizing in time can become very high indeed. 
Then both autocratic regimes and the economic achievements over which they presided are at risk. 
When financial storms start blowing, despots can no longer respond by battening down the hatches and isolating their economy from the world because it has become part of the global market. 
In order not to be blown away, they have to accept the interference of bodies like the IMF with the resulting weakening of their own hold on power. 
And then, as Indonesia’s Suharto found out, it may well be too late to retain power at all. 
So Westernization is promoted not by contacts, by trade, or by ideology. 
It is promoted by self-interest. 
It is simply a precaution against future risks. 
If you want to weather the crisis of globalization, you better Westernize. 
The global marketplace will punish those who act too late. 

When Globalization Eats Its Young 
PRINCETON – Evidence that globalization is reversing continues to pile up: trade and international capital flows are sluggish, and migration is increasingly being restricted. 
These trends emerged in the aftermath of the 2008 financial crisis, so they can’t be blamed on a new populist backlash against globalization. 
Rather, their source can be traced to national authorities’ failure to take the logic of globalization seriously. 
In a year when the United Kingdom voted to “Brexit” from the European Union, and Republicans in the United States chose Donald Trump as their presidential candidate, anti-globalization populism does seem ubiquitous. 
But while it is tempting to see populism as a cause of global economic woes, the movement has, in fact, had only limited political successes so far. 
After all, the world economy is not sputtering because Poland and Hungary have populist right-wing governments committed to reasserting national sovereignty. 
Left-wing populism, for its part, has even less to brag about: Fidel Castro is fading away in Cuba; Argentina is recovering from catastrophic mismanagement under the Néstor Kirchner and Cristina Fernández de Kirchner presidencies; and Venezuela’s economy has imploded under President Nicolás Maduro. 
Globalization is beleaguered partly because of decisions made by governments under the auspices of an open international order. 
But, more important, it is suffering as a result of judicial and quasi-judicial decisions to impose large financial penalties on foreign corporations. 
Judicial actions against multinational corporations are now straining transatlantic relations. 
In Europe, the European Commission has been leading the charge with ongoing antitrust proceedings against Microsoft and Google. 
Whether these cases are about American companies abusing competitive power, or about the European Union influencing technology policy and promoting domestic alternatives to American companies, depends on where one’s loyalties lie. 
Likewise, the US can and does take action against European companies. 
After the EU announced that it would require Apple to pay €13 billion ($14.6 billion) in back taxes, which it alleges were illegally reduced by the Irish government, the US fined Deutsche Bank, a German company, $14 billion to settle claims relating to its mortgage-backed securities business prior to the 2008 crash. 
One could regard these various penalties as an effective response in a world where multinational corporations have become extremely skilled at reducing their conventional tax liabilities. 
The problem is that, unlike normal taxes, fines against companies are not predictably or uniformly levied, and must be haggled over and settled individually in each case. 
These discussions are often politicized and involve high-level government interventions. 
What is the rationale for these fines? 
To be sure, Deutsche Bank and other European icons such as Volkswagen and British Petroleum should answer for, respectively, misdeed in selling mortgage securities, systematically manipulating CO2-emissions tests, and polluting the Gulf of Mexico. 
But while foreign companies may act more aggressively to capture market share in new areas, they are obviously not the only offenders, as demonstrated by the wave of outrage against banks and American corporations after the financial crisis. 
One difference is that it is easier for domestic companies to tell their own government why they are necessary, how many jobs they create, how many vendors and subcontractors they hire, and so forth. 
Domestic companies have a home-field advantage when lobbying to escape or reduce penalties. 
In 2014 for example, Citigroup convinced the US government to halve a fine almost the size of Deutsche Bank’s for the same mortgage abuse. 
Thus, domestic corporate lobbying often leads to something akin to regulatory capture, whereby the government privileges national corporate interests. 
The public’s ambient suspicion of corporations is then focused more directly on foreign firms. 
American and EU judicial authorities are one source of this new nationalism. 
Another is the institutions responsible for international trade, especially when new technologies are in play. 
Many of the fundamental technological breakthroughs over the past century have come from large government outlays for research and development that would be prohibitively expensive for any private firm. 
America’s technological superiority since World War II is a direct result of its Cold War-era military-industrial mobilization, which led to the development of satellite technology as well as what would become the Internet. 
Direct state support for high-tech companies often conflicts with international trade rules designed to encourage neutrality and a level playing field. 
For example, the World Trade Organization just ruled that Airbus, a European company, has received state aid in violation of WTO rules. 
According to the WTO, Airbus’s successful new Airbus A350 made it to market only because of the “direct and indirect effects” of long-term government support. 
The Airbus controversy has been dragging on for decades, with Europeans countering that Boeing, an American company, is viable only because of its status as a US military supplier. 
Indeed, this lobbying game is often a race to the bottom, and foreign companies are compelled to establish a local presence so that they can persuade politicians that they are just as beneficial to the domestic economy as their native competitors. 
Market economies cannot operate when their established rules are haphazardly enforced, which is what happens when national and international regulators turn into advocates for local enterprises and enemies of foreign businesses. 
This is not the result of a populist revolt; but populists in power certainly won’t address it. 

Globalization and its New Discontents 
NEW YORK – Fifteen years ago, I wrote a little book, entitled Globalization and its Discontents, describing growing opposition in the developing world to globalizing reforms. 
It seemed a mystery: people in developing countries had been told that globalization would increase overall wellbeing. 
So why had so many people become so hostile to it? 
Now, globalization’s opponents in the emerging markets and developing countries have been joined by tens of millions in the advanced countries. 
Opinion polls, including a careful study by Stanley Greenberg and his associates for the Roosevelt Institute, show that trade is among the major sources of discontent for a large share of Americans. 
Similar views are apparent in Europe. 
How can something that our political leaders – and many an economist – said would make everyone better off be so reviled? 
One answer occasionally heard from the neoliberal economists who advocated for these policies is that people are better off. 
They just don’t know it. 
Their discontent is a matter for psychiatrists, not economists. 
But income data suggest that it is the neoliberals who may benefit from therapy. 
Large segments of the population in advanced countries have not been doing well: in the US, the bottom 90% has endured income stagnation for a third of a century. 
Median income for full-time male workers is actually lower in real (inflation-adjusted) terms than it was 42 years ago. 
At the bottom, real wages are comparable to their level 60 years ago. 
The effects of the economic pain and dislocation that many Americans are experiencing are even showing up in health statistics. 
For example, the economists Anne Case and Angus Deaton, this year’s Nobel laureate, have shown that life expectancy among segments of white Americans is declining. 
Things are a little better in Europe – but only a little better. 
Branko Milanovic’s new book Global Inequality: A New Approach for the Age of Globalization provides some vital insights, looking at the big winners and losers in terms of income over the two decades from 1988 to 2008. 
Among the big winners were the global 1%, the world’s plutocrats, but also the middle class in newly emerging economies. 
Among the big losers – those who gained little or nothing – were those at the bottom and the middle and working classes in the advanced countries. 
Globalization is not the only reason, but it is one of the reasons. 
Under the assumption of perfect markets (which underlies most neoliberal economic analyses), free trade equalizes the wages of unskilled workers around the world. 
Trade in goods is a substitute for the movement of people. 
Importing goods from China – goods that require a lot of unskilled workers to produce – reduces the demand for unskilled workers in Europe and the US. 
This force is so strong that if there were no transportation costs, and if the US and Europe had no other source of competitive advantage, such as in technology, eventually it would be as if Chinese workers continued to migrate to the US and Europe until wage differences had been eliminated entirely. 
Not surprisingly, the neoliberals never advertised this consequence of trade liberalization, as they claimed – one could say lied – that all would benefit. 
The failure of globalization to deliver on the promises of mainstream politicians has surely undermined trust and confidence in the “establishment.” 
And governments’ offers of generous bailouts for the banks that had brought on the 2008 financial crisis, while leaving ordinary citizens largely to fend for themselves, reinforced the view that this failure was not merely a matter of economic misjudgments. 
In the US, Congressional Republicans even opposed assistance to those who were directly hurt by globalization. 
More generally, neoliberals, apparently worried about adverse incentive effects, have opposed welfare measures that would have protected the losers. 
But they can’t have it both ways: if globalization is to benefit most members of society, strong social-protection measures must be in place. 
The Scandinavians figured this out long ago; it was part of the social contract that maintained an open society – open to globalization and changes in technology. 
Neoliberals elsewhere have not – and now, in elections in the US and Europe, they are having their comeuppance. 
Globalization is, of course, only one part of what is going on; technological innovation is another part. 
But all of this openness and disruption were supposed to make us richer, and the advanced countries could have introduced policies to ensure that the gains were widely shared. 
Instead, they pushed for policies that restructured markets in ways that increased inequality and undermined overall economic performance; growth actually slowed as the rules of the game were rewritten to advance the interests of banks and corporations – the rich and powerful – at the expense of everyone else. 
Workers’ bargaining power was weakened; in the US, at least, competition laws didn’t keep up with the times; and existing laws were inadequately enforced. 
Financialization continued apace and corporate governance worsened. 
Now, as I point out in my recent book Rewriting the Rules of the American Economy, the rules of the game need to be changed again – and this must include measures to tame globalization. 
The two new large agreements that President Barack Obama has been pushing – the Trans-Pacific Partnership between the US and 11 Pacific Rim countries, and the Transatlantic Trade and Investment Partnership between the EU and the US – are moves in the wrong direction. 
The main message of Globalization and its Discontents was that the problem was not globalization, but how the process was being managed. 
Unfortunately, the management didn’t change. 
Fifteen years later, the new discontents have brought that message home to the advanced economies. 

The Globalization of Our Discontent 
NEW YORK – Fifteen years ago, I published Globalization and Its Discontents, a book that sought to explain why there was so much dissatisfaction with globalization within the developing countries. 
Quite simply, many believed that the system was “rigged” against them, and global trade agreements were singled out for being particularly unfair. 
Now discontent with globalization has fueled a wave of populism in the United States and other advanced economies, led by politicians who claim that the system is unfair to their countries. 
In the US, President Donald Trump insists that America’s trade negotiators were snookered by those from Mexico and China. 
So how could something that was supposed to benefit all, in developed and developing countries alike, now be reviled almost everywhere? 
How can a trade agreement be unfair to all parties? 
To those in developing countries, Trump’s claims – like Trump himself – are laughable. 
The US basically wrote the rules and created the institutions of globalization. 
In some of these institutions – for example, the International Monetary Fund – the US still has veto power, despite America’s diminished role in the global economy (a role which Trump seems determined to diminish still further). 
To someone like me, who has watched trade negotiations closely for more than a quarter-century, it is clear that US trade negotiators got most of what they wanted. 
The problem was with what they wanted. 
Their agenda was set, behind closed doors, by corporations. 
It was an agenda written by and for large multinational companies, at the expense of workers and ordinary citizens everywhere. 
Indeed, it often seems that workers, who have seen their wages fall and jobs disappear, are just collateral damage – innocent but unavoidable victims in the inexorable march of economic progress. 
But there is another interpretation of what has happened: one of the objectives of globalization was to weaken workers’ bargaining power. 
What corporations wanted was cheaper labor, however they could get it. 
This interpretation helps explain some puzzling aspects of trade agreements. 
Why is it, for example, that advanced countries gave away one of their biggest advantages, the rule of law? 
Indeed, provisions embedded in most recent trade agreements give foreign investors more rights than are provided to investors in the US. 
They are compensated, for example, should the government adopt a regulation that hurts their bottom line, no matter how desirable the regulation or how great the harm caused by the corporation in its absence. 
There are three responses to globalized discontent with globalization. 
The first – call it the Las Vegas strategy – is to double down on the bet on globalization as it has been managed for the past quarter-century. 
This bet, like all bets on proven policy failures (such as trickle-down economics) is based on the hope that somehow it will succeed in the future. 
The second response is Trumpism: cut oneself off from globalization, in the hope that doing so will somehow bring back a bygone world. 
But protectionism won’t work. 
Globally, manufacturing jobs are on the decline, simply because productivity growth has outpaced growth in demand. 
Even if manufacturing were to come back, the jobs won’t. 
Advanced manufacturing technology, including robots, means that the few jobs created will require higher skills and will be placed at different locations than the jobs that were lost. 
Like doubling down, this approach is doomed to fail, further increasing the discontent felt by those left behind. 
Trump will fail even in his proclaimed goal of reducing the trade deficit, which is determined by the disparity between domestic savings and investment. 
Now that the Republicans have gotten their way and enacted a tax cut for billionaires, national savings will fall and the trade deficit will rise, owing to an increase in the value of the dollar. 
(Fiscal deficits and trade deficits normally move so closely together that they are called “twin” deficits.) 
Trump may not like it, but as he is slowly finding out, there are some things that even a person in the most powerful position in the world cannot control. 
There is a third approach: social protection without protectionism, the kind of approach that the small Nordic countries took. 
They knew that as small countries they had to remain open. 
But they also knew that remaining open would expose workers to risk. 
Thus, they had to have a social contract that helped workers move from old jobs to new and provide some help in the interim. 
The Nordic countries are deeply democratic societies, so they knew that unless most workers regarded globalization as benefiting them, it wouldn’t be sustained. 
And the wealthy in these countries recognized that if globalization worked as it should, there would be enough benefits to go around. 
American capitalism in recent years has been marked by unbridled greed – the 2008 financial crisis provides ample confirmation of that. 
But, as some countries have shown, a market economy can take forms that temper the excesses of both capitalism and globalization, and deliver more sustainable growth and higher standards of living for most citizens. 
We can learn from such successes what to do, just as we can learn from past mistakes what not to do. 
As has become evident, if we do not manage globalization so that it benefits all, the backlash – from the New Discontents in the North and the Old Discontents in the South – is at risk of intensifying. 

The West’s Decline Would Hurt China 
HONG KONG – Official Chinese media are having a field day touting the dysfunction of Western democracies. 
Between the British vote to “Brexit” the European Union and the nomination of Donald Trump as the Republican candidate for the US presidency, not to mention increasingly frequent terrorist attacks, they have plenty of evidence. 
But the truth is that the West’s loss is not China’s gain. 
The hope, of course, is that the current travails of democracies around the world could boost the credibility of the Chinese Communist Party. 
And, indeed, a commentary in People’s Daily, the CCP’s official newspaper, portrayed the Brexit vote as a reflection of the fundamental flaws of Western democracies. 
The same paper used Trump’s rise to show that, in the American system, political leaders are “helpless” to address “complex social conflicts” like racial tensions and other sources of popular discontent. 
The Global Times, an ultra-nationalist tabloid affiliated with the People’s Daily, seemed to suggest that recent terrorist attacks in the West were a harbinger of some kind of democratic apocalypse. 
The West may be facing some mysterious and unthinkable “change,” intoned the tabloid. 
Given the CCP’s ideological hostility to the West, and its zero-sum geopolitical mindset, such gloating should come as no surprise. 
Indeed, the CCP has long used challenges that arise in democratic countries as part of its never-ending effort to enhance its own legitimacy. 
Claiming that democracy barely works in the West, the Party argues that it would be disastrous for China. 
Moreover, so long as China’s government is delivering consistently rising standards of living, as it has been over the last few decades, there is no need, according to the authorities, even to consider alternative systems. 
But there is little evidence that democratic tumult translates into autocratic legitimacy. 
On the contrary, dictatorships have historically fallen, regardless of the fortune of Western democracies. 
When the so-called third wave of democratization began in the mid-1970s, Western democracies were mired in stagflation and the political trauma of the Vietnam War. 
The fall of communism in the former Soviet bloc coincided with the reinvigoration of Western democracies in the 1980s. 
When the Arab Spring erupted in 2011, Western democracies were struggling with the consequences of the global financial crisis of 2008. 
All of this suggests that autocrats in China should not be holding their breath for some Brexit-induced surge in support. 
Though stories of democratic dysfunction can give people living under autocratic rule a negative impression of democracy, the effect is most likely short-lived. 
As long as dictatorships mistreat their own people and fail to improve their lives, their legitimacy will be challenged. 
Of course, China is no ordinary autocracy. 
But what makes it unique – the link between the CCP’s authority and its ability to sustain economic growth – does not make its gloating any more rational. 
After all, one of the keys to China’s economic success is its integration into a global economy dominated by the Western democracies, which buy roughly 60% of Chinese exports. 
In other words, the CCP derives more legitimacy from Western democracies’ success than it would from their failure. 
No good businessperson would hope their best customers go bankrupt. 
It makes little sense that the CCP is so pleased about the struggles of China’s most valuable trading partners. 
The factors driving the challenges facing the Western democracies today hold even worse implications for China. 
Support for Brexit and Trump is rooted largely in voters’ rejection of globalization. 
Regardless of how Brexit or the US election plays out, it is very likely that governments in Western democracies will respond to voter angst and take measures that imply a return to some degree of protectionism. 
As the world’s largest exporter, China will not escape the damaging economic consequences of such efforts. 
In that context, the legitimacy of the CCP, already challenged by China’s economic slowdown, could erode further. 
Instead of gloating, China’s leaders should be watching developments in the Western democracies with concern – and start planning for their own difficult times ahead. 

Globalization’s Political Fault Lines 
NEW YORK – The United Kingdom’s narrow vote to leave the European Union had specific British causes. 
And yet it is also the proverbial canary in the coalmine, signaling a broad populist/nationalist backlash – at least in advanced economies – against globalization, free trade, offshoring, labor migration, market-oriented policies, supranational authorities, and even technological change. 
All of these trends reduce wages and employment for low-skill workers in labor-scarce and capital-rich advanced economies, and raise them in labor-abundant emerging economies. 
Consumers in advanced economies benefit from the reduction in prices of traded goods; but low and even some medium-skill workers lose income as their equilibrium wages fall and their jobs are threatened. 
In the “Brexit” vote, the fault lines were clear: rich versus poor, gainers versus losers from trade/globalization, skilled versus unskilled, educated versus less educated, young versus old, urban versus rural, and diverse versus more homogenous communities. 
The same fault lines are appearing in other advanced economies, including the United States and continental Europe. 
With their more flexible economies and labor markets, the US and the UK have recovered more strongly than continental Europe in terms of GDP and employment since the 2008 global financial crisis. 
Job creation has been robust, with the unemployment rate falling below 5%, even if real wages are not growing much. 
Yet in the US, Donald Trump has become the hero of angry workers threatened by trade, migration, and technological change. 
In the UK, the Brexit vote was heavily influenced by fear that immigrants from low-wage EU countries (the proverbial “Polish plumber”) were taking citizens’ jobs and public services. 
In continental Europe and the eurozone, however, economic conditions are much worse. 
The average unemployment rate hovers above 10% (and much higher in the eurozone periphery – more than 20% in Greece and Spain) with youth unemployment over 30%. 
In most of these countries, job creation is anemic, real wages are falling, and dual labor markets mean that formal-sector, unionized workers have good wages and benefits, while younger workers have precarious jobs that pay lower wages, provide no employment security, and offer low or no benefits. 
Politically, the strains of globalization are twofold. 
First, establishment parties of the right and the left, which for more than a generation have supported free trade and globalization, are being challenged by populist, nativist/nationalist anti-establishment parties. 
Second, establishment parties are being disrupted – if not destroyed – from within, as champions of anti-globalization emerge and challenge the mainstream orthodoxy. 
Establishment parties were once controlled by globalization’s beneficiaries: capital owners; skilled, educated, and digitally savvy workers; urban and cosmopolitan elites; and unionized white- and blue-collar employees. 
But they also included workers – both blue- and white-collar – who were among the losers from globalization, but who nonetheless remained loyal, either because they were socially and religiously conservative, or because center-left parties were formally supporters of unions, workers’ rights, and entitlement programs. 
After the 2008 financial crisis, globalization’s losers started to organize and find anti-establishment champions on both the left and the right. 
On the left, the losers in the UK and the US, especially young people, found champions in traditional center-left parties: Jeremy Corbyn in the UK’s Labour Party, and Bernie Sanders in America’s Democratic Party. 
The deepest fault lines emerged among center-right parties. 
These parties – the Republicans in the US, the Tories in the UK, and center-right parties across continental Europe – confronted an internal revolt against their own leaders. 
The rise of Donald Trump – anti-trade, anti-migration, anti-Muslim, and nativist – is a reflection of an uncomfortable fact for the Republican establishment: the party’s median voter is closer to those who have lost from globalization. 
A similar revolt took place in the UK’s Conservative Party, with globalization’s losers coalescing around the party’s “Leave” campaign or shifting allegiance to the populist anti-EU UK Independence Party. 
In continental Europe, where multi-party parliamentary systems are prevalent, political fragmentation and disintegration are even more severe than in the UK and the US. 
On the EU’s periphery, anti-establishment parties tend to be on the left: Syriza in Greece, Italy’s Five Star Movement, Spain’s Podemos, leftist parties in Portugal. 
In the EU core, such parties tend to be on the right: Alternative for Germany, France’s National Front, and similar far-right parties in Austria, the Netherlands, Denmark, Finland, Sweden, and elsewhere. 
But, despite the growing number, organization, and mobilization of globalization’s losers, globalization itself is not necessarily doomed. 
For starters, it continues to yield net benefits for advanced and emerging markets alike, which is why the losers still tend to be a minority in most advanced economies, while those who benefit from globalization are a large – if at times silent – majority. 
In fact, even the “losers” benefit from the lower prices of goods and services brought about by globalization and technological innovation. 
This also why populist and anti-establishment parties are still a political minority. 
Even Syriza, once in power, backpedaled and had to accept austerity, as an EU exit would have been much costlier. 
And Spain’s recent general election, held three days after the Brexit referendum, suggests that, despite high unemployment, austerity, and painful structural reforms, moderate, pro-European forces remain a majority. 
Even in the US, Trump’s appeal is limited, owing to the demographic narrowness of his electoral base. 
Whether he can win the presidential election in November is highly doubtful. 
This is also why pro-European center-right and center-left coalitions remain in power in most of the EU. 
The risk that anti-EU parties may come to power in Italy, France, and the Netherlands – among others – is rising, but still remains a distant possibility. 
Finally, economic theory suggests that globalization can be made to benefit all as long as the winners compensate the losers. 
This can take the form of direct compensation or greater provision of free or semi-free public goods (for example, education, retraining, health care, unemployment benefits, and portable pensions). 
For workers to accept more labor mobility and flexibility as creative destruction eliminates some jobs and creates others, appropriate schemes are needed to replace income lost as a result of transitional unemployment. 
In the continental EU, establishment parties remain in power partly because their countries maintain extensive social welfare systems. 
The backlash against globalization is real and growing. 
But it can be contained and managed through policies that compensate workers for its collateral damage and costs. 
Only by enacting such policies will globalization’s losers begin to think that they may eventually join the ranks of its winners. 

Restoring Faith in Globalization 
MUNICH – I must confess that I am a firm believer in the benefits of globalization. 
To my mind, the gradual interlinking of regions, countries, and people is the most profoundly positive development of our time. 
But a populist has now assumed the United States presidency by campaigning on a platform of stark economic nationalism and protectionism. 
And in many countries, public discourse is dominated by talk of globalization’s alleged “losers,” and the perceived need for new policies to stem the rise of populist discontent. 
When I was born, the world’s population was 2.5 billion. 
I vividly recall a time in my life when many people feared that starvation would soon run rampant, gaps between the rich and poor would grow ever wider, and everything would eventually come crashing down. 
We now live in a world with 7.5 billion people, and yet the share of people living in absolute poverty has declined rapidly, while the gap between rich and poor countries has steadily closed. 
Around the world, average life expectancy has increased from 48 to 71 years – albeit with significant differences between countries – and overall per capita income has grown by 500%. 
Just looking back at the last 25 years, one could argue that humanity has had its best quarter-century ever. 
Since 1990, the share of people living in extreme poverty in the developing world has fallen from 47% to 14%, and child mortality – a critical indicator – has been halved. 
The world has never seen anything like this before. 
A similarly bright picture emerges from other indicators. 
Fewer people are dying on battlefields than during previous periods for which we have data; and, at least until a few years ago, the share of people living under more or less representative governments was gradually increasing. 
This spectacular progress has been driven partly by advances in science and technology. 
But it owes at least as much to increased economic interaction through trade and investment, and to the overarching liberal order that has enabled these positive developments. 
In short, globalization has been the single most important force behind decades of progress. 
These days, trade is often wrongly blamed for shuttering factories and displacing workers in developed countries. 
But, in reality, the disappearance of older industries stems primarily from new technologies that have improved productivity and expanded the wealth of our societies. 
Likewise, rising inequality, real or imagined, has far more to do with technology than with trade. 
To be sure, there are not as many farmers today as in past decades or centuries; Lancashire’s cotton mills, Pittsburgh’s steel plants, and Duisburg’s coal mines have closed; and there are far fewer workers in Northern Sweden’s vast forests. 
The children of those employed in these industries now often head for the lights of rapidly expanding cities, where they fill jobs that could scarcely have been imagined just a few decades ago. 
For most people around the world, life before globalization was poor, brutal, and short. 
And yet today’s anti-globalists have turned nostalgia into a rallying cry. 
They want to make America – or Russia, or Islam – “great again.” 
Each may be rallying against the others; but all are rallying against globalization. 
Economic conditions were certainly less favorable in the years following the 2008 financial crisis, but now employment and economic growth are rebounding pretty much everywhere. 
Real (inflation-adjusted) GDP has been rising for 15 consecutive quarters in the eurozone, and all European Union economies are expected to grow in the next few years. 
Meanwhile, the US economy is already doing well – unemployment is below 5% and real incomes are rising. 
Of course, many societies are undeniably experiencing a growing sense of cultural insecurity, not least because many people have been led to believe that external forces such as migration are eroding traditional sources of peace and stability. 
They are told that a return to tribalism in one form or another is a readily available coping mechanism. 
Their mythical tribe was great in some mythical past, so why not try to recreate it? 
Such thinking poses a serious threat to the world’s most vulnerable people. 
The United Nations Sustainable Development Goal to eliminate extreme poverty worldwide by 2030 is entirely dependent on continued economic growth through trade, technological innovation, and international cooperation. 
Erecting trade barriers, engaging in digital mercantilism, and generally undermining the liberal world order will severely harm the extreme poor in Africa and other underdeveloped regions, while doing nothing to help coal miners in West Virginia. 
The strong will always manage, but the weak will bear the burden of a nostalgic protectionism that erodes the benefits of globalization. 
At the World Economic Forum’s Annual Meeting in Davos this year, Chinese President Xi Jinping was the one extolling the virtues of globalization, while many Western business leaders wandered the halls trying to sound concerned for the supposed losers of the process. 
The communists are keeping the globalization faith; but the capitalists seem to have lost theirs. 
This is bizarre – and entirely out of sync with past performance and current facts. 
We have every reason to be confident in a process that has delivered more prosperity to more people than anyone could have dreamed of just a few decades ago. 
We must not be shy in defending globalization and combating reactionary nostalgia. 
We can have a brighter future – but only if we don’t seek it in the past. 

Globalization’s Assassin 
The world’s first wave of economic globalization, led by the British Empire in the nineteenth century, came to an end literally with a bang on a Sunday afternoon in 1914, when Gavrilo Princip killed (with two uncannily well-aimed bullets) Austria’s Archduke Franz Ferdinand and his wife. 
The years that followed witnessed pan-European carnage, instability throughout the 1920’s, and the rise of fascism and communism, culminating in the death of countless millions during World War II. 
Is today’s globalizing era also coming to an end? 
If so, it may not necessarily end with a repeat of the slaughters of the last century, but with an economic retrenchment that brings economic stagnation and consigns billions of people to grinding poverty. 
Various candidates have been proposed for the role of globalization’s assassin. 
But one little noticed, yet likely, aspirant has been sneaking up on the world economy: the growing tendency to limit the free circulation of people, to “fence in” the rich world. 
We see the menace of this tendency constantly nowadays, but we perceive it in such a seemingly unthreatening way that we may well become accustomed to it rather than arresting it. 
Globalization means free movement of capital, goods, technology, ideas, and, yes, people. 
Any globalization that is limited to the first three or four freedoms but omits the last one is partial and not sustainable. 
As soon as people cannot move, there will be little to stop governments from limiting the free movement of goods or other factors of production. 
After all, if over-populated countries with high unemployment cannot export people, why not reach for higher tariff barriers to protect the jobs they have? 
But what of the unemployed who become locked into their societies? 
The war on terror has shown us the dangers that can arise from the social frustrations that often result. 
Nevertheless, the “fencing-in” of the rich world continues apace. 
The United States plans to construct a veritable “Mexican Wall” to keep poor people from crossing into Texas or California. 
Likewise, hundreds, if not thousands, of Africans die every year trying to reach the shores of Fortress Europe. 
Efforts to restrict people’s movement between countries expose the soft underbelly of globalization: the deepening gap between countries’ mean incomes. 
Rather than poor countries growing faster than the rich (as we would expect from Economics 101), mainly the reverse is true. 
Between 1980 and 2002, average annual per capita income growth in the rich world (defined as the “old” OECD members) was almost 2%, compared to just 0.1% in the 42 least developed countries. 
Indeed, average income in Latin America is now barely above its 1980 level. 
This huge gap spurs migration. 
People nowadays know much more about conditions in different countries than they did in the past, and if moving across a border means that their income can be multiplied several-fold, they will try to do it. 
This is why today’s most contentious borders separate economies where the income gaps between people on the two sides are the greatest. 
There are four such global hot spots: the borders between the US and Mexico, Spain and Morocco, Greece (and Italy) and the southern Balkans, and Indonesia and Singapore (or Malaysia). 
The income gaps range from more than seven to one in the latter case to 4.5 to one in the case of Spain and Morocco, 4.3 to one between the US and Mexico, and four to one between Greece and Albania. 
Income differences were not always so huge. 
In 1980, average income in the US was a little more than three times that of Mexico, the gap between Singapore and Indonesia was 5.3 to one, and the difference between Spain and Morocco 3.5 to one. 
Even the gap between Greece and Albania, at three to one, was narrower than it is now. 
So income gaps between all these contiguous countries have increased significantly during the last quarter-century. 
So it is little wonder that it is in these places that most illegal immigration and human trafficking occurs – pirates in the Straits of Malacca, fast boats between Albania and Italy, and desperate human cargoes from Africa and Latin America. 
If today’s globalization continues to widen income gaps, the waves of migration will grow. 
So the rich world will, in a knee-jerk response, erect ever-higher barriers to stem the human tide. 
If globalization, which has so enriched the world’s wealthiest countries, is to continue, governments must find ways to increase incomes more evenly. 
Otherwise, today’s “fencing in” of the rich world will increase the risk of a backlash against free circulation of goods and capital, as well as of political instability punctuated by terrorism. 
Global income redistribution by the rich countries should be viewed as a matter not of charity, but of enlightened self-interest. 

Globalization’s Government 
NEW YORK – We live in an era in which the most important forces affecting every economy are global, not local. 
What happens “abroad” – in China, India, and elsewhere – powerfully affects even an economy as large as the United States. 
Economic globalization has, of course, produced some large benefits for the world, including the rapid spread of advanced technologies such as the Internet and mobile telephony. 
It has also reduced poverty sharply in many emerging economies – indeed, for this reason alone, the world economy needs to remain open and interconnected. 
Yet globalization has also created major problems that need to be addressed. 
First, it has increased the scope for tax evasion, owing to a rapid proliferation of tax havens around the world. 
Multinational companies have many more opportunities than before to dodge their fair and efficient share of taxation. 
Moreover, globalization has created losers as well as winners. 
In high-income countries, notably the US, Europe, and Japan, the biggest losers are workers who lack the education to compete effectively with low-paid workers in developing countries. 
Hardest hit are workers in rich countries who lack a college education. 
Such workers have lost jobs by the millions. 
Those who have kept their jobs have seen their wages stagnate or decline. 
Globalization has also fueled contagion. 
The 2008 financial crisis started on Wall Street, but quickly spread to the entire world, pointing to the need for global cooperation on banking and finance. 
Climate change, infectious diseases, terrorism, and other ills that can easily cross borders demand a similar global response. 
What globalization requires, therefore, are smart government policies. 
Governments should promote high-quality education, to ensure that young people are prepared to face global competition. 
They should raise productivity by building modern infrastructure and promoting science and technology. 
And governments should cooperate globally to regulate those parts of the economy – notably finance and the environment – in which problems in one country can spill over to other parts of the world. 
The need for highly effective government in the era of globalization is the key message of my new book, The Price of Civilization. 
Simply put, we need more government nowadays, not less. 
Yet the role of government also needs to be modernized, in line with the specific challenges posed by an interconnected world economy. 
I wrote The Price of Civilization out of the conviction that the US government has failed to understand and respond to the challenges of globalization ever since it began to impact America’s economy in the 1970’s. 
Rather than respond to globalization with more government spending on education, infrastructure, and technology, Ronald Reagan won the presidency in 1980 by pledging to slash government spending and cut taxes. 
For 30 years, the US has been going in the wrong direction, cutting the role of government in the domestic economy rather than promoting the investments needed to modernize the economy and workforce. 
The rich have benefited in the short run, by getting massive tax breaks. 
The poor have suffered from job losses and cuts in government services. 
Economic inequality has reached a high not seen since the Great Depression. 
These adverse trends have been exacerbated by domestic politics. 
The rich have used their wealth to strengthen their grip on power. 
They pay for the expensive campaigns of presidents and congressmen, so presidents and congressmen help the rich – often at the expense of the rest of society. 
The same syndrome – in which the rich have gained control of the political system (or strengthened their control of it) – now afflicts many other countries. 
Yet there are some important signs around the world that people are fed up with governments that cater to the rich while ignoring everyone else. 
Start with the growing calls for greater social justice. 
The upheavals in Tunis and Cairo were first called the Arab Spring, because they seemed to be contained to the Arab world. 
But then we saw protests in Tel Aviv, Santiago, London, and now even in the US. 
These protests have called first and foremost for more inclusive politics, rather than the corrupt politics of oligarchy. 
Moreover, US President Barack Obama is gradually shifting toward the left. 
After three years in which his administration coddled corporate lobbyists, he has finally begun to emphasize the need for the rich to pay more taxes. 
This has come late in his term, and he might well continue to favor the rich and Wall Street in exchange for campaign contributions in 2012, but there is a glimmer of hope that Obama will defend a fairer budget policy. 
Several European governments, including Spain, Denmark, and Greece, also seem to be moving in the same direction. 
Spain recently imposed a new wealth tax on high-net-worth taxpayers. 
Denmark elected a center-left government committed to higher government spending financed by new taxes on the rich. 
And Greece has just voted for a new property tax to help close its yawning fiscal deficit. 
The European Commission has also called for a new Financial Transactions Tax (FTT) to raise around $75 billion per year. 
The Commission has finally agreed that Europe’s financial sector has been under-taxed. 
The new FTT might still face political opposition in Europe, especially in the United Kingdom, with its large and influential banking sector, but at least the principle of greater tax fairness is high on the European agenda. 
The world’s most successful economies today are in Scandinavia. 
By using high taxes to finance a high level of government services, these countries have balanced high prosperity with social justice and environmental sustainability. 
This is the key to well-being in today’s globalized economy. 

World Order 2.0 
NEW YORK – For nearly four centuries, since the Peace of Westphalia in 1648 ended the Thirty Years’ War in Europe, the concept of sovereignty – the right of countries to an independent existence and autonomy – has formed the core of the international order. 
And for good reason: as we have seen in century after century, including the current one, a world in which borders are forcibly violated is a world of instability and conflict. 
But, in a globalized world, a global operating system premised solely on respect for sovereignty – call it World Order 1.0 – has become increasingly inadequate. 
Little stays local anymore. 
Just about anyone and anything, from tourists, terrorists, and refugees to e-mails, diseases, dollars, and greenhouse gases, can reach almost anywhere. 
The result is that what goes on inside a country can no longer be the concern of that country alone. 
Today’s realities call for an updated operating system—World Order 2.0 – based on “sovereign obligation,” the notion that sovereign states have not just rights but also obligations to others. 
A new international order will also require an expanded set of norms and arrangements, beginning with an agreed-upon basis for statehood. 
Existing governments would agree to consider bids for statehood only in cases where there was a historical justification, a compelling rationale, and popular support, and where the proposed new entity is viable. 
World Order 2.0 must also include prohibitions on carrying out or in any way supporting terrorism. 
More controversially, it must include strengthened norms proscribing the spread or use of weapons of mass destruction. 
As it stands, while the world tends to agree on constraining proliferation by limiting countries’ access to the relevant technology and material, the consensus often breaks down once proliferation has occurred. 
This should become a topic of discussion at bilateral and multilateral meetings, not because it would lead to a formal agreement, but because it would focus attention on applying stringent sanctions or undertaking military action, which could then reduce the odds of proliferation. 
Another essential element of a new international order is cooperation on climate change, which may be the quintessential manifestation of globalization, because all countries are exposed to its effects, regardless of their contribution to it. 
The 2015 Paris climate agreement – in which governments agreed to limit their emissions and to provide resources to help poorer countries adapt – was a step in the right direction. 
Progress on this front must continue. 
Cyberspace is the newest domain of international activity characterized by both cooperation and conflict. 
The goal in this area should be to create international arrangements that encourage benign uses of cyberspace and discourage malign uses. 
Governments would have to act consistently within this regime as part of their sovereign obligations – or face sanctions or retaliation. 
Global health presents a different set of challenges. 
In a globalized world, an outbreak of infectious disease in one country could quickly evolve into a serious threat to health elsewhere, as has happened in recent years with SARS, Ebola, and Zika. 
Fortunately, the notion of sovereign obligation is already advanced in this sphere: countries are responsible for trying to detect infectious disease outbreaks, responding appropriately, and notifying others around the world. 
When it comes to refugees, there is no substitute for effective local action aimed at preventing situations that generate large refugee flows in the first place. 
In principle, this is an argument for humanitarian intervention in selective situations. 
But translating this principle into practice will remain difficult, given divergent political agendas and the high costs of effective intervention. 
Even without a consensus, however, there is a strong case for increasing funding for refugees, ensuring their humane treatment, and setting fair quotas for their resettlement. 
Trade agreements are, by definition, pacts of reciprocal sovereign obligations regarding tariff and nontariff barriers. 
When a party believes that obligations are not being met, it has recourse to arbitration through the World Trade Organization. 
But things are less clear when it comes to government subsidies or currency manipulation. 
The challenge, therefore, is to define appropriate sovereign obligations in these areas in future trade pacts, and to create mechanisms to hold governments accountable. 
Establishing the concept of sovereign obligations as a pillar of the international order will take decades of consultations and negotiations – and even then, its acceptance and impact will be uneven. 
Progress will come only voluntarily, from countries themselves, rather than from any top-down edict. 
Realistically, it will be difficult to forge agreement on what specific sovereign obligations states have and how they should be enforced. 
Complicating matters further, US President Donald Trump’s administration has espoused an “America first” doctrine that is largely inconsistent with what is being suggested here. 
If this remains the US approach, progress toward building the sort of order that today’s interconnected world demands will come about only if other major powers push it – or it will have to wait for Trump’s successor. 
Such an approach, however, would be second best, and it would leave the United States and the rest of the world worse off. 
Now is the time to begin the necessary conversations. 
Globalization is here to stay. 
Moving toward a new international order that incorporates sovereign obligation is the best way to cope. 
World Order 2.0, predicated on sovereign obligation, is certainly an ambitious project – but one born of realism, not idealism. 

Globalizing NATO 
PRINCETON – Next week, NATO’s 28 members will meet in Chicago for their annual summit. 
Sixty-two years after the North Atlantic Treaty was signed, binding the United States, Canada, and ten European states to consider an attack on one an attack on all, NATO is transforming itself into a twenty-first-century global security organization. 
The result will be a safer world. 
In 1949, the world was rapidly dividing into two principle political-military blocs, East and West, alongside a large “non-aligned movement.” 
NATO faced off against the Warsaw Pact, created by the Soviet Union and its allies in 1955. 
Within both blocs, smaller powers clustered around the superpower. 
No flexibility existed within either bloc for smaller groups of members to deploy alliance assets. 
Today, NATO is becoming, in the words of its secretary-general, Anders Fogh Rasmussen, “a hub of a network of security partnerships and a center for consultation on global security issues.” 
It is a “globally connected institution,” with more than 40 individual country partners and growing ties to other international organizations. 
Indeed, the country partners include all of Europe’s non-NATO countries, such as Austria, Switzerland, Finland, and Sweden, and aspiring and possible NATO members such as Bosnia, Serbia, Macedonia, Ukraine, Belarus, and even Russia. 
Virtually all of the Central Asian countries – from Turkmenistan to Kazakhstan, as well as Armenia, Azerbaijan, Afghanistan, and Pakistan – are partners, as is the entire Maghreb, from Morocco to Egypt, as well as Israel, Jordan, Iraq, Bahrain, Qatar, Kuwait, and the United Arab Emirates. 
Finally, Pacific partners include Japan, South Korea, Australia, New Zealand, and Mongolia. 
On the organizational side, NATO describes itself as having developed “close working relations” with the United Nations, the European Union, and the Organization for Security and Cooperation in Europe. 
It also collaborates regularly with the African Union, the International Committee of the Red Cross, the International Organization for Migration, the World Bank, the International Civil Aviation Organization, and the Organization for the Prohibition of Chemical Weapons. 
If one draws links radiating outward from NATO to all of these different countries and organizations, the result is a security network that has multiple hubs and clusters – much like a map of the Internet or of planets and galaxies. 
This world is no longer unipolar, bipolar, or even multipolar, because the actors that matter are not single states but groups of states that are more or less densely connected. 
It is a multi-hub security network, in which the hubs are regional organizations of different sizes and strengths. 
This structural shift has enormous practical significance. 
For starters, it means that not only NATO’s military resources, but also its human capital and practical knowledge in combating many different kinds of threats are available globally. 
NATO has created a Comprehensive Crisis and Operations Management Center that brings together civilian and military expertise on crisis identification, planning, operations, reconstruction, and stabilization capabilities in ways that are explicitly designed to connect NATO headquarters in Europe to “the networked world.” 
Second, NATO’s own identity is becoming that of an alliance that exists to empower – to offer assistance and partnership – as much as to overpower. 
NATO is no longer just a hammer; it is an entire toolbox of security options. 
These options include developing counter-networks to meet networked security threats such as terrorism and proliferation of nuclear, chemical, or biological materials, as well as highly decentralized threats such as piracy. 
As a result, when a crisis like the war in East Timor in 1999 or last year’s political stalemate in Côte d’Ivoire arises, NATO can backstop whichever country or group of countries chooses to take the lead in carrying out a UN mandate. 
NATO members themselves also have much more flexibility to draw on NATO’s collective assets. 
Even skeptics of NATO expansion and operations like the intervention in Libya now recognize that joint operations by member countries, operating under a UN mandate and in conjunction with regional partners, is likely to be a model for the future. 
As General Brent Scowcroft, National Security Adviser for President George H.W. Bush, observed recently, the UN Charter originally envisioned a standing military force to enforce Security Council resolutions – a vision that the NATO partner model might ultimately realize. 
Power in a network flows from connectedness, or what network theorists call “centrality.” 
The most powerful member of a network is the node that has the most connections to others, which means that a node can increase its power not only by adding connections directly, but also by increasing the connectedness of nearby nodes. 
In other words, the US can increase its own power both by connecting to other NATO members (and then ensuring that NATO is connected to as many other countries and organizations as possible) and by increasing the connectedness of those other countries and organizations. 
If NATO connects with the African Union, for example, and increases the AU’s connectedness, then both NATO and the AU become more central to the network and hence more powerful in terms of their ability to exercise influence and marshal resources. 
The logic of centrality as a source of power creates a virtuous circle, in which members of a network gain advantage by bringing more members into the network and connecting more densely to them. 
That is exactly the logic behind NATO’s transformation. 
The immediate topic on the agenda in Chicago next week will be getting NATO forces out of Afghanistan. 
But the longer-term subject will be getting as many countries as possible into the global NATO security network. 

GMOs and Junk Science 
STANFORD – In today’s media landscape, where unfounded opinions, hype, and rumors are rife, the scientific method – the means by which we determine, based on empirical and measurable evidence, what is true – should serve as a touchstone of reality. 
Science enables us to gauge what we think we know and to identify what we do not. 
Most important, it discredits false claims made for personal or political reasons – at least it should. 
But scientists occasionally “go rogue,” forsaking the scientific method – often for notoriety or economic gain – to produce propaganda and to sow fear in a public that lacks expertise but is hungry for information. 
This abuse of scientific authority is especially widespread in the “organic” and “natural” food industries, which capitalize on people’s fear of synthetic or “unnatural” products. 
A recent example is the Indian-American scientist V.A. Shiva Ayyadurai, who, with Prabhakar Deonikar, published the much-ridiculed paper “Do GMOs Accumulate Formaldehyde and Disrupt Molecular Systems Equilibria? 
Systems Biology May Provide Answers.” 
(“GMOs” are “genetically modified organisms,” itself a misleading and often unfairly stigmatized non-category, circumscribing a universe of organisms modified with the most modern and precise techniques of genetic engineering.) 
Although the article supposedly passed the peer-review process, a key component of legitimate science, it appeared in a low-impact “pay-for-play” journal, Agricultural Sciences, which is produced by a “predatory” publisher. 
Within days of publication, anti-biotechnology organizations like the Organic Consumers Association and GMO Inside were reporting on Ayyadurai’s “findings” with frightening headlines – “Formaldehyde in GMO Soy?” and “New Study Shows GMO Soy Accumulates Cancer Causing Chemical Formaldehyde” – accompanied by scary graphics. 
But the problems with Ayyadurai’s paper are legion. 
Its title alone is enough to show that something is amiss. 
If you think that GMOs might “accumulate formaldehyde” – a chemical that is probably carcinogenic at high levels but is present in most living cells and found widely in our environment – the obvious response would be to measure its levels in the organisms. 
Ayyadurai, however, chose to make guesses based on modeling via “systems biology.” 
“Systems biology” enables only a prediction, not an experimental conclusion. 
Rather than actually testing the levels of any chemicals in plants, Ayyadurai plugged data into a computer algorithm to predict the levels of two chemicals, formaldehyde and glutathione. 
This is akin to a meteorologist predicting from his models that it will be sunny all day, instead of looking out the window to see whether rain is falling. 
To be sure, as Kevin Folta, the head of the horticultural sciences department at the University of Florida, explained, systems biology can be a useful approach if employed properly. 
As he put it, systems biology “is a way to make predictions based on integrating existing data, and then statistically deriving a likelihood that the predictions may be correct.” 
But, he emphasizes, the predictions are then to be tested, “and the systems approach validated.” 
Like all predictive studies based on computer modeling, the validity of the results depends on the integrity of the data and the algorithm. 
If the data are cherry-picked to support the modeler’s desired conclusions, or if the algorithm is flawed, the results will be inaccurate. 
But it is unclear from Ayyadurai’s article which data were used, and there is no validation of the model. 
Folta offers a brilliant send-up of Ayyadurai’s work. 
“If you developed a computer program that integrated Internet data to predict the location of Munich, and the program told you it was squarely in the Gulf of Mexico, right off Florida, it does not mean that Munich is in the Gulf of Mexico, right off of Florida.” Instead, it means that you have made a mistake, in your program, assumptions, or input data – all of which are testable. 
To decide not to challenge those data, Folta continues, and instead to “publish a map showing that Munich is squarely in the Gulf of Mexico, opposing all other data and the claims of millions of rather dry Germans, does not mean that you are brilliant. 
It means you have absolutely no clue, or more likely, have some reason you want a major German metropolis to be a two-hour boat ride from Tampa.” 
Folta also has something to say about Ayyadurai’s publisher. 
If you print the deceptive map showing the location of Munich, “what does that say about your integrity as a reliable information source?” 
In the spirit of scientific cooperation, Folta offered to collaborate with Ayyadurai on university-based testing of genetically engineered corn and soy samples (along with appropriate controls), with analysis by an independent lab. 
Ayyadurai declined, so Folta will proceed himself. 
The experimental data is forthcoming. 
In the meantime, if you get a hankering for sauerbraten and spaetzle, head for Central Europe, not the Gulf of Mexico. 

God Crashes the Tea Party 
OXFORD – Where does America put God? 
Historically, there has always been tension between the separation of church and state that the United States has enshrined in its Constitution and regular upsurges of religious faith, even religious extremism, that seek an outlet in the political process – or even seek to dominate it. 
Nowhere is this tension more visible today than in the struggle for the political soul of the Tea Party. 
For, as the coalition on the religious right that dominated American conservatism since the 1980’s has begun to fall apart, some of the same Christian fundamentalist elements are seeking to absorb – some would say take over – the originally non-sectarian Tea Party. 
The Tea Party emerged from a laudably grassroots base: libertarians, fervent Constitutionalists, and ordinary people alarmed at the suppression of liberties, whether by George W. Bush or Barack Obama. 
Libertarians, of course, tend to understand church-state separation: if you don’t want government intruding in your life, you definitely don’t want it telling you how to worship. 
This anti-establishmentarian impulse is a time-honored tradition in America, where advocacy of separation of church and state – a radical view in the late eighteenth century – was driven by the experiences of religious minorities such as Quakers, Huguenots, and Puritans, all of whom suffered religious persecution in Britain and France. 
Unfortunately, religious bigotry also has a long history in America, and there are powerful factions that cannot accept that God did not intend the US to be a Christian nation. 
Ronald Reagan saw the benefit of tapping these constituencies, introducing a faith-first element into what had been a more secularized, “big tent” conservatism. 
Since the 1980’s, “culture wars” (usually staged) about homosexuality, abortion, and sex education, or other coded messaging about religious values, have served to mobilize the religious right. 
Bush’s early avowal of his conversion experience was given in language poll-tested for acceptance by fundamentalist Christians. 
But, in the face of a severe recession and endless real wars, hot-button “culture war” issues don’t have the mobilizing power that they once did. 
Moreover, the Christian conservative movement has become rudderless and fragmented, with many of its leaders dead, compromised by sex scandals, or increasingly perceived as plain batty. 
This is why the architects of the religious right – many of them professional political consultants with no organic ties to movement – see the Tea Party as the great prize to subvert and then dominate. 
You can see these fingerprints everywhere. 
At early Tea Party events, secular issues dominated: the Federal Reserve, monetary policy, taxation, the size of the government, and, above all, the Constitution. 
Today, the think tanks and pressure groups of the organized right are pumping money into Tea Party “branded” sites and events – and altering the message with an increasingly “culture war” slant. 
At Townhall.com and LibertyCentral.org, for example, explanations of the Constitution sit uneasily next to articles urging citizens to take action against the construction of a mosque at the Twin Towers site in New York. 
Elsewhere, a seemingly commendable grassroots petition movement to re-establish Constitutional values at the state level turns out to be – if you read the fine print – a drive to enshrine Christian values in state law. 
Likewise, the Tea Party, which showed no interest in racist language or iconography at its outset, increasingly injects such demagoguery into its messages. 
The movement’s libertarian message is now regularly subverted by anti-Muslim paranoia and contradicted by activism supporting such initiatives as the mass round-up, without due process, of undocumented immigrants in Arizona. 
The political consultants behind this shift know that chauvinist appeals work in America – especially in times of economic stress and political turmoil. 
But perhaps enough Americans will keep their eyes open this time and learn from history. 
Over a century ago, a nation that originated modern democracy was gripped by a political fever that led ordinary people to choose sides based on racist demagoguery. 
Cynical political tacticians manipulated popular opinion – through propaganda, through what posed as a free press, and through targeted political hate speech – to unite in carrying out a massive miscarriage of justice, demonizing a religious minority for political gain. 
Not insignificantly, this hysteria was whipped up in the name of fighting “treason” and bolstering “national security.” 
Also tellingly, the accused member of the hated religious minority was jailed for life and condemned to a method of punishment – solitary confinement on an island 3,000 miles away – that was invented just for him after his conviction. 
The nation that had defined itself by its belief in freedom and reason for over a hundred years found itself seduced by the most barbaric of faith-based bigotry. 
Even civilized, educated people signed on to it. 
It was not the US that was gripped by this wave of racist paranoia, but France, the cradle of “liberté, egalité et fraternité.” 
And the hated, “treasonous” religious minority was not Muslim, but Jewish. 
Indeed, the most important book that a student of America can read right now to understand today’s malignant political climate is Ruth Harris’ admirable new look at the Dreyfus affair, The Man on Devil’s Island. 
Harris re-reads the famous trial to show how even the greatest of democracies can falter when good people abandon their principles, and when fear-mongering propaganda drives leaders to erode democratic checks and balances in the name of “national security.” 
American Jews, in particular, need reminding that when one religious minority is targeted, all religious minorities are at risk. 
France eventually regained its soul – but long after a dark eclipse of its most cherished democratic values. 
Americans – and the Tea Party – should look at France a century ago, when religious bigotry hijacked constitutionalism, and then take a good hard look at themselves. 


Godless Morality 
Is religion necessary for morality? 
Many people consider it outrageous, even blasphemous, to deny the divine origin of morality. Either some divine being crafted our moral sense, or we picked it up from the teachings of organized religion. 
Either way, we need religion to curb nature’s vices. 
Paraphrasing Katherine Hepburn in the movie The African Queen, religion allows us to rise above wicked old Mother Nature, handing us a moral compass. 
Yet problems abound for the view that morality comes from God. 
One problem is that we cannot, without lapsing into tautology, simultaneously say that God is good, and that he gave us our sense of good and bad. 
For then we are simply saying that God meets God’s standards. 
A second problem is that there are no moral principles that are shared by all religious people, regardless of their specific beliefs, but by no agnostics and atheists. 
Indeed, atheists and agnostics do not behave less morally than religious believers, even if their virtuous acts rest on different principles. 
Non-believers often have as strong and sound a sense of right and wrong as anyone, and have worked to abolish slavery and contributed to other efforts to alleviate human suffering. 
The opposite is also true. 
Religion has led people to commit a long litany of horrendous crimes, from God’s command to Moses to slaughter the Midianites – men, women, boys, and non-virginal girls – through the Crusades, the Inquisition, innumerable conflicts between Sunni and Shiite Muslims, and suicide bombers convinced that martyrdom will lead them to paradise. 
The third difficulty for the view that morality is rooted in religion is that some elements of morality seem to be universal, despite sharp doctrinal differences among the world’s major religions. 
In fact, these elements extend even to cultures like China, where religion is less significant than philosophical outlooks like Confucianism. 
Perhaps a divine creator handed us these universal elements at the moment of creation. 
But an alternative explanation, consistent with the facts of biology and geology, is that over millions of years we have evolved a moral faculty that generates intuitions about right and wrong. 
For the first time, research in the cognitive sciences, building on theoretical arguments emerging from moral philosophy, has made it possible to resolve the ancient dispute about the origin and nature of morality. 
Consider the following three scenarios. 
For each, fill in the blank space with “obligatory,” “permissible,” or “forbidden.” 
1. 
A runaway boxcar is about to run over five people walking on the tracks. 
A railroad worker is standing next to a switch that can turn the boxcar onto a side track, killing one person, but allowing the five to survive. 
Flipping the switch is ______. 
2. 
You pass by a small child drowning in a shallow pond, and you are the only one around. 
If you pick up the child, she will survive and your pants will be ruined. 
Picking up the child is _______. 
3. 
Five people have just been rushed into a hospital in critical condition, each requiring an organ to survive. 
There is not enough time to request organs from outside the hospital, but there is a healthy person in the hospital’s waiting room. 
If the surgeon takes this person’s organs, he will die, but the five in critical care will survive. 
Taking the healthy person’s organs is _______. 
If you judged case 1 as permissible, case 2 as obligatory, and case 3 as forbidden, then you are like the 1,500 subjects around the world who responded to these dilemmas on our web-based moral sense test (http://moral.wjh.harvard.edu/). 
If morality is God’s word, atheists should judge these cases differently from religious people, and their responses should rely on different justifications. 
For example, because atheists supposedly lack a moral compass, they should be guided by pure self-interest and walk by the drowning child. 
But there were no statistically significant differences between subjects with or without religious backgrounds, with approximately 90% of subjects saying that it is permissible to flip the switch on the boxcar, 97% saying that it is obligatory to rescue the baby, and 97% saying that is forbidden to remove the healthy man’s organs. 
When asked to justify why some cases are permissible and others forbidden, subjects are either clueless or offer explanations that cannot account for the relevant differences. 
Importantly, those with a religious background are as clueless or incoherent as atheists. 
These studies provide empirical support for the idea that, like other psychological faculties of the mind, including language and mathematics, we are endowed with a moral faculty that guides our intuitive judgments of right and wrong. 
These intuitions reflect the outcome of millions of years in which our ancestors have lived as social mammals, and are part of our common inheritance. 
Our evolved intuitions do not necessarily give us the right or consistent answers to moral dilemmas. 
What was good for our ancestors may not be good today. 
But insights into the changing moral landscape, in which issues like animal rights, abortion, euthanasia, and international aid have come to the fore, have not come from religion, but from careful reflection on humanity and what we consider a life well lived. 
In this respect, it is important for us to be aware of the universal set of moral intuitions so that we can reflect on them and, if we choose, act contrary to them. 
We can do this without blasphemy, because it is our own nature, not God, that is the source of our morality. 

Going to the Dogs 
GAINESVILLE, FLORIDA – There are about 70 million dogs living in human homes in the United States. 
That’s 10 million more dogs than children under the age of 15. 
The pattern in other Western nations is similar. 
Roughly 40% of house dogs are allowed to sleep on their owners’ beds. 
How did dogs achieve such an intimate position in our lives? 
One theory is that, in the thousands of years that dogs have lived with humans, they have become attuned to human ways of thinking. 
Certainly dogs have a remarkable sensitivity to human behavior. 
Dogs are able to follow human pointing gestures to find hidden food, and they can indicate successfully to their owners by their own pointing actions where a hidden toy is located. 
Under certain circumstances, dogs understand that a human who cannot see them (because, for example, she is blindfolded) is less likely to respond to begging with a tasty treat than a person whose vision is not obscured. 
Dogs are also more likely to obey a command to leave something desirable alone if their master stays in the room than if he steps out. 
And yet attempts to view canine smarts as cut from the same cloth as human intelligence gloss over a lot of the details about how dogs and humans operate. 
Evolution doesn’t ever build the same form of intelligence twice – even though similar problems may lead to similar solutions. 
As most owners of puppies know, it takes time and care for a dog to learn the ways of humans. 
We don’t literally raise our hackles when angry, or sniff each other’s backsides when making new friends. 
And dogs don’t gesture with their forepaws or use an elaborate grammatical language when trying to explain things. 
In our own research, we have found that people remain somewhat mysterious to dogs for the first five months of life, and dogs at our local pound lag considerably behind house dogs when it comes to understanding human beings. 
Recent research by Alexandra Horowitz at Barnard College in New York accentuates the “talking past each other” that sometimes goes on between humans and dogs. 
Horowitz asked owners to forbid their dogs to take a biscuit and then briefly leave the room. 
When the owners returned after a few moments away, some were told that their dogs had been naughty and eaten the forbidden food. 
Others were told their dog had been good and left the biscuit alone. 
If the dog had misbehaved, the owner was given a moment to berate his pet for its misdeed. 
The owners were then asked whether their dog looked guilty. 
The twist in this tale is that only half of the owners were correctly informed. 
Half of the time, Horowitz told the owner of a dog that had actually left the biscuit alone that his dog had taken the treat. 
And half the time the owner of a naughty dog was told that his dog had been good. 
The point of this deception was that when Horowitz asked each owner whether his dog looked guilty, she could consider whether the owner’s report of “guilty looks” actually had to do with the facts of the matter – whether the dog had taken the forbidden treat – or whether it reflected nothing more than whether the owner had chastised his hound. 
The results showed very clearly that a dog’s “guilty looks” came about solely because it was being scolded: the look had nothing to do with whether the dog had really committed an offense. 
This does not mean that we should not chastise our dogs (or praise them). 
Nor does it mean that we should not love our dogs – or sometimes be frustrated by them. 
All it means is that, if we want to live harmoniously with another species in our most intimate places, we must recognize that some of the time our preferred modes of reasoning are not theirs. 
We must try to understand dogs on their own terms, and help them to understand us. 

Emerging Markets Should Go for the Gold 
CAMBRIDGE – Are emerging-market central banks overweight in dollars and underweight in gold? 
Given a slowing global economy, in which emerging markets are probably very grateful for any reserves they retain, this might seem an ill-timed question. 
But there is a good case to be made that a shift in emerging markets toward accumulating gold would help the international financial system function more smoothly and benefit everyone. 
Just to be clear, I am not siding with those – usually American far-right crackpots – who favor a return to the gold standard, in which countries fix the value of their currencies in terms of gold. 
After all, the gold standard’s last reign ended disastrously in the 1930s, and there is no reason to believe that a return to it would turn out any differently. 
No, I am just proposing that emerging markets shift a significant share of the trillions of dollars in foreign-currency reserves that they now hold (China alone has official reserves of $3.3 trillion) into gold. 
Even shifting, say, up to 10% of their reserves into gold would not bring them anywhere near the many rich countries that hold 60-70% of their (admittedly smaller) official reserves in gold. 
For some time, the rich countries have argued that it is in everyone’s collective interest to demonetize gold. 
Sure, we hold a lot of gold, these countries say, but that is a vestige of the pre-World War II gold standard, when central banks needed a stockpile. 
Indeed, back in 1999, European central banks, seeing no reason to keep holding so much gold, entered a pact to start reducing their stocks in an orderly fashion. 
The sales made sense at the time for most of the participating countries: The real backing for their debt was the tax reach of their governments, their high levels of institutional development, and their relative political stability. 
The 1999 pact has been revisited periodically, though since the most recent edition in 2014, most rich countries have taken a long pause, still leaving them with extremely high gold reserves. 
Emerging markets have remained buyers of gold, but at a snail’s pace compared to their voracious appetite for US Treasury bonds and other rich-country debt. 
As of March 2016, China held just over 2% of its reserves in gold, and the share for India was 5%. 
Russia is really the only major emerging market to increase its gold purchases significantly, in no small part due to Western sanctions, with holdings now amounting to almost 15% of reserves. 
Emerging markets hold reserves because they do not have the luxury of being able to inflate their way out of a financial crunch or a government debt crisis. 
Simply put, they live in a world where a large fraction of international debt – and an even larger share of global trade – is still denominated in hard currency. 
So they hold reserves of such currencies as a backstop against fiscal and financial catastrophe. 
Yes, in principle, it would be a much better world if emerging markets could somehow pool their resources, perhaps through an International Monetary Fund facility; but the trust required to make such an arrangement work simply is not yet there. 
Why would the system work better with a larger share of gold reserves? 
The problem with the status quo is that emerging markets as a group are competing for rich-country bonds, which is helping to drive down the interest rates they receive. 
With interest rates stuck near zero, rich-country bond prices cannot drop much more than they already have, while the supply of advanced-country debt is limited by tax capacity and risk tolerance. 
Gold, despite being in nearly fixed supply, does not have this problem, because there is no limit on its price. 
Moreover, there is a case to be made that gold is an extremely low-risk asset with average real returns comparable to very short-term debt. 
And, because gold is a highly liquid asset – a key criterion for a reserve asset – central banks can afford to look past its short-term volatility to longer-run average returns. 
True, gold does not pay interest, and there are costs associated with storage. 
But these costs can be managed relatively efficiently by holding gold offshore if necessary (many countries hold gold at the New York Federal Reserve); and, over time, the price can go up. 
It is for this reason that the system as a whole can never run out of monetary gold. 
I don’t want to create the impression that by shifting into gold, emerging markets would somehow benefit at the expense of advanced economies. 
After all, the status quo is that advanced-economy central banks and treasuries hold vastly more gold than emerging markets do, and a systematic shift by emerging markets will bid up its price. 
But this is not a systemic problem; and, in fact, a rise in gold prices would close part of the gap between demand and supply for safe assets that has emerged due to the zero lower bound on interest rates. 
There has never been a compelling reason for emerging markets to buy into the rich-country case for completely demonetizing gold. 
And there isn’t one now. 

Good and Bad Capitalism 
PARIS – The reality of market exchange – direct transactions between merchants and customers – appeared gradually 3,000 or 4,000 years ago. 
In this novel social relationship, the customer was free to buy whatever he wanted, whenever and from whomever he chose, often bargaining with the seller about the price. 
Because of these features, the free market is part of a basic freedom that is rooted in everyday life. 
It remains dominant today, as all efforts to establish an alternative, even totalitarianism, failed. 
Indeed, it has been 20 years since the former communist countries of Eastern Europe rejoined the world of market exchange, a step taken as early as 1946 by social democrats around the world. 
For several thousand years, the free market was comprised of individuals: craftsmen, traders, and consumers. 
Capitalism when it arose three centuries ago was simply the same activity on a larger scale. 
Because of steam engines and electricity, a large number of people were enabled to work together, and corporations could attract a large number of small savers, who became capitalists. 
This system is fantastic. 
By the time of the French Revolution, the standard of living had hardly doubled since the Roman Empire. 
Today, it is 150 times higher. 
But capitalism is also cruel. 
At its inception, people were compelled to work 17 hours a day without a day off or retirement. 
It was a form of slavery. 
Thanks to democracy, social struggle, and workers’ unions, together with the political efforts of social democracy, the inhumanity of the system was partly softened. 
Nevertheless, left to itself, the system is unstable. 
It undergoes a crisis about once a decade. 
The twentieth century’s worst crisis, between 1929 and 1932, caused 70 million workers in Great Britain, the United States, and Germany to lose their jobs (with no unemployment benefits) in less than six months. 
It brought Adolf Hitler to power, leading to a war that left 50 million dead. 
After the war, the belief that the system needed to be stabilized became widespread. 
Eventually, a more balanced system emerged, based on three main institutions: health insurance, Keynesian fiscal and monetary policy to soften the impact of the business cycle, and, of utmost importance, a policy of high salaries and reduction of economic inequality in order to boost household consumption. 
The achievement was stunning: 30 years of consistent and rapid economic growth, full and permanent employment in all developed nations, and no financial or economic crisis. 
Standards of living rose nearly ten-fold during this period. 
Prosperity became the main weapon that ensured the West’s victory over Soviet communism. 
The people of Eastern Europe were eager to embrace this kind of capitalism. 
Capitalism’s political success, however, came at the very moment when the system was starting to deteriorate. 
High salaries drove growth but reduced earnings. 
Shareholders organized themselves into pension funds, investment funds, and hedge funds. 
Because of their pressure, employment fell, reducing the share of wages in total national income by 10% over the past 30 years. 
In developed nations, the number of the working poor reached 10-15% of the workforce, with another 5-10% of unemployed workers and 5-10% dropping out of the labor market altogether. 
Moreover, over the past 25 years, a severe financial crisis – regional or global – has erupted every four or five years. 
Annual growth fell below 3% on average. 
Today’s crisis was triggered by widespread concealment of bad loans within pools of securities sold all over the world. 
The spread of bankruptcies triggered a severe credit crunch, which triggered a deep recession and with it a brutal rise in unemployment. 
Capitalism’s three stabilizing devices lost their efficacy. 
While rich countries reacted more quickly and more wisely in stimulating their economies than in 1929, and the hemorrhaging of banks was stanched, this has not been enough to boost growth. 
We are now in a strange period in which governments, bankers, and journalists herald the end of the crisis just because large banks are no longer failing every week. 
But nothing has been solved, and unemployment continues to rise. 
Even worse, the banking sector is trying to take advantage of publicly financed rescue packages to protect its privileges, including immorally huge bonuses and extravagant freedoms to create speculative financial assets with no links to the real economy. 
Indeed, the so-called end of the crisis looks more like a reconstruction of the mechanisms that caused it. 
Everywhere, economic activity is painfully stabilizing at 5% to 10% below 2007 levels. 
The root of the crisis remains the fall in purchasing power on the part of the middle and lower classes, and the collapse of speculative bubbles created by the wealthy classes’ greed for more. 
But if we are to have a system where nearly everybody can become better off, the wealthy cannot become ever wealthier at the same time. 
Otherwise, we can expect a long period of stagnation, punctuated by periodic financial crises. 
In these circumstances, a majority of European voters have recently shown, once again, that they favor the right and its tendency to support the fortune seekers. 

Good Capitalism, Bad Capitalism 
Many people assumed that when the Berlin Wall fell in 1989, “capitalism” had won the ideological cold war and that “communism” had lost. 
But, while “capitalism” – defined as an economic system built on private ownership of property – clearly has prevailed, there are many differences among the nearly 200 countries that now practice it in some form. 
We find it useful to divide the capitalist economies into four broad categories. 
While many economies straddle several of these, most economies fall primarily into one of them. 
The following typology helps explain why some economies grow more rapidly than others. 
Oligarchic capitalism exists where power and money are highly concentrated among a few. 
It is the worst form of capitalism, not only because of the extreme inequality in income and wealth that such economies tolerate, but also because the elites do not promote growth as the central goal of economic policy. 
Instead, oligarchs fix the rules to maximize their own income and wealth. 
Such arrangements prevail in large parts of Latin America, the Arab Middle East, and Africa. 
State-guided capitalism describes economies where growth is a central economic objective (as it is in the other two forms of capitalism), but attempts to achieve it by favoring specific firms or industries. 
Governments allocate credit (through direct bank ownership or by guiding credit decisions by privately owned banks), provide direct subsidies and/or tax incentives, grant trade protection, or use other regulatory devices in an attempt to “pick winners.” 
Southeast Asian economies have demonstrated great success with state guidance, and, until the late 1990’s, there were calls in the United States to emulate their practices. 
But the Achilles heel of state guidance is that once such economies near the “production-possibility frontier,” policy makers run out of industries and technologies to copy. 
When government officials rather than markets then try to choose the next winners, they run a great risk of choosing the wrong industries, or channeling too much investment – and thus excess capacity – into existing sectors. 
Such a tendency contributed significantly to the Asian financial crisis of 1997-98. 
Big Firm or managerial capitalism characterizes economies where large firms – often so-called “national champions” – dominate production and employment. 
Smaller enterprises exist, but are typically retail or service establishments with one or only a few employees. 
Firms get to be large by exploiting economies of scale, refining and mass-producing the radical innovations developed by entrepreneurs (discussed next). 
Western European economies and Japan are leading exemplars of managerial capitalism, which, like state guidance, also has delivered strong economic performance. 
But managerial capitalism, too, has its Achilles heel. 
Bureaucratic enterprises are typically allergic to taking big risks – that is, developing and commercializing the radical innovations that push out the production-possibility frontier and generate large sustained jumps in productivity and thus in economic growth. 
Large firms are relatively risk-averse not only because they are bureaucracies, with layers of management required to sign off on any innovation, but also because they are reluctant to back innovations that threaten to render obsolete the products or services that currently account for their profits. 
In our view, the limits of managerial capitalism explain why, after approaching US levels of per capita income in the late 1980’s, both Western Europe and Japan failed to match America’s information-technology-driven productivity resurgence that began in the 1990s. 
This leads to the fourth type: entrepreneurial capitalism . 
Economies in which dynamism comes from new firms historically have commercialized the radical innovations that keep pushing out the production-possibility frontier. 
Examples from the last two centuries include such transformative products and innovations as railroads, automobiles, and airplanes; telegraph, telephones, radio, and television; air conditioning; and, as just noted, the various technologies responsible for the IT revolution, including both mainframe and personal computers, routers and other hardware devices, and much of the software that operates them. 
To be sure, no economy can realize its full potential only by having entrepreneurial firms. 
The optimal mix of firms contains a healthy dose of large enterprises, which have the financial and human resources to refine and mass-produce radical innovations, along with newer firms. 
It required Boeing and other large aircraft manufacturers, for example, to commercialize what the Wright Brothers pioneered, or Ford and General Motors to mass-produce the automobile, and so on. 
But without entrepreneurs, few of the really bold innovations that have shaped our modern economy and our lives would be in place. 
The challenge, then, for all economies seeking to maximize their growth potential is to find the right mix of managerial and entrepreneurial capitalism. 
Economies where entrepreneurs now flourish must not become complacent. 
State-guided economies can continue their rapid growth path, but ultimately they will need to make a transition to a suitable blend of the other two forms of “good capitalism” if they want to continue rapid growth. 
India and China, each in its own way, is already moving in this direction. 
The hardest challenge will be for economies mired in oligarchic capitalism to accomplish a similar transition. 
It may take nothing less than revolution – ideally peaceful, of course – to replace the elites who now dominate these economies and societies, and for whom growth is not the central objective. 

Good Governance Begins At Home 
The whole sorry Wolfowitz affair looks like it is finally drawing to a close. 
It is hard to believe that he will stay on much longer at the World Bank, and it is time to start thinking more closely about the future of that institution. 
From the first, I was critical of the way he was chosen because I have long opposed the “old boy” agreement between the United States and Europe, by which the US always appoints the head of the World Bank and Europe the head of the IMF. 
This unspoken arrangement dates from the founding of the Bretton Woods institution at a time when colonialism was still alive, and makes no sense in the twenty-first century. 
There are reports that European leaders have told the US that if they get Wolfowitz to step down quickly and quietly, they will be allowed to choose Wolfowitz’s successor. 
It’s easy to see why the US and Europe want to stick to business as usual, but such a deal would amount to a wasted opportunity. 
I can think of no better way to restore confidence in these two venerable institutions than to finally open up the way their presidents are selected. 
One of the lessons of the Wolfowitz debacle is that it does actually matter how stakeholders and employees feel about the Bank’s leadership. 
The world was prejudiced against him from the start because of his involvement in the Iraq War. 
But people were willing to give him a chance. 
Some said that perhaps he would be another Robert McNamara, the US defense secretary who helped mire America in the Vietnam War, but used his service to the Bank as penance. 
At first, there was reason for hope: Wolfowitz was forceful in arguing for debt forgiveness and an end to agricultural subsidies. 
But he also hired old friends and political allies – many of whom did not have experience in development – and sealed himself off from his staff, alienating the very people whose support he needed. 
As we learned from the case of Larry Summers at Harvard, relationships inside institutions (not just with donors and funders) matter. 
In this respect, Wolfowitz, while by all accounts an intelligent and pleasant person, did not do himself any favors. 
Worse, Wolfowitz did not seem to have a grand vision for the Bank. 
Instead of a development strategy, there was simply an expansion of the anti-corruption agenda initiated by his predecessor, James Wolfensohn. 
As the World Bank’s Chief Economist under Wolfensohn, I had argued that failing to deal with corruption risked undermining growth and poverty alleviation. 
By the time I left the Bank, these ideas were widely accepted, and I was pleased that Wolfowitz supported continuing the Bank’s efforts. 
But the fight against corruption was always to be only one part of a more comprehensive development agenda that was required. 
Indeed, aid effectiveness could be undermined just as much by incompetence as by corruption. 
Sadly, the anti corruption agenda of the Bank became politicized. 
There was a push to give money to Iraq – a country rife with corruption – while other countries were accused of corruption without adequate hard evidence or specific details. 
And here, too, an opportunity was lost. 
The aims of the campaign were laudable, but it generated hostility and ill will, undermining its effectiveness. 
The World Bank, in its efforts to support democracy and good governance, must insist on the highest standards of due process: charges of corruption should be treated seriously, and the evidence turned over to national authorities for use in open, transparent, and independent proceedings. 
This is something for Wolfowitz’s successor to bear in mind. 
If anti-corruption campaigns are to be seen as effective, they must be fair and transparent. 
The same is true of the selection of the World Bank’s president. 
There is still a chance to snatch victory from the jaws of defeat. 
What has been a sad and sorry saga could have a happy ending if Wolfowitz’s successor is chosen in an open, transparent process. 
This, one hopes, is the silver lining in the cloud now hanging over the World Bank. 

Good News in Bad Times 
NEW YORK – At a time when the headlines are filled with financial crises and violence, it is especially important to recognize the creativity of many governments in fighting poverty, disease, and hunger. 
The point is not merely to make ourselves feel a little better, but rather to confront one of the world’s gravest threats: the widespread pessimism that today’s problems are too big to be solved. 
Studying the successes gives us the knowledge and confidence to step up our shared efforts to solve today’s great global challenges. 
Hats off, first, to Mexico for pioneering the idea of “conditional cash transfers” to poor households. 
These transfers enable and encourage those households to invest in their children’s health, nutrition, and schooling. 
Mexico’s “Opportunities Program,” led by President Felipe Calderón is now being widely emulated around Latin America. 
Recently, at the behest of the singers Shakira and Alejandro Sanz, and a social movement that they lead, all of Latin America’s leaders committed to step up the region’s programs for early childhood development, based on the successes that have been proven to date. 
Norway, under the leadership of Prime Minister Jens Stoltenberg, is maintaining its tradition of creative social and environmental leadership. 
The government has put together a global alliance to prevent maternal death in childbirth, investing in both safe delivery and survival of newborns. 
At the same time, Norway launched an innovative $1 billion program with Brazil to induce poor communities in the Amazon to end rampant deforestation. 
Cleverly, Norway pays out the funds to Brazil only upon proven success in avoiding deforestation (compared with an agreed baseline). 
Spain, under the leadership of Prime Minister José Luis Rodríguez Zapatero, has given a major stimulus to helping the poorest countries to achieve the Millennium Development Goals (MDGs). 
Spain created a new MDG Fund at the United Nations to promote the cooperation needed within the UN to address the various challenges of the MDGs. 
The Spanish Government rightly proposed that true solutions to poverty require simultaneous investments in health, education, agriculture, and infrastructure, and then the Spanish put up the funds to help make that integrated vision a practical reality. 
Spain will host a meeting in January 2009 to launch a new fight against global hunger. 
Once again, Spain is proposing practical and innovative means to move from talk to action, specifically to help impoverished peasant farmers to get the tools, seeds, and fertilizer that they need to increase their farm productivity, incomes, and food security. 
Australian Prime Minister Kevin Rudd has similarly surged to the forefront of global problem solving, putting forward a bold action plan on climate change and proposing new and practical means to address the MDGs. 
Australia put real money on the table for increased food production, along the lines that Spain is proposing. 
It also champions an increased program of action for the poor and environmentally threatened island economies of the Pacific region. 
These efforts have been matched by actions in the poorest countries. 
The landlocked and impoverished country of Malawi, under the leadership of President Bingu wa Mutharika, has doubled its annual food production since 2005 through a pioneering effort to help its poorest farmers. 
The program has been so successful that it is being emulated across Africa. 
Mali’s government, under President Amadou Toumani Touré, has recently put forward a bold challenge to the world community. 
Mali is eager to scale up investments in agriculture, health, education, and infrastructure in its 166 poorest communities. 
The plans are detailed, thoughtful, credible, and based on proven successes that the government has already achieved. 
The rich world has promised to help Mali, and now Mali has led the way with its creativity. 
There are countless more cases that can be mentioned. 
The European Union has launched a €1 billion effort to help peasant farmers. 
The Gates Foundation, UNICEF, Rotary International, and many governments have succeeded in bringing down polio deaths to one-thousandth of the rate a generation ago, bringing the disease to the verge of eradication. 
Similar efforts are underway on many other fronts – the control of worm infections and leprosy, and now a major global effort to bring malaria deaths nearly to zero by 2015. 
All of these successes, and many more, share a similar pattern. 
They address a well-defined and serious challenge, for example low food production or a specific disease, and are based on a well-defined set of solutions, such as agricultural equipment and inputs needed by peasant farmers, or immunizations. 
Small-scale demonstration projects prove how success can be achieved; the challenge then becomes taking the solutions “to scale” in nationwide or even worldwide programs. 
Leadership is needed, within the countries in need as well as among the rich nations that can help to launch and finance the solutions. 
Finally, modest amounts of money, directed at practical problem solving, can make an historic difference. 
Bad news can crowd out good news, especially in times of serious financial crisis and political unrest. 
Yet the good news shows that we will lose the battle against poverty and misery only if we give up, and fail to heed the intelligence and goodwill that can be mobilized today. 
And perhaps next year, the United States will rejoin the global effort with a new and remarkable force, led by a young president who has rightly told Americans and the world that “Yes, we can.” 

Good Policies for Great Countries 
NEW YORK – We are in a protracted period of international transition, one that began more than two decades ago with the Cold War’s end. 
That era of strategic rivalry between the United States and the Soviet Union gave way to one in which the US possessed far greater power than any other country and enjoyed an unprecedented degree of influence. 
That American unipolar moment has given way to a world better described as non-polar, in which power is widely distributed among nearly 200 states and tens of thousands of non-state actors ranging from Al Qaeda to Al Jazeera and from Goldman Sachs to the United Nations. 
But what distinguishes historical eras from one another is less the distribution of power than the degree of order between and within states. 
Order never just emerges; it is the result of conscious efforts by the most powerful entities in the world. 
While the US remains the world’s most powerful single country, it cannot maintain, much less expand, international peace and prosperity on its own. 
It is over-extended, dependent upon massive daily imports of dollars and oil, and its armed forces are engaged in demanding conflicts in Afghanistan and Iraq. 
The US lacks the means and the political consensus to take on much more in the way of global responsibility. 
It also lacks the means to compel others to follow its lead. 
Moreover, contemporary problems – for example, thwarting the spread of materials and weapons of mass destruction, maintaining an open world economy, slowing climate change, and combating terrorism – cannot be managed, much less solved, by any single country. 
Only collective efforts can meet common challenges; the more global the response, the more likely that it will succeed. 
In short, the US requires partners if the twenty-first century is to be an era in which the majority of people around the world enjoy relative peace and satisfactory standards of living. 
But the partnerships that prevailed in the Cold War – between the US, Western Europe, and several Asian countries, including Japan, South Korea, and Australia – are no longer adequate. 
These countries lack the resources and often the will to manage most of the world’s problems. 
So the old partners need new ones. 
Emerging powers have the potential to fill this need. 
The question is what China, India, Brazil, and others are prepared to do with their growing strength. 
What makes a country great is not the size of its territory, population, army, or economy, but how it uses its power to shape the world beyond its borders. 
Countries that are strong but still developing tend to regard foreign policy as little more than a hand-maiden of domestic policy and a means to gain access to markets and resources essential for rapid development. 
This outlook is understandable, but shortsighted. 
Rising powers can neither insulate nor isolate themselves from what happens beyond their borders. 
Whether or not they acknowledge it, they have a stake in world order. 
Consider China, by many measures the most significant emerging country. 
It wants to maintain preferred access to Iran’s energy resources, but if conflict results from Iran’s nuclear aspirations, China will be paying much more for those resources. 
The prospect of a threat to the stability of the greater Middle East and to the flow of oil should give China an incentive to support robust sanctions against Iran. 
But it is not clear whether China’s leaders will recognize this and act in their country’s own long-term self interest. 
The point is not to single out China. 
Similar questions apply to India and Brazil. 
And it is not just the developing and emerging countries that must reconsider their approach to the world. 
The US must do so as well. 
While much has been said and written about America’s call for China to become a global stakeholder, China will not simply sign on as a pillar of an American-defined world. 
It wants to help set the rules and build the institutions for enforcing them. 
It is up to the US to work with China and others to do this, and this requires America’s openness to others’ preferences and their having a larger role. 
The empowerment of the G-20 is a step in the right direction, but many more changes are needed, including restructuring the UN, the International Monetary Fund, and the World Bank so that they, too, reflect the new distribution of power. 
In return, new arrangements should call on emerging countries to contribute more to addressing climate change, paying for peacekeeping and state-building, promoting free trade, and sanctioning those who support terror or develop weapons of mass destruction. 
This era’s major states, developed and emerging alike, have the ability to reach accord on today’s defining issues. 
Their willingness to do so will determine when and how this period of global transition ends and what succeeds it. 

Good Times Down Latin America’s Way 
MEXICO CITY – For Latin America, 2011 was, in Frank Sinatra’s terms, a very good year – and 2012 doesn’t look like being so bad either. 
For a region not always accustomed to things going well, this is a somewhat strange state of affairs. 
Three elections were held in Latin America in 2011. 
Two – in Argentina and Peru – went well; the other – in Nicaragua – was marred by egregious fraud and heavy-handed government intervention in favor of the incumbent. 
Still, two out of three is not bad in a region where, previously, if elections were held at all, disputes about the outcomes were the norm. 
In economic terms, high commodity prices fueled strong growth in South America in 2011, and the modest US recovery benefited nearby countries. 
In Chile, Peru, Argentina, Uruguay, Bolivia, and, to a lesser extent, Brazil and Colombia, voracious Chinese and Indian demand for raw materials and food boosted foreign reserves, enabled heavy government spending, and sustained high levels of imports. 
All this led to average growth rates well in excess of 4%. 
But it also led to new doubts about the wisdom of reliance on commodity exports. 
Chilean economist and politician Carlos Ominami, in his tell-all memoir Secretos de la Concertación, wondered what would happen if China's economy slowed or its real-estate bubble burst. 
By the end of the year, this seemed to be happening: commodity prices and growth rates were dropping, and 2012, while still promising strong economic performance, will not match this year's success. 
Sustained lower prices may bring chickens home to roost. 
The outliers were Venezuela, despite high oil prices, and the Caribbean Basin: Mexico, Central America, and the islands. 
These countries export manufactured goods to the US, on which they also rely for tourism and remittances; they lack either the geography or the geology to become great commodity exporters (or, like Mexico, they export all of their oil to the US). 
But even the outliers enjoyed decent growth this year. 
If the US avoids a new slowdown, they may do better than South America in 2012. 
All told, with the exception of 2009, the entire region will have experienced a full decade of uninterrupted growth – something not witnessed since the 1970’s. 
The boom fueled expansion of Latin America’s middle classes. 
Between 1950 and 1980, most Latin American countries’ middle classes comprised between one-quarter and one-third of the population. 
Then came the debt crisis of the 1980’s, the extreme structural reforms and financial collapses of the 1990’s, and a new global downturn in 2001. 
Such traumatic events plunged these countries into the so-called “middle-income trap”: unable to grow nor to continue broadening their middle classes. 
But, by the second half of the 2000’s, everything changed: prolonged macroeconomic stability, competent center-left or center-right governments, sensible social policies, and global economic growth allowed countries like Mexico, Brazil, Chile, Uruguay, and even Argentina to take the next giant step. 
By 2008 or so, around 55% of these countries’ populations belonged to the middle class, by whatever definition one used. 
Access to credit, more jobs, remittances, the commodity boom, and conditional cash transfers enabled millions to purchase a home, a car, and a better life. 
This was not a middle class modeled on North Atlantic precedents, and its members’ status is precarious and reversible; moreover, their standard of living is well below that of their counterparts in wealthier countries. 
But a middle class it is. 
These middle-income sectors make up an even larger part of the electorate, since their turnout rates are higher than those of the poor. 
Political candidates must engage them, occasionally pander to them, and tailor their message to them, all of which steers leaders and parties toward moderate positions. 
There are no guarantees that this will endure, but it is one of the region’s most impressive achievements in recent years. 
Latin America will witness two important elections in 2012, in Venezuela and Mexico, and one non-election, in Cuba. 
In Venezuela, President Hugo Chávez’s opponents will unite behind a single candidate for October’s presidential election. 
But everything depends on Chávez’s health, which, like that of Fidel Castro in Cuba a closely guarded state secret. 
Will Chávez’s cancer allow him to run (he is as formidable a campaigner as he is a terrible economic manager), win, and govern until 2030? 
Will he be a stand-in for his more radical brother (and designated successor), Adán? 
Or will he be too ill to participate? 
In that case – and most importantly – would he, Adán, and the entire “Bolivarian” elite accept defeat at the polls? 
In Cuba, there will be no elections, but matters may come to a head next year. 
Raúl Castro’s economic reforms have either not been implemented, or are not delivering the expected results; the island continues to depend on Venezuelan subsidies, remittances from Miami, and European tourists. 
Cuba’s octogenarian ruling brothers cannot last forever. 
Something may have to give on the island, especially if their Venezuelan benefactor is no longer in power. 
Then there is Mexico, which will hold only its fourth democratic election in its history in a context of rampant organized crime, appalling violence, and rising skepticism about President Felipe Calderón’s war on drugs. 
With three contending parties, a terrible electoral law, no run-off, and condiderable frustration with 12 years of center-right, often ineffective governments, the outcome is highly uncertain. 
That said, Mexico’s political institutions have survived hard times, the middle class rejects extremism, and the US is close by. 
One would prefer to see Mexico’s presidential candidates offer platforms with ideas and proposals that respond to the challenges facing the country, but this substance deficit occurs everywhere now, almost all the time. 
For a region that has suffered so long from frustration and despair over its failures, these are among the best of times. 
Latin America should count its blessings, and remember that nothing lasts forever. 

 

Goodbye to the West 
BERLIN – Now that Donald Trump has been elected President of the United States, the end of what was heretofore termed the “West” has become all but certain. 
That term described a transatlantic world that emerged from the twentieth century’s two world wars, redefined the international order during the four-decade Cold War, and dominated the globe – until now. 
The West shouldn’t be confused with the “Occident.” 
While the West’s culture, norms, and predominant religion are broadly Occidental in origin, it evolved into something different over time. 
The Occident’s basic character was shaped over centuries by the Mediterranean region (though parts of Europe north of the Alps made many important contributions to its development). 
The West, by contrast, is transatlantic, and it is a child of the twentieth century. 
When World War I began, it was a European conflict between the Central Powers and the Entente of Britain, France, and Russia. 
It became a true world war only in 1917, when the US entered the fray. 
This is the moment when what we now call the West began to take form. 
The West can be said to have received its birth certificate during World War II. 
In August 1941, after Nazi Germany had invaded the Soviet Union, British Prime Minister Winston Churchill and US President Franklin D. Roosevelt met on a warship off the coast of Newfoundland and signed the Atlantic Charter. 
That agreement would later develop into NATO, which, for four decades, enabled an alliance of independent democracies with shared values and market economies to withstand the Soviet threat – and which has safeguarded Europe to this day. 
More fundamentally, the West was founded on an American commitment to come to its allies’ defense. 
The Western order cannot exist without the US playing this crucial role, which it may now abnegate under Trump. 
As a result, the future of the West itself is now at stake. 
No one can be certain what Trump’s election will mean for American democracy, or what he will do when he takes office. 
But we can already make two reasonable assumptions. 
First, his presidency will be highly disruptive to American domestic and foreign policy. 
Trump won the presidency by flouting virtually every unwritten rule of American politics. 
He beat not only Hillary Clinton, but also the Republican Party establishment. 
There is little reason to think that he will suddenly abandon this winning strategy come January 20. 
We can also safely assume that Trump will stick firmly to his pledge to “Make America great again”; this will be the foundation for his presidency, come what may. 
Former President Ronald Reagan also promised this, but he did so while the US, still engaged in the Cold War, could take an imperial approach. 
Thus, Reagan pursued rearmament on such a large scale that it ultimately led to the Soviet Union’s collapse; and he paved the way for an American economic boom with a massive increase in the national debt. 
Trump does not have the luxury of an imperial approach. 
On the contrary, during the campaign, he heaped criticism on America’s senseless wars in the Middle East; and his supporters want nothing more than for the US to abandon its global leadership role and retreat from the world. 
A US that moves toward isolationist nationalism will remain the world’s most powerful country by a wide margin; but it will no longer guarantee Western countries’ security or defend an international order based on free trade and globalization. 
The only remaining questions now concern how quickly US policy will change, and how radical those changes will be. 
Trump has already pledged to scrap the 12-country Trans-Pacific Partnership – a decision that amounts to a gift to China, whether he realizes it or not. 
He could also bestow upon China another gift: reducing US engagement in the South China Sea. 
China might soon find itself the new guarantor of global free trade – and probably the new global leader in combating climate change, too. 
With respect to the war in Syria, Trump might simply hand that devastated country over to Russian President Vladimir Putin and Iran. 
Practically speaking, this would overturn the balance of power in the Middle East, with grave consequences well beyond the region; morally, it would be a cruel betrayal of the Syrian opposition and a boon to Syrian President Bashar al-Assad. 
And if Trump defers to Putin in the Middle East, one wonders what he will do with respect to Ukraine, Eastern Europe, and the Caucasus. 
Should we expect a Yalta Conference 2.0 to recognize Putin’s new de facto sphere of influence? 
The new course Trump will chart for the US is already discernible; we just don’t know how quickly the ship will sail. 
Much will depend on the opposition (Democrats and Republicans alike) that Trump encounters in the US Congress, and on pushback from the majority of Americans who did not vote for him. 
But we should not harbor any illusions: Europe is far too weak and divided to stand in for the US strategically; and, without US leadership, the West cannot survive. 
Thus, the Western world as virtually everyone alive today has known it will almost certainly perish before our eyes. 
So what comes next? 
China, we can be certain, is preparing to fill America’s shoes. 
And in Europe, the crypts of nationalism have been opened; in time, they will once again release their demons upon the continent – and the world. 

Goodbye to Going It Alone 
A key lesson that the next American president will take away from the experiences of the Bush administration is certain to be that multilateralism matters. 
Notions of American hegemony and unilateral responses make little sense when most of the serious challenges that countries face today – problems like climate change, pandemics, financial stability, and terrorism – fall outside the control of even the largest countries. 
All of them require multilateral cooperation. 
The United Nations can play an important role in helping to legitimize and implement agreements among countries, but even its closest friends admit that its large size, rigid regional blocs, formal diplomatic procedures, and cumbersome bureaucracy often impede consensus As one sage put it, the problem for multilateral organizations is “how to get everyone into the act and still get action.” 
One answer is to supplement the UN by creating informal consultative organizations at the regional and global level. 
For example, during the financial crises that followed the oil shocks of the 1970’s, the French government hosted the leaders of five leading economies to discuss and coordinate policies. 
The idea was to keep the meeting small and informal by limiting it to a number that could fit into the library of the chateau at Rambouillet. 
But keeping the group small proved impossible. 
It was soon grew to a “G-7” of advanced industrial economies. 
Later, Russia was added to make it the “G-8.” 
More recently, the annual G-8 summit has invited five other countries to attend as observers, creating a de facto G-13. 
With this expansion have come problems. 
The new invitees resent not being included as full members able to help plan and shape the meetings, and the original countries’ delegations have expanded to include hundreds of officials each. 
The once informal summits have become unwieldy. 
There have been several proposals for new types of supplemental multilateral organizations. 
Todd Stern and William Antholis have suggested the creation of an “E-8”: a compact forum of leaders from developed and developing countries – including the United States, the European Union, Japan, Russia, China, India, Brazil, and South Africa – that would devote their full attention once a year to environmental challenges and global climate change. 
These states represent their regions’ core economies, account for three-quarters of global GDP, and include the top six emitters of greenhouse gases. 
But some critics worry about restricting a group to only one topic. 
Leaders’ time is a scarce resource. 
They cannot afford to attend multiple summits for each transnational issue. 
Moreover, a variable geometry of attendance at meetings might weaken the development of a personal chemistry and the breadth of bargaining that can arise when the same group of leaders meets regularly to discuss a broader range of subjects. 
Former Canadian Prime Minister Paul Martin, drawing on his personal experience with the Group of 20 finance ministers as well as the G-8, has proposed a new informal grouping that he calls an “L-20,” with the “L” signifying that it is restricted to leaders. 
The L-20 would build upon the G-8’s original strengths of informality and flexibility to provide a consultative forum on issues such a climate change, global health, and conflict management. 
Martin argues that about 20 people in a room is probably a reasonable size for attempting to tackle difficult cross-sectoral problems. 
With a larger group, real discussion is lost; with a smaller group, meaningful regional representation is difficult. 
He would include the present G-8, other leading economies, and major regional powers regardless of economic ranking. 
Marcos de Azambuja, former secretary-general of Brazil’s Foreign Ministry, agrees that international life cannot be managed solely or primarily by vast assemblies of nearly 200 states with enormous disparities in their political and economic weight. 
He suggests something like an “L-14” would be an effective group to reflect the world as it is evolving, and could be quickly accomplished by expanding the current G-8 to include China, India, Brazil, South Africa, Mexico, and a Muslim country. 
Whatever the geometry of such a consultative group, it would be designed to supplement the UN in reaching decisions, and would help galvanize bureaucracies in member governments to address key transnational issues. 
Like the G-8, it would act as a catalyst to set agendas, and focus the attention of national bureaucracies on a set of important issues as they prepare their head of government for the discussions. 
The G-8, for example, is often credited with helping to advance international trade rounds, addressing public health issues, and increasing aid to Africa. 
In addition to membership, several other issues remain. 
Should such a new grouping have a secretariat to present common proposals, or should it rely solely on meetings of national officials? 
The former runs the risk of developing a new bureaucracy, but the latter may forego continuity. 
Should papers be exchanged in advance, with comments from a secretariat or from other countries? 
How can informality be preserved and the size of meetings be restricted? 
Perhaps leaders should be limited to one aide in the room and prohibited from reading formally prepared opening statements. 
None of the proposals suggested thus far is perfect, and many of the details need to be worked out. 
But the pendulum has swung back from unilateralism to multilateralism, and the world’s largest countries are searching for ways to make it more effective. 
Prolonged negotiations and gridlock are not acceptable, because today’s most serious problems cannot wait for perfect institutional solutions. 

Goodbye to the Dollar? 
CAMBRIDGE – As the world’s financial leaders meet in Washington this month at the World Bank-International Monetary Fund annual meeting, perhaps they should be glad there is no clear alternative to the dollar as the global currency standard. 
If the euro were fully ready for prime time, we might well be seeing it’s dollar exchange rate jump to over 2.00, and not just to 1.65 or 1.70, as it seems poised to do anyway. 
You can’t treat your customers as badly as the United States has done lately if they can go elsewhere. 
Over the past six years, the value of the trade-weighted dollar has fallen by more than a quarter, as the US has continued to rack up historically unprecedented trade deficits. 
With a soft economy, a badly compromised financial system, and serious concerns about rising inflation, the long-term dollar trend is downward, however the current crisis ends. 
And it is not over. 
The Federal Reserve’s bailout of the financial system is unlikely to stand up unless banks find fresh capital, and lots of it. 
Ultra-rich sovereign wealth funds have the cash to rescue US banks. 
But they are unlikely to want to do so at this point, even if the US political system allowed it. 
Instead, as the credit crunch and housing price decline continue, an epic mortgage bailout appears increasingly likely, possibly costing US taxpayers a trillion dollars or more. 
The problem is that after so many years of miserable returns on dollar assets, will global investors really be willing to absorb another trillion dollars in US debt at anything near current interest rates and exchange rates? 
US debt hardly looks like a bargain right now, even without the sinking dollar. 
Far-flung military misadventures continue to stretch the country’s fiscal resources, with costs potentially running into many trillions of dollars, according a recent study by Linda Bilmes and Joseph Stiglitz. 
Next year will almost certainly see a massive rise in US corporate defaults, even though many firms entered the recession with relatively strong balance sheets. 
State and municipal finances are in even worse shape. 
With tax revenues collapsing due to falling home prices and incomes, dozens of US municipalities could well go into receivership, as New York City did in the 1970’s. 
US municipal bonds are already trading at huge risk premia, and the first big government default hasn’t even hit yet. 
Of course, if the dollar were to fall off its perch as the world’s dominant currency any time soon, the euro would be the only serious alternative. 
The Yuan may well supplant the dollar in the second half of this century. 
But China’s draconian capital controls and massive financial repression currently disqualify it from anchoring the global economic system. 
Fortunately for the dollar, the euro, too, seems to have its problems. 
European banks remain balkanized, with a patchwork of national regulators seeking to promote their own champions. 
European governments’ debt may all be denominated in euro, but German and Italian debt are hardly the same thing, so the government euro-bond market lacks the depth and liquidity of the US Treasury Bill market. 
Moreover, international investors can buy and sell real estate far more easily in the US than in most of Europe. 
And the absence of a Europe-wide fiscal policy creates significant uncertainty about how the European Central Bank would finance itself if it suddenly faced large losses on junk bank debt after a big bailout. 
But the euro does have growing strengths. 
At current market exchange rates, the European Union is now larger economically than the US. 
New central and eastern European members are bringing enormous dynamism and flexibility. 
At the same time, the ECB has gained considerable credibility from its handling of the global credit crisis. 
Indeed, if the euro zone can persuade Great Britain to become a full-fledged member, thereby acquiring one of the world’s two premier financial centers (London), the euro might really start to look like a viable alternative to the dollar. 
In 1971, as the dollar collapsed towards the end of the post-World War II fixed exchange-rate system, US Treasury Secretary John Connally famously told his foreign counterparts that “the dollar is our currency, but your problem.” 
And the dollar’s exalted global status has survived ever since, despite many episodes of neglect and abuse. 
World currency standards have enormous inertia. 
The British pound only forfeited its role to the US dollar after more than 50 years of industrial decline and two world wars. 
But it could happen a lot faster this time. 
As central bankers and finance ministers ponder how to intervene to prop up the dollar, they should also start thinking about what to do when the time comes to pull the plug. 

The Health Costs of Tax Reform 
NEW YORK – The sweeping tax bill that US President Donald Trump signed into law on December 22, 2017, may have been presented as an early Christmas gift. 
But to the millions of Americans whose health outcomes will worsen as a result, the legislation looks more like a costly white elephant. 
The Tax Cuts and Jobs Act targets health care in the United States in three major ways. 
First, it eliminates the individual mandate, a provision of the 2010 Affordable Care Act (Obamacare) that imposes a tax penalty on people who go without health insurance. 
According to the Congressional Budget Office (CBO), this repeal alone will reduce the number of insured Americans by 13 million over the next decade, and increase average health-insurance premiums by about 10%. 
Moreover, eliminating the individual mandate could disrupt health-insurance markets, because there will be fewer younger, healthier people purchasing insurance. 
Second, the CBO estimates that the law will add $1.45 trillion to the deficit over the next decade, which could trigger spending cuts to health-insurance programs for the elderly, poor, and disabled, such as Medicare and Medicaid. 
These programs are already some of the government’s largest budget items, accounting for $1 trillion in spending – 26% of the federal budget – in 2016. 
Any cuts to them made in the name of deficit reduction will disproportionately harm the most vulnerable. 
Third, the tax law will decrease consumer health-care spending and adversely affect health outcomes among poor and at-risk populations. 
Although the law was sold as a tax “cut,” it will actually reduce the after-tax income of some 53% of Americans, while boosting the incomes of the richest 5%. 
According to the Joint Committee on Taxation, an independent body that evaluates tax proposals before Congress, Americans earning more than $1 million per year will see their annual tax bill fall by an average of $12,865 over the next decade. 
For the poorest Americans, however, the tax burden will rise during this period. 
Those earning less than $10,000 per year will be subject to an average annual tax hike of $152, and those earning $10,000-$20,000 per year will face an average annual increase of $2,563. 
Income has a huge impact on health outcomes. 
A 2016 study published in the Journal of the American Medical Association found that American men with incomes in the top 1% live 15 years longer than the poorest 1%; for women in these respective groups, the gap is ten years. 
The tax law could worsen these disparities by lowering the incomes of low- and middle-income Americans, many of whom are already living shorter lives, owing partly to the opioid crisis that is ravaging much of the country. 
In 2016, for example, life expectancy fell for the second consecutive year, by 0.1 years, to 78.6. 
Because the poor, unemployed, and uninsured suffer disproportionately from opioid abuse and addiction, the tax law puts their health further at risk. 
Falling incomes and rising deficits could translate into less stable health-insurance markets and cuts to Medicaid, which reimburses prescriptions for naloxone, a drug used to reverse opioid overdoses. 
Evidence from two of the states that have been hit hardest by the opioid epidemic is sobering. 
Last year, researchers at Harvard University found that in Massachusetts, which has expanded its Medicaid coverage in recent years, 868 opioid-related deaths were averted in 2016, whereas only 11 opioid-related deaths were averted in Tennessee, which did not expand its Medicaid program. 
The researchers concluded that, “Medicaid expansion helped put more purchasing power into the hands of laypersons and in so doing, expanded the use of naloxone, thereby saving lives.” 
Each of the tax law’s injustices – fewer Americans with health coverage, stripped-down public programs, lower incomes for the poor, less access to substance-abuse treatment – is unambiguously bad for health outcomes. 
Taken together, they will have an adverse effect on worker productivity, thus undermining overall economic growth. 
Some argue that the CBO’s initial forecast of the impact of repealing the individual mandate was overly dire, and that many Americans will purchase insurance even in the absence of a penalty. 
And, to be sure, there is no guarantee that spending for Medicare and Medicaid will be cut, given that the expansion of Medicaid under Obamacare has made the program even more popular among those it serves. 
But even if these two assumptions prove to be unfounded, the unintended consequences of the new tax law will still threaten Americans’ wellbeing. 
The bill was rushed through Congress and signed into law without any meaningful debate about its potential effects on health care. 
As the law’s provisions take effect, policymakers must start paying closer attention. 
Otherwise, the legislation could end up costing Americans something more valuable than money: their health. 

Educating Everyone 
EDINBURGH – The odds are weighed heavily against achieving the target set by the Millennium Development Goals (MDGs) of ensuring by December 2015 that every school-age child is actually in school. 
With children in Gaza, Syria, Iraq, and Nigeria literally in the firing line in recent months, the immense scale of the challenge could not be more apparent. 
After all, fulfilling the promise of universal education demands that even those in the most difficult circumstances, such as child refugees and children in combat zones, can safely acquire a basic education. 
Academic research suggests that no country can enjoy sustained prosperity – and none can avoid the middle-income trap – without large-scale investment in high-quality education. 
This is particularly true for today’s knowledge-based economy, in which companies value themselves according to their human, not just physical, assets, and stock exchanges assess intellectual, in addition to physical, capital. 
Education has long been viewed as the number one guarantor of income, wealth, status, and security. 
Yet millions of people have consistently been left out or left behind, with nearly half of the world’s children still lacking access to basic education. 
To be sure, for the first five years after the MDGs were introduced, significant progress was made, with enrollment in primary and lower-secondary schools increasing by 1.5% annually. 
On that trajectory, the enrollment rate would have reached 97% worldwide by 2022, with Sub-Saharan Africa reaching that level by 2026. 
But, after 2005, progress stalled. 
As a result, only 36% of children in the world’s poorest countries complete lower-secondary schooling. 
By 2030, that rate will have increased, but only to 54%. 
Unsurprisingly, girls in rural communities face the biggest obstacles. 
Today, some three-quarters of girls do not receive basic primary education; in 2030, half will still be missing out. 
Likewise, some 90% of girls today are unable to complete secondary education; by 2030, that figure will have declined by only 20%. 
And, whereas boys in Sub-Saharan Africa will have to wait until 2069 for universal access to primary education, girls will have to wait until 2086. 
As for lower-secondary education, it will take almost a century, if current trends persist, to ensure access for all girls in Sub-Saharan Africa. 
None of this squares with global leaders’ promise to develop the talents of all of the world’s children. 
A recent study indicates that Africa is so far behind in terms of educational opportunity that in 2025 just 2% of young adults in their early thirties in Rwanda, Chad, Liberia, and Malawi – and only 3% in Tanzania and Benin – will have a college or university education. 
Such low levels of tertiary education make it impossible not only to hire qualified teachers for the next generation, but also to staff medical centers and clinics with fully trained health professionals – failures that perpetuate the seemingly endless cycle of poor education, bad health, unemployment, and poverty. 
Of course, a few African countries – such as Algeria, Nigeria, and Egypt – might manage to buck the trend. 
But even in South Africa – currently Africa’s most advanced country – 10% of young adults, at most, will have college or university degrees by 2045. 
Meanwhile, in Pakistan, a bold education campaign led by Malala Yousafzai is helping to increase the share of young adults with a tertiary education, which stood at a measly 7% in 2010. 
But the gains are slight; even by 2045, the share is unlikely to exceed 15%. 
Nepal is expected to experience faster growth in tertiary education, but its lower base means that the 2045 level will likely be around 16%. 
Even a major emerging economy like India will progress by only 11% from 2010 to 2045, reaching just 23% – far below the level suggested by the global reputation of its institutions of higher education. 
Meanwhile, in Singapore, South Korea, and Japan, the share of young adults with college or university degrees will reach 80-90%. 
The assumption that economic development and technological progress will inevitably expand opportunities for all is little more than wishful thinking. 
In reality, unless a concerted effort is made, the distribution of educational – and thus economic – opportunity will become increasingly unequal in the coming years. 
But the real divide is not between the educated and the uneducated; it is between those with access to education and those who want it. 
These long-neglected people will continue pressing governments and international organizations until every person’s fundamental right to education is respected. 
And the next stop in their campaign is the United Nations General Assembly in New York, with hundreds of young people, representing all countries, gathering to demand change from world leaders. 
As school doors reopen around the world, the international community should renew its commitment to ensuring that every child, everywhere, has a chance to walk through them. 

Gordon Brown Can't Avoid Europe 
Tony Blair's troubles are not confined to overwhelming public skepticism regarding the war in Iraq. 
The strong economy that has buttressed his government since 1997 is showing cracks. 
Indeed, until now, Europe's worries about public finance have centered on Germany, France, and Portugal. 
Britain seemed a paragon of fiscal prudence. 
In his forthcoming budget, however, Chancellor of the Exchequer Gordon Brown may need to admit that the UK risks breaching the Maastricht Treaty's deficit limits. 
Before Britain's next election, an even more worrying admission may be forced on Chancellor Brown: the need to raise taxes to meet his own fiscal rules. 
Last November, Chancellor Brown forecast that the UK's budget deficit would rise to £24 billion in 2003/4, then fall to £19 billion by 2004/5-well below the Maastricht Treaty's ceiling of 3% of GDP. 
But the average forecast among analysts is a £27 billion deficit next year, and some observers project a deficit of £30 billion or more in 2004/05. This will press hard against the Maastricht ceiling. 
Two issues are at stake here. 
One concerns growth. 
In November, Brown forecast that UK GDP would grow by 2.5-3% in 2003/4, accelerating to 3-3.5% the following year. 
But independent forecasters disagree here, too. They expect growth of only 2.2% this year and 2.4% next year. 
But the more critical issue concerns Brown's assumption that the tax/GDP ratio will rise in coming years. 
There are many reasons why this won't happen, the most powerful being the end of Britain's equity boom and the consequent loss of revenue from taxes on the sale of stocks. 
Moreover, UK pension funds are reporting large deficits due to the collapsing value of their equity holdings. 
This casts doubt on the UK's "solution" to the problem of pension sustainability, which had given the UK immunity from criticism by the European Commission for budget over-runs. 
Since coming to power in 1997, Brown has trumpeted two strict fiscal "rules": 
· The "Sustainable Investment Rule" states that over the economic cycle, the ratio of net public-sector debt to GDP will be set at a "stable and prudent" level-40% of GDP. 
With net public-sector debt forecast to remain at or below 33% of GDP for the foreseeable future, this rule will most likely be comfortably met; 
· The "Golden Rule" states that over the course of an economic cycle, government can borrow only to invest and not to finance current spending. 
One difference between the Golden Rule and the Stability Pact is that investment expenditure is excluded from Brown's Golden Rule, which is assessed only on the basis of "current" spending. 
Another is that the Golden Rule applies to fiscal policy across the whole economic cycle, not to any given year, so that cyclical deterioration can be distinguished from structural weakening. 
One consequence of this is that any conclusion about whether the Golden Rule has been met can only be reached with hindsight, after an economic cycle is completed. 
Brown's Treasury estimates that the current economic cycle began in 1999-2000, when output last started growing above trend. 
Growth is forecast to return above trend by 2005-06, bringing the current cycle to an end. 
The average surplus on the "current" budget since this cycle began is 0.8% of GDP. 
Huge surpluses in the three years since 1999 far outweigh the official deficits forecast in the next two years. 
This means that the Treasury expects the average surplus since 1999/2000 to stabilize at 0.7% of GDP until the cycle ends, allowing Brown's strictures to be met. 
But independent forecasters are more pessimistic. 
Some project that the cumulative deficit over the next four years will be £26 billion higher than the Treasury predicts. 
The most pessimistic foresee a cumulative overshoot of £61 billion. 
All are based mainly on predicted shortfalls in revenue and excessive current spending, rather than increases in investment spending over and above the Chancellor's ambitious plans. 
So they are highly pertinent to the question of whether the Golden Rule can be met. 
The independent Institute of Fiscal Studies calculates that the Chancellor could run cumulative current deficits of nearly £50 billion between now and the end of the cycle in 2005/06 without breaking the Golden Rule, rather than the £2.7 billion the Treasury currently projects. 
So only if the most pessimistic independent forecasts are accurate is it conceivable that the Chancellor will break his Golden Rule in this cycle. 
Moreover, the overshoot would have to be almost entirely in current, rather than investment, spending. 
But the Chancellor has so much room for maneuver in the next few years only because of the big surpluses he accumulated earlier in the cycle. 
The Government's tax and spending positions have changed mightily since then, so Brown cannot rely on similar surpluses at the equivalent stage of the next cycle. 
While the Golden Rule should be met for the current cycle, it seems likely to be violated in the future unless tax and spending plans are adjusted. 
So however much Brown wants to resist obeying European rules, he cannot long delay raising taxes (or cutting spending) without breaching his own Golden Rule and undermining his personal credibility. 
Brown need not take such measures in his forthcoming budget. 
But on current expectations, his policy will come under increasing scrutiny next year. 

Education Without Borders 
LONDON – As the third anniversary of the start of Syria’s civil war approaches, there is a race against time to deliver a groundbreaking education project to the conflict’s hardest-hit victims – hundreds of thousands of child refugees. 
A shocking three million Syrian children have now been displaced. 
More than one million of them have fled Syria and are languishing in camps in neighboring countries, particularly Lebanon, Jordan, and Turkey. 
These children are now suffering a third winter away from their homes, schools, and friends. 
Many are separated from their families, and thousands more join the ranks of displaced persons every day in what is becoming the largest humanitarian catastrophe of our time. 
But a pathbreaking initiative in Lebanon, involving teachers, aid agencies, and education charities has opened a small window of hope. 
Amid the chaos of camps, makeshift huts, and destitution, the fight for an important new principle of international aid has begun: even in times of conflict, children must have access to education. 
A century and a half ago, the Red Cross established the norm that health care could – and should – be provided even in conflict zones. 
This principle was carried forward by groups like Médicins sans Frontières, whose doctors have risked their lives for the last four decades to deliver medical care to the world’s most dangerous places. 
Now Lebanon is the site of a pilot program to advance the idea that providing education for refugee children is equally feasible – and no less important. 
Across 1,500 communities in this troubled, divided country, where Syrian refugee children now make up 20% of the school-age population, the aim is to establish children’s right to education as a humanitarian priority. 
The typical refugee child spends more than ten years away from home. 
And every month that a child is out of school makes it less likely that they will ever return. 
Three years ago, most Syrian children were at school, and the country had near universal primary education. 
Today, millions of children are being denied any chance to realize their talents. 
The scars will last for decades. 
So, in Syria and the surrounding region, there is already a lost generation in the making: children who are now eight and nine and who have never been to school, children condemned to work as child laborers, and hundreds of girls forced into early marriages. 
There are gruesome tales of young people who have been forced to sell their kidneys and other organs simply to survive. 
Of course, we must provide food, shelter, and vaccinations. 
But, in conflicts like these, the one thing that children need, beyond the material basics, is hope. 
And it is education that provides children with hope that there is light at the end of the tunnel – hope that they can plan for the future and prepare for jobs and adulthood. 
The pilot project in Lebanon, designed by Kevin Watkins of the United Kingdom’s Overseas Development Institute and led by the United Nations Children’s Fund (UNICEF) and the UN High Commission for Refugees (UNHCR), creates the opportunity to establish a right to education irrespective of borders. 
Indeed, it is designed to cater to all 435,000 Syrian child refugees now in the country. 
Thanks to a historic agreement with the Lebanese government, places for hundreds of thousands of children can be created within weeks by putting 1,500 of Lebanon’s schools on a double-shift system. 
The scheme is already being piloted in a small village called Akroum in the north of the country. 
Lebanese children are taught during the first shift, and Syrian children in the second. 
Using the same school for both sets of pupils means that education can be delivered at a cost of only £400 ($670) per child per year. 
To secure places for all refugee children, we are seeking $195 million dollars a year for UNICEF and UNHCR, with the plan to be implemented on the ground by NGOs and the Lebanese authorities. 
The aim is to secure all funding during March, as the world marks the third anniversary of this tragic exodus from Syria. 
We have already assembled a coalition of ten donor countries to take the lead, but we need ten more donors to fund the project fully. 
We are appealing to donors not just to create thousands of school places for desperately needy children, but also to establish a precedent for the 20 million other children driven by violent conflict into displaced-persons camps and shantytowns. 
There cannot be universal educational opportunity for the worlds’ children without an agreement that we will cater to children in conflict zones. 
One million Afghan children are in camps along the border with Pakistan. 
Thousands of children in South Sudan still await their first chance to go to school, and schools have yet to be provided for a million more children in the war-torn Central African Republic. 
These children’s chances now depend on showing that we can make progress in Lebanon. 
The UN Millennium Development Goals, adopted in 2000, expire in December 2015, which means that time is running to meet the deadline for achieving the target of universal primary education. 
That goal will remain unattainable unless and until we establish the long-overdue principle that a child’s right to education knows no boundaries. 

Putting Education First 
LONDON – For far too long, the cause of universal education has taken a back seat to other great international movements for change. 
Now, for two new reasons that lie at the heart of UN Secretary-General Ban Ki-moon’s launch of the “Education First” initiative, education has returned to its rightful place atop the global policy agenda. 
First and foremost, young people have themselves become the biggest advocates of universal education for girls and boys. 
Refusing to remain silent while denied opportunity, young people – particularly girls – have launched one of the great civil-rights struggles of our time. 
Few could remain unmoved by the brave fight of the young Pakistani girl Malala Yousafzai after the Taliban shot her in the head because she insisted on the right of young girls to an education. 
Few have failed to notice the massive public outpouring of support in Pakistan and elsewhere for the cause that she is championing. 
Likewise, we have also seen in recent months the creation by schoolgirls in Bangladesh of child-marriage-free zones, aimed at defending the right of girls to stay in school instead of being married off as teenage brides against their will. 
In India, the Global March Against Child Labor, led by the children’s rights advocate Kailash Satyarthi, has rescued thousands of young boys and girls from a life of slavery in factories, workshops, and domestic service, and has ensured that they return to school. 
These demonstrations by girls and boys demanding their right to education have made the fight for basic schooling impossible to ignore. 
Consequently, every government now feels under even greater pressure to deliver the second of the global Millennium Development Goals (“achieve universal primary education”) by the end of 2015. 
But a second worldwide force also has propelled education to the center of the policy agenda in most countries: the increased recognition of the importance of education by those who examine why countries succeed or fail. 
For years, academics have debated whether culture, institutions, ideology, or resources cause some countries to lag behind. 
Today, a growing number of writers, researchers, and policymakers see the crucial link between education and national economic success. 
The deployment of human capital has become an important factor in explaining why some countries remain stuck in a “middle-income trap” and why others cannot break out of low-income status. 
And research assessing a country’s human capital now focuses on the quantity and quality of basic skills, qualified graduate manpower, and expertise in research and development. 
Putting education first is urgent in view of the scale of wasted talent and potential worldwide. 
Some 57 million children still do not go to school, 500 million girls will never finish the secondary education to which they are entitled, and 750 million adults remain illiterate. 
The link between education and economic success makes the delivery of quality schooling and training a hugely important issue for business as well. 
By 2020, according to the McKinsey Global Institute, we will face the twin problems of a shortfall of up to 40 million high-skill workers and a surplus of up to 95 million low-skill workers. 
By 2030, the global workforce of 3.5 billion will include an estimated one billion workers who lack a secondary education, significantly hindering their countries’ economic prospects. 
As a result, without urgent action, businesses are likely to face a huge skills shortage, especially in emerging markets and developing countries, where most economic activity will be concentrated. 
Indeed, the adult illiteracy rate in Somalia is 63%, and 39% in Nigeria; in South Sudan, more girls die during childbirth than complete primary school. 
Unless we act, by mid-century the global economy will be characterized by massive waste of talent and unequal opportunities. 
According to new figures from the Wittgenstein Center’s forthcoming book World Population and Human Capital in the 21st Century, only 3% of young adults in Mali and Mozambique are projected to have a tertiary education in 2050; the expected proportion is just 4% in Niger, Liberia, Rwanda, and Chad, and only 5% in Malawi and Madagascar. 
While the projection for North America as a whole is 60%, the forecast for Sub-Saharan Africa is 16%. 
Such figures reveal a world divided between those who have and those who lack educational opportunity, with huge potential repercussions not only in terms of skill shortages and economic waste, but also in terms of social stability. 
The late US Supreme Court Chief Justice Earl Warren’s words in Brown v. Board of Education,which struck down the legal basis for racial segregation in America’s public schools, remain no less relevant today: “It is doubtful that any child may reasonably be expected to succeed in life if he is denied the opportunity of an education.” 
As Warren put it, “Such an opportunity…is a right which must be made available to all on equal terms.” 
We have little more than two years to turn basic education from a privilege for some into a right for all. 
Secretary-General Ban and I are determined that every day until that deadline in December 2015, we will work as hard as possible to ensure every child is in school. 

The War on Education 
LONDON – The kidnapping of more than 200 schoolgirls in northern Nigeria by the Islamist terrorist group Boko Haram is beyond outrageous. 
Sadly, it is just the latest battle in a savage war being waged against the fundamental right of all children to an education. 
That war is global, as similarly horrifying incidents in Pakistan, Afghanistan, and Somalia attest. 
Around the world, there have been 10,000 violent attacks on schools and universities in the past four years, according to a report by the Global Coalition to Protect Education from Attack. 
The evidence is as ample as it is harrowing, from the 29 schoolboys killed by suspected Boko Haram militants in the Nigerian state of Yobe earlier this year and Somali schoolchildren forced to become soldiers to Muslim boys attacked by ethnic Burmese/Buddhist nationalists in Myanmar and schoolgirls in Afghanistan and Pakistan who have been firebombed, shot, or poisoned by the Taliban for daring to seek an education. 
These are not isolated examples of children caught in the crossfire; this is what happens when classrooms become the actual targets of terrorists who see education as a threat. 
(Indeed, Boko Haram is literally translated to mean that “false” or “Western” education is “forbidden.”) 
In at least 30 countries, there is a concerted pattern of attacks by armed groups, with Afghanistan, Colombia, Pakistan, Somalia, Sudan, and Syria the worst affected. 
Such attacks reveal with stark clarity that providing education is not only about blackboards, books, and curricula. 
Schools around the world, from North America to northern Nigeria, now need security plans to ensure the safety of their pupils and provide confidence to parents and their communities. 
At the World Economic Forum in Abuja, Nigeria’s capital, this week, together with partners from business and civil society, I launched a program to ensure the personal safety of children in areas where the threats to them are real and immediate. 
The “Safe Schools Initiative” will combine school and community-based plans with special measures to protect children attending some 5,000 primary and secondary schools in the most vulnerable areas. 
For individual schools, the measures will include reinforcing security infrastructure, planning and response, training for staff, and counseling for students and community members. 
At the community level, education committees comprising parents, teachers, and volunteers will be formed, along with specially developed teacher-student-parent defense units for rapid response to threats. 
Other countries’ experience grappling with similar threats has shown that it is crucial to engage religious leaders formally in promoting and safeguarding education. 
In Afghanistan, in collaboration with community shuras and protection committees, respected imams sometimes use their Friday sermons to raise awareness about the importance of education in Islam. 
In Peshawar, Pakistan, in a program supported by UNICEF, prominent Muslims leaders have spoken out about the importance of education and of sending students back to school. 
In Somalia, religious leaders have gone on public radio in government-controlled areas and visited schools to advocate against the recruitment of child soldiers. 
In countries such as Nepal and the Philippines, community-led negotiations have helped to improve security and take politics out of the classroom. 
In some communities, diverse political and ethnic groups have come together and agreed to develop “Safe School Zones.” 
They have written and signed codes of conduct stipulating what is and is not allowed on school grounds, in order to prevent violence, school closures, and the politicization of education. 
In general, the signatory parties have kept their commitments, helping communities to keep schools open, improve the safety of children, and strengthen school administration. 
Millions of children remain locked out of school around the world. 
This not just a moral crisis; it is also a wasted economic opportunity. 
In Africa, for example, education is particularly crucial as the continent’s economies increasingly shift from resource extraction to knowledge-driven industry. 
Providing a safe environment for learning is the most fundamental and urgent first step in solving the global education crisis. 

Gordon Gekko Reborn 
NEW YORK – In the 1987 film Wall Street, the character Gordon Gekko famously declared, “Greed is good.” 
His creed became the ethos of a decade of corporate and financial-sector excesses that ended in the late 1980’s collapse of the junk-bond market and the Savings & Loan crisis. 
Gekko himself was packed off to prison. 
A generation later, the sequel to Wall Street – to be released next month – sees Gekko released from jail and returned to the financial world. 
His reappearance comes just as the credit bubble fueled by the sub-prime mortgage boom is about to burst, triggering the worst financial and economic crisis since the Great Depression. 
The “Greed is good” mentality is a regular feature of financial crises. 
But were the traders and bankers of the sub-prime saga more greedy, arrogant, and immoral than the Gekkos of the 1980’s? 
Not really, because greed and amorality in financial markets have been common throughout the ages. 
Teaching morality and values in business schools will not tame such behavior, but changing the incentives that reward short-term profits and lead bankers and traders to take excessive risks will. 
The bankers and traders of the latest crisis responded rationally to compensation and bonus schemes that allowed them to assume a lot of leverage and ensured large bonuses, but that were almost guaranteed to bankrupt a large number of financial institutions in the end. 
To avoid such excesses, it is not enough to rely on better regulation and supervision, for three reasons: 
· Smart and greedy bankers and traders will always find ways to circumvent new rules; 
· CEOs and boards of directors of financial firms – let alone regulators and supervisors – cannot effectively monitor the risks and behaviors of thousands of separate profit and loss centers in a firm, as each trader and banker is a separate P&L with its own capital at risk; 
· CEOs and boards are themselves subject to major conflicts of interest, because they don’t represent the true interest of their firms’ ultimate shareholders. 
As a result, any reform of regulation and supervision will fail to control bubbles and excesses unless several other fundamental aspects of the financial system are changed. 
First, compensation schemes must be radically altered through regulation, as banks will not do it themselves for fear of losing talented people to competitors. 
In particular, bonuses based on medium-term results of risky trades and investments must supplant bonuses based on short-term outcomes. 
Second, repeal of the Glass-Steagall Act, which separated commercial and investment banking, was a mistake. 
The old model of private partnerships – in which partners had an incentive to monitor each other to avoid reckless investments – gave way to one of public companies aggressively competing with each other and with commercial banks to achieve ever-rising profitability, which was achievable only with reckless levels of leverage. 
Similarly, the move from a lending model of “originate and hold” to one of “originate and distribute” based on securitization led to a massive transfer of risk. 
No player but the last in the securitization chain was exposed to the ultimate credit risk; the rest simply raked in high fees and commissions. 
Third, financial markets and financial firms have become a nexus of conflicts of interest that must be unwound. 
These conflicts are inbuilt, because firms that engage in commercial banking, investment banking, proprietary trading, market making and dealing, insurance, asset management, private equity, hedge-fund activities, and other services are on every side of every deal (the recent case of Goldman Sachs was just the tip of the iceberg). 
There are also massive agency problems in the financial system, because principals (such as shareholders) cannot properly monitor the actions of agents (CEOs, managers, traders, bankers) that pursue their own interest. 
Moreover, the problem is not just that long-term shareholders are shafted by greedy short-term agents; even the shareholders have agency problems. 
If financial institutions do not have enough capital, and shareholders don’t have enough of their own skin in the game, they will push CEOs and bankers to take on too much leverage and risks, because their own net worth is not at stake. 
At the same time, there is a double agency problem, as the ultimate shareholders – individual shareholders – don’t directly control boards and CEOs. 
These shareholders are represented by institutional investors (pension funds, etc.) whose interests, agendas, and cozy relationships often align them more closely with firms’ CEOs and managers. 
Thus, repeated financial crises are also the result of a failed system of corporate governance. 
Fourth, greed cannot be controlled by any appeal to morality and values. 
Greed has to be controlled by fear of loss, which derives from knowledge that the reckless institutions and agents will not be bailed out. 
The systematic bailouts of the latest crisis – however necessary to avoid a global meltdown – worsened this moral-hazard problem. 
Not only were “too big to fail” financial institutions bailed out, but the distortion has become worse as these institutions have become – via financial-sector consolidation – even bigger. 
If an institution is too big to fail, it is too big and should be broken up. 
Unless we make these radical reforms, new Gordon Gekkos – and Charles Ponzis – will emerge. 
For each chastised and born-again Gekko – as the Gekko in the new Wall Street is – hundreds of meaner and greedier ones will be born. 

Restoring Yesterday's Hope for Tomorrow's World 
WASHINGTON, DC – The year 2015 was difficult, punctuated by declining growth forecasts, horrific terror attacks, massive refugee flows, and serious political challenges, with populism on the rise in many countries. 
In the Middle East, in particular, chaos and violence has continued to proliferate, with devastating consequences. 
This represents a disappointing turn from the undoubtedly flawed, but far more hopeful world of just a few decades ago. 
In his autobiography The World of Yesterday, Stefan Zweig described a similarly drastic change. 
Born in 1881 in Vienna, Zweig spent his youth in an optimistic, civil, and tolerant environment. 
Then, starting in 1914, he witnessed Europe’s collapse into World War I, followed by revolutionary convulsions, the Great Depression, the rise of Stalinism, and finally the barbarism of Nazism and the outbreak of World War II. 
Devastated, Zweig committed suicide while in exile in 1942. 
One imagines that Zweig would have been comforted by the post-WWII creation of the United Nations and the Bretton-Woods system, not to mention the subsequent decades of reconstruction and reconciliation. 
He could have witnessed the cooperation and progress that marked the post-war era. 
Perhaps, then, he would have looked at the period from 1914 to 1945 as a terrible but limited detour in the world’s march toward peace and prosperity. 
Of course, the second half of the twentieth century was far from perfect. 
Until 1990, peace was secured largely by the threat of mutual nuclear destruction. 
Local conflicts, such as in Korea, Vietnam, parts of Africa, and the Middle East, took their toll. 
And while about 100 developing countries gained independence, the process was not always peaceful. 
At the same time, however, the world economy grew more rapidly than ever. 
A strong middle class emerged in the advanced countries, and then began to appear elsewhere. 
The Western democracies and Japan built economies in which productivity growth led to shared prosperity; governments engaged in regulation and redistribution, while private companies fueled growth by implementing technologically advanced production methods. 
On both the regional and global levels, decisive progress was made in reaping the benefits from trade and economies of scale. 
The European integration project seemed to herald a new kind of cooperation, which could extend to other regions and even influence global cooperation. 
The generation that came of age in the 1960s felt much like Zweig had felt in his youth. 
We believed that, though progress may not be linear, we could count on it. 
We expected an increasingly peaceful and tolerant world, in which technological advances, together with well-governed markets, would generate ever-expanding prosperity. 
In 1989, when the Soviet Union was poised to collapse and China was shifting to a market-based economy, Francis Fukuyama announced the “end of history.” 
Over the last two decades, however, our hopes – political, social, and economic – have been repeatedly dashed. 
There was a time when US policymakers were wondering whether Russia should join NATO. 
That possibility is difficult even to consider today, after Russia’s intervention in Ukraine and annexation of Crimea (apparently carried out in response to fears that Ukraine would deepen its ties with the European Union and NATO). 
Many emerging economies achieved rapid growth for years – even decades – enabling billions of people to escape extreme poverty and reducing the wealth gap between developed and developing countries. 
But that growth has lately slowed substantially, leading many to question whether economists spoke too soon when we labeled them the new engines of global economic growth. 
Likewise, the Arab Spring in 2011 was supposed to herald a new, more democratic future for the Middle East and North Africa. 
While Tunisia has averted disaster, most of the other affected countries have ended up mired in chaos, with Syria’s brutal civil war facilitating the rise of the Islamic State. 
The euro, meanwhile, suffered its own crisis. 
The common currency, once portrayed as the start of a quasi-federal Europe, instead created serious tension between “creditor” and “debtor” countries when many debtors faced a protracted economic downturn. 
Just as Europe seemed finally to be escaping the euro crisis, refugees, especially from Syria, began flooding in. 
That has jeopardized the Schengen Area of borderless travel, and some are asking whether the EU can withstand the pressure. 
In the United States, the Syrian refugee crisis has led Congress to rush to restrict visa-free entrance for tourists from 38 countries. 
This comes at a time when income and wealth inequality is skyrocketing in the US – the median wage for men has not increased in decades – leaving many to wonder whether their children will be able to maintain the living standard they enjoyed. 
On top of all this, for the first time in decades, the growth of international trade no longer comfortably exceeds the growth of global output. 
A fundamental driver of many of these problems may well be the unprecedented speed of change – driven by globalization and technological innovation – which has produced disruptions too quickly and on too large a scale for us to manage. 
For example, while communication technology has done wonders, say, to expand access to finance in Africa, it has also enabled terrorist networks to encrypt their communications effectively. 
And as the global financial crisis starkly demonstrated, regulators have struggled to keep pace with financial innovation. 
The potential for human progress still seems immense, because the world wants for neither resources nor technological innovation. 
Indeed, technology offers the hope of lifesaving medical treatments, higher economic productivity, and sustainable energy systems. 
But people are fearful, as shown by the return of identity politics and a lack of economic and political inclusiveness. 
As a result, productivity growth is slowing, and, though capital seems cheap and profits plentiful, investment remains sluggish. 
The key to managing the disruptions and assuaging people’s fears is governance. 
Zweig saw the world fall apart a century ago not because human knowledge stopped advancing, but because of widespread governance and policy failures. 
As we enter 2016, we must focus on adapting governance, in all of its economic and political dimensions, to the twenty-first century, so that our resources and knowledge produce inclusive progress, not violent conflict. 

The Good-Governance Trap 
ROME – Development and improved governance have tended to go hand in hand. 
But, contrary to popular belief, there is little evidence that success in implementing governance reforms leads to more rapid and inclusive economic and social development. 
In fact, it may be the other way around. 
The focus on good governance stems from the struggle to restore sustained growth during the developing-country debt crises of the 1980s. 
Instead of reassessing the prevailing economic-policy approach, international development institutions took aim at the easy targets: developing-country governments. 
Advising those governments on how to do their jobs became a new vocation for these institutions, which quickly developed new “technical” approaches to governance reform. 
The World Bank, using well over 100 indicators, introduced a composite index of good governance, based on perceptions of voice and accountability, political stability and the absence of violence, government effectiveness, regulatory quality, the rule of law, and levels of corruption. 
By claiming that it had found a strong correlation between its governance indicators and economic performance, the Bank fueled hope that the key to economic progress had been found. 
The case was flawed from the beginning. 
The indicators used were ahistorical and failed to account for country-specific challenges and conditions, with cross-country statistical analyses suffering from selection bias and ignoring the interlinkages among a wide array of variables. 
As a result, the World Bank badly overestimated the impact of governance reform on economic growth. 
To be sure, governance that is effective, legitimate, and responsive provides untold benefits, especially when compared to the alternative: inefficient governance, cronyism, and corruption. 
But the focus on governance reform has not proved nearly as effective as promised in fostering development. 
In fact, this governance-focused approach may have actually undermined development efforts. 
For starters, it has allowed international institutions to avoid acknowledging the shortcomings of the new development orthodoxy of the last two decades of the twentieth century, when Latin America lost over a decade, and Sub-Saharan Africa a quarter-century, of economic and social progress. 
It has also complicated the work of governments unnecessarily. 
With good-governance reforms now a condition for international aid, developing-country governments often end up mimicking donor expectations, instead of addressing the issues that are most pressing for their own citizens. 
Indeed, such reforms can even undermine traditional rights and customary obligations worked out among communities over many generations. 
Moreover, the required reforms are so wide-ranging that they are beyond the means of most developing countries to implement. 
As a result, good-governance solutions tend to distract from more effective development efforts. 
Another problem with governance reforms is that, although they are formally neutral, they often favor particular vested interests, with grossly unfair consequences. 
Reforms aimed at decentralization and devolution have, in some cases, enabled the rise of powerful local political patrons. 
The conclusion is clear: the development agenda should not be overloaded with governance reform. 
As Harvard’s Merilee Grindle has put it, we should be aiming for “good enough” governance, selecting a few imperatives from a long list of possibilities. 
But selecting the most important measures will not be easy. 
Indeed, advocates of governance reform have rarely been right about the most effective approach. 
Consider the unrelenting promotion of efforts to strengthen property rights. 
Absent alienable individual ownership of productive resources, it is asserted, there will be insufficient means and incentives to pursue development initiatives, and shared resources (the “commons”) will be over-exploited and used inefficiently. 
In reality, the so-called “tragedy of the commons” is neither ubiquitous nor inevitable, and individual property rights are not always the best – and never the only – institutional solution for dealing with social dilemmas. 
The late Elinor Ostrom, a Nobel laureate in economics, showed that human societies have built myriad creative and lasting solutions to resolve a wide range of dilemmas involving the use of common resources. 
The theme of good governance has special appeal to large bureaucratic organizations like multilateral development banks and UN agencies, which favor apolitical solutions to what are essentially political problems. 
In other words, good governance is an ostensibly technocratic answer to what donors and other well-meaning international groups consider bad policies and, especially, bad politics. 
Herein lies the real problem with the good-governance agenda: it supposes that the solution to most policy and political dilemmas lies in compliance with a set of formal process-oriented indicators. 
But experience over two decades shows that such directives provide little practical guidance for solving the technically, socially, and politically complex real-world problems of economic development. 
Recognizing that governance improves with development, the international community would be better served by pursuing reforms that directly advance development, instead of a broad agenda that may have, at best, a small indirect impact. 
Such a pragmatic approach to improving governance would be neither dogmatic nor pretend to universality. 
Instead, the major constraints would be identified, analyzed, and addressed, perhaps sequentially. 
Many of the good-governance agenda’s key goals – empowerment, inclusion, participation, integrity, transparency, and accountability – can be built into workable solutions, not because outsiders demand them, but because effective solutions require them. 
Such solutions should draw from relevant experiences, with the understanding that they do not amount to “best practices.” 
The blind pursuit of good governance has guided development efforts for too long. 
It is time to acknowledge what works – and disregard what does not. 

Government Accountability or Government Accounting? 
Paris amp#45;amp#45; 
When Nicolas Sarkozy’s government spokesperson announced that each minister’s performance would be assessed according to criteria set by a private auditing firm, he probably did not expect to elicit a fierce response. 
But he should have. 
The opposition quickly attacked the move as a “dangerous gimmick” and a “smokescreen.” 
One pundit asked, “Will the time soon come when ministers are hired by head-hunters?” 
And a young MP declared that “France cannot be managed like a bolt factory.” 
But what is so absurd about establishing standards by which to assess the fulfillment of Sarkozy’s campaign promises? 
As soon as they were appointed in June 2007, Sarkozy’s ministers were given a clear set of objectives in the form of a letter of intent. 
Isn’t it normal to create some means of holding ministers accountable? 
A culture of “results” has become central to economic modernization in France, so shouldn’t the same be true of French governments, with their entrenched inclination toward passivity and aloofness? 
And the issue of setting measurable standards for government operations is not confined to France. 
British Prime Minister Gordon Brown has made such quantifiable goals a hallmark of his leadership ever since he was Chancellor of the Exchequer. 
Of course, the institutions charged with supervising France’s public sector, such as the Cour des comptes or the Inspection générale des finances , have the skills and capacities that are needed to fulfill their tasks. 
Moreover, French public policies are subject to a general review procedure. 
But the culture of a private auditing firm can bring something new by moving beyond a basic review of legality to a general assessment of performance. 
For the plan’s opponents, the main causes of indignation are the criteria for assessment. 
Should the immigration minister be judged according to the number of illegal immigrants expelled? 
Should the education minister be assessed according to how much overtime work teachers are made to perform? 
Should the culture minister be assessed according to the number of visitors to free museums and the share of French movies in the domestic market? 
Such questions hide more basic ones: can the fulfillment of political goals really be quantified? 
Is it possible to evaluate a state in the same way that you evaluate a firm, thereby reducing its performance to a set of specific actions? 
To some extent, the answer is yes. 
After all, state bureaucracies are, on one level, simply a species of the large and complex organizations that, in the private sector, are subject to standardized performance indicators. 
In many Western democracies – New Zealand, Sweden, the United Kingdom, and even Italy – efforts at administrative modernization have focused on forging a stronger link between management and performance. 
On another level, however, state bureaucracies are very different from private-sector organizations, for they have their own characteristics and objectives, which will be endangered were they are reduced to quantitative standards of performance and efficiency. 
Indeed, one of the main reasons why certain tasks are given to governments, rather than left to the private sector, is that ordinary market mechanisms do not work in the case of so-called “public goods” because the market cannot determine the optimal level of their supply. 
Quantitative targets thus hide the crucial policy decision about the right “portfolio” of services that a government should provide. 
And if assessment of state action were based only on a set of pre-defined quantitative targets, ministers would also understandably – but mistakenly – neglect quality and other important objectives. 
So, should the French be worried? 
According to Prime Minister Francois Fillon, “We are not at school.” 
Beyond technical criteria, ministers will still be assessed according to the influence exercised by their party or political faction, election results, and their popularity among the media and the public. 
Thus, there is no contradiction between the aim of turning ministers into efficient managers and parliament’s power to hold members of the government accountable. 
Eventually, the voters will have the final say. 

Innovate or Stagnate 
DUBAI – Companies, like people, grow old. 
They start life small and eager to survive, fueled by youthful energy and fresh ideas. 
They compete, expand, mature, and eventually, with few exceptions, fade into obscurity. 
The same is true of governments: they, too, can lose the hunger and ambition of youth and allow themselves to become complacent. 
Consider this: only 11% of the Fortune 500 companies from 1955 still exist today, while the average time that companies stay in the top 500 has fallen from 75 years to 15 years. 
In this age of rapid change, those who lag behind become irrelevant– in a heartbeat. 
Countries whose governments grow old face the same fate as outdated companies. 
Their choice is simple: innovate or become irrelevant. 
The race for national competitiveness is every bit as fierce as the competition among companies in the marketplace. 
Countries compete for investment, talent, growth, and opportunity in a globalized world, and those that are pushed out of the running surrender the greatest prize of all: human development, prosperity, and happiness for their people. 
To avoid this fate, governments must focus on what really matters: how to be like the 11% of companies that have remained, through the decades, in the top 500. 
The lifecycle of companies should teach governments that the secret of eternal youth is constant innovation – seizing opportunities and behaving like the dynamic, entrepreneurial companies that are defining today’s world and shaping its future. 
The key to corporations’ rejuvenation, civilizations’ evolution, and human development in general is simple: innovation. 
I am always amazed when governments think they are an exception to this rule. 
Innovation in government is not an intellectual luxury, a topic confined to seminars and panel discussions, or a matter only of administrative reforms. 
It is the recipe for human survival and development, the fuel for constant progress, and the blueprint for a country’s rise. 
The first key to business-like innovation in government is a focus on skills. 
Top-tier companies continuously invest in their employees to provide them with the right skills for the marketplace. 
Governments must do the same, by constantly upgrading skills and nurturing innovation – among their own employees, across key sectors of the economy, and at the foundations of the education system. 
Governments that fail to equip new generations with the skills needed to become leaders for their time are condemning them to be led by other, more innovative societies. 
A United States Department of Labor study found that 65% of children currently in primary school will grow up to work in jobs that do not exist today. 
Another study at Oxford University found that 47% of job categories are at high risk of ceasing to exist because they can be automated through technology. 
So, how do we prepare our children and future generations for such times? 
How do we equip our countries to compete, not only today, but in the coming decades as well? 
The answer lies in honing our children’s creativity, and providing them with the analytical and communication skills needed to channel it toward productive ends. 
The second key to transforming governments into engines of innovation is to shift the balance of investment toward intangibles, as in the private sector. 
Whereas more than 80% of the value of the Standard & Poor’s 500 consisted of tangible assets 40 years ago, today that ratio is reversed: more than 80% of the largest companies’ value is intangible – the knowledge and skills of their employees and the intellectual property embedded in their products. 
Governments, too, should think strategically about shifting their spending away from tangible infrastructure like roads and buildings, and toward intangibles like education and research and development. 
It is no secret that the US and Europe, combined, spend more than $250 billion of public funds annually on R&D to maintain their leading positions. 
Likewise, a key driver of rapid development in countries like Singapore, Malaysia, and South Korea has been their strategic decision to shift public expenditure away from hard infrastructure and toward the “soft” infrastructure needed to build and sustain a knowledge economy. Likewise, the British government spends markedly more of its budget on such intangibles than on tangible assets. 
Most of today’s transformative companies are well known for having an innovative corporate culture and working environment that inspires and empowers employees. 
Governments that set an example for innovation have the power to implant a nationwide culture of creativity. 
When such a culture takes root, people feel inspired to run further with their ideas, to aim higher with their ambitions, and to pursue bigger dreams. 
That is how countries that encourage innovation take the lead – and stay there. 
To sustain innovation, businesses must attract and retain the most creative and productive minds. 
In this age of global mobility, countries, too, go head to head in the battle for talent. 
Global cities compete to provide an ideal life and work environment for innovators, and to harness their creativity to become stronger and more competitive still. 
Innovative governments do the same thing on a national scale. 
They attract talent, perform efficiently, and continually upgrade their systems and services. 
They empower citizens to cultivate their collective energy and develop their potential, and thus become drivers of their countries’ growth and advancement in the world arena. 
Above all, they value human minds and help people become better guardians and builders of our planet. 
For governments, innovation is an existential question. 
Only those that sustain innovation can drive change in the world, because they are the governments that never grow old. 

The Scarecrow of National Debt 
CAMBRIDGE – Most people are more worried by government debt than about taxation. 
“But it’s trillions” a friend of mine recently expostulated about the United Kingdom’s national debt. 
He exaggerated a bit: it is £1.7 trillion ($2.2 trillion). 
But one website features a clock showing the debt growing at a rate of £5,170 per second. 
Although the tax take is far less, the UK government still collected a hefty £750 billion in taxes in the last fiscal year. 
The tax base grows by the second, too, but no clock shows that. 
Many people think that, however depressing heavy taxes are, it is more honest for governments to raise them to pay for their spending than it is to incur debt. 
Borrowing strikes them as a way of taxing by stealth. 
“How are they going to pay it back?” my friend asked. “Think of the burden on our children and grandchildren.” 
I should say that my friend is extremely old. 
Horror of debt is particularly marked in the elderly, perhaps out of an ancient feeling that one should not meet one’s maker with a negative balance sheet. 
I should also add that my friend is extremely well educated, and had, in fact, played a prominent role in public life. 
But public finance is a mystery to him: he just had the gut feeling that a national debt in the trillions and growing by £5,170 a second was a very bad thing. 
One should not attribute this gut feeling to financial illiteracy. 
It has been receiving strong support from those supposedly well-versed in public finance, particularly since the economic collapse of 2008. 
Britain’s national debt currently stands at 84% of GDP. 
This is dangerously near the threshold of 90% identified by Harvard economist Kenneth Rogoff (together with Carmen Reinhart and Vincent Reinhart), beyond which economic growth stalls. 
In the face of criticism of the data underlying this threshold Rogoff has held firm, and he now gives a reason for his alarm. 
With US government debt running at 82% of GDP, the danger is of a “fast upward shift in interest rates.” 
The “potentially massive” fiscal costs of this could well require “significant tax and spending adjustments” (economist’s code for increasing taxes and reducing public spending), which would increase unemployment. 
This is the financial leg of the familiar “crowding out” argument. 
The higher the national debt, according to this view, the greater the risk of government default – and therefore the higher the cost of fresh government borrowing. 
This in turn will raise the cost of new private-sector borrowing. 
(That is why Rogoff wants the US government to “lock in” currently low rates by issuing much longer-term debt to fund public infrastructure). 
Maintaining low interest rates for private bank loans has been one of the main arguments for reducing budget deficits. 
But this argument – or set of arguments (there are different strands) – for fiscal austerity is invalid. 
A government that can issue debt in its own currency can easily keep interest rates low. 
The rates are bounded by concerns about inflation, over-expansion of the state sector, and the central bank’s independence; but, with our relatively low levels of debt (Japan’s debt amounts to over 230% of its GDP) and depressed output and inflation, these limits are quite distant in the UK and the US. 
And as the record bears out, continuous increases in both countries’ national debt since the crash have been accompanied by a fall in the cost of government borrowing to near zero. 
The other leg of the argument for reducing the national debt has to do with the “burden on future generations.” 
US President Dwight Eisenhower expressed this thought succinctly in his State of the Union message in 1960: generating a surplus to pay back debt was a necessary “reduction on our children’s inherited mortgage.” 
The idea is that future generations would need to reduce their consumption in order to pay the taxes required to retire the outstanding debt: government deficits today “crowd out” the next generation’s consumption. 
Although governments have endlessly repeated this argument since the 2008 crash as a justification for fiscal tightening, the economist A. P. Lerner pointed out its fallacy years ago. 
The burden of reduced consumption to pay for government spending is actually borne by the generation which lends the government the money in the first place. 
This is crystal clear if the government simply raises the money it needs for its spending through taxes rather than borrowing it. 
Furthermore, the idea that additional government spending, whether financed by taxation or borrowing, is bound to reduce private consumption by the same amount assumes that no flow of additional income results from the extra government spending – in other words, that the economy is already at full capacity. 
This has not been true of most countries since 2008. 
But in the face of such weighty, if fallacious, testimony to the contrary, who am I to persuade my elderly friend to ignore his gut when it comes to thinking about the national debt? 

Fraud, Fools, and Financial Markets 
NEW HAVEN – Adam Smith famously wrote of the “invisible hand,” by which individuals’ pursuit of self-interest in free, competitive markets advances the interest of society as a whole. 
And Smith was right: Free markets have generated unprecedented prosperity for individuals and societies alike. 
But, because we can be manipulated or deceived or even just passively tempted, free markets also persuade us to buy things that are good neither for us nor for society. 
This observation represents an important codicil to Smith’s vision. 
And it is one that George Akerlof and I explore in our new book, Phishing for Phools: The Economics of Manipulation and Deception. 
Most of us have suffered “phishing”: unwanted emails and phone calls designed to defraud us. 
A “phool” is anyone who does not fully comprehend the ubiquity of phishing. A phool sees isolated examples of phishing, but does not appreciate the extent of professionalism devoted to it, nor how deeply this professionalism affects lives. 
Sadly, a lot of us have been phools – including Akerlof and me, which is why we wrote this book. 
Routine phishing can affect any market, but our most important observations concern financial markets – timely enough, given the massive boom in the equity and real-estate markets since 2009, and the turmoil in global asset markets since last month. 
As too many optimists have learned to their detriment, asset prices are highly volatile, and a whole ocean of phishes is involved. 
Borrowers are lured into unsuitable mortgages; firms are stripped of their assets; accountants mislead investors; financial advisers spin narratives of riches from nowhere; and the media promote extravagant claims. 
But the losers in the downturns are not just those who have been duped. 
A chain of additional losses occurs when the inflated assets have been purchased with borrowed money. 
In that case, bankruptcies and fear of bankruptcy spawn an epidemic of further bankruptcies, reinforcing fear. 
Then credit dries up and the economy collapses. 
This vicious downward spiral for business confidence typically features phishes – for example, the victims of Bernard Madoff’s Ponzi scheme – discovered only after the period of irrational exuberance has ended. 
Epidemics, in economics as much as in medicine, call for an immediate and drastic response. 
The response by the authorities to the Great Crash of 1929 was small and slow, and the world economy entered a “Dark Age” that lasted through the Great Depression of the 1930s and the Second World War. 
The 2007-2009 financial crisis portended a similar outcome, but this time the world’s governments and central banks intervened promptly, in a coordinated fashion, and with an appropriately high volume of stimulus. 
The recovery has been weak; but we are nowhere near a new Dark Age. 
For that we should be grateful. 
Yet some now argue that the fiscal and monetary authorities should not have responded so quickly or strongly when the 2007-2009 crisis erupted. 
They believe that the primary cause of the crisis was what economists call moral hazard: because risk-takers expected that the authorities would intervene to protect them when their bets went awry, they took even greater risks. 
By contrast, our view (supported by plenty of data) is that rapidly rising prices usually reflect irrational exuberance, aided and abetted by phishes. 
The irrationally exuberant were not thinking of the returns they would garner if the authorities intervened to maintain the economy and the flow of credit (or, in extreme cases, moved to bail out their bank or enterprise). 
Such possibilities were a marginal consideration in the euphoria preceding the 2007-2009 crisis: those selling at inflated prices were making profits; and buyers “knew” they were doing the right thing – even when they weren’t. 
The reluctance to acknowledge the need for immediate intervention in a financial crisis is based on a school of economics that fails to account for the irrational exuberance that I have explored elsewhere, and that ignores the aggressive marketing and other realities of digital-age markets examined in Phishing for Phools. 
But adhering to an approach that overlooks these factors is akin to doing away with fire departments, on the grounds that without them people would be more careful – and so there would then be no fires. 
We found out many years ago, to the world’s great regret, what happens when a financial epidemic is allowed to run its course. 
Our analysis indicates that not only are there endemic and natural forces that make the financial system highly volatile; but also that swift, effective intervention is needed in the face of financial collapse. 
We need to give free rein to fiscal and monetary authorities to take aggressive steps when financial turmoil turns into financial crisis. 
One Dark Age is one too many. 


Let’s Get Fiscal 
LONDON – Everyone knows there is no gain without pain. 
But there can be pain without gain – a lesson that Western populations have been learning the hard way since at least 2012. 
With years of fiscal austerity in the United States, Europe, and Japan having achieved nothing, it is time for governments to start spending again. 
The proposal will be met with outrage from many governments, especially, but not exclusively, Germany’s, and will be dismissed by the many political candidates who treat sovereign debt, built up by the incumbents they are seeking to depose, as the devil’s work. 
But beyond ideology and self-interest lies a simple and unavoidable truth: austerity is not working. 
Japanese Prime Minister Shinzo Abe reluctantly acknowledged austerity’s failure when he announced on June 1 that his government would postpone a planned increase in the country’s consumption tax. 
Far from helping to control Japan’s budget deficit and huge public debt, the tax hike probably would have reduced revenues. 
After all, the previous hike, implemented in April 2014, quickly drove the economy back into recession. 
The eurozone – the developed world’s leading champion of austerity – has yet to come to the same realization, despite glaring evidence. 
In 2012, eurozone leaders signed a fiscal compact aimed at controlling public debt – which, in total, amounted to 91.3% of GDP, according to the International Monetary Fund – by forcing countries to cut spending and raise taxes. 
By 2015, the eurozone’s budget deficit, as a share of GDP, had fallen by two-thirds from its peak in 2010. 
Yet gross public debt had actually increased, to 93.2% of GDP. 
Indeed, while Germany has managed to reduce its gross public debt, from 79.7% of GDP in 2012 to 71% last year, debt ratios in France and Italy have continued to rise, despite tight fiscal controls (especially in Italy). 
Elsewhere in Europe, the United Kingdom has followed a similar trajectory, with gross public debt increasing from 85.3% of GDP in 2012 to 89.3% of GDP in 2015. 
And in the US, the debt ratio rose from 102.5% to 105.8% over the same period. 
The problem, of course, lies in sluggish economic growth, which undermines wage growth, weakens tax revenues, and makes it impossible for governments to pay down their debts. 
Among the biggest drags on growth today is fiscal austerity. 
The more governments cut their deficits, the faster growth slows – and the further out of reach debt-reduction targets become. 
Thus runs the self-defeating cycle of fiscal austerity. 
To be sure, this is not always how austerity works. 
In the inflation-plagued 1970s and 1980s, when investors’ demand for inflation-risk premia pushed up long-term borrowing costs, larger deficits tended to boost long-term interest rates further, while smaller deficits reduced them. 
It was this experience that caused policymakers after 2010 to assume that reducing government demand would help to boost private investment. 
(In the eurozone, it should be noted, arguments for fiscal austerity were also fueled by mistrust among governments, with creditor countries demanding that debtors endure some pain in exchange for “gains” like bailouts.) 
But times have changed. 
For starters, we are no longer living in an inflationary era. 
On the contrary, Japan and some eurozone countries face deflation, while inflation in the UK is essentially zero. 
Only in America is inflation picking up – and only gently. 
Moreover, long-term borrowing costs are at historic lows, just as they have been throughout the last five years. 
Pursuing austerity in this context has resulted in a drag on growth so severe that not even the halving of energy prices over the last 18 months has overcome it. 
Expansionary monetary policy – that is, massive injections of liquidity through so-called quantitative easing – is clearly not enough, either. 
While QE does serve a purpose – and remains necessary in Europe and Japan – it has failed to stimulate private investment and accelerate job creation and wage growth. 
Some direct intervention in wages may help. 
The UK has implemented an increase in the mandatory minimum wage, and some US states, led by California, will soon follow. 
Japan, which faces stagnant wages, despite apparent labor shortages, may stand to benefit the most from this approach. 
But, in today’s world, nothing can substitute for fiscal expansion. 
Many countries, particularly in Europe, need to boost public investment in infrastructure. 
More broadly, Europe needs a new Marshall Plan, this time self-financed, rather than funded by the Americans, to kick-start economic growth and boost productivity. 
There is plenty of scope for a similar program in the US, too. 
Such spending could even help get tax revenues growing, by pushing employment and wages higher. 
At a time of low borrowing costs and little to no inflation (or even deflation), austerity is not the answer. 
It is time for policymakers to recognize that there is no need for pain that is not bringing any gain. 
It is time to get fiscal. 

Governments Without Opposition 
America's mid-term elections provide the latest example of an expanding phenomenon: democratic governments that face no effective challenge by an opposition. 
More precisely, this phenomenon entails the growing number of democratically elected political leaders who do not confront alternative leaders able to gather the disaffected into a viable opposition. 
The phenomenon is by no means confined to what once was the political right. 
Britain is nowadays experiencing what can almost be called the self-destruction of the opposition Conservative Party. 
For the third time in seven years the Tories are devouring their own leader, without any viable alternative leader for the party anywhere in sight. 
In Germany, Gerhard Schröder's narrow victory is made secure by the intense soul-searching now underway among the defeated Christian Democrat opposition, as well as because of the moral collapse of the CDU's junior partner, the Free Democrats. 
Even more starkly unbalanced political landscapes can be found in France and Italy, where neither President Chirac nor Prime Minister Berlusconi need fear their challengers; indeed neither has a challenger to speak of. 
Moreover, this situation is not confined to Europe. 
The self-destruction of the Congress Party has left India's government unworried by any political threat from outside its own ranks. 
In Russia, President Putin bestrides his country's elected Duma like Gulliver over the Lilliputians. 
How and why has this happened? 
How, in particular, can this situation be explained in view of the fact that today's unchallenged heads of government are (at least for the most part) not towering leaders whose charisma shields them from opposition? 
One reason is the ongoing personalisation of politics that is taking place everywhere in the world. 
Whether someone is charismatic or not, voters want a figurehead, and preferably one with celebrity value. 
This 'celebrity' may be based on personality, as with Blair and Berlusconi, or on circumstance, as with Bush and Schröder and Putin, but it is part and parcel of the new politics of media appeal. 
Behind this, however, lies a deeper change to democracy. 
The end of ideology has been invoked so often that one hesitates to repeat the phrase. 
Still, it is a fact that in all cases of governments without effective opposition it is not easy to formulate an electorally viable alternative policy to challenge the leaders. 
Mr Putin is perhaps the most exteme in this regard, but Blair and Berlusconi are not far behind in possessing this "policy immunity." 
They could form coalitions with anyone, not least with each other, whatever their traditional political affiliations may be. 
It is difficult to trip them up by offering alternative policies in any field. 
However, this condition may not last. 
In at least two respects, alternative policy options are beginning to emerge, and these may one day dominate public debate. 
Domestically, there is an obvious difference between advocates of a "European model" of social and moral capitalism and others who adhere to the neoliberal "Washington consensus" that Europeans associate with America's economic model. 
Internationally, the clash between unilateralists and multilateralists is not confined to the United States. 
Some see it, in present circumstances, as a clash between peace by negotiation and active, even pre-emptive intervention. 
Then there are the great unspoken issues. 
Law and order is on the agenda of most governments, but many voters feel that it still does not have proper prominence. 
Immigration is regarded as a deep threat by many people, so that demagogues are increasingly able to marshal resentment and grassroots support. 
In the EU, European integration is taken for granted by most political parties in the older member states of the Union, but a sizeable portion of these electorates have doubts about it, and in the EU's candidate countries, the doubts run even stronger. 
Thus, despite today's political quiet, major cleavage between apparently unchallenged leaders and shifting popular moods may be gaining strength below the surface. 
This disquiet is expressed in several ways. 
One is through voter apathy. 
Most of the leaders mentioned earlier command a strong loyalty from only a small minority of their total electorates, so their legitimacy is dubious. 
Another takes the form of "opposition by media." 
This has become an issue in a number of countries, and it has led some governments (as President Putin's did recently) to try and curb freedom of expression. 
Then there is the tell-tale emergence and disappearance of protest parties like the Dutch groups gathered by the murdered Pim Fortuyn. 
The tale they tell is one of the failure of democratic institutions as they now stand. 
This tale is further underlined by the growing role of "the street," of demonstrations of public irritation focusing on particular issues but really directed against unchallenged governments. 
The result is a worrying combination of creeping authoritarianism among those who rule with a growing unrest of the ruled. 
As so often the case, there is no patent medicine against this syndrome. 
However, the crying need for an effective institutional, usually parliamentary, opposition is evident. 
Governments without opposition pose a threat to democracy itself. 
To defend our liberty we need domestic democracy at least as much as a readiness to attack whatever "forces of evil" may exist elsewhere in the world. 

Grading Obamanomics 
PALO ALTO – It is still too soon to gauge the full economic impact of President Barack Obama’s implemented and proposed policies, but a preliminary read indicates limited short-term benefit at large long-term cost. 
The administration is exploiting a crisis atmosphere to enact a vast agenda that would reengineer the American economy, from autos and financial services to health care, energy, and the distribution of income. 
Obama outsourced the details of the $787 billion fiscal stimulus to Congress and, no surprise, the old barons of the House stuffed it with pork and social engineering. 
Several months later, only 4%-6% of the funds have been spent, and the federal government is brow-beating state governments – for example, demanding that California rescind a small pay cut for some unionized workers or lose $7 billion in stimulus funds. 
(Intervening in contractual relations ex post to enforce union demands is an emerging characteristic of the administration). 
The foreclosure relief plan is off to an even slower start, and is likely to run into numerous problems concerning how to rework delinquent mortgages without inducing a lot more delinquencies. 
So score the stimulus a very expensive, largely wasted opportunity. 
Instead, Obama could, for example, have suspended the payroll tax for a year, getting money directly into people’s pockets quickly and decreasing the need for firms to lay off workers. 
Obama’s long-run budget calls for much higher spending, higher taxes, and an explosion of debt that will crowd out borrowing in capital markets by private companies, state and local governments, and developing countries. 
Obama would add $6.5 trillion to the United States’ national debt, more than all previous presidents, from George Washington to George W. Bush, combined. 
That is in addition to explicit tax hikes on income, capital gains, and dividends, the implicit ones on energy via cap-and-trade, etc. 
It appears that the Obama strategy is to “stuff the beast” (the mirror image of the tax-cutting “starve the beast” philosophy attributed to some of President Ronald Reagan’s advisers), i.e., to initiate massive spending and hide the true cost from citizens. 
The large deficits will eventually force much higher taxes, such as a national value-added tax similar to those in Europe, or gigantic increases in everyone’s income taxes. 
The Federal Reserve lowered its target federal funds rate to zero before Obama was inaugurated, and initiated many programs to try to revive credit markets, with mixed results (the commercial paper facility has helped, whereas others seem to have gotten off to less sanguine starts). 
The Fed’s independence is a key component of its anti-inflation credibility, and a key test for Obama will be to support the Fed’s efforts to withdraw the liquidity before substantial inflation pressures assert themselves several years from now. 
The Obama administration also seems to be heading toward regulating derivatives and financial institutions deemed too big to fail. 
America does need a clearinghouse for derivatives, and a much higher percentage of derivative trading should take place on exchanges, rather than bilaterally over the counter. 
Any institution that is or could quickly become too big to fail needs to have adequate capital (rising with size), and real-time continuous monitoring of risk, but these measures should be implemented without overbearing micromanagement. 
Unfortunately, the Obama administration’s decision to put the unions ahead of secured debt-holders in the orchestrated Chrysler bankruptcy risks rupturing the basic fabric of credit markets. 
But Treasury Secretary Timothy Geithner’s much-ridiculed bank “stress tests” made sense (although one can argue that sufficiently dire scenarios were not included or that too much was negotiated with the banks, etc.). 
Determining the size of likely losses is necessary to decide whether banks’ retained earnings from profitable ongoing operations and their ability to raise private capital will allow them to work down their toxic assets over time. 
If not, more draconian solutions will be necessary. 
I support Geithner’s plan to cooperate with private investors in dealing with the banks’ toxic assets, because they make better business decisions than government bureaucrats. 
But the Fed’s low-interest, non-recourse loans to buy up toxic assets have not yet caused a stampede of participants. 
Will banks be willing to part with the assets at a low enough price to attract private investment? 
And would doing so force larger write-downs, requiring banks, in turn, to ration credit – and thus harming the economy? 
Obama has been better than feared on international trade. 
He was famously protectionist during the primaries, declaring he would unilaterally rewrite NAFTA. 
But, while he has continued his softer tone since the election, he has not even bothered to ask for fast-track trade-promotion authority, let alone try to pump new life into the Doha Round of global trade talks. 
Obama is getting a large part of his agenda. 
Unfortunately, the numbers don’t add up and he is laying twin time bombs with the explosion of federal government debt and inefficient government micromanagement of the economy. 
His call for immense deficits even once the economy is back to normal, funds are returned from the financial bailouts, and the US is out of Iraq – is simply irresponsible. 
The American economy will likely return to growth late this year and next, especially with all the monetary and fiscal stimulus (growth would have initially been slower and then much stronger without it), but it will still be an economy on a government lifeline. 
The big questions left unanswered are how far Obama wants to push the US toward a European-style social-welfare state, how he intends to pay for it, and how much long-term economic damage will result? 

Grandmasters and Global Growth 
CAMBRIDGE – As the global economy limps out of the last decade and enters a new one in 2010, what will be the next big driver of global growth? 
Here’s betting that the “teens” is a decade in which artificial intelligence hits escape velocity, and starts to have an economic impact on par with the emergence of India and China. 
Admittedly, my perspective is heavily colored by events in the world of chess, a game I once played at a professional level and still follow from a distance. 
Though special, computer chess nevertheless offers both a window into silicon evolution and a barometer of how people might adapt to it. 
A little bit of history might help. 
In 1996 and 1997, World Chess Champion Gary Kasparov played a pair of matches against an IBM computer named “Deep Blue.” 
At the time, Kasparov dominated world chess, in the same way that Tiger Woods – at least until recently – has dominated golf. 
In the 1996 match, Deep Blue stunned the champion by beating him in the first game. 
But Kasparov quickly adjusted to exploit the computer’s weakness in long-term strategic planning, where his judgment and intuition seemed to trump the computer’s mechanical counting. 
Unfortunately, the supremely confident Kasparov did not take Deep Blue seriously enough in the 1997 rematch. 
Deep Blue shocked the champion, winning the match 3.5 to 2.5. 
Many commentators have labeled Deep Blue’s triumph one of the most important events of the twentieth century. 
Perhaps Kasparov would have won the rematch had it continued to a full 24 games (then the standard length of world championship matches). 
But, over the next few years, even as humans learned from computers, computers improved at a far faster pace. 
With ever more powerful processors, silicon chess players developed the ability to calculate so far ahead that the distinction between short-term tactical calculations and long-term strategic planning became blurred. 
At the same time, computer programs began to exploit huge databases of games between grandmaster (the highest title in chess), using results from the human games to extrapolate what moves have the highest chances of success. 
Soon, it became clear that even the best human chess players would have little chance to do better than an occasional draw. 
Today, chess programs have become so good that even grandmasters sometimes struggle to understand the logic behind some of their moves. 
In chess magazines, one often sees comments from top players such as “My silicon friend says I should have moved my King instead of my Queen, but I still think I played the best ‘human’ move.” 
It gets worse. 
Many commercially available computer programs can be set to mimic the styles of top grandmasters to an extent that is almost uncanny. 
Indeed, chess programs now come very close to passing the late British mathematician Alan Turing’s ultimate test of artificial intelligence: can a human conversing with the machine tell it is not human? 
I sure can’t. 
Ironically, as computer-aided cheating increasingly pervades chess tournaments (with accusations reaching the highest levels), the main detection device requires using another computer. 
Only a machine can consistently tell what another computer would do in a given position. 
Perhaps if Turing were alive today, he would define artificial intelligence as the inability of a computer to tell whether another machine is human! 
So has all this put chess players out of work? 
Encouragingly, the answer is “not yet.” 
In fact, in some ways, chess is as popular and successful today as at any point in the last few decades. 
Chess lends itself very well to Internet play, and fans can follow top-level tournaments in real time, often with commentary. 
Technology has helped thoroughly globalize chess, with the Indian Vishy Anand now the first Asian world champion, and the handsome young Norwegian Magnus Carlsen having reached rock-star status. 
Man and machine have learned to co-exist, for now. 
Of course, this is a microcosm of the larger changes that we can expect. 
The horrible computerized telephone-answering systems that we all now suffer with might actually improve. 
Imagine, someday you might actually prefer digital to human operators. 
In 50 years, computers might be doing everything from driving taxis to performing routine surgery. 
Sooner than that, artificial intelligence will transform higher learning, potentially making a world-class university education broadly affordable even in poor developing countries. 
And, of course, there are more mundane but crucial uses of artificial intelligence everywhere, from managing the electronics and lighting in our homes to populating “smart grids” for water and electricity, helping monitor these and other systems to reduce waste. 
In short, I do not share the view of many that, after the Internet and the personal computer, it will be a long wait until the next paradigm-shifting innovation. 
Artificial intelligence will provide the boost that keeps the teens rolling. 
So, despite a rough start from the financial crisis (which will still slow global growth this year and next), there is no reason why the new decade has to be an economic flop. 

The Grassroots of Climate Change 
PARIS – The climate-change agreement reached here on December 12 was a rich victory for diplomacy. 
Both the agreement itself and the atmosphere of cooperation that permeated the proceedings represent a sea change from the failed Copenhagen summit in 2009. 
But while we should congratulate world leaders on their success, Paris marks the beginning, not the end, of the road. 
It is now our collective duty to hold our leaders to account and ensure that they turn promises into action – especially in the world’s most vulnerable regions, such as Africa. 
We should applaud China, India, the United States, and the European Union for their pre-Paris pledges on climate action. 
These countries’ commitments created the sense of responsibility, trust, and solidarity that enabled 195 nations not merely to agree on a one-off deal, but to set in motion a series of increasingly ambitious five-year cycles to phase out greenhouse-gas emissions this century. 
This is a clear signal that the carbon era has reached a turning point; as a result, there will be more investment in renewable energy. 
Countries also promised to work harder to protect the world’s most vulnerable, by aiming to limit average global warming to as little as 1.5º Celsius above pre-industrial levels. 
And developed countries pledged at least $100 billion of annual climate finance to help the least developed countries cut their carbon emissions and prepare for climate change. 
For the first time, an international agreement offers the least developed countries funds to cover some of the loss and damage caused by climate shocks. 
But in order to fulfill the Paris agreement, we must ensure that governments keep their promises. 
National emissions targets are voluntary, rather than inscribed in the agreement, so they are not legally binding. 
In hard, practical terms, there is not yet anything specific to slow the extraction of fossil fuels or stop high-polluting countries from using coal for electricity. 
Developed countries made no individual commitments, and the starting year for funding adaptation assistance remains unclear. 
We must keep the pressure on to make sure that the promised climate finance is sufficient to enable the least-developed countries to adapt to present and future climate change. 
All of this must happen urgently. 
The cumulative effect of previous decades of emissions means that there will be no chance for a last-minute solution. 
In Africa, climate change may already be responsible for falling water levels in West African rivers; declining coral reefs in tropical waters; lower fruit production in the Sahel; fewer fish in the Great Lakes region; and the spread of malaria in the Kenyan uplands. 
Without significant cuts in greenhouse-gas emissions, we will see far worse. 
By threatening basic human needs, such as food and water, climate change will be a catalyst for instability, migration, and conflict. 
Africa will pay a heavy price. 
Fortunately, we now know that we can prevent catastrophic climate change while still providing the energy needed to sustain economic growth, create jobs, and lift millions of people out of poverty. 
The many benefits of pursuing a low-carbon development path include not only cleaner air and better energy security, but also the opportunities that arise from decentralized and renewable power. 
These opportunities are particularly crucial for Africa, where more than 620 million people live without electricity. 
The falling cost of solar power, batteries, and LED lighting means that renewable sources can now provide affordable, modern energy. 
In Kenya, for example, Maasai women in Magadi who have been trained to install solar power have brought electricity to 2,000 households in just two years. 
But to realize this economic and social potential, African leaders must combat corruption. 
They must make the management of their utilities more transparent, strengthen regulations, and increase public spending on energy infrastructure. 
Investment and external financing must follow. 
This is not a question of aid, but of fairness, given that Africa contributes so little to global emissions but stands to suffer the most from climate change. 
Investing in low-carbon energy also makes sound business sense: It boosts technology companies and promotes social entrepreneurship globally. 
I am pleased that two initiatives launched in Paris will take us farther down the renewable-energy path. 
Europe and Canada pledged $10 billion toward an ambitious project called the Africa Renewable Energy Initiative, which aims to install ten gigawatts of solar, wind, and geothermal capacity by the end of the decade. 
And France and India launched the International Solar Alliance to raise more than $1 trillion by 2030 to deploy solar power in more than 100 developing countries. 
The Paris agreement has drawn the first broad strokes of a solution to climate change. 
But until its targets are translated into action, the world’s least-developed countries may not be convinced that the developed countries are serious about equity – or “climate justice.” 
For Africa, 2015 must be a turning point. 
If the world’s citizens hold their leaders to account for the targets they have set, it will be. 
Quite simply, the historic responsibility for the planet’s future rests on the shoulders of us all. 

Grassroots Democracy in China 
Critical assessments of grassroots democracy in rural China are hard to make: have the reforms that have been undertaken created a genuine democracy that represents a significant step toward participatory government? 
If so, can they be implemented beyond the village level? 
Where does China's Communist government fit in? 
What role will elected village leaders play in the future? 
In 1987, the Chinese government quietly launched a program of self-governance at the village level. 
Originally intended as a means to liberalize agriculture and stimulate economic growth by allowing villagers to freely decide what they would produce, reform-minded officials of the Ministry of Civil Affairs soon introduced local elections that allowed rural farmers to elect local leaders. 
Gradually, local elections spread to nearly every village and a simple decentralized system of checks and balances between the village committee chief and the village assembly was established. 
Rural farmers found themselves empowered to organize themselves, criticize some authorities and even dismiss their village chief. 
However, democratization has been a local phenomenon limited to the village level. 
As a country, China remains an authoritarian regime and decision-making is highly centralized. 
Nonetheless, the emergence of grassroots democracy transformed village power structures by returning political power to the will of the people. 
As local elections and the right to freely nominate candidates becomes increasingly institutionalized, the centralized power structure of the Party will be slowly eroded by the people's growing desire for self-determination. 
True to its name, grassroots democracy has planted the seeds for future change. 
Certainly, this scenario is at odds with the Chinese Communist Party. 
In recent years, the Party made determined efforts to weaken village democracy while preserving the fiscal benefits of rural economic liberalization. 
One strategy for neutralizing local politics can be seen in Party attempts to exert greater influence through the installation of Party officials as heads of village committees. 
A second method has been to actively interfere and encroach upon village government affairs through higher-level township officials. 
Such strategies complicate rural politics by producing a highly contentious dual power structure that pits party secretaries and village committee chiefs against one another. 
However, despite government attempts at control, the proliferation of rural elections has already laid a solid groundwork for a nation-wide transformation. 
The establishment of local electoral systems and self-governance has raised democratic consciousness, which will serve as a powerful foundation for future demands for ever higher levels of democratization. 
Already, township elections are widely welcomed as a mechanism to stamp out rampant political corruption, as well as reduce conflicts between peasants and the government. 
Three years ago, under the direction of liberal local cadres, the town of Buyan, in Sichuan Province, held the first-ever direct election of a township chief, the next level of governance above the village. 
Numerous towns have attempted to follow with elections of their own of this type. 
Demand for township elections is strong, but high-level Party cadres fear a possible further loss of control if townships go the way of villages in terms of elections. 
In response, the Chinese government prohibited township level direct elections earlier this year. 
Despite this disappointing setback, prospects for higher-level democratization within China will continue. 
Grassroots democracy may at present be limited to the village level, but the Chinese people have tasted democracy and self-governance for the first time and like it. 
Although the future of local elections and grassroots democracy may appear precarious in the face of government opposition, the experience of democratic empowerment, and the expression of popular will this has allowed, has left a deep and indelible impression on ordinary rural Chinese people. 
Political rights and local elections may be at the mercy of the Party, but the historical memory of millions of people will not so easily be erased. 
Grassroots democracy may be momentarily suppressed, but once the seeds have been planted, the roots can only grow deeper and deeper before an inevitable bloom. 
Until that time, village level democracy will continue to inform and educate individual rural Chinese on the fundamental aspects of participatory government. 
Calls for political reform are strong at all levels in China. 
Consequently, it is only a matter of time before calls for democratic reform spread to cities and urban communities. 
The question is no longer ``if'' but ``when.'' 
The political future of China, and arguably the survival of the Chinese Communist Party, rests on whether the Chinese government chooses to wisely continue to scatter and cultivate the seeds of democracy or foolishly attempt to thwart their inexorable growth. 
The Party must make a choice, for the seeds of democracy have been planted, and the People are growing ever hungrier for more than a mere taste. 


Revanchist China 
SYDNEY – In a speech at the Center for Strategic and International Studies in Washington, DC, on February 22, Japanese Prime Minister Shinzo Abe informed the audience of officials, experts, and journalists that Japan is “back” and will not stand down in its ongoing sovereignty dispute with China over the Senkaku/Diaoyu Islands. 
With Chinese provocations on the rise, US President Barack Obama, Abe’s host, appealed for calm and restraint on both sides. 
Japan is likely to accede – grudgingly – to America’s request, as it remains dependent on its alliance with the US for its security. 
But it will be much more difficult to persuade China that it should stand down. 
China’s assertiveness over its sovereignty claim reflects more than a desire to exploit seabed resources, or to gain a widened strategic gateway into the western Pacific. 
It is also about national renewal and rejuvenation – the core of the Chinese Communist Party’s raison d’être. 
Turning away from a fight with its former occupier and historical rival would be a step backward in this six-decade-long quest. 
The idea of Chinese renewal or rejuvenation was popularized by then-Premier Zhao Ziyang in the late 1980’s, and frequently promoted by Presidents Jiang Zemin and Hu Jintao. 
Most recently, incoming President Xi Jinping, visiting the National Museum of China’s “Road Toward Renewal” exhibition, pledged to continue the “great renewal of the Chinese nation.” 
What does “renewal” or “rejuvenation” mean to the Chinese? 
All nations – great and small – embody a combination of historical fact and myth. 
In this case, the CCP’s view of rejuvenation is built on the belief that the zenith of Chinese power under the Ming and Qing dynasties represents the natural, just, and permanent state of affairs for a 5,000-year-old civilization. 
When Mao Zedong took power in 1949, his immediate goal was to re-establish the “greater China” of the Qing Dynasty (1644-1912), insisting that the Manchu-led empire was the permanent and enduring China. 
But, while the assault on the Qing Dynasty by foreign powers is a historical fact, the notion that there has been one enduring China struggling against avaricious outsiders across several millennia is false and self-serving. 
Mao achieved his goal following the so-called peaceful liberation of the East Turkestan Republic (now Xinjiang) in 1949 and the invasion of Tibet in 1950, which promptly increased China’s size by more than one-third. 
And every CCP leader since has carried forward his vision of a greater China, adjusting and expanding it as the country’s power grows. 
For example, China showed little interest in the Senkaku/Diaoyu Islands prior to 1968 – the year a geographical study pointed to vast oil reserves beneath the seabed. 
The same can be said for China’s growing stridency with respect to its claims in the South China Sea. 
In 2009, relying heavily on a dubious historical claim, China formally tabled its “nine-dotted line” map to the United Nations Commission on the Limits of the Continental Shelf, and has since referred to almost all of the South China Sea as being under its “indisputable sovereignty.” 
Having dominated East and Southeast Asia for all but the last two centuries of the past two millennia, China is chafing at the current US-led regional order of sovereign states, in which even the smallest enjoys the same rights, privileges, and protection as the largest. 
Modern China has benefited enormously from this arrangement; nonetheless, there is keen resentment that the Chinese civilization-state’s vast achievements over several thousand years offer China no special status. 
To a people imbued with a deep sense of superior moral worth, historical achievement, and victimization by foreign powers, this state of affairs is unjust and unnatural. 
It follows that pulling back from any territorial dispute with smaller and inferior states would be seen as a humiliating defeat, rather than a step toward ensuring long-term regional stability. 
Moreover, an expanding view of greater China implies that a resolution of the dispute over the Senkaku/Diaoyu Islands in China’s favor would be likely to embolden rather than satisfy its ambitions. 
Making good on its claim to the South China Sea could be next. 
As Obama and Abe forge a common strategy aimed at helping to manage China’s rise peacefully, they must understand that China’s conception of renewal seeks to resurrect a glorious past, and that this implies revision, not affirmation, of the existing regional order. 
This means that they will have to limit China’s strategic and military options, even if they cannot constrain its ambitions. 

Europe’s Last Act? 
NEW YORK – European Union leaders continue to play a game of brinkmanship with the Greek government. 
Greece has met its creditors’ demands far more than halfway. 
Yet Germany and Greece’s other creditors continue to demand that the country sign on to a program that has proven to be a failure, and that few economists ever thought could, would, or should be implemented. 
The swing in Greece’s fiscal position from a large primary deficit to a surplus was almost unprecedented, but the demand that the country achieve a primary surplus of 4.5% of GDP was unconscionable. 
Unfortunately, at the time that the “troika” – the European Commission, the European Central Bank, and the International Monetary Fund – first included this irresponsible demand in the international financial program for Greece, the country’s authorities had no choice but to accede to it. 
The folly of continuing to pursue this program is particularly acute now, given the 25% decline in GDP that Greece has endured since the beginning of the crisis. 
The troika badly misjudged the macroeconomic effects of the program that they imposed. According to their published forecasts, they believed that, by cutting wages and accepting other austerity measures, Greek exports would increase and the economy would quickly return to growth. 
They also believed that the first debt restructuring would lead to debt sustainability. 
The troika’s forecasts have been wrong, and repeatedly so. 
And not by a little, but by an enormous amount. 
Greece’s voters were right to demand a change in course, and their government is right to refuse to sign on to a deeply flawed program. 
Having said that, there is room for a deal: Greece has made clear its willingness to engage in continued reforms, and has welcomed Europe’s help in implementing some of them. 
A dose of reality on the part of Greece’s creditors – about what is achievable, and about the macroeconomic consequences of different fiscal and structural reforms – could provide the basis of an agreement that would be good not only for Greece, but for all of Europe. 
Some in Europe, especially in Germany, seem nonchalant about a Greek exit from the eurozone. 
The market has, they claim, already “priced in” such a rupture. 
Some even suggest that it would be good for the monetary union. 
I believe that such views significantly underestimate both the current and future risks involved. 
A similar degree of complacency was evident in the United States before the collapse of Lehman Brothers in September 2008. 
The fragility of America’s banks had been known for a long time – at least since the bankruptcy of Bear Stearns the previous March. 
Yet, given the lack of transparency (owing in part to weak regulation), both markets and policymakers did not fully appreciate the linkages among financial institutions. 
Indeed, the world’s financial system is still feeling the aftershocks of the Lehman collapse. 
And banks remain non-transparent, and thus at risk. 
We still don’t know the full extent of linkages among financial institutions, including those arising from non-transparent derivatives and credit default swaps. 
In Europe, we can already see some of the consequences of inadequate regulation and the flawed design of the eurozone itself. 
We know that the structure of the eurozone encourages divergence, not convergence: as capital and talented people leave crisis-hit economies, these countries become less able to repay their debts. 
As markets grasp that a vicious downward spiral is structurally embedded in the euro, the consequences for the next crisis become profound. 
And another crisis in inevitable: it is in the very nature of capitalism. 
ECB President Mario Draghi’s confidence trick, in the form of his declaration in 2012 that the monetary authorities would do “whatever it takes” to preserve the euro, has worked so far. 
But the knowledge that the euro is not a binding commitment among its members will make it far less likely to work the next time. 
Bond yields could spike, and no amount of reassurance by the ECB and Europe’s leaders would suffice to bring them down from stratospheric levels, because the world now knows that they will not do “whatever it takes.” 
As the example of Greece has shown, they will do only what short-sighted electoral politics demands. 
The most important consequence, I fear, is the weakening of European solidarity. 
The euro was supposed to strengthen it. 
Instead, it has had the opposite effect. 
It is not in the interest of Europe – or the world – to have a country on Europe’s periphery alienated from its neighbors, especially now, when geopolitical instability is already so evident. 
The neighboring Middle East is in turmoil; the West is attempting to contain a newly aggressive Russia; and China, already the world’s largest source of savings, the largest trading country, and the largest overall economy (in terms of purchasing power parity), is confronting the West with new economic and strategic realities. 
This is no time for European disunion. 
Europe’s leaders viewed themselves as visionaries when they created the euro. 
They thought they were looking beyond the short-term demands that usually preoccupy political leaders. 
Unfortunately, their understanding of economics fell short of their ambition; and the politics of the moment did not permit the creation of the institutional framework that might have enabled the euro to work as intended. 
Although the single currency was supposed to bring unprecedented prosperity, it is difficult to detect a significant positive effect for the eurozone as a whole in the period before the crisis. 
In the period since, the adverse effects have been enormous. 
The future of Europe and the euro now depends on whether the eurozone’s political leaders can combine a modicum of economic understanding with a visionary sense of, and concern for, European solidarity. 
We are likely to begin finding out the answer to that existential question in the next few weeks. 

Europe’s Greek Failure 
BRUSSELS – Narratives matter, especially when they are intertwined with hard interests. 
As Greece and its creditors court catastrophe, we are getting a clear picture of how conflicting narratives can lead to a lose-lose result. 
The facts are indisputable. 
In early 2010, when the Greek government could no longer finance itself, it turned to its European partners and the International Monetary Fund for financial support. 
And they delivered: not only did other eurozone countries issue loans to Greece, but the IMF provided its largest-ever loan to the country. 
Later, Greece received even more support through the eurozone’s bailout funds. 
The result was hundreds of billions of euros worth of assistance. 
But, as time progressed, Greece and its creditors came to view these facts very differently. 
As Greece’s economic situation deteriorated, its citizens got the sense that the loans were not really intended to help them, but rather to bail out German and French banks. 
With this narrative, Greeks could avoid admitting the role of their own government’s policy mistakes in thrusting them into recession. 
Greece’s creditors, by contrast, felt that they had generously saved a profligate country from bankruptcy. 
This narrative allowed policymakers in Germany to disregard the fact that their country’s banks had financed Greek borrowing for too long. 
Both narratives contain a large amount of truth, but conveniently overlook some important facts. 
For instance, a substantial share of the loans given to Greece until early 2012 was indeed used to pay off maturing debt. 
But it is likely that the holders of the debt were no longer French or German banks – who for the most part would have been unable to bear the uncertainty that preceded the 2012 bailout and haircut on Greek debt. 
By the time the eurozone governments intervened decisively, most French and German banks had largely unloaded their holdings at a loss to hedge funds and other investors with a greater appetite for risk. 
Whatever debt they had held onto lost more than half its value in the haircut. 
Given this, it cannot be said that French and German banks did not suffer losses. 
Similarly, the creditor countries were right that they had helped Greece, a country that had undeniably overspent for years. 
Their financial assistance allowed Greece to reduce its fiscal deficits more slowly than if it had simply gone bankrupt in 2010, as it enabled the country to remain connected to financial markets. 
In the first quarter of last year, Greece actually experienced a slight uptick in growth and a small decline in unemployment. 
What the creditors overlooked was that, over time, the pain of austerity began – in the minds of many Greeks – to outweigh the benefits of their assistance. 
Until a few months ago, it still looked as if Greece could achieve a primary surplus, albeit a small one, this year. 
When the country turned to its creditors for help, it was only because it could not cover some large payments on maturing loans. 
Greece had ceased to be a “bottomless pit.” 
With a bit of financial engineering, Greece’s creditors could have postponed some of the payments the country owed this year – payments that, it should be noted, everyone knew it would not be able to repay at this stage – and enabled it to continue its gradual recovery. 
Instead, these clashing narratives created a deleterious spiral, fanning the flames of animosity and leading to the election of a left-wing government in Greece with a mandate to oppose austerity – with disastrous results for both sides. 
Rather than help Greece make its payments, the creditors reacted by imposing tough conditions for a new loan that would be used only to repay debts that they themselves held – a point that Greek Prime Minister Alexis Tsipras emphasized in his last proposal. 
And yet, blaming the creditors for their “punitive” conditions, as Greek negotiators have done, would also be a mistake, for this simplistic narrative too obscures a complicated truth. 
Right before the talks were abruptly cut off for Greece to hold its referendum, the two sides had agreed on fiscal targets for Greece; all that was left was to determine how the targets should be reached. 
The Greek government wanted to raise some taxes. 
Its creditors believed that this approach would stifle growth even more, so they advocated increasing the tax base, such as by eliminating the lower value-added tax rates enjoyed by Greek islands, instead. 
Though the creditors’ logic was sound and their intentions laudable, the Greek side believed that such a condition would amount to an affront to their country’s sovereignty. 
With that, their narrative morphed into one of national pride. 
It was a classic “prisoner’s dilemma.” 
Both sides have known throughout the tortuous negotiations of recent months that failure to reach an agreement would benefit no one. 
Greece’s economy would contract even further, and its creditors would have to accept even larger write-offs. 
But the two sides have remained locked in their respective narratives – narratives that the recent cutoff of negotiations and hastily arranged referendum have reinforced. 
Now, the Greek electorate is rejecting the creditors’ demands in the name of national pride, democracy, and sovereignty; the creditors are angry not only at their attitude, but also at their government’s unreliability. 
Saving Greece was always going to be difficult, given its previous fiscal excesses and weak economy. 
But last year, it seemed that success was within reach – until the clash of narratives derailed the progress the two sides had made. 
This highlights a larger problem: the European Union lacks a unifying narrative strong enough to prevent the emergence of conflicting – and highly destructive – narratives within its borders. 
In this sense, the failure to save Greece amounts to a failure of Europe. 

Greece’s Imperfect Imperative 
LONDON – Greece and its creditors are now enacting a deal that provides financial support in exchange for wide-ranging reforms. 
Although reservations about the agreement abound, political conditions did not permit a better one. 
But the deal can – and must – serve as the basis for saving Greece and the eurozone. 
For the plan to work, Greek Prime Minister Alexis Tsipras must show real commitment to a reform program in which neither he nor many Greek citizens believe. 
And he must forge an alliance with Greece’s pro-European parties, because only a united government will be able to deliver. 
The creditors must find the money to fund the bailout. And the International Monetary Fund must agree with the Eurogroup on how to restore debt sustainability in Greece, a precondition for the country to regain access to capital markets. 
In this effort, a critical distinction must be made: though Greece has committed to deep and rapid reform, it must not be forced into hurried fiscal consolidation. 
Indeed, such an approach could undermine urgently needed structural reforms, not least by destroying the political capital required to enact them. 
Unfortunately, the recent agreement includes unrealistic proposals for fiscal adjustment. 
Before Greek banks closed and capital controls were imposed in late June, the European Commission put the primary budget deficit for this year at €4-6 billion ($4.3-6.5 billion), or 2-3% of GDP. 
Now, it looks like the primary deficit (which excludes interest payments) could reach 6% of GDP, with GDP falling by 4%. 
Yet the new deal anticipates that Greece will make up for the year’s fiscal shortfall in just five months. 
As Greece and other eurozone countries have already learned, attempting to rush fiscal adjustment increases the debt burden, as the liquidity squeeze and concomitant uncertainty undermine output and reform efforts. 
For example, one of the key initiatives to address the fiscal shortfall is an increase in the value-added tax to 23% for almost all goods and services. 
But with VAT evasion in Greece as high as 50%, the hike will place firms that pay, which tend to be larger and more efficient, at an even greater disadvantage relative to firms that do not. 
Greece should therefore focus first on building the legal and technical infrastructure to combat tax evasion. 
Greece’s government will find it hard to adhere to the new program unless its fiscal targets make sense. 
Though it is politically unrealistic to renegotiate the deal at this point, a serious analysis of the necessary fiscal adjustment, possibly arbitrated by independent experts, is needed. 
The IMF’s latest analysis of Greece’s debt sustainability reinforces this assessment. 
Despite pressure from Germany and other countries to participate in the new bailout program, the Fund will not get involved unless it judges Greece’s debt to be sustainable. 
That means making the economy’s debt stocks and fiscal flows consistent, with the right combination of tough but feasible fiscal targets and debt relief. 
Fiscal discipline should not take priority over the important structural reforms included in the new deal, particularly measures to overhaul pensions, the legal system, product markets, public administration, and the judiciary. 
Implementation will be very difficult even without excessively tight fiscal targets; with them, it may be impossible. 
Previous attempts at pension reform, for example, have been partial and indecisive, with exceptions and grace periods undermining their effectiveness. 
Similarly, though attempts to reform the code of civil procedure, aimed at improving the judicial system’s efficiency, began in 2011, little progress has been made, owing largely to the government’s failure to face down opposition from lawyers’ associations, which stand to lose their excessive fees from useless procedures. 
And, although the groundwork has been laid for product-market reforms, no preparations for serious public-administration reform have been made. 
The key to overcoming these challenges is for the Greek people to take ownership of the reforms, so that the public interest can prevail over vested interests. 
But that, too, will be difficult, given the widespread view that the reforms are being imposed on Greece by its creditors. 
Tsipras must lead the way by building a broad consensus. 
The details of the reform legislation are important. 
Rather than attempting to meet unfeasible deadlines, legislators should proceed with deliberate speed. 
Meanwhile, Greek banks – which, given their huge volume of non-performing loans, are now more likely to be insolvent than illiquid – will require massive recapitalization, funded by the European Stability Mechanism, not the Greek state, in order to break the bank-sovereign link. 
The operation might involve restructuring as well. 
In this effort, there must be no bail-in of depositors, which would have damaging social consequences, or Greek state ownership of the banks, which would entrench clientelism in the financial system. 
The ESM would later sell the banks in open auctions to recoup its investment. 
Many in Greece, as well as some outsiders, have called the new agreement “neocolonialist oppression.” And, indeed, Greece’s humiliation in the negotiations evoked memories of the Indonesian president’s treatment by the IMF during the Asian financial crisis of 1997. 
(Some creditors feel that they are the true victims, exploited by Greek counterparts who never intended to fulfill their promises.) 
But the Greeks must put aside these emotional responses and recognize the need for many of the proposed reforms. 
Greece’s failure to implement them has allowed the clientelism, oligarchy, corruption, and tax evasion underpinning its economic and political dysfunction to continue practically unfettered. 
The alternative is a Greek exit from the eurozone. 
(German Finance Minister Wolfgang Schäuble’s suggestion that Greece can just take a “time out” is a fiction.) 
Economists who pretend that this would be anything less than an economic and political catastrophe for Greece should look closely at the structure of Greek trade, the anemic response of exports to the already huge internal devaluation, and company and household balance sheets. 
Some would welcome the damage this would do to European unity; we would not. 
The recent agreement is far from ideal. 
But Greece and its creditors must make it work. 

A Way Out for Greece 
QUITO – The Greek crisis is a tragedy for the country and a danger for the world economy. 
Germany is demanding that Greece continue to service its debts in full, even though Greece is clearly broke and the International Monetary Fund has noted the need for debt relief. 
The collision of reality (Greece’s insolvency) with politics (Germany’s demands) was bound to create a disaster. 
And, indeed, it has: the shocking collapse this week of the Greek banking system. 
Yet there still is a way out of this mess. 
Greece’s debt should be cut sharply, and the country should remain within the eurozone. 
In negotiations with its creditors this spring, Greece recognized this, insisting that its debt be reduced. 
Germany refused. 
Though the United States and the IMF privately sided with Greece, Germany prevailed, as creditors usually do. 
Yet creditors sometimes prevail to their own detriment; by pushing the debtor to the breaking point, they end up bringing about a complete default. 
Germany’s mistake this past week was to push the Greek economy – already in conditions rivaling those of the Great Depression – into a complete financial collapse. 
German Finance Minister Wolfgang Schäuble has a clear negotiating strategy, aimed at getting Greece to agree to leave the eurozone. 
Unfortunately for him, Greece does not want to exit, and it cannot be forced to do so under the treaties governing the European Union. 
What Greece wants is to remain in the eurozone, with a lower debt burden – a position that is both economically astute and protected by treaty. 
Indeed, a euro exit would be remarkably costly for Greece, and would almost certainly create political and social chaos – and perhaps even hyperinflation – in the heart of Europe. 
The value of Greek residents’ savings would be slashed, as euros were suddenly converted into New Drachmas. 
The middle class would be eviscerated. 
And the currency conversion would not save the country one cent with regard to its external debt, which would, of course, remain denominated in euros. 
Still, Greece’s debt burden is unsustainable. 
This week, Greece defaulted on its payments to the IMF, rightly choosing pensions over debt service. 
The country’s creditors should now negotiate a consensual debt reduction through some combination of lower (and fixed) interest rates, reduced face value of debt, and very long maturities. 
There are plenty of precedents for such a course. 
Sovereign debts have been restructured hundreds, perhaps thousands, of times – including for Germany. 
In fact, hardline demands by the country’s US government creditors after World War I contributed to deep financial instability in Germany and other parts of Europe, and indirectly to the rise of Adolf Hitler in 1933. 
After World War II, however, Germany was the recipient of vastly wiser concessions by the US government, culminating in consensual debt relief in 1953, an action that greatly benefitted Germany and the world. 
Yet Germany has failed to learn the lessons of its own history. 
I propose a four-step path out of the Greek crisis. 
First, I recommend that the Greek people give a resounding “No” to the creditors in the referendum on their demands this weekend. 
Second, Greece should continue to withhold service on its external debts to official creditors in advance of a consensual debt restructuring later this year. 
Given its great depression, Greece should use its savings to pay pensioners, provide food relief, make crucial infrastructure repairs, and direct liquidity toward the banking system. 
Third, Prime Minister Alexis Tsipras must use his persuasive powers to convince the public, in the style of US President Franklin D. Roosevelt, that the only thing they have to fear is fear itself. 
Specifically, the government should make clear to all Greeks that their euro deposits are safe; that the country will remain within the eurozone (despite the false claims by some members of the Eurogroup that a no vote means a Greek exit); and that its banks will reopen immediately after the referendum. 
Finally, Greece and Germany need to come to a rapprochement soon after the referendum and agree to a package of economic reforms and debt relief. 
No country – including Greece – should expect to be offered debt relief on a silver platter; relief must be earned and justified by real reforms that restore growth, to the benefit of both debtor and creditor. 
And yet, a corpse cannot carry out reforms. 
That is why debt relief and reforms must be offered together, not reforms “first” with some vague promises that debt relief will come in some unspecified amount at some unspecified time in the future (as some in Europe have said to Greece). 
To be sure, in the Greek debacle, both sides have made countless mistakes, misjudgments, and misdeeds over the last decade, and even before. 
A country does not reach Greece’s parlous state without a generation of egregious mismanagement. 
But nor does a country go bankrupt without serious mistakes by its creditors – first in lending too much money, and then in demanding excessive repayments to the point of the debtor’s collapse. 
With both sides at fault, it is important for them not to lose the future by squabbling endlessly over the past. 
Easing Greece’s debt burden while keeping the country within the eurozone is the correct and achievable path out of the crisis, and it can be accomplished easily through a mutual accord between Germany and Greece, to which the rest of Europe will subscribe. 
The result would be a win not only for those countries, but also for the world economy. 

A New Deal for Greece 
ATHENS – Three months of negotiations between the Greek government and our European and international partners have brought about much convergence on the steps needed to overcome years of economic crisis and to bring about sustained recovery in Greece. 
But they have not yet produced a deal. 
Why? 
What steps are needed to produce a viable, mutually agreed reform agenda? 
We and our partners already agree on much. 
Greece’s tax system needs to be revamped, and the revenue authorities must be freed from political and corporate influence. 
The pension system is ailing. 
The economy’s credit circuits are broken. 
The labor market has been devastated by the crisis and is deeply segmented, with productivity growth stalled. 
Public administration is in urgent need of modernization, and public resources must be used more efficiently. 
Overwhelming obstacles block the formation of new companies. 
Competition in product markets is far too circumscribed. 
And inequality has reached outrageous levels, preventing society from uniting behind essential reforms. 
This consensus aside, agreement on a new development model for Greece requires overcoming two hurdles. 
First, we must concur on how to approach Greece’s fiscal consolidation. 
Second, we need a comprehensive, commonly agreed reform agenda that will underpin that consolidation path and inspire the confidence of Greek society. 
Beginning with fiscal consolidation, the issue at hand concerns the method. 
The “troika” institutions (the European Commission, the European Central Bank, and the International Monetary Fund) have, over the years, relied on a process of backward induction: They set a date (say, the year 2020) and a target for the ratio of nominal debt to national income (say, 120%) that must be achieved before money markets are deemed ready to lend to Greece at reasonable rates. 
Then, under arbitrary assumptions regarding growth rates, inflation, privatization receipts, and so forth, they compute what primary surpluses are necessary in every year, working backward to the present. 
The result of this method, in our government’s opinion, is an “austerity trap.” 
When fiscal consolidation turns on a predetermined debt ratio to be achieved at a predetermined point in the future, the primary surpluses needed to hit those targets are such that the effect on the private sector undermines the assumed growth rates and thus derails the planned fiscal path. 
Indeed, this is precisely why previous fiscal-consolidation plans for Greece missed their targets so spectacularly. 
Our government’s position is that backward induction should be ditched. 
Instead, we should map out a forward-looking plan based on reasonable assumptions about the primary surpluses consistent with the rates of output growth, net investment, and export expansion that can stabilize Greece’s economy and debt ratio. 
If this means that the debt-to-GDP ratio will be higher than 120% in 2020, we devise smart ways to rationalize, re-profile, or restructure the debt – keeping in mind the aim of maximizing the effective present value that will be returned to Greece’s creditors. 
Besides convincing the troika that our debt sustainability analysis should avoid the austerity trap, we must overcome the second hurdle: the “reform trap.” 
The previous reform program, which our partners are so adamant should not be “rolled back” by our government, was founded on internal devaluation, wage and pension cuts, loss of labor protections, and price-maximizing privatization of public assets. 
Our partners believe that, given time, this agenda will work. 
If wages fall further, employment will rise. 
The way to cure an ailing pension system is to cut pensions. 
And privatizations should aim at higher sale prices to pay off debt that many (privately) agree is unsustainable. 
By contrast, our government believes that this program has failed, leaving the population weary of reform. 
The best evidence of this failure is that, despite a huge drop in wages and costs, export growth has been flat (the elimination of the current-account deficit being due exclusively to the collapse of imports). 
Additional wage cuts will not help export-oriented companies, which are mired in a credit crunch. 
And further cuts in pensions will not address the true causes of the pension system’s troubles (low employment and vast undeclared labor). 
Such measures will merely cause further damage to Greece’s already-stressed social fabric, rendering it incapable of providing the support that our reform agenda desperately needs. 
The current disagreements with our partners are not unbridgeable. 
Our government is eager to rationalize the pension system (for example, by limiting early retirement), proceed with partial privatization of public assets, address the non-performing loans that are clogging the economy’s credit circuits, create a fully independent tax commission, and boost entrepreneurship. 
The differences that remain concern how we understand the relationships between the various reforms and the macro environment. 
None of this means that common ground cannot be achieved immediately. 
The Greek government wants a fiscal-consolidation path that makes sense, and we want reforms that all sides believe are important. 
Our task is to convince our partners that our undertakings are strategic, rather than tactical, and that our logic is sound. 
Their task is to let go of an approach that has failed. 

A New Deal for Debt Overhangs? 
CAMBRIDGE – The International Monetary Fund’s acknowledgement that Greece’s debt is unsustainable could prove to be a watershed moment for the global financial system. 
Clearly, heterodox policies to deal with high debt burdens need to be taken more seriously, even in some advanced countries. 
Ever since the onset of the Greek crisis, there have been basically three schools of thought. 
First, there is the view of the so-called troika (the European Commission, the European Central Bank, and the IMF), which holds that the eurozone’s debt-distressed periphery (Greece, Ireland, Portugal, and Spain) requires strong policy discipline to prevent a short-term liquidity crisis from morphing into a long-term insolvency problem. 
The orthodox policy prescription was to extend conventional bridge loans to these countries, thereby giving them time to fix their budget problems and undertake structural reforms aimed at enhancing their long-term growth potential. 
This approach has “worked” in Spain, Ireland, and Portugal, but at the cost of epic recessions. 
Moreover, there is a high risk of relapse in the event of a significant downturn in the global economy. 
The troika policy has, however, failed to stabilize, much less revive, Greece’s economy. 
A second school of thought also portrays the crisis as a pure liquidity problem, but views long-term insolvency as an outside risk at worst. 
The problem is not that the debt of countries on the eurozone’s periphery is too high, but that it has not been allowed to rise nearly high enough. 
This anti-austerity camp believes that even when private markets totally lost confidence in Europe’s periphery, northern Europe could easily have solved the problem by co-signing periphery debt, perhaps under the umbrella of Eurobonds backed ultimately by all (especially German) eurozone taxpayers. 
The periphery countries should then have been permitted not only to roll over their debt, but also to engage in full-on countercyclical fiscal policy for as long as their national governments deemed necessary. 
In other words, for “anti-austerians,” the eurozone suffered a crisis of competence, not a crisis of confidence. 
Never mind that the eurozone has no centralized fiscal authority and only an incomplete banking union. 
Never mind moral-hazard problems or insolvency. 
And never mind growth-enhancing structural reforms. 
All of the debtors will be good for the money in the future, even if they have not always been reliable in the past. 
In any case, faster GDP growth will pay for everything, thanks to high fiscal multipliers. 
Europe passed up a free lunch. 
This is a fully coherent viewpoint, but naive in its unqualified confidence (for example, in the polemical writings of the Nobel laureate economist Paul Krugman). 
As a result, the anti-austerian view masks strong assumptions and risks. 
In fact, piling loans atop already-high debt burdens in the eurozone’s periphery entailed a significant gamble, particularly as the crisis erupted. 
Political corruption, exemplified by the revolving door between Spain’s government and financial sector, was endemic. 
Dual labor markets and product-market monopolies still hobble growth, and oligarchs have disproportionate power to protect their interests. 
In reality, Germany could not have underwritten all of the European periphery’s debt without risking its own solvency and creditworthiness, particularly in the absence of a functioning system of eurozone-wide checks and balances. 
Expansive and open-ended guarantees might have worked, but if they didn’t, the economic rot from the periphery could have spread to the center. 
A third point of view is that, given the massive financial crisis, Europe’s debt problem should have been diagnosed as an insolvency problem from the start, and treated with debt restructuring and forgiveness, aided by moderately elevated inflation and structural reform. 
This has been my viewpoint since the crisis began. 
In Ireland and Spain, private bondholders, not Irish and Spanish taxpayers, should have taken the hit from bank failures. 
In Greece, there should have been faster and larger debt write-downs. 
Of course, national governments would have had to use taxpayer funds to recapitalize northern European banks – especially in France and Germany – that lent too much to the periphery. 
And transfers would have been needed to recapitalize the periphery banks. 
But at least then the public would have understood the reality of the situation, while restructured and recapitalized banks would have been in a position to start lending again. 
Unfortunately, too many policymakers in advanced economies allowed themselves to believe that such heterodox policies are only for emerging markets. 
In fact, advanced countries have resorted to heterodox policies to reduce debt overhangs on many occasions. 
Debt restructuring would have given Europe the reset it needed. 
Yes, there would have been risks, as IMF chief economist Olivier Blanchard has pointed out, but running those risks would have been well worth it. 
So what is the way forward? 
Deeper European integration, stricter equity requirements for banks, and deeper but homegrown structural reforms are certainly key elements of any solution. 
Further aid to the European periphery is still badly needed. 
But, beyond that, Europe’s experience ought to spur a full rethink of the global system for administering sovereign bankruptcies. 
That could mean bringing back older IMF proposals for a sovereign bankruptcy mechanism, or finding ways to institutionalize the Fund’s recent stance on Greek debt. 
There is no free lunch in Europe, and there never was; but there are much better ways to deal with unsustainable debt. 

How Europe’s Band-Aid Ensures Greece’s Bondage 
ATHENS – Greece’s never-ending public-debt saga has come to signify the European Union’s inept handling of its inevitable eurozone crisis. 
Eight years after its bankruptcy, the Greek state’s persistent insolvency remains an embarrassment for Europe’s officialdom. 
That seems to be why, after having declared the euro crisis over in the rest of Europe, the authorities seem determined to declare final victory on the Greek front, too. 
The big moment, it is said, will come in August, when Greece will be pronounced a “normal” European country again. 
Recently, in preparation for the government’s return to the money markets – from which it has been effectively excluded since 2010 – Greece’s public-debt authority has been testing the waters with a long-term bond issue. 
Unfortunately, all the happy talk about impending “debt relief” and a “clean exit” from Greece’s third “bailout” obscures an uglier truth: the country’s debt bondage is being extended to 2060. 
And, by ossifying Greece’s insolvency, while pretending to have overcome it, Europe’s establishment is demonstrating its dogged refusal to address the eurozone’s underlying fault lines. 
This augurs ill for all Europeans. 
For an EU country to be considered “normal,” it should be subject to the scrutiny facing countries that were never bailed out. 
That means the standard twice-yearly checks of compliance with the EU’s Stability and Growth Pact, as performed by the European Commission under the so-called European Semester procedure. 
Nevertheless, for countries like Ireland or Portugal, a tougher “post-program surveillance” procedure was designed following their bailouts: quarterly checks conducted not only by the European Commission but also by the European Central Bank. 
It is plain to see why Greece’s road will be much bumpier than Ireland’s or Portugal’s. 
The ECB had already begun purchasing Irish and Portuguese debt in the secondary markets well before these countries’ bailout exit, as part of its “quantitative easing” program. 
This enabled the Irish and Portuguese governments to issue large quantities of new debt at low interest rates. 
Greece was never included the ECB’s quantitative easing program, for two reasons: its debt burden was too large to service in the long term, even with the help of ECB-sponsored low interest rates, and the ECB was under pressure, mainly from Germany, to wind down the program. 
Moreover, the post-program surveillance procedure does not give the “troika” of official creditors – the European Commission, the ECB, and the International Monetary Fund – the leverage over Greece that they desire. 
In celebrating Greece’s “clean exit,” while retaining its iron grip on the Greek government and withholding debt restructuring, Europe’s establishment is once again displaying its skill at inventing neologisms. 
Until 75% of Greece’s public debt is repaid – in 2060, at the earliest – the country, we are told, will be subject to “enhanced surveillance” (a term with unfortunate echoes of “enhanced interrogation”). 
In practice, this means 42 years of quarterly reviews, during which the European Commission and the ECB “in collaboration with the IMF” may impose new “measures” on Greece (such as austerity, fire sales of public property, and restrictions on organized labor). 
In short, the next two generations of Greeks will grow up with the troika and its “process” (perhaps under a different name) as a permanent fixture of life. 
The celebration of Greece’s return to normality began a few weeks ago with the government’s oversubscribed €3 billion ($3.7 billion) issue of its first seven-year bond in years. 
What the revelers failed to note, however, was that, to borrow that €3 billion on behalf of its creditors, the Greek state added €816 million in interest payments to its debt repayments for 2025. 
Germany’s cost for rolling over the same sum, on the same day, was a mere €63 million. 
Will Greece’s income rise by a similar amount between now and 2025 to make this sustainable? 
The official answer is that debt relief will come soon, paving the way for Greece’s smooth return to the money markets. 
But European officials have ruled out restructuring debt that cannot be repaid. 
What debt relief really means is that repayment will be shifted from 2022-2035 to 2035-2060, with interest added. 
In other words, Greece will gain easier medium-term repayments in exchange of 40 years of debt serfdom. 
Back in 2015, I was pushing for substantive debt restructuring by means of linking the volume of debt and the rate of repayment to the size of Greece’s nominal GDP and its rate of growth, respectively. 
Now, it seems that the idea of nominal GDP-indexing will be revived, but only to determine the extent to which medium-term repayment is pushed into the future. 
Moreover, the easier medium-term payments will be made contingent not only on growth, but also on new “conditionalities” (read: austerity measures) imposed by the (renamed) troika. 
According to the authorities’ propaganda, Greece’s creditors are linking debt repayments to growth. 
In reality, the prospect of recovery will be dealt another blow, because long-term investors will be deterred by the combination of prolonged insolvency and protracted austerity. 
What accounts for this implacable determination to leave the Greek wound festering under a flimsily applied Band-Aid? 
The answer lies in France and Germany, where, a decade after the 2008 financial crash exposed the eurozone’s design flaws, there is still no consensus about how to manage the large-scale insolvencies that are inevitable in a currency union lacking any mechanism to temper financial flows and trade imbalances. 
Greece remains the litmus test of the European establishment’s capacity to rationalize the eurozone, and its people have been sacrificed on the altar of an impasse whose repercussions have long since spilled over to the fragmenting political scenery of Central Europe. 
Something has to give. 
Will it be the establishment’s determination to stick to business as usual? 
Or will it be Europe’s integrity? 

The Threat of Greek Debt Relief 
BERLIN – With Greece’s economic crisis still raging, prominent voices, ranging from Nobel laureate economists like Paul Krugman to officials like US Secretary of the Treasury Jack Lew, are calling for more lenient bailout terms and debt relief. 
Even the International Monetary Fund – which, along with other European lenders, has provided Greece with emergency financing – recently joined that call. 
But could such an approach really be the proverbial silver bullet for Greece’s crisis? 
The short answer is no. 
While Greece’s public debt is undeniably high, and evidence abounds that high debt can hold back economic growth, the country faces even stronger drags on growth, including structural weaknesses and political brinkmanship, that must be addressed first. 
In fact, Greece will likely depend on concessional funding from official sources in the years ahead – funding that is conditional on reforms, not debt ratios. 
Greece’s nominal debt stock will matter only once the country re-enters the debt markets and becomes subject to market, not concessional, borrowing terms. 
In the meantime, Greece must implement the structural reforms needed to restore the country’s long-term growth prospects and thus to strengthen its capacity to repay its creditors without a large nominal debt reduction. 
But there is another critical reason why debt relief is not the answer, and it lies in the political architecture of the European Monetary Union. 
Because the eurozone lacks a strong central governing body, crisis policies emerge from a political process in which each of the 19 member states has veto power. 
For such a complex system to work, eurozone policymakers must be able to trust one another to behave in a particular way – and that requires a common framework of rules and standards. 
A restructuring of Greece’s official debt, despite offering short-term benefits, would weaken that framework in the long run by setting a precedent for exceptions, with other eurozone countries, sooner or later, requesting the same concession. 
In 2013, the extension of Greece’s loan maturities prompted Ireland and Portugal to demand – and receive – comparable extensions, despite their less obvious need. 
Instead of offering concessions, which could create long-term instability in the eurozone, Europe’s leaders must remain committed to creating strong incentives for all member states to maintain prudent fiscal policies capable of reducing public-debt ratios and restoring fiscal buffers against asymmetric shocks to the currency union. 
Only then will the eurozone have a chance of upholding the Lisbon Treaty’s “no bailout” clause. 
Greece may account for less than 2% of eurozone GDP, but the pursuit of shortsighted ad hoc solutions to its problems may set precedents that could bring down the entire monetary union. 
To prevent such an outcome, it is critical that any solution to the Greek crisis reinforces, rather than undermines, the eurozone’s cohesion. 
It is true that Greece has had to undergo painful adjustments to address its deep structural weaknesses, unsustainable public finances, and lack of price competitiveness – adjustments that led to a drop in Greek output. 
But high unemployment and a lack of investment cannot be blamed on the medicine prescribed; they are symptoms of the country’s failure to reform its public administration and to enhance the flexibility of its economy. 
The international debate about how much austerity is appropriate to balance the interests of Greece and its creditors has distracted policymakers for too long. 
It is time to focus on the real imperative: designing and implementing vital structural reforms, at the national and European levels. 
To guide this process, the German Council of Economic Experts, which I chair, has developed a set of reforms – called “Maastricht 2.0” – that would reinforce the rules-based framework that is so essential to the eurozone’s long-term success. 
For example, the banking union needs to be strengthened through an enhanced resolution regime and an integrated financial supervisor, and a sovereign insolvency mechanism should be introduced. 
Underpinning the proposed reforms is the so-called “principle of unity of liability and control,” which demands that both the power to make decisions and liability for their consequences are kept at the same political level, be it national or supranational. 
In other words, if countries want to make their own fiscal decisions independent of their eurozone partners, they cannot expect those partners to step in and save them later. 
To be sure, in recent years, the European institutional framework has undergone major reforms that reflect the principles of “Maastricht 2.0,” such as the need to emphasize national responsibility for public finances and international competitiveness. 
But the reform process remains far from complete. 
There is no denying that short-term measures to address acute problems – such as debt relief for Greece – threaten the eurozone’s long-term stability. 
If the European Monetary Union is to survive and ultimately thrive, its leaders must not be tempted by facile solutions. 

The Lethal Deferral of Greek Debt Restructuring 
ATHENS – The point of restructuring debt is to reduce the volume of new loans needed to salvage an insolvent entity. 
Creditors offer debt relief to get more value back and to extend as little new finance to the insolvent entity as possible. 
Remarkably, Greece’s creditors seem unable to appreciate this sound financial principle. 
Where Greek debt is concerned, a clear pattern has emerged over the past five years. 
It remains unbroken to this day. 
In 2010, Europe and the International Monetary Fund extended loans to the insolvent Greek state equal to 44% of the country’s GDP. 
The very mention of debt restructuring was considered inadmissible and a cause for ridiculing those of us who dared suggest its inevitability. 
In 2012, as the debt-to-GDP ratio skyrocketed, Greece’s private creditors were given a significant 34% haircut. 
At the same time, however, new loans worth 63% of GDP were added to Greece’s national debt. 
A few months later, in November, the Eurogroup (comprising eurozone members’ finance ministers) indicated that debt relief would be finalized by December 2014, once the 2012 program was “successfully” completed and the Greek government’s budget had attained a primary surplus (which excludes interest payments). 
In 2015, however, with the primary surplus achieved, Greece’s creditors refused even to discuss debt relief. 
For five months, negotiations remained at an impasse, culminating in the July 5 referendum in Greece, in which voters overwhelmingly rejected further austerity, and the Greek government’s subsequent surrender, formalized in the July 12 Euro Summit agreement. 
That agreement, which is now the blueprint for Greece’s relationship with the eurozone, perpetuates the five-year-long pattern of placing debt restructuring at the end of a sorry sequence of fiscal tightening, economic contraction, and program failure. 
Indeed, the sequence of the new “bailout” envisaged in the July 12 agreement predictably begins with the adoption – before the end of the month – of harsh tax measures and medium-term fiscal targets equivalent to another bout of stringent austerity. 
Then comes a mid-summer negotiation of another large loan, equivalent to 48% of GDP (the debt-to-GDP ratio is already above 180%). 
Finally, in November, at the earliest, and after the first review of the new program is completed, “the Eurogroup stands ready to consider, if necessary, possible additional measures… aiming at ensuring that gross financing needs remain at a sustainable level.” 
During the negotiations to which I was a party, from January 25 to July 5, I repeatedly suggested to our creditors a series of smart debt swaps. 
The aim was to minimize the amount of new funding required from the European Stability Mechanism and the IMF to refinance Greek debt, and to ensure that Greece would become eligible within 2015 for the European Central Bank’s asset-purchase program (quantitative easing), effectively restoring Greece’s access to capital markets. 
We estimated that no more than €30 billion ($33 billion, or 17% of GDP) of new, ESM-sourced financing would be required, none of which would be needed for the Greek state’s primary budget. 
Our proposals were not rejected. 
Although we had it on good authority that they were technically rigorous and legally sound, they simply were never discussed. 
The political will of the Eurogroup was to ignore our proposals, let the negotiations fail, impose an indefinite bank holiday, and force the Greek government to acquiesce on everything – including a massive new loan that is almost triple the size we had proposed. 
Once again, Greece’s creditors put the cart before the horse, by insisting that the new loan be agreed before any discussion of debt relief. 
As a result, the new loan deemed necessary grew inexorably, as in 2010 and 2012. 
Unsustainable debt is, sooner or later, written down. 
But the precise timing and nature of that write-down makes an enormous difference for a country’s economic prospects. 
And Greece is in the throes of a humanitarian crisis today because the inevitable restructuring of its debt has been used as an excuse for postponing that restructuring ad infinitum. 
As a high-ranking European Commission official once asked me: “Your debt will be cut come hell or high water, so why are you expending precious political capital to insist that we deliver the restructuring now?” 
The answer ought to have been obvious. 
An ex ante debt restructuring that reduces the size of any new loans and renders the debt sustainable before any reforms are implemented stands a good chance of crowding in investment, stabilizing incomes, and setting the stage for recovery. 
In sharp contrast, a debt write-down like Greece’s in 2012, which resulted from a program’s failure, only contributes to maintaining the downward spiral. 
Why do Greece’s creditors refuse to move on debt restructuring before any new loans are negotiated? 
And why do they prefer a much larger new loan package than necessary? 
The answers to these questions cannot be found by discussing sound finance, public or private, for they reside firmly in the realm of power politics. 
Debt is creditor power; and, as Greece has learned the hard way, unsustainable debt turns the creditor into Leviathan. 
Life under it is becoming nasty, brutish and, for many of my compatriots, short. 

Greece’s Two Currencies 
ATHENS – Imagine a depositor in the US state of Arizona being permitted to withdraw only small amounts of cash weekly and facing restrictions on how much money he or she could wire to a bank account in California. 
Such capital controls, if they ever came about, would spell the end of the dollar as a single currency, because such constraints are utterly incompatible with a monetary union. 
Greece today (and Cyprus before it) offers a case study of how capital controls bifurcate a currency and distort business incentives. 
The process is straightforward. 
Once euro deposits are imprisoned within a national banking system, the currency essentially splits in two: bank euros (BE) and paper, or free, euros (FE). 
Suddenly, an informal exchange rate between the two currencies emerges. 
Consider a Greek depositor keen to convert a large sum of BE into FE (say, to pay for medical expenses abroad, or to repay a company debt to a non-Greek entity). 
Assuming such depositors find FE holders willing to purchase their BE, a substantial BE-FE exchange rate emerges, varying with the size of the transaction, BE holders’ relative impatience, and the expected duration of capital controls. 
On August 18, 2015, a few weeks after pulling the plug from Greece’s banks (thus making capital controls inevitable), the European Central Bank and its Greek branch, the Bank of Greece, actually formalized a dual-currency currency regime. 
A government decree stated that “Transfer of the early, partial, or total prepayment of a loan in a credit institution is prohibited, excluding repayment by cash or remittance from abroad.” 
The eurozone authorities thus permitted Greek banks to deny their customers the right to repay loans or mortgages in BE, thereby boosting the effective BE-FE exchange rate. 
And, by continuing to allow payments of tax arrears to be made in BE, while prescribing FE as a separate, harder currency uniquely able to extinguish commercial bank debt, Europe’s authorities acknowledged that Greece now has two euros. 
The real effects of the dual-currency regime on Greece’s economy and society can be gleaned only from the pernicious interaction between the capital controls and the “reforms” (essentially tax hikes, pension reductions, and other contractionary measures) imposed on the country by the eurozone authorities. 
Consider the following beguiling example. 
Greece’s companies fall roughly into two categories. 
In one category are a large number of small firms asphyxiating under the tax office’s demand that they pay in advance, and immediately, 100% of next year’s corporate tax (as estimated by the tax authorities). 
The second group comprises listed companies whose depressed turnover jeopardizes their already diminished share value and their standing with banks, suppliers, and potential customers (all of which are reluctant to sign long-term contracts with an underperforming company). 
The coexistence, in the same depressed economy, of these two types of businesses gives rise to unexpected opportunities for shadowy trades without which countless businesses might close their doors permanently. 
One widespread practice involves two such firms, say, Micro (a small family firm facing a large advance tax payment) and Macro (a publicly traded limited liability company that needs to demonstrate higher turnover than it has). 
Macro agrees to issue invoices for (non-existent) goods or services rendered to Micro, up to, say, €20,000 ($22,000). 
Micro agrees to pay €24,600 into Macro’s bank account (the price plus 23% value-added tax) on the understanding that Macro will reimburse the €20,000 to Micro. 
This way, at a cost of €4,600, Micro reduces its taxable revenue by €24,600, while Macro boosts its turnover figure by €20,000. 
Alas, due to capital controls, Macro cannot reimburse Micro in FE, nor can it wire €20,000 to Micro’s BE bank account (lest they be found out by the authorities). 
So, to seal the deal, Micro and Macro approach a cash-rich vendor. 
This is usually a gas-station owner who is flush with cash at the end of each day and who, for security reasons and in order to pay for his fuel supplies, is obliged to deposit his cash daily at his bank, turning valuable FEs into less valuable BEs. 
The mutually beneficial deal is completed when Macro wires €20,000 in BE to the gas-station owner, who then hands over a smaller sum of FE (cash) to Micro’s owner, pocketing the difference. 
The fact that this informal deal benefits all sides exposes the terrible inefficiency of current fiscal policy (namely, punitive business taxes) and how capital controls magnify it. 
The state collects additional VAT from Micro (at a loss of corporate taxes that Micro cannot pay anyway); 
Macro enjoys the benefits of seemingly higher turnover; and the gas-station owner reduces his losses from converting FE into BE. 
The downside is that economic activity is overstated and, more important, that reform becomes even harder as entrepreneurs internalize the necessity to find new, creative ways of bending the rules. 
The sole purpose of the capital controls imposed on Greece last summer was to force the country’s rebellious government to capitulate to the eurozone’s failed policies. 
But an unintended consequence was the formalization of two parallel (euro-denominated) currencies. 
Combined with the punitive taxation caused by Europe’s refusal to recognize the unsustainability of Greek public debt, the dual-currency regime produces unforeseen incentives for informal transactions in a country that desperately needs to defeat informality. 
The reality of Greece’s two currencies is the most vivid demonstration yet of the fragmentation of Europe’s monetary “union.” 
In comparison, Arizona has never looked so good. 

The Endgame in Greece 
PARIS – After months of wrangling, the showdown between Greece and its European creditors has come down to a standoff over pensions and taxes. 
Greece is refusing to acquiesce to demands by its creditors that it cut payments to the elderly and raise the value-added tax on their medicine and electricity. 
Europe’s demands – ostensibly aimed at ensuring that Greece can service its foreign debt – are petulant, naive, and fundamentally self-destructive. 
In rejecting them, the Greeks are not playing games; they are trying to stay alive. 
Whatever one might say about Greece’s past economic policies, its uncompetitive economy, its decision to join the eurozone, or the errors that European banks made when they provided its government with excessive credit, the country’s economic plight is stark. 
Unemployment stands at 25%. 
Youth unemployment is at 50%. 
Greece’s GDP, moreover, has shrunk by 25% since the start of the crisis in 2009. 
Its government is insolvent. 
Many of its citizens are hungry. 
Conditions in Greece today are reminiscent of those in Germany in 1933. 
Of course, the European Union need not fear the rise of a Greek Hitler, not only because it could easily crush such a regime, but also – and more important – because Greece’s democracy has proved impressively mature throughout the crisis. 
But there is something that the EU should fear: destitution within its borders and the pernicious consequences for the continent’s politics and society. 
Unfortunately, the continent remains split along tribal lines. 
Germans, Finns, Slovaks, and Dutch – among others – have no time for the suffering of Greeks. 
Their political leaders tend to their own, not to Europe in any true sense. 
Relief for Greece is an especially fraught issue in countries where far-right parties are on the rise or center-right governments face popular left-wing opposition. 
To be sure, European politicians are not blind to what is happening in Greece. 
Nor have they been completely passive. 
At the beginning of the crisis, Greece’s European creditors eschewed debt relief and charged punitive interest rates on bailout funds. 
But, as Greeks’ suffering intensified, policymakers pressed private-sector banks and other bondholders to write off most of their claims. 
At each stage of the crisis, they have done only what they believed their national politics would bear – no more. 
In particular, Europe’s politicians are balking at steps that would implicate taxpayers directly. 
The Greek government has asked Europe to swap existing debts with new debts to lock in low interest rates and long maturities. 
It has also requested that interest payments be linked to economic growth. 
(It has notably not asked for cuts in the face value of its debt). 
But debt relief of this sort vis-à-vis European governments or the European Central Bank has been kept off the table. 
Such measures would likely require parliamentary votes in countries across the eurozone, where many governments would face intense public opposition – no matter how obvious the need. 
Rather than confront the political obstacles, Europe’s leaders are hiding behind a mountain of pious, nonsensical rhetoric. 
Some insist that Greece finish its payment program, regardless of the humanitarian and economic consequences – not to mention the failure of all previous Greek governments to meet its terms. 
Others pretend to worry about the moral-hazard implications of debt relief, despite the fact that the country’s private-sector debt has already been written off at EU insistence, and that there are dozens, if not hundreds, of precedents for restructuring the debts of insolvent sovereigns. 
Almost a century ago, at World War I’s end, John Maynard Keynes offered a warning that holds great relevance today. 
Then, as now, creditor countries (mainly the US) were demanding that deeply indebted countries make good on their debts. 
Keynes knew that a tragedy was in the making. 
“Will the discontented peoples of Europe be willing for a generation to come so to order their lives that an appreciable part of their daily produce may be available to meet a foreign payment?” he asked in The Economic Consequences of the Peace. 
“In short, I do not believe that any of these tributes will continue to be paid, at the best, for more than a few years.” 
Several European countries now seem content to force Greece into an outright default and provoke its exit from the euro. 
They believe that the fallout can be contained without panic or contagion. 
That is typical wishful thinking among politicians. 
Indeed, it is the type of heedlessness that led US Treasury Secretary Hank Paulson to let Lehman Brothers fail in September 2008, ostensibly to teach the market a “lesson.” 
Some lesson; we are still digging out from Paulson’s monumental mistake. 
Similarly, Keynes watched in horror as economic policymakers blundered repeatedly in the years following WWI, through the upheavals of the 1920s, and into the Great Depression of the 1930s. 
In 1925, Keynes criticized the insouciance of those “who sit in the top tier of the machine.” 
He argued “that they are immensely rash in their regardlessness, in their vague optimism and comfortable belief that nothing really serious ever happens. 
Nine times out of ten, nothing really serious does happen – merely a little distress to individuals or to groups. 
But we run a risk of the tenth time…” 
Today, Greece’s European creditors seem ready to abandon their solemn pledges on the irrevocability of the euro in order to insist on collecting some crumbs from the country’s pensioners. 
Should they press their demands, forcing Greece to exit, the world will never again trust the euro’s longevity. 
At a minimum, the eurozone’s weaker members will undergo increased market pressures. 
In the worst case, they will be hit by a new vicious circle of panic and bank runs, also derailing the incipient European recovery. 
With Russia testing Europe’s resolve to the east, the timing of Europe’s gamble could not be worse. 
The Greek government is right to have drawn the line. 
It has a responsibility to its citizens. 
The real choice, after all, lies not with Greece, but with Europe. 

A Greek Morality Tale 
NEW YORK – When the euro crisis began a half-decade ago, Keynesian economists predicted that the austerity that was being imposed on Greece and the other crisis countries would fail. 
It would stifle growth and increase unemployment – and even fail to decrease the debt-to-GDP ratio. 
Others – in the European Commission, the European Central Bank, and a few universities – talked of expansionary contractions. 
But even the International Monetary Fund argued that contractions, such as cutbacks in government spending, were just that – contractionary. 
We hardly needed another test. 
Austerity had failed repeatedly, from its early use under US President Herbert Hoover, which turned the stock-market crash into the Great Depression, to the IMF “programs” imposed on East Asia and Latin America in recent decades. 
And yet when Greece got into trouble, it was tried again. 
Greece largely succeeded in following the dictate set by the “troika” (the European Commission the ECB, and the IMF): it converted a primary budget deficit into a primary surplus. 
But the contraction in government spending has been predictably devastating: 25% unemployment, a 22% fall in GDP since 2009, and a 35% increase in the debt-to-GDP ratio. 
And now, with the anti-austerity Syriza party’s overwhelming election victory, Greek voters have declared that they have had enough. 
So, what is to be done? 
First, let us be clear: Greece could be blamed for its troubles if it were the only country where the troika’s medicine failed miserably. 
But Spain had a surplus and a low debt ratio before the crisis, and it, too, is in depression. 
What is needed is not structural reform within Greece and Spain so much as structural reform of the eurozone’s design and a fundamental rethinking of the policy frameworks that have resulted in the monetary union’s spectacularly bad performance. 
Greece has also once again reminded us of how badly the world needs a debt-restructuring framework. 
Excessive debt caused not only the 2008 crisis, but also the East Asia crisis in the 1990s and the Latin American crisis in the 1980s. 
It continues to cause untold suffering in the US, where millions of homeowners have lost their homes, and is now threatening millions more in Poland and elsewhere who took out loans in Swiss francs. 
Given the amount of distress brought about by excessive debt, one might well ask why individuals and countries have repeatedly put themselves into this situation. 
After all, such debts are contracts – that is, voluntary agreements – so creditors are just as responsible for them as debtors. 
In fact, creditors arguably are more responsible: typically, they are sophisticated financial institutions, whereas borrowers frequently are far less attuned to market vicissitudes and the risks associated with different contractual arrangements. 
Indeed, we know that US banks actually preyed on their borrowers, taking advantage of their lack of financial sophistication. 
Every (advanced) country has realized that making capitalism work requires giving individuals a fresh start. 
The debtors’ prisons of the nineteenth century were a failure – inhumane and not exactly helping to ensure repayment. 
What did help was to provide better incentives for good lending, by making creditors more responsible for the consequences of their decisions. 
At the international level, we have not yet created an orderly process for giving countries a fresh start. 
Since even before the 2008 crisis, the United Nations, with the support of almost all of the developing and emerging countries, has been seeking to create such a framework. 
But the US has been adamantly opposed; perhaps it wants to reinstitute debtor prisons for over indebted countries’ officials (if so, space may be opening up at Guantánamo Bay). 
The idea of bringing back debtors’ prisons may seem far-fetched, but it resonates with current talk of moral hazard and accountability. 
There is a fear that if Greece is allowed to restructure its debt, it will simply get itself into trouble again, as will others. 
This is sheer nonsense. 
Does anyone in their right mind think that any country would willingly put itself through what Greece has gone through, just to get a free ride from its creditors? 
If there is a moral hazard, it is on the part of the lenders – especially in the private sector – who have been bailed out repeatedly. 
If Europe has allowed these debts to move from the private sector to the public sector – a well-established pattern over the past half-century – it is Europe, not Greece, that should bear the consequences. 
Indeed, Greece’s current plight, including the massive run-up in the debt ratio, is largely the fault of the misguided troika programs foisted on it. 
So it is not debt restructuring, but its absence, that is “immoral.” 
There is nothing particularly special about the dilemmas that Greece faces today; many countries have been in the same position. 
What makes Greece’s problems more difficult to address is the structure of the eurozone: monetary union implies that member states cannot devalue their way out of trouble, yet the modicum of European solidarity that must accompany this loss of policy flexibility simply is not there. 
Seventy years ago, at the end of World War II, the Allies recognized that Germany must be given a fresh start. 
They understood that Hitler’s rise had much to do with the unemployment (not the inflation) that resulted from imposing more debt on Germany at the end of World War I. The Allies did not take into account the foolishness with which the debts had been accumulated or talk about the costs that Germany had imposed on others. 
Instead, they not only forgave the debts; they actually provided aid, and the Allied troops stationed in Germany provided a further fiscal stimulus. 
When companies go bankrupt, a debt-equity swap is a fair and efficient solution. 
The analogous approach for Greece is to convert its current bonds into GDP-linked bonds. 
If Greece does well, its creditors will receive more of their money; if it does not, they will get less. 
Both sides would then have a powerful incentive to pursue pro-growth policies. 
Seldom do democratic elections give as clear a message as that in Greece. 
If Europe says no to Greek voters’ demand for a change of course, it is saying that democracy is of no importance, at least when it comes to economics. 
Why not just shut down democracy, as Newfoundland effectively did when it entered into receivership before World War II? 
One hopes that those who understand the economics of debt and austerity, and who believe in democracy and humane values, will prevail. 
Whether they will remains to be seen. 

The Economic Consequences of Greece 
TILTON – The first sentence of the 1957 Treaty of Rome – the founding document of what would eventually become the European Union – calls for “an ever-closer union among the peoples of Europe." 
Recently, however, that ideal has come under threat, undermined by its own political elite, which adopted a common currency while entirely neglecting the underlying fault lines. 
Today, those cracks have been exposed – and widened – by the seemingly never-ending Greek crisis. 
And nowhere are they more evident than in Greece's relationship with the International Monetary Fund. 
When the euro crisis erupted in 2010, European officials realized that they lacked the necessary expertise to manage the threat of sovereign defaults and the potential breakup of the monetary union. 
For EU officials, avoiding the eurozone's collapse became the top political imperative, so they turned to the IMF for help. 
The irregularities in the Fund's resulting intervention attest to how serious the eurozone's problems were – and continue to be. 
For starters, the IMF's Articles of Agreement require it to interact only with entities that are fully accountable for the help received: a member country's “treasury, central bank, stabilization fund, or other similar fiscal agency." 
But the institutions with which the IMF is dealing in the eurozone are no longer responsible for their country's macroeconomic management; that power lies with the European Central Bank. 
In lending to Greece, it is as if the Fund had lent to a sub-national unit, such as a provincial or city government, without insisting on repayment guarantees from the national authorities. 
Another problem is the sheer magnitude of the Fund's intervention. 
The size of the Greek debt necessitated lending on a scale far exceeding what other countries could expect. 
The “exceptional access" to IMF resources granted to Greece in 2010 was set at a “cumulative limit of 600%" of the country's IMF quota, a measure of a country's financial commitment to the IMF. 
Instead, in April 2013, cumulative financing was programmed to peak at 3,212% of Greece's quota. 
The reason the IMF had to take on such huge exposure was Europe's initial refusal to contemplate debt reduction for Greece, owing to the authorities' fear that financial contagion would overwhelm the eurozone's firewall-free banking system. 
That decision resulted in uncertainty about the currency union's capacity to resolve the crisis and aggravated the contraction in Greek output. 
When a debt-restructuring agreement was finally reached in 2012, it provided a window for private creditors to reduce exposure by offloading their residual claims onto taxpayers. 
Initially, the IMF took the official position that Greek debt was sustainable. 
But IMF staff knew otherwise. 
In 2013, the Fund admitted that its analysts knew that Greece's debt was not sustainable, but decided to go ahead with the program “because of the fear that spillovers from Greece would threaten the euro area and the global economy." 
In addition, from November 2010 to April 2013, the IMF revised downward its forecast for 2014 Greek nominal GDP by 27%. 
This cast doubt on the transparency and accountability of the Fund's debt-sustainability projections. 
The implication is shocking: the IMF was unable to provide a credible framework for the adjustment that Greece would have to make. 
This background provides crucial context for the ongoing negotiations, for it reveals that the aim of the Greek bailout was not to restore prosperity to the country's people, but to save the eurozone. 
Given this, the new Greek government is entirely justified in questioning the terms that the country was given. 
The agreements previous administrations made will certainly reduce the range of policies available to the new government, especially with respect to debt reduction, which would require a unilateral default and withdrawal from the eurozone. 
But a democratically elected government need not be bound by its predecessors' commitments, and this is doubly true in the wake of an election that was a referendum on those very policies. 
Ultimatums from unelected institutions that have compromised their own legitimacy have inflamed anti-EU sentiment across the continent. 
The single worst outcome of the current negotiations would be Greece's submission to its creditors' demands, with few concessions in return. 
Such a result would fuel greater public support for anti-EU parties and movements elsewhere, and would amount to a missed opportunity for Greece and Europe. 
That opportunity is default and exit from the eurozone, which would allow Greece to begin correcting past mistakes and putting its economy on the path to recovery and sustainable growth. 
At that point, the EU would be wise to follow suit, by unraveling the currency union and providing debt reduction for its most distressed economies. 
Only then can the EU's founding ideals be realized. 


Greece is Playing to Lose 
LONDON – The future of Europe now depends on something apparently impossible: Greece and Germany must strike a deal. 
What makes such a deal seem impossible is not the principled opposition of the two governments – Greece has demanded a debt reduction, while Germany has insisted that not a euro of debt can be written off – but something more fundamental: while Greece is obviously the weaker party in this conflict, it has far more at stake. 
Game theory suggests that some of the most unpredictable conflicts are between a weak, but determined, combatant and a strong opponent with much less commitment. 
In these scenarios, the most stable outcome tends to be a draw in which both sides are partly satisfied. 
In the Greek-German confrontation, it is easy, at least in theory, to design such a positive-sum game. 
All we must do is ignore political rhetoric and focus on the economic outcomes that the protagonists really want. 
Germany is determined to resist any debt write-offs. 
For German voters, this objective matters much more than the details of Greek structural reforms. 
Greece, for its part, is determined to gain relief from the punitive and counter-productive austerity imposed on it, at Germany’s insistence, by the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund). 
For Greek voters, this objective matters much more than detailed calculations about the net present value of national debt in 30 years. 
A deal should be easily negotiable if both sides concentrate on their top priorities, while compromising on their secondary aims. 
Unfortunately, human fallibility seems to be working against such a rational solution. 
Yanis Varoufakis, Greece’s new finance minister, is a professor of mathematical economics who specializes in game theory. 
But his negotiating technique – unpredictable oscillations between aggressiveness and weakness – is the opposite of what game theory would dictate. 
Varoufakis’s idea of strategy is to hold a gun to his own head, then demand a ransom for not pulling the trigger. 
German and European Union policymakers are calling his bluff. 
As a result, the two sides have become stuck in a passive-aggressive standoff that has made serious negotiation impossible. 
There was nothing inevitable about this outcome. 
Just last month, ECB President Mario Draghi provided a textbook example of how these negotiations could, and should, have progressed, when he outmaneuvered German opposition to the monetary stimulus that Europe clearly needed. 
Draghi spent months before the ECB’s January 22 announcement that it would launch quantitative easing (QE) in intense public debate with the Germans over which point of principle they chose as a “red line” – the point beyond which no deal would be possible. 
Germany’s red line was debt mutualization: there must be no sharing of losses if any eurozone country should default. 
Draghi let Germany win on this issue, which he viewed as economically irrelevant. 
But, crucially, he was careful not to back down until the last possible moment. 
By focusing the QE debate on risk-sharing, Draghi managed to distract Germany from an infinitely more important issue: the enormous size of the QE program, which completely defied the German taboo against monetary financing of government debts. 
By conceding at the right time on an issue of no importance, Draghi achieved an enormous breakthrough that really mattered to the ECB. 
Had Varoufakis adopted an equivalent strategy for Greece, he would have stuck doggedly to his demand for debt cancellation until the last moment, then backed down on this “principle” in exchange for major concessions on austerity and structural reforms. 
Or he could have adopted a less aggressive strategy: Concede from the start the German principle that debts are sacrosanct and then show that austerity could be eased without any reduction in the face value of Greek debt. 
But, instead of consistently pursuing either strategy, Varoufakis veered between defiance and conciliation, losing credibility both ways. 
Greece started the negotiation by insisting on debt reduction as its red line. 
But, instead of sticking to this position and turning a debate over debt forgiveness into a Draghi-style diversionary tactic, Greece abandoned this demand within days. 
Then came the pointless provocation of refusing talks with the troika, despite the fact that the three institutions are all much more sympathetic to Greek demands than the German government. 
Finally, Varoufakis rejected any extension of the troika program. 
This created an unnecessary new deadline of February 28 for the withdrawal of ECB funding and consequent collapse of the Greek banking system. 
Greece’s idealistic new leaders seem to believe that they can overpower bureaucratic opposition without the usual compromises and obfuscations, simply by brandishing their democratic mandate. 
But the primacy of bureaucracy over democracy is a core principle that EU institutions will never compromise. 
The upshot is that Greece is back where it started in the poker contest with Germany and Europe. 
The new government has shown its best cards too early and has no credibility left if it wants to try bluffing. 
So what will happen next? 
The most likely outcome is that Syriza will soon admit defeat, like every other eurozone government supposedly elected on a reform mandate, and revert to a troika-style program, sweetened only by dropping the name “troika.” 
Another possibility, while Greek banks are still open for business, might be for the government to unilaterally implement some of its radical plans on wages and public spending, defying protests from Brussels, Frankfurt, and Berlin. 
If Greece tries such unilateral defiance, the ECB will almost certainly vote to stop its emergency funding to the Greek banking system after the troika program expires on February 28. 
As this self-inflicted deadline approaches, the Greek government will probably back down, just as Ireland and Cyprus capitulated when faced with similar threats. 
Such last-minute capitulation could mean resignation for the new Greek government and its replacement by EU-approved technocrats, as in the constitutional putsch against Italy’s Silvio Berlusconi in 2012. 
In a less extreme scenario, Varoufakis might be replaced as finance minister, while the rest of the government survives. 
The only other possibility, if and when Greek banks start collapsing, would be an exit from the euro. 
Whatever form the surrender takes, Greece will not be the only loser. 
Proponents of democracy and economic expansion have missed their best chance to outmaneuver Germany and end the self-destructive austerity that Germany has imposed on Europe. 

Greece’s Other Deficit 
OAKLAND – For the past decade, much attention has been paid to Greece’s public finances. 
And when, in November, the country faced the first review of its reform progress under its latest agreement with its creditors – an exercise required to obtain a new infusion of bailout funds – its budget deficit was put under the microscope once again. 
But Greeks would do well to consider another type of deficit – one that has received far less public scrutiny, but could have economic consequences that are just as serious. 
Like the rest of the Mediterranean region (and indeed the entire world), Greece is not just running a fiscal deficit; it is also running an ecological one. 
According to our analysis, Mediterranean countries currently use 2.5 times more ecological resources and services than their ecosystems can renew. 
Greece, for example, would need the total ecological resources and services of three Greeces in order to meet its citizens’ demand on nature for food, fiber, timber, housing, urban infrastructure, and carbon sequestration. 
Athens alone demands 22% more from nature than the entire country’s ecosystems can provide. 
And, after years of recession during which pressure on Greece’s natural resources declined, demand has begun to rise again, as GDP growth has shown some improvement. 
To enable lasting economic progress, we need to break this link between GDP growth and overuse of the environment. 
Ecological deficits can jeopardize energy sources and threaten food security, with direct social and economic consequences. 
If Greece and other countries are to ensure the health and prosperity of their citizens in the decades to come, they will have to find a way to prevent current economic activity from increasing an already unsustainable burden of environmental debt. 
For that to happen, ecological resources must come to be viewed as valuable endowments to be managed wisely. 
The Mediterranean region’s unique, breathtaking natural capital is one of its greatest assets – the reason why more than 200 million tourists flock to the region each year, feeding the region’s economy. 
Overusing resources, or even failing to manage them carefully, inevitably saps the region’s economic strength. 
Of course, countries with ecological deficits can often fill part of the gap through global trade – if they can pay for the necessary imports. 
But, as Greece has recently learned, countries dependent on external natural resources can experience economic shocks when commodity prices increase or their ability to pay otherwise declines. 
According to our calculations, a mere 10% increase in commodity prices would result in a $7.6 billion hit to Greece’s trade balance – equivalent to 0.3% of its GDP. 
In any case, reliance on global trade is not an adequate solution to the problem. 
Some ecosystem services – including clean air and water, mitigation of extreme climate events such as floods or droughts, and recreational uses of nature – simply cannot be imported. 
More important, if a country is importing natural resources, another country must be exporting them. 
And just as governments cannot run huge financial deficits indefinitely, countries cannot continue to run large annual ecological imbalances without depleting their natural capital – and thus weakening their economic health. 
Fortunately, countries like Greece are not powerless to act. 
Cities offer particularly promising opportunities for improvement, especially in areas like transportation and housing. 
Athens, for example, is an obvious target for policy changes. 
The average ecological footprint of an Athenian is higher than the national average (and higher than the average footprint of residents in other Mediterranean cities such as Barcelona, Izmir, Palermo, and Valencia). 
Transportation is the biggest source of this disparity, which means that policy interventions favoring public transport or walkability can reduce Athens’ ecological deficit. 
Another area in which Greece should consider taking action is food. 
The world-famous Mediterranean diet – heavy in vegetables, fruits, and olive oil – is not only healthy; it is less taxing on the environment. 
As consumption of meat and processed foods rises around the Mediterranean, a renewed focus on the region’s culinary heritage could help lighten the load on the world’s natural resources – and boost people’s health. 
As Greece’s government works to revive an economy flattened by fiscal disaster and improve the wellbeing of all, the path it forges toward long-term prosperity must not lead to further environmental degradation. 
Greece cannot afford to address one of its deficits at the expense of the other. 

Austerity Is the Only Deal-Breaker 
ATHENS – A common fallacy pervades coverage by the world’s media of the negotiations between the Greek government and its creditors. 
The fallacy, exemplified in a recent commentary by Philip Stephens of the Financial Times, is that, “Athens is unable or unwilling – or both – to implement an economic reform program.” 
Once this fallacy is presented as fact, it is only natural that coverage highlights how our government is, in Stephens’s words, “squandering the trust and goodwill of its eurozone partners.” 
But the reality of the talks is very different. 
Our government is keen to implement an agenda that includes all of the economic reforms emphasized by European economic think tanks. 
Moreover, we are uniquely able to maintain the Greek public’s support for a sound economic program. 
Consider what that means: an independent tax agency; reasonable primary fiscal surpluses forever; a sensible and ambitious privatization program, combined with a development agency that harnesses public assets to create investment flows; genuine pension reform that ensures the social-security system’s long-term sustainability; liberalization of markets for goods and services, etc. 
So, if our government is willing to embrace the reforms that our partners expect, why have the negotiations not produced an agreement? 
Where is the sticking point? 
The problem is simple: Greece’s creditors insist on even greater austerity for this year and beyond – an approach that would impede recovery, obstruct growth, worsen the debt-deflationary cycle, and, in the end, erode Greeks’ willingness and ability to see through the reform agenda that the country so desperately needs. 
Our government cannot – and will not – accept a cure that has proven itself over five long years to be worse than the disease. 
Our creditors’ insistence on greater austerity is subtle yet steadfast. 
It can be found in their demand that Greece maintain unsustainably high primary surpluses (more than 2% of GDP in 2016 and exceeding 2.5%, or even 3%, for every year thereafter). 
To achieve this, we are supposed to increase the overall burden of value-added tax on the private sector, cut already diminished pensions across the board; and compensate for low privatization proceeds (owing to depressed asset prices) with “equivalent” fiscal consolidation measures. 
The view that Greece has not achieved sufficient fiscal consolidation is not just false; it is patently absurd. 
The accompanying graph not only illustrates this; it also succinctly addresses the question of why Greece has not done as well as, say, Spain, Portugal, Ireland, or Cyprus in the years since the 2008 financial crisis. 
Relative to the rest of the countries on the eurozone periphery, Greece was subjected to at least twice the austerity. 
There is nothing more to it than that. 
Following Prime Minister David Cameron’s recent election victory in the United Kingdom, my good friend Lord Norman Lamont, a former chancellor of the exchequer, remarked that the UK economy’s recovery supports our government’s position. 
Back in 2010, he recalled, Greece and the UK faced fiscal deficits of more or less similar size (relative to GDP). 
Greece returned to primary surpluses (which exclude interest payments) in 2014, whereas the UK government consolidated much more gradually and has yet to return to surplus. 
At the same time, Greece has faced monetary contraction (which has recently become monetary asphyxiation), in contrast to the UK, where the Bank of England has supported the government every step of the way. 
The result is that Greece is continuing to stagnate, whereas the UK has been growing strongly. 
Fair-minded observers of the four-month-long negotiations between Greece and its creditors cannot avoid a simple conclusion: The major sticking point, the only deal-breaker, is the creditors’ insistence on even more austerity, even at the expense of the reform agenda that our government is eager to pursue. 
Clearly, our creditors’ demand for more austerity has nothing to do with concerns about genuine reform or moving Greece onto a sustainable fiscal path. 
Their true motivation is a question best left to future historians – who, I have no doubt, will take much of the contemporary media coverage with a grain of salt. 

Lesbos’s Ghosts, Europe’s Disgrace 
ATHENS – In 2015, hundreds of thousands of refugees landed on Greece’s island shores. 
Many had perished at sea. 
Today, the international public has been lulled into believing that Greece’s refugee crisis has abated. 
In fact, it has become a permanent scourge blighting Europe’s soul and brewing future trouble. 
The island of Lesbos was, and remains, its epicenter. 
The story of Shabbir demonstrates how starkly reality clashes with Europe’s official storyline. 
Shabbir, 40, lived with his wife and two young children in a midsize town in Pakistan, where he ran a car rental business. 
One night in December 2015, a local group of Islamist extremists petrol-bombed Shabbir’s neighbor’s home and waited outside for the fleeing family. 
Shabbir’s neighbors were Christian, and the extremists were keen to evict them and convert their home into a madrasa (religious school). 
Instinctively, Shabbir rushed to his Christian neighbors’ defense. 
Designated an “apostate,” his business was burned down, his brother was brutally murdered, his wife and children fled to neighboring villages, and Shabbir, together with his elderly father, took the long, cruel road, via Iran and Turkey, to imagined safety in civilized Europe. 
Along the way, Shabbir’s father died of exhaustion on some snow-covered Turkish mountain peak. 
Months later, after managing to board a trafficker’s flimsy vessel on Turkey’s Aegean coast, he found himself shipwrecked, surrounded by dozens of drowned fellow refugees. 
Picked up off the coast of Lesbos, he was brought to the Moria camp. 
That is when his next ordeal began. 
No Westerner who saw Moria during the winter of 2016/2017 could do so without feeling dehumanized. 
Mud, refuse, and human excrement formed a magma of misery, a hellscape surrounded by barbed wire and the official indifference reflected in the puny resources provided by the European Union and Greek authorities. 
Refugees like Shabbir faced a minimum of nine months before their first encounter with any official who would receive their asylum application. 
Within the camp, a small makeshift office, surrounded by more barbed wire and hundreds of despairing refugees, would admit one or two per hour for their first interview. 
“If you are a little ill, Afghani or Pakistani, it may take 12 months before you speak to an official,” one refugee told us. 
“We are ghosts roaming around without anyone noticing,” he remarked: “I wish we had died in the war instead.” 
Wandering around the camp, segregation was in plain sight. 
Some families were afforded the luxury of containers, guarded behind tall fences. 
Despite the absence of running water, heating, or any facilities to speak of, they were the privileged ones. 
Walking northwest up the hill was like experiencing the ascent of inhumanity. 
First there was the Afghanis’ shantytown, enveloped in mud and an unbearable stench. 
On the hilltop were Pakistanis in the same dire conditions, burning anything they could find in order to cook. 
Next to them were Algerians, feared by all the others and caged behind a triple row of barbed wire. 
At the foot of the slope, just next to the appalling semi-open-air toilets, were the “Africans,” amidst whose tents runs filth from up the slope. 
A year after Shabbir arrived on Lesbos, and three months after his first interview, his asylum application was refused and a deportation order was issued. 
His appeal was unceremoniously rejected and, when he tried to seek refuge with supporters in a nearby village, the police mounted a manhunt. Eventually, he surrendered, before being taken back to Turkey. 
For weeks, we heard nothing of his fate. Then we learned that he was returned to Pakistan, where he had been located by the Taliban and shot. 
Reportedly, he is still alive, though we do not know his condition. 
Shabbir had imagined, he told one of us, that, “despite being Muslim,” Europe would give him asylum, “not least because I thought that defending Christians at my family’s expense would mean something here.” 
But “Europe” had other ideas. 
The EU deal with Turkey’s President Recep Tayyip Erdoğan, negotiated in 2016 by German Chancellor Angela Merkel, had a single purpose: To stop the flood of refugees from Turkey to Greece at all cost. 
If that meant that the EU would end up bribing Erdoğan with several billion euros in order to violate international legislation protecting refugees like Shabbir, so be it. 
In September alone, another 2,238 refugees arrived in Lesbos, despite Turkey’s attempts to cut the flow. 
A camp designed for 2,000 people now “houses” three times that number. 
In early October, the first autumnal storms turned the Moria camp into a mud field again. 
Europe pretends to itself that this crime against humanity is no one’s fault. 
The Greek authorities blame the EU for not providing funds, the EU blames Greece for not doing enough with available funds, and large NGOs are preoccupied with maintaining their own line of command and funding. 
The only survivors in this moral shipwreck are the local grassroots teams – comprising volunteers from all over the world and smaller NGOs – that have been keeping the spirit of humanity alive. 
Meanwhile, the West in general, and the EU in particular, perpetuates the economic, environmental, and military factors driving the unfolding humanitarian disaster. 
Galrim, another Pakistani refugee in Lesbos, explained to us Europe’s blunder: “The Islamist extremists have a plan. 
By spreading fear and loathing,” he says, “they wish to ghettoize refugees in Europe, to cut them off from European societies, to make them victims of European xenophobia. 
It is their recruitment strategy by which to stoke the fires of East-West hatred and render them significant players.” 
Galrim should know. 
A democrat who opposed ballot rigging in his town, his body was broken by mafia networks in “safe” Turkey, in a succession of torture sessions for ransom. 
On one occasion, he was dragged behind a speeding truck. 
Galrim’s asylum application was also turned down, placing him on the deportation list. 
Some 2,500 years ago, Sappho of Lesbos wrote: 
Their heart grew cold 
they let their wings down 
To prevent that from happening to humanists across Europe, we need a new movement to campaign for refugees’ release from odious conditions and a swift asylum process. 
Beyond that, we need to end the policies that are contributing to their desperate flight. 

Fresh Momentum for the Balkans 
MADRID – As autumn comes to Europe, it is time to reap the fruits of months of hard diplomatic work across the Balkan Peninsula. 
On September 30, the former Yugoslav Republic of Macedonia (FYROM) will hold a consultative referendum that could lead the country to change its name to “Republic of North Macedonia.” 
This is no mere linguistic exercise. 
If the referendum passes, it could put an end to 27 years of bickering between the Macedonian and Greek governments. 
Greece vehemently opposes its northern neighbor’s use of “Macedonia” without a qualifier, because a region in Greece bears the same name. 
Moreover, the ancient kingdom of Macedonia has great cultural and historical significance for modern-day Greeks. 
If a large share of the Macedonian electorate turns out and votes in support of the name change and related matters, the required constitutional amendments will be more likely to pass in Macedonia’s parliament. 
In that case, the last word would go to Greece’s parliament, which would also have to vote on the change. 
Owing to the name dispute, Greece has blocked the former Yugoslav Republic of Macedonia (a provisional reference used since 1993) from joining the EU and NATO. 
But, three months ago, the Macedonian and Greek governments finally reached an agreement to resolve their bilateral disputes. 
The implications of what they agreed to are plainly visible in the wording of the Macedonian referendum question: “Do you support EU and NATO membership by accepting the agreement between the Republic of Macedonia and the Republic of Greece?” 
Federica Mogherini, the High Representative of the EU for Foreign Affairs and Security Policy, and Matthew Nimetz, the United Nations Secretary General’s personal envoy on the name dispute, both played key roles in ensuring the success of the negotiations. 
Nimetz, who first started working on this issue in 1994, has warned that the diplomatic stars will not soon align so favorably again. 
At a time of resurgent nationalism, the “Prespa Agreement” – named for the lake that spans the borders of Greece, FYROM, and Albania – is a breath of fresh air. 
Macedonian Prime Minister Zoran Zaev and his Greek counterpart Alexis Tsipras have displayed remarkable boldness and responsible leadership in order to conclude the agreement. 
Both have had to expend a great deal of political capital, confronting domestic nationalist forces and facing down no-confidence motions spearheaded by opposition parties. 
The Prespa Agreement offers a viable model for addressing disputes elsewhere, because it embodies a holistic conflict-resolution approach based on the promise of mutually shared long-term benefits. 
For example, one of its articles states that, “In the age of the new industrial revolution […] the deepening of cooperation amongst States and societies is necessary now more than ever, in particular with respect to social activities, technologies, and culture.” 
This statement by long-feuding parties is an inspiration for a region that remains entangled in stalemated disputes over ethnic and national identities. 
The Balkans – and not only the Balkans – are in need of a new narrative based on people’s real priorities, which is precisely what the Prespa Agreement provides. 
As it happens, another frozen dispute in the region could soon thaw enough to move toward a resolution. 
In 2011, the EU initiated a dialogue between Serbia and Kosovo that has since produced significant benefits in terms of freedom of movement, trade, economic opportunities, security, justice, connectivity, and much else. 
Despite this gradual normalization of bilateral relations, the fundamental dispute between the two countries remains unresolved. 
Both sides are acutely aware that the status quo implies a high cost, by hampering their EU accession bids and imposing an unsustainable burden on their respective economies. 
Working with Mogherini, Presidents Aleksandar Vučić of Serbia and Hashim Thaçi of Kosovo have accelerated their negotiations over the past few months, with the aim of reaching a definitive, comprehensive, and legally binding agreement. 
Of course, it is not the EU’s prerogative to dictate the terms of the conflict’s resolution, and it is clear that local ownership will be key to any deal that may emerge from the process. 
At this stage in the dialogue, it is essential that caution and moderation prevail. 
Vučić and Thaçi’s legacies will largely depend on their willingness to formulate a realistic proposal that aligns with the foundational values of the EU. 
Both leaders have an opportunity to eschew maximalist positions and to emulate the sagacity of the Greek and Macedonian governments. 
Less promising is the situation in Bosnia and Herzegovina (BiH), where a general election is set to take place on October 7, despite the fact that the country currently lacks an effective electoral law. 
Having been trapped in a territorial and administrative jumble since the end of the war in 1995, BiH is an exceedingly difficult country to govern. 
Ethnocentrism continues to dominate its politics, and the current electoral race is no exception. 
Complicating matters further, the secessionist politician Milorad Dodik, who just served his final term as president of the Republika Srpska (one of the two largely autonomous entities into which the country is divided), has made the disquieting decision to run for BiH’s tripartite presidency. 
Let us hope that the more constructive spirit pervading the rest of the region finally seeps into BiH, and that inter-ethnic initiatives gain steam, as a large part of Bosnian civil society has long advocated. 
There can be little doubt that the last few decades have brought more frustration than progress to the Balkans. 
But if the Prespa Agreement shows anything, it is that no conflict is unsolvable when diplomatic creativity and political will are brought to bear. 
If the coming crucial weeks end well, a region that was ravaged by nationalism at the end of the last century could now defy today’s global lurch toward chauvinism. 
At a time when so many countries seem intent on building walls, it would be ironic and deeply gratifying to see the Balkans build bridges. 

Greece Must Exit 
NEW YORK – The Greek euro tragedy is reaching its final act: it is clear that either this year or next, Greece is highly likely to default on its debt and exit the eurozone. 
Postponing the exit after the June election with a new government committed to a variant of the same failed policies (recessionary austerity and structural reforms) will not restore growth and competitiveness. 
Greece is stuck in a vicious cycle of insolvency, lost competitiveness, external deficits, and ever-deepening depression. 
The only way to stop it is to begin an orderly default and exit, coordinated and financed by the European Central Bank, the European Commission, and the International Monetary Fund (the “Troika”), that minimizes collateral damage to Greece and the rest of the eurozone. 
Greece’s recent financing package, overseen by the Troika, gave the country much less debt relief than it needed. 
But, even with significantly more public-debt relief, Greece could not return to growth without rapidly restoring competitiveness. 
And, without a return to growth, its debt burden will remain unsustainable. 
But all of the options that might restore competitiveness require real currency depreciation. 
The first option, a sharp weakening of the euro, is unlikely, as Germany is strong and the ECB is not aggressively easing monetary policy. 
A rapid reduction in unit labor costs, through structural reforms that increased productivity growth in excess of wages, is just as unlikely. 
It took Germany ten years to restore its competitiveness this way; 
Greece cannot remain in a depression for a decade. 
Likewise, a rapid deflation in prices and wages, known as an “internal devaluation,” would lead to five years of ever-deepening depression. 
If none of those three options is feasible, the only path left is to leave the eurozone. 
A return to a national currency and a sharp depreciation would quickly restore competitiveness and growth. 
Of course, the process would be traumatic – and not just for Greece. 
The most significant problem would be capital losses for core eurozone financial institutions. 
Overnight, the foreign euro liabilities of Greece’s government, banks, and companies would surge. 
Yet these problems can be overcome. 
Argentina did so in 2001, when it “pesofied” its dollar debts. 
The United States did something similar in 1933, when it depreciated the dollar by 69% and abandoned the gold standard. 
A similar “drachmatization” of euro debts would be necessary and unavoidable. 
Losses that eurozone banks would suffer would be manageable if the banks were properly and aggressively recapitalized. 
Avoiding a post-exit implosion of the Greek banking system, however, might require temporary measures, such as bank holidays and capital controls, to prevent a disorderly run on deposits. 
The European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) should carry out the necessary recapitalization of the Greek banks via direct capital injections. 
European taxpayers would effectively take over the Greek banking system, but this would be partial compensation for the losses imposed on creditors by drachmatization. 
Greece would also have to restructure and reduce its public debt again. 
The Troika’s claims on Greece need not be reduced in face value, but their maturity would have to be lengthened by another decade, and the interest on it reduced. 
Further haircuts on private claims would also be needed, starting with a moratorium on interest payments. 
Some argue that Greece’s real GDP would be much lower in an exit scenario than it would be during the hard slog of deflation. 
But that is logically flawed: even with deflation, real purchasing power would fall, and the real value of debts would rise (debt deflation), as the real depreciation occurs. 
More importantly, the exit path would restore growth right away, via nominal and real depreciation, avoiding a decade-long depression. 
And trade losses imposed on the eurozone by the drachma depreciation would be modest, given that Greece accounts for only 2% of eurozone GDP. 
Reintroducing the drachma risks exchange-rate depreciation in excess of what is necessary to restore competitiveness, which would be inflationary and impose greater losses on drachmatized external debts. 
To minimize that risk, the Troika reserves currently devoted to the Greek bailout should be used to limit exchange-rate overshooting; capital controls would help, too. 
Those who claim that contagion from a Greek exit would drag others into the crisis are also in denial. 
Other peripheral countries already have Greek-style problems of debt sustainability and eroded competitiveness. 
Portugal, for example, may eventually have to restructure its debt and exit the euro. 
Illiquid but potentially solvent economies, such as Italy and Spain, will need support from Europe regardless of whether Greece exits; indeed, without such liquidity support, a self-fulfilling run on Italian and Spanish public debt is likely. 
The substantial new official resources of the IMF and ESM – and ECB liquidity – could then be used to ring-fence these countries, and banks elsewhere in the eurozone’s troubled periphery. 
Regardless of what Greece does, eurozone banks now need to be rapidly recapitalized, which requires a new EU-wide program of direct capital injections. 
The experience of Iceland and many emerging markets over the past 20 years shows that nominal depreciation and orderly restructuring and reduction of foreign debts can restore debt sustainability, competitiveness, and growth. 
As in these cases, the collateral damage to Greece of a euro exit will be significant, but it can be contained. 
Like a doomed marriage, it is better to have rules for the inevitable divorce that make separation less costly to both sides. 
Make no mistake: an orderly euro exit by Greece implies significant economic pain. 
But watching the slow, disorderly implosion of the Greek economy and society would be much worse. 

Europe’s Vindictive Privatization Plan for Greece 
ATHENS – On July 12, the summit of eurozone leaders dictated its terms of surrender to Greek Prime Minister Alexis Tsipras, who, terrified by the alternatives, accepted all of them. 
One of those terms concerned the disposition of Greece’s remaining public assets. 
Eurozone leaders demanded that Greek public assets be transferred to a Treuhand-like fund – a fire-sale vehicle similar to the one used after the fall of the Berlin Wall to privatize quickly, at great financial loss, and with devastating effects on employment all of the vanishing East German state’s public property. 
This Greek Treuhand would be based in – wait for it – Luxembourg, and would be run by an outfit overseen by Germany���s finance minister, Wolfgang Schäuble, the author of the scheme. 
It would complete the fire sales within three years. 
But, whereas the work of the original Treuhand was accompanied by massive West German investment in infrastructure and large-scale social transfers to the East German population, the people of Greece would receive no corresponding benefit of any sort. 
Euclid Tsakalotos, who succeeded me as Greece’s finance minister two weeks ago, did his best to ameliorate the worst aspects of the Greek Treuhand plan. 
He managed to have the fund domiciled in Athens, and he extracted from Greece’s creditors (the so-called troika of the European Commission, the European Central Bank, and the International Monetary Fund) the important concession that the sales could extend to 30 years, rather than a mere three. 
This was crucial, for it will permit the Greek state to hold undervalued assets until their price recovers from the current recession-induced lows. 
Alas, the Greek Treuhand remains an abomination, and it should be a stigma on Europe’s conscience. 
Worse, it is a wasted opportunity. 
The plan is politically toxic, because the fund, though domiciled in Greece, will effectively be managed by the troika. 
It is also financially noxious, because the proceeds will go toward servicing what even the IMF now admits is an unpayable debt. 
And it fails economically, because it wastes a wonderful opportunity to create homegrown investments to help counter the recessionary impact of the punitive fiscal consolidation that is also part of the July 12 summit’s “terms.” 
It did not have to be this way. 
On June 19, I communicated to the German government and to the troika an alternative proposal, as part of a document entitled “Ending the Greek Crisis”: 
“The Greek government proposes to bundle public assets (excluding those pertinent to the country’s security, public amenities, and cultural heritage) into a central holding company to be separated from the government administration and to be managed as a private entity, under the aegis of the Greek Parliament, with the goal of maximizing the value of its underlying assets and creating a homegrown investment stream. 
The Greek state will be the sole shareholder, but will not guarantee its liabilities or debt.” 
The holding company would play an active role readying the assets for sale. 
It would “issue a fully collateralized bond on the international capital markets” to raise €30-40 billion ($32-43 billion), which, “taking into account the present value of assets,” would “be invested in modernizing and restructuring the assets under its management.” 
The plan envisaged an investment program of 3-4 years, resulting in “additional spending of 5% of GDP per annum,” with current macroeconomic conditions implying “a positive growth multiplier above 1.5,” which “should boost nominal GDP growth to a level above 5% for several years.” 
This, in turn, would induce “proportional increases in tax revenues,” thereby “contributing to fiscal sustainability, while enabling the Greek government to exercise spending discipline without further shrinking the social economy.” 
In this scenario, the primary surplus (which excludes interest payments) would “achieve ‘escape velocity’ magnitudes in absolute as well as percentage terms over time.” 
As a result, the holding company would “be granted a banking license” within a year or two, “thus turning itself into a full-fledged Development Bank capable of crowding in private investment to Greece and of entering into collaborative projects with the European Investment Bank.” 
The Development Bank that we proposed would “allow the government to choose which assets are to be privatized and which not, while guaranteeing a greater impact on debt reduction from the selected privatizations.” 
After all, “asset values should increase by more than the actual amount spent on modernization and restructuring, aided by a program of public-private partnerships whose value is boosted according to the probability of future privatization.” 
Our proposal was greeted with deafening silence. 
More precisely, the Eurogroup of eurozone finance ministers and the troika continued to leak to the global media that the Greek authorities had no credible, innovative proposals on offer – their standard refrain. 
A few days later, once the powers-that-be realized that the Greek government was about to capitulate fully to the troika’s demands, they saw fit to impose upon Greece their demeaning, unimaginative, and pernicious Treuhand model. 
At a turning point in European history, our innovative alternative was thrown into the dustbin. 
It remains there for others to retrieve. 

Europe’s Attack on Greek Democracy 
NEW YORK – The rising crescendo of bickering and acrimony within Europe might seem to outsiders to be the inevitable result of the bitter endgame playing out between Greece and its creditors. 
In fact, European leaders are finally beginning to reveal the true nature of the ongoing debt dispute, and the answer is not pleasant: it is about power and democracy much more than money and economics. 
Of course, the economics behind the program that the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) foisted on Greece five years ago has been abysmal, resulting in a 25% decline in the country’s GDP. 
I can think of no depression, ever, that has been so deliberate and had such catastrophic consequences: Greece’s rate of youth unemployment, for example, now exceeds 60%. 
It is startling that the troika has refused to accept responsibility for any of this or admit how bad its forecasts and models have been. 
But what is even more surprising is that Europe’s leaders have not even learned. 
The troika is still demanding that Greece achieve a primary budget surplus (excluding interest payments) of 3.5% of GDP by 2018. 
Economists around the world have condemned that target as punitive, because aiming for it will inevitably result in a deeper downturn. 
Indeed, even if Greece’s debt is restructured beyond anything imaginable, the country will remain in depression if voters there commit to the troika’s target in the snap referendum to be held this weekend. 
In terms of transforming a large primary deficit into a surplus, few countries have accomplished anything like what the Greeks have achieved in the last five years. 
And, though the cost in terms of human suffering has been extremely high, the Greek government’s recent proposals went a long way toward meeting its creditors’ demands. 
We should be clear: almost none of the huge amount of money loaned to Greece has actually gone there. 
It has gone to pay out private-sector creditors – including German and French banks. 
Greece has gotten but a pittance, but it has paid a high price to preserve these countries’ banking systems. 
The IMF and the other “official” creditors do not need the money that is being demanded. 
Under a business-as-usual scenario, the money received would most likely just be lent out again to Greece. 
But, again, it’s not about the money. 
It’s about using “deadlines” to force Greece to knuckle under, and to accept the unacceptable – not only austerity measures, but other regressive and punitive policies. 
But why would Europe do this? 
Why are European Union leaders resisting the referendum and refusing even to extend by a few days the June 30 deadline for Greece’s next payment to the IMF? 
Isn’t Europe all about democracy? 
In January, Greece’s citizens voted for a government committed to ending austerity. 
If the government were simply fulfilling its campaign promises, it would already have rejected the proposal. 
But it wanted to give Greeks a chance to weigh in on this issue, so critical for their country’s future wellbeing. 
That concern for popular legitimacy is incompatible with the politics of the eurozone, which was never a very democratic project. 
Most of its members’ governments did not seek their people’s approval to turn over their monetary sovereignty to the ECB. 
When Sweden’s did, Swedes said no. 
They understood that unemployment would rise if the country’s monetary policy were set by a central bank that focused single-mindedly on inflation (and also that there would be insufficient attention to financial stability). 
The economy would suffer, because the economic model underlying the eurozone was predicated on power relationships that disadvantaged workers. 
And, sure enough, what we are seeing now, 16 years after the eurozone institutionalized those relationships, is the antithesis of democracy: Many European leaders want to see the end of Prime Minister Alexis Tsipras’s leftist government. 
After all, it is extremely inconvenient to have in Greece a government that is so opposed to the types of policies that have done so much to increase inequality in so many advanced countries, and that is so committed to curbing the unbridled power of wealth. 
They seem to believe that they can eventually bring down the Greek government by bullying it into accepting an agreement that contravenes its mandate. 
It is hard to advise Greeks how to vote on July 5. 
Neither alternative – approval or rejection of the troika’s terms – will be easy, and both carry huge risks. 
A yes vote would mean depression almost without end. 
Perhaps a depleted country – one that has sold off all of its assets, and whose bright young people have emigrated – might finally get debt forgiveness; perhaps, having shriveled into a middle-income economy, Greece might finally be able to get assistance from the World Bank. 
All of this might happen in the next decade, or perhaps in the decade after that. 
By contrast, a no vote would at least open the possibility that Greece, with its strong democratic tradition, might grasp its destiny in its own hands. 
Greeks might gain the opportunity to shape a future that, though perhaps not as prosperous as the past, is far more hopeful than the unconscionable torture of the present. 
I know how I would vote. 

Greece’s “No” is No Victory for Democracy 
PARIS – Despite what many are saying – especially those who do not have to bear the consequences of their words – Greek voters’ rejection on Sunday of the latest bailout offer from their country’s creditors did not represent a “victory for democracy.” 
For democracy, as the Greeks know better than anyone, is a matter of mediation, representation, and orderly delegation of power. 
It is not ordinarily a matter of referendum. 
Democracy becomes a matter of referendum only in exceptional circumstances: when elected leaders run out of ideas, when they have lost the confidence of their electorate, or when the usual approaches have ceased to work. 
Was that the case in Greece? 
Was the position of Prime Minister Alexis Tsipras so weak that he had no better choice than to pass the buck to his people by resorting to the extraordinary form of democracy that is democracy by referendum? 
What would happen if Greece’s partners, each time they confronted a decision that they lacked the courage to make, broke off discussions and demanded a week to allow the people to decide? 
It is often said – and rightly so – that Europe is too bureaucratic, too unwieldy, too slow to make decisions. 
The least that can be said is that Tsipras’s approach does not make up for these defects. 
(Much more could be said, if it inspires Spanish citizens to take the risky decision of electing a government led by their own anti-austerity party, Podemos.) 
Putting this aside, let us suppose that the decision before Tsipras was so crucial and complex that it merited the exceptional step of referendum. 
In that case, the event should have reflected that complexity. 
It should have been a careful and deliberate sounding out of the will of the people. 
It should have been organized and carried out with due respect for the stakes involved, with the government ensuring that adequate information was relayed to the Greek people. 
Instead, Greece got a hastily arranged referendum. 
It got an opaque – indeed, a downright incomprehensible – referendum question. 
It got no public-information campaign worthy of the name. 
It got an appeal for a “No” vote that no one understood; the details of the proposals that Greek voters were supposed to reject were not even disclosed to them. 
Ancient Greek had two words for the people: the “demos” of democracy and the “laos” of the mob. 
With his puerile call to shift the burden of his own errors and his reluctance to reform onto the shoulders of Greece’s fellow Europeans, Tsipras is leaning toward the latter manifestation – and promoting the worst version of Greek politics. 
Tsipras might defend his approach to the referendum by asserting that his goal was not so much to sound out the people as to reinforce his position in the confrontation with Greece’s creditors. 
But what is the justification for that confrontation? 
That they had the audacity to demand progress toward the rule of law and social justice, as well as efforts to tame Greece’s shipping magnates and its tax-avoiding clergy? 
The European Union has achieved peace precisely by learning, gradually, to replace the old logic of confrontation and conflict with that of negotiation and compromise. 
Despite its defects, the EU has become a laboratory of democratic innovation, in which, for the first time in centuries, an attempt is being made to settle differences not by political war and blackmail but by listening, dialogue, and a synthesis of different points of view. 
In this sense, the Greek referendum delivered an insult to 18 countries, including some that are in situations no less difficult than Greece’s, and yet have made considerable sacrifices to grant the country, in 2012 alone, €105 billion ($116 billion) in debt relief while remaining accountable to their own populations. 
What twist of the mind enables one to call that an “act of resistance” or the “defense of democracy?” 
Yet many have. 
Indeed, since the referendum, many have acted as if Tsipras were the last eurozone democrat, as if he had faced a “totalitarian” clique (as described by the far-right French politician Marine Le Pen) against which he valiantly “stood firm” (in the words of far-left politician Jean-Luc Mélenchon). 
I will not dwell on Tsipras’s parliamentary alliance with the conspiracy-minded, right-wing Independent Greeks, whose leaders do not shy away from diatribes against homosexuals, Buddhists, Jews, and Muslims. 
Nor will I dwell on the fact that Tsipras did not refrain, when assembling parliamentary support for his referendum, from soliciting the support of the neo-Nazi Golden Dawn party, whose help any other European leader would have rejected. 
Instead, I will emphasize the fact that Tsipras’s fellow European leaders are no less democratic or legitimate than he. 
The countries of Central Europe that endured Nazi and Soviet totalitarianism do not need lessons in legitimacy from anyone – especially not the Greek prime minister. 
The brave Baltic countries – the “legality” of whose independence is reportedly being reviewed by Russian President Vladimir Putin, another unsavory pal of Tsipras – have not yielded to panic or succumbed to the temptation to burden others with their misfortune. 
They are not using their struggles as a pretext to default on their duty of solidarity with Greece. 
None of this means that we should write off Greece’s EU membership. 
In other times, the Greeks paid dearly for their “No” to Nazism and their “No” to military dictatorship. 
Nothing would be sadder than to see them also have to pay for last Sunday’s “No” – a farcical simulation of those earlier noble acts of defiance. 
May eurozone leaders have the forbearance to recognize the flawed “No” that has been delivered, and to be more Greek than the Greeks. 
May they act in a way that prevents Greece from ever having to face the true, tragic meaning of Sunday’s vote. 

Still No Exit for Greece 
WASHINGTON, DC – Opinion polls in the run-up to Greece’s early general election on January 25 indicate that the left-wing Syriza party is likely to win the largest share of votes. 
As a result, Syriza stands to earn a crucial premium under Greek electoral law, according to which the party that gains the most votes is allocated an extra 50 of the parliament’s 300 seats. 
In other words, Syriza could come to power, with enormous implications for Greece and Europe. 
Syriza is more a coalition than a unified party, meaning that its leader, Alexis Tsipras, must reconcile moderate socialists, including some of his economic advisers, with radical left-wing members. 
The implementation and impact of Syriza’s agenda, especially its decisive economic program, will depend on the new government’s ability to maintain support at home and compromise with Greece’s creditors abroad. 
Syriza’s economic program rejects the austerity policies supported – or, some might say, imposed – by the so-called “troika” (the International Monetary Fund, the European Central Bank, and the European Commission). 
These policies require Greece to maintain a very high primary budget surplus – more than 4% of GDP – for many years to come. 
Syriza also plans to demand a substantial reduction in Greece’s foreign debt, the nominal value of which remains very high – close to 170% of GDP. 
In fact, the real present value of the debt is much lower, given that most of it is now held by governments or other public entities and carries long maturities and low interest rates. 
Nonetheless, repayment “spikes” this year constitute a real short-term challenge. 
The problem for Greece is that its creditors may adopt a very tough stance. 
This largely reflects the belief that, if a breakdown of negotiations triggers another Greek crisis, the systemic risks to the eurozone and the wider European Union would be far smaller than they were just a few years ago. 
The “acute” phase of the euro crisis is over; even if growth remains elusive, financial contagion is no longer viewed as a risk. 
After all, private creditors hold only a minimal share of Greek debt nowadays. 
In 2010-2012, by contrast, systemically important European banks were exposed, raising the risk of a domino effect that threatened the entire eurozone. 
Moreover, a debt reduction in the form of further interest-rate reductions and maturity extensions on foreign government-held debt would not hurt financial markets. 
But debt held by the European Central Bank and the IMF could pose a problem. 
If Greece’s new government does not tread lightly in these discussions, withdrawal of these institutions’ liquidity support for Greek banks could follow. 
Despite the lack of significant financial contagion risk, a renewed Greek crisis, stemming from a lasting and serious breakdown of negotiations between the new government and EU institutions, would constitute a major problem for European cooperation. 
The absence of financial contagion would not rule out serious political repercussions. 
Europe’s political landscape is changing. 
Populist parties, both on the far right and the far left, are gaining electoral traction. 
Some, such as France’s National Front, oppose their country’s eurozone membership; others, such as Podemos in Spain, do not. 
Nonetheless, the challenge that these new parties pose to Europe could prove to be extremely disruptive. 
A Greek exit from the eurozone, together with financial and political turmoil inside Greece, would be perceived as a major defeat for European integration – especially after the laborious efforts made to hold together the monetary union and, with it, the European dream. 
Such an outcome would be even more disheartening in light of the tragic terrorist attacks in Paris, and after unity marches in France and across the continent rekindled a long-fading sense of European solidarity. 
A new image of solidarity is precisely what the Greek election should produce. 
There is little doubt that the suffering that Greeks have had to endure for the last five years is mainly attributable to the fiscal profligacy and poor public management of a procession of Greek governments. 
But as most analysts, including at the IMF, now agree, the troika’s approach was also deeply flawed, as it emphasized wage and income cuts, while neglecting the reform of product markets and the dismantling of harmful public and private oligopolies. 
For the sake of Greece and Europe, the new government must work with the European institutions to revise their strategy, while taking responsibility for implementing growth-promoting structural reforms. 
Greece’s creditors and partners, for their part, must provide the fiscal space needed for the reforms to work. 
Walking away from Greece because it no longer poses a threat of financial contagion is not a politically viable option. 
Both sides will have to show more foresight. 
The last five years have provided two clear lessons for Europe: procrastination only makes reform more difficult, and the end of financial turmoil does not necessarily mean the end of socioeconomic crisis. 
It is time to use these lessons to develop a cooperative strategy that will finally enable Greece to make real progress toward a more stable future. 
A Greek exit from the euro is not a more viable solution today than it was three years ago. 

Greece’s Aid Addiction 
NEW YORK – The ongoing Greek debt saga is tragic for many reasons, not least among them the fact that the country’s relationship with its creditors is reminiscent of that between the developing world and the aid industry. 
Indeed, the succession of bailouts for Greece embodies many of the same pathologies that for decades have pervaded the development agenda – including long-term political consequences that both the financial markets and the Greek people have thus far failed to grasp. 
As in the case of other aid programs, the equivalent of hundreds of billions of dollars has been transferred from richer economies to a much poorer one, with negative, if unintended, consequences. 
The rescue program designed to keep Greece from crashing out of the eurozone has raised the country’s debt-to-GDP ratio from 130% at the start of the crisis in 2009 to more than 170% today, with the International Monetary Fund predicting that the debt burden could reach 200% of GDP in the next two years. 
This out-of-control debt spiral threatens to flatten the country’s growth trajectory and worsen employment prospects. 
Like other aid recipients, Greece has become locked in a codependent relationship with its creditors, which are providing assistance in the form of de facto debt relief through subsidized loans and deferred interest payments. 
No reasonable person expects Greece ever to be able to pay off its debts, but the country has become trapped in a seemingly endless cycle of payments and bailouts – making it dependent on its donors for its very survival. 
The country’s creditors, for their part, have an incentive to protect the euro and limit the geopolitical risk of a Greek exit from the eurozone. 
As a result, even when Greece fails to comply with its creditors’ demands – for, say, tax hikes or pension reforms – it continues to receive assistance with few penalties. 
Perversely, the worse the country performs economically, the more aid it receives. 
The long-term consequences of this cycle of dependence could be serious. 
As long as Greece’s finances are propped up by international creditors, the country’s policymakers will be able to abdicate their responsibility to manage the provision of public goods like education, health care, national security, and infrastructure. 
They will also face few incentives to put in place a properly functioning system to collect taxes. 
Dependence on aid undermines the implicit contract between citizens and their government, according to which politicians must keep taxpayers satisfied in order to stay in office. 
With foreign infusions of cash easing the need for tax revenues, politicians are likely to spend more time courting donors than caring for their constituents. 
The weakened connection between public services and taxes not only makes it easier for officials to cling to power, but also increases the scope for corruption and inefficiency. 
Indeed, based on the experience of aid-recipient economies in the emerging world, the Greek people may find it increasingly difficult to hold their government accountable or penalize officials for misbehavior or corruption. 
So far, the Greek crisis has been treated as a recurring emergency, rather than the structural problem that it is. 
And yet, as long as the country remains locked in a cycle of codependence with its creditors, the state of perpetual crisis is likely to persist. 
Effective aid programs have almost always been temporary in nature, working – as was the case with the Marshall Plan – through short, sharp, finite interventions. 
Open-ended commitments, like aid flows to poor developing countries, have had only limited success, at best. 
As long as Greeks view assistance as guaranteed, they will have little incentive to put their country on a path toward self-sufficiency. 
Whatever the way forward for Greece, if there is to be any hope of progress, the assistance provided by the European Union and the IMF must come to be regarded as temporary. 
Cutting the umbilical cord in a relationship of aid dependency is never easy, and there is no reason to expect that it will be any different with Greece. 
Phasing out transfers, even in a considered and systematic way, works only when the recipient is determined to put in place the measures necessary to survive without assistance. 
There are few signs that Greece is ready to walk on its own, and as long as the aid continues to flow, that is unlikely to change. 
In this sense, markets should view the Greek situation as an equilibrium, not a transition. 

Deescalating Europe’s Politics of Resentment 
ATHENS – A German television presenter recently broadcast an edited video of me, before I was Greece’s finance minister, giving his country the middle-finger salute. 
The fallout has shown the potential impact of an alleged gesture, especially in troubled times. 
Indeed, the kerfuffle sparked by the broadcast would not have happened before the 2008 financial crisis, which exposed the flaws in Europe’s monetary union and turned proud countries against one another. 
When, in early 2010, Greece’s government could no longer service its debts to French, German, and Greek banks, I campaigned against its quest for an enormous new loan from Europe’s taxpayers to pay off those debts. 
I gave three reasons. 
First, the new loans did not represent a bailout for Greece so much as a cynical transfer of private losses from the banks’ books onto the shoulders of Greece’s most vulnerable citizens. 
How many of Europe’s taxpayers, who have footed the bill for these loans, know that more than 90% of the €240 billion ($260 billion) that Greece borrowed went to financial institutions, not to the Greek state or its people? 
Second, it was obvious that if Greece already could not repay its existing loans, the austerity conditions on which the “bailouts” were premised would crush Greek nominal incomes, making the national debt even less sustainable. 
When Greeks could no longer make payments on their mountainous debts, German and other European taxpayers would have to step in again. 
(Wealthy Greeks, of course, had already shifted their deposits to financial centers like Frankfurt and London.) 
Finally, misleading peoples and parliaments by presenting a bank bailout as an act of “solidarity,” while failing to help ordinary Greeks – indeed, setting them up to place an even heavier burden on Germans – was destined to undermine cohesion within the eurozone. 
Germans turned against Greeks; 
Greeks turned against Germans; and, as more countries have faced fiscal hardship, Europe has turned against itself. 
The fact is that Greece had no right to borrow from German – or any other European – taxpayers at a time when its public debt was unsustainable. 
Before Greece took any loans, it should have initiated debt restructuring and undergone a partial default on debt owed to its private-sector creditors. 
But this “radical” argument was largely ignored at the time. 
Similarly, European citizens should have demanded that their governments refuse even to consider transferring private losses to them. 
But they failed to do so, and the transfer was effected soon after. 
The result was the largest taxpayer-backed loan in history, provided on the condition that Greece pursue such strict austerity that its citizens have lost one-quarter of their incomes, making it impossible to repay private or public debts. 
The ensuing – and ongoing – humanitarian crisis has been tragic. 
Five years after the first bailout was issued, Greece remains in crisis. 
Animosity among Europeans is at an all-time high, with Greeks and Germans, in particular, having descended to the point of moral grandstanding, mutual finger-pointing, and open antagonism. 
This toxic blame game benefits only Europe’s enemies. 
It has to stop. 
Only then can Greece – with the support of its European partners, who share an interest in its economic recovery – focus on implementing effective reforms and growth-enhancing policies. 
This is essential to placing Greece, finally, in a position to repay its debts and fulfill its obligations to its citizens. 
In practical terms, the February 20 Eurogroup agreement, which provided a four-month extension for loan repayments, offers an important opportunity for progress. 
As Greece’s leaders urged at an informal meeting in Brussels last week, it should be implemented immediately. 
In the longer term, European leaders must work together to redesign the monetary union so that it supports shared prosperity, rather than fueling mutual resentment. 
This is a daunting task. 
But, with a strong sense of purpose, a united approach, and perhaps a positive gesture or two, it can be accomplished. 
This is an updated and extended version of a post at yanisvaroufakis.eu. 

Down and Out in Athens and Brussels 
NEW YORK – The Greek catastrophe commands the world’s attention for two reasons. 
First, we are deeply distressed to watch an economy collapse before our eyes, with bread lines and bank queues not seen since the Great Depression. 
Second, we are appalled by the failure of countless leaders and institutions – national politicians, the European Commission, the International Monetary Fund, and the European Central Bank – to avert a slow-motion train wreck that has played out over many years. 
If this mismanagement continues, not only Greece but also European unity will be fatally undermined. 
To save both Greece and Europe, the new bailout package must include two big things not yet agreed. 
First, Greece’s banks must be reopened without delay. 
The ECB’s decision last week to withhold credit to the country’s banking system, and thereby to shutter the banks, was both inept and catastrophic. 
That decision, forced by the ECB’s highly politicized Executive Board, will be studied – and scorned – by historians for years to come. 
By closing the Greek banks, the ECB effectively shut down the entire economy (no economy above subsistence level, after all, can survive without a payments system). 
The ECB must reverse its decision immediately, because otherwise the banks themselves would very soon become unsalvageable. 
Second, deep debt relief must be part of the deal. 
The refusal of the rest of Europe, and especially Germany, to acknowledge Greece’s massive debt overhang has been the big lie of this crisis. 
Everyone has known the truth – that Greece can never service its current debt obligations in full – but nobody involved in the negotiations would say it. 
Greek officials have repeatedly tried to discuss the need to restructure the debt by slashing interest rates, extending maturities, and perhaps cutting the face value of the debt as well. 
Yet every attempt by Greece even to raise the issue was brutally rebuffed by its counterparties. 
Of course, as soon as the negotiations collapsed two weeks ago, the truth about the Greek debt began to be stated. 
The IMF was the first to break the silence, acknowledging that it had been urging debt relief but to no avail. 
The United States then let it be known that President Barack Obama and Treasury Secretary Jack Lew had been trying to convince German Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble to offer debt relief to Greece, also without success. 
Then even Schäuble himself, by far the staunchest opponent of debt relief, admitted that Greece needed it; but he also claimed that such relief would violate European Union treaty provisions barring bailouts of governments. 
Following Schauble’s remarkable acknowledgment (made publicly only after utter catastrophe had struck), Merkel herself opined that perhaps certain kinds of relief (such as cuts in interest rates, rather than in the debt’s face value) could do the job in a way that would be consistent with EU rules. 
The fact that the Greek debt overhang was acknowledged only after negotiations had collapsed exposes the deep systemic failures that have brought Greece and Europe to this point. 
We see a European system of crisis management that is fraught with ineptitude, extreme politicization, gamesmanship, and unprofessionalism. 
I certainly do not mean to excuse Greek clientelism, corruption, and mismanagement as ultimate causes of the country’s predicament. 
Yet the failure of the European institutions is more alarming. 
Unless the EU can now save Greece, it will not be able to save itself. 
The EU today operates something like the US under the Articles of Confederation, which defined the US’s ineffectual governing structure after independence from Britain in 1781 but prior to the adoption of the Constitution in 1787. 
Like the newly independent US, the EU today lacks an empowered and effective executive branch capable of confronting the current economic crisis. 
Instead of robust executive leadership tempered by a strong democratic parliament, committees of national politicians run the show in Europe, in practice sidelining (often brazenly) the European Commission. 
It is precisely because national politicians attend to national politics, rather than Europe’s broader interests, that the truth about Greece’s debt went unspoken for so long. 
The Eurogroup, which comprises the 19 eurozone finance ministers, embodies this destructive dynamic, meeting every few weeks (or even more frequently) to manage Europe’s crisis on the basis of national political prejudices rather than a rational approach to problem-solving. 
Germany tends to call the shots, of course, but the discordant national politics of many member states has contributed to one debacle after the next. 
It is the Eurogroup, after all, that “solved” Cyprus’s financial crisis by partial confiscation of bank deposits, thereby undermining confidence in Europe’s banks and setting the stage for Greece’s bank panic two years later. 
Amid all this dysfunction, one international institution has remained somewhat above the political fray: the IMF. 
Its analysis has been by far the most professional and least politicized. 
Yet even the IMF allowed itself to be played by the Europeans, especially by the Germans, to the detriment of resolving the Greek crisis many years ago. 
Once upon a time, the US might have pushed through policy changes based on the IMF’s technical analysis. 
Now, however, the US, the IMF, and the European Commission have all watched from the sidelines as Germany and other national governments have run Greece into the ground. 
Europe’s bizarre decision-making structure has allowed domestic German politics to prevail over all other considerations. 
And that has meant less interest in an honest resolution of the crisis than in avoiding the appearance of being lenient toward Greece. 
Germany’s leaders might rightly fear that their country will be left holding the bill for European bailouts, but the result has been to sacrifice Greece on the altar of an abstract and unworkable idea: “no bailouts.” 
Unless some rational compromise is agreed, insistence on that approach will lead only to massive and even more costly defaults. 
We are now truly at the endgame. 
Greece’s banks have closed, its debt has been acknowledged as unsustainable, and yet the future of both the banks and the debt remains uncertain. 
The decisions taken by Europe in the next several days will determine Greece’s fate; wittingly or not, they will determine the EU’s fate as well. 

Statesmanship and the Greek Crisis 
NEW YORK – Sovereign-debt crises such as the one in Greece can be resolved only through bold steps by both debtor and creditor. 
The debtor needs a fresh start through a debt write-off; the creditor must find a way to provide one without rewarding bad behavior. 
For a deal to be struck, both sides must have their needs addressed. 
Thus, serious reforms and deep debt relief need to go hand in hand. 
It is for this reason that Greece and Germany, its largest creditor, need a new modus vivendi in order to resume negotiations. 
To begin with, the Greek government must be clear about the need for urgent economic reforms. 
The country’s economy has not just collapsed; it is structurally moribund. 
The roots of Greece’s problems stretch far deeper than the austerity of recent years. 
In 2013, for example, resident inventors in Germany filed some 917 patent applications for every million inhabitants. 
Resident inventors in Greece, by contrast, filed just 69 patent applications for every million. 
If Greece wants the prosperity associated with a technologically advanced, twenty-first-century economy, it will have to earn it, by producing innovative products that are competitive on world markets, just as Germany does. 
Doing so is likely to be a generational challenge. 
For its part, Germany must acknowledge the enormity of Greece’s collapse. 
The Greek economy has shrunk by around 25% since 2009; unemployment stands at 27%, with youth unemployment at nearly 50%. 
When Germany faced comparable conditions in the early 1930s, its creditors shrugged, and the resulting instability allowed for the rise of Adolf Hitler. 
After World War II, however, Germany’s debt was slashed, enabling it to rebuild. 
Given this experience, it should understand the importance of cutting a country’s debt when the burden of servicing it becomes unsustainable. 
The case for offering a country a fresh financial start is both economic and moral. 
This makes it difficult for many bankers to understand, as their industry knows no morality – only the bottom line. 
Politicians, too, tend to have their moral compasses calibrated to the relentless hunt for votes. 
Finding effective and moral solutions requires genuine statesmanship – something that has been all too rare during the euro crisis. 
Greek Prime Minister Alexis Tsipras and German Chancellor Angela Merkel now have the opportunity to rise to the occasion as European statesmen. 
Since Tsipras’s election in January, German officials have barely been able to contain their fury that a left-wing upstart government of a tiny, bankrupt country would dare to challenge one of the world’s great economies. 
Finance Minister Wolfgang Schäuble, for example, has repeatedly sought to provoke Greece into leaving the eurozone. 
Tsipras’s response to these provocations has been clear and consistent: Greece should stay in the eurozone, and it needs a fresh financial start to do so. 
On July 5, the Greek people backed their young, charismatic leader with a decisive “No” vote on the unreasonable demands of their country’s creditors. 
Their decision will one day be recognized as a victory for Europe over those who preferred to carve up the eurozone, rather than give Greece the chance to start anew within it. 
At the likely meeting between Tsipras and Merkel this week in Brussels, the stakes could not be higher. 
The economic costs of the impasse have been catastrophic for Greece, and pose a grave threat to Europe. 
The breakdown of negotiations last week sparked a bank panic, leaving Greece’s economy paralyzed and its banks on the verge of insolvency. 
If the banks are to be revived at all, they must be saved within days. 
If Tsipras and Merkel meet as mere politicians, the results will be catastrophic. 
Greece’s banks will be pushed to the point of failure, making the costs of saving Greece and the eurozone prohibitively high. 
If the two leaders meet as statesmen, however, they will save Greece, the eurozone, and the faltering European spirit. 
With the promise of deep debt relief for Greece and a rapprochement between Greece and Germany, economic confidence will return. 
Deposits will flow back into Greek banks. 
The economy will come back to life. 
Tsipras needs to assure Merkel that Greece will live within its means, not as a chronic ward of Europe. 
To ensure such an outcome, debt relief and tough reforms should be phased in over time, according to an agreed schedule, with each party following through on its commitments, as long as the other does, as well. 
Fortunately, Greece is a country of exceptional talents, capable of building new competitive sectors from the ground up, if given the chance. 
Merkel must now take a stance that is the opposite of the one her finance minister has pursued to date. 
Schäuble is undoubtedly one of Europe’s towering political figures, but his strategy for saving the eurozone by pushing Greece out was misguided. 
Merkel now must step in to save Greece as part of the eurozone – and that means easing the country’s debt burden. 
To do otherwise at this stage would create an irreparable split between Europe’s rich and poor, and powerful and weak. 
Some – in particular, the ever-cynical bankers – argue that it is too late for Europe to save itself. 
It is not. 
In Europe, many influential leaders and citizens still view the marketplace as constrained by moral considerations, such as the need to alleviate economic suffering. 
This is an invaluable asset. 
It makes it possible for Merkel to offer Greece a fresh start, because it is the right thing to do and because it accords with Germany’s own experience and history. 
That idea of an ethical approach to the Greek crisis might sound absurd to readers of the financial press, and many politicians will undoubtedly consider it naive. 
Yet most European citizens could embrace it as a sensible solution. 
Europe rose from the rubble of World War II because of the vision of statesmen; now it has been brought to the verge of collapse by the everyday vanities, corruption, and cynicism of bankers and politicians. 
It is time for statesmanship to return – for the sake of current and future generations in Europe and the world. 

A Greek Suicide? 
LONDON – The good news is that a Greek default, which has become more likely after Prime Minister Alexis Tsipras’ provocative rejection of what he described as the “absurd” bailout offer by Greece’s creditors, no longer poses a serious threat to the rest of Europe. 
The bad news is that Tsipras does not seem to understand this. 
To judge by Tsipras’s belligerence, he firmly believes that Europe needs Greece as desperately as Greece needs Europe. 
This is the true “absurdity” in the present negotiations, and Tsipras’ misapprehension of his bargaining power now risks catastrophe for his country, humiliation for his Syriza party, or both. 
The most likely outcome is that Tsipras will eat his words and submit to the conditions set by the “troika” (the European Commission, European Central Bank, and the International Monetary Fund) before the end of June. 
If not, the ECB will stop supporting the Greek banking system, and the government will run out of money to service foreign debts and, more dramatically, to pay Greek citizens their pensions and wages. 
Cut off from all external finance, Greece will become an economic pariah – the Argentina of Europe – and public pressure will presumably oust Syriza from power. 
This outcome is all the more tragic, given that the economic analysis underlying Syriza’s demand for an easing of austerity was broadly right. 
Instead of seeking a face-saving compromise on softening the troika program, Tsipras wasted six months on symbolic battles over economically irrelevant issues such as labor laws, privatizations, even the name of the troika. 
This provocative behavior lost Greece all potential allies in France and Italy. 
Worse still, the time wasted on political grandstanding destroyed the primary budget surplus, which was Tsipras’s trump card in the early negotiations. 
Now Tsipras thinks he holds another trump card: Europe’s fear of a Greek default. 
But this is a delusion promoted by his finance minister, Yanis Varoufakis. 
A professor of game theory, Varoufakis recently boasted to the New York Times that “little Greece, in order to survive, [could] bring down the financial world,” and that his media image “as an irrational fool… is doing my work for me” by frightening other EU finance ministers. 
Apparently, Varoufakis believes that his “sophisticated grasp of game theory” gives Greece a crucial advantage in “the complicated dynamics” of the negotiations. 
In fact, the game being played out in Europe is less like chess than like tic-tac-toe, where a draw is the normal outcome, but a wrong move means certain defeat. 
The rules of this game are much simpler than Varoufakis expected because of a momentous event that occurred in the same week as the Greek election. 
On January 22, the ECB took decisive action to protect the eurozone from a possible Greek default. 
By announcing a huge program of bond purchases, much bigger relative to the eurozone bond market than the quantitative easing implemented in the United States, Britain, or Japan, ECB President Mario Draghi erected the impenetrable firewall that had long been needed to protect the monetary Union from a Lehman-style financial meltdown. 
The ECB’s newfound ability to print money, essentially without limit, to support both banks and governments has reduced Greek contagion to insignificance. 
That represents a profound change in Europe’s financial environment, which Greek politicians, along with many economic analysts, still fail to understand. 
Before the ECB’s decision, contagion from Greece was a genuine threat. 
If the Greek government defaulted or tried to abandon the euro, Greece’s banks would collapse, and Greeks who failed to get their money out of the country would lose their savings, as occurred in Cyprus in 2013. 
When savers in other indebted euro countries such as Portugal and Spain observed this, they would fear similar losses and move their money to banks in Germany or Austria, as well as sell their holdings of Portuguese or Spanish government bonds. 
As a result, the debtor countries’ bond prices would collapse, interest rates would soar, and banks would be threatened with collapse. 
If the contagion from Greece intensified, the next-weakest country, probably Portugal, would find itself unable to support its banking system or pay its debts. 
In extremis, it would abandon the euro, following the Greek example. 
Before January, this sequence of events was quite likely, but the ECB’s bond-buying program put a firebreak at each point of the contagion process. 
If holders of Portuguese bonds are alarmed by a future Greek default, the ECB will simply increase its bond buying; with no limit to its buying power, it will easily overwhelm any selling pressure. 
If savers in Portuguese banks start moving their money to Germany, the ECB will recycle these euros back to Portugal through interbank deposits. 
Again, there is no limit to how much money the ECB can recycle, provided Portuguese banks remain solvent – which they will, so long as the ECB continues to buy Portuguese government bonds. 
In short, the ECB bond-buying program has transformed the ECB from a passive observer of the euro crisis, paralyzed by the outdated legalistic constraints of the Maastricht Treaty, into a proper lender of last resort. 
With powers to monetize government debts similar to those exercised by the US Federal Reserve, the Bank of Japan, and the Bank of England, the ECB can now guarantee the eurozone against financial contagion. 
Unfortunately for Greece, this has been lost on the Tsipras government. 
Greek politicians who still see the threat of financial contagion as their trump card should note the coincidence of the Greek election and the ECB’s bond-buying program and draw the obvious conclusion. 
The ECB’s new policy was designed to protect the euro from the consequences of a Greek exit or default. 
The latest Greek negotiating strategy is to demand a ransom to desist threatening suicide. 
Such blackmail might work for a suicide bomber. 
But Greece is just holding a gun to its own head – and Europe does not need to care very much if it pulls the trigger. 

What Is Plan B for Greece? 
TOKYO – Financial markets have greeted the election of Greece’s new far-left government in predictable fashion. 
But, though the Syriza party’s victory sent Greek equities and bonds plummeting, there is little sign of contagion to other distressed countries on the eurozone periphery. 
Spanish ten-year bonds, for example, are still trading at interest rates below US Treasuries. 
The question is how long this relative calm will prevail. 
Greece’s fire-breathing new government, it is generally assumed, will have little choice but to stick to its predecessor’s program of structural reform, perhaps in return for a modest relaxation of fiscal austerity. 
Nonetheless, the political, social, and economic dimensions of Syriza’s victory are too significant to be ignored. 
Indeed, it is impossible to rule out completely a hard Greek exit from the euro (“Grexit”), much less capital controls that effectively make a euro inside Greece worth less elsewhere. 
Some eurozone policymakers seem to be confident that a Greek exit from the euro, hard or soft, will no longer pose a threat to the other periphery countries. 
They might be right; then again, back in 2008, US policymakers thought that the collapse of one investment house, Bear Stearns, had prepared markets for the bankruptcy of another, Lehman Brothers. 
We know how that turned out. 
True, there have been some important policy and institutional advances since early 2010, when the Greek crisis first began to unfold. 
The new banking union, however imperfect, and the European Central Bank’s vow to save the euro by doing “whatever it takes,” are essential to sustaining the monetary union. 
Another crucial innovation has been the development of the European Stability Mechanism, which, like the International Monetary Fund, has the capacity to execute vast financial bailouts, subject to conditionality. 
And yet, even with these new institutional backstops, the global financial risks of Greece’s instability remain profound. 
It is not hard to imagine Greece’s brash new leaders underestimating Germany’s intransigence on debt relief or renegotiation of structural-reform packages. 
It is also not hard to imagine Eurocrats miscalculating political dynamics in Greece. 
In any scenario, most of the burden of adjustment will fall on Greece. 
Any profligate country that is suddenly forced to live within its means has a huge adjustment to make, even if all of its past debts are forgiven. 
And Greece’s profligacy was epic. 
In the run-up to its debt crisis in 2010, the government’s primary budget deficit (the amount by which government expenditure on goods and services exceeds revenues, excluding interest payments on its debt) was equivalent to an astonishing 10% of national income. 
Once the crisis erupted and Greece lost access to new private lending, the “troika” (the IMF, the ECB, and the European Commission) provided massively subsidized long-term financing. 
But even if Greece’s debt had been completely wiped out, going from a primary deficit of 10% of GDP to a balanced budget requires massive belt tightening – and, inevitably, recession. 
Germans have a point when they argue that complaints about “austerity” ought to be directed at Greece’s previous governments. 
These governments’ excesses lifted Greek consumption far above a sustainable level; a fall to earth was unavoidable. 
Nonetheless, Europe needs to be much more generous in permanently writing down debt and, even more urgently, in reducing short-term repayment flows. 
The first is necessary to reduce long-term uncertainty; the second is essential to facilitate near-term growth. 
Let’s face it: Greece’s bind today is hardly all of its own making. 
(Greece’s young people – who now often take a couple of extra years to complete college, because their teachers are so often on strike – certainly did not cause it.) 
First and foremost, the eurozone countries’ decision to admit Greece to the single currency in 2002 was woefully irresponsible, with French advocacy deserving much of the blame. 
Back then, Greece conspicuously failed to meet a plethora of basic convergence criteria, owing to its massive debt and its relative economic and political backwardness. 
Second, much of the financing for Greece’s debts came from German and French banks that earned huge profits by intermediating loans from their own countries and from Asia. 
They poured this money into a fragile state whose fiscal credibility ultimately rested on being bailed out by other euro members. 
Third, Greece’s eurozone partners wield a massive stick that is typically absent in sovereign-debt negotiations. 
If Greece does not accept the conditions imposed on it to maintain its membership in the single currency, it risks being thrown out of the European Union altogether. 
Even after two bailout packages, it is unrealistic to expect Greek taxpayers to start making large repayments anytime soon – not with unemployment at 25% (and above 50% for young people). 
Germany and other hawkish northern Europeans are right to insist that Greece adhere to its commitments on structural reform, so that economic convergence with the rest of the eurozone can occur one day. 
But they ought to be making even deeper concessions on debt repayments, where the overhang still creates considerable policy uncertainty for investors. 
If concessions to Greece create a precedent that other countries might exploit, so be it. 
Sooner rather than later, other periphery countries will also need help. 
Greece, one hopes, will not be forced to leave the eurozone, though temporary options such as imposing capital controls may ultimately prove necessary to prevent a financial meltdown. 
The eurozone must continue to bend, if it is not to break. 

Greek Lessons for Europe 
BERLIN - “It’s when the tide goes out that you find out who has been swimming naked,” the legendary investor Warren Buffett aptly remarked when the global economic crisis hit. 
And, as we have found out in the meantime, this is as true for countries as it is for companies. 
Following Ireland, Greece is now the second euro-zone member to have gotten into massive payment difficulties due to the crisis, almost to the point of national bankruptcy. 
Ireland was able to resolve its problems by itself, through a restructuring policy that was painful yet unflinching. 
It could do so because its economy, apart from its excessive debt burden following the collapse of an asset bubble, was basically sound. 
The situation in Greece is different. 
A restructuring of the economy will be much more difficult, because it will have to be more far-reaching. 
The fiscal deficit must now be redressed resulted not just from internal financial imbalances, but also from a political system that for too long time has been in denial of reality, allowing the country to live beyond its means. 
Nevertheless, the European Union can neither allow Greece to slide into national bankruptcy nor hand it over to the International Monetary Fund, since other euro-zone members – namely, Portugal, Spain, and Italy – would probably be next in line to be attacked by the financial markets. 
In that case, the euro would be in danger of failing, for the first time seriously imperiling the entire project of European integration. 
The real problem at the heart of the Greek crisis is so grave because it involves the fundamental weakness of the euro: its lack of support by a government policy. 
The caps on member states’ budget deficits and public debt imposed by the Maastricht criteria have proven relatively early on to be of limited use in the real world, and the same is true for the monitoring tools linked to these limits. 
In any case, the Maastricht rules were never designed for a perfect storm like the one triggered by the collapse of Lehman Brothers in September 2008. 
The euro, which turned out to be the critical tool for defending European interests in this crisis, will now be subjected to an endurance test directed at the soft political heart of its construction. 
Europe’s leaders – first and foremost Germany and France, which will play the deciding role – must act quickly and put through new, imaginative solutions. 
This will not come cheap, and therefore will entail substantial political risks. 
But, given a global economic environment that promises scant sustainable growth in the coming years, things could otherwise get very tough very soon. 
The solutions that Europe’s leaders provide must go beyond Maastricht, but without triggering new institutional debates, which would lead us nowhere. 
Moreover, new instruments like Eurobonds will have to be made available in order to reduce the affected euro-zone countries’ interest burden, provided that they have taken serious steps – subject to effective control mechanisms – toward credible restructuring. 
The current crisis has, however, also shown that the Council of Finance Ministers (Ecofin) is unable to assert such control over EU member states’ fiscal policies. 
The direct leadership of heads of state and government is needed, at least in these times of extreme crisis. 
One sign of hope is that, following the recent Franco-German summit, German Chancellor Angela Merkel for the first time did not publicly oppose the idea of a European economic government. 
Spelling out such a body’s structure, costs, decision-making procedures, and control mechanisms as quickly as possible is now the order of the day. 
Indeed, there is no time to lose. 
But even with one, two, or three steps forward, the German and French governments will be taking great political risks domestically if the euro crisis in the Mediterranean worsens and a financial bailout there becomes necessary to save the common currency. 
The populations in the countries that will have to foot the bill are unprepared for the reality check ahead of them, adding fuel to a years-long growth in Euro-skepticism, which now pervades all political camps. 
This applies increasingly to Germany as well, making it very likely that we will see an extremely large political problem emerge there in the near future. 
Pay for the southern European countries or resign oneself to the end of the euro? 
The question alone makes clear what this crisis is about: the future of the European project. 
At the same time, muddling through – a typically European answer that limits political risk while not really changing anything – will be difficult, because the consequences of the global economic crisis have not yet been fully addressed. 
What is necessary now is statesman-like leadership – and even more so states woman -like leadership. 
Angela Merkel and French President Nicolas Sarkozy are facing the defining challenge of their respective terms in office. 
They must navigate the European ship safely through this storm. 
Only courageous thinking and action will enable them to steer clear of the rocks. 

A Blueprint for Greece’s Recovery 
ATHENS – Months of negotiations between our government and the International Monetary Fund, the European Union, and the European Central Bank have produced little progress. 
One reason is that all sides are focusing too much on the strings to be attached to the next liquidity injection and not enough on a vision of how Greece can recover and develop sustainably. 
If we are to break the current impasse, we must envisage a healthy Greek economy. 
Sustainable recovery requires synergistic reforms that unleash the country’s considerable potential by removing bottlenecks in several areas: productive investment, credit provision, innovation, competition, social security, public administration, the judiciary, the labor market, cultural production, and, last but not least, democratic governance. 
Seven years of debt deflation, reinforced by the expectation of everlasting austerity, have decimated private and public investment and forced anxious, fragile banks to stop lending. 
With the government lacking fiscal room, and Greek banks burdened by non-performing loans, it is important to mobilize the state’s remaining assets and unclog the flow of bank credit to healthy parts of the private sector. 
To restore investment and credit to levels consistent with economic escape velocity, a recovering Greece will require two new public institutions that work side by side with the private sector and with European institutions: A development bank that harnesses public assets and a “bad bank” that enables the banking system to get out from under their non-performing assets and restore the flow of credit to profitable, export-oriented firms. 
Imagine a development bank levering up collateral that comprises post-privatization equity retained by the state and other assets (for example, real estate) that could easily be made more valuable (and collateralized) by reforming their property rights. 
Imagine that it links the European Investment Bank and the European Commission President Jean-Claude Juncker’s €315 billion ($350 billion) investment plan with Greece’s private sector. 
Instead of being viewed as a fire sale to fill fiscal holes, privatization would be part of a grand public-private partnership for development. 
Imagine further that the “bad bank” helps the financial sector, which was recapitalized generously by strained Greek taxpayers in the midst of the crisis, to shed their legacy of non-performing loans and unclog their financial plumbing. 
In concert with the development bank’s virtuous impact, credit and investment flows would flood the Greek economy’s hitherto arid realms, eventually helping the bad bank turn a profit and become “good.” 
Finally, imagine the effect of all of this on Greece’s financial, fiscal, and social-security ecosystem: With bank shares skyrocketing, our state’s losses from their recapitalization would be extinguished as its equity in them appreciates. 
Meanwhile, the development bank’s dividends would be channeled into the long-suffering pension funds, which were abruptly de-capitalized in 2012 (owing to the “haircut” on their holdings of Greek government bonds). 
In this scenario, the task of bolstering social security would be completed with the unification of pension funds; the surge of contributions following the pickup in employment; and the return to formal employment of workers banished into informality by the brutal deregulation of the labor market during the dark years of the recent past. 
One can easily imagine Greece recovering strongly as a result of this strategy. 
In a world of ultra-low returns, Greece would be seen as a splendid opportunity, sustaining a steady stream of inward foreign direct investment. 
But why would this be different from the pre-2008 capital inflows that fueled debt-financed growth? 
Could another macroeconomic Ponzi scheme really be avoided? 
During the era of Ponzi-style growth, capital flows were channeled by commercial banks into a frenzy of consumption and by the state into an orgy of suspect procurement and outright profligacy. 
To ensure that this time is different, Greece will need to reform its social economy and political system. 
Creating new bubbles is not our government’s idea of development. 
This time, by contrast, the new development bank would take the lead in channeling scarce homegrown resources into selected productive investment. 
These include startups, IT companies that use local talent, organic-agro small and medium-size enterprises, export-oriented pharmaceutical companies, efforts to attract the international film industry to Greek locations, and educational programs that take advantage of Greek intellectual output and unrivaled historic sites. 
In the meantime, Greece’s regulatory authorities would be keeping a watchful eye over commercial lending practices, while a debt brake would prevent our government from indulging in old, bad habits, ensuring that our state never again slips into primary deficits. 
Cartels, anti-competitive invoicing practices, senselessly closed professions, and a bureaucracy that has traditionally turned the state into a public menace would soon discover that our government is their worst foe. 
The barriers to growth in the past were an unholy alliance among oligarchic interests and political parties, scandalous procurement, clientelism, the permanently broken media, overly accommodating banks, weak tax authorities, and a weighed-down, fearful judiciary. 
Only the bright light of democratic transparency can remove such impediments; our government is determined to help it shine through. 

The Greek Time Bomb 
ATHENS – Much is at stake in Greece’s upcoming election. 
Indeed, the outcome could determine whether the country remains in the eurozone, with far-reaching implications for the rest of the monetary union. 
Syriza, a radical left-wing party whose popularity has skyrocketed amid the country’s economic crisis, is the favorite to win, though it is unlikely to gain enough parliamentary seats to govern alone. 
Instead, it will probably lead a coalition government, though with which other parties remains unclear. 
Fundamental to Syriza’s platform is its economic program, designed to counteract the impact of the excessively strict austerity that Greeks have endured for the last four and a half years, in exchange for bailouts from the “troika” of the European Central Bank, the International Monetary Fund, and the European Commission. 
Pensions have been reduced by 40%, on average, while the middle class is suffering under the weight of crippling new property taxes. 
As a result, Greece has fallen into a deep and prolonged recession, with output down 25% from pre-crisis levels. 
Worse, unemployment stands at nearly 26% – and more than 50% among young people. 
Yet most unemployment benefits are now being eliminated after 12 months, with the long-term unemployed often losing access to the state health-care system. 
Add to this a 30% increase in prices for prescription drugs, and it is easy to see why Greek society is unraveling. 
Of course, these sacrifices might be worthwhile were they helping Greece reduce its public debt to manageable levels. 
But, at the end of 2014, public debt amounted to 175% of GDP, having increased from its 2009 level of 127%. 
Servicing that debt would require primary budget surpluses equal to at least 4% of GDP until 2022 – an outcome that would require a surge in growth. 
Under the weight of relentless fiscal austerity, however, such growth is out of the question. 
That is why Syriza has promised to launch a massive new spending program – including free electricity and food coupons for the poor and an increase in state pensions to pre-crisis levels – that would cost about 6.5% of GDP. 
Tax hikes for high-income earners and large property owners would help to finance these expenditures, while increases in the minimum wage would round out income redistribution efforts. 
Syriza has also promised to repeal labor-market liberalization and suspend privatization. 
Finally, it plans to renegotiate Greece’s debt with lenders, in the hope of writing off the bulk of its liabilities. 
Syriza’s economic program neglects the important fact that fiscal consolidation and structural measures not only form part of Greece’s commitments; they also serve the country’s long-term interest. 
Given this, they cannot – and should not – be abolished. 
Instead, the problems in their design and implementation should be addressed, in order to improve their effectiveness within current economic circumstances. 
Such an approach would strengthen Syriza’s position in debt-relief negotiations. 
Nonetheless, official statements suggest that the troika would not be inclined to accept Syriza’s negotiating framework, intending instead to complete the talks that it had launched with the outgoing center-right government, the goal being to securing further budget cuts and initiate new labor-market and pension reforms. 
In short, the troika will insist that Greece honors its prior commitments. 
If negotiations stall, financial and liquidity stress, resulting from Greece’ inability to borrow at current interest rates – ten-year bond yields have reached 9.5 % – will weaken the fiscal position and banking system further. 
This could lead to a collapse in confidence, triggering financial upheaval and, in turn, forcing the country to seek a third bailout – one that would require Greece to leave the eurozone and introduce a new, devalued currency. 
In that case, Greece’s geopolitical position would be weakened, its economy would sink further into recession, and social tensions would rise. 
Moreover, instability would become chronic, because the eurozone would no longer offer a backstop for fiscal and financial laxity. 
Eurozone authorities may claim that a Greek exit no longer poses a systemic risk, given the introduction in recent years of various instruments for fighting financial crises, including government-backed rescue funds, a partial banking union, tougher fiscal controls, and the European Central Bank’s new role as lender of last resort. 
But a member’s exit would still indicate that the eurozone’s integrity is not guaranteed – a message that the markets are unlikely to miss. 
A Greek exit may serve as a warning to countries like Spain, Italy, and France, where strong anti-Europe or anti-establishment parties are on the rise. 
But it would do nothing to address the real problem: the increasing economic divergence among eurozone countries. 
So long as performance gaps continue to widen, voters will continue to challenge European integration. 
Only further unification, underpinned by growth-oriented policies in the struggling countries, can reverse this trend. 
Such an outcome is still possible – but only if the relevant actors recognize the risks associated with a Greek exit from the eurozone. 
A Syriza-led government must moderate its approach and promise that it will continue to pursue reform and limit spending in exchange for a substantial reduction to its debt burden – a reduction that the troika must be willing to grant. 

Greening Digital Finance 
BEIJING – Digital finance has turned out to be an unexpected revolutionary, simply by enabling low-cost financial inclusion. 
Thanks to new financial technologies (fintech), consumers can shop seamlessly, migrants can send hard-earned money to their families cheaply, small businesses can access credit in minutes through Big Data-driven profiling, and savers can shape their own investment destinies. 
But if fintech is to reach its potential to advance the global public good, another factor must be accounted for: the environment. 
The United Nations Environment Programme (UNEP) recently published a report, “Fintech and Sustainable Development: Assessing the Implications,” exploring how digital finance can be leveraged for environmental gains. 
As the report points out, by reducing costs and boosting efficiency, fintech is already mobilizing green finance, enabling poorer people to access clean energy through innovative payment systems and facilitating green savings for rich and poor alike. 
The Swedish start-up Trine, for example, enables savers in downtown Stockholm to fund distributed solar-energy systems in rural areas thousands of kilometers away. 
Kenya’s M-KOPA is leveraging the hugely successful domestic mobile payments platform, M-PESA, to make clean energy available to poorer communities. 
Other experiments highlight the green potential of blockchain and cryptocurrencies. 
The rewards of such initiatives could be substantial – for households, financial-services providers, economies, and the environment. 
With this in mind, a coalition of digital-finance companies, the Green Digital Finance Alliance, was launched at this year’s World Economic Forum Annual Meeting in Davos, Switzerland. 
One of the alliance’s founders, ANT Financial Services has a mobile-payments platform with 450 million users in China alone. 
The organization is now working with UNEP to offer an experimental “green energy” app that rewards users for reduced carbon use. 
Fintech is part of a broader digital revolution, which also includes Big Data, the Internet of Things, blockchain, and artificial intelligence. 
Such technologies enable us to record and trace the lifecycle of products – even money itself – thereby determining precisely how they were used, how they were financed, and what impact they had on the environment. 
So ANT’s new green energy app translates financial-transaction data into implied carbon emissions. 
This approach, if extended across more payments platforms, could engage hundreds of millions of individuals in factoring carbon-savings into their daily lifestyle choices. 
All revolutions carry unintended costs, and are susceptible to diversion, if not outright corruption. 
The fintech revolution is no different. 
Loss of privacy is the most obvious risk; indeed, despite efforts to create safeguards, it is all but inevitable. 
But there are also less visible risks, stemming from the disruption of existing markets. 
As the journalist and author Michael Lewis emphasized in his bestseller Flash Boys, the risks created by high-frequency trading on the financial returns of our lumbering, twentieth-century pension funds are far-reaching. 
Another casualty will be regulation, at least for a while, as policymakers struggle to figure out how to manage an increasingly complex, dynamic, and virtual financial system. 
There is also a risk that the commoditization effects brought by speed and Big Data will undermine the conditions for sustainable development. 
Though these risks cannot be eliminated, they can be mitigated. 
Regulators, in particular, will need to work fast to keep up, as best they can, in a fast-changing financial milieu. 
But their goal should not be only to protect against fintech’s risks; they should also aim to guide it, so that it can reach its full potential. 
For example, fintech should be aligned with the Sustainable Development Goals – an effort that demands new standards, market innovation, and collaboration. 
Countries worldwide should integrate digital finance into their sustainable-development financing plans. 
Coalitions like the Green Digital Finance Alliance can support these efforts, by mobilizing collective action on the part of financial institutions and their stakeholders. 
Multilateral measures will also be important. 
This year, the G20, under Germany’s leadership, will focus on building resilience, improving sustainability, and assuming responsibility for climate change – all areas where digitization must be part of the solution. 
Likewise, the G7, under Italy’s leadership, will explore how to finance “green” small and medium-size enterprises, taking advantage of fintech-powered innovations. 
With the right approach, fintech can be harnessed to strengthen economies and societies, while helping to preserve the environment. 
Fortunately, this could well be the year that green digital finance comes of age. 


A State-Powered Green Revolution 
LONDON – Discussions about building a green future tend to focus on the need to improve the generation of energy from renewable sources. 
But that is just the first step. 
Better mechanisms for storing and releasing that energy – when the sun isn’t shining, the wind isn’t blowing, or when electric cars are on the move – are also critical. 
And, contrary to popular belief, it is the public sector that is leading the way toward effective solutions. 
Since the commercial development of lithium-ion batteries – the rechargeable batteries common in consumer electronics – in the early 1990s, the challenge of storing and releasing power effectively enough to make sustainable energy sources viable alternatives to fossil fuels has been a vexing one. 
And efforts by entrepreneurial billionaires like Bill Gates and Elon Musk to overcome this challenge have been the focus of much excited media speculation. 
So how many billionaires does it take to change a battery? 
The answer, it turns out, is zero. 
This week, Ellen Williams, Director of the Advanced Research Projects Agency-Energy, part of the US Department of Energy, announced that her agency had beaten the billionaires to it. 
ARPA-E, she declared, had attained “some holy grails in batteries,” which will enable us to “create a totally new approach to battery technology, make it work, make it commercially viable.” 
While praising Musk’s achievements, Williams drew a sharp distinction between their approaches. 
Musk has been engaged in the large-scale production of “an existing, pretty powerful battery technology.” 
ARPA-E, by contrast, has been pursuing technological innovation in the purest sense: “creating new ways of doing” things. 
And they “are pretty well convinced” that some of their technologies “have the potential to be significantly better.” 
To many people, this development may seem surprising. 
After all, the private sector has long been regarded as an economy’s most important source of innovation. 
But this perception is not entirely accurate. 
In fact, history’s great entrepreneurial figures have frequently stood on the shoulders of the entrepreneurial state. 
The late Apple founder and CEO Steve Jobs was a smart businessman, but every technology that makes the iPhone “smart” was developed with state funding. 
That is why Gates has declared that only the state, in the form of public institutions like ARPA-E, can lead the way to an energy breakthrough. 
It is critical to note here that it is not the state as administrator fulfilling this role; rather, it is the entrepreneurial state in action, creating markets, instead of just fixing them. 
With a mission-oriented approach and the freedom to experiment – with failure understood to be an unavoidable, and even welcome, feature of the learning process – the state is better able to attract top talent and pursue radical innovation. 
But, of course, leading a green revolution will be no easy feat. 
To succeed, public agencies will have to overcome significant challenges. 
Consider ARPA-E, which was founded in 2009 as part of US President Barack Obama’s economic-stimulus package. 
Though still in its infancy, the agency – based on the model of the long-established Defense Advanced Research Projects Agency (DARPA) – has already shown major promise. 
And, following the commitment, made by Obama and 19 other world leaders at last December’s climate change conference in Paris, to double public investment in green-energy research, ARPA-E seems set to receive a welcome boost in funding. 
But ARPA-E still lacks the capacity to create and shape new markets that, say, DARPA enjoys. 
This represents a major challenge, because the agency is working in an industry that remains in its early stages. 
Though the development of wind- and solar-power technologies received a big push in the 1970s, both are still marked by market and technological uncertainty. 
The embedded energy infrastructure retains strong incumbency advantages, and markets do not value sustainability adequately or price waste and pollution fairly. 
In the face of such uncertainty, the business sector will not enter the market until the riskiest and most capital-intensive investments have been made, or until coherent and systematic political signals have been communicated. 
Governments must therefore act decisively to make the needed investments and provide the right signals. 
Crucially, governments must also install safeguards to ensure that the entrepreneurial state reaps an appropriate share of the rewards for its efforts. 
In the past, this might have happened via tax spillovers. 
But the top marginal rate is nowhere near the level it was in the 1950s, when NASA, a foremost example of state-sponsored innovation, was founded in the US. 
(At that time, the highest marginal tax rate was 91%.) 
Indeed, thanks to the lobbying of Silicon Valley venture capitalists, capital gains tax fell by 50% in five years at the end of the 1970s. 
The increased use of upstream patenting has weakened spillovers. 
Of course, private-sector players like Gates and Musk are essential partners in driving forward the green revolution. 
As they assume a greater role in the commercialization and deployment of battery-storage technology, they will earn their fair share of rewards. 
But shouldn’t the ARPA-E (or its angel investors – US taxpayers) also get some return, for its early – and risky – investment? 
In some countries, such as Israel (with its Yozma program) and Finland (with its Sitra fund), the government has retained a stake in state-funded innovation. 
This enables the entrepreneurial state to continue to invest, catalyzing the next wave of innovations. 
Why are Western countries so resistant to this sensible idea? 

Green Money 
NEW YORK – There is little doubt that green will be the metaphorical color of choice for world leaders when they gather at the G-20 Summit in Pittsburgh. 
Attention will focus on turning the “green shoots” of recovery into sustainable “green growth,” leading to “green economies” consistent with the goal of protecting the world’s climate. 
Governments in rich countries are beginning to spell out just what that will mean in terms of policy and lifestyle changes and the investments required to develop clean energy sources. 
But, to be successful, a “green new deal” will have to address some enormous challenges in the developing world, where the impact of global warming will be felt first and hardest, and where rapid growth requires massive expansion of cheap energy. 
Globally, more than 30 million tons of oil equivalent are consumed in the form of primary energy every day, equivalent to 55 kilowatt hours per person per day, with rich countries, on average, consuming more than twice that figure. 
For many developing countries, the figure is well under 20 kwh; 
China is still well below the global average, and even most emerging markets consume less than one-third of the average in many advanced economies. 
The economics behind efforts to close these energy gaps are relatively straightforward. 
Up to a threshold of around 100 kwh per capita per day, energy consumption and human development indicators go hand in hand. 
At current prices, between $10 and $20 per person per day would be needed to reach that threshold. 
This puts energy security well beyond the means of not just the poorest, but also of most people in emerging economies. 
Spending $10 per day on energy services would, for example, exhaust the per capita incomes of countries such as Angola, Ecuador, and Macedonia. 
Hence, big investments in energy services are the order of the day throughout the developing world. 
In order to provide more energy to meet development goals without accelerating global warming, there must be a shift to a new energy infrastructure built around renewables (of which the most significant are probably solar power, wind, and biofuels), cleaner coal, and carbon capture and storage. 
The problem is that these are currently much more costly options than their carbon-heavy alternatives. 
Policy makers in developing countries are concerned that being forced to go down this path could put modern energy services beyond the reach of poor countries, families, and communities. 
Market-based solutions to the climate challenge run the very serious risk of undermining development objectives, precisely because they aim to raise the price of energy services in order to make renewable energy sources attractive to private investors. 
Indeed, the protectionist elements tacked on to these proposals make them decidedly anti-development. 
So what is needed is massive public investment in cleaner energy provision, coupled in the short term with appropriate subsidies to offset high initial prices. 
If targeted at the most promising technology options (say, solar and wind), such a strategy would yield early unit cost write-downs through innovation, learning, and economies of scale; give the private sector clear, credible, and attractive signals; and encourage energy efficiency. 
The big obstacle is access to predictable and affordable finance. 
The onus is on rich-country governments to support this big push into clean energy in the developing world, as it was their carbon-fueled economic prosperity that has brought us to the brink of a climate catastrophe. 
So far, rich countries have not risen to the challenge; despite commitments made at Kyoto, Bali, and elsewhere, the resources committed for climate-change mitigation – let alone adaptation – in developing countries have been paltry and poorly targeted. 
The scale of the needed support is comparable to the Marshall Plan, which committed 1% of the United States’ GDP per year to help European reconstruction after World War II. 
But, as with the original plan, the long-term returns from such a commitment will be enormous. 
This time, moreover, the burden will not fall on one country alone, and a broader mix of traditional and innovative sources of financing are already available to help fund the required investment programs in energy efficiency and renewables. 
Even so, scaling-up multilateral support will require a massive overhaul of international finance. 
Back in April, G-20 leaders accepted that investing in a low-carbon infrastructure, particularly energy services, is key to a truly sustainable economic and environmental future. 
In Pittsburgh, with the clock ticking on talks to adopt a successor treaty to the Kyoto Protocol this December in Copenhagen, the G-20 will have a real opportunity to show that the color of serious money to meet both climate and development goals really is green. 

Green Shoots or Yellow Weeds? 
New York – Recent data suggest that the rate of contraction in the world economy may be slowing. 
But hopes that “green shoots” of recovery may be springing up have been dashed by plenty of yellow weeds. 
Recent data on employment, retail sales, industrial production, and housing in the United States remain very weak; Europe’s first quarter GDP growth data is dismal; 
Japan’s economy is still comatose; and even China – which is recovering – has very weak exports. Thus, the consensus view that the global economy will soon bottom out has proven – once again – to be overly optimistic. 
After the collapse of Lehman Brothers in September 2008, the global financial system nearly melted down and the world economy went into free fall. 
Indeed, the rate of economic contraction in the fourth quarter of 2008 and the first quarter of 2009 reached near-depression levels. 
At that point, global policymakers got religion and started to use most of the weapons in their arsenal: vast fiscal-policy easing; conventional and unconventional monetary expansion; trillions of dollars in liquidity support, recapitalization, guarantees, and insurance to stem the liquidity and credit crunch; and, finally, massive support to emerging-market economies. 
In the last two months alone, one can count more than 150 different policy interventions around the world. 
This policy equivalent of former US Secretary of State Colin Powell’s doctrine of “overwhelming force,” together with the sharp contraction of output below final demand for goods and services (which drew down inventories of unsold goods), sets the stage for most economies to bottom out early next year. 
Even so, the optimists who spoke last year of a soft landing or a mild “V-shaped” eight-month recession were proven wrong, while those who argued that this would be a longer and more severe “U-shaped” 24-month recession – the US downturn is already in its 18th month – were correct. 
And the recent optimism that economies will bottom out by mid-year have been dashed by the most recent economic data. 
The crucial issue, however, is not when the global economy will bottom out, but whether the global recovery – whenever it comes – will be robust or weak over the medium term. 
One cannot rule out a couple of quarters of sharp GDP growth as the inventory cycle and the massive policy boost lead to a short-term revival. 
But those tentative green shoots that we hear so much about these days may well be overrun by yellow weeds even in the medium term, heralding a weak global recovery over the next two years. 
First, employment is still falling sharply in the US and other economies. 
Indeed, in advanced economies, the unemployment rate will be above 10% by 2010. 
This will be bad news for consumption and the size of bank losses. 
Second, this is a crisis of solvency, not just liquidity, but true deleveraging has not really started, because private losses and debts of households, financial institutions, and even corporations are not being reduced, but rather socialized and put on government balance sheets. 
Lack of deleveraging will limit the ability of banks to lend, households to spend, and firms to invest. 
Third, in countries running current-account deficits, consumers need to cut spending and save much more for many years. 
Shopped out, savings-less, and debt-burdened consumers have been hit by a wealth shock (falling home prices and stock markets), rising debt-service ratios, and falling incomes and employment. 
Fourth, the financial system – despite the policy backstop – is severely damaged. 
Most of the shadow banking system has disappeared, and traditional commercial banks are saddled with trillions of dollars in expected losses on loans and securities while still being seriously undercapitalized. 
So the credit crunch will not ease quickly. 
Fifth, weak profitability, owing to high debts and default risk, low economic – and thus revenue – growth, and persistent deflationary pressure on companies’ margins, will continue to constrain firms’ willingness to produce, hire workers, and invest. 
Sixth, rising government debt ratios will eventually lead to increases in real interest rates that may crowd out private spending and even lead to sovereign refinancing risk. 
Seventh, monetization of fiscal deficits is not inflationary in the short run, whereas slack product and labor markets imply massive deflationary forces. 
But if central banks don’t find a clear exit strategy from policies that double or triple the monetary base, eventually either goods-price inflation or another dangerous asset and credit bubble (or both) will ensue. 
Some recent rises in the prices of equities, commodities, and other risky assets is clearly liquidity-driven. 
Eighth, some emerging-market economies with weaker economic fundamentals may not be able to avoid a severe financial crisis, despite massive IMF support. 
Finally, the reduction of global imbalances implies that the current-account deficits of profligate economies (the US and other Anglo-Saxon countries) will narrow the current-account surpluses of over-saving countries (China and other emerging markets, Germany, and Japan). 
But if domestic demand does not grow fast enough in surplus countries, the resulting lack of global demand relative to supply – or, equivalently, the excess of global savings relative to investment spending – will lead to a weaker recovery in global growth, with most economies growing far more slowly than their potential. 
So, green shoots of stabilization may be replaced by yellow weeds of stagnation if several medium-term factors constrain the global economy’s ability to return to sustained growth. 
Unless these structural weaknesses are resolved, the global economy may grow in 2010-2011, but at an anemic rate. 

Greenspan Hypnotizes Himself 
On the eve of the last G-7 meeting in London, US Federal Reserve Chairman Alan Greenspan did a startling about-face by soft-pedaling America’s trade deficit. 
“Market pressures …appear poised to stabilize and over the longer run possibly to decrease the US current-account deficit and its attendant financing requirements,” he said. 
But just two months earlier, in Frankfurt, Mr. Greenspan had cautioned that the US deficit could not go on forever without the dollar depreciating. 
What is going on here? 
To be sure, the US trade figures have improved somewhat. 
The expected December trade deficit is $57 billion—an improvement on the record $60.3 billion gap in November. 
And the November figure will be adjusted downward because of a recently discovered statistical error by Canadian authorities. 
But politics, not economics, explains why the Fed chairman changed his tune about America’s weak external position. 
Mr. Greenspan’s statement in Frankfurt in November alarmed senior European Central Bank (ECB) officials, who considered it a “provocation” – one that promptly sent the dollar into an unwanted tailspin. 
The last thing the Fed Maestro needed was a repeat performance on the eve of the G-7 – a meeting that is supposed to exemplify international co-operation. 
So Mr. Greenspan decided to extend a peace offering to the Europeans. 
Politics also explains Mr. Greenspan’s pre-G-7 comment that “the voice of fiscal restraint, barely audible a year ago, has at least partially regained volume.” 
The Fed chairman is “hearing voices” because he is a team player who wants to encourage US budget cutting. 
How would it look if he had openly expressed misgivings about Bush’s plan to cut the budget deficit in half by 2009 just days before it was made public? 
What Mr. Greenspan chose to overlook, however, is that most experts are extremely – and rightly – skeptical of the Bush plan, which leaves out big-ticket items such as the cost of the Iraq War, and uses an unrealistic benchmark from which to measure the alleged 50% cutback. 
Timing the budget’s release for just after the G-7 made for a harmonious London meeting in which both Americans and Europeans could claim that the US was taking care of business—that is, its twin fiscal and current-account deficits. 
The Europeans gladly went along with this charade because they now fear dollar depreciation more than global imbalance. 
So far, Europe’s fragile economic recovery has been based largely on exports. 
The euro’s rapid appreciation against the dollar threatens to undermine this foundation. 
But internal European Union studies indicate that European exports are more closely linked to changes in external demand than the euro-dollar exchange rate. 
So long as external demand holds up – and recent growth numbers from China and the US are positive in this regard – Europe’s exports should continue to perform well. 
In any case, protecting exports by resisting euro appreciation – or, more precisely, dollar depreciation – is a poor way to promote economic growth. 
A strong currency keeps both inflation and ECB interest hikes at bay. 
This helps boost private consumption and investment. 
Moreover, because crude oil is priced in US dollars, a rise in the euro means a fall in energy costs. 
This, too, helps European growth. 
Over the longer term, a strong currency promotes efficiency in export industries, further insulating competitiveness from exchange-rate effects. 
Dollar depreciation improves Europe’s terms of trade and real income. 
America’s fiscal and external deficits will not disappear just because the chief magician at the Federal Reserve waves his wand and says abracadabra. 
On the contrary, the longer Greenspan plays down America’s dangerous macroeconomic imbalances with happy talk, the more damage they will ultimately inflict on the global economy. 
What the world needs now is the realist Greenspan of Frankfurt, not the cheerleader Greenspan of London. 
Simply put, there must be dollar depreciation to keep global imbalances in check. 
Instead of catering to European fears and prejudices about exchange rates, the Fed chairman should put politics aside and stick to sound economics. 

Europe and Anti-Europe 
BERLIN – Since 2008, when the global financial crisis erupted, the European Union has been confronted by a succession of crises: the escalating Greek crisis; Russian revanchism in Ukraine; and the refugee crisis in the Mediterranean (which is inextricably linked to the regional crisis in the Middle East and Africa’s various wars). 
These crises have stretched the EU’s powers and institutions up to – and beyond – their limits, which is why Europe’s response has been so mortifyingly weak. 
The ineffectiveness of existing institutions and structures in the face of today’s threats is now jeopardizing the EU’s legitimacy, because Europe’s citizens are calling for solutions that the EU obviously is unable and partly unwilling to provide. 
One consequence is erosion of support for the EU among its member states’ electorates. 
And the pace of erosion could accelerate in the next two years. 
The United Kingdom now seems certain to hold, by 2016, a referendum on remaining in the EU, and a far-left party – determined, as in Greece, to escape the rigors of economic reform – could win Spain’s general election next autumn. 
Certainly, events could turn out positively, with the UK remaining part of the EU, and Spain opting for the status quo or a more moderate vision of change than Greece’s Syriza-led government has embraced. 
But the worst-case scenario for the EU’s future looks increasingly likely: “Grexit” (Greece leaving the eurozone), “Brexit” (the UK leaving the EU), and a Spanish election result that resembles Greece’s. 
Should such a perfect storm occur, the EU’s very existence would be in doubt, because other member countries would consider or begin planning their own post-EU futures. 
Indeed, all of the Euroskeptic and nationalist forces in the EU’s member states would strive, with increasing success, to make their respective countries’ withdrawal from the EU the central issue in domestic political debate and election campaigns. 
In other words, nearly 60 years of European integration – the entire European project – could be undone. 
Europe need not go down this path; but, given EU leaders current failure to acknowledge and rise to the challenges they confront, it seems realistic to assume that it could happen. 
The combination of Grexit and Brexit, and its consequences not just for the stability of the eurozone, but for the continued existence of the EU, is probably the greatest danger that Europe has faced since the Cold War’s end. 
Moreover, Europe’s internal crisis is playing out in a dangerous, unstable geopolitical environment. 
Though external threats may bolster strategic cooperation among the EU member states, this may not be enough to keep the Union intact, particularly given Russia’s effort to divide Europe by strengthening its nationalist, Euroskeptic, and xenophobic forces. 
Preventing the EU from falling apart will require, first and foremost, a strategic solution to the Greek crisis. 
Greece needs both money and reforms – rapidly and within the eurozone and the EU. 
The governments in Athens, Brussels, and even Berlin cannot live with Greece as a failed state and economy. 
The continuing poker game between the Greek government and the troika (the European Commission, the European Central Bank, and the International Monetary Fund) hurts all parties involved – and Europe most of all. 
It can ultimately end only with a renewed bailout of Greece or with Europe’s plunge into disaster. 
If Grexit is to be averted (which should be the EU’s highest priority), the challenge posed by Brexit would already look significantly less daunting, given that here the risks are spread much more evenly between the Union and the UK. 
In fact, the risks are greater for British Prime Minister David Cameron, because it is almost certain that Scotland will not accept a Brexit, placing the UK’s own future in jeopardy. 
So, despite Cameron being in a largely self-dug hole, the EU should show some flexibility in its negotiations with Britain over questions that do not concern the Union’s basic principles. 
The UK could be offered additional opt-outs from EU policies (such as it now enjoys from the euro). 
And EU leaders could find a formulation that reassures Britain about the eurozone’s impact on the single market. 
If, in addition to dealing effectively with the risks of Grexit and Brexit, the EU can strengthen its unity and determination in addressing the Ukraine crisis and confronting today’s revisionist Russia, it will have succeeded in fending off today’s existential threats. 
Indeed, it could even emerge from its coming tests stronger than before. 
That is not the likeliest scenario today, but it could become so if Europe decides – sooner rather than later – that the consequences of failure must be avoided at nearly any cost. 

Grit is Good 
PARIS – The United States is widely recognized as possessing the deepest, most liquid, and most efficient capital markets in the world. 
America’s financial system supports efficient capital allocation, economic development, and job creation. 
These and similar phrases have been common currency among American legislators, regulators, and financial firms for decades. 
Even in the wake of the financial crisis that erupted in 2008, they trip off the word processors of a hundred submissions challenging the so-called Volcker rule (which would bar banks from making proprietary investments). 
The casual reader nods and moves along. 
But there are signs that these assumptions are now being challenged. 
Prior to the crisis, regulatory authorities focused mainly on removing barriers to trading, and generally favored measures that made markets more complete by fostering faster, cheaper trading of a wider variety of financial claims. 
That is no longer the case. 
On the contrary, nowadays many are questioning the assumption that greater market efficiency is always and everywhere a public good. 
Might such ease and efficiency not also fuel market instability, and serve the interests of intermediaries rather than their clients? 
Phrases like “sand in the machine” and “grit in the oyster,” which were pejorative in the prelapsarian days of 2006, are now used to support regulatory or fiscal changes that may slow down trading and reduce its volume. 
For example, the proposed Financial Transactions Tax in the European Union implies a wide-ranging impost generating more than €50 billion a year to shore up the EU’s own finances and save the euro. 
The fact that 60-70% of the receipts would come from London is an added attraction for its continental advocates. 
Opponents argue, in pre-crisis language, that the FTT would reduce market efficiency and displace trading to other locations. 
“So what?” supporters reply: maybe much of the trading is “socially useless,” and we would be better off without it. 
The Volcker rule (named for former Federal Reserve Chairman Paul Volcker) provoked similar arguments. 
Critics have complained that it would reduce liquidity in important markets, such as those for non-US sovereign debt. 
Defending his creation, Volcker harks back to a simpler time for the financial system, and refers to “overly liquid, speculation-prone securities markets.” 
His message is clear: he is not concerned about lower trading volumes. 
There is more grit on the horizon. 
In a penetrating analysis of the “Flash Crash” of May 6, 2010, when the Dow lost $1 trillion of market value in 30 minutes, Andy Haldane of the Bank of England argues that while rising equity-market capitalization might well be associated with financial development and economic growth, there is no such relationship between market turnover and growth. 
Turnover in US financial markets rose four-fold in the decade before the crisis. 
Did the real economy benefit? 
Haldane cites a striking statistic: in 1945, the average investor held the average US share for four years. 
By 2000, the average holding period had fallen to eight months; by 2008, it was two months. 
There appears to be a link between this precipitous drop in the average duration of stock holdings and the phenomenon of the so-called “ownerless corporation,” whereby shareholders have little incentive to impose discipline on management. 
That absence of accountability, in turn, has contributed to the vertiginous rise in senior executives’ compensation and, in financial firms, to a shift away from shareholder returns and towards large payouts to insiders. 
But Haldane’s main concern is with the stability of markets, particularly the threats posed by high-frequency trading (HFT). 
He points out that HFT already accounts for half of total turnover in some debt and foreign-exchange markets, and that it is dominant in US equity markets, accounting for more than one-third of daily trading, up from less than one-fifth in 2005. 
The rapid, dramatic shifts brought about by HFT are likely to continue. 
It is only a decade since trading speeds fell below one second; they are now as fast as the blink of an eye. 
Technological change promises even faster trading speeds in the near future. 
Indeed, HFT firms talk of a “race to zero,” the point at which trading takes place at close to the speed of light. 
Should we welcome this trend? 
Will light-speed trading deliver us to free-market Nirvana? 
The evidence is mixed. 
It would seem that bid-offer spreads are falling, which we might regard as positive. 
But volatility has risen, as has cross-market contagion. 
Instability in one market carries over into others. 
As for liquidity, while on the surface it looks deeper, the joint report on the Flash Crash prepared by the US Securities and Exchange Commission and the US Commodity Futures Trading Commission shows that HFT traders scaled back liquidity sharply, thereby exacerbating the problem. 
The liquidity that they apparently offer proved unreliable under stress – that is, when it is most needed. 
There are lessons here for regulators. 
First, their monitoring of markets requires a quantum leap in sophistication and speed. 
There is a case, too, for looking again at the operation of circuit-breakers (which helped the Chicago markets in the crash), and for increasing the obligations on market makers. 
Such steps must be carefully calibrated, as greater obligations, for example, could push market makers out of the market. 
But Haldane’s conclusion is that, overall, markets are less stable as a result of the sharp rise in turnover, and that “grit in the wheels, like grit on the roads, could help forestall the next crash.” 
So the traditional defense of US and, indeed, European capital markets is not as axiomatic as it once seemed. 
Market participants need to engage more effectively with the new agenda, and not assume that claims of greater “market efficiency” will win the day. 
Without more sophisticated arguments, they might well find themselves submerged under a pile of regulatory sandbags. 

Grow Your Own Silicon Valley 
SAN FRANCISCO: The dot.com boom may have gone bust for the moment, but that is not stopping governments from wanting to encourage their own high-tech industries. 
Many countries, indeed, are envious of Silicon Valley outside of San Francisco, the world's center of the computer, software, and Internet industries. 
Microsoft's huge investments in Cambridge, England, and the $200 million Bill Gates gave its ancient university for scholarships for technology students from around the world, helped Cambridge become a powerful center of technological innovation. 
Cities and university towns everywhere now want to get into the act. 
Indeed, across Europe and in Asia other nations have either started, or are considering offering state subsidies to encourage the growth of their own high tech clusters. 
After observing Silicon Valley during my many years at the Hoover Institution of Stanford University, however, I am convinced that dynamic industrial clusters require a flexible economic environment, not government industrial policy. 
Silicon Valley started in the 1950's with a modest plan by Frederick Terman, a farsighted dean of Stanford's Engineering School, to create an Industrial Park on unused Stanford land. 
A few companies took up Stanford's offer, but the area was still sleepy and unimpressive when I first visited Stanford in the early 1960's. 
The region took off in the 1970's with Apple's development of the personal computer, and it has exploded since then following the creation of the Internet and the enormous demand for software. 
Silicon Valley now employs over 1 million persons, almost 40% have at least a bachelor's degree, and more than one third are foreign born. 
They are attracted by the good jobs with excellent prospects, and by the early access to frontier developments in the high tech field. 
Silicon Valley is loaded with startup companies, and with former startups like Intel and Cisco Systems that grew very big, very fast. 
Venture capitalists invested over $6 billion in 1999 in new or young Valley companies, and 77 companies had IPOs, mainly related to the Internet. 
The most prestigious individuals in this Valley are those who can claim they work in "startups". 
Faculty and graduates from the strong science and engineering departments of two nearby major universities, Stanford and the University of California at Berkeley, have been leaders in forming dynamic startups. 
Although good universities may be necessary to develop these industrial clusters, they are not sufficient. 
Other regions with strong science and engineering universities, such as the University of Illinois at Urbana, do not have many high tech companies. 
Whatever got Silicon Valley going, its advantages in attracting quality labor and venture capital multiplied as the region grew. 
A large pool of engineers, scientists, and software experts are available to both new and old companies. 
Talented individuals flock to the region not only because of generous options and decent pay, but also because they know they can find other good jobs if their employers fail. 
So while job changes are common in the Valley, unemployment rates are extremely low. 
Innovations and other new developments spread rapidly in Silicon Valley, partly carried by the employees who change jobs. 
As Alfred Marshall, a great British economist of the late 19th century recognized, when companies in related industries locate near each other, Athe mysteries of the trade become no mysteries; but are as it were in the air". 
This makes it difficult to keep secrets, but at the same time companies have early access to innovations by neighbors. 
Silicon Valley's labor market flexibility indicates that nations that want to encourage high tech clusters should make it easy to hire and lay off workers rather than mandate substantial severance pay, or legislate limits on working hours. 
Companies have stronger incentives to hire added workers when they are formed or expand if they can reduce employment when demand turns down. 
The US has relatively few obstacles to starting new companies, raising private capital, or going public. 
It also allows key employees to be hired with potentially valuable stock options that economize on out of pocket expenses. 
Although several countries have begun to reduce the red tape that hampers the formation and financing of new companies, most have a long way to go in appreciating and encouraging entrepreneurial activities. 
For example, reducing artificial obstacles to starting a company is far different from the generous subsidy programs started recently by Germany and other countries desperate for more dynamic economies. 
Subsidies generate "safe" startups that appeal to bureaucrats rather than to market demand. 
The tremendous spontaneity found in Silicon Valley could never be reproduced through bureaucratic greenhouse support. 
Silicon Valley clearly grew over time with little help from government. 
Indeed, the major attempt to help actually hurt the region. 
For the U.S.-Japan Semiconductor Agreement of 1986 that imposed "antidumping" restrictions on imports of semiconductors from Japan slowed the shift of Silicon Valley toward software and other higher valued added products and services. 
It is unlikely that industrial policies toward the high tech sector by other nations will be any wiser than America's failed policy of that time. 
Where dynamic industrial clusters locate is partly due to luck and accident. 
But Silicon Valley's history indicates that top universities, flexible labor and capital markets, and limited regulatory obstacles to entrepreneurship all help attract high tech companies. 


America’s Inflation Risks 
NEW HAVEN – It was inevitable. 
Another upturn in the US inflation cycle is at hand. 
Since the Great Disinflation of the early 1980s, when the annual increase in the Consumer Price Index (CPI) plunged from 14.7% in March 1980 to 2.4% in July 1983, inflation has generally remained in a relatively narrow 1-5% range for a quarter-century. 
When the economy softened, inflation slid to the lower end of that range, and when it strengthened in the late 1980s, late 1990s, and in the pre-crisis 2000s, it moved to the upper end. 
Such is the case today. 
Not surprisingly, this pattern has been slow to emerge in the current cycle, largely owing to an unusually weak post-crisis economic recovery. 
But now a confluence of global and domestic forces is starting to push inflation higher and should continue to do so for some time. 
That will pose a challenge to the Federal Reserve, which operates under a price-stability mandate. 
Recent volatility in stocks and bonds suggests that these risks could prove vexing to financial markets as well. 
The global risk to US inflation reflects not only a cyclical upturn in the world economy, but also mounting trade frictions that pose serious threats to the stability of global value, or supply, chains (GVCs). 
As GVCs have grown in importance over time, so has the internationalization of inflation. 
In economic terms, that means broadening the assessment of inflation risks from a focus on domestic “output gaps” – the difference between actual and potential (or full employment) GDP – to the global output gap. 
Significantly, recent research by the Bank for International Settlements has found that a global output gap of about 1% – precisely the outcome for all advanced economies over the past five years – reduces inflation by 0.9%. 
Two major disruptions currently occurring in GVCs are likely to have a meaningful impact on the internationalization of US inflation. 
First and foremost is the Trump administration’s trade war with China. 
The initial waves of US tariffs on Chinese imports are aimed mainly at intermediate goods that are processed by low-cost China-centric GVCs. 
These tariffs will raise the prices of about half of Chinese goods imports, which totaled $506 billion in 2017, by 10% today and 25% in 2019. 
The recent reworking of the North American Free Trade Agreement should also have an impact on GVC-induced disinflation. 
With its more stringent local-content and minimum-wage requirements, the United States-Mexico-Canada Agreement (USMCA) injects new cost pressures into the GVC that has played an important role in the establishment of a fully-integrated North American auto production platform over the past quarter-century. 
NAFTA may not have been perfect, but under USMCA there is a different cost calculus for vehicles, which account for fully 3.7% of the items included in the US CPI. 
While this new strain of global pressures on US inflation reflects the impact of aggressive trade policies on GVCs, the domestic pressures stem from a more familiar source: an extremely tight labor market. 
The unemployment rate fell to 3.7% in September, its lowest level since December 1969. 
Sub-4% unemployment rates have become extremely rare in the US. There was a brief episode in 2000, when inflation generally remained under control, and a more protracted one in the late 1960s, setting the stage for the Great Inflation of the 1970s. 
The current tightness of the US labor market is problematic for two reasons. 
The first is a nascent increase in long-dormant wage pressures. 
Average hourly earnings are now running 2.8% above the year-earlier level, reinforcing an acceleration that began in 2015, and well above the subdued 2% post-crisis average from 2010 through 2014. 
Moreover, there are signs that wage gains are now broadening out, with the balance tilting away from low wage-inflation industries such as manufacturing, health care, and education into higher wage-inflation industries such as finance, the information sector, and professional and business services. 
At the current sub-4% unemployment rate, overall wage inflation could easily move into the 3.5% zone by mid-2019. 
The second conclusion to draw from an extremely tight US labor market is that, unlike earlier periods of low unemployment when domestic wage pressures were constrained by GVCs, today’s mounting wage inflation will be tempered by a smaller GVC offset. 
Absent an unlikely acceleration in productivity, it is the confluence of these two forces – a tight domestic labor market and new global pressures – that spells trouble on the US inflation front. 
Such an outcome has important and actionable consequences for the Fed. 
The federal funds rate is currently at only 2.25%. 
That is little different from the underlying rate of so-called core inflation (which excludes the CPI’s volatile food and energy components), currently running at 2-2.2%, depending on which measure one chooses. 
Therein lies the Fed’s dilemma. 
Knowing full well that monetary policy works with lags of 12-18 months, the central bank has to be forward-looking, setting its policy rate on the basis of where it thinks inflation is headed, not on the basis of a backward-looking assessment of where inflation has been. 
And that’s precisely the problem: Based on the confluence of global and domestic pressures outlined above, 3-3.5% inflation is well in sight over the next year. 
To counter such a likely upturn in US inflation, the Fed is entirely correct to send the message that there is considerably more to come in its current tightening cycle. 
In fact, there is an increasingly compelling argument that a forward-looking Fed is actually “behind the curve,” because its policy rate currently is only just equal to the backward-looking core inflation rate. 
That could mean that the Fed must contemplate monetary tightening that significantly exceeds the so-called comfort zone of normalization that financial markets are currently discounting. 
Unlike a certain Fed-bashing president, I would hardly call that a crazy conclusion. 

Have We Dodged the Secular-Stagnation Bullet? 
WASHINGTON, DC – In 2016, Northwestern University’s Robert Gordon published his 700-plus-page magnum opus, The Rise and Fall of American Growth. 
Two years on, with not just the United States, but the entire world economy experiencing a synchronized acceleration in growth, the second noun in Gordon’s title seems excessively pessimistic, to say the least. 
Gordon’s main argument was that the century after the US Civil War – from about 1870 to 1970 – brought an unprecedented economic revolution, as innovations like electricity and piped water rapidly raised productivity and transformed people’s lifestyles. 
In his view, today’s innovations – especially in digital technology, machine learning, and artificial intelligence – may be breathtaking, but they do not have the same broad productivity-raising potential. 
Gordon is essentially a supply-side pessimist, though he also points out that income inequality can act as a drag on growth, by lowering effective demand. 
Another gloomy take on future growth, advanced by former US Treasury Secretary Lawrence H. Summers after the global economic crisis, has a decidedly more Keynesian or “demand-side” flavor. 
Summers’ theory of “secular stagnation” (a term first used by the economist Alvin Hansen back in 1938) holds that, in the United States, the desire to save chronically outweighs the desire to spend on growth-enhancing investments. 
The balance between saving and investment could be achieved, Summers argues, only with a nominal interest rate that is below the zero lower bound. 
The fact that ample corporate profits were not being invested seemed to support this hypothesis, which also took root outside the US. 
Today’s synchronized growth acceleration does not necessarily invalidate such pessimistic perspectives. 
After all, Summers – and Gordon even more so – was making an argument about the long term. 
If the current growth acceleration peters out after six months or a year, they could yet be vindicated. 
So, in assessing the possibility of weak long-term growth, it is worth looking at where exactly the Gordon and Summers hypotheses are linked, and what would invalidate them. 
The lower the expected return on marginal investment in an economy, the lower the interest rate must be for that investment to be made. 
A low return on investment could be the result of demand-side factors, related to, say, income distribution or financial-sector activities. 
It could also be rooted in the supply side, with slow technological progress leading to weak productivity growth. 
In short, the secular stagnation that Summers has predicted, with low interest rates being necessary to offset low returns on investment, could well be caused by the slowdown in productivity-enhancing technological change that Gordon highlights. 
It is useful to note, therefore, that what seems to have changed recently is not the supply of savings, but the expected return on investment. 
The economy is escaping the zero-interest-rate trap not because savings are declining, but because investment is becoming more appealing, owing to improved expectations. 
That confidence may be derived partly from the business-friendly tax legislation that was recently enacted in the US. 
But, more fundamentally, it seems to reflect a shift in the way current and developing technologies are being perceived. 
Simply put, techno-optimism is gaining ground. 
If, controverting Gordon’s thesis, today’s technologies do boost productivity significantly, the return on investment would rise (unless labor receives all of the gains in the form of higher wages, an outcome that nobody expects). 
That would lift the interest rate that balances supply and demand out of negative territory, solving Summers’ secular-stagnation problem. 
It must be stressed, however, that what has changed are expectations, not estimated potential growth. 
In the US, annualized productivity growth reached 2% in the second and third quarters of 2017, but was negative in the first quarter of that year and zero in the last. 
According to the World Bank’s recent Global Economic Prospects report, “despite a recent acceleration of global economic activity, potential output growth is flagging.” 
So whether or not we are on the cusp of a sustainable acceleration in global economic growth hinges on whether today’s innovative technologies finally have an appreciable impact on labor and total factor productivity. 
I happen to believe that they will. 
But the fact is that, so far, they haven’t. 
Only if annual productivity growth rises from its current range of 0.5-1% to 1.5-2% in the coming years can one declare that the US has avoided the fate predicted by Summers and Gordon. 
Today’s economic optimism should not be allowed to obscure that, much less breed complacency about the future. 
After all, even if technology does meet the optimists’ expectations in terms of its impact on growth, the challenge of ensuring that the added growth is inclusive will remain. 

Long Live China’s Boom 
BEIJING – After three decades of 9.8% average annual GDP growth, China’s economic expansion has been slowing for 13 consecutive quarters – the first such extended period of deceleration since the “reform and opening up” policy was launched in 1979. 
Real GDP grew at an annual rate of only 7.5% in the second quarter of this year (equal to the target actually set by the Chinese government at the beginning of this year). 
Many indicators point to further economic deceleration, and there is a growing bearishness among investors about the outlook for China. 
Will China crash? 
In fact, many other rapidly growing emerging economies have suffered – and worse than China – from the drop in global demand resulting from ongoing retrenchment in high-income economies since the 2008 financial crisis. 
For example, GDP growth in Brazil has slowed sharply, from 7.5% in 2010 to 2.7% in 2011 and to just 0.9% in 2012, while India’s growth rate slowed from 10.5% to 3.2% over the same period. 
Moreover, many high-income newly industrialized economies (NIEs) with few structural problems were not spared the effects of the 2008 crisis. 
South Korea’s GDP growth slowed from 6.3% in 2010 to 3.7% in 2011 and to 2% in 2012; Taiwan’s fell from 10.7% to 1.3% over this period; and Singapore’s plummeted from 14.8% to 1.3%. 
Given this, China’s economic slowdown since the first quarter of 2010 has apparently been caused mainly by external and cyclical factors. 
Facing an external shock, the Chinese government should and can maintain a 7.5% growth rate by taking counter-cyclical and proactive fiscal-policy measures, while maintaining a prudent monetary policy. 
After all, China has high private and public savings, foreign reserves exceeding $3.3 trillion, and great potential for industrial upgrading and infrastructure improvement. 
Indeed, China can maintain an 8% annual GDP growth rate for many years to come, because modern economic growth is a process of continuous technological innovation and industrial upgrading. 
Of course, this is true for developed and developing countries alike. 
But developed countries differ from developing countries in an important way. 
Since the Industrial Revolution, developed countries have always been on the global frontier of technologies and industries, which has required them to invest in costly and risky indigenous research and development. 
By contrast, technologies and existing industries in developing countries are in general well within the global frontier. 
As a result, they benefit from the “latecomer’s advantage”: technological innovation and industrial upgrading can be achieved by imitation, import, and/or integration of existing technologies and industries, all of which implies much lower R&D costs. 
In theory, any developing country that can harness its latecomer’s advantage to achieve technological and industrial upgrading can grow faster than developed countries. 
How much faster is an empirical question. 
According to the Growth Commission led by Nobel laureate Michael Spence, 13 economies took full advantage of their latecomer status after World War II and achieved annual GDP growth rates of 7% or higher – at least twice as high as developed countries’ growth rates – for 25 years or longer. 
China became one of the 13 economies after 1979. 
Because the country’s latecomer status explains its 33 years of rapid economic growth, the key to understanding its potential for further rapid growth in the future lies in estimating how large those advantages still are. 
Per capita GDP, which reflects a country’s average labor productivity and its overall technological and industrial achievement, is a useful proxy to estimate latecomer’s advantage. 
That is, the per capita GDP gap between China and developed countries essentially reflects the gap between them in terms of overall technological and industrial achievement. 
According to the most up-to-date estimate by the late economic historian Angus Maddison, China’s per capita GDP in 2008 was $6,725 in 1990 dollars, which was 21% of per capita GDP in the United States. 
That is roughly the same gap that existed between the US and Japan in 1951, Singapore in 1967, Taiwan in 1975, and South Korea in 1977 – four economies that are also among the 13 successful economies studied by the Growth Commission. 
Harnessing their latecomer’s advantage, Japan’s average annual growth rate soared to 9.2% over the subsequent 20 years, compared to 8.6% in Singapore, 8.3% in Taiwan, and 7.6% in South Korea. 
If the latecomer’s advantage implied by the income gap between the four NIEs and the US enabled the NIEs to realize average annual GDP growth rates of 7.6%-9.2% for 20 years, China’s annual growth potential should be a similar 8% for the 2008-2028 period. 
To realize its potential growth as a latecomer, China needs, above all, to deepen its market-oriented reforms, address various structural problems, and develop its economy according to its comparative advantages. 

Globalization’s Last Gasp 
LONDON – Does Donald Trump’s election as United States president mean that globalization is dead, or are reports of the process’ demise greatly exaggerated? 
If globalization is only partly incapacitated, not terminally ill, should we worry? 
How much will slower trade growth, now in the offing, matter for the global economy? 
World trade growth would be slowing down, even without Trump in office. 
Its growth was already flat in the first quarter of 2016, and it fell by nearly 1% in the second quarter. 
This continues a prior trend: since 2010, global trade has grown at an annual rate of barely 2%. 
Together with the fact that worldwide production of goods and services has been rising by more than 3%, this means that the trade-to-GDP ratio has been falling, in contrast to its steady upward march in earlier years. 
This disturbing trajectory, argue the mavens of globalization, reflects the resurgent protectionism manifest in popular opposition to the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP), and now in Trump’s electoral victory. 
It means that the benefits of openness and specialization are being squandered. 
Causality in economics may be elusive, but in this case it is clear. 
So far, slower trade growth has been the result of slower GDP growth, not the other way around. 
This is particularly evident in the case of investment spending, which has fallen sharply since the global financial crisis. 
Investment spending is trade-intensive, because countries rely disproportionately on a relatively small handful of producers, like Germany, for technologically sophisticated capital goods. 
In addition, slower trade growth reflects China’s economic deceleration. 
Until 2011 China was growing at double-digit rates, and Chinese exports and imports were growing even faster. 
China’s growth has now slowed by a third, leading to slower growth of Chinese trade. 
China’s growth miracle, benefiting a fifth of the earth’s population, is the most important economic event of the last quarter-century. 
But it can happen only once. 
And now that the phase of catch-up growth is over for China, this engine of global trade will slow. 
The other engine of world trade has been global supply chains. 
Trade in parts and components has benefited from falling transport costs, reflecting containerization and related advances in logistics. 
But efficiency in shipping is unlikely to continue to improve faster than efficiency in the production of what is being shipped. 
Already, motor-vehicle manufacturers ship an automotive transmission back and forth across the US-Mexican border several times in the course of production. 
At some point, unpacking that production process still further will reach the point of diminishing returns. 
So should we worry that trade is growing more slowly? 
Yes, but only in the sense that a doctor worries when a patient runs a fever. 
Fever is rarely life-threatening; rather, it is a symptom of an underlying condition. 
In this case, the condition is slow economic growth, also known as secular stagnation, caused by depressed investment, which in turn reflects financial problems and policy uncertainty. 
This, then, is the underlying condition. 
Trade agreements like the TPP and TTIP address it only obliquely. 
Increased spending on infrastructure by governments, to boost investment and growth directly, is more to the point. 
But whether the Trump administration and the new US Congress can design and implement a program of productive infrastructure spending remains to be seen. 
More generally, a political consensus is needed on growth-promoting policies, so that investment is not held hostage to political infighting. 
Whether this will be possible under Trump’s administration is another open question. 
The story for cross-border flows of financial capital is even more dramatic. 
Gross capital flows – the sum of inflows and outflows – are not just growing more slowly; they are down significantly in absolute terms from 2009 levels. 
But dramatic is not the same as alarming. 
In fact, it is mainly cross-border bank lending and borrowing that have fallen. 
Foreign direct investment – financial flows to build foreign factories and acquire foreign companies – remains at pre-crisis levels. So do cross-border borrowing and lending through stock and bond markets. 
This difference reflects regulation. 
Having concluded, rightly, that cross-border bank lending is especially risky, regulators clamped down on banks’ international operations. 
In response, many banks curtailed their cross-border business. 
But, rather than alarming anyone, this should be seen as reassuring, because the riskiest forms of international finance have been curtailed without disrupting more stable and productive forms of foreign investment. 
We now face the prospect of the US government revoking the Dodd-Frank Act and rolling back the financial reforms of recent years. 
Less stringent financial regulation may underpin a recovery in international capital flows. 
But we should be careful what we wish for. 

Growth in a Buddhist Economy 
NEW YORK – I have just returned from Bhutan, the Himalayan kingdom of unmatched natural beauty, cultural richness, and inspiring self-reflection. 
From the kingdom’s uniqueness now arises a set of economic and social questions that are of pressing interest for the entire world. 
Bhutan’s rugged geography fostered the rise of a hardy population of farmers and herdsmen, and helped to foster a strong Buddhist culture, closely connected in history with Tibet. 
The population is sparse – roughly 700,000 people on territory the size of France – with agricultural communities nestled in deep valleys and a few herdsmen in the high mountains. 
Each valley is guarded by a dzong (fortress), which includes monasteries and temples, all dating back centuries and exhibiting a masterful combination of sophisticated architecture and fine arts. 
Bhutan’s economy of agriculture and monastic life remained self-sufficient, poor, and isolated until recent decades, when a series of remarkable monarchs began to guide the country toward technological modernization (roads, power, modern health care, and education), international trade (notably with neighboring India), and political democracy. 
What is incredible is the thoughtfulness with which Bhutan is approaching this process of change, and how Buddhist thinking guides that thoughtfulness. 
Bhutan is asking itself the question that everyone must ask: how can economic modernization be combined with cultural robustness and social well-being? 
In Bhutan, the economic challenge is not growth in gross national product, but in gross national happiness (GNH). 
I went to Bhutan to understand better how GNH is being applied. 
There is no formula, but, befitting the seriousness of the challenge and Bhutan’s deep tradition of Buddhist reflection, there is an active and important process of national deliberation. 
Therein lies the inspiration for all of us. 
Part of Bhutan’s GNH revolves, of course, around meeting basic needs – improved health care, reduced maternal and child mortality, greater educational attainment, and better infrastructure, especially electricity, water, and sanitation. 
This focus on material improvement aimed at meeting basic needs makes sense for a country at Bhutan’s relatively low income level. 
Yet GNH goes well beyond broad-based, pro-poor growth. 
Bhutan is also asking how economic growth can be combined with environmental sustainability – a question that it has answered in part through a massive effort to protect the country’s vast forest cover and its unique biodiversity. 
It is asking how it can preserve its traditional equality and foster its unique cultural heritage. 
And it is asking how individuals can maintain their psychological stability in an era of rapid change, marked by urbanization and an onslaught of global communication in a society that had no televisions until a decade ago. 
I came to Bhutan after hearing an inspiring speech by Prime Minister Jigme Thinley at the 2010 Delhi Summit on Sustainable Development. 
Thinley had made two compelling points. 
The first concerned the environmental devastation that he could observe – including the retreat of glaciers and the loss of land cover – as he flew from Bhutan to India. 
The second was about the individual and the meaning of happiness. 
Thinley put it simply: We are each finite and fragile physical beings. 
How much “stuff” – fast foods, TV commercials, large cars, new gadgets, and latest fashions – can we stuff into ourselves without deranging our own psychological well-being? 
For the world’s poorest countries, such questions are not the most pressing. 
Their biggest and most compelling challenge is to meet citizens’ basic needs. 
But, for more and more countries, Thinley’s reflection on the ultimate sources of well-being is not only timely, but urgent. 
Everybody knows how American-style hyper-consumerism can destabilize social relations and lead to aggressiveness, loneliness, greed, and over-work to the point of exhaustion. 
What is perhaps less recognized is how those trends have accelerated in the United States itself in recent decades. 
This may be the result of, among other things, the increasing and now relentless onslaught of advertising and public relations. 
The question of how to guide an economy to produce sustainable happiness – combining material well-being with human health, environmental conservation, and psychological and cultural resiliency – is one that needs addressing everywhere. 
Bhutan has many things going its way. 
It will be able to increase exports of clean, run-of-the-river hydropower to India, thereby earning foreign exchange in a manner that is sustainable and that can fill government coffers to fund education, health care, and infrastructure. 
The country is also intent on ensuring that the benefits of growth reach all of the population, regardless of region or income level. 
There are serious risks. 
Global climate change threatens Bhutan’s ecology and economy. 
Incautious and expensive advice from McKinsey and other private consulting firms could help turn Bhutan into a degraded tourist zone. 
One must hope that the quest for GNH will help steer the country away from such temptations. 
The key for Bhutan is to regard GNH as an enduring quest, rather than as a simple checklist. 
Bhutan’s Buddhist tradition understands happiness not as attachment to goods and services, but as the result of the serious work of inner reflection and compassion toward others. 
Bhutan has embarked on such a serious journey. 

 

The Right Question About Inequality and Growth 
CAMBRIDGE – The belief that inequality hurts economic growth is gaining currency among policymakers. 
Some argue forcefully that high levels of inequality can make sustained growth impossible, and may even contribute to recessions. 
This view stands in stark contrast to the traditional view that there is a tradeoff between equality and growth, and that greater inequality is a price that must be paid for higher output. 
Lost in the discussion, however, is whether any of this is actually germane to economic policymaking. 
I don’t believe it is. 
Whether inequality is good or bad for growth should and will continue to concern social scientists. 
But those guiding an economy should focus on assessing outcomes and modes of distribution rather than on a puzzle that will never fully be solved. 
Three developments make this refocusing necessary. 
For starters, while recent studies have concluded that higher levels of inequality produce lower long-term growth, other data have challenged this assumption, making definitive claims that are impossible to support, partly because different sources and types of inequality likely have different impacts on growth. 
Second, most research focuses on the impact of inequality on growth, rather than on how specific policies affect growth. 
The former is of interest to social scientists and historians, but it is the latter that is relevant for policymakers. 
And, finally, politicians generally defend their policies in terms of how they affect the middle class or the poor, not the arithmetic average of incomes across an economy – which gives equal weight to a $1 increase in the income of a poor person and that of a billionaire. 
So, even if reducing inequality was bad for overall growth, it might still be good for social welfare in the relevant sense, if it made many households in the middle better off. 
The fact is, economic policies in the real world are nuanced and site-specific, making the search for a single answer to the question of how – and how much – inequality affects growth a Sisyphean task. 
Rather than concerning themselves with how to balance growth and inequality, policymakers would do better to focus on how policies impact average incomes and other welfare indicators. 
Win-win policies – defined as distribution mechanisms that produce growth and reduce inequality simultaneously – are the easiest to evaluate, and the most advantageous to adopt. 
Education is a classic example. 
Reforms that cost little or no money, such as improving the quality of primary and secondary education, have been shown to encourage growth while ameliorating inequality. 
Even reforms that cost more – like expanding preschool education in the United States – generate economic benefits that far exceed the tax losses associated with funding them. 
These types of approaches – what I call “all good things go together” policies – could be applied to other sectors of the economy that are being squeezed by imperfect competition. 
More vigorous antitrust policies, or increased consumer ownership of data, could strengthen competition and, in the process, boost efficiency and improve income distribution. 
Any policy that promotes growth or lowers inequality without negatively affecting the other variable can also be classified as a win-win. 
A revenue-neutral reform of business taxes, for example, could raise the level of output with no meaningful impact on the distribution of income. 
It is far more difficult to evaluate policies that involve a tradeoff between growth and inequality. 
For the sake of illustration, consider the effects of a hypothetical 10% reduction in labor taxes paid for by a lump-sum tax modeled using a neo-classical Ramsey growth model – a scenario that I detailed in a recent paper for the Olivier Blanchard and Lawrence Summers series on Rethinking Macroeconomics. 
This plan is good for growth, with average output increasing by 1%. 
But to understand how this policy would actually play out for taxpayers, I applied the scenario to the real distribution of US household incomes in 2010. 
Nearly all households in the model experienced an increase in pre-tax income. 
But taxes increased for two-thirds of households. 
For middle-income households, the increased taxation was offset by earnings, but leisure also fell. 
As a result, the tax change left around 60% of households worse off, even as average household income grew, driven by gains at the top. 
This analysis does not answer the question of whether this illustrative tax policy is a good idea. 
But most policymakers would likely object if they understood that growth would be achieved by higher taxes on two-thirds of households, leaving the median household working harder to earn the same after-tax income. 
Social scientists should continue to ask whether inequality is good or bad for economic growth. 
More research is needed on the variables that affect growth, such as median income. 
Economists should also pay less attention to inequality in the aggregate, and more on the specific policies that might increase or reduce inequality. 
But policymakers have different priorities than economists do. 
Rather than rethinking macroeconomics, policymakers must consider whether specific goals for social welfare and distribution can be achieved through win-win measures or through policies that make worthwhile tradeoffs. 
The answer may be to obsess less over aggregate data, and to focus more on how policy decisions impact real people. 

Grumpy Old Men 
LONDON – Having reached pensionable age, I qualify to be a grumpy old man. 
I should be boring my children, and the students at Oxford University where I am Chancellor, with grumbles about how everything is going to the dogs. 
But that is not quite how I see things. 
I went to university myself in 1962. 
My first term coincided with the Cuban missile crisis. 
The world seemed to be teetering on the brink of nuclear catastrophe. 
Those were the days when global peace was sustained by a concept known suitably enough by the acronym MAD – Mutually Assured Destruction. 
Was that world a worse and more dangerous one than today, where our main nuclear concerns are how to prevent proliferation and strengthen the treaty that has deterred it for the last generation? 
At the end of my years at Oxford, I went as a student to the United States and visited Alabama. 
You may recall the story of Richard Nixon attending the independence celebrations in Ghana. 
At a gala reception, he went up to one guest, mistaking him for a local, and asked what it felt like to be able to vote and enjoy freedom under the rule of law. 
“I wouldn’t know,” the man replied, “I’m from Alabama.” 
Within my adult lifetime, we have moved from the murder of civil-rights campaigners in the US to the election of a black president. 
Nothing to be grumpy about there. 
Elsewhere, some of our biggest problems have a sort of Hegelian quality. 
They are the result of solving past problems or of past success. 
Consider, for example, the biggest challenge facing us, which deserves to be called existential: global warming and climate change. 
In the last century, the world got richer; its population quadrupled; the number of people living in cities grew thirteen-fold; and we consumed more of everything. 
Water consumption rose nine-fold and energy use thirteen-fold. 
Industrial output soared to 40 times its level at the beginning of the twentieth century. 
But – and here comes the real hit – carbon-dioxide emissions grew seventeen-fold. 
That is the biggest problem we face – the unforeseen result of increased economic activity and prosperity. 
Looking at preparations for the Copenhagen summit in December, when we will try to broker a new global agreement to combat climate change, does not make me grumpy. 
At last, the big players are taking the issues seriously. 
The US is no longer in denial on the question. 
President Barack Obama and his advisers do not deny the scientific evidence of what is happening to us all. 
In China, political leaders seem genuine in their commitment to reduce the carbon content of their runaway economy. 
The big problems, of course, are how we take account of past responsibility for the carbon in the atmosphere, how we balance aggregate national emissions and per capita figures – China leads in the first category; the US, Australia, and Canada are the biggest culprits in the second – and how we manage technology transfer from developed to emerging and poor economies. 
There will be plenty to moan about if we don’t solve these problems sooner rather than later. 
This is where old men seem past their political expiration dates. 
Let me explain. 
For all of our lives, my generation has defined success in terms of rising GDP growth: more money in more pockets, more resources for public programs, and more jobs. 
None of these will necessarily be a measure of future success. 
We need to talk more about the quality of growth. 
French President Nicolas Sarkozy has raised this issue, and he is right to do so. 
I am not arguing that growth is bad. 
Try telling that to the poor. 
But what we should want to promote is the right sort of growth – growth that won’t ravage our future prospects. 
We have to define the sustainability of growth in ways that create an attractive narrative for our citizens. 
At the moment, people applaud sustainable growth, but they don’t vote for what it means in practice. 
German voters balk at any suggestion that we should limit the environmental damage caused by big and expensive cars. 
British voters line up behind the truck drivers when protests are launched against hikes in the price of petrol, not least through the introduction of higher energy taxes. 
Ideas for carbon taxes run into resistance everywhere. 
I have five grandchildren below the age of four. 
By the time they qualify for pensions and the license to grumble, the century will be into its seventh or eighth decade. 
We hope! 
How much will they have to get angry about then because of the way that we are behaving today? 

Guatemala's Candidate from Hell 
The indictment describes brutal crimes--mass murders, rapes, and the dislocation of hundreds of thousands of people--carried out systematically in the Guatemalan highlands. 
In San Martín Jilotepeque, villagers were rounded up by Guatemala's military, forced to cook for soldiers and dig pits in the earth. 
Later, their masters shot and then dumped them into the pits. 
In Santa María Nebaj, children were shot or beaten to death before being thrown into a ravine that also served as an open-air outhouse. 
After the massacre, soldiers burned the bodies and the houses of their victims. 
They killed and ate their livestock. 
The man that Guatemalan human rights organizations charge with responsibility for these acts is Efraín Ríos Montt, ruler of Guatemala during the "scorched earth" campaign of the early 1980's. Given the gravity of the accusations, and the abundance of evidence against him, Ríos Montt should be on his way to prison. 
Instead, he could be headed to the presidency. 
Against great odds--and the wording of Guatemala's Constitution--the former brigadier general and dictator has qualified for the ballot in Guatemala's presidential election, set for November 9. 
Ríos Montt's presence on the ballot has shocked Guatemalans committed to combating the impunity the country's powerful have traditionally enjoyed. 
Claudia Samayoa, a Guatemalan political analyst, calls it "a blow against the victims, and against all those who have struggled in Guatemala for human rights and democracy". 
His election would have enormous implications, symbolizing the triumph of impunity over accountability. 
It would indicate that there can be no true peace in Guatemala as long as the powerful are accommodated with grants of amnesty and forgetting is prized over truth and justice. 
As for a bit of history- following Guatemala's transition from military rule to electoral democracy, Ríos Montt made several attempts in the 1990's to run for president. He was barred from the ballot by a provision in the 1985 Guatemalan constitution that prohibited people who had participated in military coups from serving as head of state. 
Rebuffed but undaunted, Ríos Montt founded a political party, the Guatemalan Republican Front (FRG). 
His deputy, Alfonso Portillo, won the presidency in 1999. Ríos Montt earned a seat in Guatemala's Congress, and went on to rule both the party and the legislature. 
All of this occurred at the very moment a UN supported truth commission was concluding that the violence conducted under Ríos Montt's rule constituted genocide against the Mayan people of Guatemala. 
Ríos Montt's latest political battle began when he sought to contest the upcoming presidential election. 
His petition was first denied by the Guatemalan electoral authority and then by the Supreme Court. 
In July, however, the Constitutional Court--staffed by several justices appointed by Ríos Montt--ruled in favor of permitting him to participate in the election. 
Whether Ríos Montt can win is a topic of intense debate. 
Polls show him trailing Oscar Berger, a conservative former Guatemala City mayor supported by the business community, as well as the more leftist candidate, Alvaro Colom. 
It is difficult to gauge Ríos Montt's actual popularity. 
Guatemala's press has taken a hostile position against the former general. 
In July, amidst the turmoil surrounding the judicial flip-flopping on his candidacy, busloads of his followers--including paramilitaries armed with machetes and guns--entered the capital and attacked groups of people critical of the general. 
One journalist, Hector Ramirez, died of a heart attack while fleeing from the mob; others narrowly escaped lynching. 
Meanwhile, all over Guatemala, thousands of communities are seeking to exhume the graves of the massacred. 
Evidence produced in these exhumations is being organized into indictments, prepared by the non-governmental Center for Human Rights and Legal Action (CALDH). 
The genocide charges against Ríos Montt are being pursued in Guatemala's courts. 
If the courts fail to act, the CALDH will take the case to the Inter-American Court of Human Rights in San Jose, Costa Rica, or perhaps to Europe. 
Human rights activists have increasingly sought friendly foreign courts, willing to invoke universal jurisdiction over so-called crimes "of international concern." 
If Ríos Montt faces trial instead of another reign as ruler, perhaps Guatemalans--and the wider world--will begin to see the power of the truth. 
Otherwise, we will once again see only the truth about power. 
Sadly, at this moment Guatemala invokes the bitter wisdom of William Faulkner, who once observed that "the past isn't dead--it isn't even over yet." 

The Changing of the Monetary Guard 
NEW YORK – With leadership transitions at many central banks either under way or coming soon, many of those who were partly responsible for creating the global economic crisis that erupted in 2008 – before taking strong action to prevent the worst – are departing to mixed reviews. 
The main question now is the extent to which those reviews will influence their successors’ behavior. 
Many financial-market players are grateful for the regulatory laxity that allowed them to reap enormous profits before the crisis, and for the generous bailouts that helped them to recapitalize – and often to walk off with mega-bonuses – even as they brought the global economy to near-ruin. 
True, easy money did help to restore equity prices, but it might also have created new asset bubbles. 
Meanwhile, GDP in many European countries remains markedly below pre-crisis levels. 
In the United States, despite GDP growth, most citizens are worse-off today than they were before the crisis, because income gains since then have gone almost entirely to those at the top. 
In short, many central bankers who served in the heady pre-crisis years have much to answer for. 
Given their excessive belief in unfettered markets, they turned a blind eye to palpable abuses, including predatory lending, and denied the existence of an obvious bubble. 
Instead, central bankers focused single-mindedly on price stability, though the costs of somewhat higher inflation would have been miniscule compared to the havoc wrought by the financial excesses that they allowed, if not encouraged. 
The world has paid dearly for their lack of understanding of the risks of securitization, and, more broadly, their failure to focus on leverage and the shadow banking system. 
Of course, not all central bankers are to blame. 
It was no accident that countries like Australia, Brazil, Canada, China, India, and Turkey avoided financial crisis; their central bankers had learned from experience – their own or others’ – that unfettered markets are not always efficient or self-regulating. 
For example, when Malaysia’s central-bank governor supported the imposition of capital controls during the East Asian crisis of 1997-1998, the policy was scorned, but the former governor has since been vindicated. 
Malaysia had a shorter downturn, and emerged from the crisis with a smaller legacy of debt. 
Even the International Monetary Fund now recognizes that capital controls may be useful, especially in times of crisis. 
Such lessons are most obviously relevant to the current competition to succeed Ben Bernanke as Chair of the US Federal Reserve Board, the world’s most powerful monetary authority. 
The Fed has two main responsibilities: macro-level regulation aimed at ensuring full employment, output growth, and price and financial stability; and micro-level regulation aimed at financial markets. 
The two are intimately connected: micro-level regulation affects the supply and allocation of credit – a crucial determinant of macroeconomic activity. 
The Fed’s failure to fulfill its responsibilities for micro-level regulation has much to do with its failure to meet macro-level goals. 
Any serious candidate for Fed chairman should understand the importance of good regulation and the need to return the US banking system to the business of providing credit, especially to ordinary Americans and small and medium-size businesses (that is, those who cannot raise money on capital markets). 
Sound economic judgment and discretion are required as well, given the need to weigh the risks of alternative policies and the ease with which financial markets can be roiled. 
(That said, the US cannot afford a Fed chairman who is overly supportive of the financial sector and unwilling to regulate it.) 
Given the certainty of divisions among officials on the relative importance of inflation and unemployment, a successful Fed chairman must also be able to work well with people of diverse perspectives. 
But the next leader of the Fed should be committed to ensuring that America’s unemployment rate falls below its current unacceptably high level; an unemployment rate of 7% – or even 6% – should not be viewed as inevitable. 
Some people argue that what America needs most is a central banker who has “experienced” crises firsthand. 
But what matters is not just “being there” during a crisis, but showing good judgment in managing it. 
Those in the US Treasury who were responsible for managing the East Asian crisis performed miserably, converting downturns into recessions and recessions into depressions. 
So, too, those responsible for managing the 2008 crisis cannot be credited with creating a robust, inclusive recovery. 
Botched efforts at mortgage restructuring, failure to restore credit to small and medium-size enterprises, and the mishandling of bank bailouts have all been well documented, as have major flaws in forecasting both output and unemployment as the economy went into free-fall. 
Even more important for a central banker managing a crisis is a commitment to measures that make another crisis less likely. 
By contrast, a laissez-faire approach would make another crisis all but inevitable. 
A top contender to succeed Bernanke is Fed Vice Chair Janet Yellen, one of my best students when I taught at Yale. 
She is an economist of great intellect, with a strong ability to forge consensus, and she has proved her mettle as Chair of the President’s Council of Economic Advisers, President of the San Francisco Fed, and in her current role. 
Yellen brings to bear an understanding not just of financial markets and monetary policy, but also of labor markets – which is essential in an era when unemployment and wage stagnation are primary concerns. 
(A classic article that she co-authored remains, many years later, on my list of required reading for Ph.D. students.) 
Given the fragile economic recovery and the need for continuity in policy – as well as for confidence in the Fed’s leadership and global cooperation based on mutual understanding and respect – Yellen’s steady hand is precisely what US policy making requires. 
President Barack Obama is supposed to appoint senior officials with the “advice and consent” of the US Senate. 
Roughly one-third of Democratic senators have reportedly written to Obama in support of Yellen. 
He should heed their counsel. 


The Gulf States’ Expat Dividend 
PARIS – How should policymakers in the Middle East’s Gulf States manage their countries’ large expatriate workforces? 
In Saudi Arabia, foreign nationals account for roughly one-third of the population. 
In Qatar and the United Arab Emirates, nine out of every ten residents is an expatriate. 
Should these countries’ governments continue to invest heavily in developing indigenous labor forces, with the aim of decreasing dependency on foreign workers? 
The extraordinarily high proportion of foreign labor within the Gulf Cooperation Council (GCC) countries is often considered problematic, because, as some see it, it threatens local cultures and national identities, holds down wages, and impedes the development of domestic skills and talent. 
With so many trades and professions dominated by relatively cheap overseas labor, the indigenous population is often left with few occupational domains offering competitive wages. 
These tend to be predominantly in the public sector, where oil revenues are used to maintain high pay and attractive working conditions. 
But an important dimension of the policy debate within the region risks being overlooked: The Gulf States’ large foreign populations are not just workers; they are also consumers. 
By inflating the population of the countries in which they live, expatriate workers are helping drive economic growth. 
In fact, the GCC benefits from a double expat dividend: not just a diverse consumer base on the demand side, but also a flexible, youthful workforce on the supply side. 
As a result, following the rapid decline in oil prices of recent years, companies could lay off thousands of workers without having to worry about raising the unemployment rate or putting a substantial burden on government coffers. 
This unique feature of GCC labor markets enhances the region’s ability to adapt and adjust to fluctuating economic cycles. 
Because GCC countries can afford to expand their workforces without running the risk that the share of their elderly population will increase over the long run, they enjoy constant young-to-old and consumer-to-producer “support ratios.” 
Moreover, public and private investment in the region – in infrastructure, education, health, and other services – has been geared toward the existing consumer base, inflated by the expat population. 
Those inflows are now causing the GCC population to grow four times faster than in emerging markets and the United States, seven times faster than in China, and ten times faster than in the eurozone. 
This trend is expected to continue, with annual population growth in the GCC averaging 1.8% – twice the average for emerging markets. 
And, according to an IMF study, population growth in the Middle East and North Africa between 1970 and 2000 has raised the annual rate of growth of output per effective consumer by about 0.5-0.6 percentage points. 
Larger consumer markets have sufficient economies of scale and diversity to make the introduction of new products and services into the region economically viable. 
They have the added benefit of generating what the economist Amar Bhidé calls venturesome consumption: demand-led entrepreneurship and innovation. 
Economies of scale also allow the delivery of health, education, and other services, such as entertainment and leisure, at lower prices. 
And larger markets provide a greater incentive for investors and traders to enter, and for governments to provide new public goods. 
If not for expat populations in rural and remote areas, there would have been little reason to invest in roads, schools, and hospitals – let alone parks, libraries, and theaters. 
GCC countries have made such investments for the past four or five decades, and ongoing construction projects in the GCC are estimated to run in the trillions of dollars. 
In education, enrollment in K-12 schools across the GCC rose from 2.7 million in 2003 to 10.7 million in 2012, a compound annual growth rate of 16.5%. 
Investment in this sector stands at around $150 billion. In health care, total spending in the region is expected to increase to $133 billion per year by 2018. 
The foreign population also provides a human-capital dividend to the local population, as talented expats introduce knowledge and innovation in sectors that the GCC wants to develop. 
Research from MIT has shown that an increase in population size is an important driver of technological progress. 
And studies in Japan indicate that higher population densities create stronger incentives for individuals to become entrepreneurs; a 10% increase in population density increases the share of people who wish to become entrepreneurs by approximately 1%. 
The GCC’s expat dividend could grow much bigger – but only if governments in the region establish the necessary mechanisms. 
Such mechanisms should be designed to maximize the benefits that foreign nationals provide. 
Work-and-retire or invest-and-retire visas, for example, would encourage expats to save and accumulate pension funds – thereby enabling them to contribute even more significantly to the region’s rapid economic growth. 

Gunboat Democracy? 
In one sense, Iraq’s weapons of mass destruction were also weapons of mass distraction. 
Without doubt, President George W. Bush and Prime Minister Tony Blair believed that Saddam Hussein either had, or had the wherewithal to produce, such weapons when they decided for pre-emptive war. 
In the case of Iraq, there was particular fear of chemical and biological weapons. 
But WMD were not the only motive for war. 
Both leaders were outraged about a murderous dictator and hoped that toppling him would open the door for democracy in Iraq. 
This (they hoped) would automatically bring about a degree of stability that would help resolve other conflicts in the region, and also guarantee the uninterrupted flow of oil. 
Mixed motives are not necessarily bad motives. 
In fact, most human motives are mixed. 
The real question is whether democracy could really have done the trick, and then, whether missiles and tanks are the right method to bring democracy to a country that has suffered dictatorial rule for a long period of time. 
Historical precedents played a part in the Iraq decision, not least because President Bush’s national security adviser, Condoleezza Rice, cited them often. 
One example is Nazi Germany. 
To be sure, the Allies did not enter that war to bring democracy to Germany. 
In any case, Germany started the war. 
The Allies defended those to whom they were bound by treaty, and then the integrity of their own countries. 
Perhaps the entry of the United States into the (European) war had something to do with the post-war order. 
But there were actually two views about that order. 
One was that Germany should be flattened and reduced to a pre-industrial society from which no effective aggression could ever emerge again. 
The other was that Germany should be helped on the way to democracy. 
As it happened, the protagonists of the first view were sidelined and the proponents of democratization prevailed. 
Indeed, the US was effective in using its “soft power” to build democracy in post-war Germany, though Britain was better. 
Democratic manners came more naturally to the British occupation forces. 
The second example, the end of the Cold War in 1989, was also a success story. 
Of course, communism’s collapse was not the result of a pre-emptive strike by the West (though the arms race helped drive the system to implosion). 
After 1989, however, Western assistance, not least by the US and Britain, eased the transition to democracy, the rule of law, and market economies in most post-communist countries. 
So why does this not seem to work in Iraq? 
Evidently, differences of culture and circumstances abound. 
Even so, why has so little come of the intention of the Iraq war’s leaders to give democracy a chance in that country? 
One reason is that bringing democracy with missiles and tanks is almost a contradiction in terms. 
Democracy is by definition a peaceful method of settling conflicts. 
Of course, the bombing of Dresden in 1945 was not exactly peaceful. 
One must doubt whether it contributed anything to making democracy more acceptable after WWII. 
Still, when the fighting was over, the bombing stopped for good, and out of the tanks came people who were intent on creating democratic conditions and capable of doing so. 
There is much talk these days about “hard” and “soft power,” about America having one and Europe the other. 
In fact, the two belong together. 
Soft power without the backing of hard power changes little: witness Iran. 
On the other hand, hard power without soft power means only destruction. 
It is the greatest single weakness of the US forces that in 2004 – contrary to 1945 – they do not have the capacity to stop the bombing, get out of their tanks, and encourage indigenous democratic development from the bottom up. 
Where such capacity exists, there would also be recognition of the fact that democracy does not mean the same institutions in all cultural contexts. 
If there are elections in Iraq in January – and this is a very big “if” – they may not resolve much. 
Involving the people and providing for peaceful conflict resolution may require institutions peculiar to the region and its history. 
It is a great shame that so many Europeans have steered clear of Iraq with a mixture of self-righteousness and anti-American Schadenfreude . 
Greater European input might have balanced the “hard power” of the US military machine with the “soft power” of Europe’s experience of diversity and of dealing with post-war situations. 
In fact, Europe’s failure is not just a shame, but a historic calamity. 
Missiles and tanks alone cannot bring democracy, but coupled with the civil power of sensitive help for the defeated, democracy can be adapted to Iraq and the rest of the Middle East. 

Guns, Drugs, and Financial Markets 
CAMBRIDGE – The sub-prime mortgage crisis has demonstrated once again how hard it is to tame finance, an industry that is both the lifeline of modern economies and their gravest threat. 
While this is not news to emerging markets, which have experienced many financial crises in the last quarter-century, a half-century of financial stability lulled advanced economies into complacency. 
That stability reflected a simple quid pro quo : regulation in exchange for freedom to operate. 
Governments brought commercial banks under prudential regulation in exchange for public provision of deposit insurance and lender-of-last-resort functions. 
Equity markets were subjected to disclosure and transparency requirements. 
But financial deregulation in the 1980’s ushered us into uncharted territory. 
Deregulation promised to spawn financial innovations that would enhance access to credit, enable greater portfolio diversification, and allocate risk to those most able to bear it. 
Supervision and regulation would stand in the way, liberalizers argued, and governments could not possibly keep up with the changes. 
What a difference today’s crisis has made. 
We now realize even the most sophisticated market players were clueless about the new financial instruments that emerged, and no one now doubts that the financial industry needs an overhaul. 
But what, exactly, needs to be done? 
Economists who focus on such issues tend to fall into three groups. 
First are the libertarians, for whom anything that comes between two consenting adults is akin to a crime. 
If you are selling a piece of paper that I want to buy, it is my responsibility to know what I am buying and be aware of any possible adverse consequences. 
If my purchase harms me, I have nobody to blame but myself. 
I cannot plead for a government bailout. 
Non-libertarians recognize the fatal flaw in this argument: financial blow-ups entail what economists call a “systemic risk” – everyone pays a price. 
As the rescue of Bear Stearns shows, the government may need to bail out private institutions to prevent a panic that would lead to worse consequences elsewhere. 
Thus, many financial institutions, especially the largest, operate with an implicit government guarantee. 
This justifies government regulation of lending and investment practices. 
For this reason, economists in both the second and third groups – call them finance enthusiasts and finance skeptics – are more interventionist. 
But the extent of intervention they condone differs, reflecting their different views concerning how dysfunctional the prevailing approach to supervision and prudential regulation is. 
Finance enthusiasts tend to view every crisis as a learning opportunity. 
While prudential regulation and supervision can never be perfect, extending such oversight to hedge funds and other unregulated institutions can still moderate the downsides. 
If things get too complicated for regulators, the job can always be turned over to the private sector, by relying on rating agencies and financial firms’ own risk models. 
The gains from financial innovation are too large for more heavy-handed intervention. 
Finance skeptics disagree. 
They are less convinced that recent financial innovation has created large gains (except for the finance industry itself), and they doubt that prudential regulation can ever be sufficiently effective. 
True prudence requires that regulators avail themselves of a broader set of policy instruments, including quantitative ceilings, transaction taxes, restrictions on securitization, prohibitions, or other direct inhibitions on financial transactions – all of which are anathema to most financial market participants. 
To grasp the rationale for a more broad-based approach to financial regulation, consider three other regulated industries: drugs, tobacco, and firearms. 
In each, we attempt to balance personal benefits and individuals’ freedom to do as they please against the risks generated for society and themselves. 
One strategy is to target the behavior that causes the problems and to rely on self-policing. 
In essence, this is the approach advocated by finance enthusiasts: set the behavioral parameters and let financial intermediaries operate freely otherwise. 
But our regulations go considerably further in all three areas. 
We restrict access to most drugs, impose heavy taxes and marketing constraints on tobacco, and control gun circulation and ownership. 
There is a simple prudential principle at work here: because our ability to monitor and regulate behavior is necessarily imperfect, we need to rely on a broader set of interventions. 
In effect, finance enthusiasts are like America’s gun advocates who argue that “guns don’t kill people; people kill people.” 
The implication is clear: punish only people who use guns to commit crimes, but do not penalize others as well by restricting their access to guns. 
But, because we cannot be certain that the threat of punishment deters all crime, or that all criminals are caught, our ability to induce gun owners to behave responsibly is limited. 
As a result, most advanced societies impose direct controls on gun ownership. 
Likewise, finance skeptics believe that our ability to prevent excessive risk-taking in financial markets is equally limited. 
Whether one agrees with the enthusiasts or the skeptics depends on one’s views about the net benefits of financial innovation. 

Hacking for Humanity 
CAMBRIDGE – “Life,” Oscar Wilde famously said, “imitates Art far more than Art imitates Life.” 
In the case of Sony Pictures’ movie The Interview, the world found itself confronted with a further iteration: life imitating art imitating life. 
The movie’s release sparked international intrigue, drama, and shadowy geopolitical power struggles. 
It even prompted a grave US Presidential address – all for a simple case of hacking. 
Hacking into information systems is nothing new; it goes hand in hand with the emergence of telecommunications. 
One of the first attacks struck Guglielmo Marconi’s demonstration of radio transmission in 1903, when he communicated from Cornwall to London, 300 miles away. 
Nevil Maskelyne, a music-hall magician and would-be wireless tycoon, who had been frustrated by the Italian inventor’s patents, managed to take control of the system and broadcast obscene messages to the Royal Institution’s scandalized audience. 
Though hacking is as old as wireless itself, much has changed since Marconi’s time. 
Information networks now blanket our planet, collecting and transferring immense amounts of data in real time. 
They enable many familiar activities: instantaneous communications, social media, financial transactions, and logistics management. 
Most important, information is no longer sequestered in a virtual realm, but permeates the environment in which we live. 
The physical, biological, and digital worlds have begun to converge – giving rise to what scientists refer to as “cyber-physical systems.” 
Automobiles, for example, have evolved from straightforward mechanical systems into veritable computers on wheels. 
The same thing is happening to other consumer goods: We now have connected washing machines and learning thermostats, not to mention Bluetooth toothbrushes and computerized infant scales. 
Indeed, cyber-physical systems range from the macro level (think urban transport, like Uber) to the micro (say, the beating of a human heart). 
Our very bodies, strapped with connected wearables, are today imbued with more computing power than all of NASA at the time of the Apollo missions. 
All of this promises to revolutionize many aspects of human life – mobility, energy management, health care, and much more – and may point toward a greener and more efficient future. 
But cyber-physical systems also heighten our vulnerabilities to malicious hacking, an issue that is being discussed at the World Economic Forum in Davos. 
Far from being isolated in cyberspace, attacks can now have devastating consequences in the physical world. 
It is an annoyance when a software virus crashes our computers; but what if the virus crashes our cars? 
Malicious hackers are difficult to combat with traditional government and industry tools – the Sony Pictures case being a telling example. 
Hacking can be carried out anywhere and everywhere, potentially involving multiple networks in obscure locations. 
It defies conventional retaliation and protection strategies. 
As then-US Defense Secretary Leon Panetta warned in 2012, given its current systems, the United States is vulnerable to a “cyber Pearl Harbor” that could derail trains, poison water supplies, and cripple power grids. 
So, how can such a scenario be prevented? 
One option, surprisingly, could be to promote widespread adoption of hacking itself. 
Familiarity with hackers’ tools and methods provides a powerful advantage in diagnosing the strength of existing systems, and even in designing tighter security from the bottom up – a practice known as “white hat” hacking. 
Ethical infiltration enables a security team to render digital networks more resistant to attack by identifying the flaws. 
This may become routine practice – a kind of cyber fire drill – for governments and businesses, even as academic and industry research focuses in the coming years on the development of further technical safeguards. 
In general, today’s defenses take the form of autonomous, constantly vigilant digital “supervisors” – computers and code that control other computers and code. 
Similar to traditional military command-and-control protocols, they gain power in numbers and can quickly react to a broad array of attacks. 
Such a digital ecosystem strengthens checks and balances, reducing the possibility of failure and mitigating the effects of an incursion. 
In such a future scenario, a Hollywood blockbuster might be about networks of computers fighting each other, while humans stand by. 
It would portray the broader idea of “singularity,” a hypothetical turning point when the artificial surpasses the human. 
Fortunately, in this case, life is still far from imitating art. 

Hair of the Top Dog 
NEW YORK – Much has been written about Donald Trump’s peculiar hairstyle, the kind of puffy, dyed comb-over one would associate with a downmarket nightclub manager rather than a presidential candidate. 
Is there really any more to be said? 
Actually, the question of hair in politics might not be as trivial as it seems. 
It is remarkable how many politicians, especially on the populist right, have sported heterodox hairdos. 
Silvio Berlusconi, Italy’s former prime minister, used black pencil to fill in the patches not covered by his two hair transplants. 
The Dutch demagogue Geert Wilders dyes his Mozartian bouffant platinum blond. 
Boris Johnson, the Brexit rabble-rouser, now UK foreign secretary, takes care to keep his straw-colored thatch in a permanent state of studied untidiness. 
All have scored highly with voters filled with anger and resentment at polished urban elites. 
Then there was the father of modern European populism, the late Dutch politician Pim Fortuyn, who had no hair at all. 
But his shiny, clean-shaven pate stood out as much among the neat gray coiffures of mainstream politicians as Johnson’s blond mop or Trump’s gilded comb-over (all these men, except Berlusconi, are blonds, by the way, or fake blonds; dark hair doesn’t seem to work so well with the populist mob). 
Standing out is of course the point. 
The strange hair, or shaven head, makes the popular leader instantly recognizable. 
This type of branding is common among dictators. 
Hitler’s visual image could be reduced to a greasy cowlick and a toothbrush moustache. 
The oddest-looking of all contemporary dictators must be North Korea’s Kim Jong-un, whose clean-shaven back and sides are cultivated as a deliberate imitation of his grandfather’s 1930s proletarian hairstyle. 
His father, Kim Jong-il, tried – albeit with little success – to emulate Elvis Presley’s pompadour. 
But self-parody sometimes works in democracies too. 
Winston Churchill, who in many ways is Johnson’s model, always made sure to carry a big cigar, even when he had no intention of smoking it. 
There was not much he could do about his sparse hair, but he certainly dressed differently than anyone else. 
No other British politician, even during the war, wore the kind of zipped-up boilersuit Churchill adopted. 
Studied nonchalance, or cultivated eccentricity, was a sign of the typical aristocrat who felt no need to conform to the boring standards of middle-class correctness. 
Churchill understood something that many mainstream politicians miss. 
The way to the masses’ hearts is not to pretend that you are just like them. 
On the contrary, if you are from the upper class, you lay it on thick, you turn yourself into a caricature of the higher born, like the old-fashioned aristocrat who despises the timid bourgeois, but gets on fine with his gamekeeper. 
Johnson is not an aristocrat, but he went to Eton and can easily pose as one, a skill he uses to great effect. 
The US does not have a formal aristocracy. 
Status is more a question of money. 
One of the secrets of Trump's popularity is that he flaunts his supposed great wealth. 
He even exaggerates it, if necessary. 
The absurd golden chairs in his pastiche Louis XIV homes are a coarse imitation of aristocratic style. 
Fortuyn, on a more modest Dutch scale, and Berlusconi, on a more grandiose Italian stage, had similar tastes. 
People for whom this is the stuff of dreams admired them for it. 
Affirming the dreams of people who have little is the key to successful populism. 
The main thing is that these politicians are not like the dull and moderate mainstream. 
Even insiders have to pose as outsiders, who can stand with the common man against the political establishment. 
Weirdness – peculiar upper-class mannerisms, ostentatious living, outrageous jokes, deliberate crassness, and mad hairstyles – is an asset. 
I am not sure that people, who rightly see Trump as a great danger to the US and the world, sufficiently appreciate this. 
Much has been made of the reasonable and moderate tone of the Democratic National Convention, compared to the “dark,” snarling bombast of the Republicans’ event. 
President Barack Obama, Vice President Joe Biden, and Hillary Clinton herself were paragons of dignity, compared to Trump’s Mussolini-like mannerisms and verbal aggression. 
Clinton supporters, at the convention and elsewhere, tend to attack Trump with ridicule, the method once used by Voltaire against the dogmas of the Catholic Church. 
Ridicule can be an effective weapon. 
In the 1920s, journalists like H.L. Mencken made Christian fundamentalists in the US look so foolish that they dropped out of politics for several generations. 
Trump’s mad and offensive braggadocio, his vulgar tastes, and his extraordinary looks are all eminently ripe for satire. 
Comedians like Jon Stewart have had merciless fun at his expense. 
But satire and ridicule will not work to persuade people who love Trump precisely because of his weirdness. 
It sets him apart from the establishment they despise. 
Charisma does not call for restraint in words, appearance, or manner. 
The weirder he gets, the more his supporters like him. 
And the more that clever comedians in New York mock him, the more his fans will rally to his side. 
This is the great perversity in our age of angry populism. 
Reasonable arguments and political optimism can now be turned into negative qualities, the typical marks of a complacent elite, oblivious to the concerns of people who feel that the joke has been on them. 
Reasonable argument did not work to convince 51.9% of British voters to remain part of the EU. 
It may not work to keep an ignorant and dangerous buffoon – silly hairstyle and all – from becoming President of the US. 

Haiti and the Limits of Generosity 
MELBOURNE – All over the world, people have responded generously to the devastating earthquake that struck Haiti. 
In just three days, more than a million Americans had donated $10 with the aid of text messages from their cellphones. 
People with very little themselves, like Maria Pacheco, an unemployed single mother from Chicago, donated food and clothes. 
Others did whatever they could – from pedicures to washing cars – to raise money. 
On current indications, the amount Americans will give to relief efforts in Haiti could surpass the $1.9 billion they gave to assist victims of the 2004 Asian tsunami, which until now has stood as a record for donations to a disaster outside the United States. 
Given that the US is undergoing economic hard times, the size of the response has surprised many. 
Haiti ’s proximity, plus the fact that close to a million Haitians live in the US, goes some way towards explaining why Americans have responded so generously. 
But the response has been worldwide. 
In Melbourne for the Australian Open, Roger Federer, Serena Williams, and other stars held an exhibition match that led to donations of $600,000. 
In Rwanda, a group of community health workers making less than $200 a month raised $7,000 for Haiti. 
All of this raises many questions about how we respond – and how we should respond – to such tragedies. 
The earthquake killed up to 200,000 people. 
Terrible as that is, it is fewer than the number of children who, according to the United Nations Children’s Fund, UNICEF, die every 10 days from avoidable, poverty-related causes. 
Moreover, as Elie Hassenfeld has argued on GiveWell.net, there are good grounds for thinking that disaster relief is less cost-effective than aid aimed at saving the lives of those who are risk from extreme poverty. 
Why do people give generously to earthquake victims, but not to prevent the much larger number of deaths brought about by extreme poverty, insufficient food, unsafe water, lack of sanitation, and the absence of even the most basic health care? 
Media saturation obviously makes a critical difference. 
Scenes from Hurricane Katrina, the Asian tsunami, and now the Haitian earthquake were shown over and over again on all television news broadcasts. 
An earthquake in a remote part of Pakistan that killed 80,000 people received relatively little television coverage, and a much less generous response. 
The daily deaths of children in poor countries from diarrhea, measles, and malaria are part of the background of the world we live in, and so are not news at all. 
Suppose that a million children all in one place seemed likely to be swept away and drowned by approaching floodwaters. 
The media coverage would be enormous. 
Now imagine the jubilation if they were saved! 
And imagine the acclaim for the heroes who had saved so many children. 
Yet when UNICEF announced, in September of last year, that the number of children dying each year from poverty-related causes had dropped by one million, as compared to two years earlier, the story got very little media attention. 
The people who contributed to this drop by delivering effective basic health care, building a supply of safe water, or immunizing children against measles remain largely unknown. 
Perhaps people respond more generously to the victims of natural disasters than they do to those in extreme poverty because, after a natural disaster, we tend not to blame the victims. 
We seem to accept that to be struck by an earthquake, a tidal wave, or a hurricane is just bad luck (unless, as the American evangelist Pat Robertson suggested after the Haitian earthquake, your ancestors made a pact with the devil in order to free themselves from colonial rule). 
Still, many people profess to believe that poverty is the result of not working hard enough, or of having too many children. 
But the circumstances that produce extreme poverty are not, except in rare cases, under the control of such poor people. 
They may be, to some extent, under the control of governments, and undoubtedly bad government is a major contributor to poverty. 
But then, bad government can also contribute to the toll exacted by a natural disaster. 
Two years ago, a team of geophysicists led by Eric Calais of Purdue University predicted that the fault that produced the recent Haitian earthquake was at high risk of doing exactly what it did. 
They urged the Haitian government to take steps to strengthen critical buildings, including hospitals and schools. 
Failure to do so contributed to the toll. 
What should we do? 
Brian Tucker, founder of the non-profit organization Geohazards International, urges that 10% of the money raised by relief efforts should be set aside for mitigating damage from future earthquakes: training builders, improving engineering, and making the public more aware of the risks and how to reduce them. 
He claims that every dollar invested in preparing for natural disasters saves ten dollars in future damage. 
Tucker’s proposal makes good sense, but it is difficult – and arguably unethical – for charities that raised money to help Haitians now to divert some of those funds to programs to mitigate the damage caused by future earthquakes. 
It would be excellent if the general public responded to an appeal for funds for mitigating future damage. 
But the prospects of that happening are slim, because such an appeal would lack the emotional pull of the desire to help immediate victims. 
Instead, governments that are pledging aid to Haiti now should ensure that part of their assistance goes to reducing the chances that such a disaster will affect Haiti so dramatically again. 

Haiti’s Moment 
NEW YORK – Fortune has not been kind to Haiti. 
The pain and suffering arising from last year’s earthquake was already enormous, and has since been compounded by Hurricane Tomas and an outbreak of cholera. 
Now there is growing tension surrounding the just completed election. 
That epidemic has spread to all ten departments of the country, as well as to the capital, Port au Prince. 
The Haitian Ministry of Public Health reports that the number of deaths is approaching 2,000, with the number of infections exceeding 80,000. 
Because many people do not have easy access to hospitals and clinics, these figures are rough estimates at best. 
United Nations teams fear that the actual number of deaths and current infections may in fact be up to twice as high. 
Clearly, the epidemic will continue to spread. 
This is a function of a particularly virulent strain of cholera and underlying issues: a weak national health system, poor sanitary conditions, and a lack of clean water and other basic services. 
The World Health Organization and the Pan-American Health Organization (PAHO) estimate that the outbreak could affect some 400,000 people. 
As the international community mobilizes to respond, we have two priorities: first, bringing down the fatality rate through effective treatment, and, second, informing the population about how to care for themselves, their families, and their communities. 
There is some positive news, however grim the overall picture. 
While the epidemiological statistics are alarming, the death rate has declined in recent weeks, from 7.6% to 3.6%. 
The Haitian government, UN agencies, and the humanitarian community are moving quickly to put treatment and preventive measures in place. 
They are providing water-purification materials, carrying out large-scale public-information campaigns, and helping to build treatment centers. 
Yet one thing is clear. 
Admirable as these collective efforts may be, they are simply not sufficient. 
Without a massive and immediate international response, the lives of hundreds of thousands of people will be at risk. 
It is up to us to act, with maximum speed and full deployment of resources. 
Most immediately, there is an urgent need for more cholera treatment centers. 
More trained medical and non-medical personnel are needed to run these facilities. 
PAHO and WHO estimate that an additional 350 doctors, 2,000 nurses, and 2,200 support staff will be required over the next three months. 
Approximately 30,000 community health workers and volunteers are also needed to help staff an estimated 15,000 oral re-hydration points. 
Still others are required to educate and promote better hygiene in camps and communities. 
It is vital that the Haitian people in all communities are fully informed about how to deal with this disease, and that they understand that cholera is quickly cured when diagnosed and treated quickly. 
Essential medicines and materials are in short supply: water purification tablets, chlorine disinfectant, antibiotics, jerry cans, soap, water cisterns, and construction material for latrines. 
Stocks of oral re-hydration salts must be constantly replenished. 
Not surprisingly, the incidence of cholera is highest in Haiti’s slums and rural areas, where people are farthest from assistance. 
In the camps where an estimated 1.3 million took refuge after this year’s earthquake, ironically, incidence is relatively low. 
The reason: we are there with what is required – medical aid, sanitation, and clean water. 
To help Haiti help itself, we must extend our reach. 
That is why the UN and its partners issued the Cholera Inter-Sector Response Strategy for Haiti, a $164 million funding appeal to support the international community’s efforts to contain the outbreak. 
So far, it is only 20% funded. 
This will not be a short-term crisis, so we cannot think only in the short term in formulating our response. 
Millions of people look to the international community for immediate survival. 
At the same time, our response must be viewed within the broader context of recovery and long-term development. 
Investment in basic infrastructure is critical – clean water, sanitation, healthcare, education, and durable shelter. 
Along the way, we must help strengthen Haitian institutions. 
Haiti needs a strong and legitimate government to overcome the challenges ahead. 
The recent elections were a milestone in the country’s long and very hard road. 
But irregularities now seem more serious than initially thought. 
Tensions are on the rise. 
Political leaders must put the national interest ahead of personal and partisan ambitions. 
The UN and its many international partners will help Haiti to get back on its feet. 
But, at the end of the day, Haitians can stand only on their own. 
As a people, they are singularly resilient and brave. 
They need, and deserve, our support. 
But they need, and deserve, strong national leadership as well. 

Haiti’s State-Building Challenge 
SANTO DOMINGO -- The $5 billion in short-term aid for Haiti, and the $10 billion pledged for its long-term reconstruction at the International Donors’ Conference on March 31, is a vote of confidence in the potential of collective international action. 
The question, however, is not only one of money; it is about whether Haiti’s agony is to be addressed as just one more humanitarian crisis or as a structural problem of state building – a long-term quest for institutional stability and sustainable development. 
Conspicuously, Haiti’s Dominican neighbors were the first to gauge the magnitude of the problem and the global nature of the required solution. 
The Dominican government’s decision to hold a summit on Haiti’s future has the objective of securing the international community’s ongoing commitment to Haiti, beyond the generous response to the catastrophe produced by the earthquake in January. 
In addition to harmonizing the flow of donations and an agreed-upon list of development projects, Dominican President Leonel Fernandez seeks to make clear that the task is a long-term enterprise: re-founding the failing Haitian state. 
A believer in the essentially political nature of Haiti’s tragedy, Fernandez rightly aspires to turn the current crisis into the lever for state-building, Haiti’s extraction from political isolation, and its maturation into an active member of the regional and world community. 
It is to be hoped that the current global economic crisis does not undermine the reliability of the world’s commitments to Haiti. 
After all, even in times of prosperity, the international community has been notorious for making grand pledges, only to renege when it comes to following through with the money. 
Keeping alive the international community’s commitment – that is, seeking an international solution to Haiti’s tragedy – is a vital necessity for the Dominicans. 
Their initiative is essentially driven by the fear that once Haiti’s immediate humanitarian crisis is addressed, the country’s underlying problems could be left at the door of the “prosperous” neighbors across the border. 
A case like the island of La Española (Hispaniola), where a simple border can reflect such vast differences, is not very common. 
On one side of the border is the poorest country in the Western Hemisphere, a place where 56% of the population survives on less than one dollar a day. 
On the other side of the island stands a stable democracy with a promising outlook for a reasonably prosperous future. 
For Dominicans, helping Haiti develop and become politically stable is the best way to safeguard their own stability. 
That was also the logic of the Barcelona Process in the late 1990’s, whereby the European Union worked to promote the development and democratization of the countries of the Maghreb as the best way to stem the uncontrolled tide of illegal immigration into Europe. 
But, unlike the EU, the Dominican Republic is not an economic giant that can assume exclusive responsibility for extracting Haiti from its Biblical destitution. 
The Dominicans are right to seek at least a more solid regional commitment. 
The Haitian refugee crisis in the early 1990’s tragically showed that no country in the region – including the United States, which either repatriated most illegal immigrants or confined them to the hardship of open camps in Guantánamo Bay – was ready to absorb the Haitians who fled their politically torn country. 
So long as the Haitian state remains fragile and the Haitian economy continues to decompose, the network of mafias living on illegal immigration into the Dominican Republic will continue to flourish. 
About one million Haitians now live in the Dominican Republic, but only about 10% of the Haitian laborers in the country are there legally, a condition that invites their exploitation by greedy employers. 
Cheap Haitian labor has become a substitute for less-skilled Dominican labor in a way that increases income inequalities, and puts a special burden on the country’s public finances and services, owing to lower tax revenues. 
Though the Dominican Republic suffers from its own social and economic maladies – it is itself an exporter of emigrants to the US, Puerto Rico, and Spain – it certainly has a role to play in Haiti’s reconstruction. 
But it must supersede the exclusivist attitudes held by many members of its political class, particularly given that much of its economic growth in recent years reflects the contribution of Haitian immigration. 
The two countries are condemned by history and geography to develop civilized neighborly relations. 
Haitians should not be encouraged to seek a solution to their tragic plight simply by crossing the border, but Dominicans should not demonize Haiti as the source of all their problems. 
Both sides need to engage in the vital enterprise of turning the border that separates them into a benign space of transnational development and stability. 
Precisely because developing a mutually beneficial border regime is, as Secretary of State Hillary Clinton rightly remarked in her 2009 visit to the island, a task that affects the two countries’ stability and well-being, it also needs to be part of the current international reconstruction effort. 
But Clinton should be reminded that every free industrial zone that was built along the Israeli-Palestinian border eventually fell victim to political instability. 

Hamas, Fatah, and the Palestinian Dilemma 
GAZA CITY – With dueling authorities running Gaza and the West Bank, the Palestinian people find themselves in the middle of an experiment. 
In Gaza, where Hamas is in charge, the high price of armed resistance to Israel has discredited any attempts to revive the conflict. 
In the West Bank, under Fatah rule, negotiations have gone nowhere. 
Neither track of Palestinian politics – resistance or negotiation – offers hope of achieving independence. 
As a result, Palestinians face their most difficult challenge since 1948. 
Israeli threats of renewing its war on Hamas in the Gaza Strip are taken very seriously. 
The scenes of devastation are still vivid in the streets and neighborhoods of Gaza, and Hamas is taking no chances of provoking Israel into a new war. 
The fighting cost Hamas two of its top leaders, Saeed Siyam and Nizar Rayan, and significantly weakened its military capabilities. 
Only recently have these been rebuilt. 
Hamas finds itself in a difficult position, since its policy calls for strong resistance, alongside politics. 
Yet this policy has failed. 
Hamas has put pressure on all resistance groups in Gaza to refrain from provoking Israel. 
In an unprecedented statement, Mahmoud al-Zahar, a top Hamas leader, said any missiles fired at Israel from Gaza would be “betrayal missiles.” 
Instead, Hamas has turned its attention to the West Bank, where it has no political authority. 
It has called on Palestinians there to launch a new intifada against Israel, even while insisting on calm in the Gaza Strip. 
Fatah, which runs the West Bank, wants no part of another Palestinian uprising. 
President Mahmoud Abbas has made no secret of his objection to such a strategy. 
But, with their government unable to do anything about the expansion of Israeli settlements, including in East Jerusalem, as well as continued conflicts over holy sites in Hebron, Bethlehem, and the Al-Aksa mosque, West Bank Palestinians are extremely frustrated. 
Recent street demonstrations could easily turn into an outbreak of ongoing resistance to Israeli rule. 
The Palestinian Authority, which runs the West Bank, is afraid that a popular, non-violent intifada might quickly turn violent. 
If so, Israel might use it as a pretext to crush the Palestinians and their newly built institutions. 
This has happened before, during the last intifada in 2002. 
There is another scenario that also terrifies Fatah leaders. 
An outbreak of violence could strengthen Hamas and its military wing, Al-Qassam Brigades, in the West Bank. 
This, in turn, could produce a repeat of the scenario that brought Hamas to power in Gaza in June 2007, when all Fatah authority in the area collapsed after the Israeli withdrawal. 
Yet the peace process has been stalled for more than a year, greatly reducing Fatah’s credibility in the West Bank. 
Abbas has repeatedly described peace as a strategic choice for the Palestinians. 
But, 17 years since the signing of the Oslo agreement and the launch of bilateral talks between the Palestine Liberation Organization and Israel, there has been very little movement toward a Palestinian state. 
In popular opinion, negotiations have reached a dead end. 
Arab diplomats also show few signs of optimism. 
At its recent summit in Libya, the Arab League rejected the proximity talks proposed by the United States’ Middle East peace envoy, George Mitchell. 
The Arab position is that no proximity talks can be held until Israel freezes its settlement activity in the West Bank and East Jerusalem. 
Palestinian and Arab opinion is waiting for the US, as Israel’s ally, to intervene and press for concessions. 
Though the Palestinian economy in the West Bank has improved greatly under Prime Minister Salam Fayyad, this is no substitute for serious peace negotiations. 
In August 2009, Fayyad declared his vision of a Palestinian state in two years. 
Under his blueprint, which has received strong financial support from the US and the European Union, the political, economic, and security infrastructure of the Palestinian state would be ready by August 2011. Fayyad has also gained the backing of Fatah and most other Palestinian groups in the West Bank. 
Fayyad’s strategy for international recognition of a Palestinian state is to fight a legal battle against Israel in the United Nations Security Council and other international bodies. 
He is convinced that establishing a Palestinian state would serve the interest of all parties, and that the odds favor the Palestinians in international political struggle. 
Hamas does not share this view, and Palestinian reconciliation efforts have reached an impasse. 
The Arab League has given Egypt the lead role in bringing the two sides together, but Hamas has spurned Egypt’s proposals. 
Now, with questions about President Hosni Mubarak’s successor in the air, Egypt has put aside these talks. 
Palestinians are looking instead to Iran, Hamas’ ally, for signs of any revival in discussions between Fatah and Hamas. 
Palestinians’ choices are limited, and there is no consensus among them on how to proceed. 
But there is a growing sense that the waiting game cannot last much longer. 

Hamas and Fatah at the Crossroads 
Palestinian politics is approaching the point of no return. 
The power struggle between the Islamist Hamas and Palestinian president Mahmoud Abbas and his secular/nationalist Fatah movement is intensifying, with tensions breaking into outright combat. 
Since Hamas was founded in the early 1980’s, it has refused to come under the leadership of the Palestine Liberation Organization (PLO). 
Hamas’s victory in the parliamentary election earlier this year – a democratic watershed – demonstrated that it had come of age politically. 
For the first time in Palestinian history, a religious party is dominant. 
But Fatah has not accepted defeat, while Hamas is convinced that elements within Fatah agree with Israeli and American plans to topple the Hamas government. 
Abbas remains the Palestinian president, and the Basic Law makes him commander of all Palestinian security forces. 
However, while most official security forces remain loyal to him, over the past year Hamas has created an alternative security structure, built around a 4000-member “Operational Force.” 
Moreover, Hamas has announced plans to recruit 1,500 additional security personnel for the West Bank, Fatah’s stronghold. 
In recent weeks, the two sides have clashed frequently across the Gaza strip, heightening tensions further. 
The confrontations have come at a time when Abbas has been trying to persuade Hamas to moderate its anti-Israel stance and ally with Fatah in a national unity government. 
Abbas believes that Hamas’s acceptance of negotiations with Israel is the only way to break the international sanctions that are devastating Palestinian society. 
Despite this, both sides are building up their forces. 
Intelligence reports suggest that Hamas is smuggling weapons and explosives from the Sinai into the Gaza Strip at an accelerated pace. 
The United States, Israel, and some Arab governments plan to arm and train forces loyal to Abbas, especially his presidential guard. 
They want to prepare Abbas’s forces in Gaza for a confrontation with Hamas, which they believe is inevitable. 
Israel is considering Abbas’s request to transfer arms and ammunitions from Egypt and Jordan in hopes of bolstering his loyalist forces. 
There is also an American proposal to allow the Badr Brigade – a wing of the Palestine Liberation Army that is currently stationed in Jordan – to relocate to the Palestinian territories as Abbas’s rapid reaction force in Gaza in anticipation of a feared civil war. 
The Badr Brigade is composed of several thousand Palestinians, mostly long-time PLO activists. 
As the maneuvering continues, Israel and Egypt find themselves working together to bolster Abbas and Fatah. 
With the Gaza Strip in its backyard, Egypt has already mediated several times between Hamas and Fatah, and has been trying, so far unsuccessfully, to arrange a swap of prisoners with Israel following Hamas’s abduction of Israeli soldier Gilad Shalit. 
But Egypt’s government is angry with Hamas for opposing the formation of a coalition government. 
Indeed, the seizure of Shalit deepened the rift between Hamas and Fatah, which believes that the abduction was staged in order to sabotage discussions about a national unity government. 
More generally, Egypt is concerned that Gaza is becoming politically radicalized and may be transformed into “Hamastan.” 
This, Egypt fears, would give a boost to its own Islamic radicals, against which the government has long fought. 
Egypt also worries about a possible Hamas-Fatah civil war. 
Although Hamas has ruled this out, it has shown no hesitation to use heavy force against its opponents. 
Likewise, Foreign Minister Mahmoud Al-Zahar of the Hamas-led government says that any dissolution of the government or call for early elections by Abbas would be a recipe for civil war. 
Fear of major fighting has already sent many Palestinians into Egypt, leading to the deployment of Egyptian troops on the border to control any mass exodus. 
Israel, meanwhile, is worried that Hamas has strengthened its military grip on Gaza, in terms of both fortifications and networks capable of launching Qassam rockets into neighboring Israeli towns. 
Israel might not wait for Abbas and his forces, but rather launch a full-scale intervention to weaken Hamas. 
Can Hamas and Fatah put aside their differences and form a unity government? 
Abbas says that if a coalition government is not agreed upon within the next two weeks, he will dissolve the current government, a move Hamas will not tolerate. 
But forming a coalition government is unlikely to ease the tension between Hamas and Fatah. 
New confrontations would likely emerge as soon as a new government was formed. 
Ironically, the most likely way to avoid large-scale confrontation between Fatah and Hamas is through an Israeli incursion into Gaza. 
Facing the Israelis together is the only way that the rival Palestinian groups will postpone their own bloody showdown. 

Hamas Comes in from the Cold 
GAZA CITY – In the wake of revolutionary change in the Middle East, the forces of political Islam have scored one electoral victory after another. 
As the West grapples with the rapid rise of moderate Islamists in Tunisia, Morocco, and Egypt, the issue of Hamas’s role in the Palestinian territories looms large. 
The signing of a new unity deal between Hamas and Palestinian President Mahmoud Abbas’s secular Fatah party earlier this month has heightened an unprecedented struggle within Hamas over its future course as an Islamist movement. 
How the West responds could very well influence the outcome. 
As events in recent weeks have proven, Hamas’s days of near-total isolation in the Middle East are over. 
While most Western governments continue to consider it a terrorist organization, in Arab capitals, political embargos have given way to engagement. 
In December, Ismail Haniyeh, Prime Minister of the Hamas-led Palestinian Authority in Gaza, embarked on a tour of the Mediterranean that included stops in Tunis, Cairo, and Istanbul. 
In mid-February, he was warmly received in Qatar, Bahrain, and Iran. 
This political outreach, however, has not emanated solely from Gaza. 
In January, Khaled Mashal, the leader of Hamas’s Damascus-based political bureau, embarked on a diplomatic initiative of his own, and was hosted by King Abdullah of Jordan – the first such visit in more than a decade. 
In February, Mashal crowned these efforts in Qatar with the signing of the new unity agreement with Fatah, which commits both Palestinian movements to a transitional government under Abbas’s leadership. 
Ever since, disagreements within Hamas have been escalating, pitting the movement’s Diaspora leadership against the Hamas-led Gaza administration, which has openly rejected the unity deal. 
While personal ambitions certainly play a role in the tensions, what lies at the core is a fundamental conflict over Hamas’s character. 
Haniyeh, who represents the conservative wing of Gaza’s Hamas leadership, has sought to cash in on regional changes. 
His long-boycotted government was thrown a lifeline by regime change in Egypt and the opening of the border with Gaza. 
Notably, Haniyeh’s recent diplomatic tour garnered not only symbolic recognition for Hamas, but also support for his uncompromising stance vis-à-vis Israel. 
He missed no opportunity to criticize “futile” peace negotiations, and, in Tehran, he pledged that Hamas’s “resistance” would continue “until all Palestinian land has been liberated.” 
What that means needs little clarification. 
In a further telling move, Haniyeh also recently suggested merging Hamas with the Islamic Jihad movement, which continues to target Israeli civilians with rockets fired from Gaza. 
Mashal, by contrast, has come to represent a force of change. 
Last May, he signed an initial reconciliation agreement with Fatah in Cairo, which committed Hamas to a Palestinian unity government, called for a cessation of violence, and accepted the notion of a Palestinian state on the 1967 borders. 
Mashal also offered Abbas a one-year mandate for negotiations with Israel, and, unlike Haniyeh, supported recent Israeli-Palestinian “exploratory talks” in Jordan. 
One reason for Mashal’s change of heart can be found in the ongoing popular revolt in Syria against President Bashar al-Assad. 
The leader of the Sunni Hamas can no longer support his Syrian host, who has cracked down on the Sunni-dominated opposition. 
Thus, Mashal has attempted to close ranks with Fatah, and is seeking to move Hamas’s Diaspora headquarters from Damascus – a powerful symbol of his efforts at re-invention. 
But Mashal’s refusal to support Assad has not only forced him to re-locate. 
It has also unleashed the wrath of Syria’s ally, Iran, which has responded by scaling down its financial support for Hamas – thus denying Mashal a key source of influence within the movement. 
Indeed, Mashal’s decision has effectively ended his ties to his two most important allies, thereby not only weakening his position, but also increasing his readiness to embrace political moderation. 
Tensions increased dramatically when Mashal signed the unity agreement with Fatah, after stating his intention to resign as head of the political bureau. 
While that announcement may have been political blackmail aimed at forcing Gaza into line, it underscored Mashal’s confidence in his popularity, which has since been vindicated by expressions of support from both within and outside of the political bureau for him to remain in charge. 
Mashal has more than one option. 
He may reemerge as the head of a newly established Palestinian branch of the Muslim Brotherhood, or as a leader of a new Islamist political party under the umbrella of the Palestine Liberation Organization. 
Such a merging of Hamas with the established Palestinian political organizations would signify Hamas’s formal acceptance of a two-state solution, and would mark an important step in transforming the movement. 
For the West, using the opportunity to influence Hamas’s future course requires modifying the failed policy of all-encompassing rejection. 
As in Egypt, Morocco, and Tunisia, Islamist moderates in the Palestinian territories need to be engaged as a legitimate political force. 
Leaders such as Mashal, who has expressed a readiness to forsake alliances with Syria and Iran and to accept a two-state solution with Israel, should be bolstered rather than boycotted. 
That means supporting the ongoing effort to form an interim Palestinian government of technocrats, as stipulated in the Qatar agreement. 
At times, such an approach will be challenging; 
Hamas will undoubtedly prove to be a difficult counterpart. 
But the United States, European governments, and Israel should take this opportunity to engage Hamas’s moderates and test their flexibility. 
In the new Middle East, the West’s current approach will only strengthen the hardliners in Gaza and elsewhere. 

Will Palestinian Reconciliation Revive the Two-State Solution? 
RAMALLAH – When representatives of the two major Palestinian factions, Fatah and Hamas, signed a new reconciliation agreement in Cairo on October 12, the focus was not on those actually doing the signing, Fatah Central Committee member Azzam al-Ahmad and Deputy Head of the Hamas Politburo Saleh al-Arouri. 
Instead, all eyes were on the man standing behind them: Khaled Fawzy, the head of Egypt’s General Intelligence Directorate. 
The ceremony, held at the intelligence agency’s headquarters, was orchestrated entirely by the Egyptians, who view the reconciliation as a stepping-stone to a much larger goal. 
As the agreement stated in its opening, it stemmed from Egyptian President Abdel Fattah el-Sisi’s “insistence” on ending the divisions among Palestinians, “with the aim of creating an independent state” along pre-1967 borders. 
Egypt’s leadership in this process will raise the country’s standing in the Arab world, reinforcing its position as a regional heavyweight. 
Already, the reconciliation agreement between Hamas and Fatah has gone some way toward achieving that, while providing a badly needed morale boost for Sisi’s government. 
The good news for Egypt is that the Palestinians have shown a renewed willingness not only to pursue reconciliation, but also to pursue a difficult negotiating process with Israel and its main strategic ally, the United States. 
This revival of Palestinian national politics largely reflects the recent shift in Hamas’ stance, which follows years of trials for the Sunni Islamist organization. 
The troubles for Hamas began when it chose to back the wrong side in both Syria and Egypt. 
Syrian dictator Bashar al-Assad’s regime prevailed over the Hamas-supported Islamic rebels in Damascus, while the Hamas-backed Muslim Brotherhood government in Egypt, led by Mohamed Morsi, fell after a year. 
Then, Saudi Arabia, Egypt, the United Arab Emirates, and Bahrain severed diplomatic relations with Qatar, causing Hamas to lose its Qatari and Iranian financial and political support. 
With few friends and even fewer sponsors in the region, Hamas had little choice but to return to its fellow Palestinian. 
The group quickly and unconditionally accepted President Mahmoud Abbas’s three demands: to dissolve the Hamas-led administrative committee, to allow the Ramallah-based Palestinian government to resume its role in Gaza, and to allow presidential and parliamentary elections to take place in both Gaza and the West Bank. 
Reconciliation among the Palestinians will certainly open the way for peace, not least because the new elections will deliver the needed legitimacy to those tasked with handling negotiations with Israel. 
But the real work – for Egypt and the Palestinians – lies ahead. 
In order to achieve an independent Palestinian state along pre-1967 borders, both actors will need to work with both the US, under President Donald Trump, and Israel, under Prime Minister Binyamin Netanyahu. 
And, on this front, expectations are low. 
Trump claims that he will deliver the “ultimate deal” to resolve the Israel-Palestine conflict. 
But Trump and Netanyahu, feeding each other’s hawkishness, both remain unwilling to accept what the rest of the world views as the basic premise of any good deal: a two-state solution. 
And the aging Abbas is unlikely to accept whatever bad deal the decidedly pro-Israel Trump administration offers. 
Even that futile scenario might be optimistic, as it assumes that talks get off the ground – an impossible feat, if Israel continues its illegal construction of settlements in the occupied Palestinian territories. 
Such activities are not just unjust; they are a violation of United Nations Security Council Resolution 2334, adopted nearly unanimously last year (the US, then led by Barack Obama, abstained). 
That resolution demanded “that Israel immediately and completely cease all settlement activities in the occupied Palestinian territory, including East Jerusalem” – activities that amount to a “flagrant violation under international law.” 
Any agreement between Israelis and Palestinians will require deep concessions by both sides – concessions that leaders on both sides will need to convince their respective publics to accept. 
Trump’s son-in-law and adviser, Jared Kushner, who has been tasked with settling the conflict, and the Trump administration’s chief negotiator on the issue, Jason Greenblatt, seem to understand this. 
Egypt certainly does, having made it clear that a divided Palestinian leadership without a public mandate, like the one to be delivered by new elections, will be unable to carry out serious negotiations or win popular support for any eventual agreement. 
The question is whether the Israelis will be willing to make such concessions, allowing either a two-state solution or a system of genuine and credible power-sharing within a single state. 
If they aren’t, the recent Palestinian reconciliation, however positive, will not mark the beginning of the end of the Israeli-Palestinian conflict. 
It will merely be the start of a new chapter in the struggle for freedom for Palestinians. 

Hamas in Power 
The victory of the fundamentalist Hamas in the Palestinian elections will have far-reaching consequences for the region, some totally unexpected. 
Two aspects, however, are already visible. 
The Hamas victory is, first and foremost, an indication of the total failure of the traditional Palestinian leadership to create a body politic. 
Palestine is not yet a state, but it is already a failed one. 
Since the Oslo Accords of l993 between Israel and the PLO, the Palestinians enjoyed limited transitional autonomy. 
To be sure, the new Palestinian Authority (PA) took power under difficult conditions, but which new liberation movement does not face serious challenges when it finally must govern? 
The PA had an opportunity to lay the institutional foundations for a functioning state. 
But, but instead of supplying the population with the necessary infrastructure – economic development, education, welfare, medical services, housing, and refugee rehabilitation – Yasser Arafat’s Fatah-led PA spent more than 70% of its meager budget on a dozen competing security and intelligence services, neglecting all other spheres of activity. 
It created what is called in Arabic a Mukhabarat (security services) state, very much like what is prevalent in almost all Arab countries – Egypt, Syria, Saudi Arabia, republics and monarchies alike. 
The vacuum that the PA left elsewhere, including the social sphere, was filled by Hamas. 
Indeed, its popularity is due not only to its fundamentalist Islamic ideology and its commitment to the destruction of Israel. 
The high esteem in which Palestinians hold Hamas also grew out of what Hamas actually did for them while the PA squandered its resources. 
It was not only the endemic corruption of the official Palestinian leadership that turned so many Palestinians from it. 
Hamas set up better schools, kindergartens, crèches for mothers, medical centers, welfare services, and programs for youth and women – all of this in addition giving special grants to the families of suicide bombers. 
In the elections, Hamas received its dividend for doing what the Fatah-led Palestinian Authority failed to do. 
It is still an open question whether Hamas in government will become more pragmatic and less committed to terrorism: it certainly is a possibility, and one should not prejudge the outcome. 
But nor, on the other hand, is it clear that the existing organs of the Palestinian Authority – especially the security services at its disposal – will allow a peaceful transfer of power. 
Indeed, no such precedent exists: there has never been a peaceful transfer of power in any of the Arab League’s 22 member states. 
Israel’s response to Hamas’s victory will obviously be complicated by its own elections on March 28, and by a government headed by an interim prime minister, Ehud Olmert, owing to Sharon’s incapacitation just weeks after leaving Likud and founding a new, centrist party, Kadima (Forward). 
Despite Sharon's absence, Kadima maintains its lead in public opinion polls – the most recent gave it 44 of the Knesset’s 120 seats, compared to 21 for Labor and 14 for the right-wing rump-Likud, under Binyamin Netanyahu. 
Kadima’s success is due to Sharon’s main innovation in Israeli politics: the successful unilateral disengagement from Gaza. 
That withdrawal was based on the conviction that the gaps between the Israeli and Palestinian positions are too wide to enable meaningful negotiations. 
Hence, Israel must start deciding the future boundaries of the country unilaterally, hoping for eventual negotiations at a later stage. 
This is also the line adopted by Olmert. 
But Hamas’s victory suggests that the gaps between the Israeli and Palestinian sides will grow even wider, and that the chances for a negotiated settlement will recede even farther into the future. 
This leaves further unilateral Israeli moves – such as a partial set of withdrawals from selected areas in the West Bank – as the only feasible option. 
Realistic conflict management will replace utopian hopes for conflict resolution. 
In a region full of paradoxes, the Hamas victory may have added another one: usually, when extremists on one side become stronger, it plays into the hands of extremists on the other side, producing a dangerous spiral effect. 
In this case, however, the victory of the extremist Hamas may strengthen not the extremists of Likud, but, surprisingly, the more moderate centrists of Kadima. 
One cannot be certain of such an outcome, of course, but it is now the best that one can realistically hope for. 

Hamas’s Ghost in Annapolis 
America’s return to the Israeli-Palestinian diplomatic front is a welcome development. One surely that EU diplomacy has sought to bring about. 
Secretary of State Condoleezza Rice’s efforts to push the peace process forward during her last years in office seem genuine. 
If they succeed, Rice and the Bush administration will be remembered not just for the endless tragedy of Iraq, but for making a serious contribution to Middle East peace. 
But can the Middle East conference set to take place in Annapolis, Maryland succeed? 
It could if it ushered in a Palestinian national unity government and an agreement to an extended truce backed by a strong international military presence. 
Unfortunately, that is highly unlikely. 
A failure to take Palestinian domestic factors sufficiently into account is the root cause for pessimism. 
The need to involve all Palestinian forces in any future peace negotiations is one of the key points of consensus that emerged from a recent Euro-American conference organized by the European Union Institute for Security Studies. 
Hamas must be a part of any lasting solution to the Palestinian issue, not just because it won democratic elections, but also because it controls the Gaza Strip and has real influence in the West Bank. 
Moreover, while Hamas’s long truce with Israel shows that it may be willing to abandon violence given the right amount of persuasion, it can make itself a terrible nuisance if it continues to be excluded. 
There is still the remote possibility, however unlikely, that Israeli Prime Minister Ehud Olmert and Palestinian Authority President Mahmoud Abbas will come to Annapolis with a concrete plan (a divided Jerusalem, a return to the 1967 borders with minor alterations, compensation for refugees), and a calendar to dismantle West Bank settlements. 
In this case, Abbas would leave Annapolis in a stronger position and thus be better able to negotiate with Hamas to establish a national unity government. 
But any strategy that aims to destroy Hamas as a political force, were it feasible, would only aggravate the crisis by transforming Hamas into a cluster of violent armed groups with which dialogue would be almost impossible. 
Henry Kissinger recently proposed waiting for so-called “moderate” Arab countries to impose a solution. 
But that strategy ignores Palestinian and regional realities. 
Arab state involvement is, of course, essential. 
But a strategy that aims to isolate Hamas entirely divides the Palestinians, and also poses a serious problem to Arab governments, which face strong domestic opposition from Islamic parties that back Hamas. 
Saudi Arabia understood this when it promoted the Mecca agreement that ushered in the first Hamas-PLO national unity government. 
Supporting another attempt to form such a government, moreover, could gain the backing of the Israeli public. 
It is worth remembering that public opinion polls in Israel immediately after the 2006 war in Lebanon indicated that 76% of the population supported negotiations with a Palestinian national unity government that included Hamas. 
The Annapolis conference could indeed achieve a firm commitment to the future involvement of all major Palestinian political forces in any future peace negotiations, coupled with the recommendation that these should start with an equally firm pledge to abandon violence by all parties to the conflict. 
This would remove the main obstacle to rebuilding a Palestinian national unity government. Such an arrangement can establish the strong popular legitimacy that the Palestinians will need at the negotiating table in order to make any real compromise. 
Ending violence is also important for improving the lives and engendering trust among ordinary Palestinians and Israelis, and ensuring that Israelis and Palestinians alike support the negotiations. 
The Israeli population is genuinely concerned about security, as are the Palestinians, and the support of Israel’s political parties for negotiations depends upon security guarantees. 
That is why the question of violence is more pressing than that of immediate recognition of the state of Israel, something that Hamas has already done in practice. 
International peacekeepers should enforce such a truce. 
Palestinians have always favored an international military presence, and the Israelis have also moved in that direction, accepting European forces in South Lebanon and in Gaza at the Rafah border with Egypt. 
Europeans should agree to supply the bulk of such a force. 
Indeed, Europeans should continue to play their traditional role, and to talk without ideological blinkers with all those involved in Palestine’s tragedy – including Hamas. 
This is, in fact, what many Americans privately ask Europeans to do. 
But, if the Annapolis meeting is to re-ignite a successful peace process, EU governments must first develop a common position on this issue. 

Hamas’s Zero-Sum Game 
Imagine your next-door neighbor – with whom you have had a long and bloody feud – pulling out a gun and shooting into your windows, from his own living room, which is densely packed with women and children. 
In fact, he’s holding his daughter on his lap as he tries to target your own kids. 
He claims he will not stop until your family is dead. 
Police are unavailable. 
What should you do? 
One option is to do nothing, or little. 
You try this for a while. 
After all, your neighbor is poor and traumatized, there is a sad and complicated history between you, and you bear some of the blame. 
But finally, as one shot hits your child’s bedroom, you decide that enough is enough. 
You pull out your far superior gun. 
You attempt a surgical strike: aim at the shooter’s head and try to spare the innocents. 
In an abstract sense, this is what Israel is doing right now. 
But there is nothing surgical about the blood and agony that have engulfed Gaza in the last week. 
Try as Israel might to target militants alone, civilian bodies are being pulled from the rubble, because, like our metaphorical gunman’s home, militants and civilians inhabit the same urban space in the Gaza Strip. 
Gaza City and Rafah are crowded and poor – and, more than ever before, they double as army camps. 
Fighters train next to schools, and rockets are stored in the basements of apartment buildings. 
According to recent reports, Hamas’s senior officials are currently hiding in hospitals. 
Over a million Palestinians, unable to flee to either Egypt or Israel, have for years been ruled by a military junta that prioritizes the killing of Israelis, across the international border, at all costs. 
Of course, civilians have always been in the line of fire and conquest, from Troy to Berlin. 
But no regime has ever used its citizens so deliberately as tools to arouse world sympathy, as hostages to modern sensitivities. 
While theories of just war instruct us not to hurt non-combatants, Hamas and its military arm have made a conscious decision, banking on global humanitarian concerns, to ensure that Israel hits as many civilians as possible. 
Even if Israel’s current war against Gaza is a just war – which is suggested by its attempts at limited and “measured” retaliation after eight years of Hamas rockets followed its unilateral retreat from Gaza – it is therefore a very dirty war, too. 
There is a sad zero-sum game between Palestinian suffering and Israeli sovereignty, security, and normal life. 
Most Israelis – even those hoping to see, in their lifetime, an independent and prosperous Palestine – agree that the attack on Hamas was necessary. 
Many others would not like to see the Israeli army launch a ground invasion into Gaza. 
Prime Minister Ehud Olmert has rightly allowed convoys of food and medicine into Gaza during the fighting, and Israeli hospitals are treating several injured Gazan citizens. 
Not unreasonably, Israel wants an internationally guaranteed and monitored ceasefire agreement that would put a total stop to Hamas assaults against its territory. 
But, as world opinion awakens from its holiday slumber, it is likely to turn against Israel. 
After all, Israel is the strong guy, the former occupying power, the better shooter. 
Its bombardment of Gaza is not “proportional.” 
Indeed, there is no symmetry of suffering on the two sides of the border. 
Gazans are worse off than Israelis in every conceivable way. 
But does that mean that Israel should let them keep shooting at it? 
Or should Israel respond “proportionally,” by firing 10 to 80 rockets, indiscriminately aimed against Gazan homes and schools, every day for the next few years? 
Israelis have become used to blanket accusations. 
It is the kind of message that unites the nation, left and right, in grim resolve. 
What, Israelis ask, would other countries do? 
Does the enemy’s civilian suffering trump Israel’s sovereignty? 
Does it trump the real, if less bloody, agony and fear of hundreds of thousands Israelis over long years? 
Olmert, Defense Minister Ehud Barak, and Foreign Minister Tzippi Livni have cast aside their political rivalries in order to orchestrate an answer: Israel must fight off the Gazan rockets. 
That said, Israel’s unity may be short-lived. 
It is a democracy, not a one-voice nation, and, with a general election due in February, debate is continuing both within the government and beyond it. 
If the Gaza campaign turns Lebanon-like, with a humanitarian catastrophe, ongoing bombardment of Israeli civilians, or both, domestic criticism will echo loud and clear. 
But even opponents of Olmert’s second war must face the blunt fact that Hamas is lethal. 
To the detriment of their own people, its leaders, Haled Mash'al and Ismail Hanieh, want neither peace nor compromise. 
Like their friend and supporter, President Mahmoud Ahmedinejad of Iran, they want Israel dead. 
It is as simple as that. 
One ray of hope is that moderate Arab leaders, including Egypt's foreign minister, have openly blamed Hamas for the current Gazan predicament. 
Egypt, Saudi Arabia, and Jordan are willing to broker peace, and perhaps save the Palestinians from their own worst leadership. 
Israel has gone a long way since the Arab world set out to kill it off. 
For the first time, prominent Arab voices acquit Israel of the wholesale blame that some Western critics still lazily throw at it. 
For the time being, Israel should strive for the safest truce it can accomplish, provided that Hamas stops shooting out of its own crowded living room. 
But, after the election in February, Israel’s next leader must face the moderate Arab challenge. 
He or she must talk directly to the Arab League, whose proposed peace plan will require tough Israeli negotiation, but is a reasonable start to preventing future wars, including just wars. 

Hamas Takes on the Radicals 
GAZA CITY – The recent shoot-out in a Gaza mosque between Hamas security officers and militants from the radical jihadi group the Warriors of God brought to the surface the deep tensions that divide Palestinian Islamists. 
Twenty-two people died, including the Warriors of God’s leader, Abdel Latif Moussa. 
But Palestinian security officials doubt that these will be the last casualties. 
With Hamas in control for more than two years, the Gaza Strip has long been considered much more traditional and conservative than the West Bank. 
Nevertheless, in Gaza’s political milieu, Hamas is a moderate Islamic group that opposes al-Qaeda-style extremism. 
But such extremist Islamic groups have been gaining support in Gaza, and Hamas has noticed. 
The shoot-out in the mosque shows that Hamas will be ruthless in taking them on. 
Various Salafi extremist groups have been operating in Gaza for years. 
Salafis, whose name is derived from the Arabic phrase for “righteous ancestors,” known as “Salaf al-Salih,” insist on a return to what they consider the purity of the practices of the first Muslims. 
Hamas has, in the past, cooperated with some of the Salafis, assuming they would stand behind Hamas’s leadership. 
The Army of Islam joined in the raid that abducted the Israeli soldier Gilad Shalit in June 2006. 
The group also took responsibility for the 2007 kidnapping of the BBC’s Gaza correspondent Alan Johnston, who was later released after negotiations led by Hamas. 
The Warriors of God is one of a handful of radical, al-Qaeda-inspired groups to have appeared in the Gaza Strip in recent months, first coming to public attention in June after claiming responsibility for a failed horseback attack on Israel from Gaza. 
Their Web site shares images, language, and music with al-Qaeda and other jihadi groups. 
In a recent declaration, the group made favorable mention of al-Qaeda leaders Osama bin Laden and Ayman al-Zawahiri. 
The Warriors of God demands a pure form of Islamic practice throughout the Gaza Strip, including the implementation of Sharia religious law and a rejection of democracy. 
Indeed, the confrontation at the mosque followed the declaration of an Islamic Caliphate in Gaza, a flagrant rejection of Hamas’s authority. 
Many young men in Gaza have become increasingly radicalized. 
Pakistani-style dress has become common, as is the long hair that is thought to resemble the style of the Prophet Mohammad. 
At the same time, violence against “law-breakers” is on the rise. 
Internet cafes have been bombed, institutions with Christian affiliations burned down, foreign schools attacked, and wedding parties assaulted. 
There are substantial ideological differences between Gaza’s Salafi al-Qaeda affiliates and Hamas. 
As a ruling party, Hamas has insisted that its sole concern is the Palestinian people, not a global Islamic revolution. 
Hamas has not imposed Islamic law in the Gaza Strip. 
The Salafi groups, however, appear increasingly influenced by the growth of radical al-Qaeda-style extremism in Pakistan, Iraq, and Afghanistan. 
While traditional Salafi movements have stayed away from politics, the younger groups see activism and violence as the best means of realizing their goals. 
But Hamas’s failure to establish and implement Islamic law is not the only issue that rankles. 
One of the reasons for these groups’ increased appeal is the de facto cease-fire between Israel and Hamas, which has led some in Gaza to charge that Hamas has been neutralized as a resistance force. 
With the border closed under Israeli blockade for more than two years, levels of poverty, unemployment, and despair have grown, with young men increasingly interested in joining the global jihad as it comes to Gaza. 
Indeed, Hamas’ confrontation with Salafi groups comes as Israel is charging that dozens of foreign terrorists have crossed into Gaza from the Sinai Desert to join the violent underground. 
Hamas’s crackdown thus highlights its desire to maintain control over its conflict with Israel. 
The threat of Salafi extremism in Gaza is far from over. 
Salafis have threatened to retaliate against Hamas, particularly the security brigades that led the counter-attack on the mosque. 
A new Salafi group called the Brigade of Swords of Righteousness has declared its obedience to the Warriors of God, and has warned Gazans to stay away from government buildings, security headquarters, mosques attended by Hamas leaders, and other official buildings. 
The group now considers these legitimate targets. 
With hundreds of tunnels connecting the Gaza Strip and Sinai, it is very difficult to control the flow of arms, ammunition, and possibly foreign fighters. 
Hamas’s battle with these radicals, who detonated suicide bombs and killed six Hamas security men during the mosque fight, is just beginning. 
Residents are afraid that Gaza could become another Iraq, with bombings and mass killings a daily occurrence. 
Hamas will use all means necessary to protect its power, and to break the jihadi groups now spreading in Gaza. 

Hands Off the "Super-Euro" 
Three years ago, the European single currency, the Euro, was born at an exchange rate of 1:$1.17, which presumably was deemed to reflect appropriately price levels on both sides of the Atlantic at that time. 
The Euro's exchange rate has since endured a roller-coaster ride. 
Now, it has returned to almost exactly its opening level. 
So why is the European business community claiming that the "super Euro" is bringing calamity down upon their heads? 
The answer is that blaming the Euro is an easy way to deflect attention from the true cause of Europe's economic malaise: a surprisingly low level of productivity per capita. 
Europe's low productivity reflects a simple statistical fact that fatally undermines relatively high productivity per hours worked: weak participation in the active labor force means that Europeans work a very low number of hours. 
It is important to clarify a few fundamental points regarding the Euro/dollar exchange rate, because this is an issue on which confusion--often generated strategically--pervades public debate. 
First, nobody knows how to explain or predict the short-term movements (from one day to six months, say) of exchange rates. 
A famous academic paper about 20 years ago showed that a random walk was better at predicting short-run exchange rate movements than any fancy mathematical model based on selected economic variables. 
That conclusion still applies. 
Nobody had a clear idea why the Euro plummeted to almost $0.80 in its first year and a half of trading, and nobody could predict when it would recover. 
Some observers attribute the current "high" level of the Euro (and thus low growth in Europe) to tight monetary policy on the part of the European Central Bank (ECB). 
But if high interest rates are causing the Euro's rise, why was the dollar appreciating in periods when the US Federal Reserve cut rates aggressively? 
People should be wary of commentators who purport to explain "why" a currency's exchange rate is doing what it is doing. 
Second, exporters who blame the current level of the Euro for their difficulties should wake up to reality. 
The current level of the Euro makes prices on both sides of the Atlantic relatively similar. 
If an exporting firm is only profitable when the Euro falls to $0.80 or $0.90, it better start increasing productivity fast if it is to survive with the Euro back up at $1.17. 
For many years Germany and Japan dominated world exports, and at the time both the yen and the Deutsche Mark were among the "strongest" currencies in the world. 
It was innovation, and high productivity, not a weak currency, that enabled German and Japanese goods to conquer the world. 
Third, the Euro area is about as open to international trade as the US. 
The US economy was flying in the 1990s, when the dollar was strong. 
As was true for Germany and the Deutsche Mark and remains true for Japan and the yen, a strong dollar has not historically caused weak US growth. 
Europeans are used to thinking of the exchange rate as a critical variable, because they live in very open economies that export close to 50% of their total output. 
But most of these exports go to other Euro-zone countries, and are thus unaffected by the level of the Euro. 
Exports outside the Euro area claim only 15-16% of Europe's total output, and will be even less when (and if) Sweden and the UK join the Euro. 
So commentators, policymakers, and businessmen should stop calling for the ECB to do something about the "strong Euro." 
Central bank intervention in the currency market is merely destabilizing, and therefore counter-productive. 
The ECB was right to ignore the exchange rate when it fell to $0.80, and it is right to ignore it today when it is close to $1.20. 
Most economists believe that central banks should only target inflation, which means cutting interest rates only when the economy slows down and inflation falls--which is precisely what the ECB has been doing. 
The bottom line is that Europeans should worry and talk less about the Euro exchange rate, and spend the time they save trying to address their real problems: low productivity, market rigidities, fiscal polices constrained by the Stability Pact, and bankrupt pension systems. 
Europe's economic policymakers have enough problems on their plate. 
They should let the currency markets take care of the Euro/dollar exchange rate. 

Happiness, Money, and Giving It Away 
Would you be happier if you were richer? 
Many people believe that they would be. 
But research conducted over many years suggests that greater wealth implies greater happiness only at quite low levels of income. 
People in the United States, for example, are, on average, richer than New Zealanders, but they are not happier. 
More dramatically, people in Austria, France, Japan, and Germany appear to be no happier than people in much poorer countries, like Brazil, Colombia, and the Philippines. 
Comparisons between countries with different cultures are difficult, but the same effect appears within countries, except at very low income levels, such as below $12,000 annually for the US. 
Beyond that point, an increase in income doesn’t make a lot of difference to people’s happiness. 
Americans are richer than they were in the 1950’s, but they are not happier. 
Americans in the middle-income range today – that is, a family income of $50,000-$90,000 – have a level of happiness that is almost identical to well-off Americans, with a family income of more than $90,000. 
Most surveys of happiness simply ask people how satisfied they are with their lives. 
We cannot place great confidence in such studies, because this kind of overall “life satisfaction” judgment may not reflect how much people really enjoy the way they spend their time. 
My Princeton University colleague Daniel Kahneman and several co-researchers tried to measure people’s subjective well-being by asking them about their mood at frequent intervals during a day. 
In an article published in Science on June 30, they report that their data confirm that there is little correlation between income and happiness. 
On the contrary, Kahneman and his colleagues found that people with higher incomes spent more time in activities that are associated with negative feelings, such as tension and stress. 
Instead of having more time for leisure, they spent more time at and commuting to work. 
They were more often in moods that they described as hostile, angry, anxious, and tense. 
Of course, there is nothing new in the idea that money does not buy happiness. 
Many religions instruct us that attachment to material possessions makes us unhappy. 
The Beatles reminded us that money can’t buy us love. 
Even Adam Smith, who told us that it is not from the butcher’s benevolence that we get our dinner, but from his regard for his self-interest, described the imagined pleasures of wealth as “a deception” (though one that “rouses and keeps in continual motion the industry of mankind”). 
Nevertheless, there is something paradoxical about this. 
Why do governments all focus on increasing per capita national income? 
Why do so many of us strive to obtain more money, if it won’t make us happier? 
Perhaps the answer lies in our nature as purposive beings. 
We evolved from beings who had to work hard to feed themselves, find a mate, and raise children. 
For nomadic societies, there was no point in owning anything that one could not carry, but once humans settled down and developed a system of money, that limit to acquisition disappeared. 
Accumulating money up to a certain amount provides a safeguard against lean times, but today it has become an end in itself, a way of measuring one’s status or success, and a goal to fall back on when we can think of no other reason for doing anything, but would be bored doing nothing. 
Making money gives us something to do that feels worthwhile, as long as we do not reflect too much on why we are doing it. 
Consider, in this light, the life of the American investor Warren Buffett. 
For 50 years, Buffett, now 75, has worked at accumulating a vast fortune. 
According to Forbes magazine , he is the second wealthiest person in the world, after Bill Gates, with assets of $42 billion. 
Yet his frugal lifestyle shows that he does not particularly enjoy spending large amounts of money. 
Even if his tastes were more lavish, he would be hard-pressed to spend more than a tiny fraction of his wealth. 
From this perspective, once Buffett earned his first few millions in the 1960’s, his efforts to accumulate more money can easily seem completely pointless. 
Is Buffett a victim of the “deception” that Adam Smith described, and that Kahneman and his colleagues have studied in more depth? 
Coincidentally, Kahneman’s article appeared the same week that Buffett announced the largest philanthropic donation in US history – $30 billion to the Bill and Melinda Gates Foundation and another $7 billion to other charitable foundations. 
Even when the donations made by Andrew Carnegie and John D. Rockefeller are adjusted for inflation, Buffett’s is greater. 
At a single stroke, Buffett has given purpose to his life. 
Since he is an agnostic, his gift is not motivated by any belief that it will benefit him in an afterlife. 
What, then, does Buffett’s life tell us about the nature of happiness? 
Perhaps, as Kahneman’s research would lead us to expect, Buffett spent less of his life in a positive mood than he would have if, at some point in the 1960’s, he had quit working, lived on his assets, and played a lot more bridge. 
But, in that case, he surely would not have experienced the satisfaction that he can now rightly feel at the thought that his hard work and remarkable investment skills will, through the Gates Foundation, help to cure diseases that cause death and disability to billions of the world’s poorest people. 
Buffett reminds us that there is more to happiness than being in a good mood. 


The Political Logic of Hard Brexit 
PARIS – Little more than three months after the United Kingdom’s decision in June to leave the European Union, Brexit politics are careening out of control in the UK. 
An almost revolutionary – and very un-British – dynamic has taken hold, and, as British Prime Minister Theresa May indicated in her “Little Englander” speech at the Conservative Party conference this month, the UK is heading for a “hard Brexit.” 
That outcome would run counter to British public opinion, which remains moderate on the question of fully breaking with the EU. 
According to a July BBC/ComRes poll, 66% of respondents considered “maintaining access to the single market” to be more important than restricting freedom of movement. 
In an ICM poll the same month, only 10% of respondents said they would prioritize ending free movement over maintaining access to the single market, while 30% viewed the two as equally important and 38% considered maintaining full access to the single market the priority. 
These findings will surprise only those who buy into the narrative that the West is confronting a large-scale xenophobic revolt against the elites. 
While the “Leave” camp certainly included many hard Brexiteers whose primary motivation was to end free movement, it also comprised people who believed Boris Johnson, the former London mayor and current foreign secretary, when he promised (as he still does) that the UK could have its cake and eat it. 
In fact, despite Leave’s large faction of angry white working-class voters, middle-class trade-friendly Brexiteers, together with the “Remain” camp, constitute a clear majority of everyone who voted in the June referendum. 
Under normal circumstances, one would expect the government’s policy to reflect the majority’s preference, and to aim for a “soft Brexit.” 
Instead, a classic revolutionary pattern has emerged. 
According to the Brexiteers, the people have spoken, and it is the government’s duty to deliver a “true” Brexit. 
But the government must overcome the spoilers, such as senior civil servants and the Remain majority in the House of Commons, who favor a Brexit in name only – a “false” version that could never deliver the benefits of the real thing. 
In this revolutionary narrative, the worst elements of Europe’s political tradition have crowded out British pragmatism. 
What a majority of British voters want is considered irrelevant. 
With a hard Brexit, the Leave camp can avoid being seen by voters as the supplicant in negotiations with the EU – which it inevitably would be, no matter how often May denies it. 
The EU will have the upper hand in negotiations for two simple reasons. 
First, the UK has more to lose economically. 
While other EU countries’ total exports to the UK are double what the UK exports to the rest of the bloc, its exports to the EU amount to three times more as a share of its GDP. 
Likewise, the UK has a services surplus, which matters far less to the rest of the EU than it does to Britain. 
Second, just like the EU’s Comprehensive Economic and Trade Agreement with Canada, any negotiated arrangement between the EU and the UK will have to be unanimously accepted by all EU member states. 
Thus, the negotiation will not really be between the UK and the EU, but rather among EU members. 
The UK, without a presence at those talks, will simply have to accept or reject whatever the EU offers. 
This would be true even if the UK pursued a prepackaged arrangement such as membership in the European Economic Area or the EU Customs Union; it will be all the more true if the UK seeks a “bespoke” deal, as May has indicated she will. 
If British voters recognized their country’s weak negotiating position, the Brexiteers, who won the referendum on their promise to “take back control,” would face a political disaster. 
Walking away from substantive negotiations is the simplest way to avoid such an embarrassing unmasking. 
Thus, politically, a hard Brexit is actually the soft option for the government. 
Economically, however, hard Brexit will come at a high price, which the UK will have to pay for years to come. 
The only consolation is that Brexit’s revolutionary momentum may not be sustainable. 
Shortly after the Leave camp labeled bureaucrats in her Her Majesty’s Civil Service “enemies of the people” – a typical statement in the early stages of a revolution – pro-Brexit Foreign Trade Minister Liam Fox derided British exporters, calling them “too lazy and too fat” to succeed in his brave new free-trading Britain. 
Such rhetoric is a symptom of desperation. 
It carries echoes of the declining years of the Soviet Union under Leonid Brezhnev, when Marxist apologists insisted that there was nothing wrong with communism, except that humanity wasn’t yet mature enough for it. 
If developments continue at this pace, the revolutionary zeal we see among British politicians may burn itself out before “hard Brexit” is consummated. 

A Silver Lining for a Hard Brexit 
LONDON – It is easy to forget that defense and security are not the same thing. 
Defense is what countries must resort to when their security breaks down. 
And during peacetime, countries spend money on defense precisely because they fear for their security. 
Since 2014, the security environment for Britain and the European Union has deteriorated sharply. 
In March of that year, Russia invaded Ukraine and annexed Crimea. 
It was the first time since World War II that a major European power sought to redraw its own borders by force of arms. 
In 1994, Russia agreed to defend Ukraine’s territorial integrity in exchange for Ukraine’s handover of the nuclear weapons it had inherited from the Soviet Union. 
But Russia didn’t stop with Crimea; since then, it has waged a low-intensity unconventional war against Ukraine in the country’s eastern Donbas region. 
And Ukraine is not alone. 
Russia has also sent ships and warplanes to threaten the coasts of other Western countries, abducted an Estonian intelligence officer on NATO territory, and sustained an ongoing military buildup in Eastern Europe, the Arctic, and elsewhere. 
Despite these deteriorating security conditions, a slim majority of Britons voted in June 2016 to withdraw from the EU – a decision that could fatally undermine the United Kingdom’s relationship with its European NATO partners. 
Making matters worse, in November of 2016, Donald Trump, who has long expressed admiration for Russian President Vladimir Putin, was elected president of the United States. 
Although Trump expressed disdain for NATO during the 2016 campaign, he appears to have been reined in by the many generals he has installed in top positions. 
Still, he could always change his mind. 
The Republican Party is in the throes of a deep internal schism that could end with the victory of its populist wing, led by Trump’s nationalist, anti-EU Svengali, Stephen Bannon. 
If Bannon does manage to transform the Republican Party in accordance with his nationalist vision, and if the Republicans retain or regain power in the future, US security commitments to Europe will no longer be reliable. 
Continued Russian attacks on Western political systems, or even an outright military attack in Europe, could go unanswered by the US. 
Without firm US support, a politically divided EU would be increasingly vulnerable to Russian political domination. 
At the same time, a politically cohesive EU would be a bulwark of stability stretching from the English Channel to Ukraine’s Dnieper River. 
In the absence of US leadership, a stable and secure EU could thus become the most important pillar of the UK’s post-Brexit security strategy. 
But the stability of the EU is far from guaranteed, because a smooth and painless Brexit may tempt other member states to also quit the bloc. 
Some argue that this outcome is unlikely, because it is impossible, in practice, for eurozone countries to leave. 
If a eurozone country even suggested that it might withdraw from the euro and the EU, the resulting capital flight would devastate its economy. 
According to this view, the fact that two-thirds of EU member states belong to the euro is enough to prevent the EU from unraveling. 
If only that were so. 
In reality, a number of important EU members remain outside the euro, including Poland, the Czech Republic, Denmark, Romania, and Sweden. 
Moreover, under favorable circumstances, eurozone countries with current-account surpluses – such as Germany, the Netherlands, Spain, and Austria – could probably leave the euro without suffering catastrophic harm. 
And lest we forget, Western electorates have demonstrated a unique capacity for self-harm. 
Consider not just Brexit and the election of Trump, but also Catalan separatists’ game of economic Russian roulette over the past month and a half. 
As things stand, the UK still seems to be politically incapable of abandoning Brexit altogether, even though that would be the best course of action for all involved. 
But between the options of a “soft” and “hard” Brexit – in which Britain would leave the EU single market and customs union – the latter may have at least one advantage. 
Namely, it would not further undermine European stability, which also happens to be Britain’s biggest security asset. 
To be sure, a “hard” Brexit would come at a high economic cost for the UK. 
Industrial supply chains would be disrupted, the construction industry would be denuded of its EU workers, the City of London would lose international importance, the pound would continue depreciating, and the public sector – particularly the National Health Service – would be stretched thin. 
The EU, too, would incur costs, albeit much smaller as a share of its overall economy. 
Despite the costs, a “hard” Brexit would, at a minimum, discourage other EU members from following the UK’s lead, thereby shoring up European stability and helping Britain maintain its national security, which may be the most important consideration in the long run. 
Such an outcome would be ironic, to say the least. 
But even more ironic is the fact that those pushing for it are the very Brexiteers who would like to see the EU fail. 
They are convinced that their vision of a buccaneering, global Britain can be achieved only with a clean break from Europe. 
They might soon find out if they’re right. 

Hard Financial Questions about Soft Development Money 
Achieving the Millennium Development Goals (MDG’s) by 2015 is a tremendous challenge facing the international community, and there is widespread agreement that additional external aid is required to meet it. 
So the question now is not whether to increase aid, but how best to finance it. 
The search for additional and more stable funding to meet the MDG’s has led to various proposals for innovative financing mechanisms and debt relief, in particular by British Chancellor of the Exchequer Gordon Brown. 
But the broad range of proposed schemes to bolster resources for development assistance raises hard questions about the appropriate balance between objective needs and sound and effective financing. 
Donors as well as recipients must ensure consistency between financing and absorptive capacity. 
They must also ensure that additional official financing and debt relief will not distort incentives or create moral hazard. 
New money should go to good performers, not just to those who are experiencing debt distress. 
In addition to these issues, financing proposals to achieve the MDG’s should be discussed from a central banker’s perspective. 
The best solutions include sufficient increases in rich countries’ foreign aid allocations and more ambitious trade liberalization. 
But such policies seem politically untenable in the short term, even though – according to the World Bank’s estimation – an appropriate conclusion of the current trade round under the auspices of the World Trade Organization could contribute $350 billion a year to developing countries by 2015. 
Similarly, when it comes to increasing foreign-aid budgets, politicians want solutions that are not “felt” by taxpayers (that is, voters) and that can remain outside of national budgets. 
However, opaque solutions designed to avoid critical public scrutiny do not seem particularly democratic. 
“Innovative” financing solutions might also undermine the clear assignment of responsibilities for raising and using public money. 
Indeed, the term “innovative financing mechanism” conjures the idea that there is an easy way to meet the MDG’s. 
But, in the end, there are only three ways to secure additional financing for development aid or debt relief: higher taxes, increased indebtedness (that is, higher taxes for future generations), and/or monetary expansion. 
One proposal calls for taxing national and international financial transactions. Others call for allocating Special Drawing Rights (SDR’s) from the IMF, or for using the IMF’s gold resources. 
But none of them appears desirable. 
To be effective, any tax on financial transactions would have to be implemented on a global scale, which currently does not seem realistic. 
Moreover, taxation would increase costs (passed on to borrowers) and reduce the volume of transactions, thereby fueling market volatility amid decreasing liquidity. 
Allocating new SDR’s also is inappropriate. 
Above all, SDR’s represent liquidity and can be allocated only if and when there is a “global need,” which would currently be difficult to prove given highly liquid and “easy” international capital-market conditions. 
Even if a “global need” were recognized, SDR’s, as a component of countries’ official foreign-exchange reserves, should not be available for budgetary spending. 
Financing development aid with SDR’s – or even to replace budget-financed aid with such allocations – is comparable to financing budget deficits with central bank money. 
In any case, new SDR allocations require the support of 85% of votes within the IMF’s board, which appears unachievable in the foreseeable future, as major shareholders are opposed. 
Even the special one-time issuance of SDR’s, agreed upon in 1997 to ensure that all Fund members receive an “equitable” share of cumulative SDR allocations, has still not been activated, owing to insurmountable opposition. 
Finally, the proposed “better use” of the IMF’s gold holdings to finance the costs of debt relief seeks to raise up to $8 billion. 
At the current market price, this would require selling about a quarter of the Fund’s holdings of 103.4 million fine ounces. 
However, these reserves represent an important “hidden” asset that lends strength to the Fund’s balance sheet. 
The IMF’s creditors consider it a necessary safeguard against increased risks in the Fund’s credit portolio. 
This is because the Fund has experienced exceptionally high access and prolonged use of its resources by a few large economies in the last decade. 
Moreover, the IMF’s share in crisis countries’ total external debt has reached unprecedented and systemically problematic levels. 
As a result of both tendencies, there is a high concentration of credits on a few large borrowers. 
To use IMF gold for further debt relief in the face of increased risk threatens the Fund’s financial integrity and contradicts the recent decision to increase the IMF’s precautionary balances. 
Development aid has to be financed in “real terms,” or in a reputable manner, not by spending central bank money or by jeopardizing the IMF’s financial integrity. 
Aid should preferably be financed out of donor countries’ national budgets in a transparent, democratically accountable way. 
“Innovative” must not become a euphemism for non-transparent, ineffective, or unsound. 

Hard Truths about Bird Flu 
The issues surrounding the possibility of a pandemic of the H5N1 strain of avian flu are extraordinarily complex, encompassing medicine, epidemiology, virology, and even politics and ethics. 
Moreover, there is tremendous uncertainty about exactly when H5N1, which now primarily affects birds, might mutate into a form that is transmissible between humans, and how infectious and lethal it might be. 
It is thus hardly surprising that commentaries about avian flu often miss the mark. 
A recent New York Times editorial, for example, decried wealthy countries’ “me first” attitude toward a possible H5N1 pandemic, because “[t]he best hope of stopping a pandemic, or at least buying time to respond, is to improve surveillance and health practices in East Africa and Asia, where one would probably begin.” 
To be sure, good surveillance is needed in order to obtain early warning that a strain of H5N1 flu transmissible between humans has been detected, so that nations around the world can rapidly initiate a variety of public health measures, including a program to produce large amounts of vaccine against that strain. 
But the massive undertaking required to “improve health practices in the poorest countries of the world” plays better on the editorial page than on the ground. 
Intensive animal husbandry procedures that place billions of poultry and swine in close proximity to humans, combined with unsanitary conditions, poverty, and grossly inadequate public health infrastructure of all kinds, make it unlikely that a pandemic can be prevented or contained at the source. 
It is noteworthy that China’s chaotic effort to vaccinate 14 billion chickens has been compromised by counterfeit vaccines and the absence of protective gear for vaccination teams, which might actually spread disease by carrying fecal material on their shoes from one farm to another. 
In theory, it is possible to contain a flu pandemic in its early stages by performing “ring prophylaxis” – using anti-flu drugs and quarantine aggressively to isolate relatively small outbreaks of a human-to-human transmissible strain of H5N1. 
According to Johns Hopkins University virologist Donald S. Burke, “it may be possible to identify a human outbreak at the earliest stage, while there are fewer than 100 cases, and deploy international resources – such as a WHO stockpile of antiviral drugs – to rapidly quench it. 
This ‘tipping point’ strategy is highly cost-effective.” 
However, a strategy can be “cost-effective” only if it is feasible. 
Although ring prophylaxis might work in Minneapolis, Toronto, or Zurich, in the parts of the world where flu pandemics begin, the probability of success approaches zero. 
In places like Vietnam, Indonesia, and China – where the pandemic strain will likely originate – expertise, coordination, discipline, and infrastructure are lacking. 
The response in Turkey – where as many as 50 possible cases have appeared in the eastern part of the country – is instructive. 
Officials in that region warned the government on December 16 of a surge in bird deaths, but it took 12 days for an investigation to begin. 
When a fourteen-year-old boy became Turkey’s first avian flu mortality last week (soon followed by two siblings), a government spokesman criticized doctors for mentioning the disease because they were “damaging Turkey’s reputation.” 
This is ominously reminiscent of China’s initial response to SARS in 2003. 
For now, it seems that all of the human H5N1 infections have been contracted from contact with infected poultry. 
But the situation in Turkey is what the outbreak of a human to human pandemic could look like at its earliest stages: the rapid spread of confirmed cases (and deaths) from an initial site to nearby villages and cities. 
We would expect to see a large number of illnesses among both employees and patients in hospitals where the victims are treated, and soon someone (perhaps even a carrier who is not ill) would spread it to Ankara, Istanbul, Tbilisi, Damascus, Baghdad, and beyond. 
The anti-flu drugs Tamiflu and Relenza are extremely expensive and in short supply. 
History suggests that if we were to make these drugs available to poor countries for ring prophylaxis, they would often be administered improperly – such as in sub-optimal doses – in a way that would promote viral resistance and only intensify a pandemic. 
Or perhaps they would be sold on the black market to enrich corrupt government officials. 
A politically incorrect but rational strategy would be for rich countries to devote resources to developing countries primarily for surveillance. 
They would obtain timely warning of the existence of an H5N1 strain that is transmissible from human to human, but would focus the vast majority of their funding on parallel, low- and high-tech approaches – vaccines, drugs, and other public health measures – that would primarily benefit themselves. 
If the pandemic were to begin relatively soon – say, within a year or two – there would be little that could be done to attenuate significantly the first wave of infections. 
But, if we’re ready to rush the pandemic strain into an emergency program to manufacture vaccine, we could possibly blunt the second wave. 
A flu pandemic will require triage on many levels, including not only decisions about which patients are likely to benefit from scarce commodities such as drugs, vaccines, and ventilators, but also broader public policy choices about how best – among, literally, a world of possibilities – to expend resources. 

Hard Turkey 
JERUSALEM – The recent surge in Turkey’s military actions against the Kurds in northern Iraq is an indication that, somewhat surprisingly – but not entirely unpredictably – Turkish foreign policy has undergone a 180-degree turn in less than two years. 
The Turkish offensive is also an indication that these changes go beyond the current tensions between Turkey and Israel, which are just one facet of much deeper trends. 
Just a couple of years ago, after the European Union slammed the door in Turkey’s face (despite some significant military and penal reforms by the Justice and Development Party (AKP) government), Turkey re-oriented its policy away from Europe towards its immediate region. 
Foreign Minister Ahmet Davutoğlu’s “zero conflicts with neighbors” approach gave this re-orientation its strategic and theoretical foundation. 
Opening an impressive new page, Turkey reached out to Armenia; softened its position on Cyprus; tried to draw Iran into a positive dialogue with the West; convinced Syria to settle the two countries’ simmering border dispute; and, as a crowning achievement, launched peace talks between Syria and Israel under Turkish mediation. 
Yet these good-neighborhood policies did not work out as intended. 
Rapprochement with Armenia stalled; no significant progress was made on Cyprus, especially after a less-accommodating leader was elected in the Turkish Republic of Northern Cyprus (an entity that only Turkey recognizes); the opening to Iran did not soften the mullahs’ position on nuclear development (and strained relations with the United States); the Syria-Israel talks failed; and Turkey’s participation in the 2010 flotilla to Gaza, and Israel’s brutal response to it, signaled an end to decades of close Israeli-Turkish cooperation. 
To top it all off, Syria’s President Bashar al-Assad, ostensibly Turkey’s closest new ally, emerged as the most oppressive and bloody regional tyrant. 
Assad has now spent the better part of 2011 killing his own people as they demonstrate for liberalization and reform. 
Notwithstanding these failures, Turkey’s strategic stature did not suffer, partly because the diminution of US engagement under President Barack Obama enabled Turkey to fill the ensuing regional power vacuum. 
The Arab Spring, despite its still-inconclusive outcome, greatly weakened Egypt’s role in regional politics and made it possible for Prime Minister Recep Tayyip Erdoğan to position Turkey – and himself – as the leader of a Muslim bloc and a model of co-existence between Islam and democracy. 
Last but not least, the AKP’s victory in recent parliamentary elections has encouraged Erdoğan to embrace Putinesque ambitions. 
All of this exposed the built-in ambivalence in Davutoğlu’s “zero conflict” policy. 
While initially viewed as pacific and moderate, it was underpinned by an overarching view of Turkey as the hegemonic regional power – as an arbiter of conflicts, but ultimately also as an enforcer of its own views on lesser players. 
It may be incorrect to call Turkey’s behavior “neo-Ottoman,” but some neighboring countries, after expecting a mediator and facilitator, may now feel faced by a possible bully. 
Erdoğan’s policy re-orientation vis-à-vis Israel can be understood as an attempt not only to overcome traditional Arab suspicion of Turkey, given its imperial past, but also to present a more moderate Islamic alternative to theocratic Iran and its unpredictable president. 
But Erdoğan’s threat to consider using the Turkish navy as a military escort for further flotillas to Gaza already borders on saber rattling, as does his declared willingness to use force to prevent the Republic of Cyprus from exploring for gas in its continental shelf. 
Indeed, Erdoğan’s has warned of a diplomatic rupture with the EU if Cyprus accedes to the Union’s rotating presidency in 2012. 
At the same time, renewed violent incursions into northern Iraq in pursuit of alleged guerillas suggest a reversion to hardline anti-Kurdish policies. 
The withdrawal of US forces from Iraq only seems to have encouraged Turkey’s will to create a cordon sanitaire on the Iraqi side of the border – and possibly to establish a counterweight to Iran’s influence on a Shia-led government in Baghdad. 
And, while Turkey’s agreement to host NATO anti-missile radar facilities, and its recent seizure of a Syrian-registered arms ship, may please the West, here, too, its policies are focused on “hard” military power. 
Similarly, Erdoğan’s recent visit to Egypt, Libya, and Tunisia brings out the ambivalence of Turkey’s new claim to regional hegemony. 
While Egypt’s shaky military junta welcomed Erdoğan, many Egyptians were not happy about his hectoring them – and other Arabs – to follow Turkish policies and to regard Turkey as their Muslim leader. 
A new sultanate? 
Erdoğan as the new Saladin? 
Turkey has an enormously important role to play in the region. 
It could be a bridge between the West and the East, between Islam and modernity, and between Israel and the Arabs. 
But it runs the danger of succumbing to the arrogance of power, which has corrupted and sidelined many strong states in the past. 

The Literary Magic of Harry Potter 
PRINCETON – This summer, at literary festivals and bookstores around the world, readers celebrated the 20-year anniversary of the debut of the first book in J.K. Rowling’s Harry Potter series – Harry Potter and the Philosopher’s Stone (re-titled Harry Potter and the Sorcerer’s Stone in the United States) – and with good reason. 
Since the young wizard’s first appearance on June 26, 1997, the “Boy Who Lived” has become the “Icon Who Endures.” 
Over the last two decades, the Harry Potter series has expanded to include seven novels, with a total of 450 million copies in print, including translations into more than six dozen languages. 
The eight films spawned by the books have grossed $7 billion, with Harry Potter-themed toys and merchandise garnering another $7 billion. For those of a certain age and literary mindset, it is difficult to recall a day when global audiences weren’t spellbound by Rowling’s creation. 
That is why it is startling for me to recall the sour reception that my students gave Harry Potter and the Sorcerer’s Stone in the fall of 1999, when it appeared on the syllabus of my Princeton University course on popular literature, “American Best Sellers,” which I had been teaching since 1993. 
A survey of popular writing from the seventeenth century to the present, the course invites students to consider how and why particular best-selling works have captivated their audiences. 
At the end of each term, I let the students select the final book as an exercise in popular taste. 
In 1999, they chose that first Harry Potter novel. 
Potter-mania had hit America’s shores hard that year. 
In June, the series’ US publisher rushed the hardcover edition of the second book, Harry Potter and the Chamber of Secrets, to bookstores. It published the third book, Harry Potter and the Prisoner of Azkaban, along with the paperback edition of Sorcerer’s Stone,on September 8. 
By the end of that month, Rowling’s novels held the first three slots on the New York Times fiction best-seller list, while the paperback Sorcerer’s Stone sat atop the paperback list. 
The magazine Time had even put the bespectacled wizard on its cover. 
You couldn’t turn around without knocking into Harry. 
My students were eager to see what all the fuss was about. 
Boy, were they disappointed. 
For them, it was second-rate blather, nowhere near as worthy of their attention as the cherished series from their childhoods, such as The Chronicles of Narnia or The Lord of the Rings. 
Despite being only a few years removed from those childhoods, they laid into Harry Potter with the same fervor as many of the notoriously negative adult reviewers: “Derivative.” “Poorly written.” 
“Cloying.” For them, Harry held no wonder, no warmth, and no wit. 
My students’ antipathy surprised me, but in hindsight, it should not have. 
Though adults comprised a significant portion of the Harry Potter audience from the start, these students were in precisely the wrong demographic to appreciate the phenomenon as it was unfolding. 
Too old for new children’s books, and too young to have children of their own (as I newly did at the time), they were quick to insist that despite its current popularity, the series would soon fade from memory. 
The following autumn, in 2000, the next cohort of students also picked Sorcerer’s Stone for the final text, and, like their peers, they confidently dismissed it. 
Fast-forward to the spring of 2007. 
I was again teaching “American Best Sellers,” after having set the course aside for a few years. 
When it came time for the students to choose the final book, they went with Harry Potter and the Sorcerer’s Stone. 
I braced myself for their criticisms. 
This time, however, the reviews were glowing. 
This new group, born between 1986 and 1989, had first read Rowling as pre-teens and early adolescents, not college students, which meant they had practically grown into young adults alongside Harry, Ron, and Hermione. 
The same thing happened in the fall of 2010. 
For both of these groups, “We grew up with Harry Potter” was a motto, not a label. 
Would Harry fade from memory? 
Not on your life. 
I’ve taught my Best Sellers course twice since 2010, and both times the students have chosen a non-Harry Potter novel to end the semester. 
Is it Potter fatigue? 
Not likely, judging from the reception the series continues to receive in the other course in which I teach Rowling’s work, “Children’s Literature.” 
Here, it is my choice to put a Harry Potter novel on the syllabus. 
Instead of Sorcerer’s Stone, however, I assign Harry Potter and the Prisoner of Azkaban – my favorite book of the seven, which marks the series’ shift from children’s literature to young adult fiction, through its complex treatment of fidelity, betrayal, rage, and mercy. 
It is also the favorite of many of my students. 
But how long will Harry Potter’s popularity hold? 
Each time I teach “Children’s Literature,” I start with a poll: “Which books on the syllabus do you remember reading as a child?” 
In 2010, 86% had read Harry Potter and the Prisoner of Azkaban. 
In 2012, that figure rose to 94%. 
But in the years since, the percentage has dropped – to 87% in 2014, and to 81% in 2016. 
This is all unscientific, I know. 
But I’m curious: will it fall under 80% next spring, when I teach “Children’s Literature” again? 
Will my students from 1999 and 2000 be proved right, with Harry Potter fading from relevance, never to become an enduring classic? 
Or is there an equilibrium point ahead, where the percentage holds steady without declining further? 
Perhaps Harry’s 40th anniversary will provide the answers. 
Until then, I’ll happily keep inviting him into my classroom. 

Harvest of Suicide 
NEW DELHI – An epidemic of farmers’ suicides has spread across four Indian states – Maharashtra, Andhra Pradesh, Karnataka, and Punjab – over the last decade. 
According to official data, more than 160,000 farmers have committed suicide in India since 1997. 
These suicides are most frequent where farmers grow cotton, and appear directly linked to the presence of seed monopolies. 
For the supply of cotton seeds in India has increasingly slipped out of the hands of farmers and into the hands of global seed producers like Monsanto. 
These giant corporations have begun to control local seed companies through buyouts, joint ventures, and licensing arrangements, leading to seed monopolies. 
When this happens, seed is transformed from being a common good into being the “intellectual property” of companies such as Monsanto, for which the corporation can claim limitless profits through royalty payments. 
For farmers, this means deeper debt. 
Seed is also transformed in this way from being a renewable regenerative resource into a non-renewable resource and commodity. 
Seed scarcity is directly caused by seed monopolies, which have as their ultimate weapon a “terminator” seed that is engineered for sterility. 
This means that farmers can’t renew their own supply but must return to the monopolist for new seed each planting season. 
For farmers, this means higher costs; for seed corporations, higher profits. 
The creation of seed monopolies is based on the deregulation of seed corporations, including giving them oversight over bio-safety. 
With the coming of globalization, seed companies were allowed to sell seeds for which the companies had certified their safety. 
In the case of genetically engineered seed, these companies are again seeking self-regulation for bio-safety. 
State regulation does continue to exist where seeds are concerned, but nowadays it is aimed at farmers, who are being pushed into dependency on patented, corporate seed. 
Such compulsory licensing is a big cause of the global destruction of biodiversity. 
The creation of seed monopolies, and with them crushing debts to a new species of moneylender – the agents of the seed and chemical companies – has taken a high human toll as well. 
The farm suicides first started in the district of Warangal in Andhra Pradesh. 
Peasants in Warangal used to grow millets, pulses, and oilseeds. 
Overnight, Warangal was converted to a cotton-growing district based on non-renewable hybrids that require irrigation and are prone to pest attacks. 
Small peasants without capital were trapped in a vicious cycle of debt. 
Some saw only one way out. 
This was a period when Monsanto and its Indian partner, Mahyco, were also carrying out illegal field experiments with genetically engineered Bt cotton. 
All imports and field trials of genetically engineered organisms in India are governed by a provision of the Environment Protection Act called the “Rules for the Manufacture Use, Import, Export, and Storage of Hazardous Microorganisms, Genetically Engineered Organisms, or Cells.” 
We at the Research Foundation for Science, Technology, and Ecology used the law to stop Monsanto’s commercialization of Bt cotton in 1999, which is why approval was not granted for commercial sales until 2002. 
Rising production costs and falling prices for their products is a recipe for indebtedness, and debt is the main cause of farmers’ suicides. 
This is why the suicides are most prevalent in the cotton belt on which the seed industries’ claim is rapidly becoming a stranglehold. 
At the start, the technology for engineering Bt genes into cotton was aimed primarily at controlling pests. 
However, new pests have emerged in Bt cotton, leading to higher use of pesticides. 
In the Vidharbha region of Maharashtra, which has the highest number of suicides, the area under Bt cotton has increased from 0.2 million hectares in 2004 to 2.88 million hectares in 2007. 
The cost of pesticides for farmers has increased 13-fold in the same period. 
A pest control technology that fails to control pests might be good for seed corporations that are also agrichemical corporations. 
For farmers, it translates into suicide. 
Technologies are tools. 
When the tool fails, it needs to be replaced. 
Bt cotton technology has failed to control pests or secure farmers lives and livelihoods. 
It is time to replace GM technology with ecological farming. 

Harvests of Hunger 
New York – Lack of food is rarely the reason people go hungry. 
Even now, there is enough food in the world, with a bumper harvest this year, but more people cannot afford to buy the food they need. 
Addressing this growing crisis is the aim of the Global Conference on Food Security in Rome on June 3-5. 
Even before the recent food price spikes, an estimated billion people were suffering from chronic hunger, while another two billion were experiencing malnutrition, bringing the total number of food-insecure people to around three billion, or almost half the world’s population. 
Roughly 18,000 children died daily as a direct or indirect consequence of malnutrition. 
Obviously, the recent increases in food prices are likely to drive the number of people vulnerable to food stress even higher. 
There is now an urgent need to finance existing food aid programs to address mounting food demands, avert further social unrest, and ensure that farmers get the costlier farm inputs they need for the next planting season. 
But, as we respond to the current humanitarian emergency due to higher food prices, we must not lose sight of the longer-term problems that have undermined food security in recent decades. 
Clearly, a “new deal” for food security is urgently needed. 
The major increases in food production associated with the Green Revolution in the 1960’s – with considerable government and international not-for-profit support – gave way to new policy priorities in the 1980’s. 
As food supply growth slowed, demand continued to grow, and not only due to population increase. 
With higher incomes, rising meat consumption requires more grain for animal feed. 
Since the 1980’s, governments have been pressed to promote exports to earn foreign exchange and import food. 
But food cannot be treated as just another commodity, and governments should develop appropriate policies, infrastructure, and institutions to ensure food security (not to be equated with total self-sufficiency) at the national or regional level. 
The problem is that, having neglected food security and the productive sectors of their economies for several decades, many developing countries’ governments now lack the fiscal capacity to increase public spending in order to increase food production and agricultural productivity. 
Moreover, growing urbanization and other non-agricultural uses of land have reduced acreage available for food production, while agricultural land is increasingly used to produce commodities other than food, such as bio-fuels. 
But we should not rush to abandon bio-fuels, despite some undoubtedly poor policies in recent years. 
Some bio-fuels are far more cost-effective and energy-efficient than others, and different bio-fuel stocks have very different opportunity costs for food agriculture (sugar has not experienced any significant price increase). 
Another problem is that fewer and fewer transnational agro-businesses now dominate marketing, production, and inputs. 
This comes largely at the expense of small farmers and consumers, particularly the poor. 
Moreover, with less government support, rural credit has often become prohibitively expensive. 
In addition, more securitization, easier online trading, and other financial market developments in recent years have facilitated greater speculative investments, especially in commodity futures and options markets, including those affecting food. 
Falling asset prices in other financial market segments, following the sub-prime mortgage meltdown in the United States, may be more important for explaining the recent surge in food prices than supply constraints or other factors underlying longer-term gradual upward price trends. 
Meanwhile, rich countries’ agricultural subsidies and tariffs have undoubtedly undermined food production in developing countries. 
However, cutting farm subsidies will increase food prices, at least initially, while reducing agricultural tariffs alone will not necessarily lead to an increase in food production in poor countries without complementary support. 
Instead, some food security advocates have called for rich countries to compensate for the adverse consequences of their own agricultural subsidies and protectionism by providing additional foreign aid to the developing world, targeting production efforts that enhance food security. 
To avoid catastrophe, the world community must also meet the urgent emergency food and planting requirements mentioned above, including more generous budget and balance-of-payments support for low-income food-importing countries. 
Finally, as world leaders gather in Rome, the international community must secure a meaningful global commitment to food security that will not be undermined by contradictory policies. 

The Psychology of Superstar Sex Predators 
LONDON – The Harvey Weinstein sexual assault scandal shows no sign of winding down. 
Just the opposite: police in the United Kingdom are now investigating several allegations involving the Oscar-winning film producer. 
While Weinstein has “unequivocally denied” allegations of non-consensual sex, and no arrests have been made, more than two dozen women – including the actors Angelina Jolie, Gwyneth Paltrow, and Rose McGowan – have publicly accused him of harassment. 
The allegations stretch over nearly three decades. 
Hollywood is struggling to explain how one of its most visible figures could have gotten away with such behavior for so long. 
Woody Allen offered an important clue. 
Despite working with Weinstein on several films, he claims that no one ever brought allegations of abuse to his attention. 
“And they wouldn’t, because you are not interested in it,” Allen told the BBC. “You are interested in making your movie.” 
Others who worked with Weinstein over the years have made similar statements. 
Is this the Hollywood equivalent of a police officer’s “blue wall of silence,” or is there something more clinical at work? 
One possible answer may be found in the results of recent psychological research. 
According to scientists in the United States and Israel, there are certain personality traits – the “dark triad” of narcissism, psychopathy, and Machiavellianism – that are more commonly associated with sexually abusive behavior. 
One intriguing finding from this research, published in 2016 in the journal Personality and Individual Differences, is that personality traits associated with a proclivity for harassment may be “specialized psychological adaptations” that allow individuals to exploit “niches” in society. 
In other words, some sexual predators may seek careers in particular industries that allow them to exploit others. 
The researchers also found that the disposition that makes someone successful may also comprise the personality traits that explain their tendency to exploit. 
The traits needed to win Academy Awards, for example, may be similar to the traits of an individual who pursues a large number of sexual partners and relationships requiring little commitment. 
Taken a step further, the research suggests that we should not be surprised to find a similar parallel in many others corners of society. 
It is not just in Hollywood where the traits that make someone a star could make the same person an abuser. 
The “dark triad” study was published long before the allegations against Weinstein came to light, but it remains the most comprehensive investigation into the personalities of sexual harassers. 
The researchers – based at Oakland University and the University of Georgia in the US, and Sapir Academic College in Israel – surveyed more than 2,500 Israeli men and women. 
Subjects prone to exploiting others demonstrated a number of characteristics, including callousness, disagreeableness, deceitfulness, egocentrism, lack of honesty or humility, and an excessive interest in one’s personal talents and goals. 
This last trait – also known as narcissism – is a key component of the dark triad. 
Narcissists tend to be convinced of their own magnificence, and believe that other people should be flattered to be in their company – even if that involves unwanted sexual advances. 
Machiavellians, meanwhile, believe that the best way to interact with others is to tell them what they want to hear. 
Their manipulative default can lead to a pattern of continually deceiving colleagues and friends, which may explain why a Machiavellian personality would engage in sexual harassment or pursue short-term sexual encounters. 
They simply believe they are too cunning to get caught. 
When abusers are unmasked, they often seek to deflect blame. 
Claiming to be suffering from a disorder such as “sexual addiction,” or checking into a rehabilitation clinic for “treatment,” as Weinstein has reportedly done, fits with a classic Machiavellian response. 
If the allegations pan out, Weinstein would be an extreme example of a “dark triad” abuser. 
But this combination of character traits is not all that rare. 
In fact, powerful predators might be lurking around the nearest water cooler right now. 
According to a 1994 survey of federal employees in the US, cited in the “dark triad” study, 44% of female workers, and 19% of male workers, reported being sexually harassed on the job within the two previous years. 
And, as the authors of the 2016 study remind us, sexual harassment is not always about trying to secure sex. 
Rather, psychological drives – including the need to boost one’s sense of self-esteem, attractiveness, or masculinity – may be driving predators’ abuse of power in dominating or degrading others. 
What may be particularly relevant to the Weinstein case, whatever the outcome, is that Hollywood is itself a bubble of narcissistic power. 
Psychologists could argue that this feature explains the blindness some have demonstrated toward the alleged depraved behavior of one of their colleagues. 
Sexual harassment is the immediate focus of the Weinstein case, as it should be, given the severity of the alleged crimes and the distress caused to the victims. 
But for psychologists seeking to understand the apparent nexus of success and abuse, Weinstein’s apparent downfall is just the tip of an analytic iceberg. 

Has America Lost its Mojo? 
Cambridge – You know that American self-confidence is shaken when even the President starts expressing fear that the financial crisis may turn out worse than the Great Depression of the 1930’s. 
George Bush is not alone in worrying that things might get a lot worse before they get better. 
A growing number of savvy business people are also starting to wonder whether the United States will be able to right its economy anytime soon. 
Professional forecasters are considerably more sanguine, with the consensus forecast for US growth in 2009 at around -1.5%, after a similar contraction in the second half of 2008. 
This would be a painful recession, but far short of the 10-15% output drop normally associated with a full-blown depression. 
Of course, economic forecasters have generally been far too optimistic at every turn of late, so the public is understandably leery of their prognostications. 
Consensus forecasts do still seem optimistic. 
With its financial system on life support, housing prices continuing to plummet, and unemployment rising, the US economy is looking more vulnerable than it has at any time since the 1970’s, and perhaps since World War II. 
Still, it must be noted that negative output growth for more than two years is a relatively rare event, even in the aftermath of severe banking crises. 
Historical statistical relationships are perhaps cold comfort in a downturn that now seems so insidiously different from previous catastrophes. 
But they should not be dismissed. 
Japan may have taken what seemed like forever to recover from its 1990’s crisis, but it is an exception – the crisis occurred as the Japanese economy needed to restructure in the face of the huge challenges posed by China’s emergence. 
The complete policy paralysis that has prevailed during the interregnum between Presidents Bush and Obama has not helped. 
US policy has devolved into a sort of “wheel of fortune” game for financial firms. 
One day you get bankruptcy, another day loans with few strings attached. 
One hopes that President-elect Obama’s all-star economic team will at least adopt a coherent and consistent policy. 
Consistency alone would be a big boost for confidence. 
The basic elements of a recovery package include, first and foremost, a rational approach to rebooting the financial system. 
This means mark-to-market pricing of assets, restructuring and recapitalizing banks, and a new approach to regulation that allows creativity while better protecting the public against some of the madness that has prevailed for more than a decade. 
Help for housing is required to prevent overshooting in home prices, as is massive macroeconomic stimulus, including a moderately inflationary monetary policy. 
A number of leaders, most prominently German Chancellor Angela Merkel, are understandably worried about the longer-term consequences of aggressive macroeconomic stimulus. 
These concerns are valid, even more so given government’s growing role in the economy. 
But, as in wartime, one hopes these effects are temporary. 
Besides, is inaction a real alternative? 
Prior to the 1950’s, output drops of 15-20% in a single year were routine (admittedly, national income accounting was more primitive.) 
A number of academic economists say we should simply tough it out as we did back then. 
Recessions have important cleansing effects, helping to facilitate painful restructuring. 
But today’s social, economic, and political systems – at least in developed countries – are unable to withstand a peacetime decline in output of 15-20% within a short period. 
Massive stimulus and intervention – the US Federal Reserve’s current stance – is unavoidable. 
One can only hope that the state can get out of the economy half as fast as it is getting in. 
Nevertheless, the distinct possibility that stimulus and restructuring may work is further cause to hope that the deepening recession will not morph into a full-blown depression. 
The US may be ground zero for the global financial crisis, but it is not the only country riven by self-doubt. 
Britain, Ireland, and Spain each face financial crises of a similar magnitude. 
Some countries that depend on energy exports, particularly governance-challenged ones such as Russia and Venezuela, are experiencing even worse downturns. 
Even once-invulnerable China must contemplate a halving of its growth rate. 
Europe and Japan do not have quite as complex financial messes as the US. 
But these regions are nevertheless mired in recession. 
The global economy is in a pickle. 
But, just as optimists were too sanguine in the boom, ultra-pessimists probably go too far in forecasting a depression around the corner. 
2009 will be a tough year. 
Yet, absent a large-scale conflagration, there is a fair chance that 2010 will see a restoration of weak growth in the US, Europe, and Japan, and probably robust growth in most emerging markets. 

Has Economic Power Replaced Military Might? 
CAMBRIDGE – At the Cold War’s end, some pundits proclaimed that “geo-economics” had replaced geopolitics. 
Economic power would become the key to success in world politics, a change that many people thought would usher in a world dominated by Japan and Germany. 
Today, some interpret the rise in China’s share of world output as signifying a fundamental shift in the balance of global power, but without considering military power. 
They argue that a dominant economic power soon becomes a dominant military power, forgetting that the United States was the world’s largest economy for 70 years before it became a military superpower. 
Political observers have long debated whether economic or military power is more fundamental. 
The Marxist tradition casts economics as the underlying structure of power, and political institutions as a mere superstructure, an assumption shared by nineteenth-century liberals who believed that growing interdependence in trade and finance would make war obsolete. 
But, while Britain and Germany were each other’s most significant trading partners in 1914, that did not prevent a conflagration that set back global economic integration for a half-century. 
Military power, which some call the ultimate form of power in world politics, requires a thriving economy. 
But whether economic or military resources produce more power in today’s world depends on the context. 
A carrot is more effective than a stick if you wish to lead a mule to water, but a gun may be more useful if your aim is to deprive an opponent of his mule. 
Many crucial issues, such as financial stability or climate change, simply are not amenable to military force. 
Today, China and the US are highly interdependent economically, but many analysts misunderstand the implications of this for power politics. 
True, China could bring the US to its knees by threatening to sell its dollar holdings. 
But doing so would not only reduce the value of its reserves as the dollar weakened; it would also jeopardize US demand for Chinese imports, leading to job losses and instability in China. 
In other words, bringing the US to it knees might well mean that China would bring itself to its ankles. 
Judging whether economic interdependence produces power requires looking at the balance of asymmetries. 
In this case, it resembles a “balance of financial terror,” analogous to the Cold War military interdependence in which the US and the Soviet Union each had the potential to destroy the other in a nuclear exchange. 
In February 2010, a group of senior Chinese military officers, angered over US arms sales to Taiwan, called for China’s government to sell off US government bonds in retaliation. 
Their suggestion was not heeded. 
Economic resources can produce soft-power behavior as well as hard military power. 
A successful economic model not only finances the military resources needed for the exercise of hard power, but it can also attract others to emulate its example. 
The European Union’s soft power at the end of the Cold War, and that of China today, owes much to the success of the EU and Chinese economic models. 
Economic resources are increasingly important in this century, but it would be a mistake to write off the role of military power. 
As US President Barack Obama said when accepting the Nobel Peace Prize in 2009, “We must begin by acknowledging the hard truth that we will not eradicate violent conflict in our lifetimes. 
There will be times when nations – acting individually or in concert – will find the use of force not only necessary but morally justified.” 
Even if the probability of the use of force among states, or of threats of its use, is lower now than in earlier eras, the high impact of war leads rational actors to purchase expensive military insurance. 
If China’s hard power frightens its neighbors, they are likely to seek such insurance policies, and the US is likely to be the major provider. 
This leads to a larger point about the role of military force. 
Some analysts argue that military power is of such restricted utility that it is no longer the ultimate measuring rod. 
But the fact that military power is not always sufficient to decide particular situations does not mean that it has lost all utility. 
While there are more situations and contexts in which military force is difficult to use, it remains a vital source of power. 
Markets and economic power rest upon political frameworks, which in turn depend not only upon norms, institutions, and relationships, but also upon the management of coercive power. 
A well-ordered modern state is one that holds a monopoly on the legitimate use of force, and that allows domestic markets to operate. 
Internationally, where order is more tenuous, residual concerns about the coercive use of force, even if a low probability, can have important effects – including a stabilizing effect. 
Indeed, metaphorically, military power provides a degree of security that is to order as oxygen is to breathing: little noticed until it becomes scarce, at which point its absence dominates all else. 


Has Financial Innovation Been Discredited? 
MOSCOW – Skeptics of financial liberalization and innovation have been emboldened by the crisis in the world’s credit markets that erupted in mid-2007, when the problems with sub-prime mortgages first appeared in the United States. 
Are these skeptics right? 
Should we halt financial liberalization and innovation in order to prevent crises like the sub-prime disaster from recurring? 
The entire sub-prime market is largely a decade-old innovation – the word “sub-prime” did not exist in any language before 1994 – built on such things as option adjustable-rate mortgages (option-ARM’s), new kinds of collateralized debt obligations, and structured investment vehicles. 
Previously, private investors in the US simply did not lend to mortgage seekers whose credit history was below prime. 
But, while it does sometimes appear that the current crisis is due, at least in part, to financial innovation, financial-market liberalization has been shown to be a good thing overall. 
A study published in 2005 by economists Geert Bekaert, Campbell Harvey, and Christian Lundblad found that when countries liberalize their stock markets, allowing them to operate freely without government intervention, economic growth rises by an average of one percentage point annually. 
The higher growth tends to be associated with an investment boom, which in turn seems to be propelled by the lower cost of capital for firms. 
Of course, while complicated financial arrangements allow us to move forward economically, they also can create hazards. 
Think of the scaffolding and equipment around construction sites. 
Sometimes people trip over the equipment, or a piece of scaffolding falls, with disastrous consequences. 
Any time you build something, there is always a chance of a setback. 
But, with every setback, we learn. 
Governments and insurance companies implement better safety requirements in response to construction accidents. 
The same is true, over time, with financial disasters. 
The US is one of the world’s most financially liberal countries. 
Its financial markets’ high quality must be an important reason for America’s relatively strong economic growth. 
Indeed, given a very low savings rate and high fiscal deficit over the past few decades, the US might otherwise have faced economic disaster. 
The reason is simple. 
Individual firms might have splendid investment opportunities – to enlarge plant and equipment, capitalize on new software, or exploit new research and new training of key personnel – but might be deterred by cash shortages or perceived macroeconomic risks. 
Effective financial markets enable them to pursue such opportunities despite these constraints by enlisting investors to provide the capital. 
These investors can, in turn, be encouraged when financial hedging devices and financial diversification protect them. 
There has been a longstanding discussion about whether new derivative markets, which provide such financial hedging, tend to increase preexisting financial markets’ volatility. 
The consensus is that they do not. 
In 2000, Stewart Mayhew, Assistant Chief Economist at the US Securities and Exchange Commission’s Office of Economic Analysis, surveyed the extensive literature on this topic. 
Mayhew concluded that it is rather difficult to tell whether derivative markets worsen financial-market volatility, because their creation tends to come when existing financial markets already are more volatile, or can be predicted to become so. 
Moreover, he found that there is no evidence that derivative markets create volatility in underlying cash markets; in fact, they may even reduce it. 
The effect on underlying financial markets’ volatility may not even be the right question to consider in deciding whether to permit new derivative products. 
The right question is whether these products are conducive to economic success and growth. 
Here, Mayhew concludes that new derivative markets clearly increase the liquidity and quality of information in existing financial markets. 
And it is this liquidity and quality of information that ultimately propels economic growth. 
The sub-prime crisis has exposed serious problems that we must address. 
For example, we need stronger consumer protection for retail financial products, stricter disclosure requirements for new securities, and better-designed vehicles for hedging risks. 
Some of the innovations associated with the sub-prime crisis – notably option-ARM’s, when extended to borrowers who couldn’t handle them – seem to have little redeeming value. 
But others – those involved with the securitization of mortgages – were clearly important long-run innovations, because they can help spread risks better around the world. 
So, we should not slow down financial innovation in general. 
On the contrary, some of the fixes that result from the sub-prime crisis will probably take the form of still more innovation, further increasing the sophistication of our financial markets. 

Has Global Stag-Deflation Arrived? 
NEW YORK – The latest macroeconomic news from the United States, other advanced economies, and emerging markets confirms that the global economy will face a severe recession in 2009. 
In the US, recession started in December 2007, and will last at least until December 2009 – the longest and deepest US recession since World War II, with the cumulative fall in GDP possibly exceeding 5%. 
The recession in other advanced economies (the euro zone, United Kingdom, European Union, Canada, Japan, Australia, and New Zealand) started in the second quarter of 2008, before the financial turmoil in September and October further aggravated the global credit crunch. 
This contraction has become even more severe since then. 
There is now also the beginning of a hard landing in emerging markets as the recession in advanced economies, falling commodity prices, and capital flight take their toll on growth. 
Indeed, the world should expect a near recession in Russia and Brazil in 2009, owing to low commodity prices, and a sharp slowdown in China and India that will be the equivalent of a hard landing (growth well below potential) for these countries. 
Other emerging markets in Asia, Africa, Latin America, and Europe will not fare better, and some may experience full-fledged financial crises. 
Indeed, more than a dozen emerging-market economies now face severe financial pressures: Belarus, Bulgaria, Estonia, Hungary, Latvia, Lithuania, Romania, Turkey, and Ukraine in Europe; 
Indonesia, Korea, and Pakistan in Asia; and Argentina, Ecuador, and Venezuela in Latin America. 
Most of these economies can avoid the worst if they implement the appropriate policy adjustments and if the international financial institutions (including the IMF) provide enough lending to cover their external financing needs. 
With a global recession a near certainty, deflation – rather than inflation – will become the main concern for policymakers. The fall in aggregate demand while potential aggregate supply has been rising because of overinvestment by China and other emerging markets will sharply reduce inflation. 
Slack labor markets with rising unemployment rates will cap wage and labor costs. 
Further falls in commodity prices – already down 30% from their summer peak – will add to these deflationary pressures. 
Policymakers will have to worry about a strange beast called “stag-deflation” (a combination of economic stagnation/recession and deflation); about liquidity traps (when official interest rates become so close to zero that traditional monetary policy loses effectiveness); and about debt deflation (the rise in the real value of nominal debts, increasing the risk of bankruptcy for distressed households, firms, financial institutions, and governments). 
With traditional monetary policy becoming less effective, non-traditional policy tools aimed at generating greater liquidity and credit (via quantitative easing and direct central bank purchases of private illiquid assets) will become necessary. 
And, while traditional fiscal policy (government spending and tax cuts) will be pursued aggressively, non- traditional fiscal policy (expenditures to bail out financial institutions, lenders, and borrowers) will also become increasingly important. 
In the process, the role of states and governments in economic activity will be vastly expanded. 
Traditionally, central banks have been the lenders of last resort, but now they are becoming the lenders of first and only resort. 
As banks curtail lending to each other, to other financial institutions, and to the corporate sector, central banks are becoming the only lenders around. 
Likewise, with household consumption and business investment collapsing, governments will soon become the spenders of first and only resort, stimulating demand and rescuing banks, firms, and households. 
The long-term consequences of the resulting surge in fiscal deficits are serious. 
If the deficits are monetized by central banks, inflation will follow the short-term deflationary pressures; if they are financed by debt, the long-term solvency of some governments may be at stake unless medium-term fiscal discipline is restored. 
Nevertheless, in the short run, very aggressive monetary and fiscal policy actions – both traditional and non-traditional – must be undertaken to ensure that the inevitable stag-deflation of 2009 does not persist into 2010 and beyond. 
So far, the US response appears to be more aggressive than that of the euro zone, as the European Central Bank falls behind the curve on interest rates and the EU’s fiscal stance remains weak. 
Given the severity of this economic and financial crisis, financial markets will not mend for a while. 
The downside risks to the prices of a wide variety of risky assets (equities, corporate bonds, commodities, housing, and emerging-market asset classes) will remain until there are true signs – towards the end of 2009 – that the global economy may recover in 2010. 

A Special Moment for Special Drawing Rights 
NEW YORK – The recent annual meetings of the International Monetary Fund and the World Bank in Lima, Peru, were dominated by talk of the weakness of several emerging and developing economies. 
But the discussion focused very little on one key cause: the global monetary system. 
Much more will be said next month at the IMF board, though what the Fund will do remains an open question. 
The problem that emerging and developing economies are facing stems from the fact that their capital inflows follow a strongly pro-cyclical pattern. 
When they were growing rapidly – especially compared to the advanced economies – they attracted massive amounts of capital. 
But as risks multiplied, capital started to flow back toward a reserve-issuing country – namely, the United States. 
After all, the US is set to raise interest rates, and the dollar has appreciated against virtually all of the world’s currencies. 
In the past, this pattern has always ultimately led to a correction, with America’s growing current-account deficit eventually bringing about a dollar depreciation. 
But such corrections – in 1979-1980, 1990-1991, and 2007-2008 – have also always been associated with a global slowdown or crisis. 
This highlights the problem inherent in using the US dollar, a national currency, as the global economy’s primary international-reserve currency. 
The Belgian economist Robert Triffin first identified this problem – dubbed the “Triffin dilemma” – in the 1960s, emphasizing the fundamental conflict between national objectives, such as limiting the size of the external deficit, and international imperatives, such as creating enough liquidity to satisfy demand for reserve assets. 
Moreover, this system subjects the world economy to cycles of confidence in the US dollar, while placing the world economy at the mercy of a national authority – one that often makes decisions with scant regard for their international implications. 
The only way to stabilize the system would thus be to place a truly global currency at its center. 
This was the idea behind John Maynard Keynes’s proposal in the 1940s to create a supranational currency, called the “bancor.” 
And it was the motivation behind the 1969 creation of the IMF’s Special Drawing Right (SDR), which was supposed to become “the principle reserve asset in the international monetary system.” 
General SDR allocations are to be based on “a long-term global need to supplement existing reserve assets,” with decisions made for successive periods of up to five years. 
So far, such allocations have been made only three times, in 1970-72, in 1979-81, and in 2009, with the latter allocation, amounting to $250 billion, being part of the recovery package adopted by the G-20 to manage the global financial crisis. 
The SDR has been in the news again lately, owing to debate about whether the IMF should add the Chinese renminbi to the basket of currencies that determine the unit’s value. 
Given the renminbi’s growing international role, it seems abundantly obvious that the currency should be part of the SDR basket. 
Now, the discussion should focus on how to enable the SDR to reach its potential as an instrument of international cooperation. 
The first step toward making SDRs a more active force in global finance would be to remove the division between SDR accounts and normal IMF operations. 
As long as that partition remains in place, SDRs will function, at best, like a credit line that can be used unconditionally by the holder – a kind of overdraft facility, not a true reserve asset. 
A better approach would be to allow countries to “deposit” unused SDRs in the Fund, so that they can be used to finance IMF lending operations. 
In other words, issuing more SDRs would enable the IMF to finance more lending. 
If those SDRs were issued during crises, like the one that emerging and developing economies are confronting today, the result would be a truly counter-cyclical global monetary policy. 
This could even be taken one step further, with SDRs being allocated according to a new formula that accounts not just for IMF quotas, but also for demand (or need) for foreign-exchange reserves. 
The current formula would have the countries most in need of foreign reserves – that is, middle- and low-income countries (excluding China) – receiving just over one-third of the total allocation. 
That is not enough. 
Even without this change, the SDR can and should gain a more prominent position in global reserves. 
With emerging and developing economies in deepening trouble, there is no time to waste. 
Some five decades after Triffin first identified the problems with the US dollar’s reserve-currency status, the SDR’s moment has, one hopes, finally arrived. 

Has Neo-Liberalism Failed Mexico? 
Six years ago, I was ready to conclude that the North American Free Trade Agreement (NAFTA) was a major success. 
The key argument in favor of NAFTA had been that it was the most promising road the United States could take to raise the chances for Mexico to become democratic and prosperous, and that the US had both a strong selfish interest and a strong neighborly duty to try to help Mexico develop. 
Since NAFTA, Mexican real GDP has grown at 3.6% per year, and exports have boomed, going from 10% of GDP in 1990 and 17% of GDP in 1999 to 28% of GDP today. 
Next year, Mexico’s real exports will be five times what they were in 1990. 
It is here – in the rapid development of export industries and the dramatic rise in export volumes – that NAFTA made the difference. 
NAFTA guarantees Mexican producers tariff and quota-free access to the US market, the largest consumer market in the world. 
Without this guarantee, fewer would have invested in the capacity to satisfy the US market. 
Increasing trade between the US and Mexico moves both countries toward a greater degree of specialization and a finer division of labor in important industries like autos, where labor-intensive portions are increasingly accomplished in Mexico, and textiles, where high-tech spinning and weaving is increasingly done in the US, while Mexico carries out lower-tech cutting and sewing. 
Such efficiency gains from increasing the extent of the market and promoting specialization should have produced rapid growth in Mexican productivity. 
Likewise, greater efficiency should have been reinforced by a boom in capital formation, which should have accompanied the guarantee that no future wave of protectionism in the US would shut factories in Mexico. 
The key word here is “should.” 
Today’s 100 million Mexicans have real incomes – at purchasing power parity – of roughly $10,000 per year, a quarter of the current US level. 
They are investing perhaps a fifth of GDP in gross fixed capital formation – a healthy amount – and have greatly expanded their integration into the world (i.e., the North American) economy since NAFTA. 
But the 3.6% rate of growth of GDP, coupled with a 2.5% per year rate of population and increase, means that Mexicans’ mean income is barely 15% above that of the pre-NAFTA days, and that the gap between their mean income and that of the US has widened. 
Because of rising inequality, the overwhelming majority of Mexicans live no better off than they did 15 years ago. 
(Indeed, the only part of Mexican development that has been a great success has been the rise in incomes and living standards that comes from increased migration to the US, and increased remittances sent back to Mexico.) 
Intellectually, this is a great puzzle: we believe in market forces, and in the benefits of trade, specialization, and the international division of labor. 
We see the enormous increase in Mexican exports to the US over the past decade. 
We see great strengths in the Mexican economy – a stable macroeconomic environment, fiscal prudence, low inflation, little country risk, a flexible labor force, a strengthened and solvent banking system, successfully reformed poverty-reduction programs, high earnings from oil, and so on. 
Yet successful neo-liberal policies have not delivered the rapid increases in productivity and working-class wages that neo-liberals like me would have confidently predicted had we been told back in 1995 that Mexican exports would multiply five-fold in the next twelve years. 
To be sure, economic deficiencies still abound in Mexico. 
According to the OECD, these include a very low average number of years of schooling, with young workers having almost no more formal education than their older counterparts; little on-the-job training; heavy bureaucratic burdens on firms; corrupt judges and police; high crime rates; and a large, low-productivity informal sector that narrows the tax base and raises tax rates on the rest of the economy. 
But these deficiencies should not be enough to neutralize Mexico’s powerful geographic advantages and the potent benefits of neo-liberal policies, should they? 
Apparently they are. 
The demographic burden of a rapidly growing labor force appears to be greatly increased when that labor force is not very literate, especially when inadequate infrastructure, crime, and official corruption also take their toll. 
We neo-liberals point out that NAFTA did not cause poor infrastructure, high crime, and official corruption. 
We thus implicitly suggest that Mexicans would be far wose off today without NAFTA and its effects weighing in on the positive side of the scale. 
That neo-liberal story may be true. But it is an excuse. 
It may not be true. Having witnessed Mexico’s slow growth over the past 15 years, we can no longer repeat the old mantra that the neo-liberal road of NAFTA and associated reforms is clearly and obviously the right one. 

Has Palestine Won? 
TEL AVIV – The somber spectacle of Israel’s isolation during the United Nations debate on Palestinian statehood marks the political tsunami that Prime Minister Binyamin Netanyahu’s critics warned would arrive if Israel did not propose a bold peace initiative. 
But, more importantly, the speeches at the UN General Assembly by the two rivals, Netanyahu and Palestinian President Mahmoud Abbas, showed that any initiative to bring the parties back to the negotiating table might turn out to be futile. 
Speeches do not make peace, but they can mar its prospects. 
Netanyahu and Abbas both showed once again how the politics surrounding “the peace process” has defeated the cause of peace. 
Both leaders exhibited utter indifference to the other’s core concerns, and catered to their constituencies, Hamas and Israeli settlers included, making it clear, urbi et orbi, that the gaps separating their positions are as unbridgeable as ever. 
Netanyahu could not bring himself to admit the sins of occupation, or even to utter a minimal expression of empathy with the Palestinian tragedy of dispossession and dispersion. 
Israel’s march of folly in expanding its West Bank settlements did not deserve a hint of soul searching on his part. 
Indeed, Netanyahu’s call for peace will remain hollow so long as he continues to view the solution to Israel’s legitimate security concerns as requiring continuous occupation of sizable portions of the future Palestinian state. 
The Jordan Valley and the hills of Judea and Samaria are, undoubtedly, strategic assets for a country whose width is that of the length of a Manhattan avenue. 
But demilitarization, the deployment of international forces, and rigid security arrangements could offer an answer. 
Security concerns can no longer be treated as a license for territorial expansion. 
Eager to deliver his elementary history lessons, Netanyahu refuses to admit the validity of one key perspective. 
Rather than interpreting Israel’s victory in the 1967 Six-Day War as permission for annexation of territory, that triumph should be viewed as a watershed that made possible peace with the entire Arab world should Israel relinquish occupied Arab lands. 
This principle was stipulated by the 2002Arab peace initiative, and was previously realized in Israel’s peace with Egypt and Jordan. 
So, whoever aspires to help the parties reach a settlement needs to be attentive to the fact that territorial borders are only one aspect of this conflict – and not necessarily the most contentious one. 
Unlike Israel’s peace with Egypt (and, one hopes, its peace with Syria), the Israeli-Palestinian conflict is rooted in more than a real-estate dispute. 
As the UN debate showed, what is at stake is a clash of irreconcilable national narratives. Egypt had to grant Israel only political recognition, but the Palestinians are being asked to recognize Israel’s moral legitimacy by accepting Jewish links to the Holy Land and hence admitting the Jews’ millenarian claim for a state in a land that the Palestinians believe is historically theirs. 
Not a word, nor an omission, in Abbas’s UN speech was accidental. 
What was most striking was how flagrantly dismissive he was of Israel’s most fundamental national narrative. 
He spoke of the Holy Land as the source of Christianity and the home of sacred shrines of Islam, but intentionally ignored the Biblical roots of Judaism and Jerusalem as the home of Hebrew kings and prophets. 
For Israelis, that omission reveals even the most moderate Palestinians’ unwillingness to embrace the existence of a Jewish state. 
Abbas’s refusal to recognize Israel as a Jewish state – on the ground that to do so would betray Israel’s 1.5 million Palestinian citizens – vindicated a key Israeli concern, and fueled skeptics’ fears of a hidden long-term Palestinian agenda to do away with the Jewish state altogether. 
This is likely to dishearten Israeli doves – and embolden hawks in their insistence that no progress toward peace is possible without the Palestinians’ unequivocal acceptance of Israel as the Jewish national homeland. 
Thus, Abbas’s implicit message that Israel will never offer a fair deal to its Arab minority will reinforce Netanyahu’s leadership as the staunch defender of the national interest against the naïve dreamers of the left. 
Netanyahu has only to present Abbas’ arguments as proof that, for the Palestinians, peace with Israel is just the first stage in a grand strategy leading to one Palestine, embracing all of Israel, with an Arab majority. 
Even if, as expected, the Security Council rejects the Palestinians’ request for full UN membership and Palestine ends up with observer status in the General Assembly, Abbas can already claim victory. 
He managed to redress the balance of power with Israel and the United States by mobilizing the vast support that the Palestinian cause elicits in the international community. 
If not for his bold initiative at the UN, the Quartet (the UN, the US, the European Union, and Russia) would not have become so suddenly hyperactive in searching for a formula to bring the parties back to the negotiating table. 
But don’t hold your breath. 
Nothing will come out of the Quartet’s move unless the parties change their attitudes. 
Peacemaking is about courageously addressing the other side’s genuinely vital concerns. 
And would-be mediators, for their part, can no longer just be “facilitators”; they need to regard themselves as stakeholders – and be prepared to exert pressure and twist arms. 
Left to their own devices, Israelis and Palestinians will never reach a comprehensive peace settlement. 


Has the US Recovery Begun? 
CAMBRIDGE – Although the American economy is continuing to decline, it is no longer falling as fast as it was at the beginning of the year or in the weeks after the collapse of Lehman Brothers in September 2008. 
In that sense, it is reasonable to say that the worst of the downturn is now probably behind us. 
But my reading of the evidence does not agree with that of those who claim that the economy is actually improving, and that a sustained cyclical recovery is likely to begin within the next few months. 
Although the stimulus package of tax cuts and increased government outlays enacted earlier this year will give a temporary boost to growth, we are unlikely to see the start of a sustained upturn until next year at the earliest. 
The optimists back their claims of an earlier recovery by pointing to a variety of statistics. 
They note that construction activity is rising, home prices are declining more slowly, disposable personal income increased in the first quarter, consumer spending is up, and the labor market is improving. 
But a careful look at these data is less reassuring. 
In each case, the details do not support what the headline number appears to indicate. 
While total construction spending recently rose by a very small 0.3% (less than the measurement error), private construction spending actually fell and residential construction was down a much more significant 4%. 
Likewise, home prices declined at a very rapid rate of 18.7% in the 12 months to March, which is not meaningfully lower than the 19% fall over the 12 months to February. 
And the most recent monthly decline corresponded to an annual rate of more than 25%. 
Moreover, disposable personal income rose in the first quarter only because of a massive jump in tax rebates and government pension payments. 
In contrast, salaries, self-employment income, dividends, and interest all fell. 
The anomaly of rising consumption driven only by tax rebates and social-welfare payments ended in March, when consumer spending declined in response to lower employment and falling labor incomes. 
This was confirmed by a fall in retail sales in April. 
Finally, employment continues to contract rapidly. 
Although the pace of decline slowed between March and April, half of that improvement was the result of an increase in government employment, owing to a one-time hiring of more than 60,000 temporary staff to conduct the 2010 census. 
But, although the recent news is not as encouraging as some have claimed, I expect that the next few months will see some real improvements that will reduce the rate of overall economic decline, or even produce a temporary rise in the GDP growth rate, owing to the Obama administration’s fiscal stimulus measures. 
The stimulus package will add about $60 billion to overall GDP during April, May, and June, or roughly 1.5% of quarterly output. 
But when the GDP figures for the second quarter are reported later this summer, the government’s statisticians will annualize the 1.5% increase and add 6% in calculating the annual growth rate. 
If economic activity apart from the stimulus package is continuing to decline at nearly the 6% annual rate that was recorded in the last two quarters, the temporary boost from the stimulus package will suffice to make the overall GDP change close to zero or even positive. 
But the key thing to bear in mind is that the stimulus effect is a one-time rise in the level of activity, not an ongoing change in the rate of growth. 
While the one-time increase will appear in official statistics as a temporary rise in the growth rate, there is nothing to make that higher growth rate continue in the following quarters. 
So, by the end of the year, we will see a slightly improved level of GDP, but the rate of GDP growth is likely to return to negative territory. 
The positive effect of the stimulus package is simply not large enough to offset the negative impact of dramatically lower household wealth, declines in residential construction, a dysfunctional banking system that does not increase credit creation, and the downward spiral of house prices. 
The Obama administration has developed policies to counter these negative effects, but, in my judgment, they are not adequate to turn the economy around and produce a sustained recovery. 
Having said that, these policies are still works in progress. 
If they are strengthened in the months ahead – to increase demand, fix the banking system, and stop the fall in house prices – we can hope to see a sustained recovery start in 2010. 
If not, we will just have to keep waiting and hoping. 

What Iran Wants in 2014 
TEHRAN – When I campaigned to become President of Iran, I promised to balance realism and the pursuit of the Islamic Republic’s ideals – and won Iranian voters’ support by a large margin. 
By virtue of the popular mandate that I received, I am committed to moderation and common sense, which is now guiding all of my government’s policies. 
That commitment led directly to the interim international agreement reached in November in Geneva on Iran’s nuclear program. 
It will continue to guide our decision-making in 2014. 
Indeed, in terms of foreign policy, my government is discarding extreme approaches. 
We seek effective and constructive diplomatic relations and a focus on mutual confidence-building with our neighbors and other regional and international actors, thereby enabling us to orient our foreign policy toward economic development at home. 
To this end, we will work to eliminate tensions in our foreign relations and strengthen our ties with traditional and new partners alike. 
This obviously requires domestic consensus-building and transparent goal-setting – processes that are now underway. 
While we will avoid confrontation and antagonism, we will also actively pursue our larger interests. 
But, given an increasingly interconnected and interdependent world, challenges can be addressed only through interaction and active cooperation among states. 
No country – including big powers – can effectively address on its own the challenges that it faces. 
Indeed, developing and emerging economies’ rapid “catch-up growth” suggests that their aggregate economic weight is about to surpass that of the advanced world. 
Today’s developing and emerging countries are likely to account for nearly 60% of world GDP by 2030, up from around 40% in 2000, enabling them to play a much greater role on the world stage. 
In such a period of transition, Iran can enhance its global role. 
The election this year, in which close to 75% of eligible voters turned out, showed how our religious democracy is maturing. 
Iran’s ancient culture and civilization, long state continuity, geopolitical position, social stability amid regional turmoil, and well-educated youth enable us to look to the future with confidence, and aspire to assume the major global role that our people deserve – a role that no actor in global politics can ignore. 
We are also considering how to rebuild and improve our bilateral and multilateral relations with European and North American countries on the basis of mutual respect. 
This requires easing tensions and implementing a comprehensive approach that includes economic ties. 
We can begin by avoiding any new strain in relations between Iran and the United States and, at the same time, endeavoring to eliminate inherited tensions that continue to mar relations between our countries. 
While we may not be able to forget the mistrust and suspicion that have haunted Iranians’ thinking about US governments for the last 60 years, now we must focus on the present and look to the future. 
That means rising above petty politics and leading, rather than following, pressure groups in our respective countries. 
In our view, cooperating on issues of mutual interest and concern would contribute to easing tensions in our region as well. 
This means countering those in the US and our region who seek to distract international attention from issues in which they are directly involved and prevent Iran from enhancing its regional status. 
By diminishing the prospects for a permanent negotiated agreement on our nuclear program, such behavior increases the likelihood that the Iran-US standoff will continue. 
Our region is grappling more than ever with sectarianism, group enmities, and potential new breeding grounds for extremism and terrorism. 
At the same time, the recent use of chemical weapons in Syria could haunt the region’s peoples for many years. 
We believe that, under such circumstances, a voice of moderation in the region could affect the course of events in a constructive and positive way. 
There is no doubt that the turmoil in nearby countries affects the interests of many regional and global actors, which need to act in concert to ensure long-term stability. 
Iran, as a major regional power, is fully prepared to move in this direction, sparing no effort to facilitate solutions. 
So those who portray Iran as a threat and thus seek to undermine its regional and global credibility should cease – in the interest of peace and tranquility in the region and beyond. 
I am profoundly disturbed over the humanitarian tragedy in Syria and the enormous suffering that the Syrian people have endured for almost three years. 
Representing a people who have experienced the horror of chemical weapons, my government strongly condemned their use in the Syrian conflict. 
I am also concerned that parts of Syrian territory have become breeding grounds for extremist ideologies and rallying points for terrorists, which is reminiscent of the situation on our eastern border in the 1990’s. 
This is an issue of concern to many other countries as well, and finding a durable political solution in Syria requires cooperation and joint efforts. 
So we are pleased that in 2013 diplomacy prevailed over threats of military intervention in Syria. 
We must build on this headway and understand that Syria is in dire need of coordinated regional and international efforts. 
We are ready to contribute to peace and stability in Syria in the course of serious negotiations among regional and extra-regional parties. 
Here, too, we need to prevent the talks from becoming a zero-sum game. 
That is no less true of Iran’s peaceful nuclear-energy program, which has been subject to enormous hype in recent decades. 
Since the early 1990’s, one prediction after another regarding how close Iran was to acquiring a nuclear bomb has proved baseless. 
Throughout this period, alarmists tried to paint Iran as a threat to the Middle East and the world. 
We all know who the chief agitator is, and what purposes are to be served by hyping this issue. 
We know also that this claim fluctuates in proportion to the amount of international pressure to stop settlement construction and end the occupation of Palestinian lands. 
These false alarms continue, despite US national intelligence estimates according to which Iran has not decided to build a nuclear weapon. 
In fact, we are committed not to work toward developing and producing a nuclear bomb. 
As enunciated in the fatwa issued by Supreme Leader Ayatollah Ali Khamenei, we strongly believe that the development, production, stockpiling, and use of nuclear weapons are contrary to Islamic norms. 
We never even contemplated the option of acquiring nuclear weapons, because we believe that such weapons could undermine our national-security interests; as a result, they have no place in Iran’s security doctrine. 
Even the perception that Iran may develop nuclear weapons is detrimental to our security and overall national interest. 
During my presidential campaign, I committed myself to doing everything in my power to fast-track a resolution to the standoff over our nuclear-energy program. 
To fulfill this commitment and benefit from the window of opportunity that the recent election opened, my government is prepared to leave no stone unturned in seeking a mutually acceptable permanent solution. 
Following up on November’s interim agreement, we are ready to continue to work with the P5+1 (the five permanent members of the United Nations Security Council plus Germany) and others with a view to ensuring our nuclear program’s full transparency. 
The peaceful nuclear capability that we have achieved will be used within an internationally recognized framework of safeguards, and it will be accessible to multilateral monitoring by the International Atomic Energy Agency, as has been the case in the past several years. 
In this way, the international community can ensure the exclusively peaceful nature of our nuclear program. 
We will never forgo our right to benefit from nuclear energy; but we are ready to work toward removing any ambiguity and answer any reasonable question about our program. 
The continuation of pressure, arm-twisting, intimidation, and measures aimed at cutting off Iranians’ access to a whole range of necessities – from technology to medicines and foodstuffs – can only poison the atmosphere and undermine the conditions needed to make progress. 
As we showed in 2013, Iran is fully prepared to engage seriously with the international community and to negotiate with our interlocutors in good faith. 
We hope that our counterparts, too, are ready to take advantage of this window of opportunity. 

Healing Bolivia 
BUENOS AIRES – Since the mid-19th century, Latin America has suffered fewer inter-state wars and undergone less state creation than any other region of the world. 
The continent has been a relatively quiet periphery because its countries tend neither to fight each other nor to divide from within. 
Bolivia, however, may be poised to buck the latter trend. 
A referendum on autonomy which was approved in May in Bolivia’s eastern province of Santa Cruz has generated fear about the region’s eventual secession. 
This relatively rich, opposition-controlled, ethnically mixed, and more conservative province, blessed with fertile lowlands and hydrocarbons, voted for autonomy by a wide margin. 
The most outspoken anti-government forces in Santa Cruz seem to be itching for partition. 
And recent referendums in the Amazonian provinces of Beni and Pando appeared to have exacerbated this sense of potential national fracturing. 
A key ingredient of this simmering conflict is ethnicity, the salience of which became evident even before the election of President Evo Morales in 2005. 
The combination of highly mobilized and vocal indigenous groups (the Amerindians, mainly located in the western highlands of Bolivia, represent some 55% of the population) and the declining influence of traditional elites at a time of socio-economic deterioration, has created a society in which there are more losers than winners. 
The referendum marked a critical conjuncture of Bolivia’s social, regional, and political divisions. 
Yet, despite Bolivia’s arrival at this gloomy turning point, events can, paradoxically, turn out moderately well. 
The country stands before two distinct paths: uncontrolled and protracted civil violence, political crisis, and institutional collapse, or short-term tension, medium-term accommodation, and long-term stability. 
But can Bolivia move away from becoming a quasi-failed state? 
The inauguration of Morales, an indigenous leader, was a political earthquake, but it was also a sign of deepening democracy. 
Restructuring relations between the state and the private sector in the hydrocarbons’ sector has provided the central government with the resources and capacities needed to rebuild an extremely weak state. 
Morales’s social and cultural policies have been geared toward not only recognition of the rights of Bolivia’s indigenous majority, but also bringing about a redistribution of power among racial groups. 
His initial radicalism was more symbolic and rhetorical than real, moderated by late 2007, and most of his foreign policy initiatives were eclectic rather than extremist. 
If Morales had ever conceived a major revolutionary change in Bolivia, by early 2008 that project had dissipated, owing to the absence of a national consensus on the feasibility, intensity, and direction of such a transformation. 
The muddled results of a Constituent Assembly that Morales had convened to amend the constitution reflected this reality. 
In the meantime, the opposition, although strong and immoderate, is not yet secessionist. 
Fortunately, the world economy is not exacerbating Bolivia’s domestic polarization. 
High global commodity prices have helped all the country’s major economic sectors: mining business in the west, agro-industrial production and hydrocarbon projects in the east, and further oil and gas development in the south. 
Moreover, boom in global consumption of cocaine – owing to higher demand in Europe and Latin America, together with stable demand in the United States – has brought new income to some Bolivians. 
But, while the relative power of Bolivia’s diverse regions is increasing, none can survive alone or veto the actions of highly mobilized zones of the country. 
Ethnic and social groups, activated by an intense, politicized agenda, may think in zero-sum terms, but they cannot advance their interests without positive-sum compromises. 
Moreover, neighboring countries such as Argentina and Brazil have shown a remarkable degree of understanding for Bolivia’s domestic predicament. 
They have sought to avoid, wherever possible, economic or political disputes with Morales’s government, and have become more diligent about exerting a positive influence on Bolivian affairs. 
The recently established “Group of Friends” (Argentina, Brazil, and Colombia) is trying to promote confidence-building and conflict-prevention measures. 
In addition, the US appears to be seeking to avoid open antagonism with Morales. 
With a reformist regime in La Paz, it is difficult not to expect tensions with the Bush administration. 
But, crucially, the US has refrained from intervention in Bolivian politics, because it understands that undermining the current government could lead to chaos. 
Bolivia’s future is not inexorably bleak. 
There is a window of opportunity to rebuild its state and institutions in more viable forms. 
More democracy and material welfare probably can co-exist with realistic local autonomy, whereas partition, it should be remembered, does not always breed political pluralism, social cohesion, and economic well-being. 
Bolivians must recognize that there is a real chance to avoid this risky course. 

Healing the Depressed Brain 
Scientists and mental health professionals have made major strides in understanding and treating major depression, including the discovery of the role played by imbalances in brain chemicals such as serotonin and noradrenaline. 
But there is increasing evidence that there is more to the story: depression also involves structural changes in areas of the brain that are involved in mood, memory, and decision-making. 
Depression is often precipitated by stressful experiences. 
The brain interprets our experiences and decides if they are threatening, and then controls our behavioral and physiological responses to them. 
Data obtained from animal experiments show that harmful physiological changes result from the inability of the brain and body to respond to repeated stress with adaptive modifications in structure and function. 
Three brain areas - the hippocampus, the prefrontal cortex, and the amygdala - are particularly susceptible to pathological changes in size and function. 
These areas are instrumental in interpreting what is stressful and in determining appropriate responses. 
Many chemical mediators are involved, including cortisol and adrenalin from the adrenal glands, other hormones and neurotransmitters (such as serotonin and noradrenalin), and responses from the autonomic and immune systems. 
Depression thus leads to changes in the rest of the body, owing to long-term chemical imbalances in the systems that control the heart, the immune system, and metabolism. 
The hippocampus, a key structure in the formation of memories of events and contexts, expresses receptors that enable it to respond to stress hormones in the blood. 
We now know that it atrophies in a number of psychiatric disorders. 
Within the hippocampus - a curved elongated ridge located in each of the brain's two temporal lobes - is a structure called the dentate gyrus, which produces new neurons throughout adult life. 
Chronic stress inhibits neurogenesis and also causes many hippocampal neurons to shrink - a process called "remodeling." 
Animal studies have shown that the stress hormone cortisol, together with neurotransmitters in the brain, also plays an important role in the remodeling of neurons. 
Similarly, there is evidence that the prefrontal cortex - a key structure in emotional regulation as well as in decision-making and working memory - shrinks in major depression. 
On the other hand, rather than atrophying, the amygdala, the seat of emotional memories, becomes hyperactive both in post-traumatic stress disorder and depressive illness, and there is evidence from animal studies of a hypertrophy of nerve cells after repeated stress. 
A hyperactive amygdala, along with abnormal activity in other regions of the brain, leads to disrupted patterns of sleep and physical activity, as well as irregular patterns of secretion of hormones and other chemical mediators that control many of the body's structures. 
For example, levels of the stress hormone cortisol increase in the evening, when they are normally low. 
Over time, if uncorrected, major depression can cause such conditions as progressive mineral loss from bones, accumulation of abdominal fat, increased blood platelet reactivity, and increased risk of cardiovascular disease. 
Moreover, certain types of antidepressants may contribute to some of these conditions. 
Nevertheless, one of the most interesting features of these structural changes is that they can be prevented, and potentially reversed, with medication. 
Indeed, in key respects depression is comparable to Cushing's disease, a disorder cause by excessive production of cortisol. 
The elevated cortisol in Cushing's patients is higher than that found in major depression, but the psychiatric and somatic features of Cushing's disease are strikingly similar: melancholia, depression, abdominal obesity, bone mineral loss, and increased risk for cardiovascular disease, along with shrinkage of the hippocampus and memory impairment. 
The good news from Cushing's disease is that hippocampal shrinkage and memory impairment is at least partially reversible over several years after correction of the excess cortisol. 
This encourages the belief that structural changes in the brain that are associated with major depression can be prevented or even reversed with the right medications and other treatments. 
For example, neurogenesis in the dentate gyrus that is suppressed by acute and chronic stress is elevated by many antidepressant treatments. 
Still, one of the problems with many of the current medications is that, even with treatment, the recurrence of major depression is very high - around 70-80%. 
This suggests that physiological processes underlying depression - the ones that may also lead to structural changes in the brain - are not being completely arrested, and thus that a new generation of anti-depressant medications is urgently needed. 
If so, new, the new antidepressants would have to target what appear to be progressive neurodegenerative changes in the brain, which we infer are taking place because recurrence of depression is so high under currently available treatments. 
Lithium, a mood stabilizer and neuroprotective agent, has the properties we are seeking, although its toxicity makes it less than ideal. 
As ever, the challenge facing medical researchers is to develop more effective treatments without reducing their safety. 

Healing the Sick Man of South Asia 
LAHORE – Pakistan is undergoing three transitions simultaneously. 
How they unfold matters not only for Pakistan, but also for much of the Muslim world, particularly as the Arab Spring forces change upon governments across the wider Middle East. 
Most Muslim countries were governed for decades by autocrats who had either emerged directly from the armed forces, or had strong “khaki” support. 
That was the case in Egypt, Libya, Yemen, Syria, and, of course, Pakistan. 
The Arab Spring drained away whatever spurious legitimacy that style of governance ever had. 
But, in Pakistan, delegitimation of military rule had actually occurred three years earlier, and the pressure for change came from much the same source – a restive and mobilized new middle class. 
Several decades ago, the American political scientist Samuel P. Huntington argued that economic prosperity in developing countries with weak governing institutions would not necessarily lead to political stability. 
On the contrary, economic growth in such contexts can be – and often is – politically destabilizing. 
That proved to be the case in Turkey and Pakistan in the 1990’s and early 2000’s, and later in much of the Arab world. 
Indeed, the rising aspirations of Arab youth in Egypt and Tunisia, the wellspring of the Arab Spring, followed impressive economic growth that had failed to trickle down. 
And such rising expectations have been visible in all large Muslim countries. 
As Huntington suggested, when young people see their economies grow, they begin to demand participation in decisions that affect all aspects of their lives, not just their economic well-being. 
Military-dominated political systems precluded such participation, so, with economic growth, demilitarization of politics became a rallying cry in all large military-led Muslim states, from Indonesia to the Mediterranean coast. 
Even Iran, where the Revolutionary Guards control roughly one-third of the economy, was affected when the result of the presidential election in 2009 triggered large anti-government protests in Tehran and other major cities. 
But demilitarization means more than transferring power and policymaking from the armed forces to elected parliaments. 
In their recent book Why Nations Fail, the economists Daron Acemoglu and James Robinson suggest that elections – even those that are free and fair – do not necessarily move societies from what they call “extractive” to “inclusive” systems. 
Indeed, extraction of a country’s wealth for use by the elite can occur even in democratic societies when those who dominate the political system face no constraints other than periodic elections. 
This is where the effort to devise institutional mechanisms to check and balance elite behavior enters the picture. 
Indeed, the search for such mechanisms is precisely what is now underway in Pakistan. 
In Pakistan, a discredited military was forced by public opinion to withdraw from power, creating political space for elected representatives. 
They assumed control (though not over the military), but did not govern wisely. 
While their personal wealth increased, living standards for everyone else either stagnated or, for lower-income groups, declined. 
So, as Pakistan negotiated its political transition, it experienced significant economic decline. 
As a result, Pakistan’s judiciary, media, and many civil-society organizations are now engaged in attempts not only to keep the soldiers in their barracks, but also to constrain the political establishment’s rapacious behavior. 
Three cases before the country’s increasingly assertive Supreme Court promise to take Pakistan from the phase of demilitarization to a system in which meaningful checks can be exercised on those who wield power. 
One case is an attempt to force Prime Minister Yusuf Raza Gilani’s administration to reopen proceedings in a Swiss court that were examining charges of money-laundering and misuse of public funds by President Asif Ali Zardari. 
The Swiss proceedings were stopped at the request of the Pakistani government when Zardari became president. 
In the second case, the Supreme Court wants Pakistan’s military intelligence agencies to account for hundreds, if not thousands, of missing people who were detained as part of the agencies’ campaign to contain the rise of Islamic extremism, or to undermine separatist aspirations in restive Baluchistan. 
The third case opened an old complaint lodged by a politician decades ago against the “troika” – composed of the president, the prime minister, and the chief of army staff – that then governed Pakistan. 
The plaintiff alleged that large amounts of funds were channeled to the troika’s favored candidates to contest the 1990 general election, in which Nawaz Sharif’s party won a big victory over Benazir Bhutto’s Peoples’ Party. 
Finally, Pakistan is undergoing a transition in which power is moving from the central administration to sub-national governments. 
The 18th amendment to the constitution, adopted in 2010, does precisely that, but implementation is being delayed by parties that prefer a highly centralized political structure. 
If Pakistan’s transformation of its political system succeeds, it could serve as a model for other Muslim countries that are attempting to move from extractive to inclusive systems of governance. 
Turkey has already traveled some distance along this path. 
If Pakistan also advances, demilitarization of politics elsewhere in the Islamic world might not be far behind. 

Health, Wealth, and Malaria 
Health and economic performance are interrelated. 
Infant mortality, child mortality, and life expectancy all correlate with rising income. 
In four random countries in which the average annual income ranged, in 1990, from $660, to $1,727, to $3,795, to $11,422, infant mortality ranged from 114, to 66, to 34, to 9 (per thousand). 
As income doubles, infant survival tends to rise proportionately, a trend reflected in other measures of health and of wealth. 
Different health conditions impede development in characteristic ways. 
HIV/AIDS for example, destroys the lives of workers in their most productive years and orphans millions of children. 
This combined effect will damage societies for generations, while discouraging investment today. 
Malaria's economic impact is more insidious, particularly where transmission is most intense. 
In contrast to HIV/AIDS, young children rather than working adults are most affected. 
Some 300 million people become ill with malaria each year, causing 1.5 million deaths, most of them small children. 
Children who survive malaria develop into relatively immune adults. 
But visitors to a malaria infested country, because they lack this immunity, share the risks borne by local children. 
Precisely because malaria differs in this way from other infections, its economic harm is so huge. 
No other disease is so prevalent, so rooted in the landscape, and so asymmetrical in its effects on visitors and residents. 
Although it once protected people in tropical areas by scaring away colonial invaders, malaria now burdens those same people by scaring investors and other outsiders away. 
The effect on foreign direct investment stands out as a crucial factor linking poverty and malaria. 
Industries shun malarious regions, except where valuable resources can be extracted or where particular kinds of agriculture require unique environmental conditions. 
Malaria-related health insurance costs for expatriate workers and their families provide a powerful disincentive for manufacturing activities. 
Where malaria transmission is less intense and immunities are not developed, epidemics occasionally sweep through the local population, taking a heavy toll of lives in all age-groups. 
Such outbreaks are explosive, affecting the entire population in mere weeks. 
In urban areas, where indigenous workers tend to lack immunity to malaria, occasional episodes of the disease result in reduced productivity. 
This further contributes to the reluctance of foreign companies to invest in malaria-ridden regions, despite otherwise low labor costs. 
Ill health due to malaria also directly reduces household income by incapacitating workers, causing lost work time, time lost for child-care, impaired cognitive development, and adverse effects during pregnancy resulting in low birth weight and producing physical disabilities. 
Malaria further obstructs travel, industrial activities, commerce and tourism. 
Indeed, malaria's effect on tourism is important because of tourism's role in bringing foreign exchange to developing countries. 
Malaria not only inhibits foreign investment, but also contributes to the "brain drain" of local talent by inhibiting people from returning home after prolonged stays abroad. 
Thus, people who go abroad for advanced education fear the loss of the partial immunity they once enjoyed and tend to find work elsewhere, rather than return home. 
This is likely to be most true for those who acquire families abroad because their children are likely to become ill when they return to their parent's homelands. 
All in all, the vast bulk of malaria's weight falls on developing countries, particularly those in sub-Saharan Africa, and evidence of a reciprocal relationship with poverty has become increasingly evident. 
Malaria causes poverty, while poverty causes malaria - far more than other diseases. 
By all calculations, the burdens imposed by malaria on economic growth are huge. 
In countries where transmission is intense, incomes tend to be a third less than in other countries. 
Growth is reduced by 1.3% annually, and the total economic costs of malaria add up to about 1% of annual GDP. 
No other human condition appears to result in such a disjunction between its (relatively mild) direct effects on local populations and its total effect on national economies. 
The link between poverty and malaria suggests that sub-Saharan countries cannot develop economically unless something is done about the disease. 
But fighting malaria also poses particular problems because so much of the disease's economic burden is indirect, threatening the lives of non-immune visitors to endemic sites. 
In fact, anti-malaria measures undertaken to address health goals may not fully address the economic ones. 
Anti-malaria efforts traditionally focus on distributing insecticide-treated bed-nets and drugs to vulnerable residents of a region. 
Although human lives can be saved by this kind of assistance to the "poorest of the poor," efforts to promote economic development might more effectively focus on other modes of intervention, such as environmental management, housing improvement, applications of residual insecticide, and efforts against the mosquitoes that transmit the infection. 
These kinds of interventions, seeking to reduce the force of transmission, aim at the creation of an environment that is likely to serve as an "engine of economic growth." 
They target communities rather than individuals and should be supported by public investment. 
In particular, in addition to individual life-saving efforts, strategies should be implemented to reduce the risk of infection in port cities and other centers of economic activity. 
As the applicability of a vaccine-based approach to malaria has not yet been demonstrated, what anti-malaria efforts must above all strive to achieve is a balance between interventions designed to produce immediate health benefits and those that might eliminate malaria as an obstacle to economic development. 

New Life in Old Age 
ZURICH – Many of us have seen our aging parents or grandparents lose their independence. 
In 2012, more than 2.4 million Americans over the age of 65 were treated in emergency rooms for injuries from falls alone. 
With populations worldwide aging fast, the scale of such challenges is growing exponentially, affecting not only health-care systems, but also economies, government policies, and, of course, families. 
The United Nations estimates that, by the middle of this century, the number of people older than 60 will double, with people over the age of 65 outnumbering – for the first time in history – children under the age of five. 
The explanation for this demographic trend is straightforward: global fertility rates have plummeted, from five children per woman, on average, in 1950-1955, to 2.5 children per woman in 2010-2015. 
Of course, aging citizens should not be viewed simply as an economic burden. 
In fact, they can play a positive role as active consumers – a potential that many industries have already recognized and begun to tap. 
According to Bank of America Merrill Lynch, people over 50 are responsible for almost 60% of consumer spending in the United States. 
But that does not ameliorate the seemingly intractable underlying challenge: a shrinking pool of taxpayers to support a growing number of retirees. 
This imbalance has already driven some governments to raise their retirement ages and change their pension policies to delay or reduce benefits and keep people in the workforce. 
To keep people working longer, it is crucial to keep them healthy. 
That is why the health-care industry must play a significant role in efforts to address the challenges of population aging. 
Old age must be viewed not simply as an inevitable stage of life, but as an opportunity for health-care companies and systems to help people thrive. 
To this end, health-care companies should shift the focus of their research-and-development efforts toward conditions that are prevalent among older patients, including chronic diseases like diabetes, heart disease, glaucoma, rheumatoid arthritis, and cancer. 
Such efforts are also vital to find ways to stem more effectively the deterioration of people’s productivity and independence, by preserving their physical strength, mental acuity, and senses like hearing and vision. 
This is important not only for older patients themselves, but also for their families and caregivers. 
One particularly promising area is regenerative medicine, which has many potential applications – including for preventing or reversing hearing loss. 
As it stands, one-third of people aged 65-70 (and half of those over 75) experience significant hearing loss, often caused by damage to or loss of inner-ear hair cells, which sense and transform sound waves into signals that register in the brain. 
To address this issue, my company, Novartis, is testing a compound called CGF166, which targets certain healthy cells in the inner ear in order to “turn on” a specific gene that stimulates hair-cell development. 
We have already entered the clinical-trial phase of our research, during which we will assess the tolerability and efficacy of CGF166 in treating patients with severe hearing loss. 
But such treatments will mean little if they are not affordable or accessible to ordinary people. 
And the current trajectory, with the burden of rising health-care costs increasingly being shifted onto patients themselves, is not encouraging. 
To reverse this trend, the health-care industry must work with all stakeholders to support the financial sustainability of health-care systems, so that they can better handle the growing demand for care. 
Success will require innovative strategies for improving patient outcomes in a financially sustainable way. 
For example, the health-care industry could work with governments to offer health-enhancing services – such as remote patient monitoring, health apps, and patient-engagement tools – in addition to medications. 
Ensuring the availability of trained health workers or counselors to answer patients’ questions about their treatment or related issues like insurance could also help. 
For their part, payers – both governments and private insurers – should create a mechanism for rewarding health-care companies based on the real-world benefits of their products and services. 
Beyond the annual payment per patient, the health-care company could receive a bonus or penalty, depending on the outcomes achieved. 
Addressing the needs of aging populations is the biggest challenge facing health-care companies and payers. 
A successful model will lower health-care costs, increase life expectancy, and improve elderly people’s quality of life. 
And, by providing a more comprehensive understanding of the aging process, it could also guide us toward treatments and cures for other diseases – including those affecting the young. 
Ensuring that every person lives as healthy a life as possible, for as long as possible, is in everyone’s interest. 
That is why it makes sense now to focus on the most senior among us. 


How to Boost Access to Essential Medicines 
DÜSSELDORF – Around the world, health security is increasingly being recognized as the foundation of economic growth. 
Healthy populations are better able to produce, trade, and innovate, while unhealthy populations strain public budgets and create risks that discourage economic exchange. 
This logic is written into countless European Union reports, and is even gaining traction in the United States, despite the “America First” approach to international affairs embraced by President Donald Trump’s administration. 
Against this backdrop, the World Health Organization (WHO), under its new Director-General, Tedros Ghebreyesus, has a unique opportunity to pursue urgently needed reforms. 
The WHO’s response to the 2014-2016 Ebola outbreak in West Africa was roundly judged a failure. 
And with the emergence of new diseases such as Zika – and the revival of old foes like bubonic plague – there is no question that much of humanity remains at the mercy of biology. 
Moreover, globalization has compounded the danger by facilitating the spread of communicable diseases. 
A flu outbreak like that of 1918-1920, which killed between 50 and 100 million people, would be even more devastating today. 
To prevent such catastrophic outcomes, we need a comprehensive approach for strengthening health-care delivery in low- and middle-income countries. 
In particular, these countries need help improving drug delivery and managing chronic diseases such as cancer and diabetes, which impose an immense burden on their economies. 
Unfortunately, the WHO’s leadership, like much of the West, has not pursued this course of action, because it has been distracted by an ideological obsession with drug prices. 
But drug prices are a vanishingly small part of the problem in countries struggling to build healthy, productive societies. 
Of all the drugs on the WHO’s “Essential Medicines” list, 95% are already off-patent, meaning that cheaper generic versions are available worldwide. 
In cases where drugs aren’t reaching people who need them, the reason is not high prices, but rather dysfunctional health systems. 
Fortunately, public-health analysts have identified a handful of structural reforms that would largely eliminate existing bottlenecks that are hindering the distribution of essential medicines. 
The first trouble spot is infrastructure. 
More than half of the world’s rural population lacks access to basic health care, compared to about a fifth of the urban population. 
Inadequate and unreliable transportation networks make accessing health-care services costly and time-consuming, and impede drug deliveries from supply centers. 
With better roads and more fully developed transportation systems, emerging economies could boost not just health outcomes, but also economic and educational opportunities. 
A second problem, even in areas with adequate infrastructure, is the prevalence of bureaucratic and economic barriers that limit access to essential medicines. 
According to a 2008 study of 36 developing countries, torturous registration and approval processes create frequent shortages of 15 of the most commonly used generic medicines. 
For example, in South Africa it can take up to five years for new medicines to reach the market, owing to that country’s drug-registration and labeling regulations. 
By streamlining drug-approval processes, removing tariffs, and simplifying customs procedures, many countries could immediately increase the availability of dozens of essential medicines. 
A third problem is that there are too few health-care workers. 
In many low- and middle-income countries, patients cannot get the drugs they need simply because there are no doctors or nurses to prescribe them, nor pharmacists to dispense them. 
According to the WHO, the world suffers from a deficit of some seven million health-care professionals; by 2035, that number is expected to reach 13 million. 
Making matters worse, there is an even greater shortfall of specialists equipped to treat chronic diseases such as diabetes, which is spreading rapidly through the developing world, owing to changing diets and habits. 
Flawed – or nonexistent – health-finance schemes are the fourth, and perhaps the largest, barrier to drug delivery in many countries. 
Even when generic-brand essential medicines are available, they often are unaffordable for low-income patients in countries with scant state subsidies and no risk-pooling insurance mechanisms. 
By one estimate, almost 90% of people in low- and middle-income countries will face impoverishment if they have to pay out of pocket for a single commonly used generic drug. 
Some of the countries that are most eager to strip patent protections are also notorious for skimping on health-care expenditures. 
The Indian government, for example, spends just around 1% of GDP on health care, well below the 5% needed to move toward universal health coverage. 
But expropriating drug makers’ intellectual property will do nothing to improve outcomes where crucial safety nets are missing. 
Increasing the availability of essential medicines is imperative for improving health-care outcomes for hundreds of millions of people around the world. 
When societies are not burdened by disease, they can focus on boosting productivity, consumption, and trade. 
At the same time, neglecting the threat posed by communicable diseases in the developing world invites catastrophe not just in those countries, but in developed economies, too. 
We can do much to close the global health-security gap; but undermining patent protections for new drugs will do precisely the opposite. 

A New Era of Health-Care Innovation 
ZURICH – We are experiencing a new wave of innovation in health care – one that promises to create the smartest, most connected, and most efficient health systems the world has ever seen. 
Game-changing new technologies and treatments are transforming the practice of medicine, dramatically altering the patient experience, and creating conditions for even more breakthroughs. 
The proof is in the data. 
Last year, a record 61 drugs were introduced worldwide, compared with an annual average of 34 in the previous decade. 
More than 40% of these treatments were for rare or difficult-to-treat conditions, including hepatitis C, meningococcal B, and metastatic melanoma. 
And more new breakthroughs are on the horizon. 
It is estimated that about 70% of the drugs currently in development across the industry are potential “first in class” treatments, meaning that they use a completely new mechanism of action against disease. 
The new wave of innovation is attributable to three key factors: the ability to personalize therapy, the capacity to get treatments to market faster, and improved engagement with patients. 
First, major advances in our knowledge of genomics – specifically, the way diseases manifest and develop in the body at the genetic level – are improving our ability to target illness at each stage and improve the patient experience. 
Genetic markers, for example, can indicate which patients are likely to benefit from a drug, thereby improving outcomes while allowing patients to avoid potentially painful side effects of treatments that are unlikely to work. 
For early-stage breast cancer patients, genetic markers show whether chemotherapy is likely to have an impact, or if hormone therapy alone is the better option. 
A new lung cancer drug developed by my company, Novartis, is effective only in patients with non-small-cell lung cancer who have a particular genetic mutation. 
The use of genomic expertise to improve health care is just beginning. 
One promising area of investigation is CRISPR – a cutting-edge tool that could allow us to delete, repair, or replace the genes that cause disease. 
As our understanding of the characteristics of a particular patient’s illness becomes increasingly precise, treatment will become increasingly effective and will reduce the risk of side effects. 
Moreover, advances in our understanding of disease are boosting the efficiency of the drug development process, making it possible to bring new innovations to market faster. 
For example, genetic testing is being used to pre-select participants for clinical trials, cutting recruitment times. 
With this approach, research can begin in as little as three weeks, compared to the 34 weeks, on average, for a standard trial. 
Add to that our ability to analyze data more quickly, and to make more precise decisions about dosing, and the clinical trial timeframe shrinks considerably. 
Finally, real-time data and emerging technology tools have the potential to improve patient engagement and adherence, especially among those with chronic conditions caused by non-communicable diseases (NCDs). 
As the world’s population ages, the incidence of NCDs is expected to rise, accounting for 52 million deaths annually by 2030. 
More than 80% of NCD deaths are the result of chronic conditions such as cardiovascular and respiratory diseases, cancer, and diabetes. 
As it stands, noncompliance with medication regimes is a major problem in treating NCDs. 
For example, diabetes patients in the United States with the lowest level of compliance have a 30% yearly risk of hospitalization, compared to a 13% risk for patients with a high level of adherence. 
That implies large costs for health-care systems – about $200 billion in the US and €125 billion ($133 billion) in the European Union each year. 
Technologies that engage patients in their own health care and enable more seamless adherence to medication regimes have the potential to improve disease management, reduce hospitalization, and lower costs. 
Today’s transformational advances in health care owe much to new genomics information, to the availability of big data to influence decisions in real time, to more targeted and individualized therapies, and to smarter, more connected delivery systems. 
But they are just the beginning. 
Further breakthroughs, enabled by the convergence of science and technology, can be expected, especially as unconventional players enter the health-care sector. 
In this process, partnerships between health-care and technology companies will become increasingly important. 
It is an exciting time for health care, with many disruptive innovations on the horizon. 
For patients and providers alike, this is very good news. 


Too Many Health Clinics Hurt Developing Countries 
FREETOWN, SIERRA LEONE – Donors like the World Bank and the World Health Organization often urge developing countries to invest in national health systems. 
But while rushing to construct clinics and other medical facilities in even the remotest regions may seem like a straightforward approach to ensuring universal health coverage, that has not turned out to be true. 
The recent Ebola epidemic in West Africa highlighted the urgent need for stronger, more efficient, and more resilient health-care systems in developing countries. 
But when countries rush to build more clinics, the resulting facilities tend to be hastily constructed and lacking in the equipment, supplies, and staff needed to deliver vital health services effectively. 
In my frequent visits to rural areas of my native Sierra Leone, I have seen more than a few health facilities that communities could do without. 
A newly refurbished facility in Masunthu, for example, had scant equipment and no water in the taps. 
The facilities in nearby Maselleh and Katherie had cracked walls, leaky roofs, and so few cupboards that supplies like syringes and medical registers had to be stacked on the floor. 
This situation is the direct result of a piecemeal and hurried approach to investment in health-care infrastructure. 
At the end of the civil war in 2002, Sierra Leone had fewer than 700 health facilities, according to the 2004 Primary Health Care Handbook. 
In 2003, the cash-strapped government decided to “decentralize” various public services to the district level, fueling fierce competition for limited resources. 
Local councils, seeking to grab the biggest possible slice of the pie, began to push forward new projects, leading to rapid and uncontrolled expansion of the health system. 
Today, Sierra Leone – with a population of just seven million – has nearly 1,300 health facilities. 
The Ministry of Health has been unable to equip all of these new facilities and cover staff and operational costs, as its budget has not risen to match the system’s expansion. 
In fact, very few (if any) of the African countries that signed the 2001 Abuja Declaration to allocate 15% of their budget to health have been able to do so. 
Last September, Sierra Leone conducted an assessment of the distribution of public-health facilities and health workers in the country, in order to guide discussions on the Human Resources for Health Strategy 2017-2021. 
The results were stark: only 47% of the country’s health facilities employed more than two health workers, including unsalaried workers and volunteers. 
Seven percent of health facilities had no health workers assigned to them at all – an empty promise in physical form. 
This situation is not unique to Sierra Leone – or to Africa. 
In Indonesia, the government invested oil revenue in the massive and rapid expansion of basic social services, including health care. 
But today an insufficient number of doctors plagues many of these facilities, particularly in remote areas, where absenteeism also is high. 
There are many nurses, but most are inadequately trained. 
Still, they are left to run remote facilities on their own. 
Beyond personnel, remote health facilities in Indonesia lack adequate supporting infrastructure: clean water, sanitation, reliable electricity, and basic medicine and equipment. 
Decentralized local governments, which have little authority over remote clinics, cannot supervise their activities. 
Small wonder that Indonesia has one of the highest rates of maternal mortality in East Asia. 
An excess of poorly equipped health facilities is not only ineffective; it can actually make matters worse, owing to factors like poor sanitation and weak emergency referral systems. 
During the recent Ebola crisis, underequipped facilities caused even more deaths, not just among patients, but also among the health workers committed to helping them. 
Rather than continuing to pursue the uncontrolled proliferation of poorly equipped and operated health-care facilities, policymakers should consider a more measured approach. 
Of course, people living in remote areas need access to quality health care, without having to navigate rough and dangerous roads that can become virtually inaccessible during some periods of the year. 
But outreach services and community health workers could cover these areas much more effectively. 
The value of such an approach has recently been demonstrated in Ethiopia, where health outcomes have improved. 
While most of the Sierra Leone facilities were built with donor funds, the government has gone along with plans to accelerate the construction drive. 
The government and donors have a joint responsibility to pursue a more cautious approach that guarantees quality service delivery. 
At the WHO’s World Health Assembly this month, participants should shine a spotlight on this responsibility and begin to rethink current strategies for achieving universal health coverage. 
With a more measured approach, it will take longer to build the same number of clinics. 
But more lives will be saved. 
And that’s the only indicator that should count. 

Health Food Truths 
“Low-carbohydrate” pasta is in a category of health foods known in the trade as “lesser evils” – foods with fewer unwanted calories, fat, trans fat, sugars, salt, or carbohydrates. 
There is now a whole industry of such products, as well as health foods classified as “natural,” “organic,” and “functional.” 
But are these foods really better for you? 
In the United States, “organic” has a precise meaning established by the US Department of Agriculture. 
“Natural,” however, means whatever the food producer or manufacturer says it means. 
So-called “functional” foods – or “techno-foods” – are those to which manufacturers add omega-3 oils, artificial sweeteners, indigestible starches, cholesterol reducers, soy or milk (whey) proteins, phytochemicals, and other ingredients to enable them to take advantage of “qualified” health claims permitted by the Food and Drug Administration (FDA). 
Sales of lesser-evil and functional foods have done well in recent years, bringing in about $85 billion in US sales in 2004. 
If you routinely buy such foods, you are among LOHAS (Lifestyles of Health and Sustainability) consumers – the health food industry’s cherished demographic base. 
You buy low-carbohydrate products, energy and nutrition bars, vitamin- and mineral-fortified foods and beverages, soy foods, and practically anything with a health claim. 
Like many people, I thought that small, innovative companies dominated functional foods. 
In fact, PepsiCo holds a 25% share of the market with products like Quaker cereals and fortified Tropicana juices, which qualify for FDA-approved health claims. 
Coca-Cola, General Mills, Kellogg, Kraft, Nestlé, and Groupe Danone all have market shares ranging from 4% to 7%. 
These companies’ control of this market makes sense if you think about what they are selling. 
The most popular functional foods are soft drinks, sports drinks, breakfast cereals, snacks, energy bars, and juice drinks. 
About three-quarters of breakfast cereals make health claims for the whole grain or fiber that has been added to make them “functional.” 
Moreover, as Nancy Childs, a business school professor, wrote in Nutrition Business Journal in 2004, functional foods for obesity, for example, promise their manufacturers “a double reward”: eligibility for qualified health claims and possible reimbursement under Medicare as a disease treatment. 
They also provide “balance to food company product portfolios, thereby limiting corporate liability on both legal and stock valuation fronts” – a reference to potential claims against companies that their products might cause obesity or poor health. 
But many of these products are basically sugar water or sugary foods that might as well be cookies, with ingredients added or removed to appeal to LOHAS customers who would otherwise not buy them. 
A private testing laboratory, ConsumerLab.com, found that hardly any of the “vitamin waters” it tested contained what their labels said they did, and some had only 20% to 50% of the amounts of nutrients listed. 
Likewise, half the fat in most power and energy bars – which bring in $2 billion in annual sales – is saturated and some is trans. 
Many bars targeted to low-carbohydrate dieters have misleading “net carb” calculations. 
Some do not disclose their content of sugar alcohols, and some have so much of these additives that they are almost certain to produce laxative effects or gas. 
Others are so highly fortified with vitamin A or D that ConsumerLab advises against giving them to young children. 
Even if I had not seen these results and warnings, I wouldn’t eat power and energy bars, which, according to the magazine Consumer Reports , taste “gritty, chalky, or chemical.” 
I agree. 
When I ask friends and colleagues why they buy the bars, they say: “Because I know they are healthy and I don’t care how they taste.” 
Well, I do. 
I can’t see the point of eating indigestible vitamin-and-fiber supplemented carbohydrates flavored with artificial sweeteners. 
If I think I need more vitamins, I prefer to take a multivitamin supplement. 
If I need a hundred or so calories in a hurry, I prefer a banana, a handful of nuts, or, for that matter, a delicious candy bar. 
This is not to diminish the value of some of the lesser evils – low-fat milk and yogurt, for example. 
But most foods posing as “health food” raise the same question as vitamin-supplemented candy: does adding vitamins really make a food better for you? 
Real health foods do not need to be made functional to be good for you. 
They are functional just the way they are. 

The Developing World’s Health Innovators 
DHAKA – We live in an age of tragic health paradoxes. 
Mass immunization campaigns have eliminated entire diseases, but children in countries like Haiti and Bangladesh continue to die of easily treatable diseases caused by common pathogens. 
Globalization has lifted millions of people out of extreme poverty, but has left them exposed to the non-communicable diseases of the post-industrial age – from diabetes to heart disease – in countries that lack the resources to treat them. 
Underlying these paradoxes is yet another: the vast majority of health research is conducted in wealthy economies, but the vast majority of the global public-health burden falls on low- and middle-income countries. 
There is something grossly inefficient – even immoral – about this allocation of resources, which undermines the development of health solutions for those who need them most. 
To be sure, it was possible to address the first generation of global development problems with straightforward transfers of capital and solutions from rich to poor countries. 
Examples include programs to boost primary-school enrollment and, in public health, mass immunization campaigns. 
But the new generation of development problems, from the quality of education to child deaths from treatable diseases, will not be so easy to resolve. 
They demand long-term capacity building and knowledge transfers from rich to poor countries, with the latter gaining far more agency in developing solutions. 
In other words, the focus of global public-health strategies and investments should shift toward reducing the structural disparities between rich and poor countries, in terms of their capacity for medical research and public-health implementation. 
This mission – which, I would argue, should be the main goal of global public-health efforts today – would entail a central role for institutions like the International Centre for Diarrhoeal Disease Research (icddr,b), based in Dhaka, Bangladesh, where I work as a scientist. 
As it stands, most global public-health activities involve researchers from advanced countries leading local teams in developing countries. 
While this is better than imposing ready-made solutions on the developing world, as occurred during the Cold War, it is not good enough. 
Medical research and policy implementation in the developing world must be led by researchers and specialists from low- and middle-income countries – people who can combine cutting-edge scientific expertise with an intimate understanding of local contexts. 
The value of developing-country-led innovation has been demonstrated time and again. 
Over the last 15 years, scientific innovations spearheaded by developing countries contributed significantly to progress on the United Nations Millennium Development Goals (MDGs), particularly those related to global health. 
The contributions of icddr,b alone are enough to prove the value of developing-country health innovation. 
The institute’s researchers carry out innovative and complex science, from classic clinical trials and epidemiological studies to behavioral-modification trials aimed at reducing the spread of infectious disease – with remarkable results. 
An iconic example of icddr,b’s work is oral rehydration solution (ORS), a simple balanced solution of sugar and salt administered orally to people suffering from diarrheal diseases like cholera. 
That solution, which icddr,b played a central role in developing, has prevented an estimated 40 million deaths globally since the 1960s, and has been called one of the most important medical inventions of the twentieth century. 
More recently, my team and I developed a new low-cost system for delivering “bubble CPAP” (continuous positive airway pressure), which keeps air flowing during the process of treating severe pneumonia. 
Trevor Duke, Director of the Centre for International Child Health at the Royal Children’s Hospital at the University of Melbourne, also participated in the project. 
Our version of bubble CPAP, which uses cheap and readily available materials like plastic tubing and shampoo bottles, proved in trials to be more effective than the standard low-flow oxygen therapy recommended by the World Health Organization. 
Following the trial, the Dhaka Hospital of icddr,b implemented the new low-cost bubble CPAP, instead of the WHO-recommended therapy, as part of standard treatment of children with pneumonia. 
Since then, the death rate for bubble CPAP-treated patients has fallen from 21% to just 6%. 
These remarkable successes stem from the fact that icddr,b researchers – most of them Bangladeshis who trained abroad – are well acquainted with the problems they are trying to address. 
They understand what it means to face severe – and, to some extent, insurmountable – resource constraints. 
The 15-year MDG experience made clear the indisputable potential of developing-country innovation to advance public health. 
Fortunately, world leaders seem to have taken that lesson to heart: the Sustainable Development Goals – the ambitious post-2015 development agenda adopted at the UN last September – are premised on the idea of local ownership. 
But, despite vocal support for locally led research and development, severe constraints to developing-country innovation remain – and must urgently be removed. 
Unsurprisingly, the tightest constraint is the lack of resources, both human and financial. 
To ease it, developed and developing countries must now work together to ensure adequate investment to support local efforts reliably and sustainably. 
With adequate support from local and international financing mechanisms, more innovation hubs like icddr,b could emerge and flourish in poor countries. 
By advancing knowledge sharing and technology transfer, these hubs would enhance cooperation among developing countries, and help us finally overcome the persistent and tragic disparities that plague global health. 
Health innovations developed in the world’s poor countries have passed the test of scalability and applicability in the places that need them most. 
With the majority of the world’s population living in resource-challenged settings, we must recognize – and invest in – the efforts of those who are pushing the frontiers of medical science in the developing world. 

The Right to Health Is Universal 
GENEVA – On this year’s World AIDS Day, on December 1, we should remember the 35 million people who have died of AIDS-related illnesses, and the 76 million who have been infected with HIV since reporting began. 
And we can celebrate the fact that nearly 21 million people living with HIV now have access to life-saving treatment. 
But we also must not lose sight of the fact that more than 15.8 million people are still awaiting treatment, while an estimated 11 million people do not even know they have the virus. 
In the time it takes to read this commentary, three more young women will have contracted HIV. 
These figures represent an indefensible injustice: millions of people are being denied their right to health. 
The third United Nations Sustainable Development Goal (SDG3) addresses health. 
It aims to reduce road accidents; tackle non-communicable diseases; end AIDS, tuberculosis, malaria, and neglected tropical diseases; guarantee universal health coverage and access to sexual and reproductive health-care services; and substantially reduce deaths from environmental pollution – all by 2030. 
Although countries around the world have committed to this goal, countless people still inhale dangerous levels of toxic particles, and lack access to safe water and adequate sanitation. 
Too many governments consistently fail to act on environmental and other regulatory issues, turn a blind eye to companies that profit from selling unhealthy and addictive products, and thus fail those whom they are supposed to protect and serve. 
Health is neither a gift nor an act of charity. 
It is a fundamental human right, encompassing both freedoms and entitlements. 
Everyone is free to make decisions about their health, regardless of who they are, where they live, what they believe, or how they earn a living. 
And everyone is entitled to affordable, quality health services and freedom from discrimination and coercion. 
Enjoying the right to health means having one’s physical and mental integrity respected, and having the ability to participate and contribute to one’s community. 
Today, we call on world leaders to confront health injustices wherever they see them, and to take action to respect, protect, and uphold the right to health for all people. 
The ambitious SDG agenda for 2030 has afforded all of us the opportunity to shape policies aimed at creating and empowering the “global health citizen.” 
Who is this citizen? 
She is an individual who knows her rights and can voice her concerns, challenge injustices, and hold decision-makers accountable. 
He is an individual who does not just ask for but demands access to doctors, treatments, or preventive care. 
The global health citizen is one who becomes a part of the solution. 
Empowering global health citizens will require progress in at least three policy areas: popularizing participation, democratizing data, and eliminating discrimination. 
As to the first, we must open up health programs and policies to meaningful public engagement. 
In the 1990s, the disability-rights movement coined the phrase, “Nothing about us without us.” 
All global health citizens, and particularly health-care leaders, should adopt this mantra. 
To be sure, public and private corruption remains a significant obstacle to ensuring the right to health for all people. 
In many countries, health care is one of the most corrupt sectors. 
To address this, global health citizens will need both institutional support and better tools for demanding that their right to health be respected. 
They should start demanding more measures to ensure good governance and transparency, improve “legal” literacy, fund civil-society organizations, and reinforce legal mechanisms for holding governments accountable. 
The second policy area where progress is needed is access to data for every community. 
At UNAIDS, we follow the adage, “What gets measured gets done.” 
Data analysis has proven to be one of the most potent tools in the fight against the HIV epidemic, because it enables us to raise awareness, identify people being left behind, guide investment, and coordinate action. 
We in the global health field have always been good at estimating mortality and morbidity rates. 
But it is now time to look beyond epidemiological facts. 
Guaranteeing the right to health will require us also to monitor the effects of discrimination and stigmatization, as well as laws and environmental factors that threaten people’s health and wellbeing. 
Likewise, conducting thorough assessments of the health impact of key policies and investments must become the norm, rather than the exception. 
The global health sector needs far more independent advocacy and accountability, which the UN and civil-society groups, in particular, are in a strong position to provide. 
The third policy area – eliminating discrimination in health-care settings – must become an international priority. 
The central promise of the SDG agenda is to leave no one behind. 
Discrimination creates de facto barriers to universal health coverage, and prevents many people from accessing health services of any kind. 
For example, one in eight people responding to the HIV Stigma Index say they have been denied health care as a result of prejudice. 
It is clear that ending AIDS will require social – not just medical – breakthroughs. 
Governments must redouble their efforts to protect individuals against discrimination, and create effective mechanisms for people to seek redress when private or state actors violate their right to health. 
We call on all health-care practitioners and institutions to resist discriminatory laws, policies, or practices. 
Safeguarding the right to health provides the foundation needed to enable everyone to realize their potential and their dreams. 
We should demand nothing less. 

The ABCs of NCD Care 
GENEVA – The World Health Organization recently began sounding the alarm about a deadly new pathogen called Disease X. In fact, Disease X does not actually exist, at least not yet. 
Rather, it is part of a clever public-awareness campaign by the WHO to prepare people and governments for the threat posed by new infectious diseases. 
The emergence of dangerous new infectious diseases is not a matter of if, but when. 
As the WHO announcement makes clear, we urgently need to develop stronger, more responsive public health systems to confront future epidemics. 
But while outbreaks of infectious illnesses such as Ebola, flu, Zika, SARS, and – hypothetically – Disease X tend to capture headlines, most global health practitioners understand that noncommunicable diseases (NCDs) like diabetes, hypertension, and cancer pose an even greater threat to health and economic stability. 
According to the World Obesity Federation, obesity-related NCDs could cost the world as much as $1.2 trillion per year by 2025. 
That will have a profoundly destabilizing effect on low- and middle-income countries, and it could derail efforts to achieve global health security. 
Avoiding such an outcome will require us to rethink investments in global health systems. 
At the same time that we prepare for the emergence of Disease X, we must also strengthen the kind of supportive health-care systems that help patients live full, healthy lives. 
To that end, health-care providers, non-governmental organizations, governments, and businesses in some of the highest-risk countries are collaborating to develop innovative approaches to combat NCDs. 
One promising initiative is Casalud (a portmanteau of the Spanish words for “house” and “health”). 
Created by the Carlos Slim Foundation with the backing of the Mexican government and evaluation support from Eli Lilly and Company, Casalud uses a multi-pronged approach to improve detection, diagnosis, and treatment of Type 2 diabetes. 
It also works to prevent the disease by raising awareness of key risk factors such as excess weight. 
Diabetes poses an especially grave threat to Mexico, where urbanization and other social changes are pushing people toward more sedentary lifestyles and triggering a surge in obesity-related diseases. 
If current trends continue, the number of people living with diabetes in Mexico is expected to increase from 11.5 million to 16 million – over 10% of the population – between 2016 and 2035. 
One of the main challenges Mexican health-care providers face in tackling the problem is that many people with NCDs are managing their diseases outside the hospital setting. 
Most of the country’s diabetes specialists are concentrated in referral centers. 
Yet roughly 30 million Mexicans have access only to primary-care clinics operated by the Seguro Popular, Mexico’s public health system for people without health insurance. 
This implies a significant gap in diabetes management for a large portion of the population. 
That is where Casalud comes in. 
To fill the gap in care, Casalud introduced a program of integrated mobile devices and continuing education to empower primary-care providers – including nurses and clinical workers – to be more proactive in screening for diabetes. 
The program’s use of mobile technology allows health-care workers (and others) to measure blood sugar and other vital indices as part of a regular checkup. 
Casalud also created an online information management system to coordinate patient care and referrals, and to manage the supply of necessary medicines. 
Most important, Casalud planners, understanding that primary-care providers in clinics have only a small window to educate patients on improving their own quality of care, introduced mobile technologies to enable ongoing monitoring and patient-provider communication between visits. 
The program’s technological features have also made life easier for providers. 
Before the mobile inventory-management system was introduced, 44% of pharmacies routinely ran out of key medicines; now, just 15% of pharmacies do. 
The expansion of the Casalud system in recent years attests to its success. 
Initially launched in 2009 in clinics across seven Mexican states, by 2015, it had been extended to clinics in 20 states, serving 1.3 million patients per year. 
Now, the Mexican government has incorporated it into its national strategy to combat obesity and diabetes. 
The WHO should be commended for raising awareness about the threat of new infectious diseases. 
But we should also remember that global health security is about more than protecting people from the latest bug. 
It means accompanying patients along the full continuum of care, to ensure that they live long, healthy, and productive lives. 
To do that, we will need to strengthen current health systems, educate and empower frontline health-care workers, and maximize cost-saving technologies. 
We have already seen the high returns of this approach in Mexico. 
Now it is time to bring it to the rest of the world. 

Hearing Voices 
You are in a crowd when you hear your name. 
You turn, looking for the speaker. No one meets your gaze. 
It dawns on you that the voice you heard must have sprung from your own mind. 
This foray into the uncanny is as close as most people come to experiencing auditory hallucinations or "hearing voices," a condition that affects 70% of patients with schizophrenia and 15% of patients with mood disorders such as mania or depression. 
For these individuals, instead of hearing just one's name, voices produce a stream of speech, often vulgar or derogatory ("You are a fat whore," "Go to hell") or a running commentary on one's most private thoughts. 
The compelling aura of reality about these experiences often produces distress and disrupts thought and behavior. 
The sound of the voice is sometimes that of a family member or someone from one's past, or is like that of no known person but has distinct and immediately recognizable features (say, a deep, growling voice). 
Often certain actual external sounds, such as fans or running water, become transformed into perceived speech. 
One patient described the recurrence of voices as akin to being "in a constant state of mental rape." 
In the worst cases, voices command the listener to undertake destructive acts such as suicide or assault. 
But hearing voices is not necessarily a sign of mental illness, so understanding the mechanics of auditory hallucinations is crucial to understanding schizophrenia and related disorders. 
For example, your occasional illusionary perception of your name spoken in a crowd occurs because this utterance is uniquely important. 
Our brains are primed to register such events; so on rare occasions the brain makes a mistake and reconstructs unrelated sounds (such as people talking indistinctly) into a false perception of the spoken name. 
Hallucinated voices are also known to occur during states of religious or creative inspiration. 
Joan of Arc described hearing the voices of saints telling her to free her country from the English. 
Rainer Maria Rilke heard the voice of a "terrible angel" amidst the sound of a crashing sea after living alone in a castle for two months. 
This experience prompted his writing the Duino Elegies . 
How can we understand differences between an inspired voice, an isolated instance of hearing one's own name, and the voices of the mentally ill? One answer is that "non-pathological" voices occur rarely or perhaps only once. 
Not so for the person with mental illness. Without treatment, these experiences recur relentlessly. 
Brain imaging studies have found that parts of the temporal lobe activate during these hallucinations. 
Our research at Yale University, as well as studies conducted at the Institute of Psychiatry in London, also detected activation in an area of the brain known as Broca's region during production of "inner speech" or verbal thought. 
One theory is that voices arise because Broca's area "dumps" language outputs into parts of the brain that ordinarily receive speech inputs from the outside. 
To test this theory we are using trans-cranial magnetic stimulation (TMS) to reduce the excitability of portions of the temporal lobe and Broca's region. 
So far, most patients appear to experience significant improvements from TMS directed to both brain regions, with improvements lasting from two months to over a year. 
These results, although preliminary, suggest an alternative treatment if validated in larger-scale studies. 
What remains unaddressed is the root cause of abnormal brain activations. 
We are pursuing three intertwined ideas. 
The first is based on studies suggesting that schizophrenia patients suffer from reduced brain connectivity. As a result, certain groups of neurons, such as those responsible for producing and perceiving language, may begin to function autonomously, beyond the control or influence of other brain systems. 
It is as if the string section of the orchestra suddenly decided to play its own music, disregarding everyone else. 
The second idea is that deprivation of social interaction--namely human conversation--makes the brain more likely to produce hallucinated conversations. 
Often one of the first signs of schizophrenia--occurring well before manifestations such as hearing voices--is social isolation. 
Indeed, sensory deprivation can produce hallucinations in the sense mode that is deprived. 
An example is Charles Bonnet Syndrome, where visual impairments in the elderly can produce visions of human figures. 
Could the absence of actual spoken human conversation--a cornerstone of day-to-day human intellect and creativity--produce hallucinated conversations? 
Recall the extreme isolation that preceded the appearance of Rilke's startling voice. 
Third, heightened emotions may play a role in producing voices. 
Indeed, heightened emotionality prompts the brain to produce information consonant with that emotional state. 
For example, a low mood favors generation of thoughts that are themselves depressing. 
It is possible that intense states of emotion could pre-select and perhaps elicit from the brain certain verbal messages having the same emotional charge. 
Verbal messages expressed by voices often are highly emotional. 
Moreover, when schizophrenia begins, these persons are often in states of extreme fear or elation. 
It could be that these powerful emotional states increase the propensity of the brain to produce corresponding verbal "messages." 
This would account for the fact that voices also emerge during states of extreme, but incidental, emotionality brought on by inspired thought, mania, depression, or ingestion of certain drugs. 
Here the voices disappear when the emotional states return to normal. 
The brains of schizophrenia sufferers may be vulnerable to becoming "stuck" in these hallucinatory states. 
Our hypothesis is that voices arise from different combinations of these three factors--reduced brain integration, social isolation, and high levels of emotionality. 
This view has become the focus of efforts to understand and help patients with mental illness quiet their minds. 

Ban Heavy Fuel Oil in the Arctic 
LONDON – Thirty-five years ago, as part of a global expedition, Charles Burton and I traveled across the Arctic Ocean via the North Pole, camping for three months on a fast-moving ice floe. 
It was, for us, a journey that defined our lives, and formed one leg of an enduring world record. 
But another record, this one far less stable, belongs to the Arctic ice itself: by March of this year, it had shrunk to the smallest size ever recorded. 
The disappearance of polar ice is driven by the use of fossil fuels, which not only underpins global warming, but also has a more immediate effect, owing to widespread reliance on heavy fuel oil (HFO) to power ships. 
HFO is cheap and abundant, but it is also toxic and dirty. 
When ships navigate the Arctic, pollutants like sulphur oxide and black carbon are deposited onto the ice and snow. 
The pollutant accumulation accelerates snowmelt, which warms ocean waters and, in turn, creates a self-reinforcing cycle of more melting. 
The world has an opportunity to reverse these trends this week, when the Marine Environment Protection Committee of the International Maritime Organization (IMO) meets in London. 
At that meeting, Canada, along with a number of Arctic and non-Arctic member states, will propose a strategy for limiting the use and transport of HFO by ships in the Arctic. 
It is imperative that every state in attendance supports this crucial measure to protect the fragile and fast-vanishing Arctic ecosystem. 
HFO has been the “king of marine fuels” since the 1960s, but only in recent years has it come under increased scrutiny. 
In August 2011, it was banned from ships entering Antarctic waters, but Arctic states have been slower to move. 
In 2015, HFO accounted for nearly 60% of the marine fuel consumed by ships operating in the Arctic. 
Economic considerations drive HFO’s popularity, but it is now widely understood that its environmental and human costs outweigh the benefits. 
When HFO is spilled in icy waters, it breaks down slowly and can devastate ecosystems and the livelihoods of those who depend on them. 
HFO is also a significant source of air pollution. 
The climate warming effects of black carbon, for example, are up to five times worse in the Arctic than they are at lower latitudes. 
Alternative shipping fuels exist. 
Marine diesel oil and liquefied natural gas, for example, are cost effective and cleaner than HFO. 
What’s needed is the political will to enforce a transition to less-polluting options. 
For now, only limited HFO bans have been enacted, such as those enforced in the Southern Ocean and the waters around the Norwegian archipelago of Svalbard. 
As Arctic ice recedes, new shipping lanes will open to larger vessels, bearing the flags of a larger number of states, making HFO regulations even more important. 
The Arctic Council has warned that more shipping traffic will increase the risk of catastrophic oil spills. 
Some countries are already taking action. 
In 2016, the United States and Canada announced a “phase down” in the use of HFO in vessels operating in the Arctic. 
Many other countries quietly support this work. 
But passive support is not enough. 
Now that the IMO meeting is taking place, more countries must step forward and add their voice to the growing number of states calling for an HFO ban in the Arctic. 
The European Parliament, for its part, has already broadly supported such a move. 
Momentum toward an HFO phase-out in the Arctic is building. 
The Danish Shipowners’ Association and the Arctic expedition cruise operator Hurtigruten are just two of the players calling for tighter regulations or an outright ban. 
Other shipping companies have highlighted the need for regulations to maintain a level playing field. 
In January 2017, Hurtigruten joined the Clean Arctic Alliance to launch the Arctic Commitment. 
The initiative brings together shipping operators, polar explorers, NGOs, communities, and businesses to back an HFO phase-out, ahead of any increase in Arctic shipping, while urging the broader shipping industry to switch to alternative fuels. 
(I signed earlier this year.) 
At this month’s Marine Environment Protection Committee meeting, IMO member states must build on the progress already made by supporting the HFO phase-out proposed by Canada. 
In particular, they must commit to enforcement of any resulting IMO measures, and to ensuring that the use of HFO is eventually banned from Arctic waters. 
We have time to append the record books on Arctic ice, but we must act fast. 

Hedge Funds: The Sting is in the Tail 
PHILADELPHIA – Imagine that you are shopping for a high-performance car, but that you are not allowed to look under the hood. 
What’s inside is a secret. 
Furthermore, you cannot find out how similar vehicles have performed, because there are none. 
Finally, the car carries no warranty. 
The same logic applies to hedge funds: investors are typically not allowed to know how they work, and no warranties are offered. 
Moreover, hedge fund managers can easily “fake” high performance without getting caught. 
To see how high performance can be faked, consider a fairly rare event, such as the S&P 500 falling by more than 20% in the coming year. 
Such events are commonly priced in the derivatives market, which puts the price for the S&P event at ten cents on the dollar. 
An option costs ten cents now and pays $1 if the event occurs by the end of the year, but nothing if it does not. 
Enter Oz, who holds a doctorate in physics. 
He has no investment talent, but he knows about probabilities, and is running a hedge fund worth $100 million. 
He decides to sell options on the S&P event. 
In order to meet his obligations to the option holders if it occurs, he parks the $100 million in one-year US Treasury bills yielding 4%. 
He then sells 100 million covered options, which fetch ten cents on the dollar and thus net $10 million. 
He parks this $10 million in Treasury bills, too, and sells another 10 million options. 
This nets him another $1 million, which he uses to cover expenses. 
At the end of the year, the probability is 90% that the event does not occur, so Oz owes nothing to option holders. 
The fund grosses $11 million from the sale of the options plus 4% on $110 million in Treasury bills, which represents a handsome 15.4% return before expenses. 
Moreover, Oz’s fee is the standard “two and twenty”: 2% for funds under management plus a 20% performance bonus for returns that exceed some benchmark – say, 4%. 
He therefore gets more than $3 million after expenses. 
Oz is happy that he left physics. 
Since the probability of the event occurring is only 10% in any year, the chances are nearly 60% that more than five years will pass without the event occurring, in which case Oz makes more than $15 million even if no new money comes into the fund. 
Of course, after several years of such returns, Oz’s fund may grow enormously as new investors clamor for a piece of the action. 
But investors do not know – and cannot tell – that Oz has no talent. 
They see what happened, not what could have happened. 
So when the event eventually does occur, investors who leave their money in the fund lose everything, whereas Oz nets more than $3 million in each year before the fund crashes. 
Moreover, the outcome for investors is the same even if managers are honest and merely think that they can beat the market. 
Oz may not be a crook; he may merely think that the probability of the S&P plummeting is much less than 10%. 
The bottom line is that hedge fund managers put their investors at risk, yet assume little risk themselves. 
If the fund blows up, investors cannot tell whether it was due to bad management or just bad luck. 
This poses real challenges for regulators. 
Fraud is difficult to prove, because managers can always say that they thought the odds were better than were. 
Nor will changing the incentives – say, by penalizing underperformance as well as rewarding high performance – solve the problem, because any fee structure that rewards true financial wizards also rewards charlatans. 
Yet steps to protect investors can be taken. 
All hedge funds should be required to register immediately, and to report their returns regularly. 
Requiring managers to apprise investors of downside exposure would help even more. 
Alternatively, managers could guarantee limits on losses, similar to a car manufacturer’s warranty. 
It is in the hedge fund industry’s interest to encourage greater regulation and transparency, lest a rising tide of failed funds cause investor confidence to collapse, putting both good and bad wizards out of business. 

Quantitative Easing for the People 
OXFORD – It is now a near certainty that, by the end of this year, falling energy and commodity prices will push annual inflation in the eurozone below zero – well under the European Central Bank’s target of near 2%. 
Rather than continue to allow misguided conventional thinking, centered on German economic ideology, to impede effective action, the ECB must pursue quantitative easing (QE) “for the people” – an adaptation of Milton Friedman’s “helicopter drops” strategy – to reverse deflation and get the eurozone back on track. 
As it stands, conventional monetary policy has had – and American-style QE will have – little impact on the eurozone’s core countries. 
This can be explained partly by the fact that, when it comes to credit provision, capital markets do far less of the heavy lifting in the eurozone (where banks matter more) than in the United States. 
As a result, bringing down yields on government, corporate, and asset-backed bonds has less impact. 
At the same time, the euro exchange rate – the one mechanism whereby current policies could still make a difference – cannot be pushed down much further. 
For starters, given the eurozone’s huge trade surplus, doing so would incur strong international resistance. 
Moreover, the mechanisms by which the US Federal Reserve’s purchases of asset-backed securities stimulate consumer spending – low mortgage rates, widely available home refinancing, high housing prices, and home-equity withdrawal – function differently in the eurozone. 
In Germany, France, and Italy, higher house prices spur non-owners to save more for the down payment and inspire caution among tenants, who expect future rent hikes. 
And the housing wealth of existing owners does not translate into significantly higher spending, given the lack of access to home-equity loans and cheap mortgage refinancing. 
Finally, in countries like Germany, where households’ bank and saving deposits far outweigh their debt, lower interest rates reduce total household spending. 
Another factor impeding QE’s impact in the eurozone is low bond yields, which, by increasing measured pension-fund deficits, make some companies reluctant to invest and thus more likely to raise contribution rates and limit pension benefits. 
In the US, more generous assumptions regarding discount rates are used to calculate pension-fund liabilities. 
Furthermore, US-style QE, in particular, tends to have adverse distributional implications, because it channels more money toward the wealthy, who have a lower propensity to spend, without providing much to the poorer people who would use it to consume more. 
In the eurozone, the distribution issue is especially complex, given that institutional differences between countries can give the impression of discrimination among them. 
Clearly, the ECB must develop a strategy that works in the eurozone’s unique system, instead of continuing to follow the Fed’s lead. 
Such a strategy should be based on Friedman’s assertion that “helicopter drops” – printing large sums of money and distributing it to the public – can always stimulate the economy and combat deflation. 
But, in order to maximize the impact of such an operation, the ECB would also have to find a way to ensure fair distribution. 
One simple solution would be to distribute the funds to governments, which could then decide how best to spend them in their countries. 
But the eurozone’s rule against using the ECB to finance government spending bars this approach. 
A more feasible option, therefore, would be to provide all workers and pensioners with social-security numbers (or the local equivalent) with a payment from the ECB, which governments would merely assist in distributing. 
Another alternative would be to use the electoral register, a public database that the ECB could use independently of governments. 
Of the roughly 275 million adults with social-security numbers in the eurozone, some 90% are on the electoral register. 
Extrapolating from America’s experience in 2001, when a $300 per person social-security rebate boosted spending by about 25% of the total amount distributed, a €500 ($640) check from the ECB could increase spending by about €34 billion, or 1.4% of GDP. 
The extra tax revenue that such a rebate would produce would reduce government deficits significantly. 
Beyond lifting the eurozone economy out of deflation, such an initiative would have massive political benefits, as it would reduce resentment toward European institutions, especially in struggling countries like Greece and Portugal, where an extra €500 would have a particularly strong impact on spending. 
In this way, the ECB could prove to disgruntled citizens and investors that it is serious about meeting its inflation target, and even help to stem the rise of nationalist parties. 
To be sure, some countries – especially Germany – are likely to resist this approach by marshaling arguments about prudence and responsibility. 
But the fact is that “helicopter money” would work – and nothing in eurozone law prohibits it. 
After years of austerity, infighting, and unemployment, it is time to implement a QE program that delivers what Europe needs. 

Helicopter Money Is in the Air 
LONDON – Fiscal policy is edging back into fashion, after years, if not decades, in purdah. 
The reason is simple: the incomplete recovery from the global crash of 2008. 
Europe is the worst off in this regard: its GDP has hardly grown in the last four years, and GDP per capita is still less than it was in 2007. 
Moreover, growth forecasts are gloomy. 
In July, the European Central Bank published a report suggesting that the negative output gap in the eurozone was 6%, four percentage points higher than previously thought. 
“A possible implication of this finding,” the ECB concluded, “is that policies aimed at stimulating aggregate demand (including fiscal and monetary policies) should play an even more important role in the economic policy mix.” 
Strong words from a central bank. 
Fiscal policy has been effectively disabled since 2010, as the slump saddled governments with unprecedented postwar deficits and steeply rising debt-to-GDP ratios. 
Austerity became the only game in town. 
This left monetary policy the only available stimulus tool. 
The Bank of England and the US Federal Reserve injected huge amounts of cash into their economies through “quantitative easing” (QE) – massive purchases of long-term government and corporate securities. 
In 2015, the ECB also started an asset-buying program, which ECB President Mario Draghi promised to continue “until we see a sustained adjustment in the path of inflation.” 
QE has not been a magic bullet. 
While it helped stop the slide into another Great Depression, successive injections of money have yielded diminishing returns. 
The ECB’s announcement of its policy narrowed the gap in bond yields between Europe’s core and periphery. 
But a study by Thomas Fazi of the Institute for New Economic Thinking emphasizes QE’s lack of influence on bank lending, the increase in non-performing loans, and the dire output and inflation figures themselves. 
Moreover, QE has undesirable distributional consequences, because it gives money to those who have already have it, and whose current spending is little influenced by having more. 
Policymakers should have been alert to the likelihood of this mediocre outcome. 
When central banks try to reduce inflation by pumping liquidity out of the system, their policy is subverted by commercial banks’ ability to pump it back in by making loans. 
In today’s deflationary environment, the reverse has happened. 
Central banks’ attempt to pump in liquidity to stimulate activity is subverted by commercial banks’ ability to pump liquidity out by augmenting reserves and refusing to lend. 
That leaves fiscal policy. 
The logic of current economic conditions implies that governments should be taking advantage of ultra-low interest rates to invest in infrastructure projects, which would both stimulate demand and improve the structure of the economy. 
The problem is the climate of expectations. 
As the Oxford economist John Muellbauer says, treasuries and central banks have been “hammering into the consciousness of the private sector the importance of reducing gross government debt relative to GDP.” 
This orthodoxy arises from the idea that borrowing is simply “deferred taxation.” 
If the private sector believes that taxes will have to rise to pay for government borrowing, according to this view, people will increase their savings to pay the higher taxes, thus destroying any stimulative effect. 
The orthodoxy mistakenly assumes that government spending cannot generate any extra income; but so long as it prevails, debt-financed fiscal policy is ruled out as a means to revive economic growth. 
As a result, analysts and policymakers have started mooting ideas for unconventional fiscal policy to supplement unconventional monetary policy. 
In particular, they are debating variations of so-called helicopter money, following a famous thought experiment by Milton Friedman in 1969, in which “one day a helicopter…drops an additional $1,000 in bills from the sky.” 
Former Federal Reserve Chairman Ben Bernanke, among others, has offered influential support for “helicopter drops” to revive flagging economies. 
Helicopter money comes in two forms, which could (and should) be dropped together. 
The first is to put purchasing power directly into the hands of consumers – for example, by issuing each voter or citizen with smart cards worth $1,000 each. 
The Swiss economist Silvio Gesell, who originally proposed a scheme of “stamped money” at the start of the last century, added a stipulation that balances unspent after a month should be taxed, to discourage hoarding. 
Alternatively, helicopter money could be used to finance infrastructure spending. 
The advantage of such “monetary financing” is that such spending, while adding to the deficit and leading to a permanent increase in the money supply, would not increase the national debt, because the government would “owe” the money only to its own banker. 
This would eliminate the offsetting negative expectation of higher taxes. 
Surely, issuing debt that never has to be repaid is too good to be true, right? 
There is indeed the obvious danger that governments might easily become addicted to monetary finance to pay for private and public spending, which is why it is unlikely to be tried openly unless economic conditions worsen significantly. 
But the political risk of doing nothing if we stumble into another recession (as seems quite likely) is worse. 
Like it or not, unconventional fiscal policy could well be the next game in town. 

Help the Poor Help Themselves 
HELSINKI – One early result of today’s global recession is that many donor governments are trimming their foreign aid programs. 
Before taking office, President Barack Obama had promised a doubling of American foreign assistance, from $25 billion to $50 billion, but since then Vice-President Joe Biden has warned that this commitment will probably be achieved more slowly because of the downturn. 
Here in Finland, our aid decreased by 62% in the early 1990’s, a period that Finns still call “The Depression.” 
Japan’s overseas aid declined by 44% when that country hit hard times. 
The current worldwide slump could bring a cut in official development assistance (ODA) of 30%. 
It is also easy to predict that donor governments will be looking carefully at the ever-growing expenditure on the United Nations’ 14 peacekeeping operations around the world. 
The total bill for all UN operations in the 12 months to mid-2008 reached $6.7 billion, about twice the level 15 years ago. 
One can only imagine the grave consequences if operations that are already spread thin are cut. 
Recall that the Rwandan genocide was preceded by a similar lack of enthusiasm for financing the UN mission there. 
Recent events in Congo and elsewhere suggest that there is no room for complacency. 
But by far the biggest transfer of assets from rich countries to the developing world takes place through migrant workers’ remittances. 
Few decision-makers seem aware of this. 
In 2006, around 150 million migrants sent roughly $300 billion to their families in developing countries. 
The number of transactions is huge, estimated at 1.5 billion remittances annually. 
Most are for sums of only $100-$300, and they normally go towards immediate household consumption. 
The value of all ODA in 2006 was $126 billion, less than half the value of private remittances, even though it includes assistance from OECD and non-OECD countries, as well as from China. 
If the recession costs migrants their jobs in richer host countries and forces them to return home to their countries of origin, millions of already poor people will be thrown into greater poverty. 
The possible impact can be gauged by looking at where the $300 billion in remittances are distributed. 
In 2006, poorer European countries received about $50 billion, Africa got $38 billion, Latin America and the Caribbean $68 billion, the Middle East $24 billion. 
Asia is the major beneficiary, receiving $113 billion. 
In all, an estimated 10% of the world’s population is estimated to benefit from remittances, with 57 countries each receiving $1 billion or more annually. 
Indeed, some countries are dependent on this income flow. 
Cape Verde received 34% of its GDP from remittances, Eritrea 38% and Burundi 23%. 
In Asia, the figures were 30% for Afghanistan and 38% for Tajikistan, while in Europe Moldova received 31% of its GDP from external sources. 
Some of these countries are either in conflict or are fragile states, so a diminishing flow of remittances will aggravate their instability, and perhaps increase the flow of migration to other countries. 
Governments in Europe and elsewhere should therefore consider carefully what other forces will be at work if and when migrant workers are sent home. 
These governments already spend tax money on direct foreign aid. 
So they should weigh tax breaks that might entice employers to keep migrant workers on the payrolls, as this would probably be a much more efficient way to support these poor countries. 
Moreover, given that transaction costs often take a big slice of remittances, aid mechanisms could be used to create safe and cheap channels for financial flows, especially where private money cannot easily reach remote rural areas, as is often the case in Africa or Asia. 
Anti-terrorism laws are a problem here, because the demand for more effective control mechanisms on international financial transfers places an extra burden on remittance operators. 
These new rules have certainly pushed transaction costs higher. 
But the fight against terror and its financing means that governments and financial institutions have extensive data on the cross-border flow of money, which should be used to help people send money to their relatives more easily. 
Sending money to some countries is now allowed only through formal banking channels, and this has created virtual monopolies while also preventing remittance money from reaching rural areas where banks don’t operate. 
In West Africa, a simple money transfer operator now handles 70% of official payments and also imposes exclusivity on banks. 
Allowing more informal financial institutions to channel foreign payments would ease the money flow to remote regions. 
Cooperatives, credit unions, and new forms of micro-financing could form networks that would ensure greater accessibility. 
Restrictive legal rules in some countries exclude migrants from using official banking systems unless they have the necessary legal status. 
Other countries, however, have taken steps to make remittance transfers possible via mobile phones. 
The sheer size of these remittances, and their importance in keeping many millions of people above the poverty line, suggests that rich-country governments should take a careful look at the existing system. 
An improved system could help alleviate the burden imposed on innocent victims of the financial and economic downturn. 
Such a review of remittances should look into restrictive practices that could be abolished, and ask whether official assistance should be adapted to the needs of this informal yet crucially important aid network. 

The Living Legacy of Helsinki 
VIENNA – Forty years ago, the Conference on Security and Cooperation in Europe concluded with the signing of the Helsinki Final Act, a historic triumph of cooperation over conflict that set the stage for the end of the Cold War. 
The accord represented a revolutionary approach to comprehensive security, as well as to bilateral and multilateral relations. 
Its signatories recognized a direct link between political and military issues and human rights concerns – and that this link is a fundamental component of peace and security. 
That is why, when Serbia was entrusted to lead the Organization for Security and Cooperation in Europe (OSCE), which grew from the Helsinki conference, this year, we were looking forward to celebrating the accord’s many achievements on its 40th anniversary. 
But, with the resurgence of armed conflict in Europe challenging the Helsinki Final Act’s fundamental principles, this anniversary has taken on new meaning. 
The crisis in Ukraine has, in fact, underscored the Final Act’s enduring relevance. 
Indeed, the only way to reconsolidate European security is to reach a durable settlement based on its principles; indeed, had those principles been respected, the current crisis in Ukraine would not have occurred in the first place. 
It is now apparent that the roots of that crisis are far deeper than anyone initially realized. 
Well before the turmoil in Ukraine erupted, the East-West divide, which our predecessors worked hard to close in Helsinki, had begun to reemerge. 
A growing sense of mistrust and hostility, together with a diminishing commitment to the OSCE’s brand of comprehensive security, was hindering cooperation in various areas. 
Constructive engagement on security issues had been difficult for some time, reflected in a lack of progress on arms control and other key areas of the OSCE agenda. 
The emergence of the crisis in and around Ukraine has only made these challenges more profound, and the search for a solution more urgent. 
The high-level Panel of Eminent Persons on European Security as a Common Project, established at the Basel Ministerial Council by last year’s Swiss OSCE chairmanship, provided invaluable insights when they presented their Interim Report on European security at the Munich Security Conference Core Group Meeting in Vienna this week. 
The report focuses on the lessons of the OSCE’s engagement in Ukraine, and part of the solution is reflected in the Panel’s title; 
European security is, indeed, a common project. The OSCE could play a pivotal role, serving, like the Helsinki conference 40 years ago, as a platform to overcome the existing divide, restore trust, and rebuild a cooperative approach to common security concerns. 
The most visible aspects of the OSCE response to the crisis in and around Ukraine have been carried out by the Trilateral Contact Group and the Special Monitoring Mission. 
Yet the entire OSCE toolbox has been mobilized to mitigate the crisis, as well as to support other critical steps, including constitutional reform, the protection of ethnic minority rights, and political dialogue and reconciliation. 
As the only regional platform that brings all of the key stakeholders to the table, the OSCE plays a vital role in keeping the lines of communication open and finding opportunities for joint action. 
Given our good relations with all the key stakeholders in the crisis, Serbia can contribute to the process. 
Our chief objectives are preventing the crisis from escalating into a larger conflict, ensuring a sustainable political process, and preserving the inclusive and cooperative nature of the OSCE’s work. 
There is little doubt that de-escalation on the ground and visible progress in the Trilateral Contact Group – and the four working groups operating under its auspices – would set the stage for renewed discussions on broader European security issues and the future role of the OSCE. 
Given the obvious imperative for cooperative solutions to address transnational and global security threats, this could not be more important. 
Simply put, without a shared approach to security and a dedicated joint response, overcoming our current challenges will be virtually impossible. 
And, in fact, the situation could worsen considerably, with so-called “frozen” conflicts heating up and reverting to armed confrontation. 
As growing instability exacerbates social tensions, ethnic conflict, radicalization, and violent extremism become increasingly likely. 
The East-West divide that leaders in Helsinki confronted in 1975 was much wider than the one that that exists today. 
Yet, with courage and commitment, they managed to produce a pragmatic compromise based on a set of key principles – a compromise that opened the way for far-reaching cooperation and, indeed, the emergence of today’s interconnected and interdependent world. 
Today’s leaders must show similar wisdom and vision, supporting the OSCE’s efforts to revitalize the principles of the Helsinki accord. 
This will require increased investment of both financial resources and political capital – and a shared commitment to put that investment to good use. 
Serbia, a post-conflict society built on a series of compromises, is well placed to coordinate Europe’s much-needed security dialogue during its chairmanship of the OSCE – an organization that helped us through our own transition. 
What better advocate is there than one who speaks with conviction gained from personal experience? 
The Helsinki principles do not need to be reconsidered; on the contrary, they need to be reaffirmed, strengthened, and safeguarded. 
The platform is already in place. 
Let us get to work – together. 

The Unsustainability of Organic Farming 
STANFORD – “Sustainable” has become one of the buzzwords of the twenty-first century. 
Increasing numbers of universities offer courses or even programs in “sustainability,” and many large companies boast substantial departments devoted to the subject. 
In April, many of the iconic multinational companies in the agriculture/food sector were represented at a three-day “Sustainable Product Expo,” convened by Wal-Mart – the largest retailer in the United States – at its Arkansas headquarters. 
But, as with many vague, feel-good concepts, “sustainability” contains more than a little sophistry. 
For example, sustainability in agriculture is often linked to organic farming, whose advocates tout it as a “sustainable” way to feed the planet’s rapidly expanding population. 
But what does “sustainable” really mean, and how does it relate to organic methods of food production? 
The organic movement’s claims about the sustainability of its methods are dubious. 
For example, a recent study found that the potential for groundwater contamination can be dramatically reduced if fertilizers are distributed through the irrigation system according to plant demand during the growing season; organic farming, however, depends on compost, the release of which is not matched to plant demand. 
Moreover, though composting receives good press as a “green” practice, it generates a significant amount of greenhouse gases (and is often a source of pathogenic bacteria in crops). 
The study also found that “intensive organic agriculture relying on solid organic matter, such as composted manure that is mixed in to the soil prior to planting, resulted in significant down-leaching of nitrate” into groundwater. 
Increasing the nitrate levels in groundwater is hardly a hallmark of sustainability, especially with many of the world’s most fertile farming regions in the throes of drought. 
A fundamental reason that organic food production is far less “sustainable” than many forms of conventional farming is that organic farms, though possibly well adapted for certain local environments on a small scale, produce far less food per unit of land and water. 
The low yields of organic agriculture – typically 20-50% below conventional agriculture – impose various stresses on farmland, especially on water consumption. 
A British meta-analysis published in 2012 identified some of the stresses that were higher in organic agriculture. 
For example, it found that “ammonia emissions, nitrogen leaching, and nitrous oxide emissions per product unit were higher from organic systems,” as were “land use, eutrophication potential, and acidification potential per product unit.” 
Lower crop yields in organic farming are largely inevitable, owing to the arbitrary rejection of various advanced methods and technologies. 
Organic practices afford limited pesticide options, create difficulties in meeting peak fertilizer demand, and rule out access to genetically engineered varieties. 
If organic production were scaled up significantly, the lower yields would lead to greater pressure to convert land to agricultural use and produce more animals for manure, to say nothing of the tighter squeeze on water supplies – all of which are challenges to sustainability. 
Another limitation of organic production is that it works against the best approach to enhancing soil quality – namely, the minimization of soil disturbance (such as that caused by plowing or tilling), combined with the use of cover crops. 
Such farming systems have many environmental advantages, particularly with respect to limiting erosion and the runoff of fertilizers and pesticides. 
Organic growers do frequently plant cover crops, but in the absence of effective herbicides, they often rely on tillage (or even labor-intensive hand weeding) for weed control. 
At the same time, organic producers do use insecticides and fungicides to protect their crops, despite the green myth that they do not. 
More than 20 chemicals (mostly containing copper and sulfur) are commonly used in growing and processing organic crops – all acceptable under US rules for certifying organic products. 
Perhaps the most illogical and least sustainable aspect of organic farming in the long term is the exclusion of “genetically engineered” (also known as “genetically modified,” or GM) plants – but only those that were modified with the most precise techniques and predictable results. 
Except for wild berries and wild mushrooms, virtually all the fruits, vegetables, and grains in European and North American diets have been genetically improved by one technique or another – often as a result of seeds being irradiated or undergoing hybridizations that move genes from one species or genus to another in ways that do not occur in nature. 
The exclusion from organic agriculture of organisms simply because they were crafted with modern, superior techniques makes no sense. 
It not only denies farmers improved seeds, but also denies consumers of organic goods access to nutritionally improved foods, such as oils with enhanced levels of omega-3 fatty acids. 
In recent decades, conventional agriculture has become more environmentally friendly and sustainable than ever before. 
But that reflects science-based research and old-fashioned technological ingenuity on the part of farmers, plant breeders, and agribusiness companies, not irrational opposition to modern insecticides, herbicides, genetic engineering, and “industrial agriculture.” 

More Crop for the Drop 
STANFORD – The United Nations has called drought the “world’s costliest natural disaster,” both financially, imposing an annual cost of $6-8 billion, and in human terms; since 1900, it has affected two billion people, leading to more than 11 million deaths. 
That is because so much of the world is vulnerable; currently affected areas include Australia, Sub-Saharan Africa, South Asia, North and South America, and the Middle East. 
Given that agriculture accounts for 70% of water consumption, on average, worldwide, it seems logical that this sector should be the focus of conservation measures. 
And, in fact, a proven technology exists that could go a long way toward reducing the impact of drought: genetic engineering (GE). 
Sometimes called “genetic modification,” GE enables plant breeders to make existing crop plants do new things – such as conserve water. 
Even with research and development hampered by resistance from activists and excessive government regulation, drought-resistant GE crop varieties are emerging from the development pipeline in many parts of the world. 
Over the last two decades, such crop varieties have been cultivated on more than 1.5 billion hectares by more than 17 million farmers in some 30 countries – without disrupting a single ecosystem or causing so much as a stomachache. 
Worldwide, these new varieties have provided “very significant net economic benefits at the farm level, amounting to $18.8 billion in 2012 and $116.6 billion” from 1996 to 2012, according to a recent report by Landes Bioscience. 
Most of these new crop varieties are designed to resist herbicides, so that farmers can adopt more environmentally friendly, no-till cultivation practices, and many have also been engineered to resist pests and diseases that ravage crops. 
Others have higher nutritional value, making them ideally suited for developing-country populations that struggle to acquire the nutrients they need to lead healthy, productive lives. 
But, in the long term, the greatest boon of all, for both food security and the environment, will likely be the ability of new crop varieties to tolerate periods of drought and other water-related stresses. 
Even a small reduction in the amount of water used for irrigation could have huge benefits, especially in drought conditions. 
To develop such varieties, plant biologists identified genes that regulate water use and transferred them into important crop plants, enabling them to grow with less or lower-quality water, such as water that has been recycled or is high in natural mineral salts. 
Egyptian researchers have shown that by transferring a single gene from barley to wheat, the plants can tolerate reduced watering for a longer period of time. 
This new, drought-resistant variety requires only one-eighth as much irrigation as conventional wheat; in some deserts, it can be cultivated with rainfall alone. 
Other types of GE crop varieties, such as those that are disease- and pest-resistant, indirectly improve the efficiency of water use. 
Because much of the loss to diseases and pests occurs after the plants are fully grown – that is, after most of the water required for their growth has already been supplied – resistance to them means more agricultural output per unit of water invested. 
In short, farmers can get more crop for the drop. 
Molecular genetic engineering technology can conserve water in other ways as well. 
One-third of irrigated land worldwide is not suitable for growing crops because of the presence of salt – the result of repeated fertilization. 
To regain the more than 200,000 hectares of irrigated land that is lost to cultivation annually, scientists have enhanced the salt tolerance of crops as diverse as tomatoes and canola. 
The transformed plants can grow in salty soil and be irrigated with brackish water, conserving fresh water for other uses. 
Given the benefits, one might expect such developments to be universally lauded and encouraged. 
But they face major regulatory obstacles. 
Europe, for example, largely prohibits GE crops; 
India has approved insect-resistant cotton but has failed to sanction any food crops. 
Even where GE crops are being cultivated, unscientific, excessively burdensome regulation has raised the cost of producing new plant varieties significantly, keeping many potentially important ones from the market. 
These measures are irrational, because they are inversely related to risk. 
They permit the largely unregulated use of new varieties of plants and microorganisms that have been crafted with less precise and predictable techniques, under the pretense that they are somehow more “natural,” while stringently regulating – or even banning – those based on the most advanced knowledge and methods. 
As water scarcity increases, drought-stricken crops wither, and food prices rise, the need for resilient agriculture will become more obvious – and more urgent. 
With more rational public policy, we can meet that need now. 
How much more preventable misery and death must occur before our policymakers see reason? 

The Myth of Organic Agriculture 
STANFORD – Organic products – from food to skin-care nostrums to cigarettes – are very much in vogue, with the global market for organic food alone now reportedly exceeding $60 billion annually. 
The views of organic devotees seem to be shared by the European Commission, whose official view of organic farming and foods is, “Good for nature, good for you.” 
But there is no persuasive evidence of either. 
A 2012 meta-analysis of data from 240 studies concluded that organic fruits and vegetables were, on average, no more nutritious than their cheaper conventional counterparts; nor were they less likely to be contaminated by pathogenic bacteria like E. coli or salmonella – a finding that surprised even the researchers. 
“When we began this project,” said Dena Bravata, one of the researchers, “we thought that there would likely be some findings that would support the superiority of organics over conventional food.” 
Many people purchase organic foods in order to avoid exposure to harmful levels of pesticides. 
But that is a poor rationale. 
While non-organic fruits and vegetables had more pesticide residue, the levels in more than 99% of cases did not cross the conservative safety thresholds set by regulators. 
Moreover, the vast majority of the pesticidal substances found on produce occur “naturally” in people’s diets, through organic and conventional foods. 
The biochemist Bruce Ames and his colleagues have found that “99.99% (by weight) of the pesticides in the American diet are chemicals that plants produce to defend themselves. 
Only 52 natural pesticides have been tested in high-dose animal cancer tests, and about half (27) are rodent carcinogens; these 27 are shown to be present in many common foods.” 
The bottom line is that natural chemicals are just as likely as synthetic versions to test positive in animal cancer studies, and “at the low doses of most human exposures, the comparative hazards of synthetic pesticide residues are insignificant.” 
In other words, consumers who buy expensive organic foods in order to avoid pesticide exposure are focusing their attention on 0.01% of the pesticides that they consume. 
Ironically, in both Europe and North America, the designation “organic” is itself a synthetic bureaucratic construct – and it makes little sense. 
It prohibits the use of synthetic chemical pesticides, with some pragmatic exceptions. 
For example, the EU’s policy notes that “foreseen flexibility rules” can compensate for “local climatic, cultural, or structural differences.” 
When suitable alternatives are lacking, some (strictly enumerated) synthetic chemicals are allowed. 
Similarly, in the US, there is a lengthy list of specific exceptions to the prohibitions. 
But most “natural” pesticides – as well as pathogen-laden animal excreta, for use as fertilizer – are permitted. 
Another rationale for buying organic is that it is supposedly better for the natural environment. 
But the low yields of organic agriculture in real-world settings – typically 20-50% below yields from conventional agriculture – impose various stresses on farmland and increase water consumption substantially. 
According to a recent British meta-analysis, ammonia emissions, nitrogen leaching, and nitrous-oxide emissions per unit of output were higher in organic systems than in conventional agriculture, as were land use and the potential for eutrophication – adverse ecosystem responses to the addition of fertilizers and wastes – and acidification. 
An anomaly of how “organic” is defined is that the designation does not actually focus on the food’s quality, composition, or safety. 
Rather, it comprises a set of acceptable practices and procedures that a farmer intends to use. 
For example, chemical pesticide or pollen from genetically engineered plants wafting from an adjacent field onto an organic crop does not affect the harvest’s status. 
EU rules are clear that food may be labeled as organic as long as “the ingredients containing [genetically modified organisms] entered the products unintentionally” and amount to less than 0.9% of their content. 
Finally, many who are seduced by the romance of organic farming ignore its human consequences. 
American farmer Blake Hurst offers this reminder: “Weeds continue to grow, even in polycultures with holistic farming methods, and, without pesticides, hand weeding is the only way to protect a crop.” 
The backbreaking drudgery of hand weeding often falls to women and children. 
Of course, organic products should be available for people who feel that they must have and can afford them. 
But the simple truth is that buying non-organic is far more cost-effective, more humane, and more environmentally responsible. 

The GMO Stigma 
STANFORD – In August, at the International Rice Research Institute in the Philippines, a group of activists vandalized test fields of so-called “golden rice,” which has been genetically engineered to contain beta-carotene, a precursor of vitamin A. Some of the perpetrators were even supported by the Swedish government’s International Development Cooperation Agency via its funding of the radical Filipino group MASIPAG. 
For poor people whose diet is composed largely of rice – a carbohydrate-rich but vitamin-poor source of calories – “biofortified” strains are invaluable. 
In developing countries, 200-300 million preschool children are at risk of vitamin A deficiency, which compromises immune systems, increasing the body’s susceptibility to illnesses like measles and diarrheal diseases. 
Every year, vitamin A deficiency causes blindness in about a half-million children; some 70% of them die within a year. 
In September, an eminent group of scientists called upon the scientific community to “stand together in staunch opposition to the violent destruction of required tests on valuable advances, such as golden rice, that have the potential to save millions” of people from “needless suffering and death.” 
But this passionate appeal fails to address the fundamental problem: the unfounded notion that there is a meaningful difference between “genetically modified organisms” and their conventional counterparts. 
The fact is that GMOs and their derivatives do not amount to a “category” of food products. 
They are neither less safe nor less “natural” than other common foods. 
Labeling foods derived from GMOs, as some have proposed, thus implies a meaningful difference where none exists – an issue that even regulators have acknowledged. 
Humans have been engaging in “genetic modification” through selection and hybridization for millennia. 
Breeders routinely use radiation or chemical mutagens on seeds to scramble a plant’s DNA and generate new traits. 
A half-century of “wide cross” hybridizations, which involve the movement of genes from one species or genus to another, has given rise to plants – including everyday varieties of corn, oats, pumpkin, wheat, black currants, tomatoes, and potatoes – that do not and could not exist in nature. 
Indeed, with the exception of wild berries, wild game, wild mushrooms, and fish and shellfish, virtually everything in North American and European diets has been genetically improved in some way. 
Despite the lack of scientific justification for skepticism about genetically engineered crops – indeed, no cases of harm to humans or disruption to ecosystems have been documented – they have been the most scrutinized foods in human history. 
The assumption that “genetically engineered” or “genetically modified” is a meaningful – and dangerous – classification has led not only to vandalism of field trials, but also to destruction of laboratories and assaults on researchers. 
Moreover, the GMO classification has encouraged unscientific regulatory approaches that are not commensurate with the level of risk, and that, by discriminating against modern molecular genetic-engineering techniques, inhibit agricultural innovation that could reduce strain on the natural environment and enhance global food security. 
Even as study after study – both formal risk assessments and “real-world” observations – has confirmed the technology’s safety, the regulatory burden placed on GMOs has continued to grow. 
This trend is making the testing and development of many crops with commercial and humanitarian potential economically unfeasible. 
Despite robust laboratory research on plants since the invention of modern genetic-engineering techniques in the early 1970’s, the commercialization of products has lagged. 
Unprovoked attention from regulators inevitably stigmatizes any product or technology. 
Endless discussion of the “coexistence” of genetically engineered and “conventional” organisms has reinforced the stigma, leading activists to pursue frivolous yet damaging litigation. 
For example, in at least four lawsuits brought against regulators in the United States, judges initially ruled that regulators had failed to comply with the procedural requirements of the US National Environmental Policy Act. 
And marketing as “natural” products that contain genetically engineered ingredients has led to lawsuits for false labeling. 
The discriminatory treatment of GMOs creates widespread mischief. 
In many places, the location of field trials now must be identified, even including GPS coordinates – a practice that facilitates vandalism. 
(And activists frequently destroy conventional plants inadvertently, because they are difficult to distinguish from genetically engineered varieties.) 
In 1936, the Nobel laureate Max Planck observed that scientific innovations rarely spread as a result of their opponents’ conversion; instead, opponents of innovation “gradually die out,” and the next generation accepts the breakthrough. 
This was the case with vaccinations and the recognition that DNA is the stuff of heredity – and it will happen eventually with genetic engineering. 
Unfortunately, many will suffer needlessly in the interim. 
As University of California agricultural economist David Zilberman and his colleagues have written, the lost benefits are “irreversible, both in the sense that past harvests have been lower than they would have been if the technology had been introduced and in the sense that yield growth is a cumulative process of which the onset has been delayed.” 
As long as today’s activists and regulators remain convinced that GMOs represent a distinct and dangerous category of research and products, genetic engineering will fall short of its potential. 
That is bad news for the millions of poor people for whom genetic engineering in agriculture, medicine, and environmental science could offer a healthier, more secure future. 

Governing a World Out of Order 
WASHINGTON, DC – Can we develop an international order that will keep the peace and allow countries to play by agreed rules? 
That is the question that Henry Kissinger poses in his new book World Order. 
Unfortunately, it is the wrong question. 
Kissinger defines “world order” as a concept of just international arrangements that is “thought to be applicable to the entire world.” 
Before the advent of the European Union, for example, Europe conceived of world order as a balance of great powers, in which multiple religions and forms of government could coexist. 
As a civilization and a religion, Islam envisions the optimal world order very differently – as a caliphate, in which faith and government are united and peace prevails throughout the Dar al-Islam, or house of Islam. 
That is certainly not the belief of all Muslims or of the governments of Muslim-majority states, but the radicalism espoused by groups like the Islamic State seeks to spread not just codes of conduct but an entire worldview. 
In Kissinger’s view, contending conceptions of world order are emerging not only in the Middle East, but also in Asia. 
China is currently playing by the international rules but is increasingly signaling that it expects to be treated as first among equals in the region (as the US has long insisted with respect to its position in the Americas). 
But, as China grows stronger and reclaims what it believes to be its historic position in Asia and the world, how long will it wait to insist on reshaping the international rules? 
Russia is openly breaking those rules and no longer bothering to justify itself under international law. 
Instead, it boasts of reclaiming territories once ruled by the Kremlin and threatens to use force to “protect” ethnic Russians from purported threats. 
When Russia annexed Crimea last March, Kadri Liik of the European Council on Foreign Relations pointed out the marked difference in the way it handled its invasion of Georgia in 2008. 
The Russian government essentially provoked Georgia into attacking first and then crafted an elaborate justification aimed at rendering its actions compatible with international law. 
But this time, Kadri wrote, “Moscow has challenged the whole post-Cold War European order, together with its system of rules.” 
Kissinger’s hope is that these countries and rising powers like India and presumably Brazil (he leaves Latin America out of his account of world orders) will be able to forge agreement on a set of rules that all will regard as legitimate, thereby maintaining a stable global balance of power. 
The Westphalian principle of multiplicity will be critical, he believes, as it will be necessary to allow different countries and civilizations to operate on very different domestic principles. 
An effective world order for the twenty-first century, however, must do much more than keep the peace. 
Kissinger focuses on inter-state relations – on how, from one country’s perspective, to avoid war with other countries while deterring them from aggression or other actions likely to upset a regional or global balance of power. 
Yet a glance at today’s headlines suggests that what is most likely to kill and displace millions, if not hundreds of millions, of people in the coming decades are global threats such as pandemics, climate change, and terrorist and criminal networks – not inter-state war. 
Yes, Russia’s invasion of Ukraine has led to more than 3,000 deaths. 
But current projections of the spread of the Ebola virus predict a million cases by January. 
According to the World Health Organization, the HIV/AIDS epidemic has killed 36 million people, roughly ten million higher than the estimated number of military deaths in World War II, with an additional 35 million people infected. 
Many of these global threats are closely intertwined with war, but war that is far more likely to be fought within borders than across them. 
Consider that roughly two-thirds of Syria’s population has been displaced by the country’s civil war, with millions living miserably in refugee camps. 
The disastrous state of health care in Liberia and Sierra Leone, where Ebola is raging, reflects decades of horrific civil war in both countries. 
The ongoing violence in Africa’s Great Lakes region, which has claimed millions of civilian lives, is rooted in the 1994 Rwanda genocide and the resulting flood of Hutu refugees into neighboring states. 
The droughts and floods caused by climate change will put millions of people on the move, first into crowded and combustible cities, and then across borders. 
Russia and Canada may be happy to receive them as vast new tracts of land open up, but many other parts of the world are already crowded, which spells conflict. 
Maintaining peace is mostly a matter of restraint or constraint. 
Effective global cooperation requires much more. 
Governments must be able to come together, alongside vital actors from both business and civil society, to adopt comprehensive plans of action. 
Those plans, in turn, require funding, manpower, collective will, and enforcement capability. 
Yet today, faced with a virus that kills half of those it infects and the prospect that it could decimate an entire region of Africa, disrupt air travel, and put people around the world in quarantine, the world has delivered only a fraction of the needed financial and material assistance. 
We live in a world of global problems and largely national solutions. 
The need for institutions that can respond swiftly and effectively, as domestic government does in well-governed states, is greater than ever. 
The post-WWII institutions have become insufficient. 
It is time to reform them – and to devise new structures and tools designed to address global problems. 

Henry Paulson is Wrong 
CHICAGO – When a profitable company is hit by a very large liability, the solution is not to have the government buy its assets at inflated prices. 
The solution, instead, is protection under bankruptcy law, which in the United States means Chapter 11. 
Under Chapter 11, companies with a solid underlying business generally swap debt for equity. 
Old equity holders are wiped out and old debt claims are transformed into equity claims in the new entity which continues operating with a new capital structure. 
Alternatively, the debt-holders can agree to reduce the face value of debt, in exchange for some warrants. So why not use this well-established approach to solve the financial sector’s current problems? 
The obvious answer is that we do not have time; 
Chapter 11 procedures are generally long and complex, and the current crisis has reached a point where time is of the essence. 
But we are in extraordinary times, and the government has taken and is prepared to take unprecedented measures. 
As if rescuing the big insurer AIG and prohibiting all short selling of financial stocks was not enough, now US Treasury Secretary Henry Paulson proposes buying up (with taxpayers’ money) the distressed assets of the financial sector. 
But at what price? 
If banks and financial institutions find it difficult to recapitalize (i.e., issue new equity), it is because investors are uncertain about the value of the assets in their portfolios and do not want to overpay. 
Will government do better at valuing those assets? 
In a negotiation between government officials and a banker with a bonus at risk, who will have more clout in determining the price? 
Paulson’s plan would create a charitable institution that provides welfare to the rich – at taxpayers’ expense. 
If the government subsidy is large enough, it will succeed in stopping the crisis. 
But, again, at what price? 
Aside from costing billions of taxpayer dollars, Paulson’s plan violates the fundamental capitalist principle that whoever reaps the gains also bears the losses. 
Remember that in America’s Savings and Loan crisis of the late 1980’s, the government had to bail out those institutions, because their deposits were federally insured. 
But in this case, the government does not have to bail out the debt-holders of Bear Sterns, AIG, or any of the other financial institutions that will benefit from Paulson’s plan. 
Since we do not have time for Chapter 11 proceedings and we do not want to bail out all the creditors, the lesser evil is to do what judges do in contentious and overextended bankruptcy processes: impose a restructuring plan on creditors, with part of the debt forgiven in exchange for equity or warrants. 
There is precedent for such a bold move. 
During the Great Depression, many debt contracts were indexed to gold. 
So when the dollar’s convertibility into gold was suspended, the value of that debt soared, threatening many institutions’ survival. 
President Roosevelt’s administration declared the clause invalid, forcing debt forgiveness. 
My colleague and current Fed Governor Randall Koszner studied this episode and showed that not only stock prices, but also bond prices, soared after the Supreme Court upheld the decision. 
How is that possible? 
As corporate finance experts have been saying for 30 years, having too much debt and too little equity is costly, so reducing the face value of debt can sometimes benefit not only equity-holders, but also debt-holders. 
But, while debt forgiveness benefits holders of both equity and debt, debt-holders don’t voluntarily agree to it for two reasons. 
First, even if each individual debt-holder benefits, he or she will benefit even more if everybody else cuts the face value of their debt and he or she does not. 
Hence, everybody waits for others to move first, creating obvious delay. 
Second, from a debt-holder’s point of view, a government bailout is better. 
Even talk of a government bailout reduces the debt-holders’ incentive to act, making the bailout more necessary. 
As during the Great Depression and in many debt restructurings, it makes sense in the current contingency to mandate partial debt forgiveness or a debt-for-equity swap in the financial sector. 
It is a well-tested strategy, and it leaves taxpayers out of the picture. 
Forcing a debt-for-equity swap or debt forgiveness would be no greater a violation of private property rights than a massive bailout. 
But, for the major players in the financial sector, it is much more appealing to be bailed out by the taxpayers. 
Indeed, for the financial industry, the appeal of Paulson’s proposal is precisely that it taxes the many and benefits the few. 
Since the many (taxpayers) are dispersed, we cannot put up a good fight in the US Congress, whereas the financial industry is well represented politically. 
For six of the last 13 years, the Treasury Secretary was a Goldman Sachs alumnus. 
The decisions that Congress must make now will affect not only the US economy’s short-term prospects, but will shape the type of capitalism that we will have for the next 50 years. 
Do we want to live in a system where profits are private, but losses are socialized, where taxpayer money is used to prop up failed firms? 
Or do we want to live in a system where people are held accountable for their decisions, where imprudent behavior is penalized and prudent behavior rewarded? 

Herbert Hoover and the Stability Pact 
In mid-July the great-and-good finance ministers of the European Monetary Union (EMU) gathered to consider the euro zone's economic condition. 
They ruminated over the most recent economic forecast, which projects annual GDP growth in the euro zone this year at a pathetically anemic 0.7%. 
Then, to a minister, without exception, they all but decided that their economies should suffer more of the same, if not worse. 
They reiterated their commitment to the Stability and Growth Pact, which requires euro-zone countries to raise taxes and cut spending, putting even more downward pressure on their economies. 
The Pact is already knocking Germany into recession, and Italy's government is struggling to revise its growth forecasts fast enough to keep up with falling output. 
But none of this is apparently enough to force officials to re-examine their priorities. 
Some EU finance ministers still view the Stability Pact as the ``cornerstone'' of EMU. 
Others talk of the importance of obeying the ``rules of the game.'' 
Still others say that while it is clearly essential to restore economic growth, the recovery must occur ``within the spirit of the Pact.'' 
From the American side of the Atlantic, all of these rationales seem utterly bizarre. 
The last time an American government tried to ensure a balanced budget in the face of a recession was over seventy years ago, during the presidency of Herbert Hoover at the outset of the Great Depression. 
Since then the broad consensus in the US has been that cyclical economic distress requires the use of budget deficits to ameliorate suffering, stimulate aggregate demand, and hasten recovery. 
Economists call these cyclical fiscal boosts ``automatic stabilizers.'' 
When private incomes fall, so do public revenues. 
The reduction in tax collection can increase disposable income. 
But, more importantly, when private incomes fall, government social-welfare expenditures rise, sparking a recovery in demand, output, investment, and employment. 
The fall in taxes and the rise in spending do widen the budget deficit, but in a healthy and useful way. 
On the American side of the Atlantic, the usefulness of these automatic fiscal stabilizers is unchallenged. 
On the contrary, whenever recession threatens, political debate revolves around whether they need to be reinforced by additional stimulus via discretionary fiscal policy. 
No one considers how to put further downward pressure on the economy by raising tax rates and cutting back on spending programs. 
Neither Democrats nor Republicans have an interest in choking off economic activity. 
This is not a partisan issue. 
Nor is it even a fiscal discipline issue. 
Whenever proposals have surfaced for some sort of balanced-budget amendment to the US Constitution, proponents have typically included exemptions not just for war, but also for recessions. 
We know the origins of the Stability and Growth Pact. 
Northern European countries--particularly Germany and the Netherlands--prided themselves on traditionally maintaining moderate debt-to-GDP ratios and relatively low interest rates. 
These countries saw that Southern European countries--Italy and Greece were the biggest worries--traditionally had high debt-to-GDP ratios and relatively high nominal interest rates because of their perceived tolerance of inflation. 
The Northern European countries feared that deficit spending by the South might ultimately create pressure for partial monetization of their debt through inflation of the euro--or, more precisely, their leaders feared that investors, fearing the same thing, would demand higher interest rates. 
The Stability and Growth Pact was intended to keep the public debts of southern Europe low, and thus keep interest rates low by reassuring investors that national debts would never be allowed to rise high enough to generate serious inflationary pressures. 
But if you look at the euro zone's economic problems today, the danger of high long-term nominal interest rates does not even rank among investors' top ten concerns. 
At the very least, investors clearly do not fear that high debt will lead governments to stoke inflation by printing more money. 
The EU's problems are stagnant output, high structural unemployment, weak productivity growth, the wasteful and unfair Common Agricultural Policy (CAP), and the forthcoming structural adjustments from the expansion of the EU itself. 
From one perspective, it is good that the euro zone's finance ministers are eager to keep their national debts low in the long term: it is a sign that the victories over inflation won in the 1970's will not be casually thrown away. 
But it is dangerous to become obsessed with the past. 
There is no more certain route to economic disaster than to put on historical blinders. 
As Herbert Hoover could attest, when we see only the economic policy problems of a generation ago, we risk missing the hazards that lie directly in front of our eyes. 

How Safe Substances Become Dangerous 
PALO ALTO – Since the development of the science of toxicology in the sixteenth century, its guiding principle has been that “the dose makes the poison.” 
It is a rule that applies to the medicines used by patients worldwide many billions of times a day. 
The right dose of aspirin can be a therapeutic godsend, but consuming too much can be lethal. 
The principle even applies to foods: Large amounts of nutmeg or licorice are notoriously toxic. 
The risk that a substance poses broadly depends on two factors: its inherent capacity to cause harm and one’s exposure to it. 
It is a simple idea, but even some presumptive professionals seem unable to grasp it – as evidenced by the decision by the International Agency for Research on Cancer (IARC), a component of the World Health Organization, to classify the commonly used herbicide 2,4-D as “possibly carcinogenic to humans.” 
When it comes to herbicides, the IARC seems to be on a losing streak. 
The organization recently classified glyphosate, another popular herbicide, as “probably” carcinogenic, a conclusion at odds with those of regulatory agencies around the world. 
Similarly, not a single governmental agency has deemed 2,4-D a carcinogen. 
Earlier this year, the United States Environmental Protection Agency (EPA) concluded that “based on weight of evidence consideration of the available data, 2,4-D would be classified as ‘Not Likely to be Carcinogenic to Humans.’” 
The European Food Safety Authority also recently concluded that “2,4-D, as currently manufactured, is unlikely to have a genotoxic potential or pose a carcinogenic risk to humans.” 
The decision by the IARC to classify substances like 2,4-D and glyphosate as potentially harmful is likely to cause alarm among farmers and consumers, who will wonder about the appropriateness of its continued use in commercial agriculture or gardening. 
This would be a shame, because these are highly effective and widely used herbicides, and when the IARC makes its decisions, it does not consider whether the substance in question is actually likely to cause cancer in the real world. 
Its panels do not assess whether a chemical will cause cancer – only if it is capable of causing cancer. 
As a result, the IARC has in the past classified aloe vera, acrylamide (a substance created by frying foods, such as French fries and potato chips), cell phones, working night shifts, Asian pickled vegetables, and coffee as “probable” or “possible” carcinogens. 
This is because it ignores the dosage, failing to consider the likelihood of coming into contact with enough of the substance to cause actual harm. 
In the case of coffee, for example, one would need to drink more than 50 cups a day, for an extended period of time, before any deleterious effects became likely. 
Classifying 2,4-D as a cancer risk to humans ignores extensive research and analysis conducted by health authorities worldwide, including the United Nations WHO/FAO Joint Meeting on Pesticide Residue (JMPR). 
This body evaluates the risks of substances like 2,4-D, considering real-world variables such as the amounts in soil and nearby water, exposure to animals passing through treated fields, and the potential for direct human contact. 
In reviews beginning in 1970, the JMPR has always found that when 2,4-D is applied correctly, it does not pose a health threat to anyone or anything on land or water. 
This finding has been affirmed by numerous government agencies, including the European Food Safety Authority, the EPA, the US Department of Agriculture, and Health Canada. 
When the IARC, which restricts its panels to consider only a narrow spectrum of selected publications, makes a mistaken decision, the effects are harmful. 
Its rulings give credibility to chemophobic activists looking for headlines and raise the likelihood that substances wrongly labeled as harmful will be replaced by other products that could pose greater risks or provide fewer benefits. 
If products such as glyphosate and 2,4-D were to become unavailable, farmers would be forced to resort to other methods to control weeds – none of them as efficient. 
Indeed, many of the alternatives would be more toxic or require more tillage, resulting in damaging soil erosion, increased CO2 emissions, decreased crop yields, greater production costs, and higher consumer prices. 
Nor would the problem be limited to farmers. 
There are more than 100 prescribed uses for 2,4-D, including the control of invasive weeds on lawns, in forestry, and to enhance safety along highways, power line corridors, and rail lines. 
The process the IARC uses in coming to conclusions is not only scientifically wrong; it is harmful. 
Its decisions, which have wide exposure, pose the greatest risk to human and other animal life – at any dose. 

Heroes Cross Swords in Sri Lanka 
NEW DELHI – Two celebrated heroes who, as president and army chief, helped end Sri Lanka’s long and brutal civil war against the Tamil Tigers are now crossing political swords. 
Whichever candidate wins Sri Lanka’s presidential election on January 26 will have to lead that small but strategically located island-nation in a fundamentally different direction – from making war, as it has done for more than a quarter-century, to making peace through ethnic reconciliation and power sharing. 
Sri Lanka, almost since independence in 1948, has been racked by acrimonious rivalry between the majority Sinhalese and the minority Tamils, who make up 12% of today’s 21.3-million population. 
Now the country is being divided by the political rivalry between two Sinhalese war idols, each of whom wants to be remembered as the true leader who crushed the Tamil Tiger guerrillas. 
The antagonism between President Mahinda Rajapaksa and the now-retired General Sarath Fonseka has been in the making for months. 
No sooner had Sri Lanka’s military crushed the Tamil Tigers – who ran a de facto state for more than two decades in the north and east – than Rajapaksa removed Fonseka as army chief to appoint him to the new, largely ceremonial post of chief of defense staff. 
Once the four-star general was moved to the new position, his relationship with the president began to sour. 
After rumors swirled of an army coup last fall, the president, seeking military assistance should the need arise, alerted India. 
When Rajapaksa decided last November to call an early election to help cash in on his war-hero status with the Sinhalese, he had a surprise waiting for him: anticipating the move, Fonseka submitted his resignation so that he could stand against the incumbent as the common opposition candidate. 
In his bitter resignation letter, the general accused Rajapaksa of “ unnecessarily placing Indian troops on high alert” and failing to “win the peace in spite of the fact that the army under my leadership won the war.” 
Now the political clash between the two men – both playing the Sinhalese nationalist card while wooing the Tamil minority – has overshadowed the serious economic and political challenges confronting Sri Lanka. 
Years of war have left Sri Lanka’s economy strapped for cash. 
Despite a $2.8 billion International Monetary Fund bailout package, the economy continues to totter, with inflation soaring and public-sector salary disputes flaring. 
The government, desperate to earn foreign exchange, has launched a major campaign to attract international tourists. 
But a vulnerable economy dependent on external credit has only helped increase pressure on Sri Lanka to investigate allegations of war crimes and crimes against humanity. 
This was a war with no witnesses, as the government barred independent journalists and observers from the war zone. 
Yet the United Nations estimates that more than 7,000 noncombatants were killed in the final months of the war as government forces overran Tamil Tiger bases. 
How elusive the peace dividend remains can be seen from the government’s decision to press ahead with the expansion of an already-large military. 
The Sri Lankan military is bigger in troop strength than the British and Israeli militaries, having expanded five-fold since the late 1980’s to more than 200,000 troops today. 
In victory, that strength is being raised further, in the name of “eternal vigilance.” 
With an ever-larger military machine backed by village-level militias, civil society has been the main loser. 
Sweeping emergency regulations remain in place, arming the security forces with expansive powers of search, arrest, and seizure of property. 
Individuals can still be held in unacknowledged detention for up to 18 months. 
Now calls are growing for the government to surrender the special powers that it acquired during the war and end the control of information as an instrument of state policy. 
Fonseka has promised to curtail the almost unchecked powers that the president now enjoys and free thousands of young Tamil men suspected of rebel links. 
Rajapaksa, for his part, has eased some of the travel restrictions in the Tamil-dominated north after opening up sealed camps where more than 270,000 Tamils were interned for months. 
More than 100,000 still remain in those camps. 
Neither of the two main candidates, though, has promised to tackle the country’s key challenge: transforming Sri Lanka from a unitary state into a federation that grants provincial and local autonomy. 
After all, the issues that triggered the civil war were rooted in the country’s post-independence moves to fashion a mono-ethnic national identity, best illustrated by the 1956 “Sinhalese only” language policy and the 1972 Constitution’s elimination of a ban on discrimination against minorities. 
Sri Lanka is the only country, along with Malaysia, with affirmative action for the majority ethnic community. 
As the incumbent with control over the state machinery and media support, Rajapaksa has the edge in the election. 
But, with the fractured opposition rallying behind Fonseka and a moderate Tamil party also coming out in support of him, this election may produce a surprise result. 
Whichever “hero” wins, however, building enduring peace and stability in war-scarred Sri Lanka requires a genuine process of national reconciliation and healing. 
The country’s future hinges on it. 


Herr Fischer Goes to Washington 
MUNICH: His party, the Greens, once stood for pacifism and ecology. 
He was once a stone-throwing, radical, street-fighting man. 
Now Joschka Fischer sports elegant three-piece suits, lays wreaths at the tombs of unknown soldiers and, as foreign minister, represents Germany to the world. 
That transformation will be scrutinized in his forthcoming visit to a skeptical America. 
Since Helmut Kohl's semi-eternal government was voted out of power last year, Fischer has become the surprising symbol for continuity and European commitment in German diplomacy. 
Although his party received a mere 7% of the vote, Fischer defines the framework within which Germany's international objectives are formulated. 
Even Chancellor Gerhard Schroder, who suggested in a series of throw-away remarks that his government would steer a different, more assertive course, now tows the line Fischer has tied. 
Schroder's early remarks suggested a real change in German foreign policy. 
The special relationship with France? 
Perhaps it should be turned into a triangle involving Britain. 
Commitment to European integration? 
Fine, but first a big reduction in Germany's financial contribution. 
Enlargement of the EU to include Central Europe? 
All right in principle, but let's wait. 
At any rate, Germany would pursue a foreign policy in line with national self-interest. 
The new Chancellor, whose previous job as a provincial premier had not given him much exposure to international affairs was, at the beginning of his tenure, very much at sea. 
Since then he has been learning fast, with Fischer writing the script. 
In an impressive tour de force before the European Parliament last January as President of the EU's Council of Ministers, the radical-turned-diplomat put things in order again. 
History, said Fischer, had long decided that enlargement would occur. 
Only the how and when now needed to be tackled. 
Because, after the Balkan wars it would be irresponsible to permit a zone of instability along EU frontiers, Germany favors enlargement without delay. 
Yes, a fair distribution of the financial burden within the EU was needed, but Germany, the strongest economy, would remain the largest net contributor. 
In a remark almost echoing Helmut Kohl, Fischer proclaimed: "Wars have become impossible within the EU, both politically and militarily. 
For what once was the ‘continent of wars', this is the greatest achievement of European integration, a fact we should never forget". 
Irony abounds here. 
When the Social Democrats were sniffing victory last summer, they went out of their way to assure their foreign counterparts not to worry about Green participation in the new government; no Green would get his hand on the levers of foreign and security policy. 
Now it is a Green, Fischer, who has emerged as the symbol of continuity and commitment in Germany's foreign policy. 
This is a surprise only to those who have not followed Fischer over the past decade. 
It was Fischer who, years ago, came out in favor of NATO when his party yearned for a world without arms. 
It was Fischer who fought for (and won) support among the Greens to send German forces to Bosnia and now, perhaps, to Kosovo. 
He has even, in extreme circumstances, favored the use of force without a prior mandate by the UN Security Council. 
True, Fischer ruffled quite a few Atlantic (many American) feathers by arguing that NATO's nuclear doctrine should no longer include the first use of nuclear weapons. 
But he has been enough of a pragmatist not to ram the point home against the opposition of NATO's three nuclear weapon states. 
Fischer is that increasingly rare breed among post-Kohl German politicians - a committed ‘Westerner' as well as a committed European. 
Germany's ties to the West, he argued recently, "represent the belated bourgeois revolution which is our democratic tradition." 
In other words: Western orientation is a necessary condition of German democracy. 
And Fischer made short thrift with those who like to suggest that past European policies did not adequately respond to Germany's national interest: "Completion of the European Union is in our supreme national interest and in the European interest as well." 
Clarity of purpose and deftness of style give Fischer considerable authority in Schroder's cabinet. 
He has practically written its foreign policy brief. 
Listening to the Chancellor and his Foreign Minister address some 270 international defense and security experts in February at the annual Munich "Conference for Security Policy", it was impressive how all sang in tune, a tune Fischer composed. 
As a result, an audience of staunch Atlanticists saw Germany as a responsible, reliable ally. 
A year ago, the prospect of a Red-Green coalition in Bonn would have caused great dismay; now it was all smiles and back-slapping chumminess. 
Following recent setbacks for the government coalition in regional elections in Hesse, where a red-green government was sent packing, Chancellor Schroder, frustrated by Green energy minister Trittin and his attempts to steam-roll an end of nuclear power in Germany, granted Fischer the ultimate accolade: the Greens, he said needed more Fischer and less Trittin. 
That remark is true, and unfortunate. 
It does not help Fischer among the Greens to be praised by the big brother SPD. 
More important, as foreign minister, Fischer is by definition peripatetic. 
He can no longer, as he once did, spend most of his time holding his party both together and on the course of power. 
In the end Joschka Fischer is likely to continue bringing cohesion and credibility to Germany's foreign policy - at the price of no longer being able to provide cohesion and credibility for his own party. 

Hezbollah in a Corner 
BEIRUT – The future of Hezbollah, Lebanon’s powerful Shia political and paramilitary organization, has never looked more uncertain. 
Indeed, given rising tension with Israel and possible indictments of its operatives by the international tribunal investigating the assassination of former Prime Minister Rafic al-Hariri, Hezbollah appears to be hemmed in on all sides. 
The most immediate question concerns the possibility of another Israel-Hezbollah war, fears of which have mounted throughout this year, fueled by reports of new missile transfers to Hezbollah and intermittent threats from Israel. 
Those who foresee war argue that Israel is unwilling to tolerate a heavily armed Iranian proxy on its border while tensions with Iran over the nuclear issue remain unresolved. 
Although war is unlikely in the coming months, if sanctions on Iran don’t bear fruit by early 2011, Israel might feel the need to act. 
If it launched military strikes on Iran’s nuclear installations, Hezbollah would likely join the fray and Israel would have to engage Hezbollah at the same time. 
Alternatively, Israel might launch a pre-emptive war against Hezbollah in order to rob Iran of a nearby retaliatory capacity. 
Hezbollah is preparing intensively for such scenarios, building defenses, digging tunnels, and assembling a powerful missile arsenal. 
But, although Hezbollah’s preparations are likely to ensure its survival, it would be hard-pressed to justify to the Lebanese public a strategy that led to two ruinous wars in the span of five years. 
In the end game of such a war, Syria might be asked by the Arab countries and the international community to take greater responsibility in Lebanon, in order to contain Hezbollah and its military profile. 
Moreover, if peace prevents a slide into war, Hezbollah has another problem. 
Although a real breakthrough in the Arab-Israeli peace process appears unlikely, United States envoy George Mitchell is still talking of Arab-Israeli peace as a distinct possibility in 2011. 
Sources within the US administration hint that President Barack Obama might announce the outlines of an Arab-Israeli settlement sometime later this year. 
An accord between Syria and Israel is a key element of all proposed scenarios for Arab-Israeli peace. 
In exchange for giving back the occupied Golan Heights, Israel and the US will insist on the disarmament of Hezbollah. 
Indeed, within the context of the Arab Peace Plan, announced in Beirut in 2002, the Arab states take it upon themselves to ensure the security of “all states in the region” – code words for dealing with the threats from Hezbollah and Hamas – since the region includes Israel. 
Although both Hezbollah and Iran still argue, perhaps correctly, that Israel will not give back the Golan Heights or allow the emergence of a Palestinian state, the possibility of peace cannot be ruled out. 
If it does occur, Syria will push Lebanon into a peace treaty with Israel and lean on Hezbollah heavily to adjust to the new realities. 
Given its popularity among Lebanese Shia, Hezbollah could continue as an influential political party, but it would have to abandon its role as a major proxy force for Iran’s Revolutionary Guards. 
Nevertheless, Hezbollah faces severe political trouble, too. 
Although no official announcement has been made, there are reports that Daniel Bellemare, the prosecutor for the Special Tribunal for Lebanon, might conclude his investigation and issue indictments in the fall. 
In a speech on July 16, Hezbollah leader Sheikh Hassan Nasrallah acknowledged rumors that the Tribunal might indict members of his party, but charged that the Tribunal was part of an Israeli plot to undermine the Islamic resistance in Lebanon and has no credibility. 
He argued that the indictments would probably be based on cell-phone records, and that Israeli agents had penetrated the Lebanese cell-phone network. 
Indeed, the Lebanese authorities recently arrested a high-level official at one of the country’s two cell-phone companies, alleging that he was an Israeli agent. 
In describing the tribunal as part of an Israeli plot, Nasrallah warned the government and other parties in Lebanon against cooperating with it, or accepting its verdicts. 
He reminded his audience of the street fighting in Beirut in May 2008, and made clear that Hezbollah would not shy away from another fight if necessary. 
While Hezbollah has tried to convince other Lebanese that its presence helps maintain the country’s security and stability, regional and international developments suggest that it faces mounting challenges. 
And, although the future does not look bright for Hezbollah, it is not likely to relinquish its power without a fight. 

The Hidden Debt Burden of Emerging Markets 
LIMA – As central bankers and finance ministers from around the globe gather for the International Monetary Fund’s annual meetings here in Peru, the emerging world is rife with symptoms of increasing economic vulnerability. 
Gone are the days when IMF meetings were monopolized by the problems of the advanced economies struggling to recover from the 2008 financial crisis. 
Now, the discussion has shifted back toward emerging economies, which face the risk of financial crises of their own. 
While no two financial crises are identical, all tend to share some telltale symptoms: a significant slowdown in economic growth and exports, the unwinding of asset-price booms, growing current-account and fiscal deficits, rising leverage, and a reduction or outright reversal in capital inflows. 
To varying degrees, emerging economies are now exhibiting all of them. 
The turning point came in 2013, when the expectation of rising interest rates in the United States and falling global commodity prices brought an end to a multi-year capital-inflow bonanza that had been supporting emerging economies’ growth. 
China’s recent slowdown, by fueling turbulence in global capital markets and weakening commodity prices further, has exacerbated the downturn throughout the emerging world. 
These challenges, while difficult to address, are at least discernible. 
But emerging economies may also be experiencing another common symptom of an impending crisis, one that is much tougher to detect and measure: hidden debts. 
Sometimes connected with graft, hidden debts do not usually appear on balance sheets or in standard databases. 
Their features morph from one crisis to the next, as do the players involved in their creation. 
As a result, they often go undetected, until it is too late. 
Indeed, it was not until after the eruption of the 1994-1995 peso crisis that the world learned that Mexico’s private banks had taken on a significant amount of currency risk through off-balance-sheet borrowing (derivatives). 
Likewise, before the 1997 Asian financial crisis, the IMF and financial markets were unaware that Thailand’s central-bank reserves had been nearly depleted (the $33 billion total that was reported did not account for commitments in forward contracts, which left net reserves of only about $1 billion). 
And, until Greece’s crisis in 2010, the country’s fiscal deficits and debt burden were thought to be much smaller than they were, thanks to the use of financial derivatives and creative accounting by the Greek government. 
So the great question today is where emerging-economy debts are hiding. 
And, unfortunately, there are severe obstacles to exposing them – beginning with the opaqueness of China’s financial transactions with other emerging economies over the past decade. 
During its domestic infrastructure boom, China financed major projects – often connected to mining, energy, and infrastructure – in other emerging economies. 
Given that the lending was denominated primarily in US dollars, it is subject to currency risk, adding another dimension of vulnerability to emerging-economy balance sheets. 
But the extent of that lending is largely unknown, because much of it came from development banks in China that are not included in the data collected by the Bank for International Settlements (the primary global source for such information). 
And, because the loans were rarely issued as securities in international capital markets, it is not included in, say, World Bank databases, either. 
Even where data exist, the figures must be interpreted with care. 
For example, data collected on a project-by-project basis by the Global Economic Governance Initiative and the Inter-American Dialog could provide some insight into Chinese lending to several Latin American economies. 
For example, it seems that, from 2009 to 2014, total Chinese lending to Venezuela amounted to 18% of the country’s annual GDP, and Ecuador received Chinese loans exceeding 10% of its GDP. 
Chinese lending to Brazil was closer to 1% of GDP, while lending to Mexico was comparatively trivial. 
But actual disbursements may have fallen short of the original plans, meaning that these countries’ debts to China are lower than estimated. 
Alternatively – and more likely – the data may not include some projects, lenders, or borrowers, meaning that the debts could be much higher. 
Moreover, other forms of borrowing – such as trade finance, which is skewed toward shorter maturities – are not included in these figures. 
Currency-swap agreements, which have been important for Brazil and Argentina, must also be added to the list. 
(This highlights the importance of tracking net, rather than gross, reserves.) 
In short, though emerging economies’ debts seem largely moderate by historic standards, it seems likely that they are being underestimated, perhaps by a large margin. 
If so, the magnitude of the ongoing reversal in capital flows that emerging economies are experiencing may be larger than is generally believed – potentially large enough to trigger a crisis. 
In this context, keeping track of opaque and evolving financial linkages is more important than ever. 

High Anxiety 
CHICAGO – The United States has reached a point where almost half its population is described as being in some way mentally ill, and nearly a quarter of its citizens – 67.5 million – have taken antidepressants. 
These eye-popping statistics have sparked a widespread, sometimes rancorous debate about whether people are taking far more medication than is needed for problems that may not even be mental disorders. 
Studies indicate that 40% of all patients fall short of the diagnoses that doctors and psychiatrists give them, yet 200 million prescriptions are still written annually in the US to treat depression and anxiety. 
Those who defend such widespread use of prescription drugs insist that a significant part of the population is under-treated and, by inference, under-medicated. 
Those opposed to such rampant use of drugs note that diagnostic rates for bipolar disorder, in particular, have skyrocketed by 4,000% and that overmedication is impossible without over-diagnosis. 
To help settle this long-standing dispute, I studied why the number of recognized psychiatric disorders has ballooned so dramatically in recent decades. 
In 1980, the Diagnostic and Statistical Manual of Mental Disorders added 112 new mental disorders to its third edition ( DSM-III ). 
Fifty-eight more disorders appeared in the revised third (1987) and fourth (1994) editions. 
With over a million copies in print, the manual is known as the bible of American psychiatry; certainly it is an invoked chapter and verse in schools, prisons, courts, and by mental-health professionals around the world. 
The addition of even one new diagnostic code has serious practical consequences. 
What, then, was the rationale for adding so many in 1980? 
After several requests to the American Psychiatric Association, I was granted complete access to the hundreds of unpublished memos, letters, and even votes from the period between 1973 and 1979, when the DSM-III task force debated each new and existing disorder. 
Some of the work was meticulous and commendable. 
But the overall approval process was more capricious than scientific. 
DSM-III grew out of meetings that many participants described as chaotic. 
One observer later remarked that the small amount of research drawn upon was “really a hodgepodge –scattered, inconsistent, and ambiguous.” 
The interest and expertise of the task force was limited to one branch of psychiatry: neuropsychiatry. 
That group met for four years before it occurred to members that such one-sidedness might result in bias. 
Incredibly, the lists of symptoms for some disorders were knocked out in minutes. 
The field studies used to justify their inclusion sometimes involved a single patient evaluated by the person advocating the new disease. 
Experts pressed for the inclusion of illnesses as questionable as “chronic undifferentiated unhappiness disorder” and “chronic complaint disorder,” whose traits included moaning about taxes, the weather, and even sports results. 
Social phobia (later dubbed “social anxiety disorder”) was one of seven new anxiety disorders created in 1980. 
At first it struck me as a serious condition. 
By the 1990’s experts were calling it “the disorder of the decade,” insisting that as many as one in five Americans suffers from it. 
Yet the complete story turned out to be rather more complicated. 
For starters, the specialist who in the 1960’s originally recognized social anxiety (London-based Isaac Marks, a renowned expert on fear and panic) strongly resisted its inclusion in DSM-III as a separate disease category. 
The list of common behaviors associated with the disorder gave him pause: fear of eating alone in restaurants, avoidance of public toilets, and concern about trembling hands. 
By the time a revised task force added dislike of public speaking in 1987, the disorder seemed sufficiently elastic to include virtually everyone on the planet. 
To counter the impression that it was turning common fears into treatable conditions, DSM-IV added a clause stipulating that social anxiety behaviors had to be “impairing” before a diagnosis was possible. 
But who was holding the prescribers to such standards? 
Doubtless, their understanding of impairment was looser than that of the task force. 
After all, despite the impairment clause, the anxiety disorder mushroomed; by 2000, it was the third most common psychiatric disorder in America, behind only depression and alcoholism. 
Over-medication would affect fewer Americans if we could rein in such clear examples of over-diagnosis. 
We would have to set the thresholds for psychiatric diagnosis a lot higher, resurrecting the distinction between chronic illness and mild suffering. 
But there is fierce resistance to this by those who say they are fighting grave mental disorders, for which medication is the only viable treatment. 
Failure to reform psychiatry will be disastrous for public health. 
Consider that apathy, excessive shopping, and overuse of the Internet are all serious contenders for inclusion in the next edition of the DSM, due to appear in 2012. 
If the history of psychiatry is any guide, a new class of medication will soon be touted to treat them. 
Sanity must prevail: if everyone is mentally ill, then no one is. 

The Cost of Overhyping Globalization 
BRUSSELS – As the world’s financial elite converges on Washington, DC, for the annual meetings of the International Monetary Fund and the World Bank, they cannot escape yet another clarion call to reverse the retreat of globalization. 
Faltering trade, it is assumed, must be an adverse trend that needs to be addressed. 
But the assumption is simplistic, at best. 
The problem lies in a lack of understanding of what drove trade growth over the last few decades. 
To be sure, there have been efforts to grasp the current slowdown. 
The IMF’s latest World Economic Outlook devotes an entire chapter to it. 
But no significant new barriers to trade have been identified. 
Instead, the IMF declares, some three-quarters of the slowdown in trade growth is a result of “overall weakness in economic activity,” especially investment. 
The Fund also asserts that “the waning pace of trade liberalization and the recent uptick in protectionism” have played a role, though it is not quantifiable. 
Even without establishing a clear understanding of what is driving current trends, however, the IMF report calls for action to revive the “virtuous cycle of trade and growth.” 
Clearly, faith in trade is very strong. 
But faith is part of the problem. 
Blind faith in globalization led many to overhype it, creating impossible expectations for trade liberalization. 
When those expectations were not met, many people felt duped and rejected free trade. 
This is not to say that there is no empirical case for trade liberalization. 
Dismantling trade barriers enables countries to start specializing in sectors in which they are more productive, which leads to higher growth and living standards for everyone. 
And, indeed, from the 1950s to the 1980s, the process of breaking down the high trade barriers that had been erected during World War II brought major gains. 
But these gains petered out eventually. 
Economic theory implies that the gains from reducing trade barriers decline faster as those barriers become lower. 
So it should not have been surprising that, by the early 1990s, when tariffs and other trade barriers had already reached very low levels, the traditional benefits of trade liberalization had largely been exhausted. 
Eliminating what small barriers remained would not have had much impact. 
What did have an impact was a two-decade-long commodity-price boom. 
High prices enabled major commodity exporters to import more and to pursue growth-enhancing policies at home – a boon to global growth. 
Moreover, because commodities account for a large share of world trade, rising prices boosted its total value. 
Rather than acknowledge the role of commodity prices in bolstering both trade and growth in the early 2000s, most economists and politicians attributed those positive trends to trade-liberalization policies. 
In doing so, they reinforced the notion that “hyper-globalization” was the key to huge gains for everyone. 
But the growth fueled by higher commodity prices, unlike that produced by the dismantling of trade barriers, caused a decline in living standards in the commodity-importing advanced countries, because it reduced the purchasing power of workers. 
No politician dared to make this distinction. 
So when advanced-country workers were squeezed economically, they concluded that globalization was the problem. 
The role of commodities in the recent struggles of advanced-country workers is reflected in the differences between the experiences of those in the United States and Europe. 
Because the US produces much of its own oil and gas, the increase in commodity prices had less of an impact on the economy as a whole than in Europe. 
But, for individual workers, the impact of rising commodity prices was larger in the US – not least because, in Europe, high sales taxes meant that even a doubling of crude oil prices produced only a modest increase in prices at the pump. 
Only oil producers, and a small number of workers in the sector, benefited from higher oil prices in the US. 
Still, high-priced commodities – and, in particular, crude oil – created the illusion of wealth for the US, which, unlike European countries, did not feel the need to increase its manufacturing exports to balance its external accounts. 
So the US allowed its manufacturing sector to stagnate, as its external balance deteriorated. 
As a result, American workers got squeezed from two sides. 
All of this happened at about the same time as the North American Free Trade Agreement was coming on stream. 
Though most studies show that net job losses due to NAFTA were limited, this timing created the strong impression that free-trade agreements – and globalization in general – was a raw deal for American workers. 
When the global financial crisis erupted in 2008, destroying the value of houses that had kept those workers feeling wealthy, the true weight of the situation fell on US workers. 
This created an opening for demagogues like Republican presidential candidate Donald Trump to win support on promises of prosperity through protectionism. 
Having misunderstood the causes of the extraordinary growth in trade in recent decades, political elites over-sold globalization. 
When one considers the gulf between their promises – explicit and otherwise – and the actual experience of many workers, the current backlash against trade openness should be no surprise. 
But there is good news: if the decline in the volume of trade is due to lower commodity prices, it will largely benefit advanced-country workers. 
Perhaps this will be enough to ease the demand for unnecessary new trade barriers. 

High Fences Make Bad Neighbors in Europe 
Good fences make good neighbors, so the poet Robert Frost wrote. 
Sadly, the European Union seems to be taking Frost's poetic whimsy as a serious policy prescription. 
For how is the EU preparing to welcome the citizens of the ten countries that will become members in May? 
Simple: by shutting the door in their faces, and then building regulatory walls to keep them away from the door in the first place. 
Indeed, the Union is behaving even worse. 
Because no agreement exists at the EU level concerning a common set of rules to be applied to the Union's new citizens, each member country is establishing its own rules without any coordination. 
Some of these emerging rules are draconian. 
Austria and Germany - so far the two largest recipients of migrants from Eastern Europe, receiving four out of every five - announced last year that they will restrict migration from the new member states for the full transition period of seven years. 
France and Belgium will restrict immigration by new EU citizens for at least the first two-years of the transition period. 
Sweden initially appeared to take a liberal stance, but is now postponing opening its borders and may tighten migrants' access to welfare benefits. 
The Danish government almost collapsed in January when the Ministry of Labor proposed to open the job market to all new EU citizens who can prove that they have found employment. 
Greece and Italy have been silent so far, which means that they are likely to keep current restrictions vis-à-vis the new members: they will de facto be treated the same as migrants from outside the EU. 
Thus, all the countries bordering the new member states will be closed to migration from the "New Europe." 
All this barrier-building reflects mounting public concern about citizens from the new member states emigrating to take advantage of generous welfare systems in the Union. 
Little wonder, then, that the largest drops in popular support for enlargement registered by the Eurobarometer Survey occurred in EU countries with the most generous welfare states. 
But support for enlargement is fading everywhere, right on the brink of accession. 
At the same time, closing the doors to the Union's newest citizens will not solve the problem of welfare access and will certainly hurt economic growth. 
In EU labor markets characterized by low mobility, such as those that exist across Western and Southern Europe, migrants can play a very important role. 
By increasing average productivity, they contribute not only to stronger growth, but also to achieving higher incomes per capita. 
In fact, due to distortions in how wages are set-often set irrespective of local labor productivity rates-migrants can even contribute to reducing unemployment in Western and Southern Europe. 
Moreover, shutting the door will not solve the problem of welfare access, because illegal migration is worse than legal migration: it draws resources without contributing anything to finance the welfare state even though most migrants are young and do work. 
A better way to deal with the fear of migrants abusing social welfare systems would be to adopt a common and rather generous transitional quota at the level of the EU as a whole, to be lifted early if it is not filled. 
Migration quotas should be preferred to other types of restrictions on the ground that they allow at least a part of the potential welfare gains from migration to be realized. 
Quotas could be established at levels set on the basis of past periods of high migration - say, an annual flow of 400,000 people to the EU. 
While these transitional restrictions are put in place, reforms should be undertaken that address the underlying basis for the public's fear of migration. 
The root of this fear, of course, is the vast differences in income between citizens of, say, Lithuania, and those of most of the Union. 
Of course, economic convergence is a long-term business. 
Thus, redistributive policies in the EU should be reformed in ways that discourage "welfare shopping" by citizens of its poorest member states. 
Here the problem is the incompatibility of insurance schemes, on the one hand, in which the benefits that people receive are based on what they have contributed, and, on the other hand, social assistance programs that entail cash transfers. 
All EU countries, including the new members, should be encouraged to adapt social assistance schemes (which also exist in the new member states) so as to meet some basic income requirements. 
EU-wide coordination of these minimum guaranteed income schemes should be gradually pursued, with the long-term intention of building up a pan-European safety net as one of the institutional pillars of the EU. 

Monopoly’s New Era 
NEW YORK – For 200 years, there have been two schools of thought about what determines the distribution of income – and how the economy functions. 
One, emanating from Adam Smith and nineteenth-century liberal economists, focuses on competitive markets. 
The other, cognizant of how Smith’s brand of liberalism leads to rapid concentration of wealth and income, takes as its starting point unfettered markets’ tendency toward monopoly. 
It is important to understand both, because our views about government policies and existing inequalities are shaped by which of the two schools of thought one believes provides a better description of reality. 
For the nineteenth-century liberals and their latter-day acolytes, because markets are competitive, individuals’ returns are related to their social contributions – their “marginal product,” in the language of economists. 
Capitalists are rewarded for saving rather than consuming – for their abstinence, in the words of Nassau Senior, one of my predecessors in the Drummond Professorship of Political Economy at Oxford. 
Differences in income were then related to their ownership of “assets” – human and financial capital. 
Scholars of inequality thus focused on the determinants of the distribution of assets, including how they are passed on across generations. 
The second school of thought takes as its starting point “power,” including the ability to exercise monopoly control or, in labor markets, to assert authority over workers. 
Scholars in this area have focused on what gives rise to power, how it is maintained and strengthened, and other features that may prevent markets from being competitive. 
Work on exploitation arising from asymmetries of information is an important example. 
In the West in the post-World War II era, the liberal school of thought has dominated. 
Yet, as inequality has widened and concerns about it have grown, the competitive school, viewing individual returns in terms of marginal product, has become increasingly unable to explain how the economy works. 
So, today, the second school of thought is ascendant. 
After all, the large bonuses paid to banks’ CEOs as they led their firms to ruin and the economy to the brink of collapse are hard to reconcile with the belief that individuals’ pay has anything to do with their social contributions. 
Of course, historically, the oppression of large groups – slaves, women, and minorities of various types – are obvious instances where inequalities are the result of power relationships, not marginal returns. 
In today’s economy, many sectors – telecoms, cable TV, digital branches from social media to Internet search, health insurance, pharmaceuticals, agro-business, and many more – cannot be understood through the lens of competition. 
In these sectors, what competition exists is oligopolistic, not the “pure” competition depicted in textbooks. 
A few sectors can be defined as “price taking”; firms are so small that they have no effect on market price. 
Agriculture is the clearest example, but government intervention in the sector is massive, and prices are not set primarily by market forces. 
US President Barack Obama’s Council of Economic Advisers, led by Jason Furman, has attempted to tally the extent of the increase in market concentration and some of its implications. 
In most industries, according to the CEA, standard metrics show large – and in some cases, dramatic – increases in market concentration. 
The top ten banks’ share of the deposit market, for example, increased from about 20% to 50% in just 30 years, from 1980 to 2010. 
Some of the increase in market power is the result of changes in technology and economic structure: consider network economies and the growth of locally provided service-sector industries. 
Some is because firms – Microsoft and drug companies are good examples – have learned better how to erect and maintain entry barriers, often assisted by conservative political forces that justify lax anti-trust enforcement and the failure to limit market power on the grounds that markets are “naturally” competitive. 
And some of it reflects the naked abuse and leveraging of market power through the political process: Large banks, for example, lobbied the US Congress to amend or repeal legislation separating commercial banking from other areas of finance. 
The consequences are evident in the data, with inequality rising at every level, not only across individuals, but also across firms. 
The CEA report noted that the “90th percentile firm sees returns on investments in capital that are more than five times the median. 
This ratio was closer to two just a quarter of a century ago.” 
Joseph Schumpeter, one of the great economists of the twentieth century, argued that one shouldn’t be worried by monopoly power: monopolies would only be temporary. 
There would be fierce competition for the market and this would replace competition in the market and ensure that prices remained competitive. 
My own theoretical work long ago showed the flaws in Schumpeter’s analysis, and now empirical results provide strong confirmation. 
Today’s markets are characterized by the persistence of high monopoly profits. 
The implications of this are profound. 
Many of the assumptions about market economies are based on acceptance of the competitive model, with marginal returns commensurate with social contributions. 
This view has led to hesitancy about official intervention: If markets are fundamentally efficient and fair, there is little that even the best of governments could do to improve matters. 
But if markets are based on exploitation, the rationale for laissez-faire disappears. 
Indeed, in that case, the battle against entrenched power is not only a battle for democracy; it is also a battle for efficiency and shared prosperity. 

High Noon at the IMF 
This month’s International Monetary Fund (IMF) meetings in Washington will bring together the world’s top finance ministers and central bankers at a critical juncture for the global economy. 
For starters, the roof is starting to collapse on the global housing bubble, as housing markets begin to freeze up not only in the United States, but also in many other countries, such as high-flying Spain. 
Moreover, money markets, especially in Europe, remain traumatized by the festering global credit crunch. 
Record-high food and energy prices, combined with sharply rising wages in China, are pushing up inflation in much of the world. 
Last, but not least, the US productivity boom is decelerating. 
These combined pressures will make it far more difficult for central banks to sustain the so-called “Goldilocks” economy (“just right” inflation and growth). 
At the same time, the outside world will be looking especially carefully at what, if anything, officials plan to do if the dollar continues to sink. 
Though exchange rates are notoriously unpredictable, the best guess is that a slow unwinding of the massive US trade deficit will keep the dollar on a path of gradual long-term decline. 
But the fact that several Asian and emerging-market countries are resisting this decline by buying dollars is putting inordinate pressures on the more flexible currencies, such as the euro and the Canadian dollar, which are trading at record levels. 
(What are the Chinese planning to do with all their ever-growing $1.4 trillion in reserves? 
Do they intend to give foreign athletes paper bags stuffed with dollars as a welcoming present at the Olympic village?) 
European leaders are arguing, with some justification, that their exporters are paying the price for America’s huge trade imbalance with Asian and oil-exporting countries. 
If the US goes into recession, the acrimony will get a lot worse. 
The IMF’s leadership tried to broker a deal over currencies at its April meeting, but without tangible results. 
Given that China’s ruling Communists are holding their Party Congress at the same time as the current IMF meetings, a deal seems unlikely now, too. 
Yet, given clear inflationary pressures in countries like Saudi Arabia, Argentina, and Russia, and notable price spikes in China, the world just might have reached a moment when agreement can be reached. 
Let’s hope so. 
There could be a real disaster if US growth woes turn today’s mild downward pressures into something much more serious. 
The Federal Reserve would be forced to lower interest rates further, making the dollar even less attractive, and the concomitant shift in global demand away from the US, marked by a sharp decline in the US trade balance, would put still more pressure on the dollar. 
According to my own calculations in a series of research papers with Maurice Obstfeld, the trade-weighted dollar would likely fall by 20% if a global demand shift (say, due to a US housing recession) were to cut the US trade deficit in half. 
In principle, such a depreciation against all of the world’s currencies is manageable. 
But if emerging markets force Europe to take all the adjustment, the results would be catastrophic, pushing up the euro to $1.50, $1.60 or beyond, with truly dire consequences for trade. 
Indeed, the US Congress has already produced a series of ominous bills aimed at retaliating against China and other countries that engage in one-way currency intervention. 
The leading Democratic US presidential candidates have indicated their support. 
Fortunately, the IMF recently asserted the right to take action if countries engage in sustained one-way currency intervention. 
But will incoming IMF Managing Director Dominique Strauss-Kahn be able to exercise this new power quickly enough to avert a crisis? 
The IMF itself, of course, is in a deep crisis, with many questioning its mission and legitimacy. 
For better or for worse, however, current circumstances offer an opportunity. 
It would be unfortunate if the finance ministers merely sit around and beg Fed Chairman Ben Bernanke and European Central Bank head Jean-Claude Trichet to rescue them with rate cuts. 
It would be even worse if European ministers, frustrated with gridlock over exchange rates, started sharing ideas for creatively managing their budgets to stimulate short-term demand, rather than long-term growth. 
For the past couple of years, finance ministers and central bank heads have had the luxury of using the IMF meetings to congratulate themselves on rapid global growth, regardless of how much they actually contributed to it. 
(Globalization and China were the biggest part of the story.) 
This time needs to be different. 

High Noon in the Middle East 
Jerusalem – As a result of misguided American policy, the threat of another military confrontation hangs like a dark cloud over the Middle East. 
The United States’ enemies have been strengthened, and Iran – despite being branded as a member of the so-called “axis of evil” – has been catapulted into regional hegemony. 
Iran could never have achieved this on its own, certainly not in such a short time. 
A hitherto latent rivalry between Iran and Israel thus has been transformed into an open struggle for dominance in the Middle East. 
The result has been the emergence of some surprising, if not bizarre, alliances: Iran, Syria, Hezbollah, Hamas, and the American-backed, Shia-dominated Iraq are facing Israel, Saudi Arabia, and most of the other Sunni Arab states, all of which feel existentially threatened by Iran’s ascendance. 
The danger of a major confrontation has been heightened further by a series of factors: persistent high oil prices, which have created new financial and political opportunities for Iran; the defeat of the West and its regional allies in proxy wars in Gaza and Lebanon; and the United Nations Security Council’s failure to induce Iran to accept even a temporary freeze of its nuclear program. 
Iran’s nuclear program is the decisive factor in this equation, for it threatens irreversibly the region’s strategic balance. 
That Iran – a country whose president never tires of calling for Israel’s annihilation and that threatens Israel’s northern and southern borders through its massive support of proxy wars waged by Hezbollah and Hamas – might one day have missiles with nuclear warheads is Israel’s worst security nightmare. 
Politics is not just about facts, but also about perceptions. 
Whether or not a perception is accurate is beside the point, because it nonetheless leads to decisions. 
This applies in particular when the perception concerns what the parties consider to be threats to their very existence. 
Iranian President Mahmoud Ahmadinejad’s threats of annihilation are taken seriously in Israel because of the trauma of the Holocaust. 
And most Arab governments share the fear of a nuclear Iran. 
Earlier this month, Israel celebrated its 60th birthday, and President George W. Bush went to Jerusalem to play a leading part in the commemoration. 
But those who had expected that his visit would mainly be about the stalled negotiations between Israel and the Palestinians were bitterly disappointed. 
Bush’s central topic, including his speech to Israel’s parliament, was Iran. 
Bush had promised to bring the Middle East conflict closer to a resolution before the end of his term this year. 
But his final visit to Israel seems to indicate that his objective is different: he seems to be planning, together with Israel, to end the Iranian nuclear program – and to do so by military, rather than diplomatic, means. 
Anyone following the press in Israel during the anniversary celebrations and listening closely to what was said in Jerusalem did not have to be a prophet to understand that matters are coming to a head. 
Consider the following: 
· “Stop the appeasement!” is a demand raised across the political spectrum in Israel – and what is meant is the nuclear threat emanating from Iran. 
· While Israel celebrated, Defense Minister Ehud Barak was quoted as saying that a life-and-death military confrontation was a distinct possibility. 
· The outgoing commander of the Israeli air force declared that the air force was capable of any mission, no matter how difficult, to protect the country’s security. 
The destruction of a Syrian nuclear facility last year, and the lack of any international reaction to it, are viewed as an example for the coming action against Iran. 
· The Israeli wish list for US arms deliveries, discussed with the American president, focused mainly on the improvement of the attack capabilities and precision of the Israeli air force. 
· Diplomatic initiatives and UN sanctions are seen as hopelessly ineffective. 
· With the approaching end of the Bush presidency and uncertainty about his successor’s policy, the window of opportunity for Israeli action is seen as potentially closing. 
The last two factors carry special weight. 
While Israeli military intelligence is on record that Iran is expected to cross the red line on the path to nuclear power between 2010 and 2015 at the earliest, the feeling in Israel is that the political window of opportunity is now, during the last months of Bush’s presidency. 
Although it is acknowledged in Jerusalem that an attack on Iran’s nuclear facilities would involve grave and hard-to-assess risks, the choice between acceptance of an Iranian bomb and an attempt at its military destruction, with all the attendant consequences, is clear. 
Israel won’t stand by and wait for matters to take their course. 
The Middle East is drifting towards a new great confrontation in 2008. 
Iran must understand that without a diplomatic solution in the coming months, a dangerous military conflict is very likely to erupt. 
It is high time for serious negotiations to begin. 
The most recent offer by the six powers – the UN Security Council’s five permanent members plus Germany – is on the table, and it goes very far to accommodate Iran’s interests. 
The decisive question, however, will be whether it will be possible to freeze the Iranian nuclear program for the duration of the negotiations to avoid a military confrontation before they are completed. 
Should this newest attempt fail, things will soon get serious. 
Deadly serious. 

High Tensions In the Low Countries 
Belgium and the Netherlands, two founding members of the European Union, are increasingly divided about what that project now means. 
The EU’s Reform Treaty is now the focus of that dispute, but its roots go deeper. 
At one point, according to press reports, the row became so serious that French President Nicolas Sarkozy had to intervene. 
Europe cannot afford a dogfight between these two founding member states, so it’s high time to put emotions aside and review their differences on the future course of European integration. 
As a former Dutch State Secretary for European Affairs and Benelux Coordinator, I believe that the Netherlands and Belgium can once again play complementary roles. 
From the very beginning, these countries have represented the different aspects of Europe’s identity: Belgium, as an industrial country, continentally oriented, bilingual, and an intermediary with southern Europe, and the Netherlands with its strong agricultural and trading tradition and its Anglo-Saxon and Atlantic orientation. 
Of the two, Belgium tends to be more uncritically supportive of the EU. 
Polls show that more than 80% of Belgians want yet more integration, whereas roughly 50% of the Dutch describing themselves as Euroskeptics. 
They value the Union for its economic benefits, but are wary of its politics. 
Belgian-Dutch cooperation has in years past been essential in helping Europe to move forward. 
The Benelux Economic Union treaty of 1944 was an early testing ground for the Europe of the Six, and it was the joint Benelux Memorandum, fathered by the far-sighted J. W. Beyen and presented in Messina in 1955, that gave the impetus to the creation of the common market. 
Indeed, it was the basis on which Belgian Foreign Minister Paul-Henri Spaak and his colleagues worked when setting the scene for the Treaty of Rome and the European Economic Community. 
The Spaak committee devised a system that balanced the voting power of states of varying size. 
Clearly, a system of one vote per member state would have meant domination by Europe’s smaller states. 
Conversely, a system based on population would have gone too far in favoring the big ones. 
Balance was achieved partly by a system of weighting of votes in the Council of Ministers, where most decisions are taken. 
With each enlargement of the Union, this system of decision-making has been largely maintained. 
The equilibrium in voting rights between small and large member states was also secured by vesting exclusive authority to propose regulation in the Commission, which expresses the common interests of the Community. 
This authority was reinforced by requiring unanimity among member states to overrule the Commission – a provision that has strengthened the smaller states against the larger ones. 
As open economies, Belgium and the Netherlands have both been interested in developing the internal market, while differing in their methods. 
Belgium followed the mainly French monetarist school, while the Netherlands shared Germany’s preference for economic convergence before committing to exchange-rate parity. 
Once President Valéry Giscard d’Estaing and Federal Chancellor Helmut Schmidt made the joint Franco German proposal for the Economic and Monetary Union (EMU), both Belgium and the Netherlands worked together to achieve that common goal. 
Along with Luxembourg, they were an important factor in creating EMU. 
In 1991, when the Netherlands held the European presidency, Belgium supported its far-reaching draft for a treaty of European Union. 
The Dutch proposed bringing all European decision-making − economic, foreign policy, justice, and home affairs − into a single framework. 
The proposal turned out to be a step too far and subsequently went down in Dutch history as “black Monday,” named after the day on which the then foreign minister, Hans Van den Broek, faced near-unanimous opposition in the European Council of Ministers. 
Belgium, though, was the one member state that supported the Dutch in this brave venture. 
But the Belgians and Dutch have also been less than cooperative at times. 
When it came to voting rights in the European Parliament and in the Council, the Dutch fought doggedly to get one extra vote in Amsterdam in 1991 and another in Nice in 2000. 
This may have satisfied nationalist feelings in the Netherlands, as the country is 1.5 times the size of Belgium, but it did not go down well in Belgium. 
The two countries also found themselves in opposing camps over the war in Iraq, and, of course, in their attitudes about further political integration. 
The Netherlands’ current reserved stance on further political integration is not in its broader interest. 
But Belgium could have shown greater understanding for the Netherlands’ position after Dutch voters decisively rejected the proposed European constitution in the mid-2005 referendum. 
Belgium and the Netherlands need to resuscitate their cooperative efforts within the Benelux framework. 
The Benelux economy is the EU’s fourth largest. 
Belgium will be serving on the United Nations Security Council for the next two years, and has indicated that it wants to give its mandate a European dimension. 
The coming period could thus be used in both countries to review traditional positions and reflect on how European policy can best serve their common needs. 
Traditionally, the Netherlands has thought of itself as the smallest of the EU’s large member states. 
But others generally see it as the largest of the small. 
Accepting this view could have a healthy impact on its behavior in the EU. 
After all, the three largest EU states – Germany, Britain, and France – can be expected to seek agreements among themselves about the Union’s future shape, so the Benelux countries’ common goal should be to influence their actions and ensure that their thinking is acceptable to the whole community. 

Hillary Clinton in Beijing 
NEW YORK – Hillary Clinton is off to China. 
The US Secretary of State’s decision to make her first overseas trip to Asia, particularly China, was a smart one and, if done with aplomb, could yield enormous returns for the Obama administration as it attempts to re-establish world leadership. 
The fact that Clinton chose to go to Asia now, when the State Department remains unsettled – with no ambassador in Beijing, many old officials having departed or leaving, and many new appointees still unseated – attests to her determination to stake out Asia as her own area. 
What she brings to this task is openness and an eagerness to construct a new architecture for Sino-US relations. 
But, even as a host of other issues come into play, strengthening this most important of bi-lateral relationships requires a new, underlying common interest. 
Paradoxically, the challenge of climate change is a good place to look. 
The Chinese government should not underestimate Clinton’s and Obama’s commitment to this issue. 
As she said in a pre-trip speech at the Asia Society in New York, “Collaboration on clean energy and greater efficiency offers a real opportunity to deepen the overall US-Chinese relationship.” 
Publicly acknowledging that the US “has been the largest historic emitter of greenhouse gases,” she declared that the America “must lead efforts to cut harmful emissions and build a lower carbon-economy.” 
China has long waited to hear that. 
So Clinton has set the stage for exploring a possible joint venture with China on meeting the challenge of climate change. 
The receptiveness of the Chinese will reflect the degree to which both countries advance the discussion from theory to practice, as well as stabilizing their relations. 
Until now, the Chinese have taken a wait-and-see attitude, as officials waited to see who Obama would appoint to deal with China and what the new emissaries would say. 
This caution is understandable. 
But what seemed to be missing in China was a full recognition of just how uncertain things have become in the US, and how, with a new president, almost everything is in an unprecedented state of flux. 
By being more pro-active, the Chinese might have been able to influence the policies that ultimately come from the American side. 
For, when it comes to China, Clinton and Obama are yizhang baizhi , “a sheet of blank paper.” 
With Clinton in Beijing, the time is now to begin sketching out a common US-Chinese future in a deliberate and thoughtful way. 
In her talk, Clinton evoked the ancient Chinese aphorism Tongzhou Gongji : “When on a common boat, cross the river peacefully together.” 
This alludes to an ancient episode in which soldiers from the warring states of Wu and Yue found themselves on the same boat on a river in a storm and agreed to put down their arms to make a common passage. 
It is an apt metaphor for the situation in which the US and China now find themselves: on a planet in the process of being dangerously warmed by our own runaway progress. 
It is inevitable and right that Clinton will bring up Tibet, human rights, and other contentious issues. 
But all evidence suggests that she would like to do so in the context of a re-formatted US-China relationship that places collaboration at its heart. 
The Chinese leadership thus would be gravely mistaken to treat climate change as a subsidiary issue, much less as a problem imposed on developing countries like China to impede their economic progress. 
China should take up Clinton’s call for collaboration on climate change, which could possibly become a paradigm-shifting issue in Sino-US relations, much as the united front against the Soviet Union did in 1972, when Richard Nixon and Henry Kissinger went to China to begin normalizing relations. 
As they contemplate this turning point, China’s leaders should be aware of how malleable US foreign policy currently is. 
Although they are accustomed to experiencing the US as a dominant, often censuring “great power,” the reality now is that the US is beginning not only a new presidential administration, but a whole chapter in its history. 
And, as Deng Xiaoping famously noted of China’s reforms in the 1980’s, “We are feeling our way across the river over the stones.” 
It is not that the Bush administration left Sino-US relations in such bad repair, but that the possibilities for a substantial change for the better have never been greater. 
Clinton’s openness to new approaches, and her early trip to Beijing, provides an incomparable opportunity for Chinese leaders to help make of the fight against global climate change, which is perhaps the most important challenge to confront the world in our time, a common odyssey. 

Three Encounters with Hillary 
PARIS – It is Boston, July 2004. 
The setting is a downtown restaurant to which the editor Tina Brown has invited Hillary Clinton and a handful of notables, including Caroline Kennedy, filmmaker Michael Moore, and former Senator George McGovern. 
What is immediately striking is Clinton’s youthful appearance, bright laugh, and blue eyes that appear a little too round when she gazes at us with curiosity. 
Sometimes her expression is briefly clouded by a streak of stifled pain, obstinate and not wholly contained. 
Five years earlier, she was the most humiliated wife in America, a woman whose private life was thrown open – fully and relentlessly – to public scrutiny. 
So she can talk national and international politics until she is blue in the face. 
She can sing the praises of John Kerry, whom her party has just nominated in an effort to deny George W. Bush a second term. 
And she can expound on her role as the junior senator from New York. 
Still, there persists an idea that I cannot push out of my head, and that I enter into the travel journal that I am writing for The Atlantic. 
The idea is this: to avenge her husband and to take revenge on him, to wash away the stain on the family and show what an unblemished Clinton administration might look like, this woman will sooner or later be a candidate for the presidency of the United States. 
This idea brings to mind Philip Roth’s The Human Stain, published a year after the Senate acquitted her husband of perjury and obstruction-of-justice charges, with its searing portrait of how indelible even an undeserved blot on one’s reputation can be. 
She will strive to enter the Oval Office – the theater of her inner, outer, and planetary misery – on her own terms. 
And the most likely outcome, my article will conclude, is that she will succeed. 
Fast forward to Paris in May 2011. 
The senator from New York has become President Barack Obama’s secretary of state. 
Her aura dominated the just-concluded G-8 summit hosted by France. 
It is ten in the evening, and I am waiting at the elevators in the lobby of the Hotel Westin with Mahmoud Jibril, one of the leaders of the Libyan insurrection. 
Jibril has made a special trip to plead on behalf of the civilians whom Colonel Muammar Qaddafi and his sons have promised to drown in rivers of blood. 
“I thought you were in Libya!” she exclaims when she sees me. 
“I’ve just returned,” I respond, gesturing toward Jibril. 
“Really, hidden in a vegetable truck with him?” 
That triggers one of those great bursts of laughter that, as I noticed in Boston, raise her high cheekbones still higher. 
Then, suddenly serious, and accompanied by a man whom I notice for the first time and who turns out to be J. Christopher Stevens, the young US ambassador to Libya who will be murdered a little more than a year later, she leads Jibril to her suite for an interview. 
When, after nearly an hour, Jibril reemerges, he is convinced that the conversation went badly. 
He grumbles that Clinton hardly opened her mouth, which he interprets to mean that his plea was not well received. 
In fact, Clinton was deeply moved by Jibril’s testimony, riveted by the horror of the regime’s tanks grinding toward Benghazi at that very moment. 
In the hours that follow, she convinces Obama not to bow to his anti-interventionist secretary of defense, Robert Gates. 
She displays emotion and composure, I note. 
Her humanity and compassion are coupled with an acute sense of the iron discipline required for effective governance. 
These are the reflexes of an impeccable stateswoman. 
By February 2012, the war in Libya is over, and I am wrapping up my documentary film about the conflict. 
I am in Washington, DC, in a wood-paneled conference room on the seventh floor of the Department of State’s headquarters, to gather Clinton’s recollections, as I had already done with French President Nicolas Sarkozy and British Prime Minister David Cameron. 
This is the moment for conclusions and perspective, the always-fascinating moment when the actors in the drama, who have sometimes operated in secret, turn up their last cards. 
Clinton lends herself graciously to the exercise. 
She evokes her interview with Jibril, a conversation at the White House or the Elysée Palace. 
She remembers everything and regrets nothing. 
She feels that, in acting as she did, she was faithful to her most cherished values and beliefs. 
And she has no doubt that the West, in responding to the Arab League’s entreaty to intervene, avoided a replay of Srebrenica in North Africa. 
What strikes me the most is that she sees, even then, the beginnings of the tribal conflicts and the coming contest among Islamists to outdo one another in fundamentalist purity. 
She worries about the early violations of human rights, particularly women’s rights, which she fears will multiply. 
She has no illusions that history turns out the way reason tells you it should. 
Time is needed, she says, to build a state and construct a democracy – time and a mixture of pragmatism and faith, of patience and audacity, of respect for others and regard for oneself. 
Was this concern about “nation building” a warning? Was it her ideological contribution to an administration that, though she did not know it at the time, would continue without her? 
Was she laying down the broad strokes and ambition of her own presidency? 
One thing is certain: Of my three encounters with Hillary Clinton, this third was the one where I found her the strongest and most passionate, thoroughly imbued with the meaning and pitch of the great American pastoral. 
If we meet again, I will not be surprised if I am addressing her as Madam President. 

The Agony of Hillary Clinton 
WASHINGTON, DC – Being Hillary Clinton, one of the most celebrated women in the world, holder of some of the highest offices in American politics, and possibly the next president of the United States, has had more than its share of agony. 
Widely regarded a year ago as a shoo-in for the Democratic Party’s nomination, she has faced a far more difficult slog than anyone, including her, ever contemplated. 
Yet most of the problems Clinton is encountering were predictable and foreshadowed in 2008, when she ran against Barack Obama. 
Others she has brought on herself. 
For one thing, she’s simply not a very good politician. 
Clinton is the only person known to have launched her campaign twice. 
(The first attempt, in Iowa, where she talked to about eight people in closed meetings, didn’t work out very well.) 
This impressive, remarkably intelligent woman just doesn’t have the feel for politics that is demanded at the highest levels. 
Success in US presidential politics requires superb intuition, being quick on one’s feet, and, above all, a compelling rationale for running. 
True, Clinton offers numerous programs that she would push as president; but, to borrow from Winston Churchill, there is no theme to her pudding. 
The closest she comes to a message is a less-than-soaring “I’m a progressive who can get things done.” 
By contrast, her rival, Bernie Sanders, has become a serious contender because he brilliantly composed a persuasive message for his campaign: The system is rigged and a corrupt campaign-finance regime is holding it in place. 
The sweeping programs Sanders is pushing – a single-payer health-care system and free tuition at public colleges – however impracticable, are popular, especially among younger people, who overwhelmingly favor him over Clinton. 
Her message is one of incrementalism: Don’t dare to dream big. 
Meanwhile, Sanders is preaching a political revolution. 
Then there’s the issue of trustworthiness. 
Sanders’s integrity comes across as unimpeachable, while Clinton continues to provide reasons for questioning hers. 
She and her advisers are clearly stunned by the force of the challenge she’s facing. 
Sanders appears authentic; Clinton seems programmed. 
She sometimes seems to be tone-deaf, particularly out of tune with the public mood on the subject of money. 
Anger at the growing gap between the very rich and everyone else has been brewing for years. 
Shortly before she began her campaign, Hillary Clinton said that when they left the White House she and her husband were “dead broke.” 
If so, they recovered quickly: Bill and Hillary Clinton are believed to be worth well over $100 million, all of it made since they left the White House and most of it through astronomical speaking fees. 
Not unlike other former US presidents – Jimmy Carter is a notable exception – the Clintons exploited their fame and influence to build up a fortune. 
It’s not so much how they made most of their money as who paid them. 
While Bill made business deals with some shady international figures, Hillary made a lot of her fortune by giving speeches to Wall Street firms, the main target of public wrath for causing the Great Recession of 2008. 
This provided an ideal target for Sanders, who singled out the fact that Clinton earned $675,000 for three speeches she gave to Goldman Sachs. 
Sanders’s charges put her back on her heels; when asked by the moderator in a CNN Town Hall why she accepted so much money from Goldman Sachs, a nonplussed Clinton shrugged and replied, “That’s what they offered.” 
Then there’s the controversy over her having chosen to use a private, unsecured server installed at her home in Chappaqua, New York to process her emails, business as well as personal, when she was Secretary of State during President Barack Obama’s first term in office. 
The server issue, first revealed in March 2015, now dogs her campaign, speaking not only to her tone-deafness, but, more deadly, to her judgment. 
How could she not know that a Secretary of State will receive and may respond to classified information? 
After the server became public knowledge, Clinton, as her husband has also done, resorted to legalisms: She hadn’t received or sent information on her server that was “marked classified at the time.” 
Students of Hillary-speak immediately sensed something fishy. 
The State Department, it turns out, has two email systems: one classified and one unclassified; and one kind of material can’t be sent on the other. 
To avoid sending her classified information on her private server, her aides delivered it by other means – orally or in written summaries. 
Thus, they weren’t “marked classified at the time.” 
Yet State Department inspectors have found hundreds of emails that had been sent to her server that should have been classified. 
An FBI investigation is underway. 
Finally, what was supposed to be a huge asset for her candidacy – the prospect of making history as the first woman president – isn’t working out as she and her campaign had expected. 
As in 2008, large numbers of women don’t want to be told that they must support Clinton simply because she’s a woman. 
They find that an insult to their intelligence, and young women in particular are largely supporting Sanders; they prefer his platform and are troubled by questions about her integrity. 
The only group of women that Clinton carried in New Hampshire, where Sanders beat her by 22 percentage points, was those over 65. 
In the latest caucus, in Nevada, Clinton’s presumed advantage among non-white voters, who are a far greater factor in Nevada than in Iowa or New Hampshire, seems to have served her well, with Sanders failing to win enough African-American voters, in particular, to defeat her. 
This augurs well for future nominating contests. 
But the general election could be something else. 

Hillary in Asia, Round Two 
SINGAPORE – US Secretary of State Hillary Clinton is scheduled to travel to Asia again in July to meet foreign ministers at the ASEAN Regional Forum, and to visit India. 
On her first Asian trip in February, she provided a welcome contrast to the past with her openness to others’ views, her willingness to cooperate, and her star power. 
She made Asians look at America anew. 
But this trip will be trickier. 
One challenge is that part of the plot for the US and Clinton is being written by others. 
North Korea will be on the agenda after its missile tests, as will Myanmar, since its generals persist in prosecuting Aung San Suu Kyi, the world’s most famous political detainee, on trivial charges. 
After all that has happened in recent weeks, the definition of “success” must be set low. 
Nothing positive will come from the US condemning these two difficult regimes unilaterally. 
So a key goal of Clinton’s visit must be to pull together with the Asian leaders present at the ASEAN Regional Forum. 
As for Myanmar, its neighbors and fellow ASEAN members – Indonesia, Singapore, Malaysia, and Thailand – are also concerned about Suu Kyi’s continued prosecution. 
The US should begin to work with these countries not only on this matter, but also on the elections that Myanmar military junta has promised for 2010. 
Together, they should press for assurances of a free and fair process, with the aim of avoiding the kind of mess that followed the Iranian elections. 
Indonesia can be one ally. 
After decades of autocracy, this vast archipelago of a country just concluded a presidential election that has solidified its transition to democracy. 
India, proud of its long-standing democracy and fresh from its own elections, shares a border with Myanmar and can also assist efforts there. 
The approach to North Korea is similar. 
Kim Jong-il is a naughty boy who wants attention and incentives to behave decently. 
Rather than debate with her counterparts, Clinton needs to ensure that other countries in the six-party framework, especially China and South Korea, are on the same page as the US. 
On both issues, there is little capacity to exert force or sufficient pressure for solutions any time soon. 
So diplomatic efforts must instead aim to join Americans and like-minded Asians in common cause, to push for steps forward in the medium to longer term. 
Others must be brought on board, especially the Regional Forum hosts, ASEAN and Thailand. 
A moral community should form in Asia, one that displaces its leaders’ usual cynical calculations of power in order to jump on the right bandwagon. 
In all this, China is the 800-pound dragon in the room. 
China is already closer to ASEAN and a key player with respect to Myanmar, North Korea, and other sticky issues. 
A “bamboo” economic zone appears to be emerging, perhaps to replace today’s weakening US-centric trans-Pacific ties. 
This is the context for Clinton’s visit to India, as well. 
George W. Bush’s administration should be credited for giving overdue recognition to India, but this was done primarily on a bilateral basis. 
The US should now leverage that relationship to work on regional and even global issues. 
Besides her own work, Clinton is likely to also be inundated during this visit with requests concerning President Barack Obama. 
There is still no confirmation concerning when Obama will visit Asia, though many expect that he will attend the Asia Pacific Economic Cooperation Summit, to be held in Singapore in November. 
China, Japan, and Indonesia must be among Obama’s priorities, but many others will clamor for him to visit their capitals. 
Clinton and the US administration would do well to decide which requests are merely photo ops and confine these to meetings at the sidelines of APEC. 
The US should insist on a substantive agenda as a precondition for any Obama visit. 
In China, for example, Clinton successfully established an agenda for the two countries to work together on climate change. 
Plans and resources now must be prepared. 
Clinton has reopened the doors for Obama in Asia with charm and confidence. 
Obama will eventually come to Asia with many high expectations and star billing. 
While his charisma and openness to dialog will be sought after, substance will also be measured and much needed. 
By November, after all, it will be more than a year since the global crisis began in the US, and Obama and his team must show tangible prospects for recovery. 
American leadership – globally and in Asia – can no longer be presumed. 
It must be earned. 

Hillary's Back 
NEW YORK – So, why did he do it? 
What led Barack Obama to tap his former adversary, Hillary Clinton, to serve as his Secretary of State, the face and voice of his foreign policy, his emissary to the world? 
There are plenty of plausible explanations. 
One can imagine that he is applying that old adage, “Keep your friends close and your enemies closer.” 
In one stroke, Obama gets control of the Clinton political machine: the network, the donors, and the constituency. 
And he neutralizes the Clintons’ famous skill at corrosive sniping and flamboyant stage-hogging – the kind that led Al Gore and Bill Clinton to be on barely speaking terms during the 2000 Presidential campaign. 
With this appointment, Obama turns the big guns away from himself – and directs them outward. 
Shrewd tactics. 
One can also imagine that he did it to secure the women’s vote. 
Not a single Democrat has won the White House without a substantial gender gap. 
But the exit polls and the data all show that Obama already has the support of a disproportionate share of American women. 
(The real news in his victory was that he got a chunk of white men, who rarely support a Democrat.) 
Indeed, there is plenty of evidence to suggest that Obama – the son of a strong single mother, raised also by an influential grandmother, man enough to marry an accomplished woman with opinions of her own, and a devoted father of two girls – understands in a whole new way how to draw and keep women. 
He recognizes that women will adore you when you include them as a matter of course. 
Obama is surrounding himself with accomplished female advisers without calling condescending attention to that fact. 
If you are a woman watching, you feel in your gut that these women won't be window dressing. 
They may succeed or fail; but they are really in the game. 
But I don’t think any of those reasons, however compelling each one is, provide the strongest explanation of why Obama chose Hillary. 
I think he chose her because he understands that, even as President of the United States, he is truly a citizen of a global community – one to which he is accountable and with which he is in an interdependent relationship. 
One of Hillary Clinton’s much-overlooked strengths is that she understands that, too – and has demonstrated that she knows what it means. 
There is plenty in her experience as First Lady that she has hyped. 
But one of her undeniable accomplishments, perhaps more important than anything else she did during that time, was the set of global journeys that she undertook on behalf of women’s issues. 
She surrounded herself with extremely well-informed advisers who specialized in such important issues as women’s critical role in the developing world in raising educational levels, managing population growth, containing environmental degradation, and building up microcredit economies. 
She journeyed to Africa and to the Indian subcontinent, and spoke forcefully at the Beijing conference that brought women leaders together from around the world. 
The world’s top development experts now agree that resolving many of today’s cultural, environmental, resource-driven conflicts requires educating and investing in women, as she advocated. 
But what distinguishes Hillary Clinton from Madeleine Albright or Condoleezza Rice is where she was willing to go for her education. 
She did not stay in the air-conditioned hotels and the parliamentary chambers of the nations she visited; she went to tiny impoverished villages, to places where women walk four miles a day for water, to places where women were basing their families’ prosperity on a $20 loan for a sewing machine. 
She sat on mud floors and sandy village commons to hear from these communities about their issues and priorities, and she took on controversial and culturally sensitive subjects, such as female genital mutilation and bride burning. 
Yet the respect she showed for the various cultures and people whom she was engaging did a great deal to allow such challenges to move forward without bitterness, and in a spirit of real dialogue. 
Hillary is adored by many women in the developing world for those journeys, and I am certain that they taught her crucial lessons about global policy – lessons that built up a worldview that Obama, a child of international experiences, also shares. 
In that view of the world, America does not stand alone against all others, issuing fiats and focusing narrowly on corporate profits. 
Rather, cooperating with other international leaders, America tries to solve the world’s true problems: environmental degradation, resource shortages, inadequate literacy, and the appalling poverty in which the “bottom billion” live. 
Obama understands, as I believe Hillary Clinton understands, that resolving those crises is the true key to matters of war and peace – the true marker of the possibility of international alliances. 
I believe that Obama knows that Hillary realizes that conflict emerges from these problems, and that using military intervention without addressing them is merely the equivalent of throwing a blanket into a volcano. 
America’s president-elect may even understand that his choice for secretary of state learned to look at statecraft and global policy in that way by sitting with and listening to a formerly dirt-poor woman in a sari in a dusty village commons – a woman who has now become a small-scale microcredit entrepreneur, and is helping to educate and feed her family. 

Hillary’s Kissinger Moment 
TOKYO – Hillary Clinton’s recent trip to Asia may one day be seen as the most significant visit to the region by a United States diplomat since Henry Kissinger’s secret mission to Beijing in July 1971. 
Kissinger’s mission triggered a diplomatic revolution. 
Renewal of US-Chinese relations shifted the global balance of power at the Cold War’s height, and prepared the way for China to open its economy – the decision that, more than any other, has defined today’s world. 
What Clinton did and said during her Asian tour will mark either the end of the era that Kissinger initiated four decades ago, or the start of a distinct new phase in that epoch. 
Clinton’s tour produced the clearest signals yet that America is unwilling to accept China’s push for regional hegemony. 
Offstage at the Association of Southeast Asian Nations (ASEAN) summit in Hanoi, Clinton challenged Chinese Foreign Minister Yang Jiechi over Beijing’s claim that its ownership of the Spratly Islands in the South China Sea was now a “core interest.” 
By that definition, China considers the islands (whose ownership is disputed by Vietnam and the Philippines) as much a part of the mainland as Tibet and Taiwan, making any outside interference taboo. 
Rejecting this, Clinton proposed that the US help establish an international mechanism to mediate the overlapping claims of sovereignty between China, Taiwan, the Philippines, Vietnam, Indonesia, and Malaysia that now exist in the South China Sea. 
For China, Clinton’s intervention came as a shock, and, given the warm response she received from her Vietnamese hosts – despite criticizing Vietnam’s human-rights record – the US Secretary of State may well have raised the issue at least partly at their urging, and perhaps with additional prompting from Malaysia and the Philippines. 
A general fear has arisen in Asia that China is seeking to use its growing maritime might to dominate not only development of the hydrocarbon-rich waters of the South China Sea, but also its shipping lanes, which are some of the world’s most heavily trafficked. 
So it was welcome news when Clinton later deepened America’s commitment to naval security in the seas around China by personally attending joint naval and air exercises with South Korea off the east coast of the Korean peninsula. 
Likewise, military ties between the US and the most elite unit of Indonesia’s armed forces – suspended for decades – were restored during Clinton’s Asia tour. 
Those war games were, most immediately, a warning to North Korea of the strength of America’s commitment to South Korea, following the North’s sinking of the South Korean warship Cheonan earlier this year. 
Perhaps more importantly, they also confirmed that the US military is not too distracted by its Iraqi and Afghan engagements to defend America’s vital national interests in Asia. 
A later portion of the war games took place in the Yellow Sea, in international waters very close to China, bluntly demonstrating America’s commitment to freedom of the seas in Asia. 
And this was followed by the visit of a US aircraft carrier to Vietnam, the first since the Vietnam War ended 35 years ago. 
North Korea, no surprise, wailed and blustered against the war games, even threatening a “physical” response. 
And China not only proclaimed Clinton’s intervention over the South China Sea islands an “attack,” but also held unscheduled naval maneuvers in the Yellow Sea in advance of the US-South Korean exercise. 
Clinton’s visit was important not only for its reaffirmation of America’s bedrock commitment to security in Asia and the eastern Pacific, but also because it exposed to all of Asia a fundamental contradiction at the heart of Chinese foreign policy. 
In 2005, China’s leaders announced a policy of seeking a “harmonious world,” and set as their goal friendly relations with other countries, particularly its near neighbors. 
But in August 2008, the Communist Party Central Committee declared that “the work of foreign affairs should uphold economic construction at its core.” 
All foreign relations have, it seems, now been made subservient to domestic concerns. 
For example, it is fear of spreading turmoil from a collapsing North Korea that has made Chinese policy toward the North so supine. 
And Chinese intransigence over the South China Sea is a direct result of the economic bonanza it suspects lies on the seabed. 
As a result, China is making the task of developing amicable regional relations almost impossible. 
In Asia, the hope today is that Clinton’s visit will enable China’s rulers to understand that it is primarily in Asia that their country’s overall international role is being tested and shaped. 
Strident rhetoric and a hegemon’s disdain for the interests of smaller neighbors create only enmity, not harmony. 
Indeed, it is the quality of China’s ties with its Asian neighbors, particularly India, Indonesia, Japan, Russia, and South Korea, that will be central to forging its international image, signaling not just to the region, but to the wider world, the type of great power that China intends to be. 
A Chinese policy of pressure and great-power threats against Vietnam and/or the Philippines over ownership of the Spratly Islands, or deliberate intimidation of China’s smaller South Asian neighbors, will continue to raise alarms across the Pacific and be seen as proof of the Chinese regime’s hegemonic ambitions. 
Unless China demonstrates that it can reach peaceful accommodations in its sovereignty disputes with its neighbors, its claims to a “peaceful rise” will appear unconvincing not only in Washington, but in capitals across Asia. 
Forty years ago, the US opening to Mao’s China shocked Japan and all of Asia. 
Clinton’s visit has done the reverse: it has shocked China – one hopes in a way that moderates its behavior in the region. 
And, if a shock can be said to be reassuring, this one certainly soothed Asian concerns about America’s enduring commitment to regional security. 

Historic Election in Egypt? 
Egyptians go to the polls on September 7th to elect a president from among ten contenders, including the incumbent of 24 years, Hosni Mubarak. 
While few doubt the outcome will be his re-election, many are intensely following the process. 
Some 6000 domestic election monitors have been training for the event, while hundreds of foreign reporters are converging on the country this week. 
Although all the formal trappings of a true electoral contest are in place, important aspects of authenticity are glaringly absent. 
Despite promises to the contrary, this is far from a level playing field. 
Mubarak still commands disproportionate assets: name recognition, a virtual monopoly on state-controlled electronic media and some 85% of the print media. 
One week before the poll, some opposition candidates have yet to air even one campaign ad on Egyptian television. 
All members of the presidential election commission are Mubarak appointees, and the new election rules eliminated any independent challengers. 
Since the year 2000, Egypt’s 8000 judges must supervise and certify election results, by ruling of the High Court. 
This was a major step toward fairer elections, as the judges’ professional union has remained fairly independent over the past half-century of executive power grabs. 
So the Mubarak regime has had to use various ploys to neutralize the judge’s union. 
One was to stretch the definition of ‘the judiciary’ to include thousands of loyal government employees who have law degrees but no experience on the bench. 
This boxes in the true judges, for if they protest by boycotting their supervisory duties, the task will fall once more to police from the infamous Ministry of the Interior. 
Thus, in the past, the judges’ union tended to go along, with predictable results. 
In the 2000 parliamentary elections, while Mubarak’s ruling party received roughly 38% of the popular vote in districts supervised by true judges, that percent somehow jumped to 86% where the quasi-judges were in charge. 
This year promises to be very different. 
In the spring the judges held a nation-wide assembly and resolved that unless the regime granted them full independence, and exclusive oversight of the voting process they would not supervise the upcoming presidential (or parliamentary) races. 
On September 2nd they made their final demands: allow civil society groups to observe the voting process, stop interfering in the definition of legitimate judges for purposes of the election, and agree that no ballot box will leave the presence of a legitimate judge until its contents are counted, certified and reported. 
Thus far, a standoff looks likely, as the head of the presidential election commission has stated publicly on Egyptian television that he refuses all citizen monitoring of the election process. 
Other interesting developments on the eve of the election include a fierce public debate over whether to vote or to boycott the presidential race. 
Several opposition parties have called on their members to stay away in protest over restrictive election rules that strongly favor Mubarak. 
On the other hand, the Muslim Brotherhood, thought to be the single strongest opposition group in Egypt, are urging their followers to caste ballots and vote their conscience but not to give support to any ‘despotic, corrupt rulers.’ 
This is a clear if implicit repudiation of Mubarak, the sole ruler for 24 years. 
Some 34 civil society organizations are preparing thousands of young Egyptians to monitor the elections despite repeated governmental objections. 
These groups argue that if the regime is not planning to rig the vote, then domestic as well as foreign observation of the polling process should not be a problem. 
The regime response is to say that any outside monitoring is an infringement on Egyptian sovereignty, and that domestic monitors are an affront to the integrity of the judges. 
That argument was quickly undermined when the judges’ union announced their support for civil society monitors. 
Whether the Mubarak regime is running scared because of the mounting challenges from within and without to hold a free and fair election, or is simply incapable of ridding the party of cheating as a way of life, the present signs do not bode well for next Wednesday’s polls. 

Historical Memory and Engineering Failures 
George Santayana, the Spanish-American poet and philosopher, once warned that "Those who do not remember the past are condemned to repeat it." 
This is especially true in the field of bridge building, where over the past 150 years dramatic failures have occurred at surprisingly regular intervals. 
In 1847, the first major structural failure on Britain's expanding railway network occurred at Chester, England. 
The Dee Bridge, whose cast- and wrought-iron design followed common practice for the period, collapsed under a passing train, killing everyone aboard. 
Subsequent investigation revealed that the structure, the longest of its kind, simply pushed the limits of railroad-bridge engineering too far. 
In 1879, the longest bridge in the world spanned the River Tay at Dundee, Scotland. 
Composed of many modest spans, the structure involved no radically new design concepts and seemed to be a mere application of proven technology. 
However, the force of the wind was grossly underestimated and worksmanship was inferior. 
As a result, the Tay Bridge, vulnerable in a gale, was blown off its supports. 
In 1907, the longest span in the world was being constructed over the St. Lawrence River near Quebec, Canada. 
The bridge was of a relatively new type, known as a cantilever, which had become quite fashionable. 
Although it was only slightly longer than the highly successful cantilever bridge over the Forth River near Edinburgh, Scotland, the Quebec Bridge was so inadequately designed that it collapsed before it was completed. 
In 1940, the third longest suspension bridge in the world was opened in Washington State. 
The Tacoma Narrows Bridge was designed as state of the art, which included a strong aesthetic preference for slender structures. 
Within four months of its opening, the bridge was destroyed by winds in a manner totally unanticipated by its engineers. 
In 1970, steel box-girder bridges in Milford Haven, Wales, and in Melbourne, Australia, failed spontaneously while under construction. 
Both were among the longest structures of their kind and were thought to be just natural applications of existing technology. 
In 2000, the much-anticipated opening of London's Millennium Bridge over the River Thames was followed only three days later by its closure. 
The sleek footbridge swayed unexpectedly and excessively under the feet of pedestrians, and it was deemed too dangerous to use. 
What should have been a mere extension of the millennia-old art of building pedestrian bridges, proved to be a modern engineering embarrassment. 
The thirty-year interval between historic bridge failures was first highlighted by the work of Paul Sibly, who wrote a thesis on the subject, and his University of London advisor, A. C. Walker. 
They noted the cyclical regularity of such occurrences and speculated that it represented a gap in communications between generations of engineers. 
Although each of the notable failures involved a different type of bridge, in no case was the structure radically new. 
Each used technology that engineers had been confidently employing for bridges, and for which the assumed loads and methods of analysis were well established. 
In every case, engineers believed that they were just building incrementally on successful practice. 
In fact, designing in a climate of success can be dangerous for an engineer. 
Successful experience teaches us only that what has been accomplished in the past has worked. 
But things that work on a small scale do not necessarily work when slightly larger. 
This was known to Vitruvius, who wrote about Greek and Roman engineering more than 2,000 years ago. 
It was also known to Galileo, who noted that Renaissance engineers who followed successful methods of building ships and moving obelisks were often surprised by the spontaneous failures when tried with larger ships and obelisks. 
Failures always reveal weaknesses and provide incontrovertible evidence of our incomplete understanding of how things work. 
When the failures described above occurred, engineers were sensitized to their own limitations and so approached subsequent designs - no matter of what kind of bridge - with renewed respect for the laws and forces of nature. 
Unfortunately, human memory fades with time, and new generations of engineers with no vivid experience of past failures can proceed with hubris to design again beyond wise limits. 
The history of engineering is no mere adjunct to technical know-how. 
A historical perspective on bridge building or any other engineering specialty provides a caveat about how our humanity affects our thinking. 
Building a new bridge following a familiar model can lead to complacency. 
Building a novel bridge, especially in the wake of a spectacular failure, forces engineers to think from scratch and also to think more deeply and critically. 
Hence, the paradox that success leads to failure, and failure leads to success. 
The cable-stayed bridge is a form that is currently being pushed to limits and beyond those originally imagined to apply to it. 
Widespread successes with cable-stayed structures have made the type almost commonplace. 
As such, its development into ever longer spans is following the historic pattern that in the past has led to failures. 
Whether there will be a major cable-stayed bridge failure soon - or around the year 2030 - will most likely depend not so much on computer analyses as on how well engineers know their history and are determined not to repeat it. 

History, Used and Abused 
LONDON – In her brilliant book, “The Uses and Abuses of History” the historian Margaret Macmillan tells a story about two Americans discussing the atrocities of September 11, 2001. 
One draws an analogy with Pearl Harbor, Japan’s attack on the US in 1941. 
His friend has no idea as to what this means. 
“You know,” the first man replies, “It was when the Vietnamese bombed the American fleet and started the Vietnam War.” 
Historical memory is not always quite as bad as this. 
But international politics and diplomacy are riddled with examples of bad and ill-considered precedents being used to justify foreign policy decisions, invariably leading to catastrophe. 
Munich – the 1938 meeting between Adolf Hitler, Édouard Daladier, Neville Chamberlain, and Benito Mussolini – is a frequent witness summoned to court by politicians trying to argue the case for foreign adventures. 
Britain’s disastrous 1956 invasion of Egypt was talked about as though Gamal Nasser was a throw-back to the fascist dictators of the 1930’s. 
If he were to be appeased as they had been, the results would be catastrophic in the Middle East. 
Munich was also produced as a justification for the Vietnam War and President Bush’s war of choice in Iraq. 
1930’s appeasement – a word that elides diplomatic engagement and the rejection of military options – was said to remind us of what would happen if South Vietnam was not defended and Iraq not invaded. 
We know what happened in both countries. 
But analogies are not always wrong, and those that were wrong in the past could prove correct today. 
One of the arguments for the Vietnam War was the so-called domino theory. 
If South Vietnam was to fall to the Communists, other countries in South-East Asia would tumble before Communist insurgency. 
Things turned out very different. 
Vietnam proved to be the end not the beginning of the line. 
Pol Pot’s wicked regime murdered millions in Cambodia until Vietnam intervened. 
Elsewhere in the region capitalism, promoted by the opening of markets, triggered growth and promoted stability. 
Globalisation produced its own domino effect. 
The dominoes toppled; 
GDP rose; millions were lifted out of poverty; literacy rates soared; child mortality figures fell. 
Maybe, if not there and if not then, dominoes are more relevant to foreign and security policy today. 
In America and Europe at the moment, many people are calling for the withdrawal of NATO forces from Afghanistan. 
We are told that NATO and the West cannot build a nation there and that the goals that have been set for establishing democracy and prosperity are unattainable. 
NATO soldiers die in vain. 
Sooner or later the Taliban will sweep to power again, at liberty as happened before to throw acid in women’s faces. 
It is vanity to think that anything can be done to prevent this. 
Better to cut and run than stay and die, and who is to say that the result will embolden Taliban terrorists? 
They do not necessarily share the same aims as Al Qaeda. 
There have certainly been mistakes in Afghanistan. 
After the overthrow of the Taliban regime, the West did not commit enough troops to extend the national government in Kabul’s authority over the whole country. 
The Bush administration had turned its attention to the preparations for the Iraq war. 
Development has been slow. 
The build-up of the Afghan army and police has lagged. 
The poppy crop has grown. 
Sometimes the military response to insurgency has been too tough; sometimes too light. 
The West has courted trouble in appearing to isolate the Pashtun. 
So the West can do better. 
There is no doubt about that. 
But the case for quitting is bad and touches on Pakistan’s future as well as Afghanistan’s. 
Leave Afghanistan to the Taliban, hoping against hope that they will become better-behaved global citizens, and what is the effect likely to be on Pakistan? 
Here come the dominoes – wrong in Vietnam but not necessarily in the South Asian sub-continent. 
Afghanistan is NATO’s great test. 
The Alliance has promised to see the job through. 
So if it abandons the job now, leaving the country to poverty, prejudice, and poppies, what then will happen? 
Why should anyone in Pakistan believe that the West is serious in wanting to sustain that country as a Muslim democratic state? 
Would such a decision help turn the tide against the Taliban? 

History’s Crimes and Punishments 
BUENOS AIRES: What price justice? 
How countries deal with historical violations of human rights is the material of daily politics across Latin America, Eastern Europe, and Africa. 
Look at Rwanda. 
Look at Chile, where General Pinochet may at last face trial. 
Look at Poland where President Kwasniewski and former President Walesa were almost banned from October's presidential election because of alleged ties to the communist era's secret police. 
People everywhere are perplexed by the fact that horrific, systematic violations of human rights are treated differently in different countries. 
Although differences undoubtedly exist, the ethical principles by which historical human rights violations should be treated in reconstructing democracy are the same. 
Chile and Poland are not unique in confronting the burden of history. 
Building democracy out of political cultures and civic habits riddled by state violence is no easy task. 
The difficulties are multiplied when attempted in times of economic crisis. 
I come from a country where violations of human rights were punished harshly. 
Nonetheless, I understand the impulse to limit punishment in order that society heal and rebuild. 
For punishment of systematic, historical human rights crimes as a matter of government policy is only morally justified if it is designed to protect society from greater evils in the future. 
Human rights crimes, though fostered by states, are committed by individuals acting according to their own wills. 
There are real social consequences in seeking punishment for such people. 
It is not rational to impose such punishment when the consequences, far from preventing future crimes, may incite or cause greater or new social damage. 
Punishment is ultimately an instrument – not the only one, nor the most important – for restoring a collective moral conscience to societies ravaged by dictatorship. 
More important than punishment, I believe, is the revelation of truth by credible means, such as through an impartial judicial process. 
Through such revelations what I call a "moral sentence" may be imposed on the guilty, and it is the existence of such a "sentence" which will arouse the type of deep public reflection necessary for the restoration of democracy. 
No more secure guarantee for the protection of human rights exists than a heightened, collective moral awareness within society to defend every person’s dignity. 
National laws and international studies are valuable instruments to protect such rights insofar as they serve to promote such awareness, but they cannot replace it as the ultimate guarantee. 
In democratic systems, this moral awareness can only be cultivated if the citizenry trusts the independence of its judges. 
In the transition from dictatorship to democracy, members of the judiciary lack legitimacy. 
So reestablishing social trust in the judiciary is one of the weightiest tasks democratically elected officials face during a transition. 
In the appointment of independent judges, great care must be given to insure that the judiciary helps revitalize social trust in the capacity for transformation to democracy. 
Based on my own experience as Argentina’s first democratically elected president after the collapse of its military junta, I know that this is a long, complex, and painful process. 
But if a social consensus arises that the judiciary is insufficient to guarantee or safeguard individual rights as well as the division of power between the legislative, executive, and judicial branches of government, that lack of trust could lead to social dismemberment. 
Comprehending the process by which a society begins to fail to protect itself, by which it’s moral compass deteriorates, is almost impossible. 
Perhaps ethical absolutism and its opponent relativism influenced that deterioration by undermining the sense of collective truth that is forged in social dialogue and wide civic participation. 
But a society’s decision to waive punishment for human rights violators is not necessarily a sign that its moral awareness remains stunted. 
Retribution is not the only sign of restored moral vigor. 
A moral sense is essential to a democracy of true solidarity. 
To secure the moral sense that only social solidarity may provide, a clear set of social rights must also exist. 
A decent home and health care, education and an adequate income to develop and enrich personal lives, is sometimes considered as a particular goal for a group – class, union, corporation – without effect on other groups. 
But the contrary is true. 
Developing the economic and social aspects of the rights of man helps root all human rights as undeniable truth. 
In short, democracy can only be built by men and women who are democratic in all their aspects. 
This obvious truth is forgotten frequently. 
Monarchy can exist with people who are anti-monarchists. 
Fascism and Soviet communism were constructed on the backs off unwilling people. 
Democracies built on unwilling foundations, however, cannot stand. 
For democrats, loving freedom is not enough. 
The great failure of our democratic conscience is in not recognizing this. 
The habit of limiting universal human rights to a series of political and moral rights and consigning the economic aspects of humanity to a second, lower tier of our concern is dangerous. 
It undermines the ethics of solidarity through which all human rights exist. 
Democracy today must urgently address this insufficiency of solidarity. 
If human rights are truly to be protected, the second, economic tier of human rights must be elevated to equality with the first tier in our consciences. 
Only then will history’s crimes receive the response they demand, which first and foremost is not punishment, but the certainty that such crimes will not reoccur. 
Never again: for history’s victims, that is our truest debt of honor. 

History’s Ghosts in Iran 
Using historical analogies to interpret the present is both tempting and dangerous, for history never truly repeats itself. 
Yet, to understand the difficulty of responding to the problems that Iran’s nuclear ambition and anti-Israel obsession now pose, it might be helpful to analyze the three analogies that are most commonly used. 
Some compare the Iranian regime to Nazi Germany. 
Others believe that the only useful analogy is to Europe’s old balance-of-power games. 
And still others combine the two, pointing to the “balance of terror” during the Cold War. 
In other words: is Iran to be treated as Hitler’s Germany in 1938, Prussia in 1756, or Stalin’s Soviet Union? 
Each analogy contains an element of truth, but none, of course, corresponds to the realities of the challenges Iran represents. 
Above all, each analogy, if taken seriously, should lead to a specific course of action, and this is far from being the case today. 
Let us start with the analogy between Iranian President Mahmoud Ahmadinejad and Hitler. 
Ahmedinejad pursues a dual objective with his anti-Zionist obsession: to de-legitimize Israel and to re-legitimize Iran’s claim to speak for Muslims over the heads of their more cautious governments. 
He very probably means what he says about Jews and Israel, but is he a latter-day Hitler, and is today’s Iran the equivalent of Germany in the 1930’s? 
Hitler came close to developing the nuclear bomb, but never had it, whereas Iran very well might. 
But Hitler’s power over Germany was much more absolute than Ahmadinejad’s power over Iran. 
The results of Iran’s recent municipal elections were humiliating for Ahmadinejad and his supporters. 
Those elections would have been unthinkable in Nazi Germany. 
Although the Iranian regime’s rhetoric may be totalitarian, political power there is much more diffused. 
The analogy with Hitler’s Germany is also problematic because, if it were regarded as true, the only sensible course of action would be a preventive strike on Iran and the removal of Ahmadinejad. 
Given the evolution of American strategic thinking after Iraq (and now Afghanistan), and of Israel’s strategic thinking after Lebanon, a preventive strike is highly unlikely. 
The second analogy, to the old balance-of-power system in Europe, is especially popular among Israeli and American diplomats. 
According to this view, if Iran wants to de-legitimize Israel and ultimately unite Moslems against the West, the only answer is to isolate Iran in the Middle East, and to create alliances against Iran with moderate Sunni Arab regimes. 
Before the 1979 Iranian revolution, some in Israel advocated an alliance between Israel, Turkey, and Iran, the Middle East’s three non-Arab powers. 
Today, many in the United States and Israel dream of a moderate Arab front, with countries such as Saudi Arabia and Egypt containing and isolating “radical” Iran. 
That diplomatic project is far from absurd. 
The rise of Hamas in Palestine and Hezbollah in Lebanon as instruments of Iranian ambitions can only worry moderate Arab regimes. 
But such an alliance has a price: the resumption of negotiations between Israel and the Palestinians, with serious territorial concessions on Israel’s part to match the Palestinians’ absolute recognition of Israel. 
Moderate Arab regimes will not dare to engage in an open and serious process of rapprochement with Israel in the absence of real progress over the Palestinian issue. 
But are the two parties ready for it? 
Could the US, a wounded power mired in Iraq, implement the part of the Baker report that suggests “Peace in Baghdad goes through Jerusalem”? 
While Israel’s non-victory in Lebanon and the Palestinians’ bloody divisions mean that both sides have been humbled, a breakthrough, though possible, remains unlikely. 
The third analogy is reflected in Israeli Prime Minister Ehud Olmert’s recent references to Israel’s nuclear deterrent, which may have been a mistake, but probably indicate the evolution of Israeli strategic thinking. 
Olmert seemed to be reminding the Iranians of the hard realities of nuclear deterrence: Iran may join the nuclear club someday, but it will return to the Stone Age if it uses those weapons against a country that has a far more advanced nuclear arsenal. 
The comparison here is to the Cold War period. 
But can today’s Iran be compared to the Soviet Union? 
The success of the “balance of terror” presupposed a mixture of confrontation and dialogue between two “rational actors.” 
Can Iran under Ahmadinejad be considered a rational actor? 
The dilemma concerning Iran is whether a power imbued with an “absolute” ideology can be allowed to be in control of an “absolute” weapon. 
Since a military solution is highly improbable, what are the serious alternatives? 
Can we have a productive dialogue with Iran while rejecting the mad ideology of its president? 
As the shortcomings of the three most popular historical analogies suggest, the answer is far from obvious. 

HIV and the SDGs 
BRIGHTON – Thirty years ago, when the international community marked the first World AIDS Day, we thought we would never turn the tide against HIV. 
But after millions of deaths and years of fear, we now have effective strategies to prevent transmission and bring testing and treatment to those in need. 
And yet, despite the remarkable progress made during the last three decades – or perhaps because of it – we must avoid the temptation to declare the fight against AIDS almost over. 
In many parts of the world, the hardest work is just beginning. 
Since the turn of the century, many of the advances against HIV were enabled by the Millennium Development Goals (MDGs), a 15-year policy roadmap that made reducing the spread of the virus a top priority. 
This led to an unprecedented expansion of prevention and treatment services, particularly in developing countries. 
Progress was swift and when the Sustainable Development Goals (SDGs) succeeded the MDGs in 2015, ending AIDS was no longer a standalone goal. 
Rather, further progress had become one of 169 targets that the SDGs are supposed to achieve by 2030. 
But the transition from a “goal” to a “target,” combined with steep declines in AIDS-related deaths, has lulled us into a false sense of accomplishment. 
Today, many argue that AIDS is nearing its end. 
Unfortunately, nothing could be further from the truth. 
HIV is a complex issue. 
Biomedical responses are vital to disease control, but if people cannot access medicine or preventive services, even the best-designed initiatives will fail. 
What’s more, the obstacles to treatment often have nothing to do with health care, but rather, are tied to political, economic, and social marginalization. 
For example, it can be difficult to lower rates of infection in countries where gender inequality prevents women from making decisions about when, where, and even with whom they have sex. 
To be sure, in many parts of the world, HIV is now considered a chronic disease manageable with medication and lifestyle changes; that fact alone is worthy of celebration. 
Nonetheless, millions of people still do not know their HIV status or cannot get the support they need when they test positive. 
If the world is ever to overcome HIV/AIDS, we must find ways to close these gaps. 
Above all, that means integrating the struggle against HIV more fully into sustainable-development planning. 
When governments work to implement the SDGs in areas like social protection, food security, and gender-based violence, HIV responses must also be part of their plans. 
Only by linking HIV strategies to the issues that predispose people to infection – such as poverty, education, and gender bias – can we hope for a future free from AIDS for everyone, everywhere. 
We have a long way to go before that happens. 
For example, just last month in Tanzania, hundreds of lesbian, gay, bisexual, and transgender (LGBT) people were forced into hiding after a city official in Dar es Salaam warned that a taskforce was being created to identify and punish gay people. 
With LGBT groups on the frontlines of Tanzania’s HIV-prevention efforts, any threat to their members’ human rights is also a threat to the HIV response. 
Nor is Tanzania the exception. 
On the contrary, as a recent report by my organization highlights, the situation is especially dire in the Middle East and North Africa, where forced sex within and outside of marriage is pervasive. 
These coercive and often violent encounters increase women’s risk of exposure to HIV. 
Those on the frontlines of the AIDS response have always recognized that the disease cannot be overcome in isolation; rather, it must be addressed through an interconnected set of social, cultural, economic, and legal challenges. 
That is why activists have spent years working to repeal discriminatory laws, develop education programs to improve sexual and reproductive health, and build networks of supporters who understand that HIV does not discriminate by nationality, sexuality, or economic status. 
As we continue to tackle the disease, we must not forget the inclusive approach that brought us to this point. 
The mantra of the SDGs is “leave no one behind.” 
At the moment, however, many of those most vulnerable to HIV are being forgotten and will be left behind. 
Today, HIV infection rates are highest among the poor and socially marginalized, underscoring the fact that as long as the SDGs are unmet, the “goal” of ending the scourge of HIV/AIDS will remain elusive. 

Vaccinating Against an HIV Rebound 
BRIGHTON – When I began my career as an HIV activist in Botswana two decades ago, the thought of a vaccine seemed fanciful. 
Even after the country hosted vaccine trials in the mid-2000s, many of us on the frontlines of the fight against HIV doubted that such a breakthrough would ever happen. 
But this month, research published in The Lancet upended our pessimism. 
Clinical trials involving 393 people in East Africa, South Africa, Thailand, and the United States have yielded encouraging immunogenic responses and a “favorable safety and tolerability” profile. 
While these findings are preliminary and the sample size small, it is nonetheless exciting to imagine that the world may be on the verge of a viable vaccine. 
To take advantage of the benefits, we must begin preparing for its arrival now. 
These are challenging times in the global effort to end HIV. 
Though health-care workers have focused on containing the epidemic for nearly four decades, infection rates remain stubbornly high. 
In 2017, there were 1.8 million new cases, and some 15.2 million people were unable to access HIV treatment. 
In West and Central Africa, only 2.1 million of the 6.1 million people living with HIV were receiving antiretroviral therapy. 
This history suggests that even with a vaccine, many complex social, economic, and cultural issues will continue to complicate the war on HIV. 
We must think carefully about how to introduce a vaccine without unintentionally encouraging “rebound effects,” like the re-emergence of practices that expose people to HIV infection. 
While an HIV vaccine would no doubt be a game changer, it would be only one of a diverse range of tools needed to contain one of mankind’s deadliest pandemics. 
For a vaccine to have the greatest impact, we must continue to promote other forms of prevention – such as condom use, medical male circumcision, and use of pre-exposure prophylactics for at-risk populations. 
Vaccine-related rebound effects are guiding research on other diseases, particularly malaria. 
In Sub-Saharan Africa, for example, researchers are currently assessing how human behavior might change if a malaria vaccine became widespread. 
In ongoing pilot programs, scientists are trying to determine whether people will scale back their use of bed nets and insecticides to control exposure to mosquitoes. 
Such a response would be worrying, especially given that previous studies have shown that the efficacy of malaria vaccines can wane over time. 
A similar behavioral shift in response to an HIV vaccine could be devastating. 
In many parts of the world, condom provision is in decline, while some individuals – like sex workers, drug users, and members of the LGBT community – have difficulty accessing HIV-prevention services, owing to legal restrictions or discriminatory practices. 
With scientists optimistic that a vaccine is forthcoming, there is no better time to ensure that traditional transmission interventions remain a priority for policymakers, politicians, and donors. 
Just as important, activists must continue working to remove the structural barriers that stop people from using prevention services in the first place. 
After all, it is these same obstacles that will likely keep people from accessing a vaccine in the future. 
Moreover, it is not too early to consider how an HIV vaccine would be paid for. 
In its recent report, UNAIDS warned that, given the absence of new donor commitments, the 8% increase in spending on HIV in 2017 is likely to be a one-off gain. 
Around the world, donors are cutting development aid to middle-income countries while domestic health-care spending costs are increasing. 
These trends have coincided with a global reduction in funding for HIV prevention services and research. 
Given tight finances, we must consider how developing countries will balance funding for vaccines with other HIV prevention needs. 
On a recent visit to Myanmar and Vietnam, I witnessed the progress that governments, donor agencies, and community activists are making in the fight against HIV. 
But I also heard many stories of how declining budgets are forcing organizations to make impossible choices about their prevention efforts. 
These are decisions no government should have to make, and the international community must marshal the political will to ensure that HIV prevention continues to be supported. 
For now, I share the excitement of many that a new tool to tackle HIV may be on the horizon. 
This prospect will be a topic of much discussion when prevention strategists gather in Amsterdam this week for the 22nd International AIDS Conference. 
But, no matter what becomes of this latest vaccine-related discovery, the world will still have a long way to go before HIV is eradicated. 
To increase our chances of success, prevention programming must remain at the top of the agenda. 


Holding Charities Accountable 
Suppose you are concerned about children in Africa dying from preventable diseases. 
You want to donate money to a charity that is working to reduce the toll. 
But there are many charities doing that. 
How do you choose? 
The first thing that many people ask about charities is, “How much of my donation is spent on administration?” 
In the United States, that figure is readily available from Charity Navigator, a Web site that has five million users. 
But the information is taken from forms that the charities themselves complete and send to the tax authorities. 
No one checks the forms, and the proportions allocated to administration and program expenses are easily massaged with a little creative accounting. 
Worse still, that figure, even if accurate, tells you nothing about the charity’s impact. 
The pressure to keep administrative expenses low can make an organization less effective. 
If, for example, an agency working to reduce poverty in Africa cuts staff with expert knowledge, it is more likely to end up funding projects that fail. 
It may not even know which of its projects fail, because evaluating them, and learning from mistakes, requires staff – and that adds to administrative costs. 
In 2006, Holden Karnofsky and Elie Hassenfeld faced the question of which charity would make the best use of their money. 
They were in their mid-twenties, earning six-figure incomes at an investment company – more than they needed – and were thinking about donating money to help make the world a better place. 
As investment advisers, they would never recommend investing in a company without detailed information about how well it was achieving its goals. 
They wanted to make similarly well-informed choices about the charities to which they contributed. 
So Karnofsky and Hassenfeld got together with six friends who also worked in finance and divided up the field to find out which charities could be shown to be effective. 
They contacted organizations and received lots of attractive marketing material, but nothing that answered basic questions: what do the charities do with their money, and what evidence do they have that their activities help? 
They called many charities, but eventually realized something that seemed extraordinary: the information was just not there. 
Some foundations said that information on their work’s effectiveness was confidential. 
This, Karnofsky and Hassenfeld thought, is not a good way to go about charitable work. 
Why should information about how to help people be secret? 
The fact that charities were unprepared for such questions indicated to Karnofsky and Hassenfeld that other donors and foundations give more or less blindly, without the information needed to make sound decisions about whom to support. 
Karnofsky and Hassenfeld now had a new goal: to obtain and publicize the information. 
To that end, they founded an organization called GiveWell so that other donors would not have as hard a time extracting it as they had had. 
However, it soon became apparent that the task required more than part-time attention, and the following year, after raising $300,000 from their colleagues, Karnofsky and Hassenfeld left their jobs and began working full-time for GiveWell and its associated grant-making body, The Clear Fund. 
They invited charities to apply for grants of $25,000 in five broad humanitarian categories, with the application process demanding the kind of information that they had been seeking. 
In this way, a substantial part of the money they had raised would go to the most effective charity in each category, while simultaneously encouraging transparency and rigorous evaluation. 
The first report on which organizations are most effective at saving or transforming lives in Africa is now available on GiveWell’s Web site, www.givewell.net . 
Population Services International, which promotes and sells items like condoms, to prevent HIV infection, and bed nets, to prevent malaria, came out on top, followed by Partners in Health, an organization that provides health care to poor rural populations. 
The third-ranked organization was Interplast, which is more narrowly focused on correcting deformities like cleft palate. 
Evaluating charities can be more difficult than making investment decisions. 
Investors are interested in financial returns, so there is no problem about measuring distinct values – in the end it all comes down to money. 
It is more difficult to compare the reduction of suffering brought about by correcting a facial deformity with saving a life. 
There is no single unit of value. 
In other ways, too, evaluating charities takes time, and can be expensive. 
Perhaps for this reason, many organizations, including some of the best-known anti-poverty organizations working in Africa, did not respond to GiveWell’s request for information. 
No doubt they calculated that a chance to get a $25,000 grant wasn’t worth it. 
But if donors start to follow GiveWell’s recommendations, then a high ranking from GiveWell could be worth far more than the value of the grant. 
This is why the potential of GiveWell is revolutionary. 
In the US, individual donors give about $200 billion to charities each year. 
No one knows how effective that vast sum is in achieving the goals that donors intend to support. 
By giving charities an incentive to become more transparent and more focused on being demonstrably effective, GiveWell could make our charitable donations do much more good than ever before. 

Holland After van Gogh 
The murder of filmmaker Theo van Gogh and the ensuing arson attacks against mosques, churches, and Islamic schools have caused more soul-searching in Dutch homes in the last week than in the past two decades. 
The old Netherlands, it seems, has ceased to be, never to return. 
The goal now must be to unite the Dutch people. 
This will require much work on the part of both immigrants and native Dutch. 
As long as moderates keep their heads, a new Netherlands may be born out of the terrible events of the past weeks. 
It is often said of the various immigrant groups in the Netherlands that they lack the ability to "cleanse themselves" through honest self-appraisal and criticism. 
There are many who acknowledge this and want to change. 
Non-committal multiculturalism has long kept the conservatism of Dutch Moroccans and Dutch Turks hidden from the public eye. 
Among immigrants, soul-searching is closely related to belonging and commitment, which in practice boils down to feeling part of society and feeling responsible for the city, neighborhood, and street where you live. 
We native Dutch also find it hard to hold a mirror to ourselves. 
We are bad listeners and air our views whether or not we have thought deeply about them. There is a lack of self-examination. 
As a result, many people no longer understand themselves, which makes it hard for them to understand others. 
Freedom of expression is becoming a caricature. 
When asked what it was like to be interviewed by Theo van Gogh, European Commissioner Frits Bolkestein said, "He was impertinent, and that is a good thing; he was offensive, and that is not." 
It is as simple as that. 
In today's Netherlands, assertiveness is seen as a good thing, modesty as a form of self-chastisement. 
Respect is for wimps! 
Moral relativism has damaged public life. 
Many youngsters now see politics as a kind of computer game. 
It is no longer about message or content - it is just one more form of entertainment, and what matters is who wins and who loses. 
Context has been lost. 
Extreme ideas offer an alternative compass to disoriented souls like Mohammed Bouyeri, van Gogh's suspected murderer. 
He is not so much a product of zealous imams from rural Morocco as of the West's information society. 
The gospel of Muslim extremism has found a global market through the Internet. 
Something similar is happening on the extreme right, with "white power" offering an apparent certainty to youngsters who are adrift. 
The real struggle is about ideas. 
Indeed, what is most ominous is that extremists realize this more clearly than the moderate, silent majority, who find the noise irritating but do not know how to start a serious dialogue. 
Meanwhile, tolerance degenerates into multicultural segregation. 
We do not live together, but in isolation from each other. 
The Turkish-Dutch headmaster of the Muslim school in Uden that was burned down after van Gogh's murder voiced the inhibitions we all feel when he asked, rhetorically, "Is the enemy not within us?" 
A revived permissive society is not the answer. 
The state must battle terrorism, public space must not be abandoned to extremists, and Islam in Europe must adapt to Europe. People who live in a society they hate, amidst people they despise, cannot contribute to a shared future. 
Life in Europe will only remain worth living if all cultures and religions accept the laws that represent the common interest. 
So a European Islam is needed urgently. 
It can be given shape by, for example, training imams in Europe, by encouraging mosques to promote social cohesion in their neighborhoods, and by more active participation by Muslims in the public debate. 
At the same time, native Europeans must learn to accept that Islam may offer new vantage points on such moral issues as euthanasia, abortion, individuality, and solidarity. 
This way Islam could really become a source of inspiration for the European community of values. 
If we want to build something better on the ruins of multicultural indifference, our dialogue must become more profound. 
Prejudice must make way for empathy, and alienation for respect. 
Essentially, this is all about giving a new meaning to solidarity, beyond the left-right dichotomy. 
It is time for a civilizing mission that will emerge from society itself and bring people together. 
This mission must also reflect a new politics that does not accentuate differences, but helps shape a new sense of who "we" are. 
The Netherlands need not be the focus of international religious conflict. 
What is precious must be preserved, and what enriches must be absorbed. 
This process must begin in school. 
Children must learn that they do not live in a monoculture, but in a pluralist society bound together by universal values and common laws. 
They must learn that critical thought is valuable, and that doubt is healthy. 
Restoring the past is not an option. 
Rudderless societies are easy prey for bigotry. 
This is not just a matter for politicians. All of us must help turn Europe's motto "unity in diversity" into a genuine guiding principle. 

François Hollande’s Tartuffe Syndrome 
LONDON – In his classic comedy “Tartuffe, or The Impostor,” Molière shows that allowing pride, rather than reason, to dictate one’s actions invariably ends badly. 
French President François Hollande appears to have an advanced case of Tartuffe’s malady, repeatedly making political pledges that he cannot honor, partly because of factors beyond his control – namely, the European Monetary Union (EMU) – but mostly because he lacks the determination. 
For France, the consequences of Hollande’s failures will be much more dramatic than his political downfall. 
Indeed, the country could be facing catastrophe, as Hollande’s actions risk miring the economy into sustained stagnation and driving an increasingly angry French public to elect the far-right National Front party’s Marine Le Pen as his successor. 
France’s economic policies are untenable, meaning that both of the main determinants of those policies, the EMU and Hollande’s approach, must change radically. 
So far, that does not seem to be happening. 
Earlier this month, an opinion poll showed Hollande’s approval rating plummeting to 12% – the worst result for any French president in the history of modern polling. 
On the same day, Hollande gave a long televised interview in which he combined admissions of failure with new promises. 
Consider unemployment, which in September stood at 10.5%, compared to only 5% in Germany. 
In the interview, Hollande acknowledged that, despite his pledge, a reversal of the negative employment trend “didn’t happen” this year. 
(He failed to mention that he had set the same goal last year as well.) 
France’s unemployment problem is the result of leviathan labor regulations (the labor code runs 3,648 pages) and, above all, a crippling tax burden on labor. 
Hollande’s main new promise – not to impose any new taxes, beginning next year – might have been an implicit acknowledgement of this. 
In the meantime, however, there will be an increase in diesel excise duties, and a 20% surcharge on property taxes will be imposed on unoccupied second homes in densely populated areas. 
Because these tax hikes will likely be approved by the end of the year, they should be the last – if, that is, Hollande follows through on his pledge. 
Given Hollande’s track record – the tax burden has risen by €40 billion ($50 billion) over the last two years – it seems unlikely that he will. 
Indeed, Hollande’s own officials are already backpedaling, with the budget minister, Christian Eckert, stating that more tax hikes could not be ruled out: “You can’t set in stone a situation that depends on an international context that we don’t control.” 
Of course, that “international context” is the EMU, which places considerable external constraints on French policy. 
Even without such constraints, it is only prudent for fiscal policymakers to keep their options open. 
Either way, the euro’s creators were wrong to expect that the common currency would promote economic and political convergence among its members. 
By ruling out exchange-rate adjustment to address differences in competitiveness, the euro has forced less competitive countries to pursue painful and slow “internal devaluation” (suppressing real wages). 
This has driven down demand and prices, causing the disparities among eurozone member countries’ economic performance to widen. 
France now has a 2%-of-GDP current-account deficit, compared to Germany’s 8%-of-GDP surplus. 
The deflationary impact of internal devaluation is compounded by the rule, reinforced in the 2012 “fiscal compact,” that eurozone countries are wholly responsible for their own debts and thus must adopt strict budgetary discipline. 
With demand relentlessly squeezed, not even depressed wages can generate adequate employment. 
The only solution, many euro supporters now contend, is full political union, which would allow for fiscal transfers from the eurozone’s more competitive countries to their weaker counterparts. 
But southern Italy, which has not used the fiscal transfers from the north on which it has long depended to transform its economy or boost productivity, demonstrates how little impact this approach can have. 
The notion that a eurozone fiscal union could do better is a dangerous fantasy. 
Another potential approach would be for strong eurozone economies, especially Germany, to support productivity-enhancing structural reforms in less competitive countries like France and Italy. 
This is probably what German Chancellor Angela Merkel meant when, in private discussions at last December’s European Council meeting, she reportedly said that, though Germany “cannot afford transfers to the whole of Europe,” it can “help to pay the doctors’ bills.” 
But, sooner or later, the weaker economies will probably opt out of such reforms, reclaiming their monetary sovereignty as a necessary – though far from sufficient – means of averting economic and social breakdown. 
In the meantime, Hollande will continue to channel Tartuffe. 
Locked into the single currency, mainstream French politicians’ powerlessness to take real action renders their promises worthless. 
As a result, France can expect popular protest, as well as a further increase in support for more extreme parties – above all, Le Pen’s National Front. 

Hollande or Insurrection? 
PARIS – For better or worse, Europe is now engaged in an insurrection against the fiscal pact condemning European Union member countries to austerity without growth. 
Will it take a military coup to acknowledge that the situation is untenable? 
Or will the election of François Hollande as French President shift Germany’s uncompromising stance? 
The prospect of reducing public deficits to less than 3% of GDP is unrealistic in both the Netherlands and Spain. 
Unless it is ready to take punitive measures now, the EU will have to give these countries additional leeway – mindful that the European public tends to respond negatively every time it is consulted. 
In Greece, the recent election produced no government, necessitating another popular vote in June. 
Ireland is fortunately less worrying, but the odds that the fiscal pact will be approved in a popular referendum are becoming longer. 
Granted, the removal of the unanimity clause provides a way to avoid this obstacle and allow for the pact’s implementation. 
But this solves nothing, because neither France nor Italy will ratify the pact. 
Even Germany’s Social Democrats, whose support Chancellor Angela Merkel needs to secure ratification in the Bundestag, appear to have granted only conditional support. 
Germany is accused of monetarist dogmatism and of being responsible for accentuating the economic asymmetry between it and its eurozone neighbors. 
Its relatively good economic health allows it to finance its debt at less than the rate of inflation, while other European states finance theirs at rates that are three points higher than inflation. 
With Hollande’s defeat of Nicolas Sarkozy, Merkel has virtually no support in the eurozone besides that of Finland. 
The tandem with Sarkozy was very useful to the Germans in advancing their views, while Sarkozy accepted his role in “Merkozy” in order to maintain France’s key role in Europe’s crisis management. 
In terms of form, traditionally pro-federalist Germany thus aligned with France’s longstanding insistence on a Europe of governments. 
But, in terms of substance – austerity versus urgently needed economic growth – France lost. 
Hollande is determined to change course. 
He believes deeply in the centrality to Europe of the Franco-German relationship. 
Yet he is enough of a realist to see that this relationship is significantly unbalanced, owing to France’s economic decline, and that Sarkozy’s endorsement of German preferences was not worth the appearance of being at the heart of the decision. 
Hollande’s victory has already sharply redefined European politics. 
Almost all European governments are counting on him to change the balance of power. 
Rarely has a French election had such repercussions in Europe. 
Will he succeed? 
The four proposals that Hollande has put forward are so consensual that it would be difficult for Germany to oppose them: use of non-disbursed resources from the EU Structural Funds, recapitalization of the European Investment Bank, creation of project bonds, and taxation of financial transactions. 
Significantly, two proposals that were most likely to meet German opposition – Eurobonds to pool risk and the transformation of the European Stability Mechanism into a bank that could borrow from the European Central Bank – were removed from his draft memorandum to European leaders. 
Despite the gravity of the situation, Hollande has three advantages: excessive austerity is unrealistic, given growing social opposition; public deficits are only a small part of Europe’s problems (and are not necessarily the source of the crisis); and a strong consensus has emerged outside of Germany to change tack. 
Moreover, during the upcoming G-8 summit, Hollande will enjoy the support of the United States, which worries that deflation in Europe would slow its own economic recovery. 
Germany has historically never benefitted from isolation. 
It is probably on the basis of this historical-political argument that Hollande will be able to bring about a German shift. 
Of course, one might argue that the emerging European consensus is quite ambiguous. 
Some favor stimulating growth through investment projects, while others emphasize structural reform. 
Furthermore, there is no guarantee that Hollande’s proposals will quickly revive moribund economies. 
Indeed, it is blatantly obvious that in a country like France, reduction in public spending – especially the state’s often-unproductive operating expenditures – is a prerequisite for recovery. 
Yet Europe’s problems, by definition, cannot be solved simultaneously. 
And what is not at all ambiguous is the public’s rejection of austerity – or, for that matter, financial markets’ increasing concern that long-term growth could suffer. 
That is a rare and powerful alliance, and one that Europe’s political leaders ignore at their peril. 

Hollywood’s Favorite Villains 
Once upon a time, Cold War enemies, white supremacists, and evil geniuses reigned supreme as Hollywood’s favorite bad guys. No more. 
Today, it is multinational corporations that are increasingly being cast as the über-villains of our globalized world. 
For all their subliminal paid promotions and subtle product placements, corporations are getting drubbed in the main story lines of our popular culture. 
This treatment goes far beyond documentaries like Michael Moore’s polemical Fahrenheit 9/11 or The Corporation , an earnest if somewhat paranoid portrayal of multinational companies’ role in globalization. 
It extends to mainstream hits like The Constant Gardener , in which the idealistic protagonists do battle with a malicious global pharmaceutical company that is bent on exploiting Africa’s misery to test experimental drugs. 
To be sure, sociopathic corporations have populated books and films for more than a century. 
But corporate villains, typically multinational companies, have never been so ubiquitous as today. 
Is it unfair? 
Most corporations, after all, are merely convenient mechanisms for ensuring that scarce global capital is used at maximum efficiency, to the benefit of all. 
Are famously liberal Hollywood film directors spending too much time going to anti-globalization rallies? 
Perhaps. 
But I would submit that Hollywood’s misgivings, however untutored, represent only the tip of a growing iceberg of resentment against the perceived injustices of globalization. 
The simple truth is that corporations represent capital, and capital – in the form of factories, equipment, machines, money, and even houses – has been the single biggest winner in the modern era of globalization. 
Corporate profits are bursting at the seams of investors’ expectations in virtually every corner of the world. 
Even in moribund economies like Germany and Italy, where employment security is vanishing, corporations are swimming in cash. 
This phenomenon comes as no surprise to economists. 
Add two billion Indian and Chinese workers to the global labor force, and the value of other means of production – particularly capital and commodities (for example, gold and oil) – is bound to go up. 
And so it has, with capitalists everywhere gaining an ever larger share of the economic pie. 
(In theory, capitalists in labor-abundant China and India could end up as losers, but in practice they, too, have benefited thanks to their governments’ success in simultaneously liberalizing and globalizing.) 
Many policymakers seem to be under the impression that surging profits are a purely cyclical phenomenon, as economies continue to grow out from the depths of the 2001 recession. 
Wait a bit, they predict, and wages will fully catch up later in the cycle. 
Not likely. 
Capital’s piece of the pie has been getting bigger for more than 20 years, and the trend looks set to continue. 
Indeed, corporations’ growing share of income has been a major driver behind the long, if uneven, bull market in stocks that began in the early 1990’s. 
At the same time, inflation-adjusted wages for rich-country unskilled workers have barely budged over the last two decades. 
Some of these trends also have to do with the nature of modern technological change, which seems to favor capital and skilled workers disproportionately. 
But, regardless of their cause, rapidly growing inequalities are a powerful force for instability everywhere, from wealthy America to rapidly growing China to reform-challenged Europe. 
“A rising tide lifts all boats,” conservatives like to say. 
Fine, but what happens to people, like the poor of hurricane-struck New Orleans, who don’t own boats? 
Growing inequality would not be such a problem if governments could simply raise taxes on the rich and strengthen subsidies to the poor. 
Unfortunately, any country that taxes capital too aggressively will only succeed in chasing it to regions where the tax burden is lighter. 
In a globalized world, national governments’ ability to tax potentially mobile factors of production is sharply circumscribed. 
The same mechanism that pours profits into the pockets of global corporations also prevents governments from claiming a larger share of the spoils. 
Unfortunately, the long-term trend towards ever-lower income shares for unskilled workers is likely to continue over the coming decades, as modern technology permeates the globe, and as emerging markets like China, India, Brazil, and Eastern Europe continue to integrate into global production. 
This is not to say that unskilled workers are actually being made worse off by globalization in absolute terms; the vast majority are actually breaking even or better. 
But unskilled workers’ incomes are not keeping pace with overall economic growth, and the resulting social strains are a ticking bomb. 
If so, then Hollywood’s cartoon-like caricatures of evil multinational corporations may some day seize mainstream consciousness, leading to political upheavals that shatter today’s social contract. 
That won’t be good for profits, or for the poor. 
Governments – and corporations – must find better ways to provide equal opportunity through improved education, broader financial markets, and other channels. 

Holocaust Denial, Nuclear Denial 
What connects Iran’s nuclear ambitions and Holocaust denial? 
With equal fervor, Iran’s president, Mahmoud Ahmedinejad, defends his country’s right to develop its nuclear capacity (though denying that his country seeks nuclear weapons) and challenges decades of Holocaust research. 
How should Ahmedinejad’s denial that Iran intends to pursue nuclear arms be judged in light of his Holocaust denial? 
Journalists ask, but Ahmedinejad won’t answer. 
His argument is that Iran does not want nuclear weapons, and would not use them to duplicate a crime that did not happen. 
Some westerners, while lamenting Ahmedinejad’s insensitivity, have struggled to minimize the significance of his Holocaust denial as the fulminations of a misguided fanatic (as if misguided fanaticism were an incidental quality in a nation’s president). 
This misses the point. 
Holocaust denial is not an argument about the past. 
It is an argument about the future. 
The point of Holocaust denial is to remove the taboo now associated with the original crime. 
For deniers, the problem is not that the Holocaust occurred, but that most people still consider it to be a bad thing. 
Thus, Auschwitz is dismissed as a “detail of history,” in the telling phrase of the French politician Jean-Marie Le Pen. 
What Holocaust deniers seek most is to undo the idea that Nazi crimes should have any impact on current international relations or on global notions of morality. 
Ahmedinejad made this point repeatedly in interviews with western media and in long letters to US President George W. Bush and German Chancellor Angela Merkel. 
He has even done the math: sixty years have indeed passed since the Holocaust ended, five times the actual period of Nazi rule in Germany. 
So, it is time, he wrote Merkel, to “make the shadow of World War II disappear.” 
Unsurprisingly, he has Israel in mind. 
But Ahmedinejad’s obsession with Israel blinds him to any understanding of what actually happened across Europe during WWII – and to the fact that present-day Europe was constructed over the six decades since then as a response to this historical disaster. 
In writing to Merkel, he is addressing the leader of a country decimated by Nazi rule – millions dead, an entire society and economy reduced to rubble. 
Had she been politically active during the Nazi times, Merkel would have landed in a concentration camp. 
Yet Ahmedinejad, referring to Europe’s response to the Holocaust, asks her to imagine “what standing some European countries could have had and what global role they could have played, if it had not been for this 60-year-old imposition.” 
Germany does not seem to have done too badly in these 60 years, but consider the core of this “imposition”: the effort to give enduring political expression to the moral concepts of good and evil that the Nazis tried to invert. 
As a policy, the Holocaust was premised on denial – the physical denial of any legitimate religious, racial, or political difference within Nazi Germany. 
The means of this denial were the annihilation of offending populations – the Jews foremost among them – in a merciless attempt at social purification. 
The intent of the crime was so ambitious, and its scope so great, that a new word – genocide – was coined to describe it. 
Modern media played a role, too, broadcasting images of the death camps that immediately came to symbolize the depth of Nazi depravity. 
The enduring impact of the Holocaust, explored in hundreds of books and films, was to portray Nazism as the ultimate expression of evil. 
In this context, to deny the Holocaust is to reject its modern association with evil, and implies that what happened during the Holocaust could be accommodated under a different moral order. 
Ahmedinejad argues that outside pressure, not the actual historical experience of total war, keeps the memory of the Holocaust alive in Europe. 
What he doesn’t understand is that the memory of Auschwitz is also the memory of the Battle of Britain, the bombing of Dresden, the occupation of Paris, and the Warsaw uprising. 
Auschwitz did not occur in a vacuum. 
It was the furthest extreme of a disaster that incorporated all these other events. 
If the Holocaust did not happen, or if it has no meaning, then how is the rest of modern European history to be understood? 
If there were no crimes, then the Nazis were not criminals. 
Ahmedinejad feels the power that comes with re-writing history. 
He enjoys taunting the West with the past that he denies. 
He understands the temptation of evil, the lure of forgetfulness. 
Above all, he is a practical man. 
It does Ahmedinejad no good for Europe to maintain a sense of history that must put it at cross purposes with Iran. 
Ahmedinejad’s purpose is simple: find the weak spots in the chain that links Europe to its past and, through this past, to Israel and the US. 
Europe’s choice is equally clear: to accept absolution for this past from the president of Iran, or to determine whether the standard of truth that he applies to history is the same as he applies to nuclear weapons. 

Holy Abuse 
NEW YORK – In his remarkable apology to the Catholics of Ireland (most of that country’s population), Pope Benedict XVI explained why he thought sinful priests were tempted to commit sexual acts with children. 
It was because of “new and serious challenges to the faith arising from the rapid transformation and secularization of Irish society. 
Fast-paced social change has occurred, often adversely affecting people’s traditional adherence to Catholic teaching and values.” 
As we know, the abuse of children by Catholic priests did not just occur in Ireland, but in many other countries too, something the Pope preferred not to dwell upon. 
And Ireland is not the only place where social transformation and secularization have challenged religious values. 
When the Pope blamed the sexual transgressions on these challenges, he may have been at least partly right, but not for the reasons he believes. 
In more traditional days, not so very long ago, when God reigned supreme and most people still turned to their priests (or ministers, rabbis, etc.) for moral guidance, sexual behavior was often dictated by power. 
Christians may have believed in sin. 
The values espoused by the Church were paid their due deference. 
But hypocrisy gave privileged people, including priests, a certain leeway. 
Wealthy men had mistresses, professors had affairs with students, and even the lowly village priest, a man of social and spiritual power, if not of great wealth, often enjoyed the sexual favors of a woman conveniently at hand to take care of his domestic needs. 
Such practices were accepted as facts of life, as they still are in many poor and southern countries, which might explain why the exposure of priestly abuse has taken place mostly in the north, where social change has been more rapid. 
This made the notion of celibacy, a perhaps noble, but for most people impossible ideal, bearable. 
After all, in Renaissance Italy, even the Popes had children. 
The life of women under such traditional arrangements tended to be tightly circumscribed. 
Except in small, libertine aristocratic circles, where women were able to take on extra-marital lovers too, the woman’s role was to be a mother and domestic caretaker. 
And the rights of children in most traditional societies, before the changes the Pope deplores came about, barely existed. 
Adults ruled supreme. 
To Pope Benedict, as well as other conservatives, the social and sexual revolutions of the mid-20th century may look like an orgy of libertinism. 
And to some, sometimes, it was: the hedonism of gay life in Amsterdam or San Francisco, the sexual habits in some hippie communes and the almost feudal erotic privileges of rock stars. 
But this was hardly for everyone. 
The real changes, in such countries as Ireland, Germany, or the US, concerned the status of women and children. 
It was no longer all right for men to have mistresses, teachers to have affairs with students, or priests to enjoy the favors of their chambermaids. 
People became less tolerant of hypocrisy. 
In a way, the social transformations of the 1960’s and 1970’s brought about a new form of puritanism. 
Especially in the US, a man can lose his job for making an “inappropriate” sexual remark, marriages collapse because of a one-night stand, and any form of sex with children is an absolute taboo. 
Perhaps because so many other taboos have fallen, the taboo on sex with children is guarded with almost fanatical zeal. 
Even fantasizing about it, in the form of pornographic cartoons, is illegal in certain countries. 
To be sure, the exploitation of children, whether sexual or otherwise, is deplorable, if only because children rarely have the power to resist. 
Even the Pope would agree that the emancipation of women, and the protection of children, are good things.Indeed, during his time as Cardinal it was part of his job to stop priests fromabusing minors.He does not appear to have been very successful. 
This may be because protecting the Church from scandal was held to be the more important task. 
Catholics have tended to be more tolerant of hypocrisy than Protestants. 
The rise of Protestantism was in part a protest against this. 
Strict Protestants make a virtue out of brutal frankness, because they believe they have a direct pipeline to God. 
Catholics confess to their priests, not to God himself. 
Sins can be dealt with, as long as proper ceremony is observed. 
This explains why the Vatican chooses to describe the pedophiliac transgression of its clergy as sins rather than crimes. 
That this will no longer do in a more emancipated world is not because secularization has destroyed people’s sense of morality. 
After all, secularism never implies that abusing children is good. 
No, the problem for sinning priests is that power in democratic societies is no longer as privileged as it once was, and people are less willing to tolerate hypocrisy. 
As a result, the vow of celibacy has become an unworkable anachronism. 
There is a solution to this problem. 
Or if not a solution, an amelioration: the Church could allow priests to marry, or form homosexual relationships with consenting adults. 
Pope Benedict XVI, a strict conservative in doctrinal matters, is highly unlikely to countenance such an idea. 
He will continue, instead, to preach against the evils of secular society and the dangerous temptations of liberalism. 
But this will not be of much help, because the flesh is weak, and will find a way to satisfy its needs. 
If this cannot be done legally, crimes will continue to be committed against people who are least able to defend themselves. 

Home Sweet Second Home 
Whenever I speak at finance and economics conferences around the world, I find that a great conversation starter with the spouses of the middle-aged business people who attend is to inquire about their vacation home. 
I then find myself entertained by stories of gorgeous ocean sunsets seen from the porch, views onto expanses of colorful wildflowers on mountainsides, and happy family reunions in beautiful seclusion (as well as problems with the plumbing). 
Years ago, I never asked about vacation homes. 
They never seemed so much on people’s minds. 
Purchases of second homes for pleasure were confined to the rich, and thus did not seem quite so much of a conversation topic for the rank-and-file business people that I meet at such conferences. 
But now the world is undergoing a second-home boom: an increasing number of people are buying vacation homes in beautiful and fun places that are within a few hours’ flying time from their first homes and jobs. 
Their second homes are a retreat where they will spend only a fraction of the year, and recently pristine mountain ridges and ocean cliffs are being dotted with new homes to meet the demand. 
A study by the National Association of Realtors (NAR) indicates that 13% of all homes purchased in the United States in 2004 were vacation homes. 
This does not include buyers who purchased homes as investment properties, mostly to rent out. 
According to the NAR, investment buyers account for another 23% of home sales, bringing second-home purchases to 36% of the total. 
Some of the US counties with a high proportion of vacation homes are seeing price increases that rival, if not outstrip, the booming metropolitan areas. 
For example, according to the Case-Shiller Indexes, home prices in the fashionable Cape Cod vacation area in Massachusetts soared 184% from 1997 to 2005, compared to the 131% increase in nearby Boston over the same period. 
America is not alone. 
Europeans are buying gemütliche Alpine ski chalets, glamorous condominiums with Mediterranean views in the South of Spain, and, increasingly, villas in picturesque sites in Turkey, Hungary, and Croatia. 
Australians are buying oceanfront properties at the Sunshine Coast and the Whitsundays. 
Japan’s vacation-home boom of the 1980’s has largely fizzled with its collapsing stock market and urban land market. 
But even there, the market for vacation homes remains hot in places like Karuizawa, Lake Kawaguchi, and Hakone. 
Being able to afford a vacation home in beautiful surroundings may mean a lot to some people. 
Indeed, sometimes the talk that I hear about these properties seems to integrate them into the true meaning of life. 
After all, where do we imagine that philosophers and poets and gurus live? 
In one of these captivatingly charming places, of course, and not as tourists in hotel rooms. 
Most people who couldn’t possibly afford such a vacation home probably don’t miss it. 
Craving one seems to be a desire, like fine wine, that one discovers only when one has substantial wealth. 
So, as global economic growth continues, and as household incomes rise in today’s most populous emerging countries, demand – and thus prices – for vacation homes in beautiful places, either at home or abroad, will most likely soar. 
There is reason to worry about this. 
Real GDP has been growing at around 3% a year in many advanced countries, and twice that or more in some emerging countries. 
Properties in beautiful places are likely to be what economists call “superior goods” – those goods that account for a higher proportion of consumption as incomes rise. 
With fixed supply, rents on these properties should increase at a rate equal to or above the rate of GDP growth. 
Prices could increase much faster at times. 
On the other hand, in some places, a speculative bubble is fueling today’s boom in vacation-home prices. 
The vacation-home boom appears psychologically tied to the urban home-price bubble in many of the world’s “glamour cities,” and prices of these vacation homes are similarly vulnerable to a significant drop in coming years. 
Moreover, there are plenty of ways for the construction industry to offer untold millions more people the opportunity to call some beautiful place home, simply by building more high-density and high-rise vacation apartment buildings there. 
Many of the single-family vacation mansions or low-density apartment buildings that are being built today will likely eventually be sold, torn down, and replaced with higher-density megastructures, boosting supply and thus easing pressure on prices of the remaining low-density vacation homes. 
Such higher-density construction must be the best possible outcome, for it will please the most people. 
Most vacationers seem to derive a sense of excitement from the presence of many other vacationers around them. 
Large numbers of people contribute to a holiday atmosphere and attract entertainment and sports industries. 
But, for many of those who imagine relaxing in a place that offers a quaint life of undisturbed beauty, there is a strong risk that prices will rise out of reach in future decades. 
No economic strategy can change that, even if it produces spectacular GDP growth. 

Home Truths about Immigration 
Something strange happened in Europe's election campaigns this year. 
In France and Germany, Holland and Sweden the subject uppermost on many people's minds--immigration--was either ignored or exaggerated. 
Established parties seem almost to have an unwritten pact to play down the significance of immigration. 
"We must keep this sensitive subject out of the campaign" seemed to be the prevailing attitude, as if the period of heightened political awareness that elections provide should not be used to debate serious controversies. 
As a result, fringe parties stepped in with slogans about countries being "swamped" by immigrants and the need to preserve the "purity" of nations. 
Can one blame voters for being suspicious of the silence of the political majority, and even for being taken in by the fringe's blustering? 
It is high time--indeed, past time--for those who believe in liberal and enlightened political discourse to present their case. 
Some home truths about the migration of people need to be remembered and the necessary consequences drawn. 
Here are five such truths, or at any rate, five issues for debate: 
First, emigration is no fun. 
As a rule, people do not leave their homes on a whim or out of adventurousness. 
Typically, they want to escape conditions of hopelessness, as many Europeans did when they left their homes in the 19 th and 20 th centuries, usually for America. 
Whether migrants are responding to political oppression or economic destitution, it is important to understand that the price they are prepared to pay is as high as the push to leave is strong. 
Second, immigration is a great compliment to those countries that migrants choose as their final destination. 
The answer to the question, "Where do we go if we have to leave?" is not usually China or some African country, nor is it any longer much of Latin America. 
Countries that are magnets for migrants tend to be rich and free. 
Canada has become a dream for many, but so are the countries of Europe. 
They should be proud--and a little humble--about their magnetic quality, as the US was for a long time. 
Third, it is misleading to argue for a certain amount of immigration in terms of the need to fill certain high-tech or other positions. 
Gaining a few Indian computer specialists is a bad reason for allowing "green card" access, if only because such migrants are likely to remain a tiny minority of newcomers. 
Rich countries need immigrants nowadays in order to fill the jobs that Adair Turner, in his book Just Capital , calls "high-touch" jobs. 
Getting your hands dirty is what most people in rich countries no longer want to do. 
From restaurant kitchens to care for the elderly, from harvesting cotton to laboring on building sites, people in rich countries want to consume services that they are no longer willing to provide themselves. 
It may not be dignified to expect immigrant workers to do these "dirty" jobs, but to these workers such jobs offer a step on the ladder of hope as they help to keep advanced economies and societies functioning. 
Fourth, no one has yet thought through the full implications of today's demographic and attendant social changes, but the fact is that without immigrants the welfare state in advanced countries will become unaffordable. 
This is not pleasant to say. 
Using migrants to provide for the needs of natives, but without letting the migrants share all the benefits, is morally unattractive. 
There may be ways to mitigate the result, but without immigration social benefits across Europe will have to be reduced massively within a generation. 
Fifth, immigration can be treated either as a step towards the full integration of migrants, or as a transitional phase in their lives. 
Both possibilities need to be on offer, but there is a lot to be said for the second. 
Italians (and later Turks) who worked in Northern Europe and then returned home with sufficient assets to start small businesses made a double contribution; they helped their host countries and then helped their home countries. 
The fact that countries can be turned around is a reason for hope. 
Portugal, and above all Ireland, are prime examples. 
For more than a century, Ireland was an emigration country par excellence . 
Now Ireland is so prosperous that it attracts immigrants even from Britain. 
This is not the only way forward. 
Integration of immigrants makes much sense; but it is desirable to help create sustainable conditions in troubled countries with the help of a generation of emigrants who first transfer resources and then return themselves. 
Many consequences follow from such home truths about immigration, not least a more rational debate. 
Viewed from the perspective such truths provide, the European Union's eastward enlargement, for example, is highly desirable not despite but because it may lead to migration from the new member states to the old. 
In this way, more Portugals and Irelands can be created as the wealth of already prosperous regions is sustained. 

Homeless at Home 
Today, the United Nations estimates that 77 million people – more than 1% of the world’s population – are displaced within their own countries, having been forced to flee their homes by armed conflicts, violence, urbanization, development, and natural disasters. 
This is more than the population of France, the United Kingdom, or Turkey. 
These people are not “refugees,” because they have not crossed an international border, but their experiences are often equally devastating. 
Today, the number of people who have been internally displaced by conflicts alone is twice that of refugees. 
With the increasing pattern of internal, rather than international, armed conflicts, and the rising regularity of extreme weather events affecting millions of people, internal displacement poses an even greater challenge to future generations. 
Uprooted from their homes and livelihoods, and traumatized by the violence or sudden disaster that forced them to flee, the displaced are often thrust into an extremely precarious future with few resources. 
Think of the 15 million Chinese displaced following the Sichuan earthquake, the more than two million Iraqis uprooted within their country’s borders by sectarian and other violence, the 2.4 million displaced in Darfur, or the hundreds of thousands who have fled Mogadishu in the last year. 
In the last decade, those displaced by conflicts alone rose from 19 million to 26 million, with millions more displaced by disasters. 
The plight of these victims long went unrecognized, as governments and the international community alike failed to acknowledge their rights to protection and assistance. 
In 1998, the UN issued Guiding Principles on Internal Displacement, which sets out these legal rights. 
Ten years on, what impact have the Principles had on displaced people’s lives? 
The achievements are notable, if insufficient. 
We have raised awareness of the plight of the displaced, brought about changes in government policies, and raised billions of dollars to respond to their basic needs. 
This has helped save countless lives. 
Humanitarian efforts continue to be strengthened, including through a new rapid funding mechanism, the UN Central Emergency Response Fund. 
But for every gain we have made, enormous difficulties still remain. 
The number of those displaced by natural disasters is rising, as the adverse effects of climate change continue to mount. 
Nine of every ten recorded disasters are now climate-related. 
As many as 50 million people around the world are estimated to be displaced each year by floods, hurricanes, tsunamis, earthquakes, and landslides. 
However sudden the initial displacement, the impact can last for generations, together with a long-term need for clean water, shelter, health care, and other basic services, as victims of Hurricane Mitch in Central America in 1998 know from bitter experience. 
Nor are rich countries immune. 
Two years after Hurricane Katrina, thousands of people remain in temporary shelters. 
Moreover, violent armed groups, be they government-supported militias or rebel movements, increasingly embrace terror as a tactic to force civilians from their homes, as seen in the Democratic Republic of Congo, Somalia, Iraq, and elsewhere. 
Millions of people remain impoverished, face discrimination, and suffer long-lasting trauma even after the guns fall silent. 
Life in camps is demoralizing and ultimately dehumanizing. 
The world rightly focuses on the tragedy in Darfur, but overlooks another four million Sudanese still displaced as a result of the north-south conflict, many of whom continue to live in terrible poverty in Khartoum slums or in makeshift camps across the country, with little opportunity to re-build their lives. 
We must prevent displacement from occurring, and end it as quickly as possible. 
On the preventive front, countless lives can be saved by simple actions such as flood-proofing coastlines, or strengthening earthquake codes for hospitals and schools. 
Countries like Bangladesh and Mozambique have proven that disaster risk reduction and preparedness can be a life-saving investment. 
In conflict situations, preventing displacement primarily requires political will. 
Those who forcibly displace civilians in violation of international law must be held accountable in order to deter others in the future. 
States that are not involved in the conflict are also required to uphold the rights of the displaced, including the right to return to their homes wherever possible, and this must be addressed in peace agreements and enforced in peacekeeping mandates. 
So here’s the bottom line: conflicts will continue and natural disasters are growing in frequency and intensity. 
Addressing the root causes and reducing the impact of displacement should start by heeding victims’ voices – their needs and wishes must be understood and their rights respected. 
The international community can help. 
But national authorities must lead. 
Ten years after the Guiding Principles were signed, the time for excuses and inaction has run out. 

Homeless in Iraq 
BAGHDAD -- American officials report that the number of sectarian and other killings in Iraq has declined since the onset of the military “surge.” 
But, while the number of killings may, indeed, have fallen, does that mean Iraq is really safer? 
Insecurity in Iraq is most strikingly illustrated by the number of people fleeing their homes. 
The United Nations estimates that, since July, the number has risen by 60,000 every month. 
The best estimate is that around 16% of Iraq’s population, or one in six Iraqis, no longer live in their homes. 
Roughly half of those who have fled have also left the country, implying two million refugees. 
This leaves another two million who have been displaced internally, and who represent an emerging humanitarian tragedy. 
There have been international reports and fundraising campaigns to support Iraqi refugees in Syria and Jordan, but the internally displaced have received less attention, despite their greater vulnerability, owing to their proximity to the conflict and the poor standard of basic services in Iraq. 
They tend to be less visible, and it is more difficult for donors and agencies to assist them. 
Internal displacement predates the 2003 Iraq invasion. 
During former President Saddam Hussein’s rule, large numbers of people were forcibly relocated through either conflict or government policy. 
Since 2003, displacement has affected all the peoples of Iraq, and the central reason remains the same – the use of violence to expel people from an area with the aim of increasing political and economic power. 
Mixed neighborhoods across Iraq have been targeted by one side or another as sectarian violence has risen and local militias wield power. 
The inability of the government or the multi-national force to curb this intimidation reflects the absence of the rule of law. 
Other factors causing displacement include operations of the multinational force itself, crime, the lack of basic services, and desperate poverty. 
The complexity of Iraq’s society and history means that many people have been displaced more than once, or have returned from exile only to become internally displaced. 
According to the UN, 69% of those displaced since February 2006 come from Baghdad, which demonstrates the extent of the “sectarianization” of the capital. 
Thus, one reason for the “success” claimed by supporters of the military surge may well be that sectarian cleansing in Baghdad has been hugely effective and is now nearly complete. 
Displaced Iraqis who remain in the country move to areas where their community is strong. 
Displaced Shi’a tend to move from the center of the country to the south, Sunnis from the south to the center, and Christians to Nineveh province. 
In mixed cities such as Baghdad and Baquba, those forced to move gravitate towards newly homogenized districts. 
Most displaced people rent accommodation, stay with family or friends, or squat, while a smaller number take refuge in camps. 
There are big refugee camps in Kerbala, Wasit, Diyala, and Nineveh, but most of the displacement is urban rather than camp-based, and thousands of displaced families live in major cities such as Baghdad and Mosul. 
These people now account for many of the eight million Iraqis who are in absolute poverty and in need of emergency assistance. 
Education is minimal, health care is inadequate, and many die without even being accounted for. 
Whereas between 25% and 40% of Iraqis may require food assistance at any given time, this figure is much higher for displaced people, owing to their poor access to the public distribution system. 
Only a third of the displaced had access to the system last year, while half reported receiving food rations only occasionally. 
It is a new phenomenon in Iraq to see people, particularly women and children, looking in the rubbish every day for something to eat. 
In such conditions, many young people feel they have little choice but to join violent groups, if only to provide some income and a level of protection. 
Female-headed households, in particular, face great difficulties in protecting and supporting their families. 
There are increasing reports of Iraqi women resorting to prostitution and of trafficking in women and children to neighboring countries. 
The government recently announced the extension of a program of emergency cash allowances to widows. 
However, this is insufficient to help most of the three million widows, while corruption and bureaucratic inefficiency hamper efforts further. 
Another tragedy of the current conflict has been its impact on minority communities, which make up 10% of the population and are targets for eradication. 
Violent attacks have caused a huge exodus, jeopardizing the existence of Christians, Yazidis, and Mandeans, who have lived in Iraq for hundreds of years. 
Despite the vulnerability of minorities, the religious breakdown of displaced people closely reflects that of the country: 64% Shi’a, 32% Sunni, and 4% Christian. 
But the ethnic breakdown of displaced people – 93% Arab, 4% Assyrian, and 1% Kurd – illustrates the grave insecurity in central Iraq and the relative stability of Kurdistan. 
With the prospects of return continuing to deteriorate, prolonged displacement may well become permanent. 
Should levels of displacement remain high, as appears likely, the humanitarian crisis may deepen further, especially because strained local resources have led some governorates to begin refusing to admit displaced people. 
Their predicament, too, must be reflected in any calculation of Iraq’s security conditions. 

Homophobia in Mexico 
It never fails. 
After I've given a lecture or a course on homosexuality, explaining at length why it can no longer be considered an illness, the questions are always the same: "What are the symptoms?" "Can it be cured?" 
"How can one prevent it in one's children?" Even, occasionally, "Is it contagious?" 
I encounter these questions everywhere: in Mexico City and the provinces; on radio programs and university campuses; among ordinary people, psychology students, and health professionals. 
In Mexico there is still the assumption that homosexuality is a disease, as well as a social problem to be eradicated. 
Always there is the presumption that gay people are fundamentally different from "us normal people." 
These views translate readily into action. 
With an average of 35 reported murders a year (unofficial estimates run three times higher), Mexico ranks second in the world, after Brazil, for anti-gay crimes. 
Attempts to legalize a limited form of gay marriage were quashed three times by the local congress of Mexico City, by parties of the left and right alike. 
For years I've tried to discover the underpinnings of this homophobia, which remains deeply rooted despite the progressive liberalization of public opinion in most areas of morality: contraception, premarital cohabitation, divorce, single motherhood, women's rights, have all gradually (if grudgingly) been assimilated into the spectrum of "normal" behavior. 
Yet homosexuality remains outside the pale. 
Why? 
To begin, the presumed causes of homosexuality are shrouded in pseudo-scientific theories and psycho-babble: homosexuals supposedly suffer from hormonal imbalances, or were sexually abused as children, or constitute an indeterminate "third sex" that is neither male nor female, or had absent fathers and over-protective mothers. 
Although science disproved these explanations decades ago, they still prevail in Mexican popular culture because they all fit into that culture's rigid, polarized definitions of masculinity and femininity. 
In this deeply held view, men and women are not only different, but opposite. 
A man who has any "feminine" traits is "poco hombre": boys who dislike soccer, men who enjoy the opera or express unmanly feelings such as sadness or tenderness, husbands who help with the housework or tend to their children, are considered effeminate. 
A woman who does "man's work," shows too much independence, or stands up to men is overly masculine, "hombruna." 
It is easy to take the next step and declare her a man-hater and a lesbian. 
"Effeminate" men and "masculine" women coincide perfectly with the popular view of homosexuals as men who are not "real" men and women who are not fully "feminine." 
The fact that most gay men are not effeminate, and that most lesbians are not masculine, does not affect this belief, mainly because that kind of gay individual is invisible within the culture. 
The mass media, for instance, pick up on the flamboyant queens and dykes who participate in gay pride parades. 
The vast majority of homosexuals, who are indistinguishable from straight men and women, simply don't enter into the picture. 
But homophobia is not just about homosexuality; it is also about what it means to be a man or a woman. 
Anything that violates traditional gender stereotypes is severely sanctioned in Mexican society; therein lies the true foundation of homophobia. 
But this has implications that go far beyond the rejection of homosexuality, because heterosexuals are also affected by it. 
As a psychotherapist specializing in homosexuality, I have been consulted many times by anxious parents terrified that their little boy is gay (at age five!): he likes to play with dolls, enjoys the company of girls, refuses to play soccer. 
He must be homosexual. 
When I ask them what they would think if their child was a little girl who liked to play baseball, enjoyed playing with boys and refused to play with dolls, they answer, "Oh, that would be fine. 
It's OK for a girl to be active and enjoy sports." 
This is logical: in a machista society, masculinity is the central value. 
That is why, in Mexico today, little boys (and not little girls) are subjected to hormonal and psychological treatment, are removed from mixed schools, and are forbidden to play with girls, all in an effort to prevent them from turning out homosexual. 
Thus, homophobia, far from involving only homosexuals, affects everybody who does not fit into traditional gender roles. 
Homosexual couples prove that it is possible to have relationships on an equal footing. 
Almost always, in a gay couple both men work, because men do so as a matter of course; and both women in a lesbian relationship work, simply because they don't have men to support them. 
The fact that both members of a couple have an income, and the autonomy that comes with work, produces an equality that is rarely seen in heterosexual Mexican marriage. 
Similarly, homosexual partners are generally best friends--which is rarely the case between husband and wife in a machista society. 
For all of these reasons, homosexuality poses a serious threat to the ideas that underlie Mexican society. 
Homophobia serves not only to discriminate against homosexuals, but to keep everybody--men and women, gay and straight alike--firmly in their place. 

Homosexuality is Not Immoral 
In recent years, the Netherlands, Belgium, Canada, and Spain have recognized marriages between people of the same sex. 
Several other countries recognize civil unions with similar legal effect. 
An even wider range of countries have laws against discrimination on the basis of a person’s sexual orientation, in areas like housing and employment. 
Yet in the world’s largest democracy, India, sex between two men remains a crime punishable, according to statute, by imprisonment for life. 
India is not, of course, the only nation to retain severe punishments for homosexuality. 
In some Islamic nations – Afghanistan, Iran, Iraq, Saudi Arabia, and Yemen, for instance – sodomy is a crime for which the maximum penalty is death. 
But the retention of such laws is easier to understand in the case of countries that incorporate religious teachings into their criminal law – no matter how much others may regret it – than in a secular democracy like India. 
Anyone who has visited India and seen the sexually explicit temple carvings that are common there will know that the Hindu tradition has a less prudish attitude to sex than Christianity. 
India’s prohibition of homosexuality dates back to 1861, when the British ruled the subcontinent and imposed Victorian morality upon it. 
It is ironic, therefore, that Britain has long ago repealed its own similar prohibition, while India retains its law as a colonial relic. 
Fortunately, the prohibition of sodomy in India is not enforced. 
Yet it provides a basis for blackmail and harassment of homosexuals, and has made it more difficult for groups that educate people about HIV and AIDS to carry out their work. 
Vikram Seth, the author of A Suitable Boy and other fine novels, recently published an open letter to the government of India calling for a repeal of the law that makes homosexuality a crime. 
Many other notable Indians signed the letter, while still others, including the Nobel Laureate Amartya Sen, have given it their support. 
A legal challenge to the law is currently before the high court in Delhi. 
Around the time when India’s prohibition of sodomy was enacted, John Stuart Mill was writing his celebrated essay On Liberty , in which he put forward the following principle: 
...the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. 
His own good, either physical or moral, is not sufficient warrant....Over himself, over his own body and mind, the individual is sovereign. 
Mill’s principle is not universally accepted. 
The distinguished twentieth-century British philosopher of law, H.L.A. Hart, argued for a partial version of Mill’s principle. 
Where Mill says that the good of the individual, “either physical or moral,” is “not sufficient warrant” for state interference, Hart says that the individual’s physical good is sufficient warrant, if individuals are likely to neglect their own best interests and the interference with their liberty is slight. 
For example, the state may require us to wear a seatbelt when driving, or a helmet when riding a motorcycle. 
But Hart sharply distinguished such legal paternalism from legal moralism. 
He rejected the prohibition on moral grounds of actions that do not lead to physical harm. 
The state may not, on his view, make homosexuality criminal on the grounds that it is immoral. 
The problem with this argument is that it is not easy to see why legal paternalism is justified but legal moralism is not. 
Defenders of the distinction often claim that the state should be neutral between competing moral ideals, but is such neutrality really possible? 
If I were a proponent of legal moralism, I would argue that it is, after all, a moral judgment – if a widely shared one – that the value of riding my motorbike with my hair flowing free is outweighed by the risk of head injuries if I crash. 
The stronger objection to the prohibition of homosexuality is to deny the claim that lies at its core: that sexual acts between consenting people of the same sex are immoral. 
Sometimes it is claimed that homosexuality is wrong because it is “unnatural,” and even a “perversion of our sexual capacity,” which supposedly exists for the purpose of reproduction. 
But we might just as well say that using artificial sweeteners is a “perversion of our sense of taste,” which exists so that we can detect nourishing food. 
We should beware of equating “natural” with “good.” 
Does the fact that homosexual acts cannot lead to reproduction make them immoral? 
That would be a particularly bizarre ground for prohibiting sodomy in a densely populated country like India, which encourages contraception and sterilization. 
If a form of sexual activity brings satisfaction to those who take part in it, and harms no one, what can be immoral about it? 
The underlying problem with prohibiting homosexual acts, then, is not that the state is using the law to enforce private morality. It is that the law is based on the mistaken view that homosexuality is immoral. 

The Promise of China’s Pearl River Delta 
HONG KONG – July 1, 2017, will mark the 20th anniversary of Hong Kong’s return to China, after more than a century of British colonial rule. 
It comes at a moment when China’s leaders are increasingly promoting Hong Kong’s unique role in advancing the country’s economic development. 
Two months ago, Premier Li Keqiang described China’s intention to deepen economic cooperation across the Guangdong-Hong Kong-Macau Bay Area – which Hong Kong analysts have called the Pearl River Delta (PRD) – in order to reinforce its role as a major driver of sustainable development. 
The region includes Guangdong’s nine key cities – including Guangzhou, Foshan, and Shenzhen – plus Hong Kong and Macau. 
Last year, the PRD’s population stood at 68 million, and its GDP was $1.3 trillion. 
The PRD is the southern pillar of the three Chinese coastal growth clusters. 
In the middle is the Yangzi River Delta (YRD), which includes Shanghai, has a population of 130 million and GDP of $2 trillion. 
To the north is the Beijing/Tianjin/Bohai (BTB) corridor, covering ten key cities; it has a population of 100 million and GDP of $1.3 trillion. 
Taken together, these three clusters account for 21% of China’s population and just under 40% of its GDP. 
The PRD has the lowest population of the three, but the highest income per capita, and it forms an important link between China and global supply chains. 
It gains a distinct advantage from the free-trade, low-tax, and highly globalized cities of Hong Kong and Macau; both are “special administrative regions” under China’s “one country, two systems” principle. 
Another major asset is Shenzhen, a highly innovative “special economic zone” boasting a dynamic capital market and a tradition of experimentation with private-sector-driven job creation and integration into global supply chains. 
The PRD’s competitiveness is no accident. 
Deng Xiaoping used the region as a kind of public-policy laboratory, allowing different legal and institutional arrangements to exist concurrently, while China figured out how to approach globalization. 
The system clearly works, but it does suffer from a fundamental contradiction, related to the economist Ronald Coase’s concept of transaction costs. 
Thanks to China’s geographic, demographic, and economic scale, “reform and opening up,” in Deng’s phrase, and technological progress naturally drive down transaction costs, improving markets’ capacity to allocate resources. 
This process often fuels specialization, with regional or municipal economies focusing on their own competitive advantages, in order to maximize their gains from the decline in transaction costs. 
Such specialization can be seen clearly in the PRD. 
Hong Kong is becoming a hub of international finance and services, while Macau establishes itself as a global gambling and entertainment center. 
Meanwhile, Shenzhen is focusing on technological innovation; Guangzhou is a global trading hub; and Foshan and Dongguan are major manufacturing bases. 
While each city appears to be imbalanced in its economic structure, the city cluster as a whole is well balanced and highly competitive. 
But – and herein lies the contradiction – massive numbers of transactions can raise financial, social, and security risks, which can fuel systemic volatility and contagion across regions and sectors. 
To mitigate these risks, governments and regulators must intervene, potentially even imposing restrictions on markets that artificially raise transaction costs. 
China’s leaders would do well to remember this as they attempt to take advantage of the strengths of various systems to build a more open, modern, and faster-growing economy. 
Chinese policymakers certainly recognize the value of city clusters to advance economic development and ease the pressures of rapid urbanization. 
The urban share of the Chinese population surpassed 50% in 2011, and another 300 million people could be living in urban areas within the next 20 years. 
In this context, city clusters could be essential to innovation and job creation, particularly in the service sector, while limiting resource wastage, avoiding further environmental degradation, and easing urban congestion from overcrowding. 
Already, China has worked with Singapore and other major cities to improve urban design, water management, and environmental sustainability, as well as taking steps to tap the potential of the sharing economy. 
Moreover, in April, President Xi Jinping announced the formation of the Xiongan New Area, about 50 miles south of Beijing, which will serve as a venue for experimentation with policies that enable innovative start-ups to replace obsolete smokestack industries. 
The goal is to encourage job creation in sustainable industries while relieving urban congestion in the capital. 
As for Hong Kong, China’s leaders view it as a source of valuable economic-development “software” – including an independent judiciary, a robust anti-corruption regime, a stable currency, and world-class capital markets. 
Hong Kong’s high-quality and internationally oriented education system, and its efficient and sophisticated city-management scheme, are also important assets. 
Hong Kong’s “software” complements China’s broader drive to build the “hardware” of development, exemplified in the One Belt, One Road initiative, which entails massive investment in infrastructure linking China to the rest of the world. 
Already, stock-connect schemes involving Hong Kong, Shanghai, Shenzhen, and London are being established to support Chinese city clusters’ ability to meet OBOR-driven demand for offshore financing. 
But more must be done to help Hong Kong – and, more broadly, the PRD – meet its potential. 
Hong Kong’s world-class services sector currently is working below capacity, owing to physical constraints. 
With better cross-border transport infrastructure and more flexible schemes for delivering medical, financial, and social services, senior citizens could retire outside of Hong Kong’s city limits, creating space for younger workers. 
While many observers focus on China’s credit glut, the authorities are quietly fostering the development of dynamic city clusters. 
But, in order to protect and sustain this progress, Chinese policymakers must work to minimize the risks associated with rapid urbanization and growing specialization. 
Otherwise, trends that are doing China so much good may end up undermining prosperity and social stability. 

Hope for Hong Kong 
LONDON – Hong Kong’s democracy movement has gained admiration worldwide. The principles, decency, and behavior of its youthful vanguard inspire confidence in the qualities of the generation that one day will run the great city. 
That said, it is time to move on to a sensible endgame. 
The longer the standoff between Hong Kong’s Chief Executive and the demonstrators continues, the more likely it is that individual citizens – and Hong Kong itself – will be hurt. 
The Hong Kong government should demonstrate some statesmanship, which the so-called “Umbrella Movement” – occupying the moral high ground and not wishing to risk losing public support – would surely reciprocate. 
A substantive and successful dialogue with the government would not require the protesters to call off their campaign for democracy; it would simply end the current phase of a campaign that eventually will succeed. 
Despite their protestations to the contrary, Hong Kong Chief Executive C. Y. Leung and his government have considerable room for maneuver. 
As many Hong Kong citizens have argued, the Chinese government’s current position is based on a report, submitted by Leung’s officials, which purported to reflect accurately the outcome of local consultations on constitutional development. 
But the report plainly understated the degree of public support for change. 
Given what has happened in the last few weeks, Leung could quite properly give a new report to the authorities in Beijing focusing on two issues not proscribed by Hong Kong’s mini-constitution, the Basic Law. 
The first issue concerns not just the immediate question of the terms on which the Chief Executive will be elected in 2017, but also how the Legislative Council should be elected in 2016 and after. 
The procedure is largely a matter for the Hong Kong government to decide. 
It is surprising that 17 years after the handover of sovereignty from the United Kingdom to China, Hong Kong still does not have a directly elected legislature. 
In December 1992, Margaret Thatcher suggested in a speech in the House of Lords that, if all went well, Hong Kong could have universal suffrage by 2007. 
Unfortunately, all has not gone well. 
The legislature today comprises a mix of directly elected members and those representing functional constituencies: corporate interests and groups of employees. 
Some civic groups have advocated increasing the number of directly elected legislators and opening up the functional constituencies to broader electorates. 
Moreover, the brake that the functional constituencies can put on legislation should be scrapped, leaving decisions to a simple majority. 
This could be accompanied by a pledge to create a legislature composed entirely of directly elected members in 2020. 
The second issue concerns the composition and the voting rules of the handpicked 1,200-member election committee that will choose the Chief Executive in the future. 
The current proposed arrangements would permit the Chinese government to veto any candidate that it did not like, prompting criticism that what is on offer is an Iranian-style election: “You can vote for anyone we choose.” 
The Hong Kong government could call for changes to increase the openness and fairness by which the Chief Executive is chosen, without abandoning its current method in favor of universal suffrage. 
According to the Basic Law, the election committee should be “broadly representative” – a provision that the committee’s current composition violates. 
Its membership is chosen by only 7% of the total Hong Kong electorate, and its voting procedures seek to prevent the nomination of any candidates who may harbor democratic sympathies. 
Since 1997, 55-61% of voters have voted for democratic candidates in Legislative Council elections. 
The last time a slightly smaller election committee met (to choose Leung), less restrictive constraints on candidate selection were in place, and the leader of the Democratic Party was able to be nominated (though he still received less than 7% of the vote). 
So Leung and his team should put forward proposals to broaden the electoral base of the election committee and open up the nominating process for candidates. 
There are plenty of recommendations from civil-society groups about how to accomplish these objectives. 
Both sides will need to give a little to prevent the confrontation in the streets from escalating, with the police forced to provide a substitute for a sensible policy. 
The British government has said that it is important that “the people of Hong Kong have a genuine choice.” 
Leung and his colleagues can give them one. 
This would not be all that the Umbrella Movement has demanded, but it should encourage the protesters to reach a compromise without departing from their longer-term goal. 
That is why Leung should embrace dialogue and compromise. 
Even a ruler whose mandate comes from heaven should heed the words of the Confucian sage Mencius: “Heaven sees with the eyes of its people. Heaven hears with the ears of its people.” 

Keep Hong Kong Free 
HONG KONG – Visiting Hong Kong is a true pleasure. 
With its modern architecture towering around the busy harbor, that great and exciting city must rank among the world’s most enjoyable urban destinations. 
But Hong Kong is now under stress, as it finds itself at the center of a number of issues and challenges – including how best to balance economic and political freedom and how to engage with an increasingly assertive and ambitious China – that will define its prospects in the century ahead. 
Fundamentally, Hong Kong’s prospects depend on the implementation of the “one country, two systems” principle, conceived by Deng Xiaoping to serve as the basis for Hong Kong’s eventual return to China in 1997. 
The idea – which Milton Friedman thought amounted to an impossible balancing act – was that Hong Kong would keep its way of life, liberties, and laws. 
Its people were perfectly capable of running their city; they simply had to do so as a part of China. 
One country, two systems brilliantly balanced the aspirations, anxieties, and difficulties posed by the change in sovereignty from Britain to China. 
For China, there was the smarting humiliation of having ceded its own territory to a colonial power during the Qing dynasty. 
Imperialists from all over the world gave China a hard time, behaving in a way that no one today would or should seek to justify. 
Forcing China to open up to the opium trade formed one of the most disreputable chapters in Britain’s imperial history. 
But what must have rankled the Chinese Communist Party most was that the colonial power had been so successful in building, with China’s own people in Hong Kong, a hugely prosperous and contented city – one that became a magnet for many Chinese men, women, and children. 
If Chinese communism was the wave of the future, why did so many flee from it, clambering over fences topped with razor wire and swimming through hazardous waters, to live under colonial rule? 
On the British side, there were equally implacable challenges. 
Britain needed to determine how best to establish a constructive relationship with a China intent on weaponizing trade, while standing up for the rights and promised freedoms of Hong Kong’s people. 
In this respect, the handover raised essential and complex questions about political morality. 
Just before I left Hong Kong in 1997, after departing from my post as the city’s last British governor, I visited a hospital for the mentally ill, where an in-patient asked me an eminently sane question. 
How, he wanted to know, could a country that prided itself on its deeply rooted democracy hand Hong Kong over to the world’s last big Communist tyranny, without asking its citizens for their opinion? 
The answer is that such questions were never an option, if we were to fulfill our treaty obligations and avoid a catastrophic repeat of nineteenth-century colonialism. 
Yet we should certainly have done as much to introduce and entrench democratic institutions in Hong Kong as we did to secure the rule of law and the protection of civil liberties. 
One reason why we moved more slowly on democracy was that China’s leaders had made clear that they feared Hong Kong’s people would think the road was being cleared to become an independent state, like Singapore. 
For the first few years after 1997, “one country, two systems” seemed to work pretty well, though China did break its promises by blocking democratic development. 
But more recently – and especially since 2012, when President Xi Jinping came to power – China has been tightening its grip on Hong Kong. 
This is probably related to the government’s broader crackdown on dissidents; China’s growing economic heft, which makes an open Hong Kong seem less important to its future prosperity; and a lack of understanding of what Hong Kong’s system really means. 
The question now is whether “one country, two systems” will devolve into “one country, one and a half systems” or, worse, “one country, one system.” 
There is no doubt that China has increasingly been interfering in Hong Kong’s domestic affairs. 
Most recently, concerns have focused on the treatment of some of the leaders of Hong Kong’s 2014 pro-democracy demonstrations: three of the city’s most influential activists were sentenced to up to eight months in prison for their activities, and have been prohibited from seeking public office for five years. 
Three years may seem like a long time to wait before cracking the whip, but there is no doubt that Hong Kong’s judicial system has acted according to the law. 
The trouble is that the convictions have taken place against a background of fear and divisiveness, stoked by the Chinese government’s behavior. 
China has, for example, attacked the independence of Hong Kong’s judiciary, with Rimsky Yuen, Secretary for Justice of Hong Kong, calling for the review of already-served sentences that he deems too lenient. 
And, even as officials like Yuen purport to be defending the rule of law, Chinese security operatives have apparently abducted Hong Kong residents, including several booksellers. 
To ease fears and allow Hong Kong to move forward, three things are required. 
First, China must make clear through its actions that it can be trusted to keep its promises to Hong Kong. 
To help ensure that outcome, the international community should vigorously remind it of the broader ramifications of being viewed as an untrustworthy partner. 
Second, democracy activists in Hong Kong should not allow their campaign for democracy to morph into a call for independence. 
For its part, the government should open a dialogue with them, characterized by mutual respect and transparency. 
Finally, the people of Hong Kong should not give up hope, as the Chinese communists hope they will. 
If its people remain resolute in their commitment, Hong Kong will remain a great free city, choosing those who govern it under the rule of law. 
Hong Kong is a shining example to the rest of the world about what Chinese men and women can achieve with the sort of freedom that millions of others take for granted. 
Its people must not – and, I believe, will not – give up on it. 

The Way Ahead in Hong Kong 
LONDON – It is not wholly true to say that the eyes of the entire world are on Hong Kong. 
They would be, of course, if people in mainland China were allowed to know what is happening in their country’s most successful city. 
But China’s government has tried to block any news about the Hong Kong democracy demonstrations from reaching the rest of the country – not exactly a sign of confidence on the part of China’s rulers in their system of authoritarian government. 
Before suggesting a way forward for Hong Kong’s ham-fisted authorities, three things need to be made clear. 
First, it is a slur on the integrity and principles of Hong Kong’s citizens to assert, as the Chinese government’s propaganda machine does, that they are being manipulated by outside forces. 
What motivates Hong Kong’s tens of thousands of demonstrators is a passionate belief that they should be able to run their affairs as they were promised, choosing those who govern them in free and fair elections. 
Second, others outside of Hong Kong have a legitimate interest in what happens in the city. 
Hong Kong is a great international center, whose freedoms and autonomy were guaranteed in a treaty registered at the United Nations. 
In particular, the United Kingdom, the other party to this Sino-British Joint Declaration, sought and received guarantees that the survival of Hong Kong’s autonomy and liberties would be guaranteed for 50 years. 
So it is ridiculous to suggest that British ministers and parliamentarians should keep their noses out of Hong Kong’s affairs. 
In fact, they have a right and a moral obligation to continue to check on whether China is keeping its side of the bargain – as, to be fair, it has mostly done so far. 
But, third, the biggest problems have arisen because of a dispute about where Hong Kong’s promised path to democracy should take it, and when. 
No one told Hong Kongers when they were assured of universal suffrage that it would not mean being able to choose for whom they could vote. 
No one said that Iran was the democratic model that China’s Communist bureaucracy had in mind, with the Chinese government authorized to exercise an effective veto over candidates. 
In fact, that is not what China had in mind. 
As early as 1993, China’s chief negotiator on Hong Kong, Lu Ping, told the newspaper People’s Daily, “The [method of universal suffrage] should be reported to [China’s Parliament] for the record, whereas the central government’s agreement is not necessary. 
How Hong Kong develops its democracy in the future is completely within the sphere of the autonomy of Hong Kong. 
The central government will not interfere.” 
The following year, China’s foreign ministry confirmed this. 
The British Parliament summarized what had been said and promised in a report on Hong Kong in 2000. 
“The Chinese government has therefore formally accepted that it is for the Hong Kong government to determine the extent and nature of democracy in Hong Kong.” 
So, what next? 
The peaceful demonstrators in Hong Kong, with their umbrellas and refuse-collection bags, will not themselves be swept off the streets like garbage or bullied into submission by tear gas and pepper spray. 
Any attempt to do so would present a terrible and damaging picture of Hong Kong and China to the world, and would be an affront to all that China should aspire to be. 
The Hong Kong authorities have gravely miscalculated the views of their citizens. 
Like the bad courtiers against whom Confucius warned, they went to Beijing and told the emperor what they thought he wanted to hear, not what the situation really was in the city. 
They must think again. 
Under the existing plans, there is supposed to be a second phase of consultations on democratic development to follow what turned out to be a counterfeit start to the process. 
Hong Kong’s government should now offer its people a proper second round of consultation, one that is open and honest. 
Dialogue is the only sensible way forward. 
Hong Kong’s citizens are not irresponsible or unreasonable. A decent compromise that allows for elections that people can recognize as fair, not fixed, is surely available. 
The demonstrators in Hong Kong, young and old, represent the city’s future. 
Their hopes are for a peaceful and prosperous life in which they can enjoy the freedoms and rule of law that they were promised. 
That is not only in the interest of their city; it is in China’s interest, too. 
Hong Kong’s future is the main issue; but so, too, is China’s honor and its standing in the world. 

Hong Kong Holds its Breath 
Hong Kong's residents used to be branded as "apolitical." 
But that description hardly seems appropriate nowadays. 
Since turning out to rally in record numbers on the anniversary of the handover to China in 2003, hundreds of thousands of Hong Kong citizens have taken peacefully to the streets on various occasions to protest government decisions and demand political reform. 
But China's government clings to the belief that Hong Kong's people are not ready for democracy. 
In April 2004, China's legislators ruled out universal suffrage in Hong Kong's 2007 election of its chief executive, as well as for its 2008 Legislative Council election. 
They acknowledged that under the city's special constitution, the Basic Law, these elections could be the first opportunities for the territory to choose its representatives according to the principle of "one person, one vote." 
But they expressed concern that major reform could undermine political stability and economic development. 
Currently, all eyes in China are on Hong Kong's upcoming legislative election on September 12, which will indicate to Hong Kong's government and to China's leaders what people think about the pace and direction of reform. 
A high turnout in favor of pro-democracy candidates is expected, although this won't guarantee them a majority in the legislature because of Hong Kong's unusual political structure. 
For this month's election, Hong Kong's 3.2 million registered voters can elect only 30 of the 60 seats. 
The pro-democracy camp is likely to win 22 seats of those 30 seats, which are based on five large geographical constituencies. 
The other 30 seats, however, are chosen through functional constituencies, which represent specific interests, such as banks, insurance companies, stockbrokers, chambers of commerce, and transport operators. 
Only 199,000 voters, some of them representatives from corporations, elect the legislators who fill these seats. 
Some of these constituencies have only a few hundred voters and are easily controlled by a small number of vested interests. 
Indeed, at the close of nomination on August 4, eleven functional candidates were chosen without opposition, including those representing banks and the Chinese chamber of commerce. 
The British and Chinese governments in the 1980's designed Hong Kong's awkward political system during their negotiations over the eventual transfer of sovereignty. 
Its purpose was to ensure that the will of the public could not be fully expressed through the ballot box. 
After 1997, Hong Kong's government made doubly sure that legislators' already limited powers to initiate debates, legislation, and amendments to laws were further restricted. 
It imposed rules requiring majority support from members of functional constituencies as well as geographic constituencies to take such steps. 
So resistance to change is built into the system. 
If the government can influence 16 of the 30 functional votes, it can thwart proposals from the directly elected legislators. 
This has happened with controversial issues concerning political reform and government accountability over the past few years. 
Yet no one should forget that on July 1, 2003, over 500,000 people protested because the government refused to allow more time to discuss proposed national security legislation. 
Hong Kong's government felt it could ignore public opinion and push the bill through with a large majority of the functional members, plus a handful of directly elected pro-government legislators. 
It only backed down when the pro-government Liberal Party, which held a number of functional seats, broke ranks as a result of intense public pressure. 
The Civic Exchange-Hong Kong Transition Project's latest survey results, from early August, recorded a sharp upturn in public protests over the past year. 
It noted that people increasingly adopted informal means of expressing unhappiness with Hong Kong's government, because they did not think that formal channels were sufficient. 
People began taking matters into their own hands by attending rallies, signing petitions, and donating to political parties and activist groups in unprecedented numbers. 
The survey also showed that although China's government ruled out universal suffrage in the 2007 and 2008 elections, over 40% of respondents still wanted democracy by then, with nearly 20% more wanting it by the next round of elections in 2011 and 2012. 
Furthermore, the majority did not think democratization would hurt the economy, although there were clear concerns that political instability could arise from China's intervention in Hong Kong affairs. 
China's government may well adopt a new Hong Kong policy after the election. 
The best case would be if China agreed to universal suffrage no later than the 2011 and 2012 elections, gaining legitimacy in Hong Kong by backing reform of the political system. 
While China's rulers may fear losing control, they also need to recognize that the current system is causing intense discontent. 
The worst case would be if China disregarded a decisive pro-democracy win in 2007 and 2008 and continued to insist that Hong Kong's people were unready for democracy or to allege foreign manipulation of the pro-democracy camp. 
Hong Kong's people may well conclude that they have no alternative but to use every occasion to protest chief executive Tung Chee-hwa's unpopular government, making it even harder for him to govern. 

Who Loves China? 
NEW YORK – Tens of thousands of people have been “occupying” the tear-gas-filled streets of Hong Kong’s Central district to fight for their democratic rights. 
Many more may soon join them. 
Though some businessmen and bankers are annoyed by the disruption, the demonstrators are right to protest. 
China’s government has promised Hong Kong’s citizens that they can freely elect their Chief Executive in 2017. 
But, given that candidates are to be carefully vetted by an unelected committee of pro-Chinese appointees, citizens would have no meaningful choice at all. 
Only people who “love China” – that is, love the Chinese Communist Party (CCP) – need apply. 
One can almost understand why China’s leaders should be baffled by this show of defiance in Hong Kong. 
After all, the British simply appointed governors when Hong Kong was still a crown colony, and nobody protested then. 
Indeed, the deal that Hong Kong’s colonial subjects appeared to accept – leaving politics alone in exchange for the opportunity to pursue material prosperity in a safe and orderly environment – is not so different from the deal accepted by China’s educated classes today. 
The common opinion among British colonial civil servants, businessmen, and diplomats was that the Chinese were not really interested in politics anyway; all they cared about was money. 
Anyone with the slightest knowledge of Chinese history knows that this view was patently false. 
But, for a long time, it seemed to be true in Hong Kong. 
There was, however, a significant difference between Hong Kong under the British and under China today. 
Hong Kong was never a democracy, but it did have a relatively free press, a relatively honest government, and an independent judiciary – all backed by a democratic government in London. 
For most Hong Kong citizens, the prospect of being handed over in 1997 from one colonial power to another was never an entirely happy one. 
But what really invigorated politics in Hong Kong was the brutal crackdown in Beijing’s Tiananmen Square and in other Chinese cities in 1989. 
Huge demonstrations took place in Hong Kong to protest the massacre, and massive commemorations of the event are held every June, keeping alive a memory that is repressed and fading in the rest of China. 
It was not simply humanitarian rage that galvanized so many people in Hong Kong to act in 1989. 
They recognized then that under future Chinese rule, only genuine democracy might safeguard the institutions that protected Hong Kong’s freedoms. 
Without any significant say in how they were to be governed, Hong Kong’s citizens would be at the mercy of China’s leaders. 
From the point of view of China’s Communist rulers, this seems perverse. 
They regard Hong Kongers’ democratic demands as a misguided effort to mimic Western politics, or even as a form of nostalgia for British imperialism. 
Either way, the demonstrators’ agenda is considered “anti-Chinese.” 
The way China’s rulers see it, only firm control from the top and the CCP’s unquestioned supremacy can create the conditions needed for a rich and powerful China to emerge. 
Democracy, in their view, leads to disorder; freedom of thought causes popular “confusion”; and public criticism of the Party tends toward the breakdown of authority. 
In this sense, the CCP is rather traditional. 
But, though Chinese government always was authoritarian, it was not always as corrupt as it is now. 
Nor were China’s politics always as lawless. 
China traditionally had institutions – clan associations, religious communities, business groups, and so on – that were relatively autonomous. 
Imperial rule may have been authoritarian, but there were large pockets of independence from central control. 
In that sense, Hong Kong is perhaps more traditional than the rest of China, excluding, of course, Taiwan. 
Today, the CCP’s political supremacy places it above the law, which encourages corruption among Party officials, whether at the local or national level. 
Strict Party control of religious, academic, artistic, and journalistic expression stifles the dissemination of necessary information and creative thought. 
The lack of an independent judiciary undermines the rule of law. 
None of this benefits future development. 
When Hong Kong was formally handed back to China 17 years ago, some optimists thought that the former colony’s greater freedoms would help to reform the rest of China. 
The example of a clean bureaucracy and independent judges would strengthen the rule of law throughout the country. 
Others, for the same reason, regarded Hong Kong as a dangerous Trojan horse that could seriously undermine the Communist order. 
So far, there is no evidence that the protesters in Hong Kong’s Central district have any ambition to undermine, let alone topple, the government in Beijing. They have their hands full just standing up for their own rights in Hong Kong, and the chance that they will succeed appears to be slim. 
Chinese President Xi Jinping is anxious to show how tough he can be. 
Compromise would smack of weakness. 
His aim seems to be to make Hong Kong more like the rest of China, rather than the other way round. 
And yet, there is every reason to believe that China would benefit greatly from the opposite course. 
Less official corruption, more trust in the law, and greater freedom of thought would make China a more stable, more creative, and even more prosperous society. 
In the short term, this probably will not happen. 
But the people who truly “love China” are more likely to be found in the streets of Hong Kong than in the closed government compounds of Beijing. 

China’s Hong Kong Follies 
HONG KONG – The massive public demonstrations by students and young members of the middle-class that have roiled Hong Kong in recent weeks are ostensibly demands for democracy. 
But they actually reflect frustration among a population that has been poorly governed by a succession of leaders picked by China’s central government more for their loyalty than their competence. 
In fact, the current near-uprising is the culmination of a long series of demonstrations since Hong Kong’s handover from the United Kingdom to China in 1997, after Chris Patten, the last British governor failed to persuade China to allow Hong Kong to establish a genuine democratic government. 
In China’s view, Patten’s position was hypocritical, even offensive, given that the British had ruled Hong Kong autocratically. 
China believed that it could easily manage the same kind of “executive-led” government that had served Hong Kong well for 150 years under the British. 
In order to placate Hong Kong’s restive population – which included many refugees from China – a “one country, two systems” policy was embedded in the region’s constitution, promising Hong Kong “a high degree of autonomy,” except in foreign and defense affairs for 50 years. 
Indeed, Hong Kong enjoys many freedoms that the rest of China lacks, including a judiciary system that is guided by British common law and independent from the executive branch. 
China has yet to follow through on its second promise: that Hong Kong would elect its chief executive by “universal suffrage” by 2017. 
Instead, a committee – initially comprising 800 members, but since expanded to 1,200 – selects the chief executive in accordance with the Chinese government’s wishes. 
Hong Kong’s first chief executive, Tung Chee-hwa, was widely viewed as a wise choice. 
The Western-educated heir to a shipping fortune, and unusually well connected with the global elite, Tung was thought to be a conservative, thoughtful, cosmopolitan man imbued with liberal values and free of ties to the powerful families that dominated the real-estate industry in the territory. 
This perception could not have been more wrong. 
Tung turned out to be shallow, radical in his views, more chauvinist than China’s top leaders, and prone to rash decision-making on important policies with wide-ranging social and economic consequences. 
He forced out his competent chief secretary, Anson Chan, a veteran Hong Kong civil servant, for her colonial background, thereby signaling his mistrust of the entire civil service that the British had created. 
It did not take long for Hong Kongers to realize that their new leader harbored a deep – and deeply flawed – “patriotic” worldview that regarded Western “values” as unsuitable for Hong Kong, the first globalized Chinese city in modern history. 
But it was not until Tung tried to ram through draconian internal-security legislation that many of Hong Kong’s citizens began to feel that they were being overtaken by the repressive governance from which they were supposed to be exempt. 
Under Tung’s leadership, mass protests became a frequent sight in Hong Kong. 
The Chinese government also belatedly recognized that Tung was a liability. 
In 2004, then-Chinese President Hu Jintao unceremoniously dressed down Tung on live television. 
Three months later, Tung resigned for “health reasons” and was elected Vice Chairman of the largely symbolic Chinese People’s Political Consultative Conference. 
Tung’s successor, Donald Tsang, was chosen reluctantly. 
But he was a senior civil servant, and seemed to be the only technocrat who could credibly hold together Hong Kong’s disaffected civil service, which China knew was indispensable to governing the territory, regardless of its British heritage. 
But Tsang brought his own weaknesses to Hong Kong’s government – most notably, greed. 
Tsang, who enjoyed spending time with the wealthy on their yachts and in their private suites, pursued a restrictive land policy that boosted real-estate values – and thus the wealth of the land-owning tycoons. 
Prices rose so high, however, that real estate became accessible only to the very well-off, such as the families of high officials from the mainland. 
This kind of corrupt behavior earned Tsang a disgraceful exit from government. 
Next came Leung Chun-ying, the current governor. 
Leung – who was not China’s first choice for the position – inherited a mess. 
But he did not do himself any favors with his cabinet choices, many of whom had mediocre records that indicated corruptibility. 
One of them, Paul Chan Mo-po, was tasked with managing Hong Kong’s land-supply policy, despite a history of corruption in his personal property transactions. 
Worse, Leung pushed forward an unpopular plan to introduce “patriotic education” to Hong Kong, stoking fear among students of a China-dictated brainwashing. 
After the failure of three consecutive Chinese-selected leaders to address Hong Kong’s concerns, it is no wonder that Hong Kong’s citizens are increasingly seeking to loosen China’s grip on their government. 
But, for the Chinese authorities, this movement reflects an unacceptable challenge to China’s sovereignty. 
In this sense, Hong Kong is locked in a vicious circle – and it is up to China’s government to break it. 
The fact is that Hong Kong’s citizens understand that they need China, and they have no interest in subverting the central government – nor do they have the power to do so. 
Their demands for democracy are simply calls for good governance. 
They believe that free and fair elections represent their best chance of having a competent leader – someone like Patten, China’s former nemesis, who is remembered fondly in Hong Kong. 
China’s government is doing itself a disservice by demanding that Hong Kong’s citizens bow before their sovereign, while blaming “outside hostile forces” for spurring some kind of unconstitutional rebellion. 
Instead, it should focus on the problems created by the chief executives that it chose for the wrong reasons, and it should resolve the underlying governance problems that the demonstrations reflect. 

Hong Kong's Threat to China 
Last month's massive demonstrations in Hong Kong, when over half a million residents poured into the streets in protest against the government of Chief Executive Tung Chee-hwa, continues to echo. 
Never in Hong Kong's history has popular opposition--uniting investment bankers, street hawkers, off-duty civil servants, and artists, among others--been so loud. 
China's communist rulers are dithering about how to respond. 
One objective of the demonstrators was to voice their desire to select Hong Kong's future leaders through universal suffrage. 
Today, 800 electors handpicked by the mainland Chinese government -- who mostly represent big business -- choose Hong Kong's Chief Executive. 
The unpopularity of Hong Kong's incompetent and sycophantic Chief Executive, chosen by China for a second five-year term that will only end in 2007, creates a grave dilemma for the country's communist rulers. 
Before July's protests, they hoped that Hong Kong would provide so attractive an example of the idea of ``One Country, Two Systems'' that Taiwan would be lured into accepting the sovereignty of the government in Beijing. 
Now Taiwan's leaders point to Hong Kong as a failed model of a flawed concept. 
Indeed, Mr Tung's anticipatory subservience to the real or imagined wishes of China's rulers exposed the congenital flaw in the political architecture of uniting a liberal society with a dictatorship. 
That flaw infects the heart of the ``One Country, Two Systems'' notion: the idea that genuine autonomy can exist in a country whose supreme leaders do not believe in rule by consent. 
Now China's communist rulers find themselves trapped in a bind. 
If they back Tung unconditionally for the rest of his term, they can look forward to the collapse of their long-term strategy to re-absorb Taiwan, for the alternative to peaceful reunification with Taiwan is coercion. 
But any resort to coercion increases the likelihood of military confrontation with the US, Taiwan's protector. 
In this context, the steady build-up of China's short- to medium-range missile capability is a cause for alarm, such missiles being the principle threat against Taiwan. 
As the US Defense Department's ``Annual Report on the Military Power of the People's Republic of China'' recently put it, ``The primary driving force for China's military modernization is Beijing's perceived need to prepare credible military options in any potential conflict in the Taiwan Strait.'' 
Such a nightmare scenario isn't at all likely in Hong Kong, but a steady rot of Hong Kong's vitality is. 
For if the frustrations of ordinary Hong Kong citizens are allowed to fester without a genuine commitment by China to allow for universal suffrage by 2007, a far more serious eruption of social and political unrest beckons. 
Such frustrations are growing. 
Unemployment now stands at 9%--unimaginable before the handover in 1997, when both Tung and China promised that Hong Kong would do even better under Chinese sovereignty than under British rule. 
In fact, many observers believe that Hong Kong's real rate of joblessness is much higher, and fear that the trend is not encouraging. 
China's leaders, and their handpicked servants in Hong Kong may still believe that Tung's popularity will revive if and when the economy does. 
So they comfort themselves with the thought that demands for democratization reflect Hong Kong's economic woes, nothing more. 
But six years of divisive as well as dismissively haughty misrule by Tung's administration, which pits one group against another as its preferred method of governance, suggest that Hong Kong's problems are much deeper. 
Hong Kong is now an acrimoniously divided society harking back to the days when Chinese communists routinely classified their own citizens as either ``the people'' or ``enemies of the state.'' 
Most of Hong Kong's people now recognize that their stagnating economy is not merely a matter of bad policy. 
It also results from deeply flawed political structures. 
In an oligarchic economy such of that of today's Hong Kong, the costs of stagnation and the fruits of growth are distributed in grossly unfair ways. 
This cynical structure must be changed if people are to have enough confidence in the future for the economy to recover. 
If China's rulers heed the wishes of Hong Kong's seven million people to have the right to elect their own leaders through direct elections, however, they face the prospect that China's 1.3 billion people will demand the same right. 
Perhaps so. 
But a political system is only ever truly put at risk when leaders consistently misrule. 
Indeed, democracies are so stable because they allow misrule to be ended through regularly scheduled elections. 
Because stability is their great goal, China's communist rulers, if they are wise, will allow Hong Kong to show the way to a system in which Chinese govern themselves democratically, peacefully, and prosperously. 
Taiwan has already done so. 
Hong Kong, linked physically to the mainland, provides a more intimate case study for China's people to watch and one day follow. 
But if the goal is merely for the communists to retain their monopoly on power, in both Hong Kong and China, then the rot that has settled into Hong Kong's polity and its economy may begin to infect the mainland. 
At that point, China might wish it had never heard of Tung Chee-hwa. 
Indeed, it might wish it had never secured Hong Kong's return. 

Hooray for Europe? 
CAMBRIDGE: Europe's economy is clearly on the upswing: growth forecasts run at 3% and even higher rates are quite possible. 
The world economy looks better and even inside Europe, demand is rising. 
Plenty of reason, therefore, to be optimistic: say good-bye to global crisis, forget the risk of a stagnant Europe. 
But there is even more good news, promising perhaps to turn the current upswing into something more durable. 
For this, thank the often abused Euro, for it has anchored the once profligate nations of the Mediterranean in German-style monetary discipline. 
But the most interesting new fact in European economics is surely the belief, hope, and perhaps reality, of economic restructuring on a variety of fronts. 
Governments have undertaken a few privatizations with radical consequences for competition. 
Take the case of Deutsche Telecom and the price wars it has incited. 
Young people are increasingly recognizing the dramatic importance of modern information technology and are finding their way both to the Internet and the Neumarkt, Germany's bid to inspire American-style venture capitalists. 
Big companies, too, are in the game. 
Europe is abuzz with mergers not only to take advantage of Europe's broader economic space but also to confront tough competition in world markets. 
In sum, the old Continent is hot. 
No one can say how deep the changes will go, nor how fast they will shift Europe into the fast lane. 
Germany is ablaze as its mammoth corporations are performing mating rites. In France big strategic plays are underway in banks and fashion; 
Italy is seeing its major players position themselves on a European and world scale. In smaller countries, too, appropriately downsized in terms of scope and excitement, a lot is happening also. 
Just what does all this mean for European growth and prosperity? Could it be that despite all the gripes about the American model, a little imitation of the American success story is now underway in Europe? 
No! 
Such claims are vastly overstated, the beginnings are relatively minor—privatizing telecoms is accomplished in every third world country and does not make them rich overnight; getting on the Internet is routine from Bolivia to China. 
As to corporate mergers, it remains to be seen how many are simply the vanity plays of bosses who do not face tough stockholder scrutiny. 
Three reasons stand out as to why all this is not transforming Europe fast and deep. 
First, it takes a long time to change an economic culture and existing business organizations from mere administration to profitable management. 
In the US, large companies were fat and lazy until a new generation of bosses like Jack Welch at General Electric took over and played rough. 
Twenty years later the benefits are patent but it took a long time to get there despite the fact that much of what was done was right from the start. 
Next, European governments remain mostly uncooperative, nowhere more so than in Germany. 
The Kohl government did nothing to reform and the Schroeder government is equally lazy. 
It talks, and talks but shies away from decisive moves to change the economic landscape. 
Chancellor Schroeder talks like Tony Blair, but neglects the fact that Britain had a decade of Thatcherism before turning to "New Labour." 
Worse, a country where 70% of the members of parliament are teachers and bureaucrats, as is the case in Germany, cannot hope to get dramatic legislative change. 
The cultural orientation of bureaucrats and teachers is deeply anti-market, anti-risk taking and in love with the status quo. 
No chance of a regulatory revolution here. 
There is another reason to be circumspect on the pace of change in Europe. 
Unlike the United States, Northern Europe has a culture not of entrepreneurship, experimentation, risk taking and deal making. 
Rather, the State tells everyone what to do, the State and business authorities tell everybody what position to play. 
Of course, there are exceptions, but the dominant mode is a passive one: "Nobody told me to". 
All this sounds pretty pessimistic but is not meant to be; it is meant to calibrate that change takes a lot of time, more so if it is tentative and reluctant. 
But change is taking place at last and, who knows, it might just become a new wave. 
Europe has accomplished an extraordinary move forward with the Euro, so why not in other areas? 
The Euro was not a politically expensive step to take, except in Germany where it ran into every sort of prejudice. 
What must follow for Europe to become dynamic will be much harder because a lot of toes need to be stepped on as an inefficient status quo is jettisoned. 
Normally, crisis brings the legitimacy needed for dramatic moves, but Europe is not in crisis; hence the slow pace of progress. 
But there is one great source of optimism: today Germany is the loser in Europe, viewed by the French and even Italians as the losers—overweight and immobilized by bureaucracy and regulation. 
Germany had its turn at the head when hard money was the issue of the day; today it is trailing because the restructuring mode does not accord well with its traditions of pay without work and disciplined followers without courageous leadership. 
Nothing better could happen to Europe than just this discussion; perhaps it generates the kind of shock that propels more ambitious changes forward. 
In the meantime, the significant upturn in growth makes radical change far less important and it is a short step from there to putting change on the back burner. 

The New Geo-Economics 
COLOMBO, SRI LANKA – Last year was a memorable one for the global economy. 
Not only was overall performance disappointing, but profound changes – both for better and for worse – occurred in the global economic system. 
Most notable was the Paris climate agreement reached last month. 
By itself, the agreement is far from enough to limit the increase in global warming to the target of 2º Celsius above the pre-industrial level. 
But it did put everyone on notice: The world is moving, inexorably, toward a green economy. 
One day not too far off, fossil fuels will be largely a thing of the past. 
So anyone who invests in coal now does so at his or her peril. 
With more green investments coming to the fore, those financing them will, we should hope, counterbalance powerful lobbying by the coal industry, which is willing to put the world at risk to advance its shortsighted interests. 
Indeed, the move away from a high-carbon economy, where coal, gas, and oil interests often dominate, is just one of several major changes in the global geo-economic order. 
Many others are inevitable, given China’s soaring share of global output and demand. 
The New Development Bank, established by the BRICS (Brazil, Russia, India, China, and South Africa), was launched during the year, becoming the first major international financial institution led by emerging countries. 
And, despite US President Barack Obama’s resistance, the China-led Asian Infrastructure Investment Bank was established as well, and is to start operation this month. 
The US did act with greater wisdom where China’s currency was concerned. 
It did not obstruct the renminbi’s admission to the basket of currencies that constitute the International Monetary Fund’s reserve asset, Special Drawing Rights (SDRs). 
In addition, a half-decade after the Obama administration agreed to modest changes in the voting rights of China and other emerging markets at the IMF – a small nod to the new economic realities – the US Congress finally approved the reforms. 
The most controversial geo-economic decisions last year concerned trade. 
Almost unnoticed after years of desultory talks, the World Trade Organization’s Doha Development Round – initiated to redress imbalances in previous trade agreements that favored developed countries – was given a quiet burial. 
America’s hypocrisy – advocating free trade but refusing to abandon subsidies on cotton and other agricultural commodities – had posed an insurmountable obstacle to the Doha negotiations. 
In place of global trade talks, the US and Europe have mounted a divide-and-conquer strategy, based on overlapping trade blocs and agreements. 
As a result, what was intended to be a global free-trade regime has given way to a discordant managed-trade regime. 
Trade for much of the Pacific and Atlantic regions will be governed by agreements, thousands of pages in length and replete with complex rules of origin that contradict basic principles of efficiency and the free flow of goods. 
The US concluded secret negotiations on what may turn out to be the worst trade agreement in decades, the so-called Trans-Pacific Partnership (TPP), and now faces an uphill battle for ratification, as all the leading Democratic presidential candidates and many of the Republicans have weighed in against it. 
The problem is not so much with the agreement’s trade provisions, but with the “investment” chapter, which severely constrains environmental, health, and safety regulation, and even financial regulations with significant macroeconomic impacts. 
In particular, the chapter gives foreign investors the right to sue governments in private international tribunals when they believe government regulations contravene the TPP’s terms (inscribed on more than 6,000 pages). 
In the past, such tribunals have interpreted the requirement that foreign investors receive “fair and equitable treatment” as grounds for striking down new government regulations – even if they are non-discriminatory and are adopted simply to protect citizens from newly discovered egregious harms. 
While the language is complex – inviting costly lawsuits pitting powerful corporations against poorly financed governments – even regulations protecting the planet from greenhouse-gas emissions are vulnerable. 
The only regulations that appear safe are those involving cigarettes (lawsuits filed against Uruguay and Australia for requiring modest labeling about health hazards had drawn too much negative attention). 
But there remain a host of questions about the possibility of lawsuits in myriad other areas. 
Furthermore, a “most favored nation” provision ensures that corporations can claim the best treatment offered in any of a host country’s treaties. 
That sets up a race to the bottom – exactly the opposite of what US President Barack Obama promised. 
Even the way Obama argued for the new trade agreement showed how out of touch with the emerging global economy his administration is. 
He repeatedly said that the TPP would determine who – America or China – would write the twenty-first century’s trade rules. 
The correct approach is to arrive at such rules collectively, with all voices heard, and in a transparent way. 
Obama has sought to perpetuate business as usual, whereby the rules governing global trade and investment are written by US corporations for US corporations. 
This should be unacceptable to anyone committed to democratic principles. 
Those seeking closer economic integration have a special responsibility to be strong advocates of global governance reforms: If authority over domestic policies is ceded to supranational bodies, then the drafting, implementation, and enforcement of the rules and regulations has to be particularly sensitive to democratic concerns. 
Unfortunately, that was not always the case in 2015. 
In 2016, we should hope for the TPP’s defeat and the beginning of a new era of trade agreements that don’t reward the powerful and punish the weak. 
The Paris climate agreement may be a harbinger of the spirit and mindset needed to sustain genuine global cooperation. 


Hoping for the Best Against Trump 
NEW YORK – Is there any reason for liberals to feel optimistic after a year of political disasters? 
Is there even a shred of silver lining to be found in the tatters of Brexit, Donald Trump’s election, and European disunity? 
Christians believe that despair is a mortal sin, so one might as well try to find a glimmer of hope. 
In the United States, many liberals console themselves with the belief that the obvious dangers of being governed by an ignorant, narcissistic, authoritarian loudmouth backed by billionaires, ex-generals, peddlers of malicious fake news, and neophytes with extreme views will help to galvanize a strong political opposition. 
Trump, it is hoped, will concentrate the minds of all who still believe in liberal democracy, be they left or even right of center. 
In this scenario, civil-rights groups, NGOs, students, human-rights activists, Democratic members of Congress, and even some Republicans, will do everything in their power to push back against Trump's worst impulses. 
Long-dormant political activism will erupt into mass protest, with resurgent liberal idealism breaking the wave of right-wing populism. 
Well, perhaps. 
Others seek comfort in the expectation that Trump’s wildly contradictory plans – lower taxes, while raising infrastructure spending; helping the neglected working class, while slashing welfare and repealing the Affordable Care Act – will suck his administration into a swamp of infighting, incoherence, and incompetence. 
All these things might happen. 
But protest alone won’t be of much help. 
Anti-Trump demonstrations in big cities will no doubt annoy the self-loving new president, and the moral glow of joining the resistance will warm the protesters. 
But without real political organization, mere protest will go the way of Occupy Wall Street in 2011; it will peter out into ineffectual gestures. 
One of the most dangerous ideas of contemporary populism is that political parties are obsolete, and should be replaced by movements led by charismatic leaders who act as the voice of “the people.” 
By implication, all dissenters are enemies of the people. 
That way lies dictatorship. 
Liberal democracy can be saved only if mainstream parties can regain voters’ trust. 
The Democratic Party must get its act together. 
“Feeling the Bern” (the mantra of Bernie Sanders’ leftist campaign) will not suffice to stop Trump from inflicting great harm to institutions that were carefully constructed more than two centuries ago to protect American democracy from demagogues like him. 
The same thing is true of international arrangements and institutions, whose survival depends on the willingness to defend them. 
Trump has expressed his indifference to NATO, and US security commitments in East Asia. 
His election will further erode Pax Americana, already battered by a succession of foolish wars. 
Without the US guarantee to protect its democratic allies, institutions built after World War II to provide that protection would not survive for very long. 
Perhaps there is a tiny ray of hope in this gloomy prospect. 
Europe and Japan, not to mention South Korea, have become too dependent on US military protection. 
The Japanese have fairly large armed forces, but are hampered by a pacifist constitution written by Americans in 1946. 
Europeans are completely unprepared to defend themselves, owing to inertia, complacency, and lassitude. 
It is just possible that Trump’s blustering “America first” rhetoric will galvanize Europeans and East Asians into changing the status quo and doing more for their own security. 
Ideally, European countries should build an integrated defense force that would be less dependent on the US. 
And the countries of Southeast and East Asia could construct a Japanese-led variant of NATO to balance the domineering might of China. 
But even if these arrangements came to pass (a huge if), it would not happen soon. 
Europeans are unwilling to pay higher taxes for their own defense. 
Germany has neither the wherewithal, nor the will to lead a military alliance. 
And most Asians, including many Japanese, would not trust Japan to lead such a coalition in Asia. 
The current Japanese government, under Prime Minister Shinzo Abe, would like to revise the pacifist constitution, as a necessary first step toward weaning the country off its total dependence on the US. 
But Abe’s revisionism is rooted in a nationalist ideology, which is prone to justifying historical atrocities instead of drawing lessons from them. 
This alone disqualifies Japan from leading others in a military pact. 
So, while it might be time to rethink the world order built by the US on the ruins of WWII, the Trump presidency is unlikely to bring this about in a careful and orderly manner. 
His election is more like an earthquake, unleashing forces no one can control. 
Instead of encouraging the Japanese to think about collective security in a responsible way, Trump's indifference is more likely to play to the worst instincts of panicky Japanese nationalists. 
Europe is in no shape to rise to the challenge of Pax Americana’s erosion, either. 
Without a greater sense of pan-national European solidarity, European institutions will soon become hollow, and perhaps even cease to exist. 
But this sense is precisely what the demagogues are now undermining with such conspicuous success. 
If there is reason for confidence, it is not in the liberal democratic world, but in the capitals of its most powerful adversaries: Moscow and Beijing. 
Trump, at least in the short term, seems to be good news for Russian President Vladimir Putin and his Chinese counterpart Xi Jinping. 
Without credible American leadership, or a strong alliance of democracies, there won’t be much left to restrain Russian or Chinese ambitions. 
This might not lead to catastrophe in the next few years. 
Russia and China are more likely to test the limits of their power slowly, bit by bit: Ukraine today, perhaps the Baltics tomorrow; the South China Sea islands now, Taiwan later. 
They will push, and push, until they push too far. 
Then anything may happen. 
Great powers often blunder into great wars. 
This is no reason for despair, as we begin the New Year, but no reason to be optimistic, either. 

Horse Trading and Climate Change 
AMSTERDAM – When the panda smiles, the world applauds. 
Or so it seemed after Chinese President Hu Jintao’s recent speech at the United Nations. 
Judging by the way much of the media reported his words, it seemed as if China had actually made an important announcement on cutting greenhouse-gas emissions. 
It hadn’t. 
All President Hu really said was that China would now “endeavour” to curb its carbon emissions by a “notable” margin. 
But how does one measure “endeavour” or “notable”? 
As someone with close links to the Chinese administration told me when pressed: “What was said was actually pretty meaningless.” 
Indeed, there were no specific targets and, as any China watcher knows, the “greening” of the government is old news. 
Official Chinese policy in recent years has been to make GDP growth greener. 
But not at the expense of growth itself – and China plans to grow pretty fast. 
At least the panda smiled. 
Poor Barack Obama didn’t even have that to offer. 
He offered no pledge to cut emissions in the United States, and, with vote-sapping battles already underway over health-care reform, one wonders how much time and energy Obama will have for environmental imperatives. 
If all the world got out of this UN General Assembly meeting of government leaders was insubstantial rhetoric, the worse news is that it got more of the same at the G-20 meeting in Pittsburgh. 
As one finance minister told me rather wistfully, when I asked him what had actually been delivered on climate change: “Words,” he said, "just words.” 
Given that there are little more than two months until the Copenhagen summit on climate change, which is supposed to frame the successor agreement to the Kyoto Protocol, this is depressing. 
Perhaps the only people not suddenly depressed are those immersed in the negotiations. 
With more than a thousand points still to be agreed, all the policymakers I’ve spoken to recently say that they cannot see how a meaningful deal can be reached by December in Copenhagen. 
In reality, everyone is gearing up behind the scenes for a “Copenhagen 2,” and what those involved in the negotiations are calling “an even greater slog.” 
Even if some sort of communiqué is cobbled together in December – and countries with elections coming up, such as the United Kingdom, will push for one – it is hard to believe that it will contain sufficient detail or reflect the proper level of commitment to have the impact so desperately needed. 
“Copenhagen 1” was always bound to fail, partly because – and this may sound strange at first – it is all about climate change. 
Although cuts in CO2 emissions and agreement on funding and finance are necessary goals, the geopolitical reality is that climate change cannot be decoupled from trade or discussions on exchange rates, the IMF, reform of the UN, and so on. 
There is a quid pro quo that no one explicitly talks about but which must be addressed: trade-offs between these negotiations, not just within them. 
Meaningful action on climate change will not be seen until it is agreed within this broader framework. 
This means taking the issue out of its current compartment and being realistic enough to understand that Brazil’s position on cutting down rainforests, for example, will be affected by whether or not it is given a seat on the UN Security Council. 
It means being sophisticated enough to understand that as long as China feels under pressure to stop propping up the renmimbi, it is unlikely to deliver commitments on emissions cuts. 
Widening the scope of the next round of negotiations so that much more can be used as bargaining chips would make the job of the negotiators considerably harder. 
But it would also give them considerably more to work with. 
In fact, there is no other way to prevent the process from remaining a zero-sum game. 
Worryingly, “Copenhagen 2” will not only have to navigate this complicated terrain, but it must do so in less than five years. 
The climate bomb is ticking, and there is a palpable sense of urgency among policymakers. 
For, as the UN’s Intergovernmental Panel on Climate Change has explicitly warned, if emissions do not fall before 2015, and only fall from then onwards (and the overall trend is that they have been rising), we will reach the point of no return. 
At that point, the Armageddon scenarios of droughts, rising sea levels, floods, energy and resource wars, and mass migration will become a reality. 
Just think of the images of recent storms and floods in the Philippines and Vietnam that displaced and killed thousands, and multiply those horrors manifold. 
That is what we are up against. 
Climate change negotiations are arguably the most important of our lifetime, because their outcome will determine the fate of our planet. 
It is essential that they take place within structures and frameworks that encourage agreement by putting other major multilateral issues up for discussion. 
The world’s governments must be able to trade horses if pandas and presidents are to do more than smile. 

 

Hot Rocks 
CANBERRA – Ask any power system engineer about renewable energy and you are likely to be told that it doesn’t deliver “base-load” power. 
In other words, renewable energy can’t be relied upon to provide power 24 hours a day, seven days a week: wind doesn’t always spin the turbines on the hill, the sun cannot shine on solar power stations at night, and even hydroelectricity can run short if the rains don’t come. 
The inherently erratic behavior of the major renewable energy technologies presents serious problems for power system planners. 
It limits how much of these types of renewable power can usefully be fed into the world’s electricity grids. 
After all, consumers expect power always to be available. 
The engineering solution is to keep a large amount of reliable base-load power as a major component of the generating mix and supplement this with “peaking plants” that can be brought on-line when needs arise. 
This peaking capacity is built around hydroelectric systems in some countries, but usually it is based on burning fossil fuels such as gas, diesel, or fuel oils. 
The base-load power, too, is predominantly based on fossil fuels, with around 39% of global electricity generation sourced from burning coal. 
In some countries, nuclear power has been seen as an answer, but deposits of high-grade nuclear fuel worldwide appear to be limited, and the long-term costs of waste storage and plant decommissioning are high. 
The challenge, then, is to reduce our current reliance on fossil and nuclear fuels for base-load power. 
The answer may be under our feet. 
Earth is an extraordinarily hot planet. 
Six thousand kilometers below the surface, the planet’s core is as hot as the surface of the sun. 
Yet, even at shallow depths, useful temperatures for power generation are often available. 
This “conventional” geothermal energy has been used to generate reliable base-load electricity for more than 100 years, and is now used in many countries including Italy, Iceland, Japan, New Zealand, and the western United States. 
The technology is well established, and the track record of reliable power generation includes more than 9000 megawatts of generating capacity. 
But conventional geothermal power requires a natural source of large quantities of steam or hot water, and such sources are usually found only in volcanic regions, which rules out its use in large parts of the world. 
More tantalizing for humanity’s need for widely available, clean base-load power is the non-conventional geothermal energy called “hot dry rocks,” or HDR. 
With HDR, useful heat is present in rocks only a few kilometers below the Earth’s surface. 
But, with no natural steam or hot water to bring the energy to the surface, an engineered solution is needed, and, during the past 35 years, more than $600 million has been spent worldwide devising one. 
The concept is beguilingly simple: drill at least two boreholes five kilometers deep, inject cold water into one, pass it through the hot rocks, and then bring it back to the surface, where the energy is removed in a power station. 
Then re-inject the now cooled water for another pass through the subsurface. 
Only the heat is extracted at the surface, and everything else that is brought up to the surface is re-injected again, eliminating waste. 
But it is the economics of HDR geothermal that will eventually determine its long-term role, because deep boreholes are expensive to drill, and their costs must be met before power stations can begin to generate electricity. 
The shallower the heat resources and the cheaper the capital, the more competitive an HDR project will be. 
The rising costs of fossil and fissile fuels will also make HDR more compelling, since the long-term economics of geothermal power is effectively quarantined from fuel price movements. 
Deposits of hot dry rocks are common, and large amounts of heat are within reach in many places. 
But the science and engineering of HDR has been challenging, and it is only now that the first power stations are emerging. 
A small power station is operating in Landau, Germany, and others are under construction in France and Australia. 
These first power stations will develop the operational and financial performance histories that will be necessary before HDR geothermal energy can begin making an impact on world energy supplies. 
Re-engineering humanity’s power systems is going to be an expensive undertaking, regardless of what mix of technologies are used, and the chosen systems will have to be reliable and widely available. 
The road to HDR geothermal energy has been long and expensive, but, like all developing technologies, the basic research and development had to be done before commercial development could follow. 
With power stations now being built, the signs are bright for widespread use of geothermal energy to generate clean, emissions-free base-load power. 

Houses in the Air 
Over the past six months, attention and worry have shifted from America’s enormous trade deficit to its surging property markets and real-estate bubble. 
At least two of the reasons for high – and rising – home prices in the United States are well understood. 
What remains highly uncertain, however, is whether an obviously overheating market can be cooled without sending America, and its main trading partners around the world, into an economic tailspin. 
The US housing boom is due, first, to low interest rates, which mean that large amounts of money can be borrowed for mortgages with moderate monthly payments. 
Low interest rates strengthen the ability to pay, and thus boost demand. 
And, with demand high and housing supply fixed – at least in the short run – prices go up. 
Second, the 70-year period that began with the widespread diffusion of the automobile –during which one could get nearly anywhere in a typical metropolitan area in half an hour or less – is over. 
Before there was widespread automobile ownership, land prices depended on location, and proximity to the central city or to the local railroad station carried a premium. 
Now, with serious congestion slowing traffic in major cities to a crawl, the land gradient in housing prices is steep once again. 
Perhaps this steepening of the location gradient could be delayed for a decade if we were willing to shift to denser residential patterns. 
We could, for example, tear down San Francisco’s row houses and replace them with buildings more like those of New York’s Upper West Side. 
But we aren’t willing to do that. 
These two factors – low mortgage rates, and the fact that the country has filled up so much that our cars no longer marginalize location costs – go a long way toward explaining the surge in housing prices over the past decade or so. 
But they don’t go all the way. 
On top of these two powerful fundamental factors sits a bubble. 
The bubble is filled by people with money who are buying extra houses because they think home prices will continue to rise, and by people without money who are buying $400,000 houses in less-fashionable neighborhoods with zero percent down and floating interest rates. 
Both groups’ demand is inherently ephemeral. 
When the first group discovers that housing prices don’t always go up, they will try to dump their properties. 
And when the second group discovers that interest rates don’t always stay low, many of them will be unable to meet their higher mortgage payments and will likewise try to dump their properties. 
The end of the American housing bubble might not turn out badly. 
But if it does, it will probably be due to a sharp rise in interest rates. 
This could happen for two reasons. 
First, investors, recognizing that the dollar is overvalued and that they are likely to suffer large losses when it returns to its fundamental value, could start selling their Treasury bonds, corporate bonds, and mortgage-backed securities. 
As the prices of these assets fall, their yields will rise. 
At some point, the yields on bonds and mortgages will be high enough that investors’ appetite for yield will balance their fear of exchange-rate depreciation. 
In the corridors around my office, all the economists agree that this factor should have pushed US interest rates up three years ago. 
But so far it has not. 
Does this mean that a hurricane could hit world financial markets at any moment? 
Yes. 
Or it could also mean that economists’ baseline model of the international economy – especially the assumption of “uncovered interest parity,” which holds that foreign interest income expressed in the domestic currency should equal the domestic interest rate – is simply wrong. 
The second factor that could push US interest rates sharply upward is not fear of a decline in the future value of the dollar, but the fact of a past decline in its value. 
The US imports the equivalent of 16% of its GDP. 
A 40% fall in the value of the dollar – of which half passes through to increased dollar prices of imports – thus implies a 3.2% rise in the overall price level. 
A Federal Reserve committed to effective price stability will likely raise interest rates rather than allow any year’s inflation rate to jump from 3% to 6%. 
If there is a sharp spike in interest rates – caused either by capital flight in anticipation of a dollar decline or by tight monetary policy in reaction to a dollar decline comes to pass – we will see how good the Federal Reserve really is. 
If interest rates rise too far, then the collapse in housing values will lead to large-scale foreclosures and a collapse in consumption spending as well. 
This would mean a depression not just for the US, but for Asia and probably Europe as well, for the US can remain the world’s importer of last resort and guarantor of effective demand only as long as its domestic consumption is strong. 
But if interest rates don’t rise far enough, the value of the dollar will spiral downward and US inflation will spiral upward like in the 1970’s, setting the stage for the type of extremely painful measures imposed by then Federal Reserve Chairman Paul Volcker. 
In these circumstances, straight is the gait and narrow is the path that the Federal Reserve will have to walk – hardly an enviable position. 
And yet journalists – not very experienced reporters, to be sure – ask me who is likely to get the “plum job” of Fed Chair next year. 

How Accurate Are Your Pet Pundits? 
Every day, experts bombard us with their views on topics as varied as Iraqi insurgents, Bolivian coca growers, European central bankers, and North Korea’s Politburo. 
But how much credibility should we attach to the opinions of experts? 
The sanguine view is that as long as those selling expertise compete vigorously for the attention of discriminating buyers (the mass media), market mechanisms will assure quality control. 
Pundits who make it into newspaper opinion pages or onto television and radio must have good track records; otherwise, they would have been weeded out. 
Skeptics, however, warn that the mass media dictate the voices we hear and are less interested in reasoned debate than in catering to popular prejudices. 
As a result, fame could be negatively, not positively, correlated with long-run accuracy. 
Until recently, no one knew who is right, because no one was keeping score. 
But the results of a 20-year research project now suggest that the skeptics are closer to the truth. 
I describe the project in detail in my book Expert Political Judgment: How good is it? 
How can we know? 
The basic idea was to solicit thousands of predictions from hundreds of experts about the fates of dozens of countries, and then score the predictions for accuracy. 
We find that the media not only fail to weed out bad ideas, but that they often favor bad ideas, especially when the truth is too messy to be packaged neatly. 
The evidence falls into two categories. 
First, as the skeptics warned, when hordes of pundits are jostling for the limelight, many are tempted to claim that they know more than they do. 
Boom and doom pundits are the most reliable over-claimers. 
Between 1985 and 2005, boomsters made 10-year forecasts that exaggerated the chances of big positive changes in both financial markets (e.g., a Dow Jones Industrial Average of 36,000) and world politics (e.g., tranquility in the Middle East and dynamic growth in sub-Saharan Africa). 
They assigned probabilities of 65% to rosy scenarios that materialized only 15% of the time. 
In the same period, doomsters performed even more poorly, exaggerating the chances of negative changes in all the same places where boomsters accentuated the positive, plus several more (I still await the impending disintegration of Canada, Nigeria, India, Indonesia, South Africa, Belgium, and Sudan). 
They assigned probabilities of 70% to bleak scenarios that materialized only 12% of the time. 
Second, again as the skeptics warned, over-claimers rarely pay penalties for being wrong. 
Indeed, the media shower lavish attention on over-claimers while neglecting their humbler colleagues. 
We can see this process in sharp relief when, following the philosopher Sir Isaiah Berlin, we classify experts as “hedgehogs” or “foxes.” 
Hedgehogs are big-idea thinkers in love with grand theories: libertarianism, Marxism, environmentalism, etc. 
Their self-confidence can be infectious. 
They know how to stoke momentum in an argument by multiplying reasons why they are right and others are wrong. 
That wins them media acclaim. 
But they don’t know when to slam the mental brakes by making concessions to other points of view. 
They take their theories too seriously. 
The result: hedgehogs make more mistakes, but they pile up more hits on Google. 
Eclectic foxes are better at curbing their ideological enthusiasms. 
They are comfortable with protracted uncertainty about who is right even in bitter debates, conceding gaps in their knowledge and granting legitimacy to opposing views. 
They sprinkle their conversations with linguistic qualifiers that limit the reach of their arguments: ‘but,’ ‘however,’ ‘although.’ 
Because they avoid over-simplification, foxes make fewer mistakes. 
Foxes will often agree with hedgehogs up to a point, before complicating things: “Yes, my colleague is right that the Saudi monarchy is vulnerable, but remember that coups are rare and that the government commands many means of squelching opposition.” 
Imagine your job as a media executive depends on expanding your viewing audience. 
Whom would you pick: an expert who balances conflicting arguments and concludes that the likeliest outcome is more of the same, or an expert who gets viewers on the edge of their seats over radical Islamists seizing control and causing oil prices to soar? 
In short, the qualities that make foxes more accurate also make them less popular. 
At this point, uncharitable skeptics chortle that we get the media we deserve. 
But that is unfair. 
No society has yet created a widely trusted method for keeping score on the punditocracy. 
Even citizens who prize accuracy have little way of knowing that they are sacrificing it when they switch channels from boring foxes to charismatic hedgehogs. 
Here, then, is a modest proposal that applies to all democracies: the marketplace of ideas works better if it is easier for citizens to see the trade-offs between accuracy and entertainment, or between accuracy and party loyalty. 
Wouldn’t they be more likely to read pundits with better track records? 
If so, pundits might adapt to accountability by showing more humility, and political debate might begin to sound less shrill. 
Granted, it is not easy to create methods of keeping score that are credible across the spectrum of reasonable opinion. 
But in a world where, as Yeats said, “and the best lack all conviction, while the worst are full of passionate intensity,” it is worth trying. 

How Asia Copes with America’s Zombie Consumers 
NEW HAVEN – Asia needs a new consumer. 
A post-crisis generation of “zombie consumers” in the United States is likely to hobble growth in global consumption for years to come. And that means that export-led developing Asia now has no choice but to turn inward and rely on its own 3.5 billion consumers. 
Of course, this is not the first time that Asia has had to cope with the walking economic dead. 
Japan’s corporate zombies were at the epicenter of its first “lost decade” in the 1990’s. 
Sclerotic companies were put on life-support credit lines by their zaibatsu – like banking partners – delaying their inevitable failure and perpetuating inefficiencies and disincentives that resulted in a post-bubble collapse in Japanese productivity growth. 
Similarly, the crisis of 2008-2009 led to zombie-creating bailouts in the West. 
From Wall Street to AIG to Detroit, the US was quick to rescue corporate giants that would have failed otherwise. 
Britain and Europe did the same, throwing lifelines to RBS, HBOS-Lloyds, Fortis, Hypo Real Estate, and others. 
In the West, the excuse was “too big to fail.” 
How different is that from Japan’s mindset nearly 20 years ago? 
But the most prominent zombie may well be a broad cross-section of American consumers who are still suffering from the ravages of the Great Recession. 
Afflicted by historically high unemployment, massive under-employment, and relatively stagnant real wages, while burdened with underwater mortgages, excessive debt, and subpar saving, US consumers are stretched as never before. 
Yet the US government has tried virtually everything to prevent consumers from adjusting. 
Going well beyond the requisite extension of unemployment-insurance benefits, the safety net has been expanded to include home-foreclosure containment programs, other forms of debt forgiveness, and extraordinary monetary and fiscal stimulus. 
Compassion is part of the moral fabric of any society. 
But a fine line separates it from the “creative destruction” that is essential to purge a post-crisis system of its excesses. 
Japan crossed that line in the 1990’s, as its corporate zombies prevented the painful but necessary adjustments in its post-bubble economy. 
That could happen in the US if Washington continues to favor policies that condone the reckless excesses of the recent past and inhibit the deleveraging and balance-sheet repair that America’s zombie consumers now need for post-crisis healing. 
Notwithstanding government life-support initiatives, US consumers seem headed for years of retrenchment. 
Consumption’s share of US GDP currently stands at a sharply elevated 70%. 
While that’s down from the high of 71.3% in early 2009, it remains fully four percentage points above the 66% norm that prevailed in the final quarter of the twentieth century. 
Reversion to that earlier share is likely as American consumers make the transition from the insanity of the boom to the sanity required of the bust. 
That spells subdued growth in US consumption for years to come – with a predictably massive impact on global consumption. 
While the US accounts for only 4.5% of the world’s population, its consumers spend $10.3 trillion annually – by far the most in the world. 
So, with US consumption growth likely to be restrained, who will take America’s place? 
Europe? 
Japan? 
I wouldn’t bet on either. 
That’s where Asia fits into the equation. 
As an export-led region, Asia remains heavily dependent on end-market demand from consumers in the developed world. 
The export share of developing Asia’s 12 largest economies rose from 35% of pan-regional output in the late 1990’s to 45% in early 2007. 
Little wonder that every economy in the region either fell into recession or experienced sharp slowdowns when global trade plunged in late 2008. 
Decoupling was not an option. 
Nor should Asia draw a false sense of security from all the hype currently being accorded to the hopes and dreams of a so-called “two-speed world.” 
Heavily dependent on Western markets, Asia must seek support from a new source of demand. 
It should start by looking in the mirror. 
For developing Asia as a whole, internal private consumption currently stands at a record low of just 45% of GDP – down ten percentage points from the 55% share prevailing as recently as 2002. 
It’s not as if Asian consumer demand is dormant. 
But at the margin, economic growth is heavily skewed toward exports and fixed investment as the primary means of absorbing surplus labor and spreading prosperity. 
In a post-crisis world – impaired by America’s zombie consumers – export-led Asia is in serious need of a pro-consumption rebalancing. 
Nowhere is that more evident than in China. 
With private consumption having fallen to a record low of 35% of GDP in 2008 (fully ten percentage points below the Asian norm), China faces major rebalancing imperatives – all the more urgent if post-crisis consumption growth in the West remains weak. 
The good news is that China appears to have arrived at a similar conclusion. 
Its 12th Five-Year Plan is focused on three major pro-consumption initiatives: jobs (especially labor-intensive services); wages (underscored by accelerated urbanization); and a reduction of fear-driven precautionary saving (arising out of a broadening of the social safety net). 
If China delivers on each of these three fronts – as I suspect it will – private consumption’s share of Chinese GDP could rise by as much as five percentage points between now and 2015. 
That would be good news for East Asia’s other economies – namely, Japan, Korea, and Taiwan. 
With relatively small populations – and a declining one in the case of Japan – these countries have no choice but to rely on exports and external demand to drive economic growth. 
In all three cases, China has replaced the US as their major export market. 
That shift came just in the nick of time. 
If China is successful in implementing its pro-consumption agenda, the rest of Asia will be well positioned to avoid the fallout from America’s new generation of zombie consumers. 
How the United States copes is a different matter altogether. 


Globalization for Everyone 
LIMA – Nowadays, globalization’s opponents seem increasingly to be drowning out its defenders. 
If they get their way, the post-World War II international order – which aimed, often successfully, to advance peace and prosperity through exchange and connection – could well collapse. 
Can globalization be saved? 
At first glance, the outlook appears grim. 
Every aspect of globalization – free trade, free movement of capital, and international migration – is under attack. 
Leading the charge are antagonistic forces – from populist political parties to separatist groups to terrorist organizations – whose actions tend to focus more on what they oppose than on what they support. 
In Russia and Asia, anti-Western groups are at the forefront of the campaign against globalization. 
In Europe, populist parties have tended to emphasize their aversion to European integration, with those on the right often also condemning immigration, while the left denounces rising economic inequality. 
In Latin America, the enemy seems to be foreign interference of any kind. 
In Africa, tribal separatists oppose anyone standing in the way of independence. 
And in the Middle East, the Islamic State (ISIS) virulently rejects modernity – and targets societies that embrace it. 
Despite their differences, these groups have one thing in common: a deep hostility toward international structures and interconnectedness (though, of course, a murderous group like ISIS is in a different category from, say, European populists). 
They do not care that the international order they want to tear down enabled the rapid post-1945 economic growth that liberated billions of developing-country citizens from poverty. 
All they see are massive, unbending institutions and intolerable inequalities in wealth and income, and they blame globalization. 
There is some truth to these arguments. 
The world is a very unequal place, and inequality within societies has widened considerably in recent decades. 
But this is not because of international trade or movements of people; after all, cross-border trade and migration have been happening for thousands of years. 
The anti-globalization movements’ proposed solution – closing national borders to trade, people, or anything else – thus makes little sense. 
In fact, such an approach would hurt virtually everyone, not just the wealthy elites who have benefited most from globalized markets. 
So what is fueling inequality? 
To answer that question, we must consider what about globalization is generating returns for the wealthy. 
A central aspect of globalization is the careful documentation of the knowledge and legal tools needed to combine the property rights of seemingly useless single assets (electronic parts, legal rights to production, and so on) into complex wholes (an iPhone), and appropriate the surplus value they generate. 
Clear and accessible ledgers that faithfully describe not only who controls what and where, but also the rules governing potential combinations – of, say, collateral, components, producers, entrepreneurs, and legal and property rights – are vital for the system to function. 
The problem is that five billion people around the world are not documented in national ledgers in anything approaching an organized manner. 
Instead, their entrepreneurial talents and legal rights to assets are recorded in hundreds of scattered records and rules systems throughout their countries, making them internationally inaccessible. 
Under these conditions, it is impossible for the majority of humanity to participate effectively in their national economies, much less the global one. 
Without any means of participating in the process of producing high-value combinations, people have no chance of seizing some of the surplus value created. 
So it is a lack of consolidated, documented knowledge – not free trade – that is fueling inequality worldwide. 
But addressing this problem will not be easy. 
Just determining how many people are left out took my organization, the Institute for Liberty and Democracy (ILD), two decades of fieldwork, conducted by more than 1,000 researchers in some 20 countries. 
The main problem is legal lag. 
The lawyers and corporate elites who draft and enact the legislation and regulations that govern globalization are disconnected from those who are supposed to implement the policies at the local level. 
In other words, the legal chain is missing a few crucial links. 
Experience in Japan, the United States, and Europe shows that a straightforward legal approach to ensuring equal rights and opportunities can take a century or more. 
But there is a faster way: treating the missing links as a break not in a legal chain, but in a knowledge chain. 
We at the ILD know something about knowledge chains. 
We spent 15 years adding millions of people to the globalized legal system, by bringing the knowledge contained in marginal ledgers into the legal mainstream – all without the help of computers. 
But we do not have decades more to spend on this process; we need to bring in billions more people, and fast. 
That will require automation. 
Last year, ILD began, with pro bono support from Silicon Valley firms, to determine whether information technology, and specifically blockchain (the transparent, secure, and decentralized online ledger that underpins Bitcoin), could enable more of the world’s population to get in on globalization. 
The answer is a resounding yes. 
By translating the language of the legal chain into a digital language – an achievement that required us to develop a set of 21 typologies – we have created a system that could locate and capture any ledger in the world and make it public. 
Moreover, we have been able to compress into 34 binary indicators the questions that computers have to ask captured ledgers to determine which provisions should be inserted in blockchain smart contracts between globalized firms and non-globalized collectives. 
Information technology has democratized so many elements of our lives. 
By democratizing the law, perhaps it can save globalization – and the international order. 

How Can Qurei Succeed? 
The new Palestinian Prime Minister, Ahmed Qurei, faces daunting challenges. 
He must tread between the shrapnel shards of constant Israeli military actions against the Palestinians, the ambivalence of the US about the road map, and a plethora of militant Palestinian groups seeking revenge for every one of their assassinated leaders. 
This sickening cycle of violence is all too predictable. 
It need not be inevitable. 
Breaking the sequence of Israeli assassination followed by Palestinian suicide bombing requires a change of thinking and action. 
The idea that either side can crush the other and declare victory has proven to be a seductive and dangerous mirage, leaving behind only a trail of blood and hate. 
Israeli leaders must be made to understand that preemptive attacks and assassinations only increase the chance of more anti-Israeli attacks, not less. 
So far, the right-wing Sharon government, which seems to give only lip service to peace, is more than happy to engage in military actions that it knows will lead to Palestinian retaliations. 
As harsh Israeli actions fail to deter Palestinians, Israel seems to raise the stakes, hoping that even harsher, more inhuman acts might bring the Palestinians to heel. 
Instead, brutal Israeli actions produce only more determined Palestinian reaction, and the cycle of killing and violence continues. 
The US government must change its attitude, too. 
Instead of stating that they understand that Israeli must defend itself, the Bush administration should take an unambiguous stand against Israel's assassinations and collective punishments, which now include uprooting decades-old olive trees and destroying eight story buildings. 
Travel restrictions and continued settlement activity must end. 
If the Americans can get Israel to agree to these straightforward requests, the situation could be ripe for a ceasefire, which in turn would be the prelude to a genuine peace process. 
Until recently, Israeli officials have publicly and privately refused to respond to the Palestinian request for a ceasefire agreement. 
Instead, they press for the impossible request that the Palestinian Authority dismantle the militant groups, an act that Israel, with all its powers, has not succeeded in accomplishing. 
A deadly civil war would surely ensue if the Palestinian Authority seeks to crush Palestinian militants at a time of relentless Israeli attacks and no tangible progress in the peace talks. 
Any ceasefire agreement requires both parties to refrain from attacking the other. 
Such agreements normally include a clause creating a mandate for neutral third-party monitors. 
But a ceasefire agreement to stand, it must be followed immediately with a concerted effort to produce a political solution to the issues that caused the warring parties to attack each other. 
The hudna worked out between militant Palestinian groups and the Palestinian Authority (with the knowledge of the Americans) clearly lacked a major component: Israel's assent to the agreement. 
Israel's insistence in continuing its assassination policy led, predictably, to a violent reaction--a pattern of assassinations followed by revenge suicide bombings and then further assassinations, with neither side prepared to blink. 
But Israel's belief that one more assassination will cause the Palestinians to crumble, and the Palestinian belief that one more suicide attack will cause the Israelis to raise the white flag have led both sides to a dead end. 
India's Mahatma Ghandi once said that an eye for an eye and a tooth for a tooth leaves the world blind and toothless. 
There must be a stop to this zero-sum game and a return to a sane policy based on reason, reciprocity, and compromise. 
The pattern of the past three years shows that the first order of business must be a ceasefire between the Israeli government (and all its military and intelligence agencies) and the Palestinian Authority (including all the militant factions). 
Such an agreement must end all types of military and armed attacks as well as assassinations, and it needs to be monitored by a neutral third party--namely, the quartet (the US, the UN, the EU, and Russia) that drew up the road map, which already contains a provision for foreign monitors. 
Finally a ceasefire must be supported by round-the-clock negotiations (preferably in secret with top-level US involvement) aimed at ending the basic reason for the violence--the occupation of the Palestinian areas--and determining the issues of borders, settlements, refugees, and Jerusalem. 
In this context, Israel must put aside thoughts of choosing its negotiating partners. 
Palestinian President Yasir Arafat is the legitimately elected leader of the Palestinian people. 
No serious negotiations can take place and no results can last if one party vetoes the representatives of the other side. 
Real peace presupposes agreement between enemies , not friends. 
Everyone involved in attempting to resolve the Israel-Palestine conflict knows what a peace agreement between the sides will most likely look like. 
In Taba, Palestinian and Israeli negotiators were very close to agreement on all the major issues early in 2001. President Bush's vision of a state of a free and independent Palestine established in 2005 alongside a safe and secure state of Israel could also be used as a benchmark for fresh talks. 

How Can the New Members Catch Up? 
Of the ten new EU member states, eight have undergone a transformation whose speed and scope has been unprecedented. 
Wherever one looks in the postcommunist accession countries ­­- at money, markets, ownership structures, banking sectors, foreign trade, health care, environmental protection, and education - one sees institutions that have been reconstructed from the ground up. 
In many of the transition countries, inflation was brought down from majestic heights - 251% in Poland in 1989 - and all now have fully convertible currencies. 
Private enterprise dominates production and employment, whereas it accounted for only 23.1% of GDP in Poland in 1989 and just 4% in the Czech Republic and Slovakia. 
Similarly, after the collapse of the Council for Mutual Economic Assistance (COMECON) in 1991, the transition countries quickly redirected their foreign trade to the West. 
Educational opportunities have multiplied, air and water pollution have plummeted, and life expectancy has increased almost to West European levels across the region. 
Since the early 1990's, the prospect of eventual admission to the EU has helped spur these institutional changes. 
But now the task for the new member states - which account for 20% of the enlarged EU's population but only 5% of its GDP - is no less difficult: to achieve the rapid catch-up growth rates needed to close the economic gap with the EU's leaders. 
Membership itself will certainly help. 
Increased policy credibility will boost inflows of foreign direct investment (FDI), while EU structural funds will support further institution building, infrastructure investment, and environmental protection. 
There is little empirical doubt about the positive impact of FDI inflows. 
FDI promotes technology transfer and contributes relatively more to economic growth than domestic investment, because it increases total investment in the economy more than one for one, owing to complementarities with domestic firms. 
Empirical research also confirms the positive impact of EU structural funds on growth. 
EU structural assistance has increased annual GDP growth, on average, by 0.4-0.9% in Greece, Portugal and Ireland, and by 0.3 to 0.5% in Spain, thereby helping poorer countries catch up with richer member states. 
EU membership provides the opportunity to catch up, but the actual economic outcomes will depend on the quality of domestic policies - and whether the EU policies most conducive to economic growth are strengthened, not weakened. 
This implies several imperatives for the EU and the new member countries alike. 
Defend the Stability and Growth Pact. 
In the long term, large budget deficits lead either to a crisis or to slower economic growth. 
But even in the short term, there is a negative correlation between large budget deficits, slow economic growth, high inflation, and a distorted foreign-exchange market. 
Moreover, fiscal deficits and inflation squeeze out investment and limit productivity gains. 
Strengthen single-market policies. 
The benefits of the single market are evident, not least by creating a much more attractive location for foreign investors. 
Surveys indicate that the internal market has helped more than 60% of companies that export to more than five EU countries boost their cross-border sales, and that 80% of consumers believe that the range of goods has increased, while 67% say that their quality has improved. 
Cross-border trade in goods has grown by around a third since the creation of the Internal Market in 1992 due to two principles: mutual recognition, which allows companies to apply their own national rules, and EU directives that harmonize national rules. 
But mutual recognition does not work well for relatively more complex products, and EU directives affecting items like construction products, machinery, and pressure equipment have been problematic to implement. 
Pre-tax prices of new cars can differ up to 70% between member states due in large part to regulations that suppress competition. 
Services are even more susceptible than goods to internal market barriers. 
For example, a new directive requires non-household customers to be able to choose their electricity supplier by July 2004 and their gas supplier by July 2007. 
But the directive ignores household customers, who in 2001 were able to choose their electricity supplier in only five EU States and their gas supplier in only three. 
As for labor mobility, practice has yet to catch up with theory. 
In 1992-2002, only 4% of the total EU population moved across borders either to work or to retire. 
During this period, only 8% of EU students completed part of their studies in another member state. 
Integration of EU financial markets - launched in 1999 with the adoption of the Financial Services Action Plan (FSAP) - also needs to accelerate. 
According to the European Commission, creating a single European capital market would reduce the cost of equity capital for EU businesses by 0.5% and lower the cost of corporate debt financing by 0.4%. 
It would also boost GDP in the EU-15 over ten years by about 1.1% and raise employment by 0.5%. 
But, by 2002, only 31 of the FSAP's 42 provisions had been implemented. 
Target early EMU entry. 
Entry into the euro as soon as possible is the best strategy for the accession countries, because it will mobilize them to complete structural reforms in order to meet the Maastricht criteria for inflation, interest rates, fiscal deficits, and public debt. 
This would have obvious benefits for long-term economic growth, as would elimination of exchange-rate risks, hedging costs, and transaction costs in foreign trade. 
The accession countries are already highly integrated with the EU economy, with pronounced cyclical convergence between the accession countries and the EMU countries. 
Continuing EU integration is likely to align the business cycles of these countries in a manner similar to the synchronization of supply and demand shocks in the EU in the 1990's. 
Thus, costs associated with giving up an independent monetary policy and a flexible exchange rate would not be significant. 
In each of these areas, the Union's new members still face a difficult path to full integration. 
In many of them, so does the EU. 

How China Is Winning Southeast Asia 
WASHINGTON, DC – With preparations for Chinese President Xi Jinping’s September visit to Washington, DC, underway, officials in both countries are predictably playing down their differences over China’s outsize territorial claims, backed by the construction of military facilities on previously uninhabited islands and atolls, in the South China Sea. 
And this diplomatic de-escalation, following months of recriminations and veiled threats, suits Southeast Asian leaders just fine. 
Of course, no one in Southeast Asia is ignoring China’s strategic designs. 
The region’s defense spending has increased by more than 50% in the last decade, and some $60 billion has been earmarked for new weapons, especially naval hardware, over the next five years. 
The white paper on military strategy that China released in May, which touted plans to expand the country’s defense perimeter, intensified neighbors’ concerns, making even more military spending likely. 
Leaders in the region are now welcoming a stream of US military officials and defense manufacturers to see what America’s Asian “pivot” has to offer. 
Beyond new frigates and security guarantees, however, Southeast Asian leaders have refrained from reacting too strongly to China’s offshore ambitions. 
The economic facts on the ground demand prudence. 
In only two decades, China has become Southeast Asian countries’ leading economic partner, boosting its influence throughout the region. 
Chinese leaders’ constant effort to expand economic cooperation stands in stark contrast to America’s approach to the region. 
Consider trade. 
Since 2000, bilateral trade between China and the ten members of the Association of Southeast Asian Nations has grown tenfold, from $32 billion to $350 billion last year, and could reach $500 billion in 2015. 
As China has risen to become Southeast Asia’s largest trading partner, the US has slipped to fourth place, with only $206 billion in total trade with ASEAN last year. 
Given Southeast Asia’s growing economic importance, the implications of this trend could not be weightier. 
The ASEAN countries’ combined annual GDP is already $2.4 trillion and growing fast, owing to their rapidly expanding middle class, highly skilled workers, and increasingly upscale markets. 
If the current trend holds, China’s trade with ASEAN could reach $1 trillion by 2020. 
The picture for direct investment – the financial flows that support the construction of factories, offices, warehouses, mines, and farms – is equally striking. 
From 1995 to 2003, Chinese companies invested a mere $631 million in ASEAN countries; in 2013, they invested $30 billion. 
Though China remains well behind Japan, Europe, and the US on this front, it certainly has the potential to catch up, as Chinese private-equity firms increasingly look abroad. 
Indeed, from agriculture to information technology, the Chinese are diversifying their stakes across the region and embedding their companies in ASEAN’s advanced and frontier economies. 
China’s Southeast Asian partners cannot afford to ignore these efforts. 
That is one reason why all ten ASEAN countries signed on as founding members of the China-led Asian Infrastructure Investment Bank, despite US opposition. 
China, which has pledged $100 billion in initial investment, has positioned the AIIB as a rival to the US-dominated World Bank, promising to help Asian countries meet their extensive infrastructure needs. 
Clearly, when it comes to its role in Asia, China is thinking big. 
And there is more. 
At last year’s Asia-Pacific Economic Cooperation (APEC) meeting, regional leaders agreed to begin work toward possible adoption of a Chinese-backed free-trade pact – one that is clearly meant to push back against US President Barack Obama’s Trans-Pacific Partnership, which excludes China. 
Whether or not Xi realizes his free-trade ambition, there is no denying China’s commitment to deepening its economic ties in Asia and beyond. 
The country has pledged some $60 billion to its “One Belt, One Road” initiative, which entails the construction of a Silk Road Economic Belt running through Central Asia, and a Maritime Silk Road connecting China to Southeast Asia, the Indian Ocean, the Middle East, and eventually Europe. 
The US, meanwhile, is struggling to cobble together a domestic consensus on trade. 
To be sure, China has had its setbacks, too. 
Canceled railway and hydroelectric projects in Myanmar, and riots in Vietnam over China’s move to drill for oil in disputed waters, reflect the backlash that the country’s resource hunger can generate. 
But China is also certain to learn from its mistakes, and its leaders have a clear vision of where to place their long-term economic bets. 
At a time when partisan divisions are undermining America’s economic leadership, China’s growing influence in Southeast Asia should raise a question: If push comes to shove in the South China Sea, will the US find allies in its corner, or will they just be holding Uncle Sam’s coat? 

How Corrupt are US Capital Markets? 
Why has the US stock market done so well in recent months--the Dow increased over 30% since its low on March 11, 2003, and closed above 10,000 on December 11--even with the media reporting one financial scandal after another? 
We have seen Enron-style fraud from corporate management, Arthur Anderson-style smoke and mirrors from accountants, and now Putnam Funds-style market-timing irregularities from mutual funds. 
After all this dirt, why aren't more investors voting with their feet? 
The most important reason is a sharp improvement in corporate earnings, and in economic conditions in general. 
The scandals may be pushing the boat of market sentiment downwards, but their effect is being overwhelmed by the rising tide of economic prosperity, at least for now. 
To be sure, television, radio, newspapers, magazines, and Internet sites have been hyping financial misconduct, awakening and shaping the type of emotional responses that often have a powerful influence on financial markets. 
But attention-getting emotions (such as anger) are not the only factors that drive investment decisions. 
Investors may respond emotionally, but they are unlikely to let their anger cause them to miss what appears to be a substantive increase in value. 
The excessive optimism of the late 1990's lingers, so investors are more impressed by the recent upsurge in corporate earnings--seen as confirming their optimism--than they are by the financial scandals. 
Next to the $100 billion annual rise in after-tax corporate profits in the US in 2003, the scandals look puny. 
Indeed, the scandals look even punier when one realizes that the list of crooked US companies, like Enron, is short. 
In 2002, Harvey Pitt, the former chairman of the US Securities and Exchange Commission, made a dramatic call for CEOs of US companies with revenues exceeding $1.2 billion to sign their financial statements by August 14, 2002--and then be held criminally liable if the statements turn out to be fraudulent. 
The world anticipated a wave of "restatements" of past performance by anxious CEOs. 
But, of the more than 600 CEOs who signed by the deadline, not a single one admitted major error. 
Is accounting in worse shape? 
The major accounting firms have clearly established a culture of permissiveness towards earnings manipulation. 
The 1990's saw an unprecedented rise in the number of quarters in which earnings beat analysts' estimates by a penny a share, suggesting that more irregularities could be discovered. 
But the fact that earnings beat estimates by a penny a share every quarter is itself only a sign of quarter-to-quarter manipulations of earnings, not of their wholesale fabrication. 
Finally, the market-timing practices of mutual funds that have been revealed to date simply don't amount to all that much in the broader scheme of things. 
Eric Zitzewitz of Stanford University estimates that market timing has cost US mutual fund investors about $5 billion a year--less than 0.1% of the $7 trillion mutual fund assets. 
This amount, akin to a modest management fee, is simply not a dominating consideration for investors. 
(Some media accounts have made Zitzewitz's estimates appear much larger by taking them as a percent of the most vulnerable mutual funds' assets, rather than of all mutual funds assets.) 
Paradoxically, the scandals themselves have highlighted America's strong regulatory system. 
If anything, they are evidence not of widespread corruption, but of the vigilance of US regulatory authorities--which is precisely why the cases now in the news are the exception rather than the rule. 
This vigilance is also reflected in the prompt legislative response to recent financial scandals. 
The Sarbanes-Oxley Act of 2002 has made it a lot more difficult to repeat the kinds of things that Enron and Arthur Anderson did. 
The US House of Representatives has passed a reform bill that would prevent mutual-fund market-timing abuses. 
Similarly, regulatory agencies are now better equipped to deal with financial irregularities. 
The SEC's fiscal 2004 budget set by the House spending bill is $811 million, roughly twice as much as it was before the scandals surfaced. 
This is higher than that of regulators in other major countries. 
Investors also see that the US regulatory system is stronger than the SEC alone. 
Revelations of malfeasance have also come from the governments of New York (Attorney General Elliott Spitzer) and Massachusetts (Secretary of the Commonwealth William Galvin). 
These states have set a standard for action, and there are 48 more states that could do the same. 
So investors know that even if a Federal agency like the SEC overlooks or ignores serious regulatory problems, another regulator might step in. 
The best evidence for continuing confidence in the integrity of US securities markets comes from foreign investors, who would be among the first to flee if they feared rampant corporate fraud and inadequate regulation. 
Being removed from the US, they should be highly sensitive to any whiff of information that their money may not be safe there. 
But net foreign purchases of US stocks for the first ten months of 2003 are still positive (although down about 90% from the same period of 2000, the bubble-peak year). 
In short, most investors--while not always the most rational species--do know a good thing when they see it. 
The market may not value US stocks perfectly, but it is not irrational to believe that the corporate scandals are not a major factor. 

How Democratic Is the Euro? 
SAN SERVOLO, ITALY – When Italy’s president recently vetoed the appointment of the Euroskeptic Paolo Savona as finance minister in the government proposed by the Five Star Movement-League party alliance, did he safeguard or undermine his country’s democracy? 
Beyond constitutional strictures specific to the Italian context, the question goes to the heart of democratic legitimacy. 
The difficult issues it raises need to be addressed in a principled and appropriate manner if our liberal democracies are to be restored to their health. 
The euro represents a treaty commitment from which there is no clear exit within prevailing rules of the game. 
President Sergio Mattarella and his defenders point out that an exit from the euro had not been subject to debate in the election campaign that brought the populist coalition to power, and that Savona’s appointment threatened a financial market meltdown and economic chaos. 
Mattarella’s detractors argue that he overstepped his authority and has allowed financial markets to veto the selection of a minister by a popularly elected government. 
By joining the euro, Italy surrendered monetary sovereignty to an external, independent decision-maker, the European Central Bank. 
It also undertook specific commitments with respect to the conduct of its fiscal policy, though these constraints are not as “hard” as those framing monetary policy. 
These obligations place real limits on the Italian authorities’ macroeconomic policy choices. 
In particular, the absence of a domestic currency means Italians cannot choose their own inflation target or devalue their currency vis-à-vis foreign currencies. 
They also have to keep their fiscal deficits below certain ceilings. 
Such external restraints on policy action need not conflict with democracy. 
Sometimes it makes sense for the electorate to tie its hands when doing so helps it achieve better outcomes. 
Hence the principle of “democratic delegation”: Democracies can enhance their performance by delegating aspects of decision-making to independent agencies. 
The canonical case for democratic delegation arises when there is a paramount need for credible commitment to a particular course of action. 
Monetary policy is perhaps the clearest instance of this. 
Many economists subscribe to the view that central banks can generate output and employment gains through expansionary monetary policy only if they are able to produce surprise inflation in the short run. 
But, because expectations adjust to central bank behavior, discretionary monetary policy is futile: it yields higher inflation but no output or employment increases. 
Accordingly, it is far better to insulate monetary policy from political pressures by delegating it to technocratic, independent central banks that are charged with the singular objective of price stability. 
Superficially, the euro and the ECB can be seen as the solution to this inflationary conundrum in the European context. 
They protect the Italian electorate from their politicians’ counterproductive inflationary tendencies. 
But there are peculiarities to the European situation that make the democratic delegation argument more suspect. 
For one thing, the ECB is an international institution, bearing responsibility for monetary policy for the eurozone as a whole rather than Italy alone. 
As a result, it will be generally less responsive to Italian economic circumstances than a purely Italian, but equally independent central bank would have been. 
This problem is aggravated by the fact that the ECB chooses its own inflation target, which was last defined in 2003 as “below, but close to, 2% over the medium term.” 
It is difficult to justify the delegation of the inflation target itself to unelected technocrats. 
When some countries in the eurozone are hit by adverse demand shocks, the target determines the extent of painful wage and price deflation these countries must undergo to readjust. 
The lower the target, the more deflation they must bear. 
There was a good economic argument for the ECB to have lifted its inflation target following the euro crisis to facilitate competitiveness adjustments in Southern Europe. 
Insulation from political accountability was probably a bad thing in this case. 
As Paul Tucker, a former deputy governor of the Bank of England, discusses in his masterful recent book Unelected Power: The Quest for Legitimacy in Central Banking and the Administrative State, the argument for democratic delegation is a subtle one. 
The distinction between policy goals and how they are implemented needs to be clear. 
Insofar as they entail distributional consequences or tradeoffs between contending goals (employment versus price stability, for example), policy objectives have to be determined through politics. 
Delegation is warranted at best in the conduct of policy that serves politically determined objectives. 
Tucker argues, correctly, that few independent agencies are based on a careful application of principles that would pass the test of democratic legitimacy. 
This shortcoming is far worse in the case of delegation to international agencies or treaties. 
Too often, international economic commitments serve not to fix democratic failures at home, but to privilege corporate or financial interests and undermine domestic social bargains. 
The European Union’s legitimacy deficit derives from the popular suspicion that its institutional arrangements have veered too far from the former to the latter. 
When Mattarella cited the reaction of financial markets in justifying his veto of Savona, he reinforced those suspicions. 
If the euro – and indeed the EU itself – is to remain viable and democratic at the same time, policymakers will have to pay closer attention to the demanding requirements of delegating decisions to unelected bodies. 
This does not mean that they should resist surrendering sovereignty to supranational agencies at all costs. 
But they should recognize that economists’ and other technocrats’ policy preferences rarely endow policies with sufficient democratic legitimacy on their own. 
They should promote such a delegation of sovereignty only when it truly enhances the long-term performance of their democracies, not when it merely advances the interests of globalist elites. 

People vs. Money in America’s Midterm Elections 
NEW YORK – All eyes are on the United States as November’s Congressional elections approach. 
The outcome will answer many alarming questions raised two years ago, when Donald Trump won the presidential election. 
Will the US electorate declare that Trump is not what America is about? 
Will voters renounce his racism, misogyny, nativism, and protectionism? 
Will they say that his “America First” rejection of the international rule of law is not what the US stands for? 
Or will they make it clear that Trump’s win was not a historical accident resulting from a Republican primary process that produced a flawed nominee and a Democratic primary process that produced Trump’s ideal opponent? 
As America’s future hangs in the balance, impassioned debates about what caused the 2016 outcome are more than academic. 
At stake is how the Democratic Party – and similar parties of the left in Europe – should position themselves to win the most votes. 
Should they lean toward the center or focus on mobilizing young, progressive, and enthusiastic newcomers? 
There are good reasons to believe that the latter course is more likely to bring electoral success and stymie the dangers posed by Trump. 
American voter turnout is abysmal, and worse in non-presidential-election years. 
In 2010, just 41.8% of the electorate voted. 
In 2014, only 36.7% of eligible voters cast ballots, according to data from the United States Elections Project. 
Democratic turnout is even worse, although it appears to be on the upswing this election cycle. 
People often say they don’t vote because they think it makes no difference: the two parties are as similar as Tweedledee and Tweedledum. 
Trump has shown that’s not true. 
The Republicans who abandoned all pretense of fiscal rectitude and voted last year for a massive tax cut for billionaires and corporations have shown it’s not true. 
And the Republican senators who rallied behind the nomination of US Supreme Court Justice Brett Kavanaugh, despite his misleading testimony and entirely credible evidence of past sexual misbehavior, have shown it’s not true. 
But the Democrats are also responsible for voter apathy. 
The party must overcome a long history of collusion with the right, from President Bill Clinton’s capital gains tax cut (which enriched the top 1%) and financial market deregulation (which helped bring on the Great Recession), to the 2008 bank bailout (which offered too little to displaced workers and homeowners facing foreclosure). 
Over the last quarter-century, the party has sometimes seemed more focused on winning the support of those who live on capital gains than those who live on wages. 
Many stay-at-home voters complain that the Democrats are relying on attacks on Trump, rather than putting forward a real alternative. 
The thirst for a different kind of contender is evident in voter support for progressive candidates like former presidential candidate Senator Bernie Sanders and New York’s 28-year-old Alexandria Ocasio-Cortez, who recently defeated the fourth-ranking Democrat in the US House of Representatives in a party primary. 
Progressives like Sanders and Ocasio-Cortez have managed to present an attractive message to the voters whom Democrats must mobilize to win. 
They seek to restore access to a middle-class life by providing decent, well-paying jobs, reestablishing a sense of financial security, and ensuring access to quality education – without the chokehold of student debt that so many graduates currently face – and decent health care, regardless of pre-existing medical conditions. 
They call for affordable housing and a secure retirement in which the elderly are not preyed on by an avaricious financial sector. 
And they seek a more dynamic, competitive, and fair-market economy by curbing the excesses of market power, financialization, and globalization, and by strengthening workers’ bargaining power. 
These perquisites of a middle-class life are attainable. 
They were affordable a half-century ago, when the country was substantially poorer than it is today; and they are affordable now. 
In fact, neither America’s economy nor its democracy can afford not to bolster the middle class. 
Government policies and programs – including public options for health insurance, supplementary retirement benefits, or mortgages – are crucial to realizing this vision. 
I am encouraged by the outpouring of support for these progressive proposals and the political leaders who support them. 
In a normal democracy, these ideas would, I am confident, prevail. 
But US politics has been corrupted by money, gerrymandering and massive attempts at disenfranchisement. 
The 2017 tax bill was nothing short of a bribe to corporations and the wealthy to pour their financial resources into the 2018 election. 
Statistics show that money matters enormously in American politics. 
Even with a flawed democracy – including a concerted effort to prevent some from voting – the power of the American electorate matters. 
We will soon find out whether it matters more than the money flowing into the Republican Party’s coffers. 
America’s political and economic future, and most likely the peace and prosperity of the entire world, depends on the answer. 

How Does the Weak Dollar Affect Oil Prices? 
Around the world, there is anguished hand-wringing about the high price of oil. 
But if political leaders and policymakers want lower oil prices, they should be promoting policies that strengthen the dollar. 
The implications of pricing oil in any single-currency are more far-reaching than most people think. 
For example, some oil-producing countries ask their customers to pay in euros, but that does not mean that their oil is priced in euros. 
And even if dollar prices were to be replaced by euro prices, the impact of single-currency pricing on the oil market would be the same. 
While oil-exporting countries receive revenues in dollars (or their euro equivalent), they use different currencies to import goods and services from various countries. 
Any change in the exchange rate of the dollar affects the purchasing power of these countries, and therefore their real income. 
Likewise, international oil companies sell most of their oil in dollars, but they operate in various countries and pay some of their costs in local currencies. 
Any change in the value of the dollar therefore affects their cost structure and profitability. 
In turn, it affects reinvestment in exploration, development, and maintenance. 
The relationship between the value of the dollar and oil prices is very complex. 
While they can feed on each other to produce a vicious cycle, their short-term relationship is distinct from their long-term relationship. 
In the short-term, dollar depreciation does not affect supply and demand, but it does affect speculation and investment in oil futures markets. 
As the dollar declines, commodities – including oil – attract investors. 
Investing in futures becomes both a hedge against a weakening dollar and an investment vehicle that could yield substantial profit, particularly in a climate of vanishing excess oil production capacity, increasing demand, declining interest rates, a slumping real estate market, and crisis in the banking industry. 
OPEC might be correct to blame American policies and speculators for higher prices. 
It is also correct that if OPEC had excess capacity, it would have already used it to flush out speculators to bring oil prices down. 
OPEC can regain control in one of two ways: use its “claimed” excess capacity to flush out speculators, or use its financial surpluses to overtake them. 
Recourse to the latter option means that, even without excess capacity, OPEC can still be in the driver’s seat. 
In the long run, however, statistical analysis of various oil industry variables indicates that a weaker dollar affects supply by reducing production, regardless of whether oil is owned and produced by national or international oil companies. 
A weak dollar also affects demand by increasing consumption. 
The result of a decrease in supply and an increase in demand is higher prices. 
The lower dollar also reduces the purchasing power of oil exporters. 
If nominal oil prices remain constant while the dollar declines, the real income of the oil-producing countries declines, resulting in less investment in additional capacity and maintenance. 
The same is true of oil companies. 
Consequently, oil prices increase. 
Indeed, because oil prices were rising while the dollar was declining, capacity expansion by oil firms failed to meet forecasts for non-OPEC production in the last three years. 
Even oil production in the United States has not matched the increase in oil prices, as rising import costs for tools and equipment – partly a reflection of the dollar’s weakness and other factors – have forced project delays and cancellations. 
Of course, the lower dollar means cheaper oil in Europe, Asia, and all countries with appreciating currencies. 
Oil prices hit records in the US in 2004 and 2005, but not in Europe, which partly explains why economic growth there has not been affected. 
When Americans paid $120 per barrel, Europeans paid only about €76 per barrel. 
Several factors have prevented high oil prices from affecting the demand for petroleum products in the US in recent years, such as increased government spending, low interest rates, tax breaks, and an increase in real incomes. 
To be sure, the weaker dollar has forced some American families to spend their vacations in the US instead of Europe. 
But, since many Americans use gas-guzzling SUV’s for their vacations, demand for gasoline has remained high. 
Unless and until US consumption patterns change or a rebounding dollar increases oil production, Americans will bear the brunt of single-currency oil pricing. 

How Economic Superpowers Rise 
Anti-Japanese riots across China have heightened tensions in Asia. 
Indeed China-mania, a mixture of hopes, but mostly fears, is sweeping the world due to China’s rapid economic rise. 
Should the world really be more fearful than hopeful? 
Americans fear their markets being flooded by Chinese goods. 
Mexico, Brazil, Central Europe, Indonesia, and even Sri Lanka are worried about competition from lower wages. 
Europeans may be more cheerful, believing that the Chinese market will open not only for European engineering products and machine tools to equip the new workshop of the world, but also for luxury goods and even the tourism demanded by a new and affluent Chinese middle class. 
Everyone feels that a seismic shift is under way. 
Such rapid industrial rises are rare, but not unprecedented. 
The most interesting analogies are Germany’s rise in the 19th century and Japan’s in the 20th. 
Even prior to that time, England was the economic Wunderkind of Europe. 
What had been an offshore European island with bad weather emerged as the world’s major economy, whose products, from textiles to railroad equipment, came to dominate world markets. 
England was a pioneer in industrialization, and was deeply shocked by the presumption of newcomers who soon entered the same stage. 
By the end of the 19th century, however, Germany, with much lower wages levels, had overtaken England in steel production, and was clearly dominant in the new technologies of electrical goods, chemicals, and dyes, as well as in many aspects of fine engineering. 
But Germany also swamped world’s markets with mass consumption goods: cheaper musical instruments than the traditional makers in France or Italy could produce, and lithographic prints used for Christmas cards and seaside postcards. 
Indeed, German products were omnipresent. 
When an irate British writer, E.E. Williams, wrote a protest entitled “Made in Germany,” he began by recording his discomfort that the pencil he was using was a German product as well. 
The ‘Made in Germany’ scare of the late 19th century foreshadowed the reaction in the United States to Japan’s industrial success in the 1960’s and 1970’s. 
In particular, Americans were frightened by Japanese consumer products – televisions, which wiped out domestic production, and automobiles, which seemed so malignly efficient. 
In both the German and the Japanese cases, the already-existing industrial powers complained that there was some sort of nefarious and unfair mechanism behind the newcomer’s advantages. 
Such explanations included government intervention or a new sort of industrial organization, and unfair patent infringements by the new producers who copied products and then blocked off their own markets from import competition. 
But the economics of the rise of industrial Germany and Japan should hold comforting lessons for us today. 
The fears were misplaced, because the world benefited from cheaper and more readily available products. 
Thanks to German manufacturers, pianos were no longer restricted to aristocratic salons or the professional middle class, but began appearing in respectable working-class homes. 
Thanks to Japanese car producers, American manufacturers learned to produce more efficiently and competitively. 
The classical liberal free-trade argument about the universal economic benefits of greater commerce and open markets proved to be unambiguously correct. 
It did not matter that the catch-up countries’ economic “miracles” were produced in part by illiberal policies guided by government bureaucracies. 
The outcome was an endorsement of the lessons of economic liberalism. 
But changing economic balances also lead to changing political balances. 
At the moment, it looks as if there is nothing to fear from China. 
Like Germany in the mid-19th century, or Japan in the 1960’s, China sees many advantages in participating in the international order more or less as it is currently configured. 
Can this change? 
Germany certainly became assertive, owing mostly to the social pressures and tensions incited by rapid economic growth. 
When it feared that it might be overtaken by the next rising economic power, the vast Russian empire, assertiveness turned into aggression. 
By the early 20th century, Germans had concluded that Russia’s faster demographic growth and rapid industrialization posed a military threat. 
China can already see considerable problems in the medium term. 
In forty years, a demographic implosion within China, the consequence of its one-child policy, will make European and Japanese concerns about aging populations look trivial. 
Before then, profound inequalities between China’s poor countryside and its dynamic industrial centers will generate tensions, which may be increased by the gender imbalance – young men greatly outnumber young women. 
Combine this with a tottering authoritarian regime, and something like the pre-1914 German scenario looks realistic. 
A government impressed by past national achievement, but fearful of being overtaken and deeply worried about its own legitimacy, is likely to look for an outlet in foreign policy to mobilize domestic support or ward off opposition. 
So there is no need for a strategy to deal with China’s economic rise; but there is a need to lock in China’s prosperity and reduce the chances of political eruption. 
Japan in the second half of the 20th century had stable politics, due in large part to a good constitution and democratic institutions. 
If China is to avoid the fate of early 20th century Germany, it must bolster successful economic modernization with constitutional and political reform. 

How Effective is Disaster Relief? 
When disaster strikes, non-governmental organizations (NGOs) are among the first on the scene. 
The United Nations estimates that there are now more than 37,000 international NGOs, with major donors relying on them more and more. 
Inevitably, there are problems. 
Both the Rwandan genocide of 1994 and the 2004 Indian Ocean tsunami saw chaotic competition among NGOs. 
Yet there have also been landmark successes. 
More than 1,400 NGOs operating in 90 countries helped to get 123 countries to ratify the treaty banning landmines. But the sheer scale of the disaster relief “industry” – plus the longer-term development efforts of NGOs – is raising serious concerns about how to measure their performance. 
Flexibility allows NGOs to be innovative in ways that organizations like the UN often cannot. 
But there are few international rules on what an NGO actually is, and the lack of control can lead to unpredictable consequences. 
In Chad recently, the French NGO L’Arche de Zoé tried to smuggle children out of the country without obtaining permission from either parents or the government. 
Among the questions being asked by NGOs, the UN, and national donors is how to prevent the recurrence of past mistakes. 
The wake-up call for most NGOs came after the Rwandan genocide, when hundreds of small organizations tried to set up ad hoc operations in refugee camps in the Democratic Republic of Congo and Tanzania. 
Some camps turned into staging posts for armed factions. 
In the ensuing chaos, more than 50,000 refugees died from cholera. 
There was also mayhem following the Indian Ocean tsunami. 
At one point, more than 400 NGOs were on the ground in Aceh, Indonesia, competing for resources, personnel, and funding. 
Many of the lessons learned in Rwanda were forgotten or ignored as smaller NGOs with little or no experience in dealing with disasters caused much of the confusion. 
The situation in Indonesia led the UN to adopt a new “cluster” system to improve coordination. 
And, after a review of the Rwanda debacle, 400 NGOs and UN organizations working in 80 countries got together in the Sphere Project to develop a common humanitarian mandate and handbook of standards outlining the minimum performance required of any NGO working in a disaster zone. 
As the number of post-intervention reviews increases, a rudimentary framework for evaluating the impact of NGOs has appeared. 
Rather than simply looking at project inputs and outputs, the emphasis has turned towards measuring the overall impact of an operation. 
The idea is to find out if the lives of the people on the receiving end were changed for the better in any sustained way. 
More and more donors are also insisting that NGOs provide measurable proof that they make a difference. 
That sounds fine in theory, but in practice there are drawbacks. 
By demanding quantifiable results, donors may force program managers to choose easily achieved targets over less measurable actions that accord with sound humanitarian principles. 
Or reporting about aid programs may be skewed to keep donor funds flowing. 
The greatest danger is that humanitarian relief will be tailored to meet donors’ demands, rather than actual needs. 
Until recently, the record on evaluating responses to humanitarian emergencies has been patchy at best. 
CARE, as both a relief and development agency, can take a long-term approach to disasters, matching emergency relief with a rehabilitation and recovery phase. 
But this is not an option for NGOs that focus only on emergency responses. 
Once their allotted time is up – or their funds run out – they tend to pack up and leave. 
Even for NGOs that stick around, determining their relief efforts’ impact in the middle of a crisis is difficult, if not impossible. 
Emergencies are chaotic: staff and resources are stretched, the local population is very unlikely to be able to provide meaningful feedback, and pre-crisis baseline data are largely unavailable, so comparisons are complicated. 
Moreover, all too often, events move too quickly to be measured accurately. 
And, until recently, donors who were willing to pay for relief were less likely to finance follow-up evaluations. 
As a result, emergency relief evaluations often rely on little more than guesswork and assumptions. 
A 2004 report by the Humanitarian Policy Group cited a survey carried out in Ethiopia after UN agencies said that humanitarian efforts had averted widespread famine in 2000. 
The claim sounded credible until the subsequent survey showed that the area’s crude mortality rate had actually risen to six times the normal base rate. 
Most of the deaths were from communicable diseases, which malnourished people may well have contracted after crowding into feeding centers. 
The HPG therefore recommended long-term monitoring of future humanitarian responses, and said that success or failure should be judged in a broad context rather than by a narrow focus on a specific project. 
Many people who survive an earthquake or a flood, for instance, may soon face another crisis if the disaster also destroys their only means of earning a living. 
New and more sophisticated analytical tools are needed to understand these long-term effects, along with sufficient training to ensure that new methods are applied properly in the field. 
A recent innovation has been the Coping Strategy Index, devised by the World Food Program and CARE, which analyzes how people cope with short-term food crises while also taking into account their future vulnerability to hunger. 
NGOs do the lion’s share of the world’s humanitarian work, and some mistakes are inevitable. 
But as we deepen our experience of humanitarian relief and development, we must learn the lessons of the past and understand how much more there is to know. 

Avoiding Algeria in Egypt 
PORTO – The military coup that has overthrown Egypt’s first democratically elected president and led to the arrests of Muslim Brotherhood leaders across the country poses an enormous danger not only for Egypt’s democratic transition, but for the democratic hopes of the entire Arab world as well. 
The fact that the coup was undertaken with massive popular support is a sign of the enormous difficulties faced by the Muslim Brotherhood during its first turn in power. 
President Mohamed Morsi’s government struggled to address Egypt’s inherited economic and social crises in the face of the enormous public expectations created by the 2011 revolution, whose protagonists sought not only freedom, but also economic development and social justice. 
Of course, the Muslim Brotherhood was also a victim of its own mistakes, particularly the failure of Morsi and his government to reach out to the secular opposition, elements of which had contributed to his election. 
The Morsi government seemed incapable of understanding that a slim electoral majority is not enough, especially nowadays. 
Indeed, the breadth of the opposition to Morsi reflects a major global tendency toward the empowerment of the educated and connected middle classes, whose members tend to be suspicious of political parties and demand more direct political participation. 
In this sense, Egypt’s difficulties differ only in scope, not in kind, from those faced by governments in Turkey, Brazil, and even Europe. 
Morsi’s Muslim Brotherhood dominated government from its first days in power. 
But it also faced opposition from a variety of other, far less democratically minded, forces, including holdovers from Hosni Mubarak’s regime, who continue to wield influence in official institutions. 
The judiciary, for example, dissolved the first elected legislative assembly. 
Likewise, the interior minister refused to protect the Brotherhood’s headquarters from repeated attack. 
Moreover, some secular intellectuals demonized the Brotherhood. 
Like their Algerian counterparts – who in 1992 approved of the Algerian army’s suppression of an Islamist electoral victory, leading to years of brutal fighting that left perhaps a half-million dead – many Egyptians didn’t mind repressing Islamists. 
Morsi and the Brotherhood also faced competition from Saudi-backed Salafists. 
Indeed, on the night of the coup, these ultra-conservative Islamists appeared together with military leaders and the secular political leader Mohamed ElBaradei to announce Morsi’s overthrow. 
The prospects for Egypt’s democratic transition have become increasingly difficult to predict, but one thing is clear: the military cannot and must not be trusted. 
During the period after the fall of Mubarak, when the army exercised full power, 12,000 civilians were charged in military courts, virginity tests were imposed on women (particularly those protesting against the military), demonstrators were killed, and myriad human-rights violations were committed with impunity. 
Of course, it is possible for soldiers to assure a transition to democracy, as they did four decades ago in my homeland, Portugal, following their overthrow of the Salazar/Caetano dictatorship. 
But the record of military-led transitions elsewhere has been poor: democracy may be proclaimed to be the coup’s raison d’être, but the transition stops there. 
Moreover, in this case, the Egyptian army appears far more interested in protecting its enormous economic interests than it is in securing the benefits of a civilian government responsive to its citizens. 
Trust should still be put in young Egyptians and their demands for freedom and democracy – demands that link the movement that overthrew Mubarak to the demonstrations that led to Morsi’s removal. 
But the predominant goal should be to support the creation in Egypt of a pluralistic society that defends the rights of all to political participation and free and fair elections. 
Today, this requires opposition to any Mubarak-style repression of the Muslim Brotherhood. 
Immediately following the coup, the European Union adopted an ambivalent position toward it. 
This, too, is reminiscent of Algeria in 1992, when most European governments supported the annulment of the Islamists’ electoral victory. 
(Likewise, the EU refused to recognize Hamas’s electoral victory in Gaza in 2006.) 
Continuing fear of political Islam in much of the West explains past support for dictatorial regimes. 
Today, the EU and the US should demand the liberation of all members of the Muslim Brotherhood, including Morsi, and the integration of the Brotherhood into any political solution. 
The international community should also be concerned with the coup’s regional implications. 
Syrian President Bashar al-Assad’s cynical declaration of support for the coup is a sign that some want to turn today’s struggle in the Arab world into a bloody contest between Islamists and secularists. 
In the long term, any crackdown on the Brotherhood would lead its members and supporters – already bitterly disappointed in democracy – to reject elections entirely. 
That outcome could have a very negative impact on Islamist movements elsewhere. 
For many, the extremists who criticized the Brotherhood and other Islamist parties for choosing a democratic route to power will have been vindicated, and a new wave of violence in the region may begin. 
Hope remains that Egypt will not become Algeria in 1992 (or Chile in 1973). 
But to avoid that grim fate, it is imperative that Muslim Brotherhood members’ fundamental rights now be protected. 
US President Barack Obama, who has expressed deep concern about the overthrow of Morsi, is perhaps the only leader able to mediate in such a situation and work for a consensus solution that prevents a civil war. 
To achieve this, he would need to use all of the leverage at his disposal, including cutting off the massive military assistance that the US provides to Egypt’s armed forces, as he has threatened to do. 
He can also use the reserve of trust that he established by reaching out to the Brotherhood during Morsi’s presidency. 
But will Obama take the initiative? 
His speech in Cairo in 2009 – which called for “A New Beginning” in the region – inspired many in the Arab world. 
Now it is time for more than words. 

The Economic Costs of Erdoğan 
DURHAM/CAMBRIDGE – Turkey’s political model has long lost its luster, but a growing diplomatic crisis with the equally erratic administration of US President Donald Trump has now pushed the country’s economy into a full-fledged currency crisis. 
The Turkish lira has lost nearly half of its value over the last 12 months. 
And, because Turkish banks and firms have borrowed heavily in foreign currency, the lira’s freefall threatens to bring much of the private sector down with it. 
President Recep Tayyip Erdoğan, having won the first election since Turkey’s formal change from a parliamentary to a presidential system in June, now governs the country autocratically. 
He relies on government ministers selected more for their loyalty (and family ties to him) than for their competence. 
For more than a decade, financial markets gave Erdoğan, who was Prime Minister until 2014, the benefit of the doubt and supplied the Turkish economy with easy credit. 
Economic growth became dependent on a steady flow of foreign capital to finance domestic consumption and flashy investments in housing, roads, bridges, and airports. 
This kind of economic expansion rarely ends well. 
The only real question was when it would. 
The immediate trigger was the Trump administration’s decision to use sanctions (and the threat of more) to press Turkey to release Andrew Brunson, an Izmir-based American evangelical pastor arrested during the purges that followed the failed coup against Erdoğan in July 2016. 
The crackdown has involved 80,000 arrests, 170,000 firings, the closure of 3,000 schools, dormitories, and universities, and the dismissal of 4,400 judges and prosecutors. 
These draconian measures were taken under emergency rule, generally under orders from Erdoğan’s circle. 
Resistance to the suspension of basic liberties has been minimal, as media are heavily controlled and civil society has been emasculated through repression and the consequent climate of fear. 
Brunson is but one of many thousands accused of terrorism in the post-2016 crackdown. 
Like every financial crisis enabled by unsustainable economic policies, finding a way out requires both immediate and medium-term remedies. 
In the short run, the economy needs confidence-boosting measures to stabilize financial markets. 
Turkey’s central bank may need to raise interest rates, despite Erdoğan’s deep aversion to such a move. 
A concrete and credible program of tightening fiscal discipline and restructuring private-sector debt is essential. 
The International Monetary Fund may have to be called in for temporary financial assistance. 
But these short-term fixes don’t address the economy’s long-term fragility, which is rooted in the personalistic autocracy that Erdoğan has erected. 
Turkey has never had an unblemished democracy. 
Prior to Erdoğan’s ascent to power in 2003, its democracy was interrupted four times by military interventions. 
But it had political checks and balances that constrained even the military, and power changed hands on numerous occasions through increasingly fair and free elections. 
No individual since the end of World War II had acquired unchecked powers. 
Starting from a weak base when multiparty democracy was instituted in 1946, civil society had developed to the point that governments conferred with business associations, unions, academics, the press, and various other private interest groups. 
In his early years, when he still felt threatened by the military and the secularist elite, Erdoğan paid lip service to democracy and human rights. 
He made overtures to the long-repressed Kurdish minority. 
Domestic liberals and supporters in the West were bamboozled into a “democratic Islamist” narrative that they were desperate to believe. 
But even as he garnered praise in the West, Erdoğan had begun to eviscerate independent media through gargantuan tax fines. 
He also undermined the rule of law through sham trials against generals and other leading secularists. 
Erdoğan’s descent into authoritarianism accelerated after he broke with his ally, the US-based Muslim cleric Fethullah Gülen and his followers, and it accelerated dramatically after the coup attempt. 
With the June election, says Erdoğan, “Old Turkey” has given way to “New Turkey.” 
In the new order established under this Second Turkish Republic, any challenge to his authority is liable to be viewed as treason. 
Erdoğan claims credit for whatever goes well and blames dark forces – often unnamed foreign conspirators – for failures. 
His glorification, appearance of infallibility, and ultimately political survival are portrayed as Turkey’s supreme goals. 
Every other objective, whether productivity growth, keeping foreign friends, improving education, or healing social wounds, takes a back seat to strengthening his rule. 
And in return for his sacrificial services to the Turkish nation, he is entitled to be above all laws and to enrich himself and his close associates. 
The logic of Turkey’s new political system harks back to the Ottoman “circle of justice” that divided the population into taxpaying masses and a small tax-exempt elite headed by a sultan who was subordinate only to the Sharia (Islamic law), though in practice he himself defined what it meant. 
The “circle of justice” was officially repealed in 1839, through an edict that ushered in an era of restructuring. 
Nearly two centuries later, Erdoğan has taken Turkey back to a past that generations of reformers tried to leave behind. 
The system Erdoğan has instituted leaves no place for competent politicians or bureaucrats at the helm of the economy. 
They have been pushed out because their goals transcend the leader’s self-interest. 
Fear prevents honest debate of issues. 
Businessmen, academics, and journalists at the top of their fields have fallen mute in the interest of self-preservation. 
His circle is packed with yes-men (and some token yes-women), who strive to satisfy his sense of omniscience and magnificence. 
Even opposition leaders in Turkey’s now-toothless parliament become cheerleaders whenever he signals that lack of support would be treated as aiding the enemy. 
As in Russia and Venezuela, a few courageous dissidents are allowed to exist on the margins of public discourse, to provide a semblance of free speech. 
But they lead precarious lives, always at risk of being arrested as a warning to others to remain within bounds. 
Sooner or later, economic pressures will force Turkey to adopt fixes that will stabilize its currency and financial markets. 
But that will not revive long-term private investment, bring back talent that is leaving the country in droves, or foster a climate of freedom that will allow Turkey to thrive. 
As China and other Asian countries have shown, some autocracies can prosper when their leaders prioritize sensible economic policies. 
But when economics becomes merely another tool for enhancing the president’s personal power, the economy, as we now see, necessarily pays the price. 

How Europe Can Rescue Europe 
LONDON – At their meeting in Rome last Thursday, the leaders of the eurozone’s four largest economies agreed on steps towards a banking union and a modest stimulus package to complement the European Union’s new “fiscal compact.” 
Those steps are not enough. 
German Chancellor Angela Merkel resisted all proposals to provide relief to Spain and Italy from the excessive risk premiums that both countries are now confronting. 
As a result, the EU’s upcoming summit could turn into a fiasco, which may well prove lethal, because it would leave the rest of the eurozone without a strong enough financial firewall to protect it from the possibility of a Greek exit. 
Even if a fatal calamity can be avoided, the division between creditor and debtor countries will be reinforced, and the “periphery” countries will have no chance to regain competitiveness, because the playing field is tilted against them. 
This may serve Germany’s narrow self-interest, but it will create a very different Europe from the open society that fired people’s imagination and propelled European integration for decades. 
It will make Germany the center of an empire and permanently subordinate the “periphery.” 
That is not what Merkel or the overwhelming majority of Germans stand for. 
Merkel argues that it is against the rules to use the European Central Bank to solve eurozone countries’ fiscal problems – and she is right. 
ECB President Mario Draghi has said much the same. 
Indeed, the upcoming summit is missing an important agenda item: a European Fiscal Authority (EFA) that, in partnership with the ECB, could do what the ECB cannot do on its own. 
In particular, the EFA could establish a Debt Reduction Fund – a modified form of the European Debt Redemption Pact that was proposed by Merkel’s Council of Economic Advisers and endorsed by Germany’s Social Democrats and Greens. 
In exchange for specified structural reforms in Italy and Spain, the Fund would acquire and hold a significant portion of their outstanding stock of debt. 
It would finance the purchases by issuing European Treasury bills – joint and several obligations of the member countries – and pass on the benefit of cheap financing to the countries concerned. 
The Treasury bills would be assigned a zero-risk rating by the authorities and treated as the highest-quality collateral for repo operations at the ECB. 
The banking system has an urgent need for risk-free liquid assets. 
Banks are currently holding more than €700 billion of surplus liquidity at the ECB, earning only one quarter of 1% interest. 
This assures a large and ready market for the bills at 1% or less. 
Should a participating country subsequently fail to abide by its commitments, the EFA could impose a fine or other penalty, which would be proportionate to the violation, thereby preventing enforcement from becoming a nuclear option that can never be exercised. 
This would provide strong protection against moral hazard. 
A successor government in, say, Italy, would find it practically impossible to break any commitments undertaken by Italian Prime Minister Mario Monti’s current administration. 
With practically half of Italy’s debt financed by European Treasury Bills – producing an effect similar to a reduction in the average maturity of its debt – a successor government would be all the more responsive to any punishment imposed by the EFA. 
After a suitable period, the participating countries would enter into debt-reduction programs tailored in a way that does not jeopardize their growth. 
This would be the prelude to the establishment of a full political union and the introduction of Eurobonds. 
Of course, the issuance of European Treasury bills would require the approval of the Bundestag, but it would be in conformity with the German Constitutional Court’s requirement that any commitment approved by the Bundestag be limited in time and size. 
It is not too late to turn this proposal into a political declaration that outlines not only the long-term goal of a political union, but also a road map toward a fiscal and banking union. 
Guided by this declaration, the eurozone’s financial-rescue fund, the European Stability Mechanism (ESM), could immediately take over the ECB’s holdings of Greek bonds; the ECB could start accumulating Spanish and Italian bonds; and Italy and Spain could implement the structural reforms needed to qualify for the Debt Redemption Fund. 
This agenda would bring immense relief to the financial markets. 
Equally important, it would change Europe’s political dynamics from negative to positive. 
The main obstacle is that German politicians remain mired in a “can’t do” mode. 
Merkel insists that a political union should precede a full-fledged fiscal and banking union. 
That is both unrealistic and unreasonable. 
The three have to be developed together, step-by-step. 

How Europe Can Save the Iran Nuclear Deal 
LONDON – This week, a senior German official pointed out to me that, “The Iran nuclear deal is the last firewall preventing military tensions in the world’s most combustible region from spilling over into thermonuclear war.” 
That language is unusually apocalyptic, but it reflects a genuine fear that US President Donald Trump could soon dismantle a crucial line of defense that Germans and other Europeans are proud to have built. 
European leaders have been on the back foot since January, when Trump gave them a deadline of May 12th to “fix the terrible flaws of the Iran nuclear deal,” or he would re-impose sanctions on Iran. 
Trump’s main objections to the deal are that it does not address Iran’s misbehavior in the region or its ballistic missile program, nor does it prevent Iran from restarting its nuclear program after 2025. 
And now that Trump has installed a hawkish new foreign-policy team – with John Bolton as national security adviser and Mike Pompeo as secretary of state – European diplomats fear the worst. 
Over the past few months, the German, French, and British governments have been frantically assembling a package of measures – including potential sanctions on Iranian elites – to address Trump’s concerns. 
And both French President Emmanuel Macron and German Chancellor Angela Merkel have now visited the White House to persuade Trump that it is better to build on the deal than blow it up. 
In the short term, the Europeans are hoping that their proposed measures will allow Trump to declare victory while remaining in the deal. 
They have reminded Trump that a diplomatic solution to the North Korea nuclear crisis could very well depend on whether he unilaterally abandons America’s commitments to Iran under the Joint Comprehensive Plan of Action (JCPOA). 
In the long term, though, European leaders’ ability to save the deal will depend on the extent to which they can act in their own interests, rather than being a hostage to the caprices of the Trump administration. 
It is fitting that the Iran issue has come to the fore around the 15th anniversary of the start of the Iraq War. 
For European diplomats, that disaster and the success of the JCPOA have come to represent two foreign-policy extremes. 
Iraq was post-Cold War Europe’s darkest hour, with European countries lined up against one another to support or oppose the war, even though none had any real influence over US decisions. 
The JCPOA, by contrast, is seen as modern Europe’s shining success. 
Desperate to avoid another war in the Middle East, Europeans, starting in 2005, began to define their own interests in the region. 
With the two-pronged goal of preventing Iran from acquiring nuclear weapons and avoiding another war, they devised various carrots and sticks to shape Iranian and US actions. 
To Iran, European diplomats offered a choice between two futures: one in which Iran would freeze its nuclear program and end its international isolation; and one in which it would maintain its program and face ever-harsher sanctions, and possibly war. 
At the same time, the Europeans, having convinced Russia and China to back their strategy, approached the US with another stark choice: either join an international coalition to apply diplomatic pressure on Iran, or pursue dubiously effective military measures on your own. 
Today, European leaders’ overarching goals in the Middle East are to de-escalate the hegemonic struggle between Iran and Saudi Arabia, prevent nuclear proliferation, combat terrorism, and stanch the flow of refugees into Europe. 
But many of these goals are now being actively undermined by the Trump administration, which has made a show of siding with Israel and Saudi Arabia against Iran in regional conflicts from Yemen and Iraq to Lebanon and Syria. 
Diplomats in some EU member states have started to worry that attempts to placate Trump could force them into self-defeating positions, thus reprising the relationship between British Prime Minister Tony Blair and US President George W. Bush in 2003. 
As one official confided to me, the introduction of new sanctions will make it even harder to keep Iran committed to the JCPOA, let alone engage with it on other regional issues. 
Nevertheless, the European approach so far has been carefully calibrated both to win over Trump and preserve Iran’s commitment to the deal. 
Needless to say, this requires a delicate balance. 
If the Europeans give Trump too much, they will be playing into the hands of US hardliners. 
At the same time, they will be empowering the hardliners in Iran. 
In a recent interview, political scientist Nasser Hadian of Tehran University told me that moderate Iranian leaders such as President Hassan Rouhani and Foreign Minister Javad Zarif have already been left in a weak position, with hardliners now saying, “We told you so.” 
In Hadian’s view, the greatest danger is that Europe will try to appease Trump “at any cost,” when it should be working “on a plan B to save the deal without the US.” 
Among other things, a plan B would offer Iran economic relief if the US were to re-impose sanctions, conditional on Iran’s continued compliance with the JCPOA; and it would provide the basis for a larger strategy of engaging with Iran and other stakeholders to de-escalate regional conflicts. 
Of course, it would be better for everyone if Trump agrees not to abrogate the nuclear deal. 
But to persuade him of that, Europe must show that it is willing to go it alone. 
To that end, Trump should be confronted with a clear choice: either preserve the JCPOA, in exchange for European support in addressing regional issues and Iran’s missile program; or scrap the deal and risk the loss of European cooperation and the emergence of a nuclear-armed Iran. 
As my German interlocutor put it, “Trump must be told that he cannot have his cake and eat it.” 

How Free is Speech? 
NEW YORK – Bishop Richard Williamson has some very peculiar, and frankly odious, views: that no Jews were murdered in gas chambers during World War II; that the Twin Towers were brought down by American explosives, not by airplanes, on September 11, 2001; and that Jews are fighting to dominate the world “to prepare the anti-Christ’s throne in Jerusalem.” 
And these are just some of his opinions on secular matters. 
On questions of Roman Catholic doctrine, his views were considered so out of line with the modern Church that the Vatican excommunicated him in 1988, along with other members of the ultra-conservative Society of St. Pius X, founded by the fascist sympathizer Marcel Lefebvre. 
Supporters of Williamson include the British historian David Irving, who was recently jailed in Austria for glorifying the Nazis. 
The bishop, then, does not strike one as an attractive man. 
But does he deserve everything now hanging over his head? 
As a consequence of the views he expressed on Swedish television, he was denied re-entry into the Church, as was promised earlier by Pope Benedict, which is probably just as well. 
But he was also kicked out of Argentina, where he lived, and is threatened with extradition to Germany, where preparations are made to prosecute him for Holocaust denial. 
Meanwhile, consider the case of another unappealing man, the Dutch politician Geert Wilders, who was banned last month from entering the United Kingdom, where he had planned to show his short film, entitled Fitna , which describes Islam as a terrorist faith. 
Back in Holland, a case is being made against him in an Amsterdam court for “spreading hatred” against Muslims. 
He has compared the Koran to Hitler’s Mein Kampf , and wishes to stop immigration of Muslims to the Netherlands. 
The British ban, as well as the impending court case, has actually made Wilders more popular in the Netherlands, where one poll indicated that his populist anti-Muslim party, the PVV, would get 27 seats in parliament if elections were held today. 
The reason for Wilders’ surging popularity, apart from widespread distrust of Muslims, is that he has successfully cultivated an image as a fighter for free speech. 
The principle of free speech, one of the fundamental rights in liberal democracies, means that we must live with views that we find reprehensible, up to a point. 
The question is, up to what point? 
Laws on free speech differ somewhat from country to country. 
It is a criminal offense in various European democracies, including France, Germany, and Austria, to express the view that the Holocaust never happened. 
Many democratic countries also have laws against inciting violence or hatred. 
Some countries, including the Netherlands, even have laws against deliberately insulting people on the grounds of their race or religion. 
Bishop Williamson’s ideas may be loathsome, but criminal prosecution against a man for his views about history is probably a bad idea. 
He should be criticized, even ridiculed, but not jailed. 
Similarly, it would have been much better to let Wilders show his wretched film in Britain than to ban him. 
Whatever one thinks of laws against spreading hatred or insulting people, the law remains a blunt instrument when it came to matters of speech. 
Nevertheless, free speech is not absolute. 
Even Wilders, with his absurd call to ban the Koran, clearly believes that there are limits – for his opponents, of course, not for himself. 
But it is not so easy to define precisely what those limits should be, for they depend on who says what to whom, and even where. 
Williamson’s opinions suddenly mattered, because this obscure, excommunicated priest was about to be reinstated by the Pope. 
This would have given institutional legitimacy to his private views. 
In the case of Wilders, it makes a difference that he is a politician, not just a private individual, pandering to dangerous prejudices against a vulnerable minority. 
In civilized life, people refrain from saying many things, regardless of questions of legality. 
Words used by young black men among themselves in American cities would have a very different resonance if young white men used them. 
Mocking the ways and beliefs of minorities is not quite the same thing as taking on the cherished habits and views of majorities. 
If this smacks of political correctness, then so be it. 
But civilized life, especially in countries with great ethnic and religious diversity, would soon break down if everyone felt free to say anything they liked to anyone. 
The problem is where to draw the line. 
Legally, this should probably be the point where words are designed to result in violence. 
Socially, there are too many variables to establish an absolute, universal principle. 
The proper limits must be constantly tested, contested, and renegotiated. 
People like Bishop Williamson and Geert Wilders are useful to the extent that they allow us to do just that. 
Let them speak, so that they can be judged, not in court, but by contrary opinions. 
Banning them only allows them to pose as martyrs to free speech. 
And that not only makes it harder to attack their views, but also gives free speech a bad name. 

How Germany Lost the Iraq War 
Wars always have winners and losers. 
Saddam Hussein--dead or on the run--is, of course, the Iraq war's biggest loser. 
But Germany has also lost much, including the many US troops who will now reportedly be re-deployed to bases in other countries. 
Despite the announcement of plans to create a European army along with France, Belgium, and Luxembourg, Germany is less relevant in both European and world politics than it was before the Iraq war. 
Repairing the damage will not be easy. 
Every part of Germany's international position has been wounded by the Iraq war. 
The country can no longer play the role of transatlantic mediator between France and America. 
It can forget about US support in its campaign to gain a permanent seat in the UN Security Council. 
Instead of forging a "third way" for Europe's left with British Prime Minister Tony Blair, Chancellor Gerhard Schröder needs Blair to plead his case with President George W. Bush, who feels personally betrayed by the Chancellor's conduct in the run-up to the war. 
In postcommunist Eastern Europe, Germany is no longer perceived as an absolutely dependable advocate of the region's needs. 
Multilateral institutions that served as pillars of German foreign policy for almost half-a-century have been weakened: the European Union's hopes for common foreign, security, and defense policies have been gravely jeopardized. 
From an American perspective, flexible ad hoc coalitions of the willing have turned out to be more useful than the established NATO alliance, where Germany led the fight to refuse Turkey's request for support. 
Even the UN--the institution that Schröder was supposedly defending--has been diminished by his fecklessness. 
But the heart of the matter is the deterioration of German-American relations. 
Germany is by no means the only sinner here, for US diplomacy over Iraq was often clumsy and bombastic. 
Nevertheless, pointing out others' mistakes is not going to help rehabilitate Germany's position. 
German-American relations suffered a devastating blow when Schröder stoked the country's overwhelmingly pacifist attitudes. 
By doing so he drowned out the concerns about low growth and high unemployment that were threatening his re-election prospects. 
But that political strategy left President Bush believing that Schröder had stabbed him in the back. 
As with people, so too with states: trust once lost is extremely difficult to regain. 
Germany's opposition parties and much of its foreign policy establishment warned that the country risked diplomatic isolation, so Schröder joined an ad hoc coalition of the unwilling, along with France and Russia. 
This compounded the error by adding to it a public relations disaster. 
Much of the world press dubbed this "gang of three" an "axis," a word with sinister echoes of the German-Italian-Japanese World War II axis. 
Not surprisingly, Poland--like other Central and East European countries--sought reassurance from the US and Britain when their colossal neighbors, Germany and Russia, embarked on their anti-American flirtation. 
But wartime victory makes cowards of leaders who backed the wrong side. 
So, with Baghdad's fall, Schröder began to send conciliatory signals to Washington and London. 
Schröder implicitly began to welcome regime change in Iraq. 
During a Franco-German-Russian summit in St. Petersburg, he explicitly refrained from criticizing the US and Britain. 
"I don't want to speak about the past," he emphasized, "we should think about how the military victory can be turned to help the entire region." 
That French President Jacques Chirac is even less popular in the US than Schröder gives German diplomats slight consolation. 
But opposition to US policy from France never comes as a shock. 
Indeed, Chirac's tone and tactics conform to textbook Gaullist patterns. 
By contrast, German assertiveness vis-à-vis the US was stunning--perhaps because, as it is said, you have to be fully behind someone who you stab in the back. 
The Chancellor's aides try to justify Schröder's rhetoric as an expression of the country's political maturity. 
At long last, they say, German leaders can use the unrestricted sovereignty Germany acquired with reunification in 1990. 
But the Chancellor's juvenile experiment in mature diplomacy has diminished, not expanded, Germany's prestige. 
Quite simply, German Gaullism doesn't work. 
After all, Germany's traditional low-key foreign policy made the country an anchor of NATO and helped secure reunification. 
That diplomatic tradition has never simply been about "do-goodism" and checkbook contributions to peacekeeping missions around the world. 
It was about creating and transferring stability through the strengthening of international governance and supranational structures. 
Germany is too big to abstain from leadership in Europe. 
But it is well advised to avoid being suspected of hegemonic goals. 
Sharing sovereignty with its fellow Europeans and exerting influence through European and Atlantic institutions remains Germany's most promising political strategy. 
Besides abandoning any Gaullist pretensions, the other lesson Germany must learn is that influence is based not only on soft "civilian power," but also on hard military capabilities that are adapted to the exigencies of the post-Cold War world. 
If Germany wants to increase its diplomatic weight, it must increase its defense spending. 
Only an enhanced German relevance in European and world politics will convince America that it is time to bury the hatchet. 

How Globalization Stabilizes Poor Countries 
Globalization stands accused of generating economic instability in developing countries and greatly exacerbating poverty, at least in the short run--which is the longest period the world's poor can afford to care about. 
Critics point to the string of economic crises in Africa, Asia, and Latin America in recent years, often attributing them to multilateral lenders' demands for full liberalization of foreign trade and capital flows, privatization, and fiscal austerity. 
But the raging debate over globalization often overlooks an increasingly important feature that makes life better and more stable for poor people in developing countries right now: the many millions of migrants who send money home. 
Data on families in developing countries that receive money from relatives working abroad directly demonstrate that at least one element of globalization--migration--increases economic stability in poor countries. 
Migrants from struggling countries in Latin America, Southeast Asia, and other regions are increasingly securing jobs at wages that, while low by rich country standards, are far higher than they could dream of back home. 
In 2001, workers from low- and middle-income countries sent home a staggering $43 billion--more than double the level of a decade earlier and $5 billion more than that year's total official foreign aid to these countries. 
Migrant workers may send money home for a variety of reasons: to maintain good family relations, to ensure an inheritance, or to re-pay a loan from elders. 
But whatever the reason, these so-called "remittances"--the cash workers send home to countries like Colombia, Haiti, Jamaica, Mexico, and Bangladesh--act as a safety net that their governments typically need but cannot afford to provide. 
This is particularly true in small, developing economies. Here incomes are often considerably more volatile than in richer countries, owing to heavy reliance on a few commodities or industries and hence higher vulnerability to external shocks, including weather-related and other natural disasters. 
Indeed, poor countries also often lack the private insurance needed to offer the type of emergency assistance that citizens of wealthy nations have come to expect. 
In developing countries, remittances from workers abroad amount to the best insurance around. 
In addition to providing their families at home with a much-needed source of stable income, expatriate migrant workers send home even more money when catastrophe strikes. 
Such remittances enabled thousands of Jamaicans, for example, to recover from the devastation of Hurricane Gilbert in 1988, when storm damage was estimated at more than one-quarter of the country's annual GDP and nearly three households in four reported damage. 
Insurance was scarce and the government offered only limited help, providing a mere fraction of the aid that was actually needed. 
Jamaican families got far more help from loved ones living and working in places like Miami, New York, and Los Angeles. 
The same was true when Argentina's economy collapsed last year, when violence wracked Haiti and a hurricane ravaged Honduras before that, and whenever floods submerge villages in Bangladesh. 
In case after case, billions of dollars in remittances from migrants have given families in poor countries what their governments (and foreign donors) could not always provide: food, safety, the resources to recover, and hope. 
The economic importance of such remittances to poor countries in normal times is itself revealing. 
In Jamaica, remittances from workers abroad make up more than 10% of annual GDP on average--more than double the level of foreign direct investment. 
After Hurricane Gilbert, remittances increased by 25 cents for each dollar of hurricane damage that households incurred. 
To be sure, this implies that the extra money sent home provided only partial insurance. 
Perhaps migrants worry--just like actual insurance companies--that furnishing too much assistance would result in recipients doing less to protect themselves. 
Or maybe the damage from the hurricane was simply too large for migrants to cover completely. 
After all, migrant workers may be relatively well off by standards at home, but they struggle to earn a decent living in their host countries. 
Either way, even if remittances from abroad act as a form of insurance in the event of natural disasters, this does not mean that they will increase when other types of external shocks occur. 
Damage due to hurricanes is relatively easy to observe and can't be blamed on human mistakes. 
In contrast, it might be more difficult for a migrant in a distant country to assess the extent to which family members back home, knowing that they can always rely on the remittances, are responsible for other forms of income loss. 
Nonetheless, the importance of remittances to households in poor countries, especially during periods of external shock, holds two lessons. 
First, it should be easy and inexpensive for migrants to send money home. 
Today, migrants and their families often pay 10% or more of the remittances in fees to financial institutions that transfer funds and exchange currencies. 
Reducing these fees would, in effect, be a tax cut for the world's poorest. 
Second, and perhaps more importantly, we should embrace migration as a proven method of bringing immediate relief and stability to poor nations. 
Given that family members are the best judge of need, migration and remittances may, in fact, constitute a foreign-aid framework that is better targeted and more effective than any government program can ever be. 

Are Chinese Enterprises Being Taxed to Death? 
SHANGHAI – A couple of weeks ago, an interview with the Chinese auto-glass tycoon Cao Dewang sparked a heated discussion across China. 
Cao explained that his recent $600 million investment to establish a US manufacturing branch for his company, Fuyao Glass Industry Group, was driven largely by China’s high taxes, which Cao claims are 35% higher for manufacturers in China than in the US. 
Has the tax burden on Chinese enterprises really reached economically lethal levels? 
Going strictly by the numbers, this does not seem to be the case. 
Measured as the ratio of the government’s fiscal revenue to GDP, China’s overall tax burden, according to the International Monetary Fund’s Government Finance Statistics Manual, is just over 29%. 
That is 10% less than the global average. 
Another way to measure the overall tax burden is to calculate the ratio of tax revenue and social security contributions to GDP. 
By that measure, China’s average tax burden from 2012 to 2015 was 23.4%, or 12% lower than the OECD countries. 
As a percentage of GDP, China’s tax revenues amount to about 18% – compared to around 26% of GDP in developed countries and around 20% in developing countries (in 2013) – and continues to decline. 
Yet not everyone agrees that China’s tax burden is relatively low, especially at the firm level. 
A recent World Bank report indicates that the total tax rate for Chinese enterprises averaged 68%, putting China 12th in the world. 
This may be where Cao got his 35% manufacturing-tax figure. 
It is not clear, however, how the World Bank calculated its rate. 
What is clear is that Chinese entrepreneurs and investors – who have been complaining for years about the heavy tax burden in China – are far more inclined to agree with the World Bank than more favorable comparisons and indices. 
One reason for this perception may be that China collects more taxes from producers, and less from consumers, than most developed economies. 
According to Li Wanfu, Director of the Tax Research Institute under China’s State Administration of Taxation, more than 90% of all taxes and fees are paid by Chinese enterprises, while less than 10% are paid by individuals. 
In Western countries, personal-income tax and social-insurance payroll taxes constitute a higher share of total tax revenues. 
So what is the actual tax burden on Chinese enterprises? 
Officially, Chinese producers must pay an enterprise income tax of 25%. 
But many firms receive tax incentives. 
For example, high-tech enterprises supported by the government pay an income-tax rate of just 15%, while some small-scale enterprises pay 20%. 
I would therefore estimate that the median rate of corporate-income tax is around 20%. 
Companies must also pay value-added tax of 17%, though there are options for preferential rates of 13%, 11%, 6%, and even 3%. 
That puts China more or less in the same range as other VAT countries. 
Nonetheless, China’s average tax rate is significantly higher than that of Japan, South Korea, and Singapore. 
To find out how these rates translate in the real world, I collected data (compiled by a Beijing news reporter) from two well-known Chinese manufacturers, Gree Electric Appliances and Canny Elevator. 
According to Gree’s 2015 social responsibility report, the company paid about CN¥14.8 billion ($2.1 billion) in taxes in 2015. 
Its total revenue amounted to over CN¥100.5 billion, and its net profits equaled about CN¥12.5 billion. 
The total taxes paid accounted for 14.7% of the company’s total income, or 1.18 times its net profit. 
As for Canny Elevator, its annual report showed that it paid ¥336 million in taxes and duties in 2015. That is about 10.27% of the company’s revenue for the year (which totaled ¥3.27 billion), and 68.8% of the year’s net profit (which stood at ¥488 million). 
These might be taken as evidence of a heavy burden of tax and duties. 
But it remains unclear if these figures are in line with what most Chinese firms pay. 
After all, local governments often offer tax returns, refunds, and breaks, meaning that the tax burden varies greatly across enterprises, industries, and regions. 
And that does not even account for rampant tax evasion by small firms. 
That said, the perceived “tax burden” in China also includes non-tax expenses, including a relatively high proportion of social insurance paid for workers, the actual cost of land, resources, and financing, as well as a variety of government surcharges. 
And, indeed, Cao cited China’s high land costs (as well as soaring labor costs) as additional factors driving his company’s partial move to the US. 
Government surcharges alone amount to at least 13% of Chinese enterprises’ revenues, with some 7% financing urban construction and maintenance, 5% going to education, and 1% earmarked for flood control. 
Such fees, paid to local governments, must come from profit, and cannot be passed on to consumers. 
This has contributed to the erosion of Chinese firms’ profit margins, which, according to TCL Corp Chairman Li Dongsheng, have dropped to less than 2%, on average. 
Manufacturing surcharges therefore amount to nearly a quarter of profit, putting a further squeeze on low-profit manufacturers. 
While it is impossible to estimate the precise size of Chinese firms’ tax burden, they feel under pressure. 
At a time of slowing economic growth, the last thing China needs is to drive more producers away. 
To prevent this, China needs to create a more straightforward and transparent tax system, with a transition to more explicit and direct taxation. 
Taxes, duties, and fees for businesses must be lowered, as should the share of social insurance paid by firms for their employees in China. 
At the same time, China’s leaders must commit to curbing the soaring costs of land and financing, thereby paving the way for creating a more equal and competitive market for all firms. 
They should start by recognizing that as long as upstream infrastructure remains in the hands of often-inefficient state-owned enterprises, some downstream sectors will have to bear higher costs. 
Over time, such costs could damage the competitiveness of Chinese manufacturers – or drive them to friendlier markets. 

How Independent Is The ECB? 
As the European Union prepares to welcome up to twelve new members, debate is heating up among the leading candidate countries about whether or not speedy adoption of the euro will promote or impede rapid catch-up growth. 
But expanding the reach of monetary union raises two equally fundamental questions for current euro members: does formal political independence for the European Central Bank deliver truly independent judgements about policy? 
If not, will expansion aggravate the problem because the biases of ECB members will become even more divergent than they are today? 
Each new entrant into Europe's monetary union adds one member to the ECB's Governing Council, the group that sets the euro area's monetary policy. 
With 18 members, the Governing Council is already larger than the governing bodies of the US Federal Reserve Board, the Bank of England, or the Bank of Japan. 
To reduce the risks of unwieldiness, the ECB needs to reform its Governing Council now. 
While the Nice Treaty does not permit re-structuring the Governing Council, it does allow for change in the voting rule that the Council uses. 
A rule that requires a rotation of votes among Council members, or that groups them into voting blocs, could replace the current one-man-one-vote scheme. 
How would such a change affect European monetary policy? 
Enlargement of monetary union will increase the relative number of national central bank chiefs on the Governing Council. 
Each entrant will add one member, while the number of officials from the ECB's headquarters in Frankfurt will remain fixed at six. 
Some observers suggest that this shift will make European monetary policy more prone to the regional biases of national central banks. 
But it may be a mistake to assume that central bankers in Frankfurt lack regional or national bias. 
I examined the question of regional bias in the US Federal Reserve, whose monetary policy body, the Federal Open Market Committee (FOMC), is composed of seven officials from Washington and five from regional offices. 
I analyzed records from 1978 through 2000, which included 214 meetings and conference calls, with more than 2,400 votes by FOMC members. 
America's Fed policymakers are more likely to dissent in favor of lower interest rates when their region's unemployment rate is higher than the national average. 
They are also more likely to dissent in favor of raising rates when their region's unemployment rate is below the national average. 
So officials in Washington seem to be more , not less, sensitive to regional unemployment than officials in regional Fed offices! 
Is the same thing true of the ECB? 
To find out, an identical analysis of its policy deliberations would be needed, but the absence of recorded and published votes makes this impossible. 
I devised an experiment that allows us to look at whether national loyalties played a role in ECB policy since the euro's inception. 
This experiment assumed that each member of the ECB's Governing Council casts votes on the basis of the difference between his country's inflation rate and the average inflation rate in the euro area during the previous month. 
It also assumed that if the difference between the national inflation rate and the euro-area average exceeded a certain threshold in the month prior to a monetary policy meeting, the Governing Council member would vote in a particular fashion. 
For example, if national inflation were higher than euro-area inflation by more than a particular amount (the threshold value), then a Council member from that country would vote in favor of monetary tightening or against monetary easing. 
If it were lower than the euro-area average by more than the threshold value, then he or she would vote against monetary tightening or in favor of monetary easing. 
Finally, I assumed that all policy decisions were made on the basis of a simple majority vote. 
I analysed the eleven instances in which the ECB changed interest rates from January 1999 through December 2001. 
Taking into account the national identities of each Governing Council member, I calculated the total number of members who would have voted contrary to the actual monetary policy change that was made, given the assumptions about differences between national and euro-zone inflation rates. 
I then repeated the experiment using various threshold values. 
The results indicate that the ECB's monetary policy decisions are consistent with the regional bias hypothesis. 
In nearly every case and for every threshold value tested, a majority of Governing Council members voted for the policy change that actually occurred, and their votes could be predicted by the difference between their national inflation rate and the euro-area average. 
One proposal for voting reform on the Governing Council gives greater weight to the six policymakers at the ECB's center, under the assumption that these officials are less likely to be swayed by national interests. 
But my experiment indicates that even when voting is limited to these six officials, the policy decisions taken between January 1999 and December 2001 are consistent with outcomes based on differences in regional inflation. 
Two serious conclusions follow from all this: first, any change to the voting rules of the ECB's Governing Council should minimize the potential for regional bias, which can only grow with expansion eastward. 
Second, reformers should not presume that officials at the ECB's Frankfurt headquarters are less likely to show bias than officials from national central banks. 


How Inequality Fueled the Crisis 
CHICAGO – Before the recent financial crisis, politicians on both sides of the aisle in the United States egged on Fannie Mae and Freddie Mac, the giant government-backed mortgage agencies, to support low-income lending in their constituencies. 
There was a deeper concern behind this newly discovered passion for housing for the poor: growing income inequality. 
Since the 1970’s, wages for workers at the 90th percentile of the wage distribution in the US –such as office managers – have grown much faster than wages for the median worker (at the 50th percentile), such as factory workers and office assistants. 
A number of factors are responsible for the growth in the 90/50 differential. 
Perhaps the most important is that technological progress in the US requires the labor force to have ever greater skills. 
A high school diploma was sufficient for office workers 40 years ago, whereas an undergraduate degree is barely sufficient today. 
But the education system has been unable to provide enough of the labor force with the necessary education. 
The reasons range from indifferent nutrition, socialization, and early-childhood learning to dysfunctional primary and secondary schools that leave too many Americans unprepared for college. 
The everyday consequence for the middle class is a stagnant paycheck and growing job insecurity. 
Politicians feel their constituents’ pain, but it is hard to improve the quality of education, for improvement requires real and effective policy change in an area where too many vested interests favor the status quo. 
Moreover, any change will require years to take effect, and therefore will not address the electorate’s current anxiety. 
Thus, politicians have looked for other, quicker ways to mollify their constituents. 
We have long understood that it is not income that matters, but consumption. 
A smart or cynical politician would see that if somehow middle-class households’ consumption kept up, if they could afford a new car every few years and the occasional exotic holiday, perhaps they would pay less attention to their stagnant paychecks. 
Therefore, the political response to rising inequality – whether carefully planned or the path of least resistance – was to expand lending to households, especially low-income households. 
The benefits – growing consumption and more jobs – were immediate, whereas paying the inevitable bill could be postponed into the future. 
Cynical as it might seem, easy credit has been used throughout history as a palliative by governments that are unable to address the deeper anxieties of the middle class directly. 
Politicians, however, prefer to couch the objective in more uplifting and persuasive terms than that of crassly increasing consumption. 
In the US, the expansion of home ownership – a key element of the American dream – to low- and middle-income households was the defensible linchpin for the broader aims of expanding credit and consumption. 
Why did the US not follow the more direct path of redistribution, of taxing or borrowing and spending on the anxious middle class? 
Greece, for example, got into trouble doing precisely this, employing many thousands in the government and overpaying them, even while it ran up public debt to astronomical levels. 
In the US, though, there have been strong political forces arrayed against direct redistribution in recent years. 
Directed housing credit was a policy with broader support, because each side thought that it would benefit. 
The left favored flows to their natural constituency, while the right welcomed new property owners who could, perhaps, be convinced to switch party allegiance. 
More low-income housing credit has been one of the few issues on which President Bill Clinton’s administration, with its affordable-housing mandate, and that of President George W. Bush, with its push for an “ownership” society, agreed. 
In the end, though, the misguided attempt to push home ownership through credit has left the US with houses that no one can afford and households drowning in debt. 
Ironically, since 2004, the homeownership rate has been in decline. 
The problem, as often is the case with government policies, was not intent. 
It rarely is. 
But when lots of easy money pushed by a deep-pocketed government comes into contact with the profit motive of a sophisticated, competitive, and amoral financial sector, matters get taken far beyond the government’s intent. 
This is not, of course, the first time in history that credit expansion has been used to assuage the concerns of a group that is being left behind, nor will it be the last. 
In fact, one does not even need to look outside the US for examples. 
The deregulation and rapid expansion of banking in the US in the early years of the twentieth century was in many ways a response to the Populist movement, backed by small and medium-sized farmers who found themselves falling behind the growing numbers of industrial workers, and demanded easier credit. 
Excessive rural credit was one of the important causes of bank failures during the Great Depression. 
The broader implication is that we need to look beyond greedy bankers and spineless regulators (and there were plenty of both) for the root causes of this crisis. 
And the problems are not solved with a financial regulatory bill entrusting more powers to those regulators. 
America needs to tackle inequality at its root, by giving more Americans the ability to compete in the global marketplace. 
This is much harder than doling out credit, but more effective in the long run. 

How Japan Fuels Global Financial Instability 
Over the past several years, much attention has focused on the role of China’s trade surplus in creating today’s global financial imbalances. 
But too little attention has been paid to the role of Japan’s policy of near-zero interest rates in contributing to these imbalances. 
As global financial uncertainty rises, it is time for Japan to change course. 
Japan’s ultra-low interest rate policy was initiated in the 1990’s to put a floor under the economy following the bursting of its asset price bubble. 
However, over time these ultra-low interest rates have promoted a highly speculative financial “carry” trade: speculators borrow yen at low interest rates and then buy dollars and other currencies that are invested in higher-yield assets elsewhere. 
There are two key features of this carry trade. 
First, it contributes to yen depreciation and dollar appreciation as carry traders switch out of yen. 
Second, it increases global asset demand, generating asset price inflation. 
The yen’s depreciation versus the dollar has contributed to continuing large US trade deficits with Japan. 
It has also pressured other East Asian countries to under-value their exchange rates in order to remain competitive with Japan. 
Given China’s under-valued currency, East Asia’s two largest economies have thus anchored down exchange rates throughout the region, thereby increasing the region’s trade surplus at the expense of jobs and growth in the rest of the global economy. 
Funds switched out of Japan have shifted to other financial markets, with the chase for yield driving up asset prices and lowering interest rates. 
In the US, this has complicated the Federal Reserve’s task. 
The Fed has been trying to slow demand growth and cool the housing price bubble to avoid inflation, but carry trade speculators have been easing credit. 
Most importantly, the carry trade generates global financial fragility by creating fundamental – and dangerous –mismatches. 
First, carry traders borrow in yen but invest in dollars and other currencies. 
Second, carry traders borrow short-term money in Japan but may invest in longer-term assets outside Japan. 
Unexpected yen appreciation could cause large carry trade exchange rate losses, as could unexpected closing of the interest rate gap with Japan. 
Such losses, or just the thought of them, have the potential to trigger global contagion as carry traders close positions in US markets to repay loans in Japan. 
In addition to the global dangers of the carry trade, the policy of ultra-low interest rates may also be bad for Japan. 
This is because ultra-low interest rates may hurt Japan’s households and lower consumption, and this effect may be larger than the benefit that a weak yen confers on Japan’s exports. 
Higher interest rates can spur consumption if their impact on income outweighs the increased incentive to save. 
This may well be the case for Japan, which has a rapidly aging population. 
Current ultra-low interest rates may be scaring people about the adequacy of future income. 
Raising rates could alleviate those fears, increasing consumer confidence and spending. 
Additionally, raising interest rates would be a form of expansionary fiscal policy. This is because Japan has a large public debt, and increasing interest payments on that debt would put extra money in the hands of households. 
The policy of ultra-low interest rates was justified in the aftermath of the bursting of Japan’s asset price bubble, but Japan stabilized its economy long ago. 
At this stage, the policy has become a contributor to global financial fragility, and it may be retarding Japan’s own prosperity by contributing to consumer anxieties. 
That means Japan should decisively abandon ultra-low interest rates, albeit gradually so as to allow an orderly unwinding of speculative positions. 

How Long for Low Rates? 
CAMBRIDGE – How long can today’s record-low, major-currency interest rates persist? 
Ten-year interest rates in the United States, the United Kingdom, and Germany have all been hovering around the once unthinkable 1.5% mark. 
In Japan, the ten-year rate has drifted to below 0.8%. 
Global investors are apparently willing to accept these extraordinarily low rates, even though they do not appear to compensate for expected inflation. 
Indeed, the rate on inflation-adjusted US Treasury bills (so-called “TIPS”) is now negative up to 15 years. 
Is this extraordinary situation stable? 
In the very near term, certainly; indeed, interest rates could still fall further. 
Over the longer term, however, this situation is definitely not stable. 
Three major factors underlie today’s low yields. 
First and foremost, there is the “global savings glut,” an idea popularized by current Federal Reserve Chairman Ben Bernanke in a 2005 speech. 
For various reasons, savers have become ascendant across many regions. 
In Germany and Japan, aging populations need to save for retirement. 
In China, the government holds safe bonds as a hedge against a future banking crisis and, of course, as a byproduct of efforts to stabilize the exchange rate. 
Similar motives dictate reserve accumulation in other emerging markets. 
Finally, oil exporters such as Saudi Arabia and the United Arab Emirates seek to set aside wealth during the boom years. 
Second, in their efforts to combat the financial crisis, the major central banks have all brought down very short-term policy interest rates to close to zero, with no clear exit in sight. 
In normal times, any effort by a central bank to take short-term interest rates too low for too long will boomerang. 
Short-term market interest rates will fall, but, as investors begin to recognize the ultimate inflationary consequences of very loose monetary policy, longer-term interest rates will rise. 
This has not yet happened, as central banks have been careful to repeat their mantra of low long-term inflation. 
That has been sufficient to convince markets that any stimulus will be withdrawn before significant inflationary forces gather. 
But a third factor has become manifest recently. 
Investors are increasingly wary of a global financial meltdown, most likely emanating from Europe, but with the US fiscal cliff, political instability in the Middle East, and a slowdown in China all coming into play. 
Meltdown fears, even if remote, directly raise the premium that savers are willing to pay for bonds that they perceive as the most reliable, much as the premium for gold rises. 
These same fears are also restraining business investment, which has remained muted, despite extremely low interest rates for many companies. 
It is the combination of all three of these factors that has created a “perfect storm” for super low interest rates. 
But how long can the storm last? 
Although highly unpredictable, it is easy to imagine how the process could be reversed. 
For starters, the same forces that led to an upward shift in the global savings curve will soon enough begin operating in the other direction. 
Japan, for example, is starting to experience a huge retirement bulge, implying a sharp reduction in savings as the elderly start to draw down lifetime reserves. 
Japan’s past predilection toward saving has long implied a large trade and current-account surplus, but now these surpluses are starting to swing the other way. 
Germany will soon be in the same situation. 
Meanwhile, new energy-extraction technologies, combined with a softer trajectory for global growth, are having a marked impact on commodity prices, cutting deeply into the surpluses of commodity exporters from Argentina to Saudi Arabia. 
Second, many (if not necessarily all) central banks will eventually figure out how to generate higher inflation expectations. 
They will be driven to tolerate higher inflation as a means of forcing investors into real assets, to accelerate deleveraging, and as a mechanism for facilitating downward adjustment in real wages and home prices. 
It is nonsense to argue that central banks are impotent and completely unable to raise inflation expectations, no matter how hard they try. 
In the extreme, governments can appoint central bank leaders who have a long-standing record of stating a tolerance for moderate inflation – an exact parallel to the idea of appointing “conservative” central bankers as a means of combating high inflation. 
Third, eventually the clouds over Europe will be resolved, though I admit that this does not seem likely to happen anytime soon. 
Indeed, things will likely get worse before they get better, and it is not at all difficult to imagine a profound restructuring of the eurozone. 
Nevertheless, whichever direction the euro crisis takes, its ultimate resolution will end the extreme existential uncertainty that clouds the outlook today. 
Ultra-low interest rates may persist for some time. 
Certainly Japan’s rates have remained stable at an extraordinarily low level for a considerable period, at times falling further even as it seemed that they could only rise. 
But today’s low interest-rate dynamic is not an entirely stable one. 
It could unwind remarkably quickly. 

How Military Should Japan Be? 
Is it time for Japan to prime its weapons and sail out into the world in defense of peace? 
The very idea still incites howls of protest in Asia - not least in Japan, where popular attachment to the country's postwar "peace" constitution remains powerful. 
Yet Japan's modestly named Self-Defense Forces are involved in many regional hot spots (no combat duty, of course) and seek to play a more active part in UN peacekeeping. 
If a shooting war ever breaks out in Asia, Japan is nowadays prepared to do a lot more than fill the petrol tanks. 
It is past time for these modest changes, because the Asia/Pacific region's many fault lines affect the interests of the world's great and emerging powers in fundamental ways. 
Northeast Asia contains the last remnants of the Cold War: the divided Korean Peninsula and hostile glares across the Taiwan Straits. 
Southeast Asia forms its own unique geo-political environment, with a wide variety of ethnic groups, cultures, and religions in tension - as the current Islamic unrest in Thailand attests. 
Beyond these conventional strategic concerns, the emergence of global terrorism and the Iraq War re-enforce Japan's sense that the strategic environment has changed profoundly. 
The roles and obligations of the Self-Defense Forces must gradually shift and diversify, and their zone of action broadened. 
Neat binary concepts like "peacetime" and "wartime" are no longer viable. 
The world must get used to a twilight security environment of sudden and peripheral emergencies. 
Japan's laws are primed for this change, because the obligations of the Self-Defense Forces are relatively clear in these circumstances. 
The "Anti-Terrorism Special Measures Law" allows the Self-Defense Forces to participate in the fight against international terrorism, although the form of participation is limited to logistical support. 
Nor are the Self-Defense Forces' operations and obligations any longer restricted to Japanese territory and the adjacent seas. 
Ever since Japan dispatched minesweepers to the Persian Gulf after the Gulf War in 1991, the Self-Defense Forces have been expanding their activities beyond Japan and its immediate vicinity to include international peacekeeping missions, emergency relief operations, multilateral military exercises, and naval refueling support in the Indian Ocean. 
Self-Defense Force units have been dispatched to southern Iraq to provide humanitarian aid and support reconstruction efforts. 
Of course, the obligation of the Self-Defense Forces not to engage in offensive combat operations remains unchanged. 
With its expanded roles, however, the Self-Defense Forces are well prepared to engage in other military operations, such as shadowing and chasing spy ships, anti-terror activities, and missions to prevent proliferation of weapons of mass destruction and ballistic missiles. 
Japan's warships can help with sanctions monitoring and minesweeping. Its ships and aircraft can rescue stranded nationals. 
But these incremental changes in Japan's military capacity and policies, though necessary and effective, can be sustained only with a clear national consensus on the country's defense interests. 
The international community's demand that Japan participate directly in resolving global tensions has helped, by changing the terms of domestic debate. 
The old deadlock on security issues is relaxing, and the Japanese public, recognizing the changed international environment, mostly embraces the Self-Defense Forces' deployment in pursuit of international and regional responsibilities. 
Every Japanese citizen may have his or her own opinion, but a clear majority appear to agree that Japan must become a prominent nation in promoting international and regional security, as well as economic growth. 
To achieve these ends, Japan must be endowed with responsibilities equivalent to the country's national power, while securing the safety, comfort, and prosperity of Japan and preserving the people's identity as Japanese with pride and honor. 
Achieving these goals requires fulfilling several conditions. 
Japan's political leadership needs to be founded on a competitive but stable political structure. 
Only a truly popular political mandate can assure that the Japanese people are fully aware of their international responsibilities as an influential nation in the international community. 
Prime Minister Junichiro Koizumi seems to grasp much of this, and so is undertaking discussions on security and defense that aim to help revise the "National Defense Program Outline." 
Those with bitter memories of Japanese behavior half a century ago should be reassured; this debate is about how to defend peace, not about how to promote or wage war. 
Many of Japan's neighbors were understandably reassured by the Cold War arrangement whereby America promised to defend Japan, relieving the country of the need for a powerful military. 
The one-sided nature of this alliance rankled little when Japan was just one among many protected by America's global shield. 
As Japan prospered under America's protection, it prided itself on being a "civilian" power, using its trade and aid, rather than tanks and guns, to encourage stability. 
But America, in its global war on terror, has justifiably lost interest in bearing Asia's many military burdens alone. 
Hence, Japan must be seen to be doing more to support its inseparable ally, as well as international peacekeeping efforts in general. 
A rich and powerful Japan in a region as dangerous as East Asia cannot go on playing military bit parts forever. 
The question is whether Japan's Self-Defense Forces work alongside America and the world in defense of world peace now, or eventually do so alone in defense of Japan. 

How Much Transparency is Too Much? 
PRINCETON – Transparency seems to be the word of the day in a wide array of policy domains. 
But is greater transparency always good? 
Ever since the financial crisis erupted in 2008, there has been a call for “greater transparency” in financial services. 
The financial-reform law passed by the United States Congress last month requires improved transparency from banks and other financial-services firms. 
Moreover, thanks to the hard work of Oxfam America and the Publish What You Pay coalition, the law also requires oil and mining companies – both US and foreign – that want to raise capital in the US to disclose their payments to the governments of countries in which they operate. 
For many poor countries, wealth in natural resources is a curse rather than a benefit. 
Corrupt rulers can use the billions they receive from oil and mining corporations for personal extravagance, or to buy arms for troops to crush democratic resistance movements. 
Of course, transparency alone cannot prevent this, but it will show everyone how much the rulers are getting, and who is funding them. 
This, one hopes, will change the attitude of corporations that enrich themselves by paying dictators for the right to extract valuable resources that belong to the whole country. 
Throughout the world, to receive what one knows are stolen goods is a crime – except, it seems, when the goods are stolen by dictators from the people they dominate. 
A different form of transparency received much more attention last month. 
Wikileaks, which describes itself as “an anonymous global avenue for disseminating documents the public should see,” released 92,000 documents related to the war in Afghanistan, including military reports on incidents, and intelligence reports. 
Wikileaks has, over the past three years, published a variety of sensitive documents, ranging from the American military’s manual for operating its prison in Guantánamo Bay to evidence of corruption in Kenya and the dumping of toxic chemicals off the coast of Africa. 
It also published a list of Web sites that the Australian government proposed blocking, the extreme-right British National Party’s membership roll, an analysis of a major Icelandic bank’s default risk, and video footage of a US helicopter attack in Baghdad that killed 12 people, including a Reuters journalist and photographer. 
But posting the Afghan war reports was its most controversial move yet. 
The New York Times, together with The Guardian and Der Spiegel, was given a chance to study the documents before they were released, and decided to publish some of the material. 
Its editors argued that while the decision to publicize secret material is always difficult, these documents were of “significant public interest” and “illuminate the extraordinary difficulty of what the United States and its allies have undertaken in a way that other accounts have not.” 
US Senator John Kerry, a leading Democrat who supports the war, has said that the documents may “underscore the stakes” in the conflict, and make it more urgent to “make the calibrations needed to get the policy right.” 
Wikileaks founder Julian Assange has suggested that the documents could form the basis for prosecuting war crimes committed by US forces against Afghan civilians. 
Others, including President Barack Obama, have said that the documents “don't reveal any issues that haven't already informed our public debate on Afghanistan.” 
There is a clear parallel between the recent Afghanistan leaks and Daniel Ellsberg’s release in 1971 of the Pentagon Papers, which helped the American public understand how the war in Vietnam was really being conducted. 
On its Web site, Wikileaks quotes the US Supreme Court ruling in that case: “only a free and unrestrained press can effectively expose deception in government.” 
Wikileaks also asserts that its leaks have already been the catalyst for “hundreds of reforms,” and that “[o]pen governance is the most effective method of promoting good governance.” 
But even some supporters of open government think Wikileaks goes too far. 
Steven Aftergood, head of the project on government secrecy at the Federation of American Scientists, counts Wikileaks among the enemies of an open society because of its failure to respect the rule of law and the rights of individuals. 
Although Wikileaks says it has withheld an additional 15,000 documents on the Afghan war in order to remove names and other means of identifying individuals who might be placed at risk, the Times of London revealed that in some cases sufficient identifying details were in the documents already released. 
Assange has said that he deeply regrets any harm that the released documents may cause, but has defended the release nevertheless. 
And the Wikileaks Web site points out that while openness may lead to some highly visible bad consequences, what we fail to see are the consequences of not publishing, and the way in which a climate of openness makes it more likely that governments and corporations will act more ethically. 
But how much openness is too much? 
In Latvia, an artificial-intelligence researcher in the University of Latvia's computer science department who earlier this year leaked confidential records on the income of bank managers has been praised as a modern “Robin Hood,” because otherwise the public would not have known how much some people were continuing to be paid while their banks were being bailed out with public funds. 
Each year in Norway, the government publishes the income and wealth of almost every taxpayer. 
Is that too much transparency? 
If so, why? 
In a world in which terrorists have committed atrocities and threaten to commit more, to seek complete government transparency is utopian. 
Sometimes it is possible to do good only in secret. 
Yet on the whole, a more transparent community is likely to be a better one – and the same applies to a more transparent world. 

How Musharraf Survives 
The devastating Kashmir earthquake is once again testing the skills of one of the world’s great political survivors. 
General Pervez Musharraf, president of the Islamic Republic of Pakistan, has few friends and many enemies. 
Pakistan’s major political parties oppose him. For the religious right and the mullahs, he is an agent of America, the great Satan, and has thus betrayed the cause of Islam. 
Somewhere out there, gunning for Musharraf, are Islamic militants furious at being dumped after they fought his covert wars in Afghanistan and Kashmir. 
Many in Musharraf’s own army despise him for the same reason. 
For Pakistan’s small and embattled liberal and left-wing forces, he is yet another military dictator who seized and holds power by force, undermining the development of democracy. 
So how does Musharraf survive? 
In large part, he can thank 9/11. 
Faced by a United States bent upon bloody vengeance, Pakistan’s military establishment scurried to join the US-led coalition and take up arms against its own creation, the Taliban. 
Only a few senior officers with an Islamic bent resisted this straightforward betrayal. They were soon marginalized, drawing praise from Washington. 
With US help, an economy that had nearly run aground was suddenly righted by a wave of international aid and loan write-offs. 
Even more important was a decision, taken in the hope of choking off funds to extremist groups, to require all expatriate Pakistani earnings to be remitted through official banking channels. 
In a curious way, nuclear weapons also are crucial to Musharraf’s survival, for they create conditions that distract Pakistan’s highly ideological army from its objective of war with India. 
The dispute over Kashmir had occupied the minds of military planners throughout Pakistan’s history, and war had been the raison d’etre for maintaining the world’s eighth-largest standing army. 
But nukes, a belief in deterrence, and the growing realization that Kashmir is a lost cause, have freed the army from the hard life of the trenches. 
Ideology is increasingly irrelevant as the officer class scrambles to build vast personal fortunes. 
A look at Pakistan’s economic landscape says it all. 
The CEO’s of many, if not most corporations, public and private, are retired military officers – many fairly young. 
The military owns airlines and freight companies, petrochemical factories, power generation plants, sugar mills, cement and fertilizer plants, construction firms, banks and insurance companies, advertising agencies, and more. 
Vast tracts of prime real estate in cities, sold to officers for a pittance, have turned into mega housing developments. 
Musharraf defends the military acquisitions, claiming that they are economically efficient, and angrily dismisses criticism as the ranting of unpatriotic Pakistani pseudo-intellectuals. 
But they are “efficient” only in the sense that they dampen the threat to Musharraf posed by the military. 
No so Pakistan’s Islamists, however, whom Musharraf infuriated yet again last month, when he ordered his foreign minister to initiate the first official contact with Israel. 
But the Islamists’ call for nationwide protests flopped. 
The military, after decades of rule, has dismantled all forms of political organization – parties, trade unions, and student associations – leaving a Pakistani society immobilized, apathetic, and incapable of articulating its preferences. 
As Islamists’ anger at Musharraf’s betrayals increases, so does his global standing and image as a world statesman. 
Scenes of wild-eyed mullahs demonstrating in the streets of Pakistani cities are a boon to his position. 
Surely the Pakistani public needs to be tamed by a strongman. 
No harm if it is an army general. 
But the truth is more complex. 
Musharraf flits effortlessly between personae. 
At one moment he is the “responsible” world leader who speaks charmingly to the international media about moderate Islam; at the next, he is the cunning conspirator who rigs elections, destroys political opponents, breaks promises on relinquishing power, enters into mutually beneficial relationships with mullahs, and castigates human-rights activists as “Westernized fringe elements” that “are as bad as the Islamic extremists.” 
To forestall the possibility of a coup, the army is being cleansed of hardline Islamists. 
Soldiers charged with mutiny have received the death penalty. 
This process has deepened pro- and anti- US divisions within the army, both among commissioned and non-commissioned officers, but nothing in Pakistan today suggests that radical change is imminent. 
To be sure, more incidents of global terrorism associated with Pakistan, such as July’s London bombings, will bring new pressures. 
The US and Europe will make their usual demands to close down the country’s hate-spewing madrassas, and to reform a public-school system that, unhindered by the government, churns out young militants burning to kill and die for Islam. 
For Musharraf, this means that continuing to hunt with the hounds and run with the hares might get harder. 
But the current constellation of forces suggests that, barring unforeseen developments, his survival instincts will serve him well for years to come. 

How New is Egypt’s “New” Foreign Policy? 
CAIRO – In the months since Egyptian President Hosni Mubarak’s resignation, his successors have signaled a shift in foreign policy by reaching out to former adversaries. 
Egypt’s government has welcomed Iranian diplomats and embraced the Palestinian group Hamas. 
Many interpret such moves as clear evidence of Egypt’s desire for a diplomacy that is not subordinate to American interests. 
But Mubarak never entirely fit his detractors’ portrayal of him as an American lackey. 
In fact, Mubarak’s need to please his Saudi Arabian benefactors, not the United States, was paramount in his thinking. 
Although he sometimes supported American policies, Mubarak frequently rebuffed the US when its positions did not align with his own. 
Since the end of the October 1973 war, Arab-Israeli peace has been a cornerstone of America’s Middle East agenda. 
The US often looked to Egypt, the most important and influential Arab country, to play a leading role in promoting this goal. 
And, when it suited him, Mubarak played his part. 
When the late Palestinian leader Yasser Arafat humiliated Mubarak before the US secretary of state and the international media by refusing to sign an annex to an Israeli-Palestinian accord brokered in Cairo, Mubarak told him, “Sign it, you son of a dog!” 
On the other hand, when Arab public opinion opposed Palestinian concessions, Mubarak remained aloof from US peace initiatives. 
For example, in 1996, he declined President Bill Clinton’s invitation to come to Washington, along with Arafat and the leaders of Israel and Jordan, to settle a bout of Palestinian violence. 
And when Clinton asked Mubarak to pressure Arafat to facilitate an Israeli-Palestinian peace deal during negotiations at Camp David in 2000, he refused. 


How Obama Leads 
CAMBRIDGE – Two years ago, Barack Obama was a first-term senator from a mid-western state who had declared his interest in running for the presidency. 
Many people were skeptical that an African-American with a strange name and little national experience could win. 
But as his campaign unfolded, he demonstrated that he possessed the powers to lead – both soft and hard. 
Soft power is the ability to attract others, and the three key soft-power skills are emotional intelligence, vision, and communications. 
In addition, a successful leader needs the hard-power skills of organizational and Machiavellian political capacity. 
Equally important is the contextual intelligence that allows a leader to vary the mix of these skills in different situations to produce the successful combinations that I call “smart power.” 
During his campaign, Obama demonstrated these skills in his calm response to crises, his forward-looking vision, and his superb organizational ability. 
In addition, his contextual intelligence about world politics has been shaped from the bottom up with experience in Indonesia and Kenya, and his understanding of American politics was shaped from the bottom up as a community organizer in Chicago. 
Obama continued to demonstrate these leadership skills in his almost flawless transition. 
By selecting his primary opponent, Hillary Clinton, as his Secretary of State, and reaching across party lines to retain Robert Gates as Secretary of Defense, he showed openness to strong subordinates. 
In his inaugural address, he sounded the themes of smart power – a willingness “to extend an open hand to those who unclench their fists” – but also stressed themes of responsibility as Americans confront sobering economic problems. 
Moreover, Obama has started his term in decisive fashion. 
In his first weeks in office, he began to fulfill his campaign promises by outlining a massive economic stimulus plan, ordering the closure of the Guantánamo Bay prison, promoting new fuel-efficiency standards to save energy, giving an interview to Al Arabiya, and sending a top emissary to the Middle East. 
George W. Bush once said that his role as leader was to be “the decider.” 
But even if Bush had been better as a decider, people want something more in a leader. 
We want someone who reinforces our identity and tells us who we are. 
We judge leaders not only by the effectiveness of their actions, but also by the meanings that they create and teach. 
Most leaders feed upon the existing identity and solidarity of their groups. 
But some leaders see moral obligations beyond their immediate group and educate their followers. 
Nelson Mandela could easily have chosen to define his group as black South Africans and sought revenge for the injustices of Apartheid and his own imprisonment. 
Instead, he worked tirelessly to expand the identity of his followers both by words and deeds. 
When Obama was faced with a campaign crisis over incendiary racial remarks by his former pastor, he did not simply distance himself from the problem, but made use of the episode to deliver a speech that served to broaden the understanding and identities of both white and black Americans. 
The crisis on September 11, 2001, produced an opportunity for Bush to express a bold new vision of foreign policy. 
But he failed to produce a sustainable picture of America’s leadership role in the world. 
A successful vision is one that combines inspiration with feasibility. 
Bush failed to get that combination right. 
Obama will need to use both his emotional and contextual intelligence if he is to restore American leadership. 
Contextual intelligence is the intuitive diagnostic skill that helps a leader align tactics with objectives to produce smart strategies in different situations. 
A decade ago, the conventional wisdom was that the world was a uni-polar American hegemony. 
Neo-conservative pundits drew the conclusion that the United States was so powerful that it could do whatever it wanted, and that others had no choice but to follow. 
This new unilateralism was based on a profound misunderstanding of the nature of power – that is, the ability to affect others to get the outcomes one wants – in world politics. 
The US may be the only superpower, but preponderance is not empire. 
America can influence but not control other parts of the world. 
Whether certain resources will produce power depends upon the context. 
To understand power and its contexts in the world today, I have sometimes suggested the metaphor of a three-dimensional chess game. 
On the top board of military power among countries, the US is the only superpower. 
On the middle board of economic relations among countries, the world is already multipolar. 
America cannot get the outcomes it wants in trade, antitrust, or other areas without the cooperation of the European Union, China, Japan, and others. 
On the bottom board of transnational relations outside the control of governments – pandemics, climate change, the drug trade, or transnational terrorism, for example – power is chaotically distributed. Nobody is in control. 
This is the complex world in which Obama takes up the mantle of leadership. 
He inherits a global economic crisis, two wars in which US and allied troops are deployed, crises in the Middle East and South Asia, and a struggle against terrorism. 
He will have to deal with this legacy and chart a new course at the same time. 
He will have to make difficult decisions while creating a larger sense of meaning in which America once again exports hope rather than fear. 
That will be the test of his leadership. 

The Siren Song of “Strongmania” 
CLAREMONT – Political strongmen are back in style. 
Not long ago, Russian President Vladimir Putin was one of the only leaders worthy of the label. 
Today, he has much more competition. 
The trend can be seen in traditionally autocratic regimes. 
Chinese President Xi Jinping is arguably the country’s most powerful leader since the death of Mao Zedong four decades ago. 
But something similar can be seen in countries that had been touted as model young democracies. 
In Turkey, President Recep Tayyip Erdoğan, who had long been moving toward autocracy, has concentrated power further in the wake of last month’s failed military coup. 
Hungarian Prime Minister Viktor Orbán has reversed a post-communist success story with a sharp turn toward illiberalism. 
Even in the Philippines, where the People Power Revolution overthrew Ferdinand Marcos in 1986, voters have just elected as their president Rodrigo Duterte, an avowed populist strongman and trigger-happy warrior against drug lords. 
Even the world’s most stable democracies have been infected by strongmania. 
In Austria, Norbert Hofer, leader of the far-right Freedom Party, is likely to be elected to the presidency in October. 
And in the United States, Donald Trump has capitalized on the frustration and prejudices of parts of the American electorate to gain a chance – fortunately, weakening by the day – of becoming the country’s next president. 
This embrace of leaders who promise that they alone can fix society’s problems and restore some idealized past reflects widespread ignorance of the nature and consequences of populist rule. 
In fact, history has not been kind to such rulers. 
Like today’s leaders, they would often ride to power on a wave of public anger against the perceived failures of democracy – failures that they had no intention of fixing. 
Instead, once in office, they would often pursue an entirely different agenda – one that usually made things much worse. 
One need look no further than Venezuela, where today’s economic meltdown can be traced back to the disastrous rule of populist par excellence Hugo Chávez. 
People loved Chávez’s social-welfare schemes, seemingly unconcerned that they were based on oil revenues and foreign debt. 
As long as the benefits flowed, Chávez was free to expropriate industries and otherwise discourage private competition. 
Unsurprisingly, economic diversification stalled, and when oil prices collapsed, so did the economy. 
This highlights a key reason why strongmen nearly always lead their countries toward catastrophe. 
After winning over voters with their apparent decisiveness and directness, such leaders capture enough authority to make quick decisions and demonstrate short-term results – thereby keeping voters on their side as they claim still greater authority. 
But decisiveness carries a high cost. 
With nobody checking their behavior, strongmen rarely account for long-term risks. 
In the end, the prosperity they promised never arrives, at least not for long. 
Instead, the economy usually ends up in ruins. 
And that’s not the worst of it. 
Voters surrender freedoms for that promised prosperity, as Russia under Putin illustrates. 
Putin promised stability and order, and consolidated his power by taking down his political opponents, liberals and oligarchs alike. 
Then he began methodically destroying Russia’s fragile democratic institutions, stifling the press, and curtailing civil liberties, including freedom of assembly. 
Less than a decade later, he had erected a personal autocratic regime on the ruins of a flawed new democracy. 
And, as in Venezuela, the absence of economic modernization and diversification tied the economy’s fate to the global oil market. 
The ability to criticize the government freely is the core difference between democracy and dictatorship. 
So how can anyone believe that a leader who curtails people’s right to speak out can save a flawed democracy? 
In fact, the combination of freedom of expression and electoral competition is the key to improving democracies, because it enables systemic failures – not to mention leaders’ missteps – to be subjected to public scrutiny. 
China’s autocratic government is famous for avoiding such scrutiny by suppressing freedom of information. 
Its many elements of Internet censorship – from blocking politically sensitive Wikipedia articles to filtering certain key words out of online searches – come together to form the so-called Great Firewall of China. 
That firewall, together with press censorship, enables China’s leaders to conceal their failures and highlight their achievements, however dubious. 
Putin behaves similarly, using the press to emphasize, say, how Russia’s annexation of Crimea has reminded the country’s Western opponents of its “greatness.” 
Orbán and Erdoğan seem to be operating from the same playbook. 
Moreover, like China, Russia has embraced extravagant spectacles like the Olympic Games, in an effort to showcase the country’s magnificence and the beneficence of its leaders. 
Coverage of such events fills the media space that should be used to discuss serious governance issues. 
If that were not enough to convince voters of the dangers posed by populist autocrats, one might also consider the human toll of living under their rule. 
Perhaps the dozens of journalists who have been arrested in Turkey since the coup attempt, or the families of Putin’s many opponents who have ended up dead, could provide some insight into the cost of living in constant fear of the government. 
The growing popularity of strongmen in much of the world may or may not herald the dawn of a new autocratic age. 
Strongmen tend to self-destruct, owing to colossal mistakes that doom their grandiose ambitions. 
Unfortunately, they tend to leave a severely compromised democracy and a derelict economy in their wake. 
Ultimately, the best defense against such outcomes is to prevent populist autocrats from getting elected in the first place. 
Countries that have elected such leaders should stand as a warning to others tempted to go down a similar path. 

The Competition Factor 
BRUSSELS/MEXICO CITY – Since the global economic downturn began in 2008, debate has centered on the macroeconomic strategies and instruments used to address the crisis and foster recovery. 
But correcting imbalances and addressing short-term slowdowns or recessions, while important, should not be allowed to overshadow the need to establish long-term conditions for solid and sustainable economic growth. 
So far, macroeconomic policy has borne both the blame for economic malaise and the hope that it can be overcome. 
But we should be devoting as much attention to the microeconomic problems – such as poor incentives, market failures, and regulatory shortcomings – that led us into the crisis in the first place. 
Indeed, just as microeconomic problems in the financial sector triggered a credit crunch and fueled a global recession, so microeconomic factors hold the key to recovery. 
Many economies need to fix the financial sector and restore credit, while many more need to raise productivity in order to boost growth and create jobs. 
Some industries suffer from counterproductive and ill-conceived regulation; others are ailing as a result of monopolistic behavior by dominant firms, or because they face a lack of effective competition and transparency in utilities and financial services. 
Fixing these problems would help us to return to a path of growth and prosperity for all. 
To achieve this, we first must follow the Hippocratic oath and avoid doing more harm. 
Governments around the world should ignore the temptation to relax competition in order to provide relief to particular industries or economic groups. 
The renowned American economist Mancur Olson argued that stagnation in developed economies results from cartels and lobbies becoming more numerous and powerful over time, until they eventually drain a country’s economic dynamism. 
Preserving a competitive environment in which markets remain open and contestable is the best tonic, because firms must constantly innovate and perform better under such conditions. 
This, in turn, makes our societies more creative and, ultimately, more prosperous. 
Efforts to relax competition have many faces. 
But all of them make an economy less productive and redistribute wealth to small, coordinated groups with vested interests and a strong inclination to lobby the government. 
The most common approach is protectionism, which has been part of the political discourse in various countries in recent years. 
But official measures to help national producers at the expense of domestic business customers and consumers are always short-sighted, for they fail to help producers to address the challenges that they will have to face sooner or later anyway. 
Similarly, old-fashioned dirigisme – such as attempts to “pick winners,” foster national “champions,” or keep failed business models alive through state subsidies – is both harmful and doomed to fail. 
And misplaced regulation – for example, in the service sector – remains a barrier to healthy competition in many countries. 
Once we have stopped doing harm, we must start doing the right things. 
Economic policy is like gardening: pulling on plants will not make them grow faster, but a successful gardener can provide them with the right environment in which to flourish. 
Relying on competition can help societies to unleash well-functioning markets’ power to provide goods and services. 
To achieve this, policymakers must have a sound enforcement framework at their disposal, take an economy-wide approach, and attract the participation of all stakeholders. 
Sound enforcement implies legal tools and resources to pursue and implement an economic policy, along with an institutional design that reduces meddling by vested interests. 
Consider, for example, the importance of impartial and effective antitrust authorities, or subsidy schemes that are sufficiently well designed to ensure that they truly serve the public interest. 
An economy-wide approach is needed because markets are interconnected. 
Misguided regulation or market failures that harm competition anywhere can burden the entire economy. 
The global crisis erupted because major problems in the functioning of the banking sector had been left unaddressed. 
The poor functioning of input markets, such as markets for energy or intermediary products, can also do a lot of economic harm, not least because it hampers external competitiveness. 
Finally, strengthening competition throughout the economy requires broad support. 
This cannot be achieved without bridging ideological divisions and overcoming political pressures from particular economic groups. 
Advocacy can play a key role, by educating not only policymakers, but also citizens and businessmen, about the benefits of competition. 
There should be a wide consensus that a pro-competitive environment is one of the keys to economic prosperity. 
Australia provides a good example of how pro-competitive policies deliver results. 
Its economy was one of the OECD’s worst in terms of productivity growth in the 1980’s; a decade later, Australia was in third place. 
In the interim, all of the country’s economic regulation was examined from the standpoint of maximizing competition, and a national pro-reform consensus was forged. 
Currently, significant efforts are underway in several countries, including Mexico. 
Structural reforms to boost productivity will also be crucial to ensure Europe’s economic recovery and the survival of its social model. 
The “Single Market Acts I & II” provide a comprehensive agenda to tap fully the potential of an integrated and competitive market of 500 million consumers to catalyze growth and prosperity in the European Union. 
We know from experience that competition works. 
By basing economic policy on this experience, we could not only avert Olson’s grim prophecy. 
We could also accelerate economic recovery, increase the pace of innovation, and raise livelihoods for millions of people worldwide. 

Financial Inclusion Now 
KUALA LUMPUR – Making the financial system accessible to the world’s poorest people can unlock their economic potential, improve their lives, and benefit the wider economy. 
So it is no surprise that financial inclusion of the poor has become an important component of public policymaking. 
Central banks and regulators worldwide are taking the lead in making financial inclusion a priority, in addition to their traditional mandates of maintaining monetary and financial stability. 
Financial inclusion is about providing an opportunity for the world’s 2.5 billion unbanked and financially underserved to participate in the formal financial system, thereby helping to lift them out of poverty and enter the economic mainstream. 
Greater financial inclusiveness promises a more cohesive society and more balanced growth and development. 
Moreover, financial systems themselves stand to benefit from becoming more comprehensive and progressive. 
The additional consumers participating in the formal financial system will strengthen national economies and, in turn, enrich the global economy. 
Indeed, as developing countries move toward middle-income status, financial inclusion is a key component of continued progress. 
In countries with high levels of financial exclusion, consumers are left to rely on unregulated informal services. 
These inferior substitutes often imply exorbitant costs for borrowers – and financing that is usually too short term for productive investment activity. 
Moreover, the lack of consumer protection and regulatory and supervisory frameworks exposes informal activities to vulnerabilities that can harm borrowers and jeopardize financial stability. 
Increasing the availability of formal financial services to those who have long been denied them requires establishing a balanced regulatory framework. 
Oppressive, blanket regulation, which may be necessary in complex and unpredictable financial markets, may not be relevant in a rural community – or, worse, it may stifle efforts to promote financial inclusion. 
Indeed, proportionality is an important aspect of regulation, enabling prudential measures that, rather than exceed or underestimate, are commensurate with the risks that need to be addressed. 
Little wonder, then, that high levels of exclusion in developing and emerging countries have prompted policymakers to embrace proportionate regulation, thereby gaining the flexibility to encourage innovation in the provision of financial services while preserving financial stability. 
Bangladesh, for example, has adapted its financial regulations for microfinance institutions. 
This has helped to catalyze the growth of sustainable microfinancing to local women-owned enterprises. 
Kenya’s “test and learn” approach to regulation has unleashed the potential of mobile-phone-based financial-service delivery through M-PESA, which offers consumers a safe and convenient alternative to cash. 
There are many other examples of successful implementation of proportionate regulation that have resulted in greater financial inclusion without compromising financial stability. 
In Malaysia, agent-banking regulation (which safeguards consumers’ interests while supporting financial institutions’ business models) has led to the expansion of branchless banking to reach previously unserved rural areas. 
Similarly, Mexico’s “tiered” approach to financial access – according to which requirements for opening bank accounts are proportionate to risk, with low-value accounts subject to higher transaction restrictions – has expanded access to basic accounts, while mitigating the risk of money laundering. 
And Pakistan and Indonesia, by basing capital requirements for microfinance institutions on the size of the population that they expect to serve, are enabling these institutions to serve distinct market niches sustainably. 
Policymakers in many countries have recently been considering the role of financial standard-setting bodies (SSBs) in advancing financial inclusion. 
In particular, they are focusing on the specific challenges that arise when applying supervisory standards in a developing country that is pursuing financial stability and inclusion. 
Although global standards supposedly reflect the principles of proportionality, they provide insufficient guidance for the national regulators, banking institutions, and financial-sector assessors who are trying to apply them effectively in diverse environments. 
This lack of contextual clarity has led to excessively conservative interpretations of the regulations – and thus to the creation of unintended barriers to financial inclusion. 
Addressing this will require input from policymakers with practical experience applying international standards, particularly in emerging economies. 
At the same time, in order to ensure continued progress toward financial inclusion, representatives from developing and emerging economies must play a greater role in shaping future standards. 
The Alliance for Financial Inclusion, a network of central bankers and financial policymakers from more than 80 developing countries, is already contributing to more effective and proportionate global regulation by facilitating increased engagement with SSBs. 
This September, Malaysia’s central bank will advance the process by hosting AFI’s Global Policy Forum. 
Such collaborative efforts among developing countries ultimately foster closer cooperation between them and their developed counterparts. 

How Risky is the Global Economy? 
NEWPORT BEACH – Three years after the global financial crisis, the global economy remains a confusing place – and for good reasons. 
Should we draw comfort from gradual healing in advanced countries and solid growth in emerging economies? 
Or should we seek refuge against high oil prices, geopolitical shocks in the Middle East, and continued nuclear uncertainties in Japan, the world’s third largest economy? 
Many are opting for the first, more reassuring view of the world. 
Having overcome the worst of the global financial crisis, including a high risk of a worldwide depression, they are heartened by a widely shared sense that composure, if not confidence, has been restored. 
This global view is based on multispeed growth dynamics, with the healing and healthy segments of the global economy gradually pulling up the laggards. 
It is composed of highly profitable multinational companies, now investing and hiring workers; advanced economies’ rescued banks paying off their emergency bailout loans; the growing middle and upper classes in emerging economies buying more goods and services; a healthier private sector paying more taxes, thereby alleviating pressure on government budgets; and Germany, Europe’s economic power, reaping the fruit of years of economic restructuring. 
Much, though not all, of the recent data support this global view. 
Indeed, the world has embarked on a path of gradual economic recovery, albeit uneven and far less vibrant than history would have suggested. 
If this path is maintained, the recovery will build momentum and broaden in both scope and impact. 
But “if” is where the second, less rosy view of the world comes in – a view that worries about both lower growth and higher inflation. 
While the obstacles are not yet sufficiently serious to derail the ongoing recovery, only a fool would gloss over them. 
I can think of four major issues – ranked by immediacy and relevance to the well being of the global economy – that are looming larger in importance and becoming more threatening in character. 
First, and foremost, the world as a whole has yet to deal fully with the economic consequences of unrest in the Middle East and the tragedies in Japan. 
While ongoing for weeks or months, these events have not yet produced their full disruptive impact on the global economy. 
It is not often that the world finds itself facing the stagflationary risk of lower demand and lower supply at the same time. 
And it is even more unusual to have two distinct developments leading to such an outcome. 
Yet such is the case today. 
The Middle Eastern uprisings have pushed oil prices higher, eating up consumer purchasing power while raising input prices for many producers. 
At the same time, Japan’s trifecta of calamities – the massive earthquake, devastating tsunami, and paralyzing nuclear disaster – have gutted consumer confidence and disrupted cross-border production chains (especially in technology and car factories). 
The second big global risk comes from Europe, where Germany’s strong performance is coinciding with a debt crisis on the European Union’s periphery. 
Last week, Portugal joined Greece and Ireland in seeking an official bailout to avoid a default that would undermine Europe’s banking system. 
In exchange for emergency loans, all three countries have embarked on massive austerity. 
Yet, despite the tremendous social pain, this approach will make no dent in their large and rising debt overhang. 
Meanwhile, housing in the United States is weakening again – the third large global risk. 
Even though home prices have already fallen sharply, there has been no meaningful rebound. 
Indeed, in some areas, prices are again under downward pressure, which could worsen if mortgage finance becomes less readily available and more expensive, as is possible. 
With housing being such a critical driver of consumer behavior, any further substantial fall in home prices will sap confidence and lower spending. 
It will also make relocating even more difficult for Americans in certain parts of the country, aggravating the long-term-unemployment problem. 
Finally, there is the increasingly visible fiscal predicament in the US, the world’s largest economy – and the one that provides the “global public goods” that are so critical to the healthy functioning of the world economy. 
Having used fiscal spending aggressively to avoid a depression, the US must now commit to a credible medium-term path of fiscal consolidation. 
This will involve difficult choices, delicate execution, and uncertain outcomes for both the federal government and the US Federal Reserve. 
The longer the US postpones the day of reckoning, the greater the risk to the dollar’s global standing as the world’s main reserve currency, and to the attractiveness of US government bonds as the true “risk-free” financial benchmark. 
The world has changed its supplier of global public goods in the past. 
The last time it happened, after World War II, an energized US replaced a devastated Britain. 
By contrast, there is no country today that is able and willing to step in should the US fail to get its act together. 
These four risks are material and consequential, and each is growing in importance. 
Fortunately, none of them is yet transformational for the global economy, and together they do not yet constitute a disruptive critical mass. 
But this is not to say that the global economy is in a safe zone. 
On the contrary, it is caught in a duel between healing and disruptive influences, in which it can ill afford any further intensification of the latter. 

Russia’s European Game in Syria 
PARIS – This much is clear in Syria: There is no good solution. 
There has not been a good solution since that black Wednesday in August 2013, when Syrian President Bashar al-Assad’s war machine, by using chemical weapons, crossed the “red line” that US President Barack Obama had warned would trigger an American military response. 
The moderate opposition still stood, and the Islamic State had not yet emerged from the shadows. 
Yet, in a shocking last-minute about-face, Obama declined to intervene. 
That lapse cannot be undone. 
But in the hell of bad solutions on offer for Syria, some are worse than others. 
And the one devised by Russian President Vladimir Putin is probably the most infernal of all. 
Russian airstrikes have been concentrated on targets around the cities of Idlib, Homs, and Hama – areas where, according to independent observers, jihad watchers, and other groups that scrutinize the videos placed online by the Russian authorities themselves, the Islamic State is not established. 
This means that the primary objective of the Russian attacks is to weaken the entire opposition, including the democratic opposition, fighting the Assad regime. 
The goal of Russia’s intervention is therefore not to contribute to the “struggle against terrorism,” as the Kremlin’s propagandists claim, but to restore political control, at any cost, to the regime that spawned the terrorism in the first place. 
More precisely, Russia’s aim is to rescue (after a long period of arm’s-length support) a dictatorship that American and French authorities describe as being responsible for causing more than 250,000 deaths since 2011. 
The regime’s behavior no doubt fueled the terrifying rise of the Islamic State as well, providing Assad with a trump card in his bid for international support – and Russia with a fig leaf. 
One might argue that the past is past and that, in view of the general disaster in Syria, Russia’s intervention will at least have the benefit of halting the country’s free fall. 
But the first consequence of Putin’s offensive – one employing methods tested in the two Chechen wars and not burdened, to put it mildly, by the precautions observed by Western armed forces – will be to increase, not reduce, the number of civilian casualties. 
The world was rightly horrified by America’s recent blunder in bombing the Médecins Sans Frontières’ hospital in Kunduz, Afghanistan. 
But how many Syrian Kunduzes will result from Russian airstrikes if the Kremlin continues to favor unguided bombs over guided missiles? 
(This is just one example of Russia’s tactics, but one that reveals much about how Putin intends to prosecute his latest foreign adventure.) 
And can anyone believe, even fleetingly, that Russia’s intervention will lessen, rather than aggravate, Syria’s refugee crisis? 
Putin’s methods are forcing tens of thousands of civilians to flee indiscriminate airstrikes, clearing the way for the death squads of a regime that in recent months had been showing signs of exhaustion, and dashing any remaining hope of creating effective safe zones in northern Jordan and southern Turkey. 
Now even the last holdouts among the regime’s opponents will be appearing on the roads of Europe. 
They will not appear on the roads of Russia, mind you: Unlike Germany or France, Putin will not hesitate, while terrorizing tomorrow’s refugees, to slam the door in their faces. 
Nor is Putin shy about his intentions in Syria. 
One piece of news reported by Russian media but curiously unheeded in the West is that the missile cruiser Moskva, with its dozens of anti-aircraft ordnance, has been deployed to Latakia. 
But the Islamic State has not, unbeknownst to everyone but Putin, acquired an air force that needs to be neutralized. 
Rather, the Kremlin evidently will view as a legitimate target any aircraft that might pass over territory that it comes to regard as being under its control. 
And, because any such plane would necessarily be flying the flag of the United States, the United Kingdom, France, Turkey, or another member of the coalition fighting the Islamic State, it is not hard to envisage how Russia’s involvement could lead to international escalation of Syria’s civil war. 
Fortunately, we are not there yet. 
But let us not pretend that Russia’s military operations, which, to date, have been aimed solely at providing Russia with mastery over Syrian airspace and protecting its interests on the ground, are bolstering efforts to defeat the Islamic State. 
Putin is not just a fireman who sets fires; he is an old-school imperialist. 
His operation in Syria is partly designed to divert attention from his dismemberment of Ukraine. 
And his thinly veiled threats against the Baltic states, Poland, Finland, and now Turkey – whose airspace and relations with NATO have been probed by Russian aircraft – reveal a strategy of aggression that has as its chief goal the weakening of Europe. 
Europeans must wake up to Putin’s design before it is too late. 
In France, the siren song of appeasement is becoming a national rallying cry, from the far-right National Front to far-left elements – and among a growing number of mainstream politicians of all stripes. 
Indeed, the Kremlin has assiduously cultivated party secretariats across Europe. 
A web of invisible links has brought into being what could be called “Putin’s Party” in Europe. 
If Putin’s Party were enticing only the usual European populist demagogues, from Nigel Farage in the United Kingdom to Viktor Órban in Hungary, it would be bad enough. 
But when even leaders who are normally considered to be responsible statesmen, such as Italian Prime Minister Matteo Renzi, begin justifying Putin’s actions, Europe risks frittering away the very security on which its prosperity is built. 


How Scary is Disruptive Technology? 
CAMBRIDGE – The steady stream of improvements in driverless cars has convinced me that before too long the roads will be filled with cars and trucks operating without humans at the wheel. 
Likewise, I am convinced that the revolution in artificial intelligence will allow computers and robots to do many of the tasks that white-collar workers now do. 
It’s not surprising, therefore, that many people are worried about the fate of those whose jobs are vulnerable – or have already been lost – to the latest disruptive technology. 
What will happen to the millions of men and women who now drive trucks and taxis when the trucks and taxis can drive themselves? 
What will happen to the accountants and health workers when computers can do their jobs? 
Some analysts have estimated that, with many fewer employees needed to produce the current volume of goods and services, a large share of current employment could be made redundant. 
I hear these worries and realize that they cannot be easily dismissed. 
But I am optimistic that the United States, at least, will adapt successfully to the new technology. 
There may be some losers as well as winners, but the American public as a whole will be better off. 
And those who lose their jobs to the new technology will soon find other employment. 
I believe that there is little reason to worry that the new technology will create large-scale unemployment. 
The changes in technology will increase the economy’s output and raise the potential standard of living of the population. 
Those who want to work will continue to find jobs. 
Why am I so optimistic? 
Simply put: history. 
Rapid technical change is not something new. 
We have experienced technological change that substitutes machines and computers for individual workers for many years. 
And yet, despite the ups and downs of the business cycle, the US economy continues to return to full employment. 
This has been most dramatic in manufacturing. 
Robots and automated machines have replaced production workers in manufacturing for many years, driving employment in the sector from 13 million in 1950 to only nine million now, even as the real value of manufacturing output rose by 75%. 
And those who are no longer employed in manufacturing have found jobs elsewhere in the economy. 
Computers have also replaced workers in a wide range of service industries. 
We no longer see many elevator operators. 
Switchboard operators are gone. 
Most of us get our boarding passes at airports from automated check-in machines. 
Law firms and accounting firms use computers to do what professional employees used to do. 
And yet the US unemployment rate is now just 4.9%, even lower than its average in recent decades. 
Among US college graduates – who constitute 40% of the US labor force – the unemployment rate is just 2.7%. 
Because college graduates comprise a larger share of the younger age cohorts than of the older population, the overall unemployment rate will be held down as that group ages and its share of the labor force grows. 
The rising output per worker made possible by the increased use of robots and computers also will allow employees to work fewer hours and enjoy more leisure. 
Employees in the US currently work an average of 1,790 hours a year, 30% more than their German counterparts, who average just 1,371 hours per year. 
A reduction in working hours per employee translates into quality-of-life improvements like longer vacations and longer weekends. 
Fewer working hours will also provide more opportunities for travel, eating out, and other activities that create jobs for service workers. 
The aging of the population will increase the need for service-sector employees in hospitals and nursing homes as well. 
These trends will fuel higher demand for workers in the service sector, which now accounts for 81% of employment in the US. 
The share of workers in the US service sector increases year after year; it is where those who lose jobs in manufacturing or construction find new ones. 
And computers and robots simply cannot replace many of these jobs. 
Although they can provide some of the services that older people will increasingly need, for example, they cannot provide the services that involve actually touching clients and patients. 
People choosing careers will bear such considerations in mind as they select occupations. 
That, too, will hold down the unemployment rate in the future. 
The US unemployment rate currently is less than half the rate in the European Union. 
There are many reasons for the disparity; but a critical one is the absence in the US of labor laws and union rules that prevent employees and firms from adapting to the new technologies. 
If the US maintains a relatively free labor market, employees will adjust positively to the changing technology. 

A Healthier Global Health Agenda 
LONDON – On September 25, world leaders will meet in New York at a special session of the United Nations to chart a path to a new set of Sustainable Development Goals (SDGs). 
Described as a “generational opportunity,” the potential is indeed great. 
But indications so far suggest that optimal health goals could be derailed. 
The SDGs will succeed the Millennium Development Goals, which were adopted in 2000 and expire in 2015. The MDGs have proved instrumental in galvanizing political will and focusing financial resources on a limited set of basic needs in low- and middle-income countries. 
The lives of millions of people, particularly in Sub-Saharan Africa, have been improved. 
The SDG framework has been the subject of a year of widespread consultation, lobbying, and debate. 
Consensus is emerging in a few areas: the new goals should address the unfinished MDGs; they should include not only poverty, but also planetary limits, including climate change; and they should be universal in scope, addressing challenges such as widening inequality in poor and rich countries alike. 
A universal health goal also makes a lot of sense. 
Some conditions, such as neglected tropical diseases, are unique to developing countries, while others, like AIDS, tuberculosis, malaria, and maternal mortality, affect poor countries disproportionately. 
But, for the most part, a universal set of maladies has emerged over the past decade, accounting for the vast bulk of ill health and preventable death in all regions of the world. 
Unfortunately, the proposed health agenda seems to ignore this trend. 
The Global Burden of Disease Study, conducted by hundreds of scientists collaborating over many years, provides the best comparable estimates regarding causes of death and disability and their underlying risk factors. 
The data are clear about what makes us sick and kills us prematurely. 
Non-communicable diseases accounted for two out of every three deaths worldwide in 2010, and projections indicate that by 2030, NCDs will be the most common cause of death in Africa. 
These deaths are largely driven by a few risky behaviors: tobacco smoking (second in the global ranking of risk factors), alcohol use (ranked third), obesity and poor nutrition (ranked sixth and seventh, respectively), and physical inactivity (ranked tenth). 
In late July, UN Secretary-General Ban Ki-moon published a short report to inform the upcoming General Assembly debate. 
While clear about the need to address the existing MDGs, the report only briefly mentions the burden of NCDs. 
While it calls for action to “promote healthy behaviors” it does not include any measures to curb smoking, reduce excessive alcohol consumption, or improve diets; instead, the report focuses solely on water, sanitation, and hygiene (all good things, to be sure). 
Why do NCDs, the world’s biggest killers, have such a low profile, given the evidence concerning current and future health needs? 
A look at the consultative processes that shaped the Secretary-General’s report provides some clues. 
Of the 99 papers reviewed for the health consultation, 15 came from organizations promoting sexual and reproductive health and rights, while only five were from NCD-focused groups (six if a paper from a group supported by the alcohol industry is included). 
Equally important, much evidence was simply ignored. 
A review of the documents presented to the Secretary-General’s High Level Panel on the Post-2015 Development Agenda, chaired by the Presidents of Indonesia and Liberia and the Prime Minister of Great Britain, reveals a broad range of recommendations, rooted in a deep understanding of current and future global health problems. 
The experts recognized that the world’s health problems are shifting away from communicable diseases toward NCDs. 
They gave a strong recommendation to include “interventions to reduce the consumption of alcohol and tobacco.” 
But the High Level Panel nonetheless arrived at a position that The Lancet, a leading medical journal, characterized as embodying a “weak” commitment to addressing NCDs. 
Relegating NCDs to a low position on the global health agenda is not new. 
An independent committee of experts convened by the World Health Organization found that the tobacco industry used creative, secretive, and effective tactics to divert the WHO’s focus from NCDs for years. 
Recent publications reveal that the food industry pursued similar strategies to influence global health policy. 
How can we overcome the role that vested interests may be playing in setting a global health agenda that fails to address key drivers of disease? 
Perhaps one answer lies in listening more to the communities directly affected by major health conditions. 
For example, people living with and affected by HIV organized vibrant social movements that issued demands for change at national and global levels, dismantled legal and social barriers that exacerbated risk, and articulated norms and standards in human-rights terms. 
As a result, huge progress has been made in preventing infections and keeping people living with HIV alive. 
The UN General Assembly could do well to listen and learn from that experience. 
Everyone, including the most marginalized and vulnerable, has a right to good health, which is essential to human dignity and economic development. 
But upholding this right requires that policymakers focus on what makes people sick. 
An agenda that powerful corporate interests would rather stifle might be a bitter pill for world leaders, but it is one that they should swallow sooner rather than later. 

Starved for Science 
AMSTERDAM – In the Mekong Delta, farmers obtain 6-7 tons of rice per hectare in dry seasons and 4-5 tons per hectare in wet seasons, using fast-maturing rice varieties that allow up to three consecutive yields annually. 
By contrast, West African rice farmers harvest only 1.5 tons per hectare of traditional upland rice annually, while other cereals yield no more than one ton – a figure comparable to yields in medieval Europe. 
Such disparities are unnecessary. 
Indeed, the proliferation of agricultural technology – from more efficient machinery to higher-yielding or more robust crop varieties – has the potential to narrow the productivity gap considerably, even if differences between climates and producers remain. 
For example, a new variety of African upland rice, Nerica, triples annual yields. 
Likewise, over the last four decades, improved breeding methods, higher-quality feed, and better veterinary care have more than doubled average milk production worldwide. 
Nevertheless, regional discrepancies remain massive: cows in the Netherlands can produce roughly 9,000 liters of milk annually, while Zebu cattle in the tropics produce only about 300 liters. 
The need to increase agricultural output becomes more urgent every day. 
The global population is set to reach nine billion by 2050, while people in the developing world – where nearly all of the population growth will occur – are seeking more varied diets. 
By 2030, demand for animal products will double, with overall food demand rising by 40%. 
Science has much to contribute to global food security. 
While genetic modification is not essential to feed the world, it does provide significant advantages, enabling scientists to introduce or enhance traits – virus resistance in cassava, for example, or improved digestibility of feed – that cannot be realized with conventional breeding. 
To be sure, raising yields is not the same as feeding the world. 
If a vast swath of the population cannot afford the food that is produced, the size of the yield is irrelevant. 
While nearly one billion people have been lifted out of poverty (defined by the World Bank as an income of less than $1.25 per day, in purchasing-power-parity terms) in the last 20 years, such progress will prove more difficult for the next billion. 
Given this, policymakers should redouble their efforts to reduce poverty by supporting sustainable and inclusive economic growth. 
They should commit to advancing sound agricultural management, maintaining well-functioning markets, and increasing investment in agriculture. 
At the same time, these objectives, while pressing, should not obscure the need to focus on yields – increases in which have accounted for three-quarters of food-production growth in recent decades. 
Fortunately, the most significant potential limitations – land, water, and nutrients – seem unlikely to constrain global output excessively in the foreseeable future. 
But, while none is in short supply globally, local shortages may occur. 
Although crop land per capita will continue to decline, more arable land is available worldwide than previously thought. 
The example of the use of the Brazilian cerrado, once considered useless, augurs well for the African savannas. 
Underused land reserves also exist elsewhere in South America, Central Asia, and Eastern Europe. 
A more immediate challenge is ensuring that crops receive sufficient water, which requires building and maintaining efficient irrigation systems to stabilize yields and enable farmers to harvest an additional crop each year. 
As it stands, only 4% of arable land in Sub-Saharan Africa is irrigated, compared to 38% in Asia. 
While the Middle East will face serious water shortages, Africa, where most population growth is set to occur, contains numerous unexploited water sources. 
Fertilizer use has become significantly more efficient in recent years, a trend that will continue. 
Reserves of minerals like phosphate will remain plentiful in the next decades, and nitrogen is not limited. 
Technology to extract nutrients from waste already exists, reducing dependency on mining. 
Moreover, pigs and poultry are ideal food-waste processors, and their effluents can serve again as nutrient and energy sources, turning future food chains into interconnected production cycles. 
Perhaps the most pressing constraint on agricultural production is the impending labor shortage, as rural young people, who traditionally comprise the agricultural labor force, flock to cities. 
With small farmers unable to provide sufficient surpluses, agricultural production will become increasingly consolidated and mechanized, raising fossil-fuel consumption, which will have to be offset by the introduction of more efficient technologies. 
Of course, future food production is subject to significant uncertainty. 
Population growth may not slow down as rapidly as expected. 
Protectionism threatens open markets and GDP growth. 
And price volatility, whether triggered by drought or short-sighted national policies, could deter investments in agriculture and decrease the poor’s purchasing power. 
Whether climate change will be a source of yield uncertainty in the coming decades remains unclear as well. 
Although precipitation may be affected, higher temperatures would enable agricultural production in colder regions, and CO2 is known to bolster plant growth, even in dry areas. 
In addition, while food hygiene, traceability, and labeling are improving, any amount of negligence when it comes to food safety could have far-reaching consequences in the complex and interconnected global food chain. 
Rising demand for animal products highlights microbiological risks, with animal-welfare measures sometimes creating new hazards. 
For example, open pens for poultry may increase the spread of communicable diseases like avian influenza. 
Despite such risks, the outlook for future food security is promising. 
Our food is safer and our diets are more diverse than ever before; production methods are becoming increasingly sustainable, clean, and efficient; and we are constantly becoming better at protecting biodiversity. 
Yet many in Europe and the United States – which have benefited most from agricultural advances – are mistrustful of this progress, viewing scientific advancement and free trade as a dangerous combination. 
To the extent that this perception impedes progress, it is the real threat to global food security. 

How Terrorism's Victims Became Perpetrators 
Why is America in trouble? 
September 11 was a traumatic event that shook the nation to its core. 
But it would not have changed the course of history for the worse if President Bush had not responded as he did. 
Declaring war on terrorism was understandable, perhaps even appropriate, as a figure of speech. 
The problem is that President Bush meant it literally. 
I believe there is a direct connection between this and the abuse of detainees by US soldiers in Abu Ghraib prison. 
What happened at Abu Ghraib was not a case of a few bad apples, but a pattern tolerated and even encouraged by American authorities. 
For example, the Judge Advocate General Corps routinely observes military interrogations from behind a two-way mirror; that practice was discontinued in Afghanistan and Iraq. 
The International Red Cross and others started complaining about abuses as early as December 2002. 
It is easy to see how terrorism can lead to torture. 
Last summer, I took an informal poll at a meeting of Wall Street investors to find out whether they would condone the use of torture to prevent a terrorist attack. 
The consensus was that they hoped somebody would do it without their knowing about it. 
Americans, sadly, are now victims who have turned into perpetrators. 
Indeed, since September 2001, the war on terror has claimed more innocent victims than those terrorist attacks. 
This fact is unrecognized at home because the victims of the war on terror are not Americans. 
But the rest of the world does not draw the same distinction, and world opinion has turned against America. 
The Bush administration knew what it was doing when it declared war on terror and used that pretext for invading Iraq. 
Perhaps Bush did not personally recognize this, but Vice President Dick Cheney and a group of extremists concentrated in and around the Pentagon did. 
These people are guided by the belief that international relations are relations of power, not law. 
Because America is the most powerful nation on earth, it ought to use that power more assertively. 
They advocated the overthrow of Saddam Hussein even before Bush was elected and won him to their cause after September 11. 
The invasion of Afghanistan could be justified on the grounds that the Taliban provided Bin Laden and Al Qaeda with a secure training ground. 
Invading Iraq could not be similarly justified. 
Nevertheless, the ideologues in the administration were determined to pursue it because, in the words of Paul Wolfowitz, "it was doable." 
President Bush managed to convince the nation that Saddam Hussein had some connection with the suicide bombers of September 11, and that he possessed weapons of mass destruction. 
When both claims proved false, he argued that America invaded Iraq to liberate the Iraqi people. 
That claim was even more far-fetched. 
If America had really cared for the Iraqi people, more troops would have been sent to provide protection not only for the Ministry of Oil, but for museums and hospitals, too. 
Instead, Iraq was devastated by looting. 
Now that America's position has become unsustainable, the Bush administration is handing over power to local militias in Falluja and elsewhere. 
This prepares the ground for religious and ethnic divisions and possible civil war à la Bosnia, rather than democracy. 
I would love to pin the blame for all this on Bush and his team. 
But that would ignore that Bush was playing to a receptive audience. 
Indeed, after all that has happened, a majority of the US electorate continues to have confidence in Bush on national security matters. 
If this continues and Bush is reelected, Americans must ask the question: "What is wrong with us?" 
America needs profound soul-searching. 
The terrorists seem to have hit upon a weak point in America's collective psyche. 
They have made Americans fearful and found a willing co-conspirator in the Bush administration. 
For reasons of its own, the Bush administration has found it advantageous to nurture the fear that September 11 engendered. 
By declaring war on terror, Bush united the country behind him. 
But fear is a bad counselor. 
By succumbing to fear Americans are doing the terrorists' bidding: unleashing a vicious cycle of violence that may result in a permanent state of war. 
The war on terror need never end; because the terrorists are invisible, they will never disappear. 
The war on terror polarizes the world. 
In battles for survival, whether in Yugoslavia or Israel, everyone sticks with his own tribe or nation, whether its policies are right or wrong. 
This is the state of mind that Bush sought to foster when he declared that those who are not "with us" are with the terrorists. 
That attitude cannot be reconciled with an open society, a concept based on the recognition that nobody possesses ultimate truth. 
Might is not necessarily right. 
It is not enough to reject the Bush administration's policies; Americans must reaffirm the values and principles of an open society. 
The war on terror is an aberration. America must defend itself against terrorist attacks, but that cannot be allowed to become the overarching objective of its existence. 
Today, no single country or combination of countries can stand up to American military might. 
The main threat to America's dominant position comes not from outside, but from within. 
If Americans fail to recognize that they may be wrong, they risk undermining the country's dominant position. 
Being the most powerful nation gives America privileges, but it also imposes obligations. 
If Americans want to preserve their privileged position, they must not use it to dictate to the rest of the world, but for the well being of others. 
Indeed, many problems-maintaining peace, ensuring law and order, protecting the environment, reducing poverty, and fighting terrorism-require collective action. 
Americans cannot do anything they want, but little can be done without US leadership or active participation. 
Instead of undermining and demeaning international institutions because they do not necessarily follow America's will, the US should strengthen and improve them. 
Instead of engaging in preemptive military actions, the US should pursue preventive actions of a constructive nature, creating a better balance between carrots and sticks in the prevailing world order. 

Emerging Markets’ Euro Nemesis 
BRUSSELS – Emerging markets’ currencies are crashing, and their central banks are busy tightening policy, trying to stabilize their countries’ financial markets. 
Who is to blame for this state of affairs? 
A few years ago, when the US Federal Reserve embarked on yet another round of “quantitative easing,” some emerging-market leaders complained loudly. 
They viewed the Fed’s open-ended purchases of long-term securities as an attempt to engineer a competitive devaluation of the dollar and worried that ultra-easy monetary conditions in the United States would unleash a flood of “hot money” inflows, driving up their exchange rates. 
This, they feared, would not only diminish their export competitiveness and push their external accounts into deficit; it would also expose them to the harsh consequences of a sudden stop in capital inflows when US policymakers reversed course. 
At first sight, these fears appear to have been well founded. 
As the title of a recent paper published by the International Monetary Fund succinctly puts it, “Capital Flows are Fickle: Anytime, Anywhere.” 
The mere announcement that the Fed might scale down its unconventional monetary-policy operations has led to today’s capital flight from emerging markets. 
But this view misses the real reason why capital flowed into emerging markets over the last few years, and why the external accounts of so many of them have swung into deficit. 
The real culprit is the euro. 
Quantitative easing in the US cannot have been behind these large swings in global current-account balances, because America’s external deficit has not changed significantly in recent years. 
This is also what one would expect from economic theory: in conditions approaching a liquidity trap, the impact of unconventional monetary policies on financial conditions and demand is likely to be modest. 
Indeed, the available models tell us that, to the extent that an expansionary monetary policy actually does have an impact on the economy, its effect on the current account should not be large, because any positive effect on exports from a weaker exchange rate should be offset by larger imports due to the increase in domestic demand. 
This is what has happened in the US, and its recent economic revival has been accompanied by an expansion of both exports and imports. 
The impact of the various rounds of quantitative easing on emerging markets (and on the rest of the world) has thus been approximately neutral. 
But austerity in Europe has had a profound impact on the eurozone’s current account, which has swung from a deficit of almost $100 billion in 2008 to a surplus of almost $300 billion this year. 
This was a consequence of the sudden stop of capital flows to the eurozone’s southern members, which forced these countries to turn their current accounts from a combined deficit of $300 billion five years ago to a small surplus today. 
Because the external-surplus countries of the eurozone’s north, Germany and Netherlands, did not expand their demand, the eurozone overall is now running the world’s largest current-account surplus – exceeding even that of China, which has long been accused of engaging in competitive currency manipulation. 
This extraordinary swing of almost $400 billion in the eurozone’s current-account balance did not result from a “competitive devaluation”; the euro has remained strong. 
So the real reason for the eurozone’s large external surplus today is that internal demand has been so weak that imports have been practically stagnant over the last five years (the average annual growth rate was a paltry 0.25%). 
The cause of this state of affairs, in one word, is austerity. 
Weak demand in Europe is the real reason why emerging markets’ current accounts deteriorated (and, with the exception of China, swung into deficit). 
Thus, if anything, emerging-market leaders should have complained about European austerity, not about US quantitative easing. 
Fed Chairman Ben Bernanke’s talk of “tapering” quantitative easing might have triggered the current bout of instability; but emerging markets’ underlying vulnerability was made in Europe. 
The fickleness of capital markets poses once again the paradox of thrift. 
As capital withdraws from emerging markets, these countries soon will be forced to adopt their own austerity measures and run current-account surpluses, much like the eurozone periphery today. 
But who will then be able – and willing – to run deficits? 
Two of the world’s three largest economies come to mind: China, given the strength of its balance sheet, and the eurozone, given the euro’s status as a reserve currency. 
But both appear committed to running large surpluses (indeed, the two largest in the world). 
This implies that, unless the US resumes its role as consumer of last resort, the latest bout of financial-market jitters will weaken the global economy again. 
And any global recovery promises to be unbalanced – that is, if it materializes at all. 

How the French Plunder Africa 
France's unchallenged political, economic, and military domination of its former sub-Saharan African colonies is rooted in a currency, the CFA franc. 
Created in 1948 to help France control the destiny of its colonies, fourteen countries--Benin, Burkina-Faso, Ivory Coast, Mali, Niger, Senegal, Togo, Cameroon, Central African Republic, Congo, Gabon, Equatorial Guinea, Bissau Guinea, and Chad--maintained the franc zone even after they gained independence decades ago. 
In exchange for France guaranteeing the CFA franc's convertibility, these countries agreed to deposit 65% of their foreign exchange reserves in a special account within the French Treasury and granted to France a veto over the franc zone's monetary policy whenever this special account was overdrawn. 
These decisions have had devastating consequences for forty years. 
The bulk of the CFA franc money supply comes from trade between France and its African allies. 
As a result, the franc zone's basic features have always been scarce money and high interest rates. 
On the other hand, in line with IMF and World Bank structural adjustment programs, strict budget discipline has kept inflation low--as if further belt tightening in the name of price stability was the right policy priority in desperately poor countries hit by decades of depressed demand. 
The result has been a lethal combination of currency convertibility, skyrocketing interest rates, low inflation, and free capital movement, which merely fuels speculation and capital flight. 
Speculators transfer huge amounts of money from France to high-interest-bearing local deposit accounts, collect their tax-free gains every three months, and take the no-risk plunge again. 
Commercial banks are awash with these volatile short-term speculative funds, which they lend to governments on the most stringent conditions. 
The banks and speculators reap handsome gains, governments are overburdened with unsustainable commercial debts, the domestic productive sector is starved of medium- and long-term financing, and most people remain mired in appalling poverty. 
Capital flight, meanwhile, stems from free transfer of profits, debt payments, and the propensity of the elite to exile their assets. 
This massive hemorrhage of foreign currency is channeled exclusively to France, thanks to a capital control it put in place in 1993. 
As a result, some of the poorest countries in the world are financing part of the French budget deficit. 
The only rational reason for the CFA franc's existence is connivance between France and the governing elites of its former colonies in order to plunder the franc zone states. 
Even the common currency's beneficial effects on trade among member countries were nullified by the paradoxical decision taken by the former sub-Saharan French colonies to dismantle the federal governmental structure and the single market of colonial times and to erect trade barriers in their place. 
As though all of this were not bad enough, the CFA franc's exchange rate, which had remained unchanged since 1948, was devalued by 50% in 1994. 
What better time--from the prospective of foreign investors, that is--to undertake a vast privatization of state assets? 
Under the auspices of the IMF and the World Bank, lucrative sectors such as energy, telecommunications, water supply, and banks were sold off at knockdown prices to western companies. 
So the end result of the partnership between France and its former African colonies has been spectacularly lopsided. 
France has secured a vast market for its products, a steady supply of cheap raw materials, repatriation of the lion's share of local savings, unrivaled political influence, a strategic presence with military bases occupied free of charge, and the certainty that it can rely on its African allies' diplomatic support. 
But for the Africans, the partnership has meant weak trade performance, tight money, high interest rates, massive capital flight, and mountains of debt whose repayment prevents higher investment in education, training, health, food production, housing, and industry. 
This arrangement's negative effects extend, moreover, to the entire African continent. 
At the political level, France and its allies opposed the concept of a continental government advocated in the late 1950's and early 1960's by the likes of Nasser and Nkrumah. 
They helped block the project and establish the notoriously inefficient African club of heads of states, the Organization of African Unity (OAU), thus setting back the clock of African integration by decades. 
When the OAU mandated the Economic Community of West African States (ECOWAS) to promote regional economic and monetary union, France and its allies moved quickly to impede it by spearheading the creation of the West African Economic and Monetary Union (UEMOA) and the Central African Economic and Monetary Union (CEMAC). 
This partly prevented ECOWAS from emulating the economic performance of it sister organizations, the Southern African Development Community (SADC) and the Common Market of East and Southern Africa (COMESA). 
But for France's African allies, grafting a program of economic integration onto a pre-existing artificial monetary union is delusory and unworkable. 
Indeed, it has been tearing apart the fabric of these societies ever since so-called independence came in 1960. 
No wonder that nowadays most of these countries face civil unrest, rebellion, and risk of implosion. 
If French Africa is to grow, the franc zone must be dismantled. 
The euro's birth provided an opportunity for these former colonies to break free of France's suffocating embrace. 
They missed it. 
Instead, they shifted the peg for the CFA franc to the euro while keeping the same rules, institutions, and mode of functioning. 
For the citizens of Francophone Africa, this will certainly have tragic consequences. 

A Time for Action in the Middle East 
LONDON – The announcement, following the use of chemical weapons in Syria, of an emergency summit in Jordan this week of military leaders from the United States, the United Kingdom, France, Germany, Italy, Canada, Turkey, Saudi Arabia, and Qatar is a welcome development. 
Western policy is at a crossroads: commentary or action; shaping events or reacting to them. 
After the long and painful campaigns in Iraq and Afghanistan, I understand every impulse to stay clear of the turmoil, to watch but not to intervene, to ratchet up language but not to engage in the hard, even harsh business of changing reality on the ground. 
But we have to understand the consequences of wringing our hands instead of putting them to work. 
People wince at the thought of intervention. 
But contemplate the future consequences of inaction and shudder: Syria, mired in the carnage between the brutality of Bashar al-Assad and various affiliates of Al Qaeda, a breeding ground of extremism infinitely more dangerous than Afghanistan in the 1990’s; 
Egypt in chaos, with the West, however unfairly, looking as if it is giving succor to those who would turn it into a Sunni version of Iran; and Iran itself, despite its new president, still a theocratic dictatorship, with a nuclear bomb. 
The West would appear confused, its allies would be dismayed, and its enemies would be emboldened. 
This is a nightmare scenario, but it is not far-fetched. 
Start with Egypt. 
To many in the West, it is clear that the Egyptian military has removed a democratically elected government and is now repressing a legitimate political party, killing its supporters and imprisoning its leaders. 
So we are on a steady track toward ostracizing the new government. 
In doing so, we think that we are upholding our values. 
I completely understand this view. 
But to embrace it would be a grave strategic error. 
The fallacy of this approach lies in the Muslim Brotherhood’s nature. 
We think of it as a normal political party. 
It is not. 
If you want to join the UK Conservative Party or the German Christian Democrats or America’s Democratic Party, you can do so easily, and they will welcome you with open arms. 
In all of these countries, all parties respect basic democratic freedoms. 
The Muslim Brotherhood is not such a party. 
Becoming a member is a seven-year process of induction and indoctrination. 
The Brotherhood is a movement run by a hierarchy that is more akin to the Bolsheviks. 
Read their speeches – those put out not for Western ears, but for their own. 
What they were doing in Egypt was not “governing badly.” 
If you elect a bad government, then tough – you live with it. 
The Muslim Brotherhood, by contrast, was systematically changing the constitution and taking control of the commanding heights of the state in order to make it impossible for its rule to be challenged. 
And it was doing so in pursuit of values that contradict everything for which democracy stands. 
So you can rightly criticize the actions or overreactions of Egypt’s new military government; but it is difficult to criticize the intervention that brought it into being. 
Now all of the choices that Egypt faces are ugly. 
There are large numbers of soldiers and police among the casualties, as well as civilians; and, partly as a byproduct of the fall of Libya’s Muammar el-Qaddafi, Egypt is awash with weapons. 
But simply condemning the military will not bring a return to democracy any nearer. 
Egypt is not a creation of nineteenth- or twentieth-century global power games. 
It is an ancient civilization stretching back thousands of years, imbued with fierce national pride. 
The army has a special place in its society. 
The people do want democracy, but they will be disdainful of Western critics whom they will see as utterly naive in the face of the threat to democracy that the Muslim Brotherhood posed. 
We should support the new government in stabilizing the country; urge everyone, including the Muslim Brotherhood, to get off the streets; and let a proper and short process to an election with independent observers be put in place. 
A new constitution that protects minority rights and the basic ethos of the country should be drafted, and all political parties should operate according to rules that ensure transparency and commitment to the democratic process. 
This is the only realistic way to help those – probably a majority – who want genuine democracy, not an election used as a route to domination. 
In Syria, we know what is happening – and that it is wrong to let it happen. 
But leave aside any moral argument and just think of the world’s interests for a moment. 
Doing nothing would mean Syria’s disintegration, divided in blood, with the countries around it destabilized and waves of terrorism rolling over the region. 
Assad would remain in power in the richest part of the country, with bitter sectarian fury reigning in the country’s eastern hinterland. 
Iran, with Russia’s support, would be ascendant – and the West apparently impotent. 
I hear people talk as if nothing can be done: the Syrian defense systems are too powerful, the issues too complex, and in any event, why take sides when one is as bad as the next? 
But others are taking sides. 
They are not terrified of the prospect of intervention. 
They are intervening in support of a regime that is assaulting civilians in ways not seen since the dark days of Saddam Hussein. 
It is time we took a side: the side of the people who want what we want; who see our societies, for all their faults, as something to admire; who know that they should not be faced with a choice between tyranny and theocracy. 
I detest the implicit notion behind so much of our commentary that the Arabs or, even worse, the people of Islam, are unable to understand what a free society looks like, that they cannot be trusted with something so modern as a polity where religion is in its proper place. 
It is not true. 
What is true is that there is a life-and-death struggle going on over the future of Islam, with extremists aiming to subvert both its open-minded tradition and the modern world. 
In this struggle, we should not be neutral. 
Wherever this extremism is destroying the lives of innocent people – from Iran to Syria, Egypt, Libya, and Tunisia, as well as elsewhere in Africa, Central Asia, and the Far East – we should be at their side. 
As one of the architects of policy after the terror attacks of September 11, 2001, I know the controversy, anguish, and cost of the decisions taken. 
I understand why the pendulum has swung so heavily the other way. 
But it is not necessary to revert to that policy to make a difference. 
And the forces that made intervention in Afghanistan and Iraq so difficult are of course the very forces at the heart of the storm today. 
They have to be defeated. 
We should defeat them, however long it takes, because otherwise they will not disappear. 
They will grow stronger, until we will reach another crossroads; at that point, there will be no choice. 

How to Avoid a Double-Dip Global Recession 
NEW YORK -- There is an ongoing debate among global policymakers about when and how fast to exit from the strong monetary and fiscal stimulus that prevented the Great Recession of 2008-2009 from turning into a new Great Depression. 
Germany and the European Central Bank are pushing aggressively for early fiscal austerity; the United States is worried about the risks of excessively early fiscal consolidation. 
In fact, policymakers are damned if they do and damned if they don’t. 
If they take away the monetary and fiscal stimulus too soon – when private demand remains shaky – there is a risk of falling back into recession and deflation. 
While fiscal austerity may be necessary in countries with large deficits and debt, raising taxes and cutting government spending may make the recession and deflation worse. 
On the other hand, if policymakers maintain the stimulus for too long, runaway fiscal deficits may lead to a sovereign debt crisis (markets are already punishing fiscally undisciplined countries with larger sovereign spreads). 
Or, if these deficits are monetized, high inflation may force up long-term interest rates and again choke off economic recovery. 
The problem is compounded by the fact that, for the last decade, the US and other deficit countries – including the United Kingdom, Spain, Greece, Portugal, Ireland, Iceland, Dubai, and Australia – have been consumers of first and last resort, spending more than their income and running current-account deficits. 
Meanwhile, emerging Asian economies – particularly China – together with Japan, Germany, and a few other countries have been the producers of first and last resort, spending less than their income and running current-account surpluses. 
Overspending countries are now retrenching, owing to the need to reduce their private and public spending, to import less, and to reduce their external deficits and deleverage. 
But if the deficit countries spend less while the surplus countries don’t compensate by savings less and spending more – especially on private and public consumption – then excess productive capacity will meet a lack of aggregate demand, leading to another slump in global economic growth. 
So what should policymakers do? 
First, in countries where early fiscal austerity is necessary to prevent a fiscal crisis, monetary policy should be much easier – via lower policy rates and more quantitative easing – to compensate for the recessionary and deflationary effects of fiscal tightening. 
In general, near-zero policy rates should be maintained in most advanced economies to support the economic recovery. 
Second, countries where bond-market vigilantes have not yet awakened – the US, the UK, and Japan – should maintain their fiscal stimulus while designing credible fiscal consolidation plans to be implemented later over the medium term. 
Third, over-saving countries like China and emerging Asia, Germany, and Japan should implement policies that reduce their savings and current-account surpluses. 
Specifically, China and emerging Asia should implement reforms that reduce the need for precautionary savings and let their currencies appreciate; 
Germany should maintain its fiscal stimulus and extend it into 2011, rather than starting its ill-conceived fiscal austerity now; and Japan should pursue measures to reduce its current-account surplus and stimulate real incomes and consumption. 
Fourth, countries with current-account surpluses should let their undervalued currencies appreciate, while the ECB should follow an easier monetary policy that accommodates a gradual further weakening of the euro to restore competiveness and growth in the eurozone. 
Fifth, in countries where private-sector deleveraging is very rapid via a fall in private consumption and private investment, the fiscal stimulus should be maintained and extended, as long as financial markets do not perceive those deficits as unsustainable. 
Sixth, while regulatory reform that increases the liquidity and capital ratios for financial institutions is necessary, those higher ratios should be phased in gradually to prevent a further worsening of the credit crunch. 
Seventh, in countries where private and public debt levels are unsustainable – household debt in countries where the housing boom has gone bust and debts of governments, like Greece’s, that suffer from insolvency rather than just illiquidity – liabilities should be restructured and reduced to prevent a severe debt deflation and contraction of spending. 
Finally, the International Monetary Fund, the European Union, and other multilateral institutions should provide generous lender-of-last-resort support in order to prevent a severe deflationary recession in countries that need private and public deleveraging. 
In general, deleveraging by households, governments, and financial institutions should be gradual – and supported by currency weakening – if we are to avoid a double-dip recession and a worsening of deflation. 
Countries that can still afford fiscal stimulus and need to reduce their savings and increase spending should contribute to the global current-account adjustment – via currency adjustments and expenditure increases – in order to prevent a global shortage of aggregate demand. 
Failure to implement such coordinated policy measures – to sustain global aggregate demand at a time when deflationary trends are still severe in advanced economies – could lead to a very dangerous and damaging double-dip recession in advanced economies. 
Such an outcome would cause another bout of severe systemic risk in global financial markets, trigger a series of contagious sovereign defaults, and severely damage the growth prospects of emerging-market economies that have so far experienced a more robust recovery than advanced countries. 

How to Bail out Good Banks and Let Bad Banks Fail 
LOS ANGELES – How should large-scale systemic failures of a country’s financial system be addressed? 
Nobody wants to bail out banks that make bad decisions. 
But to save a financial system from collapse requires preventing all banks from failing at the same time. 
We need a way to bail out good banks but allow bad banks to fail. 
But how can we distinguish good banks from bad? 
When markets panic, as they did in 1929 and again in 2008, supporting the financial system is essential. 
The alternative would be a 1930’s-style depression. 
But that does not mean that we should bail out individual banks. 
Recent economic history is replete with examples of financial crises: the United States in the late 1980’s; Sweden, Finland, and Norway in 1992; 
Japan in 1998; and much of the world economy in 2008. The ways these crises were handled offer important lessons. 
In 1992, Sweden’s central bank, the Riksbank, allowed private bank equity holders to be wiped out, but it rescued depositors and creditors by buying up risky assets of failing institutions. 
Sweden recovered. 
Japan recapitalized its banks in 1998, but did not wipe out equity holders. 
Because insolvent banks were kept alive through government bailouts and guarantees, Japan provided the wrong incentives to its financial institutions. 
As a result, Japan never fully recovered from its recession. 
So the lesson is that we must allow equity holders to lose money sometimes in order to maintain a healthy financial system. 
An important role of central banks is to provide cash to potentially insolvent banks in times of panic, when all other sources of capital dry up. 
The central bank is the “lender of last resort.” 
But if bankers know that they will be bailed out in bad times, they have an incentive to make risky loans. 
These loans earn the banks a high return when the economy is strong, but are protected from losses by government bailouts when the economy weakens. 
In 2007, Lehman Brothers, AIG, and most other players in the financial markets were earning huge returns by trading derivatives backed by very risky mortgages. 
When US housing prices fell, some of these players should have gone bankrupt. 
But when the Federal Reserve allowed Lehman Brothers to fail in September of 2008, there was widespread panic, leading the Fed to intervene to prevent the collapse of every other major player. 
How could things have been managed differently? 
As Simon Johnson suggests in his book 13 Bankers, we should break up the mega-banks into smaller parts that can comfortably be allowed to fail. 
But it is not enough to have many small banks. 
We must also find a way to support the system as a whole. 
I propose a new policy solution that would support the whole but not the parts. 
Central banks should put a floor under the value of a country’s banking system by committing to buy shares in an index fund of bank stocks at a predetermined price. 
This price commitment would take effect in times of financial panic. 
By guaranteeing to buy shares of a mutual fund, the central bank would provide an incentive for private investors to channel money to the stronger parts of the banking system while allowing the weaker parts to fail. 
The index fund would be similar to the ones held by so many workers today in private pension plans. 
Individual banks would rise or fall in importance based on their value relative to the market index of all banks in the fund. 
By offering to buy shares in the mutual fund at a minimum preset price, the central bank would provide a way of channeling funds into the financial system in times of crisis. 
Although this plan would prop up the value of the financial system as a whole, it would still allow market forces to determine relative share prices of individual banks. 
If this structure had been in place in the US in 2008, when house prices collapsed, banks that held large portfolios of underperforming toxic assets would have started to drag down the value of the index fund. 
But these banks also would have fallen in importance in the total index. 
The Fed’s commitment to buy shares of the mutual fund at a preset price would have caused investors to put new capital into the stronger banks to take advantage of the central bank’s price support. 
This scheme for recapitalizing banks has three advantages over others that have been suggested by economists and politicians. 
First, it does not require government regulators to decide how much individual assets are worth, because private markets value toxic assets. 
Second, it removes the incentive for banks to make bad decisions. 
By allowing bad banks to fail, it solves the moral-hazard problem. 
Finally, by offering to buy shares in a mutual fund of bank stocks, the central bank gives private investors the incentive and the confidence to recapitalize the banking system. 
This plan would allow us to bail out good banks and allow bad banks to fail – without costing the taxpayer a penny. 

How to Emerge from the Crisis in 2009 
WASHINGTON, DC – In the maelstrom of events and news that characterize the current global crisis, it is often difficult to keep a clear head and a sense of what is really going on. 
But when one takes a step back (something easier to do on days when markets are closed), the picture becomes clearer, and so do the required policies. 
Let me first set the scene by making three observations on where we are today. 
First, in the advanced countries, we have probably seen the worst of the financial crisis. 
There are still land mines, from unknowable credit default swap (CDS) positions to hidden losses on balance sheets, but the worst days of frozen money markets and obscene risk spreads are probably over. 
Second, and unfortunately, the financial crisis has moved to emerging countries. 
In crossing borders, the sharp portfolio reallocations and the rush to safer assets are creating not only financial but also exchange-rate crises. 
Add to this the drop in output in advanced countries, and you can see how emerging countries now suffer from both higher credit costs and decreased export demand. 
Third, in the advanced economies, the hit to wealth, and even more so the specter of another Great Depression, has led people and firms to curtail spending sharply. 
Not only have they revised their spending plans, but, in many cases, they have delayed purchases, waiting for the uncertainty to clear. 
The result has been a sharp drop in output and employment, reinforcing fears about the future, and further decreasing spending. 
Let me now turn to policy. 
If my characterization of events is correct, then the right set of policies is straightforward: 
First, the measures put in place earlier to repair the financial system must be refined and consolidated. 
One silver lining of the worst days of the crisis in October was to scare governments into action on the financial front. 
Central banks generously provided liquidity. 
But governments soon realized that the main issue was solvency. 
They pledged to implement programs aimed at asset purchases (to clarify the balance sheets of financial institutions), recapitalization (to make sure that, if solvent, they could operate and continue to lend), and guarantees (to reassure depositors and some investors that their funds were safe). 
The basic architecture for these measures is now in place, but the implementation has been often haphazard. 
Lessons from previous banking crises around the world could have been learned faster. 
The twists and turns in some of the programs, most notably in the United States, have left markets confused, and have led private investors to stay on the sidelines, waiting for policy clarification before taking a stake in financial institutions. 
I have little doubt that learning by doing will eventually lead to coherent programs. 
But time has been lost. 
Second, emerging market countries must get help in adjusting to the financial crisis. 
It is not just a question of providing them with liquidity so that they can simply maintain their exchange rates in the face of a large capital outflows. 
Many investors who want out will not return for some time, and countries must accept this fact and adjust accordingly. 
In some cases, they can do this on their own, so all that is needed is liquidity support to avoid a collapse of the exchange rate and allow for the adjustment to occur. 
In other cases, the capital outflows only worsen already difficult situations. 
These countries need more than liquidity; they need financial help to carry out the necessary adjustments. 
Are the proper help measures in place? 
Yes and no. 
For a few countries, the main central banks have provided access to liquidity through swap lines. 
The International Monetary Fund, for its part, has created a new liquidity facility, enabling countries that pre-qualify to apply and get funds with little or no conditionality. 
For the time being, these arrangements have been sufficient. 
But liquidity provision needs to be provided on a more coherent and comprehensive basis. 
As for countries that need more help, this is the IMF’s natural function. 
A number of countries have already obtained funds under program lending. 
One may reasonably worry that the available funds will be depleted before the crisis is over. 
Third, governments must counteract the sharp drop in consumption and investment demand. 
In the absence of strong policies, it is too easy to think of scary scenarios in which depressed output and troubles in the financial system feed on each other, leading to further large drops in output. 
It is thus essential for governments to make clear that they will do everything to eliminate this downside risk. 
Can they credibly do it? 
The answer is yes. 
With interest rates already low, the room for monetary policy is limited. 
But the room for fiscal policy is wider, so governments must do two things urgently. 
First, in countries in which there is fiscal space, they must announce credible fiscal expansions; we – the IMF – believe that, as a whole, a global fiscal expansion about 2% of world GDP is both feasible and appropriate. 
Finally, and just as importantly, governments must indicate that, if conditions deteriorate, further fiscal expansion will be implemented. 
Only with such a commitment will people and firms be confident that we are not headed for a repeat of the Great Depression, and start spending again. 
My strong belief is that if these policies are followed, by the end of 2009, if not sooner, the world economy will start recovering from the crisis. 

How to End Hunger 
ISTANBUL/KUALA LUMPUR – Last September, world leaders made a commitment to end hunger by 2030, as part of the United Nations Sustainable Development Goals (SDGs). 
It sounds like a massive undertaking. 
In fact, the world already produces enough food to feed everyone. 
So why does the problem persist? 
Poverty and hunger are intimately connected, which is why the SDGs target elimination of both. 
For someone living at the World Bank’s poverty line of $1.90 per day, food would account for some 50-70% of income. 
The Bank estimates that almost four-fifths of the world’s poor live in rural areas, though those areas account for less than half of the world’s population. 
The obvious conclusion is that raising rural incomes sustainably is required to eradicate hunger. 
That will not be easy. 
Most developing countries nowadays are burdened by high rates of unemployment and underemployment. 
And with current economic prospects bleak, especially given low commodity prices, and insistence on fiscal austerity continuing in most places, downward pressure on rural incomes is likely to worsen. 
But even if countries do manage to achieve inclusive growth, it will not be enough to eliminate hunger by 2030. 
The only way to do that will be to implement well-designed social protection and scale up pro-poor investments. 
According to the World Bank, one billion people in 146 low- and middle-income countries currently receive some form of social protection. 
Yet 870 million of those living in extreme poverty, mainly in rural areas, lack coverage. 
Unsurprisingly, the greatest shortfalls are in low-income countries, where social protection covers less than one-tenth of the population, 47% of which lives in extreme poverty. 
In the lower-middle-income countries, social protection reaches about a quarter of those living in extreme poverty, leaving about a half-billion people without coverage. 
In the upper middle-income countries, about 45% of those living in extreme poverty receive social-welfare benefits. 
This is clearly not good enough. 
Improved social protection can help to ensure adequate food consumption and enable recipients to invest in their own nutrition, health, and other productive capacities. 
As such investments sustainably raise incomes, they enable further increases in productive personal investments, thereby breaking the vicious cycle of poverty and hunger. 
Governments, too, have investments to make, in order to ensure that those who are currently mired in poverty reach the point where they can invest in themselves. 
An early big investment push would generate additional incomes sooner, reducing longer-term financing costs. 
Moreover, it would boost aggregate demand in a world economy that badly needs it. 
The world can afford the needed investment. 
According to estimates by the Food and Agricultural Organization (FAO), the International Fund for Agricultural Development (IFAD), and the World Food Programme (WFP), it would cost the equivalent of 0.3% of the world’s 2014 income. 
All that is needed is for wealthier countries to provide budgetary support and technical assistance to the low-income countries that need it. 
(Most middle-income countries can afford the needed financing themselves.) 
It should not be difficult to generate the political will to provide the needed support, at least in theory. 
After all, it has been more than a half-century since the adoption of the Universal Declaration of Human Rights and its Covenant on Economic, Social, and Cultural Rights, which treats the material needs of all persons as a fundamental human right. 
A few years earlier, US President Franklin D. Roosevelt called “freedom from want” – which, presumably, includes freedom from hunger – one of four essential freedoms of which people “everywhere in the world” should be assured. 
Now, with the adoption of the SDGs, governments everywhere are obliged to take responsibility for ending poverty and hunger, as well as for creating the conditions for ensuring that both are permanently overcome. 
The upcoming High-Level Political Forum on Sustainable Development presents an important opportunity to forge the path ahead, setting near- and medium-term priorities. 
Ending hunger and poverty in a sustainable way is morally right, politically beneficial, and economically feasible. 
For world leaders, inaction is no longer an option. 

How to End the Greek Tragedy 
SANTIAGO – European leaders, faced with the reality of an insolvent Greece, are reportedly now considering a “Plan B” that would involve reducing the burden of its future debt payments. 
This is a welcome contrast to the options considered so far, all of which involved – under different guises – foisting more debt onto a country that has too much of it already. 
Greek public debt today stands at nearly 160% of the country’s official GDP. 
Suppose Greece took 25 years to bring it down to the Maastricht ceiling of 60%. 
If the real interest rate on Greek debt were 4% (more or less what Greece is paying now for the emergency loans from the European Union) and annual GDP grew by 2% on average, the required primary fiscal surplus each year for the next quarter-century would be 5.7% of GDP. 
That is an unimaginably large burden, and it risks condemning Greece to permanent recession and social unrest. 
A possible counterargument is that Greece has a large informal economy, so its actual GDP is larger than the official figure. 
As a result, the debt ratios commonly applied to Greece could be overstated. 
But informal output is of little use for debt service if it cannot be taxed. 
In any case, the scope for tax increases is severely limited in an economy that is shrinking quickly. 
The conclusion is clear: Greece’s debt-service burden is too large, and it must be reduced. 
This can be accomplished in two ways: sharply cutting the interest rate paid by Greece, or reducing the face value of the debt. 
Some analysts – most prominently Jeffrey Sachs – have argued that the best way forward is to cut the yield on Greek debt to that of German public debt. 
Germany currently pays a little over 3% nominal interest on 10-year debt, half of what Greece is being charged for emergency loans – and far less than Greece would pay if it attempted to raise money in private markets. 
This approach has several advantages: by leaving the face value of the debt unaltered, EU officials could argue that restructuring Greece’s debt did not amount to a default, thereby limiting contagion. 
European banks holding Greek government debt could keep pretending that it is worth its full value. 
And the European Central Bank would have fewer excuses to refuse Greek bonds as collateral. 
The question is whether the change in coupons – possibly coupled with an extension of maturities – would be enough to stabilize the Greek economy and restore growth. 
Even with German-level interest rates, Greece would have to run a primary surplus of at least 2% of GDP – still quite large, and far from today’s deficit. 
And, with the face value of the debt unchanged, the psychological drag on expectations and investment might linger. 
The alternative is to cut the face value of Greece’s debt. 
European leaders seem to be moving in this direction. 
The required cut is large: eliminating half of Greece’s public debt obligation would leave it at nearly 80% of GDP, a ratio higher than Spain’s. 
Talk of “haircuts” for private investors immediately triggers concerns about contagion. 
But markets are already assigning a high probability to a Greek default. 
The rating agencies have long placed Greek debt deep in junk territory, and are now giving Portuguese and Irish debt the same status. 
Rising spreads in Spain and Italy show that contagion is already occurring, even in the absence of an official decision to write down Greek debt. 
The EU is pinning its hopes on one mechanism to reduce Greek debt: loans from the European Financial Stability Facility that would allow Greece to buy its own debt at a discount in the secondary market. 
But, while allowing the EFSF to finance buybacks is a step forward, a slew of theoretical and empirical research, generated by developing countries’ efforts to buy back their debt in the 1980’s and 1990’s, has shown that it is far from a cure-all. 
The main reason is simple: as debt is reduced, its price rises in the secondary market, sharply curtailing the benefits to the borrower. 
So far, policymakers are talking only about exchanging old Greek bonds for cash (in buybacks) or new Greek bonds. 
It would be far preferable to exchange them for Eurobonds, backed by the full faith and credit of all eurozone countries. 
Nor are European ministers, still struggling to catch up with reality, yet considering involuntary debt exchanges. 
But, if the past 18 months are any guide, they soon will be. 

How to Fail in Stimulating Business Without Really Trying 
CAMBRIDGE: Debates about supply side reform often come down to slogans: flexible labor markets, deregulation, and more competition. 
Even when everyone agrees about what to do, however, nothing much usually happens. 
Suppose you are an economics minister serious about improving the supply side of your economy but short on specific ideas about what to do. 
One interesting answer comes from a research group at Harvard University organized by Andrei Shleifer, a distinguished economist who focuses on how governments make economic life harder than it need be. 
Shleifer’s research looks at 75 countries and asks how many formal steps it takes to establish (legally and without bribes) a new company, how long it takes to do so, and what is the cost. 
For if a country makes it hard to create companies, don’t be surprised if new companies are few and far between. 
And if companies are not created, where will growth and employment come from? 
The table (see at the bottom of the text) gives a flavor of the odyssey involved in setting up a business: an average for 75 countries shows more than 10 separate steps of getting various certificates and a cumulative time of 63 days spent in getting the paperwork done (assuming no bureaucratic delays) and total payments to government as high as one third of a year’s income. 
The numbers are stunning, particularly when you ask what does the state really do other than register a name and give out a tax number? 
Who has time to spend a 110 days, as in the Slovak Republic, running around government offices? 
What struggling entrepreneur has the money to spend a $1,000, as in Poland, on paper work? 
Canada wins this contest of bureaucracies: government interventions are minimal, user friendly and come at low cost; Canada’s performance is even better than the US. 
Who is worst? 
Bolivia. 
In between sits the rest of the 75, including Western Europe. 
Italy, to cite just one example, is a bureaucratic embarrassment where it takes 4 months for an entrepreneur to set up a business. 
Brazil, your typical Latin American country looks pretty awful in this competition; so do most Eastern European economies. 
Go beyond North America, the Nordic countries, Australia and New Zealand – the world supply side leaders – indeed, and conditions become awful real fast. 
Harvard’s researchers ask: is this red tape strictly necessary? 
Attempts to show the benefits of entry regulation on business fail miserably. 
Bureaucracies, Shleifer concludes, impose hurdles mostly to set themselves up for rip-offs, bribes or safe, comfortable jobs. 
Not only does an economy suffer by having fewer jobs than it might with more user-friendly entry conditions, it also suffers the burden of paying for and enduring a bureaucracy. 
Because excessive entry regulation serves no other purpose, reforming governments should act: eliminate the obstacle course. 
An argument is made, of course, that these hurdles mean nothing in practice: if obstacles to operating in the formal economy are too cumbersome, businesses simply go underground. 
They work just as well, the argument goes, so where is the damage? 
Nonsense. 
Not only is it bad economic strategy to criminalize business formation and operation by pushing it underground, the fact is that a lot of businesses simply won’t come into existence, not even in the informal sector. 
Suppose, once again, that you a minister in charge. 
You despise corruption and bureaucratic excess; you demand change. 
What to do? 
Brazil once experimented with a minister of de-bureaucratization. 
The new minister went around the country, looked at every single form to be filled out in the various interfaces with the government. 
He eliminated perhaps a third of them. 
This was a real triumph in a country where officials love to stamp papers for just about anything. 
What happened next? 
Nobody remembers: its job supposedly finished, the ministry went out of existence. 
Bureaucracy, however, is harder to kill. 
Today, Brazil’s paper maze is stronger than ever. 
This confirms a rule that Shleifer and his colleagues intuit: the only way to control bureaucrats is to get rid of as many as you can, permanently. 
So long as they squat in their offices, bureaucrats will find something to do and, unfortunately, it usually comes down to “protecting the public from business” or, in other words, impeding business from working. 

How to Fail to Recover 
NEW YORK – Some people thought that Barack Obama’s election would turn everything around for America. 
Because it has not, even after the passage of a huge stimulus bill, the presentation of a new program to deal with the underlying housing problem, and several plans to stabilize the financial system, some are even beginning to blame Obama and his team. 
Obama, however, inherited an economy in freefall, and could not possibly have turned things around in the short time since his inauguration. 
President Bush seemed like a deer caught in the headlights –�paralyzed, unable to do almost anything – for months before he left office. 
It is a relief that the US finally has a president who can act, and what he has been doing will make a big difference. 
Unfortunately, what he is doing is not enough. 
The stimulus package appears big – more than 2% of GDP per year – but one-third of it goes to tax cuts. 
And, with Americans facing a debt overhang, rapidly increasing unemployment (and the worst unemployment compensation system among major industrial countries), and falling asset prices, they are likely to save much of the tax cut. 
Almost half of the stimulus simply offsets the contractionary effect of cutbacks at the state level. 
America’s 50 states must maintain balanced budgets. 
The total shortfalls were estimated at $150 billion a few months ago; now the number must be much larger – indeed, California alone faces a shortfall of $40 billion. 
Household savings are finally beginning to rise, which is good for the long-run health of household finances, but disastrous for economic growth. 
Meanwhile, investment and exports are plummeting as well. 
America’s automatic stabilizers –�the progressivity of our tax systems, the strength of our welfare system – have been greatly weakened, but they will provide some stimulus, as the expected fiscal deficit soars to 10% of GDP. 
In short, the stimulus will strengthen America’s economy, but it is probably not enough to restore robust growth. 
This is bad news for the rest of the world, too, for a strong global recovery requires a strong American economy. 
The real failings in the Obama recovery program, however, lie not in the stimulus package but in its efforts to revive financial markets. 
America’s failures provide important lessons to countries around the world, which are or will be facing increasing problems with their banks: 
- Delaying bank restructuring is costly, in terms of both the eventual bailout costs and the damage to the overall economy in the interim. 
- Governments do not like to admit the full costs of the problem, so they give the banking system just enough to survive, but not enough to return it to health. 
- Confidence is important, but it must rest on sound fundamentals. 
Policies must not be based on the fiction that good loans were made, and that the business acumen of financial-market leaders and regulators will be validated once confidence is restored. 
- Bankers can be expected to act in their self-interest on the basis of incentives. 
Perverse incentives fueled excessive risk-taking, and banks that are near collapse but are too big to fail will engage in even more of it. 
Knowing that the government will pick up the pieces if necessary, they will postpone resolving mortgages and pay out billions in bonuses and dividends. 
- Socializing losses while privatizing gains is more worrisome than the consequences of nationalizing banks. 
American taxpayers are getting an increasingly bad deal. 
In the first round of cash infusions, they got about $0.67 in assets for every dollar they gave (though the assets were almost surely overvalued, and quickly fell in value). 
But in the recent cash infusions, it is estimated that Americans are getting $0.25, or less, for every dollar. 
Bad terms mean a large national debt in the future. 
One reason we may be getting bad terms is that if we got fair value for our money, we would by now be the dominant shareholder in at least one of the major banks. 
- Don’t confuse saving bankers and shareholders with saving banks. 
America could have saved its banks, but let the shareholders go, for far less than it has spent. 
- Trickle-down economics almost never works. 
Throwing money at banks hasn’t helped homeowners: foreclosures continue to increase. 
Letting AIG fail might have hurt some systemically important institutions, but dealing with that would have been better than to gamble upwards of $150 billion and hope that some of it might stick where it is important. 
- Lack of transparency got the US financial system into this trouble. 
Lack of transparency will not get it out. 
The Obama administration is promising to pick up losses to persuade hedge funds and other private investors to buy out banks’ bad assets. 
But this will not establish “market prices,” as the administration claims. 
With the government bearing losses, these are distorted prices. 
Bank losses have already occurred, and their gains must now come at taxpayers’ expense. 
Bringing in hedge funds as third parties will simply increase the cost. 
- Better to be forward looking than backward looking, focusing on reducing the risk of new loans and ensuring that funds create new lending capacity. 
Bygone are bygones. 
As a point of reference, $700 billion provided to a new bank, leveraged 10 to 1, could have financed $7 trillion of new loans. 
The era of believing that something can be created out of nothing should be over. 

How to Fight the Islamic State 
CAMBRIDGE – The Islamic State has captured the world’s attention with gruesome videos of beheadings, wanton destruction of antiquities, and skilled use of social media. 
It has also captured a large part of eastern Syria and western Iraq, proclaimed a caliphate based in Raqqa, Syria, and attracted foreign jihadists from around the world. 
US President Barack Obama says that the Islamic State must be degraded and ultimately defeated. 
He has appointed General John Allen to lead a coalition of some 60 countries in the task, relying on air strikes, special forces, and training missions. 
Some critics want him to send more American troops; others say that the United States should settle for a doctrine of containment. 
In the current US presidential campaign, some candidates are calling for “boots on the ground.” 
They are right: boots are needed. 
But the soldiers who wear them should be Sunni Arabs and Turks, not Americans. 
And that says a lot about the nature of the triple threat that the US and its allies now face. 
The Islamic State is three things: a transnational terrorist group, a proto-state, and a political ideology with religious roots. 
It grew out of al-Qaeda after the misguided US-led invasion of Iraq; and, like al-Qaeda, it appeals to extremist Sunni Islamists. 
But it has gone further, by establishing a caliphate, and is now a rival to al-Qaeda. 
Its possession of territory creates the legitimacy and capacity for offensive jihad, which it wages not only against infidels but also Shia and Sufi Muslims, whom it considers “takfir,” or not true Islamic monotheists. 
The Islamic State extols the purity of seventh-century Islam, but it is extremely adept at using twenty-first-century media. 
Its videos and social-media channels are effective tools for attracting a minority of Muslims – primarily young people from Europe, America, Africa, and Asia – who are struggling with their identity. 
Disgruntled, many are drawn to “Sheikh Google,” where Islamic State recruiters wait to prey upon them. 
By some estimates, there are more than 25,000 foreign fighters serving in the Islamic State today. 
Those who are killed are quickly replaced. 
The tripartite nature of the Islamic State creates a policy dilemma. 
On the one hand, it is important to use hard military power to deprive the caliphate of the territory that provides it both sanctuary and legitimacy. 
But if the American military footprint is too heavy, the Islamic State’s soft power will be strengthened, thus aiding its global recruiting efforts. 
That is why the boots on the ground must be Sunni. 
The presence of foreign or Shia troops reinforces the Islamic State’s claim of being surrounded and challenged by infidels. 
So far, thanks largely to effective Kurdish forces, who are overwhelmingly Sunni, the Islamic State has lost some 30% of the territory it held a year ago. 
But deploying additional Sunni infantry requires training, support, and time, as well as pressure on Iraq’s Shia-dominated central government to temper its sectarian approach. 
After the debacle in Libya (where the Islamic State supports jihadist militias and has announced the creation of three “distant provinces”), Obama is understandably reluctant to overthrow Syrian President Bashar al-Assad’s regime, only to see the Islamic State take control of more territory, accompanied by genocidal atrocities against Syria’s many non-Sunnis. 
But Assad is one of the Islamic State’s most effective recruiting tools. 
Many foreign jihadists respond to the prospect of helping to overthrow a tyrannical Alawite ruler who is killing Sunnis. 
The US diplomatic task is to persuade Assad’s supporters, Russia and Iran, to remove him without dismantling the remains of the Syrian state structure. 
A no-fly zone and a safe zone in northern Syria for the millions of displaced people could reinforce American diplomacy. 
And providing massive humanitarian assistance to the refugees (at which the American military is very effective) would increase US soft power enormously. 
As it stands, the funding and coordination of America’s soft-power strategy is inadequate. 
But we know that hard power is not enough, particularly to contest the cyber territory that the Islamic State occupies – for example, by developing a capacity to take down botnets and counter hostile social-media accounts. 
Even if the US and its allies defeat the Islamic State over the coming decade, we should be prepared for a similar Sunni extremist group to rise from the ashes. 
Revolutions of the type the Middle East is experiencing take a long time to resolve. 
The sources of revolutionary instability include tenuous post-colonial boundaries; arrested modernization; the failed “Arab Spring”; and religious sectarianism, exacerbated by the interstate rivalry between Sunni-ruled Saudi Arabia and Shia-ruled Iran. 
In Europe, wars of religion between Catholics and Protestants lasted for nearly a century and a half. 
The fighting ended (with the Peace of Westphalia in 1648) only after Germany lost a quarter of its population in the Thirty Years’ War. 
But it is also worth remembering that the coalitions of that time were complex, with Catholic France aiding Dutch Protestants against Catholic Habsburgs for dynastic rather than religious reasons. 
We should expect similar complexity in today’s Middle East. 
Looking ahead in a region where the US has interests as varied as energy, Israel’s security, nuclear non-proliferation, and human rights, American policymakers will need to follow a flexible strategy of “containment plus nudging,” which implies siding with different states and groups in different circumstances. 
For example, whether or not Iranian policy becomes more moderate, sometimes Iran will share US interests, and sometimes it will oppose them. In fact, the recent nuclear agreement may open opportunities for greater flexibility. 
To seize them, however, US foreign policy toward the Middle East will have to develop a higher level of sophistication than the current debate reveals. 
Joseph S. Nye recently co-chaired an Aspen Strategy Group discussion on the Islamic State and radicalism in the Middle East. 

How to Help Burma 
RANGOON – Across the Middle East, and now in Burma (Myanmar), one of the great questions of contemporary global politics has resurfaced: How can countries move from a failing authoritarianism to some form of self-sustaining pluralism? 
Foreign ministers everywhere, in turn, face crucial policy questions: When a country launches such a political transition, when should other countries help, and what is the best way to do so? 
Happy transitions, to paraphrase Tolstoy, are all alike; but every unhappy transition is unhappy in its own way. 
The happy transitions across much of Central Europe following the end of the Cold War were made easier by the fact that the old communist order more or less died on its feet and surrendered power peacefully. 
This, along with generous support from Western Europe, the United States, and others, helped to create a mood conducive to reconciliation, allowing each country to tackle in a measured, non-vengeful way the many difficult moral issues arising from the recent dark past. 
Above all, perhaps, these transitions took place amidst a wider network of legitimate institutions – the European Union, OSCE, NATO, and the Council of Europe – championing the rule of law. 
This supportive context provided a roadmap for national policymakers, helping them to build democratic institutions and marginalize extremists. 
Elsewhere in the world, things are not so easy. 
Discredited regimes may cling all the more ruthlessly and ruinously to power, as in Syria. 
Or they may create all sorts of new problems on their way out of power, as in Libya. 
Or they may be struggling to introduce democratic accountability while maintaining stability, as in Egypt. 
In Burma, we see another model – a bold attempt after decades of military rule to move in a controlled but purposeful way toward a new, inclusive form of government. 
Here there are striking similarities to what happened in Poland as communism ended. 
A military elite favors step-by-step reform, but wants to protect its position and is determined to avoid a descent into chaos. 
The opposition is led by a charismatic leader with huge popular support. 
And the ruling elite opens a number of parliamentary seats to a popular vote, only to be shocked by a landslide opposition win. 
Moreover, as was true in Poland, Burma’s opposition leaders must strike a delicate balance: satisfy their impatient supporters (many of whom have suffered mightily under the old regime), while offering those still in power the prospect of a worthwhile future. 
But there are key differences. 
Burma has a very different internal political dynamic, not least because of the complex relationships among its various ethnic and linguistic communities – social cleavages that were not an issue in largely homogeneous Poland’s transition. 
Moreover, unlike Poland when communism collapsed, Burma already has powerful business tycoons flourishing under the existing system – and they mean to maintain and develop their privileges. 
Above all, there is no immediate international institutional context encouraging steady change and establishing standards and benchmarks: Burma must find its own path. 
Earlier this month, I visited Burma, where I met President Thein Sein and the opposition leader Aung San Suu Kyi, as well as former political prisoners and many other activists. 
I came away convinced that Burma is a country on the move – and moving firmly in a good direction. 
All sides accept that this large and resource-rich country has under-performed for far too long. 
They also agree that a step-by-step approach, based on reconciliation, is better than an open struggle for power, which could quickly take on a calamitous ethnic dimension. 
That consensus will remain credible as long as political reform continues and economic growth accelerates. 
After such a long period of stagnation, people demand to see and feel changes for the better in their own lives. 
The rest of us should be constructive and creative, not prescriptive and pernickety. 
Above all, we should be patient. 
The EU’s suspension of sanctions and general readiness to engage constructively make sense. 
Burma’s leadership should respond by releasing all remaining political prisoners and opening up the entire political process. 
The EU also should ensure that its development assistance – and the process of delivering it – enhances pluralism and reconciliation by benefiting all of Burma’s communities fairly and transparently. 
Poland is making its own direct contribution, above all by helping senior Burmese decision makers, opposition leaders, and business representatives to understand the “technology of transition” – that is, the sequencing of technical reforms, which has helped to make Poland one of Europe’s healthiest economies today. 
Our business representatives came with me to present large-scale investment projects. 
Perhaps the most encouraging aspect of my visit to Burma was a willingness to open up and learn from other countries that have navigated the painful transition from dictatorship to democracy. 
One general asked me, off the record, “How did you manage to implement such dramatic political changes without bloodshed?” 
A young woman at our democracy workshop told the assembled journalists and lecturers, “We thought that Burma was a one-off example. 
Now we see that countries far away have had very similar experiences. 
We feel less lonely – it all worked out for you.” 
Given that spirit – and appropriate foreign assistance – I am confident that it will all work out for Burma, too. 

How to Help the Middle East 
BEIRUT – In Lebanon today, all the symptoms of the Middle East’s current turmoil are visible. 
Newly arrived refugees from Syria and Iraq are joining Palestinian refugees who have long been here. 
The country hasn’t had a president for two years, as rival political factions, reflecting the rising enmity between their Iranian and Saudi Arabian backers, are weakening domestic governance. 
Political corruption runs rampant. 
The garbage doesn’t always get picked up. 
But Lebanon also shows signs of resilience. 
Investors and entrepreneurs are taking risks to start new businesses. 
Civil-society groups are proposing and implementing useful initiatives. 
Refugees are going to school. 
Political enemies are collaborating to minimize security risks, and religious leaders advocate coexistence and tolerance. 
Lebanon’s resilience owes much to the memory of its painful civil war (1975-1990). 
By contrast, the rest of the region’s experiences – which involve a long history of autocratic governance and neglect of long-simmering grievances – have fanned the flames of conflict. 
Syria, Iraq, and Yemen are now riven by war. 
Meanwhile, the Palestinians’ worsening plight is still a perennial grievance on the Arab and Muslim street. 
In this maelstrom, new radical groups with transnational agendas are blossoming. 
In the last two years, conflicts have spilled over national borders, threatening global security. 
The Islamic State has exploited long-standing Sunni grievances to challenge the territorial integrity of Iraq and Syria, creating a strategic vacuum in which Russia, Iran, the United States, Turkey, and Saudi Arabia now vie for power, sometimes through proxies, but increasingly through direct military intervention. 
Each country has its own agenda. 
Iran seeks to project its influence in support of the region’s historically dominant Shia populations, while Saudi Arabia pushes back by arming rebel factions opposing Syria’s Iranian-backed president, Bashar al-Assad, and by fighting what it views as an Iranian presence in its own backyard, in Yemen. 
As for Turkey, it opposes the creation of a Kurdish state, which became possible when Iraq and Syria came undone territorially. 
With the region seemingly being sucked deeper into a vortex of permanent conflict, it is easy to believe that only dictators or religious bigots could impose any stability. 
But to think that is to forget past progressive uprisings, such as in Beirut in 2005, Algiers and Tehran in 2009, and the Arab Spring that began in Tunisia and spread throughout the region in 2011. 
To understand where the Middle East is going, we need to look further back to comprehend how the region arrived at this point. 
Arab nationalism and its modernizing aspirations began to unravel after the Arab defeat in the 1967 Arab-Israeli War and the 1986 oil-price collapse. 
National leaders maintained control through repression and used Islamic opposition parties as scarecrows to avoid political reform. 
National economies, weighed down by cronyism, delivered low growth, and governments lost legitimacy. 
It was this strategy’s untenability that led in 2011 to the fall of regimes – in Tunisia, Egypt, Libya, Syria, and elsewhere – that pursued it. 
With no institutions left to ensure a peaceful political transition in these countries, violent groups had an advantage over ordinary citizens, and a crude fight for power ensued. 
Violent revolutions can reach peaceful resolutions, but such an outcome is less likely where deep, unresolved sectarian grievances are in play, as they are in the Middle East. 
The renewed salience of old, intractable cleavages – reflected in the grievances of Sunnis in Syria and Iraq, of Shias in Bahrain, Saudi Arabia, and Yemen, and of Kurds and Palestinians everywhere – makes the current situation especially precarious. 
These problems were simmering beneath the surface of autocratic repression for decades. 
Now, Pandora’s box has been opened, revealing an incredibly complex geopolitical puzzle. 
The West deserves a share of the blame for the current situation. 
It failed to end the long-standing Palestinian conflict, and it created new problems by dismantling the Iraqi state, funding mujahedeen in Afghanistan, and backing dictators who supported its security agenda in Iraq, Syria, Egypt, and elsewhere. 
With the latest great-power interventions by the US and Russia, many are reminded of the 1916 Sykes-Picot agreement between Great Britain and France to draw new national borders in the region and divide it into spheres of influence. 
But, if anything, Sykes-Picot provides a good model for what to avoid in rebuilding the Middle East. 
The region does not need new borders and new protectorates, but rather better states, built to be resilient against ethnic divisions and less vulnerable to external influence. 
Opinion polls indicate that the vast majority of people in the Middle East want to be governed by legitimate states that uphold the rule of law, protect civic rights, and promote coexistence among communities. 
This is a worthy goal that will require compromise and reconciliation at a global, regional, and national level. 
For national actors to have space to find solutions, it is necessary to de-escalate tensions and find compromises – first globally, between the US and Russia, and then regionally, among Iran, Turkey, Saudi Arabia, and Israel. 
The goal must be to reach a grand bargain that takes into account the major issues dividing the region, including the status of the Palestinians and Kurds, and creates conditions for viable political settlements in Syria and Iraq. 
Addressing problems that have remained unsolved for decades is a tall order, but inaction is no longer affordable. 
And none of the major fault lines of the Middle East can be resolved in isolation anymore. 
As Antonio Gramsci argued long ago in his Prison Notebooks, “The crisis consists precisely in the fact that the old is dying and the new cannot be born, and in this interregnum a great variety of morbid symptoms appear.” 
That is the Middle East’s situation in a nutshell. 
Helping it build a new regional order will require all actors, great and small, to accept compromise, as the Lebanese have done. 
A war that leaves one side vanquished is never over. 


Women and the World Economy 
WASHINGTON, DC – In many countries, public debate about gender equality focuses mainly on women's access to top positions and high-powered career opportunities. 
But the “glass ceiling" is only a small part of the issue. 
The broader question is whether women have the same opportunities as men to participate in labor markets in the first place. 
In other words, are women empowered to contribute fully to global economic growth and prosperity? 
Unfortunately, the International Monetary Fund's latest study by its staff, “Women, Work, and the Economy," shows that, despite some improvements, progress toward leveling the playing field for women has stalled. 
This is bad news for everyone, because it translates into lower economic growth – amounting to as much as 27% of per capita GDP in some countries. 
Around the world, the number of women in the workforce remains far below that of men; only about half of working-age women are employed. 
Women account for most unpaid work, and when they are paid, they are overrepresented in the informal sector and among the poor. 
They continue to be paid less than men for the same jobs, even in OECD countries, where the average gender wage gap is about 16%. 
And in many countries, distortions and discrimination in the labor market restrict women's chances of equal pay and rising to senior positions. 
The potential gains from a larger female workforce are striking. 
In Egypt, for example, if the number of female workers were raised to the same level as that of men, the country's GDP could grow by 34%. 
In the United Arab Emirates, GDP would expand by 12%, in Japan by 9%, and in the United States by 5%. 
According to a recent study based on data from the International Labor Organization, of the 865 million women worldwide who could contribute more fully to their economies, 812 million live in emerging and developing countries. 
Raising women's labor-market participation rate boosts economic performance in a number of ways. 
For example, higher incomes for women lead to higher household spending on educating girls – a key prerequisite for faster long-term growth. 
Employment of women on an equal basis with men provides companies with a larger talent pool, potentially increasing creativity, innovation, and productivity. 
And, in advanced countries, a larger female labor force can help to counteract the impact of a shrinking workforce and mitigate the costs of an aging population. 
So what underlies the persistence of gaping inequality and stalled progress? 
Legal, regulatory, and social discrimination against women in many countries still prevents them from seeking paid work in the formal sector. 
As a result, women dominate the informal economy, where jobs are often transient and earnings are low. 
In addition, tax systems and social-welfare programs in many countries are designed in ways that discourage women from working. 
Against this background, government tax and spending policies, as well as labor-market regulation, should be reformed to help boost female employment. 
For example, taxing individual rather than family income – which in many economies imposes a higher marginal tax on the second earner in households – would encourage women to seek employment. 
Linking social-welfare benefits to participation in the workforce, training, or active labor-market programs also can help, as can affordable, high-quality childcare and greater opportunities for paternity and maternity leave. 
In Brazil, for example, the share of women in the workforce has risen sharply over the past 20 years, from about 45% to almost 60%, owing in part to family-friendly policies. 
These are just a few examples; far more can be done. 
Women benefit when flexible work arrangements are introduced and the barriers between part-time and full-time work contracts are lowered, as the Netherlands has successfully done. 
In developing countries, accessible water and better transportation systems in rural areas can help women manage their time better. 
Establishing and upholding equal property and inheritance rights can increase women's access to credit and other productive resources, and creating greater awareness of legal rights in general will help reduce discrimination. 
Some of these steps have been taken in recent years, but it is time to jumpstart the process. 
We urge policymakers to take action and implement policies aimed at removing the obstacles that block women's participation in the workforce. 
We at the IMF will do our part by enhancing our analysis of the economic effects of gender inequality and working with our member countries to enable women to contribute fully to global economic growth and prosperity. 
Especially now, with the growth outlook uncertain in much of the world, policies that encourage more women to enter the workforce certainly can help. 
Women are ready, willing, and able. 
Take my word for it. 

How to Keep a New Year’s Resolution 
MELBOURNE – Did you make any New Year’s resolutions? 
Perhaps you resolved to get fit, to lose weight, to save more money, or to drink less alcohol. 
Or your resolution may have been more altruistic: to help those in need, or to reduce your carbon footprint. 
But are you keeping your resolution? 
We are not yet far into 2010, but studies show that fewer than half of those who make New Year’s resolutions manage to keep them for as long as one month. 
What does this tell us about human nature, and our ability to live either prudently or ethically? 
Part of the problem, of course, is that we make resolutions to do only things that we are not otherwise likely to do. 
Only an anorexic would resolve to eat ice cream at least once a week, and only a workaholic would resolve to spend more time in front of the television. 
So we use the occasion of the New Year to try to change behavior that may be the most difficult to change. 
That makes failure a distinct possibility. 
Nevertheless, presumably we make resolutions because we have decided that it would be best to do whatever it is that we are resolving to do. 
But if we have already made that decision, why don’t we just do it? 
From Socrates onwards, that question has puzzled philosophers. 
In the Protagoras, one of Plato’s dialogues, Socrates says that no one chooses what they know to be bad. 
Hence choosing what is bad is a kind of error: people will do it only if they think that it is good. If we can teach people what is best, Socrates and Plato seem to have thought, they will do it. 
But that is a hard doctrine to swallow – much harder than eating the extra slice of cake that you know is not good for you. 
Aristotle took a different view, one that fits better with our everyday experience of failing to do what we know to be best. 
Our reason may tell us what is best to do, he thought, but in a particular moment our reason may be overwhelmed by emotion or desire. 
Thus, the problem is not lack of knowledge, but the failure of our reason to master other, non-rational aspects of our nature. 
That view is supported by recent scientific work showing that much of our behavior is based on very rapid, instinctive, emotionally based responses. 
Although we are capable of deciding what to do on the basis of rational thought processes, such decisions often prove less powerful than our instinctive feelings in moving us to action. 
What does this have to do with keeping resolutions? 
Richard Holton, a professor of philosophy at MIT and the author of Willing, Wanting, Waiting, points out that a resolution is an attempt to overcome the problem of maintaining an intention when we expect that, at some future time, we will face inclinations contrary to our intention. 
Right now, we want to lose weight and we are rationally convinced that this is more important than the pleasure we will get from that extra slice of cake. 
But we anticipate that, faced with cake tomorrow, our desire for that rich chocolate texture will distort our reasoning so that we might convince ourselves that putting on just a little more weight doesn’t really matter all that much. 
To prevent that, we seek to shore up our current intention to lose weight. 
By making a solemn resolution and telling our family and close friends about it, we tilt the scales against succumbing to temptation. 
If we fail to keep our resolution, we will have to admit that we are less in control of our behavior than we had hoped, thus losing face in our own eyes and in the eyes of others about whom we care. 
This fits well with what psychologists have discovered about how we can improve the odds that we will keep our resolutions. 
Richard Wiseman, a professor of psychology at the University of Hertfordshire, has tracked 5,000 people who made New Year’s resolutions. 
Only about one in ten managed to stick to what they had resolved. 
In his recently released book 59 Seconds, Wiseman sets out the things that you can do to make success more likely: 
· Break your resolution into a series of small steps; 
· Tell your family and friends about your resolution, thus both gaining support and increasing the personal cost of failure; 
· Regularly remind yourself of the benefits of achieving your goal; 
· Give yourself a small reward each time you achieve one of the steps towards your goal; 
· Keep track of your progress towards your goal, for example by keeping a journal or putting a chart on the fridge door. 
Individually, each of these factors seems trivial. 
Collectively, they are ways of exerting our self-control not only now, but in the future as well. 
If we succeed, the behavior we judge to be better will become habitual – and thus no longer require a conscious act of will to keep acting in that way. 
These tools for keeping a New Year’s resolution can help us to make progress, not only in losing weight or staying out of debt, but also in living more ethically. 
We may even find that that is the best resolution to make, for our own benefit and that of others. 

How to Make EU Integration Popular 
Across the European Union, fears about globalization and antipathy to integration and immigration have produced massive political fallout, including the failed French and Dutch referenda on the Union’s draft constitutional treaty and a de facto moratorium on accession talks with Turkey. 
The European Council and the Commission have watched helplessly, as if the matter was not in their hands. 
Conventional wisdom suggests that the EU’s inability to meet the challenges of integration is due to rigid economic structures and inadequate human capital – weaknesses that can only be tackled effectively by national policies, where the Union has little role to play. 
But substantial policy spillover across the EU justifies strengthened policy coordination for labor-market and welfare reform. 
Outdated labor-market rules are the key reason why the full benefits of the internal market and monetary union have failed to materialize. 
Labor-market rigidities – above all in France, Germany, and Italy – impede adjustment to the increased competition of integrating markets. 
Those who lose their jobs cannot find new ones because of barriers to entry, while high long-term unemployment makes those who do have jobs feel threatened. 
Viewing immigrants and internal market integration with alarm, both groups thus have increasingly turned against Europe. 
If they cannot reform, France or Italy eventually may be tempted to renege on free movement of goods, services and labor – and perhaps even abandon the euro – with disruptive consequences for all members. 
Therefore, there is a common interest in fostering national policies that are consistent with integration in the internal market. 
The benefits of coordination are likely to be reinforced by policy “learning,” as confirmed by evidence that reforms tend to spread in waves. 
Structural reforms are usually resisted because of uncertainty about the costs and their distribution. 
One way to weaken this resistance is to involve not only ministers and heads of government in exchanging information on policy design, but also those who resist change, notably trade unions. 
After all, a clear message by the European Council would have a much stronger effect if it expressed not only the wishes of heads of governments, but also broad acceptance at all levels of society. 
Only then can one hope for full implementation of reforms and the virtuous circle of improved expectations and economic performance that should have been set in motion by the European Council’s Lisbon summit seven years ago. 
The experience of successful reform in the Anglo-Saxon and Nordic countries shows that Europe need not be condemned to stagnation, provided that it renounces rigid employment protection. 
The key to overcoming resistance is to give affected workers grounds to hope that they can find a new job. 
The European Council might also recommend that any relaxation of employment protection be accompanied by the establishment of a minimum wage – determined as an agreed proportion of the statutory wage for regular long-term employment. 
With such a comprehensive policy package, resistance to change would likely diminish. 
Immigration poses even greater policy challenges, since newcomers are widely perceived as threatening jobs and crowding out natives from social services. 
There is ample evidence that restrictions on immigration in one country divert migrant flows to other EU countries, and that migration is attracted by generous welfare entitlements. 
Moreover, well-functioning labor markets attract migrants with higher qualifications, while countries with rigid employment protection are targeted by the low-skilled and those willing to work illegally. 
Labor migration also presents challenges for source countries, for it diminishes their pool of young and educated workers. 
Policy coordination can provide effective remedies to these negative spillovers. 
Two measures would be particularly useful. 
First, the old member states should immediately lift remaining restrictions on the freedom of movement for workers from new member countries. 
Any minimum wage would automatically also apply to immigrant workers, mitigating “unfair” competition for low-skilled jobs. 
Second, the EU should enact a common scheme for admission of immigrant workers from outside the Union. 
Such a scheme should include a “point system” for selecting applicants for residence and work permits, which would assign each applicant a score based on objective criteria, typically including language ability, education, and experience. 
This approach has been successfully implemented in Australia, New Zealand, and Switzerland; 
Germany and Great Britain are following suit. 
By establishing a common “welfare floor” throughout the EU, providing an effective safety net to native workers whose jobs are threatened by integration, and adopting a coordinated policy on immigration, European citizens would be reassured. 
This, in turn, might reduce their hostility to migrant workers while offering migrants an equitable and fair legal framework. 
These labor-market and immigration policies should become the focus of policy coordination within the EU. 
By concentrating on policies to sustain integration while at the same preserving the European social model, the European Council would again become a relevant policy forum where the real needs and hopes of citizens could find effective responses. 

New Model Europe 
ROME – It is becoming increasingly clear that if Europe is to overcome its crisis, business as usual will not suffice. 
We need a Europe that is more concrete, less rhetorical, and better suited to the current global economy. 
We need to focus not only on the European Union’s specific policies, but also on how to change its “politics” – a change that must place economic growth at the top of the agenda. 
Europe does not need a debate between austerity and growth; it needs to be pragmatic. 
A good example of this was the most recent European Council, which addressed two of Europe’s most pressing problems: malfunctioning labor markets, reflected in record-high youth unemployment, and malfunctioning credit markets, in which access to financing is difficult and lending rates vary considerably among different parts of the single market. 
The outcome of the Council’s June meeting was encouraging, and we must continue on that path in the coming months to make progress on two equally important issues: how to foster innovation and the digital economy, and how to ensure Europe’s manufacturing competitiveness. 
We need to assess what can be achieved at the national level and what EU institutions should do. 
Fiscal consolidation and national reforms are essential and should continue. 
But we can better achieve our objectives under an EU framework that supports, rather than impedes, national action to boost growth and employment. 
The European Commission’s recent decision to grant member states some flexibility for productive public investment linked to EU structural funds is a welcome step in this direction. 
The second issue is the need to take further steps toward closer integration within the eurozone. 
A banking union is an important start, which should prevent financial markets from fragmenting along national lines and reduce private-sector borrowing costs. 
Lending rates are still too high for small and medium-size enterprises and too dependent on where in the EU a company is located. 
We have achieved important results on the way to a banking union, notably on supervision. 
Now we need to work on the second pillar, resolution of the banking crisis. 
The proposal presented by Michel Barnier, European Commissioner for Internal Market and Services, is bold, but Europe does indeed need a strong, efficient resolution mechanism that ensures timely action to address banking crises. 
We also need to consider how to enhance coordination of economic policies to promote productivity convergence. 
We already have a good mechanism for multilateral surveillance in place, but we should aim to focus it on the areas that really matter for economic union. 
This must go hand in hand with a discussion of how the EU can provide incentives to member states that are committed to difficult structural reforms at a time of retrenchment, which could lead to talks about possible forms of fiscal coordination. 
Though it is premature to enter into such discussions now, the issue should not be taken off the table. 
All of these changes concern the eurozone’s members first, of course, but they are clearly relevant for the wider EU. 
At the same time, setting eurozone members apart from the wider EU would be inadvisable. 
Ensuring a stable and effective eurozone is essential to the smooth operation of the entire single market. 
And, without an efficient EU, the eurozone could not prosper. 
We have only one Europe, and we all need to work together to reform it and drive it forward. 
Indeed, with its 500 million consumers, the EU single market remains the largest destination for goods and services worldwide and is the best engine to restore growth. 
Key economic sectors, such as financial services, benefit greatly from the single market’s common rules. 
Without the single market, all member states would be less attractive to foreign investors, who, once established in one member state, can move freely around the EU. 
The single market also provides a platform and leverage to export goods and services to international markets. 
So we must make the single market more open, internally and externally. 
But, to do so, we will need to make EU institutions more efficient, with better regulation and a lower administrative burden. 
Common institutions are needed to ensure that all EU countries’ interests are protected, and to act as a bridge between eurozone and non-eurozone member states. 
Frankly, the functioning of the EU and its institutions during the crisis has been a part of the problem. 
For many people, EU decision-making is opaque, inefficient, and removed from democratic control. 
Most worrying, the crisis has challenged the very idea of European integration. 
Thus, we will be able to advance a reformist agenda only if we have a convincing narrative that explains why we need Europe and why it serves the interests of current and future generations. 
I am a committed pro-European. 
I have in mind the extraordinary image of Helmut Kohl and François Mitterrand at Verdun in 1984, two old leaders, standing hand in hand, remembering the victims of World War I. 
Next year will mark the 100th anniversary of the outbreak of that war. 
The experience of two world wars was foundational for European integration. 
But these memories no longer provide a sufficient catalyst for action. 
We need to find a forward-looking rationale that, after 50 years of integration, shows how acting together can help Europe achieve its goals in a changed global environment. 
There is nothing worse than letting people believe that European integration is something that proceeds by stealth, a journey driven by invisible and uncontrollable forces. 
The EU cannot last unless it is built on its citizens’ explicit commitment. 
Today, we have a chance to remodel Europe. 
Next year’s European parliamentary elections will provide an opportunity for a fundamental debate about the EU’s future. 
Unless we make a successful case for Europe (and for a different Europe), Euro-skeptic forces will gain ground and Europe’s decision-making processes will be blocked. 
The choice is clear, and it will have to be made sooner rather than later. 

How to Make Trade Easier 
WASHINGTON, DC – The world is now in the fourth year of the Great Recession. 
So far, the economies belonging to the World Trade Organization have resisted the kind of widespread protectionism that would make a bad situation much worse. 
But protectionist pressures are building as weary politicians hear more and more calls for economic nationalism. 
The WTO’s best defense of open trade is a good offense. 
A new WTO Trade Facilitation Agreement would benefit all by increasing developing countries’ capacity to trade, strengthening the WTO’s development mandate, and boosting global economic growth. 
More than a decade after the launch of the Doha Round of global free-trade talks, this agreement could be a down payment on the commitment that WTO members have made to linking trade and development. 
Developing countries stand to gain the most from improving trade facilitation. 
The right support would help traders in poorer countries to compete and integrate into global supply chains. 
There are rich opportunities for gains. 
Inefficiencies in processing and clearing goods put traders in developing countries at a competitive disadvantage. 
Outdated and inefficient border procedures and inadequate infrastructure often mean high transaction costs, long delays, opportunities for corruption, and an additional 10-15% in the cost of getting goods to market – even more in landlocked countries. 
Research by the World Bank suggests that every dollar of assistance provided to support trade-facilitation reform in developing countries yields a return of up to $70 in economic benefits. 
When funds are directed at improving border-management systems and procedures – the very issues covered by the trade-facilitation negotiations – the impact is particularly significant. 
Projects aimed at boosting efficiency and transparency, supported by development banks and bilateral donors, have made a dramatic difference. 
In East Africa, procedural improvements have reduced the average clearance time for cargo crossing the Kenya-Uganda border from almost two days to only seven hours. 
In Cameroon, some of our organizations have worked with the World Customs Organization to help the customs authority reduce corruption and increase collection of revenues – estimated to be more than $25 million a year. 
On the Laos-Vietnam border, a sub-regional cross-border transport agreement has cut cargo transit times from four hours to just over one hour. 
A new customs component to a highway project between Phnom Penh and Ho Chi Minh City helped increase the total value of trade through the Moc Bai-Bavet border by 40% over three years. 
In Peru, some of our banks have worked with international freight forwarders to connect remote villages and small businesses to export markets through national postal services, turning more than 300 small firms into exporters, most for the first time. 
The outlines of a new WTO Trade Facilitation Agreement are already clear, but some technical differences remain on specific provisions. 
Developing countries want a credible commitment to support implementation, such as technical assistance and capacity-building. 
A World Bank study estimates that the costs of implementing the measures likely to be covered by a Trade Facilitation agreement would be relatively modest – $7-11 million in the countries studied, spread out over a number of years – especially when compared to the expected benefits. 
Capacity-building and financing programs for governments that want to improve their trade facilitation are available already. 
Major donor countries and international development organizations have put a priority on, and increased investment in, trade facilitation. 
According to the OECD, from 2002 to 2010, trade facilitation-related assistance increased ten-fold in real terms, from almost $40 million to nearly $400 million. 
The African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, the Inter-American Development Bank, the Islamic Development Bank, and the World Bank stand ready – alongside the WTO – to assist developing countries through the process of full and effective implementation of the agreement. 
That means helping countries to assess their trade-facilitation needs on a case-by-case basis, match those needs with the resources required, and broker partnerships between recipient countries and development allies to ensure that support is provided quickly and efficiently. 

How to Pay a Banker 
CAMBRIDGE – The United States’ Federal Reserve Board recently adopted a policy under which bank supervisors, the guardians of the financial system’s safety and soundness, would review the compensation structures of bank executives. 
Authorities elsewhere are considering or adopting similar programs. 
But what structures should regulators seek to encourage? 
It is now widely accepted that it is important to reward bankers for long-term results. 
Rewarding bankers for short-term results, even when those results are subsequently reversed, produces incentives to take excessive risks. 
But tying executive payoffs to long-term results does not provide a complete answer to the challenge facing firms and regulators. 
The question still remains: long-term results for whom? 
Equity-based awards, coupled with the highly leveraged capital structure of banks, tie executives’ compensation to a leveraged bet on the value of banks’ assets. 
As Holger Spamann and I show in our research, executive payoffs should be tied to the long-term value delivered not only to shareholders, but also to other contributors to banks’ capital. 
As it is, bank executives expect to share in any gains that might flow to common shareholders, but they are insulated from the consequences that losses, produced by their choices, could impose on preferred shareholders, bondholders, depositors, or the government as a guarantor of deposits. 
Insulating executives from losses to stakeholders other than shareholders can be expected to encourage them to make investments and take on obligations that increase the likelihood and severity of losses that exceed the shareholders’ capital. 
In addition, such insulation discourages the raising of additional capital, inducing executives to run banks with a capital level that provides an inadequate cushion for bondholders and depositors. 
The more thinly capitalized banks are, the more severe these distortions – and the larger the expected costs rising from insulating executives from potential losses to non-shareholder stakeholders. 
How could pay arrangements be redesigned to address these problems? 
To the extent that executive compensation is tied to the value of specified securities, such pay could be tied to a broader basket of securities, not only common shares. 
Thus, rather than tying executive pay to a specified percentage of the value of the bank’s common shares, compensation could be tied to a specified percentage of the aggregate value of the bank’s common shares, preferred shares, and all the outstanding bonds issued by the bank. 
Because such a compensation structure would expose executives to a broader share of the negative consequences of risks taken, it would reduce their incentives to take excessive risks. 
Nevertheless, while such a compensation structure would lead executives to internalize the interests of preferred shareholders and bondholders, thereby improving incentives, it would be insufficient to induce executives to internalize fully the interests of the government as the guarantor of deposits. 
To do so, executive payoffs could be made dependent on changes in the value of the banks’ credit-default swaps, which reflect the probability that the bank will not have sufficient capital to meet its full obligations. 
In addition, bonus compensation should be redesigned. 
In the past, bank executives’ bonuses were often based on accounting measures that are of interest primarily to common shareholders, such as return on equity or earnings per common share. 
In the future, banks should consider basing bonus compensation on broader measures, such as earnings before any payments made to bondholders. 
Recognizing the value of tying executive payoffs to the effects of executives’ choices on non-shareholders highlights the important role of bank regulators in this area. 
The common shareholders in financial firms do not have an incentive to induce executives to take into account the losses that risks can impose on preferred shareholders, bondholders, depositors, and taxpayers. 
Consequently, governance improvements that make directors more focused on shareholder interests cannot be relied on to tie executive payoffs to the interests of shareholders and non-shareholders alike. 
Regulatory encouragement may be helpful, perhaps even necessary. 
Getting executives to internalize perfectly the expected losses that their choices might impose on contributors of capital other than shareholders is complex. 
But moving in this direction, even if imperfectly, would mean real progress. 
Motivating financial executives to focus on the effects of their choices on all those contributing capital to the bank would significantly improve their risk-taking incentives. 
It thus would also contribute to making our financial systems safer. 

How to Prevent a Depression 
AMSTERDAM – The latest economic data suggests that recession is returning to most advanced economies, with financial markets now reaching levels of stress unseen since the collapse of Lehman Brothers in 2008. 
The risks of an economic and financial crisis even worse than the previous one – now involving not just the private sector, but also near-insolvent sovereigns – are significant. 
So, what can be done to minimize the fallout of another economic contraction and prevent a deeper depression and financial meltdown? 
First, we must accept that austerity measures, necessary to avoid a fiscal train wreck, have recessionary effects on output. 
So, if countries in the eurozone’s periphery are forced to undertake fiscal austerity, countries able to provide short-term stimulus should do so and postpone their own austerity efforts. 
These countries include the United States, the United Kingdom, Germany, the core of the eurozone, and Japan. 
Infrastructure banks that finance needed public infrastructure should be created as well. 
Second, while monetary policy has limited impact when the problems are excessive debt and insolvency rather than illiquidity, credit easing, rather than just quantitative easing, can be helpful. 
The European Central Bank should reverse its mistaken decision to hike interest rates. 
More monetary and credit easing is also required for the US Federal Reserve, the Bank of Japan, the Bank of England, and the Swiss National Bank. 
Inflation will soon be the last problem that central banks will fear, as renewed slack in goods, labor, real estate, and commodity markets feeds disinflationary pressures. 
Third, to restore credit growth, eurozone banks and banking systems that are under-capitalized should be strengthened with public financing in a European Union-wide program. 
To avoid an additional credit crunch as banks deleverage, banks should be given some short-term forbearance on capital and liquidity requirements. 
Also, since the US and EU financial systems remain unlikely to provide credit to small and medium-size enterprises, direct government provision of credit to solvent but illiquid SMEs is essential. 
Fourth, large-scale liquidity provision for solvent governments is necessary to avoid a spike in spreads and loss of market access that would turn illiquidity into insolvency. 
Even with policy changes, it takes time for governments to restore their credibility. 
Until then, markets will keep pressure on sovereign spreads, making a self-fulfilling crisis likely. 
Today, Spain and Italy are at risk of losing market access. 
Official resources need to be tripled – through a larger European Financial Stability Facility (EFSF), Eurobonds, or massive ECB action – to avoid a disastrous run on these sovereigns. 
Fifth, debt burdens that cannot be eased by growth, savings, or inflation must be rendered sustainable through orderly debt restructuring, debt reduction, and conversion of debt into equity. 
This needs to be carried out for insolvent governments, households, and financial institutions alike. 
Sixth, even if Greece and other peripheral eurozone countries are given significant debt relief, economic growth will not resume until competitiveness is restored. 
And, without a rapid return to growth, more defaults – and social turmoil – cannot be avoided. 
There are three options for restoring competitiveness within the eurozone, all requiring a real depreciation – and none of which is viable: 
· A sharp weakening of the euro towards parity with the US dollar, which is unlikely, as the US is weak, too. 
· A rapid reduction in unit labor costs, via acceleration of structural reform and productivity growth relative to wage growth, is also unlikely, as that process took 15 years to restore competitiveness to Germany. 
· A five-year cumulative 30% deflation in prices and wages – in Greece, for example – which would mean five years of deepening and socially unacceptable depression; even if feasible, this amount of deflation would exacerbate insolvency, given a 30% increase in the real value of debt. 
Because these options cannot work, the sole alternative is an exit from the eurozone by Greece and some other current members. 
Only a return to a national currency – and a sharp depreciation of that currency – can restore competitiveness and growth. 
Leaving the common currency would, of course, threaten collateral damage for the exiting country and raise the risk of contagion for other weak eurozone members. 
The balance-sheet effects on euro debts caused by the depreciation of the new national currency would thus have to be handled through an orderly and negotiated conversion of euro liabilities into the new national currencies. 
Appropriate use of official resources, including for recapitalization of eurozone banks, would be needed to limit collateral damage and contagion. 
Seventh, the reasons for advanced economies’ high unemployment and anemic growth are structural, including the rise of competitive emerging markets. 
The appropriate response to such massive changes is not protectionism. 
Instead, the advanced economies need a medium-term plan to restore competitiveness and jobs via massive new investments in high-quality education, job training and human-capital improvements, infrastructure, and alternative/renewable energy. 
Only such a program can provide workers in advanced economies with the tools needed to compete globally. 
Eighth, emerging-market economies have more policy tools left than advanced economies do, and they should ease monetary and fiscal policy. 
The International Monetary Fund and the World Bank can serve as lender of last resort to emerging markets at risk of losing market access, conditional on appropriate policy reforms. 
And countries, like China, that rely excessively on net exports for growth should accelerate reforms, including more rapid currency appreciation, in order to boost domestic demand and consumption. 
The risks ahead are not just of a mild double-dip recession, but of a severe contraction that could turn into Great Depression II, especially if the eurozone crisis becomes disorderly and leads to a global financial meltdown. 
Wrong-headed policies during the first Great Depression led to trade and currency wars, disorderly debt defaults, deflation, rising income and wealth inequality, poverty, desperation, and social and political instability that eventually led to the rise of authoritarian regimes and World War II. 
The best way to avoid the risk of repeating such a sequence is bold and aggressive global policy action now. 

The Egypt-Israel Peace Test 
WASHINGTON, DC – The rocket strikes that a militant Islamist group recently fired from the Egyptian Sinai into the Israeli city of Eilat served as yet another reminder of how delicate bilateral relations remain two years after Egypt’s revolution. 
Terrorist activity could easily cause a crisis on the border, with the potential to trigger an unwanted confrontation that would threaten the peace treaty that normalized bilateral relations in 1979. 
To avoid such an outcome, Israel and Egypt must take convincing action now to uphold the treaty. 
Last November, when hostilities erupted in Gaza, Egyptian President Mohamed Morsi mediated a swift resolution, even providing a guarantee for the cease-fire with Gaza’s ruling Hamas. 
Morsi thus implicitly recommitted Egypt to upholding peace on the border and to playing a constructive role in the Palestinian-Israeli conflict. 
This boosted confidence in Israel that the Muslim Brotherhood, Egypt’s ruling party, would uphold the 1979 peace treaty. 
But Morsi has not explicitly endorsed peace with Israel and has avoided direct engagement with Israeli leaders. 
Preserving peace is in both countries’ interests. 
The attack on an Egyptian army outpost in the Sinai last summer, in which armed militants killed 16 soldiers, demonstrated that terrorism threatens Egypt just as it does Israel. 
In this volatile environment, reverting to a confrontational relationship with Israel would be extremely dangerous, inviting the risk of another disastrous war. 
Upholding the peace treaty with Israel would have the opposite effect, enabling Egypt to pursue its goals of consolidating the military’s authority at home and enhancing its influence throughout the Middle East. 
Egyptian and Israeli leaders must recognize that the ongoing struggle to secure the Sinai Peninsula – which the treaty established as a demilitarized zone – is testing peace daily. 
Israel has so far tolerated Egyptian military activity and force deployments that technically violate the bilateral treaty, approving them retroactively in the hope that Egypt will do more to secure the border and crack down on weapons smuggling into Gaza. 
But Israel has little confidence that the deployments will enhance its security, and Israeli leaders are becoming increasingly anxious about the Egyptian military’s mobilization of forces without notice. 
In Egypt, the treaty is even more clearly under threat. 
The Muslim Brotherhood has long called for a referendum on the treaty, viewing the restrictions on Egyptian forces in the Sinai as an affront to national sovereignty. The Brothers condemned Morsi’s involvement in resolving the Gaza crisis last year, portraying it as kowtowing to Israel. 
In fact, Morsi is under fire from both the left and the right for upholding former President Hosni Mubarak’s obliging approach to Israel, as well as for reasserting Mubarak’s authoritarian bargain – diplomatic and financial support in exchange for “stability” – with the United States. 
Faced with a collapsing economy and approaching elections, the temptation for Morsi to stoke nationalist, anti-Israel sentiment will become stronger. 
A major incident on the border could be enough to push him over the edge. 
In order to sustain the peace treaty, Egypt and Israel should renegotiate its military annex to allow Egypt to deploy forces in previously restricted zones and re-establish full sovereignty over the Sinai. 
Such a move would strengthen bilateral relations, generate goodwill in Egypt, and increase Israel’s confidence in the Muslim Brotherhood’s commitment to peace. 
During such a renegotiation, the two countries would discuss in detail the most effective approach to tackling their shared challenges related to terrorism and transnational crime, in order to ensure that Egypt’s increased military presence in the Sinai also enhances Israel’s security. 
Egypt’s newly democratic government would be more strictly accountable for fulfilling the treaty’s terms if it played an active role in establishing them. 
At the same time, the agreement would boost domestic support for Egypt’s government and enhance its regional standing. 
Likewise, US involvement in the negotiations would benefit all parties. 
The process would provide an opportunity for the Egyptian military to engage with the US, helping to bolster its case for aid in a difficult environment. 
Moreover, the US could set clear, narrow terms for the talks and provide a guarantee that the outcome would not impinge on Israel’s core interests, thereby mitigating Israeli officials’ fears that opening the treaty’s military annex for revision would call into question its other terms. 
Finally, playing a successful role in bolstering Israel-Egypt relations could advance US Secretary of State John Kerry’s diplomatic initiatives in the Middle East. 
In a region as volatile as the Middle East, no country can afford to take peace for granted. 
But, by renewing their bilateral treaty now, Egypt and Israel would maximize their chances of prolonging an arrangement that has kept them from fighting for more than three decades. 

How to Save Brazil 
SÃO PAULO – Brazil’s political crisis appears to be coming to a head. 
Now that the lower house of the National Congress has voted in favor of President Dilma Rousseff’s impeachment for violating fiscal rules, the Senate’s 81 members will vote in the coming days on whether to try her. 
If 42 agree, she will be suspended for up to 180 days, during which time Vice President Michel Temer will assume the presidency. 
If the Senate does not produce a two-thirds vote for conviction during that period, Rousseff will return to the presidency. 
But the most likely outcome, it seems, will be for Temer to carry out the final two years of Rousseff’s term. 
Whatever happens next, Brazil is not out of the woods. 
Its economic situation is dire – a direct result of populist policies initiated by Rousseff’s predecessor, President Luiz Inácio Lula da Silva, and which she maintained. 
In the early 2000s, flush with cash thanks to a commodity boom, Lula’s government began to distribute subsidized credit to consumers and businesses, hold down energy prices artificially, and expand government spending at more than double the rate of GDP growth. 
The result was mounting public debt, which has now reached 70% of GDP, and a widening deficit, which has now reached nearly 11% of GDP. 
Rather than acknowledge the problem and revise policies accordingly, Rousseff allegedly resorted to dodgy accounting tricks to enable her government ostensibly to meet its primary-surplus target without cutting social transfers, even as commodity prices collapsed. 
This enabled her to win reelection in 2014 – and it is propelling her toward impeachment today. 
(The massive corruption scandal engulfing Petrobras, the state-owned oil company, which Rousseff used to head, has not helped her case.) 
But Rousseff is of course far from the only one suffering the consequences of this approach. 
Brazil is now facing its worst economic recession in 80 years; unemployment stands at almost 10%; annual inflation exceeds 10%; and living standards have collapsed. 
Though Brazilians pay 37% of GDP in taxes each year – about the same rate as Europeans – the quality of their public services remains very low. 
Assuming he takes over as President, Temer will have to act fast to put the economy back on track, rebuild business confidence, and restore the people’s trust in government. 
It would be a daunting task for any leader, but it is especially so for one who will spend only two years in power and does not enjoy widespread popular support. 
For Temer, there is no room for mistakes. 
His first mission will be to form a cabinet that can produce rigorous and credible economic policies and secure the needed congressional support. 
A four-point agenda for economic revitalization should then be implemented. 
The first point of that agenda should be to fast-track infrastructure investment. 
This is the fastest way to revive the economy and generate employment. 
But Brazil desperately needs foreign capital to finance construction of roads, ports, and airports, as well as energy projects. 
To attract it, the government must improve transparency, simplify rules and regulations, introduce performance bonds (to guarantee the completion of projects), and abolish the cap on return on investment. 
The second item on the agenda should be labor-market reform. 
The best approach, which would enable the government to avoid an endless political debate about which labor laws should be revoked, would be to approve a constitutional amendment that guarantees the right of workers to conclude private contracts with employers. 
Such a measure would reduce labor costs significantly and bring workers out of the informal sector. 
Third, Temer must tackle pension reform. 
Though there is a consensus that the retirement age should be raised from 60 to 65, there is strong resistance to cutting benefits. 
Again, the government can minimize time-wasting political entanglements – this time, by focusing on the public sector. 
Brazil’s government currently spends roughly the same amount on 950,000 retired public servants that it spends on 28 million retired private-sector workers, meaning that the bigger problem is also the one that will be less politically difficult to address. 
Finally, Brazil needs to reinsert itself into the global economy. 
To that end, it must revive productivity growth, expand exports, open its economy to international competition, and forge new bilateral and regional trade deals with major economic players. 
If Temer’s government succeeds in the first three areas, building up its credibility in the process, it will be in a strong position to fulfill these objectives, as well. 
This four-point agenda is crucial to restoring Brazil’s economy and bringing public spending under control. 
But it will not be enough to stop the vicious boom-and-bust cycles to which Brazil has long been vulnerable. 
For that, Brazilians must take a hard look at the attitudes and expectations that have placed them in this situation. 
Real change means breaking the addiction to a paternalistic and interventionist state and supporting needed policy adjustments, even when they are unpleasant. 
Brazilians still have a long way to go to eliminate corruption, reform or rescind populist policies, and create efficient and responsible state institutions. 
But the combination of popular indignation, courageous and independent judges, and a dynamic free press seems to be propelling the country along a promising path, as the irresponsible actions of politicians and businessmen are not only brought to light, but also punished. 
By itself, Rousseff’s likely impeachment will solve nothing. 
But if it helps to bury beliefs and values that have been holding Brazil back, the country, to paraphrase Winston Churchill, may find itself at the end of the beginning. 

How to Sell Anti-Protectionism 
STOCKHOLM – The looming global recession has brought government intervention to save failing companies to the forefront of economic policy. 
In a speech just prior to the recent G-20 summit, British Prime Minister Gordon Brown warned President-elect Barack Obama against bailing out America’s struggling Big Three automakers, arguing that global competition has made their decline irreversible. 
A bailout, then, would simply delay the inevitable at a huge cost to taxpayers. 
Such advice is always tough to sell – all the more so in the face of the worst economic outlook in 70 years. 
After all, according to conventional wisdom, global competition moves jobs to low-cost countries and puts downward pressure on wages everywhere else. 
As globalization intensifies and accelerates economic change, it affects the lives of ordinary citizens like never before, stoking popular fear. 
Little wonder, then, that French president Nicolas Sarkozy succumbed to the allure of protectionism during last year’s election campaign, as did both presidential candidates in the United States. 
But protectionism need not be the only alternative to fear of global competition. 
In the Scandinavian countries, as in the US, foreign competition intensified sharply during the past decade. 
China and India gained considerable economic power, and close neighbors in previously isolated communist states were rapidly integrated in the European economy. 
However, surveys by Pew Research show that in Sweden, 85% of the population agrees that trade is good for their country, compared to only 59% of Americans. 
Among Swedish industrial workers, the figure is 75% in favor. 
How can that be? 
By designing educational and social protection policies that strengthen the individual, Scandinavian politicians have sought to promote change rather than prevent it. 
The positive public opinion in Sweden is not a symptom of brainwashing, but a rational response to people’s experience during the last decade. 
As competition intensified and production started moving to the Baltic States and Eastern Europe, Sweden’s policy answer was to upgrade the skills of the work force. 
As a result, from 1997 to 2007, Swedish exports nearly doubled and industrial production grew by 36%, with manufacturing companies achieving record-high productivity growth. 
Indeed, while annual US output per hour grew by 6.2% during this period, Swedish productivity rose by 8%. 
Sweden accumulated a current-account surplus of 53% of GDP, in contrast to America’s 48%-of-GDP deficit. 
Employment rose by 11%, and blue-collar workers’ wages increased by 24%, fueling a more than 30% surge in private consumption. 
In short, even as globalization progressed, Swedish wage earners enjoyed a substantial improvement in living standards. 
While some jobs moved abroad, the net effect was still greatly positive. 
The secret behind Sweden’s successful development, and hence people’s attitudes, is how the costs of change are distributed. 
Official policy aims to reduce the cost of globalization for individuals, but never for companies. 
Entrepreneurs need to face competition in order to develop, whereas individuals who are laid off may have difficulties getting back into productive work. 
As trade minister of Sweden for most of this period, I never hindered or postponed import competition. 
In the European Union, Sweden voted against almost all anti-dumping and other protectionist proposals. 
This never met any criticism from my voters, because educational policy and the social safety net were designed to lower workers’ risk aversion. 
Broad educational policies equip an increasing share of Sweden’s population with basic education, thereby enhancing their employability. 
Higher education is free of charge and accessible in all parts of the country. 
But reaching one cohort per year is too little to meet demands in a fast-changing economy. 
Therefore, on top of this, large resources are spent on modernizing the skills of those already in the labor force. 
Social protection also has a broad, general nature. 
In the Scandinavian countries, as opposed to, say, Germany and the US, the government, not individual companies, are responsible for most social benefits. 
That way, economically irrational lock-in effects, whereby workers simply cannot afford to change jobs, are avoided. 
Furthermore, benefits are generous enough to ensure that short periods of unemployment don’t force workers to sell their homes or even cars. 
The system protects not only the unemployed, who can continue to pay their mortgages and interest, but also indirectly the banks, because their loans to households are repaid even in times of recession. 
And, instead of solving all sorts of economically caused private problems, laid-off workers can concentrate on finding new and more future-oriented jobs. 
No doubt, these policies are expensive. 
But they pay for themselves by producing growth and revenues. 
As the past decade shows, they have served the Scandinavian countries well during a period of extreme internationalization. 
Instead of giving in to conventional wisdom, we have exploited the possibilities that globalization and technological change offer. 
Could the Scandinavian model work for others? 
At the very least, the Scandinavian example shows that politicians have more than one option to choose from when considering how to handle globalization. 
Intense foreign competition and rapid technological change does not have to be a race to the bottom. 
On the contrary, it can be compatible with rapidly rising real income and more and better jobs. 

How to Sell Global Re-Balancing 
CHICAGO – At its most recent meeting in Toronto this spring, the G-20 agreed to disagree. 
Even though the world economy is desperately in need of rebalancing, their declaration was deliberately vague enough to accommodate any set of domestic policies that countries might choose. 
Everyone came away thinking that they had won, but the world largely lost. 
World trade is highly imbalanced. 
Households in the United States, having spent too much, are now weighed down by debt. 
Exporters in Europe and Asia have become excessively dependent on selling to the US and other, now-weakened, economies like Spain and the United Kingdom. 
Myopic actions on both sides have helped entrench a longer-term pattern of behavior that only makes it harder to move away from today’s unsustainable equilibrium. 
As ever, change upsets the cozy status quo and the interests that benefit from it. 
For example, the real-estate lobby in the US obviously has no desire to see government support for housing diminish, despite the fact that the US probably has far more housing stock than it can afford. 
Similarly, the export lobby in China has no interest in a strong renminbi, even though it is in China’s long-term interest to let its currency appreciate. 
We keep hoping that somehow meetings of heads of state will magically produce the policies that will rebalance world trade. 
Unfortunately, the macroeconomic changes that countries must make involve actions to which even heads of state are unable to commit. 
No US president can unilaterally agree to alter the pattern of government support and spending; that is a decision for Congress. 
Similarly, no Chinese president can unilaterally agree to allow the renminbi to appreciate faster; that is a consensus decision reached together with the various apparatchiks in the State Council and Communist Party. 
Moreover, the necessary reforms in both America and China go well beyond these two steps. 
They require deep, fundamental changes. 
So we are caught between a financially unsustainable pattern of global demand and the need for politically difficult changes in many countries’ domestic policies. 
All politics is local, and there is no local constituency for the global economy, so what triumphs often erodes global imbalances further. 
The G-20 asked the International Monetary Fund to prepare a road map for the policies that countries will have to follow to restore stable global growth. 
But neither the G-20 nor the IMF can impose its will on national governments – nor should they. 
How, then, can we go beyond ritualistic meetings that do little to advance the global agenda? 
Obviously, we need more political support for that agenda. 
Perhaps non-governmental organizations (NGOs) like Oxfam or Mothers against Land Mines suggest a way. 
These movements use pressure from below to convince political leaders that there is domestic support for international agreement. 
The ability of grassroots movements to influence policy is set to increase. 
As the power of the Internet spreads through social and political networking sites, and as virtual democracy grows, this bottom-up influence is likely to grow. 
Those who want to influence political leaders must get used to convincing their masters, the people, directly. 
Unfortunately, it is difficult for existing NGOs to take up the cause of popularizing global economic policy coordination. 
Unlike hunger or land mines, the cause of rectifying global trade imbalances will not touch the public enough to attract the donations that are necessary to keep NGOs afloat. 
But there is an organization that could do the job: the IMF. 
If the IMF reoriented a substantial portion of its activities towards influencing the influential among the world’s public, it could have far more impact on global macroeconomic policy, especially policies followed by countries that do not need its loans, than it does today. 
The IMF is currently under-equipped for this task. 
If it is to improve its persuasive capabilities, it must learn to become more like grassroots activists, with punchy prose, clear policy recommendations, and TV-ready talking points. 
It must go directly to the public – including political parties, nongovernmental organizations, and influential figures – in each country, and explain its position. 
The Fund must also do more to enhance its presence on the Web and in school and university classrooms, especially as students are often the most receptive to ideas about global citizenship. 
Above all, the Fund must change how it is perceived from outside. 
It must be seen as an institution that respects each country’s sovereignty but works for the global good. 
A transparent and fair process of arriving at its policy recommendations, based primarily on convincing economic research and data analysis, will be essential. 
Countries will have to agree to accept and facilitate the IMF’s direct engagement with their influential citizenry as long as it is carried out in good faith. 
The IMF’s expression of its economic views to local publics should then be protected by international agreement, much like embassies and their activities. 
If we can make these changes – and one should not minimize the scale of the task – perhaps when G-20 leaders meet in the future, they will not think that their citizens have little interest in the outcome. 
Instead, they will have a political mandate to attend meaningfully to the welfare of the global economy. 

How Fake News Wins 
WASHINGTON, DC – In response to the wave of fake news that inundated the recent presidential election campaign in the United States, much attention has been devoted to those who produce or spread those stories. 
The assumption is that if news outlets were to report only the “facts,” readers and viewers would always reach the right conclusion about a given story. 
But this approach addresses only half of the equation. 
Yes, we need news organizations to deliver reliable information; but we also need those receiving it to be savvy consumers. 
For decades, the US government has supported programs to foster independent media in authoritarian, resource-deprived, or dysfunctional countries. 
But these programs tacitly assume that the US itself is immune to the problems people in other countries encounter when they create or consume information. 
We in the US also assume that American media, sustained by advertising, will continue to thrive; that independent journalism is the norm; and that most people are capable of thinking critically and making sound judgments about the information they receive. 
In fact, some of the lessons that we have learned while supporting vibrant information gathering and distribution abroad are equally relevant to the US. 
In the 2016 election, the personal beliefs that drove millions of voters’ decisions were based not only on each person’s experiences and the information they accessed, but also on how they processed those experiences and that information. 
Voters’ own relationships with content producers, their motivation to believe or disbelieve facts, and their critical thinking skills all determined how they interpreted and acted on information. 
In the election, most mainstream pundits did not seem to “get” millions of Americans’ beliefs or viewpoints, so it is little wonder that those millions of Americans were turned off by the pundits’ incessant chatter. 
To these voters, the pundits were simply information peddlers with no attachments to the issues that matter. 
Men and women talking in front of TV cameras are too far removed from the factories, offices, bars, churches, schools, and hospitals where viewers form the relationships that determine how they process information. 
The so-called digital revolution did not render superfluous the importance of human connection in shaping people’s interpretation and response to the information they receive. 
Relationships are built on trust, which is essential for ensuring that consumers accept information that challenges their closely held beliefs. 
But, according to Gallup, only 32% of Americans have a “great deal” or “fair amount” of trust in traditional media outlets – an all-time low. 
That is deeply problematic, and it suggests that many citizens are throwing out the good information with the bad. 
As with any other good, how information is consumed reflects economic and political opportunities, personal incentives, and institutional or cultural norms. 
Workers in Ohio whose wages have stagnated, or unemployed voters in Michigan whose jobs have migrated overseas, will consume information in a way that reflects their economic situation. 
Not surprisingly, they will often select sources – whether credible or not – that are critical of globalization and current fiscal and economic policies. 
An ample supply of sound information is not sufficient to make good choices; news consumers need critical-thinking skills. 
Information is much like the food we eat: we need to understand its ingredients, and where and how it is produced, and the effects of overconsumption. 
It will probably take decades to rebuild trusting relationships between consumers and mainstream news media. 
Information consumers will always have biases and incentives to select one piece of information over another. 
Even so, we can improve critical-thinking skills so that citizens know how to pick trustworthy sources, and resist their own biases. 
Cultivating critical-thinking skills takes time and practice, which is why it is more important than ever to invest in education. 
Some of the models that have been used abroad may work in the US, too. 
For example, in Ukraine, a recent initiative carried out by IREX mobilized librarians in an effort to neutralize the detrimental effects of Kremlin-funded propaganda. 
Fifteen thousand Ukrainians were taught concrete skills in avoiding emotional manipulation, verifying sources and credentials, detecting paid content and hate speech, and debunking fake videos and photos. 
The results were impressive: participants improved their ability to distinguish trustworthy news from false news by 24%. 
Better yet, they then trained hundreds more people to detect disinformation, thus multiplying the initiative’s overall impact. 
With a rather modest investment, we can make teaching these skills a standard practice in school curricula. 
Philanthropists can also create or support grassroots organizations that work with citizens to strengthen their ability to consume information critically. 
Accurate information and critical-thinking skills are indispensable to democracy. 
We cannot take them for granted, even in America. 
That is how fake news wins. 

How to Stop Terrorism in Europe 
BERLIN – Europe is under pressure. 
Integrating asylum-seekers and other migrants – 1.1 million in Germany alone in 2015 – into European society poses a major challenge, one that has been complicated by a spike in crimes committed by new arrivals. 
Making matters worse, many European Muslims have become radicalized, with some heading to Iraq and Syria to fight under the banner of the so-called Islamic State, and others carrying out terror attacks at home. 
Add to that the often-incendiary nativist rhetoric of populist political leaders, and the dominant narrative in Europe is increasingly one of growing insecurity. 
Many European countries are moving to strengthen internal security. 
But their approach is incomplete, at best. 
Germany and others have introduced new measures, including an increase in police personnel, accelerated deportation of migrants who have committed crimes, and the authority to strip German citizenship from those who join foreign “terror militias.” 
Other steps include enhanced surveillance of public places and the creation of new units focused on identifying potential terrorists through their Internet activities. 
The pressure to reassure the public has driven Belgium, Bulgaria, France, and the Netherlands, as well as the Swiss region of Ticino and the Italian region of Lombardy, to ban the burqa (the full-body covering worn by ultraconservative Muslim women) and other face-covering veils in some or all public places. 
Several French coastal cities have also banned the burkini, the full-body swimsuit some Muslim women wear to the beach. 
Even Germany, whose Interior Minister Thomas de Maizière initially rejected such a ban, has succumbed to pressure from allies of Chancellor Angela Merkel and proposed a ban on face-covering veils in public places where identification is required. 
Such clothing, the logic goes, is not conducive to integration. 
But no internal security measures, much less clothing requirements, can guarantee Europe’s safety. 
To find a real solution, European leaders must address the ideological roots of the security challenges they face. 
The problem is not Islam, as many populists claim (and as the burqa and burkini bans suggest). 
Muslims have long been part of European society, accounting for about 4% of Europe’s total population in 1990 and 6% in 2010. 
And previous waves of immigration from Muslim countries have not brought surges in terrorist activity within Europe’s borders. 
For example, beginning in the 1960s, roughly three million migrants from Turkey settled in Germany to meet the booming economy’s demand for labor, without posing any internal security threat. 
Today, that threat results from radical Islamism – a fundamentalist vision of society reordered according to Sharia law. 
Beyond enduring untold suffering and violence, many of today’s refugees, from war-torn countries like Iraq and Syria, have imbibed radical Islamist ideology and, specifically, calls to jihad. 
Some might be Islamic State fighters who have disguised themselves as asylum-seekers, in order to carry out terrorist attacks in Europe. 
US intelligence officials have repeatedly warned of this possibility. 
Even for the majority of asylum-seekers, who are genuinely seeking safety, the violence and Islamist rhetoric to which they have been exposed may have had a powerful psychological impact. 
After living for so long in a conflict zone, assimilating to a peaceful society governed by the rule of law requires the newcomers to develop a new mindset, one that enables them to face genuine challenges without resorting to criminality. 
And this does not even account for the deep psychological scars that will afflict many of the refugees. 
Research indicates that more than 50% of the men and women who have spent time in war zones experience at least partial posttraumatic stress disorder, which is associated with an increased risk of violence. 
To many in Europe, these factors suggest that the key to keeping Europe safe is controlling the flow of refugees, including through improved vetting procedures. 
(Such procedures have often been lacking, owing to the sheer number of refugees pouring in.) 
And there is a case for keeping the refugees in the Middle East, though a key mechanism for doing that – the European Union’s deal with Turkey – is now at risk, owing to political turmoil following last month’s failed coup against Turkish President Recep Tayyip Erdoğan’s government. 
But not even constructing a Fortress Europe would eliminate the terrorist threat. 
After all, some attacks, including in Brussels and Paris, have been carried out by Muslim European citizens who became radicalized in their own bedrooms. 
According to Rob Wainwright, who heads Europol, some 5,000 European jihadists have been to Syria and Iraq, and “several hundred” are likely plotting further attacks in Europe after returning home. 
The only way to address the threat of terrorism effectively is to tackle the radical Islamist ideology that underpins it. 
This means working to stop the religious-industrial complexes in Saudi Arabia, Qatar, and elsewhere in the Gulf from using their abundant petrodollars to fund the spread of extremist ideology. 
It also means launching a concerted information campaign to discredit that ideology, much like the West discredited communism during the Cold War – a critical component of its eventual triumph. 
This is a job for all major powers, but it is a particularly urgent task for Europe, given its proximity to the Middle East, especially the new jihadist citadels that countries like Syria, Iraq, and Libya represent. 
To take down the terrorists requires delegitimizing the belief system that justifies their actions. 
Burqa bans and other measures by European authorities that target Islam as such are superficial and counter-productive, as they create divisions in European society, while leaving the ideological underpinnings of terrorism unaddressed. 

How to Target Iraq 
In the current debate about policy towards Iraq, two extreme alternatives are usually presented: either extend the military campaign against terrorism to Iraq, or maintain the current uneasy status quo with that country. 
Pious talk about reworking the UN sanctions is another version of the second alternative - that is, of doing nothing. 
Both alternatives are unpalatable. 
Yet preparing a ground war against Iraq - finishing off the unfinished business of the 1991 Gulf War - is a high risk strategy. 
Arab countries, already questionable allies in the war against fellow Muslims in Afghanistan, will be even less reliable in a war against fellow Arabs. 
The Europeans, let alone the Russians, may demure. 
The military odds appear daunting. 
Still, letting the status quo continue is equally problematic. 
It means that the Iraqi people will continue to suffer - both from Saddam's brutalities, as well as from the consequences of the sanctions caused by his continued rule. 
Moreover, it would continue to send the wrong message to would-be terrorists: you can get away with murder. 
The perceived weakness of the US after the embassy bombings in East Africa and the attack on the destroyer the USS Cole no doubt contributed to the audacity of the attacks of September 11 th . 
Other options, however, do exist and a combination of them could help bring down Saddam without necessarily engaging in outright military action. 
First, local forces opposed to Saddam should be encouraged. 
By this I do not mean the loudmouthed but totally ineffective so-called Iraqi Opposition. 
The local forces to be encouraged - by special operations people and the provision of arms and training - are the leaders of the southern Shi'a and the northern Kurds. 
In the latter case, the infrastructure for support already exists, though it was partially dismantled during the Clinton administration. 
In the Shi'a south, still reeling from the brutal suppression of the ill-fated 1991 rebellion, contacts must be created and networks established. 
Iraq's neighbors - Saudi Arabia in the south and Turkey in the north - must be reassured that Shi'a and Kurdish rebellion will not result in the dismantling of Iraq and a change of borders: both countries have legitimate concerns regarding this issue. 
With the current much more open regime in Teheran, Riyadh can also be convinced that the dangers from an Iranian-controlled Shi'a entity in southern Iraq are less formidable now than they were in 1991. 
On the other hand, the cozy relationship that now exists between Jordan and Saddam must be addressed, with all sensitivity to Jordan's dilemmas. 
The Iraqi politico-military elite must be both targeted and approached. 
Saddam has been masterful at filling most crucial positions in the army and security services with people who come from his Tikriti clan. 
But they are far from being a monolithic group: enmity, jealously, anger over the past brutalities and injustices visited upon many of their kin may make some generals and colonels open to suggestions of a coup. 
Those suggestions should be premised on a two level approach: first, the US, with UN support, should create a war crimes tribunal to judge Saddam and his top generals: they should know that come the day of reckoning, they will be hunted down like Milosevic and his minions. 
One major indictment should deal with the use of poison gas against Kurdish rebels in Halabja during the time of the Iran/Iraq war. 
Parallel to this, and the encouragement of insurrections in Iraq's south and the north, preparations for a military option should be credibly enhanced. 
But with the stick should come a carrot: with good intelligence, some Iraqi generals and colonels should be approached with offers of amnesty and support should they decide to try to topple Saddam. 
Failure to act, they should be told in no uncertain terms, will leave them exposed (like Saddam) to an indictment by in an international war crimes tribunal once Saddam's rule is brought to an end. 
They should also be offered the lifting of sanctions on Iraq provided that they - after getting rid of Saddam - accept the resumption of a UN inspection regime. 
Even if this will not immediately bring Saddam's regime down, such active attempts at undermining his rule will certainly make Saddam nervous, and as Ceausescu and Milosevic have shown, nervous dictators make fatal mistakes. 
One premise underlies this entire line of thought: to imagine that there is a democratic alternative to Saddam, or that once he disappears there will be a democratic transition in Iraq, is to entertain dangerous illusions. 
The only alternative to Saddam's regime is some sort of military rule, but one less oppressive and relatively more open. 
It must certainly be committed to a foreign and internal policy not based on terrorism and thuggery and a Saddam-like quest for weapons of mass destruction. 
Here, undoubtedly, is a complicated strategy, and one with its own inherent pitfalls. 
One key advantage of it is that such an approach has a real chance of gaining support, albeit sometimes tacit, from Arab countries - and from Europe and Russia as well. Such a calibrated approach, however, combining a differentiated understanding of the nature of Saddam's regime and its weaknesses, has a better chance of success than an outright assault, or the dangers inherent in allowing Saddam to remain in power. 
The successes in Afghanistan call for an equally nuanced and sophisticated approach in regard to Iraq. 

Reading the Signs of the Times 
PARIS – Comparing today’s demagogues with Adolf Hitler is almost always unwise. 
Such alarmism tends to trivialize the actual horrors of the Nazi regime, and distracts attention from our own political problems. 
But if alarmism is counterproductive, the question remains: At what point are democracies truly in danger? 
What was unimaginable only a few years ago – a US president insulting democratic allies and praising dictators, or calling the free press “enemies of the people,” or locking up refugees and taking away their children – has become almost normal now. 
When will it be too late to sound the alarm? 
Great books have been written about this very question. 
Giorgio Bassani’s masterpiece, The Garden of the Finzi-Continis, describes the lives of bourgeois Italian Jews under fascism. 
Slowly, step by step, a legal and social noose tightens around these cultivated Italians, who took their lives of comfort and influence for granted. 
And yet, in different ways, they are in denial. 
The narrator’s father even joins the Fascist Party, while the wealthier Finzi-Continis withdraw into their ever more isolated family circle. 
Pride and a lack of imagination blind them to the danger they are in, until it is too late and they are deported to the death camps. 
The human incapacity to see what is coming also animates Sebastian Haffner’s memoir Defying Hitler, written in 1939, a year after he left his native Germany. 
Haffner, later a journalist and author, was a law student who witnessed how the Nazi dictatorship became lethal, again incrementally, like the persecution of Jews in Italy. 
He saw how his fellow law students, none of whom were Nazis, came to accept each step – racial laws, abrogation of the constitution, and so on – precisely because they were couched in legal terms. 
There never seemed to be a point at which they recognized that an intolerable line had been crossed and only resistance or exile would do. 
Haffner, who was not Jewish, did recognize it; he left in the year that synagogues were torched and Jews driven from their homes. 
Under most circumstances, there are probably more Finzi-Continis than Haffners. 
It is hard to sleep well in a state of alarm. 
Life is easier if the world seems normal, even if it is anything but. 
There are many ways people stick their heads in the sand, and some parallels between our own time and Europe in the early 1930s can be seen. 
Quite a number of German businessmen and industrialists, who were conservatives but not Nazis, thought they could live with Hitler, as long as he benefited them financially. 
He was a vulgar upstart, whose manners might not have been the finest, but surely they would be able to control him. 
Historical knowledge can help people to recognize certain patterns of behavior – attacks on an independent judiciary, for example – that have led to tyranny in the past. 
But historical memory, often blended with myth, can also stop people from reading the signs of what might come. 
In countries with a democratic history, it is easy to assume that “it could never happen here,” because “our institutions are too strong,” or “our people love freedom too much,” or they are “too civilized” or “too modern” to slide into barbarism. 
Leftists can be just as blinkered as conservatives. 
Communists (instructed by Stalin), but also the non-Communist left in 1920s Germany, refused to defend the fragile Weimar Republic when it was under assault from the right. 
Communists saw social democrats as a greater danger than Nazis; and leftwing intellectuals were distracted by the hypocrisy and corruption of mainstream parties they really should have supported. 
Donald Trump may not be a reincarnated Hitler, but Republicans’ acquiescence in every step he has taken away from civilized democratic norms is ominous. 
And so is talk on the far left that the difference between Trump and Clinton or Obama is one of degree, not kind: he merely displays the iniquities of neoliberalism more blatantly than they did. 
In both cases, the particular dangers posed by today’s right-wing populism are underrated or ignored. 
The much-maligned mainstream press – those “enemies of the people” – is still robust. 
But its influence is waning. 
What appears in The New York Times or the Washington Post matters less than presidential tweets that go straight to millions of people and are echoed in partisan radio or TV shows. 
In a polarized society, politicians who stir up the mob by exploiting fear and resentment are probably more likely to be successful than less exciting figures who try to appeal to our more rational faculties. 
Political parties that oppose the anti-liberal trends are in a serious bind. 
If they respond to youthful anger and idealism and move too far to the left, they could lose essential votes in the center. 
If they choose centrist candidates, who look for reforms rather than radical change, they might lose the fired-up young. 
And yet freedoms must be defended, which is possible only when the threats are seen clearly. 
The moment people stop believing that the demagogues can be prevented from doing their worst is the moment we can be sure that it is already too late. 

How to Undermine an Alliance 
TOKYO – 2010 marks the 50th anniversary of the signing of the Japan-United States Security Treaty. 
But, instead of celebrating an agreement that has helped stabilize East Asia for a half-century, the treaty is now at serious risk, as much from indecision as from kneejerk anti-Americanism. 
In August 2009, Japan’s people voted for “change.” 
The Liberal Democratic Party, which had ruled Japan for most of the post-war decades, lost parliamentary elections to the Democratic Party of Japan. 
The key reason for the DPJ’s victory was that voters were fed up with the LDP. 
That feeling had been growing in the country for some time. 
In the election of 2005, the LDP retained power only because Prime Minister Junichiro Koizumi positioned the LDP as an agent of change. 
But after Koizumi left office, Japan’s prime ministers – Shinzo Abe, Yasuo Fukuda, and Taro Aso – came and went so swiftly that our country’s leadership came to seem like a “soup du jour.” 
With so little respect being shown for the LDP’s leaders, it is no surprise that Japanese voters lost what little patience they had left for the party and its antiquated practices. 
So the DPJ took power, and formed a coalition government with two smaller parties, the Social Democratic Party (SDP), and the People’s New Party (PNP). 
The DPJ’s only reason for being, however, is its anti-LDP stance, while the SDP has long opposed the Japan-US Security Treaty, and the PNP strongly opposes the privatizations of the Koizumi era. 
That does not amount to a coherent government program, and Prime Minister Yukio Hatoyama’s administration quickly revealed the DPJ’s fundamental hollowness. 
But the biggest problem with Hatoyama’s government is that the DPJ took power without a coherent national security policy. 
This should not have surprised anyone. 
The DPJ was established in 1998 as a “jambalaya” party, consisting of people who had abandoned the LDP, including Hatoyama himself, and the former Socialist Party. 
One of the DPJ’s major campaign pledges was “change,” which, at its core, meant anything but the LDP. 
But should opposing the LDP really mean undoing 50 years of work on national security? 
Although that now seems to be the case, the DPJ gave only a few lines to national security in its election manifesto, thereby avoiding infighting between the party’s left-wingers, who oppose the Japan-US Security Treaty, and its right-wingers, who support it. 
Quite a few members of Hatoyama’s cabinet are as much “anti-Japan” as they are anti-US. 
For example, Yoshito Sengoku, Minister of State for Government Revitalization, was once a member of Shaseidou, a left-wing youth group that is reflexively anti-American, as was Hirotaka Akamatsu, Minister of Agriculture, Forestry, and Fisheries. 
As a result, Hatoyama’s administration seems to be trying to emulate South Korea’s former Roh Moo-hyun administration, which foolishly sought to distance that country from its main defensive partner, the US. 
Indeed, many in the DPJ cabinet are baby boomers influenced by the radical student groups that opposed the Japan-US Security Treaty 50 years ago. 
But, as these would-be radicals play politics with Japan’s national security, serious tensions are mounting in our region. 
China continues its military build-up, and North Korea remorselessly pursues nuclear weapons while refusing to resolve or even explain its abduction of dozens of Japanese citizens over the years. 
Instead of dealing with these concrete threats to Japan, Hatoyama continues to act like an opposition politician by attacking the LDP and undermining one of the proudest achievements of LDP rule, the deep and trusting alliance with the US. 
Of course, disagreements do arise in the Japan-US relationship. 
A realignment of US military forces in Japan is needed, with priority given to relocating the Futenma US Marine Corps base on Okinawa, which houses half of the 47,000 US troops in Japan. 
It makes no sense to have that base located in the middle of a densely populated town, making it one of the most visible and tempting targets in the world. 
Hatoyama’s administration, however, is attempting to reverse the current plan, which the LDP administration and the US had agreed upon after long and intense discussions. 
The problem is that Hatoyama, in backing away from the agreed plan, has no viable alternative to offer. 
One day Hatoyama suggests relocating the base outside of Japan, perhaps to Guam, and then next he suggests only moving it outside Okinawa, giving an impression to the world of a feckless national security strategy. 
In November, when US President Barack Obama visited Japan, Hatoyama uttered the words “trust me” in an attempt to settle the issue. 
The next day, he said things that completely contradicted what he had just told Obama – stunning the US government and ordinary Japanese alike. 
Since then, his administration’s approval rating has dropped from 80% to 50%. 
People are discovering that Hatoyama is incapable of making – and sticking with – a decision. 
To be sure, finding an alternative location for the US base is extremely difficult, as Japanese are as prone to NIMBY (not in my backyard) reactions as anyone else. 
Moving the base to the lightly populated Henoko District in the northern part of Okinawa – a solution agreed by both governments – is the only realistic choice. 
Yet Hatoyama dithers, undermining the most important pillar of peace and security in the Pacific, the Japan-US alliance. 
This is not a favorable situation for Japan, the US, or, indeed, the entire world. 

How to Waste a Crisis 
The global financial crisis is reaching a bottom, and yet political frustration is growing, because the low point of the collapse seems to offer a last opportunity to promote dramatic change, and that opportunity may be missed. 
Last year, President Obama’s chief of staff Rahm Emanuel remarked that a good crisis should never be wasted. 
Disaster is an opportunity for thinking of ways to make the world fundamentally better – and also prevent future crises. 
People do a great deal of thinking, but sometimes they think so much that they come up with contradictory responses. 
Indeed, what really makes a crisis profound is precisely the broad variety of differing diagnoses and different remedies. 
The political passions aroused by the clashes of interpretation often make the crisis seemingly insoluble. 
It was those conflicts, rather than some technical flaw in the operation of the economy, which made the Great Depression of the 1930’s such a dismal and destructive event. 
Responses to a crisis fall into two categories. 
The first type aims at an institutional reordering, so that inefficiencies and perverse incentives are removed, and the economy functions more smoothly and efficiently. 
The second, more radical approach, tries to improve not the economy but the way people themselves go about their lives. 
No institutional solution is purely neutral in its effects on relative incomes – and it is relative income and wealth around which political debate typically revolves. 
Bailout operations invariably bring bitter controversy because they help some but not others. 
Rescuing automobile producers looks good to their employees and suppliers. 
But the costs must be borne by everyone, including firms that are not rescued – probably because they operate more efficiently – and are put at a competitive disadvantage as a result. 
Such rescues, in short, appear to help big companies with bad managers. 
Small businesses will always complain that they do not have the organizational clout to extract public funds from governments. 
And bank bailouts, involving the direct use of public money to recapitalize failing institutions, are even more costly and politically unpopular. 
Advocates of monetary stimulation sometimes argue that it is preferable because it is more neutral in its distributional effects, and that its benefits are spread more widely. 
But monetary stimulus is often in reality just as selective as bailouts. 
The analogy popularized by the great monetarist economist Milton Friedman was that the central bank could always deal with deflationary problems by dropping money from a helicopter. 
But, in the real world, not everyone is underneath the helicopter when it makes the drop. 
In fact, it is likely that the helicopter pilot will hover over friends and relatives when dropping the money. And even if the pilot is completely non-corrupt, the crowd on the ground will always assume that there is some hidden and partisan plan. 
That has been precisely the problem with the aggressive provision of liquidity, quantitative easing, and the reduction of central bank interest rates used to address the current crisis. 
In today’s credit crunch, as in the Great Depression, central banks lend at practically zero interest rates. 
Depositors are paid almost nothing on their deposits. But when businesses and consumers try to borrow, they find that it is very costly, if not impossible. 
Lenders (the bankers) are suspicious, worried about creditworthiness, and demand high risk premia. 
As a consequence, in most countries, credit is still contracting. 
In practice, it is only banks that have access to cheap borrowing, so they can reconstitute their balance sheets by borrowing cheaply and lending expensively. 
This is why banks suddenly look so unexpectedly profitable. 
But the contrast between bank profitability and the woes of everyone else turns up the political heat on the central banks, which have to explain why it is only their “friends,” the banks, who are standing under the helicopter when it drops money. 
Frustration with the complexities of trying to provide ready fixes leads to attempts to find even more radical solutions. 
Some try to deal with basic human proclivities, and to modify behavior to make people better. 
It is in times of crisis that Utopian ideas about ways of guaranteeing human happiness flourish, often claiming some scientific basis. 
For example, long before the financial collapse, experimental economists joined psychologists in attempting to measure varying propensities to greediness. 
Some evidence suggests that there is a link between the level of dopamine, addiction, and greedy behavior. 
Since a common diagnosis of the problems generated in the financial services business holds that human greed is to blame, a German think tank recently suggested that people with a genetic proclivity to high dopamine levels should be barred from taking leading positions in financial institutions. 
But such apparently attractive strategies aimed at making better people turn out to be exclusionary – and based on rather arbitrary testing. 
If implemented, the German proposal would most likely exclude behavior that involves acceptable risk, as well as sidelining those who take wild and inappropriate decisions. 
Both the institutional and the behavioral responses to a crisis are fundamentally problematical. 
The search for technical solutions leads to political polarization, and may produce stalemate. 


How Trump Would Weaken America 
CAMBRIDGE – Donald Trump, the Republican Party’s presumptive US presidential nominee, has expressed deep skepticism about the value of America’s alliances. 
His is a very nineteenth-century view of the world. 
Back then, the United States followed George Washington’s advice to avoid “entangling alliances” and pursued the Monroe Doctrine, which focused on US interests in the Western Hemisphere. 
Lacking a large standing army (and with a navy that in the 1870s was smaller than Chile’s), the US played a minor role in the nineteenth-century global balance of power. 
That changed decisively with America’s entry into World War I, when Woodrow Wilson broke with tradition and sent US troops to fight in Europe. 
Moreover, he proposed a League of Nations to organize collective security on a global basis. 
But, after the Senate rejected US membership in the League in 1919, the troops stayed home and America “returned to normal.” 
Though it was now a major global actor, the US became virulently isolationist. 
Its absence of alliances in the 1930s set the stage for a disastrous decade marked by economic depression, genocide, and another world war. 
Ominously, Trump’s most detailed speech on foreign policy suggests that he takes his inspiration from precisely this period of isolation and “America First” sentiment. 
Such sentiment has always been a current in US politics, but it has remained out of the mainstream since the end of World War II for good reason: It hinders, rather than advances, peace and prosperity at home and abroad. 
The turn away from isolation and the beginning of the “American century” in world politics was marked by President Harry Truman’s decisions after WWII, which led to permanent alliances and a military presence abroad. 
The US invested heavily in the Marshall Plan in 1948, created NATO in 1949, and led a United Nations coalition that fought in Korea in 1950. 
In 1960, President Dwight Eisenhower signed a security treaty with Japan. 
American troops remain in Europe, Japan, and Korea to this day. 
While the US has had bitter partisan differences over disastrous interventions in developing countries such as Vietnam and Iraq, there is a bedrock of consensus on its alliance system – and not just among those who make and think about foreign policy. 
Opinion polls show popular majorities in support of NATO and the US-Japan alliance. 
Nonetheless, for the first time in 70 years, a major US presidential candidate is calling this consensus into question. 
Alliances not only reinforce US power; they also maintain geopolitical stability – for example, by slowing the dangerous proliferation of nuclear weapons. 
While US presidents and defense secretaries have sometimes complained about its allies’ low levels of defense spending, they have always understood that alliances are best viewed as stabilizing commitments – like friendships, not real-estate transactions. 
Unlike the constantly shifting alliances of convenience that characterized the nineteenth century, modern American alliances have sustained a relatively predictable international order. 
In some cases, such as Japan, host-country support even makes it cheaper to station troops overseas than in the US. 
And yet Trump extols the virtues of unpredictability – a potentially useful tactic when bargaining with enemies, but a disastrous approach to reassuring friends. 
Americans often complain about free riders, without recognizing that the US has been the one steering the bus. 
It is not impossible that a new challenger – say, Europe, Russia, India, Brazil, or China – surpasses the US in the coming decades and takes the wheel. 
But it is not likely, either. 
Among the features that distinguish the US from “the dominant great powers of the past,” according to the distinguished British strategist Lawrence Freedman, is that “American power is based on alliances rather than colonies.” 
Alliances are assets; colonies are liabilities. 
A narrative of American decline is likely to be inaccurate and misleading. 
More important, it holds dangerous policy implications if it encourages countries like Russia to engage in adventurous policies, China to be more assertive with its neighbors, or the US to overreact out of fear. 
America has many problems, but it is not in absolute decline, and it is likely to remain more powerful than any single state for the foreseeable future. 
The real problem for the US is not that it will be overtaken by China or another contender, but that a rise in the power resources of many others – both states and non-state actors – will pose new obstacles to global governance. 
The real challenge will be entropy – the inability to get work done. 
Weakening America’s alliances, the likely result of Trump’s policies, is hardly the way to “make America great again.” 
America will face an increasing number of new transnational issues that require it to exercise power with others as much as over others. 
And, in a world of growing complexity, the most connected states are the most powerful. 
As Anne-Marie Slaughter has put it, “diplomacy is social capital; it depends on the density and reach of a nation’s diplomatic contacts.” 
The US, according to Australia’s Lowy Institute, tops the ranking of countries by number of embassies, consulates, and missions. 
The US has some 60 treaty allies; China has few. 
The Economist magazine estimates that of the world’s 150 largest countries, nearly 100 lean toward the US, while 21 lean against it. 
Contrary to claims that the “Chinese century” is at hand, we have not entered a post-American world. 
The US remains central to the workings of the global balance of power, and to the provision of global public goods. 
But American preeminence in military, economic, and soft-power terms will not look like it once did. 
The US share of the world economy will fall, and its ability to wield influence and organize action will become increasingly constrained. 
More than ever, America’s ability to sustain the credibility of its alliances as well as establish new networks will be central to its global success. 

How United Is "New Europe?" 
Seen from the point of view of the European Union's longtime member states, the eight postcommunist countries that - together with Cyprus and Malta - joined the EU on May 1st seem united in their positions on most important issues. 
Indeed, since the US intervention in Iraq, many West Europeans see the EU's new members from Europe's East as something of a bloc. 
US Defense Secretary Donald Rumsfeld's division of Europe into "new" and "old" was, above all, a clever ploy that helped the Bush Administration get its way by using the old strategy of "divide and rule." 
But, although it reflected real differences between established EU members and the newcomers, it also managed to solidify the false impression that the EU's new members share a similar identity and political agenda. 
Rumsfeld's remarks were divisive because Western Europe seems to know even less than the Americans about Europe's eastern half. 
In reality, big differences exist among the new EU members. 
Even with regard to Iraq, there was little unity. 
While some countries ­- say, Poland - strongly supported America's war effort, others tried to balance their support for the US with their "understanding" of the views of Germany and France. 
Still others - for example, Slovenia - stood on the side of "old Europe." 
Beyond politics, there are vast differences among the economies of the new members, not only in terms of wealth, but also in their structures. 
Industrialized and urbanized countries, with relatively small agricultural sectors, such as the Czech Republic, Slovenia, or Slovakia, have different concerns than Poland, where farmers form 20% of the population. 
Historical traditions also play a role. 
Although all new member states claim to be "western," some are more Western than others. 
The Czech Republic, Slovakia, Hungary, Slovenia and parts of Poland share a common legacy of Mitteleuropa , formed during the Hapsburg Empire. 
Moreover, communism in those states was different than that practiced in the three Baltic countries, which were part of the Soviet Union. 
At the start of the 1990's, following communism's fall, the common experiences and the shared legacy of Czechoslovakia, Hungary, and Poland were behind the idea of creating the so-called "Visegrad Group," with the aim of coordinating the three countries' efforts to join the EU and NATO. 
The Visegrad initiative worked to some extent, though it was temporarily paralyzed by the disintegration of Czechoslovakia just over a decade ago. 
Although the leaders of Poland, Hungary, the Czech Republic and Slovakia recently declared they wanted to keep the Visegrad grouping alive even after their countries' enter the EU, the future of Visegrad cooperation is uncertain. 
In fact, the fate of this group is perhaps the best example of how individual identities of the new member states are beginning to assert themselves now that membership in the EU and NATO are secured. 
Poland, as its stance over the EU constitution demonstrated, pursues its own specific interests in a united Europe, which may be difficult to harmonize with the interests of smaller Central European states. 
Once in the Union, Poland will have an even freer hand, unconstrained by the need to support the aspirations of other East European countries. 
Some advocates of a closer Visegrad cooperation criticize Poland's emerging strategy, while euroskeptics in the Czech Republic, Hungary, and Slovakia applaud the Poles. 
For example, the Czech Civic Democratic Party, heavily influenced by Czech President Vaclav Klaus, describes Poland as the Czech Republic's chief ally and an example of how new members should approach the EU. 
The situation could become even more complicated, because some leaders in the Czech Republic, Hungary, and Slovakia would like to join the "hard core" of European integration should some European states one day decide to create a two-speed Europe. 
If these countries join the hard core of European integration, while others, Poland in particular, opt to stay out, it would create a dividing line between them, burying Visegrad cooperation. 
Regardless of what happens, all Europe needs to get past clichés about "old" versus "new" Europe. 
Poland may find that it has security and other interests in common with some states of a similar size in the current EU. 
The three Baltic states will most likely cooperate much more closely with the Scandinavian countries than with the other new members. 
It is also time to start thinking about a new way of organizing Central Europe. 
For the Czech Republic, Hungary, and Slovakia, close cooperation with Poland may not be the best way to protect their interests in the EU, as their interests and the interests of a big, self-confident Poland may not be identical. 
It may be more natural for the Czech Republic, Hungary, and Slovakia to strive for closer regional cooperation with Austria and Slovenia, the contours of which can already be seen in some existing regional groupings. 
Such a regional group would be bound together by a long common history and compatible interests. 
This would be much more effective and durable than the Visegrad initiative, which lumps together three small states with a country that has more inhabitants than its three partners put together, plus its own agenda. 

How Will Tomorrow’s Scientists Learn? 
I was recently invited to speak at science-related meetings on two consecutive days in different places in Europe. 
One was the official opening of a network of science centers in Vienna, linking decentralized activities in an interactive exhibition that tour Austria. 
The other was the Science Festival of Genoa, Italy, a young and hugely successful event with exhibitions and high-profile speakers throughout the ancient town. 
What struck me on both occasions was the sustained, and evidently successful, attempt to reach out to the two target groups upon whom the future of science and technology will depend. 
The first group is teenagers, who are deeply interested in all the new technologies and gadgets that surround them. 
They have made these technologies an integral part of their lives, but their relationship to science has remained distant. 
The other target audience consists of younger children, whose openness and inborn curiosity have not yet been stifled by formal schooling. 
The success of Europe’s newly established science centers and festivals in reaching their potential audiences reflects their invention of a new way of teaching and learning. 
They have succeeded in setting up a largely informal learning environment, focusing mainly on truly interactive learning. 
By soliciting questions from children that have little place in the formal educational system, the audience is led to experience the research process – which often begins precisely by asking the right kind of question. 
Although we will need more such informal learning environments in the future, politicians and the public have hardly noticed. 
Gone are the utopian dreams of the 1970’s, when there were visions of life-long learning and paid leaves of absence to pursue topics that might be useful for further professional advancement – or might also include the sheer luxury of studying ancient Greek or Assyrian art. 
But the need for some kind of continuous learning has become even more obvious today, in a world driven by the forces of globalization. 
The relentless competition for talent and skills is being underscored daily by the increases in R&D investment in China and India, whose growing middle classes are only too keen to seek better educational opportunities for their children. 
Talent is now recognized as a scarce commodity that needs to be nurtured for a worldwide market of skills and competencies. 
“The battle for brainpower,” as The Economist recently put it, has begun. 
It is fairly safe to predict that learning in a knowledge-intensive society will continue at a heightened pace, both at the workplace and outside of it. 
It will be facilitated through Web-based social software, through wikis, blogs, and similar developments as much as through new, “open source” business models. 
These are informal structures, even if they have owners and access to them is regulated. 
The corporate world – indeed, the formal workplace more generally – can no longer be strictly separated from the informal world in which work and leisure have become blurred. 
Just as formal schooling needs to become better integrated with the informal learning environments to which our children are exposed in multiple ways, formal and informal learning must mesh in a life-long process. 
Science and technology have an enormous stake in this development, and worldwide competition for the best brains is already acutely felt in European universities. 
This year’s Nobel Prizes highlighted once more that the research climate in the United States continues to be more conducive to scientific excellence compared to what Europe has to offer. 
Initiatives aimed at fostering scientific excellence in Europe, like one recently launched in Germany that officially defined three universities, all in the southern part of the country, as “excellent”(qualifying them for extra funding), seek to make universities more attractive and thus more competitive. 
While such efforts certainly point in the right direction, the research-friendliness and innovativeness of the wider societal environment – particularly practices of informal learning and opportunities to follow one’s curiosity – also matter. 
When, beginning in the nineteenth century, book publishing became not only a lucrative business, but also made books increasingly affordable to many more households, the sources of learning in society exploded. 
Indeed, the societal wealth created through the Industrial Revolution is partly due to this new diffusion of knowledge and skills. 
Seeing the excitement that can be generated in young people through events like science festivals and networks of science centers gives rise to cautious optimism – provided we seize the diversity of opportunities that informal learning offers. 
Informal learning implies a messy, unruly, and potentially subversive process. 
But it also promises to nurture the creative ferment in which great science thrives. 

How Women Go Bankrupt 
As the world struggles to emerge from the economic near-collapse of last fall, there is one sub-group that has slid below the waterline in record numbers: formerly middle-class women. 
A new report shows that a million American middle-class women will find themselves in bankruptcy court this year. 
This is more women than will “graduate from college, receive a diagnosis of cancer, or file for divorce,” according to the economist Elizabeth Warren . 
Their plight, symptomatic in many ways of the plight of women around the world, holds lessons for us all. 
These bankrupt women are better educated than their male counterparts: most have some college; and more than half own their own homes. 
What tipped them from middle-class lifestyles to incomes just above the poverty line were likely to have been one or all of three factors. 
Two are economic, and, for many women, the third may be emotional. 
First, these women tend to be awash in debt. 
Just about everyone spent above their means in the recent bubble, but middle-class women have a special relationship to debt. 
Many of them have jobs that require them to dip into credit lines just to stay afloat. 
But others have been successfully targeted by luxury-goods manufacturers and credit-card companies, which benefit from the way that mass culture ties certain kinds of consumerism – the latest designer clothes, this season’s “it” bag, the right highlighting, and even the trendiest sports car – into a narrative of successful femininity. 
Nor is this pressure confined to the United States. 
New middle classes are emerging globally, and magazines like Cosmopolitan and Vogue are targeting newly middle-class women in India and China – many of them part of a generation with its own disposable income for the first time ever in their family histories – with the very same luxury goods. 
The second reason that a million US women have filed for bankruptcy is that legislation enacted in 2005 now pits individual women – who can’t afford costly legal advice – against credit-card companies in terms of who gets paid first when ex-husbands owe delinquent credit-card payments and child-support payments. 
These pressures are serious, and both are discussed publicly. 
But there is frequently a third factor in middle-class women’s economic stress, one that is seldom publicly addressed, much less measured. 
It has to do with many middle-class women’s emotionally complex expectations and projections about money. 
In the young women’s leadership program that I help to run at the Woodhull Institute, we regularly see that middle-class women, more often than working-class women, find it embarrassing to talk about money. 
When they do bring it up – to employers, for example – they use apologetic, self-defeating language. 
They are reluctant to negotiate salaries and rarely know how to do so. 
They believe that asking for money in exchange for their labor makes them “unfeminine.” 
They frequently assume that working twice as hard as those around them – while never speaking up for their own worth or accomplishments – will generate a raise because an authority figure will notice. 
Moreover, these women tend to have unrealistic notions about their economic paths. 
Young, middle-class women often fail to save because they assume – still – that marriage will rescue them financially. 
As a result, they often see buying trendy shoes or a great haircut – rather than giving some money each month to a broker – as an “investment” in their romantic futures. 
And the familiar cliché is all too often true: older middle-class women fail to become financially literate in their own households, leaving brokerage accounts, pension accounts, taxes, life insurance, and so on to their husbands. 
This leaves them economically vulnerable when divorce or widowhood strikes. 
Paradoxically, we have found that working-class women (and women of color) rarely harbor such economically problematic structures of denial. 
They tend to be more ready than middle-class white women, in our experience, to master the basics of financial literacy and to learn salary negotiation, because they don’t have the luxury of assuming that a knight on a white horse will rescue them economically. 
Indeed, the financial pragmatism of working-class and poor women is the reason for the successes in the developing world of micro-financing that puts money in their hands. 
It would surprise me if middle-class women anywhere in the world – brought up to view certain forms of economic ignorance and naiveté as socially appropriate – could, without climbing a steep learning curve, be as reliable and hard-nosed as the world’s poor and working-class women consistently prove themselves to be. 
The new book Financial Intimacy , by Jacquette Timmons, a talented financial coach who focuses on women, offers truths that would have been valuable to any of the middle-class women now in crisis. 
“Many women today earn significantly more than women in previous generations,” she writes. 
“But, ironically, that hasn’t necessarily resulted in a higher degree of financial security,” owing to the “don’t talk about money taboo.” 
When middle-class women anywhere in the world get over this taboo, we will do so by understanding that money is never just about money, and that becoming financially literate means pushing back against a social role that casts middle-class women as polite, economically vague, underpaid, shopping-dazed dependents. 
All the other awful pressures that are driving so many women into bankruptcy will still exist, but at least more women will be facing these pressures with their eyes wide open, and, one hopes, with many better options. 

Japan’s Secret Demographic Weapon 
NEW YORK – As the annual World Bank/International Monetary Fund meetings get underway in Tokyo, Japanese leaders must confront an unfolding demographic disaster. 
Japan’s National Institute of Population and Social Security Research recently forecast that by 2060, the country will have lost nearly one-third of its 2010 population of 128 million, and just half of this smaller population will be between 15 and 65 years old – the most productive age group in any economy. 
These are the kinds of numbers usually produced by wars and epidemics, and they imply both a dramatic drop in the number of young people able to provide for their elders and a much greater debt burden for a country that is already carrying one of the world’s heaviest. 
To solve this problem, Japan’s political leaders have three options: find some way to raise the country’s birthrate dramatically, open a long-insular society to a wave of immigrants, or finally unveil the country’s secret weapon – the energy, talents, and ingenuity of Japanese women. 
Opening the country to a surge of immigrants makes sense, but Japan is not about to become an American-style melting pot, and this solution alone would be inadequate to the scale of the demographic challenge. 
Foreigners make up less than 2% of Japan’s population, and a United Nations report from 2001 found that Japan would need inflows averaging 609,000 immigrants per year until 2050 to maintain the percentage of its working-age population. 
That is why Japanese policymakers should prioritize drawing more women into the workforce. 
For the moment, things are moving in the wrong direction. 
Japan slipped from 80th place in the World Economic Forum’s gender-gap rankings in 2006 to 98th in 2011, a worrying sign that a critical opportunity is being missed. 
For women in the workplace, Japan remains the Saudi Arabia of the developed world. 
The first step toward reversing this trend could be to create work environments that are better suited to the needs of Japanese women, and that promote their talents. 
Government officials have taken modest steps in this direction, but culture and inertia remain powerful obstacles. 
Still, the prize for getting this right is worth the effort. 
A 2010 Goldman Sachs study concludes that an increase in female labor-force participation rates to parity with men would add 8.2 million workers to Japan’s economy, virtually erase the projected decline in the country’s working-age population, and boost GDP growth by 15%. 
The problem is not that Japanese women lack opportunities for higher education; the university enrollment rate for 18-year-old women already exceeded that of men in 2005. 
But just 65% of women with college degrees are now working. 
One problem is that working for Japanese firms often requires both long hours on the job and post-work socializing with colleagues – customs that make life harder for working mothers. 
But Japanese men, who spend less time caring for children than fathers in most other industrialized countries, could share more of the responsibilities of parenting. 
Better work-life balance would benefit both men and women. 
And increasing the availability of affordable child care would help, too. 
Those who resist feminizing the workforce might argue that doing so would mean fewer children – and thus a new demographic complication. 
But the evidence suggests otherwise. 
OECD countries with higher female labor-force participation rates also have higher birth rates. 
Japan’s birthrate has already fallen to just 1.37 children per female, far below the level that would keep the population constant. 
Beyond the cultural obstacles, Japanese policymakers could take many concrete steps. 
According to Japan’s Ministry of Health, Labor, and Welfare, 54.7% of women were employed on a non-regular basis in 2011. 
Officials could encourage employers to offer women permanent, full-time positions, rather than all-too-common temporary contracts, which mean lower pay, less stability, and a lack of opportunity for advancement. 
More important, current tax policies that reinforce women’s over-representation in temporary contract work should be changed. 
Both the OECD and the Goldman Sachs study identify rules that discourage women from working. 
A “special dependent” exemption that could be claimed by heads of households (mainly men) for dependents (mainly women) who earned less than about $12,000 per year was eliminated in 2004, but a “dependent” exemption still remains. 
Policymakers could also find creative ways to increase the odds that women will return to the labor market after having children. 
They could close Japan’s salary gender gap – wider than in any OECD country except South Korea – in part by establishing rules that reward performance rather than seniority. 
And they could help to create credible opportunities for women to rise to leadership positions. 
Opening Japan to more immigrants could help it to meet its demographic challenge. 
But the more durable solution is already inside the country. 

Rank Mysteries 
PARIS – Gibraltar received exciting news last month. 
The latest Global Financial Centres Index (GFCI), published by the consultancy Z/Yen in London, revealed that the Rock had risen further and faster up the ranks than any other center – 17 places, from 70th to 53rd position, since the previous report in September 2013. 
I can imagine the celebrations in Gibraltar Town, where, now that the British naval base has closed and Spain is being difficult at the border, financial services are crucial for employment. 
And I can also imagine that many in Hamilton, Bermuda, which plummeted almost as far as Gibraltar climbed – 16 places, to 56th – must be crying into their rum punch. 
Of course, it is also possible that Gibraltar and Bermuda have chosen to ignore the results, or dispute their significance. 
Either way, there is no doubting the global obsession with league tables nowadays. 
One can find a ranking for almost every form of human activity. 
Commercial banks are ranked by assets. 
Investment banks are ranked on a variety of metrics, as are universities – from academic results to their prowess in environmental management, or their appeal to gay students. 
In the United Kingdom, you can find a table showing where it is best to live if you wish to win Britain’s National Lottery. (Your chances are almost twice as good in the northeast as in Northern Ireland.) 
When one looks closely, most of these tables are, as Henry Kissinger famously put it, “content-free.” 
For one brief shining moment, the Royal Bank of Scotland was global top dog in rankings of commercial banks, and we know how that story ended. 
Is this true of the GFCI, or does it contain valuable insights into how the global financial system is evolving? 
The press headlines accompanying the release of the latest GFCI focused on the change at the top of the league: New York leapfrogged ahead of London, while Hong Kong and Singapore held on in third and fourth place, respectively. 
Is this a significant switch? 
Much speculation has centered on the recent damage to London’s reputation stemming from the scandal surrounding banks’ manipulation of the Libor interest rate. 
Even if some of the machinations were carried out in other cities, there is no escaping the fact that Libor is the London Interbank Offered Rate. 
Moreover, London is the biggest center for foreign-exchange trading, the new focus of regulatory attention. 
And, though Bruno Iksil was a Frenchman working for the American bank JPMorgan Chase, he became known universally as the “London Whale.” 
But GFCI’s detailed results do not bear out that explanation. 
London’s reputational factors “are firmly above average and have not seen much change over the past five editions.” 
Indeed, it seems that London’s small decline is attributable to negative scores on general factors such as the “business environment” and “infrastructure.” 
Overcrowded Underground trains and Heathrow’s congestion are having an impact, though it is hard to understand why New York wins on these measures. 
Riding the Subway often brings unpleasant surprises, while JFK Airport is hardly a favorite among travelers (and there remains no fast rail link to it). 
And yet these subtle switches at the top of the table are not the real story. 
From a ten-year perspective, the big gainers have been Hong Kong and Singapore. 
It was once fashionable to argue that when China opened up to the world, Hong Kong and Singapore would suffer. 
Once the Chinese got their act together, these cities’ role in intermediating the region’s finances would be marginalized by Shanghai, Shenzhen, and other new centers. 
That still may happen one day, but it has not happened yet. 
Hong Kong and Singapore have played their cards astutely. 
The combination of an Asian market with strong Chinese connections and a system of English law and property rights continues to provide a powerful competitive advantage. 
That is especially true in fund management. 
Chinese companies may increasingly raise capital in Shanghai, but wealthy Chinese with money to invest like to hold it in financial centers that are perceived as safe and non-political. 
In Europe, we see a different pattern. 
Over 15 consecutive surveys, London’s ranking and ratings have remained broadly constant, while Zurich, Geneva, Frankfurt, and Luxembourg have gradually narrowed the gap with it – though that gap remains wide. 
There is little doubt that Frankfurt has won the contest with Paris to be the eurozone’s most important financial center. 
The Germans were smart to insist on putting the European Central Bank there. 
Given the ECB’s new function as the eurozone’s banking supervisor, Frankfurt can consolidate its victory. 
Every European Union bank will need to bend the knee to its supervisor on the Main River, even if she does happen to be a Frenchwoman, Danièle Nouy. 
In the United States, Boston, San Francisco, and Washington, DC, continue to consolidate their positions as important centers for asset management and, in the last case, for regulation. 
The 2010 Dodd-Frank financial-reform legislation has given the Federal Reserve Board a much larger regulatory role than it had before the crisis. 
But, unless New York’s populist new mayor, Bill de Blasio, tries to run the banks out of town, Western sheriff-style, these cities do not seem likely to steal Wall Street’s crown anytime soon. 
All of the best award shows include a surprise. 
This year’s wild card, billed as the financial center most “likely to become more significant” in the near future, is Casablanca. 
I have no idea why Casablanca is an up-and-coming center, and the GFCI’s compilers do not explain. 
Sometimes, in rankings as in life, a kiss is just a kiss. 


Europe’s Fitful Financial Integration 
LONDON – The well-publicized troubles of Portugal’s Banco Espírito Santo this summer have reminded us that the eurozone’s financial problems are by no means resolved. 
There are, no doubt, idiosyncratic factors behind the bank’s problems, stemming from its exposure to other parts of the Espírito Santo family’s empire. 
But when the bank announced a first-half loss of €3.6 billion ($4.7 billion), the sudden collapse of confidence was alarming, and nervous investors are asking whether there are similar time bombs ticking elsewhere. 
All eyes are now on the European Central Bank’s asset quality review, due to be completed in the next couple of months. 
The AQR is the key element in a “comprehensive assessment” of Europe’s banks before the ECB formally takes on supervisory responsibility for more than 80% of the eurozone banking system in November. 
The ECB, quite sensibly, wants all of the potential horrors to be visible before the takeover – so that it cannot be blamed. 
With national supervisors, who are often inclined to present a rosy picture of their countries’ institutions, no longer in charge, we can hope that the assessment will be more robust than the earlier stress tests carried out under the auspices of the European Banking Authority (EBA). 
Those tests, unlike their equivalent in the United States, failed to rebuild confidence. 
Several banks that passed with flying colors were soon obliged to raise new capital. 
But the creation of the European banking union has not been the only important change to Europe’s financial regulation since the crisis. 
The events of 2007-2009 made it clear that there were serious gaps and inconsistencies that needed to be addressed. 
So, following the recommendations of a report prepared in 2009 by former IMF Managing Director Jacques de Larosière, the European Commission created three new pan-European authorities charged with ensuring “consistent application” of European directives. 
The deal was done with a large helping of political fudge: the three biggest European Union economies – the United Kingdom, France, and Germany – were persuaded to cede some control to the center, but only if each could host an authority. 
Thus, the EBA was established in London, the European Securities and Markets Authority (ESMA) is located in Paris, and the European Insurance and Occupational Pensions Authority (EIOPA) found a home in Frankfurt. 
Collectively, they are known as the ESAs (European supervisory authorities). 
The road to pan-European regulation over the last two decades has been winding and rocky. 
In the early stages, it was assumed that the single financial market could work on the basis of mutual recognition: each country would accept the others’ regulation as broadly equivalent to its own and allow cross-border business to proceed on that basis. 
That proved inadequate, as standards and rules remained very different from country to country, and gave way to an approach based on minimum harmonization, whereby core rules were to be the same across Europe, but local variations and additions remained permissible. 
When that, too, proved ineffective at promoting competition, as countries used their national rules to block new entrants, the emphasis switched to maximum harmonization, with directives spelling out exactly how local rules must be applied across the EU. 
That caused great concern in the City of London, but has been grudgingly accepted. 
Since the global financial crisis, London has become less able to argue that it is special and must be left alone. 
Now, with the establishment of central regulatory authorities, the EU has moved to the next stage of financial integration. 
But, so far, these agencies’ responsibilities are very limited. 
ESMA supervises rating agencies directly; but, outside banking, national authorities retain their day-to-day oversight responsibilities. 
Integration-minded officials at the European Commission clearly do not regard this as a satisfactory end-state. 
So they commissioned a thoughtful review of the three ESAs from Mazars, an accounting firm, which was published earlier this year. 
The verdict, roughly, was “so far, so good.” 
Now the Commission has followed up by publishing its own assessment. 
The Commission was perhaps unlikely to be hypercritical of its own creations, and it is not. 
Its report maintains that the ESAs have “quickly established well-functioning organizations aimed at contributing to restoring confidence in the financial sector,” and that market participants seem broadly satisfied with their work. 
But the report’s authors believe that there is a need to expand the current mandates, develop a comprehensive approach to consumer protection, and reduce further the influence of national authorities. 
The ESAs should have more power to impose their will in the interests of the EU as a whole. 
Their chairs should have wider discretion to act on their own initiative. 
The ESAs also need more money, which probably can come from fees levied on financial firms, and consideration should be given to merging them in a single location, presumably Brussels. 
The general direction is clear. 
Unless the new internal market commissioner takes a different view, the European Commission plans to move further along the road to genuine pan-European regulation. 
The report now goes to the European Parliament, which can be expected to push harder for more integration, as it usually does. 
A single authority, or perhaps two or three working closely together, is a logical arrangement for the eurozone, and perhaps for the entire EU financial market. 
It would usefully complement the ECB’s new supervisory role. 
But will London fall into line this time? 
The British government, after all, has embarked on a path that runs in precisely the opposite direction – reducing the functions of central bodies and repatriating powers to national capitals. 
Given the central role of London in EU financial markets, and its political sensitivity in the UK, there is bound to be trouble ahead. 

Looking Beyond Juncker 
LONDON – The European Union appears to be capable of concentrating on only one problem at a time. 
This summer it is the question of who will succeed José-Manuel Barroso as President of the European Commission. 
British Prime Minister David Cameron has found himself fighting a rearguard action to try to block the appointment of the arch-federalist Luxembourger Jean-Claude Juncker. 
The Commission presidency is no doubt an important job. 
The Commission retains a monopoly on proposing new legislation, the character of which is heavily influenced by the president. 
But new legislation is something of a luxury for Europe these days. 
Rather than contemplating exciting new directives on the desirable characteristics of, say, lawnmowers sold in the EU, Europe’s leaders must complete three urgent and interlinked tasks. 
The first is political. 
In the recent European Parliament election, a quarter of voters in the United Kingdom and France backed parties that are hostile to further integration and committed to restoring a Europe of independent member states. 
Even in Germany, a euroskeptic party did surprisingly well. 
The center-left and center-right federalists have responded by making common cause to secure a majority for Juncker. 
That is not a stable outcome. 
Defenders of the European ideal need to engage more directly with its critics and articulate an inspiring vision, rather than sticking their heads in the sand and intoning the words “ever closer union” at every opportunity. 
They would find it easier to win over euroskeptics if they could point to more solid and durable economic achievements. 
Eurozone growth remains sluggish, at 0.7% over the last year, while unemployment, at 11.7%, is unacceptably high. 
These averages are depressing enough, but some parts of the continent are in far worse shape. 
Spanish unemployment is above 25%, and the Italian economy has barely grown since the euro’s introduction. 
Economic recovery is being held back by financial problems – the third hot topic that EU leaders must address. 
The single financial market broke down four years ago and has not yet been repaired. 
To be sure, the European Central Bank has done what it takes to narrow the borrowing cost differences between European sovereigns. 
For much of 2012 and 2013, the Spanish and Italian governments were paying 5.5-7% for ten-year money, while the German rate was below 2%. 
Today, the differential is much lower. 
Spain and Italy are paying only around 150 basis points more than Germany. 
ECB President Mario Draghi can take credit for that. 
But from businesses’ perspective, things look rather different. 
For a Spanish or Italian small firm, the interest-rate differential remains as high as it was. 
An unsecured business loan will cost a Southern European firm two percentage points more than its counterpart on the Rhine, even though the two companies have a similar credit rating. 
Until 2010, the gap was just a few basis points. 
It exploded in 2011 and has not narrowed since. 
That is a serious competitive disadvantage to add to the penalty of being at a greater distance from the EU’s center of economic gravity. 
If it persists, it will reinforce the growing division of Europe into “haves” and “have-nots.” 
How can such a differential persist in what is supposed to be a single, integrated financial market? 
The answer, of course, is that the eurozone is no such thing, at least not yet. 
The crisis of confidence in the EU banking sector that erupted in 2010 has not yet been resolved. 
European banks are still reluctant to lend to one another, especially across borders. 
They suspect that some of their counterparts are weak and vulnerable, and have little confidence in the willingness of national bank supervisors to reveal the truth and demand remediation. 
So German banks with surplus cash would rather deposit it at the ECB than put it to work in Italy or Greece. 
The banking union was agreed in order to correct that problem, with the ECB front and center as the single supervisor of all major European banks. 
But the market is clearly signaling that the banking union has not yet done its job – indeed, that it is by no means complete. 
There are doubts about the lack of a unified deposit-protection scheme, about the availability of funds to resolve a failing institution, and about whether the ECB’s approach will be rigorous enough to identify the lame ducks, force them to recapitalize, and thus rebuild confidence. 
The key test will come this autumn, when the ECB reveals the results of its asset quality review. 
I expect the supervisors to be rigorous: their institution’s credibility depends on it. 
But national supervisors and governments retain a significant role. 
Will they be prepared to be honest and, more important, willing and able to help the walking wounded raise capital? 
Recent debt issues by the Italian bank Monte dei Paschi di Siena and others have shown that financing for banks is expensive. 
Investors need to be offered heavy discounts to persuade them to part with their money. 
As a result, some banks that suspect that their balance sheets will be revealed to be weaker than they have so far acknowledged are cutting back on lending. 
The continuing credit constraints are one reason that parts of the European economy remain weak. 
So the three problems that Europe will face in the second half of this year are closely connected. 
The EU will need the strongest leadership team that it can find to steer through treacherous waters and implement crucial financial reforms. 
Just now, the signs are far from promising. 
There are few new faces or ideas on the horizon. 

The Banks that Ate the Economy 
LONDON – Bank of England Governor Mark Carney surprised his audience at a conference late last year by speculating that banking assets in London could grow to more than nine times Britain’s GDP by 2050. 
His forecast represented a simple extrapolation of two trends: continued financial deepening worldwide (that is, faster growth of financial assets than of the real economy), and London’s maintenance of its share of the global financial business. 
These may be reasonable assumptions, but the estimate was deeply unsettling to many. 
Hosting a huge financial center, with outsize domestic banks, can be costly to taxpayers. 
In Iceland and Ireland, banks outgrew their governments’ ability to support them when needed. 
The result was disastrous. 
Quite apart from the potential bailout costs, some argue that financial hypertrophy harms the real economy by syphoning off talent and resources that could better be deployed elsewhere. 
But Carney argues that, on the contrary, the rest of the British economy benefits from having a global financial center in its midst. 
“Being at the heart of the global financial system,” he said, “broadens the investment opportunities for the institutions that look after British savings, and reinforces the ability of UK manufacturing and creative industries to compete globally.” 
That is certainly the assumption on which the London market has been built and the line that successive governments have peddled. 
But it is coming under fire. 
Andy Haldane, one of the lieutenants Carney inherited at the BoE, has questioned the financial sector’s economic contribution, pointing to “its ability to both invigorate and incapacitate large parts of the non-financial economy.” 
He argues (in a speech revealingly entitled “The Contribution of the Financial Sector: Miracle or Mirage?”) that the financial sector’s reported contribution to GDP has been significantly overrated. 
Two recent papers raise further doubts. 
In “The Growth of Modern Finance,” Robin Greenwood and David Scharfstein of Harvard Business School show that the share of finance in US GDP almost doubled between 1980 and 2006, just before the onset of the financial crisis, from 4.9% to 8.3%. 
The two main factors driving that increase were the expansion of credit and the rapid rise in resources devoted to asset management (associated, not coincidentally, with the exponential growth in financial-sector incomes). 
Greenwood and Scharfstein argue that increased financialization was a mixed blessing. 
There may have been more savings opportunities for households and more diverse funding sources for firms, but the added value of asset-management activity was illusory. 
Much of it involved costly churning of portfolios, while increased leverage implied fragility for the financial system as a whole and imposed severe social costs as over-exposed households subsequently went bankrupt. 
Stephen G. Cecchetti and Enisse Kharroubi of the Bank for International Settlements – the central banks’ central bank – go further. 
They argue that rapid financial-sector growth reduces productivity growth in other sectors. 
Using a sample of 20 developed countries, they find a negative correlation between the financial sector’s share of GDP and the health of the real economy. 
The reasons for this relationship are not easy to establish definitively, and the authors’ conclusions are controversial. 
But it is clear that financial firms compete with others for resources, and especially for skilled labor. 
Physicists or engineers with doctorates can choose to develop complex mathematical models of market movements for investment banks or hedge funds, where they are known colloquially as “rocket scientists.” 
Or they could use their talents to design, say, real rockets. 
Cecchetti and Kharroubi find evidence that it is indeed research-intensive firms that suffer most when finance is booming. 
These companies find it harder to recruit skilled graduates when financial firms can pay higher salaries. 
And we are not just talking about the so-called “quants.” 
In the years before the 2008 financial crisis, more than a third of Harvard MBAs, and a similar proportion of graduates of the London School of Economics, went to work for financial firms. 
(Some might cynically say that keeping MBAs and economists out of real businesses is a blessing, but I doubt that that is really true.) 
The authors find another intriguing effect, too. 
Periods of rapid growth in lending are often associated with construction booms, partly because real-estate assets are relatively easy to post as collateral for loans. 
But the rate of productivity growth in construction is low, and the value of many credit-fueled projects subsequently turns out to be low or negative. 
So, should Britons look forward with enthusiasm to the future sketched by Carney? 
Aspiring derivatives traders certainly will be more confident of their career prospects. 
And other parts of the economy that provide services to the financial sector – Porsche dealers and strip clubs, for example – will be similarly encouraged. 
But if finance continues to take a disproportionate number of the best and the brightest, there could be little British manufacturing left by 2050, and even fewer hi-tech firms than today. 
Anyone concerned about economic imbalances, and about excessive reliance on a volatile financial sector, will certainly hope that this aspect of the BoE’s “forward guidance” proves as unreliable as its forecasts of unemployment have been. 


Hu’s Chance 
Chinese President Hu Jintao’s upcoming visit to the United States, postponed following hurricane Katrina, will be different from previous bilateral meetings. 
This time, the countries’ presidents will meet at a time of intensive American attention to the US-China trade balance and other economic issues, such as protection of intellectual property rights. 
With China’s US trade surplus reaching $200 billion last year, American sentiment is growing to take strong measures. 
Some have suggested that the trade imbalance is related to China’s currency peg to the US dollar. 
A recent Congressional bill has called for imposing a 27.5% punitive tariff on Chinese imports. 
In fact, the trade imbalance is more complicated than the currency issue per se. 
Globalization has strengthened the ability of capital to flow to wherever investment promises the highest returns; likewise, competitive manufactured products from low-wage economies will flow in the other direction. 
That is why China fascinates American investors, among others, and why US customers buy Chinese products. 
To be sure, the exchange rate has an impact on investment and trade. 
But, even with China’s efforts to loosen the renminbi-dollar linkage, it is arguable whether revaluation could save American jobs or improve the US trade balance. 
After all, China is not alone: India and other competitive developing countries pose a similar challenge to the US. 
Nevertheless, for China’s part, now seems to be a good time to reflect on how to increase its exports’ value-added, as well as focusing on environmental protection and sustainability. 
Thus, there is scope for a compromise that recognizes both sides’ legitimate concerns. 
The Chinese government is hastening its shopping spree in America these days, pushing up the renminbi’s exchange rate slowly but steadily. 
A sensible US policy on China may be to accept gradual currency appreciation, rather than a large revaluation, as America’s economic vitality stems from its own innovation rather than from concessions by the Chinese government. 
A more difficult issue for Hu could be intellectual property rights. 
China’s recent campaign to crackdown on pirating needs to be encouraged, but far more needs to be done. 
However, while the US government and American companies question whether the Chinese are willing and able to enforce such rights, one must put this issue into historical perspective. 
Intellectual property protection is related to economic development, so the question should be whether China has reached the stage at which effective protection is possible. 
There is a positive side to such problems, however, namely that their very emergence reflects the deepening and broadening of bilateral relations. 
Indeed, Sino-US interaction has been so strong that the two presidents met five times last year. 
While those meetings also highlighted trade disputes, they also yielded heightened cooperation and significant accomplishments. 
For example, the two states share a common interest in anti-terrorism efforts, and they have been collaborating to ensure container security and combat human trafficking. 
Their coordinated efforts to divert North Korea peacefully from its nuclear course have also vindicated bilateral cooperation when both sides can define a common security stake. 
Similarly, the two countries have a common interest in stabilizing mainland China’s relations with Taiwan. 
The current formula, maintaining the status quo, offers the highest common denominator. 
With this strategic understanding, there is good reason to expect that Hu’s talks with Bush on Taiwan’s recent termination of the National Unification Council will serve to reduce tensions. 
China and the US both have much to gain by thwarting Taiwan’s move toward independence. 
Nevertheless, to American eyes, other contentious issues are now emerging in relations with China. 
The recently released National Security Strategy outlines three, in particular: China’s global trade expansion, its military transparency, and its relations with “misruling” states. 
The political cost of a serious compromise on these matters would be too high for China, but it does no harm to analyze them and find ways to enhance dialogue. 
Among the three issues, military transparency seems to be the most sensitive and difficult to address. 
Nevertheless, given the large size of China’s armed forces, which currently stands at 2.3 million, a rough calculation would indicate that monthly spending per soldier is at most 2,500 yuan on average – too low to recruit and retain competitive staff. 
But if China wants to raise the military budget to improve the quality of its army, the conflict with the demands of fiscal stability could make military transparency important for domestic reasons, and China might no longer view it as being off limits in its relations with the US. 
Above all, we must bear in mind the maturation of Sino-US relations in recent years. 
A mature bilateral relationship is one in which even difficult issues can be discussed routinely and promptly. 
There is no question that such a framework has already been established in relations with the US. 
We will now see how Hu uses that framework – and thus what imprint he leaves on the bilateral relationship – in meeting the current challenges. 

The Inflation of Hugo Chávez 
MEXICO CITY – Supporters of Hugo Chávez, the recently deceased Venezuelan president, and even many of his critics, have repeatedly emphasized two supposed achievements that will burnish his legacy. 
First, the share of people living in poverty plummeted to approximately 28% in 2012, from a peak of 62% in 2003 (though it was 46% three years earlier, at the beginning of Chávez’s first term). 
Second, he gave to a majority of Venezuelans a sense of identity, pride, and dignity long denied them by a corrupt, elitist, light-skinned oligarchy. 
Both claims, however, are only partly true, and only partly account for Chávez’s recurrent electoral victories – 13 of 14 popular votes, including referenda. 
As for the first claim, both The Economist and the Nobel laureate Mario Vargas Llosa were right to put Chávez’s achievement in perspective. 
Almost every country in Latin America has reduced poverty significantly since the beginning of this century, with the extent of progress depending on baselines and cut-off dates, good years and bad years, the reliability of official data, and other factors. 
The reasons for this progress are well known: with the exception of 2001 and 2009, these were boom years for commodity-exporting countries like Brazil, Argentina, Peru, Chile, and, of course, Venezuela, as well as for manufacturing-based economies, like Mexico. 
Furthermore, during these nearly 15 years, most governments have managed their accounts responsibly: small or no fiscal deficits, low inflation, well-targeted anti-poverty programs, and so on. 
This has helped to lower not only poverty, but also inequality, Latin America’s traditional scourge. 
According to the economist Nora Lustig, between 2000 and 2010, “income inequality…declined in all 17 Latin American countries for which comparable data exist.” 
The decline was especially pronounced in the three largest countries – Brazil, Mexico, and Argentina – which comprise nearly 75% of the region’s population. 
One difference in Venezuela is that Chávez spent more than $1 trillion to achieve the same feat – in a country with a population one-sixth the size of Brazil’s and slightly more than one-quarter the size of Mexico’s. 
While the long-term viability and effectiveness of conditional cash-transfer programs in Brazil and Mexico is questionable, these anti-poverty initiatives certainly are better designed than Chávez’s massive, blanket subsidies on everything from poultry and flour to housing and gasoline. 
Then there is the destruction of Venezuelan industry, the spectacular increase in violence, the explosion of foreign debt, and the depletion of foreign-currency reserves that has accompanied Chávez’s so-called “Bolivarian socialism of the twenty-first century.” 
None of these problems has afflicted the region’s other large countries – or at least not to anywhere near the same extent. 
If Chávez had not played with the numbers, as demagogues and populist leaders tend to do, the results would be more disheartening. 
The second argument in defense of Chávez’s legacy is a bit more robust, but not much. 
True, Venezuela’s immense natural riches have been exploited and often squandered by elites more accustomed to the boulevards of Miami than to the slums of Caracas. 
But it is equally true that Venezuela enjoyed 40 years of democratic rule before Chávez, under the 1958 Punto Fijo Pact, whereby two parties, one social democratic and the other social Christian, alternated in power peacefully. 
Venezuela also boasted one of the region’s most vibrant civil societies, with some of its freest and most vigorous media. 
With the exception of the Caracazo – a wave of protests against free-market reforms in 1989 that resulted in an estimated 3,000 deaths – there were only minor bouts of repression. 
To be sure, large swaths of Venezuelan society rightly felt excluded from the country’s cozy elite consensus and insular governing arrangements, and resented it immensely; but an aspiring middle class comprised roughly half the population. 
Chávez exploited – and widened – that division; indeed, as the current campaign to elect his successor shows, the country remains more polarized than ever. 
It may well be that Chávez’s purported feats and popularity will outlast him. 
Instead of a simple rotation of elites in power, perhaps what occurred during his time in office was the advent of political leadership that looks, talks, worships, and loves like the people of the country – leadership that identifies with and benefits the millions of Venezuelans who previously were marginalized. 
In that case, Chávez’s designated successor, Nicolás Maduro, will make short work of opposition candidate Henrique Capriles in the upcoming election. 
Chavismo will outlive Chávez. 
But, whatever the outcome, all the mourning and embalming will not alter a simple fact: Venezuela and its people are not clearly better off than they were 14 years ago. 
And whatever modest improvements they may feel in their lives were also secured elsewhere, at a far lower economic and political cost. 

Air Pollution’s True Costs 
PARIS – Air pollution takes years off people’s lives. 
It causes substantial pain and suffering, among adults and children alike. 
And it damages food production, at a time when we need to feed more people than ever. 
This is not just an economic issue; it is a moral one. 
Air pollution can be produced both outdoors and indoors. 
For the poorest families, indoor smog from coal- or dung-fired cooking stoves is typically the more serious problem. 
As economies develop and start to electrify, motorize, and urbanize, outdoor air pollution becomes the bigger issue. 
Cleaner technologies are available, with the potential to improve air quality considerably. 
But policymakers tend to focus myopically on the costs of action, rather than the costs of inaction. 
With economic growth and rising energy demand set to fuel a steady rise in emissions of air pollutants and rapidly rising concentrations of particulate matter (PM) and ozone in the coming decades, this approach is untenable. 
A new OECD report, The Economic Consequences of Outdoor Air Pollution, estimates that outdoor air pollution will cause 6-9 million premature deaths annually by 2060, compared to three million in 2010. 
That is equivalent to a person dying every 4-5 seconds. 
Cumulatively, more than 200 million people will die prematurely in the next 45 years as a result of air pollution. 
There will also be more pollution-related illness. 
New cases of bronchitis in children aged 6-12 are forecast to soar to 36 million per year by 2060, from 12 million today. 
For adults, we predict ten million new cases per year by 2060, up from 3.5 million today. Children are also being increasingly affected by asthma. 
All of this will translate into more pollution-related hospital admissions, projected to rise to 11 million in 2060, from 3.6 million in 2010. 
These health problems will be concentrated in densely populated areas with high PM concentrations, especially cities in China and India. 
In per capita terms, mortality is also set to reach high levels in Eastern Europe, the Caucasus region, and other parts of Asia, such as South Korea, where aging populations are highly vulnerable to air pollution. 
The impact of air pollution is often discussed in dollar terms. 
By 2060, 3.75 billion working days per year could be lost due to the adverse health effects of dirty air – what economists call the “disutility of illness.” 
The direct market impact of this pollution in terms of lower worker productivity, higher health spending, and lower crop yields, could exceed 1% of GDP, or $2.6 trillion, annually by 2060. 
Massive as they are, however, the dollar figures do not reflect the true costs of air pollution. 
Premature deaths from breathing in small particles and toxic gases, and the pain and suffering from respiratory and cardiovascular diseases, do not have a market price. 
Nor does the experience of constantly inhaling foul-smelling air, or forcing your child to wear a face mask just to play outside. 
These burdens weigh far more heavily on people than any price tag can represent. 
Nonetheless, the truth remains that policymakers tend to respond more to hard figures than to abstract experiences. 
So the OECD examined myriad economic studies on air pollution to quantify what people’s health is worth to them. 
On average, individuals would be prepared to pay around $30 to reduce their annual risk of dying prematurely by one in 100,000. 
Using well-established techniques, these “willingness-to-pay” figures were converted into an overall value of premature deaths caused by outdoor air pollution, as illustrated, for example, in the OECD’s Mortality Risk Valuation in Environment, Health and Transport Policies. 
By that measure, the global cost of premature deaths caused by outdoor air pollution would reach a staggering $18-25 trillion a year by 2060. 
Arguably, this is not “real” money, as the costs are not related to any market transactions. 
But it does reflect the value people put on their very real lives – and the value they would put on policies that would help to delay their very real deaths. 
It is time for governments to stop fussing about the costs of efforts to limit air pollution and start worrying about the much larger costs of allowing it to continue unchecked. 
Their citizens’ lives are in their hands. 


Counting What Counts in Development 
NEW YORK – To most people, “development” is best measured by the quantity of change – like gains in average income, life expectancy, or years spent in school. 
The Human Development Index (HDI), a composite measure of national progress that my office at the United Nations Development Programme oversees, combines all three statistics to rank countries relative to one another. 
What many do not realize, however, is that such metrics, while useful, do not tell the entire story of development. 
In fact, to understand how developed a country is, we must also grasp how people’s lives are affected by progress. 
And to understand that, we must consider the quality of the change that is being reported. 
When statisticians compare countries, they require commensurate data. 
To compare school attendance, for example, researchers would count the number of registered students in each country, relative to all school-age children (although even this can be a challenge in many developing countries, where record keeping is not always standardized). 
But to gauge the relative quality of a country’s education system, researchers would want to determine whether students are actually learning. 
For those numbers, statisticians would need to test students across a range of subjects, a project that is far more ambitious than simply taking attendance. 
Statisticians have always recognized that comparing quantities is far easier than comparing quality. 
But, because existing measures are all we have, the weaknesses are often overlooked when ranking relative gains or making policies, even though “progress” according to a given indicator is not necessarily genuine. 
If the world is ever to reach parity in development, we must change how we gauge and catalogue the quality of policy initiatives. 
Consider the statistics measured by the HDI – life expectancy, education, and per capita income. 
Life expectancy statistics suggest that the world is getting healthier, and data show that people are living longer than ever before; since 1990, average life expectancy has increased by around six years. 
But the increase in quality of life has not been as dramatic. 
Those extra years are often accompanied by illness and disability – such as dementia, which the World Health Organization now estimates affects 47.5 million people worldwide. 
While life expectancy can be calculated based on birth and death records, indices that measure quality of life, like the WHO’s disability-adjusted life year estimates, require considerable amounts of information on a wide range of illnesses and disabilities in every country. 
And, unfortunately, the difficulty of gathering such data means that many life-quality datasets are incomplete or infrequently compiled. 
It’s a similarly mixed picture for education. 
The world is no doubt making progress in extending access to schools, with more children are enrolled and attending than ever before. 
But how do we measure the gaps in educational quality? 
Some 250 million children worldwide do not learn basic skills, even though half of them have spent at least four years in school. 
It will come as no surprise that in most countries, schools in wealthier neighborhoods typically have better facilities, more qualified teachers, and smaller class sizes. 
Addressing inequality requires measuring educational outcomes, rather than school enrollment rates. 
The OECD’s Program for International Student Assessment (PISA), which relies on tests not directly linked to curricula, is one approach to making cross-country comparisons. 
The results for 2015 paint a much richer picture of educational performance across participating countries, while highlighting stark disparities. 
For example, PISA found that “socio-economically disadvantaged students across OECD countries are almost three times more likely than advantaged students not to attain the baseline level of proficiency in science.” 
Data on employment – critical for policymakers, as they prepare for the future – tell a similar story. 
The 2015 Human Development Report recognized that as the world moves toward a knowledge economy, low-skill or marginal workers are at greater risk of losing their jobs, and opportunities for exploitation of informal or unpaid workers increase. 
To put this in perspective, consider employment projections for the European Union, which foresee the addition of 16 million new jobs between 2010 and 2020. 
But over the same period, the number of jobs available for people with the least formal education is anticipated to decline, by around 12 million. 
“Not everything that can be counted counts. 
Not everything that counts can be counted,” the sociologist William Bruce Cameron wrote in 1963. 
His dictum remains true today, though when it comes to measuring human development, I would suggest a slight revision: “Not everything that is counted counts for everything.” 
Equitable human development requires that policymakers pay more attention to the quality of outcomes, rather than focusing primarily on quantitative measures of change. 
Only when we know how people are being affected by development can we design policies that bring about the most valuable improvements in their lives. 
“The intention to live as long as possible isn’t one of the mind’s best intentions,” the author Deepak Chopra once observed, “because quantity isn’t the same as quality.” 

Embryos, Justice, and Personal Responsibility 
AMSTERDAM/MONTREAL – A Chinese scientist’s claims to have created the world’s first genetically edited babies have injected a new sense of urgency into the discussions about ethics and social and personal responsibility surrounding the capacity to create and genetically modify human embryos. 
New technologies such as genome “base editing” have even raised the specter of widespread “embryo farming,” prompting calls for a reevaluation of how embryo research is regulated. 
These issues generate impassioned debate, and to determine right and wrong, the toughest decisions are typically delegated to research ethics committees. 
Because these review boards are empowered to rule on the creation, modification, and termination of life, their decision-making processes should satisfy fundamental criteria of justice, including due process, public input, and personal accountability. 
At the moment, however, this standard is not being met. 
In legal theory, “justice” comprises two components: substantive justice, which concerns a law’s content and the fairness of its application, and natural or procedural justice, which concerns the fairness and transparency of how decisions are made. 
In terms of substantive justice, most research ethics protocols are sound; research on human embryos is heavily restricted or banned in most countries. 
And “germline” gene editing – genetic alterations of human embryos and gametes that are passed on to future generations – is not approved under international law, and the overwhelming majority of countries that have considered legalizing it have eventually rejected the idea. 
But when it comes to natural justice – and in particular, the frameworks guiding decisions – the record is decidedly mixed. 
For example, the World Health Organization’s standards for ethics review require only that committees be “independent.” 
Given what is at stake, we believe this guidance should go further, and that research reviews should be strengthened. 
This will require three key reforms. 
First, bioethics review committees must respect due-process standards. 
At a minimum, this means publicizing agendas in advance and ensuring that deliberations are conducted in accordance with the Universal Declaration of Human Rights, which defines a “fair” trial as a public hearing conducted by an independent and impartial arbiter. 
Moreover, verdicts must be explained clearly, published fully, and subject to appeal. 
Second, in order to be legitimate and accountable, the work of research ethics committees must be informed by a diversity of views. 
Most international frameworks covering embryo research call for engagement with the public to establish a broad societal consensus. 
And while achieving this level of involvement is not always easy, the legal system has a solution that dates to the early days of Roman law: the amicus curiae, or “friend of the court.” 
The purpose of the amicus curiae is to improve the quality and legitimacy of the judicial process. 
To that end, friends of the court – people who are not party to a case but have an interest in how it is decided – can either submit expert advice or act as a special-interest advocate. 
Various national and international courts, including the Supreme Court of the United States and the European Court of Human Rights, invite public input in the form of amicus curiae briefs. 
We propose that a similar process be established for research ethics committees considering work with human embryos. 
This would give the public an opportunity to share knowledge, perspectives, and interests related to how decisions might affect individuals and society as a whole, not to mention the human embryos themselves. 
An amicus-type brief could be particularly relevant to bioethics cases, given that most review boards are dominated by technical experts and do not always represent public opinion. 
Finally, technocratic committees must never supplant societal or personal responsibility for sensitive issues involving life and death; ethical obligations cannot be offloaded so easily. 
As the World Medical Association’s Declaration of Helsinki notes, “the responsibility for the protection of research subjects must always rest with the physician or other health-care professional and never the research subjects” themselves. 
One way to instill individual responsibility would be in the form of a personal declaration. 
For example, to ensure transparency, scientific journals require authors to declare conflicts of interest. 
Likewise, the European Union’s regulations for clinical trials require that research proposals include a discussion of ethical implications. 
Why should a scientist proposing research on human embryos – or, for that matter, the funders and publishers of that research – be held to a lower standard? 
Moral and ethical liability for science in general, and embryo research in particular, should never be outsourced. 
On the contrary, it is a weight that must be borne as transparently, inclusively, and judiciously as possible. 

How Culture Shapes Human Evolution 
ST. ANDREWS – Is there an evolutionary explanation for humanity’s greatest successes – technology, science, and the arts – with roots that can be traced back to animal behavior? 
I first asked this question 30 years ago, and have been working to answer it ever since. 
Plenty of animals use tools, emit signals, imitate one another, and possess memories of past events. 
Some even develop learned traditions that entail consuming particular foods or singing a particular kind of song – acts that, to some extent, resemble human culture. 
But human mental ability stands far apart. 
We live in complex societies organized around linguistically coded rules, morals, and social institutions, with a massive reliance on technology. 
We have devised machines that fly, microchips, and vaccines. 
We have written stories, songs, and sonnets. 
We have danced in Swan Lake. 
Developmental psychologists have established that when it comes to dealing with the physical world (for example, spatial memory and tool use), human toddlers’ cognitive skills are already comparable to those of adult chimpanzees and orangutans. 
In terms of social cognition (such as imitating others or understanding intentions), toddlers’ minds are far more sophisticated. 
The same gap is observed in both communication and cooperation. 
Vaunted claims that apes produce language do not stand up to scrutiny: animals can learn the meanings of signs and string together simple word combinations, but they cannot master syntax. 
And experiments show that apes cooperate far less readily than humans. 
Thanks to advances in comparative cognition, scientists are now confident that other animals do not possess hidden reasoning powers and cognitive complexity, and that the gap between human and animal intelligence is genuine. 
So how could something as extraordinary and unique as the human mind evolve? 
A major interdisciplinary effort has recently solved this longstanding evolutionary puzzle. 
The answer is surprising. 
It turns out that our species’ most extraordinary characteristics – our intelligence, language, cooperation, and technology – did not evolve as adaptive responses to external conditions. 
Rather, humans are creatures of their own making, with minds that were built not just for culture, but by culture. 
In other words, culture transformed the evolutionary process. 
Key insights came from studies on animal behavior, which showed that, although social learning (copying) is widespread in nature, animals are highly selective about what and whom they copy. 
Copying confers an evolutionary advantage only when it is accurate and efficient. 
Natural selection should therefore favor structures and capabilities in the brain that enhance the accuracy and efficiency of social learning. 
Consistent with this prediction, research reveals strong associations between behavioral complexity and brain size. 
Big-brained primates invent new behaviors, copy the innovations of others, and use tools more than small-brained primates do. 
Selection for high intelligence almost certainly derives from multiple sources, but recent studies imply that selection for the intelligence to cope with complex social environments in monkeys and apes was followed by more restricted selection for cultural intelligence in the great apes, capuchins, and macaques. 
Why, then, haven’t gorillas invented Facebook, or capuchins built spacecraft? 
To achieve such high levels of cognitive functioning requires not just cultural intelligence, but also cumulative culture, in which modifications accumulate over time. 
That demands transmission of information with a degree of accuracy of which only humans are capable. 
Indeed, small increases in the accuracy of social transmission lead to big increases in the diversity and longevity of culture, as well as to fads, fashions, and conformity. 
Our ancestors were able to achieve such high-fidelity information transmission not just because of language, but also because of teaching – a practice that is rare in nature, but universal among humans (once the subtle forms it takes are recognized). 
Mathematical analyses reveal that, while it is generally difficult for teaching to evolve, cumulative culture promotes teaching. 
This implies that teaching and cumulative culture co-evolved, producing a species that taught relatives across a broad range of circumstances. 
It is in this context that language appeared. 
Evidence suggests that language originally evolved to reduce the costs, increase the accuracy, and expand the domains of teaching. 
That explanation accounts for many properties of language, including its uniqueness, power of generalization, and the fact that it is learned. 
All of the elements that have underpinned the development of human cognitive abilities – encephalization (the evolutionary increase in the size of the brain), tool use, teaching, and language – have one key characteristic in common: the conditions that favored their evolution were created by cultural activities, through selective feedback. 
As theoretical, anthropological, and genetic studies all attest, a co-evolutionary dynamic – in which socially transmitted skills guided the natural selection that shaped human anatomy and cognition – has underpinned our evolution for at least 2.5 million years. 
Our potent capacity for imitation, teaching, and language also encouraged unprecedented levels of cooperation among individuals, creating conditions that not only promoted longstanding cooperative mechanisms such as reciprocity and mutualism, but also generated new mechanisms. 
In the process, gene-culture co-evolution created a psychology – a motivation to teach, speak, imitate, emulate, and connect – that is entirely different from that of other animals. 
Evolutionary analysis has shed light on the rise of the arts, too. 
Recent studies of the development of dance, for example, explain how humans move in time to music, synchronize their actions with others, and learn long sequences of movements. 
Human culture sets us apart from the rest of the animal kingdom. 
Grasping its scientific basis enriches our understanding of our history – and why we became the species we are. 

Something to Smile About 
LONDON – As I put pen to paper, my wife threw out a seasonal challenge: “Christmas is approaching – the time for peace and joy and all that. 
Can’t you write about something that will make people happy?” 
What sounds like a light-hearted request is actually a formidable task. 
Ebola is decimating lives and livelihoods in West Africa. 
A legion of Islamist thugs is terrorizing Syria and Iraq. 
Russian President Vladimir Putin’s forces have invaded Crimea and eastern Ukraine. 
Add to that a faltering global economy, and there seems to be little “holiday cheer” on offer. 
But happiness is a complex phenomenon. 
People living poorly may feel happier more often than their more “fortunate” counterparts. 
It is this kind of contradiction that has fueled research in the social sciences and neurology devoted to answering the age-old question: What is the secret to happiness? 
Of course, the tools that scientists are using – from advanced imaging to examine the brain’s pleasure centers to microeconomic happiness equations – are not proven in this area. 
Can an algorithm, however well researched and carefully crafted, ever really capture the relationship between happiness and factors like income, health, lifespan, and education? 
In any case, it is clear that happiness is not dictated by one’s job title or bank balance. 
The British comedian Spike Milligan may have wanted the chance to prove that money couldn’t buy him happiness. 
But he undoubtedly would have conceded that other factors – like good health and close friends – did much to improve his state of mind. 
Even seemingly mundane activities can – and should – bring considerable happiness, as they can represent significant progress. 
My visit to the dentist last week, for example, was far superior to my childhood visits. 
As a child, the mere sight of the dentist chair would cause me to break out in a cold sweat, as I anticipated my forthcoming encounter with the battery of gleaming instruments seemingly designed for the principal purpose of causing excruciating pain. 
My most recent experience, by contrast, was uncomplicated, even comfortable. 
And I was not a child that long ago. 
Imagine a child’s experience a century ago or earlier. Some 5,000 years ago, the Chinese used acupuncture, not dental care, to treat toothaches. 
Aristotle was preoccupied with dental issues, writing about treatments of decayed teeth and gum disease, extractions conducted with forceps, and the use of wire to stabilize fractured jaws. 
The classical Sanskrit writer Vagbhata described 75 oral diseases. 
And Shakespeare noted that tooth decay was a cause of awful pain and unpleasant odor. 
The pain affected rich and poor alike. 
Queen Elizabeth I of England used bits of cloth to plug the gaps in her teeth, in order to improve her appearance. 
Louis XIV of France had all of his upper teeth removed after a dentist fractured his jaw trying to extract a lower molar. 
So many people lost their teeth that dead people’s teeth were recycled. 
The teeth of the 50,000 soldiers killed at Waterloo in 1815 were extracted and used until the 1860s as replacements for the toothless. 
Even in my own lifetime, tooth loss was commonplace. 
My grandmother lost all of her teeth during her life, and my parents lost many of theirs. 
They used to pop their dentures into a mug of whitener every night. 
Of course, dental maladies have not been eliminated. 
Today, 30% of those aged 65-75 worldwide are toothless, with poor and disadvantaged groups recording the highest rates. 
But the overall rate is falling. 
My friend’s young daughter, who recently asked if she would ever have “in and out” teeth like her grandparents, can be relatively confident that she will not. 
Even if she did, however, she would not face the barriers that people with poor dental health confronted in the past. 
Potential army recruits were turned away if they had tooth decay or missing teeth, because they would be unable to bite open a powder cartridge for a musket or use their teeth to remove a grenade’s safety clip; they would also struggle to eat properly. 
During the Boer War, the British had to send mincing machines to South Africa, so that soldiers were not forced to choke down unmasticated lumps of meat. 
It seems that the American writer and journalist P.J. O’Rourke had a point when he argued that the best thing about living in the twenty-first century, versus some “golden age” of the past, is modern dentistry. 
Why not take teeth – their relative cleanliness and health – as a mark of economic progress and human happiness? 
It is, of course, unlikely that dental health will ever secure a place on the United Nations development agenda. 
But it does offer a straightforward indicator of relative wellbeing. 
And given how painful a dental condition can be, dentistry deserves a place of honor on next spring’s UN-sponsored International Day of Happiness. 
Whatever political horrors may be afflicting the world, there is something for many of us to smile about: a clean, healthy, and pain-free set of pearly whites. 

Charting Our AI Future 
OXFORD – Galileo viewed nature as a book written in the language of mathematics and decipherable through physics. 
His metaphor may have been a stretch for his milieu, but not for ours. 
Ours is a world of digits that must be read through computer science. 
It is a world in which artificial-intelligence (AI) applications perform many tasks better than we can. 
Like fish in water, digital technologies are our infosphere’s true natives, while we analog organisms try to adapt to a new habitat, one that has come to include a mix of analog and digital components. 
We are sharing the infosphere with artificial agents that are increasingly smart, autonomous, and even social. 
Some of these agents are already right in front of us, and others are discernible on the horizon, while later generations are unforeseeable. 
And the most profound implication of this epochal change may be that we are most likely only at the beginning of it. 
The AI agents that have already arrived come in soft forms, such as apps, web bots, algorithms, and software of all kinds; and hard forms, such as robots, driverless cars, smart watches, and other gadgets. 
They are replacing even white-collar workers, and performing functions that, just a few years ago, were considered off-limits for technological disruption: cataloguing images, translating documents, interpreting radiographs, flying drones, extracting new information from huge data sets, and so forth. 
Digital technologies and automation have been replacing workers in agriculture and manufacturing for decades; now they are coming to the services sector. 
More old jobs will continue to disappear, and while we can only guess at the scale of the coming disruption, we should assume that it will be profound. 
Any job in which people serve as an interface – between, say, a GPS and a car, documents in different languages, ingredients and a finished dish, or symptoms and a corresponding disease – is now at risk. 
But, at the same time, new jobs will appear, because we will need new interfaces between automated services, websites, AI applications, and so forth. Someone will need to ensure that the AI service’s translations are accurate and reliable. 
What’s more, many tasks will not be cost-effective for AI applications. 
For example, Amazon’s Mechanical Turk program claims to give its customers “access to more than 500,000 workers from 190 countries,” and is marketed as a form of “artificial artificial intelligence.” 
But as the repetition indicates, the human “Turks” are performing brainless tasks, and being paid pennies. 
These workers are in no position to turn down a job. 
The risk is that AI will only continue to polarize our societies – between haves and never-will-haves – if we do not manage its effects. 
It is not hard to imagine a future social hierarchy that places a few patricians above both the machines and a massive new underclass of plebs. 
Meanwhile, as jobs go, so will tax revenues; and it is unlikely that the companies profiting from AI will willingly step in to support adequate social-welfare programs for their former employees. 
Instead, we will have to do something to make companies pay more, perhaps with a “robo-tax” on AI applications. 
We should also consider legislation and regulations to keep certain jobs “human.” 
Indeed, such measures are also why driverless trains are still rare, despite being more manageable than driverless taxis or buses. 
Still, not all of AI’s implications for the future are so obvious. 
Some old jobs will survive, even when a machine is doing most of the work: a gardener who delegates cutting the grass to a “smart” lawnmower will simply have more time to focus on other things, such as landscape design. 
At the same time, other tasks will be delegated back to us to perform (for free) as users, such as in the self-checkout lane at the supermarket. 
Another source of uncertainty concerns the point at which AI is no longer controlled by a guild of technicians and managers. 
What will happen when AI becomes “democratized” and is available to billions of people on their smartphones or some other device? 
For starters, AI applications’ smart behavior will challenge our intelligent behavior, because they will be more adaptable to the future infosphere. 
A world where autonomous AI systems can predict and manipulate our choices will force us to rethink the meaning of freedom. 
And we will have to rethink sociability as well, as artificial companions, holograms (or mere voices), 3D servants, or life-like sexbots provide attractive and possibly indistinguishable alternatives to human interaction. 
It is unclear how all of this will play out, but we can rest assured that new artificial agents will not confirm the scaremongers’ warnings, or usher in a dystopian science-fiction scenario. 
Brave New World is not coming to life, and the “Terminator” is not lurking just beyond the horizon, either. 
We should remember that AI is almost an oxymoron: future smart technologies will be as stupid as your old car. 
In fact, delegating sensitive tasks to such “stupid” agents is one of the future risks. 
All of these profound transformations oblige us to reflect seriously on who we are, could be, and would like to become. 
AI will challenge the exalted status we have conferred on our species. 
While I do not think that we are wrong to consider ourselves exceptional, I suspect that AI will help us identify the irreproducible, strictly human elements of our existence, and make us realize that we are exceptional only insofar as we are successfully dysfunctional. 
In the great software of the universe, we will remain a beautiful bug, and AI will increasingly become a normal feature. 


Human Rights are Union Rights 
Are human rights related to trade union power? 
Do both march in tandem around the globe? 
For nearly two centuries the answer was almost always a resounding "Yes!" 
On every continent, the growth of organized labor seemed to herald the emancipation of common people and the demise of their oppressors. 
Today we live in an era of global human rights. 
War criminals are put on trial in The Hague. 
Women's rights are on the social and political agenda in the Middle East. 
From Burma to Nigeria, the world pays close attention to the free speech rights of political dissidents. 
Thousands of NGOs (Non-Governmental Organizations) expose human rights violations and promote social, economic, and legal standards aimed at benefiting those who toil in factories in poor countries. 
Some 182 labor and human rights codes of conduct have been adopted by corporations and industry associations around the globe. 
Prodded by groups like the Workers Rights Consortium and the Ethical Trading Initiative, some corporations promise to pay living wages, open their factories to monitors, and even provide employees a voice in the workplace. 
Reebok, the multinational sportswear firm, advertises its corporate code as being "based on the core principles" of the UN's Universal Declaration of Human Rights. 
The company markets its soccer balls and other goods with a "Guaranteed: Manufactured without Child Labor" label. 
But sensitivity to human rights has done nothing to staunch trade unionism's worldwide decline. 
The International Labor Organization reports that unions are in retreat in most nations. 
During the 1990s union membership fell to less than 20% of workers in 48 out of 92 countries. 
The paradox is clear. 
Consider the US, where since the 1960s a multicultural, gender-sensitive tradition of rights has been legitimized and codified in US law, within major corporations, inside governmental bureaucracies, and across the political spectrum. 
Most big corporations favor "diversity" and boast of their compliance with civil rights and gender-equality laws. 
At the same time, in no other large nation, save for outright dictatorships, have trade unions lost so many members and so much political leverage. 
Membership has dropped sharply over the last quarter-century, and today less than one in ten private-sector American workers are union members. 
What severed the traditional link between strong trade unions and respect for human rights? 
To be sure, trade unions have lost members and political clout owing partly to a decline in their moral authority and hence legitimacy as institutions capable of defending the interests of ordinary working people. 
Too often trade unions are seen as defending an unjust status quo, as complicit in maintaining gender and racial hierarchies, or else as being so politically self-interested that they injure the rest of society. 
Moreover, government and businesses have clearly become increasingly hostile to trade unions over the last 25 years. 
As Human Rights Watch reported, "In a system replete with all the appearance of legality and due process, workers' exercise of rights to organize, to bargain, and to strike...has been frustrated by many employers who realize they have little to fear from labor law enforcement." 
But the evisceration of US labor law also reflects the extraordinary power of America's culture of rights. 
Rights are universal and are held only by individuals, which means that a company CEO enjoys them just as much as his office clerk. 
Under a regime of universal individual rights, it becomes difficult to grant trade unions the legal status and privileges of a collectivity distinct from and superior to its members. 
For millions of workers, not to mention their bosses, union solidarity has become an antiquated or even alien concept. 
This is hardly surprising. 
In the contemporary American workplace, employers use their court-protected free-speech rights to spread millions of dollars worth of anti-union propaganda, to intimidate individual workers, and to persuade employees that joining a union would mean losing their jobs. 
But are unions relevant anymore? 
Some argue that in the US and elsewhere the human rights regime is so powerful and pervasive that trade unionism is no longer necessary or even desirable. 
If workers are protected against sexual harassment by a state agency rather than by their union shop steward, the employee's rights will be adequately protected. 
If it is legislation rather than a clause in a union contract that regulates health and safety conditions in the workplace, a factory's air will smell just as sweet. 
But a century of experience in America and other parts of the world demonstrates that, by itself, no legal-regulatory system can enforce, by administrative order or judicial ruling, the inner life of millions of workplaces. 
As anti-sweatshop and human rights advocates in places like Malaysia and South China understand, no regime of rights is possible without hearing from workers, whose voices will remain silent unless some institution protects them from the consequences of speaking up. 
The history of social regulation in the industrial West is unambiguous: systematic, organized pressure at the workplace is essential to breathing life into the rights enshrined in statute books. 
Without a new burst of trade unionism in poor countries, the worldwide movement to insure human and labor rights will lose momentum and stall, turning hope into helplessness for millions of desperate workers. 

Human Rights and the Fate of the Liberal Order 
CAMBRIDGE – Many experts have proclaimed the death of the post-1945 liberal international order, including the human-rights regime set forth in the 1948 Universal Declaration of Human Rights. 
The cover of Foreign Policy recently displayed the white dove of human rights pierced by the bloody arrows of authoritarian reaction. 
According to “realist” international-relations theorists, one cannot sustain a liberal world order when two of the three great powers – Russia and China – are anti-liberal. 
Writing in Foreign Affairs, Yascha Mounk and Roberto Stefan Foa argue that the era when Western liberal democracies were the world’s top cultural and economic powers may be drawing to a close. 
Within the next five years, “the share of global income held by countries considered ‘not free’ – such as China, Russia, and Saudi Arabia – will surpass the share held by Western liberal democracies.” 
There are several problems with this argument. 
For starters, it relies on a measure called purchasing power parity, which is good for some purposes, but not for comparing international influence. 
At current exchange rates, China’s annual GDP is $12 trillion, and Russia’s is $2.5 trillion, compared to the United States’ $20 trillion economy. 
But the more serious flaw is lumping countries as disparate as China and Russia together as an authoritarian axis. 
There is nothing today like the infamous Axis of Nazi Germany and its allies in the 1930s. 
While Russia and China are both authoritarian and find it useful to caucus against the US in international bodies like the United Nations Security Council, they have very different interests. 
China is a rising power that is highly intertwined with the international economy, including the US. 
In contrast, Russia is a declining country with serious demographic and public health problems, with energy rather than finished goods accounting for two-thirds of its exports. 
Declining countries are often more dangerous than rising ones. 
Vladimir Putin has been a clever tactician, seeking to “make Russia great again” through military intervention in neighboring countries and Syria, and by using cyber-based information warfare to disrupt – with only partial success – Western democracies. 
A study of Russian broadcasting in Ukraine found that it was effective only with the minority that was already Russia-oriented, though it was able to produce polarizing and disruptive effects in the political system. 
And the revival of Cold War-style information warfare has done little to create soft power for Russia. 
The London-based Soft Power 30 index ranks Russia 26th. 
Russia has had some success cultivating allies in Eastern Europe, but it is not part of a powerful authoritarian axis such as existed in the 1930s. 
China is different. 
It has announced its willingness to spend billions to increase its soft power. 
At meetings in Davos in 2017 and Hainan in 2018, Xi Jinping presented China as a defender of the existing international order, but one with Chinese rather than liberal characteristics. 
China does not want to overturn the current international order, but rather to reshape it to increase its gains. 
It has the economic tools to do so. 
It rations access to its huge market for political purposes. 
Norway was punished after the dissident Liu Xiaobo was awarded the Nobel Peace Prize. 
Eastern Europeans were rewarded after they watered down European Union resolutions on human rights. 
And Singaporean and Korean companies suffered after their governments took positions that displeased China. 
The Chinese government’s massive Belt and Road Initiative to build trade infrastructure throughout Eurasia provides ample opportunities to use business contracts to wield political influence. 
And China has increasingly restricted human rights at home. 
As Chinese power increases, the global human-rights regime’s problems will increase. 
But no one should be tempted by exaggerated projections of Chinese power. 
If the US maintains its alliances with democratic Japan and Australia and continues to develop good relations with India, it will hold the high cards in Asia. 
In the global military balance, China lags far behind, and in terms of demography, technology, the monetary system, and energy dependence, the US is better placed than China in the coming decade. 
In the Soft Power 30 index, China ranks 25th, while the US is third. 
Moreover, no one knows what the future will bring for China. 
Xi has torn up Deng Xiaoping’s institutional framework for leadership succession, but how long will Xi’s authority last? 
In the meantime, on issues such as climate change, pandemics, terrorism, and financial stability, both an authoritarian China and the US will benefit from cooperation. 
The good news is that some aspects of the current international order will persist; the bad news is that it may not include the liberal element of human rights. 
The human-rights regime may face a tougher environment, but that is not the same as a collapse. 
A future US administration can work more closely with the EU and other like-minded states to build a human-rights caucus. 
A G10, comprising the world’s major democracies, could coordinate on values alongside the existing G20 (which includes non-democracies such as China, Russia, and Saudi Arabia), with its focus on economic issues. 
Others can help. 
As Kathryn Sikkink points out in her new book, Evidence for Hope, while US support has been important to human rights, the US was not always very liberal during the Cold War, and the origins of the regime in the 1940s owed much to Latin Americans and others. 
Moreover, transnational rights organizations have developed domestic support in numerous countries. 
In short, we should be concerned about the multiple challenges to liberal democracy during the current setback to what Samuel P. Huntington called the “third wave” of democratization. 
But that is no reason to give up on human rights. 


Human Rights Require Stronger Institutions 
PARIS – Sixty years ago this week, the United Nations adopted the Universal Declaration of Human Rights, the first international proclamation of the inherent dignity and equal rights of all people. 
To this day, the Universal Declaration remains the single most important reference point for discussion of ethical values across national, ideological, and cultural divides. 
Yet the Declaration’s enlightened vision of individual freedom, social protection, economic opportunity and duty to community is still unfulfilled. 
Tragically, genocide is happening again, this time in Sudan. 
A heightened security agenda since the attacks on the United States in September 2001 has included attempts to legitimize the use of “extraordinary rendition” (the movement between countries of prisoners and suspects without due process of law) and torture. 
For women around the world, domestic violence and discrimination in employment are a daily reality. 
Minorities suffer stigma, discrimination, and violence in developed and developing countries. 
The right to information is denied to millions through censorship and media intimidation. 
Poverty is our greatest shame. 
At least one billion very poor people, 20% of humanity, are daily denied basic rights to adequate food and clean water. 
While gross inequalities between rich and poor persist, we cannot claim to be making adequate progress toward fulfilling the ambitions set down 60 years ago. 
As we mark this anniversary, the question is how to protect the inherent dignity and equal rights of all people. 
A key part of the answer lies in more effective systems of accountability, so that rights are recognized and laws enforced. 
Yet if we take a long, hard look at what has been achieved over the past six decades – and at what remains resistant to all our efforts – then it is also clear that this will not be enough. 
The deepest challenges of discrimination, oppression, injustice, ignorance, exploitation, and poverty cannot be addressed through the law or policy alone. 
If we are to make reforms sustainable and ensure that they truly protect human rights, we need effective institutions of government. 
Poorly equipped or corrupt institutions are a primary obstacle to the effective protection and promotion of human rights. 
In recent years, billions of dollars have been invested by governments, businesses, and private philanthropy in fighting poverty in poor countries. 
Millions of people have benefited. 
Yet those involved have recognized publicly that without greatly improved institutional capacity – for example, well-resourced and competent local and national health systems – further progress will be limited. 
Similarly, billions of people are today unable to access or protect their legal rights because judicial and law enforcement systems are impoverished or lack integrity. 
Changing this will require massive investment in courts, judicial officials, police, prison systems, social ministries, and parliaments, as well as in national human rights institutions and other official monitoring bodies. 
Nothing on this anniversary is more important than to urge our leaders to recognize the scale of the task and commit to sustained action to build institutional capacities to protect human rights, starting in their own countries. 
As world leaders race to address the current global economic crisis, it may seem unrealistic to be calling for large and long-term investments of this kind. 
But, while stabilizing the international financial system is important, doing so won’t solve wider challenges of governance. 
Human rights cannot be realized in the absence of effective institutions. 
Where courts and police are corrupt, over-burdened and inefficient, basic civil rights will be violated. 
Where social ministries are under-resourced, disempowered, or lack qualified staff, basic rights to adequate health care, education, and housing will remain unfulfilled. 
Even the world’s richest nation, the United States, struggles to implement much needed reforms for some of its most important social institutions – including its health and education systems. 
Think how much more difficult this challenge is for the world’s developing nations. 
Making progress is a great test of political maturity. 
It is, nevertheless, essential if we are to make rights a reality for all. 
Over the past year, as members of The Elders – a group of leaders formed under Nelson Mandela’s inspiration – we have been working with a range of partner organizations to send a human rights message to the world through the Every Human Has Rights Campaign. 
Thanks to this collective effort, tens of thousands of individuals – and millions more through schools, community groups, trade unions, and civil society organizations – have come to identify again, or for the first time, with the goals of the Universal Declaration of Human Rights. 
This is reason for hope. 
We have better tools to communicate and demand justice than any generation before us. 
We have global goals and shared destinies that connect us. 
What is needed now are leadership, resources, a greater sense of urgency, and commitment to the long-term efforts that must dedicated to ensuring that the rights enshrined in the Universal Declaration are not only recognized universally, but respected as well. 

Humanity’s Stake in Gaza 
Amman – Wasted time is always to be regretted. 
But in the Middle East, wasting time is also dangerous. 
Another year has now passed with little progress in bridging the divide between Palestinians and Israelis. 
The current air strikes on Gaza, and continuing rocket attacks on Askelon, Sderot and other towns in southern Israel, only prove how dire the situation is becoming. 
The security impasse that exists between Israel and the Gazan-Palestinian leadership has also led to blockades of food aid by Israel that have left Gaza’s 1.5 million people facing conditions of real hunger. 
Israel, it seems, is once again emphasizing the primacy of “hard” security in its dealings with the Palestinians of Gaza, but this focus only serves to block non-violent opportunities for creative solutions to the Israel-Palestine dispute. 
Making matters worse, Israeli politicians remain committed to further enlargement of Israel’s West Bank settlements. 
Pushed to the wall in this way, many Palestinians are beginning to see no other option for fulfilling their national aspirations than radical tactics. 
Given that this risks renewed violence, it is critical that Israel’s regional partners and international actors understand that Palestinians will not be diverted from their strategic objective of achieving an independent state. 
The Palestinian people will never abandon their national struggle. 
Both Israelis and Palestinians must understand that the mere application of force will never be enough to achieve their long-term ends. 
What is needed is a viable option for the opposing party to adopt in order for violence not to be deployed. 
Although force sometimes has its uses, a stable and lasting peace can be delivered only by an integrative, compromise solution. 
Conflict resolution, if it is to be successful, requires channeling the energy generated by conflict toward constructive and nonviolent alternatives. 
This diversion of the energy of war can take place at any stage of the cycle of escalation, but if preventive peace building is not launched at the first sign of trouble, and problems remain unaddressed as the conflict intensifies (especially if it turns violent), some type of intervention will be needed. 
Only then can conciliation, mediation, negotiation, arbitration, and collaborative problem-solving processes establish themselves. 
In the end, reconstruction and reconciliation are the only viable means to bring stability, since it cannot be imposed. 
None of this is surprising. 
But it begs the question of why there has not been a more concerted and concentrated focus on transforming the situation in Gaza and Palestine. 
An international protectorate for the area to protect the Palestinians from their own more dangerous elements, the Palestinians from the Israelis, and perhaps even the Israelis from themselves, has been proposed, but has received scant acknowledgement. 
It is this lack of a coordinated attempt to structure an agreement between Israelis and Palestinians – a structure based on an inclusive, interdisciplinary, and systemic approach that can shift the variables and lead to a peace that both peoples regard as equal and fair – that most concerns those of us who work in international crisis resolution. 
One key element in building up a structure for reconciliation must be economic growth. 
As the World Bank has emphasized repeatedly, there is a strong correlation between poverty and conflict. 
So bridging the human dignity deficit, the divide between haves and have-nots, will be essential to reaching any viable political settlement between Palestinians and Israelis. 
Yet the efforts here are piecemeal – and thus insufficient to offer real hope for better lives. 
Palestinians and Israelis need to establish viable dialogues across the huge social fissures that divide them, as well as dialogues between the authorities and ordinary people who live in a state of confusion about what is being done in their name. 
Trust needs to be rebuilt if we are to help the parties understand how to overcome past enmities. 
Only the beginning of public trust will allow problems to be correctly diagnosed and addressed. 
Of course, Israel’s need for security must be understood by all sides, but confidence-building measures are needed from all sides as well. 
What is now needed most of all is a clear message that dialogue, not violence, is the way forward in these very tense times. 
In Gaza, mankind’s basic morality is at stake. 
The suffering and wanton destruction of people’s lives, the despair and absence of human dignity in this region have gone on for too long. 
The Palestinians of Gaza – indeed, all those across the region who lead blighted lives without hope – cannot wait for new administrations or international institutions to act. 
If the Fertile Crescent is not to become a futile crescent, we must wake up and find the moral courage and political vision for a quantum leap in Palestine. 

Humpty Dumpty and Global Financial Imbalances 
WASHINGTON, DC: There is an old saying that goes, “If you have only a hammer, everything looks like a nail.” 
Nowhere is this clearer than in discussions of the United States’ trade deficit and global financial imbalances, given economists’ tendency to reduce most economic problems to questions of savings. 
Unfortunately, this focus on savings distorts understanding and distracts from the real challenge of creating mass consumption markets in developing countries. 
Within national income accounts, trade deficits represent the excess of a country’s consumption over production. 
From an accountant’s perspective, that makes it logical to label trade deficits as negative savings. 
Most economists go a step further, asserting that the US deficit is caused by a savings shortage. 
But, since one country’s trade deficit is another’s surplus, US Federal Reserve Chairman Ben Bernanke has argued for turning the conventional logic on its head: rather than resulting from a savings shortage, the US trade deficit is the result of a global savings glut – especially in China. 
Both stories are flawed. 
How does a savings glut translate into exports, given that households do not export? 
Likewise, if the US is consuming too much, why has it been closing manufacturing capacity, and why is there so much labor market softness? 
Both the savings shortage and savings glut hypotheses confuse accounting outcomes with causes. 
Trade deficits reflect transactions between producers and buyers, and those transactions are the result of incentives and price signals. 
US consumers buy imports rather than American-made goods because imports are cheaper. 
This price advantage is often due to exchange rates in places like China and Japan, whose currencies are undervalued by between 25% and 40%, which often offsets US efficiency advantages. 
Undervalued exchange rates are only one of the policies that countries use to boost exports and restrain imports, so that they run trade surpluses, while their trading partners (including the US) run deficits. 
Policies aimed at ensuring export-led growth also include export subsidies and barriers to imports. 
In the modern era of globalization, export-led growth is supplemented by policies to attract foreign direct investment (FDI), a combination that has been particularly successful in China. 
Such FDI policies include investment subsidies, tax abatements, and exemptions from domestic regulation and laws. 
These policies encourage corporations to shift output to developing countries, which gain modern production capacity. 
This increases developing countries exports and reduces their import demand (or increases it at a lower rate than export growth). 
Meanwhile, corporations reduce home country manufacturing capacity and investment, which reduces home country exports while increasing imports. 
Once again, China provides clear evidence of these patterns, with almost 60% of Chinese exports being produced by foreign corporations. 
This story is fundamentally different from the savings shortage and savings glut hypotheses, and it leads to dramatically different policies. 
Developing countries need to grow, but nowadays it is easier to acquire capacity and grow through FDI than it is to develop domestic mass consumption markets. 
Consequently, rather than facing a savings glut, the global economy faces a problem of demand failure in developing countries. 
The challenge is to get corporations to invest in developing countries, but for purposes of producing for local consumers. 
That requires expanding markets in developing countries, which means tackling income inequality and getting income into the right hands – an enormous organizational challenge that is off the radar because economists focus exclusively on savings and supply-side issues. 
Labor standards, minimum wages, and unions are part of the solution, as they were in countries that developed successfully. 
Unions have historically been especially important since they engage in decentralized wage bargaining that tie wages to firms’ productivity. 
Consequently, wages are market sustainable. 
Government spending can also help, but its role is limited. 
Countries that substitute government spending for market spending either generate inflationary budget deficits, or end up with excessively high tax rates that destroy incentives. 
But no solution is possible until we abandon the savings shortage and savings glut hypotheses and connect today’s global financial imbalances with global production patterns and inadequate demand in developing countries. 
Tortuous claims that saving is merely the flip side of consumption and investment spending are the economic equivalent of Humpty Dumpty’s argument in Through the Looking Glass : “When I use a word, it means just what I choose it to mean.” 

Humpty-Dumpty Iraq 
Iraq’s draft constitution will probably be approved in the referendum to be held on October 15. 
But whether it is ratified or not ultimately does not matter, as the constitution – and the whole constitution-making process – is totally out of touch with the realities of a country that no longer exists as a coherent body politic. 
The problem is not with the constitution, but with the conventional wisdom – almost an idée fixe – that Iraq is a viable modern nation-state, and that all it needs to make it work properly is the right political institutions. 
But this is a fallacy, and responsible leaders should begin to think of alternatives. 
The Iraqi state, established in the 1920’s by British imperialist planners (with Winston Churchill in the lead), is a strange pastiche of three disparate provinces of the old Ottoman Empire: Mosul in the north with a Kurdish majority, Baghdad in the center with a Sunni Arab majority, and Basra in the south with a Shia Arab majority. 
For their own political reasons, the British put the Sunni Arabs – never more than 25% of the population – in control of the whole country, and even imported a Sunni Arab Hashemite prince to rule over their creation. 
Ever since, the country could be held together only by an iron fist: Iraq’s history is replete with Shia, Kurdish, and even Christian Assyrian revolts, all put down in bloody fashion by the ruling Sunni minority. 
Throughout its history, modern Iraq has always been the most oppressive of the Arab countries. 
Saddam’s rule was only the most brutal in a long line of Sunni regimes. 
It was this Sunni hegemony – and not merely that of Saddam’s Ba’athist regime – that was toppled by the United States. 
But, given Iraq’s history and demography, the American attempt to refashion the country as a functioning democracy has foundered on three shoals: the Shia majority’s empowerment, the Kurds’s refusal to give up their hard-won de facto mini-state in the north, and the Sunnis’ violent campaign to undermine any system that they do not lead. 
In short, the draft constitution is an attempt to square a circle. 
The Sunni resistance – a guerilla and terrorist war that was well prepared in the last years of Saddam’s rule – will continue to try to subvert any semblance of order representing the current majority Shia-Kurdish coalition. 
The Sunnis will go on with their murderous attacks on Shias, Kurds, and the US-led military coalition. 
They will probably boycott the constitutional referendum and all subsequent elections, just as they have boycotted the previous elections. 
After all, given the brutal logic of their long hegemony in Iraq, why should the Sunnis contemplate submitting to a process that is premised on their minority status, particularly when whole areas of the country are under the effective control of the Sunni insurgency? 
Similarly, why should the Shias, for their part, submit to Sunni hegemony rather than building up their own political structure in the south, modeled on what the Kurds have already achieved in the north? 
Let’s be frank: Iraq is going the way of Yugoslavia as it disintegrated in the early 1990’s. 
This should be acknowledged and ultimately welcomed, despite conventional diplomatic norms regarding the inviolability of the territorial integrity of existing states. 
Of course, such norms are helpful. 
But once a state disintegrates, as happened in Yugoslavia, no constitutional formulations can save it. 
Constitutions works only if all sides have an interest in operating within the proposed framework – and this obviously is not the case in Iraq. 
There is nothing sacrosanct in the continued existence of multi-ethnic and multi-religious states if their constitutive groups do not wish to live together. 
On the contrary, there are lessons to be learned from the demise of the Soviet Union, Yugoslavia, and even – perhaps especially – Czechoslovakia, which negotiated its break-up without violence. 
By contrast, the current Bosnia-Herzegovina is an example of another failed attempt to keep a decrepit multi-ethnic entity alive: it doesn’t work, and the country is held together only by the almost dictatorial power of the international community’s High Representative and the presence of foreign troops. 
It is time to face reality: the Kurdish region in the north is functioning in a reasonable way, and it has even been able to allay Turkey’s fears that its existence will aggravate that country’s own Kurdish problem. 
With the Shias building their polity in the south, the Sunni areas too should be allowed to go their own way. 
This may be more conducive to peace than trying to impose on them a hated occupation or an equally hated Shia hegemony. 
The emergence of three states – or highly autonomous regions – instead of a unified Iraq is happening anyway, constitution or no constitution. 
Nobody, it appears, can put Humpty-Dumpty Iraq together again. 
But it will require courage to acknowledge what is occurring before our eyes, rather than continue to grasp at the chimera of a consolidated Iraqi state. 
In fact, to acknowledge the obvious in Iraq is also to recognize that there are grounds for hope. 
As in the former Yugoslavia, the separate entities now emerging may stand a better chance of developing a semblance of representative and eventually democratic governance than if Iraq’s warring communities are forced to live together in the prison house that the country has always been for most of its citizens. 

The Illiberal International 
WARSAW – Stalin, in the first decade of Soviet power, backed the idea of “socialism in one country,” meaning that, until conditions ripened, socialism was for the USSR alone. 
When Hungarian Prime Minister Viktor Orbán declared, in July 2014, his intention to build an “illiberal democracy,” it was widely assumed that he was creating “illiberalism in one country.” 
Now, Orbán and Jarosław Kaczyński, the leader of Poland’s ruling Law and Justice (PiS) party, and puppet-master of the country’s government (though he holds no office), have proclaimed a counter-revolution aimed at turning the European Union into an illiberal project. 
After a day of grinning, backslapping bonhomie at this year’s Krynica conference, which styles itself a regional Davos, and which named Orbán its Man of the Year, Kaczyński and Orbán announced that they would lead 100 million Europeans in a bid to remake the EU along nationalist/religious lines. 
One might imagine Václav Havel, a previous honoree, rolling over in his grave at the pronouncement. 
And former Ukrainian Prime Minister Yuliya Tymoshenko, another previous winner, must be aghast: her country is being ravaged by Russia under President Vladimir Putin, the pope of illiberalism and role model for Kaczyński and Orbán. 
The two men intend to seize the opportunity presented by the United Kingdom’s Brexit referendum, which demonstrated that, in today’s EU, illiberal democrats’ preferred mode of discourse – lies and smears – can be politically and professionally rewarding (just ask the UK’s new foreign secretary, Boris Johnson, a leading Brexiteer). 
The fusion of the two men’s skills could make them a more potent threat than many Europeans would like to believe. 
What Orbán brings to the partnership is clear: a strain of “pragmatic” populism. 
He has aligned his Fidesz party with the European People’s Party, which keeps him formally within the political mainstream and makes German Chancellor Angela Merkel an ally who provides political protection, despite his illiberal governance. 
Kaczyński, however, chose to ally the PiS with the marginal Alliance of European Conservatives and Reformists, and quarrels almost ceaselessly with Germany and the EU Commission. 
Moreover, Orbán has more of the common touch than his Polish partner. 
Like Donald Tusk, the former Polish prime minister who is now President of the European Council, he plays soccer with other politicians. 
Kaczyński, by contrast, is something of a hermit, who lives alone and spends his evenings watching Spanish rodeo on TV. 
He seems to live outside of society, whereas his supporters seem to place him above it – the ascetic messiah of a Poland reborn. 
It is this mystical fervor that Kaczyński brings to his partnership with the opportunistic Orbán. 
It is a messianism forged from Polish history – a sense that the nation has a special mission for which God has chosen it, with the proof to be found in Poland’s especially tragic history. 
Uprisings, war, partitions: these are the things a Pole should think about every day. 
A messianic identity favors a certain type of leader – one who, like Putin, appears to be animated by a sense of mission (in Putin’s case, it is the same mission proclaimed by the czars: Orthodoxy, autocracy, and nationality). 
So, whereas Orbán is a cynic, Kaczyński is a fanatic, for whom pragmatism is a sign of weakness. Orbán would never act against his own interests; 
Kaczyński has done so many times. By attacking members of his own coalition government, for example, Kaczyński lost power in 2007, only two years after he had won it. 
He seems to have no plans. 
Instead, he has visions – not of fiscal reform or economic restructuring, but of a new type of Poland. 
Orbán seeks nothing of the kind. 
He doesn’t want to create a new-model Hungary; his only aim is to remain, like Putin, in power for the rest of his life. 
Having governed as a liberal in the 1990s (paving the way for Hungary to join both NATO and the EU) and lost, Orbán regards illiberalism as the means to win until he takes his last breath. 
Kaczyński’s illiberalism is of the soul. 
He calls those outside his camp “the worst sort of Poles.” 
Homo Kaczyńskius is a Pole preoccupied with his country’s fate, and who bares his teeth at critics and dissenters, particularly foreign ones. 
Gays and lesbians cannot be true Poles. 
All non-Polish elements within Poland are viewed as a threat. 
The PiS government has not accepted a single refugee of the tiny number – just 7,500 – that Poland, a country of nearly 40 million, agreed with the EU to take in. 
Despite their different motivations for embracing illiberalism, Kaczyński and Orbán agree that, in practical terms, it means building a new national culture. 
State-funded media are no longer public, but rather “national.” 
By eliminating civil-service exams, offices can be filled with loyalists and party hacks. 
The education system is being turned into a vehicle for fostering identification with a glorious and tragic past. 
Only cultural enterprises that praise the nation should receive public funding. 
For Kaczyński, foreign policy is a function of historical policy. 
Here, the two men do differ: whereas Orbán’s pragmatism keeps him from antagonizing his European and US partners excessively, Kaczyński is uninterested in geopolitical calculation. 
After all, a messiah does not trim his beliefs or kowtow; he lives to proclaim the truth. 
So, for the most part, Kaczyński’s foreign policy is a tendentious history seminar. 
Poland was betrayed by the West. 
Its strength – today and always – comes from pride, dignity, courage, and absolute self-reliance. 
Its defeats are moral victories that prove the nation’s strength and courage, enabling it, like Christ, to return from the dead after 123 years of absence from the map of Europe. 
The question for Europe now is whether the marriage of messianic and opportunistic populism will go mainstream and spread across the Union, or remain confined to Central Europe. 
Already, former French President Nicolas Sarkozy, eyeing a return to power in 2017, is adopting some of the language and postures of the Kaczyński/Orbán axis. 
Johnson, for his part, has shown an affinity for their methods. 
Will others follow? 

Keep the Internet Tax-Free 
WASHINGTON, DC – When you spark one of the largest protests in Eastern Europe since the fall of communism, you know that you have stirred up the electorate. 
That is exactly what the Hungarian government did when it recently proposed an “Internet tax” of 50 euro cents ($0.62) per gigabyte. 
More than 100,000 protesters gathered in Budapest, furious at the political symbolism of the tax and its very real economic impact. 
Prime Minister Viktor Orbán’s government quickly backed down. 
Hungary’s proposed tax was absurd – akin to assessing fees on reading books or charging people to have conversations with friends. 
But the proposal, even if discarded (though Orbán has hinted that he may bring it back in another form), remains worrisome, because it is part of a disturbing trend. 
A large number of countries have introduced taxes and tariffs that hamper the adoption and use of information and communications technology (ICT). 
All together, 31 countries – including Turkey, Brazil, and Greece – add 5% or more to the cost of ICT, on top of standard value-added taxes. 
In Hungary, the proposed tax would have been particularly onerous, because it would raise the cost of mobile data by 5-15% and have an even bigger impact on fixed broadband subscriptions. 
For the young and the poor, it would be a significant burden. 
A cap of €2.30 per person, hastily proposed after the initial public outcry, and before the proposal was withdrawn, would have done little to ease that burden on low-income Internet users, while drastically reducing the program’s overall revenue. 
As the protesters in Budapest pointed out, the proposed tax is wrong for Hungary. 
It is wrong for other countries, too. 
Cash-strapped governments adopt these taxes because ICT goods and services are an easy target for revenue authorities. 
In addition, they are sometimes mischaracterized as luxury products – as if the Internet has not become central to peoples’ lives. 
These policies are ultimately self-defeating. 
The resulting price hikes impede the adoption and use of ICT, lowering tax revenues from purchases of goods and services. 
And the evidence shows an even larger indirect effect: restricting ICT adoption dampens growth. 
Ultimately, this has a negative impact on total tax revenues, offsetting any gains from fees on Internet use. 
One study found that for every dollar equivalent of tariffs India imposed on imported ICT products it suffered an economic loss of $1.30 from lower productivity. 
Taxes on ICT are the modern-day equivalent of eating the grain you were saving to plant next year. 
The adoption of ICT drives fundamental technological change, potentially transforming a broad range of industries, as well as people’s daily lives. 
For businesses, ICT can improve efficiency and facilitate coordination. 
For individuals, it can boost incomes and make everyday life more convenient. 
The benefits of ICT goods and services grow significantly as more businesses and consumers start to use them. 
Smart government policies, such as subsidies or tax breaks for ICT purchases, boost adoption by helping users who would not otherwise be able to afford them. 
Taxing the Internet, like other taxes and tariffs on ICT goods and services, has the opposite effect. 
Hungary’s proposed tax was especially pernicious, owing to its poor design. 
Because the tax was a flat €0.50 per gigabyte, its share in total ICT spending would rise as the cost of a gigabyte fell – as it is almost guaranteed to do. 
The cap on such a tax would prevent the rate from spiraling upward, but rising bandwidths would cause most users to max out quickly, affecting not only the poorest consumers, but also new or small businesses. 
Keeping poor people and entrepreneurs off the Internet is no way to fund a government. 
Countries would be better off with policies that promote ICT: elimination of taxes and tariffs on ICT products and services, removal of non-tariff barriers like requiring local data storage, and encouragement of digital innovation and transformation in economic sectors through regulatory and procurement reform. 
The resulting rise in productivity, competitiveness, and economic growth would establish a far more stable and successful foundation for increasing tax revenues. 
The European Union as a whole has done a good job of keeping ICT taxes and tariffs low, despite substantial fiscal difficulties in many countries. 
Indeed, the overall non-discriminatory tax regime has been an important boon to ICT adoption, and the EU’s commissioner for the digital agenda spoke out strongly against Hungary’s proposed tax, calling it “a particularly bad idea.” The only EU country with significant taxes on ICT products and services (around 9%) is Greece, something of a special case in Europe. 
The recent actions by Hungarian policymakers show that no country is immune to bad policy ideas. 
Governments need revenue, but how they raise it shapes their countries’ economies by encouraging some transactions and discouraging others. 
Policies that encourage ICT adoption are the right choice for long-term and inclusive economic growth. 
As the case of Hungary showed, ultimately it is up to citizens to hold governments accountable and ensure that tax and tariff policies work for the benefit of all. 

The Hungarian Government’s Failed Campaign of Lies 
NEW YORK – In October, Hungary’s government mailed questionnaires to all four million of the country’s households asking for peoples’ views on seven statements describing my alleged plan to flood Europe, and Hungary in particular, with Muslim migrants and refugees. 
The government made seven assertions about what it calls the “Soros Plan.” 
I rebutted each and every one based on my published statements or the lack of any published statements that could substantiate them. 
Now, the government has released the supposed results of its “national consultation” on my phantom plan, claiming that the exercise was an unprecedented success. 
I leave it to the Hungarian public to decide whether and to what extent the figure of 2,301,463 participants (out of a population of 9.8 million) was inflated. 
It should be possible to inspect the list of those who took part and check if they did indeed participate. 
Instead, I want to focus on the campaign’s substance. 
The national consultation and the release of the results are the latest elements of a massive ongoing propaganda campaign funded by Hungarian taxpayers to benefit a deeply corrupt government seeking to deflect attention from its failure to fulfill Hungarians’ legitimate aspirations, particularly in education and health care. 
The campaign started in the summer by flooding public spaces with posters featuring a close-up of my grinning visage with the words “Don’t let Soros have the last laugh.” 
Other posters portrayed me as the puppet-master of opposition politicians. 
As many have pointed out, the entire campaign carries the unmistakable odor of anti-Semitism. 
The government would have you believe that I am an enemy of the Hungarian people. 
Nothing could be further from the truth. 
I first opened my philanthropic foundation in Hungary in 1984, when the country was still under the domination of the Soviet Union. 
Since then, it has provided more than $400 million to strengthen and support the country of my birth. 
In the 1990s, as ordinary Hungarians struggled with the transition from communism to a market economy, the foundation funded free milk for elementary school children in Budapest and supplied the first sonogram machines for Hungarian hospitals. 
More than 3,200 Hungarians have received academic scholarships from the foundation. 
Many of them have completed their graduate studies at the Central European University (CEU), which I established in Budapest in the early 1990s. 
CEU now ranks among the top 100 universities in the world in the social sciences – a remarkable achievement for an academic newcomer. 
Another element of the propaganda campaign has been to twist the meaning of “open society.” 
So allow me to clarify what I mean when I use the term. 
I do not mean open borders and mass migration aimed at destroying the supposedly Christian identity of Hungary, as the government contends. 
The open society is based on the idea that nobody is in possession of the ultimate truth, and that to live together in peace we must respect minorities and minority opinions. 
Above all, it is a society based on critical thinking and vigorous public debate about public policies. 
That is why today my foundation – among many others including the European Union – supports groups such as the Hungarian Civil Liberties Union and the Hungarian Helsinki Committee, which protect and promote the values and principles on which the EU was founded. 
The government also claims that I control the European institutions in Brussels, and that I am using that control to impose the nefarious “Soros Plan” on EU member states. 
This is nonsense. 
Decisions about how to address the migration crisis are made by the EU’s member states, including the Hungarian government. 
It insults the intelligence of the Hungarian people to suggest otherwise. 
I do have deeply held beliefs about how Europe and the rest of the developed world should respond to the refugee crisis, and I have been a vocal advocate of those views. 
My beliefs are born out of personal experience. 
I arrived in Britain from Hungary in 1947 as a refugee. 
I have never encouraged others to become refugees. 
My parents, together with 200,000 Hungarians, left the country after the defeat of the 1956 revolution, and they received asylum in the United States. 
I first published my ideas on the refugee crisis in September 2015, and I have revised them over time, as the facts on the ground have changed. 
In 2015, I asserted that the developed world should be able to accept at least a million refugees annually; later I reduced that global figure to 500,000, of which I suggested Europe could take 300,000. 
My guiding principle is that the allocation of refugees within the EU should be entirely voluntary. 
Member states should not be forced to accept refugees whom they don’t want, and refugees should not be forced to settle in countries where they are not wanted. 
Member states that refuse to accept refugees can make an appropriate contribution in many other ways, but the refugee crisis is a European problem, so it needs a European solution, not 28 separate solutions. 
It is this set of policy recommendations that the Hungarian government has deliberately distorted and labeled the “Soros Plan.” 
Unfortunately, the EU has not adopted my ideas, and the toxic political atmosphere created by Hungary (and Poland) has reduced Europe’s capacity to receive and integrate refugees. 
I do not blame the Hungarian and Polish governments for refusing to accept refugees they do not want; but I do hold them largely responsible for impeding a European solution. 
I remember what happened during World War II, when another group was scapegoated for Europe’s problems. 
The wounds of the past have left deep scars that have not yet healed, and which today are being reopened. 
The true purpose of the government’s propaganda campaign is to stoke fear and hatred in the Hungarian people and render them indifferent to the suffering of others. 
I am pleased to report that the government’s propaganda campaign has been a dismal failure. 
Despite the Hungarian government’s concerted efforts, the public was not taken in. 
My short speech on Hungarian television attracted more than a million viewers, and social media platforms were flooded with outpourings of sympathy and support. 
I am greatly heartened by this response. 
I pledge to devote the remaining years of my life to supporting free thought and expression, academic freedom, and the protection of minorities and minority opinions – not only in my native Hungary, but all over the world. 

The Climate’s Low-Hanging Fruit 
NEW YORK – Next month, signatories to the 1989 Montreal Protocol on Substances that Deplete the Ozone Layer will convene in Kigali, Rwanda, to consider an amendment to the treaty that would gradually reduce, and eventually eliminate, the use of hydrofluorocarbons. 
HFCs, which are one of the six main greenhouse gases, are commonly used in air conditioners and refrigeration systems worldwide. 
The amendment would be a boon for sustainable development, and could prevent the release of as much as 100-200 billion tons of climate-changing emissions by 2050. 
That would be enough to take the world a quarter of the way toward achieving the 2º Celsius global-warming target set by the December 2015 Paris climate agreement. 
The Montreal Protocol was established to repair the ozone layer, which protects all life on the planet from deadly levels of ultraviolet rays. 
So far, it has been a remarkable success, with nearly 100 ozone-destroying chemicals phased out over the past three decades. 
The ozone layer is healing and, according to the latest estimates, it could recover by 2065, saving trillions of dollars in global health-care and agriculture costs. 
Much of this improvement is thanks to HFCs, which are excellent ozone-friendly alternatives to older chlorofluorocarbons, which have been phased out. 
However, HFCs, some of which are 4,000 times more potent as greenhouse gases than carbon dioxide, are a disaster for climate change, and their use is still increasing annually by 10%. 
It thus makes sense to focus on HFCs in taking action on climate change. 
For starters, reducing them can yield economic benefits, owing to the significant energy-efficiency improvements afforded by newer air-conditioning and refrigeration systems. 
Just phasing in more efficient air-conditioning systems would be the emissions equivalent of retiring 2,500 medium-size peak power plants (power plants that come on-stream during periods of high demand, such as during the summer). 
In China, switching to climate-friendly refrigerants and boosting the energy efficiency of air conditioning and refrigeration could lead to the equivalent in emissions savings of eight Three Gorges hydroelectric dams. 
In India, the switch could be equal to two more of the Indian government’s current National Solar Mission, which promotes solar-energy penetration and the construction of new rooftop and ground-mounted solar plants. 
Many countries – including the European Union and the United States, as well as Belize, Burkina Faso, Colombia, Egypt, Serbia, and Yemen – already recognize these far-reaching benefits and are taking unilateral action to phase out HFCs. 
A strong HFCs agreement in Kigali would add momentum to these efforts and provide financial support for developing countries that want to move to newer technologies but currently can’t afford it. 
In the private sector, retail giants such as Walmart, Nestle, and Tesco have joined the Consumer Goods Forum, a cooperative climate initiative, and agreed to phase out products with HFCs. 
The United Nations and Greenpeace, through an initiative called “Refrigerants, Naturally!”, are working with Coca-Cola, Pepsico, Redbull, and Unilever to do the same. 
The Kigali meeting is set to yield a strong HFCs amendment. 
However, some countries in especially hot parts of the world heavily worry that climate-friendly alternatives for their essential air conditioning may not function as well. 
Any agreement can account for those concerns through a temporary exemption for those countries, while others move ahead with newer systems to demonstrate their effectiveness. 
A warming planet is already having a devastating impact on some of the world’s most vulnerable populations, and it will only continue to do so. 
Ultimately, all countries will have to find a way forward on reducing HFCs and climate change generally, through national action plans and emissions reductions agreed to under the 2015 Paris agreement. 
Frameworks established by sister agreements like the Montreal Protocol can help to do this. 
HFCs will also be a central topic at the next major UN climate change conference, COP22, which convenes in Marrakesh, Morocco, in November. 
We are confident that the governments preparing to meet in Kigali understand the need for a strong HFCs amendment, which would give momentum to other agenda items, such as the UN Sustainable Development Goals, in Marrakesh. 
If the world is to succeed in quickly reducing global emissions to prevent climate change from reaching catastrophic levels, reducing HFCs is a sensible – perhaps the most sensible – first step. 

Hypocrisy and War 
MELBOURNE – All the world hates a hypocrite. 
When states preach virtues they do not practice, or set lower hurdles for allies, trading partners, or co-religionists than they do for others, irritation and non-cooperation are the least they can expect. 
International policymaking is a hardheaded, cynical business, but tolerance for double standards has its limits. 
Russia discovered that when it invoked the “responsibility to protect” doctrine to try to justify its 2008 invasion of Georgia. 
Democracy promotion by the United States and the European Union generates ridicule when it extends only to elections producing winners found palatable, as Gaza’s vote for Hamas in 2006 did not. 
Nuclear-weapons states keep learning the hard way that strengthening the non-proliferation regime is a tough sell when they drag their feet on disarmament. 
And the invasion of Iraq in 2003 is a gift that keeps on giving to the world’s malcontents: embracing the Security Council only when you get your way, but ignoring or undermining it when you don’t, is no way to promote a cooperative rule-based international order. 
But in the real world, how consistent is it possible to be in responding to genocide and other mass atrocities, treaty breaches, border violations, or other serious trespasses against international law? 
To demand that every case that seems to look alike be treated alike might set the bar impossibly high, and certainly runs the risk of becoming hostage to critics – like those who attack the intervention in Libya – who assert that if you can’t act everywhere, you shouldn’t act anywhere. 
The hardest cases, always generating the strongest emotions, involve the coercive use of military force. 
Why strike in Libya but not in Darfur – or in Yemen, Bahrain, or Syria? 
If military intervention in Libya and Côte d’Ivoire were correct decisions, why wasn’t the Iraq invasion in 2003, given Saddam’s many crimes? 
What credence can the responsibility to protect have when we know that however bad things get in Tibet, Xinjiang, or the Northern Caucasus, military action against China or Russia will always be off limits? 
Former US President George W. Bush famously did not “do nuance.” Nor do most of the world’s foreign-policy pundits. 
But nuance is exactly what is required. 
And there are tools for applying it in the five tests of legitimacy for the use of force – in any context, not just mass atrocity crimes – recommended by former United Nations Secretary-General Kofi Annan and the High Level Panel he appointed to advise the 2005 World Summit on reforms to the global security system. 
These guidelines have not yet been formally adopted by the General Assembly or the Security Council, and remain only background noise in current international debates. 
But their practical utility, combined with long philosophical pedigree, justifies much greater visibility. 
The first test is seriousness of risk: Is the threatened harm of such a kind and scale as tojustify prima facie the use of force? 
The risk of an imminent civilian bloodbath was as real in Benghazi and Abidjan last month as it was in Rwanda in 1994. 
By contrast, there was no such imminent risk in Iraq in 2003, though there certainly had been a decade and more earlier for the country’s northern Kurds and southern Shiites. 
The current situations in Bahrain, Yemen, and Syria are on the cusp: ugly, but smaller in scale and perhaps retrievable by pressure short of military action (of which the US and its allies could usefully apply much more). 
The second test is whether the primary purpose of the proposed military action is to halt or avert the threat in question. 
Libya passes, as would most other recent cases: had oil – or regime change – been the primary motivation, the Arab League and the Security Council would never have endorsed military intervention. 
Russia, by contrast, found it hard to find any takers for its assertion that civilian protection was the primary rationale for its South Ossetian adventure in 2008. 
The third test whether every non-military option has been explored and found wanting. 
Libya again followed the textbook: Resolution 1970 applied targeted sanctions, an arms embargo, and the threat of prosecution at the International Criminal Court to concentrate Col. Muammar el-Qaddafi’s mind on civilian protection. 
Only when that failed did Resolution 1973 embrace the military option. 
In Iraq in 2003, lesser options had far from run their course, which is arguably true now in Bahrain, Yemen, and Syria. 
The fourth test is one of proportionality: Are the scale, duration, and intensity of the proposed military action the minimum necessary to meet the threat? 
As military stalemate looms in Libya, there will be a growing temptation to stretch the UN’s legal authority – and the moral and political support that goes with it – to the breaking point, and NATO is now close to that line. 
It must not cross it if it wants to preserve its own credibility, and the world’s capacity for intervention in similar conscience-shocking cases. 
The final, and usually toughest, legitimacy test attempts to balance the consequences: Will those at risk be better or worse off? 
This was always the showstopper in Darfur: any attempted invasion of Sudan would have been disastrous for the two million displaced people, and would have re-ignited the country’s even deadlier north-south conflict. 
This test explains the effective impunity of China, Russia, or any other major power; however badly it behaves internally, any attempted invasion would trigger a much larger conflagration. 
Resolving Libya’s agony will take more than military action. 
But, as in Côte d’Ivoire, it is hard to argue that the use of force will cost more lives than it will save. 
Steering a course between double-speak and necessary selectivity is hard. 
But, when examined against the right criteria, cases that initially look alike are often very different. 
Even when they’re not, a higher principle surely comes into play. 
When our common humanity is under threat, even if we can’t do everything we should, shouldn’t we at least do what we can? 

Hypocrisy on the High Seas? 
Thirty years ago, Australian vessels, with the government’s blessing, killed sperm whales off the West Australian coast. 
Last month, Australia led international protests against Japan’s plan to kill 50 humpback whales. 
Japan, under mounting pressure, announced that it would suspend the plan for a year or two. 
The change in public opinion about whaling has been dramatic, and not only in Australia. 
Greenpeace began the protests against Australian whaling, and the government appointed Sydney Frost, a retired judge, to head an inquiry into the practice. 
As a concerned Australian and a philosophy professor working on the ethics of our treatment of animals, I made a submission. 
I did not argue that whaling should stop because whales are endangered. 
I knew that many expert ecologists and marine biologists would make that claim. 
Instead, I argued that whales are social mammals with big brains, capable of enjoying life and of feeling pain – and not only physical pain, but very likely also distress at the loss of one of their group. 
Whales cannot be humanely killed – they are too large, and even with an explosive harpoon, it is difficult to hit the whale in the right spot. 
Moreover, whalers do not want to use a large amount of explosive, because that would blow the whale to pieces, while the whole point is to recover valuable oil or flesh. 
So harpooned whales typically die slowly and painfully. 
Causing suffering to innocent beings without an extremely weighty reason for doing so is wrong. 
If there were some life-or-death need that humans could meet only by killing whales, perhaps the ethical case against it could be countered. 
But there is no essential human need that requires us to kill whales. 
Everything we get from whales can be obtained without cruelty elsewhere. 
Thus, whaling is unethical. 
Frost agreed. 
He said that there could be no doubt that the methods used to kill whales were inhumane – he even described them as “most horrible.” 
He also mentioned “the real possibility that we are dealing with a creature which has a remarkably developed brain and a high degree of intelligence.” 
Prime Minister Malcolm Fraser’s conservative government accepted his recommendation that whaling be stopped, and Australia soon became an anti-whaling nation. 
While Japan has suspended its plan to kill humpback whales, its Japanese whaling fleet will still kill about 1,000 other whales, mostly smaller minke whales. 
Japan justifies its whaling as “research,” because the International Whaling Commission’s rules allow member nations to kill whales for such purposes. 
But the research seems to be aimed at building a scientific case for a resumption of commercial whaling; so, if whaling is unethical, then the research itself is both unnecessary and unethical. 
Japan says that it wants the discussion of whaling to be carried out calmly, on the basis of scientific evidence, without “emotion.” 
The Japanese think that humpback whale numbers have increased sufficiently for the killing of 50 to pose no danger to the species. 
On this narrow point, they might be right. 
But no amount of science can tell us whether or not to kill whales. 
Indeed, Japan’s desire to continue to kill whales is no less motivated by “emotion” than environmentalists’ opposition to it. 
Eating whales is not necessary for the health or better nutrition of the Japanese. 
It is a tradition that they wish to continue, presumably because some Japanese are emotionally attached to it. 
The Japanese do have one argument that is not so easily dismissed. 
They claim that Western countries object to whaling because, for them, whales are a special kind of animal, as cows are for Hindus. 
Western nations, the Japanese say, should not try to impose their cultural beliefs on them. 
The best response to this argument is that the wrongness of causing needless suffering to sentient beings is not culturally specific. 
It is, for example, one of the first precepts of one of Japan’s major ethical traditions, Buddhism. 
But Western nations are in a weak position to make this response, because they inflict so much unnecessary suffering on animals. 
The Australian government strongly opposes whaling, yet it permits the killing of millions of kangaroos each year – a slaughter that involves a great deal of animal suffering. 
The same can be said of various forms of hunting in other countries, not to mention the vast amount of animal suffering caused by factory farms. 
Whaling should stop because it brings needless suffering to social, intelligent animals capable of enjoying their own lives. 
But against the Japanese charge of cultural bias, Western countries will have little defense until they address the needless animal suffering in their own backyards. 

I Want My Al Jazeera 
NEW YORK – Al Jazeera correspondent Ayman Mohyeldin is on a victory lap in the United States – or rather, Al Jazeera is sending him on its own victory lap. 
After all, Mohyeldin is a modest guy, despite being one of Al Jazeera’s best-known reporters – and clearly a rising international media star. 
Al Jazeera has good reason to gloat: it has new cachet in the US after millions of Americans, hungry for on-the-ground reporting from Egypt, turned to its online live stream and Mohyeldin’s coverage from Cairo’s Tahrir Square. 
So now Mohyeldin is in the US for three weeks of media events – there will even be a GQ photo shoot – having become well known in a country where viewers are essentially prevented from seeing his station. 
The network has been targeted by the US government since 2003, when former Vice President Dick Cheney and former Defense Secretary Donald Rumsfeld described it as tantamount to an arm of Al Qaeda. 
Two of its reporters were later killed in Baghdad when a US tank fired on the Hotel Palestine, where, according to US officials, it was believed that a spotter directing fire at US troops was located. 
But, because Al Jazeera was known to have based its team in the hotel, the channel and others voiced suspicions that the channel’s reporters had been deliberately targeted. 
And, to this day, Al Jazeera, which, together with BBC News, has become one of the premier global outlets for serious television news, is virtually impossible to find on televisions in the US. 
The country’s major cable and satellite companies refuse to carry it – leaving it with US viewers only in Washington, DC and parts of Ohio and Vermont – despite huge public demand. 
So Al Jazeera is sending its news team around the US in an effort to “mainstream” the faces of this once-demonized network. 
And Mohyeldin can sound like Robert F. Kennedy: when the cry rose up from Tahrir Square hailing Mubarak’s abdication, he commented, “One man stepped down and eighty million people stepped up.” 
The station’s US push could hardly be more necessary – to Americans. 
By being denied the right to watch Al Jazeera, Americans are being kept in a bubble, sealed off from the images and narratives that inform the rest of the world. 
Consider the recent scandal surrounding atrocity photos taken by US soldiers in Afghanistan, which are now available on news outlets, including Al Jazeera, around the globe. 
In America, there have been brief summaries of the fact that Der Spiegel has run the story. 
But the images themselves – even redacted to shield the identities of the victims – have not penetrated the US media stream. 
And the images are so extraordinarily shocking that failing to show them – along with graphic images of the bombardment of children in Gaza, say, or exit interviews with survivors of Guantánamo – keeps Americans from understanding events that may be as traumatic to others as the trauma of the terrorist attacks of September 11, 2001. 
For example, the leading US media outlets, including The New York Times, have not seen fit to mention that one of the photos shows a US soldier holding the head of a dead Afghan civilian as though it were a hunting trophy. 
So, for America’s sake, I hope that Al Jazeera penetrates the US media market. 
Unless Americans see the images and narratives that shape how others see us, the US will not be able to overcome its reputation as the world’s half-blind bully. 
Indeed, Egyptians are in some ways now better informed than Americans (and, as Thomas Jefferson often repeated, liberty is not possible without an informed citizenry). 
Egypt has 30 newspapers and more than 200 television channels. 
America’s newspapers are dying, foreign news coverage has been cut to three or four minutes, at most, at the end of one or two evening newscasts, and most of its TV channels are taken up with reality shows. 
I met Mohyeldin before a recent public appearance in Manhattan. 
His analysis of the Egyptian revolution, and others in the region, is that the kind of globalized media to which Americans do not have full access created the conditions in which people could rise up to claim democracy. 
He points out that, “People are aware of their rights from the Internet, from satellite TV – people are watching movies and reading bloggers. 
This was a revolution of awareness, based on access to fast-traveling information. 
The farmers, the peasants in Tahrir Square, were aware of their rights.” 
Americans have a hunger for international news; it is a myth that we can’t be bothered with the outside world. 
Maybe Americans will rise up and threaten to boycott their cable and satellite providers unless we get our Al Jazeera – and other carriers of international news. 
We would then come one step closer to being part of the larger world – a world that, otherwise, will eventually simply leave us behind. 

Stopping a Dirty Bomb 
VIENNA – Nuclear terrorism is, in the words of US President Barack Obama, “the gravest danger we face.” 
But while few would dispute this characterization, the world has unfinished business in minimizing the threat. 
Ten years after world leaders agreed to amend the landmark 1987 Convention on the Physical Protection of Nuclear Material (CPPNM) to make it harder for terrorists to obtain nuclear material, the new measures have yet to enter into force. 
The resulting vulnerability needs to be addressed urgently. 
In July 2005, signatories to the CPPNM agreed to amend the Convention to address the risk of terrorism more effectively. 
The new measures that were introduced would make it more difficult for terrorists to cause a widespread release of radioactive material by attacking a nuclear power plant or detonating a radioactive dispersal device – commonly known as a dirty bomb. 
But before the amendment can enter into force, two-thirds of the 152 signatories to the original convention must ratify it. 
While significant progress has been made – in July, the US, Italy, and Turkey did so – at least 14 more countries are needed. 
The fact that there has never been a major terrorist attack involving nuclear or other radioactive material should not blind us to the severity of the threat. 
There is evidence that terrorist groups have tried to acquire the material needed to construct a crude nuclear explosive device, or a dirty bomb. 
In 2011, for example, Moldovan police seized highly enriched uranium from a group of smugglers who were trying to sell it. 
The smugglers, exhibiting a worrying level of technical knowledge, had tried to evade detection by building a shielded container. 
In this case, the story ended happily. 
Thanks to efforts by Moldova, with the assistance of the International Atomic Energy Agency, to boost its nuclear security capabilities, the material was identified and confiscated, and the smugglers were arrested. 
There is no way to know whether the smuggling effort uncovered in Moldova is an outlier or the tip of a very large iceberg. 
But one thing is certain: the amount of nuclear material in the world is increasing. 
Since 1999, the amount of such material being used for peaceful purposes has increased by 70% – a trend that will continue as the use of nuclear power grows. 
It is essential that effective measures are in place to ensure that these materials are not misused or misplaced, whether accidentally or intentionally. 
Since 1995, the IAEA’s member states have reported nearly 2,800 incidents involving radioactive material escaping regulatory control. 
Although only a handful of these incidents involved material that could be used to make a nuclear explosive device, a relatively small amount of radioactive material could be combined with conventional explosives to create a dirty bomb. 
Such a weapon could be capable of killing many people, contaminating large urban areas, and sparking mass panic. 
Much has been achieved in the secure management of nuclear material since the attacks on the United States in September 2001 prompted a renewed focus on the risks of terrorism. 
Many countries have instituted effective measures to prevent the theft, sabotage, or illegal transfer of nuclear or other radioactive material, and security at many nuclear facilities has been improved. 
But much more needs to be done. 
The original Convention focused only on the international transport of nuclear material, and did not cover the protection of nuclear facilities. 
The amendment adopted ten years ago would oblige countries to protect nuclear facilities and any nuclear material used, stored, or transported domestically. 
It would expand cooperation on locating and recovering stolen or smuggled nuclear material and coordinate the response to any attack on a nuclear facility. 
It would also make nuclear trafficking a criminal offense and require signatories to cooperate on improving national systems of physical protection and minimizing the consequences of sabotage. 
Protecting nuclear material is not just an issue for countries that use nuclear power. 
Terrorists and criminals will try to exploit any vulnerability in the global security system. 
Any country, in any part of the world, could find itself used as a transit point – just as any country could become the target of an attack. 
Effective international cooperation is critically important. 
The consequences of a major security failure could be a catastrophe that transcends borders. 
All countries must take the threat of nuclear terrorism seriously. 
The single most effective way to do so would be to ensure that the amendment to the CPPNM enters into force as soon as possible. 

Cold War or Cool Calculation? 
NEW YORK – With escalating violence in southern and eastern Ukraine and no solution in sight, the Ukraine crisis has become the world’s most turbulent geopolitical conflict since that triggered by the terrorist attacks against the United States in 2001. 
The US-led sanctions strategy will neither deescalate the tensions between the West and Russia nor bolster the imperiled pro-Western Ukrainian government. 
But, even with tightening sanctions against Russia and growing violence in Ukraine, there is little chance that Cold War II is about to start. 
The US approach has been to ratchet up sanctions in response to Russian aggression, while ensuring that America’s allies remain united. 
At a recent joint press conference, President Barack Obama and German Chancellor Angela Merkel announced a new, lower threshold for additional sanctions. 
Previously, that threshold was a direct Russian military invasion; now, as Merkel explained, if Russia disrupts Ukraine’s May 25 elections, “further sanctions will be unavoidable.” 
But Merkel and Obama also lowered the bar for what those “further sanctions” would be. 
Instead of launching sweeping sectoral measures that would target vast swaths of the Russian economy – a big step toward “Iran-like” sanctions against Russia – it now seems that the next round will be only incremental. 
The elections threshold makes another round of sanctions virtually certain, but allows the tightening to be more modest and gradual. 
Why slow down the sanctions response? 
The Americans understand that if they go too far too fast, Europe will publicly break with the US approach, because the Europeans have a lot more at stake economically. 
Whereas the US and Russia have a very limited trade relationship – worth around $40 billion last year, or roughly 1% of America’s total trade – Europe’s financial exposure to Russia, as well as its reliance on Russian natural gas, make it far more hesitant to torpedo the economic relationship. 
More important, dependence on Russia varies immensely across the European Union, impeding substantial coordination – and limiting the EU’s alignment with the US. 
That is why, when the latest sanctions were announced, the Europeans issued a modest expansion of their existing list – primarily focusing on military and political officials – while the US went further, adding several Russian institutions. 
When the sanctions were announced, Russian markets rallied, a clear indication that the West’s response fell far short of expectations. 
Indeed, though the sanctions are having a real economic impact on Russia (particularly in spurring capital flight), tightening the screws further will not materially change Russian President Vladimir Putin’s decision-making. 
Putin’s Russia has too much at stake in Ukraine, and his actions have been overwhelmingly popular at home. 
But, even as tensions escalate, with no hope of Russia backing down, the world is not headed toward anything resembling a new Cold War. 
For starters, America’s interests in Ukraine do not justify putting troops on the ground, while Europe has been dragging its feet in supporting America’s diplomatic position. 
Moreover, Russia is in long-term decline. 
The economy and the government budget have become increasingly reliant on oil and gas; the wealthiest 110 Russians control more than one-third of the country’s wealth; and Russia is far less capable militarily than it was in the Soviet era, with a defense budget roughly one-eighth that of the US. 
The demographic picture is bleak, with an aging population and a low fertility rate. 
In order to form a coherent bloc that could oppose the US-led global order, Russia would need powerful friends, which it sorely lacks. 
When the United Nations General Assembly voted on the legitimacy of the Crimea annexation, only ten countries – neighbors in Russia’s orbit (Armenia and Belarus), traditionally sympathetic Latin American countries (Bolivia, Nicaragua, and Venezuela), and rogue states (Cuba, North Korea, Zimbabwe, Sudan, and Syria) – sided with the Russians. 
The one country that could tilt the balance and establish a Cold War dynamic is China. 
But the Chinese have proved completely unwilling to pick one camp or the other, as they stand to benefit from more purchases of Russian energy exports and new opportunities as Western firms become more squeamish about doing business in Russia. 
China can reap those rewards without angering its largest trade partners, the EU and the US. 
And China is hesitant to support a Russian effort to create turmoil within Ukraine’s borders, given that its own restive provinces, such as Xinjiang and Tibet, could learn the wrong lesson from the Ukraine precedent. 
So the good news is that we are not heading toward any kind of global war, cold or hot. 
But the consequences of a misguided Western policy are becoming more apparent. 
The US cannot successfully isolate Russia for not adhering to international law and seizing another state’s territory. 
While other major emerging countries may not be rallying behind Russia, they are not subscribing to the US approach. 
Pushing for tougher sanctions will lead to a rift with Europe, while pushing Russia further toward China economically. 
Meanwhile, the Ukrainian government is at risk. 
It lacks the military capacity to halt the separatist forces in the south and east but will face mounting domestic pressure and illegitimacy if it does not act. 
The best path forward for the US is to offer more carrots for Ukraine, rather than more sticks for Russia. 
Thus far, the US has put up $1 billion in loan guarantees, which is far too little. 
The fledgling pro-Western government is losing ground to Russia on a daily basis; the West should focus on supporting it. 
Obama and Merkel’s press conference was symbolically useful in establishing a united front toward Russia, despite the two leaders’ evident disagreement about how – and how much – to punish the Kremlin. 
But rallying around the Ukrainian government and putting their money where their mouths are – even when Ukraine fades from the headlines and new crises erupt – is more important for US and European interests, and represents a more viable path forward for both sides. 

Why Bomb Civilians? 
NEW YORK – The time before last that Israel was fighting a war in Gaza, in 2009, Avigdor Lieberman, the foreign minister at the time, compared the conflict to America’s war with Japan. 
There was no need for a costly ground invasion; the enemy could be bombed into submission from the air. 
The comparison, seemingly outrageous, was not entirely wrong. 
Nor is it today. 
Inflicting maximum damage from the air was and remains Israel’s strategy toward Hamas-ruled Gaza. 
Even if we accept that Israel has a legitimate reason to shut down tunnels that are used to infiltrate Palestinian commandos into Israel, this does not explain why it is necessary to bomb schools, power plants, hospitals, mosques, and densely packed civilian areas. 
The official explanation is that Palestinian missiles are hidden in civilian areas. 
This may well be true. 
But Israeli leaders also appear to believe that by smashing Gaza and its people with bombs, Palestinians’ morale can be destroyed. 
At some point, they will have had enough and give up – and perhaps even turn against their rulers. 
This is what used to be called “strategic bombing,” or sometimes “terror bombing,” a method of warfare designed to break the will of a people by destroying its “vital centers.” 
The main advocates of the idea, developed in the 1920s, were the Italian Giulio Douhet, the American William Mitchell, and the Englishman Hugh Trenchard. 
The British first used this tactic in the mid-1920s in Mesopotamia, where they tried to break the will of Iraqi and Kurdish anti-colonial rebels by wiping out entire villages from the air, sometimes with bombs filled with mustard gas. 
The bloody high point came in August 1945, when the United States used atomic bombs to obliterate Hiroshima and Nagasaki – which is what Lieberman may well have had in mind. 
There were many other instances of strategic bombing. 
Nazi Germany tried to break British morale by blitzing large areas of London, Birmingham, and Coventry, among other places. 
When the Japanese could not bring Chiang Kai-shek’s China to its knees in the 1930s, bombers brought terror to Shanghai, Chongqing, and Hankow. 
In 1940, the Germans destroyed the center of Rotterdam. 
From 1943 onward, Trenchard’s protegé, Arthur “Bomber” Harris, used wave after wave of Royal Air Force attacks to demolish almost every city in Germany. 
The RAF bombed the Germans at night, and the US Army Air Force bombed them by day. 
Worse would be in store for Japan. 
Well before the destruction of Hiroshima and Nagasaki, the USAAF, under the command of General Curtis LeMay, managed to burn every major Japanese city to a cinder with fire bombs. 
Strategic bombing is an application of the concept of “total war,” in which all civilians are considered to be combatants and thus legitimate targets. 
In 1965, when the North Vietnamese were proving to be stubborn enemies, LeMay threatened that they would be “bombed back into the stone age.” 
The problem with strategic bombing is that it seems never to have worked, with the possible exception of Rotterdam (but by then Holland had already been defeated). 
Rather than breaking popular morale in London, Berlin, Tokyo, or Hanoi, it usually strengthened it. 
Confronted by a common deadly threat, civilians rally around the only leaders who can do anything to protect them, even if those leaders are widely disliked. 
And so the Germans fought on, until the combined force of the invading Allied armies overwhelmed them in 1945. 
The Japanese finally surrendered because they feared an invasion by the Soviet Union. 
The North Vietnamese never surrendered. 
And the Palestinians, whether they are ruled by Hamas or not, will not stop fighting Israel, especially in Gaza, where wholesale destruction has left them with nothing much more to lose. 
So why do governments persist in using this cruel but ineffective strategy? 
Sheer bloodlust – the pleasure of inflicting pain on a hated enemy – may have something to do with it. 
Perhaps it motivated Harris to bomb German cities over and over again, even when there was no longer any conceivable military purpose. 
But violent passion and the desire to wreak vengeance cannot be the only, or perhaps even the main, reason. 
A more plausible explanation is that strategic bombing is indeed about morale, but not that of the enemy. 
It is the morale of the home front that must be boosted, when other methods appear to fail. 
Winston Churchill decided to unleash his bombers on German civilians when an Allied victory was still a long way off. 
He needed to build British morale with a demonstration of force against an enemy that had just spent several years bombing the United Kingdom. 
The other advantage of bombing campaigns, avidly promoted during World War II by men who were haunted by memories of the endless bloodshed of World War I, was that attacking the enemy did not require losing many of your own troops. 
Many British bomber pilots died, of course, but many more soldiers would have died in a ground invasion. 
Indeed, with supremacy in the air, as in Mesopotamia in the 1920s or Japan in 1945, mass killing can be carried out at virtually no cost at all. 
There is another explanation, which also stems from the 1920s. 
Bombing was a way, as Churchill put it, to police an empire “on the cheap.” 
Rebellions could be stopped by killing enough people from a great height. 
US President Barack Obama’s use of drones in Afghanistan, Pakistan, and Yemen derives from the same principle. 
But these are always Pyrrhic victories, because every murder of civilians creates new rebels, who will rise again in time. 
If Israeli Prime Minister Binyamin Netanyahu does not know that, he is a fool. 
If he does, he is a cynic who has given up on any idea of lasting peace. 
It is difficult to know which is worse. 

Cold War Comforts 
NEW YORK – Western relations with Russia have rarely been worse than they are now, in the aftermath of Russian President Vladimir Putin’s intervention in Ukraine and decision to annex Crimea. 
But US President Barack Obama has sought to assure the world that this is not the beginning of a new Cold War. 
Even so, hawkish American liberals and hardline conservatives are comparing Obama’s leadership unfavorably with supposedly tougher presidents like Dwight Eisenhower and Ronald Reagan. 
Never mind that Eisenhower did nothing to stop Soviet tanks from crushing the Hungarian uprising in 1956, or that Reagan had no intention of supporting Solidarity activists when they rose against Poland’s communist regime. 
In many ways, the Cold War made things easier for US presidents. 
There were only two great powers – China did not really count until recently – and their spheres of interest were clearly defined. 
The Soviet Union’s ruling ideology was equally clear: a Stalinist version of Communism. 
Stalinism, like Maoism in China, was in fact deeply conservative, aimed chiefly at consolidating the regime’s power at home and its domination over satellites abroad. 
The ideological enemy was the capitalist world, but the immediate enemies were “Trotskyists,” “revisionists,” and other “reactionary elements” inside the Soviet sphere. 
In times of crisis, old-school Russian nationalism was mobilized in the service of Soviet interests. 
China was similar. 
Mao was not an imperial expansionist – he never even bothered to ask the British to give back Hong Kong. 
Mao, too, focused Chinese nationalism almost entirely on the brave new world of Communism. 
Everything changed, however, after Mao’s death and the collapse of the Soviet Union. 
Communism, as a ruling ideology, disappeared in Russia and has become so diluted in capitalist China that little more than its symbolic trappings – and a Leninist party with a monopoly on power – remain. 
This left a vacuum in both countries, with Russia’s government struggling to justify an elected autocracy, and China’s one-party dictatorship seeking a new source of legitimacy. 
Old, discredited traditions were suddenly revived. 
Putin quotes half-forgotten philosophers in an effort to show the spiritual superiority of Russia’s national soul. 
Chinese officials now talk about Confucianism as the basis of a new political identity. 
Much of this is half-baked, at best. 
Most Chinese, including government officials, have only a patchy knowledge of the Confucian classics. 
They tend to cherry-pick quotations that support their own grip on power, stressing such “traditional” virtues as obedience to authority, neglecting to mention that Confucian thought upholds the right to rebel against unjust rulers. 
Putin’s favorite philosophers are a mixed bag of mystical nationalists who all conceived of Russia as a spiritual community based on the Orthodox faith, but whose ideas are too diverse in other ways, and too obscure, to provide a coherent ideology. 
Nor are their thoughts always in line with Putin’s own. 
Putin regards the collapse of the Soviet Union as a major calamity; yet he freely quotes Ivan Ilyin, who became a ferocious opponent of the Soviet regime and was banished by Lenin to Western Europe in 1922. 
It may be that Putin genuinely believes that Russia is a spiritual bastion against the decadence of a Western world that has been corrupted by materialism and homosexuality. 
It is also possible that China’s current rulers, whose families have grown rich through political favors, are convinced students of Confucian philosophy. 
But the governments in Russia and China are guided by something much trickier to deal with: nationalism based on resentment. 
Maoist dogma in China has been largely replaced by something called “patriotic education,” manifested in school textbooks, history museums, and an assortment of monuments. 
Chinese grow up with the idea – not wholly wrong – that China was deeply humiliated by foreigners for more than a hundred years, especially during the nineteenth-century Opium Wars and the brutal Japanese invasions. Only a strong China, under the firm leadership of the Communist Party, can protect its people from future depredations. 
In Russia, Putin, too, is manipulating old grievances and a traditional sense that the wicked West is bent on undermining Russian unity and destroying its soul. 
As is true of China’s leaders, Putin accuses the West of ganging up on Russia. 
One can call this paranoia, but it is not completely irrational. 
After all, both Russia and China are surrounded by countries allied to the US. 
And, by pushing NATO as far as the Russian borders, the West has hardly been sensitive to Russian security concerns. 
The problem with nationalism based on resentment is that it impedes diplomacy, which is based on give and take. 
Criticism is quickly seen as a sign of hostility or disrespect. 
Unwelcome moves by American or Japanese politicians are officially branded as “insults to the people.” 
Of course, much of this is intended for domestic consumption – a way to mobilize public opinion behind authoritarian rulers. 
But these powerful autocracies’ resentful nationalism still makes them harder to deal with than their more brutal, but less unpredictable, Communist predecessors. 
Given that military confrontation would be extremely dangerous, the best formula might still be the one framed by the US diplomat George Kennan in 1947. 
If China and Russia cannot be treated as friends, conflict can be managed by recognizing their different interests, by constant vigilance, and by maintaining the strength of our own democratic institutions. 
If, pace Obama, we are at the start of a new Cold War, so be it. 
The whole point of the Cold War was to ensure that a hot one would be prevented. 

America’s Late Imperial Dilemma 
NEW YORK – US President Barack Obama is under attack – from so-called liberal hawks, more or less to the left of center, as well as from active interventionists on the right – for being a weak president, leading a war-weary (even world-weary) America in retreat. 
Obama’s critics, whether on the left or the right, believe that the United States has a unique calling to impose its will on the world. 
The only difference is that the former justify their views with talk of democracy and human rights, while the latter do not need any such justification, because, after all, America is the greatest country on earth. 
Either way, the premise that the US should lead forcefully rests on the idea that without a benevolent hegemonic power to police the world, chaos will ensue and more malevolent forces will take over. 
This opinion was expressed most clearly in a recent article by the conservative foreign-policy thinker Robert Kagan. 
Kagan’s argument is that other countries cannot be relied upon to behave responsibly without strong US leadership. 
Like other hawks, he warns not only that dictators will behave badly if given the chance, which is certainly plausible, but also that democratic allies need to be kept in their place by a firm hegemonic hand. 
In East Asia, for example, China must be “hemmed in” by strong US allies. 
But if Japan, America’s main ally in the region, were “much more powerful and much less dependent on the United States for its security,” it, too, should not be trusted. 
Kagan may be right in thinking that a precipitous US retreat from East Asia could have dangerous consequences. 
But this argument has the familiar whiff of the late stages of empire. 
The European imperial powers of the twentieth century would periodically hold out the distant prospect of independence to their colonial subjects – but not yet, not before they were ready, not before their Western masters had educated them to take care of themselves responsibly. 
How long this education might take was anybody’s guess. 
That is the paradox of imperialism. 
As long as the colonized are under the imperial cosh, they can never truly be ready, because the authority to run their own affairs, responsibly or not, was taken away from them. 
Empires can impose order and stability for a long time; but imperialists – rather like many Americans today – become tired, and their subjects grow restless. 
The imperial order becomes brittle, and, as Kagan rightly notes, when the old order finally breaks down, mayhem often follows. 
That happened in India in 1947, when the British left, Pakistan broke away, and roughly a million Hindus and Muslims died in mutual slaughter. 
But does this really mean that the British Raj should have lasted longer? 
If so, how much longer? 
It is just as plausible to argue that prolonged imperial rule could have made ethnic tensions worse. 
After all, those tensions were largely the result of colonial divide-and-rule policies. 
So it is today, to some degree, with Pax Americana – a kind of imperial world order that was never a formal empire. 
Compared to most previous empires, it was relatively benign, though it is too easily forgotten how often the leader of the “Free World” subverted elected leaders and supported dictators, as in Chile, South Korea, El Salvador, Argentina, Indonesia, Guatemala, and so on. 
The much-vaunted “liberal order” policed by the US was a product of World War II and the Cold War. 
Germany and Japan had to be kept down, the Communist powers had to be contained, and the old countries of Europe had to learn to live with one another under unifying pan-national institutions. 
All of this was made possible by American money and military might. 
As a result, the Free World, in Western Europe and East Asia, became a US dependency. 
This cannot go on forever. 
Indeed, the arrangements are already fraying. 
But then comes the old imperial paradox. 
The longer others remain dependent on the US, the less capable they will be of taking care of their own affairs, including their security. 
And, like an authoritarian parent, the US itself, despite its admonitions to its allies to pull their weight, is often loath to let go of its increasingly unruly dependents. 
When a new government came to power in Japan in 2009 and tried to break the postwar mold by initiating better relations with China and seeking to reduce its dependence on the US, the Obama administration sought to undermine this effort. 
The informal empire would not stand for that kind of insubordination. 
In his recent foreign-policy speech at the US Military Academy at West Point, Obama barely mentioned East Asia. 
But if any region would benefit from the Obama doctrine, which promises to shift from military to more political approaches to regional problems, it is East Asia. 
Still, Obama’s instincts are right. 
At least he has recognized the limits of America’s power to impose a global order by force. 
His success as a president rests less on the good things he has done (although he has done plenty) than on the stupid things he has avoided, like getting into more unnecessary wars. 
This does not resolve the late imperial dilemma of how to reduce dependency on the hegemon without causing more tyranny and violence. 
But that painful and risky process will have to be launched eventually, and it will be better served by Obama’s brand of caution than by the tough talk of his critics. 

Abe’s Long March 
TOKYO – Japanese Prime Minister Abe Shinzo’s coalition government has decided to “reinterpret” the postwar Japanese constitution. 
According to Article 9 of the constitution, drafted by American lawyers in 1946, when Japan was under Allied occupation, Japan renounces “war as a sovereign right of the nation and the threat or use of force as means of settling international disputes.” 
The new interpretation would allow Japan to use military force in support of an ally if Japanese security is under threat. 
Abe chose to reinterpret the constitution because revising it would require the approval of two-thirds of the Japanese Diet. 
Given that most Japanese are still allergic to military force, securing the necessary votes would have been impossible. 
The reinterpretation will almost certainly result in protests from China and South Korea against resurgent Japanese militarism. 
Because Abe is the nationalist grandson of a former prime minister who was once arrested as a war criminal, and because he has paid public tribute to soldiers who died for the emperor in World War II, these protests might seem reasonable. 
Abe’s break with Japan’s pacifist consensus is beyond doubt. 
But the circumstances under which Japan would use force are so restricted that a revival of militarism is still a very long way off. 
More worrying is the effect on Japanese democracy: Elected governments do not simply change the meaning of the constitution without even bothering to get parliamentary support. 
There is, however, an odd contradiction in Abe’s nationalism. 
Constitutional pacifism was part of the postwar order imposed by the United States during occupation and largely supported by the Japanese people, who were tired of war. 
Unlike in Germany, Japan had no Hitler or Nazi party on which to blame their wartime atrocities. 
What needed to be purged instead, postwar reformers believed, was a specific form of Japanese militarism, rooted in emperor worship, the samurai tradition, authoritarian “feudalism,” and so on. 
Much in the remaking of Japan after 1945 is still to be admired: democracy, women’s suffrage, land reform, freedom of speech. 
But taking away Japan’s sovereign right to use military force had one major consequence: Japanese security was put almost entirely into American hands, reducing Japan to the status of a vassal state. 
That is why the main goal of nationalist-minded Japanese leaders, starting with Abe’s grandfather, Nobusuke Kishi, has been the return of full Japanese sovereignty by revising Article 9. 
That was not possible when Kishi was prime minister in the late 1950s. 
The Japanese were not ready for it and Kishi was tainted by his wartime record as Minister of Munitions. 
Abe’s dream is to make it happen now – and to go further. 
He would like to restore some aspects of an older Japan, discredited by Japanese military behavior, such as patriotic pride, a more central role for the imperial institution, and even a reappraisal of Japan’s wartime record itself. 
Hence his tributes to the Yasukuni Shrine, where the souls of imperial soldiers, including notorious war criminals, are worshipped. 
Many Asians, including some Japanese, see this as a sign of new militarism. 
Abe would like it to be viewed as an attempt to restore Japan’s international reputation as a “normal country.” 
But Abe’s idea of normality is not yet shared by the majority of Japanese, let alone other Asians. 
The contradiction in Abe’s nationalism is this: even as he talks about sovereignty regained and patriotic pride, he has done nothing to distance Japan from the postwar dominance of the US. 
On the contrary, his reinterpretation of the constitution is meant to help the US in its military policing of East Asia. 
In fact, what appears to be driving Abe’s endeavors even more than the desire to revise the postwar order in Japan is a widely shared fear of China’s increasing regional dominance. 
A cursory glance at the Japanese press, or even the kind of books piled high in Japanese bookstores, shows just how frightened the Japanese are. 
All of the talk in Tokyo is about Chinese aggression in the East and South China Seas. 
Abe’s reinterpretation, then, is not really a radical departure from the postwar order at all. 
China’s growing power has actually reinforced Japanese dependence on the US for its security. 
Japan’s main worry is that the US may not wish to risk a war with China over territorial disputes in the East China Sea. 
What is feared most, in addition to the rise of China, is the possible decline of the US. 
The Japan-US alliance is an irritation to the Chinese, who would like the US to get out of the way, in order to be Asia’s dominant player. 
Or so they say in public. 
In fact, Chinese attitudes may be more complicated and less unified than they seem. 
Indeed, China faces a rather stark choice. 
Either it must live with the continued Pax Americana in Asia, for as long as it lasts, or face a more independent, nuclear-armed Japan. 
Privately, many Chinese might still prefer the former. 
This may seem to be the most stable solution. 
In fact, it is fraught with danger. 
To be sure, the US military presence still imposes a certain order with which most parties can live; but it risks dragging the world’s largest military power into petty regional conflicts, a prospect that should alarm us one century after 1914. 

Reading Israel from Left to Right 
NEW YORK – Israel’s current government and its supporters in the West are quick to denounce criticism of Israeli policies as anti-Semitism. 
This can be inaccurate and self-serving, but it is not always wrong. 
Israel’s defenders are right to point out that public opinion in Europe, and to a much lesser extent in the United States, tends to be much more critical of Israeli atrocities in Gaza than about bloodier violence committed by Muslims against Muslims in other parts of the Middle East. 
This can be explained by the fact that Israel is supported by Western governments and generously subsidized by American taxpayers. 
There is not much that public outrage can do about the behavior of Iranian mullahs or Syrian thugs. 
But Israel is “one of us.” 
To be sure, excessive zeal in denouncing Israel, and cheap comparisons between Israeli violence and Nazi mass murder, betray a dubious urge to throw off the burdens of guilt. 
After decades of feeling obliged to drop the collective European head in shame for what was done to the Jews, people can finally say with an element of glee that Jews can be murderers, too. 
But, though unseemly, this is not necessarily anti-Semitic. 
Anti-Zionism takes a nasty turn to anti-Semitism when it conflates Jews with Israelis – for example, when the British Liberal Democratic politician David Ward criticized “the Jews” for inflicting horrors on the Palestinians. 
And, while one can be skeptical about Zionism as a historical project, to deny Israel’s right to exist is hard to distinguish from anti-Semitism. 
The most sinister form of anti-Zionism is to be found among leftists who see Israel and the US as the planet’s twin evils. 
Those who see dark American forces behind all that is wrong with the world, from financial crashes to the violence in Ukraine, are prone to detect the malign hand of Israeli or even Jewish lobbies in every US policy. 
The link between corrupting Jewish influence and the US was originally a right-wing trope. 
Jews were supposedly rootless, clannish, and omnipotent, with no loyalty to any nation. 
The immigrant society of the US was seen as rootless by definition. 
In the view of early-twentieth-century right-wing European nationalists, Anglo-American capitalism, controlled by Jews, undermined the sacred ties of blood and soil. 
This worldview also blamed the Jews for Bolshevism, which might seem like a contradiction, but is not. 
Bolshevism, like capitalism, was internationalist, at least in theory. 
(Joseph Stalin was actually a Soviet nationalist who also denounced Jews as rootless cosmopolitans.) 
The dangers of zealous anti-Semitic attacks on Israel are obvious. 
If Israel was not just a fearful nation oppressing the Palestinian people, but the source of all evil, any form of violence, however destructive of self and others, could be justified. 
If the Israel Defense Forces were the modern equivalent of the Nazis, it should be smashed with maximum force. 
If all Jews were responsible for the oppression of Arabs, attacks on Jews in Europe, or anywhere else, should be condoned, if not actively encouraged. 
The number of people in the West who really hold such beliefs is, I believe, small. 
Such people exist in universities. 
They write blogs. 
They march together in demonstrations with some indisputably anti-Semitic Islamist militants. 
But they are far from the mainstream. 
Remarkably, some of Israel’s most ardent admirers are now to be found on the right – and even the far right. 
Quite a few are members of political parties with a profoundly anti-Semitic provenance, such as Austria’s Freedom Party, whose early members included former Nazis. 
The Freedom Party leader, along with such luminaries of the populist right as Filip Dewinter, the Flemish nationalist leader, and the Dutch demagogue Geert Wilders, have visited the West Bank and voiced their support for Israeli settlements. 
This can be explained partly by antagonism against Islam. 
Right-wing populists in Europe regard Islam as the greatest threat to the West. 
So, naturally, they applaud the Israeli government for using harsh measures to keep the Arabs down. 
As Wilders put it, the Israelis “are fighting our fight. 
If Jerusalem falls, Amsterdam and New York will be next.” 
But the main reason for this new solidarity between Western right-wing populists and the state of Israel might lie deeper than shared antipathy toward Islam. 
No state is static, and Israel has changed a great deal since the heroic decades after its founding in 1948. 
In the early years, Israel was admired by Western leftists for being a progressive state, run by Polish and Russian socialists. 
Today’s Israeli leaders, however, in their rhetoric and behavior, often sound more like the old European anti-Semites. 
Israeli Jews are now firmly rooted in their own national soil. 
But the ruling ideology is no longer socialism; it is a form of ethnic nationalism, with a great deal of military swagger. 
No wonder, then, that Israel’s current admirers have a distinctly illiberal cast. 
They reflect current mainstream opinion more than leftist anti-Zionists do. 
The world is increasingly fragmenting, with fearful people embracing smaller, defensive identities: Scottish, Catalan, Flemish, Sunni, Shia, Kurdish, and so on. 
The idealistic internationalism of the early postwar years is collapsing fast. 
Tribal feelings – national, ethnic, and religious – are filling the vacuum. 
And, most ironic of all, Israel, a nation-state built by a people despised for their cosmopolitanism, has become a prime symbol of this disturbing trend. 

The Trouble with Europe 
NEW YORK – According to the latest opinion polls, the big winners in the European Parliament election later this month will be right-wing populist parties that share a common loathing of the European Union, most notably the National Front in France, the Freedom Party in the Netherlands, and the United Kingdom’s Independence Party. 
Though the Euroskeptic right may not win a majority of seats, its collective strength is a blow to the cause of European unity. 
Why is a project that began with such high hopes in the wake of World War II running into so much resistance? 
The success of right-wing populism in Europe stems not only from unease with the EU, but also from a surge of resentment against liberal/left elites, who are blamed for many sources of anxiety: immigration, squeezed economies, Islamic extremism, and, of course, the alleged domination of the “Eurocracy” in Brussels. 
As is true of Tea Party voters in the United States, some Europeans claim that their countries have been taken away from them. 
People feel politically helpless in a world that seems to be increasingly ruled by big corporations and faceless international bureaucracies. 
The appeal of populism is its claim that things would surely get better if only we could be masters of our own homes again. 
What has broken down in many countries is not just confidence in European institutions, but the underlying liberal/left consensus that emerged from the catastrophe of two world wars. 
After 1945, Christian and Social Democrats shared an ideal of a peaceful, united Europe, with continental solidarity – a commitment to economic equality, the welfare state, and multiculturalism – gradually replacing nationalism. 
This ideological edifice began to be seriously dented in the 1990’s, after the collapse of the Soviet empire discredited not only socialism, but any form of collective idealism. 
Neo-liberalism began to fill the vacuum. 
At the same time, more and more immigrants, often from Muslim-majority countries, settled in European cities, resulting in social tensions, to which mainstream parties were unable to respond adequately. 
Warnings about racism, or “xenophobia,” were no longer convincing in an atmosphere of economic decline and sporadic terrorism. 
That is why populist demagogues – with their promises to defend Western civilization against Islam, fight “Brussels,” and “take back” their countries from the leftist elites – have done so well. 
But this reaction will hardly help European countries thrive. 
To compete with rising powers on other continents, a common European foreign and defense policy will become increasingly important. 
And a shared currency, however flawed its conception, demands common financial institutions, which will be impossible to establish and sustain unless Europeans regain their sense of solidarity. 
The question is how? 
What, for example, can convince relatively wealthy northern Europeans, especially in Germany, that their tax money should be used to help southern Europeans in times of crisis? 
Unfortunately, pan-national movements do not have a good track record of nurturing a common sense of belonging. 
They are either too muddled (pan-Arabism), too dangerous (pan-Germanism), or both (pan-Asianism). 
Most of the founders of pan-European institutions, such as Robert Schuman, Konrad Adenauer, and Jean Monnet, were Catholics. 
Pan-Europeanism comes more naturally to Catholics than to Protestants, because they have traditionally found a sense of belonging in the Roman Church, which often coincided with the idea of Europe. 
Those who created the European Economic Community in 1957 were, in some ways, the heirs of the Holy Roman Empire. 
But this cannot be the model for Europe, whose citizens include members of almost all faiths, as well as many who claim no religious adherence at all. 
The kind of ethnic solidarity that Russian President Vladimir Putin is trying to whip up in the former Soviet empire is certainly not the answer for Europe, either. 
Ethnic nationalism became a toxic political strategy in the twentieth century, leading to genocide and ethnic cleansing – a legacy that suggests how dangerous Putin’s enterprise is. 
In any case, Europeans never were ethnically united, and never will be. 
Some European leaders, such as former Belgian Prime Minister Guy Verhofstadt, dream of a European cultural community. 
Verhofstadt speaks of his love of French wine, German opera, and English and Italian literature. 
All have their attractions, no doubt, but will hardly suffice to unite Europeans in a political or economic sense. 
The only thing left, then, would be a kind of social contract. 
European citizens should not be enticed to give up a degree of national sovereignty on religious, cultural, or ethnic grounds. 
Nor should they be asked to devote some of their taxes to helping other countries out of love and reverence for European flags or anthems. 
They should be persuaded that it is in their self-interest to do these things. 
People would have to be told by their national leaders that some problems can be addressed only by pan-national institutions. 
Will they be convinced? 
This question goes back to the old debates of the Enlightenment: John Locke’s social contract, based on enlightened self-interest, versus David Hume’s view that tradition and cultural prejudice are the essential glue of society. 
My sympathies are with the former. 
But history has shown that the latter may have the stronger pull. 
Then again, history has also shown that traditions are often invented to serve the interests of ruling classes. 
This has been the problem of European unification: it was always a venture driven by members of a political and bureaucratic elite. 
Ordinary people were only rarely consulted. 
And now the populists are reaping the benefit. 

Will Circumcision Survive in the West? 
WASHINGTON, DC – A bill to ban non-medical circumcision in Iceland has predictably provoked outrage from Jews and Muslims. 
They have every reason to be concerned: There have also been calls to outlaw ritual circumcision in the Netherlands and Scandinavia; doctors in the United Kingdom are under pressure to support a ban as well; and few have forgotten that the practice’s legality was challenged in Germany in 2012. 
Circumcision has increasingly come under fire in Europe, because the definition of human rights has expanded to include children’s bodily integrity, while the definition of religious freedom has narrowed to include primarily worship and association. 
But if this emerging hierarchy of rights isn’t managed carefully, the legitimacy of the entire human-rights project could be imperiled. 
According to Silja Dögg Gunnarsdóttir, the Progressive Party parliamentarian who introduced the Icelandic bill, the central issue is “children’s rights, not … freedom of belief.” 
Gunnarsdóttir accepts that “everyone has the right to believe in what they want,” but she insists that, “the rights of children come above the right to believe.” 
For his part, Imam Ahmad Seddeeq of the Islamic Cultural Center of Iceland has countered that circumcision is a part of the Muslim faith, and that Gunnarsdóttir’s bill amounts to “a contravention [of] religious freedom.” 
And Agnes M. Sigurðardóttir, the Bishop of Iceland, has warned that the ban would effectively turn Judaism and Islam into “criminalized religions,” because anyone practicing circumcision could be subject to six years in jail. 
Complicating matters further, both sides base their arguments on human rights. 
For example, some supporters of the ban have argued that circumcision violates Article 5 of the Universal Declaration of Human Rights (UDHR), which states that, “no one shall be subjected to torture or to cruel, inhuman, or degrading treatment or punishment.” 
The term “treatment,” supporters argue, applies to circumcision. 
At the same time, some of those defending the practice have also pointed to the UDHR, particularly Article 18, which holds that, “everyone has the right to freedom of thought, conscience, and religion.” 
Moreover, Article 18 defines this right broadly: everyone has the “freedom, either alone or in community with others and in public or private, to manifest his religion or belief in teaching, practice, worship, and observance.” 
The term “practice” would seem to include circumcision. 
Confronting questions of human rights requires that one consider context, in order to balance the rights and obligations of inhabitants of increasingly diverse societies. 
In the matter of circumcision, there are obvious tensions not just between religious freedom and individuals’ physical integrity, but also between parental rights and the authority of the state, multiculturalism and nationalism, and religious and secular moral perspectives. 
Moreover, different communities prioritize human rights differently. 
For some, the moral framework offered by human rights is sufficient in itself; but for others, as William Galston of the Brookings Institution notes, “the language of human rights hardly exhausts the realm of moral and spiritual goods.” 
In other words, culture plays a much larger role in shaping interpretations of human rights than many realize, which implies that human-rights practitioners should be wary of passing judgment on any practice with deep cultural or religious roots. 
As the cultural psychologist Richard Shweder notes, circumcision has featured in conflicts between Europeans and Middle Easterners for centuries. 
The Jewish revolt against Greek rule in the second century BCE, which Jews now commemorate annually as Hanukkah, was caused in part by a decree banning circumcision under penalty of death. 
In Western countries, meanwhile, interpretations of human rights have evolved alongside a larger cultural shift toward individualism and secularism, prompting opposition to a broad set of religious practices. 
The circumcision issue is one gauge for measuring whether Western societies still value religious freedom enough to accommodate and appreciate a diversity of beliefs and practices. 
Circumcision has been an integral part of the cultural identity and religious faith of a large portion of the world for thousands of years. 
The current movement to abolish it in the West augurs a further narrowing of the scope of religious freedom. 
The danger in this is that cherry-picking certain rights to enforce secular norms will not just undermine the overall project of human rights, which aims to unite the world’s peoples and improve lives through a shared understanding of the minimum conditions necessary to advance the “inherent dignity” and equality of “all members of the human family.” 
It will also undercut the credibility of the liberal order, which was founded on tolerance for diversity and minority groups. 
Banning circumcision would represent a marked shift away from that tradition in the West. 
As the United States has historically shown, tolerance means upholding a broader definition of people’s right to practice religion, or otherwise express their cultural identity, according to their beliefs, while withholding judgment on whether such beliefs are “right” or “wrong.” 

Initial Coin Scams 
NEW YORK – Initial coin offerings have become the most common way to finance cryptocurrency ventures, of which there are now nearly 1,600 and rising. 
In exchange for your dollars, pounds, euros, or other currency, an ICO issues digital “tokens,” or “coins,” that may or may not be used to purchase some specified good or service in the future. 
Thus it is little wonder that, according to the ICO advisory firm Satis Group, 81% of ICOs are scams created by con artists, charlatans, and swindlers looking to take your money and run. 
It is also little wonder that only 8% of cryptocurrencies end up being traded on an exchange, meaning that 92% of them fail. 
It would appear that ICOs serve little purpose other than to skirt securities laws that exist to protect investors from being cheated. 
If you invest in a conventional (non-crypto) business, you are afforded a variety of legal rights – to dividends if you are a shareholder, to interest if you are a lender, and to a share of the enterprise’s assets should it default or become insolvent. 
Such rights are enforceable because securities and their issuers must be registered with the state. 
Moreover, in legitimate investment transactions, issuers are required to disclose accurate financial information, business plans, and potential risks. 
There are restrictions limiting the sale of certain kinds of high-risk securities to qualified investors only. 
And there are anti-money-laundering (AML) and know-your-customer (KYC) regulations to prevent tax evasion, concealment of ill-gotten gains, and other criminal activities such as the financing of terrorism. 
In the Wild West of ICOs, most cryptocurrencies are issued in breach of these laws and regulations, under the pretense that they are not securities at all. 
Hence, most ICOs deny investors any legal rights whatsoever. 
They are generally accompanied by vaporous “white papers” instead of concrete business plans. 
Their issuers are often anonymous and untraceable. 
And they skirt all AML and KYC regulations, leaving the door open to any criminal investor. 
Jay Clayton, the chairman of US Securities and Exchange Commission, recently made it clear that he regards all cryptocurrencies as securities, with the exception of the first mover, Bitcoin, which he considers a commodity. 
The implication is that even Ethereum and Ripple – the second- and third-largest crypto-assets – are currently operating as unregistered securities. 
Gary Gensler, a former chairman of the Commodities and Futures Trading Commission who now teaches a course on blockchain (the technology underlying cryptocurrencies) at MIT, has also suggested as much. 
So, hundreds of ICOs that have raised billions of dollars from investors in recent years have been technically illegal. 
Even worse, the business model behind most of them is simply to fleece customers, as Izabella Kaminska of the Financial Times and Martin Walker of the Center for Evidence-Based Management recently demonstrated in a report for the UK House of Commons Treasury Committee. 
In normal business transactions, customers can buy goods and service with conventional currencies. 
But in an ICO, customers must convert that currency by buying into a limited pool of tokens in order to make a purchase. 
No legitimate business that is trying to maximize profits would require its customers to jump through such hoops. 
In fact, the only reason to restrict a purchase to token-holders is to create an illegal cartel of service providers who are safe from price competition and in a position to gouge their customers. 
Consider Dentacoin, a ridiculous cryptocurrency that can be spent only on dental services (and which almost no dentist actually accepts). 
It would be hard to come up with a better illustration of why business cartels are illegal in all civilized countries. 
Of course, the crypto-cartels would counter that customers who incur the cost of buying a token will benefit if that token appreciates in value. 
But this makes no sense. 
If the price of the token rises above the market value of the good or service being provided, then no one would buy the token. 
The only plausible reason for forcing the use of a token, then, is to hike prices or bilk investors. 
Beyond facilitating illegal activity, crypto-tokens obfuscate the price-discovery benefits that come when a single currency operates as a unit of account. 
In a crypto-utopia, every single good and service would have its own distinct token, and average consumers would have no way to judge the relative prices of different – or even similar – goods and services. 
Nor would they have any real certainty about a token’s purchasing power, given the volatility of crypto-token prices. 
Imagine living in a country where instead of simply using the national currency, you had to rely on 200 other world currencies to purchase different goods and services. 
There would be widespread price confusion, and you would have to eat the cost of converting one volatile currency into another every time you wanted to buy anything. 
The fact that everyone within a given country or jurisdiction uses the same currency is precisely what gives money its value. 
Money is a public good that allows individuals to enter into free exchange without having to resort to the kind of imprecise, inefficient bartering on which traditional societies depended. 
That is precisely where the ICO charlatans would effectively take us – not to the futuristic world of “The Jetsons,” but to the modern Stone Age world of “The Flintstones” where all transactions occur through the barter of different tokens or goods. 
It is time to recognize their utopian rhetoric for what it is: self-serving nonsense meant to separate credulous investors from their hard-earned savings. 

Identity Economics 
BERKELEY and DURHAM – A great strength of economics is its ability to examine how decisions are made from the point of view of decision makers. 
For example, economics can explain in this way why consumers buy what they do. 
It also offers a perspective on why employees work for some employers and not others, why they work as hard as they do, and, indeed, why they go to work at all. 
But in most economic analysis, the decision makers’ point of view is quite narrow. 
It starts with what people like and don’t like. 
People may have a taste for oranges or bananas, or a preference for enjoying life today instead of saving for the future. 
They then decide what to buy or how much to save, given prevailing prices, interest rates, and their own income. 
Economists have included in such analysis that people interact with others, but they have largely treated such social interactions in amechanical fashion, as if they were commodities. 
For example, in the standard economic analysis of workplace gender discrimination, men do not like to associate with women on the job – in the same way that they might prefer apples to oranges. 
Likewise, the standard economic analysis of racial discrimination is that whites do not want to associate with non-whites, and so demand a premium to buy from or work with non-whites. 
But neither gender nor racial discrimination arises from purely personal preferences. 
Instead, they reflect social codes that tell people how they are supposed to think of themselves and how they are supposed to interact with each other. 
People take such codes seriously. 
For example, in the case of gender, those who identify as men also want to behave as men are supposed to behave; those who identify as women want to behave as women are supposed to behave. 
When we examine people’s decisions from the perspective of their identities and social norms, we get new answers to many different economic questions. 
Who people are and how they think of themselves is key to the decisions that they make. 
Their identities and norms are basic motivations. 
We call this approach identity economics. 
To grasp the relevance of identity economics, and how it differs from standard economics, consider an otherwise puzzling fact. 
Men and women in the United States smoked cigarettes at vastly different rates at the beginning of the twentieth century, but these rates largely converged by the 1980’s. 
Women now smoke just as much as men. 
We cannot explain this convergence in terms of standard economic arguments, such as changes in relative prices and incomes, because no such changes were sufficiently large. 
But we can explain it if we ask how people think about themselves – that is, if we examine changes in gender norms. 
Women early in the twentieth century were not supposed to smoke; it was inappropriate behavior. 
By the 1970’s, however, advertising campaigns targeted “liberated” women, telling them that smoking was not only acceptable, but desirable. 
This example is just the tip of the iceberg. 
Taking social norms seriously has consequences that pervade the economic system, and also our lives more generally. 
Consider another example: military pay versus pay in civilian firms. 
Overall military pay is relatively flat – that is, it does not go up and down depending on performance, and it is also lower than for comparable positions in civilian firms. 
Nothing in standard economic analysis can make sense of such a pay structure – or of the rituals that are central to military tradition. 
But with identity economics it all makes sense, and we gain an entirely new perspective on work incentives, not just in the military, but in all pursuits. 
In organizations that function well, employees identify with their work and their organizations. 
If employees feel more like insiders – a key purpose of military rituals – there is little need for incentive pay or pay-for-performance schemes. 
The military changes the identity of its recruits, inculcating in them values such as duty and service. 
In the civilian world, too, the most important determinant of whether an organization functions well is not the monetary incentive system, as standard economic models would imply, but whether its workers identify with the organization and with their job within it. 
If they do not, they will seek to game the incentive system, rather than to meet the organization’s goals. 
Likewise, good schooling occurs not as a result of monetary rewards and costs – the stock-in-trade of conventional economics – but because students, parents, and teachers identify with their schools, and because that identification is associated with learning. 
Moreover, whether students identify with being in school becomes the major determinant of whether they stay or drop out. 
Given this, education policy should look at what some successful programs have done to establish a school identity that motivates students and teachers to work according to a common purpose. 
If we focus on training teachers in how to inspire their students to identify with their school – rather than teaching students to take standardized tests – we just might be able to reproduce these schools’ great results. 
As economists and policymakers, we could be content to continue looking only at prices and income and related statistics to explain people’s decisions. 
In some circumstances, that might be enough to understand what is happening. 
But in many other situations, we would miss major sources of motivation – and thus would adopt useless, if not counter-productive, measures aimed at producing the outcomes we seek. 
Identity Economics provides the broader, better vision that we need. 

If Fish Could Scream 
PRINCETON – When I was a child, my father used to take me for walks, often along a river or by the sea. 
We would pass people fishing, perhaps reeling in their lines with struggling fish hooked at the end of them. 
Once I saw a man take a small fish out of a bucket and impale it, still wriggling, on an empty hook to use as bait. 
Another time, when our path took us by a tranquil stream, I saw a man sitting and watching his line, seemingly at peace with the world, while next to him, fish he had already caught were flapping helplessly and gasping in the air. 
My father told me that he could not understand how anyone could enjoy an afternoon spent taking fish out of the water and letting them die slowly. 
These childhood memories flooded back when I read Worse things happen at sea: the welfare of wild-caught fish, a breakthrough report released last month on fishcount.org.uk. 
In most of the world, it is accepted that if animals are to be killed for food, they should be killed without suffering. 
Regulations for slaughter generally require that animals be rendered instantly unconscious before they are killed, or death should be brought about instantaneously, or, in the case of ritual slaughter, as close to instantaneously as the religious doctrine allows. 
Not for fish. 
There is no humane slaughter requirement for wild fish caught and killed at sea, nor, in most places, for farmed fish. 
Fish caught in nets by trawlers are dumped on board the ship and allowed to suffocate. 
Impaling live bait on hooks is a common commercial practice: long-line fishing, for example, uses hundreds or even thousands of hooks on a single line that may be 50-100 kilometers long. 
When fish take the bait, they are likely to remain caught for many hours before the line is hauled in. 
Likewise, commercial fishing frequently depends on gill nets – walls of fine netting in which fish become snared, often by the gills. 
They may suffocate in the net, because, with their gills constricted, they cannot breathe. 
If not, they may remain trapped for many hours before the nets are pulled in. 
The most startling revelation in the report, however, is the staggering number of fish on which humans inflict these deaths. 
By using the reported tonnages of the various species of fish caught, and dividing by the estimated average weight for each species, Alison Mood, the report’s author, has put together what may well be the first-ever systematic estimate of the size of the annual global capture of wild fish. 
It is, she calculates, in the order of one trillion, although it could be as high as 2.7 trillion. 
To put this in perspective, the United Nations Food and Agriculture Organization estimates that 60 billion animals are killed each year for human consumption – the equivalent of about nine animals for each human being on the planet. 
If we take Mood’s lower estimate of one trillion, the comparable figure for fish is 150. 
This does not include billions of fish caught illegally nor unwanted fish accidentally caught and discarded, nor does it count fish impaled on hooks as bait. 
Many of these fish are consumed indirectly – ground up and fed to factory-farmed chicken or fish. 
A typical salmon farm churns through 3-4 kilograms of wild fish for every kilogram of salmon that it produces. 
Let’s assume that all this fishing is sustainable, though of course it is not. 
It would then be reassuring to believe that killing on such a vast scale does not matter, because fish do not feel pain. 
But the nervous systems of fish are sufficiently similar to those of birds and mammals to suggest that they do. 
When fish experience something that would cause other animals physical pain, they behave in ways suggestive of pain, and the change in behavior may last several hours. 
(It is a myth that fish have short memories.) 
Fish learn to avoid unpleasant experiences, like electric shocks. 
And painkillers reduce the symptoms of pain that they would otherwise show. 
Victoria Braithwaite, a professor of fisheries and biology at Pennsylvania State University, has probably spent more time investigating this issue than any other scientist. 
Her recent book Do Fish Feel Pain? shows that fish are not only capable of feeling pain, but also are a lot smarter than most people believe. 
Last year, a scientific panel to the European Union concluded that the preponderance of the evidence indicates that fish do feel pain. 
Why are fish the forgotten victims on our plate? 
Is it because they are cold-blooded and covered in scales? 
Is it because they cannot give voice to their pain? 
Whatever the explanation, the evidence is now accumulating that commercial fishing inflicts an unimaginable amount of pain and suffering. 
We need to learn how to capture and kill wild fish humanely – or, if that is not possible, to find less cruel and more sustainable alternatives to eating them. 


Ignoring Serbia 
Berlin – Just before Christmas, Serbia’s government formally submitted its application for European Union membership. 
A few days earlier, visa requirements for the country’s citizens were lifted, together with those for citizens of Montenegro and Macedonia. 
The exultation about this step was great in all three of these countries; their expectations of the EU are even greater now. 
Reactions in Europe, by contrast, were meager or non-existent. 
Public sentiment towards EU enlargement is negative. 
In fact, a majority of states and citizens would prefer to stop enlargement – the most important and effective means by which Europe is capable of projecting power – once and for all. 
Anonymous senior diplomats in Brussels were quoted as regarding Serbia’s application to be too early; otherwise, an embarrassing silence prevailed. 
Exhausted by the frustrating climate negotiations in Copenhagen, European leaders seemed not to be in the mood for questions about EU enlargement. 
Indeed, given the domestic political mood in the 27 member states, they are deeply convinced that discussing further enlargement would win them no bouquets. 
As a result, a subjective twilight is lowering over the European project. 
That is tragic, because many unique and even historic opportunities are not being seized. 
Serbia’s application for accession is precisely such an opportunity. 
It was Serbia, Yugoslavia’s largest federal unit, which, led by Slobodan Milosevic, triggered the great Balkans crisis and caused numerous wars and “ethnic cleansings” as the federation collapsed at the start of the 1990’s. 
Under Milosevic, a majority of the Serbs turned to radical nationalism based on violence and territorial conquest. 
Four wars – in Slovenia, Croatia, Bosnia and Herzegovina, and Kosovo – had to be fought and a fifth one – in Macedonia – had to be prevented at the last minute by NATO and the EU in order to put violent Serb nationalism in its place. 
With the defeat in Kosovo, Milosevic was finally thwarted. 
Still, throughout this time, integrating Serbia into the region’s post-nationalist order remained central to the West’s strategy. 
Certainly by the time of the West’s military intervention in Bosnia, this strategy was based on the assumption that the European continent after the end of the Cold War should not allow itself to have a divided security system – that is, if security and peace were to be permanent. 
This meant that the Balkans, too, had to be introduced to Euro-Atlantic structures first and then integrated into NATO and the EU, because only a new European order could overcome the region’s recurring tragedies and guarantee lasting security. 
Serbia played and plays a central – perhaps even the leading – role in this. 
For Serbia’s path to Europe will immediately enable resolution of the main Balkan crises and conflicts that continue to this day: Bosnia and Herzegovina, Kosovo, and war criminals. 
Without addressing the question of its final borders, however, Serbia has no prospect of joining the EU. 
The Europeans have gained experience with Cyprus. 
They will not let another state into the EU whose border issues are not resolved beyond any doubt. 
And, in Serbia’s case, this question remains open regarding Kosovo and – in a more concealed way – Republika Srpska in Bosnia and Herzegovina. 
Serbia must also deliver Gen. Ratko Mladic, who led the Bosnian Serb army during the Balkan wars, to the war crimes tribunal in The Hague – or prove that he is dead or hiding elsewhere. 
Mladic, whose troops carried out atrocities throughout Bosnia and Herzegovina – including the massacre of thousands of Muslim civilians at Srebrenica in 1995 – is the most significant war-crimes suspect still at large since former Bosnian Serb President Radovan Karadzic’s arrest in Belgrade and extradition to The Hague in 2008. 
Nevertheless, the great importance of Serbia’s application for EU accession is that it could bring about successful and permanent reorganization of the Balkans. 
To be sure, sure, the path to accession will be tiresome and long, but if both sides set out on this path decisively and sincerely, the whole region will be changed for the better. 
Europe stands only to gain from continued accession negotiations over Serbia. 
Bringing Serbia into the EU would permanently stabilize the regional order and – at the time when Europe is increasingly wary of indefinite military commitments -- offer the prospect of a concrete exit strategy for NATO troops in Kosovo. 
But this assumes that the governments of EU member states finally accept their political responsibility and, instead of pandering to rampant enlargement fatigue, take decisive steps against it. 
Europeans may be too tired and divided to play a significant role in world politics, which could have dire consequences for Europe in this time of global realignment. 
But even if Europe abdicates its global role, the EU cannot forget about order within its immediate neighborhood, or hope that others will solve their problems for them. 
The Balkans are a part of Europe, and Europeans must solve the region’s problems. 
Serbia’s application for EU accession provides a historic opportunity to achieve just that. 

Ignoring the Storm 
The most recent G7 finance ministers’ meeting in October was an utter failure. 
The only thing that they agreed on was to admonish China to revalue its currency. 
The yuan’s value, while important, is not the central question facing the world economy today. 
The real immediate problem concerns what is happening and what will happen to the dollar. 
But the real issue for prosperity concerns the foundations of the global financial system. 
How low will the dollar go? 
How can we undo the imbalances of economies – China, followed far behind by Europe – exporting massively to the United States or to the dollar zone? 
Will the US mortgage market, which is expected to become even more difficult in 2008, subside into calm afterwards, or will it contaminate the whole international financial system? 
Is there a risk that rising oil prices – already reaching all-time highs – will cause further debt defaults worldwide? 
The spate of earning reports from America’s biggest banks suggests that there are real worries here. 
The condition of the world economy nowadays is very strange. 
There are no great shocks but various declines and crises. 
Central bankers try to soothe and reassure, but they are not very convincing. 
Governments are silent, acting more or less as if nothing important is happening. 
And, according to many economists, commentators, and journalists, today’s worries are temporary, solvable difficulties. 
There is no general crisis on the horizon. 
I disagree. 
I believe that we have entered a period of weakening across the different parts of the global economic system, and that this may lead to a global recession. 
This weakening calls for a strong international public response, including tighter regulation, if we are to avoid such a crisis. 
Why does the world economy look so flimsy? 
First, the way capitalism operates nowadays has changed mightily from just 30 years ago. 
In developed countries from 1945 to 1975, capitalism brought rapid growth, an average of 5% per year for long periods. 
Of course, it was subject to ups and downs, but it was not subject to financial crises of the type that we see regularly today. 
Moreover, capitalism in the post-WWII decades maintained full employment, with unemployment often hovering around 2% in Europe, North America, and Japan. 
Job insecurity back then was mostly unknown and mass poverty had disappeared. 
The keys to that period of growth and happiness were a strong social welfare system and mainly Keynesian domestic and foreign economic policies in all the world’s big states. 
Above all, every developed economy pursued policies designed to provide high wages, which would guarantee high consumption and thus rapid growth. 
Shareholders used to put up with relatively meager dividends compared to today. 
Thirty years on, shareholders have broken definitively with this system. 
Pension, investment, and hedge funds have taken the lead in this revolution. 
In all developed economies, profits have leaped spectacularly in the past 25 years, by between 8% and 10% of GDP. 
But wages and social security revenues have suffered an equivalent cut. 
As a result, growth has weak underpinnings. 
Everywhere, labor is becoming insecure and mass poverty has reappeared in developed countries. 
As economic deregulation increased, financial crises began erupting: since 1990, there have been three distinct crises in Latin America, one each in Russia and Asia, the Internet bubble, and now the sub-prime crisis. 
Second, over the past 6-7 years, strong GDP growth in the US and Great Britain has been offset by staggering debt. 
The US now borrows $2 billion a day, 95% of it from Asia and 45% of that amount from China’s central bank. 
America’s total debt exceeds 39 trillion dollars, or roughly 3.5 times US GDP. 
This situation will remain manageable only if oil prices stop increasing. 
And yet, the opposite is more likely, with domestic inflation – a danger aggravated by central banks’ loosening of money supply to help commercial banks – bringing the threat of higher interest rates. 
Finally, while assets nowadays are much more liquid, this has not boosted long-term productive investment. 
Instead, the profitable carving up of healthy companies has freed up capital to flow to intangible assets, houses and other forms of real estate, fueling a speculative crisis. 
In short, the global economy – replete with get-rich-quick schemes, overpaid bosses, and corporate fraud – has lost its moral bearings. 
We cannot let those dangerous trends continue unchecked. 
We are obviously sailing toward the rocks, and the whole developed world should be concerned. 
There is an urgent need for a global conference – a Bretton Woods II – to adopt strict rules to contain today’s wayward financial markets. 
Unfortunately, as the most recent G7 meeting showed, the world’s major governments are not yet ready to act. 

Anatomy of Illiberal Capitalism 
BUDAPEST – Populists such as US President Donald Trump and de facto Polish leader Jarosław Kaczyński, and authoritarians such as Turkish President Recep Tayyip Erdoğan and Russian President Vladimir Putin, do not just share Hungarian Prime Minister Viktor Orbán’s brand of so-called “illiberal democracy.” 
Each also espouses a form of “illiberal capitalism.” 
But what does illiberal capitalism entail, and how compatible is it with illiberal democracy? 
For starters, as nationalists, Trump, Kaczyński, Erdoğan, Putin, and Orbán regard the market economy not as a means of boosting dynamism, efficiency, prosperity, and individual freedom, but mainly as an instrument for strengthening state power. 
Historically, there have been various schools of authoritarian right-wing thought about the relationship between the market and the state. 
At one extreme, the Nazis established a command economy while maintaining private property and a high level of income inequality. 
At the other extreme, early twentieth-century social Darwinists in Europe and the United States called for unfettered domestic free markets in which only the “fittest” would survive, leading to a stronger country. 
Today, Russia sits at one end of the illiberal-capitalist spectrum. 
Putin views the collapse of the Soviet Union as largely an economic failure, and he recognizes that private property and the market can make the Russian economy more resilient in the face of Western sanctions. 
But he also believes that private-property rights come second to the needs of the Russian “security state,” which means that ownership is always conditional. 
As befits a former KGB officer, Putin also believes that the Russian state has “ultimate ownership rights” to its citizens’ private assets not just in Russia, but also abroad. 
Russian oligarchs and companies operating internationally – such as those that have interacted with The Trump Organization – are thus potential instruments of Russian foreign policy. 
Hitler famously quipped that while the Bolsheviks had nationalized the means of production, the Nazis had gone further by nationalizing the people themselves. 
This is similar to – albeit more “total” than – Putin’s own understanding of the relationship between capitalists and the state, according to which even the richest Russian oligarch is essentially a serf of the state. 
Under Russia’s highly concentrated ownership structure, the Kremlin’s control of wealth is synonymous with political control. 
Rather than trying to control millions of bourgeoisie, the state can deploy secret police to manage just a few dozen oligarchs. 
Trump is at the other end of today’s illiberal-capitalist spectrum: no less comfortable than Putin with deep income inequalities, but not as inclined to use the state to favor particular businesspeople (other than himself). 
As a result, his administration has been using executive orders to roll back many of the regulations that former US President Barack Obama introduced. 
Still, there are exceptions to Trump’s support for free-market policies. 
He is in favor of protectionism and cheap money, presumably because these positions play well with his core political constituency – white working-class voters. 
If Trump goes down the protectionist road, however, US trade partners will retaliate, often with measures targeted directly at his base, as when the European Union recently threatened tariffs against Kentucky bourbon. 
Given that threat, Trump’s economic populism will most likely manifest itself through abstinence – avoiding pro-market measures that clearly hurt the white working class. 
In Turkey, Erdoğan came to power in 2003 as the champion of devoutly Muslim Anatolian entrepreneurs. 
Opposing the traditional statism of Turkey’s Kemalist ruling elites, Erdoğan introduced pro-market reforms and feigned a commitment to the EU-accession process by supporting Turkish democratic institutions. 
Having achieved his political aims, Erdoğan is now dispensing with his commitment to democracy. 
But it remains to be seen if he will do the same with market capitalism. 
Even when he first came to power, Erdoğan’s support for free markets never stopped him from denouncing imaginary economic conspiracies. 
But if he tries to usher in a return to statism, Turkey’s rising entrepreneurial class may well turn on him. 
In Hungary, Orbán’s approach to capitalism has been more complex. 
Although he is often called a “populist” in the West, his approach combines social Darwinism and nationalism. 
On the one hand, he has introduced a flat income tax that favors the wealthy and a child tax credit that benefits only higher-income households; on the other hand, like Putin, he maintains a coterie of “friendly” oligarchs who help shore up his power, not least by controlling the Hungarian media. 
Kaczyński is the most economically populist of the illiberal capitalists. 
He started out as a social Darwinist, once introducing a child tax credit that would later inspire Orbán. 
But since his Law and Justice Party (PiS) returned to power in 2015, Kaczyński’s flagship policy has been monthly cash payments of €115 ($138) to Polish families for each child after the first. 
Moreover, Kaczyński has pushed for raising the minimum pension – rather than all pensions – and for lowering the retirement age, which plays well among rural, lower-income voters, even if it renders the pension system less sustainable. 
When it comes to trade, Kaczyński’s government loudly protests protectionism directed against Poland’s interests, as in the case of changes to the regime for delegated workers proposed by French President Emmanuel Macron. 
Today’s examples of illiberal capitalism range from toleration of extreme inequality to favoring heavy redistribution, and from overweening statism to broad deregulation of markets. 
Beyond a shared inclination toward protectionism, they do not seem to have much in common. 
But far more important than each government’s economic policies is its political orientation. 
It is no coincidence that all five leaders discussed here have attacked the independence of their country’s judiciary. 
To be sure, Putin’s and Erdoğan’s crackdowns have been far more effective than Trump’s tweets or PiS’s stalled attempt at judicial reform this summer. 
But in each case, independent judges are viewed as rival power holders. 
When politics comes first, there is a temptation to bend the law toward one’s own ends. 
But without the rule of law, businesses lose confidence that contracts and private-property rights will be enforced or independently arbitrated, and the economy cannot sustain strong long-term growth. 
That is why illiberal democrats who place politics first will ultimately undermine the prosperity and strength of their countries, and thus their own legitimacy. 

Illiberal Israel 
NEW YORK – After a half-century of occupying Palestinian territory, Israel is succumbing to its deepest ethnocentric impulses, and increasingly rejecting recognized boundaries. 
Israel is now well on its way to joining the growing club of illiberal democracies, and it has Prime Minister Binyamin Netanyahu to thank. 
Over the course of 11 years as Israel’s prime minister, Netanyahu has reshaped the country’s collective psyche. 
He has elevated the isolated, traumatized “Jew” – still at odds with the “gentiles,” not to mention the “Arabs” – above the secular, liberal, and globalized “Israeli” envisioned by the country’s founding fathers. 
Netanyahu himself is a secular, cynical hedonist who faces an ongoing investigation into his alleged acceptance of lavish illicit gifts from a Hollywood mogul. 
Yet he is adept at playing the “Jewish card” to his benefit. 
In 1996, his promise to be “good for the Jews” won him power. 
In 2015, his warning that Jews must rush to vote for him, or have their fate decided by “droves” of Arabs supposedly headed to the polling stations, did the same. 
Just as appealing to people’s Jewishness wins elections, it blocks negotiations on a solution to the Israeli-Palestinian conflict. 
Netanyahu’s insistence in 2014 that the Palestinians recognize Israel as a Jewish state became the last nail in the coffin of an already dying peace process. 
In many ways, Netanyahu’s political profile matches that of the most hardline Republicans. 
His wife once boasted that, had he been born in the US, he could have been president. 
He probably would have preferred such a life, largely for the sheer power it would afford him. 
It also would have enabled him to avoid eight frustrating years at loggerheads with President Barack Obama. 
Now, however, Netanyahu is relieved to have Donald Trump – a like-minded Republican who is, in practically every way, the polar opposite of Obama – in the White House. 
The last US president showed empathy for minorities and immigrants; defended human and civil rights; achieved a diplomatic breakthrough with Iran; sought peace in Palestine; and, most problematic, attempted to hold the Israeli leader to account. 
One of Obama’s last acts as president was to have the US abstain from voting on a United Nations Security Council resolution against Israeli settlement-building in the occupied territories, rather than vetoing it. 
Netanyahu prefers Trump’s crude charlatanism to Obama’s professorial liberalism. 
In fact, Trump and Netanyahu share much in common with other illiberal leaders, such as Turkish President Recep Tayyip Erdoğan. 
All three – and their counterparts in Hungary, Poland, and elsewhere – view open hostility toward the mainstream media as a means of securing and consolidating power. 
Trump has launched, in so many words, a “war on the media.” 
Erdoğan, for his part, has cracked down on press freedom, arresting journalists on accusations of involvement in last July’s failed military coup. 
And Netanyahu has been Israel’s acting communications minister since late 2014. 
The logic is not difficult to discern. 
News media are supposed to hold those in power accountable. 
So those in power try to muffle the news media. 
One way to do that is to amplify the voices of more agreeable alternatives, such as Israel Hayom – a Hebrew-language free daily newspaper dedicated to singing Netanyahu’s praises. 
The goal of this North Korean-style pamphlet is not to turn a profit. 
In 2014, Sheldon Adelson, the American casino mogul who has long supported Netanyahu and also helped to finance Trump’s campaign, invested an estimated $50 million in Israel Hayom, which has lost more than $250 million since its launch in 2007. 
Netanyahu held an early election in 2014, in order to protect his mouthpiece – which now has the largest circulation of any Israeli newspaper – from parliamentary bills threatening to hobble it. 
Netanyahu has always denied that he had anything to do with Israel Hayom, though the truth is that he is practically its editor-in-chief. 
In what other capacity could he have discussed with the owner of its main competitor, Yedioth Ahronot, the possibility of curtailing the distribution of Israel Hayom, in exchange for more favorable coverage? 
Of course, Netanyahu is not doing all of the heavy lifting in pushing Israel toward illiberalism, and censorship and harassment are not reserved exclusively for the media. 
The minister of education, Naftali Bennett – Chairman of the Jewish Home party, a key ally in Netanyahu’s far-right coalition and a leading advocate for annexing Palestinian lands – is now instructing schools that “studying Judaism is more important than math and science.” 
A novel describing a love affair between a Palestinian boy and a Jewish girl has been banned from school curricula. 
The minister of justice, Ayelet Shaked, also a member of Jewish Home, is second only to Bennett in her ultra-Zionist ardor. 
She is now spearheading an attack on Israeli democracy’s last frontier, the Supreme Court, condemning it for rulings such as last April’s decision holding that Israel’s natural-gas policy was unconstitutional. 
More recently, Shaked approved the “loyalty in culture bill,” which would make government cultural funding contingent on the recipient’s “loyalty” to the Jewish state. 
Right-wing groups supporting annexation, meanwhile, receive lavish support from the government, as well as from foreign Jewish donors. 
Notions of loyalty are used as weapons not just against artists. 
A newly passed bill – clearly aimed at Israeli Arabs’ representatives in the Knesset (parliament) – would allow MKs to be dismissed for disloyalty to the state. 
NGOs focused on human rights and peacemaking are scrutinized as foreign agents. 
For Israel, democracy has always been a strategic asset, because a democratic Israel was a natural fit in the Western alliance. 
Whereas the West lost no time in imposing sanctions on President Vladimir Putin’s Russia following its annexation of Crimea, it has not punished Israel’s occupation of Palestinian lands. 
The more Israel embraces Putin-inspired practices, however, the weaker becomes its connection to its strategic rearguard in the West. 
It remains to be seen whether the unpredictable Trump will meet Israel’s expectations. 
What is clear is that by weakening its democratic credentials, Israel imperils its lifeline to the West – including post-Trump America. 

Illiberal Stagnation 
NEW YORK – Today, a quarter-century after the Cold War’s end, the West and Russia are again at odds. 
This time, though, at least on one side, the dispute is more transparently about geopolitical power, not ideology. 
The West has supported in a variety of ways democratic movements in the post-Soviet region, hardly hiding its enthusiasm for the various “color” revolutions that have replaced long-standing dictators with more responsive leaders – though not all have turned out to be the committed democrats they pretended to be. 
Too many countries of the former Soviet bloc remain under the control of authoritarian leaders, including some, like Russian President Vladimir Putin, who have learned how to maintain a more convincing façade of elections than their communist predecessors. 
They sell their system of “illiberal democracy” on the basis of pragmatism, not some universal theory of history. 
These leaders claim that they are simply more effective at getting things done. 
That is certainly true when it comes to stirring nationalist sentiment and stifling dissent. 
They have been less effective, however, in nurturing long-term economic growth. 
Once one of the world’s two superpowers, Russia’s GDP is now about 40% of Germany’s and just over 50% of France’s. 
Life expectancy at birth ranks 153rd in the world, just behind Honduras and Kazakhstan. 
In terms of per capita income, Russia now ranks 73rd (in terms of purchasing power parity) – well below the Soviet Union’s former satellites in Central and Eastern Europe. 
The country has deindustrialized: the vast majority of its exports now come from natural resources. 
It has not evolved into a “normal” market economy, but rather into a peculiar form of crony-state capitalism. 
Yes, Russia still punches above its weight in some areas, like nuclear weapons. 
And it retains veto power at the United Nations. 
As the recent hacking of the Democratic Party in the United States shows, it has cyber capacities that enable it to be enormously meddlesome in Western elections. 
There is every reason to believe that such intrusions will continue. 
Given US President Donald Trump’s deep ties with unsavory Russian characters (themselves closely linked to Putin), Americans are deeply concerned about potential Russian influences in the US – matters that may be clarified by ongoing investigations. 
Many had much higher hopes for Russia, and the former Soviet Union more broadly, when the Iron Curtain fell. 
After seven decades of Communism, the transition to a democratic market economy would not be easy. 
But, given the obvious advantages of democratic market capitalism to the system that had just fallen apart, it was assumed that the economy would flourish and citizens would demand a greater voice. 
What went wrong? 
Who, if anyone, is to blame? 
Could Russia’s post-communist transition have been managed better? 
We can never answer such questions definitively: history cannot be re-run. 
But I believe what we are confronting is partly the legacy of the flawed Washington Consensus that shaped Russia’s transition. 
This framework’s influences was reflected in the tremendous emphasis reformers placed on privatization, no matter how it was done, with speed taking precedence over everything else, including creating the institutional infrastructure needed to make a market economy work. 
Fifteen years ago, when I wrote Globalization and its Discontents, I argued that this “shock therapy” approach to economic reform was a dismal failure. 
But defenders of that doctrine cautioned patience: one could make such judgments only with a longer-run perspective. 
Today, more than a quarter-century since the onset of transition, those earlier results have been confirmed, and those who argued that private property rights, once created, would give rise to broader demands for the rule of law have been proven wrong. 
Russia and many of the other transition countries are lagging further behind the advanced economies than ever. 
GDP in some transition countries is below its level at the beginning of the transition. 
Many in Russia believe that the US Treasury pushed Washington Consensus policies to weaken their country. 
The deep corruption of the Harvard University team chosen to “help” Russia in its transition, described in a detailed account published in 2006 by Institutional Investor, reinforced these beliefs. 
I believe the explanation was less sinister: flawed ideas, even with the best of intentions, can have serious consequences. 
And the opportunities for self-interested greed offered by Russia were simply too great for some to resist. 
Clearly, democratization in Russia required efforts aimed at ensuring shared prosperity, not policies that led to the creation of an oligarchy. 
The West’s failures then should not undermine its resolve now to work to create democratic states respecting human rights and international law. 
The US is struggling to prevent the Trump administration’s extremism – whether it’s a travel ban aimed at Muslims, science-denying environmental policies, or threats to ignore international trade commitments – from being normalized. 
But other countries’ violations of international law, such as Russia’s actions in Ukraine, cannot be “normalized” either. 

The Illusions Driving Up US Asset Prices 
NEW HAVEN – Speculative markets have always been vulnerable to illusion. 
But seeing the folly in markets provides no clear advantage in forecasting outcomes, because changes in the force of the illusion are difficult to predict. 
In the United States, two illusions have been important recently in financial markets. 
One is the carefully nurtured perception that President-elect Donald Trump is a business genius who can apply his deal-making skills to make America great again. 
The other is a naturally occurring illusion: the proximity of Dow 20,000. 
The Dow Jones Industrial Average has been above 19,000 since November, and countless news stories have focused on its flirtation with the 20,000 barrier – which might be crossed by the time this commentary is published. 
Whatever happens, Dow 20,000 will still have a psychological impact on markets. 
Trump has never been clear and consistent about what he will do as president. 
Tax cuts are clearly on his agenda, and the stimulus could lead to higher asset prices. 
Lower corporate taxes are naturally supposed to lead to higher share prices, while cuts in personal income tax might lead to higher home prices (though possibly offset by other changes in the tax system). 
But it is not just Trump’s proposed tax changes that plausibly affect market psychology. 
The US has never had a president like him. 
Not only is he an actor, like Ronald Reagan; he is also a motivational writer and speaker, a brand name in real estate, and a tough deal maker. 
If he ever reveals his financial information, or if his family is able to use his influence as president to improve its bottom line, he might even prove to be successful in business. 
The closest we can come to Trump among former US presidents might be Calvin Coolidge, an extremely pro-business tax cutter. 
“The chief business of the American people is business,” Coolidge famously declared, while his treasury secretary, Andrew Mellon – one of America’s wealthiest men – advocated tax cuts for the rich, which would “trickle down” in benefits to the less fortunate. 
The US economy during the Coolidge administration was very successful, but the boom ended badly in 1929, just after Coolidge stepped down, with the stock-market crash and the beginning of the Great Depression. 
During the 1930s, the 1920s were looked upon wistfully, but also as a time of fakery and cheating. 
Of course, history is never destiny, and Coolidge is only one observation – hardly a solid basis for a forecast. 
Moreover, unlike Trump, both Coolidge and Mellon were levelheaded and temperate in their manner. 
But add to the Trump effect all the attention paid to Dow 20,000, and we have the makings of a powerful illusion. 
On November 10, 2016, two days after Donald J. Trump was elected, the Dow Jones average hit a new record high – and has since set 16 more daily records, all trumpeted by news media. 
That sounds like important news for Trump. 
In fact, the Dow had already hit nine record highs before the election, when Hillary Clinton was projected to win. 
In nominal terms, the Dow is up 70% from its peak in January 2000. 
On November 29, 2016, it was announced that the S&P/CoreLogic/Case-Shiller National Home Price Index (which I co-founded with my esteemed former colleague Karl E. Case, who died last July) reached a record high the previous September. 
The previous record was set more than ten years earlier, in July 2006. 
But these numbers are illusory. 
The US has a national policy of overall inflation. 
The US Federal Reserve has set an inflation “objective” of 2% in terms of the personal consumption expenditure deflator. 
This means that all prices should tend to go up by about 2% per year, or 22% per decade. 
The Dow is up only 19% in real (inflation-adjusted) terms since 2000. 
A 19% increase in 17 years is underwhelming, and the national home price index that Case and I created is still 16% below its 2006 peak in real terms. 
But hardly anyone focuses on these inflation-corrected numbers. 
The Fed, like the world’s other central banks, is steadily debasing the currency, in order to create inflation. 
A Google Ngrams search of books shows that use of the term “inflation-targeting” began growing exponentially in the early 1990s, when the target was typically far below actual inflation. 
The idea that we actually want moderate positive inflation – “price stability,” not zero inflation – appears to have started to take shape in policy circles around the time of the 1990-1991 recession. 
Lawrence Summers argued that the public has an “irrational” resistance to the declining nominal wages that some would have to suffer in a zero-inflation regime. 
Many people appear not to understand that inflation is a change in the units of measurement. 
Unfortunately, although the 2% inflation target is largely a feel-good policy, people tend to draw too much inspiration from it. 
Irving Fisher called this fixation on nominal price growth the “money illusion” in an eponymous 1928 book. 
That doesn’t mean that we set new speculative-market records every day. 
Stock-price movements tend to approximate what economists call “random walks,” with prices reflecting small daily shocks that are about equally likely to be positive or negative. 
And random walks tend to go through long periods when they are well below their previous peak; the chance of setting a record soon is negligible, given how far prices would have to rise. 
But once they do reach a new record high, prices are far more likely to set additional records – probably not on consecutive days, but within a short interval. 
In the US, the combination of Trump and a succession of new asset-price records – call it Trump-squared – has been sustaining the illusion underpinning current market optimism. 
For those who are not too stressed from having taken extreme positions in the markets, it will be interesting (if not profitable) to observe how the illusion morphs into a new perception – one that implies very different levels for speculative markets. 

Images of Scarcity 
NEW HAVEN – Could the television image we’ve all seen of the Greenland ice cap crumbling into the ocean because of global warming somehow – indirectly and psychologically – be partly responsible for high oil and other commodity prices? 
The usual explanation of today’s scarcity and high prices focuses on explosive growth in emerging countries, China and India in particular, whose demand for scarce resources is “insatiable.” 
But psychology also matters in speculative markets, and perhaps that image of the Greenland ice disappearing makes it seem all too plausible that everything else– land, water, even fresh air – is running out too. 
Let’s take a case study, the last generalized boom-bust cycle in commodity prices, which caused these prices generally to rise (more or less) from some time in the 1960’s until the 1980’s, and then generally to fall until the mid-1990’s. 
Maybe images matter just as much as substance in explaining that. 
The conventional “fundamental” explanation for that cycle relates it to political events. 
The 1973-1974 oil crisis is said to have been due to the cutoff of oil following the Arab-Israeli Yom Kippur War. 
The 1979-1981 oil crisis is said to reflect the cutoff in oil due to the Iranian Revolution and the Iran-Iraq war. 
The drop in oil prices after the mid-1980’s is said to be due to the collapse of the OPEC oil cartel. 
But some economists doubt that these events tell the whole story. 
Sure, there were sharp movements in oil prices corresponding to these events, but maybe there were other, even more important factors affecting general trends in oil prices. 
After all, these events don’t really explain why prices of other commodities often followed that of oil. 
Maybe more important than those wars in the 1970’s was that people throughout the world got worried about running out of things. 
This was the time of the “great population scare,” which transformed thinking worldwide, no doubt contributing to higher commodity prices while the fear lasted. 
There seemed to be some basis for this scare. 
The rate of increase in the world’s population rose from 1.8% in 1951 to 2.1% in 1971. 
But those were just dry statistics. 
Images likely mattered more. 
In 1948, the astronomer Fred Hoyle said, “Once a photograph of the Earth, taken from outside, is available – once the sheer isolation of the earth becomes plain – a new idea as powerful as any in history will be let loose.” 
A generation later, he was proven right. 
The first photograph of the earth from space came as part of the Apollo project in November 1967. 
One of the Apollo astronauts, James B. Irwin, who landed on the moon in 1971, said of his view of the earth, “It was so far away…a little ball in the blackness of space. 
That does something to your soul….We all came back humanitarians….We saw how fragile our planet is and yet how beautiful. 
We saw how we must learn to work together, to love each other.” 
Let’s not discount that statement. 
That image of the earth from space had a profound psychological effect, and we all saw it. 
Maybe that image was at least part of the reason why people became so worried in the 1970’s about population running ahead of resources. 
The Club of Rome’s monumental book The Limits to Growth came out in 1972, with a picture of the earth on its cover. 
The book, written by a team of scientists, predicted disastrous shortages and mass starvation due to population pressure. 
Despite scientific critics of the Club of Rome’s methods, the public was ready to believe the dire forecast. 
The great population scare led to various birth-control efforts around the world, notably to the “one-child policy” instituted in China in 1979. 
Partly due to such efforts, as well as to a change in family values, the rate of growth of the world’s population, began a long decline, to 1.1% in 2005. 
That gradual decline led to gradual loss of concern about limits to growth. 
Commodity prices fell, too. 
Today, we remain mostly unconcerned about global population growth. 
But, in the last ten years or so, we have become concerned about something else: rapid world economic growth. 
While it may seem that no image in the last decade was so dramatic as the first photo of the earth from space, think again. 
Try searching YouTube, for example, on Greenland ice. 
More generally, the Internet gives a sense of vastness to the world’s economic activity that was never available before. 
The ability to communicate via e-mail to everyone in the world creates a sense of the world’s smallness relative to the abundance of people in it. 
We have seen photographs of hurricane and typhoon activity due to global warming, affecting people in Louisiana or Myanmar. 
We have seen devastation from the 2004 Indian Ocean tsunami, interpreted as a sign of crowding at the coasts. 
The North Pole turned into a lake for the first time in 2000. 
We see aerial photos of the Aral Sea drying up. 
We practically can’t buy caviar from the Caspian Sea any more. 
The European Space Agency announced in September 2007 that satellite photos showed that the Northwest Passage appeared clear of ice for shipping for the first time ever, and that the Northeast Passage is almost clear. 
With so many vivid images of a shrinking and damaged planet, is it really any wonder that human psychology is ripe for high commodity prices? 

Imagining Recession 
The world’s housing, oil, and stock markets have been plunged into turmoil in recent months. 
Yet consumer confidence, capital expenditure, and hiring have yet to take a sharp hit. 
Why? 
Ultimately, consumer and business confidence are mostly irrational. 
The psychology of the markets is dominated by the public images that we have in mind from day to day, and that form the basis of our imaginations and of the stories we tell each other. 
Popular images of past disasters are part of our folklore, often buried in the dim reaches of our memory, but re-emerging to trouble us from time to time. 
Like traditional myths, such graphic, shared images embody fears that are deeply entrenched in our psyche. 
The images that have accompanied past episodes of market turmoil are largely absent today. 
Consider the oil crisis that began in November 1973, resulting in a world stock market crash and a sharp world recession. 
Vivid images have stuck in people’s minds from that episode: long lines of cars at gas stations, people riding bicycles to work, gasless Sundays and other rationing schemes. 
Today, the real price of oil is nearly twice as high as it was at the peak of that crisis, but we have seen nothing like the images from 1973-5. 
Mostly we are not even reminded of them. 
So our confidence is not shaken, yet. 
Just before the October 19, 1987, stock market crash, the biggest one-day drop in history, the image on people’s minds was the crash of 1929. 
Indeed, the Wall Street Journal ran a story about it on the morning of the 1987 crash. 
I know that those images contributed to the severity of the 1987 crash by encouraging people to sell, because I ran a survey of individual and institutional investors the following week. 
Images of 1929 – of financiers leaping from buildings, unemployed men sleeping on park benches, long lines at soup kitchens, and impoverished boys selling apples on the street – are not on our minds now. 
The 1929 crash just does not seem relevant to most people today, probably because we survived the 1987 and 2000 crashes with few ill effects, while 1929 seems not only the distant past, but another world. 
But images of the 1987 crash, driven by computers in tall modern steel-and-glass office buildings, do seem to be on people’s minds today. 
The stock market suffered one of its biggest one-day drops this year on the 20th anniversary of the 1987 crash, with the S&P 500 falling 2.56%. 
No previous anniversary of the 1987 crash showed any such drop. 
The image of a bank run, of long lines of angry people lining up outside a failed bank, was briefly on our minds after the Northern Rock failure in Britain. 
But the Bank of England’s direct intervention prevented these images from gaining a foothold on our collective psychology. 
The images that are uppermost in our minds are of a housing crisis. 
We imagine residential streets with one “for sale” sign after another. 
Worse, there are images of foreclosures, of families being evicted from their homes, their furniture and belongings on the street. 
If home prices continue to decline in the United States and possibly elsewhere, there could be many more vivid images. 
You may yet be presented with the image of your child’s playmate moving away because his parents were thrown out in a foreclosure. 
You may see a house down the street trashed by an angry owner who was foreclosed. 
Such images become part of your sense of reality, and could disturb your sense of confidence and reduce your willingness to spend and support the economy. 
Could such changes in psychology be big enough to tip us into a world recession? 
While it is far from clear that they will, it is a possibility. 
Psychology need only change enough to bring about a drop in consumption or investment growth of a percentage point or so of world GDP, and market repercussions can do the rest. 


An IMF Bridge to Somewhere for Greece? 
ZURICH – The International Monetary Fund has resurrected an old technique – commonly used in the 1980s during the Latin American debt crisis – that would allow Greece to avoid a payment default next month on debt owed to European creditors. 
The reprieve also gives the IMF and its European partners time to sort out their technical differences on the struggling country’s growth and budget outlook. 
But the Fund’s elegant compromise still leaves Greece under the shadow of an enormous debt overhang; reducing it requires that Europe find a way to set aside national politics and act on the basis of economic logic and necessity. 
Europe and the IMF have been unable to reconcile two views of Greece’s debt sustainability, with the two sides’ differences spilling over into the public domain. 
Guided mainly by a cash-flow analysis, European authorities argue that low interest rates and long maturities have made the nation’s debt sustainable. 
But the Fund notes that, at almost 200% of GDP, Greece’s stock of debt deters investment and capital inflows. 
For the IMF, meaningful debt reduction is critical for generating the confidence and credibility needed to break Greece out of a prolonged period of impoverishment. 
This is not the only area of disagreement between Greece’s two major creditors. 
They also differ on the realism of some key economic projections, including the important nexus between growth and the government budget, with Europe adopting a much more optimistic perspective. 
For those of us who have been following the Greek economic tragedy for many years, much of the European view continues to defy economic logic – and for a simple reason: European politicians worry about the domestic political consequences of granting Greece debt relief, especially ahead of Germany’s federal election in September. 
Offering debt relief, it is feared, could undermine the credibility of governing parties and provide a boost to extremist movements. 
To be sure, debt forgiveness is tricky, raising complicated issues of fairness and incentives. 
Yet, in some cases, there comes a time when refusal to forgive debt is more damaging. 
European officials know as well as the IMF does that Greece has long been at this stage, turning the country into a permanent “ward of the state” within a eurozone that does not accommodate this outcome well. 
But they seem unable to act. 
With Europe and the IMF failing to agree, Greece has been robbed of the additional funding it needs to clear domestic arrears and meet its rather large external debt-service payments in July. 
Meanwhile, growth is languishing once again, despite the pickup in European economic performance as a whole. 
To overcome this bottleneck, the IMF has compromised, by reviving the practice of approving a financing program “in principle.” 
An approval in principle signals the Fund’s endorsement of a country’s economic policy intentions. 
This can unlock other funding (in this case, from Europe). 
But the IMF refrains from actually disbursing its own loans, pending a more satisfactory outcome on overall financing assurances (in this case, proper debt relief for Greece). 
It is a short-term compromise that acknowledges Europe’s political calendar and constraints, helps Greece avoid a summer default, and safeguards the IMF’s resources. 
The arrangement would shift more of the financing burden to Europe, where it properly belongs. 
And it even provides a signal of unity, despite the important disagreements that remain. 
But this is nothing more than yet another temporary solution – or, to be less generous, the continuation of what has come to be known as the “extend and pretend” approach. 
While the immediate funding issue is indeed addressed, not enough is being done to put Greece on a realistic path of medium-term growth and financial viability. 
It also risks exposing the IMF to even heavier political pressure, accentuating legitimate questions about the uniformity of its treatment of member countries. 
Having compromised, the IMF should now stick to its guns and refuse to make its arrangement for Greece operational until it is satisfied on both debt relief and technical assumptions. 
And, rather than declare victory, as they were inclined to do in a mid-June statement by eurozone finance ministers, European officials should treat this compromise as the next step in softening its increasingly untenable stance on Greek debt. 
In the meantime, both sides would be well advised to undertake a careful analysis of previous experiences with programs that were approved in principle, rather than becoming immediately operational. 
When defined well, including by specifying a short period for the prospective shift to being fully operational, such programs can serve as a catalyst and conduit for relaxing a binding constraint on growth and financial viability. 
They need to be part of a constructive process. 
They do not work as standalone solutions. 
Notwithstanding some bumps along the way, the succession of such programs in the 1980s helped avoid disruptive defaults, and culminated in meaningful reductions of debt and debt-service obligations, which helped several Latin American economies restore high growth and financial viability. 
A few years later, the process was repeated successfully in the debt-reduction programs for low-income countries under the HIPC (Heavily Indebted Poor Countries) initiative. 
The grudging short-term compromise between the IMF and Europe comes after months of sometimes acrimonious discussions. 
For the sake of Greece, and for the credibility of their own future interactions, they should view it as a stepping-stone to the (long-delayed) definitive resolution of Greece’s economic and financial malaise. 
Greek citizens have waited, and suffered, long enough. 

The IMF’s Euro Crisis 
OXFORD – Over the last few decades, the International Monetary Fund has learned six important lessons about how to manage government debt crises. 
In its response to the crisis in Greece, however, each of these lessons has been ignored. 
The Fund’s participation in the effort to rescue the eurozone may have raised its profile and gained it favor in Europe. 
But its failure, and the failure of its European shareholders, to adhere to its own best practices may eventually prove to have been a fatal misstep. 
One key lesson ignored in the Greece debacle is that when a bailout becomes necessary, it should be done once and definitively. 
The IMF learned this in 1997, when an inadequate bailout of South Korea forced a second round of negotiations. 
In Greece, the problem is even worse, as the €86 billion ($94 billion) plan now under discussion follows a €110 billion bailout in 2010 and a €130 billion rescue in 2012. 
The IMF is, on its own, highly constrained. 
Its loans are limited to a multiple of a country’s contributions to its capital, and by this measure its loans to Greece are higher than any in its history. 
Eurozone governments, however, face no such constraints, and were thus free to put in place a program that would have been sustainable. 
Another lesson that was ignored is not to bail out the banks. 
The IMF learned this the hard way in the 1980s, when it transferred bad bank loans to Latin American governments onto its own books and those of other governments. 
In Greece, bad loans issued by French and German banks were moved onto the public books, transferring the exposure not only to European taxpayers, but to the entire membership of the IMF. 
The third lesson that the IMF was unable to apply in Greece is that austerity often leads to a vicious cycle, as spending cuts cause the economy to contract far more than it would have otherwise. 
Because the IMF lends money on a short-term basis, there was an incentive to ignore the effects of austerity in order to arrive at growth projections that imply an ability to repay. 
Meanwhile, the other eurozone members, seeking to justify less financing, also found it convenient to overlook the calamitous impact of austerity. 
Fourth, the IMF has learned that reforms are most likely to be implemented when they are few in number and carefully focused. 
When a country requires assistance, it is tempting for lenders to insist on a long list of reforms. 
But a crisis-wracked government will struggle to manage multiple demands. 
In Greece, the IMF, together with its European partners, required the government not just to cut expenditures, but to undertake far-reaching tax, pension, judicial, and labor-market reforms. 
And, although the most urgently needed measures will not have an immediate effect on Greece’s finances, the IMF has little choice but to emphasize the short-term spending cuts that boost the chances of being repaid – even when that makes longer-term reforms more difficult to enact. 
A fifth lesson is that reforms are unlikely to succeed unless the government is committed to seeing them through. 
Conditions perceived to be imposed from abroad will almost certainly fail. 
In the case of Greece, domestic political considerations caused European governments to make a show of holding the government’s feet to the fire. 
The IMF, too, sought to demonstrate that it was being as tough with Greece as it has been on Brazil, Indonesia, and Zambia – even if doing so was ultimately counterproductive. 
The sixth lesson the IMF has swept aside is that bailing out countries that do not fully control their currencies carries additional risks. 
As the Fund learned in Argentina and West Africa, such countries lack one of the easiest ways to adjust to a debt crisis: devaluation. 
Having failed to forewarn Greece, Portugal, Ireland, and Spain about the perils of joining a currency bloc, the IMF should have considered whether it was proper or necessary for it to intervene at all in the eurozone crisis. 
Its rationale for doing so highlights the risks associated with its decision. 
The most obvious reason for the IMF’s actions is that Europe was failing to address its own problems, and had the power and influence to drag in the Fund. 
The IMF’s managing director has always been a European, and European countries enjoy a disproportionate share of the votes on the IMF’s board. 
Equally important, however, is the fact that the IMF made its decision while facing an existential crisis. 
Historically, the biggest threat to the IMF has been irrelevance. 
It was almost made redundant in the 1970s, when the US floated the dollar, only to be saved in 1982 by the Mexican debt crisis, which propelled it into the role of global financial lifeguard. 
A decade later, the IMF’s relevance had started to wane again, but was revived by its role in the transformation of the former Soviet-bloc economies. 
At the time of the euro crisis, the Fund was floundering once more in the aftermath of the East Asian crisis, as its fee-paying clients did anything they could to avoid turning to it. 
The IMF’s participation in the eurozone crisis has now given powerful emerging economies another reason to be disenchanted. 
After the US stymied their demands for a greater say within the Fund, they now find that the organization has been doing Europe’s bidding. 
It will be difficult for the IMF to regain the trust of these increasingly prominent members. 
Unless the US and the EU relinquish their grip, the Fund’s latest bid for relevance may well turn out to be its last. 

The IMF Still Misunderstands the Euro Crisis 
WASHINGTON, DC – In July, the International Monetary Fund’s Independent Evaluation Office released a major report on how the Fund handled the euro crisis after 2010. 
The IEO report is critical of Fund behavior; but, as with previous IMF self-evaluations, it misses many substantive issues. 
Specifically, the IEO argues that the Fund was captive to European interests – hardly surprising, given that Europeans constitute one-third of the Fund’s executive board. 
Moreover, the Fund was mistaken in assuming that “Europe is different,” and that “sudden stops could not happen within the euro area.” 
In a financial crisis, authorities must act fast to address the problems that caused it and restore confidence. 
The United States government did just that in the fall of 2008; European leaders, meanwhile, dithered – a point the IEO neglects to mention. 
The IEO report also doesn’t assess IMF programs’ effectiveness. 
Consider Greece, where the Fund’s response was clearly insufficient. 
In 2009, the Greek budget deficit was 15% of GDP; with an IMF program, the deficit fell in 2010, but only to 11% of GDP. 
Meanwhile, the three Baltic countries – Estonia, Latvia, and Lithuania – carried out budget tightening of 9% of GDP in 2009. 
The Fund and the European Union have long been oblivious to many EU countries’ excessive fiscal burdens. 
The Fund was lenient toward Greece because Greece is a eurozone member; but this favoritism was unjustified and ultimately costly. 
Greek public expenditures have fluctuated between 50% and 59% of GDP since 2010, creating a massive debt overhang and hindering growth. 
By comparison, Germany and the United Kingdom have kept public expenditures at a reasonable 44% of GDP. 
The IEO report ignores this and focuses instead on the need to restructure public debt, in order to make it sustainable. 
But this didn’t necessarily apply to Greece in 2009, when its public debt was high – at 127% of GDP – but not unsustainable. 
Greek debt surged and became insurmountable only under the IMF’s financing plan concluded in May 2010. 
At the end of 2015, Italy’s public debt was 133% of GDP, and the ratio for Portugal was 129%. 
Should Italy and Portugal now be forced to restructure their debt, too? 
The European economy grows slowly because it is overtaxed and overregulated. 
Rather than being told to restructure debt, European countries should be told to deregulate markets for labor, products, and services; and southern countries such as Italy, Greece, Spain, and Portugal should be told to expand secondary education and vocational training. 
As the Baltic example shows, quicker fiscal adjustments can drive structural changes. 
Instead, policymakers miss the forest for the trees, as the IEO report shows. 
Any accounting of European economic oversight in recent years should ask why the Greek crisis erupted in the spring of 2010, almost two years after the global financial crisis. 
The answer is that when the European Central Bank flooded eurozone countries with cheap liquidity, governments dispensed with serious reforms and splurged instead. 
This was partly because, in the fall of 2008, the G20 and the Fund issued desperate appeals for debt-financed fiscal stimulus. 
Many European countries heeded the call; but, rather than stimulating economic growth, deficit spending jeopardized several countries’ financial stability. 
Before it was all over, at least eight of the then 27 EU member states required IMF financing and restructuring programs. 
The obvious lesson should have been that fiscal expansion does not stimulate economic growth when there is financial instability. 
But the IMF, blinkered by its Keynesian orthodoxy, still refuses to acknowledge this fact. 
Many EU countries were vulnerable because they had accumulated excessive and unnecessary public debts by maintaining budget deficits during the pre-crisis boom years. 
By the end of 2007, the average public debt in the eurozone was 65% of GDP, five points above the ceiling set in the Maastricht treaty for countries seeking eurozone membership. 
This partly reflected the decision by France, Germany, and Italy in 2003 to violate and later “reform” the Maastricht rules, effectively declaring them null and void. 
The IMF did not object to these countries’ flouting of the public debt rules. 
In fact, if one compares the Fund’s own positions with that of its internal watchdog, they are strikingly similar, raising doubts about the IEO’s independence in writing its report. 
The IMF and the IEO both ignore the same central problems in the official response to the euro crisis so far. 
A financial crisis should be met with swift action, and budget deficits should be slashed instantly, mainly through spending cuts. 
Rapid fiscal adjustments drive structural reforms, which lead to faster economic growth. 
The IMF’s acronym used to stand informally for “It’s Mostly Fiscal.” 
Following its inadequate response to the euro crisis, the Fund should admit that the time has come to return to its roots. 

The Fund that Cried Wolf? 
LONDON – If you ask Google to find the text of the International Monetary Fund’s Global Financial Stability Report for April 2006, it helpfully asks whether you are really looking for the April 2016 version. 
I am sure the IMF would never seek to manipulate a search engine, but I imagine that the Fund’s public affairs officials are happy if as few people as possible can access the 2006 version. 
It was not one of the IMF’s most prescient publications. 
Issued just as the first doubts about the subprime mortgage market in the United States were emerging, it presented a rosy view of the present and the future. 
The authors did address whether global imbalances, derivatives, and subprime mortgages posed a threat to financial stability. 
But they liked what they saw. 
In the mortgage market, the IMF saw prospects of a soft landing. 
It believed that global imbalances would unwind gradually. 
And it paid tribute to the ability of US markets and financial firms to create innovative instruments to “attract and sustain high levels of capital inflows.” 
Indeed, US markets were described as “deep, flexible, sophisticated, and by and large well-regulated.” 
But the most remarkable misjudgment appears in the discussion of credit risk transfer. 
The IMF concluded that “a wider dispersion of credit risk has derisked the financial sector.” 
As a result, “banks should become more resilient and financially stable,” the consequences of which “should be seen in fewer bank failures and more consistent credit provision.” 
We have entered an era in which “commercial banks may be less vulnerable to credit or economic shocks.” 
This was not, shall we say, the IMF’s finest hour. 
It brings to mind John Kenneth Galbraith’s famous quip that economic forecasters were put on Earth to make astrologers look good. 
So maybe we should take the IMF’s more recent reports, which are full of dark warnings, with a grain of salt. 
It would not be surprising if, even a decade on, the Fund continues to be influenced by its failure to warn in good time that a global financial crisis – the worst in nearly 80 years – was a material risk. 
And, indeed, there are signs that the IMF now sees trouble everywhere it looks. 
But, though the Fund’s economists may be at risk of forecasting ten of the next three crises, it would be unwise to dismiss their concerns entirely on the basis of past errors. 
(That has been the trivializing response of “Brexit” campaigners to warnings by the European Union, the IMF, and the OECD, that withdrawal from the EU would cause severe damage to the British economy.) 
The Fund makes some strong points, but others appear much less well founded. 
The IMF’s strongest arguments concern China and European banks. 
It is surely true that the buildup of debt in China calls for close monitoring, and that corporate deleveraging, which is urgently required, “should be accompanied by a strengthening of banks and social safety nets, especially for displaced workers in overcapacity sectors.” 
There is no reason why that cannot be achieved – the overall balance sheet of China, Inc. remains strong – but the domestic distributional consequences will require careful management. 
The second big challenge that the IMF identifies – excess capacity in the eurozone banking system, and the related problem of non-performing loans – is also, in principle, solvable. 
The European Central Bank is well aware of the risk from weaker banks; but, with the eurozone economy heavily reliant on bank credit, addressing it is not straightforward. 
And continued massive ECB intervention in the bond markets can only postpone the day of reckoning, not avert it. 
But the third problem detected by the IMF may not be a problem at all. 
The Fund argues that the life insurance industry could be a future source of systemic risk, and should therefore be subject to macroprudential stress testing, or counter-cyclical capital buffers, on the model used for banks. 
The first recommendation is curious: IMF staff seem unaware that a stress-testing regime for insurers has already been put in place in some jurisdictions, notably the United Kingdom. 
Indeed, there are stress tests, and so-called reverse stress tests, whereby insurers are required to describe what would need to occur to make them fail. 
And of course insurers did – almost universally – pass a real-world stress test in the form of the financial crisis. 
The one big failure, AIG, occurred because of problems in its non-insurance business. 
Likewise, the IMF’s makes no compelling case for a macroprudential countercyclical approach to insurance capital. 
The Fund’s own analysis does not demonstrate that insurers behave in a procyclical way. 
On the contrary, there is some evidence that they acted counter-cyclically in the crisis. 
Even the IMF concludes that “the evidence is not unequivocal.” 
That is a thin basis on which to propose a new set of capital requirements, which would be “built up during upswings of the financial cycle and run down during periods of financial stress.” 
Why such tinkering is appropriate on the asset side of the balance sheet, while liabilities remain unchanged, is not explained. 
Perhaps it would be better if the IMF’s 2006 report could be put beyond reach, behind a firewall or somewhere on the dark web, in an unindexed museum of forecasting disasters. 
Then the IMF could again take a balanced view, rather than issuing so many false alarms that it is ignored when a real fire starts. 

The IMF’s “Tough Choices” on Greece 
ATHENS – The International Monetary Fund’s chief economist, Olivier Blanchard, recently asked a simple and important question: “How much of an adjustment has to be made by Greece, how much has to be made by its official creditors?” 
But that raises two more questions: How much of an adjustment has Greece already made? 
And have its creditors given anything at all? 
In May 2010, the Greek government agreed to a fiscal adjustment equal to 16% of GDP from 2010 to 2013. 
As a result, Greece moved from a primary budget deficit (which excludes interest payments on debt) of more than 10% of GDP to a primary balance last year – by far the largest such reversal in post-crisis Europe. 
The IMF initially projected that Greece’s real (inflation-adjusted) GDP would contract by around 5% over the 2010-2011 period, stabilize in 2012, and grow thereafter. 
In fact, real GDP fell 25%, and did not recover. 
And, because nominal GDP fell in 2014 and continues to fall, the debt/GDP ratio, which was supposed to stabilize three years ago, continues to rise. 
Blanchard notes that in 2012, Greece agreed “to generate enough of a primary surplus to limit its indebtedness” and to implement “a number of reforms which should lead to higher growth.” 
Those so-called reforms included sharply lower public spending, minimum-wage reductions, fire-sale privatizations, an end to collective bargaining, and deep pension cuts. 
Greece followed through, but the depression continued. 
The IMF and Greece’s other creditors have assumed that massive fiscal contraction has only a temporary effect on economic activity, employment, and taxes, and that slashing wages, pensions, and public jobs has a magical effect on growth. 
This has proved false. 
Indeed, Greece’s post-2010 adjustment led to economic disaster – and the IMF’s worst predictive failure ever. 
Blanchard should know better than to persist with this fiasco. 
Once the link between “reform” and growth is broken – as it has been in Greece – his argument collapses. 
With no path to growth, the creditors’ demand for an eventual 3.5%-of-GDP primary surplus is actually a call for more contraction, beginning with another deep slump this year. 
But, rather than recognizing this reality and adjusting accordingly, Blanchard doubles down on pensions. 
He writes: 
“Why insist on pensions? 
Pensions and wages account for about 75% of primary spending; the other 25% have already been cut to the bone. 
Pension expenditures account for over 16% of GDP, and transfers from the budget to the pension system are close to 10% of GDP. 
We believe a reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and that it can be done while protecting the poorest pensioners.” 
Note first the damning admission: apart from pensions and wages, spending has already been “cut to the bone.” 
And remember: the effect of this approach on growth was negative. 
So, in defiance of overwhelming evidence, the IMF now wants to target the remaining sector, pensions, where massive cuts – more than 40% in many cases – have already been made. 
The new cuts being demanded would hit the poor very hard. 
Pension payments now account for 16% of Greek GDP precisely because Greece’s economy is 25% smaller than it was in 2009. 
Without five years of disastrous austerity, Greek GDP might be 33% higher than it is now, and pensions would be 12% of GDP rather than 16%. 
The math is straightforward. 
Blanchard calls on Greece’s government to offer “truly credible measures.” 
Shouldn’t the IMF do likewise? 
To get pensions down by one percentage point of GDP, nominal economic growth of just 4% per year for two years would suffice – with no further cuts. 
Why not have “credible measures” to achieve that goal? 
This brings us to Greek debt. 
As everyone at the IMF knows, a debt overhang is a vast unfunded tax liability that says to investors: enter at your own risk. 
At any time, your investments, profits, and hard work may be taxed away to feed the dead hand of past lenders. 
The overhang is a blockade against growth. 
That is why every debt crisis, sooner or later, ends in restructuring or default. 
Blanchard is a pioneer in the economics of public debt. 
He knows that Greece’s debt has not been sustainable at any point during the last five years, and that it is not sustainable now. 
On this point, Greece and the IMF agree. 
In fact, Greece has a credible debt proposal. 
First, let the European Stabilization Mechanism (ESM) lend €27 billion ($30 billion), at long maturities, to retire the Greek bonds that the European Central Bank foolishly bought in 2010. 
Second, use the profits on those bonds to pay off the IMF. 
Third, include Greece in the ECB’s program of quantitative easing, which would let it return to the markets. 
Greece would agree to fair conditions for the ESM loan. 
It does not ask for one cent of additional official funding for the Greek state. 
It is promising to live within its means forever, and rely on internal savings and external investment for growth – far short of what any large country, controlling its own currency, would do when facing a comparable disaster. 
Blanchard insists that now is the time for “tough choices, and tough commitments to be made on both sides.” 
Indeed it is. 
But the Greeks have already made tough choices. 
Now it is the IMF’s turn, beginning with the decision to admit that the policies it has imposed for five long years created a disaster. 
For the other creditors, the toughest choice is to admit – as the IMF knows – that their Greek debts must be restructured. 
New loans for failed policies – the current joint creditor proposal – is, for them, no adjustment at all. 

IMF Go Home 
BRUSSELS – The curtains are up on another act of the Greek debt drama. 
Eurozone finance ministers and the International Monetary Fund have agreed with Greece to begin, per the IMF’s demands, providing some debt relief to the country, and to release €10.3 billion ($11.6 billion) in bailout funds. 
Greece, for its part, has agreed to another round of austerity and structural reform. 
Until recently, the IMF insisted that it would participate in the next Greek rescue program only if it deemed Greek debt to be sustainable. 
Based on the IMF’s most recent debt sustainability analysis, that is not the case. 
Germany, however, insisted that the IMF remain on board – and, with the latest deal, it seems to have prevailed, in exchange for agreeing to debt relief that it opposed. 
The victory may well not have been worth the sacrifice. 
In fact, it would have been better to let the IMF pull out, for two reasons. 
First, the IMF’s assessments of debt sustainability in Greece are undermined by a deep conflict of interest. 
Second, and more important, IMF credits are too expensive. 
In a normal bailout procedure, the IMF acts as an impartial judge of the troubled country’s debt sustainability; then, if it so chooses, it can step in as the lender of last resort. 
This is what happened in 2010, when the private sector wanted to flee from Greece and a systemic crisis loomed. 
But today Greece has only a few private-sector obligations. 
Eurozone governments are the ones offering large amounts of funding. 
For its part, the IMF has a large volume of credits outstanding. 
Of course, if Greece’s creditors accept a haircut, the IMF’s credits would become more secure – hence the conflict of interest. 
Indeed, the IMF’s debt sustainability analysis can hardly be considered neutral, and would surely be rejected by private-sector actors. 
A neutral judge – not one of the creditors – usually sets the terms in insolvency proceedings. 
This is not to say that the IMF’s conclusion is necessarily wrong. 
In fact, one could debate the question of Greece’s debt sustainability endlessly. 
Some might suspect that Greece’s debt is sustainable, since the Greek government has to pay less in interest than Portugal or Italy, both of which have much lower debt levels. 
The IMF, however, argues that, despite these low interest payments, the refinancing needs of Greece will surpass 15% of GDP (an arbitrary threshold, to be sure) at some point – perhaps as soon as 15 years. 
What the IMF fails to highlight is that, if that happens, it will be primarily because of the IMF itself – or, more precisely, the high cost of its loans. 
The IMF is charging a much higher interest rate (up to 3.9%) than the Europeans (slightly above 1%, on average), largely because it has surcharges of up to 300 basis points on its own funding costs, compared to less than 50 basis points for the European lenders. 
Moreover, IMF loans are to be repaid in just 5-7 years, on average, compared to up to 50 years for the European funding. 
The IMF assumes that its loans will be substituted by private-sector loans at even higher interest rates (over 6%). 
This would cause Greece’s debt to snowball, given that its GDP growth is highly unlikely to achieve such a rate in the foreseeable future. 
The good news is that there is a simple way to avoid this outcome: replace the IMF’s expensive short-term funding with cheap long-term European loans. 
With that switch, Greek debt may well become sustainable, even by IMF standards. 
Of course, this would require more funding from the European Stability Mechanism, the eurozone’s rescue fund. 
But the ESM would face lower risks, because the IMF has “super-senior status,” meaning that its loans are supposed to be repaid first, anyway. 
(It should be noted that the most senior creditor usually charges the lowest, not the highest, interest rate, as the IMF does.) 
The savings for Greece would be huge. 
Given that the average surcharge on the IMF’s Greek loans is about 250 basis points, and the IMF has more than €14 billion in outstanding credits, the IMF is extracting huge profits from Greece – more than €800 million annually since 2013, nearly the equivalent of the Fund’s yearly operating costs. 
The IMF is a valuable global institution, but it should not be financed mainly by Greek taxpayers (and pre-financed by eurozone taxpayers). 
By sending the IMF packing today, Greece might save several billion euros over the next decade, with a commensurate reduction in risk for European creditors. 
Add to that the IMF’s inability to provide impartial analysis of Greece’s debt sustainability, and it is hard to see how anyone can argue that the Fund can make a contribution to the Greek negotiations today. 
There is a broader point as well. 
Greece is not the only country suffering from the high cost of IMF loans. 
The outstanding IMF loans held by Ireland and Portugal, which amount to another €23 billion, should also be re-financed. 
If IMF loans are replaced with ESM financing, eurozone taxpayers will save hundreds of millions of euros per year. 
The IMF’s participation in the rescue programs for Greece, Ireland, and Portugal has already cost taxpayers in those countries nearly €9 billion in excess charges. 
While that mistake cannot be reversed, it can be rectified. 
If it is handled quickly enough, some €4 billion could still be saved. 
A few years ago, European bodies may not have had the expertise to manage adjustment programs without the IMF’s guidance. 
That is no longer true. 
There is no good reason to keep the IMF around today – and there are billions of good reasons to send it home. 

How the IMF Failed Greece 
NEW DELHI – Democracy is about real choices. 
But, throughout their country’s crisis, the Greek people have been deprived of them. 
For this, the Europe Union and especially the International Monetary Fund bear considerable responsibility. 
Greece was offered two stark choices: Leave the eurozone without financing, or remain and receive support at the price of further austerity. 
But Greece should have been offered a third option: Leave the euro, but with generous financing. 
This option should have been put on the table, recognizing that Greece has broader political reasons for staying within the eurozone. 
Although exiting the monetary union would have yielded considerable benefits, “Grexit” would have entailed sizeable costs as well. 
The benefits would have included a massive devaluation, which would have restored some dynamism to what was once a fast-growing economy. 
But the costs were terrifying. 
The government would have had to default, the banks would have been ruined, and both would have struggled for years to regain the trust of financial markets. 
As a result, interest rates would have remained high for a long time to come, impeding efforts to restore growth. 
Is it any wonder that the Greek government shrank from this horror and chose the “safe” option of austerity? 
But this option may not be safe at all. 
It is in fact, to quote T.S. Eliot, that “awful daring of a moment’s surrender...” 
Greece will now need to grind away at austerity, hoping that in some distant future “internal devaluation” – that is, wage and price deflation – will help to spark a recovery. 
Only the IMF could have offered the third option of an orderly exit. 
Greece should have been told that it could reap the benefits of devaluation, while the international community would act to minimize the attendant costs. 
The precise terms of Grexit – agreed by the troika (the IMF, the European Commission, and the European Central Bank) and Greek authorities – surely would have included a negotiated reduction in Greece’s debts, as well as a strategy for recapitalizing the banking system in order minimize uncertainty, pain, and disruption. 
Still, the costs would have been sizeable, so the IMF would have needed to offer generous financing, covering the country’s import requirements for, say, two years while providing the liquidity to manage the transition to a new currency. 
Of course, this would have increased the IMF’s already-large exposure to Greece; but this would have been a worthwhile trade-off, because it would have served a strategy that would have had a much better chance of success. 
But is there any strategy that could have succeeded in restoring the Greek economy? 
After all, under any scenario, Greece will need to run a primary surplus and undertake structural reforms to transform its economy. 
And many insist that this will not happen, because Greece simply refuses to change. 
And yet such assessments overlook the record of the past few years, during which successive governments have taken some fairly radical measures to strengthen Greece’s fiscal position and scale back the public payroll. 
Moreover, the skeptics overlook the fact that incentives to carry out structural reforms are partly endogenous. 
After all, without devaluation and the prospect of debt relief, reform merely spells more short-term pain, not less. 
The reason why an assisted Grexit was never offered seems clear: Greece’s European creditors were vehemently opposed to the idea. 
But it is not clear that the IMF should have placed great weight on these concerns. 
Back in 2010, creditor countries were concerned about contagion to the rest of the eurozone. 
If Grexit had succeeded, the entire monetary union would have come under threat, because investors would have wondered whether some of the eurozone’s other highly indebted countries would have followed Greece’s lead. 
But this risk is actually another argument in favor of providing Greece with the option of leaving. 
There is something deeply unappealing about yoking countries together when being unyoked is more advantageous. 
More recently, creditor countries have been concerned about the financial costs to member governments that have lent to Greece. 
But Latin America in the 1980s showed that creditor countries stand a better chance of being repaid (in expected-value terms) when the debtor countries are actually able to grow. 
In short, the IMF should not have made Europe’s concerns, about contagion or debt repayment, decisive in its decision-making. 
Instead, it should have publicly pushed for the third option, which would have been a watershed, for it would have signaled that the IMF will not be driven by its powerful members to acquiesce in bad policies. 
Indeed, it would have afforded the Fund an opportunity to atone for its complicity in the creditor-driven, austerity-addled misery to which Greeks have been subject for the last five years. 
Above all, it would have enabled the IMF to move beyond being the instrument of status quo powers – the United States and Europe. 
From an Asian perspective, by defying its European shareholders, the IMF would have gone a long way toward heralding the emergence of a new institution: a truly International Monetary Fund, in place of today’s Euro-Atlantic Monetary Fund. 
All is not lost. 
If the current strategy fails, the third option – assisted Grexit – remains available. 
The IMF should plan for it. 
The Greek people deserve some real choices in the near future. 

The IMF Needs More Lagarde 
DAVOS – Christine Lagarde has said she is open to serving another five-year term as Managing Director of the International Monetary Fund. 
She should get it. 
The IMF has never had better leadership, and its board of directors should give her the chance to finish the work she has begun. 
When Lagarde took the helm in July 2011, she inherited an institution in crisis. 
The global financial meltdown in 2008 and its economic aftershocks had discredited Western-led multilateral lenders and the free-market “Washington Consensus.” 
Lagarde’s leadership has helped to restore the Fund’s reputation. 
Much attention is paid to her personal qualities – and rightly so. 
She is frank, forceful, warm, and engaging. 
In country after country, officials with whom she has met, often under delicate circumstances, describe her as both a teller of difficult truths and a sensitive listener. 
These are important qualities for the leader of an institution that must negotiate, rather than dictate, terms of agreement. 
The Europeans did not like it much when Lagarde told them their banks needed to be restructured or that they needed to build a firewall to protect against financial contagion – but they did it. 
Likewise, she made tough calls on providing IMF support to countries – for example, Greece, Pakistan, Tunisia, and Ukraine – that are crucial to global stability. 
And there’s much more. 
The Fund is not often associated with creativity and compassion. 
Lagarde has begun to change that. 
In the process, she has provided a human face for an institution often associated with the prescription of bitter medicine. 
Helping to manage the Middle East’s refugee crisis, for example, is not an expected part of the IMF’s mandate. 
Yet, under her leadership, the Fund adjusted a program so that Jordan’s government could spend more to help those displaced by conflict in Syria and Iraq (more than a million of whom are housed in camps within its borders). 
Similarly, when Ebola struck West Africa in 2014, Lagarde directed the IMF to use its available cash to buy debt relief for countries in crisis, which enabled them to pay more doctors and nurses – the first-ever such use of IMF capital. 
In addition, Lagarde has identified, and acted on, three of the most important challenges facing today’s world. 
First, she has been both a forceful voice for the introduction of more women into the workforce and an exemplar of the value of having women in leadership positions. 
In countries as different as Saudi Arabia and Japan, she has urged leaders to stop wasting so much human talent – and thereby realize their economies’ potential. 
Second, under her leadership, the IMF has also addressed the broader question of income inequality. 
This is not simply a question of basic fairness. 
The Fund’s research has highlighted the direct link between narrowing the gap between rich and poor and higher economic growth. 
The IMF is not the first to make this case, but its stature gives the issue greater prominence and urgency. 
Lagarde’s personal commitment to driving home this point has been essential to advancing the argument. 
Third, Lagarde has done important work in helping the world begin to understand the full implications – some of them frighteningly destabilizing – of technological change. 
For example, automation will continue to make manufacturing more efficient and less costly, but it will also ensure that economic growth generates fewer jobs than in the past. 
The political, economic, and social consequences of this emerging reality deserve recognition and serious study. 
Lagarde has brought the IMF into the center of that work. 
Critics will say that it’s time for an IMF head who represents the developing world. 
Lagarde is, after all, the 11th consecutive European to hold the post, a privilege that has become hard to justify in today’s world. 
Others will say that the failure to recognize the full effects of IMF-endorsed austerity on Greek citizens proves that she is out of touch with ordinary people. 
Still others will argue that the charges she faces in connection with a financial scandal in France will distract her from IMF business. 
After the ugly scandal surrounding Dominique Strauss-Kahn, her predecessor at the Fund, the Fund, critics will insist, can’t afford such a distraction. 
Let’s take these objections one at a time. 
The IMF (and the World Bank) should welcome leadership from beyond Europe and the United States. 
But the purpose of ending this Western privilege is to make the leadership selection process one that is based on merit, not political considerations. 
Lagarde is the best candidate for the job, and emerging powers like the BRIC countries (Brazil, Russia, India, and China) have not united behind an alternative. 
The leadership of a European managing director probably facilitated the IMF’s decision late last year to add China’s renminbi to the basket of currencies underpinning its Special Drawing Rights. 
In addition, Lagarde displayed impressive political dexterity in finally persuading Republicans and Democrats in the US Congress to pass governance reforms that not only bolster the IMF’s firepower to fight financial crises, but also more accurately reflect changing global economic dynamics. 
The BRIC countries, for example, are now among the IMF’s top ten shareholders. 
On Greece, Lagarde made some characteristically blunt – some would say clumsy –comments last year. 
But she is not near the top of the list of those responsible for the economic pain endured by Greeks, and her tenure at the IMF makes abundantly clear that no managing director in history has done more to lead the Fund in efforts to alleviate the suffering of people in crisis. 
Finally, the French charges against Lagarde were filed over the objection of the country’s prosecutor-general, and her involvement in the case appears tangential at best. 
The world badly needs a leader dedicated to making the world a safer and more prosperous place. 
Lagarde has shown that she is such a leader, committed to making the IMF fit for the twenty-first century. 
She deserves the chance to finish what she started. 

How to Reform the IMF Now 
WASHINGTON, DC – More than four years have passed since an overwhelming majority of the membership of the International Monetary Fund agreed to a package of reforms that would double the organization’s resources and reorganize its governing structure in favor of developing countries. 
But adopting the reforms requires approval by the IMF’s member countries; and, though the United States was among those that voted in favor of the measure, President Barack Obama has been unable to secure Congressional approval. 
The time has come to consider alternative methods for moving the reforms forward. 
The delay by the US represents a huge setback for the IMF. 
It stands in the way of a restructuring of its decision-making process that would better reflect developing countries’ growing importance and dynamism. 
Furthermore, with the reforms in limbo, the IMF has been forced to depend largely on loans from its members, rather than the permanent resources called for by the new measures. 
These loans, meant as a temporary bridge before the reforms entered into effect, need to be reaffirmed every six months. 
In our view, the best way forward would be to decouple the part of the reforms that requires ratification by the US Congress from the rest of the package. 
Only one major element – the decision to move toward an all-elected Executive Board – requires an amendment to the IMF’s Articles of Agreement and thus congressional approval. 
The other major element of the reform package is an increase and rebalancing of the quotas that determine each country’s voting power and financial obligation. 
This change would double the IMF’s resources and provide greater voting power to developing countries. 
Congress would still need to ratify the measure before the US’s own quota increased, but its approval would not be required for this part of the reform package to take effect for other countries. 
The connection between the two parts of the reforms has always been unnecessary; the measures are independent, require different approval processes, and can be delivered separately. 
Removing the link between them would require the support of the US administration, but not ratification by Congress. 
This separation could be implemented smoothly. 
A simple majority of the IMF’s Executive Board would recommend it to the Board of Governors, where a resolution separating the reforms into two parts would require 85% of the votes. 
In 2010, the reform package passed with more than 95% of the votes. 
The changes to the quotas could then quickly become effective. 
The quotas for each member country have already been agreed, so there would be no need for further complex and time-consuming negotiations. 
Countries that are willing and able to pay their quota increases would be allowed to do so, increasing the IMF’s resources and boosting their relative voting power. 
The key obstacle to this proposal is the requirement of congressional approval to increase America’s quota share. 
This opens the possibility that the US’s voting power could temporarily fall below the 15% threshold needed to veto decisions that require the support of 85% of IMF members’ votes. 
In order to secure US support, the Board of Governors could commit not to consider any draft decision requiring 85% backing without America’s consent. 
This guarantee could be included in the resolution dividing the reform package into two parts. 
It would remain valid until the US was in a position to increase its quota and recover its voting share. 
The Executive Board could approve an analogous commitment and request the IMF’s managing director to refrain from submitting any draft decision requiring an 85% majority without first obtaining US support. 
The US administration might face criticism from Congress for accepting a measure that would temporarily cut the country’s voting share and for relying on a political agreement to preserve its veto power. 
But the agreement could also act as an incentive for ratifying the reforms. 
The power to reinstate the US’s formal veto power would lie entirely in the hands of Congress – making it unlikely that another four years would pass before the matter is finally resolved. 

The Limits of Economic Optimism 
WASHINGTON, DC – As the annual spring meetings of the World Bank and the International Monetary Fund commence, the world’s economic future appears brighter than it has in some time. 
The international financial institutions, not to mention many private-sector actors, are projecting significantly faster growth this year than in 2016. 
Is their buoyant outlook warranted? 
Until recently, most macroeconomic indicators were regularly leading to downgrades in growth projections. 
Now, the opposite seems to be happening. 
The IMF’s recent flagship report raised its projection for world GDP growth for 2017 from 3.4% to 3.5%, compared to the estimated rate of 3.1% for 2016. 
Likewise, the multi-indicator Brookings – FT TIGER Index points to a “broad-based and stable” recovery. 
According to these projections – which are based on models, new data, and the judgment of the particular institution or forecaster – the United States, the United Kingdom, and Japan are contributing the most to the uptick in growth. 
India is also doing particularly well. 
Deciphering these projections’ various components – from the new information to the forecasters’ hypotheses – would be a huge task. 
But, whatever reasons for optimism forecasters may have, there are also strong grounds for caution, especially in the medium and long term. 
Forecasters, like markets, are often influenced by “herd instinct.” 
The greater the number of analysts who subscribe to a particular view, the more likely it is that additional analysts will shift their own forecasts in that direction. 
In this case, the majority’s rather optimistic view has been buttressed by a broad sense of relief. 
Both the Brexit vote in the UK and the election of Donald Trump as US president raised fears of economic disaster. 
Yet, so far, neither development has had particularly dire economic consequences. 
On the contrary, market confidence remains high, boosting expectations of increased investment and consumption. 
It is telling that the US Federal Reserve has now pursued modest interest-rate hikes without triggering an adverse reaction even in emerging markets, which last year were dreading such a move. 
Against this background, economic optimism makes some sense. 
But growth remains vulnerable to the as-yet-unresolved issues that kept dragging down previous forecasts. 
One of those issues is slowing productivity growth, which has held back global economic performance, to varying degrees, for the last two decades, with no sign of reversal in sight. 
Another is economic inequality, which seems largely to be worsening, as wealth becomes increasingly concentrated at the top of the income distribution. 
Inequality seems likely to continue to undermine aggregate demand, even if GDP growth accelerates in the short term. 
Not even a decline in unemployment would do much to boost demand, not least because such a shift could well be driven by falling labor-force participation, as has often been the case in the US. 
This points to another vulnerability: weaknesses within labor markets that have proved particularly damaging for the young. 
Then there is climate change. 
The world has still not answered what is perhaps the biggest question affecting long-term growth: how can the global economy continue to expand rapidly, without allowing the average global temperature to climb more than 2° Celsius above its pre-industrial level? 
With the Trump administration unwilling even to acknowledge the risks posed by climate change – including increased migration – we may actually be moving away from a solution. 
There is a broad consensus among economists that long-term growth can be secure only if it is both sustainable and inclusive. 
In other words, if the world economy is to perform at potential – which can mean growth rates of, say, 2.5-3% in the US and Europe, together with 5-6% growth in the emerging economies – we need to reverse some of today’s most powerful trends. 
On inequality, success will require stronger and more flexible labor markets. 
To this end, we need to develop education systems that provide the digital and civic skills that a twenty-first-century labor market demands. 
We also need to introduce modern and sustainable social-welfare systems, including fully portable benefits. 
And we need to implement strategies for managing migration. 
As for climate change, we need a global system of implicit or explicit carbon pricing, spearheaded by the world economy’s most influential actors. 
In line with the December 2015 Paris climate agreement, the range of carbon pricing should take into account, to some extent, historical responsibilities, as well as current income levels. 
There is one more prerequisite for sustainable growth: relative peace and security. 
This demands a strong international governance framework in which conflicts are resolved by negotiation and compromise, though strong defenses – both traditional and non-traditional (for example, cyber security) – will also have an important role to play in guarding against major threats. 
Here, updating multilateral institutions, which have long played an important stabilizing role, will be crucial. 
That means resisting the trend, which has lately gained momentum, toward bypassing these institutions in favor of bilateral or regional arrangements. 
More fundamentally, it means rejecting old-style nationalism, which threatens to drag us back to the 1930s, rather than preparing us for the 2030s. 
None of this is to say that the 2017 projections for GDP growth will be proved wrong. 
On the contrary, it is possible that the world will experience even-faster-than-expected growth this year, with growth forecasts being revised upward again this summer. 
But these gains are likely to be short-lived, unless policymakers seize the opportunity that they provide to address the deep-seated structural challenges that, if left unresolved, will undermine growth in the longer term. 

The Migrant Boon 
OXFORD/SHANGHAI – Many of the immigration debates now raging around the world reflect the faulty assumption that admitting immigrants is an act of largesse – and a costly one, at that. 
But, far from being an economic burden, immigrants represent a major economic opportunity for destination countries. 
Those countries that take a thoughtful, long-term approach to immigration can capture large and tangible benefits. 
New research from the McKinsey Global Institute (MGI) shows that cross-border migrants – more than 90% of whom have moved for economic reasons – comprise just 3.4% of the world’s population, but contribute nearly 10% of global GDP. 
Because roughly two-thirds of these migrants reside in developed countries, where productivity tends to be highest, they are maximizing the impact of their work, with far-reaching economic benefits. 
Migrants of all skill levels contribute to this effect. 
Migrants added roughly $6.7 trillion to global GDP in 2015 – some $3 trillion more than they are projected to have produced had they stayed in their countries of origin. 
Because flows from developing to developed countries generate the largest productivity increases, these destinations account for more than 90% of migrants’ total contribution to global GDP. 
MGI estimates that, in 2015, immigrants generated some $2 trillion in the United States, $550 billion in Germany, $390 billion in the United Kingdom, $330 billion in Australia, and $320 billion in Canada. 
Even those estimates are probably too modest, given that immigrants are also an important source of innovation and entrepreneurship. 
They can play a particularly important role in countries with rapidly aging populations, as they support much-needed labor-force growth, improve old-age dependency ratios, and contribute tax revenues. 
Contrary to popular belief, immigrants typically do not take jobs that would otherwise be filled by native-born workers. 
Many gain a foothold in a new community by taking jobs that are available precisely because locals do not want them. 
A large body of research shows that immigrants have a negligible negative impact on the wages and employment of native-born workers, not to mention on the fiscal resources of destination countries. 
Yet studies also suggest that, in Europe and North America, immigrants may earn 20-30% less than native-born workers of similar education levels, even within the same occupations. 
With immigrants less able to negotiate wages effectively – owing to, say, language barriers or unrecognized credentials – countries end up with a two-track job market. 
This inequality extends beyond economics. 
MGI found that, of 18 major destinations, none has achieved strong integration outcomes across the board, though some have done better than others. 
In all top destinations, immigrants not only face more economic obstacles than their native-born counterparts; they also have difficulty obtaining quality housing and health care, and their children face educational attainment gaps. 
Many report experiencing discrimination and mistrust. 
All of this undermines immigrants’ capacity to contribute to their new countries. 
The problem is that, in many countries, the immigration debate begins and ends with the question of how many people to admit and what their profile should be. 
It rarely extends to creating real pathways for those immigrants to assimilate fully and maximize their economic contributions. 
Focusing more attention and resources on integration can help new arrivals reach their full productive potential – an outcome that is in every destination country’s best interests. 
Such efforts can transform immigrants’ lives and those of the second- and third-generation immigrants who will shape the labor force of the future. 
To this end, short-term initiatives aimed simply at linking immigrants to employment are inadequate. 
After all, a group that is disadvantaged in education, housing, health care, and social and civic life will always be at a disadvantage in the labor market, even if efforts are made to connect that group to jobs. 
If immigrants are to meet their full potential, destination countries must pursue economic, social, and civic interventions in a holistic manner. 
Moreover, because immigrant populations change over time, these must be long-term initiatives. 
Their ultimate success requires the involvement of immigrants and host communities alike. 
Local organizations and gateway cities like New York, London, and Berlin are already pioneering effective approaches to immigrant integration. 
They have the depth of experience and the sense of accountability that is needed to seize the opportunity that immigration presents. 
The scale of that opportunity is huge. 
According to MGI research, narrowing the wage gap between immigrants and native-born workers to 5-10% would generate an additional $800 billion to $1 trillion per year in global output. 
It would also bring additional societal benefits, including lower poverty rates and higher productivity for destinations that take the lead. 
Of course, immigration does imply short-term challenges and costs for destination countries, particularly when it takes the form of a large and sudden influx of refugees. 
But these costs are far outweighed by immigration’s medium- and long-term benefits – as long as governments work actively to support integration. 
In today’s interconnected world, migration is inevitable. 
The question is whether we will create isolated, disaffected, and dependent populations of immigrants, or a powerful engine of growth and dynamism. 

The Migration Superpowers 
LONDON – We have entered the age of migration. 
If all the people who live outside the country of their birth united to form their own – a republic of the rootless – it would be the fifth-largest country in the world, with a population of more than 240 million people. 
Though much has been written about how a world on the move is changing national politics, there has been little consideration of its geopolitical effects. 
But the mass movement of people is already creating three types of migration superpowers: new colonialists, integrators, and go-betweens. 
The new colonialists call to mind the settlers from Europe who spread across the world in the eighteenth and nineteenth centuries, benefiting not just themselves, but also their homelands. 
Similarly, the most mobile populations of the twenty-first century are helping their countries of origin obtain access to markets, technology, and a political voice in the world. 
The American journalist Howard W. French describes how Africa has become “China’s second continent,” as more than a million new Chinese settlers remake Sub-Saharan Africa. 
With more Chinese citizens living outside mainland China than there are French people living in France, a similar story is playing out on almost every continent. 
When those migrants return to China, their capabilities are expertly harvested. 
Known in China as “sea turtles,” they dominate their country’s technology industry. 
India, too, has a large diaspora of an estimated 20 million citizens who are super-successful and hyper-connected. 
Indian-born entrepreneurs are responsible for setting up one in ten companies in Silicon Valley. 
Microsoft’s chief executive is of Indian origin, as is the inventor of the Intel Pentium processor, the former chief technology officer at Motorola, and the CEO of Google. 
How does this benefit India? 
For starters, India receives more than $70 billion in remittances every year, the largest sum worldwide, amounting to nearly 4% of its GDP, which is more than it spends on education. 
And while it may not be possible to prove a causal connection, the influx of Indians into America has coincided with a shift in both countries’ geopolitical orientations, as evidenced by the historic 2008 nuclear deal by which the US abandoned its policy of equidistance between India and Pakistan. 
With so many people on the move, it is even possible to become a settler superpower without being recognized as a state. 
The estimated 35 million Kurds – who regard themselves as a nation without a country – are becoming one of the most politically active migrant populations in Europe. 
It is likely no coincidence that the governments of Sweden and Germany, with their large populations of Kurdish origin, are providing militarily support to the Kurdish Peshmerga in their fight against the Islamic State (ISIS). 
The second type of superpower is the integrator. 
Libraries could be filled with books about how the United States has benefited from its ability to transform people from around the world into American citizens. 
Similarly, Angola and Brazil have reversed the brain drain and are receiving large flows of immigrants from their former colonial ruler, Portugal. 
But the two most eye-catching experiments in integration today are Israel and ISIS. 
Immigration from the diaspora is essential to Israel, which is reflected in the Hebrew word for it: aliyah, derived from the verb “to ascend.” 
Indeed, the government provides “aliyah consultants,” as well as free one-way flights, language classes, and practical support. 
As a result, Israel’s population has risen ninefold since the country’s founding in 1948. 
In Start-up Nation: The Story of Israel's Economic Miracle, co-authored with Saul Singer, the American writer and political adviser Dan Senor poses a fundamental question. “How is it,” he asks, “that Israel – a country of 7.1 million people, only sixty years old, surrounded by enemies, in a constant state of war since its founding, with no natural resources – produces more start-up companies than large, peaceful, and stable nations like Japan, China, India, Korea, Canada, and the United Kingdom?” 
The answer, of course, is immigration. 
ISIS’s leaders would not be happy with the comparison, but their group’s rapid emergence on the map has drawn some lessons from Israel. 
The so-called Islamic State may not be officially recognized by anyone, but it is being built on the basis of immigration. 
According to the Soufan Group, roughly 30,000 people from 86 countries have traveled to ISIS-held territory in Syria and Iraq. 
The third type of immigration superpowers are go-betweens, which use their geography to extract concessions from migration-phobic neighbors. 
The most notable example is Turkey; once forced to beg to be considered for European Union membership, it now dictates the terms of its relationship with Brussels. 
A leaked transcript of a recent summit with European leaders revealed how President Recep Tayyip Erdoğan threatened to bus refugees to Greece and Bulgaria if his demands were not met. 
Niger is another go-between. 
As a major transit hub through which 90% of all West African migrants pass on their way to Italy, Niger succeeded in securing €600 million ($680 million) in the last EU aid budget. 
In doing so, it followed the example of Libya’s Muammar el-Qaddafi, who famously warned that Europe would “turn black” if it did not pay him to hold back migrants attempting to cross the Mediterranean. 
If the established powers that first benefited from the globalization of trade are known as the G-7, the countries, regions, and organizations that are benefiting from migration – China, India, Kurdistan, Israel, ISIS, Turkey, and Niger – could be called the M-7. 
As control over population flows become a currency of power, states that follow the M-7’s lead will have the opportunity to boost their geopolitical heft. 
For the West, the biggest challenge will be to reconcile domestic pressure for closed borders with the geopolitical advantages of embracing migration. 
For now, at least, it seems that the G-7 – for which an easily affordable influx of refugees has somehow become a “crisis” – will continue to aid the M-7’s rise. 

The Politics of Polio Eradication 
CAMBRIDGE – A few years ago, the global campaign to eradicate polio seemed to have stalled. 
After decades of eradication efforts, the virus remained stubbornly endemic in Pakistan, Afghanistan, and Nigeria. 
Then, in 2013 and 2014, it was found to have returned to seven previously polio-free countries in Africa and the Middle East, prompting the World Health Organization to declare the disease’s resurgence a “public-health emergency of international concern.” 
Despite this recidivism, the world today is closer than ever to eradicating polio. 
In 2015, there were just 74 new cases of the disease – 80% fewer than the previous year and the lowest annual total ever. 
And all of the cases were concentrated in just two countries, 54 in Pakistan and 20 in Afghanistan. 
Moreover, it has been eighteen months since the virus was last detected in Africa. 
The reasons behind this remarkable turnaround are instructive, illustrating the challenges facing public-health workers and the best ways to overcome them. 
The barriers to polio eradication are no longer medical; the disease does not occur where vaccination programs operate unhindered. 
During the past five years, polio cases have occurred almost exclusively in five conflict-affected countries: Nigeria, Pakistan, Afghanistan, Somalia, and Syria. 
Because immunization programs are led by national governments and the WHO, which, as a specialized agency of the United Nations, works closely with incumbent regimes, it can be difficult to carry out vaccinations in areas where militants wage war against the state. 
The fall in the number of polio cases largely resulted from improved access to such areas. 
In Nigeria and Pakistan, vaccination programs were able to proceed after troops asserted the state’s control over conflict-affected territory. 
Most polio cases occurred in northern and eastern Nigeria, where the terrorist group Boko Haram had killed and kidnapped immunization workers, disrupting vaccination programs and leaving more than a million children unprotected. 
After a regional military force pushed the group into sparsely populated mountains and forests, immunization workers were provided access to previously rebel-controlled areas. 
In Pakistan, polio is concentrated in the Federally Administered Tribal Areas in the northwest of the country, where the Taliban are strongest. 
In 2012, militant leaders in the region banned immunization programs over concerns that they were being used to gather intelligence for drone attacks by the United States. 
Consequently 1-3.5 million Pakistani children were not vaccinated. 
That changed in the summer of 2014, when the Pakistan military brought large areas of the region under government control. 
In the space of a single year, the number of polio cases fell from 306 to 54. 
Using troops to assert control over conflict-affected areas is not the only way to improve access for polio workers, and in some cases it may not be the most effective. 
In Afghanistan, Somalia, and Syria, the government was either unable or unwilling to assert authority over rebel-controlled territory. 
Instead, immunization workers adapted to the political reality and worked with militants to gain access to areas under their control. 
The Afghan Taliban have cooperated with polio vaccination programs since the 1990s. 
In most cases, local-level leaders have welcomed immunization workers, seeing vaccination programs as a form of patronage that reinforces their authority. 
The few polio cases that have been detected have been either cross-border transmissions from Pakistan or have occurred in areas where intense conflict between the Taliban and the Afghan government has temporarily disrupted polio campaigns. 
By contrast, in Somalia, the terrorist group al-Shabaab has historically forbidden polio workers from operating in areas under their control, viewing vaccination campaigns as part of a foreign campaign to impose a centralized government. 
One million children were unvaccinated between 2010 and 2013, when a polio outbreak occurred. 
Since then, immunization campaigns have improved their access to rebel-controlled areas by employing locally recruited staff to work within their own clans and negotiate access with local-level militant leaders. 
In Syria, after the start of the uprising in 2011, the government prevented the WHO from operating in areas outside its control. 
Over three million children were not vaccinated for polio, leading to an outbreak in rebel-controlled regions in 2013. 
In response, an ad hoc coalition, including moderate opposition groups, Turkish authorities, and local NGOs carried out a series of vaccination campaigns and contained the outbreak. 
The coalition negotiated access with local rebel leaders, allowing them to choose volunteer vaccinators. 
Militant groups – even the so-called Islamic State – permitted immunization campaigns to operate in areas under their control. 
The lesson is clear. 
Successful immunization campaigns must secure the support of de facto political leaders – whether of an internationally recognized state or of a vilified militant organization. 
As objectionable as working with groups like the Islamic State might be, it is important to remember that the main objective of efforts like the campaign to eradicate polio is to improve the health of people wherever they may live. 


Learning from China 
BEIJING – Since beginning its reform and opening up 40 years ago this month, China has been a very good student. 
And now, after four decades of rapid development, the country is increasingly presenting itself as a teacher. 
As it commits more capital abroad, it has a strong interest in how countries where it invests are run. 
But is the world ready to learn from it? 
In recent years, China has been using its more assertive “going out” policy – most ambitiously expressed in its massive Belt and Road Initiative – both to advance its own economic self-interest and to project soft power. 
China’s leaders want to restore their country to what they view as its rightful position in the world. 
China’s economic weight reached its peak in 1600, when it accounted for more than one-third of the global economy. 
Its share of global GDP declined slowly until 1820, when it began to drop precipitously, owing to the Industrial Revolution’s enormous impact on economic growth in the West. 
By the early 1960s, China’s share of global GDP had fallen below 5%. 
Then Deng Xiaoping initiated China’s reform and opening up, and the country’s own growth miracle began. 
Since 1978, China has lifted hundreds of millions of people out of poverty, and its share of global GDP economy, now at one-fifth, continues to rise. 
If China wants to increase its international influence by holding up its experience as a model for others to emulate, it must identify the mechanisms that underlay its success and explain why they are transferrable. 
This is essentially the mandate of a new center launched by Tsinghua University in Beijing. 
The Academic Center for Chinese Economic Practices and Thinking, with its suggestive acronym ACCEPT, is dedicated to understanding and disseminating China’s development experience. 
Earlier this month, it initiated this process with its first report, called “Economic Lessons Learned from China’s 40 Years of Reform and Opening Up.” 
The report includes five notable observations. 
For starters, growth over the last four decades was spurred mainly by the entry of new firms, rather than the restructuring of old ones. 
Moreover, the distribution of rents from the conversion of agricultural land to industrial and residential use played a vital role in encouraging investment. 
At the same time, financial deepening was essential to spur entrepreneurial activity and consumption. 
Opening up also encouraged learning, and, finally, proactive macroeconomic policy enabled the country to avoid financial crises and smooth out fluctuations in growth. 
One key question raised by the report – and, indeed, by virtually any analysis of China’s development experience since 1978 – concerns the relative roles of the state and the market. 
Was the emergence of new private firms or the helping hand of the government more important to China’s success? 
This is hardly a new question. 
But, as Harvard economist Dani Rodrik pointed outat the launch event, the way someone answers it tends to say more about them than about the Chinese economy. 
China, Rodrik believes, is like a Rorschach test for economists. 
Yet the ACCEPT report may provide useful insight into the question, by highlighting how state management and economic liberalization interact. 
New private enterprises were key drivers of economic growth, but it was the state that created strong incentives for market entry. 
Entrepreneurs invested heavily in their relationships with government authorities, and the state used market signals to guide resource allocation and evaluate experimental initiatives. 
Beyond encouraging the entry of new firms, the Chinese state mobilized considerable domestic resources for investment. 
Even more impressive, the state ensured constant experimentation and learning at all levels of government, which will remain essential as China addresses issues like inequality. 
Yet explaining the main factors driving China’s development is just the first step. 
If China is to export its development model in a meaningful way, it will need to overcome a number of additional barriers – beginning with growing international mistrust. 
Among developed countries, a major complaint is that China has been free riding on others’ innovations, including by requiring foreign companies to share their technology with Chinese firms as a condition of market access. 
Though it is entirely normal for a country at China’s stage of economic development to absorb and imitate foreign technologies, its size and market power dramatically increase its capacity to encourage technology transfer. 
And China has been happy to use that leverage, often in ways that its competitors consider unfair. 
Meanwhile, developing countries are increasingly questioning whether Chinese investment is really helping them. 
So far, China has generally avoided conditioning its investments on explicit policy requirements. 
But, with many of those investments bringing low economic returns, China can no longer afford to ignore how its resources are used or the indebtedness of its loan recipients. 
In persuading other countries to accept its development lessons, China faces a difficult dilemma. 
After all, China owes its development success in part to the fact that it retained full ownership and control of the process. 
By contrast, countries in Central and Eastern Europe had development policies thrust upon them by the European Union – a dynamic that has contributed significantly to the rise of anti-establishment political forces. 
At a time of growing resentment toward its increasing international influence, China’s ability to promote its development model is being severely undermined. 
It does not help that the West remains adamant that a non-democratic approach should not be allowed to succeed globally. 
We are heading for a dangerous clash, not of civilizations, but of systems. 
We need to adapt to each other. 
It makes little sense for developing countries to reject outright the lessons of China’s economic miracle, and deepening hostility between China and the West is in nobody’s interest. 
Instead, countries should be open to learning from China, which in turn should recognize the limits of its political model, even compared to the flawed democracies of the West. 

Imperial Hubris 
The United States, with its claims of exceptionalism, is usually thought of as free of historical analogies. 
But comparisons with the fate of earlier empires are becoming more common. 
I have recently been struck by an analogy from German history: the disaster of German leadership during World War I, epitomized by Kaiser Wilhelm II. 
Wilhelm assumed the throne in 1888 at age 29, his liberal father having reigned for 88 days before succumbing to throat cancer. 
His grandfather, Wilhelm I, had presided over Prussia’s military victories, which enabled Bismarck to create the unified Reich in 1871. 
Within two years, Wilhelm II dismissed Bismarck. 
Wilhelm II became the leader of a country on the cusp of European mastery. 
By the 1890’s, Germany was the strongest power on the continent. 
But power generates opposition, and Germany’s alarmed neighbors began to form defensive alliances. 
Wilhelm flaunted his absolute power, believing it to be divinely ordained. 
He was contemptuous of parliament, whose circumscribed powers were set forth in a constitution that he boasted of never having read. 
He was intelligent, impressed by technological progress, perhaps even gifted, but untutored and impulsive; he reveled in the trappings of power and delighted in uniforms. 
His ostentation and extravagance were deeply un-Prussian. 
He was given to bombastic speeches, once warning newly sworn-in recruits that, if he so ordered, they would have to shoot their parents. 
He gave astounding orders to soldiers departing to suppress the Boxer Rebellion in China: they should awaken fear as had the Huns of yore. 
He detested liberal critics. 
And he spoke disparagingly of foreign nations, especially Great Britain. 
Some of this had to do with his ambivalent anglophobia and his distrust of his mother, Queen Victoria’s daughter. 
Worse, he supported those groups that sought to increase German military power, including the creation of a high-sea fleet that could challenge the British navy. 
He shunned the details of government, for they interfered with his diversions. 
From the beginning, members of his entourage worried about his volatility and mental balance. 
German foreign policy from 1890 to 1914, for which the Kaiser bore formal and intermittently actual responsibility, comprised a series of failures and setbacks. 
But Wilhelm did not in fact rule, as Germany’s conduct during WWI made clear. 
In early July 1914, after the murder of Austrian Archduke Franz Ferdinand, Wilhelm egged on the Austrians, but by the end of the month he couldn’t restrain his own subordinates from starting a war, following the dictates of military strategy – the famed Schlieffen Plan. 
Once war started, Wilhelm became Supreme War Lord, and his chief function would have been to adjudicate among rival elements within his government. 
At the center, a civilian-military conflict emerged, the German army having always had a state-within-a-state mentality and status. 
Moreover, military and civilian leaders were divided among themselves. 
After the battle of the Marne (September 1914) and the failure of the Schlieffen Plan, some of Wilhelm’s advisers realized that the chances for a military victory were slim, hence the need for a negotiated peace. 
But by that time, even the civilian chancellor had resolved on extravagant war aims that made hopes for a negotiated peace illusory. 
From then on, the Kaiser’s mental state became a dominant issue in the war’s conduct. 
Yet the most portentous decisions had to be taken: changes in the military and civilian leadership, and, in 1917, whether to declare unrestricted submarine warfare and thus insure the United States’ entry into the war. 
The fate of his country (and of Europe) depended on how Wilhelm decided. 
But, after three years of unimaginable carnage, the Kaiser had been reduced to an instrument of a military dictatorship run by Paul von Hindenburg and his chief of staff, Erich Ludendorff. 
They enjoyed the confidence of Germany’s ruling classes, were determined to reject all compromise, and believed that “one more push” would deliver “total victory.” 
Meanwhile, the Kaiser was systematically shielded from the truth and became estranged from reality. 
For a moment in the spring of 1918 – after the Bolsheviks signed a German-dictated Carthaginian peace – a German victory seemed possible. 
But by August, Allied forces broke through German lines, and a stunned Ludendorff, fearing a sudden collapse of his army, demanded that the newly constituted civilian government send an immediate request for an armistice. 
But the Allies wouldn’t negotiate with the Kaiser. 
War-weary Germans began to demand the Kaiser’s abdication. 
The army forced Wilhelm into exile in the Netherlands, where, until his death in 1941, he spread venomous poison where he could: the Jews and socialists were to blame; he alone was right. 
Once more reflecting and encouraging a large segment of what had been his people, he saw in Hitler the new man chosen by providence, the savior of a Germany defeated by treachery. 
Wilhelm had terrifying flaws and operated at the head of a deeply flawed political system. 
But, ultimately, his chief failure had been to hand power to military and civilian hawks – wrongly called conservatives, for their vision was a radical reordering of Europe. 
Of course, America is not Imperial Germany. 
But there may be a lesson from a country whose wartime rulers, quarrelling among themselves, inflicted unimaginable harm on their people and to the world with their mendacious, secretive, and paranoid style. 
The consequences of their leadership became manifest only later, as an aggrieved nation’s people turned against each other in their deep political and moral divisions and hatreds. 
It took a worse catastrophe, a world-historical scourge, to teach these people a lesson. 
Let us hope that Americans learn their lesson about the dangers and follies of imperial hubris sooner. 

Executing Foreign Policy 
NEW YORK – The filmmaker Woody Allen is often quoted as saying that “Showing up is 80% of life.” 
One can quibble with the percentage, but Allen’s insight is important: You have to get in the game – be a player – to have any chance of obtaining your objectives. 
The same is true of world affairs. 
If showing up is 80% of life, at least 80% of foreign policy is following up. 
Smart plans, good intentions, and strong negotiating skills are essential, but they are never enough – not even close. 
As with business, education, and much else in life, most of what makes foreign policy work – or not – is a matter of implementation and execution. 
This observation will be tested more than once in 2016 and subsequent years. 
One prominent example is the Trans-Pacific Partnership (TPP), the trade pact signed in October by 12 Pacific Rim countries in Asia and the Americas. 
If the accord enters into force, it will expand world trade, boost economic growth, and strengthen the United States’ ties with regional allies who would otherwise be tempted to move closer to China. 
The agreement’s entry into force, though, is subject to ratification by most of the 12 signatories’ legislatures. 
The outcome in the US and Japan, the world’s largest and third largest economies, respectively, will be particularly consequential. 
Indeed, everyone is waiting to see what happens in the US. 
But approval by the US Congress is far from certain, especially as the presidential candidates –all of the Democrats and the leading Republicans – have come out against it. 
The vote, if it takes place, will be close, and the stakes are high, as failure to ratify the TPP would raise fundamental questions about America’s political effectiveness and ability to be a reliable partner to its allies. 
A second test will come in Syria, arguably the biggest international failure of recent years. 
In December, the United Nations Security Council unanimously adopted Resolution 2254, which establishes a political framework for a civil war that has raged for nearly five years, claiming as many as 300,000 lives and creating millions of refugees. 
A framework, however, is nothing more than an outline. 
In this case, it was less than that, because the resolution was silent about Syrian President Bashar al-Assad’s political fate and the timing of his departure. 
It also raised more questions than it answered about which Syrian opposition groups would participate in negotiations. 
Given the many divisions both within Syria and among its neighbors, getting from the resolution to a cease-fire and political settlement is likely to take years – and even that assessment may prove to be overly optimistic. 
Yet a third test for diplomats also stems from the climate agreement reached in Paris in December. 
The agreement comprises voluntary pledges by governments that amount to no more than promises to do their best. 
In many cases, there is a lack of specificity about what is to be done. 
And, because the agreement is not legally binding on its signatories, the only sanction it permits is to “name and shame” countries that fail to deliver. 
A fourth test stems from the agreement signed over the summer by the Security Council’s five permanent members, Germany, and Iran limiting Iran’s nuclear program. 
There are sure to be numerous disagreements over whether the parties in general, and Iran in particular, are meeting their obligations. 
Perhaps most important, steps will need to be taken to reassure Iran’s neighbors so that they are not tempted to proceed with their own nuclear programs. 
At some point, the implementation challenge will include additional measures to ensure that Iran does not develop nuclear weapons once the agreement’s time limits on specified programs expire. 
There are a few lessons to be learned from all of this. 
For starters, while international accords are rarely reached easily, no one should get carried away at the signing ceremony. 
The negotiators still must be able to deliver their governments’ full backing, and this is never automatic, especially when it comes to democracies such as the US, where different branches of government are often controlled by different political parties. 
A second reality is that there is an unavoidable trade-off between negotiations and implementation. 
In many cases, agreement is possible only if critical details are left unresolved. 
But such “creative ambiguity” also ensures that the implementation phase will be more difficult, as tough choices that were postponed suddenly must be addressed. 
Third, there will inevitably be moments when one or another party does not implement the pact in a manner judged to be adequate. 
Dealing with episodes of alleged non-compliance can prove to be every bit as demanding as the original negotiation. 
Which brings us back to where we began. 
All four of the major international accords reached in 2015 – the TPP, the Security Council’s Syria resolution, the Paris climate agreement, and the Iran nuclear deal – required great effort to negotiate. 
Making them work in 2016 and beyond will prove even harder. 
As Woody Allen could tell you, it is akin to the difference between writing a screenplay and making a movie. 

Impotent America? 
JERUSALEM – Israel’s 60th anniversary has come and gone. 
So, too, has President George W. Bush’s final visit to the Middle East. 
Amidst the celebrations and the soul-searching, no meaningful breakthrough in the deadlocked Israeli-Palestinian negotiations is visible. 
There are immediate reasons why this is so: Israeli Prime Minister Ehud Olmert’s government is weak and unpopular, mainly due to the botched 2006 war against Hezbollah in Lebanon. 
The Palestinian Authority under Mahmoud Abbas is even weaker, having lost control of Gaza to Hamas after a violent putsch last year. 
On the Palestinian side, this is part of a deeper phenomenon: a longstanding failure to create the institutional structures necessary for nation building. 
For example, in 1936-1939, a Palestinian uprising against British rule deteriorated into a bloody civil war, in which more Palestinians were killed by their brethren than by the British army or the Jewish self-defense forces. 
This is repeating itself now in Gaza. 
Looking back at 60 years of American involvement in the region, one can discern two scenarios in which the United States can bring the local players to an agreement. 
Absent these conditions, the US is ultimately powerless. 
The first scenario is when a real war threatens to spill over into a wider conflict, destabilizing the region and Great Power relations. 
At such times, resolute American steps can stop the fighting and impose a cease-fire, if not peace. 
In 1973, at the end of the Yom Kippur War, Israel was poised to encircle the entire Egyptian Third Army in Sinai. 
Its troops were on the road to Cairo, threatening to inflict a major defeat on Egypt. 
Soviet intervention became a real threat. 
A few tough messages from President Richard Nixon stopped the Israelis in their tracks and enabled the Americans to start a lengthy process of de-escalation that led to a number of interim agreements. 
Likewise, in 1982, during the invasion of Lebanon, Israeli troops were about to enter Muslim West Beirut after Syrian agents assassinated the pro-Israeli Lebanese President-elect Bashir Gemayel. 
This would probably have brought Syria into the war. 
A few tough calls from President Ronald Reagan to Prime Minister Menachem Begin prevented this. 
During the first Gulf War in 1991, when Iraq fired 39 Scud missiles at Israeli civilian targets and US forces failed to stop the Iraqi attacks, Israel was set to strike Iraqi targets, which would have split the US-Arab anti-Iraq coalition. 
The US warned Israel not to get involved, and Israel was forced to comply. 
In all these cases, American involvement was swift and focused on a clear aim, and compliance was verifiable within days, if not hours. 
In such dramatic situations, US power is at its greatest. 
The other scenario is when the two sides have already engaged in bilateral peace talks, paid the domestic political price, and reached agreement on most issues, though some matters remain unresolved and threaten to derail the process. 
In such cases, America can step in and, by using both carrot and stick, make both sides go the extra mile. 
After Anwar Sadat’s visit to Jerusalem in 1977, Israel and Egypt negotiated for a year and reached agreement on most issues: peace, diplomatic relations, and full Israeli withdrawal from all occupied Egyptian territory in Sinai. 
At this point, President Jimmy Carter – who initially opposed the process – invited both sides to Camp David to hammer out a peace treaty. 
In 1993, in secret bilateral negotiations in Norway (unknown to the Americans), Israel and the PLO reached an agreement about mutual recognition and the creation of a provisional Palestinian Autonomous Authority. 
Yet some issues remained unresolved. 
President Bill Clinton stepped in, and prevailed upon the two sides to work out their remaining disagreements. 
When either of these two scenarios is lacking, American initiatives are stillborn. 
This happened to Clinton at Camp David in 2000, when he failed to bring Israeli Prime Minister Ehud Barak and PLO Chairman Yasser Arafat to an agreement, and to Bush’s Road Map in 2003, when both sides agreed in principle to its general guidelines, but did little to implement them. 
Absent local political will, and when confronted with a peace-making project that may take years to complete, the US is virtually powerless. 
It is extremely successful as a fire brigade or as a midwife , but not as an initiator . 
What applies to the US is even truer for the European Union, whose “soft power” is no match for its lack of local credibility. 
The same dynamic can be seen elsewhere: for all its power, the US has failed to resolve the conflicts in Cyprus, Bosnia, or Kosovo. 
The Annan Plan failed in Cyprus because of one party’s opposition; progress now (the minor but symbolically important opening of the Ledra Street crossing in downtown Nicosia) reflects internal political changes on the Greek Cypriot side. 
Similarly, if Belgrade will change its obstreperous position on Kosovo, this will be due not to US or EU pressure, but to internal political changes in Serbia. 
Recognizing the limits of US power doesn’t mean that America is irrelevant: it can stabilize a conflict, help bring about confidence-building measures, and negotiate interim agreements. 
But at the end of the day, in the case of Israel-Palestine, as in any conflict between two national movements, the key is in the hands of the local players. 
No national conflict has ever been solved by outside powers, however well intentioned they may be. 

Making Water Conservation Pay 
NEW YORK – Call it a sign of the times. 
Rarely a month passes in which a water crisis does not make headlines somewhere in the world. 
In early August, an algal bloom in Lake Erie, the result of agricultural runoff, contaminated drinking water in Toledo, Ohio. 
In September, the reservoirs in China’s Henan province dried up, leaving crops to shrivel and forcing some residents to drink from puddles on the ground. 
In late October, the city of Hyderabad, India, discovered that its water supply might be diverted next year for agricultural uses upstream, leaving some eight million people to wonder where they will find the 190 million gallons of water they need every day. 
City officials usually respond to such supply crises by upgrading their water infrastructure, namely, drilling, damming, and laying pipes. 
Every day, the world’s largest 100 cities move 3.2 million cubic meters of water more than 5,700 kilometers to address local water shortages or problems with pollution. 
But this is an expensive solution, one that only the wealthiest cities can afford. 
It also puts city managers at odds with environmentalists, who campaign for restrictions on development to ease pressure on forests and watersheds. 
Fortunately, it is not the only option. 
Nature, it turns out, can play an important – and so far largely untapped – role in water delivery and treatment. 
Protecting water at its source can be cheaper and more efficient than treating it after it has already been polluted. 
In a new report, my colleagues at The Nature Conservancy, the C40 Climate Leadership Group, and the International Water Association show that investing in forest protection, reforestation, stream bank restoration, improved agricultural practices, and forest-fire management can reduce the amount of pollutants flowing into supplies of drinking water. 
The report, “The Urban Water Blueprint,” analyzes the state of water supplies in 534 cities and 2,000 watersheds to provide a comprehensive overview of the potential natural solutions that can be integrated with traditional infrastructure. 
The results are compelling. 
Water quality for more than 700 million people could be significantly improved by adopting conservation practices in watersheds. 
And at least one in four cities examined would find such interventions financially viable, based solely on savings from avoided water-treatment costs. 
In some places, such measures have already been introduced. 
Farmers near Beijing, for example, have been paid to convert croplands from rice to corn. 
Rice paddies need to be constantly flooded, and, because they are often located on steep slopes, this leads to significant runoff of fertilizers and sediment. 
Shifting to corn not only reduces water consumption; it also cuts the amount of pollution that reaches city residents downstream. 
The program costs about $1,330 per hectare of farmland to implement, but produces $2,020 per hectare of benefits. 
In Brazil, a water-conservation fund is working to restore the Cantareira watershed, the source of 50% of Sao Paulo’s water. 
The area has lost 70% of its original forest cover, and sediment from eroding hillsides has clogged the city’s reservoir, jeopardizing the water supply of Brazil’s largest city. 
Under the new program, farmers and ranchers are paid $120 per hectare to reforest or terrace their fields. 
So far, about 3,500 hectares have been planted with trees or put under improved soil-management practices. 
Reforesting another 14,200 hectares could cut the concentration of sediment in the watershed by half. 
The savings produced by these programs should be viewed in the context of the $90 billion per year that cities spend to build treatment plants, pipes, and other components of water infrastructure. 
The authors of “The Urban Water Blueprint” have calculated that more than $18 billion could be productively directed toward conservation activities, saving cities money and creating a new market comparable in size to the market for the water sector’s existing technologies. 
But if these solutions are to be adopted at the necessary scale, environmentalists and city officials alike will have to expand the scope of their traditional activities. 
Environmentalists will have to embrace the idea that conservation does not only mean protecting pristine landscapes. 
It also sometimes requires the improvement of lands under production. 
Indeed, these are the areas where some of the most cost-effective solutions are to be found. 
Water quality would be improved for more than 600 million people if the farms and ranches operating within their watersheds limited runoff and restored stream banks. 
City officials, meanwhile, need to think beyond their municipalities’ boundaries. 
The 100 largest cities occupy much less than 1% of the planet’s land, but the watersheds on which they depend account for a full 12%. 
Because many cities share water resources, cross-jurisdictional financing mechanisms and a shared sense of commitment will be needed in order to protect and restore natural sources of clean water. 
These partnerships will require the cooperation of a broad variety of interest groups, all of which will have to be persuaded to support efforts to improve the water supply. 
Farmers and ranchers should be at the top of the engagement list. 
Land use and water security are firmly linked. 
By embracing both natural and traditional water infrastructure, cities will not only secure their future water supply; they will also reshape our planet’s landscape for the better. 

Health Care’s New Frontier 
BEIJING – Developing countries face a seemingly insurmountable hurdle in providing health care to their rapidly growing – or, in some cases, rapidly aging – populations, especially as health systems become increasingly over-burdened and infections and other diseases spread. 
Because access to medicine in these regions is a multifaceted challenge, it is best tackled by several parties. 
Lasting, collaborative relationships among pharmaceutical companies, governments, nonprofit organizations, and community leaders are needed to help disadvantaged populations overcome their health-care challenges. 
Together, these parties should take a binary approach, addressing both “hardware” factors (which remain constant, such as physical distance to treatment centers and elongated supply chains) and “software” factors (the intangibles that vary greatly in each region, such as the role of family and cultural beliefs). 
These principles are especially true in places like China’s rural Xinjiang province, where life expectancy is stunted at 67 years (compared to 73.5 for China as a whole), and lack of access to health care undermines well-being. 
Xinjiang covers nearly 650,000 square miles (1.7 million square kilometers), but it is home to only 21 million people, many of whom are members of nomadic tribes. 
From an economic standpoint, Xinjiang’s resilience is crucial to China’s economic growth strategy – it is seen as the country’s gateway to the west. 
But the reality is that maintaining the livelihood and well-being of this area’s population and those in other rural parts of China is a serious challenge. 
Throughout rural China, the spread of infectious diseases – particularly hepatitis B, which affects millions – reflects a lack of hygiene education. 
The health ministry cited a 9.5% increase in deaths caused by infectious diseases from 2011 to 2012. 
Moreover, there is a serious shortage of health-care workers – just 1.3 per 1,000 rural inhabitants in China. 
Free medicines are only part of the solution. 
We need to go beyond donations and reduced-pricing schemes to build sustainable health-care systems with strong distribution channels and education programs for the public and for health-care workers. 
Without these components, the model collapses. 
Through public-private partnerships, we can leverage unique strengths and be better equipped to expand access to health care. 
This can create a symbiotic relationship, offering benefits to government, business, and the local community. 
For example, Novartis’s Jiankang Kuaiche (“Health Express”) program in Xinjiang is a partnership between Novartis and the local government that aims to expand access to medicine, build capacity, and educate the public. 
Health Express achieves this by training local physicians in prevention and treatment of infectious diseases and educating primary and middle-school students on health and hygiene via a traveling caravan that moves from school to school. 
During a recent trip to Xinjiang, I met several physicians from rural hospitals who had received training through Health Express. 
They told me that in the past, hepatitis patients had to travel for hours to be diagnosed and treated at a city hospital, while many others who were unable to make the journey suffered without treatment. 
Now, with physicians trained in infectious diseases, hepatitis treatment is possible in rural areas of Xinjiang, and patient outcomes have improved significantly. 
I also met with school children at Urumqi Dengcaogou Boarding School, which is situated in a rural area outside of the provincial capital. 
The students were proud to be able to bring their new health-care knowledge back to their families. 
They told me how they had told their parents to quit smoking after learning about the consequences of the habit on health. 
These children join more than 500,000 others in Xinjiang who have participated in the educational component of Health Express. 
By targeting schools as hubs for health-care education and shaping students into health ambassadors for their families and friends, we can reach an even greater number of people in Xinjiang’s nomadic communities. 
Xinjiang means “new frontier,” and right now, we are at the edge of a new frontier in delivering sustainable health-care solutions to communities where limited resources and infrastructure constrain access to health care. 
These multidimensional, scalable interventions help to bridge the gaps in developing regions. 
But neither corporations nor governments can do it alone. 
They need to work together to achieve the best possible outcome. 
We also must abandon the idea of a one-size-fits-all model for expanding access to health care and adjust our approaches to ensure the best fit with local health priorities and customs. 
With education and prevention, capacity-building, and new kinds of partnerships, we can continue to improve access to health care in Xinjiang and beyond, boosting well-being throughout the developing world. 

The African Breadbasket 
KIGALI – On the first World Food Day in 1945, people around the world celebrated the creation of the United Nations Food and Agriculture Organization and the launch of the first coordinated global action to combat hunger. 
This year, on the 70th World Food Day, countries are mobilizing behind the Sustainable Development Goals – one of which calls for the elimination of hunger and malnutrition by 2030, together with the creation of a more resilient and sustainable food system. 
Can it be done? 
With the world population growing rapidly (to an estimated 8.5 billion by 2030), the impact of climate change becoming increasingly apparent, and the amount of arable land dwindling, there can be no denying that achieving this goal will be a daunting challenge. 
But for Africa, which boasts 60% of the world’s arable land and climates conducive to a tremendous diversity of crops, striving to do so represents a remarkable opportunity to ensure food security for Africans (one in four is undernourished) and boost its economy by becoming a major food exporter. 
Though many African economies have experienced rapid growth in recent years, the agricultural sector has remained stagnant. 
Indeed, African agriculture is still dominated by small-scale farmers who lack access to productivity-boosting technology, focus mainly on a narrow range of products, and remain poorly linked to markets, manufacturing, and the broader economy. 
Beyond undermining food security – Africa remains a major food importer – low agricultural productivity contributes to the persistence of rural poverty, even as a middle class emerges in many of Africa’s cities. 
Africa can and should be the world’s breadbasket. 
But to realize this vision – and to do it in an environmentally sustainable way – its agricultural sector must undergo a genuine transformation that entails higher capital investment, significant crop diversification, and improved linkages to burgeoning urban consumer markets. 
Moreover, Africa must start manufacturing more value-added food products for both internal consumption and export, especially to countries like India and China, where demand is growing. 
From Europe and North America to East Asia and Latin America, agricultural advances have proved to be key precursors of industrial development and gains in living standards. 
Africa has the added benefit of technologies that other regions lacked at this stage of their agricultural development, from cost-competitive off-grid solar power to mechanisms for mapping soil characteristics, regulating water use, and ensuring farmers’ access to accurate price information. 
And innovation is already happening. 
Rwanda, for example, is working to link agriculture support with broader services like electricity and education. 
And the country’s farming communities are pioneering participatory decision-making structures for agricultural planning and conflict-resolution mechanisms to settle disputes among growers. 
To bolster agricultural innovation and modernization, governments must ensure that farmers have secure titles to their land, and thus an incentive to make the needed investments. 
The challenge lies in the fact that, in many parts of Africa, land is communally owned, with almost everyone in a village having traditional rights to some farming land – a system that has helped to prevent landlessness and destitution in rural areas. 
Given this, reforms to make land tenure more compatible with modern commercial agriculture must be sensitive to local traditions and respect the ownership rights of communities and traditional smallholders. 
Of course, agricultural development can have serious economy-wide pitfalls, which must be navigated carefully. 
For example, as technology-driven productivity gains reduce the number of workers needed on farms, strategies to boost employment in other parts of the value chain and to manage migration to cities become even more essential. 
With Africa’s rural population already largely underemployed, there is no time to waste in implementing such strategies. 
Fortunately, Africa’s large population of increasingly well-educated young people, who are largely uninterested in the backbreaking work of subsistence farming, is well suited to fill the higher value-added jobs that emerge in the agricultural sector and beyond. 
Another potential pitfall of agricultural development is environmental damage, including land degradation, soil nutrient mining, excessive water use, and water pollution. 
Here, again, Africa can benefit from experience and know-how that other regions could not access at a similar stage in their agricultural development. 
By drawing on other countries’ best practices – and avoiding their mistakes – Africa can develop an environmentally sustainable agricultural system that fits African conditions. 
Such a system must place a high priority on protecting biodiversity and prevent the emergence of monocultures across the continent, which is home to some of the world’s richest ecosystems. 
Climate-change considerations – including the expected costs of mitigation and adaptation – must be central to the process of upgrading agriculture, including the relevant infrastructure. 
Ultimately, each country must chart its own course toward agricultural development. 
But cooperation – even just to exchange ideas and emulate best practices – can help the process considerably. 
That is why, next March, the African Transformation Forum in Kigali will convene leading figures from African governments, business, academia, and civil society to discuss practical next steps toward agricultural transformation in Africa, and the broader push to build globally competitive economies. 
Africa’s agricultural transformation will be a long and complex process. 
But it has the potential to ensure regional food security, promote broader economic development, and ultimately help to feed the world. 
We are confident that African leaders will rise to the challenge. 

Improving Breast Cancer Care Step by Step 
Breast cancer, the most common life-threatening malignancy in the West, is more curable than ever but remains one of the most common causes of cancer death. 
The cost of this disease is high; so, too, are the costs of treatment because no “magic bullet” cure exists. 
Yet, the death rate from breast cancer is falling in most Western countries even though the number of cases remains relatively unchanged. 
This likely reflects increased attention to the details of care. 
Because progress against breast cancer is incremental - ie, no single treatment is instantly recognized as dramatically superior – big disparities exist in how various treatments are applied in different countries. 
Even though science may clearly point to the best way to fight breast cancer, uneven application of new treatments may cause many women to suffer, or even die, unnecessarily. 
Although the causes of breast cancer remain unknown, early detection, before cancer cells spread, is crucial. 
Large randomized trials from several decades ago showed that mammography added to regular physical examination improves early detection, reducing the risk of death. 
Recent studies focus on the ideal age to begin screening and the ideal frequency of testing. 
Soon debates about the ideal technology – conventional mammography, digital mammography, ultrasound, magnetic resonance imaging, or a combination of technologies – are likely. 
Screening with mammography is clearly superior to no screening and our first priority should be to assure that women are screened. 
Arguments about effectiveness here frequently focus on cost-effectiveness. 
But if this is the barrier to widespread use, efforts to lower costs should be pursued, for this is no excuse to deny women the benefits of screening. 
Surgery, although not always curative, is the mainstay of treatment because most tumors left in place will spread. 
The classic surgical option was the mastectomy, where the entire breast and surrounding tissue was removed. 
Appreciating the fact that breast cancer could spread even before it was treated led to clinical trials testing breast-sparing surgery (“lumpectomy”). 
Studies show that the majority of women can be safely treated in this way. 
Within the US, variations in the use of breast conservation are linked to surgical bias, as well as to availability of radiation therapy. 
Individual patients should not be encouraged to have mastectomies because of their surgeons’ bias, although there are specific circumstances where this is appropriate. 
To treat cancer cells that might remain in the breast even after an optimal surgical procedure, radiation to the preserved breast is routinely used. 
Even if the breast is removed, radiation is sometimes needed to prevent recurrence of the breast cancer on the skin of the chest. 
In the case of breast conservation, radiation therapy is needed from the beginning, except in unusual circumstances. 
Efforts to assure access to high quality radiation therapy should be made so that breast cancer does not require the loss of a breast. 
Surgeons and pathology laboratories performing breast conservation need to be skilled in determining the adequacy of the procedure to assure patients of the best result. 
Because breast cancer is so invasive and spreads so unpredictably, surgery is not always sufficient. 
But treatment of cancer cells that may have spread beyond the breast is possible with systemic therapy, meaning drugs. 
Unfortunately, we cannot know in advance if surgery will succeed because we cannot detect if cancerous cells have spread. 
This is why treatment of breast cancer is ideally multi-disciplinary and multi-faceted, including not only local treatment of the breast but also systemic treatment for the entire body. 
The only way to approach cells that might have spread throughout the body is to give medicines because only drugs circulate throughout the body. 
Systemic treatment given after surgery is called “adjuvant therapy”. 
Here, however, are found the widest variations in treatment, both among and within countries. 
This reflects honest intellectual differences as well as monetary concerns and limits. 
The basic adjuvant options are hormone treatments and chemotherapy. 
Hormone therapy takes advantage of the fact that many (but not all) breast cancers have receptors for the female hormones estrogen and progesterone. 
Interaction with these receptors can kill cancer cells. 
Chemotherapy comprises a large variety of drugs that directly kill cancer cells. 
Investigators at Oxford University conduct an overview every five years of the many adjuvant treatments now available, and this report points to some clear conclusions. 
At least 50,000 women have been treated in clinical trials that demonstrate conclusively the impact of tamoxifen, the most widely used anti-estrogen treatment. 
Before the Oxford overview, American oncologists typically did not recommend tamoxifen for young patients while Europeans often recommended it for all patients including those whose tumors lacked the requisite receptors. 
As an outgrowth of the Oxford findings, there is a more consistent approach now and evidence of improving outcomes. 
Several hundred thousand women are now alive because of effective anti-estrogen therapies. 
In contrast to hormone treatments, given only to patients likely to respond by virtue of an analysis of their hormone receptors, chemotherapy is given to all or any eligible patients. 
Hence, the impact of chemotherapy appears to be smaller than that of hormone treatments in some patient groups. 
A predictive test for responsiveness to chemotherapy would be a major step forward in treating breast cancer as it might allow more selective use of these agents. 
Chemotherapy, usually comprising several drugs, is effective at killing cancer cells, increasingly safe, and adds to the effectiveness of hormone therapy. 
Building on this success, current research is exploring new drugs, particularly those that rely on our growing biological insights. 
For example, some aggressive breast cancers were found to have an excess of a protein called HER2. 
An antibody targeting HER2 appears to be effective both when given alone or in combination with conventional chemotherapy, but such therapy in the adjuvant setting will raise the cost and complexity of care. 
Newer targeted treatments entering clinical trials are likely to be even more contentious because of their cost. 
For some new agents, it is fair to ask whether they truly represent an advance over previously available (less expensive) alternatives. 
For novel agents, such as the anti-HER2 antibody Herceptin™, where there is no precedent, this cost must be considered against its novel action, activity, and limited toxicity. 
These challenges and questions are becoming more frequent and societies must ask how much they can afford. 
This requires more than discussion about how health care money is spent because this can force doctors and patients to fight over crumbs when what is needed is bigger loaves (budgets)! 
Discussions over expenditures should not pit pediatricians against oncologists but instead, patients and physicians should discuss with governments overall expenditures for health and non-health needs. 
Because the outlook for women can be improved if everyone conforms to best practice, the best available care must be provided to breast cancer’s victims even as we search for incremental steps forward. 
This requires hard decisions at the societal level as well as dedicated advocates for patients. 
We should resist sacrificing lives simply because of expense. 

Breaking the Ice in the South China Sea 
MANILA – Three months ago, the Permanent Court of Arbitration in The Hague ruled that there was no legal basis for China to claim historic rights to the resources in the West Philippine Sea (also known as the South China Sea), and thus that the Philippines has exclusive rights to the territory. 
China rejected the ruling, and an icy chill overcame the once-friendly bilateral relationship. 
It is time to bring back some warmth. 
Soon after the ruling, Philippine President Rodrigo Duterte unexpectedly designated me, at age 88, to be my country’s special envoy to China, with the goal of doing just that. 
Thanks to Hong Kong bankers (including my personal friend Wai Sun Ng of Jibsen Capital), my first point of contact was Fu Ying, who has served as China’s ambassador to the Philippines and as Deputy Foreign Minister. 
I was fortunate to meet Fu, who is now Chair of the Foreign Affairs Committee of the National People’s Congress. 
She not only possesses detailed knowledge of the issues surrounding the South China/West Philippine Sea, but is also well informed about Philippine culture and politics. 
In our first exploratory meeting, I also made contact with the similarly knowledgeable Wu Shicun, President of China’s National Institute for South China Sea Studies. 
The atmosphere at our meeting was friendly. 
In their private capacities, Wu and Fu openly discussed the need to find a way forward that would ensure enduring peace and closer cooperation between China and the Philippines. 
But, reflecting the deep sensitivity of the territorial issue on both sides, our meeting’s primary conclusion was that reducing tensions would require more discussions aimed at boosting trust and confidence. 
Such discussions would, over time, have to address a wide range of issues. 
For starters, China and the Philippines should agree on the need for marine preservation. 
To avoid tensions, fishing in the West Philippine Sea should be carefully managed. 
In fact, cooperation on fishing should be added to the bilateral agenda, as should joint efforts to confront drug trafficking, smuggling, and corruption. 
Mutually beneficial efforts to improve tourism and encourage trade and investment, and to promote exchanges among think tanks and academic institutions on relevant issues, also hold substantial promise. 
These priorities are reflected in the recommendations that I presented to Duterte. 
The Philippines must, in my view, expedite the appointment and confirmation of an ambassador to China, in order to continue exploratory talks and seize opportunities to build trust and find common ground. 
As we make progress on that front, we must pursue agreements on issues relating to fishing, tropical fruits, tourism, and infrastructure that support China’s maritime Silk Road initiative in and around the Philippines. 
But, throughout all of this, it is vital to remember that the discussions are not just about rocks and atolls; they are about war and peace. 
Just a year ago, the United Nations General Assembly adopted a resolution – since approved by 195 UN member states – setting out a long-range strategic framework for avoiding a global armed conflict that could lead to World War III. 
In our meetings with Chinese actors, my team and I found the resolution to be particularly relevant – a clear reminder of the far-reaching implications of the current tensions. 
As we told our Chinese counterparts, “The seas should be used to save and improve our lives, and to ensure mankind’s future survival. 
They should not be places where peoples are killed and institutions destroyed.” 
Fortunately, the Chinese accepted and even reiterated this fundamental belief. 
In practice, this belief should translate into a commitment to avoid violent confrontation of any kind. 
A war would do serious damage to the interests of both the Philippines and China, which possesses substantial wealth and military might, but needs peace to transform its economy and deliver a better life to the hundreds of millions of Chinese who still live in poverty. 
Perhaps more significant, given the central role of the United States in Asian security, any dispute with China could quickly escalate. 
This stark reality must underpin all discussions about the West Philippine Sea in the weeks, months, and years ahead. 
Of course, bilateral talks may be contentious at times. 
But there is plenty of incentive to make progress. 
Indeed, our geographical proximity makes the search for common ground between China and the Philippines a necessity, not a choice. 
Re-establishing the kind of long-term, mutually beneficial bilateral relationship that we enjoyed in the past – one that supports peace and sustainable development in our region – must be a priority for both sides. 

Learning from Liberia’s Educational Partnerships 
MONROVIA – Around the world, some 263 million children remain out of school, and of those who do attend classes, 330 million are receiving substandard education. 
As a result, an estimated 617 million school-age children are unable to read at grade level. 
The problem is a global one, but it is particularly acute in Sub-Saharan Africa, where 88% of young students– some 202 million boys and girls – are not achieving a sufficient level of reading proficiency. 
And it is also here where solutions are being tested. 
African governments and international donors have long paid lip service to improving educational outcomes, especially in basic skills like reading, writing, and math. 
At a financing conference for the Global Partnership for Education in February, developing countries vowed to increase spending on education by $110 billion, and wealthy donors pledged an additional $2.3 billion to improve school systems in poor countries. 
But as important as these commitments are, Africa’s education crisis will not be overcome by donations and pledges alone. 
A new approach is needed to strengthen struggling schools, train teachers, and ensure that every child can obtain the necessary skills to succeed. 
One pilot program being tested in my country, Liberia, has shown considerable promise. 
Because low-income countries rarely have enough money to implement needed education reforms, pooling public and private resources is an attractive alternative. 
Since 2016, Liberia’s education ministry has merged select public schools with various independent operators in an effort to increase educational quality in a tight budget environment. 
Early results are impressive. 
For example, at the free public schools currently managed by expert contractors participating in the program, learning outcomes improved by 60% in the first year. 
At the 25 schools operated by my employer, Bridge Partnership Schools for Liberia, average student test scores doubled in just nine months. 
Parents and pupils have embraced these reinvigorated schools, with many calling them the best they have ever experienced. 
As a result, the previous government expanded the program, and the current one is committed to continuing support. 
One of the most powerful components of a Bridge Partnership School is the pedagogy. 
For every lesson in every subject across every grade, educators have access to detailed lesson plans developed by academics. 
These plans help teachers prepare and deliver instruction to maximize learning outcomes. 
By assisting in classroom planning, Bridge ensures a degree of standardization across schools, and helps teachers focus more attention on individual students. 
At first glance, Liberia’s school system might seem a poor fit for such an innovative experiment. 
Today, some 58% of Liberian children are out of school, the literacy rate is among the lowest in the world, and teachers are in short supply. 
Moreover, the current government budgets just $50 annually for each child attending elementary school. 
The average in the OECD in 2013 was $9,200. 
But programs like these are attractive for two reasons: they deepen a country’s access to educational expertise, and, more important, they open up new funding streams. 
Developed countries have already recognized the value of strong public-private partnerships in education. 
Notably, the United Kingdom’s 2018 education policy encourages the expansion of such programs because they have been found to “improve access to education for poor and marginalized children.” 
Not everyone will agree; partial partnerships with the private sector and NGOs in education generates considerable controversy, and there is little doubt that in Liberia, the Bridge model remains a work in progress. 
(A new impact analysis is due in the next academic year.) 
But while some claim costs were high, they are quickly falling. 
And continuous teacher training for those who are part of Bridge PSL is helping to increase the quality of instruction. 
As test results in Liberia demonstrate, children are learning more than ever. 
With the support of prominent global donors, our schools are achieving outcomes that were previously unthinkable. 
From my perspective, the public-private partnership model has revolutionized education in Liberia, and I am confident that it can work in other parts of Africa, too. 
In countries where learning outcomes continue to lag, governments need collaborative solutions. 
And, as past failures have demonstrated, education systems in much of the Global South cannot succeed alone. 
To achieve “education for all” by 2030, the target set by the UN Sustainable Development Goals, educators must embrace bold solutions like Bridge Partnership Schools. 
With millions of children still being denied the right to an education, the world can no longer afford the status quo. 

Disasters Discriminate – Our Response Should Not 
ISTANBUL – When landslides devastated parts of Tajikistan’s Khatlon province in early 2009, the village of Baldzhuvan was better prepared than most. 
Bibi Rahimova, a local community organizer, had spent years alerting people to the dangers of living beneath unstable terrain; when the hillside finally gave way, all of Baldzhuvan’s 35 households were evacuated safely, and no lives were lost. 
Rahimova was part of a village emergency group trained by Oxfam International in disaster-risk reduction; her efforts before, during, and after the mudslides made her a hero in Tajikistan’s rugged west. 
But her heroism did something else, too: it served as a reminder that lives are saved when women are included in disaster planning and recovery. 
Natural disasters disproportionately affect women and children, especially in countries where women’s socioeconomic status is low. 
For example, when Oxfam tallied the death toll from the December 2004 tsunami in the Indian Ocean, it found that up to four times more women than men had died; in India, Indonesia, and Sri Lanka, 60-80% of those killed were women. 
Such ratios have been repeated in countless other disasters. 
The problem begins with the way in which disasters are reported in the media, with little attention to differences in the numbers of men and women affected. 
Many factors contribute to the uneven risk, but gender bias is a leading cause. 
In poor countries, women are almost always primary caregivers, and their responsibility for children, the elderly, the sick, and the disabled can delay evacuations. 
When an earthquake hit southeastern Turkey in 2011, the number of women and children killed was significantly higher than men because so many caregivers were at home at the time. 
Research also suggests that early-warning systems often fail to recognize that men and women receive and act upon information about disasters differently. 
After floods inundated parts of Serbia in 2014, focus groups discovered that women had waited for official notification to evacuate, while men based their exodus on informal networks. 
It is not a stretch to conclude that if official orders had been delayed or had never come, more women would have died. 
Nor does working outside the home necessarily offer protection from disaster-related risks. 
Consider the textile trade, an industry dominated by women that is also notorious for locating factories in unsafe buildings that are often among the most vulnerable in earthquakes. 
Adding to these dangers, women who survive disasters often face challenges related to sexual and gender-based violence during the recovery phase. 
In temporary housing or camps, women and girls are more vulnerable to violence and trafficking, and often endure poor sanitation, a lack of privacy, and limited access to menstrual hygiene products and reproductive health services. 
Although people in charge of managing recovery efforts may intuitively understand women’s needs, post-disaster planning and response fails to account for differences in the needs and concerns of women and men. 
To be sure, some international agreements are beginning to emphasize the gender-differentiated consequences of natural and human-caused calamities. 
One recent example is the 2015 Sendai Framework for Disaster Risk Reduction, which was adopted in the aftermath of the 2011 earthquake and tsunami in Japan. 
That resolution calls on signatories to consider gender at all stages of disaster mitigation – from preparedness to reconstruction. 
Still, much work remains to be done, with four areas demanding urgent attention. 
First, increasing the number of women on search-and-rescue teams is essential, in part because women are more likely to know the location of homes with children and elderly occupants. 
This is among the main reasons a team of firefighters and first responders in Kraljevo, Serbia, has been working since 2016 to increase the number of women within its ranks. 
Second, more women must participate in post-disaster counseling efforts, especially in regions where women survivors may not be as comfortable speaking with men about their trauma. 
Third, disaster-related funding should be tailored for women’s unique circumstances. 
In Bosnia and Herzegovina, reconstruction programs introduced after floods in 2014 placed a high priority on housing grants for single mothers and channeled redevelopment funds to businesses with large women workforces. 
Perhaps the most important challenge is simply to ensure that more women have a say in decisions related to risk reduction and response. 
One way is for community leaders and authorities to embrace the 20-point checklist developed by the United Nations Office for Disaster Risk Reduction, which identifies ways to make disaster planning more responsive to gender. 
The checklist also encourages the media to report on gender differences in disaster risk and vulnerability. 
Finally, communities and disaster management authorities everywhere should adopt gender-specific strategies in all stages of disaster planning and response; a recent report published by the United Nations Development Programme and UN Women could serve as a useful practical guide. 
Although disasters affect entire communities, women often bear the brunt of the burden. 
Disasters will continue to discriminate, unless we transform our responses to address their different effects on women and men – as the people of Baldzhuvan can readily attest. 

Improving Governance in the Arab World 
WASHINGTON, DC – A recent survey of 100 Arab thought leaders conducted by the Carnegie Endowment for International Peace revealed a sweeping consensus about what underlies many of the region’s problems: a lack of good governance. 
Indeed, those polled emphasized domestic problems resulting from that failure – authoritarianism, corruption, outdated education systems, and unemployment – over regional concerns, including the threat of the self-proclaimed Islamic State (ISIS) or interference by regional heavyweights or outside powers. 
This is not new information. 
The Arab Spring uprisings brought to the fore the inadequacy of the region’s outdated social contracts in the face of current political and economic challenges. 
Yet Arab governments still seem not to have gotten the message. 
Five years after the uprisings erupted, Arab citizens have little – in some cases, even less – voice in running their countries’ affairs. 
Moreover, they depend on rentier economies that are unable to create enough jobs for their young, educated populations. 
And they face an alarming absence of the rule of law, leaving them with no assurances that they will be treated equally, regardless of gender, ethnic origin, or religion. 
But poor governance today does not mean the Arab world is doomed to failure. 
Tunisia serves as a beacon of hope. 
After the 2011 revolution, it pursued a consensual, inclusive process to develop a new social contract that upholds all of its people’s individual and collective rights. 
While Tunisia still faces serious economic and security problems, the national dialogue that the country has undertaken is the crucial first step toward resolving them. 
Other Arab societies now must undertake similar dialogues, with the ultimate goal of creating economies and institutions that meet their people’s needs. 
History has taught us that such transformational processes take time. 
The long-suppressed ideas and energies unleashed by events like the Arab Spring must mature before having their full effect on society. 
Consider the uprisings in Europe in 1848, in which citizens protested against authoritarian, feudal systems and the lack of economic opportunity. 
By the end of that year, status quo forces managed to retake the reins of power, and the uprisings appeared to have been all but crushed. 
But something had changed. 
Taboos had been broken, and during the subsequent decades, technological advances enabled the spread of new ideas. 
It was not long before feudalism began to dissolve; liberal and democratic values gained traction; women secured greater rights; and economic systems emerged that could boost productivity, achieve high growth rates, and improve living standards. 
A similar process is unfolding gradually in the Arab world, with citizens (especially young people) who lack trust in their governments seeking alternative sources of information and new ways to survive economically. 
This shift has so far gone largely unnoticed by governments, a reflection of just how disconnected they are from their own people. 
But it will soon be impossible to ignore. 
All of this comes at a time when another important development is underway: Oil-based rentier systems are rapidly diminishing, owing to the steep decline in energy prices over the last two years. 
In particular, Saudi Arabia has been forced to initiate a shift toward an economic model that emphasizes investment and productivity as the main drivers of economic growth. 
Other countries in the region will have to follow suit and reform their economic systems, or face the wrath of their increasingly disgruntled citizens. 
One important element of economic-reform strategies will be technology. 
Already, 240 million Arabs – largely young people – have access to the Internet through mobile phones; by 2020, it is estimated that all Arab youth will be connected. 
Technology is facilitating the creation and sharing of knowledge, in a region that has historically lagged in this area, and technology start-ups are on the rise. 
This is not to say that technology is a panacea for the region. 
After all, ISIS is also using technology, but in a sinister way: to spread gruesome propaganda and recruit new members. 
But technology can speed up the Arab world’s social and economic progress, even as countries build a modern institutional framework capable of supporting it. 
Nowadays, no country can evolve without developing effective and credible institutions, establishing a meaningful system of political checks and balances, and diffusing control over decision-making. 
These elements are vital to enable countries to offer their citizens an adequate quality of life. 
In time, the Arab world will have them. 
While the international community is focused on ISIS or Iran’s destructive role in the Middle East, most Arabs are focused on improving their lives. 
Their governments should encourage them. 

Doing Well by Doing Good 
WASHINGTON, DC – Two years ago, Tesla CEO Elon Musk decided to open access to his company’s patents to anyone – a move that ran completely counter to traditional competitive behavior. 
Why would a company give away its hard-earned designs and technology to its rivals? 
Whatever one may think of Musk, his courage must be appreciated. 
He is rewriting the rules of business, based on the belief that Tesla’s success depends on that of the entire market for electric cars, and that his company’s commercial interests are inseparable from the interests of society. 
Musk’s unconventional strategy could upend entire industries – for the benefit of all. 
If Tesla’s open patents succeed in bringing other players into the sector, it could transform what is now a niche product into a mass-market phenomenon – a transformation that would significantly advance the fight against climate change. 
There is no sense in asking whether Musk is trying to fight climate change or just trying to make a buck. 
He is doing both. 
And, furthermore, it is exactly this type of public-minded capitalism that will be required of successful companies in the future. 
We live in an age of enormous transformation – an era in which focusing solely on near-term financial results is a prescription for extinction, and addressing societal needs is entirely compatible with long-term profitability. 
While this view may seem unconventional at the moment, time will prove the pioneers right. 
In the years ahead, successful companies will take the lead in tackling the most urgent development challenges of our time – everything from poverty and disease to climate change. 
Consider Kenya’s M-KOPA, a company that installs solar power kits and collects payments via mobile phones. 
By delivering electricity at lower prices than their customers would otherwise have to pay for kerosene lighting, M-KOPA has delivered solar power to more than 330,000 low-income households in Kenya, Uganda, and Tanzania. 
New connections are being added at a rate of 500 homes per day. 
Phasing out kerosene has an immense impact on the lives of M-KOPA’s customers, their children’s health, and the environment. 
But the company cannot be considered a charity: its revenues are projected to reach $60 million in 2016, having increased by 400% in just two years. 
Another example is to be found in Peru, where more than 30 financial institutions chose a similarly unconventional path to profitability, working together to establish Modelo Perú – a platform that provides digital financial services. 
In Peru, cash transactions had been the norm. 
The participating companies decided that it was in their collective interest to create a single national platform for mobile payments, and they worked with the government and four telecommunications companies to construct one. 
Today, the number of Peruvians with access to affordable financial services has expanded significantly. 
And the institutions behind the project have gained access to a much deeper pool of consumers than they would have if each had developed a separate digital platform. 
My own organization, the International Finance Corporation, also knows the value of rewriting the rules. 
In 2006, we introduced performance standards to help our client companies mitigate risks by applying environmental and social (E&S) principles and advancing the private sector’s leadership in responsible development. 
Initially, other financial institutions were skeptical of our approach; they saw the application of strict standards as a sure way to lose business and profits. 
Within a few years, however, major banks and development institutions came together to establish the Equator Principles based on our E&S standards. 
Today, our standards are applied to project finance around the world. 
They have helped level the playing field within the banking industry. 
In addition, through the Sustainable Banking Network – an association of central banks, regulators, and financial trade associations – we are helping countries develop national policies to boost green finance. 
And we are seeing a growing appetite for this kind of expertise, from within governments and the private sector. 
The world has the momentum – and the means – to create a mass market for sustainable finance, one in which investment decisions are driven as much by E&S and good governance criteria as by creditworthiness. 
Companies that have signed the UN Principles for Responsible Investment have combined assets under management totaling $60 trillion. 
A growing number of businesses recognize that today’s formula for success includes a focus on pressing societal needs. 
As Musk has found out, the trick is to address those needs in ways that are profitable and sustainable in the long run, and then, when a beneficial business solution is identified, to work together to facilitate its large-scale deployment. 
With a willingness to challenge assumptions and change conventional perceptions, we can change the world for the better. 

Multilateralism Is the Only Way Forward 
PARIS – International cooperation is under strain. 
The voices of protectionism and nationalism are gaining strength, and governments are increasingly pursuing policy goals through unilateral or ad hoc measures, rather than by working together. 
Even against this backdrop, it remains abundantly clear that effective international cooperation improves economic outcomes and everyday lives. 
The automatic exchange of financial information based on the OECD’s Common Reporting Standard has allowed governments to collect close to €85 billion ($99 billion) in additional tax revenue worldwide; this money can help fund better social policies. 
Under the OECD Anti-Bribery Convention, business bribes are now a criminal offense in 43 countries. 
And thanks to the OECD’s Program for International Student Assessment, more than 70 countries are making better-informed decisions about education policies for their children. 
These are just a sample of the benefits that multilateral institutions deliver for modern societies. 
But the value of multilateralism itself transcends any particular program or policy. 
The international system and its institutions were created as a bulwark against war. 
After helping Europe recover from the ruins of World War II, multilateralism gave countries a common purpose: to improve their citizens’ wellbeing and quality of life. 
Beyond any economic metric, we should measure the success of multilateralism in wars not fought and lives not lost. 
Yet ever more people are losing confidence that international cooperation can solve today’s problems. 
While deepening interconnections among the world’s economies have fueled growth, lifted millions out of poverty, and raised living standards, the benefits have not been sufficiently shared. 
If multilateralism is not delivering all that we want, the solution is not to give up on it. 
Rather, we must make it deliver results for the modern day. 
Given the magnitude of the world’s challenges, no country will get far going it alone – or even bilaterally. 
It is only in multilateral settings that we will find solutions for today’s complex challenges. 
Multilateral cooperation provides venues to resolve differences peacefully; platforms to agree on common rules of the game; mechanisms to better manage international flows; and channels for exchanging ideas, experiences, and practices so that countries learn from each other. 
Global cooperation and integration have been critical to the impressive expansion of wellbeing and opportunities that we have witnessed over the past 70 years. 
This week, ministers from OECD countries will convene in Paris under the chairmanship of French President Emmanuel Macron. 
They will gather in the belief that international cooperation is more crucial than ever, but that it must better address people’s frustrations and expectations, and help them realize their highest hopes. 
We know what must be done. 
We must ensure that the intelligent regulation of markets both anticipates the disruptive effects of new digital technologies and harnesses the opportunities they offer. 
We must update – not abandon – the rules of global trade and investment to spread their benefits more widely. 
We must find new ways to combat inequality and protect the most vulnerable. 
And we must provide our children not just with a quality education, but also the skills they need to thrive and a clean planet on which to live. 
Countries can learn from one another how to achieve inclusive growth when addressing issues like unemployment, falling wages, housing, and health care. 
But without cooperation to counter global challenges like corruption, illicit financial flows, cybersecurity threats, unfair competition, pollution, and climate change, solutions to such domestic issues will be partial and short-lived. 
In his recent speech before the US Congress, Macron called for a “new breed of multilateralism … effective, accountable and results-oriented,” a multilateralism that “will allow our cultures and identities to be respected, to be protected, and to flourish freely together.” 
To that end, the OECD will focus this week not just on defending the principle of international cooperation, but also on discussions about what must be improved. 
Finding solutions requires that we listen to everyone, particularly to those who have lost trust in governments and institutions. 
Multilateralism must evolve with the explicit purpose of serving all those who long for better lives. 
In a divided world, we all lose. 
But by combining our knowledge, experiences, and resources, and by recommitting to a responsible, effective, and inclusive multilateral system, we can reclaim a brighter and more prosperous future for everyone. 


In Darwin’s Place 
BERKELEY – Imagine that, as a young scientist, you spent years collecting information about the foundations of how nature works. 
You built your reputation by collecting plants, animals, fossils, and geological samples from around the world, and sending back letters that tracked your development into a first-rate scientist. 
By the time you returned from a great five-year voyage, you were surprised to find that you were a rising star. 
Throughout your trip, and in the years afterward, the mists that had obscured some incredibly simple yet powerful natural explanations lifted. 
You came to realize that you were in virgin intellectual territory. 
Your academic mentors and the scientists whose works you had read were continuing to stumble over grand problems that now seemed, if not solved, at least soluble. 
People had been talking about evolution for decades, but you have come up with a mechanism – natural selection – that just might explain much of it. 
You realize that to reveal what you’ve come to understand will not only revolutionize your science, but will potentially shatter many of your countrymen’s religious and philosophical foundations. 
These were the circumstances in which Charles Darwin found himself in the late 1830’s and early 1840’s, when he developed the principle of natural selection and its revolutionary implication: all the Earth’s life forms could have evolved from a single common ancestor. 
His was one of the most brilliant insights in the history of science: a mechanism that enabled the principle of evolution to unify and inform all of biology. 
Just for a minute, put yourself in his place. 
How would you feel? 
(“It is like confessing a murder,” he wrote at the time.) 
Here’s the translation to today’s world: your discovery might win you the Nobel Prize, but it also might get you a bullet in the brain from a religious fundamentalist. 
How do you feel about publishing now? 
But then, at roughly the same time you finish drafting the first summary of your ideas, a book, written by an anonymous author, appears that also purports to explain how life might have changed through time, and considers some of the mechanisms that may underlie this grand history. 
Have you been “scooped”? 
No, the author has many of his facts wrong and goes beyond reasonable speculation, which brings him disdain from scientists. 
Predictably, he fares as poorly with religious leaders, some of whom accuse him of blasphemy. 
And he hasn’t independently reached your new ideas – the ideas that matter. 
But you empathize with his position: you will be pilloried in the same way if you don’t nail down your theory with the best arguments possible and marginalize your opponents so that they have neither theological nor scientific reasons to attack you. 
So you wait to publish. 
Years roll by. 
You gather data, do experiments, read, and write. 
Your book becomes bigger. 
Impossibly big. 
It is a good thing you do not have to work for a living. 
Then, a bolt from the blue. 
A letter from an old colleague in Southeast Asia with whom you’ve corresponded for years, attached to a manuscript that lays out your whole theory of natural selection in a nutshell. 
He’s asking you, as a well-connected man of science, whether you would communicate his paper to the Linnean Society of London for reading and possible publication, if you think his arguments meritorious. 
You are unsure about what to do. 
He’s scooped you on your main idea, although he hasn’t thought through the implications, or worked out all the other ideas that comprise your theory. 
You don’t want to lose your investment. 
You want credit where it’s due, and you want to control the game, because you have so much more to show and to support your arguments. 
So you consult scientific colleagues who have known for years how you’ve been developing your theory. 
They agree that it is fair to broker an arrangement with your correspondent to publish together. 
This appears to satisfy everyone, but it puts you in panic mode. 
Now you have to publish your entire theory right away, before someone else gets the credit. 
It nearly kills you, but you get the book out – only an abstract of the magnum opus that you had planned – by the end of the next year. 
You call it The Origin of Species by Means of Natural Selection, or the Preservation of Favoured Races in the Struggle for Life . 
The reaction is immediate: 1,200 copies are published, and they sell out immediately. 
There are welcome reviews from scientists, but also sharp broadsides from religious people. 
Serious criticism comes from unexpected places: philosophers you knew and learned from, scientists to whom you had entrusted your priceless collections to describe. 
And yet: the genius of the argument is seen. 

In Defense of Democracy 
SYDNEY – Imagine that you, like me, are a typical product of Western liberal democracy, and are invited to give a lecture to a group of Chinese students in Beijing or Shanghai on its benefits. 
Ignoring the fact that, in reality, the Chinese government would never allow such a lecture, ask yourself: What would you say? 
First and foremost, it would be advisable to acknowledge that you do not speak from a position of moral superiority. 
Western civilization in the first half of the twentieth century was not very civilized. 
Human rights were trampled. 
Class war destroyed entire political systems. 
There were large-scale violent conflicts and much ethnic cleansing. 
Given this history, Westerners are in no position to lecture on civil liberties or humane values. 
It is also worth noting that the global march toward democracy, which seemed nearly inexorable after the fall of the Berlin Wall, now seems to be reversing. 
According to Stanford University’s Larry Diamond, several countries that were democracies at the beginning of this century have since shifted to different systems. 
Of course, elections alone do not a democracy make. 
Consider those cases when elections empower a majority ethnic or religious group, which then rides roughshod over minorities – an outcome that has been seen all too often in the Balkans, for example. 
Then there are the cases when the election of a leader is treated as if it somehow legitimizes the subsequent emergence of dictatorship. 
This has been the case in Russia, which, since President Vladimir Putin’s first electoral victory in 2000, has become a Potemkin democracy. 
This year, another election, neither free nor fair, will give Putin another term in office. 
In a real democracy, free and fair elections are complemented more broadly by the rule of law, due process, an independent judiciary, an active civil society, and freedom of the press, worship, assembly, and association. 
In fact, it is theoretically possible – though unlikely – for political systems to have all these elements without elections at all. 
(The political scientist Samuel Finer, in his comprehensive study of different sorts of government, found just one society that was liberal but not democratic: colonial Hong Kong.) 
Democracies depend on institutional software, not just hardware. 
The people who make them work accept a set of norms that often do not have to be codified. 
The problem comes when the people – or, worse, their leaders – refuse to adhere to democratic norms. 
That is what is happening today in the United States, as US President Donald Trump challenges some of the foundational rules, norms, and principles of American democracy. 
Trump threatens (as President Richard Nixon once did) to use his power to pervert the rule of law to target his opponents – most notably Hillary Clinton, whom he wants “locked up.” 
He assaults the freedom of the press, implicitly encouraging supporters to attack journalists, say, by tweeting a (since-deleted) parody video of himself body-slamming a man with a CNN logo on his head. 
He attempts to subvert America’s system of checks and balances. 
And he seems to place a higher priority on advancing his family’s own commercial interests than the interests of the American people. 
While some parts of America’s democratic political system – for example, the judicial check on executive authority – have proved resilient, others are breaking down. 
But Trump is a consequence of this breakdown, not its cause. 
The real problem is that the Republican Party has, over the years, become a hollow instrument of lobbyists and extremists, and both Democrats and Republicans seem to have abandoned their commitment to governing by consensus. 
As a result, the constitutional brakes that America’s founders created to prevent the election of a huckster like Trump have failed. 
Propelled by popular discontent with rising inequality and seemingly self-dealing elites, the political system is spinning out of control. 
Economic challenges, together with fears about migration, have created similar pressures in Europe, reflected in sizable support for right-wing populist parties in elections in Germany and France in the last year, as well as the rise of “illiberal democracy” in Hungary and Poland. 
Countering such assaults on democracy will require political leaders to show courage and vision – as French President Emmanuel Macron has so far – in defending the values that underpin democratic governance. 
In the European Union, this means that leaders must not turn a blind eye to elected governments’ assault on the institutions that safeguard freedom. 
After all, the EU not just a customs union; it is a union of shared values. 
If it fails to act accordingly, it will crumble. 
The bad few years that democracies have had is no reason to tout the virtues of dictatorship and authoritarianism. 
History shows that, when it comes to prosperity and human wellbeing, societies that defend economic and political freedom come out on top. 
In the 1930s, some admired Adolf Hitler’s autobahns and Benito Mussolini’s success in getting the trains to run on time. 
But it was clearly not worth the cost. 
The same is true of China today. 
Yes, the country has become an economic powerhouse in recent decades. 
But if a system cannot survive basic dissent – from legal challenges to television parodies – can it really be as strong as its leaders claim? 
And if a crackdown on corruption is carried out by a corrupt dictatorship, can it really be considered legitimate? 
Contrast this with India, which may have lost the economic race in the last few years, but has held together since independence, despite vast ethnic, religious, and linguistic differences – without needing to create a Bamboo Gulag. 
This does not mean that there is no dissent or disagreement. 
But, no matter how much Indians argue, they are not locking up or “disappearing” dissidents, thanks to the safety valves afforded by their democracy. 
No society can manage indefinitely without such mechanisms. 
Even Karl Marx, I think, would not have disagreed. 

In Defense of International Justice 
MEXICO CITY – Not long after I took office as Mexico’s foreign minister in 2001, a novel problem came across my desk. 
An Argentine naval officer who had resettled in Mexico under an assumed name was wanted by Spain on charges of genocide, torture, and terrorism. 
The officer, Ricardo Miguel Cavallo, was implicated in abuses committed in 1977 and 1978 at the notorious Naval Mechanics School in Buenos Aires. 
According to the Spanish indictment, Cavallo belonged to the operations unit of a group actively involved in kidnapping and torturing people whom the military regime perceived as leftist. 
The question before me was whether to extradite Cavallo to Spain, a third country, to face trial for human rights abuses committed in Argentina. 
Signing the papers would be groundbreaking, as it would signal for the first time that suspected rights abusers might face trial anywhere in the world if justice was not likely at home. 
For me, the decision was straightforward: the crimes demanded justice, and Cavallo was more likely to be held to account in Spain than in Argentina. 
Amnesty laws in Argentina at the time shielded him from prosecution. 
I signed the extradition papers. 
Since then, many inroads have been made to ensure that the world’s most serious crimes no longer go unpunished. 
The International Criminal Court is up and running, and 107 states, including Mexico, have ratified the treaty establishing the court and acceded to its jurisdiction. 
National courts, such as those in Spain, play an increasingly strong role in combating impunity through the exercise of universal jurisdiction. 
The rise of these types of prosecutions has in turn motivated countries, including Argentina and Chile, to repeal their amnesty laws so that suspected war criminals can be prosecuted at home. 
The trials of Slobodan Milosevic and Charles Taylor have demonstrated that even heads of state are no longer safe from prosecution. 
The comfort level for perpetrators of these crimes is shrinking as the options for prosecution expand. 
Whether the progress in this battle against impunity continues or slides backwards is now in the hands of the United Nations Security Council. 
On July 14, the ICC prosecutor, Argentine lawyer Luis Moreno Ocampo, announced that he was seeking an arrest warrant for Sudanese President Omar al-Bashir for orchestrating the atrocities in Darfur. 
Immediately after the announcement, Sudan’s government and its allies began a diplomatic campaign aimed at securing a Security Council deferral of the investigations for 12 months. 
They are attracting wider support than they should – in part because of fear of retaliation against UN peacekeepers and humanitarian workers. 
But the Security Council must be extremely cautious in considering any suspension of ICC proceedings. 
Such a decision would be a serious setback to the movement to end impunity for the most serious crimes. 
It would show that indicted warlords and dictators can avoid justice by holding the Security Council hostage to threats of more violence. 
Suspending the ICC’s work in this way would undermine its potential for deterrence, one of the purposes for which it was established. 
Postponing the case against al-Bashir would seriously undercut the important principle – which has gradually been taking root worldwide – that no one is above the law. 
The Security Council’s decision to refer the situation in Darfur to the ICC prosecutor in March 2005 was itself a major milestone in the battle against impunity. 
That decision demonstrated, for the first time, that there was an institution that could investigate and prosecute the most serious international crimes regardless of where they occur. 
Apart from being a victory for international justice, the referral was also a promise to victims of the horrific crimes in Darfur that the perpetrators of the crimes against them would one day be held accountable. 
For the Security Council to step back from that commitment would do more than abandon the victims in Darfur. 

In Defense of Polish Plumbers 
Supporters of Europe’s social model claim that what distinguishes it is the importance placed on “social cohesion.” 
And, of course, it is as difficult to be against cohesion as it is to be against friendship. 
But the real question is which policies work best. 
Existing policies to achieve social cohesion are based on the belief that, if uncorrected, the free play of market forces will lead to wide disparities in income and thus intensify social conflict. 
But studies tend to show that the majority of income transfers by government occur within the middle class, while only a relatively small proportion are from rich to poor. 
In fact, some transfers flow the other way. 
For example, many pension systems transfer money from the poor to the middle class, simply because richer people usually live longer. 
What most European countries get for their social expenditure is a lot of state provision of services, and not much reduction in social inequality. 
So lower levels of social expenditure could involve only a relatively small increase in inequality and social conflict. 
Moreover, if Europeans target social expenditure better, they might achieve a greater reduction in inequality with a lower level of social transfers. 
Indeed, some policies aimed at achieving cohesion may well reduce it. 
Restriction on firing employees, for example, may protect people who have jobs, but often at the expense of the unemployed, thus increasing social exclusion. 
Even where high levels of social transfers actually do reduce inequality (and therefore presumably increase cohesion), they may undermine inter-communal relations if ethnic minorities are perceived as being strong net beneficiaries. 
The European Union resulted from the tragic lessons of the first half of the twentieth century, when giving free rein to national egoism led to continental catastrophe, and increasing globalization means that economic, internal, foreign, and defense policies are unlikely to be successful when pursued exclusively at national level. 
Yet we continue to believe that social cohesion can be limited to that of the nation. 
European cohesion funds account for only a fraction of a percent of European GDP, whereas about 10% of national income is typically spent on social transfers. 
A massive increase in European Commission spending power to achieve greater pan-European social cohesion would be politically unacceptable to the richer members, who would have to pay for it. 
But neither can we accept a situation in which vast resources are spent on national cohesion, while European cohesion lags so woefully behind. 
Fortunately, inequalities can often be reduced considerably without spending much money. 
Nothing that the EU or its individual members can do would have as great an impact on reducing income inequality in Europe than eliminating national protectionist barriers to migration, movement of capital, and provision of services. 
Doing so would reduce inequalities not only between EU member states, but also within the poorer ones. 
The poorest of the poor would gain the most, while the rich member states would lose little, despite their popular fear of open borders. 
For example, during the referendum campaign in France for the European constitution, the “Polish plumber” became a symbol of the threat that European integration was supposed to pose to French workers’ standards of living. 
But the impact of free migration (when allowed) on French plumbers’ incomes is in fact minimal, not least because of the smallness of the new member states compared to the whole of Western Europe. 
Workers’ incomes in Britain and Ireland have not fallen measurably, despite both countries’ openness to immigration from the enlarged EU. 
Free migration in the EU means that Polish plumbers will not only catch up with French plumbers, but also with Polish bankers. 
Middle-class people in Poland are being hit by the increased cost of the services of skilled workers, such as plumbers, and also of the less skilled, such as decorators, and the highly skilled but low paid, such as doctors. 
Why, then, was the European Commission’s proposed services directive, which would ensure freedom to supply services across the Union to all EU companies, vilified as the “Frankenstein directive”? 
Why was it fatally diluted by the European Parliament? 
Why have demands by the EU’s new member states for freer access to Western Europe’s labor and services markets, and for the right to compete with “old Europe” for investment, been stigmatized as social dumping? 
Why are policies that would do the most to reduce inequality in Europe being presented as anti-social? 
What motivates the opponents of free service provision and labor movement in Europe is not a desire to ensure social cohesion, but a wish to maintain the status quo. 
To be sure, change creates discomfort, and may even cause tension and conflict. 
But the conservative attitudes underlying opposition to change are anything but “social,” for they would deny the poorest of Europe’s poor a chance to improve their lot. 
Indeed, such attitudes are potentially disastrous. 
If they came to be accepted as the guiding principles of European policy, Europe’s economy would become petrified, with stagnant growth making it impossible to afford even modest levels of social transfers. 

In Defense of Sharia 
This week, an Islamic court at Funtua, in Katsina State, in northern Nigeria rejected the appeal of a woman convicted of having sex out of wedlock. 
Her lawyers will likely appeal her conviction to a higher Sharia court, and if necessary, to Nigeria's Supreme Court, but if the judgment of the Funtua court stands, Amin Lawal will be stoned to death the moment her daughter is weaned. 
Muslim-Christian relations are tense all over the world, but nowhere are they more inflamed than in Nigeria, the most populous country where Christians and Muslims exist in roughly equal numbers. 
The flash point for Muslim-Christian tensions is Sharia, or Muslim religious law. 
The spread of Islamic law in Nigeria--since late 1999 ten of the country's 36 states have adopted Sharia as their public law--has provoked a sharp outcry against the severe punishments it levies, including amputation for thieves and death by stoning for woman convicted of adultery. 
As a Muslim lawyer who practices in a Sharia court in Kano, Nigeria's second-largest city, the demonization of Islamic law by Christians and human rights activists in Europe and North America angers me. 
Sharia law is systematically distorted and misunderstood. 
But as someone trained in American law who has taught at an American law school, I also am aware of the shortcomings in how Sharia is applied, especially in its treatment of women. 
No matter how great the outcry against the death sentences imposed on adulterous women, Sharia law cannot be wished away here. 
Islamic law has long been an integral part of social life in Nigeria. 
It will remain so. 
The challenge facing Sharia's critics is to modernize Islamic law, not banish it from public life. 
Sharia law is undoubtedly controversial. 
Its severe punishments fly in the face of Western legal canons. 
I have mixed feelings about these penalties. 
In theory, I accept the death penalty and even amputations, though in practice I believe that implementers of Sharia show little understanding for the reality that much crime stems from poverty and desperation. 
In my view, amputation for thieves should not be carried out unless and until society's poor are better provided for. 
The process leading to the death penalties imposed by Sharia courts have drawn rebukes from around the world, and for good reason. 
Sharia law as applied in Nigeria today is insensitive to the welfare of women. 
Why are only women sentenced to death for adultery, while men go free? 
Sharia courts contend that unless four witnesses catch a man in the act, he cannot be convicted. 
This standard of proof is so difficult to meet that men simply are not convicted. 
Until Sharia can handle adultery fairly, no penalties should be imposed. 
But attention to sensational cases of amputation and death by stoning, while justified, obscures the reality that the bulk of Sharia cases involve family matters and ordinary commercial law. 
Sharia, with its emphasis on swift justice, is often preferable to civil law in a country such as Nigeria, where courts are poorly administered and cases move slowly, when they move at all. 
It may surprise non-Muslims, but some Nigerian Christians prefer to file their cases in Sharia courts because of their speed, fairness, and relative unconcern with legal technicalities. 
Recently, a Christian car buyer drew wide attention in Nigeria when he was duped by a Muslim car seller and took his case to a Sharia court. 
Within a few weeks, he won--and paid no legal fees. 
Too often, however, Sharia law harms Christians. 
In one Nigerian state, Christian bus operators are discouraged and sometimes prohibited from carrying both men and women in a single trip. 
Christian businessmen have also suffered because the ban on the commercial sale of alcohol has led to the destruction of their beverage stocks. 
Why is Islamic law growing in importance? 
The end of Nigeria's military dictatorship and the return to civilian, elected government created countless beneficial freedoms. 
But freedom of expression resulted in more militant religious positions. 
The clash of religions is exacerbated by the indecisiveness of President Olesegun Obasanjo. 
Moreover, Muslim politicians gain popularity by siding with Islamic conservatives while their Christian rivals score political points by complaining about Sharia's extreme aspects. 
The tensions spawned by Islamic law might be justified if it targeted Nigeria's biggest problem: government corruption. 
Muslim politicians know that corruption is killing our country and yet Sharia law is not applied to the misdeeds of public officials. 
Only when the spotlight of Sharia shines on government wrongdoing will we know that Nigeria is on the road to prosperity. 
The shortcomings of Sharia, however serious, need not doom Islamic law in a society where Christians and traditional believers roughly equal Muslims in number. 
Sharia can be reformed in ways that make the law more tolerant, open, and acceptable to non-Muslims. 
It is not absurd to speak of a cosmopolitan Sharia. 
In Islamic tradition, reform of Sharia results from an Ijtijad, a creative and intellectual effort to apply Islamic law to new circumstances. 
Sharia first blossomed during a period of creative ferment centuries ago, but stagnated when later generations came to believe that the law need not adapt to changing circumstances. 
It is time for another Ijtihad. 
If Muslims wish to maintain a central role for Sharia in Nigeria, then they must find ways to soften its rough edges and turn it against official wrong-doers. 

In Defense of Swiss Banking 
GENEVA – Leaders of the G-20 have now declared that “the era of banking secrecy is over,” and have threatened to take action against “non-cooperative jurisdictions, including tax havens.” 
No one should include Switzerland among these, for the Swiss government has already offered to improve international cooperation by adopting the OECD’s standard on international administrative assistance on tax issues. 
To appreciate the implications of this, it is important to know the background. 
Swiss banks are obliged by law to extend a very high degree of bank-client confidentiality to all their clients, both Swiss and foreign. 
Any banker who reveals details of his clients’ affairs to unauthorized third parties is committing a criminal offense in Switzerland. 
But this bank-client confidentiality has never been 100% absolute, and Swiss legislation makes absolutely clear what it protects and what it does not protect. 
It poses, for example, no obstacle whatsoever to a criminal investigation. 
One characteristic of Swiss law is that it distinguishes between tax evasion and tax fraud. 
Submitting an incomplete tax return, for example, would be tax evasion and is handled through administrative measures, including severe fines if necessary. 
So, despite some foreign media reports, tax evasion is not legal in Switzerland; it merely is not a criminal offence. 
Anyone found to be illegally evading their tax obligations in Switzerland faces severe financial penalties. 
Tax fraud, on the other hand, involves forging documents and thus much more criminality. 
Tax fraud is a criminal offense in Switzerland. 
The international implication is that Switzerland has traditionally offered international assistance in criminal tax cases that have elements of fraud, but not of evasion. 
By agreeing to adopt the standard on the exchange of information set out in Article 26 of the OECD’s Model Tax Convention, Switzerland will now extend administrative assistance to cover all tax offenses, including tax evasion. 
States that implemented Article 26 agree to exchange information upon request, but not to the automatic disclosure of information. 
This means that the country seeking information must produce a substantiated request, naming the taxable person and the specific bank in question or describing them in sufficient detail. 
So-called “fishing expeditions” – indiscriminate trawling through bank accounts – remain out of bounds. 
The privacy of clients not under suspicion will thus continue to be protected by Swiss bank-client confidentiality. 
Citizens in a democracy would never allow their government to have an automatic right of forced entry into their homes on the off-chance of finding stolen goods, so why should the state have an automatic right of forced entry into bank accounts on the off-chance of finding a few tax evaders or criminals? 
Once Switzerland makes a commitment to do something, it does it thoroughly, efficiently, and on time. 
The implementation of the agreement with the European Union on the taxation of savings is a good example of this. 
I am confident that the same reliability will be demonstrated in Switzerland’s commitment to take on the OECD standard, which will be incorporated into future bilateral double-taxation agreements. 
Following this commitment, improper criticism of Switzerland and its legal system, and also various threats to put Switzerland on a so-called “black list,” should end. 
But I have not quite finished with the OECD. 
The OECD is a multinational grouping of 30 countries established nearly a half-century ago, with Switzerland a member. 
It is not an international organization, and it has no legal authority to speak for the world or to establish rules, norms, or standards for any state except its own members – that China is not a member demonstrates clearly the limits of its reach. 
The OECD’s founding convention calls on it to assist sound economic expansion and to contribute to growth in world trade on a multilateral, non-discriminatory basis. 
Switzerland’s recent treatment by the OECD, however, has been disgraceful. 
The secret drafting of a black list behind a member’s back is unacceptable and, in my view, seriously damages the OECD’s credibility. 
Incidentally, I think it would be far more revealing to draw up a list of those states that have destroyed or damaged the relationship of trust with their citizens to such an extent that they can only secure their tax revenues by criminalizing tax evasion and trampling on privacy. 
Accusations that Switzerland is a tax haven usually come from countries that have a low level of taxpayer honesty. 
The Swiss state, by contrast, has an excellent relationship with its taxpayers, and there is a correspondingly high level of taxpayer honesty. 
The Swiss people vote their own taxes, have a high degree of control over how tax revenues are spent, and believe their tax system to be fair, transparent, and comprehensible. 
Critics should study the Swiss model with a view to improving things in their own countries. 
The OECD itself has drawn attention to Switzerland's Code of Conduct for Tax Authorities, Taxpayers and Tax Advisers as an example of how to promote what it calls an “enhanced relationship between taxpayers and revenue bodies." 
Of the world’s tax evaders, 99.99% do not have a bank account in Switzerland, but Switzerland is an easy target. 
There is no political risk involved; the Swiss have no powerful lobby in the United States or the EU that they can mobilize; as the birthplace of private banking, Switzerland has enormous symbolic value; as the world leader in private banking, it triggers jealousies. 
In these difficult economic times, Switzerland serves as a handy scapegoat, enabling financially-challenged states to discharge their frustrations and divert their citizens’ attention from shortcomings in their own complicated and inefficient tax systems. 
Attacks on Switzerland should be seen and analyzed from this perspective. 

In Europe We Distrust 
MADRID – For decades, critics of the European Union have spoken about a democratic deficit. 
I never accepted that reproach of the EU and its institutions, but I do see a new and dangerous deficit within the Union – a trust deficit, both among governments, and among the citizens of various member countries. 
Indeed, if today’s euro banknotes included a motto, as dollars do, it could well be, “In Europe We Distrust.” 
This lack of trust has brought the eurozone to the cusp of implosion, and is calling into question the very future of European unity. 
The arc of EU history seems to be bending to catastrophe – the sort of periodic European disaster that integration was intended to prevent. 
Grandiloquent as it might sound, the disintegration of the euro and the disarray that would engulf the European project, not to speak of the global repercussions, would unleash comparable devastation. 
But few official pronouncements, let alone policies, are addressing Europe’s deficit of trust and credibility. 
The current crisis has exposed the original lacunae and widening cracks in the compact between Europe’s citizens and EU institutions, between Europe’s north and south, and between its peoples and its elites. 
Indeed, a dangerous emotional discourse has emerged, reflecting – and feeding – the worst stereotypes of the “lazy South” and the “despotic North.” 
It is indicative that the latest Pew Research Survey in late May reveals unanimity about who the least hardworking Europeans are: southerners, especially Greeks. 
Likewise, polls and elections signal the ascent of populists across Europe, while financial markets’ vulture-like behavior stems from the cynical calculation that the EU lacks the wherewithal to restore its credibility. 
That, after all, is the point of Europe’s straightjacket of austerity, which hampers its growth prospects, and thus makes little sense in economic terms. 
The ultimate aim of austerity is precisely the restoration of trust – among northern Europeans that the money transferred to troubled economies will not be squandered, and among the peoples affected by painful spending cuts that their efforts are recognized and supported. 
Speaking from the heartland of the troubled South, I can attest to the fact that the need for austerity has been the leitmotif of Spanish Prime Minister Mariano Rajoy’s government, a course that gained explicit popular support in the recent elections. 
Reforming Spains’s cajas (savings banks), labor market, welfare provisions, and how its autonomous regions function top the national agenda (though unfortunately only at the insistence of the European Commission and Germany). 
But restoring trust and credibility requires more than southern discipline. 
Northern Europe must hold up its side of the bargain. 
Germany, in particular, must acknowledge that, far from being an innocent victim, its economy is the eurozone’s biggest beneficiary – and has been since the euro’s inception. 
That, together with the counterfactual – the economic calamity that would befall Germany following a collapse of the euro – implies a unique obligation to maintain it. 
German Chancellor Angela Merkel has been a favorite target of opponents of austerity for some time now, and it is understandable that, after months of being a bystander to the EU’s painful inability to govern, Germany has reluctantly – indeed, insufficiently – taken charge. 
Looking ahead, as the threat of disintegration looms larger, the need for German leadership will be even greater. 
But, once the crisis has passed, EU institutional reform will be a critical element in restoring trust. 
The EU’s supposed democratic deficit is a corollary of the “technocratic imperative” that has emerged as a favorite scapegoat in the ongoing European drama. 
According to this view, European integration was flawed from the outset, more than six decades ago, because it was conceived and developed as an elite project. 
But, for as long as the European project delivered prosperity, no one bothered to question its rationale. 
Today, however, the EU is the last point of reference as far as prosperity is concerned. 
According to the Pew survey, EU favorability is down almost everywhere since 2007, having dropped 20 points in the Czech Republic and Spain, 19 points in Italy, and 14 points in Poland. 
If EU institutions are to regain trust and relevance, they need to articulate concrete policies and deliver on issues that bear directly on citizens’ interests – youth unemployment, urban planning, health care, bio-tech research, energy conservation, transport, and aging. 
All of these issues were an integral part of the EU’s ambitious Lisbon Strategy (which in 2000 promised to make Europe the world’s most competitive economy by 2010), and all were quickly hijacked by national political agendas. 
That cannot be allowed to happen again. 
In fact, there is nothing inevitable about the euro's failure. 
The dismal image that Europe projects to the world nowadays does no justice to reality. 
Europe has the world’s healthiest and most educated population, its largest economy, and huge stores of soft power, owing also to its commitment to human rights and democratic values. 
And yet Europe is facing a calamity. 
Discipline and morality may well be key to reinforcing trust and credibility to Europe’s social fabric – a point that northern Europeans never tire of making. 

In Finance We Distrust 
MILAN – Around the world, the debate about financial regulation is coming to a head. 
A host of arguments and proposals is in play, often competing with one another – and thus inciting public and political confusion. 
One approach to financial re-regulation – supported by arguments of varying persuasiveness – is to limit the size and scope of financial institutions. 
Some claim that smaller entities can fail without impairing the system, thus sparing taxpayers the cost of a bailout. 
But if systemic risk emerges in ways that are not yet fully understood, smaller banks may all fail or become distressed simultaneously, damaging the real economy. 
A second, hotly debated argument is that limiting banks’ size and scope has relatively low costs in terms of performance. 
This point is used to bolster a third argument: large institutions have undue political influence and thus “capture” their regulators. 
Put bluntly, large and profitable financial institutions will find a way to get the regulatory system they want – one that is compatible with a highly profitable trading super-structure that goes beyond the requirements of hedging and seeks to maximize short-term gains. 
A second approach, on which there is substantial agreement in principle, is to limit leverage. 
The main argument is that high leverage contributes powerfully to systemic risk – a condition in which asset prices move in a highly correlated way, and distress, when it occurs, spreads quickly. 
Leverage is also partially caused by misperceptions of risk and mispricing of liquidity. 
It is desirable to constrain leverage, but not to the point of increasing the cost of capital and investment. 
Moreover, few would disagree that, as the complexity of the system increases, gaps and asymmetries in terms of information, knowledge, and expertise are multiplying. 
Such asymmetries impair market performance in a variety of ways, and conflicts of interest are particularly dangerous in such an environment because they create an incentive to exploit precisely these advantages. 
Rigorous disclosure requirements that include conflicts of interest are one way to limit the potential damage. 
Or the conflicts can be limited by regulating the scope of financial institutions. 
For example, asset management, distribution, underwriting and securitization, and proprietary trading would be separated in various ways. 
This approach has the added advantage of preventing different risk profiles and their appropriate capital requirements from getting mixed up in the same entity and balance sheet. 
There are two other ways to address complexity and asymmetries. 
One, widely adopted in developing countries, is simply to impose restrictions on products (for example, derivatives and hedge funds) on the grounds that the upside in terms of risk avoidance far outweigh the costs – less access to capital and reduced risk spreading. 
The other way is to try to reduce the informational gaps or their impact by regulating the expertise and incentives surrounding the rating process (the failure of which had serious consequences in the current crisis). 
At a somewhat deeper level, there are two conflicting threads running through the public debate surrounding the crisis. 
One is the “perfect storm” position: there were very many failures, misperceptions, informational asymmetries, and complexities, as well as much repugnant behavior, but it never occurred to market participants, regulators, or academics that the aggregate effect would be a near-collapse of the system. 
Critics of that argument maintain that sophisticated players understood the systemic risks, didn’t care, and cynically played the game that they helped to create – in some cases for enormous profit. 
It now seems universally accepted (often implicitly) that government should establish the structure and rules for the financial system, with participants then pursuing their self-interest within that framework. 
If the framework is right, the system will perform well. 
The rules bear the burden of ensuring the collective social interest in the system’s stability, efficiency, and fairness. 
But in a complex system in which expertise, insight, and real-time information are not concentrated in one place, and certainly not in government and regulatory circles, reliance on such a framework seems deficient and unwise. 
Moreover, it ignores the importance of trust. 
A better starting point, I believe, is the notion of shared responsibility for the stability of the system and its social benefits – shared, that is, by participants and regulators. 
It is striking that no senior executive of whom I am aware has laid out in any detail how his or her institution’s expertise could be deployed in pursuit of the collective goal of stability. 
The suspicion that underlies much of today’s public anger is that these institutions, having influenced the formulation of the legal and ethical rules, could do more to contribute to stability than just obey them. 
The finance industry, regulators, and political leaders need to create a shared sense of collective responsibility for the system as a whole and its impact on the rest of the economy. 
This set of values should be deeply embedded in the industry – and thus should transcend haggling over regulation. 
It should take precedence over narrow self-interest or the potential profit opportunities associated with exploiting an informational advantage. 
And it should be thought of as an addition to the guiding norms, rules, and ethics associated with “normal” times. 
Some will object that this idea won’t work because it runs counter to greedy human nature. 
Yet such values shape other professions. 
In medicine, there is a huge and unbridgeable gap in expertise and information between doctors and patients. 
The potential for abuse is enormous. 
It is limited by professional values that are inculcated throughout doctors’ training, and which are bolstered by a quiet form of peer review. 
By itself, such a shift in values and the implicit model that defines roles certainly will not solve the challenge of systemic risk. 
Neither will fiddling with the rules. 



In Memory of Bronisław Geremek 
Warsaw – When a friend dies unexpectedly, we recall his face, his smile, the conversations forever unfinished. 
Today I can see Bronisław Geremek, who died in a car crash a few weeks ago, in jail in Białołęka and hear his hoarse shouts from behind the bars of the prison on Rakowiecka Street. 
I see and hear Bronek in Castel Gandolfo, addressing Pope John Paul II. 
I see him also during underground meetings of “Solidarity” and during the 1989 Round Table negotiations; 
I see him in our parliament declaring the end of the Polish People’s Republic, and on CNN announcing that Poland had joined NATO. 
And I remember dozens of private conversations, discussions, and arguments conducted over almost 40 years. 
Bronisław Geremek was one of us, to quote the words of Joseph Conrad, a writer whom Geremek admired. 
He was an activist in the democratic opposition and in Solidarity, who fought for Polish independence and human freedom, and who paid a high price for it. 
He was one who wanted to remain true to the tradition of the January Uprising and the Legions of Józef Piłsudski, to the tradition of the insurgents of the Warsaw ghetto and Warsaw Uprising, to the values of the Polish October and the student revolt of 1968, to the values of KOR (Workers’ Defense Committee) and of “Solidarity.” 
Geremek knew that exclusion and enslavement destroy human dignity, and degrade our humanity. 
He knew that dictatorships lead to moral shabbiness. 
He valued freedom, authentic knowledge, independent thought, the courage of nonconformity, the spirit of resistance, the beauty of Polish romanticism, disinterested behavior, and human dignity. 
He reacted to moral shabbiness with revulsion, but also with fear. 
He saw it as a source of disposable masses, a human reservoir for totalitarian movements. 
He was both idealist and pragmatist. 
As a child, Geremek witnessed the degradation of those enslaved in the Warsaw ghetto. 
Miraculously saved from the Holocaust, he spent the rest of his life dreaming of a Poland where people lived in dignity and respected the dignity of others. 
Geremek fought for this Poland. 
He believed that everyone can change for the better, and that we must nurse the spirit of dialogue, tolerance, and the ability to forgive and to reconcile. 
He wanted a democratic Poland in a strong and democratic Europe. 
Now that he is gone, we see how much he accomplished. 
Geremek knew that a feeling of national identity and pride is priceless, and that in Poland, condemned to struggle for independence, they are necessary virtues. 
But he also knew that in the interwar period, the concept of “Polishness” was used as a tool of aggressive nationalism. 
For Geremek, Polishness denoted neither a biological community nor a blood lineage. 
What was important was the nation’s history, whether that history was mythologized or de-mythologized, apologetic or critical. 
In relation to the past, he used to say, we make a choice of traditions, and with its help we express our views and options. 
Although events like the Stalinist terror were outside the Polish tradition as he conceived it, Geremek knew that a communal identity demands consciousness of the entirety of its history, all its good, all its evil. 
We must remember that acts which we now reject were also possible within our community, as we work to make what was once possible impossible. 
Bronek was proud of Poland’s stubborn will to freedom, its achievements, the democratic transformation which, thanks to the compromise reached at the Round Table negotiations, allowed for a bloodless end to dictatorship. 
He was proud of Poland’s membership in NATO and the European Union, of Polish economic successes. 
But he also worried. 
A year ago, together with Lech Wałęsa and Tadeusz Mazowiecki, he warned: “A state that we treated as a common good is being treated as a trophy to be seized by the rulers. Freedom and independence, to which we tried to point the way, are not accompanied by a sense of solidarity, especially towards those who are weaker and poorer. 
Insults and squabbles fill our political stage and ruin the citizens’ trust in the government. 
Institutions which should protect the law are becoming tools in the hands of the rulers, and we are witnessing serious accusations that they are being abused.” 
This declaration was accompanied by a dramatic appeal to “cleanse Polish politics of dirt, fury, and hatred.” 
Geremek’s essay about Marc Bloch, the French historian and anti-Nazi resistance fighter, is among his greatest intellectual and moral accomplishments. 
In writing about Bloch, Geremek described himself, particularly when he recalled Bloch’s self-definition as being part of “liberal, disinterested, and humanely progressive traditions of thought.” 
And he was describing himself as well when he cited Bloch: “Attached to my country, fed with her spiritual heritage and its history, unable to imagine any other country where I could breathe freely, I loved and served it with all my strength. 
I am a Jew. 
I see this as a reason neither for pride nor for shame. 
I appeal to my ancestry only in one single case: when I encounter an anti-Semite. 
Nevertheless, I would like to leave just this one honest testimony: I am dying, just as I lived, as a good Frenchman.” 
Geremek had two messages about anti-Semitism. 
The first, directed inside Poland, was that we have to fight anti-Semitism and all its manifestations, even when marginal. 
The second, directed to western public opinion, was that we should not play with outmoded stereotypes. 
Bronisław Geremek died with a clear conscience and clean hands. 


In Praise of Parasites 
In 1933 primatologists discovered a red-and-black colored monkey living in the canopy of West Africa's forests, which they named Miss Waldron's Red Colobus. 
Recently it was pronounced extinct - the first documented extinction of a primate since the 1700s. 
After searching for six years, a team of scientists have not been able to find any sign of the monkey, leading them to conclude that heavy logging in the region killed off the last member of the species. 
But when Miss Waldron's Red Colobus vanished, it did not go alone. 
It also took with it into oblivion an unknown number of parasite species that made the monkey their home - parasites that might have included viruses, bacteria, protozoans, fungi, tapeworms, and other gruesome creatures. 
We may be in the process of causing mass extinctions the likes of which the planet has not seen since an asteroid crashed into earth 65 million years ago. 
Surprisingly, it is parasites that will disappear in the greatest numbers, because parasites represent the vast majority of Earth's biodiversity. 
Although researchers are divided over how many species exist - estimates vary from 5 to 30 million - it appears that four out of every five species is a parasite of some sort. 
It can be difficult to grasp the fact that we live in an overwhelmingly parasitic world. 
After all, we typically think of parasites with fear and loathing. 
They are things to be eradicated or at the very least not discussed in polite company. 
But parasites are nature's great success story. 
They have been around for billions of years, and have evolved into a bizarre panoply of forms - nematodes that can curl up in a single muscle cell, crustaceans that clamp onto the eyes of Greenland sharks, flatworms that live in the bladders of desert toads buried in the sand for 11 months out of every year. 
Parasites have evolved into remarkably sophisticated creatures along the way. 
They can biochemically castrate their hosts, so that they don't waste energy making eggs or finding mates when they could be feeding the parasites. Parasites can even control the behavior of their hosts to ensure their own reproductive success. 
Many species of parasites, for example, need to live inside two or more species to complete their life cycle. 
Often the first host is prey for the second, and so the parasites helps the predators catch their prey. 
Toxoplasma, a protozoan that starts out in rats and other mammals, makes cats its final host. 
A rat infected with Toxoplasma is perfectly healthy, but it loses its instinctive fear when it smells a cat. 
By altering the rat's neurochemistry, Toxoplasma may make its hosts easier targets. 
Parasites may not win anyone's love, but they should win our respect. 
So when we take strides to preserve biodiversity, we should not forget the parasites that live inside endangered hosts, like the ones that lived in Miss Waldron's Red Colobus. 
For there are practical reasons to preserve biodiversity, and they apply to parasites just as much as to their hosts. 
Many of the most effective drugs, for example, were originally discovered in plants or animals. 
Parasites are masters of biotechnology. 
Consider hookworms. 
These nasty creatures dig their fangs into the linings of the intestines in order to drink blood and lacerated flesh. 
Normally, clots would form in the wound, making it impossible for the hookworm to feed. 
But the hookworm has evolved the ability to produce a molecule that elegantly jams up the cascade of chemical reactions that create clots. 
Biotech researchers are so impressed by the hookworm that they've synthesized the molecule and are testing it as a blood-thinning medicine that can be used during surgery. 
The hookworm is but one species out of millions of parasites; other parasites may produce chemicals that can be used to stop organ rejection or to alter the brain. 
If they disappear into extinction, they will take their secrets with them. 
The contempt that many people have for parasites hides a profound uneasiness about our own role in nature. 
We pride ourselves as the masters of nature, with the beasts of land and sea at our disposal. 
Yet parasites can sneak past our defenses and turn our bodies into their own playgrounds. The fact that we will always be part of the natural world is, in some ways horrifying. 
That horror is what makes parasites such a great device for science fiction movies such as Alien. 
But parasites make us uneasy in another way. 
When you look at an aerial photograph of housing developments spreading into prairies or logging operations obliterating rain forests, it's hard to avoid entertaining a frightening possibility: we are parasites. 
Our host is the biosphere, which we exploit and consume for our own advantage, and to our host's detriment. 
There may be something to this metaphor, but the lesson I take from it is not what others might. 
To be called a parasite is not necessarily a bad thing. 
Parasites have been incredibly successful over the past four billion years of life's history. 
If we are in fact parasites, we are not very good ones. 
Parasites make very careful use of their hosts, because killing them off too quickly will leave them without a home. 
Unlike other parasites, we have only one host, which means that we must be especially careful. 
Judging from the state of the world's rain forests, wetlands, and coral reefs, we're not. 
We should learn from the masters. 


In Search of Vampires 
In Eastern European folk tales, vampires are nocturnal bloodsuckers who have risen from the dead. 
We know these creatures' apotheosis, Dracula, as a vampire from Transylvania, a bat-like person with long canine teeth who lies in a coffin during the day and bites necks and drinks blood for sustenance. 
But why do we know about Dracula and vampires at all? 
Why and how did a regional myth grow into one of modern Western culture's most enduring fixtures? 
The historical Dracula, Vlad Tepes, was no vampire. 
Vlad was born in 1431 and reigned on and off from 1448 as Prince Woiwode of Walachei, the southern part of today's Romania, clashing regularly with the Ottoman Empire, Hungary's King Matthias Corvinus, and the Saxon cities of Transylvania. 
Although he achieved important victories over the Ottomans, Corvinus took him prisoner, and he was killed in 1477 in renewed fighting with Ottoman troops. 
Vlad received the nickname "Draculea" - derived from "Dragon" - from his father. 
Written another way, "Dragolea," the name means "of love" or "the lovely one" - hardly fitting for a man who developed the unlovely habit of lancing his foes on a stake, from which the nickname "Tepes" (the Impaler) was derived. 
Reports of Vlad's cruel method - by no means unusual at the time - were already in circulation during his lifetime, and Corvinus probably gave his brutality a particularly bloodthirsty spin. 
The propaganda campaign against Vlad succeeded brilliantly, satisfying the public's appetite for sensation with graphic images of the vicious, impaling prince. 
These images of Vlad have been revived, particularly in the West, to demonize East Europeans. 
Since the sixteenth century, Czar Ivan IV - Ivan the Terrible - was called the "Russian Dracula." 
Similarly, the seventeenth-century Hungarian Transylvanian Countess Elizabeth Báthory, who tortured young girls to death and believed in the curative power of bathing in their blood, contributed to the West's image of Eastern Europe as the heart of darkness of the human soul. 
Vampire panic seized the European public repeatedly in the eighteenth century. 
In 1732, news swept through the Continent that a dead man from a Serbian village killed others at night. 
His exhumed body had not decayed. 
A stake was driven through his heart and his body was burned. 
Soon other bodies were exhumed in various places in Europe and found to be in a similar preserved condition, giving rise to a literature that rigorously examined, among other questions, the connection between vampires and bats, butterflies, and ravens. 
But the parallel development of science underpinned efforts to expose such "superstition." 
In 1755, the enlightened absolutist monarchy in Vienna acted. 
Empress Maria Theresa prohibited belief in vampires and ordered a thorough examination of possible natural reasons for such unusual events, as well as the actual causes of death. 
Vampires, according to eighteenth-century science, were nothing more than the product of victims' delirium. 
The spirit of science found a tactical ally in the Catholic Church, which held that belief in vampires defiles the resurrection of Jesus. 
This position also opened another front in the Church's battle with Eastern European Orthodox Christianity, which lent theological support to vampire myths by teaching that non-decomposed bodies could not go to heaven and could be revivified by the devil. 
On both the scientific and the Catholic view, whoever believed in vampires was regarded as superstitious and condemned as uneducated. 
Thus, at a time when Eastern Europe began to solidify itself in the perception of the West, it did so as a bastion of heresy that had to be "civilized." 
But, having debunked the vampire myth, Western intellectuals proceeded to refashion it. 
Voltaire transferred the image of bloodsucking vampires to speculators, merchants, kings, and monks. 
From here, the line could be drawn to capitalists, Jews, women - the vamp - and politicians. 
At the same time, people's irrational fears and secret desires could not be suppressed. 
In the West, occultism emerged in response to the Enlightenment's faith in science, helped by a number of medical professionals who claimed that vampires actually existed. 
Literary works in which people who committed cruel, bloody acts were transformed into vampires became popular from 1820 onwards. 
Vlad Tepes was transformed into a vampire by the most famous of these stories: Bram Stoker's novel Dracula in 1897. 
Stoker researched vampire myths intensively, and was influenced by historical books, travel descriptions, and the Hungarian orientalist Ármin Vámbéry. 
He linked the various strands of popular myth with historically frightful characters to cement the association of Eastern Europe with obscurantism and darkness in the popular imagination of the West. 
Viewed against this foil, the West - with Stoker's Britain at its pinnacle - emerged as the seat of universal reason. 
Belief in vampires in Eastern European societies served its own historical purposes: uniting communities and identifying outsiders, giving concrete form to death fears, explaining mysterious events, and, last but not least, providing a means of resistance to the encroachment of Western ideas and patterns of thought. 
If the thought of Dracula and vampires makes us shiver, then the vampire myth still fulfills its functions for us: as a projection of our fears and uncertainties, sexual desires, group and personal animosities, and longing for the dissolution of the structure of society. 
Ultimately, the spiritual gloom and existential dread that we have come to associate with Eastern Europe are merely an extension of our own. 

 


In the Shadow of Miloševic 
Two years ago the world cheered as Slobodan Miloševic's opponents united to overthrow his dictatorship. 
Opposition to Milosevic, however, appears to have been the sole glue holding them together. 
Those protest leaders, now in power, have been at each other's throats ever since. 
Vojislav Koštunica, the current president of what remains of Yugoslavia and the `mildish' nationalist who out-polled Miloševic two years ago, holds a high-profile job with numerous ceremonial duties but little real power. 
So he decided to compete head-to-head in Serbia's presidential elections of September 29 with the reform candidate Miroljub Labus, a vice-premier in charge of finance. 
Because Koštunica did not win 50% plus one of the votes of all registered voters in the first round, he faces a run-off with Labus on October 13th. 
Intelligent speeches, spirited debates and clever slogans were conspicuous by their absence in this election. 
Violence was also absent, but insults were not. 
For example, Zoran Djindjic, the hyper-pragmatic prime minister of Serbia who supports Labus, called Koštunica a lazy drone. 
Such language is lamentable, but it is still a big step forward from the Miloševic era, when both regime and opposition commonly dubbed their opponents as traitors, spies, or Western mercenaries. 
Look beyond the insults and you see that Koštunica and Labus have similar moderate programs. 
Labus favors faster economic reform and is readier to accept Western demands to cooperate with the Hague Tribunal. 
Koštunica is also for privatization and decreasing the role of the state, but he is more worried about corruption and favoritism during the sale of state firms. 
While he claims to be pro-Western, he prefers that extraditions of indicted Serb war criminals to the Hague conform to Serbian law. 
The biggest electoral surprise of the first round was the success of the blood-curdling nationalist Vojislav Sešelj, who received 24% of the vote. 
For years he championed extreme Serbian nationalism and led paramilitary formations in the wars of Yugoslavia's disintegration. 
He also instigated many violent incidents in Serbian internal politics. 
Last but not least, Sešelj was in coalition with Miloševic when the Democratic Opposition of Serbia, a loose coalition of 18 opposition parties led by Koštunica but internally dominated by Djindjic, defeated Miloševic. 
Sešelj has worked hard to soften his image. 
He remains a nationalist, but the main theme of his electoral campaign was the struggle against organized crime and his promise to purge the police of dishonest high-ranking officers. 
Sešelj was much helped by Miloševic who, from his cell in the Hague, urged his Socialist Party to vote for Sešelj, not for one of its own two quarrelling candidates. 
Miloševic's shrewd, pugnacious cross-examination of witnesses in the Hague courtroom has somewhat restored his prestige among Serbs who perceive the Tribunal as anti-Serb. 
The good news is that Miloševic's support for Sešelj damaged the already weak Socialist Party, which is unlikely to recover soon. 
Sešelj was also the only major politician who spoke about the plight of the unemployed and the soon-to-be-unemployed, of the refugees and the homeless, and of the poor. 
He did this in a demagogical, nationalistic and populist way. 
But it is obvious that in the period of transition through which Serbia is going, there is a need for a strong, well-organized European-style social-democratic party to address these issues. 
Most of Sešelj's supporters will vote for Koštunica in the second round because they view Labus as a lackey of Americans and Germans, of the IMF and World Bank, and simply of Serbia's enemies the world over. 
Since most people who voted for the eight minor candidates in the first round will also cast ballots for Koštunica, he is all but certain to win. 
This certainty means that Koštunica need not actively court Sešelj supporters or other nationalists. 
Koštunica has made a career more by the absence of negative characteristics than by what he has achieved. 
He is neither corrupt nor a war criminal, neither aggressive in his utterance and behavior nor likely to bend the law for the sake of personal power. 
Many people voted by for him by default, both now and when he defeated Miloševic in 2000. 
Though he does not sacrifice major moral principles for power, Koštunica is not the unassuming lawyer he once was. 
He crams his party with mediocrities, selects mostly bad advisers, and does not listen to the rare good ones. 
It is possible that his image as a right-of-center democrat conceals a reactionary who would like for Serbia to restore its pre-WWII monarchy and for the Orthodox Church to play a major role in political and social life. 
For there is a deep contradiction at the core of Koštunica, as there is at the core of Serbian society - an impossible dream of combining liberal European political institutions with authoritarian Serbian political traditions. 
It should not be forgotten that Koštunica supported the struggle of Serbs in Croatia, Bosnia and Kosovo and that he adheres to a rosy picture of Serb history. 
But Parliament is the seat of real political power here. 
After the parliamentary elections that will probably take place in the spring of 2003, Koštunica's Democratic Party of Serbia (DSS) will be a formidable force in the Serbian assembly. 
But it will never come close to an absolute majority. 
Neither Serbs nor the West want a government in which Sešelj or someone like him plays a leading role. 
So Koštunica and Djindjic cannot seek allies in the nationalist camp. 
Both Djindjic and Koštunica must ultimately realize that they are stuck with each other and so begin to compromise and cooperate. 
If they do Serbia will sail on - slowly, without spectacular successes, in a disorderly way, but peacefully and in the right direction. 

 

 

The Right Incentives for a Low-Carbon Future 
BERLIN – The climate agreement that world leaders reached in Paris last month has been widely celebrated for establishing the ambitious target of limiting the increase in global temperature to well below 2º Celsius above pre-industrial levels. 
But the agreement is just one step, albeit an important one. 
Policymakers now must figure out how to achieve this goal – no easy feat, especially given that, contrary to the conventional wisdom, steadily rising costs for conventional energy cannot be counted on to propel the necessary shift toward a low-carbon future. 
At first glance, the logic of negative economic incentives seems sound. 
If, say, driving a gas-guzzling car becomes more expensive, people will presumably be less likely to do it. 
But the impact of changing fuel prices is partial and delayed. 
While drivers may purchase a more fuel-efficient car in the long run, they are more likely, in the shorter run, to reduce other kinds of consumption to offset the rise in cost. 
When it comes to resolving a problem as urgent as climate change, Keynes’s famous dictum – “In the long run, we are all dead” – clearly applies. 
Moreover, even if consumers did respond efficiently, fossil-fuel prices are dictated largely by heavily financialized markets, which tend to be extremely volatile. 
The sharp decline in oil prices over the last 18 months is a case in point. 
Not only have oil prices themselves failed to spur a reduction in consumption; they have undermined incentives to develop alternative energy sources. 
Investing in, say, solar power may have seemed worthwhile when oil cost $100 per barrel, but it looked a lot less appealing when the price dropped below $50. 
Conceivably, policymakers could raise taxes to offset such declines. 
But such hikes sometimes (like now) would have to be huge, and adopting erratic policies that mirror the volatility of the market is never a good idea. 
Carbon pricing could experience a similar fate. 
In the European Union, carbon prices have been low for several years, and for now market participants seem to be following the herd in believing that they will remain so. 
But there is no guarantee that free emissions trading will not function like other financial markets, producing sharp fluctuations in CO2 prices. 
Should expectations suddenly change, the herd might turn and run in the opposite direction, causing CO2 prices to soar. 
Yet another problem with the price-based approach to mitigating climate change is that it fails to account for markets’ potential to create perverse incentives. 
When the cost of conventional energy rises, new suppliers see an opportunity; thus, before June 2014, when oil prices were high, investors poured resources into developing shale oil and gas in the United States. 
The additional supply, however, ultimately causes prices to fall, reducing the incentive to invest in alternative energy sources or energy efficiency. 
This is a normal market reaction, but it does not advance the fight against climate change, which would require steadily rising costs. 
The final reason why negative incentives alone are inadequate to mitigate climate change may be the most irrational: after some years of rising taxes, the public is staunchly opposed to any policy that may increase energy prices, regardless of whether current prices are high or low. 
People are so convinced that energy costs are “exploding,” despite the recent oil-price collapse, that any new project implying even slightly higher prices – even if overall energy prices are still lower than they were five years ago – is now exceedingly difficult to initiate. 
The implication is clear: When policymakers get to work designing strategies for executing the Paris agreement, they should not rely heavily on rising energy costs to advance their objectives. 
A strategy that assumes that the market will punish those who do not invest in a low-carbon future is not realistic. 
A better approach is possible: Directly reward those who do invest in a low-carbon future, whether by enhancing energy efficiency or developing clean energy sources. 
For example, governments could implement accelerated depreciation schemes for investment in low-carbon businesses; offer subsidies for investment in energy-efficient buildings; and create policies that favor industrial innovation aimed at reducing emissions and boosting competitiveness. 
All of this would make fossil fuels less attractive to both investors and consumers. 
While an approach based on such positive incentives would be costlier than tax hikes in the short run, the long-term benefits can hardly be overstated. 
At a time of strong resistance to higher energy costs, this may well be among the most effective – not to mention politically savvy – mechanisms for advancing the goals set out in Paris. 

Development Beyond the Numbers 
NEW YORK – It has been said that statistics are people with the tears washed away. 
This is a message that attendees of the World Bank and International Monetary Fund spring meetings in Washington, DC, should bear in mind as they assess progress on global development. 
Despite the impressive gains many countries have made, hundreds of millions of people are still being left behind. 
To highlight this problem, the United Nations Development Program has made social and economic inclusion a major theme of its 2016 Human Development Report, “Human Development for Everyone.” 
The report offers an in-depth looks at how countries, with support from their partners, can improve development results for all of their citizens, especially the hardest to reach. 
Since the UNDP issued its first report in 1990, we have seen significant improvements made in billions of people’s lives worldwide. 
Back then, around 35% of humanity lived in extreme poverty. 
Today, that figure stands at less than 11%. 
Likewise, the proportion of children dying before their fifth birthday has been halved, partly because an additional two billion people now benefit from better sanitation and wider access to clean drinking water. 
We should take pride in these achievements; but we must not rest on our laurels. 
A sizeable number of people are still missing out on these gains. 
Worse, they are now in danger of being forgotten – literally so. 
Sometimes, they are not recorded in official statistics at all. 
And, even when they are, national averages can paint a distorted picture: an increase in average income, for example, might conceal the deepening poverty of some, as it is offset by large gains for a wealthy few. 
One of the most profound demographic shifts in recent years has been the massive expansion of a middle class in the global south. 
The convergence of global incomes has blurred the line between “rich” and “poor” countries. 
But, at the same time, inequality within many countries has increased. 
As a result, poverty – in all forms – is a growing problem in many countries, even as the number of people living in poverty worldwide has declined. 
Confronting this challenge will require us to rethink fundamentally what development should look like, which is why the UN’s Sustainable Development Goals, unlike the previous Millennium Development Goals, apply to all countries – not just the poorer ones. 
After decades of making steady development gains, what can we do differently to help the planet’s most disadvantaged people? 
As the latest Human Development Report makes clear, there is no simple answer. 
One reason is that those who are being left behind often face disadvantages on several fronts. 
They are not just short of money; often, they are also sick, uneducated, and disenfranchised. 
The problems that affect the world’s most disadvantaged people begin at birth, and worsen during their lifetime. 
As opportunities to break the cycle are missed, these disadvantages are passed on to subsequent generations, reinforcing their impact. 
Still, while today’s development challenges are numerous and complex, they also share common characteristics. 
Many of the disadvantaged belong to specific demographic groups that tend to fare worse than others in all countries, not least because they face similar economic, legal, political, and cultural barriers. 
For example, indigenous peoples constitute just 5% of the global population, but account for 15% of the world’s poor. 
And, to participate in work and community life, people with disabilities must overcome obstacles that the rest of us often do not even notice. 
Last but not least, women and girls almost everywhere continue to be underrepresented in leadership and decision-making circles, and they often work more hours for less money than their male counterparts. 
Although development policies will continue to focus on tangible outcomes – such as more hospitals, more children in school, and better sanitation – human development must not be reduced only to that which is quantifiable. 
It is time to pay more attention to the less palpable features of progress, which, while difficult to measure, are not hard to take a measure of. 
All people deserve to have a voice in the decisions that affect their lives; but the most marginalized in society are too often denied a say of any kind. 
Ensuring that those most in need are not forgotten – and that they have the freedom to make their own choices – is just as important as delivering concrete development outcomes. 
History has shown us that many of today’s challenges can be overcome in the years ahead. 
The world has the resources and the knowhow to improve the lives of all people. 
We just need to empower people to use their own knowledge to shape their futures. 
If we do that, more inclusive development will be within our reach. 

The Inclusive Road to Growth 
GENEVA – There is no bigger policy challenge preoccupying leaders around the world than meeting the need to expand participation in the benefits of economic growth and globalization. 
Indeed, a geographically and ideologically diverse consensus has emerged that a new – or at least much improved – model of economic development will be required if truly greater inclusiveness is to be achieved. 
Unfortunately, this political consensus has so far remained aspirational, rather than prescriptive. 
Policymakers have yet to develop an internationally recognized policy framework – with a corresponding set of indicators and measurable milestones – to guide countries targeting broad-based improvements in living standards, rather than simply continuing to use GDP growth as the bottom-line measure of national economic performance. 
The extent to which growth creates opportunities and improves living standards depends on an array of structural and institutional economic policies, including many in areas outside of education and redistribution (the areas most commonly featured in discussions about inequality). 
There is a growing recognition of the importance of institutions – particularly legal frameworks and public agencies that administer rules and incentives – in the development process. 
But this recognition has yet to penetrate fully the approach to economic growth that most economists and policymakers take. 
The role that institutions play in shaping economic growth was a key finding of the landmark 1993 World Bank study, The East Asian Miracle, which examined how eight countries in the region achieved “high growth and declining inequality” from 1965 to 1990. 
The Commission on Growth and Development, chaired by the Nobel laureate economist Michael Spence, reached a similar conclusion in its 2008 report, The Growth Report: Strategies for Sustained Growth and Inclusive Development. 
The lesson is also apparent in the economic history of the twentieth century, when – especially in the decades following the Great Depression – most of today’s advanced industrialized countries underwent a sustained process of institutional deepening that broadened the base and strengthened the resilience of their economies. 
Reforms targeting labor policy, the investment climate, social insurance, competition, education, and infrastructure created a more inclusive and more sustainable growth model by spreading purchasing power, which supported aggregate demand and reduced vulnerability to investment-driven booms and busts. 
It is a lesson that needs relearning today, as the world economy continues to struggle to find a more solid foundation for growth and escape the shadow of the 2008-2009 crisis. 
Adopting a more socially inclusive model of growth and development will require widening the lens through which priorities are set when shaping national economic strategies. 
Appropriate policies regarding macroeconomics, trade, and financial stability will remain crucial to establishing the basic conditions for the efficient allocation of resources underpinning growth. 
But such policies are only part of the solution. 
Developing domestic institutions and appropriate incentives in a broad range of other areas that are relevant for social inclusion will be vital to improving living standards, while reinforcing the growth process itself. 
Both types of policies – macroeconomic management and measures that boost inclusiveness – deserve equal attention in national economic strategies. 
It is important not to underestimate the cultural change that this will require of governments and economic advisers. 
The concept of “structural reform” usually refers to measures aimed at boosting economic growth by sharpening market signals and restoring the health of public finances. 
Such policies are often implemented in response to fiscal or balance-of-payments crises and frequently squeeze living standards in the short term. 
But the strengthening of institutions in areas that promote social inclusion is also a form of structural reform, in this case aimed at maximizing the contribution of growth to broad living standards and strengthening its resilience. 
Our research has identified 15 domains that are important for promoting social inclusion. 
These include educational opportunity and performance, the relationship between productivity and wage growth, the concentration of economic rents, the effectiveness of the financial system’s intermediation of investment in the real economy, physical and digital infrastructure, and the coverage and adequacy of basic social protections. 
They also include areas not traditionally considered equality-enhancing – such as facilitating asset-building through small-business and home ownership and combating corruption – but that are just as important as education or redistribution for improving living standards. 
There is no single ideal institutional mix for inclusive growth, but all countries should begin to think more systematically about strengthening their institutions and creating incentives to promote inclusive growth. 
There is much room for improvement. 
In cross-country comparisons, no country outperforms its peers in every domain. 
Indeed, not a single country scores above average across all 15. 
It is possible, indeed essential, to be pro-equality and pro-growth, to advocate strengthening social inclusion while promoting the efficiency of markets. 
An inclusive model for growth and development is inherently pro-labor and pro-business. 
It is time to put our aspirations to work. 

Decent Work, A Global Imperative 
DAVOS – The United Nations 2030 Agenda for Sustainable Development commits UN member states to “leave no one behind.” 
One crucial component of that commitment – encompassed in the International Labor Organization’s own agenda – is decent work for all. 
At a time when worker frustration and disillusionment is being expressed in elections across the world, this goal could not be more important. 
Nowadays, the expectation that each generation will be better off than the previous one, both socially and economically, is no longer automatic. 
For many, downward mobility has become the new normal. 
Little wonder, then, that long-simmering frustration with the way globalization has been handled and resentment at the unfair distribution of its gains have fueled the political backlash sweeping the world of late. 
This disillusionment arises, at least partly, from people’s own experience of work, whether exclusion from the labor market, poor working conditions, or low wages. 
In many parts of the world, including some European countries, unemployment has been persistently high in recent years. 
But even having a job is no guarantee of financial security: many employed people know that their jobs are vulnerable, and there has been inadequate progress in job quality, even in countries where aggregate economic indicators are improving. 
According to the ILO’s global wage report, Wage Inequality in the Workplace, published last month, global wage growth has decelerated since 2012, from 2.5% per year to 1.7% in 2015 – its lowest level in four years. 
Remove China, which experienced particularly rapid wage growth, and annual growth in global wages dropped from 1.6% to a mere 0.9%. 
Workers’ disillusionment is deepened by the knowledge that, as their average wages grow slowly or stagnate, the very wealthy are growing significantly wealthier. 
As the ILO’s report shows, while wages have climbed gradually across almost the entire income distribution in most countries, they have risen sharply for the top 10%, and even more for the top 1% of employees. 
In Europe, the highest-paid 10% of employees account for, on average, 25.5% of total wages, while the lowest-paid 50% get just 29.1%. 
The share of earnings taken by the top 10% is even higher in some emerging economies, such as Brazil (35%), India (42.7%), and South Africa (49.2%). 
In Europe, the top 1% earn about €90 ($95) per hour – eight times more than median-wage earners, and 22 times the average wage of the bottom 10%. 
We are now faced with the twin challenges of improving the lot of those at the lower end of the wage distribution, while creating enough new high-quality jobs for the tens of millions of new labor-market entrants each year. 
With the global economy having yet to recover fully from the global economic crisis that began a decade ago, meeting these challenges will be no easy feat. 
Indeed, it is likely that labor-force growth will continue to outstrip job creation. 
That is why the ILO’s World Employment and Social Outlook – Trends 2017 projects that just over 201 million people worldwide will be unemployed this year, with another 2.7 million joining their ranks in 2018. 
The world needs economic growth that is more sustainable, equitable, and job-rich. 
The key to success will be strong and relevant labor-market institutions, which rely on and advance internationally accepted principles and rights for workers. 
Minimum wages and collective bargaining can play an important role here. 
One remarkable trend of the last few years has been the adoption or increase of minimum wages by countries hoping to mitigate inequality, with Mexico being the most recent example. 
And the trend is set to continue: South Africa, for one, is also considering adopting a national minimum wage. 
This is good news. 
Recent evidence, including by the Minimum Wage Commission in Germany, shows that well-designed minimum wages – which meet the needs of workers and their families, while also accounting for economic conditions – can make a real difference at the lower end of the income distribution, without significantly harming employment. 
Action can also be taken at the international level, by implementing support systems to help advance key goals relating to decent work and economic inclusiveness. 
That is why the ILO and the World Bank have launched a Global Partnership for Universal Social Protection, which aims to ensure that social safety nets – including pensions and parental, disability, and child benefits – are made available to all people, covering the hundreds of millions worldwide who are currently unprotected. 
Expanding access to decent work opportunities is the most effective way to increase labor-market participation, lift people out of poverty, reduce inequality, and drive economic growth. 
It should be at the center of policymaking. 
The alternative is a dog-eat-dog world in which too many will feel left out. 
One need look no further than today’s headlines to see the instability and insecurity that can result – and has resulted – from this approach. 

The Economics of Inclusion 
CAMBRIDGE – Many people find economic growth to be a morally ambiguous goal – palatable, they would argue, only if it is broadly shared and environmentally sustainable. 
But, as my father likes to say, “Why make something difficult if you can make it impossible?” 
If we do not know how to make economies grow, it follows that we do not know how to make them grow in an inclusive and sustainable way. 
Economists have struggled with the tradeoff between growth and equity for centuries. 
What is the nature of the tradeoff? 
How can it be minimized? 
Can growth be sustained if it leads to greater inequality? 
Does redistribution hamper growth? 
I believe that both inequality and slow growth often result from a particular form of exclusion. 
Adam Smith famously argued that, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” 
So why would growth not include people out of self-interest, rather than requiring deliberate collective action? 
It is well known that levels of income are dramatically different around the world. 
Thanks to more than two centuries of sustained growth, average per capita income in the OECD countries is just under $40,000 – 3.3, 11.3, and 17.7 times more than in Latin America, South Asia, and Sub-Saharan Africa, respectively. 
Sustained growth has obviously not included the majority of humanity. 
What is less well known is that huge gaps exist within countries. 
For example, GDP per worker in the State of Nuevo León in Mexico is eight times that of Guerrero, while output per worker in the Department of Chocó in Colombia is less than one-fifth that of Bogotá. 
Why would capitalists extract so little value from workers if they could get so much more out of them? 
The answer is surprisingly simple: fixed costs. 
Modern production is based on networks of networks. 
A modern firm is a network of people with different expertise: production, logistics, marketing, sales, accounting, human-resource management, and so on. 
But the firm itself must be connected to a web of other firms – its suppliers and customers – through multi-modal transportation and telecommunication networks. 
To form part of the modern economy, firms and households need access to networks that deliver water and dispose of sewage and solid waste. 
They need access to the grids that distribute electricity, urban transportation, goods, education, health care, security, and finance. 
Lack of access to any of these networks causes enormous declines in productivity. 
Just think of how your life would change if you had to walk two hours each day to obtain drinking water or wood for fuel. 
But connecting to these networks involves fixed costs. 
Before anyone can consume a kilowatt-hour, a liter of water, or a bus ride, somebody has to get a copper wire, a pipe, and a road to their house. 
These fixed costs need to be recouped through long periods of use. 
If income is expected to be low (perhaps because of other missing networks), it does not pay to connect a firm or a household to the network, because the fixed costs will not be recouped. 
Growth is not inclusive because fixed costs deter markets from extending the networks that underpin it. 
Changes in these fixed costs have outsize effects on who is included. 
For example, the first telephone company started operations in 1878, while mobile phones are barely 25 years old. 
One might expect that the former would have diffused more than the latter, just because of the time advantage. 
Yet, in Afghanistan, there are 1,300 mobile phones for every landline. 
In India, there are 72 cellphone lines per 100 persons, but only 2.6 landlines. 
In fact, many Indians with mobile phones must defecate in the open because the median Indian does not have piped water in his house. 
In Kenya, where there are 50 mobile phones per 100 people, only 16% of the population has access to electricity. 
This reflects the fact that cellphone towers and handsets are much cheaper than pipes and copper wires, making it possible for the poor to pay the fixed costs. 
It is the fixed costs that limit the diffusion of the networks. 
So, a strategy for inclusive growth has to focus on ways of either lowering or paying for the fixed costs that connect people to networks. 
Technology can help. 
Clearly, cellphones have done wonders. 
Cheaper photovoltaic cells may enable remote villages to get electricity without the fixed costs of long transmission lines. 
Mobile banking may lower the fixed costs faced by traditional banks. 
But in other areas, the issue involves public policy. 
From its beginning in 1775, the US Postal Service was based on the principle “that every person in the United States – no matter who, no matter where – has the right to equal access to secure, efficient, and affordable mail service.” 
A similar logic led to the expansion of the interstate highway system. 
Obviously, all of this costs money, and it is here that priorities matter. 
Poor countries lack the money to connect every person to every network at once, which explains the huge regional differences in income. 
But too many resources are often allocated to palliative redistributive measures that address the consequences of exclusion rather than its causes. 
Countries such as Brazil, South Africa, Peru, Uganda, Guatemala, Pakistan, and Venezuela spend substantially more money on subsidies and transfers than on public investment to expand infrastructure networks, education, and health care. 
A strategy for inclusive growth must empower people by including them in the networks that make them productive. 
Inclusiveness should not be seen as a restriction on growth to make it morally palatable. 
Viewed properly, inclusiveness is actually a strategy that enhances growth. 

Redistribution or Inclusion? 
RIYADH – The issue of rising income inequality loomed large at this year’s World Economic Forum in Davos. 
As is well known, the United States’ economy has grown significantly over the past three decades, but the median family’s income has not. 
The top 1% (indeed, the top .01%) have captured most of the gains, something that societies are unlikely to tolerate for long. 
Many fear that this is a global phenomenon with similar causes everywhere, a key claim in Thomas Piketty’s celebrated book Capital in Twenty-First Century. 
But this proposition may be dangerously misleading. 
It is crucial to distinguish inequality in productivity among firms from unequal distribution of income within firms. 
The traditional battle between labor and capital has been about the latter, with workers and owners fighting over their share of the pie. 
But there is surprisingly deep inequality in firms’ productivity, which means that the size of the pie varies radically. 
This is especially true in developing countries, where it is common to find differences in productivity of a factor of ten at the provincial or state level and many times higher at the municipal level. 
These two very different sources of inequality are often conflated, which prevents clear thinking on either one. 
Both are related to a similar feature of modern production: the fact that it requires many complementary inputs. 
This includes not only raw materials and machines, which can be shipped around, but also many specialized labor skills, infrastructure, and rules, which cannot be moved easily and hence need to be spatially collocated. 
A shortage of any of these inputs can have disastrous effects on productivity. 
This complementarity makes many parts of the developing world unsuitable for modern production, because key inputs are missing. 
Even within cities, poor areas are so disconnected and inadequately endowed that productivity is dismal. 
As a result, there are huge disparities among firms in terms of efficiency – and hence in the income they can distribute. 
Given productivity constraints, redistribution is only palliative, not curative. 
To address the problem requires investing in inclusion, endowing people with skills, and connecting them to the inputs and networks that can make them productive. 
The dilemma is that poor countries lack the means to connect all places to all inputs. 
They are faced with the choice of connecting a few places to most inputs and getting high productivity there, or putting some of the inputs in all places and getting very little productivity growth everywhere. 
That is why development tends to be unequal. 
The other problem of modern production is how to distribute the income generated by all of the complementary inputs. 
Today, production is carried out not just by individuals, or even by teams of people within firms, but also by teams of firms, or value chains. 
Just look at the credits at the end of any contemporary film. 
Complementarity thus creates a problem of attribution. 
How should credit for the final product be allocated, and to whom? 
Economists have traditionally believed that each team member is paid her opportunity cost, that is, the highest income she could receive if she were kicked off the team. 
In this context, if markets are characterized by what economists call perfect competition, once the opportunity cost of all inputs has been paid, there is nothing left to distribute. 
But in real life, the team is worth more – often much more – than the opportunity cost of its members. 
Who gets to pocket this “team surplus”? 
Traditionally, the assumption has been that it accrues to shareholders. 
But the rise of extreme CEO compensation in the US, documented by Piketty and others, may reflect CEOs’ ability to disrupt the team if they do not get part of the surplus. 
After all, CEOs experience precipitous income declines when they are kicked out, indicating that they were paid far more than their opportunity cost. 
In the case of successful start-ups, the money paid when they are acquired or go public accrues to those who put the team together. 
For more conventional value chains, the surplus tends to go to the inputs that have greater market power. 
Business schools teach their students to capture the maximum surplus in the value chain by focusing on inputs that are difficult for others to provide while ensuring that other inputs are “commoditized” and hence cannot capture more than their opportunity cost. 
The gains do not accrue to the most deserving. 
The rise of “capital,” which Piketty documents in France and other countries, is caused mostly by the appreciation of real estate, simply because good locations become more valuable in an increasingly networked economy. 
As with land, the current intellectual property-rights regime, by over-protecting old ideas, may provide market power that not only exacerbates income inequality but also hurts innovation. 
This means that policies aimed at ensuring an equitable outcome should rely on either owning or taxing the inputs that capture the “team surplus.” 
One reason why Singapore has a well-funded government, despite low taxes, is that its successful policies caused the land and real estate it owned to explode in value, generating a huge revenue stream. 
Similarly, the Colombian city of Medellín funds itself from the profits of its successful utility company, which is now a multinational player. 
The economist Dani Rodrik recently suggested that governments should fund themselves from the dividends earned by investing in public venture funds, thus socializing the gains from innovation. 
Of course, capturing this surplus may allow for income redistribution, as many suggest; but a much bigger and sustainable bang can be achieved if the proceeds go instead to financing inclusion. 

Inconvenient Truths for Al Gore 
Cinemas everywhere will soon be showing former US Vice President Al Gore’s film on global warming. 
“An Inconvenient Truth” has received rave reviews in America and Europe, and it will most likely gain a large worldwide audience. 
But, while the film is full of emotion and provocative images, it is short on rational arguments. 
“An Inconvenient Truth” makes three points: global warming is real; it will be catastrophic; and addressing it should be our top priority. 
Inconveniently for the film’s producers, however, only the first statement is correct. 
While it’s nice to see Gore bucking the trend in a nation where many influential people deny that global warming even exists, many of his apocalyptic claims are highly misleading. 
But his biggest error lies in suggesting that humanity has a moral imperative to act on climate change because we realize there is a problem. 
This seems naïve, even disingenuous. 
We know of many vast global challenges that we could easily solve. 
Preventable diseases like HIV, diarrhea, and malaria take 15 million lives each year. 
Malnutrition afflicts more than half the world’s population. 
Eight hundred million people lack basic education. 
A billion don’t have clean drinking water. 
In the face of these challenges, why should stopping climate change be our top priority? 
Gore’s attempt at an answer doesn’t stand up to scrutiny. 
Gore shows that glaciers have receded for 50 years. But he doesn’t acknowledge they have been shrinking since the Napoleonic wars in the early 1800’s – long before industrial CO2 emissions. 
Likewise, he considers Antarctica the canary in the coalmine, but again doesn’t tell the full story. He presents pictures from the 2% of Antarctica that is dramatically warming, while ignoring the 98% that has largely cooled over the past 35 years. 
The UN climate panel estimates that Antarctica’s snow mass will actually increase during this century. 
And, whereas Gore points to shrinking sea ice in the Northern Hemisphere, he fails to mention that ice in the Southern Hemisphere is increasing. 
The movie shows scary pictures of the consequences of the sea level rising 20 feet (seven meters), flooding large parts of Florida, San Francisco, New York, Holland, Calcutta, Beijing, and Shanghai. 
Were realistic levels not dramatic enough? 
The United Nations panel on climate change suggests a rise of only 1-2 feet during this century, compared to almost one foot in the last century. 
Similarly, Europe’s deadly heat waves in 2003 lead Gore to conclude that climate change will mean more fatalities. 
But global warming would mean fewer deaths caused by cold temperatures, which in most of the developed world vastly outweigh deaths caused by heat. 
In the UK alone, it is estimated that the temperature increase would cause 2,000 extra heat deaths by 2050, but result in 20,000 fewer cold deaths. 
Financial losses from weather events have increased dramatically over the past 45 years, which Gore attributes to global warming. 
But all or almost all of this increase comes from more people with more possessions living closer to harm’s way. 
If all hurricanes had hit the US with today’s demographics, the biggest damage would have been caused not by Katrina, but by a hurricane in 1926. 
Allowing for changes in the number of people and their wealth, flood losses have actually decreased slightly. 
The movie invites viewers to conclude that global warming caused Hurricane Katrina, with Gore claiming that the warm Caribbean waters made the storm stronger. 
But when Katrina made landfall, it was not a catastrophic Category 5 hurricane; it was a milder Category 3. 
In fact, there is no scientific consensus that global warming makes hurricanes more destructive, as he claims. 
The author that Gore himself relies on says that it would be “absurd to attribute the Katrina disaster to global warming.” 
After presenting the case for the potentially catastrophic effects of climate change, Gore unveils his solution: the world should embrace the Kyoto Protocol, which aims to cut carbon emissions in the developed countries by 30% by 2010. 
But even if every nation signed up to Kyoto, it would merely postpone warming by six years in 2100, at an annual cost of $150 billion. 
Kyoto would not have saved New Orleans from Hurricane Katrina. 
But improved levees and maintenance could have. 
While Gore was campaigning for Kyoto in the 1990’s, a better use of resources would have been to bolster hurricane defenses. 
Indeed, the real issue is using resources wisely. 
Kyoto won’t stop developing countries from being hardest hit by climate change, for the simple reason that they have warmer climates and fewer resources. 
But these nations have pressing problems that we could readily solve. 
According to UN estimates, for $75 billion a year – half the cost of implementing the Kyoto Protocol – we could provide clean drinking water, sanitation, basic health care, and education to every single human being on Earth. 
Shouldn’t that be a higher priority? 
Recent hurricanes killed thousands in Haiti, and not in Florida, because Haiti is poor and cannot afford even basic preventive measures. 
Combating disease, hunger, and polluted water would bring immediate benefits to millions and allow poorer countries to increase productivity and break the cycle of poverty. 
That, in turn, would make their inhabitants less vulnerable to climate fluctuations. 
At the climax of his movie, Gore argues that future generations will chastise us for not having committed ourselves to the Kyoto Protocol. 
More likely, they will wonder why, in a world overflowing with “inconvenient truths,” Gore focused on the one where we could achieve the least good for the highest cost. 

China’s Multilateral Financial Mobilization 
LONDON – The board of the European Bank for Reconstruction and Development recently approved China’s application to join – an application a decade in the making – and sent it on to member governments for final approval. 
But EBRD membership is only one expression of China’s rapidly growing role in the world’s international financial institutions. 
The question now is whether China will spur change within them, or vice versa. 
The global financial crisis shook up the international financial architecture, catching many institutions off guard. 
The International Monetary Fund, for example, had actually pursued sharp downsizing in the preceding years. 
But it also allowed them to prove their mettle. 
Many of them – not least the IMF, but also the EBRD and the European Investment Bank – eventually showed that they could respond flexibly and, as a result, have gained expanded mandates and more capital. 
The crisis also undermined the legitimacy of the G-7 – the countries at the root of the problem – while invigorating the G-20. 
Amid these transformations, China gained an opening to boost its global influence – one that it is determined to exploit, despite resistance from some corners. 
It plans to use its presidency of the G-20 in 2016, for example, to advance an ambitious agenda. 
In fact, Chinese international engagement is now occurring on a scale and at a rate never seen before. 
China is a member of many multilateral institutions – including several regional players like the African Development Bank (AfDB) and the Inter-American Development Bank (IDB) – with which it is deepening its relationships, especially through co-investment in projects around the world. 
For example, China significantly ratcheted up its commitment to the AfDB last year through the $2 billion Africa Growing Together Fund. 
Similarly, China’s sovereign wealth funds have served as important anchor investors in the vehicles designed by the World Bank’s International Finance Corporation and the EBRD to bring long-term institutional capital into their projects. 
One of those funds, SAFE, is currently the only investor in the EBRD vehicle – and China has not even formally joined the organization yet. 
China is also forging new institutions. 
The establishment of the Asian Infrastructure Investment Bank (AIIB) captured global headlines earlier this year, not just because of strong US resistance, but also because countries like Britain and Germany joined anyway. 
China also played a leading role in the formation, with its BRICS counterparts (Brazil, Russia, India, and South Africa), of the New Development Bank (NDB), now headquartered in Shanghai. 
Then there is China’s $40 billion Silk Road Fund, intended to support the infrastructure projects needed to underpin President Xi Jinping’s “one belt, one road” strategy, which aims to improve trade and communication linkages across Eurasia. 
China’s most ambitious effort to date, the Silk Road Fund dwarfs the activities of the more traditional international financial institutions, in terms of both scale and range of activities. 
The Fund’s first initiative, the $1.65 billion Karot hydropower dam in Pakistan, will entail both direct lending to the project and equity investment in the company responsible for building the dam and managing it for 30 years. 
As it stands, the Silk Road Fund is unilateral, placing it in the same category as the China Development Bank and the state-owned investment conglomerate CITIC. 
But the Chinese authorities have said that it is open for others to join, though that seems unlikely, given the scale of the Chinese commitment. 
Despite the remarkable size of China’s investment projects, the country’s leaders have so far remained relatively conservative in terms of institutional innovation. 
Over the last year, however, Chinese Communist Party officials have mooted a proposal for a more experimental new multilateral financial institution geared toward “restoring the environment” – that is, supporting large projects aimed at land reclamation, water purification, and improvements in air quality. 
Getting such an institution off the ground will not be easy, given the need for global coordination to bring potential shareholders together and for large subsidies to make investments viable. 
But that kind of bold institutional innovation could fill an important gap in the global financial architecture, and cement China’s leadership in financing environmental remediation. 
In the meantime, Chinese institutions are innovating on a smaller scale, as they spearhead a leaner and faster approach to financing. 
For example, the AIIB’s inaugural president, Jin Liqun, has announced plans to eliminate some of the most inefficient features of existing institutions, like the resident board and nationality restrictions on hiring. 
Nonetheless, China’s growing global financial role is not likely to change profoundly how existing institutions operate. 
Of course, as efforts like Jin’s highlight the flaws in existing structures, they may help to inspire reform. 
And the EBRD can undoubtedly benefit from China’s experience with experimentation and scaling up. 
But the main aim of the AIIB and the NDB seems not to be to transform the multilateral financial landscape, but to add capacity, while showing that China can build state-of-the-art institutions. 
And when it comes to the EBRD, China’s stake will be tiny, at least at first; the Chinese say they are there to learn. 
Indeed, co-investment with the EBRD can provide Chinese companies with local knowledge – and potentially even protection – as they navigate new markets. 
For now, increased engagement in multilateral institutions seems likely to change China more than it changes the institutions, even as China’s voting power increases to reflect better its growing contributions. 
A closer look at the experiences of long-standing institutions – including working with civil-society groups and promoting local ownership of policies – will help China hone its strategy for engagement in Africa and elsewhere. 
It may even enable China to improve its own development model. 
In the longer term, however, the development challenges that China faces at home – particularly rapid environmental deterioration – could drive it to take a more transformative role, pushing for institutional innovation globally. 

How Europe Can Learn to Stop Worrying and Love Power 
PARIS – US President Donald Trump and European Commission President Jean-Claude Juncker may have averted a trade war last month, but the challenges confronting the European Union are far from resolved. 
In today’s increasingly Hobbesian global environment, the EU can survive only by increasing its capacity to project power – no easy feat for an entity that was formed precisely as a repudiation of power politics. 
With the 1957 Treaty of Rome, Europe shed what remained of its militaristic impulses and focused on building a sprawling and peaceful single market. 
From then on, Europe’s only means of projecting power would be its trade policy. 
Yet that policy has never been guided by strategic thinking, leaving the EU with only limited global influence, despite its tremendous success in world markets. 
The time has come for Europe to reestablish itself as a true global player, not by attempting to emulate a classic superpower, but rather by consolidating and deploying different types of power. 
Europe already has considerable normative power – that is, the capacity to create global standards through the so-called Brussels effect – which can be seen in its efforts to rein in technology companies. 
The recently enacted General Data Protection Regulation, for example, set guidelines for the collection and processing of personal information of individuals within the EU. 
Now, digital platforms – including powerful American companies – are scrambling to adjust. 
The “Big Four” US tech firms – Alphabet Inc. (Google’s parent company), Apple Inc., Facebook, and Amazon – are also facing pressure from the EU stemming from their dominant market position. 
Yet the EU has often failed to recognize its normative power, let alone take full advantage of it. 
This both reflects and reinforces weakness in three areas: self-esteem, risk awareness, and the capacity for action. 
Self-esteem includes the belief that the EU is a worthy undertaking, the confidence to express that publicly, and recognition of the EU’s true potential for power projection. 
Such a dispensation is severely lacking in many parts of the EU, beginning with Germany, which, despite having regained confidence in its own future, jealously guards its resources. 
As Trump berates Germany for accumulating surpluses without contributing sufficiently to transatlantic defense, the country should be all the more motivated to use its capabilities to strengthen Europe. 
But while the discourse in Germany on resource-sharing has begun to shift, concrete changes will take time. 
Europe’s unwillingness to nurture and deploy its clout contrasts sharply with America’s assertive use of its market power to advance its interests and preferences. 
For example, since Trump announced his decision to withdraw from the 2015 Joint Comprehensive Plan of Action (JCPOA) – better known as the Iran nuclear deal – and reinstate sanctions on Iran, many European companies, fearing loss of access to the US market, have decided to withdraw from the country. 
To convince European companies to remain in Iran, the European Commission updated the 1996 Blocking Regulation, which forbids actors under EU jurisdiction from complying with extraterritorial sanctions, allows companies to recover damages from such sanctions, and nullifies the effect in the EU of any foreign court’s judgment based on them. 
But the update has proved ineffective, as exemplified by the situation faced by the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the secure messaging system used for global cross-border financial transactions. 
As Iran learned in 2012, losing access to the SWIFT network essentially means losing access to the international financial system. 
Yet that is exactly what the US is pushing for: if SWIFT fails to cut off Iran by early November, it will face countermeasures. 
SWIFT’s compliance with that demand, however, would all but destroy any remaining incentive for Iran to remain in the JCPOA. 
This would amount to a major political failure for Europe, because SWIFT is under EU jurisdiction. 
Europe has shown a self-defeating lack of confidence in the euro as well. 
Although the euro is the world’s second most important currency, it lags behind the dollar on almost all metrics, increasing the EU’s vulnerability to US trade sanctions. 
The second weakness the EU needs to address is risk awareness. 
For example, China needs access to Europe’s industrial technology to realize its economic ambitions, and it needs access to European ports to complete its Belt and Road Initiative. 
Yet Europe is allowing itself to be effectively plundered, not least by China’s takeover of ports and airport facilities. 
The EU-China relationship must be made more reciprocal, with the EU – and, in particular, the Southern and Eastern European countries that have welcomed Chinese investments with open arms – recognizing the security risks posed by China’s activities. 
For that to happen, however, Europe will need a more united approach to Russia, which, despite posing less of a threat to the EU than China does, is keen to highlight – and exacerbate – internal division. 
How can one blame Greece for selling ports to the Chinese, while Germany pursues the Nord Stream 2 pipeline project, which will increase Europe’s energy dependency on Russia? 
All of this is complicated by escalating tensions between Europe and the United States, which, among other things, is spoiling cooperation to contain China. 
This is where the capacity for action comes in. 
Rather than waiting for someone else to push back against the Trump administration’s demolition of multilateral structures, Europe must take the initiative, imagining a system without the US. 
This means not only ensuring that the international trade regime can survive without the US, but also developing a military capability that can increase the EU’s geopolitical credibility and shift the global balance of power. 
Here, French President Emmanuel Macron’s initiative to create a European military force beyond NATO is essential. 
Its success will hinge on a united, cooperative approach that potentially even includes the United Kingdom. 
The challenge is obvious. 
But the payoff – for the EU and the world – would be well worth the effort. 

India, Iran, and the Case for Double Standards 
All but lost in the controversies surrounding Iraq and Iran is a major initiative involving a third “I” country: India. 
Sometime this year, the United States Congress is likely to vote on the “US-India Civil Nuclear Cooperation Initiative,” signed when President Bush visited New Delhi in March. 
The agreement paves the way for American exports of nuclear technologies and materials for use in India’s civilian nuclear program. 
In return, India has pledged to open 14 of its 22 existing and planned nuclear power reactors, as well as all future civil reactors, to international inspection. 
The agreement matters for at least two reasons. 
First, the accord symbolizes the arrival of a new geopolitical relationship between the world’s two largest democracies that were often on opposite sides during the Cold War. 
This development may be of historic importance if it not only leads to a deepening of US-Indian technical and economic ties, but also strengthens their ability to tackle regional and global challenges, ranging from the proliferation of nuclear weapons to climate change. 
But the proposed US-India accord is attracting notice for a second, and far more controversial, reason: concern that it could weaken, rather than advance, efforts to resist the further worldwide spread of nuclear weapons. 
Critics charge that the agreement undermines the Nuclear Non-Proliferation Treaty (NPT) by letting India have its cake (nuclear weapons) and eat it, too (by giving it access to nuclear fuel and technology). 
They allege that the agreement creates a double standard, according to which only some countries may possess nuclear weapons. 
To be fair, the critics are right, at least in part. 
There is a double standard at work. 
But there is nothing new about that. 
The NPT, some four decades old, is based on a double standard that gives only five countries – China, France, Russia, the United Kingdom, and the US – the right (for how long is not defined) to possess nuclear weapons. 
Moreover, the world seems to have learned to tolerate the reality that three other countries – Israel, India, and Pakistan – also possess nuclear weapons. 
Where the critics of the proposed US-India accord are wrong is in charging that such a double standard is wrong when it comes to India because it opens the way for countries such as North Korea and Iran to develop nuclear weapons. 
Not all countries are equal. 
India is a democracy. 
Transparency and the rule of law are the norm, and its government does all it can to fight terrorism. 
There is no reason to believe that India will promote the spread of nuclear fuel, technology, or weapons to any other party or country; on the contrary, it is committed to preventing this. 
This is not true of either North Korea or Iran. 
The former is arguably the most closed, tyrannical, and militarized society in the world, with a long record of irresponsible exports of dangerous technologies. 
Iran offers official support to terrorists and its president has threatened publicly to destroy Israel. 
The world has good reason to be far less tolerant of what North Korea or Iran do in the realm of nuclear weapons and to reject their calls for equal treatment with India. 
Indeed, if there is a danger in the proposed US-India accord, it is the possibility that either North Korea or Iran might conclude that it is only a matter of time before the world comes to accept their nuclear status. 
Here the US and others must disabuse them. 
The message seems to have gotten through to North Korea; we have seen no nuclear weapons test, despite its probable ability to so. 
China, the transit route for most of what goes enters and leaves North Korea, understands that were North Korea to cross this red line, it would risk US military reprisal and possibly lead Japan and/or South Korea to rethink their nuclear weapons policy. 
None of these outcomes is in China’s strategic interest. 
Unfortunately, there is no country in a position to influence Iran to the extent that China can influence North Korea. 
The situation is made more difficult by the fact that oil prices are already at a record high, while US ground forces are busy in Iraq, thus reducing the credibility of American military threats to Iran. 
Iran’s leaders, though, would be unwise to proceed with an unconstrained nuclear program and discount the possibility of US military action. 
This said, a US preventive strike at Iran’s nuclear-related installations is not in the interest of either country. 
The potential for loss of life, for Iranian retaliation, and for global economic disruption is high. 
Both countries – indeed, the world – would be better served by a diplomatic outcome in which Iran accepted severe limits on any independent uranium enrichment activity it could undertake and agreed to place all of its nuclear-related facilities under highly intrusive international inspection in exchange for economic benefits and security assurances. 
Better yet would be if Iran turned to Russia or the IAEA for uranium-generated electrical power. 
Direct US-Iran talks should be convened if they are required to bring about any such agreement. 
Iran’s calculations will not be affected by what happens between the US and India. 
Rather, Iranian policy will be shaped by its domestic politics, by the ability of the international community to present a united front, and by the willingness of the US to put forth a reasonable diplomatic offer against the backdrop of sanctions and potential military strikes should diplomacy fail. 
The stakes could hardly be greater. 
It is Iran, not India, that we should all be worried about. 

India: No Longer Handcuffed to History 
NEW DELHI – A recent court ruling has revealed India’s strengths and limitations as it grapples with its transformation from a land handcuffed to history–ever since the Partition of 1947, which carved Pakistan out of its stooped shoulders – into a modern global giant. 
The High Court of India’s most populous state, Uttar Pradesh, finally decided a 61-year-old suit over possession of a disputed site in the temple city of Ayodhya, where, in 1992, a howling mob of Hindu extremists tore down the Babri Masjid mosque. 
The mosque was built in the 1520’s by India’s first Mogul emperor, Babur, on a site traditionally believed to have been the birthplace of the Hindu god-king Ram, the hero of the 3,000-year-old epic, the Ramayana. 
The Hindu zealots who destroyed the mosque vowed to replace it with a temple to Ram, thereby avenging 500 years of history. 
India is a land where history, myth, and legend often overlap; sometimes Indians cannot tell the difference. 
Many Hindus claim that the Babri Masjid stood on the precise spot of Ram’s birth and had been placed there by Babur to remind a conquered people of their subjugation. 
But many historians – most of them Hindu – argue that there is no proof that Ram ever existed in human form, let alone that he was born where believers claim. 
More to the point, they argue, there is no proof that Babur demolished a Ram temple to build his mosque. 
Thus, to destroy the mosque and replace it with a temple was not righting an old wrong but perpetrating a new one. 
The Archaeological Survey of India, however, reported the existence of ruins beneath the demolished mosque that might have belonged to an ancient temple. 
The dispute remained intractable, and dragged interminably through the courts. 
To most Indian Muslims, the dispute is not about a specific mosque. 
The Babri Masjid had lain unused for a half-century before its destruction, as most of Ayodhya’s Muslims had emigrated to Pakistan after Partition. 
Rather, the issue was their place in Indian society. 
For decades after independence, Indian governments guaranteed Muslims’ security in a secular state, permitting the retention of Islamic “personal law” separate from the country’s civil code and even subsidizing pilgrimages to Mecca. 
Three of India's Presidents have been Muslim, as have been innumerable cabinet ministers, ambassadors, generals, and Supreme Court justices, not to mention cricket captains. 
Indeed, until at least the mid-1990’s, India’s Muslim population was greater than that of Pakistan (which has since pulled ahead, thanks to its soaring birthrate). 
For many years at the cusp of the new century, India’s richest man (the information-technology czar Azim Premji) was a Muslim. 
The destruction of the mosque thus felt like an utter betrayal of the compact that had sustained the Muslim community as a vital part of India’s pluralist democracy. 
But the Hindus who attacked the mosque had little faith in the institutions of Indian democracy. 
They view the state as soft, pandering to minorities out of misplaced Westernized secularism. 
To them, an independent India, freed after nearly 1,000 years of alien rule (first Muslim, then British) and rid of a sizable portion of its Muslim population by Partition, is obliged to embody and assert the triumphant indigenous identity of the 82% of the population who consider themselves Hindu. 
These zealots are not fundamentalists in any common sense of the term, since Hinduism is a religion without fundamentals: there is no Hindu pope, no Hindu Sabbath, no single Hindu holy book, and no such thing as a Hindu heresy. 
Hindu “fundamentalists” are, instead, chauvinists, whose religious faith is rooted not in any of Hinduism’s profound philosophical and spiritual underpinnings, but in its role as an alternative source of collective, if not “national,” identity. 
For them, Hinduism is a flag, not a doctrine. 
Indeed, these extremists can hardly claim to espouse Hinduism, which stands out not only as an eclectic embodiment of tolerance, but also as the only major religion that does not claim to be the sole true one. 
All ways of worship, Hinduism asserts, are valid, and religion is an intensely personal matter related to the individual’s self-realization in relation to God. 
Such a faith understands that belief is a matter of hearts and minds, not of bricks and stone. 
The true Hindu seeks no revenge upon history, for he understands that history is its own revenge. 
The court judgment gives two-thirds of the disputed site to two Hindu organizations, and one-third to Muslims, which suggests a solution that might permit the construction of both a mosque and a temple on the same site. 
The court’s decision thus is an affirmation of Indian pluralism and of the rule of law. 
What the court has done is to craft a solution that no political process could have arrived at independently, but which takes the dispute off the streets. 
Otherwise, the violence would continue, spawning new hostages to history – and ensuring that future generations would be taught new wrongs to set right. 
The judgment is likely to be appealed to the Supreme Court by one side or the other. 
But it reminds the world that democratic India can overcome its most fundamental difficulties without violence or revolution. 
In so doing, it is clear that India is ready to leave behind the problems of the sixteenth century as it takes its place in the twenty-first. 


India at the UN High Table 
NEW DELHI – Indian diplomacy began 2011 with election to the chair of the United Nations Counter-Terrorism Committee, a body of some importance to the country (and one which many thought India might not be asked to lead, given its strong feelings on the issue). 
Coming in the wake of India’s record margin of victory in the race for a non-permanent seat on the Security Council, this news confirms India’s standing in the world and the contribution it is capable of making on the Council. 
With such endorsements, however, expectations are high, and India’s government will have to think about how they can best be fulfilled. 
This is an unusual year at the UN high table. 
Several powerful states, whose growing global role has made them aspirants to permanent seats on a reformed Security Council, will serve alongside India. 
Germany and South Africa were elected as non-permanent members at the same time, while Brazil and Nigeria are halfway through their two-year-terms. 
This also means that four international groupings will be represented on the Council in 2011: the Russia-India-China triumvirate, whose foreign ministers meet twice a year; the BRICs, which adds Brazil to the list; the India-Brazil-South Africa alliance of the three largest southern hemisphere powers; and BASIC, which brought Brazil, South Africa, India, and China together during the climate-change negotiations in Copenhagen last year. 
India is the only country that belongs to all four. 
That not only highlights the extent to which India has become a fulcrum in global politics, but also points to the exceptional composition of the new Security Council. 
Half the members of the G-20, the grouping that is now the world’s premier forum on international economic questions, will be on the Council, dealing with issues of global peace and security. 
The five permanent Security Council members – the US, Britain, France, China, and Russia – will not be able to take these members for granted. 
They have become accustomed in recent years to making deals among themselves and more or less imposing them on the ten non-permanent members. 
But the five big countries now also on the Council will expect to be consulted; their acquiescence on key questions cannot simply be assumed. 
At the same time, the performance on the Council of those countries that aspire to permanent membership will be seen as a harbinger of what would come if they were to succeed. 
This puts the spotlight on India all the more. 
One immediate implication of serving on the Council will be the need to take positions on matters that in recent years some Indian mandarins have preferred to duck – for example, South Sudan, whose referendum on independence threatens to spark serious violence in an area where Indian UN peacekeepers are already serving. 
Also during India’s first month as a Council member, the future of the UN peacekeeping operation in neighboring Nepal will be addressed. 
Before long, the Council will also have to consider the implications of the likely commencement of a US troop drawdown in Afghanistan, another area of direct importance to India’s national security. 
Issues like sanctions on Iran, the stop-and-start Middle East peace process, and the world’s response to a likely change of leadership in North Korea, will almost certainly appear on the Council’s agenda as well. 
All are matters that call for creative and courageous thinking that transcends entrenched positions or reflexive solidarity with “non-aligned” countries. 
India will also have to reconsider its traditional opposition to the Council’s tendency to broaden its mandate by taking on issues that India believes fall within the General Assembly’s jurisdiction. 
The Council has tended to stretch into areas like HIV/AIDS, climate change, and women’s empowerment, which inflate the term “peace and security” beyond recognition. 
And yet, as a member of the G-20 and the Security Council, India may well see an interest in bringing up issues of food security or energy security, which touch on both groups’ core concerns. 
There are serious staffing implications with respect to Security Council membership as well. 
The need to acquire expertise on diverse issues and to participate in the adoption of roughly 60 resolutions a year (not to mention Presidential Statements on the same issues, which have less legal force but whose adoption requires unanimity) will test India’s capacity and negotiating skills. 
Various sub-committees and working groups of the Council (including the Counter-Terrorism Committee) will also require full-time attention. 
In August 2011, India will preside over the Council by alphabetical rotation, and may find itself playing a key role in the election (most likely the re-election) of the UN Secretary-General, which must take place before the end of the year. 
All in all, India’s place on the Security Council offers an extraordinary opportunity, after two decades of absence from the global high table, to demonstrate to the world what it is capable of. 
It should emerge from the experience with its reputation and credibility as a major global player enhanced. In any case, the world will be watching. 

India’s Cow Vigilantes 
NEW DELHI – Indian politics continues to amaze and appall. 
The surge in cow vigilantism – a uniquely Indian phenomenon that has lately begun to flourish under the Bharatiya Janata Party (BJP) government – is no exception. 
Many orthodox Hindus, particularly in the northern Indian states that comprise the so-called Cow Belt, worship the cow as gau mata, the “mother of all,” which provides nourishment and sustenance through its milk – not its meat. 
Refusing to eat beef is common in these states. 
But it is not always a personal choice. 
Several Indian states have passed laws outlawing cow slaughter, and some have prohibited the possession and consumption of beef altogether. 
Cow slaughter and beef consumption are fully legal in just five of India’s 29 states, mainly in the south and northeast. 
In the past, cow-protection laws have been weakly enforced, if at all; the police have better things to do than to check people’s kitchens, after all. 
But since the victory of the Hindu-chauvinist BJP in the 2014 general election, a wave of religious triumphalism has swept India, bringing with it not just new cow-protection laws, but also vociferous demands for their strict enforcement. 
Gau Rakshak Samitis, or “cow protection societies,” have been revived, and their members sometimes take it upon themselves to ensure that cows are not slaughtered or eaten. 
Making matters worse, the cause of cow protection has now been linked to another persistent and destructive custom in Indian society: violence against Muslims and Dalits (formerly called “untouchables”). 
Indeed, the Cow Belt, where cow vigilantism is most rampant, is also a hub of atrocities against Dalits, 63% of which occur in just four states: Uttar Pradesh, Bihar, Madhya Pradesh, and Rajasthan. 
It is no coincidence that these are also the states where the BJP fared best in 2014. 
The link between cows and Dalits is well known. 
Cows may be considered holy, but they are not immortal, and when they die (ideally of natural causes), someone must dispose of their carcasses. 
For centuries, that job has fallen to Dalits, who collect the carcasses, skin them and sell their hides to tanners and leather-makers, deliver the meat to Muslim butchers (where it is legal), and bury or cremate what remains. 
It is a livelihood for a group with few economic opportunities – one that benefits the many Hindus who would not want to perform such an unpleasant task. 
But several recent incidents have shaken the foundations of this arrangement. 
In the state of Gujarat, four Dalit youths caught skinning a cow were stripped, tied, and beaten with iron rods by cow vigilantes who accused them of killing the animal (they had not). 
In BJP-ruled Madhya Pradesh, two Dalit women were assaulted for supposedly carrying illegal cow meat (it was legal buffalo meat). 
In Punjab, two young Dalits were beaten and urinated upon for the same “crime.” 
A 16-year-old Kashmiri Muslim boy was murdered for having hitched a ride on a truck that was transporting cattle. 
Such incidents have heightened the sense of vulnerability felt by many who do not necessarily share the vigilantes’ reverence for cows. 
They have also led to serious economic challenges for some groups. 
Farmers who raise their cows with care and respect may not be able to afford to continue caring for those that are too old to produce milk. 
In the past, they would address this by quietly selling the aged cows either to local butchers or to those who would transport them to states where cow slaughter is legal. 
But, because that would be far too dangerous in the current political climate, many farmers are being driven into debt caring for old cows, while the cow population in India becomes increasingly unsustainable. 
Moreover, Dalits are increasingly refusing to dispose of cow carcasses. 
After the Gujarat incident, one group of Dalits in the state declared outright their intention to suspend their traditional duties. 
“If the cow is your mother,” they challenged upper-caste Hindus, “why don’t you bury her?” 
Where has the central government been as all of this has been happening? 
Initially, it did not condemn cow vigilantism. 
India’s social justice minister, whose principal responsibility is to promote the welfare of India’s Dalits, expressed regret not for the vigilantes’ violent actions, but for the fact that they were spurred by ill-founded rumors. 
This view was reflected in the government’s response to an attack in Uttar Pradesh, where a mob lynched a Muslim and beat his son nearly to death, simply because they suspected that he had killed a cow. 
Rather than leaping to the victims’ defense, the authorities launched a forensic investigation into whether the meat in his refrigerator was beef (it was not). 
The implication was clear: violence is unjustifiable only if the victim has not actually killed or eaten a cow. 
But on August 6, Prime Minister Narendra Modi finally broke his silence on the issue, warning people to beware of the fake Gau Rakshaks (protectors of cows) who are trying to create social conflict. 
“All states should take stern action against these people,” he declared. 
Modi’s words surely came as a relief to those who doubted the government’s willingness to stand up against its own sympathizers. 
Yet cow vigilantism is far from extinguished in India. 
If the Dalits allow rotting cow carcasses to pile up around the country, perhaps the stink will finally overwhelm it. 
But, with Hindu chauvinism going strong, many Indians will still have plenty of reasons to hold their noses. 

India’s Path From Crony Socialism to Stigmatized Capitalism 
NEW DEHLI – Is India about to get its mojo back? 
As the country’s exports accelerate on the back of today’s synchronous global economic expansion, the negative effects of the November 2016 demonetization of high-value bank notes and the enactment last July of a new goods and services tax (GST) are receding. 
Provided that macroeconomic pressures from high oil prices are contained, and sharp corrections to elevated asset prices are managed, India is poised to regain its status as the world’s fastest-growing major economy. 
But ongoing efforts by the government will be key to reviving private investment and sustaining medium-term growth. 
Specifically, economic policymakers must address the long-standing problem of over-indebted firms and under-capitalized public-sector banks – the so-called “twin-balance-sheet problem.” 
To that end, many distressed companies have been forced to clean up their balance sheets under a new bankruptcy code that was adopted in December 2016, and more companies are likely to follow suit this year. 
Meanwhile, the government has also announced a large recapitalization package (about 1.2% of GDP) to shore up public-sector banks, so that they can write down their stressed assets. 
As these reforms take hold, Indian firms should finally be able to resume spending, and banks will once again be able to lend to the critical but currently indebted infrastructure and manufacturing sectors. 
India’s economic reforms have taken a long time to implement. 
But if they continue to be a success, they will provide valuable lessons for future leaders about the proper role of the private sector not just in India, but around the world. 
In India, the private sector – and capitalism generally – evokes feelings of deep ambivalence. 
This is for good reason, given that India’s private sector still bears the stigma of having been midwifed under the pre-1990s “License Raj” – an era remembered for its red tape and corruption. 
To this day, some of India’s legendary entrepreneurs are believed to have built an empire simply by mastering the minutiae of India’s tariff and tax codes, and then manipulating them brazenly to their advantage. 
Some of the private sector’s stigma was cleansed by the boom in information and communications technology that started in the 1990s. 
The ICT sector had developed by virtue of its distance from, rather than proximity to, government. 
Indian ICT firms adopted exemplary governance standards, were listed on international stock exchanges, and thrived in the global marketplace. 
And, by extension, they improved the standing of Indian capital. 
But after that era of good capitalism, the stigma returned. 
During the infrastructure boom of the mid-to-late 2000s, public resources were captured under a “Rent Raj,” which put terrestrial rents (land and environmental permits), sub-terrestrial rents (coal), and even ethereal rents (spectrum) up for grabs. 
Moreover, the infrastructure investments of this period were funded by reckless and imprudent lending by public-sector banks, which often funneled resources to high-risk, politically connected borrowers. 
As a result, the Indian public concluded that majority equity holders (“promoters”) had little skin in the game, and that “limited liability” really meant no liability at all. 
And now that rapid technological change is threatening the ICT sector’s business model – providing low-cost programming services to foreign clients – even India’s “cleanest” capitalist industry is confronting governance challenges. 
More broadly, one could say that India has moved from “crony socialism” to “stigmatized capitalism.” 
And under stigmatized capitalism, the prevailing zeitgeist has hobbled policymakers’ efforts to address the legacy of the twin-balance-sheet problem, which, in turn, has constrained growth. 
Indeed, the mere thought that major shareholders’ debts would be forgiven at taxpayers’ expense has created political paralysis for years. 
After all, why should ordinary people bear the burden of fat cats who are laughing all the way to the bank? 
Seen against this background, it is easier to understand why India’s economic reforms have taken so long to adopt, and why they have been so difficult to implement. 
At the same time that the government has had to resolve the twin-balance-sheet problem, it has had to ensure that promoters cannot regain access to their assets, driving up fiscal costs. 
India’s early-stage experience with capitalism has lessons that other countries should heed in an age of rising tech giants. 
The Indian model, whereby public-sector-banks lent to private firms, proved so toxic and difficult to replace that public-sector bank ownership itself has lost much of its traditional socialist appeal. 
The irony is that after a long and bruising experience with crony capitalism, the best thing for India now might be more capitalism, starting in the financial sector. 
This commentary is based on the just-released Economic Survey of India. 

India’s Lost Fisherfolk 
NEW DELHI – Last month, a devastating cyclone swept the southern tip of India, causing immense damage to parts of Kerala, Tamil Nadu, and Lakshadweep. 
Most victims of the oddly named Cyclone Ockhi were fishermen from the districts of Thiruvananthapuram (in Kerala) and Kanyakumari (in Tamil Nadu) who, owing to the lack of a timely cyclone alert, had ventured out to sea, unaware of the danger. 
Their tragedy highlights the extreme vulnerability of India’s poor coastal communities to the vagaries of nature. 
So far, Ockhi is known to have taken 245 lives, with 661 still missing, many of whom were lost at sea and are unlikely ever to be found. 
Moreover, nearly 3,500 homes were damaged in Kerala alone, with 221 completely destroyed. 
The storm was so powerful that its winds even shook parts of Maharashtra and Gujarat. 
For me, Ockhi was no distant headline. 
As the Member of Parliament representing Thiruvananthapuram, I witnessed firsthand the disaster and its terrible toll on some of India’s poorest and most marginalized people. 
I have visited the homes of the bereaved, and lit incense sticks and candles at makeshift shrines. 
As I mourned with these beleaguered communities, trying to share their pain and grief, I vowed to do all I can to secure help for them. 
So far, the national and state governments have focused largely – and quite appropriately – on providing immediate relief to the affected families. 
But, to protect India’s coastal communities, policymakers must urgently undertake a comprehensive review of the reasons why the cyclone was so devastating, and how the impact of a future disaster could be mitigated. 
No cyclone alert was issued by the India Meteorological Department until Ockhi had already struck, and the initial rescue efforts were grossly inadequate to the scale of the challenge. 
By the time the Coast Guard and the Indian Navy had brought enough ships and planes to the affected area, a full 24 hours had passed since Ockhi capsized numerous fishing boats. 
It was too late to rescue those who had been clinging to the wreckage. 
Official search and rescue efforts saved only a handful of lives. 
Meanwhile, fisherfolk – that is, the friends and relatives of those who had ventured out to the wrong place at the wrong time – clamored to join those efforts. 
After all, they knew where their colleagues and loved ones were likely to be. 
When they were finally allowed on board the rescue vessels, they guided officials to areas where floating bodies had been spotted. 
But many of those bodies were not picked up, because the naval ships had no facilities to accommodate corpses, and the defense ministry was still “in the process of procuring” mobile mortuaries. 
The fisherfolk are not alone in criticizing the ineffectiveness of the rescue efforts. 
India needs a detailed official inquiry into the various elements of disaster prediction, management, and relief, guided by the experience of Ockhi. 
Would better institutional arrangements, such as closer cooperation with international typhoon monitoring bodies, have ensured a timely forecast? 
How can relief operations and overall emergency management be improved? 
Should search-and-rescue aircraft and vessels be stationed in the vicinity? 
One way to strengthen India’s disaster-response capabilities would be to create the marine equivalent of our Territorial Army, training selected fisherfolk in how to carry out search-and-rescue operations. 
Such training, together with students’ affinity for their fellow fishermen and their expertise in braving turbulent seas, would make for a highly effective reserve unit, to be deployed when disaster strikes. 
Another issue that risks being overlooked by the focus on urgent and immediate financial relief is coastal communities’ long-term economic needs. 
To be sure, immediate relief is vital: Ockhi has completely shut down everyday activities in some coastal areas, causing severe economic (not to mention emotional) distress for the region’s poor fishing communities. 
But perhaps it is time to consider whether it is fair to condemn these communities to long-term dependence on fishing. 
Just as India’s agriculture cannot sustain all the farmers trying to live off the land, our over-fished seas cannot possibly sustain all of our fishermen. 
With their traditional fishing grounds unable to deliver a decent living, they risk their lives to venture farther and farther from shore. 
Some of my constituents have been arrested as far afield as the British Indian Ocean territory of Diego Garcia, which they reached in their hunt for unexploited fishing grounds. 
As it stands, members of India’s fishing communities do not have any alternative skills that would enable them to pursue other occupations. 
Offering them and their children skills development and vocational training courses in other fields would transform their lives for the better. 
Ockhi has starkly demonstrated that all is not well for India’s fisherfolk. 
To prevent the next natural disaster from causing so much damage and inflicting so much pain, we must take action now to improve prediction and response, and strengthen the resilience of our most vulnerable citizens. 

India Dissents from Obamamania 
NEW DELHI – India is among the few dozen countries, largely clustered in Asia and Africa, where sentiment in favor of the United States actually rose during the administration of George W. Bush. 
Nonetheless, more Indians favored the election of Barack Obama than they did John McCain. 
What explains this seeming contradiction? 
At the heart of the Bush administration’s success with India was a belief that India was a nation whose rise was beneficial to US interests. 
This led Bush to seek to adjust the international order to India’s benefit, most notably by negotiating an exemption from the Nuclear Nonproliferation Treaty for India. 
The net result was a closer Indo-US relationship and a positive view of Bush that overrode unpopular actions such as invading Iraq. 
Obama’s election – the success of a member of a non-white minority in the world’s oldest democratic polity – has seized the imagination of many Indians. 
He is exhorted in the media and among the intellectual classes. 
Among the most fervent supporters of Obama in the US have been the nearly three million-strong Indian-American community. 
“You can’t swing a dead cat in the Obama camp without hitting an Indian-American,” said an Obama advisor. 
In the run up to the election, many Indians could not believe that an African-American would ever be chosen to reside in the White House. 
His election inevitably enhanced the standing of the US as a land of genuine opportunity, a nation whose multicultural credentials were as great if not better than polyglot and poly-ethnic India. 
The greatest skepticism about an Obama presidency lies among Indian strategic elite, who are focused on promoting India’s economic and political interests in the wider world. 
They found an ally in that cause in Bush. 
Whatever Obama’s ethnic credentials, India’s government has detected in his statements reason to believe that he will be less supportive than Bush. 
First, India is wary that any Democratic administration will include the same proponents of nuclear nonproliferation who opposed Bush’s exemption for India. 
Obama has publicly said he intends to push for a comprehensive test ban treaty, a treaty that India opposes because it feels its own nuclear deterrent remains incomplete. 
Second, Obama has attacked the outsourcing of service jobs to places like India and the offshoring of manufacturing jobs to Asia as a whole. 
His advisors also indicate that they will seek to incorporate social provisions, like labor standards, into future international trade negotiations. 
Though candidates tend to rollback from protectionist stances once they come to power, the Democrats’ control of both houses of Congress may not give Obama that leeway. 
Third, a Democratic administration has said it will put climate change at the forefront of its global policy concerns. 
If the focus is about mitigating carbon production through technological means, there will be few concerns. 
However, if the policy slips into more coercive measures such as carbon tariffs and the like, the result is likely to convert climate change into an energy security struggle. 
It will also pit the big carbon emitters of the future, like India and China, against present polluters like the US and Europe. 
Finally, conversations with a few Obama advisors and his own speeches indicate that Washington’s number one security concern in the coming years will be Afghanistan and Pakistan. 
“Iraq is yesterday’s problem,” said one advisor to an Indian audience several weeks ago. 
At the heart of that problem, say Obama advisors, is the growing neurosis of the Pakistani regime. 
Pakistan suffers from internal strife and is prone to seeing conspiracies against it that include virtually all of its neighbors and often the US. 
Easing those fears is big concern in the US these days. 
One element in such a policy of reassurance, repeatedly said by Obama and most recently in a television interview, is to “try to resolve the Kashmir crisis so that they [Pakistan] can stay focused not on India, but on the situation with those militants.” 
This is a sensible goal, and one India’s leaders will acknowledge as in their country’s interest. 
But any Kashmir peace process that is seen to be a consequence of US pressure is politically dead on arrival in India. 
Kashmir is a diplomatic minefield. 
One misstep by the new Obama administration could result in a deep freeze of the Indo-US relationship for years. 
Ultimately, the indicators are that the new Obama administration will seek to restore an international status quo that preceded the Bush presidency. 
This includes restoring ties with Europe, tightening the nuclear nonproliferation regime and possibly a restoration of China as the centerpiece of US policy in Asia. 
If so, the question for India will be whether this is accomplished by reducing the international space that the country gained under Bush. 
If so, there is a strong likelihood that one area in which an Obama administration will fail to gain traction is in advancing the Indo-US relationship in areas outside the strictly economic. 

India’s Economic Hotspots 
MUMBAI – India’s economy could soon be on the move again. 
The new government is re-establishing fiscal discipline and energizing the bureaucracy, fueling optimism that rising business confidence will re-activate investment, particularly in infrastructure. 
But India’s overall growth prospects conceal a patchwork of economic opportunities that exist within states, districts, cities, and even towns – opportunities that companies can uncover only with careful research. 
India’s economic data are promising. 
Annual average GDP growth is forecast to range from 6.4% to 7.7% until 2025. 
This compares favorably with last year’s 4.7% rate, and is close to the 7.7% average recorded in the decade up to 2012. 
Moreover, it contrasts sharply with the expectations of secular stagnation in the developed world. 
This acceleration would place India among the world’s fastest-growing large economies and increase the number of Indian consumers who can afford discretionary items from 27 million in 2012 to 89 million in 2025. 
But the potential is far from uniform. 
According to a new report, more than half of India’s GDP growth between now and 2025 will come from just eight states (Gujarat, Haryana, Himachal Pradesh, Kerala, Maharashtra, Tamil Nadu, Andhra Pradesh, and Uttarakhand), home to just 31% of the country’s population. 
Along with four dynamic city-states (New Delhi, Goa, Chandigarh, and Pondicherry), these states will be home to 50 million consumers, or 57% of the country’s middle-class households. 
Indeed, per capita GDP in India’s highest-performing regions could grow to twice the national level. 
This reflects several factors, including rapid urbanization, sustained investment in skills and infrastructure, and a shift from agriculture to industries such as automotive components, petrochemicals, pharmaceuticals, financial, and IT-enabled services. 
By 2025, the economies of these regions will resemble those of middle-income countries. 
Maharashtra’s consumer market of 128 million will wield purchasing power similar to that now seen in Brazil. 
New Delhi’s 22 million people will boast living standards similar to today’s Russia. 
Slightly less dramatically, though still significant, per capita GDP in Chhattisgarh, Odisha, West Bengal, Rajasthan, and Madhya Pradesh, based on current trends, is forecast to reach 0.7-1.2 times the national average by 2025, swelling the number of middle-class consumers four-fold, to 16 million. 
By contrast, the weakest-performing states, including Bihar, Uttar Pradesh, and Jharkhand, with per capita GDP of under 0.7 times India’s average, will struggle with low incomes and high population growth, unless they improve their governance and investment trajectory significantly. 
But investors seeking the best growth opportunities will have to search beyond states’ headline figures and scrutinize India’s districts more closely, especially urban clusters and their hinterlands. 
We have identified 49 such high-growth clusters, located in 183 districts nationwide. 
In 2012, these areas accounted for half of India’s population, 70% of its GDP, and 71% of consumers. 
They are also home to 250 of India’s 450 cities with populations above 100,000. 
Interestingly, one-third of these clusters can be found in states that have delivered low to medium economic performance, or are located close to smaller, lesser-known towns in better-performing states. 
The Nellore cluster in Andhra Pradesh, for example, has paddy, tobacco, groundnut, mango, and sugarcane farms. 
The Bikaner cluster in Rajasthan is rich in oilseed and the quarrying and production of Makarana marble and limestone. 
The more diversified Aurangabad cluster, in Maharashtra, is home to some of India’s largest seed companies, an active automotive, pharmaceutical, and sugar-manufacturing industry, and a tourism hub that includes the Ajanta and Ellora caves. 
The location of these lesser-known clusters underscores the point that investors, seeking low-cost real estate and a skilled workforce, should look more carefully at India’s economic geography when deciding where to place their operations. 
These locations could eventually become knowledge-based industry or services hubs, similar to those of large Indian cities such as Bengaluru, Hyderabad, and Pune – only cheaper. 
As they continue to develop, India’s dynamic economic clusters will themselves need to invest in modern sanitation and water systems, education and health, airports, railways, and road links. 
As such, they offer investors opportunities in many sectors, including consumer goods, financial services, housing, and infrastructure. 
Given their structural advantages – including proximity to large urban centers for some – these clusters could generate some of the best returns on investment anywhere in India. 
Companies hoping to catch India’s next growth wave might want to consider areas that seldom feature on investment lists, but that might offer better value than marquee destinations. 

Maintaining Growth in India 
MUMBAI – The global economy’s slowdown has not spared India. 
Sustaining the growth that it needs to continue to lift millions of people out of poverty will require rethinking its economic-policy approach. 
If India is to succeed, it will have to deepen regional and domestic demand, strengthen its macroeconomic institutions, and join in the fight for an open global system. 
Diminished expectations abroad should not lead India to lower its ambitions. 
Fulfilling these ambitions will require efficiency-boosting investments, particularly in infrastructure. 
Every corner of the country should be linked to domestic and international markets through roads, railways, ports, and airports. 
Inputs, such as energy, minerals, and water, must be made available at competitive prices. 
The country should be linked to broader markets through mobile devices and broadband, and access to finance must be made easier, especially for those who traditionally have been excluded. 
Plans to achieve these goals are being developed; they must now be implemented. 
Moreover, human capital must be improved. 
This presupposes higher investment in health care, nutrition, and sanitation, so that India’s citizens are healthy and able; education tailored to developing skills that are valued in the labor market; and the creation of jobs in firms that have an incentive to invest in training. 
Achieving all of this requires that the bureaucracy focus on serving the economy, rather than – as has too often been the case – vice versa. 
Promisingly, the political leadership has affirmed its belief in “minimum government, maximum governance.” 
Fueling growth through domestic demand will have to be carefully managed. 
As a country that does not belong to any power bloc, India cannot afford to put itself in the position of needing multilateral support – a trap into which even developed countries, like Portugal and Spain, have fallen. 
There is the risk of overstimulation, with fiscal deficits fueling large current-account deficits and debts, which suddenly become unsustainable when money gets tight. 
The few emerging economies that have avoided booms and busts have done so by adhering to sound policy frameworks. 
Fiscal prudence is essential. 
Whether India needs more institutions to control deficits and monitor the quality of its budgets is a question worthy of discussion. 
A number of countries have independent organs that pronounce on budgets. 
These bodies are especially important in providing budgetary estimates, particularly for unfunded long-term liabilities. 
As the experience of developed countries has shown, long-term fiscal commitments, such as universal pensions and health care, can be easy to make, but difficult to fulfill. 
On the monetary side, the Reserve Bank of India should focus on keeping inflation low and stable, ensuring optimal conditions for growth. 
As it focuses on inflation, however, the RBI must recognize that emerging markets are not as resilient as industrial economies. 
They are more fragile, and their households’ economic buffers and safety nets are thinner. 
Disinflation, when necessary, cannot be as steep. 
The RBI will also have to pay attention to financial stability. 
This is normally a secondary objective, but it may become central if the economy enters a low-inflation credit and asset-price boom. 
It will be important to remember that the central bank’s role is not to boost stock prices, but to ensure that the economy’s underlying fundamentals and its financial system enable sustainable growth. 
India will run a current-account deficit for the foreseeable future, which means that it will need net foreign financing. 
The most stable form of financing, foreign direct investment, has the additional benefit of bringing in new technologies and methods. 
But India should not be railroaded into compromising its interests to attract FDI. 
For example, India’s requirements for patenting a medicine are perfectly reasonable, regardless of what the international drug companies say. 
But India must ensure that its policies are transparent, and that contractual disputes, especially over taxation, are quickly resolved. 
Efforts to ensure this have already begun. 
Finally, as a country that does not export vital natural resources and is dependent on substantial commodity imports, India needs an open, competitive, vibrant system of international trade and finance. 
India’s energy security, for example, depends not on owning oil assets in remote fragile countries, but on ensuring that the global oil market works well and is not disrupted. 
Strong, independent, multilateral institutions that can play the role of impartial arbiter in facilitating international economic transactions are in India’s interest. 
For now, the international monetary system remains dominated by the frameworks implemented by developed countries. 
Though this is slowly starting to change, there is a growing need for a rapid overhaul. 
As developed countries struggle with slow growth and large debt burdens, their interest in an open global system can no longer be taken for granted. 
Indeed, their policymakers’ attention is likely to turn inward amid growing demands for protectionist measures. 
Responsibility for keeping the global economy open may thus fall on emerging countries like India. 
That is why these countries must press for quotas and management reforms in multilateral institutions and inject new agendas, new ideas, and new thinking into the global arena. 
India can no longer simply object to proposals by developed countries; it must put its own proposals on the table. 
Our research departments, universities, and think tanks have to generate ideas that India’s representatives can use. 
India can continue to thrive if it invests in physical and human capital and pursues prudent fiscal and monetary policies. 
But this strategy also requires India to embrace its place on the international stage. 

India in Africa 
China’s increasing influence in Africa has attracted great attention in recent years. 
But Asia’s other rising power, India, is also becoming more active on this front, as its economic links are moving beyond its traditional partners in the British Commonwealth. 
Indeed, India’s non-oil trade with West Africa currently stands at more than $3 billion and is rising fast, accounting for 1.2% of the country’s total foreign trade. 
India’s economic activity in Africa goes far beyond its ever popular Bollywood movies. 
Indian investment in Côte d’Ivoire is expected to grow to $1 billion by 2011, which represents 10% of total Indian foreign investment in the last decade. 
India’s state-run Oil and Natural Gas Corporation (ONGC Videsh) produces Sudanese oil, and over the next two years Indian diplomatic missions will open in Mali, Gabon, Niger, and Burkina Faso. 
Until 2003, the Indian Foreign Ministry had a single Africa division; it now has three: West and Central Africa, East and Southern Africa, and West Asia and North Africa. 
A study by the Federation of Indian Chambers of Commerce and Industry identified five main sectors that can act as “engines of growth” to boost Indo-Africa trade: pharmaceuticals and the health sector, information technology, water management, food processing, and education. 
Nigeria is India’s largest trading partner in Africa. 
Bilateral annual trade turnover exceeds $3 billion, with oil constituting more than 96% of Indian imports from Nigeria. 
India maintains a three-pronged strategy: term contract for crude purchase, participation in the upstream sector, and refineries. 
This puts India in direct competition with the West and other Asian countries to secure West African resources. 
But India’s quest for energy in West Africa is not a core component of the government’s energy policy; rather, it is part of its effort to diversify energy sources by offering infrastructure investments, in addition to cash bonus payments when contracts are signed. 
Seventeen of the 45 blocks are being reserved for unknown companies that will be given a first right of refusal on acreage in exchange for promises to invest heavily in projects not directly related to oil production, such as new power plants and refineries. 
These negotiations have been ongoing, and India’s ONGC, in alliance with Mittal Energy, part of the Mittal companies run by Indian billionaire Lakshmi Mittal, is tipped to get the right of first refusal for a number of blocks. 
During a Nigerian mini-bid round in 2006, ONGC-Mittal was offered the right of first refusal for three blocks. 
ONGC-Mittal Energy is keen to secure blocks with proven reserves, but also is less concerned about the fine detail of the infrastructure packages than their Asian competitors. 
The creation of ONGC-Mittal in late 2005 seems to have been intended to cut through bureaucratic processes, learn from the private sector, and strengthen bids as an infrastructure provider. 
In 2005, the Indian Cabinet’s Committee on Economic Affairs prevented, on due diligence grounds and at the last moment, the overseas arm of ONGC Videsh from entering into a $2 billion deal for a stake in a Nigerian oil block. 
But the 2007 licensing round appears to have been rushed through to raise cash during the dying days of the Obasanjo administration, and it would serve India’s government well to watch this process closely, too. 
Other parts of the Mittal dynasty have also raised eyebrows in West Africa. 
In late 2005, Mittal Steel, the world’s largest steel company, signed a $900 million deal with Liberia’s Transitional Government to mine iron ore, which many claim allowed Mittal to opt out of human rights and environmental law. 
The elected government of President Ellen Johnson-Sirleaf in 2006 reviewed the deal, and the Liberian Senate is currently scrutinizing it. 
India’s business engagement in Africa attracts mixed opinion. 
Mahatma Gandhi once said that “commerce between India and Africa will be of ideas and services, not of manufactured goods against raw materials after the fashion of western exploiters.” 
However, according to Zambian opposition MP Guy Scott, “People are saying, ‘The Whites were bad, the Indians were worse, but the Chinese are worst of all.’” 
India should not regard Africa as simply a source of natural resources. 
Instead, it needs to invest in the region’s human capital and share Indian know-how. 
Many Indian goods have much greater suitability for African than Western markets. 
Sales of Tata cars, for instance, are booming in many African countries. 
But shared know-how should move beyond economic links. 
India’s democracy in a post-colonial setting has relevant lessons for Africa. 
India also offers important experience in agricultural expansion, clean water management, and confronting the growing threat of climate change. 
Whatever role India ultimately plays in Africa, perhaps its most important contribution could be to introduce competition. 
India’s government needs to carefully watch how its companies and others rise to this challenge. 

Tabloid India 
NEW DELHI – When the Bollywood superstar Sridevi Kapoor drowned last month, at age 54, in a bathtub in a Dubai hotel, coverage of her tragic death once again showcased all that is wrong with Indian media. 
Sridevi – who, after a 15-year hiatus, had made a spectacularly successful return to the silver screen in two mega-hits in the last six years – led a modest and conventional life with her husband, film producer Boney Kapoor, and their teenage daughters. 
She did not dress or behave in ways that would serve as tabloid fodder or fuel lurid speculation. 
Yet Sridevi’s death became the subject of ghoulish stories, particularly on television, about what might have happened behind the closed door of her bathroom, with one TV anchor even attempting to enact a bathtub drowning. 
A politician notorious for leaping onto every available conspiracy theory went so far as to suggest foul play. 
Welcome to India’s extraordinary media environment, in which the Fourth Estate serves as witness, prosecutor, judge, jury, and executioner. 
With far too many channels competing 24/7 for the same sets of eyeballs and target rating points (TRPs), television news has long since abandoned any pretense of providing a public service, and instead blatantly privileges sensation over substance. 
(Indian TV epitomizes the old crack about why television is called a medium: because it is neither rare nor well done.) 
When it comes to print media, the situation is not much better. 
Newspapers are now competing in a fast-changing and overcrowded media landscape where it is not they, but TV, that sets the pace: every morning, they must reach readers who have watched TV the previous day. 
So, instead of providing context, depth, and analysis, newspapers are blasting out headlines that stimulate prurience or outrage. 
The result has been disturbing, to put it mildly. 
The airing of opinions is the cheapest way to fill a broadcast hour; ranting anchors score the highest TRPs. 
This reinforces the motivation to engage in sensational speculation, however baseless, as has occurred in Sridevi’s case. 
More fundamentally, the rush to beat TV by breaking stories has weakened journalists’ incentive to perform due diligence, in terms of researching stories and verifying claims. 
This erosion of professional standards has too often made newspapers willing accomplices of purveyors of manipulated “leaks” and malicious allegations. 
The distinctions among fact, opinion, and speculation, between reportage and rumor, and between sourced information and unfounded claims – which are drummed into journalism students’ heads the world over – have faded into irrelevance in today’s Indian media. 
The cavalier attitude toward facts is compounded by extreme reluctance to issue corrections. 
So a blaze of lurid and unverified headlines does untold damage. 
When corrections are offered, they are too feeble and come too late to restore innocent people’s reputations. 
I have experienced the limitations of India’s media firsthand, having been treated to repeated doses of speculation, gossip, accusation, and worse over the course of the last four years, following the tragic death of my wife. 
Instead of showing the restraint and caution one might expect from a responsible press covering matters of life and death, the media flung around baseless accusations of murder and suicide with abandon. 
The media trial of my wife’s death, fueled by politically motivated leaks, was drawn out as long as possible and made into a spectacle, with voyeuristic TV discussion shows debating accusations and imputations based on zero evidence or even elementary research. 
Malevolent claims were reported uncritically; editors failed to ask even the most basic questions about their plausibility. 
And my experience is not unique. 
Unsurprisingly, trust in Indian media is eroding. 
A friend summarized the problem succinctly for me: “When I was young, my father wouldn’t believe anything unless it was printed in the Times of India. 
Now, he doesn’t believe anything if it is printed in the Times of India.” 
This should concern all right-thinking Indians, because free media are the lifeblood of our democracy. 
The free press is both the mortar that holds in place the bricks of our country’s freedom, and the open window embedded in those bricks. 
The news media are supposed to enable a free citizenry to make informed choices about who governs them and how. 
And, by looking critically at elected officials’ actions (or inaction), they are supposed to ensure that those who govern remain accountable to those who put them there. 
Instead, Indian media today report recklessly on ephemera that have no impact on public welfare, and focus constantly on the superficial and the sensational. 
In doing so, they trivialize public discourse and abdicate their responsibilities as facilitators and protectors of democracy. 
Far from a call for controls on the free press – no Indian democrat would issue such a call – this is a demand for better journalism. 
Government needs a free and professional media to keep it honest and efficient, to serve as both mirror and scalpel. 
A blunt axe serves no society well. 
If India wishes to be taken seriously as a responsible global player and a model twenty-first-century democracy, we must take ourselves seriously and behave responsibly. 
Our journalism, a face of India that others see and by which – fairly or not – we are judged, would be a good place to start. 

Winning the War on Child Sexual Abuse 
NEW DELHI – With every new crisis that the world faces, humanity’s differences appear increasingly intractable. 
Religion, ethnicity, history, politics, and economics have all become tools to denigrate and demean. 
People seem to be drifting apart, and no country is immune from divisive discourse. 
But there is one fundamental issue where contrasts dissolve into consensus: the desire to keep children safe. 
Protecting the physical, emotional, and psychological wellbeing of children is a universal instinct that no faith, dogma, or ideology can defeat. 
And yet, despite this shared instinct, children everywhere continue to be preyed upon. 
Too often, societies ignore child sexual abuse, owing to family pride or fear of stigma. 
The world can stay silent no longer. 
The numbers are truly alarming. 
According to a 2016 World Health Organization report, one of every four adults was sexually abused as a child. 
A 2007 Indian government study found that 53% of children in India faced some form of sexual abuse growing up. 
And human trafficking, especially trafficking of children, is a booming business, with annual average profits totaling $150 billion. 
In other words, child sexual abuse is a moral epidemic afflicting the entire world –one that we can defeat only when we openly declare open against it. 
Young victims and their families should not have to live in silence while predators roam fearless and free. 
That is why, in December 2016, I joined a diverse group of Nobel laureates and global leaders to launch the “100 Million for 100 Million”campaign. 
One of the campaign’s objectives is to persuade, provoke, and inspire 100 million young people around the world to raise their voices against violence inflicted on children. 
The response so far has been overwhelming; tens of thousands have taken the pledge to defend the defenseless. 
But I believe we must do even more to awaken the world’s slumbering consciousness on this evil. 
So on September 11, I will embark on a bharat yatra (political pilgrimage), traveling across India to declare war on sexual abuse and exploitation of children everywhere. 
Together with dedicated campaigners and child-rights advocates, I will travel from Kanyakumari, on India’s southern tip, to India’s capital, Delhi. 
More than ten million people are expected to join me physically and virtually on a march that will traverse 11,000 kilometers (6,835 miles), touching all corners of India in a bid to raise global awareness. 
Cynics might say that marches cannot change engrained social taboos. 
I disagree. 
I have seen first-hand how change is possible when ordinary people speak out. 
In 1998, I accompanied a group of young people from around the world to the headquarters of the International Labor Organization (ILO) in Geneva. 
One by one, these brave children told the assembled leaders of their chained lives as forced laborers. 
They demanded the freedom to chase their own dreams. 
And they called for an international law against child labor. 
It was the culmination of the Global March Against Child Labor, and more than 15 million people had joined us by marching some 80,000 kilometers through 103 countries. 
The result of these combined efforts was dramatic and pathbreaking. 
Within a year, the ILO passed Convention 182, which banned the worst forms of child labor. 
Today, 181 countries have ratified the convention and passed domestic laws that ban the practice. 
Back in 1998, when we launched the global march – amid similar cynicism and apathy – roughly 250 million children were being forced to work in horrific conditions. 
Though much remains to be done, that number has since dropped by about a third, and I am confident we can reach zero within a generation. 
We have also had success marching for civil liberties in India. 
In 2001, our shiksha yatra (march for education) called on government officials to make access to school a fundamental right for all children. 
Today, that right is enshrined in the Indian Constitution, and primary school enrollment is almost universal. 
The world needs a similar effort against child sexual abuse and trafficking. 
As many as two million children are victims of trafficking every year, with many sold into the sex trade. 
Young refugees are especially at risk. 
In 2016, a record number of people – more than 65 million – were forced from their homes by civil war and other unrest. 
When children are displaced, they become highly vulnerable to trafficking and sexual abuse, underscoring the need to act decisively. 
When we begin marching this month, we will do so as non-violent soldiers in a global war. 
Our goal is to give voice to ordinary victims who have been silenced by fear and social pressure. 
We aim to tug at the conscience of people everywhere, to provoke others into action. 
Mahatma Gandhi galvanized millions of oppressed people through his marches. 
So did Martin Luther King Jr. 
Let us be inspired by them, and wage a humanitarian war against child sexual abuse. 
India is ready to march again on a journey of hope and audacity. 
We invite the world to join us. 

Realizing the Indian Dream 
NEW DELHI – It is not often that I get to wear two hats at once. 
But that is exactly what happened earlier this month, when I spent a few days in New Delhi. 
I was in India primarily as part of my current role as Chairman of a review for the British prime minister on anti-microbial resistance (AMR). 
But my visit coincided with the presentation of India's 2015-2016 budget, the first under Prime Minister Narendra Modi. 
Given some of my other interests and experiences, I found what was presented to be very interesting. 
Following recent revisions to its GDP figures, India's economy has recently grown – in real terms – slightly faster than China's. 
A key feature of my research into the BRIC economies (Brazil, Russia, India, and China) more than ten years ago was that at some point during this decade, India would start to grow faster than China and continue to do so for dozens of years. 
The reasoning is straightforward. 
India's demographics are considerably better than China's, and the size and growth rate of a country's workforce is one of the two key factors that drive long-term economic performance – the other being productivity. 
Between now and 2030, the growth rate of India's workforce will add as much to the existing stock of labor as continental Europe's four largest economies put together. 
India is less urbanized than China, and it is in the early stages of benefiting from the virtuous forces that normally accompany that process. 
But there is a catch. 
When it comes to productivity, India has been a laggard. 
Unless it finds a way to improve, the country's demographic profile could become a burden rather than a benefit. 
In this regard, Modi's first full budget did not include anything dramatic. 
But if a number of initiatives are successfully implemented, the economy should receive a real boost. 
Indeed, the budget's main feature is its commitment to investments in public-sector infrastructure, even at the expense of raising next year's deficit from 3.6% to 3.9% of GDP. 
I have argued for several years that India should emphasize investment spending, so I welcome this shift. 
The budget also includes a number of other helpful measures, such as the reduction of the corporate-tax rate and efforts to improve the business environment. 
My visits as chairman of the AMR review also allowed me to witness some encouraging signs. 
In my book The Growth Map, I describe my unforgettable first visit to Gurgaon, a municipality near Delhi that serves as a regional financial and industrial hub. 
Gurgaon is home to a lot of high-flying technology firms, and on this trip I visited one of India's leading diagnostics companies, SRL Diagnostic, which is developing tools that could improve the use of antibiotics. 
The last time I made the trip from the Oberoi hotel in New Delhi to Gurgaon, it took well over 2.5 hours to travel the 30 kilometers. 
Though a new freeway was under construction, the building site was full of cars and animals. 
As a result, traffic was in a state of chaos, and it was impossible for any roadwork to be done. 
I had always promised myself that the next time I took the trip, I would somehow repeat the exact journey. 
I am pleased to say that the drive now takes less than an hour and the experience was much less dramatic. 
Moreover, the hotel car that made the journey provided free Wi-Fi – the first time I have come across this anywhere in the world. 
It is probably too early to say with certainty that India will soon take its place as the world's third largest economy, behind China and the United States. 
But, given that India's investment climate seems to be improving, that moment might not be too far away. 
By 2017, India could surpass Italy and Brazil to become the world's seventh largest economy; by 2020, there is a reasonable chance that it will overtake France and the United Kingdom to become the fifth largest. 
Overtaking Germany and Japan, however, will require bolder steps, especially regarding education, health, and economic policy. 
India will need to improve its education system dramatically, both at the secondary and tertiary level, and make similarly large advances in basic sanitation (not to mention implementing my review's recommendations for combating AMR). 
These developments, along with a more stable framework for monetary and fiscal policy, could lead to the type of double-digit growth that China has enjoyed for the past three decades. 
It is up to India's policymakers to realize this ambition. 

Closing India’s Technology Gap 
MUMBAI – It is a notable irony that India, which produces solutions to many of the knottiest information-technology problems faced by the world’s largest companies, has benefited little from technological progress. 
Fortunately for India’s citizens, Prime Minister Narendra Modi intends to change that. 
The gap between India and its emerging Asian counterpart China is significant. 
Whereas China has created the world’s largest online bazaar and become a global leader in renewable energy, India has just begun to explore the potential of e-commerce; IT remains beyond the scope of millions of small and medium-size enterprises; and most citizens remain cut off from the digital economy. 
To bring India up to speed, Modi’s government announced in August a national digital initiative: 1.13 trillion rupees ($19 billion) in investment to bring broadband communications to 250,000 villages, provide universal mobile access, expand online government services, and enable online delivery of all sorts of basic services. 
Needless to say, this will do much to advance India’s e-government ambitions. 
Technology trends are helping Modi’s cause. 
The rapid decline in costs and increase in performance capabilities of a range of digital technologies – including mobile Internet, cloud computing, and expert systems – make large-scale adoption a distinct possibility in the coming decade, even in relatively poor India. 
These digital technologies – together with advances in genomics (supporting agricultural and medical innovation) and unconventional energy (wind, solar, and shale oil and gas) – will enable financial inclusion for hundreds of millions of Indians and potentially redefine how services like education, food allocation, and health care are delivered. 
Research by the McKinsey Global Institute indicates that, by 2025, these factors are likely to contribute at least $550 billion – and as much as $1 trillion – to India’s annual income. 
The gains would be distributed among a variety of sectors, even some that currently have low levels of technology adoption. 
Existing applications in agriculture, health care, education, and infrastructure can collectively contribute $160-280 billion to annual GDP – and, more important, empower ordinary Indians. 
Indeed, educational innovations – such as adaptive learning and remote teaching – could enable some 24 million workers to receive more years of education and find higher-paying employment. 
Mobile financial services will give 300 million Indians access to the financial system, allowing them to build credit. 
And precision agriculture – using geographic information systems and data to guide planting, watering, and other activities – can help 90 million farmers increase their output and reduce post-harvest losses, with access to timely market data bolstering their incomes. 
Moreover, some 400 million Indians in poor rural areas can gain access to better health care in field clinics, where health workers can diagnose and treat some ailments using low-cost diagnostic tools, expert software, and online links to physicians. 
Finally, by digitizing government services, such as food-distribution programs for the poor, India could eliminate the leakage that diverts, according to our estimates, half of the food from intended recipients. 
For India to derive the full potential of these technologies, it will need to dismantle barriers to adoption. 
McKinsey’s Internet Barriers Index for 25 countries classifies India as part of a cluster (along with Egypt, Indonesia, Thailand, and the Philippines) characterized by medium-to-high barriers in four key areas: infrastructure, affordability, incentives, and capability. 
Even with low prices for devices and data plans relative to the rest of the world, Internet access in India remains beyond the grasp of close to a billion people. 
Furthermore, network coverage and the adjacent infrastructure remain inadequate, particularly in rural areas. 
And, though 48% of urban Indians are computer literate, only 14% of rural Indians are able to use a computer efficiently. 
Indian policymakers should be working with the country’s tech industry and other private-sector actors to implement measures that would enable technology adoption. 
These include ensuring ongoing investment in broadband backbone networks, establishing inter-operability standards, and creating a supportive environment for low-cost devices. 
In order to spur growth in online-services delivery, the authorities must also address broader challenges to entrepreneurship, such as India’s cumbersome procedures for starting new businesses. 
Moreover, as the experience of India’s mobile telephony sector clearly demonstrates, scaling up for massive impact requires more than start-up innovation; it also demands a regulatory environment characterized by a liberal approach to pricing, manufacturing, and distribution. 
Sustaining the benefits of technological adoption and innovation will require continued investment and adjustment to compensate for its disruptive effects. 
For example, the automation of knowledge work – the software and systems that are increasingly capable of performing human tasks that require judgment – could affect 19-29 million jobs by 2025. 
Technology can help create new – perhaps better – jobs to replace those that are lost, but only if India’s education and training systems prepare workers adequately. 
With thoughtful planning, productive collaboration between public and private institutions, and capable execution, India’s government can clear the way for technological progress. 

The Last Bastion of a Profitable Press 
NEW DELHI – Around the world, newspapers seem to be facing imminent extinction, as a mass exodus to the Internet causes their circulation to slump and their advertising revenue to collapse. 
But not in India. 
In the West, young people have largely dispensed with the home-delivered physical morning newspaper, and instead catch up on the news whenever they choose, using tablets, laptops, or mobile phones. 
As advertising revenue has been vacuumed up by the Internet giants Facebook and Google, newspaper profits have plunged. 
The industry has faced many bankruptcies in recent years, with those still operating often having laid off large numbers of staff, especially in their foreign bureaus. 
In the United States, the number of full-time journalists has dropped by 20% since 2001. 
Even several grand titles have either closed down or publish only online. 
Cyberspace is, after all, where the eyeballs are. 
Yet, while some well-known newspapers – such as the New York Times, the Washington Post, and the United Kingdom-based Guardian – have developed a robust Internet presence themselves, it is not enough. 
In the Guardian’s case, the site receives an impressive 38 million unique visitors per day, compared to a print circulation of just 200,000 copies. 
But those online visitors read for free, leaving the Guardian hemorrhaging money. 
It doesn’t help that web advertising revenues – which, for most newspapers, account for only 10-15% of total revenues – can’t compete with the print-ad revenues of the past. 
All of this has generated a distinct sense of uncertainty at journalism schools. 
Last year, for the third year in a row, the CareerCast survey identified “newspaper reporter” as the worst career a young person could pursue in the US. 
(Full, and somewhat rueful, disclosure: one of my sons is a journalist at the Washington Post.) 
Yet, in India, the printed word on pulped trees remains an amazingly healthy industry. 
India now has the world’s largest number of paid newspapers, and the number continues to grow, from 5,767 in 2013 to 7,871 in 2015. 
Over those same two years, 50 newspapers ceased publication in the US, which has less than a quarter of India’s print papers. 
Moreover, figures for newspaper readership released by the Audit Bureau of Circulation (ABC) this month show that, over the last decade, newspaper circulation has grown significantly in India, from 39.1 million copies in 2006 to 62.8 million in 2016 – a 60% increase, for which there is no parallel in the world. 
Comparable data for the most recent year available, 2015, show that while newspaper circulation grew by 12% in India, it fell in almost every other major media market: by 12% in the UK, 7% in the US, and 3% in Germany and France. 
The robustness of India’s print-newspaper industry cannot be attributed to lack of growth in Internet access: in the last decade, the share of the population with Internet access rose from less than 10% to some 30%. 
So what does explain India’s thriving newspaper market? 
One basic factor is India’s rising literacy rate, which has climbed to 79%, owing largely to improvement in the “cow belt” of the northern states – the Hindi-speaking heartland. 
In the 1960s, when Hindi speakers were overwhelmingly less literate than those who read in English, Malayalam, and Bengali, Hindi newspapers had low circulations. 
Today, they are on top: for the second decade in a row, Hindi newspapers experienced the fastest growth, with average circulation soaring at a compounded annual growth rate of 8.78% since 2006. 
Economic development has also helped India’s newspaper industry. 
Many newly affluent Indians get their national and international news from television. 
But events close to home are best covered in the local dailies. 
And, indeed, newspapers remain the best way to reach this segment of Indian society. 
To be sure, most leading news outlets in India have been developing their digital offerings. 
They have created mobile apps to download the news from their sites, and they increasingly treat their readers to short takes of digestible news briefs tailored to the small screens of hand-held devices. 
But, for many serious readers, such options are no substitute for the look and feel of a printed newspaper article. 
Printed newspapers offer the added advantage of reliability, in a country where Internet access cannot be guaranteed all the time, owing to still-patchy electricity supplies, which cause frequent blackouts even in the capital. 
News junkies still need a tangible paper that can be read in the sunlight without a fully charged battery. 
Given all of this, it may not be quite so surprising that advertisers in India have remained loyal to the appeal of newspaper ink over the flickering cursor. 
In sharp contrast with the Western experience, advertising remains the Indian newspaper industry’s main source of revenue. 
Of course, this trend may not last forever. 
But, for now, India’s newspapers are in no danger of becoming financially unviable. 
While growth in digital advertising expenditure is surging, at an annual rate of nearly 30%, it still comprises just 8% of India’s total ad spending. 
Meanwhile, TV and print advertising revenue are also growing, at 8% and 4.5%, respectively. 
The differential, ABC predicts, will level out by 2021, with advertising revenues for print and digital media reaching parity. 
But even then, India’s print media will enjoy a healthy stream of advertising revenue that their Western counterparts can only dream about. 
So India’s print media story continues to be a happy one. 
And a robustly growing India will remain paradise for newspaper mavens for a while yet. 
There are still 280 million people yet to become literate. 
And when they get there, they will want their own newspapers, too. 

India or China? 
NEW DELHI – When US President Barack Obama visited India in November and complimented its leaders on the growing success and prowess of their economy, a tacit question returned to center stage: Will China grow faster than India indefinitely, or will India shortly overtake it? 
In fact, this contest dates back to 1947, when India gained independence and democracy became the country’s defining feature, while China turned to Communism with the success of Mao Zedong after the Long March. 
Both countries, the “sleeping giants,” were expected to awaken at some point from their slumber. 
But, since the growth model in vogue at the time laid principal emphasis on capital accumulation, China was widely held to have the advantage, because it could raise its investment rate higher than India, where democracy limited the extent to which the population could be taxed to increase domestic savings. 
As it happened, however, both giants slept on – until the 1980’s in China and the early 1990’s in India – mainly because both countries embraced a counter-productive policy framework that crippled the productivity of their investment efforts. 
Reflecting flawed economic arguments, India embraced autarky in trade and rejected inflows of equity investment. 
It also witnessed economic interventionism on a massive scale, including the proliferation of public-sector enterprises in areas beyond public utilities. 
In China, the results were similar, as the political embrace of Communism meant going autarkic and giving the state a massive role in the economy. 
After progressively dismantling their inefficient policy frameworks in favor of “liberal” reforms, the two giants began to stride forth. 
The race was finally on. 
And, once again, China seemed to be the horse to bet on: it grew faster, because it changed its policy framework much faster than democracy permits. 
But there are good reasons to suspect that China’s authoritarian advantage will not endure. 
First, while authoritarianism can accelerate reforms, it can also be a serious handicap. 
Years ago, when both Mao and Zhou Enlai were alive, Padma Desai, the Columbia University expert on Russia, was asked about China’s future growth prospects. 
She answered: it depends on whether Mao dies first or Zhao dies first – her point being that in a top-heavy system, growth paths can become unpredictable, and thus subject to volatility. 
Moreover, we know from experience elsewhere – and now in China itself – that as growth accelerates, political aspirations are aroused. 
Will the Chinese authorities respond to them with ever greater repression, as they have with dissidents and Falun Gong, creating discord and disruption, or will they accommodate new popular demands by moving to greater democracy? 
Again, China’s authoritarian politics means that it cannot profit from the innovations that depend on software, as that is an instrument through which dissent can flourish and become subversive of total control. 
As one wit has observed, the PC (personal computer) and the CP (Communist Party) do not go together. 
Finally, China’s growth must continue to depend on its exploitation of external markets, which makes it vulnerable in a world that is increasingly making democracy and human rights a central preoccupation. 
In such a world, continued hassles and hiccups for Chinese exports can be confidently expected. 
Economic factors also militate against Chinese prospects. 
China was clearly able for many years to exploit a “reserve army of the unemployed” à la Karl Marx – to grow rapidly without facing a labor-supply constraint, so that capital accumulation would not run into diminishing returns. 
But now, given China’s one-child policy and lack of adequate infrastructure (including housing) in rapidly growing areas, labor is getting scarce and wages are rising. 
In economic jargon, the supply curve of labor was flat but is now sloping upward, so that rapidly increasing demand for labor resulting from rapid growth is driving up wages. 
That means that China is beginning to “rejoin the human race” as capital accumulation meets scarcer labor and growth slows. 
By contrast, India has a far more abundant supply of labor, as well as a more favorable demographic profile, so that, as India’s investment rate increases, labor will not be a constraint. 
India will thus become the new China of the past two decades. 
Besides, in contrast to China, where economic reforms were quicker and more complete, India still has a way to go: privatization, labor-market reforms, and opening up the retail sector to larger, more efficient operators are all pending – and will give a further boost to India’s growth rate once they are implemented. 

India’s Deadly Cities 
SINGAPORE – China and India are driving Asia’s population and urbanization trends. 
According to a 2010 McKinsey study, the two countries are expected to account for 62% of the growth in the continent’s urban population between 2005 and 2025, and a staggering 40% of such growth worldwide. 
Statistics like these underscore the urgency of urban planning and growth management. 
But it is equally important to acknowledge the critical differences between the two countries. 
Variations in their urban growth paths, as well as differences in their approaches to environmental policy, are likely to make India’s population challenges far more difficult to address. 
China may be home to 20% of humanity, but for more than two decades its fertility rate has been lower than the “replacement” level (that required to maintain the current population), with population growth expected to turn negative within the next two decades. 
As a result, India, where population growth is projected to remain positive for the foreseeable future, is poised to become the world’s most populous country. 
Most projections have India’s population exceeding that of China by 2022. 
Indeed, over the next 35 years, India is expected to add more than 400 million urban residents (more than the entire population of the United States), while China will add just 292 million. 
For the first time, the majority of Indians will be living in cities – a significant transformation for a country whose rural population currently constitutes two-thirds of the total. 
India’s two largest urban centers – Delhi and Mumbai – are often described as emerging global megacities. 
Delhi is already the world’s second most populous city, and it is expected to close the gap with Tokyo, the world’s largest city, almost entirely by 2030. 
When population growth on this scale is combined with rapid urbanization, the associated environmental and social impacts become a formidable policy challenge. 
In 2014, the World Health Organization (WHO) determined that Delhi has the world’s worst air quality (based on concentration of fine particulate matter), with Indian cities occupying the top four spots and 13 of the top 18. 
China has been frequently – and often justifiably – criticized for poor environmental policies. 
But, according to McKinsey, China has been more proactive than India in planning for rapid urbanization, demonstrating that it has the capacity and the resources to address environmental challenges. 
In new cities across the country, urban plans already take into account such concerns, with riparian greenways and urban nature reserves complementing infrastructure projects that have environmental benefits (for example, extensive mass-transit networks). 
By contrast, India’s cities have grown haphazardly, with little consideration of the functioning of urban systems as a whole. 
The country’s urban areas often lack adequate regional transport networks, for example. 
Large swaths of informal settlements have emerged in vacant inner-city districts and suburban peripheries, compromising environmental conditions, public health, and personal safety. 
Land-use patterns interweave industrial and residential districts, exposing vulnerable (and growing) populations to a host of negative spillover effects. 
The differences between urban development in China and India are clear not only in the substance of policy, but also in the two countries’ governance styles. 
China’s leaders are placing heavy emphasis on pollution control. 
In advance of the 2022 Winter Olympics in Beijing, the authorities are pushing for a regionally integrated plan to balance economic growth with environmental management, including the greening of manufacturing processes and the elimination of “excess capacity” in energy production. 
Such multi-jurisdictional efforts require strong coordination and a stable vision, which China’s hierarchal governance system provides. 
In India, by contrast, the central government has no role in managing air pollution, which is a state-level responsibility. 
Whatever Prime Minister Narendra Modi’s administration decides to do, state governments under the control of different parties are likely to oppose his policies, or fail to devote adequate attention and resources to them. 
According to the WHO, of the 4.3 million annual deaths resulting from “indoor air pollution” (burning of solid fuels), nearly one-third (1.3 million) occur in India. 
A recent report argues that more stringent environmental regulation would add 3.2 years to Indians’ life expectancy. 
This tangible welfare gain would also include economic benefits. 
The resulting addition of more than two billion “life years” represents a significant amount of human productivity, creativity, and uncompensated contributions to families and society. 
By failing to address the impacts of rapid urbanization adequately, India is leaving these benefits unclaimed. 
A good-faith, well-publicized official declaration would signal to India’s citizens and the world that the country intends to save its growing population from the life-shortening effects of urban environmental degradation. 
It would also provide a roadmap for improving the quality of life in India’s cities, benefiting local residents both directly and indirectly (by inducing foreign investment). 
India’s competitive advantages in the new global economy are well known. 
But transformative social progress will be possible only if the country launches a more comprehensive effort to address pathologies long brushed off as the unavoidable collateral damage of economic growth. 

Mitigating India’s Climate-Change Misery 
SANTA MONICA – The record-setting heat that blanketed the planet this summer was a sticky reminder that as global temperatures increase, people on the margins of society – the sick, the elderly, and the poor – will suffer disproportionately. 
And, nowhere will this suffering be more acute than in India. 
Poverty entraps more people in India than any other country. 
With some 270 million Indians living below the World Bank’s poverty line of $1.90 a day, escaping the elements has never been easy. 
Now, climate change and extreme weather are making it impossible. 
In cities, the poor must contend with the effects of “heat islands” – developed areas that trap the sun’s warmth and make temperatures significantly hotter than in rural regions. 
During heat waves, urban temperatures in India can be extreme even at night, making sleeping agonizing for those without proper shelter or modern cooling methods. 
But life is no easier for India’s rural poor, who are more vulnerable to extreme heat because they often lack access to water, electricity, and health care. 
Based on research that I conducted with colleagues at the RAND Corporation, Emory University, and health departments in India, impoverished communities in central India are at the highest risk, as are populations that are less educated and have fewer amenities. 
Our country-wide index shows a strong correlation between low-income status in rural areas and heat vulnerability. 
Unfortunately, the perils for the region’s poor are mounting. 
According to a recent report by the World Bank, some 800 million people in South Asia currently reside in areas where rising temperatures and erratic rainfall are threatening livelihoods and reducing living standards. 
If these trends continue, the goal of ending extreme poverty – one of the top objectives of the United Nations 2030 Agenda for Sustainable Development – will remain elusive. 
Many rural Indians withering under the heat now see urban migration as their best option. 
But this, too, will fail to bring lasting relief. 
Although jobs may be more plentiful in cities, India’s largest metropolitan areas are already bursting; adding millions of climate refugees to underdeveloped slums and shantytowns would be catastrophic. 
To avert this new crisis, the Indian authorities must recognize that with heat risks rising, the country’s poor – urban and rural alike – are in desperate need of climate-adaptation strategies. 
To be sure, there are no easy solutions. 
When heat waves hit developed countries, the authorities advise people to stay indoors, shower often, drink plenty of fluids, and keep cool with fans and air conditioning. 
But such guidance is of little use for people whose homes lack running water or power. 
The World Bank estimates that one in five Indians is poor, while only 61% of poor households have reliable electricity and just 6% have access to tap water. 
Moreover, most of India’s working poor toil as farmers or in small-scale urban manufacturing; for them, escaping the heat means forgoing a paycheck. 
But this is an impossible choice; while the science of heat-related health damage is in its infancy, studies have linked exposure to extreme temperatures with kidney disease, micronutrient deficiencies, and even cognitive damage. 
Still, there are things that Indian authorities can do to protect the poor during heat waves. 
For example, community showering centers have been proposed as a way to lower heat-related deaths. 
While this option would be difficult to implement in areas with chronic water shortages, government-led distribution programs have worked elsewhere. 
Technological solutions are also worth exploring. 
For example, medical researchers in Bangalore have created a battery-operated cooling jacket designed to protect people who must work in the heat. 
Of course, with a $27 price tag, the device is beyond the means of most of India’s poor. 
But other solutions – including installation of solar panels to power cooling systems, and wider use of “green” roofs to help deflect heat – would be easier to scale up. 
But the most consequential change would be to give India’s poorest a greater voice. 
Too often, people working to end poverty are unfamiliar with the conditions in which the poor live. 
For climate-resiliency programs to be effective, the target audience must become part of the solution. 
Despite years of dire forecasts, the international community has been unable to halt the steady climb in global temperatures, and it is the world’s poorest who are paying the heaviest toll. 
As heat-related risks intensify, those living on the margins – in India and elsewhere – will need more than pity to cope effectively. 

India’s War on Antimicrobial Resistance 
CHENNAI – Last year, a 30-year-old teacher suffering from a severe bloodstream infection arrived in my emergency room for treatment. 
The woman had been in and out of local clinics with a stubborn chest infection and fever, and by the time I examined her, she was receiving chemotherapy for blood cancer. 
Instinctively, I treated her infection with an antibiotic from a group of drugs known as “carbapenems,” strong medicines commonly prescribed to people who are hospitalized. 
But after further tests I discovered that she was carrying a strain of bacteria that is resistant to most antibiotics in our therapeutic arsenal. 
There was no option but to treat her with drugs that I knew would be largely ineffective; she was lucky to recover. 
Sadly, many patients are not so fortunate. 
Around the world, people are being admitted to hospitals with infections that do not respond to antibiotics, and relatively benign germs – like Klebsiella and E. coli – have become potent killers, shrugging off medicines that in the past easily contained them. 
Antibiotics are different from almost every other class of drug in one important and dangerous respect: the more they are used, the less effective they become. 
When microbes are repeatedly exposed to antibiotics, the bacteria eventually win. 
Each year, an estimated 750,000 people die from antimicrobial-resistant (AMR) infections, and the death toll will climb unless the global health community acts decisively. 
In the absence of detailed and reliable reporting from all countries, the British government commissioned a series of reports on AMR, estimating that by 2050, as many as ten million people could die annually from AMR complications. 
Moreover, the economic impact of “superbug” outbreaks could top $100 trillion; low-income countries would suffer disproportionately. 
Uneven and unregulated antibiotic usage is one of the most important reasons behind the AMR crisis. 
In developed countries, doctors prescribe antibiotics for even the most basic maladies, like the common cold. 
Stronger regulations of antibiotics prescriptions in these countries, like those implemented in Finland several decades ago, could help to mitigate resistance. 
Yet such rules alone will not be enough, because in much of the developing world, antibiotics can be obtained without a prescription. 
Inequalities in access to medicine, excessive use, and poor sanitation services complicate the problem further. 
And when farmers uses antibiotics to speed the growth of chickens and other livestock, drug-resistant germs find new ways to enter the environment. 
In 2017, the World Health Organization, in an effort to address these challenges, classified antibiotics into three groups and issued guidance for how each class of drugs should be used to treat 21 of the most common infections. 
For example, the first of these groups consists of medicines that should always be available to patients, preferably by prescription. 
Amoxicillin, the preferred medicine for respiratory-tract infections in children, is in this group. 
The second tier includes carbapenems, which, as my patient last year discovered, are increasingly ineffective. 
And the third group, including colistin and other “last resort” antibiotics, are drugs that must be used sparingly and only for medical emergencies. 
Clearly, guidelines are an important first step in addressing the global AMR challenge. 
But governments, medical associations, and hospitals must also commit to tackling the antibiotic crisis together. 
That is what the health-care community in India is doing. 
In 2012, India’s medical societies adopted the Chennai Declaration, a set of national recommendations to promote antibiotic stewardship. 
Last year, Prime Minister Narendra Modi used his monthly radio address to urge doctors to join the effort. 
Still, the AMR threat remains real; containing it will require concerted effort. 
In India, for example, we must implement the regulation, formulated by the Indian Health Ministry, controlling over-the-counter sales of antibiotics. 
The WHO’s advice should strengthen support for this move. 
India’s Red Line campaign – which demands that prescription-only antibiotics be marked with a red line, to discourage the over-the-counter sale of antibiotics– is a step forward. 
Meanwhile, health-care communities in advanced economies must find the political will to reduce unnecessary antibiotic use by people, and in agriculture. 
“Last resort” antibiotics should never be used as growth promoters in livestock farming, but achieving this will require significant changes to current practices. 
Superbugs should strike fear in doctors and patients everywhere, but fear cannot lead to paralysis. 
The next time a patient arrives in my ward with a treatable infection, I need to be certain that the medicine I prescribe will be effective. 
Luck should never play a role in a patient’s recovery. 

Faster Growth Through Stronger Regulation 
WASHINGTON, DC – When India’s prime minister, Narendra Modi, was on the campaign trail, he promised to improve the way the country is governed. 
Since taking office in May, he has strived to deliver. 
Recently, he declared that he wants to boost India’s position in the World Bank’s “Doing Business” survey, which assesses the regulatory climate in 189 countries. 
Modi’s goal is to lift India into the top 50 – a bold ambition given that the country currently sits at 142. 
Cutting bureaucratic red tape can help foster a culture of entrepreneurship and dynamism. 
But putting in place an effective regulatory and enforcement infrastructure can be equally important, especially in areas where consumers have difficulty assessing the value of products and the risks they can pose. 
In all countries – but especially in developing economies – a robust regulatory system is essential to building trust in the marketplace. 
Consumers need to know that the food they eat, the cars they drive, and the medicines they take are safe. 
Confidence in local products boosts domestic consumption and makes exports more attractive in foreign markets. 
By contrast, a country riddled with regulatory shortcomings will find its arteries of commerce clogged and foreign investors spooked by unpredictable quality and unfair competition from unscrupulous producers. 
In developing countries, “poor quality regulation and implementation are formidable barriers to entrepreneurship and investment,” according to a World Bank report. 
“Regulatory failures expose people and the environment to horrific risks.” 
As developing countries upgrade their regulatory systems, they should focus on closing legal gaps that put consumers at risk and undermine market credibility. 
In China, for example, the manufacturers of pharmaceutical ingredients can dodge drug regulation by claiming that their products will be used for non-medical purposes. 
Even as reputable firms ensure the quality of all their inputs, this loophole can allow unsafe products to enter the market, as occurred in 2008, when at least 81 Americans died after receiving doses of the blood thinner heparin that contained adulterated Chinese material. 
By the same token, regulations should be based on international standards, where they exist. 
For example, American, European, Japanese, and other drug regulators have developed guidelines, through the International Conference on Harmonization, that take advantage of their collective expertise. 
Countries such as South Korea and Singapore are drawing on these guidelines to flesh out their own regulatory systems. 
As a result, their citizens will enjoy quick access to new medicines, and their researchers will find it easier to participate in global clinical research, a boon to domestic industries. 
Because a regulatory institution can only be as effective as the people who work for it, another area of focus for developing countries should be training skilled staff. 
In China, fewer than 200 people work at the Center for Drug Evaluation, the agency that reviews applications for new drugs. 
By contrast, the United States Food and Drug Administration employs 4,000 reviewers, and the European Medicines Agency has 3,000. 
Predictably, China’s approval process for new drugs is one of the world’s slowest – eight years on average. 
As a result, patients are denied access to the medicines they need. 
Building intellectual capital and institutional competence can take years, but it can be done. 
A decade ago, Japan’s drug-approval process was lethargic relative to that of other developed economies. 
The country made the safe acceleration of the approval process a high priority, and tremendous progress has followed. 
The median time taken to approve new drugs fell from 833 days in 2006 to 306 days in 2012, according to the London-based Center for Innovation in Regulatory Science. 
For regulation to be truly effective, it must be backed by robust enforcement – with sanctions for noncompliance. 
That calls for a legal system that can adjudicate disputes and ensure fair, equitable, and timely treatment. 
For India, which has only 1.2 judges per 100,000 people (compared to 10.8 in the US), this will be a difficult challenge. 
According to the Supreme Court of India, in March 2012 the country had 31.2 million cases pending, more than 80% of them in lower courts. 
Such extraordinary backlogs have persisted – and can undermine the rule of law. 
The world’s richer countries created their regulatory infrastructure over generations, during a time when there was little direct global competition. 
Emerging markets need to create theirs in a greatly compressed timeframe. 
This will not be easy anywhere. 
It will require significant resources, and the process risks angering domestic companies that have become accustomed to a lack of regulatory oversight. 
But, if implemented correctly, sound regulation can strengthen countries’ growth capacity, while protecting citizens and improving their long-term living standards. 

Clicks over Bricks in India 
SINGAPORE – After years of debate, India’s government recently announced that will open the country’s retail sector to foreign investment. 
The move was met with howls of protest from those who argue that the entry of large hypermarket chains like Carrefour and Walmart will devastate the small shops that currently dominate India’s retail sector. 
A country-wide strike called by opposition parties on September 20 brought many cities and towns to a halt. 
So far, Prime Minister Manmohan Singh’s government has not relented, despite the loss of support from a key coalition ally. 
The debate around opening the retail sector to foreign investment is currently being framed, on the one hand, by the need to modernize supply chains and, on the other hand, by the desire to protect small shopkeepers’ livelihoods. 
Those who support the decision argue that India’s supply chains are simply too wasteful, and that only the finance and knowhow of big, international retail chains can upgrade them. 
Opponents point to how big retailers decimated the traditional retail segment in the West. 
But this debate misses a crucial point: the hypermarket model is itself under serious threat everywhere from online shopping. 
Consumers worldwide are finding that they can access virtually unlimited choice on the Internet – including customized goods and services that big retailers simply cannot deliver. 
As a result, large hypermarkets are suddenly finding that their business model is unraveling. 
They watched in horror as Amazon, en route to becoming the world’s largest online retailer, pushed the bookstore chain Borders into bankruptcy, and have wondered if they will be next. 
The American discount retailer Walmart, reportedly concerned that it is cannibalizing its own sales, has gone so far as to stop selling Amazon’s Kindle tablets. 
Indeed, the Indian government’s decision to welcome foreign retailers coincided with French retailer Carrefour’s announcement that it will shut down its substantial operations in Singapore by the end of this year. 
Meanwhile, its British counterpart, Tesco, is shifting away from the large hypermarket format and investing heavily in online systems. 
Quite clearly, the established framework of retailing is being fundamentally overhauled. 
Given these developments, India may simply skip the hypermarket stage and go online, just as it skipped fixed-line telephony and went mobile. 
Of course, hypermarkets will do well in a few locations, but they are unlikely ever to dominate India’s retail sector. 
For small shopkeepers, this poses both a challenge and an opportunity. 
The challenge is that the rise of online shopping will increase competitive pressure, regardless of whether big foreign retailers enter the market. 
While Indians have traditionally been wary of buying online, owing to their distrust of digital security, in recent years the urban middle class has become increasingly accustomed to using the Internet to purchase airline tickets, reserve hotel rooms, and order books. 
As rising affluence and falling technology prices make online shopping accessible to a growing pool of customers, more products will follow. 
Change is inevitable. 
But this shift may also open an opportunity for small shops. 
We know from international experience that online shopping undermines hypermarkets more than neighborhood stores, which often offer home delivery, credit, and the reassuring familiarity of personal relationships. 
A local shop may be able to use the Internet to tailor more precisely its selection of goods to its customers’ tastes. 
In other words, small shops may be more than capable of holding their own against big retailers if they adapt to the new environment. 
Indeed, small shops’ advantages are so compelling that Tesco is investing heavily in expanding its network of convenience stores, Tesco Express, thereby effectively mimicking the traditional model of local grocery stores. 
So India’s political debate over the entry of foreign retailers into the market, while heated, is probably already outdated. 
The real question is how India’s creaking supply chains will respond when consumers leapfrog hypermarkets and go online. 
No other country has created a logistical network directly for online retailing. 
For investors and businesses – perhaps including India’s small shopkeepers – this is where the really interesting opportunities will emerge. 

India’s Agony 
MUMBAI – In most cities of South Asia, hidden beneath the grime and neglect of extreme poverty, there exists a little Somalia waiting to burst out and infect the body politic. 
This netherworld, patrolled and nourished by criminals who operate a vast black-market economy, has bred, in Mumbai, a community that has utter contempt for the state, because it knows that its survival depends on corrupting the police. 
Like underground magma, that underworld has now burst into the streets of Mumbai. 
Because the denizens of this netherworld know neither patriotism nor morality, they are easily lured into partnership with terrorists, particularly when they have reason to feel aggrieved. 
In Mumbai, a large proportion of them are Muslims who were denied space in the formal economy and have developed strong vested interests over the past 50 years. 
Details about the Mumbai outrage, where terrorists killed over 100 people, are still unfolding. 
But we do know that at least 30 men armed with AK47 rifles and grenades held India’s business and financial center hostage, targeting both Indians and foreigners, particularly Americans and British. 
It is likely that this operation was propelled from Pakistan through the Lashkar e Tauba, a terrorist organization sustained by hatred of secular India and backed by shadowy Pakistani agencies and street support. 
In the blood and drama of the events, however, we might miss a significant element of the story. 
The attacks were an operation that must have required months of planning: serious weapons were deployed, a small army was mobilized, targets were studied, transport was organized, and weak points identified. 
A plan of attack that involved hundreds of people was put in motion, and yet the massive infrastructure of India’s government discovered nothing. 
The chief of India’s Anti-Terrorist Squad, Hemant Karkare (who lost his life in the battles that raged through the night) received a death threat from the nearby city of Pune, but his own unit did not bother to investigate it, since it was busy playing games on behalf of its political masters. 
Complacency and politics gave the terrorists more protection than silence or camouflage ever could. 
Indeed, the attacks represent more than a failure of police work. 
They represent a collapse of governance; these are the wages of the sins of administrative incompetence and political malfeasance. 
India is a tough nation. 
No one should have illusions about that. 
It has fought off Muslim terrorists in Kashmir, Sikh terrorists in Punjab, Christian terrorists in Nagaland, and Hindu terrorists in Assam and across the country. 
It understands that you cannot blame the whole community for the sins of a few. 
But under ineffectual governance, particularly during the last three years, India is in danger of degenerating into a soft state. 
Instead of being an international leader in the worldwide war against terrorism, it is sinking into the despair of a perpetual victim. 
Indeed, India stands only behind Iraq in the number of people killed each year in terrorist attacks. 
Three years ago, Indian Prime Minister Manmohan Singh rather smugly told President George W. Bush in Delhi that Indian Muslims were not involved in any act of terrorism. 
The implication was that the integration of Muslims in Indian society constituted a success story. 
Muslims, Singh implied, also benefit from the virtues of democracy, a conclusion that Bush happily repeated. 
But Singh certainly did not fool any of the terrorists, some of whom may have read his self-congratulation as a challenge for them to act. 
I am an Indian and a Muslim and proud to be both. 
Like any Indian, today I am angry, frustrated, and depressed. 
I am angry at the manic dogs of war who have invaded Mumbai. 

India's Bollywood Power 
The world has heard much about India’s extraordinary transformation in recent years, and even of its claims to a share of “world leadership.“ Some of that is hyperbole, but in one respect, India’s strength may be understated. 
What makes a country a world leader? 
Is it population, military strength, or economic development? 
By all of these measures, India has made extraordinary strides. 
It is on course to overtake China as the world’s most populous country by 2034, it has the world’s fourth-largest army and nuclear weapons, and it is already the world’s fifth-largest economy in terms of purchasing power parity and continues to climb, though too many of its people remain destitute. 
All of these indicators are commonly used to judge a country’s global status. 
However, something much less tangible, but a good deal more valuable in the twenty-first century, may be more important than any of them: India’s “soft power.” 
Take Afghanistan, for instance – a major security concern for India, as it is for the world. 
But India’s greatest asset there doesn’t come out of a military mission: it doesn't have one. 
It comes from one simple fact: don’t try to telephone an Afghan at 8:30 in the evening. 
That’s when the Indian TV soap opera “Kyunki Saas Bhi Kabhi Bahu Thi” , dubbed into Dari, is telecast on Tolo TV, and no one wishes to miss it. 
"Saas" is the most popular television show in Afghan history, with a 90% audience penetration. 
It’s considered directly responsible for a spike in the sale of generator sets and even for absences from religious functions which clash with its broadcast times. 
“ Saas” has so thoroughly captured the public imagination in Afghanistan that, in this deeply conservative Islamic country where family problems are often literally hidden behind the veil, it’s an Indian TV show that has come to dominate (and sometimes to justify) public discussion of family issues. 
That’s soft power, and its particular strength is that it has nothing to do with government propaganda. 
The movies of Bollywood, which is bringing its glitzy entertainment far beyond the Indian diaspora in the United States and the United Kingdom , offer another example. 
A Senegalese friend told me of his illiterate mother who takes a bus to Dakar every month to watch a Bollywood film – she doesn’t understand the Hindi dialogue and can’t read the French subtitles, but she can still catch the spirit of the films and understand the story, and people like her look at India with stars in their eyes as a result. 
An Indian diplomat in Damascus a few years ago told me that the only publicly displayed portraits as big as those of then-President Hafez al-Assad were of the Bollywood superstar Amitabh Bachchan. 
Indian art, classical music and dance have the same effect. 
So does the work of Indian fashion designers, now striding across the world’s runways. 
Indian cuisine, spreading around the world, raises Indian culture higher in people's reckoning; the way to foreigners’ hearts is through their palates. 
In England today, Indian curry houses employ more people than the iron and steel, coal and shipbuilding industries combined. 
When a bhangra beat is infused into a Western pop record or an Indian choreographer invents a fusion of kathak and ballet; when Indian women sweep the Miss World and Miss Universe contests, or when “Monsoon Wedding” wows the critics and “Lagaan” claims an Oscar nomination; when Indian writers win the Booker or Pulitzer Prizes, India’s soft power is enhanced. 
Likewise, when Americans speak of the IITs, India’s technology institutes, with the same reverence they accord to MIT, and the “Indianness” of engineers and software developers is taken as synonymous with mathematical and scientific excellence, India gains in respect. 
In the information age, as Joseph Nye, the guru of soft power, argues, it is not the side with the bigger army, but the side with the better story, that wins. 
India is already the “land of the better story.” 
As a pluralist society with a free and thriving mass media, creative energies that express themselves in a variety of appealing ways, and a democratic system that promotes and protects diversity, India has an extraordinary ability to tell stories that are more persuasive and attractive than those of its rivals. 
And there's the international spin-off of India just being itself . 
India’s remarkable pluralism was on display after national elections in May 2004, when a leader with a Roman Catholic background (Sonia Gandhi) made way for a Sikh (Manmohan Singh) to be sworn in as Prime Minister by a Muslim (President Abdul Kalam) – in a country that is 81% Hindu. 
No strutting nationalist chauvinism could ever have accomplished for India’s standing in the world what that one moment did – all the more so since it was not directed at the world. 
There’s still much for India to do to ensure that its people are healthy, well fed, and secure. 
Progress is being made: the battle against poverty is slowly (too slowly) being won. 
But India’s greatest prospects for winning admiration in the twenty-first century may lie not in what it does, but simply in what it is. 

India’s Burma Dilemma 
The world has been horrified by graphic images of the latest crackdown by Myanmar’s military junta. 
But the bullets and clubs unleashed on Buddhist monks have worked. 
The monks have retreated, and an eerie normalcy has returned to Yangon (Rangoon), Myanmar’s principal city and former capital. 
That crackdown continues under cover of darkness. 
When the sun sets in Myanmar, fear rises. 
Everyone listens half awake for the dreaded knock on the door. 
Any night, the military’s agents can come for you, take you away, and make sure you are never heard from again. 
In recent nights, the junta’s henchmen have burst into monasteries, lined up sleepy monks, and smashed their shaved heads against the walls, spattering them with blood. 
Scores of others, perhaps hundreds, have been carted off for interrogation, torture, or execution. 
The nighttime assault on a United Nations employee and her family made international news, but hundreds of less well connected Burmese have been similarly abused. 
For 45 years, Myanmar’s people have been subjected to the junta’s reign of terror. 
My father was born in Rangoon long before the 1962 coup that brought the current regime to power. 
Afterwards, many of my relatives, prosperous Indian merchants who had been settled in Myanmar for generations, abandoned homes and businesses in order to save their skins as chaos enveloped the city, later renamed Yangon. 
A relative who now lives in Bangkok, but who returned part-time to Yangon in response to overtures from Myanmar’s cash-starved rulers, recalled those days: “We lived through hell. 
We never knew when we woke up each morning what would happen. 
People were being denounced left and right. 
They could just come and take you away and take everything away from you.” 
Those who couldn’t leave Myanmar, or didn’t want to, have lived with this fear ever since. 
The United States and Europe have issued strong statements condemning the crackdown and calling upon Myanmar’s neighbors, especially India and China, to exert their influence on the regime. 
The response from both has been muted (as it has from Thailand, which also has strong economic ties with Myanmar). 
China balks at interfering in the “internal affairs” of a neighbor from whom it gets precious natural gas and potential access to the sea. 
India, which “normalized” bilateral relations a few years ago, is reluctant to alienate Myanmar’s military, with which it has worked closely to counter rebels in India’s northeast who had been using the common border to tactical advantage. 
To this end, India has provided aid, including tanks and training, to Myanmar’s military. 
But the main reason for India’s good relations with Myanmar’s ruling thugs is the country’s vast and still largely unexploited energy reserves, which India desperately needs to fuel its economic boom. 
India has invested $150 million in a gas exploration deal off the Arakan coast of Myanmar, and India’s state-owned Oil and Natural Gas Corporation and Gas Authority of India Ltd. have taken a 30% stake in two offshore gas fields in direct competition with PetroChina, which has also been given a stake. 
India and China are simply doing what the US and European countries have done for so long: trump rhetoric about democracy and human rights with policies that serve their strategic and energy security interests. 
US relations with Pakistan and Saudi Arabia are two examples, and America’s Chevron and France’s Total, two of the world’s oil giants, continue to do a brisk business in Myanmar, thanks to loopholes in the sanctions. 
But the rise of India and China means that the time-tested posture of Western democracies toward emerging states to “do as we say, not as we do” will become less tenable. 
If the EU and the US want democratic India to act according to its stated moral values and not its vital national interests when these appear to conflict, they had better be prepared to do the same. 
Feeling the heat, including threats from some US senators to link America’s nuclear deal with India to its actions in Myanmar, India has announced that it is asking for the release of Burmese democratic opposition leader and Nobel Prize winner Aung San Suu Kyi from house arrest. 
But the credibility of all democratic regimes, not just India’s, is at stake in what unfolds in Myanmar. 

India's China Syndrome 
CAMBRIDGE: India may the most important unheralded story of the world economy in coming years. 
Though India's one billion people constitute nothing less than one-sixth of humanity, and notwithstanding the fact that India is the world's largest democracy, India remains off the radar screen for most observers of the world economy. 
This may change soon, for India is on the move. 
If it remains on course with economic reforms, India will be one of the fastest growing economies in the world in the next few years, and will become one of the premier locations for foreign investment. 
India's global political influence is likely to rise in conjunction with economic success, benefiting both the cause of democracy as well as the global economy. 
India's low profile is easy to understand. 
Upon independence half a century ago, India's first Prime Minister, Jawaharlal Nehru, set India on a course of protectionism and socialism – two of the most self-defeating economic strategies of modern times. 
To a country that had struggled for decades against British imperialism, however, neither capitalism nor openness to foreign investors seemed a prudent course. 
While India made important advances – in science, agricultural technology, and democratic institutions – the economy remained below its potential for decades. 
Only when India chose a course of market reforms in the mid-1980s did the outlook improve. 
With a decisive turn towards open trade and market liberalization in 1991, India finally broke free of the shackles of a failed economic strategy. 
During the 1990s, India found its footing as a market economy integrating with the world. 
Because of its poverty, its complexity, and its vastness (even national elections have to be held over the course of several weeks, to accommodate hundreds of millions of voters), the uptake of market reforms has been gradual, but also remarkably resilient to shocks. 
The old centralized political structure built around Nehru's Congress Party collapsed in the mid-1990s, giving way to a succession of weak multi-party governments. 
But the remarkable underlying truth is that each new government endorsed the direction of globalization and market reforms, so much so that the basic reform direction is now a national consensus of virtually every major party. 
Today's government won a strong mandate in last autumn's elections, giving it several years to deepen and widen reform. 
With this political mandate, India stands the chance of a dramatic breakthrough to rapid growth. 
Several things are now working in India's direction: 
1. rapid population growth is finally slowing (though not yet by enough). 
A growing proportion of the population will now be of working age, and a smaller population will be children. This should boost India's per capita income; 
2. old social barriers to education for girls and lower castes are giving way, under democratic pressures, to strong calls for universal education. 
This could provide the most dramatic social boost to rapid economic growth and improved well being; 
3. decades of investment in science and technology are now paying off in creating a powerful technological base for a modern Indian economy. 
Though much of rural India remains impoverished, new dynamic urban-based centers of information technology are springing up around the country. 
Indian cities such as Bangalore, Chennai (formerly Madras), Mumbai (formerly Bombay) and Hyderabad are becoming locations for software and hardware exports, the cutting edge of India's modern economy. 
India's exports of computer software and hardware have soared from a few hundred million dollars some years back to around $5 billion today, with a forecasted growth to $30 billion or more by 2005. 
As China boomed in the 1980s, India could boom in the first decade of this new century. 
If the national consensus around reforms is sustained and enlarged, two great goals could be met. 
India could enjoy a decade of "income doubling," in which per capita gross domestic product actually doubles by the year 2010. 
This would require an annual growth of per capita income of around 7%, something that is achievable given India's economic conditions. 
Second, India could create a system of universal literacy and education for the first time in its history, another dramatic social improvement that is realistically within reach. 
These goals require hard work on the part of government and society. 
Most importantly, all major political groups have to get behind the concept of universal education, a commitment that has, in practice, been missing for decades. 
Next, the Government must lead a massive effort of reform. 
For example, despite nationalist rhetoric by state enterprises and associated trade unions, the government should decide that the vast telecommunications network should be privatized, including to foreign investors. 
It's only in this way that India can hope to create a network of fiber optics and telephone lines to catapult the country into a modern information economy. 
Other economic measures will also be politically tough, like reigning in subsidies for power that undermine the budget and make it difficult to get new investors into rural areas. 
(Farmers have been promised cheap electricity for years – so cheap that private-sector power supplies are loath to make new investments.) 
Several other areas of reform – in finance, labor markets, foreign investment, tax reform – await action. 
Another goal should be to increase the government's spending on research and development, especially in areas of health, agriculture, environment and information technology. 
Despite long-standing political obstacles to some of these reforms, this may be the best and most likely moment for a political breakthrough. 
India is feeling confident about itself, especially in view of its growing role in the world of high technology and a decade of successful reforms. 
The new government has an electoral mandate. 
Favorable demographic realities are in the mind of policy makers. 
If India cannot make a breakthrough now, when could it? 
We should pay rapt attention as the new Government unveils its new budget and new development policies in coming weeks. 
It may contain positive news for India, and for the world. 

India’s Dalai Dilemma 
As the world reacts to China’s crackdown in Tibet, one country is conspicuous by both its centrality to the drama and its reticence over it. 
India, the land of asylum for the Dalai Lama and the angry young hotheads of the Tibetan Youth Congress, finds itself on the horns of a dilemma. 
On one hand, India is a democracy with a long tradition of allowing peaceful protest, including against foreign countries when their leaders come visiting. 
It provided refuge to the Dalai Lama when he fled Chinese occupation of Tibet in 1959, granted asylum (and eventually Indian citizenship) to more than 110,000 Tibetan refugees, and permitted them to create a government-in-exile (albeit one that India does not recognize) in the picturesque Himalayan hill town of Dharamsala. 
On the other hand, India has been cultivating better relations with China, which humiliated India in a brief border war in 1962. 
Though their bitter border dispute remains unresolved, and China has been a vital ally and military supplier to India’s enemies in Pakistan, bilateral relations have grown warmer in recent years. 
Trade has doubled in each of the last three years, to an estimated $40 billion this year; 
China has now overtaken the US as India’s largest single trading partner. 
Tourism, particularly by Indian pilgrims to a major Hindu holy site in Tibet, is thriving. 
Indian information technology firms have opened offices in Shanghai, and Infosys’s headquarters in Bangalore recruited nine Chinese this year. 
India has no desire to jeopardize any of this. 
India’s government has attempted to draw a distinction between its humanitarian obligations as an asylum country and its political responsibilities as a friend of China. 
The Dalai Lama and his followers are given a respected place but told not to conduct “political activities” on Indian soil. 
When young Tibetan radicals staged a march to Lhasa from Indian soil, the Indian police stopped them well before they got to the Tibetan border, detaining 100. 
When Tibetan demonstrators outside the Chinese Embassy in New Delhi attacked the premises, the Indian government stepped up its protection for the Chinese diplomats. 
Indian Foreign Minister Pranab Mukherjee – who was noticeably less forthcoming on Tibet than his American counterpart during a press conference with Secretary of State Condoleezza Rice – has publicly warned the Dalai Lama against doing anything that could have a “negative impact on Indo-Sino relations.” 
The Dalai Lama’s curious position has complicated India’s diplomatic dance with China. 
He is simultaneously the most visible spiritual leader of a worldwide community of believers, a role that India honors, and a political leader, a role that India permits but rejects in its own dealings with him. 
As a Buddhist, the Dalai Lama preaches non-attachment, self-realization, inner actualization, and non-violence; as a Tibetan he is admired by a people fiercely attached to their homeland, with most seeking its independence from China and many determined to fight for it. 
He is the most recognized worldwide symbol of a country that he has not seen for nearly five decades. 
The Dalai Lama’s message of peace, love, and reconciliation has found adherents among Hollywood movie stars, pony-tailed hippies, Irish rock musicians, and Indian politicians. 
But he has made no headway at all with the regime that rules his homeland, and he has been unable to prevent Tibet’s inexorable transformation into a Chinese province. 
His sermons fill football stadiums and he has won a Nobel Prize, but political leaders around the world shirk from meeting him openly, for fear of offending China. 
Indians are acutely conscious that, on this subject, the Chinese are easily offended. 
While India facilitated the highly publicized visit by Nancy Pelosi, Speaker of the US House of Representatives, to the Dalai Lama in Dharamsala last month, it almost simultaneously canceled a scheduled meeting between him and Indian Vice-President Mohammed Hamid Ansari. 
When China summoned India’s ambassador in Beijing to the foreign ministry at 2 a.m. for a dressing-down over the Tibetan protests in New Delhi, India meekly acquiesced in the insult. 
Though Prime Minister Manmohan Singh has publicly declared the Dalai Lama to be the “personification of nonviolence,” India has let it be known that it does not support his political objectives. 
Tibet, India’s government says, is an integral part of China, and India lends no support to those who would challenge that status. 
That position is not without detractors. 
The opposition Bharatiya Janata Party (BJP, which led the previous government) has criticized the current administration for not “expressing concern over the use of force by the Chinese government” and instead “adopting a policy of appeasement towards China with scant regard to the country’s national honor and foreign policy independence.” 
But few observers believe that the BJP would have conducted itself differently. 
The stark truth is that India has no choice in the matter. 
It cannot undermine its own democratic principles and abridge the freedom of speech of Tibetans on its soil. 
Nor can it afford to alienate its largest trading partner, a neighbor and an emerging global superpower, which is known to be prickly over any presumed slights to its sovereignty over Tibet. 
India will continue to balance delicately on its Tibetan tightrope. 

India’s Democracy at 60 
At midnight on August 15, 1947, a new nation was born on a subcontinent ripped apart by a bloody partition. 
Independent India came into being as flames blazed across the land, corpse-laden trains crossed the new frontier with Pakistan, and weary refugees abandoned everything to seek a new life. 
A less propitious start for a fledgling nation could scarcely be imagined. 
Yet, six decades later, the India that emerged from the wreckage of the British Raj is the world’s largest democracy, poised after years of rapid economic growth to take its place as one of the giants of the twenty-first century. 
A country whose very survival seemed in doubt at its founding offers striking lessons in constructing, against all odds, a working democracy. 
No other country embraces such an extraordinary profusion of ethnic groups, mutually incomprehensible languages, religions, and cultural practices, as well as variations of topography, climate, and levels of economic development. 
In 1947, India’s leaders faced a country with a million dead, 13 million displaced, billions of rupees worth of property damage, and the wounds of sectarian violence still bleeding. 
Given this, and the challenges of administering a new country, integrating the “princely states” into the Indian Union, and reorganizing the divided armed forces, they could have been forgiven for demanding dictatorial powers. 
But India made a strength out of its major weakness. 
To the American motto, “E Pluribus Unum,” India could only counter, “E Pluribus Pluribum.” 
Instead of suppressing its diversity in the name of national unity, India acknowledged its pluralism in its institutional arrangements: all groups, faiths, tastes, and ideologies survive and contend for their place in the sun. 
This wasn’t always easy. 
India suffered caste conflicts, clashes over the rights of different linguistic groups, religious riots (mainly between Hindus and Muslims), and separatist threats. 
Despite many stresses and strains, India has a remained a freewheeling multi-party democracy – corrupt and inefficient, perhaps, but nonetheless flourishing. 
It helped that India’s founding fathers, from Mahatma Gandhi on, were convinced democrats. 
India’s first and longest-serving prime minister, Jawaharlal Nehru, spent his political career instilling in his people the habits of democracy: disdain for dictators, respect for parliamentary procedures, and abiding faith in the constitutional system. 
As prime minister, Nehru carefully nurtured the country’s infant democratic institutions by showing them respect, even deference. 
For example, on the one occasion that he publicly criticized a judge, he apologized the next day and wrote an abject letter to the India’s Chief Justice. 
Though there was no serious challenger to his authority, Nehru never forgot that he derived his power from India’s people, to whom he remained astonishingly accessible. 
By his personal example, democratic values became so entrenched that when his own daughter, Indira Gandhi, suspended India’s freedoms in 1975 with a 21-month State of Emergency, she felt compelled to return to the Indian people for vindication. 
Having imbibed the most important of her father’s values, she held a free election, which she overwhelmingly lost. 
Though Indian politics is hardly immune to the appeal of sectarianism, its people have come to accept the idea of India as one land embracing many differences of caste, creed, color, culture, cuisine, conviction, costume, and custom, yet still rallying around a democratic consensus. 
The heart of that consensus is the simple principle that you don’t need to agree all the time – except on the ground rules about how you can disagree. 
India has survived all the challenges that have beset it for 60 years because it has maintained a consensus on how to manage without consensus. 
For example, India permits all religions to flourish while ensuring that none is privileged by the state. 
This includes the granting of group rights, under which Muslims are governed by their own Personal Law, distinct from the common civil code. 
If America is a melting-pot, then India is a thali , a selection of sumptuous dishes in different bowls. 
Each tastes different, and does not necessarily mix with the next, but all belong on the same plate. 
No one speaks seriously any more of the danger of disintegration. 
Separatist movements in far-flung places like Tamil Nadu and Mizoram have been quietly defused by a simple formula: yesterday’s secessionists become today’s chief ministers (the equivalent of provincial or state governors) and tomorrow’s opposition leaders. 
Moreover, democracy in India is not an elite preoccupation, but matters most to the underprivileged masses. 
Whereas in the United States, a majority of the poor do not vote, – turnout in Harlem was 23% in the last presidential election – in India the poor turn out in great numbers. 
As a result, the explosive potential of caste division also has been channeled through the ballot box, with the lowest of the low attaining high office. 
Mayawati, an “untouchable” woman, has ruled India’s most populous state, Uttar Pradesh, as Chief Minister three times, and now enjoys a secure majority. 
More generally, the logic of the electoral marketplace means that no single communal identity can dominate others. 
Three years ago, India, a country that is 81% Hindu, saw a Roman Catholic political leader (Sonia Gandhi) make way for a Sikh (Manmohan Singh), who was sworn in by a Muslim (President Abdul Kalam). 
By contrast, the world’s oldest democracy, the US, has yet to elect a president who is not white, male, and Christian. 
Democracy has sustained an India that safeguards the common space available to each identity. 
That idea has knit together a country that many thought would not survive, and whose 60th birthday is therefore well worth celebrating. 


What’s Troubling India? 
CAMBRIDGE – India’s recent fall from macroeconomic grace is a lamentable turn of events. 
After many years of outperformance, GDP growth has slowed sharply. 
Annual output will most likely rise by less than 5% this year, down from 6.8% in 2011 and 10.1% in 2010. 
Reform has stalled amid profound political paralysis. 
All of the major emerging economies face weakening external demand, but India’s slowdown has been exacerbated by a drop in investment that reflects a deeper loss of official direction and business confidence. 
Even the International Monetary Fund’s forecast of a modest improvement in 2013 is predicated on the government’s ability to breathe life into a spate of stalled economic reforms. 
India’s recent torpor has underpinned a remarkable shift in global opinion. 
Just a couple of years ago, India was developing a reputation as the cool place to invest. 
Heads of state tripped over one another to meet business leaders in Mumbai, hoping to pave the way for a significant expansion of trade and investment. 
Now their interest has faded, along with the macroeconomic numbers. 
And yet changes currently afoot might just turn things around. 
India’s octogenarian prime minister, Manmohan Singh, has recently awakened to the desperate need for renewed momentum. 
Economists around the world have taken note of the arrival of Raghuram Rajan as chief economist in the finance ministry. 
Rajan is a superstar academic researcher, a brilliant writer on political economy, and a former chief economist for the IMF. 
But it is far from obvious that Sonia Gandhi, President of the Indian National Congress and the country’s most powerful politician, shares Singh’s reform agenda. 
True, the cabinet is being reshuffled to elevate younger ministers. 
But the process points to a continuation of the tradition whereby most ministers are appointed on the basis of their loyalty to the Gandhi family rather than their merit and accomplishments. 
Unfortunately, for a country as poor as India, only sustained rapid growth can lead to enduring development gains. 
India’s poverty rate (an indicator that is admittedly both conceptually and practically difficult to measure) fell by half between 1981 and 2010, to just under 30% – a remarkable achievement. 
But faster-growing East Asia has experienced significantly greater progress, with the poverty rate falling from 77% to 14% over the same period. 
Why has India’s growth acceleration fizzled? 
For many years, India benefited from the long-lasting impact of economic liberalization in the early 1990’s. 
Back then, Singh, as finance minister, played a central role. 
He could count on the IMF – which had real policy leverage, owing to India’s need for a bailout program in 1991 – to provide external support to counter the huge internal obstacles to reform. 
Today, however, there is no external counterweight to the domestic political pressure that is stalling further liberalization. 
True, India’s government must now consider growing threats to the country’s investment-grade credit rating. 
The major ratings agencies are increasingly complaining about the country’s lack of a growth strategy and its outsize budget deficits. 
But the impact has been limited, owing to the authorities’ ability to stuff debt down the throats of captive local banks, insurance companies, and pension funds. 
Indeed, this “financial repression” tax on domestic savers remains a huge opaque source of funding for India’s debt-ridden government. 
It also prevents funds from being channeled to private-sector investment projects with far higher rates of return than the government can offer. 
The good news is that, from an economic perspective, there is still plenty of low-hanging fruit for restoring growth. 
Although India is right to avoid taking financial liberalization to the extreme that the United States did in the decades before the recent meltdown, it can do quite a lot without assuming inappropriate risks, as a commission headed by Rajan detailed a few years back. 
The retail sector is a huge source of inefficiency that effectively places a massive tax on India’s poor by driving up prices. 
Instead of suing foreign retailers like Wal-Mart, India should be finding ways to emulate and benefit from their hyper-efficient methods. 
Infrastructure is slowly improving, but roads, ports, water access, and the electricity grid are still horrific across large parts of the country. 
Of course, India’s democratic government cannot simply bulldoze through people and the environment to create infrastructure. 
But the obstacles also include layers of corrupt bureaucrats and politicians – a vast network of resistance to reform. 
Some argue that central-government paralysis is inevitable in a democracy of 1.2 billion people, and that the only way to re-energize India is to establish a looser confederation of its constituent states. 
Devolution would unshackle the economically more successful states. 
And, by combating the culture of aid dependency in economically weaker states, India’s poorer regions might benefit in the long run as well. 
As dysfunctional as a decentralized Europe seems to be these days, India might benefit from moving a few steps in that direction, even as Europe itself struggles to become more centralized. 
Devolution might sound unrealistic, but once upon a time so did the European Union. 
If Singh’s new reform agenda is again blocked, perhaps it will be time for a more radical assessment. 

India’s Elites in Crisis 
NEW DELHI – For a country with 1.2 billion people, India is ruled by a surprisingly small elite, which runs everything from the government to large companies and even sports bodies. 
But a series of scandals, some involving billions of dollars, has now seriously undermined that elite’s standing in the eyes of the Indian public. 
Almost anyone in a position of power in India, including well-known print and television journalists, is now viewed with suspicion. 
This is occurring at a time when economic growth is pulling a young and upwardly mobile population into the urban middle class. 
This new middle class is no longer constrained by the patronage systems of the village, but it also does not enjoy the cozy relationship that links the old middle class with the elite. 
Could this crisis of the elite trigger India’s own Tiananmen Square moment? 
Except in totalitarian regimes, a country’s elite depends on a degree of popular acceptance, which is mostly derived from the belief that the elite is broadly “fair” in its dealings. 
Following the recent series of scandals, the average Indian does not believe this anymore. 
Of course, doubts about the ruling elite are not unique to India. 
Almost all countries undergoing a shift from a pre-industrial equilibrium based on patronage to one based on modern institutions and the rule of law have faced such crises of legitimacy. 
Until the early nineteenth century, for example, British politics was extraordinarily corrupt. 
The old aristocracy not only dominated the House of Lords, but also used its influence to get relatives, friends, and family retainers elected to the House of Commons by exploiting a key institutional weakness – the existence of “rotten boroughs” that could be bought and sold. 
The Duke of Newcastle alone is said to have controlled seven such boroughs, each with two representatives. 
Meanwhile, large and populous industrial cities like Birmingham and Manchester were barely represented. 
In 1819, a crowd of 60,000 gathered in Manchester to demand reform, but were charged by the cavalry. 
Fifteen people were killed and many more injured in what is remembered as the Peterloo Massacre. 
Given the recent memory of the violent French Revolution, the British elite reluctantly agreed to democratizing reforms. 
Ultimately, the Reform Act of 1832 abolished the rotten boroughs and extended the franchise to the new middle class (the working class and women would have to wait). 
The United States, too, went though a period of robber-baron industrialization in the 1870’s and 1880’s. 
The greed and corruption of that era were satirized in 1873 by Mark Twain and Charles Dudley Warner in their book The Gilded Age: A Tale of Today. 
The period ended with the depression of 1893-96, and was followed by the major political reforms of the Progressive Era. 
For Britain and the US, the transition in the nature of the governing elite was relatively smooth. 
But there are many examples where such change was sudden and violent – the French and Russian Revolutions, for example. 
In Germany, the old Prussian elite successfully managed the country’s industrialization in the late nineteenth century, but was discredited by defeat in World War I. Nazism filled the ensuing vacuum, and a new equilibrium would be established only after World War II. 
Similar shifts have been witnessed in Asia. 
Japan saw two shifts – the Meiji Restoration of 1868 and the period after World War II. 
South Korea was ruled by generals until widespread student protests led to a democratic transition in 1987. (Many of the country’s top businessmen faced prosecution in subsequent years.) 
Indonesia experienced its shift more recently, in 1998. 
When China confronted this moment during the Tiananmen Square protests of 1989, the Communist state repressed the students with an iron fist, but has since maintained a single-minded focus on economic growth. 
Corruption remains a major problem, but the authorities take care to punish the worst excesses in a highly visible way. 
Still, as the recent controversy over the Nobel Peace Prize demonstrated, the government remains nervous about any dissent that challenges the legitimacy of the ruling elite. 
Even adjusted for purchasing power, India’s middle class today probably totals no more than 70 million (far smaller than is generally assumed). 
But, in the coming decade, today’s established middle class will be swamped by newcomers working their way up from the country’s slums, small towns, and villages. 
One can see them everywhere – learning English in “coaching centers,” working anonymously in the new malls and call centers, or suddenly famous as sports stars. 
Never before has India experienced such social mobility. 
So far, this new group has been too busy climbing the income ladder to express their resentment at the excesses of the elite, but one can feel a growing sense of anger among its members. 
It is impossible to predict when the shift will happen or what form it will take. 
Given India’s democratic traditions, it is likely that the change will be peaceful. 
One possibility is that it will take place province by province – the previously ungovernable state of Bihar being a prime example. 
But we might also see an unpredictable turn, with a new political leader or movement suddenly capturing the popular imagination and sweeping aside the old arrangements. 
As we know from Nazi Germany and other cases, such movements do not always lead to a happy outcome. 
Perhaps India’s existing elite will learn from history, purge itself, and then open itself up to new talent. 
Many investigations have been ordered into the current corruption scandals. 
Over the course of this year, Indians will find out if such efforts are serious and whether they will lead to reform – or merely to deeper crisis. 

India’s Fiscal Follies 
NEW DEHLI -- India’s new budget for 2008-2009 says less about the country’s current financial health than it does about the irresistible tendency of Indian governments to use the national budget as a pre-election cudgel. 
Every year, India struggles to reconcile the irreconcilable: stimulate economic growth and investment, alleviate endemic poverty, and feed a ravenous military appetite. 
The government must be seen to care about “aam aadmi,” the common man (who votes), while satisfying the needs of businessmen (who keep the economy humming). 
Indeed, the new budget is a pre-election bonanza for key constituencies: tax cuts for the middle class and perks for the country’s big corporations. 
There’s a little something for everyone, including a stunning $15 billion in loan waivers for small farmers. 
For all the attention that India’s retail revolution, information technology prowess, and booming manufacturing sectors have garnered in recent years, agriculture, on which 70% of the population still directly depends, is in crisis. 
Growth in India’s agricultural sector declined from a lackluster 3.8% to an even more anemic 2.6% last year. 
Water tables are dropping where farmers are lucky enough to have wells, and rainfall has become increasingly unpredictable. 
Subsistence farming of traditional food grains, fruits, and vegetables is giving way to cash crops and monocultures dependent on high-priced inputs that small farmers cannot afford and water that they can’t provide. 
Farmers borrow money from usurious private lenders. 
Unable to repay their loans, they kill themselves. 
Farmer suicides in India have raged unabated over the past decade, a period of much-vaunted rapid growth. 
These more than 100,000 deaths are a tragic indictment of India’s economic “miracle,” and an embarrassment for a government eager to promote India’s image as an up-and-coming global economic and military power. 
While well intentioned, the new budget’s lavish loan forgiveness scheme will not help those farmers who most need relief: 80% of India’s farmers have no access to formal credit, and it is bank loans that are to be forgiven. 
Moreover, since farmers who do have access to formal credit will have less incentive to repay their loans, banks will become more reluctant to lend to any farmers at all. 
A policy of expanding legitimate micro-lending schemes and prosecuting illegal loan sharks, not to mention the promotion of sustainable agricultural practices that require fewer expensive (and environmentally dangerous) inputs, would do far more to help India’s poorest farmers than this expensive and misguided measure. 
The new budget, recognizing the country’s acute water crisis, also calls for more money to expand irrigation. 
Most Indian farmers will benefit from greater access to irrigation, but if this means building more ill-conceived dams and pursuing large-scale projects, the result will be more water for industrial agriculture, more damage to India’s damaged environment, and little improvement for poor farmers. 
Aggressive expansion of proven low-cost, high-impact micro-irrigation techniques would do more to help small-scale farmers. 
The new budget is also likely to do little to improve India’s poor education and primary health-care systems. 
True, spending in these two critical areas is to rise dramatically (by 20% for education and 15% for health care). 
But, because these items amount to a pittance of India’s total budget, total spending remains low, especially relative to need. 
Meanwhile, the lion’s share of the new budget, 63%, will go to the military, police, administration, and debt service. 
India’s defense spending will hit a new record of $26.5 billion as the world’s fourth-largest military embarks on an aggressive drive to modernize its capabilities in the face of the deteriorating situation in Pakistan and China’s military expansion. 
Having performed poorly in a spate of recent state elections, the ruling Congress Party is betting that the new budget will swing voters its way if the national election, currently scheduled for April 2009, is moved forward to this autumn. 
The lesson of the 2004 election, when poorer voters, fed up with the previous BJP-led government’s “India Shining” policies and slogans, threw it out of office, has not been forgotten. 
But the strategy of embracing “poor-friendly” policies that deliver little real relief could backfire. 
Poor voters may not associate the largesse with the Congress-led government in New Dehli, but rather with the state governments that actually hand out the goods. 
Moreover, there is nothing to indicate that the government aid proposed in the budget will reach those who need it with any more efficiency than the dismal record so far. 
It is conceivable that Mayawati Kumari, the self-appointed “goddess” of the poor whose low-caste-based party, the BSP, swept to power last year with a clear majority in Uttar Pradesh, could be the biggest winner in an early election. 
This would represent a revolution in Indian politics, but it is hardly the outcome the champions of business-driven market reforms would welcome. 
Whether a more populist government would be able to break radically with India’s flawed fiscal policies and create an environment favorable to a dramatic improvement in India’s shamefully poor human and physical infrastructure – which would give a solid boost to India’s economy over the long term – remains to be seen. 

India’s Hillary Clinton? 
As Americans debate their readiness to accept a woman such as Hillary Clinton as president, India has already done so, with the election of Pratibha Patil. 
Although India’s presidency is primarily a ceremonial post that carries less weight than that of prime minister (the position once held by Indira Gandhi), it is symbolically significant. 
Sonia Gandhi, the leader of the ruling Congress Party, who pushed hard to promote Patil’s candidacy primarily on gender grounds, calls this election “a special moment for women across the country.” 
Moreover, India can claim a great deal of pride in the fact that the last two presidents were from minority populations – one from the lowest of castes (Harijan, formerly referred to as “untouchables”), and another one from the Muslim community. 
As a daughter of a woman who fought for women’s rights during the independence movement and was instrumental in starting one of the first women’s institutions in India, I should feel a genuine sense of pride in the election of Patil. 
But at best I have mixed emotions. 
Both of India’s last two presidents had distinguished themselves in professional careers before being elected – one in the Foreign Service and the other in nuclear physics – and their reputations were above reproach. 
Patil, on the other hand, is a controversial figure, with questionable qualifications. 
Most of India’s major news outlets highlighted in their coverage of the story charges of corruption and ineptitude. 
One well-respected publication even called Mrs. Patil’s selection “embarrassing.” 
Women hear over and over that we have to be twice as good as men to be perceived as successful, deserving leaders. 
Even if we disregard some of the accusations against Patil as baseless, it is hard to imagine a less powerful candidate for the highest ceremonial post in the largest democracy in the world. 
All the same, I applaud Sonia Gandhi for her commitment to appointing a woman to this important position. 
In a country full of contradictory attitudes toward women – ranging from the worship of the powerful goddess Durga to the killing of innocent young brides – such gestures can be very powerful. 
But gestures cannot be a substitute for real action, or for the hard work that is necessary to empower all Indian women. 
Indeed, one could argue that such symbolic acts may even create a blind euphoria that obscures the fact that, as a result of less education and lower pay, young females in India continue to have far fewer resources than their male counterparts. 
While India’s president may be only a ceremonial head of state, during periods of political instability – especially in the current age of coalition governments – it is the president who makes crucial decisions about governing parties. 
Many past presidents have also used the position to throw their intellectual weight behind such important issues as education and India’s cultural diversity. 
So President Patil has large shoes to fill. 
One can only hope that she will prove her critics wrong. 
For those women in India who have proven themselves to be effective leaders in all segments of society, it would be wonderful if she can demonstrate early on that she has the intellectual and professional gravitas that befits the position. 

India’s Illiterate Revolution 
The United States has long been divided over what it calls “affirmative action,” a system of racial preferences intended to overcome the lingering consequences of slavery and discrimination against black Americans. 
India is now becoming divided in much the same way, and for much the same reason – the emerging system of “reserved places” aimed at redressing centuries of caste discrimination. 
But India’s good intentions, like America’s affirmative action policies, are misguided. 
The underlying question is whether merit as a criterion for advancement is doomed when legacies of racial and caste discrimination exist. 
Are those who agitate for affirmative action fighting for something that is more a quack remedy than a real solution? 
In fact, India’s “reserved places” scheme operates as a deliberate smokescreen, for it allows the government cleverly to mask the real issue, which is access to primary education for India’s disadvantaged. 
Were adequate primary education available to India’s poor – or, for that matter, to America’s poor urban blacks – there would be no need for reserved places in higher education and elsewhere. 
Indeed, any Indian able to read this article should consider himself lucky, because India’s politicians have succeeded in keeping a majority of the country’s population thoroughly illiterate (as well as poor and unhealthy). 
Instead of providing quality elementary education for all, our policymakers are more concerned with enacting caste-based measures aimed at short-term political gains. 
Since India gained independence 58 years ago, billions of rupees have been doled out in numerous educational policies, but general primary education remains abysmal. 
According to a report released by the National Institute for Educational Planning Administration (NIEPA) in 2005, 8.1% of primary schools in India have no classrooms, while 17.5% have only one teacher. 
In addition, 76.2% of schools do not have clean drinking water, while 14.6% lack electricity. 
Less than 4% of all primary schools have computers. 
Likewise, the Mumbai-based NGO Pratham’s Annual Status of Education Report 2005 , which was prepared after a survey in 28 states and union territories, reveals that 35% of children in the 7-14 age group are unable to read simple paragraphs, while 41% failed to solve a simple two-digit subtraction problem or a division problem. 
Instead of preparing a pool of educated workers for the future, the government’s policies have given rise to an illiterate and innumerate population. 
These findings raise damning suspicions about the literacy levels that successive Indian governments have claimed to achieve. 
If the state of primary education is this bad, will the disadvantaged classes ever stand a chance? 
Moreover, according to Vinod Raina, a member of the Central Advisory Board on Education (CABE), 80 million of India’s 200 million children between 6-14 years of age are not in school at all. 
Of the remaining 120 million, only 20 million are expected to reach the tenth year of school, with the rest dropping out along the way. 
Indeed, Prime Minister Manmohan Singh recently expressed dismay over the fact that “only 47 out of 100 children enrolled in class I reach class VIII.” 
The government has pledged in its National Common Minimum Program to raise public expenditure on education to 6% of GDP. 
However, recent years have witnessed a steady decline in educational spending, from 4% of GDP in 2001-02 to 3.8% in 2002-04 and 3.5% in 2004-05. 
Quality education is the single greatest asset that a nation can give to its people. 
It also happens to be the least expensive and most cost-effective support that government can provide. 
But Indian politicians’ interests appear to lie elsewhere. 
After all, with the rate of functional literacy at only 37.5%, they can easily manipulate the votes of uneducated people with alcohol, pop slogans, and intimidation. 
So the protests by highly educated Indians against “reserved places” is not only wrongheaded, but dangerous as well. 
Unless India’s highly educated stand up for better schools for all, protests against caste preferences will only succeed in heightening tensions and selling newspapers, rather than improving the lives of India’s destitute. 
The government is probably happy with these protests, for they divert attention from the real issue – the authorities’ utter failure to address the fundamental problem. 
As in America, the issue is not racial and class reservations and preferences, but ensuring high-quality primary education for all, rich and poor alike. 
As India’s educated revolt against preferences, they should not do so in a way that reinforces illiteracy. 

India’s New Caste Politics 
Caste, once again, is casting its shadow over India’s politics. 
Caste-based “reservations” (reserved places) in education and government employment are supposed to benefit India’s most deprived, but in reality they have hardened, rather than eroded, India’s ancient system of discrimination. 
Every now and then, particularly before elections, caste groups demand to be placed on the list of “other backwards classes” (OBC’s), in order to benefit from these reservations. 
Indeed, nowadays political parties dangle the carrot of reservations to ever more castes, and even promise to extend the policy to admissions into elite educational institutions and the private sector. 
Many consider India’s increasing mobilization along caste lines a welcome assertion of “identity.” 
Indeed, intellectuals and politicians of all varieties almost unanimously hail the politics of caste identity as a move towards true equality. 
Some go so far as to argue that the recent rise of the lower castes in northern Indian politics and the implementation of reservations by the central government amount to a silent revolution, and that the politics of caste is secular and a bulwark against religious sectarianism. 
Public policy, however, should be based on evidence and logic, not glib sociological babble. 
Whether caste is a good indicator of socioeconomic deprivation remains an unsettled issue. 
Indeed, the protagonists of caste politics and caste-based public policy simply cannot validate their assertions, offering only small-sample surveys that can be grossly misleading in the context of a huge country characterized by monumental diversity. 
Moreover, these studies typically pool castes into three large groups, which distorts the real picture. 
Since India gained its independence, the government has systematically refused to collect sufficient data on the socioeconomic aspects of caste. 
The huge mass of evidence available in the censuses and land revenue settlement reports of the period from 1901 to 1931 lies ignored. 
If caste is a good indicator of deprivation now, it should have been even clearer in the past. 
But statistical analysis of this evidence – the only accessible macro-level quantitative data for the whole country – does not confirm caste as a clear indicator of deprivation. 
For example, less than one-third of workers in this period followed their traditional caste occupations. 
Workers belonging to each caste pursued a wide variety of occupations, although agriculture provided the bulk of employment. 
Each caste contained a varying mixture of landless laborers, cultivators, and landlords. 
While some castes concentrated on one, others were equally involved in a number of occupations. 
Access to literacy and to jobs in the government sector and modern professions was limited to a small section of the population usually belonging to the high castes. 
Access to land was uneven. 
Farmers, the single largest occupational group in most castes, with ritual rank ranging from high to low, were highly differentiated in terms of size and economic status. 
The size of holdings was similar for most upper castes and some lower castes. 
Thus, the economic status of households varied a great deal within each caste. 
In any case, the majority of peasants belonging to any caste, upper or lower, were poor. 
In many castes of low ritual rank, landlords, prosperous cultivators and traders were found, some of whom actually paid income tax. 
Consider the average economic position of the members of each caste in this sample. 
Generally, most high-ranking castes occupied high economic positions, and the majority of the “untouchable” castes were confined to the lowest economic positions. 
In some regions, e.g., Mysore (Karnataka), Madras (Tamil Nadu) and Uttar Pradesh, some lower castes occupy higher economic positions than high castes. 
The most obvious fact in the data is the great disparity in the economic positions of castes sharing the same ritual rank. 
Such differences are particularly acute for middle-ranking castes, which are now called OBC’s, and are observed in all parts of India. 
Even among the untouchables, some castes have higher economic status than others. 
Among the middle-ranking, agricultural castes, some had high economic status due to improved agriculture, brought about by canal irrigation and commercialization. 
Most other cultivating and artisan castes, enjoying similar ritual ranks as the financially more successful group, occupied much lower economic positions, which resulted in an amazing degree of heterogeneity among backward castes. 
In some regions – Uttar Pradesh, Bombay (Maharashtra and Gujarat), and the Telugu speaking areas of Madras (Andhra Pradesh) – the lowest economic positions were occupied by some “backward” castes, not by untouchables. 
Hence, caste has not been an indicator of material deprivation, even during the early decades of the twentieth century. 
But boosters of caste politics claim that it is not economic deprivation but the social backwardness from which these castes have historically suffered that makes caste reservations necessary. 
In fact, the whole population of the lower castes did not suffer from an equal degree of ritual handicap. 
There was an elaborate gradation and hierarchy among the middle-ranking and even untouchable castes, which governed interaction between them and kept inter-caste socialization to a minimum. 
Historically, the rich in each low caste emulated the customs and rituals of the upper castes, such as child marriage, the payment of dowries, and prevention of widows remarrying. 
Sometimes, well-off sections of low castes broke away to form new castes and managed to achieve higher ritual status. 
Usually a prosperous caste succeeded in raising its rank in the ritual hierarchy. 
By using caste as a criterion in public policy, India’s government is effectively treating the rich and the poor equally, thereby conveying benefits to the former. 
This helps co-opt the elite among the lower castes to the ruling coalition, and keeps the poor divided along caste lines. 
But it is hypocritical to argue that this does anything to eliminate poverty. 


India’s New Ruling Caste 
CAMBRIDGE – The largest election in history, involving more than 700 million voters, has resulted in the victory of India’s ruling alliance, led by Prime Minister Manmohan Singh of the Indian National Congress. 
The verdict disproved gloomy predictions of a hung parliament and the further strengthening of regional parties. 
The new government will be far more stable than many of its predecessors, so the election results have elicited profound relief. 
But the fact remains that, like previous governments, the new administration will consist mostly of politicians unfit to hold ministerial office. 
While several provincial satraps have been cut down to size, new, aspiring ones have garnered significant support. 
Despite the manifest success of Indian democracy, its parliamentary system is not succeeding in giving India good governance. 
Obviously, India is not a failed state. 
Lant Pritchett of the Harvard Kennedy School has coined a new name for India: a “flailing state” – a state where the government’s extremely competent upper echelons are unable to control its inefficient lower levels, resulting in poor performance. 
But this analysis gives credit where none is due: India’s problem is its top political leadership’s lack of competence. 
The inability of India’s current political system to provide effective government places the country in a different category: a non-performing state. 
The idealism of India’s freedom movement quickly evaporated after independence in the face of the opportunities for patronage that came with power. 
The way India’s political system evolved has made politics the surest path to wealth. 
The money spent to win elections (often including the purchase of a party’s nomination) is recouped many times over once the winner is in office. 
Half of India’s legislators who stood for reelection this time around had tripled their assets in the last five years. 
Increasing corruption within governments run by the Congress party, which led India to independence and monopolized political power for decades, showed what a lucrative career politics had become. 
Given India’s religious, caste, and linguistic divides, politicians saw how easily they could leverage even a small following into votes. 
Soon, Indian political parties began to break up, giving rise to a large number of regional and caste-based parties. Most of these parties are led by political dynasties that prize loyalty over merit. 
Because of the splintering of political parties, India has had only one single-party government and eight coalition governments in the last two decades. 
Members of the coalition governments have treated the ministries allocated to them as fiefdoms, to be milked for their benefit. 
Over time, India’s government has become primarily a tool for advancing the personal interests of politicians rather than the entity responsible for running the country. 
The opportunity for personal gains through public office has made electoral politics an automatic career choice for Indian politicians’ progeny. 
Record numbers of sons and daughters of political leaders and millionaires (and people with criminal backgrounds) contested this election. 
We are seeing the formation of a new Indian caste – a caste of rulers different from India’s traditional Kshatriya caste – before our very eyes. 
Like existing castes, the new caste specializes in one occupation: political office. 
Just as someone became a carpenter or a trader in an earlier era merely through birth, members of India’s ruling caste now become leaders of parties, members of legislatures, and cabinet ministers solely because of their parentage. 
And, as with the older castes, there is no need for any qualification for the vocation; birth alone is sufficient. 
Lack of vocational competence never barred Indians from remaining in their caste, and how well one performs in political office is, likewise, not a criterion for politicians to continue in positions of power. 
India’s parliamentary system requires ministers to be members of the legislature. 
Party leaders select family members and other loyal followers as candidates for elections, with absolutely no consideration of their abilities to fulfill ministerial responsibilities, resulting in cabinets that are simply not capable of managing the problems confronting the country’s national and state governments. 
Even with the best political leadership, governing India is no easy task. 
Successive governments staffed with unqualified politicians have failed dismally to carry out the core governmental functions of maintaining law and order, providing the basic services expected of modern societies, and promoting economic growth. 
India’s high-performing private sector has so far masked the failure of the Indian state. 
In its current form, India’s parliamentary system can produce only non-performing, corrupt governments. 
It rewards ambition, promotes office-at-any-cost politics, and devalues merit. 
Taking away the prize of ministerial office from elected representatives might discourage wealth-maximizing politicians from entering politics. 
It is time, therefore, for India to consider introducing a presidential system of government, which would reduce the scope for “horse trading” and allow the country’s leader to select competent people for cabinet positions. 

India’s Olympic Also-Rans 
NEW DELHI – As the world awaits the Beijing Olympics, many wonder whether China’s grand coming-out party will also mark the occasion when it wrests dominance of the medal tally from the United States. 
China’s dedicated athletes are widely assumed to have dozens of gold and silver medals in their grasp. 
Whether or not they overtake the US, however, one thing is certain: China’s neighbor and regional geopolitical rival, India, will be lucky to win even a single medal. 
International sport is, of course, an exercise in national chauvinism by other means. 
At some level, we all pretend to tune into the Olympics to admire human athleticism. 
But none of us can deny the attraction of the flags under which those athletes compete, the anthem that is played for the winners, and, ultimately, that impossible-to-ignore, regularly-updated medal tally, listing the gold, silver, and bronze medals awarded to each country, the Games’ real honor roll. 
Every Indian who follows the Olympics has cringed scanning the daily list of medal winners, eyes traveling down past dozens of nations big and small before alighting on a solitary Indian bronze in tennis or wrestling. 
Worse yet, we have all known the shame of waiting day after day for India to appear on the list at all, as countries a hundredth our size record gold upon gold and Indian athletes are barely mentioned among the also-rans. 
Indians like to think we can hold our own against the best in the world in any field: our Kalidasa can stand up to their Shakespeare, our Ramanujan to their Einstein, our Bollywood to their Hollywood and, these days, our Infosys to their Microsoft. 
In sport, however, it is a different story. 
Our cricketers have come close to being considered the best in the world, but cricket is not an Olympic sport. 
Our sole world champion in any sport is the chess grandmaster Vishwanathan Anand – in another non-Olympic sport, and one that calls for brain, not brawn. 
In fact, in the Olympics, India’s record has declined over time. 
The one gold medal we had become used to winning since the 1920’s, in field hockey, has proved elusive in recent Games, as our players have stumbled on Astroturf. 
This year, India’s hockey players failed even to qualify for the Games. 
In everything where simple human prowess is at stake – running, jumping, swimming, lifting, throwing - Indians simply don’t have what it takes. 
An Indian beauty queen, Madhu Sapre, once became an unwitting victim of Indians’ sense of national shame at our sporting insignificance. 
She was unjustly denied a Miss World title in 1992 because of her answer to the final-round question, “What is the first thing you would do if you became the ruler of your country?” 
Her response – “I would build a sports stadium” – was considered stupid by the judges, and the almost-certain crown (she was the overwhelming favorite) slipped from her grasp. 
Sapre’s answer might not have been the brightest, but if the judges had any idea of how desperate Indians are for sporting success, they would have understood that she was not expressing such an absurd priority. 
Why do Indian athletes perform so badly? 
The explanations range from the anthropological to the borderline racist: Indians don’t have the genes, the build, the stamina, the climate, whatever. 
There are structural and infrastructural explanations: lack of training facilities, gymnasiums, running tracks, equipment, financial resources. 
We are a developing country, it is said; after all, it is not just your eye against his, your legs against hers, but what you can do against their trainer, their running shoe, their ergodynamic costume, their titanium archer’s bow. 
But those rationales won’t do: other developing countries, from Jamaica to Ethiopia, regularly rake in the medals. 
Our talent pool isn’t really a billion, some argue; it’s only the well off and middle class, maybe 300 million strong, who can afford to play sports. 
But even that is a larger population base than a hundred countries that do better than India at the Olympics. 
On the other hand, the incentives for success are not great; the years of sacrifice and effort it takes to become a world-class athlete are simply not a realistic option to an Indian who needs to make a living, and sponsors are few and far between (and they are all spending their sponsorship money on cricket). 
Finally, there’s the usual Indian problem: sports administrative bodies and government departments are ridden with patronage and petty bossism, with officials more interested in protecting their turf (and enjoying paid vacations to sporting events) than in promoting athletes. 
With all these factors, failure in the Olympics, it is suggested, is encoded in our national DNA. 
Yet success or failure still depends on the individual athlete. 
Indian genes in a developing country did not prevent Vijay Singh emerging from Fiji to rival Tiger Woods as the best golfer in the world. 
And if Indians can be better than white and black sportsmen on the cricket field, why can’t they beat them in an Olympic stadium? 
The newly globalized India can no longer content itself with mediocrity in this global competition. 
For a land with world-class computer scientists, mathematicians, biotech researchers, filmmakers, and novelists, sporting excellence is the last unconquered frontier. 
But 2008 won’t be the year in which that frontier is breached. 

India's Pseudo-Democracy 
Recently, India's Prime Minister Atal Behari Vajpayee said that despite the outward appearance of health, Indian democracy appears to have become hollow, with elections reduced to a farce and the "party system eroded due to unethical practices." 
According to Vajpayee, "The outer shell of democracy is, no doubt, intact, but appears to be moth-eaten from inside." 
Indeed, in the preface to a recent collection of his speeches, Vajpayee wondered whether democracy had truly taken root in India. 
"How can democratic institutions work properly," he asked, "when politics is becoming increasingly criminalized?" 
This is a strange turn, for parliamentary democracy has long been a source of pride for most Indians. 
The country may not match up to its Asian neighbors in prosperity, but Indians have always been able to boast of the vitality of their parliamentary system. 
Nowadays, such boasts are heard far less frequently. 
Not only are India's economic failures more obvious, in comparison to Asia's revived economic juggernauts; so, too, are the failures of its political system. 
Unprincipled politics, cults of violence, communal rage, and macabre killings of religious minorities have all combined to shake people's faith in the political system's viability. 
Small wonder, then, that people are starting to ask whether India needs an alternative system of government. 
Part of the problem lies in India's deracinated party politics. 
For decades, the Congress Party of Nehru and his daughter, Indira Gandhi, basically ruled the country unchallenged. 
But with the assassinations of Indira Gandhi and her son, former Prime Minister Rajiv Gandhi, Congress disintegrated and has not recovered. 
Rather than ushering in an era of recognizable multi-party politics, Indian democracy still lacks a party system worthy of the name. 
One reason for this is that there are barely any national parties. 
Instead, India is saddled with highly volatile leader-based groups. 
When the leadership is charismatic and strong, the party is a servile instrument. 
Lacking coherent principles or an overriding ideology, these groups fragment when their leadership changes or splits, as Congress did. 
Where parties are weak, there can be no party discipline. 
India's parliament is riddled with defections by MPs, who move freely from one party grouping to another. 
So endemic is the buying and selling of legislators that parliament looks a lot like a cattle market. 
The prizes conferred on opportunistic defectors not only undermine the party system, but weaken the foundations of parliament by making organized opposition impossible. 
Public apathy bordering on fatalism is the inevitable result. 
This is dangerous because apathy does not take the form of withdrawal from public life, but increasingly finds expression in sectarian and religious conflict. 
Of course, politicians incite many of these conflicts, using caste, sect, and religion--not political ideas--to build voter loyalty. 
But apathy about democracy is what makes so many ordinary Indians prey to poisonous appeals. 
This susceptibility is the clearest sign that India's experiment with the Westminster model of parliamentary democracy has failed to justify the hopes that prevailed fifty years ago when the Constitution was proclaimed. 
Back then, parliament was seen as a means to bridge the divides of caste, religion, and region. 
Parliament's increasing irrelevance in sorting out these problems--indeed, its role in exacerbating them--is fueling a growing preference among Indians for a presidential system of government that removes executive functions from the oversight of an institution that has been addled and rendered impotent by undisciplined factions. 
Of course, politicians are not the only people at fault here. 
Sadly, Indian society never really embraced the consensual values that India's Constitution proclaims: a participatory, decentralized democracy; an egalitarian society with minimal social and economic disparities; a secularized polity; the supremacy of the rule of law; a federal structure ensuring partial autonomy to provinces; cultural and religious pluralism; harmony between rural and urban areas; and an efficient, honest state administration at both the national and local level. 
Instead, race and caste remain as potent as ever. 
Wealth is as grossly distributed as ever. 
Corruption rules many state governments and national ministries. 
Urban and rural areas subvert each other. 
But parliaments demand a minimal national consensus if they are to function, for they are creatures of compromise in decision-making. 
Executive governments, on the other hand, are creatures of decision: a popularly elected president is ultimately responsible to his voters, not to his party colleagues. 
The very election by national suffrage of an executive provides the type of minimal consensus that India's faction-riven parliaments have, sadly, never been able to cultivate. 
Of course, a president will undoubtedly need to compromise with his legislature, but the general consent that is gained by popular election implies at least some broader agreement behind the platform that he or she campaigned on. 
Of course, no magic bullet will do away with the forces that divide India. 
But at least some of the maladies of the current parliamentary system, such as defection, party factionalism, inherent political instability, and crippling coalition politics can be minimized, if not eliminated, by adopting an executive-dominant model of presidential democracy. 
In adopting such a system, Indians would have nothing to lose but the corruption and chaos of today's discredited parliament. 


India's Second Great Mutiny? 
For all its long history, India is a young country, with perhaps 70% of its population under 30 years of age. 
The number of those with memories of the bloody 1947 partition that produced India and Pakistan as independent states is declining, and for the young generation, Pakistan is no longer a part of the great nation that was lost, but a hostile neighbor that supports violent, fundamentalist jihad. 
Sadly, distrust of Pakistan increasingly touches India's Muslim community, more than 100 million strong, but still only 12% of the Indian population. 
Despite partition, India's mood in the first decades of independence was one of idealism and hope. 
Most Muslims saw Jawaharlal Nehru, India's first Prime Minister, as the true inheritor of Mahatma Gandhi's vision of India as a tolerant, multi-national state. 
In turn, several of Nehru's Muslim associates were respected nationally across the religious divide. 
Muslims trusted Nehru implicitly, and his Indian National Congress Party had a near monopoly on Muslim votes. 
This support persisted despite difficult conditions for the Muslim minority, including blatant discrimination in employment and in the distribution of government largesse. 
More ominously, Muslims were often considered a Fifth Column within India, plotting to divide the country further. 
Such suspicions frequently boiled over into religious riots, in which Muslims bore over 90% of the casualties. 
No one has ever been punished for these killings. 
By the 1980s, the Congress Party's dominance of Indian politics was ending. 
From the Muslim point of view, no major political party took up the cause of Indian pluralism with the conviction that guided Nehru. 
Other parties moved in to take their share of Muslim votes while the Hindu right-wing Bharatiya Janata Party, (BJP) the current ruling party, began creating and consolidating a growing bloc of anti-Muslim voters. 
The BJP has always evoked instinctive fear among Muslims. 
It exploited the multiple failures of the Congress Party in launching its quest for power, building vicious diatribes against Muslims and Christians into their campaign rhetoric. 
The BJP and its allies sought retribution for what they portrayed as the historical sins of the Muslims, and turned an insignificant 16 th century mosque at Ayodhya into the symbol of this mission. 
The BJP's real target was Indian society tradition of tolerance and pluralism, which it attacked for allegedly representing the appeasement of religious minorities. 
Constitutional law was defied and horrendous communal violence against religious minorities became frequent. 
Finally, the Ayodhya mosque was demolished in December 1992 during a mass gathering organized by the BJP. 
The current Deputy Prime Minister, Lal Kishan Advani, was present when the structure was brought down. 
The destruction of the mosque was seen as the most serious rupture between Hindus and Muslims since India became independent in 1947. 
The Indian state began to be perceived as openly discriminatory. 
Muslims became suspicious of other Indian political parties, none of which seemed able to stand up to the BJP. 
The Muslim community closed in on itself. 
Muslim professionals, fearing for their safety, began to move into ghettos. 
Muslim charitable organizations, often funded by Saudi Arabia and other Arab countries, began to move into areas of social life where the state had failed dismally, particularly education. 
As a result, thousands of Muslim boys were enrolled in school for the first time. 
Unfortunately, they were educated in religious seminaries espousing a deeply intolerant, fundamentalist brand of Islam. 
With discrimination soon cutting across class lines, increasing numbers of Indian Muslims began to look for links with Muslim communities elsewhere in the world. 
They willingly bought the "Great Satan" theory of Ayatollah Khomeini, whose face was spread on posters across Muslim India in the 1980s. 
In the 1990s, Saddam Hussein replaced this poster boy. 
The Taliban's rise in Afghanistan also had a strong impact. 
The jihadi movement that gripped Pakistan crossed into the neighboring Indian state of Jammu and Kashmir, where the two countries have repeatedly fought for control, even, recently, threatening an exchange of nuclear weapons. 
As the only state in India with a Muslim majority, Jammu and Kashmir has a special status under India's Constitution. 
However, the BJP has campaigned to rescind that status, a campaign that gathered supporters in reaction to Pakistan's activities. 
Today, Kashmir is seen as a front against terrorism, and Indian Muslims are seen as sympathizers with terrorists--although the overwhelming majority of the jihadis' victims inside Kashmir have been Muslim. 
Secular, liberal Indians are alarmed at the rise of both Hindu and Muslim fundamentalism as domestic policies in South Asia become entangled with America's global anti-terrorist objectives. 
Their only hope is to ensure that Indian Muslims do not lose faith in the democratic process. 
If that happens, India's admirable pluralist traditions, to which Muslims have made significant contributions, would be lost forever. 
A deepening religious conflict across all of South Asia would inevitably follow. 

 

India Shines On 
MUMBAI – Every day, a small Japanese jet brings another 60 businessmen from Tokyo to sniff out new commercial opportunities in Mumbai and the heart of the Indian economy. 
Naturally, there may be a touch of geopolitical calculation about this. 
As Japan grows increasingly nervous about China’s rise, the case for increasing investment in the other Asian giant strengthens. 
But there is more about this than politics. 
Japanese businessmen may be a little puzzled by the creative chaos of India; the argumentative culture can seem alien to them. 
They know, however, a chance for making good profits in a rapidly expanding market when they see one. 
And they see one in India’s glorious Technicolor – the Bollywood version of Adam Smith. 
When the Japanese company Daiichi Sankyo paid $4.6 billion for majority control of the Ranbury pharmaceutical group in 2008, they were placing a bet on continuing corporate success. 
Given India’s growth rates, who would seriously question their decision? 
So the lobby of Mumbai’s Taj hotel, just across the road from the gateway built to welcome Britain’s King George V and Queen Mary on their visit to India in 1911, is once again thronged with visitors, many of whom have arrived to see if India is living up to its image as the next great power. 
The grand old Taj deserves all the business it is getting, after being the target of a terrorist attack in 2008. The bravery of the staff in trying to protect the hotel’s clients deserves the applause of every world traveler. 
The business leaders you meet in Mumbai, Delhi, Bangalore, Pune, and the other buzzing commercial centers of India demonstrate the challenge of building national and global brands and businesses. 
No wonder they have started to crowd into the premier league table of the world’s rich. 
There is also an uninhibited self-confidence about them. 
They take double-digit growth in their own companies for granted. 
The task is to push sustainable growth much higher. 
Of course, they know much better than any visitor the many problems India still must tackle – social, environmental and economic, with many accompanying issues in the security domain. 
If you want a novelist’s view of this world in Mumbai, read Vikram Chandra’s Sacred Games, one of the best and most exciting novels written anywhere in the last few years. 
What is interesting is that Indian businesspeople no longer dwell on what India’s government needs to do. 
They do not expect much from the state and are not surprised when it fails to deliver. 
A government initiative is something that they seem to regard as an oxymoron. 
This does not mean that they criticize the macro-management of the Indian economy very much. 
They support the almost two decades of reform that have stripped away much of the “license raj.” 
They recognize that India has the most economically literate leadership in the world. 
They expect reforms to continue, albeit at a rather gentler pace. 
They note the infrastructure improvements – airports, for example – while sighing over what remains to be done and drawing invidious comparisons with China. 
But there is no impatience for a bigger government role. 
It is not that they have given up on government; they are just realistic about what it can achieve. 
Indian society seems to have become more globalized than its government. 
There is a marked difference in tone here from debates in much of the Western world. 
In many rich OECD countries, the financial crisis and recession have made government intervention popular again. 
Governments bail out banks, rush to the aid of manufacturers, and claim primacy in averting national catastrophe and personal hardship. 
Although increasingly strapped for cash, governments offer the solace of public subsidy. 
Gone for the moment are jokes about government being the problem, not the solution. 
Tax collectors used to be Public Enemy Number One; now bankers have usurped that role. 
In India, by contrast, even when you might think that government should be expected to deliver more, expectations are not high. 
India needs better and much more education, as its young population grows. 
But, with terrible figures for teacher truancy in state-run schools – as high as 25%, according to the World Bank – families increasingly turn to the private sector to educate their children. 
Many successful businessmen are putting some of their wealth into foundations that run schools and colleges. 
Two big issues remain for government, in addition to keeping reform moving forward. 
First, as India’s middle class expands, more must be done to ensure that economic growth is inclusive. 
This is bound to involve greater redistribution if the hundreds of millions of Indians who remain extremely poor are not to become alienated from their country’s success story and pulled toward populist extremism. 
The second challenge is today’s violent manifestation of this alienation: the Naxalite insurrection in rural central and eastern India. 
Interior Minister Palaniappan Chidambaram, a tough reformer, has this problem in his sights, but it cannot be solved by better policing alone. 
Ending the insurrection will also require better government, whatever the low expectations of business leaders. 
And, to be fair, Nitish Kumar, the chief minister of Bihar, a poor state that previously was a byword for corruption and incompetence, has shown what can be done by beginning a serious transformation of his state in just five years. 
If India’s other states – and the central government – can follow this example, then the polish of India will not lose its shine. 

India Stops Turning the Other Cheek 
NEW DELHI – For two and a half decades, Pakistan has pursued a policy of inflicting on India “death by a thousand cuts” – bleeding the country through repeated terrorist attacks, rather than attempting an open military confrontation which it cannot win against India’s superior conventional forces. 
The logic is that India’s response to this tactic would always be tempered by its desire not to derail its ambitious economic development plans, as well as the Indian government’s unwillingness to face the risk of a nuclear war. 
But this predictable and repetitive pattern of India-Pakistan relations was suddenly disrupted on September 29, when India’s Director-General of Military Operations (DGMO), Lieutenant-General Ranbir Singh, announced that Indian commandos had conducted “surgical strikes” across the Line of Control (LoC) in Kashmir, the de facto international border between the two countries. 
The DGMO stated that the strikes, in the early hours of that morning, had destroyed terrorist “launch pads” and eliminated significant numbers of militants poised to cross over for attacks on the Indian side, as well as some who were protecting them (presumably a reference to Pakistani soldiers). 
The Indian public and the country’s notoriously fractious political class reacted with great pride to the news, unanimously hailing the decisive action as long overdue. 
For the preceding quarter-century, Indians had watched helplessly as their attempts at peace-making with their belligerent, military-dominated neighbor had collapsed repeatedly, thanks to terrorist attacks from Pakistan that the government in Islamabad seemed unable or unwilling to prevent. 
The most horrific of these attacks, the assaults on multiple locations in Mumbai, starting on November 26, 2008, killed 166 innocent civilians. 
But India confined its response to diplomatic action. 
This exercise of “strategic restraint” in the face of repeated Pakistani assaults – partly in order to avoid provoking a full-fledged war with its nuclear-armed neighbor – had left many Indians seething in impotent fury. 
It seemed to them that Pakistani terrorists could strike at will in India, with the government’s reluctance to hit back guaranteeing the killers’ impunity. 
In January, militants struck across the frontier at the Indian base in Pathankot. 
As usual, India tempered its response, even inviting Pakistan to join in an official investigation of the attack. 
The Pakistanis sent over a team of military and intelligence experts, which examined the site of the assaults, went home, and proclaimed it a false-flag operation intended to inculpate an innocent Pakistan. 
Indians, sickened by this perfidy, found themselves mourning again in September, when another cross-border assault killed 18 soldiers at an Army base in Uri. 
Still, there seemed little Indians could do – until the DGMO’s statement announcing a decisive military response. 
Pakistani reactions were a curious mixture, ranging from dismissive declarations (backed by orchestrated bus tours of journalists to selected parts of the LoC) that no surgical strikes had even occurred, to angry statements declaring that irresponsible Indian firing across the LoC had killed two Pakistani soldiers. 
For once, the Pakistani military appeared to have been caught off guard by Indian action. 
Indians braced themselves for the international community’s disapproval – the fear of nuclear war between the sub-continental neighbors usually dominates world opinion whenever bilateral tensions flare. 
But this time, thanks in part to the DGMO’s measured and precise statement and an absence of military triumphalism in India’s official tone (the braggadocio of the ruling party’s publicists came later), the world seemed to consider India’s response justifiable. 
Pakistani attempts to seek support against India were widely rebuffed, with Pakistan’s usual supporters, China and the US, mildly calling for both sides to defuse the tensions. 
In the days following the strikes, fears of further military escalation have subsided. 
India also tightened the diplomatic screws on its recalcitrant neighbor, persuading other members of the South Asian Association for Regional Co-operation (SAARC) to call off a planned summit in Islamabad as punishment for Pakistan’s bad behavior. 
India’s government also announced that it was undertaking a review of the Indus Waters Treaty, under which India has conceded to Pakistan, on generous terms, the waters of the Indus River, which originates in India, not even using the share to which it is entitled. 
It has since emerged that the operation announced by Singh was not India’s first military strike across the LoC; several had occurred under the previous government as well, in response to military raids on Indian territory. 
But the strikes were the first to be announced publicly, providing a clear signal of intent and a bold statement that business as usual – Pakistani pinpricks followed by Indian inaction – is no longer to be expected. 
With its calibrated and targeted strikes, India has made clear that inaction is not the only possible response to terrorist provocations. 
It is a brave and slightly risky strategy, because it obliges India to pursue a similar course of action when the next significant terrorist strike occurs. 
Still, a country that refuses to suffer repeated body blows earns more respect than one whose restraint can be interpreted as weakness. 
If this determination, and Pakistan’s ensuing diplomatic isolation, prompts Pakistani generals to rethink their policy of sponsoring terrorism as an instrument of state policy, peace between the neighbors could once again become a possibility. 
But, for India, such hopes have been betrayed too often in the recent past for it to continue to turn the other cheek. 

India Takes the Lead 
A decisive blow against poverty was struck when India's new Finance Minister Chidambaram tabled the 2004/2005 budget. 
India is a country on the move, with rapid economic development and dazzling dynamism in the information technology sector. 
Yet it is also home to 300 million of the world's poorest people. 
In last May's national elections, India's rural voters unseated the ruling coalition. 
The lesson was clear: attend to rural poverty. 
The new government has listened, putting forward a program that is dazzling in its implications, for India and the developing world. 
India's new government is led by a veritable "dream team" of international development. 
Prime Minister Manmohan Singh is one of the world's leading development economists. 
It was Singh, serving in mid-1991 as India's Finance Minister, who began India's market reforms. 
He dismantled decades of inefficient and ineffective government restraints on trade, investment, and entrepreneurship, unleashing more than a decade of the fastest economic growth in India's history. 
Upon returning to office this spring as Prime Minister, Singh brought into government an experienced and internationally renowned team, including Finance Minister Chidambaram, who served successfully as Finance Minister in the mid-1990's, and Dr. Montek Singh Ahluwalia, who heads the Planning Commission, the key body assessing India's medium-term public investment strategies. 
When the former government lost the vote this past May, and Singh's government came into office, there were fears that Singh would be hamstrung by left-wing coalition partners, who would demand that market reforms be dismantled as the price of their participation in the new ruling coalition. 
Chidambaram's 2004/2005 budget puts those fears to rest. 
The document is a brilliant lesson in development economics: it shows how to combine a full-speed ahead approach to market reforms with urgently needed attention to poverty. 
In short, the budget is a model for all developing countries. 
At the heart of the budget is the realization that reducing poverty requires both rapid economic growth and targeted investments aimed at the poorest of the poor. 
Rapid economic growth is to be based on the private sector, including foreign direct investment. 
Thus, the budget supports critical areas of market reform and growth promotion, including measures aimed at deepening the financial sector, promoting exports, and liberalizing foreign direct investment. 
The key, however, is that the budget does not rely simply on "trickle-down" economics to raise living standards. 
The second pillar of poverty reduction is targeted investments for the poor, particularly for the rural poor. 
This approach commits India's national government and state governments to ensuring that all Indians, including the poorest, have access to basic social investments, including health, nutrition, and schooling, and to basic infrastructure, including electricity, information and communications technology, safe drinking water, and inputs for modern agriculture. 
Every village is to be lifted up in the next few years, empowered with the basic tools to become economically productive. 
The scale of the challenge is immense. 
There are an estimated 600,000 villages in this vast country of one billion citizens. 
Villages that are far from major ports and cities tend to be poorer and less invigorated by the recent economic growth. 
The government proposes to equip these villages with the basic infrastructure and services they need to take off economically. 
The government's programs are not mere populist promises. 
They reflect sensible investments that the government intends to pursue. 
The budget calls for a surtax on incomes to help pay for increased social expenditures. 
The lesson for other developing countries is that spending on the poor for health, education, safe drinking water, electricity, and the like, is not simply pandering; it is a serious and productive investment. 
It may be expensive to educate a child, but it is far more expensive to a society to leave a child without education. 
Uneducated children will be burdens on their societies for decades to come. 
It is far more rational to spend a little extra income now for a few years of schooling than face decades of social costs resulting from masses of uneducated adult workers! 
But even India, with its growing economy, cannot afford to make these investments out of national resources. 
India will need some help, at least temporarily, from richer countries and international institutions like the World Bank and the Asian Development Bank. 
The rich world should not be grudging in its help to India. 
By providing a few billion dollars per year in assistance now, the donor world would ensure a prosperous, democratic, and stable partner in India for decades to come. 
In other words, it is time for donors to step up to help reform-minded yet poor countries like India, and, even more urgently, those in Africa that are similarly committed to economic development. 

Demonetization Dos and Don’ts 
CAMBRIDGE – On November 8, at 8:15 in the evening, Indian Prime Minister Narendra Modi’s government announced that, at the stroke of midnight, all 500- and 1,000-rupee notes in circulation would no longer be considered legal tender, and would need to be exchanged for new 500- and 2,000-rupee notes. 
Modi’s “demonetization” intervention affected 85% of the money in circulation in India. 
It was an unprecedented move, whether in India or almost anywhere else, and it is by far Modi’s boldest policy intervention to date. 
The Modi government is targeting the “black money” associated with tax evasion, corruption, and counterfeiting, and thus the drug traffickers, smugglers, and terrorists who engage in those activities. 
India’s tax-paying salaried classes and even the poor initially welcomed the policy enthusiastically, viewing it as sweet revenge against tax evaders who had stowed away their ill-gotten gains; they reveled in anecdotes of corrupt officials burning bags of cash or throwing money into India’s rivers. 
But with each passing day, that initial cheer diminishes. 
Public frustration is now mounting, because the government has failed to meet the demand for new printed notes. 
Commerce in India – where the cash-to-GDP ratio is 10% – relies heavily on cash transactions, and informal-economy and small-business operations have now ground to a halt, owing to long lines and tight cash-withdrawal limits at banks and shortages at ATMs. 
The near-term impact will be the equivalent of an “anti-stimulus” policy intervention, and the consequent drag on demand will be significant. 
Moreover, as real-estate prices decline, so, too, will household wealth. 
Although lower house prices will make new homes more affordable, the stock of occupied homes will far exceed new purchases in the near term, so the negative-wealth effect will overwhelm the gains. 
Given these large upfront costs, it is reasonable to ask how effective demonetization is in fighting tax evasion and corruption, and if there is a less costly approach to demonetization. 
Back in 1976, in an article entitled “How to Make the Mob Miserable,” the American economist James S. Henry addressed the question of effectiveness, prescribing demonetization as a measure to undermine mafia operations. 
But policymakers did not take his proposal seriously. 
Henry’s proposal was, in his own words, “dismissed as either administratively impractical or as a one-shot action that would have no long-run impact on criminal behavior.” 
In a new book, The Curse of Cash, Kenneth Rogoff champions the elimination of high-denomination notes in order to fight tax evasion and criminal activity. 
Rogoff furnishes extensive evidence that making it costly to hoard cash would deter illegal activities. 
While tax evaders also store their wealth in non-monetary forms, such as land, art, and jewelry, cash remains a leading vehicle for ill-gotten gains, owing to its inherent liquidity. 
In other words, questions posed by Modi’s critics about the role of cash in feeding stockpiles of black money are misplaced. 
That said, Rogoff proposes a different strategy to address the menace of black money – one that would be minimally disruptive and arguably more effective, at least in the long run. 
That strategy would depart from the Modi government’s intervention in two fundamental ways. 
First, it would be gradualist, implemented over several years. 
Second, it would permanently eliminate high-denomination notes. 
While this gradualist strategy would not punish existing hoarders, who would find creative ways to recycle their cash in the interim, it is more likely to improve tax compliance and reduce corruption over time, as large-denomination notes are permanently taken out of circulation. 
India’s current policy of replacing 1,000-rupee notes with 2,000-rupee notes undermines the long-term effectiveness of its policy. 
Moreover, the gradualist approach is administratively practical, minimizes the collateral damage to the real economy and ensures that there is enough time to extend financial services and financial literacy to larger parts of India. 
Over the last two years, the Modi government has made an impressive push for financial inclusion with its Jan Dhan program, which has facilitated the creation of 220 million new bank accounts. 
But many people who create accounts do not necessarily use them. 
A 2015 World Bank study of bank-account usage and dormancy rates across different regions found that only 15% of Indian adults reported using an account to make or receive payments. 
In this environment, a cash scarcity is economically crippling. 
Modi’s policy intervention is bold, and the economic principles motivating it are beyond reproach. 
But a gradualist approach that includes the permanent withdrawal of large notes would have served the cause better, even if it did not generate the same “shock and awe” as the current policy. 
This will become more apparent as the large costs to the economy emerge over the next several months. 

Women, Work, and India’s Rickshaw Revolution 
BENGALURU – When resources are limited, it is human capital that defines the sustainable development of a community, especially in the case of costly misallocation and underutilization, as is often the case in developing countries. 
Nowhere is this truer than in India, where the value of the current demographic dividend hinges on a grossly underutilized resource pool – the female workforce. 
Despite rising education levels and a female literacy rate of 65%, only about a quarter of Indian women participate in the labor force. 
Increasing women’s workforce participation by a mere ten percentage points could add $700 billion to India’s GDP by 2025. 
And that requires removing one of the main obstacles to achieving this objective: broken transportation services. 
Astha (name changed), a 35-year-old teacher working in the district headquarters of Jhunjhunu, in the state of Rajasthan, is one of the youngest teachers ever to be nominated for a promotion to school headmistress. 
But accepting the promotion meant transferring farther away from home. 
She took the new position, only to find the commute difficult and unsafe, as she left in the early hours of the morning, walking 1.5-2 kilometers every day. 
Two months into her new role, unable to depend on being escorted by family members to the bus depot daily, she gave up the job and returned to a lower position at the nearby school. 
Lack of reliable transportation led her to give up this opportunity. 
According to the National Sample Survey Office, more than 60% of rural and urban households use buses as their main mode of public transportation, followed by auto-rickshaws, taxis, railways, and cycle rickshaws. 
While we have come a long way in reach and coverage when it comes to bus and rail networks, India’s door-to-door transportation network is still dispersed and unreliable. 
Unfortunately, working women are the most severely affected by inadequate service. 
When safe and efficient public transit is unavailable, women typically settle for lower-paid jobs closer to home. 
This is reflected in the distance women travel for work in urban areas. 
In Bengaluru, for example, the average daily commute for women is just over a mile, while men travel twice as far for their jobs. 
In Delhi, 75% of women work within a three-mile radius of home, whereas 75% of men work within eight miles. 
The biggest transportation roadblock for women in India lies in what planners call the first-last mile problem – getting to and from the station, a concern that Astha knows well. 
While this problem is a feature of any transportation network, in developing countries it adds significantly more time, cost, and safety constraints to every journey. 
In Delhi, for example, the first and last miles constitute 41% of the total time and 47% of the total cost of the trip. 
Clearly, the consequences of the first-last mile challenge are profound – not only for women, but also for India’s economy. 
How, then, can planners improve transportation to get more women working? 
There is only one persuasive answer: better auto-rickshaws. 
India has more three-wheeled vehicles than any other country, and every day, millions of people are whisked through narrow streets and congested traffic in these easy-to-maneuver carts. 
Yet Indian rickshaws have not evolved in the last 50 years to serve either the rider’s or the driver’s needs. 
They are poorly distributed, unsafe, and not future-ready. 
To solve women’s urban mobility challenges, we need a completely reimagined vehicle that is electric, shared, safe, and “smart.” 
Indian women’s travel is characterized by “trip chaining.” 
They make shorter and more frequent trips than men, and their trips often involve more stops, to run errands, shop, pick up children from school, and so forth. 
This increases their dependency on first- and last-mile transportation. 
However, most rickshaws operating in India today are unorganized and ply only the busiest, most lucrative routes. 
With the right innovations in technology and policy, we can bring order to the scattershot nature of India’s auto-rickshaw fleet and bridge the demand-supply gap. 
For example, ride-hailing apps and booking platforms could efficiently match rider demand with rickshaw supply, as would well-orchestrated feeder services to bus and rail networks. 
Policies that encourage ride sharing could multiply fleet capacity. 
In terms of safety, it is necessary to consider both accidents and crime or harassment. 
For starters, nearly 40% of all accidents involving these vehicles cause them to topple. 
And a study in Delhi showed that 51% of women had faced some form of harassment while using public transport, and 42% while waiting for it. 
We need innovations in accident-prevention systems and other technologies that would make such technologies a feature of low-cost three-wheelers. 
Technology can also help connect transportation nodes and vehicles to police and medical systems, substantially reducing the response times for emergency services. 
Safety from crime, on the other hand, needs a connected, smart ecosystem with auto-rickshaws at its heart. 
Rickshaws equipped with GPS systems could enable passengers to share real-time location data with family or friends. 
A mandatory SOS alert system would give passengers and drivers a means to call for help, regardless of whether they were carrying a mobile phone. 
Government regulations already require panic buttons in taxis, public buses, and other public transport; requiring them for rickshaws is the natural next step. 
Last but not least, we need these reimagined vehicles to be future-ready. 
Air pollution is a ticking bomb: 14 of the 15 cities with the world’s highest concentrations of fine particulate matter are in India, underscoring the urgency of switching to low-carbon, battery-powered vehicles. 
When women can travel to work conveniently, choosing affordable transportation, without fear of harassment or abuse, India will have arrived. 
Talented women like Astha will never need to choose between a job they love and a commute they loathe. 
Indian women need affordable, safe, and reliable options to help them overcome the first-last mile problem. 
A reimagined rickshaw may be just the ticket. 

India’s Urban Awakening 
WASHINGTON, DC – When the United Kingdom became the first country in the world to undergo large-scale urbanization in the nineteenth and early twentieth centuries, the process transformed its economy and society. 
Today, India is facing a similar transformation, only it is happening at 100 time the pace. 
By 2030, India’s urban population will reach 600 million people, twice the size of America’s. 
For India, rapid urbanization is particularly vital to enable the country to take full advantage of the demographic dividend afforded by its young population. 
With 12 million more people joining the country’s labor force every year, the potential of that dividend is huge. 
As the urbanization process continues, connectivity, proximity, and diversity will accelerate knowledge diffusion, spark further innovation, and enhance productivity and employment growth. 
For all of its benefits, however, rapid urbanization also poses enormous challenges, from managing congestion and pollution to ensuring that growth is inclusive and equitable. 
As a latecomer to urbanization, India will benefit from technological innovations – including digital technologies, cleaner energy, innovative construction materials, and new modes of transport – that will enable it to leapfrog some of its more developed counterparts. 
But taking advantage of those technologies will require effective policies, including smart infrastructure investments and measures to make cities more competitive, particularly in modern industries. 
Making its cities more competitive will require India to decide whether to emphasize specialization (with an industry concentrated in a particular city) or diversification (with each city home to a range of industries, roughly in line with the national average). 
This is no easy choice: the debate over which approach is better has been raging for nearly a century. 
In 1991, around the time India’s economic liberalization began, the country’s cities tended toward specialization. 
But, in recent years, there has been a notable shift toward diversification, with some major urban centers, like Mumbai and Bangalore, experiencing the largest and fastest shifts away from specialization. 
Specialization tends to be much higher in traditional industries than in modern industries. 
Though some modern industries – like office accounting and computing machinery, and radio, television, and communication equipment – tend to be located in more specialized districts, roughly three-quarters of Indian districts with higher specialization levels rely on traditional industries. 
Of India’s 600 districts, those that remain the most specialized are Kavaratti (water transport), Darjiling (paper products), Panchkula (office accounting and computing machinery), and Wokha (wood products). 
Though India’s specialization levels were much higher than those in the United States in the early 1990s, the two countries have converged over time. 
All of this suggests that, as technology continues to advance, so will diversification – a trend that will shape future urbanization patterns in India. 
This bodes well for employment, because more diversified cities and districts tend to experience greater job growth. 
Initial clusters of modern services have also experienced abnormally high employment growth since 2000. 
And there’s more good news: the strongest job gains due to diversification are occurring in rural areas and among small enterprises, suggesting that India’s urbanization can bring inclusive growth and prosperity. 
Evidence also shows that high growth rates, which support poverty reduction, are concentrated in the rural areas of particular districts. 
Taking full advantage of these positive trends, however, will require India to boost infrastructure investment. 
Despite a slowdown in the manufacturing sector’s growth – a trend mirrored in much of the rest of the world – urbanization has continued to accelerate in India, especially in districts with access to better infrastructure. 
In the developing world, a billion people lack access to electricity and roads, and more than a half-billion lack reliable access to safe drinking water. 
Addressing these deficiencies is critical to development – and India is no exception. 
Access to better infrastructure will enable millions more entrepreneurs, especially women, to benefit from the country’s urban awakening. 
The key to success will be to improve the efficiency of public spending, while attracting more private investment. 
There is certainly an economic incentive for private actors to channel their money toward developing-country infrastructure. 
After all, high-income countries, where populations are aging rapidly, often have an excess of savings ready to be allocated to high-yield investments. 
Lower-income countries, with their younger populations and large infrastructure needs, provide just such opportunities. 
As it stands, however, less than 1% of the $68 trillion managed by pension funds, life insurance companies, and others are channeled toward infrastructure projects. 
And, given the low risk appetite among investors, not to mention the small size of city-level projects, municipal governments will struggle to raise that share. 
But it isn’t impossible. 
What is needed is visionary leadership at the local level, with municipal governments identifying infrastructure projects that promote entrepreneurship, increase their cities’ competitiveness, and promote regional development by strengthening urban-rural connectivity. 
Those governments should also leverage their assets, including land; mobilize user revenue; and modify financial regulations and incentives to increase investors’ risk appetite. 
Add to that greater technical and financial capacity, and it would become much easier to attract the needed private funds and build partnerships benefiting India’s urban transformation. 
India has all of the tools it needs to advance its urbanization process in a way that promotes inclusive and sustainable growth. 
It must use them wisely. 

India with 1.5 Billion People 
India's population is now a little over one billion; it will almost certainly surpass 1.5 billion by mid-century, overtaking China's population along the way before it stops growing. 
But, as worrying as this might appear, this actually represents a considerable demographic slowdown: India's population more than tripled during the past sixty years. 
Moreover, the economy is growing much faster than before. 
So will India be able to provide a comfortable home for 1.5 billion people? 
I recently co-authored a study (with Tim Dyson, Leela Visaria and others) that concludes, with modest optimism, that while India can manage its population growth, it also faces a number of major difficulties. 
True, poverty fell in the 1990's, while literacy rates and school attendance rose. But they did so unevenly. 
Most of India's big poor states - Bihar, Madhya Pradesh, Orissa, Rajasthan, and Uttar Pradesh - suffer from a combination of relatively slow economic growth and rapid demographic growth. 
Only Rajasthan's economy has kept pace with the rest of the country; the other four have not benefited much from trade and regulatory liberalization. 
Similarly, states where birth rates fell earlier, such as Kerala and Tamil Nadu, are already enjoying shrinking school-age populations, whereas school-age numbers in Bihar will still be rising until around 2025. 
But the majority of children in Kerala and Tamil Nadu are already in school, while in Bihar they are not. 
These five poor states contain 45% of India's population, and 56% of its poor. 
Our projections indicate that in 20 years they will account for more than half the population and 75% of the poor. 
Unless recent trends can be reversed, the growing economic and demographic gulf between India's North and East and its South and West will pose a serious political threat. 
The environmental impact of 1.5 billion inhabitants forms the other major challenge. 
India's past population growth has been accompanied - if much too slowly and unequally - by improving health, education, and economic welfare. 
But the environment has been suffering. 
Our study concludes that India can have faster economic and industrial growth, higher rates of energy consumption, and a cleaner environment. 
But this is not what has happened so far. 
Air, soil, and water pollution has been growing, causing hundreds of thousands of deaths every year. 
The key to a clean future is clean technologies, whose costs have been falling steadily, and will continue to do so. 
Sometimes these technologies pay for themselves and will be adopted. 
But Indian producers and transporters will not invest in them if they bear the costs, while the public at large receives the benefits. 
In these cases, government will have to provide incentives, or regulate and tax. 
Unfortunately, however, when the main beneficiaries are the poor, corporations are powerful, and governments are weak or corrupt, good environmental practices are far from guaranteed. 
There are nonetheless some notable success stories. 
Delhi's barely breathable air has become tolerable, following a big move to compressed natural gas in public transport, retirement of old vehicles, and higher emissions standards in new ones. 
Delhi's cleaner air hasn't cost much, yet other cities have been slow to follow suit. 
The biggest problem is water pollution, with discharges into canals and rivers growing faster than treatment capacity. 
At the same time, India's growing population will make increasing demands on water supplies - mainly for agriculture, which absorbs more than 80% of all the fresh water India consumes. 
If the population grows by 50%, the country will need to grow 50% more food, if it is to continue to feed itself. 
But there won't be any more water. 
In fact, there could well be less water than there is now, owing to pollution and climate change. 
So India will need huge increases in water efficiency. 
Here, too, there are examples of improvement. 
But there is also far too much populist politicking, with promises of free water for farmers. 
Doing what has to be done to ensure sustainable water supplies - controlling pollution, encouraging conservation, regulating and charging where necessary - is politically tough. 
Eventually, however, India has no choice: there are already sporadic riots over water shortage, while water tankers move under armed guard in some cities, and virulent conflicts arise between communities over water-sharing. 
In questionnaires, the poor say that an adequate water supply is their foremost need. 
But one fears that something more dreadful than the daily misery must occur before India's politicians decide to act. 
Our study quotes three national water surveys. 
Each concludes that India can have a satisfactory water future. 
As with the other challenges posed by population growth, the issue is not whether the future can be managed, but whether it will be. 
India may or may not be the world's next economic wonder; but it will have to solve its age-old problems, as well as its new ones, if it is going to be a good place to live for the vast majority of its citizens. 

Time for India to Stretch its Wings 
WASHINGTON, DC – Imagine you are a parent with a large number of children and limited resources. 
Your oldest child is mature enough to move out of your home, but he does not want to. 
So he stays, consuming resources that his siblings desperately need. 
Is it right to allow your other children to suffer because their big brother is reluctant to strike out on his own? 
A similar dynamic is playing out between the World Bank and the recipients of its International Development Association program. 
IDA supports equitable growth in poor countries by providing low-interest, long-term loans and grants to national governments. 
The program supports 77 of the poorest countries in the world – half of which are in Africa. 
It also provides assistance to one country that no longer deserves it: India. 
At the end of the 2014 fiscal year, India officially graduated from the IDA program, because it was no longer poor enough to qualify. 
The World Bank sets a threshold for receiving assistance, based on per capita gross national income (GNI). 
In the fiscal year 2016, the threshold is $1,215. 
India’s per capita GNI has exceeded the World Bank’s limit each year since 2010. 
In 2014, it was $1,570. 
India is also considered creditworthy, giving it access to international capital markets. 
And yet India continues to receive $3.2 billion over a three-year period in transitional support from the IDA program, even as other poor countries plead for more funds. 
In the 2015 fiscal year, India was allocated 11.5% percent of the $14.6 billion provided by the IDA program, leaving the other 77 recipients to divide the remaining 88.5%. 
There is no reason that India should be given this exceptional treatment. 
The IDA funds it receives would be better spent in Sub-Saharan Africa, where the needs are greater and the financing options are more limited. 
If India’s FY15 allocation were divided equally among the remaining IDA countries, each would enjoy an average funding increase of more than 13%. 
Funding for just the top five Sub-Saharan African IDA borrowers – Ethiopia, Nigeria, Kenya, Tanzania, and Ghana – would increase by about $0.5 billion. This would be enough to finance 2,166 kilometers of paved roads, the distance from South Africa to Zambia in just one year. 
One can only imagine the cumulative impact of sustaining such an increase in funding over the next 5 or 10 years. 
The World Bank’s 2016 graduation policy review states that the funds being given to India are intended to smooth its transition from receiving IDA by preventing a sudden drop in financing. 
India can handle the anticipated drop off. 
It is substantially wealthier than its Sub-Saharan peers, and it boasts nearly $400 billion in international reserves. 
Some argue that, because a large share of the world’s poor live in middle-income countries, the donor community should rethink how funding is directed. 
Ravi Kanbur, a professor at Cornell University and a former World Bank chief economist for Africa, has called for resetting the IDA graduation policy. 
He points out that in a world in which inequality is increasing within states, using a country’s overall wealth as a gauge of poverty neglects millions of poor people. 
I agree. 
And yet, according to the World Bank’s World Development Indicators, India’s poverty rate, at 21.9%, is less than half that of Sub-Saharan Africa’s 44.4% rate – meaning that money is nonetheless better spent helping poorer countries in the region. 
The solution for countries like India is to find better ways to redistribute their wealth, so that more of their citizens can benefit from it. 
Wealthy countries have more options to help their poor. 
India, in particular, has access to other sources of development finance, including the International Bank for Reconstruction and Development, the newly launched Asian Infrastructure Investment Bank, and the BRICS’ New Development Bank. 
IDA should be reserved for poor countries for which regular market access is blocked. 
This is not about India per se. 
African countries like Zambia, Nigeria, Kenya, and Ghana are expected to graduate soon – and should be prepared to adhere to the same rules when they do. 
World Bank President Jim Yong Kim has urged donor countries to step up their support of IDA during this year’s triennial replenishment round, arguing that additional funding “will be essential for us to work on our goals to end extreme poverty and boost shared prosperity.” 
He listed both Africa and South Asia as important areas of focus. 
Sub-Saharan African leaders need to ensure that the World Bank’s words translate into action. 
They should lobby for accelerated and timely graduation for countries like India and make sure that the Bank lives up to its mission to serve poor countries. 
Allowing countries to hang onto IDA for years, as India has done, means there is little recourse for those with much larger needs. 
If the World Bank did not send 12 cents out of every dollar of IDA funding to India, it would have ample resources to invest in Africa – even if donations remained flat. 
IDA’s transitional support to India is scheduled to end in 2017. 
It is time for big brother to leave home for good. 
This commentary was revised on May 26, 2016. The previous version had assumed a scenario in which India’s total (three-year) allocation was re-allocated to the remaining IDA recipients in fiscal year 2015. 
The new scenario is more conservative and re-allocates only India’s FY15 funds to the remaining IDA countries in that same fiscal year. 


Indianomics 
NEW DELHI – Nowadays, economists are assailed by irresolute thoughts: what, for example, is the right term to apply to current global economic conditions? 
Is it “depression,” “recession,” or, finally, “recovery”? 
What of the euro? 
Will it flounder or regain its “health”? 
As these debates fill the air in finance ministries and economics departments around the globe, India continues its steady GDP growth, now projected to reach 9.4% this year. 
Indeed, the government says that the growth rate will hit double figures soon. 
Although many people seem amazed that India has maintained rapid growth for so long – even in the face of the global downturn – surprise is unwarranted. 
India’s proportion of global GDP stood at 25% in 1750, but slumped to 1.6% in 1900, at the high noon of imperialism. 
India is simply rising again to reassert its traditional global position. 
Can India achieve this? 
Many challenges confront India on its path to sustained strong growth, principally that of converting the country’s vast promise into reality. 
In order to achieve this in a true democracy, India must ensure distributive justice. 
It must ensure that enhanced purchasing power leads to a markedly improved quality of life for all of India’s citizens. 
Currently, India has a window of opportunity, nearly unique in nature, thanks to a huge demographic dividend: almost 60% of the country’s population is below the age of 30. 
But this advantage is limited in duration, lasting two or perhaps three decades. 
If it is not used now, it will dissipate. 
To seize this opportunity, India first must move decisively away from state capitalism, the remnants of which continue to retard the country’s economic progress. 
India’s economic future lies in maximizing its private sector’s dynamism, which demands an acceleration of institutional reform, including privatization at both the national and state level. 
But, as the Indian economist and frequent policymaker Vijay Kelkar has put it, “India needs to fashion [its] own sui generis model of growth and development…towards an advanced economy, always promoting inclusive growth, and thus gain the benefits of enhanced efficiency, greater equity, and better governance under a liberal democracy.” 
Simply copying American, British, or other Western policies and institutions will not work. 
Moreover, India is not China; it cannot be – indeed, it must not be. 
That is why it should not hanker after any ersatz export-led or state-directed growth. 
India’s second great challenge is to resolve its enormous infrastructure shortcomings. 
India is no longer primarily an agricultural economy; indeed, agriculture accounts for only around 20% of GDP. 
But this does not mean that agriculture should be neglected; on the contrary, it remains a way of life for many millions of Indians, who need capital and new technology. 
Raising farm productivity and income requires improved irrigation, wasteland reclamation, warehousing, marketing, transport development, and the free movement of produce within the country. 
This is why rapid strengthening of India’s physical and social infrastructure is central to its progress. 
This leads us to examining India’s current fixation with GDP growth as a national panacea. 
The theory is that the government, as the agent of the people, collects taxes and delivers public goods in return. 
In this sense, the Indian state has been rather a poor agent; it collects little and delivers a pittance – and what it does deliver is of grossly inadequate quality. 
Yet the Indian state continues to ask for a disproportionately high price from the people. 
This must change, by directly targeting the alleviation of poverty – and ultimately its elimination. 
I accept that the most powerful anti-poverty program is economic growth, but it works only if and when it is accompanied by distributive justice. 
Only such “just” growth can eventually be converted into high GNC: “Gross National Contentment,” a truer index of economic well-being. 
Rather than endless debates about higher budgetary allocations, India needs to find practical ways to promote effective, targeted, self-adjusting, and self-liquidating anti-poverty programs. 
It is not the amount of money allocated by government that matters. 
The true litmus test of budget expenditures is what actually gets delivered. 
Only an inclusive approach to reform can meet peoples’ expectations, and in turn spread contentment. 
India does not need more laws. 
It needs more effective and more accountable governments. 
It does not need more regulations, but rather a vastly larger canvas for individual freedom and opportunity. 
India’s economy must be freed from the organizing principle of state control, so that individual enterprise and creativity can become its main engine. 
India is at the threshold of an era of unprecedented growth. 
But to cross it, Indians must craft a new idea of India – as the flagship of a modern global economy that unleashes the dynamism of all citizens. 

Putting out Indonesia’s Fires 
MANILA – Every year, forest fires ravage Indonesia, causing massive environmental, social, and economic devastation. 
This year’s fires are the largest in nearly 20 years, destroying three million hectares of land and causing an estimated $14 billion in losses related to agriculture, forest degradation, health, transportation, and tourism. 
Perhaps even more alarming is the climate impact. 
Indonesia is already among the world’s biggest carbon emitters. 
Thanks to the fires, its daily average emissions this September and October were ten times higher than normal. 
On October 14 alone, emissions from the fires soared to 61 megatons – nearly 97% of the country’s total emissions for that day. 
As a result, this year’s fires – coming just weeks before the current United Nations Climate Change Conference in Paris, where world leaders plan to finalize a global pact limiting carbon emissions – have underscored the urgent need for Indonesia and its development partners to act quickly to address this regional and global scourge. 
If we don’t, climate change will be even more difficult to combat. 
The cause of Indonesia’s recurring infernos is the common practice of lighting fires to clear land for palm oil production, exacerbated by a prolonged dry spell partly attributable to El Niño. 
While stricter enforcement of rules against deliberate fires in Indonesia’s 1999 Basic Forestry Law and the 2014 Law on Plantations will help, far more needs to be done. 
The reason is simple: Indonesia’s fires aren’t your typical forest fires. 
The ground holds peat – dense organic matter in the process of becoming coal. 
When the peat ignites, the fire can creep beneath the surface and erupt somewhere else, days or weeks later. 
And, like coal, peat stores massive amounts of carbon, which is released into the atmosphere when the land is burned, cleared, and drained to make way for plantations. 
The scale of the fires reflects the difficulty of the enforcement challenge the authorities face. 
It is much cheaper for farmers to clear land with fire than by other means. 
Moreover, farmers have few alternatives to operating palm oil or timber plantations.So every dry season, more and more land is burned. 
And every year, the fallout widens. 
An estimated 75 million people have been exposed to the smoke this year, and 500,000 in Indonesia alone are believed to have contracted fire-related respiratory illnesses. 
Five key steps – all being actively debated in Indonesia – would help prevent the fires. 
For starters, the licenses awarded to develop peatlands should be revoked, and concessions should be taken away from landholders if there are fires. 
Moreover, a moratorium on new forest clearing should be enforced through local communities. 
Re-wetting peatlands and the restoration of degraded peat forests should be the next step, followed by the creation of early warning systems to detect and control forest fires. 
Finally, with the support of the private sector, Indonesia needs to establish a community-based forest management system. 
Regional cooperation also holds great promise. 
Indonesia and Malaysia, which together account for 85% of the world palm oil market, have agreed to establish the Council of Palm Oil Producing Countries, which will harmonize standards and promote environmentally sustainable production practices. 
To build on this, consumers and markets also need to send signals to companies that directly or indirectly support slash-and-burn farming. 
The 2014 Indonesia Palm Oil Pledge – in which five major producers committed to more sustainable solutions that preclude deforestation, respect human and community rights, and deliver shareholder value – is a good model. 
Small farmers need options other than slash-and-burn farming to boost their meager incomes. 
There is a clear need for an integrated land-management approach involving conservation, rehabilitation, investment in sustainable livelihoods, and institutional reforms. 
There is also a growing consensus on the need for broader industry standards for sustainable production and processing of agricultural commodities. 
Multilateral development institutions such as the Asian Development Bank (ADB) have a role to play in providing support to ensure that systems, capacity, and market-access initiatives are undertaken in ways that improve compliance. 
And national and local regulatory reforms that improve land-use planning, create incentives for forest conservation, and promote the use of low-carbon land must also be supported. 
Indonesia is firmly committed to clean, sustainable development. 
It recently pledged to reduce its CO2 emissions by 29% through unilateral measures by 2030, and by 41% with international support. 
Putting out Indonesia’s forest fires for good will be crucial to meeting these targets. 
For the sake of the planet, all of us need to grab a bucket. 

Bottling Indonesia’s Gini 
JAKARTA – When Indonesia declared independence from Dutch rule in 1945, the country’s founder, Sukarno, called on his people to build a nation that would “stand in strength,” eternally united. 
That mantra – unity and strength – helped shape the country’s future, including its approach to economic development. 
During much of Indonesia’s early history, its egalitarian distribution of wealth and assets set it apart from its neighbors. 
But seven decades later, the legacy of equality is fading. 
If Indonesia is to remain one of Asia’s most robust economies, it is essential that its current leadership recommit to narrowing the socioeconomic gap. 
During much of the 1970s and 1980s, Indonesia’s low level of income inequality helped raise living standards and reduce poverty. 
In 1970, just 25 years after independence, the country managed an enviable distribution of wealth among a diverse population, with a Gini coefficient (a common measure of income inequality) of 0.35 (with zero representing maximum equality). 
By comparison, neighboring Malaysia had a Gini coefficient of 0.50. 
Indonesia’s remained roughly the same for decades. 
But, since the Asian financial crisis in 1997, income gaps have widened throughout the region, and in Indonesia in particular, where social welfare programs have barely stemmed the rise in inequality. 
This year, Indonesia’s Gini coefficient is around 0.39, only slightly better than the 0.41 recorded in 2014. 
To economists like us, this trend is deeply worrying. 
Because persistent high or rising inequality can contribute to political instability and undermine social cohesion, it is critical that Indonesia address it. 
Paradoxically, Malaysia’s experience is instructive. 
In Malaysia, income inequality is no longer primarily a function of ethnicity, or the rural-urban divide, as it once was. 
Thanks to successful redistribution strategies adopted during the 1970s and 1980s, average per capita income increased, and poverty rates fell dramatically. 
Though wealth distribution remains a major concern, Malaysia’s Gini coefficient has been on a steady glide toward greater equality since the mid-1970s; in 2014, for example, it dropped to 0.40 for the first time ever, (though this figure remains higher than the average for OECD economies). 
Indonesia is moving in the opposite direction. 
Not only does it have one of the highest levels of wealth inequality in the world; it also suffers deep regional disparities. 
The country’s poorer eastern provinces, which have a history of ethnic violence, lag behind the rest of the country on human development indicators, infrastructure quality, and access to education. 
Despite the country’s overall progress, food insecurity and child malnutrition remain serious issues in the east. 
In other words, it is not just Indonesia’s income distribution that concerns us, but how unequal access to health care, education, and social services has become. 
Our concern is widely shared. 
Last month, scholars, practitioners, and policymakers from around the world gathered at the Indonesian Development Forum to explore solutions to the many forms of inequality that are affecting Indonesia today. 
The challenges are complex, and discussions focused on the need for multipronged solutions. 
As Columbia University’s Jeffrey D. Sachsnoted, greater investment in education, and more effective wealth redistribution strategies, are the key areas that Indonesia’s government must focus on. 
The classroom is the foundation of sustainable development everywhere. 
Access to education is one of the best ways for poor or disadvantaged youth to become economically productive and climb out of poverty. 
Unfortunately, Indonesia’s public schools, especially in the east, are struggling with teacher absenteeism. 
Children who want to learn simply cannot when their instructors do not show up. 
Broadening access to education is not only about boosting enrollment rates; it also requires ensuring accountability and improving service quality. 
Still, reforming the education sector alone will not be enough to close Indonesia’s wealth gap. 
Strategies that the government should consider include expanding social protection; creating more vocational-training programs; and overhauling the tax system. 
In many OECD countries, redistributive policies, like tax breaks and expansion of welfare benefits, have helped reduce inequality. 
If Indonesia is to hit the targets set by the United Nations’ Sustainable Development Goals for reducing inequality by 2030, it must follow these countries’ example. 
There are many reasons to be hopeful. 
Bambang Brodjonegoro, Indonesia’s Minister of National Development Planning, has helped make social inequality a key agenda item, following the direction of President Joko Widodo. 
This time next year, the Indonesia Development Forum will meet again to gauge progress in our efforts to tackle regional inequality. 
Clearly, the political will exists to restore greater equality to Indonesia’s economy. 
If current leaders can remain as focused on their vision as the country’s founders were on theirs, Indonesia will again serve as a model of unity and strength for the region. 

Indonesia’s Democratic Islam 
NEW YORK – The visit by “Barry Obama,” the Indonesian nickname for the former resident and current United States president, to Jakarta is intended, as much as anything, to celebrate the achievements of the largest Muslim-majority country in the world. 
In the 12 years since its transition to democracy, Indonesia has regularly held local and national elections, developed a functioning free market, and strengthened its culture of tolerance towards the country’s Christian, Hindu, Buddhist, and Chinese minorities. 
Of the ten members of the Association of Southeast Asian Nations, only Indonesia has a “free” rating from Freedom House. 
The largely Catholic Philippines, Buddhist Thailand, and Confucian Singapore lag behind Indonesia in providing basic democratic rights to their people. 
American policymakers have therefore looked to Indonesia as a model for the rest of the Muslim world. 
But what lessons are to be learned from Indonesian democracy? 
The most important lesson is that Islamic organizations can provide the backbone of a tolerant civil society. 
Muhammadiyah and Nahdlatul Ulama (NU), mass Islamic institutions with more than 30 million and 40 million members, respectively, operate more than 10,000 schools and hundreds of hospitals, as well as run youth organizations and support women’s movements. 
Both have connections to political parties, most of which have consistently spoken out for democracy and against an Islamic state. 
Indeed, Syafi’i Ma’arif, the former chair of Muhammadiyah, has made pluralist arguments, grounded in the Koran, against blind obedience to Islamic classical jurisprudence. 
Abdurrahman Wahid, the former chair of NU, for decades advocated respect for religious pluralism, and was pivotal in mobilizing democratic opposition to the authoritarian leader Suharto. 
A third Islamic intellectual, Nurcholish Madjid, called for the “de-sacralizing” of politics in the 1970’s, advocated genuine multi-party democracy in the 1990’s, and personally urged Suharto to step down in 1998. 
Indonesia also demonstrates how Islam can provide support for women’s rights. 
Among the activist community in Jakarta, the most successful organizations are those that draw support from the women’s wings of Muhammadiyah and NU: Muslimat, Fatayat, and Aisyiyah. 
The former head of Fatayat, Maria Ulfah Anshor, has made sophisticated arguments grounded in fiqh for women’s access to reproductive rights. 
And, thanks to a partnership between the state and Islamic scholars stretching back 40 years, Indonesia has one of the most successful family-planning programs in the developing world. 
Ironically, the US has done as much to block the efforts of Indonesia’s women’s-rights activists as it has to support them. 
Former President George W. Bush’s restrictions on funding for health programs that used condoms or other forms of contraception meant that Islamic organizations receiving any funding from the US Agency for International Development were unable to publish material promoting safe-sex and family planning. 
This could be, and often was, highly counter-productive. 
In one particularly absurd case, a group of Muslim feminists who wrote a book promoting women’s rights based on Koranic exegesis had to publish their work in secret, because it included arguments for women’s reproductive rights and a small percentage of the group’s funding came from a foundation that had received money from USAID. 
The fact that Islamic organizations have benefited women may also help explain Indonesian women’s political success. 
The parliament is 18% female (a slightly higher percentage than in the US Congress), and a woman, Megawati Sukarnoputri, was the country’s fourth president. 
Leading organizations like Umar, Fatayat, and Muslimat provide a corrective to the widespread view that Sharia necessarily impedes women. 
Indeed, Indonesian women have shown how Sharia can provide a tool for combating misogynist policies. 
For example, the head of Islamic affairs in the Ministry of Religion, Nasaruddin Umar, is a self-described Islamic feminist who has published sophisticated critiques of gender bias in Koranic exegesis. 
Religion permeates almost every aspect of life in Indonesia, including politics. 
But political parties advocating for implementation of Sharia have lost ground in successive elections from 1955 to 2009. 
The parties that still support Sharia have largely disappeared or changed their platform. 
Rather than taking over the state, Islamist parties have been forced by the electorate to alter their policies to account for Indonesian pluralism. 
Perhaps the best way to help Muslims is not to attempt to transplant institutions from Indonesia to the Middle East, or to give aid to “American-approved” moderates, but simply to listen more closely to the voices of Indonesian Islam. 
But that is difficult to do. 
Almost none of the writings of the intellectuals who have been crucial to democratization and women’s rights in Indonesia – for example, Abdurrahman Wahid, Nurcholish Madjid, Syafi’i Ma’arif, Siti Musdah Mulia, and Maria Ansor Ulfah – has been translated into English. 
Perhaps more unfortunately, none has been translated into Arabic. 

Indonesia's Democratic Miracle 
JAKARTA – Modern miracles do happen. 
Ten years ago, as the Asian financial crisis savaged Indonesia’s economy, many experts predicted that the country would become unstable, if not splinter. 
Instead, Indonesia, the world’s most populous Islamic country, has emerged as a beacon of freedom and democracy for the Muslim world. 
What happened? 
And why hasn’t the world taken note? 
The story is as complex as Indonesia itself. 
One leading expert on Indonesia, Benedict Anderson, roots Indonesia’s nature in its core Javanese culture, particularly the wayang religious tradition. 
According to Anderson, “In contrast to the great religions of the Near East…the religion of wayang has no prophet, no message, no Bible, no Redeemer.…The endless variety and sharp individuality of its dramatis personae indicate that wayang reflects the variegation of human life as it is felt by the Javanese...” 
In short, Javanese culture helps Indonesia handle the many diverse voices that a new democracy throws up. 
There is also a strong Indonesian tradition of resolving disagreements through “musyawarah dan mufakat” (consultation and consensus). 
Of course, this tradition has not always prevented violence, most notoriously in the killings that followed the 1966 coup against President Sukarno. 
And ten years ago, during the financial crisis, violent anti-Chinese riots erupted again, causing many Chinese to flee the country. 
Today, however, many of those Chinese have returned. 
In a remarkable development, Chinese language and culture, which had been suppressed for decades, is allowed free expression. 
By contrast, imagine Turkey, a more advanced member state of the Organization of the Islamic Conference, allowing free expression of Kurdish language and culture. 
Indonesia’s record looks even more remarkable when compared to the United States. 
Americans explain their country’s democratic backsliding by pointing to the 9/11 terrorist attacks. 
But Indonesia was attacked, too, with the bombing in Bali coming little more than a year later, on October 12, 2002. 
Despite this, Indonesia has consolidated its democracy. 
Indeed, in 2005 Freedom House declared that Indonesia had moved from “partly free” to “free.” 
President Susilo Bambang Yudhoyono deserves great credit for this remarkable success. 
Under his leadership, the long-standing and painful Aceh conflict was peacefully resolved. 
Some credit the 2004 tsunami, which killed hundreds of thousands of Acehnese, for this breakthrough. 
But Sri Lanka was hit equally hard by the tsunami, and since then the Sinhalese-Tamil conflict has worsened. 
Today, the biggest threat to Indonesia’s democracy comes from America, even though most Americans want Indonesia’s democracy to succeed. 
With modern technology, Indonesian Muslims can see clearly the plight of the Palestinians in Gaza, the disastrous results of the American invasion of Iraq and Afghanistan, and America’s silence when Lebanon was bombed in July 2006. 
Many senior Americans were puzzled that Turkey, a long-standing NATO ally and a secular state, refused to allow American forces to use Turkey as a base to invade Iraq. 
If relatively secular Turkish society could be swept by a surge of anti-American sentiment, so, too, can Indonesia society. 
Indeed, a major struggle is underway between those who want Indonesia to become more fundamentalist and those who want to preserve the traditionally open and tolerant nature of Javanese culture. 
Curiously, while many Americans and Europeans want moderate Muslim voices to succeed in Indonesia (and Southeast Asia), they often undermine moderates with policies that are perceived as anti-Islamic. 
America’s stance on military aid to Indonesia is but one example. 
For several years, some members of the US Senate have maintained a punitive policy towards Indonesia by cutting off military assistance and curtailing Indonesian military training in the US. 
These punitive policies are self-defeating. 
In recent years, the Indonesian military has provided a model for other Third World military forces on how to accept a transition to a full democracy. 
There are no threats of a coup d’état, and senior generals, such as Bambang, who studied in American military colleges, returned to Indonesia as convinced democrats. 
It is a tragedy that ignorance of how much Indonesia has changed is being allowed to endanger its democratic development – and its role as a beacon of freedom and hope in the Islamic world. 
It is to be hoped that Barack Obama, should he win America’s presidency, will recall the tolerant Indonesia where he grew up and shape policies toward it accordingly. 


Indonesia’s Forgotten Genocide 
CANBERRA – October marked 50 years since the Indonesian military launched one of the twentieth century’s worst mass murders. 
Yet the anniversary passed almost unnoticed. 
The massacre of some 500,000 members or sympathizers of the Indonesian Communist Party (PKI) during 1965-1966 is the least talked-about genocide of the last century. 
Lifting the veil on the bloodbath is long overdue, but those with a past to hide seem bound to resist this. 
Organizers of Bali’s renowned Ubud Writers and Readers Festival have just had a foretaste of what may be a new round of active censorship, with local officials threatening to cancel the entire festival if proposed panel discussions of the massacres went ahead. 
The killings started in October 1965 in the aftermath of an abortive coup allegedly planned by the PKI. 
The military reacted by portraying the party and its supporters as an atheist force of evil which had to be annihilated. 
The resulting carnage was deliberate, systematic, and spanned the country, with the most horrific and intense violence in Central and East Java, Bali, and northern Sumatra. 
This year also marks the centenary of the Armenian genocide, about which successive Turkish governments have maintained an indefensible denial. 
But at least the fate of the more than one million Turkish Armenians killed outright or death-marched into the Syrian desert in 1915 for their wartime “disloyalty” remains the subject of immense international scrutiny, research, and advocacy. 
By contrast, the Indonesian genocide remains the only killing of this scale that has not been the subject of minute international attention. 
Nor, apart from a largely ignored National Human Rights Commission report in 2012, has there been any significant domestic truth-finding, let alone a reconciliation process or reparations. 
The subject is avoided in history books, evaded by diplomats, and forms no part of domestic political discourse. 
The story begins with an abortive coup on the night of September 30, 1965, when junior military officers, claiming to be protecting President Sukarno from a right-wing clique, captured and executed the army commander and five other high-ranking generals. 
The following evening, Major General – later President – Suharto led a successful counter-coup. 
Suharto’s action marked the beginning of the end of the Sukarno era, and the birth of his “New Order”: the pro-Western, business-friendly regime that would govern Indonesia for the next three decades. 
Suharto and his associates immediately blamed the PKI as the masterminds of the “September 30 Movement,” and spread gruesome stories about the torture and mutilation of the executed officers. 
Army-led and militia-implemented mass murders soon followed. 
Controversy continues to this day as to who was actually responsible for the initial coup. 
Candidates include Suharto himself (he certainly had some foreknowledge of events), acting with or without United States support, and even the British Foreign Office. 
The balance of opinion among international scholars is that a small group around PKI leader Aidit was involved, but not in a way that even remotely implicated the entire party, or that could even begin to justify the bloody nationwide purge which followed. 
With Suharto’s accession to power, Indonesia shifted almost overnight from being a strong voice for neutrality and anti-imperialism, actively courting the attention of the Soviet Union and Communist China, to becoming a more compliant partner with the US, which now saw Indonesia as a major stabilizing force in a volatile region. 
As a result, there was no appetite among the US and its allies – including my own country, and the Australian government of which I was a member – to look closely, then or since, at how Suharto’s New Order consolidated its power. 
Within Indonesia itself, even with the Suharto era long gone, anti-communist sentiment remains strong, survivors remain cowed, and demands for justice and accountability remain few. 
Things may, however, be starting to change, especially following the release three years ago of Joshua Oppenheimer’s extraordinary documentary film, The Act of Killing. 
Oppenheimer records, in meticulous and horrifying detail, a group of former death-squad leaders re-enacting the murders they committed – not, at least initially, in any spirit of confession or remorse, but rather to portray themselves as the heroes of a necessary process of national purification. 
Some viewers are not persuaded of the film’s accuracy, or are troubled by the occasionally surreal character of the film-within-a-film structure adopted by the director. 
But to me its essential truth resonates profoundly: The Act of Killing is the most haunting and emotionally lacerating documentary I have ever seen. 
I hope that Oppenheimer’s film and its recently released follow-up, The Look of Silence, achieve the audience and impact they deserve – and not just at the world’s film festivals, but in Indonesia itself. 
The Indonesian genocide – and it deserves to be so described, even if its impulse was ideological rather than ethnic, religious, or national – is an alarming case study in the politics of mass murder. 
It shows what leaders can get away with when they demonize opponents, achieving conceivably defensible ends by morally atrocious means. 
That is just one reason Indonesia’s campaign of killing demands much more of the world’s attention, and censure, than it has so far received. 


Inequality and Discontent 
In the last two decades, the world as a whole has gotten richer, but, while some national economies have advanced sharply, others have fallen farther behind. 
The increase in aggregate wealth has not led to the abolition, or even reduction, of poverty. 
Much the same is true within countries. 
Almost everywhere, globalization has produced both a new class of multi-millionaires and an underclass comprising people who are not just poor in the statistical sense of earning less than half the national average, but who are excluded from opportunities that are supposed to be open to all. 
Globalization’s dynamism has benefited many, but it has also increased inequality. 
Is that necessarily a bad thing? 
There are many who think so. 
In fact, entire countries have a built-in egalitarian streak. 
They dislike the business leaders who take home huge sums even when they fail, and they hate to see poor and excluded people in their midst. 
But, while it is comfortable to live in the social-democratic world of Scandinavia, Germany, and other European countries, many of them have purchased their equality on credit from future generations. 
Moreover, an egalitarian climate does not promote innovation and a sense of dynamic development. 
Creative individuals tend to leave societies in which there is strong pressure not to be different. 
Inequality is not merely compatible with freedom, but is often a result of and stimulus for freedom. 
Is that the choice we have to make then: freedom or equality? 
Things are not quite so simple. 
A free society recognizes two limits to economic and general inequality. 
Both raise quite difficult practical questions, though they are clear in principle. 
Inequality is incompatible with freedom if it limits individuals’ chances of participation in the political community, in the market, and in civil society. 
At the lower end of the social scale, this raises the old and vexing question of equality of opportunity. 
What is clear is that everyone must have access to elections and political parties, to education and the labor market, and to the associations of civil society. 
In short, citizenship in the full sense of the word requires basic rights and the ability to enforce them. 
It also requires a basic economic status, including an income guarantee, which can be provided in a variety of ways. 
One difficult question is where, exactly, to draw the line that defines the basic status to which all citizens are entitled. 
In most countries, it should probably be higher than it is now. 
Another difficult question is how the basic status is to be guaranteed. 
The debate about individual income supplements versus general public services has become lively everywhere. 
It may well be resolved with different answers that accord with different countries’ traditions, although tax credits and similar additions to people’s incomes are more compatible with free societies. 
At the upper end of the social and economic scale, a different issue arises. 
Many people object to business managers who take away in pay, bonuses, and stock options hundreds of millions of dollars from their companies. 
Indeed, there is a legitimate question whether the behavior of today’s capitalists promotes the general acceptance of capitalism. 
But individual wealth becomes a problem only if and when it can be used to restrict others’ chances of participation. 
When wealth turns into unchecked power, something must be done to restrict it. 
What has come to be called money laundering, that is, the attempt to turn illicit gains into legitimate riches, provides one example of the need for action. 
There are others, including the question of inheritance taxes, which have long been regarded as a necessary component of a free society. 
Nevertheless, while a free society recognizes limits to inequality, it also accepts that inequality exists, for it provides hope for many by showing what one might achieve with ability and luck – or perhaps even luck alone. 
Inequality adds color and variety to societies; it is one of the marks of lively, flexible, and innovative countries. 
It is thus not bad in itself, even if its excesses must be capped in the name of citizenship for all. 
Social exclusion and personalized power through wealth are always unacceptable. 
But if we want freedom, then social and economic inequalities are a legitimate, and necessary, price to pay. 

Inequality and Its Discontents 
Leaders around the world seem to be convinced that inequality and lack of broad participation in economic growth, if allowed to persist, will lead to social discord and even violence. 
But is inequality the real problem? 
As Indian Prime Minister Manmohan Singh put it at the International Conference of Dalits and Minorities, held in New Delhi in December, “Even as absolute poverty may be reduced by growth, inequalities can get sharpened. 
This can be politically and socially extremely destabilizing.” 
So India must “take steps that reduce social and economic inequalities, without hurting the process of growth and without reducing the incentives for individual enterprise and creativity.” 
Likewise, at the World Economic Forum in Davos in January, Brazilian President Luiz Inácio Lula da Silva said,“ It will be through economic growth, job generation, and income distribution that we will live in a peaceful world.” 
He then urged lower barriers to agricultural exports to help the poor in developing countries. 
Such arguments have the ring of common sense. 
If people believe that they will share in overall economic growth, they should be more likely to support social peace. 
If they do not, unrest will become more likely. 
However, social scientists have found it difficult to prove that point. 
In fact, some statistical analyses of the correlation between inequality and social conflict conclude that there may even be an inverse relationship: societies that are more unequal tend to show less conflict, because the rich are better able to control the poor. 
There is some evidence that social unrest follows from inequality. 
The economists Alberto Alesina and Roberto Perotti have shown that, after controlling for several other factors, high-inequality countries do tend to have more social instability, as measured by, say, the number of politically motivated assassinations or the number of people killed in conjunction with domestic mass violence. 
Nevertheless, one wonders why the evidence that inequality causes social unrest is not stronger. 
One part of the problem may be that it is not always inequality per se that causes social discord, but also how inequality is perceived to have come. 
Unrest may reflect more a sense of betrayal – that others are not living up to their implied promises or are not behaving honorably. 
Indeed, a sense of trust in others’ intentions is central to a functioning economy. 
Lawyers write a lot of contracts, and courts spend a lot of time enforcing them, but these institutions cannot cover everything. 
Most economic relationships depend on good will, a basic inclination to do the right thing even if no one is checking. 
Trustworthiness is hardly universal. 
But the business world is built on our intuitive knowledge of when we can trust people fairly well and when we can’t trust them much at all. 
We design contracts around imperfect trustworthiness and construct elaborate institutions that take account of the hills and valleys of human honor. 
When these function well, we have a general sense that, even though people are not always trustworthy, basic fairness prevails. 
An article by Ernst Fehr at the University of Zurich and Alexander Klein and Klaus Schmidt at the University of Munich in the January 2007 issue of the journal Econometrica shows how people design economic relationships based on their knowledge of the circumstances in which people are trustworthy. 
In their experiments, subjects, acting as employers, were asked to choose among types of employment contracts and then observe the outcomes when other subjects, acting as employees, responded. 
The employers initially trusted the employees to work hard without specific incentives, and quickly learned that, without such incentives, many employees would shirk. 
But the employers also quickly learned that the best kind of employment contract is one that offers employee not just a fixed contract, but also the possibility of a bonus, a sort of gift for good performance that is outside of any contract provisions. 
Employees learned in the experiments that employers largely could be trusted to give such bonuses as a reward for hard work, even though no one could hold them formally accountable if they selfishly refused. 
Thus, a sort of free gift exchange between employer and employee emerged from these experiments, not any rigid or formulaic employment contract. 
One may infer that such informal arrangements survive in real-world employment relationships because they reinforce our heartfelt feelings of good will toward each other. 
By contrast, when inequality is perceived as the result of a breakdown in trusting relationships, it can lead to bitterness, and, ultimately, social unrest. 
This frequently occurs in times of rapid economic change. 
For example, in a rapidly globalizing world, people may have to leave their long-term employers, with whom they have built a sense of trust, or it may be their supervisors who will have to be replaced. 
In such cases, inequality may be perceived more intensely, for people may link it with the loss of good will. 
What Singh, Lula, and other world leaders really seem to want is to strengthen trust and cooperation even amidst a rapidly changing economy. 
If they succeed in devising policies, laws, and incentives that achieve this, a byproduct would likely be a reduction in inequality, which one hopes would reinforce the improved sense of trustworthiness. 

Inequality Comes to Asia 
SEOUL – From China to India, Asian countries’ rapid economic expansion has lifted hundreds of millions of people out of poverty in recent decades. 
Yet the income distribution has lately worsened, with inequality now potentially even more severe in Asia than in the developed economies of the West. 
From 1990 to 2012, the net Gini coefficient – a common measure of (post-tax and post-transfer) income inequality – increased dramatically in China, from 0.37 to 0.51 (zero signifies perfect equality and one represents perfect inequality). 
It rose in India as well, from 0.43 to 0.48. 
Even the four “Asian Tigers” – Hong Kong, Singapore, South Korea, and Taiwan – which had previously grown “with equity,” have lately faced rising inequality. 
In South Korea, for example, the share of income held by the top 10% rose from 29% in 1995 to 45% in 2013. 
This trend is being driven largely by the same forces that have fueled Asia’s economic growth in recent decades: unbridled globalization and technological progress. 
Increasingly open borders have made it easier for businesses to find the cheapest locations for their operations. 
In particular, China’s entry into global markets has put downward pressure on the wages of low-skill production workers elsewhere. 
Meanwhile, new technologies raise demand for skilled workers, while reducing demand for their less-skilled counterparts – a trend that fuels the expansion of the wage gap between skilled and unskilled. 
Capital owners also reap major benefits from technological progress. 
In short, as the Nobel laureate Angus Deaton has acknowledged, by creating new opportunities for a certain group of millions of people, while subjecting an enormous number of people to wage stagnation, unemployment, and economic precarity, globalization and technological innovation have helped to widen the gap between the haves and have-nots. 
Exacerbating this trend, income inequality often goes hand in hand with inequality of opportunity. 
With limited educational and economic prospects, talented youth from disadvantaged backgrounds end up running in place. 
As inequality becomes increasingly entrenched, it can erode the consensus in favor of pro-growth economic policies, undermine social cohesion, and spur political instability. 
To avoid such a future, Asian countries need to change the rules of the game, providing opportunities for youth, whatever their background, to ascend the income ladder. 
Market mechanisms are not enough to achieve this. Governments must take action, complementing their pro-growth policies with policies aimed at ensuring that the gains are shared much more equally and sustainably. 
To be sure, some Asian governments have been attempting to tackle inequality with progressive redistribution policies. 
For example, South Korea’s government recently announced that it will raise the minimum wage next year by 16.4%, to 7,530 won ($6.70) per hour, and up to 55% above its current level by 2020. 
It will also raise tax rates for the highest income earners and companies. 
But, while such measures have strong public support, they could end up hurting the economy, by reducing business investment, for example, and impeding job creation. 
In fact, the first rule of thumb in combating today’s inequality should be that simplistic egalitarian policies are not a permanent solution – and may, in fact, have adverse long-term consequences. 
Consider the Venezuelan government’s decision, in the late 1990s, to implement populist redistributive policies, without addressing the economy’s overreliance on the oil industry and lack of competitiveness. 
That choice has pushed the country to the edge of bankruptcy, while fueling large-scale social unrest and political turmoil. 
Venezuela’s national catastrophe should serve as a warning to everyone. 
The best way to enhance both equity and growth is effective development of human capital, which not only supports higher incomes today, but also ensures intergenerational mobility tomorrow. 
This requires enhanced social safety nets and redistributive tax-and-transfer programs, as well as access to quality education for all. 
The good news is that many East Asian economies are already investing more in public education, in order to expand opportunities for all population groups. 
But more must be done. 
Asia needs to improve further the quality of its higher education as well, reforming curricula to ensure that young people are getting the knowledge and skills they need to prepare them for the labor market. 
Meanwhile, the labor market should be made more efficient and flexible, so that it can match people with the right jobs and reward them adequately. 
As technology continues to transform the economy, life-long education and training is needed to enable workers to keep up. 
Promoting the participation of girls and women in education and economic activity is also important. 
Furthermore, governments should create an environment that fosters small innovative startups. 
And, of course, they should sustain pro-growth policies that boost overall job creation and reduce unemployment, while rejecting barriers to trade or innovation. 
In today’s charged political environment, there is a growing temptation to reject globalization and embrace populist redistribution policies that could end up doing far more harm than good. 
Asia’s leaders must do better if they are to realize the true promise of “growth with equity.” 

Inequality on the March 
How much should we worry about inequality? 
Answering that question requires that we first answer another question: “Compared to what?” 
What is the alternative against which to judge the degree of inequality that we see? 
Florida is a much more materially unequal society than Cuba. 
But the right way to look at the situation – if Florida and Cuba are our alternatives – is not to say that Florida has too much inequality, but that Cuba has much too much poverty. 
On the global level, it is difficult to argue that inequality is one of the world’s major political-economic problems. 
It is hard, at least for me, to envision alternative political arrangements or economic policies over the past fifty years that would have transferred any significant portion of the wealth of today’s rich nations to today’s poor nations. 
I can easily envision alternatives, such as Communist victories in post-World War II elections in Italy and France that would have impoverished nations now in the rich North. 
I can also envision alternatives that would have enriched poor nations: Deng Xiaoping becoming China’s leader in 1956 rather than 1976 would have done the job there. 
But alternatives that would have made the South richer at the price of reducing the wealth of the North would require a wholesale revolution in human psychology. 
Nor should we worry a great deal that some people are richer than others. 
Some people work harder, apply their intelligence more skillfully, or simply have been lucky enough to be in the right place at the right time. 
But I don’t see what alternative political-economic arrangements could make individuals’ relative wealth closely correspond to their relative moral or other merit. 
The problems that can be addressed are those of poverty and social insurance—of providing a safety net—not of inequality. 
But on the level of individual societies, I believe that inequality does loom as a serious political-economic problem. 
In the United States, the average earnings premium received by those with four-year college degrees over those with no college has gone from 30% to 90% over the past three decades, as the economy’s skill requirements have outstripped the educational system’s ability to meet them. 
Because the required skills acquired through formal education have become relatively scarcer, the education premium has risen, underpinning a more uneven distribution of income and wealth. 
Ceci Rouse and Orley Ashenfelter of Princeton University report that they find no signs that those who receive little education do so because education does not pay off for them: if anything, the returns to an extra year of schooling appear greater for those who get little education than for those who get a lot. 
A greater effort to raise the average level of education in America would have made the country richer and produced a more even distribution of income and wealth by making educated workers more abundant and less-skilled workers harder to find – and thus worth more on the market. 
Likewise, America’s corporate CEO’s and their near-peers earn ten times more today than they did a generation ago. 
This is not because a CEO’s work effort and negotiation and management skills are ten times more valuable nowadays, but because other corporate stakeholders have become less able to constrain top managers and financiers from capturing more of the value-added. 
Similar patterns are found elsewhere. 
Within each country, the increase in inequality that we have seen in the past generation is predominantly a result of failures of social investment and changes in regulations and expectations, and has not been accompanied by any acceleration in the overall rate of economic growth. 
For the most part, it looks like these changes in economy and society have not resulted in more wealth, but only in an upward redistribution of wealth—a successful right-wing class war. 
This kind of inequality should be a source of concern. 
Bill Gates, Paul Allen, Steve Ballmer, and the other millionaires and billionaires of Microsoft are brilliant, hardworking, entrepreneurial, and justly wealthy. 
But only the first 5% of their wealth can be justified as an economic incentive to encourage entrepreneurship and enterprise. 
The next 95% would create much more happiness and opportunity if it was divided evenly among US citizens or others than if they were to consume any portion of it. 
An unequal society cannot help but be an unjust society. 
The most important item that parents in any society try to buy is a head start for their children. 
And the wealthier they are, the bigger the head start. 
Societies that promise equality of opportunity thus cannot afford to allow inequality of outcomes to become too great. 

Faster than a Speeding Congressman 
LONDON – It’s a bird! 
It’s a plane! 
No, it’s Supra-politician. 
But, unlike a cartoon hero, when Supra-politician arrives in power, he or she probably won’t save the day. 
The emergence of such leaders is a relatively new phenomenon, one that is reshaping politics across the West. 
Today, two largely dissimilar presidents, Emmanuel Macron in France and Donald Trump in the United States, are its leading avatars. 
Until a few decades ago, democratic leaders had to climb the electoral ladder, rung by rung, acquiring along the way a facility for retail politics, stump speaking, and the demands of assembling a working majority. 
In the US, that meant that virtually all presidents had either served in Congress or as state governors, with the only modern exception being Dwight Eisenhower, whose background as an Army general stood in for political experience. 
In Europe, French politicians moved up the parliamentary ladder in the Fourth Republic, and could aspire to climb to the presidency in the Fifth. 
German leaders since World War II have risen through state and federal political structures. 
In Italy, postwar leaders have had to navigate the byzantine political maze created by the now-defunct Christian Democrats. 
Even in Russia, leaders have risen through the ranks of party or state hierarchies. 
Of course, political parties always had their “talent scouts” on the lookout for individuals with exceptional leadership potential. 
But even a figure like British Prime Minister John Major, who was fast-tracked to the top, served as a junior social services minister, foreign secretary, and chancellor of the exchequer before taking over the premiership. 
Things began to change with Tony Blair’s government. 
Blair had served in Parliament, and performed smoothly as the Labour Party’s home affairs spokesman. 
But, after the unexpected death of his mentor, the skillful machine politician and Labour Party leader John Smith, he was catapulted to the top, as though by divine right. 
More recently, David Cameron served just one term in Parliament before being chosen as leader of the Conservative Party. 
In the US, Trump’s predecessor, Barack Obama, was another such a “fast-tracked” politician. 
In 2004, the relatively unknown Illinois state senator delivered a spellbinding speech at the Democratic National Convention. 
Four years later, he was in the White House. 
With Trump, the rocket to the top fired on all boosters. 
In just over a year, Trump went from reality-television host and showboating property magnate to leader of the world’s most powerful country, leaving the Republican Party establishment with whiplash. 
The closest precedent for Trump may be Italy’s former prime minister, Silvio Berlusconi, who was a well-known media mogul before deciding to take advantage of the disintegration of Italy’s postwar party system in the early 1990s to create his own political movement. 
Another Italian supra-politician, Matteo Renzi, also enjoyed a meteoric political rise, becoming prime minister without ever serving as an MP, holding national office, or building a political coalition. 
Finally, there is Macron, a former banker and (briefly) economy minister, who had never entered the slog of democratic politics before the recent election. 
Without backing from an established party – like Berlusconi, Macron created his own movement – he surged from relative unknown to President of the Republic in a matter of months. 
Clearly, supra-politicians do not subscribe to a particular ideology or cultivate a particular appearance. 
And there are specific factors that fueled each individual’s rise. 
Cameron was supported by financial interests determined to resurrect the Conservative Party. 
Trump’s business background and “outsider” status helped him to appeal to the newly dispossessed. 
But these leaders do have some features in common, beginning with their use of modern media. 
Prior to the twentieth century, leaders were remote figures who rarely made direct contact with the masses. 
Then came the age of the orator, when figures like David Lloyd George and Ramsay MacDonald spoke directly to large crowds. 
Leaders from Adolf Hitler to Winston Churchill did the same, with the aid of the microphone. 
The advent of television called for a more personal and understated presentation – brilliantly grasped by John F. Kennedy – and was more conducive than ever to the rapid takeover of public discourse and consciousness. 
Blair and Cameron may not have been good orators, but they knew how to present themselves on TV. 
Obama expertly blended oratory with a relaxed, TV-optimal persona. 
What Trump lacks in rhetorical skill, he makes up for with his ability to manipulate an audience, with Twitter as his favorite tool for connecting to the masses. 
Renzi and Macron are masters of the sound bite. 
Of course, getting the right TV coverage takes some effort. 
Trump courted Rupert Murdoch, just like Blair and, to a lesser extent, Cameron had. 
Macron assiduously cultivated French media interests. 
Berlusconi’s own companies dominated the Italian airwaves. 
But there is another, more troubling commonality among supra-politicians: they tend to crash-land, owing largely to their lack of political skill. 
Blair couldn’t reconcile his neo-conservative principles with those of his own party – a situation that came to a head with his disastrous support for the US-led war in Iraq. 
Cameron’s desperation to win votes spurred him to call a referendum on Britain’s European Union membership, the result of which forced him to resign. 
Renzi’s leadership, too, was brought down in similar fashion: by tying his political fate to a referendum on much-needed constitutional reforms, he turned the vote into an assessment of his government. 
Trump’s cluelessness has been on display since day one, undermining the confidence of US allies and impeding the Republicans’ ability to enact their agenda. 
The question now is whether Macron – who went on to secure an unassailable majority in the French National Assembly – can break the mold, or whether he will provide further proof that media savvy is no substitute for experience in the political trenches. 

Our Infant Information Revolution 
CAMBRIDGE – It is frequently said that we are experiencing an information revolution. 
But what does that mean, and where is the revolution taking us? 
Information revolutions are not new. 
In 1439, Johannes Gutenberg’s printing press launched the era of mass communication. 
Our current revolution, which began in Silicon Valley in the 1960s, is bound up with Moore’s Law: the number of transistors on a computer chip doubles every couple of years. 
By the beginning of the twenty-first century, computing power cost one-thousandth of what it did in the early 1970s. 
Now the Internet connects almost everything. 
In mid-1993, there were about 130 websites in the world; by 2000, that number had surpassed 15 million. 
Today, more than 3.5 billion people are online; experts project that, by 2020, the “Internet of Things” will connect 20 billion devices. 
Our information revolution is still in its infancy. 
The key characteristic of the current revolution is not the speed of communications; instantaneous communication by telegraph dates back to the mid-nineteenth century. 
The crucial change is the enormous reduction in the cost of transmitting and storing information. 
If the price of an automobile had declined as rapidly as the price of computing power, one could buy a car today for the same price as a cheap lunch. 
When a technology’s price declines so rapidly, it becomes widely accessible, and barriers to entry fall. 
For all practical purposes, the amount of information that can be transmitted worldwide is virtually infinite. 
The cost of information storage has also declined dramatically, enabling our current era of big data. 
Information that once would fill a warehouse now fits in your shirt pocket. 
In the middle of the twentieth century, people feared that the computers and communications of the current information revolution would lead to the type of centralized control depicted in George Orwell’s dystopian novel 1984. Big Brother would monitor us from a central computer, making individual autonomy meaningless. 
Instead, as the cost of computing power has decreased and computers have shrunk to the size of smart phones, watches, and other portable devices, their decentralizing effects have complemented their centralizing effects, enabling peer-to-peer communication and mobilization of new groups. 
Yet, ironically, this technological trend has also decentralized surveillance: billions of people nowadays voluntarily carry a tracking device that continually violates their privacy as it searches for cell towers. 
We have put Big Brother in our pockets. 
Likewise, ubiquitous social media generate new transnational groups, but also create opportunities for manipulation by governments and others. 
Facebook connects more than two billion people, and, as Russian meddling in the 2016 US presidential election showed, these connections and groups can be exploited for political ends. 
Europe has tried to establish rules for privacy protection with its new General Data Protection Regulation, but its success is still uncertain. 
In the meantime, China is combining surveillance with the development of social credit rankings that will restrict personal freedoms such as travel. 
Information provides power, and more people have access to more information than ever before, for good and for ill. 
That power can be used not only by governments, but also by non-state actors ranging from large corporations and non-profit organizations to criminals, terrorists, and informal ad hoc groups. 
This does not mean the end of the nation-state. 
Governments remain the most powerful actors on the global stage; but the stage has become more crowded, and many of the new players can compete effectively in the realm of soft power. 
A powerful navy is important in controlling sea-lanes; but it does not provide much help on the Internet. 
In nineteenth-century Europe, the mark of a great power was its ability to prevail in war, but, as the American analyst John Arquilla has pointed out, in today’s global information age, victory often depends not on whose army wins, but on whose story wins. 
Public diplomacy and the power to attract and persuade become increasingly important, but public diplomacy is changing. 
Long gone are the days when foreign service officers carted film projectors to the hinterlands to show movies to isolated audiences, or people behind the Iron Curtain huddled over short-wave radios to listen to the BBC. 
Technological advances have led to an explosion of information, and that has produced a “paradox of plenty”: an abundance of information leads to scarcity of attention. 
When people are overwhelmed by the volume of information confronting them, it is hard to know what to focus on. 
Attention, not information, becomes the scarce resource. 
The soft power of attraction becomes an even more vital power resource than in the past, but so does the hard, sharp power of information warfare. 
And as reputation becomes more vital, political struggles over the creation and destruction of credibility multiply. 
Information that appears to be propaganda may not only be scorned, but may also prove counterproductive if it undermines a country’s reputation for credibility. 
During the Iraq War, for example, the treatment of prisoners at Abu Ghraib and Guantanamo Bay in a manner inconsistent with America’s declared values led to perceptions of hypocrisy that could not be reversed by broadcasting images of Muslims living well in America. 
Similarly, President Donald Trump’s tweets that prove to be demonstrably false undercut American credibility and reduce its soft power. 
The effectiveness of public diplomacy is judged by the number of minds changed (as measured by interviews or polls), not dollars spent. 
It is interesting to note that polls and the Portland index of the Soft Power 30 show a decline in American soft power since the beginning of the Trump administration. 
Tweets can help to set the global agenda, but they do not produce soft power if they are not credible. 
Now the rapidly advancing technology of artificial intelligence or machine learning is accelerating all of these processes. 
Robotic messages are often difficult to detect. 
But it remains to be seen whether credibility and a compelling narrative can be fully automated. 

The Global Security Threat of Antimicrobial Resistance 
SEATTLE – Today we are faced with the harsh reality that the treatment or prevention of infectious diseases has not made quantum advances since the early successes of vaccines and antimicrobial therapies. 
In a sense, the world is headed backward, as once-treatable microbes become resistant to existing therapies, and new infections for which there are no effective interventions continue to arise. 
The situation represents a serious and imminent threat to the world. 
Witness the global impact of the 2014 Ebola crisis in West Africa or the 2003 SARS outbreak, which jeopardized even wealthy economies like Singapore and Canada. 
The emergence of a highly lethal and rapidly spreading antimicrobial-resistant infection would lead to untold numbers of deaths and unimaginable misery. 
The consequences could be similar in magnitude to a large-scale terrorist attack. 
Communities could be walled off, national borders closed, and travel could be restricted or even suspended. 
Health systems could disintegrate or collapse, as could economies. 
The possibility of such an apocalyptic scenario suggests that the threat of infectious diseases – either from microbes that develop resistance to existing therapies or new microbes that emerge – is among the most important challenges that humankind faces. 
It is not just a public health risk; it is a threat to national and global security. 
Thus, it must be met with a comprehensive and effective solution. 
The research and development required to produce new medicines or vaccines is time-consuming, often taking more than a dozen years. 
It is also very expensive, costing hundreds of millions of dollars for every new product. 
Moreover, there is no guarantee of success; indeed, for each successful product, there are as many as nine equally promising candidates that fail. 
Given the risks involved, it is not surprising that pharmaceutical companies are very careful in their choice of investments in new drug or vaccine programs, selecting only those that promise financial gains sufficient to cover the costs of both successes and failures and provide a reasonable return on the required investment. 
Many ideas have emerged to address this investment problem, such as offering prizes for successful products, creating new incentives for industry investments, and establishing novel funding mechanisms to support research to address emerging infectious threats. 
All have merit and would have some impact, but they would lead to incremental advances at best. 
A more ambitious solution is needed. 
Almost every country is prepared to channel a large percentage of its GDP toward investments in national defense or security. 
The global threat of emerging or resistant infections must be viewed first and foremost in that context, with all countries committed to providing financing, intellectual capital, and available resources to support the discovery, development, manufacture, stockpiling, and equitable distribution of new antimicrobial agents and vaccines. 
Unless countries recognize the risks they face, they are unlikely to make such a commitment. 
It might help to inform them that the estimated cost of emerging global infectious threats is $60 billion per year; if investments are made upfront, the total costs could be much smaller. 
Country investments should be pooled to create a substantial pipeline of products to combat infectious threats. 
There are many ways this could be done. 
The easiest would be to spread the money around to scientists in academia, product-development partnerships, biotech firms, and larger pharmaceutical companies as opportunities arise. 
This might allow existing processes to move forward with new momentum based on the availability of new funds. 
Unfortunately, history suggests that this wouldn’t lead to much progress beyond the state of the pipeline today. 
An alternative would be to create a full-fledged, global, not-for-profit pharmaceutical company with a research budget equal to that of the world’s top five for-profit companies, and with the singular objective of creating a pipeline of products to address the challenge of infectious threats. 
As with any of its for-profit peers, the management and scientific talent to undertake this effort would have to be the best available, and attracting it would require competitive compensation. 
The management team would be held accountable for its performance by a board of investors, comprising representatives of countries that provide the funding and scientists who provide the intellectual capital. 
In keeping with industry practice, the pipelines would have to be built with a combination of internal research and in-licensing or acquisition of external innovation. 
Adequate infrastructure for clinical trials would have to be built to support research not only in developed countries, but also in remote regions where some of the infectious threats that the world faces are likely to emerge. 
The new company’s work would be aided by prior agreements among regulatory agencies on the requirements for registration of new products, among intellectual-property holders on waiving royalty rights, and among governments on liability-protection for the company and compensation for the victims of unexpected adverse reactions to new products. 
The international community would have to increase available manufacturing capacity, create new distribution channels, and reserve storage capacity for stockpiling products that have no immediate application. 
It goes without saying that this would be a complicated undertaking, with many details to be worked out. 
But somehow we must suspend disbelief and take action now, lest we be caught off-guard against an imminent global threat. 
This is a battle we cannot afford to lose. 

Inflation Comes to China 
SHANGHAI – Macroeconomic conditions in any country are like running water. 
How large and fast is the flow? 
Where does it originate and where does it go? 
The “main stream” of China’s economy is the vast flow of inward investment. 
China’s economy is prone to rapid growth, with buoyant investment demand sustaining powerful short-term inflationary pressures. 
As a result, credit controls on investment projects and a close watch on the money supply have been used to promote macroeconomic stability since China began its market reforms. 
But in 2003, following five years of deflation, China’s economy entered a new phase. 
Overcapacity vanished, constraints on consumption were lifted, and a dramatic increase in household demand followed. 
Since then, heavy industries – steel, automobiles, machinery, building materials, energy, and raw materials – have experienced an unprecedented investment boom, reflecting demand for urban construction, housing, transport, infrastructure, and equipment renewal. 
Not surprisingly, the economy began to overheat. 
Productivity and profitability in manufacturing and heavy industries picked up, boosting China’s national savings dramatically. 
Indeed, the huge increase in China’s trade surplus in recent years is a consequence not of the renminbi’s exchange rate, as many believe, but of the domestic savings’ increase. 
Yet, from 2005 to early 2007, macroeconomic policy was focused on reining in the surplus. 
Most importantly, the renminbi was allowed to appreciate, and the export tax rebate was virtually eliminated. 
In early 2007, because inflation was not really visible, the government did not regard it as a major problem. 
But when price increases accelerated in the second half of the year, the authorities began to worry. 
The central bank (PBOC) initially attributed it to excess liquidity, and so began to use monetary policy tools, raising interest rates five times since late 2007. 
As a result, the interest rate for 12-month fixed deposits has reached 3.9%. 
Moreover, the PBOC has issued Central Bank Notes six times, reinforcing its anti-inflationary effort. 
Nevertheless, by the end of October, M2 money supply had increased by 18.4% – growing by 1.3% faster year on year, and exceeding the 16% target. 
By the start of 2008, it was clear that controlling inflation and cooling an overheating economy had become the government’s main economic target. 
Indeed, the government’s key economic committee, the Central Work Committee, has concluded that after years of “high growth and low inflation,” China is on a route to “high growth with high inflation.” 
This invariably means that fiscal and monetary stability will become a priority while controlling the trade surplus has become a lower one. 
The problem is that, until now, the major cause of inflation has been rapidly rising manufacturing costs, and there is no sign of a slowdown in energy and raw material prices. 
Moreover, a new labor law and income policies will further increase workforce costs. 
And, due to rising consumer prices, the nominal interest rate will continue to rise. 
As a result, with investment demand remaining robust, inflation could spread. 
In the face of growing inflation, output is set to suffer. 
In order to curb investment demand, tighter credit rationing and monetary policy are inevitable in 2008, while investment projects and land use will be subject to more rigorous control. 
Likewise, increasing pressure from growing labor costs will force enterprises to lower their profit expectations and cut costs, negatively affecting output growth and employment in the short run. 
It will be difficult to ease these inflationary pressures this year. 
International commodity prices will continue to rise, increases in domestic labor costs and prices of non-tradable goods cannot easily be stemmed, the international economic situation will encourage further capital inflows, and asset inflation will persist. 
All these factors will push inflation above the 2007 level. 
With export performance also set to slow, owing to the economic downturn in the United States, employment and growth could be weakened further, which implies mounting pressure on China’s government – and thus on the fiscal deficit, creating another source of inflationary pressure. 
And, once an inflationary trend emerges and economic growth slows, the steady- as-you go pattern to China’s decade-long boom will be over. 

Inflation is Now the Lesser Evil 
CAMBRIDGE – It is time for the world’s major central banks to acknowledge that a sudden burst of moderate inflation would be extremely helpful in unwinding today’s epic debt morass. 
Yes, inflation is an unfair way of effectively writing down all non-indexed debts in the economy. 
Price inflation forces creditors to accept repayment in debased currency. 
Yes, in principle, there should be a way to fix the ills of the financial system without resort to inflation. 
Unfortunately, the closer one examines the alternatives, including capital injections for banks and direct help for home mortgage holders, the clearer it becomes that inflation would be a help, not a hindrance. 
Modern finance has succeeded in creating a default dynamic of such stupefying complexity that it defies standard approaches to debt workouts. 
Securitization, structured finance, and other innovations have so interwoven the financial system’s various players that it is essentially impossible to restructure one financial institution at a time. 
System-wide solutions are needed. 
Moderate inflation in the short run – say, 6% for two years – would not clear the books. 
But it would significantly ameliorate the problems, making other steps less costly and more effective. 
True, once the inflation genie is let out of the bottle, it could take several years to put it back in. 
No one wants to relive the anti-inflation fights of the 1980’s and 1990’s. 
But right now, the global economy is teetering on the precipice of disaster. 
We already have a full-blown global recession. 
Unless governments get ahead of the problem, we risk a severe worldwide downturn unlike anything we have seen since the 1930’s. 
The necessary policy actions involve aggressive macroeconomic stimulus. 
Fiscal policy should ideally focus on tax cuts and infrastructure spending. 
Central banks are already cutting interest rates left and right. 
Policy interest rates around the world are likely to head toward zero; the United States and Japan are already there. 
The United Kingdom and the euro zone will eventually decide to go most of the way. 
Steps must also be taken to recapitalize and re-regulate the financial system. 
Huge risks will remain as long as the financial system remains on government respirators, as is effectively the case in the US, UK, the euro zone, and many other countries today. 
Most of the world’s largest banks are essentially insolvent, and depend on continuing government aid and loans to keep them afloat. 
Many banks have already acknowledged their open-ended losses in residential mortgages. 
As the recession deepens, however, bank balance sheets will be hammered further by a wave of defaults in commercial real estate, credit cards, private equity, and hedge funds. 
As governments try to avoid outright nationalization of banks, they will find themselves being forced to carry out second and third recapitalizations. 
Even the extravagant bailout of financial giant Citigroup, in which the US government has poured in $45 billion of capital and backstopped losses on over $300 billion in bad loans, may ultimately prove inadequate. 
When one looks across the landscape of remaining problems, including the multi-trillion-dollar credit default swap market, it is clear that the hole in the financial system is too big to be filled entirely by taxpayer dollars. 
Certainly, a key part of the solution is to allow more banks to fail, ensuring that depositors are paid off in full, but not necessarily debt holders. 
But this route is going to be costly and painful. 
That brings us back to the inflation option. 
In addition to tempering debt problems, a short burst of moderate inflation would reduce the real (inflation-adjusted) value of residential real estate, making it easier for that market to stabilize. 
Absent significant inflation, nominal house prices probably need to fall another 15% in the US, and more in Spain, the UK, and many other countries. 
If inflation rises, nominal house prices don’t need to fall as much. 
Of course, given the ongoing recession, it may not be so easy for central banks to achieve any inflation at all right now. 
Indeed, it seems like avoiding sustained deflation , or falling prices, is all they can manage. 
Fortunately, creating inflation is not rocket science. 
All central banks need to do is to keep printing money to buy up government debt. 
The main risk is that inflation could overshoot, landing at 20 or 30% instead of 5-6%. 
Indeed, fear of overshooting paralyzed the Bank of Japan for a decade. 
But this problem is easily negotiated. 
With good communication policy, inflation expectations can be contained, and inflation can be brought down as quickly as necessary. 
It will take every tool in the box to fix today’s once-in-a-century financial crisis. 

The Deflation Bogeyman 
CAMBRIDGE – The world's major central banks are currently obsessed with the goal of raising their national inflation rates to their common target of about 2% per year. 
This is true for the United States, where the annual inflation rate was -0.1% over the past 12 months; for the United Kingdom, where the most recent data show 0.3% price growth; and for the eurozone, where consumer prices fell 0.6%. 
But is this a real problem? 
The sharp decline in energy prices is the primary reason for the recent drop in the inflation rate. 
In the US, the core inflation rate (which strips out changes in volatile energy and food prices) was 1.6% over the last 12 months. 
Moreover, the US Federal Reserve, the Bank of England, and the European Central Bank understand that even if energy prices do not rise in the coming year, a stable price level for oil and other forms of energy will cause the inflation rate to rise. 
In the US, the inflation rate has also been depressed by the rise in the value of the dollar relative to the euro and other currencies, which has caused import prices to decline. 
This, too, is a “level effect," implying that the inflation rate will rise once the dollar's exchange rate stops appreciating. 
But, despite this understanding, the major central banks continue to maintain extremely low interest rates as a way to increase demand and, with it, the rate of inflation. 
They are doing this by promising to keep short-term rates low; maintaining large portfolios of private and government bonds; and, in Europe and Japan, continuing to engage in large-scale asset purchases. 
The central bankers justify their concern about low inflation by arguing that a negative demand shock could shift their economies into a period of prolonged deflation, in which the overall price level declines year after year. 
That would have two adverse effects on aggregate demand and employment. 
First, the falling price level would raise the real value of the debts that households and firms owe, making them poorer and reducing their willingness to spend. 
Second, negative inflation means that real interest rates rise, because central banks cannot lower the nominal interest rate below zero. 
Higher real interest rates, in turn, depress business investment and residential construction. 
In theory, by depressing aggregate demand, the combination of increased real debt and higher real interest rates could lead to further price declines, leading to even larger negative inflation rates. 
As a result, the real interest rate would rise further, pushing the economy deeper into a downward spiral of falling prices and declining demand. 
Fortunately, we have relatively little experience with deflation to test the downward-spiral theory. 
The most widely cited example of a deflationary economy is Japan. 
But Japan has experienced a low rate of inflation and some sustained short periods of deflation without ever producing a downward price spiral. 
Japan's inflation rate fell from nearly 8% in 1980 to zero in 1987. 
It then stayed above zero until 1995, after which it remained low but above zero until 1999, and then varied between zero and -1.7% until 2012. 
Moreover, low inflation and periods of deflation did not prevent real incomes from rising in Japan. 
From 1999 to 2013, real per capita GDP rose at an annual rate of about 1% (which reflected a more modest rise of real GDP and an actual decline in population). 
Why, then, are so many central bankers so worried about low inflation rates? 
One possible explanation is that they are concerned about the loss of credibility implied by setting an inflation target of 2% and then failing to come close to it year after year. 
Another possibility is that the world's major central banks are actually more concerned about real growth and employment, and are using low inflation rates as an excuse to maintain exceptionally generous monetary conditions. 
And yet a third explanation is that central bankers want to keep interest rates low in order to reduce the budget cost of large government debts. 
None of this might matter were it not for the fact that extremely low interest rates have fueled increased risk-taking by borrowers and yield-hungry lenders. 
The result has been a massive mispricing of financial assets. 
And that has created a growing risk of serious adverse effects on the real economy when monetary policy normalizes and asset prices correct. 

The Inflation Target Trap 
BRUSSELS – Central banks have a problem: growth in much of the world is accelerating, but inflation has failed to take off. 
Of course, for most people, growth without inflation is the ideal combination. 
But central banks have set the goal of achieving an inflation rate of “below, but close to 2%,” as the European Central Bank puts it. 
And, at this point, it is hard to see how that can be achieved. 
Central banks never pretended that they could steer inflation directly. 
But they thought that by providing rock-bottom interest rates and generous liquidity conditions in the wake of the 2008 global financial crisis, they could push investment and consumption upward. 
In 2009, when financial markets were in turmoil and the economy was in free-fall, the US Federal Reserve took matters a step further, initiating large-scale asset purchases, or quantitative easing (QE). 
The ECB followed suit in 2014-2015, when deflation appeared (wrongly, in hindsight) to threaten the eurozone. 
The Fed’s actions certainly helped to stabilize financial markets. 
The ECB also claims that its bond purchases, after financial markets had already normalized, sparked economic growth and fostered employment. 
But the impact ended there. 
The tightening of the labor market should have led to higher wages, which would ultimately translate into higher prices. 
But this mechanism, the so-called Phillips curve, seems to have broken down. 
In both the United States and Japan, despite low unemployment, wages are not increasing, at least not at the rate historical experience would indicate. 
And the wage increases that are occurring, such as in the US, are not having the impact on prices that one would expect. 
The reasons for this are not well understood. 
Last year, low oil prices could be blamed; but, even when oil prices rebounded somewhat, inflation remained low. 
Another, more structural reason is that the prices of the goods comprising a large part of the consumer price index tend to fall over time, because they can be produced increasingly efficiently in low-wage countries, particularly in Asia. 
In addition, retailers’ margins are being squeezed, owing to competition from online shops. 
This problem of “missing inflation” is especially acute in the eurozone and Japan. 
Because the Bank of Japan (BOJ) and the ECB have defined success exclusively in terms of achieving their inflation target, they are now in a quandary. 
The ECB, in particular, now has little choice but to continue its expansionary policies, including QE, until it sees some sustained increase in inflation. 
For the Fed, the problem is less severe. 
The US is experiencing somewhat higher inflation than the eurozone and Japan are, and the Fed has a dual mandate: not just price stability, but also full employment. 
Having achieved the latter, it can declare at least half a victory and gradually start lifting rates. 
But there is another reason why missing inflation is more of a problem for the eurozone. 
During the bubble years before the 2007 crisis, prices and wages increased sharply in the eurozone periphery, relative to Germany, which was plagued by high unemployment and stagnant wages. 
Over time, those economies became uncompetitive. 
When capital inflows suddenly stopped, they could not cope, requiring them to increase exports. 
Now Germany is practically at full employment, but wages are not increasing at much more than 2% – far lower than the 5% rate that prevailed when Germany last had such low unemployment (below 4%), nearly 30 years ago. 
The resulting lack of inflation is not only contributing to Germany’s very high current-account surplus; it is also making it harder for the peripheral countries to improve their competitive position vis-à-vis Germany. 
The ECB must set its monetary policy on the basis of the eurozone average. 
But it would clearly be more comfortable if the competitive imbalances that arose during the boom years were corrected more quickly, and most European policymakers would welcome some rebalancing as well. 
But the real question is not whether inflation closer to 2% would be desirable. 
QE is a policy for desperate times. 
Today, the economic environment is totally different than it was just a few years ago: financial markets are buoyant, financing conditions are highly favorable, the economy is expanding satisfactorily, with no sign of deflation. 
In a recent speech, ECB President Mario Draghi observed that reflationary dynamics are “slowly taking hold.” 
Taking him at his word, markets immediately traded the euro up, because investors concluded that, under these circumstances, negative rates and asset purchases would no longer be warranted. 
But the ECB quickly denied this interpretation. 
That was a mistake. 
It makes no sense to continue with policies designed for a thunderstorm when the sun is shining again. 
The ECB need not reverse course completely, but it could declare victory in the fight against deflation and start exiting its emergency policies. 

The Information Revolution Gets Political 
NEW DELHI – The second anniversary of the “Arab Spring” in Egypt was marked by riots in Tahrir Square that made many observers fear that their optimistic projections in 2011 had been dashed. 
Part of the problem is that expectations had been distorted by a metaphor that described events in short-run terms. 
If, instead of “Arab Spring,” we had spoken of “Arab revolutions,” we might have had more realistic expectations. 
Revolutions unfold over decades, not seasons or years. 
Consider the French Revolution, which began in 1789. 
Who would have predicted that within a decade, an obscure Corsican soldier would lead French armies to the banks of the Nile, or that the Napoleonic Wars would disrupt Europe until 1815? 
If we think of the Arab revolutions, there are many surprises yet to come. 
So far, most Arab monarchies have had enough legitimacy, money, and force to survive the waves of popular revolt that have brought down secular republican autocrats like Egypt’s Hosni Mubarak and Libya’s Muammar el-Qaddafi, but we are only two years into the revolutionary process. 
Beneath the Arab political revolutions lies a deeper and longer process of radical change that is sometimes called the information revolution. 
We cannot yet fully grasp its implications, but it is fundamentally transforming the nature of power in the twenty-first century, in which all states exist in an environment that even the most powerful authorities cannot control as they did in the past. 
Governments have always worried about the flow and control of information, and our age is hardly the first to be strongly affected by dramatic changes in information technology. 
Gutenberg’s printing press was important to the origins of the Protestant Reformation and the ensuing wars in Europe. 
Today, however, a much larger part of the population, both within and among countries, has access to the power that comes from information. 
The current global revolution is based on rapid technological advances that have dramatically decreased the cost of creating, finding, and transmitting information. 
Computing power doubled roughly every 18 months for 30 years, and, by the beginning of the twenty-first century, it cost one-thousandth of what it did in the early 1970’s. 
If the price of automobiles had fallen as quickly as the price of semiconductors, a car today would cost $5. 
As recently as the 1980’s, phone calls over copper wire could carry only one page of information per second; today, a thin strand of optical fiber can transmit 90,000 volumes in a second. 
In 1980, a gigabyte of data storage occupied a room; now, 200 gigabytes of storage fits in your shirt pocket. 
Even more crucial has been the enormous drop in the cost of transmitting information, which reduces barriers to entry. 
As computing power has become cheaper and computers have shrunk to the size of smart phones and other portable devices, the decentralizing effects have been dramatic. 
Power over information is much more widely distributed today than even a few decades ago. 
As a result, world politics is no longer the sole province of governments. 
Individuals and private organizations – including WikiLeaks, multinational corporations, NGOs, terrorists, or spontaneous social movements – have been empowered to play a direct role. 
The spread of information means that informal networks are undercutting the monopoly of traditional bureaucracy, with all governments less able to control their agendas. 
Political leaders enjoy fewer degrees of freedom before they must respond to events, and must then communicate not only with other governments, but with civil society as well. 
But it would be a mistake to “over-learn” the lessons that the Arab revolutions have taught about information, technology, and power. 
While the information revolution could, in principle, reduce large states’ power and increase that of small states and non-state actors, politics and power are more complex than such technological determinism implies. 
In the middle of the twentieth century, people feared that computers and new means of communications would create the kind of central governmental control dramatized in George Orwell’s 1984. 
And, indeed, authoritarian governments in China, Saudi Arabia, and elsewhere have used the new technologies to try to control information. 
Ironically for cyber-utopians, the electronic trails created by social networks like Twitter and Facebook sometimes make the job of the secret police easier. 
After its initial embarrassment by Twitter in 2009, the Iranian government was able to suppress the country’s “green” movement in 2010. 
Similarly, while the “great firewall of China” is far from perfect, the government has managed thus far to cope, even as the Internet has burgeoned in the country. 
In other words, some aspects of the information revolution help the small, but some help the already large and powerful. 
Size still matters. 
While a hacker and a government can both create information and exploit the Internet, it matters for many purposes that large governments can deploy tens of thousands of trained people and have access to vast computing power to crack codes or intrude into other organizations. 
Likewise, while it is now cheap to disseminate existing information, the collection and production of new information often requires major investment, and, in many competitive situations, new information matters most. 
Intelligence collection is a good example, and the elaborate Stuxnet worm that disabled Iranian nuclear centrifuges seems to have been a government creation. 
Governments and large states still have more resources than information-empowered private actors, but the stage on which they play is more crowded. 
How will the ensuing drama unfold? 
Who will win, and who will lose? 
It will take decades, not a single season, to answer such questions. 
As events in Egypt and elsewhere have shown, we are only just beginning to comprehend the effects of the information revolution on power in this century. 

New Battlegrounds in Development Finance 
PRETORIA – The popularity of public-private partnerships (PPPs) to support infrastructure development in emerging countries is growing worldwide. 
The G-20 backs PPPs to boost global growth and create jobs. 
The BRICS economies (Brazil, Russia, India, China, and South Africa) see them as a way to build essential infrastructure quickly and cheaply. 
The United Nations hopes that infrastructure PPPs will provide the means to realize its post-2015 global development agenda. 
PPPs’ new appeal may redefine not just development economics, but also the overall relationship between rich and poor countries – though not necessarily for the better. 
The PPP bandwagon has three essential components: an explosion in infrastructure finance (backed by pension and other large funds); the creation of “pipelines” of lucrative mega-PPP projects to exploit countries’ raw materials; and the dismantling of environmental and social safeguards. 
Each must be carefully monitored as the use of PPPs expands. 
The World Bank is already seeking to double its lending within a decade by expanding infrastructure projects. 
Its new Global Infrastructure Facility (GIF) will mobilize global pension and sovereign wealth funds to invest in infrastructure as a specific asset class. 
The emerging world has also been active. 
The BRICS recently announced plans for a New Development Bank (NDB) for infrastructure and sustainable development. 
Its first Regional Center for Africa will be based in South Africa. 
China will launch a new Asian Infrastructure Investment Bank. 
Both banks aim to offer alternatives to the US-led World Bank and the Japan-led Asian Development Bank, respectively. 
Indeed, these new development-finance institutions are seen as a reaction against the Bretton Woods institutions, whose pursuit of neoliberal austerity policies and failure to reform their governance structures to share power with emerging economies, has been blamed for strangling public spending, de-industrialization, and the dismantling of national development banks. 
Many emerging countries also resent the World Bank’s environmental and social safeguards, which they see as compromising their national sovereignty. 
In response to this criticism, the Bank is revising its safeguards and enforcement mechanisms. 
But weaker oversight by the World Bank would leave loan recipients to monitor and enforce environmental and social standards themselves – regardless of their resources or political will to do so –thus jeopardizing efforts to defend the rights of indigenous peoples, resettle displaced people, mitigate environmental damage, or protect forests and biodiversity. 
The weakening of World Bank safeguards might also trigger a “race to the bottom,” pitting private or state investors, new financing institutions, and a deregulated World Bank against one another, while provoking a popular backlash. 
That is why it is important to have citizens’ groups that can step in to ensure that investments operate fairly. 
Though civil-society groups have long monitored the “supply side” – the project financing – they often ignore the “demand side” – namely, the value and impacts of the projects being implemented. 
This is especially the case for infrastructure investments in energy, water, transport, and information and communications technology (ICT). 
The Program for Infrastructure Development in Africa, for example, has planned $360 billion worth of “bankable mega-projects” in these sectors by 2040. 
PIDA gives priority to energy (especially hydropower) projects to support mining operations and oil and gas pipelines, while sidelining renewable energy technologies, such as solar, wind, and geothermal. 
Similar concerns surround the project “pipelines” of the Initiative for the Integration of Regional Infrastructure in South America and the ASEAN Infrastructure Fund in Asia. 
Though some PPP projects offer high returns, they also demand hefty additional guarantees from the host government to offset private-sector risk. 
In this way, fundamental tensions are created both in the way these deals are put together and in the overall conduct of North-South and South-South integration. 
For example, powerful groups and transnational corporations (such as the World Economic Forum, General Electric, and Rio Tinto) are gaining influence within the G-20, the G-7, and the BRICS, whose members compete among themselves for access to resources and markets. 
That competition now features new Infrastructure Project Preparation Facilities (IPPFs) to accelerate and replicate large PPPs with a disturbing reliance on big dams and fossil-fuel infrastructure, such as Nigeria’s gas-supply pipeline to the European Union – a top priority of PIDA that implies slow progress toward a low-carbon future. 
Indeed, the struggle for sustainability, especially in Africa, is becoming a new battleground, featuring deployments by the BRICS, the G-20, Asia-Pacific Economic Cooperation (APEC), Mercosur, and other international groupings and local vested interests. 
To understand how this plays out requires a rigorous new development paradigm. 
That is a difficult challenge, because civil society organizations with the greatest interest in learning how to cope with the new pressures tend to specialize in specific development areas, such as the Millennium Development Goals, or sectoral issues, rather than having a broader view of how development finance institutions and their big shareholders operate. 
A revived World Social Forum might take on the task, by reverting to its original intention of being a counterweight to the WEF. 
In Africa, pan-African bodies charged with coordinated oversight and agenda-setting authority should be judged by whether mega-PPPs in infrastructure reinforce a colonial-style extraction and consumption economy, or create a healthy and sustainable economy for generations to come. 

Infrastructure for a Sustainable Future 
WASHINGTON, DC – Infrastructure is a powerful driver of economic growth and inclusive development, capable of boosting aggregate demand today and laying the foundations for future growth. 
It is also a key element of the climate-change agenda. 
Done badly, infrastructure is a major part of the problem; done right, it is a major part of the solution. 
Over the next 15 years, more than $90 trillion in infrastructure investment will be needed worldwide. 
That is more than twice the value of the entire stock of infrastructure today, and requires total annual investment to increase more than twofold, from $2.5-3 trillion to above $6 trillion. 
Around 75% of this investment will have to take place in the developing world, particularly middle-income countries, owing to their growth needs, rapid urbanization, and already-large infrastructure backlogs. 
Closing the infrastructure gap will undoubtedly be challenging. 
But it also represents a profound opportunity to create the underpinnings of a more sustainable future. 
As it stands, more than 80% of the world’s primary energy supply and more than two-thirds of its electricity are derived from fossil fuels. 
Infrastructure alone accounts for around 60% of global greenhouse-gas emissions. 
If the world follows the same old approaches in building new infrastructure, it would lock in polluting, resource-intensive, and unsustainable pathways to growth. 
But shifting to renewable energies and sustainable infrastructure can have the opposite impact, helping to mitigate greenhouse-gas emissions while enhancing countries’ resilience to climate change. 
If climate risks are factored into investment decisions, renewable energies, cleaner transport, efficient water systems, and smarter, more resilient cities will emerge as the best bets. 
Fortunately, the political will to take action to mitigate climate change has never been stronger. 
At last December’s United Nations climate conference in Paris, world leaders reached a landmark agreement to work toward a more sustainable future, including by transforming the way infrastructure projects are developed, financed, and implemented. 
But agenda setting is just the first step. 
Delivering sustainable infrastructure at scale will require strong public policy leadership and responsive private-sector entrepreneurship. 
Policymakers must clearly articulate overall strategies for sustainable infrastructure investment, and embed them in comprehensive frameworks for sustainable growth and development. 
Here, the G20 countries can lead the way. 
Only with such integrated strategies can policymakers offer the level of policy coherence needed not just to maximize the effectiveness of each policy, but also to instill confidence in the private sector to do its part. 
What precisely should those strategies entail? 
While specific policy actions and priorities must be tailored to individual countries’ circumstances, the main elements of sustainable infrastructure agendas can broadly be captured under four “I”s: investment, incentives, institutions, and innovation. 
For starters, policymakers will need to ensure a significant increase in total investment. 
This requires a reversal of the broadly negative public-investment trend in the last couple of decades. 
Governments must allocate significantly more funds to sustainable infrastructure. 
But, given severe fiscal constraints in many countries, public investment alone is not enough; the private sector will still have to meet more than half of the total need. 
Efforts to reduce policy risks and costs of doing business can help spur the private sector to scale up investment considerably. 
To ensure that new investment is oriented toward sustainable infrastructure, policymakers must also adjust market incentives. 
The elimination of fossil-fuel subsidies and the implementation of carbon pricing are particularly important; with oil prices very low, now is the ideal time for countries to implement such reforms. 
Pricing reform will also be needed in other industries, including water. 
By getting prices right and reforming regulation to correct distorted incentives, governments can put markets to work in support of public-policy goals. 
But more investment alone is not enough. 
Strong institutions are needed to ensure the feasibility, quality, and impact of that investment. 
Particularly important is the capacity to develop strong project pipelines and institutional frameworks for public-private partnerships. 
With around 70% of total investment in sustainable infrastructure occurring in urban areas, close attention must also be paid to the quality of municipal institutions, as well as cities’ fiscal capacities. 
For developing economies, multilateral development banks will be a key partner in building capacity and catalyzing financing. 
Finally, there is the fourth “I”: innovation. 
On one hand, technological innovation will be needed to provide increasingly efficient components of low-carbon, climate-resilient infrastructure. 
That is why investment in research and development – especially in renewable-energy technologies – must also increase significantly. 
On the other hand, fiscal and financial innovation will be needed to capture the potential of new technologies. 
Specifically, the creative use of fiscal space will enable the mobilization of more financing for sustainable infrastructure. 
And there will be more space as carbon taxes raise substantial revenue for governments (and improve the tax structure). 
Meanwhile, new financial instruments and the resourceful use of development capital can leverage more private finance and lower its cost. 
Promoting infrastructure as an asset class could help attract more savings toward infrastructure. 
As it stands, assets under management by banks and institutional investors worldwide amount to more than $120 trillion, of which infrastructure accounts for only about 5%. 
Today, both infrastructure investment and climate action are urgently needed. 
With the right approach, we can achieve both goals simultaneously, building a more prosperous and sustainable future. 

Checks and Balances Before Roads and Bridges 
WASHINGTON, DC – In the 2016 American presidential election, Hillary Clinton and Donald Trump agreed that the US economy is suffering from dilapidated infrastructure, and both called for greater investment in renovating and upgrading the country’s public capital stock. 
Now that the Trump administration is preparing its first budget outline, its initiatives in this area will be a central focus of attention. 
The United States is not alone. 
In fact, infrastructure gaps are an even more urgent problem in the rest of the world. 
Other advanced economies also need to revive moribund investment, and emerging economies need to prepare for population growth, increased consumption, and higher demand for transportation spending. 
Initiatives adopted in the aftermath of the 2008 global financial crisis are beginning to promote infrastructure investment. 
In the European Union, the Juncker Plan – which draws on EU funds to help finance riskier and more innovative projects – aims to generate more than $300 billion in investment between 2016 and 2018. 
And there is an even greater push for infrastructure investment in emerging economies – especially China, which is pursuing projects both at home and abroad. 
In recent years, China has set up domestically funded institutions such as the Silk Road Fund and spurred the establishment of new international financial institutions such as the Asian Infrastructure Investment Bank. 
When done well, infrastructure investment can revive flagging economies and pay for itself, by galvanizing private-sector activity and fostering economic growth. 
But when done poorly, public infrastructure spending can lead to corruption and waste, with taxpayers footing the bill for “bridges to nowhere.” 
Properly executed infrastructure investment entails more than just financing; it also requires that all the myriad details of a project’s selection, design, and implementation be closely managed. 
And here, the keys to success are not just professional skill and technocratic expertise. 
They are also transparency and a free press. 
Citizens should have accurate facts about a project, so that they can monitor its progress and pressure policymakers to protect the public interest. 
In a new book, Tomas Hellebrandt and I project that consumer spending on transportation will quadruple by 2035 in Sub-Saharan Africa, India, China, and other emerging Asian countries. 
People who earn $200 per year spend only 1% of their income on transportation, compared to 18% for people earning $20,000. 
In the next two decades, the number of people earning $6,000-$20,000 will increase by more than one billion, and many of them will purchase their first car. 
Meanwhile, the number of people with annual incomes of $20,000 and above will increase by almost 800 million, and many of them will begin to fly for leisure. 
Transportation networks in emerging economies will have to expand vastly to keep up with this growing demand. 
And while advanced economies already have extensive transportation infrastructure and stable populations, their networks urgently need renovation and repair. 
Emerging countries will be able to muster sufficient financing for infrastructure only if they expand the role of the private sector; pension funds and life insurance companies, in particular, could furnish vast resources. 
But to capitalize on this opportunity, prudential requirements for such investors must be loosened, so that they can hold diversified portfolios of infrastructure projects. 
And co-investment platforms with multilateral and regional development banks should be established, to boost the credibility of these investments. 
To attract private investors, governments will need to maintain a stable regulatory environment that is free from arbitrary interference. 
At the same time, they will have to monitor and disclose fiscal obligations from projects that involve private participation, such as what Chile now does routinely. 
This will help to prevent government guarantees for public-private partnerships from imposing budgetary costs equivalent to one or more points of GDP, as has happened in Colombia, Indonesia, and Portugal. 
Governments will need to foster a culture of transparency to ensure that financing is put to productive use – rather than illicitly syphoned off or directed to low-value-added projects for political purposes. 
Tenders and key contract features should be routinely published, and good record keeping and quality control must be maintained throughout the procurement process and contract performance. 
To deter fraud, governments should reward whistleblowers, and protect them from retaliation. 
Many of the emerging countries where investment is most needed must urgently reform their institutional framework for selecting and implementing infrastructure projects. 
But corruption afflicts all countries to some extent, so advanced countries also need to protect infrastructure projects from undue private influence and arbitrary official interference. 
Successfully boosting infrastructure investment in emerging economies is in everybody’s interest. 
And with emerging economies now at the forefront of the fight against climate change, the world will benefit even more if investments in these countries are steered toward green-infrastructure projects. 
Building new metro-railway networks, instead of roads, would help to reduce carbon dioxide emissions for decades to come. 
Advanced countries can help in this effort by supporting green-technology research and development, and by providing financial incentives for climate-friendly infrastructure investment through export credit agencies and multilateral and regional development banks. 
With an open and transparent international procurement system, the most efficient technologies would then come out on top. 
Infrastructure investment holds much promise, but to reap its benefits, policymakers in emerging economies will need to strengthen their institutional frameworks for procurement sooner rather than later. 
And policymakers in advanced economies should preserve and apply well-known checks and balances, to keep the project-selection playing field level, and to permit monitoring implementation from start to finish. 
The views expressed here are those of the author, and do not necessarily represent the views of the IMF, its Executive Board, or IMF Management. 

Innocent Bystanders 
SANTIAGO – Take a taxi in São Paulo nowadays and you will experience the maddening traffic and untidy streets of an emerging-country metropolis. 
But when the time comes to pay for the ride, you may feel like you are in Boston, Luxemburg, or Zurich: the value of the Brazilian real, like the currencies of many emerging-market countries, is high – and could go higher. 
Strong currencies make strong countries, a senior United States policymaker used to say. 
Many emerging-country exporters, struggling to retain customers in the wobbly US and European markets, feel otherwise. 
For decades, developing countries dreamed of a nirvana of sky-high commodity prices and rock-bottom international interest rates. 
But perhaps finance ministers in Lima, Bogota, Pretoria, or Jakarta should have been more careful about what they wished for. 
The problem? 
An invasion of short-term capital flows fleeing the slow-growth, low-interest-rate advanced countries. 
Meeting in Calgary last month, the Inter-American Development Bank reported that $266 billion entered Latin America’s seven largest economies in 2010, compared to less than $50 billion a year, on average, between 2000 and 2005. 
And while only 37% of inflows in 2006 were “hot money” that can leave at a moment’s notice, last year such inflows accounted for 69% of the total. 
So, what is going on? 
Emerging countries in Latin America, East Asia, Eastern Europe, and Africa are innocent bystanders in the tussle between the US and China over currencies and trade imbalances. 
And the bystanders are absorbing some of the hardest blows. 
For a decade now, the world economy has suffered from tremendous global imbalances: massive external surpluses in countries like China, Japan, Germany, Switzerland, and the oil producers, matched by equally large external deficits in the US, the United Kingdom, Spain, and others. 
The imbalances were reduced temporarily as the global financial crisis caused private demand to drop in the US, the UK, and elsewhere. 
But, starting in 2010, the imbalances returned, and, according to the International Monetary Fund’s recently released World Economic Outlook, they will not shrink between now and 2016. 
G-20 communiqués have repeatedly pledged to secure “adjustment” and “rebalancing” in the world economy, but those promises have come to nothing. 
Still-troubled financial systems and huge fiscal deficits are keeping the West’s deficit countries (especially the US) from expanding domestic demand. 
And an unwillingness to trade away export-led growth is having the same effect on the East’s surplus countries (especially China). 
As a result, emerging countries, according to the IMF, have been pressed to carry “a disproportionate burden of demand rebalancing since the crisis.” 
Countries running surpluses accumulate massive stocks of foreign assets, and those resources have to be invested somewhere. 
Before the crisis, a substantial amount of that money was invested in US, Spanish, or Irish real estate. 
Today, that market is dead and the money must go elsewhere. 
Europe, gripped by a tremendous banking and debt crisis, is not an attractive destination, and loose monetary policy in the US has produced ultra-low bond yields there. 
As a result, many emerging countries, with their higher interest rates and promising growth prospects, have become irresistibly attractive to investors. 
After recent events in Tunisia, Egypt, and Libya, Wall Street analysts are waxing somewhat less optimistically about political stability in emerging countries. 
And a flat 2011 performance in some Latin American and Asian equity markets – following tremendous runs in 2010 – has taken a bit of sheen off the emerging-market investment fad. 
But the money keeps coming. 
This dollar invasion is making macroeconomic management in emerging countries even more challenging than usual. 
If high commodity prices are expected to persist, then some strengthening of currencies is both desirable and inevitable. 
But a thin line separates orderly adjustment to changed conditions from market over-reaction. 
And sensible people in many emerging-country capitals are wondering whether we have crossed that line. 
Loss of export competitiveness as a result of excessively strong currencies is not the only problem. 
Massive capital inflows caused real-estate and stock-market bubbles in the US and parts of Europe. 
Today, some policymakers in Latin America, worried that the same thing could happen to their countries, are casting about for policy tools to prevent it. 
As a result, the US Federal Reserve’s policy of so-called “quantitative easing” is going south, where it takes the form of foreign-exchange intervention. 
If rich-country central banks can buy long term bonds, then emerging-country central banks can buy dollar-denominated bonds. 
Even countries that practice inflation targeting and have otherwise vowed to let their exchange rates float – Brazil, Colombia, Peru, and Chile, for example – have done it, and in large quantities. 
Expect macroprudential policies to go south, too – and to be redefined in the process. 
If buying dollars is not sufficient to stem the appreciation tide, regulators in emerging economies will erect an array of other barriers to keep money out. 
None of these policies is without costs. 
They are second-best local-policy responses to an ineffective mechanism for international adjustment (or non-adjustment). 
A better system to rebalance the world economy is as necessary as it is unlikely. 
All we can look forward to is the next G-20 communiqué. 

Innovation and Philosophy 
MIAMI – Is it possible to learn to innovate? 
Is innovation something that can be taught at school? 
After reading literature by some of the world’s leading experts on innovation – Clayton Christensen, Henry Chesbrough, John Kao, James Andrew, and Harold Sirkin – I was fascinated, but, alas, also frustrated. 
Innovation is the production of new knowledge that generates value. 
It is about fresh ideas that give rise to novel products, services, and processes, new management methods, and original designs and inventions that generate greater profits for firms, regions and countries. 
Most experts agree that there are no ready-made formulas or recipes for how to innovate. 
But is it possible to create the appropriate conditions – to filter ideas and execute plans, and thus to facilitate creativity – under which innovation may flourish? 
Managers can perhaps be taught how to nurture innovation by creating an environment that stimulates and encourages individual freedom, creativity, and constructive criticism. 
Innovation is more likely where it is possible to defy restrictions and authority; where individuals and groups are allowed to ignore conventions; where a mixing of ideas, people, and cultures is permitted and stimulated; and where management techniques enable firms and industries to acknowledge, identify, and learn from errors as quickly as possible. 
Above all, innovation will blossom wherever it is recognized that innovation must be open to the physical world and to the world of ideas, and that, because no firm, no process, and no invention has a guaranteed future, everyone should be prepared for uncertainty. 
Innovation may increase even more when firms and managers realize that even the most successful firms – those that “have done everything right” – may languish and disappear. 
In brief, innovation will only truly take off with the understanding that the world is rapidly changing, extremely dynamic and volatile, and that the future is unpredictable. 
These are great ideas, but as I went through these texts I found them to be rather familiar sounding – I had the feeling that somehow and somewhere I had already studied them. 
I soon realized that these clever ideas had already been developed by the theory of knowledge and the philosophy of science. 
Indeed, innovation is simply a subset of scientific knowledge. 
According to the school of rational criticism, when existing theories can neither explain nor solve current problems, the formulation of new hypotheses – and thus new scientific knowledge – is, like innovation, more likely to flourish when constructive criticism is openly allowed and encouraged. 
Here, too, the formulation of new ideas and hypotheses quite often takes place at a far remove from the authority of experts, because experts, like business managers, often become prisoners of their specializations and backgrounds. 
Scientific knowledge is more likely to emerge in environments where it is accepted that there are no prescribed or logical methods for formulating hypotheses; that they may be the result of sudden inspiration; or that they may come from dreams, from other disciplines, or from people that belong to different professions or have different backgrounds. 
Once a plausible hypothesis is formulated, it must be tested against all existing theories and against all available experience and information. 
It has to be subject to open criticism from all directions, and only if it survives these tests and criticisms may it be adopted as tentative and conjectural new knowledge. 
Science and knowledge are made up not of winners, but of survivors of continuous and systematic efforts to refute. 
Theories are never certain and must always be prepared for an uncertain future. 
Or, as Karl Popper put it, truth is never definitive and error is always probable. 
No book on innovation that I have read makes the connection between innovation and the theory of knowledge and philosophy of science. 
This is unfortunate, because the theories of innovation may be subject to all the questions, conjectures, and answers that these disciplines have developed with respect to scientific knowledge. 
Should business administration students and future business managers immerse themselves in the philosophy of science, they would not only become more knowledgeable and have greater respect for science; they might also become more rigorous and more competent, have greater respect for other disciplines, and be more humble. 
At the same time, philosophy professors and students might also profit from the questions that challenge firms and industries. 
They might broaden their scope and find that they, too, can contribute to the productivity of firms, industries, and the economy in general. 

Silicon Valley or Demand Mountain? 
BELLEVUE, WASHINGTON – Everyone wants to know how to build the next Silicon Valley: an innovation hub that draws talent and capital, and that creates jobs, companies, and whole new industries. 
Developed-country governments scramble to subsidize technology that could be the Next Big Thing. 
Emerging-market policymakers hope that incentives like tax breaks and free land will induce innovators to settle and prosper there. 
But most of these well-meaning schemes are missing an essential ingredient: demand. 
Demand for innovation in specific areas of technology has been the common force behind all high-tech hot spots, as well as the most important inventions. 
Technological breakthroughs such as antibiotics and cars responded to a compelling need felt by a huge number of consumers. 
Government projects such as the United States’ Apollo program – intended to put a man on the moon – drove demand for more basic technologies (which are simply inventions that no one has asked for yet). 
Silicon Valley itself was built on demand. 
The US Department of Defense put up tens of billions of dollars in contracts for microelectronics, a commitment that both paid down innovators’ risk and created an infrastructure that would support the growth of start-ups. 
All demand is not created equal, though, and it is instructive to examine the differences. 
Consumer or market-driven demand – the kind most of us think of when we hear the word – is far less predictable, and therefore much riskier, than state-sponsored demand of the sort that landed a man on the moon. 
Companies that depend solely on their products’ commercial appeal are limited in the kinds of innovations that they can safely introduce, because if one of their products fails in the marketplace, they may not survive to build another one. 
This is especially true of start-ups and small companies – the very players that everyone hopes will show up in the next-wave of Silicon Valleys. 
Fortunately, by sponsoring long-term, targeted initiatives, governments can stimulate more predictable demand. 
The Apollo program gave innovators clearly defined goals and a roadmap for getting there: first put animals in orbit, then put people there, then send probes to the moon, then send people there. 
Equally important, the government offered rewards for interim progress, not just ultimate success. 
Putting a monkey in space may not have been the most exciting achievement, but the government was paying for it, so it happened. 
A smart government creates guaranteed demand not only for the solution itself, but for the steps along the way. 
Coupling intermediate technical milestones with guaranteed incentives enables companies to focus on problems that might take ten years or more to solve. 
It also motivates innovators from a variety of industries to take on complex problems that must be addressed by more than one kind of invention. 
The US Defense Department’s microelectronics initiative required not only new materials and circuits, but also new methods of fabrication. 
Because of the reward structure, these efforts could be coordinated, rather than pursued in isolation. 
Unlike market-driven demand, which too often results in a winner-takes-all dynamic, state-sponsored demand creates an environment in which multiple solutions to technical problems can proliferate and coexist. 
The pioneers of microelectronics tried many strategies to supplant vacuum tubes, and they delivered a host of semiconductors and chip designs: germanium, silicon, aluminum, gallium arsenide, PNP, NPN, CMOS, and so on. 
Some of these research efforts were never implemented, but many found their way into specialized devices. 
The diversity of options allowed widespread adoption, paving the way for the digital revolution. 
As with the microelectronics program, government incentives don’t have to line the road all the way to commercial success. 
At some point, companies will be ready to sell products, and market demand can take over. 
The US Department of Defense was the only customer for integrated circuits in 1962, but by the end of the decade consumers were buying transistor radios and pocket calculators in droves. 
Likewise, state-sponsored demand should not take the form of subsidies to specific technologies or companies; the government has no business gambling taxpayer money on particular ventures. 
Assuming that risk is the job of venture capitalists and others in finance, not public officials. 
But there is little risk in offering a contract for a job well done: there is no payout if the problem remains unsolved. 
And those payouts are modest compared to the research and development efforts they stimulate. 
A program offering rewards of $1-5 billion in contracts or deployment commitments can generate many times that value in private-sector R&D. Innovators and their investors are willing to bet big on these opportunities, because they know that the eventual reward in revenue from a global customer base will far exceed the initial investment. 
That makes state-sponsored demand a very efficient mechanism for generating innovation. 
Because of the multiplier effect, small governments and states, and even large cities, can successfully sponsor the kind of demand that fosters a world-class innovation epicenter. 
Certain Scandinavian countries, Chinese provinces, and the city-state of Singapore, for example, are ideally positioned to try this approach. 
Some years ago, I calculated how many units of product need to be sold to launch a technology. 
The number is actually quite modest: If you can move between 100,000 and one million units of a disruptive product, you can establish the technology standards for that category and in time become the global leader of a new industry. 
Government sponsorship ensures that a certain number of people will adopt your product. 
At the start, it need not be that many. 
The economic planners and policymakers who are chasing Silicon Valley’s taillights are learning that they cannot always replicate the entrepreneurial culture and finance mechanisms that flourish there now. 
But they have forgotten how it all started: guaranteed demand, which stimulates the most ambitious kind of innovation. 
The lesson is a simple one: Don’t try to build another Silicon Valley. 
Instead, build a Demand Mountain, and the innovators will come. 

Supply Side, Demand Side, or Innovation Side? 
NEW YORK – It has become impossible to deny the so-called secular stagnation gripping the world’s most developed economies: Wealth is piling up, but real wages are barely rising and labor force participation has been on a downward trend. 
Worse yet, policymakers have no plausible idea about what can be done about it. 
Behind this stagnation is the slowdown in productivity growth since 1970. 
The wellspring of such productivity gains – indigenous innovation – has been badly clogged since the late 1960s (mostly in established industries) and was even more so by 2005. 
Ronald Reagan and Margaret Thatcher viewed the stagnation that was gripping economies by the 1970s from the supply side. 
They pushed through tax cuts on profits and wages to boost investment and growth, with debatable results. 
But today, with tax rates much lower, cuts of that size would result in huge increases in fiscal deficits. 
And with debt levels already high and large deficits ahead, such supply-side measures would be reckless. 
So now the best and brightest view things from the demand side, using the theory built by John Maynard Keynes in 1936. 
When “aggregate demand” – the level of real expenditure on final domestic goods that households, businesses, the government, and overseas buyers are willing to make – falls short of output at full employment, output is limited to the demand. 
And innovation won’t happen. 
But the demand-siders’ conception of the economy is strange. 
For them, private investment demand is autonomous, governed by forces that Keynes dubbed “animal spirits.” 
Consumer demand is essentially autonomous, too, because the so-called induced part is yoked to autonomous investment through the “propensity to consume.” 
Thus, government measures are the sole way to boost employment and growth when autonomous demand falls short and jobs are lost. 
This conception grasps neither growth nor recovery. 
In healthy economies, a contractionary demand shock sets off two types of responses fueling recovery. 
Adaptations to emerging opportunities are one such response. 
When firms hit by reduced demand contract operations, the space they give up becomes available for use by entrepreneurs with better ways of running the business – or with better businesses. 
Some of the employees they let go will start firms (and hire employees) of their own. 
With every recession, many shops on Main Street disappear; and, over time, new shops – generally more successful – appear. 
The other response is indigenous innovation – new ideas springing from the brows of various businesspeople. 
When firms hit by reduced demand stop hiring for a time, some people who would have joined established firms use their situation to dream up new products or methods and organize startups to develop them. 
The growing number of aspiring innovators toiling in home garages may self-produce some of their capital goods. 
More important, the accumulation of new startups will gradually generate rising investment demand – induced demand! – and growth, too. 
Some may doubt this. 
Can new products and methods fare well in the market if demand is deficient? 
As an innovator said to me amid the financial crisis, his objective was to take over a market – it mattered little that the targeted market was only 90% of its former size. 
Can capital be raised where incomes are depressed? 
Small firms and startups must always struggle for credit, and the Great Recession that followed the 2008 financial crisis made it harder for them. 
Yet the recession did not prevent droves of such firms from finding financing in Silicon Valley, London, and Berlin. 
No wonder Germany, the United States, and the United Kingdom are more or less recovered. 
In the US, total factor productivity growth set records in the 1930s, when the economy fell into and then grew out of the Great Depression. 
Recovery has fallen woefully short in two kinds of economies. 
France and Italy are lacking young people who want to be new entrepreneurs or innovators, and those few who do are impeded by entrenched corporations and other vested interests. 
Greece has no lack of would-be entrepreneurs and innovators, but it lacks a system of angel and venture capital. 
Some Greeks have formed startups, though not in Greece. 
The demand-siders say that innovation only makes recovery harder, because it enables firms to meet existing demand with fewer employees. 
Thus, they call for annual public-sector investment up to the level needed for full employment. 
But such infrastructure investment would go far beyond what would ever have been undertaken had the economy been left to regain high employment through the workings of adaptive or innovative activity. 
Indeed, such investment is costly beyond the expense because it preempts the adaptation and innovation that would have brought higher employment and faster growth. 
Moreover, as long as Western innovation remains narrowly confined, a demand-side commitment to a large, sustained flow of infrastructure investment – and, likewise, a supply-side commitment to a similar flow of private investment – must bring ever-diminishing returns, until, ineluctably, the economy reaches its near-stationary state. 
Supplying more of the same old goods never “creates its own demand,” as Keynes thought. 
But supplying new goods can. 
It is the impediments to adaptation and innovation – not fiscal austerity – causing our stagnation. 
And only renewed dynamism – not more fiscal irresponsibility – offers any hope of a durable way out. 

Fostering Arab Entrepreneurship 
WASHINGTON, DC – Across the Middle East and North Africa (MENA), technology hubs are emerging. 
Whether it’s in the Beirut Digital District or the GrEEK campus in Cairo, some of the Middle East’s brightest minds are turning innovative ideas into marketable products. 
When I visited the Beirut Digital District two months ago, and the GrEEK Campus startup hub before that, optimism was palpable – and for good reason. 
In a region that has struggled to find its economic footing since the Arab Spring, the entrepreneurial ideas being refined at incubators like these hold the keys to the region’s future. 
Startups anywhere contribute to job creation, competitiveness, higher productivity, and economic growth, while helping to reduce poverty and fight climate change. 
And when energetic new companies bring innovative products and services to untapped markets, they contribute positively to private-sector development. 
In the MENA region, several successful startups are already doing this, and more. 
One example is Souq.com, an online retailer based in the United Arab Emirates that was purchased in March by Amazon. 
Souq led a revolution in e-commerce in the region that has powered cross-border trade and improved consumer choice. 
In Egypt, Fawry has developed a game-changing electronic payment system that has freed consumers and businesses from using cash. 
More than 20 million Egyptians, including many small business owners, now use the service, which processes 1.5 million payments daily. 
The region needs more of these private entrepreneurs. 
Unfortunately, at the moment, unsupportive business and regulatory environments are stifling the startup ecosystem. 
Despite the value that smaller companies bring to the region’s customers and economies, first-time business owners too often are on their own. 
For example, most new MENA businesses cannot access the credit needed to expand or hire workers. 
The region has 23 million small- and medium-size enterprises (SMEs), accounting for roughly 90% of the private sector, but SMEs receive just 8% of total bank lending. 
And capital-starved entrepreneurs have few other options; despite a growing number of accelerators and seed funds in the region, the venture capital market remains undeveloped. 
Even well financed entrepreneurs face obstacles to growth, often due to a lack of experience. 
There is little formal education for new entrepreneurs, and only a handful of networks support start-ups. 
Gender bias, too, is a limiting factor; nearly every MENA economy fails to empower female employees and executives fully. 
But much can be done to ensure that more startups in the region are able to make the leap from good idea to business success. 
For starters, countries need to reform their bankruptcy laws. 
Start-ups take risks, yet existing regulations make it difficult to liquidate companies, deterring potential creditors and increasing the cost of debt. 
An important part of these reforms is to abolish jail time for non-fraudulent bankruptcies, which remains a real threat for owners of small businesses throughout the region. 
Moreover, many countries have labor laws that make it hard for businesses to recruit and terminate staff. 
Employee mobility is also mired in bureaucracy and costly paperwork. 
Addressing both challenges would help cash-strapped startups make every dollar count. 
Finally, countries should revisit restrictions on foreign ownership and strengthen intellectual property laws to protect entrepreneurs’ hard-won innovations. 
Doing so would encourage more investment to flow into the region. 
Entrepreneurs drive economic growth in ways that go far beyond online sales and e-payment solutions. 
Creating jobs is one of the most critical contributions they make. 
Nearly one in three young people in the region are unemployed, and those who do have jobs often work in the public sector, which is the largest employer throughout the Arab world. 
In the Gulf States, Egypt, Iraq, Jordan, and Tunisia, government jobs account for an unsustainably high 60-80% of formal employment. 
Governments need to reassess this balance, and adopt reforms that unlock the potential of private businesses to grow and take on more employees. 
Global development-finance institutions, like the World Bank Group – which includes my institution, the International Finance Corporation (IFC) – can provide a bridge between governments and the private sector. 
The heart of the IFC’s strategy is to help develop new markets in low- and middle-income countries by encouraging private participation in what are often state-dominated economies. 
In May, the IFC, together with the World Economic Forum, brought together 100 of the most promising startups in the Arab world, with the goal of beginning to address the bottlenecks that stifle entrepreneurship. 
In time, it is companies like these that will deliver sustainable economic growth to the region, and create employment opportunities for millions of people. 
That is the kind of future that Arab innovators, like those I met at the World Economic Forum in Jordan, know is possible. 
Our job, as global development advisers, is to help them realize it. 

Our Collective Brain 
CAMBRIDGE – Imagine a game of survival that pits a troop of capuchin monkeys against you and your work colleagues. 
Both teams would be parachuted into a remote African forest, without any equipment: no matches, knives, shoes, fish hooks, clothes, antibiotics, pots, ropes, or weapons. 
After one year, the team with the most surviving members would be declared the victor. 
Which team would you bet on? 
You might assume that the humans, given our superior intelligence, are the team to beat. 
But do you or your colleagues know how to make bows and arrows, nets, water containers, and shelters? 
Do you know which plants are toxic? 
Can you start a fire without matches? 
Can you make fish hooks or natural glues? 
Do you know how to protect yourself from big cats and snakes at night? 
The answer to most, if not all, of these questions is probably “no,” meaning that your team would likely lose to a bunch of monkeys – probably pretty badly. 
This raises an obvious question. 
If we cannot survive as hunter-gatherers in Africa, the continent where our species evolved, how did humans achieve such immense success relative to other animals and spread to nearly all of the earth’s major ecosystems? 
Here’s a key piece of the answer: We are a cultural species. 
Our unique psychological capacities allow us to learn from one another over generations, facilitating a cumulative cultural evolutionary process that produces increasingly complex and sophisticated technologies, languages, bodies of knowledge, conceptual toolkits, and adaptive heuristics. 
The power of this process arises not from raw individual intelligence, but from the reinterpretation of the serendipitous insights and mistakes that our intelligence produces. 
This means that the rate of innovation will depend, at least in part, on the size and interconnectedness of the pool of minds contributing to the cultural evolutionary process. 
All other things being equal, larger and more socially interconnected groups will produce a greater number of fancier tools, technologies, and techniques, even if their individual members are less inventive than those comprising a smaller, more isolated group. 
This finding is supported by both tightly controlled laboratory experiments and historical case studies. 
About 10,000 years ago, for example, rising oceans transformed Tasmania from an Australian peninsula into an island. 
On the mainland, technological progress continued unimpeded. 
But in Tasmania, groups of hunter-gatherers began to lose – or failed to develop – a wide range of useful technologies: bone tools, fitted cold-weather clothing, boomerangs, spear-throwers, and durable boats. 
When the Dutch arrived in the seventeenth century, Tasmanians had the simplest technology ever encountered by European explorers. 
To understand humans’ social nature, it is crucial to understand how culture has driven our genetic evolution in ways that shape not only our physiology and anatomy, but also our social psychology, motivations, inclinations, and perceptions. 
From this long process, in which surviving and thriving meant acquiring and adhering to the local social rules, we emerged as potent social learners. 
The foundation of our ability to form cooperative communities, organizations, and societies arises not from innate cooperative tendencies, but from the specifics of the social norms that we learn, internalize, and enforce on others. 
While our innate motivations do play a role, they are harnessed, extended, and suppressed by social norms, which form the institutional skeleton that allows our innate inclinations to operate. 
This novel view of human nature and society generates some important insights. 
First, as a cultural species, humans acquire ideas, beliefs, values, and social norms from others in their communities, using cues of prestige, success, sex, dialect, and ethnicity. 
We pay particular attention – especially under conditions of uncertainty, time pressure, and stress – to domains involving food, danger, and norm violations. 
Changing people’s behavior begins with an understanding of our cultural nature, not our rationality. 
Second, we gradually internalize the social norms that we acquire through a culture-driven process of self-domestication. 
(We acquire our standards for judging and punishing others through the same process.) 
These internalized norms become the motivations that guide our actions. 
This means that people’s preferences, desires, and motivations are not fixed, and thus that well-designed programs or policies can change what is automatic, intuitive, and obvious. 
Third, the most potent social norms harness aspects of our evolved psychology. 
Social norms for fairness toward foreigners, for example, are much harder to sustain and diffuse than those that demand that mothers care for their children. 
Fourth, our ability to innovate depends on the size of our collective brain, which depends on the ability of social norms to encourage people to generate, share, and recombine novel ideas and practices. 
Fifth, there is a fundamental link between institutions and psychology. 
Because different societies have different norms, institutions, languages, and technologies, they also have different ways of reasoning, mental heuristics, motivations, and emotional reactions. 
The imposition of imported institutions often creates psychological and social mismatches that tend to lead to poor outcomes. 
Finally, humans lack a certain degree of rationality, making us terrible at designing effective institutions and organizations – at least for now. 
I am hopeful that as we obtain deeper insights into human nature and cultural evolution, this can be improved. 
Until then, we should take a page from cultural evolution’s playbook and design systems that use variation and selection to make institutions compete. 
That way, we can dump the losers and keep the winners. 
By examining the rich interaction and co-evolution of psychology, culture, biology, history, and genetics, we have the possibility to gain important insights into human psychology. 
This scientific road has rarely been traveled. 
It promises an exciting journey into unexplored intellectual territory, as we seek to understand the peculiarity of our species. 

Insecuritization 
BRUSSELS – There is no shortage of analyses of what went wrong in the world’s capital markets over the past 18 months. 
What is clear is that a complex set of relationships, interactions, events, and omissions on the part of many different actors, rather than any single factor, was to blame. 
I am convinced, for example, that over the years there has been too much “regulatory capture” by the supply side of the financial services market, with its well-organized and powerful lobbies. 
By contrast, there has been too little engagement on the demand side. 
That is an imbalance of which legislators must be much more conscious. 
A second problem for regulators, supervisors, and, indeed, credit rating agencies was scarce resources. 
When investment banking markets were booming – and the private sector easily recruited up top talent – regulators and supervisors found it difficult to get the budgets to keep up with innovation and police the markets. 
In the future, governments will have to commit the necessary resources to ensure more robust oversight of risk management in financial institutions. 
Capital markets must be subject to much more detailed and frequent hands-on supervisory inspections. 
In Europe, crisis management mechanisms must be put in place to manage their deeply integrated nature, as 80% of Europe’s banking assets held in cross-border banking groups. 
A third problem – particular relevant to banks, risk managers, and traders – has been misaligned incentives. Incentive structures have been overwhelmingly aligned to short-term performance. 
In firms where this was most pronounced, there has been almost total destruction of shareholder value. As a consequence, a wholly unacceptable long-term burden has been imposed on taxpayers. 
Privatizing banks’ profits and socializing their losses is not acceptable in democratic societies. 
The structure and timing of performance pay in banks must be more closely aligned to long-term shareholder interests and financial stability. 
Incentives for brokers and credit rating agencies have been even more perverse. 
In the United States, brokers were selling mortgages without checking whether the borrower had the means to repay. 
They had no stake beyond the immediate “sale.” 
Financed via Special Purpose Entities, mortgages were parceled up in debt packages and securitized entities in which neither originators nor sponsors retained any material long-term stake but paid credit rating agencies to award a nice little ribbon marked AAA. 
When the packages were unwrapped, most of their contents turned out to consist of pools of toxic assets for which there was no proper due diligence, no evidence of capacity to repay, and little cushion to cope with a market downturn. 
That’s why I have proposed much tougher measures in the revised Capital Requirements Directive amendments now being considered by the European Parliament. 
This will require thorough independent due diligence on securitizations, proper cash-flow sensitivity analysis, and less reliance on credit rating agencies paid by issuers. 
Originators or managers of these securitizations will be required to retain a meaningful stake in each tranche of the issue. 
I was pilloried for this proposal when I initially put it forward. 
I am therefore glad to see that a G-30 advisory group has now supported this principle, and that it is gaining increased traction in the US. 
But some banking industry lobbyists have sought amendments in the European Parliament that would totally neuter the proposal’s effectiveness. 
Even more irresponsible are attempts to undermine a requirement for adequate due diligence on securitization positions prior to investing – with some amendments containing wording that would make it virtually impossible for supervisors to monitor compliance. 
Mortgage assets and leveraged loans created in huckster shops, carved up and buried in “CDO squareds” (securitizations wrapped in other securitizations), and characterized by progressively more obscure, more contingent, and more complex orders of priority for allocating cash flows have no place in capital markets. 
The opaqueness, wholly unnecessary complexity, and near impossibility of undertaking independent due diligence on these structures’ underlying risk have undermined trust in the securitization market. 
Financial institutions – and their trade bodies – are doing themselves no favors by vigorously opposing meaningful reform. 
Is it any wonder that the valuation of securitized investments has become so challenging, that mark-to-market valuation on securitized assets has become meaningless, depressed, or both, and that the securitization market itself has seized up? 
Rather than restoring the trust and confidence in capital markets needed for recovery, those European Union members and banking federations that submitted “wrecking amendments” to the due diligence and securitization proposals are reinforcing the suspicion that is now embedded within them. 
If successful, they will impair the revival of a transparent, responsible, and vibrant securitization market – a market that, if properly managed, can contribute meaningfully to sustainable, long-term economic growth. 

Inside Africa’s Consumer Revolution 
JOHANNESBURG – Nowadays, Africa’s economic potential – and the business opportunities that go with it – is widely acknowledged. 
Poverty and unemployment are still more widespread than in other emerging markets, but accelerating growth since 2000 has made Africa the world’s second-fastest-growing region (after emerging Asia and equal to the Middle East). 
With rapid economic growth have come more prosperous consumers – and vice versa: 45% of Africa’s total GDP growth in the 2000’s (before the financial crisis erupted in 2008) came from consumer-related sectors of the economy. 
It is expected that, by 2020, more than half of African households – almost 130 million – will have discretionary income to spend (or save), up from 85 million today. 
Moreover, Africa has the world’s fastest-growing population – and the youngest, with more than half under 20 years old, compared to 28% in China. 
The United Nations estimates that the continent will account for more than 40% of global population growth through 2030, with the working-age population expected to surpass that of China by 2040. 
Given these trends, the continent’s consumer industries are expected to grow a further $410 billion by 2020 – more than half the total revenue increase that all businesses are expected to generate in Africa by the end of the decade. 
But, for many companies entering Africa or seeking to expand there from a local base, the challenge now is to obtain a better understanding of the market and its consumers. 
In one of the first studies of its kind, the McKinsey Africa Consumer Insights Center surveyed 13,000 individuals from 15 cities in ten of the continent’s 54 countries in 2011 and 2012. 
The ten countries – Algeria, Angola, Egypt, Ghana, Kenya, Morocco, Nigeria, South Africa, Sudan, and Tunisia – accounted for 81% of Africa’s private consumption in 2011. 
But, throughout the continent, market opportunities for consumer-facing companies are concentrated more in cities than in particular countries. 
Indeed, with 40% of its population living in cities, Africa is more urbanized than India (30%), and nearly as urbanized as China (45%). 
By 2016, more than 500 million Africans will live in urban centers, and the number of cities with more than one million people is expected to reach 65, up from 52 in 2011 (on par with Europe and higher than India and North America). 
This development is critically important for consumer companies. 
Urban household spending in Africa is increasing twice as fast as rural spending, with urban per capita incomes, on average, 80% higher than those of countries as a whole. 
Befitting the continent’s strong macro trends, the survey found a high degree of optimism among urban African consumers: 84% of respondents expect their households to be better off in two years. 
Sub-Saharan Africans are the most optimistic – 97% of Ghanaians, for example, expect to be much better off in two years. 
(For North Africans, however, that figure drops to only 10-15%, which is unsurprising given the uncertainty generated by the region’s recent political turmoil.) 
Overall, consumers are increasing their spending across most retail categories. 
Up to 30% of the more optimistic consumers in some countries say that they are shopping more frequently and purchasing new and more expensive products. 
And half of all respondents claim to make daily sacrifices to save for major expenditures. 
This suggests that companies offering cheap, poor-quality, unbranded products are unlikely to succeed in the long term. 
For apparel consumers, for example, quality is second only to price when choosing a store, and second only to fashion when choosing a specific item. 
And, in both North and Sub-Saharan Africa, brand loyalty is strong, averaging 58%. 
But quality and brand must be delivered at the right price. 
Even though Africans value brands and product quality, affordability remains crucial. 
To succeed, companies should work to reach consumers’ price points through a combination of product reengineering (such as removing low-value-added features), smaller package sizes, and low-cost operating models. 
Moreover, timing is crucial when choosing where to play. 
Demand for consumer products typically follows an S-curve. 
As incomes rise, categories reach a takeoff point where demand accelerates by 3-5 times. 
At higher levels of income, markets become saturated and growth slows. 
Different products and categories enter the “hot zone” at different moments: those with low price points, such as snacks and beverages, typically take off relatively early; beauty products somewhat later; and luxury goods, such as branded fashion, later still. 
Not surprisingly, in most African markets, few categories have entered the slower-growth “chill-out” zone. 
This is where understanding opportunities at a city level is vital. 
Country-level planning and resource allocation is still the rule for most businesses operating in Africa, resulting in inefficient allocation of human and capital resources. 
By creating detailed profiles of the most promising urban opportunities, companies could target their investments more effectively. 
Identifying growth hot spots is only the start. 
Substantial differences among and within Africa’s countries imply the need for a much deeper and finer-grained understanding of consumer preferences and affordability profiles by product category. 
Likewise, many markets are still in early stages of development, and must be built through concerted consumer education and trial. 
Here, Africa’s youth merit special attention: the survey found that the 16-34 age group already accounts for 53% of income in urban centers. 
Young people’s consumption habits are quite different from their elders’. 
They are more than twice as likely to search for information online and to seek products and stores that reflect the “right image.” 
They are also more educated, with 40% of 16-24 year olds having completed high school, compared with only 27% of the 45-and-older group. 
These characteristics point to a major change in African consumption habits as this cohort ages, its incomes increase, and its behaviors and decision criteria become the societal norm. 
Many companies – particularly multinational firms accustomed to old and aging populations in the advanced countries – will have to adapt accordingly. 

Inside Iran’s Nuclear Reasoning 
MELBOURNE – Is Iran really hell-bent on becoming a nuclear-armed state? 
Or will it settle for nuclear capability, able to make weapons but choosing not to? 
Does the difference matter? 
Few international questions involve higher stakes than these. 
An immediate concern, if deep pessimism about Iran’s intentions prevails, is a preventive Israeli strike, leading to another major Middle East war – with catastrophic consequences for the global economy likely. 
No one should underestimate the difficulty of assessing Iran’s real intentions. 
Mixed signals from competing power centers don’t help; nor does the recurring contrast between Iranian officials’ usually-strident public pronouncements and often-moderate private discourse. 
Pessimists and skeptics have plenty to point to in Iran’s long record of obstruction and brinkmanship in addressing legitimate international concerns about its nuclear programs. 
That said, too many policymakers and commentators have rushed to judgment, insisting that Iran is irrevocably determined to build nuclear weapons, or that it wants a break-out capability that is just as dangerous. 
In fact, there is good reason to believe that the situation is less alarming and more containable than this. 
While a negotiated settlement acceptable to both Iran and the rest of the international community would be a hugely difficult undertaking, it is achievable. 
One does not need to look hard for Iran’s reasons for testing the limits of international tolerance: to redeem the humiliations of the Mosaddeq era and beyond; to demonstrate superior technological prowess to the region and the wider world; and to make clear to the Western powers – whose perceived double standards abandoned Iran to Saddam Hussein’s chemical warfare in the late 1980’s – that it would not compromise on its “right” to enrich uranium under the Nuclear Non-Proliferation Treaty. 
By contrast, it has not been so easy for observers to see why Iran would stop short of building the nuclear weapons that it may soon have the capacity to produce. 
But in my many off-the-record discussions with senior officials in Iran and elsewhere over the last few years, I have heard five such reasons stated with clarity and consistency, and they deserve to be taken seriously. 
The first reason is concern that Israel will perceive the existence of one or two Iranian bombs as an existential threat, demanding a pre-emptive military attack – with or without US support, but in either case with resources that Iran knows it cannot match. 
Iranians think such an attack unlikely if they do not cross the red line of actual weaponization. 
Second, it is well understood that there is zero tolerance in Russia and China for an Iranian bomb, and all the rope that that these powers have so far given Iran in the Security Council will run out if Iran weaponizes. 
The writing on this wall became even clearer after the most recent round of sanctions negotiations. 
Third, following from this, there is a clear perception in Iran that acquiring an actual bomb would lead to impossibly stringent economic sanctions. 
Financial sanctions, direct and indirect, already are biting – including on the Revolutionary Guard and its significant economic interests – but have been tolerable in the context of asserting Iran’s “right to enrich” under the NPT. 
Once in obvious breach of the NPT, universal participation in a much tougher sanctions regime is seen in Iran as inevitable. 
Fourth, Iranians acknowledge that any regional hegemony bought with nuclear weapons is likely to be short-lived. 
There is skepticism about the capacity of Egypt, Saudi Arabia, or Turkey to move quickly to build bombs of their own, and a belief that they would be under much international pressure, especially from the US, not to do so. 
But there is also a clear view that Arab-Persian, Sunni-Shia, or more straightforward regional power anxieties would make a nuclear-arms race inevitable. 
Finally, there is a religious reason: weapons of mass destruction simply violate the precepts of Islam. 
Few in the West are likely to find this line very compelling, but it has echoed strongly in every conversation that I have ever had with Iranian officials, senior or minor. 
And it is not without plausibility: Iran did not, after all, respond in kind when it was bombarded with chemical weapons by Iraq. 
None of this suggests that Iranian intentions can be taken on trust. 
There is too much history, and there are too many continuing grounds for suspicion, for that. 
Any agreement involving an end to sanctions and diplomatic isolation would need to be accompanied by intrusive monitoring, inspection, and verification arrangements, covering not only all sensitive stages of the nuclear fuel cycle, but also any suspected weapons design or engineering facilities. 
The international community requires real confidence that there would be enough lead time – 12 months or so – in which to respond to any evidence of real intent to move to weaponization. 
Frustrations will continue, like those over the last year as creative efforts by Security Council members – and more recently by Brazil and Turkey – to find interim confidence-building solutions were rebuffed, largely because the leaders of last year’s democratic movement refused to support a compromise-inclined President Mahmoud Ahmadinejad. 
But there is a solid foundation of rationality on which to build in keeping the door open for negotiations. 
Iran is an extraordinarily complex country. 
But, just as we cannot afford to underestimate the forces of extremism that persist there, we also fail at our peril to comprehend the currents of restraint and good sense that run within the country, including at high policymaking levels. 

Inside Thailand’s Hidden War 
LEEDS – Thailand’s former prime minister, Chavalit Yongchaiyudh, recently ignited a furor when he proposed that the separatist campaign in his country’s Muslim-majority southern provinces might be solved politically, with a form of self-rule. 
Thailand’s ruling Democrat Party immediately called Chavalit’s remarks “traitorous.” 
But recent developments surrounding Afghanistan’s elections have highlighted the shortcomings of using military force alone to resolve a civil war. 
This precedent offers an important lesson for Thailand and other countries facing intractable insurgencies. 
As Arisotle put it, “politics is the master science in the realm of action.” 
In June 2006, I sat in a village in southern Thailand’s Yala province with several ordinary-looking young men who had taken part in extraordinary events. 
They had joined the militants who had attacked a dozen security checkpoints across three southern provinces on April 28, 2004. 
Armed mainly with machetes and kitchen knives, 106 attackers perished that day, 32 of them inside Pattani’s historic Krue-Ze mosque, where they had taken refuge. 
Five members of the Thai security forces were also killed. 
None of the youths I talked to could give any clear explanation for their actions, except to say that an Islamic schoolteacher known as Ustadz So had recruited them into a shadowy militant movement. 
Ustadz So had taught them that Thai rule over this historically Malay region was illegitimate, that Thai officials were cruel and heartless, and that the time had come for the Muslim population to rise up and expel the Buddhist infidels. 
According to counter-insurgency expert David Kilcullen, the violence in Thailand’s deep South – which has now claimed more than 3,500 lives – was some of the most intense in the world between 2004 and 2007, “second only to Iraq and Afghanistan during this period.” 
Yet, despite such alarming levels of bloodshed, the insurgency has been under-reported and under-researched, barely registering on the international community’s radar screen, largely because the conflict cannot be reduced to a sound bite-friendly narrative of identifiable bad guys and good guys. 
First, the militant movement itself has no name, operating in a highly decentralized manner through small local cells that operate relatively independently – what might be described as self-managed violence franchises. 
Thai political expert Chaiwat Satha-Anand has called the movement a “network without a core.” 
The lack of a defined enemy makes reporting on and understanding the conflict difficult for journalists, diplomats, and government officials. 
Second, outcomes are not predictable. 
On April 28, 2004, the insurgents’ primary targets were Buddhist members of the security forces, but most of those who died were Malay Muslims. 
The would-be perpetrators also became the primary victims. 
Some victims have been killed extra-judicially. 
The one group not targeted by anyone has been Westerners. 
Again, reporting such a messy story is a challenge; most Western news editors have preferred to highlight Iraq and Afghanistan. 
A third factor is that the violence has become a marginal issue even within Thailand. 
The breaking news teams returned to Bangkok long ago, where a military coup, ongoing mass protests, and other big political stories have kept them busy ever since. 
And, because the violence tends to come in dribs and drabs – rarely since 2004 has any one day’s casualties reached double figures – the South has never risen back up the news agenda. 
Many Thai military and police officials now privately admit that the insurgency cannot be defeated through security measures. 
After a dip in the number of incidents during late 2007 and 2008, violence once again increased in 2009. 
The military’s belief that Malay Muslims could be re-educated and re-socialized into accepting a Thai identity has proved untenable. 
The same goes for earlier hard-line rhetoric about rooting out the militants and destroying their organization. 
The current government under Prime Minister Abhisit Vejjajiva misses the point with rhetoric about creating peace simply through promoting justice, or by funding large-scale socio-economic development projects. 
Malay Muslims in Thailand’s southern provinces are demanding their own political space. 
Few of them seriously believe that a tiny separate Patani state, wedged between Thailand and Malaysia, would be viable. 
What many are seeking is some form of special status within Thailand, enabling them to pursue their own cultural and religious traditions without interference from Bangkok. 
Until the Thai government grasps this simple point, young men like those I met in Yala will still be recruited into militant activity. 
As Chavalit Yongchaiyudh understands, the southern Thai conflict is a political problem in need of a political solution – just like Afghanistan and other more familiar wars. 

Why Turkey is Thriving 
NEW YORK – A recent visit to Turkey reminded me of its enormous economic successes during the last decade. 
The economy has grown rapidly, inequality is declining, and innovation is on the rise. 
Turkey’s achievements are all the more remarkable when one considers its neighborhood. 
Its neighbors to the west, Cyprus and Greece, are at the epicenter of the eurozone crisis. 
To the southeast is war-torn Syria, which has already disgorged almost 400,000 refugees into Turkey. 
To the east lie Iraq and Iran. 
And to the northeast lie Armenia and Georgia. 
If there is a more complicated neighborhood in the world, it would be difficult to find it. 
Yet Turkey has made remarkable strides in the midst of regional upheavals. 
After a sharp downturn in 1999-2001, the economy grew by 5% per year on average from 2002 to 2012. 
It has remained at peace, despite regional wars. 
Its banks avoided the boom-bust cycle of the past decade, having learned from the banking collapse in 2000-2001. 
Inequality has been falling. 
And the government has won three consecutive general elections, each time with a greater share of the popular vote. 
There is nothing flashy about Turkey’s rise, which has been based on fundamentals, rather than bubbles or resource discoveries. 
Indeed, Turkey lacks its neighbors’ oil and gas resources, but it compensates for this with the competitiveness of its industry and services. 
Tourism alone attracted more than 36 million visitors in 2012, making Turkey one of the world’s top destinations. 
Even a short stay in Ankara allows one to see these underlying strengths. 
The airport, highways, and other infrastructure are first class, and a high-speed intercity rail network links Ankara with other parts of the country. 
Much of the advanced engineering is homegrown. 
Turkish construction firms are internationally competitive and increasingly win bids throughout the Middle East and Africa. 
Turkey’s universities are rising as well. 
Ankara has become a hub of higher education, attracting students from Africa and Asia. 
Many top programs are in English, ensuring that Turkey will attract an increasing number of international students. 
And the country’s universities are increasingly spinning off high-tech companies in avionics, information technology, and advanced electronics, among other areas. 
To its credit, Turkey has begun to invest heavily in sustainable technologies. 
The country is rich in wind, geothermal, and other renewable energy, and will most likely become a global exporter of advanced green innovations. 
Waste-treatment facilities are not typically tourist attractions, but Ankara’s novel integrated urban waste-management system has rightly attracted global attention. 
Until a few years ago, the waste was dumped into a fetid, stinking, noxious landfill. 
Now, with cutting-edge technology, the landfill has been turned into a green zone. 
The private waste-management company ITC receives thousands of tons of solid municipal waste each day. 
The waste is separated into recyclable materials (plastics, metals) and organic waste. 
The organic waste is processed in a fermentation plant, producing compost and methane, which is used to produce electricity in a 25-megawatt power plant. 
The electricity is returned to the city’s power grid, while the heat exhaust is piped to the facility’s greenhouses, which produce tomatoes, strawberries, and orchids. 
Turkey’s diversified, innovative base of industry, construction, and services serves it well in a world in which market opportunities are shifting from the United States and Western Europe to Africa, Eastern Europe, the Middle East, and Asia. 
Turkey has been deft in seizing these new opportunities, with exports increasingly headed south and east to the emerging economies, rather than west to high-income markets. 
This trend will continue, as Africa and Asia become robust markets for Turkey’s construction firms, information technology, and green innovations. 
So, how did Turkey do it? 
Most important, Prime Minister Recep Tayyip Erdoğan and his economics team, led by Deputy Prime Minister Ali Babacan, have stuck to basics and looked to the long term. 
Erdoğan came to power in 2003, after years of short-term instability and banking crises. 
The International Monetary Fund had been called in for an emergency rescue. 
Step by step, the Erdoğan-Babacan strategy was to rebuild the banking sector, get the budget under control, and invest heavily and consistently where it counts: infrastructure, education, health, and technology. 
Smart diplomacy has also helped. 
Turkey has remained a staunchly moderate voice in a region of extremes. 
It has kept an open door and balanced diplomacy (to the extent possible) with the major powers in its neighborhood. 
This has helped Turkey not only to maintain its own internal balance, but also to win markets and keep friends without the heavy baggage and risks of divisive geopolitics. 
No doubt, Turkey’s ability to continue on a rapid growth trajectory remains uncertain. 
Any combination of crises – the eurozone, Syria, Iraq, Iran, or world oil prices – could create instability. 
Another global financial crisis could disrupt short-term capital inflows. 
A dangerous neighborhood means inescapable risks, though Turkey has demonstrated a remarkable capacity during the last decade to surmount them. 
Moreover, the challenge of raising educational quality and attainment, especially of girls and women, remains a priority. 
Fortunately, the government has clearly acknowledged the education challenge and is pursuing it through school reforms, increased investments, and the introduction of new information technologies in the classroom. 
Turkey’s successes have deep roots in governmental capacity and its people’s skills, reflecting decades of investment and centuries of history dating back to Ottoman times. 
Other countries cannot simply copy these achievements; but they can still learn the main lesson that is too often forgotten in a world of “stimulus,” bubbles, and short-term thinking. 
Long-term growth stems from prudent monetary and fiscal policies, the political will to regulate banks, and a combination of bold public and private investments in infrastructure, skills, and cutting-edge technologies. 

Inspecting Iraq 
The UN weapons inspectors are now at work in Iraq, trying to determine how many weapons of mass destruction have been developed in the last four years. 
If the track record of previous inspections holds true, Iraq will not come clean, and the inspectors will have to work their way through a maze of deception and distortion. 
In 1991, a team from the International Atomic Energy Agency (IAEA) visited Tarmiya to check out rumors that the site was part of Iraq's nuclear weapons program. 
According to Dr. Abdul-Qadir Ahmed, the Iraqi official in charge that day, the huge magnets attached to giant spools of copper wire were simply part of the maintenance equipment for Iraq's power stations. 
How else could Iraq have managed to put its power stations back in production after the Gulf War? 
The inspectors looked over the huge winding machine and concluded that there were really no grounds for the rumors. 
At the same time, however, a defector was telling a different story to US intelligence. 
Having been refused permission to transfer out of the clandestine nuclear weapons program, Dr. Ibrahim Bawi had put his family in his government-supplied car and driven north. 
He wound up at the American Air Force base in Incirlik in southern Turkey. 
From there, he was whisked to the US to begin his debriefing. 
Soon thereafter, the inspectors returned to Tarmiya. 
This time, they knew exactly what the huge magnets were for: to produce weapons grade nuclear materials. 
This time, Dr. Ahmed, the Iraqi counterpart, realized the game was up. 
Some of the inspectors he knew well, having dined with them on collegial terms during visits to Vienna. 
That he would lie to them so brazenly was incomprehensible to his friends on the inspection team. 
Nothing personal, he told them, he was under orders. 
The word had come down: a lie under orders is not a lie, it is just following orders. 
In fact, the much-touted accomplishments of both the IAEA and UN inspectors came only after major defections from within the Iraqi weapons program and a lot of follow-up by the inspection teams. 
Though the teams were staffed by capable weapons experts on loan from their governments, it still took four years to force Iraq to admit to conducting a biological weapons program. 
Only the 1995 defection of Saddam's son-in-law, Hussein Kamel, brought definitive proof of the existence of Iraq's huge nuclear weapons program. 
Hans Blix, the director of the new inspections effort, has been fooled twice before by the Iraqis. 
In 1990, before Iraq's invasion of Kuwait, he declared that there was no nuclear weapon's program in Iraq. 
In 1994, Blix accepted the Iraqi story that there was no real nuclear weapon program, only a small research effort. 
The huge Iraqi uranium enrichment program was only meant to produce fuel for future nuclear power stations. 
Of course, the story changed after Hussein Kamel's defection. 
The problem now is that Kamel was the last major defector to come out of Iraq. 
None of the inspections or gadgetry can match the value of an insider who changes sides. 
The inspectors have very little information, and Iraq has the upper hand. 
All the research and production facilities are under Iraqi, not UN, control. 
British and American intelligence can only provide circumstantial evidence of what Iraq is doing in the weapons area. 
For inspections to work, the UN will have to get inside information. 
Accounting for this information gap, UN Security Council Resolution 1441 empowers the inspectors to talk to Iraqi scientists without government minders, outside of Iraq if necessary, and accompanied by their families. 
Most Iraqi scientists I knew would consider this a blessed opportunity to escape the confinement and threats that shadow their lives. 
Saddam is aware of their value to the UN and recently ordered the resettlement of their families to high-security camps. 
Incredibly, the UN inspection team leaders indicate that they do not plan to bring the scientists out of Iraq. 
They will rely for now on physical inspection, not private interviews with the people most directly responsible for building Iraq's weapons. 
The new inspections regimen has already been compromised by its passive approach. 
To join the inspectors, weapons experts are obliged to resign from their national postings, but few are ready to give up their careers to work in the UN bureaucracy. 
Thus, the UN team is much smaller and less experienced than its predecessors, and faces Iraqi counterparts steeped in the art of deception. 
I fear that the inspections effort is not intended to uncover the full extent of Iraq's illegal weapons program. 
The Europeans are treating Iraq as a prize to be denied the US, not as a strategic danger. 
What drives the inspections is fear of an American invasion. 
The Americans will be accommodated up to the point that their attack is forestalled. 
On December 8, Iraq is obliged to declare formally its full weapons program. 
We can expect the inspectors to be flooded with information about everything but the actual weapons. 
It is will be vintage Saddam: diversion with no real revelations. 
The real test will be for the Americans. 
Either they get the information they need, or the game will be over. 
Saddam will be the winner, ready to play another day. 

Inspection Not Invasion 
This week Hans Blix - the UN's chief weapons investigator - provided the Security Council with an interim report on the state of Iraq's compliance with all the resolutions that require it to eliminate its weapons of mass destruction. 
His definitive judgement is due January 27 th . 
As that date approaches, America's military build-up around Iraq continues at a furious pace, with Britain also mobilizing. 
Must war be inevitable should Mr Blix announce that Iraq has failed to meet its obligations? 
Far from it. 
In the vital fight to slow down the proliferation of weapons of mass destruction, imagine it were possible to subject a suspected violator to the most intrusive and continuous system of international inspections far beyond what any international treaty postulates. 
The world would no doubt be a safer place, and the power that had helped to impose such inspections would be praised for its far-sighted statesmanship. 
Such a system of inspections exist. 
The country now suffering them is Iraq, the power that helped impose them is the United States. 
If matters were to rest there, there would be every reason to heap praise on the statesmanship of President George W. Bush. Without his determination, backed by a highly credible show of military force and skilful diplomacy, Iraq's military programmes would not now be exposed to a scrutiny more intense than that applied to any other would-be proliferator in the world today. 
The credible threat of war has been essential to achieving this extraordinary feat. 
But precisely because it is so extraordinary it is difficult to see how implementing those threats by launching a war can make any sense at all. 
If in the course of inspections Iraq were exposed as having lied and cheated this would be a confirmation of the effectiveness of the inspections, scarcely a justification for military reprisals. 
The best "serious consequences" of which the UN Security Council has warned should Iraq fail to comply with its obligations would be an even more intense effort to destroy its illicit weapons through continuous inspections of the country's offensive military capabilities: inspectors, not invaders. 
True, it requires great skill to walk the narrow line that separates effective deterrence from reckless action. 
To make a hostile country comply the threat of military action must be seen as real, the will of the power seeking to deter to follow on its threats must be clear and evident. 
To give him credit, Americas President has not yet lost his balance on that narrow path. 
Many of his close advisers, however, seem intent to nudge him into war, and bellicose rhetoric has so pervaded official US statements that failure to attack Iraq could be construed as a failure of presidential leadership. 
If Great Powers go to war, it is generally because their leaders fear their credibility would suffer otherwise. 
The war-party in Washington is gearing up to use the credibility argument in order to force the President's hand. 
Yet even the most enthusiastic advocates of military action against Iraq have to admit that such steps carry considerable risks, and no expert on the region I know shares the view, popular among arm-chair orientologists, that a change of regime in Baghdad will usher in a period of peace and stability all over the Middle East. 
Therefore, those wanting to stop the slide into an unnecessary and risky war must make their own argument about credibility. 
They need to convey to the US President and the US public that America can indeed be proud of what it has achieved and that a war against Iraq would, moreover, throw away the immense advantage of having demonstrated that international inspections can effectively reduce the dangers of proliferation. 
They should publicly laud the President's statesmanship for having given the world the most effective instrument against the spread of weapons of mass-destruction, as well as for curbing Iraqi influence in the Middle East and weakening Saddam's regime. 
Mr. Bush's international credibility, they should emphasize, does not suffer through avoiding a war but gains further through controlling Iraq's hitherto covert military effort. 
To give additional credence to their praise, they should leave no doubt that if war became the only option they would stand by America. 
But they should also emphasize that war is not the only, and certainly not the automatic "serious consequence" to follow from Iraqi non-compliance. 
Of course, some of America's allies are better suited than others to get these points across to the audience on the other side of the Atlantic. 
Alas the German government, by its conduct in Chancellor Schroeder's campaign for re-election last September, maneuvered itself out of having any authority in the matter. 
Fortunately there are others, in particular Tony Blair's Britain, which can carry the message that another great Englishman who still enjoys immense respect in America, Winston Churchill, summed up in these words: "Jaw-jaw is better than war-war." 
Inspection is better than invasion. 

Instability from Rigidity 
Everyone wants economic stability, and many are reluctant to abandon today what gave them stability yesterday. 
But trying to obtain stability from rigidity is illusory. 
The stability of the international financial system today depends on the willingness of countries with rigid exchange rates to allow greater flexibility. 
In the aftermath of the international financial crisis of 1997-1998, many emerging markets found themselves – through currency depreciation, rapid productivity gains, or both – highly competitive. 
Countries that ran significant current-account surpluses, built up large reserves, and fixed (or heavily managed) their exchange rates in order to support the first two objectives appeared to secure external stability. 
The irony is that the crisis of 1997-1998 was one in which a particular system of exchange-rate pegs failed when capital flowed out. 
Yet, in many ways, accumulating reserves worked better than anyone could have imagined – countries found that they could withstand considerable shocks and growth was impressive both domestically and globally. 
So, within a few years, many countries concluded that their pegs could work fine if supported by large enough war chests of official reserves. 
A new type of order emerged in the world’s exchange rate system. 
There were, of course, some less desirable spillover effects on others. 
If a considerable fraction of the world economy wants to run a current-account surplus (by 2006, this included much of emerging Asia, most oil exporters, and Japan), an equal share of the world economy must run a deficit. 
In the period after 1998, the United States provided almost the entire required deficit. 
As long as US assets were attractive to residents of surplus countries (or there was an acceptable chain of investments from surplus countries that ended in the US), these accumulations of reserves were sustainable. 
The IMF worried a great deal about what would happen when this chain broke – and the eventual break was, of course, more a matter of arithmetic than economics. 
The US current-account deficit can persist above roughly 3% of GDP only if unrealistic assumptions are made about the share of US assets that the rest of the world is willing to hold. 
The policy plans announced by China, the euro area, Japan, Saudi Arabia, and the US in the spring of 2007 – in the context of the IMF’s Multilateral Consultation on global imbalances – represent the international community’s response to the rising risks. 
The US is to reduce its deficit, with the surplus countries proposing sensible steps to bring down their surpluses in ways that support global growth. 
The sense of urgency in these discussions has increased in recent months, as the global situation has grown more complex. 
Specifically, problems in the US housing sector have, since summer, undermined confidence in securitized assets. 
The net result has been to shift global portfolio preferences in ways that have affected some exchange rates significantly. 
The dollar has depreciated in a way that helps global adjustment and fortunately does not disrupt the US government securities market; long-term rates are in fact down from July, so adjustment has been “orderly.” 
Yet the pattern of exchange-rate movements in the rest of the world has been largely unrelated to existing current-account positions. 
In fact, currencies of surplus countries with heavily managed exchange rates have actually depreciated in real effective terms since the summer, creating inflationary pressure and frustrating global adjustment. 
This has also shifted the burden of adjustment disproportionately onto countries with floating currencies, such as the euro and the Canadian and Australian dollar. 
The lack of adjustment of surplus countries with inflexible exchange rate-regimes means that as the US deficit falls, a counterbalancing deficit develops elsewhere in the world – along with real effective exchange rate appreciation. 
Knowing what to do in this increasingly complex and volatile situation is the easy part: look at the Multilateral Consultation policy plans and “just do it.” 
As the US Treasury’s recent semiannual report to America’s Congress noted, for China these plans are to “rebalance its economy: boosting domestic demand and consumption-led growth; reforming its financial system; and achieving greater flexibility in its exchange-rate regime. 
Indeed, rebalancing the pattern of growth is a central economic goal of China’s leadership.” 
But expanding demand and allowing real effective exchange rate appreciation in China will not be enough if other countries do not do their part. 
Oil exporters must increase fiscal spending further; 
Japan and the Euro area must trigger higher growth through structural reforms; and the US must implement concrete measures to sustain higher savings. 
This would help maintain confidence that the adjustment process will remain orderly and free of new global imbalances or protectionism. 
Implementing the policy commitments from the multilateral consultation is also needed to avoid a loss of confidence in the dollar. 
The risks to global growth will increase as long as adjustment remains uneven. 
The politics is not so simple, but we need cooperation between countries to reduce these risks, and we need it now. 

David Cameron’s European Spaghetti Bowl 
WASHINGTON, DC – British Prime Minister David Cameron’s “Europe” speech, delivered on January 23, was powerful, polished, contained a bold vision, and offered good arguments. 
In particular, he got three things right. 
But translating those arguments into institutional reality will be a nearly impossible challenge. 
First, Cameron is correct to emphasize the urgent need for a renewal of popular support for the European Union. 
The percentage of Europeans who believe that the EU is “a good thing” is dropping steadily. 
Democracies require real debate. 
Yet too many decisions about the future of Europe and the eurozone are made in highly technocratic settings, with most citizens not really understanding what is going on, let alone feeling that policymakers care. 
One can debate whether a referendum is the most appropriate vehicle for asking for their consent, but ask one must. 
As Cameron put it: “There is a gap between the EU and its citizens which has grown dramatically in recent years and which represents a lack of democratic accountability and consent that is – yes – felt particularly acutely in Britain.” 
Addressing the political challenge head on is much better than trying to evade the debate. 
Second, Cameron was right to say that “the European Union that emerges from the eurozone crisis … will be transformed beyond recognition by the measures needed to save the eurozone.” 
He did not disagree that the eurozone needs more integration, but correctly noted that the required degree of political integration is beyond the comfort zone of British citizens and of others in the EU. 
Finally, Cameron argues that the EU is not an end in itself. 
Rather, it must deliver better economic performance for its citizens by emphasizing the challenge of competitiveness, particularly with respect to the new emerging countries. 
His speech stressed the economic weakness of many EU members (though some – such as Germany and the Nordic countries – are actually doing reasonably well in the global marketplace). 
As a conservative, Cameron lays the blame for economic weakness on the size of the state and a high degree of market regulation, though some Nordic countries with large government spending and strong financial and environmental regulations are in better shape than the UK, which has had less of both. 
But he is right that a debate on economic performance is needed, and that it will be crucial to reform Europe in a way that maximizes its prospects in global competition. 
It is normal for conservatives to argue for less government and to place greater trust in free markets, and for social democrats and greens to argue for public policies that deliver less income inequality, more public goods (such as a clean environment and public transport), and more regulation to help markets function with greater stability and distribute benefits more evenly. 
The competitiveness debate should indeed be part of the debate about Europe’s renewal. 
But Cameron’s vision for Europe’s institutional future is difficult to translate into workable specifics. 
He argues for a Europe “à la carte,” at least for those outside the eurozone. 
He entertains the possibility that the UK and other EU countries that have opted out of the eurozone could each negotiate a specific and special “deal” with the EU, picking and choosing among its various dimensions those that suit them best and cost them the least. 
Thinking about the consequences that such a Europe would have on EU institutions, one must ask how the European Commission, the European Parliament, and the Council of Ministers would function. 
Would there be one set of sub-institutions for every country that has made a special deal with the Union – say, a Commission for the eurozone and Sweden, and another for the eurozone and the UK? 
And would the European Parliament become fragmented in similar fashion? 
Would the European Council have a diverse set of memberships? 
How many temporary or permanent opt-outs can there be? 
How will Europe’s citizens, who already have enough trouble with the complexities of European governance, be able to comprehend such a “spaghetti bowl” structure? 
And yet Cameron is right to believe that not all EU members will want or be able to be part of a more integrated eurozone. 
There will have to be some flexibility if the EU is not to shrink, becoming a smaller eurozone. 
British membership is important to many in Europe. 
One way to overcome the dilemma might be to articulate an institutional future in which there would be essentially just two types of countries within the EU and the single market: those in the eurozone and those with national currencies. 
There would have to be two sets of EU institutions, one for the eurozone and another for non-eurozone countries, although they would overlap. 
This is already the case in some areas: consider the EU-wide Ecofin and the eurozone-only Eurogroup of Finance Ministers. 
Something similar could be created for the European Parliament, and so on. 
It would be complex, but it could be made manageable; we should discuss how. 
A new European treaty would not allow cherry-picking, but would give each member state a chance to join, or commit to, either the politically more integrated eurozone or the less integrated second group. 
There would be clear rules and decision-making mechanisms for both sets of countries, subject to democratic votes by a two-tier European Parliament. 
Many details would have to be worked out. 
But this may be a vision that gives Europe a chance to remain big and inclusive, while retaining the politically integrated core that the eurozone needs. 

Stop Insuring Climate Disaster 
RIPTON, VERMONT – Last month, the United Kingdom enjoyed its first full day without the need for coal power since the Industrial Revolution began. 
That’s remarkable news – and a sign of the future to come as the country that began humanity’s centuries-long romance with burning black rocks is now moving on. 
Just as the fax gave way to email and whale oil gave way to kerosene, so is coal giving way to cleaner forms of energy. 
And that handover will happen faster – perhaps fast enough to let us at least slow down the pace of climate change – if the massive and mighty insurance industry would play its part. 
By underwriting the development of our industrial society and the coal that has powered it, the insurance industry was one of the Industrial Revolution’s crucial but often overlooked enablers. 
“This has only been made possible by the insurers,” said Henry Ford, looking at the New York skyline: “With no insurance, there would be no skyscrapers. 
No investor would finance buildings that one cigarette butt could burn to the ground.” 
Through their ability to spread risk across broad portfolios, insurers have enabled high-risk activities for centuries. 
And that is also true of activities that contribute to the highest risk in human history: global warming. 
While insurance industry representatives declare their intent and passion to rein in climate change and ensure a livable planet, in the back rooms their agents are still busy working their financial magic to underwrite new coal-fired power stations, oil rigs, tar sands projects, gas pipelines, and other polluting projects. 
Many of these projects would not be viable without the services provided by insurance companies around the world. 
Insurers are also among the world’s largest asset owners. 
With an estimated $31.1 trillion of funds under management at the end of 2014, insurance companies represent almost a third of all institutional assets in the global economy. 
Exactly how much money these companies have sunk into fossil-fuel projects is unknown. 
But one thing is clear: to prevent the planet’s temperature from rising by more than 2º Celsius relative to its preindustrial level, and thereby avoid runaway global warming, we need to leave the majority of our coal, oil, and gas assets undeveloped. 
Ironically, while insurers’ deep understanding of climate science made them among the first actors in the business community to acknowledge climate change publicly and call for action, the industry remains a major enabler of fossil-fuel projects. 
Insurers have created and sustained a perverse loop, whereby they facilitate projects that cause global warming while providing insurance against these projects’ adverse climate impact. 
Thanks largely to its early awareness of the need to address climate change, the insurance industry’s Faustian bargain has so far avoided scrutiny from pressure groups. 
But this is about to change. 
Late last month, the French insurance giant AXA announced that it will no longer provide underwriting services to companies that generate more than 50% of their turnover from coal. 
That change builds on AXA’s earlier decision to divest from such companies. 
This is a key step toward making coal uninsurable. 
The facts couldn’t be clearer: fossil fuels are driving not only devastating climate change, but also so many other threats that, quite frankly, to insure new coal power and mines flies in the face of reasonable financial risk management. 
As one of the biggest killers on the planet, causing millions of deaths each year through air pollution, sea-level rise, and the increase in extreme weather, coal combustion should be unbankable. 
AXA’s decision is a rational one based on indisputable facts and a realistic view of the future. 
Insurance, after all, is based on the idea that the future somewhat resembles the past, making it predictable. 
But if we keep heating the planet, that assumption disappears. 
Already, insurers of coastal property are throwing up their hands at the difficulty of figuring out how high the sea will rise and how hard the storms to come will blow. 
On moral and economic grounds, the time has come for others to follow AXA’s lead and recognize that fossil fuels are uninsurable. 
For these companies – and for the rest of us – the best insurance is to keep fossil fuels where they belong: in the ground. 

Insuring Against Insurance 
NEW HAVEN -- Most people who save and invest do so for their entire lives. 
But most of the institutions upon which they rely for their investments and savings are geared to the short term. 
This mismatch causes fundamental problems. 
An excellent example is homeowners’ insurance. 
Almost universally in the world today, homeowners’ insurance is short term. 
Typically, it is renewed annually, which means that it does not cover the risk that insurance companies will raise rates at any future renewal date. 
Yet we have seen major changes recently in homeowners’ insurance rates. 
For example, the average homeowner premium in Florida soared from $723 at the start of 2002 to $1,465 in the first quarter of 2007. 
Such rapid increases represent a risk that is on the same order of magnitude as many of the damage risks that the policies are supposed to address. 
In a study presented in early May at America’s National Bureau of Economic Research, the economists Dwight Jaffee, Howard Kunreuther, and Erwann Michel-Kerjan called for a fundamental change in policy aimed at developing true long-term insurance (LTI) that set insurance premiums for many years. 
Unless we do that, homeowners are unsure from year to year whether their insurance policies will be canceled or that their premiums will skyrocket unexpectedly as they have in coastal regions of Florida where there is hurricane and flood risk. 
As the authors point out, for insurers to even consider a long term policy they must have the freedom to charge premiums that reflects risk. 
Urbanization itself is also a source of risk, as evidenced by the recent earthquake in China, which has cost at least tens of thousands of lives. 
Moreover, global warming appears to be increasing the intensity of storms. 
Some scientists attribute the intensity of Cyclone Nargis, which struck Myanmar, killing more than 30,000, to global warming. 
Of course, we do not know for sure that these risks will mean higher insured losses in the future. 
Population growth in coastal areas may not continue to imply more risk exposure, since choice lots may already be getting somewhat more scarce, and further development may favor more central areas. 
And urbanization, if done right, leads to better catastrophe planning and stricter construction standards, which might actually reduce risks. 
In fact, long term insurance may encourage homeowners to invest in risk reducing measures because the premium discounts they will obtain for taking this action will justify incurring the cost of investment. 
The course of global warming, and its impact on future storms, is also the subject of considerable uncertainty. 
Meteorology is not an exact science, and we cannot predict the precise extent and impact of environmental initiatives, though progress in weather forecasting might also reduce the damage caused by hurricanes. 
Data presented by Roger Pielke in the Natural Hazards Review in February shows that actual insured losses caused by the most important hurricanes since 1900 followed a U-shaped curve. The most damaging hurricanes (scaled for the size of the economy) to hit the United States occurred both in the early twentieth century and most recently – the worst being the 1926 hurricane that struck Miami, Florida. 
Just as no one anticipated this U-shaped pattern of losses, so future losses must remain essentially unknown. 
This means that the problem is not a certain increase in homeowners’ insurance losses, but rather a risk of increase. 
Paradoxically, that is a good thing, because it means that risk-management technology can be used to mitigate the problem. 
To see why, consider health or life insurance. 
If genetic information ever enables an exact prediction of each individual’s ultimate date of illness and death, that information, if commonly available, would make such insurance impossible to get (no one would insure someone about whom it is known that he will suffer from the harm to be insured against). 
It is just the same with homeowners’ insurance: because the risk of losses is uncertain, it can be sold by those who feel most concerned about it to others who can better bear it. 
Insurance regulators are certainly well aware of the risk of future increases in homeowners’ insurance premiums. 
But trying to address these risks by limiting such increases doesn’t work well, because if insurance companies are not making any money, they will withdraw from the market. 
Nor can this problem be solved by imposing fees on insurance companies that withdraw from the market in response to premium caps, because the companies will eventually learn to consider the possibility of such fees even before entering an insurance market. 
Sometimes, governments have become directly involved in providing insurance. 
In the US, for example, Florida’s state legislature created the Citizens’ Property Insurance Corporation in 2002. 
But replacing private insurance with government insurance plans is far from optimal. 
Like other forms of saving and investment, it is better that insurance be allocated by a market, rather than in a political arena. 
The beauty of the LTI plan proposed by Jaffee, Kunreuther, and Michel-Kerjan is that it would allow market forces to determine long-term (20 years or more) insurance premiums. 
The premiums would be set so that there would be no reason for insurance companies to withdraw from the market in response to greater risk. 
Homeowners can rest assured that they can continue to insure their property at known rates. 
Moreover, the premiums would provide price signals that would guide new construction. 
In areas where scientists think that there is a likelihood that greater risks will prevail in coming years, high insurance premiums would provide a market incentive to curtail development. 
Everyone would end up better off. 

Insuring Against Panic 
WASHINGTON, D.C.: The panics of the past two years in emerging markets have driven home many lessons about the global economy. 
It is now all too clear that in a world of interwoven financial markets and potentially destabilizing capital flows, there is a greater risk than ever that a crisis in one country will trigger crises elsewhere. 
The international community—the IMF and its member countries, other international organizations and the private sector—is addressing this challenge by devising a set of reforms that have come to be known as the "new international financial architecture." 
Important progress has been made on this task, but much remains to be done. 
Taken together, the reforms being undertaken are designed to create multiple lines of defense that would operate across borders and within individual countries—affecting the way that governments and the private sector operate. 
These reforms bring together new or strengthened standards for financial systems, markets, and businesses with a commitment to new levels of transparency. 
The aim is to ensure that all parties have access to accurate economic data and information about potentially market-moving developments. 
Included in these new global ground rules are standards for such areas as fiscal and monetary policies, accounting, corporate governance, and securities and insurance regulation. 
Observance of internationally recognized standards and greater transparency, when combined with sound macroeconomic policies, should place countries on a firmer footing. 
By helping to make adverse economic or policy developments more apparent, greater transparency is also likely to lead to earlier incentives for governments to take corrective action. 
Prevention, however, must also address the dangers posed by the potentially destabilizing movements of capital. 
Recent experience teaches that the speed and magnitude with which both domestic and foreign investors can move into and out of capital markets far exceeds the ability of individual countries—and the international community—to counter such flows. 
Many countries do not have foreign currency reserves sufficient to meet sudden and large outflows of capital without destabilizing their domestic economy. 
Sometimes these outflows can occur through no fault of the country concerned, but as a result of financial market contagion that spreads from disturbances elsewhere. 
This phenomenon was all too evident during the Asian crisis and following the Russian debt default of August 1998. 
To help prevent such contagion, the IMF has created a Contingent Credit Line (CCL), a program aimed at providing countries with the financial resources they need to combat a loss of market confidence stemming from events beyond their own policies or economic conditions. 
In essence, it will function as an insurance policy for healthy countries of the world financial system. 
The CCL marks a significant change in how the IMF interacts with its members. 
The Fund traditionally has been asked for assistance by a country seeking to repair the damage after a crisis; contingent lending shifts the emphasis to preventative medicine from curative medicine. 
The purpose is to ward off the contagion that posed such a threat to countries with generally good policies over the past two years. 
As the new international financial architecture is put in place, the CCL could emerge as an important element in forestalling future crises. 
In order to qualify for the CCL, countries will have the incentive to take proactive steps to eliminate the weaknesses that could leave them vulnerable. 
Countries can be eligible to obtain a credit line at the IMF if they are making good progress adhering to international standards; working to establish and maintain strong financial systems; maintaining sound fiscal and monetary policies; establishing constructive relationships with private creditors; and satisfactorily managing their external debt and reserves. 
All of these elements are aimed at helping countries to withstand the pressure on their balance of payments that might arise from a sudden loss of confidence caused by crises in other countries. 
The CCL is intended to provide markets with a seal of approval for good policies, backed up by money—if needed. 
Ideally, countries will never have to draw on that money, because the credit line will symbolize their strong defenses against contagion. 
It may also mean that the Fund will have to undertake fewer rescue efforts in the future as the markets come to recognize the efforts of individual countries to address potential problems. 
The IMF will play a central role not just by providing contingent financing, but also by monitoring more closely and offering technical assistance to individual countries so as to ensure that their policies accord with the international consensus for reform. 
At the same time, the IMF itself has made a commitment to greater openness in the way it interacts with countries and makes its decisions. 
All of this is part of a learning process intended to reduce the risk that the global economy might again have to go through the kind of difficult passage that threatened decades of prosperity and harmed the livelihood of millions of people. 


Insuring the Worst 
In the nearly six months since Hurricane Katrina destroyed half of New Orleans, many storm victims’ expectations of help have been dashed, creating a legacy of bitterness. 
That legacy may be all the more painful when we consider that many homeowners suffered unnecessarily devastating losses because of their lack of insurance or their underinsurance, often owing to the belief that they could not afford the right coverage. 
Future catastrophes – storms, earthquakes, tsunamis, volcano eruptions, forest fires, agricultural or other environmental crises, disease epidemics, or terrorist attacks – are likely to result in the same kinds of problems. 
So it is important to consider the causes of underinsurance and whether our insurance institutions are adequate to the risks that we face. 
According to a report from the Insurance Information Institute, nearly 70% of homeowners’ claims in Louisiana were settled by the end of January, for a total of $7.5 billion dollars. 
Sounds good, but there were roughly 200,000 homes that were either severely damaged or destroyed, so the total amounts to less than $40,000 per home – far below what was needed. 
Indeed, a large share of New Orleans homeowners – 60% in Orleans Parish – were completely uninsured against floods. 
Many of those who were insured discovered that clauses in their policies barred them from collecting full benefits. 
In some cases, insurance companies argued that houses were damaged by flood, not wind, which their policies cover more generously. 
That may seem like capricious hair-splitting to people who have suffered a major loss, but such terms are in the insurance contracts that they signed, whether they understood them or not. 
Claims disputes have led to many lawsuits, and many of those who have lost their homes have discovered that the only help available to them now is a low-interest loan. 
Not unreasonably, President George W. Bush wants government grants to bail out only the approximately 20,000 homeowners who can’t be faulted for failing to buy flood insurance, because they lived outside the designated flood plains. 
Despite the disappointments, private insurance is still the best way to deal with possible future disasters. 
Insurance policies that clearly specify the amounts that will be paid and the types of damage that will be covered are far better than the government-administered, after-the-fact bailout that many people seem to have expected. 
Adequate private insurance can be boosted in the future through public education, improved insurance institutions, and lower insurance costs. 
We need to work on all of these agendas, because each must be part of any new plan to deal with the next catastrophe. 
The cost of insurance may be the most serious problem. 
According to estimates by Robert Klein of Georgia State University, homeowners’ insurance premiums in Louisiana had already gone up by 70% between 1997 and 2005. State insurance regulators resist rate increases, but they are ultimately powerless, because insurers can simply take their business elsewhere. 
The National Association of Insurance Commissioners (NAIC) proposed in December that each of America’s 50 states should establish a disaster insurance fund to cover a wide range of big calamities. 
The funds – modeled after similar funds in France and Spain – would be designed to cover the biggest, once-in-fifty-years catastrophes. 
The federal government would then augment the protection up to the once-in-five-hundred-year level. 
The NAIC’S proposal is now under discussion. 
If it were fully implemented, which is unlikely, it would constitute a revolution in risk management in the US similar to that of the creation of Social Security in 1934. But preparation for catastrophe does not have to reside exclusively with the government. 
Mega-disaster risks can be handled with private financial markets, as long as these markets manage to get the full attention and interest of portfolio investors. 
Consider catastrophe bonds (or “cat bonds”), which contain clauses that stipulate that the issuer of the bond (the borrower) does not have to repay the money if a specified catastrophe occurs. 
The bonds can be sold to a worldwide market by insurance companies that incur major risks by writing policies. 
If the insurance companies can get a good enough price for such bonds, they can eliminate their exposure to the risk of a major disaster, thereby allowing them to issue policies to homeowners at a lower cost. 
Cat bonds have been growing in importance in recent years. 
According to estimates by Lane Financial, there were $1.8 billion worth of cat bonds issued in the year April 2004-March 2005. 
Since Katrina, issuance has accelerated. 
In the first three post-Katrina months alone (September to December 2005), $2.1 billion were issued. 
The total value of outstanding cat bonds is small by Katrina standards. 
But the trend towards increasing sophistication and breadth of our financial markets suggests that we can expect to see much further growth in cat bonds. 
Ultimately, even Hurricane Katrina and other disasters of similar magnitude are small by world standards. 
The total insured property loss of Katrina, $34.4 billion according to an insurance industry estimate, even if expanded to represent uninsured losses, represents a miniscule fraction of world wealth. 
But such disasters represent a much larger share of a single country’s wealth. 
This is why financial theory prescribes spreading risks as evenly as possible around the world, rather than around only one country, as plans for a national catastrophe fund envision. 
The possibility of managing national risks globally is another example of the advantages of economic globalization and expansion of financial markets. 

The Need for a Global Patent Market 
NEW YORK – If developed and developing countries’ national patent systems were integrated into the trade system, the result would be greater specialization among inventors and, with it, faster technological invention and productivity growth. 
Yet under current arrangements, World Trade Organization (WTO) member states do not honor foreign inventors’ claims to their own inventions. 
More than ever, the world needs a new framework of trade rules to facilitate the exchange of human ideas across borders. 
Economic growth is essentially driven by growth in productivity, which, in turn, is driven by the creation of new technologies. 
In today’s world, such innovations are increasingly being developed as a result of coordination among inventors across companies and countries. 
Yet productivity growth has been sluggish for more than 50 years, owing significantly to gaps in trade rules, intellectual-property mercantilism through “forced technology transfer,” and the weakening of national patent systems. 
These factors have shut out grassroots inventors. 
The current environment admits only powerful players, effectively excluding millions of ideas from global markets. 
Clearly, a more cooperative strategy is needed.We believe that a framework of cross-border technological exchange based on patent protection and enforcement mechanisms can release the creativity of developed and developing economies alike. 
With the right rules, a non-discriminatory, open market for patented technology – as in the 1883 Paris Convention for the Protection of Industrial Property – would create incentives for more cross-border collaboration. 
Of course, making such an initiative work poses major challenges. 
We need a global framework that puts into practice the principle of mutual gains through inventions, and which includes all people, regardless of their country of origin. 
That means further integrating existing patent systems into the trade system, and adopting common rules that are incentive-compatible with the emerging digital economy. 
The focus should be on achieving productivity gains through markets in patent licenses and transfers, by experimenting with different rules and implementing those that produce desirable outcomes. 
Such an institutional learning process would likely transform the trade system and bring about more cross-border cooperation. 
At present, however, WTO rules are holding back growth, because they fail to encourage firms to “share” their technology with one another by trading or licensing it. 
If a firm pursuing specific inventions can license parts of another firm’s patent portfolio, even on the margins, then it can focus more on the specialized fields where it is best performing. 
Thus, specialization would lead to more productive inventions. 
What is needed is WTO trade rules that create the conditions for such specialization by establishing a market for trade in ideas, particularly between developed and developing countries. 
With such a market in place, investment would be directed to fields where the productivity gains are the highest. 
Under the framework we envision, practices such as forced technology transfers would be curtailed. 
Conditioning market access on technology transfer does allow developing countries to “catch up” to developed countries, but it also weakens the prospects for long-term productivity growth. 
By eliminating incentives for inventors to benefit from the trade in patents, forced technology transfers effectively destroy the market in ideas. 
Moreover, countries that engage in this practice weaken their own economic potential, by driving their inventors to countries that will protect their rights. 
The practice is similar to Tudor England’s grants of royal patent monopolies, which were used to replenish the king’s coffers. 
This mercantilist policy was abolished by the 1623 Statute of Monopolies, which granted property rights to the “true and first inventor,” thus establishing England’s patent system. 
And yet, since the 1952-1954 period, advanced economies have adhered to the patentability criteria of “non-obviousness” (in the United States) and “inventive steps” (in Europe). 
These concepts effectively replaced the “flash-of-genius” doctrine with one of “long toil,” with the result that rewards now accrue more easily to “marginal” inventions than to “broad” ones. 
There is less of an incentive to make high-risk investments in new productivity-enhancing technologies, because one can simply add “features” to existing products. 
The 500-year-old principle of honoring the inventor – first established in Venice in 1474– has been cast aside. 
But creating an international market in patents would likely boost the growth of productivity-enhancing technologies only if effective rules-based incentives are in place. 
That requires three steps. 
First, the WTO would need to begin the diplomatic process of transforming itself into a body that enforces market principles for patents (and other intellectual property). 
As a result, the WTO’s membership could narrow, because a provision for excluding member states may be necessary to enforce compliance in this area. 
Next, to start the process of institutional learning, the WTO would encourage member states to test out new rules governing the trade in patents. 
Once decided, these rules would be incorporated into existing treaties. 
Finally, the WTO would enforce those rules among the participating countries, and among any countries wishing to enter or re-enter the bloc. 
Incorporating the national patent systems into the global trade framework would create strong incentives for cooperation, sharing, and exchange between inventors from developed and developing countries. 
At the same time, innovation strategies based on abusing intellectual property would increasingly fall out of favor, owing to the threat of “expulsion” from the new WTO and, especially, the loss of trade gains. 
The new system would empower creative people everywhere – including in least-developed countries. 
The kind of mass flourishing that we need depends on grassroots innovation, and on a non-materialist “culture of creativity” that maximizes human potential, rather than only seeking to satisfy basic needs. 
There is no time to waste. 
We should start exploring options to integrate patent markets in the trade system.. 
The United States, the European Union, Japan, South Korea, China, and many developing countries all have important roles to play. 
Those countries that are not on board risk falling behind, just as much of the world did in the 1600s, when Western countries expanded their patent systems and raced ahead. 
Let the transformation begin! 

Integrating the Maghreb 
RABAT – Tunisia’s “Jasmine Revolution” has thrown a spotlight on the consequences of stagnant economies and endemic youth unemployment for the region’s authoritarian Arab governments. 
Less noticed is a key factor contributing to this malaise: the inability of the Maghreb countries – Algeria, Libya, Mauritania, Morocco, and Tunisia – to increase their economic cooperation. 
Indeed, the Arab Union estimates that the lack of regional integration costs each country two percentage points of annual GDP growth, while the African Economic Commission reckons that if a Maghreb Union existed, the five countries would each gain 5% of GDP. 
And the World Bank estimates that deeper integration, including liberalization of services and reform of investment rules would have increased per capita real GDP in 2005-2015 by 34% for Algeria, 27% for Morocco, and 24% for Tunisia. 
These countries can no longer afford to wait. 
If they maintain the growth rates recorded over the past five years, it will take them more than two decades to reach the current per capita income of less wealthy OECD members Mexico and Turkey. 
A dynamic single market would create investment opportunities for companies throughout the region. 
But today only 1.2-2% of the five Maghreb countries’ foreign trade is within the region. 
The key question is whether structural problems or institutional and political factors are hindering the development of intra-regional trade. 
In economic terms, the negligible level of intra-Maghreb trade can be explained by factors such as small market size and low trade complementarity – the weak match, in other words, between exports and imports. 
The potential for intra-Maghreb trade seems to be constrained partly by the similarity of the economies of some countries, notably Morocco and Tunisia. 
For the two countries’ exports to the European Union, the Finger-Kreinin index, which measures trade similarities, is more than 70%. 
Regional integration could contribute to higher growth in two ways. 
First, integration of the Maghreb would create economies of scale and boost competition, establishing a market of more than 75 million consumers – similar in size to several of the world’s most dynamic trading powers and certainly large enough to increase the region’s attractiveness to foreign investors. 
Second, regional integration would reduce “hub-and-spoke” effects between the EU and the Maghreb – effects that arise when a large “hub” country or region signs bilateral trade deals with several smaller countries. 
The globalization of markets is acting as a powerful economic regulator of economies, but it is also destabilizing the world’s weakest zones. 
If the Maghreb countries fragment further into mutually hostile, protectionist entities, the only possible outcome is economic growth that is too slow to meet their populations’ expectations – already raised by the mounting contrasts in living standards north and south of the Mediterranean. 
In the face of globalization’s growing challenges, the only force strong enough to harness the Maghreb’s enormous economic potential is shared political will. 
Otherwise, the region seems destined to become a porous economic and political space buffeted by uncertainty and instability. 
In an unstable world, an integrated Maghreb is both a necessity and an opportunity. 
Yet many in the Maghreb – policymakers and the public alike – remain ambivalent about regional integration. 
So there is an urgent need to develop a political project that captures the imagination of the region’s peoples and leaders. 
Nothing highlights the benefits of regional integration as starkly as major infrastructure projects that are of common interest to several countries. 
Joint transport ventures, for example, would have a strong political impact and maximum visibility, and would bring Maghreb citizens closer together physically and psychologically. 
Energy projects also could be strengthened, given that energy needs are expected to grow even faster south of the Mediterranean than in Europe. 
Such projects would greatly boost integration of the Maghreb if they were accompanied by industrial projects based on gas as feedstock or as an energy source and jointly developed with EU partners. 
The region’s abundant gas resources should also be used to power desalination plants to meet the Maghreb’s enormous water needs. 
Indeed, the region’s population explosion and rapid urbanization, along with the accelerating pace of tourism development, already means water scarcity is holding back growth. 
Development of water infrastructure is vital for the Maghreb, so if there is one issue that should unite the region, it is management and allocation of water resources. 
The first order of business, however, must be to resolve inter-state conflicts, such as the Algerian-Moroccan dispute over the Western Sahara, which prevent the creation of a unified Maghreb. 
Otherwise, it will be difficult even to discern the outlines of a common future. 
And, without such a future, the economic despair that gave rise to the revolution in Tunis is unlikely to disappear. 

Intellectual Property for the Twenty-First-Century Economy 
NEW YORK – When the South African government attempted to amend its laws in 1997 to avail itself of affordable generic medicines for the treatment of HIV/AIDS, the full legal might of the global pharmaceutical industry bore down on the country, delaying implementation and exacting a human cost. 
South Africa eventually won its case, but the government learned its lesson: it did not try again to put its citizens’ health and wellbeing into its own hands by challenging the conventional global intellectual property (IP) regime. 
Until now. 
The South African cabinet is preparing to finalize an IP policy that promises to expand access to medicines substantially. 
South Africa will now undoubtedly face all manner of bilateral and multilateral pressure from wealthy countries. 
But the government is right, and other developing and emerging economies should follow in its footsteps. 
Over the last two decades, there has been serious pushback from the developing world against the current IP regime. 
In large part, this is because wealthy countries have sought to impose a one-size-fits-all model on the world, by influencing the rulemaking process at the World Trade Organization (WTO) and forcing their will via trade agreements. 
The IP standards advanced countries favor typically are designed not to maximize innovation and scientific progress, but to maximize the profits of big pharmaceutical companies and others able to sway trade negotiations. 
No surprise, then, that large developing countries with substantial industrial bases – such as South Africa, India, and Brazil – are leading the counterattack. 
These countries are mainly taking aim at the most visible manifestation of IP injustice: the accessibility of essential medicines. 
In India, a 2005 amendment created a unique mechanism to restore balance and fairness to patenting standards, thereby safeguarding access. 
Overcoming several challenges in domestic and international proceedings, the law has been found to comply with WTO standards. 
In Brazil, early action by the government to treat people with HIV/AIDS resulted in several successful negotiations, lowering drug prices considerably. 
These countries are fully justified in opposing an IP regime that is neither equitable nor efficient. 
In a new paper, we review the arguments about the role of intellectual property in the process of development. 
We show that the preponderance of theoretical and empirical evidence indicates that the economic institutions and laws protecting knowledge in today’s advanced economies are increasingly inadequate to govern global economic activity, and are poorly suited to meet the needs of developing countries and emerging markets. 
Indeed, they are inimical to providing for basic human needs such as adequate health care. 
The central problem is that knowledge is a (global) public good, both in the technical sense that the marginal cost of someone using it is zero, and in the more general sense that an increase in knowledge can improve wellbeing globally. 
Given this, the worry has been that the market will undersupply knowledge, and research will not be adequately incentivized. 
Throughout the late twentieth century, the conventional wisdom was that this market failure could best be rectified by introducing another one: private monopolies, created through stringent patents strictly enforced. 
But private IP protection is just one route to solving the problem of encouraging and financing research, and it has been more problematic than had been anticipated, even for advanced countries. 
An increasingly dense “patent thicket” in a world of products requiring thousands of patents has sometimes stifled innovation, with more spent on lawyers than on researchers in some cases. 
And research often is directed not at producing new products but at extending, broadening, and leveraging the monopoly power granted through the patent. 
The US Supreme Court’s 2013 decision that naturally occurring genes cannot be patented has provided a test of whether patents stimulate research and innovation, as advocates claim, or impede it, by restricting access to knowledge. 
The results are unambiguous: innovation has been accelerated, leading to better diagnostic tests (for the presence of, say, the BRCA genes related to breast cancer) at much lower costs. 
There are at least three alternatives for financing and incentivizing research. 
One is to rely on centralized mechanisms of direct support for research, such as the National Institutes of Health and the National Science Foundation in the United States. 
Another is to decentralize direct funding through, say, tax credits. 
Or a governmental body, private foundation, or research institution can award prizes for successful innovations (or other creative activity). 
The patent system can be thought of as awarding a prize. 
But the prize impedes the flow of knowledge, reduces the benefits derived from it, and distorts the economy. 
By contrast, the final alternative to this system maximizes the flow of knowledge, by maintaining a creative commons, exemplified by open-source software. 
Developing economies should use all of these approaches to promote learning and innovation. 
After all, economists have recognized for decades that the most important determinant of growth – and thus of gains in human development and welfare – is technological change and the knowledge it embodies. 
What separates developing countries from developed countries is as much a gap in knowledge as a gap in resources. 
To maximize global social welfare, policymakers should strongly encourage the diffusion of knowledge from developed to developing countries. 
But while the theoretical case for a more open system is robust, the world has been moving in the opposite direction. 
Over the last 30 years, the prevailing IP regime has erected more barriers to the use of knowledge, often causing the gap between the social returns to innovation and the private returns to widen. 
The powerful advanced-economy lobbies that have shaped that regime clearly put the latter first, reflected in their opposition to provisions recognizing intellectual property rights associated with traditional knowledge or biodiversity. 
The widespread adoption of today’s stringent IP protection is also historically unprecedented. 
Even among the early industrializers, IP protection came very late and often was deliberately eschewed to enable for quicker industrialization and growth. 
The current IP regime is not sustainable. 
The twenty-first-century global economy will differ from that of the twentieth in at least two critical ways. 
First, the economic weight of the economies such as South Africa, India, and Brazil will be substantially higher. 
Second, the “weightless economy” – the economy of ideas, knowledge, and information – will account for a growing share of output, in developed and developing economies alike. 
The rules relating to the “governance” of global knowledge must change to reflect these new realities. 
An IP regime dictated by the advanced countries more than a quarter-century ago, in response to political pressure by a few of their sectors, makes little sense in today’s world. 
Maximizing profits for a few, rather than global development and welfare for the many, didn’t make much sense then, either – except in terms of the power dynamics at the time. 
Those dynamics are changing, and emerging economies should take the lead in creating a balanced IP system that recognizes the importance of knowledge for development, growth, and wellbeing. 
What matters is not only the production of knowledge, but also that it is used in ways that put people’s health and welfare ahead of corporate profits. 
South Africa’s potential decision to enable access to medicine may be an important milestone on the road toward that goal. 

Intellectual Property, Not Intellectual Monopoly 
WASHINGTON, DC – “The copyright and patent laws we have today look more like intellectual monopoly than intellectual property,” wrote Brink Lindsey and Steven Teles in their recent book about the US economy. 
Concerns about overprotection of intellectual property acting as a barrier to innovation and its diffusion are not new. 
But they have gained greater salience now that knowledge has emerged as a dominant driver of economic activity and competitive advantage. 
Digital technologies have enabled the emergence of an “intangible economy,” based on soft assets like algorithms and lines of code, rather than physical assets like buildings and machinery. 
In this environment, intellectual-property rules can now make or break business models and reshape societies, as they determine how economic gains are shared. 
Yet the main features of today’s IP regime were established for a very different economy. 
Patent rules, for example, reflect the long-held assumption that strong protection provides an essential incentive for businesses to pursue innovation. 
In fact, recent studies by Petra Moser and Heidi Williams, among others, find little evidence that patents boost innovation. 
On the contrary, because they lock in incumbents’ advantages and drive up the costs of new technology, such protections are associated with less new or follow-on innovation, weaker diffusion, and increased market concentration. 
This has contributed to growing monopoly power, slowing productivity growth, and rising inequality in many economies over the past couple of decades. 
Patents also invite considerable lobbying and rent-seeking. 
A majority of patents are used not to produce commercial value, but to create defensive legal thickets that can keep potential competitors at bay. 
As the system expands, patent trolling and litigation soar. 
Lawsuits by patent trolls comprise more than three-fifths of all lawsuits for IP infringement in the US, and cost the economy an estimated $500 billion in 1990-2010. 
Some argue that the patent system should simply be dismantled. 
But that would be too radical an approach. 
What is really needed is a top-to-bottom reexamination of the system, with an eye to changing excessively broad or stringent protections, aligning the rules with current realities, and enabling competition to drive innovation and technological diffusion. 
One set of reforms to consider would focus on improving institutional processes, such as by ensuring that the litigation system does not favor patent holders excessively. 
Other reforms concern the patents themselves, and include shortening patent terms, introducing use-it-or lose-it provisions, and instituting stricter criteria that limit patents to truly meaningful inventions. 
The key to success may lie in replacing the “one-size-fits-all” approach of the current patent regime with a differentiated approach that may be better suited to today’s economy. 
Patents typically carry terms of 20 years (copyright protections run for 70-plus years). 
But while a relatively long patent term may be appropriate for pharmaceutical innovations, which involve protracted and expensive testing, the case is less clear-cut for most other industries. 
In digital technologies and software, for example, new advances have much shorter gestation periods and typically build on previous innovations in an incremental fashion, meaning that much shorter patent terms may be appropriate. 
Of course, if regulators do decide to tailor patents to different types of innovations, they must take care not to complicate patent regimes excessively. 
Finding the right combination of reforms would inevitably require some experimentation, as well as the careful monitoring of outcomes, so that necessary adjustments could be made. 
But designing the right reforms is only part of the challenge: powerful vested interests will make reform politically difficult. 
Fortunately, the case for reform of the decades-old patent system could not be stronger. 
If the system’s defenders truly seek to promote innovation, they should welcome it in their own backyard. 
Patents, however, are not the only important element of the innovation ecosystem. 
Governments also promote innovation through direct funding of research and development and through fiscal incentives. 
And here, too, action is needed. 
Government R&D spending focuses on supplying the public good of basic research, which often produces knowledge spillovers that benefit the economy at large. 
Yet in the US, government R&D spending has fallen from 1.2% of GDP in the early 1980s to half that level in recent years. 
This underscores the need to revitalize public research programs and ensure broad access to their discoveries. 
Moreover, R&D incentives for the private sector – provided through tax relief, grants, or prizes – must be made accessible to firms in an equitable way. 
Patent reform could complement such reforms, say, by prohibiting patents from government-supported research, which should be available to all market participants. 
Many breakthrough innovations developed commercially by private firms originate from government-supported research. 
Recent examples include Google’s basic search algorithm, key features of Apple smartphones, and even the Internet itself. 
Governments should consider how to give taxpayers a stake in such profitable outcomes from publicly supported research, not least to replenish public R&D budgets. 
Here, the tax system has an important role to play. 
More broadly, in an increasingly knowledge-intensive economy, public policy should seek to democratize innovation, in order to boost the creation and dissemination of new ideas and promote healthy competition. 
And that means overhauling an intellectual-property system that is moving in the opposite direction. 

Intellectual-Property Rights and Wrongs 
Last October, the General Assembly of the World Intellectual Property Organization (WIPO) decided to consider what a development-oriented intellectual property regime might look like. 
The move was little noticed, but, in some ways, it was as important as the World Trade Organization’s decision that the current round of trade negotiations be devoted to development. 
Both decisions acknowledge that the current rules of the international economic game reflect the interests of the advanced industrial countries – especially of their big corporations – more than the interests of the developing world. 
Without intellectual property protection, incentives to engage in certain types of creative endeavors would be weakened. 
But there are high costs associated with intellectual property. 
Ideas are the most important input into research, and if intellectual property slows down the ability to use others’ ideas, then scientific and technological progress will suffer. 
In fact, many of the most important ideas – for example, the mathematics that underlies the modern computer or the theories behind atomic energy or lasers – are not protected by intellectual property. 
Academics spend considerable energy freely disseminating their research findings. 
I am pleased when someone uses my ideas on asymmetric information – though I do appreciate them giving me some credit. 
The growth of the “open source” movement on the Internet shows that not just the most basic ideas, but even products of enormous immediate commercial value can be produced without intellectual property protection. 
By contrast, an intellectual property regime rewards innovators by creating a temporary monopoly power, allowing them to charge far higher prices than they could if there were competition. 
In the process, ideas are disseminated and used less than they would be otherwise. 
The economic rationale for intellectual property is that faster innovation offsets the enormous costs of such inefficiencies. 
But it has become increasingly clear that excessively strong or badly formulated intellectual property rights may actually impede innovation – and not just by increasing the price of research. 
Monopolists may have much less incentive to innovate than they would if they had to compete. 
Modern research has shown that the great economist Joseph Schumpeter was wrong in thinking that competition in innovation leads to a succession of firms. 
In fact, a monopolist, once established, may be hard to dislodge, as Microsoft has so amply demonstrated. 
Indeed, once established, a monopoly can use its market power to squelch competitors, as Microsoft so amply demonstrated in the case of the Netscape Web browser. 
Such abuses of market power discourage innovation. 
Moreover, so-called “patent thickets” – the fear that some advance will tread on pre-existing patents, of which the innovator may not even be aware – may also discourage innovation. 
After the pioneering work of the Wright brothers and the Curtis brothers, overlapping patent claims thwarted the development of the airplane, until the United States government finally forced a patent pool as World War I loomed. 
Today, many in the computer industry worry that such a patent thicket may impede software development. 
The creation of any product requires many ideas, and sorting out their relative contribution to the outcome – let alone which ones are really new – can be nearly impossible. 
Consider a drug based on traditional knowledge, say, of an herb well known for its medicinal properties. 
How important is the contribution of the American firm that isolates the active ingredient? 
Pharmaceutical companies argue that they should be entitled to a full patent, paying nothing to the developing country from which the traditional knowledge was taken, even though the country preserves the biodiversity without which the drug would never have come to market. 
Not surprisingly, developing countries see things differently. 
Society has always recognized that other values may trump intellectual property. 
The need to prevent excessive monopoly power has led anti-trust authorities to require compulsory licensing (as the US government did with the telephone company AT&T). 
When America faced an anthrax threat in the wake of the September 11, 2001, terrorist attacks, officials issued a compulsory license for Cipro, the best-known antidote. 
Unfortunately, the trade negotiators who framed the intellectual-property agreement of the Uruguay trade round of the early 1990’s (TRIP’s) were either unaware of all of this, or more likely, uninterested. 
I served on the Clinton administration’s Council of Economic Advisors at the time, and it was clear that there was more interest in pleasing the pharmaceutical and entertainment industries than in ensuring an intellectual-property regime that was good for science, let alone for developing countries. 
I suspect that most of those who signed the agreement did not fully understand what they were doing. 
If they had, would they have willingly condemned thousands of AIDS sufferers to death because they might no longer be able to get affordable generic drugs? 
Had the question been posed in this way to parliaments around the world, I believe that TRIP’s would have been soundly rejected. 
Intellectual property is important, but the appropriate intellectual-property regime for a developing country is different from that for an advanced industrial country. 
The TRIP’s scheme failed to recognize this. 
In fact, intellectual property should never have been included in a trade agreement in the first place, at least partly because its regulation is demonstrably beyond the competency of trade negotiators. 
Besides, an international organization already exists to protect intellectual property. 


The International Barriers to Trump’s Economic Plan 
DUBAI – US President-elect Donald Trump should have a relatively clear road ahead at home for the implementation of his economic program: with Republicans holding majorities in both houses of Congress, he seems likely to benefit from a break in the political gridlock that has paralyzed the body for the last six years. 
But the United States economy does not exist in a vacuum. 
If Trump is to succeed in delivering the high growth and genuine financial stability that he has promised, he will need some help from abroad. 
Trump has established infrastructure investment, tax reform, and deregulation as central components of his strategy to boost the US economy’s actual and potential growth. 
Confident that his plan can unfold as intended, he has set ambitious targets, including GDP growth approaching 4% per year. 
For now, investors seem to be pretty much sold. 
Under the assumption that the incoming Trump administration will ultimately refrain from triggering a trade war, they moved fast to price in optimistic prospects for higher real growth, higher inflation, and more money entering the financial markets. 
This has enabled the US Federal Reserve to begin to normalize its monetary-policy stance; in addition to a 25-basis-point interest-rate hike on December 14, the Fed has indicated that the pace of such hikes will accelerate in 2017. 
As a result, markets seem convinced that the US will gradually exit its prolonged period of excessive reliance on unconventional monetary policy, replacing it with a mix of looser fiscal policy and pro-growth structural reforms – an approach much like that pursued by former US President Ronald Reagan. 
President Barack Obama sought to pursue a similar approach, but was frustrated by a highly polarized Congress. 
The expectation that Trump will have better luck on this front has produced a textbook asset-price response. 
Stock prices have climbed, led by financials and industrials; interest rates on US government bonds have risen, both on a standalone basis and relative to those in other advanced economies; and the dollar has surged to levels not seen since 2003. 
Here is where the rest of the world comes in. 
Other major economies – namely, in Europe and Asia – may have a much harder time than the US rebalancing their policy mix (which continues to be characterized by excessively loose monetary policy, inadequate structural reforms, and, in some cases, excessively tight fiscal policy). 
But if they do not, the Fed’s continued interest-rate hikes would stimulate investors to trade their German and Japanese bonds, in particular – which are now bringing low and even negative returns – for higher-yielding US varieties. 
The resultant wave of capital flows into the US would push up the value of the dollar even further. 
Though the US economy is doing much better than most of the other advanced economies, it is not yet on sound enough footing to withstand a prolonged period of a substantially stronger dollar, which would undermine its international competitiveness – and thus its broader economic prospects. 
Augmenting the risk is the prospect that such a development could spur the Trump administration to follow through on protectionist rhetoric, potentially undermining market and business confidence and, if things went far enough, even triggering a response from major trade partners. 
If Trumponomics is to deliver on its promise, key countries – in particular, Germany (the largest and most influential European economy) and China and Japan (the world’s second- and third-largest economies, respectively) – must promote their own pro-growth policy adjustments. 
They should implement quickly growth-enhancing structural reforms to support monetary stimulus. 
Germany, in particular, would also need to pursue a looser fiscal policy, while adopting a more conciliatory attitude toward outright debt reduction for beleaguered Greece. 
Unfortunately for Trump, the rest of the world does not seem prepared at this stage to pursue such a comprehensive policy shift. 
That is why, beyond advancing Trump’s pro-growth economic agenda at home, the newly appointed members of his economic team should be establishing direct contact with their German, Chinese, and Japanese counterparts, with a view to improving international policy coordination. 
Germany, China, and Japan have good reasons to embrace such an approach. They are not getting enough out of monetary expansion at this point; the risk of collateral damage and unintended consequences is rising; and pro-growth structural reforms are overdue. 
Furthermore, helping the US to achieve healthy and sustainable growth would bring about an indirect boost to their own economies. 
And it would help to avoid a scenario in which a Trump administration, under political pressure, would threaten protectionist measures, increasing the risk of a trade war that would hurt nearly everyone. 
Despite the uncertainty surrounding Trump’s impending presidency, one thing is certain, at least on paper: he is in a strong position to boost US economic growth. 
He and his team must, however, take the time to dismantle potential international barriers to success. 

Does International Cooperation Require Shared Values? 
OXFORD – Between escalating trade disputes and the divisions at the G7’s summit this month, the breakdown of global governance has become starkly apparent. 
The United States can no longer be counted on to uphold, much less enforce, existing rules, and countries more broadly cannot be assumed to agree on, much less adhere to, a common set of norms. 
Does this mean the rules-based world order is doomed? 
Over the last seven decades, democratic values have underpinned efforts, led by the US and Europe, to deepen international cooperation. 
Since the end of the Cold War, when the West claimed victory for liberal democracy, US and European leaders have often cited “shared values” in forums like NATO and the G7 (known as the G8 until Russia was suspended in 2014 for breaching those values in Ukraine). 
But the world has changed. 
Russia no longer needs to be part of the club of Cold War “victors” to advance its geostrategic interests. 
China was never a member, and yet it has risen to the status of a major world power. 
These countries, along with other major emerging economies, are increasingly challenging the geopolitical dominance the West thought it had secured. 
Even more potent, however, is the challenge coming from within the West itself, where anti-establishment political forces in the US and Europe are winning support by contesting long-accepted values and forms of cooperation. 
To be sure, despite the United Kingdom’s Brexit vote and America’s unilateral diplomacy and trade tariffs under President Donald Trump, the West has not abandoned the notion of shared values. 
After Trump attempted to bar citizens from seven Muslim-majority countries from entering the US, German Chancellor Angela Merkel said the policy was “not justified.” 
She was speaking at a press conference alongside Swedish Prime Minister Stefan Löfven, who called it “deeply regrettable.” 
Löfven then pointed out that Sweden and Germany “share fundamental values” and emphasized the European Union’s “important role for values and human rights.” 
Merkel, for her part, has cited the importance of shared values in responding to challenges like international terrorism. 
But it is folly for European powers to believe that they can rely on shared values to achieve international cooperation, just as it was folly for the West to believe that accession to the World Trade Organization would somehow turn China into a liberal democracy. 
European countries are unlikely to persuade China, Russia, or the Trump administration to adopt their worldview. 
This does not mean that international cooperation has become impossible, much less that countries have no choice but to steel themselves for a coming age of dysfunctional alliances, proxy conflicts, or even war. 
Instead, it means that cooperation must be anchored not in shared values, but in shared long-term strategic interests. 
The imperative for countries now is to determine what their long-term strategic interests are; how they overlap (or not) with those of others; and what systems of mutual accommodation could help to advance them. 
In assessing shared interests, trade is an obvious area of concern. 
Trump’s imposition of tariffs on steel and aluminum imports is undoubtedly popular with at least some of his base, but it has infuriated America’s closest allies, which have already begun retaliating. 
Economists predict that the Trump administration’s tariffs will cause over 400,000 job losses in the US – which translates to 16 losses for every one job saved in steel and aluminum. 
This approach clearly is not in anybody’s long-term strategic interests, even if it does offer short-term political benefits. 
Countries’ consideration of their strategic interests must also focus on technology. 
Google and Alibaba now compete for the world’s top computer engineers, many of whom are European, in order to win the race to control the world’s data, develop quantum computing (on which the next generation of encryption will rely), to create more profitable applications of artificial intelligence. 
Europeans have become dependent on such companies, which are all based in China or America. 
Yet Europe has focused more on enforcing shared values in the tech sector – namely, by strengthening data privacy regulations – than on developing a long-term strategy to become competitive. 
Defining such a strategy could help Europe to identify areas for mutual accommodation. 
A third area with potential for strategic cooperation is development aid and investment in the world’s poorest and most fragile states. 
Such cooperation is essential to combat terrorism, human trafficking, and migration. 
Yet here, too, countries are acting against their own interests, with the US and Europe cutting aid budgets and trying to control immigration at the border. 
Meanwhile, China is making major investments in poorer countries, but in ways that the US and Europe consider anathema. 
Whereas the US and Europe approach development from a poverty-reduction and good governance standpoint, China places a higher priority on supporting infrastructure development as part of its industrial policy. 
It has even acquired infrastructure in distressed eurozone countries like Portugal and Greece – a move that reflects a lack of strategic thinking on Europe’s part. 
But neither approach will succeed without mutual accommodation. 
That is the implication of conclusions reached in April by the LSE-Oxford Commission on State Fragility, Growth, and Development, chaired by former British Prime Minister David Cameron. 
As the Commission’s report argues, all major powers need to adopt a more pragmatic and patient approach which is focused not on long lists of impossible objectives, but on local needs and capabilities. 
In a promising move toward strategic accommodation, China has established an International Cooperation Agency to accompany the country’s ambitious Belt and Road Initiative. 
The new body will allow aid to “play its important role in great power diplomacy.” 
The US and Europe now need to do more to develop their own long-term strategic objectives and to seek new ways to achieve cooperation internationally. 
Systems of mutual accommodation that facilitate the realization of shared interests are possible. 
If established international organizations are no longer sufficiently trusted to carry out this function, the US and Europe may well need new domestic arrangements. 
For example, former US Secretary of State Henry Kissinger has proposed a permanent office within the White House for managing relations with China. 
As values-based global governance continues to deteriorate, the need for such mechanisms of continuous interaction could not be more urgent. 

We Need an International Environmental Criminal Court 
NAIROBI – The announcement of the winners of this year’s Goldman Environmental Prize is an opportunity to celebrate activist leaders. 
But it is also a moment to recognize just how much courage their efforts (and those of a great many others) can demand. 
When my dear friend Berta Cáceres and I won the prize in 2015, Berta said in her acceptance speech, “I have given my life for the service of mother earth.” 
Not long after, Berta was assassinated in Honduras. 
Her story is tragic, but not unique. 
Indeed, just months later, Isidro Baldenegro López, another Goldman Environmental Prize recipient, was shot dead. 
There has never been a more dangerous time to be an environmental activist. 
Consider the violence unleashed against the environmental defenders protesting the Dakota Access Pipeline in the United States. 
Police were accused of using excessive force to try to disperse members of the Standing Rock Sioux Tribe and their supporters, who argued that the project would contaminate water and damage sacred burial sites. 
Fortunately, no one was killed during those protests. 
But elsewhere, in more fragile democracies, environmental campaigners who stand up to polluters are paying with their lives. 
A Global Witness report documented 185 killings across 16 countries in 2015 alone. 
That is almost double the number of journalists killed that year. 
My own experience highlights the dangers facing environmental crusaders. 
For eight years, my community in rural Kenya, Owino Uhuru, has been exposed to toxic lead poisoning caused by the operations of a state-licensed smelter. 
The World Health Organization’s measure of lead poisoning is five micrograms per deciliter. 
The highest lead level recorded in Owino Uhuru was 420 micrograms per deciliter. 
In the highly publicized contamination case in Flint, Michigan, the readings were 35 micrograms per deciliter. 
When my community found out that we were being poisoned, we fought back. 
We wrote letters to the government and organized peaceful protests. 
With the support of my community, I founded the Center for Justice, Governance, and Environmental Action (CJGEA) to hold the state and corporations accountable for ensuring a clean and healthy environment. 
In February 2016, the CJGEA went to court against six state agencies and two corporate entities. 
Nothing happened. 
One year later, when we published public notices in local newspapers of our intention to sue the two corporations, all hell broke loose. 
Despite the murders of Berta and Isidro and so many others, I did not fully recognize the danger of challenging a powerful government-backed operation. 
Soon, I received a chilling phone call warning me to watch over my son carefully. 
Environmental activists within the community were attacked, their houses surrounded by thugs wielding machetes. 
The son of a close ally was abducted – and, fortunately, later released – by unidentified men. 
You might expect that the state would protect its citizens from such tactics, if not from being poisoned in the first place. 
We broke no laws; on the contrary, we have been upholding Kenya’s constitution, which guarantees citizens’ rights to a safe and healthy environment. 
But perhaps we should not be surprised by the state’s behavior. 
After all, in 2015, Kenya’s government voted in the UN General Assembly, along with just 13 others, against a United Nations resolution calling for the protection of human-rights defenders. 
Nature provides enough for everyone’s needs, but not for everyone’s greed. 
As natural resources become scarcer, Africa’s lush, mineral-rich lands are becoming more lucrative for investors seeking to maximize profits. 
But, while governments should welcome opportunities for economic growth and job creation, they should not allow companies to damage the environment and threaten residents’ health and livelihoods. 
As stories like Berta’s, Isidro’s, and mine demonstrate, we can no longer rely on state bodies, such as national law enforcement, to ensure this outcome, much less to investigate and prosecute crimes against the planet and those who fight for it. 
That is why the world needs an independent, internationally recognized legal body to which communities and activists can turn to address environmental crimes. 
The appointment in March 2012 of the first-ever UN special rapporteur on human rights and the environment was a positive step. 
But we need a system with teeth. 
Twenty years ago, the International Criminal Court was established to prosecute war crimes and crimes against humanity. 
A similar court should do the same for crimes against the environment and its defenders. 
Silencing the voices fighting to uphold environmental laws and regulations is self-defeating. 
People and the planet are dying. 
Those who are fighting to prevent those deaths deserve protection, not to become further casualties. 

 

International Justice Supports National Justice 
In recent years, an emerging international system of justice has begun to undermine the old calculus of tyrants and torturers. 
Recently they could commit their crimes with impunity, bludgeoning their nation's judicial system into submission. 
Now international war crimes tribunals have been created for Rwanda and former Yugoslavia, national courts have indicted despots from other countries, and a permanent International Criminal Court will soon be established. 
Yet international justice is attacked as elitist and undemocratic. 
Critics complain that home-grown national justice is being replaced by distant, unaccountable international tribunals. 
Decrying a new legal imperialism, they ask why foreign prosecutors should make critical decisions about justice concerning countries with which they have no personal connection. 
Recent experience, however, suggests that, far from supplanting national law enforcement, international justice is beginning to spur toward national prosecutions, reinforcing rather than replacing local efforts. 
The clearest case concerns former Chilean dictator Augusto Pinochet. 
He left Chile for England in October 1998 confident that he would continue to enjoy impunity from prosecution until his dying days. 
This confidence lay in two legal gifts he had bestowed upon himself - an amnesty for his crimes and immunity as a senator-for-life. 
But once Pinochet was arrested in London, on charges filed by a Spanish judge, his carefully constructed edifice of impunity began to crumble. 
His arrest, and the House of Lords' later approval of it, legitimized the idea of prosecuting the former dictator. 
Indeed, in an effort to secure Pinochet's return, Chilean officials vowed for the first time to prosecute him themselves. 
As a result, when Pinochet was returned to Chile sixteen months later, on medical grounds, he faced revived criminal charges filed by victims and survivors of his rule. 
The Chilean courts allowed these cases to proceed by stripping Pinochet of his parliamentary immunity and endorsing a legal theory to bypass the amnesty. 
Because of failing health, Pinochet may still escape punishment. 
But the effect of his case on international justice ensures that, at the very least, he will be remembered for his indictment in Chile rather than for the impunity he had sought to ensure. 
Another instance in which international justice has had a positive effect is in Chad. 
In February 2000, at the request of victims, Senegal indicted and arrested Chad's former dictator Hissene Habre, who had taken refuge there. 
The fate of that prosecution in Senegal remains uncertain, but it revived the once moribund issue of justice in Chad. 
Last October, seventeen victims and survivors filed criminal complaints in Chad for murder, "disappearance," and torture against one-time members of Habre's secret service. 
Chad's current president, Idriss Deby, recently met with victims for the first time and promised to support their cases. 
He also vowed to rid his administration of Habre's security agents and to grant access to the files of a truth commission that investigated Habre's rule. 
The international human rights system plays a similar role in promoting national prosecutions. 
For example in Guatemala, where the findings of a UN truth commission has at last sparked a serious judicial investigation of former President Rios Montt for crimes against humanity committed during his scorched-earth attacks on perceived rural opponents in 1982-83. An amendment to Argentina's Constitution giving international treaties constitutional force lay behind an Argentine court's historic decision this month, reversing amnesties adopted under military pressure in the 1980s for atrocities committed during the country's 1976-83 "dirty war." 
The International Criminal Court - a tribunal with potential worldwide jurisdiction over genocide, war crimes, and crimes against humanity - is built on a comparable catalytic theory. 
It has jurisdiction only insofar as national governments fail to investigate and, if appropriate, prosecute a case in good faith. 
Of course, national justice does sometimes fail - for lack of will or capacity - and international justice must step in. 
In Indonesia, for example, the threat of international justice for the September 1999 rampage in East Timor led to the Indonesian government's publishing of a list of twenty-two suspects. 
But a year-and-a-half later, Indonesia's government has not prosecuted anyone. 
An international tribunal may be the only hope. 
Similarly, the war crimes tribunal for former Yugoslavia, based in The Hague, insists on the surrender of former Yugoslav President Slobodan Milosevic and other indicted suspects. 
Milosevic's victims and survivors - mostly ethnic Bosnians, Albanians, and Croats - have little confidence that the Serb-dominated Yugoslav government, emerging from a decade of ethnic wars, will ever prosecute their cause in good faith. 
Nor has Belgrade given grounds for confidence. 
It speaks of prosecuting Milosevic for corruption or the murder of a few Serb political opponents, but not for mass atrocities committed against other ethnic groups. 
Its apparent willingness to prosecute Milosevic at all is largely due to the threat of international justice. 
But the half-hearted prosecution that it has been willing to contemplate so far highlights the need for an international tribunal. 
Donors should withhold all non-humanitarian aid to Belgrade until it surrenders Milosevic for trial in The Hague. 
Experience shows that international justice is less a threat to national justice than a backstop; that it is less likely to replace national justice than bolster it. 
In any case, that developing partnership between national and international justice means that tyrants and torturers - past and future - can no longer blithely assume lifelong impunity. 

International Norms in Cyberspace 
CAMBRIDGE – Last month, the Netherlands hosted the Global Conference on Cyberspace 2015, which brought together nearly 2,000 government officials, academics, industry representatives, and others. 
I chaired a panel on cyber peace and security that included a Microsoft vice president and two foreign ministers. 
This “multi-stakeholder” conference was the latest in a series of efforts to establish rules of the road to avoid cyber conflict. 
The capacity to use the Internet to inflict damage is now well established. 
Many observers believe the American and Israeli governments were behind an earlier attack that destroyed centrifuges at an Iranian nuclear facility. 
Some say an Iranian government attack destroyed thousands of Saudi Aramco computers. 
Russia is blamed for denial-of-service attacks on Estonia and Georgia. 
And just last December, US President Barack Obama attributed an attack on Sony Pictures to the North Korean government. 
Until recently, cyber security was largely the domain of a small community of computer experts. 
When the Internet was created in the 1970s, its members formed a virtual village; everyone knew one another, and together they designed an open system, paying little attention to security. 
Then, in the early 1990s, the World Wide Web emerged, growing from a few million users then to more than three billion today. 
In little more than a generation, the Internet has become the substrate of the global economy and governance worldwide. 
Several billion more human users will be added in the next decade, as will tens of billions of devices, ranging from thermostats to industrial control systems (the “Internet of Things”). 
All of this burgeoning interdependence implies vulnerabilities that governments and non-governmental actors can exploit. 
At the same time, we are only beginning to come to terms with the national-security implications of this. 
Strategic studies of the cyber domain resemble nuclear strategy in the 1950s: analysts are still not clear about the meaning of offense, defense, deterrence, escalation, norms, and arms control. 
The term “cyber war” is used very loosely for a wide range of behaviors, ranging from simple probes, website defacement, and denial of service to espionage and destruction. 
In this, it reflects dictionary definitions of “war,” which include any organized effort to “stop or defeat something that is viewed as dangerous or bad” (for example, “war on drugs”). 
A more useful definition of cyber war is any hostile action in cyberspace that amplifies or is equivalent in effect to major physical violence. 
Determining whether an action meets that criterion is a decision that only a country’s political leaders can make. 
There are four major categories of cyber threats to national security, each with a different time horizon and (in principle) different solutions: cyber war and economic espionage, which are largely associated with states, and cyber crime and cyber terrorism, which are mostly associated with non-state actors. 
The highest costs currently stem from espionage and crime, but the other two may become greater threats over the next decade than they are today. 
Moreover, as alliances and tactics evolve, the categories may increasingly overlap. 
During the Cold War, ideological competition limited US-Soviet cooperation, but both sides’ awareness of nuclear destructiveness led them to develop a crude code of conduct to avoid military confrontation. 
These basic rules of prudence included no direct fighting, no first use of nuclear weapons, and crisis communication, such as the Moscow-Washington hotline and the Accidents Measures and Incidents at Sea agreements. 
The first formal arms-control agreement was the 1963 Limited Test Ban Treaty, which can be considered mainly an environmental treaty. 
The second major agreement was the 1968 Nuclear Non-Proliferation Treaty, which aimed at limiting the spread of nuclear weapons. 
The US and the Soviet Union perceived both agreements as positive-sum games, because they involved nature or third parties. 
Similarly, the most promising areas for early international cooperation on securing cyberspace are problems posed by third parties such as criminals and terrorists. 
Russia and China have sought a treaty for broad United Nations oversight of the Internet. 
Though their vision of “information security” could legitimize authoritarian governments’ censorship, and is therefore unacceptable to democratic governments, it may be possible to identify and target behaviors that are illegal everywhere. 
Limiting all intrusions would be impossible, but one could start with cyber crime and cyber terrorism. 
Major states would have an interest in limiting damage by agreeing to cooperate on forensics and controls. 
Of course, historical analogies are imperfect. 
Obviously, cyber technology is very different from nuclear technology, particularly because non-governmental actors can exploit it much more easily. 
Nonetheless, some institutions, both formal and informal, already govern the basic functioning of the Internet. 
The US wisely plans to strengthen the non-governmental Internet Corporation for Assigned Names and Numbers (ICANN) by having it supervise the Internet “address book.” 
There is also the Council of Europe’s 2001 Convention on Cybercrime, with Interpol and Europol facilitating cooperation among national police forces. 
And a UN Group of Government Experts has been analyzing how international law relates to cyber security. 
It is likely to take longer to conclude agreements on contentious issues such as cyber intrusions for purposes like espionage and preparing the battlefield. 
Nonetheless, the inability to envisage an overall cyber arms-control agreement need not prevent progress on some issues now. 
International norms tend to develop slowly. 
It took two decades in the case of nuclear technology. 
The most important message of the recent Dutch conference was that massive cyber vulnerability is now nearing that point. 

The Rule of the Lawless 
CAIRO – In one of his last essays, the late, great historian Tony Judt asked what we should have learned from the last century, a period in which so many soldiers and civilians died in conflict. 
One important part of the answer, I think, is the critical importance of the rule of law, both domestically and internationally. 
To be sure, there are many other things that are crucial to the good life in peaceful, open societies: freedom of speech, religion, and association, and the power to choose – and remove – your own government. 
But nothing guarantees free societies' liberties as much as the application of the rule of law with equal force to the governed and the governing. 
When I was a British cabinet minister and chairman of the Conservative Party, I had a legal adviser who was aptly named Mr. Maybe. 
When I was taken to task for some infringement of administrative law or alleged excessive use of my legal powers, he would never be able to tell me how the courts would ultimately rule. 
“Will we win this case?" I'd ask Mr. Maybe. 
His reply was always conditional. 
“You should win," he once said. “But I cannot promise that you will." 
Authoritarian governments find this a difficult concept to understand. 
I recall negotiations with my Chinese counterpart when I was Governor of Hong Kong. 
I was attempting to explain why the rule of law mattered so much to the territory's future, and I noted that when I was in the British government, the law applied to me just as much as to those I helped govern. 
My interlocutor thought I was joking. 
What the Chinese practice is rule by law – the law as defined by the Communist Party to its own advantage. 
Consider China's ongoing anti-corruption campaign, for example. It is plainly being used by President Xi Jinping and his ally in the Politburo, Wang Qishan, as a tool to target not just the corrupt, but those who are not part of Xi's faction of red princelings. 
In Xi's hands, the law is an instrument for securing his political objectives. 
Likewise, in Russia, President Vladimir Putin rules a state apparatus designed and run by elements of the country's old intelligence services and its new mafia. 
The law is used to reward the regime's cronies and to penalize its critics, such as the businessman Mikhail Khodorkovsky and the activist Alexei Navalny. 
Because neither Russia nor China apply the rule of law at home, it is unsurprising that they do not recognize its value in international affairs. 
Indeed, Putin has breached one of the most fundamental principles of international law: that national borders may not be changed by force. 
Indeed, he has made it a regular feature of Russian foreign policy, which is characterized by deceit, bullying, violence, and the desire to restore the empire that was dismembered after the collapse of communism. 
Long before Russia's armed annexation of Crimea and its invasion of eastern Ukraine, the Kremlin played similar games when it engineered the secession of Georgia's South Ossetia and Abkhazia regions and propped up the bandit territory of Transnistria in Moldova. 
And, given such blatant disregard for the international order, it is no surprise that Putin's agents have been implicated in the murder of at least one opponent on the streets of London. 
Building on the Geneva Conventions on the laws of war and similar binding agreements, global rules were first institutionalized with the establishment of the United Nations. 
But, above all, the international framework for managing global affairs was the creation of the United States. 
What was remarkable about this framework was that its principal author, the major superpower of the day, accepted its authority. 
As US President Harry Truman memorably put it, “We all have to recognize – no matter how great our strength – that we must deny ourselves the license to do always as we please." 
In times when the international system has been under assault, only America has had the standing to provide renewed credibility to the rule of law. 
Unfortunately, this may no longer be the case. 
During President George W. Bush's administration, the US was willfully destructive of its global interests when it disregarded international law on issues like torture. 
Those US politicians who regard international institutions as anti-American conspiracies are continuing the harm, costing their country much of its moral authority. 
The picture is no brighter in Europe, where countries' willful neglect of their military capabilities has undermined their ability to enforce the rule of law when international mechanisms break down. 
The UN Security Council, meanwhile, has become ineffectual, stymied by the great-power interests of China and Russia. 
So it does nothing, even as Europe's borders are challenged, Ukrainian citizens are bombed in their homes by Russian troops, and a violent, bandit army ravages the greater Middle East, from the beaches of Libya to the borders of Iran. 
After the massacres in Rwanda and Bosnia in the 1990s, world leaders once again solemnly declared, “Never again." 
Today, Syrian, Iraqi, and now Egyptian citizens must be wondering what happened to that pledge. 
In short, the growing, bloody challenges of the twenty-first century are to be confronted by a toothless UN, a morally weakened US, and a Europe well on the path toward disarmament. 
If that prospect worries you, it should. 
In the absence of a change of heart by our political leaders, the power of prayer may be our only recourse. 

Normalizing Abortion 
NEW YORK – Last month in Buenos Aires, Elizabeth, a 34-year-old mother of two, died after inserting parsley into her cervix in a desperate attempt to induce an abortion. 
Days earlier, Argentina’s Senate had narrowly defeated legislation that would have legalized abortion in the first 14 weeks of pregnancy. 
If that bill had passed, Elizabeth might be alive today. 
Instead, she is a grim statistic: one of more than 40 Argentinian women who will die this year from botched abortions. 
On September 28, activists around the world will mark International Safe Abortion Day, an opportunity to mourn those who have died because of oppressive anti-abortion laws. 
But this day is also about spreading a message on behalf of Elizabeth and other women like her: Abortion, while in many countries a political wedge issue, is simply a fact of life. 
Each year, 25% of all pregnancies – about 56 million – are terminated. 
Abortions occur in every country and within every socioeconomic class. 
In the United States, 61% of abortion patients are in their 20s, 59% are already mothers, and nearly two-thirds identify with an organized religion. 
But abortion is most common in developing countries, where access to family-planning services is often limited. 
In fact, a staggering 88% of the world’s abortions occur in the Global South. 
Abortion is a safe procedure that becomes hazardous wherever it is legally restricted. 
Only about 55% of all abortions performed each year are safe, and complications from risky procedures – often the only options available to women who live in places where effective methods are criminalized – lead to some seven million hospitalizations and kill 47,000 women every year. 
The struggle for safe abortion is centuries old. 
While the methods varied, abortion was a normal – and often accepted – practice in ancient China, Egypt, Greece, and Rome. 
It was only in the nineteenth century that Catholic and colonial elites propagated anti-abortion laws to control women’s sexuality, bodies, and lives. 
But, contrary to popular opinion, criminalization does not reduce the number of abortions; it only makes having one more dangerous. 
In Latin America and the Caribbean, where the procedure is banned or restricted, rates of abortion – and resulting complications – are among the highest in the world. 
By contrast, in North America and Western Europe, where abortion is legal and widely accessible, rates of abortion are comparatively low and safety is high. 
Moreover, when abortion is decriminalized, death rates fall and maternal injuries vanish almost overnight. 
For example, a year after Romania decriminalized abortion in 1990, maternal deaths fell by half, while in South Africa, deaths plummeted 91% in the first four years after passage of the 1996 Choice on Termination of Pregnancy Act. 
Simply put, there is no medical reason why any woman should have to risk her life to end an unwanted pregnancy. 
Buoyed by these statistics, rights activists around the world are demanding changes to national abortion laws, and since 2000, more than 30 countries have liberalized their approach. 
In May, voters in Ireland repealed the country’s abortion ban, a significant victory in a society so deeply influenced by its Catholic faith. 
Even in Argentina, hope remains high. 
Opinion polls show strong support for abortion rights, and the bill that could have saved Elizabeth’s life failed by only seven votes. 
Still, the fight is far from over. 
Globally, Internet searches for misoprostol, a drug that women use to induce abortion safely, are surging. 
In South Africa, only about 5% of public clinics and hospitals offer abortions, and a third of women still do not even know that abortion is legal. 
In Morocco, meanwhile, women who campaign for abortion rights are arrested and harassed. 
And in the US, activists are preparing for a rollback of reproductive freedom if Supreme Court nominee Brett Kavanaugh is confirmed. 
The fiercest opposition to abortion rights originates with the Catholic Church and other conservative forces, and it has direct consequences both for women and for their countries’ health-care systems. 
Recent research conducted by my organization, the International Women’s Health Coalition, found that in more than 70 jurisdictions worldwide – including 45 US states – health-care providers can deny abortion services to patients based simply on doctors’ personal beliefs. 
These restrictions are unconscionable. 
Abortion is part of women’s lives. 
It is time for governments to listen to the millions of women who are demanding reproductive justice and bodily autonomy. 
Laws must recognize and guarantee a woman’s right to sexual and reproductive care. 
Services must be made financially and medically accessible. 
And women everywhere – regardless of age, race, ethnicity, sexual orientation, or religious affiliation – must have access to safe abortion services. 
Elizabeth never had these opportunities, and millions of women around the world are in the same position. 
Unless and until that changes, every one of them is a potential tragedy. 

Connectivity for All 
OXFORD – Over the last decade, the number of new Internet users tripled. 
But, though a large majority of the world’s population remains offline, the pace of expansion has slowed sharply in recent years. 
Is the Internet revolution losing steam? 
From 2005 to 2008, the number of Internet users increased at a compound annual rate of 15.1%, bringing the number of people online to some 2.7 billion. 
But, according to a new report by McKinsey & Company, the growth rate fell to 10.4% in 2010-2013. 
Given the enormous economic benefits of connectivity, finding ways to provide Internet access to the world’s remaining four billion people should be a high priority. 
Of course, that is easier said than done. 
Around three-quarters of the unconnected – 3.4 billion people – live in just 20 countries. 
In 2012, about 64% lived in rural areas, compared with only 24% of Internet users, while about half live below their country’s poverty line and median income. 
Some 18% are older than 54, compared with about 7% of the online population, and roughly 28% are illiterate, whereas the literacy rate for Internet users is close to 100%. 
Finally, women comprise 52% of the offline population and only 42% of the online population. 
These groups face particularly high barriers to Internet connectivity, beginning with inadequate infrastructure, including poor mobile Internet coverage or network access and unreliable electricity supply. 
Indeed, 1.1-2.8 billion people cannot get online via a mobile network, because their area lacks sufficient coverage. 
Another barrier is affordability: Internet access is simply too costly for many low-income people. 
Beyond the need to address insufficient competition, inadequate regulation, and high taxes on Internet-enabled devices and service plans, there is the fundamental challenge of supplying cost-effective access to the most remote regions. 
In ten countries, largely in Africa and the Asia-Pacific region, fixed broadband prices exceed per capita GDP. 
The third major barrier to Internet adoption is user capability. 
The high level of illiteracy among those who remain offline often implies an inability not only to read and write, but also to use digital technology. 
An estimated 43% of India’s unconnected citizens are illiterate. 
Without technological solutions, such as user interfaces that feature text-to-speech and voice-recognition capabilities, people who have not attained basic language proficiency will struggle to engage with Internet content. 
The lack of relevant local-language content may also limit use. 
Making matters worse, misperceptions of the Internet – for example, that it is a security risk or solely for the wealthy – mean that many people will remain reluctant to use it, even if affordable access becomes available. 
In many emerging economies, a lack of trust in the system has fueled resistance to doing business online. 
The final barrier to Internet adoption is a lack of incentives. 
As research by the Oxford Internet Institute on broadband in East Africa has shown, many poor people in rural areas may know little, if anything, about the Internet, or may not be offered it. 
Given that tailoring content to such potential customers is expensive, Internet service providers are unlikely to do so without clear incentives like government support or high profit margins. 
Advertisers are not interested in reaching such markets. 
McKinsey has developed a new Internet Barriers Index that ranks 25 developed and developing countries on their performance in the face of these challenges. 
The top five countries are the United States, Germany, South Korea, Japan, and Spain. 
The bottom five are Nigeria, Pakistan, Bangladesh, Tanzania, and Ethiopia. 
Nearly half of the world’s offline population lives in ten countries that face a significant struggle to overcome all four barriers. 
In the bottom five countries in the McKinsey index, the average Internet penetration rate was only 15% in 2013. 
The offline population was largely young and rural, with low literacy rates. 
Five other countries – Egypt, India, Indonesia, the Philippines, and Thailand – face medium to high barriers across the board, especially when it comes to infrastructure and incentives. 
With an offline population of more than 1.4 billion people, these countries had an average Internet penetration rate of 19% in 2013. 
Another 1.1 billion people live in countries where a single barrier – especially a lack of awareness of the Internet, weak purchasing power, or low levels of digital literacy – dominates. 
Identifying the particular barriers affecting a country or region enables the development of effective solutions – not least because some barriers, such as awareness, are far cheaper to tackle than others, like infrastructure. That is the purpose of the Internet Barriers Index. 
By mapping the major social, political, and economic obstacles to Internet adoption, the index can help make efforts by governments and network and service providers as targeted and efficient as possible. 
The imperative to address the formidable challenges to further expansion of Internet usage is clear. 
Doing so would create considerable potential for economic growth. 
Many governments have recognized this to some extent, setting ambitious goals for mobile Internet coverage, broadband infrastructure, and public Wi-Fi access. 
But investment in infrastructure is not enough. 
Only comprehensive, targeted, and nationally tailored strategies, backed by a strong commitment from policymakers, can bring the next one billion people online. 

The Digital Transformation of Europe 
SAN JOSE – Europe is on the cusp of an unprecedented technological transformation. 
I call it the Internet of Everything: the penetration of the World Wide Web into the everyday aspects of our lives. 
Wearable technology will tell us how well we are sleeping and whether we need to exercise. 
Sensors in the street will help us avoid traffic jams and find parking. 
Telemedicine applications will allow physicians to treat patients who are hundreds of miles away. 
This massive transition will transform how citizens interact with their governments, revolutionize entire industries, and change the way we engage with one another. 
In Europe, the Internet of Everything is emerging as the single most promising way to revive a moribund economy and tackle the continent's stubborn unemployment problem, with companies, cities, and even countries positioning themselves as leaders in innovation, growth, and the creation of jobs. 
The most recent example is France. 
Last month, Prime Minister Manuel Valls and I announced an ambitious partnership to promote a digital transformation of the entire country. 
The collaboration, which includes a $100 million investment from Cisco in French startups, could transform energy management, health care, and education – boosting France's economic competitiveness, job creation, dynamism, and growth in the process. 
France's program is a major step toward a digital Europe, following German Chancellor Angela Merkel's Industrie 4.0 initiative and the United Kingdom's planned expansion of innovation centers to foster technological breakthroughs and pioneer solutions in energy, transport, health care, and education. 
Cities too are embracing digitization. 
Barcelona has installed in-ground parking sensors and launched connected public transportation as part of its Smart City strategy. 
Nice has constructed a “connected boulevard," including smart lighting and environmental monitoring. 
And the Port of Hamburg has a digital system to reduce water, rail, and ground traffic congestion. 
Projects like these are being replicated across the continent, generating billions of dollars in value in terms of reduced costs, productivity gains, and increased revenues. 
As a result, Europe's leaders see not only opportunities for growth, but also the need to avoid being left behind. 
To create a truly digital Europe will require a foundation of high-speed, high-quality broadband, both wired and wireless. 
As part of Europe's Digital Agenda, policymakers have set out to connect 50% of European households to superfast broadband (100 mbps or greater) by 2020. They also aim to connect all residences to broadband (at least 30 mbps) by this time. 
These targets should be fully embraced, and policymakers should continue to encourage major investments in broadband, as well as in the infrastructure needed to support the wireless devices in which we have all come to depend. 
Of course, Europe will also have to encourage entrepreneurship, which requires fostering a culture of risk-taking, facilitating access to venture capital, and investing in strong educational institutions. 
Many countries are doing just that, implying that the next game-changing technology may not come from Silicon Valley; it could just as easily be developed in a lab in Paris, London, or Berlin. 
Over the longer term, Europe will need a workforce trained for careers in the new digitized economy. 
It is estimated that Europe will have an e-skills gap that, if filled, could lead to 850,000 potential jobs in 2015, rising to twice that by 2020. 
On a continent where youth unemployment exceeds 50% in some countries, there should be no problem finding young and eager people able to do these jobs, provided they receive the proper training. 
This gap cannot be closed overnight, but countries that do nothing to overcome it could very well fall behind. 
Widening the talent pipeline sufficiently will require a generational commitment to teaching math and science, providing technical training, and mentoring young people of all backgrounds so they understand the full range of possibilities that a career in technology affords. 
As Europe continues down the road of digital transformation, the possibilities for growth are immediate and significant. 
The continent is already the world's largest economic bloc, with a GDP of more than €14 trillion ($15.2 trillion) in 2014. 
But its growth has been waning. 
The European Commission estimates – conservatively, in my opinion – that the digital revolution could spur an “additional 2.1% of GDP growth over the baseline." 
On the jobs front, the Internet of Everything will be a key driver of employment. 
Advances in cloud computing alone are expected to create 2.5 million additional jobs in Europe by 2020. 
The digital transformation will bring opportunities and create new types of jobs: systems developers, transportation network engineers, medical device consultants, data analysts, electrical engineers for smart grids, and many more. 
As Europe charts its economic course for the next decade, its leaders must ensure that digital transformation forms the foundation of their strategy. 
This will allow them to create a Europe that is stronger, faster, more dynamic – and more digital. 

Internet or Splinternet? 
CAMBRIDGE – Who owns the Internet? 
The answer is no one and everyone. 
The Internet is a network of networks. 
Each of the separate networks belongs to different companies and organizations, and they rely on physical servers in different countries with varying laws and regulations. 
But without some common rules and norms, these networks cannot be linked effectively. 
Fragmentation – meaning the end of the Internet – is a real threat. 
Some estimates put the Internet’s economic contribution to global GDP as high as $4.2 trillion in 2016. 
A fragmented “splinternet” would be very costly to the world, but that is one of the possible futures outlined last month in the report of the Global Commission on Internet Governance, chaired by former Swedish Prime Minister Carl Bildt. 
The Internet now connects nearly half the world’s population, and another billion people – as well as some 20 billion devices – are forecast to be connected in the next five years. 
But further expansion is not guaranteed. 
In the Commission’s worst-case scenario, the costs imposed by the malicious actions of criminals and the political controls imposed by governments would cause people to lose trust in the Internet and reduce their use of it. 
The cost of cybercrime in 2016 has been estimated to be as high as $445 billion, and it could grow rapidly. 
As more devices, ranging from automobiles to pacemakers, are placed online, malicious hackers could turn the “Internet of Things” (IOT) into “the weaponization of everything.” 
Massive privacy violations by companies and governments, and cyber attacks on civilian infrastructure such as power grids (as recently happened in Ukraine), could create insecurity that undercuts the Internet’s potential. 
A second scenario is what the Commission calls “stunted growth.” 
Some users capture disproportionate gains, while others fail to benefit. 
Three or four billion people are still offline, and the Internet’s economic value for many who are connected is compromised by trade barriers, censorship, laws requiring local storage of data, and other rules that limit the free flow of goods, services, and ideas. 
The movement toward sovereign control of the Internet is growing, and a degree of fragmentation already exists. 
China has the largest number of Internet users, but its “Great Fire Wall” has created barriers with parts of the outside world. 
Many governments censor services that they think threaten their political control. 
If this trend continues, it could cost more than 1% of GDP per year, and also impinge on peoples’ privacy, free speech, and access to knowledge. 
While the world could muddle along this path, a great deal will be lost and many will be left behind. 
In the Commission’s third scenario, a healthy Internet provides unprecedented opportunities for innovation and economic growth. 
The Internet revolution of the past two decades has contributed something like 8% of global GDP and brought three billion users online, narrowing digital, physical, economic, and educational divides. 
The Commission’s report states that the IOT may result in up to $11 trillion in additional GDP by 2025. 
The Commission concluded that sustaining unhindered innovation will require that the Internet’s standards are openly developed and available; that all users develop better digital “hygiene” to discourage hackers; that security and resilience be at the core of system design (rather than an afterthought, as they currently are); that governments not require third parties to compromise encryption; that countries agree not to attack the Internet’s core infrastructure; and that governments mandate liability and compel transparent reporting of technological problems to provide a market-based insurance industry to enhance the IOT’s security. 
Until recently, the debate about the most appropriate approach to Internet governance revolved around three main camps. 
The first, multi-stakeholder approach, originated organically from the community that developed the Internet, which ensured technical proficiency but not international legitimacy, because it was heavily dominated by American technocrats. 
A second camp favored greater control by the International Telecommunications Union, a United Nations specialized agency, which ensured legitimacy but at the cost of efficiency. 
And authoritarian countries like Russia and China championed international treaties guaranteeing no interference with states’ strong sovereign control over their portion of the Internet. 
More recently, the Commission argues, a fourth model is developing in which a broadened multi-stakeholder community involves more conscious planning for the participation of each stakeholder (the technical community, private organizations, companies, governments) in international conferences. 
An important step in this direction was the US Commerce Department’s decision last month to hand oversight of the so-called IANA functions – the “address book” of the Internet – to the Internet Corporation for Assigned Names and Numbers. 
ICANN, with a Government Advisory Committee of 162 members and 35 observers, is not a typical inter-governmental organization: the governments do not control the organization. 
At the same time, ICANN is consistent with the multi-stakeholder approach formulated and legitimated by the Internet Governance Forum, established by the UN General Assembly. 
Some American senators complained that when President Barack Obama’s Commerce Department handed its oversight of the IANA functions to ICANN, it was “giving away the Internet.” 
But the US could not “give away” the Internet, because the United States does not own it. 
While the original Internet linked computers entirely in the US, today’s Internet connects billions of people worldwide. 
Moreover, the IANA address book (of which there are many copies) is not the Internet. 
The US action last month was a step toward a more stable and open multi-stakeholder Internet of the type that the Global Commission applauded. 
Let’s hope that further steps in this direction follow. 

Reassessing the Internet of Things 
SAN FRANCISCO – Nearly 30 years ago, the economists Robert Solow and Stephen Roach caused a stir when they pointed out that, for all the billions of dollars being invested in information technology, there was no evidence of a payoff in productivity. 
Businesses were buying tens of millions of computers every year, and Microsoft had just gone public, netting Bill Gates his first billion. 
And yet, in what came to be known as the productivity paradox, national statistics showed that not only was productivity growth not accelerating; it was actually slowing down. 
“You can see the computer age everywhere,” quipped Solow, “but in the productivity statistics.” 
Today, we seem to be at a similar historical moment with a new innovation: the much-hyped Internet of Things – the linking of machines and objects to digital networks. 
Sensors, tags, and other connected gadgets mean that the physical world can now be digitized, monitored, measured, and optimized. 
As with computers before, the possibilities seem endless, the predictions have been extravagant – and the data have yet to show a surge in productivity. 
A year ago, research firm Gartner put the Internet of Things at the peak of its Hype Cycle of emerging technologies. 
As more doubts about the Internet of Things productivity revolution are voiced, it is useful to recall what happened when Solow and Roach identified the original computer productivity paradox. 
For starters, it is important to note that business leaders largely ignored the productivity paradox, insisting that they were seeing improvements in the quality and speed of operations and decision-making. 
Investment in information and communications technology continued to grow, even in the absence of macroeconomic proof of its returns. 
That turned out to be the right response. 
By the late 1990s, the economists Erik Brynjolfsson and Lorin Hitt had disproved the productivity paradox, uncovering problems in the way service-sector productivity was measured and, more important, noting that there was generally a long lag between technology investments and productivity gains. 
Our own research at the time found a large jump in productivity in the late 1990s, driven largely by efficiencies made possible by earlier investments in information technology. 
These gains were visible in several sectors, including retail, wholesale trade, financial services, and the computer industry itself. 
The greatest productivity improvements were not the result of information technology on its own, but by its combination with process changes and organizational and managerial innovations. 
Our latest research, The Internet of Things: Mapping the Value Beyond the Hype, indicates that a similar cycle could repeat itself. 
We predict that as the Internet of Things transforms factories, homes, and cities, it will yield greater economic value than even the hype suggests. 
By 2025, according to our estimates, the economic impact will reach $3.9-$11.1 trillion per year, equivalent to roughly 11% of world GDP. 
In the meantime, however, we are likely to see another productivity paradox; the gains from changes in the way businesses operate will take time to be detected at the macroeconomic level. 
One major factor likely to delay the productivity payoff will be the need to achieve interoperability. 
Sensors on cars can deliver immediate gains by monitoring the engine, cutting maintenance costs, and extending the life of the vehicle. 
But even greater gains can be made by connecting the sensors to traffic monitoring systems, thereby cutting travel time for thousands of motorists, saving energy, and reducing pollution. 
However, this will first require auto manufacturers, transit operators, and engineers to collaborate on traffic-management technologies and protocols. 
Indeed, we estimate that 40% of the potential economic value of the Internet of Things will depend on interoperability. 
Yet some of the basic building blocks for interoperability are still missing. 
Two-thirds of the things that could be connected do not use standard Internet Protocol networks. 
Other barriers standing in the way of capturing the full potential of the Internet of Things include the need for privacy and security protections and long investment cycles in areas such as infrastructure, where it could take many years to retrofit legacy assets. 
The cybersecurity challenges are particularly vexing, as the Internet of Things increases the opportunities for attack and amplifies the consequences of any breach. 
But, as in the 1980s, the biggest hurdles for achieving the full potential of the new technology will be organizational. 
Some of the productivity gains from the Internet of Things will result from the use of data to guide changes in processes and develop new business models. 
Today, little of the data being collected by the Internet of Things is being used, and it is being applied only in basic ways – detecting anomalies in the performance of machines, for example. 
It could be a while before such data are routinely used to optimize processes, make predictions, or inform decision-making – the uses that lead to efficiencies and innovations. But it will happen. 
And, just as with the adoption of information technology, the first companies to master the Internet of Things are likely to lock in significant advantages, putting them far ahead of competitors by the time the significance of the change is obvious to everyone. 

Social Media’s Junkies and Dealers 
NEW YORK – We were warned. 
The venture capitalist and Netscape founder Marc Andreessen wrote a widely read essay in 2011 entitled, “Why Software Is Eating the World.” 
But we didn’t take Andreessen seriously; we thought it was only a metaphor. 
Now we face the challenge of extracting the world from the jaws of Internet platform monopolies. 
I used to be a technology optimist. 
During a 35-year career investing in the best and brightest of Silicon Valley, I was lucky enough to be part of the personal computer, mobile communications, Internet, and social networking industries. 
Among the highlights of my career were early investments in Google and Amazon, and being a mentor to Facebook founder Mark Zuckerberg from 2006 to 2010. 
Each new wave of technology increased productivity and access to knowledge. 
Each new platform was easier to use and more convenient. 
Technology powered globalization and economic growth. 
For decades, it made the world a better place. 
We assumed it always would. 
Then came 2016, when the Internet revealed two dark sides. 
One is related to individual users. 
Smartphones with LTE mobile infrastructure created the first content-delivery platform that was available every waking moment, transforming the technology industry and the lives of two billion users. 
With little or no regulatory supervision in most of the world, companies like Facebook, Google, Amazon, Alibaba, and Tencent used techniques common in propaganda and casino gambling, such as constant notifications and variable rewards, to foster psychological addiction. 
The other dark side is geopolitical. 
In the United States, Western Europe, and Asia, Internet platforms, especially Facebook, enable the powerful to inflict harm on the powerless in politics, foreign policy, and commerce. 
Elections across Europe and in the US have repeatedly demonstrated that automated social networks can be exploited to undermine democracy. 
The Brexit referendum and the US presidential election in 2016 also revealed that Facebook provides significant relative advantages to negative messages over positive ones. 
Authoritarian governments can use Facebook to promote public support for repressive policies, as may be occurring now in Myanmar, Cambodia, the Philippines, and elsewhere. 
In some cases, Facebook actually provides support to such governments, as it does to all large clients. 
I am confident that the founders of Facebook, Google, and other major Internet platforms did not intend to cause harm when they adopted their business models. 
They were young entrepreneurs, hungry for success. 
They spent years building huge audiences by reorganizing the online world around a set of applications that were more personalized, convenient, and easier to use than their predecessors. 
And they made no attempt to monetize their efforts until long after users were hooked. 
The advertising business models they chose were leveraged by personalization, which enabled advertisers to target their messages with unprecedented precision. 
But then came the smartphone, which transformed all media and effectively put Facebook, Google, and a handful of others in control of the information flow to users. 
The filters that give users “what they want” had the effect of polarizing populations and eroding the legitimacy of fundamental democratic institutions (most notably, the free press). 
And the automation that made Internet platforms so profitable left them vulnerable to manipulation by malign actors everywhere – and not just authoritarian governments hostile to democracy. 
As Andreessen warned us, these companies, with their global ambition and reach, are eating the world economy. 
In the process, they are adopting versions of Facebook’s corporate philosophy – “move fast and break things” – without regard for the impact on people, institutions, and democracy. 
A large minority of citizens in the developed world inhabits filter bubbles created by these platforms – digital false realities in which existing beliefs become more rigid and extreme. 
In the US, approximately one-third of the adult population has become impervious to new ideas, including demonstrable facts. 
Such people are easy to manipulate, a concept that former Google design ethicist Tristan Harris calls “brain hacking.” 
Western democracies are unprepared to deal with this threat. 
The US has no effective regulatory framework for Internet platforms, and lacks the political will to create one. 
The European Union has both a regulatory framework and the necessary political will, but neither is adequate to the challenge. 
The EU’s recent judgment against Google – a record $2.7 billion fine for anti-competitive behavior – was well conceived, but undersized. 
Google appealed, and its investors shrugged. 
It may be a good start, but it was clearly insufficient. 
We are at a critical juncture. 
Awareness of the risks posed by Internet platforms is growing from a small base, but the convenience of the products and psychological addiction to them are such that it may take a generation to effect change from the user side, as it did with anti-smoking campaigns. 
Recognition of the corrosive effect of platform monopolies on competition and innovation is greater in Europe than in the US, but no one has found an effective regulatory strategy. 
Awareness that the platforms can be manipulated to undermine democracy is also growing, but Western governments have yet to devise a defense against it. 
The challenges posed by Internet platform monopolies require new approaches beyond antitrust enforcement. 
We must recognize and address these challenges as a threat to public health. 
One possibility is to treat social media in a manner analogous to tobacco and alcohol, combining education and regulation. 
With the World Economic Forum meeting in Davos, the threat from Internet platform monopolies should be a top concern for attendees. 
For the sake of restoring balance to our lives and hope to our politics, it is time to disrupt the disrupters. 

Preventing the Balkanization of the Internet 
BEIJING – The recent revelation that more than 50 million Facebook profiles were harvested by app and given to political consultancy Cambridge Analytica has produced a backlash against the platform. 
But it is just the latest example of the risks associated with the Internet, which forms the core of today’s digital revolution. 
Most of the digital innovations that have reshaped the global economy over the last 25 years rely on network connectivity, which has transformed commerce, communication, education and training, supply chains, and much more. 
Connectivity also enables access to vast amounts of information, including information that underpins machine learning, which is essential to modern artificial intelligence. 
Over the last 15 years or so, mobile Internet has reinforced this trend, by rapidly increasing not just the number of people who are connected to the Internet, and thus able to participate in the digital economy, but also the frequency and ease with which they can connect. 
From GPS navigation to ride-sharing platforms to mobile-payment systems, on-the-go connectivity has had a far-reaching impact on people’s lives and livelihoods. 
For years, it was widely believed that an open Internet – with standardized protocols but few regulations – would naturally serve the best interests of users, communities, countries, and the global economy. 
But major risks have emerged, including monopoly power for mega-platforms like Facebook and Google; vulnerability to attacks on critical infrastructure, including financial-market systems and electoral processes; and threats to privacy and the security of data and intellectual property. 
Fundamental questions about the Internet’s impact on political allegiance, social cohesion, citizen awareness and engagement, and childhood development also remain. 
As the Internet and digital technologies penetrate economies and societies more deeply, these risks and vulnerabilities become increasingly acute. 
And, so far, the predominant approach to managing them in the West – self-regulation by the companies that provide the services and own the data – does not seem to be working. 
Major platforms can’t be expected to remove “objectionable” content, for example, without guidelines from regulators or courts. 
Given this, we seem to be facing a new transition from the open Internet of the past to one subject to more extensive control. 
But this process carries risks of its own. 
Though there is a strong case for international cooperation, such an approach seems unlikely in the current climate of protectionism and unilateralism. 
It is not even clear that countries will agree to treaties banning cyber warfare. 
Even if some semblance of international cooperation were mustered, non-state actors would continue to act as spoilers – or worse. 
Against this background, it seems likely that new regulations will be initiated largely by individual states, which will have to answer difficult questions. 
Who is responsible – and liable – for data security? 
Should the state have access to user data, and for what purposes? 
Will users be allowed to maintain anonymity online? 
Countries’ answers to such questions will vary widely, owing to fundamental differences in their values, principles, and governance structures. 
For example, in China, the authorities filter content deemed to be inconsistent with state interests; in the West, by contrast, there is no entity with legitimate authority to filter content, except in extreme cases (for example, hate speech and child pornography). 
Even in areas where there does seem to be some consensus – such as the unacceptability of disinformation or of foreign meddling in electoral processes – there is no agreement on the appropriate remedy. 
The lack of consensus or cooperation could lead to the emergence of national digital borders, which would not only inhibit flows of data and information, but also disrupt trade, supply chains, and cross-border investment. 
Already, most US-based technology platforms cannot operate in China, because they cannot or will not accept the authorities’ rules about state access to data and control over content. 
Meanwhile, the US has blocked the Chinese company Huawei from investing in software startups, providing network equipment to wireless carriers, or (along with ZTE) selling mobile phones in the US market, owing to the firm’s alleged ties to the Chinese government. 
Huawei and ZTE both maintain that their activities are purely commercial, and that they play by the rules wherever they operate, but US officials continue to insist that the companies pose a security risk. 
By contrast, nearly all European countries, including the United Kingdom, are receptive to Huawei and ZTE, both of which are major players in Europe. 
Yet Europe is creating its own barriers, with new data-protection and privacy rules that may well impede the application of machine learning. 
Unlike China and the US, Europe is not yet home to a mega-platform of the type that is leading the way in machine-learning innovations. 
With the entire global economy becoming inextricably linked to the Internet and digital technologies, stronger regulation is more important than ever. 
But if that regulation is fragmented, clumsy, heavy-handed, or inconsistent, the consequences for economic integration – and, in turn, prosperity – could be severe. 
Before the world adopts ineffective or counterproductive solutions, policymakers should think carefully about how best to approach regulation. 
If we cannot agree on every detail, perhaps we can at least identify a set of shared principles that can form the basis of multilateral agreements that proscribe destructive activity such as the misuse of data, thereby helping to preserve an open global economy. 

Has Interpol Become a Tool of Oppression? 
LONDON – Arrests of journalists in Spain and Ukraine on the basis of Interpol notices have raised serious questions about the methods of the international police agency. 
For media professionals in particular, the trends are deeply worrying. 
The cases in Spain and Ukraine are not isolated incidents. 
Countries opposed to a free press are increasingly using Interpol’s “wanted person” alerts to target and silence journalists who have fled. 
Since July, Fair Trials and Reporters Without Borders (RSF) have responded to a number of cases in which reporters have been arrested and detained on the basis of Interpol information. 
Countries circulating these orders include Azerbaijan, Turkey, Uzbekistan, and Kazakhstan. 
The circulation of wanted person alerts, which include “notices” and “diffusions,” is one of Interpol’s key functions. 
These alerts, transmitted to police databases worldwide, identify the subject as a wanted criminal. 
These notifications have far-reaching consequences, and as we have learned, can easily be abused. 
For example, in recent months, journalists like Hamza Yalçin, Fikret Huseynli, Narzullo Akhunzhonov, and Can Dündar, targeted by their governments for simply doing their jobs, have all been flagged by Interpol. 
When used properly, an Interpol alert is a critical tool for fighting global crime. 
The subject of an Interpol alert can face lengthy periods in detention while challenging extradition. 
Clearing your name can be difficult. 
Even when an alert is removed from Interpol’s databases, you can continue to face the threat of arrest when traveling, or be refused visas in a never-ending cycle of persecution. 
Wanted person alerts are not the only way that Interpol’s mechanisms are being abused. 
In September 2016, Syrian journalist Zaina Erhaim had her passport seized by British border authorities at London’s Heathrow Airport after it was falsely reported stolen in the Interpol system. 
Similar efforts to use Interpol to restrict the travel of unfriendly journalists have been reported elsewhere. 
Interpol was created in 1923 to help countries coordinate in the fight against cross-border crime and terrorism. 
Its mission is simple: to “make the world a safer place.” 
But while the goal is noble, not all of its 192 member countries stick to the rules. 
Interpol’s members include some of the world’s most oppressive governments, whose leaders routinely misuse their own criminal justice systems to silence free speech and political opposition. 
These authoritarian regimes think nothing of using Interpol to target reporters in exile. 
When Interpol alerts are misused in this way, oppression gains an international stamp of approval. 
This is why tackling abuse of the Interpol system is so crucial. 
While it is lamentable that countries like Turkey, China, and Egypt persecute journalists at home, we must not allow Interpol to become complicit in such behavior. 
The international community must show its commitment to free speech by making it clear that reporters forced to flee their homelands will be protected and allowed to continue their work. 
Interpol has the tools to strengthen its notification systems. 
The agency has shown an impressive commitment to change, introducing new rules to protect refugees, for example, and creating a more robust complaints mechanism. 
Moreover, the agency’s constitution, which each member country must sign, requires that Interpol not engage in political cases and that its actions respect the United Nations Universal Declaration of Human Rights, which includes the right to freedom of expression. 
And yet countries continue to use Interpol as a means of silencing journalists, and the agency’s leaders aren’t managing to stop them. 
Part of the challenge is procedural. 
Every year, Interpol issues more than 11,000 “Red Notices” – alerts that ask member countries to locate and arrest an individual pending extradition. 
Interpol has started to review these notices before they are sent out. 
But countries can get around this by using Interpol to circulate “diffusions” – requests for police cooperation that are less formal than notices, but often produce a similar result. 
They are sent to police forces around the world before any formal review is undertaken. 
And while Interpol does eventually conduct a review before uploading a diffusion to its database, by then, any damage has already been done. 
Clearly there is a need to balance speedy police work with mechanisms that discourage abuse. 
But, beyond increased vigilance by the agency itself, what can the international community do? 
For starters, member countries should demand that Interpol dedicate resources and funding to an urgent review of the thousands of alerts sitting on its system. 
Interpol also needs to reform the diffusion system. 
If it cannot recall abusive diffusions from member countries’ databases, it must review them before they are circulated in the first place. 
Countries that abuse, or try to abuse, Interpol’s systems, must also be held to account. 
And police departments around the world should exercise more caution before acting on an alert they receive through Interpol. 
Interpol’s credibility is at stake. 
As any newspaper editor knows, audiences will eventually tune out if they are continually bombarded with inaccurate or misleading content. 
The same is true for Interpol’s information. 
In an increasingly globalized world, international mechanisms like Interpol are essential to keeping us safe. 
But if these organizations are hijacked by those committed to silencing free speech, they risk becoming part of the problems they were created to solve. 

Interpreting Facts the Bush Way 
Last month's American election saw the two sides throw facts, figures, interpretations, and counter-interpretations at the hapless electorate. 
It is an old trick: throw enough mud and some of it will stick. 
Confuse the voters enough, and eventually more will be likely to stay with the horse they know. 
Most of the media not controlled by the right wing tried to play the role of honest broker, giving equal weight to each interpretation. 
If one side said the sky was blue and the other said it was orange, journalists would work hard, for the sake of appearing balanced, to find some academic, even a color blind one, willing to say that the sky was indeed orange. 
But is it all just a matter of opinion? 
Are all interpretations equally valid? 
I can answer that question only in my own area expertise, economics. 
With the election over, the debate itself has much to teach us about economics, economic policy, and media spin. 
President Bush cited seeming huge job growth in the last 13 months, claiming that America's labor market turned the corner. 
Is this true? 
The claimed increase in jobs has barely kept up with growth in the labor force. 
Although job growth in October was robust at last, in September there were only 96,000 new jobs, 50,000 short of what was needed. 
But at this point in the business cycle, the United States normally should be creating jobs at a rapid pace to make up for job losses earlier in the cycle - as it did in 1993-1995. 
In fact, this is the worst job recovery after any of America's nine postwar recessions. 
No spin can alter this fact. 
America has not turned the corner. 
On the contrary, most forecasters expect 2005 to be weaker than 2004, with growth insufficient to eliminate the "job deficit" - the gap between the number of jobs needed during the past four years to provide employment for new labor-market entrants and the actual number of jobs created. 
But don't blame Bush. 
The economy was in a downturn when he took office in 2001, and 9/11 and Iraq made matters worse. 
True, the economy was slowing when Bush took office, but he also inherited an enormous fiscal surplus, amounting to 2% of GDP, which he transformed into a yawning deficit, equaling 4.5% of GDP. 
Normally, a fiscal turnaround of this magnitude would provide massive stimulus. 
The economy should be going gangbusters. 
Inflation - not jobs - should be the main worry. 
This has not happened because Bush pushed a tax cut that was not designed to stimulate the economy, but to benefit the rich. 
A tax cut to low-income individuals or increased unemployment benefits would have provided far more stimulus to consumption, just as a temporary investment tax credit would have boosted capital spending far more than reducing taxes on dividends did. 
In fact, fixed business investment as a share of GDP is some 2% lower today than 4 years ago. 
True, the terrorist attacks on America and the Iraq war hit the economy hard. 
But it was evident even before 9/11 that Bush's medicine wasn't working. 
In his annual economic report in February 2002, and again in February 2003 and February 2004, Bush confidently - and wrongly - predicted that his tax cut would create millions of jobs. 
Finally, Bush cannot be given a pass on the Iraq war and its economic consequences. 
Critics warned that the war would cause instability in Iraq and the Middle East, and that this would lead to high oil prices. 
Bush ignored these warnings. 
But the critics were right. 
Today, two factors threaten America's recovery. 
First, high household debt means that if interest rates rise, as they do in a normal recovery, households will find themselves strapped. 
Moreover, real estate prices might fall dramatically, in which case many households may find the value of their mortgage exceeding the value of their house. 
US bankruptcy rates are already up 33% over four years ago. 
But can Bush really be blamed for Americans' borrowing too much? 
He can and should. 
Failure to design an effective fiscal stimulus shifted the burden to monetary policy. 
Interest rates were brought to new lows, which helped the economy, but without stimulating much investment. 
Monetary loosening worked only because households took on more debt, leaving the economy more vulnerable to rising interest rates. 
The second threat to economic recovery is high oil prices. 
Bush's failed Mid-East policy is only part of the problem. 
He could, and should, have pushed for strong energy conservation measures; had he done so four years ago, America's consumption - and oil prices - would be lower today. 
Japan and other developed countries prove that a high standard of living requires only a fraction of the energy per dollar of GDP. 
Instead, Bush pushed for subsidies to oil companies to encourage more domestic production. 
This "drain America first" policy will leave America more vulnerable in the future. 
We know from the recent US election campaign that facts do not always speak for themselves. 
Yet it doesn't take much to work out where America's economy is today, where it's heading, and who's to blame. 
But more important than assessing blame is correcting mistakes. 
Unfortunately, President Bush has been as reluctant to admit the mistakes of his economic policy as he has in the case of his Iraqi misadventure. 
Without grasping what has gone wrong in either area, it will be difficult to avoid repeating the same mistakes. 

Golden Slumbers 
CAMBRIDGE – In principle, holding gold is a form of insurance against war, financial Armageddon, and wholesale currency debasement. 
And, from the onset of the global financial crisis, the price of gold has often been portrayed as a barometer of global economic insecurity. 
So, does the collapse in gold prices – from a peak of $1,900 per ounce in August 2011 to under $1,250 at the beginning of July 2013 – represent a vote of confidence in the global economy? 
To say that the gold market displays all of the classic features of a bubble gone bust is to oversimplify. 
There is no doubt that gold’s heady rise to the peak, from around $350 per ounce in July 2003, had investors drooling. 
The price would rise today because everyone had become convinced that it would rise even further tomorrow. 
Doctors and dentists started selling stocks and buying gold coins. 
Demand for gold jewelry in India and China soared. 
Emerging-market central banks diversified out of dollars and into gold. 
The case for buying gold had several strong components. 
Ten years ago, gold was selling at well below its long-term inflation-adjusted average, and the integration of three billion emerging-market citizens into the global economy could only mean a giant long-term boost to demand. 
That element of the story, incidentally, remains valid. 
The global financial crisis added to gold’s allure, owing initially to fear of a second Great Depression. 
Later, some investors feared that governments would unleash inflation to ease the burden of soaring public debt and address persistent unemployment. 
As central banks brought policy interest rates down to zero, no one cared that gold yields no interest. 
So it is nonsense to say that the rise in the price of gold was all a bubble. 
But it is also true that as the price rose, a growing number of naïve investors sought to buy in. 
Lately, of course, the fundamentals have reversed somewhat, and the speculative frenzy has reversed even more. 
China’s economy continues to soften; India’s growth rate is down sharply from a few years ago. 
By contrast, despite the ill-advised fiscal sequester, the US economy appears to be healing gradually. 
Global interest rates have risen 100 basis points since the US Federal Reserve started suggesting – quite prematurely, in my view – that it would wind down its policy of quantitative easing. 
With the Fed underscoring its strong anti-inflation bias, it is harder to argue that investors need gold as a hedge against high inflation. 
And, as the doctors and dentists who were buying gold coins two years ago now unload them, it is not yet clear where the downward price spiral will stop. 
Some are targeting the psychologically compelling $1,000 barrier. 
In fact, the case for or against gold has not changed all that much since 2010, when I last wrote about it. 
In October of that year, the price of gold – the consummate faith-based speculative asset – was on the way up, having just hit $1,300. 
But the real case for holding it, then as now, was never a speculative one. 
Rather, gold is a hedge. 
If you are a high-net-worth investor, or a sovereign wealth fund, it makes perfect sense to hold a small percentage of your assets in gold as a hedge against extreme events. 
Holding gold can also make sense for middle-class and poor households in countries – for example, China and India – that significantly limit access to other financial investments. 
For most others, gold is just another gamble that one can make. 
And, as with all gambles, it is not necessarily a winning one. 
Unless governments firmly set the price of gold, as they did before World War I, the market for it will inevitably be risky and volatile. 
In a study published in January, the economists Claude Erb and Campbell Harvey consider several possible models of gold’s fundamental price, and find that gold is at best only loosely tethered to any of them. 
Instead, the price of gold often seems to drift far above or far below its fundamental long-term value for extended periods. 
(This behavior is, of course, not unlike that of many other financial assets, such as exchange rates or stock prices, though gold’s price swings may be more extreme.) 
Gold bugs sometimes cite isolated historical data that suggest that gold’s long-term value has remained stable over the millennia. 
For example, Stephen Harmston’s oft-cited 1998 study points to anecdotal evidence that an ounce of gold bought 350 loaves of bread in the time of Nebuchadnezzar, king of Babylon, who died in 562 BC. Ignoring the fact that bread in Babylon was probably healthier than today’s highly refined product, the price of gold today is not so different, equal to perhaps 600 loaves of bread. 
Of course, we do not have annual data for Babylonian gold prices. 
We can only assume, given wars and other uncertainties, that true market prices back then, like today, were quite volatile. 
So the recent collapse of gold prices has not really changed the case for investing in it one way or the other. 
Yes, prices could easily fall below $1,000; but, then again, they might rise. 
Meanwhile, policymakers should be cautious in interpreting the plunge in gold prices as a vote of confidence in their performance. 

Doctors Should Stop Defining Sexual “Normality” 
NEW YORK – On October 26, 1996, a small group of activists picketed outside an American Academy of Pediatrics conference in Boston to draw attention to the fact that cosmetic surgeries were routinely being performed on intersex children and newborns. 
Now, October 26 is Intersex Awareness Day every year. 
To mark the occasion in 2017, intersex advocate Pidgeon Pagonis led a protest in front of the Ann & Robert H. Lurie Children’s Hospital of Chicago. 
Over a decade ago, doctors at the hospital performed a medically unnecessary surgery to alter Pidgeon’s clitoris, vagina, and gonads without Pidgeon’s consent. 
For Pidgeon and the others in attendance, the protest was both political and deeply personal. 
In anticipation of the protest, the hospital issued a friendly public statement, saying, “We are committed to open communication with the Intersex community and fully respect the diversity of opinions that exist in affected individuals.” 
And yet a leaked internal communiqué from the hospital struck a rather different note. In it, the hospital’s public-relations department described the protesters as advocates of “an extreme position on the issues related to intersex individuals.” 
These are two rather different messages. 
The first expresses openness to dialogue, while the second dismisses intersex advocates as extremists. 
But, taken together, the conflicting messages reveal some of the underlying assumptions about surgery on intersex children. 
More to the point, they shed light on why doctors continue to perform medically unnecessary, high-risk procedures on intersex children who are too young to consent, even though the practice has been controversial for decades within the medical community. 
Surgery conducted on most intersex infants is cosmetic: its aim is not to ensure proper bodily functions according to medical needs, but rather to bring the appearance of the body into line with established gender norms. 
The goal is to produce typical-looking males and females by erasing any ambiguity. 
Of course, some doctors justify these procedures in terms of psychological wellbeing. 
They argue that surgery is a humane intervention for children with ambiguous sex characteristics who might otherwise struggle to fit in with their peers. 
And they say they are helping parents, for whom they can produce a “normal”-looking child. 
In fact, Lurie Children’s website actually advertises surgeries to “reduce the size of a large clitoris” and “help correct girls’ anatomy.” 
Intersex activists argue that social attitudes and medical practices – not their bodies – are the problem. 
In confronting harmful stigmas, they have common cause with their lesbian, gay, bisexual, and transgender counterparts. 
Not too long ago, “conversion therapy” for gay or lesbian people – sometimes involving electro-shock procedures – was an accepted medical practice. 
And transgender people still commonly receive medical diagnoses that turn identity into pathology. 
Past experience shows that social attitudes, not individuals, need to change. 
Consider the International Day Against Homo-, Bi-, and Trans-phobia, which is held on May 17 every year to commemorate the World Health Organization’s 1990 decision to remove homosexuality from its classification of mental disorders. 
This change in medical consensus required a widespread cultural shift toward understanding homosexuality as a natural variation of human experience. 
Likewise, we already know that intersex bodies are a natural variation on a spectrum of body types. That being the case, we should not allow discomfort with ambiguity to be imposed on the bodies of children who are too young to speak or understand what’s going on. 
This applies especially to medical practitioners who perform cosmetic surgery on intersex infants. 
They need to take a step back and examine the cultural assumptions underpinning their medical opinions. 
To understand how cultural change can take place, it helps to take an anthropological approach, which invites us to study other societies, and to look at our own culture from a different perspective. 
When we do this, what once seemed strange about another culture becomes familiar and understandable, while aspects of our own culture that we took for granted can start to seem rather strange. 
How cultures deal with ambiguity and anomaly is a central question of anthropological inquiry. 
Intersex people’s bodies challenge fundamental cultural assumptions about sex and gender in many societies. 
But now that we have ample knowledge about the issue, we can either critically examine and adjust these assumptions, or we can insist that individuals conform to existing cultural norms and social expectations. 
The current medical paradigm does the latter. 
And yet it is not hard to read the tea leaves on this issue. 
Medical experts from Physicians for Human Rights, the WHO, the American Medical Association board of trustees, and a host of human-rights groups believe that only intersex individuals – not their parents or doctors – should decide whether to undergo surgery. 
Outside the hospital in Chicago in October, protesters held placards with messages such as “Educate, Don’t Operate” and “Our ‘extreme’ position: first do no harm.” 
They’re right. 
Respecting diversity is not an extreme idea. 
The extreme position is that intersex bodies need to be made “typical” through surgical intervention without giving the people who inhabit those bodies a say in the matter. 
Lurie Children’s and other hospitals would do well to reconsider what they are doing. 
When we look back at this issue in the future, it will be clear who – the surgeons or the protesters outside the hospital – was standing on the right side. 

The New Interventionists 
MUNICH – The consequences of Russia’s intervention in Syria stretch far beyond the Middle East. 
The Kremlin’s military campaign has tilted the stalemate in favor of the government and derailed efforts to craft a political compromise to end the war. 
It also heralds the beginning of a new era in geopolitics, in which large-scale military interventions are not carried out by Western coalitions, but by countries acting in their own narrow self-interest, often in contravention of international law. 
Since the end of the Cold War, the debate over international military action has pitted powerful, interventionist Western powers against weaker countries, like Russia and China, whose leaders argued that national sovereignty is sacrosanct and inviolable. 
The unfolding developments in Syria are further evidence that the tables are turning. 
While the West is losing its appetite for intervention – particularly involving ground troops – countries like Russia, China, Iran, and Saudi Arabia are increasingly intervening in their neighbors’ affairs. 
In the 1990s, after genocides in Rwanda and the Balkans, Western countries developed a doctrine of so-called humanitarian intervention. 
“The Responsibility to Protect” (colloquially known as “R2P”) held countries accountable for their people’s welfare and compelled the international community to intervene when governments failed to protect civilians from mass atrocities – or were themselves threatening civilians. 
The doctrine upended the traditional concept of national sovereignty, and in countries like Russia and China, it quickly came to be viewed as little more than a fig leaf for Western-sponsored regime change. 
So it is ironic, to say the least, that Russia is using a concept similar to R2P to justify its intervention, only in this case it is defending the government from its citizens, rather than the other way around. 
Russia’s efforts are, in effect, an argument for a return to the era of absolute sovereignty, in which governments are uniquely responsible for what happens within their country’s borders. 
Russia’s stance also reflects its preference for stability over justice and its acceptance of the legitimacy of authoritarian rule. 
With the proliferation of “color revolutions” in places like Georgia, Ukraine, and Kyrgyzstan, Russia and China have become increasingly wary of popular uprisings. 
The threat of Western intervention, in their view, only compounds the potential for instability. 
Indeed, the Chinese have coined their own stiff foreign-policy jargon for this sentiment: fanxifang xin ganshe zhuyi (loosely translated, “countering Western neo-interventionism”). 
But Russia’s respect for sovereignty has notable limits. 
In Crimea in 2014, the Kremlin embraced a very different doctrine of intervention, justifying its actions in Ukraine on the grounds that it was defending the rights of ethnic Russians. 
This marks a return to a pre-Westphalian world of linguistic, religious, and sectarian solidarity, of the sort Czarist Russia practiced when it regarded itself as the protector of all Slavs. 
Not surprisingly, this justification for intervention is rapidly finding adherents in other parts of the world. 
In the Middle East, Saudi Arabia has adopted a parallel argument for its support of Sunni forces in Yemen and Syria, as has Iran in backing its Shia allies in both countries. 
Even China is increasingly being pushed to take responsibility for its citizens and companies overseas. 
At the beginning of the Libyan civil war, China airlifted tens of thousands of its citizens out of the country. 
All of this has come at a time when the West is losing its military preeminence. 
Improvements in the Russian and Chinese militaries and the increasingly common use of asymmetric strategies by state and non-state actors are leveling the battlefield. 
Indeed, the proliferation of state-sponsored non-state actors in places like Libya, Syria, Crimea, and Donbas is blurring the distinction between state and non-state violence. 
After the Cold War, the West imposed an international order that defined geopolitics worldwide. 
When that order was threatened, Western leaders felt authorized to intervene in the affairs of whatever “rogue state” was causing the problem. 
But now that order is being challenged on several fronts simultaneously – globally by Russia and China, and at the regional level by increasingly assertive players in the Middle East, Latin America, and even Europe. 
As a new order takes shape, the roles countries have played for the last 25 years are likely to be reversed. 
In the West, the concept of sovereignty and the limited use of power is likely to make a comeback, while national leaders who have traditionally called for restraint will become increasingly bold in unleashing their troops. 

Three Ways to Improve Child Health 
SEATTLE – Over the last 15 years, the international community has made great strides in improving child health. 
But, with millions of children under the age of five dying each year from preventable and treatable diseases like diarrhea and pneumonia, the job is far from finished. 
Most people would say that malaria or even HIV/AIDS are the leading child killers. 
In fact, diarrhea and pneumonia top the charts as the biggest threats to child survival – as they have for the more than 30 years that we have been tracking them. 
According to the recently published 2016 Pneumonia and Diarrhea Progress Report, the two diseases caused 1.4 million child deaths last year, and one-quarter of all deaths of children under the age of five. 
They exact their highest toll in South Asia and Sub-Saharan Africa. 
Tackling the two biggest killers of children worldwide may seem daunting, but we have all the knowledge we need to mount an effective response. 
Indeed, we know which viruses, bacteria, and parasites we need to target; which interventions are likely to work; and which countries need them the most. 
Just 15 countries account for 72% of childhood deaths from pneumonia and diarrhea. 
These are the countries on which the Pneumonia and Diarrhea Progress Report focuses. 
Its analysis of national efforts shows that, while most countries have made improvements over the last year, improvement in some of the largest countries has been minimal, and a few countries have not made any progress at all. 
Most deaths happen in the first two years of a child’s life. 
To change this, governments need to step up their efforts to prevent pneumonia and diarrhea, including by ensuring that parents have access to the information they need to protect their children. 
Here, it is critical that ordinary citizens stand up and hold their governments accountable. 
The good news is that there are three relatively simple interventions that could make a big difference. 
The first is breastfeeding. 
An age-old, no-cost intervention, breastfeeding exclusively for the first six months of a baby’s life is one of the easiest ways to prevent both diarrhea and pneumonia. 
Breast milk has all the nutrients babies need to grow, as well as antibodies that boost their immune systems, thereby protecting against illness and helping to accelerate recovery. 
The Progress Report estimates that about half of all diarrhea episodes, and about a third of respiratory infections, could be averted by breastfeeding. 
Yet rates of exclusive breastfeeding during a child’s first six months remain low. 
In ten of the 15 countries evaluated in the Progress Report, fewer than half of mothers exclusively breastfeed their children. 
To increase breastfeeding rates, governments need to ensure that mothers receive the guidance and help they need. 
That means training health workers; establishing community-level support networks, such as mother-to-mother groups; investing in behavioral-change campaigns; and creating a culture in which breastfeeding is welcome and encouraged. 
The second critical intervention is improved water, sanitation, and hygiene in homes and communities. 
Globally, according to UNICEF, around 2.4 billion people still do not have access to modern sanitation, and 663 million do not have access to safe water sources. 
Many kids still lack clean drinking water, access to basic toilets, and good hygiene practices. 
Poor water quality and lack of reliable sanitation systems to treat human waste play a big role in spreading diseases. 
UNICEF reports that something as simple as hand washing with soap can cut rates of diarrhea and respiratory infections by more than 40% and 25%, respectively. 
By investing not only in systems to provide clean drinking water and sanitation, but also in educational programs that encourage better hygiene practices and toilet use, governments can break a vicious cycle of diarrhea and malnutrition that causes irreversible physical and cognitive damage. 
The children they help are more likely to be able to attend school, and grow into healthy, educated adults. 
The third key intervention is vaccination. 
Vaccines represent the most cost-effective intervention for preventing childhood illness, and they already exist for most common bacterial causes of pneumonia (pneumococcus and Hib) and for the leading causes of diarrhea (rotavirus). 
Yet half of the world’s children live in areas where the pneumococcal vaccine is not available through a national immunization program, and only 15% of the children in the world’s poorest countries have access to the rotavirus vaccine. 
By making vaccines available through national immunization programs, governments can protect all children from the diseases that are most likely to harm or kill them. 
Efforts to ensure that families take advantage of vaccination services, including by educating parents about their value, will also be needed. 
Pneumonia and diarrhea should not still be taking children’s lives. 
No single intervention will be enough. 
But the accelerated and coordinated implementation of the three interventions described here could go a long way toward preventing pneumonia and diarrhea, especially for the most vulnerable children, enabling them to lead healthy, productive lives. 

A Very Tolerant Christmas 
LONDON – Christmas is coming – and has been, it seems, since mid-autumn. 
And just in case there was any sign of flagging, we now have Black Friday, an export from the United States, when we are all encouraged to drink deep of the modern Christmas spirit and shop until we drop. 
In my old-fashioned way, I rather disapprove of celebrating “God rest you merry merchants” day. 
Since when were we happy for Christmas to dawn in early November? 
Festivals should happen only when they turn up on the calendar. 
When I was a boy, Christmas arrived on its eve, December 24. 
We went to mass at midnight. 
Afterward, my dad carried me home. 
We woke up the following morning to open presents and prepare for our turkey lunch. 
The day after Christmas was a public holiday with cold turkey and ham to sustain us. 
Then it was back to work on December 27. 
That was that. 
Christmas was over, until December 24 the following year. 
These days, whether you are Christian or not, the feast to mark the birth of Jesus Christ has turned into a winter bacchanal and a huge retailing orgy. 
Of course, there was always a commercial side to Christmas, if only for breeders of poultry and makers of greeting cards. 
But in most countries today, even those with few Christian citizens, the festival offers the chance for a holiday and a binge. 
Sometimes, the symbols of the event become very confused. 
It is reported that one Tokyo department store marked the time of year for shoppers by hanging a huge crucified Father Christmas in its entrance hall. 
Apocryphal or not, the story gives us some idea of the cultural confusion that this midwinter religious feast can cause. 
It is all a long way from the stable in Bethlehem that we read about in the New Testament – a location now ringed by Israel Defense Forces barbed wire. 
Of course, there are places where any sign of celebrating Christmas would trigger immediate persecution. 
In any part of Mesopotamia presently controlled by the Islamic State (ISIS), practicing Christians would lose their heads. 
At its worst, intolerance is literally murderous. 
But there are other forms of intolerance, infinitely less horrifying than that of jihadist bigots, that kill no one but demean us all. 
Think of all those who don’t like to write or say “Happy Christmas,” lest they offend those who are not Christians. 
This self-censorship is rather insulting to Jews, Hindus, and Muslims. 
What cause for offense should they have when Christians celebrate their December feast? 
Does the celebration of Diwali, Eid, or Passover offend Christians? 
It certainly should not, although we can recall terrible periods of Christian intolerance and bigotry. 
In Britain, we recently experienced an example of alleged political correctness that went well beyond such questions. 
The Church of England filmed various Christian groups saying the Lord’s Prayer, one of the foundations of Christian worship. 
The film was to be shown among the advertisements in cinemas. 
But the cinema proprietors banned the film on the grounds that it might give offense. 
Even well-known atheists criticized this mindless act of censorship. 
Intolerance grows, and not just in societies run by jihadists and religious fanatics. 
Across university campuses, particularly in the US but also in Britain, students claim the right to deny others free speech or to rewrite history that offends them – a complete denial of what universities should be all about. 
Censorship and assertions of sensitivity eviscerate scholarship and, with it, the very idea of a university where pluralism defines the meeting of minds. 
Disagreement is the heart of educated debate. 
Destroy that and you destroy the hallmarks of liberal order. 
As the great political philosopher Karl Popper argued, the only thing that we should not tolerate in an open society is intolerance. 
The most extreme example of such intolerance today – which much of the world is now fighting – is the religious totalitarianism of ISIS. 
The extent to which this extremism is a product of Saudi Arabia’s energetic promotion of its Wahhabi ideology is for Muslims to debate themselves. 
But it is increasingly difficult for the outside world to overlook the impact of the Kingdom’s main export, alongside oil. 
The best present we could give to the world this Christmas (regardless of whether we celebrate it religiously or not), would be to dedicate ourselves to championing tolerance everywhere. 
This will require us to address the inverted narratives of victimhood, which are often recruited to justify intolerance. 
The suffering from past wrongs does not justify current and future cruelty. 
This Christmas, the open society is endangered not only from without, by the likes of ISIS, but also by (admittedly far smaller) threats at home – a gloomy reflection, I admit, as we prepare in churches and in high streets to enjoy another year’s winter party. 
So, in the spirit of tolerance: Happy Christmas, whether you are Jewish, Muslim, Hindu, Sikh, atheist, agnostic, consumerist, or Christian. 
As the Irish comedian Dave Allen used to say, “May your God go with you.” 

Invasion of the Culture Snatchers? 
The specter of ``Americanization'' haunts the world. Its consequences are demonized everywhere, sometimes going as far as to draw on the metaphor of a (need I say American) science-fiction movie entitled Invasion of the Body Snatchers, within which hostile aliens imperceptibly take control of our bodies and our minds. 
But hyperbolic rhetoric about invasions misses the complexity of the cultural change taking place all around us. 
Neither side in the debate about Americanization offers a convincing explanation for the phenomenon. 
Those who argue that Americanization is a virulent form of ``cultural imperialism'' apparently see it as a product of growing market domination by American media concerns. 
However, many giant cultural corporations - Japanese-owned Sony, Canadian-owned Seagram, Murdoch's empire or Germany's Bertelsmann - are no longer American, even though they promote American cultural models. 
Even if the media were American-owned, it is too facile to say that consumers of culture the world over are mere clay in the hands of skilled marketing experts. 
It makes more sense to assume that there are some elements of social, psychic, and aesthetic gratification that explain the resonance of American cultural models, and provide for their commercial usefulness. 
The other side in the debate over Americanization emphasizes the liberating, anti-authoritarian power of American popular culture. 
At times, this may be fitting: in 1950's Germany, for example, American youth culture had a strong anti-authoritarian component that helped to undermine authoritarianism and contributed to the process of postwar democratization. 
Only rarely, however, does American-inspired popular culture possess this dimension explicitly. 
More often, its attack on authority takes the form of willful provocations or ever-more uninhibited and graphic depictions of violence. 
At other times, the refreshingly anti-authoritarian appeal of such programs as The Simpsons is commercially exploited to strengthen global media empires, such as Rupert Murdoch's. 
In other words, anti-authoritarianism is not the whole story either. 
We need to look with more nuance at the forward march of American culture instead of demonizing it as a form of crude imperialism or merely celebrating its liberating potential. 
In particular, American popular culture must be viewed in light of the drawn-out historical process of cultural modernization. 
In the past, culture was tied to privilege and wealth. 
Until the 18 th century, books were comparatively expensive; their ownership was limited largely to the propertied classes. 
Moreover, a certain educational grounding (such as knowledge of Latin or Greek) was necessary to make sense of most cultural objects. 
``Popular culture'' is our word for a form of culture that gradually abolished these restrictions. 
Its earliest manifestation, the novel, aided by new print technologies, created a market that allowed for much wider access to literature. 
Knowledge of meter or classical poetics was no longer necessary. 
The novel became the literature of the middle class, and the dime novel , an ``abbreviated novel'' for a dime and slimmed down to magazine-size, expanded readership to the lower strata of society, especially to adolescent readers. 
The development of an ``entertainment culture'' around the turn of the 20 th century, including vaudeville theater, amusement parks, a dance craze triggered by the domestication of black plantation dances, and silent movies, further reduced the prerequisites for cultural understanding. 
The invention of radio and television extended the audience for this new ``mass'' culture even more, and the shift to the priority of pictures and music created a ``universal'' language, not limited to a particular community. 
For a number of reasons, America was in the forefront of this cultural revolution. 
Due to its multi-ethnic and multi-cultural composition, especially in the formative years of modern entertainment culture around 1900, American popular culture was faced with the challenge of a market that anticipated the present global market on a smaller scale. 
This led to the development of broadly comprehensible, non-verbal forms of performance, relying preferably on visual and auditory forms of expression. 
Before Americanization of other societies could occur, American culture itself had to be ``Americanized.'' 
What is the meaning and cultural significance of this process of ``Americanization?'' 
The constant reduction of the prerequisites for making sense of culture may confirm the view that consumers of mass culture are passive. 
Popular music, in particular, is highly effective in insinuating itself into the listener almost imperceptibly; no intellectual processing of its content is required because it makes no claim to inform. 
Instead, moods are created by subliminal effect. 
The characteristic form by which music activates the imagination is by short evocations of out-of-context images, or a diffuse feeling of boundlessness, both of which need not be integrated into any meaningful context. 
Listeners to popular music need not ``earn'' their aesthetic experience through participation. 
Contrary to prior visual forms of cultural expression, including the movies, there is no longer a need for continuity in the flow of images; contrary to what happens with a novel, no mental translation is required because the sensual effect of music creates associations that are shaped not by narrative but by mood. 
The development of popular culture from the novel via the image to the triumph of popular music and the ``center-less'' heterogeneity of television, created forms of cultural expression that are singularly useful for the purposes of imaginary self-extension and self-empowerment. 
The result is an increasing separation of expressive elements from moral, social, even narrative contexts. 
Here is the triumph of ``mood over morals.'' 
Americanization, indeed, is carried by the promise of heightened imaginary self-realization for individuals who are freed from the bonds of social norms and cultural traditions. 
Americanization, thus, cannot be viewed as a tacitly engineered hidden cultural takeover but as a process in which individualization is the driving force. 
This process is most advanced in the US for a number of reasons. 
The promise of a particular form of individualization provides the explanation why American popular culture finds so much resonance in other societies where it has taken hold almost without resistance (mostly carried by a young generation trying to escape tradition). 
Cultural Americanization is thus part of a modernizing process. 
Americanization is not a form of cultural imperialism, but the embodiment of modernity's promise of painless self-realization for each individual, in contrast to the demands made by more traditional concepts of emancipation. 
Globalization, which often appears as the triumph of cultural standardization, in reality undermines standardization. 
No single national culture is the driving force but, instead, globalization is powered by a restless individualism drawing on a growing store of mass symbols. 
So: we are not becoming Americanized. 
We ``Americanize'' ourselves. 


Investing in a Closed-Border World 
CAMBRIDGE – Investors, like astronomers or anthropologists, rely on intellectual models to make sense of a complicated universe, guide immediate choices, and set priorities for further inquiry. 
But, every so often, a freak occurrence forces a reappraisal of what we think we know. 
It could be a black hole. 
It could be a strange fossil. 
Or it could be a political upheaval, like the Brexit referendum in the United Kingdom or the election of Donald Trump as President of the United States. 
As a tumultuous year comes to a close, giddy global markets continue to set new records. 
But investors should not become distracted. 
In 2017, they will need to reappraise how the global economy works, and recalibrate accordingly their assessment of every stock or bond on sale, because even if some market fundamentals remain the same, many others have clearly changed. 
For at least two decades, most investors accepted the consensus among economists and political scientists that the world was getting smaller and more integrated. 
With the rise of China and India, one-third of the world’s population suddenly became workers and consumers in the global economy. 
And new technologies offered cheap communications, advanced robotics, and increasingly powerful data analysis, which enabled companies to slim down their inventories and integrate supply chains. 
Meanwhile, political leaders gradually developed regulatory and trade regimes that eliminated tariffs, simplified border crossings, and opened exciting new markets. 
Good companies tried to take advantage of new opportunities, and investors looked for the firms that showed the most promise. 
According to the World Trade Organization, merchandise and commercial-services exports have quadrupled since 1995. 
Given this track record, when trade performance declined after the 2008 financial crisis, most policymakers assumed that new trade agreements would, again, boost growth. 
US President Barack Obama’s administration, for its part, envisioned a vast free-trade area encompassing both Asia and Europe. 
The two grand agreements that it pursued – the 12-country Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership – would have put the US at the center of an integrated market comprising two-thirds of the global economy. 
But that hope has faded now that populist movements across the West, tapping into public discontent about the dawning world order, have succeeded at the polls. 
Since the radical anti-establishment Syriza’s election in Greece almost two years ago, voters seem to have taken to the idea of national governments standing up to supranational and multilateral organizations such the European Commission and the International Monetary Fund. 
Likewise, many observers have interpreted the Brexit referendum as a bid to reassert control over national borders. 
And while historians will still be debating what led to Trump’s victory long after he has left office, it is already apparent that many of his supporters similarly want America to bolt its door, restock its pantry, and rely more on itself than on foreign friends. 
Taken together, these political outcomes – and the anti-establishment forces on the march ahead of next year’s French and German elections – will halt further global economic and political integration, at least in the near term. 
For now, countries will avoid grand trade deals and make only half-hearted efforts to align their regulations. 
Companies operating internationally will soon face higher costs, as it becomes harder to move goods across state borders and employ foreign workers; their investors, meanwhile, can expect lower returns. 
Even a mild trade tussle between the US and Mexico, for example, could be extremely costly for car manufacturers, given that some components currently cross the US border as many as eight times during the production process. 
And if Boeing were not already reining in its Dreamliner model’s vast global supply chain, it would now be scrambling to do so even faster. 
If voters want to limit the cross-border movement of goods, services, and people, companies will have to adopt a new model that builds in more redundancy within borders; and investors will need to look for firms that can profit with minimal border crossings, or that can still generate a profit despite increased protectionist friction. 
At the margin, the market will put a premium on companies that can quibble with governments and navigate contradictory regulations, rather than those that can boost productivity and open new markets. 
At the same time, the new model that emerges will still have to account for major forces that sustained the old model, especially the forces of globalization and technological innovation that voter resistance will not stop. 
In today’s global economy, the next substantial productivity boost will come from companies analyzing customer and production-line data on a large scale. 
Companies that do this well will be able to design better products, at lower costs; but they will achieve significant gains only if they can compare data across borders and jurisdictions. 
Meanwhile, the immutable logic of the Internet, productivity-enhancing robotics, and the division of labor that Adam Smith first described will force governments to cooperate. 
Savvy investors will look for companies that can withstand the current populist revolt against globalization and take advantage of incipient economic and technological trends. 
Theirs will be a more complicated analysis for more complicated times. 
Like a good astronomer or anthropologist, however, successful investors will find reliable patterns in a sea of crosscutting evidence. 

America’s Second Sputnik Moment? 
CAMBRIDGE – The burgeoning trade war between the United States and China has as much to do with technology as with the balance of trade. 
Reports have surfaced that the US Treasury Department is drafting rules to block Chinese firms from investing in American companies doing business in so-called industrially significant technology, while the Commerce Department is planning new export controls to keep such technologies out of Chinese hands. 
These moves follow US President Donald Trump’s proposal to impose tariffs on $50 billion worth of Chinese products, many of which are on the priority list for “Made in China 2025,” President Xi Jinping’s blueprint to transform China into a global leader in high-tech industries like aerospace, robotics, pharmaceuticals, and machinery. 
Although the Chinese government has refused to modify its initiative, the US is demanding that China end all government subsidies and grants under the program. 
Trade talks have stumbled on this point. 
America’s concern with Made in China 2025 is understandable; 
China’s approach to technology development has been controversial, to say the least. 
But there are better ways to respond to China’s policies. 
Two ways, to be precise. 
First, America and other trade partners must continue to confront China on its intellectual-property (IP) violations and market-access inequities. 
Under free-market competition, one country’s successes in science and technology should not come at others’ expense. 
Innovations like new cancer drugs or faster computing should benefit people everywhere – not only those fortunate enough to live in the country where the discoveries happen to have been developed. 
With a deep pool of talent, China has much to contribute to progress in science and technology; the world should welcome China’s efforts to innovate. 
But the terms of competition and development must be market-conforming, not market-distorting. 
Given China’s spotty record on market access and IP protection, the US is right to consider how the Made in China 2025 strategy will affect American interests. 
Its policymakers should focus, however, on getting the rules of the game right, rather than stopping Chinese innovation per se. 
The second response is even more important: as China develops its innovative capabilities, the US must invest more in its own science and technology base. 
Visionary leaders, rather than cowering in fear of Made in China 2025, should use it to galvanize support for science and technology. 
In other words, “Made in China 2025” could be another “Sputnik moment” for America. 
When the Soviet Union successfully launched Sputnik 1, the world’s first man-made satellite, on October 4, 1957, the achievement sent shock waves through the US government, which responded with huge investments in rocket technology, research, and education. 
In less than a year, President Dwight Eisenhower had approved funding for the National Aeronautics and Space Administration and launched Project Mercury, NASA’s first human spaceflight program. 
In 1959, Congress allocated $134 million to the National Science Foundation, an increase of nearly $100 million from the previous year. 
By 1968, the NSF’s budget had increased to nearly $500 million. During this period, the US government also stepped up research support and poured money into programs to strengthen American students’ skills in math and science. 
Collectively, the US response to Sputnik propelled advances in aeronautical science, microelectronics, integrated circuits, and communications. 
It is not an exaggeration to say that government policies in this period laid the foundation for decades of US dominance in global science and technology development. 
Made in China 2025 demands a similar response. 
But at the moment, America’s commitment to innovation remains grounded. 
Not only is the Trump administration failing to support innovation; it is also actively derailing investments in tech-related research. 
For example, Trump is trying to revive dirty fuels like coal, which powered the first Industrial Revolution, rather than investing in solar, wind, and other renewables that will power the “Fourth Industrial Revolution.” 
Trump is not the only guilty party; 
Congress has been equally uninspired for years. 
According to the American Association for the Advancement of Science, federal funding for research and development in 2017 fell by 23.6% in real terms compared to 2007. 
Since 1976, federal spending on R&D has actually declined as a percentage of GDP – from 1.2% to just 0.7% this year. 
Furthermore, instead of supporting advanced education, the Trump administration has proposed cutting $3.6 billion (a 5.3% reduction) for such support from the 2019 education budget. 
At the same time, the tax legislation passed by the Republican-controlled Congress in December 2017 imposes an unprecedented tax on those university endowments valued at over $500,000 per student. 
While only a handful of schools will be affected, the hardest hit include major centers of research like MIT, the University of Chicago, Harvard, and Stanford – the very institutions the US must rely on to maintain a competitive advantage. 
America needs another Sputnik initiative. 
Innovation hates a vacuum: If the US fails to boost its support for science and technology, other countries should and will fill the void. 
Ultimately, the enemy of American innovation is not trade or Made in China 2025. 
The real enemy is American leaders’ own lack of vision. 

Investing in Health for Economic Development 
At the UN Millennium Summit in September 2000, 180 world leaders pledged to achieve significant advances in the well-being of the world's poor by 2015. 
Several of the key Millennium Development Goals (MDGs) relate to health, in particular controlling epidemic diseases and reducing the death rates of mothers in childbirth and young children. 
To further the Summit's goals, Dr. Gro Harlem Brundtland asked me to head a Commission on Macroeconomics and Health with the aim of charting a path for the world to achieve those MDGs in health and poverty reduction. 
Our Commission released its findings on December 20th. 
Our Commission grappled with the challenge of burgeoning epidemic diseases that are ravaging the poorest countries of the world, especially in Sub-Saharan Africa. 
Despite a considerable diversity of views at the outset of the two-year investigation, the Commission reached a strong consensus after examining extensive evidence from around the world. 
The core findings are easily summarized. 
First, the disease burden in the poorest countries constitutes a fundamental barrier to their economic advance. 
Second, millions of impoverished people die tragic deaths each year from infectious diseases that are preventable and treatable simply because they lack access to the needed health services. 
Third, using existing technologies, it would be possible to save 8 million lives per year by the end of the decade, but only if rich countries help poor countries to obtain these technologies. 
Specifically, the Commission calls for rich countries to put aside one tenth of one percent of their gross national product - or just one penny out of every ten dollars of income - on behalf of health services for the world's poor. 
Since the combined income of rich countries is around $25 trillion per year, this would mobilize $25 billion per year which, when combined with the poor countries' own increased contributions, would dramatically improve the health conditions of the world's low-income countries. 
This modest contribution would save 21,000 lives daily in the poor countries. 
Moreover, the contributions to health would translate into huge economic strides. 
Improved health conditions would help the poor countries to escape from the poverty trap in which they have been stuck for the past decade: poor health has led to poverty and economic stagnation, which in turn has led to poor health. 
If the program is adopted, countries with high fertility rates and rapid population growth will move towards lower fertility rates and slower population growth as households gain confidence that their children will survive to adulthood. 
Population pressures will ease, as will the strain on fragile tropical ecosystems. 
Foreign investors will be able to invest in an African labor force no longer shattered by disease. 
The economic benefits would be more than $360 billion per year from 2015-2020, many times the annual costs of increased health outlays under the program presented in the Report. 
The substantial benefits of donor aid for health have already been demonstrated. 
Unlike some types of aid, where the assistance can be funneled to offshore bank accounts, assistance for health comes in the form of drugs, diagnostic tools, and salary support for doctors and nurses. 
Smallpox was eradicated even in the most remote impoverished countries; polio is well is on its way to eradication. 
Immunization campaigns, when properly funded, have reached huge proportions of very poor children. 
Recent efforts against African River Blindness, leprosy, and trachoma, backed by industrial leaders such as Merck, Novartis, and Pfizer, have also performed wonders. 
The main problem is that the scale of worthy efforts has been a shadow of what is needed. 
The Commission notes that R&D investments directed at the diseases of the poor are likely to have enormous social returns, not only because of recent breakthroughs in science (such as the mapping of the malaria parasite genome), but also because so little is currently invested in these areas. 
Malaria accounts for roughly three percent of the world's disease burden but attracts just one-sixth of one percent of global R&D outlays in biomedical research, largely because most malaria victims are impoverished and therefore ignored by private industry. 
The Commission advocates a series of measures to boost R&D into diseases of the poor, including donor R&D outlays of roughly $3 billion per year, or five percent of the global total. 
The new Global Fund to Fight AIDS, Tuberculosis, and Malaria, which was initiated by U.N. Secretary General Kofi Annan earlier this year and will begin operation in 2002, can be a critical mechanism here. 
Programs will be conceived at the country level and will be submitted to the new fund for financial backing. 
The Commission calls on each potential recipient country to establish national-level commissions to set long-term health priorities and strategies worthy of donor backing. 
The paradox of the global economy is that rich countries are now so rich and poor countries so poor that even small contributions from the rich can perform wonders. 
A penny on ten dollars would make historic breakthroughs in health; another penny on ten dollars could address the critical needs in education as well. 
The idea of controlling epidemic disease and cutting absolute poverty sharply by 2015 is not naïve idealism, but hard-headed thinking amply supported by the best evidence. 
The Commission on Macroeconomics and Health launched its Report on December 20 optimistic that the great battle against disease and poverty will now be joined in earnest. 


Can Investments Be Too Efficient? 
CAMBRIDGE – In 1831, when Charles Darwin boarded The Beagle for its five-year voyage of exploration, ships navigated with the help of chronometers, which showed the precise time at a reference location. 
That time, when compared to the local solar noon, could be used to determine current longitude. 
To ensure precision – the motion of the waves affected timekeeping – a ship needed at least three chronometers. 
The Beagle had 22. 
Like the nineteenth-century voyager, the modern engineer prizes redundancy, in the form of back-up and failsafe mechanisms (most would consider the standard triplicate provision to be adequate). 
Economists, however, privilege efficiency over redundancy – an approach that, despite its obvious merits, also has shortcomings. 
To be sure, it would be a caricature to say that an economist’s perspective disparages backups in safety-critical systems. 
But, when it comes to investment decisions, economists focus on the most efficient use of resources, as revealed by cost-benefit analysis. 
There is obviously a lot of sense in this: public policy – whether spending taxpayer money or regulating business – should return as much value as possible. 
The cost-benefit analysis helps to ensure that excessive optimism does not lead to wasteful spending. 
It can also avert the strategic gaming of investment decisions, driven by, say, competition between regions or among suppliers for taxpayer-funded projects. 
In a new book, The Cost-Benefit Revolution, the American legal scholar Cass Sunstein applauds the gradual expansion of reliance on cost-benefit analyses to guide regulatory policy in the United States since the 1980s. 
Other countries also use cost-benefit analysis, with the United Kingdom’s Treasury, for example, publishing a manual on how to conduct one. 
But efficiency isn’t everything, and the long-term benefits of an investment are not always clear from the start. 
In fact, we should be glad that earlier generations were not tethered to cost-benefit analysis. 
In Victorian London, the engineer Joseph Bazalgette built a sewage system with enough capacity to last for over 150 years; it is only now being expanded. 
Thomas Jefferson thought that the Erie Canal project was madness, yet its cost – around $100 billion in today’s dollars – was recouped relatively quickly. 
No economist wielding plausible estimates of discount rates and expected benefits would have supported the construction of the Sydney Opera House – or any of the iconic municipal buildings gracing many cities worldwide; utilitarian concrete cubes would have been far more efficient. 
The challenge is to distinguish potentially iconic projects from the more common white elephants for which operational and maintenance costs are out of line with value. 
And construction often ends up costing far more than anticipated. 
Bent Flyvbjerg, an expert on mega-projects, describes them as “over budget, over time, over and over again,” showing that nine out of ten have cost overruns – often of 50% or more of the original estimate. 
Part of the challenge in assessing major or (potentially) iconic investment projects is that standard cost-benefit analysis does not work for projects that are likely to change significantly the economy’s growth rate, as the Erie Canal did, by stimulating trade. 
It works only for smaller marginal decisions. 
It certainly does not account for the power of narratives to shape economic outcomes, as described by the Nobel laureate economist Robert J. Shiller. 
Economists should recognize the limitations of cost-benefit analysis and offer a more rigorous method for analyzing the non-marginal, non-linear feedback mechanisms that affect major investments. 
More broadly, efficiency cannot be the sole criterion for organizing the economy. 
That should have become obvious a decade ago, when the systemic vulnerabilities of financial markets, with their single-minded focus on profit maximization, were laid bare. 
Similarly, just-in-time supply chains – which cut costs by reducing the amount of goods and materials held in stock – have proved vulnerable to natural disasters (like floods) or other disruptions (like worker strikes). 
At a time when protectionism is on the rise, the risk of trade disruptions is only increasing. 
From a political perspective as well, optimal efficiency is not always desirable. 
In a democracy, reconciling conflicts of interest among stakeholders may require that we sacrifice some efficiency. 
One might think of it as a form of redundancy that delivers political resilience. 
Determining exactly how much efficiency should be sacrificed, and in which cases, is never easy. 
Even The Beagle may have overdone the redundancy: it returned in 1836 with 11 of its onboard chronometers still working. 
But given the long-term impact of Darwin’s work on that voyage, the benefits vastly outweighed the unnecessary cost. 

Investment for Sustainable Growth 
NEW YORK – The big disappointment in the world economy today is the low rate of investment. 
In the years leading up to the 2008 financial crisis, growth in high-income countries was propelled by spending on housing and private consumption. 
When the crisis hit, both kinds of spending plummeted, and the investments that should have picked up the slack never materialized. 
This must change. 
After the crisis, the world’s major central banks attempted to revive spending and employment by slashing interest rates. 
The strategy worked, to some extent. 
By flooding capital markets with liquidity and holding down market interest rates, policymakers encouraged investors to bid up stock and bond prices. 
This created financial wealth through capital gains, while spurring consumption and – through initial public offerings – some investment. 
Yet this policy has reached its limits – and imposed undeniable costs. 
With interest rates at or even below zero, investors borrow for highly speculative purposes. 
As a result, the overall quality of investments has dropped, while leverage has risen. 
When central banks finally tighten credit, there is a real risk of significant asset-price declines. 
As monetary policy was being pushed to its limits, what went missing was an increase in long-term investments in high-speed rail, roads, ports, low-carbon energy, safe water and sanitation, and health and education. 
With budget austerity restraining public investment, and major uncertainties concerning public policy and international taxation hampering private investment, such spending has generally declined in the high-income countries. 
Despite US President Barack Obama’s promises of investment in high-speed rail and other modern infrastructure, not one mile of fast rail was built during his eight years in office. 
It is time to translate words into action, in the United States and elsewhere, and usher in a new era of high investment in sustainable development. 
There are three challenges facing such a strategy: identifying the right projects; developing complex plans that involve both the public and private sectors (and often more than one country); and structuring the financing. 
To succeed, governments must be capable of effective long-term planning, budgeting, and project implementation. 
China has demonstrated these capabilities in the last 20 years (though with major environmental failures), whereas the US and Europe have been stymied. 
The poorest countries, meanwhile, have often been told by the International Monetary Fund and others not even to try. 
Today, governments will have some help in overcoming at least one of the key challenges. 
The Sustainable Development Goals (SDGs) and the Paris Climate Agreement will help to guide them toward the right projects. 
The world needs massive investments in low-carbon energy systems, and an end to the construction of new coal-fired power plants. 
And it needs massive investments in electric vehicles (and advanced batteries), together with a sharp reduction in internal combustion engine vehicles. 
The developing world, in particular, also needs major investments in water and sanitation projects in fast-growing urban areas. 
And low-income countries, in particular, need to scale up health and education systems. 
China’s “one belt, one road” initiative – which aims to link Asia to Europe with modern infrastructure networks – will help to advance some of these goals, assuming the projects are designed with a low-carbon-energy future in mind. 
That initiative will boost employment, spending, and growth, especially in the landlocked economies across Eurasia. 
It should even deliver new dynamism to economic and diplomatic relations among the European Union, Russia, and China. 
A similar program is needed urgently in Africa. 
Although African countries have already identified priority investments for electrification and transport, progress will remain slow without a new wave of investment spending. 
African countries’ combined spending on education alone should increase by tens of billions of dollars per year; combined infrastructure spending should surge by at least $100 billion per year. 
These needs should be covered mostly by long-term, low-interest-rate loans from China, Europe, and the US, as well as by mobilizing African countries’ long-term savings (through, for example, the introduction of new pension systems). 
The US and Europe also need major new infrastructure programs. 
The US – where the last big infrastructure project, the national highway system, was concluded in the 1970s – should emphasize investment in low-carbon energy, high-speed rail, and the mass uptake of electric vehicles. 
As for Europe, the European Commission’s Investment Plan for Europe – dubbed the “Juncker Plan,” for Commission President Jean-Claude Juncker – should become the EU’s SDG program. 
It should focus, for example, on creating a Europe-wide transmission grid for low-carbon energy, and on a massive increase in renewable-power generation. 
To help finance such programs, the multilateral development banks – such as the World Bank, the Asian Development Bank, and the African Development Bank – should raise vastly more long-term debt from the capital markets at the prevailing low interest rates. 
They should then lend those funds to governments and public-private investment entities. 
Governments should levy gradually rising carbon taxes, using the revenues to finance low-carbon energy systems. 
And the egregious loopholes in the global corporate-tax system should be closed, thereby boosting global corporate taxation by some $200 billion annually, if not more. 
(American companies are currently sitting on nearly $2 trillion in offshore funds that should finally be taxed.) 
The added revenues should be allocated to new public investment spending. 
For the poorest countries, much of the needed investment should come through increased official development assistance. 
There are several ways to generate that extra aid money via a reduction of military spending, including by ending the wars in the Middle East; deciding firmly against a next generation of nuclear weapons; cutting back on US military bases overseas; and avoiding a US-China arms race through enhanced diplomacy and cooperation. 
The resulting peace dividend should be channeled toward health care, education, and infrastructure in today’s impoverished and war-torn regions. 
Sustainable development is not just a wish and a slogan; it offers the only realistic path to global growth and high employment. 
It is time to give it the attention – and investment – it deserves. 

Investment Strategy after the Crisis 
MILAN – Investors have been hit hard by the current crisis. 
Lessons are being learned and investment strategies revised. 
The central lesson for investors seems to me to be that not all components of risk are static, but rather evolve in ways that are not yet fully understood – and that government regulation cannot fully address. 
For that reason, the ability of markets to self-correct should play a role as well, which requires that investment strategies attempt to take the possibility of systemic risk into consideration. 
Threats to the system as a whole can arise in a manner that is difficult to detect, and that can cause risk-mitigation strategies that work well in normal times to malfunction. 
Of course, major systemic disruptions do not occur every year. 
Instead, instability builds up until the system is shocked and resets, with the exact timing unpredictable. 
This means that addressing systemic risk requires a longer timeframe than that associated with the non-systemic, stationary risks to which investors devote most attention. 
Consider a ten-year period and assume that there are nine years of “normal” average returns, followed by a “bad year” caused by the systemic risk component. 
In that case, as an example, if an investment strategy yields an 8% annual return in normal times, a large shock of 20% at ten year intervals would reduce the average 10 returns by 3.19 percentage points, to 4.81%. 
Accounting for systemic risk has several implications. 
For example, an endowment or pension fund might consider basing its payout decisions more on long-run, potential shock-adjusted average returns than on a simple weighted average of past returns or end-period asset values (the normal practice now). 
Of course, you can argue that post-crisis regulatory reform will eventually resolve the problem of periodic systemic risk, and that we will return to the more comfortable world of relatively stationary risk without periodic imbalances. 
But I would not bet on this happening. 
The historical evidence suggests that systemic risk is persistent and resistant to regulatory efforts to eliminate it. 
Financial innovation will proceed along with regulatory arbitrage. 
And, while the international dimensions and sources of systemic risk are increasingly important, thus far we have only limited demonstrated capacity, if any, for dealing with them. 
There are, no doubt, competitive and other consequences to adopting a more conservative approach that factors in periodic systemic risk, and they will vary across institutions. 
The point is not to suggest that there is one right answer, but rather that investment strategy and payout decisions should take into account the longer-term dimensions of risk. 
This is true even for investors who ultimately decide that strategies aimed at generating higher normal and post-shock average returns are worth it. 
One can think of periodic systemic risk as an inherent tendency toward reversion to the mean: short- and medium-term returns can deviate considerably and for extended periods from the expected long-run returns associated with various investment strategies and capabilities. 
Put another way, when returns seem abnormally high for an extended period, they probably are, and something – even if we don’t know in advance what – is likely to bring them down. 
This is particularly relevant to large investors who, unlike traders, cannot totally ignore macroeconomic fundamentals without abandoning reasonable diversification. 
Successful value investors may mitigate risk by shunning what they consider to be overvalued assets. 
Nevertheless, they are not invulnerable, because even fair valuations – or, indeed, undervaluations – are not exempt from the downward pressures of a crisis or the resetting of asset prices after a build-up of systemic risk. 
Clearly, judgment is required. 
My preference is to assume that shocks arrive relatively frequently, but that they vary in size and probability. 
A sensible approach could be to hedge against intermediate-level shocks. 
That might also help mitigate the impact of larger shocks and increase the net return potential during severe shocks (though it might also lower the return potential for more mild shocks). 
In at least one area, liquidity management, many investors learned painful lessons from the crisis. 
The focus has been appropriately on the cash-flow challenges that come from a combination of large illiquid investment portfolios and large systemic shocks that cause adverse shifts in the cash flow models. 
But there are two other aspects of liquidity management that deserve attention. 
First, illiquid investments limit investors’ ability to adjust their portfolios in response to early warnings of an increase in systemic risk. 
Second, in times of widespread distress, liquid portfolios create investment opportunities, as depressed asset prices (often overly so) combine with the capacity to invest while others cannot or will not. 
This means that liquidity has potentially significant value, which rises when systemic problems emerge. 
This value should be “added” to the return that is attributed to various classes of liquid assets in “normal” times, thereby affecting the relative attractiveness of liquid and illiquid assets – and influencing the asset-allocation choices made by various classes of investors. 
All of this highlights the need for new benchmarks for performance and compensation that factor in vulnerability to periodic systemic risk, with special attention to debt and liquidity. 
Low debt and high liquidity should be valued for avoidance of cash-flow distress, ensuring greater flexibility in adjusting asset allocation, and creating opportunities in the aftermath of a crisis. 
Perhaps most importantly, short- and medium-run returns, especially during periods when they are high, should not be taken as accurate signals of long-run returns. 

Inviting the Avoidable 
Maybe it is excessive skittishness, or perhaps it is the result of global financial volatility in recent years – crises in Mexico in 1994-5, East Asia in 1997-98, Russia in 1998, and then in Brazil, Turkey, and Argentina – but we economists are more concerned about monetary affairs and possible future disasters than we have been in many decades. 
This month, the Switzerland-based Bank for International Settlements (BIS) was the latest to worry aloud about the financial risks that the world seems to be building into its future. 
“[A]ll the countries hit by financial crisis... experience[d] a very sharp slowdown,” the BIS says of the recent past. 
It then cites “global current account imbalances,” particularly “the US external deficit,” describing it as “unprecedented for a reserve currency country to have a current account deficit of such magnitude.” 
In short, the world has become “increasingly prone to financial turbulence.” 
The BIS hints at the possibility of a financial crisis that, with the US at its center, would dwarf by at least an order of magnitude all crises that have occurred since 1933. 
Yet, in response to this risk, the BIS issues the standard textbook recommendations. 
Countries whose policies and economies are out of balance should change their policies, thereby restoring balance: “deficit countries should reduce the rate of growth of domestic spending below that of domestic production. 
Allowing their currencies to depreciate in real terms would make their products more competitive, and also provide an incentive for production to shift out of non-tradables into tradables.” 
This is economists’ polite code for the message that the US must gradually cut its budget deficit, while other countries – like China and Japan – must gradually let the value of the dollar fall and that of their own currencies rise. 
So the BIS proposes nothing new or particularly attention-grabbing. 
But if we turn to America’s government, we see an enormous pretense that the current budget deficit is not a problem. 
As Stan Collender, a noted observer of the US federal budget, has commented, “No one with federal budget responsibilities actually seems to be interested in the budget.” 
This is not “because the budget committees are too busy....[T]he House and Senate...are not doing much of anything...[because] they don't want to.” 
Within the Bush administration, Director of the Office of Management and Budget Josh Bolten “has been virtually invisible,” while “the president and vice president...avoid talking publicly about the budget.” 
Let us be clear on this point: it is not that politicians who wish to take the lead on fiscal consolidation are failing to gain traction; it is that there are no politicians – at least none with any agenda-setting influence – who are even trying to steer the US towards adopting a more responsible fiscal policy. 
This is a grotesque failure of leadership. 
Governments that pursue policies – whether US fiscal laxity or China’s exchange-rate peg – that create unsustainable imbalances do so for what they regard as important political reasons. 
Appeals to them to change their policies, and thus contribute to the common global good of financial stability, are fruitless unless others are seen to change their policies, act responsibly, and so contribute to the common good as well. 
International policy coordination requires a leader, a first mover. 
But, while the US, as the world’s largest economy, is best suited for this role, it has so far failed to play its part. 
Treasury Secretary John Snow has spent almost no public time on the budget, but a lot of public time on China. 
Republican political operatives care far less about national savings than they do about manufacturing-sector job losses. 
“So what else is new?” you may ask – and with good reason. 
The list of issues on which the Bush administration has failed to lead is a long one, and failure to take steps to diminish the risks of future financial catastrophe cannot rank very high. 
The entire Bush administration has been a succession of leadership failures, so why harp on its poor financial management? 
Form a purely practical point of view, one reason is that ensuring global financial stability is an issue on which real progress can be made relatively easily. 
The Bush administration may not care that deficit reduction is the right policy for America, but it might care far more if the issue were framed as a prerequisite for policy changes abroad that diminish pressure from imports on domestic manufacturing employment. 

Invocatio Dei and the European Constitution 
In progressive liberal circles, the demand that the Preamble to the Constitution of the European Union include a reference to God and/or the "Christian Roots" of Europe has been met with derision, even contempt. 
Such a reference, it is said, would run afoul of the common European constitutional tradition of state neutrality in matters of religion. 
It would also offend against Europe's political commitment to a tolerant, multicultural society. 
But the opposite is true: a reference to God is both constitutionally permissible and politically imperative. 
Constitutionally, European nations display characteristic richness. 
As a matter of positive constitutional law, all members of the EU, under the tutelage of the European Convention on Human Rights, are committed to the principle of the "Agnostic or Impartial State," which guarantees both freedom of religion and freedom from religion. 
Across Europe, there is a remarkable degree of homogeneity-even if on some borderline issues such as religious headgear in schools or crucifixes, different EU member states balance differently the delicate line between freedom of religion and freedom from religion. 
But when it comes to constitutional symbolism and iconography, Europe is remarkably heterogeneous. 
At one extreme you find countries like France, whose constitution defines the State as secular ( laique ). 
At the other extreme are countries like Denmark and the UK, where there is an established state religion. 
In the UK, the sovereign is not only head of state but also head of the church. 
In between are states like Germany, whose constitutional preamble makes an explicit reference to God, or Ireland, where the preamble refers to the Holy Trinity. 
All in all, about half the population of the EU lives in states whose constitutions make an explicit reference to God and/or Christianity. 
What is remarkable about Europe-a value to be cherished-is that even in such states, the principle of freedom of religion and freedom from religion are fully respected. 
No one could credibly argue that, say, Denmark is less committed to liberal democracy or is less tolerant than, say, France or Italy, despite the fact that Denmark recognizes an official state church and France and Italy are avowedly secular. 
In its substantive provisions, the European Constitution reflects the homogeneity of the European constitutional tradition. 
It is fully committed to the notions of freedom of religion and freedom from religion, as it should be. 
But when it comes to the preamble, the EU Constitution should reflect European heterogeneity. 
It should reflect the European commitment to the noble heritage of the French Revolution, as reflected in, say, the French constitution, but it should reflect in equal measure the symbolism of those constitutions that include an invocatio dei . 
The refusal to make a reference to God is based on the false argument that confuses secularism with neutrality or impartiality. 
The preamble has a binary choice: yes to God, no to God. 
Why is excluding a reference to God any more neutral than including God? 
It is favoring one worldview, secularism, over another worldview, religiosity, masquerading as neutrality. 
How, then, can one respect both traditions? 
The new Polish constitution gives an elegant answer: It acknowledge both traditions: " We, the Polish Nation - all citizens of the Republic, both those who believe in God as the source of truth, justice, good and beauty, as well as those not sharing such faith but respecting those universal values as arising from other sources, equal in rights and obligations towards the common good …" 
A similar solution should be found for the European Constitution. 
Europe cannot preach cultural pluralism and practice constitutional imperialism. 
Indeed, the political imperative is as great as the constitutional one. 
Europe, after all, is committed to democracy worldwide. 
But in the European way of thinking, democracy must be spread pacifically, by persuasion, not by force of arms. 
One of the greatest obstacles to the spread of democracy is the widely held view that religion and democracy are inimical to each other: to adopt democracy means to banish God and religion from the public sphere and make it strictly a private affair. 
Indeed, that is the message that the Franco-American model of constitutional democracy sends to the world. 
But is the particular relationship between church and state at the time of the French and American Revolutions the model that Europe wishes to propagate in the rest of the world today? 
Is the European Constitution to proclaim that God is to be chased out of the public space? 
How long must we be prisoners of that historical experience? 
The state has changed, and the church has changed even more. 
In this area, as in many others, Europe can lead by example and offer an alternative to American (and French) constitutional separationism. 
It can be a living illustration that religion is no longer afraid of democracy and that democracy is no longer afraid of religion. 
The truest pluralism is embodied by states that can, on the one hand, effectively guarantee both religious freedom and freedom from religion, yet acknowledge without fear-even in their constitutions-the living faith of many of their citizens. 
Only this model has any chance of persuading societies that still view democracy with suspicion and hostility. 

Invulnerable Brazil? 
Two questions have dominated economic debate in Latin America in recent years. 
First, when will the current period of great international liquidity end? 
Second, what will happen when it does? 
We could also add a third, related, question: are Latin America’s governments preparing for that day? 
In the case of Brazil, the answer appears ambiguous, at least at first glance. 
On one hand, Brazil has remained more or less at a standstill in terms of economic reform after the start of President Luiz Inácio Lula da Silva’s administration in 2003. 
Essential changes to the tax code, labor law, and pension system have simply not been made. 
On the other hand, whereas, lenders once demanded commitments from Brazil that were often nearly impossible to meet due to the political situation, these same investors now generally seem completely satisfied with Brazil, despite its economic policy paralysis. 
There are objective reasons for this change. 
For the first time in decades, Brazil has been able to take advantage of good economic times to reduce its external debt, thereby lowering the risk to lenders. 
Indeed, Brazil’s foreign debt-to-export ratio in 2006 was the lowest in the past 50 years. 
Moreover, while Brazil’s total gross foreign debt fell by $50 billion during the past eight years, its foreign currency reserves rose rapidly, especially in the past two years, cutting the net foreign debt by more than $120 billion since the 1999 crisis (see table). 
Brazil’s foreign debt (US$ billions) 
Breakdown 1999 2000 2001 2002 2003 2004 2005 2006 2007 
Gross foreign debt 225,6 216,9 209,9 210,7 214,9 201,4 169,5 172,5 175,9 
International reserves 36,3 33,0 35,9 37,8 49,3 52,9 53,8 85,8 109,5 
Net foreign debt 189,3 183,9 174,0 172,9 165,6 148,5 115,7 86,7 66,4 
Data for December. 
For 2007, March. 
Source: Central Bank of Brazil. 
Diminishing debt is important for investors because it shows a trend: if the rate observed in 2006 and 2007 is maintained, Brazil will eliminate net foreign debt by the end of Lula’s second term in 2010. This, together with its strong fiscal position, means that Brazil will be much better “armored” against a foreign crisis than ever before in the modern era. 
Indeed, a country affected by a world recession or by falling export prices is much more vulnerable if its external debt is 40% or 50% of the value of its net exports than if it has little or no net foreign debt. 
When foreign credit dried up for Brazil years ago, the only way to avoid bankruptcy was to call in the IMF. 
Now, if something similar happens, the central bank will have the foreign exchange needed to service its debts while maintaining a stable exchange rate. 
As a result, however, Brazil faces an uncomfortable fiscal dilemma. 
In order to compensate for the increase in money supply associated with the purchase of dollars, the government issues securities that pay a higher interest rate than the central bank receives for investing its reserves overseas. 
While the result in terms of net public debt is neutral, reducing net foreign debt in the public sector – which already is less than Brazil’s international reserves – and increasing domestic debt is not good business in terms of the cost of the official debt. 
This is one reason why it is important that domestic interest rates fall, which in the coming months will very likely happen – and relatively robustly. 
In the coming years, Brazil’s government also should strive for fiscal balance (last year the deficit was still 3% of GDP), and then to attain a surplus, as Chile has done for years now. 
Brazil is preparing partially for the day when the current period of great international liquidity ends. 
While structural reforms have lagged, the economy is far less vulnerable than it was in the past. 

Is Hothouse Earth Avoidable? 
STOCKHOLM – Nearly 50 years ago, the Club of Rome’s report “Limits to Growth” warned that if economic growth continued apace without regard for the environment, the world could face ecological and economic collapse in the twenty-first century. 
Yet that is essentially what has happened. 
As new research for the Club of Rome shows – and the latest report from the United Nations Intergovernmental Panel on Climate Change (IPCC) reiterates – the world may well be headed toward disaster. 
Many wrongly interpreted the “Limits to Growth” as an attack on unbridled economic expansion. 
In fact, the report argued that if the unlimited-growth pathway was chosen, it would require complementary policies (including funding) to preserve the planet’s finite life-support systems. 
This argument has been ignored. 
Instead, the world has continued to pursue unbridled growth, without regard for the environmental consequences. 
This has enabled us to make enormous strides in reducing poverty, increasing longevity, and increasing wealth. 
But it has come at a high cost to the fabric of society and the resilience of the planet. 
As scientists have conclusively shown, in the last decade, we have entered a new geological epoch, the Anthropocene, in which human activity – in particular, economic activity – has been the dominant factor influencing Earth’s climate and environment. 
In the Anthropocene, our planet’s life-support system is changing faster than ever. 
Climate change now represents a clear and present danger. 
If our planet becomes just 2°C warmer than pre-industrial temperatures, we may be placed irreversibly on the path toward “Hothouse Earth” – a scenario in which temperatures are many degrees warmer than today, sea levels are considerably higher, and extreme weather events are more common – and more devastating – than ever. 
This need not be the case. 
For its 50th anniversary, the Club of Rome updated the “Limits to Growth” report’s “World 3” computer model. 
Using economic and social data from the last five decades, the so-called Earth 3 simulation provides new projections about the future impact of human activity. 
We based our analysis on the UN Sustainable Development Goals, agreed upon by world leaders in 2015. 
The 17 SDGs include social objectives like ending poverty and improving health, as well as critical environmental targets, including halting species extinctions, protecting our oceans, and reducing greenhouse-gas emissions. 
To determine whether the world may be able to meet these goals by the 2030 deadline, we considered four scenarios, ranging from business as usual to total economic transformation. 
The business-as-usual scenario, our analysis shows, would not bring significant progress toward achieving the SDGs or boosting environmental sustainability by 2030. 
Perhaps unsurprisingly, the scenario characterized by faster economic growth would also pose a serious threat to environmental sustainability. 
But even a third scenario, which includes stronger policies to protect the environment, would put the planet’s stability at risk. 
In any of these scenarios, human wellbeing could improve in the short term, but would be severely undermined in the longer term, as we blew past planetary boundaries and tipping points. 
There is just one scenario that can deliver improvements to human wellbeing in an environmentally sustainable way: the path of “transformational change,” brought about by a shift to unconventional policies and measures. 
In our analysis, we identify five areas where such change is particularly important. 
We do not claim to have provided a definitive list of transformative reforms the world needs. 
Our key message is that the only way to balance growth and sustainability is through structural and societal transformation on a global scale. 
The good news is that we believe that the transformational scenario presented here is possible. 
There are already signs that market forces can spur a new energy revolution – one that would be both technically feasible and economically attractive. 
Technologies to support sustainable agriculture already exist, with around 29% of all farms already using some form of sustainable farming techniques. 
And, globally, we have reached “peak child,” and the number of children is no longer growing. 
But there remain high political barriers to renewable energy and, even more so, to reducing inequality. 
Making matters worse, in the three years since world leaders agreed to the SDGs, there has been a growing backlash against multilateralism. 
At precisely the moment when global cooperation is most needed, many countries are embracing nationalism, isolationism, and trade protectionism. 
Most rational analysts would argue that keeping the planet healthy enough to support a thriving economy in the long term is a good investment. 
But, as we are seeing today, such long-term thinking does not always lend itself to political success. 
To protect our planet – and, in turn, our civilization – voices like that of the Club of Rome are more important than ever. 

The Latest Climate Science Must Mobilize Us, not Paralyze Us 
SAN JOSÉ – The Intergovernmental Panel on Climate Change (IPCC), the United Nations body tasked with providing scientific evidence and consensus on climate change and its implications for decision-makers and the public, has just issued its latest, long-awaited report. 
The challenge it presents to all of us is huge. 
To avoid severe economic and social shocks and protect essential ecosystems, we urgently need to limit the increase in global temperature to within 1.5° Celsius of the pre-industrial level. 
Achieving the required reductions in greenhouse gas emissions will require boldness, creativity, and some hard choices. 
But Costa Rica’s experience shows that, in the long run, what is gained far outweighs the sacrifices for all. 
Climate change is not the first daunting challenge our country – among the world’s most biodiverse countries per square meter – has had to overcome to preserve its natural beauty. 
Deforestation for cattle grazing nearly halved the land covered by forest over the four decades prior to 1986. 
Government investment in protecting these natural assets was essential, which meant eliminating subsidies for the cattle industry and perverse incentives for agrarian reform. 
With subsidies and negative incentives gone, Costa Rica’s cattle population dropped by a third, taking pressure off grazing lands. 
In the decades since, forests have recovered and now cover more than half the country. 
And while forest cover doubled, Costa Rica’s per capita income tripled. 
From this foundation, the economy has grown sustainably and the country has become a world leader in eco-tourism. 
Now, as this latest IPCC report makes clear, rising temperature is the new threat to both biodiversity and our economy. 
We all must combat it. 
Costa Rica, for its part, has set what President Carlos Alvarado has called the “titanic and beautiful task” of decarbonizing the economy. 
One of the goals of the national decarbonization plan, which will be launched in December, is to ensure that the market properly accounts for the costs of climate change. 
This policy has the effect of rendering fossil fuels economically uncompetitive – and creating incentives to use Costa Rica’s nearly 100% renewable power in the transportation sector to cut our dependence on oil. 
A moratorium on oil and gas exploitation, respected by five different governments, reinforces these incentives. 
Making the energy sector work properly – an objective that unites both environmentalists and economists – means recognizing that a short-term economic boost cannot justify the long-term costs of fossil fuels. 
As a minister and a climate activist, we both agree that government has an important role to play in achieving decarbonization. 
But the work of non-state actors such as local businesses and communities will also be essential. 
For this reason, government policy has focused on boosting community-based low-impact tourism initiatives that value local knowledge. 
The Costa Rican experience shows that environmental stewardship is a job done best by alliances between local people and national leaders, united by the common cause of conservation. 
At its heart, Costa Rica’s approach to climate change is about people, not industry and markets. 
Our commitment to tackling climate change is based on an understanding of the enormous health risks and costs that arise from inaction. 
Costa Rica devotes significant resources to tackling problems like dengue fever and malaria because our people remain our most important asset. 
And staying below the 1.5°C limit will mean 3.3 million fewer cases of dengue fever annually in Latin America and the Caribbean, fewer people at risk of malaria, and less food instability and poor nutrition caused by higher temperatures and unstable weather patterns. 
Costa Rica is proud to be leading the world by putting this approach into practice. 
As a result, we are one of the few countries ready to exceed our commitments under the Paris climate agreement. 
Not all of the changes will be easy, and getting them right will require perseverance and a commitment to adaptability. 
Other countries that agreed as part of the Paris agreement to boost the ambition of their national climate plans by 2020 can learn from our experience in aiming for decarbonization, investing in natural assets, and recognizing the importance of the climate for a healthy population. 
One of the most obvious lessons is the interdependence of these policies. 
Climate change is a collective problem, no single policy is enough, and no country can solve it alone. 
But this interdependence cannot be an excuse for paralysis. 
Limiting warming to 1.5° Celsius is a goal around which we can all unite in diverse ways. 
Next month’s Climate Vulnerable Forum will bring together leaders from the countries that are most vulnerable to climate change for the first entirely virtual summit of heads of state. 
Together with the next key intergovernmental meeting, COP24 in Poland this December, political leaders have an opportunity to prove they understand the science underpinning the IPCC report, and are ready to take ambitious steps to achieve the 1.5° target. 
Unless all of us do so, the consequences will spare none of us. 

A Radically Realistic Climate Vision 
BERLIN – According to the latest report by the Intergovernmental Panel on Climate Change, the world’s main scientific authority on global warming, keeping global temperatures from rising more than 1.5°C above pre-industrial levels is a feasible goal. 
The IPCC’s stance represents a move in the direction of the kind of “radical realism” that many civil-society actors have long advocated. 
The IPCC does not bet on geo-engineering proposals – for example, deep-ocean sequestration of massive amounts of atmospheric carbon dioxide, or “dimming the sun” by spraying the atmosphere with aerosols – to combat global warming. 
These largely theoretical solutions could have untold consequences for people and ecosystems, worsening not only the climate crisis, but also the other social and ecological crises we face. 
Instead, the IPCC focuses on how we can avoid crossing the 1.5°C threshold in the first place. We must, it asserts, decarbonize the global economy immediately to ensure that global CO2 emissions decline by about 45% by 2030 and reach net zero by 2050. 
Achieving this will require not just transforming economic activity, but also confronting destructive power dynamics and social inequalities. 
“Radical Realism for Climate Justice,” a new anthology published by the Heinrich Böll Foundation, sets out strategies developed by international civil-society and social movements to bring about such change. 
In line with the IPCC’s core message, we urgently need a politically managed decline in fossil-fuel production. 
This means putting a brake on oil, coal, and gas production and exploration. 
As the group Oil Change International notes, it does not mean abrupt or panicked action that could lead to a “sudden and dramatic shut-down of fossil fuel production, stranding assets, damaging economies, and harming workers and communities reliant on the energy sector.” 
In building up the renewable-energy sector, we should avoid replicating systems that have driven inequality and entrenched damaging power dynamics in the fossil-fuel sector and other industries. 
This means replacing the market-based, investor-focused approach to energy production with one that treats energy as a public good, while engineering a shift toward social ownership and management of energy supplies. 
Rooted in energy sovereignty and self-determination, this approach would spur faster decarbonization, including by weakening vested interests’ power to resist change. 
It would also facilitate the restructuring of energy systems to serve social and ecological needs. 
Another system-level transformation that would facilitate major emissions reductions would be the creation of a zero-waste circular economy, whereby everything we produce and consume returns safely to nature or is recycled and reused. 
Consider textiles production, which in 2015 generated greenhouse-gas emissions totaling 1.2 billion tons of CO2-equivalents. 
These massive emissions – more than the combined total for all international flights and maritime shipping – reflect a “fast fashion” culture that produces garments as cheaply as possible, with the expectation of constant turnover in people’s wardrobes. 
If each garment were replaced half as often, the industry’s total greenhouse-gas emissions would plummet by 44%. 
A zero-waste circular economy for textiles would include not just more use of the clothes that are produced, but also improved recycling and repurposing of materials, to avoid emissions-producing waste-disposal processes like incineration. 
The biggest gains would come from the introduction of less wasteful production processes. 
Important steps should also be taken regarding land use (encompassing agriculture and zoning changes). 
As the international peasant’s movement La Via Campesina shows, the industrial food system’s emissions – including those from production, fertilizers, transport, processing, packaging, cooling, and food waste, and from deforestation associated with the expansion of industrial agriculture – account for 44-57% of the global total. 
A peasant agro-ecological production system based on food sovereignty, small-scale farming, and agro-ecology could, La Via Campesina argues, halve carbon emissions from agriculture within a few decades. 
This approach is proven to work: small-scale farmers, peasants, fishers, indigenous communities, rural workers, women, and youth already feed 70% of the world’s population, while using only 25% of its agricultural resources. 
There is also a need to restore natural ecosystems that have been destroyed. 
Forests and peatlands, in particular, can sequester several hundred gigatons of CO2 from the atmosphere. 
Their restoration would protect not just biodiversity, but also local people, including the indigenous communities whose land-tenure rights have been systematically violated. 
In fact, retaining and expanding the land area under management by indigenous peoples and local communities could protect over 1,000 GtCO2 worth of carbon stocks. 
According to a report by the Climate, Land, Ambition, and Rights Alliance, ecosystem-based approaches in the land sector and agro-ecological changes to food production and consumption systems – including more local ownership – could deliver 13 GtCO2eq per year in avoided emissions, and almost 10 GtCO2eq annually in sequestered carbon by 2050. 
The result would be 448 GtCO2 in cumulative removals by 2100 – around ten times current global annual emissions. 
Limiting global temperatures to 1.5°C above pre-industrial levels is our best hope of containing the effects of a climate crisis born of historical injustices and deep-rooted inequities. 
The only way to succeed will be to undertake a shift to a new socioeconomic system. 
This means abandoning the single-minded obsession with GDP growth – which has facilitated the proliferation of wasteful production and consumption patterns and fueled economic and social inequality and injustice – in favor of a public-goods approach that serves genuinely to make people’s lives better. 
Demanding such a transformation is not “naive” or “politically unfeasible.” 
It is radically realistic. 
In fact, it is the only way we can achieve social justice while protecting our environment from devastating climate change. 

Iran - a Land of Paradoxes 
Iran is marking the 23 rd anniversary of its Islamic Revolution with nostalgic blasts at ``America, the Great Satan,'' thanks, in part, to President George Bush naming Iran as part of the ``Axis of Evil'' involved in terrorism and the production of weapons of mass destruction. 
Beneath the surface, however, Iran is no longer Ayatollah Khomeini's sharia state. 
Iran does deserve to be classified as a regional and, perhaps, a global promoter of instability; its support for the fundamentalist Islamic terrorism of Hizbollah in Lebanon is, indeed, aimed at further undermining the diminishing chances for an Israeli-Palestinian reconciliation. 
But internal developments in Iran are complex, and demonization of the Islamic Republic is not helpful. 
Neither is a drawing a simple dichotomy between ``conservatives'' and ``reformers,'' the latter led by President Khattami, helpful. 
In many respects, Iran is perhaps the most interesting country in the region, with the greatest potential for development leading to - not to a Western-style democracy - but greater opening and liberalization. 
The paradox is that Iran's potential is embedded in its ideology as an Islamic state. 
After the first turbulent and murderous years of the Iranian revolution, the last few years have shown some remarkable developments. 
Among them: 
Elections: these are confined to an Islamic discourse, and all candidates and parties must secure the imprimatur of the highest Islamic authority in the land before they can be listed on a ballot. 
But despite these restrictions, there is a fierce contest between various groups and interpretations; 
Women can vote and participate actively and publicly in political life. 
Moreover, the general image of Iranian women suppressed behind their black chadors is more complicated than it first seems. 
For example, in medicine: because male doctors are prevented by strict Islamic law from treating women, the government has encouraged the training of female doctors. 
Today, there are many more women doctors in Iran than under the Shah, and the number of women dying at childbirth is among the lowest in the region. 
The government has also instituted a very pro-active birth control program, and has found a way of legitimizing it within an Islamic context, saying ``we want educated Islamic families, not just large Islamic families.'' 
Iran, as a consequence, has one of the lowest birth rates in the region. 
Because elections to the Majlis (Parliament) and the Presidency are contested, they are meaningful. 
It is, for example, clear that President Khattami was elected with the support of women and younger people, and the ``establishment'' candidate was not elected. 
There is nothing like this in any Arab country: In Egypt or Syria (just as in Belarus) there is virtually only one candidate, and he receives between 97-98% of the vote. 
Parliamentary debates are real, and real contested voting takes place. 
Again, this is nothing like the rubber-stamp sham parliaments of countries like Egypt and Syria. 
The shades of gray have real consequences for policy towards Iran: as an Iranian political scientist recently put it at a seminar in Germany, younger people in Iran do feel themselves to be Muslims, and Iran will never become a secular society. 
But they view their Islam as part of their Iranian identity, whereas the older clerics viewed Islam as a universal revolutionary identity. 
These younger people - the Iranian scholar claimed - are first of all Iranian nationalists, and would like to dissociate themselves from Middle Eastern politics, in particular the Arab-Israeli conflict. 
They will continue, of course, to give verbal support for the Palestinian course, but it is not at the top of their agenda. 
In sum, Iran presents a complex, sometimes confusing picture. 
But anyone who knows European history can identify a parallel: the Calvinist, Puritan revolution. 
The Calvinists of Geneva, or Cromwell's Puritans, were - like the mullahs of Teheran - biblio-centric, with a Holy Book as their model for the ideal society. 
Their society was meant to be puritanical, frugal, non-permissive, with laws against conspicuous consumption and luxuries. 
It was also anti-feminist, anchored in patriarchal family structures. 
Because the Calvinists did not accept a Church hierarchy, they - like the Iranian Shi'ites who are not part of the Sunni majoritarian universalism - based their legitimacy on the community of believers and so introduced elections. 
But once you hold real elections, different modes of interpretation of the Holy Book become possible and legitimate. 
Suddenly, there exists a mechanism for participation, control, dissent (limited as it may be) and the introduction of innovative strategies that seek to legitimize change within a traditional context. 
In Europe, after all, Calvin's Geneva - an autocratic theocracy, more similar to Khomeini's Teheran than to any other regime - eventually developed, through English Puritanism, towards modern parliamentary government. 
Indeed, in Britain until the l820's only members of the Church of England could vote in Parliament or be elected to it. 
Will Shi'ite Iran follow a road similar to that of the European Calvinists? 
Nothing is pre-determined; but the parallel is striking. 
For all of today's involvement of some Iranian leaders in terrorism, the picture is more complex, more interesting - and perhaps more promising than President Bush's speech suggests. 

Iran: Last Exit for Diplomacy 
The Iran crisis is moving fast in an alarming direction. 
There can no longer be any reasonable doubt that Iran’s ambition is to obtain nuclear weapons capability. 
However, at the heart of the issue lies the Iranian regime’s aspiration to become a hegemonic Islamic and regional power and thereby position itself at eye level with the world’s most powerful nations. 
It is precisely this ambition that sets Iran apart from North Korea: whereas North Korea seeks nuclear weapons capability in order to entrench its own isolation, Iran is aiming for regional dominance and more. 
Iran is betting on revolutionary changes within the power structure of the Middle East to help it achieve its strategic goal. 
To this end, it makes use of Israel and the Israeli-Palestinian conflict, but also of Lebanon, Syria, its influence in the Gulf region, and, above all, Iraq. 
This combination of hegemonic aspirations, questioning of the regional status quo, and a nuclear program is extremely dangerous. 
Iran’s acquisition of a nuclear bomb – or even its ability to produce one – would be interpreted by Israel as fundamental threat to its existence, thereby compelling the West, and Europe in particular, to take sides. 
Europe has not only historical moral obligations to Israel, but also security interests that link it to the strategically vital Eastern Mediterranean. 
Moreover, a nuclear Iran would also be perceived as a threat by its other neighbors, which would likely provoke a regional arms race and further fuel regional volatility. 
In short, nuclear Iran would call Europe’s fundamental security into question. 
To believe that Europe could keep out of this conflict is a dangerous illusion. 
In this crisis, the stakes are high, which is why Germany, the UK, and France began negotiations with Iran two years ago with the goal of persuading Iran to abandon its efforts to close the nuclear fuel cycle. 
This initiative failed for two reasons. 
First, the European offer to open up technology and trade, including the peaceful use of nuclear technology, was disproportionate to Iran’s fundamental fear of regime change on the one hand, and its regional hegemonic aspirations and quest for global prestige on the other. 
Second, the disastrous US-led war in Iraq has led Iran’s leaders to conclude that the leading Western power has been weakened to the point that it is dependent on Iran’s goodwill, and that high oil prices have made the West all the more wary of a serious confrontation. 
The Iranian regime’s analysis might prove a dangerous miscalculation, because it is likely to lead sooner rather than later to a “hot” confrontation that Iran simply cannot win. 
After all, the issue at the heart of this conflict is this: who dominates the Middle East – Iran or the United States? 
Iran’s leaders underestimate the explosive nature of this issue, and how it is answered, for the US as a global power and thus for its own future. 
Nor, however, is the debate about the military option – the destruction of Iran’s nuclear program through US air strikes – conducive to resolving the issue. 
Rather, it rings of a self-fulfilling prophecy. 
There is no guarantee that attempts to destroy Iran’s nuclear potential and thus of its capability for a nuclear breakout will succeed. 
Moreover, as a victim of foreign aggression, Iran’s nuclear weapons ambitions would be fully legitimized. 
Finally, a military attack on Iran would also mark the beginning of a regional, and possibly global, military and terrorist escalation – a nightmare for all concerned. 
So what should be done? 
There remains a serious chance for a diplomatic solution if the US, in cooperation with the Europeans and thus certainly with the support of the Security Council and the non-aligned states of the Group of 77, offers Iran a “Grand Bargain.” 
In exchange for long-term suspension of uranium enrichment, Iran and other states would gain access to research and technology within an internationally defined framework and under comprehensive supervision by the International Atomic Energy Agency. 
Full normalization of political and economic relations would follow, including binding security guarantees upon agreement of a regional security design. 
The high price for refusing such a proposal has to be made absolutely clear to the Iranian leadership: should no agreement be reached, the West will do everything within its power to isolate Iran economically, financially, technologically, and diplomatically, with the full support of the international community. 
Iran’s alternatives should be no less than recognition and security, or total isolation. 
Presenting Iran with these alternatives presupposes that the West does not fear rising oil and gas prices. 
Indeed, the two other options – Iran’s emergence as a nuclear power or the use of military force to prevent this – would, in addition to all of its horrible consequences, also increase oil and gas prices. 
Everything speaks in favor of playing the economic-financial and technology card vis-à-vis Iran. 
Knowledge of the potentially horrible consequences of a military confrontation and of the equally horrific consequences of an Iran in possession of the atomic bomb must force the US to abandon its policy of no direct negotiations and its hope for regime change. 
It is not enough for the Europeans to act while the Americans continue to look on as the diplomatic initiatives unfold, partaking in discussion only behind the scenes and ultimately letting the Europeans do what they will. 
The Bush administration must lead the Western initiative in harmonized, direct negotiations with Iran, and, if these negotiations succeed, the US must also be willing to agree to appropriate guarantees. 
In this confrontation, international credibility and legitimacy will be the deciding factors, and ensuring them will require far-sighted and cool, calculated American leadership. 
An offer of a “Grand Bargain” would unite the international community and present Iran with a convincing alternative. 
Were Iran to agree to this offer, its suspension of nuclear research in Natanz while negotiations are ongoing would be the litmus test of its sincerity. 
Were Iran to refuse the offer or fail to honor its obligations, it would totally isolate itself internationally and provide emphatic legitimization to further measures. 
Neither Russia nor China could avoid showing solidarity within the Security Council. 
But such an initiative can succeed only if the American administration assumes leadership among the Western nations and sits down at the negotiating table with Iran. 
Even then, the international community would not have long to act. 
As all sides must be aware, time is running out for a diplomatic solution. 

Iran: One Year Later 
WASHINGTON, DC – This month marks the one-year anniversary of the contested re-election of hard-line Iranian President Mahmoud Ahmadinejad, which spurred the country’s largest popular uprisings since the 1979 Islamic revolution. While the regime gradually succeeded in violently quelling the momentum of the opposition Green Movement, the country’s deep internal rifts – both among political elites as well as between government and society – are far from being reconciled. 
Among the numerous post-election casualties was the notion of Iran as an “Islamic Republic.” 
As the late Grand Ayatollah Ali Montazeri put it, the regime’s brutality towards its own people has rendered it “neither Islamic nor a Republic.” 
Another casualty was the legitimacy of Supreme Leader Ayatollah Ali Khamenei. 
For two decades, Khamenei deceptively cultivated an image of an impartial and magnanimous guide, but his defiant public support for Ahmadinejad exposed him as a petty, partisan autocrat. 
Among the unprecedented slogans of last summer’s street protests were thunderous chants of “Khamenei is a murderer, his leadership is void!” 
Under Khamenei’s leadership, an unholy trinity of nouveau-riche Revolutionary Guardsmen, hard-line clergymen, and indoctrinated Basij militiamen increasingly wield power. 
Despite his religious pretensions as a spiritual guide, Khamenei’s future rests largely in the hands of the Revolutionary Guards. 
While opposition to his rule among top clerics in Qom worries Khamenei, opposition within the Revolutionary Guard could be fatal for him. 
Despite the government’s crisis of legitimacy and endemic mismanagement, the Green Movement – nominally led by opposition presidential candidates Mir Hossein Mousavi and Mehdi Karroubi – faces major obstacles. 
Their brain trust is either in prison, under virtual house arrest, or unable to communicate freely. 
They lack organization and strategy. 
As protests began last year, the grass-roots nature of the Green Movement was initially thought to be advantageous, given that it could not be easily decapitated. “Thirty years ago people were sheep and Khomeini was their shepherd,” a prominent Iranian democratic activist told me. 
“Today we don’t have a shepherd, but the people are no longer sheep.” 
Despite their strength in numbers however, Mousavi and Karroubi’s excessive reliance on street protests is misguided. 
While their courageous supporters espouse tolerance and practice non-violence, they are overwhelmed by armed government forces who are willing to kill and die to retain power. 
If the Green Movement is to mount a serious challenge to the government it must incorporate support from bazaar merchants, workers in major industries, transportation unions, and government workers. 
Sustained strikes by these groups would bring the country’s economy to a halt. 
This is a tall order, however, given that Iran’s labor groups, while deeply discontented, are just as amorphous as the Green Movement itself. 
What’s more, Mousavi and Karroubi, perhaps chastened in part by the unfulfilled promises and excesses of the Islamic Revolution – are seemingly in no hurry to see abrupt change. 
Instead, they have pursued a gradualist approach that aims to co-opt and recruit disaffected members of the traditional classes, including clergy and Revolutionary Guardsmen, to the Green Movement. 
The Green Movement’s deliberate approach is complicated by the sense of urgency that the United States, Europe, and especially Israel, feel about the Iranian government’s nuclear ambitions. 
While the role that outside powers like the US can play in affecting political reform in Iran is limited, the Obama administration faces two fundamental challenges in its Iran policy. 
First, how do you reach an accommodation with a regime that seemingly needs you as an adversary? 
While a large majority of Iranians want to make amends with the US, for Iran’s hardliners, enmity toward the US has become a central part of the Islamic Republic’s identity. “If pro-American tendencies come to power in Iran, we have to say goodbye to everything,” conceded Ayatollah Ahmad Jannati, head of the powerful Guardian Council. 
“After all, anti-Americanism is among the main features of our Islamic state.” 
The second challenge for the US is to champion human rights and democracy in Iran without compromising the independence of opposition forces. 
Given the diversity of the Green Movement, there is no clear consensus as to which US policies are most constructive. 
There is a seemingly universal belief that America should absolutely refrain from military action, condemn the Islamic Republic’s human rights abuses, and express moral solidarity with the Iranian people. 
There is little agreement, however, when it comes to more contentious questions, such as the potential efficacy of targeted sanctions. 
Iran’s first post-revolution prime minister, Mehdi Bazargan, reportedly once said that the real leader of the 1979 revolution was not Ayatollah Khomeini but rather the Shah, who united diverse groups of people against him. 
Today, a somewhat similar dynamic exists: the two individuals arguably most responsible for the opposition’s resilience are not Mousavi and Karroubi, but Ahmadinejad and Khamenei. 
Governmental brutality and intimidation can withstand the march of history for years, but not indefinitely. 

Iran, Turkey, and the Non-Arab Street 
PRINCETON – To Western eyes, Middle East politics have again been stood on their head. 
Iran’s theocratic mullahs allowed the election of Hassan Rowhani, a man who announced in his first speech as President-elect that his victory is “the victory of wisdom, moderation, and awareness over fanaticism and bad behavior.” 
Iranians, apparently surprised that the candidate whom a majority of them had backed (over six harder-line candidates) had won, poured into the streets and hailed a victory “for the people.” 
To be sure, it was a carefully controlled election: all candidates who might actually have challenged Supreme Leader Ayatollah Ali Khamenei’s authority were disqualified in advance. 
But, within those limits, the government allowed the people’s votes to be counted. 
Next door, in Turkey, the West’s favorite Islamic democrat, Prime Minister Recep Tayyip Erdoğan, was using bulldozers, tear gas, water cannon, and rubber bullets to clear central Istanbul’s Taksim Square and Gezi Park of peaceful protesters who would not bend to his will. 
Erdoğan’s theory of government seems to be that, because he was elected by a majority of Turks who still support him, anyone who opposes him is a terrorist or a pawn of sinister foreign forces. 
He appears to see no room for legitimate opposition, for the idea that today’s majority can be tomorrow’s minority and that the rules of the game must allow both to be heard. 
Four years ago, when hundreds of thousands of young Iranians flooded the streets of Tehran to protest outgoing President Mahmoud Ahmadinejad’s reelection, the Iranian government shot at them with live rounds. 
The protests were brutally repressed, with participants rounded up, imprisoned, and reportedly raped and tortured, damaging the regime’s standing not only among Iranians, but also among the millions of young Arabs across the Middle East and North Africa who would soon rise up to demand their social and political rights. 
Erdoğan was initially a hero to those same crowds. 
He toured Egypt, Tunisia, and Libya in September 2011 and received a hero’s welcome. 
He presented his Justice and Development Party as the Muslim equivalent of Europe’s Christian Democratic parties, combining economic growth, anti-corruption policies, and free elections. 
Today, Erdoğan’s government looks much more like the governments against which young Arabs rose, targeting journalists and accusing a “high-interest-rate lobby” of speculators of seeking to harm the Turkish economy. 
He has also taken a page from Syrian President Bashar al-Assad’s book, not only demonizing the demonstrators, but also going after the medical personnel who care for them and the hoteliers who shelter them. 
Turkey is certainly not Iran, and vice versa. 
But comparing current developments in the two countries yields lessons that resonate across the Middle East and North Africa. 
Most important, in a world that at least pays lip service to democracy, the voice of “the people” matters. 
It confers a kind of legitimacy that simply cannot be acquired by force and that is ultimately the surest guarantee of investment and growth. 
Of course, “the people” are never truly one: fickle in their loyalties and subject to demagoguery, they often unite in opposition but fracture once in command. 
Nonetheless, the willingness of large numbers of people to stand up (or sit in) for their right to be heard, despite the imminent possibility of violent repression, announces to their fellow citizens and the world that something has gone very wrong. 
Khamenei and his fellow guardians of Iran’s Islamic revolution were able to weather the 2009 storm, but their façade of legitimate power was collapsing. 
Somewhat paradoxically, the election of Rowhani will strengthen their political hand. 
And, though Erdoğan may well be able to force the protest genie back into the bottle, he will be significantly weakened until the next Turkish election. 
A second lesson of recent events in Iran and Turkey is that the spectrum of government in the Middle East and North Africa runs from autocracy and theocracy to varieties of managed democracy. 
No country qualifies as a full liberal democracy – that is, as a political system that combines free and fair elections with constitutional protections of individual rights for all its citizens. 
Iran has long qualified as what the American foreign-policy analyst Fareed Zakaria has called an “illiberal democracy.” 
Turkey, for its part, seemed to be on a path toward true liberal democracy, notwithstanding the criticism of those who pointed to Erdoğan’s jailing of journalists and generals; it is now backsliding for all the world to see. 
A final lesson is that the test of a secure government is whether it can bear to hear itself criticized, even excoriated. 
Erdoğan seems outraged, above all, by Turkish citizens’ temerity to speak up against him. 
After Erdoğan appeared to broker a deal with the protesters regarding the fate of Gezi Park, the planned demolition of which sparked the initial demonstrations, one of my Twitter followers expressed his satisfaction at the outcome and said the demonstrators should now go home, because “three weeks is enough.” 
But enough for what? 
Recall that the Occupy Wall Street protesters in 2011 took over lower Manhattan for two full months. 
New York City officials ultimately did shut down the protest, but largely for health and sanitary reasons and related complaints by neighborhood residents. 
At a press conference on the day the protests began, New York City Mayor Michael Bloomberg said: “People have a right to protest, and if they want to protest, we’ll be happy to make sure they have locations to do it.” 
Meanwhile, in Syria, “the people” rose up, were fired upon, took up arms, were manipulated, and began a cycle of sectarian killing and revenge that can only fracture them further. 
Neither Iran nor Turkey has reached that point. 
Nonetheless, peaceful protest, lawsuits, political negotiation, compromise, and ultimately fresh elections would provide both countries – and many others in the region and beyond – a far better way to resolve their internal tensions than the approaches their leaders currently employ. 

Iran at History’s Fork in the Road 
NEW YORK – History rarely unfolds smoothly or evenly. 
Instead, it tends to be punctuated by major developments – battles, assassinations, breakthroughs – that have consequences that are felt for years. 
Thirty-one years after the revolution that ousted the Shah and brought Islamic rule to Iran, we are at one of those turning points. 
To be sure, we do not know the degree, direction, or pace of change. 
What we do know, however, is that what happens in Iran will materially affect not just that country but the entire Middle East and beyond. 
One future for Iran would be mostly an extension of what already exists, i.e., an Iran run by conservative clerics and an aggressive Revolutionary Guard, with the latter increasingly enjoying the upper hand. 
The Iranian regime would continue to brutally repress its domestic opponents, meddle in Iraq and Afghanistan, arm and fund Hezbollah and Hamas, and, most important, develop the ability to construct one or more nuclear weapons and the means to deliver them. 
The emergence of such a future would present the world with a stark choice: either acquiesce to an Iran that possesses or could quickly assemble a nuclear device, or launch a preventive military attack designed to destroy much of the Iranian nuclear program. 
Iran’s emergence as a nuclear-weapons state would almost certainly tempt several of the main Sunni Muslim countries (Turkey, Egypt, and Saudi Arabia all come to mind) to embark on a crash program to acquire or develop nuclear arms of their own. 
A Middle East comprising several nuclear weapons states is a recipe for catastrophe. 
An armed attack by the United States, Israel, or both on Iran’s nuclear facilities is another possibility. 
One downside of such a prospect that Iran would likely retaliate against US interests and personnel in Iraq and Afghanistan, and, using Hamas and Hezbollah, against Israel and others. 
Iran could also interfere with oil traffic, leading to a spike in prices and delivering a further blow to American and global economic recovery. 
Moreover, while a preventive strike would delay Iran’s nuclear efforts, it would not stop the regime from rebuilding, and it might also create conditions that cause problems for the regime’s domestic opponents. 
But, despite these potential drawbacks, an armed attack on Iran’s nuclear facilities will and should remain a distinct possibility given the enormous strategic costs of a nuclear-armed Iran. 
It is in part to avoid the difficult choice of either living with a nuclear-armed Iran or attacking it that the five permanent members of the United Nations Security Council and Germany have pursued negotiations to limit Iran’s nuclear program and place it under international supervision. 
Russia and China, which claim to oppose the emergence of a nuclear-armed Iran, are now being pressed to support new, tough sanctions to increase the odds it does not happen. 
But if history is a guide, even strong sanctions may not be enough to persuade Iran’s rulers to negotiate constructively and accept meaningful constraints on their nuclear activities. 
These considerations raise the prospect of trying to bring about an alternative future: an Iran with a political leadership that is more moderate at home and abroad, and that forgoes developing a nuclear weapon or anything close to it. 
In addition to providing a better life for Iran’s 70 million people, political change there would weaken both Hamas and Hezbollah, thereby strengthening the relative position of moderates in the West Bank and Gaza and much improving the prospects for peace between Israel and the Palestinians. 
A more moderate Iran would also cause Turkey to reconsider its recent shift away from the West and lead Syria to rethink its foreign-policy orientation, which would create a real opportunity for an Israeli peace deal with Damascus. 
Iraq’s prospects for emerging as a successful country at peace with itself and its neighbors also would be much improved. 
It is rare in history that such widely different but plausible paths stem from a common point. 
It is not difficult, however, to determine which one is preferable. 
This is why additional measures are called for to improve the prospects for political change that brings about an Iranian government prepared to live in peace with its own people and its neighbors. 
Such measures include assisting the Green Movement so that it can maintain access to the Internet, introducing additional sanctions aimed at the Revolutionary Guard, and publicly supporting the political and legal rights of the Iranian people. 
Some governments and individuals are likely to resist these suggestions, believing that such intervention constitutes an unwarranted intrusion into Iran’s sovereignty. 
But in today’s global world, what happens in Iran is more than Iran’s affair. 
Iran’s government has a right to nuclear power to generate electricity, but not to a nuclear weapon. 
It also has obligations to its neighbors, to the world community (not to support terrorism, for example), and to its citizens. 
The world should not sit idly by as Iran’s regime fails to meet these obligations. 

Iran Confronts Reality 
MADRID – Who has not seen what looks like water on a highway on a hot summer’s day? 
Or a three-dimensional image that was actually a picture on a flat surface? 
The nature of illusion is that we mistake what we perceive for reality. 
That is true whether an illusion is cognitive or political. 
Depending on how a particular event develops, it can lead us to formulate erroneous interpretations of what is actually happening. 
Such perceptions are often mediated by ideas and previous experiences. 
And, as Robert Jervis argued in Perception and Misperception in International Politics, published during the Cold War, the illusions that we create have an enormous influence on decision-making – even becoming a fundamental cause of conflict. 
To a certain extent, this is what has happened with analysis of the recent 16th Summit of the Non-Aligned Movement (NAM), held at the end of August in Tehran – the first time Iran has hosted the meeting. 
The summit took place against a background of scant progress in negotiations with Iran on its nuclear program and growing pressure from Israel for the international community to establish a “trigger” – a line that the Islamic Republic must not cross. 
Moreover, regional tensions heightened the perception of the NAM summit’s importance and that of its host. 
In the Middle East, only Iran and Hezbollah support Syrian President Bashar al-Assad’s regime in a civil war that is nearing the point of no return and destabilizing Lebanon and Jordan. 
The NAM played an important role during the Cold War. 
Its vision was shaped by the recent independence struggles of many of its member countries, and its agenda promoted national sovereignty, non-interference, a rebalancing of North-South relations, and support for national liberation movements. 
But the reality that united NAM in the past has changed. 
The Cold War’s bipolar governance structures and a subsequent period of American unilateralism – to which the non-aligned states attempted to act as a counterbalance – have given way to a much more complex and interdependent multi-polar world. 
While the United States and Europe are still struggling to overcome a serious economic crisis, many NAM members, such as India, Chile, and Singapore, have maintained relative strong growth and form a part of new global governance structures, such as the G-20. 
Likewise, many of the problems that we now face – whether climate change, financial crisis, development challenges, terrorism, or nuclear proliferation – reflect growing global interdependence. 
Managing them effectively obliges us to rethink the concept of sovereignty. 
These changes have transformed not only the traditional structures of power, but also the leitmotif of NAM and the fate of its members. 
Globalization has fueled ever-widening disparities among its members – just compare Colombia with Afghanistan, or Chile with Sudan – that make it difficult to transform sheer numbers into coherent influence. 
The impact of the Tehran summit, and whom it may have benefited, is not entirely clear. 
Iran certainly regarded the meeting as a propaganda opportunity, promising wide media coverage at a time when it was in the eye of a diplomatic hurricane. 
But the participants’ inability to reach a common position on their hosts’ nuclear program or the violence in Syria – two of the fundamental questions that confronted the summit – obviously undermined Iran’s effort to demonstrate that, despite facing severe economic and diplomatic sanctions, it remains an effective international player. 
Indeed, United Nations Secretary-General Ban Ki-moon criticized Iran for not assuring the world that it is not seeking nuclear arms at a time when the International Atomic Energy Agency has published a new report suggesting that it is. 
And, in a speech of great depth, Mohamed Morsi, the first Egyptian president to visit Iran since the Islamic Republic’s birth in 1979, firmly rejected the Syrian regime, as he did in a subsequent appearance before the Arab League as well. 
Moreover, Morsi urged Iran to join Egypt, Turkey, and Saudi Arabia – all Sunni-majority countries – in pressing for political transition in Syria (a role that the Syrian opposition rejected before Iran could even say no). 
In other words, reality betrayed the perception that Iran sought to create in hosting the NAM summit. 
Instead, Morsi’s speech provided the occasion’s most memorable moment. 
And Iran’s nuclear quest remains a reality that must not be ignored during the next key three years, when the Islamic Republic will lead NAM while itself remaining one of the most serious problems on the international agenda. 

An Iran Deal Ten Years Late 
ROME – The only thing to lament about the agreement reached by Iran and the P5+1 (the UN Security Council’s five permanent members – China, Britain, France, Russia, and the United States – plus Germany) in Vienna this month is that it was not signed and sealed a decade ago. 
In the years that it has taken for diplomatic sanity to prevail, the Middle East has endured myriad avoidable tensions and lost opportunities for security cooperation. 
From 2003 to 2006, Iran made clear to anyone willing to listen that it would agree to all the key elements of the recent deal, including measures to block uranium and plutonium pathways to a bomb and obtrusive monitoring mechanisms to ensure ample advance notice of a likely breakout. 
All it needed in return – beyond, of course, the lifting of sanctions as implementation proceeded – was formal recognition of its “right to enrich” uranium. 
In discussions with the European Union in 2003-2004, Iran voluntarily froze its then-minimal enrichment program, pending negotiation of a full accord. 
Iran also declared its willingness to apply the “additional protocol,” allowing for much more far-reaching and stringent monitoring by the International Atomic Energy Agency than is called for under standard arrangements. 
Those commitments ended in 2005, owing to the continued insistence by the EU, backed by the US, that Iran abandon uranium enrichment entirely. 
This stance disregarded the “inalienable right,” clearly acknowledged in the Nuclear Non-Proliferation Treaty (as much as one might wish otherwise, in an ideal world), of NPT parties to engage in all stages of the nuclear fuel cycle as part of a peaceful nuclear energy program. 
If, at that time, the West had been prepared to settle for effectively containing Iran’s nuclear program, rather than destroying every last sensitive component of it, a deal would have been possible. 
And, indeed, in early 2006, the International Crisis Group published a comprehensive “delayed limited enrichment” proposal that included all of the key features of the deal that has now been signed in Vienna. 
I am confident, on the basis of many hours of productive dialogue with senior Iranian officials in Tehran, New York, and elsewhere, that this proposal could have broken the deadlock. 
It had all the right elements of an effective compromise. 
But with the US not talking to Iran at any level, and the EU talking but not listening, the effort went nowhere. 
The Iranians were never going to accept what they perceived as second-class status under the NPT. 
It was only when US President Barack Obama’s administration acknowledged that, and commenced direct back-channel talks in 2011, that progress became possible. 
The key was the recognition that Iran’s sense of honor had to be accommodated. 
Critics of the Vienna deal in the US Congress, Israel, and the Arab world tend to assume that Iran has no honor. 
They believe that Iran has always been hell-bent on building nuclear weapons, and that its leaders signed the deal, which imposes limits on the country’s nuclear program for 15 years, only to relieve the enormous sanctions pressure now crushing its economy. 
Iran is biding its time, the critics charge, and will inevitably attempt to break out again. 
While no one should be under any illusion that Iran has been a model international citizen, or is likely to become one any time soon, this perception of the country’s nuclear ambitions involves a fundamental misreading of the dynamics in play. 
My judgment, based on more dialogue with senior Iranian officials than most of the critics have conducted, is that Iran – whatever engineering research it may have carried out in the past, and whatever fuel-making and missile-delivery capabilities it may have developed more recently – has never been close to deciding actually to build nuclear weapons. 
Iran has always been keenly aware of the multiple risks involved in crossing that red line. 
It knows that it would face attack by a much more heavily armed Israel, whether supported by the US or not; that Sunni powers in the region could move quickly to counter a “Shia bomb” with their own nuclear weapons; and that additional crushing international sanctions could be imposed. 
And there is another factor that should not be instantly dismissed, as it usually is by cynical critics: Iranian leaders’ repeated strong rejection of weapons of mass destruction on religious grounds. 
The question, then, is why has Iran walked the precipice for so long by building a visible breakout capability bound to spook the West, Israel, and its Arab neighbors? 
The answer, I believe, is overwhelmingly national pride – its peoples’ desire to demonstrate that Iran is a power to be reckoned with, a country that has impressive technical prowess, and that there are limits to its willingness to suffer international humiliation. 
Iranians vividly remember the overthrow, orchestrated by the CIA and British intelligence, of the elected government of Mohammad Mosaddegh in 1953. 
They remember the West’s prolonged support for the hated Shah, and for Iraq in its brutal war with Iran in the 1980s, even after Iraqi leader Saddam Hussein employed chemical weapons. 
And they remember when US President George W. Bush labeled their country part of an “axis of evil,” despite its cooperation with the US in Afghanistan. 
It is understandable that many will not readily be persuaded of Iranian sincerity, not least because the national negotiating style – among moderates and hardliners alike – tends to be anything but frank and direct, with private reason often accompanied by public thunder that makes it hard to assess real intent. 
But the Vienna agreement deserves wide support, and not just because the alternatives – continuation of acute regional tension at best, and catastrophic military conflict at worst – are so unappealing. 
In fact, there is every reason to believe that the agreement captures and reflects the real interests not just of Iran, but also of the international community. 
It keeps intact a global non-proliferation regime that has been showing signs of falling apart, and gives new hope for wider regional security cooperation. 
Intelligent diplomacy beats brute force every time. 

Saying No to the Warmongers 
NEW YORK – The accord struck in Vienna to rein in Iran’s nuclear activities has warmongers fulminating. 
Citizens worldwide should support US President Barack Obama’s brave effort to outmaneuver them, taking heart from the fact that the signatories include not just the United States, but all five permanent members of the UN Security Council plus Germany. 
Many of the warmongers are to be found in Obama’s own government agencies. 
Most Americans struggle to recognize or understand their country’s permanent security state, in which elected politicians seem to run the show, but the CIA and the Pentagon often take the lead – a state that inherently gravitates toward military, rather than diplomatic, solutions to foreign-policy challenges. 
Since 1947, when the CIA was established, the US has had a continuous semi-covert, semi-overt policy of overthrowing foreign governments. 
In fact, the CIA was designed to avoid genuine democratic oversight and provide presidents with “plausible deniability.” 
It has gone on to topple dozens of governments, in all regions of the world, with no accountability there or at home. 
I recently examined one period of CIA activity in my book To Move the World: JFK’s Quest for Peace. 
Soon after Kennedy assumed the presidency in 1961, he was “informed” by the CIA of its plot to overthrow Fidel Castro. 
Kennedy felt stuck: Should he sanction the planned CIA invasion of Cuba or veto it? 
New to the gruesome game, Kennedy tried to have it both ways, by letting it proceed, but without US air cover. 
The CIA-led invasion, executed by a motley group of Cuban exiles at the Bay of Pigs, was a military failure and a foreign-policy disaster, one that led to the Cuban Missile Crisis the following year. 
During the missile crisis, most senior security officials advising the president wanted to launch military action against Soviet forces, a course that could well have ended in nuclear annihilation. 
Kennedy overruled the warmongers, and prevailed in the crisis through diplomacy. 
By 1963, Kennedy no longer trusted the advice of the military and the CIA. 
Indeed, he regarded many of his putative advisers as a threat to world peace. 
That year, he used diplomacy relentlessly and skillfully to achieve a breakthrough nuclear agreement with the Soviet Union, the Limited Test Ban Treaty. 
The American people strongly – and rightly – supported Kennedy over the warmongers. 
But three months after the treaty was signed, JFK was assassinated. 
Viewed through the lens of history, the main job of US presidents is to be mature and wise enough to stand up to the permanent war machine. 
Kennedy tried; his successor, Lyndon Johnson, did not, and the debacle of Vietnam ensued. 
Jimmy Carter tried; Reagan did not (his CIA helped to unleash death and mayhem in Central America throughout the 1980s). 
Clinton mostly tried (except in the Balkans); George W. Bush did not, and generated new wars and turmoil. 
On the whole, Obama has tried to restrain the warmongers, yet he has given in to them frequently – not only by relying on weaponized drones, but also by waging covert wars in Syria, Libya, Yemen, Somalia, and elsewhere. 
Nor did he truly end the US wars in Iraq and Afghanistan; he replaced troops on the ground with US drones, air strikes, and “private” contractors. 
Iran is surely his finest moment, a historic milestone that demands full-throated approval. 
The political difficulty of making peace with Iran is similar to that of JFK’s peacemaking with the Soviet Union in 1963. 
Americans have been suspicious of Iran since the Islamic Revolution of 1979 and the subsequent hostage crisis, in which Iranian students held 52 Americans at the US embassy for 444 days. 
But their suspicion also reflects jingoistic manipulation and a lack of perspective on US-Iran relations. 
Few Americans know that the CIA overthrew a democratic Iranian government in 1953. 
Iranians had had the temerity to elect a progressive, secular prime minister who believed that the country’s oil belonged to its people, not to the United Kingdom or the US. 
And few Americans recall that after the coup, the CIA installed a brutal police state under the Shah. 
Likewise, following the 1979 Iranian Revolution, the US armed Saddam Hussein’s Iraq to go to war with Iran, resulting in hundreds of thousands of Iranian deaths in the 1980s. 
And US-led international sanctions, imposed from the 1990s onward, have aimed to impoverish, destabilize, and ultimately topple the Islamist regime. 
Today, the warmongers are trying to scuttle the Vienna accord. 
Saudi Arabia is in a violent struggle with Iran for regional supremacy, with geopolitical competition converging with the Sunni-Shia rivalry. 
Israel, the Middle East’s only nuclear power, wants to retain its strategic monopoly. 
The US warmongers seem to view any Islamist state as ripe for toppling. 
Obama is correct that America’s true interests, and those of the world, are with peace, not continued conflict, with Iran. 
The US is not a partisan in the Shia-Sunni struggle; if anything, the US confronts mainly Sunni terrorism, funded from Saudi Arabia, not Shia terrorism backed by Iran. 
Obama is also right that, despite Israel’s arguments, the agreement will reduce the possibility of Iran ever becoming a nuclear state. 
The best way to ensure that outcome is to normalize relations with it, help its economy recover, and support its integration into the international community. 
Iran is a great and ancient culture. 
Its opening to the world as a place of business, tourism, the arts, and sports would be a boon to global stability and prosperity. 
The new treaty will verifiably prevent Iran from developing a nuclear weapon for at least a decade – and keep it bound to nuclear non-proliferation thereafter. 
This is the time to begin a broader US-Iran rapprochement and build a new security regime in the Middle East and the world that leads toward full global nuclear disarmament. 
To get there requires, above all, replacing war (including the CIA’s secret wars) with commerce and other forms of peaceful exchange. 

Iran’s Economy After the Elections 
LONDON – Recent gains by pro-government reformist candidates in Iran’s parliamentary elections have given President Hassan Rouhani a welcome midterm boost. 
But huge economic challenges remain. 
And in the coming months, these challenges are what will determine the battle lines between the president and his hardline adversaries inside and outside the parliament. 
Elections are normally won and lost along political lines, and Iran’s recent vote is no exception. 
But, on this occasion, there is reason to believe that economic concerns were a major driver of political change, as evidenced by the massive turnout at the electoral booths. 
Ever since July, when Iran signed a landmark nuclear deal with the five permanent members of the United Nations Security Council and the European Union, popular expectations for an improvement in the state of the economy have reached a fever pitch. 
Rouhani is well aware of the importance of economic expectations; indeed, they were what swept him into the presidency in 2013. 
The recent election campaign once again drew strength from the promise to fix an economy battered by years of tough economic sanctions and domestic mismanagement. 
That is why he placed a high priority on reaching a deal with the outside world that would close the nuclear file and pave the road to economic recovery. 
The economy that Rouhani inherited from his predecessor, Mahmoud Ahmadinejad, had been distorted by years of generous redistributions of oil revenues to the president’s supporters and then hit with stagflation, as what US Vice President Joe Biden called the “toughest economic sanctions in history” began to take hold. 
In 2013, the year Rouhani assumed office, inflation exceeded 40%, and GDP contracted by 6%. 
Rouhani’s woes were exacerbated by the economic destabilization that followed the introduction of comprehensive financial sanctions that cut Iran off from the international banking system. 
Unable to sell oil, and faced with a blockade of the central bank by the United States and the EU, Rouhani faced the momentous challenge of trying to kick-start growth and tame spiraling prices. 
Rouhani has had some success in lowering inflation, which is now down to 13%. 
But rekindling growth has proven to be a tougher challenge. 
With the International Monetary Fund predicting that GDP will either stagnate or contract this year, Iran’s economy might well be set for a double-dip recession. 
With sanctions lifted, however, the IMF now expects GDP growth to reach roughly 5% next year – a rate that would make Iran the Middle East’s best-performing economy. 
Attaining this level of growth will be essential if jobs are to be created; 
Iran habitually suffers from a double-digit unemployment rate, with official youth unemployment above 25%. 
But several obstacles stand in the way. 
The first is the collapse in oil prices, which have tumbled by 70% since mid-2014. 
A similar misfortune occurred in 1999, when President Mohammad Khatami was attempting to carry out his own reformist experiment, and prices fell below $10 per barrel. 
Then, as now, the first two years of a reformist administration were thwarted by adverse external developments in the international oil markets. 
The last crisis was driven by demand-side factors relating to the Asian financial crisis. 
This time, supply-side factors are creating a global oil glut, with similar results. 
Failing to understand this, conspiracy theorists can be forgiven for noticing that reform-minded presidencies seem to be negatively correlated with international oil prices. 
Rouhani’s main challenges, however, are internal. 
They come from Iran’s complex post-revolutionary institutional architecture, which is beset by a labyrinth of decision-making entities interlaced with yet more bodies and agencies created to ensure compliance with Islamic tenets and revolutionary standards. 
In recent decades, this system has produced tremendous political fragmentation, if not open factional fighting, at all levels. 
It is in this labyrinth of power that Rouhani is fighting an intense battle with his conservative adversaries – a battle that may be far from over. 
In fact, Rouhani’s economic remedies – attempting to open the economy to foreign trade and investment flows, and introducing economic reforms to foster the private sector following the lifting of sanctions – are at odds with the vision of Iran’s hardline conservatives. 
For these so-called Principlists – who advocate a “resistance economy,” based on years of austerity marked by self-sufficiency and reliance on domestic resources – Rouhani’s desire to declare Iran “open for business” and to encourage foreigners to take an active role in Iran’s economy raises as much alarm as the nuclear deal. 
The decline of the Principlists’ power bloc in the next parliament is undoubtedly a powerful message from Iran’s youthful electorate. 
This resonates with what former US President Bill Clinton told Charlie Rose in 2005: Iran is the only country with elections “where the liberals, or the progressives, have won two-thirds to 70% of the vote in six elections….There is no other country in the world I can say that about, certainly not my own.” 
A decade later, Clinton will no doubt find it heartening to see this trend continue. 
But, while the Principlists might be down, they are certainly not out, as the looming battle over the future of the economy attests. 
It is here that Rouhani will face his most difficult challenge. 
His electoral victory might raise the stakes for him, by increasing pressure to deliver on popular expectations. 
But, as reformists found when they lost to Ahmadinejad in 2005, growth and economic recovery cannot come at the expense of the electorate’s aspirations for greater equality and social justice. 


The Drone in the Desert 
TEL AVIV – A drone recently penetrated Israel’s airspace from the Mediterranean. 
It was allowed to fly for about half an hour over southern Israel before being shot down by the Israeli air force over a sparsely populated area. 
It is still not known who dispatched the drone and from where, but it is now assumed that it was launched from Lebanon, either by Hezbollah, acting in Iran's service, or by forces of the Iranian regime itself. 
If that is indeed the case, the episode should not be regarded as yet another incident in a region fraught by conflict and violence. 
On the contrary, it is a significant window into the arena in which the conflict over the future of Iran's nuclear program is being waged. 
Several developments and forces are now shaping this arena. 
One is Israeli Prime Minister Binyamin Netanyahu’s decision, announced in his speech to the United Nations General Assembly last month, to suspend his threat to launch unilateral military action against Iran's nuclear installations. 
He has said that Israel will give the US and the rest of the international community an opportunity to stop Iran’s progress through other means by the spring or early summer of 2013. 
Another development is the US presidential election. 
Republican challenger Mitt Romney’s success in the first debate improves his chances and the prospect of a new administration settling in before any major decisions are made on the Iranian nuclear issue. 
In Iran, the regime pushes ahead, but is clearly being hurt by an economic crisis (largely a consequence of international sanctions), popular protest, and internal bickering – and has turned bellicose as a result. 
After several months of listening to Israeli (and, to some extent, US) war rhetoric, the regime began issuing its own menacing bombast, as a matter of substance and to defend the pride of a regime that views itself as the heir to the glorious imperial tradition of Persia. 
Various Iranian spokesmen have begun threatening Israel not only with a massive response to any potential attack, but also with a preemptive strike. 
Israel would not merely be punished for any attack, they say; it would be annihilated. 
This position was accompanied by Iran’s harder line on military involvement in the Syrian civil war, echoed by its Lebanese proxy Hezbollah. 
For some time, under the impact of the Syrian civil war – and still smarting from the 2006 war with Israel – Hassan Nasrallah, the Hezbollah leader, had lowered his profile and moderated his rhetoric. 
No longer. 
At the same time, the Iranian regime is sending a variety of signals that it wants to renew the nuclear negotiations. 
One example was the announcement that some of its enriched uranium is being diverted to medical research; in other words, uranium enrichment, according to this message, can be slowed down. 
At this point, however, there are no indications that Iran is interested in more than reducing external pressure and the impact of the sanctions. 
The drone, shot down not far from Israel’s nuclear facility in Dimona, fits with these two efforts. 
Iran’s war rhetoric and threat to inflict a deadly blow on Israel is served by dispatching a drone in the general direction of Dimona. 
And, if the idea is to negotiate, the drone’s flight was an excellent prelude to a demand that Iran’s nuclear effort be dealt with as part of a larger effort to ban nuclear weapons throughout the Middle East. 
There are two other disturbing aspects to the drone affair. 
First, it is a clear indication that Hezbollah is, indeed, the long arm of the Iranian regime – its base on the Mediterranean and on Israel’s border. 
The occasional argument that it is a genuine Lebanese political movement, tied to Iran but ultimately Lebanese, is simply wrong. 
Second, the drone’s arrival from the Mediterranean underscored the danger that terrorist organizations, supplied with deadly modern equipment, can inflict damage “without a return address.” 
Just a few weeks ago, it was feared that Syria’s crumbling regime might transfer part of its arsenal of weapons of mass destruction to Hezbollah, or that some of that arsenal might fall into jihadis’ hands. 
And one of the arguments against Iran’s nuclear program has been that the regime might transfer fissile material to Hezbollah and its ilk to be used in a radioactive “dirty bomb.” 
There are four components to an effective strategy for dealing with Iran’s nuclear program: real negotiations, rather than a leisurely meeting once every few weeks; stiff sanctions on Iran, but without today’s gaping loopholes; a credible threat of military action; and a face-saving exit for the Iranian leadership. 
This is a viable strategy, but it is now clear that only the US can implement it. 
Let us hope that the Americans act in time. 

The Middle East’s New Winners and Losers 
BERLIN – “War,” said the ancient Greek philosopher Heraclitus, is the “father of all things.” 
In view of the bloody – indeed barbaric – events in the Middle East (and in Iraq and Syria in particular), one might be tempted to agree, even though such ideas no longer seem to have a place in the postmodern worldview of today’s Europe. 
The Islamic State’s military triumphs in Iraq and Syria are not only fueling a humanitarian catastrophe; they are also throwing the region’s existing alliances into disarray and even calling into question national borders. 
A new Middle East is emerging, one that already differs from the old order in two significant ways: an enhanced role for the Kurds and Iran, and diminished influence for the region’s Sunni powers. 
The Middle East is not just facing the possible triumph of a force that seeks to achieve its strategic goals by mass murder and enslavement (for example, of Yazidi women and girls). 
What is also becoming apparent is the collapse of the region’s old order, which had existed more or less unchanged since the end of World War I, and with it, the decline of the region’s traditional stabilizing powers. 
The political weakness of those powers – whether global actors like the United States or regional players like Turkey, Iran, and Saudi Arabia – has led to a remarkable role reversal in the region’s power dynamic. 
Although the US and the European Union still classify the pro-independence Kurdistan Workers’ Party (PKK) as a terrorist organization (whose founder, Abdullah Öcalan, has been in prison in Turkey since 1999), only the PKK’s fighters, it seems, are willing and able to stop the Islamic State’s further advance. 
As a result, the Kurds’ fate has become a burning question in Turkey. 
Turkey is a NATO member, and any violation of its territorial integrity could easily trigger the North Atlantic Treaty’s mutual-defense clause. 
And the Kurdish question entails a potential for much wider conflict, because statehood would also threaten the territorial integrity of Syria, Iraq, and probably Iran. 
And yet, in fighting for their lives against the Islamic State, the Kurds have won new legitimacy; once the fighting has ended, they will not simply forget their national ambitions – or the mortal threat they faced. 
And it is not just the Kurds’ unity and bravery that have raised their prestige; they have increasingly become an anchor of stability and a reliable pro-Western partner in a region that is short on both. 
That presents the West with a dilemma: Given its reluctance to commit its own ground forces to a war it knows it must win, it will have to arm the Kurds – not just the Kurdish Peshmerga militia of northern Iraq, but also other Kurdish groups – with more advanced weaponry. 
That will not sit well with Turkey – or, most likely, with Iran – which is why resolving the Kurdish question will require a large investment of diplomatic skill and commitment by the West, the international community, and the countries in question. 
But the biggest regional winner could prove to be Iran, whose influence in Iraq and Afghanistan gained a substantial boost from US policy under President George W. Bush. 
Iranian cooperation is essential to stable solutions in Iraq and Syria, and the country plays an important role in the Israel-Palestine conflict and in Lebanon. 
It is impossible to bypass Iran in the search for solutions to the region’s myriad crises. 
In fact, in the fight against the Islamic State, even limited military cooperation between the US and Iran no longer seems to be off the table. 
The key strategic question, however, will not be resolved on the region’s battlefields, but in the various negotiations on Iran’s nuclear program. 
If compromise (or even a short-term extension of the current interim agreement, with a realistic prospect for a final accord) is achieved, Iran’s broader regional role will become both stronger and more constructive. 
But that outcome remains highly uncertain. 
The nuclear issue implicates another important hidden question, namely Iran’s relationship with Israel, at whose northern border in Lebanon stands Hezbollah, Iran’s closest partner in the region. 
Hezbollah remains committed to Israel’s destruction, and Iran supplies it with powerful weapons. 
And here, unfortunately, no major change should be expected. 
This much is clear about the new Middle East: It will be both more Shia and Iranian and more Kurdish, which will also make it a good deal more complicated. 
Old alliances (and conflicts) will no longer be as self-evident as in the past – even if they continue. 
Beyond that, one can say only that the Middle East will remain the powder keg of world politics in the twenty-first century. 
Its stabilization, while of global interest, will be difficult to achieve – and only by a complicated mixture of military and diplomatic means. 
No single global power is likely to manage that alone. 

After the Iran Deal 
BERLIN – After 12 years of tedious negotiations, Iran and the “P5+1” countries (China, France, Russia, the United States, and the United Kingdom, plus Germany) have reached a comprehensive agreement that will limit Iran’s development of its nuclear capabilities to non-military objectives. 
In exchange for its cooperation, Iran will eventually be relieved of the punishing sanctions that the United Nations, the European Union, and the US have imposed upon it for years. 
This is a huge diplomatic success. 
Of course, the negotiations have attracted plenty of critics, including in the US Congress and Iran’s parliament, as well as in Saudi Arabia, Israel, and even France. 
But the agreement’s potential benefits cannot be denied. 
For starters, the deal proves that world leaders – despite being divided on a multitude of issues, such as the conflict in Ukraine and territorial disputes in the South China Sea – can still come together to resolve a shared problem. 
It will also make nuclear proliferation in the Middle East less likely, while strengthening the global nuclear non-proliferation regime. And it will allow for the normalization of Iran’s relations with the West. 
Of course, Iran’s neighbors have legitimate concerns about the impact the deal will have on the regional balance of power. 
As sanctions are lifted, Iran will become stronger, challenging the influence of the Gulf States. 
Anticipating this, these states have already sought reassurances from the US, while following a more hard-nosed policy in Yemen or Syria, where they consider themselves to be containing Iran’s hegemonic ambitions. 
Ultimately, however, the impact of the nuclear agreement will depend on political dynamics in Iran. 
Many – indeed, probably a majority – in the Iranian establishment support the resolution of the nuclear confrontation, and agree that Iran does not need to be perpetually at odds with the rest of the world. 
But some still view the dispute as a key component of the country’s revolutionary identity. 
This post-agreement dynamic thus could play out in two ways. 
In the first scenario, events unfold according to the hopes of the P5+1 and the Iranian negotiators, with the agreement amplifying the voices of those in Iran who advocate regional and international accommodation. 
In this case, Iran reaches out to Saudi Arabia with a convincing indication that it does not intend to bolster its influence at the expense of the Saudis or their allies. 
This allows Saudi Arabia to join Iran in using its influence in Syria to bring about a ceasefire agreement between regime forces and rebels, paving the way for the formation of a credible transition government capable of pushing back the Islamic State. 
Likewise, Saudi Arabia and Iran bring an end to the fighting in Yemen by backing a power-sharing agreement there. 
Meanwhile, relief from sanctions, together with the gradual return of international companies, kick-starts Iran’s ailing economy. 
Increased openness toward Europe and, more cautiously, the US encourages reform-minded members of Iran’s middle class to seek their future inside the country, rather than emigrating. 
Finally, under this scenario, President Hassan Rouhani’s strong international standing helps him to overcome conservative resistance to pursue much-needed domestic reforms. 
On this basis, Rouhani’s coalition of reformists and pragmatists easily wins a majority when Iran’s next parliament is elected in 2016, with Rouhani himself re-elected in 2017. 
The second scenario is far less benign. 
In this case, it soon becomes clear that domestic support for the nuclear agreement was broad but thin. 
Whereas Rouhani’s reformist camp wants to improve Iran’s foreign relations, the conservative and nationalist forces surrounding Supreme Leader Ayatollah Ali Khamenei view the agreement as a necessary tool to eliminate economic sanctions and strengthen Iran’s conventional military capabilities. 
The hardline clerics then undermine whatever confidence Rouhani is building with Iran’s neighbors by declaring repeatedly that the agreement represents an implicit acknowledgement of Iran’s might by the world’s major powers. 
This stance vindicates the skeptics, spurring Saudi Arabia to continue its efforts to build a “Sunni coalition” to contain Iranian influence and uphold the fight against what it views as Iranian proxies in countries like Syria and Yemen. 
Furthermore, with regional tensions high, the economic impact of the removal of sanctions turns out to be negligible, while conservatives gain ground in resisting reform. 
Rouhani and his allies are unable to offer ordinary Iranians economic hope – a failure that causes them to lose both the legislative and presidential elections. 
Paradoxically, in the pessimistic scenario, Iran’s new government, controlled by conservatives and hardliners, actually fits into the region better than the current one. 
After all, Saudi Arabia, Egypt, and many other Arab states are also ruled by authoritarian hardliners with little interest in de-escalating regional conflicts. 
This would make the resurgence of reform-oriented leadership in Iran extremely difficult. 
Of course, the most likely scenario is a combination of both dynamics. 
But, given that it is in everyone’s interest to ensure that developments hew more closely to the reform-oriented path, it should be clear to all that the diplomatic work with regard to Iran is far from complete. 

The Case for Peace With Iran 
NEW YORK – The nuclear framework agreement between Iran and the five permanent UN Security Council members (the United States, the United Kingdom, France, China, and Russia) plus Germany is an important achievement in global diplomacy. 
The deal announced earlier this month represents the triumph of rational hope over irrational fear, and it deserves to be implemented. 
But now the race is on against hardliners in the US, Iran, Israel, and elsewhere, who want to kill the deal before the deadline for a final agreement in June. 
The framework agreement benefits all parties. 
Iran scales back its nuclear activities, especially the enrichment of uranium fuel, in exchange for an end to economic sanctions. 
Its government is kept further away from developing a nuclear bomb – which it denies pursuing – and gains room for economic recovery and normalization of relations with the major powers. 
It is a smart, pragmatic, and balanced approach, subject to monitoring and verification. 
It does not require that the US and Iranian governments suddenly trust each other; but it does offer an opportunity to build confidence, even as it allows for specific steps that are in each side’s interests. 
Crucially, it is part of international law, within the framework of the UN Security Council. 
By propounding the idea that the other side can never be trusted, the hardliners are advancing a self-fulfilling theory of politics and human nature that makes war far more likely. 
These purveyors of fear deserve to be kept on the sidelines. 
It is time to make peace. 
The great divide between the West and Iran today, it should be noted, is largely the result of malign Western behavior toward Iran (Persia until 1935) in the past. 
From the start of the twentieth century, the British Empire manipulated Persia in order to control its vast oil reserves. 
After World War II, that job fell increasingly to the US. 
Indeed, from coup to dictatorship to war to sanctions, the US has racked up more than 60 continuous years of trying to impose its will on Iran. 
The CIA and Britain’s MI6 jointly toppled Mohammad Mossadegh’s democratically elected government in 1953, in order to block Mossadegh’s attempts to nationalize Iran’s oil reserves. 
The US then installed the brutal dictatorship of Shah Mohammad Reza Pahlavi, which ruled the country until the Islamic Revolution of 1979. 
Following the revolution, the US helped to arm Iraq in the Iran-Iraq War of the 1980s, in which an estimated one million Iranians died. 
Since 1987, the US has imposed economic sanctions against Iran on a variety of premises, including claims of Iranian terrorism and the alleged nuclear threat. 
And the US has worked hard to internationalize these sanctions, leading the push for UN measures, which have been in place since 2006. 
The US hardliners have their own long list of grievances, starting with the 1979 seizure of America’s embassy in Tehran, in which 66 US diplomats and citizens were held for 444 days. 
Then there is Iran’s involvement in Islamist insurgencies, and its support for anti-Israel political movements and groups deemed to be terrorist. 
Still, the British and American abuses vis-à-vis Persia and Iran started earlier, lasted longer, and imposed far higher costs than Iran’s actions vis-à-vis the US and UK. 
Moreover, much of what the US categorizes as Iranian “terror” is a product of the region’s sectarian struggles between Shia, backed by Iran, and Sunnis, backed by Saudi Arabia. 
“Terror” is a term that obscures rather than clarifies these long-standing clashes and rivalries. 
That is why Iran, called a “terrorist state” by US hardliners, is now America’s de facto ally in the fight against Sunni jihadists in Iraq and Syria. 
Iran’s confrontation with the UK and the US is part of the much broader saga of the West’s use of its military and economic dominance to project its power and political will over much of the world during the nineteenth and twentieth centuries. 
Today’s low- and middle-income countries are only now entering a period of true sovereignty. 
The proposed agreement with Iran will not overcome a century of distrust and manipulation, but it can begin to create a new path toward peace and mutual respect. 
Mutual benefit will be achieved by honest appraisals of mutual interests, and step-by-step progress backed by verification, not by hardliners on both sides claiming that the other side is pure evil and insisting on complete triumph. 
The success of US President John F. Kennedy and Soviet leader Nikita Khrushchev in reaching the 1963 Limited Nuclear Test Ban Treaty, at the height of the Cold War, provides an instructive lesson. 
At the time, hardliners on both sides denounced the LTBT as a weakening of national defense in the face of an implacable enemy. 
In fact, both sides fully honored the treaty, and it led to the landmark 1968 Nuclear Non-Proliferation Treaty. 
JFK’s words a half-century ago apply to the Iran agreement today. 
The LTBT, said Kennedy in 1963, “is not a victory for one side – it is a victory for mankind.” 
This treaty, he said, “will not resolve all conflicts, or cause the Communists to forgo their ambitions, or eliminate the dangers of war. 
It will not reduce our need for arms or allies or programs of assistance to others. 
But it is an important first step – a step towards peace – a step towards reason – a step away from war.” 

Grand Bargaining with Iran 
STOCKHOLM – Slowly but surely, Iran’s talks with the international community about its nuclear program are approaching the make-or-break point. 
But, more important, the outcome could mark a turning point for the wider – and increasingly volatile – Middle East. 
The rapprochement between Iran and its negotiating partners on the core nuclear issue is obvious. 
No one at this point seriously believes that Iran is maintaining an active program to develop nuclear weapons, though not long ago it was almost conventional wisdom that the country was close to having them. 
Now the focus is on ensuring that Iran would need a year or so to assemble a nuclear device if it ever decided to do so. 
But the concept of “breakout time” is dubious. 
If trust were to collapse, and the Iranian regime decided to abrogate all of the relevant international agreements, it is highly likely that it would get its weapon, even if the country itself was bombed repeatedly. 
The strategic emphasis on “breakout time” is thus misplaced. 
The key to progress is to help turn Iran from a cause into a country, to paraphrase Henry Kissinger. 
Iran needs to focus on developing all of its human and material resources to become part of a region moving from confrontation to cooperation. 
The deal on the core nuclear issues is central to this approach, but so is a credible process for developing the trade and investment links that will facilitate Iran’s move from isolation to integration. 
As the talks enter the final phase, the issue of sanctions is likely to be at the forefront. 
This is because the Joint Plan of Action to which the parties agreed in November 2013, while addressing virtually all of the West’s immediate nuclear concerns, does not map out the necessary pathway to Iran’s normalization. 
Just as conservative forces in Iran can be expected to try to stop an agreement, forces thriving on confrontation in the United States and elsewhere will do the same. 
Iran’s hardliners play up doubts that the West will ever agree to lift the sanctions, while their Western counterparts will do whatever they can to support that presumption. 
A spiral of mutually destructive diplomacy might result. 
Here, the European Union should clearly signal its readiness to take the lead in easing and lifting restrictions on Iran, though this obviously must be done in close coordination with Europe’s partners. 
The EU oil sanctions, for example, could be suspended almost immediately if an agreement were reached. 
An agreement should also be followed by sustained political engagement on other mutually important issues. 
Developments in Afghanistan and Iraq are obviously urgent. 
And, based on close consultation with both Saudi Arabia and other Gulf countries, it may yet be possible to move toward more cooperative arrangements in that strategically vital region. 
That will require putting the issue of Syria squarely on the table. 
Four years after the outbreak of the country’s civil war, and despite the horrific humanitarian consequences of the fighting, international diplomacy to stop the violence has achieved nothing. 
The United Nations Security Council has been split and ineffective, and even Russia seems to be gradually losing the leverage it once had in Damascus. 
Iran, the US, and the EU all share an interest in stopping a war that is causing the Syrian state to collapse – with all of the consequences seen in Iraq since 2003 – and strengthening the forces of Sunni jihadism across the region. 
Whether this is enough common ground for a constructive dialogue with Iran on ending Syria’s civil war remains to be seen, but it is an option that must be pursued. 
The talks now reaching their endgame in Lausanne are confined to the nuclear issue; but beyond the agreement loom larger possibilities and risks. 
A breakthrough might compel a phase of intense diplomacy, giving Iran a pathway to diplomatic normalization and opening the door for grand bargains that could begin to restore order and stability to the rest of the region. 
A breakdown, by contrast, though unlikely to lead immediately to war, could easily foment developments that lead in that direction, and the region as a whole could be pulled even deeper into the current vortex of chaos and violence. 
With the core nuclear issue more or less settled, it is now imperative to resolve sanctions and normalization issues and grasp the opportunity for regional grand bargains that might then become possible. 
The nuclear deal must mark the beginning of the international community’s efforts to engage Iran in addressing the Middle East’s toughest challenges. 

A Belated Victory for Non-Proliferation 
LONDON – Let us give praise where it is richly deserved. 
Despite all the criticism they faced, US President Barack Obama and his Secretary of State, John Kerry, stuck doggedly to the task of negotiating a deal with Iran to limit its nuclear program. 
Together with representatives of the United Kingdom, Russia, China, France, and Germany, they have now succeeded. 
The main terms of this historic agreement, concluded in the teeth of opposition from Israel, Iran’s regional competitors (particularly Saudi Arabia), and the political right in the United States, seek to rein in Iran’s nuclear activities so that civil capacity cannot be swiftly weaponized. 
In exchange for inspection and monitoring of nuclear sites, the international economic sanctions imposed years ago on Iran will be lifted. 
This is a significant moment in the nuclear age. 
Since 1945, the terrifying destructive force of nuclear weapons has encouraged political leaders to search for ways to control them. 
Not long after the destruction of Hiroshima, President Harry S. Truman, together with the Canadian and UK prime ministers, proposed the first non-proliferation plan; all nuclear weapons would be eliminated, and nuclear technology for peaceful purposes would be shared and overseen by a United Nations agency. 
Truman’s initiative subsequently went further, covering most of the non-proliferation issues that we still discuss today. 
But the proposals ran into outright opposition from Joseph Stalin, who would accept no limit to the Soviet Union’s ability to develop its own nuclear weapons. 
So the nuclear arms race began, and in 1960 President John F. Kennedy warned that there would be 15, 20, or 25 nuclear states by the mid-1960s. 
“I ask you,” he said in 1963, “to stop and think for a moment what it would mean to have nuclear weapons in so many hands, in the hands of countries large and small, stable and unstable, responsible and irresponsible, scattered throughout the world.” 
Two developments averted the nightmare of reckless nuclear proliferation. 
First, several countries capable of developing nuclear weapons concluded – in some cases, even after launching programs – that to do so would not increase their security. 
To their credit, South Africa and a number of Latin American countries took this route. 
Second, self-denial was greatly reinforced by the Non-Proliferation Treaty (NPT), negotiated after the 1962 Cuban Missile Crisis and administered by the International Atomic Energy Agency (IAEA). 
Since entering into force in 1968, the NPT has been central to holding the line on the spread of nuclear weapons. 
Nowadays, apart from the original nuclear powers – the US, the UK, France, and Russia – the only other countries with these weapons are China, Israel, India, Pakistan, and North Korea. 
The Iran negotiations were vital to ensuring the integrity of the system. 
The danger, of course, was that Iran would move from developing civil nuclear power to making its own weapons. 
This would inevitably have caused other countries in the region, probably beginning with Saudi Arabia, to go the same way. 
There is an important lesson to be learned from more than a decade of negotiation with Iran. 
Iran’s current president, Hassan Rouhani, was his country’s chief nuclear negotiator from 2003 to 2005. 
Iran’s president at this time was the scholarly moderate Mohammed Khatami, with whom I at one time attempted to negotiate a trade and cooperation agreement on behalf of the European Union. 
Progress was stopped by disagreement over nuclear matters. 
Khatami’s attempts to open a dialogue with the West fell on stony ground in President George W. Bush’s Washington, and eventually he was replaced by the populist hardliner Mahmoud Ahmadinejad. 
But in Rouhani’s discussions on proliferation back then, Iran had offered the three EU countries with which it had begun negotiations a reasonable compromise: Iran would maintain a civil but not a military nuclear capacity. 
This would have capped the number of centrifuges at a low level, kept enrichment below the possibility of weaponization, and converted enriched uranium into benign forms of nuclear fuel. 
The British representative to the IAEA at this time, Ambassador Peter Jenkins, has said publicly that the negotiators from the EU were impressed by the Iranian offer. 
But the Bush administration pressured the UK government to veto a deal along these lines, arguing that more concessions could be extracted from the Iranians if they were squeezed harder and threatened with tougher sanctions and even a military response. 
We know how the Bush strategy turned out. 
The talks collapsed: no compromise, no agreement. 
Today, a deal has been concluded; but it is less good than the deal that could have been reached a decade ago – a point worth keeping in mind as the likes of former Vice Present Dick Cheney and Israeli Prime Minister Binyamin Netanyahu start hollering from the sidelines. 
As it is, not only will an agreement add cement to the NPT; it could also open the way to the sort of understanding with Iran that is essential to any broad diplomatic moves to control and halt the violence sweeping across western Asia. 

The Future of the Iran Nuclear Deal 
NEW YORK – “There’s many a slip twixt the cup and the lip,” goes the old English proverb. 
Something seemingly resolved and certain in fact is neither. 
If no such expression exists in Farsi, I predict one soon will. 
The reason, of course, is the “Parameters for a Joint Comprehensive Plan of Action Regarding the Islamic Republic of Iran’s Nuclear Program,” the framework just adopted by Iran and the P5+1 (the UN Security Council’s five permanent members – China, Britain, France, Russia, and the United States – plus Germany). 
The agreement constitutes an important political and diplomatic milestone, and it contains more detail and is broader in scope than many anticipated. 
But, for all that, the text leaves unanswered at least as many questions as it resolves. 
In reality – and as the coming weeks, months, and years will demonstrate – major issues have yet to be settled. 
It is closer to the truth to say the real debate about the Iran nuclear accord is just beginning. 
The framework places significant limits on Iran’s nuclear program, including the number and type of centrifuges, the sort of reactors, and the amount and quality of enriched uranium that the country may possess. 
Standards are set for the inspections needed to provide confidence that Iran is fulfilling its obligations. 
And provision is made for easing economic sanctions once Iran has verifiably met its commitments. 
The bottom line is that the agreement will provide an estimated one-year warning from the moment that Iran might decide to build one or more nuclear weapons to the point at which it could achieve that goal. 
This assessment assumes that the monitoring called for in the accord will detect any Iranian non-compliance early enough to enable a coordinated international response, particularly the reintroduction of sanctions, before Iran could acquire nuclear weapons. 
There are no less than five reasons not to assume the deal will enter into force or have the desired impact. 
The first involves the next 90 days. 
What was announced was an interim framework; a formal, comprehensive accord is supposed to be completed by the end of June. 
In the meantime, there could easily be changes of heart and mind as those who negotiated the interim deal return home and face criticism from their governments and publics over its terms. 
Already, significant differences are emerging in how the US and Iranian sides are representing what was negotiated. 
A second concern stems from the specific issues that remain to be resolved. 
The most difficult might be the timing of when various economic sanctions are to be removed – the issue of greatest concern to Iran. 
But these same sanctions are also the source of the greatest leverage over Iranian behavior, which means that many in the US and Europe will want them to remain in place until Iran has fully met its critical obligations. 
A third source of doubt is whether the various parties will approve any long-term pact. 
The two main uncertainties involve Iran and the US. 
So-called hardliners in Iran will undoubtedly object to an agreement with the “Great Satan” that places limits on their country’s nuclear ambitions. 
But there is also a widespread desire among Iranians to get out from under economic sanctions, and Iran will approve a pact if Supreme Leader Ayatollah Ali Khamenei favors it, which he presumably does. 
The uncertainties are greater in the US. 
President Barack Obama must contend with a far more complex political environment, beginning with the US Congress. 
There is widespread and understandable concern about leaving Iran with any nuclear capabilities, about the adequacy of provisions for monitoring and inspection, and about what will happen in ten or 15 or 25 years when various limits on Iran expire. 
Persuading Congress to approve the final pact and/or lift sanctions is anything but assured. 
This question of gaining political approval is closely tied to a fourth area of concern: how any final agreement is implemented. 
The history of arms control suggests there will be occasions when Iran, which has a record of withholding relevant information from UN weapons inspectors, is suspected of not living up to the letter, much less the spirit, of what was negotiated. 
Agreement is needed on the process for judging Iranian behavior and for determining appropriate responses. 
The fifth concern stems not so much from the accord as from everything else about Iran’s foreign and defense policies. 
The agreement is only about Iran’s nuclear activities. 
It says nothing about Iran’s missile programs or support for terrorists and proxies, much less about what it is doing in Syria or Iraq or Yemen or anywhere else in the turbulent Middle East, or about human rights at home. 
Iran is a would-be imperial power that seeks regional primacy. 
Even a nuclear agreement that is signed and implemented will not affect this reality and might even make it worse, as Iran could well emerge with its reputation enhanced and a long-term option to build nuclear weapons intact. 
Obama is right: A nuclear agreement of the sort outlined is preferable to Iran possessing nuclear weapons or going to war to prevent that outcome. 
But any agreement must also generate widespread confidence in the US and the region that it will place a meaningful ceiling on Iran’s nuclear program, and that any cheating will be discovered early and dealt with firmly. 
This will not be easy; indeed, it is no exaggeration to predict that the effort to generate such confidence may well prove as demanding as the negotiations themselves. 

Where Obama Went Wrong on Iran 
JERUSALEM – The pros and cons of the accord with Iran over its nuclear program will be debated extensively over the next two months, in the run-up to a vote on the deal by the US Congress. 
But the so-called Joint Comprehensive Plan of Action will be judged by its implementation, which will take years. 
Nonetheless, two things are already clear. 
First, the JCPOA’s weakest provisions – both cumbersome and open to competing interpretations – are those covering compliance and verification. 
So some skepticism about implementation is in order. 
Second, and more immediately, the very achievement of an agreement between Iran and the five permanent members of the UN Security Council plus Germany (the P5+1) has already begun to affect the regional balance of power. 
Indeed, it is legitimate to ask whether Western (and especially US) negotiators were aware of the geopolitical implications of the deal. 
Even at this early stage, it is apparent that the agreement has empowered Iran regionally. 
Syrian President Bashar al-Assad’s minority Alawite regime lavished praise on the agreement, rightly recognizing that enhanced international legitimacy and financial resources will enable Shia Iran to provide greater backing. 
Assad’s other major regional ally, Lebanon’s Hezbollah (which the US classifies as a terrorist organization) also supports the deal. 
Vladimir Putin’s Russia is also happy to have received US assistance, however indirectly, in strengthening Assad’s hold on power. 
Understandably, Iran’s empowerment has made America’s closest allies in the region extremely uncomfortable. 
In their different ways, Israel, Saudi Arabia, and some of the smaller, more vulnerable Gulf states have let their unease be known. 
Turkey – an uncertain US ally nowadays, yet still a NATO member – may be too preoccupied with domestic political turmoil to respond in detail. 
But President Recep Tayyip Erdoğan certainly is skeptical of an agreement that Obama describes in almost messianic terms. 
The Egyptian leadership, also fighting internal challenges, is similarly unhappy with the JCPOA. 
And, whether Israel benefits or loses, Israeli Prime Minister Binyamin Netanyahu is sure to come out ahead. 
A crafty fear monger, he will be able to present the agreement as further proof of Israel’s isolation and abandonment by the world, enabling him to leverage public anxiety into enhanced political support for his government. 
Netanyahu may even succeed in bringing Yitzhak Herzog’s Zionist Union into his government, thereby shoring up his shaky coalition. 
His comparison of the Iranian threat to the Holocaust may be absurd and obscene, but it is politically effective. 
Nothing helps the Israeli right more than heightening the electorate’s sense of being under siege. 
Obama’s defense of the JCPOA may be helping Netanyahu in this regard, thanks to some historical claims that may be even more dubious than his arguments regarding Iran’s nuclear policies. 
In some of his statements, and in his recent interview with Thomas Friedman of the New York Times, Obama compared the deal with Iran to Richard Nixon’s opening to China in 1972. 
This is a savvy and enticing claim. 
But it is also a misleading one. 
Nixon’s secretary of state, Henry Kissinger, was pursuing a brilliant strategy to weaken Communism by exploiting the Sino-Soviet split. 
Emulating the French statesman Cardinal Richelieu, Kissinger helped the weaker power against the stronger one. 
No such overarching strategy underlies Obama’s policy, even if it may be justified on the more limited grounds of nuclear non-proliferation. 
In this interview with Friedman, Obama also maintained that one should try to understand Iranian history and culture. 
This sounds unexceptional, even innocuous, until one realizes what Obama means. 
“The fact is that we had some involvement in overthrowing a democratically elected regime in Iran,” he says, referring to the 1953 coup that toppled Prime Minister Mohammad Mosaddegh’s government. 
Moreover, the US “had in the past supported Saddam Hussein when he used chemical weapons against Iran.” 
Therefore, according to Obama, the Iranians have “their own security concerns and their own narratives.” 
This is an extraordinarily ahistorical claim. 
Similarly, one could claim that Germany had its own “security concerns and narratives” during the 1938 Munich crisis. 
Is Obama suggesting that the US should have supported Mosaddegh in the midst of the Cold War, or tilted toward Iran during the Iran-Iraq War in the 1980s? 
All of this may say something essential about Obama’s approach to the nuclear deal with Iran. 
Above all, while his negotiators’ unremitting focus on the issues before them – centrifuges, enrichment levels, the fate of spent fuel, and so on – undoubtedly permitted the deal to be done, the “success” of this approach has left the future of the region blurrier than ever. 

Living With the Iran Nuclear Deal 
NEW YORK – It is probable that after 60 days of intense debate in Washington, DC, and conceivably Tehran, the “Joint Comprehensive Plan of Action,” signed on July 14 by Iran and the UN Security Council’s five permanent members plus Germany (the P5+1), will enter into force. 
But no one should confuse this outcome with a solution to the problem of Iran’s nuclear ambitions or its contributions to the ongoing turmoil in the Middle East. 
On the contrary, depending on how it is implemented and enforced, the agreement could make matters worse. 
This is not to suggest the JCPOA makes no contribution. 
It places a ceiling for the next decade on the quantity and quality of centrifuges Iran is allowed to operate and allows the country to possess only a small amount of low-enriched uranium for the next 15 years. 
The agreement also establishes, in US President Barack Obama’s words, a “where necessary, when necessary” inspections mechanism that has the potential to verify whether Iran is meeting these and other commitments. 
The net result is that the accord should lengthen the period it would take Iran to produce one or more nuclear weapons from several months to as much as a year, making it more likely that such an effort would be discovered in time. 
The prospect that the JCPOA could keep Iran without nuclear weapons for 15 years is its main attraction. 
Sanctions alone could not have accomplished this, and using military force would have entailed considerable risk with uncertain results. 
On the other hand (there always is another hand in diplomacy), the agreement permits Iran to keep far more nuclear-related capacity than it would need if it were interested only in civil research and in demonstrating a symbolic ability to enrich uranium. 
The agreement also provides Iran with extensive relief from economic sanctions, which will fuel the regime’s ability to support dangerous proxies throughout the Middle East, back a sectarian government in Baghdad, and prop up Syrian President Bashar al-Assad’s regime. 
Moreover, the accord does not rule out all nuclear-related research and does not constrain work on missiles. 
Sales of ballistic missiles and missile parts to Iran are banned for no more than eight years. 
Sales of conventional arms to Iran are prohibited for no more than five years. 
There is also the danger that Iran will fail to comply with parts of the agreement and undertake prohibited work. 
Given Iran’s record, this has understandably been the focus of much concern and criticism regarding the pact. 
What matters is that non-compliance be met with renewed sanctions and, if needed, military force. 
A bigger problem has received much less attention: the risk of what will happen if Iran does comply with the agreement. 
Even without violating the accord, Iran can position itself to break out of nuclear constraints when the agreement’s critical provisions expire. 
At that point, there will be little to hold it back except the Nuclear Nonproliferation Treaty, a voluntary agreement that does not include penalties for non-compliance. 
It is important that the United States (ideally, joined by other countries) let Iran know that any action to put itself in a position to field nuclear weapons after 15 years, though not explicitly precluded by the accord, will not be tolerated. 
Harsh sanctions should be reintroduced at the first sign that Iran is preparing a post-JCPOA breakout; this, too, is not precluded by the accord. 
Iran should likewise be informed that the US and its allies would undertake a preventive military strike if it appeared to be attempting to present the world with a fait accompli. 
The world erred in allowing North Korea to pass the nuclear-weapons threshold; it should not make the same mistake again. 
In the meantime, a major effort must be launched to assuage the concerns of Iran’s neighbors, several of which will be tempted to hedge their bets against Iran’s potential breakout in 15 years by pursuing nuclear programs of their own. 
The Middle East is already nightmarish enough without the added risks posed by a number of would-be nuclear powers. 
Obama’s claim that the agreement has “stopped the spread of nuclear weapons in this region” is premature, at best. 
It will also be essential to rebuild strategic trust between the US and Israel; indeed, this will need to be a high priority for Obama’s successor. 
And the US should push back as warranted against Iran’s foreign policy or treatment of its own people. 
None of this rules out selective cooperation with Iran, be it in Afghanistan, Syria, or Iraq, if interests overlap. 
But here, too, realism should prevail. 
The notion that the nuclear agreement will lead Iran to moderate its radicalism and rein in its strategic ambitions should not be anyone’s baseline scenario. 
In fact, the emergence of an ever more capable Iran, not a transformed one, is likely to be one of the main challenges confronting the Middle East, if not the world, in the coming years. 

Trump Is Strengthening Iran’s Radicals 
STANFORD – The United States and Iran have rarely agreed on how to proceed with nuclear talks or other elements of their bilateral relations. 
But synergies and similarities between two factions – Iranian hardliners and the hawks of the current US administration – are as counterintuitive as they are profound. 
Indeed, Donald Trump’s new Iran strategy has given radicals in Tehran reason to celebrate, as they have found in the US president an unwitting ally in their quest for political dominance. 
For years, Iran’s “conservative radicals” – a concept that combines extreme conservatism in matters of faith and philosophy with radical views on violence – have argued that negotiation and rapprochement with the US are foolish and futile. 
The US, these hardliners believe, is interested only in regime change, and to fight Islam in the region. 
This view has led Iran to align more closely with Russia and China. 
But as crippling nuclear-related sanctions in recent years brought the Iranian economy to the verge of collapse, Iran’s conservatives were forced to negotiate in good faith with the international community. 
Even without sanctions, the Iranian economy would have been under severe strain. 
Corruption and mismanagement, along with structural and external challenges – such as falling oil prices, water shortages, and an aging unemployed population – had already weakened economic growth. 
The fact that China and Russia joined the most recent round of sanctions had made the radicals’ position less tenable. 
But if Iran’s hardliners were frustrated by previous negotiations, their disappointment vanished yesterday. 
Trump’s move to challenge the 2015 nuclear deal – formally known as the Joint Comprehensive Plan of Action, or JCPOA – has given them an unanticipated victory. 
While the most effective sanctions had already been lifted, and are unlikely to be re-imposed, Iran’s conservatives have gained political points that they can use against their opponents at home. 
Within Iran, a powerful coalition of moderate forces – ranging from reformists and dissidents to civil-society actors – has long advocated for a more engaged foreign policy. 
Wary of Russia’s influence and uncertain of China’s intentions, these forces have supported a continued Western orientation in economic and political ties. 
Moderates advocated for more responsible foreign policy and caution on the country’s nuclear program. 
And they sought to deepen ties to the Iranian diaspora, in the hope that closer relationships could help solve some of Iran’s most daunting economic challenges. 
Iranian moderates understood that the nuclear deal reached with the international community was flawed. 
But they supported it nonetheless, hoping to leverage it for more freedom at home. 
President Hassan Rouhani famously promised a domestic version of the deal to heal Iran’s political wounds, and to further address its economic woes. 
That pledge reflected Rouhani’s broader effort to challenge and curtail the power of the Islamic Revolutionary Guard Corps, which is rooted in the IRGC’s control of large swaths of the Iranian economy. 
Now, with Trump’s move, Rouhani’s agenda, and that of the entire moderate coalition, is in jeopardy. 
Most of those in the US who supported the nuclear deal were also aware of its flaws. 
But they saw the deal as an opportunity to engage Iranians who oppose the conservative radicals. 
American supporters believed that the vibrancy of Iranian civil society and social media boded well for the country, and hoped an Iran that was open to global markets would become more liberal politically. 
Critics of the deal object that Iran’s testing of ballistic missiles has continued unabated after the JCPOA was enacted. 
But it is folly to think that the US can curb Iran’s nuclear and regional activities by unilaterally walking away. 
In fact, the deal’s ultimate goal – to slow enrichment of uranium and halt nuclear testing – appears to have worked. 
Whatever problem Trump has with the agreement, it is worth remembering that no country can fix what it has rejected. 
And rejecting the JCPOA would only encourage the Iranian regime to resume the very activities that the deal was meant to contain or curtail. 
Trump’s challenge to the JCPOA will most likely encourage other egregious behavior as well. 
One reason for the radicals’ regional shenanigans – such as supporting militias in Yemen, Palestine, and Lebanon – is the belief that confrontation with the US or Israel is inevitable. 
Proxy forces like Hezbollah are, from this perspective, a tool either for deterring aggression or for deployment when fighting begins. 
It is true that Iran’s proxies have not holstered their guns as a result of the nuclear agreement. 
But tensions with the US did diminish. 
Now, following Trump’s about-face, the possibility of confrontation between Iran and the US has returned, which will only embolden the resolve of Iran’s proxy forces. 
Unilateral US abrogation of the JCPOA is, in short, the worst of all policy options. 
No matter what Trump says, there are plenty of people in Iran, and the US, who share this view. 

Iran in the Middle 
PARIS – International negotiations over Iran’s nuclear program have been taking place, in one form or another, for more than a decade. 
So it is not surprising that the deadline for a final deal has been extended once again. 
Iran and its interlocutors – the five permanent members of the United Nations Security Council plus Germany (the P5+1) – now have until the end of June to reach an accord. 
It is a dispiriting development, and it would be easy to say that the process seems doomed to fail. 
But there is reason for hope. 
In the ongoing round of negotiations, the two key players, Iran and the United States, have seemed willing – if not desperate – to bring the talks to a successful conclusion. 
Iranian President Hassan Rouhani and US President Barack Obama would both benefit from a deal. 
The sanctions imposed on Iran are starting to weigh heavily on its economy, and a settlement to the dispute is a prerequisite for any effort by the two countries to cooperate on a peace deal in Syria or to address the threat posed by the Islamic State. 
Iran is just emerging from a three-year internal political struggle. 
The military and hardline mullahs, who believe that Iran should produce a nuclear weapon, faced off against the bulk of the business community and reformist mullahs, led by Rouhani and former President Mohammad Khatami, who believe that it should not. 
The outcome was uncertain – until Supreme Leader Ayatollah Ali Khamenei reiterated a fatwa banning nuclear weapons. 
For as long as the issue remained unsettled, the Iranian delegation to the talks could not agree on the desired outcome. 
This was evident in cases where the International Atomic Energy Agency was granted access to suspected facilities during the negotiations, only to have local commanders turn away its inspectors when they arrived. 
(To be sure, the US delegation has also appeared inconsistent at times, often including officials vehemently hostile to Iran, along with disciplined diplomats seeking an agreement at Obama’s request.) 
There is also another, more fundamental, reason for hope. 
The Middle East is undergoing a tectonic shift – the Shia awakening. 
As with the slow, sure movement of the earth’s plates, this deep, broad, underlying transformation is manifesting itself in local, destructive eruptions. 
When America’s misguided war in Iraq deposed Saddam Hussein in 2003, it upset a delicate balance. 
Saddam was venal and cruel, but his regime was predominantly secular. 
Far from harboring weapons of mass destruction, he was focused on maintaining his grip on power. 
Having learned his lesson during Iraq’s brutal and costly war with Iran in the 1980s, Saddam was careful not to disturb the region’s geopolitical equilibrium. 
For more than a thousand years, the Islamic world has been riven by the Sunni-Shia conflict. 
Until the US-led invasion, Iran, alongside Syria’s Alawite regime, was the only country where Shia controlled the state. 
Some 70% of the Arab world’s population is Sunni, and the Shia are a minority in every Arab country – except Iraq and Bahrain. 
The fall of Saddam allowed Iraq’s Shia majority to take power through elections. 
But it also triggered civil war and regional turmoil (including ongoing Shia protests in Bahrain). 
In Syria, the situation is almost a mirror image. 
The country is a mosaic of Druze, Kurds, Christians, a few Jews, many Shia, and a Sunni majority. 
Like Saddam, President Bashar al-Assad heads a secular regime that rules through brutal repression. 
The determination in the West to depose him in the name of human rights and democracy was perceived by the Sunni majority as an opportunity to overthrow their oppressor. 
Unfortunately, Syria’s moderate Sunnis came under attack from two sides: Assad’s government and extremist adherents of Wahhabism, Islam’s most intolerant school of thought. 
The result is the emergence of the Islamic State, carrying with it the threat of extermination of the country’s minorities, including Christians and Alawites. 
The upheaval in these two neighboring countries has reshaped regional geopolitics. 
Along with Iran, Russia, which seeks to undermine American and British influence in the Middle East, supports the Shia awakening, whereas Sunni-dominated Turkey, the region’s strongest military power and a NATO member, has done little to hide its sympathy for the Islamic State. 
Recently, for example, Turkey’s government forbid the country’s Kurds from supporting their ethnic kin in Iraq and Syria, whom the Islamic State has targeted for annihilation. 
Assad’s brutal regime and Iran have become key players in the fight against the Islamic State. 
Unblocking the nuclear talks between the P5+1 and Iran is thus crucial; by unfreezing the regional status quo, a final deal could lead to a change of alliances, with far-reaching consequences. 
Indeed, perhaps the most compelling reason to hope that the negotiators will move quickly toward an agreement is their governments’ fear of the alternatives. 

Iran on the Warpath 
BERLIN – While Europe remains preoccupied with its own slow-motion crisis, and other global powers continue to be mesmerized by the bizarre spectacle of European officials’ myriad efforts to rescue the euro (and thus the global financial system), clouds of war are massing over Iran once more. 
For years, Iran has been pursuing both a nuclear program and the development of long-range missiles, which points to only one conclusion: the country’s leaders are intent on building nuclear weapons, or at least on reaching the technological threshold beyond which only a single political decision is required to achieve that end. 
The latter course would arguably keep Iran within the scope of the Nuclear Non-Proliferation Treaty (NPT), to which it is a signatory. 
But there can be no reasonable doubt about the Iranian leadership’s intentions. 
Otherwise, Iran’s nuclear and missile programs would be a pointless waste of money. 
After all, Iran does not need uranium-enrichment technology. 
The country has only one civilian nuclear reactor, with fuel rods supplied by Russia, and the Iranian technology now being developed cannot be used in it. 
But uranium enrichment makes a lot of sense if you want a nuclear weapon; indeed, for that purpose, enrichment is indispensable. 
Moreover, Iran is building a heavy-water reactor, supposedly for research purposes, but which is also needed to build a plutonium bomb. 
Iran has, in violation of the NPT, hidden substantial parts of this program. 
The country has also spent millions of dollars on illegal purchases of enrichment technology and nuclear-weapon designs from the Pakistani nuclear scientist and black marketeer A.Q. Khan, the “Father of the Pakistani bomb.” 
Iran tried to conceal these transactions for years, until its cover was blown when Libya began to cooperate with the West and exposed the Khan network. 
An Iran armed with nuclear weapons (or one political decision away from possessing them) would drastically alter the Middle East’s strategic balance. 
At best, a nuclear-arms race would threaten to consume this already-unstable region, which would endanger the NPT, with far-reaching global consequences. 
At worst, nuclear weapons would serve Iran’s “revolutionary” foreign policy in the region, which the country’s leaders have pursued since the birth of the Islamic Republic in 1979. 
The combination of an anti-status quo foreign policy and nuclear weapons and missiles is a nightmare not only for Israel, which at least has second-strike capabilities, but also for Iran’s non-nuclear Arab neighbors and Turkey. 
Indeed, the Gulf States, including Saudi Arabia, feel more existentially threatened by Iran than Israel does. 
Europe’s security profile, too, would change dramatically if Iran were to possess nuclear warheads and long-range missiles. 
All attempts at negotiations have led nowhere, with Iran continuing to enrich uranium and improve its nuclear technology. 
Sanctions, while useful, work only in the very long term, and a change in the balance of power within the country is not foreseeable in the short term. 
So it is only a matter of time – and not much time – until Iran’s neighbors and the international community will confront a fateful choice: either accept Iran as a nuclear power, or decide that the mere prospect, as it becomes more realistic, is leading to war. 
President Barack Obama has already made clear that the United States will not accept Iran as a nuclear power under any circumstances. 
The same is true of Israel and Iran’s Arab neighbors in the Gulf. 
The next year promises to be critical. 
The Israeli government recently suggested that Iran would reach the nuclear threshold within nine months, and Iran could become a major issue in the long run-up to the US presidential election in November 2012. 
And it is difficult to imagine that Israel’s current government will stand by idly while Iran becomes a nuclear power (or a nuclear quasi-power). 
On the other hand, talk of military intervention – which, under the circumstances, would largely boil down to air strikes – is cheap. 
There are grave doubts about whether the Iranian nuclear program could be eliminated from the air. 
In fact, with large parts of the world most likely condemning any attack, military intervention could clear the diplomatic path to an Iranian bomb. 
It is better not to dwell on what the Middle East might look like after this kind of confrontation. 
Iranian opposition forces would likely be the first victim of Western military action, and, elsewhere in the region, the Arab Spring would likely be submerged under a massive anti-Western wave of solidarity with Iran. 
The region would be pushed back into violence and terror, instead of continuing its transformation from the bottom up. 
The effects on the global economy would be no less significant, to say nothing of the humanitarian consequences. 
A last-ditch diplomatic solution appears unlikely, given that the nuclear question plays a decisive role in the Iranian regime’s factional struggles, in which anyone favoring compromise can be considered the loser. 
Moreover, Iran’s leaders seem to assume that the country is too big and too strong to be subdued by sanctions or air strikes. 
Historically, the road to disaster has usually been paved with good intentions and grave errors of judgment. 
That could happen again in 2012, when miscalculations on all sides could clear the path to war or a nuclear Iran – or, quite realistically, to both. 
Further escalation in the Middle East will culminate in these wretched alternatives sooner rather than later, unless a diplomatic solution is found (or unless diplomacy can at least buy time). 
Unfortunately, that may be unlikely in the year ahead. 
In the absence of any viable route to US diplomatic engagement with Iran, the burden of organizing, convening, and conducting such highly sensitive negotiations falls on Europe. 
And European leaders, as Iran knows very well, have other things on their minds. 



America’s Senseless Iran Sanctions 
CANBERRA – The sanctions imposed on Iran by the United States earlier this month are designed to isolate the country economically, and to force either regime change or a dramatic shift in the regime’s behavior. 
American officials have called the newest sanctions – the second tranche since August – the “toughest” ever on Iran. 
And yet, despite the hardship the sanctions will cause for ordinary Iranians, they are unlikely to deliver the outcomes that US President Donald Trump desires. 
The latest sanctions follow Trump’s withdrawal in May from the 2015 Iran nuclear deal – known as the Joint Comprehensive Plan of Action (JCPOA). 
Under that deal, Iran agreed to pursue nuclear technology only for peaceful purposes, in exchange for relief from all nuclear-related sanctions maintained by the United Nations and the US. 
But the JCPOA never sat well with Trump, who complains that the “very bad deal” will not prevent Iran from developing nuclear weapons in the future, does not target Iran’s missile industry, and essentially ignores Iran’s “destructive” regional behavior – such as its involvement in Syria, Iraq, and Yemen. 
Iran’s main regional adversaries, Israel and Saudi Arabia, echo Trump’s concerns. 
So far, Iran’s leaders have responded to the renewal of US sanctions with defiance. 
They have pledged to adhere to the JCPOA (even as they strengthen Iran’s conventional military capabilities and continue to pursue regional ambitions). 
Other signatories are also proceeding; leaders from Britain, China, France, Germany, and Russia, as well as the European Union and the International Atomic Energy Agency, support the Iranian position and insist that Iran is fully compliant with the JCPOA’s terms. 
To be sure, the US pressure has stung. 
While Western and Asian leaders have vowed to defy America’s extraterritorial sanctions – which target third parties that do business with Iran – foreign firms that invested in Iran after the JCPOA was signed have begun withdrawing from the country. 
More are certain to follow after this latest round of sanctions. 
As a result, Iran’s already-fragile economy is set to be hit even harder, fueling further downward pressure on the currency and upward pressure on prices. 
The rapid decline in Iranians’ standard of living has already spurred public unrest, although the regime has been able to contain recent protests by blaming America. 
Still, Iran’s ability to weather the sanctions should not be underestimated, especially given the regime’s strengthening of economic and trade ties with key partners, including Russia, China, and India. 
In Russia’s case, bilateral engagement now extends from arms deals and strategic partnerships – particularly in Syria – to direct investments. 
For example, Russian energy companies are committing as much as $50 billion to oil and gas exploration in Iran, which is also developing the South Pars natural gas field, the world’s largest. 
China, meanwhile, is providing funding and technical assistance for many projects, ranging from railways to hospitals. 
Last year, the Chinese state-owned investment arm, CITIC Group, established a $10 billion credit line, and the China Development Bank has promised $15 billion more. 
And, because China is one of eight countries exempted for six months from American sanctions, it will continue to buy as much as 11% of its oil from Iran. 
Finally, India, which has also received temporary US waivers, remains committed to good relations with Iran for two reasons. 
First, India imports more than 10% of its oil from Iran; replacing that supply would be costly. 
Second, India has cooperated with Iran to build the Iranian deep-water port of Chabahar on the Gulf of Oman, intended to help India bypass its regional rival, Pakistan, in gaining access to Afghanistan and Central Asia. 
India’s stance must be particularly troubling for Trump. 
On the one hand, he has urged India to play a greater role in Afghanistan as part of the American exit strategy from that conflict. 
On the other hand, Trump cannot endorse India’s strategic engagement with Iran. 
These factors – together with the EU’s determination to maintain the JCPOA, the possible resale of Iranian oil to Europe by Russia, and Iran’s financial activities in Iraq and elsewhere – will help Iran soften the sanctions’ blow. 
None of this is to suggest that Iran’s leaders can breathe easy. 
On the contrary, Iran is facing severe financial limitations. 
But just as US-led sanctions on Iraq in the 1990s failed to topple Saddam Hussein, sanctions are unlikely to lead to regime change in Iran now. 
While the Iranian people will no doubt suffer, the regime will likely be able to whip up enough nationalist sentiment – and external support – to contain any threat to its survival. 

Iran's Debate Over Iraq 
No country in the Middle East is monitoring postwar events in Iraq more closely than Iran. 
Geographical proximity, an intense and bloody history of conflict with Saddam Hussein's Iraq, religious and emotional connections to Shi'a Iraq, and concerns about the United States and its policies in the region are all threads that tie Iran to its western neighbor. 
Given ongoing tensions with America, Iran is particularly concerned with the likelihood of a continuing US presence next door, as well as with America's dominant role in shaping Iraq's post-Saddam future. 
Outsiders may find it difficult to follow internal Iranian debates, but they do exist, and they are intense, even if they are not always visible to the wider international public. 
Three general approaches are recognizable in the evolving Iranian debate on post-Saddam Iraq. 
Iranian pragmatists argue that Iran must inevitably cooperate with the US in post-Saddam Iraq, if only to ensure the rights of Iraq's Shi'a population. 
For this reason, Iran should win assurances that a new leadership in Iraq will not be hostile to it, and will seek friendly bilateral relations. 
Other vital considerations for the pragmatists include preserving Iraq's territorial integrity and repatriation of tens of thousands of Iraqi refugees living in Iran. 
These moderates think that Iran's government should press America for extradition of Iraq-based members of the Mujahdin-e Khalq Organization (MKO), as well as its total dismantling. 
In exchange, Iran's government should give its support to ensuring peace, stability, and security in Iraq. 
In sum, the pragmatists would limit Iranian-American dealings, keeping them focused on an agenda that largely reflects Iran's domestic concerns. 
By and large, conservative forces in Iran support this approach. 
Another approach envisions a more active, cooperative Iranian role in reconstructing Iraq. 
Advocates of this view argue that Iran is well positioned to make rebuilding easier, owing to its well-established infrastructure of personal and institutional ties in Iraq. 
Eventually, it is argued, the US and the international community will recognize the value of Iranian cooperation. 
Iranian cooperation should be repaid with the dismantling of the MKO infrastructure in Iraq, perhaps linked to an Iranian commitment to crack down further on any al-Qaida activities, as well as expel al-Qaida members from Iran. 
Most importantly, Iran ought to press for an American assurance that its cooperation will be reciprocated by an American guarantee that Iran will not be a target of American military action in the future. 
In short, advocates of cooperation call for an open and explicit bargain: Iran's support for stability during the current transitional phase in Iraq, as well as its commitment to maintain cooperative relations with whatever permanent government emerges in Iraq, in exchange for an improvement in Iran's regional and international position. 
This view is widely held among Iran's reformers--both inside and outside government--and the more internationally minded technocratic and business class. 
Finally, for Iran's radicals, the possibility of cooperative relations with the US is pure fantasy. 
They believe that America is bent on undermining Iran's security and compromising its national interests. 
In the radicals' view, the US will at the very least seek to dictate major changes in Iranian foreign policy. 
At most, they argue, America will actively push for regime change in Iran. 
It will actively work against Iran's acquisition of nuclear knowledge and energy, and may yet attempt to weaken Iran's military capability altogether. 
These radicals view the US invasion of Iraq as reflecting America's desire to encircle Iran. 
In response, they believe that Iran must be aggressive in defending its interests, forming strategic alliances with Russia and other regional powers, and using Iran's influence in Iraq to prevent a pro-American, anti-Iran government from emerging in Baghdad. 
Hardliners of all factions support this approach. 
Overthrowing Saddam's regime was the easy part of the Iraqi crisis. 
Now comes the hard part: establishing peace and security, winning the war on terrorism, and convincing the Muslim masses that America is not intent on occupying Iraq, siphoning off its oil, and reshaping the Middle East in its image. 
In the meantime, opposition to the US, expressed as suicide bombing and other forms of terrorism, will very likely increase. 
Iran is destined to remain a major regional player because its political dynamism and Muslim identity resonate widely in the Muslim world. 
What happens in Iraq has major implications for Iran, and the US is well advised to find ways of recognizing this fact. 
American threats, or talk of another war, fuel the fires of resentment and frustration in Iran, strengthening the most radical forces. 
If the US wishes to avoid this outcome, it must consider limiting the influence of its own radicals, recognizing that America's interests in Iraq are best served by greater cooperation with Iran. 

Iran’s Electoral Strategy 
WASHINGTON, DC – Negotiations over Iran’s nuclear program have again hit a wall, but the country’s Supreme Leader, Ayatollah Ali Khamenei, appears unconcerned. 
Indeed, Khamenei seems convinced that neither the United States nor Israel will attack its nuclear facilities – at least not before the US presidential election in November. 
Ironically, while Khamenei is no fan of democracy, he relies on the fact that his principal enemies are bound by democratic constraints. 
Khamenei controls Iran’s nuclear program and its foreign policy, but the US and Israel must work to reach consensus not only within their respective political systems, but also with each other. 
Iran’s leaders, who closely follow Israeli political debates, believe that Israel would not launch an assault on their nuclear facilities without America’s full cooperation, because unilateral action would jeopardize Israel’s relations with its most important strategic ally. 
Given that an Israeli offensive would need to be coordinated with the US, while an American assault would not require Israeli military support, Iran would consider both to be American attacks. 
But Iran’s leaders remain skeptical of either scenario, despite America’s official position that “all options are on the table” to prevent Iran from developing nuclear weapons capability. 
So far, they simply do not feel enough pressure to consider a compromise. 
In fact, Iran’s leaders continue to deride Israel from afar, calling the country an “insult to humanity,” or a “tumor” in the region that must be eradicated. 
Meanwhile, Iran’s citizens – including clergy in the holy city of Qom, near the Fordow nuclear facility – are deeply concerned about the consequences of an attack. 
Ayatollah Yousef Sanei, a former attorney general and a religious authority (marja’), has asked the government to refrain from provoking Israel. 
Indeed, critics of the government believe that its incendiary rhetoric might lead to a devastating war. 
But, from the perspective of Iran’s leadership, the taunting has tactical value to the extent that it reinforces the view among the Israeli public that Iran is a dangerous enemy, willing to retaliate fiercely. 
In fact, anti-Israel rhetoric reflects Iranian leaders’ confidence that Israel will not attack – a view that is bolstered by the situation in Syria. 
They are convinced that, even if Syrian President Bashar al-Assad’s regime falls, Iran will be able to destabilize the country in such a way that would pose a major security threat to Israel. 
According to this view, it is Israel that has an interest in refraining from further antagonizing Iran, not vice versa. 
Recent editorials in Kayhan – the hardline Iranian newspaper that serves as a mouthpiece for the Supreme Leader – indicate that Khamenei is looking forward to the US presidential election. 
Regardless of the outcome, he foresees no threat of military action, at least through next year. 
A victory by Obama would reinforce America’s unwillingness to attack Iran and renewed efforts to rein in Israel. 
And, if Republican challenger Mitt Romney is elected, he will need months to form his national security team and assemble his cabinet, leaving him unable to attack Iran immediately. 
That said, since the Islamic Republic’s emergence in 1979, Iran’s leaders have generally preferred Republican presidents to Democrats: despite their harsh rhetoric, Republicans have been more willing to engage with Iran in practice. 
Indeed, given that Iran has so far survived severe international sanctions, its leaders believe that they could get an offer from the US after the election – particularly if Romney wins – that recognizes their right to enrich uranium. 
In fact, it is far from certain that Iran will be able to withstand current sanctions-related pressures indefinitely. 
But its leaders’ confidence that they can remains a crucial element of their strategy, and the West cannot afford to ignore their perceptions. 
America, whether led by Obama or Romney, must understand that Iran will not negotiate seriously on its nuclear program until it perceives a clear, convincing, and unified consensus in the US and Israel on an approach that addresses both Iran’s ambitions and Israel’s concerns. 
Achieving such a consensus in the context of an American presidential election will be no small feat. 
Nor is it easy to create consensus in Israel, especially as its political parties prepare for elections next year. 

Iran’s Failing “Mullahnomics” 
ISTANBUL – As the stand-off between Iran’s government and opposition continues, one factor that may determine the outcome, but which is rarely discussed, is the rickety state of the Iranian economy. Will its sclerotic performance ultimately turn out to be what tips the balance? 
Iran’s economy has struggled ever since the Islamic Revolution, partly because of the economic embargo imposed by the United States three decades ago. 
Today, with Iran starved of technology and spare parts for existing equipment, OPEC’s second-largest oil producer in 2006 has become a net importer of refined petroleum products. 
Indeed, conditions in Iran’s oil industry had so deteriorated in 2007 that gasoline rationing was introduced, opening the way to a thriving black market. 
Such shortages, no surprise, have stoked inflation. 
In November 2009, the Iranian Central Bank (Bank Markazi) reported a 22% annual rise in the price level. 
To spur investment, new measures have been undertaken to allow foreign banks to enter the Iranian financial system. 
Many have applied, but no license has yet been granted. 
A clear sign of the rot in Iran’s economy can be found in economic relations between Iran and Turkey. 
Trade links between the two countries are old and deep-rooted, and they were supposed to benefit after Iranian President Mahmoud Ahmadinejad’s visit to Turkey in 2008, when it was decided that bilateral trade should double, to $20 billion, by 2011, and reach $30 billion in 2012. 
Turkey’s government even allowed Turkish exporters to bill in Iranian rials. 
But, while political leaders drew up such rosy plans, eight of Turkey’s largest investors in Iran were withdrawing from the country. 
According to one of the firms, “investment conditions are unclear in Iran,” and it left without even seeking compensation for its 60% share in a company it had created. 
Other Turkish investors express similar complaints. 
Cesur Ambalaj pulled out because of “unkept promises.” 
TAV Holding, which won the tender for the construction of the new Khomeini airport in Tehran, was never even given the chance to start the job. 
Another company, Gubretas, which had bought Razi, one of Iran’s biggest petrochemical companies, for $650 million dollars in 2008, has not yet been able to start production, owing to administrative restrictions. 
Moreover, the proposed truck route between the Turkish Black Sea port of Trabzon and the Iranian port of Bandar Abbas has not yet materialized because of Iran’s hesitation. 
The list of such mishaps and missed opportunities is long. 
According to the vice-president of the Iranian-Turkish Business Council, “it is extremely complicated to do business in Iran.” 
A former Turkish diplomat in Iran described the business climate in stark terms: “it is as if Iranians prefer a lose/lose outcome to a win/win one in their dealings with foreign partners.” 
What lessons can be drawn from the failure of Turkish businesses in Iran? 
Some blame appalling infrastructure and high road taxes. 
Others suggest that Iran’s almost non-existent banking system is the culprit. 
Still others blame the “invisible hand of America,” which is supposed to fear that Iran and Turkey could become too powerful. 
But the real source of Iran’s dysfunctional economy is the country’s peculiar political and economic power-sharing. 
According to the International Monetary Fund, the Iranian economy is almost totally controlled by political actors. 
Twenty thousand public companies consume 65% of the national budget and handle 80% of exports, as well as 50% of internal trade. 
The market share of state-owned banks is 85%. 
These public companies make up what is called the bonyad economy. 
A bonyad is a foundation very tightly connected to and actually run by the religious authorities. 
Through the bonyads, the mullahs have their say in most production and trade deals. 
Parallel to the bonyads, another economic network has emerged around the basij, the paramilitary force linked to the pasdaran (Revolutionary Guards), who are in turn closely connected to Ahmadinejad. 
Since he became president, Ahmadinejad has encouraged this basij economy, and today the pasdaran are granted trading licenses and exclusive control and use of some ports. 
These two networks are very often in competition, if not in conflict, with each other, reflecting the current Iranian political turmoil. 
Adding to the confusion, another group, the sarrafs (primarily private money lenders) are the key interface between foreign investors and an Iranian counterpart, whether basij or bonyad. 
They have trading licenses (kartibazargani) while foreigners do not, and thus they are also party to all trade deals. 
Under such circumstances, it is no wonder that doing business in Iran is a labyrinthine nightmare. 
These internal conflicts have worsened with the country’s domestic political crisis and the global economic crisis. 
Irrationality seems to have taken over. 
For example, Iran’s mullahs shut down the air route between Tehran and Antalya because it gave Iranians access to “sinful” leisure in Turkey, but it was replaced by a Tehran-Sparta route, which flies Iranians 140 kilometers away just making the trip slightly longer! 
Riven by such blinkered thinking, Iran seems incapable of making headway on even the most sensible policy. 
For example, Iran has not yet ratified international economic agreements such as the Economic Cooperation Organization Trade Agreement (ECOTA), which would strengthen its economic ties with its neighbors, all of which are Muslim countries. 
The most dangerous time for a country, it is said, comes when it starts to reform. 
Iran’s economy has yet to reach such a moment. 

Iran’s Hardline Choice 
Iran’s choice for its next president, the hardline Mayor of Teheran Mahmoud Ahmadinejad, is likely to worsen relations with the West and the country’s international isolation. 
Yet in domestic terms the Islamist regime is likely to be better off than it would have been with a more moderate result. 
Clearly, Ahmadinejad has a real base of support. 
But the fact that he ran as a populist, talked about helping the poor, condemned the government’s performance, and acted almost like an opposition candidate are all irrelevant: he was the regime’s choice, and, in the end, he received official help even against rival hardline candidates. 
The regime played its hand brilliantly. 
It turned the slightly more pragmatic Hashemi Rafsanjani, who disagreed with some current policies, into the “establishment” figure and its own man into the rebel. 
The government thus used anti-establishment feeling to revitalize its own rule. 
Given the fact that the last president, Muhammad Khatami, was a supporter of the reform movement – albeit a timid one who ultimately accomplished nothing – only underlines how thoroughly the rulers turned around the political situation. 
Ahmadinejad is a representative of the younger activists in the anti-Shah revolution of a quarter-century ago. 
He was directly involved in the holding of American hostages in Iran, though exactly how much so remains a matter of dispute. 
Most worrisome of all, he is close to the two main groups that represent the most extreme elements in Iran: the Islamic Revolutionary Guard Corps and the Basij organization. 
The first is a parallel pro-regime army; the second is an organization for intimidating opponents and anyone seeking a more open society. 
However, concern that an even more radical leadership has taken over in Iran is mitigated by two factors. 
First, Ahmadinejad is more likely to focus on domestic issues, trying – with whatever degree of success is unclear – to improve living standards for the poorest Iranians. 
Second, the same group that has been in control ever since the revolution will basically continue to run ideological and foreign policy. The president has fewer powers than it seems, overshadowed particularly by Supreme Guide Ayatollah Ali Khamenei. 
Nevertheless, Ahmadinejad’s election starkly clarifies the challenge that Iran poses for Western policy and Middle East stability. 
First and foremost, it sends a signal to the most extreme elements in Iran and that country’s terrorist clients – Lebanon’s Hezbollah, the Palestinian Hamas and Islamic Jihad, and various small groups operating against Saudi Arabia, Iraq, and other Arab countries – that they have a green light for launching attacks. 
They are likely to assume that Iran will support them whatever they do. 
Outwardly, Iran has often been relatively cautious, but, at the covert level, it has been the world’s leading sponsor of terror. 
Sometimes individual Iranian officials may have acted on their own to order and coordinate specific operations; they will now feel freer to do so. 
Moreover, Ahmadinejad openly advocates Iran’s crash program to obtain nuclear weapons. 
Most Iranian politicians – at least those allowed by the government to function openly – support the program, but favor a quieter and more cautious approach. 
Rafsanjani, for example, put building better economic relations with the West ahead of pushing forward on the nuclear front. 
If Ahmadinejad is president of a nuclear Iran, he is more likely to use the weapons in an adventurous manner. 
This does not mean that he would fire them, but rather that he would use them for purposes of diplomatic blackmail, raising threats to crisis levels. 
Since Iranian leaders daily proclaim their desire to wipe Israel off the map and to fight the US (Ahmadinejad stepped on a picture of an American flag on his way to vote), the risk of confrontation has increased. 
Finally, Ahmadinejad is likely to be bolder in subverting stability in Iraq, and his victory will encourage radical Iranian officials and extremists within Iraq itself. 
Iran is already sending many agents into Iraq and supporting clients seeking to turn that country into a clone. 
Iraqis, including Shia Muslims – who follow the same version of Islam as Iranians — generally reject such interference. 
A more militant Iranian posture is likely to increase friction with Iraq, as well as inspire more anti-American violence there. 
In short, Iran’s electoral outcome is a dangerous one, though precisely how destabilizing it ultimately turns out to be will depend on Ahmadinejad’s actions and the degree of power granted him by Khamenei. 
Moreover, dealing with such an openly extreme Iran – radical even by the hardline regime’s standards – will be a challenge not just for the US, but for Europe as well. 
Will European countries try to pretend that Ahmadinejad’s militant rhetoric and provocations don’t matter and that some diplomatic solution to Iran’s nuclear ambition can be found? 
With Rafsanjani, either a real agreement or the pretense of cooperation would have been easy to maintain. 
But, with Ahmadinejad, a high level of appeasement will be necessary for even the most minimal diplomatic process to continue. 
Some Iranian reformers and exiles put a bright face on Ahmadinejad’s election, arguing that his administration is more likely to show the regime’s real face and disabuse any Western hopes of compromise. 
Yet it may also represent the regime’s success at co-opting dissatisfaction with a quarter-century of radical Islamist rule. 
Whatever the outcome, for the West, Ahmadinejad’s victory means that everything related to Iran is set to become even hotter. 

Iran’s Last Chance? 
MADRID – The latest round of negotiations on Iran’s nuclear program between Iran and the so-called “5+1” group (the United Nations Security Council’s five permanent members – the United States, the United Kingdom, Russia, France, and China – plus Germany) has now begun. 
Following more than a year of deadlock, after negotiations in January 2011 led nowhere, this dialogue is for many the last chance to find a peaceful solution to a nearly decade-long conflict (in which I participated closely from 2006 to 2009 as the West’s main negotiator with Iran). 
The objective of the talks, chaired by the European Union’s foreign-policy chief, Catherine Ashton, and Iran’s chief negotiator, Saeed Jalili, is still to persuade Iran to halt uranium enrichment and to comply with Security Council resolutions and its obligations under the Nuclear Non-Proliferation Treaty. 
But several factors heighten the current negotiations’ strategic importance. 
First, domestic economic and political conditions in Iran have changed markedly since the last round of talks. 
International pressure has mounted since the International Atomic Energy Agency confirmed last November that the country’s nuclear program was advancing towards the production of nuclear arms, rather than electricity or medical isotopes, with new sanctions imposed on Iranian oil exports and on transactions with the Central Bank of Iran. 
Although rising global energy prices have given Iran some respite in recent months, the sanctions have made themselves felt more than ever among Iranian consumers. 
The rial has lost 40% of its value since October (making imports less affordable), and financial transactions have become much more expensive and difficult for the government, businesses, and households alike. 
Moreover, Iran’s leadership is fragmented and weak. 
Relations between President Mahmoud Ahmadinejad and Supreme Leader Ayatollah Ali Khamenei continue to deteriorate, while tensions are growing within the Revolutionary Guard. 
It remains to be seen what impact these political developments will have on the negotiations. 
Second, Iran’s regional standing has been shaken by the wave of Arab revolts, especially in Syria – a decisive country, given its strategic relations with both Iran and Russia. 
Indeed, Syria is Iran’s main ally in the Middle East, as well as being the only country outside of the former Soviet Union in which Russia has a military base. 
Russia’s need to reconcile its role in these negotiations with its interests in Syria makes an already-complicated dialogue more difficult. 
The strategy with respect to the Gulf’s Sunni monarchies has also changed. 
Today, these countries are more at odds with both Iran and Syria than they have been for decades. 
Led by Qatar and Saudi Arabia, they have openly admitted the possibility of arming Syrian rebels in order to overthrow President Bashar al-Assad. 
Moreover, Saudi Arabia’s oil reserves enable it to give crucial support to oil-export sanctions on Iran by offsetting the loss of global supply. 
China, with its growing energy dependency on the Gulf states, will have to weigh that factor carefully at the negotiating table. 
Along with Russia, China has backed Syria in the Security Council, and it was recently revealed that Iran helped Syria to defy international sanctions by providing a ship to transport oil from Syria to a state-owned company in China. 
Third, Israel, already unhappy with the outcome of the previous round of negotiations, is becoming increasingly uneasy. 
With Iran’s nuclear program advancing and political uncertainty looming over the region, Israel supports a military operation against Iran in 2012, before, in the words of Israeli Defense Minister Ehud Barak, it crosses the “immunity zone,” beyond which intervention would be futile. 
Israeli Prime Minister Benjamin Netanyahu, speaking last month to the membership of AIPAC, the largest pro-Israel lobby in the US, emphasized the urgency of the situation. 
But the negotiations will be long, with many ups and downs, and, to add another layer of complexity, are taking place during an election year in the US, with the opposition Republican Party more closely aligned with Netanyahu’s position. 
Finally, US President Barack Obama knows that his reelection depends on avoiding mistakes in this matter. 
But how can a lengthy negotiation be carried out without seeming to benefit the party, which wants to gain more time? 
Political optics – that is, the management of public perceptions – will be a very important part of this negotiation. 
For now, America is keeping a channel open for direct dialogue with Iran (as US Secretary of Defense Leon Panetta warned Barak months ago). 
On the first day of the talks in Istanbul, Jalili accepted a US request for a bilateral meeting within the context of the negotiations, and all participants deemed the results so far to be a step in the right direction. 
If we want to ensure that Iran never has a nuclear weapon, the only guarantee is to change its desire to possess one. 
And the best way to do that is still by negotiating, rather than by using force. 
No one has calculated the consequences of a war. 

Iran’s Less-is-More Nuclear Policy 
NEW YORK – The recent United States National Intelligence Estimate (NIE), which reports that Iran once had a “nuclear weapons program” but suspended it in 2003, means that there will probably be no American attack on Iran during the Bush administration. 
How could America’s president explain to the world why he was bombing nuclear weapon facilities that his own intelligence services have said do not exist? 
So, in all likelihood, the world has been spared a policy that would be as futile as it would be destructive. 
Indeed, the one act most likely to guarantee that Iran obtains nuclear weapons would be to attack it. 
(Nine years after Israel’s bombing raid on Iraq’s nuclear reactor at Osirak in 1981, Saddam Hussein was nevertheless within a year of having an atomic bomb.) 
Yet the NIE arrived at its result by a strange route. 
Every technically competent person knows that the paths to civilian nuclear power and to nuclear weapons are the same, except for a few last, comparatively simple steps. 
The hard part is obtaining the fissionable materials – plutonium or highly enriched uranium. 
Once that’s done, any nation – or even a sophisticated terrorist group – can do the rest. 
Nuclear power requires low-enriched uranium as fuel. 
Enrich it further, in the same facilities, and you have bomb-grade highly enriched uranium (HEU). 
The remaining step – slamming two pieces of HEU together to create a critical mass and an explosion – is easy: the blueprints can be downloaded from the Internet. 
Indeed, the “secret” of the hydrogen bomb was published in 1979 in an article by Howard Morland in The Progressive magazine, sparking a failed legal suit by the US government to suppress it. 
The hard work of building facilities for enriching uranium is precisely what the Iranians are now already doing, if not yet in sufficient quantity to make a bomb, which might take them five or ten more years to acquire. 
But, once they acquire sufficient capacity, only the easy steps will remain. 
Yet it is work on the easy steps, allegedly attempted and then canceled, that the NIE called Iran’s “nuclear weapon program.” 
In light of the technical realities, it would have been more accurate to designate the difficult and openly acknowledged enrichment activity as the nuclear weapons program, for this is what can supply the guts of an atomic bomb. 
Ironically, Iran’s suspension of the easy steps creates the impression that its weapon program has been stopped, while the most important activity continues in plain sight. 
Of course, this does not mean that once Iran has adequate enrichment facilities, it will make a bomb. 
But it is capacity, not intention, that counts. 
Iran could easily do what Japan does – hold enrichment facilities in readiness to make a bomb without actually doing so. 
Or, like India in 1974, it might wait a long time, then dash to the finish line and conduct an atomic test. 
How has this confusion arisen? 
One answer lies in the provisions of the Nuclear Nonproliferation Treaty (NPT), which forbids nuclear weapons to most of its signatories but guarantees them the right to build technology for nuclear power, including uranium enrichment. 
Thus, the treaty unfortunately permits any signatory to acquire the most important facilities needed for making atomic bombs. 
So, when the Bush administration wanted to oppose Iran’s program, merely pointing to the bare fact of enrichment wasn’t enough. 
It had to point to other acts, including concealment efforts, which violate the NPT, and argue that these infractions were so serious that Iran’s enrichment right must be taken away. 
The US was thus led to a series of over-statements. 
In December 2005, Vice President Dick Cheney said, “There is every reason to believe that they are seriously pursuing nuclear weapons.” 
President Bush now argues that all along it has been the above-board enrichment of uranium, not some other, secret program, that carries Iran ever closer to having nuclear weapons. 
But he makes that legitimate point in vain: having rested its case on misjudgments, the administration now finds itself discredited by its own intelligence estimate. 
We are left in a situation that layers paradox upon paradox. 
A disastrous possible policy – military attack on Iran – has been headed off by a misguided, misinterpreted intelligence report. 
One question is why Bush and Cheney set themselves up for this embarrassment. 
Bush has said that he learned of the NIE’s conclusion only a week before it came out – a statement that either is false or reveals a level of incompetence beyond anything suspected so far. 
None of that matters now. 
The Bush administration’s habits of falsehood have undone its aggressive proclivities, leaving a gaping vacuum. 
The doctrine according to which great powers, many of them nuclear-armed, try to stop lesser powers from acquiring nuclear weapons by force and threats of force – a fiasco in Iraq, nuclear-armed North Korea, and now Iran – has reached a dead end. 
But, report or no report, the danger that Iran will acquire nuclear weapons is real, and may even have increased. 
What’s missing is a policy to address it. 

Iran’s Muddled Presidential Politics 
WASHINGTON, DC – The decision of former Iranian president Mohammad Khatami not to seek the presidency again has revealed how muddled Iranian presidential politics now is. 
In trying to sort out this muddle, the most important thing to keep in mind is not so much who will be elected, but what that choice will reveal�about the intentions of the country’s Supreme Leader, Ayatollah Ali Khamenei. 
Unfortunately, the most likely outcome will be continuing transformation of the Islamic Republic from a civil government into a garrison state in which the military plays a major role in determining political and economic matters. 
Who will actually win the vote is unpredictable, but not because Iran is democratic. 
Ayatollah Khamenei, who is also the commander-in-chief of the armed forces, oversees the agencies that will run the election: the Guardian Council and the Ministry of Interior, which supervise the electoral process, and the Basij militia and Revolutionary Guard (IRGC), which unofficially control the ballot-boxes and the vote-counting process. 
Recent surveys show that the increasing unpopularity of the current president, Mahmoud Ahmadinejad, stems primarily from his economic policies. 
Although oil prices reached an all-time high in 2008, unemployment and inflation (now 31%) are out of control and the government is facing a $44 billion budget deficit. 
The public sector accounts for roughly 80% of the economy, and relies mostly on now-plummeting oil revenue, while Iranian banks face a credit crisis, with Mahmoud Bahmani, the governor of the Iran Central Bank, estimating total delinquent payments to be $38 billion. 
But Ahmadinejad’s unpopularity does not necessarily weaken his chances of being re-elected. 
A few months before the election, neither of the two main political currents, conservative and reformist, has settled on its candidate. 
Among the reformists now in the race, Mehdi Karrobi, the former speaker of the Majlis is a declared reformist candidate. 
Mir Hossein Moussavi, a former prime minister, and Abdullah Nouri, a former interior minister, are also expected to enter the race. 
On the conservative side, Ahmadinejad so far stands alone. 
But many conservatives also oppose his economic policies, as well as his management style. 
Conservative voices have repeatedly argued that supporting Ahmadinejad will cost them votes and reinforce the economic crisis. 
Conservative disenchantment with Ahmadinejad is apparent in the current Majlis, which is predominantly conservative. 
The Majlis has rejected the government’s economic bills, and has repeatedly impeached or challenged Ahmadinejad’s cabinet ministers. 
Iran’s main diplomatic challenge will center on its nuclear program and relations with the United States. 
Since the president has no authority over these issues, any disagreement between the Supreme Leader and the next president will place the president in a difficult position with no real power. 
In terms of domestic policy, the major challenge for the next president will be the economy. 
Over-reliance on oil revenues, the effect of longstanding international sanctions, and the reluctance of foreign companies to invest in Iran have exacerbated the economy’s structural problems. 
Perhaps one of the most significant elements in Iran’s stagnation is that the Revolutionary Guards control a large portion of the economy, and are beyond the reach of government regulation. 
In order to manage the economic crisis successfully, any president must not only shift economic policy, but also amass enough political power to be able to thwart the intervention of the Revolutionary Guards and other organizations in economic policy-making. 
Former President Khatami’s initial decision to run for the post again grabbed the international community's attention. 
Yet a Khatami victory would not have guaranteed change. 
As president, he faced criticism from reformists for his failure to resist a range of powerful groups that sabotaged economic reform and improvement in Iran’s relations with the west. 
Khatami’s organizational savvy had not improved much since then. 
So far, he lacks even a media platform for his faction. 
Reformist critics believe that in order to mobilize people it will not be enough just to campaign against Ahmadinejad. 
If a reformer is to win he must prove that he will be able to sway Iran’s political structures toward a reform agenda. 
But reformists ask: if the Supreme Leader does not even permit the Khatami faction to have a newspaper, would he really have allowed Khatami to become president? 
Even if any reformer does become president, will he be able to overcome his differences with the Supreme Leader?� 
Speculation about the outcome of the election is an interesting parlor game. 
But it should not distract us from the fundamentals of Iranian politics. 
The next president may have room to adjust economic or social policies. 
But, on the big issues of foreign policy, relations with the West, and the nuclear program, the identity of the president is not important. 

Iran’s New Contender 
WASHINGTON, DC – Iran’s presidential race just got more interesting, with former Prime Minister Mir Hussein Mousavi throwing his hat in the ring and former President Mohammad Khatami withdrawing his. 
This development poses the most significant challenge yet to current President Mahmoud Ahmadinejad – and a potential opportunity to alter the relationship between Iran and the West. 
Mousavi, who believes that Iran is in “poor shape,” is perceived by many of the Iranian elite to possess the revolutionary and ideological credentials to run against Islamist fundamentalists such as Ahmadinejad. 
At the same time, he is associated with Iranian reformists, who believe that Iran must enact major domestic and foreign policy changes to escape its economic crisis and international isolation. 
A Mousavi presidency could lead to foreign policies that incorporate engagement with the United States and European Union on a number of issues, including Iran’s nuclear program. 
However, Mousavi will face many obstacles in the months leading up to the June 12 vote, and he will succeed only if allowed to by Supreme Leader Ayatollah Ali Khamenei. 
Mousavi was an important part of the revolutionary movement that overthrew the Shah in 1979. 
As Prime Minister from 1981 to 1989, he was credited for steering Iran through the crises of the early revolutionary period and the Iran-Iraq war. 
Widely viewed as a capable technocrat, Mousavi has often been able to navigate Iran's complicated economic and political maze. 
He appeared to have abandoned an active role in politics after his post was abolished in 1989. 
But now he has ostensibly resurfaced, like a Persian Cincinnatus, to help Iran in its hour of need. 
Iran under Ahmadinejad is facing its worst economic crisis in decades. 
Inflation, unemployment, sanctions, and falling oil prices have created a perfect storm, threatening the stability of the regime. 
Yet the public and the elite few view the presidential contenders as being capable of improving Iran’s conditions. 
Ahmadinejad maintains some support among the poor and rural classes, but he is viewed with disdain by much of the ruling class, even within his own political camp. 
His economic failures have highlighted the need for a more moderate and capable president. 
Former President Khatami, meanwhile, is reviled by the fundamentalists and the top brass of the Revolutionary Guards, who repeatedly obstructed his reform agenda during his presidency. 
A recent op-ed in the right-wing Kayhan newspaper, which is closely associated with Khamenei, had warned Khatami to avoid the same fate as the assassinated Benazir Bhutto in Pakistan. 
It is no surprise that he backed out of the race, leaving Mousavi, a technocrat and a revolutionary, as the only viable challenger to Ahmadinejad. 
But change does not come easily to Iran. 
Supreme Leader Ayatollah Ali Khamenei is wary of Mousavi, who served as Prime Minister during Khamenei’s presidency in the 1980’s. 
The two were often at odds over economic, social, and religious policies. 
Ahmadinejad, by contrast, has been loyal to Khamenei and has largely followed his policies over the past four years. 
In Khamenei’s eyes, it was Ahmadinejad who kept Khamenei’s reformist opponents at bay and resisted President George W. Bush’s attempt to “dominate” Iran and the Middle East. 
A perceived change in American “behavior” under the Obama administration may facilitate Khamenei’s support for, or at least acquiescence in, an electoral victory by Mousavi. 
Khamenei may be fundamentally opposed to full US-Iranian relations, but a new Iranian president may provide some cover for limited accommodations, including perhaps on the nuclear front. 
And an easing of US-Iranian tensions over the next few months, even if unaccompanied by substantive advances in the relationship, could improve the prospect for a fairer, less manipulated election result. 
Mousavi is the man to watch. 
But, as always, elections in Iran are neither predictable nor transparent. 
The dominant actors – Khamenei and the Revolutionary Guards – will continue to exert potentially decisive influence. 

Iran’s Nuclear Grass Eaters 
MADRID – After long years of failed international efforts to end Iran’s cunning drive to develop nuclear weapons, the question today is no longer whether the West can prevent the nuclearization of Iran’s military arsenal, but whether the Islamic regime collapses first. 
Unfortunately, if it does not, the only option for stopping Iran is war – and war is a very bad option. 
Pakistan is worth invoking when assessing whether the sanctions now imposed on Iran will force it to surrender its nuclear program. 
In 1965, Pakistani Foreign Minister Zulficar Ali Bhutto famously declared that if India, its sworn enemy, went nuclear, his country would “eat grass and even go hungry” in order to develop a nuclear bomb of its own. 
Today, Pakistan, a near-failed state on the verge of disintegration, possesses more nuclear warheads than India. 
Iran’s theocratic regime, immersed in a momentous struggle for survival against what it regards as an unholy alliance of Israel, the American “Great Satan,” and a surrounding Arab world that abhors its hegemonic ambitions, will not surrender its nuclear ambitions easily. 
Indeed, nuclear weapons appear to be the regime’s only real route to self-preservation. 
The French and the Soviet revolutions taught us that exporting the revolution is one way to protect it. 
Iran tried that, and failed. 
The almost inevitable fall of Iran’s closest ally in the region, the Baath regime in Syria, only adds to the regime’s paranoid anxieties – and makes developing a nuclear capability seem all the more necessary for its survival. 
Iran’s leaders might be ready to let their people “eat grass and even go hungry” for the sake of their nuclear ambitions, but Iran’s squeezed middle class, one hopes, will not submit to such degradation. 
Social unrest has been building up in Iran for years, and certainly began well before the West became serious about imposing economic and financial sanctions. 
In fact, the popular revolts in Tunisia and Egypt were directly inspired by Iran’s Green movement, which emerged during the massive post-election protests in 2009, before succumbing to a brutal government crackdown. 
The sanctions against Iran have undoubtedly bitten hard. 
But the truth is that the severe economic hardships suffered by ordinary Iranians mainly reflect the regime’s economic mismanagement, and the widespread fear that the threat of war from both Israel and the United States, sometimes abetted by Iran’s own war rhetoric, has unleashed. 
Indeed, Iran’s economy is now firmly in the grip of a war panic. 
When a national currency loses 50% of its value in a matter of weeks, economic collapse is at hand. 
Businessmen find it impossible to use the rial even for domestic transactions, because inflation is spiraling out of control. 
Commodity prices, moreover, are skyrocketing, and the cost of small and mid-size apartments has become prohibitive for a middle class severely hit by unemployment. 
Iran’s backward economy, a third of which is controlled by the Revolutionary Guard, is simply incapable of offering job opportunities to Iran’s growing cohorts of university graduates – the same segment of society that toppled the Shah. 
The problem has become increasingly acute, because 60% of Iran’s population was born after 1979. Moreover, rapid population growth and bungled economic policy have made Iran excessively dependent on food imports. 
Yet, however crippling the effect of sanctions might be, they will not bring the regime to surrender its nuclear program. 
The most for which one can hope is that sanctions enhance the chances of regime change by reawakening popular protest, thereby triggering an Iranian version of the Arab Spring. 
This might be wishful thinking, however. 
And, even if social unrest does erupt, repression might succeed again. 
But an attack by either Israel or the US on Iran’s nuclear installations would be a calamitous mistake, or, as Meir Dagan, a former chief of Israel’s Mossad intelligence service, put it, “the stupidest idea” possible. 
So it is to be hoped that Israeli Prime Minister Binyamin Netanyahu’s war rhetoric and vulgar manipulation of the memory of the Holocaust are nothing more than a ploy to divert the world’s attention from the Palestinian problem that he has done nothing to resolve. 
Alas, one cannot rule out a scenario in which nothing – diplomacy, sanctions, or the push for a regime change – works. 
In that case, one should not underestimate the pernicious effects of Israel’s Holocaust complex. 
What led Israel to war in 1967 was not a sound assessment of Egypt’s intentions to attack, but fear of a second Shoah. 
An attack on Iran might, however, produce precisely the effect that Netanyahu seeks to avoid. 
Post-war global diplomacy might have to promote, perhaps more robustly than ever, the creation a nuclear-weapons-free zone in the Middle East, and thus address Israel’s nuclear capabilities, as well as the Palestinian problem – issues that Netanyahu has worked hard to ignore. 
But if the path of war is finally taken, and, in its aftermath, the international community fails once again to pacify the world’s most dysfunctional region, the Middle East would devolve into an unruly chaos far more dangerous than the threat of an Iranian bomb. 

Iran’s Nuclear Lies 
Mohammad El-Baradei, the director general of the International Atomic Energy Agency (IAEA), is pressing the agency’s board of governors to make one last effort to find a diplomatic solution to Iran’s nuclear ambitions before sending the case to the United Nations Security Council for possible sanctions. 
A decision to refer Iran to the Security Council could come as early as November 24, when the IAEA’s board meets to discuss “new information” discovered by inspectors on the ground. 
Thanks to the IAEA’s inspectors, we now have a fairly detailed picture of Iran’s nuclear archipelago – at least those facilities that the Iranian government has been forced to open. 
We know that Iran has discovered, mined, and milled natural uranium, the basic building block of any enrichment program, without telling the IAEA. 
We know that Iran built a uranium conversion facility in Isfahan to convert uranium yellowcake into uranium hexafluoride gas (UF6), the feedstock for uranium enrichment, without the required prior notifications to the IAEA. 
We also know that Iran built an underground uranium enrichment plant at Natanz, hardened it against missile attack, and erected dummy buildings on the surface to conceal it from overhead surveillance. 
The authorities agreed to open this facility to the IAEA only after its existence was confirmed by commercial satellite imagery, and they appear to have swept the underground halls of whatever equipment was installed before the inspectors arrived. 
Once fully operational, these facilities will give Iran mastery of the entire nuclear fuel cycle. 
For eighteen years, Iran’s government concealed these activities from the IAEA, in clear violation of its safeguards agreement. 
For this reason alone, the IAEA’s board must refer Iran to the Security Council for further actions, as required by the agency’s charter. 
Non-nuclear nations that sign the Non-Proliferation Treaty, as Iran has, pledge to abandon all efforts to develop nuclear weapons. 
In exchange, they are given access to nuclear technologies. 
But that pledges requires complete, transparent cooperation with the IAEA. 
Instead, Iran has been playing cheat and retreat, in clear violation of Article II of the NPT. 
“With Iran, we realized that mastery of the fuel cycle makes you a virtual nuclear weapons state,” a top aide to El-Baradei told me. 
“That was a wake-up call for all of us.” 
But a wake-up call that allows the IAEA‘s board to go back to sleep is useless. 
For two and a half years, the European Union has made every effort to get Iran to cooperate fully with the IAEA and come clean about its nuclear activities, to no avail. 
When the IAEA announced it wanted to inspect a suspected enrichment cascade within the Revolutionary Guards complex at Lavizan-Shian, Iran’s government stalled for months until it could raze the site. 
When it asked to visit a suspect lab within the Parchin defense production plant, the Iranians stalled. 
When they finally allowed a small team in, they limited their movements, in violation of Iran’s commitments. 
El-Baradei has stated that the IAEA has found “no evidence” of a weapons program in Iran – a statement that Iranian leaders have since cited as proof of their peaceful intentions. 
But the IAEA has no authority to determine whether or not a country has a nuclear weapons program. 
That is up to the UN Security Council. 
The IAEA’s job is to determine whether a nation has violated its safeguards agreement, and El-Baradei has made it abundantly clear that Iran has. 
Understanding the intentions of Iran’s leaders is not as difficult or as ambiguous as some believe. 
Eighteen years of concealment constitutes a powerful track record. 
So do Iranian leaders’ own statements. 
For example, in 1986, then-president Ayatollah Ali Khamenei gave a pep talk at the headquarters of the Atomic Energy Organization of Iran. 
“Our nation has always been threatened from outside,” he said. 
“The least we can do to face this danger is to let our enemies know that we can defend ourselves.” 
In 1988, Ali Akbar Hashemi-Rafsanjani – the supposed “moderate” candidate in Iran’s recent presidential election – spelled out what that meant in an address to the Revolutionary Guards Corps. 
“We should fully equip ourselves both in the offensive and defensive use of chemical, bacteriological, and radiological weapons,” urging the audience to “make use of the opportunity and perform this task.” 
At a Jerusalem Day rally at Tehran University in December 2001, he uttered one of the regime’s most sinister threats. 
“The use of an atomic bomb against Israel would destroy Israel completely, while [the same] against the world of Islam only would cause damages.” 
Iran’s regime has only grown bolder since then. 
Foreign Minister Kamal Kharrazi declared in June 2004 that Iran “won’t accept any new obligations,” and must “be recognized by the international community as a member of the nuclear club.” 
Similarly, in March 2005, Rafsanjani reiterated Iran’s refusal to dismantle its nuclear fuel cycle facilities, as the EU and the IAEA had demanded, insisting that “we can’t stop our nuclear program and won’t stop it.” 
In these circumstances, the risk entailed by doing nothing far outweighs the costs of referring Iran to the Security Council. 
Indeed, Iran may already be enriching uranium secretly. 
If it used the centrifuges that it purchased from Pakistan’s nuclear impresario A.Q. Khan, it could have enough fissile material to produce 20 bombs. 
With Iran continuing to shelter top al-Qaeda leaders, this raises an even graver threat: that terrorists get hold of nuclear weapons. 
The dangers of allowing Iran to go nuclear ought to be obvious. 
Even to El-Baradei. 

Iran’s Nuclear Zealot 
With negotiations over Iran’s nuclear program looming once again, understanding Iran’s new president, Mahmoud Ahmadinejad, is critically important. 
Perhaps the best place to start is the moment the world first gained a glimpse of Ahmadinejad’s character and hardline program. 
When President Ahmadinejad addressed the United Nations in New York last September, he suddenly felt himself surrounded by light. 
It wasn’t the stage lighting, he said. 
It was light from heaven. 
Ahmadinejad related his otherworldly experience in a videotaped meeting with a prominent Ayatollah in Tehran. 
A transcript of his comments and sections of the video-tape wound up on a hard-line, pro-regime website, baztab.com. 
According to the transcript, Ahmadinejad said that a member of his entourage at the UN meeting first told him of the light. 
“When you began with the words ‘In the name of God’… I saw a light coming, surrounding you and protecting you to the end [of the speech].” 
Ahmadinejad confirmed sensing a similar presence. 
“I felt it myself, too, that suddenly the atmosphere changed and for 27-28 minutes the leaders could not blink....They had their eyes and ears open for the message from the Islamic Republic,” he told Ayatollah Javadi-Amoli. 
Ahmadinejad’s “vision” at the UN could be dismissed as political posturing if it weren’t for a string of similar statements and actions that suggest he believes that he is destined to bring about the “End Times” – the end of the world – by paving the way for the return of the Shia Muslim messiah. 
Given that Iran continues to pursue suspect nuclear programs, which could bring the Islamic Republic dangerously close to weapons capability, a leader with messianic visions is worrying. 
After all, this is the same man who recently pledged to use Iran’s newfound powers to “wipe Israel off the map” and to “destroy America.” 
In a November 16 speech in Tehran to senior clerics who had come from all over Iran to hear him, the new president said that the main mission of his government was to “pave the path for the glorious reappearance of Imam Mahdi (May God Hasten His Reappearance).” 
The mystical 12th Imam of Shia Islam disappeared as a child in 941 CE, and Shia Muslims have awaited his reappearance ever since, believing that when he returns, he will reign on earth for seven years, before bringing about the Last Judgment and the end of the world. 
In order to prepare for the Mahdi, Ahmadinejad said, “Iran should turn into a mighty, advanced, and model Islamic society.” 
Iranians should “refrain from leaning toward any Western school of thought” and abstain from “luxurious lives” and other excesses. 
Three months into Ahmadinejad’s presidency, his views of the 12th Imam are being widely discussed in Tehran. 
According to one rumor, as mayor of Tehran, Ahmadinejad drew up a new city plan for the Imam's return. 
In recent weeks, Ahmadinejad’s aides have denied another rumor that he ordered his cabinet to write a pact of loyalty with the 12th Imam and throw it down a well near the holy city of Qom, where some believe the Imam is hiding. 
Those who give credence to the rumor point to an early decision of his cabinet to allocate $17 million to renovate the Jamkaran mosque, where devotees of the 12th Imam have prayed for centuries. 
Similarly, reports in government media outlets in Tehran have quoted Ahmadinejad as having told regime officials that the Hidden Imam will reappear in two years. 
This proved too much for one Iranian legislator, Akbar Alami, who publicly questioned Ahmadinejad’s judgment, saying that even Islam’s holiest figures have never made such claims. 
While many Shia Muslims worship the 12th Imam, a previously secret society of powerful clerics, now openly advising the new president, are transforming these messianic beliefs into government policies. 
Led by Ayatollah Mesbah Yazdi, who frequently appears with the Ahmadinejad, the Hojatieh society is considered by many Shia as the lunatic fringe. 
During the early years of the Islamic Revolution, even Ayatollah Ruhollah Khomeini found their beliefs too extreme and sent them scurrying underground. 
As devotees of the 12th Imam, the Hojatieh believe that only great tribulation will warrant his coming. 
Akin in some ways to Lenin’s doctrine that worsening social conditions would hasten revolution, the Hojatieh believe that only increased violence, conflict, and oppression will bring the Mahdi’s return. 
Since taking office last August, Ahmadinejad has installed Hojatieh devotees in his cabinet and throughout the bureaucracy. 
The Ministry of Information and Security (MOIS), largely sidelined by former President Mohammed Khatami, has re-emerged as a powerful repressive force, using plain-clothes agents, allied with the paramilitary Bassij and non-government vigilantes, to crack down on potential opponents of the regime. 
As the world prepares to confront an Iranian regime that continues to defy the International Atomic Energy Agency on its nuclear programs, we must listen to what Iran’s leaders say as we watch what they do. 
A religious zealot with nuclear weapons is a dangerous combination the world cannot afford to tolerate. 

Iran’s Options 
Berlin -- With President Bush in Europe getting EU leaders to agree to toughen UN sanctions against Iran, and with the ongoing debate between John McCain and Barack Obama about whether the US needs to talk with Iran’s rulers, the issue of Iran’s nuclear program is heating up. 
Iranians, no surprise, are watching this debate with interest. 
They need to do more than watch. 
Iran’s political elite sees the United States, rather than Europe, as their appropriate international counterpart. 
Only the US can give the Islamic Republic the security guarantees it craves. 
The US, indeed, should be prepared to eventually give such guarantees if it wants Iran to stop the more suspicious parts of its nuclear program. 
But Iran must do its part to make any future dialogue with the US a success. 
In talks with members of Iran’s policy community, I am continually astounded that they see resolving the nuclear conflict (or, indeed, other problems in which Iran has a stake) to be primarily the responsibility of the US, Europe, and other major powers, not of Iran. 
Such passivity is not in Iran’s interest. 
As the Middle East’s essential regional player, Iran can trigger and heat up conflicts as well as contribute to their solution. 
Yet few in the Iranian establishment understand that being the leading regional power brings responsibility; and that only responsible behavior can create legitimacy and acceptance that Iran craves. 
Iranian policymakers must, therefore, try to develop their own ideas for a negotiated resolution of the nuclear and other regional security issues, as well as to think about how Iran can rebuild trust in its actions. 
Iran’s leaders should begin by shunning hostile rhetoric. 
Incendiary statements about Israel exacerbate the lack of trust among Iran’s would-be partners, and make it hard for those in Europe and the US who are interested in building more favorable relations. 
Iran hints that it wants to have a high-level dialogue with the US in the not-too-distant future. 
If true, Iran should realize that violent statements on sensitive issues will set back any serious attempt to get a dialogue going. 
Iran could also build trust if it became more transparent, particularly about its own strategic ambitions. 
A good start would be to publish key documents that are constantly referred to by Iranians but never seen – say, Ayatollah Khamenei’s fatwa that reportedly rules that Islam prohibits the production, stockpiling, and use of nuclear weapons? 
It would also be helpful if Iran laid out its strategic vision for the region. 
It should accept the concerns of its neighbors, seek to develop its own ideas for regional confidence- and security building, and participate in efforts to create regional security arrangements. 
It should also positively respond to offers from the US to establish confidence-building measures between the two countries’ military forces, particularly their navies. 
As to the nuclear issue, Iran should try to switch from the language of “inalienable rights” to one of pragmatic solutions. 
This would help depoliticize the issue. 
The right to independent nuclear research and development under the NPT is not disputed. 
But rather than insist as a matter of principle on operating the fuel cycle independently under national sovereignty, Iran could engage the Saudis about their idea of a regional joint venture, or explore different options of multilateral consortia with other countries. 
Iran’s parliament, now led by Ali Larijani, Iran’s former nuclear negotiator, could make a strong contribution to confidence building and to the resolution of the nuclear conflict by ratifying the NPT’s Additional Protocol. 
Other clarifications are also needed. 
Is Iran prepared to accept a compromise that responds to European and other international concerns about its nuclear program, and thereby gain wide-ranging economic, energy, technology and science cooperation? 
Nuclear energy, after all, is only one technology, and a 20th century, rather than a 21st century one at that. 
Eventually, partnership with Europe could help Iran keep the best of its young generation at home rather than having them queue for visas at foreign embassies – or, more often, the US consulates in Istanbul or Dubai. 
The willingness of major countries to accept Iran with a nuclear status similar to Japan depends on whether Iran not only refers to itself as a status-quo power – which it occasionally does – but whether it acts as such. 
If it wants to be seen as a status-quo power, it needs to accept local and international efforts at establishing peace between Israel and its neighbors. 
For a grand bargain with the US, Iran needs to end its support for militant organizations like Hamas or Palestinian Islamic Jihad which undermine efforts at reaching a two-state solution for Israel and Palestine. 
Even without such a bargain, however, Iran will have to do certain things if it wants to be seen as a constructive regional player. 
It will have to accept all the other states in the region as legitimate players with their own legitimate interests as much as it wants to be recognized as such itself. 
It will also have to accept the wish of the huge majority of Palestinians for a peaceful settlement with Israel. 


Iran’s Pre-Emptive Strike 
Iran’s quarreling and competing leaders have decided, by their acts, to reject the offer by Europe and the United States of a nuclear reactor, aircraft spare parts, economic cooperation, and more in exchange for giving up uranium enrichment. 
Many people hoped that Iran’s leaders, despite their extremism, would accept the offer if only to avoid sanctions – which are sure to come even if China and Russia refuse to support them in the United Nations Security Council. 
The US and Europe are united this time, and can effectively cut off Iran from world banking, bar Iranian leaders from traveling to the West, and stop exports to Iran of everything but food and medicine. 
Instead of waiting passively for sanctions, Iran’s leaders decided to start a Middle East crisis by organizing attacks against Israel. 
Their aim is to discourage the US and the Europeans from starting another crisis – financial markets and everyday politics in Europe can tolerate only so much conflict. 
They may also hope to shatter the unified EU/US position that now exists. 
Moreover, Iran’s claim to leadership in the Muslim world is being undermined by the conflict in Iraq, where Iran supports the Shia militias that are killing Sunnis. 
Every bloody day of bombings and executions in Iraq reminds Arabs that the Iranians are neither Arab nor Sunni. 
But attacking Israel unites Muslims, and gains Arab gratitude. 
Iran’s move was prepared in a series of meetings with both Hamas and Hezbollah in Lebanon. 
Khaled Mashal, Hamas’s overall leader, who lives under Syrian protection in Damascus, traveled to Tehran, where he received some $50 million in badly needed cash. 
Although an offshoot of the Sunni Muslim Brotherhood, whose Arab financial supporters loathe the Ayatollahs, Hamas decided to cooperate in Iran’s scheme because it was diplomatically isolated and cut off from Western funding due to its refusal to recognize Israel. 
Hamas acted by increasing rocket attacks on nearby Israeli territory, and by launching a raid into Israel itself, killing two soldiers and capturing another. 
That provoked Israeli retaliation, starting the Gaza end of the crisis that Iran wanted. 
As for the impact on lives in Gaza, Hamas – like Yasir Arafat – has again shown itself to be more devoted to the idea of Palestine than to the welfare of Palestinians. 
It was far more costly to get Hezbollah to serve Iran’s strategy. 
While it retains a heavily armed, salaried, and uniformed guerilla/terrorist force of some 5,000, its leader, Hassan Nasrallah, has been striving for years to build Hezbollah into a legitimate political party and the main representative of Lebanon’s Shia. 
This effort was so successful that Hezbollah now has two ministers in the government. 
But to be accepted by other Lebanese, and to some extent even to retain the support of fellow Shia, Hezbollah had to agree to join the Lebanese consensus on the priority of reconstruction and economic recovery after years of civil war. 
That meant avoiding a war with Israel. 
Hezbollah is under order by the UN Security Council to disarm and disband its militia, but it claimed that even after Israel’s full withdrawal from Lebanon in 2000, it needed its weapons to continue to liberate “Lebanese territory.” 
That refers to a tiny fragment of land, the so-called Sheba farms, declared by UN inspectors to be in Israel, but which Hezbollah claims as part of Lebanon. 
Other Lebanese political parties agreed that Hezbollah could keep its weapons to fight there – but only on condition that it keep the peace on the rest of the border. 
That is the condition Nasrallah violated by ordering an attack on an Israeli patrol nowhere near the Sheba farms and launching rockets into Israeli territory. 
With that, Hezbollah threw away its political position in Lebanon. 
For the Israeli coalition government headed by Prime Minister Ehud Olmert, matters are relatively simple. 
It ordered the withdrawal from Gaza in order to stop the cycle of violence there, on the presumption that Israeli territory proper would not be attacked. 
But the possibility of attack was of course anticipated, and military planners determined that the only possible response was to counterattack as heavily and for as long as might be needed, until Palestinian attacks would stop, whether from exhaustion or agreement. 
Hamas’s control of the Palestinian Authority does not diminish or increase the need for Israeli military action, but it does increase its political benefits, because the fighting and destruction tells Gaza’s population that their rulers are endangering their physical survival. 
As for Hezbollah, the Israeli military response is by no means confined to retaliation. 
Over the years, Hezbollah has received and stored several thousand rockets and some one hundred longer-range missiles from Iran. 
Recently, and very revealingly, two Iranian leaders threatened Israel with bombardment by Hezbollah’s rockets if Israel attacked Iran’s nuclear installations. 
Thus, Israel is using the opportunity brought by the current fighting to search out and destroy Hezbollah’s underground and other hidden sites where it keeps its rockets and missiles. 
Israel’s political aim is to destroy Hezbollah’s position as a legitimate Lebanese political party by exposing it as the paid agent of Iran, which serves foreign interests at grievous cost to Lebanon. 
So Israel is blocking Lebanon’s ports from the sea, has breached the runways of all three jet-capable airfields, including Beirut’s international airport, and remains ready to destroy generating plants and other high-value targets, if necessary, to generate sufficient political pressure on Hezbollah. 
If Lebanon’s political forces and Nasrallah’s followers cannot get him to revert to a truce, Israel will bomb more targets, including Nasrallah’s offices in south Beirut. 
If more missiles are launched, Israel will cross the border deep into Lebanese territory. 
Of course, in both Gaza and southern Lebanon, the outcome is pre-determined by the one-sided military balance. 
The only open question in both places is how much damage Israel will need to inflict to obtain new cease-fires. 

Iran’s Quest 
A major shortcoming in today’s world is the persistence of a zero-sum sense of geopolitics. 
The world expected something different in the post-Cold War era to promote peace and stability. 
Instead, after the terrorist attacks of September 11, 2001, momentum swung toward a “global war on terror” that, in practice, became the rationale for maintaining a Cold War mentality and supporting strategies of preemptive war and regime change that have intensified insecurity, instability, and international terrorism. 
Consider my country, Iran, which has not invaded any country in the past 250 years. 
After decades of struggle against dictatorship and foreign domination, we secured our freedom and independence in 1979 by establishing a political system of our own choosing. 
But instead of establishing friendly relations with Iran based on this new reality, the United States has consistently sought to restore its domination, even providing massive diplomatic, financial, and military support to Saddam Hussein in his war against my country during the 1980’s. 
The current dispute over Iran’s peaceful and legal nuclear program is part of this pattern, replete with unfounded accusations, double standards, and moral and legal inconsistency, all hidden behind the alleged threat of proliferation. 
But Iran’s peaceful nuclear program originates from the late 1960’s and 1970’s. 
Iran’s energy demand will exceed its supply, possibly reducing or even eliminating its oil export capacity in the near future. 
Thus, Iran urgently needs to produce 20,000 megawatts of nuclear power by 2020. 
As long ago as 1973, the US government itself saw that Iran would need nuclear power. 
Indeed, the US expected that Iran would be capable of generating 20,000 megawatts by 1994. 
Despite the encouragement of Iran’s civil nuclear program by the US, Britain, Germany, and France, they all ultimately reneged on their contractual commitments after our revolution in 1979. 
Today, some of these governments are even questioning Iran’s need for nuclear energy – a matter that was obvious to them 30 years ago. 
Iran does not need nuclear weapons to protect its regional interests, and such weapons have no place in Iran’s security strategy. 
It seeks to win the confidence of its neighbors and has remained within the confines of the Nuclear Non-Proliferation Treaty (NPT). 
The latest report from the International Atomic Energy Agency has verified that there has been no diversion of Iran’s civil nuclear program to weapons development. 
Iran has even proposed regional and multinational participation in its uranium enrichment facilities – only to be met by resounding silence from the Western powers. 
Meanwhile, US policy toward nuclear non-proliferation and the NPT regime is a case in point of double standards and the lack of sensitivity to other countries’ security concerns. 
While the US seeks to use unilateral and unlawful pressure to preclude Iran’s legitimate right to peaceful nuclear energy, it has assisted in developing Israel’s nuclear capabilities. 
Indeed, the US has acted as a buffer to insulate Israel—whose prime minister has boasted about its nuclear weapons—from any international scrutiny, while ignoring calls by Iran and other countries to create a Middle East nuclear-free zone. 
With regard to international terrorism, Iran, as a victim of terrorism, condemns it in all its forms. 
But the same double standards are apparent here. 
The US has used and is still using extremist organizations to promote its foreign policy goals. 
This could be said of US conduct with regard to al-Qaeda’s precursors in Afghanistan in the 1980’s, and of its current dealings with terrorist groups such as the People’s Mujahadeen Organization (MKO), and the Kurdish PEJAK and PKK. 
The MKO, which was once on Saddam Hussein’s payroll and responsible for the loss of many innocent lives in Iran and Iraq, is now under the protection of the US government in Iraq and operates freely in the US itself. 
Iran has always considered regional stability to be in the vital interest of its own security and development. 
Our efforts to establish a regional security and cooperation arrangement in the Persian Gulf date back to 1986, at the height of the war with Iraq. 
We have continued to pursue these initiatives in the post-Saddam era, engaging in confidence-building measures with our immediate neighbors in order to offset extra-regional agitations. 
Iran currently applies the same policy considerations to Iraq and Afghanistan, despite its opposition to the US-led invasions of these countries. 
Iran has established excellent relations with post-Taliban Afghanistan and post-Saddam Iraq, and the most senior officials of both countries consistently reject US allegations of Iranian interference. 
These accusations are designed to portray Iran as a threat to regional stability and frighten other countries into creating an anti-Iran coalition, with the aim of diverting attention from the consequences of failed US policies not only in Iraq, but also in Lebanon and with respect to the Israeli-Palestinian conflict. 
The world deserves better. 
A just global order must be defined in terms of peace and security, alleviation of poverty, a fairer distribution of wealth, better protection of the environment, and respect for local cultural particularities. 
We can build a global order based on justice, one that negates the current unipolar order by developing tolerance for diversity instead of seeking imposition and assimi lation. 
Such an order will be culturally inclusive and less hegemonic, encompassing states, non-state actors, and social groups to minimize violence and maximize economic well-being. 
Erich Fromm, the late German psychologist and philosopher, once said that “history is a graveyard of cultures that came to their catastrophic ends because of their incapacity for planned and rational voluntary reaction to challenges.” 
We cannot predict our fate, but we can be certain that security will only come through real solidarity and global partnership. 

Iran’s Rattling Saber 
WASHINGTON, DC – As the West ratchets up its economic pressure on Iran to halt its drive to develop nuclear weapons, the Islamic Republic’s rulers are not sitting idly by. 
Since Iran lacks the soft power and the economic capacity to counter Western pressure, it is likely that its leaders will resort to threats, and even to force, to prevent the West from cracking down further, as the recent attack on the British embassy in Tehran shows. 
Iranian authorities claimed that angry “students” spontaneously stormed the embassy. 
While inside, they seized documents and set others alight, and took six embassy employees hostage. 
It was only much later that the crowd came under police control and the hostages were set free. 
The scene was quite familiar. 
In 1979, the United States embassy was also attacked by angry “students,” fueling enmity between the two countries that continues to this day. 
Ayatollah Ruhollah Khomeini was not aware of the students’ plan in 1979. But he later endorsed their actions, and made anti-Americanism a pillar of Iran’s foreign policy. 
Iran today is not the revolutionary Iran of 1979. Thirty-two years after the Islamic Republic was established, Iran’s tactics are obvious to everyone. 
The so-called students are members of the Basij militia, which was ordered to attack the embassy, with the police only pretending to stop them. 
In the government’s thinking, it does not have to accept responsibility for the attack, the attackers’ identity will remain a mystery, and no one will even be accused of or tried for breaking the law. 
The Fars News Agency, which is affiliated with Iran’s powerful Revolutionary Guard has called the British embassy a “lair of espionage” – the same term used to describe the US embassy in 1979. 
This is not the first time that a European or British embassy has been attacked by the Basij. 
But the stakes are higher now than ever before. 
In response to Iran’s nuclear program and Iranian banks’ money-laundering activities, Britain sanctioned the Central Bank of Iran. 
As a result, Iran felt compelled to respond – and not solely with the assault on the British embassy: a few days prior to the attack, a majority in the Iranian parliament voted to downgrade the country’s diplomatic relations with Britain. 
Reacting to mounting fear of Western military action against Iran’s nuclear facilities, Revolutionary Guard commanders recently sharpened their rhetoric against the US and Israel. 
Amir Ali Hajizadeh, commander of the Guard’s Aerospace Division, said that, in the event of war, “NATO’s missile-defense installations will be attacked by Iran.” 
Moreover, he threatened that Iran’s armed forces would not remain quiet if “economic and cultural pressures” continued. 
Likewise, Yahya Rahim Safavi, Supreme Leader Ayatollah Ali Khamenei’s military adviser and a former commander-in-chief of the Revolutionary Guard, appealed to Iranian officials not to confine their threats to words, but rather to respond with military action. 
He not only argued that Iran’s strategy should be offensive rather than defensive, but also threatened that Tel Aviv would be attacked by Hamas and Hezbollah if Israel went to war with the Islamic Republic. 
Some experts argue that if covert operations against Iran’s nuclear and military programs – such as the assassination of nuclear scientists and explosions at the Revolutionary Guard’s missile arsenals – are already taking place, war has already begun. 
Indeed, Khamenei and Revolutionary Guard commanders believe that covert war will inevitably become overt if Israel and the West truly believe that Iran is approaching a dangerous point in its nuclear program. 
Khamenei recently stated that “we should threaten [the West and Israel] in response to their threats,” which prompted Armed Forces Deputy Chief of Staff Brigadier General Mohammad Baqeri to conclude that Khamenei’s remark meant “revising [Iran’s] defense strategy.” 
Obviously, Revolutionary Guard commanders will not divulge what the new strategy is. 
Instead, they hope that their own covert action might stop the West from applying more sanctions and greater pressure. 
Thus, the West’s main concerns should stem not from Iran’s official responses, but from “independent elements,” like those that attacked the British embassy. 
Recently, the US accused an Iranian-American of being instructed by a member of the Quds Force (a Revolutionary Guard unit tasked with carrying out foreign operations) to assassinate the Saudi ambassador in Washington. 
Back in 2007, Iranian forces captured a group of British sailors in the Persian Gulf, releasing them a few weeks later under strong pressure from the United Kingdom. 
With tensions much higher today, however, such acts – even if carried out by unknown or unofficial groups – can trigger war. 
Indeed, Iran might become so fearful of an overt war that it starts one itself. 

Iran’s Republic of Fear 
WASHINGTON, DC – Iran’s clerical regime governs by a simple formula: he who is the most frightening, wins. 
“Victory by terrifying” is trope that is present in many of Supreme Leader Ayatollah Ali Khamenei’s speeches. 
Indeed, it is a reliable guide to his political philosophy. 
This view was not invented by Khamenei, but rather is drawn from the Koran and the Shiite tradition. 
The Iranian Revolutionary Guard have uniforms bearing a Koranic verse that reads, “Make ready for them whatever force and strings of horses you can, to terrify thereby the enemy of God and your enemy, and others besides them that you know not; 
God knows them.” 
Furthermore, in the Shiite tradition, the strategy of the Mahdi, the Shiite Messiah, will be to intimidate all his enemies upon his return to Earth. 
But cultivating fear in others also makes one more susceptible to fear, and nothing is more frightening to Khamenei and the leaders of the Islamic Republic than the social dynamism unleashed by the democratic movement brewing inside the country. 
The regime seems convinced that there is only a small likelihood of a military attack on its nuclear program. 
It does not believe that sanctions can bring about its collapse. 
Thus, external forces do not appear to pose much of a threat. 
What has shaken the government, and indeed threatens the existence of the ruling Islamic ideology, is the pressure of the Iranian people for human and political rights. 
Hossein Saffar Harandi, a former minister of culture and Islamic guidance, expressed this fear when he said that “citizens who want the government to be accountable before the people (are) part of a soft war against the Islamic Republic.” 
For 30 years, the Islamic Republic has relied on the heavy hand of the internal-security apparatus to silence dissidents and critics. 
Fear is a cornerstone of the republic. 
But, since Iran’s post-election crisis in June, the people have become fearless, and in turn are terrifying the government. 
The extent to which Khamenei fears this social upsurge is stunning. 
He is afraid of the humanities, books, arts, universities, satellites, the Internet, and even mobile phones. 
For him, the state must control public access to global culture and technology. 
If not, these forces will work to undermine the state. 
Unlike the Islamic Republic’s founder, Ayatollah Ruhollah Khomeini, Khamenei lacks charisma and deep learning. 
Both his political legitimacy and religious authority are highly questionable, and the street violence and prison brutality of recent months has undermined his authority and shaken his social base. 
Increasingly reliant on the Revolutionary Guard as the bulwark of his regime, Khamenei has cut himself off from the possibility of compromise. 
Khamenei’s foreign policy is now completely subject to how the domestic situation in Iran develops. 
As recent months have shown, he will consider a compromise with the West only when he loses his certainty that all is under control internally. It is like a seesaw: Khamenei’s domestic weakness changes the balance of Iran’s foreign policy. 
Thus, initially intimidated by the post-election crisis, the regime acceded to the October 1 proposal in Geneva that would have allowed the controlled enrichment of Iran’s uranium outside the country. 
In November, when the government thought that street brutality had intimidated the protest movement, Iranian officials backed away from the compromise. 
In this sense, the Iranian people can be regarded as a strategic ally of the West, not only because they want democracy at home and peace in the region, but because their continued protests offer the West the most effective leverage against the Islamic Republic’s nuclear program. 
This regime cannot survive in the long term with a political crisis such as the one it now faces. 
Continued crackdowns would result in a military dictatorship, while an accommodation with the protest movement would produce some kind of consensual semi-democratic government. 
In either case, however, the democratic movement would not die. 
It would reemerge continuously, despite heavy repression over short periods of times, raising the kinds of challenges that pose an existential threat to any non-democratic government. 
Support of human rights and democracy in Iran is not only a matter of morality. 
It should be a strategic priority for the West. 
Empowering the Iranian people means weakening Khamenei and his military allies. 
And a weakened Khamenei is more likely to compromise on the nuclear front. 

Iran’s Revolutionary Echoes 
STONY BROOK, NY – Iran’s continued unrest, now extending through the 30th anniversary of the revolution that toppled the Shah, raises the question of whether the Islamic Republic is about to fall. 
As in 1979, millions of Iranians have taken to the streets, this time to protest electoral fraud in the presidential vote last June. 
The cheated presidential candidates, both veterans of the revolution, instinctively thought of a replay of history. 
Mir Hossein Moussavi saw the green symbols of the demonstrators as representing the color of the House of the Prophet, and urged his supporters to continue their nightly rooftop chants of “God is Great!” 
Thus, the first slogan of the opposition invoked the religious credo of the 1979 revolutionaries. 
More recently, protesters chanted it during the funeral demonstrations for Grand Ayatollah Hussein Ali Montazeri in the closing days of 2009. 
And yet we risk being led astray by memories of 1979. It is far too soon to predict another revolution. 
But t he divide between Iran’s society and its government is much greater today than it was under the Shah 30 years ago. 
Change seems just as inevitable. 
Technological advances greatly favor the 2009 protesters. 
Text messages, Twitter, and the Web are infinitely superior to the smuggled cassettes of Ayatollah Ruhollah Khomeini’s speeches that fueled the opposition in 1979. 
What’s missing this time, however, is a charismatic leader comparable to Khomeini. 
Indeed, the striking feature of the Iranian opposition movement is the lack of effective leadership, despite the astonishing persistence of protests. 
As Moussavi has readily acknowledged, neither he nor the other presidential candidate, Ahmad Karroubi, feels in charge by now. 
The greatest difference between 2009 and 1979 was created by the revolution itself. 
R evolutions give birth to a new political class, and Iran’s Islamic revolution was no exception. 
The Iranian leadership formed after the revolution consisted of a narrow ruling stratum and a much broader supporting group that was given charge of administration and political mobilization. 
In the 20 years since Khomeini’s death, the composition of this political class has changed drastically. 
The clerical elite has gradually lost power to the military-security groups, from whose ranks President Mahmoud Ahmadinejad emerged. 
Bureaucratic and security services dominated by the Revolutionary Guards and its militia, the Basij (Mobilization Corps), are now firmly in command. 
The leader of the Islamic Republic, Ayatollah Ali Khamenei, blessed the Revolutionary Guards’ decision to steal the presidential election. 
By identifying squarely with the military-security apparatus headed by Ahmadinejad, Khamenei has alienated an important segment of the ruling clerical elite. 
He has also reduced his own status as the ultimate arbiter in Iranian society, a role that was central to Khomeini’s dominance of the system. 
As a result, he has produced a rupture between the two pillars of the revolutionary regime: the clerical elite and military-security structure. 
The growth of Khamenei’s personal, extra-constitutional power introduces a strong element of uncertainty into Iran’s future. 
Political regimes that rely on personal power, commonly known as dictatorships, prove to be fragile in crisis. 
This was the weakness of the Shah’s regime, which collapsed as he became paralyzed in his decision-making. 
There was nothing behind him supporting the system. 
Khamenei’s backing of the June 2009 putsch now appears to be a costly mistake. 
With this single error, he has undermined what had appeared to be a robust post-revolutionary course for the first and only theocracy in modern history. 
The cries of “God is Great!” have now been overtaken by chants of “Death to the Dictator!” in recent demonstrations in Tehran, Tabriz, Shiraz, and other Iranian cities. 
The Iranian regime is now critically dependent on decisions made by one man, the Leader. 
For that reason, it is demonstrating a degree of fragility that is comparable to the Shah’s regime in the latter part of the 1970’s. 
Most spokespersons of the Green protest movement advocate civil disobedience instead of revolution. 
Earlier this month, Ezattolah Sahabi, who was a member of the revolutionary provisional government in 1979, issued a statement in Tehran stating categorically that “a revolution in today’s Iran is neither possible nor desirable.” 
At roughly the same time, five prominent opposition intellectuals living in exile released a reformist, not revolutionary, manifesto directed against the “despotic guardians.” 
But there is little chance that these children of the Islamic revolution – now graying reformists – will remain in control of the Green movement, which now reflects the aspirations of a post-revolutionary generation of young women and men and students. 
The ayatollah-dictator and the Revolutionary Guards have tried their best to discredit their opponents by concocting, through forced confessions at show trials, a conspiracy of regime change based on a “velvet revolution” produced by “Western social sciences.” 
Deep down, they know there is no conspiracy. 
Their fear is grounded in what they see in front of them: the forward march of history. 

Iran’s Supreme Power Struggle 
WASHINGTON, DC – Iran’s Supreme Leader, Ayatollah Ali Khamenei, has never been happy about the status of the Iranian presidency – neither during his own tenure, from 1981-1989, nor during the terms of his three successors. 
Tension between the president and the Supreme Leader is built into the Islamic Republic’s core. 
The Supreme Leader has absolute authority and can veto decisions made by the executive, legislative, and judicial branches of government. 
At the same time, the president emerges from an electoral process with an agenda and ambitions of his own. 
During a president’s second term – which Mahmoud Ahmadinejad has now begun – the tensions inevitably emerge into public view. 
Khamenei has never been willing to tolerate a president with a large independent power base. 
In the past, he clipped the wings of Akbar Hashemi Rafsanjani, who had strong ties to the merchant class, and of Mohammad Khatami, a reformer whose support came from Westernized middle-class professionals. 
Though Ahmadinejad received the Supreme Leader’s support in the face of large-scale protests against his re-election last year, Khamenei does not appear hesitant about limiting the president’s power. 
In fact, it appears that the massive demonstrations against Ahmadinejad delayed their confrontation, since both the Supreme Leader and the president rallied publicly to defend the legitimacy of the election. 
But Ahmadinejad’s radical Islamist views and his support among religious, lower middle-class Iranians have not protected him from Khamenei. 
For the most part, the two men have avoided head-on confrontation. 
Their struggle is visible, however, in their maneuvering inside other branches of government. 
In this arena, Ahmadinejad faces off against Ali Larijani, the speaker of the parliament, and his brother, Sadeq Larijani, who is the head of the Iranian judiciary. 
The Larijani brothers have been vehement critics of the president, whom they accuse of ignoring legislation and key judicial rulings. 
Within the parliament, the conservative bloc is divided between supporters of Ahmadinejad and advocates of more parliamentary oversight of the president. 
Recently, parliament demonstrated its opposition to Ahmadinejad’s economic policies by deciding to remove the president from his traditional post as head of the General Assembly of the Central Bank. 
This would reduce Ahmadinejad’s ability to intervene in economic policies and keep him from naming the bank’s governor. 
But this decision is contingent on the approval of the Guardian Council, where a group of the president’s supporters have launched a counter-attack. 
They want the Supreme Leader to allow the president to issue warnings to both the parliament and the judiciary if he thinks they have overstepped their authority, thereby subordinating the Larijani brothers. 
Until now, parliament has been an effective tool for the Supreme Leader legitimately to rein in presidential authority, and it is difficult to imagine that the Larijani brothers would have mounted such a sharp challenge to Ahmadinejad without the Supreme Leader’s approval. 
If they carry the day, the president will lose authority over the one area where his power has been greatest: the Iranian economy. 
By contrast, the president has no serious say in foreign policy, which is under the Supreme Leader’s direct supervision. 
Khamenei is known to seek advice from various parties, but ultimately he makes decisions alone. 
For example, he overruled Iranian nuclear negotiators who offered a compromise during the Geneva negotiations in October 2009. 
He has also diminished the foreign ministry’s stature by appointing a number of special envoys in key areas. 
Khamenei does rely on Ahmadinejad to lead Iran’s public diplomacy. 
The president travels widely, speaks frequently, and mobilizes political support with his anti-American and anti-Western rhetoric. 
But public diplomacy is not diplomacy itself. 
It is clear that no one in Ahmadinejad’s inner circle – certainly not the president himself – has gained the Supreme Leader’s confidence. 
The nuclear portfolio, for example, remains exclusively under Khamenei’s control. 
Within the realm of religious politics, Khamenei has made careful use of Ahmadinejad’s radicalism. 
It is widely believed that the president would like to reduce the clergy’s influence and increase the power of the Revolutionary Guards, his main source of institutional support. 
Thus, Khamenei can present himself as a defender of the clergy, which, given widespread doubt about his clerical credentials since he took power 21 years ago, enhances his position. 
Clerics know that if Khamenei weakens, Ahmadinejad’s circle can manipulate widespread anti-clerical resentment and exclude them from power. 
Moreover, Ahmadinejad knows that, without Khamenei’s restraint, the clerics would use their political networks among conservatives like the Larijani brothers to limit the president further. 
The mutual hostility of Ahmadinejad and the clerical class offers the Supreme Leader the best of both worlds. 
The history of the Islamic Republic indicates that the power struggle between the Supreme Leader and the president never abates. 
It also suggests that the Supreme Leader will prove to be stronger. 
More importantly for the international community, this internal struggle keeps Iran’s leaders from realistically appraising their foreign and nuclear policies. 
Consumed with their test of wills, they are unable to make well-informed and nuanced decisions in their dealings with outsiders. 

Iran’s Thought Criminals 
My friend, the intellectual Kian Tajbakhsh, is in jail in Iran for, well, being an intellectual. 
He has not had access to a lawyer nor any visitors since being jailed for espionage and undermining the state. 
In short, if you live in Iran nowadays, intellectuals are the new terrorists. 
As in Hitler’s Germany and Stalin’s Russia, purveyors of ideas, information, and emotions are the enemy in President Mahmoud Ahmadinejad’s Iran, especially if the people espousing such ideas happen to work for a foreign organization. 
And, thanks to Iran’s example, that trend is proliferating across the Muslim world. 
Tajbakhsh, an internationally respected scholar, social scientist, urban planner, and dual citizen of Iran and the United States, has languished in Tehran’s Evin Prison – notorious for its documented cases of torture and detainee abuse – since May 11. 
I was shocked last week to see him on Iranian TV, pale and wan, giving the kind of faked confession that would have made Soviet prosecutors blush. 
Soft spoken, mild mannered, thoughtful, and with a wonderful sense of humor, Tajbakhsh is portrayed by the Iranian government as a ravenous wolf ready to devour the regime. 
Tajbakhsh was arrested along with other leading Iranian-American intellectuals, including Haleh Esfandiari of the Washington-based Woodrow Wilson International Center for Scholars. 
Esfandiari is a 67-year-old grandmother – just the right age to set about undermining Iran. 
Her lawyer, Nobel Peace Prize laureate Shirin Ebadi, has been denied access to her. 
Meanwhile, journalist Parnaz Azima is not allowed to leave Iran. 
As an intellectual, Tajbakhsh cannot expect the world’s celebrities to beg Iran’s government for his release. 
Instead, he has received support from other intellectuals, such as the 3,400 members of the PEN American Center, the writers’ organization that fights for freedom of expression. 
The 14,000 members of the American Sociological Association have also asked for his release. 
You would think Tajbakhsh’s record in Iran would rule out an accusation of treason. 
He has been a consultant to several Iranian ministries on urban planning, and helped the government in major rebuilding projects after the devastating earthquake that destroyed the ancient city of Bam in 2003. 
In 2006, he completed a three-year study of local government in Iran – hardly the stuff of insurrection and regime change. 
But Tajbakhsh was also a consultant to the Soros Foundation, which, according to Ahmadinejad’s government, has worked against Islam. 
That idea is preposterous. 
In fact, the Foundation’s many contributions to the Islamic world include help following catastrophic natural disasters in Pakistan and Indonesia, providing medical supplies to the Palestinians under blockade, and allowing scholars and intellectuals to learn from each other by translating and publishing works from English into local languages and vice versa. 
What makes Tajbakhsh’s incarceration look truly pathetic is that Iran boasts of one of the oldest civilizations in the world. 
Persians mingled easily with the Egyptians, Greeks, and Romans, conveying their skills, discoveries, and statecraft to the West. 
The image of the Persians portrayed in the recent movie 300 is simply false. 
Moreover, Muslim Iranians have always respected their pre-Islamic civilization. 
Thus, the Islamic revolutionaries in 1979 made a point of preserving the Zoroastrian fire temples. 
In its Muslim era, Iran has boasted of some of the greatest poets, writers, and scientists in the world. 
None of this would have been possible if Iran’s ancient Muslim rulers had not allowed academic freedom and the free exchange of ideas and expression – something that is sorely missing in today’s Islamic Republic. 
Other autocratic rulers in the Muslim world are learning from Iran’s example, cracking down hard on intellectuals, journalists, lawyers, women activists, or just about anyone who has ideas and wants to exchange them with others. 
For such Muslim rulers, intellectuals are the new global terrorists, bombarding their regimes with intellectualism. 
And my friend Kian Tajbakhsh – alone in his cell in Evin Prison wondering what he has done wrong – is the face of this new form of repression. 

Iran’s Troubled Rise 
America’s decision to target Iranian agents in Iraq who may be involved in supporting violent militias is but another sign of the massive influence Iran is exercising in that troubled country. 
But the United States in fact facilitated Iran’s growing influence by toppling Saddam Hussein’s regime and that of the Taliban in Afghanistan, thus removing two factors that had kept the Iranian regime hemmed in for the last two decades. 
Moreover, high oil prices have filled the national treasury, and Iran is benefiting from the opportunity created by America’s being bogged down in Iraq and the growing international weight of Russia and China. 
Iran is also reaping the returns of long-term investments. 
It has supported Iraqi Shiite groups since the early 1980’s and has an equally long-standing alliance with Syria. 
In Lebanon, Iran helped create Hezbollah, which recently survived a head-on war with Israel and is the leading opponent of the anti-Syrian, Western-backed government. 
Iran’s investment in Palestine is more recent, but its backing for the Hamas-led government, which has been frustrated elsewhere, is no less significant. 
A country of 70 million, Iran also has potential influence with Shiite communities in Kuwait, Saudi Arabia, Bahrain, and the UAE. 
Iran’s rise is causing alarm in the Arab Middle East, particularly in Saudi Arabia and Jordan, but also in Egypt. 
Though a Shiite country in an overwhelmingly Sunni region, Iran’s radical Islamism resonates with the politicized Islamism that is energizing most Arab opposition movements, and its militant opposition to the US and support for groups that engage Israel in battle is very popular on the Arab street and in the Arab media. 
At another level, Iran’s rise, reinforced by its suspected bid for nuclear weapons threatens to awaken historical hostilities, between Sunnis and Shiites and between Persians and Arabs. 
Both Iran and the Arab countries are struggling to come to terms with the consequences of Iran’s newfound assertiveness. 
To be sure, Iran’s longstanding support for regional Shiite groups is paying off. 
But its successes in Iraq, Lebanon, and Palestine are creating great anxiety, and even hostility, in some quarters. 
The rapid Shiite rise has already turned into a sectarian civil war in Iraq and recently has threatened to generate the same outcome in Lebanon. 
If Iran does not properly manage its growing power, it could unwittingly trigger a drawn out sectarian war throughout the region, a nuclear arms race with Saudi Arabia and Egypt, and war with Israel, the US, or both. 
It could also draw in major Sunni powers, such as Egypt and Turkey, which have at times been dominant in the region, but lately have been disengaged. 
Too many Iranian successes, and too many Sunni debacles, could also lead to immense pressure in Syria, where a minority Alawi regime dominates a Sunni majority. 
The loss of Damascus would cost Iran its influence in Syria, Lebanon, and Palestine in one fell swoop. 
Iranian President Mahmoud Ahmedinejad’s administration is maintaining its radical rhetoric, perhaps looking ahead to a post-Bush era, when the US has withdrawn from Iraq and Iran has developed nuclear weapons. 
Nevertheless, Iran also feels the need for accommodation with its adversaries. 
For example, while Iran may not be happy with the American presence in Iraq, it realizes how close the country is to full-scale civil war. 
As a result, it has expressed a willingness to cooperate with the US on finding a soft landing for Iraq. 
Likewise, while Iran supports Hezbollah, it has also held Hezbollah back from outright rebellion, which might trigger a further Sunni backlash in the region. 
In the Gulf, Iran has tried to reassure its Arab neighbors that Iranian power is not aimed at them and can in fact be a pillar of gulf security. 
But the Arab world is divided about how to deal with the sudden rise in Iranian power. 
The tension is particularly acute in Saudi Arabia, which has warned the US about the dangers of Iraq’s possible collapse and now finds itself in an unequal face-off with Iran. 
Some in the kingdom argue that Saudi Arabia must confront Iran, stand up for Sunni Arab interests, and become a hands-on regional power. 
Other Saudis believe that confrontation will only lead to wider wars and are urging dialogue and accommodation. 
In this view, the US, not Iran, produced the region’s current problems. 
Iran’s regional foreign policy has not yet caught up with its new pre-eminence; it is making as many enemies as it is gaining friends, and it might squander the windfall gains that it made in the past three years. 
If Iran and the Arab countries – and alongside them the US and the international community – do not manage today’s tensions wisely, the region could enter a period of protracted warfare. 
But there is a way forward, because all players in the region share an interest in security and stability. 
Leaders in Tehran, Riyadh, Washington, and other key capitals must realize the costs of further mismanagement, step back from the brink, and work toward cooperative solutions before it is too late. 

Iran’s Young Guard 
TEHRAN – Iranians will go to the polls on June 12 to elect a new president. 
While some argue that President Mahmoud Ahmadinejad’s re-election is a foregone conclusion, the outcome is, in fact, not at all clear. 
Iran’s Supreme Leader, Ayatollah Ali Khamenei, has repeatedly said in public settings that he will not declare his preference among the candidates. 
Indeed, in Mashad on March 21, Ayatollah Khamenei said, “There were some rumors that I support a special candidate for the presidential elections. 
But I have one vote, and I would not determine a certain candidate because the people themselves should choose their candidates based on their own knowledge.” 
So how will the Iranian people weigh their votes? 
To answer, one needs to understand the composition of the Iranian electorate. 
With the voting age set at just 16 years, Iran has roughly 48 million eligible voters. 
Turnout averages 60-65% in presidential elections, implying that around 29 million votes are likely to be cast. 
Analysts point to several electoral cleavages, particularly the urban-rural split and socioeconomic status. 
Moreover, a key determinant of voting behavior in the upcoming elections is likely to be generational. 
Some 46% of the electorate is under the age of 30. 
In previous elections, younger voters have turned out in greater numbers than their elders, leading some to predict that half of the voters will be in the 16-to-29 age bracket. 
The number of potential first-time voters (16 to 19 years old) is estimated at six million. 
Several factors distinguish members of this group from the rest of the Iranian electorate. 
They are more educated, more urbanized, and more internationally oriented than previous generations. 
More of them are university educated, and, of this group, a majority is female. 
They have branched out into new lines of work and social engagement, as inventors, entrepreneurs, and bloggers. 
No candidate can be elected president of Iran without significant support among younger voters. 
Age, not social class, will determine the outcome of June’s election. 
Like all Iranians, younger voters are focused on economic issues, particularly the difficult combination of high inflation and high unemployment. 
The populist policies of the past four years have not brought economic improvement. 
Younger Iranians have a particular economic concern as well. 
With so many of them graduating from universities, they suffer from a mismatch between their qualifications and the jobs on offer. 
Underemployment is deeply frustrating to them. 
They also want a more liberal social environment that would loosen restrictions on their dress, broaden access to cultural products like film and music, and enlarge press freedoms. 
They want university campuses, in particular, to be more open. 
Finally, younger Iranians are tired of Iran’s international isolation. 
They want Iran to succeed – and to be recognized for its success – in sports, arts, and education at an international level. 
As of this writing, only two presidential candidates have declared themselves: former Prime Minister Mir Hossein Moussavi and former parliament speaker Mehdi Karroubi. 
Assuming that Ahmadinejad seeks re-election, this line-up lacks any candidate with clear appeal to the youth vote. 
Given their dissatisfaction, it would be natural for young voters to take out their frustrations on Ahmadinejad. 
One seemingly unrelated event to watch: in the week before the presidential vote, Iran will play two critical football matches as part of the qualifying round for the 2010 World Cup. 
If Iran fails to qualify, this could turn some young voters against the incumbent. 
Among the other candidates, who will pick up this slack? 
Moussavi, Iran’s prime minister between 1981 and 1989, is barely known to young voters. 
However, his campaign has been hinting that, if elected, Moussavi will loosen some social and cultural restrictions. 
Karroubi, too, is handicapped among the young. 
Many consider him to be an old, out-of-touch cleric with no feel for their concerns. 
Former President Mohammad Khatami, who openly considered trying again for the office, would have been a strong candidate for young voters. 
His decision not to run disappointed many of them. 
Standing in the wings is one possible candidate who might take up where Khatami left off and address the economic and cultural concerns of young Iranians. 
Though he has not announced his candidacy, Mohammad Baquer Qalibaf, now Mayor of Tehran and formerly the country’s chief of police, has a relatively moderate track record and an image of someone who can get things done. 
But Qalibaf still has not taken the plunge. 
If he doesn’t, and if no younger candidate emerges, the youth bloc in Iran’s electorate may have nowhere to turn. 


Iran Versus Saudi Arabia 
BERLIN – The “new” Middle East is now on daily display. 
Unlike the old Middle East, whose fate was determined by the dominant Western powers (the United Kingdom and France after World War I, and the United States from the 1940s until recently), the new one has no external hegemon to stabilize it. 
And, without a dominant regional power, a dangerous strategic vacuum has emerged. 
The US, quite obviously, is no longer willing – or able – to play its old role. 
Though America will not withdraw its armed forces from the region completely, direct military intervention, especially with ground troops, is not tenable, given the debacle in Iraq. 
America will not be a military player so long as the region’s strategic balance is not called into question in a fundamental way (which explains US airstrikes on the Islamic State in Iraq and in Syria). 
Apart from this, the US is now operating at the level of diplomacy to resolve, or at least contain, a fundamental strategic threat – the danger posed by the Iranian nuclear program. 
Various state and non-state actors have been trying to fill the void created by America’s newfound caution, with most of the latter dependent on the support of regional powers, and two in particular: Iran and Saudi Arabia. 
These countries’ struggle for regional supremacy is playing out on proxy battlefields in Lebanon, Iraq, Syria, and, now, Yemen. 
Indeed, the Houthi rebellion in Yemen marks a new phase in the broader regional conflict. 
Not only is it occurring in the south of the Arabian Peninsula, directly on Saudi Arabia’s borders; the kingdom’s direct military intervention has brought its strategic rivalry with Iran into the open. 
As always in the Middle East, religious and ethnic factors play a large role in this rivalry. 
The Shia-Sunni divide within Islam is being reflected in the region’s geopolitics. 
Moreover, whereas Iran is a Shia country, the overwhelming majority of Arabs are Sunni, reinforcing the salience of Iran’s ethnic distinctiveness. 
Geopolitical interests, religious sectarianism, and ethnicity thus form a dangerous mélange in the new Middle East. 
And, because history has shown that outside military intervention can neither solve nor even contain such conflicts, the regional powers will have to sort this out among themselves, which is far easier said than done. 
It will entail a long phase of largely unpredictable violence, which implies a high risk of escalation, even toward global conflict; and it will most likely result in humanitarian disasters on the order of what is happening in Syria today. 
Even barring escalation beyond the Middle East, significant economic dangers are also likely, given the region’s energy reserves and thus its importance to the global economy. 
World oil prices are de facto determined on the Arabian Peninsula and by the countries of the adjacent Gulf region, and this will not change anytime soon. 
In terms of international security, a long-term fight for regional dominance will increase the threat of global terrorism, as both sides are using extremist groups that seek to legitimize their actions in religious terms. 
An even greater danger is that the key players in this conflict seek to arm themselves with nuclear weapons. 
A nuclear arms race in a region characterized by long-term instability would be a global nightmare. 
So it is no accident that, concurrently with the regional powers’ direct military confrontation in Yemen, the international community, led by the US, has been trying to negotiate a nuclear agreement with Iran. 
The framework agreement that has now resulted from these talks, which have been taking place off and on for 12 years (and in which I participated for a time) is intended to bring Iran’s nuclear program under international supervision, thereby containing the risk to regional and global stability. 
In exchange, international economic sanctions on Iran are to be lifted. 
America’s agenda is now arousing massive criticism from its close allies in the region, Israel and Saudi Arabia. 
But such criticism is based on illusionary aims. 
Acceding to it would merely ensure further escalation of the conflict with Iran, which will never completely abandon its nuclear technology and nuclear activities. 
The only realistic option to prevent a nuclear arms race in the region is international supervision – as far-reaching and as comprehensive as possible. 
But this goal, even if achieved, would satisfy neither Israel nor Saudi Arabia, both of which fear that any agreement would support Iran in its effort to establish its regional dominance. 
So the end result could be a de facto change of regional strategic partners by the US – a development that in fact is already becoming apparent in the fight against the Islamic State in Iraq. 
Iran’s strategy in all of this has not been very clever: its military interventions in Syria, Lebanon, Iraq, and Yemen entail major risks. 
That became apparent with the recent formation of a pan-Arab military force, which is clearly directed against Iran and should give its leaders reason to rethink their policy. 
The new Middle East needs neither a nuclear arms race nor religious hatred, and it also does not need a foreign policy based on military intervention. 
Rather, it requires the strength to sit down together and negotiate, and to develop systems of collective security that do serve the legitimate interests of all parties involved. 
Without diplomacy and the willingness to work toward viable mutual understandings, as has just happened with the framework agreement negotiated with Iran, the new Middle East will remain the powder keg of world politics – one whose fuse has already been lit. 

Iran v. Britain: Who Blinked? 
While commentators have charged that Britain capitulated to Iran and handed them a humiliating victory in obtaining the release of the 15 British Marines last week, it would appear that something more like the opposite is actually the case. 
But to understand why this is so, we have to look at the larger picture of internal Iranian politics against which the crisis played out. 
Our Iranian problem is actually a problem with the Islamic Revolutionary Guard Corps (IRGC, or in Persian Pasdaran) and allied institutions like the Basij militia. 
These are the “power” agencies that serve as the political base for the conservatives inside Iran. 
In return for its support, political leaders like ex-president Akbar Hashemi Rafsanjani and the Supreme Leader Ayatollah Ali Khamenei have allowed the IRGC to grow into a semi-autonomous state-within-a-state. 
Today it is a large and sprawling enterprise, that controls its own intelligence agency, manufacturing base, and import-export companies, much like the Russian FSB or the Chinese military. 
Since coming to power, the current Ahmedinejad regime has awarded IRGC-affiliated companies billions in no-bid contracts, increasing the already great perception among the Iranian public of its corruption. 
It is widely believed that Supreme Leader Khamenei put the current nutcase president Mahmoud Ahmedinejad into office as a means of counterbalancing former president Rafsanjani, and has been regretting this decision ever since as Ahmedinejad spouted off about the Holocaust and pushed Iran deeper and deeper into isolation. 
The current president comes out of the IRGC (specifically, the Ramazan Unit of the Quds Force), and has used that organization and the Basij to help consolidate his power by moving against more liberal political opponents. 
No one knows exactly why the naval wing of the IRGC took the 15 British Marines captive at the end of March. 
Some have speculated that it was a matter of freelancing by the IRGC’s command, or the navy, reacting to a local target of opportunity. The IRGC may have wanted some bargaining chips to help spring of its members captured in Iraq. 
It does not seem to be an accident, though, that the capture came quickly after the Security Council passed a very specific set of sanctions against Iran that targeted not just IRGC-affiliated companies and financial institutions like the Ammunition and Metallurgy Industries Group and the Bank Sepah, organizations dealing with nuclear or ballistic missile activities, but also a series of senior IRGC commanders, including Morteza Rezaei, the Guards’ deputy commander, Vice Admiral Ali Ahmadian, chief of the Joint Staff, and Brigadier General Mohammad Hejazi, commander of the Basij. 
By freezing Iranian assets outside of Iran, the UN was hitting the IRGC where it hurt, in its pocketbook. 
Clearly, whoever was responsible for the decision to take the British Marines prisoner was hoping to rekindle some of the fervor of the 1979 revolution, and use that to force the rest of the leadership into a confrontation with Britain and America. 
Hence the televised “confessions” that hearkened back to the taking of hostages in the American Embassy (the “nest of spies”), and the rallies against foreign embassies. 
But the gambit didn’t work, and there was clearly a behind-the-scenes power struggle between different parts of the regime. 
Ahmedinejad was supposed to give a major speech to a huge rally in Teheran, which he cancelled at the last moment, and when he did speak, it was to announce that the captives would soon be released. 
The IRGC prisoners in Iraq were released, but Britain did not apologize or admit wrong-doing in return. 
So it would appear that it was the Iranians who blinked first, before the incident could spiral into a genuine 1979-style hostage crisis. 
All of this does not mean that there are necessarily “radicals” and “moderates” within the clerical regime in Teheran. 
Those pulling the IRGC’s chain are themselves committed to a revolutionary agenda, and doubtless want a nuclear weapon as badly as the Pasdaran commanders. 
One of the alleged reasons Khamenei didn’t want Rafsanjani as president was because he was not keen enough on the nuclear program. 
The Iranian regime is not, however, a totalitarian juggernaut; there are important splits within the leadership and there is an important faction that does not want Iran to be isolated. 
The IRGC has evolved into something like a mafia organization, with extensive economic interests that lead both to corruption and potential vulnerability to sanctions imposed by the international community. 
It is important to remember: those who were responsible for taking the British Marines captive wanted an escalation of the confrontation, both to improve their domestic standing, and to punch back for sanctions that were beginning to bite. 
This suggests that what the Bush administration has been doing – slowly ratcheting up the pressure through the use of diplomacy to create an international coalition that now includes the Russians – is the proper course to be on. 

Could the Iranian Economy Sink Rouhani? 
CAMBRIDGE – For a “managed democracy,” Iran holds remarkably unpredictable presidential elections. 
And the upcoming election on May 19 is no exception, given that the incumbent, Hassan Rouhani, is facing a tough conservative challenger. 
Rouhani’s opponent, Ebrahim Raisi, is ahigh-ranking cleric who is considered to be a possible successor to Iran’sSupreme Leader, Ayatollah Ali Khamenei. 
Raisi’s campaign has received a boostfollowing the withdrawal of another hardliner, Mohammad Bagher Qalibaf, the mayorof Tehran, who garnered one-third as many votes as Rouhani in the 2013 election. 
When Rouhani was elected in 2013, Iran was suffering from 35% inflation, the national currency had depreciated by two-thirds in the previous year, and international sanctions were crippling the economy. 
Oil exports and output of automobiles – Iran’s leading manufacturing industry – had each declined by two-thirds, and restless industrial workers were demanding back pay. 
Rouhani had campaigned against former President Mahmoud Ahmadinejad’s populist policies, promising to put jobs and production before redistribution. 
He said that he would control inflation, negotiate a deal with the West to end the sanctions, and restore macroeconomic stability. 
By any reasonable standard, he delivered: inflation is in the single digits for the first time in three decades; sanctions have been lifted in accordance with the 2015 nuclear deal; and the exchange rate has been stable for four years. 
But, unfortunately for Rouhani, many Iranians who had expected their living standards and employment prospects to improve as a result of these successes are now feeling disappointed. 
To be sure, the economy has started to grow again, after contracting for two years. 
But there is disagreement about the current recovery’s breadth and durability. 
Because much of the recent growth has come from a doubling in oil production, it has not increased most household incomes, or created new employment opportunities. 
Thus, International Monetary Fund monitors who visit Iran twice a year have projected 6.6% growth for the 2016-2017 fiscal year, but only half that for the 2017-2018 fiscal year. 
Survey data show that, outside of Tehran, average real (inflation-adjusted) household expenditures fell during the first two years of Rouhani’s term, while poverty rose. 
In the 2015-2016 fiscal year, there were almost one million more people below the poverty line than when Rouhani took office. 
And yet these outcomes do not necessarily amount to broken promises. 
When voters rallied behind Rouhani’s call for lower inflation, they may not have realized that prices rising at a slower rate would also mean slower income growth. 
And the lay public was not alone: even one of Rouhani’s economic advisers initially boasted that people were 20% better off because the rate of inflation had declined by 20 percentage points. 
Moreover, Rouhani has pursued a tight fiscal policy that deepened the recession and delayed the recovery. 
He has kept the government’s rate of fixed investment at around 5% of GDP, which is twice what it was under Ahmadinejad, but still too low. 
Government fixed investment is the traditional driver of economic growth in Iran, and has been as high as 20% of GDP in good times. 
Making matters worse, Iran has a major investment bottleneck, owing to collapsing real-estate values and a frozen banking system. 
Iran’s banks are still saddled with bad loans forced on them by Ahmadinejad to finance his populist projects. 
And the Central Bank of Iran has failed to get credit flowing again, even though it has been pumping money into the economy and increasing liquidity by 26% per year. 
As a result, real interest rates have risen to above 10%, choking off private investment. 
With the state unwilling to spend, and the private sector unable to borrow, total investment fell by 9% in the first nine months of the 2016-2017 fiscal year, after falling by 17% during the same period the previous year. 
Despite renewed economic growth, unemployment actually increased in the last four years. 
Although the economy created more than a half-million jobs each year, new entrants to the labor force pushed up the unemployment rate, from 10.1% to 12.1% – and from 24% to 29% for workers aged 15-24. 
Khamenei has led the charge against Rouhani’s record on jobs. 
In a speech in March marking the Iranian new year, he called for a year of “production and employment,” and urged the next president to create jobs with local resources, rather than look for assistance abroad. 
Rouhani’s economic strategy has clearly failed younger Iranians, who account for 60% of the unemployed, and who generally favored him in the 2013 election. 
But Iran’s youth will likely overlook Rouhani’s economic-policy shortcomings, and vote for him again, because they prefer his more relaxed social-policy positions to his conservative rival's stern moralizing. 
Older Iranians, however, might not be so forgiving. 
Youth unemployment affects everyone, but particularly the adults who must house and feed the jobless. 
According to 2015-2016 survey data, of the 65% of men under the age of 35 who lived with their parents, 85% were single, and 24% were unemployed. 
Marriage and employment are the two defining elements of adult life in Iran. 
Without them, many young people have turned to crime and drugs, which has had far-reaching adverse effects. 
Rouhani has also hiked energy prices by 50%, without increasing cash transfers to the poor. 
We do not know the extent to which the poor supported Rouhani in 2013; but they are less likely to do so this time. 
Rouhani severely criticized Ahmadinejad’s cash-transfer policy, which was designed to compensate for lost bread and energy subsidies. 
But even if Ahmadinejad’s overzealous attempt to deliver “the oil money to peoples’ dinner tables” added to inflationary pressures, it also seems to have reduced poverty and inequality significantly. 
Still, Rouhani is expected to win re-election, not least because every president of the Islamic Republic has served two terms. 
But if he loses, his economic policies – which delivered too little, too late – will be to blame. 

Iraq, Katrina, Iraq 
Four years ago, President George W. Bush was on shaky political ground. 
He had barely won the controversial 2000 election, and polls showed the American people remained doubtful about him. 
After the terrorist attacks of September 11, 2001, Bush found his voice and the American people rallied around his presidency. 
Thanks to Osama Bin Laden, Bush’s popularity soared, and while his ratings had diminished by the 2004 election, his “war on terrorism” helped him win a second term. 
In September 2005, another crisis, Hurricane Katrina, probably killed at least as many Americans as the terrorist attacks in 2001, but it had the opposite effect on Bush’s poll numbers, which dropped to an all-time low. 
Why the startling difference? 
For one thing, the September 11 attacks were by a human enemy, and despite inadequate domestic preparations for such an event, Americans’ anger was directed outward. 
Katrina, on the other hand, was a terrible act of nature, but one that was predicted by the national weather service with impressive accuracy. 
The inadequate preparation and slow response by the Bush administration meant that anger was directed at the president. 
To be sure, some of the blame for poor preparation belongs to state and local officials. 
But the Bush administration bears a significant share of the responsibility. 
In the 2000 election campaign, Bush praised Bill Clinton’s Federal Emergency Management Administration (FEMA) for its effectiveness. 
As president, he treated it as a source of patronage, replacing its top officials with political cronies who had little experience in managing emergencies. 
To make matters worse, the administration shoehorned FEMA into its massive new bureaucracy, the Department of Homeland Security. 
During the 2004 election campaign, Bush claimed that the new department had made Americans safer. 
But the halting and weak response to Katrina has called this into question. 
If it was difficult to evacuate and supply a small city like New Orleans, how would New York or Los Angeles fare? 
Katrina has also raised questions about other items on the president’s agenda. 
One of the top priorities had been the Republican plan to complete the repeal of the estate tax on the richest Americans. 
But, as the costs of responding to Katrina mount, adding to the federal deficit, it seems difficult to proceed as planned. 
Moreover, rising gasoline prices have called attention to the shortcomings of the Bush administration’s energy policy, which includes recently passed legislation that contains inadequate requirements for energy conservation. 
The press, meanwhile, has reported on speculation about the relationship between warmer ocean waters and the frequency of severe hurricanes, thus highlighting the low priority that the administration has given to environmental problems in general and global climate change in particular. 
But Bush will survive Katrina. 
The floodwaters will recede in New Orleans and reconstruction will begin. 
Already the scenes of looters exploiting the chaos in the early aftermath of the storm have been replaced with stories of charitable contributions from other parts of the country, of children being accepted into schools outside the city, and of families being helped by strangers. 
On the anniversary of the September 11 attacks, a unit of the New York City Police Department was helping out in New Orleans, and the city returned a fire engine that New Orleans had earlier donated as a symbol of solidarity. 
Katrina is thus likely to be a footnote in the history of the Bush presidency. 
The real question for Bush’s role in history remains Iraq. 
The short-term effect of Katrina was to drive stories about Iraq off of television screens and newspaper front pages. 
But the news from Iraq before the storm was bad and hasn’t gotten better. 
The majority Shia and their Kurdish allies rejected Bush’s plea to Iraqi politicians to modify the new draft constitution to attract disgruntled Sunni Arabs. 
Given that the insurgency is centered among the Sunnis, this refusal is likely to make it more difficult to establish the security that is necessary for democratic government to work. 
Of course, the Sunnis comprise a minority in Iraq, so insurgents have little prospect of “winning” control of the country the way North Vietnam was able to win control of South Vietnam. 
But that is little consolation, because they can still disrupt progress toward a stable constitutional government. 
At worst, they may be able to foment a civil war. 
Despite claims by the extreme left and right around the world, America is not an imperial nation. 
Domestic public opinion will support the use of force if people feel threatened or believe that the cause is just, but Americans have little interest in ruling over other nations. 
Neo-conservative appeals to the example of the British Empire are far-fetched. 
The idea that American troops will stay in Iraq indefinitely – or even “just as long as necessary and not one day more,” in the clichéd language of Donald Rumsfeld – is implausible. 
This means that Bush has only a relatively short time to achieve his goals in Iraq. 
If he is able to produce a stable constitution, a political compromise among the contesting parties, and successful elections, he may be able to declare victory. 
But right now, the prospects look dubious. 

Iraq: More than an American Problem 
Many people around the world are indulging in what the Germans call “schadenfreude”: pleasure at the suffering of others. 
The pleasure appears to be derived from the suffering the United States is enduring after four years of efforts to stabilize Iraq. 
On one level, that reaction is predictable. 
Resentment of the wealthy and powerful is hardly new. 
But the US in the last few years has compounded this reaction by what it has done and how it has done it. 
For some, it was the decision to go to war in Iraq; for others, it was Guantánamo and the perceived double standards of American justice. 
For still others, it was the lack of sustained effort to bring about peace between Israelis and Palestinians or US opposition to the International Criminal Court and to the Kyoto Protocol on climate change. 
The result is that anti-Americanism has grown in both reach and intensity. 
Still, any satisfaction at the problems the US is undergoing in Iraq is shortsighted and sure to be short-lived. 
Every government in the world has a stake in the future of Iraq and the stability of the Middle East. 
Terrorism bred in Iraq will not stay there. 
Those men and women who learn to make and detonate roadside bombs on the streets of Baghdad will ply their trade elsewhere in the region and beyond. 
Terrorists who have tasted success in Iraq will increasingly turn on others. 
Expressions of anti-Americanism will provide no protection or immunity to governments or individuals who for good reason are not prepared to endorse the terrorists’ radical agendas. 
War in Iraq will only exacerbate frictions between the country’s Sunni minority and Shia majority, and such frictions could well be replicated elsewhere where Sunnis and Shia live side by side. 
Even if not, the flight of millions of Sunni refugees will weaken the foundations of neighboring states, including Jordan. 
Continued fighting in Iraq could also lead to regional war. 
Turkey, for example, is poised to attack the Kurdish enclave in Iraq’s north. 
It is also possible that resistance to Iranian efforts to dominate Iraq could lead to a wider conflict that draws in Saudi Arabia, Egypt, and others. 
Such a conflict would threaten the vital flow of oil from the Middle East to the rest of the world. 
Even without such a wider conflict, what happens in Iraq will affect the price of oil. 
Iraq is producing oil at levels below what it produced under Saddam Hussein, and has the potential to double or even triple output. 
Doing so would require significant investment, which in turn would require international confidence in Iraq’s future stability. 
Absent such confidence, Iraq’s oil output will not approach its potential, which will only widen the gap between global supply and demand. 
Costly oil is a tax on the poor in developing countries and a source of inflation for the developed countries. 
It also provides resources to governments that in many cases are promoting foreign policies that are contrary to the interests of most other countries. 
The rest of the world also has a stake in how the US emerges from Iraq. 
There is a real danger that a widely-perceived failure in Iraq could lead to a serious weakening of American domestic political support for an active international role, particularly difficult but necessary deployments of military force. 
The alternative to a world shaped by a strong, confident, and engaged US is not likely to be a world that is peaceful, prosperous, and free. 
In strategic terms, no other country or group of countries has the capacity to replace the US. 
The alternative to a US-led global order is disorder, in which terrorism, nuclear proliferation, and economic protectionism are increasingly the norm. 
This suggests, first, that governments should avoid public comments describing the American presence as an occupation or as lacking legitimacy, lest they make it more likely that the US departs Iraq entirely and leaves the country and its people to a terrible fate. 
Second, countries should support Iraq’s government, despite its shortcomings. 
This means extending diplomatic recognition, including opening and maintaining embassies. 
It also requires providing financial help, ranging from debt forgiveness to investment, loans, and other forms of aid. 
There is also a moral and practical case for doing more to ease the plight of refugees and internally displaced persons. 
Third, terrorism needs to be checked. 
This means doing everything possible to stop infiltration of terrorists into Iraq and rethinking support for militias. 
None of Iraq’s neighbors, including Iran, would benefit from sectarian conflict that grows into a regional war. 
Finally, governments should consider contributing troops to help establish order, train the Iraqi police and military, and help Iraq guard its borders. 
As the US inevitably reduces its role, others should be prepared to step up, lest Iraq’s government falls and the Iraqi state fails. 
The reality is that Iraq’s future is not assured even if these and similar measures are taken. 
Still, there is a big difference between an Iraq that struggles and one that implodes; between an Iraq that contributes to global energy security rather than undermining it; between a civil war and a regional war. 
It may be too late for the US to succeed in Iraq, but it is not too late for others to increase the odds that the US does not fail. 

Iraq and a Great Leap for Chinese Intellectuals 
Even before images of the first cruise missile strikes on Baghdad reached Chinese TV screens, the country's intellectuals were debating the US-led war against Iraq and the government's response. 
Commentaries in leading newspapers and on-line journals demonstrated a diversity of opinion seldom seen in the country's state-controlled media, and precipitated wider discussion in people's living rooms. 
Most debates addressed whether the war was justified. 
Opinions were voiced in newspapers and in on-line forums such as the home page of the media school of Qinghua University, widely known as "China's MIT." 
It posted an anti-war petition with over 1,000 signatories, mostly academics. 
Although this grassroots response adhered to the government's anti-war stand, it remains surprising in a country that discourages unscripted political discourse. 
So it was even more surprising to see pro-war sentiments expressed publicly, such as the petition that appeared in the Guangzhou-based weekly newspaper 21st Century World Herald . 
That petition voiced a taboo viewpoint: that "human rights are of greater value than national sovereignty." 
In a rare challenge to the government, Beijing-based writer Yu Jie, one of the petition's authors, wrote that China ought to support the war on Iraq. 
Only by embracing universal values and distancing itself from "evil states," Yu argued, can China rise to the level of the world's mainstream democracies. 
Others, such as Han Deqiang of Beijing's aerospace university, who wrote an anti-war commentary that accompanied Yu's essay, scoffed at such an idea. 
Han called pro-war Chinese intellectuals hopelessly na?ve and overly "immersed in the American dream." 
But others supported Yu Jie's critique. 
The Beijing-based dissident writer Liu Xiaobo, an activist intellectual in the 1989 Tiananmen Square demonstrations, questioned the government's motives for opposing the war. 
Since 1989, Liu wrote, the Chinese government has nurtured a strident nationalism to boost its own legitimacy. 
Moreover, Liu argued, the government's marginalization of pro-war sentiment and promotion of anti-war views accords with its broader effort to ascribe almost every domestic and international disaster to American hegemony. 
Although the surface of this debate is about America and Iraq, the subtext, as always, concerns China. 
Indeed, the debate revealed political fault lines among Chinese intellectuals that could never be openly exposed on domestic policy. 
Ultimately, the two main camps of China's intelligentsia--the "neo-leftists" (xin zuo) and "old liberals" (lao you)--ask the question that has divided Chinese intellectuals for a century: what does it mean to be Chinese and also to be modern? 
Does it mean following the West (as liberals advocate) or, as the neo-leftists suggest, is there some Third Way between Communism and western-style democratic capitalism? 
Most fundamentally, can the scope of economic disaster witnessed following the Soviet Union's collapse be avoided? 
Both groups comprise scholars from numerous fields, state intellectuals serving in government think tanks, journalists and even some dissidents. 
Liberals are known to favor more thorough economic and political reforms, such as democratization at the grassroots level and a free press. 
Conservatives insist on a more cautious approach that avoids the "shock therapy" and drastic overhauls experienced in postcommunist Eastern Europe. 
Unlike in Western countries, where intellectuals often engage in head-on public confrontations, most intellectuals in China speak obliquely. 
The invasion of Iraq presented them with a relatively safe topic with which to discuss issues that are normally off limits, such as human rights. 
Scholars used the Iraq debate to ask whether a state relinquishes its sovereignty when it loses popular support--a highly provocative topic in China. 
"A modern sovereign state, first and foremost, bases itself on the recognition of individual rights and democracy," according to Wang Yi, a liberal scholar. "That is to say, given the nature of the current Iraqi regime, it has no right to ask for treatment as a sovereign state." 
In the pro-war petition, Yu Jie and others made an explicit link between Iraq and China, likening Saddam Hussein, to his "colleague and predecessor," Mao Zedong, who "disguised the illegitimacy of his authoritarian regime in the name of the people." 
As the war progressed, pro-war voices increasingly fell silent. 
Some media critics ascribed this to a combination of official censorship and the effect of the scenes of Iraqi civilian deaths played (and replayed) on China's new 24-hour news channel, created especially to cover the war in Iraq. 
At the same time, celebrities like Zhang Ziyi, star of the film Crouching Tiger, Hidden Dragon joined the anti-war chorus. 
Zhang, who appeared in this year's Oscar-nominated film Hero , refused to attend the Academy Awards ceremony in Hollywood in protest. 
In any case, speaking out carries a price. 
The relatively independent Nanfang Daily Group , whose members include 21st Century World Herald and the Guangzhou-based liberal magazine Southern Breeze , was closed by the government for "redesign." 
It may be allowed to publish again, but no one knows when. 
The Hong Kong newspaper The South China Morning Post reported that it would have been closed, permanently, if not for the personal intervention of Hu Jingtao, China's new president and communist party chairman. 
Despite these setbacks, the debate benefited China's intellectual climate. 
As ideas advanced by Jean-Jacques Rousseau, George Orwell, and Václav Havel enter China's public discourse, interest grows in such Western thinkers and their political insights. 
This alone amounts to a great leap forward for intellectual freedom. 

Iraq and Japanese Isolation 
Every country that has sent troops to aid America's efforts in Iraq is under pressure, as the decision by the Philippines to withdraw its small contingent shows. 
But for Japan, the question of whether to continue to aid in Iraq's reconstruction extends beyond the merits of this particular policy and goes to the heart of Japanese notions of security and what constitutes the national interest. 
Throughout the Cold War, Japan's national security policy appeared to waver between "UN-first-ism" and an "Alliance-first" principle. 
In essence, however, fostering alliance with the United States dominated Japan's course. 
That tendency remains dominant. 
But the terrorist attacks on the US in September 2001 pressed Japan to recognize that it must begin to exercise greater autonomy and independent judgment in formulating and implementing its national security policies. 
The paradigm of international security that had long dominated Japan's defense thinking had shifted and policymakers realized that they had to shift with it. 
For Japan nowadays, security policy must satisfy a trinity of criteria: "national interests," "alliance," and "international cooperation." 
This trinity is not something new for Japan, but has deep historical roots. 
It may be helpful to look back, in particular, to Japanese actions at the time of the Boxer Rebellion (1900), as well as during World War I. Of course, there are huge differences between the situation then and what Japan faces now. 
But those historic contexts shed light on Japan's response to events in Iraq and the wider world today. 
At the time of the Boxer Rebellion, Japan responded to requests for help from the international community and won world trust through the sacrifices it made. 
As a consequence, and despite the anti-Japanese "yellow peril" propaganda then raging in Europe, Japan entered an alliance with the most sought-after partner of the time, Great Britain. 
That alliance enabled Japan to help defeat Russia in the Russo-Japanese War (1904-1905). 
During the First World War, however, Japan was reluctant to send troops to Europe despite repeated requests from the Allies. 
Although Japan did receive some appreciation for its dispatch of naval squadrons to the Mediterranean, it endured wide criticism for its refusal to send ground troops. 
As a consequence, after the war Japan lost Britain's confidence, which eventually resulted in the end of the Anglo-Japanese Alliance. 
From that time on, Japan trod a lonely path that ended with its defeat in World War II. 
At the time of the Boxer Rebellion, Japan fully understood that to contribute to the world for the "emergency protection of foreign residents" was a "matter of national importance." 
During World War I, on the other hand, Japan was blinded by its eagerness to protect small but immediate benefits, and failed to appreciate what a true "matter of national importance" was. 
Its passivity cost Japan the trust of the international community. 
In the light of this history, how should Japan's stance in Iraq be viewed? 
Will Japan's humanitarian and restoration aid in Iraq secure a long-term national interest? 
With the exception of international terrorists and remnants of Saddam Hussein's regime, almost everyone, including Iraqis who eye America's occupying forces with suspicion, wish to see the task of rebuilding Iraq, both politically and materially, fulfilled. 
For Japan, too, there is justification in responding to such global expectations. 
Of course, restoring peace and security is taking much more time than expected. 
With almost daily terrorist attacks, ordinary citizens victimized by shell and gunfire or misconceived bombing, the abuses of Iraqi prisoners, and the hostility of Iraq's Shiites - on whom the US had pinned high hopes for the peace process - American policy is in jeopardy of failure. 
The question for Japan is this: what will happen, both in Iraq and in the world, if America withdraws in failure? 
It is in recognition of the possible consequences - a return of US isolationism, the emboldening of terrorists - that many countries sent and retain troops in Iraq. 
Indeed, Russia, France, and Germany, which confronted the US and Britain at the UN over the Iraq war, and the UN itself, which withdrew early in the occupation, are all now searching for a way to assist in Iraq's rehabilitation. 
In the end, they agreed on international efforts under UN Security Council Resolution 1546. 
France and Germany will now participate directly by helping to train Iraqi security forces. 
Considering all this, Iraq represents a decisive moment and a "matter of national importance" for Japan. 
Thus, its Self Defense Forces must continue fulfilling their duties of "humanitarian and restoration efforts," while cooperating with Japan's key ally, the US, as a member of an integrated multinational force under UN leadership. 
Even if dangerous situations arise, the Self-Defense Forces, and Japan itself, must not flinch. 
Only by demonstrating dignified resolve will Japan's true national interests be defended. 
True autonomy for Japan, as in the past, depends once more on active and cooperative engagement in containing a world crisis. 



Iraq’s Critical Election 
BLOOMINGTON – Iraqis go to the polls on March 7 to elect a new Parliament for the second time under the country’s permanent constitution of 2006. 
Many scholars believe that it is the second general election, not the first, which is the most important test of any new democracy. 
If so, these elections appear to foreshadow ominous times ahead. 
The security situation in Iraq has deteriorated dramatically over the past six months. 
Though much of the violence in Iraq over the past six years has been random, aimed at soft targets such as markets and restaurants, its nature changed last summer. 
On August 19, 2009, the sixth anniversary of the bombing that killed the United Nations representative in Baghdad, a series of spectacular attacks were carried out. 
These bombings, and others since, have targeted the Iraqi state and its infrastructure, including the ministries of finance and foreign affairs and municipal and judicial offices. 
Moreover, as United States troops have lowered their profile, daily violence of the more random variety has increased. 
Equally ominous, the banning of hundreds of candidates for alleged ties to the Baath Party signals a return to sectarian politics, which could reignite a sectarian civil war. 
The individuals banned include the current defense minister and several members of parliament. 
The message from Iran’s allies in Iraq, who control the de-Baathification process, is clear. 
While some Shia who were prominent allies of the Baathist regime hold positions of great influence in the “new” Iraq, Sunnis will never know when they will be shut out of the process, especially if they become too powerful. 
Some of Iraq’s Sunni leaders might thus conclude that permanent armed opposition is their only viable strategy. 
True, they might not be able to topple the new regime, but they will be able to de-stabilize Iraq over the long term, in the hope of forcing a negotiated settlement of their grievances. 
The new Shia elites who control Iraq have emulated their allies in Iran, creating a system that effectively chooses which of their rivals may constitute a “legitimate” opposition and which may not participate in the political process. 
The struggle of Iraq’s Kurds should be instructive. 
As the Iraqi political scientist Ghassan Atiyyah, has noted, the Kurds, even without regional allies, have been able to de-stabilize Iraq for 80 years. 
How much more will the Sunnis be able to de-stabilize the country, he asked, enjoying as they do the support of most of the regional powers, including Saudi Arabia, Syria, and potentially Turkey? 
Politics aside, the long-term damage to Iraq’s legal institutions caused by these maneuverings should not be underestimated. 
After the de-Baathification order was issued (by a commission that does not actually have any sitting members) a panel of the Iraqi Court of Appeal essentially invalidated it. 
The prime minister then met with Iraq’s chief justice, following which the court’s decision was reversed. 
There will be several ways to gauge the election’s relative success. 
The first of these will be the length of time that it takes the victors to form a new government. 
If, as occurred after the last elections, months go by without the formation of a government, this will be confirmation that Iraq’s political elites will continue to subordinate the desperate needs of the country – for security, electricity, water, and basic services – to their political futures as they haggle over positions. 
Whether competent technocrats, or as has happened in the past, party hacks are appointed to the ministries will be a telling sign. 
Another sign will be the extent to which the newly elected leadership, which is likely to be largely the same as the current leadership, reaches out to real Sunni leaders. 
Doing so might well mean a retreat from the pre-election banning of candidates, and would demonstrate a maturity among the Shia political elites that they have not yet shown. 
Finally, the reaction of the election’s losers will be key. 
That includes not only those who have been banned from running for office, but others as well. 
For example, it is likely that the current prime minister will not be able to form a new government. 
Even the principal Kurdish parties are facing a challenge from an independent party, Goran, and are likely to incur some losses to it. 
If these losers engage in post-election jockeying to cheat opponents of their fair allotment of seats, that will tell much about the future. 
Whether Iraq achieves stability or is once again ripped apart by sectarian violence now depends, as it always has, on the new political elites. 
If the past is an indication of their future performance, there is reason for deep concern. 

Iraq’s Economic Divide 
Everyone who looks at Iraq sees a nation divided between Shia, Sunni, and Kurd communities. 
But an equally fundamental division – one that has contributed as much to the ongoing insurrection as sectarian strife and opposition to the American-led military occupation – is the widening gap between Iraq’s rich and poor. 
When Iraq was liberated, most people, especially the poor, began to hope for a charismatic leader who would save them from the bitter reality of daily life. 
Raised in fear, they had no idea how democracy could apply to their society, or how human-rights groups and other civic organizations could help shape the future. 
Soon enough, Iraq was faced with a new social divide. 
On one side stood people who understood how to operate in a democracy, attain power, and realize their ambitions. 
They learned to speak the language of democracy, gaining money and influence in the process and enlisting independent organizations to defend their rights and privileges. 
On the other side, however, remains the vast population of powerless Iraqis, including widows and divorced or abandoned women with no one to provide for them and their children. 
For these people, democracy and human rights mean nothing. 
They are ignorant, poor, and sick. 
Victimized by an educational system that collapsed over a decade ago, they have few skills that can help them find employment in Iraq’s blighted economy. 
During Saddam’s reign, no effort was made to raise living standards for the poor. 
I have visited the huge slums of Iraq and found families living in homes with barely a roof to cover them, with infestations of insects everywhere, and with raw sewage seeping under their doors. 
Day or night, they live in darkness. 
Needing nothing more than food, decent housing, and the possibility of a job, these families wait for death, dreading the cries of their starving children. 
When I met the women who live in those houses, they showered me with questions: will democracy give us food and houses? 
Will democracy stop men from beating their wives? 
Will it give citizenship to our children? 
Will it give us the right to divorce the husbands who abandon us? 
My answer to all of these questions was “yes.” 
Yes, democracy will give you the right to live in a decent house, the right to learn and work, and it will give citizenship to your children and make you equal with your men. 
But you have to work hard and make every possible effort in demanding your rights. 
They replied: “Saddam taught us for 35 years how to be jobless, silent, and fearful. 
What can we do now?” 
In these destitute areas, where most Iraqis live, people are prey to bitter temptations. 
Many are beyond the reach of political or government leaders. 
They fall easily into violence, theft, and sabotage. 
Poverty drives some to take money in exchange for acts of violence, abetted by the lure of a false heroism that they were not able to act upon during Saddam’s long reign. 
Poverty has exacerbated the trauma of Iraq’s violent history of wars and atrocities, which has desensitized people to killing. 
Though conditions in Iraq today are drawing many young men toward violence, I am convinced that we need only to provide decent jobs and housing to save them. 
Jobs, in particular, will help young people to create new lives through serious work. 
We must not use no-work jobs to disguise an army of unemployed. 
We must give people jobs that allow them to make a contribution to rebuilding the country. 
By nature, every individual seeks to prove himself as a useful person in his or her society. 
But the culture that Saddam created convinced Iraqis that political connections are the only way to gain authority, money, and knowledge. 
Overcoming such sentiments will take time and a vibrant economy, which means that a new Iraqi government must have limited power, allowing the private sector to grow while encouraging widespread understanding of democracy and human rights. 
Religious groups are ready to contribute to this process. 
We can also rehabilitate the technocrats who served under Saddam, so that they, too, have a chance to serve their country. 
Last but not least, we must provide loans to poor families to help them build a respectable life. 
Above all, the government must spare no effort in convincing poor Iraqis of the value of democracy and freedom, and how important the constitution is in realizing their aspirations for a better life. 
This will not be easy to achieve in a country where many people consider breaking the law an act of heroism. 
But we Iraqis have also learned that power should not be concentrated in a few hands, and that establishing justice requires fighting all forms of corruption. 
If the constitution is to operate as the guarantee of democracy, freedom, and security, poor Iraqis must learn to make that fight their own. 

Iraq’s Half Step 
The relatively successful election in Iraq is a major victory for democracy, but not necessarily for liberal reform in the Middle East. 
This is an important distinction. 
The anti-democratic forces who tried to stop people from voting there were Sunni Muslim Arab terror groups, ranging from supporters of Saddam Hussein’s deposed dictatorship to followers of Osama bin Ladin’s extremist Islamism. 
Because Sunni Arabs, comprising less than 25% of the population, knew that they could not win a democratic election, many of their leaders urged a boycott. 
By contrast, 75% of Iraq’s population is composed of Shi’a Muslim Arabs, who know that they will control the new regime, and Kurds, who want local autonomy. 
Thus, a vast majority of the population were sure that a democratically elected government would serve their interests and eagerly participated at the polls. 
Indeed, Shi’a Muslim clerics ordered their people – including women – to vote, warning that to stay home on Election Day was a sin. 
But if high turnout, albeit based more on communal self-interest than belief in democracy, was the good news from Iraq’s election, the bad news is the leadership they chose, which is not democratically minded. 
Liberal reform parties that tried to transcend communal identities and appeal to all Iraqis did not do well. 
The victorious coalition follows Ayatollah Ali Sistani, who can be described as a moderate Islamist, but many of its members are extreme. 
In the future, especially without Sistani, who is 74 years old, the new regime could turn into a dictatorship. 
This ambiguity in Iraq is a good example of the problem faced by Arab democratic reformers elsewhere. 
They have compelling arguments, but they lack large numbers of followers. 
Already, the reform movement has changed the debate in the Arab world, but it still faces a long road ahead. 
For a half-century, reformers explain, Arab nationalist regimes have been a disaster, creating societies and economies that rank low by every statistical measure of development, while leading their countries into countless costly but fruitless wars and crises. 
At a time when democracy is spreading, they remain dictatorships. 
But the most powerful alternative to the status quo are powerful Islamist opposition movements that have no real answers for these ailments and merely seek to impose another flavor of dictatorship. 
The terrorism generated by many of these groups is an increasingly large domestic threat that only further disrupts society. 
Besides battling these more powerful Arab nationalists and Islamists, Arab liberals must deal with a wide range of issues, including the modernization or moderation of Islam, relations with the United States, the Arab-Israeli conflict, and women’s rights. 
In each case, they must decide whether to confront or endorse the sacred cows of nationalist and Islamist ideology. 
There are no easy answers. 
Consider Islam. 
Proposing secularism – the historic approach of Western liberals – is political suicide. 
Calling for the modernization of Islam by permitting clerics to reinterpret its laws in light of contemporary conditions is more acceptable. 
But this also has a potentially dangerous drawback, too. 
After all, this is precisely what the radical Islamists have done by, for example, reversing the traditional Islamic opposition to suicide bombing. 
The easiest strategy for liberals is to side with conservative Muslims who reject not only radical Islamism, but also political reform. 
In addition, many liberals, notably in Saudi Arabia, offer to work with the current regimes against the radical Islamist revolutionaries – an understandable response, but one that strengthens the authoritarian status quo. 
There are few role models for a more moderate, contemporary-minded interpretation of Islam. 
Perhaps the most important is Tunisia’s educational system. 
There, students in the Islamic university also study the Bible, and the curriculum puts an emphasis on the most tolerant interpretation of Islam. 
For example, one final exam is built around having students use Islamic texts to write an essay showing that non-Muslims living under Muslim rule should be treated fairly. 
In promoting democracy, liberals reject the argument used by today’s rulers that the first free election would be the last, because Islamists would win and establish theocratic regimes. 
Reformers insist that the vast majority of people support moderate solutions, or at least that radical Islamist groups would have to become pragmatic in order to compete for power and govern. 
That case is not yet proven. 
January’s Palestinian elections were won by a relatively moderate leader because he was put forward by the ruling Fatah movement and Islamists boycotted the election. 
But in the Gaza Strip local elections soon afterward, radical Islamists who use terrorism won seven of the ten municipal councils. 
What happens in Iraq will show how an elected Islamist-type government wields power. 
But the new liberal wave in the Arab world is reflected in media coverage that praised Iraq’s election and suggested that it might make a good model for other Arab countries. 
There are many other small signs that change might be possible. 
All the Arab entries in an annual essay contest run by a Western agency used to focus on Israel’s alleged responsibility for all the region’s problems. 
This year, the writers unanimously made their theme the need to reform their own societies. 
The liberal, democratic reformist movement among Arabs is here to stay. 
The battle will be long and difficult, and victory is not assured. 
But these groups have already become a major contender in the Arab world’s battle of ideas. 
Now they hope to become a factor in bringing about real change. 
The Iraqi election was an important half-step in that direction. 

Iraq’s Jobs-for-Peace Mirage 
As the wisdom of President Bush’s proposed “surge” of US troops is debated across the US and around the world, another question about the US President’s new policy to avert all-out civil war there is coming to the fore. 
Can using US funding to reopen Iraqi state-owned enterprises get young men to abandon the insurgency and sectarian militias? 
The idea sounds logical: a man with a good job that enables him to build a decent life won’t want to fight Americans or his fellow Iraqis, right? 
Unfortunately, that jobs strategy is unlikely to reduce the violence. 
Iraq’s state-owned enterprises were the cornerstone of Saddam Hussein’s economic policy. 
But, propped up by military contracts, those state companies were never well run or efficient; greatly overstaffed, they produced little, similar to the failed state-owned enterprises of the old Soviet Union. 
Moreover, outside of the oil and electric power sectors, state-owned enterprises in Iraq have never been major employers. 
For example, the roughly 180 enterprises in the Ministry of Industry and Minerals, which controls all state-owned manufacturing companies, never employed much more than 100,000 workers in a nation of roughly 27 million people. 
The employees of the state-owned enterprises still receive paychecks, even though about a third of their workplaces have been destroyed. 
For example, the Sulaymaniyah Sugar Mill was bombed during the Iran-Iraq war in the 1980’s, but its employees have been paid ever since, though only rats and pigeons now report for work there. 
Indeed, many employees of state-owned enterprises show little interest in returning to work. 
When the Coalition Provisional Authority asked the employees of the Mishraq Sulfur Company to go back on the job in 2004, some of the workers lit $40 million worth of sulfur on fire and destroyed the facility. 
They preferred to be paid without working. 
There is little to resuscitate among the state-owned enterprises. 
A third are damaged beyond repair, another third are hopelessly unprofitable, and the rest are a mismanaged assortment of plants, a few of which could potentially produce something of value, but only with proper management and incentives. 
Trying to give these hopelessly inefficient enterprises a new lease on life would make Iraqis poorer without reducing the violence. 
Yet beneath Iraq’s chaos and the rubble, a rough and tumble private sector has been expanding since the US invasion, benefiting from higher oil revenues and more liberal economic policies. 
As a result, government expenditures and household incomes are up substantially since Saddam Hussein’s last years in power. 
Despite the violence, commercial activity has also risen, because Iraqis are now free to import the equipment and goods they need to build homes, run stores, and operate trucking companies. 
If the US wants to increase jobs, it should intensify efforts to work with these private Iraqi companies to bid on contracts. 
State-owned enterprises should also be free to bid, but they should receive no favors. 
The fundamental problem in Iraq is not jobs. 
In contrast to the Mexican, Chinese, or Russian revolutions, economic disenfranchisement is not driving the current conflict. 
This is a struggle for power, not for economic justice or a better life. 
The root causes are political, sectarian, and personal. 
Suicide bombers and death squads are not seeking shorter working hours, higher salaries, or better pension plans. 
All credible economic indicators show employment prospects in Iraq improving since the end of the invasion. 
Daily wages for laborers in Baghdad have doubled in the last three years – hardly a sign of rising unemployment. 
The only decent survey of employment in Iraq, the United Nations Development Program’s Iraq Living Standards Survey of 2004 , measured unemployment at 10.5%. 
Iraqi statistics, which define unemployment more expansively, show rates in percent declining from the mid-twenties to the teens in the past two years. 
Many young Iraqis join militias because that is where the money is. 
They can earn more hanging around with a gun in their hands than by working in construction or trade. 
Supporters of the insurgency are happy to plant a roadside bomb in exchange for extra cash. 
Instead of focusing on a large jobs program, the US could do more to bring peace to Iraq by reducing the money from Iraqi government coffers and smuggling activities that funds the payrolls of the insurgents and militias. 
How then should foreign assistance to Iraq be spent? 
The US should increase spending on programs to improve the police. 
Currently, many police devote their energies to shaking down citizens for bribes, and some moonlight in death squads. 
As long as Iraqis face daily threats of larceny, kidnapping, and murder – particularly from those who are supposed to protect them – they will seek security from neighborhood gangs and militias. 
The key to improving police operations is to embed more US and allied police officers in the police force to mentor Iraqi officers. Mentors provide on-the-job training. 
They also identify good officers and those who are corrupt or participating in death squads or sectarian militias. 
More funds for equipment, improved facilities, and training would also help. 
Funding and support to assist Iraqi courts and prisons to function more effectively and in accordance with international standards is also essential. 
Without progress in this area, improvements in the Iraqi police will have little effect. 
Throwing more money at Iraq won’t buy peace. 
Iraq is already one of the largest recipients of US assistance ever. 
But a targeted assistance designed to improve the operations of Iraq’s police and government could help reduce violence. 

Iraq's Next Shock Will be Shock Therapy 
With one exception - the actual military "victory," which looks increasingly Pyrrhic - President Bush's Iraqi adventure has been marked by repeated failures. 
Scant signs of weapons of mass destruction have been found, and, according to David Kay, America's chief arms inspector, the stockpiles either never existed or were destroyed years ago. 
So Bush simply ignored the data, gathered by Hans Blix's UN inspectors, and the evidence on which he based his case for war seems to have been largely fabricated. 
Worse still, it is now clear that Bush never had a plan for when the war ended. 
Instead of moving towards peace and democracy, the situation in Iraq remains so dangerous that Paul Bremer, the American occupation leader, is using instability as his rationale for avoiding democratic elections this year. 
Of course, America tried to keep real order in some places, revealing a lot about what it truly valued in Iraq. 
When Baghdad fell, the oil ministry was quickly protected, while museums and hospitals were allowed to be looted. 
If there was not outright corruption in the $7 billion in contracts awarded to Halliburton, whose former chairman was Vice President Dick Cheney, there was undoubtedly a strong whiff of crony capitalism. 
Halliburton and its subsidiaries have been ensnared in charges of war profiteering ever since, and have had to pay back millions of dollars to the US government. 
Now, everyone agrees, the most important task - beyond creating a democratic state and restoring security - is reconstructing the economy. 
Blinded by ideology, however, the Bush administration seems determined to continue its record of dismal failures by ignoring past experience. 
When the Berlin Wall fell, the countries of Eastern Europe and the former Soviet Union began transitions to a market economy, with heated debates over how this should be accomplished. 
One choice was shock therapy - quick privatization of state-owned assets and abrupt liberalization of trade, prices, and capital flows - while the other was gradual market liberalization to allow for the rule of law to be established at the same time. 
Today, there is a broad consensus that shock therapy, at least at the level of microeconomic reforms, failed, and that countries (Hungary, Poland, and Slovenia) that took the gradualist approach to privatization and the reconstruction of institutional infrastructure managed their transitions far better than those that tried to leapfrog into a laissez-faire economy. 
Shock-therapy countries saw incomes plunge and poverty soar. 
Social indicators, such as life expectancy, mirrored the dismal GDP numbers. 
More than a decade after the beginning of the transition, many postcommunist countries have not even returned to pre-transition income levels. 
Worse, the prognosis for establishing a stable democracy and the rule of law in most shock-therapy countries looks bleak. 
This record suggests that one should think twice before trying shock therapy again. 
But the Bush administration, backed by a few handpicked Iraqis, is pushing Iraq towards an even more radical form of shock therapy than was pursued in the former Soviet world. 
Indeed, shock therapy's advocates argue that its failures were due not to excessive speed - too much shock and not enough therapy - but to insufficient shock. 
So Iraqis better prepare for an even more brutal dose. 
There are, of course, similarities and differences between the former communist countries and Iraq. 
In both cases, economies were pervasively weakened before they collapsed. 
But the Gulf War and sanctions weakened Iraq's economy much more than communism weakened the USSR's. 
Moreover, while both Russia and Iraq are heavily dependent on natural resources, Russia at least possessed demonstrated abilities in some other areas. 
Russia had a highly educated labor force, with advanced technological capabilities; Iraq is a developing country. 
To be sure, Russians went decades without opportunities to exercise entrepreneurship, while Ba'athist rule did not suppress Iraq's merchant class and entrepreneurial spirit in any comparable way. 
But Iraq's location puts it at a distinct disadvantage compared to Russia and many postcommunist states: none of Iraq's neighbors is doing particularly well economically, while many postcommunist countries sat next door to the European Union during the 1990's boom. 
Most importantly, ongoing instability in the Middle East will deter foreign investment (other than in the oil sector). 
These factors, together with the ongoing occupation, make quick privatization particularly problematic. 
The low prices that the privatized assets are likely to fetch will create the sense of an illegitimate sell-off foisted on the country by the occupiers and their collaborators. 
Without legitimacy, any purchaser will worry about the security of his property rights, which will contribute to even lower prices. 
Furthermore, those buying privatized assets may then be reluctant to invest in them; instead, as happened elsewhere, their efforts may be directed more at asset stripping than at wealth creation. 
If Iraq's prospects are as dismal as my analysis suggests, any international contribution to the US-driven reconstruction effort is likely to be little more than money flushed down the drain. 
This does not mean that the world should abandon Iraq. 
But the international community should direct its money to humanitarian causes, such as hospitals and schools, rather than backing American designs. 
The World Bank and other institutions considering assistance through loans face even greater difficulties. 
Piling more debt onto Iraq's already huge obligations will only make matters worse. 
If Iraq's economy falters as a result of a misguided economic reconstruction program based on shock therapy, the country will be further indebted with little to show for it. 
The dream of Iraq's American invaders was to create a stable, prosperous, and democratic Middle East. 
But America's economic program for reconstructing Iraq is laying the foundations for poverty and chaos. 

Iraq’s Potemkin Government 
With the votes in Iraq’s election in December now counted, attempts to form a new government are set to move into high gear. 
Encouragingly, all sides appear to accept the results. 
But the key question concerning the future of the country remains: will Shia, Sunnis, and Kurds will unite behind a functioning central authority? 
In the short term, there are good reasons to believe that the most powerful among Iraq’s three main groups will do so. 
But can any such government administer the country as a whole? 
The answer to that question is likely to be no, which is why Iraq probably will be a much less stable place a year from now. 
The new Iraqi government, when it is formed, will have at least the appearance of viability for the immediate future. 
Shia have an interest in supporting the central government because they believe that their demographic weight (60% of Iraq’s population) means that representative democracy will guarantee them the right to rule and protect them from Sunni demands and attacks. 
Sunnis also will support the government, at least initially, because it represents their only opportunity to win what they consider their share of power, resources, and revenues. 
Kurds will accept the arrangement because they believe that the new constitution guarantees their right to control most of the oil wealth that lies beneath their territory, and because they don’t want the blame should Baghdad descend into chaos. 
There is another reason Shia, Sunnis, and Kurds won’t move immediately to undermine federal authority: the central government in Baghdad won’t have the legal or economic means to challenge their local power. 
In essence, while all of Iraq’s factions have a strong interest in promoting a central government that appears fully functional, that government’s powers will in fact be limited. 
But, in the longer term, those limits on federal power will push Iraq toward a sectarian scramble for power and revenue. 
Article 11 of the new constitution declares that “All that is not written in the exclusive powers of the federal authorities is in the authority of the regions.” 
That formulation all but pits the central government and regions against one another in a battle for political supremacy. 
Similarly, under current law, soldiers will answer not to Baghdad but to regional powerbrokers, while the Iraqi constitution guarantees local governments the right to pocket the revenue that flows from new oil fields within their jurisdiction. 
In fact, although the central government has the authority to collect the revenues generated by existing fields, there is no law to prevent local officials from modernizing old sites and claiming that they are new. 
The impact of this state of affairs can hardly be overestimated. 
Oil accounts for about 98% of Iraq’s current export revenue. 
It is the lifeblood of Iraq's economy and the source of the money that the central government will need to build durable institutions. 
Although inflows of international financial assistance remain substantial, reconstruction money from abroad will begin to dry up as Iraq puts its central government in place. 
In sum, the national government will lack both the authority and the means to govern Iraq. 
Indeed, with Shiite-Sunni violence already intensifying, the Iraqi government may not be able to maintain even the appearance of effectiveness for very long. 
Moreover, the Kurds are the proverbial dog that hasn’t yet barked. 
They enjoy relative economic prosperity, and their political institutions are growing more effective and efficient. 
Thus, for the moment, they have no reason to challenge the status quo. 
But this stability will face new challenges in 2006. 
Gubernatorial elections this November will force Kurdish political contenders to offer opposing programs, and some candidates will seek electoral advantage via populist calls for independence. 
At the same time, cooler heads will struggle to postpone a potentially divisive 2007 referendum on the final status of the oil-rich city of Kirkuk. 
In fact, the friction generated by electoral politics is likely to stoke resentments within Shia and Sunni communities as well. 
There is a great danger that the new Iraq’s sectarian politics will benefit those who promise their constituents the most – at the expense of the central government and the country’s other factions. 
Debates over possible constitutional amendments intended to pacify angry Sunnis and to de-fang the insurgency are likely to incite factional hostility as well. 
More worryingly, when Shia, Sunnis, and/or Kurds decide that their elected officials are not delivering the promised perks and protections, they are likely to look beyond politics to advance their individual interests. 
Some Shia may turn to militia leaders, Sunnis to insurgents, and Kurds to leaders demanding independence. 
At that point, the future of an independent Iraq itself will be called into question. 
Any separatist moves by Kurdish leaders would bring Turkey into Iraqi politics. 
At the same time, the protection that American forces offer Iraqi officials will diminish as troops are gradually withdrawn, and Iran will race to fill the security vacuum. 
In sum, the Iraqi government may appear effective for much of 2006, but it will be committed to trying to serve the competing interests of sharply divided constituencies. 
The central government’s weakness, continued insurgent violence, growing Iranian influence in Baghdad and with Shiite powerbrokers in the south, and the natural progression of sectarian politics suggest that the new Iraq will be markedly less stable as the year draws to a close. 

Iraq’s Refugee Crisis 
Among the many humanitarian disasters produced by the civil war now raging in Iraq is one that is almost invisible. 
Only rarely do scenes of massive displacement of the civilian population make it onto our television screens, because, unlike bombs and suicide attacks, displacement does not generate the blood, fire, or screams that constitutes compelling footage. 
Yet the numbers are staggering: each month, some 40,000 Iraqis flee their homes because of the war. 
Half of them go to other parts of Iraq; the rest go abroad. 
Iraq’s population, frankly, is bleeding away. 
This devastation is even more dramatic because, since the invasion four years ago, only 3,183 Iraqis have been resettled in third countries. 
According to the UN High Commission for Refugees, all countries combined have offered a chance to start a new life to approximately the same number of Iraqi refugees as flee the country in just five days. 
This exodus is not new, but since the increased violence that followed the bombing of the Shiite Golden mosque in Samarra in February 2006, the pace of the displacement has accelerated. 
Indeed, this is the largest population displacement in the Middle East since 1948. 
Two million Iraqi refugees are scattered around the region, the great majority of them in Jordan and Syria, with smaller numbers in Turkey, Lebanon, and Egypt. 
Because they are urban refugees – not housed in tents, but rather blending in with the local population in the host countries – they are easily ignored. 
For Iraq, this is a brain drain that will be hard to repair. 
The country had a total population of 26.8 million, and now nearly 13% of them are displaced; many may never return. 
But what happens to them? 
Last month, I traveled to four countries in the Middle East to meet refugees and learn about their stories and options. 
In Amman, Damascus, Istanbul, and Beirut I met dozens of people who have a well-founded fear of persecution in their home country. 
I spoke to a hairdresser who was raped because she is Christian. 
I heard the story of a liquor store owner whose one-year old son was kidnapped and beheaded. 
I met with a Shiite taxi driver whose father was killed in Najaf just a few days before. 
I listened to a Sunni engineer whose association with an American construction company makes him a target for extremists, and to a translator of the Christian Mandaean minority who narrowly escaped death when the United Nations headquarters in Baghdad was bombed in August 2003. 
Most of those to whom I spoke were poor and without hope for the future. 
None wanted me to use their names. 
Refugees who are in the country of first asylum usually face three possible choices: return to their homeland, try to integrate in the host country, or be resettled to a third country. 
But do the Iraqis really have these three choices? 
Can anyone watching reports of the daily carnage in Iraq envision Iraqis going back? 
The answer is no. 
If the Parliament in Baghdad, one of the best protected buildings in the country, can be attacked from within, then no Zone in Iraq is Green; they are all Red. 
Repatriation of Iraqis is unrealistic and definitely out of question for any foreseeable future. 
Most Iraqis cannot opt for local integration, either. 
True, Jordan and Syria let most Iraqis in, but they do not offer a possibility of durable local absorption. 
Iraqis cannot become permanent residents, and they do not have work permits or access to public health services. 
In Jordan, Iraqi children cannot go to public schools. 
It is not a matter of ill will on the part of these countries; they simply cannot afford to extend these services. 
Helping them to cope with the influx of refugees is necessary, but it is not a durable solution. 
This leaves the third possibility – that of resettlement. 
But for this to happen, countries with traditionally generous refugee programs should come forward and offer more places to receive Iraqis. 
The United States is a bad example: only 692 refugees have been accepted since the invasion – roughly the number of Iraqis who are killed every week. 
In February, the Bush administration announced that it will offer resettlement this year to 7,000 Iraqi refugees. 
If America makes good on this promise, it would be a big step forward, but the US, which led the intervention in Iraq, should now lead in attending to the victims. 
Should the US not take the lead, the only hope is that other countries will be more generous. 
The Iraqi refugees are a crisis that cannot be ignored: the international community must alleviate the burden on the countries in the region, while offering resettlement opportunities to many more of the most vulnerable Iraqis. 

Iraq's Secret Environmental Disasters 
Horror stories of all types have emerged in Iraq since the fall of Saddam Hussein. 
But not only people were horrifically abused. Iraq's environment was tormented as well. 
In the early 1970's a major methyl mercury-poisoning catastrophe occurred in which an estimated 10,000 people died and 100,000 were severely and permanently brain damaged. 
Saddam's regime was largely successful in suppressing information about the event. 
The problem began in the late 1960's and early 1970's, when Iraq experienced a series of abysmal harvests. 
Since the "green revolution" was beginning, Iraq imported "wonder wheat" from Mexico. 
The risk was that the seed might grow moldy during the long, humid ocean transport to Iraq if it was not dressed with some fungicide. 
Methyl mercury became the most cost-effective fungicide, because it had recently been banned in Scandinavia and several American states due to environmental and toxicological risks. 
So the world market was flooded and prices dropped. 
The wheat seeds were thus dressed with methyl mercury and sent to Basra in Iraq's south. 
Because the shipment arrived late, trucks and trains that had been at hand were reassigned. 
So it took another couple of months before the grain reached the farmers. 
By then the sowing season was long over. Farmers were left with a pink grain that they were told not to eat, only to plant. 
But recent harvests had been lousy and farmers had little or nothing to feed their animals and themselves. 
Like farmers all over the world, Iraqi farmers mistrust their government. 
Some began feeding the grain to chickens or sheep and watched to see if there were any bad side effects. 
Nothing happened for weeks. 
So some then gave the grain to old grandfathers and grandmothers, who also didn't drop dead instantly. 
At that point, it seems, most farmers began giving the grain to their livestock and eating it themselves. 
Children supposedly liked the pink bread. 
But within half a year or so, bad things did start to happen. 
Hospitals were flooded with patients showing symptoms of damage to the central nervous system. 
At first, doctors initially had no idea as to the cause. 
Some suspected an epidemic of "brain fever" of some sort. 
Others more accurately pointed to methyl mercury. 
A small group of international experts on mercury were called in. 
I went as a World Health Organization staff member. 
We confirmed methyl mercury poisoning through contaminated food. 
But what food had been contaminated? 
Bread could be and sometimes was. 
As grain was fed to chicken, sheep, and cows, meat, milk, cheese, and butter became contaminated. 
To avoid problems, I ate only dates and American corned beef canned in 1941 and 1942 for the US Army. 
When the imported grain was identified as the cause of the poisoning, Iraq's government acted decisively. 
Farmers were ordered to hand over all remaining supplies within a fortnight. 
To stress the urgency, a death penalty for possessing pink grain after that date was declared. 
But most farmers had no access to radio, television, or daily newspapers. 
By the time most learned about the order and the penalty, the two weeks were gone and the army had started to execute those found still to be in possession of the grain. 
So the farmers dumped grain wherever they could--along roadsides, in irrigation canals, in rivers. 
Fish soon became contaminated, as did migratory birds. 
One father of a family with several poisoned members and without any traditional food left stood in his doorway praising Allah for having made these migratory birds easy to catch when they had nothing else to eat. 
At hospitals throughout the country, doctors concluded that there was nothing they could do. There is no real treatment for methyl mercury poisoning. 
In rural Iraq the tradition is that a person preferably should die at home with his or her family around. 
Thus, when they saw and heard that doctors couldn't help, people brought their sick family member home. 
Consequently, the official figures that put the number of deaths from methyl mercury poisoning at 6,500 people only cover those who died in hospital. 
The real number is certainly far higher. 
The crisis did provide doctors with some greater understanding of how to detect methyl mercury poisoning. 
"Quiet baby syndrome," for example, when mothers praise their babies for never crying, is now considered a warning sign for methyl mercury-induced brain damage in children. 
Treatment, too, has changed in the wake of the mass poisoning. 
The agents traditionally used to speed up excretion of inorganic metals from poisoned patients turned out to make symptoms of methyl mercury poisoning worse rather than milder. 
Through tricks and threats Iraq's fallen dictatorship largely succeeded in keeping this tragedy under cover. 
Now the story can be told. 
But whether anything can and will be done to belatedly help the victims is very much an open question. 

Iraq’s Silent Dead 
Evidence is mounting that America’s war in Iraq has killed tens of thousands of civilian Iraqis, and perhaps well over one hundred thousand. Yet this carnage is systematically ignored in the United States, where the media and government portray a war in which there are no civilian deaths, because there are no Iraqi civilians, only insurgents. 
American behavior and self-perceptions reveal the ease with which a civilized country can engage in large-scale killing of civilians without public discussion. 
In late October, the British medical journal Lancet published a study of civilian deaths in Iraq since the US-led invasion began. 
The sample survey documented an extra 100,000 Iraqi civilian deaths compared to the death rate in the preceding year, when Saddam Hussein was still in power – and this estimate did not even count excess deaths in Falluja, which was deemed too dangerous to include. 
The study also noted that the majority of deaths resulted from violence, and that a high proportion of the violent deaths were due to US aerial bombing. 
The epidemiologists acknowledged the uncertainties of these estimates, but presented enough data to warrant an urgent follow-up investigation and reconsideration by the Bush administration and the US military of aerial bombing of Iraq’s urban areas. 
America’s public reaction has been as remarkable as the Lancet study, for the reaction has been no reaction. 
The vaunted New York Times ran a single story of 770 words on page 8 of the paper (October 29). 
The Times reporter apparently did not interview a single Bush administration or US military official. 
No follow-up stories or editorials appeared, and no New York Times reporters assessed the story on the ground. 
Coverage in other US papers was similarly frivolous. 
The Washington Post (October 29) carried a single 758-word story on page 16. 
Recent reporting on the bombing of Falluja has also been an exercise in self-denial. 
The New York Times (November 6) wrote that “warplanes pounded rebel positions” in Falluja, without noting that “rebel positions” are actually in civilian neighborhoods. 
Another New York Times story (November 12), citing “military officials,” dutifully reported that, “Since the assault began on Monday, about 600 rebels have been killed, along with 18 American and 5 Iraqi soldiers.” 
The issue of civilian deaths was not even raised. 
Violence is only one reason for the increase in civilian deaths in Iraq. 
Children in urban war zones die in vast numbers from diarrhea, respiratory infections, and other causes, owing to unsafe drinking water, lack of refrigerated foods, and acute shortages of blood and basic medicines at clinics and hospitals (that is, if civilians even dare to leave their houses for medical care). 
Yet the Red Crescent and other relief agencies have been unable to relieve Falluja’s civilian population. 
On November 14, the front page of The New York Times led with the following description: “Army tanks and fighting vehicles blasted their way into the last main rebel stronghold in Falluja at sundown on Saturday after American warplanes and artillery prepared the way with a savage barrage on the district. 
Earlier in the afternoon, 10 separate plumes of smoke rose from Southern Falluja, as it etched against the desert sky, and probably exclaimed catastrophe for the insurgents.” 
There is, once again, virtually no mention of the catastrophe for civilians etched against that desert sky. 
There is a hint, though, in a brief mention in the middle of the story of a father looking over his wounded sons in a hospital and declaring that, “Now Americans are shooting randomly at anything that moves.” 
A few days later, a US television film crew was in a bombed-out mosque with US troops. 
While the cameras were rolling, a US marine turned to an unarmed and wounded Iraqi lying on the ground and murdered the man with gunshots to the head. 
(Reportedly, there were a few other such cases of outright murder.) 
But the American media more or less brushed aside this shocking incident, too. 
The Wall Street Journal actually wrote an editorial on November 18 that criticized the critics, noting as usual that whatever the US does, its enemies in Iraq do worse, as if this excuses American abuses. 
It does not. 
The US is killing massive numbers of Iraqi civilians, embittering the population and the Islamic world, and laying the ground for escalating violence and death. 
No number of slaughtered Iraqis will bring peace. 
The American fantasy of a final battle, in Falluja or elsewhere, or the capture of some terrorist mastermind, perpetuates a cycle of bloodletting that puts the world in peril. 
Worse still, America’s public opinion, media, and election results have left the world’s most powerful military without practical restraint. 


Iraqi Libya 
GENEVA – As post-revolution Libya looks ahead, Iraq looms as a perilous example. 
After 42 years of dictatorship, Libya, like Iraq in 2003 after the fall of Saddam Hussein, needs more than wishful thinking to become a vibrant democracy. 
It needs organized state-building in Tripoli – and realistic policymaking in Western capitals. 
Successful transitions depend from the start on factors that are still crucially missing in Libya – a relatively cohesive leadership, an active civil society, and national unity. 
Without these, Libya will most likely fail to find its footing and, much like post-Saddam Iraq, suffer from persistent political division and volatile civil disorder, in addition to a multifaceted array of geopolitical pressures. 
Avoiding that outcome presupposes a strong political center. 
But, from the start of the uprising in February 2011, Libya has been politically atomized. 
It lacks the sort of civil society that could have led the uprising and planted the seeds for post-authoritarian politics, as was the case in Tunisia and (more problematically) Egypt. 
Libya’s transition was arguably further impeded by NATO’s intervention, as the rapid shift from a spontaneous popular uprising to an elite-led and externally supported movement prevented the revolution from following the linear course seen in Tunisia and Egypt. 
Thus, despite substantial international support, the Libyan National Transitional Council (NTC) still lacks the level of consensus needed to form a viable government. 
The NTC has suffered regular internal disputes, and its membership and functioning are shrouded in secrecy. 
Last July, the Council’s military leader, Abdul Fatah Younis al-Obeidi, was assassinated under ambiguous circumstances. 
Then, in November, the NTC’s military prosecutor named its own former deputy prime minister, Ali al-Issawi, as the prime suspect. 
The conflict and opacity surrounding the case are telling signs of the country’s political fragility since Colonel Muammar el-Qaddafi’s demise. 
Libya should take note of how Iraq’s post-Saddam transition has featured ceaseless power struggles and infighting. 
In 2010, Iraqi political leaders’ machinations – personal, as well as tribal and sectarian – left the country without a government for 249 days. 
Today, Libya appears set to undergo similar struggles, owing mostly to the presence of powerful political actors outside the NTC. 
The 20,000-strong Tripoli Military Council, for example, which controls the capital, has been consistently independent of the NTC, and forced out its first foreign minister, Mahmoud Jibril. 
The rival Tripoli’s Revolutionists Council, meanwhile, has warned that it would unseat any incoming government should its demands for representation not be met. 
The NTC also faces pressure from Libya’s Berbers, who comprise 10% of the population and have already taken to the streets to denounce the new political arrangements and to reject any system that does not accommodate theirculture andlanguage. 
This dissension may well be compounded by two additional factors. 
The first is major cities’ competing sense of entitlement to the fruits of the revolution: Misurata, where Qaddafi’s body was displayed; 
Tripoli, which hosted the liberation ceremony; and Zintan, which is holding Qaddafi’s son, Saif al-Islam el-Qaddafi, prisoner. 
And all of them, like most Libyans, share the unrealistic expectation that their newfound freedom will somehow solve their socio-economic woes. 
The second complicating factor is that political power now lies in the hands of competing militias. 
The internecine rivalries that began in earnest last November between fighters from Zawiya and Warshefana, and among Tripoli’s various factions, will be difficult to defuse, as the thowar (revolutionaries) have refused repeated calls by the NTC to disarm. 
Tripoli is in danger of becoming like Baghdad circa 2005, with different groups controlling turf and instituting a clientelist neighborhood political economy. 
Inter-urban competition and the militias’ defiant independence are all the more worrisome because Libya is awash in weapons, with unguarded caches, abandoned stockpiles, looted ammunition depots, and thousands of shoulder-fired heat-seeking surface-to-air missiles. 
Last November, Mokhtar Belmokhtar, the commander of al-Qaeda in the Islamic Maghreb (AQIM), confirmed that AQIM seized the opportunity to secure some of this arsenal when the revolution started. 
Meanwhile, the aims of France, the United Kingdom, the United States, the Arab League, NATO, and Qatar, all of which have played a role in Libya’s transformation, are unlikely to be the same. 
In other words, external pressures, too, are likely to pull Libya in several different directions, which will only further delay an autonomous and sustainable state-building process. 
Qaddafi left behind a booby-trap. 
The collapse of authoritarian rule created a security vacuum with no functioning state apparatus, making Libya highly exposed to international influence, often in the service of corporate interests. 
To avoid repetition of the costly mistakes made in Iraq, Libya will require adroit leadership that can elaborate a compelling new national vision with which to unify competing authorities, rein in undisciplined militias, and minimize the country’s strategic vulnerability. 

Apple, Brussels, and Ireland’s Bruised Sovereignty 
ATHENS – Despite their unequivocal Europeanism, the Irish have been serially mistreated by the European Union. 
When Irish voters rejected the Treaty of Lisbon in 2008, the EU forced them to vote again until they delivered the “right” outcome. 
A year later, when private Irish banks imploded, threatening their (mainly) German private creditors with severe losses, Jean-Claude Trichet, the European Central Bank’s then-president, immediately “informed” the Irish government that the ECB would shut down ATMs across the Emerald Isle unless Ireland’s unsuspecting taxpayers made the German banks whole. 
Ireland acquiesced, its public debt ballooned, emigration returned, and the country remains bruised and despondent. 
With the EU still refusing meaningful reduction of a debt burden unfairly borne by the younger generation, the Irish remain convinced, correctly, that the EU violated their sovereignty on behalf of foreign bankers. 
Ireland’s greatest weapon against the ensuing debt deflation was its ability to attract US-based tech giants, by offering them a combination of EU law, a well-trained English-speaking workforce, and a 12.5% corporate-tax rate. 
Though the shell-like subsidiaries of global tech conglomerates have little positive impact on most households’ income, Ireland’s establishment is proud of its links with the likes of Apple. 
Now, the European Commission is jeopardizing the government’s special relationship with Apple by demanding that it claw back €13 billion ($14.6 billion) in taxes from the company. 
Is the Commission’s latest intervention another example of EU bullying, in violation of Ireland’s sovereignty? 
Comparing Trichet’s 2009 intervention and the current standoff over Apple holds important lessons beyond Ireland and, indeed, Europe. 
In the eurozone’s early years, German financial institutions channeled a torrent of capital into Ireland’s commercial banks, which then lent it to real-estate developers. 
The ensuing property bubble resulted in white elephants in Dublin’s financial district, row upon row of new blocks of flats in the middle of nowhere, and a mountain of mortgage debt. 
When the bubble burst after 2008, land prices collapsed, debts went bad, and Ireland’s private banks failed. 
The ECB, in an affront comparable to British behavior during the 1845-52 Potato Famine, instructed the government to invoke “financial stability” to force Ireland’s weakest citizens to repay every euro the defunct private banks owed to German creditors. 
Financial stability was obviously a smokescreen: taxpayers were forced to repay even the debts of a bank that had already been closed (and thus systemically irrelevant). 
The roots of the Apple deal are older than the ECB. 
In 1980, a young Steve Jobs visited an Ireland eager to escape underdevelopment. 
Apple eventually created 6,000 jobs in the country, in exchange for a sweetheart tax deal allowing it to shield its European revenues from taxation by recording them there. 
To this day, the proceeds of every iPhone sold in Paris or in Stockholm (net of its Chinese assemblers’ production costs) go to Apple’s Irish subsidiary Apple Sales International. 
As a result of the original Apple-Ireland deal, ASI pays a miniscule tax on these earnings, effectively exempt from the ultra-low 12.5% corporate-tax rate. 
This arrangement also required the usually vigilant US Internal Revenue Service to play along. 
ASI’s profits stem from Apple’s intellectual property (IP) rights, which are based on research and development conducted exclusively in the US (most of it underpinned by federal government funding). 
These profits should, therefore, be taxed in the US. 
Curiously, the IRS is choosing not to enforce Apple’s obligation to pay tax on its profits from US-sourced IP returns. 
Instead, Apple charges ASI a symbolic fee for allowing it to profit from Apple’s IP rights, for which it pays a tiny tax to the IRS. 
Meanwhile, ASI is allowed to keep, in Ireland, profits representing close to two-thirds of the revenue from the sale of every Apple product sold outside the US. 
As a result, Apple has amassed untaxed cash reserves of up to $230 billion. 
Unlike in 2009, the Irish government is protesting the EU authorities’ recent Apple ruling, pointing out that tax policy is in the purview of national governments, not the Union. 
And, in a recent joint letter to German Chancellor Angela Merkel and the EU’s other 27 national governments, 185 American CEOs alleged that the EU had over-reached yet again, resulting in a “self-inflicted wound” for Ireland’s and Europe’s economy. 
But they are wrong: Ireland’s sovereignty is not an issue here. 
Apple would not have based itself in Ireland were it not for the EU’s single market, a commons that requires common rules. 
One of these rules is that governments cannot offer aid to some companies that is not available to others. 
Suppose, for example, that the Greek government, seeking to attract 6,000 jobs to its ravaged economy, offered Apple a subsidy of €110,000 per job per year, or €660 million. Over two decades, the total subsidy would come to slightly more than €13 billion. 
Were the EU to permit Greece to offer Apple such a deal, the other EU member states, including Ireland, would revolt. 
Suppose further that the Greek government proposed waiving corporate tax for 20 years on all revenue Apple earned in the rest of the EU but booked in Athens – say, €13 billion. 
The European Commission would then have a duty of care to the European commons to demand that Greece immediately recoup that €13 billion – exactly as it is telling Ireland to do today. 
Every time the EU acts as a colonial usurper, as it did in 2009, it undermines the legitimacy of its good and proper actions and strengthens the xenophobic, anti-European “Nationalist International.” 
Europe’s only beneficiaries, much to the delight of Vladimir Putin and Donald Trump, are isolationist Brexiteers, the far-right Alternative for Germany, France’s National Front, and illiberal governments in Poland, Hungary, Croatia, and elsewhere. 
The lesson to be learned from comparing Trichet’s 2009 intervention with the European Commission’s current stance on Apple is simple: Europeans’ real enemy is free riding by the few on the backs of the many. 
Without common institutions, Europeans cannot be defended from the exploitation and anti-social practices that big business and its political agents portray as economic common sense. 
Trichet compromised Ireland’s sovereignty to facilitate German bankers’ free ride on the shoulders of Ireland’s taxpayers. 
As restitution, the ECB should take on its books part of Ireland’s public debt. 
But the EU must not allow Ireland to abuse the European commons by offering Apple a deal that no other member state could. 
The right response to past injustices is to recover sovereignty in a Europe where the powerful – whether German bankers or American smartphone makers – are prevented from preying on the weak. 

Ireland Decides, Again 
Maynooth, Ireland – On October 2, Irish voters go to the polls for a second time to decide whether to adopt the European Union’s Lisbon Treaty. 
The mood in EU capitals is one of nervousness as polling day looms, with the future of the EU in the hands of Ireland’s unpredictable voters. 
On two of the last three occasions that the Irish have been asked to vote on an EU Treaty, they have rejected the proposal. 
For the EU, the stakes could not be higher. 
The Lisbon Treaty was the compromise agreed by EU leaders in the aftermath of the rejection of the Constitutional Treaty in popular referendums in France and the Netherlands in 2005. 
Much negotiating blood has been spilled on the Treaty, and its rejection a second time by Irish voters would leave the Union unable to ratify and implement its provisions; this would inevitably lead to policy paralysis and institutional decay. 
The referendum campaign in Ireland has seen a resurgence of conflict between a familiar constellation of forces. 
On the Yes side are all of the main political parties, trade unions, the business community, and a broad network of civil-society groups. 
Their campaign has been more coordinated and intense than last time, with the aim of mobilizing the maximum number of supporters and ensuring a high turnout, which most commentators assume will assist the Yes side. 
On the No side: a disparate coalition drawn from both the far right and the far left, including ultra-Catholics and unreconstructed Marxists, has sought to whip up hysteria about supposed threats ranging from military conscription to euthanasia and abortion. 
But the No side has struggled to find a coherent point of reference and seems to have none of the dynamism and vigor that it projected last time. 
The main reason for this is that Ireland has been traumatized by economic misfortune over the past year. 
The hubris of the Celtic Tiger years is a distant memory, owing to the worst recession in Ireland’s history as an independent state. 
In 2009, economists expect growth to contract by up to 8%, with a further steep decline likely next year. 
The budget deficit is now the largest in the EU, and public debt has ballooned, as the government has struggled to compensate for the steep drop in revenues. 
The Irish banking system approached total collapse in September 2008, and was only saved by a €400 billion government guarantee of all bank deposits. 
More recently, the state assumed the liabilities of rogue property developers by setting up a “bad bank” which could potentially saddle Irish taxpayers with a mountain of debt for decades to come. 
The depth of the economy’s plunge has helped the Irish government in its effort to secure a Yes vote. 
The European Central Bank has provided a monetary lifeline that has provided much needed liquidity within the financial system and helped the government to stem the crisis of confidence created by the banking collapse. 
Government ministers and EU representatives repeatedly cite the example of Iceland in pointing out what might have happened to Ireland if it had been outside the EU. 
Thus, the second referendum campaign has brought back into play the economic dimension of Ireland’s EU membership, which was largely absent from the 2008 debate on the Treaty. 
Ireland has benefited disproportionately from EU largesse during its 35 years of membership, and, in 2008, was still receiving a net sum of €500 million from the EU budget. 
When voters are reminded of the potentially catastrophic cost of being excluded, not just from the Single Market area, but from the decision-making structures in the Council of Ministers and the European Central Bank, what is at stake in the referendum becomes clear. 
In addition, the Irish government secured legal guarantees from its EU partners on the issues that most concerned voters who voted No or abstained in the first referendum. 
These compromises state that nothing in the treaties will affect Irish prerogatives on abortion, military neutrality, and taxation. 
The government also secured EU-wide agreement that, rather than reducing the size of the European Commission, Ireland will be allowed to retain a permanent place at the Commission table. 
This negotiating success has provided the government with considerable breathing space in which to conduct a more effective referendum campaign. 
This combination of legal guarantees and changed economic circumstances is helping to mobilize a majority in favor of the Treaty. 
Opinion polls conducted in recent weeks indicate that the Yes side commands a strong majority of 62% to 23%, with 15% of the electorate undecided. 
But the picture is far from clear-cut. 
Surveys indicate that the Irish are strong supporters of EU membership and the integration process. 
The problem is that these favorable attitudes vary considerably in intensity and constitute a “soft bloc” of support for the EU; in the 2008 referendum, this soft bloc crumbled in the final week of the campaign. 
It seems clear that a second rejection of the Lisbon Treaty by the Irish electorate would plunge the EU into a renewed crisis and threaten to derail the considerable gains in both democratic legitimacy and collective decision-making capacity deriving from the new Treaty. 
Everything indicates that voters now look set to approve the Treaty. 

Ireland in the Dock 
The Committee of European Finance Ministers has censured Ireland and the Irish budget, invoking for the first time in EU history the powers conferred by Article 99 of the Treaty. 
That rebuke is being applied to perhaps Europe’s most successful economy, for Ireland has the EU’s second highest budget surplus, its second lowest level of public debt, and by far the highest growth in the 1990's of countries in the Monetary Union. 
This step, and its motives, are without precedent. 
Ireland’s projected budget for 2001 foresees a slight reduction in public expenditures, from 31% to 30.8% of GDP, and a simultaneous reduction of taxes by about .6% of GDP. 
As a consequence, Ireland’s budget surplus will come down, according to forecasts, from 4.7 to 4.3% of GDP. 
Few Europeans are losing sleep over Ireland’s unprecedented good times. 
Indeed, all the finance ministers who censured Ireland would like to face the same rosy economic data the Irish finance minister does. 
Yet, according to the European Commission and those same finance ministers, Ireland’s fiscal posture may generate strong inflationary pressures in an already overheated economy and so merits maximum punishment. 
Censuring Ireland, however, is a dangerous mistake, both on the merits and from a methodological point of view. 
When a country is growing at the speed of Ireland – ie, a speed higher than Europe’s average – some inflation is not only inevitable but necessary. 
By increasing the “rate of real exchange,” inflation will help slow the Irish economy unless the growth of productivity is sufficient to maintain competitiveness. 
Of course, Ireland’s decision to cut taxes because of the huge surplus its robust economy has generated may have had electoral, rather than economic, motivations. 
(Please, will the EU finance minister without a political agenda raise his hand?). 
It is also possible that the inflationary effects of tax cuts may be slightly higher than the .3% estimated by the Irish government. 
But the amount of uncertainty over the effects posed by Ireland’s budget is enormous and the macroeconomic dimensions minuscule: the reduction in Ireland’s budget surplus is only of .4% of GDP. 
Besides, as even the EU Commission recognizes, Irish inflation is coming down, from 5.6% in the preceding year to 4.6% at the end of 2000. 
Ireland has been tried and convicted on non-existent evidence. 
Censuring Ireland is also a grave mistake from a methodological point of view; indeed, this is perhaps the gravest aspect of the case. 
EU Economic and Monetary Affairs Commissioner Pedro Solbes has often repeated in recent weeks that the Commission seeks to increase coordination of fiscal policies among Euro members. 
But how is this to happen? 
When? 
For what end? 
Coordination of fiscal policies indeed, can be counterproductive. 
It can, for example, restore through a side window the fiscal laxness which the Treaty of Amsterdam evicted by the front door. 
The Stability Pact already imposes limits on each member’s fiscal policy discretion. 
What else is there to coordinate? 
Evidently, the Commission believes that it can judge, case by case, the best policy for every country, including policies that satisfy the Stability Pact. 
To coordinate fiscal policy, however, you need to know the effects of proposed budgets. 
Yet consensus does not even exist among professional economists about this. 
For example, does reducing public expenditure have positive or negative effects on economic activity? 
Unlike in the past, many economists now say that the effects are positive. 
If true, the implications for coordinating fiscal policies would be diametrically opposed to those implicitly assumed by the Commission. 
It is astonishing that the Commission thinks itself capable of calculating, to a second or third decimal point, the effects of this or that budgetary step in a certain country in Europe’s economy. 
The Commission, for example, is particularly opposed to the Irish policy of reducing indirect taxes rather than social contributions, because the latter are supposedly more inflationary. 
But empirical evidence on this point is practically nonexistent; the econometric model of the Commission simply assumes that this is true, and that’s that. 
Coordination of economic policies is, in reality, a disguise for increasing the powers of the Commission and of the Commissioner for Economic and Monetary Affairs. 
These powers may allow large countries to impose their will on smaller ones. 
Can you imagine anyone trying to censure Germany because it reduced its budget surplus by .4% of GDP? 
There is also something surreal, even obscene, in Italy, with a public debt of 100% of GDP, a deficit of 1.5%, and asphyxiated growth, sitting in judgement on a country with a 4% budgetary surplus, a public debt of 39% of GDP, and annual growth over 10%! 
Ireland is being used by the Commission to flex its muscles and issue a warning. 
But the real if unspoken warning is this: something must be done to limit the ambitions of the Commission and of Commissioner Solbes and bring them back to reality. 


Ireland's Second, and Last, Chance 
Once again, Irish voters are poised to vote Yes or No to the Treaty of Nice. 
Forgotten what that treaty is all about? 
Well, it is one of those all-too-frequent late-night compromises reached by EU heads of state and government that seek to slither around and through some practical problems while postponing others. 
The compromise reached at Nice four years ago is important because it contains, among other provisions, all the technicalities of voting balances and power sharing among EU institutions that must be firmly in place before the Union can admit new members. 
Enlargement is the most important item on the European agenda, and the Treaty of Nice is its cornerstone. 
Without it, the accession candidates can not be invited this December to join the Union, as promised in Copenhagen ten years ago. 
The Irish rejected the Nice Treaty in a referendum last year. 
The country's entire establishment--its government, major political parties (including the opposition), trade unions and employers--all supported a Yes vote. 
But the Yes backers could never articulate clearly why people should vote in favor of the Treaty. 
Their constituents largely ended up ignoring the issue altogether. 
The No vote won 54%, but only 35% of eligible voters bothered to turn up at the polls. 
It is still difficult to fathom why the No vote attracted so much support, even given widespread apathy. 
The opposition to the Nice Treaty was and continues to be a bizarre Irish Stew of pacifism, religion, and socialism, along with some fascinating local eccentricities. 
And yet, despite winning the addition of a special protocol to the Nice Treaty that guarantees Ireland's cherished neutrality, Yes supporters face an uphill battle. 
Outside interference should always be avoided in situations such as this. 
After all, one of the core freedoms of a democracy is that voters have the right to behave in ways that outsiders might deem irresponsible and incoherent. 
As long as such choices do not impose unreasonable or unbearable burdens on others, these democratic choices merit full respect. 
But the fundamental consequences of the upcoming referendum for Europe need to be clearly impressed upon Irish voters, so that no one can later claim that they did not know what was at stake. 
If the Irish vote No a second time, and this leads to the postponement of EU enlargement, they would place an unreasonable and unbearable burden on Europe. 
Re-negotiating the Nice Treaty would not be an option. 
This would open a Pandora's box of demands from all other countries. 
Last year's Irish referendum result prompted Italy to suggest that the EU give guarantees to member states that they would not lose financial support if poorer members are brought into the Union. 
This sort of thinking is the surest way to block enlargement. 
The Irish people must be brought to understand that if they cannot accept the Nice Treaty, nor can they block it. 
A new No vote can lead to only one outcome: Ireland's departure from the institutions of the EU, one way or another. 
This is the true choice that the Irish now face. 
There is an important parallel to this situation: in 1992, Danes surprisingly voted No to the Maastricht Treaty. 
The Danes got their own add-on protocols--such as a neutrality guarantee like the one given to the Irish--making it possible to opt out of certain areas of EU cooperation. 
This led to a new referendum, in which the Danes voted Yes. 
But--and this is crucial--the Danes were told in no uncertain terms that a second No vote would lead to a situation where Denmark would have to leave the Union. 
If the Danes did not want the Maastricht Treaty, their choice would be fully respected. 
But they would not be permitted to impose their will upon their partners. 
The Irish are in the same position now. 
It is up them to say Yes or No to the Treaty of Nice. Their decision must be respected. 
But they cannot be allowed to stop the enlargement process. 
It would be an irony of historic proportions if a country that has benefited more than most others from EU integration should block the entry of countries in even more desperate conditions than Ireland was 30 years ago. 
Europe must accept the Central and Eastern European candidate countries into the Union, and must do so now. 
Too much time has been wasted already. 
The window of opportunity to create a Europe that is whole and free after a half century of division and misery may not remain open indefinitely. 

Ireland Votes, Europe Waits 
MAYNOOTH, IRELAND – On June 12, Irish voters will vote on the European Union’s Lisbon Treaty, the instrument designed to improve the efficiency and legitimacy of the now 27-member bloc. 
Ireland is the only country to put the Treaty to a referendum – all the other member states have chosen to ratify the Treaty by parliamentary means – and everything indicates that the result will be close. 
For Prime Minister Brian Cowen’s new government, the risk is that a “No” to the Lisbon Treaty would cripple his administration in its infancy. 
For the EU, Irish rejection of the Treaty would probably trigger a lengthy period of instability, and perhaps even an end to the European integration process as it is now constituted. 
In 2001, Irish voters rejected the Nice Treaty, which threw the EU into a protracted period of crisis and introspection, which ended only with agreement on the so-called Constitutional Treaty in 2005. 
Almost immediately, however, French and Dutch voters rejected that Treaty, bringing the negotiations back to square one. 
Now, after a lengthy and difficult period of reflection and bargaining, those efforts may be in jeopardy again. 
The “No” campaign has been vigorous, comprising a motley crew of aging Marxists, anti-globalization protestors, traditional euroskeptics, and obsessive “sovereigntists.” 
They have sought to capitalize on the vacuum of knowledge in Ireland regarding EU affairs and the “Yes” side’s relative lateness to mobilize. 
Voters have been subjected to a barrage of outlandish claims: the Treaty would supposedly introduce abortion into Ireland (it is outlawed under Ireland’s constitution), abolish Ireland’s low corporate-tax rate, and introduce a European army that would soon be sending Irish boys home from distant battlefields in body bags. 
Even Ireland’s dismal performance at the recent Eurovision Song Contest has been used to bolster the message: “They didn’t vote for us; why should we vote for them?” 
Though these claims are easily discredited, the “Yes” side has been unable to provide voters with sufficient reasons to vote for the Treaty. 
If that wasn’t enough, the “No” side has also been able to associate the EU with rising fuel and food prices as the campaign draws to a close. 
Two factors that are likely to decide the referendum’s outcome can be singled out: turnout and how the farming community votes. 
Opinion polls currently show the “Yes” side leading by two to one (35% to 18%). 
But there is little comfort in these figures for pro-Europeans: polls prior to the failed referendum on the Nice treaty in 2001 demonstrated an even larger “Yes” majority at the same stage. 
Now as then, “No” voters seem more committed. 
The percentage of “Don’t knows” remains high, at about 47%, so there is everything to play for in the campaign’s final days. 
The crucial issue will be turnout. 
In 2001 the ‘Yes’ side lost because it failed to convince enough voters to turn out – almost two thirds of the electorate failed to vote. 
In 2002 a second referendum was held which reversed the result and saw the ‘Yes’ side triumph. 
A good part of the explanation for this turnaround was the fact that the government managed to convince enough voters to move from abstention to the ‘Yes’ camp (though the turnout still failed to reach 50%). 
All of this suggests that the higher the turnout the greater the likelihood of a ‘Yes’ win. 
For Irish farmers the campaign has delivered a golden opportunity to engage in a tactical assault on Brussels. 
They have sought to link the Treaty to the ongoing Doha Round of World Trade Organization talks. 
Peter Mandelson, the EU’s trade commissioner, has been routinely presented as public enemy number one with his proposals to reduce some agricultural tariffs by up to 70%. 
Farming organizations threaten to withhold support for the Treaty unless the government threatens to veto Mandelson’s proposals. 
Although the Irish Farmers Association (IFA) has belatedly urged its 85,000 members to support the Treaty, opinion polls show farmers are opposed to Lisbon by a two to one majority. 
Their votes could prove crucial in a tight contest. 
From the outside looking in it seems almost perverse that Irish voters might reject the Lisbon Treaty. 
After all Ireland has benefited more than other state from the European integration process, garnering almost €60billion in EU subsidies during 35 years of membership. 
But in a context where the EU remains too remote from citizens and where apathy and confusion define the referendum campaign, the ‘No’ side has cleverly packaged its message of Europe as an existential threat to Irish jobs, investment and sovereignty. 

Is “Eurabia” Inevitable? 
What is it that makes young Muslims in the West susceptible to radicalism? 
What is it about the experience of the West’s rising generation of Muslims that leads a small minority to see violence as a solution to their economic and political dilemmas, and suicide as their reward and salvation? 
Britain, which will soon mark the anniversary of last year’s bombings in London, provides a test case for seeking answers to these questions. 
For young British Muslims, our globalized world challenges key beliefs, destabilizing their identity and thus encouraging a defensive response. 
British citizenship, of course, guarantees freedom of expression and minority rights, and young Muslims take full advantage of this. 
Yet they are using this freedom to deepen family and cultural ties to the closed world of their inherited Muslim identity, particularly its politics. 
In practice, this means that many young Muslims are utterly preoccupied with events in the Arab and Muslim world. 
They see what we see: a region where autocratic countries seem corrupt and paralyzed. 
But they also see an unprecedented level of hostility from the West, with regime after regime seeming to be either in peril or facing chaos. 
Afghanistan, Iraq, Palestine, and now Iran: all seem to be under attack as part of the “global war on terror.” 
As a result, the West’s strategic choices appear inherently anti-Islamic to countless of its young Muslims. 
This preoccupation with the Middle East is at the heart of young Muslims’ politics in British universities, mosques, and websites. 
Although most do not support Pakistan’s Pervez Musharraf, Egypt’s Hosni Mubarak, or the al-Saud family, they see hypocrisy in Western criticism of these leaders that is designed to manipulate and marginalize – after all, the West does not really want to push these regimes too far. 
Access to the Internet, satellite television, and travel is drawing these young Muslims into a community that shares their vision and their rage. 
So technology is heightening the tensions that exist between the mechanics of a modern free society and the sense of a vast conspiracy against Muslims. 
This has led to a schism between the hopes young Muslims have for successful lives in the West and their aspirations for their Muslim brothers and sisters, who have suffered so many terrible disappointments. 
As young Muslims in Britain (and across the West) try to maneuver between the various, and often conflicting, aspects of their identity, three clear tendencies have emerged. 
Messianic waves from the Middle East, reaching both schools and mosques, help draw young Muslims into radicalism. 
One such wave is created by the hardline Saudi/Wahhabi education system, which is based on the concept of al-wala’ wa al bara’ , loyalty to the system and hostility to the infidels. 
This curriculum, exported Westward by fat Saudi subsidies, is heavily punctuated with denunciations of the infidels and calls to jihad. 
Designed to secure the legitimacy of the Saudi monarchy at home, it is indoctrinating young Western Muslims with values antithetical to open and free societies. 
Britain’s government is beginning to recognize the danger, and is trying to clamp down on schools and mosques that spread hate. 
Unfortunately, such repression has been merely reactive and shortsighted, with no clear long-term vision about the nature of Islamic education in the West. 
Thus, it merely feeds young Muslims’ fears that they are being singled out for persecution. 
One difficulty with the British government’s response is that it classifies all Muslims as just that: Muslim. 
By defining people on the basis of their religion, nuances – of national identity or of the degree of orthodoxy – are lost. 
This plays into the hands of radicals, because it makes Islam the central element of identity. 
This process, indeed, is echoed in the 22 Arab countries, where religious orthodoxy rules out any significant liberal political opposition. 
In such circumstances, the Mosque becomes the sole public space in which people can voice political views. 
Politicization of the mosque has, sadly, also become the norm in Britain. 
Islamic radicalization and terror need not continue to flourish in the West. 
Regardless of their disappointments with the Western countries’ foreign policy, young Muslims have been exposed to their undeniable democratic spirit. 
They may now seek a deeper connection to their Muslim identity, but, having learned to question authority, they are unlikely to accept rigid parental or Islamic traditions. 
Like other young people around them, they want to be the agents of their own destiny. 
This desire is changing Islam, especially in the West. 
The basic texts remain the same, but their interpretation, and the application of religion in people’s lives, has not. 
Young Muslims, particularly in the West, are setting an example that is slowly being echoed in the Middle East, despite massive state repression. 
The task for Western policymakers is to recognize the interconnection of foreign and domestic policies. 
They must become serious about backing legitimate democratic representation in Muslim countries, for only then will Western policy seem less hypocritical. 
They must also ensure that career choices are as open to their Muslim citizens as they are to everyone else. 
In short, young Muslims in the West need to believe that democratic principles are respected abroad and applied equally at home. 
Only when such a belief becomes general will despair stop fueling terrorism, and suicide bombing come to be viewed as an obscene calling. 

Is “Gene Doping” Wrong? 
In recent years, the International Olympic Committee and other sports organizations have worried about the possible misuse of gene-transfer technology. 
But the sports world seems intent on exploiting this technology in pursuit of gold medals and championships, and genetic testing may be the wave of the future. 
Two Australian Football League teams have hinted that they are looking into tests that would indicate an athlete’s likely height, stamina, speed, and strength. 
Indeed, for some, “gene doping” now represents the Holy Grail of performance enhancement, while for others it means the end of sports as we know it. 
The prospect of a future of genetically modified athletes incites alarm throughout the sports world, accompanied by portrayals of such athletes as inhuman or some form of mutant. 
This is a misrepresentation of how gene transfer would alter humans, both therapeutically and non-therapeutically, should it ever be legalized. 
But the fear that rogue scientists will take advantage of athletes – or that athletes will seek to enroll in gene-transfer experiments in an attempt to receive some undetectable performance benefit – is very real. 
The World Anti-Doping Agency (WADA) prohibited gene doping in 2003, but some scientists predict that its misuse in sport is likely to appear at the Beijing 2008 Olympics. 
It is in this context that the debate about gene doping erupted during the 2004 Olympics in Athens. 
Unfortunately, because the discussion has so far been dominated by moral panic over the state of sports, many ethical considerations and important questions have been excluded. 
Policies concerning gene doping should not rely solely on the interests and infrastructures of sports organizations. 
In particular, the monitoring committees on genetic technology that nations develop must be taken on board by the world of sport. 
A simple model based on prohibition and testing for gene modification will not be enough, assuming that detection is possible at all. 
Moreover, ethics committees must be made aware of the special circumstances of sports, which limit the effectiveness of broader social policies on genetic modification. 
Again, regulation ought not to rely on one single global authority. 
As has been made clear from the ethical debates on stem-cell research, a global policy cannot easily be adopted or enforced, nor should it be. 
Above all, it is not acceptable for the world of sport to impose a moral view about the role of enhancement technology on nations that wish to participate in the Olympics, without implementing an extensive and ongoing consultative process to accompany its policy decision. 
This cannot involve the creation of working groups that merely pay lip service to ethical debate, but must enable non-sports organizations to develop their own policy framework for the regulation of ’gene doping’ and, more broadly, the use of genetic information. 
Policies governing gene transfer in sports must, therefore, be recognized as subservient to broader bio-ethical and bio-legal interests that recognize the changing role of genetics in society. 
The rhetoric surrounding “gene doping” relies heavily on its moral status as a form of cheating. 
Yet, this status relies on existing anti-doping rules. 
If we don’t ban gene transfer in the first place, then on one level, it is not cheating. 
In any case, to describe genetically modified athletes as mutants or inhuman is morally suspect, for it invokes the same kind of prejudice that we deplore in relation to other biological characteristics, particularly race, gender, and disability. 
After all, many, if not most, top athletes are “naturally” genetically gifted. 
To refer to these people as mutants would surely invite widespread criticism. 
Those who fear that gene doping heralds the “end of sports” should instead recognize this moment as an opportunity to ask critical and difficult questions about the effectiveness and validity of anti-doping tests. 
Does society really care about performance enhancement in sport? 
That may sound like a radical question. 
But advancement in ethical inquiry relies on the conflict of beliefs and values. 
For many years, commentators have expressed concerns about the culture of doping in elite sport. 
Yet, the culture of anti-doping is equally alarming, because it embodies a dogmatic commitment that limits the capacity for critical debate over what really matters in sport. 
If anti-doping authorities truly care about sports, then they have a responsibility to re-examine the basic values that underpin their work. 
They should begin by imagining what would happen if the child of a genetically modified human wanted to become an elite athlete. 
At the very least, they might then be less prone to imposing the narrow moral position of the sports world on the parent. 

Is Academic Freedom Worth Its Price? 
WARWICK, UK – Is academic freedom affordable in a time of economic crisis? 
That was the topic for discussion at the annual signing of the Magna Charta Universitatum at the mother of universities, the University of Bologna, earlier this year. 
The Magna Charta is the world’s most visible statement of principles for the promotion and protection of university autonomy. 
Over the past two decades, nearly 700 institutions of higher education on every continent have signed it. 
Nevertheless, there remains a nagging sense that universities are luxuries now that ordinary people are struggling to make ends meet. 
There has always been reason for concern. 
In the past, universities have been created in times of plenty, typically to encourage people to think beyond their immediate need for survival to more edifying spiritual or national goals. 
Nearly 50 years ago, a statistically minded historian of science, Derek de Solla Price, observed that the best indicator of academic research production is a nation’s energy consumption per capita: both grow together. 
This is hardly surprising. 
From a strictly economic standpoint, academic freedom requires relative immunity to costs, whether stemming from trial-and-error experimentation or from more radical challenges to the status quo. 
But should universities now reduce their demands in order to meet the needs of the larger society, not least in terms of their carbon footprint? 
If universities are to remain universities in the sense originally laid down by the Bolognese lawyers, the answer is no. 
Moreover, this is not an affront to economics. 
The efficiency savings of academia occur downstream from the activities of the universities themselves. 
Indeed, universities may be the most consistently performing products of long-term capital investment, especially if one is inclined to think about social and economic “investment” in exactly the same terms. 
After all, the university’s unique institutional mission is to manufacture knowledge as a public good. 
The new knowledge produced by original research is an instance of social capital formation. 
It results from academics and funders collaborating on projects that aim to increase the competitive advantage of each in their respective domains. 
Left at this stage, knowledge is simply intellectual property, access to which is restricted to paying customers. 
But universities also have an institutional mandate to teach. 
This forces knowledge to be made more widely available, thereby breaking the effective monopoly that researchers and their funders would otherwise enjoy. 
Joseph Schumpeter’s phrase “creative destruction,” his definition of entrepreneurship, aptly describes this process. 
Once teaching reduces, if not eliminates, the original competitive advantage associated with a piece of research, academics and their funders are forced to seek new sources of advantage by producing new knowledge. 
In the process, the larger public – those not involved in the original production of new knowledge – benefit through classroom instruction. 
In this sense, the heart of the university is located in its curriculum committee, as the mechanism by which research is regularly translated into teaching, generating new cycles of creative destruction. 
Efficiency-minded knowledge managers nowadays say that the very idea of the university as a place where the same people produce and distribute knowledge is a throwback to the Middle Ages. 
Today, teaching is thus said to be more efficiently delivered on-line, and research best delivered through dedicated “science parks.” 
But, while the sense of “efficiency” that attracted the mendicant Christian orders, the Dominicans and Franciscans, to staff the original universities was rather different, it is no less relevant today. 
The Dominicans and Franciscans literally lived by begging – that is, by depending on diverse sources of income, whose return to any particular investor was always unclear. 
The autonomy of these orders rested on a proven long-term ability to do more than expected with what they were given. 
The Latin word for this ability was povertas, or “poverty” in English. 
While the word does not retain its original virtuous connotations, we still warm to the virtuosity of “doing more with less.” 
In the case of the university, this means allowing access to knowledge to students who lack the intellectual, political, or financial resources that might have enabled them to produce it for themselves. 
Universities perform their natural economic function when academics speak and write plainly, demystify jargon, present their ideas in alternative media and stress applications to domains that do not concern the academics themselves. 
In these ways, academics enable knowledge to do maximum work at minimal cost to its recipients. 
In short, universities prove their worth if students find it easier to appropriate academic knowledge than the academics themselves originally did. 

Is Ahmadinejad Now Free to Make a Nuclear Deal? 
BERLIN – In Istanbul this week, representatives of Iran and the “5+1” group (the five permanent members of the United Nations Security Council plus Germany), led by European Union High Representative for Foreign Affairs Catherine Ashton, will resume talks about Iran’s nuclear program. 
No breakthrough is likely, but the outcome could be more favorable than many expect. 
In October 2009, an initial understanding was reached, according to which Iranian low-enriched uranium (LEU) would be delivered to Russia for further enrichment and conversion into fuel rods for the Tehran Research Reactor (TRR). 
But this accord faltered on Iran’s domestic politics: President Mahmoud Ahmadinejad’s political adversaries effectively blocked it. 
Might the same thing happen again? 
Ahmadinejad, who was severely weakened after his disputed reelection in 2009, has now consolidated his position. 
Representatives of his regime are still concerned about what they see as externally backed attempts to stage a “velvet revolution” in the country, but there is little fear of new challenges from within. 
One conservative intellectual put it in almost Nietzschean terms: “Yes, two million people took to the street after the elections. 
But they were voters, not fighters. 
They criticized the situation. 
But no one wants to change the system by force.” 
In other words, there is no will to power on the part of civil society and the opposition. 
Many who protested against the regime in 2009 are disillusioned. 
Ordinary people do not hide their contempt for the regime, but they also see that last year’s mass protests have failed. 
Many have withdrawn into the private sphere – education and culture for some, business for others. 
Visa applications are increasing, indicating preparations for limited or prolonged sojourns abroad. 
While Iran’s leadership continues to repress liberal dissenters, it feels secure enough to talk of “reconciliation” with parts of the “loyal” opposition – Ahmadinejad’s conservative and reform-oriented adversaries who want to preserve the Islamic system as such. 
Within the president’s camp as well, there are discussions about the post-Ahmadinejad era and possible successors to him – all, however, assuming regular presidential elections in 2013. 
Until then, despite frequently harsh criticism of his performance, the president is seen to have a mandate to govern. 
The effects of the latest round of international sanctions on Iran are somewhat ambiguous: they have weakened the country, but they do not seem to have weakened Ahmadinejad. 
Withdrawal of European companies is delaying necessary investments and forcing Iranian firms to seek less-favored alternatives, mainly in China and Russia. 
Prices are increasing, more transactions are being conducted in cash, and more dubious business figures are arriving from around the world. 
But, while government officials do not deny that sanctions worry them, they point to Iran’s high foreign-currency reserves and the Iranians’ creativity in coping with the effects. 
Moreover, Ahmadinejad uses the sanctions as political cover to pursue his economically sound – but deeply unpopular – policy of slashing subsidies on electricity, petrol, and bread. 
Though economic pressure is unlikely to force the regime to abandon uranium enrichment, unity on sanctions among the five permanent Security Council members, and moves by the EU, Japan, and South Korea to sharpen them further has had an impact. 
Most importantly, sanctions have strengthened those within the elite who favor negotiations, and weakened those who are deeply critical of Ahmadinejad’s unhidden interest in doing business with the West, particularly the United States. 
For Ahmadinejad and his supporters, there are two main reasons for engagement with the US. 
First, they know that an understanding with the US would be popular, particularly among educated youth and the business community. 
Second, Ahmadinejad and the political leadership believe that the regime is under serious threat from the US – and only from the US. 
American officials often underestimate this threat perception and deep suspicion of US intentions, but they are powerful factors in Iranian politics. 
While Iran’s ruling elite appears to be divided over the prospect of a full-scale rapprochement with the US, they share this underlying fear of America and do not want their country to be isolated further. 
Given this background, it is quite possible that this time Iranian domestic politics will not undermine a new agreement to swap Iranian LEU for fuel rods for the TRR. 
The 5+1 group has an interest in reducing Iran’s stockpile of LEU and the risk of its use at some point for military purposes. 
Iran, for its part, has an interest in securing both the supply of fuel rods for the TRR and the international community’s implicit acceptance of its uranium-enrichment efforts, as well as in engaging with the US. 
Any such deal will be possible only if it responds to both sides’ interests. 
It would certainly help if Iran began the talks with a commitment to end its enrichment of uranium to the level of 20%.Even Iranian officials admit that there is no (civilian) purpose for such a program if the 20% enriched fuel rods for the TRR are actually produced in Russia. 
Another clear signal of Iran’s intention to settle the dispute would be progress toward ratification by Iran’s parliament of the Additional Protocol to the Nuclear Non-Proliferation Treaty. 
The 5+1, for their part, should indicate that an eventual agreement on the basis of “minimum enrichment and maximum controls” is possible. 
Agreement on a LEU fuel swap would not resolve the nuclear dispute between Iran and the West, but it would open the door for a diplomatic process that could eventually reach the core of the problem – Iran’s uranium enrichment and the risks of diversion for military purposes. 
If the Istanbul talks go well, they could provide a road map for further negotiations, not only on the nuclear issue, but also on Afghanistan, the Middle East, and terrorism. 
Even if they only provide an avenue for bilateral engagement between the US and Iran, they will still prove to be worth the effort. 

Is America an Empire? 
Three decades ago, the radical left used the term "American empire" as an epithet. 
Now that same term has come out of the closet: analysts on both the left and right now use it to explain - if not guide - American foreign policy. 
In many ways, the metaphor of empire is seductive. 
The American military has a global reach, with bases around the world, and its regional commanders sometimes act like proconsuls. 
English is a lingua franca like Latin. 
The US economy is the largest in the world, and American culture serves as a magnet. 
But it is a mistake to confuse primacy with empire. 
The US is certainly not an empire in the way we think of the European empires of the 19th and 20th centuries, because the core feature of that imperialism was political power. 
Although unequal relationships between the US and weaker powers certainly exist and can be conducive to exploitation, the term "imperial" is not only inaccurate but misleading in the absence of formal political control. 
To be sure, the US now has more power resources relative to other countries than Britain had at its imperial peak. 
But the US has less power - in the sense of control over other countries' internal behavior - than Britain did when it ruled a quarter of the globe. 
For example, British officials controlled Kenya's schools, taxes, laws and elections - not to mention its external relations. 
America has no such control today. 
In 2003, the US could not even get Mexico and Chile to vote to support a second resolution on Iraq in the UN Security Council. 
Devotees of the New Imperialism would say, "Don't to be so literal." 
After all, "empire" is merely a metaphor. 
But the problem with the metaphor is that it implies a degree of American control that is unrealistic, and reinforces the prevailing strong temptations towards unilateralism in both the US Congress and parts of the Bush administration. 
In the global information age, strategic power is simply not so highly concentrated. Instead, it is distributed among countries in a pattern that resembles a complex three-dimensional chess game. 
On the top chessboard, military power is largely unipolar, but on the economic board, the US is not a hegemon or an empire, and it must bargain as an equal when, for example, Europe acts in a unified way. On the bottom chessboard of transnational relations, power is chaotically dispersed, and it makes no sense to use traditional terms such as unipolarity, hegemony, or American empire. 
So those who recommend an imperial US foreign policy based on traditional military descriptions of American power are woefully misguided. 
In a three-dimensional game, you will lose if you focus only on one board and fail to notice the other boards and the vertical connections among them. 
Witness the connections in the war on terrorism between military actions on the top board, where the US removed a tyrant in Iraq, but simultaneously increased the ability of Al Qaeda to gain new recruits on the bottom transnational board. 
These issues represent the dark side of globalization. 
They are inherently multilateral and require cooperation for their solution. 
So to describe America as an empire fails to capture the true nature of the foreign policy challenges that America faces. 
Those who promote the idea of an American empire also misunderstand the underlying nature of American public opinion and institutions. 
Will the American public tolerate an imperial role? 
Neo-conservatives writers like Max Boot argue that the US should provide troubled countries with the sort of enlightened foreign administration once provided by self-confident Englishmen in pith helmets. 
But, as the British historian Niall Ferguson points out, modern America differs from 19th century Britain in its "chronically short time frame." 
America was briefly tempted into real imperialism when it emerged as a world power a century ago, but the interlude of formal empire did not last long. 
Unlike Britain, imperialism has never been a comfortable experience for Americans, and only a small share of its military occupations led directly to the establishment of democracies. 
American empire is not constrained by economics: the US devoted a much higher percentage of its GDP to military spending during the Cold War than it does today. 
Its imperial overreach will instead come from having to police more peripheral countries than US public opinion will accept. 
Indeed, opinion polls in America show little popular taste for empire and continuing support for multilateralism and using the UN. 
Michael Ignatieff, a Canadian advocate of the imperial metaphor, qualifies it by referring to America's role in the world as "Empire Lite." 
In fact, the problem of creating an American empire might better be termed imperial underreach. 
Neither the US public nor Congress has proven willing to invest seriously in the instruments of nation building and governance as opposed to military force. 
Indeed, the entire State Department budget is only 1% of the federal budget. 
The US spends nearly seventeen times as much on its military, and there is little indication that this is about to change. 
So the US should avoid the misleading metaphor of empire as a guide to its foreign policy. 
Empire will not help America to understand and cope with the challenges it faces in the global information age of the 21st century. 
Chess, anyone? 

 

Is Azerbaijan Next? 
As Azerbaijan gears up for parliamentary elections on November 6, the main question is whether the country is about to undergo its own “color” revolution, along the lines of those that have overthrown post-Soviet elites in Georgia, Ukraine, and Kyrgyzstan in the last two years. 
Such an outcome cannot be ruled out, but the prospects are uncertain at best. 
Azerbaijan’s ruling party, Eni Azerbaijan, faces challenges all around, despite the support of President Ilham Aliyev and privileged access to state resources. 
At least three opposition parties – Isa Gambar’s “Mussavat,” Ala Keremela’s “The National Front, and the Social Democratic Party – have maintained support and political influence since Ilham succeeded his late father, Heydar Aliyev, in 2003. 
Moreover, like Georgia, Ukraine, and Kyrgyzstan, dynastic politics in Azerbaijan reflects the dominance of clans whose members’ success is determined by proximity to the president. 
While such systems may appear stable, they are inherently fragile, for they are synonymous with lawlessness, injustice, and abject poverty for the majority of the population. 
The opposition has already started preparing the ground for change. 
The leaders of the three-party opposition bloc Azadlyg (Freedom) have declared that they will regard any electoral outcome that gives opposition parties less than 70% of the vote as having been falsified, and that street protests would follow. 
This would conform to the pattern seen in Serbia in 2000, Georgia in 2003, and Ukraine in 2004. 
But can such a scheme work in Azerbaijan? 
A “dress rehearsal” failed in October 2003, when the opposition, incapable of uniting around a single candidate to challenge Ilham in the presidential election, declared the results to have been falsified and called people into the streets. 
Only several hundred showed up, and the police quickly dispersed them, arresting dozens. 
This time, the opposition is united, having found it far easier to agree on mutual support for 125 parliamentary candidates than to settle on a single presidential candidate. 
But the authorities may have the upper hand. 
In Tbilisi, Kiev, and Bishkek, the leaders of the “color revolutions” had already held lofty positions in regimes that they now attacked as thoroughly corrupt; yet they succeeded in gaining the population’s trust. 
That is far from a foregone conclusion in Azerbaijan, where the last stint in power by some of the opposition leaders in 1992-1993 still evokes bitter memories of a time of war and crisis that few can recall without horror. 
Most importantly, however, the previous “color revolutions” underscore the crucial role of world public opinion and the global mass media that shape it. 
As in Georgia, Ukraine, and Kyrgyzstan, the fate of the regime and the country may well hang on whether the current government is portrayed on the world’s television screens as a violator of human rights that is thwarting the will of the people and thus rejecting “generally accepted democratic values.” 
Such an image may be less valid in Azerbaijan. 
After coming to power in 1993, Heydar Aliyev stopped the war with Armenia over the Nagorno-Karabakh enclave, secured Azerbaijan’s existence as a sovereign state, and, as the oil-and-gas sector flourished, oversaw the country’s growing international authority. 
The transfer of power from father to son took place peacefully, and Ilham’s administration has presided over completion of the Baku-Tbilisi-Ceyhan oil pipeline – to the annoyance of Russia and Armenia. 
At the same time, high oil prices have enabled higher social spending and infrastructure investment. 
Today, the capital, Baku, resembles a huge construction site, with high-rise housing, stores, and roads being built at a breakneck pace – and apparently benefiting the broad strata of the population. 
But none of this may ultimately matter if the West ­– and the United States, in particular – decides that Ilham’s regime is not ensuring its interests and seeks to manipulate the global media image accordingly. 
The West’s main interest is not Azerbaijan’s oil reserves, which accounted for just 0.06% of the world’s total in 2004, but its geopolitical position at the crossroads of global energy and transport corridors and as a frontline state vis-à-vis an increasingly assertive Iran. 
So far, it appears as though the West will back Ilham over the opposition. 
Former US Secretary of State Madeleine Albright, the president of the European Parliamentary Assembly, Rene Van der Linden, and US Deputy Secretary of State for global affairs Paula Dopryansky have all visited Baku recently. 
As US foreign-policy doyen Zbigniew Brzezinski put it in an interview with a German radio station, “The majority of Azeris actually support President Ilham Aliyev. 
Therefore, we have a situation that differs from those that took place in Georgia, Ukraine, and Kyrgyzstan.” 
Nevertheless, the West appears to be hedging its bets by sustaining contacts with the opposition. 
As Brzezinski added, “Of course, it is important for the political regime in Azerbaijan to be as stable and legitimate as possible.” 
If the West decides that the government has become unreliable, television shots of demonstrators’ weekly clashes with the Baku police, Ilham’s refusal to hold televised debates, and the confiscation of all orange objects from stores will come in handy. 
Of course, modern technology alone cannot bring about a revolution. 
But almost all post-Soviet states remain weak, and therefore vulnerable to domestic turmoil. 
Azerbaijan is no exception, and Russia, having been burned by its naked intervention on behalf of the governments in Georgia and Ukraine, has given every indication that it intends to sit this one out. 
The government appears confident that high oil prices, administrative resources, and dominance of the local media will ensure an election victory. 
That may not be enough. 

Is Bankers’ Pay Really the Root of Financial Evil? 
CHICAGO – Compensation practices at financial firms stand accused of being a primary cause of the recent global financial crisis. 
Restricting bankers’ pay is said to be the answer. 
But will such restrictions work? 
Before instituting such invasive regulation, we should examine whether past compensation structures really were the catalysts for our recent problems. 
To say that they were implies three things: top bank executives were rewarded for short-term results with large amounts of up-front cash; bank executives did not hold sufficiently large amounts of stock to align their interests with those of shareholders; and executives with more short-term pay and less stock ownership should have had the greatest incentive to take bad and excessive risks, and thus should have performed worse in the crisis. 
Two economists, Rudiger Fahlenbrach and Rene Stulz, tested these implications by studying the CEOs of almost 100 large financial institutions from 2006 to 2008. 
They start in 2006 because that seems to be the point at which some financial firms took on the risky positions that led to the crisis. 
In 2006, the CEOs took home $3.6 million in cash compensation on average, which represented less than half of total compensation. 
The larger share of pay was in restricted stock and options. 
At the same time, they held an average of $88 million in their firms’ equity and options. 
In other words, they left more than 24 times as much in their firm as they took home. 
So it seems unlikely that this up-front cash provided much of an incentive for the average CEO to knowingly take bad or excessive risks that would jeopardize their much larger equity stakes. 
Moreover, these CEOs lost a lot in the crisis. 
From 2006 to 2008, the average CEO lost $31 million in his or her holdings of a firm’s stock, dwarfing any gains from cash compensation. 
The CEOs lost on their options as well. 
So, if pay and front-loaded incentives were not the reason that banks’ CEOs got their firms (and the world) into a mess, what was? 
Some economists point to highly expansionary monetary policy in the years leading up to the crisis. 
Others cite the so-called “capital glut” – large inflows of external financing from China and much of the developing world. 
Still others highlight the role that the political system played in inflating the banking sector and real-estate prices, particularly the sub-prime sector. 
Ruling out compensation practices hardly leaves us at a loss for culprits. 
While today’s proposed pay restrictions are unlikely to stop the next financial crisis, they are likely to damage the financial sector. 
To see why, it is important to understand why bankers are paid so much. 
Over the last two or three decades, technological change and increased scale have led to much greater productivity and much higher incomes for those at the top of society’s income distribution. 
Corporate executives manage larger companies. 
Investors manage much larger sums of money. 
Entertainers and athletes appeal to larger audiences. 
Lawyers oversee bigger transactions and cases. 
Pay for all of these groups has increased by much more than pay for the average worker. 
Given this reality, the best bankers, traders, dealmakers, etc. will work for companies that provide the most attractive compensation. 
Greater pay regulation will drive the most talented away from regulated banks and towards hedge funds, private equity funds, boutique investment banks, and other unregulated investment firms. 
This talent drain is likely to be exacerbated as pay regulations impose a one-size-fits-all regime. 
Why impose restrictions on a dealmaker who earns a large fee for arranging a merger that imposes no risk on the bank after the transaction has closed? 
The same is true for a trader who makes money on spreads rather than from taking on risk. 
These types of employees will be penalized for no good purpose under the proposed pay regimes. 
Perhaps more troubling is that pay restrictions open a Pandora’s box of other restrictions. 
Indeed, politicians, eager to look good in the eyes of angry voters, are often more interested in setting limits to total compensation than they are in designing the optimal form of compensation. 
Banks serve a special function in the economy that does warrant a special role for the government: not in setting pay, but in imposing effective capital requirements. 
Higher and pro-cyclical equity-capital requirements on banks, combined with a requirement to raise contingent long-term debt – debt that converts into equity in a crisis – is a better way forward. 
The typical bank is capitalized with equity, long-term debt, short-term debt, and deposits. 
Investment banks like Bear Stearns and Lehman Brothers got into trouble because they had too little equity capital – far less than 10%. 
Regulators might consider imposing pro-cyclical equity requirements – increasing the equity percentage in boom times in order to offset losses in the inevitable bust times. 
In addition, regulators should require banks to issue an additional amount of capital – say, 10% – in the form of long-term debt that is forced to convert into equity if the bank and the overall banking system get into financial difficulty. 
In issuing contingent capital, banks would have to pay a higher interest rate than they would on ordinary long-term debt, because debt investors will face the true cost of capital, not the government-subsidized cost. 
Over time, however, the interest-rate premium is likely to be small, because higher capital requirements and contingent capital should significantly reduce the likelihood of ever reaching the triggers. 
If such a contingent-capital structure had been in place before the crisis, troubled banks would have been recapitalized by the contingent debt holders while avoiding the complications and legal posturing inevitable in formal bankruptcy. 
Debt investors, not the government, would have bailed out the banks, making the financial crisis substantially smaller, if it had occurred at all. 

Is Bernanke Ready? 
Ben Bernanke, the nominee to replace Alan Greenspan this month as Chairman of the US Federal Reserve Board, is a highly capable economist who has devoted his professional life to understanding the historical role of central banks and the problems that they have faced. 
His views represent, as much as can be expected, a consensus among those who have studied the issues carefully. 
But that does not mean that Bernanke is prepared to ensure that healthy economic growth continues in the US in the coming years and provide the kind of leadership that the world needs. 
By the standards of what is generally understood today, he will do a good job. 
Unfortunately, that may not be enough. 
John Maynard Keynes once said that monetary policy may work like a string. 
A central bank can pull the string (raise interest rates) to rein in an economy that is galloping ahead unsustainably. 
But it cannot push the string up: if economic growth stalls, as when confidence is seriously damaged, lowering interest rates may not be enough to stimulate demand. 
In that case, a recession can occur despite the central bank’s best efforts. 
Bernanke made his name as an economist by analyzing the worldwide Great Depression of the 1930’s – good expertise to have, since preventing such disasters is a central bank head’s most important job. 
The Great Depression, which followed the stock market crash of 1929, saw unemployment rise sharply in many countries, accompanied by severe deflation. 
In the US, consumer prices fell 27% between 1929 and 1933, and the unemployment rate topped out in 1933 at 23%. 
According to Bernanke’s “debt deflation” theory, the collapse in consumer prices was one of the causes of the Great Depression, since deflation raised the real value of debts, making it difficult to repay loans. 
As Bernanke pointed out, 45% of US farms were behind on mortgage payments in 1933, and in 1934, default rates on home mortgages exceeded 38% in half of US cities. 
The debt burden destroyed consumer confidence and undermined the banking system, crippling the economy. 
Bernanke’s research also stressed that the sooner a country abandoned the gold standard, the better off it was. 
Adhering to the gold standard during the Great Depression implied a deflationary monetary-policy bias, since it required keeping interest rates relatively high to encourage investors to hold deposits in banks rather than demanding the gold that backed them. 
Once a country eliminated convertibility into gold, it was free to pursue monetary expansion, and deflation tended to end. 
But Bernanke’s impressive research on the Great Depression does not mean that he can prevent the next recession or depression, for stopping deflation hardly solves all problems. 
After all, the US went off the gold standard in 1933, and the Fed cut the discount rate to 1.5% in 1934, ending deflation (except for minor episodes); but the unemployment rate did not fall consistently below 15% until 1941 and the onset of World War II. 
Bernanke will therefore have to be careful about over-generalizing from his past research, just as medical specialists must be careful not to over-diagnose diseases in their own specialty and military strategists must be careful not to over-prepare to fight the last war. 
Of course, this does not mean that we should ignore the past altogether. 
A 2005 study headed by Guillermo Calvo, Chief Economist for the Inter-American Development Bank, found important similarities between the Great Depression of the 1930’s and economic crises since 1980 in 31 emerging countries. 
But the study also found important differences. 
The fundamental experience of the Great Depression has repeated itself, on a smaller scale, many times and in many countries in recent decades: a shock in financial markets, followed by a sharp decline in gross domestic product. 
But the behavior of consumer prices in the post-1980 crises is fundamentally different from that seen in the 1930’s. 
In contrast to the Great Depression, collapsing national output was in recent decades accompanied by accelerating inflation, not deflation. 
The Calvo study thus concludes that Bernanke’s debt deflation theory of the Great Depression does not generally apply to the more recent crises. 
At the same time, Bernanke is inheriting a pair of economic vulnerabilities that are unusual by historical standards, and that did not precede the Great Depression of the 1930’s. 
We are now in the late stages of the biggest real estate boom in US (or world) history, driven by frenzied market psychology. 
In contrast, US home prices were uneventful before the Great Depression, and actually fell slightly in real terms between 1925 and 1929. 
Moreover, we are now experiencing a fundamental change in expectations about oil prices: not only are today’s prices quite high in real terms by historical standards, but the futures markets indicate that prices are expected to remain high for years to come. 
In contrast, real oil prices were flat leading up to 1929, and down nearly 50% in real terms from the 1925-6 “fuel folly” peaks. 
In the near future, substantially higher oil prices, lower real estate prices, or both, could, depending on public reaction, put Bernanke into uncharted territory for economic stress. 
If confidence declines, his historical understanding of the Great Depression of the 1930’s could leave him ill-equipped to prevent such shocks from sinking the US, and the world, economy. 
He might find himself pushing on a string. 

Is Bush Right? 
Whatever critics at home and abroad may think, the “surge” that President Bush is planning for Iraq is more than a troop increase; it is a new and high-risk regional strategy. 
True, Bush’s plan will prove far too little and comes far too late to stabilize Iraq. 
But it does offer the United States some longer-term benefits in the regional battle with Iran for influence. 
At the heart of the new strategy is Bush’s decision to take the fight directly to Iraq’s most powerful militia, the Mahdi Army. 
Under the nominal control of the militant cleric Moqtada al-Sadr, the group has become Iraq’s largest and best-armed fighting force and is pursuing its own political and security agenda. 
The Mahdi Army has exchanged fire with US troops before, most notably during the fierce battles for control of the southern Iraqi cities of Najaf and Karbala in 2004. 
Those confrontations ended with a truce of sorts – though skirmishes have continued – because US forces have been reluctant to fight Sunni insurgents and Shi’a militiamen at the same time. 
Iraqi Prime Minister Nouri al-Maliki has also been reluctant to take on the Mahdi Army, mainly because the support of Sadr loyalists in Iraq’s parliament is crucial for his political survival. 
Now, instead of waiting for Maliki to act, US forces appear poised to do the job themselves. 
If they can significantly degrade the militia’s strength, or at least contain its influence within Baghdad’s Shi’a slums, the Iraqi government will have a somewhat better chance of developing a credible security force and Bush can claim some success. 
At the very least, the new strategy recognizes that the gravest challenge to stability in the near term comes from militia groups in general and the Mahdi Army in particular. 
Then there is the broader and growing conflict with Iran. 
Recent official US rhetoric and actions on the ground – including the arrest of five Iranians in Irbil in early January and Bush’s authorization of deadly force against Iranians who threaten Iraqi security or US troops – reflect a much more confrontational approach toward Iran’s influence inside Iraq. 
But it also indicates recognition that Iran’s effort to extend its regional influence poses the single biggest challenge to the Middle East’s long-term stability. 
To be sure, Bush’s new strategy is highly unlikely to help Iraqis avert a slide into sectarian civil war. 
A temporary 16% boost in troops simply is not enough to get that job done. 
Bush insists that there will soon be enough US troops in central Iraq to “hold” areas seized from militia groups and insurgents. 
But for how long? 
A month? 
Four months? 
Three years? 
American troops will eventually leave Iraq, and all the relevant parties – the Maliki government, Shi’a militias, Sunni insurgents, Iran, and Iraq’s Sunni Arab neighbors – know it. 
Sadr can simply hold back and wait the Americans out. 
Moreover, any viable solution in Iraq requires political agreement among Iraqis, which in turn will depend on their willingness to compromise. 
Laws guaranteeing a fair division of Iraqi oil profits must be drafted, and all factions must have confidence that what is agreed will be enforced. 
Sunnis must be persuaded that neither their minority status nor former membership in Saddam Hussein’s Ba’ath Party will exclude them from political and economic life. 
But Sunnis and Shi’a are now killing one another in increasing numbers, and the new aggressiveness of US forces will make compromise all but impossible. 
It is unrealistic to expect Iraqi politicians to make substantial political sacrifices while their constituents are fighting Americans and one another. 
Finally, Bush’s strategy already faces challenges at home. 
Few Americans – and therefore few US lawmakers – have much confidence in Bush’s leadership on Iraq. 
If the new strategy fails to produce positive and tangible results within a few months, the steady domestic drumbeat for troop withdrawals will become deafening. 
A sharp spike in US casualties would compound the pressure to get out. 
Even so, the new strategy has some benefits. 
First, it sidelines Maliki, which means that he will be less damaged politically than if he were directly identified with US attacks on Iraqi Shi’a. 
US actions will spark Iraqi criticism that Maliki is impotent or an American puppet, but those charges have already been made. 
Nothing could be worse for Maliki than explicit authorization for attacks on Shi’a militias, and the near-term survival of his government is crucial if any progress is to be made on the political challenges facing all of Iraq’s factions. 
Second, the new strategy will keep the Mahdi Army on its heels. 
Sadr’s militia threatens to quickly become Iraq’s answer to Hezbollah: a well-armed, politically connected private army with its own foreign policy. 
The more that US forces can degrade the Mahdi Army’s position and force Sadr into face-saving political moves, the weaker the militia will be relative to other forces in Iraq after US troops head home. 
Finally, taking the fight directly to Iraq’s most powerful Shi’a militia and Iranians inside Iraq will align the US much more closely with its traditional Sunni Arab allies – Saudi Arabia, Egypt, Jordan, and the Gulf states. 
Arab governments have been especially angry over the chaos in Iraq, fearing that the US will abandon the Sunni minority to the not-so-tender mercies of revenge-minded Shi’a and expressing growing anxiety that the war has empowered Iran to extend Shi’a influence throughout the Middle East. 
When Iraq falls apart, as now appears all but inevitable, the US will need as many friends in the region as it can get, particularly as the battle with Iran for regional influence and the conflict over its nuclear program intensifies. 
If nothing else, having a common enemy will help the US and its Arab allies restore damaged ties. 

Is Capitalism Doomed? 
NEW YORK – The massive volatility and sharp equity-price correction now hitting global financial markets signal that most advanced economies are on the brink of a double-dip recession. 
A financial and economic crisis caused by too much private-sector debt and leverage led to a massive re-leveraging of the public sector in order to prevent Great Depression 2.0. 
But the subsequent recovery has been anemic and sub-par in most advanced economies given painful deleveraging. 
Now a combination of high oil and commodity prices, turmoil in the Middle East, Japan’s earthquake and tsunami, eurozone debt crises, and America’s fiscal problems (and now its rating downgrade) have led to a massive increase in risk aversion. 
Economically, the United States, the eurozone, the United Kingdom, and Japan are all idling. 
Even fast-growing emerging markets (China, emerging Asia, and Latin America), and export-oriented economies that rely on these markets (Germany and resource-rich Australia), are experiencing sharp slowdowns. 
Until last year, policymakers could always produce a new rabbit from their hat to reflate asset prices and trigger economic recovery. Fiscal stimulus, near-zero interest rates, two rounds of “quantitative easing,” ring-fencing of bad debt, and trillions of dollars in bailouts and liquidity provision for banks and financial institutions: officials tried them all. 
Now they have run out of rabbits. 
Fiscal policy currently is a drag on economic growth in both the eurozone and the UK. 
Even in the US, state and local governments, and now the federal government, are cutting expenditure and reducing transfer payments. 
Soon enough, they will be raising taxes. 
Another round of bank bailouts is politically unacceptable and economically unfeasible: most governments, especially in Europe, are so distressed that bailouts are unaffordable; indeed, their sovereign risk is actually fueling concern about the health of Europe’s banks, which hold most of the increasingly shaky government paper. 
Nor could monetary policy help very much. 
Quantitative easing is constrained by above-target inflation in the eurozone and UK. 
The US Federal Reserve will likely start a third round of quantitative easing (QE3), but it will be too little too late. 
Last year’s $600 billion QE2 and $1 trillion in tax cuts and transfers delivered growth of barely 3% for one quarter. 
Then growth slumped to below 1% in the first half of 2011. 
QE3 will be much smaller, and will do much less to reflate asset prices and restore growth. 
Currency depreciation is not a feasible option for all advanced economies: they all need a weaker currency and better trade balance to restore growth, but they all cannot have it at the same time. 
So relying on exchange rates to influence trade balances is a zero-sum game. 
Currency wars are thus on the horizon, with Japan and Switzerland engaging in early battles to weaken their exchange rates. 
Others will soon follow. 
Meanwhile, in the eurozone, Italy and Spain are now at risk of losing market access, with financial pressures now mounting on France, too. 
But Italy and Spain are both too big to fail and too big to be bailed out. 
For now, the European Central Bank will purchase some of their bonds as a bridge to the eurozone’s new European Financial Stabilization Facility. 
But, if Italy and/or Spain lose market access, the EFSF’s €440 billion ($627 billion) war chest could be depleted by the end of this year or early 2012. 
Then, unless the EFSF pot were tripled – a move that Germany would resist – the only option left would become an orderly but coercive restructuring of Italian and Spanish debt, as has happened in Greece. 
Coercive restructuring of insolvent banks’ unsecured debt would be next. 
So, although the process of deleveraging has barely started, debt reductions will become necessary if countries cannot grow or save or inflate themselves out of their debt problems. 
So Karl Marx, it seems, was partly right in arguing that globalization, financial intermediation run amok, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct (though his view that socialism would be better has proven wrong). 
Firms are cutting jobs because there is not enough final demand. 
But cutting jobs reduces labor income, increases inequality and reduces final demand. 
Recent popular demonstrations, from the Middle East to Israel to the UK, and rising popular anger in China – and soon enough in other advanced economies and emerging markets – are all driven by the same issues and tensions: growing inequality, poverty, unemployment, and hopelessness. 
Even the world’s middle classes are feeling the squeeze of falling incomes and opportunities. 
To enable market-oriented economies to operate as they should and can, we need to return to the right balance between markets and provision of public goods. 
That means moving away from both the Anglo-Saxon model of laissez-faire and voodoo economics and the continental European model of deficit-driven welfare states. 
Both are broken. 
The right balance today requires creating jobs partly through additional fiscal stimulus aimed at productive infrastructure investment. 
It also requires more progressive taxation; more short-term fiscal stimulus with medium- and long-term fiscal discipline; lender-of-last-resort support by monetary authorities to prevent ruinous runs on banks; reduction of the debt burden for insolvent households and other distressed economic agents; and stricter supervision and regulation of a financial system run amok; breaking up too-big-to-fail banks and oligopolistic trusts. 
Over time, advanced economies will need to invest in human capital, skills and social safety nets to increase productivity and enable workers to compete, be flexible and thrive in a globalized economy. 
The alternative is – like in the 1930s - unending stagnation, depression, currency and trade wars, capital controls, financial crisis, sovereign insolvencies, and massive social and political instability. 

Is Central Bank Independence All It’s Cracked up to Be? 
Alan Greenspan attained an almost iconic status as Governor of the Federal Reserve Board. 
So, as his term draws to a close and his mantle of infallibility is passed on to his successor, it is worth examining whether his legacy will measure up and what we can expect from the new Fed chief, Ben Bernanke. 
Few central bank governors have the kind of hagiography lavished upon them, especially in their lifetime, that Greenspan has had. 
But what makes for a great central bank governor in our modern societies, great institutions or great individuals? 
In economics, we seldom have a clearly defined counterfactual: Would the economy have performed even better or a little differently if someone else had been at the helm? 
We can’t know, but there is little doubt that those “managing” the economy receive more credit than they deserve, if sometimes less blame. 
Many forces behind the boom of the 1990’s, including advances in technology, were set in motion before Bill Clinton took office (just as the legacy of President George W. Bush’s deficits will be felt long after he leaves). 
So Greenspan cannot be given credit for the boom. 
But, while no central bank governor can ensure economic prosperity, mismanagement can cause enormous harm. 
Many of America’s post-World War II recessions were caused by the Fed hiking interest rates too fast and too far. 
There is little doubt that Greenspan had great moments, when one could at least imagine a less deft governor doing the “wrong” thing with disastrous consequences. 
One such moment was the stock market crash of 1987. 
Perhaps another occurred in 1998, when the Fed lowered interest rates in the face of what appeared to be an impending global financial crisis. 
These successes, combined with the 1990’s boom and the seeming durability of price stability, reinforced Greenspan’s exalted status. 
But they also led many to forget less successful moments. 
The Fed failed to avert the economic downturn of 1990, and a reading of Greenspan’s testimony to Congress during that period makes clear that the basic nature of the economy’s problems was not well understood. 
But the real problem for Greenspan’s legacy concerns what happened to the American economy in the last five years, for which he bears heavy responsibility. 
Greenspan supported the tax cuts of 2001 with the most specious of arguments – that unless something was done about America’s soaring fiscal surpluses, the national debt would be totally paid off within, say, ten to fifteen years. 
According to Greenspan, immediate action needed to be taken to avert this looming disaster, which would impede the Fed’s ability to conduct monetary policy! 
It says a great deal about the gullibility of financial markets that they took this argument seriously. 
More accurately, tax cuts were what Wall Street wanted, and financial professionals were willing to accept any argument that served that purpose. 
Of course, if, say, by 2008 the disappearing national debt really did appear to pose an imminent danger, Congress would have happily obliged in cutting taxes or increasing expenditures. 
Greenspan’s irresponsible support of that tax cut was critical to its passage. 
The fault was not only in the magnitude of the tax cut, but also in its design; by directing the cuts at upper-income Americans, it provided little economic stimulus. 
But soaring deficits did not return the economy to full employment, so the Fed did what it had to do – cut interest rates. 
Lower interest rates worked, but not so much because they boosted investment, but because they led households to refinance their mortgages, and fueled a bubble in housing prices. 
In short, as Greenspan departs, he leaves behind an American economy burdened with high household and government debt and fragile balance sheets – a legacy that is already contributing to global financial instability. 
It is still not clear what led Greenspan to support the tax cut. 
Was it a massive economic misjudgment, or was he currying favor with the Bush administration? 
The most likely explanation is a combination of the two, for he and Bush were pursuing the same “starve the beast” political strategy, which calls for tax cuts to be used to reduce revenues, thereby forcing the public sector to be downsized. 
The traditional argument for an independent central bank is that politicians can’t be trusted to conduct monetary and macroeconomic policy. 
Neither, evidently, can central bank governors, at least when they opine in areas outside their immediate responsibility. 
Greenspan was as enthusiastic for a policy that led to soaring deficits as any politician; but the fig leaf of being “above politics” gave credence to that policy, engendering support from some who otherwise would have questioned its economic wisdom. 
This, then, is Greenspan’s second legacy: growing doubt about central bank independence. 
Macroeconomic policy can never be devoid of politics: it involves fundamental trade-offs and affects different groups differently. 
Unemployment harms workers, while the lower interest rates needed to generate more jobs may lead to higher inflation, which especially harms those with nominal assets whose value is eroded. 
Such fundamental issues cannot be relegated to technocrats, particularly when those technocrats place the interests of one segment of society above others. 
Indeed, Greenspan’s political stances were so thinly disguised as professional wisdom that his tenure exposed the dubiousness of the very notion of an independent central bank and a non-partisan central banker. 
Unfortunately, many countries have committed themselves to precisely this illusion, and it may be a long time before they take heed of Greenspan’s most important lesson. 
Stressing the new Fed chief’s “professionalism” may only delay the moment when this lesson is learned again. 


Is China Cheating? 
Foul play! 
How else, says the US, could China undercut American producers in so many areas? 
For decades America seemed to dominate manufacturing, so US officials focused on liberalizing trade in manufactured goods. 
They put little effort into creating a level playing field for farmers, since they knew America couldn't compete in agriculture. 
Now, China is out-competing everyone, racking up huge trade surpluses with the US. 
So America's Treasury Secretary accuses China of deliberately keepings its exchange rate low, and calls for China to let market forces determine the value of the reminbi. 
The IMF's departing Chief Economist, Ken Rogoff, warns that the surpluses put global stability at risk. 
For those who recall East Asia's crisis of five years ago, much of this seems to run counter to what was said then. 
China was urged not to float its currency. 
Until Argentina's peso imploded, fixed exchange rates were fine. 
The US Treasury welcomed government intervention in exchange rate markets, and encouraged the IMF to support such interventions with mega-billion dollar loans to crisis countries. 
If China had let its currency float back then, it would have depreciated in value, deepening the crisis. 
Countries were warned: avoid trade deficits and build up reserves, because they are the key frontline defense. 
East Asia's countries followed that advice, and for a good reason: they had seen the consequences of a lack of reserves. 
East Asia's governments knew then that the IMF's policies would deepen their downturns, but they were helpless to resist. 
The IMF had the money they needed. 
China and Malaysia, lucky enough not to have to turn to the IMF or brave enough to set their own course, did what every textbook said you should do: they pursued expansionary monetary and fiscal policies. 
China's economy continued to grow at 7%; Malaysia had the shortest and shallowest downturn. 
To understand what is at stake, a few basic economic points need to be spelled out. 
First, international trade is based on the principle of comparative advantage; countries export goods in which they have a relative advantage and import goods in which they have a relative disadvantage. 
By and large, America now has a relative disadvantage in manufacturing, while China has a relative advantage. 
China should be exporting manufactured goods to the US. 
Secondly, if a country invests more than it saves, it will need to borrow, and the counterpart to that borrowing is a trade deficit. 
America's burgeoning trade deficit is a result of the Bush Administration's unprecedented mismanagement. 
Tax cuts that America could ill afford turned a huge fiscal surplus into a massive deficit; rather than saving, America's government is borrowing, much of it from abroad. 
That, not China's exchange rate policy, is the culprit. 
In fact, China's overall trade surplus today is actually small, around 1% of its GDP. 
Of course, the Bush Administration wants to shift the blame, but neither China, nor anyone else, should be fooled. 
This is reminiscent of what happened twenty years ago, when President Reagan engineered huge tax cuts that were supposed to pay for themselves, but which incited huge fiscal deficits, which in turn led to huge trade deficits. 
Back then, Japan was blamed! 
The harsh truth is that neither the IMF nor the Bush administration really believes in free markets. 
They interfere with markets when it suits their purposes. 
The Bush Administration supported bailouts for airlines, unprecedented subsidies for agriculture, and tariff protections for steel. 
The IMF is right: there is a real risk of global instability, but the underlying cause is massive US borrowing from abroad, which began under President Reagan. 
This turned the US into a huge debtor. 
If, someday, America's creditors decide that they want to hold fewer dollars, it could set off large exchange rate movements, causing global instability. 
Why hasn't the IMF sternly criticized these deficits? 
Why should the richest country in the world live beyond its means while the IMF scolds poorer countries for smaller transgressions? 
This problem is compounded by the global reserve system, which sees most countries demanding US dollars, effectively to bury them in the ground. 
The system requires the reserve currency country (the US) to be a massive debtor--to the point where others lose faith. 
But to solve deep-seated problems with the global financial system, we need to go beyond the complacency that has long marked the G-7 and the unilateralism that defines the current US administration. 
China is right to have ignored America's demands. 
Floating the exchange rate would expose the country to instabilities that would lead to a host of further problems, particularly the country's shaky banking system. 
A higher exchange rate would undermine job creation and would contribute to deflation, which China is successfully combating. 
China is fortunate to have the freedom to follow its own views. 
Its huge foreign currency reserves give it the freedom to ignore the IMF and the US Treasury. 
In the end, this may be the most compelling reason for why China should continue to run trade surpluses. 
Once again, China has shown its mastery of basic economic principles. 
Others in the region only wish that they could have acted similarly. 


Is China Losing the Diplomatic Plot? 
SINGAPORE – In 2016, China’s share of the global economy will be larger than America’s in purchasing-price-parity terms. 
This is an earth-shaking development; in 1980, when the United States accounted for 25% of world output, China’s share of the global economy was only 2.2%. 
And yet, after 30 years of geopolitical competence, the Chinese seem to be on the verge of losing it just when they need it most. 
China’s leaders would be naïve and foolish to bank on their country’s peaceful and quiet rise to global preeminence. 
At some point, America will awaken from its geopolitical slumber; there are already signs that it has opened one eye. 
But China has begun to make serious mistakes. 
After Japan acceded to Chinese pressure and released a captured Chinese trawler in September 2010, China went overboard and demanded an apology from Japan, rattling the Japanese establishment. 
Similarly, after North Korean shells killed innocent South Korean civilians in November 2010, China remained essentially silent. 
In a carefully calibrated response, South Korea sent its ambassador to attend the Nobel Peace Prize ceremony for the imprisoned Chinese human-rights activist Liu Xiaobo in December 2010. 
China has also ruffled many Indian feathers by arbitrarily denying visas to senior officials. 
Chinese Premier Wen Jiabao subsequently calmed the waters in meetings with Indian Prime Minister Manmohan Singh, but such unnecessary provocations left a residue of mistrust in India. 
But all of these mistakes pale in comparison with what China did to the Association of Southeast Asian Nations in July. 
For the first time in 45 years, the ASEAN Ministerial Meeting (AMM) failed to agree to a joint communiqué, ostensibly because ASEAN’s current chair, Cambodia, did not want the communiqué to refer to bilateral disputes in the South China Sea. 
But the whole world, including most ASEAN countries, perceived Cambodia’s stance as the result of enormous Chinese pressure. 
China’s victory proved to be Pyrrhic. 
It won the battle of the comminiqué, but it may have lost 20 years of painstakingly accumulated goodwill, the result of efforts such as the ASEAN-China free-trade agreement, signed in November 2002. 
More importantly, China’s previous leaders had calculated that a strong and unified ASEAN provided a valuable buffer against any possible US containment strategy. 
Now, by dividing ASEAN, China has provided America with its best possible geopolitical opportunity in the region. 
If Deng Xiaoping were alive, he would be deeply concerned. 
It may be unfair to blame China’s leaders for the ASEAN debacle. 
More likely than not, over-zealous junior officials pushed a hard line on the South China Sea, whereas no Chinese leader, if given the choice, would have opted to wreck the AMM Communiqué. 
But the fact that it happened reveals the scope of China’s recent poor decision-making. 
The “nine-dotted line” that China has drawn over the South China Sea may prove to be nothing but a big geopolitical millstone around China’s neck. 
It was unwise to attach the map in a note verbale responding to a joint submission by Vietnam and Malaysia to the United Nations Commission on the Limits of the Continental Shelf in May 2009. 
This was the first time that China had included the map in an official communication to the UN, and it caused great concern among some ASEAN members. 
The geopolitical opportunity implied by inclusion of the map has not been lost on America, which is why the US, somewhat unusually, has made another effort to ratify the Law of the Sea Convention. 
Having tabled the nine-dotted line at the UN, China walked into a no-win situation, owing to the difficulty of defending the map under international law. 
Indeed, as the eminent historian Wang Gungwu has pointed out, the first maps to claim the South China Sea were Japanese, and were inherited by Nationalist China. 
Domestically, too, the nine-dotted line may cause problems for the government by presenting critics with a useful weapon. 
Any hint of compromise will expose officials politically. 
In other words, a few rocks in the South China Sea have put China between a rock and a hard place. 
There is no doubt that China will have to find a way to compromise over the nine-dotted line. 
In private, it has begun to do so. 
Even though the line covers the waters northeast of the Indonesian-owned Natuna Islands, the Chinese government has given Indonesia categorical assurances that China does not claim the Natuna Islands or their Exclusive Economic Zone. 
These private assurances calmed relations with Indonesia. 
So why not make similar overtures to other ASEAN states? 
The legacies of Deng and his predecessor, Mao Zedong, are very different. 
But the People’s Republic’s two most important leaders did agree in one area: both bent over backwards to make territorial concessions to resolve border disputes. 
This explains why China was so generous to Russia, for example, in its border settlements. 
Mao and Deng could do this because both provided China with strong leadership. 
The challenge for the world now is that China has become politically pluralistic: no leader is strong enough to make wise unilateral concessions. 
Nothing will happen in China until the leadership transition is completed in November. 
The new administration of Xi Jinping and Li Keqiang will need some time to settle in. 
But America is waking up. 
So, too, will the rest of the world in 2016. 
The big question then will be: Is China as geopolitically competent as number one as it was when it was number two? 

Is China Overplaying Its Hand? 
LONDON – Remember the G-2? 
America’s financial difficulties and foreign entanglements, together with China’s economic ascent, led many last year to envisage the emergence of a sort of global condominium between the two countries. 
The G-8 had morphed by necessity into the G-20, which, whenever it really mattered, would shed its zero: the United States and China would call the shots. 
The idea was an over-simplified reflection of global realities. 
It left out other emerging powers like Brazil and India. 
It exaggerated the weakness of America, which remains the world’s only superpower. 
It also reeked of the European Union’s peevish realization that its inability to get its act together on contentious issues was likely to place it firmly on the sidelines. 
At the Copenhagen climate summit last December, don’t forget, a deal of sorts was cobbled together by the US and the emerging economies over the EU’s head, even though Europe had the most advanced set of proposals on tackling climate change. 
Despite all this, there was enough credibility in the G-2 idea to give it legs. 
President Barack Obama’s first visit to China last November, in which he accepted the role of pliant suitor at the court of the emperor, strengthened the impression of a deal between today’s great power and tomorrow’s. 
That was last year. 
This is now, and the idea looks a lot less plausible. 
Why has the G-2 become so far-fetched so fast? 
First, the weak and largely jobless economic recovery in America and Europe shines the spotlight on China’s surging exports and the non-tariff barriers confronted by would-be importers to China. 
You would have difficulty finding many members of the US Congress who do not ascribe some of America’s problems, including the hollowing out of the middle class, to China’s alleged currency manipulation. 
China may point to the mountain of US Treasury bonds that it has bought up, thereby helping to sustain America’s budget deficit. 
(What China’s recent sell-off of US T-bills will mean is, for now, anyone’s guess.) 
They grumble at the injustice of blaming them for the global economy’s imbalances. 
But China does have a case to answer. 
Critics think that pegging the currency below its real value is part of a deliberate strategy to keep growth rolling, thereby avoiding the tricky politics of growing unemployment in a system that has no institutionalized channels for expressing popular grievances. 
Unless this issue is addressed soon, it will lead inexorably to protectionism in America and Europe. 
Advocates of tit-for-tat trade polices have even found supportive quotes from Adam Smith on the subject. 
A second issue likely to blow the G-2 apart before it has actually taken shape is the impact of China’s authoritarianism on the free movement of information. 
China’s clash with Google and US protests at cyber attacks on American targets remind the outside world, as well as America’s media and political elites, of the difference in values between the two countries. 
This is particularly awkward at a time when the Chinese authorities seem to be taking an even harder line on dissent. 
The human rights activist Liu Xiaobo has just been locked up for 11 years, drawing widespread condemnation. 
The veteran campaigner for the release of political detainees, John Kamm, argues that this was “a tipping point” for the Chinese authorities, and that “they will have to work themselves out of this in a less hard-line way.” 
The outcome of the climate talks in Copenhagen is a third reason for concern. 
China has been widely accused of blocking a more ambitious result, mostly because of its resistance to external surveillance of its agreed targets, appealing to state sovereignty with all the self-righteousness that the world was accustomed to hearing from former US President George W. Bush. 
Maybe the criticism is unfair. 
But it certainly was unwise to allow a junior official to shout and wag his finger at Obama at one of the key Copenhagen meetings. 
Americans, too, Chinese officials should remember, have “face” that they do not wish to lose. 
Some people cite the spat over arms sales to Taiwan and the Dalai Lama’s visit to Washington as a fourth dampener on all the G-2 talk. 
I am not so convinced. 
These are fairly ritualistic issues, and Chinese officials are smart enough to know that, given the Chinese government’s recent behavior, Obama had little choice but to decide on them as he did. 
Far more worrying is an issue that is yet to play out. 
How will China react to any move to introduce tougher sanctions on Iran if no progress is made in efforts to prevent it from developing nuclear weapons? 
If China blocks action in the United Nations Security Council, relations with America will be set back to a point where any G-2 talk will seem laughable. 
Deng Xiaoping, the architect of China’s economic rise, advised his colleagues to move stealthily in dealing with the rest of the world. 
“Hide your brightness, bide your time,” he counseled. 
As someone who believes that China’s rise should be good for the world, I hope that Deng’s wise advice will be heeded by those Chinese officials who seem to think that this is a good moment to start stamping their feet. 

Is China Overtaking America? 
CAMBRIDGE – The twenty-first century is witnessing Asia’s return to what might be considered its historical proportions of the world’s population and economy. 
In 1800, Asia represented more than half of global population and output. 
By 1900, it represented only 20% of world output – not because something bad happened in Asia, but rather because the Industrial Revolution had transformed Europe and North America into the world’s workshop. 
Asia’s recovery began with Japan, then moved to South Korea and on to Southeast Asia, beginning with Singapore and Malaysia. 
Now the recovery is focused on China, and increasingly involves India, lifting hundreds of millions of people out of poverty in the process. 
This change, however, is also creating anxieties about shifting power relations among states. 
In 2010, China passed Japan to become the world’s second largest economy. 
Indeed, the investment bank Goldman Sachs expects the Chinese economy’s total size to surpass that of the United States by 2027. 
But, even if overall Chinese GDP reaches parity with that of the US in the 2020’s, the two economies will not be equal in composition. 
China would still have a vast underdeveloped countryside. 
Assuming 6% Chinese GDP growth and only 2% US growth after 2030, China would not equal the US in terms of per capita income – a better measure of an economy’s sophistication – until sometime near the second half of the century. 
Moreover, linear projections of economic growth trends can be misleading. 
Emerging countries tend to benefit from imported technologies in the early stages of economic takeoff, but their growth rates generally slow as they reach higher levels of development. 
And the Chinese economy faces serious obstacles to sustainable rapid growth, owing to inefficient state-owned enterprises, growing inequality, massive internal migration, an inadequate social safety net, corruption, and inadequate institutions, all of which could foster political instability. 
China’s north and east have outpaced its south and west. 
Almost alone among developing countries, China is aging extraordinarily fast. 
By 2030, China will have more elderly dependents than children. 
Some Chinese demographers worry that the country will get old before getting rich. 
During the past decade, China moved from being the world’s ninth largest exporter to its leader, displacing Germany at the top. 
But China’s export-led development model will need to be adjusted as global trade and financial balances become more contentious. 
Indeed, China’s 12th Five-Year Plan is aimed at reducing dependence on exports and boosting domestic demand. 
Will it work? 
China’s authoritarian political system has thus far shown an impressive capacity to achieve specific targets, for example, staging a successful Olympic Games, building high-speed rail projects, or even stimulating the economy to recover from the global financial crisis. 
Whether China can maintain this capability over the longer term is a mystery to outsiders and Chinese leaders themselves. 
Unlike India, which was born with a democratic constitution, China has not yet found a way to channel the demands for political participation (if not democracy) that tend to accompany rising per capita income. 
Communist ideology is long gone, so the legitimacy of the ruling party depends on economic growth and ethnic Han nationalism. 
Whether China can develop a formula to manage an expanding urban middle class, regional inequality, and resentment among ethnic minorities remains to be seen. 
The basic point is that no one, including the Chinese, knows how China’s political future will affect its economic growth. 
Some analysts argue that China aims to challenge America’s position as the world’s dominant power. 
Even if this were an accurate assessment of China’s intentions (and even Chinese cannot know the views of future generations), it is doubtful that China will have the military capability to make this possible. 
To be sure, Chinese military expenditures, up more than 12% this year, have been growing even more rapidly than its economy. 
But China’s leaders will have to contend with other countries’ reactions, as well as with the constraints implied by the need for external markets and resources in order to meet their economic-growth objectives. 
A Chinese military posture that is too aggressive could produce a countervailing coalition among its neighbors, thereby weakening China’s hard and soft power. 
In 2010, for example, as China became more assertive in its foreign policy toward its neighbors, its relations with India, Japan, and South Korea suffered. 
As a result, China will find it more difficult to exclude the US from Asia’s security arrangements. 
China’s size and high rate of economic growth will almost certainly increase its relative strength vis-à-vis the US in the coming decades. 
This will certainly bring the Chinese closer to the US in terms of power resources, but China will not necessarily surpass the US as the most powerful country. 
Even if China suffers no major domestic political setback, many current projections based on GDP growth alone are too one-dimensional: they ignore US military and soft-power advantages, as well as China’s geopolitical disadvantages in the internal Asian balance of power. 
My own estimate is that among the range of possible futures, the more likely scenarios are those in which China gives the US a run for its money, but does not surpass it in overall power in the first half of this century. 
Most importantly, the US and China should avoid developing exaggerated fears of each other’s capacities and intentions. 
The expectation of conflict can itself become a cause of conflict. 
In reality, China and the US do not have deeply rooted conflicting interests. 
Both countries, along with others, have much more to gain from cooperation. 


Is China’s Economy Overheating? 
The Chinese economy has been growing at such a breathtaking annual pace – 9.5% in the year ending in the second quarter of 2005 – that it is the toast of the world, an apparent inspiration for developing countries everywhere. 
But is China getting too much of a good thing? 
Since he became president in 2003, Hu Jintao has repeatedly warned that China’s economy is overheating, and his government has recently acted accordingly, raising interest rates last October, imposing a new tax on home sales in June, and revaluing the Yuan in July. 
But claims that China is overheating don’t seem to be based on observations of inflation. 
While China’s consumer price index rose 5.3% in the year ending in July 2004, this was due primarily to a spike in food prices; both before and since, inflation has been negligible. 
Nor are these claims based on the Chinese stock market, which has generally followed a downward path over the past few years. 
Instead, those who argue that the Chinese economy is overheating cite the high rate of investment in plant and equipment and real estate, which reached 43% of GDP in 2004. 
On this view, China has been investing too much, building too many factories, importing too many machines, and constructing too many new homes. 
But can an emerging economy invest too much? 
Doesn’t investment mean improving people’s lives? 
The more factories and machines a country has, and the more it replaces older factories and machines with more up-to-date models, the more productive its labor force is. 
The more houses it builds, the better the private lives of its citizens. 
A number of studies show that economic growth is linked to investment in machines and factories. 
In 1992, Bradford DeLong of the University of California at Berkeley and Lawrence Summers, now President of Harvard University, showed in a famous paper that countries with higher investment, especially in equipment, historically have had higher economic growth. 
One of their examples showed that Japan’s GDP per worker more than tripled relative to Argentina’s from 1960 to 1985, because Japan, unlike Argentina, invested heavily in new machinery and equipment. 
In short, the more equipment and infrastructure a country is installing, the more its people have to work with. 
Moreover, the more a country invests in equipment, the more it learns about the latest technology – and it learns about it in a very effective, “hands-on” way. 
It would thus appear that there is nothing wrong with China continuing to buy new equipment, build new factories, and construct new roads and bridges as fast as its can. 
The faster, the better, so that the billion or so people there who have not yet reached prosperity by world standards can get there within their lifetimes. 
And yet any government has to watch that the investment is being made effectively. 
In China, the widespread euphoria about the economy is reason for concern. 
Some universal human weaknesses can result in irrational behavior during an economic boom. 
Simply put, China’s problem is that its economic growth has been so spectacular that it risks firing people’s imaginations a bit too intensely. 
At times like these, people can easily imagine that an apartment in Shanghai will be worth some enormous amount in 10 or 20 years, when China is vastly more prosperous than it is today. 
And if it will be worth an enormous amount in 10 or 20 years, then it should be worth a lot today, too, since real interest rates – used to discount future values to today’s values – are still low in China. 
People are excited, and they are lining up to buy. 
To be sure, their reasoning is basically correct. 
But when the ultimate determinants of values today become so dependent on a distant future that we cannot see clearly, we may not be able to think clearly, either. 
Since the true value of long-term assets is so hard to estimate, it is human nature to focus on the rate of increase in their observed prices, and to allow one’s attention to become fixated on these assets just as their value is increasing very fast. 
This can lead people to make serious mistakes, paying more for long-term assets than they should, even assuming that the economy will perform spectacularly well in the future. 
They can overextend their finances, fall victim to promotions, invest carelessly in the wrong assets, and direct production into regions and activities on the basis of momentary excitement rather than calculation of economic fundamentals. 
So, maybe the word “overheated” is misleading. 
It might be more accurate to say that public attention is over-focused on some recent price changes, or over-accepting of some high market values. 
Whatever one calls it, it is a problem. 
Fortunately, people also tend to trust their national leaders. 
For this reason, it is all the more important that the leaders not remain silent when a climate of speculation develops. 
Silence can be presumed to be tacit acceptance that rapid increases in long-term asset price are warranted. 
National leaders must speak out, and they must match their words with concrete actions, to help signal to the public that the speculative bubble cannot be expected to continue. 
That is what the Chinese government has begun to do. 
The real-estate boom appears to be cooling. 
If the government continues to pursue this policy, the salutary effects in terms of public trust in the country’s businesses and institutions will help ensure stable, sustainable economic growth for years to come. 

Is China’s Tibet Policy Bad for Business? 
When a Chinese government security official recently accused followers of the Dalai Lama of organizing suicide attacks – merely the most extreme of a barrage of allegations against the “Dalai clique” – it was as though the Cultural Revolution were still raging. 
Indeed, particularly where Tibet is concerned, the increasingly sophisticated and pragmatic Chinese leadership seems more like a throwback to the Mao era, with its haranguing propaganda and coercive policies. 
Do foreign investors have reason to be worried by all this? 
While there is arguably a genuine possibility that the recent protests in Tibet will prompt the authorities to change course, early signs are not promising. 
So far, the regime has merely applied the same blunt measures that fueled Tibetans’ grievances in the first place. 
International pressure alone will not change this. 
Domestic pressure could, but any such opportunity has perished on the battlefield of a public-relations war. 
On one hand, some international media painted a black-and-white (and not always entirely objective) portrait of the March violence as a brutal Chinese crackdown on peaceful Tibetan monks. 
On the other hand, official Chinese media have stoked domestic anger at perceived Western anti-Chinese bias. 
With nationalist sentiment aroused, few Chinese are asking why the violence occurred. 
Of course, the Tibet issue has been around for decades, generally without posing serious problems for foreign investors. 
But the combination of the first serious unrest in Tibet in almost 20 years and the wider groundswell of criticism being directed at China ahead of the Beijing Olympics has sent businesses and investors scrambling to assess what it means for them, particularly in terms of reputational and ethical concerns. 
The Tibet-related protests at several Chinese embassies around the world and during the Olympic torch relay merely provide a glimpse of what is likely to follow. 
Investors in China must consider their vulnerability to negative publicity, and be confident that they can explain their position. 
Some have already been forced to do so, and many could conceivably be targeted in connection with ongoing campaigns to draw international attention to various human-rights issues ahead of the Olympics. 
The most vulnerable firms are generally those with the highest public profile, those making the largest or most visible investments, those that are major sponsors of the Games, and those with some specific connection to Chinese government policies in Tibet. 
The latter group includes extractive- and construction-related companies operating in partnership with the government of the Tibet Autonomous Region (TAR) itself. 
They face the greatest difficulties, both in terms of distancing themselves from government policies and in countering negative investor perceptions about the viability of operations there in the current climate. 
Of course, foreign investment in the TAR is a drop in the ocean relative to that in China as a whole. 
Activists cannot possibly take aim at all foreign businesses in China, so most firms are unlikely to be specifically targeted or suffer reputational damage. 
It seems highly doubtful that the tide of international opinion will turn against China to the extent that investors in general are seriously expected to shun the market. 
Nonetheless, where firms or industries are particularly vulnerable to reputational issues, image and ethics could be a significant factor in more marginal business decisions (particularly with rising costs and tougher labor regulations already causing some firms to look elsewhere). 
Meanwhile, the most recent twist in the Tibet fallout serves as a striking reminder of how China’s newfound assertiveness and clout on the international scene is creating an increasingly complex challenge for foreign companies. 
While Western firms investing in China must face the prospect of protest and criticism back home from pro-Tibet campaigners, some companies are coming under pressure in China itself. 
The big French retailer Carrefour has seen protests at its stores all over China by nationalist activists incensed by the protests that took place in Paris when the Olympic torch passed through the city. 
In the current climate, many businesses will find it difficult to avoid becoming stuck between a rock and a hard place. 

Is Colombia Becoming Another Vietnam? 
BOGOTÁ: Cocaine production is rising; peace talks with leftist guerrillas have stalled; America’s $1.8 billion “Plan Colombia” - meant to train and equip special anti-drug battalions to eradicate coca production - is portrayed as a clumsy, self-serving intervention in the affairs of a vulnerable neighbor. 
So alarming are conditions in Colombia nowadays that some Americans worry about the country becoming another Vietnam. 
How different it all seemed a decade ago! 
Back then, Colombians rejoiced at the prospects for peace, political change and economic progress. 
Indeed, newly elected president Cesar Gaviria, a youthful Kennedyesqe figure, ended his inaugural address with: “Colombians: welcome to the future”. 
Demobilization of one large rebel army, the EPL, was so recent a memory that progress with the other two main guerrilla forces fighting in the country’s seemingly endless guerrilla wars seemed certain. 
Both the National Liberation Army (ELN) and the Revolutionary Armed Forces of Colombia (FARC) were involved throughout 1991-92 in apparently serious conversations intended to end their revolts. 
Moreover, Colombian tolerance for the drug lords - Pablo Escobar, perhaps the most notorious, had been elected to Congress - was evaporating. 
The dismantling of the Medellin drug cartel, then taking place, stood in sharp contrast with the murders of three presidential candidates - Luis Carlos Galán, Bernardo Jaramillo and Carlos Pizarro - during the 1990 election. 
This public outrage also incited political change. 
Congress, which most Colombians saw as irredeemably corrupt, was sent packing and a broad-based Constitutional Assembly was elected to rewrite the country’s 1886 Constitution. 
Even economic progress seemed near. 
Once deemed the “Tibet of Latin America” because of its excessive protectionism and intolerable isolation, Colombia embarked on market-based reforms - the “apertura” - which Chile, Mexico and Argentina were then experimenting with. 
This effort was to be the means through which a weary, dusty nation was to find a better economic future. 
The years since, however, were eaten by locusts. 
Many people see the country as on the edge of an abyss, with peace a distant dream. 
Today, the number of “desplazados” from Colombia’s guerrilla wars (1.5 million refugees at the latest count) is greater than the population of all but three of our largest cities and forms the third largest group of refugees in the world. 
Emigration is at historic highs, and a new rebel force has appeared in the form of an aggressive - and potent - rightwing paramilitary army. 
Indeed, much of Colombia’s national territory is now dominated by one of three insurgent groups. 
In addition, the economy is in ruins. 
Having experienced practically zero growth from 1997-2000, with unemployment at 20.5%, Colombia’s distress is so pronounced that a three year program was agreed with the IMF in late 1999. 
The “Colombia Problem,” indeed, now threatens to destabilize the neighboring countries of Panama, Venezuela, Brazil, Peru and Ecuador. 
Churning this turmoil into frenzy is the illegal drug trade. 
Credible estimates put the total flow of income from production and distribution of cocaine at between US$2.5 and US$4 billion annually, or between 2.8% and 4.4% of Colombia’s GDP. 
These resources feed armed insurgents, criminal bands and, increasingly, provide the lifeblood for many small peasants, who cultivate some 130 thousand hectares of coca plants. 
All this violence is incited by rebels who number barely 40,000, not much in a nation of 40 million. 
The rebels lack any coherent political agenda and command little, if any, support among ordinary Colombians. Despite this, the income from drug trafficking is enough to keep the rebels well-armed and in the field. 
Although drug money plays a defining role in these rebellions, putting the blame solely on illegal narcotics is wrong. 
The truth is that Colombia lacks both the will and the ability to stem criminal activities and that the only effective cure for Colombia’s illness is a root-and-branch redesign of its civil institutions. 
First, the world increasingly recognizes that Colombia’s problems are international in nature, requiring international solutions. This “internationalization” includes more than America’s “Plan Colombia” aid, for the EU has also coughed up $280 million for social and development projects, though much, much more is needed. 
Moreover, for the first time, Colombia’s neighbors seem willing to abandon Latin America’s traditional “hands-off” policy in order to offer assistance. 
A second, perhaps more important, cause for optimism is the fact that Colombians are more aware than ever that their political institutions are morally bankrupt. In that recognition may lay the political support needed for serious reform to take place. 
Here the case of Bogotá is telling, for amid all the national bleakness, the capital has witnessed real progress. 
Crime rates are falling, the public infrastructure revolutionized, corruption curtailed, and a sense of legitimate, transparent authority is being established. 
All this happened because an activist local administration enlisted the broad support of Bogatá’s citizens. 
Chronically ill, Colombia has returned to the same critical juncture it faced a decade ago. 
Back then, the illusion of costless progress prevented the root and branch reform Colombia so desperately needed. 
Now, painfully, Colombians have learned that doing nothing costs even more than reforming, which makes it much more likely that Colombians will choose to persevere in reinventing and restoring their country. 

Is Democracy Possible in the Arab World? 
With Iraq rapidly descending into bloody chaos, the prospects for holding successful democratic elections in January, as the US and the Iraqi interim government have promised, look bleak. 
Some skeptics go further, arguing that the Iraq debacle proves that prospects for democracy throughout the Arab world are dim. 
Are they right? 
Half the world's countries are democracies, yet none of the 22 Arab countries is among them. 
The United Nations' Arab Human Development Report is frank in its criticism of the region's economic and social progress. 
Economic growth has been slow, approximately half of women are illiterate, and the region is not well integrated into the world economy. 
Indeed, with a population of more than 300 million, Arab countries export less to the world, excluding oil and gas, than Finland. 
An enormous "youth bulge" in the Arab world's demographic tables looms, with 45% of the population now under the age of 14, and the population as a whole set to double over the next quarter-century. 
Yet the region has inadequate opportunities for young people to find meaningful work. 
Unemployment hovers at 20%. 
At the same time, the Middle East is awash with modern communications, much of it with an anti-Western slant. 
During the Cold War, America's approach to the Middle East was to foster stability in order to prevent the spread of Soviet influence, ensure the supply of oil, and provide security for Israel. 
The American strategy was management through autocratic leaders, and a "don't rock the boat" approach. 
After the terrorist attacks of September 11, 2001, the Bush administration launched an ambitious new policy to encourage a democratic transformation of the Middle East. 
Saddam Hussein's removal was intended as only the first step. 
In August 2003, US National Security Advisor Condoleeza Rice argued that "much as a democratic Germany became a linchpin of a new Europe that is today whole, free, and at peace, so a transformed Iraq can become a key element in a very different Middle East in which the ideologies of hate will not flourish." 
Germany and Japan were, indeed, postwar success stories. 
But both were relatively homogeneous societies with significant middle classes and no organized resistance to American occupation. 
Yet both transitions still took nearly a decade. 
Moreover, Iraq's possession of oil is a mixed blessing, because few oil-based economies have proven hospitable to liberal democracy. 
Moreover, cultural differences between the US and Germany were not as great as those between the US and the Middle East. 
Of course, cultural barriers are not insurmountable: democracy has taken root in Japan, South Korea, and in other Muslim countries, such as Turkey, Indonesia, and Bangladesh. 
But the time horizons required for a fundamental makeover are measured in decades, not years. 
Democracy is, after all, more than mere voting. 
Since the Middle East's autocratic regimes destroyed their liberal oppositions, in many countries radical Islamists represent the only dissent, feeding on widespread resentment of corrupt regimes, opposition to American policies, and popular fears of modernization and globalization. 
At the same time, the global economy and modernization can also promise better education, more jobs and opportunities, and improved health care, and opinion polls indicate that a majority of the region's population desires these benefits. 
Given ambivalence among Arab moderates, there remains a chance to isolate the extremists and gradually build stable polities with broader participation. 
To achieve this will require policies that open up economies, reduce bureaucratic controls, speed economic growth, improve educational systems, and encourage the types of gradual political changes now seen in small countries like Bahrain, Oman, Jordan, Kuwait, and Morocco. 
Japan and Korea demonstrated that democracy could be combined with indigenous values in Asia. 
The Arab world, too, can develop intellectuals, social groups, and eventually countries with liberal economies and societies that are consistent with local cultures. 
But this will take time and patience - and it will need to be accompanied by policy changes on Iraq, Palestine-Israel, and the regional economy. 
Equally important will be whether Western countries cooperate to create a long-term strategy of cultural and educational exchanges that can help develop a richer and more open civil society in Middle Eastern countries. 
The most effective advocates for democratic change are not American or European officials, but citizens of the region who understand Western virtues as well as flaws - and can adapt them to indigenous conditions to press for social change. 
Corporations, foundations, universities, and other non-profit organizations can promote much of this work. 
Companies and foundations can offer technology to help modernize Arab educational systems and take them beyond rote learning. 
Western universities can host more students and faculty. 
Other organizations can support specific institutions in Arab countries, or programs that enhance the professionalism of journalists. 
But governments also have an important role to play. 
By supporting the teaching of foreign languages and financing student exchanges, they can help people in the region accomplish their own goals as spelled out in the Arab Human Development Report . 
There are many strands to an effective long-term strategy to promote conditions for stability and broader political participation in the Arab world. 
This is America's declared goal. 
But getting there requires American policies that are consistent with the comprehensive approach that democratic transformation requires. 

Is Dialogue with Iran and Syria Worth It? 
Despite frequent claims to the contrary, the fundamental problem in the Middle East is not intervention by the West. 
On the contrary, the real problem is that, for all their dabbling, the Western powers seem capable of neither war nor dialogue. 
This leaves everyone in the region at the mercy of the Middle East’s oppressive regimes and proliferating terrorists. 
Advocates of the Iraq war lacked an understanding of the complexities on the ground to wage an effective war of liberation and democratization. 
As a result, their policies merely ended up eliminating Iran’s two major regional rivals: the Taliban and Saddam Hussein’s regime. 
This presented Iran with a golden opportunity to project itself as a regional hegemon, and Iran’s leaders are unlikely to let this opportunity slip away. 
Advocates of dialogue with the Iranians and their Syrian allies, like former United States Secretary of State James Baker, labor under the delusion that they can actually reach an understanding that can enable a graceful US exit from Iraq and help stabilize that wounded country. 
The delusion is based on two false assumptions: that the Iranians and the Syrians can succeed in Iraq where the US has failed, and that the international community can afford to pay the price of ensuring their cooperation. 
True, Syria and Iran are playing a major role in supporting Iraqi insurgents, and Syria is still encouraging the trafficking of jihadists and weapons across its borders with Iraq. 
But the idea that these activities can be halted at will is naïve. 
For one thing, the interests of the Shia communities in Iraq and Iran are not the same. 
Iraqi Shia have never accepted Iranian dictates, and many took part in Saddam’s war against Iran in the 1980’s. 
After all, the Iraqi Shia are Arabs, and if they are now willing to coordinate their activities with their Persian counterparts, their main goal will always be to secure an independent course as soon as possible, even while they carry on with their internecine disputes within Iraq. 
Iran is in no better position than the US to convince them to resolve their differences. 
President Basher al-Assad of Syria faces a similar dilemma. 
Although he has opened Syria’s border to jihadists and has allowed Saddam’s supporters to operate freely there, that choice may not be entirely his. 
Syria’s aid to Saddam in maneuvering around the United Nations’ oil-for food program brought Iraqi money to inhabitants of the border region, who have always been closer in customs, dialect, and outlook to their Iraqi neighbors than to their fellow Syrians. 
In the absence of government investment, local inhabitants’ loyalty went to Iraqi Baathists who helped improve their lot. 
Indeed, even local security apparatuses have been unwilling to comply with dictates from Assad and his clique to seal the borders. 
In these cirumstances, neither Syria nor Iran seems capable of delivering anything but mayhem in Iraq. 
What, then, would the proposed dialogue between the US and these states achieve other than continue to empower their corrupt yet ambitious regimes? 
The story gets more complicated when one considers the UN inquiry into the assassination of former Lebanese Prime Minister Rafiq al-Hariri. 
Assad wants nothing more than to see this affair forgotten – and the proponents of dialogue think that they can give him what he wants in the hope of breaking Syria’s alliance with Iran. 
But that is merely another erroneous (not to mention amoral) assumption. 
The alliance between Syria and Iran dates back more than two decades, and was explicitly reaffirmed by the two ruling regimes as recently as January 2005. 
Indeed, the two regimes are now joined at the hip. 
Assad’s recent refusal to attend a summit in Tehran with his Iranian and Iraqi counterparts was a mere tactical move designed to appeal to the proponents of dialogue. 
In fact, Iran has invested hundreds of millions of dollars in Syria, and annual bilateral trade tops a billion dollars. 
Irani’s growing influence over the Syrian security apparatus is well established, and Iran is funding an effort to create Syrian Shia militias to compensate for Assad’s sagging support in the army and in the minority Alawite community. 
Assad cannot turn his back on all of this. 
No deal would be sweet enough, even if it included the return of the Golan Heights. 
For Assad and his supporters, survival is more important than sovereignty. 
Still, to read the well-known names of commentators and policymakers who are recommending engaging Syria and/or Iran is a testament to how inconsequential and cut off the Western powers have become from the realities on the ground in the world’s most turbulent region. 
That, it seems, is the price of their arrogance. 


Is Employee Ownership Coming Back? 
FLORENCE: Faced with an embarrassing strike by Air France pilots during the World Cup, the French government purchased labor peace by, among other things, offering striking pilots a big ownership stake in their company. 
Such employee ownership, uncritically lumped together with socialist nostrums over the years, was once widely dismissed as a nutty, ideological illusion. 
Recently, it has attracted fresh and widespread interest not only as a means to secure more tranquil labor relations, but as a practical means of business organization. 
In the West, this interest derives in part from declining faith in traditional trade unionism; in the postcommunist East it was stimulated by the speedy collapse of state socialism. 
Today, reformers on the left hope that employee ownership will succeed where unionism and government ownership failed in equalizing power and wealth, and in decreasing worker alienation and exploitation. 
Reformers on the right hope that employee ownership will improve productivity and increase worker identification with the interests of capital. 
In many countries, these hopes are stimulating public policy. 
In the United States employee ownership has been promoted by large tax subsidies and by exceptional provisions in pension laws. 
In Russia, employees have been awarded majority stakes in newly privatized state enterprise. 
And in Germany, mandatory worker representation on the board of directors, together with substantial job security, effectively gives employees many of the attributes of owners. 
Employee-owned firms have, in fact, always been common. 
The partnerships of professionals that have long dominated services such as law, accounting, and -- until recently -- investment banking are familiar examples. 
Nor are they trivial: the largest U.S. accounting firms do business on an international scale and have long had thousands of partners. 
Transportation is another field where employee ownership is common: around the world, trucking companies, bus companies, and taxi companies are often organized as cooperatives owned by their drivers. 
There are also important examples in other industries, including plywood manufacturing in America, appliance manufacturing in Spain, and construction in Italy. 
Owing in part to encouragement from public policy, employee ownership has been spreading in recent years. 
A conspicuous example is United Air Lines -- the world’s largest airline -- in which more than 50,000 employees collectively acquired a controlling share in 1994. 
So, does employee ownership have a bright future in the organization of industry? 
It clearly has attractions. 
Employee ownership improves incentives for employee productivity, and reduces incentives for a firm to exploit its workers by, for example, imposing poor wages or working conditions on employees who, though highly productive, find that for personal or professional reasons their opportunities for alternative employment have decreased over time. 
It also largely removes incentives for both management and workers to engage in the kind of costly strategic behavior -- such as strikes and lockouts -- that sometimes characterizes labor relations in investor-owned firms. 
Undoubtedly these virtues are significant. 
If they were the most important factor governing the success or failure of employee ownership, however, we would expect employee ownership to be most common in those industries in which workers are unusually difficult to monitor, are relatively immobile, or are extensively unionized. 
Yet just the reverse is true, at least where employee ownership is not mandated by law. 
Evidently there are countervailing costs to employee ownership that often outweigh these potential benefits. 
Among these costs are the difficulty of raising capital and excessive risk for employees. 
Yet, while these are important problems, they are not decisive. 
Employee ownership has long been successful even in industries -- such as plywood manufacturing and investment banking -- that are both volatile and relatively capital intensive. 
Rather, the Achilles’ heel of employee ownership seems to lie in problems of governance. 
To be sure, employees frequently have better incentives and ability to oversee a firm's managers than do investors of capital, who are often remote from the firm. 
But investors hold an important advantage that employees generally lack: substantial unanimity of interest. 
Employees with diverse roles within a firm are often affected differently by firm policies. 
The resulting conflicts of interest can make employee governance costly, both by complicating the process of decision-making and by producing decisions skewed toward the interests of dominant employee groups. 
These governance costs appear critical. 
True employee ownership, with effective employee participation in governance, has generally met long-term success only where there is substantial homogeneity of interest among the employees involved: the employees who participate in ownership commonly do similar work within the firm, have similar kinds and levels of skill, and exercise little hierarchical authority over each other. 
Partners in a law firm and driver-owners in a transportation firm are typical examples here. 
Moreover, to reduce even further the potential for conflict, employee-owned firms often adopt costly strategies, such as the rigid seniority-based profit-sharing schemes found in many law firms or the firm-wide job rotation that typifies US plywood cooperatives. 
Experience with employee ownership offers a mixed picture. 
True employee ownership, in which employees participate meaningfully both in earnings and control, appears effective in a surprisingly broad range of circumstances so long as ownership can be placed in the hands of a class of employees who have highly homogeneous interests. 
But where, as is common, this requirement cannot be met, investor ownership has the advantage. 
As a consequence, the boldest new experiments in employee ownership - United Airlines, privatized Russian firms, even Air France - seem likely to serve only as temporary expedients in industrial restructuring. 


Is Europe’s Financial Crisis Over? 
LONDON – The European Central Bank’s recently announced policy of bond buying, what it calls “outright monetary transactions” (OMTs) marks a convergence of European central banks with their Anglo-Saxon counterparts. 
While the ECB’s actions represent the best chance yet to put an end to a crisis that has been playing out since 2010, the Bank has markedly raised the stakes for governments. 
The ECB’s policy framework is well suited to fighting systemic blazes, but poorly suited to local fires, which thus can spread uncontrollably. 
The OMT program, which allows the ECB to buy sovereign bonds of countries that have agreed to reform their economies, significantly levels the playing field between the Bank and its advanced-economy peers. 
Spain has the same fiscal and structural problems that it had prior to the OMT program’s launch, but now it has an external lender of last resort. 
That is a game-changer. 
Under the pre-OMT regime, a capital outflow from Spain, whether through the sale of government bonds or the liquidation of private claims, resulted in tighter monetary conditions. 
The sale of sovereign bonds under the fixed exchange-rate regime put direct upward pressure on their yields, while sales of private securities by foreigners had a similar effect, but through indirect channels. 
Monetary tightening was forestalled only to the extent that another source of foreign capital (either private or ECB) could replace the outflow. 
The point at which credit risk becomes exchange-rate/redenomination risk is ambiguous. 
But the metamorphosis tends to go hand in hand with localized monetary contractions that exacerbate the correlated risk of sovereign default and bank failures. 
In Spain, as in Greece before it, the monetary squeeze has become chronic as banks run short of ECB-eligible collateral. 
Under the OMT program, the ECB can replace foreign outflows from sovereign-bond markets through direct purchases, putting Spain on par with non-eurozone countries like the United Kingdom. 
And, to the extent that there is even an informal price target associated with the ECB’s commitment to purchase bonds, foreign outflows, at least from the sovereign-bond market, are automatically replaced, in full, with ECB cash. 
Without the ECB’s willingness to buy a potentially unlimited volume of sovereign bonds to achieve its very imprecise objective of mitigating redenomination risk, the eurozone would have been doomed to recurring episodes of internal funding stress. 
The OMT program breaks the volatile liquidity cycle that stems from chronic shortages of bank collateral and a limited fiscal transfer mechanism. 
More broadly, the ECB’s marginal lending facility is an indirect means of monetizing sovereign debt. 
It is an even less direct way to address the private, related-debt overhang. 
But it works. 
That said, much can still go wrong. 
The ECB has bought time, but it has also raised the stakes. 
The credibility of its pledge depends as much on what it will do (buy unlimited quantities of government bonds) as on what it will not do (buy them from countries that do not fulfill conditionality). 
Without a credible threat to cut off wayward sovereigns, the ECB’s pledge provides a free lunch to investors and governments alike. 
The problem is that following through on that threat would severely test the ECB’s commitment to do whatever it takes. 
After all, if markets truly believed that the ECB would refuse to backstop errant governments, investors would run away from participating countries at the first sign that conditionality was not being met. 
As with its predecessor, the Securities Markets Program, the OMT program is legally and democratically questionable: it violates the spirit, but not the letter, of the European Union treaty’s no-bailout clause; its promise of equal treatment with private creditors still has no precedent; and it involves back-door fiscal transfers, leaving the ECB heavily exposed to political backlash – witness the visceral reaction of the German press to ECB President Mario Draghi’s announcement. 
But OMTs also fit well with a large body of historical evidence that, in times of crisis, policymakers must focus on extinguishing the fire, rather than negotiating over who owns the water and what its cost should be. 
The OMT program will cause credit conditions to ease, but without necessarily reversing the financial balkanization of the eurozone that has occurred over the last three years. 
Reversal of that process will likely not occur until the three key elements of banking union – common supervision, common deposit insurance, and a common resolution fund – are within tangible reach. 
Indeed, if Spanish savers become truly afraid of redenomination risk in the interim, the OMT will not matter: they will just take their cash and deposit it as quickly as possible in, say, a German bank. 
The eurozone is still prone to bad equilibria as long as growth on its periphery remains weak. 
Even with OMTs, there remain crucial differences between the eurozone and the Anglo-Saxon economies. 
Fixed exchange rates within the eurozone impose a constraint that simply does not exist in the UK or the United States, and quantitative easing by the Bank of England and the Federal Reserve is unconditional in nature. 
With OMTs, the ECB has converged toward the Fed in its ability to backstop each of its individual parts. 
Whether that hastens or hinders political progress toward fiscal and banking federalism is the next big question. 
In the interim, OMTs enable financial markets to start breathing again. 
The acute crisis is over, at least for now. 
But the existential challenge – political agreement on the key elements of banking and fiscal union – is only just beginning. 
Unless it is met, the eurozone’s financial disintegration will eventually resume. 

Is Europe’s Housing Market Next? 
A bubble in the American housing market – fueled in part by so-called “sub-prime” mortgages – was the catalyst for today’s financial market turbulence. 
But the bubble was not confined to the United States. 
In Europe, house prices have also increased sharply over the last decade – more dramatically than in the US in many cases. 
The same is true of other OECD countries and emerging markets, where rapidly increasing incomes have put pressure on asset prices. 
Indeed, with a few exceptions (essentially Germany and Japan), housing prices have risen almost everywhere to levels never seen before. 
How could such a global pattern emerge when real estate is the most local of all assets? 
Recent research suggests that the global housing boom was closely linked to the unprecedented increase in the supply of liquidity by major central banks. 
To be sure, financial innovation, like lending to buyers who would not normally have qualified for mortgage loans (sub-prime borrowers) also played a role. 
But sub-prime mortgages would probably not have been supplied on the same scale if central banks had not created an environment of ample liquidity and persistently low interest rates. 
The sub-prime crisis has so far affected mainly financial markets in the US and Europe. 
This is not surprising if one considers that on both sides of the Atlantic prices have reached historical peaks and, until recently, had accelerated. 
This is no mere coincidence. 
There has always been a correlation between American and European house prices. 
Over the last three decades, prices in the US and Europe have tended to follow three slow-moving, related boom-bust cycles. 
All previous peaks were followed by several years of declining prices (in real terms). 
There is no reason to assume that this cycle will be any different. 
Since last year, prices have declined in the US. 
Because data for the euro area will become available only much later, it is not yet possible to determine whether prices have already turned on the Continent as well. 
But if the past pattern holds, house prices should start to fall very soon in (continental) Europe as well. 
In both the US and Europe it seems that prices went 20-30% above their longer-term average values. 
Such a large overshooting is likely to be followed by some undershooting. 
This would imply that prices will probably have to fall at least by 20-30 %, but possibly considerably more before they find a bottom. 
European policy makers thus have cause for concern. 
While there is little evidence in the euro area of large-scale sub-prime lending, there is considerable evidence to suggest that house prices have an important impact on domestic demand, albeit with wide variations among individual countries. 
Almost everywhere, higher house prices have been associated with strong consumption. 
Lower house prices throughout Europe are thus likely to be accompanied by weaker consumption demand, as in the US. 
In Germany, for example, house prices have remained relatively low and consumption weak. 
The impact of house prices on construction activity has been more varied. 
In Spain and Ireland, construction investment has increased to a level (18-20% of GDP) far above that of the US and not seen in any other OECD country except Japan before its bubble burst in 1989. 
In these two countries, lower housing prices are likely to be associated with a sharp and prolonged drop in domestic demand, which should be stronger even than what can be expected in the US. 
By contrast, in France and Italy, where house prices have increased almost as much as in the US, there is no evidence of a housing overhang. 
The negative impact of a downturn in housing prices in these two countries should thus be limited to a drop in consumption. 
Germany should be affected the least, because both house prices and construction activity have been below trend for some time. 
In short, the downturn in house prices will not be limited to the US. 
And, on both sides of the Atlantic, that decline is likely to undermine consumer spending. 

Is Europe Turning Toward A Strong Euro? 
Is this a sign that the tide is turning in Europe in favor of a stronger euro? 
Or does it simply reflect the fact that the ECB now is reverting to its old policy of not commenting on exchange rates whatever the circumstance? 
The answer may come clearer at the June meeting next Thursday when the appreciating euro undoubtedly will be brought up once again at the press conference. 
Two factors point to a possible turning of the tide. 
One is the fact that crude oil is heading towards $75 a barrel or higher. 
Second, Europe’s economic recovery is progressing to the point where exports are no longer the sole source of growth. 
Indeed, with sky-high prices of crude oil and base metals like copper, aluminum, and zinc, the rising euro has become a shield for Europe’s ongoing economic recovery. 
These commodities, after all, are priced in US dollars. 
Because the euro has appreciated against the dollar, the euro price of crude oil and base metals has increased at a slower pace than their corresponding dollar prices. 
As the escalation of dollar commodity prices continues, so will Europe’s appreciation of its stronger currency. 
The recently rising euro also has helped keep down European long-term interest rates — a key determinant of economic activity — as inflationary expectations deteriorated somewhat in the euro-zone area. 
During April, the rise in inflationary expectations and the euro’s appreciation occurred more or less concurrently. 
The yield on the 10-year German bond, which might have been expected to go higher because of the deterioration in inflationary expectations during this period, barely moved. 
This is a big plus for sustaining economic recovery. 
Should Bush, Bernanke or the new Treasury Secretary Henry Paulson cause investors to lose faith in US financial assets at some point in time, the rising euro will help shield European interest rates from the consequences. 
Still, politicians and maybe even some central bankers continue to be concerned about the currency, because they fear that a stronger euro could stifle exports, thus weakening overall economic performance. 
But this fear is likely to diminish as Europe’s recovery broadens past exports into the economy’s domestic sectors. 
In fact, there is evidence that this is now happening. 
Surveys show that business confidence is up throughout the euro-zone economy, indicating that a domestic investment boom may be around the corner. 
Likewise, the new ECB growth forecasts may show the internal economy strengthening. 
In short, the fear that a stronger euro could kill the only goose laying the golden eggs is likely to recede in coming months. 
Of course, not everyone in Europe can be expected to be equally enthusiastic about a stronger euro. 
The euro zone is a vast area comprised of different nations with different cultures, histories, economies, politics, and so forth. 
Germany, with its history of a strong deutsche mark and very competitive costs, likes the strong euro more than, say, its partners, France and Italy, which have histories of weak domestic currencies and non-competitive export costs. 
The mere existence of a common currency is no guarantee that everyone will agree about what its value should be. 
Still, even in the traditionally weak-currency countries, changes afoot suggest that a turnaround in political attitudes and public opinion toward a stronger euro may be on the horizon. 
The recent election in Italy of a center-left government led by Romano Prodi is a case in point. 
Not only did the Northern League – an important component of Silvio Berlusconi’s ousted right-wing coalition – favor a weak euro, but it also favored pulling Italy out of the euro altogether. 
Now it is out of power. 
So is Berlusconi himself, who favored a weak euro to compensate for Italy’s economic inefficiency and the complete lack of reform during his years in office. 
Prodi, a convinced European, is less likely to favor a weak euro. 
Another promising change in Italy has been the appointment of Mario Draghi as Governor of the Bank of Italy. 
Draghi, a respected MIT economist, favors economic reform and understands the role that a strong euro plays in spurring it. 
Economic reform must be financed somehow, and if the funds are to come, at least in part, from outside the EU, the euro must be a strong currency. 
Draghi replaced Antonio Fazio, whose corrupt protectionist practices in Italy’s banking sector had both discouraged capital from coming into Italy and depressed the euro. 
In the current global environment, the case for the strong euro is becoming increasingly apparent. 
Mr. Trichet’s silence at the May ECB press conference on the rising euro could be a tacit acknowledgement of this new reality. 
We should learn more at next week’s June meeting. 

Is Export Led Growth Passé? 
CAMBRIDGE – For five decades, developing countries that managed to develop competitive export industries have been rewarded with astonishing growth rates: Taiwan and South Korea in the 1960’s, Southeast Asian countries like Malaysia, Thailand, and Singapore in the 1970’s, China in the 1980’s, and eventually India in the 1990’s. 
In all these cases, and a few others – also mostly in Asia – domestic reforms would surely have produced growth regardless of international trade. 
But it is difficult to see how the resulting growth could have been as high – reaching an unprecedented 10% or more annually in per-capita terms – without a global economy able to absorb these countries’ exports. 
Many countries are trying to emulate this growth model, but rarely as successfully because the domestic preconditions often remain unfulfilled. 
Turn to world markets without pro-active policies to ensure competence in some modern manufacturing or service industry, and you are likely to remain an impoverished exporter of natural resources and labor-intensive products such as garments. 
Nevertheless, developing countries have been falling over each other to establish export zones and subsidize assembly operations of multinational enterprises. 
The lesson is clear: export-led growth is the way to go. 
But for how long? 
While reading the economic tea leaves is always risky, there are signs that we are at the cusp of a transition to a new regime in which the rules of the game will not be nearly as accommodating for export-led strategies. 
The most immediate threat is the slowdown in the advanced economies. 
Europe and the United States are both entering recession, and fears are mounting that the financial meltdown accompanying the sub-prime mortgage debacle has not worked itself out. 
All this is happening at a time when inflationary pressures hamper the usual monetary and fiscal remedies. 
The European Central Bank, tightly focused on price stability, has been raising interest rates, and the US Federal Reserve may soon follow suit. 
So the advanced economies will suffer for a while, with obvious implications for the demand for exports from emerging markets. 
On top of this is the almost certain unwinding of global current-account imbalances. 
Emerging markets and developing countries ran a surplus of $631 billion in 2007, split roughly equally between Asian countries and the oil-exporting states. 
This amounts to 4.2% of their collective GDP. 
The US alone ran a current-account deficit of $739 billion (5.3% of its GDP). 
Neither the economics nor the politics of this pattern of current-account balances is sustainable, especially in a recessionary environment. 
The politics is clear to see. 
Nothing works as potently to inflame protectionist sentiment as large trade deficits. 
According to a December 2007 NBC/Wall Street Journal poll, almost 60% of Americans think globalization is bad because it has subjected US firms and workers to unfair competition. 
If globalization has acquired a lousy reputation in the US, the external deficit deserves much of the blame. 
US trade policy has been remarkably resistant to protectionist pressure in recent years. 
But, regardless of who wins America’s presidency, the world should expect closer scrutiny of imports from China and other low-cost countries as well as of outsourcing of services to places like India. 
As the US and other advanced economies become less hospitable to developing-country exports, rapidly growing emerging markets, help as they may, are unlikely to take up the slack and thus provide ample fuel for export-led growth. 
Import tariffs tend to be higher in developing countries, making it more difficult to gain access to them. 
Moreover, developing countries compete in similar products – consumer goods of varying levels of sophistication – so that the politics of expanded South-South trade looks even worse than the politics of North-South trade. 
Anti-dumping action against imports from China, Vietnam, and other Asian exporters is already commonplace in developing countries. 
So exporting will become an even tougher business. 
Countries like China that have large surpluses will have to rely much more on domestic demand to fuel their economies. 
This is not all bad, because China can certainly use more public investment in social sectors such as health and education. 
But the impact will extend beyond the surplus countries. 
If exporters from Brazil, Turkey, South Africa, and Mexico – all deficit economies – were already struggling to compete with China in third markets when those markets were wide open and expanding rapidly, imagine how they will fare under less hospitable conditions. 
The impact on growth will almost certainly be negative, even if domestic demand compensates fully for the decline in external demand. 
The reason is microeconomic, not macroeconomic: you can sell only so much steel or auto parts at home, and labor productivity in service industries does not match that of export-oriented activities. 
So shrinking export markets will slow down growth-promoting structural change at home. 
None of this implies a disaster for developing countries. 
Long-term success still depends on what happens at home rather than abroad. 
What is moderately bad news at the moment will become terrible news only if economic distress in the advanced countries – especially the US – is allowed to morph into xenophobia and all-out protectionism; if large emerging markets such as China, India, and Brazil fail to realize that they have become too important to free ride on global economic governance; and if, as a consequence, others overreact by turning their back on the world economy and pursue autarkic policies. 
Absent these missteps, expect a tougher ride on the global economy, but not a calamity. 

Is France Unreformable? 
It all began a year ago with the French “No” in the referendum on the European Constitution. 
It continued last fall with the wave of violence in the suburbs. 
Now, France has again brought itself to the world’s attention with weeks of street demonstrations against the “contract of first employment” (CFE) proposed by Prime Minister Dominique de Villepin to address high youth unemployment. 
These three sets of events, different as they are, together illustrate several deep-seated characteristics of social life in France. 
First, France has found it difficult to adjust to the demands of globalization. 
Beyond ordinary dissatisfaction with economic problems, the failed referendum in May 2005 expressed the rejection by an important part of the French electorate of the discipline imposed by EU policies ensuring free movement of people, goods, and capital – and thus of the primacy of economic competition. 
In a similar vein, last fall’s explosion of violence in the suburbs reflected the frustrations of disoriented young people facing the grim prospects that a modern economy offers to those who lack proper training and education. 
The young are also at the center of the most recent protests, but this time, the disaffected include all strata of French youth, including university graduates. 
In combating the CFE, they express their refusal to accept a precarious life outside the French model of job security that their parents enjoyed in the context of a profoundly different economy. 
There is something very French about all this, because, while the economic rules of the game have changed throughout Europe in the last couple of decades, the need for greater labor-market flexibility seems to have been accepted more easily in most other countries. 
In Spain, under a socialist government, roughly one-third of wage earners are working on temporary contracts; the percentage is even higher for the young. 
In Italy, greater employment flexibility was introduced by the Prodi government in 1997, and further strengthened under the so-called Biagi Law of 2003. 
In Germany too, the coalition agreement between the Social Democrats and the Christian Democrats includes a provision that extends from six months to two years the trial period during which an employee can be dismissed without explanation – the same duration contemplated in the Villepin’s CFE law. 
In all these European countries, the new employment laws seem to be accepted as inevitable. 
In France, by contrast, the statist tradition – which, as Tocqueville so aptly observed, harks back to the Ancien Régime, and which is equally shared today by both the Gaullist and socialist ideologies – is strongly linked to a marked distaste toward the strictures of economic liberalism. 
Since the French Revolution, the imperative of equality has often triumphed over the concern for liberty. 
As a result, the French are enamored with the welfare state in all its manifestations. 
Not even the obvious failures of the French social model in today’s environment – mass unemployment (reaching 25% among the young), huge public deficits, the blockage of social mobility – have diminished its public prestige. 
It would be much more logical to take inspiration instead from the Scandinavian model of “flexisecurity,” which combines employment flexibility and social security (albeit at the cost of a tax burden that France would not easily accept). 
Add to all this the French preference for ideological confrontation and the absence of a culture of negotiation and compromise, to say nothing of consensus, and one can understand why so many reform projects in France end up being contested in the streets. 
Indeed, quite significantly, most observers have automatically associated the recent disturbances with those of May 1968, which continues to hold a strange fascination for the French. 
In truth, however, other than reflecting the French preference for the politics of the street, the two phenomena have nothing in common. 
So is France unreformable? 
Certainly not. 
The country has been transformed profoundly in the recent decades. 
Whether it is the breakup of public monopolies, such as electricity, gas, telecommunications, and even the post office, or the replacement of military conscription by a professional military, or pension reform, France has changed much more than is commonly believed. 
This is particularly true with respect to French companies, which have remarkably adapted to the demands of international competition. 
But much remains to be done: the entire educational system, up through the university level, requires serious reform, and many taboos regarding employment rules, social security, and the functioning of the state must be questioned. 
What the experience with the CFE shows is not that reform is impossible, but that it cannot be unilaterally imposed. 
Time must be taken for explanation, consultation, and negotiation. 
In a society like France, marked by uncertainty about the future and in great need of having its self-confidence restored, the time taken to build consensus and create legitimacy for further reforms will certainly be well spent. 


Is Freedom Enough? 
Do democracies need values? 
The question seems absurd in the light of photographs of American soldiers torturing and humiliating Iraqi prisoners. 
But the fact is that the advance of democracy historically entailed the erosion of shared values and the rise of individual autonomy. 
It presupposed moral agnosticism and a plurality of meanings, none of which are sacred or compulsory to all. 
Democracy does nurture some common values, but they are overwhelmingly liberal values - in other words, individual rights trump collective obligations. 
For contemporary democrats, the fullest possible respect for the autonomous individual is, as Thomas Jefferson put it, "self-evident." 
But are civil, political, and human rights enough to ensure the strength and survival of democracies? 
Are today's democracies virtuous enough to rally the energies - including self-sacrifice - needed to defeat their enemies? 
Such questions were never so urgent in the past, partly because fundamental democratic values were less abstract than they seem nowadays. 
Such values animated the fight against Nazi and Soviet totalitarianism, fascism, and military dictatorship; in their name, decolonization was achieved, and minorities gained equality and dignity. 
Democracy's values may be one-sided on behalf of individual rights, but this has also made them universal, legitimizing the struggle against oppression, wherever it is played out. 
But in the world's most advanced countries, the promise of material prosperity that freedom made possible has long since replaced attention to and defense of fundamental democratic values as the cement of society. 
Western citizens do not rush to emulate the freedom fighters who built their world, despite celebrations, memorials, and the persistence of oppression. 
The September 11, 2001, terrorist attacks in the United States allegedly changed everything - not only international relations, but the balance between rights and obligations that we long took for granted. 
In fact, the attacks, while surprising in their method, symbolic character, and scope, changed nothing. 
By themselves, they merely revealed the urgency of a fundamental reappraisal that has long been necessary. 
What is the Western model of democratic development really worth? 
Some non-democratic systems seem to evoke deeper support, because they are based on religious or national communal solidarity, and because closed societies minimize doubt, drift, and criticism. 
Beyond fundamental freedoms and economic prosperity, do we have a specific civilization to defend? 
Ours is a civilization that accepts selfishness towards one's own family and group; that tolerates, with few exceptions, autonomy in moral matters; and that considers blasphemy, criticism of authority, and even civil disobedience fundamental freedoms. 
Our civilization, despite its drugs, prostitution, alcoholism, incivility, and vandalism, will always be better than rule by Mullahs or soldiers, because its social problems can be allayed, if never entirely eliminated, without changing the foundations of the regime. 
This is not true of totalitarian or fundamentalist regimes, because, to foster free societies, they must be deposed. 
But if our civilization is worth defending, why is it that fundamentalists, of whatever stripe, have the most committed fighters on their side? 
Can we oppose them with anything but individual rights? 
Two opposite temptations must be resisted. 
The first temptation, characteristic of frightened societies, is a rush to embrace so-called "traditional" values, with their implications of withdrawal, closure, intolerance, and even hatred. 
The second temptation is a purely military policy that fixates on physical strength without considering how to project greater credibility and fairness. 
Of course, when enemies are already attacking, one cannot afford to ask too many questions. 
But when enemies are merely threatening, it is better first to assert legitimacy, and thus acquire some credibility at home and abroad. 
To do so, there cannot be too wide a gap between our stated principles and our actual behavior. 
Nor can we claim, as we used to, that our values spring from God, nature, reason, or historical laws. 
Our values reflect the democratic debate itself, nothing more, and our defense of them must address three related fields. 
First, we must update our social contract. 
France's ongoing public debate about secularism and legislation is an important effort in this direction, even if the debate could be better organized to demonstrate the link between principles, social and anthropological facts, and public policy. 
Such a debate should also involve education - its rules, objectives, and contents. 
In many countries, however, political parties find it difficult even to contemplate such debates. 
The second axis of values concerns social justice and the environment. 
Issues linked to inequality, the distribution of wealth, and our exploitation of the natural world will become increasingly salient. 
This debate has not happened in the US, despite vague attempts at the beginning of the first Clinton administration; it has barely begun with Tony Blair's "Third Way" in the UK, or with Gerhard Schröder's variant in Germany. 
In France, the debate has stalled altogether due to bitter distributive conflicts, deep division within the Left, and the Right's absence of an economic and social vision. 
What remains are the values linked to the global order, defense of which requires leading by example, not by narrow, legalistic initiatives aimed at crisis management or conflict resolution. 
This approach too often sacrifices long-term essential objectives to short-term concerns. 
The fight for democracy cannot be selective. 
A desirable vision for the future of humanity must appeal to universally shared conceptions of justice and equity. 
We must all become freedom fighters. 

Is Global Financial Reform Possible? 
HONG KONG – Nowadays there is ample evidence that financial systems, whether in Asia in the 1990’s or a decade later in the United States and Europe, are vulnerable to breakdowns. 
The cost in interrupted growth and unemployment has been intolerably large. 
But, in the absence of international consensus on some key points, reform will be greatly weakened, if not aborted. 
The freedom of money, financial markets, and people to move – and thus to escape regulation and taxation – might be an acceptable, even constructive, brake on excessive official intervention, but not if a deregulatory race to the bottom prevents adoption of needed ethical and prudential standards. 
Perhaps most important is a coherent, consistent approach to dealing with the imminent failure of “systemically important” institutions. 
Taxpayers and governments alike are tired of bailing out creditors for fear of the destructive contagious effects of failure – even as bailouts encourage excessive risk taking. 
By law in the US, new approaches superseding established bankruptcy procedures dictate the demise rather than the rescue of failing firms, whether by sale, merger, or liquidation. 
But such efforts’ success will depend on complementary approaches elsewhere, most importantly in the United Kingdom and other key financial centers. 
Strict uniformity of regulatory practices may not be necessary. 
For example, the UK and the US may be adopting approaches that differ with respect to protecting commercial banks from more speculative, proprietary trading, but the policy concerns are broadly similar – and may not be so pressing elsewhere, where banking traditions are different and trading is more restrained. 
But other jurisdictions should not act to undercut the restrictions imposed by home authorities. 
Closely related to these reforms is reform of the international monetary system. 
Indeed, one might legitimately question whether we have a “system” at all, at least compared to the Bretton Woods arrangements and, before that, the seeming simplicity of the gold standard. 
No one today has been able to exert authority systematically and consistently, and there is no officially sanctified and controlled international currency. 
Arguably, the ideal of a well-defined and effective international monetary regime has become more difficult to realize as markets and capital flows have become vastly larger and more capricious. 
Indeed, the global economy, it is said, has grown – and emerging countries have flourished – without a more organized system. 
But what is too often overlooked is that international monetary disorder lay at the root of the successive financial crises of the 1990’s, and played an even more striking role in the crisis that erupted in 2008. 
The sustained and, in a sense, complementary imbalances in the US and Asia stand out. 
From 2000 to 2007, the US ran a cumulative current-account deficit of roughly $5.5 trillion, with nearly symmetrical offsetting increases in reserves in China and Japan. 
China found it useful to run a large trade surplus, using a very high rate of internal savings and inward foreign investment to support its industrialization and rapid growth. 
By contrast, the US, in the face of slow growth, was content to sustain exceptionally high levels of consumption at the expense of personal savings, inflating a massive housing bubble that burst with a very large and deeply disturbing bang. 
The practical and inescapable lesson is that when any country is left to its own policy devices, its preferences may lead to prolonged and ultimately unsustainable imbalances. 
Sooner or later, adjustment will be necessary – if not by considered domestic policy or a well-functioning international monetary system, then by financial crisis. 
Not so long ago, we were comforted by theorizing that floating exchange rates would mediate international adjustments in a timely and orderly way. 
But, in the real world, many countries, particularly but not limited to small, open economies, simply find it impractical or undesirable to permit their currency to float. 
We are left with the certainty, however awkward, that active participation in an open world economy requires some surrender of economic sovereignty. 
Or, to put the point more positively, it requires a willingness to coordinate policies more effectively. 
The possibilities include: 
· Stronger surveillance by the International Monetary Fund and a firmer commitment by countries to abide by “best practices” and agreed norms. 
· Direct and public recommendations by the IMF, the G-20, or others, following mandatory consultation. 
· Qualification or disqualification with respect to the use of IMF or other credit facilities (for example, central banks’ swap lines). 
· Interest or other financial penalties or incentives along the lines under consideration in Europe. 
But, if approaches that build on past failure do not seem sufficiently effective, perhaps a new approach toward currency fluctuations would be more promising. 
That would require some agreement about appropriate “equilibrium” exchange rates, with a fairly wide band that would allow for uncertainty and permit the market to exert its own discipline. 
But individual countries would orient intervention and economic policies toward defending the equilibrium rate, or, more radically, an international authority might authorize aggressive intervention by trading partners to promote consistency. 
An appropriate reserve currency and adequate international liquidity represent another central concern. 
For years, the pragmatic answer has been the dollar, and to some extent other national currencies, giving rise to complaints of an “inordinate privilege” for the US. 
But it is not in America’s interest to accentuate and extend its payment deficits at the expense of an internationally competitive economy with strong industry and restrained consumption. 
And the rest of the world wants the flexibility afforded by the currency of the largest, strongest, and most stable economy. 
A useful reserve currency must be limited in supply, but have sufficient elasticity to satisfy the large, unpredictable needs that may arise in a turbulent financial world. 
Above all, confidence in its stability and availability must be maintained, which highlights the practicality of a national currency, or perhaps a variety of national currencies. 

Is Globalization the Only Way to Develop? 
A US Treasury official recently "urged Mexico's government to work harder to reduce violent crime, saying the country's high crime rate could frighten away foreign investors." 
An off-the-cuff remark, perhaps, but it shows how foreign trade and investment are seen as the yardsticks for evaluating developing countries. 
Development strategy, indeed, is becoming hostage to the idea of integration into the world economy. 
This equation is too facile. 
Openness to trade is presented as the most potent force for economic growth, yet integration into the world economy has demanding institutional prerequisites, which are not met cheaply. 
It would cost a typical developing country $150 million - a sum equal to a year's development budget in many poor countries - to implement the reforms required under WTO agreements. 
Although countries benefit from strengthening their institutions in relevant areas, the reality, according to Michael Finger, who calculated these figures, is that "WTO obligations reflect little awareness of development problems." 
Integration has other, more subtle, institutional requirements as well. 
Openness implies heightened exposure to external risk, and thus greater demand for social insurance. 
So, in the real world opening up is not simply a matter of letting barriers down. 
You must ensure that you abide by international rules of propriety, covering newly exposed domestic sources of weaknesses, and protecting yourself from the elements. 
None of the institutional reforms needed for insertion in the world economy are bad; in fact, many are independently desirable. 
But recognize the argument favoring openness for what it is: trickle-down institutional reform. 
Reforms may or may not trickle down; even when they do, they will rarely constitute the most effective way of targeting the desired ends (whether those ends are legal reform, observance of human rights, or reduced corruption). 
Investing in the prerequisites of trade and financial openness as the first order of business in development not only forecloses alternatives, it crowds out possibly urgent priorities by diverting human resources, administrative capabilities, and political capital. 
Consider some tradeoffs: 
Education. 
What should a government's priorities be in its education budget? 
Should it train more bank auditors and accountants, even if it means fewer secondary-school teachers? 
Corruption. 
How should a government focus its anti-corruption strategy? 
Should it target the "grand" corruption that foreign investors complain about, or the petty corruption that affects the average person the most? 
Legal reform. 
Should a government focus its energies on "importing" legal codes and standards, or on improving existing domestic legal institutions? 
Public health. 
Should a government pursue tough policies on compulsory licensing and/or parallel importation of basic medicines, even if that means running breaking WTO rules? 
Industrial strategy. 
Should a government simply open up and let the chips drop wherever they might, or emulate East Asia's experience before the 1990s, with industrial policies such as export subsidies, directed credit, and selective protection? 
Social protection and safety nets. 
How much can a government afford to spend on such programs in view of the fiscal constraints imposed by market "discipline?" 
In each area, a strategy tilted toward global integration precludes other paths that could be more development-friendly. 
Of course, none of this would be bad if openness were the key to growth. 
Alas, evidence for a link between a country's trade barriers and its growth rate is weak. 
The appropriate conclusion is not that trade protection is preferable to trade liberalization, because there is no evidence that trade protection systematically promotes higher growth. 
But don't oversell the benefits of trade openness. 
When useful policy objectives compete for scarce administrative resources and political capital, trade liberalization often does not deserve the priority it typically receives in development strategies. 
This lesson is of real importance to countries (such as in Africa) in the early stages of reform. 
My conclusion is that openness is not an adequate substitute for a development strategy. 
Policymakers must evaluate globalization in terms of developmental needs, not vice versa. 
Any economist who appears to question the benefits of trade openness risks banishment, so let me be clear: I do not question the standard version of the gains-from-trade theory, but the extravagant, unsubstantiated claims made about the consequences of openness. 
For the latter endangers broad public acceptance of the real article because it unleashes expectations unlikely to be fulfilled. 
In the real world, opening up is not a simple matter of revising tariff codes and removing barriers to foreign investment. 
It requires a heavy dose of institutional reform, which consumes financial, bureaucratic, and political resources. 
While many institutional reforms are development-friendly, they may not be targeted at key developmental goals - growth, improved governance, industrial and technological capability, poverty alleviation - and occasionally divert attention from them. 
Institutional reforms aimed at maximizing trade and capital flows may produce broad benefits, but they are not necessarily the most effective way of fostering development. 
Strategic use of international trade and capital flows is part of a development strategy; it should not be a substitute for it. 

Is Goodness Natural? 
It is hard to imagine that anyone thinks of goodness as a problem, but Charles Darwin did. 
The little worker bees that sacrificed themselves to protect their hives – the ultimate example of animal goodness – kept Darwin up at night. 
Given Darwin’s ideas about evolution natural selection were correct (and, of course, they were and are), then this sort of altruism should be extraordinarily rare in nature. 
If increased reproduction is the ultimate end all and be all of evolution by natural selection, then altruists should disappear – and fast. 
But they don’t disappear, and Darwin was so puzzled by this that he spoke of altruism as a problem that could prove fatal to his whole theory of evolution. 
Then a solution to this nasty conundrum hit Darwin like a ton of bricks. 
Worker bees weren’t helping just any old bunch of bees; they were protecting their hive. 
And their hive contained special individuals: blood relatives. 
Blood relatives are, by definition, very similar to one another. 
So even though the little worker bees may have been giving up their lives, by doing so they were potentially saving hundreds of blood relatives. 
In modern parlance, we’d say that the worker bees were helping blood kin, because blood kin are genetically related. 
By helping your blood relatives, you are indirectly promoting the reproduction of copies of your own genes - copies that just happen to reside inside your kin. 
Darwin wasn’t the only scientist who was fascinated with the question of the evolution of goodness. 
In fact, his good friend and colleague, Thomas Henry Huxley, was as well. 
Huxley, in fact, got himself into quite a heated argument over whether blood kinship could or could not explain altruism. 
Huxley’s opponent was Prince Peter Kropotkin, ex-page to the Czar of Russia, naturalist, and arguably the most famous anarchist of the nineteenth century. 
Huxley argued that all goodness could be traced to blood kinship, while Kropotkin argued that goodness and blood kinship were completely divorced from one another - one had nothing to do with the each other. 
Of course, neither was right, but it would take almost a hundred years before a shy, reserved, and brilliant British biologist named William D. Hamilton would settle all the arguments about blood kinship and altruism by coming up with a simple, but elegant mathematical equation. 
Instead of asking if blood kinship explains everything or nothing about altruism, Hamilton approached the question differently. 
He began by defining three terms: the genetic relatedness between individuals (labeled r), the cost of an act of goodness (c), and the benefit that a recipient obtained when someone was nice to him or her (b). 
Using some beautiful mathematics, in the early 1960’s Hamilton discovered that altruism and blood kinship are not linked by an all- or- nothing relationship. 
Instead, what is now known as “Hamilton’s Rule” states that altruism evolves whenever r times b is greater than c. 
In other words, if enough relatives receive benefits from altruism to outweigh the cost of altruism, then altruism spreads; otherwise, it does not. 
Phrased in the cold language of natural selection, blood relatives are worth helping in direct proportion to their genetic (blood) relatedness, weighted by how great a benefit they received. 
Literally thousands of experiments with both nonhumans and humans show the power of Hamilton’s Rule. 
This little equation is evolutionary biology’s version of e = mc2. 
Over and over, we see that an analysis of the costs and benefits of altruism, along with the genetic relatedness of interactants, allows us to predict the presence or absence of altruism. 
Hamilton’s Rule, of course, does not explain all altruism. 
Another large chunk of goodness falls under the category of “reciprocity.” 
Individuals are sometimes willing to be altruistic to someone now in the expectation that they will, in turn, be helped when we they need it. 
Evolutionary biologists have been almost as interested in this type of altruism, as they have been in kinship-based altruism. 
Amazingly enough, it was Bill Hamilton, along with the political scientist Robert Axelrod and the evolutionary biologist Robert Trivers, who formalized the models behind the evolution of reciprocity. 
Following up on work done by Trivers in the early 1970’s, in 1981, Axelrod and Hamilton used the mathematics of game theory to predict when so-called “reciprocal altruism” should evolve. 
Again, scores of empirical studies have followed up the model. 
Reciprocity can be complex, but an evolutionary perspective has cleared the path to understanding, just the same way it did in the case of blood kinship and altruism. 
If goodness is a problem, then the answer – or at the least part of the answer – can be found in evolutionary biology. 

Is Gordon Brown Electable? 
Gordon Brown obviously wants to succeed Tony Blair as British prime minister. 
But it is less obvious that he is willing to do what is necessary to lead the Labour Party to victory in the next general election. 
In some critical sense, he must repudiate Blair’s legacy, which, at a minimum, means promising to take Britain out of the Iraq War. 
Brown has longed to be prime minister ever since May 12, 1994, the fateful day when John Smith, the Labour Party’s leader in opposition, dropped dead of a heart attack. 
Two weeks later, on May 31, Blair and Brown met in a small restaurant in North London, and debated who should take over the party leadership. 
By the end of their discussion, they had made a double deal: Brown would stand aside and support Blair as the next party leader; in return, Blair would later give up the leadership to him. 
Crucially, but inevitably, they did not agree when, or under what circumstances, Blair would fulfil his side of the bargain. 
Inevitably, they could not foresee that Blair would go on to win an unprecedented three successive election victories for Labour, in 1997, 2001, and 2005, and thus keep Labour in power for a record-breaking period of possibly as long as 13 years. 
The key challenge for New Labour (as Blair re-styled it with his characteristic gift for spin), was the management of the British economy. 
Since World War II, most British governments tried to manipulate the economy for short-term party advantage, usually with disastrous long-term results. 
This lamentable tradition was common to both Conservatives and Labour; and yet, unfairly, it was the Labour Party that was most contaminated by the smear that it could not be trusted to manage the economy. 
Brown decisively changed that reputation. 
He has been probably the most outstanding Chancellor of the Exchequer in British history, not because of any inspiration or genius, but simply because he has built on a new tradition of prioritizing low inflation, low interest rates, and stable government finances. 
Brown understood that these priorities were essential, not just for the British economy, but also for the long-term prospects of Labour in power; and he entrenched this agenda by giving the Bank of England independent responsibility for keeping inflation low. 
As a result, Britain has had an unprecedented decade of low inflation and relatively high economic growth, outperforming many of its European counterparts. 
Yet, despite economic success, it became steadily clearer that Blair’s time was running out. 
The electorate grew increasingly disillusioned with the unavoidable shortcomings of an over-familiar government, and the party grew increasingly discontented with a leader who had outstayed his welcome. 
At first, Blair thought that he could claim the right to remain in power for a third full five-year term. 
But the pressure on him to go has steadily risen, to the point where he has now almost promised to give up in the summer of 2007. 
But no one knows exactly when, or how, Blair will step down. 
If there is a formal leadership contest, it seems likely that several rival candidates will aim to stand. 
But almost all authoritative observers seem to agree that Brown is by far the most likely man to be the next Labour prime minister. 
That is the easy part. 
From that point on, no one seems certain whether Brown knows what to do, or has what it takes, to fight and win another general election for Labour. 
His reputation for command and control of the economy is magisterial and unchallenged, but he has given almost no clue as to what he thinks of other government policies. 
He has remained dour and almost silent, visibly chafing with impatience to come into his inheritance, but offering no hint of what difference he would make when he does. 
The one thing he cannot do is promises to continue Blair’s policies. 
If Brown offers more of the same, he will lose. 
After ten years of Blair, he must offer one or more policies that mark a clear break. 
The most obvious candidate for such a policy switch is Iraq: if Brown wants to win an election as Labour leader, he must renounce Blair’s policy and announce the withdrawal, in short order, of British troops. 
In tactical terms, this should be easy and obvious: whatever the deceitful and illegal reasons originally given for invading Iraq, everyone now knows that this war has proved a political, strategic, and moral catastrophe. 
Everyone knows that it cannot be “won,” whatever that means, and Brown knows that both the war and Britain’s servile subordination to the Bush administration are deeply unpopular in Britain. 
This is the issue that is crying out to be addressed: but so far none of the main political parties has dared touch it. 
In the past three weeks, Labour, the Liberal Democrats, and the Conservatives have all held their annual conferences. 
All of them concentrated on domestic policies; none dared discuss Iraq, because they all know that to do so would raise the question of withdrawal, which in turn would unleash a major and possibly explosive debate about Britain’s relationship with the US. 
Does Brown have the stomach to take on the risks involved in confronting the Iraq question? 
Possibly not. 
He may decide that it is too difficult, in which case he will be a lame duck prime minister, condemned to serve out the three years remaining in Labour’s current term with no hope of winning the next election. 
That is not what he planned when he struck his bargain with Blair back in 1994. 

Is Greece Japan’s Future? 
TOKYO – The Greek fiscal crisis has sent shockwaves through markets around the world. 
In just two years, Greece’s budget deficit jumped from 4% of GDP to 13%. 
Now other European Union countries seem under threat, and the EU and the International Monetary Fund are grappling to stem the crisis before another nation trembles. 
But the problem of excessive government debt is not confined to the EU. 
Indeed, Japan’s debt-to-GDP ratio is around 170% – much higher than in Greece, where the figure stands at around 110%. 
But, despite the grim parallel, Japan’s government does not seem to think that it needs to take the problem seriously. 
Last year’s general election brought regime change to Japan. 
Yukio Hatoyama’s Democratic Party of Japan (DPJ) thrashed the Liberal Democratic Party, which had governed almost continuously for a half-century. 
But Hatoyama’s government has ignored macroeconomic management by abolishing the policy board charged with discussing economic and fiscal policy. 
Instead, the government has focused on increasing spending to meet its grand electoral promises, including a huge amount for new grants to households and farmers. 
As a result, the ratio of tax revenue to total spending this fiscal year has fallen below 50% for the first time in Japan’s postwar history. 
If the government continues on this path, many expect next year’s budget deficit to widen further. 
Despite the weakness of Japan’s fiscal position, the market for Japanese Government Bonds (JGBs) remains stable, at least for now. 
Japan had a similar experience in the 1990’s, the country’s so-called “lost decade.” 
At that time, Japan’s budget deficit soared after the country’s property bubble burst, causing economic stagnation. 
But JGBs are mostly purchased by domestic organizations and households. 
In other words, the private sector’s huge savings financed the government’s deficit, so that capital flight never occurred in the way it has in Greece, despite the desperate budget situation. 
But this situation has deteriorated recently, for two reasons. 
First, the total volume of JGBs has become extremely high relative to households’ net monetary assets, which stand at roughly ¥1,100 trillion. 
But in a mere three years, total JGBs will exceed this total. 
This suggests that taxpayer assets will no longer back government debt, at which point confidence in the JGB market is likely to shatter. 
Second, Japanese society is aging – fast. 
As a result, the country’s household savings rate will decrease dramatically, making it increasingly difficult for the private sector to finance budget deficits. 
Moreover, an aging population implies further pressure on fiscal expenditure, owing to higher pension and health-care costs, with all of Japan’s baby boomers set to reach age 65 in about five years. 
The increase in social-welfare costs is expected to start around 2013, three years from now. 
Given these factors, the JGB market, which has been stable so far, will face serious trouble in the years ahead. 
After averting its eyes since coming to power, Japan’s new government has finally started discussing tax hikes. 
One possibility is an increase in the consumption tax, which currently stands at 5% – low in comparison with other industrialized countries. 
But tax hikes alone with not close Japan’s fiscal black hole. 
What is most needed is consistent and stable macroeconomic management. 
Such management is possible. 
Between 2001and 2006, Prime Minister Junichiro Koizumi aggressively tackled Japan’s fiscal problems. 
Koizumi sought smaller government and set clear numerical targets for fiscal consolidation, including a primary budget balance in 10 years. 
Surprisingly, Koizumi was almost successful. 
Japan’s primary deficit of ¥28 trillion in 2002 was reduced to only ¥6 trillion by 2007. 
If this effort had been continued for two more years, a primary budget surplus could have been realized. 
But over the past three years, the prime minister changed each year, and a populist trend in fiscal expenditure took hold. 
What is needed most now is for the DPJ government to restore comprehensive economic management. 
A tax hike is only part of that. 
Without a strategy for growth, an effort to reduce government spending, and a policy to stop deflation, a tax hike will not solve the problem. 
Indeed, some economists fear that a fiscal crisis could erupt even aftera tax hike is passed. 
Once that happens, the impact on neighboring countries – and on the world economy – will be huge compared to the current European problem. 
After all, Japan remains the world’s second largest economy, accounting for about one-third of Asia’s GDP, and 8% of global output, whereas the GDP share of Greece in the EU is about 3%. 
In some countries, lower military expenditures and interest rates has helped to improve a weak fiscal position. 
But in the case of Japan, military spending is already low, as are interest rates. 
This suggests that fiscal rescue will be extremely difficult if and when trouble starts – and underscores the urgent need for real political leadership now. 

Is Growth Incomplete without Social Progress? 
WASHINGTON, DC – The geography of poverty and social deprivation has changed dramatically over the last two decades. 
More than 70% of the world’s poor now live in middle-income countries. 
This pattern, likely to continue into the next decade, raises important questions. 
Have poverty reduction and human development kept up with income growth? 
Is growth incomplete without social progress and gender-inclusiveness? 
Consider South Asia, where the poverty rate fell from 60% in 1981 to 40% in 2005 – not fast enough, given population growth, to reduce the total number of poor people. 
In fact, the number of poor people (defined as those living on less than $1.25 per capita per day at 2005 purchasing power parity) in South Asia increased from 549 million in 1981 to 595 million in 2005, and from 420 million to 455 million in India, where almost three-quarters of the region’s poor reside. 
In other words, while South Asia’s economies have not underperformed on poverty reduction, merely matching global trends may not be enough for the region with the world’s largest concentration of poor people. 
India has experienced slower income growth than has China, which partly explains its higher poverty rate. 
But a country’s poverty rate also depends on the degree of income inequality – a reduction in which makes growth more pro-poor – and inequality in China has, in fact, increased more rapidly than in India. 
So a rising tide really can lift all boats, with growth trumping inequality when it comes to poverty reduction. 
Moreover, income growth has contributed to improved education. 
Adult literacy rates in South Asia match the global norm. 
But education outcomes lag behind when it comes to secondary and tertiary education, which are becoming increasingly necessary to thrive in today’s world. 
Nor have health indicators kept up with income growth. 
South Asia has the world’s highest rates of malnutrition and the largest number of undernourished children, who have higher mortality rates, lower cognitive performance, and a greater likelihood of dropping out of school. 
More than 200,000 people in India die annually from malaria, mainly in poor regions. 
And, while much of the existing international health-care assistance is focused on sub-Saharan Africa, India, along with Bangladesh, Bhutan, Nepal, Pakistan, and Sri Lanka, are just as devastated by neglected tropical diseases. 
Indeed, India alone accounts for one-quarter of intestinal worm infections worldwide and more than one-half of all cases of elephantiasis, leprosy, and visceral leishmaniasis. 
Over the last 50 years, the most striking forms of inequality, including discrimination against women in access to education, health, employment, political participation, and household resources, have been largely reversed. 
But dramatic gender inequities persist in South Asia, more so than in other low-income countries. 
Although gender parity in primary education has improved, dropout rates for girls are higher than for boys. 
The dowry tradition puts pressure on girls’ families to marry them early, leading to a preference for sons – and thus to sex-specific abortions targeting female fetuses. 
Legislation, courts, and law-enforcement mechanisms have failed to address the high incidence of violence against women. 
Death rates for young girls are much higher than for boys. 
These indicators are symptomatic of a general pattern of discrimination. 
The expectation that girls will grow up to do little other than serve their husbands reduces parents’ incentives to invest in their daughters’ education. 
Uneducated women then have few alternatives, and the expectation becomes self-fulfilling, leaving women in a continuous cycle of powerlessness that has had significant adverse long-term effects. 
In 2008, India’s female labor-force participation rate averaged 35%, while low-income countries averaged 58%. 
Moreover, a large proportion of women in the region are employed in the informal sector. 
The paradox of South Asia is that growth has been instrumental in reducing poverty and improving social outcomes, but poverty rates and social outcomes have not improved fast enough to reduce the total number of people living in misery. 
As a result, policymakers should begin to consider direct policy interventions to accelerate social progress, with a particular focus on human development and gender inclusiveness. 
In today’s uncertain world, social turmoil, gender deprivation, and rising conflict have tested countries’ abilities to create jobs, promote gender equity, equip young people with skills, and design effective social protection programs. 
Tackling these challenges requires a clear understanding of how economic opportunities can be broadened to ensure faster poverty reduction, promote human development, and stimulate gender-inclusive growth. 
Greater gender equality can contribute to economic growth and development, and major initiatives to increase opportunities for women can transform society. 
If more girls had gone to school a generation ago, millions of infant deaths could have been averted each year, and tens of millions of families could have been more educated, healthier, and happier. 
Deeper social disparities should never be viewed as the inevitable price of rapid growth, and more egalitarian outcomes in education, health, and gender should not be considered “second-stage” reforms. 
A development strategy that promotes growth first, and only then deals with human misery, is not sustainable. 
Policies designed to make redistribution more efficient need not hamper growth itself. 

Is Honest Politics Possible? 
" Those who desire to treat politics and morals separately will never understand anything of either." 
So wrote Jean-Jacques Rousseau, and I agree. 
The practice of politics not only can but must be reconciled with the imperatives of honesty. 
But what is honesty or dishonesty in a politician? 
Is it possible for a politician to be honest at all? 
The question goes to the heart of democracy. 
When voters write off politicians as dishonest, anti-democratic movements thrive. 
Yet all politicians know that ambiguity and compromise tend to prevail over universal truths. 
Sometimes one must choose the lesser evil. 
Our ordinary standards of decency and righteousness cannot always be applied - but not because cynicism and hypocrisy are all that matter in politics. 
Consider, for example, that prince of ambiguity, the Duc de Talleyrand. 
Not only corrupt, but a notorious traitor to consecutive masters, Talleyrand was said to have failed to sell his own mother only because there were no takers. 
Yet, although serially disloyal to French rulers, Talleyrand probably never betrayed France. 
Political dishonesty, it turns out, takes different forms. 
Let us identify the various types. 
One type is someone who is a dishonest man or woman to begin with. 
Such a person will be a dishonest leader, ideologue, or diplomat in any circumstance. 
Another type is the well-meaning dilettante. 
Clumsy and amateurish, the dilettante's actions harm the interests he aims to advance. 
Political "gamblers," on the other hand, put competence to bad use. 
They are skilled but ruthless, lack humility and eschew reflection. 
The gambler's close kin is the political "troublemaker," who pursues his soaring ambitions by any means necessary, whatever the risks and regardless of the cost to others. 
The political "fanatic" is also dishonest, for he is blinded by the conviction that he is absolutely right in all cases. 
The fanatic is inflexible and inertial, a steamroller ready to flatten everything in his way. 
By contrast, the political "wheeler-dealer" is no less dishonest, for he lacks what the first President Bush called the "vision thing." 
He is spineless, devoid of principle, and retreats in the face of responsibility. 
Beyond these distinct types of dishonest politicians are more general political postures. 
Cynical forms of pragmatism take the lead, embodied in the principle that the end justifies the means whenever moral imperatives conflict with political interests. 
At the other extreme is a naive, utopian, and moralistic stance that is equally dishonest. 
Its acolytes deplore the grit and relativism of politics and issue futile appeals for moral revivals. 
But things are not that simple. 
History is not an idyll and politicians' biographies do not read like the lives of the saints. 
Paradoxically, if all people were honest, politics would become redundant. 
This does not mean that we cannot identify honest politicians when we see them. 
Immanuel Kant described two types of politicians. 
The political moralist wants to "hammer out morality" in keeping with the requirements of politics construed as a cynical game. 
It is a label that easily applies to all the types of dishonest politicians described above. 
Kant's second type is the moral politician , who rejects cynical pragmatism but does not succumb to naive moralising. 
An honest politician is someone who regards politics as a tool for achieving the common good. 
He is not naive, and knows that patience, compromise, and a policy of small steps are often needed. 
Yet in pursuing partial goals he will not lose sight of higher objectives. 
An honest politician, in short, pursues a pragmatism built on principles, on the courage to say unpleasant things, but always with a constructive attitude. 
Indeed, irresponsible criticism - the eagerness to expose and publicize a problem, unmatched by the willingness to propose feasible solutions - is perhaps the most common form of dishonesty in politics. 
This is why actual governance is so often the best test of political honesty. 
In democratic countries, if politicians who are critical of others while in opposition prove to be ineffective when in government, voters can - and often do - punish their dishonesty at the ballot box. 
The toughest test of an honest politician comes when he or she must defend ideas that are unpopular but right. 
Not everyone passes such a test, particularly when elections are approaching. 
However, only the dishonest politician equates politics exclusively with popularity. 
At the same time, a moral politician never succeeds single-handedly in ensuring the common good. 
Only when politicians support one another's decency can they be confident that in critical moments for the state, they can rise above their political divisions. 
But political honesty is not the sole responsibility of politicians. 
Public opinion must play its part as well. 
After all, political honesty - and honest politicians - is more likely to take root in a society marked by a culture of tolerance, solidarity, and the equal enjoyment of individual rights. 
Political mischief-makers do poorly in such soil. 
I am a political practitioner, first and foremost. 
So I know that no theory, no amount of analysis, can free a politician from bouts of soul-searching, from troubling his or her conscience with questions about what is and what is not honest when confronting political choices. 
Above all else, the honest politician willingly shoulders this burden. 

Is Ignorance Bliss? 
The age of the Renaissance man is long gone. 
No one thinks it is possible anymore for an individual to grasp, fully, all areas of science and technology. 
Popular software contains millions of lines of code. Mechanisms of the immune response for just one kind of lymphocyte take up thousands of pages of scholarly journals. 
An iPod's elegantly simple appearance masks underlying technology that is understood by only a tiny percentage of its users. 
But, despite the vast incompleteness of our knowledge, recent research suggests that most people think that they know far more than they actually do. 
We freely admit to not knowing everything about how a helicopter flies or a printing press prints, but we are not nearly modest enough about our ignorance. 
The easiest way to show this is to have people to rate the completeness of their knowledge on a seven-point scale. 
For any question, a “7” denotes the equivalent of a perfectly detailed mental blueprint, and a “1” implies almost no sense of a particular mechanism at all, just a vague image. 
People happily, and reliably, assign numbers to their understandings of everything from complex machines to biological systems to natural phenomena such as the tides; but these ratings are usually far higher than their actual knowledge. 
We can measure the discrepancy between what we think we know and what we actually know by simply asking people, after they have given their initial ratings, to tell us how some things work in as much detail as they can and then to rate their knowledge again in light of their attempt to explain. 
Similarly, we can ask them to answer critical diagnostic questions (for example, “How does a helicopter go from hovering in place to flying forward?”) 
Or we can simply provide them with a concise but meaty expert explanation. 
In all of these cases, people somewhat sheepishly confess that their level of understanding was far worse than they originally thought. 
People are often surprised and dismayed at their ignorance, but we are not generally bad at estimating how much we know. 
Instead, we have a special deficit with regard to our explanatory understandings. 
We are good at estimating how well we know simple facts (such as the capitals of countries), procedures (such as how to make an international phone call), and narratives (such as the plots of well-known movies). 
But we seem to have a specific “illusion of explanatory depth” – the belief that we possess a more profound causal understanding than we really do. 
We can be appropriately modest about our knowledge of other things, but not so about our ability to explain the workings of the world. 
Several factors converge to create this illusion of knowledge. 
When Leon Rozenblit and I uncovered the illusion and its specificity, we ran an extensive series of studies exploring why explanatory understanding is so vulnerable to a false sense of knowing. 
All of the factors that we identified are less influential for facts, procedures, and narratives. 
One important factor underlying the illusion of explanatory depth arises from the richly hierarchical nature of most complex systems, which means that they can be understood at several levels of analysis. 
One can understand how a computer “works” in terms of the high-level functions of the mouse, the hard drive, and the display while not having any understanding of the mechanisms that enable a cursor to move when a mouse is moved, or allow information to be stored and erased, or control pixels on a screen. 
This hierarchical structure of complex causal systems seduces us into a sense of understanding at a high level, which is then mistaken for having an understanding at a lower level. 
A second factor is the false comfort we derive from seeing the parts of a system. 
The more parts you can see, the more you think you know how those parts actually work. 
Thus, the illusion is stronger for objects with easy-to-inspect parts than it is for objects with more invisible, inaccessible, or microscopic parts. 
For example, we may think that we understand the mind much better than we do when we see images of glowing brain regions. 
Finally, we often figure out things on the fly when they are in front of us, but then falsely assume that we came to the object with a full understanding in our heads rather than using and manipulating the object to decipher its mechanism. 
There may be a silver lining to our inflated sense of understanding. 
The world is, of course, far too complex for any lone person to fully grasp. 
If a gnawing sense of ignorance kept us diving deeper in our quest to understand everything we encountered, we might suffocate in the details in one area and miss other areas completely. 
The illusion of explanatory depth may stop us at just about the right level of understanding, one that enables us to know how to get more information from others when we really need it without being overwhelmed. 
It would perhaps be better if we recognized the limits our own explanatory ability, but there may be some adaptive value of those limits as well. 



Is International Justice the Enemy of Peace? 
It is only a little more than fifteen years ago that the first of the contemporary international courts was created to prosecute those who commit war crimes, crimes against humanity, and genocide. 
That court, the International Criminal Tribunal for the former Yugoslavia, may soon mete out justice to a new defendant, following the arrest in Belgrade of Radovan Karadzic, wartime leader of Bosnia’s Serbs. 
Yet there is already a persistent theme in criticism of such tribunals: in their effort to do justice, they are obstructing achievement of a more important goal, peace. 
Such complaints have been expressed most vociferously when sitting heads of state are accused of crimes. 
The charges filed by the prosecutor of the International Criminal Court against Sudanese President Omar Hassan al-Bashir for crimes against humanity and genocide in Darfur are the latest example.& Indeed, the denunciations of the justice process this time are more intense and more vehement than in the past. 
The complaints were also loud in 1995, when the ICTY’s prosecutor indicted Karadzic and his military chief, General Ratko Mladic, and even louder when they were indicted again later in the same year for the massacre at Srebrenica. 
The timing of that second indictment especially aroused critics, because it came just before the start of the Dayton peace conference.& Because they faced arrest, Karadzic and Mladic did not go to Dayton. 
But, as matters turned out, their absence did not hinder the parties from reaching an agreement. 
Indeed, it may have helped as the leaders of Bosnia, Croatia, and Yugoslavia negotiated an end to the war in Bosnia. 
In 1999, the ICTY indicted Slobodan Milosevic, President of Yugoslavia, for crimes committed in Kosovo. 
Again, there were denunciations that focused on timing. 
NATO’s intervention in Kosovo was underway, and critics claimed that prosecuting Milosevic made the tribunal an arm of NATO and would prevent a settlement. 
That prediction was wrong. 
Milosevic capitulated two weeks after he was indicted, and the war ended. 
The next sitting head of state to be indicted was Liberian President Charles Taylor. 
Although the prosecutor for the Special Court for Sierra Leone indicted Taylor in March 2003 for his crimes in the war that had devastated that country, the indictment was not disclosed publicly until three months later. 
Again, timing was a principal factor in sparking outrage. 
The indictment was made public in June 2003, while Taylor was attending a peace conference in Ghana that was intended to settle the civil war in his own country. 
As hosts of the conference, the Ghanaians were particularly incensed at being asked to make an arrest under such circumstances, and refused to do so. 
Though it is possible to sympathize with the Ghanaians, who were placed in a very awkward position, the indictment intensified demands for Taylor’s removal. 
He fled into exile in August, effectively ending the war. 
Taylor is now being tried in The Hague, and, after two decades of horrendous conflict, Liberia is at peace and rebuilding under a democratic government. 
We cannot rule out the possibility that doing justice in Darfur will make it more difficult to achieve peace there. 
Justice and peace are independent values. Each is immensely important in its own right. 
In the long run, doing justice seems a way to contribute to peace, but one cannot be sure that things will work out that way every time. 
On the basis of the record so far, however, some skepticism seems in order over the claim that justice will obstruct peace. 
After all, the conflict in Darfur has been underway for five and a half years. 
An estimated 300,000 people have been killed by forces ultimately controlled by al-Bashir, and an estimated 2.7 million have been forcibly displaced. 
Just a week before the indictment, seven African Union and UN peacekeepers were killed and 22 injured during an ambush by well-armed militiamen. 
No peace settlement is under serious consideration. 
So what basis is there for suggesting that the indictment of al-Bashir is obstructing a settlement? 
What settlement is there to obstruct? 
It should be noted that the Darfur case was referred to the ICC by the UN Security Council. The treaty establishing the ICC empowers the Security Council to delay a prosecution if this is needed to bring about a peace settlement. 
So critics of the indictment should at least be made to bear the burden of demonstrating to the Security Council that a peace settlement is likely if they wish the Council to act. 
The world embarked on the creation of international criminal tribunals a decade and a half ago in order to end the impunity with which heads of state and leaders of guerrilla groups commit atrocious crimes. 
As the arrest of Karadzic shows, that effort is gradually succeeding. The indictment of al-Bashir, who is as entitled to the presumption of innocence as any other defendant, is another important milestone on the long road that must be traveled to reach the goal that the world set for itself. 

Is Iran Next? 
Can politics learn from history? 
Or is it subject to a fatal compulsion to repeat the same mistakes, despite the disastrous lessons of the past? 
President Bush’s new strategy for Iraq has posed anew this age-old philosophical and historical question. 
Ostensibly, President Bush has embarked on a new political and military strategy for the war-torn Iraq. 
Bush’s new course can be summarized under three headings: more American troops, more Iraqi responsibility, and more US training for more Iraqi troops. 
If you apply this new plan to Iraq alone, two things immediately catch the eye: almost all the proposals of the Baker-Hamilton report have been ignored, and the plan itself – in the face of the chaos in Iraq – is quite simplistic. 
In light of the failure of all previous “new strategies” for stabilizing Iraq, there is little to suggest that the newest “new strategy” will succeed any better, despite the additional 21,000 US soldiers. 
What is interesting and really new in the US administration’s recently announced policy is the way it reaches beyond Iraq, to deal with Iran, Syria, and the Gulf states. 
Here, unexpected and genuinely new decisions have been announced: an additional US aircraft carrier group will be moved to the Persian Gulf; Patriot anti-aircraft missiles will be stationed in the Gulf states; and the additional 21,000 soldiers far exceed what the American generals had asked for to deal with Iraq. 
So one wonders about the purpose of this military build-up? 
One might almost think that Saddam was still alive and in power, so his overthrow had to be prepared all over again. 
The surprise of Bush’s new policy is its shift of political focus from Iraq to its two immediate neighbors. 
Bush accuses Syria and Iran of interfering in Iraq, threatening its territorial integrity and endangering American troops, and, more generally, of seeking to undermine America’s allies in the region. 
If you add to this the seizure, on President Bush’s orders, of Iranian “diplomats” by US forces in the northern Iraqi town of Erbil, a completely new picture of the President’s plan comes to the fore: the “new strategy” does not follow the advice of the Baker-Hamilton report, but harks back to the disastrous strategy of the neo-cons. 
Iran is now in the superpower’s sights, and the US approach brings to mind the preparatory phase of the Iraq war – down to the last detail. 
Where does all this lead? 
Basically, there are two possibilities, one positive and one negative. 
Unfortunately, the positive outcome appears to be the less likely one. 
If the threat of force – a force that the US is quite obviously building – aims at preparing the ground for serious negotiations with Iran, there can and should be no objection. 
If, on the other hand, it represents an attempt to prepare the American public for a war against Iran, and a genuine intention to unleash such a war when the opportunity arises, the outcome would be an unmitigated disaster. 
Unfortunately, this danger is all too real. 
Since the Bush administration views Iran’s nuclear program and hegemonic aspirations as the major threat to the region, its new strategy is based on a newly formed undeclared anti-Iranian alliance with moderate Sunni Arab states and Israel. 
The nuclear program is the dynamic factor here, because it will set a timeline for action. 
But air strikes on Iran, which America may see as a military solution, would not make Iraq safer; they would achieve exactly the opposite. 
Nor would the region as a whole be stabilized; on the contrary, it would be plunged into an abyss. 
And the dream of “regime change” in Tehran would not come true, either; rather, Iran’s democratic opposition would pay a high price, and the theocratic regime would only become stronger. 
The political options for stabilizing Iraq, and the whole region, as well as for securing a long-term freeze of Iran’s nuclear program, have not yet been exhausted. 
The current state of Iran’s nuclear program does not call for immediate military action. 
Instead, the focus should be on diplomatic efforts to detach Syria from Iran and isolate the Tehran regime. 
But this presupposes American willingness to return to diplomacy and talking to all the parties involved. 
Tehran is afraid of regional and international isolation. 
Moreover, the recent municipal elections in Iran have shown that betting on diplomacy and a transformation of Iran from within is a realistic option. 
So why the current threats against Iran? 
The debacle in Iraq was foreseeable from the beginning, and America’s numerous partners and friends predicted it quite clearly in their warnings to the Bush administration. 
The mistake that the US may be about to make is equally predictable: a war that is wrong will not be made right by extending it – that is the lesson of Vietnam, Laos, and Cambodia. 
The ideologically driven strategy of regime change by means of military force led the US into the Iraq war disaster. 
Getting into Iraq and defeating Saddam was easy. 
But today, America is stuck there and knows neither how to win nor how to get out. 
A mistake is not corrected by repeating it over and over again. 
Perseverance in error does not correct the error; it merely exacerbates it. 
Following the launch of the new American policy, the old question of whether politics can learn from history will be answered again in the Middle East. 
Whatever the answer, the consequences – whether good or bad – will be far-reaching. 

Is Iraq Safe Yet? 
WASHINGTON, DC – The Obama administration’s decision to withdraw the bulk of United Sates troops from Iraq over the next 19 months has sparked fears that Iraq will once again plunge into the wide-scale and debilitating violence that it endured from 2004 to 2007. 
Those fears are, for the most part, overblown. There are good reasons to believe that the level of stability achieved in Iraq can be maintained even without a large-scale US presence. 
To understand why, it is important to know what else was going on inside Iraq in 2007, when President George W. Bush ordered the “surge” of 20,000 additional troops and General David H. Petraeus shifted US forces to a more aggressive strategy. 
For, although the surge was important, two other factors played a critical role in bringing Iraq back from the brink. 
First, Baghdad had been transformed into a Shiite-dominated city. 
Although exact statistics are hard to come by, in 2003 approximately 35% of Baghdad’s population was Sunni. 
Today, based upon the results of the recently held regional election, Baghdad is only 10% to 15% Sunni. 
This means that between one million and 1.5 million Sunnis have fled the capital. 
Most now are refugees in Jordan and Syria, and they are unlikely to be welcomed home anytime soon by the new Shiite elite running the country. 
The ethnic cleansing of many Baghdad neighborhoods in 2006 and 2007 was deplorable. 
But it made it difficult for Sunni insurgents to hide or blend in with the population, and deprived them of logistical and financial support.�It also provided a degree of safety and security for the Shiite-led government, which was largely the purpose of the well-organized campaign in the first place. 
The second critical factor in stabilizing Iraq was its regional neighbors’ recognition of, and in some cases support for, Prime Minister Nouri al-Maliki’s government. 
This was a major change from the 2003-2005 period, when Iraq’s Sunni neighbors, fearing the country’s new Shiite elite, actively opposed the US occupation. 
The multiple insurgencies that developed in Iraq in 2003 and 2004 were supported at least in part by money, materiel, and fighters from abroad.�Suicide bombers from all over the Arab world crossed into the country through the porous Syrian and Jordanian borders. 
Regional governments may not have openly supported the insurgents, but they clearly avoided cracking down on the jihadist groups operating within their borders. 
Foreign governments began to change these polities after al-Qaeda in Iraq bombed three hotels in Amman, Jordan, in November 2005, killing 60 people. 
Frightened governments in the region realized that the type of violence occurring almost daily in Iraq was starting to spill across the country’s borders. 
Soon after this incident, the highly effective Jordanian intelligence service began assisting the Iraqi government in going after the al-Qaeda network in Iraq. 
By June 2006, this effort was paying off. 
Jordanian agents were instrumental in providing the intelligence that enabled US forces to kill Abu Zarqawi, the mastermind of the Amman bombing. 
Slowly but surely, throughout 2006 and 2007, Jordanian intelligence, working with Iraqi Sunni tribes, chipped away at al-Qaeda. 
Moreover, quiet efforts were made in the Arab world to curtail the recruitment and funding of suicide bombers headed to Iraq. 
Iran’s role in Iraq also changed. 
The Iranian government had been a major backer of Shiite militia groups, including the Mahdi Army, led by radical cleric Muqtada al-Sadr.�But the Iranians also had close ties from the beginning with elements of the Shiite-led coalition government. 
In 2008, following Maliki’s military operation to clean out militia groups in Basra, Iran’s leaders seem to have decided that this two-faced strategy had run its course. 
Iran then helped broker a ceasefire that was highly favorable to Maliki, and cemented his commanding position inside the Iraqi coalition government. 
No doubt Maliki’s hard-line stance on the need for a firm timetable for the withdrawal of US troops was critical to Iran’s decision to throw its weight behind him. 
Both the transformation of Baghdad into a Shiite city and the recognition and support of Iraq’s neighbors for the country’s new political order have been instrumental in stabilizing the country.�These changes are likely to be permanent, and offer hope that the wide-scale violence that afflicted the country between 2003 and 2007 will not return after US forces depart. 

Is Israel a Normal Country? 
NEW YORK -- Israel’s decision in May to drop commandoes onto a flotilla of pro-Palestinian activists was brutal. 
The killing of nine civilians by those commandoes was a terrible consequence. 
Israel’s blockade of Gaza and occupation of Palestinian territories on the West Bank, not to mention the road blocks, destruction of homes, and other daily torments of the Palestinians, are also a form of institutionalized inhumanity. 
Nevertheless, Turkish Prime Minister Recep Tayyip Erdogan’s description of the Israeli raid on the activists’ boat as “an attack on the conscience of humanity,” which “deserves every kind of curse,” and as a “turning point in history” after which “nothing will be the same,” seems hysterical. 
Whatever one thinks of various Israeli governments (and I don’t think much of the current one), reactions to Israeli government-sponsored violence tend to be much fiercer – not just in Turkey – than to crimes committed by the leaders of other countries, with the exception perhaps of the United States. 
But then, in the minds of many critics, the two countries are often conflated. 
Israel has never done anything comparable to the late Syrian leader Haffez al-Assad’s 1982 massacre of more than 20,000 members of the Muslim Brotherhood in the city of Hama. 
Far more Muslims are still being murdered by fellow Muslims than by Israelis, or indeed by Americans. 
And if one thinks of the death toll of the civil war in the Democratic Republic of Congo (more than four million), talk of turning points in history, after the killing of nine people, sounds a little absurd. 
But none of that seems to count as much as what Israel does. 
So is it true, as many defenders of Israel claim, that the Jewish state is judged by different standards from other countries? 
I believe that it is. 
But, while anti-Semitism certainly plays a part, it may not be the main reason. 
Especially after the 1973 “Yom Kippur” War, many Europeans, I suspect, sighed with relief that Jews could be aggressors, too. 
Jewish brutality relieved the burden of wartime guilt. 
Eagerness to overcome this guilt might even have prompted some people to exaggerate Israeli aggression. 
The old anti-Semitic slogan, promoted by the Nazi newspaper Der Stürmer, that “the Jews are our misfortune,” has been given new currency by the Israeli conflict with the Palestinians. 
There are other reasons, however, for the double standard directed at Israel. 
One is what the liberal Israeli philosopher and peace activist Avishai Margalit has termed “moral racism.” 
The bloodlust of an African or Asian people is not taken as seriously that of a European – or other white – people. 
After all, some might say (and many more might think), what can one expect from savages? 
They don’t know any better. 
This is, of course, a deeply colonial sentiment, and the legacy of colonialism works against Israel in another way, too. 
As was true of Apartheid-era South Africa, Israel reminds people of the sins of Western imperialism. 
Israel is regarded in the Middle East, as well as by many people in the West, as a colony led by white people (even though many prominent Israelis have their roots in Teheran, Fez, or Baghdad). 
The Palestinians are seen as colonial subjects, and the longer Israel continues to occupy Arab territories, the more this perception will be confirmed. 
Finally, Israel is still a democracy, so it should not be judged by the same standards as dictatorships. 
We must expect more of Binyamin Netanyahu’s government than of, say, Mahmoud Ahmadinejad’s regime in Iran, not because Jews are morally superior to Persians, but because Netanyahu was freely elected and is subject to the rule of law, whereas Ahmadinejad has helped to wreck whatever was democratic about Iran. 
In a sense, to hold Israel to the highest standards is to pay it the compliment of being treated like a normal democracy. 
If some critics of Israel refuse to treat Israel as a normal country, however, the same is true of some of Israel’s staunchest defenders. 
Special pleading for Israel as a nation of victims – the natural heirs of the targets of Nazi mass murder – is another way to apply a double standard. 
The French philosopher Alain Finkielkraut was right to criticize the Erdogan for over-reacting to the raid on the “Gaza freedom flotilla.” 
But, by adding that Hitler’s Mein Kampf is a bestseller in Turkey, he implied that Erdogan’s Turks are modern-day Nazis. 
Israel as a nation of victims is, in fact, contrary to its founders’ creed. 
They wanted to create a new nation, a normal nation, a nation of good Jewish soldiers and farmers, different from the powerless Jews who fell victim to European persecution. 
It was only later, starting perhaps with the Eichmann trial in 1961, that the Holocaust became a staple of state propaganda. 
Later still, under such leaders as Menachem Begin, military enterprises were justified by references to the Nazi genocide. 
That all Jews, including Israeli Jews, should remain haunted by a horrible past is understandable. 
But it must never be used to justify aggression against others. 
Israel is an immensely powerful country – freer, richer, and better armed than all its neighbors. 
Holding its leaders to account for their actions is essential, not only to protect Palestinians from brutality, but to preserve the freedom of Israelis. 
Allowing the past to cloud our critical faculties undermines Israeli democracy, and will have further dangerous consequences in the future. 

Is it Okay to Cheat in Football? 
MELBOURNE – Shortly before half-time in the World Cup elimination match between England and Germany on June 27, the English midfielder Frank Lampard had a shot at goal that struck the crossbar and bounced down onto the ground, clearly over the goal line. 
The goalkeeper, Manuel Neuer, grabbed the ball and put it back into play. 
Neither the referee nor the linesman, both of whom were still coming down the field – and thus were poorly positioned to judge – signaled a goal, and play continued. 
After the match, Neuer gave this account of his actions: “I tried not to react to the referee and just concentrate on what was happening. 
I realized it was over the line and I think the way I carried on so quickly fooled the referee into thinking it was not over.” 
To put it bluntly: Neuer cheated, and then boasted about it. 
By any normal ethical standards, what Neuer did was wrong. 
But does the fact that Neuer was playing football mean that the only ethical rule is: “Win at all costs”? 
In soccer, that does seem to be the prevailing ethic. 
The most famous of these incidents was Diego Maradona’s goal in Argentina’s 1986 World Cup match against England, which he later described as having been scored “a little with the head of Maradona and a little with the hand of God.” 
Replays left no doubt that it was the hand of Maradona that scored the goal. 
Twenty years later, he admitted in a BBC interview that he had intentionally acted as if it were a goal, in order to deceive the referee. 
Something similar happened last November, in a game between France and Ireland that decided which of the two nations went to the World Cup. 
The French striker Thierry Henry used his hand to control the ball and pass to a teammate, who scored the decisive goal. 
Asked about the incident after the match, Henry said: “I will be honest, it was a handball. 
But I’m not the ref. 
I played it, the ref allowed it. 
That’s a question you should ask him.” 
But is it? 
Why should the fact that you can get away with cheating mean that you are not culpable? 
Players should not be exempt from ethical criticism for what they do on the field, any more than they are exempt from ethical criticism for cheating off the field – for example, by taking performance-enhancing drugs. 
Sports today are highly competitive, with huge amounts of money at stake, but that does not mean it is impossible to be honest. 
In cricket, if a batsman hits the ball and one of the fielders catches it, the batsman is out. 
Sometimes when the ball is caught the umpire cannot be sure if the ball has touched the edge of the bat. 
The batsman usually knows and traditionally should “walk” – leave the ground – if he knows that he is out. 
Some still do. 
The Australian batsman Adam Gilchrist “walked” in the 2003 World Cup semi-final against Sri Lanka, although the umpire had already declared him not out. 
His decision surprised some of his teammates but won applause from many cricket fans. 
An Internet search brought me just one clear-cut case of a footballer doing something equivalent to a batsman walking. 
In 1996, Liverpool striker Robbie Fowler was awarded a penalty for being fouled by the Arsenal goalkeeper. 
He told the referee that he had not been fouled, but the referee insisted that he take the penalty kick. 
Fowler did so, but in a manner that enabled the goalkeeper to save it. 
Why are there so few examples of such behavior from professional footballers? 
Perhaps a culture of excessive partisanship has trumped ethical values. 
Fans don’t seem to mind if members of their own team cheat successfully; they only object when the other side cheats. 
That is not an ethical attitude. 
(Though, to their credit, many French football followers, from President Nicolas Sarkozy down, expressed their sympathy for Ireland after Henry’s handball.) 
Yes, we can deal with the problem to some extent by using modern technology or video replays to review controversial refereeing decisions. 
But, while that will reduce the opportunity for cheating, it won’t eliminate it, and it isn’t really the point. 
We should not make excuses for intentional cheating in sports. 
In one important way, it is much worse than cheating in one’s private life. 
When what you do will be seen by millions, revisited on endless video replays, and dissected on television sports programs, it is especially important to do what is right. 
How would football fans have reacted if Neuer had stopped play and told the referee that the ball was a goal? 
Given the rarity of such behavior in football, the initial reaction would no doubt have been surprise. 
Some German fans might have been disappointed. 
But the world as a whole – and every fair-minded German fan too – would have had to admit that he had done the right thing. 
Neuer missed a rare opportunity to do something noble in front of millions of people. 
He could have set a positive ethical example to people watching all over the world, including the many millions who are young and impressionable. 
Who knows what difference that example might have made to the lives of many of those watching? 
Neuer could have been a hero, standing up for what is right. 
Instead, he is just another footballer who is very skillful at cheating. 

Is Japanese Militarism Back? 
Japan's barbaric conduct during WWII--and the Allies' nuclear retaliation at Hiroshima and Nagasaki--laid the foundation for the US-imposed pacifism that has reigned since the war's end. 
The Self-Defense Forces (SDF) that emerged during the 1950's were designed (in theory) only to defend Japan from attack. 
Offensive missions were forbidden by the Constitution. 
But Japan now has in Prime Minister Junichiro Koizumi a leader who wants the country to be militarily proactive. 
Koizumi holds a majority in both houses of the Diet, Japan's parliament, and despite the continuing popularity of pacifism, he intends the SDF to become capable of ``preventive self defense''--a form of offensive action in all but name. 
That proposal is uniting Japan's opposition parties against him. 
Indeed, the dispatch of Japanese peacekeepers under UN command to Cambodia in 1992 (the first time the 240,000-strong SDF had ventured on a mission abroad) was bitterly contested. 
While Japanese warships' logistical support during the recent Afghan conflict was a no-risk operation, that may not be true of the SDF's latest venture--participation in reconstruction in ``pacified zones'' in Iraq. 
Japan's growing willingness to flex its muscles overseas is reflected in the changing face of the SDF. 
The Koizumi government plans to add two new 13,500-ton warships, both capable of carrying helicopters and of being converted to take jump jets to strike enemy territory. 
Similarly, a 6,000-man commando unit will be recruited not only to confront outbreaks of domestic terrorism, but also to provide the air-landed component for the new ship-based helicopter squadrons. 
Today, Japanese spy satellites closely observe North Korea's nuclear sites. 
If evidence emerges that Korea has the means to deliver nuclear weapons, then it seems probable that Japan will follow suit and develop its own nuclear capacity, riling South Korea and China. 
All of this suggests a tectonic shift in Japan's military thinking. 
But Koizumi is behaving in accordance with a deep-rooted tradition in Japan, one that long precedes the attack on the US naval base at Pearl Harbor in December 1941. 
Indeed, next year is the centenary of the Russo-Japanese War. 
To understand what is happening militarily in Japan today, there is no better approach than to examine the soul of the Japanese state one hundred years ago. 
By 1904, Japan had already fought a one-sided, eight-month campaign against China. 
Under the 1895 peace settlement of Shimonoseki, the full independence of Korea was guaranteed and Japan gained Formosa, the Pescadores, and Manchuria's strategically important Liaoting Peninsula, with Port Arthur (Lushun) lying just to the south. 
Russia, France, and Germany objected to this. 
Russia coveted Port Arthur, and the powers jointly brought pressure on Japan to withdraw from the Treaty of Shimonoseki. 
As a sweetener, Japan was offered £5 million. 
Outraged at being forced to back down, the Japanese invested in shipyards to build a modern fleet. 
Japan was determined to assert its mastery in the region because Korea and Manchuria were essential for producing food for a population of over 46 million engaged principally in manufacturing. 
Russia also coveted Korea and Manchuria. 
The Japanese at first tried to appease the Russians, declaring Manchuria beyond its sphere of interest in exchange for a similar guarantee from Russia about Korea. 
But Russian noblemen with timber interests in Korea persuaded the Tsar to resist. 
What, they asked, could Russia possibly fear from ``yellow monkeys''? 
Besides, a short, victorious war might help stem the revolutionary tide threatening the Romanov dynasty. 
With a diplomatic resolution ruled out, Japan launched a preemptive strike that annihilated the Russian Fleet in Port Arthur and Chemulpo, Korea. 
For the Russians, the situation military went from bad to worse. 
But the peace treaty agreed at Portsmouth, New Hampshire in 1905 (brokered by President Theodore Roosevelt) hardly reflected this. 
On the contrary, the New York Times called the outcome ``astonishing... A nation hopelessly beaten in every battle of the war, one army captured and the other overwhelmingly routed, with a navy swept from the seas that dictated her own terms to the victor.'' 
Predictably, this fueled more outrage in Japan. 
Indeed, from this point began the fatal rivalry between Japan and the US that culminated in Pearl Harbor. 
The Japanese aircraft carrier Akagi , which led the attack on Pearl Harbor, flew the battle flag flown by the Mikasa , Admiral Togo's ship when he attacked the Russian fleet at Port Arthur. 
Japan became militaristic previously because civilian politicians lost control of Japan's generals, who were ignored by their own colonels and majors. 
The most dangerous course for Japan now would be to continue its dribbled, strategically aimless increase in defense spending, while treating the armed forces as pariahs, leaving them without a coherent command and with no leadership from the government. 
The doctrine of preventive defense has deep roots in Japan, and it is a dangerous doctrine if there is a political vacuum for the country's militarists to fill. 
Such a vacuum can be created only by government leaders who are too cowardly to devise and enforce their own defense policy. 
The Koizumi government ought to take note. 

Is Keynesian Economics Dead? 
Since capitalism's beginnings, the market economy has been subject to fluctuations, to booms and busts. 
Capitalist economies are not self-adjusting: market forces might eventually restore an economy of full employment, as Keynes said, but in the long run we are all dead. 
Keynes proposed clear prescriptions for hard economic times: expansionary monetary and fiscal policy. 
He thought fiscal policy particularly important in situations where monetary policy was likely to be ineffective. 
In advanced economies, Keynesian economics is the bread and butter of economic forecasting and policy making. 
Expansions are longer and downturns shallower and shorter, because Keynesian prescriptions work. 
Of course, theory and practice have been refined. 
The theory of asymmetric information provides much of the micro-foundations for modern macroeconomics. 
But some of the simplest and most important precepts, formulated well before these micro-foundations were well established--such as the fact that temporary income tax cuts are unlikely to be effective, while temporary investment tax credits can be extremely powerful--are as valid today as ever. 
We learn from economic policy failures as well as from successes. 
When the IMF forced large expenditure cuts in East Asia, output in those countries fell--just as Keynesian theory predicted. 
In early 1998, when I was chief economist of the World Bank, I debated the US Treasury and the IMF concerning Russia. 
They said that any stimulation of the Russian economy would incite inflation. 
This was a remarkable admission: through their transition policies, they had managed, in just a few years, to decrease the productive capacity of the world's number two superpower by more than 40%, a devastating outcome greater than that of any war! 
The loss went well beyond the cutback in military expenditures, overwhelming the civilian industrial and agricultural sectors. 
In August 1998, with the ruble's devaluation, we tested the alternative, Keynsian hypotheses: production soared, and relatively quickly, showing that policies emphasizing excessive austerity had caused unnecessary idleness of human and physical resources, and unnecessary suffering. 
Remarkably, the IMF was slow to learn the lesson. 
While it belatedly recognized its fiscal policy mistake in East Asia, it repeated it in Argentina, forcing expenditure cuts that deepened recession and boosted unemployment--to the point where things finally fell apart. 
Even now, the IMF has not acknowledged the lesson: it still insists on further cutbacks as a condition for assistance. 
The IMF continues to insist on an alternative economic "theory" (though using that term may suggest a higher level of analysis than is merited)--one which Keynes fought against over sixty years ago. 
In a nutshell, Keynes struggled against the notion that if only countries would cut their deficits, "confidence" would be restored, investment would return, and the economy would again attain full employment. 
Under "IMF" theory, investors, seeing government resolve to eliminate deficits, flock to the country, economic performance recovers, and the policy is vindicated. The government's budget targets are more than met. 
I know of no country where this scenario has played out successfully, for there are two key problems with this "theory." 
Confidence is important, but it is only one factor. 
For example, even if investors in telecoms become utterly confident in the US economy, they are not going to invest in more fiber optics, given today's huge excess capacity. 
Similarly, Argentina's export industries were unlikely to attract investors, regardless of the fiscal deficit, given the overvalued exchange rate, low export prices, and the many foreign markets that remain closed to Argentine goods. 
Even if "confidence" were the single most important factor, deficits are not the only, or even the most important factor determining investor confidence. 
A country in recession or depression does not inspire confidence. 
Contractionary policies only exacerbate recession. 
Investors in such a situation take a wait-and-see approach. 
As they wait, they will not like what they see. 
After all, the first effect of the expenditure cutbacks is a further decline in income, and with it profitability of investment. 
With the decline in income, tax revenues decline, and, if the country has any kind of social safety net, expenditures increase. 
The hoped-for improvement in the fiscal position does not materialize. 
At this point, the IMF castigates the country for failing to fulfill its commitments. 
But it is the IMF that should be castigated--for pushing an economic theory that was rejected long ago. 
Between 1999 and 2001, Argentina's central government had done an impressive job of cutting back its expenditures, net of interest, by 10%. 
What would have happened if Argentina's provincial governors had also miraculously been converted to the IMF's niggardly "logic," as demanded? 
I believe the downturn would have come earlier and more precipitously. 
Today's unemployment rates of 20% or more (with another 10-15% of hidden joblessness) would have been seen even before last December. 
Riots and political protests would have broken out earlier, too. 
Economics is a difficult subject, because we cannot conduct controlled experiments. 
There are not two or three Argentina's, one following the experiment that I described above, and another adopting the policies that I prefer. 
But we do have a wealth of experience from which to draw inferences. 
This wealth of experience all points in one direction: Keynes's teachings are still very much alive, and Argentina today would be in far better shape if his lessons had been taken to heart. 

Is Liquidity Enough? 
Every week more liquidity is injected into the global banking system by the United States Federal Reserve and the European Central Bank. 
The average interest rate paid for overnight reserves in the US has been well below the 5.25% per year that the Fed still publicly says is its target. 
But the market for overnight reserves now appears to be divided into three segments. 
Banks known to be healthy can borrow at much less than 5.25%. 
But banks facing possible liquidity problems – which the Fed wants to be able to borrow at 5.25% – are borrowing from the Fed itself at 5.75%, as are a few big banks that want more liquidity but don’t believe they could get it without disrupting the market. 
Such a difference in the prices charged to “regulated banks” in financial markets is a sign of a potential breakdown. 
To date, the premiums charged are small: for an overnight loan of $100 million, even a one-percentage-point spread in the interest rate is only $3000. 
That reflects the small probability that the market is assigning to the occurrence of a full-blown financial crisis with bankruptcies and bank failures. 
In normal times, however, there is no such premium at all. 
The fact that there is even a small liquidity crunch for banks implies larger liquidity crunches for less intensively regulated financial institutions, and even greater liquidity crunches for manufacturing and real-estate companies. 
It is hard to imagine that manufacturers are not now postponing orders of capitals goods, and that new home sales in America are not dropping right now. 
How does the Fed deal with such a situation? 
Gingerly. 
A decade ago, Alan Greenspan likened his problems of monetary management to driving a new car, having it suddenly stop, opening the hood, and not understanding a thing about what he saw. 
The changes in finance had been that great. 
The Fed’s actions have involved what former Fed governor Larry Meyer calls “liquidity tools,” as opposed to interest rate-based monetary policy. 
The Fed hopes that it can handle the current situation without being forced to rescue market liquidity by cutting interest rates and thus giving what it fears would be an unhealthy boost to spending. 
The Fed still hopes that liquidity and confidence can be restored quickly, and that the summer of 2007 will serve future economists as an example of how de-linked financial markets can be from the flows of spending and production in the real economy. 
I think that the Fed is wrong: the fallout from the current liquidity panic means that a year from now we are likely to wish that the Fed had given a boost to spending this month. 
The reason is that healthy spending and production no longer depend only on the soundness of the banking system and public confidence in its stability. 
Nowadays, the banking system is much larger than the set of institutions formally called “banks” that are intensively regulated by central banks and treasuries. 
A bank, at bottom, is something that (a) takes deposits, (b) provides loans, (c) pretends to its depositors that their money (its liabilities) are more liquid than its assets, (d) collects net interest as a result, and (e) gets away with it almost all the time. 
The deposits can be individuals’ paychecks and the loans can be to small businesses. 
Or the deposits can be consumer paper issued by KKR Atlantic Financing, and the loans can be CDO sub-prime mortgage tranches that KKR Atlantic holds in its portfolio. 
Or the deposits can be investments in D.E. Shaw’s funds and the loans can be the complex derivatives that make up D.E. Shaw’s portfolio. 
In all these cases, the liability holders – i.e., the depositors – have been promised liquidity, yet that promise cannot be kept if it is ever doubted. 
It is being doubted now. 
Central banks should not focus only on keeping markets liquid. 
In the future, even liquid markets will be willing to intermediate fewer transactions than they were two months ago. 
So central banks must also focus on how the fall in the volume of money flowing through financial markets will affect spending, and on how much they should cut interest rates and expand money supply to offset these effects. 

Is Low-Wage China Disappearing? 
BEIJING – Reports about labor shortages, wage disputes, and wage increases for migrant workers in China have abounded of late. 
They naturally raised concerns, or expectations, that China’s labor-cost advantages may be disappearing. 
It is my hope that China’s comparative advantage as a low-wage producer does disappear – the sooner the better. 
But why should I, a Chinese economist, wish to see China’s competitiveness reduced through rising labor costs? 
After all, when a country still lacks real advantages, such as higher education, efficient markets and enterprises, and a capacity for innovation, it needs something like low wages to maintain growth. 
While cheap labor has been a key factor in generating high growth over the past three decades, it has also contributed to profound income disparities, especially in recent years. 
And persistent, widening inequality might cause social crises that could interrupt growth and damage competitiveness. 
China must avoid such a scenario, and if wages could increase in some meaningful way, it would indicate that the economy might finally reach the next stage of development, during which income disparities would be narrowed. 
Unfortunately, China has not yet reached that point – and will not any time soon. 
Agriculture remains the main source of income for more than 30% of China’s labor force, compared to less than 2% in the United States or 6% in South Korea. 
Another 30% of the labor force comprises migrant workers, who have doubled their incomes by moving from agriculture to the industrial and service sectors. 
Although migrant workers earn only about $1,500 per year on average, the income gap between them and agricultural laborers provides a powerful incentive for the latter to try to find better-paid non-farm jobs. 
Naturally, this competition in the labor market suppresses non-farm wages: whereas labor productivity in non-farm sectors increased by 10-12% annually in the past 15 years, migrant workers’ real wages have increased by only 4-6% per year. 
As a result, income disparity between low-end labor, on the one hand, and professionals and investors, on the other, has also increased. 
All this means that the process of industrialization in China still has a long way to go. 
To reduce farm labor to 10% of the labor force (the point at which, judging by historical experience elsewhere, China may achieve worker-farmer wage equilibrium), the economy needs to create about 150 million new non-farm jobs. 
Even if the economy continues to grow at 8% per year, China might need 20-30 years to reallocate agricultural laborers and reach “full employment.” 
But this requires generating eight million new jobs every year, including five million for farmers leaving the countryside. 
During this long process of industrialization, wages will increase gradually, but it is very unlikely that they will grow at the same rate as labor productivity. 
This is bad news for reducing income inequality, as capital gains and high-end wages may grow much faster. 
But it should be the good news for competitiveness, because Chinese wages will remain relatively low in terms of “wage efficiency.” 
Indeed, the wage increases of recent years have not changed the basic cost structure of Chinese companies. 
An analysis by Goldman Sachs shows that, despite real wage gains, the share of labor costs in total manufacturing costs is lower than it was in 2001 – a trend that continued in the first half of 2010. 
To prevent serious social tension, China’s government (at various levels) has begun to intervene by enforcing higher minimum wages, in addition to investing in a social safety net for the poor. 
In some provinces, minimum wages have increased by more than 30%. 
But the minimum wage is normally much lower than the effective wage, and thus has not changed the fundamental relationship between wages and labor productivity. 
Nevertheless, artificial wage increases enforced by government policies could slow down the process of labor reallocation and make some “surplus labor” permanent. 
Income disparities will not be fundamentally altered until the market equilibrium wage inches upwards sufficiently to create labor demand at decent wage levels. 
So will companies, both multinationals and Chinese, leave for Vietnam, Bangladesh, or Mozambique? 
Perhaps. 
But that will happen only if the other countries’ wages are relatively more efficient (i.e., productivity there is ultimately higher than in China), and not just because Chinese nominal wages go up. 
For now, however, this does not seem to be the case in general. 
Evidence that China’s wage efficiency remains high relative to other developing countries comes in the form of continued growth in inflows of foreign direct investment over the past 12 months, despite wage increases. 
In July, for example, FDI increased by 29.2% year on year, much higher than the global average. 
There may be many factors behind China’s strong FDI performance, but it does mean that the nominal wage increase itself may not lower the capital gains that concern investors most. 
In any case, the Chinese wage story is much more complicated than it might seem. 
Nominal wages may increase, while real wages stagnate, owing to higher inflation. 
Even if real wages increase in some coastal cities, “surplus labor” could keep the national average flat. 
And even a real wage increase on the national level will not undermine competitiveness if labor productivity grows still faster. 
So the conclusion seems to be that wage growth will not threaten China’s competitiveness in the next 10 or even 20 years. 
As China will not complete the process of reallocating workers from agriculture to more modern economic sectors any time soon, it should remain a cost-competitive economy for the foreseeable future. 

Is Mexico Disintegrating? 
MEXICO CITY – Shortly before America’s elections last November, then vice-presidential candidate Joseph Biden was widely criticized for predicting that an Obama administration would almost certainly be tested by what he called a “generated” international crisis, in much the way that the Soviet Union “tested” John F. Kennedy shortly after he assumed office. 
Biden did not point to a specific region of the world, but mentioned the Middle East, the Indian sub-continent, and Russia as the likeliest sources of trouble for the new president. 
Impolitic or not, Biden’s anxieties seem to have informed several of the administration’s early foreign policy decisions. 
These include Biden’s own extension of an olive branch to Russia at the recent Munich Security Conference, and Barack Obama’s appointment of Richard Holbrooke as special envoy for Pakistan and Afghanistan and of George Mitchell to a similar post for Israel-Palestine. 
But, as pressing as the Middle East, south Asia, and Russia (as well as Iran and North Korea) are, another crisis far closer to home could create as much peril as a nuclear-armed Iran, an aggressively resurgent Russia, or even an Islamist-dominated Pakistan. 
That crisis is located in Mexico, which is in freefall, its state institutions under threat as they have not been since at least the Cristero Uprising of the late 1920’s and possibly since the Mexican Revolution of 1910. 
While the Obama administration is obviously aware of what is happening south of the Rio Grande, the threat simply does not command the attention that its gravity requires. 
The crisis consists in nothing less than an effort by the major drug cartels to tame and suborn the Mexican state, and not just in the strip along the United States border, though the epicenter of the crisis is there. 
Obviously, the cartels’ leaders do not have designs on Mexico’s presidential palace. 
But, through a policy of terror extending from Oaxaca in the south, through Acapulco on the Pacific coast, and up to the great border cities of Tijuana and Juarez (Mexico’s sixth and seventh most populous cities, respectively), they have made it abundantly clear that they are trying to achieve impunity. 
The only recent parallel in Latin America was a similar effort fifteen years ago by the Colombian drug cartels. 
That disguised coup failed – barely – and there is no guarantee that the result will be similar this time around in Mexico. 
Journalists with long experience of war zones report being more worried about their safety in Mexico border than when they were in Bosnia, Afghanistan, or Iraq, though much of the violence is internecine. 
Of the thousands who have been killed, often after being horribly tortured, many, if not most, have been members of the drug cartels and their families. 
But it is the campaign of targeted assassination against any Mexican official who seems to pose a serious threat to the cartels’ operations that makes the crisis so dire. 
First, in May 2007, the cartels killed Jose Nemesio Lugo Felix, the general coordinator of information at the National Center for Planning and Analysis to Combat Organized Crime. 
Soon after, a hit man murdered Edgar Milan Gomez, Mexico’s highest-ranking Federal police official. 
In November, 2008, a plane carrying Juan Camilo Mourino, Mexico’s national security advisor, crashed under mysterious circumstances. 
And very recently, retired General Mauro Enrique Tello Quinones, one of the most decorated officers in the Mexican army, was abducted, tortured, and killed less than a week after assuming a new position as anti-drug chief in the resort city of Cancun. 
For all the lip service paid to relations with Mexico (and, indeed, with Latin America more generally) from Franklin D. Roosevelt to Obama, the truth is that developments in Mexico have always gotten short shrift from US presidents. 
Illegal immigration is a major issue, to be sure, as is the drug trade. 
But the US government has always regarded them as domestic American issues rather than as key foreign-policy concerns. 
It is emblematic that while Obama has received Mexican President Felipe Calderón, the White House only recently announced that one of his first foreign trips would be to Mexico. 
And incoming Secretary of State Hillary Clinton was asked almost nothing about Mexico at her confirmation hearing, and she emphasized relations with Mexico neither in her own statement nor in those she has made since assuming her post. 
Indeed, the conventional wisdom in the US is that Mexico policy regarding illegal immigration and drugs will be the province of the new Homeland Security secretary, Janet Napolitano (herself a former border state governor). 
Meanwhile, the Treasury and Commerce departments will be handle trade policy concerning the North American Free Trade Agreement. 
This is the way Mexico policy has been run for decades. 
And, offensive as this has been to Mexican sensibilities – and harmful to finding long-term solutions to America’s immigration dilemma –these complacent arrangements have never presented so clear and present danger as they do today. 

Is Middle East War Inevitable? 
BERLIN – Fuad Siniora, Lebanon’s former prime minister, is a thoughtful man with deep experience in Middle Eastern politics. 
So when he speaks of “trains with no drivers that seem to be on a collision course,” as he recently did at a private meeting in Berlin, interested parties should probably prepare for unwanted developments. 
Of course, no one in the region is calling for war. 
But a pre-war mood is growing. 
Four factors, none of them new but each destabilizing on its own, are compounding one another: lack of hope, dangerous governmental policies, a regional power vacuum, and the absence of active external mediation. 
It may be reassuring that most Palestinians and Israelis still favor a two-state solution. 
It is less reassuring that most Israelis and a large majority of Palestinians have lost hope that such a solution will ever materialize. 
Add to this that by September, the partial settlement freeze, which Israel’s government has accepted, will expire, and that the period set by the Arab League for the so-called proximity talks between the Palestinians and Israelis, which have not seriously begun, will also be over. 
Serious direct negotiations are unlikely to begin without a freeze on settlement building, which Israel’s Prime Minister Netanyahu is unlikely to announce or implement, given resistance within his coalition government. 
Syria, which until the end of 2008 was engaged in its own Turkish-mediated proximity talks with Israel, does not expect a resumption of talks with Israel anytime soon. 
This may be one reason why Syrian President Bashar al-Assad mentions war as an option, as he recently did in Madrid. 
Moreover, Israelis and people close to Hezbollah in Lebanon are talking about “another round,” while many pundits in the Middle East believe that a limited war could unblock a stagnant political situation. 
Their point of reference is the 1973 war, which helped to bring about peace between Egypt and Israel. 
But the wars that followed, and the latest wars in the region – the Lebanon war of 2006 and the Gaza war of December 2008/January 2009 – do not support this reckless theory. 
Iran, whose influence in the Levant is not so much the cause of unresolved problems in the Middle East as the result of them, continues to defy the imposition of new sanctions by the United Nations Security Council. 
Iranian rulers have as little trust in the West as the West has in them, and they continue to increase international suspicion by their words and actions. 
Repeated calls by Iranian President Mahmoud Ahmadinejad about Israel’s eventual disappearance play into the hands of those in Israel who argue that Iran’s nuclear program must be ended militarily. 
Some of the Middle East’s most important players are increasing the risks of confrontation because they have either lost a proper feeling for their regional and international environment, or seek to increase their own political power through provocation and brinkmanship. 
Netanyahu’s short-sighted reluctance to give up settlements and occupied territory threatens Israel’s long-term interest to reach a fair settlement with the Palestinians. 
In its deadly assault on the Gaza flotilla in May, Netanyahu’s government demonstrated a kind of political autism in its inability to realize that even Israel’s best friends no longer wish to accept the humanitarian consequences of the Gaza blockade. 
In the Arab world, there is currently no dominant power able to project stability beyond its own national borders. 
It will take time before Iraq will play a regional role again. 
The Saudi reform agenda mainly concerns domestic issues. 
Egypt’s political stagnation has reduced its regional influence. 
Qatar over-estimates its own strength. 
The only regional power in the Middle East today is Iran, but it is not a stabilizing force. 
The Arab states are aware of this. 
Much as they dislike it, they are also fearful of a war between Israel or the United States and Iran, knowing that they would have little influence over events. 
Indeed, intra-regional dynamics in the Middle East today are driven by three states, none of which is Arab: Israel, Iran, and, increasingly, Turkey. 
In recent years, Turkey tried to mediate between Israel and Syria, Israel and Hamas, opposing factions in Lebanon, and lately between Iran and the five permanent members of the UN Security Council plus Germany. 
Turkey should continue to play this role. 
But the Turkish government has increasingly allowed itself to be dragged into Middle East conflicts, rather than functioning as an honest broker. 
The Obama administration has had a strong start with respect to the Middle East. 
But a year and a half after his inauguration, Obama’s “outstretched hand” to Iran has turned into a fist, and his attempts to encourage Israeli-Palestinian negotiations seem stuck. 
Domestic issues are likely to preoccupy Obama and his team at least up until the mid-term elections this November, thus precluding active diplomacy during the critical months ahead. 
And the European Union? 
There has not been much active crisis-prevention diplomacy from Brussels or from Europe’s national capitals. 
None of the leading EU states’ foreign ministers seems even to have made an attempt to mediate between Europe’s two closest Mediterranean partners, Israel and Turkey. 
Twenty years ago, in the weeks that preceded Iraq’s invasion of Kuwait, many observers saw signs of a looming crisis. 
But Arab and Western players somehow managed to convince themselves that things would not get out of hand. 
That crisis, and others before and since, showed that tensions in the Middle East rarely dissolve with the passage of time. 
Sometimes they are resolved through active diplomatic intervention by regional or international players. 
And sometimes they are released violently. 

Is Military Power Becoming Obsolete? 
CAMBRIDGE – Will military power become less important in the coming decades? 
It is true that the number of large-scale inter-state wars continues to decline, and fighting is unlikely among advanced democracies and on many issues. 
But, as Barack Obama said in accepting the Nobel Peace Prize in 2009, “we must begin by acknowledging the hard truth that we will not eradicate violent conflict in our lifetimes. 
There will be times when nations – acting individually or in concert – will find the use of force not only necessary but morally justified.” 
When people speak of military power, they tend to think in terms of the resources that underlie the hard-power behavior of fighting and threatening to fight – soldiers, tanks, planes, ships, and so forth. 
In the end, if push comes to shove, such military resources matter. 
Napoleon famously said that “God is on the side of the big battalions,” and Mao Zedong argued that power comes from the barrel of a gun. 
In today’s world, however, there is much more to military resources than guns and battalions, and more to hard-power behavior than fighting or threatening to fight. 
Military power is also used to provide protection for allies and assistance to friends. 
Such non-coercive use of military resources can be an important source of the soft-power behavior of framing agendas, persuading other governments, and attracting support in world politics. 
Even when thinking only of fighting and threats, many analysts focus solely on inter-state war, and concentrate on soldiers in uniforms, organized and equipped by the state in formal military units. 
But in the twenty-first century, most “wars” occur within, rather than between states, and many combatants do not wear uniforms. 
Of 226 significant armed conflicts between 1945 and 2002, less than half in the 1950’s were fought between states and armed groups. 
By the 1990’s, such conflicts were the dominant form. 
Of course, civil war and irregular combatants are not new, as even the traditional law of war recognizes. 
What is new is the increase in irregular combat, and the technological changes that put ever-increasing destructive power in the hands of small groups that would have been priced out of the market for massive destruction in earlier eras. 
And now technology has brought a new dimension to warfare: the prospect of cyber attacks, by which an enemy – state or non-state – can create enormous physical destruction (or threaten to do so) without an army that physically crosses another state’s border. 
War and force may be down, but they are not out. 
Instead, the use of force is taking new forms. 
Military theorists today write about “fourth generation warfare” that sometimes has “no definable battlefields or fronts”; indeed, the distinction between civilian and military may disappear. 
The first generation of modern warfare reflected the tactics of line and column following the French Revolution. 
The second generation relied on massed firepower and culminated in World War I; its slogan was that artillery conquers and infantry occupies. 
The third generation arose from tactics developed by the Germans to break the stalemate of trench warfare in 1918, which Germany perfected in the Blitzkrieg tactics that allowed it to defeat larger French and British tank forces in the conquest of France in 1940. 
Both ideas and technology drove these changes. 
The same is true of today’s fourth generation of modern warfare, which focuses on the enemy’s society and political will to fight. 
Armed groups view conflict as a continuum of political and violent irregular operations over a long period that will provide control over local populations. 
They benefit from the fact that scores of weak states lack the legitimacy or capacity to control their own territory effectively. 
The result is what General Sir Rupert Smith, the former British commander in Northern Ireland and the Balkans, calls “war among the people.” 
In such hybrid wars, conventional and irregular forces, combatants and civilians, and physical destruction and information warfare become thoroughly intertwined. 
Even if the prospect or threat of the use of force among states has become less probable, it will retain a high impact, and it is just such situations that lead rational actors to purchase expensive insurance. 
The United States is likely to be the major issuer of such insurance policies. 
This leads to a larger point about the role of military force in world politics. 
Military power remains important because it structures world politics. 
It is true that in many relationships and issues, military force is increasingly difficult or costly for states to use. 
But the fact that military power is not always sufficient in particular situations does not mean that it has lost the ability to structure expectations and shape political calculations. 
Markets and economic power rest upon political frameworks: in chaotic conditions of great political uncertainty, markets fail. 
Political frameworks, in turn, rest upon norms and institutions, but also upon the management of coercive power. 
A well-ordered modern state is defined by a monopoly on the legitimate use of force, which allows domestic markets to operate. 
Internationally, where order is more tenuous, residual concerns about the coercive use of force, even if a low probability, can have important effects. 
Military force, along with norms and institutions, helps to provide a minimal degree of order. 
Metaphorically, military power provides a degree of security that is to political and economic order as oxygen is to breathing: little noticed until it begins to become scarce. 
Once that occurs, its absence dominates all else. 
In this sense, the role of military power in structuring world politics is likely to persist well into the twenty-first century. 
Military power will not have the utility for states that it had in the nineteenth century, but it will remain a crucial component of power in world politics. 


Is Neo-Conservatism Dead? 
Neo-conservatism has served as a badge of unity for those in the Bush administration advocating an aggressive foreign policy, massive military spending, disdain for international law and institutions, an assault on the welfare state, and a return to “traditional values.” 
So, with the Bush era winding down in a tailspin of plummeting popularity and high-level resignations, has the neo-conservative movement, too, run its course? 
Neo-conservatism began with different premises from traditional forms of conservatism. 
Because reforms can become part of “our” heritage, traditional conservatives can adapt to change, even taking credit for negotiating the connection between past and future. 
By contrast, neo-conservatism’s adherents are unconcerned with what Edmund Burke called the ties that bind “the dead, the living, and the yet unborn.” 
On the contrary, they are revolutionaries or, rather, “counter-revolutionaries” intent upon remaking America and the world. 
Indeed, in a certain sense, Irving Kristol, Norman Podhoretz, and other neo-conservative elder statesmen remain defined by the communist dogmatism they sought to oppose when they were youthful Trotskyists. 
The virtue of their “party” or clique needs no complex justification: it stands for “American values,” while critics merely provide an “objective apology” for the “enemies of freedom.” 
Until the 1960’s, future neo-conservatives shared the Democratic Party’s vehement anti-communism, acceptance of the Civil Rights Movement, and support for President Franklin Roosevelt’s New Deal welfare-state policies. 
Tellingly, the influential neo-conservative Richard Perle said in 2003 that he was still a registered Democrat, out of “nostalgia” for Henry “Scoop” Jackson, the powerful former Senator who embodied these commitments. 
For future neo-conservatives, however, the 1960’s produced a “trauma” that transcended the humiliation of a lost war and the disgrace of Richard Nixon. 
What in the 1950’s had seemingly been a culture of contentment was transformed into what Podhoretz called an “adversary culture.” 
New social movements, seeking to de-mythologize history, rejecting platitudes justifying the policies of elite interests, and demanding greater institutional accountability, seemingly threatened the entire “establishment.” 
Nevertheless, it was not until Ronald Reagan forged an alliance between conservatism’s two traditionally warring factions that the political foundations of neo-conservatism’s triumph were secured. 
One faction primarily comprised elites opposed to state intervention in the market. 
Its members cared little about the verities associated with “community” or “family values.” 
Their best intellectual arguments derived from Milton Friedman, Friedrich von Hayek, and Robert Nozick, who sought to challenge collectivist theories of society in general and “socialism” in particular. 
The other faction was rooted in nineteenth-century “know nothing” populism, with its flights of nationalist hysteria, defense of traditional prejudices, and resentment of intellectual and economic elites. 
However, its members do not necessarily oppose social legislation that benefits working people – especially when white workers are privileged – and some even retain a positive image of the New Deal. 
Neo-conservatism thus cannot be reduced to advocacy of the free market or right-wing populism, since its ideological specificity consists in the fusion of these contradictory outlooks. 
The question was how to package elites’ interest in free-market capitalism with the provincial temperament of a parochial constituency. 
What sold best was an image of oppressive “big government,” reflected in a tax system that was increasingly burdensome to ordinary people, combined with anti-communist nationalism and barely veiled racism. 
After all, everyone understood who the “welfare cheat” was, and who Kristol had in mind when he famously quipped that a neo-conservative is “a liberal who has been mugged by reality.” 
But, with the demise of communism, neo-conservatism’s two factions once again seemed fated to clash. 
Economic globalization risked provoking a backlash by provincial populists, while the external enemy – the glue that held the neo-conservative movement together – had disappeared. 
Then came the terrorist attacks of September 11, 2001. 
From the beginning, senior Reagan era officials were wary of pursuing a unilateral response. 
It was clear to many that Islamic fundamentalism was not comparable to communism, and, particularly in Iraq, military leaders saw the dangers in stretching American forces too thin. 
But their arguments did not carry the day. 
For the neo-conservative enterprise, 9/11 helped create a new context for linking the quest for American hegemony abroad with intense nationalism – and an even more intense assault on the welfare state – at home. 
Employing a crude form of “realism,” which has traditionally viewed the state as the basic unit of political analysis, neo-conservatives portrayed al-Qaeda in terms of familiar enemies, namely fascism and communism, with backing from “rogue” states that must not be “appeased.” 
Thus, the “axis of evil” and the “pre-emptive strike.” 
This new “hyper-realism” has little in common with old-style realism. 
Churchill and Roosevelt did not lie to the international community about the threat of fascism, construct an artificial “coalition of the willing,” or employ violence without accountability: these were the tactics of their totalitarian enemies. 
Today, a meaningful realism calls for recognizing the constraints on building democracy: suspicion of western values generated by imperialism, the power of pre-modern institutions and customs, and the still-fragile character of the state system in most of the world. 
But genuine realism, unfortunately, is beside the point. 
Given the inherent tension implied by neo-conservatism’s simultaneous embrace of secular free-market capitalism and “traditional” values, its strategy, perfected since the Reagan era, has been to re-draw the lines of division: then, as now, the West is “at risk,” which requires nurturing a strongly emotional distinction between “us” and “them.” 
That strategy’s popular appeal will not end with the Bush administration, because neo-conservatism feeds on a set of public fears that are deeply rooted in American history. 
Changing that will require not merely confronting a new ideological outlook, but also deciding which policies reflect what is best about the American political tradition. 

Is Obama Losing Iraq? 
BAGHDAD – The Obama administration’s Iraq policy is in chaos. 
Seven months after Iraq’s national elections, the United States has publicly denied taking sides in the wrangling over who will be prime minister. 
Privately, however, the US is backing the incumbent, Nouri al-Maliki. 
The US has applied tremendous diplomatic pressure on Iraq’s Arab neighbors to get them to accept another Maliki term. 
Most have refused. 
Initially, the US backed Maliki in order to keep the Sadrist bloc from gaining a share of power. 
However, that has now backfired, since the Sadrists are the only group other than Maliki’s coalition of Shia parties that supports him. 
One unsettling consequence of US diplomacy is that it has reinforced Iran’s role in Iraq, because Maliki is Iran’s preferred candidate for Prime Minister. 
Thus, at the very moment that the US is leading a global campaign to isolate Iran over its nuclear program, it is strengthening Iran’s regional position. 
The US-Iranian dispute is not limited to the nuclear issue. 
American efforts to re-start Israeli-Palestinian peace talks have faced adamant opposition from Iran, which maintains its 30-year-old policy of opposing any effort to promote peace in the region. 
Iran exerts significant influence on both state and non-state actors whose support is indispensible to any long-term peace in the Middle East. 
First among these is Syria. 
Post-election Iraq was an obvious opening for the US to place a wedge between Iran and Syria. 
While Iran promotes the Shia religious parties in Iraq, Syria’s interests there tilt toward secular nationalism, as represented by former prime minister Ayad Allawi’s coalition, which actually defeated Maliki in the parliamentary elections held earlier this year. 
Indeed, Syria has supported Allawi for the past seven years. 
Yet, in the wake of intense US and Iranian diplomatic pressure in favor of Maliki, Syria has apparently shifted its support accordingly. 
The impact of this American misstep has already been felt, emboldening Iranian President Mahmoud Ahmadinejad on his provocative visit to Lebanon, which included a public appearance on Hezbollah-controlled territory near Israel’s northern border. 
The Gulf States, especially Saudi Arabia, have so far resisted US pressure to endorse Maliki. 
They cannot forget that Maliki was in charge during the ethnic cleansing of Baghdad’s Sunni Muslims. 
They regard Iran – and thus Maliki’s closeness to it – as an existential threat. 
Kuwait, Saudi Arabia, and Bahrain, in particular, perceive Iran as inciting unrest among their own substantial Shia populations. 
Iraq’s political elites have resisted Maliki’s desire for a second term for two reasons. 
First, they are weary of renewed Iranian attempts to destabilize Iraq. 
Security forces recently intercepted suicide bombers entering Iraqi Kurdistan from Iran, with, Kurdish leaders believe, the support and training of Iranian intelligence. 
Second, Maliki’s tenure has been worrying to those who believe in democracy and the peaceable transfer of power. 
He has created security forces – some of which have reportedly acted as death squads – that are answerable directly to him, thus bypassing the constitutional chain of command. 
He has also replaced career army and security officers with cronies. 
Last March, as rumors circulated that he was losing the vote, Maliki asserted that state security would be threatened if he lost, noting his responsibility to maintain order. 
When he did lose, he demanded a recount, not as a candidate, but in his capacity as Commander-in-Chief. 
The fact that Maliki, despite his incumbency, has been unable to secure a second term seven months after the elections attests to the widespread opposition to his continued rule among Iraq’s political class. 
There is only one way to explain the US administration’s decision to exert such diplomatic pressure in favor of Iran’s favorite in Iraq: Obama’s pledge during his presidential election campaign to disengage from Iraq during his first term. 
In this, Obama is following the example of President George W. Bush, who let the US electoral agenda, rather than American – not to mention Iraqi – national interests, dictate Iraq policy. 
The Bush administration insisted that Iraq achieve various “milestones” – elections for which the country was not ready and completing a constitution in six weeks, to name two – simply to create the appearance of substantive achievements ahead of the 2004 presidential election or the 2006 mid-term elections. 
Similarly, the Obama administration is trying to force what it perceives as the easiest path to a new government in Iraq – even if it is pro-Iranian – not because it is in the US national interest, but to enable it to head for the exits more quickly in advance of the president’s re-election campaign. 

Is Oil Becoming Stranded? 
LONDON – The conventional wisdom regarding the recent plunge in the price of oil is that we are seeing a repeat of the 1985-1986 collapse, when Saudi Arabia ramped up production as part of a dispute with other members of the OPEC cartel. 
This time, the thinking goes, Saudi Arabia is doing the same in response to its loss of market share to shale-oil production in the United States. 
But there is another parallel that is even more relevant – with important implications for the long-term price of oil. 
The recent collapse is reminiscent of a similar dive in the price of coal – which crashed from a brief high of $140 a ton in 2008 to about $40 a ton today – which led some deposits to become “financially stranded,” meaning that the cost of developing them outweighs potential returns. 
The drop was the result of long-term environmental policies, including programs aimed at mitigating climate change, which undercut demand for coal. 
Efforts to improve air quality in China, US carbon and mercury emissions standards, cheaper natural gas, and growing investments in renewable energy have all eroded coal’s share of the energy market. 
A similar mechanism may be at work in the oil market. 
As pressure grows on governments to take action to combat climate change, demand for fossil fuels is likely to drop, which could result in prices remaining depressed for longer than the industry anticipates – perhaps forever. 
To be sure, some critics – including the British economist Dieter Helm – dismiss the possibility that assets can become stranded. 
They contend that the absence of serious international efforts to reduce emissions, the cyclical nature of petroleum markets, investors’ short time horizons, and the fact that most oil assets are state-owned make it unlikely that policies to mitigate climate change will have an impact on oil prices. 
These arguments are easily rebutted. 
For starters, while the international community is unlikely to agree any time soon on a global mechanism for putting a price on carbon emissions, other types of environmental policies have already had an effect on demand for oil. 
That is a crucial development, because even small shifts in supply or demand can cause large swings in the price of oil. 
The drop from $120 per barrel in 2014 to under $35 today is the result of a 2% change (roughly two million barrels a day) in the supply-demand balance. 
That reflects Saudi Arabia’s output increase of more than a million barrels a day, as well as mandated efficiency measures in the European Union, partly motivated by efforts to cut carbon dioxide emissions, which have contributed to a comparable drop in demand – by about 1.5% a year. 
Similar measures can be expected elsewhere as governments strive to meet the targets pledged under the Paris climate agreement. 
Second, though oil prices may be cyclical, structural changes in energy markets are likely to undermine price increases. 
Alternative transport technologies, including electric cars, static batteries, and hybrid solutions, are already threatening to make oil less necessary. 
Third, while many investors do have short time horizons, development of resources in the oil industry can easily extend to more than a decade. 
That means that the “safe” cash flow from today’s assets can end up invested in the next generation of high-cost assets that are at a far greater risk of stranding. 
Finally, the fact that many oil properties are state-owned does not protect investors who have put their money into publicly traded assets. 
Governments may have strategic reasons to hold onto unprofitable assets, but investors who own shares in partly privatized state firms do not. 
Furthermore, the first victims of any long-term price decrease will be high-cost producers, many of which are publicly traded, leaving investors more – not less – exposed. 
Commodity markets have repeatedly proved vulnerable to expectations that prices will fall. 
Given the political pressure to mitigate the impact of climate change, smart investors will be watching closely for indications of policies that will lead to a drop in demand and the possibility that their assets will become financially stranded. 
It is dangerous to assume that stranding can occur only over the long term. 
Doing so risks putting investors in the same position as the last shareholders in Peabody Energy, the world’s largest private coal company, which is teetering on the edge of bankruptcy. 
The fact that Peabody Energy is still operating, and thus technically not stranded, is probably of little comfort to its owners. 


Is Peru Next? 
On April 9, when Peruvians elect a new President, they will choose between Ollanta Humala Tasso, a nationalist former army commander who proposes radical economic and social change, and Lourdes Flores Nano, who would maintain the country’s current neo-liberal policies. 
Whoever wins, the results will echo across Latin America. 
A victory for Humala would seem to confirm the waning appeal of the neo-liberal policies that have dominated the continent since the 1980’s. 
It would bolster the informal axis of Venezuela’s populist Hugo Chávez (also a former soldier) and Evo Morales in Bolivia, but also the line supported by Brazil`s Lula da Silva and Argentina’s Kirchner who combine administrative efficiency and left-leaning rhetoric. 
On the other hand, a victory for Lourdes Flores would stand out as an exception in the area, together with Alvaro Uribe in Colombia, whose reelection at the end of May seems certain today. 
Flores, a Social Christian candidate representing a rightist alliance, wants to maintain present President Alejandro Toledo’s neo-liberal policies, which have boosted economic growth, foreign investment, and exports spectacularly over the past four years. 
The problem for Flores is that half the population has not yet benefited from Toledo’s policies and lives under the poverty line, giving Humala his political opening. Humala calls for overhauling Peru’s economic policy in particular by revising foreign companies’ concession contracts, increasing taxes on the rich, and lowering the salaries paid to congressmen and government members –“old fashioned populism that will ruin the country,” claim his opponents. 
Flores, who was the favorite for most of the campaign, has now lost support as a result of popular frustration over the distribution of wealth and because of her links with powerful domestic and foreign business interests. 
Her running mate, Arturo Woodman, is an old associate of the richest man in Peru, Dionisio Romero, a businessman who had no qualms about asking favors from Vladimiro Montesinos, the loathed adviser to President Alberto Fujimori, who is now in jail on corruption charges. 
But Humala is hardly a saint. 
He concealed information about his military past when the election campaign started, and is now under investigation for alleged human rights violations. 
In 1983, he attended a course at the infamous School of the Americas, the counterinsurgency training institute where many of the region’s most brutal military officers learned their craft. 
In 1992, he commanded a military base in an Amazon village where coca leaf was grown – and where Sendero Luminoso guerrillas and drug trafficking bands worked together. 
Families of the disappeared, killed, and tortured told the press that Humala ordered the atrocitie 
In November 2000, Ollanta Humala led a small-scale military uprising against Fujimori’s dying regime. 
But Humala's detractors claim he took up arms to help the escape of Montesinos, who was already wanted by the law, but managed to flee aboard a sailboat towards Galapagos on the day of the coup. 
Humala denies everything, and none of the allegations has harmed him. 
Even so, not only foreign investors and local big businesses are worried by his rise in opinion polls. 
The United States is also concerned. 
In its most recent report on the global trade in illegal drugs, the US State Department stressed the increase in coca leaf crops in Peru and Bolivia last year. 
It attributed the rise to the “nationalistic preaching” that has taken root in both countries. 
Washington believes anti-drug policies will fail, to the benefit of drug dealers, if coca growers continue to identify themselves with nationalists who vindicate the leaf’s production. 
Ollanta Humala opposes compulsory and mass coca eradication, claiming that he would industrialize and export the product to keep it from falling into drug dealers’ hands. 
In a meeting with Evo Morales, he spoke of a joint agenda to discuss the issue with US officials. 
But for the US, an anti-drug policy designed by nationalist leaders whose countries account for more than half of America’s cocaine market hardly inspires confidence. 
The same is true for investors, particularly those from Chile, who have assets worth $1.5 billion in Peru. 
Humala glorifies two Peruvian military dictators: Cáceres, who fought against Chile, and Velasco Alvarado, who nationalized oil and mining companies, redistributed land, and controlled the press. 
In fact, Humala has singled out Chilean contracts and investments as targets for revision. 
At the same time, he has spoken of reinforcing the armed forces, which implies buying weapons. 
Flores, by contrast, offers legal security for businessmen and investors. 
At the same time, acknowledging that in Peru there has made little progress in fighting poverty, she is promising to create 650,000 jobs a year. 
Regardless of whether that promise is realistic, many consider her candidacy important for maintaining democratic continuity, whereas Ollanta Humala proposes to overhaul the political system by drafting a new constitution. 
When Peruvians vote on April 9, after many years of poverty and inequality, it is likely that popular indignation will prevail. That emotion has led many candidates to victory in Latin America. 
The last of them was Evo Morales, an explicit and staunch soporter of Humala[APC1]. 

Is Pornography Driving Men Crazy? 
NEW YORK – It is hard to ignore how many highly visible men in recent years (indeed, months) have behaved in sexually self-destructive ways. 
Some powerful men have long been sexually voracious; unlike today, though, they were far more discreet and generally used much better judgment in order to cover their tracks. 
Of course, the heightened technological ability nowadays to expose private behavior is part of the reason for this change. 
But that is precisely the point: so many of the men caught up in sex-tinged scandals of late have exposed themselves – sometimes literally – through their own willing embrace of text messages, Twitter, and other indiscreet media. 
What is driving this weirdly disinhibited decision-making? 
Could the widespread availability and consumption of pornography in recent years actually be rewiring the male brain, affecting men’s judgment about sex and causing them to have more difficulty controlling their impulses? 
There is an increasing body of scientific evidence to support this idea. 
Six years ago, I wrote an essay called “The Porn Myth,” which pointed out that therapists and sexual counselors were anecdotally connecting the rise in pornography consumption among young men with an increase in impotence and premature ejaculation among the same population. 
These were healthy young men who had no organic or psychological pathology that would disrupt normal sexual function. 
The hypothesis among the experts was that pornography was progressively desensitizing these men sexually. 
Indeed, hardcore pornography’s effectiveness in achieving rapid desensitization in subjects has led to its frequent use in training doctors and military teams to deal with very shocking or sensitive situations. 
Given the desensitization effect on most male subjects, researchers found that they quickly required higher levels of stimulation to achieve the same level of arousal. 
The experts I interviewed at the time were speculating that porn use was desensitizing healthy young men to the erotic appeal of their own partners. 
Since then, a great deal of data on the brain’s reward system has accumulated to explain this rewiring more concretely. 
We now know that porn delivers rewards to the male brain in the form of a short-term dopamine boost, which, for an hour or two afterwards, lifts men’s mood and makes them feel good in general. 
The neural circuitry is identical to that for other addictive triggers, such as gambling or cocaine. 
The addictive potential is also identical: just as gamblers and cocaine users can become compulsive, needing to gamble or snort more and more to get the same dopamine boost, so can men consuming pornography become hooked. 
As with these other reward triggers, after the dopamine burst wears off, the consumer feels a letdown – irritable, anxious, and longing for the next fix. 
(There is some new evidence, uncovered by Jim Pfaus at Concordia University in Canada, that desensitization may be affecting women consumers of pornography as well.) 
This dopamine effect explains why pornography tends to become more and more extreme over time: ordinary sexual images eventually lose their power, leading consumers to need images that break other taboos in other kinds of ways, in order to feel as good. 
Moreover, some men (and women) have a “dopamine hole” – their brains’ reward systems are less efficient – making them more likely to become addicted to more extreme porn more easily. 
As with any addiction, it is very difficult, for neurochemical reasons, for an addict to stop doing things – even very self-destructive things – that enable him to get that next hit of dopamine. 
Could this be why men who in the past could take time-delayed steps to conduct affairs behind closed doors now can’t resist the impulse to send a self-incriminating text message? 
If so, such men might not be demons or moral ciphers, but rather addicts who are no longer entirely in control of themselves. 
This is not to say that they are not responsible for their behavior. 
But I would argue that it is a different kind of responsibility: the responsibility to understand the powerfully addictive potential of pornography use, and to seek counseling and medication if the addiction starts to affect one’s spouse, family, professional life, or judgment. 
By now, there is an effective and detailed model for weaning porn-addicted men and restoring them to a more balanced mental state, one less at the mercy of their compulsions. 
Understanding how pornography affects the brain and wreaks havoc on male virility permits people to make better-informed choices – rather than engage in pointless self-loathing or reactive collective judgments – in a world that has become more and more addictively hardcore. 

Is Psychiatry Stuck in the Past? 
Ever since psychiatry emerged as an independent field of medicine, it has stood in the shadows of other specialties, never progressing scientifically as fast as neurology, oncology, or cardiology. 
In many developed countries, the decline of mental hospitals has brought psychiatric services into closer professional contact than ever with these and other medical domains. 
Yet psychiatry continues to inhabit medicine's netherworld - within the mainstream clinically, outside it scientifically. 
Psychiatry is separated from other medical specialties by its lack of an objective basis for diagnosis. 
Other medical fields have refined the diagnostic process to the point where computerized laboratory tests have virtually replaced clinical examination of patients. 
Psychiatry remains dependent on interpretation of detailed case histories. These can be obtained only through careful examination and direct questioning of patients. 
No universal diagnostic tests exist for the most frequent mental disorders, such as depression, anxiety, and schizophrenia. 
Of course, computer programs can now process data derived from patients' symptoms and generate psychiatric diagnoses. 
But these apply rules that only replicate the way one or more psychiatrists interpret a patient's symptoms. 
There is nothing absolute about the program's output, although it does at least do the same thing every time, which cannot be said for psychiatrists. 
After all, interpretations of a case may differ, and the outcome cannot be resolved other than by an appeal to authority - "I am more senior and experienced than you, so my diagnosis takes precedence." 
Beyond diagnostic disputes in individual cases, psychiatry's absence of objective diagnostic tests implies something more radical. 
The history of the field is littered with definitions of entire disease categories that have been influenced by diagnostic fashions, politics, and the availability of treatments. 
Diagnostic fashions reflect prevailing views of what causes mental illness. 
From the 1950's to 1980's, for example, psychoanalysis held sway among US psychiatrists. 
But the psychoanalytic approach, with its reliance on personal interaction with patients, led to a broad conception of pathology. 
During the 1970s, two international studies demonstrated that US psychiatrists diagnosed about twice as many patients as having schizophrenia as psychiatrists in other countries, where psychoanalytic training was relatively uncommon. 
The pendulum has since swung in the US, with biological theories of mental disease displacing all other causal contenders. 
Parallel to this shift away from psychoanalysis, the diagnosis of schizophrenia has shrunk dramatically, and standard psychiatric practice in the US now incorporates a narrower definition of schizophrenia than is used in Europe. 
Psychiatric diagnosis has also been vulnerable to politicization, nowhere more so than in the former Soviet Union, which locked up political dissidents in mental hospitals on what amounted to a charge of schizophrenia. 
I once interviewed three former Russian dissidents who had been diagnosed with schizophrenia and forcibly treated. 
In no case did I find any evidence that they had ever suffered from the disease as it is defined in the West. 
Soviet authorities relied on an idiosyncratic definition of schizophrenia, introduced by a professor of psychiatry (A.V. Snezhnevsky) in Moscow. 
Anyone who believed that the political system should be changed was suffering from "reformist delusions." 
In deference to psychiatry's diagnostic conventions, he emphasized the history of the "condition." 
If a dissident demonstrated against the Soviet system at least twice - say, by distributing illicit writings - the "delusions" signified schizophrenia. 
But we should not be complacent about the potential for politicization in the West. 
In 1987, political pressure in the US led to the elimination of homosexuality as a diagnosis from the nationally accepted guidelines. 
In fact, the inclusion of homosexuality as a pathological condition suggests the extent to which psychiatric diagnosis has been shaped by social and political currents. 
By contrast, no one - whatever a society's characteristics - has ever seriously questioned whether cancer is a disease. 
Moreover, how psychiatrists treat mental illness profoundly influences how it is defined. 
Depression is a recent diagnosis - and now one of the most common. 
A study of diagnoses from 1949-1969 at the London psychiatric hospital where I work suggests why: a major shift from diagnoses of anxiety to diagnoses of depression coincided with the introduction of the first antidepressant pill. 
Psychiatrists began altering their diagnoses to a condition for which they had an effective treatment. 
So is psychiatric diagnosis akin to pseudo-science? 
International comparisons carried out by the World Health Organization show that as long as psychiatrists from different countries are trained to interview patients using a standardized format, they can agree on who is suffering from schizophrenia. 
The WHO studies revealed that schizophrenia defined narrowly - using a particular group of unusual symptoms - occurs with similar frequency throughout the world. 
Still, a broad definition produces wide variation in frequency across countries. 
Yet defining schizophrenia broadly may be unavoidable, for it is probably not a single disease with a distinct cause. 
Indeed, Eugen Bleuler, the Swiss psychiatrist who introduced the term, referred to the condition as "the group of schizophrenias." 
Until biological markers for psychiatric illnesses are identified, diagnosis will remain in a 19 th century time warp, relying on the equivalent of broad and outdated medical terms like "fever" and "dropsy." 
But patients and their families and friends need not worry excessively. 
Most psychiatric treatments are effective across a wide range of diagnoses, whatever their origin. 
Psychiatry's success - like that of all medical specialties - should be judged by its ability to relieve human suffering, regardless of disagreements about causes. 

Is Putin Self-Destructing? 
With the arrest of Russia's richest man, oil tycoon Mikhail Khodorkovsky, Russia has lurched into a deep political crisis. 
Unwittingly, President Vladimir Putin has opted for an all-or-nothing victory over the oil oligarch. 
At stake is nothing less than Russia's frail democracy. 
The legal charges against Khodorkovsky concern old privatization and tax evasion cases. 
But the charges against Khodorkovsky are as flimsy as they are tendentious: the privatization case had been amicably settled previously, and Khodorkovsky has merely used tax avoidance schemes that are commonplace in Russia--and that have been upheld in court. 
Putin's real problem is that Khodorkovsky is too powerful and independent for the straitened politics he wants. 
During his four years in power, Putin has advanced four major policies. 
The first three--free market reform, the rule of law, and a pragmatic foreign policy--have been widely acclaimed, while the fourth--"managed democracy"--has been tolerated because it has brought political stability. 
But "managed democracy" now threatens to unravel all three of his real achievements. 
Khodorkovsky is the fourth major businessmen taken out of action by the authorities. 
Four independent TV channels have also been taken over by the state, and no criticism of Putin is permitted in significant media. 
The main polling organizations have also been brought under Kremlin control. 
Regional elections are regularly manipulated, often by disqualifying leading opposition candidates. 
The pattern is evident: a systematic authoritarian drive is underway. 
Russia's oligarchs are undoubtedly unpopular, and Khodorovsky's arrest was evidently aimed at boosting Putin's prospects in the looming parliamentary and presidential elections. 
But although Russians dislike the powerful, and cherish underdogs and martyrs, a man in jail no longer looks strong. 
With Khodorkovsky's arrest, the authorities flaunted their extralegal and arbitrary powers in such a way that they have aroused widespread public worry. 
Previously, Putin had enigmatically appealed to most Russians. 
By balancing between ex-KGB people and big businessmen, he seemed independent of both. 
Now he has antagonized all big businessmen; he even refuses to meet them. 
Suddenly, he has reduced himself to KGB President, jeopardizing the very political stability he sought to guarantee. 
Putin has spoken continuously about the need for the rule of law, but in his TV statement on October 27, he effectively stated his preference for law enforcers. 
Indeed, in the Khodorkovsky affair, all procedural requirements have been blithely neglected. 
For example, although prosecutors control the relevant courts, they did not bother to secure the necessary court orders for the Yukos raids and arrests. 
The obvious conclusion that even ordinary Russians are drawing is that neither property rights nor people are safe. 
Investments are likely to be stopped or delayed. 
Those who can export capital will do so. 
An emerging panic seems certain to dampen today's strong growth. 
The fallout from Khodorkovsky's arrest is felt abroad as well. 
The world's business press has roundly condemned the authorities' behavior, especially the impounding of Yukos shares worth many times more than possible state claims, which smacks of expropriation. 
Foreign governments are voicing their fears. 
In one stroke, Putin has jeopardized his considerable accomplishments. 
With his public bluntness, he has discarded his prior coyness and deprived himself of deniability. 
As the KGB culprits keep quiet, the President must do most of the talking, exposing himself further. 
But why defend the arrest in a televised statement? 
Why refuse to meet Russia's business elite, while meeting with foreign investment bankers? 
Why seize Yukos shares and licenses? 
A couple of weeks before his arrest, Khodorkovsky told me: "I do not understand how they can win, given how many mistakes they make." 
His words seem prescient. 
The situation in the Kremlin appears reminiscent of the spring of 1996, when a group of KGB men, led by President Boris Yeltsin's chief bodyguard, General Alexander Korzhakov, almost seized power. 
But the oligarchs mobilized behind Anatoly Chubais, who ousted Korzhakov and his circle by June. 
Once again, Russia's big businessmen have united behind Chubais. 
If Putin wants to save his own skin, he must act fast and sack his top KGB aides in the Kremlin and the Prosecutor General. 
It is worth recalling that in 1999 former Prime Minister Yevgeny Primakov and Moscow Mayor Yuri Luzhkov were seen as a shoo-in ticket for the presidency. 
But, having curried favor with Russia's media, they were unaccustomed to criticism--and rendered helpless when it appeared. 
The taboo against criticizing Putin is already powerless. 
The main liberal parties--the Union of Rightist Forces and Yabloko--are attacking him ferociously, while the faceless parties that supposedly support him are silent and confused. 
They are presumed to be on the verge of winning an overwhelming majority in the parliamentary elections due on December 7, yet like Korzhakov and his clique, they could be routed. 
Indeed, by alienating big business and letting his wily chief of staff, Alexander Voloshin, resign, Putin has deprived himself of crucial electoral resources. 
His former chief political advisor has even accused him of using "Stalinist measures." 
If Putin falls short of the high expectations in the upcoming parliamentary election, his fortunes in the March 14, 2004, presidential vote may be jeopardy. 
By arresting Khodorkovsky, Putin has revealed his authoritarian nature to the entire world. 
He has thrown a gauntlet in the face of Russia's civil society and business elite. 
They have little choice but to resist, and their strength should not be underestimated. 
The battle for Russian democracy is joined anew. 

Is Regulation Really for Sale? 
LONDON – Relationships between London banks and their regulators are not especially warm just now. 
The latest bonus rules issued by the Committee of European Banking Supervisors (soon to morph into the European Banking Authority), have left those sensitive souls on the trading floors feeling rather bruised and unloved. 
In the future, 70% of their bonuses will have to be deferred. 
Imagine living on only $3 million a year, with the other $7 million paid only if the profits you earned turn out to be real? 
It is a shocking turn of events. 
Yet, in narratives of the financial crisis, regulatory capture is often an important part of the story. 
Will Hutton, a prominent British commentator, has described the Financial Services Authority, which I chaired from 1997-2003 (the date things began to go wrong!) as a trade association for the financial sector. 
Even more aggressive criticism has been advanced about American regulators – and, indeed, about Congress – alleging that they were in the pockets of investment banks, hedge funds, and anyone else with lots of money to spend on Capitol Hill. 
How plausible is this argument? 
Can benign regulation really be bought? 
When I was a regulator, I would certainly have denied it. 
I had never worked in the financial industry, and knew few people who did. 
(Full disclosure: I am now an independent Director of Morgan Stanley.) 
My successors have all come from the financial sector, however, which, until recently, was regarded as a sign that they were street-wise. 
Now we are not so sure. 
The consultation processes on rules and regulations were highly structured, and much effort was devoted to ensuring balanced representations from providers and users of financial services. 
We funded research for a Consumer Panel in an effort to ensure “equality of arms.” 
Of course, regulatory staff had more informal links with the industry than with consumers. 
But that is inevitable in any country. 
The industry’s voice was more often heard in Parliament as well. 
The most effective lobbyists were Independent Financial Advisers, who seemed to be especially active in the local Conservative Party associations. 
Goldman Sachs could learn a lot from their tactics! 
I have no first-hand knowledge of the legislative process in the United States. 
But, as an outsider, I am amazed at the apparent intensity of lobbying, and at the amounts of money that firms and their associations spend. 
Is it effective? 
The media seem to think so, though with relations between government and industry still only a notch below open warfare, it is difficult to be sure. 
An intriguing sidelight on the relationship between Congress and business is provided in a study by Ahmed Tahoun of the London School of Economics on “The role of stock ownership by US members of Congress on the market for political favors.” 
Tahoun analyzed the relationship between stock owned by congressmen and contributions their political campaigns by the relevant firms, and found a powerful positive association. 
In particular, Tahoun’s research shows that US congressmen systematically invest more in firms that favor their own party, and that when they sell stock, firms stop contributing to their campaigns. 
Moreover, firms with more stock ownership by politicians tend to win more and bigger government contracts. 
The data are not from financial firms alone, and Tahoun has not disaggregated them by sector. 
But the results are of interest nonetheless. 
They suggest a less-than-healthy relationship between lawmakers’ political and pecuniary interests. 
Regulators are typically not subject to those temptations. 
They are not normally allowed to own stock in financial firms (at least in the jurisdictions that I know). 
But can they nonetheless be captured? 
I see two potential grounds for concern. 
The first is the revolving door between the industry and regulatory bodies. 
This is more prevalent in the US, where regulators’ salaries are very low, especially in the Securities and Exchange Commission and the Commodity Futures Trading Commission. 
Turnover among senior – and not so senior – people in these agencies is very high. 
The Fed folk are paid a little better, and stay rather longer. 
The United Kingdom pays its regulators more, but there is still a lot of “in and out” activity, and more than there used to be. 
Singapore and Hong Kong have a different model. 
Their regulators are given market-related compensation packages, and continuity of senior staff is more effectively maintained. 
My view is that the Asian financial centers have it right. 
The second concern is what one might call intellectual capture. 
While I would strongly argue that the FSA in my day did not favor firms unduly, it is perhaps true that we – and in this we were exactly like US regulators – were inclined to believe that markets were generally efficient. 
If willing buyers and willing sellers were trading claims happily, then, as long as they were “professional” investors, there was no legitimate reason to interfere in their markets. 
These people were “consenting adults in private,” and the state should avert its gaze. 
We now know that some of these market emperors had no clothes, and that their activities, far from benign, could result in severe financial instability and generate serious losses for taxpayers, not to mention precipitating a global recession. 
That has been a grave lesson for regulators and central banks. 
So intellectual capture is a charge hard to refute. 
But were regulators surrogate lobbyists for the financial industry? 
I do not think so, and to argue as much devalues the efforts of many overworked and underpaid public servants around the world. 

Japan’s Nationalist Turn 
TOKYO – Japan has been in the news lately, owing to its dispute with China over six square kilometers of barren islets in the East China Sea that Japan calls the Senkakus and China calls the Diaoyu Islands. 
The rival claims date back to the late nineteenth century, but the recent flare-up, which led to widespread anti-Japanese demonstrations in China, started in September when Japan’s government purchased three of the tiny islets from their private Japanese owner. 
Prime Minister Yoshihiko Noda has said that he decided to purchase the islands for the Japanese central government to prevent Tokyo Governor Shintaro Ishihara from purchasing them with municipal funds. 
Ishihara, who has since resigned from office to launch a new political party, is well known for nationalist provocation, and Noda feared that he would try to occupy the islands or find other ways to use them to provoke China and whip up popular support in Japan. 
Top Chinese officials, however, did not accept Noda’s explanation, and interpreted the purchase as proof that Japan is trying to disrupt the status quo. 
In May 1972, when the United States returned the Okinawa Prefecture to Japan, the transfer included the Senkaku Islands, which the US had administered from Okinawa. 
A few months later, when China and Japan normalized their post-World War II relations, Japanese Prime Minister Kakuei Tanaka asked Chinese Premier Zhou Enlai about the Senkakus, and was told that rather than let the dispute delay normalization, the issue should be left for future generations. 
So both countries maintained their claims to sovereignty. 
Though Japan had administrative control, Chinese ships would occasionally enter Japanese waters to assert their legal position. 
For China, this was the status quo that Japan upended in September. 
In Beijing recently, Chinese analysts told me that they believe that Japan is entering a period of right-wing militaristic nationalism, and that purchasing the islands was a deliberate effort to begin eroding the post-WWII settlement. 
While Chinese rhetoric is overheated, there is certainly a rightward shift in mood in Japan, though it would be difficult to describe it as militaristic. 
A large group of students at Waseda University recently were polled on their attitudes toward the military. 
While a significant number expressed a desire for Japan to improve its ability to defend itself, an overwhelming majority rejected the idea of developing nuclear arms and supported continued reliance on the US-Japan Security Treaty. 
As one young professional told me, “we are interested in conservative nationalism, not militaristic nationalism. 
No one wants to return to the 1930’s.” 
And, of course, Japan’s Self Defense Forces are professional and under full civilian control. 
Japan faces parliamentary elections in the near future, by August 2013 at the latest, but perhaps as early as the start of the year. 
According to public-opinion polls, the governing Democratic Party of Japan, which came to power in 2009, is likely to be replaced by the Liberal Democratic Party, whose president, Shinzo Abe, would become prime minister – a position he has already held. 
Abe has a reputation as a nationalist, and recently visited the Yasukuni Shrine, a Tokyo war memorial that is controversial in China and Korea. 
In addition, Toru Hashimoto, the young mayor of Osaka, Japan’s second-largest city, has built a new party and also developed a reputation as a nationalist. 
Japanese politics, it seems, is showing signs of two decades of low economic growth, which has led to fiscal problems and a more inward-looking attitude among younger people. 
Undergraduate enrollment of Japanese students in US universities has fallen by more than 50% since 2000. 
Thirty years ago, Harvard professor Ezra Vogel published Japan as Number 1: Lessons for America, a book that celebrated Japan’s manufacturing-fueled rise to become the world’s second-largest economy. 
Recently, Vogel has described Japan’s political system as “an absolute mess,” with prime ministers replaced almost every year and the youngest generation’s expectations sapped by years of deflation. 
Yoichi Funabashi, former Editor-in-Chief of the newspaper Asahi Shimbun, also is worried: “There’s a sense in Japan that we are unprepared to be a tough, competitive player in this global world.” 
Despite these problems, Japan still has remarkable strengths. 
Although China surpassed Japan as the world’s second-largest economy two years ago, Japan is a comfortable society with a much higher per capita income. 
It has impressive universities and a high education level, well- managed global companies, and a strong work ethic. 
It is a society that has reinvented itself twice in less than 200 years – in the nineteenth-century Meiji Restoration and after defeat in 1945. 
Some analysts hoped that last year’s earthquake, tsunami, and nuclear catastrophe would spark a third effort at national reinvention, but that has not yet occurred. 
Many younger Japanese have told me that they are “fed up” with stagnation and drift. 
When asked about the rightward trend in politics, some young Diet (parliament) members said they hoped that it might produce a realignment among political parties that would lead to a more stable and effective national government. 
If a moderate nationalism is harnessed to the yoke of political reform, the results could be good for Japan – and for the rest of the world. 
But if Japan’s deepening nationalist mood leads to symbolic and populist positions that win votes at home but antagonize its neighbors, both Japan and the world will be worse off. 
What happens in Japanese politics over the coming months will ripple far beyond the country’s shores. 

Is Russia Weak? 
MOSCOW – Western leaders and observers persistently repeat, like a mantra, that Russia is “weak.” 
This judgment is based on a flawed comparison between Russia and the Soviet Union –though one that is also popular in Russia itself. 
Measured by Soviet standards, Russia has weakened. 
But, as former United States National Security Advisor Brent Scowcroft noted, Russia still “has enormous capacities to influence the US security strategy in any country.” 
A country with such influence over a military superpower cannot be considered weak. 
In fact, the issue is not Russia’s strength per se , but whether Russia intelligently concentrates and applies it. 
The new Russia has transcended its Soviet identity and managed to put down uprisings in the post-Soviet space as far away as Tajikistan. 
It has dealt with a new generation of security threats on its own territory – most prominently Chechen warlord Shamil Basayev – and prevented them from turning into a global force like al-Qaeda. 
Moreover, Russia has helped other new nations in Eastern Europe create their own identities. 
Does this not demonstrate Russia’s global know-how? 
Is it not a contribution to international security? 
The US has recognized the Russian factor in post-Soviet state-building processes. 
Russia has not been the only beneficiary of its activities in the Caucasus, especially since 2000. 
By bringing recalcitrant minorities into a new security consensus, Russia helped transform local ethnic conflict into a constructive process of nation-building. 
So Russia’s claim to being a central element in Eurasian security, on par with the US and the European Union, is not the blustering of a spent Leviathan. 
Rather, it is a demand for a fair international legal order. 
The debate about whether the US should allow Russia to have “special interests” in Eastern Europe – renewed by Russia’s opposition to America’s proposed missile-defense installations in the Czech Republic and Poland – is pointless. 
Russia’s interests are by necessity becoming global. 
The agenda of US-Russian relations includes issues such as treaties on the reduction of strategic weapons and on nuclear non-proliferation, NATO, Afghanistan, Iran, Central Asia, North Korea, and the post-Soviet space. 
These are all global, not local, issues. 
Russia can be effective in dealing with these issues only if it becomes a competent global actor. 
Yet many assume that world politics should be designed to bypass Russia. 
Everywhere Russians are expected to support something without participating in creating it. 
We are supposed to help stabilize the region around Afghanistan, for example, but only in order to create a “greater Central Asia” that will not include Russia. 
It is clear that modern Russia lacks global “status” in the Soviet sense. 
But the US has also been unable to achieve the global status of a “Yalta superstate.” 
America’s global military power is undisputed, although it is used with decreasing frequency. 
Sprawled over 11 time zones between the EU and the US, of which five border China, it is impossible to expect Russia to remain merely a regional power. 
A state that is involved in three global regions (Europe, Central Asia, and the Far East, not to mention the Arctic) and borders several others cannot be considered “regional.” 
Moreover, because the regions in which Russia has interests face a number of problems, it must seek influence over the strategies for these regions pursued of other powers of various sizes, from China and the US, to the EU and Iran. 
Russia is expected to act in ways that are beneficial to US and Western interests. 
But it is in America’s interest to enhance Russia’s capacity to act – in other words, to strengthen a globally competent Russia. 
This would be a Russia that acts in pursuit of its own interests – the same way that the US and the EU act. 
Americans sometimes suggest that the Russians have a hidden strategic agenda. 
But the consensus that Vladimir Putin has created in Russia since 2000 is more than a question of interests; it is a value-based reality. 
It is based on the possibility of a free life in a secure environment – something that Americans take for granted. 
For many years, we had to deal with the problem of Russia’s very existence rather than that of the quality of its governance. 
Putin’s consensus made it possible to resolve both problems without foreign assistance and interference. 

Is Russia’s National Character Authoritarian? 
NEW HAVEN – Russia’s aggression against Ukraine and the Russian public’s acquiescence in direct government control of news media have many people wondering if Russians are predisposed to authoritarianism. 
It seems like a sensible question. 
But I have learned from experience that we have to be very careful about drawing conclusions about national character from isolated events. 
In 1989, I was invited to an economic conference in Moscow, then in the Soviet Union, sponsored jointly by the Soviet think tank IMEMO (now called the Primakov Institute of World Economy and International Relations) and the United States’ National Bureau of Economic Research. 
Such joint conferences were part of a historic breakthrough, resulting from a thaw in US-Soviet relations. 
The Soviet economists seemed enthusiastic about a transition to a market economy, and I was struck by how openly they spoke to us during coffee breaks or at dinner. 
But, significantly, the Soviets expressed serious doubts at the conference that their public could ever allow free markets to function. 
Individual market actions, they said, would strike the public as wrong, unfair, and intolerable. 
I met one of the younger IMEMO economists, Maxim Boycko, and was impressed by his sincerity and intellect. 
(He later became Russian Deputy Prime Minister and Minister of State Property under President Boris Yeltsin, left the Russian government before Vladimir Putin came to power, and recently came to the US, where he is lecturer in economics at Harvard and Brown.) 
We had a lively conversation. 
I told him that many Americans also think capitalist practices are unfair. 
Were attitudes in the two countries really different? 
It appears no one had ever conducted a survey about such attitudes. 
In 1989, however, it was possible to do just that. 
We decided on the spot to carry out a careful questionnaire survey comparing attitudes toward free markets. 
After laboring over subtleties of translation and possible extraneous associations that might bias respondents’ answers, we arrived at a set of virtually identical questionnaires in both Russian and English. 
We administered the survey (with the help of Ukrainian survey expert Vladimir Korobov) in New York and Moscow in 1990 and published our results in the American Economic Review in 1991 and in the IMEMO journal MEIMO in 1992. 
The differences we found in attitudes toward free markets were often small, and it was hard to make sense of them in terms of authoritarianism and democracy. 
For example, we asked, “On a holiday, when there is a great demand for flowers, their prices usually go up. 
Is it fair for flower sellers to raise their prices like this?” 
Just as the IMEMO economists predicted, most (66%) of those who answered this question in Moscow thought it was unfair. 
But there was a surprise: New York yielded virtually identical results (68% thought it was unfair). 
So we decided last year to find out whether the same similarity between Moscow and New York persists today, or whether, given the revival of authoritarianism in Russia today, attitudes toward markets there had become more negative. 
We administered the identical questionnaire in the two cities in 2015. We presented the results at the American Economic Association’s annual meeting this January. 
In the flower question, we found very little change in attitude in Moscow (67% said raising prices on holidays was unfair). 
In New York, by contrast, public opinion had become somewhat more pro-market (55% said raising prices was unfair). 
For our 2015 survey, Boycko and I decided to examine attitudes toward democracy itself. 
Fortunately, we were able to find a study conducted in 1990 by the political scientists James Gibson, Raymond Duch, and Kent Tedin (GDT), which asked questions in Moscow that, like ours, got past slogans to assess basic values. 
Though they did not do a comparison with New York, we thought to add it in 2015. 
Surprisingly, most of the results concerning democratic values do not support the idea that Russians prefer strong authoritarian government. 
For example, GDT asked in 1990 if respondents agreed with the statement “The press should be protected by the law from persecution by the government.” 
Only 2% disagreed in 1990; in 2015, Russians were substantially more likely to disagree (20% did), suggesting a decline in democratic values. 
But the real surprise is our 2015 results in New York for the same question: 27% disagreed. 
New Yorkers appear less supportive of a free press than Muscovites today! 
The biggest difference of all between Moscow and New York came from the GDT statement “It is better to live in a society with strict order than to allow people so much freedom that they can bring destruction to the society.” 
In 1990, 67% of the Muscovites agreed, and 76% agreed in 2015, while in New York in 2015 only 36% agreed. 
Maybe this is important, but it is an outlier – the most extreme difference between Moscow and New York in our entire survey. 
Overall, while there are differences, the results do not lend strong support to the idea that recent events have a simple explanation in terms of differences in deep attitudes toward free markets or authoritarianism. 
It’s wrong to write Russia off as fundamentally different from the West. 
In 1991, we concluded that the Russian national character was not an obstacle to creating a market economy in Russia – and were proven right. 
We hope we are right again, and that national character will not prevent Russia from becoming a truly democratic society someday. 

Is Speculating on Food Dangerous? 
ROME – The prices of many staple foods increased dramatically during 2007-2008, creating a food crisis for many poor and developing countries. 
International prices of maize, rice, and wheat, for example, reached their highest levels in 30 years, causing political and economic instability – and leading to food riots – in many countries. 
Several factors contributed to the crisis, including high oil prices, high demand for crops from the bio-fuel sector, falling global stockpiles of food commodities, and lower cereal production. 
Strong economic growth and expansive monetary policies further boosted the trend, as did protectionist measures, such as export restrictions. 
While these factors undoubtedly placed upward pressure on food prices, they alone cannot explain the steep hikes. 
Some believe that the crisis was amplified by speculative trading in commodity futures, which have become an integral part of food markets. 
Commodity futures are formal agreements to buy or sell a specified amount of a commodity at a specified future date for a specified price. 
They thus provide an important instrument for hedging price risks in commodity markets. 
By entering into a futures contract, both buyer and seller gain certainty as to the price of their subsequent transaction, independent of actual developments in the market. 
Commodity futures are generally traded before their expiration date. 
Indeed, only 2% of contracts end in the delivery of the physical commodity. 
Thus, the market also attracts investors who are not interested in the commodity, but in speculative gain. 
In fact, commodity futures have become increasingly appealing to non-commercial investors, as their returns seem to be negatively correlated with returns on equities and bonds. 
The growing presence of non-commercial investors has provided important liquidity to the market, as speculators assume risks related to commodity prices that hedgers wish to avoid. 
But their presence has also raised concerns that speculation in commodity futures could result in higher price volatility. 
Economists generally consider commodity futures to be the solution to higher price volatility, not its cause. 
They argue that traders of commodity futures merely react to price signals that ultimately depend on market fundamentals. 
In this way, speculation accelerates the process of finding an equilibrium price and stabilizing the physical market. 
But what about trend-following investors, or those with market power? 
In fact, in the short term, an investor might be attracted by the increasing price of a commodity, although the price is not based on any fundamental data. 
These speculative investments can further strengthen the trend and push futures price further away from market equilibrium, especially if many investors follow suit or those who invest have sufficient funds to influence the market. 
Index funds are an example of such powerful investors. 
They have become key players in the market, holding about 25-35% of all agricultural futures contracts. 
Besides investing large amounts of money, they hold futures contracts for a long time, which might make them less likely to react to changes in market fundamentals. 
Empirical evidence yields no clear answer concerning which hypothesis is correct. 
For each study that finds a significant connection between speculative trading and market volatility, there is at least one that claims the contrary. 
There are three main reasons to believe that speculation was not the main driver of the recent food-price surge: 
· Although index-fund investments are important compared to the positions of other futures participants, their behavior is predictable, as they publicly announce both their commodity portfolio and the timing of their transactions; 
· Price volatility has also been high for commodities that are not traded in futures markets (copper, iron, and ore), or for which these markets are not important (steel and rice); 
· As excess demand in well-functioning futures markets can easily be met by sufficient supply (i.e., by issuing new futures contracts), the effect of speculation on the equilibrium price is relatively small and short-lived compared to price swings of a physical asset, for which supply might be less elastic or even fixed in the short term. 
Given these findings, trading in futures markets seems to have amplified price volatility in the short term only. 
Longer-term equilibrium prices, however, are ultimately determined in cash markets where buying and selling physical commodities reflect the fundamental forces. 
Futures markets have evolved historically in response to market participants’ need to manage price risks, and they are an indispensable marketing tool for many commodities. 
Limiting or even banning speculation in futures markets might therefore be costly and have unintended consequences. 
Proposals to create an international fund to counteract price hikes in futures markets, for example, might divert speculators from trading and thus lower the market liquidity available for hedging purposes. 
Moreover, such a fund would require exorbitant resources to be operational, not to mention the tremendous challenges in determining a price level that would trigger its intervention. 
Given the important role that commodity futures play for many market participants, regulatory measures should aim at enhancing confidence in the functioning of the market. 
This can be achieved by increasing transparency and the amount of available information on futures trading. 
Recent initiatives by the US Commodity Futures Trading Commission point in the right direction. 
In order to counteract suspicious behavior – such as traders requesting permission to invest amounts that are above their speculative-position limits – the Commission lifted exemptions for two firms trading in maize, wheat, and soybean futures. 
Such measures will contribute to shaping a more stable market environment and ensure that commodity futures reduce risks and volatility. 

Is Stimulus Still Necessary? 
LONDON – Have stimulus packages brought the world’s traumatized economies back to life? 
Or have they set the scene for inflation and big future debt burdens? 
The answer is that they may have done both. 
The key question now concerns the order in which these outcomes occur. 
The theory behind the massive economic stimulus efforts that many governments have undertaken rests on the notion of the “output gap.” 
This is the difference between an economy’s actual output and its potential output. 
If actual output is below potential output, this means that total spending is insufficient to buy what the economy can produce. 
A stimulus is a government-engineered boost to total spending. 
Government can either spend more money itself, or try to stimulate private spending by cutting taxes or lowering interest rates. 
This will raise actual output to the level of potential output, thereby closing the output gap. 
Some economists – admittedly a diminishing number – deny that there can ever be an output gap. 
The economy, they argue, is always at full employment. 
If there are less people working today than yesterday, it is because more people have decided not to work. 
(By this reasoning, a lot of bankers have simply decided to take long holidays since last September’s financial meltdown.) 
So today’s output is what people want to produce. 
Attempts to stimulate it will produce only higher prices as people spend more money on the same quantity of goods and services. 
A more sensible view is that today’s economy is not producing as much as it could and that there are many more people who want to work than there are jobs available. 
So a stimulus will boost both output and employment. 
But how large must such a stimulus be? 
The United States Congressional Budget Office (CBO) estimates that American output will be roughly 7% below its potential in the next two years, making this the worst recession since World War II. 
American unemployment is projected to peak at 9.4% towards the end of 2009 or the beginning of 2010, and is expected to remain above 7% at least until the end of 2011. 
The US government has pledged $787 billion in economic stimulus, or about 7% of GDP. 
Superficially this looks about right to close the output gap – if it is spent this year . 
But it is in fact a three year-program. 
Some $584 billion is allocated for 2009-2010, leaving perhaps $300 billion of extra money for this year. 
Even so, it is not clear how much of that will be spent. 
This can be illustrated by a simple example. 
Suppose the government distributes the extra cash to its citizens. 
Some of it will be saved. 
American household saving has shot up from 0% to 5% since the start of the recession, understandably to pay off debt. 
Another part of the extra money will be spent on imports, which does nothing to stimulate spending on US output. 
Let’s subtract 20% for these two items. 
The bad news, then, is that only 80% of the $300 billion, or $240 billion, will be spent initially. 
The good news is that this figure is multiplied over successive rounds of spending, as one person’s spending becomes another person’s income, and so on. 
The value of the multiplier depends on assumptions about the size of the “gap,” “leakages” from the spending stream, and the effect of government programs on confidence. 
Estimates vary from a multiplier of about two all the way down to zero. 
A multiplier of two would generate $480 billion of extra spending, compared to a multiplier of one, which would generate just the initial $240 billion. 
If the multiplier is zero, as conservative-minded economists believe, there will be no effect on output, only on prices. 
A further source of stimulus is “quantitative easing,” or, more simply, printing money. 
By buying government securities, the central bank injects cash into the banking system. 
This is intended to stimulate private spending by bringing down the rate of interest at which banks lend to their customers. 
Extra hundreds of billions of dollars have been injected into banks worldwide by this means. 
But the stimulus effect of quantitative easing is far less certain than even that of fiscal stimulus. 
While the policy caused credit spreads to narrow and bond market liquidity to improve, many banks have been using the extra money to rebuild their balance sheets (the equivalent of increased household savings) rather than lending it to businesses and individuals. 
Several conclusions can be drawn from what admittedly are back of the envelope calculations. 
The first is that stimulus packages around the world arrested the slide into depression, and may have started a modest recovery. 
Second, it is too early to scale down the stimulus, as Japan and the US seem ready to do. 
As one British official said ahead of the G-20 summit in Italy in July, “We should start to prepare exit strategies, but we should start implementing them only when [we] are sure [we] have got a recovery that is entrenched and self-sustaining, and I don't think anyone is saying we are at that point yet.” 
Third, existing policy, even if maintained, will not produce self-sustaining recovery. 
At best, it offers the prospect of several years more of sub-normal activity. 
A double round of stimulus packages is needed to counteract the real prospect of a double-dip recession. 
The time to start worrying about inflation is when the recovery is entrenched. 
To pay back the debt without strain, we need a booming economy. 
Talk of government spending cuts is premature. 
‘A boom not a slump is the right time for austerity at the Treasury’ said Keynes. 


Is Syria the Next Domino? 
LONDON – With the Tunisian and Egyptian regimes gone and street protests roiling cities from Algiers to Tehran, many people are now wondering which domino might fall next. 
Syria, whose secular, militarized dictatorship most closely resembles the fallen regimes of Tunisia and Egypt, may not be next in line, but appears nonetheless to be approaching a tipping point. 
Of course, the old “domino theory” in international relations was only a crude way of emphasizing that different parts of any region are linked to each other. 
For today’s Arab world, a better metaphor might be a chessboard, from which the removal of even a pawn inevitably alters the relationships among all the other pieces. 
Today, as protests mount and multiply, the government of every Arab state in the Middle East and North Africa probably believes that, if left to its own devices, it can contain internal dissent. 
In Syria, it seems inevitable that protest may soon crack the regime’s brittle political immobility. 
Most ordinary Syrians face extremely difficult economic and social conditions, including high unemployment, rising food prices, constraints on personal freedom, and endemic corruption. 
These factors are no different from those that brought people on to the streets in North Africa and the Middle East. 
What began as protests over living conditions became full-scale demands for freedom and democracy. 
The regime in Damascus is fearful of similar unrest, as it should be. 
The best way to avoid a confrontation between the people and the security forces is a process of genuine reform leading to elections and a government of national unity. 
The ingrained inertia of the current regime, however, seems to preclude any early move toward that. 
Instead, Syria’s rulers are offering inducements to ensure that key constituencies remain in line – laptops for teachers, subsidies for public-sector workers, and empty reformist rhetoric. 
But the current situation calls for far more serious measures. 
Lifting the state of emergency that has been in force since 1963 – giving sweeping powers to the regime and its security services – would be both a symbolic and tangible step in the right direction. 
Unless Syria’s rulers, like other leaders in the Arab world, begin to appreciate that freedom is a fundamental human right, even the most quiescent people’s patience may wear dangerously thin. 
High food prices may have served as a trigger in North Africa, but the speed with which the protesters turned their attention to political reform caught everyone off guard. 
Putting this genie back in its bottle would be virtually impossible without bloodshed of the type we are now witnessing in some parts of the Arab world. 
So the Syrian leadership knows that it must respond – hence the half-hearted reform agenda that it recently outlined. 
But trying to address deep-rooted popular grievances with flowery language and a bouquet of subsidies is like trying to extinguish a forest fire with a water pistol. 
The solutions to Syria’s problems must be as substantive as the problems are serious. 
Until now, Syria’s rulers have relied on their anti-Israel, anti-Western rhetoric to protect themselves. 
But cries about the Israel-Palestine conflict were rarely heard in the protests in Tunis and Cairo. 
Furthermore, in the last few years, when Israeli planes struck targets in Syria, there was no answer from the regime –amp#160;and still none when Israeli planes flew over the presidential palace. 
The regime claims that it is part of the 'resistance' with its senior partner Iran. 
However the WikiLeaks cables show that the Syrian leadership told the Iranian regime not to count on it in any war with Israel because it is too weak. 
So the regime is making a fatal error if it thinks that its old diversionary tactics will continue to provide it with immunity. 
On the contrary, with a young, well-educated population unable to find suitable work, the regime has created its own cadre of potential protestors, who are aware that it is using empty slogans to keep the state of emergency and stay in power. 
The Syrian people are strong, patient, resilient, and resourceful. 
Family and social bonds remain potent in the face of adversity. 
When food is scarce, people share. 
When the regime cracks down on the Internet, people use proxy servers. 
But they should not have to make do. 
They should not have to risk their safety when they seek to engage with the world online. 
No one wants to see the streets of Damascus consumed in protest, or a violent confrontation erupt between protesters and security forces. 
What the Syrian people want is a meaningful dialogue with the regime. 
The regime must appreciate that, despite its best efforts, Syrians have been watching events in the region with as much interest as the rest of the world. 
Syria’s people may have no predilection for violence, but the birth of freedom, once witnessed, is not easily forgotten – or trumped by state handouts and vacuous statements by a distant, self-isolated leadership. 
People said the Berlin Wall would not fall. 
They said that Mubarak would not stand down. 
And still some say that Syria cannot change. 
But Syria will change, and I, like my compatriots, pray that when change comes, it is peaceful and harmonious. 

Is the "New Economy" a Fad? 
Not long ago the "new economy" was portrayed by many as having repealed the laws of economic gravity: stock prices, productivity, and employment were to go ever up, never to go down. 
NASDAQ's crash and the worldwide slowdown which followed caused many to think that the much vaunted "IT revolution" was merely another speculative bubble. 
So, the question we now face is this: how important will the technological revolutions in data processing and communications be in the long run? 
Can we really speak of a "new economy"? 
No one has a crystal ball and erroneous predictions are possible. 
Nevertheless, we believe that the long_run economic impact of the "new economy" is likely to be huge. 
Some technological innovations change our lives but have no lasting effect on the economy as a whole. 
The revolution in illumination is a good example. 
In 1800, an American household spent 4% of its income on candles, lamps, oil, and matches. 
It now spends less than 1% on lighting and consumes more than a hundred times as much artificial illumination. 
The real price of light fell by a thousandfold over the past two centuries, yet we do not speak of the "illumination revolution," or of a "new economy" based on streetlights and fluorescent office and store lights. 
For a technological change to revolutionize an entire economy, as steam power and electricity did, its effect must not be local, but must radiate across much of the economy, so that the demand for new products grows more rapidly than the decline in their prices. 
Only then can we speak of a "new economy" because only then does the share of the new sector's products in total expenditure grow, with high productivity growth in the new sector translated into productivity growth for the entire economy. 
Armed with this observation, let's look at the impact of the changes in data processing and communications. 
Note first the phenomenal growth of productivity in the new sector. 
By the late 1950s there were roughly 2000 computers in the world and their processing power averaged 10,000 machine instructions per second. 
There are now 300 million computers in the world, with processing power averaging several hundred million instructions per second--a four_billion_fold increase in raw automated computational power, an average annual growth rate of 56%! 
There is every reason to believe that this pace of productivity growth will continue for decades. 
More than a generation ago Intel's co_founder Gordon Moore noticed that improvements in semiconductor fabrication allow for a doubling of the density of transistors on a chip every eighteen months. 
The scale of investment needed to make what is known as "Moore's Law" hold has grown exponentially along with the density of transistors and circuits, but "Moore's Law" remains in force, and engineers see no immediate barriers that will bring the process of improvement to a halt anytime soon. 
Rapid technological progress brings rapidly falling prices. 
As prices fall, IT products, unlike light, are ever more in demand because this explosion of technology has profound consequences for how we organize production across the whole economy. 
Computers, switches, cables, and software are general_purpose technologies, hence demand for them is likely to be extremely elastic. 
Indeed, each successive generation of falling prices appears to produce new uses for computers and communications equipment, thus increasing demand and increasing their salience in the economy as a whole. 
The early, very expensive, computers performed complicated and lengthy arithmetic operations. 
Their use was at first limited to the military, and was then extended to America's Census Bureau, which also needed to perform lengthy calculations. 
Only later did it become clear that the computer was good for much more than repetitive calculations at high speed. 
The computer was also an organizer. 
Airlines automated their reservation systems and insurance companies automated back office sorting and classifying. 
Subsequent uses included computer_aided product design. 
In this and other applications, the computer functions as a "what_if machine": it creates models of what would happen if the airplane, the molecule, the business, or the document were to be built up in a particular way. 
It thus enables an amount and a degree of experimentation in the virtual world that would be prohibitively expensive in the real world. 
Indeed, the process has come full circle: today's complex designs for new semiconductors would be impossible without automated design tools. 
Progress in computing depends upon Moore's law; and the progress in semiconductors that makes possible the continued march of Moore's law now depends upon progress in computers and software! 
As computing power increases, computer usage continues to expand to new applications. 
Production and distribution processes are being transformed, not just through robotic auto painting or assembly, but through such things as scanner_based retail inventory control and robot_guided hip surgery. 
Computers have burrowed inside conventional products and become embedded systems. 
They have become interconnected in the World Wide Web--a distributed database of information accessible through a single global network. 
Paralleling the revolution in data processing has been a similar revolution in data communications capacity. 
There is no sign that the domain of potential uses is exhausted. 
Indeed, we used to live in an economy in which the canonical source of value was an ingot of iron, a barrel of oil, or a bushel of wheat. 
We are now moving towards an economy in which the canonical source of value is a gene sequence, a line of computer code, or a logo. 
Goods are increasingly valued not for their physical properties but for weightless ideas. What you know matters more than how much you can lift. 
Thus, unless Moore's Law ceases to hold or the marginal usefulness of computers and communications equipment rapidly declines, the economic significance of the IT sectors will not shrink, but grow. 
Rapidly falling prices and extremely elastic demand will sustain rapid growth in these sectors' share of total economic expenditure. 

Is the Bank Crisis Over? 
MUNICH – As America’s various rescue plans take hold, stock markets are recovering somewhat. 
The S&P 500 price/earnings ratio is gradually climbing back to its long-term average of 16. 
Bank shares in particular are rebounding, and some banks have even succeeded in repaying at least part of their government-provided capital. 
But, as I point out in my new book Kasino-Kapitalismus , this may only be a temporary improvement in expectations rather than a sign of permanent recovery, as the size of the banks’ hidden losses on their balance sheets is probably enormous. 
According to the International Monetary Fund’s most recent estimates, the total write-offs on financial claims in this crisis will be $4.05 trillion for the United States, Japan, the euro zone and the United Kingdom, of which the US alone will have to absorb $2.7 trillion. 
But according to my calculations of Bloomberg data, just $1.12 trillion had actually been written off worldwide by February, 2009. 
This suggests that only a quarter of the necessary write-offs have been realized. 
For the US and Switzerland, this is particularly bad news, as in both countries the realized write-offs already amount to 53% and 54% of the aggregate balance sheets of their national banking systems, which corresponds to 4.4% or 15.0% of GDP, respectively. 
The Netherlands, the UK, and Germany should also be concerned, as they come next in the ranking of countries whose banking systems have been hit hardest by the crisis. 
Their write-offs were 2.0%, 4.2% and 2.8% of GDP, respectively, which corresponds to 11%, 16% and 22% of the aggregate equity stock of their banking systems. 
These frightening numbers raise doubts about the stability of the West’s financial system, and they dwarf all measures, such as “bad banks” and government guarantees, that attempt to solve a mere liquidity crisis. 
The banking system is not primarily suffering from a temporary breakdown of the inter-bank market and a transitory decline in asset values that could be overcome simply by waiting for recovery. 
Rather, the banking system is at the brink of insolvency, with a permanent loss in equity capital. 
The prices of structured securities such as collateralized debt obligations have come down, because the institutional fraud of a multi-fold chain of securitizations has been detected. 
Cash-back loans to NINJA (No Income, No Job, and No Assets) customers that included voluminous fees to brokers and were securitized and structured up to 60 times do not represent any value. 
And if the structuring process created 70% triple-A rated paper out of what on average were B-value loans, there must have been fundamental flaws in the rating process, which will not disappear simply because the economy or the stock market recover. 
Moreover, defaults on securitized credit card debt and commercial loans to companies that are driven to bankruptcy are still to come. 
They will continue to deprive the banking system of its equity capital, with little chance of it being recouped in the near future. 
Accounting rules are generous enough to allow banks to keep many losses under the carpet for the time being. 
But it is only a matter of time until banks are forced to reveal the truth. 
Thus, there is no point in waiting for miracles. 
That mistake was made by the Japanese, who tried, unsuccessfully, to muddle through, only to end up with 18 years of stagnation. 
In today’s crisis, muddling through would be a recipe for a continuation of the crisis and secular stagnation of the type once described by Alvin Hansen, a contemporary of Keynes. 
Hansen predicted that capitalism would suffer from a permanent underinvestment crisis. 
Banks would scale down their balance sheets in proportion to their reported equity losses and exacerbate the credit crunch from which the world is already suffering today. 
Bad banks that are constructed generously enough to provide banks with hidden equity injections are one way to avoid or mitigate the credit crunch. 
But establishing them would be a bad idea, because to do so would imply that government subsidization of banks, thereby creating incentives for imprudent behavior in the long run. 
After all, one reason for the banking crisis was that banks expected governments to bail them out in case of trouble. 
A better way to help banks and prevent them from simply deleveraging their business would be to establish full transparency and provide fresh money from taxpayers. 
But governments should not make gifts. 
Instead, they should become partners of private shareholders, endowing the banks temporarily with new equity capital until the crisis is over. 
This rescue strategy has a double advantage. 
It helps banks immediately, and it creates the right incentives for future behavior, as banks will know that the government will not prevent private equity capital from being destroyed in a crisis. 
This type of rescue strategy also makes it possible to increase the required supervisory equity-asset ratios of banks in the midst of the crisis without risking a credit crunch. 
If government becomes a partner, it may well endow the banks immediately with the equity required to sustain their business. 
Banks would again trust each other, and the inter-bank market would be re-established. 
Of course, from a political perspective, reforms such as these can best be carried out when the crisis is acute, not when Wall Street believes it can go back to business as usual. 
The time for reform is now. 

Is the Boss Overpaid? 
Ever since 2001, when France enacted a law requiring listed companies to reveal their executives’ pay packages, newspapers have had a field day denouncing greedy bosses. 
Not only are fixed salaries revealed, but so are bonuses, fees for serving on boards of directors, returns on stock options, pension packages, and other perks, such as corporate jets or chauffeur-driven cars. 
But executive remuneration has usually faded from view once the journalistic spotlight shifts elsewhere – that is, until now. 
This year, executive heads have started to roll. 
In June, Antoine Zacharias, chairman and CEO of Vincy, France’s biggest public concessions and construction company, was obliged to resign when a majority of the board of directors judged his remuneration to be outrageous: €4.3 million in salary, a €13 million retirement bonus, a €2.2 million pension, and an estimated €173 million in stock options. 
But the focus of debate was a €8 million exceptional bonus that he requested after successfully executing a financial operation at the end of his tenure. 
More recently, Noel Forgeard, the French co-CEO of the Franco-German aeronautical and defence company EADS, was forced to resign under a cloud of suspicion: he sold his EADS shares in March, before the company announced a costly delay in production of the Airbus A380. 
Whether Forgeard acted illegally is still under investigation, but, with the announcement causing the share price to plummet by 26% overnight – wiping out €5.5 billion of the company’s value – his position became untenable. 
Such events have brought old questions back to the fore in almost every rich country: Are bosses being paid too much? 
Should laws governing stock options be reformed? 
Although the circumstances are different, the fundamental issues are always the same, for they touch on questions of legitimacy and morality. 
If remuneration is perceived as unjust, trust in the capitalist system will suffer. 
The French debate about executive compensation is particularly striking in this respect, because managers’ salaries are in fact lower than those paid to their German, British, and American counterparts, and their remuneration has grown in step with corporate share prices, increasing six-fold in 25 years. 
Moreover, like managers everywhere, their responsibility is great, making their positions less secure, while companies must compete for the relatively few good ones, driving up their price. 
But critics argue that the best managers are not necessarily the best paid, that the market for them is not transparent, and that boards of directors are often partial to their presidents when setting compensation. 
Likewise, they insist that mergers and acquisitions, which make big companies bigger, should not be motivated by salary considerations, and that “golden parachutes” should not be granted to failed managers. 
More fundamentally, they claim that it is simply immoral that bosses should earn as much in a day as their employees do in a year. 
No manager is a superstar, a Tiger Woods or Michael Schumacher of the boardroom. 
Stock options, too, often stir passionate criticism. 
Allowing managers to buy shares at prices fixed in advance was intended to align their interests with those of other shareholders by giving them a personal stake in building the value of the company. 
But, for some managers, stock options have created an incentive to inflate profits and hide losses, thereby enriching themselves artificially while jeopardizing their companies and other shareholders. 
The question is not specific to France. 
In the United States, a recent study by two university professors showed that more than 25% of the companies reviewed had manipulated the dates of stock-option allowances to increase the profits of the beneficiaries. The US Securities and Exchange Commission (SEC) and the US Department of Justice apparently decided to fight the “backdating” practices, which where especially common in Silicon Valley. 
In France, a law adopted in 2005 requires that severance pay for company managers now be subject to a shareholder vote, and the EADS scandal has spurred consideration of further legal changes. 
A bill proposed by former Prime Minister Edouard Balladur seeks to eliminate perverse incentives by barring corporate officers from exercising their stock options until they leave the company. 
Jacques Chirac, more cautiously, stated that stock options should be legally “encadrés” (framed). 
Others suggest broadening the scope of stock options to include more employees. 
Some Socialists are more radical, advocating, as Laurent Fabius recently did, the suppression of stock options. 
The problem with legal measures, however, is that they can have pernicious side effects and unintended consequences, especially when they are tailored to a particular crisis. 
The state’s function should be to enact and enforce laws on corporate governance and taxation of managers’ compensation. 
In all other areas, legislation cannot serve as a substitute for the exercise of common sense, discernment, and responsibility by a company’s board of directors. 
But if we must have laws to bolster our ethics, their guiding principle should be that remuneration is always linked to the performance and services it is intended to compensate. 
Only measures that ensure that companies reward true merit will be considered legitimate by employees, shareholders, and the public. 

Is the EU Paralyzing Itself? 
European integration has been compared to a bicycle that must be moved forward, because otherwise it falls to the ground. 
According to this analogy (which does not imply that Europe is a Tour de France) integration is an ever-moving process that always demands new stimuli, otherwise the forces of stagnation and disintegration will gain the upper hand. 
The introduction of Euro coins and notes, as well as the looming enlargement of the EU eastward, should provide the needed stimulus, and add to the economic dynamics of the EU. 
But when the EU expands to include 27 members, its decision-making process will risk becoming deadlocked. 
The economic heterogeneity of such a large number of members, when paired with the unanimity required for core decisions to be taken on issues such as taxation, the budget, fundamental rules and other areas, means that the common denominator for decisions in the EU will become smaller and smaller. 
National interest and the status quo will become even more dominant, deepening the chance of paralysis. 
The arrival of these problems was foreseen long ago, but the Treaty of Nice failed to improve the means for intergovernmental decision-making within the European Council. 
On the contrary: the threshold for a qualified majority has been raised from 71.26% (68 of 87 votes) to 74.79% ( 258 out of 345 votes). 
With increased membership, the enlarged EU will move towards greater unanimity, which makes decision-making even more difficult, and increases the likelihood of blocking coalitions of members. 
But correcting this will become harder after new members have joined. 
So, as enlargement approaches, the EU faces a cross roads. 
To avoid a ``Stagno-Europe,'' the EU must focus on the essentials in the common institutional framework and allow more variety in an enlarged union, or it must develop institutional arrangements that shift additional portions of national sovereignty to the Union level. 
Certainly, political union and a common market require a uniform frame of reference to prevent major distortions in competition. 
But increased heterogeneity in a Union of 27 requires a more flexible institutional framework. 
Only what is essential should be harmonized within this institutional framework. 
Here, the rule should be: deem something essential only if the EU's four freedoms - free movement of goods, services, people and capital - will be seriously impaired without such a designation. 
Whatever is necessary in order for markets to function efficiently should be considered essential. 
Following this approach, the EU's Structural and Regional Funds must be changed before Eastward enlargement takes place because, after it does, the new East European members will be able to forge a blocking minority. 
Agricultural policy should be shifted from price subsidies to income transfers, with these transfers turned into a national obligation, not a Union one. 
Moreover, a social union - that is, a common European framework of social insurance systems for health, unemployment and retirement as well as social welfare - is not feasible and so should not be treated as essential to the Union. 
Labor market deregulation must also be treated as a national obligation. 
The alternative to focussing on the essentials is to cede more national sovereignty to the Union level. 
Europe's autonomous nation states have already passed important elements of their sovereignty to supranational decision-making through the Treaty of Europe. 
If more national sovereignty is to be ceded, the EU's ``democratic deficit'' must be closed, with the European Parliament gaining a bigger say over policy. 
For any of that to happen, a constitution-like arrangement will need to be developed in which decisions are assigned to different layers within Europe: the European, the national, and the regional level. 
According to the subsidiarity principle, economic competencies should be transferred to the lowest possible government body. 
Only when a transfer of competencies to the supranational level leads to efficiency gains that exceed the welfare losses due to centralization should national and regional responsibility be replaced by the supranational. 
This implies that public goods of a limited dimension in space should be provided on the local or regional level, those of a larger size should be supplied on the national level and that Europe-wide public goods be dealt with on the European level. 
The route to a constitution-like arrangement will be severe and complex. 
It requires considerations similar to those written about in the ``Federalist Papers,'' which appeared when the US was creating itself. 
In Europe's case, a constitutional framework will require an even more federalist structure than that established in America. 
Such a route presupposes that ``the people'' are sovereign. 
But a European people does not (or does not yet) exist. 
Neither does European ``public opinion.'' 
Thus, the role of a European parliament must be limited. Consequently, surrenders of national sovereignty must be limited as well. 
At the core of this debate, as it was over two hundred years ago in America, is taxation. 
Ceding national sovereignty implies shifting the power to tax, the power to spend and the power of the budget to the European level. 
This means that a European institution such as the European parliament would be authorized to decide the type of tax, the tax base and the tax rate for the individual tax payer; it would also be able to decide that a tax collected in one country can be spent in another country. 
But preparedness to surrender national sovereignty to the Union varies between EU member countries. 
It is hard to imagine how the process of ceding national sovereignty will look in the next twenty years. 
Yet it is certainly one way to overcome the institutional blockade that now looms. 

Is the Euro Overvalued? 
CAMBRIDGE – An American traveler in Paris or Berlin is continually struck by how high prices are relative to those in the United States. 
A hotel room, a simple lunch, or a man’s shirt all cost more at today’s exchange rate than they would in New York or Chicago. 
To bring the cost of those goods and services down to the level in the US would require the euro to fall relative to the dollar by about 15%, to around $1.10. 
It is easy to jump from this arithmetic to the conclusion that the euro is overvalued, and that it is likely to continue the decline that began last December. 
But that conclusion would be wrong. 
Looking ahead, the euro is more likely to climb back to the $1.60 level that it reached in 2008. 
There are three reasons why the traveler’s impression that the euro is overvalued is mistaken. 
First, the prices that the traveler sees are generally increased by value-added tax (VAT), which is universal in Europe but unknown in the US. 
Remove the VAT, which is typically 15% or more, and the prices in Europe are similar to those in the US. 
Second, the goods and services that the traveler buys are just a small part of the array of goods and services that are traded internationally. 
The goods that Europe exports include machinery, chemicals, and a variety of other products that consumers do not buy directly. 
To judge whether their prices are “too high” at the existing exchange rate we have to look at the trade balance. 
Germany , Europe’s largest exporter, has a very large trade surplus with the rest of the world. 
Because German exports are attractive to foreign buyers at the existing exchange rate, Germany in 2009 was the world’s second largest exporter (after China). 
Germany’s exports exceeded its imports by nearly $200 billion in the past twelve months, a surplus equivalent to nearly 6% of GDP. 
It is clear that Germany’s net exports would remain high even if the euro appreciated substantially from its current level. 
The other eurozone countries are not as competitive as Germany at today’s exchange rate. 
But the euro area as a whole nonetheless had a trade surplus of more than $30 billion over the past 12 months. 
And, with the euro down significantly relative to many other currencies over the past year, Europe’s trade balance can increase further in the months ahead. 
To limit that increase, the euro must rise. 
This brings me to the third, and most fundamental, factor that is likely to cause the euro to strengthen substantially from its current level: global economic conditions require the eurozone to have a substantial trade and current-account deficit so that it becomes a large net importer of funds from the rest of the world. 
There are two reasons for this. 
First, the oil-producing countries and China will continue to export substantially more than they import. 
Their net foreign earnings must be invested in foreign countries’ stocks and bonds. 
While much of that investment will flow to the US, the surplus countries want to diversify their investment of these new net export earnings. 
The eurozone provides the only large capital market other than the US for such investments. 
But the eurozone can increase its inflow of foreign capital only if it has a current-account deficit, i.e., if it increases its imports relative to its exports. 
And that will require a less competitive euro – higher relative to the dollar and other currencies. 
The flow of net export earnings from the oil producers and others into euros will push up the value of the euro and enable the transfer of funds to occur. 
Second, countries with large accumulations of dollar reserves will be shifting substantial fractions of those reserves into euros. 
Central banks in Asia and the Middle East have traditionally held their reserves in dollars. 
That made sense when they needed those reserves to be very liquid so that they could bridge temporary trade deficits. 
But those foreign-exchange balances have grown far beyond the level needed as emergency reserves. 
South Korea and Taiwan, for example, have foreign-exchange holdings of more than $250 billion each, and China’s holdings total more than $2 trillion. 
These and other countries with very large foreign-exchange balances are beginning to diversify their holdings from dollars to euros, a process that will continue and that will inevitably cause the euro to rise relative to the dollar. 
So, while I will continue to complain about the prices that I face when I travel in Europe, I understand that the prices that matter for trade are more competitive than those that I see when I pay for my lunch. 

Is the European Dream Over? 
NEW YORK – Were the Euroskeptics right after all? 
Was the dream of a unified Europe – inspired by fears of another European war, and sustained by the idealistic hope that nation-states were obsolete and would give way to good Europeans – a utopian dead end? 
On the surface, Europe’s current crisis, which some people predict will tear apart the European Union, is financial. 
Jacques Delors, one of the architects of the euro, now claims that his idea for a single currency was good, but that its “execution” was flawed, because the weaker countries were allowed to borrow too much. 
But, fundamentally, the crisis is political. 
When sovereign states have their own currencies, citizens are willing to see their tax money go to the weakest regions. 
That is an expression of national solidarity, a sense that a country’s citizens belong together and are prepared, in a crisis, to sacrifice their own interests for the collective good. 
Even in nation-states, this is not always self-evident. 
Many northern Italians fail to see why they should pay for the poorer south. 
Affluent Flemings in Belgium resent having to support unemployed Walloons. 
Still, on the whole, just as citizens of democratic states tolerate the government that won the last election, they usually accept economic solidarity as a part of nationhood. 
Since the EU is neither a nation-state nor a democracy, there is no “European people” to see the EU through hard times. 
Rich Germans and Dutch do not want to pay for the economic mess in which the Greeks, Portuguese, or Spanish now find themselves. 
Instead of showing solidarity, they moralize, as though all of the problems in Mediterranean Europe were the result of native laziness or its citizens’ corrupt nature. 
As a result, the moralizers risk bringing the common roof down on Europe’s head, and confronting the nationalist dangers that the EU was created to prevent. 
Europe must be fixed politically as much as financially. 
It is a cliché, but nonetheless true, that the EU suffers from a “democratic deficit.” 
The problem is that democracy has only ever worked within nation-states. 
Nation-states need not be monocultural, or even monolingual. 
Think of Switzerland or India. 
They need not be democracies, either: China, Vietnam, and Cuba come to mind. 
But democracy does require that citizens have a sense of belonging. 
Is this possible in a supra-national body like the EU? 
If the answer is no, it may be best to restore the sovereignty of individual European nation-states, give up on the common currency, and abandon a dream that is threatening to become a nightmare. 
This is what the more radical Euroskeptics in Britain think, having never shared the EU dream to begin with. 
It is easy to dismiss this as typical British chauvinism – the insular attitude of a people living in splendid isolation. 
But, in Britain’s defense, its citizens have had a longer and more successful democratic history than have most continental Europeans. 
Still, even if disbanding Europe were possible, it would come at enormous cost. 
Abandoning the euro, for example, would cripple the continent’s banking system, affecting both Germany and the affluent north and the distressed countries in the south. 
And, if the Greek and Italian economies face difficult recoveries inside the eurozone, consider how hard it would be to repay euro-denominated debts with devalued drachmas or liras. 
Quite apart from the financial aspects, there would be a real danger of throwing away the benefits that the EU has brought, particularly in terms of Europe’s standing in the world. 
In isolation, European countries would have limited global significance. 
As a union, Europe still matters a great deal. 
The alternative to dismantling the EU is to strengthen it – to pool the debt and create a European treasury. 
If European citizens are to accept this, however, the EU needs more democracy. 
But that depends upon a vital sense of European solidarity, which will not come from anthems, flags, or other gimmicks devised by bureaucrats in Brussels. 
For starters, affluent northern Europeans have to be convinced that it is in their interest to strengthen the EU, as it certainly is. 
After all, they have benefited most from the euro, which has enabled them to export cheaply to southern Europeans. 
While it is up to national politicians to make this case, the EU’s governing institutions in Brussels, Luxembourg, and Strasbourg also have to be brought closer to European citizens. 
Perhaps Europeans could vote for members of the European Commission, with candidates campaigning in other countries, rather than just in their own. 
Perhaps Europeans could elect a president. 
Democracy may seem like a mad dream in a community of 27 nation-states, and perhaps it is. 
But unless one is prepared to give up on building a more united Europe, it is surely worth considering. 
And who can say what is possible? 
Consider football clubs, the modern world’s most insular, even tribal institutions. 
Thirty years ago, who would have imagined that two of London’s most popular clubs – Arsenal and Chelsea – would have a French and a Portuguese coach, respectively, and players from Spain, France, Portugal, Brazil, Russia, Serbia, the Czech Republic, Poland, Mexico, Ghana, South Korea, Holland, Belgium, Nigeria, and the Ivory Coast? 
Oh, yes, they have one or two from Britain, too. 

Is the European Union imploding? 
The prospect of being accepted into the EU provided the nations of Eastern and Central Europe with a strong incentive to achieve fiscal balance - a process somewhat similar to what happened in Western Europe at the time the euro was launched. 
In both cases, however, after initial progress, countries have shown clear signs of political "fatigue": in the euro area, the Stability Pact has imploded; throughout Eastern Europe, budget deficits have started to rise. 
In the Czech Republic last year, the budget deficit jumped to 13% of GDP, a threefold increase since 1999. Although this included a one-time charge for bank restructuring costs, this year the deficit will close above 6% of GDP. 
In Hungary the budget deficit is widening again, after narrowing to 4% of GDP in 2001. Malta, too, has a deficit close to 10% of GDP, up four percentage points since 2001. 
In many ways, this is not surprising: once politicians no longer face annual EU progress reports - and the threat of exclusion - fiscal relaxation becomes much less costly. 
At the same time, the big euro area members (France and Germany) do not have a leg to stand on to criticize other countries' fiscal policies, so there are virtually no international constraints on EU countries' budget deficits. 
Indeed, these constraints have proven to be utterly useless after a country's EU entry, and it will be hard to impose them as an admission criterion for other potential entrants. 
Perhaps more surprising is the apparent political backlash against the governments that have led countries into the EU. 
Once again the similarity with what happened in Western Europe at the time of the euro's implementation is striking. 
The government of Romano Prodi, having managed against all the odds to get Italy into Europe's monetary union, fell three months later. 
The Czech Republic, Poland, and Hungary have each endured a government crisis since EU accession. 
Throughout Central and Eastern Europe, the EU is not as popular as it used to be. 
Voter turnout in the European Parliament elections in June was embarrassingly low in the new accession countries, ranging from just 17% in Slovakia to 38.5% in Hungary. 
Participating in their first-ever EU election, citizens in these countries turned out at a rate not only well below the European average (about 45%), but even below the UK average. 
The reasons are twofold. 
Accession countries felt that they were asked to make major fiscal adjustments in order to be accepted into the EU. 
Regardless of whether such policies were in the long-term interest of these countries, in the short run they were politically costly. 
This "adjustment fatigue," a term coined to describe the experience of Latin American countries to economic liberalization in the 1990's, is now coupled with the feeling that the EU is not such a great bargain after all. 
Perhaps most visible has been Western European countries' eagerness to protect their labor markets against migration from Central and Eastern Europe - a sticking point that always comes up in every meeting between politicians from the West and the East. 
Little wonder, then, that voters in Central and Eastern Europe now feel that they got a poor bargain from the governments that brought them in: belt tightening, labor market restrictions, and the notorious barrage of EU regulation. 
The result has been a reaction against these governments and a lack of public interest in EU affairs. 
So, after all the celebrations of European enlargement, we are left with a predictable set of problems: a "union" of countries with very different views on everything (from foreign policy to labor market policies) and different economic interests; widespread disillusionment among voters in the new member states; a constitutional process whose future is uncertain; and all the usual political wrangling in Brussels between countries seeking to get as much power as possible. 


Is the Market Moral? 
Clemenceau once said that war is too important to be left to the generals. 
By the same token, morality is too important to be left to philosophers, especially where the morality of markets is concerned. 
Those who see themselves as the protectors of morality are more likely to be antipathetic to markets, whereas those who favor them typically talk about production, distribution, and material wealth--anything but morality. 
The market's positive moral features, however, are many. 
Consider one identified by Adam Smith, namely the link between individual autonomy and self-support through legally free labor. 
"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest," Smith wrote. "Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow citizens." 
This passage is a famous statement of the utility of self-interest. 
But notice its assertion that dependence on others is morally degrading. 
Thomas Carlyle, and later Marx and Engels, would decry this appeal to self-interest and the related rise of the "cash nexus" as either a dangerous assault on tradition or a source of human self-alienation. 
At the least, there is the danger that the cash nexus can encourage a mindless commitment to work, and the belief that one's worth comes only from paid labor, leading to fear of dependence on others, or to shunning vital but unpaid activity. 
But the flip side of the cash nexus is the freedom and self-determination that comes from overturning customary social relations such as slavery and serfdom, which totally subordinated the individual to the will of a master. 
Nor does the cash nexus subordinate the individual to the will of the state. 
This independence was at the core of Hegel's insistence that supporting oneself by earning a living is one of the key ways that we gain a sense of ourselves as individuals. 
Moreover, market relations stimulate honesty as a virtue. 
Merchants who seek to build their business on a strong base of regular customers are unlikely to engage in fraud. 
Companies that want to attract and retain investors strive for financial transparency. 
Perhaps most importantly, market relations contribute to international peace by creating ever-wider forms of association. 
As Smith emphasized, when commerce links us to foreign peoples, we come to regard them not as barbarians but as potential suppliers and customers. 
In other words, capitalism creates a rational awareness of their needs and interests. 
Similarly, markets are a powerful solvent of religious and communal antagonism, by creating incentives to cooperate with those whose identity and ultimate commitments differ from our own. 
Having just passed through the bloodiest century in human history, increasing the zone of indifference to the ultimate goals of others--as long as they are not directed against us--should be mankind's top priority. 
But self-interested indifference does not mean a lack of mutual concern. 
Self-interest is linked to mutual concern every time a sales clerk asks, "Can I help you?" 
That phrase is often derided as phony and manipulative--except by those who have lived in societies where sales clerks ignore customers. 
The sales clerk's commercially motivated solicitude does lack true charity and altruism. 
But, seen historically, the market's ability to create a self-interested regard for others is surely preferable to the alternatives. 
Of course, self-interested solicitude can lead to inauthenticity , to a sense of always selling oneself--or rather, a sense of having to become someone who can be sold. 
This is a consistent theme of modern social criticism, from Rousseau through "Death of a Salesman" and beyond. 
The constant creation of new needs--when not bounded by a sense of how novelty fits into our lives--may put us on a treadmill of joyless consumption. 
But capitalism also creates newer and more complex forms of individuality than before. 
In previous societies, one's status as a peasant, artisan, or merchant often defined one totally. 
Being a member of a guild, for example, encompassed a complete set of social roles--economic, legal, political, and even religious. 
Modern market society, by contrast, is based upon looser, more temporary associations, founded to pursue specific economic, cultural, or political interests. 
Such associations demand only a small part of the individual's resources, sometimes only a token monetary contribution. 
As a result, the modern individual can belong to a greater range of groups, but groups that are less all encompassing. 
Modern associations allow for participation without absorption. 
I am a husband and father, a Buddhist, a jazz aficionado, a molecular biologist, a marksman, and a reader of modernist fiction. 
What is historically new--emerging just in the last few hundred years--is the possibility of being all of these things at once. 
This choice of possibilities is due in no small part to the market, and the peril we face is that so much choice can create a protean self, lacking binding commitments to anyone or anything, a self for whom the bottom line of every social contract is the escape clause. 
But awareness of this danger should not lead us to lose sight of a fundamental fact: many of the moral advantages and conceptions of selfhood that those in capitalist societies take for granted are due in no small part to capitalism itself. 

Is the US Economy Still in Recession? 
Given the size and economic importance of the US, the world is watching where the US economy is going. 
It peaked--and the 1990s boom came to an end--around March 2001, when America's remarkable economic expansion gave way to the first recession in ten years. 
But did that recession end when output started to grow in December 2001? Or is it still continuing? 
The National Bureau of Economic Research (NBER) and its Business Cycle Dating Committee, the semi-official arbiter and tracker of the US business cycle, remain silent. 
Recent economic and monetary policy changes have exposed a crucial ambiguity that had always been implicit in the way the NBER thought about business cycles. 
Since the Great Depression, it was almost always clear when a recession ended: industrial production grew strongly, total sales reversed their decline, and the unemployment rate fell. 
All of these trend reversals occurred simultaneously or within a very few months of each other. 
Thus, it never really mattered how one identified the end of a recession, or even whether one had a definition at all. 
As a Supreme Court justice once said of obscenity, "I may not know how to define it, but I know it when I see it." 
Recently, however, this rough-and-ready approach has begun to prove inadequate. 
In retrospect, the first warning sign was the so-called "jobless recovery" of the early 1990s. 
Production and sales bottomed out in March 1991. 
But the unemployment rate continued to rise--by more than a full percentage point before peaking at 7.6% in June 1992. 
If, as I believe, the most important business-cycle indicator is workers' justified anxiety about losing a job and the difficulty of finding a new one, then the worst cyclical moment for the American economy came a full fifteen months after the recession's semi-formal end. 
And things are worse this time. 
As measured by trends in production, the recession that began in March 2001 was one of the shortest and shallowest ever: over in less than nine months, and amounting to an extremely small decline in gross domestic product. 
The same appears true when measured by sales. 
But, as measured by employment, this is one of the worst, if not the worst, recession since the Great Depression: 2.1 million fewer people are at work in the US today than at the peak of the business cycle two years ago. 
If one includes normal growth of the labor force, the employment shortfall today relative to what it would have been had the 1990's boom continued amounts to 4.7 million jobs. 
So why the breakdown of the old business-cycle indicators? 
One reason is that the Federal Reserve has acted differently in the past decade and a half. 
Most earlier recessions were not entirely undesired: higher unemployment helped reduce inflation when it exceeded the Fed's comfort level. 
When the Fed concluded that inflation was no longer a threat and shifted its primary short-term task from ensuring price stability to boosting production, most earlier recessions ended. 
Lower interest rates caused all business cycle indicators--production, sales, employment, and the unemployment rate--to turn upward. 
A second reason is that roughly from 1970-1995, the underlying trend of productivity growth was relatively slow. 
When productivity grows slowly, it is extremely unlikely that rising production will be accompanied by falling employment. 
Since 1995 or so, however, the productivity growth trend underlying the US economy has been quite rapid: not 0.7% per year--the average during the preceding 25 years--but 2% or 3%, perhaps even more. 
And so far, there is every sign that rapid underlying potential productivity growth persists. 
With these two considerations in mind, the NBER's current dilemma becomes obvious. 
Unlike in previous recessions, this time there was no sudden shift in Fed policy to give all macroeconomic business cycle indicators the same turning point. 
Moreover, rapid growth in underlying productivity means that a respectable, if subnormal, recovery in terms of output growth is associated with falling employment and a rising unemployment rate. 
The lesson is that if we are to continue to use the word "recession," we finally have to define exactly what one is. 
Is a recession a period of falling output alone? 
Or is a recession a period when the labor market becomes worse for a typical worker? 
Whether the US economy is still in recession depends on how we answer this question. 
The most important point is not whether the US economy is in recession, but that the old categories simply do not fit. 
The US is still in an employment recession; but in the past, employment recessions were accompanied by falling output, which is not the case now. 
The US is in a production recovery; but in the past (except for 1991-1992), production recoveries were accompanied by improving labor markets, which is not the case now. 
Changes in economic policy and in the underlying productivity trend have created a situation in which neither "recession" nor "expansion," as these terms were used in the second half of the 20 th century, adequately describes the current situation. 
And that, it seems to me, is by far the most important issue to grasp regarding the current phase of the US business cycle. 

Is the World Bank Beginning to Understand Growth? 
At first sight, the World Bank's newest report on globalization contains few surprises. 
It repeats the mantra that the countries that went farther down the path of globalization became the ones with the greatest success in economic growth and poverty reduction. 
Buried within the pages of the report, however, is a startling admission: countries that integrated into the world economy most rapidly were not necessarily those that adopted the most pro-trade policies. 
Think about what this means. 
For the first time, the World Bank acknowledges that trade liberalization may not be an effective instrument, not only for stimulating growth, but even for integration in world markets. 
It is admitting, in an underhanded manner, that its repeated assertions about the benefits of globalization do not carry direct implications for how trade policy should be conducted in developing countries. 
In other words, the World Bank is beginning to face up to a reality that is obvious to anyone who looks at the empirical record with an open mind. 
Rapid integration into global markets is a consequence, not of trade liberalization or adherence to World Trade Organization (WTO) strictures per se, but of successful growth strategies with often highly idiosyncratic characteristics. 
Consider China and India, the two growth miracles of the last twenty years as well as the leading exemplars of what the World Bank calls ``globalizers.'' 
In both countries, the main trade reforms took place about a decade after the onset of higher growth. 
Moreover, trade restrictions in China and India remain among the highest in the world. 
In China's case, high growth started in the late 1970s with the introduction of the household responsibility system in agriculture and of two-tier pricing. 
China's authorities did not embark on import liberalization in earnest until much later, during the second half of the 1980s and the 1990s. 
As for India, its trend growth rate increased substantially in the early 1980s by about 3%. 
Meanwhile, serious trade reform did not start until 1991-93. 
Governments in both countries focused their scarce political capital and administrative resources on areas other than trade liberalization. 
Because both India and China did increase trade substantially, they are both considered as globalizers by the World Bank's criterion. 
But as their experience reveals--along with the experiences of many others, such as South Korea, Taiwan, and Vietnam--deep trade liberalization is hardly ever a factor in fostering higher growth and expanded trade early on. 
It is good to see the World Bank catching on to this simple reality. 
Unfortunately, there is still a lot of subterfuge in the World Bank's report. 
You will not notice how much ground the Bank has given up unless you dig deep in the report and look at the way the evidence is presented. 
Even there, you will find a residue of the intellectual sloppiness that the World Bank has displayed on this issue in the past. 
For example, a chart in the report shows that the World Bank's sample of ``more globalized'' countries had deeper tariff cuts than the ``less globalized'' countries. 
The unstated implication - but the one the reader is expected to draw - is that tariff cuts were an important determinant of global integration and hence growth. 
Of course, if there was direct evidence that these tariff cuts were correlated with growth (there isn't), you can be certain that the World Bank would have presented those results instead. 
In fact, only a few lines further down, the report denies that the question is even relevant. ``Whether there is a casual connection from opening up trade to faster growth is not the issue'' declares the report. 
One wonders why not. 
Why did the World Bank invest so much intellectual capital on establishing the linkage between trade openness and growth if that is not an important issue? 
These oddities are perhaps to be expected for an institution that is being forced to backtrack from a position that has become analytically and empirically untenable. 
We should just be happy that some degree of realism is returning to the World Bank's discussion of globalization. 
The bottom line is this. 
Countries that managed to grow rapidly and reduce poverty also tended to become increasingly integrated into the world economy. 
What's at issue is the policy conclusion to be drawn from this empirical observation. 
Previously, the World Bank wanted you to think that a significant liberalization of the trade regime is a key element in unleashing all those good things. 
Now it is no longer so sure. 
Neither should we be. 

Is There a Bubble in Home Prices? 
Around the world, newspapers trumpet a "housing bubble" about to burst. 
The Economist has run numerous cautionary articles with titles like "Castles in Hot Air." 
"Housing Prices Soar, Fueling Bubble Fears," chirped The Wall Street Journal . 
"The Property Bubble Menaces Growth," warned Le Monde . 
"Homes Bubble May go Toxic," The Sydney Morning Herald admonished. 
Are such fears justified? 
How do we know if the housing market is in a bubble? 
The term "bubble" is widely used but rarely defined. 
A bubble occurs when public expectations for future price increases become exaggerated, pushing prices up to unsustainable levels. 
When this happens, many people buy homes to rent out as investment properties, and many more who are buying homes to live in also behave like investors, fearing that if they wait, they will be priced out of the market. 
During a bubble, buyers are relatively undeterred by high prices because they think that even bigger price increases will compensate them for spending too much. 
If expectations of rapid and steady future price increases are important motivating factors, then the price level is inherently unstable, because prices cannot rise forever. 
The bubble will eventually burst and prices will fall. 
At least one aspect of a housing bubble is visible: rapid price increases. 
A surge in home prices has infected almost all advanced countries since 2000, with the exception of Germany and Japan. 
But the key question is whether expectations of large future price increases are sustaining the market. 
If the relationship between average incomes and house prices is stable, then economic fundamentals clearly have the potential to explain prices. 
The increase in housing prices during the 1980's is now viewed as the veritable model of a boom cycle turned bust. 
A pattern of sharp price increases, which peaked around 1990, was followed by declines in cities from Boston and Los Angeles to London, Sydney, and Tokyo, contributing to severe regional recessions. 
Will the current run-up in prices be followed by similar, or worse, collapses? 
Evidence about a housing bubble in the 1980's was compelling. 
Buyers were influenced by strong expectations about future price increases, and they perceived little risk. 
Responses to a survey that my colleague Karl Case and I conducted in 1988 during the US boom revealed that casual word-of-mouth transmission of emotional excitement played a big role in purchasing decisions. 
Moreover, there was no agreement among buyers about the causes of recent price movements and no cogent analysis of fundamentals. 
Earlier this year, we conducted another survey of US homebuyers who bought between March and August of 2002. 
For the vast majority, investment was either "a major consideration" or at least "in part" a motive for buying. 
But far fewer homebuyers in 2003 said that they were buying "strictly for investment purposes" than in 1988. 
Thus, conditions would appear to be consistent with a bubble, though less so than in the 1980's. 
The US is hardly alone. 
In Europe, the average ratio of home prices to incomes is slightly below its long-term average, mainly because housing prices in Germany are at historically low levels by this measure. 
In France, Italy, and Belgium, the ratio is close to its long-term average, and in Spain, the Netherlands, and Ireland, it is 40-50% above it. 
Australia, too, is close to the level that preceded previous crashes. 
These are averages across whole countries, but some regions are more overvalued than others. 
This is likely to be the case for "glamour cities" in which international celebrities, entertainment industries, world-class universities, or high technology industries are located. 
Home prices in these cities are high as well as volatile. 
The surveys in 1988 and 2003 showed that the central issue is the role of price expectations. 
In both booms, roughly 90% of respondents in the US expected an increase in home prices over the next several years, with large expected increases over the next 12 months, surpassing 15% in San Francisco in 2003. 
Longer-term expectations were almost as high. 
Indeed, word-of-mouth transmission of excitement about real estate prices is nearly as prevalent now as in 1988. 
In "glamour cities," newspaper articles feature stories of homes that sold well above asking price, and 45% of respondents in the 2003 survey reported selling at above asking prices in San Francisco. 
More than 20% of sellers in all markets surveyed felt that that their property would have sold as quickly if they had charged 5% or 10% more. 
Even so, the 2003 survey indicates that US homebuyers are not as confident of real estate prices now as before the 1980's bubble burst. 
This may mean that buyers will not allow prices to rise like last time, but it could also mean that owners will be more ready to exit from the market. 
This may amplify any price declines, especially in "glamour cities" and those with weakening economies. 
The consequences could be severe, and not only in the US, where 21% of mortgages last year were for more than 90% of a home's purchase price, up from 7% at the peak of the boom in the late 1980s. 
Australian household debt over the past decade has soared from 55% to 130% of personal disposable income. 
It has almost doubled, to 180%, in the Netherlands, where the average mortgage is 110% of home values, because lenders are happy to finance all the purchasing costs. 
Judging from the historical record, housing price declines fortunately tend to be relatively local, and nationwide drops are unlikely. 
This should blunt the macroeconomic impact of bursting bubbles. 
The bad news, though, is that the run-up of personal debt means that many households will be left with liabilities exceeding the value of their homes, implying a rising number of bankruptcies. 

Is There a New Washington Consensus? 
CAMBRIDGE – Two and a half years ago, senior staff members of the World Bank approached the Nobel laureate Michael Spence to ask him to lead a high-powered commission on economic growth. 
The question at hand could not have been more important. 
The “Washington consensus” – the infamous list of do’s and don’ts for policymakers in developing countries – had largely dissipated. 
But what would replace it? 
Spence was not sure he was the man for the job. 
After all, his research had focused on theoretical issues in advanced economies; he had been dean of a business school; and he did not have much experience in economic development. 
But he was intrigued by the task. And he was encouraged by the enthusiastic and positive response he received from the commission’s prospective members. 
Thus was born the Spence Commission on Growth and Development, a star-studded group of policymakers – including another Nobelist – whose final report was issued at the end of May. 
The Spence report represents a watershed for development policy – as much for what it says as for what it leaves out. 
Gone are confident assertions about the virtues of liberalization, deregulation, privatization, and free markets. 
Also gone are the cookie cutter policy recommendations unaffected by contextual differences. 
Instead, the Spence report adopts an approach that recognizes the limits of what we know, emphasizes pragmatism and gradualism, and encourages governments to be experimental. 
Yes, successful economies have many things in common: they all engage in the global economy, maintain macroeconomic stability, stimulate saving and investment, provide market-oriented incentives, and are reasonably well governed. 
It is useful to keep an eye on these commonalities, because they frame the conduct of appropriate economic policies. 
Saying that context matters does not mean that anything goes. 
But there is no universal rulebook; different countries achieve these ends differently. 
The Spence report reflects a broader intellectual shift within the development profession, a shift that encompasses not just growth strategies but also health, education, and other social policies. 
The traditional policy framework, which the new thinking is gradually replacing, is presumptive rather than diagnostic . 
It starts with strong preconceptions about the nature of the problem: too much (or too little) government regulation, too poor governance, too little public spending on health and education, and so on. 
Moreover, its recommendations take the form of the proverbial “laundry list” of reforms, and emphasize their complementary nature – the imperative to undertake them all simultaneously – rather than their sequencing and prioritization. 
And it is biased toward universal recipes – “model” institutional arrangements, “best practices,” rules of thumb, and so forth. 
By contrast, the new policy mindset starts with relative agnosticism about what works. 
Its hypothesis is that there is a great deal of “slack” in poor countries, so simple changes can make a big difference. 
As a result, it is explicitly diagnostic and focuses on the most significant economic bottlenecks and constraints. 
Rather than comprehensive reform, it emphasizes policy experimentation and relatively narrowly targeted initiatives in order to discover local solutions, and it calls for monitoring and evaluation in order to learn which experiments work. 
The new approach is suspicious of universal remedies. 
Instead, it searches for policy innovations that provide a shortcut around local economic or political complications. 
This approach is greatly influenced by China’s experimental gradualism since 1978 – the most spectacular episode of economic growth and poverty reduction the world has ever seen. 
The Spence report is a consensus document, and therefore an easy target for cheap shots. 
It has no “big ideas” of its own, and at times it tries too hard to please everyone and cover all possible angles. 
But, as Spence puts it with regard to economic reform itself, you need to take small steps in order to make a big difference in the long run. 
It is quite a feat to have achieved the degree of consensus he has around a set of ideas that departs in places so markedly from the traditional approach. 
It is to Spence’s credit that the report manages to avoid both market fundamentalism and institutional fundamentalism. 
Rather than offering facile answers such as “just let markets work” or “just get governance right,” it rightly emphasizes that each country must devise its own mix of remedies. 
Foreign economists and aid agencies can supply some of the ingredients, but only the country itself can provide the recipe. 
If there is a new Washington consensus, it is that the rulebook must be written at home, not in Washington. 

Is There Moral Progress? 
MELBOURNE – After a century that saw two world wars, the Nazi Holocaust, Stalin’s Gulag, the killing fields of Cambodia, and more recent atrocities in Rwanda and now Darfur, the belief that we are progressing morally has become difficult to defend. 
Yet there is more to the question than extreme cases of moral breakdown. 
This year marks the 60th anniversary of the United Nations General Assembly’s adoption of the Universal Declaration of Human Rights. 
In response to the crimes committed during World War II, the Declaration sought to establish the principle that everyone is entitled to the same basic rights, irrespective of race, color, sex, language, religion, or other status. 
So, perhaps we can judge moral progress by asking how well we have done in combating racism and sexism. 
Assessing the extent to which racism and sexism have actually been reduced is a daunting task. 
Nevertheless, recent polls by WorldPublicOpinion.org shed some indirect light on this question. 
The polls, involving nearly 15,000 respondents, were conducted in 16 countries, representing 58% of the world’s population: Azerbaijan, China, Egypt, France, Great Britain, India, Indonesia, Iran, Mexico, Nigeria, the Palestinian Territories, Russia, South Korea, Turkey, Ukraine, and the United States. 
In 11 of these countries, most people believe that, over their lifetimes, people of different races and ethnicities have come to be treated more equally. 
On average, 59% say this, with only 19% thinking that people are treated less equally, and 20% saying that there has been no change. 
People in the US, Indonesia, China, Iran, and Great Britain are particularly likely to perceive greater equality. 
Palestinians are the only people of whom a majority sees less equality for people of different racial or ethnic groups, although opinion is relatively evenly divided in Nigeria, Ukraine, Azerbaijan and Russia. 
An even stronger overall majority, 71%, regards women as having made progress towards equality, although once again, the Palestinian territories are an exception, this time joined by Nigeria. 
Russia, Ukraine, and Azerbaijan again have significant minorities saying that women are now treated less equally than they once were. 
In India, although only 53% say that women have gained greater equality, an additional 14% say that women now have more rights than men! 
(Presumably, they were thinking only of those females who are not aborted because prenatal testing has shown them not to be male.) 
Overall, it seems likely that these opinions reflect real changes, and thus are signs of moral progress toward a world in which people are not denied rights on the basis of race, ethnicity, or sex. 
That view is backed up by the polls’ most striking results: very widespread rejection of inequality based on race, ethnicity, or sex. 
On average, 90% of those asked said that equal treatment for people of different races or ethnic origins is important, and in no country were more than 13% of respondents prepared to say that equal treatment is not important. 
When asked about equal rights for women, support was almost as strong, with an average of 86% rating it important. 
Significantly, these majorities existed in Muslim countries as well. 
In Egypt, for example, 97% said that racial and ethnic equality is important, and 90% said that equality for women is important. 
In Iran, the figures were 82% and 78%, respectively. 
Compared to just a decade before the Universal Declaration of Human Rights, this represents a significant change in people’s views. 
Equal rights for women – not simply suffrage, but also working outside the home or living independently – was still a radical idea in many countries. 
Openly racist ideas prevailed in Germany and the American South, and much of the world’s population lived in colonies ruled by European powers. 
Today, despite what happened in Rwanda and the former Yugoslavia – and appeared to be on the verge of happening after the recent disputed election in Kenya – no country openly accepts racist doctrines. 
Unfortunately, the same cannot be said about equal rights for women. 
In Saudi Arabia, women are not even permitted to drive a car, let alone vote. 
In many other countries, too, whatever people may say about gender equality, the reality is that women are far from having equal rights. 
This may mean that the surveys I have quoted indicate not widespread equality, but widespread hypocrisy. 
Nevertheless, hypocrisy is the tribute that vice pays to virtue, and the fact that racists and sexists must pay this tribute is an indication of some moral progress. 
Words do have consequences, and what one generation says but does not really believe, the next generation may believe, and even act upon. 
Public acceptance of ideas is itself progress of a kind, but what really matters is that it provides leverage that can be used to bring about more concrete progress. 
For that reason, we should greet the poll results positively, and resolve to close the gaps that still exist between rhetoric and reality. 

 

Is Ukraine Next? 
LONDON – The war in Georgia has clearly exposed the security vacuum in the surrounding region, as well as a lot of raw nerves. 
Russia’s hasty decision to recognize the “independence” of South Ossetia and Abkhazia was a shot across the bow for every former Soviet country, and has intensified speculation about who might be “next” – and how to prevent Russia from multiplying the supposed Kosovo “precedent” in other ex-Soviet countries. 
Having established itself as the main broker in the conflict, the European Union has many urgent priorities in Georgia itself. 
But it should also be thinking ahead about how it can demonstrate a stronger commitment to security, democracy, and prosperity in the European “neighborhood.” 
The most effective way of dealing with a newly assertive Russia will be for Europe to issue a collective refusal to accept a bipolar Europe of distinct Russian and EU spheres of influence. 
The place to start is Ukraine. 
Fortunately, the EU-Ukraine summit on September 9 in Evian, France, provides the perfect opportunity. 
Many Ukrainians now hear domestic echoes of the lead-up to war in Georgia. 
Ukraine has its own potentially separatist region in Crimea, and the country’s Russian minority numbers some 8.3 million (the largest minority in Europe). 
Half of Ukraine’s population is Russian-speaking in various degrees. 
Although the Ukrainian constitution bans dual citizenship, the government has had to launch an inquiry into alleged covert Russian passport-holding in the Crimean city of Sevastopol. 
Ukrainians note that Russia justified its invasion of Georgia, as the Nazis justified their dismemberment of Czechoslovakia, as being necessary to “protect” a minority to whom they had just given citizenship. 
Russia has begun a war of words over Ukraine’s supply of arms to Georgia. 
And the conflict itself has shown that the Russian Black Sea Fleet, based in Sevastopol, can operate with impunity, whether Ukraine likes it or not. 
Based on its analysis of Ukraine’s “Orange Revolution” as a foreign-backed “NGO revolution,” Russia has also been quietly building its own network of Russia-friendly NGOs in Ukraine since 2004. 
Ukrainians also talk of an otkat ekonomiya (“kickback economy”), in which Russian money percolates throughout the Ukrainian elite. 
The European Neighborhood Policy is worthy enough, but it does not address the pressing concerns about maintaining and securing Ukraine’s independence. 
Many member states will worry about leaping straight to the contentious issue of ultimate membership for Ukraine, but the EU already recognizes Ukraine’s theoretical right to join once it has met the Copenhagen criteria; and it cannot be beyond EU leaders’ verbal dexterity to play up the prospect. 
What Ukraine would value most is a real sense that it is being treated distinctly in its own right. 
The key words are “association” and “partnership,” in whatever order or combination. 
The EU has more scope for short-term measures, and should develop a multi-dimensional solidarity strategy as a signal to both Ukraine and Russia. 
For example, the EU’s foreign ministers should invite their Ukrainian counterpart to give a briefing on Ukraine-Russia relations at their next meeting. 
Ukraine should be offered a road map for visa-free travel. 
The new EU-Ukraine agreement should include a beefed-up solidarity clause, building on the 1994 Budapest Memorandum, whereby the EU would consult and assist Ukraine in case of challenges to its territorial integrity and sovereignty. And the EU should back Ukraine if it insists that the Russian Black Sea Fleet leaves on schedule in 2017. 
The EU should also launch a comprehensive study of all aspects of Europe’s reliance on Russian energy supplies, including transit, energy security and conservation, supply diversification, and the impact of “bypass” pipelines like Nord Stream and South Stream. 
It should consider linking the opening of the Nord Stream pipeline, which would allow Russia to cut off gas to Poland and Ukraine while maintaining deliveries to Germany, to the opening of the proposed “White Stream” pipeline to bring gas from Azerbaijan directly to Ukraine via Georgia, bypassing Russia. 
The EU could even play a part in keeping the 2012 European Championship football finals on track. 
The decision to appoint Ukraine and Poland as co-hosts was a powerful symbol of European unity across the current EU border (Poland is a member, Ukraine is not). 
UEFA is unhappy with Ukraine’s progress in building the necessary infrastructure, but Ukraine should be given time to get its act together. 
Where appropriate, the EU should extend these measures to Moldova, which is now calling Ukraine a “strategic shelter.” 
Ukraine faces a crucial presidential election in 2009 or 2010 (and Moldova will hold elections in March 2009). 
After getting its fingers badly burned at the last election in 2004, Russia is clearly tempted to intervene again. 
The “Russian factor” will strongly influence the campaign. 
Greater Western engagement is needed to ensure that the “Europe factor” is equally prominent. 

ISIS After Mosul 
RAMALLAH – Last week, Iraqi Prime Minister Haider al-Abadi declared that the Islamic State (ISIS) had been driven out of Mosul, the city where the group first announced its self-styled caliphate three years ago. 
Before long, ISIS is expected also to lose Raqqa, its last stronghold, on which its grip is already slipping. 
But it would be a mistake to assume that these defeats will spell the demise of ISIS or similar violent extremist groups. 
A group like ISIS relies on its ability to attract young people to join its ranks, by offering frustrated individuals an ideologically charged sense of purpose. 
And ISIS has proven adept at doing just that, drawing fighters from all over the world who are willing to die for its cause – to create an expansive caliphate – and inspiring many more to carry out attacks in their home countries. 
Recapturing territory from ISIS – particularly the cities that have served as “capitals” of their self-proclaimed caliphate – goes a long way toward weakening it, by sending the message that the group cannot, in fact, translate its religious ideology into a real geopolitical force. 
And, indeed, US intelligence estimates indicate that, by last September, the flow of foreign recruits crossing from Turkey into Syria to join groups like ISIS had dropped from a high of 2,000 per month to as few as 50. 
But the experience of other terrorist groups – most notably, al-Qaeda – shows that, even without anything resembling a state, radical ideologies can survive. 
Their sponsors must change their tactics, building their ranks and plotting attacks underground. 
But they can still wreak havoc, destabilizing countries and carrying out deadly assaults on civilians near and far. 
Moreover, there are plenty of other like-minded jihadist groups operating in the same areas. Consider the al-Nusra Front, a former branch of al-Qaeda and one of the most powerful jihadist groups in Syria. 
Like ISIS, al-Nusra nurtures state-building aspirations. 
That effort is supported, on the religious side, by leaders who are largely non-Syrian Arabs – for example, Abdullah al-Muhaysini is from Saudi Arabia – whose religious edicts are not questioned by the largely Syrian fighters. 
Al-Nusra also benefits from its links with other groups that share its desire to rid Syria of President Bashar al-Assad’s regime. 
Indeed, al-Nusra currently dominates a coalition called Hay’at Tahrir al-Sham (HTS), which comprises 64 factions, some more moderate than others. 
Against this background, the notion that reclaiming territory from ISIS will amount to freeing the region of extremist groups is clearly naive. 
Preventing such groups from acquiring the power they seek will require not just military defeats, but also a concerted effort to bring order to the political arena, strengthen the rule of law, and ensure broad representation. 
In both Syria and Iraq, this may require a closer look at the Muslim Brotherhood, an international political movement that many believe has infiltrated various Sunni radical groups, despite its public insistence that it is a nonviolent movement. 
More crucial for Iraq, the central government in Baghdad, led by Abadi, must overcome the sectarianism that has divided the country for decades, and that intensified in the aftermath of the United States-led invasion to oust Saddam Hussein. 
In fact, sectarianism is an even bigger issue in Iraq than it is in Syria, a Sunni-majority country where the ruling Assad family belongs to the minority Alawite sect of Shia Islam. 
Rooting out extremism in Iraq and Syria will also require a more nuanced reckoning with the role of external powers, particularly the Gulf States. 
It is easy to assume that the recent split between Qatar, on the one hand, and Bahrain, Egypt, Saudi Arabia, and the United Arab Emirates, on the other, over Qatar’s support for jihadist groups reflects these countries’ allocation of loyalties. 
But, in Iraq, both Qatar and Saudi Arabia opposed Saddam’s regime and publicly support Abadi’s government. 
At the same time, governments and private citizens from several Gulf countries – including Kuwait, Qatar, Saudi Arabia, and the UAE – have close ties with al-Nusra. 
Qatar’s foreign minister, Mohammed bin Abdulrahman Al-Thani, has denied that his country funds the group, but also publicly called on its leaders to distance themselves from al-Qaeda, reinforcing the view that Qatar retains influence over the group. 
As complex and fluid as the situation is, the key to resolving it may be rather straightforward. 
First, national and regional governments and non-governmental players need to find ways to cut jihadist groups’ financial lifelines. 
Second, the hateful and violent ideology fueling these jihadist movements needs to be confronted head-on, regardless of who might be offended. 
As ISIS’s dreams of a caliphate slip away, its hold over the hearts and minds of frustrated young potential fighters may be weakening. 
But, unless a concerted and comprehensive effort is made to discredit jihadists and strengthen political systems, the cycle of violence in Iraq, Syria, and elsewhere in the Middle East will remain unbroken. 

Managing the ISIS Crisis 
NEW YORK – One day, historians will have their hands full debating the causes of the chaos now overtaking much of the Middle East. 
To what extent, they will ask, was it the inevitable result of deep flaws common to many of the region's societies and political systems, and to what extent did it stem from what outside countries chose to do (or not to do)? 
But it is we who must deal with the reality and consequences of the region's current disorder. 
However we got to where we are in the Middle East, we are where we are, and where we are is a very bad place to be. 
The stakes – human, economic, and strategic – are enormous. 
Hundreds of thousands have lost their lives; millions have been rendered homeless. 
Oil prices are low, but they will not remain so if Saudi Arabia experiences terrorist strikes or instability. 
The threat to the region is large and growing, and it menaces people everywhere, as extremist fighters return home and still others who never left are inspired to do terrible things. 
Indeed, though the Middle East is facing an abundance of challenges to its stability, none is as large, dangerous, and immediate as the Islamic State. 
Those who object to calling the Islamic State a state have a point. 
In many ways, IS is a hybrid: part movement, part network, and part organization. 
Nor is it defined by geography. 
But it does control territory, boasts some 20,000 fighters, and, fueled by religious ideology, has an agenda. 
Ultimately, of course, deciding whether to call what has emerged “ISIS" or “ISIL" or the “Islamic State" matters much less than deciding how to take it on. 
Any strategy must be realistic. 
Eliminating IS is not achievable in the foreseeable future; but weakening it is. 
A strategy must also be comprehensive. 
First, the flow of money to the Islamic State must be reduced. 
Lower oil prices help, and there are only so many banks to rob. 
But extortion continues, as does financial support from individuals. Such flows should be shut down both by governments and financial institutions. 
Curtailing the flow of recruits is even more essential. 
Countries can do more to make it difficult for individuals to leave for Iraq or Syria; a Europe-wide watch list, for example, would help. 
But nothing would have a greater impact than Turkey deciding that it will no longer allow itself to be a conduit, and that it will enforce United Nations Security Council Resolution 2178, which calls for stronger international cooperation against terrorism. 
Another component of any strategy must be to counter IS's appeal and propaganda. 
This means publicizing the misery it has caused to those living under its rule. 
It also means persuading Muslim religious leaders and scholars to make the case that IS's behavior is illegitimate from the standpoint of Islam. 
Of course, any strategy must challenge IS directly in Iraq and Syria. 
In Iraq, there is some evidence that its momentum has been halted; but the growing role of Iran and the Shia militias it backs all but guarantees that many Iraqi Sunnis will come to sympathize with or even support the Islamic State, whatever their misgivings. 
This is why outsiders should place greater emphasis on providing military and political support to Kurdish forces and Sunni tribes. 
Syria is a far more difficult case, given its civil war and the competition among outsiders for influence. 
Attacks from the air on IS forces are necessary but insufficient. 
Because IS is a territorially based entity, there must be a ground dimension if the effort is to progress; after all, only ground forces can take and hold territory. 
The best approach would be to create a multinational force consisting of soldiers from neighboring countries, particularly Jordan. 
The United States and other NATO countries could offer assistance, but the fight must be waged largely by other Sunnis. 
What is occurring in the region is a clash within a civilization; to enable IS to portray it as a conflict between civilizations – and itself as the true defender of Islam – would be a grave strategic mistake. 
Moderate Syrian opposition forces and local Kurds could be part of such a multinational Sunni force, but they are not in a position to substitute for it. 
If such an expeditionary force cannot be formed, air attacks can be stepped up, thereby at least slowing IS and buying time to develop alternative strategies. 
Under such a scenario, IS would remain less a problem to be solved and more a situation to be managed. 
Diplomacy cannot play a large role at this point. 
No solution can be imposed, given disagreements among the outside countries with a stake in Syria and the strength of both IS and the Syrian government. 
What diplomacy may be able to do is reduce, if not end, the fighting between the Syrian government and its own people, as the UN is attempting to do in Aleppo. 
The biggest danger in 2015 may well be a widening of the regional crisis to Saudi Arabia and Jordan. 
Intelligence and military support for both countries will be essential, as will enhanced efforts to help Jordan shoulder its massive refugee burden. 
In this time of unprecedented turmoil in the Middle East, one of the region's basic rules still applies: No matter how bad the situation, it can always become worse. 


Mosque or Modernity? 
PARIS – Whatever happened to the “Arab Spring”? 
When demonstrations erupted in Tunisia, Egypt, and Libya, ultimately leading to the demise of three old and weary dictatorships, no one knew which forces, institutions, and procedures would emerge from the protesters’ demand for democracy. 
And yet, despite the unprecedented and unforeseeable nature of events – or perhaps because of it – hope ran high. 
What has happened since shows clearly what everyone knew (or should have known) all along: nothing about regime change is simple. 
None of the three countries has yet found a stable institutional solution that can defuse intensifying internal tensions and respond effectively to popular demands. 
Other countries in the region, including Yemen and some of the Gulf states, have experienced varying degrees of turmoil as well. 
Sectarian violence is once again consuming Iraq, while clashes between anti-regime factions in Syria are becoming ever more frequent, with Islamists seeking to gain the upper hand ahead of the political transition that would occur should the government collapse. 
Even in Morocco, a king with absolute power as Commander of the Faithful has been forced by intense public outrage to move toward a system more inclusive of political Islam. 
Likewise, developments in the region’s two non-Arab powers suggest that neither is immune to instability. 
In Turkey, recent protests have highlighted growing opposition to Prime Minister Recep Tayyip Erdoğan’s overweening power and divisive, religious-based social policies. 
In Iran, much of the middle class backed the most moderate of the candidates acceptable to the country’s Islamic guardians in June’s presidential elections. 
Several related factors underlie the region’s chronic instability. 
One is underdevelopment. 
While oil has made a few presidents and princes staggeringly rich, the rest of the population has received little benefit. 
Hunger is widespread; indeed, poverty and inequality have fueled much of the popular mobilization in the region. 
But the region’s protest politics also reflects growing rejection of dictatorship and arbitrary rule. 
Despite these countries’ lack of a tradition of open dissent, globalization has made it plain to all that economic development requires regime change. 
Finally, political Islam is common to all of the region’s conflicts, and should not be viewed – as it often is – in isolation from these countries’ economic woes. 
Simply put, Islam – one of the world’s great religions, practiced by nearly one-quarter of humanity – missed its development takeoff. 
There are no easy ways out of underdevelopment without challenging traditional lifestyles, customs, and social relations. 
Indeed, religions do not resist the pressures of economic change well. 
For Jews, given the absence of a homeland, development occurred among the diaspora, with civil emancipation in Europe giving rise to reformist movements aimed at reconciling faith and modernity. 
Similarly, Christianity, whether Catholic or Orthodox, blocked economic development for centuries, until internal reformists redefined theological positions on money and banking, the nature of progress, and science and technology. 
It is no accident that religious reform in Scandinavia, Germany, England, the Netherlands, and the United States gave rise to today’s global capitalism. 
This dynamic extends even to officially atheist China. 
Orthodox Communism, a perfect secular simulacrum of religion, has been the primary victim of development since China launched its market reforms in 1979. 
Islam also has its reformists. 
Consider the mission entrusted to Rifa’a al-Tahtawi, the great Egyptian scholar sent to Europe by Mohammed Ali in 1826 to learn about Western civilization and to try to forge an understanding between it and Islam. 
But everywhere in the Arab world, without exception, reformists have been jailed, killed, or reduced to political impotence. 
In the absence of an analog to the West’s Industrial Revolution, Muslims (and especially Arabs) have faced multiple humiliations and partial colonization over the past two centuries. 
The resulting legacy of grievance, shame, and anger is part of what underpins the region’s current malaise. 
Indeed, some of the street demonstrations leave no doubt that many people are moving away from religion altogether. 
This is as visible in Egypt and Tunisia as it is in Turkey. 
But the grim reality for the Islamic world is that, in times of widespread uncertainty, the forces of tradition tend to speak more loudly and clearly than those of change. 
Peace in this huge and strategically vital region – and thus in the world – can prevail only if its countries manage, despite their turmoil, to protect themselves from ideological extremes and political excesses. 
The importance of this should be abundantly clear to Westerners, whose modern civilization grew out of religious dissent that was initially met by the violence of the Inquisition and the Counter-Reformation. 
If Islam, particularly in the Middle East, is on a similar trajectory, long-term instability in the region is all but assured. 
Mutual understanding is the only way to moderate the consequences. 

Islam as a Tool of Modernization 
A big worry in Iraq and the wider Middle East is that Islam and modernization are enemies. But Malaysian history over the past three decades shows that this belief is mistaken. 
In fact, Islamization has proved to be an effective political means of reconciling the majority of Malays to the country’s rapid economic development. 
In the early 1970’s, when it was still an overwhelmingly agrarian country and Islamization was just gaining momentum, Malaysia embarked on its so-called “New Economic Policy” (NEP), designed to help the majority Malays gain a bigger share of the country’s wealth. 
After three decades of spectacular economic growth, many Malays have become prosperous and content not only through secular capitalism, but through the country’s renewed sense of Islamic identity, one which – for the most part – embraced modernization. 
(Of course, paradoxes appear every now and then, such as when globalization is advocated alongside demands for stronger censorship.) 
Islamic-minded politicians such as Anwar Ibrahim gained prominence when Islamization took off in the 1970’s. 
But the Islam they promoted was not backward looking; instead, it sought to shape a modernizing economic policy that took note of Muslim sensibilities. 
Faced with the grassroots popularity of this movement, by 1982 the government of then Prime Minister Mahathir Mohamed decided to co-opt Anwar Ibrahim into his United Malays National Organisation (UMNO), the dominant party within the country’s ruling coalition. 
The strategy worked well, and helped defuse Islamic opposition to the wrenching changes that accompanied the country’s rapid economic modernization. 
During the 1990’s, however, Anwar increased his influence within the party, unsettling many of the old guard. 
Matters came to a head after the 1997 financial crisis, when Anwar, the deputy prime minister, adopted an even more economically liberal approach than Mahathir. 
Partly in response to this challenge, Anwar was sacked. 
Anwar’s bizarre trial and sentencing on charges of sodomy and abuse of power invigorated the reformasi movement, as growing anti-UMNO and anti-Mahathir sentiments took hold among Islamic-minded Malays. This culminated in poor electoral results for the ruling coalition in November 1999. 
The Islamist party, Parti Islam SeMalaysia (PAS), took power in the states of Kelantan and Trengganu and strongly threatened UMNO in other northern states. The personal conflict between Mahathir and Anwar thus led to an apparent rupture between Malaysia’s Islamist political forces and the modernizers of UMNO. 
So, once again, Mahathir felt pressure to adopt a strategy aimed at preventing Islam from becoming a tool of opposition. 
This impulse strongly affected his choice of a successor when he decided to step down as prime minister. 
His choice of Abdullah Badawi, the current prime minister, helped UMNO regain the Islamist moral high ground that the PAS had been claiming. 
It was the beginning of America’s global “war on terror” in 2001, however, that brought the political march of the Islamist parties to a screeching halt, as it provided an excuse for the government to crack down on the Malay right and the PAS. 
But this only renewed UMNO’s desire to portray itself as sufficiently Islamist. So, before stepping down, Mahathir went so far as to declare Malaysia a de facto Muslim state. 
Eyebrows were raised and questions were asked about the lengths to which Mahathir would go to counteract the Islamist appeal. 
This trend continues. 
One of Badawi’s first acts after taking over as prime minister in October 2003 was to introduce the concept of Islam Hadhari. 
This vague term was finally fleshed out with a list of ten principles in September 2004, all but one of which, however, was without religious connotations. 
Nevertheless, this move appeared to be all that was needed for Islam-minded voters to return to the fold of the ruling front. 
In the general election in March 2004 – the first since Mahathir stepped down after 22 years in power – moderate Muslims helped Abdullah Badawi to a landslide victory. 
The release of Anwar Ibrahim soon afterwards raised the new premier’s prestige further as a leader who could heal intra-Malay, and intra-Muslim, conflicts. 
Since then, Abdullah Badawi has been popularizing the concept of “Hadhari,” shaping it as a means to shift Islam’s focus from its sanctioning function to its civilizing potential and rendering it less ideological. 
In Malaysia today, Islam is being presented as a generator of civilization and culture, and not merely as a source of religious inspiration. 
This has helped to counter extremist tendencies domestically and provides a conceptual platform for moderate Islam. 
Islam Hadhari tries to project the idea that UMNO’s materialism and nationalism do not contradict Islam. 
With various feints and strategies, Malaysia has effectively managed the tensions between a secular, modernizing agenda and the Islamic faith that the Malays profess. 
By making Islamists and Islamist sentiments a part of the process of modernization, Malaysia demonstrates that Islamic faith and economic growth can be reconciled if politicians are clever enough not to treat them as contradictions. 

Islam, Faith, and Climate Change 
AMMAN – The Islamic Declaration on Climate Change, endorsed in August by Islamic scholars from around the world, calls on countries to phase out greenhouse-gas emissions and switch to 100% renewable energy. 
With 1.6 billion Muslims worldwide, the collective statement sends a strong signal ahead of the United Nations Sustainable Development Summit later this month, and the UN Climate Change Conference in Paris in December. 
Released during a two-day symposium on Islam and climate change in Istanbul, the Declaration explains why Muslims should be responsible activists for the welfare of the planet, and sets out a series of demands to world leaders and the business community. 
First, the Declaration calls on policymakers responsible for crafting the comprehensive climate agreement to be adopted in Paris to come to “an equitable and binding conclusion.” 
The agreement should set clear targets and establish ways to monitor them. 
Additionally, prosperous countries and oil-producing states should phase out their carbon-dioxide emissions no later than the middle of the century; turn away from “unethical profit from the environment”; and invest in a green economy. 
Second, the Declaration asks people and leaders from all countries to commit to 100% renewable energy and a zero-emissions strategy as soon as possible, and to recognize that unlimited economic growth is not a viable option. 
Moreover, adaptation should be a high priority, particularly for the most vulnerable groups. 
Notably, the business sector is asked to take a more active role to reduce its carbon footprint, commit to 100% renewable energy and zero emissions, shift investments into renewable energy, adopt more sustainable business models, and assist in the divestment from fossil fuels. 
Finally, the Declaration issues an appeal to “all Muslims wherever they may be” that is underpinned by quotes from the Holy Koran. 
Care for creation is a fundamental part of the Islamic message, the Declaration notes, and humans are currently responsible for squandering gifts bestowed by Allah. 
The Koranic ayah 24:45 tells us how Allah created every living creature from water, and the Hadith instructs us that we are “stewards of the Earth”: 
“The Earth is green and beautiful, and Allah has appointed you his stewards over it. 
The whole Earth has been created a place of worship, pure and clean. 
Whoever plants a tree and diligently looks after it until it matures and bears fruit is rewarded. 
If a Muslim plants a tree or sowed a field and humans and beasts and birds eat from it, all of it is love on his part.” 
This message echoes and affirms examples found in the doctrines of many faiths, which call on us to be kinder and wiser in how we use this planet, and to advocate for all creatures. 
As the Buddhist Za Choeje Rinpoche, the 6th incarnation of ZaChoeje Rinpoche, teaches: 
“By injuring any part of the world’s system, you injure yourself. 
Think of life on this planet in terms of systems and not detached elements. 
See that the environment does not belong to any single country to exploit and then disregard.” 
The Islamic Declaration on Climate Change, like Pope Francis’s recent encyclical Laudato Si', is a call to humanity, regardless of faith, to work together to protect the planet upon which we depend. 
I hope that they will indeed provide an impetus for shifts in policies, allowing for deeper and broader reductions in CO2 emissions. 
These statements of faith are both historic and timely, as the world’s countries seek to implement global agreements in areas ranging from climate change to the Sustainable Development Goals and the establishment of marine reserves on the high seas. 
Indeed, it is important to remember that the earth’s surface is primarily ocean, which plays a critical role as both a carbon sink and a regulator of the climate. 
The oceans annually absorb approximately 25% of all human-caused CO2 emissions, and we are now overtaxing this capacity. 
The carbon dissolved in the ocean has altered its chemistry, driving up acidity by 30% since the beginning of the Industrial Revolution. 
The ocean’s health is now largely dependent upon lowering CO2 emissions within the next few decades, before runaway ocean acidification occurs and sea levels change radically. 
As an Ocean Elder, I was also heartened by Francis’s emphasis in Laudato Si' on the need for strict mechanisms of regulation and control on the open seas – a real step forward in this regard. 
The high seas are the earth’s last great global commons, representing nearly 50% of the planet’s surface, and the multiple threats they face require universal solidarity and action. 
Just this past June, UN member states unanimously supported a General Assembly resolution to negotiate a new international agreement to protect marine life in the high seas. 
Restoring and regenerating the abundance and diversity of species across one of our planet’s critical life-support systems is essential to building the entire earth’s resilience to climate change. 
Many have pointed out that we are the first generation to have hard evidence of the enormous damage that humanity is causing to natural ecosystems, and probably the last that can truly do something about it. 
Now is the critical time for multilateralism, multi-faith dialogues, and, perhaps most important, active engagement. 
We are all humans who live on Earth and from it. 
We have all been entrusted to care for the planet. 
We can and must do this by forging bold climate and protective ocean agreements together – regardless of belief, circumstance, or status. 
Science tells us we have to act; our faith and humanity compel us to do so. 

Islam's Clash with Modernization 
Ten years ago, Samuel Huntington argued that the fault lines of world politics in the post-Cold War era are mainly cultural - a ``clash of civilizations'' defined by five or six major cultural zones that can sometimes co-exist but will never converge, because they lack shared values. 
One implication of this argument is that the September 11 th terrorist attacks, and the US-led response, should be viewed as part of a larger civilizational struggle between Islam and the West. 
Another is that what we in the West regard as universal human rights are simply an outgrowth of European culture, inapplicable to those who do not share this particular tradition. 
I believe that Huntington is wrong on both counts. 
Sir V. S. Naipaul, recently awarded the Nobel Prize for literature, once wrote an article entitled ``Our Universal Civilization.'' 
How appropriate. 
Naipaul is, after all, an author of Indian descent who grew up in Trinidad. 
He argued not only that Western values are applicable across cultures, but that he owes his literary achievements to precisely that universality afforded by crossing Huntington's putative civilizational boundaries. 
Universality is possible in broader terms as well, because the primary force in human history and world politics is not cultural plurality, but the general progress of modernization, whose institutional expressions are liberal democracy and market-oriented economics. 
The current conflict is not part of a clash of civilizations in the sense that we are dealing with cultural zones of equal standing; rather, it is symptomatic of a rearguard action by those who are threatened by modernization, and thus by its moral component, respect for human rights. 
Virtually any right that is or has been asserted historically relies on one of three authorities: God, man, or nature. 
The original source of rights, God or religion, has been rejected in the West since the beginning of the Enlightenment. 
John Locke's ``Second Discourse on Government'' begins with a long polemic against Robert Filmer's argument for the divine right of kings. 
In other words, the secularism of the Western conception of rights lies at the root of the liberal tradition. 
Today, this seems to be the major dividing line between Islam and the West, because many Muslims reject the secular state. 
But before we endorse the idea of an irreducible clash of civilizations, we should consider why modern secular liberalism arose in the West in the first place. 
It is no accident that liberal ideas emerged in the 16th and 17th centuries, when bloody sectarian struggles between Christian sects throughout Europe exposed the impossibility of a religious consensus on which to base political rule. 
Hobbes, Locke, and Montesquieu reacted to such horrors as the Thirty-Year War by arguing that religion and politics must be separated in the interest, first and foremost, of ensuring civil peace. 
Islam now confronts a similar dilemma. 
Efforts to unite politics and religion are dividing Muslims just as they divided Christians in Europe. 
Our politicians are right (and not merely expedient) to insist that the current conflict is not with Islam - an extremely heterogeneous faith that recognizes no authoritative source of doctrinal interpretation. 
Intolerance and fundamentalism form one choice for Muslims, but Islam has always had to contend with the question of secularism and the need for religious tolerance, as is evident from the ongoing reformist ferment in theocratic Iran. 
The second source of rights - the essentially positivist view that whatever a society declares by some constitutional means to be a right becomes one - likewise provides no guarantee for liberalizing tendencies, for it leads to cultural relativism. 
If, as Huntington implies, the rights that we claim in the West emerged uniquely from the political crisis of European Christianity after the Protestant Reformation, what is to stop other societies from appealing to their own local traditions to deny these rights? 
The Chinese government is very adept at wielding this question. 
The final source of rights is nature. 
In fact, the language of natural rights - advanced most emphatically in 18 th century America - continues to shape our moral discourse. 
When we say, for example, that race, ethnicity, wealth, and gender are all non-essential characteristics, this obviously implies that we believe that there is a substrate of ``humanness'' which entitles us to equal protection against certain types of behavior by other groups or states. 
This belief is the ultimate reason to reject cultural arguments that would subordinate some - women, for example - within a society. 
Moreover, the spread of democratic institutions in non-European contexts during the last decades of the 20 th century suggests that we in the West are not alone in this belief. 
But if human rights are indeed universal, should we demand their implementation everywhere and at all times? 
Aristotle argues in his Nicomachean Ethics that natural rules of justice exist, but that their application demands flexibility and prudence. 
That insight remains valid today. 
We must distinguish between a theoretical belief in the universality of human rights and the actual practice of supporting human rights around the world, for our shared ``humanness'' is shaped in varying social environments, such that our perception of rights differs. 
In many traditional societies, where life choices and opportunities are limited, the Western, individualistic view of rights is very jarring. 
This is because the Western conception cannot be abstracted from the larger process of modernization. 
To argue otherwise is to put the cart before the horse. For our commitment to the universality of human rights forms but one part of the complex context of a universal civilization, from which an understanding of the other elements of modern societies - economic justice and political democracy - cannot be excluded. 

Islam’s Democratic Imperative 
Mahmoud Abbas’s election in Palestine and the forthcoming vote in Iraq on January 30 have pushed the question of Islam’s compatibility with democracy to the center of the world’s agenda. 
Sheik Dia al-Shakarchi, a leading Shi’ite theologian, argues that democracy is not only compatible with Islam, but is essential to it. 
During the last 25 years, Islam has played an increasingly influential role in politics, and not only in the Islamic world, with political Islam frequently expressing itself in radicalism and terror. 
Both Muslims and non-Muslims have not always agreed on the extent to which this is compatible with genuine Islam. 
How Islam is understood varies widely among devout, moderately religious, and non-observant Muslims, as well as among Islamic scholars, political parties, and organizations. 
Even western experts and critics of Islam hold different views. 
Overall, there are two conflicting images of Islam: a peaceful Islam, which is ready for dialogue and coexistence, and a fundamentalist Islam, which is militant and even terrorist. 
There is a widespread misperception that Islam’s holy texts are written in a way that can justify both interpretations. 
But, in my opinion, the reason for different – and frequently contradictory – interpretations is an incompetent and incomplete approach that detaches individual texts from their context and construes them without a thorough understanding of the true spirit of the Koran. 
This approach to Islamic texts – coming from both secular and religiously oriented Muslims, as well as from non-Muslims with an interest in the subject – calls into question the compatibility of Islam and democracy, and also whether Islam is capable with peace and moderation. 
But, based on more than a decade of study and debate, I am convinced of the compatibility between Islam and democracy. 
Indeed, in my view, democracy is not only permitted by Islam, but can be regarded as a religious rule. 
My understanding is drawn from a principle contained by the basic Islamic theory of legal reasoning, which asserts that when strong religious interests can be realized only through a particular path of action, that path itself is no longer a matter of choice. 
It also becomes a religious rule. 
Thus, if we can establish that democracy is the means to realize the strong interests of the Muslim community – and I believe we can do this – then democracy may be declared a religious duty in Islam. 
Even if democracy might be viewed primarily as an evil from an Islamic point of view, there is another principle of interpretation of religious laws in Islam, according to which minor evils – even if religiously impermissible or not recommended at first – become permissible, recommended, and even mandatory if they alone can prevent major evils. 
The Muslim interest in democracy is best understood through a clear perception of the reality of how Muslims live. 
A country like Iraq, for example, is home to a diverse and varied population: Arab and Kurd, Sunni and Shi’ite, not to mention minorities of other religions and ethnic groups. 
Moreover, not all Muslims practice Islam, nor do those who practice do so in the same way. 
So religion cannot be imposed; individuals must practice it according to their own decisions. 
Any enforcement of religious practice only creates hostility toward religion. 
Thus, I believe that a political system that best serves free choice – including the choice of people to be practicing Muslims – is the best system for Islam. 
Of course, the problem of Islam’s compatibility with democracy may be analyzed from different points of view. 
One possible approach is purely practical, comparing democracy with all other conceivable alternatives. 
In my opinion, there are only five conceivable alternatives in a Muslim country. 
The first is secular dictatorship. 
This is unacceptable for two reasons. 
First, dictatorship itself is ugly and unacceptable; second, secular dictatorship excludes Islamic parties from participating normally in the political system. 
We have considerable experience of this in the Middle East. 
Of course, an Islamic dictatorship is also possible. 
But this, too, is unacceptable. 
As with a secular dictatorship, Islamic dictatorship is ugly and destructive. 
Such a dictatorship would damage Islam by associating Islam with unjust rule and creating enemies for Islam. 
A third alternative is democracy, but with secular restrictions on religious parties. 
In fact, this would be a pseudo-democracy, and would infringe on the rights of religious people to full participation. 
Likewise, an Islamic democracy with restrictions on non-religious parties would be a mockery of democracy and harmful to Islam. 
This would also be unrealistic, because in the current age of globalization, any claims to democracy would be exposed as obviously false. 
So, in my view, true democracy is the only alternative, because it is realistic and promotes peace. 
Call this ideology-free democracy: a political system that tolerates restrictions imposed only from within, never from outside, the democratic process itself. 
We must recognize that democracy has proved its worth around the world. 
It is the best way of organizing a society based on reality and not ideals. 
Why shouldn’t Iraqis benefit from the proven experience of other peoples? 

Islam's Electoral Divide 
How to reform the Islamic world will be among the topics NATO's leaders will discuss in Turkey next week. 
Both President Bush and the European Union have proposed bold democratization initiatives in the region. 
Can such initiatives succeed? 
Islam and democracy are frequently presumed to be bitter antagonists. 
A careful study of the world's 47 Muslim-majority states, however, shows that Islam and democracy can and do co-exist. 
The real gap is narrower: it is the Arab world, not Islam, which seems at loggerheads with democracy. 
This conclusion is based on comparing Muslim countries' "electoral competitiveness." 
If a government sprang from reasonably fair elections and the elected government is able to fill the most important political offices, the country is deemed "electorally competitive." 
Electorally competitive countries are not necessarily democratic: some do not fully control the state's territory; others violate both their constitutions and human rights. 
But electoral competitiveness is always a necessary condition for democracy - and therefore a central consideration when evaluating a country's prospects for democratization. 
Two initiatives - the Polity Project, founded by political scientist Ted Gurr, and Freedom House's annual Freedom in the World surveys - gauge political rights in almost every country. 
The differences between Arab and non-Arab Muslim countries are striking. 
Of 29 non-Arab Muslim countries evaluated by Polity IV , 11 enjoyed significant political rights for at least three consecutive years in the period from 1972 to 2000, while eight experienced at least five consecutive years of political rights. 
The Freedom House scores are remarkably similar: 12 of 31 non-Arab Muslim countries had relatively high scores for at least three consecutive years, and eight for five consecutive years. 
Both research teams rate Albania, Bangladesh, the Gambia, Malaysia, Mali, Niger, Nigeria, Pakistan, and Turkey as meeting the three-year criterion, with all but Albania and Niger meeting the five-year criterion. 
But on the Arab side, only Lebanon had three consecutive years of relatively strong political rights - before the 15-year civil war that began in 1975 - and no country experienced five consecutive years of strong rights. 
A non-Arab Muslim country in the period from 1972 to 2000 was almost 20 times more likely to be electorally competitive than an Arab Muslim-majority country. 
In the non-Arab Muslim-majority subset, both Polity IV and Freedom House rate nine countries as having experienced at least three consecutive years of substantial political rights. 
Strikingly, seven of them are clear "overachievers," because they also have low per capita GDP levels. 
Indeed, five of the nine qualify as "great overachievers" - significant political rights despite annual per capita income of less than $1,500. 
By contrast, none of the 16 Arab Muslim-majority countries is an overachiever. 
Seven had annual per capita income levels exceeding $5,500 in the period from 1972 to 2000 but no significant political rights for three consecutive years. 
These states are electoral "underachievers" - weak political rights despite relative affluence. 
Elections do occur in the Arab world, and they vary in frequency and significance. 
In the complete autocracies - Saudi Arabia, Libya, Syria, Tunisia, Iraq under Saddam, and the United Arab Emirates - there have been no meaningful elections to fill the most important offices. 
The UAE, a somewhat decentralized and consensual federation, is not as dictatorial as the others, but only seven voters - the traditional rulers of the federation's seven emirates - elect the president. 
Elections have begun to play a greater role in Qatar, Kuwait, Bahrain, and Oman, but none uses free and fair elections to fill the most important and powerful political offices. 
Traditional monarchs still have broad powers of appointment and decree. 
Finally, some Arab countries are not electorally competitive now but once did use free and fair elections to fill the state's most politically powerful offices (Lebanon). 
Others seemed close to doing so (Yemen, Morocco, and Jordan) or had a possible political opening but are now substantially farther away from being electorally competitive (Egypt and, arguably, Algeria). 
It makes intuitive sense that Islam cannot by itself explain such differences. 
All of the world's religions contain some doctrines and practices that are potentially harmful to the emergence of democracy, and others that are potentially beneficial. 
A beneficial Islamic doctrine is the Koranic injunction that "there shall be no compulsion in matters of religion." 
Others include shura (consultation), ijtihad (independent reasoning), and ijma (consensus). 
Perhaps religious and political leaders in electorally overachieving states such as Senegal, Mali, Bangladesh, and Indonesia draw upon some of these concepts. 
Most political cultures can and do change over time, because to some extent they are socially constructed by new opportunities, threats, and contexts generally. 
Witness Catholicism's pro-democratic transformation. 
Unless Arab political culture is shown to be uniquely and permanently inimical to electoral competitiveness, it makes more sense to understand the democratic divide in the Muslim world in terms of the political - as opposed to the ethnic or religious - particularities of the Middle East and North Africa. 
One such particularity is that many contemporary Arab states were established with relatively new and arbitrary boundaries, and were then occupied and often reconfigured as European colonies. 
The linguistic dominance of Arabic throughout the Middle East and North Africa, together with pan-Arabism, reinforced weak national identities. 
Anyone even remotely familiar with the region knows how common is the phrase "the Arab nation" ( watan ). 
Furthermore, unlike Latin America, Africa, and elsewhere, Middle East democrats have not benefited from the Cold War's end. 
The US continues to subsidize authoritarian Arab regimes, such as Egypt (which receives at least $2 billion a year), because it buys peace with Israel and maintains US geopolitical influence in the Arab-Israeli conflict. 
Resolving that conflict - itself a key aspect of Arab political identity - might enable Arab political culture to change. 
But NATO's leaders should bear in mind that, viewed in comparative and historical perspective, such change will be less an imposition from outside and more the result of internal pressures and initiatives. 

Islam’s European Hope 
MADRID – Mohamed Merah’s killing spree in and around Toulouse in March, like the 2004 Madrid train bombings and the 2005 suicide attacks in London’s Underground, has highlighted once again the dilemmas that Europe faces with regard to its growing Muslim minority. 
No social-integration model has proven to be free of flaws. 
But is the picture really so bleak as those who despair of an emerging “Eurabia” would have us believe? 
Neither the multicultural ethos (respect for “cultural diversity in an atmosphere of mutual tolerance,” as British Labor Minister Roy Jenkins put it in 1966), nor official indifference to religious identities (as in France, where the state, as the nineteenth-century historian Jules Michelet put it, “takes the place of God”) has worked as planned. 
Multiculturalism in Britain has entrenched almost self-contained Muslim communities and turned Islam into a badge of identity to counteract exclusion. 
Similarly, imposed laïcité(France’s strict republican secularism) seems to have deepened French Muslims’ attachment to their religious identity. 
Devastatingly high unemployment rates among European Muslims (three times higher than the national average in most countries) aggravate their social marginalization and cultural self-segregation. 
Isolated, destitute, and in a state of permanent rage, the French banlieues and immigrant ghettos of British cities have turned into powder kegs where young Muslims easily fall prey to radical religious preaching and political extremism. 
At least 85 sharia courts are now operating in Britain’s parallel Muslim society, while the number of mosques (1,689) now almost equals the number of Anglican churches that have recently closed (1,700). 
Mohammed is the most popular name for baby boys in Britain. 
For Prime Minister David Cameron, all of this, as he implied at the 2011 Munich Security Conference, represents the spoiled fruit of multiculturalism. 
In fact, it should come as no surprise that enthusiasm for religious self-assertion is strongest among young, second-generation immigrants. 
Their parents, still influenced by life under the repressive autocracies from which they fled, tend to be submissive to the powers that be. 
Younger generations rebel precisely because they have internalized the values of freedom and choice offered by democracy. 
In a way, their rebellion is the hallmark of their Britishness or Frenchness. 
True, some young European Muslims have traveled to Afghanistan, Pakistan, and Iraq; some went as far as Yemen and Somalia, and came back as hardened radicals, soldiers in a war against a West that, in their view, dishonors Islam. 
As the young Muslim Briton Mohammed Sidique Khan put it (speaking in a heavy Yorkshire accent), he participated in the London Underground bombings “to avenge my Muslim brothers and sisters.” 
But becoming a murderous fanatic like Merah or Sidique Khan is the personal choice of a pathological mind, not the trend of a generation. 
Social rejection has not turned young French and British Muslims into mass murderers, and the infatuation of many with al-Qaeda has not overwhelmed their desire to fit in. 
The massive influx of Muslims into Europe in the last two generations, it should be remembered, is the largest encounter between Islam and modernity in human history, and it has yielded invaluable benefits, such as a growing Muslim middle class, an emerging intelligentsia, and greater freedom for Muslim women. 
Polls in France – where the rate of intermarriages is the highest in Europe – have shown that the majority of Muslims do accept laïcité, gender equality, and other key republican values. 
Moreover, sizeable segments of the Muslim community are upwardly mobile in socioeconomic terms. 
About 30% of those born before 1968 have become middle or senior managers. 
More broadly, Islam has failed to supersede other identity patterns, such as class and economic status. 
In Britain, too, immigrants have been changing the ethnic profile of the middle and professional classes. 
Increasingly educated and financially successful, Pakistani Britons are also actively engaged in political life, with more than 200 representing the main political parties in local councils. 
In the 2010 election, the number of British Muslim members of the House of Commons doubled, to 16. 
The most influential Muslim woman in British politics, Baroness Sayeeda Warsi (also the Conservative Party chairperson), joined other Muslims in the House of Lords, such as Lord Ahmed, the most senior Labour peer, and Baroness Kishwer Falkner, a Liberal Democrat. 
To consider Islam as a civilization that is not susceptible to change is an historical fallacy. 
Religious moderation, if not secularization, remains the key not only to social integration, but also to Muslims’ opportunity to influence Europe’s future. 
The example of European Jewry is not entirely irrelevant. 
An oppressed tribe of Ostjuden, destitute immigrants from the shattered communities of Eastern Europe, was transformed in just two generations from God-fearing shoemakers, tailors, and wandering peddlers into a community of writers, philosophers, scientists, and tycoons. 
That happened precisely because they reformed their Judaism in the light of Western values. 
They knew that there was no other way to seize the opportunities for human improvement presented by the West. 
Reform Judaism in Germany resulted in religious and cultural particularism yielding to a far greater degree of universalism than was envisaged at any time in the Jewish past. 
Any religious minority in quest of a place in the European project would do well to reflect on that theological shift. 


Islam’s Forsaken Renaissance 
Children often play a game where they sit in a circle. 
One whispers something to his neighbor, who then whispers that information to the next child, and so on, around the circle. 
By the time the last child whispers the information to the first, it is totally different from what was originally said. 
Something like that seems to have happened within Islam. 
The Prophet of Islam, Muhammad, brought one – and only one – religion. 
Yet today we have perhaps a thousand religions that all claim to be Islam. 
Divided by their different interpretations, Muslims do not play the role they once did in the world; instead, they are weakened and victimized. 
The Shia/Sunni schism is so deep that each side condemns followers of the other as apostates, kafir. 
The belief that the other’s religion is not Islam, and its followers not Muslim, has underpinned internecine wars in which millions have died – and continue to die. 
Even among the Sunnis and Shias there are further divisions. 
The Sunnis have four imams and the Shias have twelve; their teachings all differ. 
Then there are other divisions, including the Druze, the Alawites, and the Wahabis. 
We are also taught by our ulamas (religious instructors) that their teachings must not be questioned. 
Islam is a faith. 
It must be believed. 
Logic and reason play no part in it. 
But what is it that we must believe when each branch of Islam thinks the other one is wrong? 
The Koran, after all, is one book, not two or three, or a thousand. 
According to the Koran, a Muslim is anyone who bears witness that “there is no God (Allah) but Allah, and that Muhammad is his Rasul (Messenger).” 
If no other qualification is added, then all those who subscribe to these precepts must be regarded as Muslims. 
But because we Muslims like to add qualifications that often derive from sources other than the Koran, our religion’s unity has been broken. 
But perhaps the greatest problem is the progressive isolation of Islamic scholarship – and much of Islamic life – from the rest of the modern world. 
We live in an age of science in which people can see around corners, hear and see things happening in outer space, and clone animals. 
And all of these things seem to contradict our belief in the Koran. 
This is so because those who interpret the Koran are learned only in religion, in its laws and practices, and thus are usually unable to understand today’s scientific miracles. 
The fatwas (legal opinions concerning Islamic law) that they issue appear unreasonable and cannot be accepted by those with scientific knowledge. 
One learned religious teacher, for example, refused to believe that a man had landed on the moon. 
Others assert that the world was created 2,000 years ago. 
The age of the universe and its size measured in light years – these are things that the purely religiously trained ulamas cannot comprehend. 
This failure is largely responsible for the sad plight of so many Muslims. 
Today’s oppression, the killings and the humiliations of Muslims, occurs because we are weak, unlike the Muslims of the past. 
We can feel victimized and criticize the oppressors, but to stop them we need to look at ourselves. 
We must change for our own good. 
We cannot ask our detractors to change, so that Muslims benefit. 
So what do we need to do? 
In the past, Muslims were strong because they were learned. 
Muhammad’s injunction was to read, but the Koran does not say what to read. 
Indeed, there was no “Muslim scholarship” at the time, so to read meant to read whatever was available. 
The early Muslims read the works of the great Greek scientists, mathematicians, and philosophers. 
They also studied the works of the Persians, the Indians, and the Chinese. 
The result was a flowering of science and mathematics. 
Muslim scholars added to the body of knowledge and developed new disciplines, such as astronomy, geography, and new branches of mathematics. 
They introduced numerals, enabling simple and limitless calculations. 
But around the fifteenth century, the learned in Islam began to curb scientific study. 
They began to study religion alone, insisting that only those who study religion – particularly Islamic jurisprudence – gain merit in the afterlife. 
The result was intellectual regression at the very moment that Europe began embracing scientific and mathematical knowledge. 
And so, as Muslims were intellectually regressing, Europeans began their renaissance, developing improved ways of meeting their needs, including the manufacture of weapons that eventually allowed them to dominate the world. 
By contrast, Muslims fatally weakened their ability to defend themselves by neglecting, even rejecting, the study of allegedly secular science and mathematics, and this myopia remains a fundamental source of the oppression suffered by Muslims today. 
Many Muslims still condemn the founder of modern Turkey, Mustafa Kamal, because he tried to modernize his country. 
But would Turkey be Muslim today without Ataturk? 
Mustafa Kamal’s clear-sightedness saved Islam in Turkey and saved Turkey for Islam. 
Failure to understand and interpret the true and fundamental message of the Koran has brought only misfortune to Muslims. 
By limiting our reading to religious works and neglecting modern science, we destroyed Islamic civilization and lost our way in the world. 
The Koran says that “Allah will not change our unfortunate situation unless we make the effort to change it.” 
Many Muslims continue to ignore this and, instead, merely pray to Allah to save us, to bring back our lost glory. 
But the Koran is not a talisman to be hung around the neck for protection against evil. 
Allah helps those who improve their minds. 

Islam's Reformist Tradition 
The "clash of civilizations" supposedly underway between the West and the Muslim world, which many see as manifested in Iraq, as well as in Saudi Arabia's growing violence, in fact masks other conflicts - disputes that will probably prove to be far more significant in the long term. 
One of these struggles is taking place among Muslims themselves over the shape of reform within their own societies. 
The Muslim reformist tradition - the search for an authentic path that links Islam's traditions to the modern world - has deep roots, stretching back to the middle of the 19th century. 
Back then, Muslim thinkers contrasted the decline of their own societies with Europe's dynamism, a particularly painful distinction in light of European successes in colonizing large parts of the Muslim world. 
Then, too, Muslim intellectuals focused on the "decadence" of Muslim societies, their debilitating political and social corruption. 
Many early Muslim reformists were clerics or senior bureaucrats, who had seen first hand how diminished their societies had become. 
More importantly, they were members of a tiny minority that had been educated in the written heritage of Islam. 
Far beyond Koranic recitation, these men aspired to participate in the centuries-long discussions among Muslim scholars about the proper ordering of Muslim life. 
This training enabled them to compare the debased state of affairs of their time with the norms and aspirations of earlier generations of clerics and thinkers. 
Their judgment was clear: Muslims had sunk far below what their religion required them to be, and lagged far behind the accomplishments of their ancestors. 
For the reformers, normality meant the progressive development of Muslim societies, and they tied this to the interaction of Islamic teaching with relevant, worldly ideas of the time. 
So these first reformers sought to engage with the ideas that they saw emerging from Europe: rationality, tolerance and ethically determined behavior. 
These early reformers, among them Muhammad Abduh and Jamaleddin al-Afghani, did not ignite the mass mobilization they hoped for, and were not able to redress social ills through better implementation of religious prescriptions. 
But their influence was powerful and lasting, and extended in directions that they could not have anticipated. 
The paradox here is that the open-minded reformism they espoused helped stir conservative trends among Islamic thinkers, who seized on the reformists' revival of Islamic norms to urge a return to the "purity" of the first Islamic societies. 
This conservative trend did not follow-up on the reformists' engagement with the modern ideas of the European Enlightenment, arguing instead that these represented a further estrangement from authentic Islamic values. 
Thus, the most lasting effect of the first reformist wave was the establishment of a " salafi " (traditionalist) trend and eventually the emergence of an even more radical fundamentalism. 
Both conservative traditionalists and radical fundamentalists were drawn to political activism and came to regard the modern state as a means to liberate Muslims from foreign domination and to re-Islamicize society through a revival of Islam's original norms. 
Today, we can see the force of this ideology, but it would be a mistake to assume that the spirit of the original Muslim reformists has vanished. 
Out of the spotlight, countless Muslim scholars and academics have continued to probe the connections between Islamic thought and modern values. 
Drawing on critical scholarship in history and theology, they have detailed the ways in which Muslims have changed - and continue to change - their traditions, in different times and places. 
Thus, a sharp, focused challenge to the assertions of religious orthodoxy has emerged in the work of such important thinkers as Abdolkarim Soroush (Iran), Abdelmajid Charfi (Tunisia), Fazlur Rahman (Pakistan), and Mahmud Muhammad Taha (Sudan). 
While their work encounters great resistance from traditionalist and fundamentalist circles (whose views are widely covered in mainstream Muslim and Western media), these contemporary reformers - and the questions they have raised - have had a big impact on a rising generation of Muslim intellectuals around the world. 
Of course, listeners must strain to hear the voices of reformists amidst the din of those calling for resistance to the enemy and a return to the pure sources of Islam. 
However, the seeds of a new wave of "reform" have taken root, and await an early thaw to sprout. 
The reformists of the first wave attempted to "reopen the doors of Ijtihad (religious interpretation)" in order to adapt the inherited systems of Islamic thinking to new conditions. 
Today's reformists are subjecting these traditional frameworks to scrutiny and attempting to separate the core ethical principles of Islam from the various historical adaptations that conservatives have enshrined as sacred. 
Adapting Islam to modern conditions was the purpose of the first generation of reformers. 
By engaging fully with the main currents of modern thinking, their contemporary successors seek to better understand how universal principles can be expressed through Muslim tradition. 

Islam’s Path to Modernity 
UPPSALA – Many in the Muslim community have long taken issue with the United Nations Universal Declaration of Human Rights (UDHR). 
The declaration, these critics attest, was created by colonial powers with a long history of gross human-rights violations, and amounts to yet another attempt by a few Western players to impose their will upon Muslim countries. 
Islamic conservatives and fundamentalists go a step further, as they declare that no human invention can equal – much less supersede – sharia law, which amounts to the word of God. 
This clash between the UN’s secular human-rights standards and Muslim religious doctrine mirrors the broader conflict between Islam and modernity – a conflict that has left some citizens of Muslim countries, including women and non-Muslims, highly vulnerable. 
Fortunately, an emerging school of Muslim thought addresses the question in a new way, emphasizing that the Quran, like any religious text, must be interpreted – and that those interpretations can change over time. 
In fact, the Quran does defend principles like liberty, impartiality, and righteousness, which indicates a fundamental respect for justice and human dignity. 
The problem, as emphasized by the Iranian theologian Mohsen Kadivar, is that many parts of sharia law are linked to pre-modern social structures, which deny women or non-Muslims the same protections as Muslim men receive. 
It does not help that, as George Mason University’s Abdulaziz Sachedina points out, men have been the ones to interpret Islam’s holy texts. 
This, rather than those texts’ true content, is the root cause of legal discrimination against women in Muslim countries. 
The theologian Ayatollah Mohammad Taqi Fazel Meybodi points out that Islamic law regarding punishment – which includes brutal practices like stoning and amputation – originates from the Old Testament. 
Islam did not invent these punishments; they were simply the prevailing practices of the time. 
As societies progress and evolve, so must the rules and standards that govern them. 
As the Iranian theologian Mohammad Mojtahed Shabestari of the University of Tehran emphasizes, many of the ideas associated with justice and human rights, as we understand them today, were completely “un-thought” in the pre-modern era. 
But Muslims cannot simply disregard such ideas on the grounds that humans had not developed them at the time the Quran was written. 
With the abandonment of outdated notions of tiered justice and the recognition of the liberty and dignity of all individuals, Shabestari believes that it will become possible to realize the Quran’s message that there should be no compulsion in religion. 
People’s religious decisions should be driven by their sense of faith, rather than their desire to retain their civil rights. 
According to the philosopher Abdolkarim Soroush, this distinction between religious beliefs and civil rights should be obvious. 
But interpretations of Islamic law have traditionally been so focused on questions about mankind’s various duties that they have failed to recognize it. 
For Soroush, however, the denial of human rights based on “a person’s beliefs or absence of belief” is undeniably a “crime.” 
The school of Muslim thought promoted by these scholars, who come from both Sunni and Shia backgrounds, offers a way forward for Islam. 
Its adherents know that key Islamic concepts, beliefs, norms, and values can be harmonized with modern social structures and understandings of justice and human rights. 
By recommending ways to do so, they are reaffirming the durability of the core Islamic tradition. 
To use the language of the German philosopher Jürgen Habermas, they are creating “saving translations,” whereby a language, conceptual apparatus, and social system is updated to reflect progress in human reason. 
Such saving translations in Islam have been emerging for a considerable period of time. 
Indeed, the late Iranian writer and philosopher Ayatollah Hussein-Ali Montazeri fell out with Supreme Leader Ayatollah Ruhollah Khomeini, after being designated his successor, over policies that he believed infringed on people’s fundamental rights and freedoms. 
In defending freedom of speech, Montazeri referred to a Quranic verse stating that God taught humans how to express themselves. 
“How can God, on the one hand, teach humans the ability of expression and, on the other hand, limit it?”, he asked. 
The obvious conclusion, he declared, was that “no one should be condemned for heresy, libel, or insult just for expressing his or her opinion.” 
Montazeri, like today’s innovative Muslim thinkers, chose to remain open to alternate interpretations of the Quran, rather than becoming trapped by accepted tradition. 
The saving translations that these figures have offered demonstrate that modern global norms like the UDHR are not only compatible with Islam; they are deeply embedded within it. 
Reinterpreting – or even abandoning – antiquated rules rooted in outdated social structures does not amount to subverting the word of God. 
On the contrary, it proves the true depth of Islam’s sacred texts. 

Islam versus Asia's Chinese Diaspora 
When Malaysia's prime minister, Dr Mahathir Mohamed, recently announced that he intended to resign, Malaysians of Chinese descent joined Mahathir's Malay party loyalists in demanding that he reconsider. 
When Mahathir agreed to stay on, if only for another 16 months, the sighs of relief from these Chinese Malaysians were the loudest of all. 
That ethnic Chinese Malaysians rallied to Dr. Mahathir's side marks a quiet revolution in Malaysian politics, one that demonstrates how much Mahathir's nationalist image has softened during his 22 years in power. 
It also shows how much Malaysia's ethnic Chinese have changed in their views about the nationalist movement that once seemed so antagonistic to them. 
When Southeast Asia's colonial rulers were overthrown four decades ago, ethnic Chinese often shunned the nationalist movements that fought for independence. 
Some movements saw the local Chinese as outsiders or as intrinsically disloyal for seeming to have benefited disproportionately during the years of imperial rule. 
Across the region, anti-Chinese communal violence was widespread. 
In the decades since, many Chinese remained suspicious of political parties with ties to the former national liberation movements. 
In Malaysia, that fear is dissipating. 
Malaysia's Chinese citizens now view Premier Mahathir as a bastion against a new form of violent extremism: the threat posed by Muslim fundamentalism. 
Such a bulwark is something members of the vast Chinese diaspora across Southeast Asia need, not only in Malaysia, where Islamic extremism remains a small threat, but in Indonesia, where thousands of Chinese have been killed and injured in rioting in recent years, and where thousands more have seen their property damaged or lost. 
Among most of Southeast Asia's ethnic Chinese, the presence of even a hint of allegiance to a secular distinction between faith and state in a Muslim leader is admired like a precious gem. 
When found among Islamic believers like Mahathir, evidence of secular tolerance represents a rare sign of modernity and commitment to progress. 
Dr. Mahathir has always been a hard-headed modernist. 
Lately, he has begun to admit that the "Malay first" policies he has promoted since 1969 have failed to produce the skilled Malay elite essential to a modern knowledge economy. 
Mahathir calls for young Malays to work harder, despite knowing that this is an unpopular thing to say. 
Much of this new tone in Malaysia's ethnic politics has gone unnoticed due to the furor surrounding Mahathir's efforts to discredit his former deputy, Anwar Ibrahim. 
This campaign to denigrate Mr. Anwar cost Mahathir's party, the United Malay National Organization (UMNO), much support among ethnic Malays. 
Indeed, during the 1999 national elections, Mahathir retained power only with the help of Chinese voters. 
Now non-Malays hope that he will reconsider the idea of special treatment for ethnic Malays. 
Such reform, however, remains anathema among Malays. 
Malaysia's ethnic Chinese are also impressed by Dr. Mahathir's skillful response to American demands to combat terrorism. 
The Premier used this opportunity to soften his anti-Western image by re-affirming his modernist and secular position against those who sympathized with Islamic extremism. 
By doing so he revitalized the multi-cultural base of the National Alliance that has ruled Malaysia since independence in 1957. All of this helped rally Malaysia's Chinese community to his side. 
Contrast this with the Chinese in Indonesia, a country where everything secular and modern is associated with political and cultural conformity to the nation-state. 
For thirty years, former President Suharto systematically discriminated against ethnic Chinese, while at the same time favoring a few select Chinese cronies, who helped his family and military colleagues make huge, ill-gotten profits. 
For the indigenous majority who remained poor, such cronyism spawned an image of the Chinese as corrupt and unscrupulously greedy. 
Despite memories of the slaughter of Chinese during the anti-communist purges of the 1960s, Indonesia's Chinese were unprepared for the intense hatred shown in the riots of May 1998, when arson and looting, as well as gang rapes of numerous Chinese women, battered the Chinese community. 
Such violence still casts a shadow over ethnic relations in Indonesia. 
Successive Indonesian governments headed by Presidents Habibie, Abdulrahman Wahid and Megawati Sukarnoputri all welcomed the Chinese to play their customary leading role in business. 
Yet Indonesian officials waver from assuring the Chinese that they retain equal rights as citizens, and they have allowed various forms of discrimination to run rampant. 
Today's tensions between Indonesia's secularists, religious believers, and various Muslim extremist groups has taken the spotlight off the Chinese, allowing many to resume their economic role under conditions of growing uncertainty. 
But the personal security they crave, and which Malaysia's ethnic Chinese are achieving, is as far away as ever. 
Indeed, Indonesia is unlikely any time soon to produce a leader they can depend upon in ways that Malaysia's Chinese now rely upon Premier Mahathir. 

 

Islamic Evangelism 
Many believe that religious revival and political radicalism among Muslims who reside in the West reflects the traditions and conflicts of the Middle East or the wider Muslim world. 
But Islamic Salafism (fundamentalist religious radicalism) is above all a consequence of the globalization and Westernization of Islam, and of the decoupling of culture and religion more generally. 
All forms of religious fundamentalism rely on the notion of a "pure" religion independent of cultural variations and influences. 
Today's Islamic revival shares the dogmatism, communitarianism, and scripturalism of American evangelist movements: both reject culture, philosophy, and even theology to favor a literalist reading of sacred texts and an immediate understanding of truth through individual faith. 
Recent books published in the West reflect this, with titles like What is Islam? , What Does It Mean To Be A Muslim? , and How To Experience Islam? 
It is easy to fast during Ramadan in Afghanistan, Pakistan, and Egypt, even if one does not want to. 
But a Muslim living in Europe is confronted with the necessity of objectifying the religion. 
Ulemas (religious scholars) are useless for believers who must search for purely religious criteria that are no longer linked to a given culture. 
The real issue is not a theoretical question about Islam, but concerns the religious practices of Muslims. 
The forms of religiosity in Islam today are more or less the same as those found in Catholicism, Protestantism, and even Judaism. 
Contemporary adherents insist more on personal faith and individual spiritual experience. 
Such "born again" believers rebuild their identities through their rediscovery of religion. 
With Islamic fundamentalism, too, we are not witnessing a traditional religion asserting itself against the Christian West. 
When the Taliban came to power in Afghanistan in 1996, they initially had excellent relations with the Americans, and Westerners could travel freely in Afghanistan between 1996 and 1998. 
The Taliban were not fighting Western culture, but traditional Afghan culture. 
Why forbid owning songbirds? 
Why ban kites? 
The rationale is common to all forms of fundamentalism: this world exists to prepare believers for salvation. 
The state's role is not to ensure social justice and the rule of law, but to create opportunities - even through coercion - for believers to find salvation. 
The Taliban's argument was simple: if your bird starts singing while you are praying, you will be distracted and your prayer will be nullified. 
If you are a good Muslim, you will start again from the beginning. 
But, because we are unsure that you are a good Muslim, it is easier to forbid owning songbirds, so that they cannot jeopardize your salvation. 
Similarly, kites get tangled in trees, and if you climb the tree to free it, you might look over your neighbor's wall and see a woman without her veil, which would put you in sin. 
Why risk burning in hell for a kite? 
Better to ban them. 
Fundamentalism is thus not a protest by original cultures under threat; it reflects these cultures' disappearance. 
So it is a grave mistake to link modern forms of fundamentalism with the idea of a clash of civilizations. 
Young people do not become fundamentalists because their parents' culture is ignored by Western civilization. 
Fundamentalist religiosity is individual and generational, a rebellion against the religion of one's parents. 
Of course, religious fundamentalists of whatever stripe often emphasize similar codes, norms, and values. 
When Pim Fortuyn in Holland decided to wage a campaign against Muslim influence, he was defending sexual freedom, not traditional Christian values. 
But on this subject and others - say, family and abortion - religious Muslims in Europe side with conservative Christians. 
Nevertheless, such commonalities do not explain political and radical Islam. 
Osama Bin Laden is much more the expression of deracination than of a tradition of political violence in Islam. 
Muhammad Atta, Zacharias Moussaoui, and Kamel Daoudi were "born again" in Marseilles, London, and Montreal, not in Egypt or Morocco (and they all broke ties with their families). 
Moreover, young radicals go to fight in Bosnia, Chechnya, Afghanistan, or Kashmir rather than in their countries of origin, because they do not regard the Middle East as the heart of a Muslim civilization under siege by crusaders. 
They live in a global world; they do not perceive themselves as Middle Easterners. 
The irrelevance of traditional culture explains the growing number of converts in all the recently discovered radical networks. 
The members of the Beghal network in France were roughly one-third converts. 
The French police arrested a German citizen with a Polish name in connection with the terrorist attack on the synagogue in Djerba, Tunisia. 
Richard Reid, who tried to blow up a British airplane, José Padilla, accused of plotting a "dirty bomb" attack in the United States, and John Walker Lindh, the American Taliban, are all converts. 
In Europe, conversion is typically confined to underprivileged neighborhoods, populated by young people with no job prospects who generally live in an underground economy of delinquency. 
The radical and violent left in Europe today has abandoned these zones of social exclusion. 
Radicals used to learn to handle a Kalashnikov and hijack planes with the Palestinians. 
Now they learn to handle a Kalashnikov and hijack planes with Al Qaeda. 
Their quest for mythic, messianic, transnational movements of liberation remains the same, as does the enemy: America's imperial colossus. 
They are the product not of Western or Middle Eastern history, but the fusion of all histories, of globalization. 
They are at home in a homeless world. 

Leveraging Islamic Finance for Sustainable Development 
WASHINGTON, DC – Roughly one-third of those suffering from extreme poverty worldwide live in member states of the Organization of Islamic Cooperation (OIC). 
In 21 of those 57 countries, fewer than half of the population has access to adequate sanitation. 
Four percent of infants born in these countries die before they reach the age of five. 
Simply put, despite great potential, many OIC countries have struggled to achieve broad-based development. 
For many countries, the infamous “resource curse” is at work; in others, weak leadership and failed institutions are to blame. 
It does not help that the vast majority (some 71%) of the 125 million people affected by conflicts and natural disasters reside in OIC countries. 
Instability places enormous strain on national budgets. 
But these countries have options. 
In particular, the capital that has accumulated in some of the OIC countries’ financial systems could play an important role in helping them to meet their development goals – especially if Islamic finance is used to its full potential. 
Islamic finance has important advantages over conventional financial products. 
Its prohibition of interest and requirement that investments be linked to the real economy, together with its approach to profit- and loss-sharing, add stability to the financial sector. 
Islamic finance also can enhance financial inclusion, as it incorporates people who, for cultural or religious reasons, are excluded from the traditional financial system. 
This is perhaps one reason why Islamic finance has been expanding at 10-12% per year over the last decade or so. 
If Islamic finance is to play its full part in revitalizing and diversifying the economies of the OIC countries, governments will need to undertake important reforms. 
Topping the list is the need for stronger legal institutions that protect property rights and ensure that contracts are enforced. 
If people are to have full confidence in Islamic financial products, moreover, the industry will need to be standardized and regulated. 
National tax policies will also need to be tweaked, to prevent discrimination against Islamic financial instruments. 
The World Bank Group is working with partners to help realize these reforms. 
Furthermore, it has introduced investment projects that use Islamic financing across the region. 
The World Bank Treasury has issued a variety of Islamic financial instruments, including two Sukuk (bonds that meet Islamic strictures on interest), which have raised $700 million. 
Similarly, the Bank’s private-sector arm, the International Financial Corporation, has established the IFC Sukuk Company, which issued $100 million in trust certificates in 2015. 
The Bank’s political risk insurance arm, the Multilateral Investment Guarantee Agency (MIGA), has provided a $427 million Sharia-compliant investment guarantee for an infrastructure project in Djibouti and $450 million in political risk insurance for a telecommunications investment in Indonesia. 
And, together with the Islamic Development Bank Group, the United Nations, and other donors, the World Bank has created a joint facility to assist the countries hardest hit by instability with concessional financing, which includes an Islamic-finance instrument for Lebanon and Jordan to help them bear the costs of supporting refugees from Syria. 
New technology can play a vital role in making financial systems more inclusive, particularly for groups that face greater barriers to access. 
For example, some 90% of Syrian refugees have access to smart phones, through which they could access financial services. 
Efforts must be made to ensure that we make the most of such technologies. 
Finally, there are humanitarian objectives. 
And, indeed, work is already underway to address how waqf (charitable endowments), zakat (the obligatory alms tax), and a variety of Islamic financial instruments can be channeled effectively and efficiently to meet humanitarian needs. 
Islamic finance can help deliver much-needed solutions to the Muslim world’s development challenges. 
Its ability to enhance financial stability, promote financial inclusion, and drive sustainable development could spark transformative change across the region. 
To realize this potential, Islamic finance, no less than its conventional counterpart, needs an appropriate enabling environment, one characterized by a level playing field, an adequate regulatory framework, and effective partnerships. 

Ending Blowback Terrorism 
NEW YORK – Terrorist attacks on civilians, whether the downing over Sinai of a Russian aircraft killing 224 civilian passengers, the horrific Paris massacre claiming 129 innocent lives, or the tragic bombing in Ankara that killed 102 peace activists, are crimes against humanity. 
Their perpetrators – in this case, the Islamic State (ISIS) – must be stopped. 
Success will require a clear understanding of the roots of this ruthless network of jihadists. 
Painful as it is to admit, the West, especially the United States, bears significant responsibility for creating the conditions in which ISIS has flourished. 
Only a change in US and European foreign policy vis-à-vis the Middle East can reduce the risk of further terrorism. 
The recent attacks should be understood as “blowback terrorism”: a dreadful unintended result of repeated US and European covert and overt military actions throughout the Middle East, North Africa, the Horn of Africa, and Central Asia that aimed to overthrow governments and install regimes compliant with Western interests. 
These operations have not only destabilized the targeted regions, causing great suffering; they have also put populations in the US, the European Union, Russia, and the Middle East at significant risk of terror. 
The public has never really been told the true history of Osama bin Laden, Al Qaeda, or the rise of ISIS in Iraq and Syria. 
Starting in 1979, the CIA mobilized, recruited, trained, and armed Sunni young men to fight the Soviet Union in Afghanistan. 
The CIA recruited widely from Muslim populations (including in Europe) to form the Mujahideen, a multinational Sunni fighting force mobilized to oust the Soviet infidel from Afghanistan. 
Bin Laden, from a wealthy Saudi family, was brought in to help lead and co-finance the operation. 
This was typical of CIA operations: relying on improvised funding through a wealthy Saudi family and proceeds from local smuggling and the narcotics trade. 
By promoting the core vision of a jihad to defend the lands of Islam (Dar al-Islam) from outsiders, the CIA produced a hardened fighting force of thousands of young men displaced from their homes and stoked for battle. 
It is this initial fighting force – and the ideology that motivated it – that today still forms the basis of the Sunni jihadist insurgencies, including ISIS. 
While the jihadists’ original target was the Soviet Union, today the “infidel” includes the US, Europe (notably France and the United Kingdom), and Russia. 
At the end of the 1980s, with the Soviet retreat from Afghanistan, some elements of the Mujahideen morphed into Al Qaeda, Arabic for “the base,” which referred to the military facilities and training grounds in Afghanistan built for the Mujahideen by bin Laden and the CIA. 
After the Soviet withdrawal, the term Al Qaeda shifted meaning from the specific military base to the organizational base of jihadist activities. 
Blowback against the US began in 1990 with the first Gulf War, when the US created and expanded its military bases in the Dar al-Islam, most notably in Saudi Arabia, the home of Islam’s founding and holiest sites. 
This expanded US military presence was anathema to the core jihadist ideology that the CIA had done so much to foster. 
America’s unprovoked war on Iraq in 2003 unleashed the demons. 
Not only was the war itself launched on the basis of CIA lies; it also aimed to create a Shia-led regime subservient to the US and anathema to the Sunni jihadists and the many more Sunni Iraqis who were ready to take up arms. 
More recently, the US, France, and the UK toppled Muammar el-Qaddafi in Libya, and the US worked with the Egyptian generals who ousted the elected Muslim Brotherhood government. 
In Syria, following President Bashar al-Assad’s violent suppression of peaceful public protests in 2011, the US, Saudi Arabia, Turkey, and other regional allies helped to foment a military insurgency that has pushed the country into a downward spiral of chaos and violence. 
Such operations have failed – repeatedly and frequently disastrously – to produce legitimate governments or even rudimentary stability. 
On the contrary, by upending established, albeit authoritarian, governments in Iraq, Libya, and Syria, and destabilizing Sudan and other parts of Africa deemed hostile to the West, they have done much to fuel chaos, bloodshed, and civil war. 
It is this turmoil that has enabled ISIS to capture and defend territory in Syria, Iraq, and parts of North Africa. 
Three steps are needed to defeat ISIS and other violent jihadists. 
First, US President Barack Obama should pull the plug on CIA covert operations. 
The use of the CIA as a secret army of destabilization has a long, tragic history of failure, all hidden from public view under the agency’s cloak of secrecy. 
Ending CIA-caused mayhem would go far to staunch the instability, violence, and anti-Western hatred that fuels today’s terrorism. 
Second, the US, Russia, and the other permanent members of the United Nations Security Council should immediately stop their infighting and establish a framework for Syrian peace. 
They have a shared and urgent stake in confronting ISIS; all are victims of the terror. 
Moreover, military action against ISIS can succeed only with the legitimacy and backing of the UN Security Council. 
The UN framework should include an immediate end to the insurgency against Assad that the US, Saudi Arabia, and Turkey have pursued; a Syrian cease-fire; a UN-mandated military force to confront ISIS; and a political transition in Syria dictated not by the US, but by a UN consensus to support a non-violent political reconstruction. 
Finally, the long-term solution to regional instability lies in sustainable development. 
The entire Middle East is beset not only by wars but also by deepening development failures: intensifying fresh water stress, desertification, high youth unemployment, poor educational systems, and other serious blockages. 
More wars – especially CIA-backed, Western-led wars – will solve nothing. 
By contrast, a surge of investment in education, health, renewable energy, agriculture, and infrastructure, financed both from within the region and globally, is the real key to building a more stable future for the Middle East and the world. 

The Islamic State’s European Strategy 
LONDON – Terrorist attacks by Islamic State (ISIS) affiliates and sympathizers over the past year have raised alarms in Europe, but they have not yet reached the frequency Europe experienced in the 1970s, according to the Global Terrorism Database. 
However, whereas previous waves of terrorism in Europe stemmed from internal conflicts, today’s deadly surge is linked to instability outside the continent. 
The latest attacks are emerging from the political vacuum left by fallen dictators in the Middle East and North Africa. 
So, just as there seems to be no end in sight for the violence in Syria, Iraq, and Libya, or for Egypt’s extreme polarization, or for the fragile security situation in Tunisia and Algeria, there is little reason to believe that attacks in Europe will end anytime soon. 
Making matters worse, July’s bloody putsch in Turkey – where 270 people were killed and another 1,500 wounded in just a few hours – makes the country an even more attractive ISIS target. 
ISIS feeds off troubled states from which it can draw recruits and launch attacks – either by establishing an “official Province,” as in Syria, Iraq, Libya, and Egypt, or by supporting secret cells and small combat units, as it has done in Tunisia and Turkey already. 
These two modes of operation – insurgency and terrorism – go hand in hand. 
When an insurgent organization loses control of territory or battlefield momentum, it resorts to terrorism, reasoning that attacks on softer civilian targets are cheaper, easier, and just as politically effective. 
This is why ISIS wants to strike Europe directly, even as it loses territory in Iraq, Syria, and Libya. 
ISIS has multiple goals in following this path. 
It believes that terrorist attacks in Europe will deter the West from striking territories it controls, and it wants to avenge the more than 20,000 members it has lost to Western coalition airstrikes. 
Moreover, it wants to stoke anti-Muslim animus, thereby further alienating European Muslims from the rest of European society and boosting its supply of recruits in Europe. 
Similarly, it wants to sow discord among European religious and minority communities themselves (the Sunni-Shia and Sunni-Alevi divide being two clear examples). 
ISIS’s objectives in using terrorism are not new; but its capacity for carrying out attacks is. 
It has managed to sustain its terror operations in Europe despite being heavily bombarded since 2014, because it has been able to draw from relatively small subsets of more than 5,000 Europeans who have joined the fight in Syria. 
The exact number of European fighters who have received training from ISIS and returned home is still unknown. 
Abdelhamid Abaaoud, who led the November 2015 Paris attacks, claimed he was one of 90 ISIS-trained terrorists in Europe. 
ISIS has allegedly trained 400-600 fighters for “external operations” involving urban guerrilla warfare, improvised explosive devices (IEDs), surveillance, counter-security, and forgery. 
ISIS has so far hit France and Turkey the hardest. 
France has suffered more than 230 deaths and about 700 injuries, while Turkey has endured more than 220 deaths and about 900 injuries. 
As it happens, France and Turkey are each the source of a relatively high number of foreign militants fighting in Iraq and Syria, with an estimated 700 French citizens and 500 Turks fighting under the ISIS flag. 
So why has ISIS focused on attacking France and Turkey? 
Preliminary findings by two scholars show negative reactions to French laïcité – the tradition of secularism in public and political life – among disenfranchised young Sunni Muslims in French-speaking countries. 
This, the argument goes, facilitates their radicalization and recruitment by extremists. 
But more factors need to be investigated. 
For example, French foreign policy in the twenty-first century recognized many Middle Eastern grievances. 
France opposed the war in Iraq in 2003; intervened militarily against Libya’s dictator, stopping a potential crime against humanity in March 2011; and saved a fragile democracy in Muslim-majority Mali in 2013. 
While these policies were perceived favorably in most of the Middle East, ISIS and their supporters and sympathizers saw things differently. 
Turkey, for its part, has long been an attractive alternative model for other Muslim-majority countries. 
Until its latest challenges, democracy seemed to be succeeding (if in fits and starts), and economic growth was as high as 9% in recent years. 
Given its Western leanings, it is no surprise that ISIS has dedicated several issues of its official magazine, Dabiq, to attacking the Turkish model and Turkish President Recep Tayyip Erdoğan. 
An earlier iteration of ISIS, the Islamic State in Iraq, reportedly ordered vehicle-borne IED attacks on Turkey as early as April 2012. 
Europe needs its democracies to unite around a common strategy to defend against manifold security challenges. 
Signs of disunity and fragmentation – to say nothing of bloody coup attempts – serve ISIS’s publicly declared objective of “weakening European cohesion.” 
While France and Turkey have stood out as ISIS targets, they are not alone. 
But, given their shared position, their bilateral relationship is especially important, and diplomats from each country should get to work shoring it up. 
Any further tensions will only undermine the potential for strategic cooperation. 
Now is the time to come together. 


Blinded By ISIS 
MADRID – The general consensus emerging since last month’s carnage in Paris seems to be that the Islamic State (ISIS) can be defeated only by a ground invasion of its “state.” 
This is a delusion. 
Even if the West and its local allies (the Kurds, the Syrian opposition, Jordan, and other Sunni Arab countries) could agree about who would provide the bulk of ground troops, ISIS has already reshaped its strategy. 
It is now a global organization with local franchised groups capable of wreaking havoc in Western capitals. 
In fact, ISIS has always been a symptom of a deeper malady. 
Disintegration in the Arab Middle East reflects the region’s failure to find a path between the bankrupt, secular nationalism that has dominated its state system since independence and a radical brand of Islam at war with modernity. 
The fundamental problem consists in an existential struggle between utterly dysfunctional states and an obscenely savage brand of theocratic fanaticism. 
With that struggle, in which most of the region’s regimes have exhausted their already-limited stores of legitimacy, a century-old regional order is collapsing. 
Indeed, Israel, Iran, and Turkey – all non-Arab-majority countries – are probably the region’s only genuinely cohesive nation-states. 
For years, key states in the region – some of them, like Saudi Arabia and Qatar, darlings of the West – have essentially paid protection money to jihadists. 
Yes, America’s wars in the region – as destructive as they were stupid – bear a substantial part of the blame for the mayhem now engulfing the Fertile Crescent. 
But that does not exculpate the Arab fundamentalist monarchies for their role in reviving the seventh-century vision that ISIS (and others) seek to realize. 
ISIS’s army of psychopaths and adventurers was launched as a “startup” by Sunni magnates in the Gulf who envied Iran’s success with its Lebanese Shia proxy, Hezbollah. 
It was the combination of an idea and the money to propagate it that created this monster and nurtured its ambition to forge a totalitarian caliphate. 
For years, the Wahhabis of Arabia have been the fountainhead of Islamist radicalism and the primary backer and facilitator of extremist groups throughout the region. 
As former US Senator Bob Graham, the lead author of the classified Senate report on the terror attacks of September 11, 2001, put it earlier this year, “ISIS is a product of Saudi ideals” and “Saudi money.” 
Indeed, Wikileaks quotes former US Secretary of State Hillary Clinton accusing Qatar and Saudi Arabia of collusion “with Al Qaeda, the Taliban, and other terrorist groups.” 
That raises an obvious question: When regimes in the region collaborate with terrorist groups, how can intelligence cooperation with them, let alone a coalition to fight Islamic extremism, be credible? 
The so-called pro-Western regimes in the Arab Middle East simply do not see eye to eye with the West about the meaning and implications of the war on terror, or even about what violent radicalism is. 
That is just one reason why an invasion of the caliphate, with local armies supported by Western airstrikes, could have devastating unintended consequences – think of George W. Bush’s invasion of Iraq. 
Indeed, even if such a division of labor could be agreed, a ground invasion that denies ISIS its territorial base in Iraq and Syria would merely push it to redeploy in a region that is collapsing into various no man’s lands. 
At that point, “Caliph” Abu Bakr al-Baghdadi, or some future would-be caliph, would invariably fuse the region’s mounting governance chaos with a global jihadi campaign – a process that, as we have seen in Paris and elsewhere, has already started. 
The ideological and strategic rift between ISIS and Al Qaeda notwithstanding, an alliance against the common enemy – the incumbent Arab regimes and the West – cannot be entirely discounted. 
Osama Bin Laden himself never ruled out the idea of establishing a caliphate. 
Indeed, his terrorism was perceived as a prelude to it. 
At the same time, Syria and Iran might exploit the inevitable chaos to expand their presence in Iraq, and all parties, including Turkey, would oppose a central role for the Kurds. 
The latter have proven themselves to be tremendously reliable and capable fighters, as the battles to liberate the cities of Kobani and Sinjar from ISIS control have shown. 
But no one should think that they can be the West’s tool for subduing the Sunni heartland of Iraq and Syria. 
Nor is it clear that the West is capable of compensating the Kurds with full-fledged statehood. 
The geostrategic constraints that have prevented Kurdish independence for centuries are even more acute today. 
Some of the consequences of a Western-backed Arab invasion of the caliphate are no less predictable for being “unintended.” 
It would eventually stir up mass sympathy for the caliphate throughout the region, thus providing ISIS with a propaganda victory and further inspiration for alienated young Muslims in Europe and elsewhere to fight the "Crusaders" and the Muslim "traitors" aligned with them. 
The only realistic alternative is more – much more – of the same. 
That means a constant and resolute effort to stop the caliphate’s expansion, cut off its sources of finance, deepen and expand intelligence cooperation among credible allies, end the oil-rich monarchies’ collusion with terrorist groups, and encourage reform (without engaging in grand state-building projects). 
The Arab Middle East is not susceptible to quick fixes. 
It requires profound indigenous change that might take the better part of this century to produce. 
For now, turning the caliphate into yet another failed state in the region seems to be the best possible outcome. 

The Strategic Logic of the Islamic State 
LONDON – The so-called Islamic State (ISIS) continues to pose a serious challenge not just to the Middle East, but to the entire world. 
While the efforts of a US-led coalition have weakened ISIS, destroying the group has proved difficult – and it has continued to inspire attacks in faraway places, from Brussels to Bangladesh. 
To understand how to defeat ISIS once and for all, we first need to comprehend its strategy. 
And make no mistake: even if the ISIS-associated international attacks seem random, the group’s global crusade does have a strategic logic. 
ISIS is fighting for its survival. 
It has neither the money nor the manpower to fight anything like a traditional war against the US-led coalition and its local allies – at least not for long. 
What it does have is a message that resonates with certain groups – typically marginalized, disenchanted, and tormented young men – within a broad range of countries, in the Middle East, Europe, and elsewhere. 
And it has become very good at tapping these sources of manpower. 
The group’s spokespeople have repeatedly called on followers and supporters worldwide to strike its enemies, particularly in the West. 
Inspiring lone wolves and stay-at-home groupies or tight-knit local cells to launch attacks in distant, unpredictable locations is the ultimate weapon of the weak in asymmetric conflicts. 
It enables ISIS to reap all of the benefits of an attack, while incurring none of the costs. 
The benefits are substantial. 
Such attacks divert attention from ISIS’s losses in Syria and Iraq, and can even make it seem that the group is getting stronger. 
This not only enhances ISIS’s capacity to recruit and inspire more terrorists; it also penetrates the thinking of citizens in coalition countries. 
ISIS hopes that, as the human and economic costs of the fight against ISIS accumulate in those countries, particularly in Europe, public opinion may turn against military involvement in Iraq and Syria. 
As pressure on ISIS builds – particularly in Mosul, Iraq’s second-largest city, and Raqqa, the Syrian city that has become the self-proclaimed caliphate’s de facto capital – its calls for attacks will intensify. 
Given a widespread willingness – from San Bernardino to Nice – to heed those calls, the results could be devastating. 
Of course, ISIS does not rely entirely on inspiration. 
It also recruits skilled combatants from just about anywhere – including Tunisia, Morocco, Libya, Jordan, Turkey, France, Belgium, and Britain – whom it then sends to launch spectacular operations, such as those in Istanbul, Brussels, and Paris. 
There are credible reports that ISIS has even established an external branch responsible for plotting terrorist operations abroad. 
If Mosul and Raqqa fall in the coming year, as seems likely, thousands of surviving ISIS combatants will return to their home countries, where they are likely to continue waging their war with terror attacks. 
As a result, the coming year is bound to be at least as bloody as the last one. 
Who will bear the brunt of ISIS’s desperation? 
The US tops the list of ISIS’s enemies. 
But dispatching fighters there from the Middle East poses a logistical challenge. 
And there are only about 100 Americans fighting with ISIS, meaning that, in the US, inspiration is ISIS’s main tactic. 
European and Muslim countries are much more convenient targets, and not only in geographic terms. 
Most ISIS fighters are from the Arab world, and 4,000 European men and women have joined the group. 
Of the European countries, France, which has assumed a leadership role in the fight against ISIS, is the most vulnerable. 
It has already suffered more casualties than all of its neighbors together, with 235 people killed in the last 18 months. 
One reason for this is that the sense of exclusion and alienation felt by a large segment of France’s Muslim community has made it easier for ISIS to recruit in the country. 
Some 1,200 French nationals have joined as fighters – the largest contingent of Westerners in the group. 
Add to that serious gaps in France’s domestic security arrangements, and the odds of further attacks appear high. 
But as much as ISIS wants to hurt the West, the countries of the Middle East – especially the Shia regimes of Iraq and Syria, plus their Iranian ally – remain its prime target. 
After all, ISIS’s effort to build a caliphate requires it to control territory. 
The struggle against America, Europe, and even Israel must be deferred until a Sunni Islamic state is built in the heart of Arabia. 
Given this, it is crucial that the security threat posed by terror attacks does not overshadow, particularly for Western leaders, the imperative of dismantling ISIS’s pseudo-state in Iraq and Syria. 
But even when that task is finished, ISIS will still wield its ideology as a weapon to attract fighters to engage in guerrilla warfare in Iraq and Syria, and in terrorism abroad. 
That is why it is also necessary to cut off the social and ideological oxygen that has nourished ISIS’s spectacular rise. 
This means addressing the Middle East’s broken politics, including both its causes (such as the geostrategic rivalry between Sunni-ruled Saudi Arabia and Shia-led Iran) and its symptoms (including the civil wars spreading through the Arabian heartland). 
Only then can the Arab-Islamic world and the international community defeat ISIS and others like them. 

Islamicizing Malaysia 
Malaysian society is now gripped by a fundamental question: is the country, which is more than half Muslim, an Islamic state? 
In practice, various religious and ethnic groups give Malaysia a distinctly multi-cultural character. 
But the Malaysian constitution provides room for arguments on both sides of the question, and the relatively secular status quo is facing a serious challenge. 
Drafted by a group of experts in 1957, under the auspices of the country’s former British rulers, the constitution includes two seemingly contradictory clauses. 
On the one hand, Article 3 states that Islam is the religion of the federation, and that only Islam can be preached to Muslims. 
On the other hand, Article 11 guarantees freedom of religion for all. 
As a result, Malaysia has developed both a general civil code, which is applied universally, and Islamic law, which is applied only to Muslims in personal and family matters. 
Recently, however, some Muslim groups have pressed the government to proclaim Malaysia an Islamic state, on the basis of Article 3 and the Muslims’ population majority. 
Ultimately, they would like Malaysia to be governed by Islamic law. 
For years, there was little need to resolve this constitutional issue. 
For example, if a Muslim decided to renounce his faith, the matter would be handled outside the legal system, or conversion records would be sealed. 
Today, however, every Malaysian must declare a religious affiliation, which is registered with the government – a requirement that has made it difficult for a Muslim to leave Islam without formalizing the change of status through the legal process. 
The country is now riveted on the fate of ordinary citizens like sales assistant Lina Joy and former religious teacher Kamariah Ali, who are trying to change their religious affiliation through the legal system. 
Muslim professional organizations and the Islamic opposition political party hold the view that renunciation of Islam is punishable by death. 
Likewise, the defense by Malaysian civil reform movements of individuals’ freedom of conscience has been denounced by some religious leaders as an attack on Islam. 
Currently, Malaysia has no law that would impose the death penalty on apostates. 
Yet public movements have been formed to highlight this Islamic tenet. 
If it is not applied, the argument goes, there will be a massive exodus of Muslims to other faiths. 
The immediate goal is to keep the courts from allowing Lina Joy or Kamariah Ali to convert. 
Attempts by other democratic civil society groups to debate this issue in peaceful public forums have been thwarted by threats of violence from a coalition of Muslim non-governmental organizations calling themselves BADAI (the Malay acronym for Coalition against the Inter-Faith Commission). 
Concerned about sparking an ethnic clash, Prime Minister Abdullah Ahmad Badawi has proclaimed a ban on open discussion of these issues, threatening to arrest Internet news providers and activists if they continue to fan such debates. 
Badawi is right to be worried. 
Since independence, national politics in Malaysia has reinforced group identity, especially among ethnic Malays, an exclusively Muslim community. 
Identity politics allowed ethnic Malays to assert their claims to control over land, language, and religion. 
All attempts to reduce Malay influence serve to mobilize this community – in both ethnic and religious terms. 
Malay politicians have learned how to play this card very effectively. 
Ethnic Malays’ special status has long been codified in affirmative action policies giving them special economic benefits. 
However, as Malaysia engages with the global economy, these privileges may eventually be removed in order to heighten the country’s competitiveness. 
As a result, many Malay-Muslims increasingly worry about the loss of familiar economic and political safeguards. 
In particular, tensions have grown between the Malay majority and the country’s large Chinese minority, which has been quicker to benefit from Malaysia’s economic opening to the world. 
Moreover, efforts to Islamicize the state comes at a time when conflict in the Middle East has further politicized Muslim movements in Malaysia. 
They view themselves as counter-forces to cultural domination by the West, asserting their religious identity in the face of what they regard as imperializing ideas like secularism and human rights. 
Small disputes are magnified by this underlying conflict. 
Disagreements are increasingly depicted as being rooted in an East-West divide, as a struggle between believers and apostates. 
Many Muslims are wary of this brand of identity politics. 
They recognize that the intolerance of Islamist groups can easily be turned against moderate Muslims. 
But all Malaysians must learn how to manage pressures that seem to be pushing their country’s constituent communities away from one another. 
Defending a multi-cultural national identity in the face of religious intolerance is thus the great challenge facing Malaysia’s state and society. 

Militant Islamism and Vaccine Skepticism 
LONDON – We know how to eradicate polio. 
Since the 1980s, an international vaccination effort led by the World Health Organization has driven the virus to the cusp of extinction. 
A disease that killed or paralyzed a half-million people annually now infects only a few hundred. 
What is standing in the way of the virus’s eradication is not medical or technical constraints, but political resistance to the vaccination effort. 
Indeed, the few areas where the virus continues to hold out share worrying similarities. 
Since 2012, 95% of polio cases have occurred in five countries – Afghanistan, Pakistan, Nigeria, Somalia, and Syria – all of which are affected by Islamist insurgencies. 
In order to eradicate polio, we must understand this linkage. 
Islamist opposition to vaccination programs is often attributed to the belief that vaccines are a Western conspiracy to harm Muslims, and that the vaccines sterilize children, are infected with HIV, or contain pork. 
But it is important to note that jihadists in Syria and Afghanistan have been largely supportive of polio vaccination campaigns. 
If the virus is to be defeated, we will have to move beyond caricatures of Islamists as violent zealots opposed to Western science and look closely at the specific political contexts in which the eradication effort has so far been unsuccessful. 
In Nigeria, for example, the extremist group Boko Haram’s animosity toward vaccination campaigns stems from an intra-Muslim conflict rooted in the colonial era, when the United Kingdom ruled northern Nigeria indirectly through a pro-British indigenous elite. 
The descendants of the colonial elite continue to dominate the region’s state governments, which are responsible for implementing the vaccination programs. 
Boko Haram’s opposition to the effort reflects its broader antipathy to what it regards as a corrupt and Westernized political class. 
Similarly, in southern Somalia, attempts by outsiders to impose a stable centralized government have generated resentment toward polio vaccination programs. 
Since the early 1990s, interventions by the United Nations and the African Union in Somalia have included troops from the United States and from the country’s predominantly Christian neighbors, Kenya and Ethiopia. 
This has resulted in widespread discontent and has fueled support for Islamist militants, whom many Somalis view as the main bulwark against foreign interference. 
In recent years, al-Shabaab militants have attacked aid workers, making it very difficult to undertake public-health programs in insurgent-controlled areas. 
Médecins Sans Frontières, for example, had to close its Somali programs in 2013. 
In Pakistan, opposition to the vaccination effort has its roots in Pashtun communities’ resistance to the national government. 
Broadly speaking, the Pakistani Taliban is a Pashtun movement, concentrated in the semi-autonomous Federally Administered Tribal Areas in the northwest of the country. 
This mountainous region was never ruled directly by the British, and the Pashtun have fiercely resisted attempts by the Pakistani state to expand its power. 
Thus, external interventions like the vaccination program are viewed as a stalking horse for deeper government encroachment into Pashtun areas. 
The Pakistani Taliban’s hostility has been further hardened by US interventions in the country, including the use of a fake hepatitis vaccination campaign to gather DNA from Osama bin Laden’s relatives prior to his assassination. 
For Islamist militants, this confirmed that polio immunization efforts are a cover for gathering intelligence to identify targets for drone attacks. 
The importance of local politics – rather than religious ideology – can be seen in the response to polio vaccination programs on the other side of the Durand Line. 
In Afghanistan, the Taliban is also a largely Pashtun movement, but its attitude toward the polio eradication effort could not be more different. 
When the Taliban ruled Afghanistan, from 1996 to 2001, it supported the vaccination effort, and indeed it continues to do so; a recent Taliban statement urged its Mujahedeen to provide polio workers with “all necessary support.” 
This difference reflects the political position of Pashtuns in the two countries. 
In Afghanistan, Pashtun are the majority; as a result, they have a much stronger influence in national politics than their counterparts in Pakistan – and thus view the state with less suspicion. 
In Syria, the biggest obstacle to the vaccination effort has been the central government. 
The refusal of President Bashar al-Assad’s regime to allow WHO to carry out vaccination programs in insurgent-controlled areas directly resulted in a polio outbreak in 2013. 
Moderate opposition groups like the Free Syrian Army, with the help of the Turkish authorities and local non-governmental organizations, have organized their own vaccination program in areas outside Syrian government control. 
Islamist militants, including the Islamic State and the al-Nusra Front, have allowed these immunization programs to operate in areas under their control as well, as they are not associated with the Assad regime. 
The stance Islamist insurgents take toward polio vaccination campaigns has less to do with anti-Western zealotry than with the specific dynamics of the conflict in which they are involved. 
This has important implications for public-health policy. 
Only by understanding the political context in which vaccination programs operate will those committed to eradicating polio succeed. 

Islands of Isolation 
PARIS – The Japanese and the British may seem very different, but a closer look reveals something akin to a parallel destiny for these two island peoples. 
With their old imperial ambitions and widespread distaste for the great continents from which the narrowest of seas divide them, both the British and the Japanese are vulnerable to the siren song of isolationism. 
Unfortunately, both now appear to be succumbing to that dangerous temptation. 
Perhaps geography is destiny. 
As islanders, Britons and Japanese have had wary relations with – and often a superiority complex toward – their great continental neighbors, Europe and China, respectively. 
Both historically compensated for their isolation with strong central governments, powerful navies, dynamic entrepreneurship, vibrant culture, and imperial ambition. 
Today, Japan and the United Kingdom pretend to be open societies, and to be stakeholders in the globalization process. 
In reality, both remain mostly inward looking and preoccupied with the disintegration of their original culture. 
Both try desperately to keep immigrants at bay, whether through cultural segregation in the UK or, in Japan’s case, by mere rejection. 
The more civilizations become intertwined in the new world order, the more the Japanese and British are tempted to remain aloof and apart. 
In Japan, the isolationist temptation is expressed in the current nostalgia for the Edo period, from 1600 to 1868, before Emperor Meiji opened Japan to the world. 
“Back to Edo” has become a dominant mood and theme in public debates, promoted by writers, pundits, and historians like Inose Naoki (who is also Vice Governor of Tokyo), who argue that the Japanese were much happier within their closed world, blissfully insulated from the quest for material success and international status. 
This “Back to Edo” discourse translates into the refusal of young Japanese to learn a foreign language or travel abroad. 
Indeed, in Europe, North America, and elsewhere, the omnipresent Japanese tourists of the 1970’s have been replaced by Chinese and Koreans. 
The number of Japanese studying abroad is at a new low at the very moment when South Koreans and Chinese are swarming into European and North American universities. 
Even the world’s great universities, from Harvard to Oxford, are seeing fewer Japanese students. 
Here the British are very much mimicking the Japanese: fewer and fewer are learning foreign languages, studying abroad, and following the old path of working in Hong Kong, Singapore, or Australia. 
So prevalent is this “little England” mood that Prime Minister David Cameron’s government is now tempted to hold a referendum to ask the British whether they want to remain within the European Union, a vote that even that arch euro-skeptic, Margaret Thatcher, never risked. 
The prospect of a referendum reflects the overwhelming mood among the Tories, who sometimes mention Norway – a non-EU member whose main role in global affairs is to award the Nobel Peace Prize – as a model for Britain’s role in the world. 
Of course, Norway has the world’s highest per capita income. 
But that is not the relevant standard against which the UK or other Western countries should measure themselves, because Norway has a tiny, homogeneous, population and sits on vast – and well-managed – natural resources. 
If asked in a referendum, the British might well leave the EU, which they never liked. 
This would have the unintended consequence of strengthening the federalists on the continent, thereby accelerating the integration dynamic that the British now want to stop. 
Indeed, the British would leave just when Iceland, Serbia, Turkey, and Ukraine, despite Europe’s current crisis, are trying to get in. 
And, while the eurozone may be in crisis, Poland, among others, still want to join in the near future. 
The British may turn their nose up at the euro – to which even the supposedly independent Swiss franc is pegged – but it will almost certainly remain the currency of nearly 300 million Europeans. 
Isolationism, whether in Japan or the UK, is not only a short-sighted choice; especially for Japan, it may also be a perilous one, given the rise of China next door. 
Both Japan and the UK, much as they may not wish to admit it, depend on the global market. 
Isolationism would leave their citizens ill prepared to confront competition and their governments excluded from decisions that impact the global economy and trade. 
Nor can isolationism guarantee national security at a time of rising threats from terrorist groups and rising ambitions on the part of China and Russia. 
The Edo nostalgia in Japan and the Norway model’s appeal in the UK are not rational choices. 
They merely channel national wariness at a time of global competition between cultures, economies, and emerging strategic ambitions. 
Sometimes nations, like individuals, grow tired and long for their idealized youth – a recurrent phenomenon that historians call “declinism.” 
Whether one calls it that or a desire for a holiday from history, Japan and the UK today seem to be choosing a path that will only accelerate decline. 

The New Middle East’s New Problems 
BERLIN – When hostilities flared in Gaza last month, it seemed like the same old story was repeating itself. 
The world again witnessed a bloody and senseless surge of violence between Israel and Hamas, in which the main victims were innocent civilians maimed and killed on both sides. 
This time, however, things were not what they seemed, because the Middle East has undergone a significant change in the past two years. 
The political epicenter of this troubled region has shifted from the conflict between Israel and the Palestinians toward the Persian Gulf and the struggle for regional mastery between Iran on one side and Saudi Arabia, Turkey, and now Egypt on the other. 
In the emerging struggle between the region’s Shia and Sunni powers, the old Middle East conflict has become a sideshow. 
Today, the key confrontation in this power struggle is Syria’s civil war, where all of the region’s major players are represented either directly or indirectly, because that is where the battle for regional hegemony will largely be decided. 
This much is clear: Syrian President Bashar al-Assad and his Alawite/Shia power base will not be able to maintain control against the Sunni majority in the country and the region as a whole. 
The only question is when the regime will fall. 
When it does, it will be a major defeat for Iran, not only entailing the loss of its main Arab ally, but also jeopardizing the position of its client, Hezbollah, in Lebanon. 
At the same time, a variant of the Muslim Brotherhood will come to power in Syria, as has been or will be the case almost everywhere in the Middle East as a result of the “Arab Awakening.” 
From Israel’s viewpoint, the rise to power of Sunni political Islam throughout the region over the past two years will lead to an ambivalent outcome. 
While the weakening and rollback of Iran serves Israeli strategic interests, Israel will have to reckon with Sunni Islamist power everywhere in its vicinity, leading directly to a strengthening of Hamas. 
The rise of the Muslim Brotherhood and its offshoots has come at the expense of secular Arab nationalism and the military dictatorships that supported it. 
Thus, the Brothers’ rise has de facto also decided the internal Palestinian power struggle. 
With the recent war in Gaza, the Palestinian national movement will align itself, under Hamas’s leadership, with this regional development. 
Palestinian Authority President Mahmoud Abbas and his Fatah party will be unable to offer much opposition – all the more so in view of Hamas’s break with Iran (despite ongoing arms deliveries) a year ago. 
This development most likely means the end of prospects for a two-state solution, because neither Israel nor Hamas and the Muslim Brotherhood has any interest in it. 
Hamas and the Brothers reject territorial compromise, because, for them, a Palestinian state means a Palestine that incorporates all of Israel. 
This is by no means a tactical position or an expression of political naiveté. 
On the contrary, the territorial question has morphed into a religious one, and has thus fundamentally redefined the conflict. 
Hamas is playing a long game. 
As long as it lacks the strength to achieve its more ambitious objectives, its intransigence in no way precludes negotiations with Israel or even peace treaties, as long as such agreements advance its long-term goals. 
But such agreements will produce only truces of shorter or longer duration, not a comprehensive settlement that ends the conflict. 
The recent success of Abbas in the United Nations General Assembly – securing observer-state status for Palestine – will not alter the basic aspects of this trend. 
Palestine’s promotion is an alarming diplomatic defeat for Israel and a demonstration of its growing international isolation, but it does not imply a return to a two-state solution. 
Paradoxically, the position of Hamas fits the political right in Israel, because it, too, puts little stock in a two-state solution. 
And neither the Israeli left (of which little remains) nor Fatah is strong enough to maintain the two-state option. 
For Israel, a future as a bi-national state entails a high long-term risk, unless the option of a West Bank-Jordan confederation, lost in the 1980’s, is rediscovered. 
This is again a possibility. 
Indeed, after the Assad regime falls, Jordan could prove to be the next crisis hotspot, which might revive the debate over Jordan as the “real” Palestinian state. 
Israel’s settlement policy in the West Bank would then have a different foundation and take on new political significance. 
While I do not believe that a West Bank-Jordan confederation could ever be a viable option, it might be the last nail in the coffin of a two-state solution. 
Along with Syria, two issues will determine this new Middle East’s future: Egypt’s path under the Muslim Brotherhood, and the outcome of confrontation with Iran over its nuclear program and regional role. 
The Egyptian question is already high on the agenda; indeed, it spilled into the streets after President Mohamed Morsi’s non-violent coup attempt. 
Morsi’s timing was remarkable: the day after winning international acclaim for his successful efforts to broker a truce in Gaza, he staged a frontal assault on Egypt’s nascent democracy. 
The question now is whether the Brothers will prevail, both in the streets and by means of Egypt’s new constitution (which they largely wrote). 
If they do, will the West withdraw its support for Egyptian democracy in the name of “stability”? 
It would be a bad mistake. 
The question of what to do about Iran’s nuclear program will also return with a vengeance in January, after US President Barack Obama’s second inauguration and Israel’s general election, and will demand an answer within a few months. 
The new Middle East bodes poorly for the coming year. 
But one thing has not changed: it is still the Middle East, where it is nearly impossible to know what might be waiting around the corner. 

Israel after Goldstone 
TOLEDO – Israel’s predicament with the Judge Richard Goldstone’s report accusing it of war crimes in Gaza, and the report’s subsequent endorsement by the United Nations Human Rights Council, brings to mind the reaction of United States Vice-President Spiro Agnew to his indictment on corruption charges in 1973: “The bastards, they changed the rules, but they never told me.” 
Indeed, the rules have changed, and Israel cannot say that it was not warned that this is an era in which international law and universal justice are being forcefully promoted as pillars of an improved world order. 
That was not the case when the Arab-Israeli conflict started more than 60 years ago. 
Now, however, the international community is bound to scrutinize how wars are conducted, and crimes of war will not be allowed to go unpunished. 
Or so it should be. 
Alas, the new rules apply in fact only to those countries that are not world powers. 
The UN’s Human Rights Council would not have dared to put Russia in the dock for razing Grozny, Chechnya’s capital, or China for brutally suppressing the people of Tibet and the Muslim Uighur minority. 
In her first visit to Beijing, indeed, US Secretary of State Hillary Clinton made it clear that when it comes to China, order and stability take priority over human rights. 
After all, she explained to a European colleague, one is not supposed to abuse one’s banker. 
And this particular banker finances the Pentagon’s entire budget. 
Nor is it conceivable that the US or Britain would have been called to account by the Geneva Commission, itself composed by some of the most brutal abusers in the world, for the massive casualties they inflicted on civilians in Iraq and Afghanistan. 
The hundreds of civilian victims of NATO’s massive bombardment of Serbia in 1999 will likewise remain forever anonymous. 
It is a major flaw of the system of international law that the application of the lofty principles of universal justice should be conditioned by the global balance of political power, and that the world’s most notorious abusers, such as Libya and Iran, are allowed to pose as guardians of human rights in UN agencies. 
Can anyone really expect Israel to be impressed by Iran’s righteous criticism of its “defiance of the law”? 
Indeed, as Justice Richard Goldstone himself was dismayed to discover, the Human Rights Council chose to censure Israel exclusively while not even bothering to mention Hamas, which Goldstone explicitly accused of war crimes and crimes against humanity. 
It is not entirely far-fetched to assume that an “Obama effect” is having an impact on Israel’s current international predicament. 
The onslaught on Israel was indirectly encouraged by the now widespread perception that, with Obama in the White House, America’s unwavering support for the Jewish state can no longer be taken for granted. 
The indifference of some European countries towards Israel’s call for help during the debate over the Goldstone report was not unrelated to their frustration at Israeli Prime Minister Binyamin Netanyahu’s refusal to freeze the settlements, as Obama has been insisting. 
But, however understandable Israel’s sense of being wrongfully treated might be, it should hold itself to higher standards, and avoid entrenching itself behind the walls of its own convictions. 
Israel’s exploits in Gaza were a Pyrrhic victory, and the country is now bound to change its war doctrine of “offensive defense.” 
A show of devastating force, with limited Israeli casualties at the price of an unlimited number of Palestinian civilian casualties, is no longer internationally sustainable. 
If repeated, this approach will irretrievably undermine Israel’s standing in the family of nations. 
Israel will have to adapt its war doctrine to the modern battlefield and to the sensibilities of the international community. 
Regular armies are no longer the exclusive threat to countries’ security. 
Non-state actors – like Hamas and Hezbollah, or the Taliban in Afghanistan and Pakistan – that shield themselves behind a defenseless civilian population expose the widening gap between the traditional rules of war and the realities of today’s battlefield. 
It is doubtful whether Israel has the capacity to forge an international alliance that would adapt the rules of war to the conditions of asymmetric warfare. 
The Goldstone report is not necessarily bad news for peace prospects in the Middle East. 
Arguably, the war in Gaza created a new kind of mutual deterrence in this war-torn region. 
Hamas was definitely deterred by Israel’s merciless offensive, and Israel, whether it admits it or not, is bound to be deterred by the specter of Israeli leaders and army officers becoming the object of arrest warrants in Europe. 
The entire legal process might well be cut short by a US veto at the UN Security Council, and Israel might still stick to its traditional claim about its right of self-defense. 
But the truth is that Israel’s hands have been tied. 
Its leaders will now have to take much more resolute steps on the way to peace if the argument that they used to derail the Goldstone Report – that it should be seen as “hindering the peace process” – is to have any credibility at all. 


Israel and NATO – Between Membership and Partnership 
MADRID – The idea of integrating Israel into NATO has frequently been advanced as bait to encourage the Jewish state to make the necessary concessions for an Arab-Israeli peace settlement. 
And some Israeli leaders – Foreign Minister Avigdor Liberman, for example – are convinced that joining NATO would act as a vital deterrent against Iran. 
But it is highly unlikely that Israel’s full integration into the Alliance is feasible from NATO’s standpoint. 
The Alliance would not be happy to apply Article 5 of the NATO charter, which would oblige its members to fight for Israel if it were attacked by any of its many potential enemies in an endemically dangerous region. 
Nor is it clear that membership would be in the best interest of Israel, a country whose defense doctrine has been always based on self-reliance and freedom of maneuver in security matters. 
Israel’s unwritten alliance with the United States is a more convenient alternative. 
Cooperation and even partnership with NATO – an interim stage potentially leading to membership – is another matter. 
Notwithstanding the stalled peace process and the adverse effect that Israel’s conflict with the Palestinians is having on its international standing, NATO and Israel have been incrementally strengthening their cooperation in recent years. 
This serves the interests of both sides. 
For the Israelis, cooperation with NATO is a major component of legitimacy in its frequently troubled relations with the West; for NATO, cooperation serves its capacity to work in new theaters of operation andrespond to the changing profile of the threats it confronts. 
Such is NATO’s interest in Israel that Patrick Hardouin, a high official at the Political Affairs and Security Policy Department of the Alliance, made it explicit in 2006, saying that “the ups and downs of the Israeli-Palestinian conflict must not limit Israel-NATO cooperation.” 
In recent years, NATO has been undergoing major changes in both its deployment and objectives. 
Two landmarks define these changes: the end of the Cold War, which rendered NATO’s defensive strategy against the Soviet Union obsolete, and the September 11, 2001, terrorist attacks on the US, which changed the profile of the enemy and the nature of the battlefield. 
It also changed the theater of operation, and forced the Alliance to shift its attention from Europe to the Mediterranean, the Middle East, and beyond. 
NATO’s Mediterranean emphasis was inaugurated in 1994 through the Mediterranean Dialogue, which linked countries like Egypt, Israel, Jordan, Morocco, Mauritania, Algeria, and Tunisia in security discussions with the Alliance. 
The Dialogue was not exactly an edifying success, however. 
The Istanbul Cooperation Initiative of 2004, triggered by the trauma of the 9/11 attacks, holds far greater potential, for it transforms NATO’s relations with friendly states in the Middle East from dialogue to partnership – a level comparable to the Partnership for Peace program used to promote Central and Eastern European countries to full membership. 
Under this framework, multilateral cooperation in combating terrorism and the spread of weapons of mass destruction was offered to the region’s main actors. 
The Initiative also envisages the promotion of regional defense reforms and the improvement of interoperability among military forces in the region. 
Nevertheless, both the Mediterranean Dialogue and the Istanbul Initiative suffer from the lack of a real multilateral culture of cooperation in security matters among the main regional players. 
The Arab-Israeli conflict is a major political obstacle, but by no means the only one. 
Morocco, Algeria, and Libya are hardly partners for such regional cooperation, which is also the case for most Arab countries in the Middle East. 
Not surprisingly, then, of all the states in the region, it is Israel that has established the closest links with NATO. 
This reflects the benefits that NATO believes can be drawn from Israel’s unique military experience. 
Israel recently became the first country to conclude an Individual Cooperation Program with NATO, through which it conducts an ongoing strategic dialogue with the Alliance covering a wide array of areas, including terrorism, intelligence sharing, nuclear proliferation, procurementand logistics, and rescue operations. 
Israel also joined NATO’s naval control system in the Mediterranean, contributing to Operation Active Endeavor by joining NATO forces in patrolling the Mediterranean. 
Both sides seem eager to expand the scope of their partnership, with the objective of reaching a high level of interoperability. 
Recently, in anticipation of a hypothetical confrontation with Iran, a major military maneuver – the Juniper Cobra exercise – was conducted to test Israel’s integration into US ballistic missile defenses. 
American sources described the drill as “the most complete air missile defense system we’ve ever done anywhere in the world.” 
It was a major contribution, they said, to the development of a planned NATO missile shield for Europe. 
The options for further cooperation are many, ranging from intelligence and procurement to the development of an updated anti-terrorism doctrine (including cyber-terrorism), a domain to which NATO is a newcomer. 
David Ben-Gurion’s dream of Israel becoming a NATO member might not materialize, but the developing partnership reflects the Alliance’s unequivocal recognition that Israel shares the challenges facing the West and is a vital partner in developing responses to them. 

Israel and Palestine After Oslo 
RAMALLAH – On September 13, 1993, Shimon Peres and Mahmoud Abbas met on the South Lawn of the White House to sign the Israel-PLO Declaration of Principles, or the Oslo Accords. 
PLO leader Yasir Arafat and Israeli Prime Minister Yitzhak Rabin then sealed the agreement with a historic handshake. 
The Oslo Accords – the result of secret talks that had been encouraged by the Norwegian government and conducted in the country’s capital – called for a five-year transitional period during which Israeli forces would withdraw from the Gaza Strip and unspecified areas of the West Bank, and a Palestinian Authority would be established. 
Letters of recognition between the PLO and Israel accompanied the agreement. 
The ultimate aim, though never explicitly stated, was to create a Palestinian state roughly within the 1967 borders. 
But the goals laid out in the Oslo Accords remain unfulfilled. 
In fact, the agreement is unlikely to survive 89-year-old Peres and 77-year-old Abbas, who are now presidents of Israel and the Palestinian Authority, respectively. 
Several factors contributed to the deterioration of prospects for lasting peace. 
Perhaps the most important factor has been the continuation – and, at times, acceleration – of Israeli settlement activities in occupied Palestinian territories. 
Some Palestinians in the West Bank and Gaza objected to the Accords’ failure to call explicitly for the end of illegal Israeli settlement building. 
But, given the PLO’s weakness and lack of support in the Arab world after its refusal to oppose Iraq’s occupation of Kuwait, its leaders accepted the flawed agreement, arguing that Palestinian borders would be agreed upon during the transition period. 
But, 19 years later, the Washington-based Foundation for Middle East Peace reports that more Jewish settlements have been built in the occupied Palestinian territories since the Oslo Accords than before they were signed. 
As a result, the need for Israel to freeze settlement activities has become an international – not just a Palestinian – requirement for effective peace talks. 
Another crucial factor is continued violence. 
Since Rabin and Arafat shook hands, roughly 7,500 Palestinians and 1,400 Israelis have been killed, and many more have been injured or jailed. 
Israel’s unilateral policy of demolishing homes in Palestine has resulted in scores of Palestinians being deported or made homeless in Jerusalem, Hebron, the Jordan Valley, and elsewhere. 
While killings have declined sharply in recent years, hardly a day passes without some form of violence, often against civilians – including children. 
Fueling this violence is growing hopelessness in the absence of a diplomatic agreement. 
While international leaders fill the airwaves with talk of peace, they have failed to address the conflict boldly and resolutely. 
For example, US President Barack Obama’s election four years ago revived hope that negotiations would resume. 
But Obama’s peace envoy, George Mitchell, resigned, and the quartet (the United Nations, the European Union, Russia, and the United States) was sidelined. 
Meanwhile, Israeli Prime Minister Binyamin Netanyahu’s conditional promise to support Palestinian statehood has been rendered meaningless by his government’s provocative settlement policies in the areas that were supposed to comprise the Palestinian state. 
The Oslo Accords divided the occupied territories into three regions. 
Palestinians took charge of the most densely populated urban areas, while Israel maintained total military and administrative control over the largest territory, “Area C,” which makes up 61% of the West Bank. 
Many Palestinians believe that this serves a long-term Zionist aim to keep the land without the people. 
Indeed, Israeli settlements have amounted to de facto Israeli annexation of territory into which Palestinians seek to expand their state. 
As a result, without a clear agreement on borders, Area C will witness the most serious confrontations. 
The Oslo Accords have also failed to put Palestinians on a path toward economic independence. 
According to the World Bank and other international agencies, slow and complicated bureaucratic and security processes, including hundreds of checkpoints, make Palestinian economic development impossible. 
Palestinian dependence on Israeli goods exacerbates the problem, as does Israeli control over the movement of goods and people to, within, and between the West Bank and the blockaded Gaza strip. 
The 1994 Paris Protocol, one of the most important annexes to the Oslo Accords, was intended to define economic relations between Israel and the Palestinian Authority. 
But it has been hijacked by Israel for the benefit of its businesses. 
The Protocol requires the Palestinian Authority to peg prices of certain goods and its rate of value-added tax to Israel’s; forces Palestinians to use Israel’s currency; and regulates customs procedures at border crossings with Jordan and Egypt. 
The Palestinian-Israeli conflict, now at least 45 years old, is not a complicated problem; on the contrary, it can be summed up quite succinctly: to paraphrase the American political operative James Carville, “It’s the occupation, stupid.” 
Eventually, Abbas will gain the UN General Assembly’s acceptance of Palestinian statehood – his final accomplishment before leaving politics, as he has confided to his top aides. 
After his departure, Israel will miss his firm opposition to violence and his support for security cooperation. 
The symbolic decision on statehood, followed by Abbas’s exit, will mark the end of the process that began in Oslo, and that has been undermining Palestinian aspirations for nearly two decades. 
With the Oslo Process now clearly dead, two options remain: chaos, extremism, and violence, or a new peace process – ideally one that can end the occupation and allow for Palestinian independence and freedom alongside a safe and secure Israel. 

Israel’s Government Hawks and Military Doves 
PRINCETON – Those who lead Israel’s defense establishment often come to consider peace with the Palestinians a necessary condition for the country’s security. 
Being tasked with maintaining the territories Israel has occupied since the Six-Day War in 1967 evidently causes the military and security brass to support political measures that would end the occupation. 
And yet the government shows no interest in pursuing a permanent settlement. 
To appreciate this divide, consider the late Meir Dagan, who served as Major General of the Israel Defense Forces (IDF) and then as Director of Mossad, Israel’s intelligence agency. 
Several years ago, I sat on a panel at a conference in Jerusalem convened by then-Israeli President Shimon Peres. 
To my right sat Dagan, who had just completed eight years as head of Mossad; to my left sat Dore Gold, a former academic and former Israeli ambassador. 
The two men held very different views about how best to guarantee Israel’s security, and it is worth recapitulating their respective arguments. 
Gold argued that returning to pre-1967 armistice lines would leave Israel without “defensible borders.” 
He insisted that Israel could guard against threats from the east only if it maintained a military presence in the West Bank and controlled the Jordan River – which runs along the border separating Jordan from Israel and the West Bank. 
Dagan countered that the military’s role is to safeguard Israel’s borders, regardless of where those borders are drawn. 
While the IDF would certainly prefer to operate with the strategic advantages that holding more territory can confer, it would fulfill its mission under whatever conditions the Israeli government set for it. 
But Dagan went further, describing the principle of “defensible borders” as a canard that ignores the intentions and capabilities of the party on the other side of the border. 
With an Israeli-Palestinian peace agreement, the burden of defending the border would be vastly reduced, because Israel would have a serious cross-border partner with a mutual interest in avoiding armed conflict. 
A Palestinian security force would by default provide a significant measure of security for Israel as well. 
Dagan’s dovish position has a long tradition in Israel’s defense establishment. 
Peace Now, a nongovernmental organization that represents Israelis who support a political resolution to the Israeli-Palestinian conflict, was founded in 1978 when 348 IDF reservists sent a letter to then-Prime Minister Menachem Begin urging him to conclude the peace process with Egypt. 
Similarly, in the aftermath of the first Intifada, the Palestinian uprising that lasted from 1987 to 1993, the defense establishment led the effort for peace. 
In 1991 Yitzhak Rabin – a former IDF chief of staff, prime minister, and defense minister who at the time served on the Foreign Affairs and Defense Committee of the Knesset, Israel’s legislature – argued for a comprehensive regional peace effort. 
Like Dagan, Rabin considered the Arab-Israeli conflict to be a burden on Israel’s security, and both active and retired military officers have since then led or participated in negotiations with the Palestinians and with Syria. 
Most recently, many prominent former defense figures supported the deal reached between Iran and the so-called P5+1 (China, France, Russia, the United Kingdom, and the United States, plus Germany) over Iran’s nuclear program – an agreement that Israel’s government bitterly opposed. 
Indeed, the divide between the security establishment and the politicians now governing Israel seems wider than ever. 
Most former senior defense officials echo Dagan’s argument, while government officials sound more like Gold. 
A number of advocacy organizations have emerged to push for peace. 
The Peace and Security Association, which includes hundreds of veterans of the IDF, Mossad, Shin Bet (Israel’s domestic security agency), and the National Police Force, says its mission is, “to promote a sustainable political solution to the Israeli-Palestinian conflict as a critical component of Israel’s national security and social resilience.” 
The nongovernmental organization Commanders for Israel’s Security (CIS), with more than 200 members from Israel’s security elite, just published a paper titled “Security First” with a comprehensive set of proposals to revitalize efforts to share peacefully the land west of the Jordan River. 
CIS maintains that terror against Israel cannot be defeated by military means alone, and that any peace process must improve Palestinians’ quality of life. 
Senior former Israeli security officials also participated actively in a study undertaken by the Center for a New American Security that produced a detailed security plan for an Israeli-Palestinian agreement. 
Some former officials have gone even further: Former Mossad Director Efraim Halevy argues that Israel should accept “the political reality of Hamas” and open a dialogue with the organization that governs the Gaza Strip. 
Likewise, in the 2012 documentary The Gatekeepers, six former heads of Shin Bet reflect on the lessons of the past few decades and issue a call for peace with the Palestinians. 
Remarkably, Israel’s political leadership has not suffered electorally for ignoring the views of the defense establishment. 
There was no public reaction when, after The Gatekeepers was released, Prime Minister Binyamin Netanyahu’s office issued a statement saying he had not seen the documentary and had no intention of doing so. 
Given the public’s high regard for the Israeli defense establishment, particularly relative to the government, voters’ indifference is a mystery. 
In a 2015 survey conducted by the Central Bureau of Statistics, 93% of Israeli Jews expressed trust in the army, compared to only 40% in the government, and only 22% in Israeli political parties. 
One answer is that, after so many failed efforts, the Israeli public is disillusioned with the peace process. 
Moreover, acts of incitement and terrorism emanating from the occupied territories have intensified. 
This allows the current governing coalition to justify policies – such as enabling expanded settlement activity in the West Bank – that further deepen the conflict. 
Against this backdrop, Netanyahu has portrayed himself as Israel’s protector, appropriating the esteem afforded to the defense establishment. 
Those calling for a renewed peace process will now have to make their case to the public and reclaim that title. 
Whether they can do that in a context of regional turmoil and domestic insecurity remains uncertain, to say the least. 

Israel at Sixty 
Tel Aviv – Ten years ago, on Israel’s 50th anniversary, the peace process begun by the path-breaking Oslo accord, reached by Israel and the Palestinian Authority in 1993, established the legitimacy of two peoples’ national existence in their shared homeland on the basis of territorial compromise. 
There was a general feeling that this long conflict was being resolved. 
Unfortunately, the past ten years have witnessed a painful setback in many areas. 
Individuals and peoples are capable of enduring difficulties if there is a sense that the future will be better and conflicts resolved. 
But a sudden backward regression can lead to despair, which we feel today. 
Why is it that struggles far more complex than the Israel-Arab conflict – apartheid in South Africa, the partition of Germany, or the collapse of the Soviet Union – all seem to have been resolved, usually without bloodshed, whereas the Middle East conflict, after more than a century, claims more victims every day? 
One reason is that this conflict is unparalleled in human history. 
There is no other example of a nation that returned after a 2,000-year absence to a territory that it never stopped regarding as its homeland. 
So it is no wonder that the Arabs, especially the Palestinians, remain unable to comprehend, existentially or morally, what has befallen them. 
The Jews’ return to Israel was not colonialism, as the Arabs thought. 
Not only did the Jews lack a mother country, but in Europe they lived as a foreign nation, leading to expulsion and annihilation. 
The Jews did not come to exploit Palestine’s resources or subjugate its residents in order to transfer the economic benefits elsewhere. 
Nor did they come like the American or Australian settlers in order to build a new identity and assimilate the natives into it. 
Zionism aimed at renewing and deepening an old identity. 
From the beginning, there was no intention to damage the identity of the native-born Arabs, or to merge it with the traditional Jewish identity. 
Because the Arabs had no corresponding historical model from which to learn how to relate to the phenomenon that had overtaken them, they tried to interpret Zionism as colonialism, and thought that other nations’ fight against colonialism provided a model for resistance. 
Thus, the legitimacy of Israel’s right to exist remains an open question. 
Indeed, never before has the question of legitimacy been so fundamental to a conflict between nations. 
Although recognition of Israeli nationality is increasingly widespread, even among most nations of the Middle East, it remains obstructed by two closely related – and dangerous – notions. 
The first is the growing shift in the Middle East, and elsewhere, from rejection of Israel’s legitimacy to rejection of Zionism’s legitimacy. 
The second is the growing tendency among Palestinians, other Arabs, and many Europeans to prefer a bi-national Israeli-Palestinian state to the original two-state solution. 
Hamas spokesmen speak not of “Israelis” but of “Zionists,” as does Iran’s President Mahmoud Ahmedinejad. 
Discussion about the “de-Zionization” of Israel can also be heard at universities worldwide and even among Jewish leftists. 
In Israel, too, there are people, though not many, who call themselves “post-Zionist” or “non-Zionist.” 
But the sole practical expression of Zionism nowadays is the Law of Return, which is not a racist law but a moral law. 
When the world’s nations decided in favor of the creation of an independent Jewish state, they did not designate it only for the 600,000 Jews then living there. 
Rather, they intended that Israel would help solve the Jewish problem everywhere in the world by enabling every Jew who wished to leave the diaspora to do so. 
The idea of a bi-national Israeli-Palestinian state embodies the dangerous illusion that two peoples who are utterly different in their language, religion, culture, and history, who are divided by a deep economic chasm and connected to their own external worlds – the Palestinians to the Arab world and Israelis to the rest of world Jewry – can be combined in the framework of a single state. 
Moreover, these are two peoples that have been intensely engaged in a bloody and intractable conflict for the last century. 
Both Palestinians and Israelis, as two different nations, deserve their own states. 
There must be a clear border between the two. 
In Israel, an Israeli Arab-Palestinian minority has full citizenship, even if much remains to be done to afford it full social and economic equality. 
It is possible that in the Palestinian state there would be a small Jewish minority, consisting of West Bank settlers whose attachment to the Biblical homeland is so intense that they would be willing to live under Palestinian control – provided that the Palestinians would grant them Palestinian citizenship. 
During the early years of Zionism, the great Jewish scholar Gershom Scholem – who was born in Berlin – said that the Jews were embarking on a difficult journey, a return to history. 
In other words, the Jews, who based their identity in the diaspora on mythological memory and time, were now returning to its clear-cut elements: a territory defined by borders, and a detailed chronological understanding of their own history. 
Sixty years later, the Arab-Israeli conflict reminds us that the Jews’ journey back to history continues. 

A Yellow Star for the Jewish State? 
PARIS – The world has recently seen a rapid succession of efforts to delegitimize Israel. 
Earlier this month, the CEO of French telecommunications company Orange declared at a press conference in Cairo his desire to part ways with an American partner that is too closely tied to Israel. 
In May, Palestinians tried to have the Israeli soccer federation expelled from FIFA. 
And Britain’s National Union of Students recently approved a resolution supporting boycotts and sanctions against Israel. 
Meanwhile, a campaign to ban Israeli products has been gaining strength in the United States and Europe. 
And then there are the many performers who – following the lead of Brian Eno, Elvis Costello, Vanessa Paradis, Roger Waters, and others – wonder out loud whether or not to appear in “occupied Palestine.” 
None of these developments is, in itself, of great moment. 
But, taken together, they create a climate – and perhaps form a watershed. 
And this is no accident. 
All of the recent episodes can be traced, more or less directly, to the global Boycott, Divestment, and Sanctions (BDS) movement, established in 2005 by 171 Palestinian nongovernmental organizations. So they provide a good occasion to remind those who support this campaign of its true nature. 
BDS is supposedly a worldwide civil-society movement embodying respect for law, democracy, and human rights. 
If that is true, why target the only country in the region that was founded on those values, and that has continued, for better or worse – and despite a nearly 70-year state of war with its neighbors – to be broadly faithful to them? 
How is it that these scrupulous humanists have had nothing whatsoever to say about the 200,000 victims of Syrian President Bashar Al-Assad, the crimes of the Islamic State, or the massive deportation of Christians from the Plain of Nineveh, to name just a few contemporaneous issues? 
BDS is an “anti-apartheid” movement, comes the reply, adopting the methods and spirit of Nelson Mandela in South Africa. 
That sounds splendid. 
But then, once again, why the focus on Israel? 
With its multiethnic polity and society – a mix of Western and Eastern Europeans, Americans and Russians, Ethiopians and Turks, Kurds, Iranians, and Arabs (17 of whom sit in the Knesset) – Israel is precisely the opposite of an apartheid state. 
By contrast, in Qatar, whose foundations (together with Saudi think tanks) provide most of the financing for the BDS movement, 95% of the labor force consists of Asian non-citizens working in slave-like conditions under the kafala system, which is a close cousin to apartheid. 
Perhaps the goal is to pressure Israel to conclude a peace deal with the Palestinians, which surely is worth a little accommodation with Qatar. 
In that case, it is a peculiar peacemaking strategy that puts pressure on only one of the belligerents, and that, instead of strengthening the hand of the many Israelis who favor negotiation, imposes collective punishment in the form of exclusion from the community of nations. 
Only one real formula for peace exists, and everyone knows it. 
That formula, enshrined in the Oslo Accords, is the two-state solution. 
One has only to read the declarations of Omar Barghouti, Ali Abunimah, and other promoters of the BDS movement to see that this solution is precisely what they do not want. 
They prefer a “one-state solution” (Abunimah’s term) – under a Palestinian flag, of course. 
Is this just a detail that can be safely ignored on the grounds that BDS targets “only” the territories, the Jewish settlements being built there, and the goods that the settlers produce? 
This is another sucker trap. 
Here, too, it is enough to read the movement’s founding declaration of July 9, 2005, which specifies that one of its “three objectives” is to “protect” the “rights of Palestinian refugees to return to their homes and properties as stipulated in UN resolution 194.” 
In fact and in law, that would amount to establishing on those lands a new Arab country that could be counted on, in short order, to undergo an ethnic cleansing that would make it judenfrei. 
And, finally, how can I refrain from reminding those whose memory is as full of holes as their thinking that the idea of boycotting Israel is not as new as it appears? 
In fact, it is older than the Jewish state, having emerged on December 2, 1945, from a decision by the Arab League, which then wasted no time in relying on that decision to reject the United Nations’ dual resolution to establish two states. 
Among the promoters of this brilliant idea were Nazi war criminals who had settled in Syria and Egypt, where they gave their new masters lessons in marking Jewish shops and businesses. 
A comparison is not an argument. 
And the meaning of a slogan does not reside entirely in its genealogy. 
But words do have a history. 
As do debates. 
And it is better to know that history, if we wish to avoid repeating its ugliest scenes. 
The truth is that the BDS movement is nothing more than a sinister caricature of the anti-totalitarian and anti-apartheid struggles. 
It is a campaign whose instigators have no aim other than to discriminate against, delegitimize, and vilify an Israel that in their mind never stopped wearing its yellow star. 
To activists of good faith who may have been taken in by duplicitous representations of the movement, I would say only that there are too many noble causes in need of assistance to allow oneself to be enlisted in a dubious one. 
Those worthy causes include fighting the jihadist decapitators, saving the women and girls enslaved by Boko Haram, defending the Middle East’s imperiled Christians and Arab democrats, and, of course, striving for a just peace between Israelis and Palestinians. 

Bibi’s Big Surprise 
NEW YORK – Binyamin Netanyahu proved the pollsters wrong – not once, but twice. 
In the weeks and days leading up to Israel’s election, his defeat was widely predicted. 
Then, in the hours after the vote, exit polls suggested parity between his Likud party and the center-left Zionist Union, led by his chief rival, Yitzhak Herzog, with a slight edge for the right-wing bloc. 
Several hours after the polls closed, it turned out that Likud was the big winner, gaining 30 of the Knesset’s 120 seats, compared to 24 for the Zionist Union. 
As a result, Netanyahu will have no real difficulty in forming a right-wing government coalition. 
The kingmakers in the event of parity – the smaller parties and electoral lists in the center of the political spectrum – have lost most of their bargaining power. 
It was a crucial election in two respects: The outcome reflected the Israeli electorate’s sharp turn to the right and has reinforced Netanyahu’s political dominance. 
As recently as 2006, Ehud Olmert had won an election in Israel on a dovish platform, pledging to extend Ariel Sharon’s unilateral withdrawal from Gaza to the West Bank. 
In the 2009 election, the Kadima party, under his successor, Tzipi Livni, received one seat more than Likud, but was unable to form a government coalition. 
Netanyahu did, and went on to win the 2013 election. 
Now he has won yet again. 
The turn to the right derives from both structural and circumstantial factors. 
Israel’s right-wing parties draw support from the Orthodox and ultra-Orthodox communities, West Bank settlers, and a large part of the Sephardic and Russian communities. 
When the center left won elections in the past two decades, it did so under a powerful security-oriented leader: Yitzhak Rabin, Ehud Barak, Sharon (after his conversion), and Sharon’s successor, Olmert. 
Though Herzog and Livni – who formed the Zionist Union by merging Herzog’s Labor party and Livni’s Hatnuah party – possess several attractive qualities, they do not match the prototype preferred by today’s average voter. 
These structural elements have been reinforced by developments in the region, which have reinforced the sense among Israeli voters that they are threatened by numerous enemies: Iran and its nuclear ambitions; 
Hezbollah and Hamas and their missiles; the rise of ISIS amid state failure in Iraq, Syria, and elsewhere. 
Against this backdrop, it is easier to defend the status quo than to advocate accommodation involving territorial concessions. 
Netanyahu’s victory was clearly an impressive personal comeback. 
In the weeks leading up to the elections, it seemed that the public had grown weary of a prime minister who had been in office long enough to be corrupted by the arrogance of power and tainted by a raft of petty scandals. 
He conducted a campaign that relied on his eloquence and charisma, as well as on scare tactics. 
Most significantly, he swung sharply to the right, out-flanking his rivals. 
Thus, two days prior to the election, he rescinded his formal acceptance, in 2009, of a two-state solution, vowing that his government would never allow Palestinian statehood. 
The formation of a right-wing government will have a profound impact on the country’s foreign and domestic policies. 
Netanyahu has already destroyed his relationship with US President Barack Obama, and Israel’s relationship with the European Union is not much better. 
A government that continues to settle the West Bank and refuses to negotiate with the Palestinians will face erosion of its international legitimacy, boycotts, and sanctions. 
Relations with Egypt and Jordan will also be affected, and hopes of collaboration with the moderate Arab camp will be frustrated. 
On the home front, attempts by Likud and its right-wing allies to tamper with the legal system, the press, and other institutions identified with the “old elite” are likely to gain momentum. 
Netanyahu knows how risky this course will be at home and abroad, which is why he is likely to invite Herzog to join the government as a junior partner. 
Herzog would then confront the same dilemma that his predecessors faced in 2009 and 2013. 
The arguments for and against joining the government are well known. 
Doing so is the responsible thing to do, offering the opportunity to moderate the government’s policies and reduce the danger of a disaster. 
And, by holding a major portfolio, a junior partner can avoid marginalization and strengthen its position for the next election. 
But, as Livni and Barak know, a junior partner more often ends up having no real impact on the core issues, merely providing window dressing for the status quo. 
Nor are Herzog and Livni free to make that choice on their own. 
Some party members are eager for cabinet portfolios and the other trappings of power; but many more would rather stay out and fight. 
When Netanyahu traveled to Washington, DC, to deliver his controversial speech on Iran to the US Congress, he was described by his American supporters as “Churchillian,” the lonely courageous voice warning a complacent world against an evil force. 
One can only hope that now Netanyahu will be Churchillian in a more profound sense, by using his empowered position to make the bold decisions needed to lead his country out of its current predicament and paralysis. 

Israel Unbound 
TEL AVIV – Israel’s persistent occupation of Palestinian lands is irreparably damaging its international standing – or so the conventional wisdom goes. 
In fact, Israel currently enjoys a degree of global influence unprecedented in its history, as a slew of new international challenges give its foreign policy, long held hostage by the single issue of Palestine, significantly more room for maneuver. 
Recognizing mounting popular opposition to unequivocal support for Israel in the West, Israel has been looking elsewhere for economic, and ultimately political, partners. 
From 2004 to 2014, Israeli exports to Asia tripled, reaching $16.7 billion last year – one-fifth of total exports. 
Israel now trades more with the once implacably hostile Asian giants – China, India, and Japan – than it does with its leading global ally, the United States. 
Neither Japanese Prime Minister Shinzo Abe, who visited Israel a few weeks after his reelection in December 2014, nor the leaders of China, now Israel’s third-largest trading partner, bother to link their economic ties with Israel to the success of peace talks with the Palestinians. 
With India, defense cooperation is the order of the day. 
Israeli Defense Minister Moshe Ya’alon visited India in February last year, and Indian President Pranab Mukherjee reciprocated with a historic visit to Israel in October. 
The election of the Hindu nationalist Narendra Modi as Prime Minister in May 2014 may be accelerating cooperation. 
Already, Israel is India’s second-largest supplier of military technology. 
Beyond Asia, Israel is cozying up to Russia, purely on the basis of strategic considerations. 
With Russia now setting the geostrategic tone in the Middle East through a show of nineteenth-century-style power diplomacy, Israel has pursued an understanding with the Kremlin concerning the lines that must not be crossed in Syria. 
(That understanding was undoubtedly facilitated by Israel’s neutrality on Russia’s annexation of Crimea and arming of separatists in Ukraine.) 
Earlier this month, speaking before the Knesset Foreign Affairs and Defense Committee, Israel’s ambassador to Moscow praised the “flourishing in an unprecedented manner” of the bilateral relationship. 
Even Turkey’s President Recep Tayyip Erdoğan, an irascible interlocutor in the past, is now seeking reconciliation. 
Turkey – locked in conflict with Russia, estranged from Egypt and Iran, and pursuing policies on Syria, the Islamic State (ISIS), and the Kurds that clash with those of its NATO allies – has lately found itself increasingly isolated in a sea of chaos. 
Having drawn no strategic benefits from the Palestinian cause, Erdoğan finally admitted in January that Turkey needs “a country like Israel.” 
Interestingly, that statement came upon Erdoğan’s return from a visit to Saudi Arabia, another key regional actor that maintains discreet security links with Israel on the basis of a similar logic. 
For Saudi Arabia, Iran’s escape from global isolation, losses in proxy wars in Syria and Yemen, the specter of an ISIS onslaught, and America’s non-committal regional policies are far higher priorities than the Palestinians. 
Other Sunni Gulf monarchies and Egypt are also cooperating with Israel to contain Islamist terrorism and Iran’s regional rise. 
Even European countries have found new reasons to engage with Israel. 
Greek Prime Minister Alexis Tsipras, who was fiercely hostile to Israel while in opposition, has become a close ally, having visited the country twice within three months in 2015. 
In exchange for gas, defense technology, and military intelligence, Greece is now offering its airspace for Israeli air force training. 
Moreover, Greece and Israel are cooperating with Cyprus in creating a geostrategic counterweight to Turkey. 
So strong is Greece’s interest in building its relationship with Israel that Foreign Minister Nikos Kotzias has declared that the country will not honor the European Union’s latest guidelines regulating the labeling of goods produced by Israeli settlements in the occupied territories. 
No wonder Nabil Shaath, a former Palestinian foreign minister, complained to the Israeli newspaper Haaretz in January about Greece’s “betrayal of Palestine.” 
But Greece is not alone in opposing the EU’s new labeling guidelines: Hungary, too, has come out against them. 
And, in fact, as Prime Minister Binyamin Netanyahu edges Israel toward illiberal democracy, he is counting on Eastern Europe’s increasingly illiberal governments to help shield Israel from adverse EU initiatives. 
Clearly, Israel faces a multitude of new foreign-policy opportunities, which offer far-reaching potential benefits. 
But Israel’s new friends simply cannot replace its Western allies. 
With the Asian giants, Israel lacks the shared global outlook that is essential for a true strategic alliance. 
As for the Palestinian question, Israel’s new alliances surely will not help advance a resolution. 
On the contrary, they reflect a changing global political agenda that has relegated the question to a lower tier of importance, which is likely to weaken Israel’s incentive to rethink its suppression of Palestine. 
As a result, the possibility of a two-state solution is more remote today than at any time since the start of the peace process 25 years ago. 
This is no reason for Israel to rejoice. 
After all, the suppression of Palestine has, and will continue to have, fatally corrosive effects on Israeli society. 
Insofar as Israel’s new foreign-policy opportunities allow for the continuation of that suppression, they are not good for Palestine or Israel. 

Israel’s Election in a Bubble 
TEL AVIV – Forty-five years into Israel’s occupation of the Palestinian territories, and four years after Prime Minister Binyamin Netanyahu’s government became the undertaker of the two-state solution, an electoral campaign run in utter denial of Israel’s Palestinian conundrum has just ended with yet another Netanyahu government in office. 
Yes, Netanyahu was humbled by the electorate, but his loss of support was not a victory for the peace camp. 
The victors were an amorphous political center, focused on domestic issues, and the annexationist religious right. 
A country whose modern economy is fully integrated into the global system and whose conflict with the Palestinians has for decades drawn the attention of the global media and the major world powers has gone to the polls as if it were a separate, secluded planet. 
Parties in the center campaigned for “social justice,” for ultra-religious students to “share the burden” of military service (from which they have been exempt since Israel’s founding), and in defense of the country’s struggling middle class. 
With opinion polls indicating that only 18% of the electorate was concerned with the Palestinian problem, Labor, the party of Yitzhak Rabin and the Oslo Accords, refrained from even mentioning the peace process, lest it alienate potential voters. 
Labor’s current leader, Shelly Yachimovich, superseded the fatalism of her predecessor, Ehud Barak, who maintained that the Palestinian conflict has no solution, with the politics of denial; she refused even to acknowledge that there is a problem. 
Israel’s life in a bubble was also exemplified by the two major religious parties in the elections. 
Shas, led by a 92-year-old rabbi, combined its traditional defense of the have-nots with its fight for stricter rules for conversion to Judaism, an undisguised allusion to Israel’s masses of Russian immigrants with doubtful Jewish credentials. 
Meanwhile, Jewish Home, a party linked to fanatical, messianic rabbis for whom Zionism should now be imbued with eschatological meaning, challenged Netanyahu to adopt a more resolute expansionist policy in Palestinian territories. 
Demographers warn that the Jewish and Arab populations between the Jordan River and the Mediterranean will reach parity this year. 
From that point on, the specter of a Jewish minority ruling over an Arab majority in an apartheid state is bound to become a reality, turning Israel into an international pariah, unless a more sober coalition replaces Netanyahu’s suicidal alliance with religious fundamentalists and extreme nationalists. 
The good news is that these elections make such a change of alliances politically inevitable. 
Always a politician in search of a platform to sustain his lust for power, Netanyahu is now forced to change course and form a centrist government. 
The remarkable success of Yair Lapid’s new centrist party, Yesh Atid (“there is a future”), makes it practically impossible for Netanyahu to form a right-wing coalition with his traditional allies from the lunatic fringe. 
Will this be enough to revitalize the moribund peace process and reach a settlement with the Palestinians? 
Not really. 
The “Tea Party” radicalization of Netanyahu’s Likud party does not augur well for the chances of a robust peace process. 
Those prospects will diminish further if the annexationist Jewish Home, with whose domestic platform (a liberal economy, a better deal for the middle classes, and military service for the Orthodox) Lapid fully concurs, joins a Likud-Yesh Atid government. 
Moreover, Lapid himself is far from being an especially forthcoming peacemaker. 
Yes, he believes that Israel should end its policy of confrontation with the international community, and he truly wants a two-state solution. 
But he remains in a fantasy world in which peace with the Palestinians can be achieved for less than what previous left-wing governments offered. 
To make his point, Lapid even launched his electoral campaign in Ariel, an Israeli city built in the heartland of the Palestinian West bank. 
Sadly, the so-called peace camp, now in opposition, is in complete disarray. 
Faithless and wavering, it has been defeated by the unswerving conviction of the right. 
Its demise reflects the destructive power of the narrative about the peace process that the right succeeded in persuading many Israelis to accept. 
The right’s narrative is simple. 
The Oslo Accords ushered in an era of bus explosions in Israel’s main cities. 
The Second Intifada, with its waves of suicide terrorist attacks that slaughtered hundreds of innocent civilians, followed the Israeli concessions offered at the 2000 Camp David Summit. 
And the withdrawal from Gaza ushered in a Hamas government that has overseen routine missile attacks on Israel. 
Little wonder that, once most Israelis accepted this narrative, the “peace process” became a repulsive, discredited expression, and its advocates on the left came to be perceived at best as innocents detached from the real world. 
Indeed, instead of facing the region’s changing realities with a new approach to peace in Palestine and beyond – endorsing the Arab peace initiative, for example – the Israeli left and center retreated either to worn-out slogans or to the safety of domestic agendas. 
These parties made no effort to reach out to the new regimes and the rising new generations in the public squares of the Arab world. 
The bottom line, however, is that even the domestic issues that loomed so large in the election can never be addressed effectively without regard for the colossal sums that Netanyahu and his allies have been pouring into the occupation system in Palestinian lands. 
Nor should Israelis ignore what former Prime Minister Ehud Olmert described as “megalomaniacal preparations” for an attack on Iran “that would never happen.” 
Israelis now seem to believe that their politicians can choose which problems should be solved and which should be ignored. 
As a result, they are bound to be disappointed. 
Israeli leaders have never had that choice. 

The Israel Lobby’s Gay-Rights Hypocrisy 
LONDON – One of the few liberal victories in a conservative age in the United States has been the formal acceptance of homosexuality. 
Same-sex marriage is now recognized by the federal government and is legal in 35 out of 50 states. 
The US is not alone. 
Nineteen other countries (or regions of countries) – mostly in Europe and North and South America – now allow gay couples to marry legally. 
South Africa is the only African country where same-sex marriage is permitted, and it is not legal anywhere in Asia or the Middle East, where to be openly gay can still be extremely dangerous. 
Last year, Uganda enacted a law – attributed partly to the influence of well-funded evangelical missionaries from the US – mandating a life sentence for people caught in homosexual acts. 
In Iran, sodomy can lead to a death sentence, as is true in Saudi Arabia, Hamas-controlled Gaza, and, of course, under the lash of militant groups like the Islamic State. 
So there is nothing untrue about the headline of a paid advertisement that ran in the New York Times on December 23. Placed beneath a picture of a vulnerable-looking young American male, it read: “Hamas, ISIS and Iran kill gays like me.” 
And the last line of the advertisement is at least fairly true: “In Israel, I am free.” 
That he is – but not to get married, owing to the opposition of Israel’s powerful Orthodox community. 
There is something not quite right about this ad. 
It was paid for by the Orthodox Rabbi Shmuel “Shmuley” Boteach, a popular media performer also known as “America’s Rabbi,” who presides over an advocacy group called This World, which promotes Israel and “Jewish values.” 
Another major figure in the group is Sheldon Adelson, a Las Vegas casino magnate who donates millions of dollars to Republican politicians who most actively support Israel. 
Favored speakers at This World galas include the right-wing Republican former governor of Texas, Rick Perry, who once compared homosexuality to alcoholism. 
Neither traditional “Jewish values,” nor Perry, are naturally friendly to gays. 
Homosexuality is considered an abomination in Jewish law, and Texas tried to ban gay marriage. 
Still, gay people are not executed in Israel or Texas, and it is good to be reminded of such horrors where they exist. 
But hypocrisy is not what is most disturbing about this particular campaign. 
It is the insinuation that people who criticize the Israeli government are therefore guilty of condoning violence against homosexuals in other parts of the Middle East. 
A snippet from the ad: “To those who scapegoat Israel...yet remain silent about the oppression and violence Hamas, Iran and other countries inflict on the gay community: Shame on you. 
You are letting them murder us, literally.” 
First of all, not all people who criticize, say, Israel’s treatment of Palestinians are indifferent to violence against gays or anyone else. 
Moreover, the two problems are hardly related. 
The Israeli government is not driving Arabs off their land on the West Bank to protect gay people in Palestine, let alone in Iran. 
And no one is criticizing Israel for its treatment of gays. 
By stressing real human-rights abuses in Iran and Arab countries, this lobby group for Israel is suggesting that criticism (“scapegoating”) of Israel is not only wrong but immoral: “Your misguided actions ensure that LGBT people in the Middle East continue to live in hiding under constant threat of death.” 
If the lobbyists had simply wished to point out that Western critics often consider Israel more harshly than its Middle Eastern enemies, they would be right. 
But their ad wrongly implies that those double standards lead to the oppression of Arab and Iranian gays. 
Calling on people to pay more attention to such oppression is no reason to pay less attention to problems in Israel/Palestine. 
Abuses in one place, no matter how grotesque, should not be used to stifle criticism in another. 
The ad shows the extent to which the language of human rights has become politicized. 
As was true of religious zealotry in the past, the ideology of human rights is being invoked to defend or obscure the oppression of others. 
Right-wing populist parties in Europe regularly whip up popular sentiment against Muslim minorities by condemning their treatment of women. 
There is no doubt that many Muslim men treat women in ways that most modern people in the West would no longer condone. 
(The same is true of men in ultra-Orthodox Jewish communities.) 
But this is no reason to exclude them as fellow citizens. 
More serious in terms of its consequences is the way in which human rights have been used to promote wars. 
The idea, now accepted by the United Nations, of “humanitarian intervention” to save people from extreme human-rights abuses, sounds moral and high-minded. 
And there may indeed be cases where armed intervention is the only way to stop mass murder. 
But most “humanitarian” wars make things worse for the people they are supposed to be saving. 
They tear societies apart, destroy the livelihoods of millions, and cause even greater conflicts, as we have seen in Iraq. 
This is why, until recently, wars could be justified only if they were fought in self-defense, or in defense of allied nations. 
The temptation to embark on wars that cause more harm than good is not the only danger of using the language of human rights to justify military intervention in political conflicts (which usually involve many other interests that have nothing to do with human rights). 
Those who invoke human rights to promote wars or, as with This World, to make political propaganda, degrade the very ideals for which they claim to be fighting. 

Israel’s Victory of Fear 
TEL AVIV – Binyamin Netanyahu is probably the most deficient prime minister in Israel’s history. 
His blunders and vices have been laid bare in great abundance during his nine years in power. 
When he embarked on his most recent campaign for re-election, even his own supporters and constituents could not hide their disgust at his egomaniacal behavior and his wife’s embarrassing public conduct. 
Beyond Netanyahu’s noxious personal characteristics, Israel has consolidated its position as one of the OECD’s most unequal countries under his rule. 
Netanyahu, the most fanatic neo-liberal leader in Israel’s history, asked the country’s penurious middle class and poor to re-elect him on a record of high living costs, unaffordable housing, and a 21% poverty rate. 
Yet re-elect him they did. 
Nor could Netanyahu find any respectable security experts to vouch for his return to power. 
Some 180 generals and war heroes, chief among them Meir Dagan, one of the most revered former heads of Mossad, Israel’s intelligence service, came together to oppose the re-election of a man they described as a threat to Israel’s security. 
But one does not have to be a security icon to see how Netanyahu has burned Israel’s bridges with the international community, particularly the United States, Israel’s most indispensable ally and benefactor. 
Not only did he openly seek to sabotage President Barack Obama’s negotiations with Iran by aligning himself with Obama’s Republican opponents; two days before the election, he suddenly reneged on his commitment to the two-state solution, the cornerstone of the international community’s vision for achieving peace in the Middle East. 
Given all of this, why did Israeli voters reward Netanyahu with a third consecutive term as prime minister (indeed, with his most comfortable margin of victory since his first election in 1996)? 
Quite simply, the vast majority of Israelis agree with Netanyahu in a fundamental respect: A small country surrounded by enemies, in a chaotic region of failing states and vicious non-state actors like Hamas, Hezbollah, and now the Islamic State, cannot afford to run elections on socioeconomic platforms as if it were a peaceful West European duchy. 
The pathetic attempt by Netanyahu’s opponents to shift the campaign to the spiraling cost of living and prohibitive housing prices was easily defeated by that compelling message. 
One must, after all, ensure life, before working on the cost of living. 
Like their prime minister, this ever-growing constituency does not trust Arabs, including those who are their fellow citizens. 
Liberal Israelis were shocked by Netanyahu’s warning on Election Day of “Arabs voting in droves, bussed in by the left.” 
But to his constituents, emulating the racist politics of Europe’s far right was a legitimate exhortation to turn out. 
Nor were they scandalized when Netanyahu reneged on his commitment to the creation of a Palestinian state. 
The Palestinians, having turned down the peace proposals of left-leaning governments as well as the most comprehensive US peace proposal, the so-called Clinton parameters, appear to such voters as not really interested in peace. 
They also agree with Netanyahu that Israel’s disengagement from Gaza, and the subsequent rise of Hamas there, proves that every piece of land that Israel relinquishes is destined to turn into a base for launching missiles against the country. 
There is, however, another reason for Netanyahu’s victory. 
The left failed to recognize that Israeli elections are not strictly political affairs; they are an expression of an ongoing Kulturkampf in an ethnically kaleidoscopic society. 
Israeli elections are in some ways a tribal affair; people vote on the basis of memories, insults, religious sensibilities, and group grievances. 
The Israeli right’s current political dominance is fed by a widespread yearning for Jewish roots, a deep-seated fear of Arabs, and an uncompromising mistrust of a “world,” the so-called international community, with which Jews have a centuries-old dispute. 
The left’s yearning for peace is seen as naive, if not an exercise in political lunacy (and in either case an unpardonable betrayal of Jewish identity). 
Netanyahu positioned himself as a magnet for the fears and complexes of a broad array of aggrieved voters, including Russian immigrants, Orthodox Jews, most traditionalist Israelis, and religious settlers. 
Whether motivated by tribal animosities, an ideological rejection of the peace process, or cultural estrangement from Israel’s liberal elites, anyone who feels alienated – ethnically, culturally, or socially – joined Netanyahu to defeat those on the left who had usurped Jewish history and betrayed Eretz Israel. 
Achieving a two-state solution would be a formidable task even if Israel had not explicitly voted against it. 
Indeed, the hope that Netanyahu’s opponents could achieve a breakthrough is misplaced. 
The Palestinians, after all, never accepted any of the left’s peace proposals over the years, and the current fragmentation of Palestinian politics – defined by a weak and ineffective PLO and a Hamas obsessed with an irrational and self-defeating war option – does not give room for much optimism. 
The Israeli left certainly cannot be expected, after years in opposition, to crack the code of Israel’s labyrinthine politics and lead the country toward a peace agreement with Palestine. 
If the Palestinians are to avoid the sad destiny of the Kurds, the world’s largest stateless nation, and if Israel is to extricate itself from its suicidal march to an apartheid state, both parties need the world to save them from themselves. 
But does the world have the will, and the wisdom, to act? 

The Fall of Netanyahu? 
JERUSALEM – The dissolution of Israel’s parliament, the Knesset, just a day after Prime Minister Binyamin Netanyahu sacked two senior cabinet ministers, marks a surprising turnabout. 
Indeed, when Israelis vote again in March, more than two years ahead of schedule, Netanyahu could be voted out of office, with important implications not only for Israel, but also for the wider Middle East. 
Until last summer, Netanyahu appeared politically unassailable. 
His coalition government, despite some internal bickering, was expected to serve out its term. 
Not even 10% of Israelis would have preferred the opposition leader, the Labor Party’s Yitzhak Herzog, as Prime Minister. 
Things began to unravel when two cabinet ministers abruptly resigned, citing family commitments or policy disagreements. 
Then came the inconclusive war in Gaza, which, given Netanyahu’s unfulfilled pledge to “crush Hamas,” undermined his credibility, especially when ministers like Naftali Bennett, the leader of the nationalist-religious Jewish Home party, openly challenged his policies. 
When some European parliaments voted in 2014 to recognize Palestine as an independent state, many Israelis, who had long blamed the Palestinians for the continued failure of peace talks, began to worry. 
More significant, Netanyahu’s public clashes with US President Barack Obama fueled concerns among Israelis – including supporters of Netanyahu’s Likud party – that their government’s policies were deepening Israel’s isolation and thus undermining its security. 
The domestic situation is not much better. 
Netanyahu has failed to fulfill his promises since the massive demonstrations of 2011 to address prohibitively high living costs, especially for young couples. 
On the contrary, housing prices have continued to rise. 
When Yair Lapid – the ambitious but inept finance minister, who leads the centrist Yesh Atid party – proposed waiving the value-added tax on first apartment purchases by young couples, Netanyahu failed to respond decisively, giving the impression that he lacked control over his own cabinet. 
But it was Netanyahu’s support for draft legislation seeking to constitutionalize Israel’s identity as the Jewish people’s nation-state – to the detriment of Israel’s Muslim, Christian, and Druze citizens – that brought the situation to a head. 
The bill, which emphasizes Israel’s Jewish identity above its democratic principles, has caused deep divisions not only among the electorate, but also within the government coalition. 
Netanyahu, with his weak and vacillating leadership exposed, sacked his opponents, Lapid and Justice Minister Tzipi Livni (who also denounced Netanyahu’s settlement-construction plans), and called for new elections. 
But the real game changer was the declaration by Herzog and Livni, who leads the small centrist Hatnuah party, that their parties would run jointly in the elections. 
If they win, they will rotate in the prime minister’s post. 
This changed Israeli political discourse almost overnight. 
Far from invincible, Netanyahu is now viewed as a failed prime minister, confronted by a center-left bloc that may well become the most powerful voice in the Knesset. 
Yesh Atid voters, who have been disappointed by Lapid’s failure to deliver the “new politics” of efficiency and transparency that he promised, may supply the Herzog-Livni alliance with the necessary votes. 
Some of the moderate orthodox parties, which have been undergoing their own internal splits, have also signaled their willingness to work with a center-left bloc that might enable Israel to make real progress. 
Even Minister of Foreign Affairs Avigdor Lieberman, head of the right-wing Yisrael Beiteinu party, is now criticizing Netanyahu for alienating the US and has suggested that he would not rule out joining a centrist government. 
All of this bodes well for the Herzog-Livni alliance. 
But three months is a long time in politics. 
Netanyahu may be a dismal prime minister; but he is also a formidable campaigner. 
And if the centrist alliance finishes first in the election, it will still need coalition partners to form a majority in the Knesset. 
Gaining fewer than 30 of its 120 seats might drive it to seek potential partners among the orthodox – an approach that could alienate moderate secular voters. 
Moreover, once in power, the Herzog-Livni alliance would be met with serious challenges – beginning with reaching an agreement with the Palestinians. 
Given that the Palestinians’ political leadership is divided between the Fatah-led Palestinian Authority, which controls the West Bank, and Hamas, which has established an Islamic fundamentalist regime in Gaza, a deal between Israel and Palestinian Authority President Mahmoud Abbas would mean little. 
Nonetheless, a Herzog-Livni government would bring significant change, particularly in terms of relations with Europe and the US. 
Netanyahu’s provocative policies and statements, which have undermined support for Israel among even its closest allies, would be supplanted by a willingness to negotiate in earnest and make genuine concessions. 
Such a shift would reinvigorate hope among Israelis – and not a moment too soon. 
There is a growing realization in Israel that it is time to chart a new path. 
Netanyahu, always eager to impress upon the Israeli public the impossibility of making peace with the Palestinians, failed to address the question of what kind of country Israel will become if it continues to rule millions of people against their will. 
This is what has turned so many people in the West against Israel, leading some to question its very legitimacy. 
If Zionism means eternal dominion over the Palestinians, is it really worthy of support? 
The Herzog-Livni alliance has tentatively named itself the “Zionist Camp.” 
It may not be catchy (and it is likely to be changed), but it expresses an essential truth: Zionism is about the right of the Jewish people to self-determination, not about the permanent domination of another people. 
One hopes that Israeli voters recognize this in March. 

Israel’s Centrist Victory 
JERUSALEM – Israel’s election is a victory for centrism and national consensus. 
Indeed, that is the key to understanding not only the vote count, but also Israeli public opinion, the next government, and its policies. 
From experience, most Israelis have developed a worldview that combines traditional left-wing and right-wing thinking. 
On one hand, they want to achieve a comprehensive political solution with the Palestinians based on creating a Palestinian state, in exchange for real, lasting peace. 
On the other hand, they understand that there is no Palestinian leadership strong or moderate enough to bring it about. 
Both the left and the right have been proven wrong. 
The left offered big concessions and was ready to take high risks for the sake of peace. 
Yet there is no credible way to achieve an agreement with such radical forces as Iran, Syria, Hamas, and Hezbollah, all of whom seek Israel’s destruction. 
The Palestinian Authority (PA) is less extreme, but its leadership is weak, doesn’t control Gaza, and is still full of hard-line elements. 
This approach also lost credibility as a result of the rise of Hamas and its determination to wage permanent war on Israel; Iran’s expanding influence and nuclear weapons’ program; and the high – even rising – levels of hatred against Israel among Arabs and Muslims. 
In addition, the world didn’t reward Israel for making concessions and taking risks. 
Indeed, the more Israel gave, the more slander and hostility it faced in many sectors. 
At the same time, the right-wing mantra – victory – failed to offer a credible way to replace the Iranian and Syrian governments, or to destroy Hamas and Hezbollah. 
There is neither the illusion nor the desire to hold onto captured territories permanently, or to build Jewish settlements, and Israel has virtually no international support for any of these goals. 
With alternatives to the status quo constrained, it has become clear that Israel is in a long transitional period in which old ideas don’t work and a new approach is needed. 
Foreign Minister Tzipi Livni’s Kadima party, opposition leader Binyamin Netanyahu’s Likud party, and Defense Minister Ehud Barak’s Labor party all fall – with only secondary variations – within a centrist consensus, which also reflects a popular national consensus. 
Thus, regardless of who becomes prime minister, the next government will not commit to real concessions to the Palestinians in exchange for a two-state solution unless the result will be an end to the conflict and a long, stable peace. 
Few believe that the PA and Hamas’s main rival, Fatah, will be willing or able to make such an agreement for decades. 
The same applies to Syria. 
As a result, any real changes affecting the status of Jerusalem, the Golan Heights or West Bank settlements are a long way off. 
Moreover, no deal can be made with Hamas. 
But, since Hamas will not simply disappear – nor will Hezbollah – so the key point is to defend Israel and its citizens as they pursue their normal lives. 
This also means that at some point a big decision may have to be made on attacking Iran’s nuclear facilities. 
As a result of this national consensus – accepted by Labor, Likud, and Kadima, along with many others – the next government will most likely be a national unity government consisting of this trio. 
Its policy guidelines are already clear: 
· To stress Israel’s willingness to make peace, its readiness to agree to the creation of a Palestinian state, and its refusal to bear responsibility for the continuing conflict and violence; 
· To maintain deterrence and defend Israel and its citizens from cross-border attacks; 
· To preserve the best possible relations with the United States, Europe, and other countries, as long as this does not involve risks to Israel’s national interests or its citizens; 
· Security cooperation with the PA to prevent terrorist attacks on Israel, in exchange for economic aid and assistance to prevent a Hamas takeover; 
· To strike back at Hamas – and potentially Hezbollah – based on any attacks against Israel, with the precise response to depend on timing, opportunity, and these groups’ behavior; 
· To work for the international isolation of Iran, Hezbollah, and Hamas; 
· To negotiate with Syria for peace, though without illusions as to the probability of success. 
The main differences between the leading Israeli parties are more atmospheric than real, mainly concerning how much to concede and how much to demand. 
Even so, Netanyahu will not embark on a settlement-building campaign, and Livni is not about to give away east Jerusalem. 
The most important decision that Israel’s new government is likely to face, when the time comes, is whether the country’s well being and even survival requires acting decisively against Iran’s nuclear facilities. 

Israel’s Debacle at Sea 
HAIFA – Israel was dead wrong in launching an attack by naval commandos against a flotilla carrying pro-Palestinian activists who were making an attempt to break the Israeli-Egyptian siege of Gaza. 
That long-term siege, put in place after Hamas assumed sole control of the government in Gaza – breaking with the Palestine National Authority in the process – is a humanitarian catastrophe and a grave moral error. 
There can be no excuses, no “but we didn’t intend.” 
The Israeli government of Prime Minister Binyamin Netanyahu must apologize to the victims, investigate what happened on the blood-stained decks of the flotilla’s boats, and move on to honest peace talks with willing Palestinian leaders, like Abu Mazen, the president of the Palestine National Authority. 
The fact that Hamas is refusing to make peace has nothing to do with the recent travesty in the sea en route to Gaza. 
The fact that Gazan militants have fired missiles on Israeli civilians, and continue to do so, is irrelevant. 
The fact that the flotilla did not carry only “peace activists,” but also many people who wish to see Israel destroyed and Israelis perish, is no reason to drop soldiers upon them. 
Even the fact that some of the “humanitarian aid workers” turned on the soldiers with a rather un-peaceful array of knives and clubs is no justification for shooting to kill. 
The trespassers on the scene, the true-blue pirates, were unfortunately the uniformed Israeli commandos acting in my name. 
Prime Minister Netanyahu and Defense Minister Ehud Barak sent top combatants into a seafaring crowd of aggressive protesters and thought that they would win. 
What were they thinking? 
Other cabinet ministers had been promised that no fatalities would occur. 
The Israeli public woke up to a justified storm of global outrage. 
Once again, an army intended for self-defense on the battlefield was sent on a mission that only diplomacy, humanity, and tact could resolve. 
Has Israel lost the remainder of its wisdom? 
Are we witnessing a classic case of sheer political stupidity? 
If so, then here’s further proof that only peaceful and stable countries can afford the luxury of incompetent decision-makers. 
In a hypersensitive reality, stupidity equals malice. 
But I am afraid that something more than stupidity (though less than plain evil) is at work here. 
Israel’s current leaders, and a segment of Israeli society, are trapped in an idiosyncratic logic of fear and self-centeredness. 
This deviant logic has expanded Israel's justifiable acts of self-defense (such as targeting rocket launchers in Gaza and Lebanon) into all-out attacks. 
It has eroded the Israeli ethos of respect for the lives of civilians, even when militants hide among them. 
It has forced innocent Gazan civilians to pay dearly for their rulers’ crimes. 
And it has muddied the Jewish moral legacy demanding the active pursuit of both justice and peace. 
In short, Israel’s current leadership has inflated “security” into a surreal new cult, trumping morality. 
Not all Israelis share this logic. 
Not all of us feel more secure when civilian protesters are shot in our name. 
Israel should apologize and make amends. 
In this particular case, we must even apologize to those who openly loathe us and our state. 
Hatred, after all, is not a punishable crime. 
Moderate Israeli citizens, who had nothing to do with the flotilla fiasco, should lower their heads in shame for their government’s act. 
And then we should raise our eyes again, proudly meet the gaze of those Palestinians who are willing to talk peace with us, and tell them: “Let’s get on with it. 

Israel’s Egyptian Dilemma 
JERUSALEM – The Arab revolt against inertia, despair, and decline has rightly inspired the admiration of civilized people everywhere – everywhere, that is, except in Israel. 
The fall of corrupt Arab dictatorships is being met in Israel with profound skepticism, even hostility. 
For years, the Israeli discourse has been that a true peace with the Arab world would be possible only when the region embraced democracy. 
But the prospect of Arab democracy has now become a nightmare for Israeli leaders. 
They are used to dealing with autocrats in Cairo, Damascus, and Amman, and now fear the consequences of an Arab foreign policy that genuinely responds to the voice of the people. 
Egypt, where Hosni Mubarak’s regime was Israel’s closest ally in the war against Hamas in Gaza and in curtailing Iran’s drive for regional hegemony, is of special concern. 
Mubarak’s ineffectiveness as broker of an Israel-Palestinian peace was not truly inconvenient for some of Israel’s leaders. 
All this is now bound to change. 
It is inconceivable, for example, that an Egyptian democracy, in which the Muslim Brotherhood would be a legitimate political force, would persist in Mubarak’s complicity with Israel’s siege of Hamas-controlled Gaza. 
Egypt’s policies concerning two of Israel’s other key rivals in the region, Turkey and Iran, also might shift. 
The US had two requirements of Mubarak: that he undertake domestic political reform, and that he be a peace broker in the region. 
Mubarak conveniently focused on the “peace process,” which explains his jealousy at Turkey's recent attempts to usurp the role of regional broker. 
Egypt’s regional power reflects its objective strategic weight, and this is not expected to change. 
But Egypt’s attitude to Turkey and Iran would not be as confrontational as Israel would like it to be. 
Indeed, one of the first decisions taken by Egypt’s interim government was to allow an Iranian vessel to cross into the Mediterranean through the Suez Canal for the first time in three decades. 
Moreover, after 30 years of tension, preparations are under way for the exchange of ambassadors between Egypt and Iran. 
“Egypt does not view Iran as an enemy,” proclaimed Egyptian Foreign Minister Nabil el-Arabi. 
The voice of a democratic Egypt in defense of the cause of Palestine or in putting pressure on Israel to join the Non-Proliferation Treaty (NPT) would be far more credible than that of Mubarak’s regime, which sometimes looked as if it were simply going through the motions on policy issues like these. 
Nor is Egypt’s political discourse likely to be especially palatable to Israelis. 
Already, the new Egyptian finance minister, Samir Radwan, has made it clear that he does not favor investments from “the enemy” – that is, Israel – which might lead to a takeover of the Egyptian economy. 
All of this does not mean that Egypt’s commitment to the two countries’ peace treaty is in imminent danger. 
Egypt, whose new paradigm in foreign affairs increasingly looks like an imitation of Turkey’s strategy of “zero problems with its neighbors,” needs the treaty at least as much as Israel does. 
Any Egyptian democracy that was truly accountable to its popular base would have to address the country’s colossal domestic problems, and a state of war with Israel would hardly advance that goal. 
The real threat to Egypt’s security today is on its southern and eastern borders, not in Israel. 
The secession of South Sudan is a real concern in Egypt, for it might eventually lead to the disintegration of the entire Sudanese state into fiefdoms of instability and Islamic radicalism. 
Egypt is now also rightly concerned about neighboring Libya possibly splitting into its tribal components. 
Conservatism in revolutionary times is an inadequate option. 
Israel’s tragedy lies in its obsession with taking (or avoiding) decisions only on the basis of worst-case scenarios. 
This is blatantly obvious in its failure to respond creatively to the Arab world’s democratic upsurge. 
The Netanyahu government’s political paralysis – its wait-and-see philosophy in the face of massive change all around it – will end up leaving the initiative in others’ hands, to the detriment of Israel’s national interest. 
No convincing peace initiatives or major policy responses are expected from Israel at a time when the United Nations General Assembly is poised to recognize overwhelmingly the creation of a Palestinian state – a move that would further isolate the country. 
Moreover, an emerging democratic Egypt that is reconciling with Israel’s sworn enemies, and that is bound to be more proactive in its defense of the Palestinian cause, is not viewed in Israel as a legitimate intermediary. 
Inertia was not always Israel’s way. 
Netanyahu does not have to look very far for examples of bold and visionary Israeli leaders to follow. 
Some reached peace agreements with the country’s neighbors; others came very close – and at least succeeded in conveying to the Arab world Israel’s commitment to reaching out to the region’s peoples. 
The focus of Israel’s regional policy should be building bridges to those peoples, the true masters of the current “Arab awakening.” 
A generous solution to the plight of the Palestinians is more vital to that task than ever before. 

Israel’s Mission 
JERUSALEM – Israel is one of the biggest success stories of modern times. 
A nation was reborn out of Holocaust survivors and uprooted Jewish communities who, mostly through the quality of their human capital, built a booming economy, created one of the world’s most innovative agricultures, and revived a dead language. 
They also sustained, against all odds, a democracy that, however imperfect and dysfunctional, is nonetheless amazingly vibrant. 
And yet, at its 60th anniversary, Israel stands at a crossroads. 
Indeed, Israeli Prime Minister Ehud Olmert has warned of “the end of the Jewish state” if the country remains bogged down in the occupied territories and a Palestinian state is not established. 
Israel’s internal challenges are no less demanding. 
The relatively homogeneous society envisaged by its founders has fragmented into a tense multi-ethnic tapestry comprising secular Jews, an alienated Arab minority, a prolific ultra-orthodox community living on state allowances, religious nationalists bent on a Messianic brand of Zionism, immigrants from the former Soviet Union, marginalized Ethiopians, and Oriental Jews still struggling to join the middle class. 
Moreover, Israel has failed to redress a dangerous imbalance: however creative its economy may be, the burden of military expenditure is undermining its investment in education and scientific research. 
Metaphorically, Israel’s national psyche oscillates between “Tel Aviv” and “Jerusalem.” 
“Tel Aviv” embraces secularism, hedonism, and economic growth, and views the State of Israel as a legal entity, in contrast to the dangerous, faith-driven “Jerusalemite” concept of “Eretz Israel.” 
It has replaced Israel’s early pioneering ethos with the temptations of modernity, liberalism, and “normalcy.” 
It aspires to be part of the “global village,” not an isolated, parochial Jewish outpost. 
By contrast, “Jerusalem” regards “Tel Aviv’s” drive for “normalcy” as a shallow affair, one that is almost criminally indifferent to Jewish memory and the lessons of Jewish history. 
The Israel of “Jerusalem” is one of yearning for Jewish roots, a deep-seated fear of “the Arabs,” and an unyielding distrust of “Gentiles” and their “international community.” 
Israel was born in war and has lived by the sword ever since. 
Rarely in history has a national movement marched to its Promised Land with such a brilliant display of diplomatic savoir-faire and military skill as the Zionists did on their way to statehood. 
But Israel’s breathtaking victory against three Arab armies in 1967 brought it not only grandeur, but also moral and political decay. 
Forty-one years later, Israel is still incapable of extricating itself from the corrupting occupation of Palestinian lands, and from the folly of settlements. 
This is the paradox of Israel’s existence: a sense of power combined with an ever-present apocalyptic fear of annihilation, reflected in its hostile reaction to any initiative that touches its physical security. 
Of course, Jews’ historical experience is not conducive to easy conciliation. 
The crisis of the Jewish conscience in the traumatic transition from Holocaust to statehood has not yet been fully overcome. 
Israel always, it seems, opts for a fatalistic interpretation of regional challenges, and its agonizing task today is to adopt a radical change of strategy by overcoming its leaders’ traditional tendency to make decisions only on the basis of worst-case scenarios. 
It has been a sadly recurrent condition of the Arab-Israeli conflict that no war lost by a humiliated Arab side has ever ushered in a peace settlement, just as no war overwhelmingly won by Israel has ever led its leaders to be magnanimous in victory. 
Peace efforts began almost invariably thanks to Arab, not Israeli, moves. 
Such was the case of the 1973 war, which was started by President Anwar Sadat with the aim of forcing the United States to broker an Egyptian-Israeli peace. 
Likewise, the Palestinian Intifada of 1987 forced Israel to abandon the politics of inertia and engage in a process that culminated in the Oslo accords. 
Zionism’s unique combination of democracy and utopianism enabled the Jews to recover their birthright and gave them a key to the future. 
The same tools must be used to end the conflict with the Arab world, in particular with the Palestinians. 
The Jews did not survive extermination only to entrench themselves behind walls of their own making. They survived in order to resolve what for too long has looked like an insoluble conundrum: legitimizing Jewish statehood in the eyes of those who consider themselves its victims. 

Obama in Israel’s New World 
PARIS – Now that Binyamin Netanyahu has formed a new Israeli government out of a dizzying kaleidoscope of possible post-election permutations, has the country’s politics moved to the center? 
US President Barack Obama would be wrong to think so as he prepares for his first official visit. 
The unexpected second-place finish of Yair Lapid’s new Yesh Atid (“There is a Future”) party in the recent election has certainly changed the complexion of the government: the two leading Orthodox parties, Shas and United Torah Judaism, are out, while two smaller centrist parties, Kadima and Hatnua, are in. 
But those who breathed a sigh of relief at the weakening of Netanyahu’s Likud and the country’s extreme right-wing parties should be as anxious as ever. 
The political horse-trading is over for the time being, and the outcome seems assured. 
Netanyahu will return as Prime Minister, and every party – in power or not – is ready to block, dilute, or paper over whatever policies the new government manages to adopt. 
In Israel, the question nowadays is not whether the center will hold, but whether it matters. 
In both domestic and in international terms, Israel has not so much moved to the center as it has embraced a new type of national consensus that began to emerge in 2011. 
In May-June of that year, while the international community was still mooting potential land swaps for an increasingly distant peace settlement with the Palestinians, Israelis were focusing on a domestic battle over the regulation of cottage cheese. 
The new consensus was best symbolized by the massive popular protests that erupted two months later, bringing together young, economically frustrated, mainly middle-class Israelis who might once have been politically divided by their allegiance to either the center-left Labor party or Netanyahu’s Likud. 
No mention was made, then or now, of the need for peace initiatives; of the state of mind of the now-invisible (to Israeli eyes) Palestinians, now relegated to their side of the security wall; or of the growing inequalities that separate Israel’s Arab citizens from their Jewish counterparts. 
By representing the aspirations of middle class Israelis seeking a better economic deal, Yair Lapid and Naftali Bennett of the nationalist Jewish Home party became the two sides of a newly minted political coin, one backed by an inward-looking ethnic and national identity in a country that sees itself as alone in the world. 
This identity may be secular or religious; it may seek middle-class normality or proclaim an Israeli version of manifest destiny – the two are not incompatible. 
Either way, the country no longer resonates with the expectations, hopes, and fears of a world still focused (ever more dimly) on resolving the Israeli-Palestinian conflict. 
Nor does Israel listen to the anguish of its own Ciceronian Zionists, perhaps best represented by the novelist Amos Oz. 
Israel has simply stopped seeking to reconcile its Jewish identity with its commitment to democracy, for it has stopped addressing the contradiction that the Israeli-Palestinian question represents. 
Simply put, that contradiction is no longer relevant to the new Israel. 
Despite the deep economic frustrations of many of its middle-class citizens (the truly indigent did not protest), Israel has become a global economic and military powerhouse. 
The country increasingly lives in its own virtual reality, simultaneously proximate to and far removed from the revolutionary pre-modernity of most of its neighbors. 
Indeed, Israel is now on an equal footing with all of the rising new powers of an increasingly globalized world. 
Few of them are democracies, and not one of them holds Israel to task for its settlement policies in the West Bank or cares, like the United States, about Middle East peace. 
Why should Israel continue to focus on a weakened West that is constantly reprimanding it when the rest of the world beckons? 
Nor does the old secular/religious divide have much salience anymore. 
Israel has become post-modern, producing new – and sometimes startling – synergies among its avant-garde high-tech sensibility, its secular and ever more orthodox religious identities, and its overall ethno-nationalist outlook. 
Its ancient biblical past can now coexist seamlessly with its ultra-modern present. 
Israel’s new millionaires can easily live in far-flung settlements in “Judea and Samaria” and commute daily to their coastal startups. 
And the army has already become the purview of nationalistic and religious cadres, even without conscription of the ultra-orthodox – one of the centrist camp’s demands in pressing for fairer national burden-sharing. 
As a result, the Israeli state seems to be moving closer to its Asian counterparts, with their emphasis on economic innovation and their indifference to universal values or, for that matter, peace. 
Israel is now proud to be in a world of its own, in which it feels free to act unilaterally and scoff at toothless criticism from Europe (and now partly from the US). 
There is no reason to believe that Netanyahu’s new government will seek to revive the increasingly feeble and moribund peace process, beyond offering verbal promises and inconsequential half-measures. 
Nor should anyone expect a moratorium on settlement expansion. 
On the contrary, the settlements offer cheaper housing than is available in Israel, and thus resolve one of the main economic problems of the country’s middle class. 
“Red lines” in Israel have a way of mutating into lines drawn in the sand, which are then rendered invisible at the slightest wind. 
The new government’s fragile equilibrium only reinforces this sober interpretation. 
In Israel, Obama will encounter a country that has indeed moved, but not toward a missing center. 
It has moved into its own orbit. 

Israel’s New Realism 
Kadima’s victory in Israel’s elections is the country’s most important political turning point in 30 years, if not longer. 
The new party—barely six months old—has realigned Israeli politics by transforming the entire framework of ideological assumptions underpinning the country’s security strategy. 
Everyone knew that Kadima would win and form a coalition with the moderate left Labor party, which managed a respectable second-place finish. 
As a result, some Kadima voters stayed home, while other potential supporters voted for Labor to strengthen its hand in pushing social and economic issues in Kadima-led coalition. 
On the right, the Likud party, which Sharon abandoned to establish Kadima, did very poorly, partly because many conservative voters also deserted it for religious, immigrant, and other parties. 
In fact, a wide variety of small political groups, including three Jewish religious parties, Arab parties, and a pensioners’ party won seats. 
Since Kadima and Labor will not have a majority even as coalition partners, they will have to bring in some of these groups. 
But the importance of the distribution of seats pales in comparison to that of the longer-term changes in Israeli politics implied by Kadima’s victory. 
Indeed, having attracted leading figures from both Labor and Likud, Kadima is now established as the most successful centrist party in Israel’s history. 
With few political stars left in either Labour or Likud, Kadima may become the country’s dominant party for many years to come. 
Ehud Olmert, the party’s leader and now elected prime minister, has been a maverick of the center since his student days – a fitting symbol for the rapprochement of left and right. 
But the rapprochement itself is, of course, mainly the work of Ariel Sharon, whose influence is by no means diminished because he is in a coma. 
Kadima is built on Sharon’s charisma and program, which reversed the most basic Israeli strategic thinking of the last half-century. 
For 30 years after the 1967 war, Israelis agreed on the need to keep control of the West Bank and Gaza Strip unless or until there was a comprehensive peace agreement with the Palestinians and the Arab states. 
From a security standpoint, the occupied territories constituted critical terrain for defending Israel against an attack on its borders by Arab states’ armies. 
Moreover, from a diplomatic standpoint, the territories were regarded as bargaining chips (“land for peace”) to be used in achieving a negotiated solution. 
The Oslo agreement in 1993 and the ensuing peace process embodied that expectation. 
The strategy ran aground in 2000, when Prime Minister Ehud Barak offered to give up almost all the occupied territories and accept a Palestinian state in exchange for real peace. 
The Palestinian leader Yasir Arafat turned him down flat and instead returned to a massive campaign of terrorism against Israel. 
The entire Israeli political spectrum was thrown into confusion. 
The left had maintained that Arafat would make a deal and honor it; the right claimed that Arafat would make a deal and violate it. 
Everyone was wrong: there would be no deal to honor or violate. 
With the collapse of the strategy’s most basic premises, what should Israel do? 
Sharon formulated the answer in 2004, concluding that Israel did not need the territories. 
They were no good as bargaining chips, because there was no one with whom to bargain. 
Nor could they be annexed to Israel, owing to the demographic problem implied by continued control over so many Palestinians. 
Finally, with the USSR gone and the United States the world’s sole superpower, the geostrategic situation had changed entirely. 
Arab states, preoccupied with other issues in the post-Cold War era, were less interested in the conflict, while the security situation in the territories themselves had become a problem. 
Sharon’s solution was unilateral withdrawal and the idea that Israel would decide on its own interim boundaries with a view to what it would claim if there was ever a negotiated agreement. 
Moreover, Sharon now agreed that a security fence, which historically was favored by the Israeli left, would enhance Israel’s defenses. 
The country would then focus on domestic issues such as economic development, improving its public institutions, and raising living standards. 
This approach appealed to the vast majority of Israelis, regardless of their political loyalties, and the victory in January’s Palestinian election by Hamas, which extols terrorism and demands Israel’s extinction, only reinforced the new strategic consensus. 
In fact, the new consensus is shared by most of Labour and the main opposition within Likud. 
The dream of peace, the nationalist fervor, and the purported religious redemption that animated Israel’s political combatants for a half-century are gone, replaced by a resigned pragmatism. 
That may inspire little enthusiasm, but the Israel that Olmert has now won a firm mandate to lead is by no means demoralized. 
On the contrary, public opinion polls show that citizens remain highly patriotic and optimistic about their personal lives. 
They have merely concluded that politics will not bring miracles, and that the most they can expect is to keep external threats to a minimum. 
That is Sharon’s legacy. 
And, in Israel, fulfilling it will be no small achievement. 

Israel’s Nightmares 
Paris – “It is reasonable to believe in miracles,” David Ben-Gurion, the first Prime Minister of Israel, once said. 
Today’s Israelis do not seem to believe in miracles. 
Instead, more than ever before they are obsessed by nightmares, foremost among them, the prospect of a nuclear Iran. 
To prevent a regime imbued with an absolute ideology from gaining possession of the “absolute weapon” is Israel’s paramount priority. 
Everything must be done, even a unilateral military strike, to prevent or at least delay Iran’s acquisition of such a weapon. 
This Israeli conviction on what it considers an existential issue stands in stark contrast with the fatalism that otherwise dominates Israelis’ thinking about themselves and their relations with the Palestinians. 
How is this fatalism manifesting itself, where does it come from, and what can be done to transcend it? 
These questions are important, because “fatalism” has become a major obstacle that must be overcome by anyone seriously interested in bringing peace to the region. 
For this fatalism is a strong card in the hands of someone such as Israeli Prime Minister Benjamin Netanyahu, who is intent on preserving the status quo . 
A majority of Israelis would probably back a preventive attack on Iran and satisfy themselves with the preservation of the status quo in relations with the Palestinians. 
In the aftermath of the Israeli election in February, which brought to power a government coalition that includes the extreme rightist Avigdor Lieberman, now Israel’s foreign minister, an Israeli friend whose sympathies had always been with the left said to me in a resigned, cryptic way, “It’s sad, but it does not change anything; we have no one to talk to anyway.” 
He gave me approximately the same answer when I referred to the need to change Israel’s electoral system based on proportional representation, which produces weak majorities at best and near-paralysis at worst. 
“So what if the system is blocked; to reform it would not make any difference!” 
The same fatalism directly applies to the prospect of peace with Palestinians and the Arab/Muslim world in general. 
It is as if, paradoxically, Israelis had internalized the concept of “temporary truce” advocated by their Hamas adversary, and had given up the goal of peace through a two-state solution that they once pursued with the Palestinian Authority. 
For a majority of Israelis today, the present and the foreseeable future are not about peacemaking, but about conflict management, through the preservation of credible deterrence – a hard-core realistic assessment darkened by the perception that, while time is not necessarily on Israel’s side, that there is no alternative. 
Israelis don’t want to delude themselves the way they did in the 1990’s during the so-called Oslo peace process. 
The same fatalism also applies to relations with the outside world. 
A majority of Israelis are even more convinced today than they were yesterday that they can count only on themselves and, at the margin, on the Jewish Diaspora. 
This vision not only tends to encourage a process of self-isolation, but it raises serious issues in the long run. 
At the end of the day, there are only 13.2 million Jews in the world and nearly 1.3 billion Muslims. 
Israel needs allies, because its ultimate security depends on its legitimacy nearly as much as on its deterrence capability. 
If each relative military success is accompanied by an absolute political defeat, as was the case with the recent military operations in Gaza, what is the ratio between costs and benefits? 
These deep Israeli emotions are the product of the encounter between the weight of the past and the “facility” of the present. 
It could be said without any exaggeration that the weight of the Holocaust is even more present today than it was decades ago. 
By calling for the destruction of the “Zionist entity,” Iran’s president rubs that raw nerve. 
A little more than 60 years after the Shoah, one does not play lightly with such an evocation of destruction. 
In a world where, for many Israelis and non-Israeli Jews, Israel is becoming to the community of nations what Jews once were in the community of peoples – a pariah state, if not an eternal scapegoat – the memory of the Shoah resounds with a vengeance. 
On the other hand, there is great comfort in the status quo . 
After all, if you walk along Tel Aviv’s beaches, the dramas of Hamas-controlled Gaza and Hezbollah-controlled southern Lebanon seem so far away. 
If the United States wants to be seriously involved in a renewed peace initiative, it can neither ignore nor passively accept the hierarchy of Israeli emotions. 
But creating a new balance that contains a little less obsession with Iran and a little more concern for the Palestinians is a formidable challenge. 

Israel’s Nuclear Option in Iran 
LOS ANGELES – Revelations in former President George W. Bush’s recently published memoirs show that he declined an Israeli request to destroy Syria’s secret nuclear reactor in the spring of 2007. 
While the revelation may appear merely to be a historical footnote, more profoundly it raises new uncertainty about whether Israel now thinks that it can rely on the United States to apply military force to stop Iran’s nuclear program should diplomacy fail. 
The Syrian episode suggests that it cannot, which means that Israel may decide to go it alone once again, this time to eliminate Iran’s nuclear facilities. 
If Israel did so, however, it would confront a conundrum. 
Unlike the attack on Syria’s nuclear plant, Israel’s conventional forces do not have the capacity to destroy Iran’s suspect installations. 
Portions of Iran’s nuclear program may be too heavily bunkered, dispersed, or concealed. 
This raises the question of whether Israel’s repeated refrain that “all options are on the table” implies that even a nuclear strike is possible. 
Israel’s nuclear history provides no clear answer, but the future may force the issue. 
Israel has never acknowledged having nuclear weapons, let alone the size and scope of its arsenal. 
Israeli policymakers refuse to talk about the subject. 
Israel’s parliament, the Knesset, never discusses the program or appropriates money for it. 
Military censors quash public discourse about it. 
Yet American and other intelligence services and strategic-research institutes around the world all agree that Israel possesses nuclear weapons. 
They disagree about how many, with estimates ranging broadly, from 40 to more than 400 warheads. 
Israel’s reluctance to rattle its nuclear saber, even in dire circumstances, adds to the mystery. 
In the Yom Kippur War, as Syrian forces threatened to break the country’s defensive lines, Israeli decision-makers recoiled even from threatening to use nuclear weapons. 
While Israel keeps its bomb in the basement, it has a long history of stopping its adversaries. 
As Iraq moved to complete the Osirak reactor by the early 1980’s, Israel applied diplomatic pressure and actions against foreign nuclear vendors, sabotaged atomic exports, and assassinated Iraqi scientists, before finally settling on the June 1981 air strike on the plant. 
In the Syrian case, with one caveat, Israel decided to dispense with the preliminaries and simply destroy the reactor. 
The caveat consists in a plea that Israel made to the US. 
According to Bush’s memoir, in the spring of 2007, Prime Minister Ehud Olmert made a blunt request of the US president regarding Syria’s reactor: “George, I am asking you to bomb the facility.” 
After consultation with his staff, Bush responded that, absent a plutonium extraction facility, US intelligence could not confirm that the plant comprised a nuclear weapons program. 
“I told him [Olmert] I had decided on a diplomatic option backed by force” to stop Syria, Bush writes. 
An apprehensive Olmert responded, “I must be honest with you. 
Your strategy was very disturbing to me.” 
Within months, Israel struck. 
One year later, it followed up by assassinating Mohammed Suleiman, the Syrian general in charge of resurrecting the nuclear enterprise. 
Given its efforts to fend off an attack, Iran represents a far more difficult target for Israel than Iraq and Syria did. 
As a result, Israel ceded to the US and others responsibility to move the Iranian regime from its current path. 
Since 2002, the US has applied a multi-pronged approach. 
It pressed the International Atomic Energy Agency for greater scrutiny. 
It got the United Nations Security Council to agree to impose increasingly onerous economic sanctions – and roped allies into even stronger sanctions. 
It adulterated nuclear-related exports from European vendors to perform poorly during operation. 
It may have inserted computer worms into Iran’s atomic infrastructure. 
The result of all these efforts has been to slow, but not halt, Iran’s nuclear progress. 
And, even as the US and its allies attempt to restrain Iran, its regime continues to goad Israel, calling for its extinction and exporting military wares to its Lebanese and Gazan adversaries. 
In May 2010, Israel responded with a new wrinkle. 
It leaked to the London Sunday Times that it had placed nuclear-armed submarines off Iran’s coast. 
In the months before and after, it continued to hold war games and practice air strikes on Iran. 
And it repeatedly uttered threats that “all” options are on the table. 
Iran remains unmoved. 
Concerned that President Barack Obama will be less likely than Bush to use force to stop Iran, Israel must now contemplate its next steps should diplomacy continue to stall. 
One option would be to pursue a policy of “opacity plus”: a further lifting of the veil over its nuclear arsenal in order to caution Iran’s rulers about the potential consequences of their actions. 
Another option would be to bring the country’s nuclear arsenal out of the basement altogether. 
Israel could then mimic other nuclear-armed states by flexing its capacity through announcement and transparent nuclear deployment on land and sea, thereby promoting deterrence. 
But, for a country that has had little faith in deterrence when it comes to existential nuclear threats, relying on it now would mark a new, uncomfortable bet. 
That leaves nuclear use as the final option. 
But nuclear attack carries its own heavy burden. 
Given Iran’s placement of strategic sites in or near population centers, the deaths of many thousands of people would forever tar Israel. 
The only worse stain on Israel would be if survivors of an Iranian nuclear strike were to lament that, had their country acted proactively, “the third destruction of the Temple” – the end of the Jewish state – could have been avoided. 
These sobering prospects should prompt all involved to seek a peaceful resolution. 
Time is growing short. 

From Gaza to Where? 
CANBERRA – The wisest words on the Second Gaza War may have come from an Israeli living in a kibbutz near the Gaza border. 
“If you want to defend me… Don’t send the Israel Defense Forces for us in order to ‘win,’” Michal Vasser wrote in Haaretz on November 15. “Start thinking about the long term and not just about the next election. 
Try to negotiate until white smoke comes up through the chimney. 
Hold out a hand to Palestinian President Mahmoud Abbas. 
Stop with the ‘pinpoint assassinations’ and look into the civilians’ eyes on the other side as well.” 
Israel is, of course, entitled to defend itself from rocket attacks. 
But the lesson of the last two decades is that attacks stop, and intifadas do not start, when there is a prospect of peace – and that, when there is no such prospect, Palestinian militancy is uncontainable. 
The chances of a comprehensive and sustainable two-state settlement now being negotiated with Mahmoud Abbas’s West Bank-based Palestinian Authority (PA) – and of its acceptance, albeit grudgingly, by Gaza’s Hamas after a popular vote – may be slim and receding. 
But the only alternative is an endlessly recurring cycle of deadly violence between Israelis and Palestinians. 
The immediate priority is to calm and stabilize the situation in Gaza. 
But if there are not to be more and even worse eruptions, Israeli policymakers need to ask themselves some fundamental questions. 
So, too, must their rusted-on supporters in the United States and countries like mine. 
How is peace fostered if the elimination or dramatic diminution of Hamas’s capability leaves Gaza in the hands of even more militant groups, and gives Islamists throughout the region another recruitment tool? 
How is Israel’s national security served when, by its action in Gaza and inaction with Abbas, it jeopardizes its longstanding and hard-won peace treaties with Egypt and Jordan (both now looking very fragile indeed in the aftermath of the Arab Spring)? 
How can Israel’s preferred Palestinian leaders, Abbas and PA Prime Minister Salam Fayyad, be left with any credible capacity to negotiate if talks cannot begin until, as Israel insists, they retreat on their minimum condition of a settlement freeze in the Occupied Territories? 
For all that Israel downplays its significance, the Arab Peace Initiative of 2002 still offers a critically important deal: full normalization of relations by the entire Arab world in exchange for a comprehensive peace settlement. 
How long can this Arab League position be sustained with peace talks going nowhere? 
Another big question for Israel is whether it can accept the consequences if a two-state solution disappears completely from the agenda. 
Israel, as founding father David Ben-Gurion warned, can be a Jewish state, it can be a democratic state, and it can be a state occupying the whole of historical Israel; but it cannot be all three. 
According to the CIA World Factbook, Jews currently outnumber non-Jews, by 6.4 million to 5.6 million, in the total area of historical Palestine. 
But, with a much lower birthrate and declining immigration, it is only a matter of time before Jews are in a minority. 
With Gaza still smoldering, yet another burning question is waiting in the wings. 
What are Israel and its supporters supposed to gain by bitterly resisting the United Nations General Assembly resolution recognizing Palestine as a non-member “observer state” (with a status like the Vatican), which now seems bound to be introduced, and passed by a huge international majority, on or around November 29? 
The text of the draft resolution now in circulation contains no offensive language. 
It makes clear both that full UN membership remains to be determined and that final-status issues like borders, refugees, Jerusalem, and security all remain to be negotiated. 
True, passage of this resolution might give Palestine some standing that it now lacks to seek prosecutions in the International Criminal Court for alleged violations of international law. 
But the ICC is not a kangaroo court, and allegations without substance can be expected to be treated accordingly. 
Palestinian statehood has always been an indispensable requirement of Israel’s own long-term peace and security, and it is overwhelmingly in Israel’s interest to defuse rather than further inflame the issue. 
This need has become more urgent than ever in view of the new realities of power in the region. 
In short, Israel should treat the UN vote not as an excuse for renewed confrontation, but as an opportunity for a fresh start to serious negotiations. 
The US reaction is key: Rather than punishing the PA, and maybe the UN as well, it should use the resolution to propose the kind of diplomatic circuit-breaker for which the world has long been hoping. 
Of course, to put on the table a comprehensive settlement plan that addresses all of the final-status issues, with compromises that all sides could be persuaded and pressured to accept, would require statesmanship. 
Unhappily, that quality has been agonizingly absent from Middle East diplomacy for almost as long as anyone can remember. 

Israel’s Political Earthquake 
Israeli politics is undergoing its most dramatic changes in 30 years. 
The realignment of parties and leaders is all the more remarkable because the latest developments – Ariel Sharon’s decision to leave the ruling Likud party, the defeat of Shimon Peres as the Labor party’s chairman, and Labor’s withdrawal from Sharon’s grand coalition government – were utterly unexpected. 
So it is all the more important to comprehend the significance of these changes for the future of Israel, the region, and the Arab-Israeli conflict. 
Israel’s political system is, to put it simply, coming to the end of its second era. 
From independence in 1948 until 1977, the Labor party was dominant, before giving way to an opposition coalition of conservative, nationalist, and centrist parties allied in the Likud bloc. 
Since then, the two parties have taken turns in power, sometimes in grand coalitions and often in partnership with smaller parties. 
On the surface, party competition has been between “left” and “right,” or “hawks” and “doves.” 
The truth, of course, is more complex. 
Social class and economic issues, overshadowed by the persistence of more existential concerns – physical security and the continued existence of the state – have played a much less important role in Israel than in other societies. 
Here, the political divide could be defined as “optimists” versus “pessimists.” 
The former, as in Labor, believed that some day a force would emerge among Arabs and Palestinians ready to make peace on a reasonable basis; the latter, as in Likud, were more doubtful. 
For years, the argument remained an abstraction, a debate over what might happen in the future, until the Oslo agreement with the PLO in 1993 put the competing perspectives to the test. 
Since 2000, when PLO leader Yasir Arafat rejected a political settlement and instead launched a five-year war of terrorism, there have been few optimists left. 
The subsequent intellectual realignment in Israel has given rise to a new national consensus. 
It is now generally accepted that, as the left has always insisted, Israel should be ready to withdraw from the West Bank and Gaza Strip and accept a Palestinian state in exchange for real peace. 
But it is also accepted that, as the right has always maintained, there is no partner ready to make real peace. 
In this context, Sharon gained two landslide election victories as a hardliner, but implemented a moderate policy, including a full withdrawal from the Gaza Strip. 
This is where Israel stands today, facing a political upheaval fueled by two developments. 
First, Sharon moved the Likud to the center, making it the hegemonic party, while destroying every stereotype about his personality, methods, and worldview. 
For the same reason, though, many within Likud view Sharon – who helped found the party – as a traitor. 
Sharon now needs to institutionalize his reforms, even if he now needs to establish another party to do so. 
Second, the Labor party has proven politically bankrupt, with its only conceivable leader being the 82-year-old Shimon Peres and its anachronistic dovish optimism the source of much ridicule. 
As a result – and helped by low voter turnout – the party’s leadership primary was won by Amir Peretz, an outsider and populist who wants to revitalize Labor by putting social and economic issues at the forefront, which means withdrawing from the national unity coalition with Likud. 
Despite having to form a new party, Sharon will probably win the next election, which he has called for February. 
Peretz’s strategy may draw voters from other parties on the left, but Labor will most likely lose centrist voters (and those for whom national security is paramount) to Sharon. 
Paradoxically, all of this will mean both a great deal in principle and perhaps little in practice. 
With Sharon enjoying a strong public mandate for a moderate policy, Israel will be more ready than ever to make a deal with the Palestinians, Syria, and the Arab world in general for a comprehensive diplomatic solution to the conflict. 
Yet, given the chaos and paralysis that increasingly characterize Palestinian politics, that opportunity will go untaken. 
The rising power of Hamas, which openly proclaims its strategy of increasing terrorism and its goal of destroying Israel, reinforces that trend. 
The same can be said of Syria, whose hardline government is turning toward a dangerously adventurous militancy. 
Sharon might decide on partial withdrawals and dismantling of settlements on the West Bank. 
But it is now widely recognized that such changes are a response to dim prospects of real progress toward peace. 
Holding onto territory as a bargaining chip makes less sense if there is no one with whom to bargain. 
Instead, Israel will continue to prioritize its own security, strengthening its defenses against terrorism and consolidating control over the relatively small portions of the West Bank that it intends to claim as part of an eventual diplomatic settlement. 
A byproduct of this strategy, combined with ongoing Palestinian attacks, has been growing international sympathy with Israel. 
That, too, could continue if the current political realignment proves permanent, enabling Sharon to win over the center and even moderate left for his program. 
Nothing is assured, of course. 
The still popular Benjamin Netanyahu could emerge as a powerful rival on his right, and Peretz might yet shape Labor into a serious contender on his left. 
Nevertheless, the national consensus has shifted, shaking all assumptions about Israeli politics. 
The February elections will put those assumptions to their severest test in decades. 

Israel’s Wrong Friends 
JERUSALEM – Israel has been welcoming some rather peculiar visitors of late. 
The Dutch populist, Geert Wilders, is a frequent caller, telling sympathetic audiences that Israel is on the front line of the Western war against Islam. 
And, in December, a delegation of European far-right politicians toured Jewish settlements on the occupied West Bank, pleasing their hosts by reassuring them that this was “Jewish land.” 
Some of these “friends of Israel” represent political parties whose supporters, to put it mildly, have not traditionally been noted for their fraternal feelings towards Jews. 
Heinz-Christian Strache, for example, leads the Freedom Party of Austria, which began, under its late leader, Jörg Haider, by actively courting former Nazis. 
“More strength for our Viennese blood,” one of his election slogans, gives an idea of Strache’s typical tone. 
His Belgian colleague, Filip Dewinter, represents a Flemish nationalist party tainted by wartime collaboration with the Nazis. 
To be sure, nowadays even right-wing politicians in Europe are careful not to sound openly anti-Semitic. 
Wilders, for one, is ostentatiously philosemitic, and all the New Rightists like to stress the importance of what they call “Judeo-Christian values,” which must be defended against “Islamofascism.” 
Leftist and liberal critics of Israeli politics like to point out that anti-Zionism is not the same thing as anti-Semitism. 
But it is just as true that being a friend of Israel is not necessarily the same thing as being a friend of the Jews. 
Richard Nixon, for example, said of Jews that “you can’t trust the bastards,” but was a great admirer of Israel. 
And, of course, the last 2,000 years have shown that anti-Semitism is perfectly compatible with the worship of a Jew called Jesus of Nazareth. 
In the United States, some of the fiercest defenders of hardline Zionism are evangelical Christians who firmly believe that Jews who refuse to convert to Christianity will one day face terrible retribution. 
Sometimes, the wrong friends can be useful. 
When Theodor Herzl was making the rounds of Europe at the end of the nineteenth century, trying to gain support for the establishment of a state for the Jews, he was often rebuffed by rich and powerful Jewish grandees, who saw him as a troublemaker. 
Instead, he found eager supporters among pious Protestants, for whom Jews belonged in their own holy land rather than in Europe. 
Once the Jewish state was established, the earliest European friends of Israel were often people on the left, who admired the communal life on the kibbutzim, and saw Israel as a great socialist experiment, led by wise old left-wing idealists, such as David Ben-Gurion. 
Residual guilt about the Holocaust bolstered this attitude. 
Things began to change after the 1967 Six Day War, and even more after the 1973 “Yom Kippur” war, when it became clear that Israel was not going to let go of the Palestinian territories that it had conquered. 
Later, when Israel began to build settlements all over the occupied territories, admiration even turned into active hostility from Europe’s left. 
To many people on the right, however, the very things deplored by the European (and Israeli) left became reasons to admire Israel. 
These new friends liked the ruthless use of force, the ethnic nationalism, the continued humiliation of the Palestinians. 
Keen to revive a more militant form of nationalism in their own countries, politicians like Strache, Wilders, and Dewinter see Israel as a kind of model – a model discredited for a long time in Europe, owing to bad memories of fascism and Nazism. 
Indeed, anti-Zionist leftists frequently attempt to discredit Israel by comparing its actions in Gaza and the West Bank to Nazi atrocities. 
This is a cheap trick, aimed to give maximum offense. 
Contrary to what the Nobel Prize-winning author José Saramago once said, the Israeli army’s attacks in Gaza are not comparable in any way to Auschwitz. 
But the view, espoused by Israel’s new right-wing friends, that Israel is on the front line against Islamic fascism, is equally mendacious. 
By comparing Islam in general – not only Islamist terrorism – to fascism, as the right-wing populists do, and to suggest that Europe faces a threat comparable to the Nazis, is not just wrong, but dangerous. 
For, if it were true, any and all measures taken against Muslims, however brutal, would be justified, and Israel would indeed be a frontline state, resisting “Islamofacism” to prevent another Auschwitz. 
This is certainly how many Israeli right-wing politicians explain things. 
And they find eager parrots among some of Europe’s most retrograde political forces. 
It is a view that carries the grave implication that a peaceful solution of the Israeli-Palestinian conflict is almost impossible. 
The longer Israel, cheered on by the wrong European friends, continues to humiliate the Palestinians and occupy their lands, the more likely it will be that hatred and violence will stand in the way of compromise, without which there can be no peace. 
There is another potential consequence, however. 
False analogies with the past trivialize history. 
If the Israelis, or the Palestinians, are like Nazis, then the horror of what the real Nazis did has been greatly diminished. 
But exploiting history to justify current violence will not work forever. 
Once people stop believing that Israel is defending the West against fascism, Israel will be blamed for all the violence in the Middle East. 
And Jews everywhere else will be blamed by association. 
In short, the wrong friends of Israel are even worse friends of the Jewish people. 

Israel Votes for Violence 
War and violence always have a direct effect on elections. 
Wars account for dramatic shifts in voter preferences, and radical leaders and parties often poll much higher after a round of sharp violence than in normal times. 
Minority ethnic groups are therefore often able to sway the balance of power between major competing forces. 
This appears to have been precisely what has happened in Israel’s recent election. 
Benjamin Netanyahu’s right-wing Likud Party and the even harder right Avigdor Lieberman and his Yisrael Beiteinu (Israel is Our Home) party achieved a dominant result that saw Labor, the dominant party throughout Israel’s history, consigned to a lowly fourth place. 
Throughout the campaign, Israeli leaders competed over who would deal more firmly (read: violently) with the Palestinians. 
In the aftermath of Israel’s assault on Gaza, Palestinians hoped that Israel would choose a leader who would focus on the need to end the suffering, lift the siege, and begin rebuilding. 
It appears that just the opposite has happened. 
The last time that Israeli elections were so obviously affected by violence was in 1996, when polling results shifted wildly in the run-up to the vote, finally allowing Netanyahu a razor-thin win over acting Prime Minister Shimon Peres. 
Competing against an older Peres (who had taken over after the assassination of Yitzhak Rabin) Netanyahu dyed his hair white to appear more mature, and then took advantage of a badly handled mini-war and the anger of Israel’s Arab voters. 
Now Peres is Israel’s president, while Netanyahu heads Likud. 
But not much has changed: badly handled wars, incomplete peace talks, and a boycott by Israel’s Arab voters made this 2009 election seem almost like a carbon copy of 1996, when Rabin’s assassination ended the Palestinian-Israeli talks at a crucial time and Peres’ ill-advised war on South Lebanon reduced his large lead almost to a tie with Netanyahu. 
The anger of northern Israel’s Arab citizens at the killing of their brethren across the border led to a boycott that cost Peres the few thousand votes he needed to win. 
Israel’s 2009 election is similar in many ways. 
It follows two controversial wars (although the current nominees were not directly involved in the 2006 war with Hezbollah). 
It also follows serious negotiations between Israeli Prime Minister Ehud Olmert and Palestinian President Mahmoud Abbas, which are said to have moved both sides much closer to each other. 
But wars and violence move electorates to the hawkish right, and Israel’s operation in Gaza was no exception. 
Many Palestinian citizens of Israel, disgusted by the large-scale casualties inflicted on their brethren – and believing that to vote would mean to endorse the political system responsible for the carnage – stayed home once again. 
The most important element now is the new administration in the United States. 
The decisive victory of a candidate who opposed the Iraq war and favors direct talks with Iran will no doubt have a major influence on US-Israel relations and the peace process. 
The appointment of George Mitchell, who opposes Israel’s West Bank settlements, and Mitchell’s decision to open an office in Jerusalem, speaks volumes about what the new Israeli government should expect from the Obama administration. 
The Arab world is also in a state of flux after an emotional 22 days of Israel’s televised bombardment of Gaza. 
Millions of Arabs throughout the Middle East took to the streets, so angered by the inability of anyone to stop the bloodshed that a huge schism has been created. 
Egypt, Jordan, Saudi Arabia, and the Palestinian Authority beat a hasty retreat from their moderate and accommodating positions. 
The major stumbling block for the world in trying to relieve the suffering in Gaza is how to finesse the biggest bloc in the Palestinian Legislative Council, Ismael Hanieh’s Islamist list of Reform and Change. 
This challenge has become more interesting with European countries’ willingness to deal with a united Palestinian government that includes Hamas’ Hanieh. 
President Barack Obama’s pragmatism and refusal to embrace the Bush administration’s “war on terror” will also be a key determinant of the outcome. 
But, beyond band-aid solutions for the deep injuries inflicted on Gaza, Palestinians’ biggest concern is to ensure that Israel’s attempt to split Gaza from the West Bank does not become permanent. 
Egypt and the Palestinian Authority have been made to look bad in the eyes of the Arab world, owing to their refusal to make Egypt responsible for Gaza and possibly Jordan for the West Bank. 
But that proposal was a trap that would have destroyed the possibility of an independent, contiguous Palestinian state. 
Despite the election results, Palestinians still hope to re-establish momentum in resolving the remaining points of disagreement with Israel. 
While an international consensus now supports a two-state solution, settling the status of Jerusalem and of Palestinian refugees will be the main obstacles facing the two sides. 
The only hope now for resuming negotiations is the old “only Nixon could open up China” argument, meaning that only a truly hard-right Israeli leader would have the credibility to make peace with the Palestinians. 
But it is now clear to historians that Richard Nixon was determined to make his overture to China from the moment he began his presidency. 
Sadly, the signs that any of Israel’s potential prime ministers are truly prepared to take so bold a step are few. 

Climate Change at Ground Zero 
OUAGADOUGOU – Burkina Faso is located in the heart of the Sahel, which means that it is one of the world’s most vulnerable countries when it comes to climate change. 
Its farmers may know little of the physical causes of global warming, but they know about its effects – not least the huge variability in rainfall patterns, from droughts to flooding, which lead to lost harvests, the erosion of pastureland, and food crises. 
As a result, the concept of sustainable agriculture has been gaining ground for several years, both internationally and in Burkina Faso. 
The term features in political discourse and has become a key approach to global agricultural development. 
Indeed, sustainability is now a driving force in agriculture – and as important as productivity was in previous decades. 
The concept of sustainable agriculture is inextricably linked to that of sustainable development, first defined in 1987 as a model of economic growth “that meets the needs of the present without compromising the ability of future generations to meet their own needs.” 
Sustainable agriculture is defined as a type of farming that ensures that internal and external resources are used and conserved as efficiently as possible; is ecologically sound (it improves, rather than damages, the natural environment); and is economically viable, offering reasonable returns on agricultural investments. 
Close scrutiny of both definitions leads us to conclude that there can be no sustainable development without sustainable agriculture. 
Indeed, in Burkina Faso, sustainable agriculture features prominently – as it must – in the country’s development policies and strategies. 
In 2012, Burkina Faso adopted the National Policy of Sustainable Development, which has become a key tool for realizing the vision set out in the Strategy for Accelerated Growth and Sustainable Development. 
That vision describes “a productive economy which accelerates growth, increases living standards, improves and preserves the living environment and living conditions through wise and efficient governance.” 
All stakeholders in farming in Burkina Faso broadly share a commitment to sustainable agriculture. 
The national conference of the General Assembly for Agriculture and Food Security, held in November 2011, embraced the following objective: “By 2025, farming in Burkina Faso will be modern, competitive, sustainable, and driving growth. 
It will be founded on family-owned farms and efficient agricultural businesses, and will guarantee [that] all citizens have access to the food they need to lead healthy, active lives.” 
Likewise, the aim of Burkina Faso’s National Program for Rural Areas is to “contribute in a sustainable way to food and nutrition security, to strong economic growth, and to reducing poverty.” 
Another tried and tested agricultural practice in Burkina Faso is the integrated management of production. 
The goal is to improve smallholders’ productivity in a sustainable way, equipping them with the knowledge and understanding needed to operate efficiently while respecting human health and the environment. 
This policy has prompted behavioral changes regarding the management of natural resources and the use of agricultural inputs like pesticides. 
Sustainable agriculture has changed farming in Burkina Faso for the better. 
Here and elsewhere, it is the key to our ability to confront climate change and build resilience against food and nutritional insecurity, because it respects the land and is far more effective in the long term than industrial farming. 
Moreover, sustainable practices reassert the value of small, family-run holdings, which, in countries like Burkina Faso, produce nearly all of the domestic food supply. 
But countries like Burkina Faso cannot address climate change alone. 
Nor should they: Drought and flooding here and elsewhere occur largely because of climate imbalances caused by industrial activities that produce greenhouse gases. 
We are victims of a phenomenon caused mainly by developed countries – a phenomenon that is holding back our own development. 
If we are to take the definition of sustainable development seriously, those responsible for this outcome must also help, particularly by contributing to the adaptation costs that countries like Burkina Faso now face. 


It’s Not Just Russia’s Fault 
MOSCOW: Today, many people see Russia as undeserving of Western help, due to the chaos, corruption and defaults of the Yeltsin years, but also because of concerns about authoritarianism and human rights abuses under President Putin. 
Russia is also thought to no longer need help because its economy and public finances are much improved, thanks to rising oil prices and a GDP growing at 6.5% per annum. 
Indeed, Russia is running fiscal and current account surpluses of 2% and 17% of GDP respectively. 
Despite being up to its neck in debt - its obligations equal 75% of GDP - Russia appears able to pay its creditors. 
But Russia is seeking further relief from the so-called "Paris Club" (made up of western governments) on nearly $40 billion of inherited Soviet debt to those governments. 
Prime Minister Mikhail Kasyanov, indeed, journeys to Berlin next week in search of support for an interim deal now under negotiation. 
Russia's case for relief is strong. 
Even stronger is the case for Western governments - above all, Germany, which holds nearly half Russia's Paris Club debt – to ask taxpayers to forgo part of these claims. 
Loans from western governments to the Soviet Union are at issue. 
Soviet central planning could not secure a proper return on those loans - and indeed on all investment, which was a primary reason for the USSR’s collapse. 
Paris Club loans were made by government export credit agencies, which underwrite foreign purchases of their countries’ capital goods and other products. 
As the OECD never tires of pointing out, this is a form of government subsidy to domestic industry more than to the recipient country. 
Debt relief is being raised simultaneously with a growing debate about “Who lost Russia?”in western capitals. 
Whom do I think responsible? Western governments acting as the Paris Club in the autumn of 1991 must share the blame. 
As the Soviet Union crumbled and Yeltsin’s new, independent Russian government attempted radical reform, the G7 countries’ sent a bunch of deputy finance ministers to Moscow to insist that Soviet era debts be honored. 
To show that the new Russia stood for civilized values, Yeltsin refused to repudiate the country’s external obligations as the Bolsheviks had in 1917. 
While unilateral debt repudiation by Russia in 1991-92 would have been wrong, revolutionary conditions in Russia called for far-sighted debt forgiveness by the West. 
Indeed, Poland received just that in 1991. 
No such favor was shown Russia, which was reduced to economic/political meltdown by year’s end. 
It was argued - then as now - that debt relief depended on Russia implementing (IMF-approved) economic reform programs aimed at restoring creditworthiness. 
Russia’s government under Yegor Gaidar launched such a program in January 1992. 
By the time the IMF approved anything, however, Gaidar had been ousted by a fierce political reaction. 
Only in 1996, was the scale of Russia’s inherited Soviet debt burden acknowledged in the form of 25-year rescheduling agreements concluded with the Paris and London clubs of government and commercial creditors. 
The collapse of Russia’s GDP in dollar terms (from about $430 billion to less than $130 billion) as a result of 1998's ruble devaluation, however, left Russia unable to make even these reduced payments. 
In 1999, debt service payments reached about 80% of planned tax revenue. 
Just as the oil price fall sparked by 1997's ‘Asian’ crisis contributed to Russia’s default and devaluation of 1998, so soaring prices for oil and other commodities restored Russia’s debt service capacity this year. 
But a downturn in prices is only a matter of time (indeed, for many non-oil commodities, it has already happened). 
Instead of shortsightedly focusing on Russia’s seeming current ability to pay, the West should commit itself to fostering a supportive environment for Putin’s reform drive. 
Will Russia’s official creditors be less blinkered than in 1991-92? 
There is no doubt that Putin means business on structural reform. 
His political resources are far greater than Yeltsin ever had. 
Indeed, Putin has taken advantage of his legitimacy, popularity, and working majority in the State Duma (federal parliament) to force through radical tax reform and a continued tight fiscal policy in the 2001 budget. 
New stability and confidence are underpinning buoyant investment and (amounting to the same thing) reducing capital flight. 
Mountains remain to be climbed. 
Discipline and restructuring must be imposed on the so called natural monopolies: railways, power utilities and, above all, Gazprom - the country’s largest company, and in which there is overwhelming evidence of theft by managers. 
Effective corporate governance must be required by law, and those laws enforced. 
Corruption must be combated by cutting red tape and overhauling the judiciary. 
A land market must be created virtually from scratch. 
The same goes for the banking system, which today consists of little besides an inefficient, state-owned virtual monopolist. 
Russia’s Paris Club creditors are right in seeking a new IMF arrangement to keep Putin on track and create the discipline of monitored performance. 
It is also right that Paris Club creditors receive meaningful repayment. 
But they cannot expect repayment in full and on time as Russia is doing for its ‘own’ - ie, post-Soviet - debt. 
The London Club (banks and investors holding $32 billion of commercial Soviet-era debt) wrote off 36.5% of this debt earlier this year, and rescheduled the remainder over thirty years. 
Germany has set its face against forgiving any debt, but real relief can still be given by a comprehensive long-term rescheduling. 
A fair deal is one that won’t strangle Russia’s prospects for sustaining economic recovery. 
For without continuing growth there is little hope for implementing the long-term reforms necessary to complete Russia’s escape from the Soviet system and so allow its people the chance to live normal, decent lives. 

It's not the economy, stupid! 
Gerhard Schröder will remain the German Chancellor, but his majority in Parliament has become extremely narrow. 
His Social Democrats (SPD) got 38.5 per cent of votes, and so did the Christian Democrats (CDU/CSU) of his rival candidate Edmund Stoiber. 
The main reason why Schröder won is that his coalition partner, the Greens, became slightly stronger than the Free Democrats (FDP) who would otherwise most probably have formed a center-right government with the CDU/CSU. 
Heads or tails? 
It looks as if the German electorate had refused to make up their mind and had instead tossed up a coin. 
As a result, the SPD was weakened and the CDU/CSU strengthened - and now, nobody knows exactly what most Germans do want. 
While Parliament majorities in other EU member states like Britain, France, Italy and Spain are clear, they are not in Germany. 
This seems to be symptomatic of the country's state of mind: it is blocked. 
The election result may have fixed that paralysis for the next term of Parliament (2002 - 2006). 
The preceding election campaign had foreshadowed that outcome. 
It was about everything, except for Germany's real and pressing problems. 
Schröder, who still seemed to be on the losing side in August, desperately tried to get rid of what were the most dangerous issues for him, namely, low growth and high unemployment. 
He finally succeeded in doing so when he chose to campaign on an anti-American platform, declaring that under his Chancellorship Germany would not support any use of force against Iraq even if a military campaign were authorised by the UN. 
It's not the economy, stupid! 
It is the first time in post-war German history foreign policy has played such a crucial role in federal elections. 
Certainly Konrad Adenauer was successful in the 1950s with his politics of Western integration, and so was Willy Brandt with his Ostpolitik in the early 1970s. 
But these were sustainable strategies, not tactical pirouettes. 
They proved the Federal Republic to be a responsible player in European and world politics and strengthened its international reputation. 
This time, the issue was not involvement but disengagement. 
By asserting what he called the "German course" (deutscher Weg) , deliberately dissociating himself from British and French initiatives and openly rousing anti-American feelings, Schröder not only appealed to old resentments on the left, but also addressed a neutralist mood in the German population at large, especially among East Germans. 
All his predecessors, including the Social Democrats Willy Brandt and Helmut Schmidt, had fought that German "leave me alone" (ohne mich) version of pacifism. 
Schröder has been the first post-war Chancellor to exploit it for campaign purposes. 
For the Federal Republic, Schröder's anti-American tactics may have caused strategic damage. 
But in purely Machiavellian terms, his modest success shows he was right. 
The East German voters were not only impressed by his decisive handling of severe floods in August, but also by his ad hoc neutralism with regard to Iraq in September. 
They saved him from defeat; a narrow majority of West German voters preferred the CDU/CSU (40.8 percent) to the SPD (38.3) and a center-right coalition (48.4) to a "red-green" one (47.7). 
Twelve years ago, during and after reunification, the question was whether the German colossus would be tempted to establish first an economic and then a political hegemony over the continent. 
These fears have turned out to be mistaken. 
Today, German strength is not a matter of concern; German weakness is. 
The plain truth is that Germany is lacking any kind of expansionary drive. 
It has lost much of its former reputation as a model of economic efficiency. 
Meanwhile, it has become more inward-looking than ever. 
So the good news that nobody has to be afraid of Germany is accompanied by bad news: Unintentionally, the colossus is exerting a kind of passive hegemony; his lethargy is slowing down Europe's dynamism. 
Being the EU's biggest member state, however, Germany cannot afford parochialism - in its own as well as in Europe's interest: 
Germany must begin to understand that the long overdue domestic reforms - that is, the bold modernisation of its welfare state, labor market and system of education - would work like a vitamin shot for its partners, too, not least for the European Economic and Monetary Union of which it is the most important member. 
Germany cannot help answering the question what role it is willing to play in the shaping of an enlarged European Union. 
When the treaty on the incorporation of ten new members into the EU will be debated in 2003, will Schröder, the center-left populist, be prepared to firmly resist the likely public sentiment against letting in neighbours from the East? 
Germany must commit itself to the strengthening of the EU's role as a global player. 
Without Germany's intellectual, financial and military contribution, the EU, an economic giant, will remain a political dwarf in world affairs. 
Instead of complaining about American unilateralism, as Schröder did during the election campaign, Germany should help overcome the EU's irrelevance in matters of global security and defense. 
One of the first things Schröder will have to do after the "red-green" majority in Parliament has re-elected him is to repair the unparalleled damage he has done to German-American relations. 
The point is not that Berlin should humbly accept whatever Washington says. 
But it is Berlin that has to do the first step towards resuming dialogue with Washington after Schröder slammed the door. 
Secondly, Berlin will have to reconnect with Paris. 
The 40 th anniversary of the Franco-German Elysée treaty in January next year will be a good formal opportunity to do so. 
The aim is not to create a bilateral hegemony over the enlarged EU. 
What is at stake is the ability of the EU to speak with one voice and act as one body vis-à-vis other powers, whether friends or not. 
During the last couple of years, the Franco-German relations have dramatically deteriorated; as a consequence, it has become visible that the revitalisation of this special relationship is the necessary (though not sufficient) condition for the EU to become a relevant player in world politics. 
Finally, Schröder and his government will have to find new ways of coping with the many vested interests that have until now obstructed all major attempts to thoroughly modernize German economy and society. 
Looking back to the four "red-green" years since 1998, one has to conclude that the neocorporatist style of "round-table" agreements between Big Business, Big Labour, and Big Government no longer works. 
The structurally conservative network of intertwined institutions lacks the flexibility and creativity needed to give an innovative answer to globalization. 
Therefore, it's a pity that the German voters refused to endow the new Berlin government with a clear mandate to start fighting against the army of domestic veto powers. 

It’s Politics, Not a Pogrom 
MOSCOW: First it was Yids (Jews). 
Then the Romanovs, the nobility, and the kulaks. 
After 1991, it was Lenin and the communists. 
Now, it seems, its is the turn of the Jews again. 
Like history in the old saying, Russian hatreds repeat themselves. 
Luckily, the other half of that saying also appears to be true, for Moscow’s most recent bout of anti-Semitism is a case of history repeating itself, not as tragedy, but as farce. 
The October Revolution of 1917, with its attractive slogans of internationalism, multi-culturalism and ethnic equality was a liberating time for Russian Jews. 
It didn’t last long. 
With Lenin's death in 1924, Stalin embarked on another round of chest thumping for "Russia's Greatness". 
This chauvinist period, however, lasted for over six decades, and was marked by quotas for all those with not-quite-Russian-sounding names. 
Jews in particular were restricted in their numbers at universities, research institutes, the foreign service, and in government. 
One notation in the Soviet passport was a sad reality for those who could not list themselves as Russian under "nationality," but were, instead, labeled "Georgian" or "Armenian" or, God forbid a policeman was examining it, "Jewish." 
No talking your way out of trouble with that in your documents. 
The August revolution of 1991 appeared to undo much of the anti-Semitic nastiness imposed since 1917. 
Other nationalities, including people of Jewish origin, began to appear in the political spotlight. 
Chubais, Livshitz, Nemtsov, Yavlinksy, and Kiriyenko among the reformers. 
Berezovsky and Guzinsky among the new plutocrats. 
Vladimir Zhirinovsky among the ranting would-be fascists. 
Russia, freed from its ethnic and mental straitjacket, was letting its most resourceful, entrepreneurial, vibrant, and yes, cynical, citizens climb to the top. 
With so many "different" names bestriding society, it is no surprise that some Russians, reared on the endemic paranoia of communism, smelled a conspiracy. 
The hysterical Zhirinovsky, denying his roots, said "Jews are the most powerful, the most talented and the most rich," and so were able to take over in 1917 and again after 1991. 
Communists, too, following the good old Russian slogan "kill the Yids, save Russia" insisted that, yes, the Jews were conspiring, once again, to ruin Russia. 
So communist General Albert Makashov’s recent remarks that "the Russian Government should impose quotas on hiring non-ethnic Russians" should not have been surprising. 
No, the surprise was that it took so long for communists to trot out this old card, and that the echo was so feeble. 
The two leading "nationalist" candidates for president in 2000- Aleksander Lebed, and Moscow mayor Yuri Luzhkov - were conspicuous in not picking up this old battle cry. 
That the Communist party leader Gennady Zyuganov didn't rebuke Makashov right away, and that the Duma voted against depriving the general of his parliamentary immunity and special rights (it did, however, pass a resolution against stirring up ethnic conflicts, mentioning Makashov by name) probably reflects mental inertia rather than outright support. 
For Duma members, the majority being communist, there yet remains the notion that only they, as communists, represent the country. 
Everyone else really isn’t Russia at all. 
Here the old Leninist idea is in play: the party isn’t just part of society, it is society. 
As for Zyuganov, he couldn’t publicly disagree with a party member, again on hoary Leninist grounds: division within the party will bring an end to the party. 
What is surprising though is the reaction (at home and abroad) to General Makashov’s tantrums and the actions and inactions in the Duma and Communist Party. 
Over more than a month every TV show, every newspaper in Russia and abroad has been discussing, condemning, and thus reinforcing the incident. 
This focus has, however, smoked out what may be the real target of communist rage: the media. 
Another communist Duma deputy, the First Secretary of the city of Moscow’s communist organization, Alexander Kuvaev called for the formation of a special organization to deal with journalists who "sold themselves to the regime, and have become the enemies of the people." 
War to the last breath was declared by Kuvaev on the media, and he was soon echoed by the feral Makashov, who suddenly found reporters "acting worse than the worst of the Yids." 
Here Zyuganov reacted quickly, saying that "prosecution is not the tool communists should exercise, and the Communist Party is the party of the future, not the party of revenge." 
The saddest part of this rhetoric of hate is not that pogroms are poised to be unleashed, but that so little has changed for so many in their mindsets. 
People continue to think in ways typical to authoritarian/totalitarian regimes, where blaming others is the standard escape for your own inadequacies, and where anyone who is even the slightest bit different may be an enemy. 
So the search for scapegoats proceeds, not in earnest and with energy, but as a reflex, the death throes of the old ways of doing things. 
For the cries of the anti-Semites cannot hide the fact that the man the Communists now support as prime minister, Yevgeny Primakov, is himself of Jewish origins. 
No, what is important is not the rants of men like Makashov and Kuvaev, but the ditherings of Zyuganov and the general silence of the Duma. 
In that, there is a sign that even the Communists recognize that, at the end of one century and the beginning of a new one, the old vulgar tricks are not enough. 

Italian Politics and Europe’s Future 
NEW YORK – More than ever, the European Union needs unity to assert its values and interests in an age when US global leadership is on the verge of collapse, China is ascendant, and Russia wavers yet again between cooperation and confrontation with the EU. 
Divided, the EU is a mere helpless spectator to geopolitical upheaval. 
United, the EU can play a critical global role, as it uniquely combines prosperity, democracy, environmentalism, innovation, and social justice. 
And whether the EU regains unity of purpose, or instead spirals into disarray, will depend on what happens now in Italy. 
Italy’s pivotal role stems from its position at the geographic divide between northern Europe’s prosperity and southern Europe’s crisis, and the intellectual and emotional divide between an open Europe and one trapped again by nationalism, prejudice, and fear. 
Italy stands also at the political divide, with an insurgent new party, the Five Star Movement (M5S), sharing the political stage with the right-wing, anti-immigrant, and anti-EU League party and the pro-EU but greatly weakened center-left Democratic Party. 
The insurgent M5S finished first in the March 4 parliamentary vote with an astounding 33% of the vote, compared to 19% for the Democrats and 17% for the League. 
The implications of M5S’s strong victory are a topic of heated debate in Italy and around Europe. 
Throughout the EU, traditional center-left and center-right pro-EU parties are losing votes. 
Just as in Italy, anti-EU nationalist parties like the League are gaining votes, and anti-establishment insurgencies like M5S – for example, Podemos in Spain, and Syriza in Greece – are either winning power outright or holding the balance of power between traditional pro-EU mainstream parties and anti-EU nationalist parties. 
There are three reasons for Europe’s changing politics. 
The first, and perhaps least recognized, is a generation of disastrous US foreign policy in the Middle East and Africa. 
After the Cold War ended in the early 1990s, the US and local allies aimed to establish political and military hegemony in the Middle East and North Africa through US-led wars of regime change in Afghanistan, Iraq, Syria, Libya, and elsewhere. 
The result has been chronic violence and instability, leading to massive refugee flows into Europe that have upended politics in one EU member state after another. 
The second reason is Europe’s now chronic under-investment, especially by the public sector. 
Under former Finance Minister Wolfgang Schäuble, a self-satisfied and economically successful Germany blocked European-wide investment-led growth, and turned the eurozone into a debtors’ prison for Greece and a dispiriting zone of stagnation for much of southern and eastern Europe. 
With the EU’s economic policy limited to austerity, it’s not hard to see why populism has taken root. 
The third reason is structural. 
Northern Europe innovates, while southern and eastern Europe by and large do not, or at least not nearly at the same rate. 
Italy straddles the two sides of Europe: a dynamic north, and chronic malaise in the south (the Mezzogiorno). 
This is an old story, but also an ongoing one. 
It helps to explain the frontlines of EU politics. 
The M5S was triumphant especially in Italy’s stagnating south. 
My political predilections lie with social democracy. 
I blame conservatives like Schäuble for driving voters into the arms of populist parties. 
Yet too many mainstream social-democratic leaders went quietly along with Schäuble. 
I also fault Chancellor Angela Merkel and other European leaders for failing to speak strongly enough against the US-led wars in the Middle East and North Africa. 
European leaders should have been much more energetic at the United Nations in opposing America’s hegemonic policy in the Middle East, with its catastrophic effects, including mass displacement and refugee movements. 
Advocates of a strong and vibrant EU – and I am firmly among them – should be rooting for the insurgent parties to join forces with the weakened traditional social-democratic parties in order to promote sustainable development, innovation, and investment-led growth, and to block anti-EU coalitions. 
Or, as in Germany, they should urge the grand coalition of center-left and center-right parties to become much more dynamic and investment-oriented at European scale, both for the sake of economic good sense and to combat far-right nationalists. 
Or, as in France, they should cheer the amalgamation of pro-EU traditionalists and insurgents in President Emmanuel Macron’s La République En Marche ! 
Such pro-EU alignments give the EU time to reform its institutions, stake out a common foreign policy, and initiate investment- and innovation-led green growth in place of austerity and complacency. 
Traditional social-democratic parties mostly shun the new insurgent parties, viewing them as populist, irresponsible, opportunistic, and dishonest. 
Such is the view in Italy on the part of the Democrats, with key politicians rejecting a coalition with M5S. 
That is understandable: the upstarts thoroughly defeated the Democrats at the polls, often with outsize populist promises. 
Yet the social democrats have been flaccid and even silent in the face of Schäuble-style austerity and irresponsible US-led wars. 
The traditional social-democratic parties will have to regain their dynamism and appetite for risk-taking to win again at the polls as true progressive parties. 
The stakes in Italy are high. 
With Europe politically and geographically divided, Italy’s politics could tip the balance. 
A pro-EU Italy governed by an M5S-Democrat coalition could join with France and Germany to reform the EU; regain a clear foreign-policy voice for EU vis-à-vis the US, Russia, and China; and implement a strategy for green, innovation-based growth. 
To forge such a coalition, the M5S would have to adopt a responsible and clearly defined economic program, and the Democrats would have to accept being the junior partner of an untested insurgent force. 
A possible key to mutual confidence would be for the Democrats to hold the crucial finance ministry, while M5S appoints the prime minister. 
It is not surprising that US President Donald Trump’s utterly reckless former adviser, Stephen Bannon, rushed to Italy to encourage M5S and the League to form a coalition that he called the “ultimate dream,” because it would break the EU. 
That by itself should remind Italians of the importance of a pro-EU coalition that rejects such miserable nightmares. 

Will More Italians Vote With Their Feet? 
MILAN – Italy’s inconclusive general election, with its clear populist drift, will likely lead to a prolonged period of political stalemate, freezing the adoption of much-needed structural reforms. 
But the deadlock, and the related perception that the country is unwilling to change, might have another chilling effect. 
It will push more of Italy’s top talent abroad, exacerbating a trend that has plagued the country for more than a decade. 
Since 2007, almost 1.5 million Italians have left the country, joining four million other expats. 
To put the number in perspective, roughly 8% of the Italian population currently resides abroad. 
But the actual figure could be higher. 
Italian expats refrain from declaring to national authorities their true residential status to preserve their access to benefits like free health care. 
Around one-third of these émigrés hold university degrees. 
Many are highly qualified professionals working in finance, consulting, academia, architecture, or law. 
And stories about Italian entrepreneurs who found successful companies in the world’s Silicon Valleys are legion. 
France, Germany, the United Kingdom, and the United States are the main magnets. 
London, is said to be Italy’s fifth-largest city – after Rome, Milan, Naples, and Turin – with roughly 250,000 Italians. 
Not even Brexit has halted immigration from Italy, contrary to the prevailing trends in Western Europe. 
This is a clear symptom of the dissatisfying conditions back home, where a rigid labor market, inadequate funding for academic research and start-ups, and a socioeconomic system biased toward the old prevent individuals from expressing their full potential. 
But Italy is not just losing skilled, ambitious, and visionary workers. 
Its intellectual elite is pouring out of the country, too. 
OECD data for the years 1996-2011 show that, among the largest European countries, Italy is a net contributor of scientists to the rest of the world. 
Making matters worse, it trades researchers with a track record of highly significant publications for mediocre ones. 
In economics, seven of the eight recipients of the Carlo Alberto Medal, which is awarded biennially to an outstanding Italian economist under the age of 40, were teaching in elite foreign universities. 
And when one looks at the very top of the talent distribution, the situation is even more disheartening. 
With few exceptions, Italian recipients of Nobel prizes, the Fields Medal in mathematics, the Pritzker Prize in architecture, or the Breakthrough Prize in life sciences have spent their careers abroad. 
The loss for the country is twofold. 
First, those who leave are usually educated in Italy at government expense: around $600,000 for the full school career of each college graduate. 
It is as if the country had lost 4-5 percentage points of GDP each year since 2007. 
Second, because expats are usually the least satisfied with the status quo, Italy loses the most likely agents of change – those who would disrupt a stagnant economy and push the technology frontier outward. 
If Italy’s president, Sergio Mattarella, succeeds in pushing for a government of national unity, he should put the brain drain problem at the top of the political agenda, along with the labor market, the financial sector, and the pension system. 
Being an issue of national concern, no political force would obstruct it. 
And to prove the government’s commitment to the issue, the next prime minister should expand the government team by appointing a diaspora minister. 
Ideally, Italy should reverse the brain drain by adopting the necessary reforms to retain and re-attract its own talent. 
But, even if the current parliamentary constellation were more reform-minded, the effects of such measures would materialize only in the long term. 
The diaspora ministry should focus instead on short-term fixes, like engagement policies and leveraging expats’ emotional attachment to their homeland. 
Even from afar, they can contribute to Italy’s renewal by increasing the flow of knowledge, money, and innovation back home, promoting the national interest internationally, connecting local businesses with the global market, and helping build partnerships with research centers or private companies abroad. 
And one day, if true change happens, they might even decide to return home. 
The new ministry should map the diaspora and compile detailed profiles of the skills and expertise possessed by Italy’s top minds abroad. 
Thus, it would be possible to assess the severity of the brain drain, build a bridge with potential employers at home, and involve the most successful émigrés in philanthropic and mentorship projects. 
In addition, the government should organize on a regular basis formal events with expats and exploit their ideas and experience to promote innovation, entrepreneurship, and the growth of key industries. 
Ireland represents the best source of inspiration for such a program. 
Since 2009, Ireland has maintained a program called “Global Irish” to promote engagement with the country’s massive diaspora through the establishment of an ad-hoc ministry and the adoption of targeted measures like the Global Irish Economic Forum. 
Ireland’s impressive recovery from the financial crisis a decade ago would have not been possible without the support, recommendations, and engagement of its diaspora. 
For too long, Italy has ignored its brain drain. 
Paradoxically, the current stalemate provides an excellent opportunity to address it. 

What Italy’s Election Means for the EU 
ROME – Italy’s recent election – in which voters rebuffed traditional parties in favor of anti-establishment and far-right movements, producing a hung parliament – should serve as a wake-up call for Europe. 
The decades-old project of building European unity may not just be far less robust than assumed; without a significant rethink, it may not even be viable. 
The financial crisis of 2008 and the debt crisis that followed revealed major flaws in the governance of the Economic and Monetary Union (EMU). 
Member states responded by building new institutions, such as the Single Supervisory Mechanism and the European Stability Mechanism. 
These efforts are, however, almost certainly inadequate to make the EMU resilient enough to withstand future financial crises. 
Anyone who believes in the European project should hope that further reforms follow soon. 
But there is an even more urgent task at hand. 
The European Union (EU) and the EMU, in particular, are now facing a serious political challenge, exemplified by Italy’s recent election. 
Are European institutions strong enough to confront that challenge, or must we reconsider – and potentially recast – the pillars of European cooperation? 
The link between economic and political crises is well known. 
Among EU countries, Italy has experienced the second-largest decline in output (after Greece) during the last decade – a trend that caused a significant deterioration in economic welfare. 
And, as recent research indicates, a decline in welfare correlates more strongly with political support for populists than its absolute level. 
In this sense, economic crises are almost bound to undermine political stability. 
But the risk is particularly acute in the EU, because populist political forces, should they win power, are likely to reject, in the name of national sovereignty, the supranational rules that form the basis of European institutions. 
In the face of such noncompliance, the EU’s only recourse is sanctions – a temporary solution that is inadequate to keep in check governments that have based their political platforms on disavowing common EU rules. 
In fact, such sanctions can even serve to strengthen public support for the populists. 
This dynamic is illustrated by the current row over immigration between the EU and some of its eastern members, such as Hungary and Poland. 
Of course, if the rules being broken are fiscal, the markets might impose the necessary discipline, as happened in 2011-2012. 
But today, the ongoing economic recovery – and the fact that governments and central banks hold the majority of countries’ debts – makes such a market response far from guaranteed. 
Complicating matters further for the EU are regional disparities, like those starkly on display in Italy’s recent election. 
While anti-establishment political parties did well across Italy, reflecting broad frustration with the mainstream parties, there was also a distinct north/south divide. 
Italy’s industrial north favored the far-right League party, which favors tax cuts and opposes immigration. 
By contrast, Italy’s economically deprived southern regions – where youth unemployment has, in some areas, reached nearly 60% – voted overwhelmingly for the Five Star Movement, which advocates a guaranteed basic income and condemns the corruption of local elites. 
Regional inequalities are not limited to Italy. 
On the contrary, they have increased throughout the EU since the 1980s. 
And the EU does have a budget for reducing them, which it uses to support its cohesion policies. 
But while measures encouraging economic convergence have been successful in many jurisdictions, they have failed in others, such as southern Italy, precisely because of the institutional weakness and widespread corruption that the populists decry. 
As anyone with experience in development policy knows, fiscal transfers cannot generate convergence growth, unless they are backed by deep societal changes – and that demands active local leadership. 
It is thus significant that Italian voters threw their support behind those who decried the abuse of power by local elites and traditional parties, instead of believing that those local elites, let alone the faraway EU, can fix the problem. 
This might seem to imply that the EU needs to be able to impose looser terms of cooperation, including fewer benefits from membership. 
But while that might work for, say, Hungary, it would be inconceivable for an EMU member like Italy. 
In any case, if the EU is to survive long enough to implement the needed institutional reforms, it will to have to find ways to make the project more appealing for all. 

The Italian Economy’s Moment of Truth 
MILAN – Italy and Europe are at an inflection point. 
After an election in March in which the anti-establishment Five Star Movement (M5S) and the far-right League party captured a combined parliamentary majority, followed by months of uncertainty, Italy has become the first major EU member state to be governed by a populist coalition. 
M5S and the League both openly question the benefits of eurozone membership, though neither party made leaving the euro a specific commitment of their governing program in the election campaign, a failure that Italian President Sergio Mattarella seized upon in vetoing key cabinet pick. 
They also disdain globalization more generally. 
The League, in particular, is obsessed with cracking down on immigration. 
On the domestic front, both parties have promised to tackle corruption and topple what they see as a self-serving political establishment, while introducing radical policies to reduce unemployment and redistribute incomes. 
Still, we won’t know the precise dimensions of the M5S/League agenda until the populist coalition begins governing in earnest. 
There are rumors that the parties want to write down Italy’s sovereign debt, which currently stands at a relatively stable level of just over 130% of GDP. 
If they did, a Greek-style confrontation with the European Union would seem certain to follow, with interest rates and spreads on Italian sovereign debt increasing rapidly, especially if the European Central Bank decided that its mandate precluded it from intervening. 
In such a scenario, Italian banks currently holding considerable amounts of government debt would suffer substantial balance-sheet damage. 
The risk of deposit flight could not be excluded. 
Unlike most eurozone countries, Italy’s nominal (non-inflation-adjusted) growth is too weak to produce substantial deleveraging, even at today’s low interest rates. 
Other things being equal, a rise in nominal interest rates would thus produce rising debt ratios and further constrain the government’s fiscal space, with adverse knock-on effects for growth and employment. 
And, unlike most of the rest of Europe, Italy’s real per capita GDP remains well below its 2007 pre-crisis peak, indicating that the restoration of growth remains a key challenge. 
Whether any of the risks Italy now faces will materialize depends on whether the incoming government accepts reality and pursues prudent action and policies to spur more inclusive growth. 
The outcome in Italy resonates beyond Europe, because political developments there are consistent with a worldwide retreat from globalization and growing demands for national governments to reassert control over the flow of goods and services, capital, people, and information/data. 
Looking back, this worldwide trend seems to have been inevitable. 
For years, global market forces and powerful new technologies have plainly outstripped governments’ capacity to adapt to economic change. 
Broadly speaking, then, Italy’s situation is not unique. 
And yet, more than many other countries, it desperately needs an agenda that ensures macroeconomic stability and encourages inclusiveness growth. 
That means more employment, more equitably distributed incomes and wealth, and more entrepreneurial opportunities. 
Without greater economic inclusiveness, Italy could soon find that its leading export is talented young people. 
Mobile workers in their prime will seek outlets for their skills, creativity, and entrepreneurial impulses elsewhere, and Italy will have lost one of the principal engines of economic dynamism, growth, and adaptability. 
Outside of financial and economic circles, foreigners tend to see a different and important side of Italy. 
They see a country of stunning beauty that is rich in intangible assets, culture, and creative industries, and home to many of the world’s most sought-after travel destinations. 
Those in academia or certain business sectors know about its centers of excellence in biomedical science, robotics, and artificial intelligence, and that Italian researchers, technologists, and entrepreneurs figure prominently in innovation hubs worldwide. 
And others are no doubt aware that Italian governments tend to come and go rather frequently, and that the economy and society have rarely suffered undue disruptions as a result. 
In fact, international observers and Italians would all agree: Italy has enormous economic potential. 
But the challenge lies in unlocking it, which will require several things to happen. 
For starters, the Italian government needs to root out corruption and self-dealing, and demonstrate a much stronger commitment to the public interest. 
The populists are probably right about these problems. 
And they are probably right that a reassertion of greater sovereignty over the key flows of globalization is necessary to counter the centrifugal political, social, and technological forces sweeping across advanced countries. 
Moreover, Italy needs to develop the entrepreneurial ecosystems that underpin dynamism and innovation. 
As matters stand, the financial sector is too closed, and it provides too little funding and support for new ventures. 
There are major opportunities in e-commerce, mobile-payment systems, and social-media platforms to lower entry barriers and promote innovation. 
China, for its part, is rapidly advancing in these areas, creating significant opportunities for young people in the process. 
Of course, with any digital technology, there are justifiable concerns about data security, privacy, and bad actors bent on manipulating information to undermine social cohesion and democratic institutions. 
But these issues should not stand in the way of realizing digital technology’s tremendous potential as an engine of inclusive growth. 
Finally, it is worth noting that collaboration between government, business, and labor has played a key role in the countries that have adapted better to globalization and technology-induced structural change. 
To be sure, collaboration requires trust, and trust is established gradually over time. 
But without it, economic structures ossify, productivity lags, competitiveness suffers, and activity in tradable goods and services migrates elsewhere. 
At this stage, uncertainty about the future is inevitable. 
But unless a country is prepared to accept long-term stagnation, failing to adapt to the coming changes is not an option. 
With a clear mandate for change, Italy’s new government could implement a vigorous, pragmatic, long-term policy agenda to produce inclusive growth. 
Otherwise, the country’s great potential will continue to fall short of being fully realized. 


Italy’s Slow-Motion Euro Train Wreck 
NEW YORK – The arrival in power of a populist, Euroskeptic government in Italy has focused investors’ minds like few other events this year. 
The yield differential, or spread, between Italian and German bonds has widened sharply, indicating that investors view Italy as a riskier bet. 
And Italian equity prices have fallen – particularly in domestic bank shares, the best proxy of country risk – while insurance premia against a sovereign default have increased. 
There are even fears that Italy could trigger another global financial crisis, especially if a fresh election becomes a de facto referendum on the euro. 
Even before Italy’s March election, in which the populist Five Star Movement (M5S) and the right-wing League party captured a combined parliamentary majority, we warned that the market was being too complacent toward the country. 
Italy now finds itself in more than just a one-off political crisis. 
It must confront its core national dilemma: whether to remain shackled by the euro or try to reclaim economic, political, and institutional sovereignty. 
We suspect that Italy will compromise and remain in the eurozone in the short run, if only to avoid the damage a full-scale rupture would cause. 
In the long run, however, the country could increasingly be tempted to abandon the single currency. 
Since Italy returned to the European Exchange Rate Mechanism in 1996 – after withdrawing from it in 1992 – it has surrendered its monetary sovereignty to the European Central Bank. 
In exchange, it has enjoyed much lower inflation and borrowing costs, resulting in a dramatic reduction in interest payments – from 12% of GDP to 5% – on its massive public debt. 
Still, Italians have long been uncomfortable with the lack of an independent monetary policy, and that sense of lost control has gradually overshadowed the advantages of euro membership. 
The adoption of the euro has had massive implications for the millions of small and medium-size enterprises that once relied on periodic currency devaluation to offset the inefficiencies of Italy’s economic system and remain competitive. 
The inefficiencies are well-known: labor-market rigidities, low public and private investment in research and development, high levels of corruption and of tax evasion and avoidance, and a dysfunctional and costly legal system and public bureaucracy. 
And yet several generations of Italian political leaders have cited “external constraint,” rather than domestic necessity, when pushing through the structural reforms required for euro membership – thereby reinforcing the sense that reforms have been imposed on Italy. 
The loss of monetary sovereignty means there are effectively two chains of political command in Italy. 
One extends from the German government, through the European Commission and the ECB, down to the Italian presidency, treasury, and central bank. 
This “institutional” chain of command ensures that Italy meets its international commitments and maintains strict adherence to EU fiscal rules, regardless of domestic political developments. 
The other chain of command starts with the Italian prime minister and extends through the government ministries that are responsible for domestic affairs. 
In most cases, the two chains of command are aligned. 
But when they are not, a conflict inevitably ensues. 
Hence the current crisis, which came to a head when the prime minister-designate tried to appoint the Euroskeptic economist Paolo Savona as Italy’s next economy and finance minister without first consulting the other chain of command. 
The appointment was duly rejected by the Italian president. 
Let us return to the question of whether Italy will now choose to break free of its straitjacket. 
Despite the euro’s advantages, it has not delivered for Italy economically. 
Italy’s real (inflation-adjusted) per capita GDP is currently lower than it was when the euro experiment began in 1998, whereas even Greece has managed to register growth, despite its depression from 2009 onward. 
Some would explain this poor performance by arguing that the eurozone is an incomplete monetary union, and that its “core” countries like Germany drain labor and capital from “periphery” countries like Italy. 
Others might counter that Italians failed to conform to the rules and standards, and to implement the reforms, upon which a successful monetary union is based. 
But the real explanation no longer matters. 
The prevailing narrative in Italy holds the euro responsible for the country’s economic malaise. 
And political parties that have either openly or implicitly called for leaving the eurozone currently hold a parliamentary majority, and would likely retain it in another election later this year or in early 2019. 
If Italians were confronted with the choice of retaining or abandoning the single currency, recent polls suggest that they would initially decide to stay, for fear of a run on Italian banks and public debt, as Greece experienced in 2012-2015. 
But the long-term costs of remaining in a club dominated by inherently deflationary, German-dictated rules might tempt Italians to leave. 
That decision could come in the midst of another global financial crisis, recession, or asymmetric shock that pushes several fragile countries out of the euro at the same time. 
Like the United Kingdom’s Brexiteers, Italians might convince themselves that they have what it takes to succeed on their own in the global economy. 
After all, Italy has a large industrial sector that is capable of exporting worldwide, and exporters would benefit from a weaker currency. 
Italians might be tempted to think: Why not escape the euro before those industries fold or end up in foreign hands, as is already happening? 
If Italians do eventually go down this path, the immediate costs will be borne by domestic savers, whose nest eggs will be redenominated in depreciated liras. 
And the costs would be still greater if an Italian exit precipitated another financial crisis with bank holidays and capital controls. 
Faced with these possibilities, Italians – like the Greeks in 2015 – might blink and stay. 
But they also might decide to close their eyes and take the plunge. 
Though Italy would be better off staying in the eurozone and reforming accordingly, we fear that an exit could become more likely over time. 

Roman Europe? 
BERLIN/VENICE – As the European Union begins to disintegrate, who can provide the leadership to save it? 
German Chancellor Angela Merkel is widely credited with finally answering Henry Kissinger’s famous question about the Western alliance: “What is the phone number for Europe?” 
But if Europe’s phone number has a German dialing code, it goes through to an automated answer: “Nein zu Allem.” 
This phrase – “No to everything” – is how Mario Draghi, the European Central Bank president, recently described the standard German response to all economic initiatives aimed at strengthening Europe. 
A classic case was Merkel’s veto of a proposal by Italian Prime Minister Matteo Renzi to fund refugee programs in Europe, North Africa, and Turkey through an issue of EU bonds, an efficient and low-cost idea also advanced by leading financiers such as George Soros. 
Merkel’s high-handed refusal even to consider broader European interests if these threaten her domestic popularity has become a recurring nightmare for other EU leaders. 
This refusal underpins not only her economic and immigration policies, but also her bullying of Greece, her support for coal subsidies, her backing of German carmakers over diesel emissions, her kowtowing to Turkey on press freedom, and her mismanagement of the Minsk agreement in Ukraine. 
In short, Merkel has done more to damage the EU than any living politician, while constantly proclaiming her passion for “the European project.” 
But where can a Europe disillusioned with German leadership now turn? 
The obvious candidates will not or cannot take on the role: Britain has excluded itself; 
France is paralyzed until next year’s presidential election and possibly beyond; and Spain cannot even form a government. 
That leaves Italy, a country that, having dominated Europe’s politics and culture for most of its history, is now treated as “peripheral.” 
But Italy is resuming its historic role as a source of Europe’s best ideas and leadership in politics, and also, most surprisingly, in economics. 
Draghi’s transformation of the ECB into the world’s most creative and proactive central bank is the clearest example of this. 
The enormous program of quantitative easing that Draghi pushed through, against German opposition, has saved the euro by circumventing the Maastricht Treaty’s rules against monetizing or mutualizing government debts. 
Last month, Draghi became the first central banker to take seriously the idea of helicopter money – the direct distribution of newly created money from the central bank to eurozone residents. 
Germany’s leaders have reacted furiously and are now subjecting Draghi to nationalistic personal attacks. 
Less visibly, Italy has also led a quiet rebellion against the pre-Keynesian economics of the German government and the European Commission. 
In EU councils and again at this month’s International Monetary Fund meeting in Washington, DC, Pier Carlo Padoan, Italy’s finance minister, presented the case for fiscal stimulus more strongly and coherently than any other EU leader. 
More important, Padoan has started to implement fiscal stimulus by cutting taxes and maintaining public spending plans, in defiance of German and EU Commission demands to tighten his budget. 
As a result, consumer and business confidence in Italy have rebounded to the highest level in 15 years, credit conditions have improved, and Italy is the only G-7 country expected by the IMF to grow faster in 2016 than 2015 (albeit still at an inadequate 1% rate). 
Padoan has more recently created an imaginative public-private partnership to finance a desperately needed recapitalization of Italy’s banks. 
And he has launched his initiative without waiting for approval from ECB and EU officials, who blocked an earlier “bad bank” plan under German pressure. 
Financial markets immediately rewarded Italy for its defiance, with the share price of the country’s biggest bank, Unicredit, jumping by 25% in three days. 
Italy’s increasingly assertive resistance to German economic dogmas may not be surprising: The country has suffered from almost continuous recession since joining the euro. 
Moreover, Padoan, who was formerly the OECD’s chief economist, is the only G-7 finance minister with professional economics training. 
He understands better than anyone that misguided fiscal and monetary policies have been the underlying cause of Europe’s economic underperformance, and are largely responsible for the political tensions threatening to destroy the EU. 
The renaissance of Italian self-confidence and leadership can also be observed in domestic and international politics. 
Renzi was the only European leader to increase his party’s vote share in the 2014 European Parliament election, and his dominance of Italian politics has since grown. 
While populist politics now threatens Germany, France, Spain, and Britain, Italy has turned its back on Silvio Berlusconi, and Renzi has squeezed support for the Northern League and the Five Star Movement. 
As a result, Italy has started implementing labor, pension, and administrative reforms that were unthinkable in the past. 
In foreign affairs, too, Italy has become more assertive. 
The Italian foreign minister, Paolo Gentiloni, is collaborating with his predecessor, Federica Mogherini, now the EU’s High Representative for foreign affairs, to create more pragmatic and effective European policies on Libya and the refugee crisis. 
Most significantly, Italy is leading an effort to repair relations with Russia after the Ukraine confrontation and to strengthen cooperation over Syria. 
This campaign appears to be bearing fruit with a gradual lifting of EU sanctions against Russia, starting this summer. 
Given the failures of German leadership in Europe and the political vacuum elsewhere in the EU, Italy’s decision to raise its profile is surely right. 
As Renzi put it in a recent interview, “After two years listening, now I speak.” 
It remains to be seen whether Italy can assemble a coalition of economically progressive and politically pragmatic countries to overcome German conservatism and dogmatism. 
But one way or another, Europe’s political economy will have to adapt to the new type of global capitalism evolving out of the 2008 crisis. 
With luck, a new breed of wily and agile Italian leaders will out-maneuver the blundering German dinosaurs, whose outdated rules and doctrines are leading the EU toward extinction. 

The Upheaval Italy Needs 
FLORENCE – Two months after the Italian general election on March 4, amid continuing uncertainty about what kind of government will emerge, a strange complacency seems to have set in. 
Yet it would be foolish to believe that a country where anti-system parties won 55% of the popular vote will continue to behave as if nothing had happened. 
The supposed “barbarians” are not at the gate anymore. 
They are inside. 
The populist Five Star Movement, which won by a landslide in Southern Italy, has promised to increase spending on public investment and social transfers, while reversing the pension reform enacted a few years ago. 
The League party, which captured the North, also promises to dismantle the pension reform, as well to cut taxes, and has openly mooted the idea of leaving the euro. 
Both parties want to relax the European fiscal straitjacket, though in different ways. 
At least one of them is bound to be part of the governing coalition. 
The economic consequences could be profound. 
With a 132% debt-to-GDP ratio, Italy’s public finances are precarious. 
Should markets start questioning their sustainability, the situation would quickly spiral out of control. 
Italy is far too big for the European Stability Mechanism to tackle a debt crisis there in the same way it did in Greece or Portugal. 
The European Central Bank would need to come to the rescue. 
The debt might even end up being restructured. 
There is little doubt, therefore, that the European Union will insist on fiscal discipline. 
The question is what strategy Italy should adopt to tackle its fiscal problem. 
Contrary to conventional wisdom, Italy’s high public debt is not the result of runaway budget deficits – at least not of recent ones. 
With the exception of 2009, the primary balance (which excludes interest payments) has been in surplus for the last 20 years. 
No other eurozone country matches this performance. 
The root of Italy’s public-finance problem is that it inherited excessively high debt from the 1980s and has not recorded significant economic growth for two decades. 
Real (inflation-adjusted) GDP in 2017 was at the same level as in 2003, and real GDP per capita was at the level of 1999. 
With a stagnant denominator, it is hard to reduce the debt-to-GDP ratio: the legacy of the past continues to weigh excessively on the present. 
A thought experiment helps in understanding Italy’s problem. 
Had France followed the same policy as its southern neighbor since the launch of the euro in 1999 – that is, had it recorded, year after year, the same primary balances – its public debt today would be 45% of GDP, instead of 97%. 
The difference between the two countries is not that France has been wise and Italy profligate. 
Quite the contrary. 
The reason why France has a significantly lower debt today is that it inherited a better fiscal position and has been growing faster. 
The lesson, therefore, is that Italy’s key priority should be to revive growth. 
But this cannot be accomplished by relaxing the brake on public spending. 
The bulk of Italy’s growth problem comes from the supply side, not the demand side. 
As documented in a recent paper produced by the Bank of Italy, the country’s productivity performance is truly dismal: over the last two decades, output per employee has decreased by 0.1% per year, compared to 0.6% growth in Spain, 0.7% in Germany, and 0.8% in France. 
Furthermore, the demographic outlook is frightening: the working-age population, currently at the same level as in the late 1980s, is set to decline by 0.5-1% annually in the years to come. 
The burden of repaying the debt will fall on a smaller labor force – even more so if the retirement age is lowered. 
Boosting productivity is therefore imperative. 
On paper, the recipe for success looks straightforward: economic policy should aim at reducing the gap between larger companies, whose performance matches those of their German or French counterparts, and smaller firms, where productivity is half as high. 
Small companies everywhere are less productive than large firms – after all, growth is a selection process – but Italy’s peculiarity is that such companies are both much less efficient and much more numerous. 
For each innovative champion that sells cutting-edge products on the global market, there are many poorly managed companies with fewer than ten employees that produce only for the local market. 
It is this high degree of fragmentation that explains Italy’s poor aggregate performance. 
Two Italian economists who teach in the United States, Bruno Pellegrino and Luigi Zingales, have investigated what explains this peculiar situation. 
Their conclusion is that neither sectoral developments nor credit constraints nor labor-market regulation can account for the observed productivity developments. 
Instead, they emphasize family management of the smaller firms and a tendency to select and reward people on the basis or loyalty rather than merit. 
As they put it, familyism and cronyism are the ultimate causes of the Italian disease. 
These observations have direct implications for future discussions between the next Italian government and its European partners. 
The latter would be well advised to put the need for a growth and productivity policy, rather than simple adherence to fiscal targets, at the top of the agenda. 
And they should focus on the most critical reforms, rather than on a long wish list of standard recipes. 
It is hard to gauge whether the Italian government that will emerge from the ongoing negotiations will be ready to respond. 
All political parties have clienteles to take care of, and the insurgents are no exception. 
They might well be reluctant to swallow the harsh medicine that Italy needs. 
But they should realize that though they may be popular, unfunded distributional proposals will ultimately prove ineffective, even more so if the productivity problem is not addressed head-on. 
Political ruptures sometime provide a unique opportunity for addressing seemingly intractable problems. 
The chance of such an outcome may be slim, but it should not be ignored. 
After its political upheaval, Italy now needs an economic one. 

Europe’s December Day of Reckoning 
VIENNA – While most of the European Union seems panic-stricken by the prospect of a victory for French far-right leader Marine Le Pen in France’s presidential election in May, the EU’s next test will come much sooner. 
On Sunday, Italians will vote in a referendum on constitutional reforms, and Austrians will choose their next president. 
Both countries’ votes could have major ramifications beyond their borders. 
In Italy, the upcoming plebiscite has become a popular confidence vote in Prime Minister Matteo Renzi, who has said he will resign if the reforms are rejected. 
According to the latest polls, Renzi could be forced to make good on his pledge, which might spell the end of reformist social democracy in Italy – and beyond. 
In Austria, voters will choose between a pro- and an anti-EU candidate in the nationalist mold of Le Pen, Norbert Hofer of the Austrian Freedom Party (FPÖ). 
A victory for Hofer could add wind to Le Pen’s sails. 
The constitutional changes that Renzi’s Yes campaign is asking voters to approve would undo some of his predecessor Silvio Berlusconi’s legacy – a legacy that serves as a prime example of the damage right-wing populism can do to a country. 
Among other things, Berlusconi altered Italy’s political system in such a way as to prevent the left from ever gaining full power again, and to block any criminal charges that could be leveled against him. 
Renzi’s proposed reforms would, among other things, modernize the political system by disempowering the Senate (the upper house of Parliament). 
Such an amendment is sorely needed to eliminate political gridlock, and Renzi has already succeeded in getting it through both chambers of Parliament. 
Indeed, the plebiscite was only supposed to provide final confirmation. 
But Renzi failed to improve Italy’s dismal economic performance. 
Eight years after the 2008 financial crisis, industrial production is still down by 25% from pre-crisis levels, and youth unemployment is hovering at more than 40%. 
According to these economic indicators, “la crisi,” as the Italians call it, is as bad as that experienced a quarter-century ago in Poland and other Eastern European countries, in the aftermath of communism’s collapse. 
But those countries endured their post-communist hardships, because their leaders and enough of their people believed in the promise of free-market capitalism. 
By contrast, since the 2008 global financial crisis, that belief has been badly shaken in Italy and other EU-countries. 
The boyish Renzi did try to improve the existing system and close some of Italy’s generational gaps, by implementing labor-market reforms. 
But, unlike former British Prime Minister Tony Blair in the 1990s or former German Chancellor Gerhard Schröder in the early 2000s, Renzi is operating under far worse global economic conditions. 
Italy cannot build on an export-driven growth model, and it is staggering under the massive debt burden inherited from Berlusconi. 
Renzi’s foes include left-wing populists such as the Five Star Movement (Movimiento Cinque Stelle) and right-wing populists such as the Northern League, or Lega Nord, which fiercely attack him while blaming the EU for many of Italy’s economic and political problems. 
The EU, meanwhile, has left Italy to manage on its own the 160,000 North African refugees who have arrived so far just in the course of this year. 
If Renzi’s referendum fails, Five Star Movement leader Beppe Grillo has indicated that he will demand another plebiscite on Italy’s eurozone membership, which might just succeed. 
While Italy was once a staunchly pro-EU country, many Italians may now support less integration, especially after the high-profile example set by the United Kingdom’s Brexit referendum in June. 
On the other hand, a eurozone-membership referendum may not even be necessary. 
If Renzi steps down, Italy could become almost ungovernable, which will frighten financial markets. 
This, in turn, will make it difficult for Italy to remain in the eurozone, given the already high interest rates on its public debt, which amounts to 132% of its GDP. 
Meanwhile, in Austria, the upcoming presidential election – pitting Hofer against independent left-wing candidate Alexander Van der Bellen – will be more about the country’s politics than about its economy. 
For the past 10 years, Austria has been governed by a grand coalition of Social Democrats and Conservatives; but these two mainstream parties constantly block each other, and are united only in their opposition to right-wing populists such as Hofer. 
This sclerotic arrangement, however, has enabled those same right-wing populists to present themselves as the only alternative to “the system.” 
Austria is one of the EU’s richest countries, and it is doing well compared to Italy. 
But Austrians are afraid of losing their current wealth, and they do still have economic grievances that politicians can tap. 
For example, low- and middle-class Austrians’ incomes have been slowly shrinking for ten years; overall economic growth is lower than the EU average; and unemployment is rising. 
As in Italy, Austria’s right-wing populists have railed against the EU, and have mused about taking the country out of the Eurozone. 
But such a move would be even more suicidal than in Italy’s case, and the FPÖ has actually moderated its anti-European stance since the Brexit vote. 
Instead, the FPÖ has announced its intention to turn Austria’s political system into a more presidential-plebiscitary democracy. 
This, too, would be a blow against Europe, because it would mean that any EU legislation – such as policies to disperse refugees now in Italy to other member countries – could be blocked by a plebiscite. 
When the Berlin Wall came down – and state socialism along with it – the European Economic Community’s founding member states responded by establishing the European Union, and committing to deeper European integration. 
That project worked well until the 2008 crisis, suggesting that the EU might be best suited for good times, not for hard times. 
Its double test in Italy and Austria on December 4 will provide powerful evidence one way or the other. 

The Stakes of Italy’s Referendum 
MILAN – In the last 68 years, Italy has held 17 general elections and a few referenda. 
But only three times has an Italian vote claimed center stage internationally: in 1948, when the choice was between the West and communism; in 1976, when voters faced a similar choice, between the Christian Democrats and Enrico Berlinguer’s “Eurocommunism”; and now, with the upcoming referendum on constitutional reforms. 
The implications of the upcoming vote are enormous. 
Prime Minister Matteo Renzi has staked his political future on the vote, pledging to step down (though not immediately) if the reforms are rejected. 
Such an outcome that would irreparably weaken the center-left government coalition as well: Renzi’s Democratic Party (PD) is already roiled by infighting over the reforms. 
In fact, the PD may not be able to avoid a split even if the vote goes the prime minister’s way. 
A defeat for Renzi will be read as a victory for Italy’s two major populist parties: the Lega Nord and the larger Five Star Movement, led by the comedian Beppe Grillo. 
The two parties are not allied, but both are nurtured by anti-establishment sentiment and favor “national solutions” to Italy’s problems – beginning with a return to the Italian lira. 
If Renzi is defeated, Lega Nord and the Five Star Movement could join forces to support a new government and hold a new referendum – this time on the euro. 
If Italy – one of the world’s largest public debtors – decided to go it alone, the entire European project could be dealt a mortal blow. 
In the age of Donald Trump and Brexit, that outcome is far from unthinkable. 
The issue at stake in the referendum is not inconsequential, but it should not decide the fate of Europe. 
Italians will vote on whether to strip the Senate (the parliament’s upper house) of two-thirds of its members and much of its legislative authority, making it merely a talking shop akin to Germany’s Bundesrat, and return some of the regions’ powers to the central government. 
Changes like these have been discussed for 30 years. 
The lack of movement could benefit Renzi, if voters conclude that they should not waste such a rare opportunity to do something to reform their sclerotic system. 
President Sergio Mattarella is impartial, but he would prefer that the reforms go forward. 
His predecessor, Giorgio Napolitano, is also strongly in favor of the reforms, which he says would be “great news for Italy.” 
But the reforms have also faced stiff opposition. 
Some state institutions dislike the idea of delivering more powers to the executive branch; magistrates, for example, fear a loss of judges’ extensive and unchecked powers. 
Then there are the new populists, several PD old-timers, and plenty of other establishment figures, including several former members of the constitutional court, who generally fear change. 
Former Prime Minister Silvio Berlusconi, ever the opportunist, is also opposing the reforms. 
The opposition, as usual, benefits considerably from its simple message. 
To vote “no” is to vote against the “system” and all of its corruption. 
Who is not against corruption? 
Add to that rising Euroskepticism, and the result is an intoxicating political brew. 
Opinion polls now indicate a 5-6-point majority for No, with 20% of voters still undecided. 
If a general election follows the referendum, Grillo will be running neck and neck with Renzi’s PD. 
Given the huge premium accorded to the winner by Italy’s new electoral law (Renzi was sure he would be the one to benefit), such a prospect is truly frightening. 
Grillo – much like Lega Nord’s Matteo Salvini – has scant political experience, little knowledge of European history, few refined arguments, and no credible vision for the future. 
He blames Europe for Italy’s mistakes, such as piling up massive public debt, which now amounts to 132% of GDP. 
And he makes unfeasible promises, such as a guaranteed income for all citizens without other means. 
Juan Perón, the consummate populist, proved just how flawed such giveaways can be when he took a similar tack in Argentina. 
And that is not even the only Argentinian mistake Grillo may be set to make. 
He also supports the Argentinian model of dealing with the debt by defaulting on it. 
It is such an absurd proposition – Italy has never defaulted, though it did, under Mussolini, try to go its “own way,” with disastrous results – that one wonders whether Grillo is capable of distinguishing between policy and comedy. 
As in the United Kingdom and the United States, change is the magic word in Italy today. 
Nobody wants to be against change. 
Instead, opposition to reform is framed as support for better reforms. 
Don’t just change the constitution, the No campaign implores voters: change everything! 
As in Giuseppe Tomasi di Lampedusa’s great novel Il Gattopardo (The Leopard), changing everything could be just the way to keep it all the same. 
That is the last thing Italy needs. 

Italy on the Brink 
LONDON – Political instability in Italy is nothing new. 
But Italian voters’ rejection of constitutional reforms in a referendum has not only led Prime Minister Matteo Renzi to resign; it has dealt another blow to a crisis-ridden European Union. 
In the near term, Italy’s ongoing banking crisis could flare up again and threaten European stability; in the longer term, Italy may have to leave the eurozone, which would put the single currency itself at risk. 
The “No” side was widely expected to win. 
But the scale of its victory – a whopping 59% of the vote – was shocking, and largely a triumph for anti-establishment forces, particularly the Five Star Movement. 
The movement, led by the comedian Beppe Grillo, is leading in opinion polls, supports holding a referendum on eurozone membership, and is now demanding an immediate general election. 
Most Italian commentators have downplayed the referendum’s significance for the rest of Europe. 
They argue that a new caretaker government, probably led by the technocratic finance minister, Pier Carlo Padoan, will reform electoral laws to keep the Five Star Movement from power. 
And even if the Five Star Movement captures a majority in the Italian Parliament’s lower house, it will not have a majority in the Senate, so it cannot form a government, unless it breaks its pledge not to join a coalition. 
In any case, the argument goes, a eurozone referendum would be hard to deliver, because it would require a constitutional amendment. 
All of that may be true, but it misses the big picture. 
Renzi was the pro-EU establishment’s best – and perhaps last – hope for delivering the growth-enhancing reforms needed to secure Italy’s long-term future in the eurozone. 
Muddling through with a weak technocratic-led government amounts to waiting for an accident to happen. 
And, with the far-right Northern League and former Prime Minister Silvio Berlusconi’s Forza Italia also aligned against the euro, an anti-euro government is likely to come to power at some point – perhaps after the next general election, which is due by 2018 (but could be held as early as next spring). 
Then all bets will be off. 
The immediate problem is Italy’s zombie banks, which are inadequately capitalized, insufficiently profitable, and saddled with bad loans. 
These banks need to raise fresh capital, which was already proving difficult before the referendum, and now may be impossible amid the heightened political uncertainty. 
Capital is fleeing Italy, as Carmen Reinhart observes. 
Government-bond yields, which rose sharply in the run-up to the referendum, have so far remained steady; if they were to spike, however, Italian banks’ fragile balance sheets would deteriorate further. 
And, because the European Central Bank has already bought many Italian bonds through its quantitative easing (QE) program, it could not readily intervene further. 
The most endangered bank is Monte dei Paschi di Siena (MPS), which is trying to raise €5 billion ($5.3 billion) in new capital. 
If it fails to do so, the government will likely furnish it with public money to stave off a collapse. 
That, in turn, would require MPS’s junior bondholders to take losses, unless the government breaches the EU’s bank “bail-in” rules, which would undermine the eurozone’s new banking union. 
While small investors who were mis-sold bonds could be compensated, large, politically powerful ones would not be. 
MPS’s travails could have wider economic repercussions. 
Italy’s largest bank, UniCredit, which is better positioned than MPS, could struggle to raise the more than €10 billion that it is seeking. 
Because many eurozone banks remain weak, the crisis could then spread. 
In the longer term, Italy’s eurozone membership could be at risk. 
Unless Italy enacts radical reforms to address its sclerotic growth, it is hard to see how it could ever have a viable future in a dysfunctional monetary union dominated by a mercantilist, deflationary Germany. 
Italy’s economy is no larger today than it was in 2000. 
Its share of global exports has plummeted. 
And despite the boost from the ECB’s QE program, a weak euro, and the looser fiscal policies of recent years, output is growing at an annual rate of less than 1%. 
Moreover, Italy could barely stabilize its public debt – which now amounts to 133% of GDP – even when bond yields were reaching record lows. 
An economic downturn or rising interest rates would thus send public debt soaring again – and Italy cannot count on the ECB to continue buying its bonds indefinitely. 
Italy’s political situation – marked by a sense of never-ending misery and growing resentment against the EU and Germany – is equally unsustainable. 
Youth unemployment is at 37%. 
Eurozone fiscal rules continue to chafe. 
And EU governments have done little to help Italy cope with the refugee crisis. 
Italians used to be enthusiastically pro-European, and saw EU governance as preferable to corrupt domestic mismanagement. 
But support for the euro, the EU, and the country’s pro-EU establishment has plunged. 
The mere possibility of Italy leaving the eurozone – which would entail the redenomination of €2.2 trillion of Italian government bonds in devalued lira – could spark financial panic. 
What’s more, Italy is too big to bail out, and an anti-euro government may be unwilling or unable to agree to the strictures of an EU loan, which would be necessary for the ECB to quell the panic. 
It is also implausible that Germany would offer to enter into a eurozone fiscal union that entails pooling its debts with Italy’s. 
In addition to stronger demand in the eurozone, Italy desperately needs bold leadership – to restructure its banks, write down unpayable corporate and household debts, reform its economy, boost investment, and clean up its politics. 
So it is scarcely reassuring that both the eurozone and Italy are likely to try to muddle on for now. 

Can Trump Save the Euro? 
BRUSSELS – Europe has just endured two more difficult tests. 
While Austrian voters rejected the possibility of the European Union getting its first far-right head of state, Italians delivered a stinging rebuke to their government – and opened the way for populist forces to come to power. 
Add to that a Brexit that has yet to unfold and the eurozone’s still-lackluster economic performance, and the survival of the common currency is far from guaranteed. 
With the euro taking the blame in recent years for Europe’s many economic travails (from a double-dip recession to a slow and uneven recovery), nationalist, Euroskeptic, and populist political movements have gained ground. 
Austria has sidestepped their advance, but Italy may not. 
Prime Minister Matteo Renzi’s decision to make good on his promise to resign if voters rejected his government’s proposed constitutional reforms has thrown Italian politics into disarray, and an early general election is likely. 
At a time of substantial economic challenges – Italy’s output has been stagnant for a decade, and its public finances remain precarious – the populist Five Star Movement, which has pledged to hold a referendum on continued euro membership, may well tempt voters. 
If the eurozone’s breakdown is to be avoided, Italy – indeed, the entire currency area – urgently needs an economic boost. 
US President-elect Donald Trump may be just the person to deliver it. 
Even weeks before Trump takes office, he is beginning to have an impact. 
Long-term interest rates have risen in the United States, and are expected to climb higher. 
That has contributed to a (much smaller) rate increase in Europe. 
Yields on German ten-year bunds are in positive territory, having risen by around 50 basis points since the US election. 
Populists can no longer complain that the European Central Bank is taxing German savers. 
In the eurozone’s periphery, the increase has been more marked; in Italy, for example, ten-year bond yields are up almost a full percentage point. 
While this might seem problematic, the reality is that the negative impact of higher rates in the periphery is likely to be limited. 
After all, a large share of the borrowing by households and businesses in the periphery is indexed to short-term rates, which are set by the ECB, not the markets, and therefore have remained low. 
Moreover, periphery governments are largely shielded from the increase in the risk premium on long-term bonds, because their central banks continue to purchase their outstanding debts. 
And the US dollar’s substantial appreciation in the wake of Trump’s election is likely to make European exports more competitive. 
So the immediate impact of Trump’s victory has been a net positive for the eurozone – and the benefits seem set to continue. 
Trump has pledged to implement sweeping tax cuts, including a reduction of the corporate tax rate from 35% to 15%. 
Add to that plans to subsidize infrastructure investment and increase military spending, and it seems likely that the US will face rapidly rising fiscal deficits and a huge short-term increase in demand. 
With the US economy already operating at close to full capacity (unemployment is below 5%), higher imports – and a stronger US dollar – will be needed to meet that demand. 
All of this will be good for the eurozone, for which the US remains a leading export market. 
But it is the peripheral countries that are likely to benefit the most. 
For example, the impact of a euro depreciation is about three times larger in Italy than it is in Germany, because demand for Germany’s exports of specialized capital goods is not very price elastic. 
As a result, rapid demand-fueled growth in the US, together with the strong dollar, could contribute to a much-needed rebalancing of the eurozone. 
Europe may also benefit from Trump’s energy policy. 
During the campaign, Trump pledged to ensure energy self-sufficiency – an effort that would probably entail new subsidies for domestic oil, gas, and possibly coal production. 
That would help to suppress oil prices – a boon for the eurozone’s energy-importing countries. 
There is a precedent for Trumponomics’ potential benefits for Europe. 
After the collapse of the dollar-based Bretton Woods system of fixed exchange rates in the 1970s, Europe created the European Monetary System to serve as an island of stability in an ocean of widely fluctuating exchange rates. 
While maintaining stable exchange rates within the EMS initially proved difficult, owing to large differences in national inflation rates and economic-policy priorities, the situation quickly improved, thanks to US President Ronald Reagan. 
“Reaganomics” produced large fiscal deficits and an ultra-strong dollar. 
Together with low oil prices, this put Europe in a strong position to overcome challenging disparities and achieve growth. 
In fact, it was the last time Italy’s GDP grew faster than the EMS average. 
Trumponomics aims to create precisely the same conditions. 
Whatever the potential downsides to Trump’s policies, there is one clear upside: they will boost growth and employment in a eurozone where economic dissatisfaction is generating political turmoil – and the gains will be most pronounced in the countries that most need them. 
As Italians face the prospect of a referendum on eurozone membership, and the French prepare for next year’s presidential election, the value of this cannot be overestimated. 
Indeed, Trump could well end up saving the euro. 

Saving Italy From Itself 
SIENA – Now that Italian Prime Minister Matteo Renzi’s credibility is weakening at home, he will need all the friends he can get to clear the hurdle of a constitutional referendum in December – and thereby avoid likely political disruption. 
Renzi will need the support not just of his own party, which is deeply divided over the referendum, but also of an Italian electorate that has grown disillusioned with politics in general. 
The referendum has become a litmus test for Renzi and his government partly because of his ill-considered warning earlier this year that he would resign if the proposed reform of the Senate (the parliament’s upper house) were voted down. 
But Renzi’s bigger problem is that he is a mid-term, unelected prime minister who promised, in 2014, to bring change to a country that has heard it all before. 
Two years later, far less change than expected has materialized, and Renzi has come to resemble a guarantor of political stability more than a rottamatore – a “scraper of the old,” as he had been nicknamed. 
Renzi has vigorously backpedaled from his conditional vow to step down; but if voters reject the Senate reform, he will become a lame duck, and political stability will most likely suffer unless he keeps his promise. 
Renzi is an astute politician who understands and speaks to many voters’ gut feelings about the two main issues on their minds: the state of the economy and immigration. 
So he knows that his government’s survival – and his own political future – depends on their trust in his ability to address both. 
There is no guarantee that he will succeed. 
Italy’s economy started the year with strong exports and positive growth, but it has since lost momentum: for the first time since 2014, the economy recorded zero growth in the second quarter, and full-year GDP growth is now expected to be a modest 0.8%. 
That is far below what Italy needs to make up for the economy’s 5% contraction between 2005 and 2015. 
Simply put, Italy’s economic malaise stems from the country’s inability to live with the euro. 
The economy has always needed radical supply-side and public-administration reforms to cope with eurozone-membership constraints – both fiscal and monetary. 
And yet no government, not even those of Silvio Berlusconi, which held comfortable parliamentary majorities, could accomplish more than piecemeal reforms in specific areas, such as pensions. 
Lacking a framework to adjust to new economic realities, Italian real (inflation-adjusted) GDP growth has suffered, averaging just 0.3% per year from 1999 to 2015. 
During this period, real wages and employment were hit hard – almost 37% of young people and 19% of people in southern Italy are unemployed – and as many as 1.5 million young Italians have left the country, with 90,000 departing in 2014 alone. 
Meanwhile, five million foreign immigrants have arrived, constituting 8.3% of all residents (and not including undocumented immigrants). 
Many Italians blame German-inspired fiscal austerity for their country’s economic malaise; and opposition parties such as the right-wing Northern League and the anti-establishment Five Star Movement want Italy to leave the euro, redenominate, and devalue to regain competitiveness. 
Just 20 years ago, Italians willingly agreed to pay a one-off tax to bring the fiscal deficit into compliance with eurozone rules. 
Today, an estimated 35-40% of Italians want out. 
But Italians are torn between antipathy toward the European Union, which disciplines the Italian government, and discontent and frustration with that government itself, owing to its failure to present a credible reform plan. 
Because there is no clear villain, an Italian version of the United Kingdom’s “Brexit” referendum is implausible. 
In an August opinion poll, only 28% of respondents supported leaving the EU; in a May survey, as many Italians wanted “more Europe” as wanted “less Europe.” 
Italy’s upcoming constitutional referendum cannot plausibly be compared to June’s Brexit vote. 
In Italy, the referendum is required by the constitution – it did not come about through political machinations – and it is not a vote on EU membership, even if the EU or the eurozone will be on voters’ minds. 
Still, the referendum could have far-reaching implications that would spill over into Europe. 
The political uncertainty likely to result if voters reject the Senate reform would adversely affect Italy’s struggling economy. 
International investors have come around to Renzi, believing that he strikes the right balance between dynamism and stability needed to bring Italy out of its torpor. 
They have tolerated his exuberance and even his mistakes (for example, in his management of the country’s banking crisis). 
They are underwriting the narrative that Renzi is the only person who can save Italy from itself; that may be the right bet – at least for the time being. 

Italy’s Return to Political Paralysis 
For more than a decade, Italy has been ruled through a bipolar political system. 
Voters could choose between a left-wing coalition and a right-wing coalition. 
Those disappointed by the incumbent government could vote for the opposition. 
And the existence of a viable alternative has had a disciplining effect on politicians: not by chance, Silvio Berlusconi’s government served its entire electoral term. 
This is in stark contrast to the Italian political tradition. 
Throughout the post-war era, until the early 1990’s, Italian governments survived less than a year on average. 
Voters were unable to choose between the incumbent and the opposition, because the same centrist parties were in office all the time. 
Government crises were merely an opportunity to reshuffle key cabinet positions or change the party faction of the prime minister. 
However, there is now a high risk that Italian politicians will return to their old habits. 
This may seem strange, given the antagonism between Romano Prodi and Silvio Berlusconi during the electoral campaign. 
But that antagonism reflected the personalization of politics achieved by Berlusconi, as well as an institutional feature that he abolished. 
One of the last acts of his government was to replace the majoritarian electoral system, introduced in 1993, with proportional rule. 
The new electoral system changes the politicians’ incentives, and could induce a return to shifting coalitions and unstable governments. 
This outcome would be accelerated if, as is likely, Berlusconi himself were to distance himself from politics in the coming electoral term. 
Under the new electoral rules, seats are allotted to parties in proportion to votes, but a special provision induces parties to forge pre-electoral agreements: the pre-electoral coalition that wins the most votes receives a seat premium that ensures a comfortable majority in the Chamber of Deputies (the lower house). 
Unfortunately, the new law – hastily enacted at the last minute of the previous legislature – has a silly formulation that does not guarantee an equally safe majority in the Senate. 
As a result, Prodi has won a large margin in the lower house, but he has only a handful of extra votes in the Senate. 
Given Italy’s almost perfect bicameralism, this means that the new government will find it very difficult to function even under ideal circumstances. 
But Italy’s circumstances are far from ideal. 
The new government will face formidable challenges. 
The budget deficit is again out of control, and well over the 3%-of-GDP Maastricht ceiling. 
The aging population is straining the public pension and healthcare systems beyond sustainability. 
The manufacturing sector, squeezed by stagnating productivity and competition from China and other low-cost producers, is no longer competitive. 
Many services remain inefficient, because they are either in the domain of an archaic public administration or enjoy monopoly rents created by regulatory barriers. 
Inaction is simply not an option for the new government. 
And yet agreement on virtually everything of significance will be very difficult to reach. 
Prodi’s left-wing l’Unione coalition comprises a hodge-podge of parties spread all over the political spectrum, ranging from staunch communists to former liberals (with communists stronger than in the previous election). 
Under the new electoral system, all of these parties will be competing with each other for the same votes, and each one will seek to protect its own constituency or claim credit for whatever is accomplished. 
Given l’Unione’s razor-thin majority in the upper house, the most likely outcome is paralysis. 
As if this was not enough, Prodi will face another problem. 
Just before stepping down, Berlusconi’s government also approved a constitutional reform that, among other things, provides a logical complement to the new electoral system. 
In particular, the new constitution strengthens the powers of the prime minister and enables him to call early elections in the event of a government crisis. 
This provision would be an important weapon in Prodi’s hands. 
But the left-wing parties that support him have already announced that they will block the constitutional reform, which they opposed for other reasons. 
Hence, Prodi will almost certainly be deprived of his best tool for imposing discipline on his unruly coalition. 
What is likely to happen when a large and heterogeneous coalition with barely a parliamentary majority must govern in an increasingly dire economic situation? 
The answer is almost obvious: either the government will collapse, or it will seek to poach supporters from opposition parties. 
Which of these two outcomes will materialize also depends on what happens inside Berlusconi’s camp, and that is less easy to predict. 
But, either way, the bipolar political system to which Italians were getting accustomed is unlikely to survive unscathed. 
The left-right divide will become easier for opportunistic politicians to cross, and perhaps a new centrist party will emerge. 
As a result, Italy will soon return to its older tradition of short-lived governments and unstable coalitions. 
Of course, Prodi could preserve a bipolar political system – and thus increase the longevity of his government – by either restoring a majoritarian electoral system or pressing ahead with other constitutional amendments designed to preserve government and coalition stability. 
But forcing such changes on his coalition partners could be as difficult for Prodi as tackling Italy’s daunting economic problems. 

No Country for Young Men (and Women) 
MILAN – Over the last 20 years, roughly a half-million Italians aged 18 to 39 have moved abroad, especially to more economically dynamic European Union countries such as Germany, France, and the United Kingdom. 
And those are just the official figures; the actual numbers are probably much higher, possibly more than double. 
Why are young Italians so eager to leave? 
It is not for lack of political representation. 
Since 2013, the share of Italy’s parliament that is under 40 has increased from 7% to 13%. 
Moreover, Italy now has one of the youngest governments among advanced countries (only France does better). 
And Prime Minister Matteo Renzi, at age 41, is Italy’s youngest prime minister ever. 
Nonetheless, young Italians remain deeply dissatisfied with the state of their country and the economic opportunities it can provide. 
Indeed, despite Renzi’s promise to implement reforms aimed at rejuvenating the country’s economy and institutions – the platform on which he won power in 2014 – some 90,000 Italians under the age of 40 have since left. 
Renzi’s message, while skillfully crafted and optimistic, cannot mask the harsh economic reality in Italy today. 
Most jarring, youth unemployment stands at 39% – one of the highest rates in the EU and well above the bloc’s average of 20%. 
With 26% of people under the age of 30 not in school, employment, or training – the second-highest rate in the EU, behind only Greece – structural youth unemployment will prove difficult to correct. 
Even those who have jobs have reasons to be unhappy. 
According to Eurostat, Italy’s young people are among the most dissatisfied with their jobs, with many convinced that the best jobs are reserved for the well connected. 
And, indeed, corruption still poses a major challenge for Italy; 
Rome’s last two mayors, for example, were forced out of office for malfeasance. 
In last year’s Transparency International’s Corruption Perceptions Index, Italy was ranked 61st, trailing all other advanced economies. 
Making matters worse, Italy’s economy has been stagnant for years. 
To be sure, it remains the world’s eighth-largest economy, with a per capita income of roughly €26,000 ($29,300) and a relatively high gross savings rate of 18% of GDP. 
But from 2000 to 2015, real GDP shrank slightly, while real per capita income dropped by 0.5%. 
The 2012-2014 period was especially difficult, with a deep and prolonged recession resulting in a 2.1% drop in real GDP and 4.3% drop in real per capita income. 
Unsurprisingly, for many young people, emigration seems a better option than unemployment or underemployment at home, where they must rely on support from their families. 
Of course, some end up in precarious or unsatisfactory jobs abroad. 
But for the most skilled and best qualified, the chances of building a career in their chosen field abroad are significantly higher than in Italy. 
Not surprisingly, it is Italy’s most qualified who are most likely to leave. 
This trend began in the late 1980s, with PhDs and researchers who could not find a place at local universities, which are hierarchically controlled, prone to corruption, and starved of funding. 
Since then many other professionals, from doctors and health-care practitioners to librarians and software specialists, have joined them. 
To some extent, this trend is being offset by immigration, with three newcomers (officially) arriving for every Italian who leaves. 
For Italy’s demographic balance, this influx of foreigners – just over five million people, 8.3% of the population – is a positive development. 
Not only does Italy have the EU’s oldest population after Germany, with 1.5 people over 65 for every one person under 15; its fertility rate, 1.35 children per woman, is also one of the world’s lowest, about on par with Japan. 
But the limited supply of higher-skill jobs in Italy, compared to other advanced EU countries, also affects migrant flows. 
With 30% of foreign workers believing that they are overqualified for the job they perform, Italy is losing its appeal, especially to skilled professionals. 
As a result, since 2007, the number of immigrants arriving each year has fallen by half, while the number of emigrants has tripled. 
Those who remain in Italy – Italian or foreign – tend to be the least skilled. 
Some 41% of Italy’s population has only a basic education, a considerably higher share than in most other European countries (with the exceptions of Portugal, Malta, and Spain). 
Moreover, 17% of Italy’s population leaves education prematurely, and only 22% of young people receive tertiary education. 
The good news is that Italy, along with its EU partners, has already committed to improving these education outcomes. 
The European Commission’s Europe 2020 growth strategy – aimed at creating “a smart, sustainable, and inclusive economy” – demands that countries reduce by 2020 the share of early school leavers to below 10% and ensure that at least 40% of people aged 30-34 have completed some form of higher education. 
But these goals represent just one feature of an effective strategy for revitalizing Italy’s economy and capacity to attract top talent. 
Italy’s government must also fulfill its promise of further improving labor-market flexibility and fighting corruption, including in the form of nepotism. 
Given the headwinds of a sluggish world economy and the legacy of a long recession, however, reforms will be difficult to implement. 
At the very least, they will take time. 
In the meantime, young Italians will continue to try to build their future elsewhere. 
Not even a young, buoyant prime minister can persuade them to stay. 

Putin’s World 
VIENNA – The West is now living in Putin’s world. 
It is there not because Putin is right, or even because he is stronger, but because he is taking the initiative. 
Putin is “wild” while the West is “wary.” 
While European and American leaders recognize that the world order is undergoing a dramatic change, they cannot quite grasp it. 
They remain overwhelmed by Putin’s transformation from CEO of Russia, Inc., into an ideology-fueled national leader who will stop at nothing to restore his country’s influence. 
International politics may be founded on treaties, but it functions on the basis of rational expectations. 
If those expectations turn out to be wrong, the prevailing international order collapses. 
That is precisely what has happened in the course of the Ukrainian crisis. 
Just a few months ago, most Western politicians were convinced that in an interdependent world revisionism is too costly and that despite Putin’s determination to defend Russia’s interests in the post-Soviet space, he would not resort to military force to do so. 
It is now clear that they were sorely mistaken. 
Then, after Russian troops occupied Crimea, international observers largely assumed that the Kremlin would support its secession from Ukraine but would stop short of making it part of the Russian Federation. 
That belief, too, proved to be entirely wrong. 
At this point, the West has no idea what Russia is willing to do, but Russia knows exactly what the West will – and, more important, will not – do. 
This has created a dangerous asymmetry. 
For example, when Moldova requests membership in the European Union, Russia may move to annex its breakaway region of Transnistria, where Russian troops have been stationed for two decades. 
And Moldova now knows that, should that happen, the West will not intervene militarily to protect its sovereignty. 
When it comes to Ukraine, Russia has made it clear that it hopes to obstruct the May presidential election, which Western leaders hope will cement change in Ukraine, while turning the country’s constitutional negotiations into the opening act in the establishment of a new European order. 
Russia envisions Ukraine becoming something akin to Bosnia – a radically federalized country comprising political units that each adhere to their own economic, cultural, and geopolitical preferences. 
In other words, while Ukraine’s territorial integrity would technically be preserved, the eastern part of the country would have closer ties with Russia than with the rest of Ukraine – similar to the relationship between Bosnia’s Republika Srpska and Serbia. 
This creates a dilemma for Europe. 
While radical federalization could allow Ukraine to remain intact through the current crisis, it would most likely doom the country to disintegration and failure in the longer term. 
As Yugoslavia’s experience demonstrated, radical decentralization works in theory but does not always work in practice. 
The West will be confronted with the uneasy task of rejecting in the post-Soviet space solutions that it promoted two decades ago in the former Yugoslavia. 
Confronted with Russia’s revisionism, the West resembles the proverbial drunkard searching for his lost keys under a streetlight, because that is where the light is. 
With their assumptions invalidated, Western leaders are struggling to craft an effective response. 
In Europe, the strategies that have emerged – trivializing the annexation of Crimea or treating Putin as a madman – are self-defeating. 
The EU is oscillating between rhetorical extremism and policy minimalism. 
Though some have recommended an ill-advised expansion by NATO in the post-Soviet space, most are limiting themselves to support for symbolic sanctions, such as visa bans that affect a dozen or so Russian officials. 
But this could ratchet up pressure on non-sanctioned Russian elites to prove their loyalty to Putin, possibly even triggering a purge of the more pro-Western elements in Russia’s political class. 
Indeed, no one actually believes that the visa bans will make a difference. 
They were imposed because doing so was the only action upon which Western governments could agree. 
When it comes to Ukraine, both Western leaders and Western publics are in a mood of preventive disappointment. 
Burned by a decade of wishful thinking and over-expectations – from the “color revolutions” in the post-Soviet world to the Arab Spring – Western public opinion has chosen to hear only bad news now. 
And this is the real risk, because the future of the European order mostly depends on what happens next in Ukraine. 
It is now clear that Crimea will not return to Kyiv; but it is also clear that postponement of the May election will mean the end of Ukraine, as we know it. 
It is the West’s responsibility to persuade Russia to support the elections – and to guarantee that the needed constitutional reforms will be decided in Kyiv, not in Dayton. 

Ivy League Investors 
Yale University, where I teach, has entrusted its endowment portfolio to one man, David Swensen, for over 20 years. 
During this period, the portfolio has grown from just over $1 billion to $18 billion – an average return of more than 16% a year, which appears to be the highest of any major university. 
And it shows no signs of diminishing: in the latest fiscal year ending in June, the return was 22.9%. 
Presidents of Yale have come and gone, but Swensen stays on. 
He has done more for the university than any president, or anyone else. 
In a university, ideas count more than money, but $18 billion dollars can create an environment for many new ideas. 
With 11,500 students, that is more than $1.5 million per student (not including the university’s buildings and art collection, each worth many billions of dollars more). 
How did this happen? 
How did Swensen make so much money? 
Everyone is wondering – not least those of us at Yale. 
After all, many people here have been teaching the “efficient markets hypothesis” that financial markets around the world have become so competitive that it is impossible to make more than a normal return from investing. 
Anyone who beats the market must simply be lucky. 
Studies seem to confirm this. 
For example, a 2004 study by Brad Barber and Terrance Odean of the University of California and Yi-Tsung Lee and Yiu-Jane Liu at National Chengchi University acquired trade-by-trade data on individual day traders on the Taiwan Stock Exchange. 
The study found that only the top 1% of day traders made a profit – after deducting trading costs – in two consecutive six-month periods, and the median profit was hardly worth the effort: only about US$4000. 
It is easy to conclude that there is just no point in even trying to beat the market. 
But then one remembers people like Swensen. 
Can his consistent performance really be attributed to luck? 
Robert Kiyosaki, author of the Rich Dad, Poor Dad series of popular investment books, bases his books’ titles and themes on a comparison of his own highly-educated father with his friend’s father, an eighth-grade dropout. 
According to Kiyosaki, his poor but scholarly dad tended to be pessimistic about one’s ability to achieve anything in the real world, so he discouraged his son from even trying. 
By contrast, the friend’s dad relished trying to achieve something big. 
Is it just a coincidence that he was rich? 
Kiyosaki may try too hard to be inspirational, but I often think of him when I hear finance professors opine on the efficiency of markets and the futility of making money by trading in them. 
Maybe many academics find it difficult to take the initiative to achieve in the real world – I have yet to meet another professor who has mentioned having read Kiyosaki. 
But Swensen is an academic, with a Ph.D. in economics. 
He is surrounded by academics. 
Somehow, all this talk about efficient markets has not discouraged him from trying, and succeeding. 
There seems to be a pattern. 
Two similar universities, Harvard and Princeton, have had nearly the same success. 
The Harvard endowment, under Jack Meyer, earned a 15.2% average annual return over the last ten years, compared to Swensen’s 17.2% average, while the Princeton endowment, under Andrew Golden, earned an average of 15.6% per year. 
In fact, Golden worked under Swensen at Yale from 1988 until 1993. 
Swensen has written two books about investing, one for professionals and one for the general public. 
I did not come away from reading them with a feeling that I know how to do what he did. 
But a couple of things stand out. 
One is his long-term focus. 
Yale lets Swensen invest for the very long term, and does not bother him about quarterly performance. 
Maybe this allows him to focus more on long-term fundamentals – and thus to make investments that may not perform well in the short run. 
But, in fact, he has done consistently well in both the short term and the long term. 
Part of the reason for Swensen’s success is “absolute return,” a term – now widely quoted in the investment community – that he coined for unusual investment strategies involving such things as merger arbitrage and distressed securities. 
He also has invested in non-traditional asset classes, including real estate, oil, timber, private equity, and venture capital and buyout firms. 
These assets are generally not followed by multiple analysts, and are not easily understood, giving him a greater advantage in applying his intellectual skills and the skills of others around him. 
In these senses, Swensen is completely different from day traders, who are both investing for the short term and trying to beat the most crowded market – the market for exchange-listed securities. 
But I also think that the phenomenal success of Swensen and others like him reflects the environment that Kiyosaki criticizes. 
The problem is a defeatist attitude, not scholarship. 
When an analytical mind, a mind that is trained to search rigorously for the truth and as part of a community of such people is set free from self-doubt, it can do amazing things. 
Knowing David Swensen, I can attest that he is not a lonely day trader trying to beat the market. 
He is a good listener, is supportive of people he trusts, and is surrounded by a lot of good people with a wide array of skills. 
And he is certainly not a defeatist. 

The Two Mexicos 
MEXICO CITY – Mexico is making headlines of late. 
For a change, they are mostly positive. 
January marked the 20th anniversary of the North American Free Trade Agreement, the treaty that created a single market with the United States and Canada, and helped to propel Mexico into the top ranks of manufacturing exporters. 
The reform agenda of President Enrique Peña Nieto has received global attention. 
And, in recent months, global leaders in auto and food manufacturing have announced multi-billion-dollar investments in new facilities. 
Indeed, in a world that has grown nervous about emerging economies, Mexico stands out as an island of opportunity, with a stable fiscal position and the prospect of rising demand for its goods as the US recovery gathers momentum. 
Yet there is another side to the Mexico story. 
For all of its successes under NAFTA and other market-opening devices, the country has recorded relatively slow GDP growth. 
For the past 20 years, annual GDP growth in Mexico has averaged about 2.7%, which is low by emerging-economy standards and not enough to raise living standards substantially across a growing population. 
The main factor behind Mexico’s anemic growth is chronically weak productivity increases. 
If Mexico cannot find ways to spur higher productivity soon, it could be headed to 2% growth, rather than the 3.5% that is widely expected. 
That is because population aging and a falling birth rate will slow the flow of new workers into the labor force, the source of more than two-thirds of GDP growth in recent decades. 
The solution to the productivity problem is easy to state but difficult to accomplish: the country must bridge the widening gap between the “two Mexicos” – the agile, dynamic, post-NAFTA modern economy (the “Aztec tiger”)and the traditional economy of slow-growing, unproductive traditional businesses. 
These two Mexicos are pulling in opposite directions, which explains why three decades of reforms to open markets, privatize industries, embrace free trade, and welcome foreign investment have failed to raise growth rates. 
This is the central finding of our recent research. 
Modern, highly productive, and globally competitive Mexico has flourished under NAFTA and other rounds of market liberalization. 
Today, Mexican multinationals such as FEMSA, Grupo Alfa, Grupo Bimbo, Grupo Lala, Mabe, and Walmex have become leaders in some of the most competitive markets in the world. 
But policy changes have barely touched the other Mexico, where traditional enterprises operate in the same old ways and are experiencing falling labor productivity. 
While the largest modern companies have been ratcheting up productivity by 5.8% annually, productivity at traditional Mexican enterprises – tiny stores, bakeries, low-skill manufacturers – has been declining by 6.5%. 
Worse, employment is growing faster in the traditional economy, in effect shifting labor from high-productivity to low-productivity work – the opposite of what any economy wants. 
The question looming over Mexico today is whether Peña Nieto’s reform agenda can fuel economic growth in both Mexicos. 
Two broad priorities need to be addressed: 
· Mexico must work to transform the traditional sector from a low-productivity, low-wage trap for workers into a dynamic source of growth, innovation, and employment. 
The share of workers employed by medium-size Mexican companies – a potential engine of job growth – dropped from 41% in 1999 to 38% in 2009. 
· Mexico needs to create a level playing field on which all companies can blossom; today regulatory preferences, tax policies, and other structural obstacles limit the growth of the modern sector and perpetuate the traditional and informal sector. 
Of course, no magic wand can turn small business owners with limited capital and skills into entrepreneurs. 
But conditions encouraging more small companies to join the formal, modern economy can be created. 
For starters, incentives that reward companies for remaining small, inefficient, and informal should be removed. 
To take one example, small business owners subscribe to electric service as individual consumers and can even qualify for subsidies of up to 80%. 
Likewise, traditional markets and street stalls pay no sales taxes. 
Despite recent labor-market reforms, limitations on layoffs and temporary workers continue to encourage even large companies to hire full-time workers through third-party agencies (and thereby avoid burdensome restrictions). 
Access to capital is another barrier. 
Mexico lags far behind its emerging-market peers in outstanding bank loans. 
We estimate that Mexico’s annual credit gap – the difference between what companies would be expected to borrow and what is actually loaned – is $60 billion a year. 
Three-quarters of that gap is under-lending to small and medium-size enterprises, which in other economies create new products and services and deliver the most employment growth. 
To achieve the second goal – making Mexico a place where modern companies thrive – Mexico needs not only to remove obstacles such as restrictive zoning, which limit the growth of modern stores; it also must improve the overall business environment and ensure that contracts can be enforced. 
Despite Mexico’s energy riches, for example, the cost of electricity for commercial customers is 73% higher than for US businesses. 
Moreover, Mexico would need to invest $71 billion annually to bring infrastructure to the level needed to support 3.5% growth. 
Mexico also needs to continue to raise educational attainment to prepare the labor force for modern-sector employment. 
The private sector has a critical role to play in bridging the two Mexicos. 
Even in auto manufacturing, where top global competitors are maximizing plant productivity, 80% of companies are small, traditional shops, with fewer than ten employees. 
These subcontractors provide low-cost labor to global parts makers and assemblers and have one-tenth the productivity of producers in the top 10%. 
Some global companies are already working with their small suppliers, providing technical know-how and even access to capital for new equipment and technology. 
Mexico needs more of this kind of development. 
Most important, Mexico needs to become a place where those who do not play by the rules are penalized and where law-abiding companies grow and prosper – and inspire others to emulate their success. 


Kill and Let Die 
NEW YORK – By a strange but fitting coincidence, US President Barack Obama and his Republican challenger, Mitt Romney, held their final debate – which focused on foreign policy – just as the new James Bond film, Skyfall, had its world premiere in London. 
Although 007, who turned 50 this year, is a British-born global brand, his influence on the American political psyche – and that psyche’s influence on Bond – is obvious. 
Indeed, the latest production is a British-American partnership, and the violent special-operations action hero that Bond has come to embody reflects US assumptions about foreign policy and the rule of law. 
The presidential debate merely reinforced the dominant real-time plotline: Assassinating people (including US citizens) solely on the president’s orders, once considered a war crime, has become an applause line. 
That is as true for Romney as it has been for Obama. 
Romney asserted that his foreign policy was “pretty straightforward.” 
It was, he said, “to go after the bad guys, to make sure we do our very best to interrupt them, to kill them, to take them out of the picture.” 
In other words, he would “kill them” where they were found, not only on the battlefield, but also in other sovereign countries, such as Pakistan, without charge or trial. 
Obama, for his part, scored points by shaming Romney for having opposed the illegal raid that killed Osama Bin Laden. 
Later, he championed the drone-strike strategy that he has used to “kill bad guys” without charge or trial. 
Romney cheered. 
Neither candidate mentioned that, by some estimates, the drone strikes have killed far more civilians than “suspected terrorists.” 
The most authoritative study puts civilian deaths from drone strikes between June 2004 and mid-September 2012 at 474-881, including 176 children. 
Prior to the debate, CNN Chief White House correspondent Jessica Yellin asked Obama about his drone strategy. 
His vaguely worded answer – the attacks “must be authorized by our laws” – made no mention of trials for those accused of terror crimes, of international war-crimes treaties, or any other bow to legality. 
Indeed, US law cannot “authorize” drone strikes if they are carried out in countries with which the US is not at war. 
Not even Americans are exempt. 
Obama averred that American citizens “are subject to the protections of the constitution and due process.” 
But Anwar al-Awlaki was a US citizen whom Obama directed to have killed in just this way. 
So was al-Awlaki’s 16-year-old son, who was deliberately killed by a drone strike two weeks later. 
I happened to watch the debate while surrounded by other American teenagers. 
They had grown up in a post-9/11 environment saturated with the claim that US presidents may call anyone anywhere a “bad guy” and order his or her summary assassination. 
“That’s illegal,” I kept saying when the candidates spoke of “killing bad guys” rather than arresting or extraditing them to face criminal charges. 
None of these well-educated teenagers believed me. 
Having grown up with presidents and presidential candidates tossing around the Bond meme virtually without challenge, they thought I was making things up. 
“Of course it’s legal,” they said. 
Both candidates had just told the entire world that they planned to continue to engage in what are, according to both US and international law, criminal acts. 
The debate’s moderator, Bob Schieffer, who should have known better, said nothing. 
In the background of this legal and moral failure is major cheerleading about the Bin Laden raid, in which a US Navy SEAL team swarmed a compound in a residential Pakistani neighborhood and assassinated a lot of people. 
The book No Easy Day, written by a team member, is a bestseller. 
Likewise, this month the magazine Vanity Fair published a hagiographic behind-the-scenes look at the steps that Obama and his team took in the run-up to the raid. 
What is striking about No Easy Day and the Vanity Fair article is that the rationale for legal due process is reflected in every other paragraph. 
The sources cited by Vanity Fair confirm that the intelligence on which the team made the decision to “go in” was impressionistic and incomplete (that is, the target, judging from the length of his shadow, was “tall and thin” like Bin Laden, but his identity was not 100% certain). 
It was also clear from the piece that arresting the man would have been no more difficult – and perhaps easier – than killing him and jeopardizing his family. 
Like the Navy SEALs and other special-ops teams now roaming the planet in secrecy, Bond is an extrajudicial killer, whether for personal revenge, as in Quantum of Solace; geopolitical reasons, as in Die Another Day; or simply because someone is in his way. 
His bosses, too, identify targets from afar and order their annihilation, without revealing any awareness of ambiguity concerning who is a “bad guy” or acknowledging the possibility of poor intelligence or mistaken identity. 
His innocent victims, meanwhile, are invisible. 
Fabulous military technology is part of the spectacle and becomes its own justification – a character in the hero’s story line. 
For 50 years, James Bond and his “license to kill” have stood for imperial justice beyond the limits of law. 
But he is imaginary, as are his victims. 
America’s violation of domestic and international law – and the bodies of innocents mown down by drones or operatives – are all too real. 

Reassurance and Resolve in East Asia 
WASHINGTON, DC – As territorial frictions involving China and many of its neighbors persist in the East and South China Seas, the United States needs a clearer regional strategy. 
America must simultaneously uphold its interests and alliance commitments and avoid counterproductive confrontation, or even conflict. 
Doing so will be difficult, especially because it is not clear whose claims to the region’s disputed islands and outcroppings should be recognized, and the US has no intention of trying to impose a solution. 
At the same time, the US must modernize its armed forces in response to new challenges – particularly China’s rise. 
As China develops advanced precision weapons to create a so-called anti-access/area-denial capability, the US must consider how to respond to the growing vulnerability of its bases and naval forces in the region. 
There is no easy answer to these challenges. 
What is needed is a nuanced approach, which is what we develop in our new book Strategic Reassurance and Resolve. 
Our approach is an adaptation of America’s longstanding “engage but hedge” strategy, through which the US and its allies have used economic, diplomatic, and sometimes military instruments to give China incentives to rise peacefully, while maintaining robust military capabilities in case engagement proves unsuccessful. 
The problem is that hedging has typically been interpreted to mean sustaining overwhelming US military superiority. 
But China’s development and acquisition of advanced weapons, including precision anti-ship missiles, makes it implausible that the US can maintain its forces’ decades-long invulnerability in the region, including the ability to operate with impunity near China’s shores. 
Given China’s own history of vulnerability to foreign intervention, unilateral US efforts to maintain overwhelming offensive superiority would only trigger an increasingly destabilizing arms race. 
Some American strategists advocate a largely technological solution to this dilemma. 
Their approach, a concept called “Air-Sea Battle,” implies a mix of defensive and offensive tools to address the new challenges posed by the proliferation of precision-strike weaponry. 
Officially, the Pentagon does not direct the concept of “Air-Sea Battle” against any particular country. 
For example, Iran’s possession of precision-strike capabilities – and a much more hostile relationship with America – would warrant new US initiatives to cope with growing security vulnerabilities. 
But it is clearly China, which has the resources to develop a credible anti-access/area-denial strategy, that most worries US military planners. 
Some Air-Sea Battle proponents propose tactical preemptive strikes on missile launchers, radars, command centers, and perhaps also air bases and submarine ports. 
Moreover, many of these attacks would be carried out with long-range weapons based on US territory, rather than at sea or on the territory of regional allies, because these assets would be less vulnerable to preemptive attacks themselves. 
Unfortunately, Air-Sea Battle’s underlying logic poses serious risks of miscalculation – beginning with the name. 
Air-Sea Battle is, obviously, a concept for battle. 
Though the US clearly needs war plans, it also needs to be wary of sending China and regional partners the message that its hottest new military ideas base deterrence primarily on the ability to win a war quickly and decisively through large-scale escalation early in a conflict. 
Air-Sea Battle recalls the AirLand Battle idea that NATO adopted in the late 1970s and early 1980s to counter the growing Soviet threat to Europe. 
But China is not the Soviet Union, and America’s relationship with it needs to avoid Cold War echoes. 
“Air-Sea Operations” would be a much more appropriate name for a more effective approach. 
Such a doctrine could include classified war plans; but it should center on a much broader range of twenty-first-century maritime activities, some of which should include China (such as the ongoing counter-piracy patrols in the Gulf of Aden and some military exercises in the Pacific). 
Moreover, war plans need to avoid depending on early escalation, particularly against strategic assets on the Chinese mainland and elsewhere. 
If a skirmish erupts over a disputed island or waterway, the US needs to have a strategy that enables a favorable resolution short of all-out war. 
Indeed, in the broader context of Sino-American relations, even “victory” in such an encounter might be costly, because it could trigger a Chinese military buildup designed to ensure a different outcome in any subsequent skirmish. 
Instead, the US and its partners need a broader range of responses that would enable them to adopt effective measures that are proportionate to the stakes involved – measures that demonstrate a willingness to impose meaningful costs without triggering counterproductive escalation. 
Likewise, America’s military modernization agenda needs balance. 
Responding to the threat that China’s growing arsenal of advanced weapons poses to many of its assets does not require greatly expanding America’s long-range strike platforms. 
In fact, doing so would inevitably create incentives for US war planners to emphasize preemptive options in contingency plans and deemphasize American forces’ day-to-day presence in forward areas near China, where they contribute significantly to maintaining deterrence. 
And it would create a powerful incentive for Chinese war planners to develop further their country’s anti-access/area-denial capabilities. 
Continued US engagement in the region requires it to heed the lesson of the Cold War: No technological fix will provide complete invulnerability. 
Economic and political measures, as well as a sustained US military presence, would be more effective than reliance solely on offensive escalation should the US need to counter Chinese actions that threatened important American interests. 
Indeed, relying on the capacity to attack the Chinese mainland to defend freedom of navigation and alliance commitments in East Asia could tempt China’s leaders to test America’s willingness to risk Los Angeles to defend the Senkaku Islands. 
A more balanced US strategy to increase regional stability requires a judicious combination of resolve and reassurance, and a military posture that reflects this mix. 
This approach would give the US the best chance to induce China’s leaders to adopt a more cooperative approach to the region’s territorial disputes. 

Europe’s Digital Reactionaries 
BRUSSELS – Many European politicians praise the Internet. 
Unfortunately, their lofty rhetoric often rings hollow. 
While calling for a strong digital agenda in one breath, the same politicians, supported by protectionist interests at home, often argue for putting a brake on the Internet’s “disruption” by imposing strict new regulation. 
Such double-talk is misguided. 
If Europe is to prosper in the twenty-first century, its newly elected leaders need to embrace a positive, concrete pro-Internet agenda. 
That means signing digital free-trade agreements and creating a true European digital single market out of today’s fragmented 28 national jurisdictions. 
Long-outdated copyright and licensing laws must be overhauled. 
New privacy rules must protect citizens and allow innovation; calls for mandatory data localization and local versions of the “Internet” must be resisted. 
If carried out, this substantive digital agenda could provide what Europe needs most after the financial crisis: economic growth. 
According to the OECD, the Internet now accounts for up to 13% of economic output in the US. 
Every type of business now depends on the digital economy. 
With a few keystrokes, small companies selling Polish antiques, traditional Bavarian costumes, and Spanish shoes have burst out of their home markets and reached consumers around the globe. 
By unleashing the Internet, financially strapped Europe can create new jobs without taking on new debt. 
European Commission figures suggest that Europe’s so-called “app-economy” workforce will rise to 4.8 million by 2018, from 1.8 million in 2013, with revenues more than tripling, to €63 billion ($86 billion). 
We also know that some 90% of jobs by 2020 will require workers to have skills in information and communication technologies. 
Such success requires breaking down resistance by Europe’s market incumbents and embracing rather than blocking new entrants. 
Under the European Union’s current fragmented regulatory regimes, companies must obtain separate permission to sell in each of the 28 national markets. 
It takes even large companies like Apple and Google years of work to open local stores and launch new offerings. 
The growth of small European innovators, such as Spotify, has been stunted. 
Many new services that allow us to swap, rent, and share everything from taxi rides to second-hand designer dresses are struggling to get off the ground. 
Internet skeptics could also scuttle potentially transformative transatlantic free-trade talks, launched with great fanfare last year. 
A growing volume of trade is conducted in bits and bytes that flow over the Internet. 
A new study by McKinsey finds that digital-driven, knowledge-intensive goods today comprise a full 50% of total global cross-border trade – and are growing at least 1.3 times as fast as other types of trade. 
If current trends persist, the volume of such goods could triple by 2025. 
Yet many Europeans talk of imposing draconian privacy or data-localization rules as a precondition for signing any new free-trade deal. 
Such requirements would be diametrically opposed to the Internet’s founding principles of frictionless, borderless access to information. 
Like Russia and China, Europe would be blocked from the rest of the global Internet, because new services that are unable to build European data centers would be locked out. 
In this context, the European Court of Justice’s recent ruling, which recognizes a “right to be forgotten” – and thus requires Google to remove search information, even when legal, on demand – represents a significant danger. 
By requiring every search service, including those of university libraries, to make it difficult to find legal information, we risk opening the door to large-scale private censorship. 
Such unintended consequences pervade EU competition policy as well. 
European policymakers are considering a regulation that would require Internet platforms like app stores, social networks, search engines, and ecommerce sites to meet certain publicly specified criteria to achieve economic, social, or political ends. 
Such regulation, it is argued, would facilitate the emergence of European Internet platforms and guarantee “open access” to users. 
In fact, these moves might create new barriers to entry, entrenching market leaders and undermining innovation. 
Internet markets are typified by dramatic change. 
Witness how Facebook overtook MySpace in social networks, or how Apple upended the market for smartphones – or how new services and markets are constantly being invented. 
Twitter has displaced no one; rather, it supplements and competes with all other modes of communication. 
By contrast, EU competition investigations drag on and on. 
It took ten years to reach a settlement with Microsoft; it may end up taking that long with Google. 
By that point, the fast-paced Internet environment may well have evolved beyond recognition. 
European authorities should avoid shackling digital progress. 
Europe’s consumers should be able to buy online songs, watch online video, and shop online for whatever products they choose, and Europe’s businesses should be able to benefit fully from the EU’s giant market. 
Indeed, letting the Internet blossom not only makes good business sense; it might also help to restore voters’ waning faith in the European project. 

Back to the Future in Ukraine and Asia 
NEW YORK – With Russian troops occupying Ukrainian territory and the Chinese Navy inhabiting Philippine territorial waters in the South China Sea, the world is now entering a dangerous time warp. 
In geopolitical terms, Russia and China are reenacting the norms of the nineteenth-century, when states competed by amassing hard power in a system of unbridled nationalism and rigid state sovereignty. 
Indeed, Russian President Vladimir Putin seems to be trying to reassemble the nineteenth-century map of Czarist Russia by holding on to Crimea, Abkhazia, South Ossetia, and other parts of the old empire at all costs. 
Similarly, China is staking its claim to the South China Sea in full violation of the United Nations Convention on the Law of the Sea on the basis of vague histories of bygone empires. 
Both countries are now behaving as if power is a zero-sum game dictated by the old rules of realpolitik. 
But, despite US Secretary of State John Kerry’s admonition that Russia’s occupation of Crimea “is not twenty-first-century, G-8, major-nation behavior,” the United States and its allies are struggling to hold on to the postwar twentieth-century world. 
For the US, the destruction wrought by Europe’s rapacious nationalisms, reflected in colonialism and two world wars, had to end in 1945. 
America’s postwar planners concluded that if excessive nationalism was the problem, transnationalism was the answer. 
The US took the lead in building a system of international law, creating the UN, and fostering free trade and open markets around the world, while maintaining the security umbrella that allowed transnational institutions like the European Union and the Association of Southeast Asian Nations to develop. 
The US was far from consistent or perfect in this process, sometime to murderous effect in places like Vietnam. 
But its steadfast defense of an international system that was more mutually beneficial than any that had preceded it ushered in seven decades of the greatest innovation, growth, and improvement our species has ever known. 
Now, however, with China rising, global power rebalancing, and the US worn down by two decade-long wars that have eroded its credibility, the postwar international order is under intense strain. 
Contemporary Japan, a stalwart supporter of the US-led postwar system, was also transformed by it. 
When US Commodore Matthew Perry blasted his way into Tokyo harbor in 1854, he found a weak, isolated, and technologically backward country. 
Fourteen years later, Japan began a massive modernization drive under Emperor Meiji; thirty-seven years after that, its victory in the Russo-Japanese war shocked the world. 
Rapidly appropriating the lessons of nineteenth-century Europe, Japan in 1894 launched a brutal five-decade effort to dominate Asia and secure its resources, stopping only when America’s atomic bombs flattened Hiroshima and Nagasaki. 
After the war, under America’s protection and initial guidance, Japan emerged as a champion of a rule-based international system. 
It financed the UN to a greater degree in relative terms than any other country, engaged meaningfully in other international institutions, and supported the development of its Asian neighbors, including China. 
But, with China’s leaders now aggressively demonizing Japan and pressing disputed territorial and maritime claims more assertively than ever before, the country is being thrust in a direction that Prime Minister Shinzo Abe, with his penchant for historical revisionism and highlighting Japan’s nationalist past, may in some ways have already favored: back to the nineteenth century. 
Europe, too, embraced the postwar international system. 
With security outsourced to America, European governments shifted their focus and expenditures to social welfare and set about building a twenty-first-century post-sovereign utopia that has blurred national divisions and replaced aggression and hostility with negotiation and compromise. 
The EU’s twenty-first-century dream now confronts the nineteenth-century Czarist bear, flashing its atavistic claws on the Russia-Ukraine border. 
And, just as ASEAN has been unable and unwilling to stand up to China over its encroachment in the South China Sea, the EU is already discovering the limits of its soft-power, consensus-driven approach to Russia. 
If a twenty-first-century post-sovereign system remains an unreachable dream in our Hobbesian world, and reverting to nineteenth-century norms by acquiescing to aggressive behavior by Russia and China is unpalatable, defending the postwar international system may be the best option we have. 
Ironically, a nineteenth-century response, featuring balance-of-power politics and the rearmament of Europe and Japan, may be part of what is required to do it. 

Russia’s Last Act? 
RZESZOW – With the Winter Olympics underway in Sochi, Russia is again in the global spotlight – and President Vladimir Putin is taking the opportunity to present his country as a resurgent power. 
But, beneath the swagger and fanfare lie serious doubts about Russia’s future. 
In fact, long-term price trends for the mineral resources upon which the economy depends, together with Russia’s history (especially the last two decades of Soviet rule), suggest that Putin’s luck may well be about to run out. 
Mineral-resource price cycles generally begin with a rise lasting 8-10 years, followed by a longer period of stable, relatively low prices. 
Given that prices have been on an upswing since the middle of the last decade, they should begin declining within two years, if they have not done so already. 
Moreover, the last price trough lasted more than 20 years, implying that Russia cannot expect simply to wait it out. 
But, beyond acknowledging the need to cut spending – an obvious imperative, after the estimated $50 billion cost of the Sochi Olympics – Putin has not signaled any concrete plans to tackle Russia’s economic weaknesses. 
Russia faced a similar challenge in the 1970’s and 1980’s – and, like Putin today, its leaders failed to do what was needed. 
According to former Prime Minister Yegor Gaidar, who led Russia’s only post-Soviet government that was oriented toward systemic change, the socialist command economy exhausted its growth potential by 1970. 
Under non-totalitarian circumstances, the threat of stagnation would have generated strong pressure for systemic reform. 
But the Soviet Union’s aging communist leadership, encouraged by the OPEC-generated oil-price explosion and the discovery of massive hydrocarbon reserves in western Siberia, took a different tack, using natural-resource revenues to finance continued military expansion. 
In an effort to appease the public, the Soviet leadership increased food imports – both directly (meat imports, for example, quintupled from 1970 to 1980) and indirectly (by increasing feedstock imports). 
While this strategy worked in the short term, it caused food consumption to increase far beyond what the economy could sustain. 
As a result, the Soviet economy became even more dependent on resource revenues, making it extremely vulnerable to price fluctuations in international commodity markets. 
When mineral prices began to decline in the early 1980’s – reaching their lowest point in 1999 – the economy, which had already been stagnating for about five years, went into a free-fall. 
Today, the Russian economy is no more resilient than it was in the late Soviet era, with commodities, especially oil and natural gas, accounting for around 90% of total exports and manufacturing for only about 6%. 
If anything, the economy’s dependence on exports of fuels and industrial minerals has increased, meaning that smaller price fluctuations have a greater impact on Russia’s fiscal and external position. 
Indeed, some observers – including the Central Bank of Russia (CBR) – have predicted that the country’s current account could slip into deficit as early as next year. 
A lasting deficit would eliminate the major economic difference between Putin’s Russia and its Soviet counterpart during the 1980’s – namely, the financial buffer that has been accumulated over the last decade. 
It is this buffer – which amounted to $785 billion in the 2000-2011 period – that protected the economy from a larger shock when the global financial crisis erupted in 2009, and that has financed Russia’s foreign-policy initiatives, including its recent cooperation with Ukraine. 
The CBR’s warning of twin fiscal and current-account deficits assumed that oil prices would remain steady, at $104 per barrel in 2015. 
But my expectation that oil prices will decline over the next 3-7 years suggests that Russia’s medium-term prospects are actually considerably worse. 
In short, Russia will soon have to confront diminished macroeconomic health, with few options for restoring it. 
Russia’s uncompetitive manufacturing sector certainly cannot pick up the slack, and this is unlikely to change, given Putin’s unwillingness to pursue the needed shift to a more knowledge-intensive economy. 
This new reality will not only affect Russia’s foreign-policy and imperial ambitions; it will also undermine the relative social and political stability that has characterized the last decade. 
Without resource revenues, the government will struggle to finance the policies and programs that are needed to placate ordinary Russians. 
In this context, the Sochi Olympics, intended to herald Russia’s triumphant return as a global power, may soon come to be regarded as a swansong. 


 

Japan and the Politics of Guilt 
CANBERRA – Japan is again alienating its neighbors and driving its friends to despair over the issue of accepting responsibility for its wartime aggression and atrocities. 
With the election of the new government, the voices of denial are heard again at the highest levels, and are resonating with the public, including the young, in ways that would be unthinkable, by contrast, in modern Germany. 
All of this is fueling nationalist sentiment in China and South Korea, and making even more dangerous the already volatile territorial disputes in the East China Sea and the Sea of Japan. 
It may be, as some Japanese colleagues tell me, that newly elected Prime Minister Shinzo Abe, despite his deeply conservative nationalist background and instincts, is ultimately a realist who will do what it takes – no doubt with the help of pressure from the United States – to defuse these tensions. 
But there are three specific talismanic issues on which he and his colleagues have taken worrying positions, jangling regional nerves. 
The first is the long-running saga of an appropriate apology for Japan’s initiation and conduct of aggressive war the years before and during World War II. 
For many years, the affected countries sought a comprehensive and unequivocal apology; as Australia’s foreign minister from the late 1980’s, I pushed hard for it in Tokyo, as a form of closure that was morally right and in Japan’s own interests. 
Eventually, on the 50th anniversary of Japan’s defeat in 1995, Prime Minister Tomiichi Murayama responded with personal language of both “deep remorse” and “heartfelt apology.” 
Most subsequent leaders have repeated these sentiments in various degrees – albeit never to the complete satisfaction of China or South Korea. 
But, after his landslide election victory last month, Abe told the newspaper Sankei that he would seek to replace the landmark 1995 statement – “issued by a Socialist prime minister” – with a “forward-looking” statement, the content of which he did not describe. 
The second issue is that of a specific apology to the “comfort women” – from many countries, including my own, but especially South Korea – who were sexually enslaved in army brothels. 
Then-Chief Cabinet Secretary Yohei Kono broke the ice in 1993, expressing “sincere apologies and remorse” to all those who had “suffered immeasurable pain.” 
But Abe and several of his colleagues have gone on the record over the years – including during Abe’s first term as Prime Minister in 2006-2007 – denying that coercion was involved. 
In 2007, his national security adviser told a colleague of mine, “All of this is the work of Korean leftists: there’s nothing to it.” 
Now, in January 2013, Abe’s chief cabinet secretary, Yoshihide Suga, has said that experts would be invited to study the basis of Kono’s statement. 
Finally, there is the issue of the Yasukuni Shrine to Japanese war dead, which records in its “Book of Souls” 14 A-class war criminals, and contains a museum that glorifies Japan’s conquests as “just wars fought for survival and self-defense” or for the “liberation of Asia.” 
Abe has been a regular visitor to Yasukuni. 
He visited it again last October, after being elected LDP leader, and expressed “bitter grief” during the election campaign that he had not done so during his previous term as Prime Minister. 
It has been reliably reported that he wants to visit the shrine while in office this time. 
Fourteen of his 19 cabinet members are reported to belong to a group promoting pilgrimage tours to the site. 
Compounding these concerns is evidence that Japanese public opinion is sympathetic toward the positions that Abe has taken or seems to favor. 
In a Jiji Press opinion poll conducted in January, 56.7% of those surveyed believed that Abe should visit Yasukuni now – up significantly from 2006, when 43% took a similar position. 
There are, of course, always two sides to these stories. 
It is possible to argue – as many Japanese do – that much of the negative reaction by Japan’s neighbors has been driven by cynical nationalist considerations. 
Campaigners for South Korean comfort women, for example, have often failed to acknowledge the number and intensity of the statements that have been made on this issue over the last two decades, and the amount of compensation on offer. 
Likewise, China may have set the bar too high concerning the language that it has demanded in any general apology. 
But, even before Abe’s latest wavering, there is much more that Japan could have done long ago – and which it should still do – to put its position beyond reasonable criticism. 
The benchmark 1995 Murayama apology remains a personal one, because the Japanese Diet, then and since, would not agree to anything as strong: a “deep feeling of remorse” was as much as they could muster, and even then 241 members abstained. 
Moreover, Murayama’s statement referred vaguely to “a certain period in the not-too-distant past,” rather than to specific war years, and others have since resisted phrases – for example, “war of aggression” or “colonial rule” – that Japan’s neighbors have not unreasonably sought. 
The more fundamental problem is that Japan seems unable, as a nation, to manage the kind of collective psychological shift that has transformed Germany, with which it is inevitably compared. 
Apologizing sincerely for the sins and omissions of earlier generations is never easy. 
Australia had a long national debate before we could say that we were sorry for the horrible past mistreatment of our Aboriginal people, particularly the “stolen generations” of Aboriginal children who were regularly taken from their parents by governments until the 1970’s. 
But statesmen, if they are to deserve the name, sometimes must take the politically uncomfortable high ground – and then bring their publics along. 
Leadership of that quality has been a long time coming in Japan. 

Japan As Number Three 
TOKYO – China has now officially supplanted Japan as the world’s second largest economy. 
The question for Japan is whether or not the country will continue to tumble down the list of the world’s great economies, or whether its politicians will return to a path of reform that can revive growth. 
That the ruling Democratic Party of Japan now seems trapped in a power struggle between Prime Minister Naoto Kan and party power broker Ichiro Ozawa suggests that serious economic reform is not at the top of the DPJ agenda. 
In the 1980’s, Japan’s annual GDP growth averaged 4.5％; since the early 1990’s, the economy has been virtually stagnant, averaging barely 1% annual growth. 
In the 1990’s, Japan’s government, grossly misjudging the sources of the economy’s difficulties, vastly increased government expenditures on public works, but ignored supply-side adjustments. 
This policy created new vested interests, and thus a new political environment, as construction companies and other beneficiaries of government contracts began donating heavily to the ruling Liberal Democratic Party. 
This kept the LDP’s coffers brimming, but posed the risk of a serious financial crisis in the late 1990’s. 
It was in these circumstances that Prime Minister Junichiro Koizumi took office in April 2001. 
Under Koizumi’s leadership, insolvent banks were made whole again. 
At the start of Koizumi’s government, 8.4% of bank loans in Japan were non-performing. 
By the end of his tenure, the rate was down to 1.5%, restoring the country’s potential for growth. 
Indeed, this was one reason why Japan was so little affected by the “Lehman Shock” that incited the global financial crisis. 
But macroeconomic reform came to a screeching halt after Koizumi stepped down in 2006. 
A series of short-term prime ministers began a pattern of huge government outlays. 
Not surprisingly, the economy deteriorated. 
Frustrated by the long-ruling LDP’s poor political and economic management, voters opted last year for change at the top. 
But the pattern of economic mismanagement, far from being reversed, has only become worse. 
Huge spending increases were directed at farmers and households. 
As a result, the share of tax revenue to total spending this fiscal year slipped below 50%, something unseen in Japan’s entire post-war history. 
Despite the parlous fiscal position, for now the market for Japanese government bonds (JGBs) remains stable. 
But this is because government bonds are purchased mostly by domestic organizations and households. 
In another words, the government’s negative saving is financed by the private sector’s positive savings. 
But that private-sector safety net of savings is fraying. 
Japanese households hold savings of about ¥1.1 trillion in net monetary assets. 
In about three years, however, the amount of JGBs will exceed the total assets of Japanese households. 
Government debt will no longer be backed up by taxpayers’ assets. 
Confidence in the JGB market will likely decline. 
Moreover, as Japan’s society ages, the household savings rate will decrease dramatically. 
This will make it difficult, if not impossible, for the domestic private sector to finance the budget deficit indefinitely. 
And new demands for fiscal expenditures are expected to grow as the country ages. 
In about five years, all baby boomers will be over 65, but pressure on government expenditures for pensions and health care is expected to start sooner, around 2013. 
Japan’s new government, led by Prime Minister Naoto Kan, started discussing a consumption-tax hike to offset the growth in spending. 
But a consumption-tax hike is no panacea, particularly given the government’s lack of a growth strategy. 
Although a tax increase will undoubtedly be needed, it is the wrong priority at the moment – and could prove counter-productive if it causes the economy to decline dramatically. 
Indeed, Koizumi’s government demonstrated the best way to tackle fiscal consolidation. 
Koizumi decided that a primary budget balance should be restored in 10 years. 
And he came close to being successful, as the primary deficit of ¥28 trillion in 2002 was reduced to just ¥6 trillion in 2007. Had this effort been continued for two more years, a primary surplus could have been realized. 
Without a strategy for growth, which includes efforts to reduce government expenditures and a policy to stop deflation, Japan’s economy will remain in the doldrums. 
But Kan still seems unwilling to focus on growth. 
Instead, like so many other leaders before him, he proclaims his desire to find a “third way.” 
But, as history has shown, no third way exists. 
Kan continues to believe that a large government, with growing social-welfare expenditures, is the way to get the economy moving. 
This should not be surprising. 
He used to be involved in civic movements and groups – like environmental organizations – that take little heed of the need for economic growth. 
Increasing the tax burden seems almost a natural part of such a mindset, as does ignorance of the need for increased economic competition. 
Without that, and a renewed focus on growth, Japan will continue to climb down the global ladder of success. 
Indeed, any Japanese who thinks that complacency is an option should look to Argentina. 
A hundred years ago, Argentina was arguably the world’s second wealthiest economy. 
Now, thanks to bad policies, and even worse politicians, it ranks among the world’s also-rans. 

Japan’s Economic Quandary 
CAMBRIDGE – The Japanese economy is a paradoxical mixture of prosperity and failure. 
And, in a significant way, its prosperity makes its failures difficult to address. 
Japan’s affluence is palpable to anyone who visits Tokyo. 
The standard of living is high, with per capita income in 2015 (in terms of purchasing power parity) amounting to $38,000, close to the $41,000 average in France and Britain. 
The unemployment rate, at 3.3%, is substantially lower than the US rate of 5% and the eurozone rate of about 10%. 
But Japan’s economy has now slipped into deflation, with consumer prices lower in March than a year ago, while real GDP is declining. 
Despite near-zero borrowing costs, the fiscal deficit is running at nearly 7% of GDP, and government debt exceeds 230% of GDP. 
The population and the labor force are shrinking, implying even higher debt ratios in the future. 
When Prime Minister Shinzo Abe took office in December 2012, he announced a strategy – comprising three “arrows” – to overcome the economy’s combination of slow growth and low inflation: very easy monetary policy, a short-term fiscal stimulus, and structural reforms to labor and product markets. 
But the government’s economic policies (so-called Abenomics) have not fixed Japan’s problems and are unlikely to do so in the future. 
After Abe appointed Haruhiko Kuroda as the new head of the Bank of Japan (BOJ) and charged him with getting the inflation rate to 2%, Kuroda loosened monetary policy immediately and dramatically, by slashing interest rates and launching large-scale purchases of long-term government bonds. 
This caused a sharp fall in the value of the yen and sent the interest rate on ten-year bonds toward zero. 
The more competitive exchange rate raised the profits of Japanese exporters, but not their output, while the weaker yen also raised import prices, reducing the real incomes of most Japanese households. 
In January, the BOJ went further and introduced negative deposit rates on commercial banks’ mandatory reserves, which markets interpreted as a confusing act of desperation. 
That had the adverse effect of weakening household and business demand. 
And, despite the BOJ’s easing, global financial conditions soon caused a rise in the value of the yen, which rose nearly 10% relative to the dollar. 
This week, the BOJ surprised markets by making no policy change at its meeting, contrary to the widespread expectation of a significant further easing of monetary conditions. 
Markets reacted sharply, with the yen strengthening by 2% against the dollar and the Japanese stock market falling 3%. 
Abe began his fiscal policy with a substantial spending program, focused primarily on repairing and replacing infrastructure affected by the 2011 earthquake. 
But he also raised the value-added tax (VAT) from 5% to 8% to address the enormous deficit and growing national debt. 
The result was an economic downturn, with two quarters of declining GDP. 
The level of real GDP now is no higher than it was in 2008. 
The third arrow of Abenomics – structural policies aimed at boosting potential growth – has barely been launched. 
The good news is that there has been some increase in female labor-force participation and in the number of tourists visiting Japan. 
And a variety of reforms are intended to overhaul the highly protected agricultural sector, though substantial change depends on ratification of the Trans-Pacific Partnership trade agreement (and even then the changes would be phased in only over several decades). 
Japan’s declining population and shrinking labor force is a major long-term challenge – reflected in Abe’s call for more women to work outside the home. 
Although a system of temporary permits allows foreign workers to be employed in Japan for up to three years, the country will not seek to ameliorate adverse demographic trends by opening itself to permanent immigration. 
Reluctance to expand the number of foreign workers and to change work customs to encourage more married women to join the labor force may reflect the relative affluence that Japan currently enjoys. 
The Japanese public may prefer to maintain its current lifestyle and cultural homogeneity, even though doing so is preventing more rapid economic growth. 
Japan’s biggest immediate problem, however, is the budget deficit and government debt. 
If the BOJ succeeds in achieving a 2% inflation rate, the deficit will rise rapidly, as the interest rate on government debt would increase from the current zero level. 
Failure to implement the spending cuts and revenue increases needed to reduce the budget deficit would undermine confidence in the economy’s prospects and increase speculation that the government would eventually resort to some form of debt repudiation. 
Abe thus faces a dilemma in deciding whether to raise the VAT further, from 8% to 10%, as planned. 
Doing so is undoubtedly hard at a time when GDP has declined and CPI inflation has turned negative. 
And yet failure to raise the VAT or to cut government spending means continued large deficits and soaring government debt. 
Abe has said he would offset the immediate contractionary effect of the VAT hike with a short-term fiscal stimulus in the form of higher government spending. 
That might allow the necessary permanent reduction of the deficit without causing a repeat of the economic downturn that accompanied the last VAT increase. 
Another strategy that might help sustain aggregate demand would be to phase in the VAT increase at an annual rate of 1% for three or four years. 
This would give consumers an incentive to increase spending, especially on large ticket items, before each increment raises prices. 
There is no way to avoid shrinking the budget deficit without jeopardizing debt sustainability – and probably sooner rather than later. 
If Abe can get public finances under control, Japan will be in a much stronger position to face its other economic challenges. 

Japan’s Constitutional Albatross 
TOKYO – The approach of the 70th anniversary of Japan’s defeat in World War II has sparked much discussion – and lamentation – of East Asia’s resurgent historical feuds. 
But recent tensions in the region may partly reflect a lack of progress in another, overlooked area: Japanese constitutional reform. 
Indeed, despite the powerlessness so vividly highlighted by the Islamic State’s beheading of two Japanese hostages, Japan has not adopted even one amendment to the “peace constitution” that the occupying American forces imposed on it in 1947. 
At first glance, this may not be altogether surprising. 
After all, the constitution served an important purpose: by guaranteeing that Japan would not pose a military threat in the future, it enabled the country finally to escape foreign occupation and pursue rebuilding and democratization. 
But consider this: Germany adopted an Allied-approved constitution under similar circumstances in 1949, to which it has since made dozens of amendments. 
Moreover, whereas Germany’s constitution, or Basic Law, authorized the use of military force in self-defense or as part of a collective security agreement, Japan’s constitution stipulated full and permanent relinquishment of “the threat or use of force as a means of settling international disputes.” 
Japan is the only country in the world bound by such restrictions – imposed not just to prevent a militarist revival, but also to punish Japan for its wartime government’s policies – and continued adherence to them is unrealistic. 
That is why Japanese Prime Minister Shinzo Abe has made constitutional reform a high priority. 
Having cemented his authority in December’s snap general election, in which his Liberal Democratic Party won a decisive victory, Abe is determined to pursue his goal of building a stronger, more competitive Japan – one that can hold its own against an increasingly muscular China. 
Abe’s effort to “normalize” Japan’s strategic posture began with a reinterpretation of Article 9 of the constitution, according to which the country would henceforth be allowed to engage in “collective self-defense.” 
Japan’s government approved the change last summer, and the United States backed the move as well. 
With the Islamic State’s attempts to leverage the lives of two Japanese hostages, legislation to implement the reinterpretation is set to be submitted to the Diet. 
Yet the reinterpretation has faced some resistance at home and abroad. 
Chinese critics, in particular, have expressed concern that Japanese militarism could reemerge, though they neglect to mention that it is China’s military buildup that prompted Japan’s government to reassess its national defense policy. 
In fact, the reinterpretation amounts to little more than a tweak: Japanese forces can now shield an American warship defending Japan, but they remain prohibited from initiating offensive attacks or participating in multilateral military operations. 
Given that the United Nations charter recognizes individual and collective self-defense as an “inherent right” of sovereign countries, the change should be uncontroversial. 
But significant obstacles continue to block wider constitutional reform. 
Amendments require a two-thirds majority in both chambers of the Diet, and a majority in a popular referendum, making Japan’s constitution one of the world’s most difficult to revise. 
To facilitate his ambitions, Abe hopes to scale down the requirement to simple majorities in both chambers or eliminate the need for a public referendum. 
Given popular resistance to change, Abe’s task will not be easy. 
Whereas citizens of most democracies regard their constitutions as works in progress – India, for example, has amended its constitution 99 times since 1950 – the Japanese largely treat their constitution as sacrosanct. 
As a result, rather than ensuring that their constitution reflects social, technological, economic, and even ideological developments, they zealously uphold its precise provisions, like religious fundamentalists defending the literal truth of scripture. 
Moreover, pacifism is deeply ingrained in the Japanese psyche, even among young people, largely owing to the painful legacy of Japan’s prewar militarism. 
Indeed, a poll conducted by the World Values Survey last year revealed that only 15.3% of Japanese – compared with 74.2% of Chinese and 57.7% of Americans – would be prepared to defend their country, the lowest rate in the world. 
Just 9.5% of Japanese under the age of 30 said that they would be willing to fight. 
Given such opposition, an actual revision of Article 9, rather than just a reinterpretation, does not seem feasible, especially while the avowedly pacifist Komeito party remains part of the ruling coalition. 
Even if Abe manages to relax the amendment requirements – no easy feat, given the likelihood that a popular referendum would reveal weak public support – he will probably have to leave the change to his successor. 
But one factor could bolster Abe’s cause considerably. 
Explicit US support for Japanese constitutional reform might not only blunt Chinese criticism, but could also reassure many Japanese that updating Article 9 would not amount to rejecting the postwar order that the Americans helped to establish in Japan. 
Such a move would also serve US security interests. 
A more confident and secure Japan would be better able to block China from gaining ascendancy in the western Pacific, thereby advancing the central US policy objective of ensuring a stable balance of power in Asia. 
No other country in the region could act as a credible counterweight to China. 
Today’s Japan – a liberal democracy that has not fired a single shot against an outside party in nearly seven decades, and that has made major contributions to global development during this period – is very different from the Japan of 1947. 
Its constitution should reflect that. 

Japan’s Demographic Lessons for Europe 
BRUSSELS – Demography is not destiny, at least not entirely. 
Over centuries, policy can affect fertility decisions, and migration can transform a country, as the experience of the United States shows. 
Over shorter time horizons, however, demographic trends must be taken as given, and can have a profound impact on growth. 
Yet demographic factors are often neglected in economic reporting, leading to significant distortions in assessments of countries’ performance. 
Nowhere is this more apparent than in Japan. 
With real output – the key measure of economic performance – having risen by only about 15% since 2000, or less than 1% per year, Japan easily seems the least dynamic of the worlds’ major economies. 
But given Japan’s demographics – the country’s working-age population has been shrinking by almost 1% per year since the start of this century – this result is remarkable. 
In fact, Japan’s growth rate per working-age person was close to 2% – much higher than in the US or in Europe. 
Though the US economy grew more than 35% since 2000, its working-age population also grew markedly, leaving the annual growth rate per working-age person at only about 1%. 
That indicator – growth rate per working-age person – is not widely used by economists, who instead focus on GDP per capita. 
By that measure, Japan is doing about as well as Europe and the US. 
But, while per capita indicators are useful for assessing a country’s consumption potential, they do not provide an adequate picture of growth potential, because they include the elderly and the young, who do not contribute to production. 
Even in Japan, with its high life expectancy, those over the age of 70 do not contribute much to output. 
So, given its rapidly declining potential, Japan has been extraordinarily successful. 
A key reason is that it has put a growing proportion of its working-age population to work: unemployment is today at a record low of less than 3%, and almost 80% of those who could work have a job, compared to about 70% for Europe and the US. 
Japan’s achievement of full employment and high job growth over the last two decades is all the more noteworthy in view of near-permanent deflation during this period (most prices are still lower today than they were 15-20 years ago). 
This should give food for thought to those who maintain that deflation imposes unbearable economic costs. 
The Japanese experience holds important lessons for Europe, where the demographic future looks a lot like Japan’s past. 
The eurozone’s working-age population has not grown at all in recent years, and will soon start to decline at a rate similar to Japan’s over the last generation. 
It seems unlikely that immigration will alter the trend. 
In recent years, Europeans, like Japanese, have proven to be highly resistant to large-scale immigration, which is what would be required to offset demographic decline. 
Moreover, the eurozone has now settled on a current-account surplus of around 3% of GDP. 
That is similar to the level long seen in Japan (except for the short period in the aftermath of the 2011 Fukushima Daiichi nuclear meltdown). 
A first lesson of Japan’s experience is that, despite the eurozone’s difficulty generating inflation in an aging society characterized by excess savings, growth is not necessarily out of reach. 
Rather, given Japan’s record of growth without inflation, the European Central Bank should recognize that its target of “close to 2%” inflation might not be so important after all. 
In any case, the particularities of the eurozone’s structure mean that the ECB will have no choice but to halt its bond-buying operations in a year or so. 
This means that the ECB will not be able to follow in the footsteps of the Bank of Japan, which continues to purchase large volumes of government bonds, without any visible pick-up in inflation. 
Another lesson from Japan is that a country with a large savings surplus can handle a large public debt, because it can be financed internally. 
That does not necessarily mean that it is desirable to run up the debt. 
Japan’s debt-to-GDP ratio now exceeds 150% of GDP (taking into account the large financial assets of the government-owned savings institutions), and continues to rise, owing to large fiscal deficits. 
This brings us to a final key lesson from Japan: in a low-growth economy, the debt-to-GDP ratio can quickly spin of out control. 
Fortunately, it seems that this lesson already has been learned, with the average deficit in the eurozone now amounting to only around 2% of GDP. 
The deficit cap imposed by the Stability and Growth Pact (3% of GDP) seems to have had at least some impact in terms of stabilizing the debt ratio. 
The structure of the eurozone imposes limits on the use of both fiscal and monetary policy. 
This should prevent the excessive build-up of debt, ultimately making it easier for the eurozone to manage a future in which the only way to sustain growth is to capitalize fully on the economy’s declining demographic potential. 

Pro-Growth Education for Japan 
TOKYO – Since Prime Minister Shinzo Abe initiated his “Abenomics” reform program in 2012, Japan’s economy has received a remarkable boost. 
But the job is not yet finished. 
I once argued that the three “arrows” of Abenomics – monetary easing, fiscal expansion, and a long-term growth strategy – should be given grades of A, B,and E, respectively. 
Monetary easing gets an “A,” even though, as critics love to point out, the 2% inflation target is far from being achieved. 
The reason is that the inflation target is only a means to an end: full employment. 
Here, Japan has been tremendously successful, creating more than 2.7 million jobs since the first arrow of Abenomics was launched. 
The job vacancy-to-applicant ratio now stands above parity, though it does remain low – even below 50% – in jobs such as clerical work, where automation is replacing workers and suppressing wages. 
Fiscal policy gets a “B,” because – along with monetary expansion – it has shifted the economy from excess supply to excess demand. 
It is only on the third arrow, a long-term growth strategy underpinned by structural reforms, that Abenomics has performed insufficiently, because so much work remains to be done. 
And the current excess-demand situation makes that work all the more urgent. 
A critical element of an effective long-term growth strategy will be to address the barrier to growth posed by Japan’s rapidly aging and shrinking population. 
That means ensuring not only that the country’s young people have jobs, but also that they are educated and productive enough to carry the weight of the economy on their shoulders. 
To that end, Japan needs to invest more in education. 
This proposition is not unheard of in Japan. 
On the contrary, the Abe government currently places a high priority on preschool education – an approach supported by research conducted by the Nobel laureate economist James Heckman, who has found that investment in preschool education brings large returns. 
But there is one aspect of Heckman’s work that Japan may fail to embrace. 
According to Heckman (writing with co-authors Jora Stixrud and Sergio Urzua), non-cognitive skills such as cooperation are just as important as cognitive skills, like reading or math, to improve labor-market productivity, because they enhance the capacity to take initiative and assert effective leadership. 
Yet, in Japan, schools continue to emphasize rote learning, with students memorizing facts and formulas, rather than practicing critical thinking, problem solving, and conflict resolution. 
This undermines innovation and productivity in the best of times. 
But it is all the more harmful at a moment when automation is taking over a growing number of roles. 
As part of a new long-term growth strategy, Japan must rethink its approach to education. 
For some clues as to how that can be done, it is worth examining the ideas of the composer Zoltán Kodály, whose widow I met on a recent trip to Hungary, where I was invited not just as an economist, but also as an aspiring musician. 
(After my lecture at the central bank, my own composition echoed in the lecture hall.) 
The Kodály method of music education does not simply teach a child which motions it takes to read or play a song. 
Instead, it allows children, from a very young age, to develop a relationship with the music by, say, singing or moving to it. 
And even that process is not rigid: for example, his method encourages group singing without adherence to particular written notes, in order to foster interactions within the group 
The Kodály method bears some similarities to the Suzuki method, created by the Japanese violinist Shinichi Suzuki, whose curriculum emulates the process of natural language acquisition. 
In both cases, the way children actually think and develop musical sense – rather than rigid rules and structures – guides the learning process. 
In Japan, where cognitive, academic scores are overly emphasized above holistic human development, this style of engagement with the arts, including music, can foster not only an appreciation of beauty, but also imagination, cooperation, initiative, leadership, empathy, and compassion. 
And the child-development approach to learning can be applied to other subjects as well, enabling children to spend more time engaging with the material and one another. 
An effective long-term growth strategy – in Japan and elsewhere – must recognize that no human can out-memorize a machine. 
Instead, such a strategy must make the most of what humans, and only humans, do best. 

Keynes Reborn 
TOKYO – In the fourth century, Japan’s emperor looked out from a small mountain near his palace and noticed that something was missing: smoke rising from people’s kitchens. 
While there were some faint trails here and there, it was clear that people were facing such harsh economic conditions that they could barely purchase any food to cook. 
Appalled at the circumstances of the Japanese people, who were largely peasants, the emperor decided to suspend taxation. 
Three years later, the palace gates were in disrepair and the stars shone through leaks in the roof. 
But a glimpse from the same mountain revealed steady plumes of smoke rising from the peasants’ huts. 
The tax moratorium had worked. 
The people were so grateful to the emperor – who became known as Nintoku (Emperor with Virtue and Benevolence) – that they volunteered to repair his palace. 
Almost two millennia later, the Japanese people are, again, under economic pressure. 
A steep hike in the consumption tax in 2014, together with another hike expected in the near future, has undermined household spending. 
As in the Nintoku story, it is the wealth of the people – not that of the government – that dictates consumption. 
Of course, the wealth of the government does play a role in economic performance. 
But excessive concern about government’s solvency can cause the private sector to be reluctant to spend. 
That is what has happened in Japan. 
Excessive government debt can be highly damaging. 
In inflationary periods, high outstanding government liabilities impair fiscal policy, because higher taxes are needed to finance the same level of real government spending. 
Making matters worse, governments can be tempted to inflate their debts away – a power that has been abused since the age of monarchs, resulting in a uniform inflation tax on asset holders. 
But large public debts are not always bad for an economy, just as efforts to rein them in are not always beneficial. 
The focus on a balanced budget in the United States, for example, has led some elements of the Republican Party to block normal functions of state and even federal authorities, supposedly in the name of fiscal discipline. 
Likewise, the eurozone’s recovery from the 2008 financial crisis has been held back by strict fiscal rules that limit member countries’ fiscal deficits to 3% of GDP. 
To understand the relationship between public debt and economic performance, we should look to the fiscal theory of the price level (FTPL), a macroeconomic doctrine that has lately been receiving considerable attention. 
In August, at the annual conference of central bankers in Jackson Hole, Wyoming, Princeton’s Christopher Sims provided a lucid explanation of the theory. 
As Sims explained, contrary to popular belief, aggregate demand and the price level (inflation) are not dictated only – or even primarily – by monetary policy. 
Instead, they are determined by the country’s net wealth and the liabilities of the central bank and the government. 
When government deficits are lower, investing in government debt becomes more attractive. 
As the private sector purchases more of that debt, demand for goods and services falls, creating deflationary pressure. 
If the central bank attempts to spur inflation by expanding its own balance sheet through monetary expansion and by lowering interest rates, it will cause the budget deficit to fall further, reinforcing the cycle. 
In such a context, Sims argued, monetary policy alone would not be adequate to raise inflation; fiscal policy that increases the budget deficit would also be necessary. 
The FTPL provides a clear diagnosis of the Japanese economy’s problems – and points to solutions. 
When Abenomics was introduced in 2012, a massive injection of liquidity by the Bank of Japan was supposed to offset deflation. 
But, as both traditional Keynesians and FTPL followers would note, quantitative easing – which amounts to an exchange of money for its close substitutes (zero-interest bonds) – becomes less effective in stimulating demand over time. 
Add to that Japan’s fiscal tightening – and, especially, its consumption-tax hike – and it is no surprise that demand has remained repressed. 
More recently, Japan’s negative-interest-rate policy worked rather well to push down market interest rates. 
But the policy also impaired the private sector’s balance sheet, because it functioned as a tax on financial institutions. 
As a result, it has failed to provide the intended boost. 
During periods of recession or stagnation, additional interest payments by banks would burden the economy, whereas public debt may enable the economy to reach full employment. 
(Neo-Ricardians would argue that public debt in the hands of people is worthless, because consumers internalize their children’s future tax payments by holding debt certificates. 
But, as David Ricardo himself recognized, people are rarely that smart.) 
John Maynard Keynes’ The General Theory of Employment, Interest, and Money,which argued for active fiscal policies, was published in 1936. 
Forty years later, a counterrevolution took hold, reflecting sharp criticism of fiscal activism. 
After another 40 years, Keynes’ key idea is back, in the form of the FTPL. 
This may be old wine in a new bottle, but old wine often rewards those who are willing to taste it. 

Shinzo Abe’s Pivot To Asia 
LONDON – Over the past year, relations among East Asia’s three most successful economies – Japan, South Korea, and China – have been slowly but steadily improving. 
This is notable, because their ties with one another have never been easy or smooth. 
The history of the twentieth century and their longer-term rivalries have seen to that. 
This August, when Japanese Prime Minister Shinzo Abe gives a major speech to mark the 70th anniversary of the end of World War II, he has a chance either to accelerate the rapprochement or bring it to a halt. 
Given his rightist pedigree and revisionist views about Japan’s wartime history, the region is bracing itself for a new bout of diplomatic turbulence surrounding his address. 
Abe should remember that it is within his power to bring about a different outcome. 
And, though not delivering a speech at all might have been the most prudent course, he can still use the occasion to reinforce an image of his country as a positive force in Asia. 
He should take pains to present Japan as a strong country that looks forward rather than backward, and that wants to contribute to economic development, peace, and security around the world – and especially within Asia. 
During the 1960s and 1970s, after Japan’s economy had recovered, the country dealt with its wartime history in large part by becoming a generous donor of overseas aid throughout Asia, including China. 
Abe should place this type of generosity of spirit and action at the center of his speech. 
The power of generosity can be disarming. 
In 2007, I visited the “Museum of the War of Chinese People’s Resistance against Japanese Aggression,” an institution whose name reflects the sentiment expressed by the bulk of its exhibits. 
So it was a pleasant surprise to see that the last exhibit on display was a wall of items acknowledging Japan’s aid and investment in China in recent decades. 
Last month, Abe showed that he may be thinking along these lines when he announced a Japanese plan to invest $110 billion in infrastructure projects in Asia over the next five years. 
The trouble was in the timing. 
Both the United States and Japan have made the mistake of refusing to join the China-led Asian Infrastructure Investment Bank (AIIB) and criticizing the more than 50 countries – including the United Kingdom, Germany, and France – that have done so. 
That stance has left both countries isolated and looking somewhat churlish. 
For Japan, it has had the additional effect of making its investment announcement look like a tit-for-tat response to the AIIB, even to the extent of topping the bank’s initial capitalization of $100 billion. 
Abe would do even more damage to the region’s perception of Japan were he to use his speech to try to mollify right-wing supporters. 
Chinese and Koreans, in particular, will be incensed should he avoid overt apologies for Japan’s behavior during World War II or question criticism of its conduct at the time, such as the Imperial Japanese Army’s sexual enslavement of Korean “comfort women.” 
Instead, Abe should take a leaf from his speech to the US Congress in April. 
There, he described a “deep repentance in his heart” when he visited a memorial to American soldiers who died in World War II, to whom he offered his “eternal condolences.” 
Concerning Japan’s actions in Asia, however, Abe pledged only “to uphold the views expressed by the previous prime ministers in this regard,” without repeating their actual apologies. 
In August, Abe should reiterate – and go beyond – his predecessors’ statements. 
Words similar to those he used to address the subject of America’s war dead would demonstrate that Japan does not intend to rewrite history, and that Abe feels repentant toward not only its US ally, but also its neighbors in Asia. 
Abe would then have an opportunity to pivot from the past to the future by declaring Japan’s intention to be generous and constructive. 
He could talk about the sort of Asia he would like to help build and describe the kind of regional institutions that he believes are necessary. 
One dramatic way to seize the initiative would be to build on Japan’s existing initiatives in post-conflict peace-building with a proposal for an inclusive plan for Asia’s defense and security. 
Such a scheme would include joint military exercises and information-sharing arrangements not just with South Korea and the US, but also with China, India, the Southeast Asian countries. 
Such a proposal might turn out to be too bold to realize; it would, after all, come up against Asia’s very real divisions. 
But as a gesture for peace and a better future, it certainly would allow Japan to claim the moral high ground. 
And that is where the country should aim to be. 

The TPP’s Second Act 
CLAREMONT – When US President Donald Trump withdrew the United States from the Trans-Pacific Partnership (TPP) this past January, many observers saw that decision as a boon for China. 
If so, it may not last. 
The conventional wisdom is based on simple economic and geopolitical logic. 
China has become every other Asian country’s largest trading partner, inexorably gaining strategic leverage as a result. 
As China’s neighbors grow increasingly dependent on the Chinese market, the logic suggests, America’s influence in the region will gradually decline. 
Former US President Barack Obama’s administration understood the far-reaching geopolitical consequences of China’s economic dominance in East Asia. 
Obama and his advisers had hoped that, by creating a new US-centered trading bloc, the TPP would counter China’s clout and preserve American military and economic primacy in the world’s most dynamic region. 
But while the consensus view that Trump has effectively ceded East Asia to China is not necessarily wrong, it overlooks a fundamental geopolitical fact: American preeminence has created a powerful incentive for free riding in East Asia. 
As the region’s countries have grown accustomed to the US-furnished security umbrella and free-trade system, they have not invested in their own national and economic security. 
When they can no longer count on US-supplied public goods to maintain peace and deliver prosperity, they will face some tough choices. 
One group of countries will undoubtedly jump on the Chinese bandwagon, hoping that closer ties with Asia’s future hegemon will give them what the US provides now. 
This bloc includes countries ruled by autocratic regimes that have no ideological or territorial disputes with China, such as Thailand, Malaysia, Cambodia, and Laos. 
Other countries have already adopted a hedging strategy, whereby they maintain close security relations with the US while taking advantage of China’s enormous market. 
Australia, South Korea, and Singapore may fall into this category. 
But a third group of countries appears to have opted for a self-help strategy. 
As American protection and oversight of free trade have become increasingly uncertain, they have taken proactive measures to counter Chinese power on their own, not least by banding together. 
The countries leading this charge are India and Japan – two great powers that cannot imagine living in a China-dominated Asia. 
They are joined by countries such as Vietnam and Indonesia, which have also resisted falling into China’s orbit. 
India and Japan are demonstrating that, through diplomacy and trade, Asia’s major powers can frustrate Chinese ambitions on their own. 
To see this dynamic at work, we need look no further than Japanese Prime Minister Shinzo Abe’s recent declaration that Japan will continue to push ahead with the TPP. 
To be sure, without US participation, the remaining 11 Pacific-rim countries will have much less economic heft than they would have had under the original deal. 
But in 2016, these countries’ combined GDP still exceeded $10 trillion, which is only slightly less than China’s GDP of $11 trillion. 
The TPP has not yet been ratified by all of its 11 remaining signatories. 
But if these countries can come together and push the agreement through, one can imagine that other Asian powers such as South Korea and Indonesia will be tempted to join. 
These new additions, and the formation of a new regional trading bloc, could partly fill the void left by America’s withdrawal. 
Of course, a self-help strategy to counterbalance China is not guaranteed to succeed. 
Leadership and substantial sacrifice will also be critical. 
In the immediate aftermath of World War II, the US opened its markets and deployed its immense financial resources to reconstruct Japan and Western Europe’s devastated economies. 
The Marshall Plan and other similar measures were part of America’s Cold War strategy against the Soviet Union. 
And, in retrospect, we now know that these enlightened economic policies played just as crucial a role as military superiority in winning that conflict. 
Fortunately, Asia today is not in the grip of a cold war. 
But leading powers such as Japan and India must show that they are ready and willing to bear the costs of maintaining the region’s balance of power, and to prevent the emergence of a Sino-centric Asia. 
Abe has declared his resolve. 
Now he must back up his words with action. 
To persuade wavering Asian countries to band together, rather than submit to China, Japan will have to adopt policies that demonstrate its willingness to absorb the high costs of keeping itself and its partners outside of China’s orbit. 
If Abe’s Japan delivers on its pledge, even a smaller TPP could give China a run for its money in Asia. 

Japan Isn't Doomed 
TOKYO/STOCKHOLM: Pessimism about Japan is easy and pervasive nowadays. 
Its financial crisis drags on, growth is nil, unemployment rises, and, recently, deflation appeared. 
Is there any way out? 
For a Swede, Japan's economic problems are a form of déjŕ vu. 
In 1992, Swedes accepted that their "Swedish Model" didn't work. 
This was hard to understand, because everything had gone so well in Sweden for so long. 
With an economy falling apart and a bankrupt financial sector, radical reforms were needed. 
Change began in banking. 
Sweden's experience suggests that Japan's most urgent problem is its financial crisis. 
As in Sweden 8 years ago, there is too much bad debt and too many banks. 
Insolvency in the financial sector spills into other sectors in the form of a credit crunch, because Japanese banks are unwilling to lend money. 
This type of financial crisis is not unique to Japan. 
Countries where land and stock prices rose and fell dramatically also experienced similar crisis. 
America in the 1930's and 1980's had banking crisis of this sort which had real economic effects. 
So, also, Sweden in the early 1990s. 
Sweden's crisis is a case for Japan to study, not only because it was similar, but also because Sweden solved it. 
Just as Japan has done, Sweden's government took over most bad loans from private banks so that they could begin operating more normally. 
In contrast to Japan, however, Sweden simultaneously restructured the entire banking sector by closing down inefficient banks. 
Restructuring was crucial to revitalizing Sweden's financial sector, and is necessary in Japan. 
Quick, forceful restructuring will help end the credit crunch and lay the base for renewed growth. 
Longer term, a closer look at Japanese demographic trends is crucial. 
Japan recently achieved the longest life expectancy of all countries. 
One-third of Japanese will be over 65 years of age in 2040, double 1995's level. 
Simultaneously, fertility rates dropped to 1.4 per woman. 
These demographic influences will incite severe labor shortages early in the 21st century, just when an aging population places severe pressure on health and welfare facilities. 
Japan will likely experience a slowing in its traditionally high savings rate as its population ages. 
This implies a dramatic slowdown in investment and long-term growth rates unless offsetting increases in productivity emerge. 
Throughout history, however, Japan confronted big challenges by restructuring its culture and economy. 
To revitalize Japan's economy in the long run, three big adjustments are necessary. 
Liberalization of labor markets and greater inclusion of women in the workforce must occur. 
Conventional wisdom says that low unemployment and job turnover rates, attributable to a system of ‘life-time employment' and worker devotion to their firms, contributed to Japan's rapid postwar growth. 
Firms invested heavily in worker education, which focused on providing broad exposure to manufacturing activities, increasing productivity, and firm-specific innovations. 
The need for narrowly specialized firm-specific workers is disappearing as service sectors like telecommunications, computers, software, and finance expand. 
So the need for broad-based, firm-specific worker training in manufacturing will shrink. 
In response to increasing labor shortages, the 21st century will bring new roles for Japanese women. 
Women have traditionally been underutilized given their education levels. 
While the increase in women in the labor force has recently been rapid, female employment is only 50% in Japan (relative to almost 80% amongst men). 
A second structural adjustment concerns regulatory reform. 
Japan's economy has been marked by high government involvement and regulation in most industries. 
Japan's postwar development strategy relied on a public-private partnership. 
The government sought to modernize the economic base by selecting and nurturing promising industries - limiting competition, supporting research and development and technology transfers, and encouraging the extension of credit. 
Industries with potential to achieve economies of scale and scope were most favored and permitted to form horizontal and vertical cartels that cooperated on pricing, R&D, production, etc. 
The government also protected special interests, such as rice farmers and small retailers, against competition through a complex system of licensing, regulation, and quality controls. 
Close partnership between business and government is in direct contrast to the western, particularly the American, model grounded in strong antitrust policy, competition, and private ownership. 
Japan viewed this approach as wasteful, with firms using real resources to drive others out of business or duplicate R&D costs. 
In the face of a stagnant economy and an integrated global economy, Japan is under increasing pressure to modify its regulatory framework and promote competition. 
Japan's regulatory environment must converge toward the industrial policies of other advanced nations. 
This has been the case across Europe during the 1980s and 1990s. 
These reforms will create new markets, stimulate competition, attract foreign investment and technology transfers, and improve consumer interests. 
Finally, global economic conditions will compel even more restructuring upon Japan. 
Japan has committed to further liberalization of its markets under the WTO. 
While export expansion delivered growth in this century, import substitution and inward foreign direct investment (FDI) will lead to increasing productivity in Japan in the next. 
Imports inspire a more competitive domestic business environment. 
As import barriers fall and as Japan's distribution systems become more transparent, converging to OECD standards, the import share of Japan's GDP will rise, improving domestic productivity. 
Deregulation and greater openness, moreover, will generate inward FDI. 
Competitive pressure from such investment, like import competition, will improve productivity. 
In Sweden we say "it is darkest before you see light at the end of the tunnel". 
Japan's crisis may look hopeless, but don't forget that this is not the first time Japan has faced such a challenge. 
If Sweden solved its crisis, so too can Japan, where much of the basis for a prosperous future exists. 
Only a few structural changes are needed to get Japan's growth machine working again. 

Japan’s Sensitive Military Normalization 
NEW YORK – Soon after the Islamic State's brutal murder in January of the Japanese hostages Haruna Yukawa and Kenji Goto, Prime Minister Shinzo Abe called for the country's “biggest reform" of its military posture since the end of World War II. 
Abe wants Japan to become a “normal" country again, with the capacity to defend its interests and citizens wherever they are threatened. 
But how should his government go about it? 
Even for a Japanese public that still generally supports their country's post-war pacifism, the hostage crisis was unsettling, not least because it highlighted Japan's military impotence. 
Unlike Jordan, which was able to consider a rescue mission for its own hostage and launch a powerful military response after he was killed, Japan's constitution left it no options for rescue or retaliation. 
Article 9 of Japan's constitution, which was adopted in 1947 under US occupation, prohibits the country from maintaining armed forces or using force to settle international conflicts. 
Though interpretations of Article 9 have liberalized over the years, and Japan now maintains a very capable self-defense force, constitutional constraints continue to impair Japan's military capabilities and posture considerably. 
To be sure, Japan's treaty alliance with the United States provides for its security. 
But the risks that Japan faces – including an increasingly assertive China, a nuclear North Korea, and an Islamic State that has threatened to murder Japanese citizens abroad – have raised legitimate questions about whether the country needs greater latitude to defend itself. 
This could be achieved in several ways. 
For example, Japan could simply continue to increase the defense budget, reinterpret the existing constitution, and strengthen collective security; the capacity of Japanese special forces could be expanded; or Article 9 could be repealed altogether by a vote in both houses of the Diet, followed by a national referendum. 
Regardless of the specific route taken, Japan deserves to be able to protect its territory and population, just like any other country. 
But any boost in its military capabilities will meet strong opposition, particularly from China and the Koreas, which continue to insist that Japan's alliance with the US provides it with all the security it needs. 
Moreover, they argue that Japan has yet to come fully to terms with its colonial and wartime record. 
Japan has indeed benefited enormously from US protection. 
But there can be no guarantee that the US will continue to defend Japan's interests indefinitely, particularly in any clash with China. 
Questions, justified or not, about America's ability to retain its dominant position in Asia's security architecture in the medium to long term – together with the rise of isolationist sentiment within the US – have spurred its regional allies and partners, including stalwart friends like Australia, to hedge their strategic bets. 
It is only logical that Japan would share such concerns. 
Likewise, though Japan's behavior before and during WWII was undeniably atrocious, its record since 1945 – including championing the United Nations and other multilateral institutions and providing guidance and assistance to developing countries – has been exemplary. 
It strains credulity to argue, as China and North Korea have, that a normalized Japan would threaten regional stability any more than China's massive military buildup and territorial aggression, or North Korea's bellicosity and nuclear weapons, already do. 
In fact, it is far more likely that a normalized Japan would enhance regional security by playing an important role in the balance-of-power system that China is steadily advancing with its unilateral behavior. 
Nonetheless, if Japan chooses to move toward military normalization, it must demonstrate more convincingly that it has come to terms with its history – or risk seeing that effort undermined unnecessarily. 
Though Japan has made significant efforts to atone for its past – by issuing repeated apologies, for example, and providing development assistance – revisionism and insensitivity by some of its leaders lately have revived historical tensions with its neighbors. 
That should stop. 
For starters, Japan's leaders should either forswear visits to Tokyo's controversial Yasukuni shrine, or find a creative way to have the souls of the 14 Class A war criminals that it honors moved elsewhere. 
Likewise, instead of refuting claims about the extent of sexual slavery during the war, Japan's government should build a monument in central Tokyo – possibly even on the Imperial Palace grounds – commemorating the “comfort women" from Korea and elsewhere who were forced to provide sexual services to the Japanese Imperial Army. 
The authorities could even establish an annual conference to bring together world leaders to find ways to help protect women in conflict zones. 
Finally, rather than protesting the way Japan's WWII activities are described in US textbooks or squabbling over the number of people murdered during the Nanjing massacre, Japan should seek to help its own citizens understand and process their country's wartime record. 
Other countries, particularly China, may have strong domestic political motives for their anti-Japanese propaganda, but Japan's more sensitive treatment of its history could at least stop adding fuel to the fire. 
Japan's achievements since the end of WWII – including its enormous contribution to global peace and security – count for a lot. 
But, unless Japan makes more sensitive treatment of its history a cornerstone of its effort to change its military posture, the past could well become an impediment to a more secure future. 

Japan Must End its Silence 
A recent opinion poll in Japan shows that 68% of Japanese believe that the US and Britain should not attack Iraq. 
Yet, in debates in the Diet, our parliament, neither Prime Minister Koizumi nor the Foreign Minister utter anything more than such tepid responses as: "Japan cannot respond to a hypothetical situation;" or "Japan cannot take a definitive stance without assessing the results of the inspections;" and "It is in Japan's national interest not to declare whether or not it supports the use of force." 
But Japan can no longer afford to be silent or vague about growing global insecurity, as the crisis next door on the Korean peninsula demonstrates. 
Why is Japan so seemingly detached in international affairs? 
Japan has relied entirely on the US for its security needs for over fifty years and the Japanese government essentially believes that it has no option but to agree with the US or to keep silent. 
Indeed, since the end of WWII, Japan has avoided a full-fledged debate on the country's national security framework, in which Japan would have the courage to disagree with the US. 
Of course, most Japanese politicians, media commentators, and academics understand the need for this stance, and the Japanese trait of putting a lid on troublesome issues reinforces this silence, compounding all problems in foreign policy. 
But at times like these, when issues such as North Korea's bid to acquire nuclear weapons and a possible US-led war against Iraq provoke heated debate in the international community, the Japanese public is also engaged in frequent, daily exchanges about what Japan should do. 
It is only the government that steadfastly refuses to intervene in the debate or propose any action. 
Criticizing Japan's silence need not undermine the Japanese-US strategic alliance. 
Only last year the two countries commemorated the 50 th anniversary of the signing of the US-Japan Security Treaty. 
During those fifty years, however, the map of world conflict has been rewritten and the means of warfare transformed, while Japan remains locked in viewpoints forged in the trauma of wartime defeat and US occupation. 
There is another factor at work, too. 
Japan's "Peace Constitution" supposedly bans possession of military forces. 
As a party to Japan's debate on national security, I know from experience that attempting to clarify the vague constitutional status of our Self Defense Forces would lead China and South Korea--victims of past Japanese invasions--to use dissenting voices within Japan to smother all discussion, killing mature debate. 
But Japan urgently needs such a debate if it is to respond to a world exposed to the threat of terrorism and gripped by fear. 
The terrorist attacks of September 11, 2001, and recent statements by CIA Director George Tenet that North Korea possesses missiles capable of reaching the US West Coast undoubtedly shocked Americans out of their complacency over North Korea's nuclear status. 
But what can shake Japan's political class out of its silence? 
Japan's dependence on imported Middle Eastern oil also demands that we understand what a war against Iraq might mean. 
If Iraq's oil fields are destroyed or the war is prolonged, surging oil prices will hit Japan and the world economy hard. 
The best way to avoid this risk is for Iraq to raise its level of cooperation towards the inspections unconditionally and show all the proof needed to dispel the allegations leveled against it. 
Japan ought to speak up and say this. 
Japan also can directly assist in resolving the North Korea crisis by acting as a facilitator, encouraging Russian President Vladimir Putin--in concert with Japan, South Korea, and China--to initiate negotiations with North Korea's Kim Jong Il. 
President Putin enjoys a relationship of trust with Kim and thus may be able to persuade him that only by abiding by international law will he ensure his country's future and that this, indeed, is the only option left open to him. 
But Putin needs to be convinced to take the lead. 
His hope for better relations with Japan gives Japan's leaders leeway to nudge him in this direction. 
Undoubtedly, most Japanese strongly support the US-Japan alliance. 
While unequivocally commending America's tough stance in pressuring Iraq, Japan should not hesitate to deliver a clear message to the US: exercise patience to avoid war. 
But Japan's government also must stop prevaricating with the Japanese people: it should welcome and encourage debate about Japan's defense posture, without fearing that the US-Japan friendship is so fragile that it will be destroyed. 
The benefits and burdens of international affairs must become subjects of open debate in the Japanese Diet. 
A clear statement from the government, now rather than later, on what contribution Japan would make to any post-war reconstruction effort in Iraq is needed. 
Japan must avoid repeating the unseemly scenario following Saddam Hussein's defeat in the Gulf War of 1991, when it wrote large checks to cover the war's costs, yet had no say in the war's conduct or war aims. 
Transparency of this kind is needed if Japan is to make a stronger contribution to world affairs and help prevent the 21 st century from becoming yet another century of war. 

The Surrender of Japan’s Peace Constitution 
WASHINGTON, DC – In February, Japanese Prime Minister Shinzo Abe called on the National Diet to amend Article 9 of the country’s constitution, which renounces war as a means of settling disputes. 
Drafted by the United States after World War II, the constitution contains “some parts [that] do not fit into the current period,” Abe said. 
He is particularly concerned with the constitutional provision that prohibits Japan from maintaining “land, sea, and air forces,” arguing that it seems to be in direct contradiction with the existence of the country’s Self-Defense Forces. 
At a glance, Abe’s proposal seems deeply unpopular. 
According to one poll, some 50.3% of the Japanese public objects to amending Article 9. 
Only 37.5% of those polled favor such action. 
The good news for Abe, however, is that opposition to his efforts, though broad, does not seem to run deep. 
Voters, it seems, are less concerned about the direction Abe is taking the country than they are about his decision to make the issue a top priority. 
Revising the constitution would provide stronger legal grounding for Abe’s controversial defense measures. 
Introduced last year, the new legislative provisions lift restrictions on deploying Japanese forces overseas and expand the definition of self-defense to include aiding an ally. 
These, too, are unpopular – at least superficially. 
Some 51% of Japanese voters disapprove of the measures, compared to 30% who support them. 
And yet only 38% say they would like to see Abe reverse course and repeal the legislation. 
To be sure, many in Japan are concerned about the implications of Abe’s agenda, feeling that it runs counter to the country’s national security and proper international stance. 
They worry that Abe’s defense moves will make it more likely that Japan will be dragged into war, putting an end to its post-war pacifism. 
Another avenue of criticism regards worries that Japan’s new defense doctrine will worsen its relationships with its neighbors. 
Several countries have indeed already expressed concerns. 
China’s Foreign Ministry spokesperson, Hong Lei, stated that Japan’s new approach was “out of step with the trend of the times featuring peace, development, and cooperation.” 
His counterpart at South Korea’s foreign ministry commented that his country would “never tolerate” Japan’s exercise of the right to collective self-defense on the Korean peninsula “without the [Republic of Korea’s] request or consent.” 
And North Korean state media reported that Abe’s reforms were intended to “pave the way for invading other countries.” 
Not all of the opposition to Abe’s agenda, however, stems from substantive objections. 
In some cases, concern focuses on the legitimacy of the process that produced the laws. 
According to one poll, 67% of respondents disapprove of how the ruling coalition pushed the legislation through the Diet. 
There is a widespread feeling in Japan that Abe’s cabinet “did not make a sufficient effort” to explain the legislation to the public. 
By ignoring criticism from the majority of voters, Abe’s government allegedly discredited Japan’s democratic system. 
Similarly, some 51% of respondents disapproved of the laws on constitutional grounds, believing them to be in violation of Article 9 of the constitution, the provision that Abe would like to alter. 
These voters are less likely to support scrapping the bills; indeed, some of them may be mollified if Abe is successful in amending the constitution. 
There is also a simple, practical answer that explains why opponents of the laws may not be in favor of efforts to repeal them. 
Many in Japan would like to avoid a divisive debate that could distract the government’s attention from other priorities. 
Japan’s economy shrunk more than expected in the final quarter of 2015, and its stock market has been in turmoil since the beginning of this year. 
No matter how unenthusiastic the Japanese might be about Abe’s security bills and his attempts to change the constitution, they would prefer that the issue be relegated to a back burner. 
That way, the government can focus on what voters really care about: turning the economy around and saving the country’s social security programs. 

Japan's Emerging China Strategy 
Football hooliganism and nationalism create a witch's brew that, until lately, has rarely been sipped in Asia. 
That changed at the recent Asian Football Cup. 
Wherever Japan's players went, they were met by hostile crowds, which culminated in the championship match with China before a huge - and hugely hostile - crowd in Beijing. 
This is especially worrisome because, unlike elsewhere in the world, official manipulation helps fan the flames of nationalism in China. 
Young Chinese have been thoroughly indoctrinated with anti-Japanese sentiments. 
China's former President Jiang Zemin systematically and relentlessly pursued a "Resistance and Victory-over-Japan Campaign" throughout the 1990's - a sinister device used to divert popular grievances and to legitimize continuing Communist rule by making the Party appear to be the defender of Chinese honor. 
At the same time, the ancient sense of cultural superiority that runs in Chinese veins makes feelings of inferiority hard to bear. 
With China's growing sense of itself as a superpower, resentment about the country being poorer and less admired than some other nations has become intolerable. 
Now the young people who make up the vanguard of China's economic modernization are also nationalist-minded football hooligans. 
Instead of providing an early showcase of decent spectator manners for the Beijing Olympics of 2008, the Asian Cup provided a glimpse at the rage that seethes beneath China's economic boom - and exposed the government's inability to control its increasingly restless people. 
Of course, the bitterness of Sino-Japanese relations since the end of WWII helps set the stage for such nationalist outbursts, but the roots of China's rage go deeper. Even as China grows richer and more powerful, memories of its past suffering and humiliation at the hands of the West and Japan remain alive - particularly because the Communist Party finds such memories so useful. 
China's modern view of foreigners and their intentions is necessarily refracted through the prism of such history. 
Perhaps inevitably, the recent anti-Japanese rage during the Asian Cup left most Japanese with a strong sense of China as an irreconcilable and unfriendly nation. 
As usual, Japan's government reacted meekly, offering superficial complaints about China to assuage domestic displeasure. 
But these complaints fail a vital diplomatic test - preservation of national dignity, prestige, and the honor of one's citizens. 
So how should Japan respond? 
Should Japan fight fire with fire? 
Part of the problem lies in Japan's educational system. 
Owing to a curriculum controlled by the powerful Japan Teachers Union, since the end of WWII many Japanese youth have viewed the Japan-China relationship with a consciousness of the need for atonement for the Sino-Japanese War. 
Today, however, calls are growing to promote a more accurate and balanced historical education that focuses on modern history after the Meiji Restoration and WWII, and that reflects the reality of the Sino-Japanese relationship free from an obsession with "atonement." 
Obviously, calls for greater balance in historical education raise the specter of reactionary overkill: either complete affirmation of past Japanese conduct or other forms of anti-Chinese bias. 
But the majority of reform advocates seek something else: fairness and objectivity in history education, including studying the differences between Japan and China in their historical interpretations of the Sino-Japanese War. 
Equally important, unlike the subject of WWII, Japanese history education barely addresses the two countries' post-war relations. 
Japanese textbooks, indeed, hardly touch upon the enormous economic aid that Japan has given to China - which, not surprisingly, is ignored completely in China's history curriculum. 
But the issue goes beyond education. 
Coerced into feeling the need to atone to China, Japan passively tolerated recent episodes of worrying Chinese behavior. 
This attitude contributed to inattention by Japan's political, administrative, academic, and media elite toward China's unlawful advance toward Japanese territories and neighboring waters, including Japan's Exclusive Economic Zone (EEZ). 
China's recent and recurrent actions - such as ocean surveys for economic and military purposes, conducted without notification by navy or survey ships in Japanese territorial or EEZ waters - have, however, finally awakened Japan's elite from its inertia. 
In response, the ruling Liberal Democratic Party established a Working Team on the Protection of Maritime Interests. 
Based on the team's recommendations, the government established an inter-ministerial commission on the survey of continental shelves and maritime resources. 
The Japanese media's attention to the issue has also grown. 
More is at stake than maritime interests. 
With a revision of Japan's National Defense Program expected by year's end, the prime minister's Council on Security and Defense Capabilities has indicated a need to respond to China's military expansion, particularly its buildup of armed forces. "China is now in the stage of surging nationalism, and the trend is expected to continue in the future," the Council warned in its interim report, concluding that, "Japan must take appropriate actions in response to each incident" in which China attempts to "gradually advance its defense line [ocean-ward]." 
Japan seems to be departing from its conventional low-profile diplomacy toward China, and readying itself to construct a comprehensive long-term national and regional security strategy. 
The military core of such a strategy must include appropriate maritime tactics to respond to China's assertiveness. 
But, ultimately, the effectiveness - and hence the success - of such a strategy will depend on how Japan positions itself in the region, especially in the relationship with China. 
The Asian Football Cup highlighted not only China's growing nationalism, but also the parlous state of relations with Japan. 
A glimpse of the silent rage of China's populace has awakened Japan to the need for a comprehensive regional strategy. 

Japan’s Financial Truant 
TOKYO – When asked if he had ever read the classic economics textbook by Paul Samuelson, something almost all first-year students in the subject read, Japanese Minister of Finance and Deputy Prime Minister Naoto Kan replied: “I read about 10 pages.” 
Of course, no textbook can provide all the answers a finance minister needs in today’s post-crisis world, particularly to meet Japan’s daunting challenges. 
But many Japanese were dumbfounded to learn that their finance minister began to grapple with the basic principles of economics only after assuming office. 
Kan assumed his current office in Prime Minister Yukio Hatoyama’s administration this past January. 
A civil-rights activist for much of his career, Kan is one of the few members of the Hatoyama government with previous cabinet experience, having served for 10 months in 1996 as Minister of Health and Welfare. 
An aggressive debater, Kan is often mentioned as a candidate to succeed Hatoyama should he leave his post – a live possibility, given the prime minister’s plummeting approval ratings and strained relationship with Ichiro Ozawa, the kingpin of Hatoyama’s Democratic Party of Japan (DPJ). 
Kan became finance minister after his predecessor Hirohisa Fujii suddenly resigned, citing ill health. 
But Kan stumbled out of the gate by calling, during his first press conference, for a weaker yen – a statement that drew an instant rebuke from Hatoyama. 
Kan ’s international debut was equally inauspicious. 
At the G-7 meeting in Canada in February, the focus was on the Greek financial crisis and its international implications. 
Kan jokingly told journalists that he was glad the meeting was not addressing Japan’s public debt, which has now reached almost ¥900 trillion. 
The meeting, it turns out, was “all Greek” to him. 
As a member of the European Union, Greece at least can hope for assistance from other EU members. 
Japan, however, stands alone with its massive debt. 
Likewise, whereas Greece’s nominal gross national product is at least growing, Japan remains mired in deflation. 
And while stock markets are recovering in much of the developed world, Japanese stocks continue to stagnate. 
When Kan led the DPJ in opposition, he avoided discussing any raise in the rate of consumption tax. 
But now that his party is in power and must face the reality of running the second largest economy in the world, and coping with its huge debt burden, he is tossing aside his long-held views, broaching the subject of tax increases to help close the government’s gaping budget deficit. 
With Hatoyama continuing to oppose an increase in consumption tax in the next four years, the issue will be a test of the government’s fundamental seriousness. In last year’s general election, the DPJ offered countless rosy promises. 
New childcare allowances of ¥26,000 per month were to be introduced, at a cost of ¥5.2trillion. The gasoline tax, which brings in ¥2.6 trillion, was to be abolished. 
In attempting to fulfill these inconsistent pledges, government spending this year will reach an all-time high of ¥92.3 trillion. 
But tax revenue will cover only a fraction of that, as it is estimated at only ¥37trillion for 2010. 
So, to meet the budget shortfall, a staggering ¥44.3 trillion in government bonds will be issued. 
Coming at a time when governments with even less debt than Japan need to show that they are putting their financial houses in order, Japan’s budget sends precisely the wrong signal to markets. 
Japan ’s consumption tax (essentially the same as VAT in Europe) was introduced in 1989 at a rate of 3%, and increased to 5% in 1997, after heated political battles. 
Japan is no different from other countries in witnessing such disputes over taxes. 
What is different is that, given the extent of the country’s fiscal problems, the government still continues to think of taxes only in partisan terms. 
Voters chose the DPJ in order to change Japan, but they have mostly seen the same old political scandals. 
Hatoyama has been accused of receiving shady donations – “childcare allowances” – from his heiress mother. 
Ozawa, the all-powerful Secretary General of DPJ, has been accused of using party funds to buy real estate, and of receiving bribes from construction companies. 
Such scandals have tainted Japanese politics for decades. 
But, just as Kan is planning only to “discuss” raising taxes, the supposedly clean DPJ is planning only to discuss the problem of money in politics by establishing a new non-partisan commission to investigate the problem. 
Japan, however, cannot afford to waste time building a new apparatus to prevent party-financing scandals. 
The country has laws on the books to handle the matter. 
They simply need to be enforced. 
What is needed, and badly, is a nonpartisan body to find a sustainable way to pay for the country’s social security programs. 
Social security expenditures will face a shortfall of ¥6 trillion this year. 
Given Japan’s aging population, there is a natural increase in the social security budget of ¥1 trillion per year. 
The country simply cannot keep on piling debt upon debt. 
To stop the country’s fiscal rot, Japan must achieve a consensus on the type of social services that national and local governments should offer, for how long, and at what cost. 
The problem is too grave to be left to partisan bickering. 

Japan’s Kamikaze Isolation 
It almost seems as if Japan is bent on self-isolation in Asia. 
After a few months during which Prime Minister Junichiro Koizumi ostensibly sought to improve his country’s relations with China, his fifth visit to the controversial Yasukuni Shrine has again raised tempers. 
China and South Korea both cancelled meetings of their foreign ministers with their Japanese counterpart. 
Once again, Japan has missed a chance to rebuild trust in a part of the world where, in the absence of cooperative international institutions, trust is all there is. 
Why does Japan still not understand that the way it treats its history echoes across every part of Asia that Japan’s military occupied in the first part of the 20th century? 
Japanese reactions reveal an extraordinary degree of stubborn self-righteousness. 
As Japan’s government never ceases to point out, the Yasukuni shrine, built in 1869, venerates the 2.5 million Japanese who have died for their country, not just the 14 judged as war criminals after WWII. 
But, while many Japanese feel (with some justification) that South Korea and, in particular, China, exploit the Yasukuni issue to reduce Japan’s influence in the region and to pander to their publics’ strong nationalism, they are missing the point. 
Indeed, domestic politicking seems to be at least as important to Japan’s leaders as to South Koreas’s or China’s. 
Koizumi’s visit to the shrine, officially presented as that of a private citizen, was intended to impress the Japanese public, regardless of its effects abroad. 
But the country now is isolated, which affects the whole fabric of stability in the region. 
Japan’s diplomatic isolation strengthens those in the Chinese leadership who have long sought to marginalize what is economically and militarily still Asia’s most powerful nation, while sucking other states in the region deeper into China’s shadow. 
Japan’s isolation also increases its dependency on its only ally, the United States, and undermines the fragile chance of developing a framework in Asia to address future regional crises in a spirit of cooperation rather than confrontation and rivalry. 
Because Japan’s isolation is a matter not only for the Japanese, it must be a matter for Western policy. 
The record, however, is not impressive. 
The US administration, fashionably worried over China’s growing regional influence, seems quite happy with a closely-tied Japan that could help balance China. 
But this is obviously a shortsighted approach, for a Japan that is tied exclusively to America will lose, not gain, against China in the region, thus making the balancing act even harder. 
The Europeans have no Japan policy at all, not even a shortsighted one. 
Fixated on the promise of an ever growing Chinese market, they give little thought to the stability of the region. 
They seem to think of the powers in the region as unconnected islands, and of their own behavior towards one as devoid of political consequence for the others. 
When the European Union last year considered lifting its symbolic arms embargo against China, none of the governments driving the proposal bothered to consider that this, too, would be symbolic, sending a message all over Asia that Europe was putting its political weight behind Chinese regional policies. 
Japanese demands to reconsider fell on deaf ears, and the initiative was put on ice only when US congressmen threatened economic repercussions and China increased pressure on Taiwan. 
Instead of exploiting Japan as a regional aircraft carrier, as the US tries to do, or neglecting her politically, as Europeans do, both need to work out a new, strategic approach – if possible, jointly. 
The aim must be to prevent a clash of nationalisms and encourage a cooperative framework in which the region’s major countries interact and develop respect for each other’s interests. 
Such a framework can emerge in Asia only with Japan’s active involvement, not on the basis of her isolation. 
Of course, Japan must lead the way. 
Japan’s leaders must recognize that the mindlessness with which they still treat the sensitivities of societies that suffered from Japanese imperialism in the twentieth century is as morally deaf as it is strategically damaging. 
But this process of realization is more likely to succeed if Japan does not feel it stands with its back against a wall. 
Friends from abroad, therefore, can assist this process by ensuring that Japan does not to feel alone. 
Far from endorsing Japanese lack of sensitivity, active Western political engagement – for its own credibility in Asia – must convey that Japan’s future depends on gaining the trust of the region. 
That is not too much to ask. 
After all, Japan was a political ally throughout the half-century of the Cold War. 
In a part of the world where democracy is gradually advancing, Japan can point to firm democratic traditions and institutions. 
Its economic clout remains formidable, and its commercial and cultural ties to the West are broad and varied. 
Japan may have shied away for decades from sharing the task of maintaining international order, but a new awareness of international responsibility is steadily emerging. 
For those who want a stable Asia, the interest in establishing close links with Japan should be obvious. 
This should not come at the expense of similar links with others, such as China and India, but these ties must not be acquired at the price of isolating Japan. 

Japan's Leadership Muddle 
OSAKA – Having seen a new prime minister every year for five consecutive years, Japan has just narrowly avoided having its third in 2010. 
Prime Minister Naoto Kan has been elected President of the ruling Democratic Party of Japan (DPJ), surviving a challenge from Ichiro Ozawa, the DPJ’s most potent behind-the-scenes power broker. 
Had Nan lost to Ozawa, he would have lost the premiership to him as well. 
With DPJ lawmakers almost equally split, Kan’s victory is being attributed to the support of general and associate party members. 
Their vote was more in line with recent public-opinion polls, which showed popular support running at seven-to-two in favor of Kan over Ozawa. 
Only three months ago, Kan was chosen as the DPJ’s top leader to restore its public image, which had been severely tarnished by political-financing scandals involving his predecessor as prime minister, Yukio Hatoyama, and a separate scandal involving Ozawa. 
Hatoyama’s mismanagement of Japan’s relations with the United States, centered on the relocation of a Marine base in Okinawa, had also dented the DPJ’s standing. 
From the moment the DPJ took power in 2009, Kan was tacitly slated to be Hatoyama’s successor, given that he was concurrently Hatoyama’s deputy prime minister and treasury minister. 
In these posts, Kan avoided involvement with the two issues that wrecked Hatoyama’s premiership: the controversial base relocation issue, and debates over budget cuts. 
Consequently, he was aloof from the DPJ’s feud with Japan’s powerful bureaucratic mandarins, who are desperately trying to safeguard the longstanding bureaucratic/cabinet system in which the once-ruling Liberal Democratic Party (LDP) passed mandarin-drafted, cabinet-sponsored bills and budgets, almost continuously, for five decades. 
Surprisingly, Kan, who entered politics to dismantle the old system, now has switched to the mandarins’ side. 
The DPJ suffered a bitter defeat in this summer’s upper-house election, after Kan abruptly proposed a significant increase in the highly unpopular consumption tax. 
That increase would enable Treasury mandarins to maintain their latitude in setting fiscal policy, while making it unnecessary to streamline special-account budget financing for gargantuan public corporations, into which retiring bureaucrats parachute for lucrative jobs. 
Moreover, Kan’s approach to the base relocation issue revived the old LDP plan, which the DPJ had previously denounced. 
Kan’s retreat means that the mandarins continue to hold the reins of foreign and defense policy. 
Even if Kan had failed to win the upper-house election, the mandarins would have faced a weakened DPJ. 
Either way, they won. 
Small wonder, then, that Hatoyama advocated replacing Kan with Ozawa, even though Hatoyama insisted that Ozawa resign when he was forced from the premiership three months ago. 
Both are openly opposed not only to the tax increase, but also to the continuing presence of the US Marine base on Okinawa. 
While committed to the bilateral US-Japan alliance, Ozawa has said that Japan’s security requires the continued presence only of the US Seventh Fleet, not of US ground troops. 
Evidently, he is trying to redefine the relationship, probably with a view to enhancing Japan’s freedom of maneuver in foreign and security policy. 
Despite his confusing signals, Ozawa’s stance is neither pro-China nor anti-American, given that he most recently emphasized Japan’s sovereignty over the Senkaku islands as an integral part of its territory – a position that China strongly disputes. 
Logically, Ozawa’s approach involves a significant military buildup, but he remains silent about how to maintain effective deterrence once the US Marines leave Okinawa. 
Kan’s status quo approach to alliance management won’t hold up long, because Hatoyama’s bungling has inflated Okinawans’ expectations about evicting the Marines. 
The current governor will likely block any construction to relocate a base on the island, exercising a de facto veto, particularly with the gubernatorial election due in late November. 
Only by equivocating about the relocation plan could Kan appease both the governor and US President Barack Obama, who is scheduled to meet Kan in Tokyo the same month. 
Japan and America can now agree only on what will not be implemented. 
The DPJ is caught between a rock and a hard place, and Kan’s premiership will surely reach a stalemate. 
Because the DPJ has neither an upper-house majority nor the two-thirds lower-house majority needed to override upper-house votes, his government will be unable to pass budget and/or appropriation bills by the end of the current fiscal year, March 31, 2011. 
Ozawa, had he become prime minister, would inevitably have been subjected to not only similar obstruction in Diet sessions but also to interrogation about his financing scandal, while fearing prosecution. 
An Ozawa government might be stable only if he could form a grand coalition. 
Yet, given strong public sentiment against Ozawa, that is impossible. 
Meanwhile, Ozawa’s electoral challenge has left the DPJ more divided than ever. 
In order to ride out the hung Diet, Kan will have to reconstruct party unity by replacing at least the incumbent anti-Ozawa party chief or Chief Cabinet Secretary, and, possibly, by appointing a pro-Ozawa Justice Minister – i.e., someone who can block Ozawa’s prosecution in the financing scandal. 
Appeasing Ozawa, however, is contrary to public sentiment and detrimental to the DPJ’s hopes of regaining popular support. 
For the moment, Japan’s political situation is stable, but that will last for the next six months, at most. 
The time is fast approaching when the public becomes entirely disillusioned with both the LDP and the DPJ, which comprise a two-party system in name only, in which legislators shift allegiance for reasons centered on attachment to or enmity against the LDP. 
Without a grand reorganization of the major political parties along ideological lines, Japan’s domestic and foreign policies – including relations with the US – will remain a muddle. 

Japan's Malaise Was Made In America 
The long bureaucratic struggle over whom to name as the next Governor of the Bank of Japan is over. 
Prime Minister Koizumi has chosen a career BOJ insider, Toshihiko Fukui, a man who is unlikely to rock the boat. 
The BOJ's hidebound policies are usually blamed for Japan's deflation. 
That guilt is real, argues Deepak Lal, but there is another culprit: American economic policy toward Japan. 
It is now widely recognized that an unintended consequence of the "Asian" economic model was an increasingly inefficient allocation of capital. 
Japan's chronic slump is a case in point. 
Artificially low domestic interest rates in the late 1980s promoted capital-intensive investment, driving down the rate of return on capital from an average of around 12% in 1952-1973 to less than 2% in 1996. 
But what still needs to be explained is the timing of Japan's boom and bust over the last 15 years, as well as the reasons for the duration of the country's ongoing slump. 
In their excellent book Dollar and Yen , Ronald McKinnon and Kenici Ohno provide an answer: the recurrence of endaka fukyo , a "strong yen recession," which the authors attribute to a "strong yen syndrome" rooted in persistent trade frictions between the US and Japan. 
Ever since Richard Nixon took the dollar off the gold standard and exchange rates were floated worldwide, the US has sought to tackle its chronic bilateral trade deficit with Japan by pushing for a strong yen. 
Real and threatened action against Japanese exports forced Japan to comply rather than risk a trade war, with the Bank of Japan (BOJ) delivering the requisite appreciation through tight monetary policy. 
Thus, while liberalization of Japan's capital market in the early 1980s tied Japanese and US interest-rate movements, Japanese interest rates were discounted by the expected rate of currency appreciation. 
As long as US interest rates were high, Japanese interest rates remained fairly positive, allowing the BOJ to moderate the effects of the yen's appreciation by easing domestic monetary policy. 
But this ended after 1985, as the so-called "Plaza Accord" - agreed by the central banks of France, Germany, the UK, the US, and Japan - weakened the dollar by 30%. 
Massive yen appreciation led to a Japanese recession in 1985-86, and the BOJ lowered interest rates to near zero. 
Even with the tradable sector suffering due to the strong yen, capital-market liberalization meant that the capitalized value of future income streams, particularly from land, soared, as the interest rate at which they were discounted fell. 
This was the start of the great Japanese asset-price bubble. 
As the yen's strength undermined foreign demand for Japanese output, rising asset values turned domestic demand into the engine of the economy, and Japan rapidly grew out of the recession. 
The BOJ hailed this outcome, since it gave the tradable sector time to adjust to the stronger yen. 
The Japanese government also was happy; having just restored fiscal balance after the oil-price shocks of the 1970's, it was spared the need to run Keynesian-type deficits to deal with the post-1985 endaka fukyo . 
But all bubbles burst. 
By the end of the decade, the BOJ was worried by a massive appreciation in land and stock prices. 
Before long, monetary tightening accompanied renewed trade friction with the US, prompting more yen appreciation and another recession. 
It was only in 1995-96 that the US eased its position and allowed the yen to depreciate against the dollar. 
But the respite was short-lived. 
As US pressure for a strong yen resumed, Japan's economy plunged into its second endaka fukyo of the 1990s, from which it has yet to emerge. 
Successive stimulus packages failed, leaving behind a massive build-up of public debt. 
Fiscal stability, meanwhile, is already threatened by the growing pension and health-care costs implied by a rapidly aging population. 
Another asset price bubble is out of the question; the last one left most of the domestic financial system virtually insolvent. 
So Japan's future prospects ultimately depend on the US abandoning its strong-yen policy. 
The US's policy is, in fact, economically indefensible. 
In a world of integrated capital markets and floating exchange rates, the trade balance between any two countries reflects the difference between their domestic investment and savings. 
The US has saved less than it invests for two decades, while Japan has done the reverse. 
Japan's bilateral trade surplus is nearly the same size as its savings in the US. 
As long as America borrows Japanese savings to fuel its domestic investment, a trade deficit is inevitable. 
A strong yen can not prevent this. 
When Japan's asset-price bubble burst in 1990-91, Japanese investors pulled out of the US-leading to a credit crunch and the mild recession that torpedoed President Bush's re-election hopes in 1992. 
But pitifully low domestic returns on capital soon spurred Japanese investors to resume foreign lending, fueling the massive investment boom of the Clinton-era "new economy." 
Japan has hardly benefited. 
Although Japan is now the world's largest creditor nation and the US its largest debtor, its foreign-trade and capital flows are still largely denominated in dollars. 
Unlike past creditor nations - Great Britain in the 19th century and the US for most of the 20th - Japanese investors have borne the exchange-rate risk involved in foreign lending. 
With the dollar depreciating against the yen, the returns on their foreign investments in the 1980-90s were virtually wiped out. 
So pity the millions of aging Japanese who bailed out the world economy - America, in particular - and now have nothing to show for it. 

Japan’s New Model Political Leadership 
AMSTERDAM – Amid the horrifying news from Japan, the establishment of new standards of political leadership there is easy to miss – in part because the Japanese media follow old habits of automatically criticizing how officials are dealing with the calamity, and many foreign reporters who lack perspective simply copy that critical tone. 
But, compared to the aftermath of the catastrophic Kobe earthquake of 1995, when the authorities appeared to wash their hands of the victims’ miseries, the difference could hardly be greater. 
This time, Prime Minister Naoto Kan’s DPJ (Democratic Party of Japan) government is making an all-out effort, with unprecedented intensive involvement of his cabinet and newly formed specialized task forces. 
The prime minister himself is regularly televised with relevant officials wearing the work fatigues common among Japanese engineers. 
In 1995, Kobe citizens extricated from the rubble were looked after if they belonged to corporations or religious groups. 
Those who did not were expected to fend mostly for themselves. 
This reflected a ‘feudal’ like corporatist approach, in which the direct relationship between the citizen and the state played no role. 
This widely condemned governmental neglect of the Kobe earthquake victims was among the major sources of public indignation that helped popularize the reform movement from which Kan emerged. 
Unfortunately, today’s Japanese media are overlooking that historical context. 
For example, the newspaper Nihon Keizai Shimbun recently lamented the shortcomings of the Kan government’s response, emphasizing the poor lines of command running from the cabinet to officials carrying out rescue and supply operations. 
But it failed to point out that the feebleness of such coordination, linked to an absence of cabinet-centered policymaking, was precisely the main weakness of Japan’s political system that the founders of the DPJ set out to overcome. 
When the DPJ came to power in September 2009 it ended half-a-century of de facto one-party rule by the Liberal Democratic Party (LDP). 
But even more significantly, its intentions addressed a cardinal question for Japan: who should rule, bureaucratic mandarins or elected officials? 
The LDP, formed in 1955, had not done much actual ruling after helping to coordinate postwar reconstruction, which extended without debate into an unofficial but very real national policy of, in principle, unlimited expansion of industrial capacity. 
Other possible priorities hardly ever entered political discussions. 
The need for a political steering wheel in the hands of elected politicians was highlighted in 1993, when two major political figures bolted from the LDP with their followers. 
By doing so, they catalyzed the reformist political movement that resulted in the DPJ, the first credible opposition party that – unlike the Socialists who engaged in mere ritualistic opposition – was prepared to win elections and actually govern rather than merely maintain the façade of government that had become the norm under the LDP. 
Lowering the prestige of the government right now is the fact that Kan has not shown any talent for turning himself into a TV personality who can project a grand image of leadership. 
But his government is dealing without question as best it can in the face of four simultaneous crises, its efforts encumbered by huge logistical problems that no post-World-War-II Japanese government has ever faced before. 
The efforts of Kan’s government are obviously hampered by a rigid and much fragmented bureaucratic infrastructure. 
The DPJ has had scant time to make up for what the LDP has long neglected. 
Its seventeen months in power before the current catastrophe have been a saga of struggle with career officials in many parts of the bureaucracy, including the judiciary, fighting for the survival of the world they have always known. 
Other countries could learn much from the DPJ’s attempt to alter a status quo of political arrangements that has had half a century to form and consolidate. 
But it was the United States that first undermined the DPJ administration, by testing the new government’s loyalty with an unfeasible plan – originally the brainchild of the George W. Bush-era US defense secretary, Donald Rumsfeld – to build a new base for the US Marines stationed on Okinawa. 
The first DPJ prime minister, Yukio Hatoyama, miscalculated in believing that a face-to-face meeting with the new American president to discuss long-term matters affecting East Asia could settle the issue. 
He was steadily rebuffed by the American government. 
As Hatoyama could not keep his promise to safeguard the interests of the Okinawan people, he followed up with a customary resignation. 
Japan’s main newspapers have mostly backed the status quo as well. 
Indeed, they now appear to have forgotten their role in hampering the DPJ’s effort to create an effective political coordinating body for the country. 
A half-century of reporting on internal LDP rivalries unrelated to actual policy has turned Japan’s reporters into the world’s greatest connoisseurs of political factionalism. 
It has also left them almost incapable of recognizing actual policy initiatives when they see them. 
The rest of the world, however, has marveled at the admirable, dignified manner in which ordinary Japanese are dealing with terrible adversity. 
I am repeatedly asked why there is no looting or signs of explosive anger. 
The term “stoicism” appears over and over in media coverage of Japan’s calamity. 
But, in my half-century of close acquaintance with Japanese life, I have never thought of the Japanese as stoic. 
Rather, the Japanese behave as they do because they are decent people. 
Being considerate, they do not burden each other by building themselves up as heroes in their own personal tragedies. 
They certainly deserve the better government that the DPJ is trying to give them. 

Japan’s New Monetary Policy 
CAMBRIDGE: The economic world breathed easier when the Bank of Japan announced that it would expand Japan’s money supply in order to boost demand. 
Japan’s stock market soared nearly 10%, though it has fallen a bit since. 
Worries about Japan – the world’s second-largest economy, gripped by stagnation for years – are high. 
Unless its monetary policy really changes, both America and Japan could fall into recession simultaneously, with risks for all the world. 
In the 1980s, Japan’s economy could do no wrong. 
Its economy grew 4% annually, much faster than America’s annual 3% growth. 
In the 1990s, however, Japanese growth averaged less than half of the annual 3.4% growth of the US. 
Two usual explanations exist for Japan’s poor economic performance. 
One is that Japan still suffers from the collapse of a financial bubble in the late 1980s. 
Steep decline in Japan’s stock and real estate markets at the end of the 1980s and early 1990s left many financial bankruptcies and a weak banking system filled with bad loans. 
Japan’s Government has been rather ineffective in cleaning up the mess, for example by delaying for nearly a decade the re-capitalization of Japanese banks. 
A second explanation is that Japan’s economic structure became rigid because vested interests, especially in construction and services, prevented structural changes. 
Political paralysis also contributed to the lack of structural change. 
These explanations are undoubtedly correct, at least in part. 
But there are stranger aspects to Japan’s sluggish economy. 
After the oil price hikes of 1974 and 1980, Japan’s economy recovered through export-led growth. 
Each time, the Yen weakened, making Japan’s exports – particularly electronics and automobiles – more competitive internationally. 
This export-led recovery did not occur in the 1990s. 
Why? 
A partial, little-recognized explanation of Japan’s sluggishness in the 1990s is that export-led recovery was prevented by America and Europe. 
When Japan’s financial bubble burst in 1990, the exchange rate stood around 140 Yen/1dollar. 
As the economy weakened, the Yen strengthened, reaching 83 Yen/1 dollar in 1994. 
While the Yen later weakened, it remained in the range of 100-120 Yen/1dollar until recently, when it weakened to around 123 Yen/1dollar. 
This is strange. 
In a floating exchange rate system, a currency should weaken in the face of chronic weakness in the economy. 
This didn’t happen. 
The direct explanation is that the Bank of Japan kept monetary policy tight, so that the currency did not weaken alongside the economy. 
But a policy like that demands a deeper explanation. 
Was it monetary policy error or something else? 
If we review debates about Japan since 1988 we recognize the international pressures felt by Japan’s politicians and policymakers. 
In the 1980s, Japan was not seen as a laggard but as a juggernaut who would soon dominate world markets in automobiles, semiconductors, electronics, even finance. 
So American and European leaders insisted that Japan “voluntarily” restrain exports or face steep tariff and non-tariff barriers. 
Japan’s export growth was crippled by these non-market interventions, not by a loss of competitiveness. 
Moreover, the Bush and Clinton Administrations warned that Japan should not export its way out of trouble, as if a trade surplus resulting from export growth was somehow “unfair.” 
Japan is a country with a structural trade surplus – ie, exports are likely to remain above imports on a sustained basis because Japan’s trade surplus results from an excess of national saving over investment. 
With Japan’s high saving rate (a function of Japan’s aging population) and with investments held down by rates of return that diminished as Japan invested heavily during the postwar period, Japan’s excess savings naturally sought outlets abroad. 
This translated into exports persistently higher than imports. 
Notwithstanding this economic logic, America told Japan that it must grow through domestic demand, not exports. 
US advice was: cut the savings rate. 
Incredibly, Japan was told to run huge budget deficits (reducing government saving) to boost domestic demand. 
It was the kind of advice you give to others, but never follow yourself. 
Predictably, the results were awful. 
First, Japan’s government ran up enormous debts. 
Second, as government stopped saving, Japanese households saved even more. 
They feared that the government would never be able to pay their pensions when due. 
Thus, higher household savings negated the stimulus of government deficits. 
While government ran large deficits, the Bank of Japan kept the money supply tight. 
That decision came, in part, out of fear of reprisals if the Yen weakened more than American and European politicians deemed “fair.” 
The strong Yen led to weak demand for Japanese products, and an inability to surmount the pile of bad debts through export-led growth. 
Relatively slow growth in the money supply also led to deflation, worsening the problems of bad debts. 
While Japan’s problems are partly due to its own mistakes, both America and Europe bear responsibility for its ongoing debacle. 
It’s time for an expansionary monetary policy in Japan (and in other parts of Asia), even if the Yen weakens, as is likely (especially against the Euro, but also against the dollar). 
Other Asian countries should let their currencies weaken, too. 
If international trade and financial markets are allowed to operate freely, Japan’s recovery will come faster than in the past decade, benefiting the entire world. 

Japan’s Nuclear Morality Tale 
NEW DELHI – The troubles of the Fukushima nuclear-power plant – and other reactors – in northeast Japan have dealt a severe blow to the global nuclear industry, a powerful cartel of less than a dozen major state-owned or state-guided firms that have been trumpeting a nuclear-power renaissance. 
But the risks that seaside reactors like Fukushima face from natural disasters are well known. 
Indeed, they became evident six years ago, when the Indian Ocean tsunami in December 2004 inundated India’s second-largest nuclear complex, shutting down the Madras power station. 
Many nuclear-power plants are located along coastlines, because they are highly water-intensive. 
Yet natural disasters like storms, hurricanes, and tsunamis are becoming more common, owing to climate change, which will also cause a rise in ocean levels, making seaside reactors even more vulnerable. 
For example, many nuclear-power plants located along the British coast are just a few meters above sea level. 
In 1992, Hurricane Andrew caused significant damage at the Turkey Point nuclear-power plant on Biscayne Bay, Florida, but, fortunately, not to any critical systems. 
All energy generators, including coal- and gas-fired plants, make major demands on water resources. 
But nuclear power requires even more. 
Light-water reactors (LWRs) like those at Fukushima, which use water as a primary coolant, produce most of the world’s nuclear power. 
The huge quantities of local water that LWRs consume for their operations become hot-water outflows, which are pumped back into rivers, lakes, and oceans. 
Because reactors located inland put serious strain on local freshwater resources – including greater damage to plant life and fish – water-stressed countries that are not landlocked try to find suitable seashore sites. 
But, whether located inland or on a coast, nuclear power is vulnerable to the likely effects of climate change. 
As global warming brings about a rise in average temperatures and ocean levels, inland reactors will increasingly contribute to, and be affected by, water shortages. 
During the record-breaking 2003 heat wave in France, operations at 17 commercial nuclear reactors had to be scaled back or stopped because of rapidly rising temperatures in rivers and lake. 
Spain’s reactor at Santa María de Garoña was shut for a week in July 2006 after high temperatures were recorded in the Ebro River. 
Paradoxically, then, the very conditions that made it impossible for the nuclear industry to deliver full power in Europe in 2003 and 2006 created peak demand for electricity, owing to the increased use of air conditioning. 
Indeed, during the 2003 heat wave, Électricité de France, which operates 58 reactors – the majority on ecologically sensitive rivers like the Loire – was compelled to buy power from neighboring countries on the European spot market. 
The state-owned EDF, which normally exports power, ended up paying 10 times the price of domestic power, incurring a financial cost of €300 million. 
Similarly, although the 2006 European heat wave was less intense, water and heat problems forced Germany, Spain, and France to take some nuclear power plants offline and reduce operations at others. 
Highlighting the vulnerability of nuclear power to environmental change or extreme-weather patterns, in 2006 plant operators in Western Europe also secured exemptions from regulations that would have prevented them from discharging overheated water into natural ecosystems, affecting fisheries. 
France likes to showcase its nuclear power industry, which supplies 78% of the country’s electricity. 
But such is the nuclear industry’s water intensity that EDF withdraws up to 19 billion cubic meters of water per year from rivers and lakes, or roughly half of France’s total freshwater consumption. 
Freshwater scarcity is a growing international challenge, and the vast majority of countries are in no position to approve of such highly water-intensive inland-based energy systems. 
Nuclear plants located by the sea do not face similar problems in hot conditions, because ocean waters do not heat up anywhere near as rapidly as rivers or lakes. 
And, because they rely on seawater, they cause no freshwater scarcity. 
But, as Japan’s reactors have shown, coastal nuclear-power plants confront more serious dangers. 
When the Indian Ocean tsunami struck, the Madras reactor’s core could be kept in safe shutdown condition because the electrical systems had been ingeniously installed on higher ground than the plant itself. 
And, unlike Fukushima, which bore a direct impact, Madras was far away from the epicenter of the earthquake that unleashed the tsunami. 
The central dilemma of nuclear power in an increasingly water-stressed world is that it is a water guzzler, yet vulnerable to water. 
And, decades after Lewis L. Strauss, the Chairman of the United States Atomic Energy Agency, claimed that nuclear power would become “too cheap to meter,” the nuclear industry everywhere still subsists on munificent government subsidies. 
While the appeal of nuclear power has declined considerably in the West, it has grown among the so-called “nuclear newcomers,” which brings with it new challenges, including concerns about proliferation of nuclear weapons. 
Moreover, with nearly two-fifths of the world’s population living within 100 kilometers of a coastline, finding suitable seaside sites for initiation or expansion of a nuclear-power program is no longer easy. 
Fukushima is likely to stunt the appeal of nuclear power in a way similar to the accident at the Three Mile Island plant in Pennsylvania in 1979, not to mention the far more severe meltdown of the Chernobyl reactor in 1986. 
If the fallout from those incidents is a reliable guide, however, nuclear power’s advocates will eventually be back. 

Japan’s Options 
TOKYO – The current tensions between China and Japan have revived talk about how far Japan has fallen since its glory years of the 1980’s. 
To the extent that this sense of decline is grounded in reality, can Japan recover? 
Japan’s economy has suffered two decades of slow growth because of the poor policy decisions that followed the collapse of the country’s massive asset-price bubble in the early 1990’s. 
In 2010, China’s economy surpassed Japan’s in total size, though it is only one-sixth the size in per capita terms. 
In 1988, eight of the top ten companies in the world by market capitalization were Japanese; today, none is. 
But, despite its recent poor performance, Japan retains impressive power resources. 
It possesses the world’s third largest national economy, sophisticated industries, and the best-equipped conventional military forces among Asian countries. 
Only two decades ago, many Americans feared being overtaken after Japanese per capita income surpassed that of the United States. 
Books predicted a Japanese-led Pacific bloc that would exclude the US, and even an eventual war between the two countries. 
Futurologist Herman Kahn forecast that Japan would become a nuclear superpower, and that the transition in Japan’s role would be like “the change brought about in European and world affairs in the 1870’s by the rise of Prussia.” 
These views extrapolated an impressive Japanese record. 
Today, however, they serve as a useful reminder about the danger of linear projections based on rapidly rising power resources. 
On the eve of World War II, Japan accounted for 5% of the world’s industrial production. 
Devastated by the war, it did not regain that level until 1964. 
From 1950 to 1974, Japan averaged a remarkable 10% annual growth rate, and by the 1980’s was the world’s second largest national economy, accounting for 15% of global output. 
Japan also became the world’s largest creditor and largest donor of foreign aid. 
Its technology was roughly equal to that of the US – and even slightly ahead in some manufacturing branches. 
Japan armed itself only lightly (restricting military expenditures to about 1% of GNP), and focused on economic growth. 
This was not the first time that Japan had impressively reinvented itself. 
A century and a half ago, Japan became the first non-Western country to adapt successfully to modern globalization. 
After centuries of isolation, Japan’s Meiji restoration chose selectively from the rest of the world, and within 50 years the country had become strong enough to defeat a European great power, in the Russo-Japanese War. 
Can Japan reinvent itself again? 
In 2000, a prime minister’s commission on Japan’s goals in the twenty-first century called for just that. 
Little has happened. 
Given economic stagnation, the political system’s weaknesses, the aging of the population, and resistance to immigration, fundamental change will not be easy. 
But Japan retains a high standard of living, a highly skilled labor force, a stable society, and areas of technological and manufacturing leadership. 
Moreover, its culture (both traditional and popular), overseas development assistance, and support of international institutions provide resources for soft, or attractive, power. 
But it seems unlikely that a revived Japan, a decade or two hence, could become a global challenger economically or militarily, as was predicted two decades ago. 
Roughly the size of California, Japan will never have the geographical or demographic scale of China or the US. 
And its soft power is undercut by ethnocentric attitudes and policies. 
Some Japanese politicians talk about revising Article 9 of the constitution, which restricts Japan’s forces to self defense, and a few have spoken of nuclear armament. 
Both seem unwise and unlikely now. 
Alternatively, if Japan were to ally with China, the two countries’ combined resources would make for a potent coalition. 
In 2006, China became Japan’s largest trade partner, and the new government formed by the Democratic Party of Japan in 2009 sought improved bilateral relations. 
But an alliance also seems unlikely. 
Not only have the wounds of the 1930’s failed to heal, but China and Japan have conflicting visions of Japan’s proper place in Asia and the world. 
For example, China has blocked Japan’s efforts to become a permanent member of the United Nations Security Council. 
More recently, after Japanese maritime officials arrested a Chinese fishing-boat captain near the disputed Senkaku islands, China responded harshly with arrests of Japanese businessmen, cancelation of student visits, and suspension of exports of rare-earth minerals upon which key Japanese industries depend. 
China’s actions shocked many Japanese and undercut its soft power in Japan. 
As one Japanese professor put it, in football terms, China scored an “own goal.” 
In the highly unlikely prospect that the US were to withdraw from the East Asian region, Japan might join a Chinese bandwagon, but Japan is more likely to maintain its American alliance to preserve its independence from China. 
The main danger for Japan today is a tendency to turn inward, rather than becoming a global civilian power that realizes its great potential to produce global public goods. 
For example, Japan’s aid budget has declined, and only half as many Japanese students study overseas as did two decades ago. 
An inward-looking Japan would be a loss for the entire world. 


Japan’s Political Tremors 
NEW YORK – Rarely – indeed, perhaps not since World War II – have the Japanese had such good press abroad. 
Even South Korean newspapers have been full of praise for the self-discipline of ordinary Japanese in dire circumstances. 
And coming from Koreans, not usually Japan’s biggest fans, that is no small thing. 
When it comes to Japanese officials, however, matters are a little different. 
There has been much complaining from foreign observers, aid teams, reporters, and government spokesmen about the lack of clarity, not to mention reliability, of official Japanese statements about the various disasters following the massive earthquake that struck northeastern Japan on March 11. 
Serious problems appeared to be skirted, deliberately hidden, or played down. 
Worse still, few people had any understanding of who was responsible for what. 
Sometimes it looked very much as if the Japanese government itself was kept in the dark by officials from the Tokyo Electric Power Company (TEPCO), owners of the nuclear power plants that are leaking radiation into land, sea, and sky. 
Prime Minister Naoto Kan had to ask TEPCO executives at one point, “What the hell is going on?” 
If Kan didn’t know, how could anyone else? 
Indeed, Japan’s powerful bureaucrats, normally assumed to know what they are doing, appeared to be as helpless as elected politicians. 
Outside Japan, it is widely believed that everything works differently there, owing to the country’s exotic culture. 
This perception is not entirely false. 
An important aspect of culture is the use of language. 
Often Japanese officials’ utterances are deliberately vague, to avoid having to take responsibility if things go wrong – a fairly universal trait among the powerful. 
But some utterances may get lost in translation. 
When a Japanese official says that he will take something “into serious consideration,” he means “no.” 
This is not always properly understood. 
In the case of Japan’s official response to the earthquake and tsunami-related disasters, however, cultural exoticism is not an adequate explanation. 
In fact, the Japanese themselves have been as critical as any foreigner, if not more so, of their politicians’ apparent haplessness, and of TEPCO officials’ evasions and obfuscations. 
Some people are even leaving the relative safety of Tokyo, having lost trust in the government and TEPCO, which has a history of covering up dangerous flaws in its nuclear facilities. 
An investigation in 2002 revealed that TEPCO had submitted false data to the government, concealed accidents, and literally hid cracks. 
The breakdown of public trust in Japanese officialdom would be worrying were it to lead to a democratic breakdown. 
But it might also lead to necessary changes. 
Even though systems of government may have certain traditional components, Japan’s problems are systemic, not cultural. 
Japanese government was always paternalistic, and the chain of command complex and vague. 
During the war, the emperor was omnipotent in theory, but relatively powerless in fact. 
But there was never a dictator, either. 
Decisions emerged from murky negotiations and hidden rivalries between bureaucrats, imperial courtiers, politicians, and military officials, often pushed this way or that by various domestic and foreign pressures, some of them violent. 
The post-war political order, though no longer belligerent, was just as murky, with bureaucrats acting as the puppeteers of underfunded and ill-informed politicians, who operated regional pork-barrel operations together with big business, which in turn worked in cahoots with the bureaucrats. 
So long as Japan was playing catch-up with the West, and government and industrial resources were concentrated on economic growth, the system worked quite well. 
Indeed, it was the envy of many Westerners, who were fed up with self-interested lobbying, pesky labor unions, and meddling politicians. 
Such Westerners are now often just as enamored of China’s paternalistic – and equally opaque and impenetrable – political system. 
But it was this system that produced the problems now associated with TEPCO. 
Tight-knit cliques of bureaucrats and corporate officials made sure that a utility company vital for economic growth would never be hindered by strict regulation or political oversight. 
The cozy relationships between government officials and the corporate world – and not just in the case of TEPCO – was reflected in the large number of retired bureaucrats who took jobs on the boards of companies that they had supposedly regulated. 
Many Japanese are aware of these problems, which is why they voted for Kan’s Democratic Party of Japan (DPJ) in 2009, breaking the virtual political monopoly exercised for a half-century by the conservative Liberal Democrats. 
One of the DPJ government’s stated goals was to increase the political system’s transparency: less hidden authority for bureaucrats, more responsibility for elected politicians. 
The aftermath of the earthquake is thus a potential watershed. 
If Japan’s relatively inexperienced government is blamed for everything that goes wrong, people might wish to retreat to the old ways of murky paternalism. 
If, on the other hand, enough people realize that the old ways are the problem, rather than the solution, democratic reforms will still have a fighting chance. 
That would cast at least one ray of light on the gloom that envelops Japan today. 


Japan’s Road to Harmonious Decline 
PARIS – Forget what you have heard about the hard-working Japanese salaryman: since the early 1990’s, the Japanese have drastically slackened their work habits. 
Indeed, Tokyo University economist Fumio Hayashi has demonstrated that the main reason behind Japan’s 20 years of stagnation has been the decrease in the quantity of work performed by the Japanese. 
The government itself has led the way here, starting with its decision to close public administration buildings on Saturdays. 
Japan’s banks followed suit. 
From 1988 to 1993, the legal work week fell 10%, from 44 hours to 40. 
This, as much as anything, helped to bring Japan’s long-running post-WWII economic “miracle” to its knees. 
In the service sector, the decline is even worse than in manufacturing, because services are heavily regulated and partially closed to foreign competition. 
In the retail sector, which employs a huge number of Japan’s unskilled workers – the so-called “mom and pop” shops – Japanese productivity is now 25% lower than in Western Europe. 
Former Prime Minister Junichiro Koizumi (in power between 2000 and 2004) and his chief economic adviser and minister of finance, Heizo Takenaka, understood all too well that Japan was losing ground in terms of productivity. 
They sought to counter the trend toward less work through privatization and deregulation. 
Japan’s powerful bureaucrats, nostalgic for the 1960’s model of development, whereby government and its business cronies nurtured the Japanese miracle, strongly opposed this bold, free-market solution. 
But their model is obsolete, because Japan now competes directly with many other Asian and non-Asian countries, where work habits are of the type that used to prevail among the Japanese. 
Moreover, public opinion never supported Koizumi’s policy, which was alleged then, as it is now, to be a source of inequality. 
But that is a canard: real-estate speculation, not privatization, has been the real source of undeserved wealth in Japan. 
Nonetheless, the newly victorious Democratic Party of Japan (DPJ) has been able to make the accusation stick to free-market policies. 
The recent electoral triumph of Yukio Hatoyama’s untested DPJ thus confirmed the popular wish not to follow America’s free-market model. 
Hatoyama makes no economic sense in declaring that growth is important but that happiness comes first. 
Nevertheless, this sentiment does reflect the mood of many Japanese. 
Assuming that Hayashi and Takenaka are right about the causes of Japan’s stagnation, one must ask whether today’s Japanese are willing to work more in order to catch up with the United States and to lead Asia development? 
Stagnation is a tacit collective choice made by a country’s majority. 
Have the Japanese people opted for it? 
Nearly half of the Japanese population is either retired or near retirement age, and they worked very hard to achieve a high level of comfort. 
Thanks to them, despite the blighted economy of the “lost decade,” Japanese income is still higher than it is in Europe. 
Moreover, unemployment is low compared to the Western world, because the unproductive distribution sector absorbs young people who cannot find better jobs. 
Stagnating Japan has thus remained a peaceful and rather conservative society. 
By contrast, a higher growth rate would require fewer golf breaks for salarymen and significant immigration in a nation that is unaccustomed to foreign intrusion and different cultural habits. 
Are the Japanese really ready to accept such a cure? 
Most Japanese, mostly among the old generation, are satisfied with the kind of society they have built. 
They perceive Americans and Europeans as being obsessed with money and material ambition, and they seem ready to accept some stagnation as the price of remaining truly Japanese. 
Hatoyama understands this, which is why he won the recent election. 
Hatoyama’s talk about a “new age,” which sounds strange from a Western perspective, is in harmony with the Japanese way: this is a country where thousands of cult leaders offer myriad paths to Happiness, in particular a glib mishmash of New Age and Zen Buddhism. 
How long can Japan sustain this period of harmonious stagnation? 
Japan’s high-tech industries remain competitive, and the country is still the world’s second largest exporter. 
It retains a highly innovative economy, which registers more new patents each year than all European countries combined – second only to the US and eons ahead of China and India. 
Japan’s 150 million people still produce far more than 2.5 billion Chinese and Indians. 
In ten years or so, however, Japan could lose its status vis-à-vis the rest of Asia. 
Stagnation is already having a big impact on Japan’s young, for whom it is becoming hard to find a job, let alone life-long employment in a leading global company. 
Teenagers know that they will have fewer opportunities than their parents had. 
How they will pay for their parent’s pensions and health care is unknown. 
Most troubling is the absence of open debate about these matters. 
Japan is a hush-hush society, where everyone is supposed to guess what is going on, and the media are careful not to provoke social division. 
Hard questions are not to be asked, and straightforward answers are considered too rude and crude to be given. 
Foreigners are welcome to make comments, but their advice will usually be ignored. 
It may seem to most Japanese that their continuing economic power affords them the luxury of indulging such ingrained habits. 
Perhaps they should bear in mind Ernest Hemingway’s description of how a man goes broke: “slowly, then all at once.” 

Japan’s Secret Shogun 
OSAKA – With the post-general election honeymoon over, the Japanese public has become increasingly aware that Ichiro Ozawa, Secretary-General of the ruling Democratic Party of Japan (DPJ), is the puppet-master behind Prime Minister Yukio Hatoyama’s cabinet. 
Although he distances himself from formal policy-making within the executive branch, Ozawa in fact masterminds the entire legislative process, including the budget and appropriations. 
He has centralized the DPJ’s contacts with lobbyists at his office in the Diet (Parliament). 
He also exercises a total grip over the allocation of the DPJ’s state subsidy to individual DPJ legislators. 
Alas, Hatoyama controls only the narrow field of policy. 
Ozawa’s political style is that of his mentor, former Prime Minister Kakuei Tanaka (1972-1974), who became the longtime boss of the biggest faction of the former ruling Liberal Democratic Party (LDP) after his resignation following bribery charges. 
Together with other factions, Tanaka commanded a majority within the LDP and remained the party’s kingmaker and string-puller in successive LDP governments, perfecting the LDP’s quasi-social-democratic combination of export-led growth and pork-barrel wealth redistribution. 
Recently, Ozawa had a visit that he made to Tanaka’s tombstone televised, thereby holding himself up to the public as Tanaka’s heir. 
With the LDP suffering from organizational sclerosis, Ozawa and some four dozen fellow legislators of the Tanaka faction broke away from the LDP in 1993 in a bid to build a two-party system. 
Since then, and until the DPJ’s victory in the 2008 upper-house election, Ozawa was almost always at the center of political battles against the LDP, building an effective political machine by making the most use of the art of patronage. 
In fact, Ozawa has established one of the largest financial war chests of any political party, using tactics reminiscent of Tanaka: three of Ozawa’s current and former political aides were recently arrested on charges of channeling kickbacks from civil engineering and construction firms into Ozawa’s fund-raising operation. 
Ironically, Ozawa’s power results from the rise and fall of former Prime Minister Junichiro Koizumi and the LDP. 
Having pledged to destroy the “old LDP,” Koizumi implemented exemplary reforms that took the spoils away from special-interest groups, which merely accelerated the LDP’s enfeeblement. 
Behind Koizumi’s pro-reform slogans was an intra-party factional struggle with the dominant Tanaka faction, whose seemingly invincible political machine and electoral constituencies were anchored to public works involving special-interest groups, particularly civil engineering and construction firms. 
Koizumi slashed a large portion of the budgets for public works and abandoned the rural population, which depended on a variety of redistributive schemes. Instead, Koizumi appealed to an electoral majority comprising urban and suburban swing voters. 
But, while Koizumi successfully knocked out the Tanaka faction within the LDP, many of Tanaka’s adherents ,led by Ozawa, had re-established themselves by colonizing and taking over the DPJ. 
Unsurprisingly, as Koizumi’s reforms stalled, and as LDP governments under Prime Ministers Shinzo Abe, Yasuo Fukuda, and Taro Aso ran adrift, Ozawa-proposed wealth redistribution captured the hearts and minds not only of rural voters, but also of city dwellers displeased at the fraying social-safety net. 
Now that the DPJ has won the most recent upper- and lower-house elections, Ozawa’s faction has become the largest by far within the party. 
Moreover, there are several veterans of the old Tanaka faction in the Cabinet, including Hatoyama himself and Foreign Minister Katsuya Okada. 
Now the public is increasingly disenchanted with the DPJ, which it expected to jump-start Japanese politics. 
But instead of that happening, the country faces the grotesque revival of a domestic variant of the Cold War structure. 
Formerly, the LDP and the Japan Socialist Party (JSP) disguised their ideological confrontation, at least publicly, while making deals under the table after behind-the-scenes negotiations. 
This was a key to the one-party dominant system in which the LDP maintained a majority in the Diet while the JSP laid low as the largest opposition party. 
Today, Ozawa and the DPJ’s Tanaka veterans, who lead a party overwhelmingly composed of newly elected, amateurish lawmakers, deal directly with former socialists and other populist spin-offs from the LDP, in both the Cabinet and the Diet. 
It is no wonder that the two regimes have many domestic and foreign/security policies in common. 
Prosecutors have so far taken an aggressive approach to the cases involving Ozawa’s aides, just as they once did with Tanaka. 
But Ozawa remains combative, hinting that the two sides are engaged in a grudge match – and knowing that his faction can intervene through the ruling DPJ to shake up the personnel, budget, and operations of the prosecutor’s office. 
In Japan’s season of political discontent, it seems that there is nothing new under the sun. 

Japan’s Slow-Motion Crisis 
TOKYO – If you listen to American, European, or even Chinese leaders, Japan is the economic future no one wants. 
In selling massive stimulus packages and bank bailouts, Western leaders told their people, “We must do this or we will end up like Japan, mired in recession and deflation for a decade or more.” 
Chinese leaders love pointing to Japan as the prime reason not to allow any significant appreciation of their conspicuously undervalued currency. “Western leaders forced Japan to let its currency rise in the second half of the 1980’s, and look at the disaster that followed.” 
Yes, nobody wants to be Japan, the fallen angel that went from one of the fastest growing economies in the world for more than three decades to one that has slowed to a crawl for the past 18 years. 
No one wants to live with the trauma of the deflation (falling prices) that Japan has repeatedly experienced. 
No one wants to navigate the precarious government-debt dynamic that Japan faces, with debt levels far above 100% of GDP (even if one factors in the Japanese government’s vast holdings of foreign-exchange reserves.) 
No one wants to go from being a world-beater to a poster child for economic stagnation. 
And yet, visitors to Tokyo today see prosperity everywhere. 
The shops and office buildings are bustling with activity. 
Restaurants are packed with people, dressed in better clothing that one typically sees in New York or Paris. 
After all, even after nearly two decades of “recession,” per-capita income in Japan is more than $40,000 (at market exchange rates). 
Japan is still the third-largest economy in the world after the United States and China. 
Its unemployment rate remained low during most of its “lost decade,” and, although it has shot up more recently, it is still only 5%. 
So what gives? 
First, things look a lot grimmer when one gets two hours outside of Tokyo to places like Hokkaido. 
These poorer outlying regions are hugely dependent on public-works projects for employment. 
As the government’s fiscal position has steadily weakened, the jobs have become far scarcer. 
True, there are beautifully paved roads all around, but they go nowhere. 
Old people have retreated to villages, many growing their own food, their children having long abandoned them for the cities. 
Even in Tokyo, the air of normalcy is misleading. 
Two decades ago, Japanese workers could expect to receive massive year-end bonuses, typically amounting to one-third of their salary or more. 
Now these have gradually shrunk to nothing. 
True, thanks to falling prices, the purchasing power of workers’ remaining income has held up, but it is still down by more than 10%. 
There is far more job insecurity than ever before as firms increasingly offer temporary jobs in place of once-treasured “lifetime employment.” 
Although hardly in crisis (yet), Japan’s fiscal situation grows more alarming by the day. 
Until now, the government has been able to finance its vast debts locally, despite paying paltry interest rates even on longer-term borrowings. 
Remarkably, Japanese savers soak up some 95% of their government’s debt. 
Perhaps burned by the way stock prices and real estate collapsed when the 1980’s bubble burst, savers would rather go for what they view as safe bonds, especially as gently falling prices make the returns go farther than would be the case in a more normal inflation environment. 
Unfortunately, as well as Japan has held up until now, it still faces profound challenges. 
First and foremost, there is its ever-falling labor supply, owing to extraordinarily low birth rates and deep-seated resistance to foreign immigration. 
The country also needs to find ways to enhance the productivity of those workers it does have. 
Inefficiency in agriculture, retail, and government are legendary. 
Even at Japan’s world-beating export firms, reluctance to confront the ingrained interests of the old-boy network has made it difficult to prune less profitable product lines – and the workers who make them. 
As the population ages and shrinks, more people will retire and start selling those government bonds that they are now lapping up. 
At some point, Japan will face its own Greek tragedy as the market charges sharply higher interest rates. 
The government will be forced to consider raising revenues sharply. 
The best guess is that Japan will raise its value-added tax, now only 5%, far below European levels. 
But is it plausible to raise taxes in the face of such sustained low growth? 
Investors who have bet against Japan in the past have been badly burned, grossly underestimating the Japanese people’s remarkable flexibility and resilience. 
But the fiscal road ahead looks increasingly perilous, with political consensus fraying badly in recent years. 
In the end, are foreign leaders right to scare their people with tales of Japan? 
Certainly, the hyperbole is overblown; the Chinese, especially, should be so lucky. 
But nor should apologists for deficits point to Japan as reason to be calm about outsized stimulus packages. 
Japan’s ability to trudge on in the face of huge adversity is admirable, but the risks of crisis ahead are surely greater than bond markets seem to recognize. 


Japan’s Unfinished Reformation 
TOKYO – Revolutions, it is often claimed, do not happen when people are desperate. 
They occur in times of rising expectations. 
Perhaps this is why they so often end in disappointment. 
Expectations, usually set too high to begin with, fail to be met, resulting in anger, disillusion, and often in acts of terrifying violence. 
Japan’s change of government in 2009 – when the Democratic Party of Japan (DPJ) broke the almost uninterrupted monopoly on power held by the Liberal Democratic Party (LDP) since 1955 – was not a revolution. 
But, rather like the election of the first black president of the United States, it was fizzing with popular expectations, promising a fundamental shift from the past. 
This was even truer of Japan than the US. 
The DPJ not only put many new faces into power, it was going to change the nature of Japanese politics. 
At last, Japan would become a fully functioning democracy, and not a de facto one-party state run by bureaucrats. 
To judge from the Japanese press, as well as the DPJ’s plunging poll ratings, disillusion has already set in. 
The permanent bureaucracy proved resistant, and DPJ politicians, unused to power, made mistakes. 
One of the worst was Prime Minister Naoto Kan’s announcement in June of a consumption-tax hike just before the Upper House elections, which the DPJ went on to lose badly. 
The other disappointment has been the government’s failure to get the US to move its Marine airbase out of Okinawa. 
This promise by the DPJ was meant to be part of Japan’s new assertiveness, a first step away from being a mere “aircraft carrier” for the US, as a former LDP prime minister once described his country. 
If Japan’s status quo is to change, the country’s oddly skewed relationship with the US is one key factor. 
Too much dependence on American power has warped the development of Japanese democracy in ways that are not always sufficiently recognized by the US. 
Japan’s one-party state, under the conservative LDP, was a product of World War II and the Cold War. 
Like Italy, the old Axis partner during the war, Japan became a front-line state in the battle against Communist powers. 
And, as in Italy, a right-wing party, backed by the US, dominated politics for decades in order to crush any chance for the left to take power. 
Even former Japanese war criminals, one of whom became prime minister in the late 1950’s, became subservient allies of the US in the wars (hot and cold) against Communism. 
In fact, Japanese dependence on the US was even greater than that of Italy and other European powers. 
West European armies were embedded in NATO. 
Japan, whose armed forces were entirely blamed for driving the country into the catastrophic Pacific War, was not even supposed to have an army or navy after the war. 
During their occupation of Japan in the 1940’s, Americans wrote a new pacifist constitution, which made the use of Japanese military force abroad unconstitutional. 
In matters of war and peace, Japan abdicated its sovereignty. 
Most Japanese were happy to be pacifists and concentrate on making money. 
Japanese governments could devote their energy to building up the country’s industrial wealth, while the US took care of security, and by extension much of Japan’s foreign policy. 
It was an arrangement that suited everyone: the Japanese became rich, the Americans had a compliant anti-communist vassal state, and other Asians, even Communist China, preferred Pax Americana to a revival of Japanese military clout. 
But there was a steep political price to pay. 
A democracy that is over-dependent on an outside power, and monopolized by one party whose main role is to broker deals between big business and the bureaucracy, will become stunted and corrupt. 
Italy, under the Christian Democrats, had the same problem. 
But the end of the Cold War in Europe changed the political status quo – with mixed results, to be sure. 
Old parties lost power, which was a good thing. 
The vacuum was filled in Italy by the rise of Silvio Berlusconi, which may have been less of a good thing. 
In East Asia, by contrast, the Cold War is not yet entirely over. 
North Korea still causes trouble, and China is nominally a Communist state. 
But it is a very different world from the one left in ruins in 1945. 
For one thing, China has become a great power, and Japan, like other Asian countries, must adapt to new circumstances. 
But, while it is the only Asian democracy able to balance the power of China, the system established after WWII is not best suited to this task. 
This was recognized by the DPJ, which would like Japan to play a more independent role, as a more equal ally, rather than a mere protectorate, of the US, and thus be a more assertive political player in Asia. 
Hence, the first symbolic step was to get the US to move its marines from Okinawa, an island that has carried the burden of a US military presence for much too long. 
The US did not see things that way. 
The DPJ threatened to change comfortable old arrangements, whereby the US could more or less tell the Japanese what to do. 
As a result, the US showed little patience with Japan on the question of Okinawa, and has barely concealed its contempt for the DPJ government, feeding popular disappointment with its performance so far. 
The US seems to prefer an obedient one-party state to a difficult, faltering, but more democratic partner in Asia. 
The Obama administration, struggling to fulfill its own promises of change, should be more understanding of its Japanese counterpart. 
If the US is as serious about promoting freedom abroad as it claims, it should not be hindering one of its closest ally’s efforts to strengthen its democracy. 

Japan’s War Guilt Revisited 
“It is our obligation as Japan’s most influential newspaper to tell our readers who was responsible for starting the Sino-Japanese War and the Pacific War.” 
So writes Tsuneo Watanabe, Editor-in-Chief of Japan’s (and the world’s) most widely circulated newspaper, Yomiuri Shimbun , in the introduction to the book From Marco Polo Bridge to Pearl Ha rbor: Who Was Responsible . 
Watanabe, who is now in his eighties and served in the Imperial Japanese Army during WWII, was bothered by the way unfinished business concerning the war continued to hinder Japan’s progress. 
As a remedy, he set up a War Responsibility Re-Examination Committee at his newspaper to undertake a 14-month investigation into the causes of Japan’s Pacific War. 
Watanabe tells us that the Committee concluded that, “not only high-ranking government leaders, general, and admirals should shoulder the blame.” 
According to the Committee, “field officers were often more influential than even the Emperor, war ministers, and chiefs-of-staffs in making decisions to go to and escalate the wars, and were responsible for many atrocities.” 
It has never been easy for a nation to face up honestly to the bitter fact of having committed war crimes, genocide, unjustified foreign aggression, or having mistreated and killed its own people. 
Japan is no exception. 
Although there have been numerous initiatives to investigate its war guilt, especially its occupation of China, there has not yet been an official effort comparable to what the Germans undertook to take collective responsibility for their war crimes. 
While Yomiuri’s unique public effort is not a government initiative, it comes as close as Japan will probably ever get to conducting an acceptable “official” inquiry and offering an adequate apology. 
Its style is almost scientific – factual, staccato-like, and unemotional – and it goes a long way toward meeting China’s demand for a convincing investigation and act of contrition that might allow the bitter and still poisonous past to be overcome. 
Watanabe laments the fact that after Japanese war criminals were tried by the Tokyo Tribunal of 1951, “No efforts were made in the name of Japan or the Japanese people to look into where responsibility for the war rested.” 
As a result, “there can be no genuinely honest and friendly dialogue with those countries that suffered considerable damage and casualties in the wars with Japan.” 
Indeed, Yomiuri’s report may well have helped convince Japan’s new prime minister, Shinzo Abe, to go to China immediately after being elected in to seek better bilateral relations. 
China’s leaders seem to have taken note of this moment of Japanese remorse. 
This implies a ray of hope for a bilateral relationship – the most important in Asia – that over the past two decades has been battered by Japan’s reluctance to face its past, which has become a lightning rod for over-heated nationalist sentiment on both sides. 
But does the Yomiuri study go far enough? 
While it assigns responsibility to Japan for WWII, and even unflinchingly names the political and military leaders who bear responsibility, one can still detect a whiff of reluctance in its failure to fully describe some of Japan’s war-time actions. 
For example, the horrors of the Nanjing Massacre in 1937, when Japanese soldiers killed 45,000-250,000 Chinese – many of whom were civilians – are given little more than a brief mention. 
But it would be a pity if China’s leaders did not endorse this acknowledgement of Japanese guilt as a manifestation of Japan’s willingness to repent. 
The damaged bilateral relationship has only made China’s desire for a “peaceful rise” more uncertain. 
At the same time, it has left Japan’s long sought transcendence of its war guilt and quasi-pariah status incomplete. 
Watanabe and Yomiuri Shimbun have provided a rare opportunity that should be seized for the greater good of China and Japan and the world. 
Of course, it is always easier to export blame than to shoulder it. 
And, true, no Japanese prime minister has yet fallen to his knees in Nanjing the way Chancellor Willy Brandt did on the site of the Warsaw Ghetto, where he apologized for the crimes of Germany by saying, “No people can escape from their history.” 
But that was in 1970, when memories of the war’s ravages were fresh. 
Now, over half-a-century has elapsed. 
“If things are left as they are,” writes Watanabe, “a skewed perception of history – without knowledge of the horrors of the war – will be handed down to future generations.” 
It would be an immensely encouraging sign of China’s growing maturity if its leaders used this moment to look beyond the bitter past toward a new future with Japan. 

Can Japan Reboot? 
CAMBRIDGE – Japanese Prime Minister Shinzo Abe’s recent policy decisions – to increase monetary stimulus dramatically, to postpone a consumption-tax increase, and to call a snap election in mid-December – have returned his country to the forefront of an intense policy debate. 
The problem is simple: How can aging advanced economies revive growth after a financial crisis? 
The solution is not. 
It is now clear that the first round of Abe’s reforms – known as “Abenomics” – has failed to generate sustained inflation. 
Hopes for continued recovery have now given way to two consecutive quarters of negative growth. 
The question is whether Abenomics 2.0 will put Japan’s economy back on the path to renewed prosperity. 
My own view is that the “three arrows” of Abenomics 1.0 basically had it right: “whatever it takes” monetary policy to restore inflation, supportive fiscal policy, and structural reforms to boost long-run growth. 
But, though the central bank, under Governor Haruhiko Kuroda, has been delivering on its side of the bargain, the other two “arrows” of Abenomics have fallen far short. 
There has been no significant progress on supply-side reforms, especially on the core issue of how to expand the labor force. 
With an aging and shrinking population, Japan’s government must find ways to encourage more women to work, entice older Japanese to remain in the labor force, and develop more family-friendly labor policies. 
Above all, Japan needs to create a more welcoming environment for immigrant workers. 
There has been some movement on immigration. 
Panicked by deadlines for the 2020 Summer Olympics in Tokyo, the government managed to clear the import of foreign construction workers (though the decision had to make its way through a half-dozen ministries). 
But overall progress has been slow. 
Japan desperately needs more nurses and hospice workers to care for its aging population, but bureaucratic and political resistance to immigration is deeply entrenched. 
When I first started asking my Japanese academic friends about Abe’s supply-side reforms, they said, “Don’t worry, they’re coming.” 
Then, after a while, they would say, “Don’t worry, they’re coming – but slowly.” 
Recently, the mantra has changed to, “Don’t worry, we still think they’re coming.” 
One can only hope so. 
Without structural reforms, especially of the labor market, Abenomics cannot succeed in the long run. 
The timing of the April 2014 consumption-tax hike (from 5% to 8%) was also unfortunate. 
It would not have been easy for Abe to postpone the move, given that it had been locked in place by broad-based political agreement before he took office. 
But the government could have engaged in more aggressive fiscal stimulus to counteract the hike’s short-term effects. 
Instead, two successive quarters of negative growth have had a dispiriting psychological impact. 
True, the slump is partly an illusion: the earlier boom was fueled by Japanese households’ effort to beat the tax by front-loading purchases of consumer durables – a nuance that seems to have been lost in the public debate. 
But the big picture remains: Abenomics so far has failed to turn around a deflationary mindset. 
Mind you, Japan’s outsize government debt and undersize pension assets are a huge problem, and only the most reckless and crude Keynesian would advise the authorities to ignore it. 
For the moment, the risks are notional, with interest rates on ten-year government debt below 0.5%. 
But saying that Japan’s debt is irrelevant is like saying that a highly leveraged hedge fund is completely safe; the risks may be remote, but they are not trivial. 
Think about what would happen if the Bank of Japan actually managed to convince the public that inflation will average 2% on a sustained basis. 
Would ten-year interest rates still be 0.5%? 
What if other factors – say, a sharp decline in emerging-market growth – led to a sharp rise in global real interest rates, or a rise in risk premia on Japanese debt? 
In principle, Japan could weather such shocks without high inflation or other extreme measures, but it is folly to deny the country’s vulnerability. 
A hedge fund can simply go out of business; that is not an option for a great nation. 
Fiscal sustainability requires an eventual rise in the consumption tax, and of course Japan should not wait until international investors start doubting its willpower. 
The problem is in the timing and tactics. 
Postponing the second consumption-tax increase seems like a good compromise between pushing Abenomics to escape velocity and maintaining long-run credibility. 
But this brings us back to Japan’s deeper problems. 
Demand policies alone will not alone prevent two more lost decades, much less guarantee two golden ones. 
Demographic decline was a key factor in setting off Japan’s 1992 financial crisis and the long malaise that followed. 
Japan is still a rich country, but its ranking in terms of real per capita income has now slipped below that of many other advanced economies – including the United Kingdom, by some measures – and far below that of the United States. 
Japan’s experience holds important lessons for Europe, the main one being that stimulus policies, though necessary in the short run to support demand, cannot address long-term structural deficiencies. 
If Abenomics 2.0 fails to embrace deep structural reform, it will fare no better than the original. 

America’s Bickering Asian Allies 
ATLANTA – American diplomats like to portray their country’s allies in glowing terms. 
So the world should take note when they do not – such as when US Under Secretary of State Wendy Sherman, at a recent conference in Washington, DC, on Asian security, publicly scolded South Korea for its seemingly endless vilification of Japan. 
According to Sherman, South Korea’s stance – reflected in its demand that Japan apologize, once again, for forcing Korean women to provide sexual services to the Imperial Army during World War II – has produced “paralysis, not progress.” 
But Sherman’s criticism could also be leveled against Japan. 
Prime Minister Shinzo Abe has rarely missed an opportunity to provoke Japan’s Korean critics, whether by visiting Tokyo’s Yasukuni shrine, where the “souls” of 14 Class A war criminals are interred, or embracing revisionist critiques of previous official apologies for Japanese aggression. 
Instead of working together to help their American ally confront the challenges posed by a rising China and the North Korean nuclear threat, South Korea and Japan have allowed their rancor to stymie effective action. 
This seemingly endless tension has been frustrating – and worrying – American leaders for years, especially as it has undermined the United States’ strategic “pivot” toward Asia. 
Since President Barack Obama announced the pivot five years ago, the US has been attempting to bolster its forces and alliances in Asia, thereby reinforcing its strategic role in a region that China is increasingly attempting to dominate. 
But the relentless sniping by its two most important Asian allies has blocked the kind of concrete cooperation needed to help it achieve its main goals, including ensuring a durable, long-term military presence in the region. 
Intelligence sharing is a case in point. 
In December, US officials, seeking to better their understanding of North Korea’s missile and nuclear programs – and enable commanders to react swiftly if potential threats materialize – announced a new information-sharing agreement with South Korea and Japan. 
But the deal could be a script for a situation comedy: Japan and South Korea refuse to provide intelligence data to each other, leaving the US to play the middleman. 
The US has accentuated the positive, calling the agreement an important step forward. 
But, though it does represent progress from 2012, when popular opposition in South Korea to the idea of military cooperation with Japan caused a similar agreement to collapse, the latest effort is inefficient, at best. 
China has been eager to capitalize on the animosity between Japan and South Korea to undermine America’s security interests in Asia. 
During a visit to South Korea last July, President Xi Jinping highlighted not only the two countries’ deepening economic relationship, but also their shared views regarding Japan’s wartime past. 
Other Chinese officials have picked up the theme, dropping hints that China’s 70th anniversary celebration of the end of World War II could exclude Japan – unless, that is, Japan is more contrite about its historic transgressions. 
It is time for the US to tell its Asian allies to get over it. 
As the underwriter of both Japan’s and South Korea’s national defense, the US simply cannot allow their historical animosities to impede action to address urgent threats in this critical region. 
The timing could not be better, as rising security fears are altering public perceptions. 
Recent opinion polls suggest that at least half of all South Koreans are worried enough about regional tensions to support closer military ties with Japan. 
And, indeed, the security risks facing Asia are only growing – exemplified in China’s move from military expansion to blatant assertiveness. 
Most notably, in the South and East China Seas, China has been staking its claim to disputed island territories, deploying advanced military hardware, and aggressively patrolling an expanded security zone. 
Meanwhile, leaks from Chinese think tanks have suggested that if the North Korean regime collapses, China could well send troops to preserve the country’s stability. 
Asia’s new security landscape places a premium on seamless cooperation among US allies – a prospect that the sustained bickering between South Korea and Japan calls into question. 
It could even be said that their longstanding dispute makes America’s Asian alliance system worth less than the sum of its parts. 
Repairing relations between South Korean and Japan could not be more urgent. 
Even with good will on both sides, it will take time to build a strong defense partnership. 
Effective military cooperation requires personal ties that take years to build, and, aside from some joint naval and air exercises, the two countries have little experience working together. 
Boosting technical interoperability also will take considerable time, though both countries maintain sophisticated defense forces with great potential to be linked together. 
Effective cooperation will also require a broader scope for joint action – an imperative that is not reflected in the recent intelligence-sharing agreement. 
The risks to stability in Northeast Asia extend well beyond North Korea’s nuclear weapons and missile programs, and a joint intelligence agenda should address them. 
How will the allies respond to the threat of a conventional military attack by – or instability in – North Korea? 
What if the North Korean regime collapses, and China does intervene militarily? 
After spending the last six decades defending South Korea and Japan, the US has every reason – and plenty of leverage – to demand that its two long-time allies enhance their military cooperation. 
Simply focusing on the positive – America’s classic approach to alliance diplomacy – is no longer enough. 
Whatever their historical disagreements, South Korea and Japan both face serious risks in their immediate neighborhood. 
It is up to the US to ensure that they work together to protect themselves – and ensure long-term stability throughout Asia. 


Toward an Alliance of Hope 
WASHINGTON, DC – At World War II’s close in the Pacific, we Japanese, with feelings of deep remorse, embarked on the path of rebuilding and renewing our country. 
Our predecessors’ actions brought great suffering to Asia’s peoples, and we must never avert our eyes from that. 
I uphold the views expressed by Japan’s previous prime ministers in this regard. 
Given this recognition and remorse, we Japanese have believed for decades that we must do all that we can to contribute to Asia’s development. 
We must spare no effort in working for the region’s peace and prosperity. 
I am proud of the path that we have taken, but we did not walk that path alone. 
Seventy years ago, Japan had been reduced to ashes, and each and every month, citizens of the United States sent and brought gifts like milk for our children, warm sweaters, and even goats. 
Yes, 2,036 American goats came to Japan in the years right after the war. 
Former enemies had become close friends. 
And it was Japan that benefited earliest from the postwar international system that the US fostered by opening up its own market and calling for a liberal world economy. 
From the 1980s onward, we have seen the rise of the Republic of Korea, Taiwan, the ASEAN countries, and, before long, China – all taking the path of economic development enabled by the open world order created by the US. 
Japan, to be sure, did not stand idly by; it poured in capital and technologies to support these countries’ growth. 
Both the US and Japan fostered prosperity – the seedbed for peace – in the region. 
Today, the US and Japan recognize that they must continue to take the lead in fostering a rules-based international economic order – fair, dynamic, and sustainable – within which all countries can flourish, free from the arbitrary intentions of any national government. 
In the world’s great growth center, the Pacific market, we cannot overlook sweatshops or environmental burdens. 
Nor can we simply allow free riders to weaken intellectual property. 
Instead, we must spread and nurture our shared values: the rule of law, democracy, and freedom. 
That is exactly what the Trans-Pacific Partnership is all about. 
The TPP’s strategic value extends far beyond the economic benefits it promises. 
It is also about turning an area that accounts for 40% of the world economy and one-third of global trade into a region of lasting peace and prosperity for our children and theirs. 
As for US-Japan negotiations, the goal is near. 
Let us bring the TPP to a successful conclusion through our joint leadership. 
I know how difficult this path has been. 
Twenty years ago, I myself opposed opening Japan’s agricultural market. 
I even joined farmers’ representatives in a rally in front of Japan’s Diet. 
But Japan’s agriculture sector has declined over the last two decades. 
Our farmers’ average age has increased by ten years, to more than 66. 
If our agriculture sector is to survive, we must follow through on sweeping reforms, including to our agricultural cooperatives, which have not changed in 60 years. 
Change is coming to Japanese business, too. 
Corporate governance in Japan is now fully in line with global standards because we made it stronger. 
And I am spearheading regulatory overhauls in such sectors as medicine and energy as well. 
Moreover, I am determined to do whatever it takes to reverse the decline in Japan’s labor force. 
We are changing some of our old habits; in particular, we are empowering women to become more actively engaged in all walks of life. 
In short, Japan is in the midst of a far-reaching transition to a more open future. 
We are determined to press ahead with the structural reforms needed to succeed. 
But reform requires the continuation of the peace and security that is the bequest of US leadership. 
My grandfather, Nobusuke Kishi, chose the path of democracy and alliance with the US when he was Prime Minister in the 1950s. 
Together with the US and other like-minded democracies, we won the Cold War. 
I intend to stick to that path; indeed, there is no alternative to it. 
Our two countries need to make every effort to strengthen our ties. 
This is why I support America’s strategic “rebalancing” to enhance peace and security in the Asia-Pacific region. 
Japan will support this effort first, last, and throughout. 
Japan is doing so by deepening its strategic relations with Australia and India, and we are enhancing our cooperation with the ASEAN countries and the Republic of Korea. 
Adding these partners to the central pillar of the US-Japan alliance will strengthen stability throughout the region. 
And now Japan will provide up to $2.8 billion dollars to help improve US bases on Guam, which will have even greater strategic significance in the future. 
Regarding Asia’s ongoing maritime disputes, let me underscore my government’s three principles. 
First, states must stake their territorial claims on the basis of international law. 
Second, they must not use force or coercion to press their claims. 
And, third, they must settle all disputes by peaceful means. 
We must make the vast seas stretching from the Pacific to the Indian Oceans a zone of peace and freedom, where all adhere to the rule of law. 
For this reason, too, it is our responsibility to fortify the US-Japan alliance. 
That is why we are working hard to enhance the legislative foundations of our security. 
These enhanced legislative foundations should make cooperation between the US military and Japan’s Self-Defense Forces even stronger, and the alliance still more solid, providing credible deterrence in the service of peace in the region. 
Once these legal changes – the most sweeping in our post-war history – are in place by this summer, Japan will be better able to provide a seamless response for all levels of crisis. 
The new Defense Cooperation Guidelines between the US and Japan will serve the same purpose, and help secure peace in the region for years to come. 
Finally, Japan is ever more willing to bear its global responsibilities. 
In the early 1990s, Japan’s Self-Defense Forces removed mines in the Persian Gulf. 
For ten years in the Indian Ocean, we supported US operations to stop the flow of terrorists and arms. 
In Cambodia, the Golan Heights, Iraq, Haiti, and South Sudan, members of our Self-Defense Forces provided humanitarian support and participated in peace-keeping operations. 
Some 50,000 service men and women have participated in those activities thus far. 
Japan’s agenda is simple and straightforward: reform at home and proactive contributions to global peace based on the principle of international cooperation. 
It is an agenda that promises to lead Japan – and Asia – into a more stable and prosperous future. 

China, Japan, and Trump’s America 
CAMBRIDGE – The key strategic issue in East Asia is the rise of Chinese power. 
Some analysts believe that China will seek a form of hegemony in East Asia that will lead to conflict. 
Unlike Europe, East Asia never fully came to terms with the 1930s, and Cold War divisions subsequently limited reconciliation. 
Now US President Donald Trump has launched a trade war with China and negotiations with Japan that take aim at Japan’s trade surplus with the United States. 
While the recent announcement of bilateral talks postpones Trump’s threat of auto tariffs against Japan, critics worry that Trump may push Japan closer to China, whose president, Xi Jinping, is scheduled to hold a summit with Prime Minister Shinzo Abe later this month. 
The balance of power between Japan and China has shifted markedly in recent decades. 
In 2010, China’s GDP surpassed Japan’s as measured in dollars (though it remains far behind Japan in per capita terms). 
It is difficult to remember that a little over two decades ago, many Americans feared being overtaken by Japan, not China. 
Books predicted a Japanese-led Pacific bloc that would exclude the US, and even an eventual war with Japan. 
Instead, during President Bill Clinton’s administration, the US reaffirmed its security alliance with Japan at the same time that it accepted the rise of China and supported its admission to the World Trade Organization. 
In the early 1990s, many observers believed that the US-Japan alliance would be discarded as a Cold War relic. 
Trade tensions were high. 
Senator Paul Tsongas campaigned for president in 1992 on the slogan, “The Cold War is over and Japan has won.” 
The Clinton administration began with Japan-bashing, but after a two-year process of negotiation, Clinton and then-Prime Minister Ryutaro Hashimoto issued a declaration in 1996 that proclaimed the alliance to be the bedrock of stability for post-Cold War East Asia. 
There was a deeper level of malaise, however, and although it was rarely expressed openly, it related to the Japanese concern that it would be marginalized as the US turned toward China. 
When I was involved in negotiating the reaffirmation of the alliance in the mid-1990s, my Japanese counterparts, seated across a table festooned with national flags rarely discussed China formally. 
But later, over drinks, they would ask whether America would shift its focus from Japan to China as the latter grew in strength. 
Such anxieties are not surprising: when two allies’ defense capacities are not symmetrical, the more dependent party is bound to worry more about the partnership. 
Over the years, some Japanese have argued that Japan should become a “normal” country with a fuller panoply of military capabilities. 
Some experts have even suggested that Japan drop some of its anti-nuclear principles and develop nuclear weapons. 
But such measures would raise more problems than they would solve. 
Even if Japan took steps to become a “normal” country (whatever that term may imply), it would still not equal the power of the US or China. 
Today, Japan has a new set of concerns about American abandonment. 
Trump’s “America First” orientation and protectionist policies pose a new risk to the alliance. 
Trump’s withdrawal from the Trans-Pacific Partnership was a blow to Japan. 
While Abe has skillfully played to Trump’s ego to deflect conflict, acute differences remain. 
The Trump administration’s imposition of steel and aluminum tariffs on national security grounds surprised Abe and has fueled disquiet in Japan. 
The Trump administration has also suggested that US allies in Asia should do more to defend themselves and openly questioned the value of forward deployed US forces. 
Some analysts wonder whether Trump’s actions will force Japan to hedge its bets and edge toward China. 
But that is unlikely at this stage. 
While such options may be explored, they will remain limited, given Japanese concerns about Chinese domination. 
The US alliance remains the best option – unless Trump goes much further. 
Thus far, the alliance remains remarkably strong. 
Abe reached out early to President-elect Trump, meeting him first at Trump Tower in New York and then during visits to Washington, DC, and Mar-a-Lago, Trump’s Florida residence. 
The Abe-Trump relationship allowed the Pentagon to maintain close cooperation on security matters. 
North Korea helped focus the alliance’s attention and provided an opportunity for Trump to assure Japan that the US was behind Japan “100%.” 
Abe and Trump both supported the “maximum pressure” strategy against North Korea, working hard to build international support for United Nations sanctions. 
Meanwhile, Japan announced a major new investment in ballistic missile defense and cooperated in its joint development. 
On the other hand, Trump’s surprising reversal in attitude toward North Korean leader Kim Jong-un after their Singapore summit in June raised Japanese concerns about a US deal focusing on intercontinental missiles and ignoring the medium-range missiles that could reach Japan. 
Trump’s rhetoric about burden sharing has also raised concern. 
While Japan’s defense expenditure is little above 1% of GDP, it contributes significant host-country support. 
The US Department of Defense estimates suggest that the Japanese government pays roughly 75% of the cost of supporting US forces in Japan. 
This year alone, the Japanese government budgeted ¥197 billion ($1.7 billion) for cost sharing, ¥226 billion ($2 billion) for the realignment of US forces, and ¥266 billion ($2.3 billion) in various types of community support, among other alliance-related expenditures. 
As the Clinton administration recognized a quarter-century ago, China’s rise created a three-country balance of power in East Asia. 
If the US and Japan maintain their alliance, they can shape the environment that China faces and help moderate its rising power. 
But that will depend on whether the Trump administration successfully maintains the US-Japan alliance. 

Japanese Lessons for China’s Currency 
SHANGHAI – The question of how much China’s currency should appreciate to rebalance its trade has become a global hot-button issue. 
But the answers have been all over the map, with some finding that the yuan is not undervalued at all, while others argue that it should appreciate against the dollar by more than 30%. 
Clearly, there must be major differences in the macroeconomic models used to produce such a wide range of estimates. 
But the one thing about which everyone seems to agree is the theoretically and empirically unjustified assumption that an equilibrium exchange rate actually exists. 
The theoretical problem is simple: a country’s trade balance depends on a lot more than the value of its currency in the foreign exchange markets. 
Interest rates, employment, aggregate demand, and technological and institutional innovation all play a role. 
As the economist Joan Robinson pointed out in 1947, just about any exchange rate will be the equilibrium value for some combination of these other variables. 
The equilibrium exchange rate, she famously argued, is a chimera. 
Not surprisingly, the empirical evidence that trade imbalances can be resolved through exchange rate changes alone is unconvincing. 
In the case of China, the most useful precedent is probably that of Japan in the period from the end of the Bretton Woods fixed exchange-rate regime in August, 1971, to the collapse of its “bubble economy” in 1990. 
During that period, the yen’s value more than doubled against the dollar, rising from its original fixed rate of 360 to 144 at the end of 1989. 
Yet, even as Japan’s exports became much more expensive in dollar terms and its imports much cheaper in yen, its trade surplus rose from $6 billion in 1971 to $80 billion in 1989. 
For two decades, expectations that an appreciating yen would restore external balance were repeatedly disappointed. 
At the time of the December 1971 Smithsonian Agreement, 308 yen to the dollar was supposed to do the trick. 
Fourteen years later, during the Plaza Accord negotiations, the Japanese argued for an eventual level of 200-210, while some US Treasury officials thought the final target should be as high as 165-170. 
At the end of the 1980’s, some analysts thought rates as high as 120 might finally produce the long-sought equilibrium. 
Yet, as Japan entered the “lost decade” of the 1990’s, its exports continued to grow faster than its imports. 
Japan’s trade surplus peaked only in 1994, at $144 billion, just a few months before the yen’s April 1995 all-time high of 79.75. 
In retrospect, it is easy to see why none of these supposed equilibrium exchange rates delivered external balance. 
As the yen appreciated, Japan responded not by exporting less but by improving productivity and quality control through plant and equipment investment and innovations in factory management, making possible rapid growth in exports of high-value-added products. 
Exchange-rate equilibrium calculations from the 1970’s and 1980’s, which could only have been based on the export sector’s contemporary structure, naturally would have little relevance subsequently. 
The same is true of calculations at the beginning of the 1990’s, which would have forecast Japanese import growth based on extrapolations from the high GDP growth rates of the previous 40 years rather than on the decade of stagnation that ensued. 
In China, changes in the export sector’s structure similar to those observed in Japan are now taking place. 
These changes are likely to make today’s attempts to find an equilibrium yuan-dollar exchange rate seem just as chimerical in hindsight as previous calculations of the yen-dollar equilibrium rate. 
For the 30 years since the beginning of China’s economic reforms, Chinese industry has achieved impressive efficiency gains by adopting new technologies and realizing economies of scale, leading to a huge expansion in locally made products suitable for export. 
While an appreciating currency might eventually drive labor-intensive manufacturers out of business, if Japan’s economic history is any guide, they are likely to be replaced by producers of things like ships, machine tools, semiconductors, and doubtless new products yet to be invented. 
The equilibrium yuan-dollar rate is a chimera not because China’s trade could never be balanced, but because the exchange rate alone does not determine equilibrium. 
The structure of the entire economy matters, too. 
As this is constantly evolving in unpredictable ways, there is no reason to expect that the assumptions underlying any particular macroeconomic model will ever remain valid long enough for its steady-state solution to be achieved in practice. 

 

The Conscience of a Conservative? 
CAMBRIDGE – In a recent speech that received much attention in the United States and abroad, US Senator Jeff Flake, a Republican from Arizona, announced that he would not seek reelection. 
To agree with the reasoning Flake offered in defense of his decision, one must believe that a US senator’s highest duty is to speak truth to power, repudiate the president for “reckless, outrageous, and undignified behavior” that is “undermining our democracy,” and then quit. 
Many mainstream media outlets apparently believe just that, lavishing praise on Flake’s impassioned jeremiad. 
According to a CNN political analyst, it was “the most important political speech of 2017 – and one of the most powerful political speeches in the modern era of the Senate.” 
Both The New York Times and The Washington Post featured the speech prominently in front-page stories. 
But if we take Flake at his word that he is acting on principle, we must ask: what principle? 
If Flake is right that democracy itself is in peril unless we all “stand up and speak out,” then what good does it do to throw in the towel? 
In his speech, Flake began by pointing out that President Donald Trump’s words and actions are consistently beyond the pale, bringing disgrace to the office of the presidency. 
But Trump’s coarse behavior isn’t news to anyone who has been paying attention. 
Flake then announced that he would “no longer be complicit or silent.” 
We can certainly applaud him for that, but then we should ask what took him so long. 
All Americans have a right – indeed, a duty – to speak out against threats to their country. 
But a senator is more than just another citizen. 
Flake is one of 100 members of America’s highest legislative body. 
He shares with his fellow senators the power to vote yes or no on proposals made by the president. 
He can draft and help shape legislation that he believes to be in the public interest. 
And if at some point the US House of Representatives brings impeachment charges against Trump, he would be one of 100 judges presiding over that fateful case. 
It is understandable that a senator who regards a sitting president as a serious threat to the Republic would sound the alarm. 
But for that senator simultaneously to announce that he is quitting makes no sense at all, especially given a senator’s unique power to act as well as to talk. 
Flake’s dire warning suggests that he should stay, not run away. 
Of course, Flake’s unstated reason for choosing flight over fight is hiding in plain view. 
Polls showed that he would have had a tough time getting reelected in 2018. 
Having been targeted first by Trump, and then by former White House Chief Strategist and current Breitbart News Executive Chairman Steve Bannon, Flake might not even have defeated a Republican primary challenger. 
Granted, no one is obliged to submit himself to the slings and arrows of electoral politics. 
And no one can be blamed for not wanting to participate in the poisonous politics of Washington today. 
As a citizen, I thank Flake for his service in Congress. 
But if he wants us to believe that his speech and decision to resign are in the service of the country, and based on principle, then he needs to explain what that principle is. 
According to Immanuel Kant’s categorical imperative, principled action is that action which, if emulated by all others, would create a world in which we all want to live. 
Does Flake want to live in a world in which all lawmakers who disagree with Trump have already stood up, spoken out vigorously, and left office? 
It isn’t clear whether Flake is calling for a boycott of electoral politics, or merely warning others not to run in races they might not win. 
Either way, somebody will replace Flake in the Senate. 
So, it is worth asking if he thinks his successor will be better suited than he is to carry out the critically important duties of public service. 
In his 2017 book, Conscience of a Conservative, Flake boldly asserts that “we have become so estranged from our principles that we no longer know what principle is.” 
Should this now be read as an unwitting confession that he has lost his own moral bearings? 
In his speech, Flake cited the Republican president Theodore Roosevelt as the model of “conscience and principle” to which he aspires. 
But those who have read Roosevelt know that he would not have walked away from today’s fight. 
“It is not the critic who counts,” Roosevelt said in the speech “Citizenship in a Republic,” which he delivered at the Sorbonne in Paris in April 1910. “The credit belongs to the man in the arena,” Roosevelt continued, “who spends himself in a worthy cause, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.” 
Now, that is a principle upon which the United States, and any republic, should stand. 

Cities and Sustainable Development 
NEW YORK – Tacloban in the Philippines has now joined the growing list of cities – including New Orleans, Bangkok, Moscow, New York, Beijing, Rio de Janeiro, and Port-au-Prince, to name just a few – pummeled in recent years by climate catastrophes. 
Many of the world’s largest cities, built on seacoasts and rivers, face the threat of rising sea levels and intensifying storms. 
So the new global development agenda now taking shape should empower cities to help lead the way to sustainable development in the twenty-first century. 
The importance of cities in today’s world economy is unprecedented. 
Until the Industrial Revolution, human history was overwhelmingly rural. 
Only around 10% of people lived in cities. 
Today, the share of urbanites is around 53% and is likely to rise to around 67% by 2050. 
Because per capita incomes are higher in cities than in rural areas, the world’s cities today are estimated to account for more than 80% of global income, with the largest 600 accounting for around half. 
Most of the new jobs over the next few decades will be created in cities, offering livelihoods to hundreds of millions of young people and, as China and Brazil have demonstrated, helping to slash extreme poverty. 
Cities are also the innovation hubs for public policy. 
Every day, mayors are called on to get the job done for residents. 
They are the ones responsible for providing safe water, garbage collection, safe housing, infrastructure, upgraded slums, protection from disasters, and emergency services when catastrophes hit. 
So it is not surprising that while national governments often are paralyzed by partisan politics, city governments foster action and innovation. 
In the United States, for example, Martin O’Malley, Baltimore’s former mayor and now Maryland’s popular governor, pioneered the use of advanced information systems for urban management. 
New York City’s outgoing mayor, Michael Bloomberg, worked relentlessly to implement a new sustainability plan (called PlaNYC). 
And the city’s incoming mayor, Bill de Blasio, is championing a bold program of educational innovations to narrow the vast gaps in income, wealth, and opportunity that divide the city. 
Sustainable development offers a new concept for the world economy in the twenty-first century. 
Rather than focusing solely on income, sustainable development encourages cities, countries, and the world to focus simultaneously on three goals: economic prosperity, social inclusion, and environmental sustainability. 
Economic prosperity speaks for itself. 
Social inclusion means that all members of society – rich and poor, men and women, majority and minority groups – should have equal rights and equal opportunities to benefit from rising prosperity. 
And environmental sustainability means that we must reorient our economies and technologies to provide basic services like safe water and sanitation, combat human-induced climate change, and protect biodiversity. 
Achieving these three goals will require good governance, public finance, and effective institutions. 
Cities will be in the front lines of the battle for sustainable development. 
Not only do they face direct threats; they also have the best opportunities to identify and deliver solutions. 
As high-density, high-productivity settlements, cities can provide greater access to services of all kinds – including energy, water, health, education, finance, media, transport, recycling, and research – than can most rural areas. 
The great challenge for cities is to provide this access inclusively and sustainably. 
A significant part of the solution will come through advanced technologies, including information systems and materials science. 
The information and communications revolution has spawned the idea of the “smart city,” which places the relevant technologies at the heart of systems that collect and respond to information: smart power grids, smart transport networks (potentially including self-driving vehicles), and smart buildings and zoning. 
The advances in materials science open the possibility of much more energy-efficient residences and commercial buildings. 
Cities also give rise to the opportunity to combine public utilities, as when urban power plants use the steam released in electricity generation to provide hot water and heating to residents. 
Yet technology will be only part of the story. 
Cities need to upgrade their governance, to allow for a greater role for poorer and more marginalized communities, and to enable much more effective coordination across city lines when a metropolitan area is home to many individual cities. 
Metropolitan governance is therefore crucial, as smart cities require networks that operate at the metropolitan scale. 
When the metropolitan scale is recognized, the importance of leading urban areas is even more remarkable. 
New York City has around 8.4 million people, but the NYC metropolitan area has roughly 25 million people, with an economy estimated at about $1.4 trillion per year. 
If this metropolitan area were a country, it would rank about 14th in the world in GDP terms. 
A wise political doctrine known as subsidiarity holds that public-policy challenges should be assigned to the lowest level of government able to address them, thereby ensuring maximum democratic participation in problem solving and the greatest opportunity to tailor solutions to genuine local needs. 
While some issues – for example, a national highway or rail system – require national-level problem solving, many key challenges of sustainable development are best confronted at the urban level. 
The world’s governments are now negotiating the Sustainable Development Goals, which will guide the world’s development agenda from 2015 to 2030. 
In an important meeting on September 25, the United Nations General Assembly agreed that the SDGs would be adopted at a global summit in September 2015, with the next two years used to select the priorities. 
An urban SDG, promoting inclusive, productive, and resilient cities, would greatly empower tens of thousands of cities worldwide to take up the cause of sustainable development for their own citizens, their countries, and the world. 

Winning the Fight Against Killer Diseases 
MAPUTO – One of the greatest successes in development aid in the past decade has been the Global Fund to Fight AIDS, Tuberculosis, and Malaria. 
The Global Fund has saved millions of lives and helped countries around the world beat back three epidemic diseases. 
Now it is appealing to the world’s governments and the private sector for another three years of funding, with governments set to decide on further financing in early December in Washington, DC. 
Back in 2000, the HIV/AIDS epidemic was devastating the world’s poorest countries, especially in Africa. 
New antiretroviral medicines had been developed and were being used in rich countries, but were too expensive for the poorest. 
Millions of poor people were dying of AIDS, even though the new medicines could have kept them alive. 
Two other major killer diseases, malaria and TB, were also resurgent. 
Deaths from malaria were soaring, partly because poor countries’ health systems were dramatically underfunded, and partly because the malaria parasite had developed resistance to the usual medicines. 
Yet the potential to control malaria was actually improving, thanks to several newly emerging technologies: long-lasting insecticide-treated bed nets to prevent the mosquitos from biting, better diagnostics to identify infections, and a new generation of highly effective medicines. 
TB was also running out of control, with a massive disease burden in both Asia and Africa. 
As with malaria, the TB bacteria had developed resistance to the traditional therapeutic drugs. 
A frightening new epidemic of multi-drug-resistant TB – or MDR-TB, which was much harder to treat than mainstream TB – had erupted. 
There were also cases of extreme MDR-TB, soon called XDR-TB, which resisted even the back-up medicines. 
Back in 2000, the rich countries were not taking adequate steps to fight AIDS, TB, and malaria. 
Aid flows were tiny. 
At the time, I had recently been appointed by the Director-General of the World Health Organization (WHO) to help bring finance ministers and health ministers together to see what could be done, both immediately and in the longer term. 
Our advisory group, known as the Commission on Macroeconomics and Health, recommended that rich countries scale up their health-care aid to poor countries, including efforts to fight AIDS, TB, and malaria. 
This aid would save lives, improve well-being, and help strengthen economic development. 
Former Norwegian Prime Minister Gro Harlem Brundtland, the remarkable director-general of the WHO at the time, strongly supported this recommendation. 
At the international AIDS conference in Durban, South Africa, in July 2000, I described why a new global fund was needed to fight AIDS. 
In early 2001, former United Nations Secretary General Kofi Annan launched a powerful and persuasive appeal to establish the Global Fund. 
Leaders around the world responded to Annan’s call; within months, the Global Fund was born. 
I remember those days vividly. 
In international public-health circles, there was great excitement. 
Yet there was also frustration and bewilderment, as vocal opponents of foreign aid began to oppose the increased funding for disease control. 
Several economists with little knowledge of public health became outspoken opponents. 
They argued on the basis of free-market ideology rather than evidence, claiming that foreign aid always fails. 
Fortunately, world leaders listened to public-health specialists and not to the aid skeptics. 
US President George W. Bush’s administration provided strong and important support for the Global Fund – and also created new US programs to fight AIDS and malaria. 
By the second half of the 2000’s, programs to fight the three main killer communicable diseases were scaling up around the world. 
Over the objection of the aid skeptics, the Global Fund provided financial support for massive free distribution of bed nets, diagnostics, and medicines to address malaria. 
Lo and behold, for the first time in a generation, deaths from malaria in Africa began to fall (steeply in some places). 
Hundreds of thousands of lives, mainly African children, were now being saved every year. 
Children were spared not only death but also debilitating infections, enabling them to attend school and lead more productive lives in the future. 
The same thing happened with HIV/AIDS and TB. 
Back in 2000, before the Global Fund was established, infected people in developing countries died of AIDS without any chance to receive life-saving antiretroviral medicines. 
By 2010, more than six million people in developing countries were receiving antiretroviral treatment. 
Similarly, testing and treatment for TB rose sharply, including a strong increase in several heavily affected Asian countries. 
The aid skeptics were proved wrong. 
Aid for health has worked. 
The world has benefited enormously from the triumph of generosity, professionalism, common decency, and good sense. 
Yet the battle to mobilize adequate financing remains. 
The same skeptics repeat their tired opposition without reference to a decade of evidence. 
It is shocking how their free-market fundamentalism (or simply ideological opposition to aid of any kind) can blind them to life-and-death needs and the efficacy of practical approaches that are well known to health professionals. 
(They are also blind to professional methods in other areas, such as food production.) 
The Global Fund is urgently appealing for a minimum of $5 billion per year for the next three years – a tiny sum relative to the world economy (and equal to roughly $5 per person in the high-income countries). 
It could wisely use twice that amount. 
It seems likely that the US Government will agree to contribute one-third of the $5 billion if the rest of the world delivers the remainder. 
The United Kingdom recently made a strong pledge, and the world now awaits the announcements of Germany, Canada, Australia, Japan, and other long-standing and new donor countries in Europe, the Middle East, and Asia. 
Millions of people around the world will live, or die, depending on what these governments decide in December. 
May they, and we, choose life. 

The Age of Sustainable Development 
NEW YORK – A half-century ago, John F. Kennedy observed that, “man holds in his mortal hands the power to abolish all forms of human poverty and all forms of human life.” 
Those words speak to us today with special urgency. 
Our generation can indeed end the ancient scourge of extreme poverty. 
Yet it can also destroy the earth’s life-support system through human-induced environmental devastation. 
By necessity, then, we have entered The Age of Sustainable Development. 
So I am enormously excited to be launching a free, global, online university course by the same name in January 2014. 
(Those interested in joining the course can register here.) 
I hope that people all over the world will join the course – and then join the generation-long quest to achieve sustainable development. 
Sustainable development is both a way of understanding the world and a way to help save it. 
As a method of understanding the world, sustainable-development practitioners study the interactions of the economy, the environment, politics, and culture and how they influence prosperity, social inclusion, and environmental sustainability. 
Students of sustainable development must therefore learn about a wide range of subjects, including economic development, education, health care, climate change, energy systems, biodiversity, and urbanization, among others. 
As a method of helping to save the world, sustainable development encourages a holistic approach to human well-being, one that includes economic progress, strong social bonds, and environmental sustainability. 
The challenges are becoming more urgent as the large and rapidly growing world economy causes massive environmental destruction, and as new technologies demand new skills. 
Young people without the appropriate training and skills are likely to find few opportunities for decent jobs and incomes. 
I predict that sustainable development will become the organizing principle for our politics, economics, and even ethics in the years ahead. 
Indeed, the world’s governments have agreed to place it at the very center of the world’s post-2015 development agenda. 
They will soon adopt Sustainable Development Goals (SDGs), which will help guide the world to a safer and fairer twenty-first-century trajectory. 
Just as the Millennium Development Goals, adopted in 2000, have proved highly effective in the fight against poverty and disease, the SDGs (which will succeed the MDGs in two years) promise to address the global challenges that we face in areas including energy, food, water, climate, and jobs. 
I also believe that global, free, online teaching about sustainable development can help to propel global solutions. 
Online global courses are part of the world’s ongoing information revolution – a revolution that is now fundamentally reshaping higher education, most importantly by creating new avenues of access for more people around the world. 
I know this from personal experience. 
For most of my years as a professor, the basic educational technologies did not change much. 
I stood in front of a class and gave a 57-minute lecture. 
Yes, the blackboard gave way to an overhead projector, and then to PowerPoint, but otherwise the basic classroom “technology” changed little. 
Yet, with the new information technologies, higher education (and of course education at other levels) is suddenly changing. 
Courses can now incorporate a lot more information – data, videos, and even live chats with experts halfway around the world. 
More and more people worldwide can access free, high-quality educational materials that previously were available only to a lucky few. 
This is especially important today, because the challenges of sustainable development will require knowledgeable and educated citizens everywhere. 
According to recent data, online university courses have already reached students in more than 190 countries, enabling them to watch lectures, take quizzes, and interact with fellow students and professors. 
Online education is transforming the classroom experience as well. 
Now, rather than watch me lecture for 57 minutes, my students at Columbia University can watch the online lectures ahead of time, permitting a much richer, in-depth discussion in the classroom. 
In the years ahead, I believe that all of us will have to become leaders in sustainable development in our homes, communities, and countries. 
Millions of young people will soon have to help solve problems of climate change, water, energy, transportation, and education. 
Thousands of cities and 200 countries around the world will need to rally all stakeholders – government, communities, experts, business, and non-governmental organizations – to play their roles, and open online education will be key to disseminating the information they need. 
For these reasons, I am also pleased that my course will be part of a more general education program of the Sustainable Development Solutions Network, an initiative under the auspices of UN Secretary-General Ban Ki-moon that I am honored to direct. 
The SDSN mobilizes scientific and technical expertise from academia, civil society, and the private sector in support of sustainable-development problem solving at local, national, and global scales. 
One of the SDSN’s key objectives is to reach students all over the world by developing and disseminating online materials for sustainable-development curricula. 
More than a dozen institutions have already committed to incorporating The Age of Sustainable Development into their own classes, tailored for their own local circumstances and issues. 
The SDSN will encourage the world’s universities to participate in the new era of global online teaching. 
The goal will be to equip today’s young people to use wisely the power that will soon pass into their own hands to help address the world’s great challenges. 

Putin’s Perilous Course 
NEW YORK – The dangers of the crisis in Ukraine cannot be exaggerated. 
Russian President Vladimir Putin is overtly and covertly inciting separatism in eastern Ukraine, and has declared Russia’s unilateral right to intervene there, in complete contravention of international law. 
Russia’s provocative policies are putting it on a collision course with the West. 
Putin explained his point of view in a recent television appearance: Russia’s current international borders are provisional, determined by accidents of history, such as the transfer of Crimea from Russia to Ukraine in 1954, or the transfer of Russian territories to eastern Ukraine in the 1920’s. 
Putin claims that it is Russia’s right and duty to defend ethnic Russians in neighboring countries, especially in light of the arbitrariness of the existing borders. 
If ethnic Russians call for a return to Russia, Putin asserts, then Russia must heed their call. 
Putin pointedly reminded listeners that eastern Ukraine was called “Novorossiya” (New Russia) in Czarist times, clearly implying that it could be Novorossiya again. 
Evidently, Putin believes that relentless pressure and claims over neighboring states, designed to undermine their sovereignty and force them to accede to Russian demands, will result in a stronger Russia, better able to confront the West. 
In the recent past, Russia sharply opposed American and NATO military intervention in Libya, Syria, and Serbia on the grounds that the West was violating those countries’ sovereignty. 
Now Putin claims the right to ignore neighboring countries’ sovereignty on the pretext that Russia is merely defending the rights of ethnic Russians abroad, up to and including their right to secede and join the Russian homeland. 
Putin no doubt hopes to create facts on the ground – as in Crimea – without provoking a severe Western reaction. 
Even without an invasion, Russia can use threats, displays of military power, secret operations, and heated rhetoric to destabilize its neighbors. 
That may be enough to achieve Russian foreign-policy aims, including its neighbors’ docility. 
But Putin’s adventurism is likely to end very badly for Russia. 
Though the West is justifiably reticent to be drawn into any military confrontations with Russia beyond NATO’s boundaries, and is even reluctant to apply economic sanctions, Putin’s actions have triggered a strong and growing anti-Russian backlash in the US and Europe. 
The West’s response will intensify dramatically if Russia deploys forces across its borders, whatever the pretext; should Russia adopt subtler methods of political destabilization, Western pressure will build more gradually, but build it will. 
Existing trade, investment, and financial relations between Russia and the West are already becoming severely frayed. 
New investment projects and joint ventures are being put on hold. 
Loans from Western investors to Russian entities are being called in. 
Russian banks and companies will face a growing credit squeeze. 
In the short term, Russia has ample foreign-exchange reserves to offset capital outflows; but the reversal of capital flows will begin to bite within a matter of months. 
Following Russia’s forcible takeover of Crimea, it is almost unimaginable that normal economic relations between Russia and the West could survive Russian intervention, subversion, or annexation elsewhere in Ukraine. 
In other words, if Cold War II sets in, as appears increasingly likely, Russia would be the long-term economic loser. 
The European Union can certainly survive without imports of Russian natural gas, even with a full cutoff. 
Russia’s gas exports to Europe constitute less than 10% of the EU’s primary energy consumption. 
Russia, on the other hand, would suffer a major loss of revenues. 
Putin seems to believe that Russia can offset any worsening of economic relations with the West by strengthening its economic relations with China. 
But technologies and business are too globally intertwined to divide the world into economic blocs. 
China knows that its long-term economic prosperity depends on good economic relations with the US and Europe. 
Putin seems not to understand this point, or even the fact that the Soviet economy collapsed as a result of its isolation from technologically advanced economies. 
Russia’s future economic strength depends on its ability to upgrade technologies in key sectors, including aviation, high-speed rail, automobiles, machinery, and heavy industry. 
That can be achieved only if Russian companies are more closely integrated into global production networks that knit them together with German, Japanese, American, and Chinese firms that rely on cutting-edge technology and advanced engineering. 
Of course, matters could become much worse. 
A new cold war could all too easily turn hot. 
Many in the US are already calling for arming Ukraine as a deterrent to Russia. 
But, while military deterrence sometimes works, the West should emphasize trade and financial retaliation, rather than military responses to Russian provocations. 
Military responses could provoke disaster, such as turning Ukraine into a Syria-type battlefield, with untold thousands of deaths. 
There can be no doubt that NATO will defend its own members if necessary. 
But Russia’s belligerency and appalling behavior should not permit Western hardliners to gain control of the policy debate. 
Hardline approaches brought expanded conflicts in Afghanistan, Iraq, Libya, and Syria, leading to plenty of deaths but not to meaningful political or economic solutions in the affected countries. 
War is not politics by other means. 
War is mayhem and suffering. 
Putin is no doubt acting in Ukraine with domestic politics very much in mind, using his adventurism abroad to shore up his political base at home. 
The Russian economy is flagging, and the population is weary of repression, not to mention Russia’s pervasive corruption. 
Russia’s annexation of Crimea and threat to invade eastern Ukraine appear to be hugely popular. 
It remains a terrifying reality that politicians often perceive war to be an antidote to internal weakness. 
Both Russia and the West have played fast and loose with international law in recent years. 
The West violated national sovereignty in Serbia, Afghanistan, Iraq, Libya, and Syria. 
Russia is now playing the same card with shocking brazenness in its own neighborhood, often justifying its actions by pointing to Western precedents. 
But Russia’s true long-term interests lie in multilateralism, integration into the world economy, and the international rule of law. 
Putin’s current path is strewn with grave hazards. 
He is undermining Russia’s economic prospects, while confronting the world with a growing threat of war. 
Our only hope is that all sides return to the principles of international law, which they have forsaken for too long. 

Ukraine and the Crisis of International Law 
NEW YORK – Russia’s actions in Ukraine constitute a serious and dangerous violation of international law. 
In 1994, Ukraine agreed to give up the nuclear weapons it had inherited from the Soviet Union, in return for a solemn commitment by the United States, the United Kingdom, and Russia to protect Ukraine’s territorial integrity and sovereignty. 
Russia has now violated that pledge, not only harming Ukraine but also undermining the international legal framework for preventing nuclear proliferation. 
Unless Russia changes course – which seems unlikely anytime soon – the global consequences are apt to be grave. 
The US and the European Union will impose sanctions, weakening Russia’s economy and the world economy – and stoking even more tension and nationalism. 
Mistakes on one side or the other could lead to violent disaster. 
We need only to recall the spiral of hubris and miscalculation that led to the outbreak of World War I, a century ago this year. 
As frightening as the Ukraine crisis is, the more general disregard of international law in recent years must not be overlooked. 
Without diminishing the seriousness of Russia’s recent actions, we should note that they come in the context of repeated violations of international law by the US, the EU, and NATO. 
Every such violation undermines the fragile edifice of international law, and risks throwing the world into a lawless war of all against all. 
The US and its allies have also launched a series of military interventions in recent years in contravention of the United Nations Charter and without the support of the UN Security Council. 
The US-led NATO bombing of Serbia in 1999 lacked the sanction of international law, and occurred despite the strong objections of Russia, a Serbian ally. 
Kosovo’s subsequent declaration of independence from Serbia, recognized by the US and most EU members, is a precedent that Russia eagerly cites for its actions in Crimea. 
The ironies are obvious. 
The Kosovo War was followed by the US-led wars in Afghanistan and Iraq, both of which occurred without the support of the Security Council, and in the case of Iraq, despite vigorous objections within it. 
The results for both Afghanistan and Iraq have been utterly devastating. 
NATO’s actions in Libya in 2011 to topple Muammar el-Qaddafi constituted another such violation of international law. 
After the Security Council approved a resolution to institute a no-fly zone and take other actions ostensibly to protect Libyan civilians, NATO used the resolution as a pretext to overthrow Qaddafi’s regime through aerial bombardment. 
Russia and China strenuously objected, stating then and now that NATO seriously exceeded its mandate. 
Libya remains unstable and violent, without an effective national government, to this day. 
As Russia itself has repeatedly pointed out, US actions in Syria have been similarly illegal. 
When the Arab Spring protests began in early 2011, peaceful demonstrators in Syria demanded reforms. 
President Bashar al-Assad’s regime cracked down violently on the protesters, leading some military units to revolt. 
At that point, in the summer of 2011, the US began to back the military insurrection, with President Barack Obama declaring that Assad must “step aside.” 
Since then, the US, Saudi Arabia, Turkey, and others have provided logistical, financial, and military support to the insurrection, in violation of Syria’s sovereignty and international law. 
There is no doubt that Assad has behaved cruelly, but there is also no doubt that the US-led support of the insurrection is a violation of Syria’s sovereignty, one that has contributed to an upward spiral of violence that by now has claimed more than 130,000 Syrian lives and destroyed much of the country’s cultural heritage and infrastructure. 
One can add many other US actions, including drone strikes on the territory of sovereign states without their governments’ permission; covert military operations; renditions and torture of terror suspects; and massive spying by the US National Security Agency. 
When challenged by other countries or UN organizations, the US has brushed aside their objections. 
International law itself is at a crossroads. 
The US, Russia, the EU, and NATO cite it when it is to their advantage and disregard it when they deem it a nuisance. 
Again, this is not to justify Russia’s unacceptable actions; rather, it is to add them to the sequence of actions contrary to international law. 
The same problems may soon spill over into Asia. 
Until recently, China, Japan, and others in Asia have staunchly defended the requirement that the Security Council approve any outside military intervention in sovereign states. 
Recently, however, several countries in East Asia have become locked in a spiral of claims and counterclaims regarding borders, shipping lanes, and territorial rights. 
So far, these disputes have remained basically peaceful, but tensions are rising. 
We must hope that the countries of the region continue to see the great value of international law as a bulwark of sovereignty, and act accordingly. 
There have long been skeptics of international law – those who believe that it can never prevail over the national interests of major powers, and that maintaining a balance of power among competitors is all that really can be done to keep the peace. 
From this perspective, Russia’s actions in the Crimea are simply the actions of a great power asserting its prerogatives. 
Yet such a world is profoundly and unnecessarily dangerous. 
We have learned time and again that there is no such thing as a true “balance of power.” 
There are always imbalances and destabilizing power shifts. 
Without some scaffolding of law, open conflict is all too likely. 
This is especially true today, as countries jostle for oil and other vital resources. 
It is no coincidence that most of the deadly wars of recent years have taken place in regions rich in valuable and contested natural resources. 
As we look back in this centennial year toward the outbreak of WWI, we see again and again that the only possible route to safety is international law, upheld by the United Nations and respected on all sides. 
Yes, it sounds naive, but no one has to look back to see the naiveté of the belief that great-power politics will preserve peace and ensure humanity’s survival. 
In the Ukraine crisis, the Security Council should help to find a negotiated solution that preserves Ukraine’s sovereignty and territorial integrity. 
That will not happen soon, but the UN should persevere, looking for a breakthrough at a later date. 
And, just as the US turns to the Security Council in this case, so it should hold itself accountable to international law as well, helping to build a bulwark against dangerous global instability. 

Deep Decarbonization 
NEW YORK – Have a look at what happened around the world this past month. 
Australia’s heat wave filled headlines when temperatures reaching 45° Celsius disrupted the Australian Open tennis tournament. 
California’s extreme drought forced the governor to declare a state of emergency. 
Major floods in Indonesia killed dozens and displaced tens of thousands. 
Beijing’s coal-induced smog forced people to stay in their homes, closed highways, and diverted flights. 
Such events are daily warnings to the world: wake up before it is too late. 
We have entered the Age of Sustainable Development. 
Either we make peace with the planet, or we destroy our hard-won prosperity. 
The choice seems obvious, but our actions speak louder than words. 
Humanity continues on a path of ruin, driven by short-term greed and ignorance. 
Much (though not all) of the global environmental crisis stems from the world’s fossil-fuel-based energy system. 
More than 80% of all primary energy in the world comes from coal, oil, and gas. 
When these fossil fuels are burned, they emit carbon dioxide, which in turn changes the Earth’s climate. 
The basic physics has been known for more than a century. 
Unfortunately, a few oil companies (ExxonMobil and Koch Industries are the most notorious) have devoted enormous resources to sowing confusion even where there is clear scientific consensus. 
But, in order to save the planet we know, and to preserve the world’s food supply and the well-being of future generations, there is no alternative to shifting to a new, low-carbon energy system. 
There are three parts to this transition. 
The first is improved energy efficiency, meaning that we should use much less energy to achieve the same level of well-being. 
For example, we can design our buildings to use sunlight and natural-air circulation so that they require far less commercial energy for heating, cooling, and ventilation. 
Second, we need to shift to solar, wind, hydro, nuclear, geothermal, and other forms of energy that are not based on fossil fuels. 
The technology exists to use these alternatives safely, affordably, and at a scale large enough to replace almost all of the coal, and much of the oil, that we use today. 
Only natural gas (the cleanest-burning fossil fuel) would remain a significant source of energy by mid-century. 
Finally, to the extent that we continue to rely on fossil fuels, we must capture the resulting CO2 emissions at power plants before they escape into the atmosphere. 
The captured CO2 would then be injected underground or under the ocean floor for safe long-term storage. 
Carbon capture and sequestration (CCS) is already being used successfully on a very small scale (mainly to enhance oil recovery in depleted wells). 
If (and only if) it proves successful for large-scale use, coal-dependent countries like China, India, and the United States could continue to use their reserves. 
American politicians have proved to be incapable of designing policies to shift the US to low-carbon energy use. 
Such policies would include a rising tax on CO2 emissions, large-scale research-and-development efforts in low-carbon technologies, a shift to electric vehicles, and regulations to phase out all coal-fired power plants except those that install CCS. 
Yet politicians are pursuing none of these policies adequately. 
Climate-change foes have spent billions of dollars to influence policymakers, support election campaigns by defenders of fossil fuels, and defeat candidates who dare to promote clean energy. 
The Republican Party as a whole attracts massive financial support from opponents of decarbonization, and these donors aggressively fight even the smallest step toward renewable energy. 
For their part, many Democratic members of the US Congress are also in the pro-fossil-fuel camp. 
A few big players in the energy industry, showing no concern for truth (much less for our children, who will bear the consequences of our present folly), have teamed up with Rupert Murdoch. 
Indeed, Murdoch, the Koch Brothers, and their allies behave just like Big Tobacco in denying scientific truths; even use the same experts for hire. 
The situation is generally the same around the world. 
Wherever powerful lobbies defend existing coal or oil interests, politicians typically are afraid to tell the truth about the need for low-carbon energy. 
Brave politicians who do tell the truth about climate change are found mainly in countries that do not have a powerful fossil-fuel lobby. 
Consider the fate of one courageous exception to this rule. 
Kevin Rudd, the former Australian prime minister, tried to implement a clean-energy policy in his coal-producing country. 
Rudd was defeated in his re-election bid by a candidate whose backing from an alliance of Murdoch and coal companies enabled him to outspend Rudd by a huge margin. 
Murdoch’s tabloids pump out anti-scientific propaganda opposing climate-change policies not only in Australia, but also in the US and elsewhere. 
The reason all of this matters is that the path to deep decarbonization is open to us. 
Yet time is very short. 
The world needs to stop building new coal-fired power plants (except those that implement CCS) and to shift to low-carbon electricity. 
It needs to phase out the internal combustion engine for almost all new passenger vehicles by around 2030, shifting to vehicles powered by electricity. 
And it needs to adopt energy-saving technologies that consume less commercial energy. 
The technologies are available and will get better and cheaper with use, if only fossil-fuel lobbies can be held at bay. 
If this happens, people around the world will discover something wonderful. 
Not only will they have saved the planet for the next generation; they will also enjoy sunshine and clean, healthy air. 
And they will ask what took so long when the Earth itself was at dire risk. 

The Price of Scottish Independence 
NEW YORK – Though the world’s eyes now are on Scotland’s referendum on independence from the United Kingdom, Scotland is not alone in seeking to redraw national boundaries. 
There are independence movements in many other parts of the world; indeed, 39 new states have joined the United Nations since 1980. 
Many more aspirants are waiting in the wings, and would likely be encouraged by a Scottish “Yes” vote. 
The Scottish pro-independence campaign is based on four claims. 
The first is cultural: to protect and strengthen the identity of the Scottish people. 
The second is ideological: to move Scotland toward a Scandinavian-style social democracy. 
The third is political: to bring democratic governance closer to the people. 
And the fourth is economic: to lay claim to a larger share of North Sea oil and gas. 
UK political leaders and many European governments are strongly urging the Scots to vote against independence. 
Scottish independence, the “No” campaign argues, would bring few if any of the claimed benefits; on the contrary, it would cause many economic calamities, ranging from financial panics to the flight of jobs and industry from Scotland. 
Moreover, an independent Scotland might be excluded from the European Union and NATO. 
What should the rest of the world think about this debate? 
Should the Scottish independence campaign be hailed as a breakthrough for claims to cultural identity and self-governance? 
Or should it be viewed as yet another source of instability and weakness in Europe – one that would increase uncertainty in other countries and parts of the world? 
Secession movements can, no doubt, cause great instability. 
Consider the regional and even global turmoil over Kosovo, South Sudan, Kurdistan, and Crimea. 
Yet national independence can also be handled peacefully and smoothly. 
The 1993 division of Czechoslovakia into the Czech Republic and Slovakia – the famed “velvet divorce” – imposed no significant or lasting costs on either successor state. 
Both accepted the division, and, knowing that their future lay within the EU, focused their attention on accession. 
Here, then, is a plausible and positive scenario for an independent Scotland. 
The rest of the UK (called the “RUK” in the current debate), including England, Wales, and Northern Ireland, would quickly and efficiently negotiate the terms of independence with Scotland, agreeing how to share the UK’s public debt and public assets, including offshore oil and gas. 
Both sides would be pragmatic and moderate in their demands. 
At the same time, the EU would agree immediately to Scotland’s continued membership, given that Scotland already abides by all of the required laws and democratic standards. 
Similarly, NATO would agree immediately to keep Scotland in the Alliance (though the Scottish National Party’s pledge to close US and British nuclear-submarine bases would be a complication to be overcome). 
Both Scotland and the RUK might agree that Scotland would temporarily keep the British pound but would move to a new Scottish pound or the euro. 
If such monetary arrangements are transparent and cooperatively drawn, they could occur smoothly and without financial turmoil. 
But if the RUK, the EU, and NATO respond vindictively to a Yes vote – whether to teach Scotland a lesson or to deter others (such as Catalonia) – matters could become very ugly and very costly. 
Suppose that a newly independent Scotland is thrown out of the EU and NATO, and told that it will remain outside for years to come. 
In this scenario, a financial panic could indeed be provoked, and both Scotland and the RUK would suffer economically. 
The key point is that the costs of separation are a matter of choice, not of inevitability. 
They would depend mainly on how the RUK, the EU, and NATO decided to respond to a Yes vote, and how moderate a newly independent Scotland would be in its negotiating positions. 
If cool heads prevail, Scottish independence could proceed at a relatively low cost. 
The dangers of national secession are much greater in places without overarching entities like the EU and NATO to constrain the situation among the successor states. 
In such circumstances, unilateral claims of independence opposed by the national government or a sub-national unit often lead to a breakdown of trade and finance – and often to outright war, as we saw in the breakup of the Soviet Union, Yugoslavia, and most recently, Sudan. 
In those cases, separation was indeed followed by deep economic and political crises, which in some ways persist. 
Indeed, in the case of ex-Yugoslavia and the former Soviet Union, the EU and NATO absorbed some but not all of the successor states, thereby raising major geopolitical tensions. 
International politics in the twenty-first century can no longer be about nation-states alone. 
Most key issues that are vital for national wellbeing – trade, finance, the rule of law, security, and the physical environment – depend at least as much on the presence of effective regional and global institutions. 
Even if Scotland declares independence, it will – and should continue to be – bound by a dense web of European and global rules and responsibilities. 
I am personally sympathetic to Scotland’s independence as a way to bolster Scottish democracy and cultural identity. 
Yet I support independence only on the assumption that Scotland and the RUK would remain part of a strong and effective EU and NATO. 
Certainly, a Yes vote would put an even higher premium on effective EU governance. 
But, if the EU and NATO were to “punish” a newly independent Scotland by excluding it, real disaster could ensue, not only for Scotland and the UK, but also for European democracy and security. 

Why Bill Gates Gets It Wrong 
NEW YORK – In his review of Nina Munk’s error-filled and out-of-date book, Bill Gates oddly abandons the rigorous approach to measurement and evaluation that defines his foundation’s invaluable work. 
He simply accepts Munk’s assertion that the Millennium Villages Project – an ongoing development project across more than 20 African countries – has failed. 
In fact, it is flourishing. 
This credulousness is puzzling. 
Munk’s book covers only a sliver of the first half of a ten-year project, and only two of 12 villages. 
And she never “lived for extended periods in the Millennium Villages.” 
Munk spent an average of around six days per year – around 36 days over six years – actually visiting the villages, and usually at a stretch of 2-3 days. 
Moreover, she came to the story as a reporter for the magazine Vanity Fair, with no training or experience in public health, agronomy, economics, or African development. 
Worse, Munk’s observations frequently seem to have been, at the very least, greatly exaggerated for narrative effect. 
Does Bill Gates really believe that I advocated specific crops without worrying about whether there was a market for them, or that I failed to consider national taxation in my ongoing advice to government leaders? 
Moreover, the agricultural strategies and choices in the MVP have been led by African agronomists, some of the very best in Africa – often working hand in hand with Bill’s own agricultural staff in the Alliance for a Green Revolution in Africa (AGRA). 
Bill will be happy to know that the MVP will be properly and professionally evaluated next year – on time at its conclusion (and at the end of the Millennium Development Goals in 2015). 
The assessment will be based on the very considerable data that have been collected over the past decade, and on extensive new survey data that will be collected in 2015. 
Moreover, the evaluation will include comparisons with areas surrounding the Millennium Villages. 
In fact, I hope that the Bill & Melinda Gates Foundation will help to carry out the detailed, independently supervised survey work needed for a full evaluation of this complex project. 
Let me provide some more good news, based on the detailed data on community health delivery, morbidity (disease), and mortality that the MVP collects each month. 
Mortality rates are down sharply in the Millennium Villages. 
In fact, the current evidence, to be examined in greater detail next year, suggests that the bold goal of reducing under-five mortality rates to below 30 deaths per 1,000 births has been achieved or is within reach by 2015, and at a remarkably low cost to the health system. 
Recently, one of the Gates Foundation’s senior staff members visited the Millennium Village site in northern Nigeria. 
Afterwards, he confirmed to me personally that he and his team were deeply impressed by what they saw of the Millennium Village health system in operation. 
So let me take this opportunity to reiterate a challenge that I have posed to Bill. 
He can pick any district in rural Africa, and our team will work with the local communities using the Millennium Village health approach to reduce the under-five mortality rate to below 30/1,000 – a rate characteristic of many middle-income countries – at an annual health-sector cost of just $60 per person. 
And we will do it in five years or less. 
That success, I believe, would help Bill and others to recognize the remarkable value of investing in low-cost rural health systems that follow the design principles of the Millennium Village Project. 
Finally, given concerns, shared by Bill, about the MVP’s sustainability and scalability, it is no small matter that host governments are strong advocates of the approach. 
These governments’ leaders have seen the Millennium Villages day in and day out over almost a decade. 
They are putting their own money and policies behind expanded implementation of the MVP’s guiding concepts. 
For example, Nigeria has used the MVP concepts for national-scale delivery of health and education services in all 774 of the country’s Local Government Areas. 
Governments across the region have taken over $100 million in financing from the Islamic Development Bank to scale up the MVP concepts themselves. 
Around a dozen countries are now starting or have approached the Millennium Village Project to help them start their own Millennium Villages. 
And the Pan African Youth Leadership Network, Africa’s own young people, recently visited the Millennium Village in Senegal, and requested the support of the MVP to expand the Millennium Village Project’s techniques and strategies in their home countries and regions. 
This spread of the Millennium Village approach throughout Africa shows that African political and community leaders consider the MVP’s methods, strategies, and systems to be highly useful in combating poverty in rural Africa. 
Nina Munk’s book is out of date and misses the mark. 
I invite Bill Gates to visit one or more Millennium Village sites on an upcoming trip to Africa to see first hand why the approach is of such practical interest across the continent. 

The Waste of War 
NEW YORK – Karl Marx famously wrote that history repeats itself, “the first time as tragedy, the second time as farce.” 
Yet when we look around nowadays, we can’t help but wonder whether tragedy will be followed by yet more tragedy. 
Here we are, at the centenary of the outbreak of World War I, and we find ourselves surrounded by cascading violence, duplicity, and cynicism of the very sort that brought the world to disaster in 1914. 
And the world regions involved then are involved again. 
WWI began with a mindset, one based on the belief that military means could resolve pressing social and political issues in Central Europe. 
A century earlier, the German military theorist Carl von Clausewitz had written that war is “a continuation of political intercourse carried on with other means.” 
Enough politicians in 1914 agreed. 
Yet WWI proved Clausewitz tragically wrong for modern times. 
War in the industrial age is tragedy, disaster, and devastation; it solves no political problems. 
War is a continuation not of politics, but of political failure. 
WWI ended four imperial regimes: the Prussian (Hohenzollern) dynasty, the Russian (Romanov) dynasty, the Turkish (Ottoman) dynasty, and the Austro-Hungarian (Habsburg) dynasty. 
The war not only caused millions of deaths; it also left a legacy of revolution, state bankruptcy, protectionism, and financial collapse that set the stage for Hitler’s rise, World War II, and the Cold War. 
We are still reeling today. 
Territory that was once within the multi-ethnic, multi-state, multi-religious Ottoman Empire is again engulfed in conflict and war, stretching from Libya to Palestine-Israel, Syria, and Iraq. 
The Balkan region remains sullen and politically divided, with Bosnia and Herzegovina unable to institute an effective central government and Serbia deeply jolted by the 1999 NATO bombing and the contentious independence of Kosovo in 2008, over its bitter opposition. 
The former Russian Empire is in growing turmoil as well, a kind of delayed reaction to the collapse of the Soviet Union in 1991, with Russia attacking Ukraine and violence continuing to erupt in Georgia, Moldova, and elsewhere. 
In East Asia, tensions between China and Japan – echoes of the last century – are a growing danger. 
As was the case a century ago, vain and ignorant leaders are pushing into battle without clear purpose or realistic prospects for resolution of the underlying political, economic, social, or ecological factors that are creating the tensions in the first place. 
The approach of too many governments is to shoot first, think later. 
Take the US. 
Its basic strategy has been to send troops, drones, or bombers to any place that would threaten America’s access to oil, harbors Islamic fundamentalists, or otherwise creates problems – say, piracy off the coast of Somalia – for US interests. 
Hence, US troops, the CIA, drone missiles, or US-backed armies are engaged in fighting across a region stretching from the Sahel in West Africa, through Libya, Somalia, Yemen, Syria, Iraq, Afghanistan, and beyond. 
All of this military activity costs hundreds of thousands of lives and trillions of dollars. 
But, rather than solving a single underlying problem, the chaos is growing, threatening an ever-widening war. 
Russia is not handling itself any better. 
For a while, Russia backed international law, rightly complaining that the US and NATO were violating international law in Kosovo, Iraq, Syria, and Libya. 
But then President Vladimir Putin took aim at Ukraine, fearing that the country was about to drop into Europe’s pocket. 
Suddenly, he was silent about obeying international law. 
His government then illegally annexed Crimea and is fighting an increasingly brutal guerrilla war in eastern Ukraine, through proxies and, it now appears, direct engagement of Russian forces. 
In this context, the fate of Malaysia Airlines Flight 17 is terrifying not only for its brutality, but also in its intimation of a world gone mad. 
At the time of this writing, those who aimed and fired the missile remain unknown, though Russian-backed rebels in eastern Ukraine are the most likely culprits. 
What is certain, however, is that the violence unleashed by Putin’s war on Ukraine has claimed hundreds of innocent lives and brought the world a step closer to disaster. 
There are no heroes among the great powers today. 
Cynicism is rife on all sides. 
The US effectively violates international law by resorting to force without United Nations sanction. 
It sends drones and secret forces into sovereign countries without their approval. 
It spies relentlessly on friend and foe alike. 
Russia does the same, inflicting death on Ukraine, Georgia, and other neighbors. 
The only constants in all of this are the easy resort to violence and the lies that inevitably accompany it. 
There are four major differences between now and the world of 1914. 
For starters, we have since lived through two disastrous wars, a Great Depression, and a Cold War. 
We have had the opportunity to learn a thing or two about the stupidity and uselessness of organized collective violence. 
Second, the next global war, in this nuclear age, would almost surely end the world. 
The third major difference is that today, with our wondrous technologies, we have every opportunity to solve the underlying problems of poverty, hunger, displacement, and environmental degradation that create so many dangerous tinderboxes. 
Finally, we have international law, if we choose to use it. 
The belligerents in Europe and Asia 100 years ago could not turn to the UN Security Council and UN General Assembly, venues where diplomacy, rather than war, can be the true continuation of politics. 
We are blessed with the possibility to construct peace through a global institution that was founded to help ensure that global war would never recur. 
As citizens of the world, our job now is to demand peace through diplomacy, and through global, regional, and national initiatives to address the scourges of poverty, disease, and environmental degradation. 
On this hundredth anniversary of one of the greatest disasters of human history, let us follow tragedy not by farce or more tragedy, but by the triumph of cooperation and decency. 

Responding to Ebola 
NEW YORK – The horrific Ebola epidemic in at least four West African countries (Guinea, Liberia, Sierra Leone, and Nigeria) demands not only an emergency response to halt the outbreak; it also calls for re-thinking some basic assumptions of global public health. 
We live in an age of emerging and re-emerging infectious diseases that can spread quickly through global networks. 
We therefore need a global disease-control system commensurate with that reality. 
Fortunately, such a system is within reach if we invest appropriately. 
Ebola is the latest of many recent epidemics, also including AIDS, SARS, H1N1 flu, H7N9 flu, and others. 
AIDS is the deadliest of these killers, claiming nearly 36 million lives since 1981. 
Of course, even larger and more sudden epidemics are possible, such as the 1918 influenza during World War I, which claimed 50-100 million lives (far more than the war itself). 
And, though the 2003 SARS outbreak was contained, causing fewer than 1,000 deaths, the disease was on the verge of deeply disrupting several East Asian economies including China’s. 
There are four crucial facts to understand about Ebola and the other epidemics. 
First, most emerging infectious diseases are zoonoses, meaning that they start in animal populations, sometimes with a genetic mutation that enables the jump to humans. 
Ebola may have been transmitted from bats; 
HIV/AIDS emerged from chimpanzees; 
SARS most likely came from civets traded in animal markets in southern China; and influenza strains such as H1N1 and H7N9 arose from genetic re-combinations of viruses among wild and farm animals. 
New zoonotic diseases are inevitable as humanity pushes into new ecosystems (such as formerly remote forest regions); the food industry creates more conditions for genetic recombination; and climate change scrambles natural habitats and species interactions. 
Second, once a new infectious disease appears, its spread through airlines, ships, megacities, and trade in animal products is likely to be extremely rapid. 
These epidemic diseases are new markers of globalization, revealing through their chain of death how vulnerable the world has become from the pervasive movement of people and goods. 
Third, the poor are the first to suffer and the worst affected. 
The rural poor live closest to the infected animals that first transmit the disease. 
They often hunt and eat bushmeat, leaving them vulnerable to infection. 
Poor, often illiterate, individuals are generally unaware of how infectious diseases – especially unfamiliar diseases – are transmitted, making them much more likely to become infected and to infect others. 
Moreover, given poor nutrition and lack of access to basic health services, their weakened immune systems are easily overcome by infections that better nourished and treated individuals can survive. 
And “de-medicalized” conditions – with few if any professional health workers to ensure an appropriate public-health response to an epidemic (such as isolation of infected individuals, tracing of contacts, surveillance, and so forth) – make initial outbreaks more severe. 
Finally, the required medical responses, including diagnostic tools and effective medications and vaccines, inevitably lag behind the emerging diseases. 
In any event, such tools must be continually replenished. 
This requires cutting-edge biotechnology, immunology, and ultimately bioengineering to create large-scale industrial responses (such as millions of doses of vaccines or medicines in the case of large epidemics). 
The AIDS crisis, for example, called forth tens of billions of dollars for research and development – and similarly substantial commitments by the pharmaceutical industry – to produce lifesaving antiretroviral drugs at global scale. 
Yet each breakthrough inevitably leads to the pathogen’s mutation, rendering previous treatments less effective. 
There is no ultimate victory, only a constant arms race between humanity and disease-causing agents. 
So, is the world ready for Ebola, a newly lethal influenza, a mutation of HIV that could speed the transfer of the disease, or the development of new multi-drug-resistant strains of malaria or other pathogens? 
The answer is no. 
Though investment in public health increased significantly after 2000, leading to notable successes in the fights against AIDS, tuberculosis, and malaria, there has recently been a marked shortfall in global spending on public health relative to need. 
Donor countries, failing to anticipate and respond adequately to new and ongoing challenges, have subjected the World Health Organization to a debilitating budget squeeze, while funding for the Global Fund to Fight AIDS, Tuberculosis, and Malaria has fallen far short of the sums needed to win the war against these diseases. 
Here is a shortlist of what urgently needs to be done. 
First, the United States, the European Union, the Gulf countries, and East Asian states should establish a flexible fund under WHO leadership to combat the current Ebola epidemic, probably at an initial level of $50-$100 million, pending further developments. 
This would allow a rapid public-health response that is commensurate to the immediate challenge. 
Second, donor countries should quickly expand both the Global Fund’s budget and mandate, so that it becomes a global health fund for low-income countries. 
The main goal would be to help the poorest countries establish basic health systems in every slum and rural community, a concept known as Universal Health Coverage (UHC). 
The greatest urgency lies in Sub-Saharan Africa and South Asia, where health conditions and extreme poverty are worst, and preventable and controllable infectious diseases continue to rage. 
In particular, these regions should train and deploy a new cadre of community health workers, trained to recognize disease symptoms, provide surveillance, and administer diagnoses and appropriate treatments. 
At a cost of just $5 billion per year, it would be possible to ensure that well-trained health workers are present in every African community to provide lifesaving interventions and respond effectively to health emergencies like Ebola. 
Finally, high-income countries must continue to invest adequately in global disease surveillance, the WHO’s outreach capacities, and life-saving biomedical research, which has consistently delivered massive benefits for humanity during the past century. 
Despite tight national budgets, it would be reckless to put our very survival on the fiscal chopping block. 

From Moscow to Sochi 
NEW YORK – The Winter Olympics in Sochi are the first to be hosted by Russia since the Cold War-era Moscow Summer Games in 1980. 
Obviously, much has changed politically in the interim. 
But today’s Games also create an opportune moment to look back at Russia’s recent economic history – and to peer forward as well. 
Many people who remember the collapse of the Soviet Union in 1991 and its tumultuous aftermath believe that Russia’s economy today must be impoverished and unstable – and far behind booming China. 
Wrong. According to the International Monetary Fund, Russia’s per capita income in 2013, measured in terms of purchasing power parity, is roughly $18,600, nearly double China’s per capita income of around $10,000. 
And, according to World Bank data, extreme poverty is close to zero, compared to 11.8% in China in 2009 (the most recent year for which data are available). 
Yes, Russia’s economy has been buoyed recently not only by sound macroeconomic policies, but also by high world oil and gas prices. 
In fact, the collapse of world oil prices after 1985 contributed to the severe economic crisis in the Soviet Union and Russia in the late 1980’s and early 1990’s. 
This is an important point, given that the economic reforms implemented by former Soviet President Mikhail Gorbachev and former Russian President Boris Yeltsin thus confronted powerful headwinds. 
For two years (1992-1993), I was a macroeconomic adviser to Prime Minister Yegor Gaidar and Finance Minister Boris Fyodorov, trying to help Russia to end the high inflation and extreme shortages that characterized the last years of the Soviet era, and to begin Russia’s transition to a market economy. 
I recommended a macroeconomic stabilization strategy that had been highly successful in nearby Poland, and that called for timely financial assistance from the United States, Europe, and the IMF, just as Poland had received. 
Unfortunately, the West did not provide the needed financial assistance, contrary to my (and many other people’s) recommendations, and the Russian economic and financial calamity was more severe as a result. 
At the time, I attributed Western inaction to incompetence on the part of the US government and the IMF. 
Looking back, it is clear that there was also a deliberate strategy by US neoconservatives, such as then-Defense Secretary Dick Cheney, to weaken the new Russian state. 
The US government was also complicit during the mid-1990’s in the plundering of Russian state-owned property, including oil assets that were unscrupulously privatized. 
The good news is that Russia was able to bounce back from those terrible years, no thanks to the West or the US government. 
Russia’s market economy, albeit marred by corruption, took root. 
After several years of political infighting and unnecessary delay, macroeconomic stabilization was achieved, and Russia’s economic growth was restored, especially as world oil and gas prices began to rise. 
From 2001 to 2013, Russia’s GDP grew at a robust 4.4% average annual rate. 
Russia achieved a good measure of financial stability as well. 
The IMF puts Russia’s inflation rate at 6.9% in 2013, with unemployment at 5.5%, while the budget deficit was just 0.3% of GDP. 
Moreover, Russia’s foreign-exchange reserves stand at a healthy $500 billion. 
But Russia could achieve still greater success by basing its economy on two growth engines rather than one. 
Oil and gas will continue to provide a strong lift to Russia for years to come, especially as China becomes a major customer. 
Yet Russia also has vast and still under-developed potential in many global high-tech industries. 
During the Soviet era, Russia produced a vast array of technology-based industrial products, from airplanes to computers to sophisticated machine goods. 
Unlike Chinese industry, Russia’s manufacturing branches were almost completely cut off from world markets, both by the Cold War and by Soviet planning. 
When post-Soviet Russia opened itself to trade, its industrial enterprises lagged far behind cutting-edge technologies, especially in the dynamic information and communications technology (ICT) sector. 
Many industries collapsed, owing to neglect, lack of international partners, and financial chaos. 
Those that survived did so only barely, with greatly reduced output going mainly to the ex-Soviet market. 
Russia has the know-how, skilled engineering, and natural-resource base to become a global competitor in a range of major high-tech industries, including nuclear energy, commercial aviation, commercial space technology (including satellites and GPS), ICT hardware and software, electric vehicles, high-speed rail, petrochemicals, and heavy equipment for the mining and hydrocarbon sectors. 
All of these industries will benefit from the potential for enormous demand growth in large markets, such as China, Africa, and India. 
But achieving long-term growth led by high-tech industries requires a business environment that encourages private-sector investment, including openness to foreign players. 
Moreover, the social and political environment must be conducive to a high-tech labor force, providing an attractive quality of life, ensuring civil liberties, and supporting entrepreneurship and creativity. 
Finally, economic policies must promote technological advances and global technical cooperation in promising sectors. 
It is notable that Russia recently completed an agreement to finance a nuclear power plant in Hungary, and looks likely to do the same in Turkey. 
The demand for nuclear energy will grow as part of the global effort to decarbonize the world energy system. 
Russia’s new reactors seem to be safe and competitive with those produced elsewhere. 
Similarly, we might see new Russian-built civilian aircraft entering the global market in partnership with international firms, especially those that can work with Russian companies on advanced ICT avionics. 
Back in 1991, many thought that Russia could not end high inflation, adopt a market economy, or compete effectively in world markets. 
Two decades later, Russia has proved the skeptics wrong. 
Yes, Russia remains too dependent on oil and gas, and should move further on transparency, openness, and competition in business and governance. 
Yet the trend is positive: Russia has become a stable, high-income market economy, with strong prospects for decades of rapid GDP growth and high-tech progress if it pursues a sensible economic strategy in the coming years. 

The Limits of Climate Negotiations 
NEW YORK – If the world is to solve the climate-change crisis, we will need a new approach. 
Currently, the major powers view climate change as a negotiation over who will reduce their CO2 emissions (mainly from the use of coal, oil, and gas). 
Each agrees to small “contributions” of emission reduction, trying to nudge the other countries to do more. 
The United States, for example, will “concede” a little bit of CO2 reduction if China will do the same. 
For two decades, we have been trapped in this minimalist and incremental mindset, which is wrong in two key ways. 
First, it is not working: CO2 emissions are rising, not falling. 
The global oil industry is having a field day – fracking, drilling, exploring in the Arctic, gasifying coal, and building new liquefied natural gas (LNG) facilities. 
The world is wrecking the climate and food-supply systems at a breakneck pace. 
Second, “decarbonizing” the energy system is technologically complicated. 
America’s real problem is not competition from China; it’s the complexity of shifting a $17.5 trillion economy from fossil fuels to low-carbon alternatives. 
China’s problem is not the US, but how to wean the world’s largest, or second largest economy (depending on which data are used) off its deeply entrenched dependence on coal. 
These are mainly engineering problems, not negotiating problems. 
To be sure, both economies could decarbonize if they cut output sharply. 
But neither the US nor China is ready to sacrifice millions of jobs and trillions of dollars to do so. 
Indeed, the question is how to decarbonize while remaining economically strong. 
Climate negotiators cannot answer that question, but innovators like Elon Musk of Tesla, and scientists like Klaus Lackner of Columbia University, can. 
Decarbonizing the world’s energy system requires preventing our production of vast and growing amounts of electricity from boosting atmospheric CO2 emissions. 
It also presupposes a switchover to a zero-carbon transport fleet and a lot more production per kilowatt-hour of energy. 
Zero-carbon electricity is within reach. 
Solar and wind power can deliver that already, but not necessarily when and where needed. 
We need storage breakthroughs for these intermittent clean-energy sources. 
Nuclear power, another important source of zero-carbon energy, will also need to play a big role in the future, implying the need to bolster public confidence in its safety. 
Even fossil fuels can produce zero-carbon electricity, if carbon capture and storage is used. 
Lackner is a world leader in new CCS strategies. 
Electrification of transport is already with us, and Tesla, with its sophisticated electric vehicles, is capturing the public’s imagination and interest. 
Yet further technological advances are needed in order to reduce electric vehicles’ costs, increase their reliability, and extend their range. 
Musk, eager to spur rapid development of the vehicles, made history last week by opening Tesla’s patents for use by competitors. 
Technology offers new breakthroughs in energy efficiency as well. 
New building designs have slashed heating and cooling costs by relying much more on insulation, natural ventilation, and solar power. 
Advances in nanotechnology offer the prospect of lighter construction materials that require much less energy to produce, making both buildings and vehicles far more energy efficient. 
The world needs a concerted push to adopt to low-carbon electricity, not another “us-versus-them” negotiation. 
All countries need new, low-carbon technologies, many of which are still out of commercial reach. 
Climate negotiators should therefore be focusing on how to cooperate to ensure that technology breakthroughs are achieved and benefit all countries. 
They should take their cue from other cases in which government, scientists, and industry teamed up to produce major changes. 
For example, in carrying out the Manhattan Project (to produce the atomic bomb during World War II) and the first moon landing, the US government set a remarkable technological goal, established a bold timetable, and committed the financial resources needed to get the job done. 
In both cases, the scientists and engineers delivered on time. 
The example of atomic bombs might seem an unpleasant one, yet it raises an important question: If we ask governments and scientists to cooperate on war technology, shouldn’t we do at least the same to save the planet from carbon pollution? 
In fact, the process of “directed technological change,” in which bold objectives are set, milestones are identified, and timelines are put into place, is much more common than many realize. 
The information-technology revolution that has brought us computers, smart phones, GPS, and much more, was built on a series of industry and government roadmaps. 
The human genome was mapped through such a government-led effort – one that ultimately brought in the private sector as well. 
More recently, government and industry got together to cut the costs of sequencing an individual genome from around $100 million in 2001 to just $1,000 today. 
A dramatic cost-cutting goal was set, scientists went to work, and the targeted breakthrough was achieved on time. 
Fighting climate change does depend on all countries having confidence that their competitors will follow suit. 
So, yes, let the upcoming climate negotiations spell out shared actions by the US, China, Europe, and others. 
But let’s stop pretending that this is a poker game, rather than a scientific and technological puzzle of the highest order. 
We need the likes of Musk, Lackner, General Electric, Siemens, Ericsson, Intel, Electricité de France, Huawei, Google, Baidu, Samsung, Apple, and others in laboratories, power plants, and cities around the world to forge the technological breakthroughs that will reduce global CO2 emissions. 
There is even a place at the table for ExxonMobil, Chevron, BP, Peabody, Koch Industries, and other oil and coal giants. 
If they expect their products to be used in the future, they had better make them safe through the deployment of advanced CCS technologies. 
The point is that targeted and deep decarbonization is a job for all stakeholders, including the fossil-fuel industry, and one in which we must all be on the side of human survival and wellbeing. 

Let the Middle East Govern Itself 
NEW YORK – It is time for the United States and other powers to let the Middle East govern itself in line with national sovereignty and the United Nations Charter. 
As the US contemplates yet another round of military action in Iraq and intervention in Syria, it should recognize two basic truths. 
First, US interventions, which have cost the country trillions of dollars and thousands of lives over the past decade, have consistently destabilized the Middle East, while causing massive suffering in the affected countries. 
Second, the region’s governments – in Syria, Saudi Arabia, Turkey, Iran, Iraq, Egypt, and elsewhere – have both the incentive and the means to reach mutual accommodations. 
What is stopping them is the belief that the US or some other outside power (such as Russia) will deliver a decisive victory on their behalf. 
When the Ottoman Empire collapsed at the end of World War I, the great powers of the day, Britain and France, carved out successor states in order to ensure their control over the Middle East’s oil, geopolitics, and transit routes to Asia. 
Their cynicism – reflected, for example, in the Sykes-Picot Agreement – established a lasting pattern of destructive outside meddling. 
With America’s subsequent emergence as a global power, it treated the Middle East in the same way, relentlessly installing, toppling, bribing, or manipulating the region’s governments, all the while mouthing democratic rhetoric. 
For example, less than two years after Iran’s democratically elected parliament and prime minister, Mohammad Mossadegh, nationalized the Anglo-Iranian Oil Company in 1951, the US and Britain used their secret services to topple Mossadegh and install the incompetent, violent, and authoritarian Shah Reza Pahlavi. 
Not surprisingly, the Islamic Revolution that overthrew the Shah in 1979 brought a wave of virulent anti-Americanism in its wake. 
Rather than seeking rapprochement, however, the US supported Saddam Hussein during Iraq’s eight-year war with Iran in the 1980s. 
Iraq fared no better with the British and Americans. 
Britain ruthlessly created a subservient Iraqi state after WWI, backing Sunni elites to control the majority Shia population. 
After oil was discovered in the 1920s, Britain assumed control over the new oil fields, using military force as needed. 
The US supported the 1968 coup that brought the Ba’ath Party – and Saddam – to power. 
With Saddam’s invasion of Kuwait in 1990, however, the US turned on him, and has been entwined in Iraq’s politics ever since, including two wars, sanction regimes, the toppling of Saddam in 2003, and repeated attempts, as recently as this month, to install a government that it considered acceptable. 
The result has been an unmitigated catastrophe: the destruction of Iraq as a functioning society in an ongoing civil war, fueled by outside powers, that has caused economic ruin and collapsing living standards. 
Hundreds of thousands of Iraqis have died in the violence since 1990. 
Syria endured decades of French dominance after WWI, and then alternatingly hot and cold relations with the US and Europe since the 1960s. 
During the past decade, the US and its allies have tried to weaken, and then, starting in 2011, to topple President Bashar al-Assad’s regime, mainly in a proxy war to undermine Iranian influence in Syria. 
The results have been devastating for the Syrian people. 
Assad remains in power, but more than 190,000 Syrians are dead and millions have been displaced as a result of an insurrection supported by the US and its allies (with Assad backed by Russia and Iran). 
Some US officials are now reportedly considering an alliance with Assad to fight the militant Islamic State, whose rise was enabled by the US-backed insurrection. 
After decades of cynical and often secret interventions by the US, Britain, France, Russia, and other outside powers, the region’s political institutions are based largely on corruption, sectarian politics, and brute force. 
Yet whenever a new Middle East crisis erupts, the latest being triggered by the Islamic State’s recent gains, the US intervenes again, perhaps to change a government (as it has just orchestrated in Iraq) or to launch a new bombing assault. 
Backroom dealings and violence continue to rule the day. 
Pundits claim that Arabs cannot manage democracy. 
In fact, the US and its allies simply don’t like the results of Arab democracy, which all too often produces governments that are nationalist, anti-Israel, Islamist, and dangerous to America’s oil interests. 
When the ballots go in that direction, the US simply ignores the election results (as it did, for example, in 2006, when Hamas won a large majority of the popular vote in Gaza). 
The US cannot stop the spiral of violence in the Middle East. 
The damage in Libya, Gaza, Syria, and Iraq demands that a political solution be found within the region, not imposed from the outside. 
The UN Security Council should provide an international framework in which the major powers pull back, lift crippling economic sanctions, and abide by political agreements reached by the region’s own governments and factions. 
Iran, Turkey, Egypt, Syria, Saudi Arabia, the UAE, and other neighbors know one another well enough – thanks to 2,000-plus years of trade and war – to sort out the pieces themselves, without interference from the US, Russia, and the former colonial powers of Europe. 
The countries of the Middle East have a common interest in starving hyper-violent groups like the Islamic State of arms, money, and media attention. 
They also share an interest in keeping oil flowing to world markets – and in capturing the bulk of the revenues. 
I am not claiming that all will be well if the US and other powers pull back. 
There is enough hatred, corruption, and arms in the region to keep it in crisis for years to come. 
And nobody should expect stable democracies any time soon. 
But lasting solutions will not be found as long as the US and other foreign powers continue to meddle in the region. 
One hundred years after the start of WWI, colonial practices must finally come to an end. 
The Middle East needs the opportunity to govern itself, protected and supported by the UN Charter, not by any individual great power. 

Our Last Chance for a Safe Planet 
MELBOURNE – Humanity has just about run out of time to address climate change. 
Scientists have pointed out that a rise in temperature of 2º Celsius above pre-industrial levels will put the Earth in dangerous, uncharted territory. 
Yet we currently are on a path toward an increase of 4º or more this century. 
The last chance for action has arrived. 
That chance lies in Paris in December 2015, when the world’s governments meet for the 21st annual United Nations climate-change meeting. 
But this time will be different. 
Either governments will agree to decisive action, as they have promised, or we will look back at 2015 as the year when climate sanity slipped through our fingers. 
In 1992, the world’s governments adopted the UN Framework Convention on Climate Change, promising to avoid “dangerous anthropogenic [human-induced] interference in the climate system” by reducing the rate of emission of greenhouse gases, especially carbon dioxide. 
But, though the treaty entered into force in 1994, the rate of emissions of greenhouse gases, including CO2, has actually increased. 
In 1992, global combustion of coal, oil, and gas, plus cement production, released 22.6 billion tons of CO2 into the air. 
In 2012, the most recent year for which comparable data are available, emissions were 34.5 billion tons. 
Humanity has accelerated, rather than controlled, human-induced climate change. 
This is now the greatest moral issue of our time. 
Global fossil-fuel use gravely threatens the poor, who are the most vulnerable to climate change (though the rich are the main cause), and future generations, who will inherit a planet that has become unlivable in many places, with food supply subject to massive shocks. 
We are causing this harm in an age when technological breakthroughs enable the world to shift from dangerous fossil fuels to low-carbon energy sources, such as wind, solar, nuclear, and hydro, and reduce the impact of fossil fuels by using carbon capture and storage (CCS) technology. 
Pope Francis recently put it just right: “Safeguard Creation,” he said. 
“Because if we destroy Creation, Creation will destroy us! 
Never forget this!” 
Yet, for the many powerful interests, climate change remains a game, with the goal being to delay action for as long as possible. 
The giant fossil-fuel companies have continued to lobby behind the scenes against the shift to low-carbon energy, and have used their vast wealth to buy media coverage designed to sow confusion. 
Rupert Murdoch’s media empire in the United States, the United Kingdom, Australia, and elsewhere stands out as playing a particularly cynical and harmful role in spreading anti-scientific propaganda. 
Even so, the politics of climate change may be changing for the better – a change reflected in the Pope’s forceful message. 
Here are six reasons why the stalemate might soon end. 
First, the world is waking up to the calamity that we are causing. 
Though the Murdoch propaganda machine churns out a daily stream of anti-scientific falsehoods, the public also sees prolonged droughts (now in parts of Brazil, California, and Southeast Asia, to name a few places), massive floods (recently in Bosnia and Serbia), and lethal heat waves (in many parts of the world). 
Second, the world’s citizens do not want to go down in flames. 
Public opinion has so far succeeded in blocking the construction of the Keystone XL Pipeline, which would accelerate the production of Canada’s oil sands – a shocking prospect, given that neither Canada nor the US yet have committed to a climate plan. 
Third, more severe climate shocks may lie ahead. 
This year could prove to be a major El Niño year, when the waters of the Eastern Pacific warm and create global climate disruptions. 
A big El Niño now would be even more dangerous than usual, because it would add to the overall rising trend in global temperatures. 
Indeed, many scientists believe that a big El Niño could make 2015 the hottest year in the Earth’s history. 
Fourth, both the US and China, the two largest emitters of CO2, are finally beginning to get serious. 
President Barack Obama’s administration is trying to stop the construction of new coal-fired power plants, unless they are equipped with CCS technology. 
China, for its part, has realized that its heavy dependence on coal is causing such devastating pollution and smog that it is leading to massive loss of life, with life expectancy down as much as five years in regions with heavy coal consumption. 
Fifth, the Paris negotiations are finally beginning to attract global attention from both the public and world leaders. 
UN Secretary-General Ban Ki-moon has called for political leaders to attend a special summit in September 2014, 14 months ahead of the Paris meeting, to launch intensive negotiations. 
The UN expert network that I direct, the Sustainable Development Solutions Network (UN SDSN), will issue a major report in July on how each of the major economies can successfully decarbonize the energy system. 
Finally, technological advances in low-carbon energy systems, including photovoltaics, electric vehicles, CCS, and fourth-generation nuclear power with greatly enhanced safety features, all help make the transition to low-cost, low-carbon energy technologically realistic, with huge benefits for human health and planetary safety. 
Starting this fall, the UN SDSN will create a platform for all global citizens to participate in the hard work of saving the planet. 
The SDSN will offer a free, online introductory course to climate change, and then host a global online “negotiation” of a global climate agreement. 
We expect that hundreds of thousands, perhaps millions, of interested citizens worldwide will participate online, showing the way for the politicians. 
The control of climate change is a moral imperative and a practical necessity – far too important to be left to politicians, Big Oil, and their media propagandists. 

The Subsidy Trap 
CAMBRIDGE – Few policies place good economics so directly at odds with good politics as subsidies for food and energy. 
The issue of unaffordable subsidies is now front and center for three of the world’s most important new leaders: Egyptian President Abdel Fattah el-Sisi, Indonesian President-elect Joko “Jokowi” Widodo, and Indian Prime Minister Narendra Modi. 
Sisi is confronting the need to cut subsidies better than might have been expected. 
Modi, by contrast, is doing worse than expected – even torpedoing a long-anticipated Word Trade Organization agreement. 
With Jokowi, it is too soon to tell. 
In July, Sisi accomplished what few leaders in North Africa or the Middle East have: he sharply cut longstanding fuel subsidies and allowed prices to rise by 41-78%. 
Surprisingly, few protests materialized. 
Egypt’s food subsidy program, which costs more than $5 billion a year, is in urgent need of reform as well. 
The price of bread has been kept so low that it is often fed to animals. 
Past attempts to reduce such subsidies in North African countries have brought unrest and even toppled governments. 
But the Sisi government appears to be making progress here as well. 
Bread subsidies have already been cut by 13%. 
Sisi had little choice. 
Even with subsidy cuts, the current government is targeting a budget deficit of 10% of GDP in the coming fiscal year (compared to 14% otherwise). 
Still, few expected Sisi, who took office in a fragile political environment, to move faster than Modi, who was elected with a whopping democratic majority amid hopes for sweeping economic reform. 
In Indonesia, when Jokowi takes office in October, he will inherit a long history of fuel subsidies that, at $21 billion a year (up to 20% of government spending), the country can no longer afford. 
Outgoing President Susilo Bambang Yudhoyono took a first courageous step by raising fuel prices a year ago. 
Jokowi’s advisers favor cutting the remaining subsidies, and he has already forthrightly said that he plans to do so gradually, over a four-year period. 
Economists feel confident in opposing commodity subsidies because agricultural and energy markets tend to approach the ideal of perfect competition, with a large number of consumers on the demand side and producers on the supply side. 
Where competition is imperfect, government, not large private monopolies, is usually the reason. 
Critics of the invisible hand point out that, left to themselves, private markets can fail in a number of ways. 
For example, income inequality and environmental externalities are two of the most prominent justifications for government intervention. 
What is striking about food and fossil-fuel subsidies is that they are often promoted in the name of the environment or equity, but usually do little to achieve these goals, and often have the opposite effect. 
Less than 20% of Egyptian food subsidies benefit poor people. 
Gasoline subsidies in most countries benefit the middle class, while the poor walk or take public transportation. 
In India, less than 0.1% of rural subsidies for Liquefied Petroleum Gas go to the poorest quintile, while 52.6% go to the wealthiest. 
Worldwide, far less than 20% of fossil-fuel subsidies benefit the poorest 20% of the population. 
Food and energy subsidies can also distort public policy, as Modi’s government, seeking to protect India’s agricultural subsidies, has shown. 
Indeed, its veto of a WTO compromise has derailed the most important progress in multilateral trade negotiations of the last ten years. 
Agricultural subsidies sometimes seek to benefit consumers at the expense of producers, especially in poor countries, and sometimes seek to benefit producers at the expense of consumers, especially in rich countries. 
India’s policies try to do both. 
As a result, India has accomplished the extraordinary feat of rationing grain to consumers at artificially low prices, while simultaneously suffering excess supply, because farmers are paid high prices. 
(Farmers are also subsidized via agricultural inputs – electricity, water, and fertilizer – to the detriment of the environment.) 
The government has purchased huge stockpiles of rotting rice and wheat, while the limited amount available to consumers is allocated in ways that are corrupt and inconsistent with the stated goal of helping the poor. 
The government would like to keep its subsidies and stockpiles. 
But it knows that this would violate WTO rules. 
Unable to obtain a permanent change in these rules, Modi vetoed the WTO’s eagerly anticipated Trade Facilitation Agreement. 
Once subsidies are in place, they are extraordinarily difficult to remove. 
When world commodity prices rise, as they often have over the last decade, citizens who are accustomed to the domestic price being set in the market are more likely to accept the reality that officials cannot insulate them from the shock. 
But people who are accustomed to administratively established food and energy prices hold the government responsible. 
That is a strong reason not to adopt such subsidies in the first place. 
But it does not necessarily mean that, once subsidies are in place, keeping them is a savvy politician’s best option. 
If the alternative to raising the price is shortages or rationing, angry protesters may mobilize anyway. 
Similarly, the procrastinating leader is unlikely to benefit if ever-widening gaps force an even bigger retail-price rise when the day of reckoning comes. 
Ideally, other, more efficient means of supporting incomes at the bottom will be instituted at the same time that food and energy subsidies are cut. 
Developing countries have learned a lot about efficient transfer mechanisms, from policy innovations, such as the conditional cash transfers of Mexico’s Progresa-Oportunidades program or Brazil’s Bolsa Família, and from technological innovations such as India’s Unique Identification system. 
But in countries where the adjustment does not come until a budget crisis forces it, there may be no money for transfers to cushion the pain. 
The savvy politician should probably announce the unpleasant adjustment as soon as he takes office. 
Jokowi and Sisi seem to have adopted this approach. 
Modi, despite his huge electoral mandate and hype about market reforms, has fallen short. 

Britain’s Populist Fantasies 
LONDON – The election of Jeremy Corbyn as the new leader of the British Labour Party is a reminder that life is rich with paradox. 
Globalization – the web of travel, technology, trade, and information that binds the world ever more closely together – is hardly a new phenomenon. 
But politics in many developed democracies has lately been disrupted by populist insurgencies seeking to exit this shared reality. 
What these groups do not seem to recognize is that the alternative they wish for is a fantasy. 
From Syriza in Greece to the National Front in France, voters across Europe are being encouraged to believe in a virtual reality shaped by prejudice and uninformed nostalgia. 
In the United States, this mood first emerged several years ago, fueling the rise of the Tea Party and now enabling the splenetic presidential campaigns of Donald Trump and other Republican candidates who promise to seal America off from the twenty-first century. 
(The promise is to some extent literal: By building walls along the country’s northern and southern borders, the candidates would defend the American dream from outside contamination.) 
The United Kingdom is the latest victim of this fantasy-driven populism. 
On the right, we have already suffered the rise of the anti-European, anti-immigrant UK Independence Party, led by the cigarette-smoking, beer-swilling joker Nigel Farage, in whom Britain has found its own version of Silvio Berlusconi, if you can imagine such a thing. 
Now the British left has embraced a similar folly. 
The Labour Party’s defeat in May’s general election brought about the resignation of its leader, Ed Miliband, a courteous and intelligent figure who, having abandoned the middle ground once controlled by former Prime Minister Tony Blair, had failed to convince even his own party that he could run the country. 
The campaign to choose his successor proceeded throughout the summer. 
On the whole, the search was a pretty dismal business. 
Three respectable, if uninspiring, former ministers vied for the position, but struggled to find a compelling message that connected the party of the left with modern Britain. 
Unsure of the right approach, they wavered somewhere between moderation and left-wing nonsense. 
Such indecisiveness was not a problem for Corbyn, whose principal distinction in more than three decades in parliament has been voting against his own party more than 500 times on the grounds that its proposals were not socialist enough. 
In fact, Corbyn made it onto the ballot only because a few MPs wanted to show that the Labour Party welcomed debate. 
But his passionate advocacy of old-fashioned socialism quickly caught on, breathing new life – and drawing tens of thousands of new members – into a party that had been losing adherents in droves. 
So what exactly are Corbyn’s proposals? 
At home, he would nationalize industries, especially in energy, and raise taxes, especially on business and the wealthy. 
Any semblance of fiscal prudence would go out the window, with cuts in health, welfare, and education spending being reversed. 
Trade unions would regain the power they enjoyed before Margaret Thatcher’s reforms in the 1980s. 
And public-sector workers would become the principal beneficiaries of the country’s spending programs. 
In foreign policy, Corbyn would slash defense spending and abandon the UK’s nuclear deterrent. 
He would blame virtually anything that went wrong in the world on America, which is, in his view, morally equivalent to Russia. 
If a leader like the late Hugo Chávez, the architect of Venezuela’s “socialist revolution,” emerges, Corbyn would probably be on the next plane to meet him. 
Despite his radical views, Corbyn won the battle to lead Labour – and hence Britain’s parliamentary opposition, with nearly 60% of the vote. 
But Labour will not win a general election under Corbyn – a reality that has caused some Conservatives to respond to his victory as though they had won the lottery. 
In my view, however, no good will come from this insurrection for anyone. 
First, Corbyn will not be swept out of his job by an early display of public distaste and hostility. 
On the contrary, at the outset, he may be able to galvanize many alienated young voters against a government that has earned wary respect but is not much liked. 
Second, without effective and responsible opposition, governments can become arrogant, careless, and too focused on their own supporters. 
In this case, leaders of the Conservative Party’s far-right component are likely to think that they can dispense with offering disciplined support to Prime Minister David Cameron and his policies, because Labour can never win under Corbyn, anyway. 
Third, at some time over the next year, the UK will face a referendum over its membership in the European Union. 
While no one knows the position Corbyn will take on this issue, one can speculate that he, like some of the trade-union bosses who support him, might decide that the EU is a rich man’s club, thereby precluding the much-needed cross-party consensus in favor of continued membership. 
Fourth, Corbyn, who shares many of the political views of the Scottish nationalists, will make it more difficult to manage the question of Scotland’s place in the UK. 
Making common cause with the nationalists in policy matters will complicate the question of how best to deal with their constitutional aspirations. 
Fifth, there is a danger that the Conservative government, faced with irrational populist forces on both the left and the right, will shrink from its duty to stand up for good values and good sense. 
But it is vital that, amid all the make-believe, there are still those who hammer home the simple truth that, no matter how much people wish for it, a country cannot decide simply to stop the world and get off. 
Corbyn’s election underscores how many Britons are refusing to accept reality. 
It is up to Cameron to end their dangerous reverie. 

Jeremy Lin and the Political Economy of Superstars 
CAMBRIDGE – The biggest news around Cambridge in recent weeks has been Jeremy Lin, the Harvard economics graduate who has shocked the National Basketball Association by rising overnight from “nowhere” to become a genuine star, leading a losing New York Knicks team to an unlikely string of victories. 
Lin’s success is delicious, partly because it contradicts so many cultural prejudices about Asian-American athletes. 
Flabbergasted experts who overlooked Lin have been saying things like “he just didn’t look the part.” 
Lin’s obvious integrity and graciousness has won him fans outside the sport as well. 
The whole world has taken note, with Lin being featured on the cover of Sports Illustrated for two consecutive issues. 
The NBA, which has been trying to build brand recognition and interest in China, is thrilled. 
I confess to being a huge Lin fan. 
Indeed, my teenage son has been idolizing Lin’s skills and work ethic ever since Lin starred on the Harvard team. 
But, as an economist observing the public’s seething anger over the “one percenters,” or individuals with exceptionally high incomes, I also see a different, overlooked facet of the story. 
What amazes me is the public’s blasé acceptance of the salaries of sports stars, compared to its low regard for superstars in business and finance. 
Half of all NBA players’ annual salaries exceed $2 million, more than five times the threshold for the top 1% of household incomes in the United States. 
Because long-time superstars like Kobe Bryant earn upwards of $25 million a year, the average annual NBA salary is more than $5 million. 
Indeed, Lin’s salary, at $800,000, is the NBA’s “minimum wage” for a second-season player. 
Presumably, Lin will soon be earning much more, and fans will applaud. 
Yet many of these same fans would almost surely argue that CEOs of Fortune 500 companies, whose median compensation is around $10 million, are ridiculously overpaid. 
If a star basketball player reacts a split-second faster than his competitors, no one has a problem with his earning more for every game than five factory workers do in a year. 
But if, say, a financial trader or a corporate executive is paid a fortune for being a shade faster than competitors, the public suspects that he or she is undeserving or, worse, a thief. 
Economists have long studied the economics of superstars in fields where a company can lever enormously the decisions of a small number of individuals, making them valuable in a way that someone who can, say, chop down trees like the legendary Paul Bunyan, is not. 
But the political economy of what levels of income differences countries will tolerate remains uncharted territory. 
Of course, there is a certain logic to the public’s disdain for superstar compensation outside of professional sports and entertainment. 
This is especially the case in some areas of finance that are essentially zero-sum games, in which one person’s gain is another’s loss. 
There are other areas, such as technology, in which someone like Apple’s late founder, Steve Jobs, arguably delivers real innovation and quality, rather than just employing lawyers and lobbyists to maintain a monopoly position. 
As a basketball fan, I would not describe the sport as a zero-sum game, even though one team wins and one team loses. 
The best players have huge creative flair. 
But so do some “street ball” players who excel in slam-dunk theatrics; perhaps because they are not tall enough to compete, they make almost nothing. 
Do fans tolerate outsize sports incomes because players are role models? 
Many certainly are, but not all high-paid sports celebrities are exemplary citizens. 
Michael Vick, a star quarterback in the US National Football League, served time in prison for running a vicious dog-fighting operation, and arrests of players on charges ranging from illegal possession of drugs and weapons to domestic battery have been a regular occurrence. 
And, back on the field or court, serious infractions occur all the time. 
Think of Zinedine Zidane’s infamous head butt in the 2006 football World Cup. 
In the NBA itself, a star player, Ron Artest, was suspended for the remainder of the 2004 season after going into the stands and brawling with heckling fans during a game. 
(Artest has now changed his name to Metta World Peace, perhaps in response.) 
Moreover, sports teams surely lobby governments as aggressively as any big business. 
Professional sport is a legislated monopoly in most countries, with top teams extracting free stadiums and other privileges from host cities. 
Indeed, Lin’s story, it should be remembered, grew out of a huge labor dispute between the NBA’s billionaire owners and its millionaire players over division of the league’s nearly $4 billion in annual revenues – more than many countries’ national income. 
As the late University of Chicago economist Sherwin Rosen postulated, globalization and changing communication technologies have increasingly made the economics of superstars important in a variety of fields. 
That is certainly true in sports and entertainment, but it is also the case in business and finance. 
I wish Lin a long and successful career as a superstar, though he will have already had a huge cultural impact even if his success proves meteoric. 
One can hope that, as Asian-Americans continue to break barriers in other arenas – they remain under-represented among corporate CEOs, for example – these rising superstars will be greeted with similar acclaim. 
If the public is not happy about high superstar incomes, the obvious remedy is to improve the tax system, including for powerful sports-team owners, many of whom benefit from huge tax breaks in their day jobs. 
Who knows? 
With a more level playing field, superstars outside sports and entertainment might find themselves a bit better appreciated. 

Food for All 
LONDON – With food prices having doubled in the past decade, food security is back on the international agenda. 
How can the world produce more to feed the next billion people? 
How can agricultural yields be raised? 
What is the best way to develop aquaculture? 
Unfortunately, this focus on the supply side misses half the problem. 
The world already produces more than twice the number of calories that the human population requires. 
An estimated one-third of global food production is wasted. 
In poor countries, food is lost due to inadequate storage and gaps in the supply chain (for example, a lack of refrigeration); in rich countries, food is also wasted in the supply chain, and consumers throw a lot of food away. 
Moreover, in many cases, it is poverty, not lack of food in the market, that drives hunger and nutritional deficiency. 
Millions of people simply cannot afford to buy the food that they need, which could still be the case if supply were increased. 
Fixing the demand side to get nutritious food to the poor – particularly to the mothers and children who are most vulnerable – is one of the most pressing food-security imperatives. 
A broad range of initiatives can contribute to a solution. 
For example, micro-level food security can be enhanced through programs that deliver free meals to vulnerable population groups. 
Schemes that provide free meals to schoolchildren not only help to feed the young; they also create an incentive for parents to keep their children in the classroom. 
Initiatives like these are especially successful when complemented with programs that provide access to clean water, energy, safe cooking stoves, and so on. 
Action to reduce diarrhea – so that children retain the nutritional value of what they eat – is another part of the solution. 
Of course, in very poor countries and regions, where people cannot afford to buy food on world markets, the supply side should not be neglected. 
Boosting yields of locally grown staple foods (rather than cash crops) would increase self-sufficiency and strengthen resilience when international food prices are high. 
At the same time, higher agricultural production must be balanced against the associated ecological and social costs. 
Output in South America, Southeast Asia, and Central Africa currently is being raised mainly by clearing tropical forests, grasslands, and wetlands. 
This approach contributes to climate change, interrupts hydrological cycles, and causes soil degradation, all of which undermine our planet’s ability to produce food in the long term. 
If current trends continue, the majority of the world’s remaining species will be extinct by the end of the century, and it is food production, above all other factors, that has driven the decline. 
More than 80% of all endangered birds and mammals are threatened by unsustainable land use resulting from agricultural expansion. 
The lesson is clear: We should focus our attention on making production more efficient, reducing waste, and addressing the problem of unsustainable consumption. 
Reducing food waste could save more than $250 billion worldwide – the equivalent of 65 million hectares of agricultural land use – by 2030. 
Building a temperature-controlled supply chain with 30,000 tons of modern storage in China would cost more than $100 million a year for the next 20 years. 
Many developing countries simply do not have the money for such up-front investment. 
But, with the right focus and much more modest resources, they could dramatically improve the quality of grain silos where more than 30% of food – typically located close to the rural poor – spoils to the point of being unfit for human consumption. 
There are already some positive trends that should be capitalized on globally. 
In the past few years, households in the United Kingdom have cut their food waste by 21% and the food industry has trimmed its waste streams by 8%. 
The public is more willing to forgo cosmetic perfection: “ugly” fruit and vegetables are the fastest-growing sector of the UK’s fresh-produce market, last year saving 300,000 tons of produce that would otherwise have been wasted for being the wrong shape or size. 
Much anxiety is directed toward growing demand for meat and dairy products in China and India. 
But per capita meat consumption in the United States and Europe is still more than three times higher than in either country. 
In addition to eating less meat, production of it needs to be more resource-efficient. 
In the past, cattle, sheep, and goats fed on grass and other energy sources unavailable to humans, while pigs and chickens fed on waste, thus contributing overall to total food availability. 
Now one-third of all arable land is used to grow crops to feed livestock, not to grow staple crops for people. 
The rich buy this food to feed their animals, outbidding the poor who want to buy it to feed their children. 
The United Nations Environment Program estimates that using more by-products and waste to feed livestock could liberate enough food on the world market to feed an additional three billion people. 
The Pig Idea campaign calls for an end to legislation in the European Union and some US states prohibiting the use of food waste to feed pigs and chickens because of the risk of animal diseases. 
These risks can be managed effectively through proper treatment systems (as in Japan and South Korea). 
The environmental, economic, and social benefits would be enormous. 
The earth is capable of feeding everyone. 
Failing to address problems affecting supply and demand amounts to grotesque mismanagement and a crime against the world’s poor, the planet’s other species, and future generations. 

Donald Trump’s Federal Reserve 
CAMBRIDGE – With the appointment of Jerome Powell as the next Chair of the United States Federal Reserve Board, Donald Trump has made perhaps the most important single decision of his presidency. 
It is a sane and sober choice that heralds short-term continuity in Fed interest-rate policy, and perhaps a simpler and cleaner approach to regulatory policy. 
Although Powell is not a PhD economist like current Fed Chair Janet Yellen and her predecessor, Ben Bernanke, he has used his years as an “ordinary” governor at the Fed to gain a deep knowledge of the key issues he will face. 
But make no mistake: the institution Powell will now head rules the global financial system. 
All other central bankers, finance ministers, and even presidents run a distant second. 
If that seems hyperbolic, it is only because most of us don’t really pay attention to the Fed on a day-to-day basis. 
When the Fed gets it right, price stability reigns, unemployment remains low, and output hums along. 
But “getting it right” is not always easy, and when the Fed gets it wrong, the results can be pretty ugly. 
Famously, the Fed’s efforts to tame a stock-market bubble in the late 1920s sparked the Great Depression of the 1930s. 
(Fortunately, of the candidates Trump was considering for the Fed post, Powell is the one least likely to repeat this mistake.) 
And when the Fed printed mountains of money in the 1970s to try to dull the pain of that decade’s oil shocks, it triggered an inflationary surge that took more than a decade to tame. 
At times, the rest of the world seems to care more about Fed policy than Americans do. 
Little wonder: perhaps more than ever, the US dollar lies at the heart of the global financial system. 
This is partly because much of world trade and finance is indexed to the dollar, leading many countries to try to mimic Fed policies to stabilize their exchange rates. 
Powell will face some extraordinary challenges at the outset of his five-year term. 
By some measures, stock markets look even frothier today than they did in the 1920s. 
With today’s extraordinarily low interest rates, investors seem ever more willing to assume greater risk in search of return. 
At the same time, despite a strongly growing US and global economy, inflation remains mystifyingly low. 
This has made it extremely difficult for the Fed to normalize policy interest rates (still only 1%) so that it has room to cut them when the next recession hits, which it inevitably will. 
(The odds of a recession hitting in any given year are around 17%, and that seems like a good guess now.) 
If Powell and the Fed cannot normalize interest rates before the next recession, what will they do? 
Yellen insists that there is nothing to worry about; the Fed has everything under control, because it can turn to alternative instruments. 
But many economists have come to believe that much of this is smoke and mirrors. 
For example, so-called quantitative easing involves having the Fed issue short-term debt to buy up long-term government debt. 
But the US Treasury owns the Fed, and can carry out such debt purchases perfectly well by itself. 
Some argue for “helicopter money,” whereby the Fed prints money and hands it out. 
But this, too, is smoke and mirrors. 
The Fed has neither the legal authority nor the political mandate to run fiscal policy; if it tries to do so, it runs the risk of forever losing its independence. 
Given that monetary policy is the first and best line of defense against a recession, an urgent task for the new chair is to develop a better approach. 
Fortunately, good ideas exist, and one can only hope that Powell will quickly move to create a committee to study long-term fixes. 
One idea is to raise the Fed’s inflation target. 
But this would be problematic, not least because it would breach a decades-long promise to keep inflation around 2%. 
Moreover, higher inflation would induce greater indexation, ultimately undermining the effectiveness of monetary policy. 
Paving the way for effective negative-interest-rate policy is a more radical – but by far the more elegant – solution. 
Bank regulation is also part of the Fed’s mandate. 
The 2010 Dodd-Frank financial-reform legislation, which has spawned 30,000 pages of rules, has been a boon for lawyers. 
But the massive compliance costs ultimately fall on small and medium-size businesses. 
It would be far better simply to require banks to raise much more of their resources in equity markets instead of through bonds. 
That way, shareholders, not taxpayers, would take the big hit in a crisis. 
I have not mentioned the elephant in the room: the threat to the Fed’s independence posed by a president seemingly intent on challenging all institutional norms. 
When President Richard Nixon was intent on being re-elected in 1972, he put heavy pressure on then-Fed Chair Arthur Burns to “juice” the economy. 
Nixon was re-elected, but inflation soared and growth collapsed. 
No one should be wishing for a replay – even if Nixon eventually was impeached. 


Jihad or Murder? 
It is remarkable that some of the most critical concepts of Muslim religious terminology have now become part of the international language of current affairs. 
Questions drawn from Islamic theology are discussed freely by the world public, engaging specialists and non-specialists, Muslims and non-Muslims. 
Theological disputation has moved far from Islam’s religious academies. 
For example, the term jihad, commonly translated as “holy war,” has become nearly ubiquitous. 
Though conceived in early Muslim history as a means of spreading God’s word, Muslim scholars today distinguish between two kinds of jihad – one being an internal struggle against temptation, and the other a physical conflict against an aggressor who threatens the survival or the fundamental rights of a Muslim community. 
In this context, there is widespread rejection of the fundamentalists’ use of the term. 
Numerous Muslim scholars have raised their voices to challenge the terrorists’ defense of suicide bombings or attacks on civilians, offering long citations from centuries of religious jurisprudence. 
In itself, this approach represents a worthy expression of collective conscience in opposition to the terrorists. 
But many among the public and in the media want more. 
Muslim intellectuals are being encouraged to press the religious argument against fundamentalist violence in order to deprive the terrorists of their most fearsome and potent arguments. 
If Muslim scholars can somehow disprove these arguments, it is thought, then the terrorists’ ability to sustain their violent underground will be reduced. 
Is this right? 
A quick survey of the history of religious conflict shows that theological controversies have never been resolved by theological arguments. 
Looking more closely, one finds that while these controversies were often framed in religious terms, they were not at all about religion. 
The range of opposing interpretations of religious texts is virtually unlimited, and disputes are seldom resolved by rational argument. 
In earlier times, such controversies were decided by political authorities, which used military force to impose one particular point of view at the expense of all others. 
Muslim history is full of such cases. 
Recently, when Saddam Hussein invaded Kuwait, he found scholars who raised theological arguments on his behalf. 
The coalition confronting him had no difficulty finding religious arguments that led to precisely the opposite conclusion. 
Today, it is clear that fundamentalists and their supporters are completely closed off to even the most elaborate theological refutation of their views, even when produced by distinguished religious authorities. 
The first reflex of the fundamentalists is to withdraw from the mainstream, to build around themselves a shell that is impervious to any logic other than their own. 
The most essential questions that humans face today – those that engender the deepest conflicts – have nothing to do with theology. 
They concern disputes over territory, political power, definitions of rights, and distribution of wealth. 
The means of discussing these questions is known to all and is expressed in all religions and all languages. 
The evils most deeply resented – in all societies – are injustice, despotism, corruption, and poverty. 
We all understand what these mean, and how certain people must live with them on a daily basis. 
Why, then, do we follow the fundamentalists to the very heart of their madness? 
Allowing them to frame these problems in religious terms legitimizes the perspective that they are attempting to impose, particularly in their own societies.It also allows them to camouflage their very worldly thirst for power. 
Repeatedly, the Muslim religious establishment has been urged to issue statements denying fundamentalists the right to use religious terms like jihad. 
But experience has proven that this approach leads nowhere. 
In fact, debates about the use of religious terms lend credibility to fundamentalist efforts to apply these ideas to conditions in the modern world. 
Such debates concede that these religious concepts are generally valid, even when, as in the fundamentalists’ case, they simply do not apply. 
As a result, the entire discussion could easily backfire. 
Invariably, fundamentalists dismiss religious critiques of their views as evidence that religious authorities have been corrupted by hostile influences. 
In this way, the terrorists oppose the “purity” and “authenticity” of their arguments to the compromises presumably forced upon religious establishments. 
Speaking to Muslims exclusively in their own religious terms also excludes them from broad ethical frameworks that defend essential human values, most notably the protection of innocent civilians. 
These values are the foundation upon which all religious and cultural traditions rest. 
To be sure, it is important to understand the discourse of those who are making war on societies – their own societies first and foremost. 
But adopting the terrorists’ interpretation of events conceals the reality of this conflict. 
Instead of fighting on behalf of political and religious liberty, we risk engaging in a conflict with the false images that the terrorists have created. 
Worse still, we would bring this conflict into our own societies, where different religious and cultural traditions are now inextricably mingled. 
There is simply no need to look to theology to call a crime by its proper name. 
The revulsion provoked by the murder of innocents is deeply felt by all, and it is reprehensible by any standard, religious or not. 
It may even be that religious language does not adequately express the repulsion we all feel toward the terrorists’ actions. 
No feeling of victimhood can justify, under any conditions, such crimes against innocents, and no theology can accept the negation of the human essence that we all share. 

Greens for Trump? 
MELBOURNE – I’m a Green. 
I’ve twice been the Australian Greens’ candidate for a seat in Australia’s federal parliament. 
But on November 8, all of the good that the Green political movement has done since it was founded could be outweighed by the Green Party in the United States if Jill Stein, its candidate for president, brings about the election of Donald Trump. 
We’ve been here before. 
In 2000, Al Gore would have become president if he had won Florida. 
George W. Bush won the state by 537 votes, while 97,241 Floridians voted for Ralph Nader, the Green candidate. 
Nader subsequently wrote on his website: “In the year 2000, exit polls reported that 25% of my voters would have voted for Bush, 38% would have voted for Gore and the rest would not have voted at all.” 
If we divide up Nader’s vote in that way, the result is that, without him in the race, Gore would have won Florida by more than 12,000 votes. 
Before the election, a group of former activists for Nader published an open letter calling on him to end his campaign. 
“It is now clear,” they wrote, “that you might well give the White House to Bush.” 
Nader refused, saying that there was no significant difference between the two major party candidates. 
We now know how wrong that was. 
If there had been no Nader candidacy in Florida, the US would have elected the strongest advocate of urgent action on climate change ever to have held the presidency. 
Already in 1992, in his book Earth in the Balance, Gore had argued for such an agenda. 
As America’s vice president, moreover, Gore signed, on behalf of President Bill Clinton’s administration, the Kyoto Protocol, the first serious international effort to limit greenhouse-gas emissions. 
Bush, in contrast, rejected the scientific research on climate change, withdrew the country’s signature from the Kyoto Protocol, and for eight years effectively torpedoed international efforts to solve the problem. 
Bush also made many other disastrous decisions, of course, the foremost being the unprovoked and unnecessary invasion of Iraq. 
The world is still struggling with the consequences of the destabilization of that region. 
After that, you might have thought, no one would try the “no difference” line again – and surely not in an election between Donald Trump and Hillary Clinton! 
After all, Clinton would not only be the first female US president; she is also a long-standing campaigner for women, for health insurance, and for gun control. 
In accepting the Democratic Party’s nomination, she said: “I believe in science, I believe that climate change is real.” 
In contrast, Trump tweeted: “The concept of global warming was created by and for the Chinese in order to make US manufacturing non-competitive.” 
He later called that statement a joke; but he has also said – not in a tweet, but in a major speech about economic policy – that he would “cancel the Paris climate agreement” and “stop all payments of US tax dollars to UN global warming programs.” 
Yet, incredibly, Stein is sounding just like Nader in 2000. 
Asked if the prospect of a Trump presidency is equal to that of a Clinton one, she replied, “they both lead to the same place.” 
She then said that the Democrats “have better spin…but they’re catastrophic as well.” 
In support of that, she added, “Just look at the policies under Obama on climate change.” 
I’m looking. 
And the policies on climate change under Obama are vastly better than those under Bush. 
Obama’s policies made possible the Paris climate agreement concluded last December – not enough, to be sure, but far better than anything Trump is likely to do. 
Given the Republican majority in the US Congress, Obama has done well. 
Will history repeat itself? 
I suspect that Trump would be an even worse president than George W. Bush, so I hope not. 
But Stein is on the ballot in Florida and Ohio, two big states that could decide the election. 
One recent poll gives her 3% of the vote, enough to make the difference in either of those states. 
I call on Green party leaders all over the world to ask Stein to take her name off the ballot in states where the contest is likely to be close. 
If she won’t do it, they should take their appeal to voters, and ask them, in this election only, not to vote Green. 
The stakes are too high. 
I understand the importance of changing the two-party system. 
What the US needs to achieve this is voting reform. 
Greens should not be working to elect a Green president, which is impossible under the current system, but to institute a fairer voting system, perhaps like Australia’s, which uses what is known in the US as “instant runoff.” 
Voters rank the candidates in order of preference, and if no candidate receives a majority of all votes cast, the candidate with the fewest votes is eliminated. 
The votes received by that candidate would then be transferred in accordance with the second preferences of those who voted for him or her. 
In the current election, Stein’s voters would be able to vote for their candidate without worrying that their choice might benefit Trump, who presumably would not be these voters’ second preference. 
If the US had such a system, I wouldn’t be writing this column. 

Big Data for Poor Students 
WASHINGTON, DC – Countries need skilled and talented people to generate the innovations that underpin long-term economic growth. 
This is as true in developed as it is in developing economies. 
But it will not happen without investment in education and training. 
If we are to end poverty, reduce unemployment, and stem rising economic inequality, we must find new, better, and cheaper ways to teach – and on a vast scale. 
This goal may seem to be beyond even wealthier countries’ means; but the intelligent collection, analysis, and use of educational data could make a big difference. 
And, fortunately, we live in an age in which information technology gives us the right tools to broaden access to high-quality, affordable education. 
Big data – high-volume, complex data sets that businesses use to analyze and predict consumer behavior – can provide teachers and companies with unprecedented amounts of information about student learning patterns, helping schools to personalize instruction in increasingly sophisticated ways. 
The World Bank Group and its private-sector lending arm, the International Finance Corporation (IFC), are trying to harness this potential to support national education systems. 
A recently launched initiative, called the Systems Approach for Better Education Results (SABER), collects and shares comparative data on educational policies and institutions from countries around the world. 
In the private sector, the ability to collect information about teacher-student interaction, and interaction between students and learning systems, can have a profound impact. 
In Kenya, for example, Bridge International Academies is using adaptive learning on a large scale. 
An IFC client founded by three American entrepreneurs, Bridge runs 259 nursery and primary schools, with monthly tuition averaging $6. 
It is a massive learning laboratory for students and educators alike. 
Bridge tests different approaches to teaching standard skills and concepts by deploying two versions of a lesson at the same time in a large number of classrooms. 
The lessons are delivered by teachers from standardized, scripted plans, via tablets that also track how long the teachers spend on each lesson. 
Exam results are recorded on the teacher’s tablet, with more than 250,000 scores logged every 21 days. 
From these data, Bridge’s evaluation team determines which lesson is most effective and distributes that lesson throughout the rest of the Academy’s network. 
We know that a host of issues can cause a student’s performance to decline – scorching summer heat in classrooms without air conditioning, problems at home, or poor-quality teachers, to name a few. 
But when one gathers results on a large scale, variables flatten out, and the important differences emerge. 
That is the great value of big data. 
Another case is SABIS, a provider of K-12 education in the United States, Europe, Asia, the Middle East, and North Africa. 
SABIS mines large data sets to ensure high standards and enhance academic performance for more than 63,000 students. 
Continuous tracking of annual student academic performance yields more than 14 million data points that are used to shape instruction, achieve learning objectives, and ensure consistency across the company’s network of schools in 15 countries. 
Knewton, an adaptive learning platform that personalizes digital courses using predictive analytics, is another company at the forefront of the data revolution. 
With tailored content and instruction, even classrooms without private-school resources can provide individual learning. 
As a result, teachers spend their time in the most effective way possible – solving problems with students – instead of delivering undifferentiated lessons. 
These benefits do not come without risk. 
We are only beginning to grapple with how big data’s tremendous potential for learning can be harnessed while protecting students’ privacy. 
In some cases, data-collection technology is outpacing our ability to decide how it should be collected, stored, and shared. 
No matter how rigorously data are secured, there is still a need for a clear licensing structure for its use. 
In many developing countries, there are no regulations for data privacy at all. 
The interface between data and education holds the promise of new educational products for improved learning, with large potential benefits, especially for the poor. 
To realize those benefits – and to do so responsibly – we must ensure that data collection is neither excessive nor inappropriate, and that it supports learning. 
The private sector, governments, and institutions such as the World Bank Group need to formulate rules for how critical information on student performance is gathered, shared, and used. 
Parents and students deserve no less. 

Jinnah’s Labyrinth 
NEW DELHI – Three recent events vividly illustrate the dilemmas of today’s Pakistan, which are in many ways the same challenges faced by the country’s founder, Mohammed Ali Jinnah, over six decades ago. 
The foreign secretaries of India and Pakistan met in New Delhi recently, after a gap of more than 15 months, the terrorist attacks of November 11, 2008 having frozen bilateral relations between the two countries in suspicion and mutual recrimination. 
The New Delhi meeting marked a temporary thaw, yet even as Pakistan’s foreign secretary returned home to Islamabad, suspected Taliban bombers had attacked an Indian medical mission in the heart of Kabul, Afghanistan, killing 11 people. 
Moreover, in the Pakistani province of Waziristan, three Sikhs, a minority in Pakistan, were abducted. 
When the ransom could not be raised, one was beheaded. 
India and the world watch such events in horror, unable to decide how to respond. 
As people wonder if the United States-NATO surge in Afghanistan which began last month will succeed, all of South Asia is asking even more troubling questions: Who runs Pakistan? 
Who is really in charge of its nuclear arsenal? 
To understand where Pakistan’s massive problems began, we need to look back to the country’s founding. 
At a press meeting on November 14, 1946, nine months before British India was partitioned into two countries, India and Pakistan, Jinnah was asked about the future of the communal situation in what would become Pakistan. 
He foresaw “a really stable and secure government in Pakistan,” whose Muslim majority would treat minorities in their midst “in a most generous way.” 
Seeking to dispel skepticism, he declared that “Pakistan and Hindustan by virtue of contiguity and mutual interests will be friends in this subcontinent.” 
That was Jinnah’s dream, but the reality is that Pakistan has lived in high drama ever since its birth, often troubled by dark and imaginary historical shadows. 
It has been a victim of its own grandiose dreams about its role in the world and place among Islamic nations, and often of intense emotionalism and an absence of calm, dispassionate logic. 
Almost inevitably, or so it seems, the idea of Pakistan has been usurped, which is why Pakistan’s friends have so often become its masters, and why Pakistan continues to remain fragile, insecure, and tense. 
But there are other, non-psychological factors for Pakistan’s troubles. 
Founded on the notion of separateness, Pakistan has continuously had to affirm its Islamic identity, as well as its opposition to India. 
So it adopted the identity of an Islamic Republic – a seemingly direct and logical evolution from “Muslims as a distinct nation” before partition to Pakistan as an “Islamic State” afterward. 
In reality, this transition has impeded Pakistan’s evolution into a modern, functioning state underpinned by a coherent national identity. 
Indeed, by becoming an Islamic state, Pakistan ultimately – and perhaps inevitably –became something of a “jihadi” state. 
Unsurprisingly, when set on this path, it also became the chosen refuge of Osama bin Laden and of the Taliban leadership that fled Afghanistan after the US-led invasion. 
Can Pakistan alter its identity? 
Peace in the region, and within Pakistan, depends on the answer to this question, which only Pakistani civil society – not the US, NATO, or any “surge” – can provide. 
But Pakistani society is now an orphan, dependant almost totally on both the Pakistani Army and the all-pervasive Inter-Services Intelligence (ISI) , which has grown into a state within a state, answerable only to itself . 
Of course, there are ideas of Pakistan other than that of an “Islamic state.” 
Indeed, Pakistan aspired at one point to becoming something of a modern extension of India’s long-ruling Mughal dynasty. 
But this aspiration grossly misread both the present and the inherited historical reality, for Pakistan also wanted to be a legatee of British India – a confused desire that made Pakistan more vulnerable to becoming a “rented state” than when it was part of either the Mughal or British Empire. 
Likewise, dreams of cultural links with Central Asia by themselves do not make Pakistan a boundary between it and the teeming masses of India. 
Indeed, the only role Pakistan plays in this respect is as an outpost for Central Asian terrorists. 
There is cruel irony in the observation that in the country which Jinnah created in the name of Islam, that noble faith itself now constitutes the principal challenge to the very survival of the state. 
It is no less ironic that Pakistan, once seen as the protector of Western interests in South Asia, has become the central challenge to those interests – what one high Western dignitary has undiplomatically called an “international migraine.” 

Deconstructing the Euro 
PARIS – In January, Chris Williamson, Chief Economist at the economics research firm Markit, called France “the new sick man of Europe.” 
With near-zero GDP growth, rising unemployment, and mounting public debt – not to mention counter-productive austerity policies – it is difficult to argue otherwise. 
Given France’s profound importance to Europe’s economic and political stability, this poses a major threat to the entire European project. 
Recent developments confirm Williamson’s diagnosis. 
French business activity sank to a seven-month low in December. 
While tax revenues increased by €32 billion ($44 billion) last year, the government deficit fell by a mere €8 billion and public debt increased from 89% of GDP to more than 93%. 
Meanwhile, unemployment rose from 9.5% to 10.5%. 
The obvious conclusion is that austerity is not the answer. 
Indeed, France must abandon its current policies, for its own – and the rest of Europe’s – sake. 
France’s problems, like those of the eurozone’s other troubled economies, stem from the fact that the euro’s exchange rate does not align with member countries’ economic positions. 
As a result, these countries’ virtual exchange rates vis-à-vis Germany are critically overvalued, inasmuch as wages in these countries have risen more quickly, and labor productivity more slowly, than in Germany. 
Given that the implicit nominal exchange rates are fixed “forever” within the euro, these countries have accumulated major deficits relative to Germany. 
Likewise, the deficit countries’ exchange rates are overvalued relative to third countries like the United States and Japan, while Germany’s currency is undervalued, because the euro’s exchange rate is determined by the balance of payments of the eurozone as a whole, which Germany’s massive surplus distorts. 
In short, the euro exchange rate is too weak for equilibrium in Germany and too strong for equilibrium in France and the other less competitive eurozone economies. 
The eurozone’s weaker economies thus face a dilemma: either expand in line with productive potential, thereby incurring external deficits, or enforce austerity, eliminating external deficits by squeezing imports. 
Under pressure from Germany, they have so far pursued the latter option. 
The current “competitive austerity” trend is irrational, first and foremost, because, by undermining domestic demand, it directly controverts the currency union’s fundamental principle that a large domestic market should act as a buffer against external demand shocks. 
This is causing everyone to suffer – even Germany. 
Indeed, from 2007 to 2012, Germany’s exports to other eurozone countries declined by 9%, from €432 billion to €393 billion. 
But this is not the only threat that austerity poses to Germany’s hard-won prosperity. 
The euro has also caused Germany’s business cycle to diverge from those of the less competitive economies, while prohibiting customized monetary policies. 
And the common monetary policy that all are being forced to pursue is intensifying deflationary pressures in the weaker countries, while increasing inflationary pressures in Germany. 
Furthermore, populations in the eurozone’s stagnant economies are increasingly demanding that Germany change its policies, increasing wages and implementing measures aimed at boosting consumption and discouraging savings. 
While responding to such demands would help to ease political tensions across the eurozone, they would face strong opposition within Germany. 
Similarly, resolving the crises that will inevitably emerge from the current rigid exchange-rate system will ultimately require Germany to agree either to debt write-offs or to large-scale government-bond purchases by the European Central Bank, which would flood the eurozone with liquidity. 
Either outcome would run contrary to Germany’s interests and preferences, making it as unfair an approach as austerity. 
What the eurozone needs is a solution that does not force any one country or group of countries to bear the brunt of the adjustment – and that means a controlled segmentation of the currency union. 
Contrary to popular belief, this could be done in a way that reinvigorates the European ideal, rather than reviving the parochial nationalism of the past. 
The key is to ensure that it arises from the European Union’s economic and political core. 
Specifically, Germany, Europe’s greatest economic power, and France, the intellectual progenitor of European unification, should announce their simultaneous exit from the euro and re-adoption of the Deutsche Mark and the franc. 
This would trigger the immediate revaluation of the Deutsche Mark – and possibly of the franc – relative to the euro. 
For their part, other EU member countries would have to decide whether to retain the euro in its truncated form or revert to their own national currencies, possibly pegging them to the revived Deutsche Mark or franc. 
Regardless of their decision, the price competitiveness of the eurozone’s weaker economies would improve considerably. 
Of course, France and Germany would need to implement interim arrangements to safeguard their banking systems’ stability. 
Moreover, they would have to negotiate with the ECB and other European governments a plan for managing euro-denominated debts. 
A period of monetary uncertainty, as European economies adjusted to the new environment, would be unavoidable. 
But that would be far better than the economic and political impasse in which the eurozone is now trapped. 

From War to Work 
OXFORD – There is no denying that conflict has far-reaching negative effects, including on employment. 
But the prevailing understanding of the relationship between conflict and employment does not fully recognize the complexity of this relationship – a shortcoming that undermines effective employment policies in fragile states. 
The conventional wisdom is that conflict destroys jobs. 
Moreover, because unemployment can spur more conflict, as unemployed young people find validation and economic rewards in violent movements, job creation should be a central part of post-conflict policy. 
But, while this certainly sounds logical, these assumptions, as I detailed in a 2015 paper, are not necessarily entirely accurate. 
The first assumption – that violent conflicts destroy jobs – ignores the fact that every conflict is unique. 
Some, like the 2008-2009 Sri Lankan civil war, are concentrated in a relatively small area, leaving much of the country – and thus the economy – unaffected. 
Even endemic conflicts, like the recurrent conflicts in the Congo, might not have a major impact on net employment. 
After all, the jobs that are lost in, say, the public sector or among commodity exporters may be largely offset by new jobs in government and rebel armed forces, informal production substituting for imports, and illegal activities like drug production and smuggling. 
Likewise, the second assumption – that unemployment is a major cause of violent conflict – misses crucial nuances. 
For starters, the formal sector accounts for just a fraction of total employment in most conflict-affected countries. 
The majority of working people are in the informal sector, often engaged in low-status, low-productivity, and low-incomes activities that can, just like unemployment, generate dissatisfaction and potentially motivate young people to join violent movements. 
Given this, simply expanding formal-sector employment is not enough, unless it also improves the situation of young people in low-income informal-sector jobs. 
Yet post-conflict employment policies almost invariably neglect the informal sector. 
Worse, new regulations – such as the ban on commercial biking in Freetown, Sierra Leone – sometimes block productive informal activities undertaken by youth. 
But even a focus on the informal sector is insufficient, as research has shown that poverty and marginalization are not, on their own, enough to cause conflict. 
If they were, most poor countries would be in conflict most of the time. 
And that is not even remotely the case. 
Violent conflict occurs when leaders are motivated to mobilize their followers for it. 
That motivation can stem from a variety of sources, among the most common being exclusion from power. 
In that case, leaders will appeal to a common identity – for example, religion in the case of contemporary conflicts in the Middle East, or ethnicity in many African conflicts – to mobilize followers. 
Of course, more than a shared identity alone is needed for mobilization to occur. 
People will generally respond only if they already have grievances – in particular, if they feel that their group faces discrimination in access to resources and jobs. 
In this sense, employment is relevant, but what matters is not the absolute level of employment so much as the distribution of good jobs among religious or ethnic groups. 
In other words, simply creating more jobs, without regard to their allocation, may not ease tensions; if imbalances persist, job creation may even make things worse. 
Yet post-conflict employment policies almost always neglect so-called “horizontal inequalities.” 
For example, employment policies did little to reduce the strong regional imbalances and discrimination within regions that persisted in Bosnia and Herzegovina after the war there in the 1990s. 
Given these failings, it is not surprising that employment policies’ net effects are often very small relative to the size of the problem. 
In both Kosovo and Bosnia and Herzegovina, job creation was thought to be central to post-conflict peacekeeping efforts. 
Yet, in Kosovo, unemployment stood at 45% six years after its war ended. 
In Bosnia, new programs generated just 8,300 jobs, while 450,000 people were demobilized; 20 years after the end of the conflict, the unemployment rate stood at 44%. 
There is one example of a successful post-crisis employment policy. 
Nepal’s government sought to expand opportunities in the informal sector after the country’s civil war, implementing programs focused on building infrastructure, issuing micro-credit, and providing technology assistance, targeting the most deprived regions and castes. 
Recognizing the role that caste and ethnic tensions and discrimination played in fueling the conflict, the government designed employment schemes specifically for rural areas, along the same lines as India’s employment scheme, with 100 days of work per household guaranteed. 
The programs were supported by the Nepalese government and external donors, and focused on poorer regions and villages (and, within them, on the poorest castes). 
The period immediately following a conflict is a delicate one. 
Leaders must make the most of that time, ensuring that every policy they pursue is as effective as possible. 
When it comes to employment, that means designing programs that reflect how people actually spend their working lives, as well as addressing the real grievances generating tensions. 
Otherwise, they risk allowing, if not encouraging, a relapse into organized violence. 

Jobless Recoveries and Manic Policies 
CHICAGO – Monetary and fiscal policies in the United States, both in this recession and the recession of 2001, have been among the most accommodating in the industrial world. 
As I write, Congress is working on yet another “jobs” bill. 
Indeed, John Taylor of Stanford University attributes the recent financial crisis to excessively stimulatory monetary policy towards the end of Alan Greenspan’s tenure as head of the US Federal Reserve. 
Why is US policy so accommodating? 
A central reason is that the nature of US economic recoveries has changed. 
From 1960 until 1991, US recoveries were typically rapid. 
From the trough of recessions, recovery to pre-recession output levels took less than two quarters on average, and employment recovered within eight months. 
But the recoveries from the recessions of 1991 and 2001 were different. 
For example, in 2001, it took just one quarter for output to recover, but 38 months for jobs to come back. 
The current recovery appears to be similarly slow in creating jobs. 
Some economists argue that, unlike past recoveries, when workers who were temporarily laid off were rehired, job losses starting in 1991 were more permanent. 
Unemployed workers had to find jobs in new industries, which took more time and training. 
Others suggest that the Internet has made it easier for firms to hire quickly. 
So, rather than hire in panic at the first sign of a recovery for fear that they will be unable to do so later and lose sales, firms would rather make sure that the recovery is well established before adding workers. 
Regardless of the true explanation, the US is singularly unprepared for jobless recoveries. 
Typically, unemployment benefits last only six months. 
Moreover, because health-care benefits are often tied to jobs, an unemployed worker also risks losing access to affordable health care. 
Short-duration benefits may have been appropriate when recoveries were fast and jobs plentiful, because the fear of losing benefits before finding a job may have given workers an incentive to look harder. 
But, with few jobs being created, a positive incentive has turned into a source of great anxiety. 
Even those who have jobs fear that they could lose them and be cast adrift. 
Politicians ignore popular anxiety at their peril. 
President George H.W. Bush is widely believed to have lost his re-election bid, despite winning a popular war in Iraq, because he seemed out of touch with public hardship following the 1991 recession. 
That lesson has been fully internalized. 
Economic recovery is all about jobs, not output, and politicians are willing to push for economic stimulus, both fiscal (tax cuts or government spending) and monetary (lower short-term interest rates), until jobs start reappearing. 
In theory, this is what democracy is all about – policy responding to the needs of the people. 
In practice, though, public pressure to do something quickly enables politicians to run roughshod over the usual checks and balances on government policy making. 
Long-term spending and tax policies are enacted under the shadow of an emergency, with the party that happens to be in power at the time of the downturn getting to push its pet agenda. 
Much of what is enacted as stimulus has little immediate effect on job creation, but does have an adverse long-term effect on government finances. 
For example, the 2009 stimulus package enacted by the Obama administration had many billions of dollars devoted to cancer research, though such research employs few people directly and is spent over a long time horizon – far beyond that of even a prolonged recovery. 
Equally deleterious to economic health is the recent vogue of cutting interest rates to near zero and holding them there for a sustained period. 
It is far from clear that near-zero short-term interest rates (as compared to just low interest rates) have much additional effect in encouraging firms to create jobs when powerful economic forces make them reluctant to hire. 
But prolonged near-zero rates can foster the wrong kinds of activities. 
For example, households and investment managers, reluctant to keep money in safe money-market funds, instead seek to invest in securities with longer maturities and higher credit risk, so long as they offer extra yield. 
Likewise, money fleeing low US interest rates (and, more generally, industrial countries) has pushed up emerging-market equity and real-estate prices, setting them up for a fall (as we witnessed recently with the flight to safety following Europe’s financial turmoil). 
Moreover, even if corporations in the US are not hiring, corporations elsewhere are. 
Brazil’s unemployment rate, for example, is at lows not seen for decades. 
If the Fed were to accept the responsibilities of its de facto role as the world’s central banker, it would have to admit that its policy rates are not conducive to stable world growth. 
Policy would still be accommodative if the Fed maintained low interest rates rather than the zero level that was appropriate for a panic. 
And this would give savers less of an incentive to search for yield, thus avoiding financial instability. 
Politicians will not sit quietly, however, if the Fed attempts to raise rates. 
Their thinking – and the Fed’s – follows the misguided calculus that if low rates are good for jobs, ultra-low rates must be even better. 

Profiles in Peacemaking 
NEW YORK – Fifty years ago, President John F. Kennedy did the seemingly impossible. 
At the height of the Cold War, he moved the two nuclear superpowers, the United States and the Soviet Union, toward peace. 
The lessons of Kennedy’s act of leadership – one of the greatest of modern times – are directly relevant today. 
I recount this remarkable story in a new book, To Move the World. 
To many, war between the two superpowers seemed inevitable. 
The Cuban missile crisis in October 1962 created a global air of fear and pessimism, and certainly the belief that the US and the Soviet Union could not be reconciled. 
Kennedy knew better. 
He understood that much of the dangerous tension stemmed from each side’s hardliners, who acted as if peace were impossible. 
Their actions on one side would provoke the other side’s hardline response, fueling an upward spiral of distrust that strengthened the extremes in both camps. 
The “experts” of that era spoke of the balance of nuclear power. 
They believed that neither side would use nuclear weapons, owing to the fear of retaliation. 
But Kennedy recognized something far more dangerous: Accidents, misjudgments, bluffs, provocation by hardliners, or tactical mistakes could easily throw either side into panic. 
In the Cuban missile crisis, the US and the Soviet Union stumbled to the precipice of nuclear war, not because of any desire for one (except among a few hothead extremists), but because of a series of miscalculations and pressure exerted by hardliners. 
Following the crisis, Kennedy was determined to pull back from the precipice for good. 
In his extraordinary “Peace Speech” of June 10, 1963, he suggested to Americans that there was a way to make peace with the Soviet Union. 
Rather than issuing a list of demands, Kennedy did something far more interesting and unusual: he called upon Americans to reconsider their own attitudes about war and peace. 
“First: Let us examine our attitude toward peace itself,” Kennedy said. 
“Too many of us think it is impossible. Too many think it unreal. 
But that is a dangerous, defeatist belief. 
It leads to the conclusion that war is inevitable, that mankind is doomed, that we are gripped by forces we cannot control. 
We need not accept that view. 
Our problems are manmade; therefore, they can be solved by man.” 
Kennedy diagnosed the problem succinctly: “We are both caught up in a vicious and dangerous cycle in which suspicion on one side breeds suspicion on the other, and new weapons beget counter-weapons.” 
And his assessment of its solvability was equally concise: “[B]oth the United States and its allies, and the Soviet Union and its allies, have a mutually deep interest in a just and genuine peace and in halting the arms race.” 
Kennedy’s speech provoked a highly positive response from his Soviet counterpart, Nikita Khrushchev, who called in the US envoy and told him that the speech was the finest by any American president since Franklin Roosevelt. 
Within a few weeks, both sides had agreed to the Partial Nuclear Test Ban Treaty. 
Five years later, the first treaty led to a second, and even more important, agreement: the Nuclear Non-Proliferation Treaty. 
Kennedy had proved a powerful truth. 
“[H]istory teaches us that enmities between nations, as between individuals, do not last forever,” he said. 
“However fixed our likes and dislikes may seem, the tide of time and events will often bring surprising changes in the relations between nations and neighbors.” 
That lesson applies powerfully today. 
The US is again caught in a spiral of distrust and uncertainty with other countries (and the same is true of countless conflicts around the world that do not involve the US). 
America’s conflict with Iran is one such powerful case; others include its conflicts with Cuba and North Korea, and also the Israeli-Palestinian conflict, in which the US is deeply engaged as a supporter of Israel. 
In all of these cases, many people consider hatred and conflict inevitable, owing to a fundamental clash of values and interests. 
But this is rarely the case. 
Even though the US and Iran are in a spiral of distrust, for example, there could be grounds for reestablishing a far healthier bilateral relationship. 
To be sure, the two sides are now dangerously divided. 
Their conflict has spilled over into Syria, where the US is now planning to arm the rebellion against President Bashar al-Assad in no small part because his regime is aligned with Iran. 
Syria’s civil war is therefore increasingly a proxy fight between Iran and the US (and other anti-Iranian countries), with Syrians dying in massive numbers as victims of somebody else’s conflict. 
Now that the Iranian people have elected a new president, Hassan Rowhani, the opportunity for a new peace overture is at hand. 
Yes, there are important matters to discuss, notably Iran’s nuclear ambitions; but several countries in Iran’s neighborhood already possess nuclear weapons, threatening the entire region. 
US President Barack Obama should take the next steps, both with Iran and with other countries (including North Korea and Cuba). 
A decade of US secret and not-so-secret wars, drone attacks, and covert operations is enough. 
We now urgently need US leadership that envisions peace rather than war as the solution. 
Fifty years ago, Kennedy showed that peace could be achieved even in the most difficult circumstances. 
His courage, vision, eloquence, and political skills provide a model and inspiration for the US and other countries today. 
Then, as now, the path to peace must always be preferred to the dead end of war. 

The Mosquito Menace 
STANFORD – Mosquito-borne diseases kill millions of people annually, and cause suffering for many more. 
In 2012, there were an estimated 207 million cases of malaria, leading to some 627,000 deaths. 
Dengue fever is a leading cause of illness and death in the tropics and subtropics, with as many as 100 million people infected each year. 
And there are an estimated 200,000 cases of yellow fever annually, leading to 30,000 deaths worldwide. 
It takes only one bite from a disease-carrying mosquito to transmit a debilitating or deadly infection – and mosquitoes breed and multiply with astonishing speed. 
Given that there are no vaccines or drug treatments for illnesses like dengue fever and West Nile virus, and that treatments for diseases like malaria are difficult to access in many at-risk areas, more effective mechanisms for controlling mosquito populations are desperately needed. 
The good news is that a promising new technology is ready for field-testing. 
It is now up to government agencies to facilitate its development. 
Today, the dominant method for reducing insect populations – the so-called “sterile insect technique” (SIT) – relies on radiation to sterilize males, which are then released into infested areas to mate. 
But this approach, which has been used since the middle of the last century, has not been effective with mosquitoes, owing to their fragility. 
Advances in molecular biology offer analogous – but far more sophisticated – solutions. 
Using molecular genetic-engineering techniques, the British company Oxitec has created a new way to control the mosquito species that transmits dengue fever. 
Male mosquitoes are bred in the laboratory with a specific genetic mutation. 
As a result, their offspring produce high levels of a protein that prevents their cells from functioning normally, causing them to die before reaching maturity. 
Male mosquitoes do not bite, so their release presents no health risk, and, because their progeny die, no genetically engineered mosquitoes persist in the environment. 
If the males are released over a period of several months, this would, in theory, result in a marked reduction in the mosquito population. 
All that is needed now is to determine whether it works in practice. 
Scientific research to develop products like irradiated sterile insects or the Oxitec mosquitoes proceeds progressively from more to less contained conditions – from the laboratory to confined trials to limited field trials. 
Now that Oxitec has conducted promising field trials in the Cayman Islands, Malaysia, and Brazil, it is preparing to conduct trials in other countries, including the United States. 
Such trials are always appropriately controlled and monitored to ensure that they are safe and effective, with government regulation providing an extra safeguard. 
In order to determine the appropriate level of oversight, government bodies would presumably conduct a science-based risk analysis. 
When it comes to genetic engineering, however, science seems to matter less than politics. 
The fact is that molecular genetic engineering is more precise and predictable than older, cruder techniques like irradiation. 
But, while SIT remains unregulated in most places, the regulatory reviews of genetically engineered living organisms have tended to be drawn out and excessive worldwide, with politics delaying – and sometimes even preventing – approvals. 
As a result, research and development in genetic engineering is more expensive, discouraging investment and hampering innovation. 
This is all the more problematic in the case of mosquito control, given the urgency of the problem. 
The World Health Organization’s Special Program for Research and Training in Tropical Diseases has called upon regulatory agencies to emphasize “science-based, case-by-case targeted requirements with a degree of practical parsimony,” instead of relying on “a precautionary approach that can require data to address all theoretical risks.” 
In other words, regulators should consider these innovations’ public-health costs and benefits, and expedite their review. 
Given the degree of suffering caused by mosquito-borne diseases, government leaders must not subject genetic-engineering solutions for controlling them to the same kinds of political and populist headwinds that have impeded the approval of genetically engineered agricultural products. 
Only with pragmatic, fact-based regulation can the world realize genetic engineering’s full disease-fighting potential. 

Israel’s Neglected Peace Dividend 
TEL AVIV – Twenty years after the Oslo Accords, the prospects for a comprehensive Israeli-Palestinian peace deal are dimmer than ever. 
Indeed, roughly a half-million Israeli settlers in the occupied territories (including East Jerusalem) make the creation of a contiguous Palestinian state an almost impossible mission. 
So, is the renewed vigor of US President Barack Obama’s administration in the quest for peace too little, too late? 
Israeli Prime Minister Binyamin Netanyahu claims that his government has no preconditions for resuming negotiations with the Palestinians. 
Meanwhile, his housing minister, Uri Ariel (himself a settler and a member of the annexationist Jewish Home party), unleashes a new wave of settlement expansion that threatens to link the 1967 border with the Jordan Valley, thus bisecting Palestinian territory. 
Netanyahu’s own insistence on “ironclad” security arrangements is a euphemism for an Israeli presence in the Jordan Valley – and no return to the “Auschwitz borders” of 1967. 
Palestinian President Mahmoud Abbas is too weak and too burdened by his rivalry with the hard-line Islamist Hamas – which rules in Gaza – to allow himself the political luxury of departing from the core demands of Palestinian nationalism. 
Nor does Netanyahu, an ideologue who is visibly uncomfortable with his forced support of the two-state idea, truly have a governing coalition for peace. 
Thus, US Secretary of State John Kerry will require great deal of creativity to reconcile Netanyahu’s position and the Palestinian precondition, recently reiterated by Abbas’s close associate Nabil Shaath, that Israel must agree to negotiate on the basis of the 1967 borders. 
Mahmoud Al-Habbash, the Palestinian minister of religious affairs, even went so far as to demand “assurances that the talks won’t fail,” because if they do, a new intifada would surely erupt. 
Moreover, Kerry’s peace drive is taking place in a regional environment that is not amenable to a negotiated resolution of the Israeli-Palestinian conflict. 
The Arab Spring has turned bloody and unpredictably turbulent, further diminishing the odds for peace in Palestine. 
Nor does the election of Hassan Rowhani, a relative moderate, to Iran’s presidency improve Kerry’s chances. 
Rowhani’s victory is certainly good news for Iranians, and it may lead to a more civilized dialogue between the Islamic Republic and the international community. 
But Rowhani’s presidency can hardly be expected to change Iran’s strategic objectives. 
Iran will continue its nuclear program, fight for the survival of Bashar al-Assad’s regime in Syria, seek to maintain its vital alliance with key regional proxies such as Hezbollah, and defend Palestine and al-Quds (Jerusalem). 
If Assad defeats his opponents with the help of Hezbollah and Iran, his survival is bound to be perceived as a victory for the regional “axis of resistance” to Israel. 
And a permanent Iranian presence in Syria would make a war between Israel and Iran practically unavoidable. 
Palestine would then be relegated to an obscure corner of the international agenda. 
Complicating matters further, America’s wars in Iraq and Afghanistan have limited its regional clout. 
The US now faces an unpredictable Middle East that is writing its own history as well – or as badly – as it can. 
Syria’s internal conflict has now become a Sunni-Shia sectarian war that is spreading across the region. 
The Sunni clerics who have just declared a jihad against “the Iranian regime, Hezbollah, and its sectarian allies” are the voice of millions across the Muslim world. 
Furthermore, waves of Syrian refugees are threatening the sustainability of the Jordanian monarchy, already roiled by profound internal cleavages. 
Hezbollah has drawn Lebanon into the Syrian conflict, setting up a showdown between Shia and Sunni at home. 
A similar scenario is already unfolding in Iraq. 
Turkey, a responsible regional power, has so far resisted being drawn into the Syrian quagmire, but its effects can be seen in the rising tensions between the country’s Sunni majority and the Shia Alevi sect. 
Inertia is not an adequate response in an era of revolutionary change. 
Unfortunately, Israel is missing a coherent regional strategy. 
Netanyahu, always on the defensive, does not view Middle East turmoil as a trigger for a proactive strategy that would use a solution to the Palestinian problem as leverage for broader positive change in the region. 
America, burdened by the cost of its Middle East troubles, eager to refocus on Asia, and no longer in need of Arab oil, can allow itself to leave the region to its destiny. 
Israel is part of the region and has a strong interest in helping to shape its future. 
Israel has traditionally strived to forge alliances with the region’s minorities – Kurds, Persians, Maronites, and others. 
Now is the time for a major shift to an alliance with the region’s overwhelming Sunni majority. 
Israel should follow Obama, whose recent decision to arm the Syrian rebels, though belated and still ill-defined, is a choice for the Sunni alliance. 
Israel should play an active role in the fall of Assad as a way to undermine the region’s “Shia crescent” and isolate its leader, Iran. 
Assad’s defeat would break the “axis of resistance,” choke off Hezbollah’s arms supplies, and drive a permanent wedge between Turkey and Iran. 
A solution to the Palestinian problem would serve such a strategy. 
It would strengthen Israel’s relations with Egypt, help to stabilize Jordan (a vital and friendly buffer state), and remove a major source of tension with Turkish Prime Minister Recep Tayyip Erdoğan’s Islamist government. 
Most important, it would undermine Iran’s efforts to make inroads into the Arab world under the pretext of defending Palestine and Holy Jerusalem. 


John McCain and the Decline of America 
BERKELEY – Back in 1981, America’s Republican Party gave up all belief that the government’s budget ought to be balanced. 
The idea took hold that tax cuts should be undertaken all the time, at every opportunity, because reducing taxes supposedly raised revenue. 
Irving Kristol, sometime editor of the magazine The Public Interest and one of the intellectual midwives of this idea, later wrote that he was interested not in whether it was true, but in whether it was useful. 
Years later, he spoke of his “own rather cavalier attitude toward the budget deficit and other monetary or fiscal problems. 
The task...was to create a new...conservative... Republican majority – so political effectiveness was the priority, not the accounting deficiencies of government...” 
Now it has become clear that John McCain – who once criticized George W. Bush’s tax cuts as imprudent and refused to vote for them – has succumbed to this potion. 
He appears to be proposing further tax cuts that promise to cost the United States Treasury some $300 billion a year, to “offset” them with cuts in earmarked spending accounted for at $3 billion a year, and somehow to balance the budget. 
We know the consequences: McCain’s fiscal policy is likely to be standard Republican fiscal policy – and since 1981, standard Republican fiscal policy has increased the ratio of gross federal debt to GDP by nearly 2% per year. 
By contrast, a typical post-WWII Democratic administration has reduced the debt-to-GDP ratio by more than 1% per year. 
This is one of the issues at stake in this year’s presidential election. 
Policies that ignore the level of government debt lead to the currency’s collapse, depression (due to the resulting disruption of the sectoral division of labor), and high inflation – perhaps hyperinflation. 
Often, the guilty blame the economic catastrophe on the sinister manipulations of foreigners like the “gnomes of Zurich” or the IMF. 
The US is far from that point. 
But even in the shorter run – over the next two presidential terms, say – the costs of a high deficit and rapid debt growth would be substantial. 
A growing debt-to-GDP ratio would, in the first instance, crowd out investment, as resources that would otherwise go to fund productive investment instead support private or public consumption. 
Since 1981, the US has been lucky in that inflows of capital from abroad financed the growth of government debt. 
At some point, this will stop, and increases in deficits will trigger capital flight from the US. 
Suppose that over the next eight years larger deficits trigger neither extra capital inflows nor capital outflows, and suppose that a lower-investment America is a poorer America, with a gross social return on investment of 15% per year. 
By 2016, America’s productive potential would be smaller by an amount that would reduce real GDP by 3.6% – $500 billion real dollars, or roughly $3,000 per worker. 
In a poorer America, fewer businesses would find it worthwhile to entice secondary workers from families into the labor force, and perhaps 500,000 net jobs would disappear. 
In getting from here to there over the next eight years, a higher-debt America would see productivity growth slow by perhaps a third of a percentage point per year. 
Average unemployment would then have to rise in order to keep workers’ demands for real wage increases at a level warranted by productivity growth. 
The gross correlations between productivity growth and average unemployment found in the 1970’s, 1980’s, 1990’s, and 2000’s would increase the economy’s natural rate of unemployment by about one-fifth of a percentage point, costing an additional 500,000 jobs. 
And a higher-debt America is one in which savers and lenders would have a justified greater fear that the government would resort to inflation in order to repudiate part of its outstanding debt. 
The Federal Reserve would then have to fight inflation – putting upward pressure on unemployment – in order to reassure savers and lenders of its willingness to guard price stability. 
There are not even crude gross correlation-based estimates of the size of this effect, but economists believe that it is very real. 
Would it cost a negligible number of jobs? 
A quarter-million? 
A million? 
Add it all up, and you can reckon on an America that in 2016 that will be much poorer if McCain rather than Barack Obama or Hillary Rodham Clinton is elected president. 
Other countries that are counting on exporting to America would be affected by slower growth and lower employment in the US. 
However, under McCain, the wedge between public spending and taxes would be larger, Americans would feel richer, and they would spend more at the expense of “posterity” eight years down the road. 
Ronald Reagan might have approved. After all, as he put it: “Why should I do anything for posterity? 
What has posterity ever done for me?” 
Or was that Groucho Marx? 

John Paul the Modernizer 
The death of Pope John Paul II was not unexpected, and his immense influence on the modern world will be judged and commented on by everybody who thinks that he has something to say. 
Before explaining one of the less known aspects of his teaching, it should be emphasized that one of the comments that is now being heard repeatedly is based either on stupidity or on a lack of understanding of what the Catholic Church is about: the charge that the Pope was and is “conservative” is nonsense. 
John Paul II was undoubtedly conservative when he commented on Catholic dogma, but the institution of the Catholic Church is based on the Ten Commandments and dogmas which cannot be changed. 
Being truthful and faithful to what is the bedrock of Church teaching cannot be deemed conservative. 
In reality, John Paul II was called “conservative” because he was against abortion and some other progressive ideas. 
But if you want a Pope who is for abortion, then you want a different Church. 
Some things, some values that constitute both the faith and membership in the Catholic Church, are neither conservative nor liberal or progressive; they are fundamental, inevitable and immutable. 
John Paul II had a specific task that he implemented during his nearly 27-year papacy: following through on the changes in the teaching and behavior of the Catholic Church that were started by the Second Vatican Council over forty years ago. 
Before then, the Catholic Church had lost almost two centuries (XVIII and XIX) because it refused to accept that the world had changed, that social and economic issues are among the most important, that modernity happened. 
Only with the Second Vatican Council did things begin to change in the Church, and the impact of John Paul II was immense. 
One of the questions that the Church could not answer in a satisfactory way for nearly three centuries concerned its attitude towards the economy and society. 
The Church tried everything possible to avoid an unequivocal approval of capitalism. 
After Leo XIII stated for the first time – in the famous encyclical Rerum Novarum in 1891 – that there are such people as workers and that there are serious social problems, Pius XI, in another encyclical in 1931, Quadrogesimo Anno, tried to show which economic approach is in keeping with the faith. 
He proposed a corporatist system, and some of his followers spoke about a “third way” between capitalism and socialism. 
The only country that with some, albeit very doubtful, success, introduced such economic devices was Salazar’s Portugal. 
So when, a hundred years after Leo XIII, John Paul II issued his encyclical Centesimus Annus, no one expected that for the first time in history the Church would approve of the free market economy and capitalism. 
But the words of the Pope are clear and leave no doubt. 
“It would appear that, on the level of individual nations and of international relations, the free market is the most efficient instrument for utilizing resources and effectively responding to needs. 
But this is true only for those needs which are ‘solvent,’ insofar as they are endowed with purchasing power, and for those resources which are ‘marketable,’ insofar as they are capable of obtaining a satisfactory price.” 
But the Pope added: “[T]here are many human needs which find no place on the market.” 
That encyclical also contained a second fundamental statement concerning the idea of profit. 
“The Church acknowledges the legitimate role of profit as an indication that a business is functioning well. 
When a firm makes a profit, this means that productive factors have been properly employed and corresponding human needs have been duly satisfied.” 
Once again, the Pope added a caveat: “But profitability is not the only indicator of a firm's condition. 
It is possible for the financial accounts to be in order, and yet for the people — who make up the firm’s most valuable asset – to be humiliated and their dignity offended. 
Besides being morally inadmissible, this will eventually have negative repercussions on the firm's economic efficiency.” 
John Paul II was no follower of neo-liberalism. 
For him, markets and profits were not a solution to human problems, but a mechanism to be used for moral purposes. 
Indeed, we often forget that both Adam Smith and Herbert Spencer’s reasoning are very similar. 
Both of them – the two greatest thinkers that promoted the idea of the free market – were also moral philosophers. 
For them, as for John Paul II, the free market and profits were ways to improve humanity. 
They were sometimes naive, as when Spencer hoped that rich citizens would nearly automatically be good citizens and thus find it natural to help those who were not so successful. 
John Paul II might have been naive, too, but only up to a point. 
Everything depends on our idea of human nature. 
If we believe, as the Catholic Church believes, that human beings bear the burden of original sin, but are perfectible; that human beings can understand what is good and bad and can choose between them because we have free will, then approval of the free market is understandable and not naive. 
By this one encyclical, John Paul II moved Church teaching from the Middle Ages to modernity. 
The debate the Pope began on the relationship between the free market and moral problems remains unfinished. 
Eliminating the abuses that accompany capitalism and harnessing it for the benefit of society and human morals still needs to be tackled. 
John Paul II had the courage to raise the fundamental questions that needed asking. 
We will continue to ask them without his leadership and prompting? 

Goodbye, Johnny 
PARIS – What better send-off for a rocker than Saturday’s vast, silent concert on the steps of a church? 
And what better farewell to a great performer than the one delivered by the immense crowd chanting around a body that seemed to have arranged, from the great beyond, this last demonstration of enthusiasm and love? 
Herein lies the beguiling feature of the funeral of Johnny Hallyday, France’s national singer: his ability to stage-manage his destiny, right up the final hour, and the star power that his being retained even in death. 
The costume he chose for his last performance was oblong and white. 
Nothing remained of his swaying hips and his howls, or of the pale eyes perpetually on the verge of laughing or crying (you never knew which). 
And yet there he was, charisma and presence, the spell of a shaman inviting you one last time to dance the eternal chorus in the aura of his mystery and his smile. 
And there was the spirit of France: young and old, the French president and two of his predecessors, the novelists Philippe Labro and Daniel Rondeau, celebrities, artists, fans from 50 years ago wearing Apache fringe, a remembrance of the striking miners of Lorraine, the words of Jacques Prévert, tears shed by ordinary people. 
And all of them seemed to be under Hallyday’s influence still: The great actor who was suddenly starkly human and at a loss. 
The old, unsentimental crooner with a tear on his cheek. 
The column of bikers that descended the Champs-Elysées, which never wore its funereal name so well. 
There was the Place de la Madeleine, too. 
Usually so staid and cold, it echoed to the rhythm of strings with the swing of the Louisiana bayous at one moment, and at the next with the memory of the concert at the Olympia, so close but a half-century away, where the saturnine firebrand upended ten thousand hearts. 
Here was an upwelling of emotion the likes of which France had not seen since the funerals of Victor Hugo and Edith Piaf, since the catafalque of Jean Jaurès went up the Rue Soufflot. 
A million mourners were left not knowing whether to cry, sing, throw chairs around, request an encore, or light candles. 
Disappearing in a final parade of passion and energy, of restlessness and quiet rebellion, of inner fissures and desire for harmony, was someone who had spent his life trying not to survive. 
And on that day, he was so well mourned that his absence seemed like part of a show, somehow making us forget that he was no longer with us. 
Abiding in each of us was the Johnny that moved us all: the youth spent with a traveling act, like Gautier’s Captain Fracasse; the father, a character out of Modiano, who, between bouts of drinking, pawned the gifts given to him by his abandoned son. 
And then there was the ’60s rocker with the eyes of a sad wolf and cheekbones hewn by Giacometti, the Catcher in the Rye mood, and a melancholy so intensely hopeless that it seemed to condemn him to live on the edge of every form of excess. 
He was the consummate artist of the French scene, a chameleon beamed out on satellite TV, dripping with fake sweat and real glitz, an artist who, like a novelist, confessed as a way of lying. 
Hallyday was the child of a generation that watched American GIs enter Paris and that invented for itself an American ascendance. 
America was cigarettes, Levi’s, and Coca-Cola. 
But it was also the languor of the blues, Nashville, and the green light that he saw gleaming at dawn after nights soaked in alcohol and amphetamines. 
When this distraught colossus of sorrow, the unsleeping and suicidal cowboy, offered his body in sacrifice to the camera and to the mob of entranced fans, he struck François Mauriac as a Mephistophelean figure. 
Here was the hero, motley and scarred, whose glory seemed like a wound, whose victories were stigmata, and who, from metamorphosis to metamorphosis, embodied what is wrongly called pop or variety but that was, in him, more like fallen greatness or the lament of a cleverly disguised poet. 
And, at the end, there was King Lear triumphant, the wax face with the periwinkle gaze, survivor of an era whose heroes perished before the age of 30, one who knew that his survival was a miracle. 
And then, finally, there were those near-deaths in the manner of Bossuet (“Johnny is dying! 
Johnny is dead!”): he would always revive, right up to the very last time, when he lived again in Paris for a few hours under a cold December sun. 
The Vatican of literature that is the Swedish Academy has, with the Nobel coronation of Bob Dylan, rescued song from its canonical hell. 
In the case of Johnny Hallyday, it is perhaps not too farfetched to believe that this man of sphinx-like mystery is now, like Baudelaire, “a block of granite surrounded by vague fear” whose “fierce nature sings only to the rays of the setting sun.” 

The Immorality of Boris Johnson and Donald Trump 
LONDON – In a 2013 press conference, then-recently inaugurated Pope Francis famously said that, when it comes to sexual orientation, including past homosexual acts, “who am I to judge?” 
Should we take a similarly non-judgmental approach to the past personal behavior of our political leaders? 
The question is acutely relevant today in both the United States and the United Kingdom. 
US President Donald Trump, who has already reached the height of political power in his country, and former UK Foreign Secretary Boris Johnson, who aspires to keep rising in the ranks, have in common not just their crude nationalism, but also their apparent inability to control their sexual appetites. 
Trump’s extramarital affairs are common knowledge, despite hefty pay-offs intended to silence his sexual partners, such as the adult film performer and stripper known as Stormy Daniels. 
Though Trump is far from the first US president with a long record of adultery, he stands out for the crudeness of his remarks about women, including the infamous “grab ’em by the pussy” comment, exposed during the campaign. 
As for Johnson, reports are circulating that his wife has kicked him out over an affair. 
While this is hardly his first – nor even the first time he has been given the boot – there are questions now about whether this will hurt his political ambitions, which many believe were the main motivation behind his decision to act as a leader of the campaign to withdraw the UK from the European Union. 
But is it appropriate to judge political leaders based on their sex lives, as many have been wont to do? 
The answer, in my opinion, is no. 
Of course, actions like sexual harassment or assault should inform our assessment of a leader. 
But while Trump has faced such accusations, Johnson has not. 
And, ultimately, we do not elect people to political office because we want them to act as standard bearers for our subjective, varied, and evolving definitions of morality. 
Someone who has been unfaithful to his or her spouse can be a skilled leader, just as a faithful wife or husband can be a poor one. 
Nonetheless, there are plenty of other problems with the leadership of both Trump and Johnson, who resigned from his post as foreign secretary in July over his opposition to the compromises that Prime Minister Theresa May’s government decided it would be willing to make in the Brexit negotiations with the EU. 
While Johnson has some rhetorical skill – which he has been using with increasing vigor to whip up support for a “hard Brexit” – the general view is that he was a hopeless diplomat, always preferring a cheap joke to a serious brief. 
During his stint as foreign secretary, Johnson was a near-constant cause of embarrassment for the UK, with gaffe after gaffe leaving Britain’s friends abroad with their heads in their hands. 
Since leaving that position, Johnson has not cleaned up his act. 
Just last month, he made the Islamophobic declaration that Muslim women wearing niqabs resemble “bank robbers” and “letter boxes.” 
Soon after, Johnson described May’s EU negotiating position as being tantamount to wrapping “a suicide vest around the British constitution” and handing the detonator to the EU. 
The comment was tasteless, to put it mildly, not least because 22 people (including children) were killed by a suicide bomber at a concert in Manchester last year. 
Such statements are clearly not befitting of a British political leader, much like many of the racially charged and otherwise incendiary comments (not to mention actions) that Trump has made. 
But these leaders’ failures run even deeper. 
To understand them, it is worth looking at three reputable leaders who died this summer: former United Nations Secretary-General Kofi Annan, former British Foreign Secretary and NATO Secretary-General Peter Carrington, and US Senator John McCain. 
Having worked with Annan and for Carrington, I can vouch for their grace, honor, and commitment to truth. 
McCain plainly had the same qualities, not to mention a level of personal bravery far beyond what is expected of most of us (though it should be noted that Carrington was also a war hero). 
These leaders’ combination of honor and commitment to truth – two attributes that are intrinsically connected – is nowhere to be seen in Trump or Johnson. 
No one would suggest that political leaders must respond to every question they are asked with entirely frank answers. 
That would be to expect behavior far above and beyond what is normal. 
Dealing with life’s predicaments sometimes demands, to borrow the language of former UK Cabinet Secretary Robert Armstrong, that we are somewhat economical with the truth. 
But there is a big difference between some economizing, as even honorable leaders like McCain and Carrington have surely done, and being a serial liar, as is the case with Trump and Johnson. 
Trump typically says whatever is in his short-term interest, though sometimes it seems that he does not even know what the truth is. 
Even his own lawyer is reputed to have described him as a liar. 
Yet Trump’s dishonesty runs even deeper: his entire nationalist political platform is based on the mendacious notion that America needs to be made great again. 
Yet America was great before Trump, and his behavior – riding roughshod over international agreements, trashing allies, and pursuing protectionist trade measures – will only undermine that greatness by, among other things, depleting the country’s formidable stock of soft power. 
Similarly, Johnson’s Brexit campaign was based entirely on deception, crackpot economics, and vainglorious wishful thinking. 
A healthy democracy depends on an honest exchange of ideas and opinions, against a background of shared respect for facts and truth. 
The moral case against Trump and Johnson is not that they have been unfaithful to their wives, but rather that they subvert these conditions by lying relentlessly to the people they are supposed to represent. 

Joking about Science 
ITHACA, NEW YORK – An apocryphal story sometimes heard among physicists concerns a toast, proposed by his Cambridge University colleagues, to J. J. Thomson’s discovery of the electron in 1897: “To the electron: may it never be of use to anyone!” 
Pure mathematicians supposedly tell a similar joke about their profession. 
Why should it be considered witty to celebrate the uselessness of knowledge? 
I witnessed a similar attitude from a cosmologist when I participated in a radio show a few years ago: the host remarked to him that his research “has virtually no practical applicability,” to which he quickly replied, “I’m proud of that, yes.” 
These jokes all seem to rely on the same assumption: everyone thinks that knowledge, especially scientific knowledge, should be useful. 
So it’s funny to boast that one’s own brand of knowledge, whether experimental physics, mathematics, or cosmology, is useless. 
But the joke wouldn’t work if there were not at the same time another widely shared assumption that scientific knowledge has a value independent of any practical use. 
After all, it would not be funny if a charity dedicated to famine relief celebrated its own ineffectiveness; practical value in that case would be paramount, because it would be the only real reason for the charity to exist. 
So, even though potential usefulness is the reason why governments devote so much money to scientific research, people really expect more from science than that. 
On this view, science also has a quite different, higher aim: understanding the natural world. 
Einstein may have drawn US President Franklin Roosevelt’s attention to the possibility of making nuclear weapons, but he is chiefly remembered for his profound ideas about the nature of the universe. 
More recent scientific gurus, such as Carl Sagan and Stephen Hawking, have presented a similar image to the public. 
Science from this perspective is about natural philosophy, an enterprise that seeks to acquire deep understanding of the world regardless of whether that knowledge can be put to use. 
Jokes also betray a certain uneasiness about the apparent contradictions that they reveal. 
In this case, the uneasiness derives from a fundamental uncertainty about which of the two faces of science, natural philosophy or instrumentality, represents its true character. 
Is science really about understanding the world, with instrumentality being a matter of fortuitous spin-offs? 
Or is it really about putting the natural world to human uses, with natural philosophy being little more than a language to account for why certain techniques work? 
The nineteenth century invented the familiar terms “pure” and “applied” science as a way of reconciling these alternative understandings. 
Pure science, as the name suggests, is presented as the “real thing,” untainted by practical considerations and rooted in properly conducted empirical and theoretical investigation of nature. 
Applied science takes the knowledge provided by pure science and puts it to work. 
But that straightforward picture bears little resemblance to the complexities of real scientific activity: if applied science involved nothing more than the application of the results of pure science, there would be no need for “research and development” departments in manufacturing corporations, or research laboratories at chemical or electronics companies. 
The instrumental achievements of science would depend solely on the scraps falling from the pure scientist’s table. 
In fact, the two faces of science are much more intimately interwoven – less like faces than like two ingredients of a thoroughly stirred mixture. 
“Truth and utility,” wrote Francis Bacon, the early seventeenth-century English philosopher and statesman, “are the very same things.” 
In other words, the truth of beliefs about the world is guaranteed only by the capacity of those beliefs to be turned into actions that produce the practical outcomes that human beings desire. 
What we understand as the instrumentality of science was, for Bacon, nothing but the other side of the scientific coin. 
Where the poet John Keats wrote “Beauty is truth, truth beauty,” Bacon might have said, “Utility is truth, truth utility”—as long as we take “utility” in a very broad sense. 
But we don’t believe Bacon, either. 
Like Bacon, we value utility because it seems to lend credibility to the claims that science makes about the nature of the world – science is true because it works. 
But, at the same time, we won’t allow science to be reduced to practical utility, because that would destroy its intellectual status, as well as the intellectual status of scientists themselves, and would prevent science from giving explanations. 
So science must retain its claim to being natural philosophy, too. 
Sometimes we believe that science is natural philosophy, and sometimes we believe that science is instrumentality. 

Finishing Off Hunger 
ROME – At least 842 million people worldwide suffer from chronic hunger – a nearly 1.5% decrease from the 854 million estimated for 2010-2012. 
Clearly, while some progress has been made, the world still has a long way to go to eradicate under-nutrition. 
As world leaders attempt to determine the best way forward, a report published jointly this year by the Food and Agriculture Organization, the International Fund for Agricultural Development, and the World Food Program, can serve as an important resource. 
“The State of Food Insecurity in the World" (SOFI 2013) provides updated estimates of under-nutrition and progress toward achieving the hunger targets set by the Millennium Development Goals (MDGs) and the World Food Summit (WFS). 
Progress on the MDGs has been uneven. 
While many countries in the developing world – home to 827 million of the world's undernourished (compared to 838 million in 2010-2012) – have moved toward halving, by 2015, the share of hungry people relative to 1990, the average rate of decline is inadequate to meet the target in the next two years. 
The more ambitious WFS target of halving the total number of hungry people worldwide is even more distant, with the number of undernourished people having fallen by only 17% since 1990-1992. 
As SOFI 2013 points out, progress toward eradicating hunger and undernourishment has slowed since 2000, when food prices began to rise, following almost a half-century of decline. 
Although rapid economic growth has boosted per capita incomes in much of the developed world, income gains are not spread evenly, leaving hundreds of millions of people to face higher food prices without sufficient increases in income. 
The World Bank originally defined its “dollar a day" extreme-poverty threshold principally in terms of the amount of food one needed to purchase to avoid hunger. 
But subsequent adjustments – such as to $1.25 per day for 2005 – appear to have lost this link. 
Today's extreme-poverty line is inadequate to avoid being undernourished – in Nicaragua, for example. 
Although the share of people living in extreme poverty in 1990 was halved by 2010, progress will have to accelerate considerably to halve the prevalence of under-nutrition by 2015. 
Meanwhile, despite declining expatriate employment and incomes in the last half-decade, remittances have helped to fight poverty, reduce hunger, improve diets, and increase agricultural investment. 
Globally, remittances amount to nearly three times the size of official development assistance, which has been an easy target for budget cuts by rich countries in recent years. 
The SOFI 2013 report also describes the persistent and marked disparities among regions. 
East and Southeast Asia and Latin America – which have experienced particularly rapid economic growth in recent decades – have fared the best in terms of reducing hunger. 
Sub-Saharan Africa has, after a quarter-century of economic stagnation, made some progress over the last decade, but it maintains the highest rate of under-nutrition worldwide. 
Gains in South Asia and North Africa have been modest, while conditions in West Asia have actually worsened. 
Hunger and undernourishment (which reflects only dietary energy supply) often coexist. 
But, in most places, under-nutrition rates – as indicated by, say, the proportion of stunted children – are much higher than estimates for the prevalence of undernourishment. 
That is why nutrition-enhancing interventions in agriculture, schools, health care, water supplies, and elsewhere – especially targeting women and young children – are needed. 
Efforts to ensure sustainable and inclusive economic growth are also vital. 
With the protracted economic slowdown of the last half-decade spreading to even the most resilient areas of the developing world, achieving full employment is unlikely in most countries, at least in the foreseeable future. 
But much can still be done to improve workers' employment prospects, and thus their ability to acquire the nourishment that they and their families need. 
In many cases, comprehensive reforms aimed at inducing sufficient agricultural investment and providing adequate social protection could facilitate major reductions in poverty and hunger. 
This includes ensuring that people have reliable access to potable water and adequate sanitation. 
With the right design, the contribution of social-protection measures to reducing malnutrition would increase substantially. 
For example, certain benefits could be conditional on prenatal and postnatal nutrition measures targeting mothers and pre-school children. 
Well-designed school meal programs have enabled children to overcome hunger – including the “hidden hunger" caused by micronutrient deficiencies. 
Related food-procurement policies have spurred the emergence of cooperatives of small family farmers practicing sustainable agriculture. 
Such measures – together with initiatives to enhance poor people's incomes – also help to spur rural development, stimulate markets, and promote job creation. 
A long-term political commitment to eradicating hunger and undernourishment – backed by decisive action – holds the key to improving health outcomes and supporting sustainable, inclusive economic growth worldwide. 

Jordan: The Fire Next Door 
Jordanians are facing sleepless nights as the siege of Baghdad proceeds. 
The images coming to us from next door are horrifying, and Jordanians have taken to the street in protest. 
Yet while contemplating the collapse of Saddam's regime, Jordanians are also now recognizing how closely our own society is tied to Iraq's, and how difficult it will be for Jordan to set out on a new course if the Americans end the rule of Saddam Hussein. 
At the economic level, Jordan's ties with Iraq are very close. 
Nearly all of our oil comes from Iraq at highly subsidized rates. 
Replacing this oil at market prices could cost more than $600 million a year. 
Former Minister of Trade and Industry Mohammad al-Samadi estimates that Iraqis buy more than $500 million of Jordanian goods annually. 
Our trucking industry - 5000 mostly family-owned trucks - is largely dependent on this trade. 
How much of it will be lost, particularly if a new regime in Baghdad punishes Jordan for its close ties with the Iraqi government, is a worrying question. 
Fahed al-Fanek, a leading Jordanian economist, estimates that the war could cost Jordan as much as 25% of its GDP, about $2 billion. 
Such losses could be devastating. 
Increased debt and budget deficits are one likely result, putting at risk the accomplishments of more than a decade of effort to reform the economy. 
Already, we are expecting the tough conditions of the IMF's reform program to be extended from five years to six. 
But economic closeness is merely the tip of the Iraqi-Jordanian relationship. 
Through business dealings, the Iraqi regime insinuated itself into the Jordanian elite, coloring our own political culture. 
Many prominent Jordanians believe that our reliance on Iraqi markets and oil ought to be the basis of a priority alliance. 
Indeed, the complicated networks of commercial relationships help shape the views of political groups, the media, bankers and contractors. 
Not only are Jordanians largely silent about the practices of the Iraqi regime, but also they are sceptical about efforts to bring reform or greater openness to Jordan. 
Maintaining the status quo is their priority, despite the international cost to Jordan's reputation or the consequences for the Iraqi people. 
They cast any criticism of Saddam as a willingness to accept American aggression. 
For example, a recent Jordanian decision to freeze all Iraqi government funds held in Jordanian banks produced accusations by the Jordanian opposition that Jordan had stabbed Iraq in the back. 
Likewise, there was criticism of the government's recent decision to expel three Iraqi diplomats for activities threatening Jordan's security. 
Within Jordan, however, there is another perspective on the future, one that welcomes reduced dependence on Iraq. 
Former Foreign Minister Abdullah al-Khatib argues that Jordan should have begun distancing itself from Iraq years ago. 
Rejecting the idea of a holy alliance between the two countries, al-Khatib said, ``This relationship was not a strategic alliance between the two countries, but a relationship of mutual interests and benefits.'' 
While Jordan's access to discounted Iraqi oil was clear for all to see, the benefits to Iraq have not been as visible. 
Observers interpret al-Khatib's comments as a reference to the passage of vast amounts of luxury goods through Jordan into Iraq, one of the means by which Saddam has been able to reward his followers. 
Others note the presence of numerous Iraqi businesses in Jordan, conducting activities whose purposes have not always been clear. 
Although Jordan is at a turning point in its relations with Iraq, there remains little public support for American policy. 
More than 80% of Jordanians oppose the war. 
Speculation about America's motives, with press commentators highlighting the role of the Christian right-wing in formulating American policy, is increasing. 
Links between US Christians and American support for the expansionist Sharon government in Israel are heard frequently. 
Within the Arab world, moderate and liberal groups are losing ground to radical Islamic movements. 
Confronting the West, particularly the US, has become the common theme of opposition to the war. 
Advocates of more democracy in the Arab world now risk being accused of cooperation with the American design for re-making the Middle East. 
The only way to begin to turn this tide is for the US to reverse its primarily unilateral approach to the region's problems. 
To many Arabs across the region, American reliance on overwhelming military force to achieve its stated goal of spreading democracy is an inherent contradiction. 
A critical test awaits in how the US handles post-war Iraq. 
If it chooses to take the predominant role in transforming the Iraqi government, instead of relying on the UN, Arab doubts will grow. 
A second test lies in American handling of the Israeli-Palestinian conflict. 
The US now has an opportunity to address the Palestinians' need to be free from military occupation. 
If America misses these opportunities and continues on its current course, it risks exacerbating the issues and conflicts in the region and destabilizing friends like Jordan. 

Latin America’s Ukraine 
MEXICO CITY – By all indications, the international community has resigned itself to Russian President Vladimir Putin’s Crimean “land grab,” as US Vice-President Joe Biden has called it. 
Once Putin decided he wanted to assume the consequences of his acts, there was very little the United States, the European Union, or the United Nations could do. 
Latin America, meanwhile, is experiencing the opposite problem. 
Though the region’s countries have the means to stop the growing political, economic, and human-rights catastrophe in Venezuela, they lack the will, while the rest of the world’s attention to Ukraine has removed any pressure on them to act. 
In Ukraine, the US and the EU seem to have decided on a sensible course of action – or, rather, on a realistic two-track response – that is unlikely to produce spectacular results, but is certainly preferable to passivity. 
First, the sanctions imposed so far – visa cancellations, asset seizures or freezes, and the like – will not give Sevastopol back to Ukraine, but they will eventually bite, at least in certain Russian business sectors. 
Whether this unites the oligarchs, or divides them, and whether it forces them to take their money out of Russia, or bring it back home, cannot be predicted. 
But uncertainty is far better than knowing acquiescence. 
There are simply no alternatives right now, and applying the entire gamut of sanctions from the outset would leave the EU and the US without further options. 
Second, and much more important, a tacit anti-appeasement ultimatum has been issued to the Kremlin: additional expansion in Ukraine will lead to much stronger and more painful sanctions. 
This may or may not work, but the decisions and announcements at least have the merit of existing, thereby demonstrating the willingness of the G-7 and others to uphold principles and values to which Russia is, in theory, also committed. 
Clearly, the world’s democracies lack perfect options, given everyone’s eminently reasonable reluctance to resort to force. 
Given Ukraine’s location, history, and the potential for trouble, the international community’s greater attention to the crisis there than to the disaster unfolding in Venezuela is not surprising. 
But it is not appropriate, either. 
Recent events in Venezuela imply as many perils and unforeseen, perverse consequences as in Ukraine, and the international community, as well as most Latin American democracies, should be paying much more attention. 
For starters, there is energy security. 
Venezuela has some of the world’s largest oil and gas reserves, and is a major exporter (though smaller than ten years ago). 
And, for better or for worse, it is a key supplier to certain countries. 
Nearly all of the Caribbean, Central America, and some Gulf ports in the United States depend on Venezuelan low-sulfur crude oil for their power plants, refineries, and balance-of-payments positions. 
Cuba is the most dramatic case of dependence: Without subsidized Venezuelan petroleum and the enormous sums paid for the Castros’ doctors – some excellent, some fraudulent – the island’s economy would sink, causing a wave of Cubans to leave, as has occurred repeatedly over the past half-century. 
This time, though, the consequences for Florida and Mexico could be graver than before. 
But what happens in Venezuela matters for other reasons as well. 
Targeted repression, imprisonment of opposition leaders, press censorship, shortages, inflation, and wanton violence – Caracas is one the world’s most dangerous cities – have created a situation that appears untenable in the medium term. 
The harsh economic and security measures that Venezuela needs to emerge from its current debacle cannot be implemented without some form of consensus, which requires an end to repression and polarization. 
Unfortunately, none of this seems likely if left exclusively in the hands of Venezuelans, who have failed repeatedly over the past 15 years to find solutions to their dilemmas. 
Some have suggested a papal mediation; others have advocated intervention by a group of Latin American former presidents. 
The problem is that no Latin American government, with the exception of Panama, wants to dirty its hands. 
The three that count because of their size – Argentina, Brazil, and Mexico – are all frightened of the consequences: Brazil that its companies will lose contracts, Mexico that the Venezuelans will finance opposition to their energy reforms, and Argentina of losing an ally that knows too much. 
The other two conceivably relevant countries – Colombia and Chile – refuse to get involved for different reasons. 
Colombia needs President Nicolás Maduro’s cooperation to sustain negotiations with the FARC guerrillas; the new Chilean president, Michelle Bachelet, has always had a soft spot for Chavismo and its antics. 
In the case of Crimea, the deaths of hundreds of demonstrators in Kyiv and the possible Russian takeover of eastern Ukraine has called into question principles such as non-intervention. 
Not in Latin America: the number of students in Venezuela that are killed by government-sponsored paramilitary groups is still viewed as nobody’s business but the Venezuelans’, even though the country is a party to every regional instrument of international human-rights law. 
And no outside mediation is feasible without a minimum of censure or criticism of Maduro’s extremism, even if the opposition takes its lumps, too, for some of its factions’ radical, occasionally subversive stances. 
Paradoxically, whereas the Western powers are probably powerless in Ukraine, Latin America’s major players could exert great influence in Venezuela. 
Economic sanctions on Russia may eventually hurt, and the Kremlin may desist from further encroachment; but the Ukrainian crisis is largely impervious, in the short term, to outside involvement. 
In Venezuela, the danger is just as great for everybody, and addressing it is much cheaper and easier. 
But doing so requires what most Latin American governments sorely lack: vision and courage. 

World Cup Blues 
MEXICO CITY – The conventional wisdom in Latin America is that the combination of economic growth, representative democracy, and middle-class expansion has led the region into a trap, with citizens’ expectations rising faster than governments’ ability to fulfill them. 
The frustrated middle classes, together with traditional sectors, stage demonstrations and riots, and vote out unresponsive governments. 
But few expected this tide of frustration to threaten Latin America’s most competent president, Colombia’s Juan Manuel Santos, or one of its most revered traditions, Brazilian soccer. 
Santos has governed Colombia boldly and effectively for four years. 
He not only ratified a free-trade agreement with the United States and addressed previous governments’ human-rights violations; he also stuck to his guns on important reforms, despite large-scale protests by students, teachers, peasants, and business owners last year. 
While the economy has not grown fast enough to meet the country’s needs, it has performed better than many others in the region. 
Most important, Santos staked his political capital on negotiating peace and disarmament with the Revolutionary Armed Forces of Colombia (FARC) – the powerful guerrilla group (often characterized as a “narco-guerrilla”movement) that has been wreaking havoc on the country for four decades. 
While some progress had been made since peace talks began in Cuba three years ago, the negotiations were moving along slowly, giving opponents like Álvaro Uribe, Santos’s predecessor, ample time to mobilize public opinion against the talks. 
Taking advantage of widespread opposition to amnesty for FARC leaders – a concession that would be an essential component of any deal – Santos’s rivals transformed the first round of the election into a referendum on the negotiations. 
Santos lost by nearly five percentage points. 
Colombians were in a funk, and they took it out on Santos. 
He recovered by the second round, but won by a much smaller margin than anyone expected six months ago. 
Brazilians are in a funk, too, and they are directing their ire against the ruling Workers’ Party, with the ongoing World Cup soccer tournament and plans for the 2016 Olympics serving as prominent symbols of its leadership. 
Following the kickoff of the World Cup earlier this month, President Dilma Rousseff, who will run for re-election in October, began to slide in the polls. 
The Workers’ Party presidents – first Luiz Inácio Lula da Silva, then Rousseff – believed that holding the world’s two most important sporting events within a two-year period would mark Brazil’s emergence as a rising world power, serving as a kind of “coming out party.” And their logic was sound, if a little arrogant; only two other countries – Mexico and Germany – can count a back-to-back World Cup and Olympic Games among their achievements. 
But Brazil’s rise was not as secure as its leaders seemed to believe. 
In 2011, the economy stalled, and output has been stagnating ever since. 
The growth of the lower middle class – which had swelled by tens of millions of people in the preceding years – was halted, and consumer debt exploded. 
Even soaring commodity prices, bolstered by strong demand from China, became problematic, with the expectation of a terms-of-trade reversal generating significant uncertainty. 
Indeed, as GDP growth in China and India has slowed, so have these countries’ purchases of Brazilian primary goods. 
Brazilians’ belief that their country was headed toward long-term prosperity has been shattered – and they are taking it out on Rousseff. 
Last June, a small increase in public-transport fares in São Paulo sparked a wave of protests throughout the country, with citizens incensed over the shoddiness of public services provided by a government that records Latin America’s highest tax take. 
Against this backdrop, demonstrators have also decried the government’s decision to spend billions of dollars on World Cup infrastructure, including stadiums, hotels, and airports. 
A few years ago, a substantial majority of Brazilians supported holding the World Cup in their country. 
By last May, the share had declined to half – astoundingly low for some of the world’s most enthusiastic soccer fans – with small but strident protests persisting across the country. 
Rousseff’s opponents want the protests to disrupt the games, damaging Brazil’s international image; some are even hoping for Brazil’s team to lose. 
Such an outcome would not be good for the country. 
Whatever frustration lower-middle-class Brazilians are feeling, a successful World Cup is their best option. 
Likewise, contrary to the perceptions of Uribe’s supporters, Santos’s reelection and continued pursuit of peace is exactly what Colombia needs right now. 
The more citizens understand and support this effort, the better its chances of success. 
All of this uncertainty says much about the state of affairs in Brazil and Colombia – and, indeed, in much of Latin America. 
Slow growth and high expectations have left the region in a deepening funk, and nobody seems quite sure how to escape it, leaving citizens and leaders alike to wait, watch, and hope. 

Brazil’s Cautious Voters 
MEXICO CITY – Brazil has been in the global spotlight this year, and not always for the right reasons. 
Following the 2013 riots over the amount of money being spent on the 2014 soccer World Cup, protests continued up to, and even during, the tournament in June. 
There were dire – though ultimately misplaced – predictions about chaotic conditions for participants, and then, of course, the catastrophic performance of the home team. 
Now, the costs of the soccer jamboree, coming on top of the country’s ongoing economic slowdown, are coming home to roost. 
Several analysts have concluded that Brazil’s bubble has burst, and that the so-called “country of the future” will remain stuck in the present. 
Economic uncertainty is also dramatically affecting Brazilian politics. 
And a once placid, even predictable, presidential election campaign has been thrown into disarray by the death of the Brazilian Socialist Party candidate, Eduardo Campos, in an airplane crash in August. 
Campos’s running mate, Marina Silva, was then nominated to take his place. 
A presidential candidate four years ago who ran on a green, socially conservative, but strongly pro-democratic platform, Silva received nearly 20 million votes. 
Her ties to Brazil’s huge evangelical churches, and her unwillingness to break with them on issues such as abortion, same-sex marriage, and drug policy, alienate many voters. 
Nonetheless, she has rapidly overtaken Aécio Neves, the Social Democratic Party (PSDB) candidate, as the main challenger to Dilma Rousseff, the incumbent President and Workers’ Party (PT) candidate. 
A run-off between the two women, following the October 5th first round, seems inevitable, as opinion polls give neither close to 50% of the vote. 
Though competent and tough, Rousseff faces voter fatigue after 12 years of PT rule, which many will remember, perhaps unfairly, for corruption scandals and the national team’s 7-1 drubbing by Germany in this year’s World Cup. 
But it is the government’s dismal economic record over the past four years that is causing the biggest problems for Rousseff’s campaign. 
At the same time, Silva will not be able to win the run-off without an enthusiastic and persuasive endorsement from Neves and the PSDB. 
Fortunately for Silva, the PSDB is highly critical of the PT administration, especially the foreign policy of Rousseff’s predecessor, Luis Inácio Lula da Silva. 
PSDB-allied diplomats and former senior officials strongly have opposed the PT’s support for Latin America’s authoritarian regimes (particularly in Cuba and Venezuela), its futile insistence on a permanent seat on the United Nations Security Council, and its excessive embrace of non-aligned, anti-imperialist positions. 
A Silva victory would herald change in domestic and foreign policy alike. 
But perhaps its most remarkable impact would be cultural. 
Though she would not be the first woman president (Rousseff broke the gender barrier) or the first from humble origins (Lula broke that taboo), she would be the first mulatto – darker-skinned than traditional Brazilian political leaders – to hold the office. 
Just as Lula’s 2002 election signified a sea of change in a highly class-conscious, socially stratified society, Silva’s election would shake up the racial order in a country – and indeed continent – where racism has not been eradicated. 
Indeed, in a country that has been proud of its supposedly non-racist nature, there has been no Afro-Brazilian politician of significant stature for a century. 
Despite the excitement aroused by her candidacy, however, Silva is unlikely to win. 
Since Latin America’s democratization in the 1980s, only two incumbents have lost – Daniel Ortega in Nicaragua (who was not really elected the first time) and Hipólito Mejía in the Dominican Republic. 
More than a dozen incumbents have won re-election, more or less democratically. 
The incumbent’s advantage in Latin America owes much to the feeble regulations restricting the government’s use of the state apparatus for campaign purposes. 
The scope for abuse of power, public money, the media, and most state institutions available to sitting presidents makes it almost impossible to defeat them. 
Ultimately, Brazilians may just be too unsure about handing power to Silva, who has become a media phenomenon but remains an unknown quantity. 
Rousseff will probably be re-elected, not so much on the strength of her record as because voters fear the unfamiliar. 
That would be a pity. 
After all, most new political challengers appear unprepared for the top job until they are in power. 
But Brazilians may feel that they have already broken enough political barriers and taboos in recent years, and that Silva would represent one too many. 

Mexico’s Second Revolution 
MEXICO CITY – Mexico, a stagnant and violence-plagued country in recent years, finally began to overcome its malaise in 2013, thanks to an activist president and a coalition of political parties determined to move the country forward. 
But, alongside substantive changes, there is considerable uncertainty and hyperbole. 
It could hardly be otherwise. 
The situation resembles that of 20 years ago – almost to the day. 
When the North American Free Trade Agreement (NAFTA) among Mexico, Canada, and the United States entered into force on January 1, 1994, it seemed that Mexico was poised for a true takeoff. 
But a series of events – the Zapatista uprising in Chiapas, the assassinations of a presidential candidate and the incoming president’s chief aide, and the collapse of the currency – shook Mexico that year, underscoring the depth of the challenges it faced. 
NAFTA brought with it a spectacular increase in Mexican exports, as well as a dramatic shift in their composition. 
But it proved to be a great disappointment in terms of foreign investment inflows and economic growth, which has averaged 2.6% per year over the last two decades – slower than Peru, Chile, Colombia, Brazil, and Uruguay. 
As a result, Mexico’s income gap with the US and Canada has barely narrowed. 
Thus, President Enrique Peña Nieto’s task since taking office one year ago has been to ensure that the promise of major change in Mexico finally translates into sustained economic growth, improved living standards, and faster convergence with the US and Canada. 
While both the foreign and local press refer generally to “reforms,” or lump together education, labor, financial, fiscal, energy, telecommunications, and political reforms, there are significant differences among them. 
Some consider all of the changes that have taken place in Mexico this year to be equally important. 
Others have mused that Peña Nieto’s administration sometimes seems intent on announcing reforms, regardless of their content, the time necessary to implement them, or their actual impact on Mexican society. 
In fact, a clear distinction can be drawn between two subsets of legislative achievements: those that, while not meaningless, are incomplete, superficial, or essentially maintain the status quo, and those that will change Mexico (if all goes well). 
The changes in how teachers are evaluated and their labor rights (wrongly described as an education reform), together with changes to tax and telecommunications legislation, belong to the first category; energy and political reforms belong to the second. 
Energy reform opens up electricity generation and oil exploration, extraction, and refining to private foreign or domestic investment through licenses, concessions, production sharing, or profit sharing. 
The oil workers’ union has been banished from the board of directors of Pemex, the national oil company, and new contracts for shale oil and gas, together with deep-water prospecting and drilling, will be signed with a government agency, not with Pemex. 
Once the myriad legal and political obstacles are cleared, Mexico will be able to increase oil and gas production, drive down the price of electricity, and stimulate growth in an otherwise lethargic economy. 
One hopes that 12 years of obstruction by Peña Nieto’s Institutional Revolutionary Party (PRI) will not mean that these reforms are too little, too late. 
The second crucial reform is political. 
For the first time since the early 1920’s, Mexican legislators and mayors will be allowed to seek reelection to consecutive terms. 
While no panacea, reelection is one of the most important instruments of accountability in a democracy, and Mexico has been deprived of it for nearly a century. 
The same is true of ballot initiatives, referenda, and independent candidacies, all of which were non-existent until the recent reform. 
For the first time since Mexico left behind 70 years of authoritarian rule, the country has a political and electoral framework that resembles those found in all modern democracies. 
Both reforms are incomplete and may not be sufficient to jump-start the economy and mobilize a singularly passive civil society. 
Because Pemex, unlike the Brazilian and Colombian state-owned oil companies, will not be listed on the New York or Mexico City stock exchanges, internal reform will be postponed or half-baked. 
Moreover, it will be years before any oil actually begins to flow from the deep waters of the Gulf of Mexico, and how much shale oil and gas actually exists in northeastern Mexico is unknown. 
Nor is it certain that foreign investment (or tourism) will increase, given the country’s current levels of violence, crime, and human-rights violations. 
Likewise, restrictions and ambiguities continue to plague the institutional arrangements sought by the framers of the country’s political and electoral reforms. 
Reelection is permitted only for candidates nominated by the same party for which they originally ran, and the enabling legislation for independent candidates, ballot initiatives, and referenda remains unclear. 
Most important, the government appears to be backtracking on a commitment to allow a binding referendum on the opening of the oil sector and other “transcendent” issues. 
Its reluctance is understandable, because voters are evenly divided on the issue, and no one will invest a cent in Mexican oil or gas if the recently approved constitutional amendment on Pemex can be overturned in 2015, as the opposition claims will happen. 
But curtailing democracy in order to modernize the energy sector is not a good idea. 
Finally, skepticism persists with regard to the Mexican economy’s capacity to achieve sustainable 4-5% annual economic growth – the bare minimum needed to ensure long-term prosperity. 
Deficient education, infrastructure, security, and courts, together with endemic corruption and scant entrepreneurial dynamism, militate against excessive optimism. 
NAFTA 20 years ago, and Peña Nieto’s reforms now, are necessary but insufficient conditions for progress. 
More is needed, and what is needed is not necessarily attainable. 

The Middle East and the Return of History 
BERLIN – Ever since Francis Fukuyama argued, more than two decades ago, that the world had reached the end of history, history has made the world hold its breath. 
China’s rise, the Balkan wars, the terrorist attacks of September 11, 2001, the wars in Afghanistan and Iraq, the global financial crisis of 2008, the “Arab Spring,” and the Syrian civil war all belie Fukuyama’s vision of the inevitable triumph of liberal democracy. 
In fact, history could be said to have come full circle in the space of a quarter-century, from the fall of communism in Europe in 1989 to renewed confrontation between Russia and the West. 
But it is in the Middle East that history is at work on a daily basis and with the most dramatic consequences. 
The old Middle East, formed out of the remains of the Ottoman Empire after World War I, is clearly falling apart, owing, in no small part, to America’s actions in this conflict-prone region. 
The United States’ original sin was its military invasion of Iraq in 2003 under President George W. Bush. 
The “neoconservatives” in power at the time were oblivious to the need to fill the power vacuum both in Iraq and the region following the removal of Saddam Hussein. 
President Barack Obama’s hasty, premature military withdrawal constituted a second US failure. 
America’s withdrawal, nearly coinciding with the outbreak of the Arab Spring and the eruption of the Syrian civil war, and its persistent passivity as the regional force for order, now threatens to lead to the disintegration of Iraq, owing to the rapid advance of the Islamic State in Iraq and Syria, including its capture of the country’s second-largest city, Mosul. 
Indeed, with ISIS in control of most of the area northwest of Baghdad, the border between Iraq and Syria has essentially ceased to exist. 
Many of their neighbors’ borders may also be redrawn by force. 
An already massive humanitarian disaster seems certain to become worse. 
Should ISIS succeed in establishing a permanent state-like entity in parts of Iraq and Syria, the disintegration of the region would accelerate, the US would lose its “global war on terror,” and world peace would be seriously threatened. 
But even without an ISIS terror state, the situation remains extremely unstable, because the Syrian civil war is proving to be highly contagious. 
In fact, “civil war” is a misnomer, because events there have long entailed a struggle between Saudi Arabia and Iran for regional predominance, powered by the age-old conflict between Islam’s Sunni majority and Shia minority. 
The Kurds form another unstable component of the Ottoman legacy. 
Divided among several Middle Eastern countries – Iran, Iraq, Syria, and Turkey – the Kurds have been fighting for their own state for decades. 
Nonetheless, they have shown great restraint in northern Iraq since Saddam’s fall, contenting themselves with building up their autonomous province both economically and politically – to the point that it is independent in all but name, with a strong and experienced army in the Peshmerga militia. 
The advance of ISIS and its capture of Mosul have now resolved, in one fell swoop, all territorial disputes between the central government and the Kurdish regional government in favor of the latter, particularly regarding the city of Kirkuk. 
Following the Iraqi army’s retreat, the Peshmerga promptly took over the city, giving the Kurdish north ample oil and gas reserves. 
Moreover, neighboring Iran and Turkey, as well as the US, will urgently need the Peshmerga’s support against ISIS. 
Thus, an unexpected window of opportunity has opened for the Kurds to achieve full independence, though their dependence on good relations with both Turkey and Iran for access to global markets will moderate their political ambitions. 
Moreover, with its invasion of Iraq, the US opened the door to regional hegemony for Iran and initiated a dramatic shift in its own regional alliances, the long-term effects of which – including the current nuclear negotiations with the Iranian government – are now becoming apparent. 
Both sides are fighting the same jihadists, who are supported by America’s supposed allies, the Sunni-ruled Gulf states. 
Though the US and Iran remain opposed to official cooperation, the wheels have been set in motion, with direct bilateral talks becoming routine. 
One key question for the future is whether Jordan, which plays a key function in the region’s equilibrium, will survive the geopolitical shifts unscathed. 
If it does not, the entire balance of power in the traditional Middle East conflict between Israel and the Palestinians could collapse. 
The consequences would most likely be far-reaching, if difficult to assess in advance. 
For Europe, developments in the Middle East pose two major risks: returning jihadi fighters who threaten to bring the terror with them, and a spillover of their extremist ideas to parts of the Balkans. 
In the interest of their own security, the European Union and its member states will be compelled to pay much closer attention to southeastern Europe than they have until now. 

Putin’s Reality Check for Europe 
BERLIN – For far too long, the West has harbored illusions about Vladimir Putin’s Russia – illusions that have now been shattered on the Crimean peninsula. 
The West could (and should) have known better: Ever since his first term in office as Russian president, Putin’s strategic objective has been to rebuild Russia’s status as a global power. 
To this end, Putin used Russia’s energy exports to recover gradually the territories lost when the Soviet Union collapsed a generation ago. 
Ukraine has been at the heart of this strategy, because, without it, the aim of a revived Russia is unachievable. 
So Crimea was just the first target; the next will be eastern Ukraine and persistent destabilization of the country as a whole. 
Before our eyes, the post-Soviet international system in Eastern Europe, the Caucasus, and Central Asia is being overthrown. 
Nineteenth-century concepts of international order, based on zero-sum balance-of-power considerations and spheres of interest, are threatening to supersede modern norms of national self-determination, the inviolability of borders, the rule of law, and the fundamental principles of democracy. 
As a result, this upheaval will have a massive impact on Europe and its relations with Russia, for it will determine whether Europeans live by twenty-first-century rules. 
Those who believe that the West can adapt to Russian behavior, as Putin’s Western apologists suggest, risk contributing to further strategic escalation, because a soft approach will merely embolden the Kremlin. 
Indeed, whether or not its leaders acknowledge it, the European Union is now in direct conflict with Russia over its enlargement policy since the end of the Cold War. 
That is because Russia’s re-emergence as a global power requires not just the reintegration of lost Soviet territories, but also direct access to Europe and a dominant role there, especially in Eastern Europe. 
So a fundamental strategic struggle is now a given. 
From a Western perspective, willful confrontation makes little sense, because the EU and Russia are and will continue to be neighbors. 
Looking ahead, Russia will need the EU even more than vice versa, because in its Far East and in Central Asia, China is emerging as a rival of entirely different dimensions. 
Moreover, Russia’s rapid demographic decline and enormous modernization deficit imply the need for a joint future with Europe. 
But seizing this opportunity is possible only on the basis of the rule of law, not of force, and must be guided by the principles of democracy and national self-determination, not great-power politics. 
Instead, Putin has now triggered a lasting crisis. 
The West’s response will be a new containment policy, mainly taking the form of economic and diplomatic measures. 
Europe will reduce its energy dependence on Russia, review its strategic alignment and priorities, and scale back investment and bilateral cooperation. 
In the short term, Putin seems to have greater leverage, but the weakness of his position will soon become apparent. 
Russia is completely dependent, economically and politically, on its commodity and energy exports, which go primarily to Europe. 
Lower European demand and an oil price that no longer suffices to sustain Russia’s budget stand to hobble the Kremlin very quickly. 
Indeed, there is reason to believe that Putin may have overplayed his hand. 
The collapse of the Soviet Union at the beginning of the 1990’s was caused not by the West, but by a wave of secession, as nationalities and minorities, seeing the party-state weakened, seized the opportunity to break free. 
Today’s Russia has neither the economic nor the political strength to regain and integrate the lost Soviet territories, and any attempt by Putin to press on with his plan would impoverish its people and lead to further disintegration – a bleak prospect. 
Europeans have reason to be worried, and they now have to face the fact that the EU is not just a common market – a mere economic community – but a global player, a cohesive political unit with shared values and common security interests. 
Europe’s strategic and normative interests have thus re-emerged with a vengeance; in fact, Putin has managed, almost singlehandedly, to invigorate NATO with a new sense of purpose. 
The EU will have to understand that it is not acting in a vacuum in its eastern and southern neighborhood, and that, for the sake of its own security interests, the conflicting interests of other powers there cannot simply be ignored or, worse, accepted. 
The EU’s enlargement policy is not merely some expensive, expendable annoyance; it is a vital component of the EU’s security and outward projection of power. 
Safety comes with a price tag. 
Perhaps now there will be a reassessment in the United Kingdom of the costs of an EU exit. 
And maybe there will be a realization on the Continent that European unification must move forward more quickly, because the world – and Europe’s neighborhood in particular – has turned out to be not as peaceful as many, above all the Germans, perceived it to be. 
The EU peace project – the original impetus for European integration – may have worked too well; after more than six decades of success, it had come to be considered hopelessly outdated. 
Putin has provided a reality check. 
The question of peace in Europe has returned, and it must be answered by a strong and united EU. 


The Middle East in the Arab Winter 
BERLIN – Travel broadens the mind, goes the old saying. 
This is especially true for the Middle East. 
But travel there nowadays can be extremely disorienting; indeed, developments that were impossible to contemplate just a few months ago are becoming reality. 
The youth revolt that began in Tunis and Cairo in 2010-2011 has come to an end (at least for the time being), though the region has been changed fundamentally by it. 
The victory of counter-revolution and power politics, as in Egypt, has only seemed to restore the old order; the current regime’s political foundations are simply too brittle. 
Equally noticeable has been the permanent shift in the region’s political-strategic axis. 
Iran, with its nuclear and hegemonic ambitions, is the current center, while the old center – the Israeli-Palestinian conflict – has been marginalized, giving rise to entirely new alliances of interests. 
Saudi Arabia and Israel (which have no formal diplomatic relations) are united against Iran – and against the possibility of a US-Iranian détente. 
Ideologically, the central conflict between Iran and its neighbors is based on the sectarian conflict between Sunni and Shia Islam. 
The devastating Syrian civil war is already being fought along these lines; given signs of a military and political stalemate, those lines could become the basis of a permanent division of the country, as in Bosnia. 
If this happens, Iraq, Lebanon, and Jordan would not be left unaffected. 
The old Anglo-French Middle East mapped out by the Sykes-Picot Agreement in May 1916 would be gone for good. 
Moreover, the Kurdish issue has reappeared – and could indirectly influence and re-radicalize the Palestinian question. 
Unfortunately, there is not much evidence that an Israeli-Palestinian settlement based on a two-state solution will preempt this development. 
Then there is the question of the long-term consequences of Al Qaeda’s rebirth in the form of Sunni jihadism in Syria, Yemen, and North and East Africa. 
The Gulf monarchies are trying to ride this tiger militarily against Iran. 
But what will happen when they one day find themselves in the role of the sorcerer’s apprentice? 
Will this fanatical wind blow back to the Arab peninsula? 
And could these societies’ domestic institutions withstand such an attack? 
Throughout the Middle East, most of the political elite remain trapped within a worldview defined by power politics and nineteenth-century notions of sovereignty. 
Their strategic watchwords are national rivalry, balance, and hegemony – concepts that offer no solution for the future of the region’s nations and states. 
Intraregional economic cooperation, which is essential to achieving sustained growth and social development, much less a regional security framework to ensure peace and stability, remains an alien idea. 
In essence, the Middle East is experiencing a crisis of modernization. 
The rebellious youth who led popular demands for change are lying low (or have been rounded up); but, given the intellectual paralysis of the region’s rulers (and large parts of the opposition), an even more violent eruption can be expected. 
As in the past, Egypt will play a guiding role for the entire region (whether it wants to or not). 
The region’s modernization crisis is being compounded by the partial withdrawal of an exhausted force for order, the United States. 
This is fueling tremendous anxiety in the region and has contributed to the overthrow of existing alliances and the search for new ones. 
President Barack Obama has ended America’s ruinous wars in Iraq and Afghanistan. 
Above all, it was the war in Iraq – and thus former President George W. Bush and his neoconservative advisers – that brought Iran to its current position of strategic strength. 
Yet it is Obama who is now regarded as weak in the Middle East. 
Obama is heavily criticized for not having intervened militarily in Syria, even though his threat to do so subsequently forced President Bashar al-Assad’s government to surrender its chemical weapons. 
Likewise, far from strengthening Iran further, Obama has pushed the Islamic Republic into a corner by leading the global push for strict economic sanctions. 
To be sure, many aspects of Obama’s policy in the region are worth criticizing – above all, the defensive attitude with which his administration presents it. 
But, rather than weakness, what America’s traditional allies in the Middle East fear most is far-reaching change in the status quo. 
And Obama’s policy does indeed appear to be aiming for precisely that: a nuclear détente with Iran, an end to Syria’s civil war by means of a regional security architecture, and a two-state solution to the Israeli-Palestinian conflict. 
It is a policy that sounds almost utopian, given the enormous inertial force of the region’s problems. 
But if, against all expectations, Obama succeeds, his accomplishment will be historic. 
And if he fails? 
The Middle East will continue its slide into mayhem – perversely befitting the upcoming centenary of World War I’s outbreak. 

Europe’s Act in Ukraine’s Tragedy 
BERLIN – Grand political strategy and everyday experience often have a lot in common. 
Try, for example, to swallow a salami whole, and you will probably choke to death. 
In the world of high politics, people behave no differently: they slice their salami before consuming it. 
If they cannot achieve an objective immediately, they approach it patiently, step by step. 
Today, the Kremlin is employing such “salami tactics” vis-à-vis Ukraine. 
Before our eyes, a tragedy in several acts is unfolding, in which the players and their aims are clear. 
What is not known is how many more acts this sad political spectacle will have, and thus when – and how – it will end. 
The first act began in the fall of 2013, when then-Ukrainian President Viktor Yanukovych duped the European Union and its leaders by refusing to sign a long-planned association agreement. 
Instead, he chose to have Ukraine enter a customs union with Russia, in exchange for a pile of cash and cheap oil and natural gas. 
Russian President Vladimir Putin seemed to have achieved his political aim, namely to bring Ukraine, which had been drifting toward Europe throughout the post-Soviet period, firmly back into the Kremlin’s sphere of influence. 
The second act was staged by the Ukrainian people, who, in the west of the country and on the Maidan in Kyiv, rebelled against Yanukovych’s effort to align their country more closely with Russia. 
After three months of protests, the uprising led to Yanukovych’s ouster, temporarily derailing Putin’s plan to vassalize Ukraine peacefully. 
It was not NATO, the EU, or the United States that acted to block Ukraine’s shift eastwards. 
Yanukovych was chased from power by a significant majority of Ukrainians themselves. 
The third act was born of Putin’s domestic political situation, and resulted in a stopgap solution that led to Russia’s poorly disguised armed invasion, and then annexation, of Crimea. 
Without Crimea’s annexation, Putin faced domestic political disaster and a premature end to his dream of reenacting Ivan the Great’s “gathering of the Russian lands” and restoring Russia’s global power. 
But Putin’s aim has never been Russian control only of Crimea; he has always wanted all of Ukraine, because he fears nothing more than a successful, democratic, modern neighbor that undermines by example the authority of his own “managed democracy.” 
So now we have reached the tragedy’s fourth act, in which Russia attempts to grab eastern Ukraine, and the West responds. 
Annexing eastern Ukraine – and thus splitting the country in two – by force has much less support, even among Russian-speakers, than the operation in Crimea. 
The aim of Russia’s covert military intervention there is to destabilize Ukraine in the long term by using stage-managed “unrest” to delegitimize the May 25 presidential election in the short term, thereby preventing consolidation of the post-Yanukovych political order. 
The task for the West is to stabilize Ukraine by economic and political means and contain Russian expansionism. 
The Kremlin, not surprisingly, is seeking to make any Western response as expensive and uncomfortable as possible, by implementing its destabilization strategy before our eyes, step by step, hoping that a frustrated Europe and America will one day throw in the towel. 
It is foreseeable that neither Russia nor the West will be strong enough to achieve its aims fully in Ukraine. 
It would therefore be sensible for both sides to try, together with the Ukrainians, to reconcile their interests. 
But that would require Putin to abandon his strategic ambitions, which he will never do so long as he can continue to slice the salami. 
Dulling Putin’s knife and ending the Ukraine crisis peacefully depends largely on the EU. 
Sanctions will not impress Putin (he and his cronies are isolating Russia economically and financially more effectively than most sanctions could); peaceful yet tangible political steps within Europe will. 
Polish Prime Minister Donald Tusk has made the right suggestion here: prompt establishment of a European energy union, starting with the market for natural gas and including joint external representation and a common pricing policy. 
This step, combined with further differentiation among supplier countries and progress toward implementing renewable-energy technologies, would invert the balance of power between the EU (Russia’s most important customer for oil and natural gas) and the Kremlin. 
If, at the same time, Poland resolved to join the euro at the earliest possible opportunity, Putin’s challenge to Eastern Europe would receive a powerful and completely peaceful answer. 
And Poland would assume the role of a major player at the center of an increasingly integrated Europe. 
It has largely been Germany that has opposed integrating Europe’s energy and natural gas markets. 
After the tragedy in Ukraine, no one in Berlin will be able to defend this stance, particularly given that Germany’s leaders do not want to confront Russia through sanctions. 
There will no longer be any room for excuses about why an energy union should be rejected. 
Everyone knows now what this communality called Europe is about. 
To borrow from Aesop’s “The Braggart”: Hic Rhodus, hic salta! 
Enough said, Europe. 
Now show us! 

The Great War’s Long Shadow 
BERLIN – This year marks the centennial of the outbreak of World War I, which is reason enough to reflect on what this seminal European catastrophe teaches us today. 
Indeed, the Great War’s consequences for international relations and the global system of states continue to be felt. 
So, have we learned anything from the policy failures of governments, institutions, and international diplomacy that occurred in the summer of 1914? 
Large parts of the northern hemisphere continue to struggle with the legacies of the great European empires – Habsburg, Russian, and Ottoman – that collapsed in WWI’s wake, or whose decline, like that of the British Empire, was initiated by the war and sealed by its even bloodier sequel a generation later. 
The resulting fracture zones – in the Balkans and the Middle East, for example – are the source of some of today’s gravest risks to regional and even world peace. 
After the Cold War’s end and the collapse of the Russian Empire’s Soviet successor, war returned to the Balkans under very similar conditions to those that prevailed in the period before 1914, with aggressive nationalism ultimately reconfiguring the disintegrating Yugoslavia as six separate states. 
Of course, Serbian President Slobodan Milošević, whose call for a “Greater Serbia” triggered the war, was not alone: For a moment, Europe was in danger of reverting to the confrontation of 1914, with France and the United Kingdom supporting Serbia, and Germany and Austria favoring Croatia. 
Fortunately, there was no relapse, because the West had learned its lessons from historical mistakes. 
Today, three factors loom large in the avoidance of disaster: the United States’ military presence in Europe, the progress of European integration, and Europe’s abandonment of great-power politics. 
Yet there is no point in fooling oneself: Only as long as the Balkan countries believe in the European Union and the benefits of membership will today’s precarious peace in the region become permanent. 
No such hope currently exists for the Middle East, whose contemporary political borders were largely established by Britain and France during WWI, when the diplomats Mark Sykes and François Georges-Picot negotiated the division of the Ottoman Empire. 
Likewise, the creation of Israel harks back to the 1917 Balfour Declaration, whereby the subsequent British mandatory power in Palestine supported the establishment of a national home for the Jewish people. 
The Middle East created back then is, more or less, the Middle East today. 
Yet we are now witnessing its disintegration, because the Sykes-Picot design always implied a strong external hegemonic power (or two) able and willing to maintain stability by channeling (or suppressing) the region’s numerous conflicts. 
Great Britain and France, the first hegemonic powers, were succeeded by the US and the Soviet Union – and, finally, by the US alone. 
America’s misadventure in Iraq, its exhaustion as a world power, and its unwillingness to maintain its previous level of commitment to the region have rendered the Sykes-Picot structure untenable, because no other external force for order is available. 
The resulting vacuum has been filled by various currents of political Islam, terrorism, protest movements, uprisings, secession attempts by national or religious minorities, and aspiring regional hegemons (Iran and Saudi Arabia). 
Indeed, the partial withdrawal of the US implies that the end of the enforced stability of the old Middle East will not spare the Sykes-Picot borders. 
Developments in Syria and Iraq already suggest as much, and the future of Lebanon and Jordan has become increasingly uncertain. 
One of the few positive features of the region is that no global power rivalries are currently playing out there. 
But the regional struggle for mastery between Iran and Saudi Arabia (with Israel as a third actor) could prove to be all the more dangerous, given the prevailing – and deeply entrenched – mindset of traditional power politics. 
Institutions and traditions supporting cooperative conflict resolution hardly exist in the region. 
The memory of 1914 may trigger the most concern in East Asia, where all the ingredients of a similar disaster have accumulated: nuclear weapons, the rise of China as a global power, unresolved territorial and border disputes, the division of the Korean Peninsula, historical resentments, an obsession with status and prestige, and hardly any cooperative conflict-resolution mechanisms. 
Distrust and power politics are the order of the day. 
And yet there are grounds for optimism in East Asia. 
The world has changed dramatically since the summer of 1914. 
At the time, the world’s population was two billion; now it is seven billion. 
This, together with the communications revolution, has created even more interdependencies and has forced more cooperation upon governments – as has the continued presence of the US as a stabilizer in the region, which has proved to be indispensable. 
Moreover, while nuclear weapons pose a continuing danger, they also inhibit the risk of war as a means of power politics by making mutual destruction a certainty. 
Military technology, the mindset of politicians and citizens, the structure of international diplomacy, and much more have changed in the century since WWI erupted. 
And, yes, we have even learned a few things from history, which has made the world safer. 
But, lest we forget: in the summer 1914, most actors regarded the impending disaster as an impossibility. 

Europe’s Ukrainian Soul 
BERLIN – This November marks the first anniversary of the Euromaidan uprising in Kyiv. 
Large parts of Ukraine’s population – and young people in particular – rose in opposition to then-Ukrainian President Viktor Yanukovych’s refusal to sign the country’s European Union association agreement (finalized after many years of negotiations), in favor of joining a customs union with Russia. 
This would have amounted to an eastward shift for Ukraine, with accession to Russian President Vladimir Putin’s Eurasian Union ruling out any possibility of ever joining the EU. 
In view of Ukraine’s ongoing crisis, this starting point – the first pro-European revolution in the twenty-first century, brought about by opposition to Russian influence and post-Soviet corruption and inefficiency – is important to bear in mind. 
A lot has happened since: Russia launched an undeclared war, first occupying and then annexing Crimea. 
In eastern Ukraine, the Kremlin continued the war – which, in military terms, seems unwinnable for the Kyiv authorities – in the Donbas region. 
Russia’s aim is not to occupy Ukraine militarily, but to prevent political and economic stabilization – a strategy that could include the de facto secession of significant parts of eastern Ukraine. 
Moreover, Putin will use the full range of tools at his disposal – including, of course, energy supplies – to pressure and extort Ukraine this winter. 
Europeans should brace themselves for what is coming. 
Putin believes that time is on his side; he is convinced that he will still be in office when all of his Western foils – Obama, Cameron, Hollande, and Merkel – have long since passed from the political scene. 
In military terms, Ukraine has never stood a chance against the Russian army and never will. 
But the country’s fate will be decided not only on the battlefield, but also on economic, legal, administrative, and political terrain. 
The fateful question is whether Ukraine, under the enormous pressure of military aggression by a much larger and stronger neighbor, can successfully become more European. 
Put bluntly: either the country succeeds in emulating Poland’s successful shift toward Europe, or it will once again fall under long-term Russian influence. 
For Europe, Ukraine’s fate is a vital strategic question, because its independence has been the cornerstone of the post-Cold War European order and its framework for peace. 
Ukraine’s subjugation to Russia by military force would bring down the curtain on that order and its underlying principles: non-violence, the inviolability of borders, and popular self-determination, rather than spheres of influence. 
This would entail enormous consequences for the security not just of Eastern Europe, but also of the continent as a whole. 
A revanchist Russia would once again – beyond Kaliningrad and the Baltic states – have a long joint border with the EU, and would seek a different, significantly more assertive role: that of a re-established great European power. 
For Europe, this would be a fundamental change for the worse. 
Cooperation would be replaced by confrontation, trust by distrust, and arms control by re-armament. 
If the EU and its members (with the exception of Poland and the Baltic states) can be faulted, it is not because they negotiated a free-trade agreement with Ukraine, but because they ignored Ukraine’s importance to the post-Cold War European order, reflected in insufficient support for the country’s modernization. 
Western politicians should have recognized that Ukraine’s Orange Revolution in 2004, triggered by Yanukovych’s attempt to steal the presidential election that year, was both a warning and an opportunity, because the very same aims and principles being fought for today were at stake then. 
In the end, the Orange Revolution failed, because the new leadership lacked the ability and incentive to implement far-reaching economic and other domestic reforms, partly owing to the West’s lack of interest. 
With the approach of winter, the Euromaidan revolution has once again reached this point, and the challenge is the same now as it was a decade ago. 
Will the West provide the generous and energetic help that Ukraine needs to become more European internally and break from the corruption and oligarchic rule of its post-Soviet economy and society? 
Ukraine remains a potentially rich country, and today it is closer to Europe – and vice versa – than at any time in its recent past. 
Should Ukraine succeed in breaking its post-Soviet shackles, there will be no way around its EU membership. 
Moreover, the West finally seems to understand what is at stake in Ukraine, namely the future of the European order and its framework for peace. 
Whether the Euromaidan revolution succeeds will depend to a crucial extent on the Ukrainian people and their ability to free themselves from the structures and forces of the past, and on the West’s support, generosity, and resilience. 
In Goethe’s Faust, Mephistopheles describes himself as “Part of that Power which still/Produceth good, whilst ever scheming ill.” 

Europe’s Ukrainian Blunder 
BERLIN – The European Union has probably never experienced anything like it before: Ukrainian President Viktor Yanukovych’s government pretended to negotiate an association agreement, only to back out at the last minute. 
EU leaders felt duped; in Moscow, however, the mood was celebratory. 
As we now know, Yanukovych’s real motivation for the negotiations was to raise the price that Russia would have to pay to keep Ukraine in its strategic orbit. 
Only a few days later, Yanukovych and Russian President Vladimir Putin announced a Russian loan worth $15 billion, a cut in natural-gas prices, and various trade agreements. 
From Yanukovych’s point of view, this agreement made sense in the short run: the gas deal would help Ukraine survive the winter, the loan would help keep it from defaulting on its debt, and the Russian market, on which the economy depends, would remain open. 
In the medium term, however, by rejecting the EU and embracing Russia, Ukraine faces the risk of losing its independence – on which the post-Soviet order in Europe depends. 
In terms of its strategic orientation, Ukraine is a divided country. 
Its eastern and southern regions (especially Crimea) want to return to Russia, whereas its western and northern regions insist on moving toward Europe. 
For the foreseeable future, this domestic conflict can be resolved, if at all, only with a lot of violence involved, as the ongoing mass protests in Kyiv suggest. 
But no sensible person can seriously desire such an outcome. 
Ukraine needs a peaceful, democratic solution, and this will be found only within the status quo. 
The EU’s behavior demands explanation. 
Yanukovych had always been the Kremlin’s ally. 
Indeed, his election in 2010 marked the end of Ukraine’s pro-European Orange Revolution, which had defeated his effort to steal the presidential election in 2004 and keep Ukraine in the Russian camp. 
So why did the EU press for an association agreement, without being able to offer Ukraine anything comparable to what Russia offered? 
The answer can be found in the relationship between Europe and Russia. 
With the collapse of the Soviet Union, Russia not only lost its status as a world power; within Europe, it was forced to withdraw toward a frontier that it had extended westward since Peter the Great – ultimately to the Elbe and Thuringia. 
After Putin succeeded Boris Yeltsin as President of the Russian Federation, he followed three strategic goals, which he continues to pursue: an end to post-Soviet Russia’s strategic submission to the West; reestablishment of sovereignty over most of the ex-Soviet republics, or at least enough control over them to stop NATO’s eastward expansion; and gradual recovery of Russia’s status as a global power. 
These goals were not to be enforced by the Red Army, but by Russia’s economic potential, especially a strategic energy policy supported by vast oil and natural-gas reserves. 
This would require securing control over these resources. 
It would also require establishing new export routes to Europe that, by circumventing Ukraine, would make the country vulnerable to blackmail, because a cutoff of gas supplies to it would no longer trouble Europe. 
The ultimate goal would be to regain Russian control over the Ukrainian pipeline network. 
At that point, Ukraine could be coaxed into joining Putin’s “Eurasian Union,” a Russian alternative to the EU aimed at keeping ex-Soviet countries within Russia’s sphere of influence. 
Apart from using the Nord Stream and South Stream pipelines to disconnect Ukraine from Russian energy exports to Europe, the Kremlin successfully blocked European access to the hydrocarbon-rich Caspian Sea and Central Asia. 
Virtually the only way that countries like Azerbaijan, Turkmenistan, and Kazakhstan can export their output to the West is via Russia’s pipeline network. 
The sole exception, the Baku–Tbilisi–Ceyhan (BTC) oil pipeline from Azerbaijan to Turkey, was pushed through by the United States; 
Europe has done nothing similar. 
None of this is exactly a secret in Western capitals; on the contrary, Putin’s ultimate goal – a far-reaching revision of the post-Cold War strategic order in Europe – has become increasingly clear as Russia has moved closer to achieving it. 
But neither the EU nor the US has been willing or able (so far) to formulate an effective response. 
The EU’s Ukraine initiative was supposed to be an attempt to provide such an answer. 
Europe played for high stakes, because if Ukraine does lose its independence in one way or another, European security will be at risk – a risk nowhere more keenly felt than in Poland and the Baltic states. 
With Yanukovych’s rejection of the association agreement, the EU has lost its bet. 
Putin cannot be faulted for skillfully pursuing his interpretation of Russian interests. 
The blame for the outcome in Ukraine falls squarely on the EU’s leaders, who represented European interests so badly. 
Grand gestures and paper-thin statements cannot mask Europe’s neglect of its own strategic interests, which will not be helpful in its relations with Russia. 
If Europeans want to change this, they will have to invest in their interests and devise an effective approach to ensure that these investments pay off. 
This is true not only with respect to Ukraine. 
At the end of 2013, Russian diplomacy can look back on a year of impressive successes: Syria, the interim nuclear agreement with Iran, and now Ukraine’s rejection of Europe. 
Whether Europe’s leaders see the connections and understand the consequences remains a serious question. 
That fact alone gives rise to considerable concern. 

Joschka Fischer's Federal Europe and Its Enemies 
BRUSSELS: Joschka Fischer, Germany's foreign minister, set the cat among the pigeons when he laid out his vision of a federalist European Union. 
In Britain, where the idea of European federalism has never been popular, it was predictable that the Euro-sceptic newspaper The Times would denounce Mr Fischer's ideas. 
But even in France, traditionally committed to its partnership with Germany, he raised a small storm, most sensationally when Jean-Pierre Chevčnement, the French Interior Minister, responded with the bizarre claim that the Germans had not fully recovered from their Nazi past. 
These intemperate reactions may seem bizarre. 
For one thing, Mr Fischer made it clear at the time that he was only expressing his personal thoughts, not speaking officially for the German government. 
For another, it quickly emerged that his federalist vision was not shared by the French government. 
Hubert Vedrine, France's foreign minister, described Fischer's ideas as "ambitious", which sounds friendly, but is really diplomatic code for "well-meaning but unrealistic"; and when French and German leaders met a few days later, for a brain-storming session on Europe, they did not endorse the Fischer vision. 
Yet it may be a mistake to conclude that this was an episode without significance. 
Joschka Fischer set out his federalist vision because he believes that some form of federalism will be necessary if the European Union is to continue to function after enlargement to embrace the countries of Central and Eastern Europe. 
He is not alone in this belief. 
Last year, Romano Prodi, President of the European Commission and a former prime minister of Italy, made it clear that he believed enlargement would require radical constitutional reform of the Union. 
So did a committee of "Three Wise Men", led by Jean-Luc Dehaene, former Belgian prime minister. 
This year, the case for radical constitutional reform of the EU was argued by Valery Giscard d'Estaing, the former French President, and Helmut Schmidt, a former German Chancellor; and also by Jacques Delors, a former President of the Commission. 
The cause of radical reform has also been taken up by the European Parliament. 
EU governments, however, seem determined to steer clear of any attempt at radical solutions. 
Last December, they conceded that some constitutional changes would be required before enlargement. 
But they also agreed to keep these changes to a minimum: a small increase in the scope for majority voting; some change in the relative voting weights of large and small countries; and some reform of the Commission. 
The French government will be leading the negotiations on these modest changes in the second half of this year, and its priority is not to provoke controversy, but to work towards a successful year-end summit at Nice. 
The reluctance of governments to consider radical solutions may not be admirable, but is understandable. 
One reason is that the idea of European integration is, in many countries, less popular than in the past. 
But the bottom line is that constitutional changes can only be carried by unanimous agreement, and several member governments, starting with the UK, would resist any overtly federalist agenda. 
In the past, no doubt, France (under President Mitterrand) and Germany (under Chancellor Kohl) would together regularly press the case for closer integration, despite British reluctance. 
But today, France and Germany are less united on a common European strategy, and their commitment to European integration seems less strong. 
As a result, the French government is reluctant to force a confrontation with the British, if there is any chance of a softer compromise in future. 
The problem is that this conspiracy of evasion may not work, and the significance of Fischer's speech is that he is the first government minister in office to say so in public, even if he pretends to say it in a personal capacity. 
"Enlargement", he says, "will render imperative a fundamental reform of the European institutions. 
Just what would a European Council with thirty heads of state and government be like? 
How long will Council meetings actually last? 
Days, maybe even weeks?" 
His answer is that the incrementalist method of integration, followed for the past 50 years, will no longer work, and that such a large Union must be a federal Union, though still composed of traditional nation states. 
It must be reconstructed with a new constitution, built on fundamental human rights. 
There must be a clear allocation of distinct competences between the Union and its member states. 
And democracy must be reinforced by two chambers of parliament. 
There may be great merits in this recipe; but to describe it as "ambitious" is a serious under-statement. 
In the first place, it implies a wholesale re-writing of the European Union Treaty, as well as a far-reaching renegotiation of existing EU policies. 
This would be a heroic task at the best of times, but more than heroic in the face of the hostility of several member states. 
And since Mr Fischer places his federal transformation some ten years from now, after enlargement, the opponents of federalism may by then be even more numerous than today. 
But if the obstacles to Mr Fischer's federal vision are too great, then there may be an alternative: an inner group of like-minded states could forge ahead without the others, negotiate a new Treaty, and even form a federal government. 
At this point there emerges a clear convergence between French and German thinking. 
For shortly before the Fischer speech, Lionel Jospin, the French prime minister, argued that the 11 members of the Euro currency zone should form an economic government for Europe. 
In short, the future of European integration may lie with those states that want it, and the others (i.e. the British) may lose the power to block it. 

Defusing Iran 
BERLIN – On February 18, crucial negotiations over Iran’s nuclear program began in Vienna between Iran and the five permanent members of the United Nations Security Council plus Germany (the P5+1). 
The alternative to the talks is a further nuclear buildup by Iran, followed by additional international sanctions and, eventually, another war in the Middle East, which no one believes can resolve the problem. 
So, can a comprehensive agreement that respects Iran’s right to civilian nuclear energy, while allaying the international community’s fears of weaponization, be achieved? 
The interim agreement reached last November in Geneva reflected the West’s de facto acceptance that Iran is entitled to carry out limited low-grade uranium enrichment within the framework of the Non-Proliferation Treaty (NPT). 
The West released about $7 billion of frozen Iranian funds and relaxed some sanctions (in particular, on crude oil and auto parts), while Iran agreed to a quasi-freeze of its nuclear program. 
That created the basis for a lasting agreement. 
But realizing that potential will be difficult. 
First and foremost, a mountain of mutual distrust will need to be overcome. 
The West and Israel do not believe that Iran’s nuclear program is meant to serve merely civilian aims. 
Otherwise, why would Iran invest billions of dollars in a program that is almost tailor-made for military purposes, including long-distance delivery systems? 
The Iranian leadership, for its part, remains convinced that the United States still seeks to bring about regime change. 
From Iran’s perspective, accepting an American hand extended in a spirit of conciliation could turn it into a fist. 
Moreover, any compromise would be fiercely contested within both camps, possibly leading to serious domestic political conflict. 
And even if both sides’ current leaderships are sincere, will this hold true for their successors? 
The absence of trust between Iran and the West leads directly to the second obstacle to a comprehensive agreement: verification and monitoring. 
The central issue in these negotiations, around which everything else revolves, concerns Iran’s “breakout capability” – the time it would need, within the framework of any agreement with the West, to renege and build a nuclear weapon. 
How much supervision will be required not just to verify compliance but also to detect any possible attempt at a breakout? 
The technical questions are complex, and the proverbial devil really is in the countless details. 
But prospects for a deal will hinge on resolving three broad issues. 
The first two issues reflect the two paths toward the bomb: uranium enrichment and plutonium production. 
Any workable agreement will require Iran to renounce uranium enrichment above the 5% level needed for a civilian nuclear-power program; accept limits on enrichment volumes, the number of centrifuges, and technology; agree to forgo reprocessing; and address operations at the heavy-water reactor in Arak. 
The third issue concerns supervision and monitoring, which for quite some time would probably have to go beyond that agreed in the Additional Protocol to the NPT and include certain military installations. 
Indeed, the duration the agreement will be of vital importance. 
The West wants it to be implemented for as long as possible, while Iran would prefer a very short timeframe within which to achieve its central objectives: a comprehensive and lasting repeal of international sanctions and recognition as an NPT non-military nuclear power. 
That raises another important question: Does US President Barack Obama really have a domestic mandate for negotiating a comprehensive repeal of the sanctions? 
Here, we are brought back to the central issue in this process: technical questions, though important, are still only an expression of the underlying political conflicts and animosities. 
These are the real factors driving the confrontation that the Vienna negotiations are meant to defuse over the next six months. 
And the current regional and sectarian confrontation in the Middle East affects the nuclear negotiations directly. 
All of the relevant players – including those, like Saudi Arabia and Israel, that are not sitting at the table but whose presence is very much felt – are clinging to their initial positions. 
The US does not want Iran to become a military nuclear power or gain regional predominance; above all, the Americans do not want another Middle East war. 
Iran, however, wants to become a (non-military?) nuclear power and shape a region in which it is heavily involved militarily (in Syria, Lebanon, and Iraq). 
Europe shares the US position, but is more flexible. 
Saudi Arabia, a Sunni power, wants to stop Shia Iran from becoming an emerging or, worse still, a military nuclear power in the Gulf, and has taken the opposite side in Syria, Lebanon, and Iraq. 
Israel opposes Iran’s becoming a military nuclear power – or even a nuclear-threshold state – and is willing to try to prevent this by military means. 
To achieve a sustainable compromise that all sides accept (even if with gritted teeth), the negotiations must be accompanied by diplomatic steps aimed at building trust both in the region and beyond. 
Europe is very well versed in such processes and should put its experience to good use. 
Iran must decide whether it wants to follow the North Korean route to international isolation, or some variation on the Chinese route to integration into the global economy. 
It must also understand that its relationship with both Israel and Saudi Arabia will affect the negotiations, either positive or negatively. 
And the West – the US, Europe, and, more than any other country, Israel – will have to get used to the idea of living with an Iranian civilian nuclear-power program, while limiting Iran’s capacity to become an emerging military nuclear power. 
As the very different examples of the Soviet Union and China show, the Iranian regime might someday collapse or change fundamentally – probably when hardly anyone expects it. 
Until then, we must do our best to defuse the nuclear time bomb together. 



Emerging Economies on Their Own 
NEW YORK – There was a remarkable similarity between European Central Bank President Mario Draghi’s statement after a recent meeting of the ECB Governing Council and US Federal Reserve Chair Janet Yellen’s first testimony to Congress: both asserted that their policy decisions would take into account only domestic conditions. 
In other words, emerging-market countries, though subject to significant spillover effects from advanced economies’ monetary policies, are on their own. 
This confirms what emerging-country authorities have known for a while. 
In 2010 – following the Fed’s announcement of a third round of quantitative easing – Brazilian Finance Minister Guido Mantega accused advanced countries of waging a global “currency war.” 
After all, advanced economies’ policies were driving large and volatile capital flows into the major emerging markets, pushing up their exchange rates and damaging their export competitiveness – a phenomenon that Brazilian President Dilma Rousseff later referred to as a “capital tsunami.” 
Recently, the impact of the advanced economies’ withdrawal of monetary stimulus has been just as strong. 
Since last May, when the Fed announced its intention to begin tapering its asset purchases, capital has become less accessible and more expensive for emerging economies – a shift that has been particularly painful for countries whose large current-account deficits leave them dependent on foreign finance. 
In response, Raghuram Rajan, Governor of the Reserve Bank of India, has called advanced-country policies “selfish,” declaring that “international monetary cooperation has broken down.” 
To be sure, emerging economies have plenty of their own problems to address. 
But there is no denying that these countries have been victims of advanced economies’ monetary policies, which have increased capital-flow volatility over the last three decades. 
According to the International Monetary Fund’s April 2011 World Economic Outlook, though the volatility of capital flows has increased worldwide, it is higher in emerging market economies than in advanced economies. 
Boom-bust financial cycles are driven largely by shocks generated in advanced economies, but they are key determinants of emerging markets’ business cycles. 
Moreover, the spillover effects of advanced economies’ monetary policies extend beyond financial shocks. 
Emerging economies are also suffering from the effects of developed countries’ external imbalances – particularly the eurozone’s swelling current-account surplus. 
In the last few years, the deficit economies of the eurozone’s periphery – and, more recently, Italy – have undertaken massive external adjustments, while Germany and the Netherlands have sustained their large surpluses. 
As a result, the burden of offsetting the eurozone’s rising surplus has fallen largely on emerging economies, contributing to their growth slowdown. 
Such spillover effects are precisely what international policy cooperation – such as the “mutual assessment process” that the G-20 established in 2009 – was supposed to prevent. 
The IMF has created an elaborate system of multilateral surveillance of major countries’ macroeconomic policies, including the “consolidated multilateral surveillance reports,” the spillover reports for the so-called “systemic five” (the US, the United Kingdom, the eurozone, Japan, and China), and the “external sector reports” assessing global imbalances. 
But this system has proved to be utterly ineffective in preventing spillovers – not least because the Fed and the ECB simply ignore it. 
Given that the US dollar and the euro are the top two international reserve currencies, spillovers should be considered the new normal. 
Adding insult to injury, the $1.1 trillion appropriations bill for federal-government operations agreed last month by the US Congress does not include any money to recapitalize the IMF, the main instrument of international monetary cooperation. 
That decision represents yet another setback for IMF reforms aimed at increasing the influence of emerging economies. 
Given the considerable benefits that stable and prosperous emerging countries bring to the world economy – exemplified by the role that they played in propping up global growth in the wake of the recent crisis – it is in everyone’s interest to change the status quo. 
The G-20 and the IMF’s International Monetary and Financial Committee must work to align reality with the rhetoric of macroeconomic-policy cooperation. 
For that, the recent statements by Draghi and Yellen should be treated as ground zero. 

After the Dollar 
NEW YORK – It is symbolic that the recent BRICS summit in Fortaleza, Brazil, took place exactly seven decades after the Bretton Woods Conference that created the International Monetary Fund and the World Bank. 
The upshot of the BRICS meeting was the announcement of the New Development Bank, which will mobilize resources for infrastructure and sustainable development projects, and a Contingent Reserve Arrangement to provide liquidity through currency swaps. 
The Bretton Woods Conference marked one of history’s greatest examples of international economic cooperation. 
And, while no one can say yet whether the BRICS’ initiatives will succeed, they represent a major challenge to the Bretton Woods institutions, which should respond. 
Rethinking the role of the US dollar in the international monetary system is a case in point. 
One key feature of the Bretton Woods system was that countries would tie their exchange rates to the US dollar. 
While the system was effectively eliminated in 1971, the US dollar’s central role in the international monetary system has remained intact – a reality that many countries are increasingly unwilling to accept. 
Dissatisfaction with the dollar’s role as the dominant global reserve currency is not new. 
In the 1960s, French Finance Minister Valéry Giscard d’Estaing famously condemned the “exorbitant privilege” that the dollar’s status bestowed upon the United States. 
The issue is not merely one of fairness. 
According to the Belgian economist Robert Triffin, an international monetary system based on a national currency is inherently unstable, owing to the resulting tensions among the inevitably divergent interests of the issuing country and the international system as a whole. 
Triffin issued his warning more than 50 years ago, but it has recently gained traction, as China’s rise has made the world increasingly disinclined to tolerate the instability caused by a dollar-denominated system. 
The solution, however, lies not in replacing the dollar with the renminbi, but in strengthening the role of the world’s only truly global currency: the IMF’s Special Drawing Rights. 
Following the creation of SDRs in 1969, IMF members committed to make them “the principle reserve asset in the international monetary system,” as stated in the Articles of Agreement. 
But the peculiar way in which SDRs were adopted limited their usefulness. 
For starters, the separation of the IMF’s SDR account from its general account made it impossible to use SDRs to finance IMF lending. 
Furthermore, though countries accrue interest on their holdings of SDRs, they have to pay interest on the allocations they receive. 
In other words, SDRs are both an asset and a liability, functioning like a guaranteed credit line for the holder – a sort of unconditional overdraft facility. 
Nonetheless, SDRs have proved to be useful. 
After initial allocations in 1970-1972, more were issued to increase global liquidity during major international crises: in 1979-1981, in 1997, and, in particular, in 2009, when the largest issue – the equivalent of $250 billion – was made. 
While developed countries, including the US and the United Kingdom, have drawn on their allocations, the major users have been developing and, in particular, low-income countries. 
In fact, this is the only way in which developing countries (China aside) share in the creation of international money. 
Several estimates indicate that, given the additional demand for reserves, the world could absorb annual allocations of $200-300 billion or even more. 
This has prompted many – including People’s Bank of China Governor Zhou Xiaochuan; the United Nations-backed Stiglitz Commission; the Palais-Royal Initiative, led by former IMF Managing Director Michel Camdessus; and the Triffin International Foundation – to call for changes to the international monetary system. 
In 1979, the IMF economist Jacques Polak, who had been part of the Dutch delegation at the Bretton Woods conference, outlined a plan for doing just that. 
His recommendations include, first and foremost, making all of the IMF’s operations in SDRs, which would require ending the separation of the IMF’s SDR and general accounts. 
The simplest way to fulfill this vision would be to allocate SDRs as a full reserve asset, which countries could either use or deposit in their IMF accounts. 
The IMF would use those deposits to finance its lending operations, rather than having to rely on quota allocations or “arrangements to borrow” from members. 
Other provisions could be added. 
To address developing countries’ high currency demands, while enhancing their role in the creation of international money, a formula could be created to give them a larger share in SDR allocations than they now receive. 
The private use of SDRs could also be encouraged, though that would likely be met with strong opposition from countries currently issuing international reserve currencies, especially the US. 
Keeping SDRs as pure “central-bank money” would eliminate such opposition, enabling them to complement and stabilize the current system, rather than upend it. 
Just as the Bretton Woods framework restored order to the global economy after WWII, a new monetary framework, underpinned by a truly international currency, could strengthen much-needed economic and financial stability. 
Everyone – even the US – would benefit from that. 

Revoking America’s Exorbitant Privilege 
NEW YORK – The ongoing political stalemate in the United States holds two major implications for the international monetary system. 
The better-known consequence has been deepening uncertainty about the US dollar, the main global reserve currency, and US Treasury securities, supposedly the world’s “safest” financial asset. 
Not surprisingly, the major investors in US Treasuries, China and Japan, have expressed alarm. 
Simply put, the global economy has at its center a dysfunctional political regime that generates recurrent threats of default on the world’s major reserve asset. 
The second implication is further postponement of the International Monetary Fund’s 2010 quota and governance reforms, which would double member countries’ contributions and modestly increase major emerging economies’ voting power. 
Prior to its approval by the IMF Board in December 2010, the reform, agreed at the G-20 Seoul Summit, had been hailed as a “historic” breakthrough. 
But history has stalled without approval by the US, which has an effective veto over major IMF decisions. 
The threat of a US default may well end in a political agreement to raise the US government’s debt ceiling, as occurred in 2011. 
But, whatever the outcome, the latest episode makes it abundantly clear that our globalized world deserves a better international monetary system than the current “non-system” that evolved in an ad hoc manner after the collapse in the early 1970’s of the initial Bretton Woods arrangements. 
The need to overhaul the international monetary and financial system was one of the basic lessons of the global financial crisis. 
While there have been major, albeit incomplete, reforms of international finance, efforts in 2009 and 2010 to reform the international monetary system – including the proposed changes at the IMF – have led to no significant action. 
The reform proposals came from diverse quarters: the governor of the People’s Bank of China; a commission convened by the United Nations General Assembly on reform of the international monetary and financial system, headed by the Nobel laureate Joseph E. Stiglitz; and the French Palais Royal Initiative, led by former IMF Managing Director Michel Camdessus. 
There have been myriad academic contributions to the debate as well. 
The first element of reform should be to give a greater role to the only true international money that the world now has: the IMF’s Special Drawing Rights, created in 1969 as the result of another dollar crisis. 
The establishment of SDRs was accompanied by a commitment, included in the IMF Articles of Agreement, to “making the special drawing right the principal reserve asset in the international monetary system” (Article VIII, Section 7 and Article XXII). 
But this commitment has remained a dead letter, except for periodic emissions of SDRs during crises, including the equivalent of $250 billion in 2009. 
The IMF Articles of Agreement should be amended to allow more flexible use of SDRs, replicating the way central banks operate. 
That is, SDRs could be created during global recessions and withdrawn during booms. 
They should be the major source of IMF financing as well, replacing quota subscriptions or lending to the Fund by member countries (potentially making the IMF a purely SDR-based institution, as proposed decades ago by the late IMF economist Jacques Polak). 
The simplest approach would be for countries to “deposit” the SDRs that they receive at the IMF, which could then lend them to countries and invest the remainder in sovereign bonds. 
This should be combined with a more active role for the IMF – rather than the G-20 – as the true instrument of global macroeconomic policy coordination. 
One essential (and generally agreed) goal of such coordination should be to reduce global imbalances like those caused in recent years by the European Union’s rising external surplus, which has forced many emerging economies to run growing deficits. 
Because other global currencies – the dollar, the euro, and increasingly the renminbi – would continue to coexist with the SDRs as global reserve assets, another essential element of global macroeconomic cooperation should be defining the particular obligations of countries (or regions) issuing reserve currencies. 
Still another element of international monetary reform is better management of the global exchange-rate system (or, again, “non-system”), which should aim at avoiding currency “manipulation” – but only after defining precisely what that means. 
It should also reduce the high levels of exchange-rate volatility – “a tax on international specialization,” as the economist Charles Kindleberger once put it – that we have seen in recent years, including among major currencies. 
Long-term global-finance discussions have also made clear that, under certain conditions, regulation of capital flows (“capital-flow management measures,” in current IMF terminology) are warranted on “macroprudential” grounds – an understanding accepted by the G-20 at its 2011 Cannes meeting and by the IMF last year. 
Last but not least, the international monetary system requires governance reform, which includes giving a stronger voice to emerging and developing countries. 
Aside from the final adoption of the 2010 reforms and the forthcoming 2014 quota debates, the changes should include those recommended by the Stiglitz Commission, the Palais Royal Initiative, and the 2009 Committee on IMF Governance Reform headed by Trevor Manuel, among others. 
One central element of these proposals is to eliminate, once and for all, the veto power of any individual country. 
With the world waiting anxiously for some of America’s political leaders to behave like adults, the cost of maintaining the current non-system has become all too obvious. 

Jose Bove Against the Poor 
Support for increased foreign aid, debt relief and debt forgiveness comes from all sides. 
From rock stars, to "anti-globalists," to religious organizations, to various advocates for developing countries, to the UN, the calls are becoming deafening. 
The "story" promoted by the pro-aid movement is simple and appealing. 
Global differences in income per capita are too extreme; globalization is increasing income inequality; the poor are becoming progressively poorer and many starve in order to pay their debt. 
So more aid is needed, and more debt forgiveness, because the world's rich become rich only at the expense of the world's poor. 
Aid and debt forgiveness will lift poor countries out of poverty 
This story is almost completely wrong. 
The only part that is true is that differences in per capita income are extreme. 
All the rest is false. 
Globalization is not responsible for third world poverty. 
Corrupt and inefficient governments of developing countries are. 
There is not one shred of evidence showing that more openness to trade increases poverty, but anti-globalists do not let facts interfere with their ideology. 
More trade makes both sides of a transaction wealthier. 
Even if globalization did increase inequality - a big if - since nobody has shown it convincingly, it still reduces poverty. 
That is, it increases the income of both the poor and the rich who trade - more so the rich, of course, yet the poor gain too. 
The anti-global alternative is to make both sides poorer. 
Inequality may be lower, perhaps, but poverty higher. 
What's appealing about that? 
It is not true that poor countries have become poorer. 
Many examples exist of countries that lifted themselves out of poverty, from South Korea to Costa Rica to Botswana. 
Others squandered the immense wealth of natural resources, say Nigeria or Venezuela, the latter, incidentally, recently adopting protectionist policies. 
There is no evidence that increasing foreign aid to governments in developing countries improves their economic performance and lifts them out of poverty permanently. 
In fact, more aid is likely to increase corruption, because it augments the amount of resources over which elites fight. 
The same goes for debt forgiveness: it only encourages countries to borrow more, often for the benefit of local elites. 
A recent widely cited book by William Easterly - a former economist at the World Bank and an expert on aid and development - provides a mountain of shocking stories about local elites squandering foreign assistance. 
The pro-aid coalition should read it carefully. 
Those who really care about reducing poverty should place blame where it belongs: with governments and bureaucracies in many developing countries, especially in Africa and Latin America. 
Traditionally, instead, foreign aid paid no attention to the virtues of the receiving countries and did not discriminate in favor of "good governments." 
Donors have typically favored their former colonies, irrespectively of the nature of their regimes. 
One of the worst offenders here is France. 
Statistical evidence shows that a hypothetical former colony of France, following hideous policies, with dictatorial and objectionable regimes, would receive much more aid from France than a non-former colony struggling and trying to adopt decent polices. 
In other words, France gives almost exclusively to its former colonies, irrespective of how bad their regimes are. 
Aid given by the US has been overly influenced by Middle East politics and, previously, by the Cold War. 
Political alliances, indeed, are often more important than the quality of the receiving countries policies as a determinant of the direction of aid giving. 
The only donors that directed their aid reasonably well are the Scandinavian countries, whose aid giving is the highest in per capita terms but small as a percentage of the total. 
One of the reasons is that these countries did not have colonies and political alliances to support. 
Before providing more aid or debt forgiveness two conditions need to be met. 
One is "institutional conditionality:" only governments that show serious progress in reducing inefficiency, robbery of public property and corruption, should receive aid. 
Reasonable ways to measure corruption do exist; we know which countries are more corrupt than others. 
This evidence should be used more aggressively by donors to discriminate amongst receivers. 
Unfortunately, in most cases the poorest countries, where aid is most needed, are also the most corrupt. 
So a second condition must be applied: in such cases aid flow should be kept completely out of public channels and administered by non-local groups un-associated with local elites and governments. 
Finally, other rich country policies may be much more beneficial than aid. 
The main change should be stopping agricultural protection for rich country farmers. 
The worst enemies of poor countries are farmers in rich countries. 
Defeating the lobby of French farmers that strangles reform of the EU common agricultural policy should be the top priority of Europe's pro-poor coalition. 
Instead, anti-globalists care more about the charm of French agricultural towns threatened by globalization, that is, by the agriculture of struggling poor countries. 

Waste Not, Want Not 
ROME – Every year, we waste or lose 1.3 billion metric tons of food – one-third of the world’s annual food production. 
The sheer scale of the number makes it almost impossible to grasp, no matter how one approaches it. 
Try to imagine 143,000 Eiffel Towers stacked one on top of another, or a pile of 10 trillion bananas. 
The figure is all the more unfathomable, given that, alongside this massive wastage and loss, 840 million people experience chronic hunger on a daily basis. 
Many millions more suffer from “silent hunger” – malnutrition and micronutrient deficiencies. 
For the more economically minded, here is another number: food wastage and loss, expressed in producer prices, costs roughly $750 billion per year. 
If we were to consider retail prices and the wider impacts on the environment, including climate change, the figure would be much higher. 
In an era of austerity, it is difficult to understand how such a massive hemorrhage of resources could be neglected. 
In fact, in some places, the volume of food wastage is rising. 
Now a new report by the United Nations Food and Agriculture Organization focuses on another troubling aspect of the problem: the negative consequences for the environment and the natural resources on which we rely for our survival. 
When food is lost or wasted, the energy, land, and water resources that went into producing it are squandered as well. 
At the same time, large amounts of greenhouse gases are released into the atmosphere during production, processing, and cooking. 
From any perspective – ethical, economic, environmental, or in terms of food security – we simply cannot tolerate the annual wastage of 1.3 billion tons of food. 
This is why serious reduction of food loss and wastage is one of the five elements of UN Secretary General Ban Ki-moon’s “Zero Hunger Challenge” and a major focus of the UN High Level Task Force on Global Food Security. 
We are working together within the UN system and with a broad coalition of other partners to ensure universal access to adequate food all year round; eliminate childhood stunting; make all food systems sustainable; and eradicate rural poverty. 
Next week, the Global Green Growth Forum in Copenhagen will allow for a deeper look at this issue. 
There is much that can be done. 
For starters, food loss and wastage needs to be seen as a cross-cutting policy issue, rather than a lifestyle choice to be left in the hands of individual consumers and their consciences. 
The world needs to wake up to the need for policies that address all stages of the food chain, from production to consumption. 
Food loss – on farms, during processing, transport, and at markets – undermines food security in most developing countries, where post-harvest losses can reach as high as 40% of production. 
Investment in infrastructure for transport, storage, and marketing of food is badly needed, as are programs to train farmers in best practices. 
In developed countries, food-retailing practices require a rethink. 
For example, rejection of food products on the basis of aesthetic concerns is a major cause of wastage. 
Some supermarkets have already begun relaxing standards on fruit appearance, selling “misshapen” items at reduced prices and helping to raise awareness that ugly does not mean bad. 
More approaches like this – and concerted efforts to find markets or uses for surplus food – are needed. 
Businesses and households alike should monitor where and how they waste food and take corrective steps, because prevention of wastage is even more important than recycling or composting. 
Yes, 1.3 billion tons is a mindboggling figure. 
But these simple steps are easy enough to grasp – and within reach for everyone. 
The world confronts many seemingly intractable problems; food wastage is one issue that we all can do something about now. 

Argentina’s Griesafault 
NEW YORK – On July 30, Argentina’s creditors did not receive their semiannual payment on the bonds that were restructured after the country’s last default in 2001. 
Argentina had deposited $539 million in the Bank of New York Mellon a few days before. 
But the bank could not transfer the funds to the creditors: US federal judge Thomas Griesa had ordered that Argentina could not pay the creditors who had accepted its restructuring until it fully paid – including past interest – those who had rejected it. 
It was the first time in history that a country was willing and able to pay its creditors, but was blocked by a judge from doing so. 
The media called it a default by Argentina, but the Twitter hashtag #Griesafault was much more accurate. 
Argentina has fulfilled its obligations to its citizens and to the creditors who accepted its restructuring. 
Griesa’s ruling, however, encourages usurious behavior, threatens the functioning of international financial markets, and defies a basic tenet of modern capitalism: insolvent debtors need a fresh start. 
Sovereign defaults are common events with many causes. 
For Argentina, the path to its 2001 default started with the ballooning of its sovereign debt in the 1990s, which occurred alongside neoliberal “Washington Consensus” economic reforms that creditors believed would enrich the country. 
The experiment failed, and the country suffered a deep economic and social crisis, with a recession that lasted from 1998 to 2002. 
By the end, a record-high 57.5% of Argentinians were in poverty, and the unemployment rate skyrocketed to 20.8%. 
Argentina restructured its debt in two rounds of negotiations, in 2005 and 2010. 
More than 92% of creditors accepted the new deal, and received exchanged bonds and GDP-indexed bonds. 
It worked out well for both Argentina and those who accepted the restructuring. 
The economy soared, so the GDP-indexed bonds paid off handsomely. 
But so-called vulture investors saw an opportunity to make even larger profits. 
The vultures were neither long-term investors in Argentina nor the optimists who believed that Washington Consensus policies would work. 
They were simply speculators who swooped in after the 2001 default and bought up bonds for a fraction of their face value from panicky investors. 
They then sued Argentina to obtain 100% of that value. 
NML Capital, a subsidiary of the hedge fund Elliot Management, headed by Paul Singer, spent $48 million on bonds in 2008; thanks to Griesa’s ruling, NML Capital should now receive $832 million – a return of more than 1,600%. 
The figures are so high in part because the vultures seek to earn past interest, which, for some securities, includes a country-risk premium – the higher interest rate offered when they were issued to offset the larger perceived probability of default. 
Griesa found that this was reasonable. 
Economically, though, it makes no sense. 
When a country pays a risk premium on its debt, it means that default is a possibility. 
But if a court rules that a country always must repay the debt, there is no default risk to be compensated. 
Repayment on Griesa’s terms would devastate Argentina’s economy. 
NML Capital and the other vultures comprise just 1% of the creditors, but would receive a total of $1.5 billion. 
Other holdouts (6.6% of total creditors) would receive $15 billion. 
And, because the debt restructuring stipulated that all of the creditors who accepted it could demand the same terms as holdouts receive, Argentina might be on the hook for $140 billion more. 
Every Argentine might thus owe more than $3,500 – more than one-third of average annual per capita income. 
In the United States, applying the equivalent proportion would mean forcing every citizen to pay roughly $20,000 – all to line the pockets of some billionaires, intent on wringing the country dry. 
What’s more, the existence of credit default swaps creates the possibility of further gains for the vultures. 
A CDS insures against a default, paying off if the bonds do not. 
They can yield substantial returns, regardless of whether the bonds are repaid – thus reducing their holders’ incentive to achieve an agreement. 
In the run-up to July 30, the vultures conducted a scare campaign. 
A second default in 13 years would be a big setback for Argentina, they claimed, threatening the country’s fragile economy. 
But all of this presumed that financial markets would not distinguish between a default and a Griesafault. 
Fortunately, they did: Interest rates for different categories of Argentine corporate loans have not reacted to the event. 
In fact, borrowing costs on July 30 were lower than the average for the whole year. 
Ultimately, though, the Griesafault will carry a high price – less for Argentina than for the global economy and countries needing access to foreign financing. 
America will suffer, too. 
Its courts have been a travesty: As one observer pointed out,it was clear that Griesa never really fathomed the issue’s complexity. 
The US financial system, already practiced at exploiting poor Americans, has extended its efforts globally. 
Sovereign borrowers will not – and should not – trust the fairness and competence of the US judiciary. 
The market for issuance of such bonds will move elsewhere. 

Debeaking the Vultures 
NEW YORK – In the midst of the ongoing dispute between Argentina and the “vulture funds” that hold its bonds, a broad consensus has emerged concerning the need for sovereign-debt restructuring mechanisms (SDRMs). 
Otherwise, US Federal Judge Thomas P. Griesa’s ruling that Argentina must pay the vultures in full (after 93% of other bondholders agreed to a restructuring) will give free rein to opportunistic behaviors that sabotage future restructurings. 
Most recently, the International Capital Market Association (ICMA) recommended new terms for government bonds. 
Though the ICMA’s proposal leaves unresolved the hundreds of billions of bonds written under the old terms, the new framework says in effect that Griesa’s interpretation was wrong, and recognizes that leaving it in place would make restructuring impossible. 
The ICMA’s proposed contractual terms clarify the pari passu clause that was at the heart of Griesa’s muddle-headed ruling. 
The intent of the clause – a standard component of sovereign-bond contracts – was always to ensure that the issuing country treated identical bondholders identically. 
But it has always been recognized that senior creditors – for example, the International Monetary Fund – are treated differently. 
Griesa did not seem to grasp the common understanding of the clause. 
After Argentina defaulted on its sovereign debt in 2001, vulture funds bought defaulted bonds in the secondary market at a fraction of their face value, and then sued for full payment. 
According to Griesa’s interpretation of pari passu, if Argentina paid the interest that it owed to creditors that accepted the restructuring, it had to pay the vultures in full – including all past interest and the principal. 
The vultures’ business was enabled in part by litigation over the so-called champerty defense – based on a longstanding English common-law doctrine, later adopted by US state legislatures, prohibiting the purchase of debt with the intent of bringing a lawsuit. 
Argentina is simply the latest victim in the vultures’ long legal battle to change the rules of the game to permit them to prey on poor countries seeking to restructure their debts. 
In 1999, in Elliot Associates, LP v. Banco de la Nacion and the Republic of Peru, the Second Circuit Court of Appeals determined that the plaintiff’s intent in purchasing the discounted debt was to be paid in full or otherwise to sue. 
The court then ruled that Elliot’s intent, because it was contingent, did not meet the champerty requirement. 
Though some other courts accepted the Second Circuit’s narrow reading of the champerty defense, the vultures were not satisfied and went to the New York state legislature, which in 2004 effectively eliminated the defense of champerty concerning any debt purchase above $500,000. 
That decision contradicted understandings according to which hundreds of billions of dollars of debt had already been issued. 
Investors who acquire defaulted sovereign debt at huge discounts should not expect repayment in full; the discount is an indication that the market does not expect that, and it is only through litigation that one could hope to receive anything close to it. 
An important change in the legal framework, such as the elimination of the champerty defense, is de facto a change in “property rights,” with the debtors losing, and creditors who purchase the bonds intending to sue if they are not paid what they want – the vultures – gaining. 
The vultures were thus unjustly enriched, doubly so with the novel and unjustified interpretation of the pari passu clause. 
Will so-called collective-action clauses (CACs) – another aspect of the ICMA “reform” aimed at debeaking the vultures – save the day? 
In many countries, CACs stipulate that if, say, two-thirds of the investors accept a company’s (or a country’s) restructuring proposal, the other investors are bound to go along. 
This mechanism prevents speculative holdouts from holding up the restructuring process and demanding ransom. 
But CACs do not exist for sovereign debt written in many jurisdictions, leaving the field open for the vultures. 
Moreover, CACs are no panacea. 
If they were, there would be no need for domestic bankruptcy law, which spells out issues like precedence and fair treatment. 
But no government has found CACs adequate for resolving domestic restructuring. 
So why should we think that they would suffice in the much more complex world of sovereign-debt restructurings? 
In particular, CACs suffer from the problem of “aggregation.” 
If a CAC required, say, 75% of the holders of each bond class, vultures could buy 26% of only one bond class and block the entire restructuring. 
The recent Greek debt restructuring had to confront this issue. 
The ICMA’s new framework seems to provide a way out: The supermajority would be defined by the acceptance of the aggregate principal amount of outstanding debt securities of all of the affected series. 
The supermajority’s decisions would be binding on all other investors. 
But this, too, poses a problem: The more junior creditors could vote to have themselves treated in the same way as more senior creditors. 
What recourse would the senior creditors then have? 
In bankruptcy court, they would have grounds for objecting, and the judge would have to weigh the equities. 
These issues are especially important in the context of sovereign-debt restructurings, because the claimants to a country’s resources include not only formal creditors; others, too – for example, pensioners – might not be paid if bondholders are paid in full. 
Chapter 9 of the US Bankruptcy Code (which applies to public entities) recognizes these rights – unlike Griesa and the vultures. 
Today, the international community faces two challenges. 
One is to deal with the hundreds of billions of dollars of debt written under the old terms, which cannot be restructured under Griesa’s ruling. 
The second is to decide on the terms that should be imposed in the future. 
The investing community has made a serious proposal. 
But changes of this magnitude must be based on discussions among creditors and debtor governments – and more is needed than tweaking the terms of the agreements. 
An initiative at the United Nations to encourage the establishment of SDRMs is receiving the support of prominent academic economists and practitioners. 
Global efforts are good first steps to remedy the damage to international financial markets that the US courts have inflicted. 
For the sake of a healthy global economy, the vultures must be grounded. 

Stagnation by Design 
NEW YORK – Soon after the global financial crisis erupted in 2008, I warned that unless the right policies were adopted, Japanese-style malaise – slow growth and near-stagnant incomes for years to come – could set in. 
While leaders on both sides of the Atlantic claimed that they had learned the lessons of Japan, they promptly proceeded to repeat some of the same mistakes. 
Now, even a key former United States official, the economist Larry Summers, is warning of secular stagnation. 
The basic point that I raised a half-decade ago was that, in a fundamental sense, the US economy was sick even before the crisis: it was only an asset-price bubble, created through lax regulation and low interest rates, that had made the economy seem robust. 
Beneath the surface, numerous problems were festering: growing inequality; an unmet need for structural reform (moving from a manufacturing-based economy to services and adapting to changing global comparative advantages); persistent global imbalances; and a financial system more attuned to speculating than to making investments that would create jobs, increase productivity, and redeploy surpluses to maximize social returns. 
Policymakers’ response to the crisis failed to address these issues; worse, it exacerbated some of them and created new ones – and not just in the US. 
The result has been increased indebtedness in many countries, as the collapse of GDP undermined government revenues. 
Moreover, underinvestment in both the public and private sector has created a generation of young people who have spent years idle and increasingly alienated at a point in their lives when they should have been honing their skills and increasing their productivity. 
On both sides of the Atlantic, GDP is likely to grow considerably faster this year than in 2013. 
But, before leaders who embraced austerity policies open the champagne and toast themselves, they should examine where we are and consider the near-irreparable damage that these policies have caused. 
Every downturn eventually comes to an end. 
The mark of a good policy is that it succeeds in making the downturn shallower and shorter than it otherwise would have been. 
The mark of the austerity policies that many governments embraced is that they made the downturn far deeper and longer than was necessary, with long-lasting consequences. 
Real (inflation-adjusted) GDP per capita is lower in most of the North Atlantic than it was in 2007; in Greece, the economy has shrunk by an estimated 23%. 
Germany, the top-performing European country, has recorded miserly 0.7% average annual growth over the last six years. 
The US economy is still roughly 15% smaller than it would have been had growth continued even on the moderate pre-crisis trajectory. 
But even these numbers do not tell the full story of how bad things are, because GDP is not a good measure of success. 
Far more relevant is what is happening to household incomes. 
Median real income in the US is below its level in 1989, a quarter-century ago; median income for full-time male workers is lower now than it was more than 40 years ago. 
Some, like the economist Robert Gordon, have suggested that we should adjust to a new reality in which long-term productivity growth will be significantly below what it has been over the past century. 
Given economists’ miserable record – reflected in the run-up to the crisis – for even three-year predictions, no one should have much confidence in a crystal ball that forecasts decades into the future. 
But this much seems clear: unless government policies change, we are in for a long period of disappointment. 
Markets are not self-correcting. 
The underlying fundamental problems that I outlined earlier could get worse – and many are. 
Inequality leads to weak demand; widening inequality weakens demand even more; and, in most countries, including the US, the crisis has only worsened inequality. 
The trade surpluses of northern Europe have increased, even as China’s have moderated. 
Most important, markets have never been very good at achieving structural transformations quickly on their own; the transition from agriculture to manufacturing, for example, was anything but smooth; on the contrary, it was accompanied by significant social dislocation and the Great Depression. 
This time is no different, but in some ways it could be worse: the sectors that should be growing, reflecting the needs and desires of citizens, are services like education and health, which traditionally have been publicly financed, and for good reason. 
But, rather than government facilitating the transition, austerity is inhibiting it. 
Malaise is better than a recession, and a recession is better than a depression. 
But the difficulties that we are facing now are not the result of the inexorable laws of economics, to which we simply must adjust, as we would to a natural disaster, like an earthquake or tsunami. 
They are not even a kind of penance that we have to pay for past sins – though, to be sure, the neoliberal policies that have prevailed for the past three decades have much to do with our current predicament. 
Instead, our current difficulties are the result of flawed policies. 
There are alternatives. 
But we will not find them in the self-satisfied complacency of the elites, whose incomes and stock portfolios are once again soaring. 
Only some people, it seems, must adjust to a permanently lower standard of living. 
Unfortunately, those people happen to be most people. 

The Innovation Enigma 
NEW YORK – Around the world, there is enormous enthusiasm for the type of technological innovation symbolized by Silicon Valley. 
In this view, America’s ingenuity represents its true comparative advantage, which others strive to imitate. 
But there is a puzzle: it is difficult to detect the benefits of this innovation in GDP statistics. 
What is happening today is analogous to developments a few decades ago, early in the era of personal computers. 
In 1987, economist Robert Solow – awarded the Nobel Prize for his pioneering work on growth – lamented that “You can see the computer age everywhere but in the productivity statistics.” 
There are several possible explanations for this. 
Perhaps GDP does not really capture the improvements in living standards that computer-age innovation is engendering. 
Or perhaps this innovation is less significant than its enthusiasts believe. 
As it turns out, there is some truth in both perspectives. 
Recall how a few years ago, just before the collapse of Lehman Brothers, the financial sector prided itself on its innovativeness. 
Given that financial institutions had been attracting the best and brightest from around the world, one would have expected nothing less. 
But, upon closer inspection, it became clear that most of this innovation involved devising better ways of scamming others, manipulating markets without getting caught (at least for a long time), and exploiting market power. 
In this period, when resources flowed to this “innovative” sector, GDP growth was markedly lower than it was before. 
Even in the best of times, it did not lead to an increase in living standards (except for the bankers), and it eventually led to the crisis from which we are only now recovering. 
The net social contribution of all of this “innovation” was negative. 
Similarly, the dot-com bubble that preceded this period was marked by innovation – Web sites through which one could order dog food and soft drinks online. 
At least this era left a legacy of efficient search engines and a fiber-optic infrastructure. 
But it is not an easy matter to assess how the time savings implied by online shopping, or the cost savings that might result from increased competition (owing to greater ease of price comparison online), affects our standard of living. 
Two things should be clear. 
First, the profitability of an innovation may not be a good measure of its net contribution to our standard of living. 
In our winner-takes-all economy, an innovator who develops a better Web site for online dog-food purchases and deliveries may attract everyone around the world who uses the Internet to order dog food, making enormous profits in the process. 
But without the delivery service, much of those profits simply would have gone to others. 
The Web site’s net contribution to economic growth may in fact be relatively small. 
Moreover, if an innovation, such as ATMs in banking, leads to increased unemployment, none of the social cost – neither the suffering of those who are laid off nor the increased fiscal cost of paying them unemployment benefits – is reflected in firms’ profitability. 
Likewise, our GDP metric does not reflect the cost of the increased insecurity individuals may feel with the increased risk of a loss of a job. 
Equally important, it often does not accurately reflect the improvement in societal wellbeing resulting from innovation. 
In a simpler world, where innovation simply meant lowering the cost of production of, say, an automobile, it was easy to assess an innovation’s value. 
But when innovation affects an automobile’s quality, the task becomes far more difficult. 
And this is even more apparent in other arenas: How do we accurately assess the fact that, owing to medical progress, heart surgery is more likely to be successful now than in the past, leading to a significant increase in life expectancy and quality of life? 
Still, one cannot avoid the uneasy feeling that, when all is said and done, the contribution of recent technological innovations to long-term growth in living standards may be substantially less than the enthusiasts claim. 
A lot of intellectual effort has been devoted to devising better ways of maximizing advertising and marketing budgets – targeting customers, especially the affluent, who might actually buy the product. 
But standards of living might have been raised even more if all of this innovative talent had been allocated to more fundamental research – or even to more applied research that could have led to new products. 
Yes, being better connected with each other, through Facebook or Twitter, is valuable. 
But how can we compare these innovations with those like the laser, the transistor, the Turing machine, and the mapping of the human genome, each of which has led to a flood of transformative products? 
Of course, there are grounds for a sigh of relief. 
Although we may not know how much recent technological innovations are contributing to our wellbeing, at least we know that, unlike the wave of financial innovations that marked the pre-crisis global economy, the effect is positive. 

Reforming China’s State-Market Balance 
BEIJING – No country in recorded history has grown as fast – and moved as many people out of poverty – as China over the last thirty years. 
A hallmark of China’s success has been its leaders’ willingness to revise the country’s economic model when and as needed, despite opposition from powerful vested interests. 
And now, as China implements another series of fundamental reforms, such interests are already lining up to resist. 
Can the reformers triumph again? 
In answering that question, the crucial point to bear in mind is that, as in the past, the current round of reforms will restructure not only the economy, but also the vested interests that will shape future reforms (and even determine whether they are possible). 
And today, while high-profile initiatives – for example, the government’s widening anti-corruption campaign – receive much attention, the deeper issue that China faces concerns the appropriate roles of the state and the market. 
When China began its reforms more than three decades ago, the direction was clear: the market needed to play a far greater role in resource allocation. 
And so it has, with the private sector far more important now than it was. 
Moreover, there is a broad consensus that the market needs to play what officials call a “decisive role” in many sectors where state-owned enterprises (SOEs) dominate. 
But what should its role be in other sectors, and in the economy more generally? 
Many of China’s problems today stem from too much market and too little government. 
Or, to put it another way, while the government is clearly doing some things that it should not, it is also not doing some things that it should. 
Worsening environmental pollution, for example, threatens living standards, while inequality of income and wealth now rivals that of the United States and corruption pervades public institutions and the private sector alike. 
All of this undermines trust within society and in government – a trend that is particularly obvious with respect to, say, food safety. 
Such problems could worsen as China restructures its economy away from export-led growth toward services and household consumption. 
Clearly, there is room for growth in private consumption; but embracing America’s profligate materialist life-style would be a disaster for China – and the planet. 
Air quality in China is already putting peoples’ lives at risk; global warming from even higher Chinese carbon emissions would threaten the entire world. 
There is a better strategy. 
For starters, Chinese living standards could and would increase if more resources were allocated to redress large deficiencies in health care and education. 
Here, government should play a leading role, and does so in most market economies, for good reason. 
America’s privately-based health-care system is expensive, inefficient, and achieves far worse outcomes than those in European countries, which spend far less. 
A more market-based system is not the direction in which China should be going. 
In recent years, the government has made important strides in providing basic health care, especially in rural areas, and some have likened China’s approach to that of the United Kingdom, where private provision is layered atop a public base. 
Whether that model is better than, say, French-style government-dominated provision may be debated. 
But if one adopts the UK model, the level of the base makes all the difference; given the relatively small role of private health-care provision in the UK, the country has what is essentially a public system. 
Likewise, though China has already made progress in moving away from manufacturing toward a service-based economy (the GDP share of services exceeded that of manufacturing for the first time in 2013), there is still a long way to go. 
Already, many industries are suffering from overcapacity, and efficient and smooth restructuring will not be easy without government help. 
China is restructuring in another way: rapid urbanization. 
Ensuring that cities are livable and environmentally sustainable will require strong government action to provide sufficient public transport, public schools, public hospitals, parks, and effective zoning, among other public goods. 
One major lesson that should have been learned from the post-2008 global economic crisis is that markets are not self-regulating. 
They are prone to asset and credit bubbles, which inevitably collapse – often when cross-border capital flows abruptly reverse direction – imposing massive social costs. 
America’s infatuation with deregulation was the cause of the crisis. 
The issue is not just the pacing and sequencing of liberalization, as some suggest; the end result also matters. 
Liberalization of deposit rates led to America’s savings and loan crisis in the 1980’s. 
Liberalization of lending rates encouraged predatory behavior that exploited poor consumers. 
Bank deregulation led not to more growth, but simply to more risk. 
China, one hopes, will not take the route that America followed, with such disastrous consequences. 
The challenge for its leaders is to devise effective regulatory regimes that are appropriate for its stage of development. 
That will require the government to raise more money. 
Local governments’ current reliance on land sales is a source of many of the economy’s distortions – and much of the corruption. 
Instead, the authorities should boost revenue by imposing environmental taxes (including a carbon tax), a more comprehensive progressive income tax (including capital gains), and a property tax. 
Moreover, the state should appropriate, through dividends, a larger share of SOEs’ value (some of which might be at the expense of these firms’ managers.) 
The question is whether China can maintain rapid growth (though somewhat slower than its recent breakneck pace), even as it reins in credit expansion (which could cause an abrupt reversal in asset prices), confronts weak global demand, restructures its economy, and fights corruption. 
In other countries, such daunting challenges have led to paralysis, not progress. 
The economics of success is clear: higher spending on urbanization, health care, and education, funded by increases in taxes, could simultaneously sustain growth, improve the environment, and reduce inequality. 
If China’s politics can manage the implementation of this agenda, China and the entire world will be better off. 

Democracy in the Twenty-First Century 
NEW YORK – The reception in the United States, and in other advanced economies, of Thomas Piketty’s recent book Capital in the Twenty-First Century attests to growing concern about rising inequality. 
His book lends further weight to the already overwhelming body of evidence concerning the soaring share of income and wealth at the very top. 
Piketty’s book, moreover, provides a different perspective on the 30 or so years that followed the Great Depression and World War II, viewing this period as a historical anomaly, perhaps caused by the unusual social cohesion that cataclysmic events can stimulate. 
In that era of rapid economic growth, prosperity was widely shared, with all groups advancing, but with those at the bottom seeing larger percentage gains. 
Piketty also sheds new light on the “reforms” sold by Ronald Reagan and Margaret Thatcher in the 1980s as growth enhancers from which all would benefit. 
Their reforms were followed by slower growth and heightened global instability, and what growth did occur benefited mostly those at the top. 
But Piketty’s work raises fundamental issues concerning both economic theory and the future of capitalism. 
He documents large increases in the wealth/output ratio. 
In standard theory, such increases would be associated with a fall in the return to capital and an increase in wages. 
But today the return to capital does not seem to have diminished, though wages have. (In the US, for example, average wages have stagnated over the past four decades.) 
The most obvious explanation is that the increase in measured wealth does not correspond to an increase in productive capital – and the data seem consistent with this interpretation. 
Much of the increase in wealth stemmed from an increase in the value of real estate. 
Before the 2008 financial crisis, a real-estate bubble was evident in many countries; even now, there may not have been a full “correction.” 
The rise in value also can represent competition among the rich for “positional” goods – a house on the beach or an apartment on New York City’s Fifth Avenue. 
Sometimes an increase in measured financial wealth corresponds to little more than a shift from “unmeasured” wealth to measured wealth – shifts that can actually reflect deterioration in overall economic performance. 
If monopoly power increases, or firms (like banks) develop better methods of exploiting ordinary consumers, it will show up as higher profits and, when capitalized, as an increase in financial wealth. 
But when this happens, of course, societal wellbeing and economic efficiency fall, even as officially measured wealth rises. 
We simply do not take into account the corresponding diminution of the value of human capital – the wealth of workers. 
Moreover, if banks succeed in using their political influence to socialize losses and retain more and more of their ill-gotten gains, the measured wealth in the financial sector increases. 
We do not measure the corresponding diminution of taxpayers’ wealth. 
Likewise, if corporations convince the government to overpay for their products (as the major drug companies have succeeded in doing), or are given access to public resources at below-market prices (as mining companies have succeeded in doing), reported financial wealth increases, though the wealth of ordinary citizens does not. 
What we have been observing – wage stagnation and rising inequality, even as wealth increases – does not reflect the workings of a normal market economy, but of what I call “ersatz capitalism.” 
The problem may not be with how markets should or do work, but with our political system, which has failed to ensure that markets are competitive, and has designed rules that sustain distorted markets in which corporations and the rich can (and unfortunately do) exploit everyone else. 
Markets, of course, do not exist in a vacuum. There have to be rules of the game, and these are established through political processes. 
High levels of economic inequality in countries like the US and, increasingly, those that have followed its economic model, lead to political inequality. 
In such a system, opportunities for economic advancement become unequal as well, reinforcing low levels of social mobility. 
Thus, Piketty’s forecast of still higher levels of inequality does not reflect the inexorable laws of economics. 
Simple changes – including higher capital-gains and inheritance taxes, greater spending to broaden access to education, rigorous enforcement of anti-trust laws, corporate-governance reforms that circumscribe executive pay, and financial regulations that rein in banks’ ability to exploit the rest of society – would reduce inequality and increase equality of opportunity markedly. 
If we get the rules of the game right, we might even be able to restore the rapid and shared economic growth that characterized the middle-class societies of the mid-twentieth century. 
The main question confronting us today is not really about capital in the twenty-first century. 
It is about democracy in the twenty-first century. 

Creating a Learning Society 
NEW YORK – Citizens in the world’s richest countries have come to think of their economies as being based on innovation. 
But innovation has been part of the developed world’s economy for more than two centuries. 
Indeed, for thousands of years, until the Industrial Revolution, incomes stagnated. 
Then per capita income soared, increasing year after year, interrupted only by the occasional effects of cyclical fluctuations. 
The Nobel laureate economist Robert Solow noted some 60 years ago that rising incomes should largely be attributed not to capital accumulation, but to technological progress – to learning how to do things better. 
While some of the productivity increase reflects the impact of dramatic discoveries, much of it has been due to small, incremental changes. 
And, if that is the case, it makes sense to focus attention on how societies learn, and what can be done to promote learning – including learning how to learn. 
A century ago, the economist and political scientist Joseph Schumpeter argued that the central virtue of a market economy was its capacity to innovate. 
He contended that economists’ traditional focus on competitive markets was misplaced; what mattered was competition for the market, not competition in the market. 
Competition for the market drove innovation. 
A succession of monopolists would lead, in this view, to higher standards of living in the long run. 
Schumpeter’s conclusions have not gone unchallenged. 
Monopolists and dominant firms, like Microsoft, can actually suppress innovation. 
Unless checked by anti-trust authorities, they can engage in anti-competitive behavior that reinforces their monopoly power. 
Moreover, markets may not be efficient in either the level or direction of investments in research and learning. 
Private incentives are not well aligned with social returns: firms can gain from innovations that increase their market power, enable them to circumvent regulations, or channel rents that would otherwise accrue to others. 
But one of Schumpeter’s fundamental insights has held up well: Conventional policies focusing on short-run efficiency may not be desirable, once one takes a long-run innovation/learning perspective. 
This is especially true for developing countries and emerging markets. 
Industrial policies – in which governments intervene in the allocation of resources among sectors or favor some technologies over others – can help “infant economies” learn. 
Learning may be more marked in some sectors (such as industrial manufacturing) than in others, and the benefits of that learning, including the institutional development required for success, may spill over to other economic activities. 
Such policies, when adopted, have been frequent targets of criticism. 
Government, it is often said, should not be engaged in picking winners. The market is far better in making such judgments. 
But the evidence on that is not as compelling as free-market advocates claim. 
America’s private sector was notoriously bad in allocating capital and managing risk in the years before the global financial crisis, while studies show that average returns to the economy from government research projects are actually higher than those from private-sector projects – especially because the government invests more heavily in important basic research. 
One only needs to think of the social benefits traceable to the research that led to the development of the Internet or the discovery of DNA. 
But, putting such successes aside, the point of industrial policy is not to pick winners at all. 
Rather, successful industrial policies identify sources of positive externalities – sectors where learning might generate benefits elsewhere in the economy. 
Viewing economic policies through the lens of learning provides a different perspective on many issues. 
The great economist Kenneth Arrow emphasized the importance of learning by doing. 
The only way to learn what is required for industrial growth, for example, is to have industry. 
And that may require either ensuring that one’s exchange rate is competitive or that certain industries have privileged access to credit – as a number of East Asian countries did as part of their remarkably successful development strategies. 
There is a compelling infant economy argument for industrial protection. 
Moreover, financial-market liberalization may undermine countries’ ability to learn another set of skills that are essential for development: how to allocate resources and manage risk. 
Likewise, intellectual property, if not designed properly, can be a two-edged sword when viewed from a learning perspective. 
While it may enhance incentives to invest in research, it may also enhance incentives for secrecy – impeding the flow of knowledge that is essential to learning while encouraging firms to maximize what they draw from the pool of collective knowledge and to minimize what they contribute. 
In this scenario, the pace of innovation is actually reduced. 
More broadly, many of the policies (especially those associated with the neoliberal “Washington Consensus”) foisted on developing countries with the noble objective of promoting the efficiency of resource allocation today actually impede learning, and thus lead to lower standards of living in the long run. 
Virtually every government policy, intentionally or not, for better or for worse, has direct and indirect effects on learning. Developing countries where policymakers are cognizant of these effects are more likely to close the knowledge gap that separates them from the more developed countries. 
Developed countries, meanwhile, have an opportunity to narrow the gap between average and best practices, and to avoid the danger of secular stagnation. 

South Africa Breaks Out 
NEW YORK – International investment agreements are once again in the news. 
The United States is trying to impose a strong investment pact within the two big so-called “partnership” agreements, one bridging the Atlantic, the other the Pacific, that are now being negotiated. 
But there is growing opposition to such moves. 
South Africa has decided to stop the automatic renewal of investment agreements that it signed in the early post-apartheid period, and has announced that some will be terminated. 
Ecuador and Venezuela have already terminated theirs. 
India says that it will sign an investment agreement with the US only if the dispute-resolution mechanism is changed. 
For its part, Brazil has never had one at all. 
There is good reason for the resistance. 
Even in the US, labor unions and environmental, health, development, and other nongovernmental organizations have objected to the agreements that the US is proposing. 
The agreements would significantly inhibit the ability of developing countries’ governments to protect their environment from mining and other companies; their citizens from the tobacco companies that knowingly purvey a product that causes death and disease; and their economies from the ruinous financial products that played such a large role in the 2008 global financial crisis. 
They restrict governments even from placing temporary controls on the kind of destabilizing short-term capital flows that have so often wrought havoc in financial markets and fueled crises in developing countries. 
Indeed, the agreements have been used to challenge government actions ranging from debt restructuring to affirmative action. 
Advocates of such agreements claim that they are needed to protect property rights. 
But countries like South Africa already have strong constitutional guarantees of property rights. 
There is no reason that foreign-owned property should be better protected than property owned by a country’s own citizens. 
Moreover, if constitutional guarantees are not enough to convince investors of South Africa’s commitment to protecting property rights, foreigners can always avail themselves of expropriation insurance provided by the Multilateral Investment Guarantee Agency (a division of the World Bank) or numerous national organizations providing such insurance. 
(Americans, for example, can buy insurance from the Overseas Private Investment Corporation.) 
But those supporting the investment agreements are not really concerned about protecting property rights, anyway. 
The real goal is to restrict governments’ ability to regulate and tax corporations – that is, to restrict their ability to impose responsibilities, not just uphold rights. 
Corporations are attempting to achieve by stealth – through secretly negotiated trade agreements – what they could not attain in an open political process. 
Even the notion that this is about protecting foreign firms is a ruse: companies based in country A can set up a subsidiary in country B to sue country A’s government. American courts, for example, have consistently ruled that corporations need not be compensated for the loss of profits from a change in regulations (a so-called regulatory taking); but, under the typical investment agreement, a foreign firm (or an American firm, operating through a foreign subsidiary) can demand compensation! 
Worse, investment agreements enable companies to sue the government over perfectly sensible and just regulatory changes – when, say, a cigarette company’s profits are lowered by a regulation restricting the use of tobacco. 
In South Africa, a firm could sue if it believes that its bottom line might by harmed by programs designed to address the legacy of official racism. 
There is a long-standing presumption of “sovereign immunity”: states can be sued only under limited circumstances. 
But investment agreements like those backed by the US demand that developing countries waive this presumption and permit the adjudication of suits according to procedures that fall far short of those expected in twenty-first-century democracies. 
Such procedures have proved to be arbitrary and capricious, with no systemic way to reconcile incompatible rulings issued by different panels. 
While proponents argue that investment treaties reduce uncertainty, the ambiguities and conflicting interpretations of these agreements’ provisions have increased uncertainty. 
Countries that have signed such investment agreements have paid a high price. 
Several have been subject to enormous suits – and enormous payouts. 
There have even been demands that countries honor contracts signed by previous non-democratic and corrupt governments, even when the International Monetary Fund and other multilateral organizations have recommended that the contract be abrogated. 
Even when developing-country governments win the suits (which have proliferated greatly in the last 15 years), the litigation costs are huge. 
The (intended) effect is to chill governments’ legitimate efforts to protect and advance citizens’ interests by imposing regulations, taxation, and other responsibilities on corporations. 
Moreover, for developing countries that were foolish enough to sign such agreements, the evidence is that the benefits, if any, have been scant. 
In South Africa’s review, it found that it had not received significant investments from the countries with which it had signed agreements, but had received significant investments from those with which it had not. 
It is no surprise that South Africa, after a careful review of investment treaties, has decided that, at the very least, they should be renegotiated. 
Doing so is not anti-investment; it is pro-development. 
And it is essential if South Africa’s government is to pursue policies that best serve the country’s economy and citizens. 
Indeed, by clarifying through domestic legislation the protections offered to investors, South Africa is once again demonstrating – as it has repeatedly done since the adoption of its new Constitution in 1996 – its commitment to the rule of law. 
It is the investment agreements themselves that most seriously threaten democratic decision-making. 
South Africa should be congratulated. 
Other countries, one hopes, will follow suit. 

A Light Unto Cities 
NEW YORK – Last month, a remarkable gathering occurred in Medellín, Colombia. 
Some 22,000 people came together to attend the World Urban Forum and discuss the future of cities. 
The focus was on creating “cities for life” – that is, on promoting equitable development in the urban environments in which a majority of the world’s citizens already live, and in which two thirds will reside by the year 2050. 
The location itself was symbolic: Once notorious for its drug gangs, Medellín now has a well-deserved reputation as one of the most innovative cities in the world. 
The tale of the city’s transformation holds important lessons for urban areas everywhere. 
In the 1980’s and 1990’s, cartel bosses like the infamous Pablo Escobar ruled Medellín’s streets and controlled its politics. 
The source of Escobar’s power was not just the hugely profitable international cocaine trade (fueled by demand in the United States), but also extreme inequality in Medellín and Colombia. 
On the steep Andean slopes of the valley that cradles the city, vast slums, virtually abandoned by the government, provided a ready supply of recruits for the cartels. 
In the absence of public services, Escobar won the hearts and minds of Medellín’s poorest with his largesse – even as he terrorized the city. 
One can hardly recognize those slums today. 
In the poor neighborhood of Santo Domingo, the city’s new Metrocable system, consisting of three lines of aerial gondolas, serves residents hundreds of vertical feet up a mountainside, ending their isolation from the city center. 
The commute is now minutes, and the social and economic barriers between the informal settlements and the rest of the city are on their way to being broken down. 
The problems of the city’s poor neighborhoods have not been erased, but the benefits that the infrastructure improvements have brought are brilliantly evident in the well-kept houses, murals, and soccer fields perched near the gondola stations. 
The cable cars are only the most iconic of the projects for which Medellín last year won Harvard University’s Veronica Rudge Green Prize in Urban Design, the most prestigious award in the field. 
Beginning with the mayoralty of Sergio Fajardo (now the governor of Medellín’s department, Antioquia), who took office in 2004, the city has made major efforts to transform its slums, improve education, and promote development. 
(The current mayor, Aníbal Gaviria, has affirmed his commitment to continuing on this path.) 
Medellín constructed avant-garde public buildings in areas that were the most run down, provided house paint to citizens living in poor districts, and cleaned up and improved the streets – all in the belief that if you treat people with dignity, they will value their surroundings and take pride in their communities. And that faith has been more than borne out. 
Throughout the world, cities are both the locus and the focus of society’s major debates, and for good reason. 
When individuals live in close quarters, they cannot escape major societal problems: growing inequality, environmental degradation, and inadequate public investment. 
The forum reminded participants that livable cities require planning – a message at odds with prevailing attitudes in much of the world. 
But without planning and government investment in infrastructure, public transportation and parks, and the provision of clean water and sanitation, cities won’t be livable. 
And it is the poor who inevitably suffer the most from the absence of these public goods. 
Medellín holds some lessons for America, too. 
Indeed, recent research shows how inadequate planning has fueled economic segregation in the United States, and how poverty traps have formed in cities without public transportation, owing to a shortage of accessible jobs. 
The conference went beyond this, emphasizing that “livable cities” are not enough. 
We need to create urban areas in which individuals can flourish and innovate. 
It is no accident that the Enlightenment – which led in turn to the fastest and largest increases in living standards in human history – unfolded in cities. 
New thinking is a natural consequence of high population density, provided the right conditions are met – conditions that include public spaces in which people can interact and culture can thrive, and a democratic ethos that welcomes and encourages public participation. 
A key theme of the forum was the emerging consensus on the need for environmentally, socially, and economically sustainable development. 
All of these aspects of sustainability are intertwined and complementary, and cities provide the context in which this is most clear. 
One of the biggest obstacles to achieving sustainability is inequality. 
Our economies, our democracies, and our societies pay a high price for the growing gap between the rich and poor. 
And perhaps the most invidious aspect of the widening income and wealth gap in so many countries is that it is deepening inequality of opportunity. 
Some cities have shown that these widely observed patterns are not the result of immutable economic laws. 
Even in the advanced country with the most inequality – the US – some cities, like San Francisco and San Jose, are comparable to the best-performing economies in terms of equality of opportunity. 
With political gridlock afflicting so many national governments around the world, forward-thinking cities are becoming a beacon of hope. 
A divided US seems incapable of addressing its alarming increase in inequality. 
But in New York City, Mayor Bill de Blasio was elected on the promise of doing something about it. 
While there are limits to what can be done at the local level – national taxation, for instance, is far more important than municipal taxes – cities can help ensure the availability of affordable housing. 
And they have a special responsibility to provide high-quality public education and public amenities for all, regardless of income. 
Medellín and the World Urban Forum have shown that this is not just a pipe dream. 
Another world is possible; we need only the political will to pursue it. 

Advanced Malaise 
NEW YORK – Economics is often called the dismal science, and for the last half-decade it has come by its reputation honestly in the advanced economies. 
Unfortunately, the year ahead will bring little relief. 
Real (inflation-adjusted) per capita GDP in France, Greece, Italy, Spain, the United Kingdom, and the United States is lower today than before the Great Recession hit. 
Indeed, Greece’s per capita GDP has shrunk nearly 25% since 2008. 
There are a few exceptions: After more than two decades, Japan’s economy appears to be turning a corner under Prime Minister Shinzo Abe’s government; but, with a legacy of deflation stretching back to the 1990’s, it will be a long road back. 
And Germany’s real per capita GDP was higher in 2012 than it was in 2007 – though an increase of 3.9% in five years is not much to boast about. 
Elsewhere, though, things really are dismal: unemployment in the eurozone remains stubbornly high and the long-term unemployment rate in the US still far exceeds its pre-recession levels. 
In Europe, growth appears set to return this year, though at a truly anemic rate, with the International Monetary Fund projecting a 1% annual increase in output. 
In fact, the IMF’s forecasts have repeatedly proved overly optimistic: the Fund predicted 0.2% growth for the eurozone in 2013, compared to what is likely to be a 0.4% contraction; and it predicted US growth to reach 2.1%, whereas it now appears to have been closer to 1.6%. 
With European leaders wedded to austerity and moving at a glacial pace to address the structural problems stemming from the eurozone’s flawed institutional design, it is no wonder that the continent’s prospects appear so bleak. 
But, on the other side of the Atlantic, there is cause for muted optimism. 
Revised data for the US indicate that real GDP grew at an annual pace of 4.1% in the third quarter of 2013, while the unemployment rate finally reached 7% in November – the lowest level in five years. 
A half-decade of low construction has largely worked off the excess building that occurred during the housing bubble. 
The development of vast reserves of shale energy has moved America toward its long-sought goal of energy independence and reduced gas prices to record lows, contributing to the first glimmer of a manufacturing revival. 
And a booming high-tech sector has become the envy of the rest of the world. 
Most important, a modicum of sanity has been restored to the US political process. 
Automatic budget cuts – which reduced 2013 growth by as much as 1.75 percentage points from what it otherwise would have been – continue, but in a much milder form. 
Moreover, the cost curve for health care – a main driver of long-term fiscal deficits – has bent down. 
Already, the Congressional Budget Office projects that spending in 2020 for Medicare and Medicaid (the government health-care programs for the elderly and the poor, respectively) will be roughly 15% below the level projected in 2010. 
It is possible, even likely, that US growth in 2014 will be rapid enough to create more jobs than required for new entrants into the labor force. 
At the very least, the huge number (roughly 22 million) of those who want a full-time job and have been unable to find one should fall. 
But we should curb our euphoria. 
A disproportionate share of the jobs now being created are low-paying – so much so that median incomes (those in the middle) continue to decline. 
For most Americans, there is no recovery, with 95% of the gains going to the top 1%. 
Even before the recession, American-style capitalism was not working for a large share of the population. 
The recession only made its rough edges more apparent. 
Median income (adjusted for inflation) is still lower than it was in 1989, almost a quarter-century ago; and median income for males is lower than it was four decades ago. 
America’s new problem is long-term unemployment, which affects nearly 40% of those without jobs, compounded by one of the poorest unemployment-insurance systems among advanced countries, with benefits normally expiring after 26 weeks. 
During downturns, the US Congress extends these benefits, recognizing that individuals are unemployed not because they are not looking for work, but because there are no jobs. 
But now congressional Republicans are refusing to adapt the unemployment system to this reality; as Congress went into recess for the holidays, it gave the long-term unemployed the equivalent of a pink slip: as 2014 begins, the roughly 1.3 million Americans who lost their unemployment benefits at the end of December have been left to their own devices. 
Happy New Year. 
Meanwhile, a major reason that the US unemployment rate is currently as low as it is, is that so many people have dropped out of the labor force. 
Labor-force participation is at levels not seen in more than three decades. 
Some say that this largely reflects demographics: an increasing share of the working-age population is over 50, and labor-force participation has always been lower among this group than among younger cohorts. 
But this simply recasts the problem: the US economy has never been good at retraining workers. 
American workers are treated like disposable commodities, tossed aside if and when they cannot keep up with changes in technology and the marketplace. 
The difference now is that these workers are no longer a small fraction of the population. 
None of this is inevitable. 
It is the result of bad economic policy and even worse social policy, which waste the country’s most valuable resource – its human talent – and cause immense suffering for affected individuals and their families. 
They want to work, but the US economic system is failing them. 
So, with Europe’s Great Malaise continuing in 2014 and the US recovery excluding all but those at the top, count me dismal. 
On both sides of the Atlantic, market economies are failing to deliver for most citizens. 
How long can this continue? 


American Delusions Down Under 
NEW YORK – For better or worse, economic-policy debates in the United States are often echoed elsewhere, regardless of whether they are relevant. 
Australian Prime Minister Tony Abbott’s recently elected government provides a case in point. 
As in many other countries, conservative governments are arguing for cutbacks in government spending, on the grounds that fiscal deficits imperil their future. 
In the case of Australia, however, such assertions ring particularly hollow – though that has not stopped Abbott’s government from trafficking in them. 
Even if one accepts the claim of the Harvard economists Carmen Reinhart and Kenneth Rogoff that very high public debt levels mean lower growth – a view that they never really established and that has subsequently been discredited – Australia is nowhere near that threshold. 
Its debt/GDP ratio is only a fraction of that of the US, and one of the lowest among the OECD countries. 
What matters more for long-term growth are investments in the future – including crucial public investments in education, technology, and infrastructure. 
Such investments ensure that all citizens, no matter how poor their parents, can live up to their potential. 
There is something deeply ironic about Abbott’s reverence for the American model in defending many of his government’s proposed “reforms.” 
After all, America’s economic model has not been working for most Americans. 
Median income in the US is lower today than it was a quarter-century ago – not because productivity has been stagnating, but because wages have. 
The Australian model has performed far better. 
Indeed, Australia is one of the few commodity-based economies that has not suffered from the natural-resource curse. 
Prosperity has been relatively widely shared. 
Median household income has grown at an average annual rate above 3% in the last decades – almost twice the OECD average. 
To be sure, given its abundance of natural resources, Australia should have far greater equality than it does. 
After all, a country’s natural resources should belong to all of its people, and the “rents” that they generate provide a source of revenue that could be used to reduce inequality. 
And taxing natural-resource rents at high rates does not cause the adverse consequences that follow from taxing savings or work (reserves of iron ore and natural gas cannot move to another country to avoid taxation). 
But Australia’s Gini coefficient, a standard measure of inequality, is one-third higher than that of Norway, a resource-rich country that has done a particularly good job of managing its wealth for the benefit of all citizens. 
One wonders whether Abbott and his government really understand what has happened in the US? 
Does he realize that since the era of deregulation and liberalization began in the late 1970s, GDP growth has slowed markedly, and that what growth has occurred has primarily benefited those at the top? 
Does he know that prior to these “reforms,” the US had not had a financial crisis – now a regular occurrence around the world – for a half-century, and that deregulation led to a bloated financial sector that attracted many talented young people who otherwise might have devoted their careers to more productive activities? 
Their financial innovations made them extremely rich but brought America and the global economy to the brink of ruin. 
Australia’s public services are the envy of the world. 
Its health-care system delivers better outcomes than the US, at a fraction of the cost. 
It has an income-contingent education-loan program that permits borrowers to spread their repayments over more years if necessary, and in which, if their income turns out to be particularly low (perhaps because they chose important but low-paying jobs, say, in education or religion), the government forgives some of the debt. 
The contrast with the US is striking. 
In the US, student debt, now in excess of $1.2 trillion (more than all credit-card debt), is becoming a burden for graduates and the economy. 
America’s failed financial model for higher education is one of the reasons that, among the advanced countries, America now has the least equality of opportunity, with the life prospects of a young American more dependent on his or her parents’ income and education than in other advanced countries. 
Abbott’s notions about higher education also suggest that he clearly does not understand why America’s best universities succeed. 
It is not price competition or the drive for profit that has made Harvard, Yale, or Stanford great. 
None of America’s great universities are for-profit-institutions. 
They are all not-for-profit institutions, either public or supported by large endowments, contributed largely by alumni and foundations. 
There is competition, but of a different sort. 
They strive for inclusiveness and diversity. 
They compete for government research grants. 
America’s under-regulated for-profit universities excel in two dimensions: the ability to exploit young people from poor backgrounds, charging them high fees without delivering anything of value, and the ability to lobby for government money without regulation and to continue their exploitative practices. 
Australia should be proud of its successes, from which the rest of the world can learn a great deal. 
It would be a shame if a misunderstanding of what has happened in the US, combined with a strong dose of ideology, caused its leaders to fix what is not broken. 

Europe’s Austerity Zombies 
NEW YORK – “If the facts don’t fit the theory, change the theory,” goes the old adage. 
But too often it is easier to keep the theory and change the facts – or so German Chancellor Angela Merkel and other pro-austerity European leaders appear to believe. 
Though facts keep staring them in the face, they continue to deny reality. 
Austerity has failed. 
But its defenders are willing to claim victory on the basis of the weakest possible evidence: the economy is no longer collapsing, so austerity must be working! 
But if that is the benchmark, we could say that jumping off a cliff is the best way to get down from a mountain; after all, the descent has been stopped. 
But every downturn comes to an end. 
Success should not be measured by the fact that recovery eventually occurs, but by how quickly it takes hold and how extensive the damage caused by the slump. 
Viewed in these terms, austerity has been an utter and unmitigated disaster, which has become increasingly apparent as European Union economies once again face stagnation, if not a triple-dip recession, with unemployment persisting at record highs and per capita real (inflation-adjusted) GDP in many countries remaining below pre-recession levels. 
In even the best-performing economies, such as Germany, growth since the 2008 crisis has been so slow that, in any other circumstance, it would be rated as dismal. 
The most afflicted countries are in a depression. 
There is no other word to describe an economy like that of Spain or Greece, where nearly one in four people – and more than 50% of young people – cannot find work. 
To say that the medicine is working because the unemployment rate has decreased by a couple of percentage points, or because one can see a glimmer of meager growth, is akin to a medieval barber saying that a bloodletting is working, because the patient has not died yet. 
Extrapolating Europe’s modest growth from 1980 onwards, my calculations show that output in the eurozone today is more than 15% below where it would have been had the 2008 financial crisis not occurred, implying a loss of some $1.6 trillion this year alone, and a cumulative loss of more than $6.5 trillion. 
Even more disturbing, the gap is widening, not closing (as one would expect following a downturn, when growth is typically faster than normal as the economy makes up lost ground). 
Simply put, the long recession is lowering Europe’s potential growth. 
Young people who should be accumulating skills are not. 
There is overwhelming evidence that they face the prospect of significantly lower lifetime income than if they had come of age in a period of full employment. 
Meanwhile, Germany is forcing other countries to follow policies that are weakening their economies – and their democracies. 
When citizens repeatedly vote for a change of policy – and few policies matter more to citizens than those that affect their standard of living – but are told that these matters are determined elsewhere or that they have no choice, both democracy and faith in the European project suffer. 
France voted to change course three years ago. 
Instead, voters have been given another dose of pro-business austerity. 
One of the longest-standing propositions in economics is the balanced-budget multiplier – increasing taxes and expenditures in tandem stimulates the economy. 
And if taxes target the rich, and spending targets the poor, the multiplier can be especially high. 
But France’s so-called socialist government is lowering corporate taxes and cutting expenditures – a recipe almost guaranteed to weaken the economy, but one that wins accolades from Germany. 
The hope is that lower corporate taxes will stimulate investment. 
This is sheer nonsense. 
What is holding back investment (both in the United States and Europe) is lack of demand, not high taxes. 
Indeed, given that most investment is financed by debt, and that interest payments are tax-deductible, the level of corporate taxation has little effect on investment. 
Likewise, Italy is being encouraged to accelerate privatization. 
But Prime Minister Matteo Renzi has the good sense to recognize that selling national assets at fire-sale prices makes little sense. 
Long-run considerations, not short-run financial exigencies, should determine which activities occur in the private sector. 
The decision should be based on where activities are carried out most efficiently, serving the interests of most citizens the best. 
Privatization of pensions, for example, has proved costly in those countries that have tried the experiment. 
America’s mostly private health-care system is the least efficient in the world. 
These are hard questions, but it is easy to show that selling state-owned assets at low prices is not a good way to improve long-run financial strength. 
All of the suffering in Europe – inflicted in the service of a man-made artifice, the euro – is even more tragic for being unnecessary. 
Though the evidence that austerity is not working continues to mount, Germany and the other hawks have doubled down on it, betting Europe’s future on a long-discredited theory. 
Why provide economists with more facts to prove the point? 

Rethinking Pharmaceutical Business Models 
ZURICH – The world’s health needs are changing dramatically. 
Demographic trends, shifting patterns of disease, and strained public funding are placing new burdens on health-care systems. 
For developed and developing countries alike, the new demands cannot be met if health care continues to operate in the same way. 
What is required are new business models that spread risks, take a broader view of health, and address the needs of the world’s poorest people. 
Demographic changes will present significant challenges for countries’ long-term health planning. 
By 2050, the number of people worldwide who are 60 or older will exceed the number of children under 15. 
Moreover, an additional three billion people will join the global middle class over the next two decades, altering the types of health issues that countries will face, and the way health care is financed. 
At the same time, non-communicable diseases, such as cancer, heart disease, and diabetes, are rising, while previously deadly conditions, such as HIV/AIDS, are now more treatable and have been deemed chronic diseases. 
Keeping up with these changes would be difficult in the best of times. 
But a stagnant global economy is straining health-care budgets to the breaking point. 
Governments, insurers, and other health-care payers are becoming ever more concerned about getting value for money. 
In response, pharmaceutical companies and policymakers are looking for innovative ways to reduce these pressures, not just by developing new drugs, but also by rethinking how the industry operates. 
My company, for one, has tested three business models that have shown encouraging results. 
One involves risk sharing, in which the user pays for the drug only if his treatment turns out to be successful. 
If it is not, the pharmaceutical company refunds the cost. 
We have used risk-sharing programs in Germany, where we cooperate with two major payers on the pricing for Aclasta, an osteoporosis treatment. 
If a patient suffers a bone fracture after treatment (signifying that the drug has not worked), Novartis repays the cost. 
The payer benefits from this system, because risk sharing minimizes the cost of failure. 
The pharmaceutical firm gains as well, because the effective guarantee underpins public confidence in its products. 
The risk-sharing model has limitations, though. 
Some payers find that the system is too complex, especially when trying to define a successful outcome, and that they must wait too long for refunds. 
Nevertheless, risk sharing is a good starting point from which to develop a fairer and more efficient business model – and one that can be refined or simplified over time. 
A second business model brings patients, payers, and health-care professionals together to provide an integrated program to complement treatment for a specific illness. 
In Brazil, for example, our Vale Mais Saúde program uses this approach to treat chronic obstructive pulmonary disease (COPD), a potentially fatal lung condition forecast to be the world’s third biggest killer by 2030. 
In addition to providing Onbrez Breezhaler, a daily treatment to improve lung function in COPD patients, the program provides a comprehensive treatment package covering all symptoms. 
Patients can receive discounted flu vaccines, nicotine replacement therapies, help in enrolling in pulmonary rehabilitation sessions, and health information sent to their homes. 
These interventions alleviate symptoms, prevent other illnesses from exacerbating them, and help patients continue their normal daily activities. 
But it is in the poorest countries with the least developed health-care systems and weakest infrastructure that new business models are needed the most. 
In the past, corporate philanthropy has gone some way to help, but such an approach is neither sustainable nor scalable. 
If companies are to make a significant difference, they must find ways to work with existing health-care systems over the long term. 
One way to do this is through social ventures. 
For example, our Arogya Parivar (or “Healthy Family”) program reaches millions of India’s poorest citizens. 
It is organized around four principles: awareness, acceptability, availability, and adaptability. 
Arogya Parivar raises general public awareness of health issues by training educators to teach disease prevention and treatment in villages, helping some 2.5 million rural inhabitants in 2012 alone. 
The program reaches more than 45,000 local doctors through a network of 90 medical distributors, ensuring that medicines are available in 28,000 of India’s remotest pharmacies. 
To ensure affordability, especially to those on a daily wage, we sell smaller, over-the-counter doses. 
The program is also flexible, adapting medicines, packaging, and training according to the different health and cultural needs of India’s diverse communities. 
These three examples demonstrate that, with innovative thinking, we can meet the world’s changing health needs. 
Pharmaceutical companies are doing what they can – but they need help. 
Most important, governments, payers, and physicians must come together to test, support, and roll out the best and most cost-effective ideas. 
Only then can we improve the health of all people, rich and poor alike, regardless of where they live. 

A Healthier, Wealthier Africa 
ZURICH – The BRIC countries (Brazil, Russia, India, and China) have long been the focus of emerging-market investors. 
But it is in Africa, a region with the world’s second-fastest growth, where the next big business opportunities lie. 
In about one-third of the continent’s 55 countries, annual GDP growth is above 6%, and Sub-Saharan Africa grew at an estimated 5.1% pace in 2013. 
Foreign investors report that their return on investment in Africa is higher than in any other emerging region. 
By 2040, the continent’s working-age population will total an estimated 1.1 billion people, providing businesses with a larger labor pool than even China or India. 
Moreover, economic expansion is taking place not just in urban centers, but in small towns and villages as well. 
However, Africa also faces major challenges. 
One of the biggest concerns is inadequate health care. 
Preventable and treatable diseases plague the population. 
Life expectancy is 14 years below the global average. 
Nearly one in 20 adults in the 15-49 age group in Sub-Saharan Africa lives with HIV – roughly six times the global average. 
Every minute, an African child dies from malaria. 
Africa’s rapid economic growth and urbanization are also creating new health challenges. 
Non-communicable diseases are projected to become the most common causes of death by 2030. 
The number of diabetes cases, for example, is expected nearly to double over the next two decades. 
If left unaddressed, the dual burden of communicable and non-communicable diseases could jeopardize Africa’s economic potential. 
To avoid this, three critical areas of health care must be addressed: technology, infrastructure, and education. 
Africa has witnessed some remarkable technological leaps. 
A decade ago, telecoms infrastructure was almost non-existent. 
Today, one in six people owns a mobile phone, the benefits of which go far beyond easy communication. 
Africa has pioneered the use of mobile banking, with local players like M-Pesa and global corporations like Citi demonstrating how new technology can provide vital financial services to the unbanked population. 
Mobile money and digital wallets accessed on cellphones eliminate the need for physical cash in rural areas, where financial services are limited and carrying large amounts of cash is risky. 
Joining this mobile-phone revolution, Novartis is working with five African governments and private-sector partners to improve drug distribution and monitor the supply of anti-malaria medicines in rural areas, using text messaging and electronic mapping. 
Previously, patients would travel to distant health clinics only to find that the medicines that they needed were no longer in stock. 
Now, thanks to the SMS for Life project, vital medicines can be quickly redistributed to where they are most needed. 
A second crucial aspect of improving Africa’s health care is infrastructure. 
Good rail lines, roads, and ports allow products and services to be distributed widely at lower cost, and to benefit from economies of scale. 
This is an essential component of any country’s economic development. 
And nowhere are the benefits more evident than in the provision of health care. 
Fortunately, several companies are rising to the challenge. 
Coca-Cola, for example, is contributing its supply-chain expertise to map out health facilities and implement stock-management software to support the distribution of bed nets, contraceptives, anti-AIDS drugs, and vaccines to remote villages. 
Meanwhile, Novartis is piloting a “social venture” business model to give poor people in remote villages access to vital medicines that are packaged in small, affordable doses. 
Finally, education is one of the most powerful tools for reducing poverty and generating sustainable, inclusive economic growth. 
But, given limited resources and few teachers, too many children are being left behind. 
Public-private partnerships are helping to change this. 
The IT company Cisco, for example, works with NGOs to connect communities and help students develop skills in information and communications technology. 
Poor education also affects health. 
Although Africa accounts for one-seventh of the world’s population, it bears one-quarter of the global disease burden, yet has a mere 2% of the world’s doctors. 
Unsurprisingly, many health problems stem from ignorance about diseases and basic hygiene. 
So Novartis has formed a partnership with the Earth Institute, the United Nations, and private-sector groups to train and deploy by 2015 a million community health workers in Sub-Saharan Africa to deliver basic treatment and preventive care, and to track disease outbreaks. 
The idea is that local people will learn how to support their communities, rather than rely on handouts, and thereby lift themselves out of poverty permanently. 
Africa is increasingly showing signs of its promise, but innovative solutions to improve its people’s health are essential if the continent is to approach its potential. 
This will require more than philanthropy: it will demand new commercial models that solve health-care issues, help the economy to grow, and benefit those who invest in Africa’s future. 

Putin’s Calculus 
CAMBRIDGE – By most accounts, Russian President Vladimir Putin has been the winner in the Ukraine crisis, at least so far. 
His annexation of Crimea, which Nikita Khrushchev arbitrarily transferred to Ukraine in 1954, has been widely applauded at home, and he has largely shrugged off Western governments’ responses. 
But, from a longer-term perspective, Putin’s victory is not quite so certain. 
The current crisis in Ukraine began with President Viktor Yanukovych’s decision to reject a European Union Association Agreement, opting instead for a deal with Russia that included desperately needed financing. 
This outraged Ukrainians in the country’s more pro-EU western regions, spurring protracted popular protests that ultimately toppled Yanukovych’s corrupt but democratically elected government. 
But not all Ukrainians were averse to pursuing closer ties with Russia. 
Indeed, Yanukovych’s decision pleased many Russian speakers in Ukraine’s eastern and southern regions. 
And it was to Russia that Yanukovych turned when, after months of peaceful demonstrations in Kyiv, violence broke out and demonstrators were killed, spurring him to flee Ukraine. 
For his part, Putin not only provided sanctuary for Yanukovych and refused to recognize the new government in Kyiv; he began to help organize – and incite – resistance among Crimea’s ethnic Russian majority. 
By deploying Russian troops (often masked and without insignias) from the Black Sea Fleet’s base in Sevastopol, which Russia had leased from Ukraine, Putin was able to take control of the peninsula with no loss of life. 
When Western leaders expressed outrage over the forced changes to European borders, Putin remained unfazed, citing NATO’s use of force in Kosovo 15 years ago, and their subsequent support for its formal secession from Serbia, as an example of their hypocrisy. 
The West shot back with targeted sanctions against a few high-level Russian officials, to which Putin responded with sanctions of his own, barring entry to selected Western politicians. 
All in all, a few Russian banks have had their accounts frozen; some shipments of sensitive goods have been halted; and the ruble and the Russian stock market have suffered losses. 
But the overall impact of the West’s response has been moderate. 
The West’s reluctance to intensify sanctions stems largely from European countries that retain strong economic ties with Russia. 
While the United States – which trades little with Russia – and the EU have vowed to develop a framework for additional sanctions, to be activated if Putin sends forces into eastern Ukraine, designing them in a way that does not hurt Europe will not be easy. 
Nonetheless, Russia has paid a high price for its actions in terms of its international standing. 
The goodwill and soft power generated by the Sochi Olympics were immediately depleted, and Russia has now been all but expelled from the G-8. 
In the United Nations General Assembly, Russia had to face an embarrassing vote in which 100 countries condemned its actions. 
And, at the end of the nuclear security summit in The Hague, US President Barack Obama cited Russia as a regional power whose aggressive policies toward its neighbors displayed weakness. 
Does any of this matter to Putin? 
The answer depends on what his objectives are. 
If, as some observers claim, Putin’s aggressive actions stem from feelings of insecurity, he has had mixed success. 
By this account, Putin feared diminished influence in a neighboring country with which Russia shares deep historical ties. 
But, despite Russia’s obvious influence among eastern Ukraine’s Russophones, the overall impact of the annexation of Crimea has been to reduce Russia’s influence in the country, while reinvigorating Putin’s bête noire, NATO. 
Putin may also have worried that a successful revolution in Ukraine might encourage a revival of the protests that caused him so much trouble in 2012, when he re-assumed the presidency from Dmitri Medvedev. 
In the wake of his annexation of Crimea, Putin’s domestic approval rating has soared, and the chances that any protest would succeed in genuinely undercutting – much less toppling – his administration are very low. 
Others claim that Putin’s primary motivation was to restore Russia’s global “great power” status. 
After all, Putin, a former KGB agent in East Germany, has lamented the Soviet Union’s dissolution as “the greatest geopolitical disaster of the twentieth century.” 
In fact, Putin often has been described as angry with the West, beset by a sense of betrayal and humiliation from what he perceives as unfair treatment of Russia. 
For Putin, gestures like including Russia in the G-8, the G-20, and the World Trade Organization, and inviting a Russian ambassador to NATO discussions in Brussels, could not make up for NATO’s expansion to Russia’s borders, the placement of anti-ballistic missile sites in Eastern Europe, or the dismemberment of Serbia. 
The overthrow of Libya’s Colonel Muammar el-Qaddafi and ongoing efforts to undercut the Kremlin’s client, Syrian President Bashar al-Assad, have only made matters worse. 
If status was an important motive for Putin’s actions in Crimea, the West’s response may have a greater impact than many now believe. 
Before the Winter Games in Sochi (where the G-8 was scheduled to meet in June), Putin cited increased soft power as an important goal for Russia – an objective that his use of hard power in Ukraine has made much more difficult to achieve. 
In this sense, Obama’s declaration that Russia is a regional power acting out of weakness, no less than Russia’s suspension from the G-8, may have hit Putin where he is most vulnerable. 
His actions in Ukraine have undoubtedly brought Russia tangible gains in the short term. 
But they also imply less obvious costs. 
It remains to be seen whether Putin’s bold move was worth it. 

1914 Revisited? 
CAMBRIDGE – This year marks the hundredth anniversary of a transformative event of modern history. 
World War I killed some 20 million people and ground up a generation of Europe’s youth. 
It also fundamentally changed the international order in Europe and beyond. 
Indeed, WWI destroyed not only lives, but also three empires in Europe – those of Germany, Austria-Hungary, and Russia – and, with the collapse of Ottoman rule, a fourth on its fringe. 
Until the Great War, the global balance of power was centered in Europe; after it, the United States and Japan emerged as great powers. 
The war also ushered in the Bolshevik Revolution of 1917, prepared the way for fascism, and intensified and broadened the ideological battles that wracked the twentieth century. 
How could such a catastrophe happen? 
Shortly after the war broke out, when German Chancellor Theobald von Bethmann-Hollweg was asked to explain what happened, he answered, “Oh, if I only knew!” 
Perhaps in the interest of self-exoneration, he came to regard the war as inevitable. 
Similarly, the British Foreign Minister, Sir Edward Grey, argued that he had “come to think that no human individual could have prevented it.” 
The question we face today is whether it could happen again. 
Margaret MacMillan, author of the interesting new book The War that Ended Peace, argues that, “it is tempting – and sobering – to compare today’s relationship between China and the US with that between Germany and Britain a century ago.” 
After drawing a similar comparison, The Economist concludes that “the most troubling similarity between 1914 and now is complacency.” 
And some political scientists, such as John Mearsheimer of the University of Chicago, have argued that, “to put it bluntly: China cannot rise peacefully.” 
But historical analogies, though sometimes useful for precautionary purposes, become dangerous when they convey a sense of historical inevitability. 
WWI was not inevitable. 
It was made more probable by Germany’s rising power and the fear that this created in Great Britain. 
But it was also made more probable by Germany’s fearful response to Russia’s rising power, as well as myriad other factors, including human errors. 
But the gap in overall power between the US and China today is greater than that between Germany and Britain in 1914. 
Drawing contemporary lessons from 1914 requires dispelling the many myths have been created about WWI. 
For example, the claim that it was a deliberate preventive war by Germany is belied by the evidence showing that key elites did not believe this. 
Nor was WWI a purely accidental war, as others maintain: Austria went to war deliberately, to fend off the threat of rising Slavic nationalism. 
There were miscalculations over the war’s length and depth, but that is not the same as an accidental war. 
It is also said that the war was caused by an uncontrolled arms race in Europe. 
But the naval arms race was over by 1912, and Britain had won. 
While there was concern in Europe about the growing strength of armies, the view that the war was precipitated directly by the arms race is facile. 
Today’s world is different from the world of 1914 in several important ways. 
One is that nuclear weapons give political leaders the equivalent of a crystal ball that shows what their world would look like after escalation. 
Perhaps if the Emperor, the Kaiser, and the Czar had had a crystal ball showing their empires destroyed and their thrones lost in 1918, they would have been more prudent in 1914. 
Certainly, the crystal-ball effect had a strong influence on US and Soviet leaders during the Cuban missile crisis. 
It would likely have a similar influence on US and Chinese leaders today. 
Another difference is that the ideology of war is much weaker nowadays. 
In 1914, war really was thought to be inevitable, a fatalistic view reinforced by the Social Darwinist argument that war should be welcomed, because it would “clear the air” like a good summer storm. 
As Winston Churchill wrote in The World Crisis: 
“There was a strange temper in the air. 
Unsatisfied by material prosperity, the nations turned fiercely toward strife, internal or external. 
National passions, unduly exalted in the decline of religion, burned beneath the surface of nearly every land with fierce, if shrouded, fires. 
Almost one might think the world wished to suffer. 
Certainly men were everywhere eager to dare.” 
To be sure, nationalism is growing in China today, while the US launched two wars after the September 11, 2001, attacks. 
But neither country is bellicose or complacent about a limited war. 
China aspires to play a larger role in its region, and the US has regional allies to whose defense it is committed. 
Miscalculations are always possible, but the risk can be minimized by the right policy choices. 
Indeed, on many issues – for example, energy, climate change, and financial stability – China and the US have strong incentives to cooperate. 
Moreover, whereas Germany in 1914 was pressing hard on Britain’s heels (and had surpassed it in terms of industrial strength), the US remains decades ahead of China in overall military, economic, and soft-power resources. 
Too adventuresome a policy would jeopardize China’s gains at home and abroad. 
In other words, the US has more time to manage its relations with a rising power than Britain did a century ago. 
Too much fear can be self-fulfilling. 
Whether the US and China will manage their relationship well is another question. 
But how they do so will be dictated by human choice, not some ironclad historical law. 
Among the lessons to be learned from the events of 1914 is to be wary of analysts wielding historical analogies, particularly if they have a whiff of inevitability. 
War is never inevitable, though the belief that it is can become one of its causes. 

The Old World’s New Roles 
CAMBRIDGE – China’s rise has raised many questions for the West, with some wondering whether it is set to usurp a struggling Europe’s global leadership role. 
As one columnist put it, “there is nothing much European governments can do in East Asia, save serve as marketing managers for their domestic businesses.” 
With neither the diplomatic weight nor the military heft to make an impression in the region, Europe had better leave the heavy lifting to the United States. 
But this does not have to be the case. 
For Europe, the implications of China’s rise are far-reaching, beginning with the United States’ strategic “pivot” toward Asia. 
After more than 70 years as a top US priority, Europe is beginning to lose its privileged position in the eyes of American policymakers. 
Moreover, European sales of high-tech dual-use products that complicate America’s security role in Asia is bound to create friction. 
Nonetheless, warnings that the Atlantic partnership is eroding are unduly dire. 
Tellingly, US President Barack Obama’s administration has replaced the term “pivot,” which implies a turn away from something, with “rebalancing.” 
This change reflects a recognition that China’s increasing economic dominance does not negate the importance of the European Union, which remains the world’s largest economic entity and a leading source of economic innovation, not to mention values like the protection of human rights. 
This is not to say that Asia’s rise will not demand adjustments. 
When the Industrial Revolution began, Asia’s share of the global economy began to decline from more than 50% to just 20% by 1900. 
By the second half of this century, Asia is expected to recover its former economic dominance – that is, account for 50% of global output – while lifting hundreds of millions of people out of poverty. 
This power shift – perhaps the most consequential of the twenty-first century – implies serious risks. 
Historians often warn that the fear and uncertainty generated by the emergence of new powers like China can trigger serious conflict, like that which Europe experienced a century ago, when Germany overtook the United Kingdom in industrial production. 
With Asia riven by territorial disputes and historical tensions, maintaining a stable security balance will not be easy. 
But there are levers in place that can help. 
In the 1990s, when US President Bill Clinton’s administration was considering how to respond to China’s increasing economic might, some urged a policy of containment. 
Clinton rejected that advice: It would have been impossible to forge an anti-China alliance, given the enduring desire of China’s neighbors to maintain good relations with it; more important, such a policy would have guaranteed future enmity with China. 
Instead, Clinton chose a policy that could be called “integrate and insure.” 
While China was welcomed into the World Trade Organization (WTO), America revived its security treaty with Japan. 
If China pursues a “peaceful rise,” its neighbors will focus on building strong economic relationships with it. 
If it throws its weight around – which some say is implied by its recent actions on the Indian border and in the East and South China Seas – its neighbors will seek to balance its power, with an American naval presence offering backup. 
Where does Europe fit into this picture? 
For starters, it should monitor and restrain sensitive exports to avoid making the security situation more dangerous for the US. 
Even in trading terms, Europe has an interest in regional stability and secure sea lanes. 
Furthermore, Europe can contribute to the development of the norms that shape the security environment. 
For example, Europe can play an important role in reinforcing a universal interpretation of the United Nations Convention on the Law of the Sea, rather than China’s idiosyncratic version – especially given that the US has not even ratified the treaty. 
Contrary to the claims of some analysts, China is not a revisionist state like Nazi Germany or the Soviet Union, eager to overthrow the established international order. 
Indeed, it is not in China’s interest to destroy international institutions – such as the United Nations, the WTO, and the International Monetary Fund – that have helped to facilitate its rise. 
Given Europe’s leading roles in such institutions, it can help China gain the multilateral legitimacy that it seeks, in exchange for responsible behavior. 
Though China is not attempting to upend the global order, it is now undergoing a profound – and destabilizing – transformation. 
With the rise of transnational issues like climate change, terrorism, pandemics, and cyber crime – brought about by rapid technological progress and social change – power is being diffused not among states, but among a wide range of non-governmental entities. 
Addressing these challenges will require broad international cooperation, with China, the US, and Europe each playing an important role. 
Finally, there is the question of values. 
Europe, together with the US, has already resisted Chinese (and Russian) demands for greater Internet censorship. 
And European countries like Norway and Germany have willingly taken economic hits in the name of human rights. 
While it is impossible to predict how Chinese politics will evolve, other countries’ experiences suggest that political change often occurs when per capita income reaches roughly $10,000. 
If such change does occur, Europe will have an opening to promote its core values even more effectively. 
Whether China’s economic interest in an impartial world order based on the rule of law will lead to greater protection of individual rights remains to be seen. 
Only China will decide that. 
But Europe can make a strong case. 

Duties Without Borders 
CAMBRIDGE – More than 130,000 people are said to have died in Syria’s civil war. 
United Nations reports of atrocities, Internet images of attacks on civilians, and accounts of suffering refugees rend our hearts. 
But what is to be done – and by whom? 
Recently, the Canadian scholar-politician Michael Ignatieff urged US President Barack Obama to impose a no-fly zone over Syria, despite the near-certainty that Russia would veto the United Nations Security Council resolution needed to legalize such a move. 
In Ignatieff’s view, if Syrian President Bashar al-Assad is allowed to prevail, his forces will obliterate the remaining Sunni insurgents – at least for now; with hatreds inflamed, blood eventually will flow again. 
In an adjoining article, the columnist Thomas Friedman drew some lessons from the United States’ recent experience in the Middle East. 
First, Americans understand little about the social and political complexities of the countries there. 
Second, the US can stop bad things from happening (at considerable cost), but it cannot make good things happen by itself. 
And, third, when America tries to make good things happen in these countries, it runs the risk of assuming responsibility for solving their problems. 
So what are a leader’s duties beyond borders? 
The problem extends far beyond Syria – witness recent killings in South Sudan, the Central African Republic, Somalia, and other places. 
In 2005, the UN General Assembly unanimously recognized a “responsibility to protect” citizens when their own government fails to do so, and in 2011 it was invoked in UN Security Council Resolution 1973, authorizing the use of military force in Libya. 
Russia, China, and others believe that the principle was misused in Libya, and that the guiding doctrine of international law remains the UN Charter, which prohibits the use of force except in self-defense, or when authorized by the Security Council. 
But, back in 1999, when faced with a Russian veto of a potential Security Council resolution in the case of Kosovo, NATO used force anyway, and many defenders argued that, legality aside, the decision was morally justified. 
So which arguments should political leaders follow when trying to decide the right policy to pursue? 
The answer depends, in part, on the collectivity to which he or she feels morally obliged. 
Above the small-group level, human identity is shaped by what Benedict Anderson calls “imagined communities.” 
Few people have direct experience of the other members of the community with which they identify. 
In recent centuries, the nation has been the imagined community for which most people were willing to make sacrifices, and even to die, and most leaders have seen their primary obligations to be national in scope. 
In a world of globalization, however, many people belong to multiple imagined communities. 
Some – local, regional, national, cosmopolitan – seem to be arranged as concentric circles, with the strength of identity diminishing with distance from the core; but, in a global information age, this ordering has become confused. 
Today, many identities are overlapping circles – affinities sustained by the Internet and cheap travel. 
Diasporas are now a mouse click away. 
Professional groups adhere to transnational standards. 
Activist groups, ranging from environmentalists to terrorists, also connect across borders. 
As a result, sovereignty is no longer as absolute and impenetrable as it once seemed. 
This is the reality that the UN General Assembly acknowledged when it recognized a responsibility to protect endangered people in sovereign states. 
But what moral obligation does this place on a particular leader like Obama? 
The leadership theorist Barbara Kellerman has accused former US President Bill Clinton of the moral failure of insularity for his inadequate response to the genocide in Rwanda in 1994. 
In one sense, she is right. 
But other leaders were also insular, and no country responded adequately. 
Had Clinton tried to send American troops, he would have encountered stiff resistance in the US Congress. 
Coming so soon after the death of US soldiers in the 1993 humanitarian intervention in Somalia, the American public was in no mood for another military mission abroad. 
So what should a democratically elected leader do in such circumstances? 
Clinton has acknowledged that he could have done more to galvanize the UN and other countries to save lives in Rwanda. 
But good leaders today are often caught between their personal cosmopolitan inclinations and their more traditional obligations to the citizens who elected them. 
Fortunately, insularity is not an “all or nothing” moral proposition. 
In a world in which people are organized in national communities, a purely cosmopolitan ideal is unrealistic. 
Global income equalization, for example, is not a credible obligation for a national political leader; but such a leader could rally followers by saying that more should be done to reduce poverty and disease worldwide. 
As the philosopher Kwame Anthony Appiah has put it, “Thou shalt not kill is a test you take pass-fail. 
Honor thy father and thy mother admits of gradations.” 
The same is true of cosmopolitanism versus insularity. 
We may admire leaders who make efforts to increase their followers’ sense of moral duties beyond borders; but it does little good to hold leaders to an impossible standard that would undercut their capacity to remain leaders. 
As Obama wrestles with determining his responsibilities in Syria and elsewhere, he faces a serious moral dilemma. 
As Appiah says, duties beyond borders are a matter of degree; and there are also degrees of intervention that range from aid to refugees and arms to different degrees of the use of force. 
But even when making these graduated choices, a leader also owes his followers a duty of prudence – of remembering the Hippocratic oath to first of all, do no harm. 
Ignatieff says Obama already owns the consequences of his inaction; 
Friedman reminds him of the virtue of prudence. 
Pity Obama. 

Safeguarding Cyberspace 
CAMBRIDGE – Brazil recently hosted NETmundial, the first global conference on Internet governance, attended by 800 representatives of governments, corporations, civil-society organizations, and technologists. 
Based on the notion of “multi-stakeholderism,” the meeting produced a 12-page “outcomes” document. 
Nonetheless, at the end of the conference, there was still no consensus on global cyber governance. 
Many governments continued to advocate traditional United Nations voting procedures for making global decisions, and defend their right to control domestic cyber activities. 
In a sense, this is not surprising. 
After all, though the Internet is a complex, fast-evolving, and all-encompassing global resource, it has not been around for very long. 
While the World Wide Web was conceived in 1989, it was only in the last 15 years that the number of Web sites burgeoned, and Internet technology began to transform global supply chains. 
Since 1992, the number of Internet users has exploded from one million to nearly three billion. 
Just like that, the Internet became a substrate of economic, social, and political life. 
In its early days, the Internet was often characterized as the ultimate egalitarian conduit of free-flowing information – a harbinger of the end of government controls. 
But the reality is that governments and geographical jurisdictions have always played a central role in regulating the Internet – or at least have tried. 
Ultimately, however, the Internet poses a major governance challenge, exemplified in ongoing efforts to understand the implications of ubiquitous mobility and the collection and storage of “big data.” 
The governance challenge stems from the fact that cyberspace is a combination of virtual properties, which defy geographical boundaries, and physical infrastructure, which fall under sovereign jurisdictions. 
Control of the physical layer can have both territorial and extraterritorial effects on the virtual layers. 
At the same time, attacks can be launched from the low-cost virtual realm against the physical domain, where resources are scarce and expensive. 
The Internet began as a small village of known users, where an authentication layer of code was unnecessary and the development of norms was simple. 
But then it grew, and everything changed. 
Though cyberspace offered the advantages of access to information and easy communication to a growing number of people, it became a breeding ground for crime, hacker attacks, and threats to governments. 
Efforts to limit the risks incurred in this volatile environment have focused on creating private networks and “walled gardens” (closed platforms) – cyber equivalents to the seventeenth-century enclosures that were used to solve that era’s “tragedy of the commons.” 
But this raises the risk of fragmentation, which, if allowed to go far enough, could curtail the Internet’s economic benefits. 
Given that security is a traditional function of the state, some observers believe that growing insecurity will lead to a greater role for governments in cyberspace. 
Indeed, accounts of cyber war may be exaggerated, but cyber espionage is rampant, and more than 30 governments are reputed to have developed offensive capabilities and doctrines for the use of cyber weapons. 
Ever since the Stuxnet virus was used to disrupt Iran’s nuclear program in 2009-2010, governments have taken the threat posed by cyber weapons very seriously. 
Governments also want to protect their societies from what comes through the Internet. 
For example, China’s government has not only created a “Great Firewall” of software filters; it also requires that companies take responsibility for censoring their public content. 
And, if China is attacked, it has the capacity to reduce its Internet connections. 
But China’s government – and others that practice Internet censorship – still want to reap the economic benefits of connectivity. 
That tension leads to imperfect compromises. 
A similar tension exists in the effort to create international Internet-governance norms. 
While authoritarian countries like China and Russia seek “information security,” including the kind of overt censorship that would be prohibited in countries like the United States, Western democracies pursue “cyber security.” 
This divergence was starkly apparent in 2012, at a conference convened in Dubai by the UN’s International Telecommunications Union (ITU). 
Though the meeting was ostensibly about updating telephony regulations, the underlying issue was the ITU’s role in Internet governance. 
Authoritarian regimes and many developing countries believe that their approach to sovereignty, security, and development would benefit from the multilateral processes that the ITU employs. 
But democratic governments fear that these processes are too cumbersome, and would undercut the flexibility of the “multi-stakeholder” approach, which stresses the involvement of the private and non-profit sectors, as well as governments. 
The vote in Dubai was 89 to 55 against the “democratic” governments. 
This outcome raised concerns about a crisis in Internet governance – concerns that the recent conference in Brazil alleviated, but only slightly. Stayed tuned. 
There are many more conferences scheduled on cyber governance – and a lot more work to be done. 


Governance in the Information Age 
ABU DHABI – As the year comes to an end, it is only natural to ask what might lie ahead. 
But, instead of asking what may lie ahead in 2014, let us jump to mid-century. 
What will governance look like in 2050? 
That is what the World Economic Forum (WEF) asked at a recent meeting in Abu Dhabi that focused on the future of governance under three potential scenarios arising from the ongoing information revolution. 
With that revolution already marginalizing some countries and communities – and creating new opportunities for others – the question could hardly be more timely. 
The first scenario that participants considered is a world ruled by so-called “megacities,” where governance is administered largely by major urban agglomerations. 
The second possibility is a world in which strong central governments use big data to fortify their control. 
And, in the third scenario, central governments are fundamentally weak, with markets – and the enterprises that dominate them – providing almost all services. 
Each of these scenarios is an extrapolation of a current trend. 
While all of them could be beneficial in some respects, they also have features that, if left unchecked, could lead to dystopian outcomes. 
Policymakers should already be implementing policies aimed at guiding trends like urbanization, the rise of big data, and the grouping of people into narrow communities, often based on their relationship to the market. 
The goal should be to take advantage of these trends’ potential benefits, while ensuring that they do not undermine other critical aspects of governance. 
For example, although megacities have the potential to create new opportunities for workers and businesses, they cannot solve universal problems like climate change or manage the production and protection of national and global public goods. 
Likewise, while the use of big data has substantial problem-solving potential, important questions remain about who owns, who controls, and who regulates the use of the data. 
The notion of a “datocracy” incites fear of an Orwellian “e-1984.” 
Indeed, the recent revelations about National Security Agency surveillance programs barely scratch the surface of the issue. 
After all, the use of big data is not confined to governments and corporations; anonymous criminal groups can easily abuse the information, too. 
Finally, while individual choice within markets is often the most efficient way to allocate resources, markets do not produce a sufficient supply of public goods. 
Indeed, there are some goods that the private sector is simply unable to provide. 
This system may seem acceptable to those within the “gated communities” that benefit from it, but what about all those left outside? 
The WEF’s Global Agenda Council on the Future of Government, of which I am a part, has considered ways in which information technology can improve governance and reduce feelings of alienation among the governed. 
The most effective initiatives, the council observed, often arise from partnerships between government and the private sector. 
For example, in Kenya, a private company developed a mobile-payments system that allows users to transfer money using cell phones, effectively creating a banking system much more quickly than the government could have done. 
Once the system was privately created, the government was able to use it to provide additional services. 
As a result, a Kenyan farmer in a remote district can now obtain information about crop prices or transfer funds, without having to travel long distances and wait in lines. 
While such initiatives cannot solve the problem of inequality, they can help to relieve some of its most damaging effects. 
At a time of rapid social change and relentless technological advancement, efforts to improve governance – at the local, national, or international level – will require careful thought and experimentation, in order to determine how to balance inclusive decision-making with the ever-evolving needs of markets. 
As the American diplomat Harlan Cleveland once asked, “How will we get everybody in on the act, and still get some action?” 
Consider international institutions. 
Today, the world is organized into some 200 countries; in all likelihood, it will be in 2050 as well. 
But only 16 governmental entities account for two-thirds of the world’s income and two-thirds of its population. 
Many have advocated the use of “double majorities” – which require a majority of votes according to two separate criteria, population and economic output – to elicit action from a manageable number of states while enhancing weaker states’ influence in decision-making. 
But, though the G-20 has moved in this direction, the approach to setting a global agenda remains flawed. 
Indeed, it seems to be most effective in times of crisis; in more normal times, as we have seen, the G-20 struggles to get things done. 
Moreover, even if the double-majority system helps to empower some weaker states, it does not account for the role of the world’s smallest countries in global decision-making processes. 
Although these countries represent a small share of the global population, they comprise a significant majority of the total number of countries. 
One potential solution would be for states to represent each other, as occurs in the International Monetary Fund. 
But the IMF’s experience exposes significant challenges in implementation. 
World leaders have not yet figured out how to reconcile the moral conviction that all people are equal with the simple fact that all countries are not. 
In a global information age, governance systems capable of addressing fundamental issues like security, welfare, liberty, and identity will require coalitions that are small enough to function efficiently and a decision concerning what to do about those who are underrepresented. 
Obviously, all of this calls for a lot more investigation. 
Exploring potential future scenarios, as the WEF has done, is an important step in the right direction. 

Japan’s Self-Defense Defense 
CAMBRIDGE – Since the end of World War II, Japan has been ruled by an American-written “peace constitution,” Article 9 of which prohibits war and limits Japanese forces to self-defense. 
Prime Minister Shinzo Abe is now seeking legislation to enable Japan to reinterpret the constitution to include “collective self-defense,” whereby the country would enhance its security cooperation with other countries, particularly its closest ally, the United States. 
Critics view this as a radical departure from seven decades of pacifism. 
But Abe’s central objectives – improving Japan’s ability to respond to threats that do not amount to armed attack; enabling Japan to participate more effectively in international peacekeeping activities; and redefining measures for self-defense permitted under Article 9 – are actually relatively modest. 
Fears that the move would lead to Japanese involvement in distant US wars are similarly overblown. 
Indeed, the rules have been carefully crafted to prohibit such adventures, while allowing Japan to work more closely with the US on direct threats to Japanese security. 
It is not difficult to see why Abe is pursuing broader rights to self-defense. 
Japan lies in a dangerous region, in which deep-rooted tensions threaten to erupt at any moment. 
Given that East Asia, unlike Europe after 1945, never experienced full reconciliation among rivals, or established strong regional institutions, it has been forced to depend on the US-Japan Security Treaty to underpin regional stability. 
When US President Barack Obama’s administration announced its “rebalancing” toward Asia in 2011, it reaffirmed the 1996 Clinton-Hashimoto Declaration, which cited the US-Japan security alliance as the foundation for stability – a prerequisite for continued economic progress – in Asia. 
That declaration served the larger goal of establishing a stable, albeit uneven, triangular relationship among the US, Japan, and China. 
Subsequent US administrations have upheld this approach, and opinion polls show that it retains broad acceptance in Japan – not least owing to close cooperation on disaster relief following the Tōhoku earthquake and tsunami of 2011. 
But Japan remains extremely vulnerable. 
The most immediate regional threat is North Korea, whose unpredictable dictatorship has invested its meager economic resources in nuclear and missile technology. 
A longer-term concern is the rise of China – an economic and demographic powerhouse whose expanding military capacity has enabled it to take an increasingly assertive stance in territorial disputes, including with Japan in the East China Sea. 
China’s territorial ambitions are also fueling tensions in the South China Sea, where sea-lanes that are vital to Japanese trade are located. 
Complicating matters further is the fact that China’s political evolution has failed to keep pace with its economic progress. 
If the Chinese Communist Party feels threatened by a public frustrated with insufficient political participation and enduring social repression, it could slip into competitive nationalism, upending the already-delicate regional status quo. 
Of course, if China becomes aggressive, Asian countries like India and Australia – which are already disturbed by China’s assertiveness in the South China Sea – will join Japan in the effort to offset China’s power. 
But, as things stand, a strategy of containment would be a mistake. 
After all, the best way to engender enmity is to treat China as an enemy. 
A more effective approach, spearheaded by the US and Japan, would focus on integration, with a hedge against uncertainty. 
American and Japanese leaders must shape the regional environment in such a way that China has incentives to act responsibly, including by maintaining strong defense capabilities. 
Meanwhile, the US and Japan must rethink the structure of their alliance. 
While the expected revisions to Japan’s defense framework are a positive development, many Japanese still resent the lack of symmetry in the alliance obligations. 
Others chafe at the burden of US bases, particularly on the island of Okinawa. 
A longer-term goal should thus be for the US gradually to transfer its bases to Japanese control, leaving American forces to rotate among them. 
In fact, some bases – notably, Misawa Air Base north of Tokyo – already fly Japan’s flag, while hosting American units. 
But the process must be handled carefully. 
As China invests in advanced ballistic missiles, the fixed bases on Okinawa become increasingly vulnerable. 
To avoid the perception that the US decided to turn the bases over to Japan just when their military benefits were diminishing, and to ensure that the move represented America’s recommitment to the alliance, a joint commission would have to be established to manage the transfer. 
For Japan, becoming an equal partner in its alliance with the US is essential to securing its regional and global standing. 
To this end, Abe’s modest step toward collective self-defense is a step in the right direction. 

JFK Reconsidered 
CAMBRIDGE – November 22 will mark the 50th anniversary of the assassination of President John F. Kennedy. 
For people alive at the time, it was one of those events that are so shocking that you remember where you were when you heard the news. 
I was getting off a train in Nairobi when I saw the dramatic headline. 
Kennedy was only 46 when he was killed in Dallas by Lee Harvey Oswald, a disgruntled former Marine who had defected to the Soviet Union. 
Though his life had been plagued by illness, Kennedy projected an image of youth and vigor that added to the drama and poignancy of his death. 
Martyrdom led many Americans to elevate Kennedy to the ranks of great presidents like George Washington and Abraham Lincoln; but historians have been more restrained in their evaluations. 
Critics point to his sometimes reckless sexual behavior; to his scant legislative record; and to his failure to match words with deeds. 
While Kennedy spoke about civil rights, tax cuts, and reducing poverty, it was his successor, Lyndon Johnson, who used Kennedy’s martyrdom and his own far more impressive political skills to pass historic legislation in these areas. 
A 2009 poll of 65 American presidential scholars rated JFK as the sixth most important president, while a recent survey of British experts on American politics put Kennedy in 15th place. 
Those are impressive rankings for a president who was in office for less than three years, but what did Kennedy really accomplish and how might history have been different if he had survived? 
In my book Presidential Leadership and the Creation of the American Era, I divide presidents into two categories: those who are transformational in their objectives, pursuing large visions related to major changes; and transactional leaders, who focus more on “operational” issues – ensuring that the metaphorical trains run on time (and stay on the tracks). 
Because he was an activist and a great communicator with an inspirational style, Kennedy appeared to be a transformational president. 
He campaigned in 1960 on a promise to “get the country moving again.” 
Kennedy’s inaugural address appealed to sacrifice (“Ask not what your country can do for you – ask what you can do for your country”). 
He established programs like the Peace Corps and the Alliance for Progress with Latin America, and he set the United States on a path to landing a man on the moon by the end of the 1960’s. 
But, despite his activism and rhetoric, Kennedy was a cautious rather than an ideological personality. 
As the presidential historian Fred Greenstein put it, “Kennedy had little in the way of an overarching perspective.” 
Rather than being critical of Kennedy for not living up to his rhetoric, we should be grateful that in critical situations, he was prudent and transactional rather than ideological and transformational. 
The most important achievement of Kennedy’s brief presidency was to manage the 1962 Cuban missile crisis and defuse what was probably the riskiest episode since the dawn of the nuclear age. 
Kennedy certainly can be blamed for the bungled Bay of Pigs invasion of Cuba and the subsequent Operation Mongoose – the covert CIA effort against the Castro regime that convinced the Soviet Union that its ally was under threat. 
But Kennedy learned from his failure at the Bay of Pigs and created a careful process for managing the crisis that followed the Soviet Union’s placement of nuclear-armed missiles in Cuba. 
Many of Kennedy’s advisers, as well as US military leaders, urged an air strike and invasion, which we now know might have led Soviet field commanders to use their tactical nuclear weapons. 
Instead, Kennedy played for time and kept his options open as he negotiated a stand-down with the Soviet leader, Nikita Khrushchev. 
Judging by Vice President Lyndon Johnson’s hawkish comments at the time, the outcome might have been far worse if Kennedy had not been president. 
Moreover, Kennedy learned from the Cuban missile crisis as well; on June 10, 1963, he gave a speech aimed at easing Cold War tensions. 
“I speak of peace, therefore, as the necessary rational end of rational men,” he said. 
While a presidential vision of peace was not new, Kennedy followed it up by negotiating the first nuclear arms-control agreement, the Limited Test Ban Treaty. 
The great unanswered question about Kennedy’s presidency and how his assassination affected American foreign policy is what he would have done about the war in Vietnam. 
When Kennedy became President, the US had a few hundred advisers in South Vietnam; he increased that number to 16,000. 
Johnson eventually raised the number of US troops to more than 500,000. 
Many Kennedy supporters claim that he would never have made such a mistake. 
But he had supported a coup to replace South Vietnamese President Ngo Dinh Diem and left Johnson a deteriorating situation and a group of advisers who counseled against withdrawal. 
Some fervent Kennedy supporters – for example, the historian Arthur Schlesinger, Jr. and Kennedy’s speechwriter, Theodore Sorensen – have written that Kennedy planned to withdraw from Vietnam after he won re-election in 1964, and claim that Kennedy told Senator Mike Mansfield that that was his plan. 
But skeptics point out that Kennedy always spoke publicly about the need to prevail in Vietnam. 
The question remains open. 
In my view, Kennedy was a good but not a great president. 
What made him good was not merely his ability to inspire others, but his prudence when it came to complex foreign-policy decisions. 
We are fortunate that he was more often transactional than transformational in foreign policy. 
We are unfortunate that we lost him after only a thousand days. 

The Return of Japan 
TOKYO – “Japan is back!” Prime Minister Shinzo Abe declared during a visit to Washington, DC, earlier this year. 
But, while Japan may be on the right track after two decades of economic stagnation, there is still much to be done to secure the country’s long-term future. 
In July, Abe’s Liberal Democratic Party (LDP) won control of both houses of parliament – a resounding electoral victory that amounts to the strongest political mandate any Japanese leader has received in many years. 
As a result, Abe seems likely to remain in power longer than his ineffectual predecessors, most of whom did not last more than a year. 
Meanwhile, Japan’s economy seems to be recovering from a generation of malaise, with this year’s annualized growth rate exceeding 3%. 
Moreover, following the triple shock of the earthquake, tsunami, and nuclear catastrophe in 2011, Japan has managed (at considerable cost) to replace the 25% of its energy supply that the disabled reactors at the Fukushima Daiichi plant provided. 
The announcement that Tokyo will host the 2020 Olympic Games has also boosted public confidence. 
Skeptics worry that the economic progress may not last, arguing that the high growth rate is simply a reflection of loose monetary policy and fiscal stimulus – a strategy that inflation will render unsustainable. 
Abe’s supporters reply that the third “arrow” of “Abenomics” – productivity-enhancing structural reforms – has only now been removed from its quiver. 
They point to Abe’s ability to overcome resistance from small rice farmers, part of the LDP’s electoral base, to Japan’s participation in negotiations on the Trans-Pacific Partnership, which would open Japan’s economy to increased global competition. 
Nevertheless, Japan faces serious long-term challenges. 
First, with its birth rate well below replacement level, Japan’s population is aging and shrinking. 
Offsetting this trend will require increased immigration and greater female labor-force participation – neither of which will be easy to bring about. 
Japan has not traditionally been a country of immigration, and the World Economic Forum’s Global Gender Gap Report, which ranks 136 countries, has Japan in 105th place. 
But, of course, this can change – and Japan does have a history of successfully reinventing itself. 
Perhaps the most critical question about Japan’s future concerns its relationship with its neighbors – North Korea, South Korea, and China. 
While recent polls suggest that Japan retains substantial soft power globally, this is not the case in its immediate neighborhood. 
Unlike Europe, where Germany overcame World War II’s legacy through its integration into the European Union, Northeast Asia remains burdened by history. 
According to its neighbors, Japan’s apologies for is past aggression are inadequate. 
It does not help that some Korean and Chinese leaders have used anti-Japanese rhetoric to win domestic support. 
In Japan, the relentless criticism has triggered a nationalist backlash, spurring politicians to respond in kind during last year’s election campaign. 
For example, Abe threatened to rescind the official apologies issued by former leaders or officials for abuses and atrocities committed by Japan’s army during WWII, and stated his intention to visit the controversial Yasukuni Shrine, which honors not only Japan’s war dead, but also many of its war criminals. 
While Abe has not acted on these campaign statements, some observers remain convinced that he will visit Yasukuni at some point, further straining Japan’s relations with South Korea and China. 
Territorial disputes have exacerbated these tensions significantly. 
China challenges Japanese control over more than seven square kilometers of islets – called the Senkaku Islands in Japan, and the Diaoyu Islands in China – in the East China Sea. 
While the rival claims date back to the late nineteenth century, the latest flare-up – which has included widespread anti-Japanese demonstrations in China – was triggered in September 2012, when Japan’s government purchased three of the tiny islets from their private Japanese owner. 
Then-Prime Minister Yoshihiko Noda said that he decided to purchase the islands for the Japanese central government to prevent Tokyo Governor Shintaro Ishihara from purchasing them with municipal funds. 
Noda feared that Ishihara, who was well known for nationalist grandstanding, would try to occupy the islands or find other ways to use them to provoke China. 
But Chinese officials viewed the move as proof that Japan was trying to disrupt the status quo. 
Some even claimed that Japan was trying to reverse the territorial outcome of WWII. 
The May 1972 transfer back to Japan of Okinawa, which the United States had administered, included the Senkaku Islands. 
A few months later, when China and Japan were working to normalize relations, Japanese Prime Minister Kakuei Tanaka asked Chinese Premier Zhou Enlai about the islets; 
Zhou responded that the dispute should be left to later generations, in order to avoid any delay of normalization. 
As a result, both countries maintained their sovereignty claims. 
So, though Japan has administrative control, Chinese ships and planes frequently enter Japanese waters to assert China’s claim. 
While Japan’s security treaty with the US serves as a deterrent, there is always a danger of miscalculation. 
A quick resolution of the Senkaku Islands dispute (or of Japan’s lower-profile conflict with South Korea over the Korean-controlled Liancourt Rocks) is improbable, but Japan could be more proactive. 
For example, by stating their willingness to take any territorial disputes to the International Court of Justice, Japanese authorities could help to dispel perceptions of militarism. 
Furthermore, Japan should take the sovereign act of designating the Senkaku Islands as an international maritime preserve free of habitation or military use. 
China might not agree, but such a move might at least return the issue to the back burner, while reinforcing Japan’s image as a peaceful power. 
Japan and Northeast Asia need bold initiatives that focus on the future. 
It is time to give history a rest. 

The Myth of Isolationist America 
CAMBRIDGE – Is the United States turning inward and becoming isolationist? 
That question was posed to me by a number of financial and political leaders at the recent World Economic Forum at Davos, and was heard again a few days later at the annual Munich Security Conference. 
In a strong speech at Davos, Secretary of State John Kerry gave an unambiguous answer: “Far from disengaging, America is proud to be more engaged than ever.” 
Yet the question lingered. 
Unlike the mood at Davos a few years ago, when many participants mistook an economic recession for long-term American decline, the prevailing view this year was that the US economy has regained much of its underlying strength. 
Economic doomsayers focused instead on previously fashionable emerging markets like Brazil, Russia, India, and Turkey. 
The anxiety about US isolationism is driven by recent events. 
For starters, there is America’s refusal (thus far) to intervene militarily in Syria. 
Then there is the coming withdrawal of US troops from Afghanistan. 
And President Barack Obama’s cancellation of his trip to Asia last autumn, owing to domestic political gridlock in the US Congress and the resulting government shutdown, made a poor impression on the region’s leaders. 
Indeed, with Kerry’s time and travel focused on the Middle East, many Asian leaders believe that Obama’s signature foreign policy – strategic “rebalancing” toward Asia – has run out of steam, even as tension between China and Japan, evident in their leaders’ statements at Davos, continues to mount. 
Particularly egregious from the point of view of “Davos” was the recent refusal by Congress to approve the reform and refunding of the International Monetary Fund, even though a plan that added no significant burden to the American taxpayer had been agreed years earlier by the G-20 under Obama’s leadership. 
When I asked a prominent Republican senator why Congress had balked at keeping an American commitment, he attributed it to “sheer orneriness,” reflecting the mood of right-wing Tea Party Republicans and some left-wing Democrats. 
Further evidence of American isolationism can be found in a recent opinion poll taken by the Pew Research Center and the Council on Foreign Relations. 
According to the survey, fifty-two percent of Americans believe that the US “should mind its own business internationally and let other countries get along the best they can on their own.” 
About the same number said that the US is “less important and powerful” than it was a decade ago. 
The problem with these perceptions – both at home and abroad – is that the US remains the world’s most powerful country, and is likely to remain so for decades. 
China’s size and rapid economic growth will almost certainly increase its relative strength vis-à-vis the US. 
But even when China becomes the world’s largest economy in the coming years, it will still be decades behind the US in terms of per capita income. 
Moreover, even if China suffers no major domestic political setback, projections based on GDP growth alone are one-dimensional and ignore US military and soft-power advantages. 
They also ignore China’s geopolitical disadvantages within Asia. 
America’s culture of openness and innovation will ensure its role as a global hub in an age when networks supplement, if not fully replace, hierarchical power. 
The US is well positioned to benefit from such networks and alliances, if American leaders follow smart strategies. 
In structural terms, it matters greatly that the two entities in the world with economies and per capita income similar to the US – Europe and Japan – are both American allies. 
In terms of balance-of-power resources, that boosts America’s net position, but only if US leaders maintain these alliances and ensure international cooperation. 
Decline is a misleading metaphor for today’s America, and Obama fortunately has rejected the suggestion that he should pursue a strategy aimed at managing it. 
As a leader in research and development, higher education, and entrepreneurial activity, the US, unlike ancient Rome, is not in absolute decline. 
We do not live in a “post-American world,” but we also no longer live in the “American era” of the late twentieth century. 
In the decades ahead, the US will be “first” but not “sole.” 
That is because the power resources of many others – both states and non-state actors – are growing, and because, on an increasing number of issues, obtaining America’s preferred outcomes will require exercising power with others as much as over others. 
The capacity of US leaders to maintain alliances and create networks will be an important dimension of America’s hard and soft power. 
The problem for US power in the twenty-first century is not just China, but the “rise of the rest.” 
The solution is not isolation, but a strategy of selectivity similar to what President Dwight Eisenhower advocated in the 1950’s. 
A smart power strategy starts with a clear assessment of limits. 
The preeminent power does not have to patrol every boundary and project its strength everywhere. 
That is why Eisenhower prudently resisted direct intervention on the French side in Vietnam in 1954. 
Eisenhower was right about something else, too: America’s military strength depends on preservation of its economic strength. 
Nation-building at home is not the isolation that critics fear; on the contrary, it is central to a smart foreign policy. 
A smart strategy would avoid involvement of ground forces in major wars on the Asian continent. 
Yet such prudence is not the same as isolationism. 
The US needs to combine its soft- and hard-power resources better. 
As Obama said in his 2014 State of the Union address, “in a world of complex threats, our security depends on all elements of our power – including strong and principled diplomacy.” 
Eisenhower could have said that, and no one would accuse him of being an isolationist. 

A Western Strategy for a Declining Russia 
CAMBRIDGE – The Aspen Strategy Group, a non-partisan group of foreign-policy experts that former US National Security Adviser Brent Scowcroft and I co-chair, recently wrestled with the question of how to respond to Russia’s actions in Ukraine. 
And now NATO is wrestling with the same question. 
While the West must resist Russian President Vladimir Putin’s challenge to the post-1945 norm of not claiming territory by force, it must not completely isolate Russia, a country with which the West has overlapping interests concerning nuclear security, non-proliferation, anti-terrorism, the Arctic, and regional issues like Iran and Afghanistan. 
Moreover, simple geography gives Putin the advantage in any escalation of the conflict in Ukraine. 
It is natural to feel angry at Putin’s deceptions, but anger is not a strategy. 
The West needs to impose financial and energy sanctions to deter Russia in Ukraine; but it also must not lose sight of the need to work with Russia on other issues. 
Reconciling these objectives is not easy, and neither side would gain from a new Cold War. 
Thus, it is not surprising that when it came to specific policy recommendations, the Aspen group was divided between “squeezers” and “dealers.” 
This dilemma should be put in long-term perspective: What type of Russia do we hope to see a decade from now? 
Despite Putin’s aggressive use of force and blustery propaganda, Russia is a country in decline. 
Putin’s illiberal strategy of looking East while waging unconventional war on the West will turn Russia into China’s gas station while cutting off its economy from the Western capital, technology, and contacts that it needs. 
Some of Russia’s opponents might welcome the country’s decline on the grounds that the problem will eventually solve itself. 
But that would be shortsighted. 
A century ago, the decline of the Austro-Hungarian and Ottoman Empires proved highly disruptive to the international system. 
A gradual decline, like that of ancient Rome or eighteenth-century Spain, is less disruptive than a rapid one, but ultimately the best scenario would feature a recovering and rebalanced Russia over the next decade. 
The evidence of Russia’s decline is pervasive. 
The rise in oil prices at the beginning of the century gave the economy an artificial boost, leading Goldman Sachs to include it among the world’s major emerging markets (one of the “BRICs,” along with Brazil, India, and China). 
Today, however, that growth has vanished. 
Russia’s GDP is about one-seventh the size of America’s, and its per capita income (in purchasing-power-parity terms) of $18,000 is roughly one-third that of the US. 
Oil and gas account for two-thirds of Russian exports, half of state revenues, and 20% of GDP, whereas high-tech exports represent only 7% of its manufactured exports (compared to 28% for the US). 
Resources are allocated inefficiently across the economy, with a corrupt institutional and legal structure that impedes private investment. 
Despite the attractiveness of traditional Russian culture and Putin’s calls to boost Russian soft power, his bullying behavior has sown mistrust. 
Few foreigners watch Russian films, and no Russian university was ranked in the global top 100 last year. 
The likelihood of ethnic fragmentation is lower than in Soviet days, but it still remains a problem in the Caucasus. 
Non-Russians comprised half of the Soviet population; they now make up 20% of the Russian Federation and occupy 30% of its territory. 
The public health system is in disarray. 
The birth rate is declining, mortality rates have increased, and the average Russian male dies in his early sixties. 
Mid-range estimates by United Nations demographers suggest that Russia’s population may decline from 145 million today to 121 million by mid-century. 
But, though Russia at this point appears to be an industrial banana republic, many futures are still possible. 
It has talented human resources, and some sectors, like the defense industry, can produce sophisticated products. 
Some analysts believe that with reform and modernization, Russia would be able to surmount its problems. 
Former President Dmitri Medvedev, who worried that Russia would fall into the so-called middle-income trap rather than graduate to advanced-country status, laid out plans to do just that. 
But little has been implemented, owing to rampant corruption. 
Under Putin, Russia’s post-imperial transformation has failed, and Russia remains pre-occupied with its place in the world and torn between its historical European and Slavophile identities. 
Putin lacks a strategy for Russia’s long-term recovery and reacts opportunistically – albeit sometimes successfully in the short run – to domestic insecurity, perceived external threats, and the weakness of his neighbors. 
Russia has thus become a revisionist spoiler of the international status quo – one that seeks to be a catalyst for other revisionist powers. 
But an ideology of anti-liberalism and Russian nationalism is a poor source of the soft power that the country needs to increase its regional and global influence. 
Thus, the prospects that a Russian-led Eurasian Union can compete with the European Union are limited. 
Whatever the outcome of Putin’s revisionism, Russia’s nuclear weapons, oil and gas, skills in cyber technology, and proximity to Europe, will give him the resources to cause problems for the West and the international system. 
Designing and implementing a strategy that contains Putin’s behavior while maintaining long-term engagement with Russia is one of the most important challenges facing the international community today. 

The Hazards Behind the Headlines 
LONDON – Not too long ago, the only journalists working in conflict areas who might be afforded protection were those working for wealthy, predominantly Western news organizations. 
These journalists would attend expensive courses run by former special forces personnel, who trained them to navigate hostile environments. 
They would be furnished with flak jackets and helmets, and given first aid kits. 
But journalists elsewhere have rarely benefited from this culture of safety. 
From Mexico and Brazil to Pakistan and Somalia, journalists are often murdered with impunity. 
And more often than not, when the messenger is silenced, so is the message. 
For the last 15 years, the International News Safety Institute has been collating a list of journalists who have died on the job. 
What we have found is shocking: for every ten reporters killed, nine died while on assignment in their home country. 
Countless others have had to abandon their homes, jobs, and countries; and those who do stay often live in constant fear for their safety. 
In places where corrupt regimes or militant groups want to control the flow of information, journalists have long had to risk being kidnapped or killed. 
But in recent years, this threat has become so great that some countries are now effectively no-go zones for international-media organizations. 
Western correspondents are aware of these risks when they travel abroad to cover active war zones. 
But now they confront similar dangers at home. 
Wherever journalists work – whether online or offline – they need to be mindful of more physical, psychological, and digital risks than ever before. 
Terrorist attacks have affected news organizations, particularly in Europe, in unexpected ways. 
Many of those who arrived first at the scene of the Manchester Arena bombing or the massacre at the Bataclan concert hall in Paris had not received the physical training for such eventualities, nor were they emotionally prepared to cover stories where they would be exposed to that degree of trauma. 
In response to these events, some newsrooms have started preparing for what they will do if a domestic terrorist attack directly affects their operations. 
Organizations – including the BBC, the Dutch public service broadcaster NOS, and others across Europe – have plans in place for journalists responding to incidents in their home cities or those directly targeting their newsrooms. 
Beyond bullets and bombs, journalists also face increasing psychological threats at home. 
In July, a report I co-authored for the International News Safety Institute put a name to one such threat, a phenomenon known as “moral injury.” 
The report, published by the Reuters Institute for the Study of Journalism at the University of Oxford, examined the impact of covering the recent refugee crisis in Europe on members of the media. 
Reporting on a traumatic story, we found, can have a profound impact on one’s mental health. 
Our research noted that feelings of guilt and helplessness can be overwhelming when events “transgress personal moral and ethical values or codes of conduct.” 
To guard against the risks of moral injury, we highlighted the importance of education, explaining that, “journalists need to understand that this is the ‘new’ terrain, part of the mental landscape of the profession.” 
Our report also suggested that organizations should look to provide support to those who needed it, bearing in mind that individuals respond to and recover from trauma in different ways. 
In the US, journalists face another kind of psychological threat: harassment from their own government. 
Although journalists are protected by the First Amendment of the US Constitution, US President Donald Trump has nevertheless used his social-media bully pulpit to routinely vilify the entire news media. 
Trump’s disdain for free speech mirrors that of authoritarian governments, from Turkey to the Philippines, where journalists have been arrested, imprisoned, and harassed in record numbers. 
Journalists are also increasingly vulnerable online, where anonymity has created a culture of trolling and harassment. 
Female journalists have had to bear the brunt of digital attacks, which can rapidly escalate into threats of sexual violence. 
In response, many journalists have abandoned social media, and others have left the profession of journalism altogether. 
The world is a risky place for journalists, which is precisely why we must do everything that we can to protect them. 
Never before has the role of journalism been so important. 
In today’s noisy, confusing, multi-channel news landscape, where “fake news” is sold as fact, we need accountable, analytical, responsible reporting more than ever. 
A free press delivers truth, holds power to account, and calls out threats to liberty and justice. 
But the press can never be free if its members are not kept safe. 

Judging Bush's Military Tribunals 
Britain continues to be America's staunchest ally in the US-led war in Iraq, and Prime Minister Tony Blair remains unwavering in his support. 
But his government does have a serious quarrel with the Bush administration. 
The American President's designation of two Britons to be among the first six of 680 prisoners held at the US base at Guantanamo Bay in Cuba to face a military trial has been condemned across the political spectrum in the United Kingdom. 
The British are not alone. 
Worldwide, the detentions at Guantanamo Bay and President Bush's military tribunals have become symbols of America's readiness to abandon concern for rights in the name of the struggle against terrorism. 
Indeed, one senses a certain satisfaction in some countries that have been the targets of human rights criticism by the US; now they sense an opportunity to turn the tables. 
Whether denunciations of the detentions at Guantanamo and the planned military tribunals are driven by genuine concerns about human rights or by glee at pointing out American hypocrisy, the effect is the same. 
Because the US is such an outspoken proponent of human rights internationally, its failure to respect rights assumes added significance, contributing to a rising tide of anti-Americanism in much of the world. 
The Bush administration has only itself to blame for this state of affairs. 
The creation of Camp X-Ray at Guantanamo, and President Bush's executive order establishing military commissions to try those held there, aimed to deal with prisoners seized during the war in Afghanistan whom the US considered to be ``unlawful combatants.'' 
That is, the Bush administration believed that they were al Qaeda members or others who did not fight by the rules of war and thus not entitled to prisoner-of-war status. 
Potentially, there are three bodies of law that could govern the treatment of these prisoners: 
domestic American law in accordance with the rights guaranteed by the US Constitution; 
international human rights law to which the US is a party through its membership in the UN and its ratification of the International Covenant on Civil and Political Rights; 
international humanitarian law--also known as the laws of war--to which the US is also a party through its ratification of the Geneva Conventions of 1949 and through its acceptance that certain provisions of the First Additional Protocol of 1977 have the status of customary international law that is binding on America as on all other governments. 
In practice, the Bush administration rejects application of any of these bodies of law to the Guantanamo prisoners. 
Instead, President Bush asserts the power to hold them indefinitely at Guantanamo or, in his unreviewable discretion, to bring them to trial before military commissions that deny them the due process protections to which they would be entitled if any of the three legal systems were followed. 
The Bush administration's argument for not applying domestic law is that the prisoners are not American citizens and are not held on American territory. 
Guantanamo was selected as the site to imprison them in a deliberate--and successful--effort to prevent American civilian courts asserting their jurisdiction. 
As far as international human rights law is concerned, the Bush administration has been silent. 
But its fundamental position is that treaties such as the International Covenant on Civil and Political Rights are not self-executing. 
Hence, they accord no rights to the prisoners at Guantanamo in the absence of implementing legislation. 
It is the Geneva Conventions and the First Additional Protocol that create the greatest difficulties for the Bush administration. 
The Conventions require that, where there is any doubt, a hearing must be held before an impartial tribunal to determine whether a prisoner seized during an armed conflict is entitled to prisoner-of-war status. 
Since no such hearings have been held, the Bush administration is effectively claiming that there is no doubt in the case of any detainee. 
As in other instances where government officials claim unanimity--such as Saddam Hussein's assertion that he obtained 100% of Iraqis' support in the plebiscite that he conducted shortly before the war--America's position is simply not credible. 
It amounts to a determination that all the detainees at Guantanamo are guilty of being unlawful combatants without any proceedings or any opportunity for them to defend themselves. 
Moreover, even if they are found to be unlawful combatants, the First Additional Protocol of 1977 requires that they be afforded certain due process protections, which will not be available to those brought before the proposed military commissions. 
The commissions may even sentence detainees to death, with no appeal to a civilian court whatsoever. 
Little wonder, then, that Tony Blair's government is angry that two of its citizens will be tried before President Bush's military commissions. 
Up to now, criticism from the rest of the world has had no effect on the Bush administration's plans. 
It remains to be seen whether protests by an ally who has stood by America so loyally, and at such great cost to his own political standing, will have a greater impact. 

Judgment in Phnom Penh 
Three decades after the Khmer Rouge killed a quarter of Cambodia’s seven million people, a court to try the most responsible surviving leaders is set to open its doors. 
Under an agreement between the United Nations and Cambodia’s government, 13 foreign judges and prosecutors have now been chosen to serve alongside 17 Cambodian counterparts. 
This eclectic group of jurists will begin, in the first week of July, an unusual experiment in international justice. 
Over the next three years, the aptly named Extraordinary Chambers will seek to produce a measure of legal accountability for one of the worst genocides of the twentieth century. 
Among those likely to be tried are two of Pol Pot’s closest and most powerful cohorts: Nuon Chea, a Khmer Rouge party leader, and Ieng Sary, the former Deputy Prime Minister for Foreign Affairs. 
Given how long it has taken to get off the ground – on-again, off-again talks dragged out over nine years – this tribunal’s very existence is a cause for celebration. 
But the test of the trials will be whether they are – and are seen to be – fact-driven, impartial, and consistent with international standards. 
For reasons of history and as a matter of law, both the Cambodian government and the international community share responsibility for making this court a success. 
To do so, they must address several major challenges. 
First, unlike hybrid tribunals in East Timor, Kosovo, and Sierra Leone, international judges are a minority. 
(A “super-majority” voting mechanism will ensure that the vote of at least one international judge is needed to reach a judgment.) 
There are good reasons why mixed tribunals should have substantial national components. 
Nonetheless, this arrangement poses particular challenges in a country where the quality and independence of judicial decision-making have long been questioned. 
Second, the length of time that has passed since the crimes – longer than 30 years, in some cases – far exceeds that for any comparable proceeding. 
Other war crimes courts have taken place in the immediate aftermath of conflict. 
Cambodia’s long delay complicates the task of preserving evidence, including human memory, that is so essential to proving guilt. 
These structural impediments cannot be removed. 
But they can be partly overcome with intensive training in Cambodian and international law and complex investigative techniques. 
This must be reinforced by vigorous independent monitoring throughout the process. 
Third, the court site is located in a military compound far from downtown Phnom Penh. 
If ordinary people are to observe this historic event, buses will have to transport them. 
The proceedings should be broadcast nationwide on radio and television. 
Civic groups and the court will need to develop creative outreach strategies to target the predominantly rural population to ensure that all Cambodians have the opportunity to understand these proceedings. 
At the very least, court staff should work with local groups to convene meetings about the trials, and the issues they raise, in communities across the country. 
Fourth, in recent months opposition leaders and human rights activists have been subjected to criminal charges for speech critical of the government. 
Draft legislation seeks to make criminal defamation a permanent fixture, and includes new provisions making it an offense to criticize a court ruling. 
Cambodia’s political leaders and donor states should do more to underscore the value of wide-ranging debate about the tribunal and the larger legacy of Cambodia’s civil conflict. 
Cambodian survivors of the Khmer Rouge recall the daily fear of criticizing that regime; it would be especially tragic if Cambodians did not feel free to express their views of the Extraordinary Chambers. 
Meaningful public engagement with the court requires an underlying environment that fosters – not punishes – the free expression of ideas. 
Fifth, Cambodia has a shortage of highly qualified lawyers, because the legal profession was nearly wiped out by the Khmer Rouge. 
Yet, contrary to the practice in other international and hybrid war crimes courts, local law permits only Cambodian lawyers to represent the accused. 
For the sake of fairness and due process, this rule must be changed for the Extraordinary Chambers, so that international lawyers can contribute equally to the defense. 
Finally, having generously contributed most of the tribunal’s funds, donor governments cannot just sit back and watch. 
They can best help the court by coordinating their actions, exercising robust oversight, and helping to identify – and, where necessary, solve – problems as they arise. 
In addition, they may have to provide additional resources. 
The court’s bare bones budget of $56 million over three years does not cover basics such as a safe house for protected witnesses, transcripts of court testimony, or a library. 
It would help if the United States, which has yet to contribute to the Extraordinary Chambers, were to do so. 
The Extraordinary Chambers marks a milestone in Cambodia’s effort to come to terms with an exceptionally violent period in its past. 
How the court performs matters deeply to the millions of Cambodians scarred by the crimes of the Khmer Rouge. 
At the same time, this court is the latest manifestation of an enduring worldwide movement – which extends back to Nuremberg – to end impunity for mass atrocities. 
Its capacity to render justice should be of paramount concern to us all. 

The Dred Scott of Climate Change? 
WASHINGTON, DC – In 2015, 21 young people between the ages of 11 and 22 filed a major lawsuit against the US government for failing to limit the effects of climate change. 
In Juliana v. United States, the plaintiffs argue that because they will have to live with the repercussions of global warming for much longer than anyone else, on average, the government’s failure to protect the environment violates their constitutional rights to equal protection under the law and due process. 
The philosopher Peter Singer points out that this case represents a historical turning point, because it addresses the rights of children and future Americans to a livable environment. 
But the trial is about more than the environment; it will have far-reaching implications for intergenerational justice more broadly. 
Consider the issue of public debt. 
There have always been moral objections to one generation burdening the next with excessive debt, effectively limiting young people’s future liberty by impinging on their ability to form families, educate children, and create wealth. 
With US federal deficits rising toward $1 trillion a year, the issue is becoming cripplingly urgent. 
In deciding Juliana v. United States, the Supreme Court must grapple with the fact that the US Constitution does not explicitly recognize future citizens. 
While it was the first of many national constitutions to embody the Enlightenment principles that citizens are equal under the law and endowed with unalienable rights, it applies those principles only to living Americans. 
Future US citizens will have rights only after they are born. 
That might sound reasonable. 
But if the interests of future Americans are not protected, powerful actors today can drain resources from the not-yet-born. 
The result is environmental degradation, unsustainable public debt, and generations of under-educated, unemployable people who will have difficulty raising their own children to become productive adults. 
One modern country does recognize this risk in its constitution: Germany. 
Article 20a of Germany’s Grundgesetz (Basic Law) stipulates that, “Mindful also of its responsibility toward future generations, the state shall protect the natural foundations of life and animals by legislation and, in accordance with law and justice, by executive and judicial action…” 
By demonstrating that younger living citizens suffer more than their older counterparts from short-sighted fiscal and environmental policies, Juliana could be the first step toward recognizing a similar responsibility in the US. 
It is a small step, but one that could have far-reaching implications for policy, especially at a time when the president and his administration are actively pursuing policies that effectively loot the next generation. 
And, indeed, US President Donald Trump’s administration has resisted the case at every turn. 
Earlier this year, a lower court ruled that the case could go to trial, and the trial was set to begin at the US District Court in Oregon, on October 29. 
But in late September, Supreme Court Chief Justice John Roberts issued a temporary stay of the case to consider a request from the Justice Department to halt it altogether – a highly unusual move. 
Fortunately, the Supreme Court decided to deny the government’s request and let the trial move forward. 
But the Trump administration is not giving up: it has now filed dismissal appeals with the US District Court in Oregon and the Ninth Circuit Court of Appeals in San Francisco. 
Trump administration attorneys insist that the case is “nonjusticiable,” meaning that the courts are not the proper venue to resolve the issues in Juliana; even if this was not the case, they continue, the plaintiffs lack standing to sue. 
The US federal courts from the district level up to the Supreme Court – all of which have already ruled that the case should go to trial – clearly disagree. 
There are parallels between Juliana v. United States and the Supreme Court’s infamous decision in Dred Scott v. Sandford. 
Scott, a slave, sued for his and his family’s freedom in 1857 – eight years before the US Constitution’s 13th Amendment abolished slavery. 
Chief Justice Roger B. Taney ruled that slaves and their descendants were “beings of an inferior order” who had “no rights which the white man was bound to respect.” 
Scott, therefore, had no standing to sue in federal court. 
Will Kelsey Juliana, the chief plaintiff in the federal suit, also be denied? 
Already, in the US Supreme Court’s comments about Juliana, there are echoes of Dred Scott. 
Ultimately, however, the Dred Scott ruling was out of touch not only with basic morality, but also with the growing economic and cultural power of the North and the direction of US history. 
That is what we are seeing today, both in the Trump administration’s claims that Juliana is nonjusticiable, and in US law’s antiquated failure to recognize future Americans’ rights to a livable environment, unburdened by excessive debt. 
Opponents of Juliana, including the politically influential energy industry, cynically hope that they can succeed in getting the case dismissed and put generational rights in the hands of a deeply divided – and, for powerful vested interests, pliable – Congress. 
Like the opponents of emancipation in the 1850s, they count success in terms of the few months or years they can continue to benefit from the Constitution’s lacunae. 
And they may well be able to hold onto the past a little longer. 
When it came to abolishing slavery, the US trailed the United Kingdom by more than 30 years – a delay that only made matters worse in the mid-1800s. 
But the direction of history is clear. 
The tide is turning against permitting living citizens to exploit their children and grandchildren. 
In this sense, whatever the outcome, Juliana v. United States is just the beginning. 

Mandela’s Children 
NAIROBI – Before I knew that Nelson Mandela existed, I thought our then-leader, Kenyan President Daniel Toroitich arap Moi, was the world’s only statesman. 
I was five years old, and no world existed for me outside Nairagie Enkare, my birthplace in rural Maasailand. 
Moi was a mythical figure to me, because he didn’t live in Nairagie Enkare, yet he was always present through radio, a technology too complicated for a child like me to understand. 
Every newscast from the government-controlled radio station began with what “His Excellency, Holy President Daniel Toroitich arap Moi” had said or done. 
He visited a school. 
He planted a tree. 
He helped a women’s group. 
He attended church. 
He said agriculture was the backbone of our nation. 
He said we were fortunate to live in Kenya. 
Throughout the day, the airwaves were filled with songs repeating the Father of the Nation’s message, and reminding Kenyans to follow in his footsteps. 
Perhaps because what came over the radio was so predictable, people sought alternative news from the BBC Swahili Service. 
On most evenings, at six o’clock, men gathered to listen at the homes of the few, like my father, who had radios. 
The news lasted only 30 minutes, so everyone had to be absolutely quiet. 
But, on February 11, 1990, the men began to say repeatedly, “He is free! 
He is free! 
Nelson Mandela is free!” 
I’m sure that my father and his friends had heard earlier from government radio that Mandela had been released, but they waited for verification from the BBC. 
They left before the news was over to go to a bar to celebrate. 
When my father came home that night, he was singing praises for Mandela. 
I never asked my father who Mandela was. 
The following year, I enrolled in school and began to learn that the world extended beyond Nairagie Enkare. 
My teachers explained to me why Mandela’s freedom, after 27 years in prison, meant so much to Africans – from big cities to small villages. 
Europeans, I learned, had colonized Africa and stripped Africans of the right to self-governance. 
As African countries began to gain independence in the 1950’s, the white minority in South Africa was tightening its grip on power through a racial-segregation system known as apartheid. 
It was Mandela’s fight against apartheid that led to his imprisonment. 
By 1980, black Africans had taken over governance in every country on the continent except South Africa. 
Mandela’s release from prison ten years later moved Africa one step closer to absolute independence. 
That mission was completed in 1994, when apartheid fell and South Africans chose Mandela as their first democratically elected president. 
As I learned more about Mandela, I wondered how he had achieved the unimaginable, overcoming a 27-year ordeal to become the leader of Africa’s largest economy. 
And, just when I thought that he had already made his mark on history, he shocked the world by announcing that he would not seek re-election after the end of his first term in 1999. 
I was 14 then, old enough to understand how unusual it was for an incumbent African president to retire willingly. 
In my own country, for example, people were beginning to wonder whether Moi would leave office in 2002, when his second term expired. 
He had ruled Kenya for 13 years before a move in 1991 to reintroduce multi-party democracy paved the way for an election the following year. 
Moi was allowed to run again, as long as he honored the constitutional two-term limit. 
I feel extremely fortunate and honored that the start of my formal education coincided with Mandela’s re-emergence in African politics. 
His patience, civility, and politics of reconciliation provided me a better example of democracy and good governance than any civics class could have done. 
Mandela embodied the type of leader that Africans had in mind when they struggled for freedom from the European empires. 
Africans wanted leaders who would reconcile and reunite them – leaders who would restore to them the dignity that colonialism had robbed. 
Unfortunately for many African countries, freedom and independence ended up in the hands of a few who had tasted and become addicted to the repressive practices that Africans had spent decades fighting. 
They amassed untold wealth as hunger and disease ripped their societies apart and pushed more Africans deeper into poverty. 
Indeed, more than two decades after Mandela walked through the prison gates, supposedly completing Africa’s struggle for freedom, “Big Men” in countries like Congo and Zimbabwe continue to cling to power against the will of their people. 
Nevertheless, I am encouraged by the fact that, since Mandela left office, many African presidents – including Moi and Thabo Mbeki, Mandela’s successor – have adhered to their countries’ constitutions and left office without a fight. 
I am also hopeful that Mandela has inspired other young people like me to continue Africa’s liberation peacefully – the Mandela way. 

Jumping Viruses 
Scientists long anticipated that an influenza virus will spread - as now appears to be happening in Asia - from wild birds to humans, causing a pandemic. 
But few predicted last year's SARS epidemic, a pneumonia caused by a coronavirus. 
Prior to 2003, coronaviruses ranked very low on the scale of important human diseases, mostly being associated with the common cold. 
But we have long known that coronaviruses can cause dreadful diseases in domestic animals. 
We simply haven't learned our lesson. 
Indeed, events of the last couple of decades - the AIDS viruses transferring from monkeys to man, followed by their global spread, being just one example - should have convinced us that, where diseases are concerned, the unexpected will happen. 
After all, the "jumping" of viruses from wild animals to humans is more common than we like to think. 
All types of virus strains or variants exist - somewhat akin to dogs existing as different breeds. 
Veterinarians and farmers have long known of a coronavirus that can kill 90% or more of young pigs. 
Less well known is the fact that cats and dogs are infected by a coronavirus that can also cause disease in pigs. 
The cat coronavirus can cause lethal abdominal disease in cats, while some strains of the chicken coronavirus cause kidney disease rather than just bronchitis. 
There is simply no room for complacency where viruses - or bacteria, for that matter - are concerned. 
Evolution - whether of microbes or humans - involves pushing at the margins, going a little bit further than yesterday or last year, driven by the need to find additional sources of food. 
Humans, unlike other creatures, may also desire more of everything. 
Whatever the reason, we invade other creatures' space by, say, cutting down forests. 
As we come close to other animals, their viruses come closer to us. 
The outcome can be the same if we trap, enclose, and trade wild animals, such as civet cats, which seems to be the scenario that led to SARS in humans. 
When a virus has been associated with its host for a very long time, it mutates to a form that grows well without killing its host, which would be a pointless outcome from an evolutionary standpoint. 
A well-understood example is that of influenza viruses in wild fowl, where the virus causes infections that are hard to detect. 
But if an influenza virus jumps from, say, ducks to chickens, there may be lethal consequences. 
The virus is not well adjusted to the chicken, and some strains of the virus "go berserk." 
It is possible that the SARS coronavirus does not cause serious disease in its natural, wild animal hosts. 
Our problem arose when we enabled the virus to move from its normal home into us, by "farming" civet cats and other animals. 
Many human viral diseases have not been with us very long, perhaps only ten to twenty thousand years. 
Most probably, the viruses came from the wild animals in whose environment we were encroaching. 
In other words, the SARS outbreak was not a novel event. 
Chinese researchers have detected antibodies to SARS-like viruses in 2% of people from whom blood samples were taken in 2001 - a year before the disease first occurred. 
Many animal traders tested in 2003 in a market in the epicenter of the SARS outbreak also had the antibodies - again with no history of disease. 
This shows that the SARS virus has jumped species, from animals to man, on other occasions, with benign consequences. 
The difference in late 2002 was, perhaps, that people were infected with a variant that "went berserk" and grew too extensively in humans. 
It was bad luck. 
It is also possible that - again by chance - a benign SARS virus from a civet cat mutated after it infected people, becoming highly virulent. 
Both aspects of this scenario - a virus jumping to a strange host and then mutating to a devastating form - are familiar. 
Waterfowl commonly spread influenza viruses to chickens, although the outcome usually is not serious. 
On occasion, however, the virus mutates to a lethal form that can kill almost 100% of its victims. 
It is a highly virulent influenza virus such as this that is devastating chickens in parts of Asia. 
That influenza virus has also "jumped" from the chickens to those who look after them, killing some people. 
The influenza viruses established in humans for several decades originated from bird viruses. 
The chronic fear of health authorities is that, by chance, another avian influenza virus will mutate and spread from person to person to spawn a global pandemic. 
Human SARS might never have spread to the extent that it did (killing 800 people and devastating economies) if the problem had been openly acknowledged, with the World Health Organization involved from the outset. 
Similar failings have exacerbated the consequences of today's bird-origin influenza epidemic in Vietnam, Thailand, and elsewhere. 
Some countries that have the greatest reservoirs of viruses with "jump potential" are ill equipped politically, socially, and institutionally for the world to have confidence in them. 
Humans will continue to push against our existing boundaries, whether out of necessity, curiosity, pleasure, or greed, so more virus jumps will undoubtedly occur. 
We must trust the WHO and its associates to come to our rescue, as it did so admirably with SARS. 
But those involved in human and veterinary medicine must no longer remain aloof from one another. 
Recent events have made crystal clear what we already knew - that human and animal viruses are not mutually exclusive. 

Jumpstarting Europe’s Economy 
PARIS – Not so long ago, the notion of the European Central Bank handing out money to governments or directly to citizens – so-called “helicopter money” drops – would have seemed outlandish. 
But today a surprising number of mainstream economists and centrist politicians are endorsing the idea of monetary financing of stimulus measures in different forms. 
This represents a much-needed change in the conversation – one that, at long last, finally puts the focus squarely on stimulating the demand side of the European economy. 
After years of stagnant growth and debilitating unemployment, all options, no matter how unconventional, should be on the table. 
The United Kingdom’s referendum decision to leave the European Union only strengthens the case for more stimulus and unconventional measures in Europe. 
If a large majority of EU citizens is to support continued political integration, strong economic growth is critical. 
As research by McKinsey Global Institute (MGI) shows, despite bold quantitative easing and record low interest rates – the ECB was the first major central bank to introduce negative interest rates in 2014 – anemic demand continues to hobble GDP growth throughout Europe. 
In several EU countries, more than a quarter of the population has been unemployed for close to a decade, and political discontent is boiling over into extremism. 
The uncertainty and volatility in financial markets in the aftermath of the Brexit vote will further cripple demand. 
The wave of corporate investment that was supposed to be unleashed by a combination of fiscal restraint (to rein in government debt) and monetary easing (to generate ultra-low interest rates) has never materialized. 
Instead, European companies slashed annual investment by more than €100 billion ($113 billion) a year from 2008 to 2015, and have stockpiled some €700 billion of cash on their balance sheets. 
This is not surprising – businesses invest when they are confident about future demand and output growth. 
Even before the Brexit vote, European and other global companies were not confident in Europe’s prospects. 
Now they are confronting elevated risks of a European recession and the real possibility that both the UK and the EU could break up if populist contagion takes hold. 
Business investors hate uncertainty and the Brexit vote has created a dramatically more uncertain world in Europe and beyond. 
Fiscal austerity and ultra-low interest rates have also proven ineffective at stimulating household demand – and they may be backfiring. 
When individuals cannot find decent yields, they may actually increase their savings to achieve their retirement goals. 
And in the typical European city, where land and affordable housing are in short supply, lower interest rates have been driving property prices higher rather than stimulating construction. 
It’s well past time to acknowledge the limits of current policy. 
Under today’s precarious conditions, demand could certainly be better supported through strategies other than quantitative easing and ultra-low interest rates. 
Moreover, alternative approaches to stimulate private demand might have fewer undesirable distributional consequences, as MGI has discussed. 
Proponents of helicopter money – directly crediting citizens with central bank funds, or crediting national treasuries to finance infrastructure and other demand-generating activities – rightly argue that it has the advantage of putting money directly into the hands of those who will spend it. 
An appropriately sized helicopter-money program might also raise inflation in a measured way, heading off the possibility of a Japanese-style deflationary trap. 
Indeed, the boost to demand might give central banks the opening they need to move interest rates back toward historical norms. 
This could take the air out of incipient assets bubbles that might be forming and ease pressures on institutional investors who are struggling to find the yield they need to meet their insurance and pension commitments. 
But a helicopter-money program – a fanciful idea when Milton Friedman proposed it in 1969 – would also be a radical departure for policymakers, requiring an abundance of caution about citizen and investor perception, confidence, and solid governance structures. 
And such an approach would cement the notion that central bank policy is “the only game in town,” relieving elected government leaders of their responsibility for pro-growth policies and the fiscal decisions they control. 
A less risky and time-tested route for stimulating demand would be a significant increase in public infrastructure investment funded by government debt. 
It is well documented that Europe and the United States have underinvested in infrastructure. 
From a macroeconomic perspective, infrastructure investment is a “twofer”– it strengthens productivity and competitiveness in the long run and, where there is unused capacity, it boosts demand, output, and employment with significant multiplier effects in the short run. 
Yet governments across Europe have clamped down on infrastructure spending for years, giving precedence to fiscal austerity and debt reduction in the misguided belief that government borrowing crowds out private investment and reduces growth. 
But the crowding-out logic applies only to conditions of full employment, conditions that clearly do not exist in most of Europe today. 
In addition, infrastructure investment cannot be deferred forever. 
A new reckoning is warranted, one that accounts for the full costs of underinvestment in terms of foregone employment and growth. 
One way to break the stalemate is a change in public accounting standards. 
Specifically, if governments were able to treat infrastructure investment just as companies treat capital expenditure – as balance-sheet assets that are depreciated over their lifecycle, rather than as one-off expenses – such investment could then be exempted from Europe’s deficit rules without opening the door to profligate spending or easing the pressure for credible plans for long-term fiscal-consolidation. 
Of course, it would be crucial to improve the planning and oversight of infrastructure projects simultaneously, as MGI has argued. 
Fresh thinking about structural reform is needed, too. 
For decades, reform discussions in the EU have focused on reducing labor-market regulation, cutting red tape in product markets, privatizing state-owned enterprises, and lowering tax rates. 
But reform should now work with the grain of efforts to bolster demand – for example, unleashing the silver economy, fostering digital education and innovation, and unlocking urban land markets to pave the way for much-needed investment in housing. 
Each of these options would require robust debate and deeper investigation. 
But it’s clear that Europe needs a larger set of policy options. 
Quantitative easing and ultra-low interest rates should no longer be the only arrows in the macroeconomic policy quiver. 
These tools, along with excessive fiscal austerity, may have higher costs in terms of foregone employment and growth – and rising political discontent – than “risky” alternative options. 
The Brexit vote is a canary in the coal mine for Europe’s economic policy makers. 
Unconventional times require consideration of bold unconventional policy approaches. 

Europe’s Trade Coup 
BRUSSELS – All has gone quiet on the transatlantic trade front, with last month’s agreement between US President Donald Trump and European Commission President Jean-Claude Juncker having dispelled fears of an all-out tariff war. 
The deal was surprising, but perhaps it shouldn’t have been. 
At the core of the agreement concluded by Juncker and Trump was the understanding that the European Union and the United States will “work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods,” with no new trade barriers in the meantime. 
But the potential for a free-trade agreement isn’t the point; what matters is the end to the escalation of tit-for-tat measures, set in motion by Trump’s decision to impose tariffs on US imports of European steel. 
The US president has the power to impose tariffs and other trade barriers unilaterally, in the interest of national security. 
That is why Trump has been able to launch his own personal trade war, without so much as consulting the US Congress. 
A full-scale trade agreement, however, would need congressional approval. 
Given the myriad special interests that such a deal would mobilize, it is highly unlikely that any trade agreement – even one limited to industrial products – will materialize any time soon. 
Historically, the US has been able to conclude trade agreements only when a coalition of actors that would benefit from better export opportunities secured more votes than those who were vulnerable to import competition. 
When trade is considered an economic issue, it is usually possible to assemble such a coalition, because the benefits of trade liberalization outweigh the costs. 
But this has often proved more difficult in the US than elsewhere, because trade plays a relatively small role in the US economy. 
Goods exports may be Trump’s main focus, but the reality is that they account for less than 10% of GDP. 
Direct employment in exporting industries does not play a significant role in the US labor market. 
In Europe, by contrast, exports account for more than 25% of GDP in most countries; in Germany, the figure exceeds 50%. 
When an economy is so dependent on trade, it becomes much easier to make the case for liberalization, which is why Europe has long been more enthusiastic than the US about a transatlantic free-trade agreement. 
Negotiations for such an agreement – the Transatlantic Trade and Investment Partnership – stalled during President Barack Obama’s administration. 
Beyond the deal itself, Juncker apparently made a personal promise that the EU would buy more US agricultural products. 
This pledge is both empty and easy to fulfill. 
It is empty, because the European Commission has no budget to buy US soybeans or any means to impel EU consumers to do so. 
It is easy to fulfill, because China has already imposed tariffs on US soybeans in retaliation for US tariffs on its exports, meaning that non-US soybean producers are now likely to shift their exports to the Chinese market, freeing up the EU market for US producers. 
The main impact of Chinese tariffs on US soybeans will thus be the redirection of global soybean flows. 
But China’s role extends beyond soybeans. 
In fact, it is the trade dynamics with China that explain Trump’s willingness to reach an agreement with Juncker in the first place. 
A tariff on imports to the US has a much greater impact if Chinese exporters are the only ones to encounter it. 
A 25% duty on, say, aircraft engines from China would allow manufacturers elsewhere to gain market share, whereas if everyone had to pay the same tariff, the playing field would be unchanged. 
Ensuring that the EU does not face the same tariffs as China is particularly significant, because European suppliers are Chinese exporters’ main competitors in many industries. 
Given that the EU also competes with the US in the Chinese market, European industry might actually gain (marginally) from a Sino-American trade war. 
So long as the US and China are battling it out on trade, the transatlantic truce represents a coup for Europe. 
The truce is not nearly as good for China. 
While the country’s leaders have continued to pay lip service to free trade, they have so far proved unwilling to take into account the grievances of both the US and Europe. 
If China wants allies in its trade war with the US, it will have to revise many domestic regulations and practices that constitute de facto discrimination against foreign competitors. 
Thus, the EU-US deal has brought to the fore the real question China’s leaders face: whether to maintain strong government support for domestic industry. 
While protectionist measures might have been defensible 20 years ago, China’s economy is far more competitive today. 
Whatever benefit China derives from such measures may well be outweighed by an escalating trade war– especially now that the EU is safe and China will have to face the US alone. 

How Much Europe Can Europe Tolerate? 
CAMBRIDGE – This month the European Union will celebrate the 60th anniversary of its founding treaty, the Treaty of Rome, which established the European Economic Community. 
There certainly is much to celebrate. 
After centuries of war, upheaval, and mass killings, Europe is peaceful and democratic. 
The EU has brought 11 former Soviet-bloc countries into its fold, successfully guiding their post-communist transitions. 
And, in an age of inequality, EU member countries exhibit the lowest income gaps anywhere in the world. 
But these are past achievements. 
Today, the Union is mired in a deep existential crisis, and its future is very much in doubt. 
The symptoms are everywhere: Brexit, crushing levels of youth unemployment in Greece and Spain, debt and stagnation in Italy, the rise of populist movements, and a backlash against immigrants and the euro. 
They all point to the need for a major overhaul of Europe’s institutions. 
So a new white paper on the future of Europe by European Commission President Jean-Claude Juncker comes none too soon. 
Juncker sets out five possible paths: carrying on with the current agenda, focusing just on the single market, allowing some countries to move faster than others toward integration, narrowing down the agenda, and pushing ambitiously for uniform and more complete integration. 
It’s hard not to feel sympathy for Juncker. 
With Europe’s politicians preoccupied with their domestic battles and the EU institutions in Brussels a target for popular frustration, he could stick his neck out only so far. 
Still, his report is disappointing. 
It sidesteps the central challenge that the EU must confront and overcome. 
If European democracies are to regain their health, economic and political integration cannot remain out of sync. 
Either political integration catches up with economic integration, or economic integration needs to be scaled back. 
As long as this decision is evaded, the EU will remain dysfunctional. 
When confronted with this stark choice, member states are likely to end up in different positions along the continuum of economic-political integration. 
This implies that Europe must develop the flexibility and institutional arrangements to accommodate them. 
From the very beginning, Europe was built on a “functionalist” argument: political integration would follow economic integration. 
Juncker’s white paper opens appropriately with a 1950 quote from the European Economic Community founder (and French prime minister) Robert Schuman: “Europe will not be made all at once, or according to a single plan. 
It will be built through concrete achievements which first create a de facto solidarity.” 
Build the mechanisms of economic cooperation first, and this will prepare the ground for common political institutions. 
This approach worked fine at first. 
It enabled economic integration to remain one step ahead of political integration – but not too far ahead. 
Then, after the 1980s, the EU took a leap into the unknown. 
It adopted an ambitious single-market agenda that aimed to unify Europe’s economies, whittling away at national policies that hampered the free movement not just of goods, but also of services, people, and capital. 
The euro, which established a single currency among a subset of member states, was the logical extension of this agenda. 
This was hyper-globalization on a European scale. 
The new agenda was driven by a confluence of factors. 
Many economists and technocrats thought Europe’s governments had become too interventionist and that deep economic integration and a single currency would discipline the state. 
From this perspective, the imbalance between the economic and political legs of the integration process was a feature, not a bug. 
Many politicians, however, recognized that the imbalance was potentially problematic. 
But they assumed functionalism would eventually come to the rescue: the quasi-federal political institutions needed to underpin the single market would develop, given sufficient time. 
The leading European powers played their part. 
The French thought that shifting economic authority to bureaucrats in Brussels would enhance French national power and global prestige. 
The Germans, eager to gain France’s agreement to German reunification, went along. 
There was an alternative. 
Europe could have allowed a common social model to develop alongside economic integration. 
This would have required integrating not only markets but also social policies, labor-market institutions, and fiscal arrangements. 
The diversity of social models across Europe, and the difficulty of reaching agreement on common rules, would have acted as a natural brake on the pace and scope of integration. 
Far from being a disadvantage, this would have provided a useful corrective regarding the most desirable speed and extent of integration. 
The result might have been a smaller EU, more deeply integrated across the board, or an EU with as many members as today, but much less ambitious in its economic scope. 
Today it may be too late to attempt EU fiscal and political integration. 
Less than one in five Europeans favor shifting power away from the member nation-states. 
Optimists might say that this is due less to aversion to Brussels or Strasbourg per se than to the public’s association of “more Europe” with a technocratic focus on the single market and the absence of an appealing alternative model. 
Perhaps emerging new leaders and political formations will manage to sketch out such a model and generate excitement about a reformed European project. 
Pessimists, on the other hand, will hope that in the corridors of power in Berlin and Paris, in some deep, dark corner, economists and lawyers are secretly readying a plan B to deploy for the day when loosening the economic union can no longer be postponed. 

Jurassic Park for Sale 
One bright day last September, Icarosaurus, the famous fossil of a Triassic Age gliding reptile, which had exited the halls of the American Museum of Natural History a decade earlier, was brought back to New York to roost. 
Its return was a wake-up call for public education and science everywhere. 
Unless action is taken, fossils will continue to be sold to the highest bidder. 
Sad to say, the US is not the only country with this problem. 
The story begins in 1961 with three teenagers combing the New Jersey Palisades, the cliffs surrounding the Hudson River across from New York City, searching for ancient fossils. 
An old quarry was being widened and leveled, and the boys followed the bulldozers as they scraped away a stratum of earth to reveal fragile, fossil-bearing shale underneath. 
One day they found an ancient reptile with long ribs that enabled it to glide between trees. 
The boys brought the specimen to the Museum of Natural History, where its curator recognized the importance of the find and named it after one of the boys. 
Three decades later, one of them, now a man, became sick and needed money. 
He asked the Museum for compensation for the fossil. 
When his multimillion-dollar demand was refused, he spoke of legal action and claimed the specimen was only on loan to the Museum. 
The papers proved him correct. 
So the Museum let Icarosaurus go. 
The fossil was offered to the highest bidder. 
After nearly ten years, when no museum or private buyer met his price, the man put Icarosaurus up for sale at auction – a shock to the world of paleontology. 
When should individuals have the right to buy and sell such a fossil? 
The boys who found the specimen didn’t own the fossil quarry. 
So why do they have any rights to it? 
Why does it not belong to everyone? 
Why not put it in a public institution where scientists can study it and the public can admire it in perpetuity? 
American policy on fossil artifacts is more benighted than those of most third world countries. 
Each year, uncounted skeletons of dinosaurs and fossil mammals and fishes are whisked through airport customs and sold to the highest bidder. 
International commercial fossil collectors flock to the American West to vacuum up duckbills, carnivores, ceratopsians, and everything that will fetch a price. 
They pay landowners for exclusive collecting rights on ranches, displacing paleontologists and ruining publicly funded research and graduate dissertations. 
Fossil bones are harvested and made into mounted skeletons, often with little regard for accuracy. 
Some are sawn and polished to be made into clock faces, gewgaws, and souvenirs. 
If these were trees, we could grow more. 
But Jurrasic Park is fiction, dinosaurs will be no more. 
Icarosaurus was rescued from the auction block by a philanthropic and conservation-minded businessman repelled by the thought that such valuable treasures could be lost to science and education. 
Such individuals should not be pivotal to preserving the natural heritage. 
The US is not alone in this problem. 
China, Argentina, Brazil, and many other countries are losing their fossil resources to marketplaces, fossil conventions, and internet dealers. 
International cooperation is one way to stem this tide; stronger internal laws another. 
Practices vary among countries and even within them. 
In Bavaria, for example, there are no regulations on the ownership of fossils found on private land, while landowners in Baden-Württember are given finder's fees for important specimens, which must be turned over to the state. 
Commercial fossil collectors are trying to get US public lands - national parks and wildernesses – as open for business as private lands are. 
Why should such people control the fate of irreplaceable natural resources? 
What are the limits of land ownership when nature’s legacy is in the balance? 
Public lands should continue to be closed to commercial exploitation. 
Valuable scientific specimens, no matter who happens to own the land, should not be at the disposition of those who see only dollar signs in nature. 
On the other hand, commercial collectors could work with scientists and the public. 
They could excavate specimens on private lands, and on public lands, too, under the supervision of scientists who know how to recover important information about what their surroundings, such as what the rocks say about the fossil when it was alive. 
Original and unique specimens would be remanded to museums for permanent care, common or incomplete specimens still be bought and sold. 
Businessmen could make casts and mounted skeletons of the specimen and market them to other museums, schools, companies, and shopping centers. 
In this way everyone benefits. 
The public could get a piece of the history of life and the natural heritage is preserved. 
Whether commercial collectors will agree to such a plan without legislative coercion remains to be seen. 
So scientists, educators, and the international public must hold the line against commercial exploitation of public lands, and push for laws and treaties that stop the flow of valuable fossils across international borders – both physical borders, and those of common sense. 

The ECB’s Leap into the Unknown 
FRANKFURT – The European Central Bank is in the middle of a big, risky experiment. 
Key interest rates have remained close to zero for six years now. 
Financial markets are flooded with liquidity. 
Crisis management has resulted in major market distortions, with some segments’ performance no longer explainable by fundamental economic data. 
The unintended consequences of this policy are increasingly visible – and will become increasingly tangible with the US Federal Reserve’s exit from post-2008 ultra-loose monetary policy. 
And yet Europe’s crisis is far from over, as the decisions by the European Central Bank’s Governing Council in June and September demonstrate. 
This reflects two factors: too little ambition in carrying out essential balance-sheet corrections, and slow progress – negligible in France and Italy – in restructuring Europe’s national economies. 
The ECB’s decision to double down on monetary stimulus should thus be regarded as an act of desperation. 
Its key rate has been cut to 0.05%, the deposit rate is negative, and targeted longer-term refinancing operations are supposed to support bank lending. 
Moreover, the asset-backed securities market is to be revived by the purchase of ABSs. 
All of this is intended to flood the markets, expand the euro system’s balance sheet by €700 billion ($890 billion), and return to the balance-sheet volume recorded at the start of 2012. 
The expansion of the ECB’s balance sheet and the targeted depreciation of the euro should help to bring the eurozone’s short-term inflation rate close to 2% and thus reduce deflationary risks. 
For the first time in its history, the ECB appears to be pursuing an exchange-rate target. 
As was the case for the Bank of Japan, the external value of the currency will become an important instrument in the framework of a new strategic approach. 
Financial markets have applauded the ECB’s recent decisions. 
Moreover, having “effectively thrown off all of the Maastricht Treaty restrictions that bound the bank to the model of the Deutsche Bundesbank,” as former Fed Chair Alan Greenspan put it, the ECB is prepared to break further taboos. 
But for what purpose? 
Particularly by guaranteeing highly indebted countries’ sovereign bonds, the ECB has actually weakened the willingness to reform, particularly in the larger European Union countries, whose decrepit economic structures are an obstacle to potential growth, and where more room must be given to private initiative. 
The ECB’s willingness to buy ABSs is especially risky and creates a new element of joint liability in the eurozone, with European taxpayers on the hook in the event of a loss. 
The ECB lacks the democratic legitimacy to take such far-reaching decisions, with potentially substantial redistributive effects, which implies an even greater risk to monetary-policy independence. 
Indeed, the ECB already has been driven onto the defensive by the International Monetary Fund, the OECD, financial-market analysts, and Anglo-Saxon economists in the wake of feverish discussion of the risk of deflation in the eurozone. 
But what is the appropriate eurozone inflation rate, given de facto economic stagnation? 
Should higher nominal (that is, inflation-driven) growth replace debt-driven growth? 
Europe must aim for sustainable, non-inflationary growth and the creation of competitive jobs. 
The current inflation rate of 0.3% is due to the significant decline in commodity prices and the painful but unavoidable adjustment of costs and prices in the peripheral countries. 
Only Greece currently has a slightly negative inflation rate. 
In other words, price stability reigns in the eurozone. 
This strengthens purchasing power and ultimately private consumption. 
The ECB has fulfilled its mandate for the present and the foreseeable future. 
There is no need for policy action in the short term. 
It is, instead, the eurozone governments that must act. 
But any clear division of tasks and responsibilities between governments and central banks has, it seems, been jettisoned. 
Government action in many problem countries ultimately ends in finger pointing: “Europe,” the ECB, and Germany, with its (relatively) responsible policy, have all been scapegoats. 
Against this background, the ECB has yielded to immense political pressure, particularly from France and Italy, to loosen monetary policy further and weaken the exchange rate. 
But indulging the old political reflex of manipulating the exchange rate to create a competitive advantage will yield a short-term fix at best. 
It will not eliminate the structural weaknesses of the countries in question. 
The ECB is moving ever farther into uncharted territory. 
In view of the insufficient balance-sheet corrections in the private sector and inadequate structural reforms, macroeconomic demand-management tools will not work. 
Despite the ECB’s aggressive approach, monetary policy in the absence of structural economic reform risks being ineffective. 
Simply put, more liquidity will not lead to more active bank lending until there is more transparency regarding the extent of non-performing loans and the relevant economies have become more flexible. 
The ECB’s asset quality review and bank stress tests are expected to bring some clarity to the first question. 
Then, more lending will occur on acceptable terms – assuming that there is corresponding demand. 
But the uncertainty regarding the extent and pace of economic reforms remains. 
The ECB’s recent decisions, with their focus on short-term effects, indicate that monetary policy is no longer targeted at the eurozone as a whole, but at its problem members. 
Ad hoc decisions have replaced a feasible and principled medium-term strategy. 
The problems created by this approach will be compounded by the unavoidable conflicts of interest with monetary policy implied by the ECB’s assumption of its new financial-stability and banking-supervision roles. 
The first casualty will most likely be price stability. 

The ECB’s Leap into the Unknown 
FRANKFURT – The European Central Bank is in the middle of a big, risky experiment. 
Key interest rates have remained close to zero for six years now. 
Financial markets are flooded with liquidity. 
Crisis management has resulted in major market distortions, with some segments’ performance no longer explainable by fundamental economic data. 
The unintended consequences of this policy are increasingly visible – and will become increasingly tangible with the US Federal Reserve’s exit from post-2008 ultra-loose monetary policy. 
And yet Europe’s crisis is far from over, as the decisions by the European Central Bank’s Governing Council in June and September demonstrate. 
This reflects two factors: too little ambition in carrying out essential balance-sheet corrections, and slow progress – negligible in France and Italy – in restructuring Europe’s national economies. 
The ECB’s decision to double down on monetary stimulus should thus be regarded as an act of desperation. 
Its key rate has been cut to 0.05%, the deposit rate is negative, and targeted longer-term refinancing operations are supposed to support bank lending. 
Moreover, the asset-backed securities market is to be revived by the purchase of ABSs. 
All of this is intended to flood the markets, expand the euro system’s balance sheet by €700 billion ($890 billion), and return to the balance-sheet volume recorded at the start of 2012. 
The expansion of the ECB’s balance sheet and the targeted depreciation of the euro should help to bring the eurozone’s short-term inflation rate close to 2% and thus reduce deflationary risks. 
For the first time in its history, the ECB appears to be pursuing an exchange-rate target. 
As was the case for the Bank of Japan, the external value of the currency will become an important instrument in the framework of a new strategic approach. 
Financial markets have applauded the ECB’s recent decisions. 
Moreover, having “effectively thrown off all of the Maastricht Treaty restrictions that bound the bank to the model of the Deutsche Bundesbank,” as former Fed Chair Alan Greenspan put it, the ECB is prepared to break further taboos. 
But for what purpose? 
Particularly by guaranteeing highly indebted countries’ sovereign bonds, the ECB has actually weakened the willingness to reform, particularly in the larger European Union countries, whose decrepit economic structures are an obstacle to potential growth, and where more room must be given to private initiative. 
The ECB’s willingness to buy ABSs is especially risky and creates a new element of joint liability in the eurozone, with European taxpayers on the hook in the event of a loss. 
The ECB lacks the democratic legitimacy to take such far-reaching decisions, with potentially substantial redistributive effects, which implies an even greater risk to monetary-policy independence. 
Indeed, the ECB already has been driven onto the defensive by the International Monetary Fund, the OECD, financial-market analysts, and Anglo-Saxon economists in the wake of feverish discussion of the risk of deflation in the eurozone. 
But what is the appropriate eurozone inflation rate, given de facto economic stagnation? 
Should higher nominal (that is, inflation-driven) growth replace debt-driven growth? 
Europe must aim for sustainable, non-inflationary growth and the creation of competitive jobs. 
The current inflation rate of 0.3% is due to the significant decline in commodity prices and the painful but unavoidable adjustment of costs and prices in the peripheral countries. 
Only Greece currently has a slightly negative inflation rate. 
In other words, price stability reigns in the eurozone. 
This strengthens purchasing power and ultimately private consumption. 
The ECB has fulfilled its mandate for the present and the foreseeable future. 
There is no need for policy action in the short term. 
It is, instead, the eurozone governments that must act. 
But any clear division of tasks and responsibilities between governments and central banks has, it seems, been jettisoned. 
Government action in many problem countries ultimately ends in finger pointing: “Europe,” the ECB, and Germany, with its (relatively) responsible policy, have all been scapegoats. 
Against this background, the ECB has yielded to immense political pressure, particularly from France and Italy, to loosen monetary policy further and weaken the exchange rate. 
But indulging the old political reflex of manipulating the exchange rate to create a competitive advantage will yield a short-term fix at best. 
It will not eliminate the structural weaknesses of the countries in question. 
The ECB is moving ever farther into uncharted territory. 
In view of the insufficient balance-sheet corrections in the private sector and inadequate structural reforms, macroeconomic demand-management tools will not work. 
Despite the ECB’s aggressive approach, monetary policy in the absence of structural economic reform risks being ineffective. 
Simply put, more liquidity will not lead to more active bank lending until there is more transparency regarding the extent of non-performing loans and the relevant economies have become more flexible. 
The ECB’s asset quality review and bank stress tests are expected to bring some clarity to the first question. 
Then, more lending will occur on acceptable terms – assuming that there is corresponding demand. 
But the uncertainty regarding the extent and pace of economic reforms remains. 
The ECB’s recent decisions, with their focus on short-term effects, indicate that monetary policy is no longer targeted at the eurozone as a whole, but at its problem members. 
Ad hoc decisions have replaced a feasible and principled medium-term strategy. 
The problems created by this approach will be compounded by the unavoidable conflicts of interest with monetary policy implied by the ECB’s assumption of its new financial-stability and banking-supervision roles. 
The first casualty will most likely be price stability. 

Just Say No to Bush 
For three years, America's president has pursued a unilateralist agenda, ignoring all evidence that contradicts his positions, and putting aside basic and longstanding American principles. 
Take global warming. 
Here Bush is conspicuously absent without leave (AWOL in military jargon). 
Time and again, he questions the scientific evidence. (Of course, Bush's academic credentials were never very impressive.) 
Bush's position is more than wrong; it is an embarrassment. 
Indeed, when asked by Bush to look into the matter, America's National Academy of Sciences came to a resounding verdict (the only one they could honestly reach) that greenhouse gases are a menace. 
But America's automakers love their gas-guzzlers, and Bush's oil industry pals want no interference with their destruction of the planet's atmosphere. 
So no change in policy. 
In Iraq, Bush again pursued a unilateralist agenda, saying that there was incontrovertible evidence of a link with Al Queda, and that Saddam had weapons of mass destruction. 
Even before the invasion, there was overwhelming evidence that Bush was lying. 
Detection technology made it clear that Iraq did not have nuclear weapons, as chief UN inspector Hans Blix pointed out. It's possible that Bush read those reports, but that they were beyond his comprehension. 
It is also possible that he did not believe what he read. 
Whatever the case, American policy was not based on evidence. 
Since the Cold War's end, America is the world's sole superpower. 
Yet it has failed to exercise the kind of leadership needed to create a new world order based on principles like fairness. 
Europe and the rest of the world are aware of this; but they don't vote in American elections. 
Even so, the rest of the world is not powerless. Instead, the rest of the world should just say no. 
America has not won the hearts and minds of those in Iraq; indeed, it has lost them, just as it has lost the hearts and minds of much of the world. 
The US wants to retain control of the occupation, but it wants others to receive the bullets now mowing down American soldiers. 
UN soldiers should not bear the consequence of America's failure to manage the occupation, so US cries for financial help should fall on deaf ears. 
What sympathy does the US agenda deserve, when President Bush has ladled out tax cuts of hundreds of billions of dollars to the richest people in the world. 
It was not long ago that a Republican Congress held up $1 billion of UN dues, and threatened that it would only pay what it owed if the UN satisfied a raft of conditions. 
America's unwillingness to provide small sums to wage peace contrasts sharply with the huge amounts Congress quickly granted to wage war. 
Advocates of a softer approach say that if the UN stays on the sidelines, it will become irrelevant; by participating in Iraq, it will build trust with America, so that the next time a dispute such as this arises, America will turn earlier to the UN. 
Nonsense. 
Those in the White House today believe in realpolitik. 
They don't believe in loyalty or trust. 
If history matters, it matters most significantly in this: those who have shown that they can be pushed around will be pushed around again. 
If there is a next time, the US will make its judgments on what is in its best interests, regardless of what the UN does. 
I normally write about economics, not politics. 
But in the new world of globalization, there is greater economic interdependence, which requires more collective action, rules and institutions, and an international rule of law. 
Economic globalization has, however, outpaced political globalization; the processes for decision making are far from democratic, or even transparent. 
In no small measure, the failures of globalization can be traced to the same mindset that led to the failures in Iraq: multilateral institutions must serve not just one country's interest, but all countries'. 
At the recent World Trade Organization (WTO) meeting in Cancun, the developing countries put America--and Europe--on notice that this system can no longer continue. 
In that case, Europe was as much the culprit as America. 
Europe has no trouble seeing the dangers of unilateralism in America's actions, in everything from abandoning Kyoto to its refusal to join the International Criminal Court. 
But Europe should also reflect on its own practices, including trade policy, where the EU works systematically to unbalance the global trade regime against developing countries, despite promising that those imbalances would be corrected in the current round of trade negotiations. 
Here, Europe acts like America, which has long talked the rhetoric of free trade, while its actions have long ignored the principles. 
Forget about America's rhetoric of upholding fairness and justice; in trade negotiations, the US ignores the pleas of the poorest countries of the world to eliminate the cotton subsidies that have had so devastating an effect on them. 
If we are to make the world politically more secure and economically more stable and prosperous, political globalization will have to catch up with economic globalization. 
Principles of democracy, social justice, social solidarity, and the rule of law need to be extended beyond national boundaries. 
Europe and the rest of the world will have to do their part--abiding by these principles themselves, and giving each other, and America, a shove in the right direction. 
Right now, this entails `Just Saying No' to President Bush. 

Justice Comes to Chad 
N'DJAMENA, CHAD: "Since when has justice come all the way to Chad?" a former political prisoner asked as a group of torture victims discussed the idea of prosecuting the country's exiled ex-dictator Hissène Habré. 
Habré, who brutalized this impoverished country from 1982 to 1990, was then living safely in a seaside villa across the continent in Senegal, enjoying the $14 million he reportedly looted from the treasury on his way into exile. 
But justice did come to Chad. 
It came in the form of a young Belgian judge, a Brussels prosecutor, four strapping police officers, and a court clerk, who arrived in this dusty capital to investigate charges filed against Habré in a Belgian court pursuant to that country's long-arm anti-atrocity law, which permits prosecution of the worst human rights crimes no matter where they took place. 
When news of the group's arrival was announced on Chad's radio, former victims began to line up at the courthouse to tell their stories. 
Habré, once backed by the United States and France as a bulwark against Libya's Moammar Quadafi, allegedly killed tens of thousands of real and suspected opponents before he was deposed by his former army chief. 
Many of Habré's most brutal henchmen still occupy key security posts in the new administration, however, and coming forward remains a risky business. 
The judge's visit - and the Chad government's full cooperation - seemed to give the victims courage, however. 
The judge and his team visited the five N'Djamena jails, including one in the presidential compound, where Habré's American-trained political police systematically tortured prisoners. 
Ismael Hachim, president of the victims' association, described how he was subjected to the "arbatachar," a common form of torture in which a victim's four limbs were tied tightly behind his back until blood circulation stopped and paralysis resulted. 
Souleymane Abdoulaye showed the judge the sweltering underground cell where, as a boy of fourteen, he was crowded in with 72 other prisoners, only eleven of whom survived the near-starvation regimen. 
Those left alive rested their heads on the cool stomachs of the newly dead for some relief from the heat. 
Sabadet Totodet took the judge to a clearing on the outskirts of town where he was forced to dig graves for more than 500 fellow prisoners who died in custody. 
The judge spent a day examining the newly unearthed files of Habré 's dreaded political police, the Documentation and Security Directorate (DDS), including their reports to Habré on massacres of rival ethnic groups and daily lists of prison deaths. 
The judge also took the testimony of a number of Habré's DDS directors, and even allowed former victims to confront their torturers face to face. 
The Belgian judge, everyone here now hopes, will shortly seek Habré's extradition from Senegal, where Habré's victims began their quest two years ago. 
Inspired by the London arrest of Chile's ex-dictator August Pinochet, they filed complaints in Habrè's place of exile. 
To everyone's astonishment, a Senegalese judge indicted Habré on charges of crimes against humanity and torture, and placed him under house arrest. 
But Senegal's highest court later ruled that Habré could not be tried for crimes allegedly committed in Chad because Senegal did not have a long-arm law like Belgium's. 
Responding to a plea by UN Secretary General Kofi Annan, Senegal's president Abdoulaye Wade announced that he would hold Habré pending his extradition to a country where he could get a fair trial. 
No one yet thinks that Chad is that country. 
Indeed, after a group of victims, emboldened by Habré's arrest in Senegal, filed criminal complaints in Chad last year against a number of alleged Habré -era torturers, the office of the prosecutor handling the file was ransacked and the victims' lawyer, Jacqueline Moudeïna, was badly injured when a police squad commanded by an ex-DDS defendant threw a grenade at her. 
Belgium thus looks like the only place where Habré's victims may get their day in court. 
Ironically, the judge's visit comes as Belgium's anti-atrocity law is under legal and political attack. 
Last year, in a widely acclaimed trial, four Rwandans were convicted by a Belgian jury of involvement in the 1994 genocide in their country. 
Since then, however, Belgian politicians have grumbled as cases have piled up against leaders such as Ariel Sharon, Yasser Arafat and Fidel Castro. 
In February, after the Democratic Republic of Congo challenged an arrest warrant against its foreign minister, the International Court of Justice said Belgium had gone too far by not respecting the immunity of sitting office holders. The Habré case poses no such problems, because Habré is no longer in office and because Chad, where the crimes were committed, and Senegal, where Habré resides, are both ready to see him tried in Belgium. 
Rather, the case shows that long-arm laws like Belgium's, properly applied, can be an important tool to curtail the impunity of the perpetrators of atrocities as well as provide a forum for their victims. 

Justice for Some 
NEW YORK – The mortgage debacle in the United States has raised deep questions about “the rule of law,” the universally accepted hallmark of an advanced, civilized society. 
The rule of law is supposed to protect the weak against the strong, and ensure that everyone is treated fairly. 
In America in the wake of the sub-prime mortgage crisis, it has done neither. 
Part of the rule of law is security of property rights – if you owe money on your house, for example, the bank can’t simply take it away without following the prescribed legal process. 
But in recent weeks and months, Americans have seen several instances in which individuals have been dispossessed of their houses even when they have no debts. 
To some banks, this is just collateral damage: millions of Americans – in addition to the estimated four million in 2008 and 2009 – still have to be thrown out of their homes. 
Indeed, the pace of foreclosures would be set to increase – were it not for government intervention. 
The procedural shortcuts, incomplete documentation, and rampant fraud that accompanied banks’ rush to generate millions of bad loans during the housing bubble has, however, complicated the process of cleaning up the ensuing mess. 
To many bankers, these are just details to be overlooked. 
Most people evicted from their homes have not been paying their mortgages, and, in most cases, those who are throwing them out have rightful claims. 
But Americans are not supposed to believe in justice on average. 
We don’t say that most people imprisoned for life committed a crime worthy of that sentence. 
The US justice system demands more, and we have imposed procedural safeguards to meet these demands. 
But banks want to short-circuit these procedural safeguards. 
They should not be allowed to do so. 
To some, all of this is reminiscent of what happened in Russia, where the rule of law – bankruptcy legislation in particular – was used as a legal mechanism to replace one group of owners with another. 
Courts were bought, documents forged, and the process went smoothly. 
In America, the venality is at a higher level. 
It is not particular judges that are bought, but the laws themselves, through campaign contributions and lobbying, in what has come to be called “corruption, American-style.” 
It was widely known that banks and mortgage companies were engaged in predatory lending practices, taking advantage of the least educated and most financially uninformed to make loans that maximized fees and imposed enormous risks on the borrowers. 
(To be fair, the banks tried to take advantage of the more financially sophisticated as well, as with securities created by Goldman Sachs that were designed to fail.) 
But banks used all their political muscle to stop states from enacting laws to curtail predatory lending. 
When it became clear that people could not pay back what was owed, the rules of the game changed. 
Bankruptcy laws were amended to introduce a system of “partial indentured servitude.” 
An individual with, say, debts equal to 100% of his income could be forced to hand over to the bank 25% of his gross, pre-tax income for the rest of his life, because, the bank could add on, say, 30% interest each year to what a person owed. 
In the end, a mortgage holder would owe far more than the bank ever received, even though the debtor had worked, in effect, one-quarter time for the bank. 
When this new bankruptcy law was passed, no one complained that it interfered with the sanctity of contracts: at the time borrowers incurred their debt, a more humane – and economically rational – bankruptcy law gave them a chance for a fresh start if the burden of debt repayment became too onerous. 
That knowledge should have given lenders incentives to make loans only to those who could repay. 
But lenders perhaps knew that, with the Republicans in control of government, they could make bad loans and then change the law to ensure that they could squeeze the poor. 
With one out of four mortgages in the US under water – more owed than the house is worth – there is a growing consensus that the only way to deal with the mess is to write down the value of the principal (what is owed). 
America has a special procedure for corporate bankruptcy, called Chapter 11, which allows a speedy restructuring by writing down debt, and converting some of it to equity. 
It is important to keep enterprises alive as going concerns, in order to preserve jobs and growth. 
But it is also important to keep families and communities intact. 
So America needs a “homeowners’ Chapter 11.” 
Lenders complain that such a law would violate their property rights. 
But almost all changes in laws and regulations benefit some at the expense of others. 
When the 2005 bankruptcy law was passed, lenders were the beneficiaries; they didn’t worry about how the law affected the rights of debtors. 
Growing inequality, combined with a flawed system of campaign finance, risks turning America’s legal system into a travesty of justice. 
Some may still call it the “rule of law,” but it would not be a rule of law that protects the weak against the powerful. 
Rather, it would enable the powerful to exploit the weak. 
In today’s America, the proud claim of “justice for all” is being replaced by the more modest claim of “justice for those who can afford it.” 
And the number of people who can afford it is rapidly diminishing. 

Justice Is Reconciliation 
In South Africa, indeed around the world, we are raised on a strict diet of justice as retribution. 
With violent crimes on a shocking upsurge, with the hideous crimes of child rape and abuse on the increase, there are nowadays frequent calls – backed by wide public support – to restore capital punishment. 
Mercifully, South Africa’s Constitutional Court has ruled that the death penalty – which South Africans eliminated at the same time we were liberated from apartheid – is unconstitutional. 
Sadly, in many places in the world, it seems that men and women have not advanced beyond the biblical admonition of “an eye for an eye” in their yearning for retribution. 
Indeed, some Muslim countries amputate the hands of convicted thieves in public. 
But that biblical adage was in fact invoked originally to curb blood feuds from claiming the innocent relatives of the person who committed the killing. 
“An eye for an eye” asks that the culprit should be the sole target, and not others, whose only crime was to be related to him. 
So the “eye for an eye” adage was not intended to mean what it has come to mean, namely that killing be paid for by another killing. 
Given the brutality of the apartheid era, that would have never worked in my homeland. 
Some South Africans called for Nuremberg-type trials, especially for perpetrators of those atrocities that were designed to maintain the vicious apartheid system. 
There were demands that the guilty be brought to book. 
But we were fortunate in that Nuremberg was not really an option for us. 
Nuremberg happened because the Allies inflicted unconditional surrender on the Nazis and so could impose a so-called victor’s justice. 
In our case, neither the apartheid government nor the liberation movements could defeat each other. 
We had a military deadlock. 
Moreover, in the case of Nuremberg, the prosecutors and judges could pack up their bags after the trial and leave Germany for their several homes. 
We had to make our homes in this, our common motherland, and learn to live with one another. 
Such trials would probably have gone on nearly forever, leaving gaping wounds open. 
It would have been difficult to procure the evidence to get convictions. 
We all know just how cunning bureaucrats can be in destroying incriminating evidence. 
So it was a mercy that our country chose to go the way of the Truth and Reconciliation Commission – granting amnesty in exchange for the truth. 
This was ultimately based on the principles of restorative justice and ubuntu. 
At the TRC hearings we were exposed to gruesome details about atrocities that were committed to uphold or to oppose apartheid. 
“We gave him drugged coffee and shot him in the head and then we burned his body. 
As it takes 7 – 8 hours for a human body to burn, we had a braaivleis on the side, drinking beer and eating meat.” 
How low men can sink in our inhumanity! 
Each time such horrible stories were published, we had to remind ourselves that, yes indeed, the acts were demonic, but the perpetrators remained each a child of God. 
A monster has no moral responsibility and so cannot be held accountable; but even more seriously, designating someone a monster closes the door to possible rehabilitation. 
Restorative justice and ubuntu are based firmly on the recognition of the fundamental humanity of even the worst possible offender. 
We cannot give up on anybody. 
If it was true that people could not change, once a murderer always a murderer, then the whole TRC process would have been impossible. 
It happened because we believed that even the worst racist had the capacity to change. 
And I think we in South Africa have not done badly; at least that is what the rest of the world seems to think of our transformation and the TRC process. 
Because an “eye for an eye” can never work when communities are in conflict – reprisal leads to a counter-reprisal in the sort of blood spiral we are seeing in the Middle East. 
The type of justice South Africa practiced, what I call “restorative justice” is, unlike retribution, not basically concerned with punishment, it is not fundamentally punitive. 
It sets high store by healing. The offence has caused a breach in relations and this breach needs to be healed. 
It regards the offender as a person, as a subject with a sense of responsibility and a sense of shame, who needs to be reintegrated into the community and not ostracised. 
There is a wealth of wisdom in the old ways of African society. 
Justice was a communal affair and society set a high store by social harmony and peace. 
The belief was that a person is a person only through other persons, and a broken person needed to be helped to be healed .What the offence had disturbed should be restored, and the offender and the victim had to be helped to be reconciled. 
Justice as retribution often ignores the victim and the system is usually impersonal and cold. 
Restorative justice is hopeful. 
It believes that even the worst offender can become a better person. 
This does not mean being soft on crime. 
Offenders must realize the seriousness of their offences by the kind of sentences they get, but there must be hope, hope that the offender can become a useful member of society, after paying the price they owe to society. 
When we act as if we really believe that someone can be better, is better, then they will often rise to our expectations. 

Justifying Humanitarian Intervention 
In 1998, I visited Central Asia's former Soviet republics for talks--concerning the democratic development that was--or should have been--taking place in those newly independent countries. 
My hosts were former communist leaders who were now more or less democratically elected presidents. 
Each spoke easily about institutions, democratic procedures, and respect for the rule of law. 
But human rights were another matter entirely. 
In each country, I presented lists of political prisoners and asked about their fates. 
In one country, the president immediately decided to free a man accused of plotting a coup. 
But even this seeming success was morally ambiguous. 
The president had not made a political decision; he had bestowed a personal favor. 
I was receiving a gift--itself merely another demonstration of the president's arbitrary exercise of power--not proof of respect for moral principles. 
In one country, I spoke with a leader of the Islamic fundamentalist opposition, which had waged a long civil war against the government. 
This man now styled himself as chairman of a "Committee of National Reconciliation." 
Guards armed to the teeth surrounded him, yet he firmly supported the notion of democratization. 
Indeed, he saw it as his surest route to power, because the vast majority of the population thought exactly as he did. 
Democracy, he hinted more ominously, would enable him to "eliminate"--he did not dwell on the exact meaning of the word--those who did not. 
In such democracies without democrats, "human rights" are more problematic to discuss than procedural formalities, because they are not thought of as "rights" in the legal sense, but merely as pangs of conscience, or else as gifts to be exchanged for something else of value. 
This distinction matters because it points to the limited effectiveness of formalized legal norms as a means of promoting human rights. 
This gap between human rights and the behavior of rulers has brought about the greatest shift in the conduct of international affairs in our time--the advent of "humanitarian intervention." 
It arose initially outside established international institutions and the UN system, originating with the French group, Doctors Without Borders, which deemed human rights to be a value superior to national sovereignty. 
Doctors Without Borders introduced the concept of "the right of intervention" in humanitarian disasters, bypassing the strictures of traditional international law. 
The international system rather quickly adopted (and transformed) this notion, and numerous humanitarian military interventions followed--in Somalia, Haiti, Bosnia, Kosovo, East Timor, and Sierra Leone. 
As a rule, such operations were conducted under the Security Council's mandate. 
A notable exception was NATO's intervention in Kosovo, which was not explicitly sanctioned by the UN. 
The Kosovo intervention was also notable in another way: its legitimation was entirely moral in character, responding to the Milosevic regime's ethnic cleansing campaign, which had created a real threat of yet another immense humanitarian disaster. 
NATO's intervention in Kosovo is a precedent that US Secretary of State Colin Powell used to justify the war with Iraq. 
But, however compelling the cause of humanitarian military intervention, such actions must be brought under the umbrella of the UN Charter. 
Promoting respect for human rights was, after all, the guiding principle behind the UN's establishment. 
Its tasks in this area were affirmed in the 1948 Universal Declaration of Human Rights and the 1975 Helsinki Accords, which give human rights legal supremacy over the sovereignty of individual states. 
Yet a glaring contradiction exists between the universality and supremacy of human rights and the principles of sovereignty and non-interference in states' internal affairs, which are also enshrined in UN documents. 
One way to overcome this chasm is to introduce into the UN Charter a new chapter devoted to human rights and to reformulate Chapter IV, which concerns the use of force in international relations. 
Moreover, the principle of sovereignty itself needs redefinition. 
What the world needs is a system of legal injunctions--bilateral and multilateral agreements, as well as appropriate monitoring and supervisory institutions--to regulate the use of force for humanitarian reasons. 
Legal restraints on humanitarian intervention are necessary because dictators too often use it to justify criminal aggression. 
Adolf Hitler minted this strategy when he dismantled Czechoslovakia--supposedly in defense of the Sudeten Germans--and later when he invaded my homeland, Poland. 
As Milosevic showed again in the 1990s, when he claimed to be defending innocent Serbs in Croatia and Bosnia, justifying military intervention solely on the basis of moral principles leaves too much room for their distortion and abuse. 
This is why debates about reforming the Security Council should focus not on changing its composition, but on its mission. 
The Council should be made explicitly responsible for "human security" and be given a responsibility to protect it, in addition to its current role in safeguarding more traditional notions of international security. 
The principle of non-intervention in a state's internal affairs was never absolute, and globalization confronts it with a radical challenge. 
The term "international relations" assumes the Westphalian order of commitments among sovereign nation states, which replaced the medieval order of communities defined by personal fealty to a king. 
But today it is the Westphalian order that is in decline, along with the significance of state borders. 
In this wider and uncertain context, the need to regulate humanitarian military intervention looms large. 

Infrastructure’s Class of Its Own 
BEIJING – After several months of disappointing economic indicators, China’s State Council has unveiled a “mini-stimulus” package, focused on social-housing construction and railway expansion. 
The decision came a month after Premier Li Keqiang’s declaration that China had set its annual growth target at “around 7.5%” – the same as last year’s goal. 
The implication is clear: While consumption-driven growth remains a long-term goal for China, infrastructure will continue – at least in the short term – to serve as a key driver of China’s economy. 
Of course, China is not the only economy that depends on infrastructure investment to buttress economic growth. 
The World Bank estimates that infrastructure investments accounted for nearly half of the acceleration in Sub-Saharan Africa’s economic growth in 2001-2005. 
According to the Bank, a 10% increase in infrastructure investment is associated with GDP growth of 1%. 
Such investment also creates jobs, both in the short term, by creating demand for materials and labor, and in the long term, for related services. 
For example, every $100 million invested in rural road maintenance translates into an estimated 25,000-50,000 job opportunities. 
But these benefits are diluted in China, owing to its excessive reliance on public funding. 
Indeed, in recent years, less than 0.03% of Chinese infrastructure investment – which amounted to roughly 9% of GDP – was derived from private capital. 
This problem is not limited to China; of the 7.2% of GDP that Asian countries spend, on average, on infrastructure development, only about 0.2% is privately funded. 
By contrast, in Latin America and the Caribbean, private capital finances, respectively, 1.9% and 1.6% of infrastructure investment. 
Discussions within the G-20 have produced two possible explanations for Asian countries’ inability to attract more private capital to infrastructure projects. 
Most developing countries argue that the problem is rooted in the provision of capital, with investors preferring to fill their infrastructure portfolios with low-risk projects, and insurance companies and banks facing overly restrictive regulations. 
OECD countries like Germany counter that the problem is the lack of investment-worthy assets; there are simply not enough bankable projects available. 
In fact, both explanations are correct – but neither is complete. 
It is time for Asia’s leaders to recognize that the lack of private funding for infrastructure projects cannot be reduced to one or even two problems, and to develop comprehensive solutions that account for the full scope of the challenge. 
This requires, first and foremost, abandoning the view that infrastructure assets fit into the paradigm of traditional asset classes like equity, debt, or real estate. 
Infrastructure must be redefined as a new asset class, based on several considerations. 
For starters, there is the public-good element of many infrastructure projects, which demands contingent government obligations like universal coverage levels for basic services. 
In order to make such projects more appealing to private investors, economic externalities should be internalized, and a link should be established between the internal rate of return, which matters to a commercial investor, and the economic rate of return, which matters to society. 
Moreover, innovative mechanisms to supply new assets to investors would be needed – and that requires the creativity found and priced by markets. 
To this end, private-sector sponsors must be given space to initiate valuable projects. 
The new asset class would need its own standardized risk/return profile, accounting, for example, for the political risks that public-sector involvement may imply and for the lower returns from infrastructure relative to traditional private equity. 
Moreover, the risks associated with the new asset class would change as projects progress from feasibility study to construction to operation, implying that each phase would attract different sources of funding. 
A clear understanding of this process would enable potential investors to assess projects more effectively, which is critical to encouraging them to put up financing. 
Another important consideration is the considerable technical expertise that infrastructure investments demand, which makes them more complex than most assets. 
Similarly, a specialized network of actors would be needed to ensure that intermediation of infrastructure transactions is efficient and cost-effective, instead of fragmented and slow, as it is now. 
For countries that lack China’s strong fiscal position, the need to attract private capital to infrastructure investment is obvious. 
With nearly 70% of Sub-Saharan Africa’s population lacking access to electricity and 65% of South Asians lacking access to basic sanitation, there is no greater imperative than to plan, fund, build, and maintain infrastructure assets. 
But private investment in infrastructure remains vital even in countries like China, because it brings the power and dynamism of the market, which improves the allocation of capital and promotes transparency. 
Indeed, more private-sector involvement would make the kind of scandals that have occurred in China’s railway sector far less likely. 
In short, redefining infrastructure as a new asset class is the only credible way to attract funding for infrastructure construction, and thus to boost long-term economic growth and the employment rate. 
It is time for Asia’s leaders to step up. 

Donald Tusk’s Polish Stalker 
WARSAW – European Union leaders are set to announce their choice for President of the European Council at a summit on March 9. 
Until very recently, the reelection of the incumbent, former Polish Prime Minister Donald Tusk, seemed certain: the outgoing French president, François Hollande, former Austrian Chancellor Werner Faymann, and German Foreign Minister Sigmar Gabriel tested the waters, but preliminary polling showed none of them standing a chance. 
But then, on February 27, the Financial Times reported that the Polish government was sounding out the possibility of presenting an alternative candidate, Jacek Saryusz-Wolski, an MEP from Civic Platform, the party Tusk founded. 
In the European Parliament, Saryusz-Wolski is a member of the European People’s Party (EPP), which he served as Vice Chair until November 2016. 
Less than a week later, on March 4, the FT’s report was borne out. 
The leadership of Poland’s ruling Law and Justice (PiS) party instructed Prime Minister Beata Szydło’s government to withhold support for Tusk’s reelection. 
The same day, the foreign ministry issued a diplomatic note proposing Saryusz-Wolski. 
A half-hour later, Saryusz-Wolski confirmed it on Twitter. 
He was immediately expelled from Civic Platform, and the EPP’s chairman, Joseph Daul, reaffirmed his party’s full support for Tusk. 
With all EU members except Poland supporting Tusk, denying him a second term would require an extraordinary justification. 
The PiS has not provided one. 
Indeed, until now, the PiS had failed to formulate any clear position regarding Tusk’s candidacy. 
So why has it suddenly become such a high priority to block him? 
All we have to go on is a public statement by PiS Chairman Jarosław Kaczyński. 
“Donald Tusk is violating the elementary principles of the European Union,” he said. 
Offering no evidence whatsoever, Kaczyński accuses Tusk of breaching “the principle of neutrality by openly supporting the opposition, which calls itself absolute and seeks to overthrow the government through extra-parliamentary means.” 
In fact, Kaczyński alleges much worse. 
He believes that Tusk conspired with Russian President Vladimir Putin to bomb the Polish presidential plane in April 2010 as it carried a delegation of dignitaries to Smolensk to participate in a commemoration of the Katyn massacre (the execution, on Stalin’s orders, of more than 20,000 Polish officers, police, and intelligentsia in 1940). 
Where Kaczyński sees a “coup,” however, the rest of the world (including all professional Polish and international institutions that investigate aviation disasters) sees a tragic accident that claimed the lives of Kaczyński’s twin brother, then-President Lech Kaczyński, and 95 senior government officials. 
Tusk, who defeated the PiS in eight consecutive elections over the course of his career, was Prime Minister at the time. 
Prior to the government’s recent move, the entire Visegrad Group (the Czech Republic, Hungary, Poland, and Slovakia) officially supported Tusk, and its leaders are reacting with embarrassment to Kaczyński’s effort to replace him. 
Karel Schwarzenberg, the chairman of the Czech parliament’s foreign affairs committee, told Gazeta Wyborcza that Tusk was “a very good leader.” 
His Slovak counterpart František Šebej put it bluntly: “I do not understand the objections to Tusk. 
I am satisfied with him.” 
Even Hungarian Prime Minister Viktor Orbán, with whom Kaczyński has been pursuing an illiberal counterrevolution within the EU, is not hiding his support for Tusk. 
Saryusz-Wolski is hardly unknown. 
An expert of European integration since the 1970s, he has served in many government posts and has been a (very conservative) MEP since 2004. 
He has never been Prime Minister, President, or even a European Commissioner. 
With these credentials, one would expect Saryusz-Wolski to head a European parliamentary committee (as he did in 2007), or to serve as vice president of a parliamentary grouping (as he did for half a term in 2004-2007). 
But no one would expect him to become President of the European Council – perhaps least of all. 
And, indeed, Saryusz-Wolski – who, ironically, told an interviewer in 2008, “I note with horror that in EU institutions, Poles would sooner harm than help fellow Poles” – stands no chance. 
He is merely Kaczyński’s “useful idiot” in an effort to score a political victory over a man who represents the greatest threat the PiS faces. 
The most Saryusz-Wolski can realistically hope for is some government position in Poland. 
Perhaps he will replace the widely criticized foreign minister, Witold Waszczykowski. 
The most the PiS, for its part, can hope for is that some coalition of countries (for example, those ruled by Social Democrats) will propose another alternative to Tusk, whom EU member states will elect in order to avoid escalating the conflict with Poland. 
In that case, Tusk would most likely return to domestic politics, where a ninth victory against the PiS would be the punishment Kaczyński deserves. 
Perhaps only a Pole can save Poland from its most ardent patriots. 
Indeed, the PiS, a party that claims to place national solidarity above all else – even the constitution – has brought about a situation in which only Poland is standing against a Pole. 
And it has caused an unseemly commotion at a time when the EU must respond to the loss of the United Kingdom and the degradation of the transatlantic alliance. 
Instead of focusing on how best to position itself in this shifting landscape, Poland – and Europe – is consumed with one politician’s delusional obsession. 
On March 9, Europe should reject Kaczyński’s paranoid fantasies by returning Tusk to the presidency of the European Council. 

The West’s Other Trump 
BRUSSELS – In the second American presidential debate, Donald Trump promised that, if elected, he would appoint a special prosecutor to investigate Hillary Clinton. 
“You’d be in jail,” Trump told her. 
Trump’s threat to politicize the justice system has received the backlash that it deserves; but, sadly, his cynicism is not unique to the United States. 
The current Polish government, led by the Law and Justice (PiS) party, which came to power just under a year ago, has displayed a similar authoritarian streak, flouting legal conventions to further its own ends. 
PiS leader Jarosław Kaczyński has repeatedly called for an inquiry into former Polish Prime Minister and current European Council President Donald Tusk. 
Kaczyński holds Tusk’s former government partially responsible for the April 2010 plane crash in Smolensk, Russia, which killed 96, including Kaczyński’s twin brother, Polish President Lech Kaczyński. 
The Polish government delegation was traveling to a commemoration of the 1940 massacre in Katyn, where Stalin ordered the murder of 22,000 Polish army officers, police officers, and intelligentsia and blamed Hitler for the crime. 
When the Cold War ended, the truth about the massacre finally came out, and was officially recognized by Russian President Boris Yeltsin. 
Jarosław Kaczyński and other PiS members maintain that Russia – with help from some Polish officials – was responsible for the plane crash, too. 
They have relied on this bizarre conspiracy theory in their rise to power, despite having no evidence to support it. 
Indeed, transcripts from the plane’s recovered cockpit voice recorder indicate that the plane crashed during a bad-weather landing. 
Armed with his conspiracy theories, Kaczyński wants to deny Tusk a second term at the helm of one of the European Union’s three main governing institutions, saying, “Should such a person be at the head of the European Council? 
I have profound doubts.” 
Meanwhile, Poland’s right-wing media has fanned the flames, with one magazine recently depicting Tusk in handcuffs. 
Kaczyński’s anti-Tusk crusade is a Trump-worthy abuse of political power that foreshadows what life would be like for Trump’s political opponents if he were actually to win. 
It also reflects a broader, raging battle for Poland’s soul. 
Poland was once Central Europe’s post-Cold War democratic poster child. 
But now the PiS is pursuing a wide-ranging power grab, seeking control of the country’s constitutional court, public media channels, and security services. 
Instead of cementing Poland’s strategic importance to NATO and its rightful place as a powerful, respected EU member state, the PiS has become obsessed with reversing modernity. 
As proof, one need look no further than the government’s assault on its own judiciary and democratic institutions, which is raising eyebrows in the US, Brussels, and across Europe. 
Poland is experiencing a constitutional crisis that began when PiS-backed Polish President Andrzej Duda refused to swear in three Constitutional Tribunal judges chosen by the previous parliament. 
The PiS then selected its own judges instead, while adopting legislation that essentially paralyzed the court. 
The court declared the PiS’s judicial rule changes unconstitutional, but the PiS-led government refused to publish the court’s decision, thereby blocking it from taking effect. 
It is now all but impossible for the court to assess the constitutionality of the current parliament’s legislation, despite the Polish constitution’s explicit provision authorizing judicial review. 
Now that the PiS’s actions have been universally condemned, it is holding out until the end of the year, when the current constitutional court president’s mandate expires. 
After that, the PiS will appoint a friendlier president, who will no doubt dance to whatever tune it plays. 
But a newly appointed president likely won’t end Poland’s constitutional crisis, because with valid court judgments from this summer remaining unpublished, there is now a black hole in Poland’s constitutional order. 
The EU has started legal proceedings against Poland, and it is calling on the Polish government to work with opposition parties to reform the court. 
If Poland doesn’t comply, the EU could ultimately strip it of its voting rights. 
But it is unlikely that the EU or other international bodies will ensure a solution to the Polish political problem. 
Only Poles can do that. 
In fact, huge protests against a recent bill that would have banned virtually all abortions (under penalty of imprisonment for up to five years) forced the government to back down and withdraw the proposed legislation. 
This marked a victory for Polish women, and it suggests that Poland is more progressive than Kaczyński would like to believe. 
Still, while the government may have suffered one major public defeat, the PiS’s underlying ideological illiberalism remains intact. 
That means Polish civil-society advocates will have to fight many more battles in the coming months to contain and reverse the PiS’s lawlessness. 

Disrupting Putin’s Game Plan 
MUNICH – No sooner did the Sochi Winter Games end than Russia bade farewell to the Olympic spirit by invading and occupying a foreign country. 
With its aggression against Ukraine, the Kremlin has breached the United Nations Charter, the Helsinki Final Act, and other international agreements, including the Budapest Memorandum on Security Assurances and the Black Sea basing agreement, which spelled out Russia’s relations with Ukraine. 
Crimea has been turned into a military zone, and its inhabitants might soon find themselves trapped in the firing line if the crisis continues to escalate. 
Russians now face international diplomatic and economic isolation, thus exacerbating their country’s economic woes. 
And Russian President Vladimir Putin’s reckless gamble risks dragging the world into a wider conflict. 
In light of Putin’s dangerous behavior, the West must rethink its stance toward him. 
Here is a leader who read a hidden, menacing agenda into a technical European Union document about export subsidies and anti-fraud provisions. 
More broadly, here is a paranoiac who sees an implausible coalition of liberal Russians, Ukrainian fascists, the CIA, and Islamist terrorists trying to thwart his preferences, if not topple him, at every turn. 
Indeed, what we are seeing is not an unfortunate over-reaction to recent events, but a result of meticulous preparation. 
Armies do not mobilize 150,000 troops within days, or have vehicles and thousands of uniforms without insignias ready, or hold military exercises in peaceful regions of the world without warning. 
It would be a mistake for NATO to respond to Russia’s provocations with similar saber rattling. 
After all, the United States and the EU still have a range of tools to modify Putin’s calculus, or that of those bankrolling his regime. 
Most important, the US and Europe must cooperate much more closely than they have so far. 
The impression of disunity on sanctions plays into Putin’s hands. 
Some EU members, like Germany, must live up to the expectations they have recently raised. 
If German leaders are serious about instituting a “culture of responsibility,” they are obliged to act accordingly, even if doing so entails economic costs. 
The West should also listen carefully to Ukraine’s neighbor, Poland, which probably has the deepest insight into the complexities of the crisis. 
Most important, it is essential to adhere to certain key principles: 
Use diplomacy. 
Europe, the US, and Japan have already suspended their cooperation with Russia in the G-8. 
Similarly, the OECD should put Russia’s accession process on hold. 
Following punitive measures by the US, the EU has now decided on some “soft” sanctions. 
But modest steps like suspending talks on visa liberalization will not impress the Kremlin much. 
Stronger signals, such as cancellation or suspension of agreements concerning the South Stream gas pipeline and a trade embargo on arms and dual-use items, merit serious consideration. 
Impose targeted sanctions against those responsible for Russia’s Crimean incursion. 
An obvious tool here is to broaden the US Magnitsky Act, which prohibits the 18 people identified as being directly responsible for the detention, abuse, and death of the Russian lawyer Sergei Magnitsky from entering the US or using its financial system. 
The Magnitsky Act should be amended to include the names of political and military leaders responsible for the invasion of Ukraine. 
Moreover, the modified bill should be adopted by the US and the EU simultaneously – thus delivering a credible threat to freeze the foreign assets of Russia’s government, state-owned companies, individual officials, and relevant oligarchs. 
Engage Russians. 
The West needs to communicate to ordinary Russians the spuriousness of Putin’s zero-sum, us-versus-them narrative. 
Closer relations between Ukraine and the EU pose no threat to Russia; on the contrary, a Ukraine closely integrated with its Western neighbors could boost Russia’s economy as well. 
That may be irrelevant to a leader who is guided by visions of restored imperial glory, but not to the people under his rule. 
Knocking holes in the Kremlin’s wall of propaganda will not be easy, but it should not be impossible in our hyper-connected world. 
Support Ukraine with financial aid – as the EU has now done –and by securing its upcoming elections. 
Military assistance should include, at a minimum, Western intelligence sharing and cooperation through the NATO-Ukraine Commission. 
Should the situation deteriorate further, the West should also provide medical aid and surveillance assets. 
If the 2008 Russo-Georgian war is any guide, NATO’s Cyber Defense Center should help Ukraine prepare for a large-scale digital offensive. 
Defend NATO allies. 
NATO should discuss concrete steps to protect its members. 
Ukraine borders four NATO members (Poland, Slovakia, Hungary, and Romania), while a fifth (Turkey), along with Romania, borders the Black Sea. 
Moreover, Estonia and Latvia are alarmed at Russia’s geopolitical ambitions, especially given the pretext of protecting ethnic kin. 
Both have populations that are about 25% Russian – a legacy of their Soviet past. 
Finally, Poland and Lithuania border Kaliningrad, Russia’s exclave in the middle of Europe (and the scene of its most recent combat-readiness exercise). 
This is a time for diplomacy, and NATO must try to avoid direct confrontation, but not at all costs. 
It must reckon that Russia’s actions might deliberately run counter to a peaceful settlement. 
The alliance cannot afford to launch a lengthy and heated debate about the deployment of its forces and capabilities only at the moment diplomatic efforts fail. 
When Ukrainians stood up against their corrupt elite, they became the first people to put their lives on the line for the goal of EU membership. 
The result was unwarranted retaliation from Russia. 
So this is not Ukraine’s war. 
Ukraine is the immediate victim, but it is by no means Putin’s ultimate target. 
This is a blatant attack on the principles of state sovereignty, inviolability of negotiated borders, and adherence to multilateral agreements that underpin today’s rule-based international system. 
Countering Russia’s aggression is thus the responsibility of all who would uphold that system. 

Merkel’s American Minders 
BERLIN – Germans used to joke that Chancellor Angela Merkel’s penchant for communicating via fleeting text messages effectively marked the end of traditional historiography. 
Well, at least American spy agencies seem to have kept full track of the behind-the-scenes communications – in Berlin and beyond. 
Regrettably, US President Barack Obama and his administration have yet to comprehend the scale and severity of the damage caused to America’s credibility among its European allies. 
The problem is not that countries spy on each other (they all do). 
Rather, it is the extent of US intelligence gathering and America’s attitude toward allies that is most damaging. 
Previous transatlantic clashes over diverse issues such as climate change, the detainees at Guantánamo Bay, and the Iraq War exposed a breakdown of mutual understanding, sometimes stemming from sharp differences over how best to achieve certain common objectives. 
But the wiretapping crisis and other troubling revelations from the former American intelligence contractor Edward J. Snowden point to a deeper problem: a crisis of mutual distrust that risks becoming a serious transatlantic rift at a time when closer political, economic, and security cooperation between Europe and the United States is needed more than ever. 
There is probably nothing more destructive to friendly relations among democratic states than behavior by an ally that causes the other side to lose face at home. 
After all, it was Merkel who tried to calm the waters after the NSA scandal first hit Europe this summer. 
That is why the alleged US wiretapping of her cellphone is so damaging for her, both personally and politically. 
As someone who served in Merkel’s government from 2009 to 2011, I must admit that I was rather careless in the use of mobile communication devices while in office. 
In principle, of course, one should always assume that foreign intelligence services attempt to listen in on other governments’ conversations. 
But it makes a big difference whether such activities are conducted by Russia or China, or by an ally that repeatedly emphasizes the importance of close transatlantic friendship and cooperation. 
Obama’s personality makes matters more complicated. 
It is hard to recall any other US president who has been so personally disconnected from other heads of state. 
Instead of immediately reaching out to a friendly country, he decided to lie low and send White House Press Secretary Jay Carney to issue a rather awkward statement that the US government “is not” and “will not” monitor Merkel’s communications. 
Of course, it does not take much interpretive skill to recognize a clumsy attempt to avoid confessing that US intelligence services targeted Merkel in the past. 
The Obama administration appears to have failed to ask itself some basic questions. 
How could it justify spying on a leader who is among America’s closest allies in NATO and in the Afghanistan mission – a leader whom he invited to the Rose Garden to bestow the Presidential Medal of Freedom, the highest honor that America can give to a foreigner? 
Moreover, Merkel was not the only target. 
In the case of France, how could the Obama administration justify targeting an ally that has tried hard to build trust with the US by providing much-needed military and political cover in Libya and Syria? 
French President François Hollande, too, must feel like a fool – not just as a result of US surveillance, but also because he probably received no advance warning from his intelligence services about Obama’s sudden decision to ask Congress to pass a resolution prior to using military force in Syria. 
Finally, how can Obama explain to the EU (whose delegation in Washington, DC, was also bugged) that it is crucially important to enter into honest, serious, and comprehensive negotiations to conclude a Transatlantic Trade and Investment Partnership? 
Prominent voices in Europe – including the president of the European Parliament and the leader of Germany’s Social Democrats (who is about to form a coalition government with Merkel) – are already demanding a suspension of the TTIP talks. 
The potential economic cost of a delay or a failure to achieve closer transatlantic economic integration could total hundreds of billions of dollars – in addition to the incalculable damage done to America’s credibility in Europe. 
There is much talk today about the risks of a new era of American isolationism and a lack of US leadership in the world. 
It is important to remember that isolationism can be triggered not only by a potential retreat from global affairs, but also by the rather imprudent use of America’s hard and soft power on the world stage. 
To escape the NSA mess, various options will be discussed. 
The new Franco-German push for an intelligence-sharing agreement with the US is probably difficult to put into practice, especially considering that spy services operating around the world are not always fully controllable. 
As a first step, Obama must rediscover the great communications skills that propelled him to the White House in the first place. 
From a public-diplomacy perspective, his handling of the surveillance scandal has been a complete failure. 
To contain the damage and begin to rebuild much-needed trust, Obama must issue a credible apology to Merkel, other Western allies, and their citizens. 
In the American political context, issuing an apology, especially to foreign governments, is often viewed as a sign of weakness. 
In the case of the NSA scandal, an unequivocal apology by Obama is the only viable solution to leave the past behind and move forward. 
Unfortunately, the window of opportunity for such a gesture to be viewed in Europe as a much-awaited olive branch – and a sign of real American strength and conviction – is closing fast. 

Karzai's Crisis of Legitimacy 
Reading the press of late, you might conclude that all Harmid Karzai, Afghanistan's chief, needs to pacify his country is an expanded international peacekeeping presence and faster delivery of aid. 
The carrot of international assistance and the stick of peacekeeping forces will allegedly prevent Karzai's government from dying in the cradle. 
Swayed by this logic, the US has pushed to accelerate delivery of aid--a task it knows well how to achieve, having provided nine-tenths of all emergency relief money to Afghanistan even during the Taliban years. 
President Bush's announcement that the US, Japan, and Saudi Arabia have created a $180 million fund to reconstruct Afghanistan's trunk highways is the most recent measure to speed up the flow of development assistance. 
The international security force, staffed mainly by Turks, is being upgraded and its mandate extended to the entire country. 
When Paul Wolfowitz, the US Deputy Secretary of Defense, announced this, it represented a reversal of America's earlier position, which favored confining the peacekeeping forces to Kabul lest they get in the way of US operations against Al Qaeda and Taliban diehards. 
The trouble with this carrot-and-stick strategy is not that it is wrong but that it is insufficient. 
It fails to recognize that neither expanded peacekeeping nor efficiently delivered aid will achieve their desired ends until the Afghan public accepts the Karzai government as fairly representing its interests. 
Today it does not. 
The American Revolution can be traced directly to the growing sense among colonists that Parliament's rule in North America was illegitimate. 
The speed with which debates in the French Estates General evolved into a revolt against the Bourbons reflected the deepening sense among ordinary Frenchmen that Louis XVI's rule lacked legitimacy. 
Neither the best-armed government nor the richest can long survive unless broad sections of their population accept its rule as legitimate. 
Britain failed in America and the French crown failed in France because the governed ceased to recognize their authority. 
Legitimacy shifted from the regime to its opponents, who soon brought it down. 
Something like this is now occurring in Afghanistan. 
If the causes of this development are not addressed, Karzai's government will inevitably collapse, and with it the entire international process that began a year ago. 
Why do Afghans perceive as illegitimate a government put in place by an agreement to which all factions assented, a government that was confirmed by a duly constituted National Assembly (Loya Jirga) held under international patronage? 
The reason is that Karzai's government, and Karzai himself, are controlled by a small group of powerful men associated with the former Northern Alliance and dominated by Minister of Defense Marshall Fahim. 
Foreign commentators often acknowledge that a clique of Tajiks exerts inordinate influence in the government. 
This understates the government's exclusiveness. 
Many key figures are from a handful of villages in just one valley, the Panjshir. 
Pashtuns living in the strategically important south and east, together with Shi'a Muslim Hezaras, constitute some two-thirds of Afghanistan's population. 
Neither group feels adequately represented in Karzai's councils. 
Every politically active person in the country understands the reality of this power grab. They know that Fahim used the Loya Jirga to promote Karzai, a Pashtun, because he was malleable and without independent forces of his own. 
They tremble at the fact that Marshall Fahim's army, the country's largest, sits in garrisons ringing Kabul. They are frustrated at the international community's blindness to their fate. 
This frustration, and Fahim's efforts to suppress it, lies at the heart of many of the recent bloody events now blamed on Taliban die-hards, uncooperative local warlords, and Al Qaeda. 
Many dissenting Pashtuns did back the Taliban, mostly because it promised to bring peace and order. 
Many warlords are indeed carrying on their struggle, often with foreign (and even American) backing. 
Al Qaeda, too, has an interest in crippling Karzai's government and is happy to exploit its Achilles heel. 
The only way to resist these threats is to address their root cause: the imbalance of power at the top of the regime and within ministry staffs that is gradually robbing Karzai's government of legitimacy. 
The fact that Karzai is decent and well intentioned does not alleviate his problem, which he is incapable of addressing alone. 
The solution must be to use firmness backed, if necessary, by military strength, to enable Karzai to face down Marshall Fahim. 
Now that the international peacekeeping force is to operate nationally, Marshall Fahim must be told to lift his stranglehold on Kabul. 
Now that aid is beginning to flow, Karzai must be told that its continuation is contingent on his bringing prominent Pashtuns and Hezaras into the inner circles of government. 
The US and UN are both acting on the basis of a naïve hope that Karzai's legitimacy problem can somehow be "finessed." 
They are misjudging the seriousness of the situation. 
If action is not taken soon, Karzai will not survive. 
The next government would likely be anti-UN, anti-western, anti-American, and anti-secular--and form its political and strategic alliances accordingly. 
Of course, a new government may not emerge at all. 
Either way, unless decisive measures are taken within weeks or at most months, Afghanistan will be on its way to yet another round of bloody conflict. 

Central Banking’s New Club Class 
NEW YORK – In the wake of the 2007-2008 financial crisis, the world’s central banks played a critical role in rescuing the global financial system. 
They stepped in when private markets froze, acting as lenders and dealers of last resort, and provided additional liquidity to grease the wheels of finance. 
These central banks offered their services primarily to domestic actors, but they also extended their largess to foreign private entities. Indeed, even foreign states benefited after central banks entered into swap agreements, giving one another unlimited access to their respective currencies. 
This has created a worrying precedent. 
Originally created as a temporary fix in 2007, the swap lines established at that time connecting the US Federal Reserve, the European Central Bank, and the Swiss National Bank have been extended each time a new crisis has unsettled the markets. 
More recently, however, six central banks announced that they had made their swap lines permanent. 
But did these central banks have the legal authority to do so? 
And, even if they did, should they have used it? 
The original swap lines might fairly be classified as emergency measures. 
But what may be permissible and justifiable in a financial emergency may not be appropriate as standard practice during normal times. 
Central bankers might argue that we have entered a state of permanent market crisis analogous to the never-ending “war on terror.” 
But even this frightening analogy does not answer the question of whether central banks should assume positions of power in international relations. 
Of course, a central bank’s mandate is price stability in the national economy that it serves, and price stability is influenced by exchange rates. 
So a case can be made that central banks should have the power to intervene in foreign-exchange markets, and that this power should – at least in times of crisis – include commitments to foreign central banks to provide unlimited liquidity in the domestic currency. 
What is less clear, though, is whether the same justification can be used by central banks to create permanent swap lines with just a few other central banks of their choosing. 
This is akin to an announcement on a cruise ship approaching an iceberg that the crew will definitely rescue first-class passengers but not necessarily others. 
Not every country’s central bank – not even every “friendly” country’s central bank – has been invited to join the swap-lines club. 
Membership is restricted to the United States Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan, the Swiss National Bank, and the Bank of Canada. 
There may be a legal rationale for this neo-imperial elitism. 
The so-called C-6 might argue that, given their price-stability mandate, only central banks of countries whose economic fate might destabilize domestic prices should receive privileged access to domestic currency. 
But the choice of monetary partners is nonetheless a matter of judgment. 
For example, why Canada and not Mexico? 
Aren’t both members of NAFTA? 
Why Switzerland and not Brazil, one of the largest emerging markets? 
Picking partners is an inherently political act. 
It bestows access to high-demand currencies on a select few, relatively strong, countries precisely when the weakest countries are at their most vulnerable. 
Having been left outside the club, these countries have no option but to self-insure by accumulating foreign-exchange reserves. 
Indeed, empirical research suggests that countries without explicit or implicit access to liquidity tend to hold much higher reserves than the privileged few – only to be blamed by the same privileged few for contributing to global imbalances by hoarding excess reserves. 
The C-6 swap club’s members may be correct in thinking that global finance requires more proactive central banking. 
But is it fair or right that they should be allowed to take matters into their own hands and determine a system of international monetary management designed to serve their own interests, with little regard for other, equally exposed, countries? 
The joint announcement by the C-6 cements the great divide between first-class and coach economies. 
We are being asked to trust that these select central banks will do the right thing. 
Trust is important. 
But when it comes to political decision-making, democratic control and accountability are essential. 

America’s Debt-Ceiling Debacle 
NEW YORK – When Greece’s sovereign-debt crisis threatened the euro’s survival, US officials called their European counterparts to express bewilderment at their inability to resolve the issue. 
Now, the tables have turned, with American leaders on the receiving end of such calls. 
The most recent threat of a US debt default has been avoided, but only temporarily. 
Another battle looms early next year, when the US government’s debt ceiling will have to be raised again. 
In Europe, the absence of a political union – considered a necessary precondition for sharing debt obligations and, thus, putting the euro on a sound footing – is widely held to lie at the root of the continent’s crisis. 
But the US crisis suggests that political union is no panacea for managing sovereign debt. 
For weeks, Republicans in the House of Representatives threatened to keep the government shuttered – thereby preventing it from extending its borrowing authority beyond the October 17 deadline – in order to challenge laws that were enacted by Congress as a whole and upheld by the Supreme Court. 
In the eurozone, the main source of disagreement has been how debts in need of refinancing were incurred – that is, whether they contravened agreed debt limits. 
In the United States, the bone of contention has been the purpose that the funds will serve. 
The difference is ultimately minor, and should not be allowed to overshadow what is really at stake: democratic self-governance in an age of high public debt. 
In 1773, the so-called Sons of Liberty staged the Boston Tea Party under the slogan, “No taxation without representation.” 
And America’s founders clearly regarded legislative control over the budget as a key pillar of democratic governance. 
Taxation remains the dominant source of government revenue in most developed countries. 
But the role of debt finance has been growing – and, with it, the need to refinance old debt when total expenditure, including debt service, exceeds total revenue. 
Broad access to deep and liquid international debt markets has enabled policymakers to bypass some of the most challenging aspects of democratic governance. 
Rather than tackle thorny questions about how to allocate limited resources, democratic governments seem to believe that they can have it all: low taxes and ample debt finance to fund wars or electorate-pleasing programs. 
Growing debt burdens suggest that this form of cheap politics has run its course. 
But the problem runs deeper than that. 
Excessive reliance on debt finance has undermined basic tenets of democracy, with government finance increasingly determined not by electoral cycles and political deliberation, but by repayment schedules. 
In times of economic growth, debt finance provides an easy escape from difficult choices. 
When the economy falters, however, creditors – and those who are willing to entertain the prospect of default – can impose their will on everyone else. 
This power follows from the nature of debt. 
A tax is a quasi-equity claim of the government on its citizens’ financial expectations. 
Gaining the consent of the majority of citizens to raise taxes can be a tall order politically, and has become more difficult as capital mobility has narrowed the tax base and triggered a race to the bottom on rates. 
Debt, by contrast, is a contractual commitment to repay creditors who are largely oblivious to how the money is spent. 
By incurring debt, states trade an element of sovereignty – the flexibility to alter course over time in response to the electorate’s demands – for the ability to fund expenditures without being compelled to navigate the political minefield of raising taxes. 
Creating viable institutions for managing public debt in a democracy is difficult. 
The mechanisms currently on offer are treaty-based, constitutional, and statutory debt ceilings, pegged as a ratio of GDP, or, as in the US, established in nominal terms. 
Treaty-based debt ceilings are largely toothless, as Europe’s experience suggests. 
Constitutional debt limits have yet to be tested in times of emergency, when new funding is needed quickly. 
And, as the recent impasse in the US demonstrates, political minorities with effective veto power can abuse statutory ceilings in an economic downturn, when dependence on external debt finance increases. 
Indeed, to the extent that reliance on debt finance undermines self-governance, debt-ceiling abuse for partisan gain becomes more likely. 
The problem is that democracies have yet to learn how to manage debt effectively. 
While political union may stabilize the euro, it will not sustain or strengthen democracy unless Europe’s leaders address this critical failing. 
Even the world’s oldest continuous democracy is not immune to the erosion of self-governance. 
Commitments never to raise taxes have left the US dependent on debt finance – and, more frightening, on those who are ready to veto refinancing it. 

Europe’s Top-Down Myopia 
MUNICH – The French statesman Georges Clemenceau famously remarked that, “Generals always fight the last war.” 
Today, in the wake of the euro crisis, the same might be said of the European Union as it seeks to put itself on a more stable institutional footing. 
The EU is undergoing fundamental changes, many of which have gone largely unnoticed, owing to the overwhelming focus on large-scale top-down reforms. 
Officials seem not to recognize change unless it takes the form of Eurobonds, new European treaties, or policy reversals by German Chancellor Angela Merkel. 
But the case for small steps guided by market mechanisms is strong. 
Europe’s obsession with top-down reforms is rooted in prevailing analyses of the causes of the euro crisis. 
Most people in Germany, the Netherlands, and Finland blame excessive public spending and inadequate regulation in countries like Greece, Spain, and Cyprus for destabilizing the eurozone and, in turn, the EU. 
A somewhat more nuanced analysis holds that the euro itself is responsible for these countries’ problematic spending. 
The European Central Bank’s one-size-fits-all monetary policy created destabilizing imbalances in the eurozone. 
Interest rates were too low in Southern Europe, where governments and households binged on cheap loans, and arguably too high in Germany, which was already held back by the economic burden of reunification. 
If the euro generated these imbalances, the argument goes, country-level solutions are inadequate. 
Europe’s only option is to repair and strengthen the currency union through banking, fiscal, and political union. 
A banking union really is needed to break the vicious cycle of weak banks and debt-laden governments. 
The good news is that its contours are fairly clear, and the process of constructing it is already underway, though the pace is very slow. 
But the logic behind fiscal union is muddier – not least because its proponents have largely failed to explain exactly what it means. 
The implication is that it would entail a much larger EU budget, presumably financed by some kind of EU-wide taxation, as well as eurozone-backed unemployment insurance and a debt-mutualization mechanism like Eurobonds. 
The centralization of financial and fiscal powers would demand increased accountability at the European level. 
For that, a political union – with directly elected European officials and a significantly more powerful European Parliament – would be needed. 
This is unlikely to happen, at least in the foreseeable future. 
But that probably does not matter as much as many people claim. 
The fact is that in designing elaborate new institutions in response to the events of the last five years, there is a risk of fighting a rearguard action, rather than looking ahead to meet new challenges. 
After all, the eurozone crisis was rooted in the emergence of imbalances generated by the euro’s introduction and, to a lesser extent, German reunification. 
But neither event will happen again. 
Moreover, the imbalances generated during the euro’s first decade are already being resolved. 
Indeed, the painful adjustments that southern European countries (and Ireland) have endured have led to substantially smaller external deficits and declining unit labor costs. 
Nowadays, Spain’s exports are growing faster than Germany’s. 
The changes that countries like Spain and Portugal are making to their labor laws, pension schemes, and regulatory systems are encouraging. 
These improvements will put increasing pressure on France and Italy to follow suit, which could make Europe as a whole more competitive. 
Furthermore, the politics of the eurozone currently are not conducive to lasting reforms. 
The crisis has amplified the role of Germany – with its economic size and large external surplus – and made everyone else look weak. 
If Europe were to thrash out a fiscal and political union now, it would look too rigidly rules-based, too Germanic. 
As the rest of Europe recovers (and as Germany squanders some of its economic power by going slow on domestic reforms), Germany’s relative strength will decline. 
An EU without one overly dominant power could probably establish more broadly acceptable – and thus more durable – institutions. 
If past problems are already being corrected, and future problems will be of a different kind and magnitude, then perhaps there is no need for Eurobonds or EU taxes. 
And, without debt mutualization or large-scale redistribution of wealth, political union becomes unnecessary – at least for now. 
This is not to say that European institutions did not need more authority than they had before the crisis. 
Even without fiscal and political union, the European Commission has been empowered to supervise fiscal spending and other macroeconomic developments – such as wage growth and real-estate prices – that could cause imbalances to re-emerge. 
Likewise, the ECB, together with national bodies, has gained the authority to supervise major eurozone banks. 
But it is also critical to recognize that financial markets have become more disciplined. 
Herein lies the discrepancy between those who put their faith in institutional fixes and those who trust a more bottom-up approach. 
Many people, especially in the United Kingdom and the United States, seem to believe that “solving” the euro crisis means returning to the Elysian state in which all European government bonds are equally risk-free assets. 
But, for Germans, Dutch, and Austrians, interest-rate spreads are not the problem; they are part of the solution, given that they impose discipline that extends beyond European institutions’ new powers. 
The eurozone’s new institutional framework does not have to direct 18 countries’ fiscal and economic policies. 
It just needs to be strong enough to enable markets to recognize and react to worrying developments, while offering real help to countries that find themselves temporarily in trouble. 
This is not only doable; it is being done. 
Now European countries can turn to the challenge of becoming more flexible and productive so that they can be more competitive in the future. 
This commentary reflects the author's personal views. 


A Radioactive Bank to be Welcomed 
CANBERRA – One of the many things the world has learned from the Iran nuclear saga is that its leaders made a mistake, when negotiating the Nuclear Non-Proliferation Treaty (NPT) in the 1960s, in not doing anything to constrain uranium enrichment and plutonium reprocessing. 
This failure apparently stemmed from the belief – long since proven wrong, certainly in the case of uranium – that the only states ever likely to possess that technical capability already possessed nuclear weapons, or (like Germany) were totally committed never to acquire them. 
As a result, any member state can argue for its “inalienable right” under the NPT to pursue any stage of the nuclear fuel cycle. 
Although any such right extends only to activities for “peaceful purposes,” the loophole is gaping. 
Any technically capable state – and there are now dozens of them – can build uranium enrichment facilities with the official purpose of producing fuel for nuclear power or research reactors, but which are nonetheless inherently capable of producing the much higher-grade fuel needed for nuclear weapons. 
It is not for nothing that such facilities have been described as “bomb starter kits,” and that Iran’s progress down that path – whether deliberately designed to give it a latent weapons breakout capability or not – has spooked so many others in the international community. 
That is why there was so much pressure to produce the deal now on the table, which dramatically limits Iran’s enrichment capability. 
While renegotiating the NPT itself to close the enrichment loophole seems for now a lost cause, there are other ways to address this proliferation risk. 
One of the most important, and long-advocated, strategies is to demonstrate to countries that rely on nuclear power, or are planning to develop it, that they do not need their own uranium-enrichment program to ensure their fuel supply’s security. 
Concern about fuel-supply security has always been Iran’s main publicly stated justification for acquiring its enrichment capability – a justification that its critics assert was manufactured simply to conceal a covert weapons agenda. 
Whether or not that is the case, all current and would-be nuclear power producers are entitled to be anxious about having an absolutely assured fuel supply, given the major economic and social consequences they would face in the event of a disruption. 
Yes, until now, the commercial nuclear-fuel market has worked well: no power reactor has had to shut down because of fuel-supply disruptions. 
But the cut-off of the supply of other energy resources (notably Russia’s disruption of natural-gas supplies to Ukraine and, by extension, to Western Europe) has raised legitimate concerns about whether this could happen with nuclear fuel. 
Although the issue has been much debated, until now there has been only modest progress in developing fuel-supply assurance arrangements that would meet this concern. 
Russia, with the support of the International Atomic Energy Agency (IAEA), maintains a sizeable reserve of low-enriched uranium (LEU) at its international center in Angarsk; but, in the current security environment, there has been understandable international reluctance to rely on it. 
The United Kingdom has proposed a supply guarantee of its own, though it has so far attracted little attention. 
Now, in an important new development, to be officially launched this month (on August 27), Kazakhstan is establishing a major new international fuel bank, which it will operate on behalf of the IAEA. 
The new facility should once and for all remove the main excuse that has been advanced, sincerely or not, for building and maintaining homegrown enrichment capability. 
Scheduled to commence operations in 2017, the Kazakh fuel bank will store up to 90 tons of LEU, sufficient to refuel three typical power-producing light water reactors. 
While Kazakhstan will physically operate the bank, the uranium will be owned and controlled by the IAEA, and made available to non-nuclear-weapon states if, for any reason, they cannot secure the LEU they need from the commercial market. 
Provided the state in question is in compliance with its comprehensive non-proliferation safeguards agreement with the IAEA, it can draw the required fuel from the bank and transfer it to a fuel fabricator to make fuel assemblies for the reactors involved. 
The Kazakh fuel bank has very wide and high-level international backing, helped by the country’s credentials. 
A former nuclear test-site state, Kazakhstan willingly gave up the nuclear weapons on its territory when the opportunity arose with the dissolution of the Soviet Union, and it has been a strong and consistent advocate of nuclear arms control and disarmament ever since. 
The bank has been funded by voluntary contributions, including $50 million from the Nuclear Threat Initiative, a United States-based NGO, $49 million from the US government, up to $25 million from the European Union, $10 million each from Kuwait and the United Arab Emirates, and $5 million from Norway. 
Aside from the Iran deal, good news on nuclear weapons has been sparse in recent years. 
The new Kazakh fuel bank is a significant step toward achieving a world free of nuclear weapons. 
Those who have worked to establish it deserve the world’s gratitude. 

A Young State in an Uncertain World 
ALMATY – In mid-November, Kazakhstan hosted the third annual “Astana Club,” a new independent and unbiased platform for dialogue among international experts, politicians, and media representatives on the “critical issues affecting all the countries of Eurasia.” 
The event epitomized Kazakhstan’s foreign policy over the last two decades, at a moment when that policy is set to confront unprecedented tests. 
Participants in this year’s Astana Club were as high-profile as they were diverse. 
They included representatives of leading think tanks from Europe, Asia, the United States, and the Middle East; former presidents, such as Turkey’s Abdullah Gül and Slovenia’s Danilo Türk; former European Commissioner Benita Ferrero-Waldner; Indian member of parliament Shashi Tharoor; and CEO of Channel One Russia Konstantin Ernst. 
The discussions took place in the Nazarbayev Centre, housed in an imposing and futuristic building designed by the renowned British architect Norman Foster. 
In a scene reminiscent of the intergalactic assembly in Star Wars, participants sat at a large table encircling a map of Eurasia to discuss the emerging world order, great power rivalries, sanction wars, nuclear proliferation, and regional integration projects. 
This combination of status-seeking public relations and the provision of public goods that characterizes the Astana Club discussions has long been a feature of Kazakhstan’s foreign policy. 
For example, every three years Kazakhstan hosts a Congress of Leaders of World and Traditional Religions, for which it commissioned Foster to build another imposing and futuristic building, the Palace of Peace and Reconciliation. 
Kazakhstan’s leadership has also worked to place itself at the forefront of the international non-proliferation movement. 
And this past October, talks were held in Astana, the capital, on the Syrian crisis, with representatives of the Syrian government and some armed opposition groups in attendance – despite Kazakhstan’s distance from the tragic developments in that country. 
This approach emerged soon after Kazakhstan’s independence in 1991, when the country initiated the Conference on Interaction and Confidence-Building Measures in Asia, modeled after the Conference on Security and Cooperation in Europe (now the OSCE). 
It reflects Kazakhstan’s appreciation of the liberal world order into which it was born in 1991 – an order that, at that time, had just received a major boost, with the Soviet Union’s collapse. 
Kazakhstan was never one to settle for being an accepted member of the liberal world order. 
It wanted to be exemplary, not just joining multilateral regimes and organizations, but also making its own contribution. 
That is why Kazakhstan sought the chairmanship of the Organization for Security and Cooperation (OSCE) in Europe, which it obtained in 2010, and pursued a difficult but ultimately successful campaign to become a non-permanent UN Security Council member in 2017-2018. 
Kazakhstan aspires eventually to join the advanced economies in the Organization for Economic Cooperation and Development. 
But the international community that Kazakhstan is trying so hard to impress is undergoing fundamental change. 
Russia, the great power of Kazakhstan’s neighborhood, has unsettled the region with its invasion of Ukraine, in which it illegally annexed Crimea and started a war in the eastern Donbas region. 
Compounding the problem, it seems that the United States under President Donald Trump cannot be counted on to continue constraining Russia or underwriting the post-1945 liberal world order that it created. 
Having ridden to power on a wave of popular anger, Trump can’t even be counted on to follow its rules. 
The European Union is similarly beset by internal political challenges – including negotiations with the United Kingdom over its withdrawal from the bloc – that stem from a surge in anti-establishment and nationalist sentiment. 
China has sought to step into the breach of global leadership – and has been met with surprisingly strong approval from the rest of the world. 
Such tectonic shifts are jarring enough for the large powers that bring them about; for smaller countries, they can be even more disorienting. 
Even as some welcome the demise of Western hegemony, the fact is that, for a country like Kazakhstan, unpredictability implies danger. 
It does not help that the emerging powers are less bound to international human rights norms and conventions, and thus less likely to attempt to enforce them. 
Kazakhstan achieved independence at a time when international cooperation, free trade, and collective security were encouraged, and it has long worked to support these principles. 
Though Kazakhstan’s government, like other young states in the region, has lagged in advancing democracy and human rights, it has at least avoided foreclosing them entirely. 
For now, Kazakhstan is trying to stay the course. 
But if today’s trends continue, it might lose direction. 

Keep Europe’s Commitments to Turkey 
The moment of truth has come. 
The European Union must decide on December 17 whether to open accession talks with Turkey. 
Is today’s Union prepared to reverse a course first charted by such titans as Charles de Gaulle and Konrad Adenauer four decades ago? 
When European Heads of State and Government concluded in 1999 that, “Turkey is a candidate state, destined to join the Union on the basis of the same criteria as applied to the other candidate States,” they did so in full knowledge of all the arguments for and against Turkish EU membership. 
The same is true for the decision they took three years later, when they promised to open negotiations, should they find in December 2004 that Turkey fulfils the political criteria and should this be recommended by the European Commission. 
The latter happened in October. 
When offering its recommendation, the Commission highlighted Turkey’s progress, while indicating those areas where greater effort must be made. 
The Commission’s conclusions, however, were clear: it “considers that Turkey sufficiently fulfills the political criteria and recommends that accession negotiations be opened.” 
Were Europe’s leaders to now balk at beginning accession talks with Turkey, they would not only contradict their own previous decisions; they would also be in clear breach of the Union’s repeated political commitments to Turkey. 
By nature and design, these negotiations must be directed at accession. 
They are expected to be long and difficult. 
But there is a benefit in this for Turkey, as it will give it time to continue – and deepen – the transformation process already underway. 
For its part, the EU should make use of this interval to put its own house in order: to ratify the Constitutional Treaty and to conclude the integration of the new member states taken in this year as well as those – Bulgaria, Romania, and Croatia – that may join as the accession talks with Turkey take place. 
To be sure, this task is not beyond the Union’s grasp. 
If the challenge is met, by the time Turkey and the Union reach a final decision, both parties will have changed profoundly. 
Because of Turkey’s specific characteristics – its size, geopolitical position, and religious traditions – accession to the EU presents both great challenges and huge opportunities for the two sides. 
None of the problems, however, should be seen as an unyielding obstacle to Turkish membership. 
Indeed, in its report, the Commission has shown how to overcome them. 
Most arguments put forward by skeptics about Turkish membership are, in fact, disingenuous and misleading. 
Surely, everybody must know that Turkey has always identified itself as a European state and was recognized as such by the rest of Europe decades ago. 
After all, how else could it be full a member of all European organizations and institutions except the EU? 
In this respect, Turkey is fundamentally different from North African and Middle Eastern countries. 
It is simply not true that Turkish accession would open the floodgates to non-European countries. 
Equally wrong is the view that Turkey’s Association agreement of 1963 holds little relevance for its membership in the EU because at the time the Community’s character was purely economic. 
From the beginning of the integration process, Europe’s founding fathers had made it abundantly clear that the ultimate goal was a political union, with economic integration being but the first step. 
It is absurd to suggest that European visionaries such as Adenauer and de Gaulle failed to realize the consequences of their decision to admit Turkey as an associate member of the EEC. 
Indeed, Commission President Walter Hallstein repeated three times on that occasion that, “Turkey belongs to Europe”. 
When the European Council opened the way for Turkish membership in 1999, it fully took into account the establishment of the European (political) Union by the Maastricht Treaty years earlier. 
Moreover, members of the European Convention could not have been blind to the possibility of early accession negotiations with Turkey. 
Finally, there is no reason to believe that the new Constitution could not accommodate Turkish membership. 
On December 17 European Heads of State and Government must take a clear and unequivocal decision in favor of accession negotiations with Turkey, honoring their own longstanding commitments and thus serving Europe’s most profound interests. 

Keep the IMF Out of Europe 
BUENOS AIRES – A short-lived rumor recently suggested that the International Monetary Fund was putting together a €600 billion ($803 billion) package for Italy to buy its new government about 18 months to implement the necessary adjustment program. 
Except for the magnitude of the package, this sounds no different from a standard IMF adjustment program – the kind that we are accustomed to seeing (and criticizing) in the developing world. 
But there is one crucial difference: Italy is part of a select club that does not need outside rescue funds. 
So far, programs for the eurozone periphery have been spearheaded and largely financed by European governments, with the IMF contributing financially, but mainly acting as an external consultant – the third party that tells the client the nasty bits while everyone else in the room stares at their shoes. 
By contrast, the attempt to crowd multilateral resources into Europe was made explicit by eurozone finance ministers’ call in November for IMF resources to be boosted – preferably through debt-generating bilateral loans,– so that it could “cooperate more closely” with the European Financial Stability Facility. 
That means that the short-lived story of Italy’s jumbo IMF package, which was to be funded largely by non-European money, can be regarded as a game changer: while Italy may never receive such a package, Europe, it seems, is determined to resolve its problems using other people’s money. 
There are at least three reasons why the IMF should resist this pressure, and abstain from increasing its (already extremely high) exposure to Europe. 
First, and most obviously, Europe already has its own in-house lender of last resort. 
The European Central Bank can make available all the euros needed to backstop Italy’s debt. 
And printing them would only offset, through mild inflation, the effects of the otherwise Draconian relative price adjustment that is taking place under the corset of the common currency. 
So it is puzzling that some observers have saluted the IMF’s involvement as a virtuous effort by the international community to bring the listing European ship to port. 
Why should the IMF (or, for that matter, the international community) do for Europe what Europe can but does not want to do for Italy? 
Why should international money be mobilized to pay for European governance failures? 
And if, as appears to be the case, Germany is playing a dangerous game of chicken with some of its eurozone partners, why should the cost be shifted to the IMF for the benefit of Europe’s largest and most successful economy? 
Letting the ECB off the hook in this manner would simply validate for Europe as a whole the same moral hazard feared by German and other leaders who oppose ECB intervention. 
The second reason to avoid IMF intervention in Europe is that lending to a potentially insolvent country has serious implications for the Fund. 
For starters, taking the IMF’s preferred-creditor status at face value, an IMF loan would entail substituting its “non-defaultable” debt for “defaultable” debt with private bondholders, because the Fund’s money is used primarily to service outstanding bonds. 
As a result, a group of lucky bondholders would be bailed out at the expense of those that became junior to IMF debt and remained highly exposed to a likely restructuring. 
Since a “haircut” can be imposed only on whatever is left of the defaultable private debt, the larger the IMF share, the deeper the haircut needed to restore sustainability. 
For the same reason, IMF loans can be a burdensome legacy from a market perspective. 
Because they represent a massive senior claim, they may discourage new private lending for many years to come. 
This brings us to the third reason why the IMF should stay out of Europe’s crisis: what if Fund seniority fails? 
The implicit preferred-creditor status is based on central-bank practices that establish that the lender of last resort is the “last in and first out.” 
It is this seniority that enables the IMF to limit the risk of default so that it can lend to countries at reasonable interest rates when nobody else will. 
This works when the IMF’s share of a country’s debt is small, and the country has sufficient resources to service it. 
But seniority is not written in stone: poor economies that are unable to repay even the IMF are eligible for debt reduction under the Heavily Indebted Poor Countries program, and 35 have received it since the program was established in 1996. 
What would happen if, in five years, Italy were heavily indebted to the IMF? 
What if private debt represented a share so small that no haircut would restore sustainability, forcing multilateral lenders to pitch in with some debt relief? 
The IMF’s seniority is an unwritten principle, sustained in a delicate equilibrium, and high-volume lending is testing the limit. 
From this perspective, the proposal to use the IMF as a conduit for ECB resources (thereby circumventing restrictions imposed by European Union’s treaties), while providing the ECB with preferred-creditor status, would exacerbate the Fund’s exposure to risky borrowers. 
This arrangement could be seen as an unwarranted abuse of Fund seniority that, in addition, unfairly frees the ECB from the need to impose its own conditionality on one of its members. 
It makes little sense for the international community to assume that unnecessary risk. 
Let us hope that the IMF’s non-European stakeholders will be able to contain the pressure. 
The solution for Europe is not IMF money, but its own. 

Keeping Africa's Turnaround on Track 
MONROVIA – For more than a decade, much of Africa has been moving forward. 
Economic growth is rising, poverty is falling and democratic governance is spreading. 
But the global financial crisis threatens to undo this progress by reducing investment, exports and aid just as they should be expanding to build on these successes. 
While international attention has been understandably focused on events in Darfur, Somalia and Zimbabwe, countries across the continent including Ghana, Tanzania, Mozambique and Liberia have been quietly turning their economies around. 
Economic growth rates regularly exceed 5% in many nations. 
The key to this progress is stronger African leadership and more accountable governance. 
Today, more than 20 African countries are democracies, up from just three in the 1980’s. 
They have competitive elections and improved human rights, and a much freer media. 
These efforts have been supported by increasingly effective development assistance. 
Consider what has happened in my country, Liberia. 
After 14 years of devastating war, we faced enormous challenges. 
Our democratically elected government has worked with international partners and a growing number of private investors to turn things around. 
In the past three years, we have doubled primary school enrollment nationwide, refurbished hundreds of health facilities, begun rebuilding roads and restoring electricity. 
We have taken steps to root out corruption and remove unscrupulous officials. 
Growth has exceeded several percent per year. 
And, most critical, we are at peace. 
We are restoring our once-vibrant nation, and the crucial component -- hope -- has already been revived. 
Without international support, we would not have made this progress and would be at much greater risk of returning to war. 
The global economic crisis threatens the progress in my country and elsewhere on our continent. 
Declining remittances from overseas workers, shrinking trade flows and investment could undermine new businesses, throw thousands out of work, and increase tensions and instability. 
The crisis -- which Africa did nothing to cause -- demands a strong response. 
African nations must do their part by continuing to address corruption, eliminate red tape and reduce obstacles to private-sector growth. 
But just as industrialized countries need a stimulus, African economies need a boost to keep their progress on track. 
The G8 nations meeting in Italy this week have a useful role to play. 
Among other measures, they must keep their promises to increase aid and make it more effective by reducing bureaucratic delays, speeding disbursements and better aligning programs with African priorities. 
Effective aid is certainly not the only answer, but it has an increasingly vital role to play as other sources of finance dry up. 

Keeping Cool in the Nuclear Heat 
CANBERRA – Perhaps it is going too far to say, as someone did after the Gulf of Mexico oil spill two years ago, that most Americans want a president who is cool, calm, and collected in a crisis – except when there is a crisis. 
But of all the charges thrown at President Barack Obama by his domestic political opponents, the hardest for most outsiders to accept is that he is too emotionally disengaged: all brain cells and no red-blood cells. 
Certainly in defense and foreign policy, a cool and measured response to the extreme provocations that often come with that territory is what the world wants, and needs, from the leader of its reigning superpower. 
Nowhere is that need greater than in the cases of North Korea and Iran, owing to the destructive potential of the weapons that they have or may be developing. 
With North Korea, the provocations continue to come thick and fast. 
Understandings are reached, only to be immediately broken, as with the North’s agreement in February, in return for US food aid, to accept International Atomic Energy Agency inspectors, suspend uranium enrichment, and halt missile and weapons tests. 
Within little more than a month, a “satellite rocket” is launched, albeit spectacularly misfiring, and all bets are off. 
With the North’s new leader Kim Jong-un feeling the heat of that technical humiliation, there is now every reason to be concerned that another nuclear-weapon test, or some other chest-beating military antic, is imminent. 
China seems unable or unwilling to moderate its neighbor’s behavior. 
Nerves in South Korea, and especially Japan, are raw. 
The Obama administration has been right not to appear too spooked by all of this. 
The tone of the American response has been firm, giving appropriate reassurance to its allies and making clear that gamesmanship will not be tolerated, but not raising the temperature further. 
Its three-pronged approach of containment, deterrence, and openness to negotiation is exactly the right course to pursue. 
Denuclearization of the Korean peninsula – with the price being guaranteed regime survival and major economic support for the North – may be a fading dream. 
But it is still not impossible. 
We came much closer to getting there than is now remembered in the Agreed Framework deal of the mid-1990’s, in which I participated as Australia’s Foreign Minister. 
The underlying dynamics have not changed fundamentally since then. 
For all of their infuriating brinkmanship, it is reasonable to assume that North Korea’s leaders are not bent on national suicide, as any attempted use of their still very modest nuclear arsenal would certainly entail. 
With Iran, the stakes are, and always have been, higher. 
Should Iran acquire nuclear weapons, the prospect of a regional arms race (starting with Saudi Arabia) – and thus heightened risk of nuclear war by accident, design, or miscalculation – is very much greater than is the risk of further proliferation in Northeast Asia. 
And just one or two nuclear weapons could effectively destroy a country of Israel’s size. 
Accordingly, the pressure on Obama to be seen to be doing something to stop Iran in its tracks is very much greater than in the case of North Korea, and will become almost unbearable during this election year. 
But Obama’s response so far has been, again, exactly right – cool and measured; avoiding any military adventurism of his own and discouraging Israel from it; and applying the same three-pronged strategy of containment, deterrence, and openness to negotiations. 
It remains to be seen whether the talks now under way between Iran and the 5+1 Group (the five permanent members of the United Nations Security Council plus Germany) will bear fruit. 
But, with the escalating financial sanctions of the past year now clearly biting hard, the signs are more encouraging than they have been for some time. 
What makes things politically difficult for Obama is the widespread perception that Iran is hell-bent on actually acquiring a physical nuclear arsenal; that all else is dissimulation; and that negotiations can at best buy time. 
But it is still possible to achieve a negotiated outcome that recognizes Iran’s “right to enrich” uranium, while giving the international community complete confidence that the red line of weaponization would not be crossed. 
That has long been my view, based on a decade of engagement with the issue as President of the International Crisis Group, and I know many US and other international policymakers share it. 
Iran’s calculations, as I have heard them, reflect five key factors. 
One is its concern to avoid preemptive strikes by Israel, and a war that it does not believe that it could win. 
Another is its belief that any Shia bomb would soon be matched by a Sunni one, making any regional hegemony short-lived. 
Third, Iran is anxious that weaponization could exhaust any remaining tolerance from Russia and China. 
Fourth, it wants to avoid the further economic pain that universally applied sanctions would cause. 
Finally, and interestingly (if unpersuasive to many), all of Iran’s leaders continue to insist that weapons of mass destruction are incompatible with the basic tenets of Islam. 
Full-throated bellicosity often has more popular appeal than the thoughtful and patient exploration of opportunities for peace. 
The world should be profoundly grateful that, on nuclear proliferation as on other issues, we have in the current US president someone for whom reason instinctively trumps emotion. 

The Noose Tightens 
WASHINGTON, DC – Even with a new minder trying to bring some order to the White House, President Donald Trump remains in a heap of trouble. 
The recent installation of retired Marine Corps general John Kelly, formerly Trump’s Secretary for Homeland Security, as Chief of Staff, replacing the hapless Reince Priebus, has reduced some of the internal chaos and induced a bit more discipline in Trump’s behavior. 
But all this could change any day, or at any moment. 
Kelly has put a stop to aides sauntering into the Oval Office whenever they felt like it – Trump tends to echo the last person he’s spoken with – and has demanded that papers and memos for the president be submitted to him first. 
For the time being, at least, the president’s tweeting has been reduced in number and nuttiness. 
Keen Trump observers expect that he’ll soon begin to chafe under the discipline Kelly has encouraged. 
Understanding Trump’s enormous ego, Kelly is said to encourage gently rather than instruct. 
Kelly also has the advantage of Trump’s high regard for generals. 
But Trump could well become incensed by news stories praising Kelly for bringing order to the White House. 
(Counselor Steve Bannon never fully recovered in the president’s esteem after he was on the cover of Time magazine soon after the inauguration.) 
Meanwhile, Trump’s poll ratings are lower than ever – and the lowest of any president at such an early point in an administration. 
Members of his own Republican Party are distancing themselves from him. 
The recent failure of the Republican-dominated Congress to repeal Barack Obama’s signature achievement, the Affordable Care Act, which made health care available for millions of people who previously couldn’t afford it, was a humiliating defeat for Trump. 
Just enough Republican senators (three, but more were in reserve if needed) voted to reject the last of several efforts to fulfill the party’s vow to replace “Obamacare.” 
That nickname for the ACA, coined by the Republicans when the law was enacted in early 2010, was intended to be derogatory, and their opposition to the program seemed to be vindicated in that year’s midterm elections, when they swept both houses of congress. 
But the Republicans didn’t reckon on two things: that as people gained access to health insurance (some 20 million by this year), it became popular – as did Obama, who ended his second term as one of America’s most liked presidents. 
Over Obama’s tenure, Republicans came to realize that it was no longer sufficient simply to call for a repeal of Obamacare, and their rhetoric shifted to the need to “repeal and replace.” 
They held more than 50 roll-call votes saying that they’d do just that, knowing that it didn’t really matter because Obama would veto any serious repeal. 
The roll calls were actually fundraisers: appeals to the unsuspecting Republican base to send money to keep up the fight against the supposedly hated program. 
But when the 2016 election put a Republican in the White House, the party’s congressional leaders had nowhere to hide. 
The Republicans were now in full control of the government – and they hadn’t a clue about what should replace Obamacare. 
At the end of six months in office, Trump doesn’t have a single legislative achievement to crow about (though he has claimed the Senate’s approval of Neil Gorsuch as a new Supreme Court justice as a victory). 
Significantly, Senate Republican leaders ignored Trump’s demand that they take up repeal and replace of Obamacare again, before they consider any other major issue. 
While the health-care bill was commanding most of the attention on Capitol Hill, another piece of legislation was moving along in the Congress, representing another setback for Trump. 
Troubled by the president’s apparent soft spot for (or perhaps fear of) Vladimir Putin, overwhelming bipartisan majorities in both chambers passed a bill to impose more sanctions on Russia and – most unusually – to prevent the president from lifting any such penalties. 
And, because the bill passed with enough votes to override a presidential veto, Trump had little choice but to sign it, which he did in private, without the customary presence of a bill’s sponsors and the press. 
Meanwhile, the investigation into Trump and his campaign’s relations with Russia in connection with its meddling in Trump’s favor in the 2016 election has continued out of the public’s sight. 
That investigation has broadened to include Trump’s son-in-law Jared Kushner and his son Donald Jr. 
This spring, Trump let it be known that he wanted the special counsel running that investigation, Robert Mueller, a former FBI director who is highly respected by both parties, to be fired. 
He’d already fired FBI director James Comey, but by law, he couldn’t fire Mueller himself, so he tried to bully Attorney General Jeff Sessions, who had (appropriately) recused himself from the investigation, into resigning. 
That way, Trump could appoint a replacement who would fire Mueller. 
But Sessions, the first Republican senator to endorse Trump, was enjoying rolling back numerous Obama-era protections in areas like civil rights, and refused to resign. 
Several of Sessions’ former Senate colleagues also demanded that Trump back off. 
Though Kelly called Sessions to tell him that his job was safe, Republican senators, concerned that Trump might remove him during the August recess, established a procedure that would prevent Trump from appointing an interim attorney-general to fire Mueller, and warned that such a move would provoke a constitutional crisis. 
Then, as Congress prepared to leave for the August recess, it was learned that Mueller – who had hired highly regarded prosecutors specializing in international financial transactions, despite Trump’s warnings not to investigate his finances – had impaneled a grand jury in Washington. 
The noose tightens. 

Tailspin or Turbulence? 
WASHINGTON, DC – Since the beginning of the year, a new wave of doubt has engulfed emerging markets, driving down their asset prices. 
The initial wave struck in the spring of 2013, following the Federal Reserve’s announcement that it would begin “tapering” its monthly purchases of long-term assets, better known as quantitative easing (QE). 
Now that the taper has arrived, the emerging-market bears are ascendant once again. 
Pressure has been strongest on the so-called “Fragile Five”: Brazil, India, Indonesia, South Africa, and Turkey (not counting Argentina, where January’s mini-crisis started). 
But worries have extended to other emerging economies, too. 
Will the Fed’s gradual reduction of QE bring with it more emerging-market problems this year? 
To what extent are today’s conditions comparable to those that triggered the Asian crisis of 1997 or other abrupt capital-flow reversals in recent decades? 
Emerging-market bulls point out that most major middle-income countries have substantially lowered their public debt/GDP ratios, giving them fiscal space that they lacked in the past. 
But neither the Mexican “Tequila crisis” of 1994 nor the Asian crisis of 1997 was caused by large public deficits. 
In both cases, the effort to defend a fixed exchange rate in the face of capital-flow reversals was a major factor, as was true in Turkey in the year prior to its currency collapse in February 2001. 
Today, most emerging countries not only have low public-debt burdens, but also seem committed to flexible exchange rates, and appear to have well-capitalized banks, regulated to limit foreign-exchange exposure. 
Why, then, has there been so much vulnerability? 
To be sure, the weakest-looking emerging countries have large current-account deficits and low net central-bank reserves after deducting short-term debt from gross reserves. 
But one could argue that if there is a capital-flow reversal, the exchange rate would depreciate, causing exports of goods and services to increase and imports to decline; the resulting current-account adjustment would quickly reduce the need for capital inflows. 
Given fiscal space and solid banks, a new equilibrium would quickly be established. 
Unfortunately, the real vulnerability of some countries is rooted in private-sector balance sheets, with high leverage accumulating in both the household sector and among non-financial firms. 
Moreover, in many cases, the corporate sector, having grown accustomed to taking advantage of cheap funds from abroad to finance domestic activities, has significant foreign-currency exposure. 
Where that is the case, steep currency depreciation would bring with it serious balance-sheet problems, which, if large enough, would undermine the banking sector, despite strong capital cushions. 
Banking-sector problems would, in turn, require state intervention, causing the public-debt burden to rise. 
In an extreme case, a “Spanish” scenario could unfold (though without the constraint of a fixed exchange rate, as in the eurozone). 
It is this danger that sets a practical and political limit to flexible exchange rates. 
Some depreciation can be managed by most of the deficit countries; but a vicious circle could be triggered if the domestic currency loses too much value too quickly. 
Private-sector balance-sheet problems would weaken the financial sector, and the resulting pressure on public finances would compel austerity, thereby constraining consumer demand – and causing further damage to firms’ balance sheets. 
To prevent such a crisis, therefore, the exchange rate has to be managed – and in a manner that depends on a country’s specific circumstances. 
Large net central-bank reserves can help ease the process. 
Otherwise, a significant rise in interest rates must be used to retain short-term capital and allow more gradual real-sector adjustment. 
Higher interest rates will of course lead to slower growth and lower employment, but such costs are likely to be smaller than those of a full-blown crisis. 
The challenge is more difficult for countries with very large current-account deficits. 
And it becomes harder still if political turmoil or tension is thrown into the mix, as has been the case recently in a surprisingly large number of countries. 
Nonetheless, despite serious dangers for a few countries, an overall emerging-market crisis is unlikely in 2014. 
Actual capital-flow reversals have been very limited, and no advanced country will raise interest rates sharply; in fact, with the United States’ current-account deficit diminishing, net flows from the US have increased over the last 12 months. 
Moreover, most emerging-market countries have strong enough fiscal positions and can afford flexible enough exchange rates to manage a non-disruptive adjustment to moderately higher global interest rates. 
Much of the recent turmoil reflects the growing realization that financial-asset prices worldwide have been inflated by extraordinarily expansionary monetary policies. 
As a result, many financial assets have become vulnerable to even minor shifts in sentiment, and this will continue until real interest rates approach more “normal” long-run levels. 
In the medium term, however, the potential for technological catch-up growth and secular convergence remains strong in most emerging countries. 
The pace of a country’s convergence will depend, even more than in the past, on the quality of governance and the pace of structural reforms. 

The Great Income Divide 
WASHINGTON, DC – Thomas Piketty’s book Capital in the Twenty-First Century has captured the world’s attention, putting the relationship between capital accumulation and inequality at the center of economic debate. 
What makes Piketty’s argument so special is his insistence on a fundamental trend stemming from the very nature of capitalist growth. 
It is an argument much in the tradition of the great economists of the nineteenth and early twentieth centuries. 
In an age of tweets, his bestseller falls just short of a thousand pages. 
The book’s release follows more than a decade of painstaking research by Piketty and others, including Oxford University’s Tony Atkinson. 
There were minor problems with the treatment of the massive data set, particularly the measurement of capital incomes in the United Kingdom. 
But the long-term trends identified – a rise in capital owners’ share of income and the concentration of “primary income” (before taxes and transfers) at the very top of the distribution in the United States and other major economies – remain unchallenged. 
The law of diminishing returns leads one to expect the return on each additional unit of capital to decline. 
A key to Piketty’s results is that in recent decades the return to capital has diminished, if at all, proportionately much less than the rate at which capital has been growing, thereby leading to an increasing share of capital income. 
Within the framework of textbook microeconomic theory, this happens when the “elasticity of substitution” in the production function is greater than one: capital can be substituted for labor, imperfectly, but with a small enough decline in the rate of return so that the share of capital increases with greater capital intensity. 
Larry Summers recently argued that in a dynamic context, the evidence for elasticity of substitution greater than one is weak if one measures the return net of depreciation, because depreciation increases proportionately with the growth of the capital stock. 
But traditional elasticity of substitution measures the ease of substitution with a given state of technical knowledge. 
If there is technical change that saves on labor, the result over time looks similar to what high elasticity of substitution would produce. 
In fact, just a few months ago, Summers himself proposed a reformulation of the production function that distinguished between traditional capital (K1), which remains, to some degree, a complement to labor (L), and a new kind of capital (K2), which would be a perfect substitute for L. 
An increase in K2 would lead to increases in output, the rate of return to K1, and capital’s share of total income. 
At the same time, increasing the amount of “effective labor” – that is, K2 + L – would push wages down. 
This would be true even if the elasticity of substitution between K1 and aggregate effective labor were less than one. 
Until recently not much capital could be classified as K2, with machines that could substitute for labor doing so far from perfectly. 
But, with the rise of “intelligent” machines and software, K2’s share of total capital is growing. 
Oxford University’s Carl Benedikt Frey and Michael Osborne estimate that such machines eventually could perform roughly 47% of existing jobs in the US. 
If that is true, the aggregate share of capital is bound to increase. 
Given that capital ownership remains concentrated among those with high incomes, the share of income going to the very top of the distribution also will rise. 
The tendency of these capital owners to save a large proportion of their income – and, in many cases, not to have a large number of children – would augment wealth concentration further. 
Other factors could help to augment inequality further. 
One that has been largely neglected in the debate about Piketty’s book is the tendency of the superrich to marry one another – an increasingly common phenomenon as more women join the group of high earners. 
This, too, causes income concentration to occur faster than it did two or three decades ago, when wealthy men married women less likely to have comparably large incomes. 
Add to that the modern scale effects on professional and “superstar” incomes – a result of winner-take-all global markets – and a picture emerges of fundamental forces tending to concentrate primary income at the top. 
Without potent policies aimed at counteracting these trends, inequality will almost certainly continue to rise in the coming years. 
Restoring some balance to the income distribution and encouraging social mobility, while strengthening incentives for innovation and growth, will be among the most important – and formidable – challenges of the twenty-first century. 

Europe’s Political Transcendence 
WASHINGTON, DC – This month, European citizens will head to the polls to select the 751 members of the European Parliament to represent 507 million people. 
The way the election campaign has unfolded marks a small but significant step in the emergence of the first transnational political space in European – indeed, world – history. 
To be sure, the European Parliament elections have been bringing smaller shares of voters to the polls: 43% in 2009, compared to almost 60% in 1978-1994. 
Nonetheless, the participation rate over the last decade is comparable to average turnout in American congressional elections. 
Given the perceived remoteness of the European parliament and widespread frustration with the European Union’s bureaucracy, the level of participation and the movement toward transnational politics is remarkable. 
The transnational nature of the election is stronger this time because the major pan-European political parties have, for the first time, nominated specific candidates for the presidency of the European Commission, and the candidates are campaigning, including in televised debates. 
The European Council, as mandated by the Lisbon Treaty, will have to take into account the election results in selecting the candidate to put forward for parliamentary endorsement. 
The campaign for the Commission’s presidency may turn out to be as significant as the final selection. 
The first debate, held late last month, included Jean-Claude Juncker of the center-right European People’s Party (EPP), the Green Party’s Ska Keller, Martin Schultz of the center-left Progressive Alliance of Socialists and Democrats, and Guy Verhofstadt of the centrist Alliance of Liberals and Democrats. 
Alexis Tsipras, representing the Party of the European Left, is expected to participate in the final debate this month. 
All of the candidates spoke flawless English – though the debate was translated into 16 languages. 
Given the United Kingdom’s reservations about European integration, it is somewhat ironic that English is playing such a critical role in facilitating the creation of a transnational political space. 
The debate attracted significant social-media attention, with tens of thousands of tweets on the subject reflecting the passion that some Europeans – especially the younger generation – feel about Europe’s political evolution. 
More generally, while public interest in the campaign remains far below that seen in national political contests, it has become stronger than in recent pan-European elections, despite the rise of nationalism and Euro-skepticism. 
In this context, it would be strange if the European Council tried to nominate the Commission president without regard for the public’s response to the campaign. 
And yet there is a risk that the selection process becomes no more than an exercise in political horse-trading, with Council members awarding leadership positions, including seats on the Commission, purely on the basis of national political considerations. 
Such an approach would deal a powerful blow to the citizens who took their European ballot seriously – and to the credibility of the EU as a whole. 
Could this really happen? 
Or has the transnational European space – however young – already grown to the point that it cannot be ignored? 
Much will depend on the election results. 
First and foremost, the participation rate will be critical. 
If it were to fall below the 43% attained in 2009, the Council could more plausibly argue that the preferences of a decreasingly interested public can be largely ignored. 
A substantial increase, however – say, toward the 45-47% range – would make it much more difficult to ignore the outcome of the campaign. 
The relative performance of the pan-European parties will also matter. 
If, for example, the Socialists won 215 seats, compared to 185 for the EPP, the substantial difference would make their leader, Martin Schultz, a very strong contender, even though no party came close to an absolute majority of 376 seats. 
If the outcome turns out to be closer, with a difference of only five or ten seats between the two top parties, it could be argued that neither of the leading candidates had “won.” 
This would give the Council more space to consider an “outside” candidate (for example, Pascal Lamy, who is closer to the center left, or Christine Lagarde, who is closer to the center right, both of whom are extremely experienced European policymakers whose names have already been raised in the media). 
To bolster the legitimacy of such a move, the Council would have to select the candidate more closely associated with the party that gained more votes, however narrow the margin. 
Moreover, an outside candidate must be likely to generate backing by a sufficiently large coalition in the parliament. 
Alternatively, with neither of the larger parties able to declare real victory, they could decide as a compromise to indicate preference for one of the other leaders who had campaigned – perhaps Verhofstadt, the liberal centrist. 
As Jean Pisani-Ferry has explained, despite the European Parliament’s substantial – and increasing – power, it cannot be the central actor in Europe’s economic-policy debates in the short term. 
Real decision-making power will remain largely national. 
But, given the parliament’s position at the center of a nascent transnational European space that could, over time, transform Europe’s politics and help the continent overcome resurgent and dangerous chauvinism, this first European election with a transnational flavor should not be ignored. 
When they meet on May 28, European leaders would do well to encourage the strength of European institutions by choosing both competence and legitimacy. 

A Great Breakdown? 
ISTANBUL – This month – the centenary of the outbreak of World War I – is an opportune time to reflect on big risks. 
As Michael Spence recently warned, the international order’s widening security deficit, reflecting the weakening of whatever global governance we have, is fast becoming the biggest risk facing the world economy. 
The same point could have been made a century ago. 
On July 30, 1914, Austrian warships bombarded Belgrade, five weeks after the assassination of Archduke Franz Ferdinand in Sarajevo. 
By mid-August, the world was at war. 
The armistice that was agreed four years later, after about 20 million people had died, amounted only to an interlude before the horror of World War II. 
In the years preceding August 1914, until the assassination of the archduke, the global economy performed relatively well: trade expanded worldwide, financial markets seemed healthy, and the business community shrugged off political problems as either temporary or irrelevant. 
It was a political breakdown that led to three terrible decades for the world economy. 
Markets and economic activity can withstand a great deal of political stress and uncertainty – up to the point that the international order breaks down. 
Today, for example, the economic mood is rather upbeat. 
The International Monetary Fund forecasts 4% growth for the world economy in 2015, while stock-market indices are up in many parts of the world; indeed, the Dow Jones reached an all-time high in July. 
In the last few months, however, a civilian airliner was downed in eastern Ukraine by a sophisticated Russian-made missile, tensions have increased around disputed islands in the South and East China Seas, and chaos in the Middle East has continued to spread. 
The Israeli-Palestinian conflict is in one of its worst phases in decades, with the renewed frustration unleashed by the massive loss of civilian life in Gaza likely to encourage extreme reactions. 
Terrorists may be on the verge of designing much less detectable weapons. 
There are other, less “political” dangers. 
West Africa is afflicted by a terrible outbreak of the deadly Ebola virus, which will kill thousands of people. 
The outbreak has so far remained regional, but it serves as a reminder that in an age of air travel by millions, no one is safe from the spread of infectious disease. 
Containing a disease or a terrorist threat by curtailing international travel or transport would devastate the world economy. 
Thinking about August 1914 should remind us that great catastrophes can materialize gradually. 
Leaders can be “sleepwalkers” who fail to manage risk by, say, establishing institutions that can channel the rival interests and claims that fuel international conflict. 
Such sleepwalking by policymakers caused the financial meltdown of 2008 as well. 
Its consequences were not as deadly, though the political effects of mass unemployment and the heightened perception of economic insecurity are still with us. 
These examples should spur the world to find ways forward for cooperative action. 
But the opposite appears to be happening. 
The United Nations seems more paralyzed than ever. 
The US Congress still has not approved the IMF reform package agreed in 2010, weakening one of the most important international institutions. 
Partly because the United States makes capital increases and governance reforms in global financial institutions so difficult, the BRICS countries (Brazil, Russia, India, China, and South Africa) have launched their own development bank, to be based in Shanghai. 
Likewise, instead of providing a shining example of supranational cooperation and pooled sovereignty for the twenty-first century, the European Union remains mired in rather petty disputes. 
While it still cannot fully agree on the design of its banking union, it is allowing Prime Minister Viktor Orbán of Hungary, a member country, to denigrate the democratic and liberal values upon which the EU rests. 
The way forward cannot be a return to the past, with its clashing nation-states. 
The future can be secured only by strong cooperation among all those committed to liberal democracy and the rule of law, with no double standards or excuses, and by patient strengthening of international institutions that embody these values and can translate them into practice. 
Whenever a global or regional power acts in a way that contradicts these values, or allies itself closely with those who do, it undermines the international order, which should deliver security and increasing prosperity (and to some degree has). 
The global economy holds great promise, but it is a promise that can be realized only in an international system based on rules, consent, respect, and a shared sense of justice. 
The fact that neither the mayhem in the Middle East nor the crisis in Ukraine seem to touch financial markets should not lull us into complacency. 
The memory of August 1914 should remind us how the world stumbled into catastrophe. 
As we know – or should know – from the example of climate change, big risks must be managed, even if the probability of worse-case outcomes is low. 

Catching Up at Different Speeds 
PARIS – With weak demand in advanced countries now impeding growth in emerging economies, including major players in Asia and Latin America, many are arguing that the era of income convergence has come to an end. 
Nothing could be further from the truth. 
As I have argued before, convergence of emerging countries’ real average incomes, in the aggregate, with advanced countries’ incomes is likely to continue into the 2020’s. 
That process started in the late 1980’s, and continued unabated, except in the years around the Asian financial crisis in 1997-1998. 
The pace of convergence accelerated further during, and just after, the global financial crisis of 2008-2009: the aggregate average differential in per capita income growth increased to more than four percentage points in the 2008-2012 period, from a little more than two percentage points in the two decades before. 
As the advanced economies recover, however weakly, the growth differential is likely to narrow again, perhaps to about two percentage points, which still implies steady convergence at a decent pace. 
In that sense, it is not “the end of the party” for emerging markets, as some claimed early last summer, when US Federal Reserve Chairman Ben Bernanke’s suggestion of a possible “taper” of the Fed’s policy of quantitative easing triggered a “mini-crisis” in several of the more vulnerable emerging markets. 
These economies have since recovered a significant part of the lost ground in terms of exchange rates and asset prices. 
A major part of the economic-convergence process that has been taking place since the late 1980’s has been due to “catch-up” growth. 
The emerging markets developed the institutions and the skills base needed to import and adapt technology, which is easier than generating new technology from scratch. 
The pace of catch-up growth declines only gradually over time, as the less advanced economies slowly move closer to the technological frontier. 
The catch-up process also takes place within countries, as labor moves from low-productivity rural activities to higher-productivity urban activities, and as low-productivity firms in all sectors emulate their more advanced domestic counterparts. 
Moreover, the transfer and diffusion of technology has been facilitated greatly over the last few decades by increased foreign direct investment, the information revolution, which has facilitated access to knowledge, increased trade, and the globalization of financial markets. 
These factors apply to emerging countries generally. 
Why, then, do Latin American economists seem to share a cautious – even pessimistic – mood about future growth and convergence in the region, whereas most Asian economists, while conceding that further structural reforms are needed, believe strongly that Asia will continue to converge rather rapidly? 
Beyond global factors that apply to all, rapid catch-up growth requires sufficient investment in both physical and human capital. 
New manufacturing techniques and new products or product improvements are usually embodied in new machines and skills. 
China has invested about 43% of its GDP, on average, during the 2000-2013 period. 
Emerging Asia, excluding China but including India, has invested about 28% of GDP over the same period, while the investment share for Latin America has been just 21%. 
That alone probably explains much of the difference among China, in a category of its own, emerging Asia, and Latin America. 
The quality of skills and education cannot be measured as easily by a single figure, but there is ample evidence that Latin America has also lagged behind most of Asia when it comes to skills accumulation. 
Many other factors, of course, influence growth and convergence: macroeconomic stability, the efficiency and robustness of the financial sector, the terms of trade, the quality of public administration, demographic factors, and political factors. 
There also is variation within regions, including among provinces of China. 
(Likewise, Africa’s growth performance has improved spectacularly since the turn of the century, but variance within the continent is even larger than elsewhere.) 
Nonetheless, in terms of the likely strength of the convergence process that globalization has facilitated, it is important to distinguish between Latin America and Asia, and, within Asia, to distinguish China from the rest of the continent. 
China’s economy will most likely continue to converge rapidly, though its annual growth rate may fall from 9% to 7%. 
The rest of emerging Asia will also converge reasonably quickly, though not as quickly as China. 
Latin America, however, will likely converge only very slowly in the absence of major structural reforms that increase its ability to invest and improve the quality of education. 
There will surely be exceptions to this general trend, but there are some stable regional characteristics. 
Overall, however, basic economics, which has always stressed the need to save and invest in order to grow, still explains a lot. 
Latin America and Asia operate in the same global economy, with access to similar technology and markets. 
If Latin America invests around 20% of its national income in a sustained manner, while emerging Asia invests close to 30% – including investments in education – emerging Asia will converge significantly more rapidly. 

Democracy in Europe 
ROME – A real struggle over who will preside over the European Commission has begun. 
Though the center-right European People’s Party won only a narrow plurality of 221 seats in the 751-seat European Parliament, center-left, green, and liberal MEPs have all rallied behind the EPP’s candidate, Jean-Claude Juncker, as the “legitimate” choice. 
The opposition, led by British Prime Minister David Cameron with the support of “sovereignists” across Europe, particularly in Scandinavia, but also in Hungary, contends that someone whom the majority of European citizens hardly know, cannot claim any kind of political legitimacy. 
German Chancellor Angela Merkel is now in a bind. 
Though she endorsed Juncker before the election, she never really backed the notion that the European Parliament should have a decisive part in selecting the Commission’s president. 
She was certain that no party would win an absolute majority, but she did not foresee that almost all representatives from moderate parties would back whichever candidate won a plurality, making it difficult to appoint anyone else. 
The larger issue at stake is whether Europe is prepared to establish the common political space that is needed to manage the monetary union and strengthen the European Union’s influence in world affairs. 
Most economists agree that in the absence of advanced fiscal-policy coordination and a real banking union, Europe’s monetary union cannot succeed. 
This does not bother the United Kingdom, which has no desire to join the eurozone. 
Among eurozone members, however, the need for greater political integration is broadly accepted, and not just by the economic and political elites. 
Moreover, as Russia’s recent assertions of power in Ukraine and elsewhere in the former Soviet Union demonstrate, European countries need to deepen their security cooperation and develop a common energy policy. 
And, though cooperation in areas such as of data privacy, financial-sector regulation, and climate change may not require the degree of political integration that a common currency does, it would benefit greatly from stronger political cohesion and a more profound sense of shared European identity. 
The pan-European parties’ nomination of Spitzenkandidaten for the Commission presidency – and the three direct debates among the nominees – marked the start of building a genuine supranational European political space. 
Indeed, the endorsement of Juncker by the Social Democrats, the Greens, and the Liberals reflects their belief in the need for such a space. 
The candidates, particularly Martin Schulz, the leader of the Party of European Socialists, campaigned beyond their national borders. 
But Europe still has a long way to go, which is apparent from the fact that only a minority of European citizens followed the campaign. 
A supra-national political space can develop only if European politics gains visibility, influence, and credibility. 
For this reason, Europe’s leaders should reach a compromise on the next Commission president quickly and transparently, thereby dispelling the impression among ordinary citizens that European politics is shaped by a dysfunctional process of behind-the-scenes horse-trading. 
As usual, Merkel has a critical role to play. 
Her endorsement of a candidate whom she knew Cameron would vehemently oppose was a serious mistake, because it strengthened the hand of those in the UK who want to leave the EU. 
Merkel must now determine how to forge a compromise that does not discredit the Europe-wide democratic process, which currently has more support in Germany than in any other large European country. 
To this end, support from Italian Prime Minister Matteo Renzi – whose party won 41% of his country’s vote, arguably making him the only real winner at the national level – could help. 
The stakes are high – and not just for Europe. 
The world needs a thriving, cohesive EU to advance democratic principles, facilitate conflict resolution, protect the global commons, promote peace, and build trust across borders. 
The alternative – already gaining traction – is the resurgence of naked power politics and dangerous xenophobia. 
Without a shared European political space, everyone will be much worse off. 

Revamping Europe’s Tattered Social Contract 
WASHINGTON, DC – For most of the beginning of 2014, the eurozone seemed to be in a state of recovery – weak and unsteady, but nonetheless real. 
In April, the International Monetary Fund estimated that overall GDP growth would reach 1.2% this year, with slowly declining unemployment, up from its previous forecast of 1% growth. 
With the threat of unsustainably high interest rates in the countries of the eurozone periphery having disappeared, the path to moderate recovery was supposedly open, to be followed by some acceleration in growth in 2015. 
While it is important not to overreact to quarterly figures, recent data, as well as some of the revised data for the first quarter, are deeply disappointing. 
The pessimism of two years ago has returned – with good reason. 
Italy is in an outright recession, and, far from showing hoped-for signs of vitality. 
French growth is close to zero. 
Even Germany’s GDP declined in quarterly terms in the first half of the year. 
Finland, a staunch supporter of firm austerity policies, is in negative territory for the first half of the year. 
Nominal interest rates for periphery countries’ sovereign debt have remained extremely low, and, even when taking into account expectations of very low inflation (or even deflation), real interest rates are low. 
The eurozone now is facing not only a financial crisis, but a stagnation crisis. 
Tensions with Russia may make recovery even more difficult, and it is unlikely that the eurozone can attain 1% growth in 2014 without major policy changes. 
The European Central Bank has announced that it will offer new monetary-policy support and has decided to use all instruments short of direct quantitative easing (it is still not buying sovereign bonds). 
But it is far from clear whether the proverbial horse led to water will actually drink. 
If growth and employment expectations remain dismal, it will be difficult to rekindle demand, particularly private business investment, no matter how low interest rates are, or how many resources banks have for potential lending. 
ECB President Mario Draghi’s message in his speech last month in Jackson Hole, Wyoming, as well as at his September press conference was a clear call for more fiscal support to boost effective demand. 
The essential economic problem is clear: there is an almost desperate need for more fiscal space in the eurozone to boost aggregate demand, including more investment in Germany. 
But there is also a persistent need for deep structural reforms on the supply side, so that fiscal stimulus translates into sustainable long-term growth, not just temporary spurts and further increases in countries’ debt ratios. 
What the “best” structural reforms actually are remains a matter for debate. 
But in most countries, they include some combination of tax, labor-market, service-sector, and education reforms, as well as reforms in territorial administration, particularly in France. 
These reforms should seek to achieve a thoroughly revamped social contract that reflects the realities of twenty-first-century demographics and global markets, but that also remains sensitive to Europeans’ commitment to distributive fairness and political equality, and insures citizens against shocks. 
It is easy to call for “reforms” without specifying their content or taking into account the social, historical, and political context. 
At the same time, it will not be possible to design this new social contract country by country. 
Europe has become too interwoven in myriad ways – not just in purely financial and economic terms, but also psychologically. 
It must have come as a surprise to many that it was a German court, not a French one, that banned Uber, the mobile app that is revolutionizing the taxi business. 
If the new social contract cannot be forged Europe-wide, it must at least apply to the eurozone to enable the necessary structural reforms. 
Otherwise, given that the politics and economics of eurozone reform are inseparably linked, fiscal expansion could prove to be as ineffective as efforts by monetary policymakers to foster growth. 
Italy’s finance minister, Pier Carlo Padoan, is rightly pushing for a eurozone “reform scorecard,” which would enable direct comparison among national reforms. 
But, beyond such a scorecard, the will to overcome the stagnation trap must be more than a sum of national wills. 
Germany must be reassured by what is happening in France and Italy; conversely, Southern Europeans must be able to trust that their efforts will gain additional traction from greater investment throughout the region, particularly in Germany. 
A new social contract will not appear out of thin air. 
Now is the time for the new European Commission to propose – and the new European Council and European Parliament to endorse – a political pact to legitimize and sustain the reforms needed to solve Europe’s economic problems. 

The Future of Economic Progress 
WASHINGTON, DC – Slowly but surely, the debate about the nature of economic growth is entering a new phase. 
The emerging questions are sufficiently different from those of recent decades that one can sense a shift in the conceptual framework that will structure the discussion of economic progress – and economic policy – from now on. 
The first question, concerning the potential pace of future economic growth, has given rise to serious disagreement among economists. 
Robert Gordon of Northwestern University, for example, believes that the US economy will be lucky to achieve 0.5% annual per capita growth in the medium term. 
Others, perhaps most carefully Dani Rodrik, have developed a version of growth pessimism for the emerging economies. 
The key premise, common to many of these leading analysts, is that technological progress will slow, including the catch-up gains that are most relevant for emerging and developing countries. 
On the opposite side are the “new technologists.” 
They argue that we are at the beginning of a fourth industrial revolution, characterized by truly “intelligent machines” that will become almost perfect substitutes for low- and medium-skill labor. 
These “robots” (some in the form of software), as well as the “Internet of things,” will usher in huge new productivity increases in areas such as energy efficiency, transport (for example, self-driving vehicles), medical care, and customization of mass production, thanks to 3D printing. 
Second, there is the question of income distribution. 
In his instantly famous book, Thomas Piketty argues that fundamental economic forces are fueling a persistent rise in profits as a share of total income, with the rate of return on capital constantly higher than the rate of economic growth. 
Moreover, many have observed that if capital is becoming a close substitute for all but very highly skilled labor, while education systems need long adjustment times to supply the new skills in large quantities, much greater wage differentials between highly skilled and all other labor will cause inequality to worsen. 
Perhaps the US economy in ten years will be one in which the top 5% – large capital owners, very highly skilled wage earners, and global winner-take-all performers – get 50% of national income (the percentage is not far below 40% today). 
Though national circumstances still differ greatly, the fundamental economic trends are global. 
Are they politically sustainable? 
The third question concerns the employment effects of further automation. 
As was true in previous industrial revolutions, human beings may be freed from much “tedious” work. 
There will be no need for cashiers, call operators, and toll collectors, for example, and less need for accountants, travel or financial advisers, drivers, and many others. 
If the “technologists” are half-right, GDP will be much higher. 
So why should we not rejoice at the prospect of a 25- or 30-hour workweek and two months of annual leave, with intelligent machines taking up the slack? 
Why, with all this new technology and imminent productivity increases, do so many continue to argue that everyone has to work more and retire much later in life if economies are to remain competitive? 
Or is it just the highly skilled who have to work harder and longer, because there are not enough of them? 
In that case, perhaps older workers should retire sooner to make room for the young, who have skills more appropriate to the new century. 
If such a shift were to increase overall GDP, fiscal transfers could pay for early retirement, while retirement itself could become a flexible and gradual process. 
Finally, there is the question of climate change and possible natural-resource constraints, issues that have become more familiar over the last decade. 
Will these factors impede long-term growth, or can a transition to a clean-energy economy fuel another technological revolution that actually increases prosperity? 
As these questions move to the top of the policy agenda, it is becoming clearer that the traditional focus on growth, defined as an increase in aggregate GDP and calculated using national accounts invented a century ago, is less and less useful. 
The nature and measurement of economic progress should involve a new social contract that allows societies to manage the power of technology so that it serves all citizens. 
Working, learning, enjoying leisure, and being healthy and “productive” should be part of a continuum in our lives, and policies should be explicitly aimed at what facilitates this continuum and increases measured wellbeing. 
The trends underpinning widening inequality will have to be counteracted using many policy instruments, with tax regimes and life-long, inclusive, and affordable education and health care at the center of the effort to ensure equity and social mobility. 
Though the quality of human lives can still be greatly improved, even in the advanced countries, focusing on aggregate GDP will be less helpful in achieving this goal. 
The questions surrounding future economic growth are becoming clearer. 
But we are only at the start of the process of creating the new conceptual framework needed to enable national and global policies to advance the cause of human progress. 

The Great War and Global Governance 
ISTANBUL – This year marks the hundredth anniversary of the outbreak of World War I – and, arguably, the worst year in human history. 
A century later, is the world any safer? 
Not only did WWI leave almost 40 million people dead; it can be viewed as a precursor to World War II. 
After all, had Germany’s hyperinflation of the 1920’s – a direct result of the war – been avoided, Hitler may well never have risen to power, and WWII might not have occurred. 
Instead, the assassination of Austrian Archduke Franz Ferdinand in Sarajevo on June 28, 1914, set in motion a chain of bloodletting that killed nearly 100 million people by 1945 and caused human suffering on a previously unimaginable scale. 
Of course, generations of historians have meticulously researched the origins of the world wars and written elegantly about their conclusions. 
That history should spur today’s economists and policymakers to reflect on the difficult trade-off between efficiency and robustness when it comes to global governance. 
The painstaking effort since the end of WWII to build effective regional and global governance institutions has reduced considerably the risk of catastrophes like the world wars or the Great Depression. 
Indeed, while such institutions are far from perfect, the progress that has been made in terms of preventing human suffering is worth far more than the efficiency costs of ensuring that they are adequately robust. 
This efficiency-robustness tradeoff exists in many fields. 
When designing an airplane, aeronautical engineers must ensure sufficient robustness so that their creation can avoid crashing even under highly unusual or unforeseen circumstances. 
This requires a degree of redundancy – for example, extra engines and extensive backup systems – that comes at the cost of efficiency. 
Economic systems also must be robust, as episodes like the Great Depression or the 2008 global financial crisis demonstrate. 
In the United States, in particular, the financial sector’s structure prior to the recent crisis emphasized the efficient generation of huge profits – and succeeded for more than a decade. 
But the realization in 2007 that some of the system’s fundamental assumptions were no longer valid triggered a crisis with huge economic and social costs. 
Had governments worldwide not intervened with massive rescue and stimulus packages, the consequences would have been catastrophic. 
That near miss highlighted the unsustainability of pre-crisis policies. 
The new Basel III banking guidelines, together with new national regulations, aim at creating a more robust financial system by insisting on higher capital-adequacy ratios, less leverage, greater separation between investment and retail banking, a better macro-prudential framework, and measures to prevent financial institutions from becoming “too big to fail.” 
All of these efforts are shaped by the efficiency-robustness tradeoff. 
If capital requirements are pushed too high, banks become less profitable, making it more difficult for them to channel savings to investment and undermining economic growth. 
The challenge, therefore, is to find the ideal balance between opportunity and security – that is, between efficiency and robustness. 
Policymakers face a similar challenge when designing, for example, efforts to combat climate change. 
The scientific consensus is that greenhouse-gas emissions are generating significant risks, but the scale and timing of these risks remain uncertain. 
To illustrate the tradeoff (in admittedly simplistic terms), a 14% capital-adequacy ratio for banks may be compared to the objective of stabilizing carbon-dioxide levels in the atmosphere at 450 parts per million, with both targets reflecting caution and a desire for robustness, at an immediate economic cost. 
By contrast, a capital-adequacy target of 7% and a CO2 target of 550 ppm would demonstrate policymakers’ willingness to place a higher priority on short-term gains – even if that means allowing another financial crisis or global warming’s long-term economic and human consequences to manifest themselves. 
An extreme course in either direction would be a bad idea. 
After all, it is impossible to avoid all risk, and, at a certain point, the level of inefficiency generated by excessive robustness would create new risks of collapse. 
Minimizing the risk of a major war, depression, or financial breakdown thus requires that policymakers find the optimal balance – and that requires more explicit discussion of the efficiency-robustness trade-off. 
As it stands, policies are often presented without any mention of costs in terms of efficiency or robustness – and mere awareness of the tradeoff is insufficient for effective decision-making. 
Instead, the tradeoff must be quantified in approximate and reasonably accessible terms to facilitate productive debate and preempt polarized ideological clashes that have little hope of resolution. 
Perhaps the commemoration this year of the disaster unleashed in 1914 will inspire people to think more deeply about how to avoid major risks without having to pay a prohibitively high price in lost efficiency and dynamism to ensure robustness and resilience. 
Now, as then, the fate of the world hangs in the balance. 

Good Governance and Economic Performance 
BERLIN – The debate about emerging countries’ growth prospects is now in full swing. 
Pessimists stress the feared reversal of private capital flows, owing to the US Federal Reserve’s tapering of its purchases of long-term assets, as well as the difficulties of so-called second- and third-generation structural reforms and the limits to “catch up” growth outside of manufacturing. 
Optimists argue that the potential for rapid growth remains immense, owing to better macroeconomic fundamentals and the promise of best-practice technology spreading throughout the emerging world. 
So who is right? 
Recent events point once again to the importance of good governance and responsive political systems, a familiar topic in studies of long-term economic growth. 
Countries that appeared successful for a long time, such as Turkey or Thailand, suddenly seem to face obstacles related to governance and the ability to forge domestic political compromises. 
The resulting divisiveness and dysfunction are surely bigger threats than the Fed’s tapering. 
It is the nature of governance that determines whether people deploy their talents and energy in pursuit of innovation, production, and job creation, or in rent seeking and lobbying for political protection. 
And here the contrast between Egypt and Tunisia may turn out to be an object lesson in what makes the difference between success and failure. 
In Egypt, the old regime under Hosni Mubarak, having failed to democratize, collapsed in the face of massive protest. 
A low-turnout election gave a plurality of the popular vote to the Muslim Brotherhood, which came to power alone and proceeded to ignore good governance and alienate all except its most fervent followers. 
The Brotherhood’s approach to governance also explains the mess it made of the economy. 
Instead of trying to build non-partisan and competent regulatory institutions, all positions were stacked with political followers. 
Unfortunately, the military intervention last July gave rise to yet another regime that seems unable to build durable institutions that could foster political reconciliation and deliver inclusive growth. 
Tunisia may give us an example of the opposite scenario: a real constitutional compromise supported by an overwhelming majority (reflected in a 200-16 vote in the National Constituent Assembly). 
If that compromise holds, stability will take hold, markets will function, Tunisia will attract investment, and tourism will thrive again. 
At the heart of the difference between the two cases is a vision of governance that makes such compromise possible. 
Such a vision presupposes an assurance that a winner-take-all system will not be established, as well as broad agreement that regulatory institutions should be reasonably non-partisan and staffed with competent professionals. 
China’s long-lasting success is sometimes given as a counterexample to the importance of good governance for economic performance. 
The Chinese example certainly calls into question a strong correlation between multi-party democracy and economic growth. 
Democracy is of course something valuable in itself and can be desired independently of its effect on economic growth. 
But, in the context of economic performance, it is important to emphasize that there is a huge difference between dictatorial regimes, where a single individual monopolizes all power – à la Mubarak or Syrian President Bashar al-Assad – and China, where there has been competition and contestability within a large communist party. 
And it is the party, operating as a fairly inclusive and meritocratic institution, not an autocratic leader, that has governed in the post-Mao period. 
Lack of reasonably independent regulation and competent public administration – or, worse, one-person dictatorships – lead inexorably to economic waste and inefficiency, and eventually to political turmoil. 
This is true even in cases like Venezuela, where large oil revenues masked the underlying weakness for a while. 
In the complex global economy of the twenty-first century, sustained good economic performance requires a panoply of well-functioning institutions that do not fall within a single leader’s purview. 
For example, successful economies require a reasonably independent central bank, and competent bank supervision that does not get dragged into short term politics. 
They also need regulatory agencies in sectors such as telecommunications and energy that can pursue policies in accordance with broad goals established by the political process, but with appointees selected according to nonpartisan criteria who then exercise their authority in a way that fosters competition open to all. 
When credit decisions, public procurement, construction contracts, and price determination reflect only short-term and purely political goals, good economic performance becomes impossible – even in countries with large natural-resource endowments. 
In countries with little or no such endowments – where innovation, competitive efficiency, and a focus on production rather than rents is all the more important – the lack of good governance will lead to failure more rapidly. 
All of this implies that analyzing the determinants of economic success is a subject not just for economists. 
Why do some societies achieve the compromises needed to sustain an independent judiciary and a modern regulatory framework – both necessary for an efficient modern economy – while others perpetuate a partisan, winner-take-all approach to governance that weakens public policy and erodes private-sector confidence? 
The contrast is starkest in emerging countries, but differences also exist among the advanced economies. 
Perhaps Germany’s ability to reach sociopolitical compromise – again demonstrated by the formation of a right-left coalition after the 2013 elections – has been more fundamental to its recent economic success than the details of the fiscal and structural policies it has pursued to achieve it. 

The Cuban Missile Crisis at 50 
CAMBRIDGE – This month marks the 50th anniversary of the Cuban missile crisis – those 13 days in October 1962 that were probably the closest the world has come to a major nuclear war. 
President John F. Kennedy had publicly warned the Soviet Union not to introduce offensive missiles into Cuba. 
But Soviet leader Nikita Khrushchev decided to cross Kennedy’s red line surreptitiously and confront the Americans with a fait accompli. 
When an American surveillance plane discovered the missiles, the crisis erupted. 
Some of Kennedy’s advisers urged an air strike and invasion to destroy the missiles. 
Kennedy mobilized troops, but also bought time by announcing a naval blockade of Cuba. 
The crisis subsided when Soviet ships carrying additional missiles turned back, and Khrushchev agreed to remove the existing missiles from the island. 
As then US Secretary of State Dean Rusk put it: “We were eyeball to eyeball, and I think the other fellow just blinked.” 
At first glance, this was a rational and predictable outcome. 
The United States had a 17-to-1 advantage in nuclear weaponry. 
The Soviets were simply outgunned. 
And yet the US did not preemptively attack Soviet missile sites, which were relatively vulnerable, because the risk that even one or two of the Soviet missiles would be fired at an American city was enough to deter a first strike. 
In addition, both Kennedy and Khrushchev feared that rational strategies and careful calculation might spin out of control. 
Khrushchev offered a vivid metaphor in one of his letters to Kennedy: “We and you ought not now to pull on the ends of the rope in which you have tied the knot of war.” 
In 1987, I was part of a group of scholars that met at Harvard University with Kennedy’s surviving advisers to study the crisis. 
Robert McNamara, Kennedy’s secretary of defense, said he became more cautious as the crisis unfolded. 
At the time, he thought that the probability of nuclear war resulting from the crisis might have been one in 50 (though he rated the risk much higher after he learned in the 1990’s that the Soviets had already delivered nuclear weapons to Cuba). 
Douglas Dillon, Kennedy’s treasury secretary, said he thought that the risk of nuclear war had been about zero. 
He did not see how the situation could possibly have escalated to nuclear war, and thus had been willing to push the Soviets harder and to take more risks than McNamara was. 
General Maxwell Taylor, the chairman of the Joint Chiefs of Staff, also believed that the risk of nuclear war was low, and he complained that the US let the Soviet Union off too easily. 
He felt that the Americans should have removed the Castro regime. 
But the risks of losing control of the situation weighed heavily on Kennedy, too, which is why he took a more prudent position than some of his advisers would have liked. 
The moral of the story is that a little nuclear deterrence goes a long way. 
Nonetheless, there are still ambiguities about the missile crisis that make it difficult to attribute the outcome entirely to the nuclear component. 
The public consensus was that the US won. 
But how much the US won, and why it won, is hard to determine. 
There are at least two possible explanations of the outcome, in addition to Soviet acquiescence to America’s superior nuclear firepower. 
One focuses on the importance of the two superpowers’ relative stakes in the crisis: the US not only had a greater stake in neighboring Cuba than the Soviets did, but could also bring conventional forces to bear. 
The naval blockade and the possibility of a US invasion strengthened the credibility of American deterrence, placing the psychological burden on the Soviets. 
The other explanation questions the very premise that the Cuban missile crisis was an outright US victory. 
The Americans had three options: a “shoot-out” (bomb the missile sites); a “squeeze out” (blockade Cuba to convince the Soviets to withdraw the missiles); and a “buyout” (give the Soviets something they want). 
For a long time, the participants said little about the buyout aspects of the solution. 
But subsequent evidence suggests that a quiet US promise to remove its obsolete missiles from Turkey and Italy was probably more important than was thought at the time (the US also gave a public assurance that it would not invade Cuba). 
We can conclude that nuclear deterrence mattered in the crisis, and that the nuclear dimension certainly figured in Kennedy’s thinking. 
But it was not the ratio of nuclear weapons that mattered so much as the fear that even a few nuclear weapons would wreak intolerable devastation. 
How real were these risks? 
On October 27, 1962, just after Soviet forces in Cuba shot down a US surveillance plane (killing the pilot), a similar plane taking routine air samples near Alaska inadvertently violated Soviet air space in Siberia. 
Fortunately, it was not shot down. 
But, even more serious, unbeknownst to the Americans, Soviet forces in Cuba had been instructed to repel a US invasion, and had been authorized to use their tactical nuclear weapons to do so. 
It is hard to imagine that such a nuclear attack would have remained merely tactical. 
Kenneth Waltz, an American scholar, recently published an article entitled “Why Iran Should Get the Bomb.” 
In a rational, predictable world, such an outcome might produce stability. 
In the real world, the Cuban missile crisis suggests that it might not. 
As McNamara put it, “We lucked out.” 

What’s the Problem With Advanced Economies? 
CAMBRIDGE – Is today’s slow growth in advanced economies a continuation of long-term secular decline, or does it reflect the normal aftermath of a deep systemic financial crisis? 
More important, do we need to answer that question definitively in order to boost the pace of economic recovery? 
At a recent International Monetary Fund (IMF) conference, former US Treasury Secretary Lawrence Summers argued that today’s growth blues have deep roots that pre-date the global financial crisis. 
Summers placed particular emphasis on the need for more infrastructure investment, a sentiment that most economists wholeheartedly share, especially if one is referring to genuinely productive investment. 
Others also certainly worry about secular decline, though most have emphasized the supply side rather than the demand side. 
The economist Jeffrey Sachs, for example, has argued that the US economy needs to confront a plethora of structural impediments to sustained growth, including offshoring, skill mismatches, and decaying infrastructure. 
The Internet entrepreneur Peter Thiel and the legendary chess champion Garry Kasparov have suggested that the malaise runs even deeper, as has the economist Robert Gordon. 
They argue that the technology engine that has driven mankind from one economic plateau to the next over the past 200 years is running out of steam. 
Simply put, the Internet may be cool, but it is hardly as essential as running water, electrification, or the internal combustion engine. 
The Gordon-Kasparov-Thiel thesis is extremely interesting, though I have challenged their negative conclusions, both in print and in a debate at Oxford. 
Personally, I think the greater risk is that the pace of technological progress will accelerate too much for societies to adapt, though the experience so far has basically been positive. 
Certainly, today’s advanced economies urgently need to address all kinds of technological, social, and political deficiencies. 
Nevertheless, the subpar growth of the past half-decade still bears all the hallmarks of a typical sluggish recovery from a deep systemic financial crisis, as Carmen Reinhart and I documented in our 2009 book This Time is Different. 
Of course, structural reform is essential after a financial crisis, as are policies to maintain aggregate demand while the economy heals. 
To my mind, the biggest failure of post-2008 economic policy has consisted in governments’ inability to find creative ways to write down unsustainable debts, for example in US mortgage markets, and in Europe’s periphery. 
This includes the failure to issue public debt where necessary to facilitate restructuring, particularly if overall economy-wide (or eurozone-wide) debt could be reduced in the same operation. 
But Summers is certainly right that productive infrastructure investment is the low-hanging fruit. 
Of course, governments should be concerned about the long-term trajectory of public debt, all politically charged and polemical nonsense to the contrary. 
But productive infrastructure investment that generates long-term growth pays for itself, so there need not be any conflict between short-term stabilization and risks to long-term debt sustainability. 
With today’s ultra-low interest rates and high unemployment, public investment is cheap and plenty of projects offer high returns: fixing bridges and roads, updating badly outmoded electricity grids, and improving mass-transportation systems, to take just a few notable examples. 
I appreciate that there are those who take on faith that Keynesian multipliers are much bigger than one, implying that even wasteful government spending is productive. 
But, given thin empirical evidence and legitimate concerns about undermining trust in the effectiveness of government, and with so many options for the productive use of resources, this seems like a titanic ideological distraction. 
It is also far from clear why virtually all infrastructure needs to be publicly financed. 
There are still huge pools of private wealth sitting on the sidelines that can be rapidly mobilized to support productive infrastructure. 
The government needs to help with rights of way before construction, and with strong regulation to protect the public interest afterwards. 
In his first term in office, US President Barack Obama suggested the creation of an infrastructure bank to help promote public-private partnerships. 
It is still a good idea, particularly if the bank maintained a professional staff to help guide public choice on costs and benefits (including environmental costs and benefits). 
Even if Keynesian multipliers are truly at the upper end of consensus, mobilizing private capital for investment has most of the advantages of issuing public debt. 
One qualification is in order. 
Some commentators have suggested that the root cause of secular decline, as well as the main explanation of ultra-low interest rates, is low fertility throughout the advanced world. 
If true, the case for any kind of investment, public or private, would be more mixed; there must be labor to use the capital. 
But I suspect that the drivers of today’s slow growth and low interest rates go far beyond low fertility rates, in which case this should not be an obstacle. 
The important point is that the case for expanding productive infrastructure investment does not rest on one narrow ideological viewpoint or economic theory. 
Whether Summers is right about secular stagnation in advanced economies, or whether we are still mainly suffering the aftermath of the financial crisis, it is time to break the political gridlock and restore growth. 

A Surplus of Controversy 
CAMBRIDGE – When the US Treasury recently added its voice to the chorus of critics of Germany’s chronic current-account surplus, it underscored the deep disagreement over what, if anything, should be done about it. 
The critics want Germany to increase its contribution to global demand by importing more and exporting less. 
The Germans view the maintenance of strong balance sheets as essential to their country’s stabilizing role in Europe. 
Both sides’ arguments will certainly receive a full airing at the spring meetings of the International Monetary Fund and the World Bank. 
Unfortunately, the debate has too often been informed more by ideology than facts. 
The difference between what a country exports and imports can reflect myriad factors, including business cycles, demographics, investment opportunities, and economic diversification. 
It can also reflect the government’s penchant for running fiscal surpluses; after all, the current-account surplus, by definition, is the excess of public and private savings over investment. 
During the first half of the 2000’s, US policymakers chose not to worry about sustained current-account deficits, which peaked at above 6% of GDP. 
They argued at first that the deficits merely reflected the world’s attraction to superior US investment opportunities, an odd position given that the US was not growing especially quickly compared to emerging markets. 
Later, academic researchers identified more plausible reasons why the US might be able to run large deficits without great risk, as long as investors’ desire for diversification, safety, and liquidity sustained global demand for US assets. 
But policymakers should have recognized that even these better rationales had limits, and that massive sustained current-account deficits are often a blinking red signal of deeper problems – in this case, over-borrowing by households to finance home purchases. 
In the case of Germany, of course, we are talking about surpluses, not deficits. 
And even though the surpluses exceed 6% of German national income and would seem to be on the same order of magnitude as pre-crisis US deficits, one must remember that the German economy is less than a quarter the size of the US (at market exchange rates). 
However, as the Center for European Policy Studies’ Daniel Gros has pointed out, the issue is not simply Germany. 
Smaller northern European countries, including the Netherlands, Switzerland, Sweden, and Norway have been collectively running surpluses at least as large as Germany’s relative to national income, and, in absolute terms, their combined surpluses are even larger. 
So the issue obviously merits attention. 
But what is the cause, and is it related to policy? 
Certainly, no one can criticize northern Europe for exchange-rate undervaluation. 
By almost any purchasing-power measure, the euro seems overvalued (and the Swiss franc even more so). 
Keynesians look at these surpluses and say that the northern European countries should drive them down by running much larger fiscal deficits to boost domestic demand. 
They have a point, but they grossly overstate the case. 
Many studies have shown that changes in private savings and investment tend to offset partly the current-account effects of higher fiscal deficits. 
For example, larger German fiscal deficits would hardly have been a decisive factor in Europe. 
Research by the IMF and others suggests that the demand spillovers from German fiscal policy to Europe are likely to be modest, particularly in the eurozone’s troubled countries, like Greece and Portugal. 
Germany trades with the entire world. 
The European Commission has recently completed its own report on Germany’s surpluses, concluding that it is difficult to pin down the many factors underlying it, which of course is true. 
For example, Germany’s capital-goods exporters have benefited enormously from growth in China. 
The Commission nonetheless argues persuasively that policies to promote public and private investment would tame the surpluses in the short term and strengthen German growth in the long term. 
One might add that there are still extensive impediments to competition in the service and retail sectors in many northern European countries. 
Removing them would increase consumption of all goods, including imports. 
And Germany is right to point out that its strong balance sheet underpins Europe’s fragile stability today. 
Would European Central Bank President Mario Draghi’s vow in the summer of 2012 to do “whatever it takes” to save the euro have been nearly as effective if investors doubted Germany’s underlying financial strength and resolve? 
At the same time, it is also true that Germany could have been more forthcoming and more liberal in using its balance sheet to defuse debt-overhang problems in periphery countries like Portugal and Greece, and perhaps even Ireland and Spain. 
The bottom line is that large sustained external imbalances are something that global policymakers do need to monitor closely, because, as the US housing bust showed, they can be an indicator of problems that need to be investigated more deeply. 
And critics of the surplus countries are right that there are two sides to every balance, and that policies in both surplus and deficit countries should be subject to review. 
But it is wrong to believe that simplistic answers, such as more fiscal stimulus or more austerity, are a panacea; more often, the underlying problems relate to debt, structural rigidities, low investment, and weak competitiveness. 

The Exaggerated Death of Inflation 
CAMBRIDGE – Is the era of high inflation gone forever? 
In a world of slow growth, high debt, and tremendous distributional pressures, whether inflation is dead or merely dormant is an important question. 
Yes, massive institutional improvements concerning central banks have created formidable barriers to high inflation. 
But a significant part of a central bank’s credibility ultimately derives from the broader macroeconomic environment in which it operates. 
In the first half of the 1990s, annual inflation averaged 40% in Africa, 230% in Latin America, and 360% in the transition economies of Eastern Europe. 
And, in the early 1980s, advanced-economy inflation averaged nearly 10%. 
Today, high inflation seems so remote that many analysts treat it as little more than a theoretical curiosity. 
They are wrong to do so. 
No matter how much central banks may wish to present the level of inflation as a mere technocratic decision, it is ultimately a social choice. 
And some of the very pressures that helped to contain inflation for the past two decades have been retreating. 
In the years preceding the financial crisis, increasing globalization and technological advances made it much easier for central banks to deliver both solid growth and low inflation. 
This was not the case in the 1970s, when stagnating productivity and rising commodity prices turned central bankers into scapegoats, not heroes. 
True, back then, monetary authorities were working with old-fashioned Keynesian macroeconomic models, which encouraged the delusion that monetary policy could indefinitely boost the economy with low inflation and low interest rates. 
Central bankers today are no longer so naive, and the public is better informed. 
But a country’s long-term inflation rate is still the outcome of political choices not technocratic decisions. 
As the choices become more difficult, the risk to price stability grows. 
A quick tour of emerging markets reveals that inflation is far from dead. 
According to the International Monetary Fund’s April 2014 World Economic Outlook, inflation in 2013 reached 6.2% in Brazil, 6.4% in Indonesia, 6.6% in Vietnam, 6.8% in Russia, 7.5% in Turkey, 8.5% in Nigeria, 9.5% in India, 10.6% in Argentina, and a whopping 40.7% in Venezuela. 
These levels may be a big improvement from the early 1990s, but they certainly are not evidence of inflation’s demise. 
Yes, advanced economies are in a very different position today, but they are hardly immune. 
Many of the same pundits who never imagined that advanced economies could have massive financial crises are now sure that advanced economies can never have inflation crises. 
More fundamentally, where, exactly, does one draw the line between advanced economies and emerging markets? 
The eurozone, for example, is a blur. 
Imagine that there was no euro and that the southern countries had retained their own currencies – Italy with the lira, Spain with the peseta, Greece with the drachma, and so on. 
Would these countries today have an inflation profile more like the United States and Germany or more like Brazil and Turkey? 
Most likely, they would be somewhere in between. 
The European periphery would have benefited from the same institutional advances in central banking as everyone else; but there is no particular reason to suppose that its political structures would have evolved in a radically different way. 
The public in the southern countries embraced the euro precisely because the northern countries’ commitment to price stability gave them a currency with enormous anti-inflation credibility. 
As it turned out, the euro was not quite the free lunch that it seemed to be. 
The gain in inflation credibility was offset by weak debt credibility. 
If the European periphery countries had their own currencies, it is likely that debt problems would morph right back into elevated inflation. 
I am not arguing that inflation will return anytime soon in safe-haven economies such as the US or Japan. 
Though US labor markets are tightening, and the new Fed chair has emphatically emphasized the importance of maximum employment, there is still little risk of high inflation in the near future. 
Still, over the longer run, there is no guarantee that any central bank will be able to hold the line in the face of adverse shocks such as continuing slow productivity growth, high debt levels, and pressure to reduce inequality through government transfers. 
The risk would be particularly high in the event of other major shocks – say, a general rise in global real interest rates. 
Recognizing that inflation is only dormant renders foolish the oft-stated claim that any country with a flexible exchange rate has nothing to fear from high debt, as long as debt is issued in its own currency. 
Imagine again that Italy had its own currency instead of the euro. 
Certainly, the country would have much less to fear from an overnight run on debt. 
Nevertheless, given the huge governance problems that Italy still faces, there is every chance that its inflation rate would look more like Brazil’s or Turkey’s, with any debt problems spilling over faster price growth. 
Modern central banking has worked wonders to bring down inflation. 
Ultimately, however, a central bank’s anti-inflation policies can work only within the context of a macroeconomic and political framework that is consistent with price stability. 
Inflation may be dormant, but it is certainly not dead. 

The 4% Non-Solution 
PARIS – For some time now, there has been concern that central bankers have “run out of bullets.” 
Having lowered their policy rates to near zero, they have engaged in increasingly extravagant measures such as “quantitative easing” and “forward guidance.” 
Given the fog cast over real economic activity by the financial crisis, it is difficult to offer a definitive assessment of just how well or badly those measures have worked. 
But it is clear that there must be a better way to do things. 
There is no longer any reason to let the zero bound on nominal interest rates continue to hamper monetary policy. 
A simple and elegant solution is to phase in a switchover to a fully electronic currency, where paying interest, positive or negative, requires only the push of a button. 
And with paper money – particularly large-denomination notes – arguably doing more harm than good, currency modernization is long overdue. 
Using an electronic currency, central banks could continue to stabilize inflation exactly as they do now. 
(Citigroup’s chief economist, Willem Buiter, has suggested numerous ways to address the constraint of paper currency, but eliminating it is the easiest.) 
A second, less elegant idea is to have central banks simply raise their target inflation rates from today’s norm of 2% to a higher but still moderate level of 4%. 
The idea of permanently raising inflation targets to 4% was first proposed in an interesting and insightful paper led by IMF chief economist Olivier Blanchard, and has been endorsed by a number of other academics, including, most recently, Paul Krugman. 
Unfortunately, the problem of making a smooth and convincing transition to the new target is perhaps insurmountable. 
When Blanchard first proposed his idea, I was intrigued but skeptical. 
Mind you, two years previously, at the outset of the financial crisis, I suggested raising inflation to 4% or more for a period of a few years to deflate the debt overhang and accelerate wage adjustment. 
But there is a world of difference between temporarily raising inflation to address a crisis and unhinging long-term expectations. 
After two decades of telling the public that 2% inflation is Nirvana, central bankers would baffle people were they to announce that they had changed their minds – and not in some minor way, but completely. 
Just recall the market’s “taper tantrums” in May 2013, when then-Fed Chairman Ben Bernanke suggested a far more modest turn in monetary policy. 
People might well ask why, if central bankers can change their long-term target from 2% to 4%, they could not later decide that it should be 5% or 6%? 
Given the likelihood of a confused, mistrustful public, it is hard to find any deep rationale for a 4% target. 
At least the existing 2% inflation target stands for something, because central bankers can portray it as the moral equivalent of zero. 
(Most experts believe that a true welfare-based price index would show significantly lower inflation than government inflation statistics indicate, because official data fail to capture the benefits of the constant flow of new goods into the economy.) 
There is an analogy to the problems countries faced when they tried to re-establish the gold standard after World War I. Until the war, money was backed by gold and could be redeemed at a fixed rate. 
Though the system was highly vulnerable to bank runs and there was little scope for a monetary stabilization policy, people’s confidence in the system enabled it to anchor expectations. 
Unfortunately, the system completely collapsed after the war broke out in August 1914. 
Revenue-desperate combatants were forced to turn to inflation finance. 
They could not simultaneously debase the currency and back it with gold at a fixed rate. 
After the war, as things settled down, governments tried to return to gold, partly as a symbol of a return to normalcy. 
But the revived inter-war gold standard ultimately fell apart, in no small part because it was impossible to rebuild public trust. 
A move by central banks to a long-term 4% inflation target risks triggering the same dynamic. 
Fortunately, there is a much better way. 
Moving to an electronic government currency would not require a destabilizing change in the inflation target. 
Minor technical issues could easily be ironed out. 
For example, ordinary citizens could be allowed zero-interest-transactions balances (up to a limit). 
Presumably, nominal interest rates would move into negative territory only in response to a deep deflationary crisis. 
But when such a crisis does occur, central banks could power out of it far more quickly than is possible today. 
And, as I have argued elsewhere, governments have long been penny-wise and pound-foolish to provide large-denomination notes, given that a large share are used in the underground economy and to finance illegal activities. 
Moving to a twenty-first-century currency system would make it far simpler to move to a twenty-first-century central-banking regime as well. 

Malthus, Marx, and Modern Growth 
CAMBRIDGE – The promise that each generation will be better off than the last is a fundamental tenet of modern society. 
By and large, most advanced economies have fulfilled this promise, with living standards rising over recent generations, despite setbacks from wars and financial crises. 
In the developing world, too, the vast majority of people have started to experience sustained improvement in living standards and are rapidly developing similar growth expectations. 
But will future generations, particularly in advanced economies, realize such expectations? 
Though the likely answer is yes, the downside risks seem higher than they did a few decades ago. 
So far, every prediction in the modern era that mankind’s lot will worsen, from Thomas Malthus to Karl Marx, has turned out to be spectacularly wrong. 
Technological progress has trumped obstacles to economic growth. 
Periodic political rebalancing, sometimes peaceful, sometimes not, has ensured that the vast majority of people have benefited, albeit some far more than others. 
As a result, Malthus’s concerns about mass starvation have failed to materialize in any peaceful capitalist economy. 
And, despite a disconcerting fall in labor’s share of income in recent decades, the long-run picture still defies Marx’s prediction that capitalism would prove immiserating for workers. 
Living standards around the world continue to rise. 
But past growth performance is no guarantee that a broadly similar trajectory can be maintained throughout this century. 
Leaving aside potential geopolitical disruptions, there are some formidable challenges to overcome, mostly stemming from political underperformance and dysfunction. 
The first set of issues includes slow-burn problems involving externalities, the leading example being environmental degradation. 
When property rights are ill-defined, as in the case of air and water, government must step in to provide appropriate regulation. 
I do not envy future generations for having to address the possible ramifications of global warming and fresh-water depletion. 
A second set of problems concerns the need to ensure that the economic system is perceived as fundamentally fair, which is the key to its political sustainability. 
This perception can no longer be taken for granted, as the interaction of technology and globalization has exacerbated income and wealth inequality within countries, even as cross-country gaps have narrowed. 
Until now, our societies have proved remarkably adept at adjusting to disruptive technologies; but the pace of change in recent decades has caused tremendous strains, reflected in huge income disparities within countries, with near-record gaps between the wealthiest and the rest. 
Inequality can corrupt and paralyze a country’s political system – and economic growth along with it. 
The third problem is that of aging populations, an issue that would pose tough challenges even for the best-designed political system. 
How will resources be allocated to care for the elderly, especially in slow-growing economies where existing public pension schemes and old-age health plans are patently unsustainable? 
Soaring public debts surely exacerbate the problem, because future generations are being asked both to service our debt and to pay for our retirements. 
The final challenge concerns a wide array of issues that require regulation of rapidly evolving technologies by governments that do not necessarily have the competence or resources to do so effectively. 
We have already seen where poor regulation of rapidly evolving financial markets can lead. 
There are parallel shortcomings in many other markets. 
A leading example is food supply – an area where technology has continually produced ever-more highly processed and genetically refined food that scientists are only beginning to assess. 
What is known so far is that childhood obesity has become an epidemic in many countries, with an alarming rise in rates of type 2 diabetes and coronary disease implying a significant negative impact on life expectancy in future generations. 
Many leading health researchers, including Kelly Brownell, David Ludwig, and Walter Willett, have documented these problems. 
Government interventions to date, mainly in the form of enhanced education, have proved largely ineffective. 
Self-destructive addiction to processed foods, which economists would describe as an “internality,” can lower quality of life for those afflicted, and can eventually lead to externalities for society, such as higher health-care costs. 
Again, despite a rising chorus of concern from researchers, political markets have seemed frozen. 
All of these problems have solutions, at least in the short to medium run. 
A global carbon tax would mitigate climate risks while alleviating government debt burdens. 
Addressing inequality requires greater redistribution through national tax systems, together with enhanced programs for adult education, presumably making heavy use of new technologies. 
The negative effects of falling population growth can be mitigated by easing restrictions on international migration, and by encouraging more women and retirees to enter or stay in the workforce. 
But how long it will take for governments to act is a wide-open question. 
Capitalist economies have been spectacularly efficient at enabling growing consumption of private goods, at least over the long run. 
When it comes to public goods – such as education, the environment, health care, and equal opportunity – the record is not quite as impressive, and the political obstacles to improvement have seemed to grow as capitalist economies have matured. 
Will each future generation continue to enjoy a better quality of life than its immediate predecessor? 
In developing countries that have not yet reached the technological frontier, the answer is almost certainly yes. 
In advanced economies, though the answer should still be yes, the challenges are becoming formidable. 

Europe’s Debt Wish 
CAMBRIDGE – Eurozone leaders continue to debate how best to reinvigorate economic growth, with French and Italian leaders now arguing that the eurozone’s rigid “fiscal compact” should be loosened. 
Meanwhile, the leaders of the eurozone’s northern member countries continue to push for more serious implementation of structural reform. 
Ideally, both sides will get their way, but it is difficult to see an endgame that does not involve significant debt restructuring or rescheduling. 
The inability of Europe’s politicians to contemplate this scenario is placing a huge burden on the European Central Bank. 
Although there are many explanations for the eurozone’s lagging recovery, it is clear that the overhang of both public and private debt looms large. 
The gross debts of households and financial institutions are higher today as a share of national income than they were before the financial crisis. 
Nonfinancial corporate debt has fallen only slightly. 
And government debt, of course, has risen sharply, owing to bank bailouts and a sharp, recession-fueled decline in tax revenues. 
Yes, Europe is also wrestling with an aging population. 
Southern eurozone countries such as Italy and Spain have suffered from rising competition with China in textiles and light manufacturing industries. 
But just as the pre-crisis credit boom masked underlying structural problems, post-crisis credit constraints have greatly amplified the downturn. 
True, German growth owes much to the country’s willingness a decade ago to engage in painful economic reforms, especially of labor-market rules. 
Today, Germany appears to have full employment and above-trend growth. 
German leaders believe, with some justification, that if France and Italy were to adopt similar reforms, the changes would work wonders for their economies’ long-term growth. 
Yet what of Portugal, Ireland, and (especially) Spain, all of which have taken significant steps toward reform since the crisis? 
All are still experiencing double-digit unemployment rates amid moribund growth, and, as the last International Monetary Fund Fiscal Monitor made abundantly clear, all still suffer from significant debt problems. 
Debt overhang traps countries in a vicious circle. 
Exceptionally high public and private debts constrain a country’s options and are indisputably associated with slower growth, which in turn makes it difficult to escape a debt trap. 
Last spring’s campaign against anyone who dared to worry about the long-run effects of high debt largely ignored the substantial academic literature, just as a remarkably similar recent challenge to Thomas Piketty’s research on inequality took no account of a larger body of evidence. 
It is true that not all debt is created equal, and there is a strong case for adding more of it if the purpose is to finance highly productive infrastructure investments. 
Europe greatly lags many Asian countries in its efforts to expand the reach of broadband. 
Outside the Nordic countries, electricity networks are thoroughly Balkanized, and major efforts are needed to integrate them. 
Raising debt for the purposes of significantly increasing or ensuring long-run growth makes sense, especially in an environment of low real interest rates. 
A similar argument can be made for expenditures aimed at improving education, for example to improve Europe’s underfunded universities. 
Beyond growth-enhancing investment, however, the case for greater stimulus becomes more nuanced. 
Brad Delong and Larry Summers have argued that in a repressed economy, short-term increases in borrowing can pay for themselves, even if the expenditures do not directly increase long-run potential. 
By contrast, Alberto Alesina and Silvia Ardagna argue that in an economy with a large and inefficient government, debt-stabilization measures directed at reducing the size of government can actually be expansionary. 
I admit to being an outsider to this debate. 
(The word “austerity” does not appear once in my 2009 book with Carmen Reinhart on the history of financial crises.) 
My general sense, however, is that both views are extreme. 
In general, neither pure austerity nor crude Keynesian stimulus can help countries escape high-debt traps. 
Throughout history, other measures, including debt rescheduling, inflation, and various forms of wealth taxation (such as financial repression), have typically played a significant role. 
It is hard to see how European countries can indefinitely avoid recourse to the full debt toolkit, especially to repair the fragile economies of the eurozone’s periphery. 
The ECB’s expansive “whatever it takes” guarantee may indeed be enough to help finance greater short-term stimulus than is currently being allowed; but the ECB’s guarantee will not solve long-run sustainability problems. 
Indeed, the ECB will soon have to confront the fact that structural reforms and fiscal austerity fall far short of being a complete solution to Europe’s debt problems. 
In October and November, the ECB will announce the results of its bank stress tests. 
Because many banks hold a large volume of eurozone government debt, the results will depend very much on how the ECB assesses sovereign risk. 
If the ECB grossly understates the risks, its credibility as a regulator will be badly tarnished. 
If it is more forthright about the risks, there is a chance that some periphery countries might have difficulty plugging the holes, and will require help from the north. 
One hopes that the ECB will be forthright. 
It is high time for a conversation on debt relief for the entire eurozone periphery. 

How Fragile are Emerging Markets? 
CAMBRIDGE – Emerging-market equities and exchange rates are again under severe downward pressure, but are the underlying economies really as fragile as global traders seem to fear? 
The short answer, for a few, is probably “yes,” but for most, “not just yet.” 
For most countries, what we are seeing is a recalibration as investors incorporate the risk that China’s GDP might rise more slowly, the US Federal Reserve might start tightening monetary conditions more quickly, and policy backsliding in many countries might undermine potential growth. 
At the same time, Europe’s massive shift to a trade surplus (a key factor underpinning the region’s new-found stability) and the Japanese yen’s sharp depreciation are among myriad factors squeezing countries seeking to rein in current-account deficits. 
It seems like only yesterday that Goldman Sachs analysts were celebrating the growth miracle of the “BRICS” (Brazil, Russia, India, China, and South Africa) and the International Monetary Fund, in its April 2013 World Economic Outlook, was forecasting a three-speed global recovery led by emerging markets. 
What happened? 
The most popular culprit is the Fed, which has begun to taper its highly experimental policy of “quantitative easing,” or purchases of long-term assets aimed at supporting growth beyond what could be achieved with zero nominal interest rates. 
But the Fed’s role is almost certainly overblown. 
For one thing, the Fed’s retreat partly reflects growing confidence in the US economy, which should mean a stronger export market for most emerging economies. 
Moreover, the Fed’s modest tightening is being matched by a trend toward looser monetary policy in the eurozone and Japan; so, overall, advanced-country monetary policy remains highly accommodative. 
Uncertainty over China’s growth path is more fundamental. 
For more than a decade, China’s stunning growth has fueled a remarkable price boom that has flattered policymakers in commodity-exporting emerging markets from Russia to Argentina. 
Remember how the Argentines were able to thumb their noses at the pro-market “Washington Consensus” in favor of an interventionist “Buenos Aires consensus”? 
Now, not so much. 
China’s near-term growth is an open question, as its new leadership attempts to curb the unsustainable credit-fueled boom. 
Until recently, global markets had not seemed to recognize that a growth recession was even a possibility. 
Certainly, if there ever is a pause in China’s heady growth, today’s emerging-market turmoil will seem like a mere hiccup compared to the earthquake that will ensue. 
There are other notable, if less consequential, fundamentals in the mix. 
The shale-gas revolution in the US is changing the global energy equation. 
Energy exporters such as Russia are feeling the downward pressure on export prices. 
At the same time, hyper-low-cost energy in the US is affecting Asian manufacturers’ competitiveness, at least for some products. 
And, as Mexico reforms its energy sector, the range of pressures on Asian manufacturing will expand; Mexico is already benefitting from cost pressures in China. 
Japan’s Abenomics is also important for some countries, as the sharp depreciation in the value of the yen puts pressure on Korea in particular and on Japan’s Asian competitors in general. 
In the long run, a Japanese resurgence would, of course, be beneficial to the region’s economies. 
Stability in the eurozone has been perhaps the single most important positive factor underpinning market confidence in the last year. 
But, as periphery countries move into current-account balance and northern countries such as Germany run massive surpluses, the flip side has been deterioration in emerging-market surpluses, heightening their vulnerabilities. 
At the core of emerging-market problems, however, is policy and political backsliding. 
Here, there are significant differences among countries. 
In Brazil, the government’s efforts to weaken the central bank’s independence and meddle in energy and lending markets have harmed growth. 
Turkey is suffering acute challenges to its democratic institutions, as well as government pressure on the central bank. 
Russia’s failure to develop strong independent institutions has made it difficult for an entrepreneurial class to emerge and help diversify the economy. 
In India, central-bank independence remains reasonably strong, with the Reserve Bank of India now mulling a move to an inflation-targeting regime. 
But a sustained period of populist policies has weakened trend growth and exacerbated inflation. 
Nevertheless, some emerging markets are moving forward and stand to benefit from the turmoil if they are able to stay the course. 
Aside from Mexico, countries such as Chile, Colombia, and Peru are well positioned to gain from investments in institution-building. 
But, of course, new institutions can take decades, and sometimes longer, to consolidate. 
So, overall, how fragile are emerging markets? 
Unlike in the 1990’s, when fixed exchange rates were widespread, most countries now have shock-absorbing flexible rates. 
Indeed, today’s drama can be interpreted, in part, as a reflection of these shock absorbers at work. 
Emerging-market equities may have plummeted, but this, too, is a shock absorber. 
The real question is what will happen when the turmoil moves to debt markets. 
Many countries have built up substantial reserves, and are now issuing far more debt in domestic currency. 
Of course, the option of inflating away debt is hardly a panacea. 
Unfortunately, there is surely more drama to come over the next few years. 

Where Is the Inequality Problem? 
CAMBRIDGE – Reading Thomas Piketty’s influential new book Capital in the Twenty-First Century, one might conclude that the world has not been this unequal since the days of robber barons and kings. 
That is odd, because one might conclude from reading another excellent new book, Angus Deaton’s The Great Escape (which I recently reviewed), that the world is more equal than ever. 
Which view is right? 
The answer depends on whether one looks only at countries individually or at the world as a whole. 
The overarching fact in Deaton’s book is that over the last few decades, several billion people in the developing world, particularly in Asia, have escaped truly desperate levels of poverty. 
The same machine that has increased inequality in rich countries has leveled the playing field globally for billions. 
Looking from afar, and giving, say, an Indian the same weight as an American or a Frenchman, the last 30 years have been among the greatest in human history for improving the lot of the poor. 
Piketty’s brilliant book documents within-country inequality, with the main focus being on the rich world. 
Much of the cultural groundswell surrounding his book has come from people who view themselves as middle class within their own countries, but who are upper middle class or even rich by global standards. 
There are various arcane technical debates surrounding the facts that Piketty has established over the past 15 years with his co-author Emmanuel Saez. 
But I find their results persuasive, especially given that other authors, using completely different methods, have reached similar conclusions. 
Brent Neiman and Loukas Karabarbounis of the University of Chicago, for example, argue that labor’s share of GDP has been declining globally since the 1970’s. 
However, Piketty and Saez do not really offer a model; nor does this new book. 
And the lack of a model, combined with a focus on the world’s upper-middle-class countries, matters a lot when it comes to policy prescriptions. 
Would Piketty’s followers be nearly as enthusiastic about his proposed progressive global wealth tax if it were aimed at correcting the huge disparities between the richest countries and the poorest, instead of between those who are well off by global standards and the ultra-wealthy? 
Piketty argues that capitalism is unfair. 
Wasn’t colonialism unfair, too? 
In any event, the idea of a global wealth tax is replete with credibility and enforcement problems, aside from being politically implausible. 
Though Piketty is right that returns to capital have increased in the last few decades, he is too dismissive of the wide-ranging debate among economists concerning the causes. 
For example, if the main driver is the massive influx of Asian labor into globalized trade markets, the growth model put forth by the Nobel laureate economist Robert Solow suggests that eventually capital stocks will adjust and the wage rate will rise. 
Retirements from an aging labor force will eventually drive up wages as well. 
If, on the other hand, labor’s share of income is falling because of the inexorable rise of automation, downward pressures on that share will continue, as I discussed in the context of artificial intelligence a few years ago. 
Fortunately, there are much better ways to address rich-country inequality while still fostering long-term growth in demand for products from developing countries. 
For example, a shift to a relatively flat consumption tax (with a large deductible for progressivity) would be a far simpler and more effective way to tax past wealth accumulation, especially if citizens’ tax home can be linked to the locale where their income was earned. 
A progressive consumption tax is relatively efficient and does not distort savings decisions as much as today’s income taxes do. 
Why try to move to an improbable global wealth tax when alternatives are available that are growth friendly, raise significant revenue, and can be made progressive through a very high exemption. 
In addition to a global wealth tax, Piketty recommends an 80% marginal tax rate on income for the United States. 
Though I strongly believe that the US needs more progressive taxation, particularly of the top 0.1%, I don’t understand why he assumes that an 80% rate would not cause significant distortions, especially as this assumption contradicts a large body of work by the Nobel laureates Thomas Sargent and Edward Prescott. 
There are many practical policies that can be adopted to reduce inequality, in addition to a progressive consumption tax. 
Focusing on the US, Jeffrey Frankel of Harvard University has suggested the elimination of payroll taxes for low-income workers, a cut in deductions for high-income workers, and higher inheritance taxes. 
Universal pre-school education would enhance long-term growth, as would a much greater emphasis on lifetime adult education (my addition), possibly via online courses. 
Carbon taxes would help mitigate global warming while raising considerable revenues. 
In accepting Piketty’s premise that inequality matters more than growth, one needs to remember that many developing-country citizens rely on rich-country growth to help them escape poverty. 
The first problem of the twenty-first century remains to help the dire poor in Africa and elsewhere. 
By all means, the elite 0.1% should pay much more in taxes, but let us not forget that when it comes to reducing global inequality, the capitalist system has had an impressive three decades. 

Foreign-Aid Follies 
MUMBAI – The huge gap between the world’s richest and poorest countries remains one of the great moral dilemmas for the West. 
It also presents one of the greatest challenges for development economics. 
Do we really know how to help countries overcome poverty? 
In his eloquently written and deeply researched new book The Great Escape: Health, Wealth, and the Origins of Inequality, Princeton University’s Angus Deaton urges caution. 
For those interested in world poverty, it is unquestionably the most important book on development assistance to appear in a long time. 
Deaton suggests that far too often, Western aid serves to assuage donors’ guilt rather than improve recipients’ plight. 
This is particularly the case when naïve assistance serves to reinforce a dysfunctional status quo. 
Although Deaton supports select initiatives, particularly for delivering medical and technological knowledge, he questions whether the vast majority of aid passes the basic Hippocratic litmus test of “first do no harm.” 
For starters, assessing and implementing aid policy requires developing tools to gauge accurately where need is greatest. 
Economists have developed some useful indicators, but they are vastly less precise than politicians and the media seem to understand. 
Most experts agree, and Deaton concurs, that at least a billion people on the planet live in desperate circumstances resembling conditions that prevailed hundreds of years ago. 
Our failure to alleviate their plight is morally reprehensible. 
But where, exactly, are the greatest concentrations of poor people? 
Data are hard to come by and even harder to interpret. 
Attempts to convert national incomes into a common denominator are fraught with complications. 
To take one prominent example, there is a 25% margin of error on purchasing-power-parity comparisons between GDP in the United States and China. 
In other words, we cannot say whether Chinese output today equals 55% of US GDP or 92%. 
So much for precise forecasts of the date when China will overtake the US as the world’s largest economy; we won’t even know for sure when it happens! 
This problem is hardly unique to comparisons of China and the US; it applies with perhaps even greater force when comparing incomes of the poor in Mumbai with those of the poor in Freetown. 
Another major problem is measuring progress in a given country over time. 
How can one compare cost-of-living indices in different periods when new goods are constantly upending traditional consumption models? 
Consider the impact of cell phones in Africa, for example, or the Internet in India. 
Deaton goes on to offer a revealing critique of some of the most hyped and fashionable approaches to improving aid. 
For example, the “hydraulic model” of aid – the idea that if we simply pumped in more aid, better results would gush out – ignores the fact that funds are often fungible. 
Even if aid is narrowly targeted at say, food or health, a government can simply economize on expenditures that it might have made anyway and redirect them elsewhere – for example, to the military. 
Direct delivery of medical help is one of the best options, but it still can be a huge drain on already-scarce local resources – hospitals, doctors, and nurses. 
An influx of Western NGOs often bids talent away from nascent businesses that could help the country long after the NGOs reset their priorities and move on. 
Indeed, there is a striking parallel between the problems caused by aid inflows and the “natural resource curse” (or “Dutch disease” as it is termed in Western countries), whereby inflows into one economic sector – typically oil or minerals – drive up economy-wide prices (including the exchange rate), rendering other sectors uncompetitive. 
Moreover, a great deal of this aid is delivered in kind and for strategic reasons, often supporting ineffective and kleptocratic governments. 
Deaton observes that, in general, Western countries developed without receiving any aid. 
(Perhaps America’s post-World War II Marshall Plan in Europe is an exception, but that aid was intended more for reconstruction than for development.) 
China and India, too, have succeeded in lifting hundreds of millions of people out of poverty with relatively little Western aid (particularly China). 
Deaton argues that aid providers must be extremely careful not to interfere with political and social forces that, over time, can generate organic – and therefore more lasting – internal change. 
Another intellectually fashionable approach is to conduct small randomized trials to examine, say, the effectiveness of school-attendance incentives or immunization campaigns. 
Deaton rightly argues that this approach, now enshrined in World Bank procedures, is of very little use for understanding how to help a country develop more broadly. 
The results are often specific to a particular country’s circumstances, and there is no reason to presume that they would scale up when fully confronted with a developing country’s governance problems. 
The fact that people in several African countries appear to be worse off now than in 1960 is far more related to despotism and internal conflict than it is to the effectiveness of aid-delivery programs. 
Despite these caveats, Deaton’s message is fundamentally positive. 
For most of mankind, now is a better time than ever before to be alive. 
The path to development remains for others to follow. 
Highly targeted Western aid and advice can help, but donors must take more care not to stand in the way of the beneficiaries in assisting them. 

A Tear for Argentina 
CAMBRIDGE – Argentina’s latest default poses unsettling questions for policymakers. 
True, the country’s periodic debt crises are often the result of self-destructive macroeconomic policies. 
But, this time, the default has been triggered by a significant shift in the international sovereign-debt regime. 
The shift favors hardline creditors in bond issuances governed by US law. 
With emerging-market growth slowing, and external debt rising, new legal interpretations that make debt future write-downs and reschedulings more difficult do not augur well for global financial stability. 
There are no heroes in this story, certainly not Argentina’s policymakers, who a decade ago attempted unilaterally to force a massive generalized write-down on foreign bondholders. 
Economists who trumpeted the “Buenos Aires consensus” as the new way to run economies also look foolish in hindsight. 
The International Monetary Fund has long recognized that it made one too many loans to try to save Argentina’s unsustainable dollar peg as it collapsed back in 2001. 
This is not the first time that an Argentine default has upended international capital markets. 
According to the tabulation that Carmen Reinhart and I compiled in our 2009 book This Time is Different, Argentina has defaulted on seven previous occasions – in 1827, 1890, 1951, 1956, 1982, 1989, and 2001. 
Argentina may be almost as famous for its defaults as it is for its soccer teams, but it is hardly alone. 
Virtually every emerging-market country has experienced recurrent sovereign-debt problems. 
Venezuela is the modern-day record holder, with 11 defaults since 1826 and possibly more to come. 
Back in 2003, partly in response to the Argentine crisis, the IMF proposed a new framework for adjudicating sovereign debts. 
But the proposal faced sharp opposition not only from creditors who feared that the IMF would be too friendly to problem debtors, but also from emerging markets that foresaw no near-term risk to their perceived creditworthiness. 
The healthy borrowers worried that creditors would demand higher rates if the penalties for default softened. 
Recently, as an outgrowth of a reconsideration of the IMF’s lending to the periphery of Europe (and Greece in particular), the Fund has advanced another approach to debt rescheduling, one that might be easier to implement. 
The IMF now recognizes that the bulk of its financing was effectively being used to allow short-term creditors to exit loss-free. 
As a result, there was not enough money left over to help soften budget cuts necessitated by the sudden stop in foreign funding. 
The experience of the recent eurozone crisis stands in sharp contrast to the Latin American debt crisis in the 1980s, when banks were not allowed to exit precipitously from their loans. 
If the new proposal is adopted, the IMF would conditionally refuse funds to countries carrying debt burdens that Fund staff determine are most likely unsustainable; creditors would first have to agree to a “reprofiling” of debt. 
Reprofiling is a euphemism for debt restructuring, which allows countries to borrow from existing creditors for longer periods and at lower interest rates than they would be able to do on the open market. 
Although it is far from clear how easily the IMF could hold the line against hard-bargaining creditors, the new policy, if adopted, would toughen the Fund’s approach to cases where it finds itself repeatedly throwing good money after bad. 
At present, the United States seems reluctant to go along with the IMF’s proposal. 
Evidently, US authorities believe that in some situations geopolitics trump economics (reflected, for example, in the IMF’s recent re-entry into Ukraine after a string of failed programs). 
This American resistance is unfortunate. 
It would be far better if the US found ways simply to organize outright grants in exceptional cases like Ukraine, rather than design the international financial system around them. 
Given the recurring complications of adjudicating sovereign-debt contracts in foreign courts, and the world’s inability to organize a credible and fair procedure for foreign bankruptcies, perhaps the best idea is to steer the bulk of international debt flows through debtor-country courts. 
Jeremy Bulow and I made a proposal along these lines 25 years ago; it is still the right approach. 
In this scenario, countries interested in borrowing large amounts from abroad would need to develop institutions that made the promise to repay credible. 
By and large, experience supports this method. 
Indeed, the huge expansion in emerging-market domestic-debt issuance in recent years has helped reduce market tensions (though continuing reliance by corporates on foreign debt still leaves many countries vulnerable). 
But domestic borrowing is not a panacea. 
To believe that any country issuing debt in its own currency is risk-free as long as the exchange rate is flexible is astonishingly naive. 
For one thing, there is still inflation risk, particularly for countries with weak fiscal institutions and heavy debt burdens. 
Nonetheless, Argentina’s latest debt trauma shows that the global system for sovereign-debt workouts remains badly in need of repair. 
Deepening domestic debt markets – and perhaps change along the lines proposed by the IMF – is sorely needed. 

Why Wealth Taxes Are Not Enough 
CAMBRIDGE – Should advanced countries implement wealth taxes as a means of stabilizing and reducing public debt over the medium term? 
The normally conservative International Monetary Fund has given the idea surprisingly emphatic support. 
The IMF calculates that a one-time 10% wealth levy, if introduced quickly and unexpectedly, could return many European countries to pre-crisis public debt/GDP ratios. 
It is an intriguing idea. 
The moral case for a wealth tax is more compelling than usual today, with unemployment still at recession levels, and with deep economic inequality straining social norms. 
And, if it were really possible to ensure that the wealth levy would be temporary, such a tax would, in principle, be much less distortionary than imposing higher marginal tax rates on income. 
Unfortunately, while a wealth tax may be a sound way to help a country dig out of a deep fiscal pit, it is hardly a panacea. 
For starters, the revenue gains from temporary wealth taxes can be very elusive. 
The economist Barry Eichengreen once explored the imposition of capital levies in the aftermath of World Wars I and II. He found that, owing to capital flight and political pressure for delay, the results were often disappointing. 
Italy’s armada of Guardia di Finanza boats would hardly forestall a massive exodus of wealth if Italians see a sizable wealth tax coming. 
Over- and under-invoicing of trade, for example, is a time-tested way to spirit money out of a country. 
(For example, an exporter under-reports the price received for a foreign shipment, and keeps the extra cash hidden abroad.) 
And there would be a rush into jewelry and other hard-to-detect real assets. 
The distortionary effects of a wealth levy would also be exacerbated by concerns that the “temporary” levy would not be a one-off tax. 
After all, most temporary taxes come for lunch and stay for dinner. 
Fears of future wealth taxes could discourage entrepreneurship and lower the saving rate. 
In addition, the administrative difficulties of instituting a comprehensive wealth tax are formidable, raising questions about fairness. 
For example, it would be extremely difficult to place market values on the family-owned businesses that pervade Mediterranean countries. 
Wealth taxes that target land and structures are arguably insulated from some of these concerns, and property taxes are relatively underused outside the Anglo-Saxon countries. 
In theory, taxing immobile assets is less distortionary, though taxes on structures obviously can discourage both maintenance and new construction. 
So what else can eurozone governments do to raise revenue as their economies recover? 
Most economists favor finding ways to broaden the tax base – for example, by eliminating special deductions and privileges – in order to keep marginal tax rates low. 
Broadening the income-tax base is a central element of the highly regarded Simpson/Bowles proposals for tax reform in the United States. 
In Europe, efficiency would be enhanced by a unified VAT rate, instead of creating distortions by charging different rates for different goods. 
In principle, low-income individuals and families could be compensated through lump-sum transfer programs. 
Another idea is to try to raise more revenue from carbon permits or taxes. Raising funds by taxing negative externalities reduces distortions rather than creating them. 
Though such taxes are spectacularly unpopular – perhaps because individuals refuse to admit that the externalities they themselves create are significant – I regard them as an important direction for future policy (and I intend to suggest other ideas along these lines in future columns). 
Unfortunately, advanced countries have implemented very little fundamental tax reform so far. 
Many governments are giving in to higher marginal tax rates rather than overhauling and simplifying the system. 
In Europe, officials are also turning to stealth taxes, particularly financial repression, to resolve high public-debt overhangs. 
Through regulation and administrative directives, banks, insurance companies, and pension funds are being forced to hold much higher shares of government debt than they might voluntarily choose to do. 
But this approach is hardly progressive, as the final holders of pensions, insurance contracts, and bank deposits are typically the beleaguered middle class and the elderly. 
There is also the unresolved question of how much the periphery countries really should be asked to pay on their debilitating debt burdens, whatever the tax instrument. 
Although the IMF seems particularly enthusiastic about using wealth taxes to resolve debt overhangs in Spain and Italy, some burden sharing with the north seems reasonable. 
As the economists Maurice Obstfeld and Galina Hale recently noted, German and French banks earned large profits intermediating flows between Asian savers and Europe’s periphery. 
Unfortunately, arguing over burden sharing creates more scope for delay, potentially undermining the efficacy of any wealth tax that might finally be instituted. 
Still, the IMF is right – on grounds of both fairness and efficiency – to raise the idea of temporary wealth taxes in advanced countries to relieve fiscal distress. 
However, the revenues will almost certainly be lower, and the costs higher, than calculations used to promote them would imply. 
Temporary wealth taxes may well be a part of the answer for countries in fiscal trouble today, and the idea should be taken seriously. 
But they are no substitute for fundamental long-term reform to make tax systems simpler, fairer, and more efficient. 

Kentucky Fried University? 
Academics are easily flattered by talk about "knowledge management" and the "knowledge society." 
They often think this phrase highlights the central role of universities in society. 
In fact, it signals the opposite--that the wider society itself is a hotbed of knowledge production, over which universities do not enjoy any special privilege or advantage. 
This has caught academics off-guard, because they have traditionally treated knowledge as something pursued for its own sake, regardless of cost or consequence. 
Now they face increasing global pressure to open universities to the wider public, typically for reasons unrelated to the pursuit of pure knowledge. 
Today's universities are expected to function as dispensers of credentials and engines of economic growth. 
Consequently, academics are losing control of their performance standards to "knowledge managers." 
Universities, according to former Fortune editor Tom Stewart, are "dumb organizations" with too much "human capital" but not enough "structural capital." 
A fast food chain, on the other hand, is supposedly a "smart organization" because it makes the most of its relatively low-skilled staff through the alchemy of good management. 
Academia proceeds almost exactly in reverse, as department heads and deans struggle to keep track of what the staff are doing. 
McDonald's, unlike a university, is much more than the sum of its parts. 
Academics remain largely in denial about the impact of knowledge management. 
But the sheer increase in the number of university presidents drawn from business and industry implies that McDonald's and MIT may, at least in principle, be judged according to the same operational and performance standards. 
At the same time, it is unreasonable to expect the increasing number of academics on short-term contracts to defend the integrity of an institution that cannot promise them job security. 
Indeed, many academics--not just professional knowledge managers--have endorsed recent steps to disaggregate the "unity of teaching and research" that has defined the university since the early 19 th century. 
With the establishment of each new on-line degree program and science park, universities appear more vulnerable to this mindset. 
The two types of "post-academic" university that they represent--the one a diploma mill, the other a patent factory--share an overriding interest in benefiting those who can pay at the point of delivery. 
But universities have always been hard-pressed to justify their existence in such immediate cost-benefit terms. 
It would be a mistake to blame knowledge managers, or, for that matter, neo-liberal ideology, for this instrumental view of universities as "service providers." 
Even in the heyday of the welfare state, service provision was precisely what lay behind academia's appeal to policymakers. 
The public would pay higher taxes because either they or their children might qualify for a course of study that would improve their job prospects, or because researchers' discoveries might improve the quality of life. 
The same mentality operates today in an increasingly privatized funding environment. 
But this need not mean that universities become thoroughly commercialized. 
The corporate origin of universities is of more than historical interest here. 
Universities, along with churches, religious orders, guilds, and cities, were the original corporations. 
Commercial ventures came to be regularly treated as corporations only in the 19 th century. 
What originally entitled a university to corporate status under Roman law was its pursuit of aims that transcend the personal interests of any of its current members. 
Corporate status enabled universities to raise their own institutionally earmarked funds, which were bestowed on individuals who were "incorporated" on a non-hereditary basis, through examination or election. 
The oldest and most successful US universities were founded by British religious dissidents, for whom the corporate form remained vividly alive. 
From the 17 th century on, American graduates were cultivated as "alumni" who regard their university experience as a life-defining process to be shared, and thus worthy of receiving financial support from them. 
The endowments built through these donations allow successive generations to enjoy the same opportunity for enrichment. 
"Ivy League" universities like Harvard, Yale, and Princeton still charge the world's highest tuition fees, but only one-third of students pay the full amount. 
Universities are not, in fact, such dumb organizations. 
True, they must endeavor to be much greater than the sum of their parts. 
But this means that a university's value must not be measured only by the short-term benefits it provides for immediate clients. 
The ideal of uniting teaching and research promised just such a breadth of organizational vision, one worth updating today. 
After all, universities are distinctive in producing new knowledge (through research) that is then consolidated and distributed (through teaching). 
In the former phase, academia generates new forms of social advantage and privilege, while in the latter phase, it eliminates them. 
It is this unique brand of creative destruction that marks the university as one of our greatest entrepreneurial organizations. 

The Case for Burning Ivory 
JOHANNESBURG – Kenya is about to destroy its entire stockpile of elephant ivory. 
More than 100 metric tons of “white gold” – both illegally harvested (confiscated from poachers or traders) and naturally accruing (from natural mortality) – will go up in smoke this weekend. 
In China – where the majority of the world’s ivory is consumed or stockpiled – the recently reported price is $1,100 per kilogram, putting the total value of the material to be burned at roughly $110 million. 
To most economists, the idea of destroying something with so much value is anathema. 
But there are good reasons for a country – even one as poor as Kenya – to surrender its ivory wealth to the flames. 
For starters, stockpile destruction fortifies the credibility of demand-reduction campaigns in East Asia, without which the poaching problem will never be solved. 
Demand reduction aims to weaken the market for the product by changing consumer tastes. 
As prices drop, so does the incentive for poachers to kill elephants. 
When countries keep their stockpiles, however, they signal that they anticipate being able to sell ivory in the future. 
This undermines the credibility of demand-reduction efforts; if the trade is likely to be legalized one day, any stigma associated with ivory consumption will be eroded. 
Proponents of a regulated, legal international ivory trade argue that demand-reduction efforts can coexist with a limited legitimate supply. 
But this line of reasoning has a dangerous weakness: It assumes that a legal cartel – one proposed model for regulating supply – would crowd out illegal suppliers by providing ivory to the market at a lower cost. 
This assumption is dubious at best. 
The quantities traded through a legal mechanism would be insufficient to flood the market and suppress the price. 
Indeed, with legalized trade undermining demand-reduction efforts, the price of ivory is likely to remain high, ensuring that poaching continues. 
Some southern African countries argue that they should be allowed to sell their ivory in CITES-permitted, one-off sales to fund conservation efforts aimed at maintaining healthy elephant populations. 
But, aside from the low probability in some countries that the revenue would be directed to that end, it is not clear that much money would be made. 
Under CITES regulations, governments are permitted to sell only to other governments. 
But what other governments are willing to pay may be as low as one-tenth of the illicit value. 
And even then, governments can sell only naturally accrued ivory, not what was confiscated from poachers or illicit dealers. 
China and the United States are in the process of formulating bans on domestic ivory trade, so it is not clear which governments would be interested in purchasing African stockpiles. 
Vietnam and Laos are likely candidates, but they are also part of the infamous “golden triangle,” where illegal trade in wildlife and wildlife products continues to thrive. 
The possibility of the legal ivory trade shifting to poorly regulated markets calls for a concerted international response, spearheaded by African governments through coalitions like the Elephant Protection Initiative, together with countries such as China. 
Preserving – rather than burning – stockpiles is the inefficient choice. 
Maintaining a stockpile is administratively and operationally expensive – and often pointless. 
Inventory management is labor-intensive and technologically demanding. 
The ivory also must be air-conditioned to prevent the tusks from cracking or becoming brittle (important factors for attracting higher prices). 
Given the low probability of being able to sell ivory in the future, the cost of storing and protecting it is unlikely to be recouped. 
Meanwhile, criminal syndicates need only corrupt a handful of local officials to make off with the goods. 
Then there are the high opportunity costs of investment in maintaining stockpiles. 
The scarce human and financial resources allocated toward stockpile management could be more efficiently directed toward landscape preservation efforts (which can become self-sustaining over time through payment for ecosystem services). 
Finally, burning ivory worth millions of dollars has an undeniable symbolic impact. 
It sends a clear message: Ivory belongs to elephants and to no one else. 
And it makes clear that elephants are worth more alive than dead. 
Indeed, elephants’ value is anything but symbolic. 
Elephants are a keystone species for preserving important ecosystems. 
And yet rampant poaching is destroying elephant populations across Africa, killing, on average, 30,000 a year. 
Poaching also has a negative impact on communities, benefiting a few at the expense of the many. 
Recent research has shown that community conservancies (areas set aside for wildlife conservation) in northern Kenya are highly effective forms of landscape (and therefore elephant) preservation, provided the right incentives are in place. 
This is important because in countries like Kenya and Tanzania, the majority of wildlife exists outside formally protected areas. 
Kenya should be commended for making a wise – and efficient – decision. 
Its neighbors, as well as countries farther south, should follow its example. 
Ideally, all range-state countries should destroy their stockpiles to overcome the regional collective action problem. 
Doing so would send an unmistakable signal to the global market: Ivory is not for sale, not now and not in the future. 

A Loss for Kenyan Democracy 
NAIROBI – On March 27, eight columnists from the Nation Media Group resigned from the Nation newspaper, citing a lack of editorial independence. 
For Kenya’s largest daily, the exodus of top talent was the latest blow to an already tarnished reputation. 
The newspaper has suffered a series of embarrassing episodes in recent months, including high-profile firings, mass layoffs by the parent company, and allegations of state meddling in the editorial process. 
But the resignations were more than another repudiation of a once-vaunted institution; they were a reminder that the media remain a powerful player in Kenya’s fledgling democracy. 
When governments constrain journalists – in Kenya or elsewhere – they do so at their own peril. 
Like many African countries, Kenya has a long tradition of what might be called “activist journalism” – the dissemination of news and ideas to inspire political or social action. 
The practice has its roots in anti-colonialism; when the Nation was founded in 1960, it joined other pan-African publications like the New African and Drum to oppose colonial rule. 
By giving Kenyans a platform to voice their dissent, the Nation – led by its journalists – helped protesters articulate the ideas, slogans, and catchphrases that animated their movements. 
For many columnists, simply writing for these magazines was an act of resistance. 
In the West, activist journalism carries a negative connotation, suggesting bias. 
But in Africa, this type of journalism has historically kept the media honest by forcing owners to focus more on public good than on profit. 
In Kenya, however, this model is being eroded by the flow of public funds into private media outlets in advertising and through increasing repression. 
The media industry in Kenya is more lucrative than in most African countries, which has led some to assume that Kenya’s press is free. 
But, increasingly, the opposite is true. 
Many media companies are dependent on government advertising revenue, and, according to the Committee to Protect Journalists, this spending is being used as leverage by the authorities to censor unfavorable coverage. 
This is one element of the “state capture of the media” that the eight Nation columnists cited in resigning. 
To be sure, official censorship is not new in Kenya. 
After an attempted coup in 1982, many smaller newspapers were shut down by the state, and between 1988 and 1990, at least 20 newspapers were forced to cease publication permanently. 
And yet, even during periods of government repression, savvy journalists have always found audiences for their dissenting views. 
During Kenya’s democracy movement in the 1990s, one of the most influential was Wahome Mutahi, a humorist who skirted state control to parody the authoritarian president, Daniel Toroitich arap Moi. 
Mutahi eventually spent 15 months in the infamous Nyayo House torture chambers as punishment for his writings. 
Kenyan media experienced a revival in the post-Moi era; by 2012, the country had 301 radio stations and 83 television stations, up from only three television networks in the 1990s. 
But the growth in media outlets and liberalization of the country’s politics did not translate into more press freedom. 
Instead, after a brief reprieve between successful elections in 2002 and post-election violence in 2007, journalists were targeted once more. 
Crackdowns have ranged from the severe – including detention, torture, and disappearances – to the subtle. 
For example, when the political cartoonist Godfrey Mwampembwa, known as Gado, was forced from his post at the Nation in 2016, his bosses didn’t explicitly fire the newspaper’s most popular contributor. 
Rather, they simply refused to renew his contract when it expired. 
The same thing happened to David Ndii, an economist and opposition-affiliated columnist for the Sunday Nation. 
But these dismissals pale in comparison to a government-imposed blackout in early February. 
To prevent journalists from reporting on a political rally by then-opposition leader Raila Odinga, the Kenyan government forced three private television stations off the air for days, ignoring court orders to end the blockade. 
Journalists at one station, Nation Television, huddled in their offices as they coordinated with lawyers and sought to avoid arrest. 
When the dust eventually settled, executives from all three networks had resigned. 
Without courageous, pioneering journalists, Kenya’s pro-democracy movement may never have succeeded. 
Activist columnists helped the public understand political decisions by making policy accessible. 
In Mutahi’s case, the use of his own family in his parodies was a device intended to demonstrate that petty domestic despotism was no different from the political tyranny orchestrated by an autocratic president. 
Kenyans need similar means of reflection today. 
And yet, just when the country’s democratic institutions could most benefit from such a mirror, those who have historically held it up now believe they have no alternative but to put it down. 
For Kenya, the very public decline of the Nation has come at a high cost. 
But it has also demonstrated that press freedom means much more than letting journalists say what they want, when they want, and how they want. 
It also means holding media owners accountable. 
A highly competitive electoral system framed by a compromised media is more likely to fuel dissent than to stem it, and Kenya’s democracy will suffer so long as the country’s stewards of public enlightenment turn their backs on it. 

Good Fences Make Safe Species 
NAIROBI – African countries are often criticized for failing to meet their environmental challenges. 
Observers often cite loss of habitat in the face of population growth, land degradation, and industrialization. 
And then there is the most frequent charge of all: that an increase in poaching is endangering species such as elephants and rhinos. 
In Kenya, however, an innovative and extensive conservation project is underway. 
Begun in the Aberdare mountains in central Kenya, “Rhino Ark,” originally conceived to protect the highly endangered black rhino from the ravages of poachers, is supported by the very people who might have resisted it: the local communities in some of the country’s most productive farming areas. 
In 1988, conservationists decided to finance and build an electrified fence to protect an area of the Aberdare National Park bordering smallholder farms. 
The fence was designed to prevent intrusion from the human population and degradation of the park’s habitat. 
But it also protected the farmers, whose crops were regularly being destroyed by marauding elephant and other wildlife. 
Local farmers welcomed the initiative, which influenced the decision to expand the fence to surround the perimeter of the entire Aberdare range. 
The Aberdare Mountains, encompassing 2,000 square kilometers of indigenous forest and vital water catchment areas, as well as a national park, are vital to Kenya. 
Four of the country’s largest rivers, flowing north, west, east and south, begin there, providing water and power to seven major towns, including the capital, Nairobi. 
On the mountains’ lower slopes, four million farmers benefit from rich soil and plentiful rainfall. 
In the foothills and high slopes, 30% of Kenya’s tea and 70% of its coffee are produced. 
For 21 years, the fence around the Aberdares was painstakingly built, supported mainly by Kenya’s corporate sector, individual donors, and innovative fundraising exercises such as the Rhino Charge, an off-road motor event that has captured the Kenyan public’s imagination and annually raises more than $1 million. 
But, by the time the fully electrified fence was completed, in 2009, the government, under then-President Mwai Kibaki, had become an essential partner, with the Kenya Wildlife Service (KWS) and the Kenya Forest Service (KFS) deeply involved in the project. 
With Kenyan government backing, Rhino Ark has been able to turn its attention to other forested but degraded areas – such as Mount Eburu in the Mau Forests Complex, overlooking Lake Naivasha, and Mount Kenya, a World Heritage Site that has been heavily affected by human-wildlife conflicts. 
The 45-kilometer Mount Eburu fence was completed last year. 
The Mount Kenya fence, at 450 kilometers, will be longer than the Aberdares’ project and is now making rapid progress, with 80 kilometers completed. 
Of course, building a fence is just the beginning. 
Fences must be managed and maintained (some of the original fence posts in the Aberdares, for example, have had to be replaced), wildlife corridors must be developed, and local communities require support. 
All areas are kept under surveillance by air and foot patrols along the fence line – a constant monitoring process with considerable cost implications. 
The benefits, however, are significant. 
The fences keep the authorities fully alert to any incidents of poaching – particularly of elephant, rhino, and exceptionally rare species such as the Mountain Bongo antelope, which now exist only in the Aberdares, Mount Kenya, and the Mau Forests Complex, including Mount Eburu. 
Local communities are involved in all areas of fence and forest maintenance. 
In effect, they are the guardians of the fences, keeping them clear of vegetation and repairing damage caused by wildlife and other factors – and learning new skills in the process. 
The longer-term goal is the protection of these critical forests in perpetuity. 
To achieve this, endowment funds are being established as public-private partnerships, bringing together the Rhino Ark, the KWS and the KFS, and representatives from local communities. 
So-called trust deeds, set up locally, will manage these funds, which will eventually pay for the fences’ maintenance. 
The Aberdare Trust Deed became effective last October. 
The region’s hard-working farmers can now see added value in co-existing with the fence. 
Since the completion of the Aberdares fence, the value of local farmers’ land has quadrupled. 
They can work their fields in peace for the first time in more than a century, their children can walk to and from school without fear of being attacked by wild animals, and conservation is now part of the curriculum. 
The main lesson is straightforward: Good fences are good for everyone. 

Kenya’s Democratic Hope 
Kenyans have much to celebrate this week. 
They lined up in large numbers, peacefully cast their ballots, and resoundingly rejected a flawed constitution that had been hastily forced upon them. 
The November 21 referendum marks another pivotal step towards consolidating Kenya’s transition to a real democracy. 
The “no” vote not only forestalled attempts by President Mwai Kibaki and his inner circle to tighten their grip on power, but it also confirmed to ordinary Kenyans the power of the ballot box. 
While the Kenyan public appeared to show their high regard for legal process and participatory democracy, the run-up to the referendum revealed the government’s much uglier face. 
The Kibaki administration used this year to entrench power in the hands of a small ethnic Kikuyu clique. 
Reformers within the government not only capitulated to the backsliding, but actively contributed to it. 
Two years ago, the picture looked a bit brighter. 
Billing itself as a reform government that would promote respect for human rights and the rule of law, the Kibaki government promised Kenyans a new constitution within 100 days of taking office in 2003. 
The draft constitution had been many years in the making and had been crafted following extensive national consultations. 
It contained provisions that would have removed excessive presidential powers and given Kenyans a stronger bill of rights. 
What the Kibaki government failed to mention was that it would change this draft at the last minute. 
After stalling for two and a half years, the day before the draft constitution was due to expire, the government hastily pushed through Parliament an alternate draft that preserved strong presidential powers, weakened the bill of rights, and rigged the electoral percentages needed to win the presidency. 
The participatory process, so critical in any constitution making, was hijacked. 
The public was presented with one choice: “yes” or “no.” 
The frenzied campaigning for the constitutional referendum began in uproar. 
Through a combination of financial incentives and menacing threats, including two incidents of police shootings during demonstrations, the Kibaki government ordered the nation to vote yes. 
The rhetoric of reform was dropped as President Kibaki handed out title deeds of national trust and parkland to gain votes. 
Public employees were informed that the draft constitution was a government project that they had to support, and newspaper and broadcast journalists were warned that their licenses could be revoked after a radio station aired an interview with a parliamentarian who opposed Kibaki’s constitution. 
Anticipating the 2007 election, the government announced the creation of 47 new electoral districts. 
These steps barely veiled an agenda intended not only to guarantee electoral victory, but also to cement political dominance by the Kibaki’s ethnic group. 
But ordinary people rejected Kibaki’s power play, reclaiming their nation’s path through the ballot box – an idea that is still almost unheard of in the Kenyan context. 
Kenya’s bumpy road to democracy is no different from that of many other countries in Africa whose political transitions were heralded with high expectations. 
Kenya has suffered the inevitable democratic backsliding, the continued corruption, and the unfulfilled reform agendas that remain persistent themes elsewhere on the continent. 
One of the most important beacons of hope remains a change in mindset of the Kenyan public. 
Having been buoyed by the successful and peaceful 2002 election that brought in the promise of change, the Kenyan public remains loudly outraged by the government’s failures to make good on its promises. 
Radio call-in shows have burgeoned and public discourse is at its most lively. 
While public euphoria and high hopes have been dampened, Kenyans remain resolutely engaged in the democratic process. 
The Kibaki government should be acknowledged for gracefully conceding defeat, but true credit goes to the Kenyan public for its unwillingness to allow the authorities to dispense with the rule of law. 
Ordinary Kenyans played a key role in changing the outcome of what, ten years ago, would have been a done deal. 
The many other Africans who lament their nations’ flagging democratic transitions would do well to draw strength from Kenya’s milestone. 
The international community’s challenge will be to help ensure that the political space claimed by the Kenyan public remains open. 


When Shall We Overcome? 
NEW YORK – In 1967, riots erupted in cities throughout the United States, from Newark, New Jersey, to Detroit and Minneapolis in the Midwest – all two years after the Watts neighborhood of Los Angeles exploded in violence. 
In response, President Lyndon B. Johnson appointed a commission, headed by Illinois Governor Otto Kerner, to investigate the causes and propose measures to address them. 
Fifty years ago, the National Advisory Commission on Civil Disorders (more widely known as the Kerner Commission), issued its report, providing a stark account of the conditions in America that had led to the disorders. 
The Kerner Commission described a country in which African-Americans faced systematic discrimination, suffered from inadequate education and housing, and lacked access to economic opportunities. 
For them, there was no American dream. 
The root cause was “the racial attitude and behavior of white Americans toward black Americans. 
Race prejudice has shaped our history decisively; it now threatens to affect our future.” 
I was part of a group convened by the Eisenhower Foundation to assess what progress had been made in the subsequent half-century. 
Sadly, the Kerner Commission report’s most famous line – “Our Nation is moving toward two societies, one black, one white – separate and unequal” – still rings true. 
The just-published book based on our efforts, Healing Our Divided Society: Investing in America Fifty Years After the Kerner Report, edited by Fred Harris and Alan Curtis, makes for bleak reading. 
As I wrote in my chapter, “Some problematic areas identified in the Kerner Report have gotten better (participation in politics and government by black Americans – symbolized by the election of a black president), some have stayed the same (education and employment disparities), and some have gotten worse (wealth and income inequality).” 
Other chapters discuss one of the most disturbing aspects of America’s racial inequality: inequality in securing access to justice, reinforced by a system of mass incarceration largely targeted at African-Americans. 
There is no doubt that the civil rights movement of a half-century ago made a difference. 
A variety of overt forms of discrimination were made illegal. 
Societal norms changed. 
But rooting out deep-seated and institutional racism has proven difficult. 
Worse, President Donald Trump has exploited this racism and fanned the flames of bigotry. 
The core message of the new report reflects the great insight of the civil rights leader Martin Luther King, Jr.: achieving economic justice for African-Americans cannot be separated from achieving economic opportunities for all Americans. 
King called his August 1963 march on Washington, which I joined and at which he delivered his ringing, unforgettable “I Have a Dream” speech, a march for jobs and freedom. 
And yet the economic divide in the US has grown much wider, with devastating effects on those without a college education, a group that includes almost three-quarters of African-Americans. 
Beyond this, discrimination is rampant, if often hidden. 
America’s financial sector targeted African-Americans for exploitation, especially in the years before the financial crisis, selling them volatile products with high fees that could, and did, explode. 
Thousands lost their homes, and in the end, the disparity in wealth, already large, increased even more. 
One leading bank, Wells Fargo, paid huge fines for charging higher interest rates to African-American and Latino borrowers; but no one was really held accountable for the many other abuses. 
Almost a half-century after the enactment of anti-discrimination laws, racism, greed, and market power still work together to the disadvantage of African-Americans. 
There are, however, several reasons for hope. 
First, our understanding of discrimination is far better. 
Back then, the Nobel laureate economist Gary Becker could write that in a competitive market, discrimination was impossible; the market would bid up the wage of anyone who was underpaid. 
Today, we understand that the market is rife with imperfections – including imperfections of information and competition – that provide ample opportunity for discrimination and exploitation. 
Moreover, we now recognize that the US is paying a high price for inequality, and an especially high price for its racial inequality. 
A society marked by such divisions will not be a beacon to the world, and its economy will not flourish. 
The real strength of the US is not its military power but its soft power, which has been badly eroded not just by Trump, but also by persistent racial discrimination. 
Everyone will lose if it is not addressed. 
The most promising sign is the outpouring of activism, especially from young people, who realize that it is high time that the US lives up to its ideals, so nobly expressed in its Declaration of Independence, that all men are created equal. 
A century and a half after the abolition of slavery, the legacy of that system lingers. 
It took a century to enact legislation ensuring equal rights; but today, Republican-controlled courts and politicians often renege on that commitment. 
As I concluded my chapter, “An alternative world is possible. 
But 50 years of struggle has shown us how difficult it is to achieve that alternative vision.” 
Further progress will require determination, sustained by the faith expressed in the immortal words of the spiritual that became the hymn of the civil rights movement: “We shall overcome.” 

Kerry and Europe 
Those whom the gods would destroy, they grant their wishes. 
Those in Europe and around the world who yearn for a victory by John Kerry in the US presidential election ought to keep that bit of ancient Greek wisdom in mind. 
During the Cold War, America was the natural leader of the Atlantic community, but the price of this leadership was that the US had to accept the autonomy and influence of its European allies. 
After the terrorist attacks of September 11, 2001, President Bush embarked on a unilateral foreign policy. 
The traditional Atlantic alliance was replaced by what the US called "coalitions of the willing," where "the mission determines the coalition," not historic alliances. 
This policy divided Europe. 
It has also fueled deep divisions in the US presidential campaign, with one of the most potent arguments used by Kerry being that he will restore trust between America and its allies; that as president he will recruit international help in Iraq. 
America undoubtedly needs more allies to bring Iraq's chaos under control and to build an Iraqi state that is seen as legitimate both by Iraqis and the world. 
Allies are seen as an answer to America's twin credibility and legitimacy deficits in its occupation of Iraq. 
But can a Kerry-led US get a fresh start in Europe? 
Will a President Kerry really be able to rally allies to America's side? 
Iraq's mayhem has hardened the antagonism of countries like France and Germany, which led the opposition to the war in the first place. 
Even countries that rallied to Bush's call for help, like my homeland, Poland, are now wary of their involvement. 
Consider the attitudes of France and Germany. 
Their leaders can scarcely hold their tongues, so badly do they want a Kerry victory. 
But they are not going to change their policy to help Kerry win, and they won't change even if he does. 
As a gesture intending to boost Kerry's chances, German Defense Minister Peter Struck suggested that his country might reconsider its position on troops in Iraq. 
But Chancellor Gerhard Schröder instantly shot down that trial balloon, declaring: "To be clear, we will send no troops to Iraq." 
Actually, Germany, like most European countries, is politically and logistically unable to send meaningful military forces to Iraq. 
France, which did ponder sending 15 000 soldiers to Iraq had the UN given its blessing to the war, is as clear as Schröder. 
According to Michel Barnier, France's Foreign Minister, "Neither today, nor tomorrow," will French troops be sent. 
Both countries firmly believe that military success in Iraq is impossible. 
So will transatlantic relations remain as poisoned as they are now if Kerry wins? 
Is Texas swagger merely to be replaced by the distinguished disdain of a Boston Brahmin? 
This is probably too pessimistic. 
Europe cannot give an openly negative answer to Kerry's request for help, because that would be a slap in the face to the most pro-European American likely to be elected president anytime soon. 
Such a rejection would not only put transatlantic relations even more at risk than they are today; it would also put relations between European countries in peril. 
So some compromise must be found should Kerry win. 
Fortunately, one is possible. 
The first part is purely face-saving: both parties must simply declare their good will. 
Today, European leaders are unlikely to throw even that slender lifeline to Bush. 
The reality behind such a declaration is that Europe would deliver low-level military and economic involvement in Iraq. 
Most European leaders understand the tiny wiggle room that Kerry will have if elected. 
The near certainty that the House of Representatives will be in Republican hands, and perhaps the Senate, too, means that America's Congress will pounce on any supposed attempt by Kerry to "sell out" Bush's war. 
So Kerry may put even more pressure on Europe to help out in Iraq than the unilateralist Bush ever did. 
But there is a second, more fundamental, part to any viable compromise: a redefinition of transatlantic relations. 
The key point here is joint recognition that a fundamental transatlantic community of values exists, and that both sides need each other. 
That transatlantic community must jointly feel responsible for maintaining peace and stability in the world. 
The US must accept this principle, and recognize that Europe is a partner, not merely a servant, whether willing or unwilling, of American orders. 
If burdens are to be shared, decisions must be shared as well. 
This will require that America recognize the validity of Europe's view of the Israel-Palestinian conflict as the major roadblock toward a peaceful Middle East. 
Europe, for its part, must not only show that it feels responsible for the world, but that it is ready and willing to act accordingly by contributing in a significant way to reconstructing Iraq. 
Europe's military means may be limited, but it has important experience in peacekeeping and "state building" that can be brought to bear. 
Is Europe really ready to undertake such an effort if its wish for a Kerry victory comes true? 

Kerry vs. Bush: Will Reason Prevail? 
With over 1,000 US deaths in Iraq, and the huge pressures that the occupation of that benighted country has put on American troops around the world, it is clear that - for the first time in decades - foreign policy issues may determine the outcome of a US presidential election. 
Ordinary Americans are asking themselves the same questions that people around the world are asking: how should America's global supremacy be used? 
What price must be paid for that supremacy to be maintained? 
What limits on the use of US military power are acceptable or necessary? 
These have long been dominant questions in America's strategic debate. 
But, after the terrorist attacks of September 11, 2001, they became confused with another debate, one far more important for a US electorate that feels threatened: how can alliances and multilateral institutions protect Americans? 
John Kerry's great virtue has been to resist confusing the demand for security and peace with the hegemonic impulses of America the hyper-power. 
Nationalist and neo-conservative currents within the Bush administration believe that unilateral action best serves US interests because it handcuffs American power the least. 
On this view, the security of the US can be guaranteed through energetic military action, with or without allies. 
Hence the Bush administration's tendency to weaken the ties of America's permanent alliances, including those that NATO represents. 
Unilateral announcement of troop reductions in Europe and Asia, where US forces primarily serve (as in South Korea) to dissuade aggression, can only be seen as a corollary of this tendency. 
The Bush doctrine's bedrock notion is that of "pre-emptive war," a doctrine that lacks international legitimacy and that therefore can usually count on only a limited number of allies. 
The idea behind pre-emptive wars is that American force should be projected through high-tech, blitzkrieg type wars waged from US soil, or from the soil of uncritical allies. 
On this view, NATO is merely to serve as a means to mobilize Europeans to tackle the inevitable postwar stabilization and reconstruction missions - obviating the need for the US to place its forces under NATO command. 
This is what happened in Afghanistan. 
But as NATO's Secretary General has said, if it is the mission that defines the coalition, then NATO - a permanent alliance - is no longer needed. 
John Kerry is focused upon the same type of security problems as Bush. 
This leaves many observers skeptical about the possibility for real change. 
Where he differs fundamentally from Bush is in his belief that resolving international problems that affect the US almost always calls for the support of others. 
He therefore considers the revival of America's alliances to be a key foreign policy priority, and he has proposed that US forces in Iraq should be integrated into a NATO operation, as long as this remains under US command. 
Acting jointly means that the US will have to take into account other interests and views - views that may not always be in harmony with its own. 
America will have to accept a world that is regulated not by the US unilaterally, but by global institutions and permanent alliances. 
And the norms and rules that govern international institutions constitute a boundary on American power - and thus as a check on its hegemony. 
Kerry and a growing number of Americans recognize that accepting limits on US power and the use of military force are a precondition for America's ultimate security, that what binds can also strengthen, and that such limits will reinforce America's ability to tackle the crisis in Iraq. 
Kerry knows that in most cases military power alone cannot be decisive, as there are other dimensions of power - so-called "soft power" - that are essential to resolving crises and establishing peace. 
These dimensions include international legitimacy, values (including tolerance), and public opinion. 
The coming US election recalls a famous debate described by Thucydides in his History of the Peloponnesian War, concerning how Athens should respond to the revolt of Mytilene. 
The vote supported those who felt that "those who make wise decisions are more formidable to their enemies than those who rush madly into strong action." 
Let us hope that reason also prevails this time round. 

Problem Solving in the Anthropocene 
STOCKHOLM – Take a deep breath. 
Savor it for a moment. 
Now consider this: None of our modern human ancestors ever breathed anything like it – and, the way things are going, nor will our descendants. 
Since the Industrial Revolution began, human activity has substantially changed the atmosphere’s composition. 
Carbon-dioxide levels are higher today than they have been in at least 800,000 years. 
The amount of nitrogen and sulfur circulating through the Earth system has doubled. The ocean’s pH is changing at an unprecedented rate, reaching levels of acidity that marine organisms have not experienced in the last 20 million years. 
Clearly, humans – who now occupy almost 40% of the planet’s ice-free land surface – are shaping many of the planet’s fundamental processes. 
According to Nobel laureate Paul Crutzen, this shift is so profound that it amounts to the beginning of a new epoch: the Anthropocene. 
While some scientists believe that the Anthropocene actually began when humans started farming and domesticating animals, others (including me) consider it to be a more recent development. 
But, regardless of when the Anthropocene began, it is clear that humanity’s impact on the planet increased substantially after World War II’s end. 
Indeed, around 1950, the world seems to have reached a tipping point, with practically every factor that heightens humanity’s impact on the planet – population, GDP, fertilizer use, the proliferation of telephones, and paper consumption, to name only a few – beginning to increase rapidly. 
During this period, which the scientist Will Steffen dubbed the “Great Acceleration,” the human population became sufficiently large and connected, with high enough consumption, to become a major global force. 
In a 2009 study, scientists concluded that, by crossing any of nine “planetary boundaries” – climate change, biodiversity loss, disruption of nitrogen and phosphorus cycles, land use, freshwater extraction, ocean acidification, ozone depletion, atmospheric aerosol loading, and chemical pollution – humans would increase the risk of fundamentally changing the Earth system. 
Given that these boundaries are closely interlinked, allowing trends toward any of them to continue, especially at the current rate, would drive the environment into unknown territory, potentially causing serious damage to the systems that underpin human survival. 
In order to cope with the unique challenges of the Anthropocene, humans need a new approach to management and strategic decision-making. 
Developing successful strategies will require abandoning long-held assumptions that worked in the past, but that have become counterproductive myths today. 
One such myth is that it is best to tackle one problem at a time with straightforward, targeted solutions. 
While this approach may be appealing, it is inadequate to address today’s most pressing issues. 
For example, producing and delivering nutritious food consistently to upwards of nine billion people by mid-century has implications for water and energy consumption, agricultural development and land use, the nitrogen and phosphorus cycles, and ocean acidification, not to mention biodiversity loss, such as through overfishing. 
Given this, the Green Revolution’s narrow, production-focused approach cannot overcome food insecurity in the future, even though it produced truly impressive output increases in the past. 
The world needs an innovative, comprehensive strategy aimed at optimizing the entire food system – for example, by improving fertilizer and water use and food transportation and storage; by ensuring that adequate nutrition is accessible and affordable for all; and by changing communities’ eating habits to include less resource-intensive food. 
The trouble is that complexity can be overwhelming, so people often prefer to break down complex systems into individual components. 
Rather than consider, say, eradicating extreme poverty and averting global warming in tandem – and developing mutually reinforcing strategies to achieve these goals – proposed solutions focus on one or the other, undermining their effectiveness. 
Of course, addressing interconnected issues simultaneously carries its share of challenges. 
For one thing, no single person or group has enough knowledge or experience to solve all of the problems afflicting a complex system at once. 
But a wider community – including governments, businesses, researchers, philosophers, faith communities, and even poets and artists – could devise and implement holistic strategies. 
Success will depend on participants’ willingness to cooperate and their commitment to put evidence before ideology. 
Thus, the real challenge lies in marshaling such an inclusive community – something at which global leaders have not proved adept. 
A second major challenge is that resources are limited, making it impossible to solve all of the world’s problems at once. 
In this context, the ability to prioritize effectively is essential. 
But, rather than emphasizing one problem over another, the top priority should be building resilience into all global systems. 
Mechanisms aimed at solving a problem in one system should not be allowed to compromise another system’s resilience. 
Another challenge will be to devise new metrics to replace GDP as the leading measure of human well-being. 
Even Simon Kuznets, the main architect of the concept of GDP, recognized that it does not account for many of the factors affecting human well-being; he argued that it should be used “only with some qualifications.” 
In the Anthropocene, GDP must be part of an array of metrics for assessing economic, natural, and social capital – that is, the value of the goods and services produced, as well as the dignity of the ecosystems and social structures that underpin this output. 
Navigating the Anthropocene effectively and ethically is perhaps the most daunting challenge that modern humans have faced. 
Overcoming it will require a smarter approach to strategic decision-making and a broader understanding of innovation. 
It is time for us to rise to the challenge. 

How Can Countries Reduce Poverty Faster? 
KUALA LUMPUR and MANCHESTER – Can the world end poverty by 2030, the target set by the United Nations Agenda for Sustainable Development? 
The UN General Assembly recently reaffirmed this deadline but conceded that meeting it will require “accelerating global actions” to tackle poverty’s causes. 
As the international community explores new solutions, lessons from the past could be instructive. 
Poverty reduction has been central to development policy for decades. 
During the 15 years of the Millennium Development Goals (MDGs), the predecessor to the Sustainable Development Goals (SDGs), the percentage of people living in poverty – defined as less than $1.90 a day – declined significantly, from nearly 27% in 2000, when the MDGs began, to about 9% in 2017. 
At first glance, the rate of poverty reduction in the first few years of the SDGs has also been impressive. 
Between January 2016 and June 2018, an estimated 83 million people were lifted out of extreme poverty. 
And yet, to remain on track to meet the 2030 target date, about 120 million people should have escaped poverty during that period. 
Despite the welcome gains, the pace of progress has been less than satisfactory. 
In a recent paper co-authored for the journal World Development, we examined what factors drive successful poverty reduction. 
Using poverty statistics from developing countries during the MDGs era, we assessed whether countries with higher levels of income poverty – that is, more people living on less money – experienced faster reductions in their poverty rates than economies with lower income-poverty levels. 
Using limits of $1.25 and $2 per person per day, we found that poverty tended to decrease faster in countries that started out poorer. 
But these findings, while positive, tell only part of the story. 
In many countries, the end of poverty remains a distant goal. 
For example, at the current pace of poverty reduction, we estimate that Mali, where 86% of the population lived on less than $1.25 a day in 1990, will require another 31 years to eradicate extreme poverty altogether. 
But even in Ecuador, where only 7% of the population lived on less than $1.25 a day in 1990, eliminating poverty will take at least another decade. 
The differing experiences of countries in Africa and Asia illustrate that while adoption of the MDG agenda did accelerate poverty reduction, the degree of progress has varied widely. 
In the early 1990s, poverty levels in Nigeria, Lesotho, Madagascar, and Zambia were similar to those in China, Vietnam, and Indonesia. 
But by the time the MDGs ended in 2015, the Asian countries had reduced levels of poverty dramatically; the African countries had not. 
This divergence continues. 
Today, extreme poverty is mostly contained to Africa; according to the World Bank’s 2018 Poverty and Shared Prosperity report, 27 of the world’s 28 poorest countries are on the continent, and each has a poverty rate above 30%. 
In fact, at current rates of poverty reduction, more than 300 million people in Sub-Saharan Africa will still be poor in 2030. 
Many factors have contributed to the shifting geography of poverty. 
In Africa, weak economic performance – fueled by conflict, ineffective policies, ethnic fragmentation, and external shocks – has made it more difficult for countries to fund poverty-alleviation programs. 
But the most important factor may be state capacity. 
After all, weak state institutions cannot effectively deliver public goods and services. 
Of course, this leads to another question: what factors determine a state’s capacity? 
In general, states work better when ruling elites are bound by limits on their power. 
But administrative experience also plays a role. 
China, with a slightly longer period of modern statehood than most of its younger African counterparts, may simply have developed a greater ability to administer its territory. 
And yet, whatever the reason for the variation, there is no doubt that state capacity is one of the key ingredients for successful poverty reduction. 
We found that during the MDGs, high-poverty countries with strong state institutions were able to reduce poverty twice as fast as countries with feeble capacity, and were more likely to achieve the MDGs’ target of halving poverty by 2015. 
Poverty eradication remains a top priority for the 193 governments that have adopted the SDGs. 
But as the international community learned from the MDGs, goals do not guarantee progress. 
To ensure that the 725 million people who remained in poverty at the end of MDGs period can escape requires investing in programs that aim at building effective states. 
Otherwise, an end date for poverty will remain elusive. 

Keyboard Cops 
NEW YORK – Almost no one had read the Cyber Intelligence Sharing and Protection Act (CISPA) before it was rushed through the United States House of Representatives in late April and sent to the Senate. 
CISPA is the successor to SOPA, the “anti-piracy” bill that was recently defeated after an outcry from citizens and Internet companies. 
SOPA, framed by its proponents in terms of protecting America’s entertainment industry from theft, would have shackled content providers and users, and spawned copycat legislation around the world, from Canada and the United Kingdom to Israel and Australia. 
Now, with CISPA, the clampdown on Internet freedom comes in the guise of a bill aimed at cyber terrorism that should give Internet entrepreneurs – and all business leaders – nightmares. 
And yet, this time, major Internet and technology companies, including Facebook and Microsoft, supported the bill, on the grounds that it would create a clear procedure for handling government requests for information. 
Microsoft, at least, belatedly dropped its support after recognizing that the law would allow the US government to force any Internet business to hand over information about its users’ online activities. 
But the bill is far more alarming than that. 
For example, “the head of a department or agency of the Federal Government receiving cyber threat information…shall provide such cyber threat information to the National Cybersecurity and Communications Integration Center of the Department of Homeland Security.” 
No actual threat need be made. 
And what counts as “threat information” is defined so broadly that it can mean anything. 
“Notwithstanding any other provision of law,” the government may rely on “cybersecurity systems to identify and obtain cyber threat information.” 
The vague concept of “cyber threat information” does not just let DHS investigate anyone. 
By including information pertaining to “a vulnerability of a system or network of a government or private entity,” and the “theft or misappropriation of private or government information, intellectual property, or personally identifiable information,” the bill appears to target whistleblowers and leakers, and threatens investigative journalism. 
The respected Internet technology site Techdirt has called the bill “insanity”: “CISPA can no longer be called a cybersecurity bill at all. 
The government would be able to search information…for the purposes of investigating American citizens with complete immunity from all privacy protections as long as [it] can claim someone committed a ‘cybersecurity crime.’” 
Indeed, the DHS may look through data transmitted online without restraint, regardless of what it ultimately finds. 
And, in this respect,business leaders who believe that this bill is aimed at terrorists – or “at most” at the domestic activists and documentarians who can make it harder for them to operate – should be careful about what they wish for. 
Indeed, because the definition of cyberterrorism is so broad and subjective, US business leaders who are pushing for CISPA risk exposing themselves to the DHS’s power to scrutinize their personal lives, subpoena their bank records, and disrupt their electronic communications. 
And the law would give the DHS similar control over the personal and financial lives of anyone who does business in the US or with American companies – a power that the US government has already tried to assert by issuing a subpoena for Icelandic legislator Birgitta Jonsdottir's personal bank records. 
Everyone has secrets: love affairs, substance-abuse problems, mental-health diagnoses, heterodox sexual preferences, or questionable discussions with accountants. 
In a strong civil society, these personal matters properly remain private. 
In a surveillance society, they become leverage. 
I am fearful of the effects of unrestrained domestic surveillance for specific reasons: I worked in two US presidential campaigns, and saw firsthand the standard tactics – nonviolent but still mafia-inflected – of high-level politics. 
There was no shortage of privately contracted surveillance and wiretapping. 
Campaigns routinely planted spies – interns, household staff, or even lovers – in the opposing camp, and devoted vast numbers of man-hours to combing through private records in opposition research. 
The results were then regularly used behind the scenes to bully, intimidate, and coerce targets. 
Most of these “scandals” never saw the light of day – the goal was pressure, not disclosure. 
CISPA would give the same power to the DHS. 
America’s business leaders may think that they are immune, but the bill’s definition of “a threat” is so vague – with no distinction between a “threat” to the Internet and any random, even metaphorical “threat” on the Internet – that the DHS may keep tabs on anyone who says something that irks someone in a cubicle. 
If CISPA enters into US law, alongside the recently enacted National Defense Authorization Act – which gives the government the power to detain any American for anything forever – fundamental civil liberties will be threatened in a way that no democracy can tolerate. 
And because so much of the freedom of the Internet around the world derives from the freedom of expression that until recently characterized the US, enactment of CISPA poses a similar threat around the world. 
The good news is that President Barack Obama has vowed to veto CISPA. 
The bad news is that he made – and then broke – a similar vow on the NDAA. 

Keynes versus the Classics: Round Two 
LONDON – The economist John Maynard Keynes wrote The General Theory of Employment, Interest, and Money (1936) to “bring to an issue the deep divergences of opinion between fellow economists which have for the time being almost destroyed the practical influence of economic theory…” Seventy years later, heavyweight economists are still at each other’s throats, in terms almost unchanged from the 1930’s. 
The latest slugfest features New Keynesian champion Paul Krugman of Princeton University and New Classical champion John Cochrane of the University of Chicago. 
Krugman recently published a newspaper article entitled “How Did Economists Get It So Wrong?” 
There was nothing in mainstream economics, Krugman wrote, “suggesting the possibility of the kind of collapse that happened last year.” 
The reason was that “economists, as a group, mistook beauty, clad in impressive-looking math, for truth.” 
They purveyed an “idealized vision of an economy in which rational individuals interact in perfect markets.” 
Unfortunately “this sanitized vision of the economy led most economists to ignore all the things that could go wrong.” 
So now economists will have to accept “the importance of irrational and often unpredictable behavior, face up to the often idiosyncratic imperfections of markets and accept that an elegant economic ‘theory of everything’ is a long way off.” 
Krugman’s heavy pounding of Chicago School economics goaded Cochrane, a professor of finance, into some bad-tempered counter-punching on the university’s Web site, much of which consisted of a personal attack on Krugman’s scientific integrity. 
When he gets around to economics, Cochrane aims his blows at two points: Krugman’s attack on the “efficient market theory” and his advocacy of “fiscal stimulus” for depressed economies. 
Cochrane accuses Krugman of misleading his readers about the efficient market theory, which asserts that, given the available information, financial markets always get asset prices right. 
Rather than defend that theory, Cochrane admits that “asset prices move more than reasonable expectations of future cash flows.” 
Unfortunately, “no theory is particularly good at that right now.” 
But it’s theoretical nihilism, Cochrane argues, to ascribe these excessive fluctuations to “irrationality” as Krugman does. 
What Krugman is really after (“though he can’t quite come out and say this”) is for the government to “take charge of the allocation of capital.” 
And the one thing we do know is that however badly asset markets behave, government control “has always been much worse.” 
Cochrane’s heaviest punching is reserved for Krugman’s support for President Barack Obama’s fiscal stimulus. 
He invokes the hoary old “Ricardian equivalence theorem,” revived by the Harvard economist Robert Barro, according to whom “debt-financed spending can’t have any effect, because people, seeing the higher future taxes that must pay off the debt, will simply save more. 
They will buy the new government debt and leave all spending decisions unaltered.” 
In short, Krugman “has absolutely no idea about what caused the crash, what policies might have prevented it, and what policies we should adopt going forward” – except that the government should now spend money like a drunken sailor. 
Far from having too much math, economists need more, in order to “keep the logic straight.” 
On the stimulus, though, Krugman achieves a knock-out punch. 
The view that extra government spending “crowds out” an equal amount of private spending, so that its net stimulus effect is zero, would be true only if the economy were at full employment. 
Indeed, the Chicago School tacitly assumes that economies are always at full employment. 
They are unfazed by the fact that America’s economy has shrunk by 4% in the last year and that over 6 million people have been added to the unemployment rolls. 
To Chicago economists, an increase in the number of idle workers represents a voluntary choice for leisure. 
In a concession to commonsense, they concede that people may make mistakes and, to that extent, a stimulus may be beneficial. 
But they insist that the only stimulus that will work is printing money. 
This will drive down interest rates and lead to an economic rebound. 
Against this view, Keynes pointed out that interest-rate reductions may not do the job, because at zero or near-zero rates investors hoard cash rather than lend it out. 
Hence, as he put it in 1932, there may be “no escape from prolonged and perhaps interminable depression except by direct state intervention to promote and subsidize new investment” – which is what the Obama administration is rightly doing. 
On the question of what caused the crash, the debate is more even. 
Krugman is hampered by the fact that he attributes the crash to “irrationality,” which, as Cochrane points out, is no theory. 
This is because Krugman refuses to take seriously Keynes’s crucial distinction between risk and uncertainty. 
In my view, Keynes’s major contribution to economic theory was to emphasize the “extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made.” 
The fact of their ignorance forces investors to fall back on certain conventions, of which the most important are that the present will continue into the future, that existing share prices sum up future prospects, and that if most people believe something, they must be right. 
This makes for considerable stability in markets as long as the conventions hold . 
But they are liable to being overturned suddenly in the face of passing bad news, because “there is no firm basis of conviction to hold them steady.” 
It’s like what happens in a crowded theater if someone shouts “Fire!” 
Everyone rushes to get out. 
This is not “irrational” behavior. It is reasonable behavior in the face of uncertainty. 
In essence, this is what happened last autumn. 
Chicago School economics has never been more vulnerable than it is today – and deservedly so. 
But the attack on it will never succeed unless policy Keynesians like Krugman are willing to work out the implications of irreducible uncertainty for economic theory. 

The Keys to Universal Health Coverage 
DAR ES SALAAM – It has been three years since world leaders committed to one of the boldest goals ever set in global public health: achieving universal health coverage by 2030. 
Achieving this objective will mean that every person in every community has access to affordable care, both to prevent them from falling ill and to treat them when they do. 
The stakes are simply too high not to deliver on this promise. 
We cannot eradicate poverty, protect people from pandemics, advance gender equality, or achieve any of the other 2030 Sustainable Development Goals (SDGs) without accelerating progress toward universal health coverage. 
Fortunately, national leaders are starting to take concrete steps toward expanding access to health care. 
As I, along with many others, have come to realize, success depends on first overcoming one of the most significant challenges in health: overly fragmented approaches to delivering care. 
Instead of treating one disease at a time, we need to establish systems in which people’s diverse health needs are treated side by side. 
Every woman should be able to turn to a trusted provider in her community to receive family planning services for herself, routine immunizations for her children, or diabetes treatments for an aging relative. 
The best way for countries to achieve a more integrated approach is to strengthen primary care, which is most people’s first point of contact with the health system. 
Primary-care providers can address more than 80% of health needs. 
And because primary care is delivered to rich and poor alike, it is the foundation of a fair and equitable society. 
Having recognized these potential benefits, world leaders recently met at the Global Conference on Primary Health Care in Astana, Kazakhstan, to endorse a new declaration that commits them to strengthening primary-care systems within their respective countries. 
But now the hard work begins. 
With national leaders considering how best to meet their new commitment, I would emphasize two factors that are integral to making progress. 
First, we need to maintain the political will to strengthen primary care and achieve universal health coverage. 
To that end, World Health Organization Director-General Tedros Adhanom Ghebreyesus recently called on heads of state and government to undertake concrete reforms in that direction starting this year. 
From my own experience as a former president of Tanzania, I know that persistent, firm, top-level leadership is necessary to move the complex machinery of government. 
That is why I joined with the health advocacy organization Access Challenge to launch the “One by One: Target 2030” campaign on the sidelines of the United Nations General Assembly this year. 
As part of the campaign, I will be meeting with leaders throughout Africa to encourage them to take tangible steps toward strengthening primary care. 
The goal is to protect the basic right to health of every child, adolescent, mother, and family. 
The second key to progress is improved data so that we can monitor what we have accomplished and what work remains to be done. 
Reliable data are needed to determine whether people are encountering financial or geographic obstacles to health care; whether care is being administered safely and effectively; and whether it is reaching the most marginalized groups in society. 
National leaders and public health officials need to know all of this and more in order to identify weaknesses in the primary-care system and target areas for improvement. 
Data are also an important tool for health-care advocates and average citizens who want to track progress over time, hold leaders accountable, and demand the care they need and deserve. 
Yet too often, and despite its potential to drive improvement and foster accountability, data collection is treated as an afterthought. 
The Primary Health Care Performance Initiative is working to address precisely this issue. 
At the Global Conference on Primary Health Care, the PHCPI joined with several countries from around the world to launch a new tool to help policymakers and providers improve care. 
With Vital Signs Profiles, they can quickly access information on primary care that is both useful and easy to understand. 
As I begin to reach out to African leaders one by one, I look forward to the day when we will have achieved universal health coverage for the world’s 7.7 billion people. 
With high-level political commitments and new tools for promoting access to care and fostering accountability, I am confident that we can make this ambitious vision a reality. 


A World of Khashoggis 
AMMAN – For two months, the brutal murder of the US-based Saudi journalist Jamal Khashoggi in Saudi Arabia’s consulate in Istanbul, and its geopolitical repercussions, has dominated headlines worldwide. 
But his case is far from an anomaly. 
In fact, according to the International Press Institute, violence against journalists and impunity for the perpetrators are “two of the biggest threats to media freedom in our world today.” 
Governments often use both carrots and sticks to keep journalists in line. 
They might reward journalists for toeing the official line, using financial or other kinds of bribes. 
Those who refuse to be bought, however, may suffer the loss of basic rights (such as passport renewal), or have their reputations destroyed. 
To this end, some autocratic regimes emulate US President Donald Trump, calling journalists “enemies” who disseminate “fake news.” 
This is a bleak reversal for the United States, a country that has historically set a powerful positive example with its formal and informal mechanisms for protecting freedom of the press and its robust culture of investigative journalism. 
Imprisonment is another favorite way for autocratic regimes to silence journalists who dare to speak truth to power. 
In Egypt, Al Jazeera’s Mahmoud Hussein has been detained for two years without trial. 
In the United Arab Emirates, the Jordanian journalist Tayseer al-Najjar is serving a three-year sentence, which will be prolonged if his family is unable to pay the massive $136,000 fine imposed on him for a post he made on social media. 
In Turkey, more than 150 journalists have been imprisoned since the failed coup in July 2016, making the country the world’s biggest jailer of journalists. 
And then, of course, there are the journalists who are forced to make the ultimate sacrifice in service of the truth. 
By one count, 73 journalists have been killed so far this year, and in, 12 countries five or more murders of journalists went unresolved in 2017. 
This includes not only violence-plagued countries like Iraq, Somalia, and Syria, but also democracies (and quasi-democracies) like Brazil, India, Mexico, Nigeria, and Russia. 
Such countries – many of which are allies of the US and other Western countries – have often faced no political or diplomatic price for their actions. 
In this sense, Khashoggi’s murder sends a powerful message. 
Saudi Crown Prince Mohammed bin Salman is widely believed to have ordered the killing. 
Yet journalists and human-rights activists in developing countries that benefit from or depend on financial support from Saudi Arabia are being politely (or not so politely) requested to keep quiet as MBS tours the region in order to restore his image. 
In many Arab countries, for example, it is a crime to carry out any action or publish anything that could hurt the reputation of “a brotherly or friendly country.” 
So, while Tunisian human-rights activists protested MBS’s recent visit, many Arab activists had to refrain, despite strongly opposing the Saudi leader’s actions, in order to avoid imprisonment. 
Even some Western countries have failed to take a stand. 
Trump, for example, has declared that he “stands with” Saudi Arabia, a close US ally, largely in order to protect large arms deals with the Kingdom. 
Among the few who have been courageous enough to speak out are Palestinian journalists living under Israeli occupation. 
More than 150 independent Palestinian journalists have signed an Avaaz petition stating that his murder sets “a dangerous precedent that threatens the lives of journalists, their right to free expression, the freedom of journalistic work, and the right of the public to know.” 
The petition also looks beyond Khashoggi’s case, calling for the enactment of “binding laws that protect journalists, guarantee their right to work in freedom, and punish those who violate this right.” 
Given how widespread crimes against journalists are – and how vital their work is to our societies – the petition’s demands deserve the support of all citizens where press freedom is restricted or under threat. 

Khrushchev’s Secret Speech and End of Communism 
In history, some events at first appear insignificant, or their significance is hidden, but they turn out to be earthshaking. 
Such a moment occurred 50 years ago, with Nikita Khrushchev’s so-called “Secret Speech” to the Twentieth Congress of the Communist Party of the Soviet Union. 
It ranks, I believe, just below the Bolshevik Revolution of 1917 and the start of Hitler’s War in 1939 as the most critical moment of the twentieth century. 
At that moment, the communist movement appeared to be riding the tide of history, and not only for those in the Soviet Union. 
In the mid-1950’s, communism was on the offensive in Europe, as well as in the emerging Third World. 
Capitalism seemed to be dying. 
All of communism’s imperfections were deemed temporary, just bumps on the way to the just society that was then being born. 
A third of humanity saw the Soviet Union as leading the world toward global socialism. 
The Twentieth Congress put an end to that. 
It was a moment of truth, a cleansing from within of the brutality of Stalinism. 
Khrushchev’s speech to the Congress inspired doubt and second thoughts throughout the worldwide Communist movement. 
Khrushchev’s motives as he took the podium on the morning of February 25, 1956, were, in his mind, moral ones. 
After his ouster from power, in the seclusion of his dacha, he wrote: “My hands are covered with blood. 
I did everything that others did. 
But even today if I have to go to that podium to report on Stalin, I would do it again. 
One day all that had to be over.” 
Khrushchev had, of course, been an intimate part of Stalin’s repressions, but he also didn’t know half of what was going on. 
The whole Stalinist system of government was built on absolute secrecy, in which only the General Secretary himself knew the whole story. 
It wasn’t terror that was the basis of Stalin’s power, but his complete monopoly on information. 
Khrushchev, for example, was stunned when he discovered that in the 1930’s and 1940’s, some 70% of Party members were annihilated. 
Initially, Khrushchev didn’t plan to keep his denunciation of Stalin a secret. 
Five days after the Congress, his speech was sent to all the leaders of the socialist countries and read at local party meetings across the Soviet Union. 
But people didn’t know how to discuss it. 
And with good reason, for the problem with the de-Stalinization process was that, although the truth was partly revealed, no answer regarding what to do next was offered. 
After the Congress, it became clear that the communist gospel was false and murderously corrupt. 
But no other ideology was offered, and the crisis – the slow rot of the system that became clear during the era of stagnation under Leonid Brezhnev – that began with Khrushchev’s speech lasted another 30 years, until Mikhail Gorbachev took up his mantle of change. 
The doubts inspired at the Congress may have been inchoate, but they nonetheless sowed genuine unrest. 
In the first of the protests that rocked the communist world in 1956, huge crowds in Georgia demanded that Khrushchev be fired and Stalin’s memory reinstated. 
An uprising in Poland and the far more tumultuous Hungarian Revolution argued for the opposite. 
The Poles demanded communism with a human face, and the Hungarians, after Imre Nagy sought to reform communism, ended up wanting no communism at all. 
All of these protests were brutally crushed, which resulted in many West European Communists leaving the Party in utter disillusion. 
Khrushchev’s speech also ignited the feud between Mao’s China and the USSR, for it allowed Mao to claim the crown of world revolutionary leadership. 
Worried by the protests, Khrushchev tried to cool off the anti-Stalin campaign. 
The release of the Gulag prisoners that followed his speech continued, but it was done in silence. 
Party membership was restored to purge survivors, and they received new jobs, but they were forbidden from discussing the horrors that they had endured. 
That silence lasted until 1961, when Khrushchev permitted new revelations of Stalin-era crimes. 
These were publicly reported and discussed on TV and radio. 
Stalin’s body was removed from Red Square, Stalin monuments were destroyed, and cities restored their original Soviet names. 
Stalingrad became Volgograd. 
The idea of the Gulag entered our literature with Alexander Solzhenitsyn’s One Day in the Life of Ivan Denisovich. 
This second anti-Stalinist campaign lasted two years, which was not nearly enough to change the country’s mentality. 
The Twentieth Congress shattered the world Communist movement, and it turned out to be impossible to cement the cracks. 
The Soviet Union and other socialist countries faced a crisis of faith, as the main threat to communism was not imperialism, or ideological dissidents, but the movement’s own intellectual poverty and disillusion. 
So, although it is common today in Russia to blame Gorbachev and Boris Yeltsin for the collapse of the USSR, it is both useless and unfair to do so. 
The system was dead already, and it is to Yeltsin’s great credit that he was able to bring Russia out of the ruins in one piece. 
Although Russia’s future is uncertain, its history is becoming clearer, in part because we now know that the Twentieth Party Congress started the process that brought about the end of Soviet despotism. 

Kick-Starting Employment 
BERKELEY – Unemployment is currently rising like a rocket, because businesses that normally would be expanding and hiring are not, and those businesses that would normally be contracting and shedding workers are doing so very rapidly. 
Businesses that ought to be expanding and hiring cannot, because the depressed general level of financial asset prices prevents them from borrowing money or selling bonds on profitable terms. 
In response, central banks should purchase government bonds for cash in as large a quantity as needed to push their prices up as high as possible. 
Expensive government bonds will shift demand to mortgage or corporate bonds, pushing up their prices. 
Even after central banks have pushed government bond prices as high as they can go, they should keep buying government bonds for cash, in the hope that people whose pockets are full of cash will spend more of it, and that this will directly pull people out of joblessness and into employment. 
In addition, governments need to run extra-large deficits. 
Spending – whether by the United States government during World War II, following the Reagan tax cuts of 1981, by Silicon Valley during the late 1990’s, or by home buyers in America’s south and on its coasts in the 2000’s – boosts employment and reduces unemployment. 
And government spending is as good as anybody else’s. 
Finally, governments should undertake additional measures to boost financial asset prices, and so make it easier for those firms that ought to be expanding and hiring to obtain finance on terms that allow them to expand and hire. 
It is this point that brings us to US Treasury Secretary Timothy Geithner’s plan to take about $465 billion of government money, combine it with $35 billion of private-sector money, and use it to buy up risky financial assets. 
The US Treasury is asking the private sector to put $35 billion into this $500 billion fund so that the fund managers all have some “skin in the game,” and thus do not take excessive risks with the taxpayers’ money. 
Private-sector investors ought to be more than willing to kick in that $35 billion, for they stand to make a fortune when financial asset prices close some of the gap between their current and normal values. 
If the fund does well over the next five years – returns profits of 9% per year –private investors get a market rate of return on their very risky equity investment and the equivalent of an “annual management fee” equal to 2% of assets under management. 
If the portfolio does less well – profits of 4% per year – the managers still get a healthy but sub-market return of 10% per year on their equity. 
And if the portfolio does badly – loses 1% per year – they lose roughly 70% of their investment. 
Those are attractive odds. 
Time alone will tell whether the financiers who invest in and run this program make a fortune. 
But if they do, they will make the US government an even bigger fortune. 
And 2% of assets under management is an annual fee that many sophisticated investors have been willing to pay private hedge funds – topped off with an extra fee of 20% of annual profits, which the Treasury is not paying. 
The fact that the Geithner Plan is likely to be profitable for the US government is, however, a sideshow. 
The aim is to reduce unemployment. 
The appearance of an extra $500 billion in demand for risky assets will reduce the quantity of risky assets that other private investors will have to hold. 
And the sudden appearance of between five and ten different government-sponsored funds that make public bids for assets will convey information to the markets about what models other people are using to try to value assets in this environment. 
This sharing of information will reduce risk – somewhat. 
When assets are seen as less risky, their prices rise. 
And when there are fewer assets to be held, their prices rise, too. 
With higher financial asset prices, those firms that ought to be expanding and hiring will be able to get money on more attractive terms. 
The problem is that the Geithner Plan appears to me to be too small – between one-eight and one-half of what it needs to be. 
Even though the US government is doing other things as well –fiscal stimulus, quantitative easing, and other uses of bailout funds – it is not doing everything it should. 
My guess is that the reason that the US government is not doing all it should can be stated in three words: Senator George Voinovich, who is the 60th vote in the Senate – the vote needed to close off debate and enact a bill. 
To do anything that requires legislative action, the Obama administration needs Voinovich and the 59 other senators who are more inclined to support it. 
The administration’s tacticians appear to think that they are not on board – especially after the recent AIG bonus scandal – whereas the Geithner Plan relies on authority that the administration already has. 
Doing more would require a legislative coalition that is not there yet. 

Kicking the Oil Habit 
Chancellor Angela Merkel has made addressing climate change a high priority on Germany’s agenda for its EU and G-8 presidencies that begin in January. 
Here is a concrete proposal, one general enough for world leaders to consider and accept, and clear enough for other governments and businesses to grasp: simply set a date, at the next G-8 summit, by which oil-powered cars would no longer be licensed in major industrialized countries. 
Such a decision would have a strongly positive economic and geopolitical impact. 
The real cause of today’s worries over energy is not the decline in world oil reserves, but rather that domestic oil production by the top consumers – Europe, the United States, and China – will decline at the very moment that growing Asian demand strains the market. 
Available reserves will increasingly be concentrated in the Middle East simply because supplies in all other regions will be depleted sooner. 
Moreover, the main oil exporters are unwilling to subordinate their investment policies to market requirements. 
Saudi Arabia seeks to run its oil production independently, while Iran scares off potential investors with bureaucratic hurdles and corruption. 
Iraq suffers from a lack of security, and foreign investors in Russia are thwarted at every turn. 
Those four states contain half of the world’s proven oil reserves and two-thirds of what could potentially be exported. 
All this, not production costs, lies at the heart of high oil prices and the scramble for oil contracts in Central Asia and Africa. 
To believe that high oil prices are good because they serve the environment ignores some basic facts of international politics. 
First, in many of the poorest African and Asian countries, oil imports account for a significantly higher share of national expenditure than in industrialized countries, which means that economic growth and social development are being imperiled, while new debt crises loom. 
Rents from oil production impede reforms in the major exporting countries. 
Thanks to their lubricated financial strength, regimes like those in Venezuela and Iran increasingly feel unconstrained by international rules. 
Latecomers among consuming nations, such as China, mimic the former habits of the industrialized West, with their long record of overlooking human rights abuses in order to secure lucrative deals with authoritarian, oil-rich regimes. 
Only the world’s political and economic heavyweights, the main industrialized countries that remain by far the biggest consumers of hydrocarbons, can initiate change on a global scale. 
Change must begin in the transport sector, which accounts for more than half of current oil consumption – a share that is likely to rise in the future. 
The G-8 countries should therefore agree to no longer license any new, oil-powered cars from 2025 onwards. 
This decision would not be directed against individual mobility, but against the dissipation of a scarce resource that is more urgently needed to produce synthetic materials. 
Political leaders should not privilege any particular technology. 
Instead, they should provide the automobile industry with incentives to develop alternative technologies that rely on bio-mass fuel, ethylene, hydrogen, and even natural gas during a transition period. 
Countries that lead the way politically will, as a collateral benefit, provide domestic industries with a leading position in energy technology, ensuring future markets. 
The expected significant reduction of CO2-emissions could eventually bring about the breakthrough that is needed in international climate policies. 
But economic development comes into play as well: curing our “addiction” to oil would leave more of it to poorer, less developed, and newly industrializing countries, as well as pushing down prices and easing geopolitical energy competition. 
Geopolitically, the benefits would similarly obvious, as the ability of major oil exporters to blackmail industrialized countries would be significantly reduced. 
This could increase the bargaining power of the international community in the Middle East, and might strengthen those social forces in countries like Saudi Arabia, Iran, and Russia that seriously wish to promote political and economic reform from within. 
As a technologically advanced and major automobile-producing country, Germany is well placed to bring about such an initiative. 
Merkel, who holds a doctorate in physics and started her political career as an environment minister – presiding in 1995 over the first conference of the UN Framework Convention on Climate Change – may have more credibility in addressing the issue than any of her EU and G-8 colleagues. 
Now is the time for a bold act of leadership. 

Kidney for Sale 
NEW HAVEN – World Kidney Day, to be held on March 12, is part of a global health campaign meant to alert us to the impact of kidney disease. 
Sadly, there is little to celebrate. 
According to the International Society of Nephrology, kidney disease affects more than 500 million people worldwide, or 10% of the adult population. 
With more people developing high blood pressure and diabetes (key risks for kidney disease), the picture will only worsen. 
There are 1.8 million new cases of the most serious form of kidney disease – renal failure – each year. 
Unless patients with renal failure receive a kidney transplant or undergo dialysis – an expensive life-long procedure that cleanses the blood of toxins – death is guaranteed within a few weeks. 
Last year, an Australian nephrologist, Gavin Carney, held a press conference in Canberra to urge that people be allowed to sell their kidneys. 
“The current system isn't working,” the Sydney Morning Herald quoted him as saying. 
“We’ve tried everything to drum up support” for organ donation, but “people just don’t seem willing to give their organs away for free.” 
Carney wants to keep patients from purchasing kidneys on the black market and in overseas organ bazaars. 
As an American recipient of a kidney who was once desperate enough to consider doing that myself (fortunately, a friend ended up donating to me), I agree wholeheartedly that we should offer well-informed individuals a reward if they are willing to save a stranger’s life. 
If not, we will continue to face a dual tragedy: on one side, the thousands of patients who die each year for want of a kidney; on the other side, a human-rights disaster in which corrupt brokers deceive indigent donors about the nature of surgery, cheat them out of payment, and ignore their post-surgical needs. 
The World Health Organization estimates that 5% to 10% of all transplants performed annually – perhaps 63,000 in all – take place in the clinical netherworlds of China, Pakistan, Egypt, Colombia, and Eastern Europe. 
Unfortunately, much of the world transplant establishment – including the WHO, the international Transplantation Society, and the World Medical Association – advocates only a partial remedy. 
They�focus on ending organ trafficking but ignore the time-tested truth that trying to stamp out illicit markets either drives them further underground or causes corruption to�reappear elsewhere. 
For example, after China, India, and Pakistan began cracking down on illicit organ markets, many patients turned to the Philippines. 
Last spring, after the Philippines banned the sale of kidneys to foreigners, a headline in the Jerusalem Post read, “Kidney Transplant Candidates in Limbo after Philippines Closes Gates.” 
(Israel has one of the lowest donation rates in the world, so the government pays for transplant surgery performed outside the country.) 
Similarly, patients from Qatar who traveled to Manila are “looking for alternative solutions,” according to The Peninsula . 
True, more countries must develop efficient systems for posthumous donation, a very important source of organs. 
But even in Spain, which is famously successful at retrieving organs from the newly deceased, people die while waiting for a kidney. 
The truth is that trafficking will stop only when the need for organs disappears. 
Opponents allege that a legal system of exchange will inevitably replicate the sins of the black market. 
This is utterly backward. 
The remedy to this corrupt and unregulated system of exchange is a regulated and transparent regime devoted to donor protection. 
My colleagues and I suggest a system in which compensation is provided by a third party (government, a charity, or insurance) with public oversight. 
Because bidding and private buying would not be permitted, available organs would be distributed to the next in line – not just to the wealthy. 
Donors would be carefully screened for physical and psychological problems, as is currently done for all volunteer living kidney donors. 
Moreover, they would be guaranteed follow-up�care for any complications. 
Many people are uneasy about offering lump-sum cash payments. 
A solution is to provide in-kind rewards – such as a down payment on a house, a contribution to a retirement fund, or lifetime health insurance – so that the program would not be attractive to people who might otherwise rush to donate on the promise of a large sum of instant cash. 
The only way to stop illicit markets is to create legal ones. 
Indeed, there is no better justification for testing legal modes of exchange than the very depredations of the underground market. 
Momentum is growing. 
In the British Medical Journal , a leading British transplant surgeon called for a controlled donor compensation program for unrelated live donors. 
Within the last year, the Israeli, Saudi, and Indian governments have decided to offer incentives ranging from lifelong health insurance for the donor to a cash benefit. 
In the United States, the American Medical Association has endorsed a draft bill that would make it easier for states to offer various non-cash incentives for donation. 
Until countries create legal means of rewarding donors, the fates of Third World donors and the patients who need their organs to survive will remain morbidly entwined. 
What better way to mark World Kidney Day than for global health leaders to take a bold step and urge countries to experiment with donor rewards? 


Killer Fish Farms 
A recent report by the United Nations Food and Agriculture Organization found that almost half of all the fish eaten worldwide are raised on fish farms rather than caught in the wild. 
It is likely that consumption of no other fish has soared more than that of farmed salmon, with production surging by almost 300% in 20 years. 
Salmon are carnivorous, however, and to feed the voracious appetite of these legions of farm-raised fish, the aquaculture industry increasingly has turned its attention to a small crustacean commonly known as Antarctic krill. 
But that’s bad news for leopard seals and Adelie penguins, humpback and blue whales, and many other species, because most organisms in the Antarctic marine ecosystem eat either krill or something that eats krill. 
Found in the cold waters of the Southern Ocean, krill constitute a key ingredient in fish oil and feed. 
Unfortunately, recent research indicates that expanded krill fishing might put the Antarctic ecosystem at risk. 
Representatives from the world’s major fishing nations, meeting this fall in Australia, have an opportunity to limit krill catches, thereby helping creatures that need krill to survive. 
Although each krill may only grow to weigh about two grams, together they constitute one of the most abundant animal species on Earth. 
Indeed, krill form the largest known aggregation of marine life, with a biomass perhaps greater than any other multi-cellular animal organism on the planet. 
This “pink gold” forms the heart of the Antarctic marine food web, and land-based krill predators, such as penguins and seals, are most vulnerable to krill scarcity. 
Scientists have found that demand for krill has begun to exceed supply in some areas of the Southwest Atlantic. 
As a result, penguins and albatrosses already experience difficulty rearing their offspring in areas such as South Georgia. 
And yet krill fishing is projected to grow. 
The Southern Ocean contains the largest population of krill in the world. 
As krill tend to aggregate in concentrated swarms, they are easy to catch and have become particularly attractive to large-scale commercial interests. 
Moreover, krill fishing has recently been fueled by new technological advances such as vacuum pumps, which allow a single fishing vessel to catch and process huge amounts – up to 120,000 metric tons per season. 
Furthermore, demand for krill products – from fish oil and feed to skin creams and other cosmetics – has increased over the past 20 years. 
As wild fish populations continue to decrease, in tandem with an ever-growing global appetite for seafood, the pressure on the aquaculture industry for fish feed will skyrocket. 
The increased demand for krill, together with the new catching and processing capabilities, has combined in a way that the Antarctic ecosystem might not be able to withstand. 
But there is hope. 
The Convention on the Conservation of Antarctic Marine Living Resources (CCAMLR) was established in 1982, as part of the Antarctic Treaty System, in response to concerns that continued unregulated fishing might undermine the basis of the Antarctic food chain. 
The CCAMLR is governed by a commission of 24 member states – including Argentina, Australia, Chile, Japan, Norway, Russia, South Africa, South Korea, Ukraine, the United States and the European Union – that meets annually in Hobart, Australia, to discuss new fishing regulations concerning marine species in the Southern Ocean. 
The CCAMLR has pioneered ecosystem and precautionary approaches to fisheries management, which are now central to maintaining Antarctic krill. 
Although the needs of krill-dependent species were previously considered for large areas of the Southern Ocean, the CCAMLR must still scientifically subdivide the overall catch limit into smaller units. 
This would help avoid local competition between krill vessels and the creatures that need krill to live, since krill fishing closely overlaps with the critical foraging areas for penguins and seals. 
The CCAMLR’s members must honor the organization’s mandate for conservation and ensure that there is enough “pink gold” to feed the penguins and other wildlife that depend on it. 
The CCAMLR should also apply to krill fishing the same monitoring, control, and surveillance measures that it requires for all other fisheries. 
Antarctic krill must not be fished to feed the fish farms of the world while starving the penguins, seals, whales, and other species whose survival depends on these tiny, but vitally important, creatures. 

Killing Growth in Russia 
I want Russia to be a boring country – at least for the next few decades. 
In the twentieth century, Russia set an unquestionable record for all sorts of upheavals and social experiments that attracted the world’s attention. 
A time-out is essential. 
This objective seemed to be entirely within reach – or at least possible – until the first half of 2003. Foreign correspondents accredited in Moscow complained that nothing was happening in Putin’s Russia. 
Investment in the Russian economy was growing fast. 
Unfortunately, Russia’s rulers are not accustomed to leaving the country and the rest of the world for long without something surprising to gawk at. 
Instilling a feeling of insecurity is the best way to scare your population into submission and frighten away potential investors. 
How democratic or undemocratic a regime is usually doesn't bother investors. 
All they need and care about is stable, predictable rules. 
Indeed, the watchword among major investors is inertia. 
It takes time to reach a decision on whether or not to invest in a project, and once an investment decision is made, it becomes rather difficult to stop the process quickly. 
Russia’s government is now doing its best to prove that, while difficult, it is possible to defy the laws of business physics and kill investments that are already in the pipeline. 
When Mikhail Khodorkovsky and other executives of Yukos, his oil company, were arrested last year, corporations investing or interested in investing in Russia were prepared to interpret the crackdown as an isolated incident brought on by the political agenda of the company and its CEO, who should have known better. 
Never mind that by the second half of 2003, it had become obvious that the government intended to use legal means – in the form of massive tax claims – to destroy the company. 
When only one company faced legal and financial problems, investors who had made a decision to put their money in Russia were ready to ignore this kind of development. 
“This must be an exception,” they kept repeating, like a mantra or a prayer. 
I’ve heard something similar when Russian problems are discussed: “Just finish this Yukos affair. 
We don’t care how it goes, just put an end to it.” 
Unfortunately, the genie has been let out of the bottle. 
Throughout 2004, it became abundantly clear that Russia’s internal security apparatus had gained the upper hand in deciding how to manage economic and political problems. 
Security structures developed a taste for this kind of work, and welcomed new responsibilities. 
In many ways, they began to see fighting big business as akin to fighting terrorists. 
And, indeed, they share one thing in common: the fight never ends. 
More and more tax claims are being produced, and not only against Yukos. 
Tax claims against the telecommunications company Vympelkom (one of Russia’s leading firms, and the first to be listed on the New York Stock Exchange in 90 years) send an unambiguous signal to investors: no one is safe. 
In fact, official documents have now even started questioning the legitimacy of the privatization of the leading Russian companies in the 1990’s, which has opened the way for discussions about revising the outcomes of these privatizations. 
Similarly, British Petroleum, which has invested more in Russia than any other company to date, has recently discovered that its rights to the Kovytkino gas field are not guaranteed at all. 
This property, it now seems, could be reclaimed by the state at any moment. 
It would be wrong to draw long-term conclusions from short-term economic information, even if this information confirms reality. 
The alarming tendencies we are seeing today may be short-lived and with no serious consequences. 
Post-socialist growth is a process that cannot (and should not) be easily stopped. 
If, however, the authorities continue their efforts to destabilize the Russian economy, today’s disturbing tendencies may actually take root. 
Russia can then forget about attaining the fast, sustainable growth that China has achieved. 
Instead, we Russians will find ourselves trying to avert an impending economic crisis. 
Of course, no one can predict when such a crisis might occur. 
But one thing is certain: we will know which path the country’s leaders have chosen sooner rather than later. 
Indeed, this year could be Russia’s most fateful yet. 

Killing the Death Penalty 
It is finally happening. 
After 13 years of negotiations, delays, and hesitation, the UN General Assembly will vote this month on the proposal for a universal moratorium on the death penalty. 
A large majority of the UN adopted the proposal on 15 November, despite attempts by some member states to obstruct, amend, or bury it. 
Fortunately, in the end, the opponents were forced to fight a will stronger than their own: the will of those who – after the abolition of slavery and torture – want to mark another turning point for civilization. 
But will this December’s vote be a mere formality? 
Experience teaches us to be prudent. 
I have not opened my bottle of spumante yet. 
To be honest, I am not sure that all of the world’s governments have accepted the inevitable, or that even the most inflexible will now agree to the moratorium. 
But I continue to have faith that the General Assembly will know, as always, how to meet this challenge. 
We are all aware that even if the vote succeeds, the UN resolution will not be binding, and that establishing and enforcing a moratorium is only a necessary mid-way step toward full abolition. 
I believe the UN should push for an immediate de facto suspension, without waiting for the debates to begin on legal reforms in the respective countries. 
I hope that this approach will allow a wide consensus in the General Assembly, and that any last minute change of heart will fail. 
One big lesson I learned during the struggle to create the International Criminal Court (ICC), and now during the battle for a moratorium on the death penalty, is that it is often better to aim for a realistic result rather than a perfect one. 
Before the international community established the ICC, there were two ad hoc tribunals – one for the former Yugoslavia and one for Rwanda. 
Their work paved the way for the ICC. 
Some European Union countries wanted to push for complete abolition of the death penalty right away. 
I understand their position. 
I would have wanted the same thing myself. 
But had we followed that route, we would most likely have failed. 
There is an important lesson in this for the EU at a time when it is seeking to become a global actor: we must reach an internal consensus while always bearing in mind what the external ramifications of our decision might be. 
On the moratorium, we remained pragmatic and built a strong European foreign policy. 
And it was an advantage in the UN negotiations to have a common Europeans position and to have spoken with a single voice. 
A second lesson that I learned is also useful for the EU, which finds itself in a world in which new powers are emerging and where all actors from Manila to Algiers, from Doha to Libreville, must deal with the challenges of globalization and interdependence on a daily basis. 
That lesson is that Europe has more friends than it has enemies in the world. 
These friends deserve respect and attention. 
If Italy and the EU had not understood the need to work with non-European countries, and make them feel that they were responsible and fully-fledged protagonists, the efforts to establish the ICC and be so close to declare a universal moratorium on the death penalty would have failed. 
I know that this is not exactly a new lesson, but it is what I have in mind when I think of efficient multilateralism. 
Not only does it work, but, above all, in some cases, it is the only way of moving forward. 
Finally, a third lesson – relevant to the fight against the death penalty and, indeed, to winning any political battle – is perseverance, which I consider to be a mix of pig-headedness and the ability to maintain one’s position. 
Without perseverance, there can be no progress. 
All this is a success, not only for anti-death penalty radicals, for the “Hands off Cain” association, the Italian government, and for the European Union and its friends in the world. 


How Kim Has Played Trump 
ATLANTA – North Korean leader Kim Jong-un is eager to hold a second summit with US President Donald Trump. 
Since their first meeting in Singapore in June, Kim has consistently outmaneuvered his counterpart. 
Trump may still fancy himself a world-class dealmaker, but the truth is that Kim – like Russian President Vladimir Putin – has got Trump’s number. 
Kim’s bonhomie (real or feigned) and promises of denuclearization have muted Trump’s threats, brought the South Korean government closer to his side, and eroded international sanctions against his regime. 
Kim has accomplished all of this without diminishing his regime’s nuclear capacity, and he appears to have continued ballistic-missile development at 16 hidden sites. 
Having gone from nuclear-armed pariah to presidential negotiating partner, it is little wonder that Kim would want a second summit to consolidate his newfound international legitimacy and position in the global limelight. 
Kim has already outdone his forebears. 
His father and grandfather both tried and failed to create a high-level channel to the US government. 
The relationship that Kim has forged with Trump is thus an historic and personal success. 
After six reclusive years in power, the 35-year-old scion of North Korea’s dynastic regime has made a remarkable debut on the world stage, both managing an erratic, ego-driven president and setting the terms of the negotiations. 
By contrast, the Trump administration has little to show for its efforts. 
Since the Singapore summit, US officials have reportedly been pushing the Kim regime to lay out a path to denuclearization. 
But the North Koreans have refused to turn over even the most basic facts about their arsenal. 
This stonewalling suggests that Kim has read Trump well. 
As Trump himself contends, “I am the only one that matters.” 
Trump’s narcissism, hunger for the spotlight, and desperation to match former President Barack Obama’s Nobel Peace Prize are all that Kim needs to know about the man. 
The only question is how far Trump will go to secure something that he can hawk as an unprecedented deal with North Korea. 
By agreeing to another summit while slow-rolling preliminary talks, Kim is reconnoitering Trump’s bottom line. 
Recall that, as its up-front price for serious denuclearization talks, the North initially pushed for diplomatic steps, such as a treaty to end to the Korean War. 
In Singapore, Trump promised to do just that, surprising American allies and US officials alike. 
Then, in talks last month with US Secretary of State Mike Pompeo, Kim upped the ante by also calling for an end to the international sanctions against his regime. 
No doubt, Kim is hoping that Trump’s impulsiveness will lead him to fold. 
This month, Kim’s foreign ministry issued a public threat that North Korea could restart its weapons program if the US does not soften its position on sanctions. 
As Pompeo pursues further talks in Pyongyang this month, Kim will surely hold his ground. 
Since declaring in June that North Korea is “no longer a nuclear threat”, Trump has backpedaled on virtually all of his demands, dropped his draconian deadlines, and failed even to hint that Kim’s foot-dragging is a cause for concern. 
In October, Pompeo made no headway toward defining even the basic vocabulary of a future agreement. 
According to officials who are familiar with the talks, on at least two occasions, the North Koreans asked him if he wanted to step out and call his boss. 
As matters stand, the Kim regime and the US have yet to agree on the definition of terms such as “denuclearization,” “verifiable,” and “irreversible.” 
To be sure, playing Trump and reneging on promised steps toward denuclearization has its risks. 
In May, Trump temporarily canceled the Singapore meeting in response to North Korean statements, and he did the same with talks between Pompeo and the North Koreans in August. 
There is no guarantee that he will not repeat that gambit. 
And yet, even if he does, Kim’s own penchant for drama – from firing missiles over Japan to carrying out frequent purges at home – suggests that he knows how to command the stage and bring Trump to the table. 
Moreover, his ego-stroking personal letters to Trump show that he has a good fix on the president’s psyche. 
So far, he has proved to be highly effective at keeping the bromance alive, and the forthcoming summit on track. 
Regardless of when the second summit occurs, the North Korean regime will continue to reap dividends at America’s expense in the meantime. 
Trump’s cancellation of two major US-South Korean joint military exercises already has commanders from both countries worried about their military readiness. 
And international support for economic sanctions – particularly on the part of China and Russia – has been steadily eroding since even before the Singapore summit. 
With a fourth 2018 summit between Kim and South Korean President Moon Jae-in now in the works, it is clear that Moon’s political future is tied to rapprochement. 
During his October trip to Europe, Moon lobbied hard for the easing of sanctions, reflecting his government’s desire to engage, not embargo, the North. 
It is time for the self-described master of the “art of the deal” to admit that he doesn’t have one. 
Trump prefers hype to the hard work of hammering out arms-control agreements, so controlling his craving for the spotlight will not be easy. 
Nonetheless, when it comes to Kim, a bit of 54-year-old wisdom from Barry Goldwater, another outsider-turned-Republican Party icon, still applies: “The only summit meeting that can succeed is the one that doesn’t take place.” 

Getting to Yes With Kim Jong-un 
SEOUL – Has North Korea’s ruler, Kim Jong-un, made a strategic decision to trade away his nuclear program, or is he just engaged in another round of deceptive diplomacy, pretending that he will denuclearize in exchange for material benefits for his impoverished country? 
This is, perhaps, the key question in the run-up to the summit between Kim and US President Donald Trump in Singapore on June 12. 
Until then, no one will know the answer, perhaps not even Kim himself. 
Optimists tend to believe that Kim’s declared intention to denuclearize is sincere. 
They highlight the fact that North Korea’s economy has changed fundamentally since he succeeded his father, Kim Jong-il, in 2011. 
It is now more open, with foreign trade accounting for almost half of GDP, the result of a gradual marketization process that began in the mid-1990s. 
But with this openness comes vulnerability, which explains Kim’s active diplomatic efforts to prevent serious economic disruption from the existing international sanctions regime. 
Unlike his father, the 34-year-old Kim has been active in pursuing pro-market economic growth and may be aiming to emulate Deng Xiaoping, the architect of China’s reforms in the late 1970s. 
Kim’s recent sacking of three senior old-guard military officials may hint that he is ready to offer some important concessions to prepare a favorable diplomatic environment for concentrating on economic development. 
The key question remains whether Trump is now ready to embrace Kim’s North Korea as President Richard Nixon did with Deng’s China. 
Pessimists, however, caution against believing that Kim is serious about denuclearization. 
There is so far no evidence, they argue, that Kim is different from his father (and grandfather, Kim Il-sung), when it comes to adhering to international agreements. 
They are skeptical, for example, that North Korea will cooperate fully on three major issues. 
First, despite Kim’s declaration, it remains unclear whether he is agreeing to “complete, verifiable, and irreversible dismantlement” (CVID) of North Korea’s nuclear weapons program. 
His commitment remains aspirational and lacks substance or operational content. 
Second, given North Korea’s bad track record, the pessimists think it unlikely that Kim will permit intrusive nuclear inspections, which is a critical component of CVID. 
Finally, North Korea has not yet clarified the terms of its denuclearization. 
Its past official position – withdrawal of US troops from South Korea and an end to the bilateral alliance, would be a non-starter. 
But there may be a way to achieve denuclearization that satisfies both optimists and pessimists. 
To find it requires taking a step back and considering the most fundamental reason for the diplomatic failures of the last three decades: the high level of mutual distrust, which has made a small and weak country like North Korea, surrounded by big powers, paranoid about its own security. 
In order to address this problem at the root, the US should have taken a political approach, rather than focusing repeatedly on concluding a narrowly defined military-security deal. 
For example, President George H.W. Bush’s administration declined North Korea’s offer to establish diplomatic relations in 1991-92, when the fall of the Soviet Union heightened Kim Il-sung’s sense of insecurity. 
Likewise, North Korea’s major complaint regarding the October 1994 Geneva Agreed Framework was that the US did not keep its promise to improve political relations with North Korea. 
The Clinton administration tried a political approach in 2000, but it was too little too late. 
The first Trump-Kim summit may not be able to resolve all three major issues dividing the US and North Korea all at once. 
But that does not mean the summit will be a failure. 
For the first time, the US is tackling the fundamental cause of the North Korea problem, rather than focusing on its symptoms. 
And this is why Trump’s seemingly impromptu decision to meet Kim face to face is meaningful and productive, especially if he can bolster Kim’s confidence that he and his regime will be safe without nuclear weapons and that the international community will help him to focus on economic growth. 
That said, Trump would be well advised to leave the details of the denuclearization process in the hands of diplomats who have much experience in dealing with North Korea. 
In the meantime, he will need to rebuild an international coalition to maintain effective economic sanctions, which is the most powerful leverage for persuading Kim to accept CVID. 
Here, close cooperation with China will be essential. 
Moreover, the US should reward critical concessions by North Korea – for example, permission to conduct intrusive inspections of its entire nuclear program by international inspectors – even before the completion of CVID. 
There are of course no guarantees that it will work. 
What is clear is that successful denuclearization of North Korea will require a combination of bold political decisions – say, formally ending the Korean War, opening liaison offices, or relaxing some economic sanctions – and realistic prudence. 

What Sank the Kim-Trump Summit? 
CANBERRA – When US President Donald Trump abruptly canceled his summit with North Korea’s leader Kim Jong-un, he blamed “tremendous anger and open hostility” from the North. 
In fact, the summit, scheduled for June 12 in Singapore, was doomed for three reasons. 
First, the two sides mirrored each other’s misperception of the main motivation for the summit. 
Both thought the other had agreed to meet because of weakness and had made major concessions. 
Kim believed that his nuclear strength had forced Trump to the summit without preconditions, making him Trump’s equal as a head of state. 
He could afford to explore possible avenues for a peace regime, he thought, because North Korea’s nuclear sword provided immunity from US attacks. 
But the Americans concluded that international sanctions had brought North Korea to its knees, leaving Kim desperate to conclude a deal on US terms. 
Part of the US strategy was to place additional pressure on China to rein in its client state or itself face tough financial penalties from Washington. 
South Korea’s President Moon Jae-in, who deserves the most credit for recent developments on the Korean Peninsula, unwittingly stoked this misperception by attributing his summit with Kim to Trump’s policy of “maximum pressure” on the North. 
This was calculated flattery on Moon’s part. 
By validating Trump’s self-serving belief that tough sanctions bend countries to America’s will, Moon gained political cover from US foreign-policy hawks unhappy about diplomatic overtures to Kim. 
Unfortunately, endorsement of this narrative emboldened the US hardliners now surrounding Trump to prevail upon him to exit the Iran nuclear deal. 
To Kim, who expects to rule for decades, the reinstatement of US sanctions against Iran signaled that a deal concluded with one administration could be canceled without penalty by the next. 
To China (and Russia), it signaled the futility of falling in line with US demands against an ally and the pointlessness of engaging in tough multi-party negotiations over several years. 
To the rest of the world, it highlighted America’s growing international isolation. 
The second reason for the summit’s cancellation was contradictory understandings of “denuclearization” – the single most critical issue in the entire episode. 
The US, believing Kim had buckled under pressure, understood this to mean achievement of its long-sought goal of “CVID”: complete, verifiable, and irreversible denuclearization of North Korea. 
The North, mistakenly concluding that its nuclear deterrent had brought Trump to the summit, believed it was on the cusp of achieving its own long-sought goal: a nuclear-free Korean Peninsula, including an end to the US nuclear umbrella for Japan and South Korea. 
If it played its cards right, it could even end the US alliance with South Korea and Japan, with all US troops withdrawing from East Asia. 
Because the US misread Kim’s primary motivation and expectations, it ran into a third problem – in fact a trap of its own making, from which there was no escape. 
The North Koreans made it abundantly clear that they understood what can happen to regimes that pick fights with America without having the ultimate weapon. 
They were very conscious of what happened to Slobodan Milošević, Saddam Hussein, and Muammar el-Qaddafi. 
And the example of Qaddafi turned out to be especially important. 
After abandoning his quest for nuclear weapons in exchange for normalization of relations with the US and the world, Qaddafi died a horrible death (during which he was tortured and sodomized with a bayonet). 
And then, on April 30, Trump’s national security adviser, John Bolton, made the incendiary suggestion that North Korea could follow the “Libya model” of denuclearization. 
Vice Foreign Minister Kim Kye-gwan delivered the North’s furious response: “We do not hide our feeling of repugnance toward him.” 
The North was not interested in a dialogue aimed at a coerced “unilateral nuclear abandonment.” The “world knows too well that our country is neither Libya nor Iraq, which have met miserable fates.” 
Although Trump distanced himself from Bolton’s remarks, Vice President Mike Pence warned three weeks later that if North Korea did not make a deal, it would indeed meet with Libya’s fate. 
Choe Son Hui, vice minister of foreign affairs, replied by threatening a “nuclear-to-nuclear showdown” if Washington stuck to “unlawful and outrageous” belligerence. 
So what happens next? 
If North Korea resumes nuclear and long-range missile tests, Trump, whose instinct is to escalate the rhetoric of conflict, will come under pressure to respond forcefully. 
Amid a re-run of last year’s lurid schoolyard taunts – “little rocket man” and “mentally deranged dotard” – Moon will be desperate to rescue a semblance of improvement in relations with the North. 
Kim could try to drive a deep wedge between South Korea and the US. 
Japan’s hardline Prime Minister Shinzo Abe is probably relieved that the summit has been called off. 
The best the rest of the world can hope for is that, however slim the prospects, a diplomatic process will be maintained, along with channels of clear, accurate communication. 
A modest goal would be to reach an agreement to keep North Korea’s nuclear and missile program at current levels of capability. 
But the US may have cornered itself by rejecting such a cap with respect to Iran. 
Having made the perfect the enemy of the good in the Middle East, the Trump administration will find it humiliating to agree to a comparable arrangement on the Korean Peninsula. 
For Trump, the art of breaking deals is more important. 

Could the Trump-Kim Summit Succeed? 
CANBERRA – Last year, North Korea’s Kim Jong-un and US President Donald Trump were hurling kindergarten insults at each other – “Rocket Man is on a suicide mission,” said Trump of Kim; “mentally deranged US dotard,” Kim retorted – while threatening to reduce East Asia to a post-atomic wasteland. 
Now, in a stunning and dramatic development, the two are to meet by May. 
Kim reportedly is willing to denuclearize and eager to talk directly to Trump, who has agreed. 
But optimism about this turn of events must be tempered with cautious realism. 
North Korea is the nuclear problem from hell. 
Neither South Korea nor the United States can control the narrative; definitions of success or failure are highly relative; and Trump must enter the talks with no exit strategy. 
The six decades since the Korean War ended in 1953 – with a ceasefire but no peace agreement – have hardened an increasingly dangerous stalemate. 
Although neither side is likely to launch a premeditated nuclear attack, the risk of war from miscommunication, misperception, or miscalculation is real. 
All key announcements so far have come from Seoul, not Pyongyang or Washington. 
President Moon Jae-in, a son of refugees from North Korea, was elected on the promise of a two-track approach to the North: sanctions and diplomacy. 
This led to the Olympic initiative whereby Kim’s sister, Kim Yo-jong, attended the Winter Games in Pyeongchang, and the two countries competed as one team. 
Afterwards, Moon’s national security adviser, Chung Eui-yong, and intelligence chief Suh Hoon traveled to Pyongyang and Washington, where, standing on the White House lawn with Cho Yoon-je, South Korea’s ambassador to the US – but with no US officials present – they announced the summit. 
North Korea conducted the first of six nuclear tests in 2006. 
The regime’s nuclear program has many components, and discussions could founder on what is to be proscribed, permitted, and reversed, and in exchange for what concessions by the US. 
Will the deal require freezing North Korea’s capability at current levels, or complete, verifiable, and irreversible denuclearization? 
The answer will depend on North Korea’s motives in getting the bomb and agreeing to talk. 
For the Kim regime, the main lesson from the fates of Slobodan Milošević, Saddam Hussein, and Muammar el-Qaddafi was that only nuclear weapons can neutralize US efforts at regime change. 
But the US never attacked North Korea in the decades after 1953, when it clearly did not have the bomb. 
Conversely, the North’s growing nuclear capability provoked the US into quietly preparing for war while hoping to avert one. 
Sanctions are an ineffective tool to force North Korea’s compliance with the UN’s demand that it give up nuclear weapons, and it could prove dangerous to conclude that their pain brought Kim to the talks. 
Similarly, the threat of US military strikes did little to concentrate Kim’s mind: even Western analysts do not find that threat credible. 
The US lacks the ability to identify, locate, and destroy all three categories of nuclear targets: warheads, bomb production infrastructure, and delivery vehicles. 
North Korea also has formidable conventional military capabilities, and estimates of human casualties could total as many as 25 million, depending on the types of weapons used, the geographical theater of the conflict, and the countries sucked into it. 
In February, Moon said: “The United States needs to lower its bar for dialogue and the North, too, must show its willingness to denuclearize” as critical first steps. 
The summit became possible because the US acceded to that counsel, turning its demand for denuclearization, which had previously been a precondition for talks, into a goal of negotiations. 
But Kim will not trust unilateral US guarantees. 
Therefore, any deal would require the support of China and Russia, economic and energy assistance from Japan and others, and endorsement by the UN Security Council. 
China and Russia have welcomed news of the direct talks, but Japan is uneasy. 
All parties will explore six elements of a deal that North Korea is seeking: a peace treaty to replace the 1953 armistice, comprehensive sanctions relief, an end to US-South Korea military exercises, diplomatic recognition, acceptance of North Korean space activities, and nuclear energy assistance. 
The North must halt all nuclear and missile tests until the summit, and sanctions will remain in place. 
But will the US and South Korea suspend military exercises? 
To North Korea, complete denuclearization means the withdrawal of US extended nuclear deterrence from the peninsula. 
The Kim-Trump summit is an opportunity that will be difficult to seize and easy to squander. 
For example, if Trump decertifies the Iran nuclear deal on May 12, ahead of the summit, the move would almost certainly call into question America’s good faith and ability to honor negotiated international agreements. 
Moreover, there is the general matter of Trump’s ignorance, lack of foreign-policy experience, and the many unfilled posts in the US State Department. 
There is still no US ambassador in Seoul, and Joseph Yun, US Special Representative for North Korea Policy, retired this month. 
Without extensive diplomatic groundwork, the wily Kim could outsmart Trump. 
Participation in the Winter Olympics and willingness to sit down with Trump have already given the North a propaganda boost, and a summit with the US president will confer legitimacy on Kim. 
Yet Trump has proven to be pragmatic, not ideological. 
His transactional approach could prove the key. 
Whether genuine or tactical, Moon has constantly praised Trump’s tough stance of maximum pressure as helpful to gaining Kim’s interest in a possible diplomatic solution. 
Moreover, Trump carries no historical baggage, and his decisiveness, even if rooted in impulsiveness, could provide the necessary breakthrough to overcome decades of accumulated inertia. 
Trump’s ability to reverse himself and deny having done so could be equally advantageous. 
If a good deal is on the table, nothing the US has done, or that Trump has said in the past, will stop him from seizing the moment. 
On such slender threads of hope hang nuclear peace. 

King Coal’s Climate Policy 
COPENHAGEN – The United Nations Climate Change Treaty, signed in 1992, committed the world to “avoiding dangerous anthropogenic interference in the climate system.” 
Yet, since that time, greenhouse-gas emissions have continued to soar. 
The United States has proved to be the biggest laggard in the world, refusing to sign the 1997 Kyoto Protocol or to adopt any effective domestic emissions controls. 
As we head into the global summit in Copenhagen in December to negotiate a successor to the Kyoto Protocol, the US is once again the focus of concern. 
Even now, American politics remains strongly divided over climate change – though President Barack Obama has new opportunities to break the logjam. 
A year after the 1992 treaty, President Bill Clinton tried to pass an energy tax that would have helped the US to begin reducing its dependence on fossil fuels. 
The proposal not only failed, but also triggered a political backlash. 
When the Kyoto Protocol was adopted in 1997, Clinton did not even send it to the US Senate for ratification, knowing that it would be rejected. 
President George W. Bush repudiated the Kyoto Protocol in 2001 and did essentially nothing on climate change during his presidency. 
There are several reasons for US inaction – including ideology and scientific ignorance – but a lot comes down to one word: coal. 
No fewer than 25 states produce coal, which not only generates income, jobs, and tax revenue, but also provides a disproportionately large share of their energy. 
Per capita carbon emissions in US coal states tend to be much higher than the national average. 
Since addressing climate change is first and foremost directed at reduced emissions from coal – the most carbon-intensive of all fuels – America’s coal states are especially fearful about the economic implications of any controls (though the oil and automobile industries are not far behind). 
The US political system poses special problems as well. 
To ratify a treaty requires the support of 67 of the Senate’s 100 members, a nearly impossible hurdle. 
The Republican Party, with its 40 Senate seats, is simply filled with too many ideologues – and, indeed, too many senators intent on derailing any Obama initiative – to offer enough votes to reach the 67-vote threshold. 
Moreover, the Democratic Party includes senators from coal and oil states who are unlikely to support decisive action. 
The idea this time around is to avoid the need for 67 votes, at least at the start, by focusing on domestic legislation rather than a treaty. 
Under the US Constitution, domestic legislation (as opposed to international treaties) requires a simple majority in both the House of Representatives and the Senate to be sent to the president for signature. 
Getting 50 votes for a climate-change bill (with a tie vote broken by the vice president) is almost certain. 
But opponents of legislation can threaten to filibuster (speak for an indefinite period and thereby paralyze Senate business), which can be ended only if 60 senators support bringing the legislation to a vote. 
Otherwise, proposed legislation can be killed, even if it has the support of a simple majority. 
That will certainly be true of domestic climate-change legislation. 
Securing 60 votes is a steep hill to climb. 
Political analysts know that the votes will depend on individual senators’ ideologies, states’ voting patterns, and states’ dependence on coal relative to other energy sources. 
Based on these factors, one analysis counts 50 likely Democratic “Yes” votes and 34 Republican “No” votes, leaving 16 votes still in play. 
Ten of the swing votes are Democrats, mainly from coal states; the other six are Republicans who conceivably could vote with the president and the Democratic majority. 
Until recently, many believed that China and India would be the real holdouts in the global climate-change negotiations. 
Yet China has announced a set of major initiatives – in solar, wind, nuclear, and carbon-capture technologies – to reduce its economy’s greenhouse-gas intensity. 
India, long feared to be a spoiler, has said that it is ready to adopt a significant national action plan to move towards a trajectory of sustainable energy. 
These actions put the US under growing pressure to act. 
With developing countries displaying their readiness to reach a global deal, could the US Senate really prove to be the world’s last great holdout? 
Obama has tools at his command to bring the US into the global mainstream on climate change. 
First, he is negotiating side deals with holdout senators to cushion the economic impact on coal states and to increase US investments in the research and development, and eventually adoption, of clean-coal technologies. 
Second, he can command the Environmental Protection Agency to impose administrative controls on coal plants and automobile producers even if the Congress does not pass new legislation. 
The administrative route might turn out to be even more important than the legislative route. 
The politics of the US Senate should not obscure the larger point: America has acted irresponsibly since signing the climate treaty in 1992. 
It is the world’s largest and most powerful country, and the one most responsible for the climate change to this point, it has behaved without any sense of duty – to its own citizens, to the world, and to future generations. 
Even coal-state senators should be ashamed. 
Sure, their states need some extra help, but narrow interests should not be permitted to endanger our planet’s future. 
It is time for the US to rejoin the global family. 

King Coal’s Pyrrhic Victory 
BRUSSELS – Sometimes the most important news is what is not happening. 
This summer has given us one such example: the climate-change bill, for which President Barack Obama had pushed so hard, will not even be presented to the United States Senate, because it stands no chance of passage. 
This means that the US is about to repeat its “Kyoto experience.” 
Twenty years ago, in 1990, the US participated (at least initially) in the first global talks aimed at achieving a global accord to reduce CO2 emissions. 
At the time, the European Union and the US were by far the greatest emitters, so it seemed appropriate to exempt the world’s emerging economies from any commitment. 
Over time, it became apparent that the US would not live up to its commitment, owing, as now, to opposition in the Senate. 
The EU then went ahead on its own, introducing its path-breaking European Emission Trading System in the hope that Europe could lead by example. 
Without the American climate-change package, the promises made by the US administration only seven months ago at the Copenhagen summit have become worthless. 
The European strategy is in tatters – and not only on the transatlantic front. 
China’s commitment to increase the CO2 efficiency of its economy by about 3% per year is of no help, because annual GDP growth rates of close to 10% mean that the country’s emissions will soar during this decade. 
Indeed, by 2020, Chinese emissions could be more than triple those of Europe and even surpass those of the US and Europe combined. 
Exempting emerging markets from any commitments, as the Kyoto Protocol sought to do, no longer makes sense. 
Why has every attempt to set prices for global carbon emissions failed? 
The answer can be found in one word: “coal” – or, rather, the fact that coal is cheap and abundant. 
Burning hydrocarbons (natural gas and petrol) yields both water and CO2. 
By contrast, burning coal yields only C02. 
Moreover, compared to natural gas and crude oil, coal is much cheaper per ton of CO2 released. 
This implies that any tax on carbon has a much higher impact on coal than on crude oil (or gas). 
Owners of coal mines and their clients are thus strongly opposed to any tax on carbon. 
They constitute a small but well organized group that wields immense lobbying power to block efforts to limit CO2 emissions by putting a price on them, as the planned US cap-and-trade system would have done. 
In Europe, indigenous coal production no longer plays an important economic role. 
It is thus not surprising that Europe could enact a cap-and-trade system that imposes a carbon price on a large part of its industry. 
Indeed, the tax seems to fall mostly on foreign suppliers of coal (and to a lesser extend on foreign suppliers of hydrocarbons in the Middle East and Russia). 
By contrast, opposition by US states whose economies rely significantly on coal production proved decisive for the fate of Obama’s climate-change bill. 
The US experience has wider implications. 
If it proved impossible to introduce a moderate carbon tax in a rich economy, it is certain that no commitment will be forthcoming for the next generation from China, which remains much poorer and depends even more on indigenous coal than the US. 
And, after China, India looms as the next emerging coal-based industrial superpower. 
Without any significant commitment from the US, the Copenhagen Accord, so laboriously achieved last year, has become meaningless. 
Business will now continue as usual, both in terms of climate-change diplomacy, with its wandering circus of big international meetings, and in terms of rapidly increasing emissions. 
The meetings are aimed at creating the impression that the world’s leaders are still working on a solution to the problem. 
But rising CO2 emissions constitute what is really happening on the ground: a rapidly growing industrial base in emerging markets is being hard-wired to intensive use of coal. 
This will make it exceedingly difficult to reverse the trend in the future. 
A planet composed of nation-states that in turn are dominated by special interest groups does not seem capable of solving this problem. 
Unfortunately, there is enough cheap coal around to power ever-higher emissions for at least another century. 
The world will thus certainly become much warmer. 
The only uncertainty is how much warmer that will be. 
Determined action at the global level will become possible only when climate change is no longer some scientific prediction, but a reality that people feel. 
But, at that point, it will be too late to reverse the impact of decades of excessive emissions. 
A world incapable of preventing climate change will have to live with it. 


Kipling’s Wisdom 
LONDON – The beginning of October marked the seventh anniversary of the beginning of the American-led bombardment of Afghanistan. 
Seven years later, the Taliban are still fighting. 
Some 50 insurgents died recently in an assault on Lashkar gar, the capital of Helmand province. 
Osama bin Laden is nowhere to be found. 
Has the time come for NATO to declare victory and leave? 
Recently, a French diplomatic cable relating a conversation on September 2 between the French ambassador to Afghanistan, Francois Fitou, and his British colleague, Sherard Cowper-Coles, was leaked in Le Canard Enchainé , a French satirical magazine. 
Cowper-Coles was reported to have said that the security situation in Afghanistan was deteriorating, that NATO’s presence was making it worse, and that the two American presidential hopefuls should be dissuaded from getting bogged down further. 
The only realistic policy would be to cultivate an “acceptable dictator.” 
Of course, the British Foreign Office denied that these thoughts reflected the British government’s views. 
The departing commander of British forces in Afghanistan, Brigadier Mark Carleton-Smith, has claimed that defeating the Taliban was “neither feasible nor supportable.” 
Two days after making that gloomy assessment, the French chief of the defense staff, General Jean-Louis Georgelin, followed suit. 
And Kai Eide, the United Nations Secretary-General’s special representative in Afghanistan, has agreed that the situation cannot be stabilized by military means alone. 
All call for a concerted political effort implying some form of negotiation with the Taliban. 
A draft report by American intelligence agencies has also concluded that Afghanistan is in a “downward spiral” and casts serious doubt on the Afghan government’s ability to stem the Taliban’s resurgence. 
Moreover, King Abdullah of Saudi Arabia hosted a Ramadan breakfast for the Afghan government and Taliban representatives. 
Predictably, both parties deny that any serious negotiations took place, while the United States and Britain claimed to know nothing about this “Saudi initiative.” 
But Afghan Defense Minister Abdul Rahim Wardak subsequently said that resolution of the conflict required a “political settlement” with the Taliban. 
Yet at the recent NATO summit in Budapest, US Defense Secretary Robert Gates called on NATO members to provide more troops for missions in Afghanistan. 
He accused the British of being “defeatist” and argued that Afghanistan’s deteriorating security situation could be addressed with an Iraq-style “surge,” which has undoubtedly brought down violence levels in that country. 
The Americans have already committed 8,000 extra troops for next year. 
So there seems to be a split. 
The British and French are busy briefing, and preparing to scale down their commitments in Afghanistan. 
They believe that boosting allied forces will only increase the sense of occupation and give the Taliban more targets. 
The emergence of a “realistic dictator” might allow NATO to withdraw most of its troops within a few years. 
But the Americans want a “surge,” and the US general commanding NATO forces in the country said last month that he needed three more brigades, some 15,000 troops in all, and Gates has asked the Europeans either to send or pay for them. 
The Americans do recognize the importance of courting those Taliban leaders they believe to be motivated by tribal loyalties rather than religious ideology, but they oppose the latest Afghan policy of negotiating directly and officially with the Taliban. 
Both Barack Obama and John McCain advocate increasing troop levels in Afghanistan above the levels that the Bush administration has already pledged. 
Obama has that said he would send troops from Iraq as an urgent priority. 
McCain has given no details of his plans. 
Obama has made it a campaign issue to criticize the Bush administration for neglecting Afghanistan and diverting resources needed there to the misguided war in Iraq. 
McCain, though, has always maintained that Iraq is the more important battlefield. 
What candidates promise on the stump is not always what they do in office. 
In the second presidential debate, Obama said, “We will kill bin Laden. 
We will crush al-Qaeda.” 
Are his patriotic credentials strong enough for him to renege on this pledge and pursue negotiations to withdraw without capturing the talismanic Osama? 
What would a US withdrawal mean for Afghanistan, for Pakistan, and for the future of NATO? 
To retreat from its first major “out of area” mission would be a damaging blow for the alliance. 
Curiously, McCain may have more room for maneuver. 
Republican presidents have a better record in negotiating with enemies than do Democratic ones. 
Eisenhower ended the Korean War, Nixon the war in Vietnam – both wars started by their Democrat predecessors. 
Nixon, a vitriolic anti-Communist, opened relations with Mao’s China and started détente with the Soviet Union. 
Reagan brought the US hostages back from Iran. 
Having condemned the “evil empire” of communism, he helped bring the Cold War to an end. 
Only recently, George W Bush evicted North Korea from his “axis of evil” by removing that country from America’s list of countries that sponsor terrorism. 
And what about the British? 
Have they suddenly remembered the unsustainable cost of fighting asymmetric conflicts? 
Afghanistan has never been a place any foreign army could stay for long. The British were burned there twice (1840-1, 1878-80). 
So were the Russians. 
Rudyard Kipling got his arithmetic right in 1886: 
No proposition Euclid wrote, 
No formulae the text-books know, 
Will turn the bullet from your coat, 
Or ward the tulwar’s downward blow 
Strike hard who cares – shoot straight who can – 

Asia’s Giants Under New Management 
BALI – More than one-third of the world’s population lives in just three countries: China, India, and Indonesia. 
With all three undergoing significant political transitions – whether electing a new leader or experiencing a recently installed leader’s first key decisions – this is a decisive moment in shaping the global economy’s future. 
If Narendra Modi and Joko “Jokowi” Widodo win the upcoming elections in India and Indonesia, respectively, they will join Chinese President Xi Jinping in spurring regional economic growth – likely causing Asia’s rise to global economic preeminence to occur faster than the world ever imagined. 
In the year since Xi assumed the Chinese presidency, he has centralized power to a remarkable degree. 
Not only has he positioned himself as General Secretary of the Chinese Communist Party and Chairman of the Central Military Commission; he has also neutralized potential rivals, including former Chongqing party boss Bo Xilai and former security chief Zhou Yongkang. 
Consolidating power in a country as large and messy as China is extremely difficult, making Xi’s accomplishment remarkable, to say the least. 
After all, it took Xi’s predecessor, Hu Jintao, far longer to achieve a similar degree of authority. 
But it is only a first step. 
Xi is now attempting to use this power to push through the difficult reforms that Hu and his prime minister, Wen Jiabao, have been widely criticized for neglecting. 
Despite the pressure to make up for lost time, Xi knows that he must be pragmatic in his reform efforts. 
First, he must build a national consensus capable of overcoming the powerful vested interests that oppose changes – including the dissolution of monopolies, improved market regulation, increased transparency, and tax reform – that would level the economic playing field. 
While Western leaders generally support Xi’s market-oriented reform strategy, they remain puzzled by his devotion to the CCP. 
To the Western mind, any truly effective reformer must be a closet democrat, like the Soviet Union’s last president, Mikhail Gorbachev. 
But Xi has no intention of being the People’s Republic’s last president, and the Soviet Union’s collapse in the wake of Gorbachev’s political reforms taught him the importance of balancing change with stability. 
For Xi, the CCP’s appeal lies not so much in its ideology as in its capacity to help bolster China’s prosperity. 
Indeed, China’s current leaders are modernizing nationalists, not communists. 
They recognize that China’s success over the last three decades is a direct result of its shift toward a more open economy and a freer society – a shift that will continue under Xi. 
Another modernizing nationalist, Narendra Modi, is likely to become India’s prime minister following the elections that started this month. 
Modi’s pro-business approach is a major theme of his election campaign, and ordinary Indians are hopeful that his policy program will enhance their wellbeing. 
As Chief Minister of Gujarat, Modi worked to encourage foreign investment, provide around-the-clock electricity, build roads, and engage in intelligent urban planning. 
Annual economic growth in the state averaged more than 10% from 2006 to 2012, when the Gujarati city of Ahmedabad was short-listed for the Lee Kuan Yew World City Prize. 
But history haunts Modi’s campaign – namely, the deaths of more than 1,000 people in anti-Muslim riots in Gujarat in 2002. 
Though the Supreme Court cleared him of all personal wrongdoing, the tragedy’s legacy persists, making it difficult for Modi to win Muslim votes without alienating his Hindu nationalist base. 
This has not prevented Modi from taking political risks, beginning with his assertion that India needs toilets more than temples. 
But his decision to run for Prime Minister is by far his riskiest move, as it will test his national appeal. 
Of course, even if he wins, Modi will never be able to consolidate power to the degree that Xi has, owing to India’s separation of powers and democratic constitution. 
At best, he will lead a coalition government, in which his capacity to make compromises and connect with unlikely allies will dictate his success. 
Jokowi, the governor of Jakarta, will face a similar challenge if he wins Indonesia’s presidential election in July, given that his party, the Indonesian Democratic Party of Struggle, will not have a majority in parliament. 
Fortunately, he is a skilled politician – popular, but not populist, with tremendous persuasive powers. 
These qualities enable Jokowi to deliver results, exemplified in his success in convincing Jakarta’s slum dwellers to leave their shanties to allow for urban development. 
Under his leadership, highway projects that had been blocked for 16 years have been relaunched in the city. 
Like Xi and Modi, Jokowi is focused mainly on economic development. 
In this regard, his background as a furniture manufacturer and exporter is a major asset, enabling him to bring a level of hands-on knowledge and experience that past Indonesian presidents have lacked. 
Given Jokowi’s business acumen, he understands that Indonesia must improve its logistical capabilities if its economy is to engage the world. 
Perhaps most important, Xi, Modi, and Jokowi are all pragmatists. 
They know that, in order to achieve rapid economic growth and modernization – a key priority for all of them – they will need to compromise with opposition forces at home and adopt best practices from abroad. 
Their shared desire to engage the modern world suggests that their leadership will improve the lives of their countries’ citizens. 
And better lives for one-third of the world’s population will benefit the rest of us as well. 

Asia’s Reform Trinity? 
SINGAPORE – Asia is poised to enter a historical sweet spot, with three of its most populous countries – China, India, and Indonesia – led by strong, dynamic, and reform-minded leaders. 
In fact, China’s Xi Jinping, India’s Narendra Modi, and Indonesia’s Joko “Jokowi” Widodo could end up ranked among their countries’ greatest modern leaders. 
In China, Mao Zedong united the country in 1949, while Deng Xiaoping was responsible for engineering its unprecedented economic rise. 
For Xi to join their ranks, he must create a modern, rules-based state. 
That requires, first and foremost, slaying the massive dragon of corruption. 
Over the years, corruption has become endemic in China, with regional party leaders and bosses in state-owned enterprises wielding their vast privileges and authority to accumulate personal wealth. 
This has severely undermined the Chinese Communist Party’s legitimacy, while hampering the kind of market-based competition that China’s economy needs to propel the country to high-income status. 
So far, Xi seems to be up to the challenge. 
He has been boldly pursuing major figures who were previously considered “untouchable,” such as General Xu Caihou, a former vice chairman of the Central Military Commission, and Zhou Yongkang, a former member of the Politburo Standing Committee, China’s highest government body. 
But the long-term fight against corruption cannot depend on Xi alone. 
It will succeed only if strong institutions are created to protect and nurture the rule of law long after Xi is out of power. 
If Xi chooses to establish such institutions, he has a strong legal tradition upon which to call. 
As former US Ambassador to China Gary F. Locke reported in a speech early this year, the concept of equality before the law has deep historical roots. 
Indeed, in the fourth century BC, the statesman and reformer Shang Yang famously asserted that, “When the prince violates the law, the crime he commits is the same as that of the common people.” 
Building on this tradition, Xi can create strong institutions that will stand the test of time. 
If he does – recognizing that, to be credible, the rule of law must apply even to the Party’s most influential figures – he will become modern China’s third-strongest leader. 
In India, Mahatma Gandhi rejuvenated the country’s soul, which had been battered by colonialism, and Jawaharlal Nehru established its democratic political culture. 
Modi now must lay the foundations for India’s emergence as a global economic power. 
Replicating the 10% annual growth rates achieved in Gujarat under Modi’s leadership from 2004 to 2012 would obviously be a boon to India’s development prospects and global standing. 
But achieving such high growth rates in a sustainable way will demand far-reaching, sometimes painful reforms, such as the removal of wasteful subsidies, especially for fuel, in order to free up resources for, say, increased health-care expenditure. 
Other imperatives include shrinking the budget deficit, removing internal barriers to trade, and encouraging private investment. 
To win the support needed to implement these reforms without undermining political stability or social cohesion, Modi must demonstrate that he is an inclusive leader capable of cooperating with Indians outside of his Hindu nationalist base – including the country’s 150 million-plus Muslims. 
If he succeeds, he, like Xi, will become his country’s next iconic leader. 
In Indonesia’s case, the two most influential leaders so far have been Sukarno, who used powerful rhetoric to foster a sense of national unity in one of the world’s most diverse countries, and Suharto, who overthrew Sukarno and created a strong economic base that lifted millions out of poverty. 
Jokowi must now lay the institutional foundations for good governance. 
Jokowi has risen from humble beginnings to the apex of power without compromising his image as a “man of the people” or his reputation for pragmatism and honesty. 
Jokowi has a long track record of good governance, having implemented effective policies during his stint as Mayor of Surakarta (such as refurbishing markets, relocating slum dwellers, and cutting bureaucratic red tape), and as Governor of Jakarta (where he broadened access to health care and education). 
But replicating this success at the national level will be no easy feat. 
Jokowi, who takes office in October, must implement policies that address rising inequality, unsustainable fuel subsidies, entrenched corruption, inadequate infrastructure, and restrictive labor laws – all while rebuilding trust in Indonesian institutions. 
The challenges facing Jokowi are compounded by the fact that his ruling coalition holds only about one-third of the seats in Indonesia’s parliament, with the rest loyal to the coalition of his rival in the presidential election, Prabowo Subianto. 
So, in introducing a new style of governance, exemplified by merit-based cabinet appointments, Jokowi must be careful not to alienate the political and business elites who have long benefited from their tight grip on power. 
In short, if Jokowi is to form a national consensus on the institutions that Indonesia needs, he will have to reach across this political divide. 
To this end, Mexican President Enrique Peña Nieto’s cross-party “Pact for Mexico” could serve as a useful model. 
Promisingly, Jokowi has a reputation for independence from partisan and religious politics, and a talent for communicating with the people. 
And, as a political outsider, he is in a unique position to direct Indonesia toward a more prosperous, united future – and vault himself into the country’s pantheon of great leaders. 
China, India, and Indonesia are all well positioned to take important steps forward. 
A commitment by Xi, Modi, and Jokowi to do what is needed would bring rapid, far-reaching progress to their respective countries, Asia, and the global order. 

The Techno-Political Transformation 
GENEVA – It would be an understatement to say that our world is undergoing rapid and far-reaching change. 
The global economy, the geopolitical landscape, the environment, and technology are subject to constantly shifting conditions that reinforce and transform one another in a web of complex interactions. 
In such an unpredictable and interconnected setting, effective leadership must be based on a radical outlook, a multifaceted skillset, and an understanding of technology and talent. 
The trends that are shaping the twenty-first-century world embody both promise and peril. 
Globalization, for example, has lifted hundreds of millions of people out of poverty, while contributing to social fragmentation and a massive increase in inequality, not to mention serious environmental damage. 
Likewise, big data offers untold benefits to companies and consumers, but poses a real threat to privacy and personal freedom. 
A similar dichotomy applies to many other critical issues, including adaptation to climate change, efforts to improve resource management, urbanization and the rise of megacities, increased labor mobility, and human-capital expansion. 
The scale and complexity of the challenges that lie ahead are undoubtedly daunting. 
But rapid, far-reaching change can also present great opportunities. 
To make the most of them, the world needs technologically literate leaders – call them “techno-politicians” – who have an intuitive understanding of how to shape progress in this new, unpredictable environment. 
Within the framework of techno-politics, economic growth and technological innovation are the two most important factors shaping the global landscape. 
How we adapt to and guide their trajectories will determine our collective future. 
In economic terms, the world is entering an era of diminished expectations. 
If, as predicted, average annual GDP growth amounts to 3% in the foreseeable future, it will take 25 years for the world economy to double in size – ten years longer than it took before the global economic crisis, when average GDP growth stood at 5%. 
Learning to live with slower growth will not be easy. 
Given that debt-fueled consumption has run its course, productivity gains will become an increasingly critical driver of economic growth. 
But, at a time when rising inequality is undermining social cohesion, it is far from certain that the conditions required to support such gains – that is, improved education and stronger incentives to innovate – can be met. 
Perhaps most important, even as economic growth slows, technological change continues at a breakneck pace, raising seemingly unanswerable questions about its potential impact on the global economy. 
While some warn that technological progress will leave many unemployed, others remain convinced that displaced workers will find new jobs that do not yet exist, as has occurred in the past. 
All that is certain is that technology and innovation are disrupting virtually every aspect of life. 
How can we adapt to such a world? 
What underpins success in this new and challenging environment? 
In a techno-polity, two inextricably linked factors are crucial: talent and innovation. 
Talent is now the key factor driving competitiveness (or the lack thereof) for companies and countries alike. 
Indeed, “talentism” will be the prevailing economic credo, with human or intellectual capital becoming the most critical asset – and the one most difficult to acquire and retain. 
Innovation, spurred by talent, will determine success. 
In the future, the distinction between high- and low-income countries, or between emerging and mature markets, will no longer matter. 
The question will be whether or not an economy can innovate. 
A techno-polity also recognizes the critical role of cooperation, strategic thinking, and adaptation. 
The biggest challenges nowadays are global in nature, and thus can be addressed only by engaging decision-makers and interest groups from various spheres. 
New partnerships must be forged, even among actors with seemingly disparate interests. 
Those who struggle to cope with change must be supported, not scorned. 
But effective techno-politicians must go beyond firefighting to think about the long term. 
They must be able to respond to new and impending developments without delay, constantly experimenting with new ideas and processes. 
Moreover, they must to be able to understand and react simultaneously to multiple competing realities. 
The role of the techno-polity is to steer the world toward positive outcomes. 
It will demand that decision-makers use their heads and hearts – and it will also test their nerves. 

The Global Economy in 2014 
GENEVA – At the dawn of a new year, the world is in the midst of several epic transitions. 
Economic growth patterns, the geopolitical landscape, the social contract that binds people together, and our planet’s ecosystem are all undergoing radical, simultaneous transformations, generating anxiety and, in many places, turmoil. 
From an economic standpoint, we are entering an era of diminished expectations and increased uncertainty. 
In terms of growth, the world will have to live with less. 
To understand the implications of this, consider the following: If the global economy grew at its pre-crisis pace (more than 5% per year) for the foreseeable future, its size would double in less than 15 years; at 3%, doubling world GDP would take about 25 years. 
This makes a significant difference to the speed at which wealth creation occurs, with profound effects on expectations. 
We ignore the power of compound growth to our detriment. 
As for uncertainty, the world’s four largest economies are currently undergoing major transitions. 
The US is striving to boost growth in a fractured political environment. 
China is moving from a growth model based on investment and exports to one led by internal demand. 
Europe is struggling to preserve the integrity of its common currency while resolving a multitude of complex institutional issues. 
And Japan is trying to combat two decades of deflation with aggressive and unconventional monetary policies. 
For each, the formulation and outcome of complex and sensitive policy decisions implies many “unknowns,” with global interdependence heightening the risk of large unintended consequences. 
For example, the US Federal Reserve’s policy of quantitative easing (QE) has had a major effect on other countries’ currencies, and on capital flows to and from emerging markets. 
When QE was launched, it was the least flawed of the available policies, and it averted a catastrophic global depression. 
But its downsides are now apparent, and its abatement in 2014 could fuel further uncertainty. 
The Fed’s QE policy, and variants of it elsewhere, have caused the major central banks’ balance sheets to expand dramatically (from $5-6 trillion prior to the crisis to almost $20 trillion now), causing financial markets to become addicted to easy money. 
This has led, in turn, to a global search for yield, artificial asset-price inflation, and misallocation of capital. 
As a result, the longer QE lasts, the greater the collateral damage to the real economy. 
The concern now is that when the Fed begins to taper QE and dollar liquidity drains from global markets, structural problems and imbalances will resurface. 
After all, competitiveness-enhancing reforms in many advanced economies remain far from complete, while the ratio of these countries’ total public and private debt to GDP is now 30% higher than before the crisis. 
This source of uncertainty coincides with weakening performance in many emerging countries. 
Back in 2007, emerging-market growth was expected to outpace that of advanced economies by a wide margin, before converging. 
Today, the advanced economies contribute more to global GDP growth than emerging countries, where growth is forecast to average 4% in the coming years. 
Economic conditions are slowly improving in high-income countries, but a range of downward pressures may persist for years. 
The US economy, for example, remains stuck in a subpar recovery: inflation is too low and unemployment is too high. 
Official data have often been better than expected, reflecting how resilient, adaptive, and innovative the US economy is, but pre-crisis consumer-spending and growth patterns are unlikely to recur. 
Improvements in the eurozone are real but tenuous. 
The good news is that the disaster predicted by many pundits has been avoided, and the recession is coming to an end. 
But improvement does not mean resurgence: achieving the robust growth needed to reduce high unemployment, lower the debt/GDP ratio, and improve the fiscal outlook remains elusive. 
The greatest risk for the eurozone in the foreseeable future is not a disorderly exit by some countries, but rather a prolonged period of stagnant growth and high unemployment. 
Meanwhile, the emerging-market slowdown may well persist, particularly in the largest economies. 
Over the past 15 years, the BRICs (Brazil, Russia, India, and China) have achieved remarkable progress, but their reforms – including new banking regulations and currency regimes – have been among the least difficult to implement. 
So-called second-generation reforms, which are more structural in nature, are vital to long-term growth but much more difficult to realize. 
Elimination of subsidies, labor market and judicial reforms, and effective anti-corruption measures are politically charged and often are blocked by powerful vested interests. 
The global growth slowdown is taking place against a backdrop of rising economic inequality, owing to labor’s declining share of national income – a worldwide phenomenon, resulting from globalization and technological progress, that poses a serious challenge to policymakers. 
Systems that propagate inequality, or that seem unable to stem its rise, contain the seeds of their own destruction. 
But in an interdependent world, there is no obvious solution, because the high mobility of capital fuels global tax competition. 
Even in stronger-performing countries, such as the US or the United Kingdom, faster GDP growth has yet to boost real incomes. 
In the US, for example, median household income has fallen by more than 5% since the recovery began. 
More generally, lower growth is fueling popular protest and social unrest, particularly in countries that were growing rapidly (for example, Brazil, Turkey, and South Africa), owing to the impact of rising living standards on expectations. 
In such a charged social and political context, reviving high-quality economic growth is crucial. 
But where will it come from? 
Technological progress is a distinct, but highly uncertain, possibility. 
Many disruptive technologies (for example, advanced robotics, next-generation genomics, energy storage, renewable energy, and 3D printing) could drive future growth, but their full potential can be realized only in the distant future. 
With most governments facing fiscal constraints, officials are reluctant to consider projects that might increase public debt. 
But there is some low-hanging fruit – productive investments that would boost long-term growth and therefore pay for themselves. 
A focus on four areas, in particular – infrastructure, education, green energy, and sustainable agriculture – could yield high economic and social returns. 
Ultimately, however, the path to sustained growth requires not just new policies, but also a new mindset. 
Our societies must become more entrepreneurial, more focused on establishing gender parity, and more rooted in social inclusion. 
There simply is no other way to return the global economy to a path of strong and sustained growth. 

 

Unlocking Girls’ Potential 
NEW YORK – I recently visited a “girls club” – a safe space where adolescent girls come together with trained mentors to build their social networks and learn life skills – in the Tonk District of Rajasthan, India. 
As I arrived, I was greeted by a group of teenage girls bouncing along the road, so full of energy and laughter that I couldn’t help but smile, too. 
Just imagine, I thought, the potential of 600 million such girls. 
History’s largest generation of girls aged 10-19 is here, ready to make its mark on the world. 
Governments, development organizations, and private institutions are eager to help them translate that youthful potential into an engine of creativity, economic growth, and social progress. 
But, on the path to such a future, girls continue to face major obstacles. 
Some 170 million girls – almost one third of girls worldwide – are not enrolled in school. 
This is a major missed opportunity: for every year of forgone schooling, a girl’s potential income drops 10-20%. 
Yet there are major barriers to boosting school enrollment – beginning with the persistence of child marriage. 
Every year, 15 million girls are married before they reach the age of 18 – one every two seconds – with early or forced child marriage affecting about a quarter of girls worldwide. 
Beyond increasing the probability that a girl will suffer violence, early marriage boosts girls’ chances of early pregnancy by 90%. 
The likely result is a larger family that demands more unpaid childcare, thereby undermining educational attainment and reinforcing the gender pay gap. 
Girls who are married before age 18 also face a severe reduction in mobility, though they are not alone. 
A study in South Africa showed that, overall, girls face a drastic reduction in access to the public sphere – with spatial access falling from an area of 6.3 square miles to just 2.6 – when they reach puberty. 
Spatial access for boys, by contrast, more than doubles, from 3.8 square miles to 7.8, when they are seen as becoming men. 
Reduced mobility for girls puts them at risk of social isolation and limits their opportunities to build social capital. 
As a result of these and other factors, only 47% of women in low- and middle-income countries are now in the labor force, compared to 79% of men. 
My research team estimates that if we cut the labor-force participation gap by just half – from 32 percentage points to 16% – GDP in the affected countries would increase by 15% in the first year alone, adding $4 trillion to global GDP. 
Giving girls the skills and knowledge they need to become productive individuals who can participate in the twenty-first-century economy empowers them in all aspects of their lives, enabling them to contribute to their families, communities, and economies in ways they choose. 
It is the right thing to do for global development – and for girls and women themselves. 
A growing number of governments, foundations, companies, and communities recognize this, and are now investing in girls’ health, education, and wellbeing. 
But considerable resources are being channeled toward ineffective approaches or – worse – programs that have been proved not to work. 
And too many well-meaning development actors regard girls as victims to be saved, rather than as the innovative, energetic game changers they are. 
So how can we best expand opportunities for girls? 
We know, for example, that educating girls may be the most cost-effective investment for promoting economic development. 
We also know that girls, including those with children of their own, benefit considerably from access to sexual and reproductive information and services, which enable them to choose the size and structure of their families and ensure their own health and wellbeing. 
But girls’ advocates – in governments, non-governmental organizations, and development and funding agencies – struggle daily with meeting these needs. 
And, despite recognizing the multifaceted and interconnected nature of girls’ needs, we often struggle in silos, working on the same problems without communicating with one another. 
This lack of effective coordination, collaboration, or knowledge sharing carries through to investments, which often end up narrowly focused on a single project, sector, or geographic area – often weakening their effectiveness. 
That’s why the Population Council created the Girl Innovation, Research, and Learning (GIRL) Center, a kind of global knowledge hub for girl-centered research and programming. 
The GIRL Center, which I direct, aims to make the most of the world’s investments in girls, both by supporting evidence-based policies and by aligning the goals and priorities of various stakeholders. 
To that end, we are building the world’s largest open data repository on adolescents, curating the Population Council’s records on more than 120,000 individuals of adolescent age, as well as data from other organizations working on girl-centered research and programs. 
The repository will enable rigorous analyses that provide policymakers with a deeper understanding of how girls’ lives and needs evolve during adolescence and which interventions are most effective for which groups (and under which conditions). 
It will also connect people from different disciplines and sectors united by the goal of promoting systemic changes that give adolescents, especially girls, the opportunity to fulfill their potential. 
Empowering girls to use their energies and talents to transform their societies will not be easy. 
The key is to pursue a comprehensive approach – one that recognizes the fundamental linkages among programs and objectives, takes advantage of proven solutions, and adopts a long-term perspective. 

West Africa’s Misguided War on Drugs 
ACCRA – A recent estimate by the United Kingdom’s Office for National Statistics that the market for illegal drugs adds £4.4 billion ($7.6 billion) annually to the country’s economy gives a sense of the astonishing scale of the illicit narcotics trade. 
For regions such as West Africa, with economies that are neither as large nor as developed as the UK’s, the impact of such activity can be even more corrosive. 
West Africa finds itself increasingly enmeshed in the global drug trade. 
Its location makes it vulnerable to being exploited as a transit point between the Latin American and Asian production centers and consumer markets in Europe and the United States. 
But, as the experience of Central America shows, transit countries do not serve only as a corridor for drugs. 
Illegal drugs and the money that surround them invade and destabilize their societies. 
This disturbing development – a byproduct of the failed “global war on drugs” – threatens to reverse recent economic and social gains in our region. 
So far, West Africa has avoided the worst of the endemic and routine violence that accompanies the passage of drugs through Central America. 
But, with the stakes so high, there is no room for complacency. 
The scale of the cocaine trade alone in West Africa dwarfs the combined government budgets of several countries in the region. 
We already know that the narcotics trade has played a direct or indirect role in political upheaval in countries such as Guinea-Bissau and Mali. 
National and international action against the traffickers must be stepped up, and it should include targeting those who run the networks, rather than expending scarce law-enforcement resources to pursue their foot soldiers. 
We need to pursue those who gain the most, whoever they are and whatever position they hold. 
But it is not only the trade in illegal drugs that is destabilizing countries in the region; narcotics consumption is becoming a major problem as well. 
The West Africa Commission on Drugs, which I convened and former Nigerian President Olusegun Obasanjo chairs, points out in a new report that cocaine, heroin, and locally produced methamphetamines have become increasingly available across the region. 
This has led to greater use and dependence, especially among the region’s young people. 
Yet the region is simply not ready or equipped to deal with the spread of drug use and dependency. 
All too often, the response is to stigmatize and penalize drug users. 
But pushing them to the fringes of society or locking them up in ever increasing numbers will not solve the problem. 
On the contrary, it worsens health problems and puts enormous pressure on West Africa’s already over-stretched criminal justice systems. 
The Commission’s report instead calls for a new approach to drug abuse, one that treats it not as a criminal-justice issue, but rather as a public-health problem. 
That means tackling the near total absence of drug-treatment facilities and programs and the lack of personnel qualified to manage and monitor drug abuse. 
The Commission accepts that there are many urgent demands on strapped health-care budgets. 
But such is the importance of this challenge – and so dire are the consequences of failure to overcome it – that the Commission strongly recommends the adoption of a drug-treatment policy with minimum standards across the region. 
This includes the establishment of drug treatment and related health services and facilities, and the implementation of harm-reduction approaches, such as needle-exchange programs, which have been proven to reduce the spread of HIV and the incidence of drug-related deaths. 
To date, Senegal is alone in West Africa in implementing some form of government-run harm-reduction initiative. 
Tackling the impact of drugs through informed, humane, and coordinated policy will require leadership and a concerted effort by countries across the region. 
The Commission calls for a shared commitment from governments, civil-society groups, and regional organizations. 
We can no longer sweep this issue under the carpet or pretend that it is not our problem. 
The report also urges increased support for these efforts from the international community. 
Governments in those West African countries that are the principal producers and consumers of illegal drugs should fund prevention, treatment, and harm-reduction initiatives, rather than only investing in interdiction and law enforcement. 
Without a change of direction, drug trafficking, production, and consumption in West Africa will continue to undermine institutions, threaten public health, and damage development progress. 
But reforming drug laws, offering chronic users proper treatment, and vigorously pursuing high-level drug traffickers will reduce the damaging impact of illegal drugs on communities, families, and individuals. 
By having the courage to refocus national and international efforts, we can help to ensure that our young people grow up healthy and secure. 

Kofi Annan’s Achievement 
CANBERRA – Kofi Annan deserves to be remembered as a near-exemplary United Nations secretary-general (SG). 
Great chief executives need a guiding vision for the exercise of authority, and all the more so when that authority is international civil authority. 
Annan’s success was based on his ability to combine pragmatism and humility with an enduring vision of human progress and solidarity. 
This fusion of vision and character was perhaps best encapsulated in the Millennium Development Goals (2000-2015), which mapped an ambitious set of priorities for the UN. 
In addition, animated by an abiding humanism and faithful to the spirit, as well as the letter, of the UN Charter, Annan stretched the executive authority of the organization through creative interpretations of the Charter and a charismatic personality to secure the adoption of the exciting, but challenging, “Responsibility to Protect” (R2P) principle. 
The grandson of tribal chiefs and son of a provincial governor in the British colony of Gold Coast (now Ghana), Annan blended an aristocratic style of leadership with soft-spoken personal charm, empathy, intellectual gravitas, and sartorial elegance. 
His years as SG (1997-2006) were marked by political judgment, tact, and integrity. 
An eloquent testament to the quality of his ten-year tenure at the helm is the lasting loyalty, bordering on devotion, he inspired in the immensely talented group of senior advisers he assembled. 
The world witnessed many profound changes during those turbulent years. 
Annan oversaw a massive expansion in UN peace operations, in response to growing demands and expectations, but many were dogged by charges of ineffectiveness, financial corruption, and sexual exploitation. 
A central challenge with which Annan had to contend, with mixed success, was how to combine the UN’s unique legitimacy with the Security Council as the world’s geopolitical cockpit. 
When the big powers were united, he could but obey. 
When they were at one another’s throat over clashing vital interests, he could do little. 
But when the international community was bitterly divided, he tried to forge agreement by identifying common interests and nudging member states toward face-saving compromises. 
Annan’s approach to UN reform was instructive. 
Identify the big global issues that require UN engagement, he told me. 
Then ignore issues where states will not agree to common action, as well as those where they can agree on their own because of shared priorities. 
He saw no point in expending scarce political capital in either case. 
Instead, he focused on the big issues where action by member states could be pushed beyond the tipping point by investing the prestige and authority of the SG in the cause. 
Annan succeeded as SG through the skills of soft leadership: the elusive ability to make others connect emotionally and intellectually to a larger cause that transcended their immediate self-interest. 
Treated as a “rock star” celebrity in his first term, Annan was in regular contact with leaders of governments, international organizations, multinational corporations, and civil-society organizations. 
Quiet diplomacy within the confidential confines of his private office was only rarely supplemented by the public diplomacy of the UN’s bully pulpit. 
On one hand, Annan tried to expand the “license” function of international law to empower the UN to take necessary action against recalcitrant states using sovereignty to shield their behavior. 
On the other hand, he upheld the “leash” function of checking aggression by great powers. 
In 2004, Annan pointedly noted that the invasion of Iraq was in breach of the UN Charter’s law on the use of force. 
This earned him the undying hostility of the neoconservatives in US President George W. Bush’s administration, who threatened to make the UN irrelevant. 
Yet if the Security Council had capitulated to Anglo-American pressure to endorse the war, based on trumped-up charges of terrorist attacks and fabricated evidence of weapons of mass destruction, the UN would have suffered graver and more lasting harm. 
Annan did become entangled in the oil-for-food scandal, which his neoconservative enemies exploited to the fullest. 
Yet even there, the ethical lapses by member states – including the US and Australia, which refused to take action on red flags raised by UN officials – were more serious. 
The involvement of his son in shady dealings was personally painful to Annan. 
The more indelible stain on Annan’s reputation was his responsibility for the restrictive interpretations of the UN mandates for the peacekeeping operations in Rwanda and Srebrenica, Bosnia, in 1994-1995. 
Indeed, some people contend that Annan never paid the political price for these two derelictions of duty. 
But Annan did commission internal reviews into these conscience-shocking failures, encouraging the investigators to go wherever the search for truth took them. 
When the investigators were finished, he authorized the publication of their reports, including adverse findings of UN systemic shortcomings and a failure of leadership on his part as the top peacekeeping official at the time. 
Deeply scarred by these searing experiences, Annan converted a troubled conscience into an enduring legacy of three principles and institutional advances. 
The protection of civilians was made a top priority in UN peacekeeping operations. 
He championed the R2P principle to circumvent the abuse of state sovereignty by brutal rulers committing atrocities against their own people. 
And he welcomed the creation of the International Criminal Court as the legal instrument to end impunity and prosecute and punish military commanders and political leaders for the most heinous crimes. 
Annan’s dedication to serving humanity did not end with his departure from the UN. 
He remained engaged with poverty alleviation, conflict resolution, and humanitarian relief efforts through UN requests, the Kofi Annan Foundation, and the Group of Elders as a custodian of world conscience. 
Annan was exceptionally considerate and solicitous of the welfare of his staff, often with a gentle sense of humor. 
On one occasion, some UN personnel were trapped in a rapidly escalating conflict zone. 
A couple of senior aides were trying to explain the danger to Annan when one stopped and asked: “Why are you not panicking, SG?” 
“Why should I panic,” he replied, “when I have you to panic for me?” 

Grading Abenomics 
TOKYO – It has been almost a year since Prime Minister Shinzo Abe launched his plan to lift Japan’s economy out of two decades of deflation and recession. 
How has “Abenomics” fared so far? 
Answering this question requires breaking Abenomics down into its three components – massive monetary easing, expansionary fiscal policy, and a long-term growth strategy – which Abe, referring to the tale of Motonari Mori, a sixteenth-century daimyo (feudal lord), calls the “three arrows.” 
According to legend, Mori instructed each of his three sons to snap an arrow in half. 
After they had succeeded, he told them to tie three arrows together, and break the whole bundle at once; none was able to do it. 
Like Mori’s three arrows, the three arrows of Abenomics are supposed to reinforce each other. 
But Mori’s arrows were bound together in parallel, whereas Abe’s policy arrows are connected through underlying structural relationships. 
While the first and second arrows aim to transform Japan’s actual growth path, the third operates on the economy’s potential growth path, which assumes the optimal use of all available resources and technologies. 
Since Abenomics was launched, the “deflation gap” (the difference between actual and potential output) has dropped from roughly three percentage points to below 1.5. 
This implies that, while the first two arrows are helping to improve Japan’s actual growth path, the third arrow has yet to do much for potential growth. 
In fact, since Abe’s first arrow took flight, Japan’s stock market has soared with it, recording an unprecedented 40% annual gain, while the yen has depreciated against the dollar by 20%, boosting Japanese firms’ export competitiveness. 
Moreover, credit growth has accelerated and asset prices have risen – trends that will encourage consumption by triggering the wealth effect (when people spend more because they feel richer). 
And monetary expansion is also having a positive impact on the labor market: the unemployment rate has fallen to 4%, and the job-to-applicant ratio is nearing parity. 
With real GDP growth around 4% in the first half of the year (though it did fall below 2% in the third quarter), the first arrow has already hit the bull’s eye – a performance worthy of an A+. 
The second arrow entails a sharp increase in short-term fiscal expenditure, especially investment in infrastructure projects. 
While those who, like me, adhere to the Mundell-Fleming framework (according to which fiscal stimulus will be offset by the resulting increase in capital inflows, currency appreciation, and reduced export competitiveness) do not stress the impact of flexible fiscal policy, Keynesians take it very seriously. 
On the assumption that faster growth will neutralize any threat to debt sustainability, the second arrow receives a B. 
When the first and second arrows lift actual growth above potential growth, monetary expansion will no longer be able to produce substantial GDP or employment gains. 
That is when the third arrow, which aims to boost Japan’s potential growth through structural change (including increased private investment, technological innovation, improved trade links, and reformed corporate-tax policy), will become far more important. 
Abe has set out the vision behind his long-term growth plan. 
“Japan is a country that challenges, that is open, and that innovates,” he says. 
But many of the details of his strategy remain uncertain. 
Japan’s longtime approach to industrial policy, in which the Ministry of International Trade and Industry provided support and subsidies for selected industries, helping them to compete in world markets, is now obsolete (indeed, MITI’s role was taken over by the Ministry of Economy, Trade, and Industry in 2001). 
When Japanese firms operate at the frontier of industry, bureaucrats cannot choose the winners. 
Given this, the government’s role should be confined to areas where externalities exist, such as carbon-emissions reduction. 
Unfortunately, a new, clearly defined approach to industrial policy is still missing. 
In fact, descriptions of some third-arrow projects seem to be based on little more than wishful thinking, with new technology or knowhow apparently expected simply to fall into Japan’s lap. 
A more effective approach would entail achievable, concrete goals like relaxing labor- and financial-market regulations, reducing corporate income taxes, liberalizing trade by joining the Trans-Pacific Partnership, and perhaps easing immigration policy. 
The problem is that bureaucrats like the power that regulation affords them. 
Indeed, deregulation would require them to put their country’s long-term interests above their own short-term interests – a choice that they have so far resisted. 
To paraphrase John F. Kennedy, it is time for Japan’s leaders to ask not what their country can do for its government, but what the government can undo for its country. 
In this context, the third arrow of Abenomics cannot yet be fairly assessed. 
While its impact has so far been lacking, it certainly cannot be deemed a failure, with Japan’s top leaders still working tirelessly to build the needed momentum. 
The most appropriate grade is therefore an “E” for effort. 
One hopes that it is an effort that proves adequate to overcome bureaucratic resistance to deregulation in the coming year. 
With an A+, a B, and an “E,” Abenomics’s first-year report card reflects important progress, providing plenty of reason for enthusiasm. 
It even spells its originator’s name. 

Who’s Afraid of Tapering? 
TOKYO – The US Federal Reserve’s gradual exit from so-called quantitative easing (QE) – open-ended purchases of long-term assets – has financial markets and policymakers worried, with warnings of capital flight from developing economies and collapsing asset prices dominating policy discussions worldwide. 
But, given that most major economies operate under a flexible exchange-rate regime, these concerns are largely unwarranted. 
The logic behind the fear of the Fed’s “tapering” of QE is straightforward. 
Unconventional monetary policy in the United States – and in other advanced countries, particularly the United Kingdom and Japan – drove down domestic interest rates, while flooding international financial markets with liquidity. 
In search of higher yields, investors took that liquidity – largely in the form of short-term speculative capital (“hot” money) – to emerging markets, putting upward pressure on their exchange rates and fueling the risk of asset bubbles. 
Thus, the Fed’s withdrawal from QE would be accompanied by a capital-flow reversal, increasing borrowing costs and hampering GDP growth. 
Of course, not all emerging markets, according to this logic, are equally exposed. 
Among the most vulnerable countries are Turkey, South Africa, Brazil, India, and Indonesia – the so-called “Fragile Five” – all of which are characterized by twin fiscal and current-account deficits, high inflation, in addition to faltering GDP growth. 
This logic would be correct if the world were operating under a fixed exchange-rate regime, with governments tying official exchange rates to another country’s currency or the price of gold. 
Under these conditions, monetary contraction (or slowing expansion) would have a recessionary (or a less stimulative) impact on other economies. 
With flexible exchange rates, however, monetary-policy contraction in a major economy would stimulate other economies in the short run, while monetary expansion would damage their performance. 
(To be sure, in the medium or long run, monetary expansion can facilitate increased domestic production and trade, thereby generating positive spillover effects.) 
After the collapse of Lehman Brothers in 2008, the rapid expansion of the money supply in the US and the UK triggered a sharp appreciation of the Japanese yen, as well as of some emerging-market currencies. 
In short, QE is what merits concern – not its termination. 
Of course, the Fed’s policy reversal could hurt countries that maintain fixed – or, like China, “managed floating” – exchange rates. 
Likewise, weaker eurozone economies like Greece and Spain, which would prefer stronger monetary stimulus than their more competitive counterparts in Europe are willing to accept, may suffer. 
But, given that these economies have chosen to adhere to a fixed exchange rate, the Fed cannot really be blamed for the fallout. 
In fact, the Fed – and other advanced-country central banks – should not be blamed for the negative effects of monetary expansion, either. 
Japan’s bold monetary easing, for example, was a critical element of Prime Minister Shinzo Abe’s strategy for lifting the Japanese economy out of more than a decade of recession – and it has led to a remarkable recovery. 
The problem is that the policy has also caused the yen to depreciate, leading nearby countries to accuse Japan of adopting “beggar-thy-neighbor” policies. 
Similarly, emerging-market officials warned that monetary expansion in the US and the UK would trigger a wave of competitive currency devaluations, with Brazilian Finance Minister Guido Mantega going so far as to accuse the Fed and the Bank of England of waging a full-blown “currency war.” 
But, while it is true that such expansionary policies can have a recessionary impact on other economies, modern international-finance theory shows that the concept of a “currency war” is a myth. 
The reality is that, under a flexible exchange-rate regime, competitive devaluations do not produce undesirable imbalances. 
On the contrary, they can bolster recovery in participating economies. 
In fact, currency devaluations were critical to ending the Great Depression. 
As Barry Eichengreen and Jeffrey Sachs demonstrated in 1984, while abandoning the gold standard had an immediate negative impact, it quickly spurred recovery, with the first countries to devalue their currencies escaping depression earlier than others. 
The fact is that, with a flexible exchange rate, a country can offset the recessionary impact of a neighboring country’s monetary easing using its own independent monetary policy, guided by carefully chosen inflation targets. 
If all countries adopt this approach, the entire global economy benefits. 
By working to revive the domestic economy, the Fed, like other advanced-country central banks, is simply fulfilling its mandate. 
Instead of complaining about its actions, emerging-country policymakers should be devising strategies for offsetting the spillover effects on their own economies. 
After all, they have the tools to do so. 

Japan’s Tax-Hike Test 
TOKYO – As October began, Japanese Prime Minister Shinzo Abe announced that his government would raise the country’s consumption-tax rate from 5% to 8% next April, and presumably to 10% 18 months after that. 
The contrast with what is now happening in the United States could not be sharper. 
As US President Barack Obama’s domestic opponents resist his signature health-care legislation, owing to the wealth transfers that it implies, Japanese bureaucrats are trying to recover the authority to administer tax revenue to support social-welfare programs. 
There are many arguments for raising Japan’s consumption-tax rate. 
Japan’s government has a huge debt burden, and its consumption-tax rate is far lower than the value-added-tax rates that prevail in Europe. 
At the same time, the effective corporate-tax rate in Japan is higher than it is elsewhere, making it difficult for Japan to attract investment, foreign or domestic. 
In order to survive international tax competition – and thus be able to rely on corporate taxes as a source of revenue – Japan’s corporate-tax rate should be lowered in the long run. 
Nonetheless, with Japan’s economy just beginning to recover from more than 15 years of stagnation, such a steep consumption-tax hike is not advisable. 
In fact, such a large increase has seldom – if ever – been attempted, owing to the risk that it would spur consumers to spend before it takes effect, thereby reducing future consumption. 
Moreover, any sudden rise in the tax burden results in deadweight losses. 
A consumption-tax hike should be timed in such a way that it does not suffocate the economic recovery that Abe’s bold economic program, dubbed “Abenomics,” is facilitating. 
Western economists typically favor gradual tax increases; 
Jeffrey Frankel, for example, recommends a pre-announced plan to increase the tax rate by, say, one percentage point annually for five years. 
But Japanese policymakers, media, and academics largely continue to favor a sudden and substantial hike. 
Last year, when Japan’s Diet passed the legislation to raise the consumption tax, it included a provision calling for the plan to be reevaluated if economic conditions required it. 
When the Cabinet Office called upon 60 business leaders, academics, and economists (including me) to perform such an evaluation, more than 70% favored the hike. 
But the selection of experts reflected a clear bias toward the finance ministry’s views. 
In fact, the ministry has used its “informational campaign” to shape public discussion, convincing scholars, business economists, and the general public to be more concerned about keeping the budget deficit under control than about the effects of a negative demand shock. 
This is a typical example of what economists like Joseph Stiglitz call “cognitive capture.” 
For more than two decades – a period characterized by chronic recession and deflation – Japan has retained its position as the world’s richest country in terms of net wealth abroad. 
At the end of last year, Japan’s net international wealth amounted to ¥296 trillion ($3 trillion). 
But Japan’s government is believed to be the world’s poorest, with the finance ministry reporting that the gross debt/GDP ratio exceeds 200%. 
That is an exaggeration. 
For example, Ichizo Miyamoto, a former senior finance-ministry official, claims that, accounting for the government’s assets, Japan’s net debt/GDP ratio is below 100%, similar to that of the United States. 
The validity of the finance ministry’s position on the tax increase was called into question by the decline in Japan’s Nikkei index of stock futures after Abe’s October 1 announcement. 
To be sure, the budget crisis in the US caused most stock futures to decline on that day. 
But, if the ministry’s view of the consumption tax was correct, Nikkei futures would have gained more – or at least lost less – than futures in other countries. 
Instead, the index declined three times more steeply than others. 
And yet, while the consumption-tax increase is not ideally timed, I am not entirely pessimistic about its impact. 
The Mundell-Fleming framework – which describes the short-run relationship between the nominal exchange rate, interest rates, and output in an open economy – indicates that, under Japan’s flexible exchange-rate regime, the post-hike decline in demand could be addressed relatively easily with more expansionary monetary policy. 
That is why Bank of Japan Governor Haruhiko Kuroda should respond accordingly if the tax increase has a deflationary impact. 
In doing so, he would avoid the criticism that former Bank of England Governor Mervyn King faced for supporting a consumer-tax hike in 2011 but failing to use monetary policy to offset its recessionary effects. 
Just a year ago, former Prime Minister Yoshihiko Noda attempted, despite a deep recession, to raise the consumption tax without monetary easing – a strategy that could have brought only continued economic stagnation. 
Abe must not make the same mistake. 
If Japan’s government can overcome a demand setback after the tax increase takes effect – leaving the economy functioning smoothly and initiating a recovery in government revenue – Abe will be able to declare Abenomics an unequivocal success. 

Toward a People-Centered ASEAN Community 
SEOUL – I am delighted that my first meeting with the leaders of the Association of Southeast Asian Nations comes at a historic moment: the 50th anniversary of ASEAN’s founding. 
During those 50 years, not only my country, the Republic of Korea, but almost all of Asia has been utterly transformed. 
ASEAN’s role in harnessing and spreading economic dynamism has been essential to the region’s success. 
For Korea, ASEAN has undoubtedly been a special and valued friend. 
Last year alone, some six million Koreans visited ASEAN member states, both as tourists and for business. 
Approximately 500,000 citizens of ASEAN member states now live and work in Korea, while roughly 300,000 Koreans live and work in ASEAN countries. 
This is one example of why Korea’s ties with ASEAN are more than just intergovernmental relations. 
Our relationship is deepened in the most personal way possible, through the intertwining of so many individuals’ lives. 
This fact should not surprise anyone. 
ASEAN 2025: Forging Ahead Together, which was endorsed by ASEAN leaders at their 27th Summit in November 2015, states that the group strives to be a “people-centered, people-oriented community” that seeks to build a caring and sharing society which is inclusive and where the well-being, livelihood, and welfare of the people are enhanced. 
“People first” has been my longstanding political philosophy as well, and it is a vision in line with the spirit of Korea’s “candlelight revolution” that lit and heated up the winter in Korea a year ago. 
Korea and ASEAN share a common philosophy that values people, and that shared outlook will set the path that Korea and ASEAN take together in the years and decades ahead. 
Since 2010, Korea and ASEAN have made significant strides together as strategic partners. 
Korea-ASEAN cooperation so far, however, has remained focused mainly on government-led collaboration in political, security, and economic affairs. 
I intend to help advance Korea-ASEAN relations while placing a high priority on the “people” – both Koreans and the people of ASEAN. 
My vision is to create, in cooperation with ASEAN, a “peace-loving, people-centered community where all members are better off together.” 
This can be summed up in “three Ps”: People, Prosperity, and Peace. 
To realize this vision, I will pursue “people-centered diplomacy.” 
So, from this point onward, cooperation between Korea and ASEAN will be developed in a way that respects public opinion among all of the peoples of our association, gains their support, and invites their hands-on participation. 
To this end, and in commemoration of ASEAN’s 50th anniversary, we have designated this year as “Korea-ASEAN Cultural Exchange Year,” and actively promoted various cultural and people-to-people exchanges. 
Last September, the ASEAN Culture House (ACH) opened in Korea’s southern port city of Busan. 
The ACH is the first of its kind to be opened in an ASEAN dialogue partner country, and it is expected to serve as a hub for cultural and people-to-people exchanges between Korea and ASEAN members. 
The Korean government will spare no effort to expand these exchanges, especially among the young people who will lead Korea-ASEAN relations in the future. 
We should also work to build a community of peace where people are safe. 
In Asia, we all are facing the threat posed by North Korea’s nuclear weapons and missiles, as well as non-traditional security threats, including terrorism, violent extremism, and cyber-attacks on our businesses, our social and civic infrastructure, and our official institutions. 
The Korean government will strive to ensure that both Koreans and the people of ASEAN are able to lead happy and safe lives, which means cooperating with all ASEAN member states, at both the bilateral and multilateral level, to overcome the security challenges that we jointly face. 
Finally, I will endeavor to promote greater mutual prosperity, which benefits citizens of both ASEAN and Korea. 
To ensure the sustainability of people-centered cooperation, all countries in the region must grow and develop together. 
Creating a structure for mutual prosperity requires lowering regional and transnational barriers to facilitate the flow of goods and promote people-to-people interactions. 
In short, ASEAN’s dynamism must now be tied to its inclusiveness. 
That is why Korea will actively support the “Master Plan on ASEAN Connectivity 2025” and “Initiative for ASEAN Integration (IAI) Work Plan,” both of which call for enhancing the connectivity between ASEAN economies and citizens. 
We will also accelerate the pace of negotiations for the further liberalization of a Korea-ASEAN Free Trade Agreement (FTA), in order to pave the way for freer and more inclusive growth in the region. 
Korea is now preparing for yet another “hot” winter: the PyeongChang Olympic and Paralympic Winter Games, to be held in February 2018. 
Our preparations are focused on ensuring that these Games deliver a message of reconciliation, peace, mutual understanding, and cooperation throughout the world. 
I happily invite you all to discover a peaceful and joyous winter in PyeongChang, and experience the dynamism sweeping through Korea and ASEAN. 
Don’t miss an opportunity to find out and enjoy what Korea and ASEAN share in common. 

Korea Emerges from Crisis 
SEOUL: Last year saw the worst of times in South Korea since the end of the Korean War, with Asia's crisis bringing a devastating 33.8% drop in per capita GDP, from $10,307 to $6,823 and mass starvation in North Korea threatening stability on the peninsula. 
Times of crisis, however, like the approach of an execution, concentrate the mind. 
South Korea has focused on systemic reform and, today, despite labour unrest the signs of economic recovery abound and political prospects are brightening, too. 
Even relations with the North may be slightly more predictable. 
In the year-and-a-half since South Korea received a $57billion IMF bailout, and the 13 months since former dissident Kim Dae Jung became president, the currency (the won) has stabilized, short-term debts have been rolled over into long-term ones, foreign reserves have increased, and interest rates have been cut. 
Foreign reserves stood above $50 billion at the end of 1998, compared to under $9 billion a year before, thanks mostly to a $39 billion trade surplus last year, the first in nine years. 
This surplus enabled a stabilizing of the won at 1,200 to the dollar, compared to the 2,000 to 1 ratio of 1997. 
Much has been done, but South Korea has only touched the surface in restructuring its economy, its relations with the North, and domestic political reform. 
A cabinet shake-up this week points to President Kim's recognition that much more needs to be done. 
In all areas the direction is toward even liberalization, but President Kim's path to liberalism is through a curious kind of social corporatism. 
These detours are necessary because of the roadblocks posed by big labor and even bigger business. The most important challenge now is for President Kim to build a new ruling coalition that can ensure a measure of political stability at home as the economy is opened up and the knotty issues of nuclear weapons and ballistic missiles in North Korea are tackled. 
So-called "Asian values" are not in President Kim's vocabulary. 
He believes that democracy and a market economy are not opposites but complement each other. 
After consulting the IMF, the government has pushed insolvent banks to merge or face bankruptcy, allowed for the first big layoffs of workers, and "downsized" the bureaucracy through a strict reorganization. 
In all this President Kim assumed personal leadership, surprising many with his grasp of, and commitment to, liberal economic ideas. 
Korea's five huge conglomerates, the chaebol – Hyundai, Samsung, Daewoo, LG and SK groups – have been dragged, kicking and screaming, into rationalization. 
They have been pushed into concentrating on core businesses, and encouraged to swap overlapping enterprises. 
So Daewoo took over Samsung's car plants, and Samsung took over Daewoo's electronics subsidiaries. 
Although they pay lip service to a continued shedding of extraneous businesses, the chaebol still resist complete rationalization, claiming that they cannot rid themselves of excess capacity so long as they maintain excess employment. 
They say that "market forces" will, in time, sort out their profit-losing units. 
But without even stronger signs from President Kim that another big round of layoffs will be supported by government, it is unlikely that the chaebol will do much more restructuring on their own. 
Labor unions have been just as disagreeable as chaebol bosses. 
Two million are now unemployed, fully 9% of the workforce and a nightmarish figure already for the government. 
To promote industrial peace, President Kim instituted an emergency Tripartite Commission on Labor, Business and Government so that the government could mediate conflicts between labor and business on employment policy. 
When this took off in January 1998, the labor unions did accept the inevitability of layoffs. 
As mass layoffs became reality, the radical Korean Confederation of Trade Unions withdrew from the commission. 
This prompted the moderate Federation of Korean Trade Unions to follow it into the wilderness. 
Because no social safety net protects workers, the government is finding it next to impossible to keep unions as partners in its corporatist design. 
Relations with North Korea remain the central priority, and always the greatest danger. 
A bold program to allow cruise boats to call at the holy Mount Kumkang in the North has seen over 40,000 South Koreans visit the famous site for the first time since 1945. 
Whether this thaw yields more meaningful fruit hinges on the North maintaining its freeze on nuclear and missile tests. 
Former U.S. secretary of defense William Perry is leading a comprehensive review of the joint US/South Korean approach to the North Korea now. 
But ambitious domestic and foreign policy reforms demand public and political support. 
President Kim must decide this year whether or not to keep the promise he made with Prime Minister Kim Jong Pil to change Korea into a parliamentary system of government. 
Because the president's party controls only a third of the seats in the National Assembly, a new ruling coalition will be needed, which is tricky as parties are now increasingly divided along regional lines. 
President Kim has needed all the powers of the presidency to push reform along this far. 
Whether or not to surrender some of those powers in order to deepen Korean democracy is the riskiest question he now faces. 

Kosovo and Kostunica 
PRISTINA: “Everything must change so that nothing will change.” 
That aphorism, from Prince Lampedusa’s great novel The Leopard now seems applicable to Kosovo after Milosevic’s fall. 
Will a democratically elected president in Belgrade mean that everything has changed for Serbia, but that nothing has changed in Serbia’s relations with Kosovo? 
Whether Serbia is a democracy or not, one thing is certain: in the next five years Kosovo has little hope of becoming a prosperous democratic country. 
The reason is simple: Kosovo has never been such. 
Today, it is a UN administered territory undergoing a transition from 50 years of communism, 10 years of apartheid-like Serb rule, and the ravages of war. 
Moreover, Kosovo’s long-term status is undefined: although a UN protectorate it remains formally under the sovereignty of the disintegrating Yugoslav federation of Serbia and Montenegro. 
Becoming a democratic, economically prosperous state may, indeed, be beyond the reach of Kosovars for years to come, because Kosovo first needs to become its own state if prosperity and democracy are to take root. 
UN Security Council Resolution 1244, the supreme law here, precludes this unless both sides – Serbia and Kosovo – agree to it in negotiations. 
But Resolution 1244 does not rule out Kosovo acquiring a de-facto government that functions like a true national government. 
Real possibilities exist for this to happen. 
The first democratic local elections in Kosovo’s history – which began last weekend – will bring strong pressures from Kosovars to write a provisional constitution and hold general elections. 
Furthermore, there is also a wide consensus to pursue privatization at full speed. 
Indeed, there is a chance that economic reform here can be conducted in an unprecedented way in this region. 
Corruption, which blighted privatization elsewhere, should be minimized because of UN supervision. 
Effective privatization could change Kosovo’s dynamics. 
But an improved economy is unlikely to satisfy the vast majority of Kosovo’s people. 
Permanent status is what matters most, and will be determined largely by Kosovo’s political and economic transformation. 
But a tolerant society living in peace with its neighboring states must also be created if international recognition is to be secured. 
Vast improvement is needed on the Kosovar side for tolerance to take root. 
Tolerance, however, is hard to come by when hindered by the UN’s failure to contain the lawlessness that has plagued Kosovo since the end of NATO’s bombing. 
Improved relations with most of Kosovo’s neighbors should not be hard to achieve, save for one neighbor. 
Relations between Serbia and Kosovo, however, provide all the complications a diplomat could need. 
Here, Milosevic’s fall raised hopes by offering the promise of open dialogue between Serbia and Kosovo. 
Those hopes are laced with skepticism. 
Kosovo’s skepticism about Serbia’s democratic credentials is derived, primarily, from knowing that conflict between Kosovo and Serbia is structural, not based on a single man. 
No matter how much Milosevic exacerbated tensions, his policies toward Kosovo’s ethnic Albanians were genuinely popular among Serbs. 
Indeed, throughout the decade of Yugoslavia’s wars, Serbia’s attitude toward its minorities reflected a nationalist consensus, in which the bulk of what was then the opposition participated. 
Most Kosovars will find talking to Serbia about improved relations difficult if Serbia does not undergo some sort of “de-nazification” process. 
President Kostunica’s refusal, so far, to even discuss putting internationally indicted war criminals on trial is not a hopeful omen here. 
But Kosovo is not alone in continuing to identify the state led from Belgrade with the atrocities of the past decade. 
So most of Serbia’s neighbors are surprised at the West’s euphoria at Milosevic’s fall. 
Several Western diplomats, indeed, claim that the changes in Belgrade are so historic that everything in the region must be subordinated to them; that today’s Yugoslav Federation must quickly become a member of the OSCE, the UN, the IMF, and the World Bank. 
But overlooking history provides no incentive for President Kostunica to critically examine Serbian actions over the past decade. 
A warm international embrace may only undermine the chance for negotiated settlements between Serbia and its neighbors. 
Recently I suggested that what needs to develop is something like a “Three Taiwan Scenario” in which Kosovo, Montenegro, and Serbia experience a period of internal consolidation, focusing on how their states function rather than on how they are recognized internationally. 
Stripped of international recognition two decades ago, Taiwan turned inward and created a prosperous economy and new democracy. 
This process, somewhat clandestinely, is underway in Kosovo. 
It should begin in Serbia and Montenegro as well. 
If everything has now changed in Serbia, the events of a year ago also changed everything forever in Kosovo. 
Today, no politically relevant force in Kosovo is prepared to advocate or accept any solution that hinders the ability of Kosovo’s people to decide their own fate. 

Kosovo is Europe’s Responsibility 
One year ago, on February 17, 2008, Kosovo declared its independence, and has so far been recognized by more than 50 countries representing close to 60% of the world’s economic power. 
Interethnic violence – which many feared – has largely been avoided, and the mass exodus of Serbs that some also predicted has not occurred. 
The Comprehensive Proposal for the Kosovo Status Settlement (the so-called “Ahtisaari Plan”), which provides for international supervision of Kosovo’s independence, is gradually being implemented. 
A large civilian European Union mission has been deployed. 
Unfortunately, however, we still cannot turn the page on this pernicious conflict, which has led to so much tragedy and has been a cause of instability in the Balkans for far too long. 
The issue will not go away, because Serbia persists in its rejection of the new reality, and is doing everything in its power to prevent normalization. 
On orders from Serbia’s government, Kosovo Serbs, who represent some 5% of the population, refuse to cooperate with Kosovo’s government and the EU mission. 
In doing so – and this is the irony of the matter – Serbs themselves are preventing the early implementation of the wide-ranging community rights foreseen in the Ahtisaari Plan, which would bring to them a normal and secure life. 
On the international level, Serbia – with strong support from Russia – is actively engaged in blocking Kosovo’s accession to the United Nations and other global or regional organizations. 
It is difficult to comprehend what Serbia aims to achieve. 
Nobody will deny that, for any state, being separated from part of its territory is a painful matter – even if a different ethnic group largely populates that territory. 
Still, there are examples in recent history when this has been achieved in a consensual manner. 
In the case of Kosovo, after the Milosevic regime’s brutal behavior in the 1990’s – including repression, massive human rights violations, and large-scale expulsions of Kosovo Albanians – prompted NATO to intervene and the UN to take over the country’s administration, return to Serbian rule became unthinkable. 
Serbia’s democratic leaders of today must understand that the loss of Kosovo – although not their doing – is an irreversible reality with which they must come to terms. 
All they can achieve with their current policy of rejection is to delay the much-needed stabilization of the region following the break-up of Yugoslavia, and to make life miserable for Kosovo and its people. 
Would it not be wiser to give a helping hand to the infant state, turning hostility into friendship and thus securing the future presence of Serbs in Kosovo? 
Kosovo is, first of all, a European problem, and the EU has the primary responsibility to turn it into a success story. 
Regrettably, the Union’s inability to agree on a common policy has not only weakened its role on the international level, but has also become a major obstacle to determined action in the country itself. 
The five member states that continue to withhold recognition of Kosovo should be aware that their stance encourages those who reject the EU mission any cooperation and impede its work. 
It also makes it infinitely more difficult for moderate forces in Serbia to adjust to the new situation. 
Only a unified EU position, combined with the knowledge that EU accession for Serbia is unthinkable as long as this conflict has not been fully resolved, may over time lead to a change of attitude on the part of both ordinary Serbs and their government. 
Kosovo, on the other hand, needs a clear European perspective and unhesitating help to meet the daunting challenges it is facing. 
At the moment, both are missing. 
Nobody should be misled by the relative calm now prevailing in Kosovo. 
The Balkans’ recent tragedies have shown that problems that remain unresolved sooner or later turn into open conflict, and that the costs become unbearable for all. 
There is no time for complacency. 
Those concerned should take to heart what American President Barack Obama said in his inaugural speech: “Our time for standing pat, for protecting narrow interests and putting off unpleasant decisions – that time has surely passed.” 

Kosovo's Constitutional Fiction 
PRISTINA, KOSOVO: One year after NATO's war over Kosovo, renewal is to be seen everywhere: in reconstructed houses; in the many shops opened in the ground floors of ruined buildings; in the budding cultural, intellectual, and journalistic life of Pristina. 
In only one area – politics – do these energies face a serious obstacle. 
Kosovo's political logjam is due, in part, to the inexperience of Kosovo's political parties, but it is mostly the result of a contradiction in UN Resolution 1244 which serves, for now, as a kind of constitution for Kosovo. 
This document maintains the fiction that Kosovo is subject to the "sovereignty" of the "Federal Republic of Yugoslavia." 
In the resolution's words, the UN mission for Kosovo (UNMIK) must provide "substantial self-government for Kosovo" while "taking full account" of "the principles of sovereignty and territorial integrity of the Federal Republic of Yugoslavia." 
Considering that it was Yugoslavia under the Slobodan Milosevic, an indicted war-criminal, which attempted genocide against the Albanian majority of Kosovo, the requirement seems akin to telling someone to jump ten feet into the air while taking into full account the need to keep his feet on the ground. 
The provision, adopted to satisfy countries worried about their own potential breakaway regions (Chechnya in Russia, and Tibet in China), violates the principle, engraved in common sense if not in international law, that genocide nullifies sovereignty – that a state cannot seek to extinguish a people and yet insist on governing them. 
UNMIK, of course, was not established to carry out the orders of Slobodan Milosevic and does not do so. 
Nevertheless, the contradiction at the heart of 1244 hinders Kosovo's administration. 
Consider privatization of the economy, formerly run on socialist lines. 
Under the Yugoslavian constitution of 1974 now provisionally used in revised form by UNMIK, industry is "owned" by parliament. 
(In reality, of course, the Communist Party was in charge.) 
However, Kosovo has no parliament, while Yugoslavia (meaning, Serbia) does. 
Theoretically, funds from privatization in Kosovo should go to Serbia. 
UNMIK scarcely intends to send money to Milosevic; yet neither, thanks to 1244, can it set up a Kosovar parliament. 
Legal limbo is the result. 
Ajri Begu, head of the Bank for Payments and Transfers and co-head of UNMIK's economic policy board, comments, "Life started here from the first day after the war. 
Now we have done what we can do as citizens, and we need someone to play the role of a state to set the rules for investment." 
But a state is what Resolution 1244 rules out. 
Kosovo is something utterly new: an internationally mandated stateless state. 
It has every form of political organization: NGOs, an international governing authority, political parties of every stripe. 
But what it needs most, namely government, it is denied. 
So everything is improvised. 
Those doing the improvising, unfortunately, are not only UNMIK, but criminals, both international and domestic, who revel in a legal vacuum. 
Their specialties are drugs, smuggling, and, recently, traffic in women. 
Corruption may become what it has nearly become in Russia: not the exception to the rule but the rule itself. 
This October local elections will be held. 
What will be the powers, competencies, and resources of the mayors to be elected? 
Whatever rules are improvised by UNMIK, they will lack the legitimacy which a Kosovar constitution would enjoy. 
No matter how well intentioned, UNMIK rule cannot be democratic. 
Intervention in Kosovo will succeed only when a true body politic is established. 
UNMIK can act more boldly to create economic and political structures than so far. 
Yet, due to Resolution1244, it cannot write a constitution for Kosovo. 
Russia, China, and others on the Security Council would likely prevent this. 
Can the Kosovars write a constitution on their own? 
Maybe. 
Given today's legal ambiguity, there appear to be few obstacle to moves by the Kosovars to establish their own governing institutions. 
To suggest this is not to say that it will occur. 
The degree of devotion to democracy among local parties is unknown. 
Political violence has rampaged since the war – not only against Serbs but against political moderates. 
In the war's aftermath, the Kosovo Liberation Army unilaterally took de-facto power in many cities. 
The UN accommodated these self-appointed authorities. 
Will the KLA willingly relinquish office if a democratic vote goes against them? 
The answer is unclear. 
Success in resolving these issues has repercussions beyond Kosovo. 
It could offer an example of successful international intervention to prevent a human catastrophe. 
Failure would cast a shadow over similar efforts in future. 
Ardian Arifaj, managing editor of Koha Ditore, Kosovo's most alert newspaper, comments that "it is in a way a good thing that 'the internationals' don't have a vision for Kosovo. 
It leaves room for us to develop a vision." 
Mrs. Nekibe Kelmendi, whose son and husband were murdered at the war's outset, and who is now Co-head of the Department of Justice for Kosovo, agrees. "We do not need to ask the security council in order to become a state. 
There are other paths. 
In part, it will depend on other states around us, who can recognize us. 
In the last analysis, self-government cannot be derived from international documents; it is in the people. 
It is ours." 

Kosovo’s Original Sin 
PRISTINA – Hundreds of people disappeared ten years ago in Kosovo, the former Serbian province that is now the world’s newest state. 
These are not missing persons like the Albanians whom Serbian police executed and buried in secret graves during the Kosovo conflict of 1999. 
These missing persons disappeared after the conflict, on NATO’s and the United Nations’ watch. 
Most were Serb civilians. 
Relatives of most report that they were abducted. 
Kosovo, to a significant degree, owes its independence to a NATO military intervention undertaken in the name of human rights. 
And in the name of human rights, it is time for the truth to come out about the people who went missing after the conflict, and about why, for a decade, UN officials ignored appeals by the victims’ families and launched no criminal investigation. 
Kosovo’s Albanian authorities have for years made no significant decision without receiving the imprimatur of the European Union and, especially, the United States. 
They should urge the Kosovo government to mount a credible investigation, for the sake of the victims and people in Kosovo who want their state to be ruled by law. 
In 1999, the US led NATO into war against Slobodan Milosevic’s Serbia to end gross violations of the rights of Kosovo’s majority Albanians. 
Serb nationalists had quashed Kosovo’s autonomy. 
Serb troops beat, killed, and jailed Albanians, whose leaders, following cues from Western embassies, urged nonviolence. 
After the rise of an Albanian insurgency, the Kosovo Liberation Army (UCK), Milosevic launched a violent, all-out campaign to expel Kosovo’s Albanians. 
Villages were burned. 
Serbian police forces killed Albanian civilians and cast out hundreds of thousands. 
(The authorities in Belgrade have yet to come clean on the Albanians civilians executed and buried on police and military bases in Serbia.) 
NATO forced Serb forces to withdraw in June 1999, and international peacekeepers, under NATO’s leadership, occupied Kosovo. 
The UN sent a mission to help establish local institutions. 
The US and West European countries began shepherding Kosovo’s new Albanian authorities toward statehood. 
Last year, Kosovo gained independence. 
Sixty countries, including the US and most EU states, have recognized it. 
According to a recent BBC news investigation, however, UCK members abducted Serbs, Albanians, Roma, and others after NATO’s arrival. 
UN missing-persons researchers – not criminal investigators – searched for them for years and found no trace of them in Kosovo. 
They did, however, find Albanian witnesses who asserted that UCK members took captured Serbs, Albanians, and Roma into Albania, where they were killed. 
Now the BBC has broadcast interviews with Albanians who were imprisoned in secret UCK camps in Albania. 
These witnesses confirmed that the camps also held Serbs, Roma, and others. 
The BBC located graves of some of the missing in Albania. 
There have been leaks of UN documents citing Albanian sources who name people involved. 
From June 1999, the UN and NATO contingents in Kosovo clearly calculated that stability trumped justice. 
Despite the urging of staff members, leaders of these missions avoided launching criminal investigations into the missing. 
Some UCK leaders, lionized by the local Albanian population as the victors of 1999, are now running Kosovo’s government. 
Their blanket denials are no longer credible. 
Kosovo will not convince many more countries to recognize its independence unless it investigates these disappearances and demonstrates a commitment to the rule of law. 
(Likewise, no one should forget the Albanian dead that Serbia has not returned.) 
A credible investigation requires full backing from the authorities in Albania and from the newly established EU mission in Kosovo. 
On the record, leaders of this mission say that they are interested in investigating. 
Diplomats speaking off the record, however, tell a different tale, even as some Albanian political leaders, including some former UCK officials, call for an inquiry. 
The US should use its political clout with Albania and Kosovo to press for a thorough investigation, and for criminal proceedings against anyone who is implicated. 
Albanians are outraged at the allegations that UCK members engaged in war crimes and other criminal behavior. 
Some Albanians claim that these allegations are Serbian propaganda. 
But there are many Albanians who know differently, and believe that Kosovo is failing to come to terms with the acts of a few rogue fighters. 
These Albanians fear that, in the absence of the rule of law, Kosovo will become a mafia state. 
Kosovo’s Albanians do not want a state tainted by such allegations. 
They want a state that respects human rights for everyone. 
And they want answers about the fate of hundreds of people who have been missing for a decade. 

The Kremlin and the US Election 
CAMBRIDGE – In early November, US President Barack Obama reportedly contacted Russian President Vladimir Putin personally to warn against cyber attacks aimed at the American presidential election. 
The previous month, the Director of National Intelligence, James Clapper, and Jeh Johnson, the Secretary of Homeland Security, publicly accused Russia’s most senior officials of using cyber attacks to “interfere with the US election process.” 
In the aftermath of the November 8 election, no firm evidence has emerged that hacking interfered with voting machines or other electoral machinery. 
But in an election that turned on 100,000 votes in three key states, some observers argue that Russian cyber interference in the political process may have had a significant impact. 
Can such Russian behavior be deterred in the future? 
Deterrence always depends on who and what one is trying to deter. 
Ironically, deterring states from using force may be easier than deterring them from actions that do not rise to that level. 
The threat of a surprise attack such as a “cyber Pearl Harbor” has probably been exaggerated. 
Critical infrastructures such as electricity or communications are vulnerable, but major state actors are likely to be constrained by interdependence. 
And the United States has made clear that deterrence is not limited to cyber retaliation (though that is possible), but can target other sectors with any tools it chooses, ranging from naming and shaming and economic sanctions to nuclear weapons. 
The US and others, including Russia, have agreed that the laws of armed conflict apply in cyberspace. 
Whether a cyber operation is treated as an armed attack depends on its consequences, rather than on the instruments used. 
It would have to result in destruction of property or injury or death to individuals. 
But what about deterring operations that are not equivalent to an armed attack? 
There are gray areas in which important targets (say, a free political process) are not strategically vital in the same way as the electrical grid or the financial system. 
Destroying the latter could damage lives and property; interference with the former threatens deeply held political values. 
In 2015, a United Nations Group of Government Experts (including the US, Russia, China, and most states with significant cyber capabilities) agreed to a norm of not targeting civilian facilities in peacetime. 
This agreement was endorsed by the G20 countries at their summit in Turkey in November 2015. 
When an anonymous cyber attack interfered with the Ukrainian electric grid the following month, some analysts suspected the Russian government of using cyber weapons in its continuing hybrid warfare against Ukraine. 
If true, it would mean that Russia had violated the agreement it had just signed. 
But how should one interpret Russian behavior in regard to the American election? 
According to US officials, Russian intelligence agencies hacked into the email accounts of important Democratic Party officials and provided the materials to WikiLeaks to dribble out over the course of the campaign, thereby ensuring a continuous steam of news stories that were unfavorable to Hillary Clinton. 
This alleged Russian disruption of the Democratic presidential campaign fell into a gray area that could be interpreted as a propaganda response to Clinton’s 2010 proclamation of a “freedom agenda” for the Internet or retaliation for what Russian officials saw as her critical comments about Putin’s election in 2012. 
Whatever the motive, it looked like an effort to skew the US political process – precisely the type of nonlethal political threat that one would want to deter in the future. 
The Obama administration had previously made efforts to rank the seriousness of cyber attacks, but without sorting out the ambiguities of these gray areas. 
In 2016, Obama faced difficult choices in estimating the escalatory potential of responding with cyber measures or with a cross-sector response such as sanctions. 
The administration did not want to take steps that might themselves disrupt the election. 
So, eight days before the vote, the US sent Russia a warning about election meddling over a hotline – created three years earlier to deal with major cyber incidents – that connects the Nuclear Risk Reduction Centers in both countries. 
Because Russian hacking activity seemed to slow or halt, the Obama administration cited the warning as a successful exercise in deterrence. 
But some critics say the Russians had already achieved their main goals. 
Three weeks after the election, the administration said that it remained confident in the overall integrity of America’s electoral infrastructure, and that the election was free and fair from a cyber-security perspective. 
But intelligence officials continued to investigate the impact of a broader Russian information-warfare campaign, in which fake stories about Clinton appeared intended to influence voters. 
Many of the false reports originated from RT News and Sputnik, two state-funded Russian outlets. 
Should this be treated as traditional propaganda or something new? 
A number of critics believe that the level of official Russian state involvement in the 2016 US election process crossed a line and should not be dismissed as a form of tolerable gray-area behavior. 
These critics have urged the Obama administration to go further in naming and shaming, by providing a fuller public description of what US intelligence knows about Russia’s behavior, and by imposing financial and travel sanctions against high-level Russian officials who are identified. 
Other US officials, however, are reluctant to jeopardize the intelligence means used for attribution, and are wary of escalation. 
Russia’s involvement in the 2016 US election was a watershed. 
With important elections coming in a number of Western democracies, analysts will be watching closely to see what lessons the Kremlin draws from it. 

Kremlin Musical Chairs 
It’s that time again – Russia’s pre-election season when prime ministers are changed as in a game of musical chairs. 
The last one seated, it is supposed, will become Russia’s next president. 
As the end of his rule approached, Boris Yeltsin went through at least a half-dozen prime ministers, looking for the one who would ensure the security not only of Russia’s new democracy and market economy, but also of his “family” and the wealth that it had accumulated during his rule. 
The last man seated then was, of course, Vladimir Putin. 
Now it is Putin’s turn to call the tune, dismissing Mikhail Fradkov and dissolving the government that had served him throughout his second term in order to prepare for the parliamentary elections looming in December and the presidential ballot in March 2008. 
In 1999, Yeltsin picked Putin, who was then the little-known head of the FSB (formerly the KGB). 
Putin chose to elevate the equally mysterious Victor Zubkov, head of the Federal Financial Monitoring Service (also known as the “finance espionage” agency). 
Despite that similarity, the reasoning behind these choices appears to be somewhat different. 
Yeltsin’s choice of Putin – encouraged, ironically, by Boris Berezovsky, the prominent Russian oligarch and Yeltsin advisor who is now exiled in London as Putin’s mortal enemy – was based on his belief that the quiet apparatchik, even if a former KGB spy, was a democrat at heart. 
After all, Putin had been a protegé of Anatoly Sobchak, the liberal mayor of St. Petersburg as communism collapsed. 
A security services insider, Putin was seen as well placed to protect Yeltsin and his oligarchic allies. 
Indeed, Berezovsky intended to continue ruling the country from behind the scenes, first as Yeltsin’s health failed in the final months of his presidency, and then by controlling the successor he had helped to choose. 
In Russia, however, the KGB is famous for turning the tables in any struggle with the Kremlin apparat. 
So no one but Yeltsin and Berezovsky was surprised when Putin, their supposed marionette, began pulling the strings. 
And pull them he did, turning Berezovsky into an international villain, exiling former media mogul Vladimir Gusinsky, jailing the oil magnate Mikhail Khodorkovsky, and eventually imposing a new authoritarian regime behind the façade of Yeltsin’s democratic institutions. 
Putin’s own game of prime ministerial “musical chairs” does not reflect a desire to secure for himself a quiet position behind the scenes while someone else rules, for he knows all too well that the path from the Kremlin leads only to inner exile and the grave. 
Stalin replaced the dying Lenin, Khrushchev denounced Stalin, Brezhnev banished Khrushchev to his dacha, and Gorbachev buried Chernenko. 
Only Yeltsin did things differently. 
He disliked his predecessor, Mikhail Gorbachev, as much his predecessors disliked their predecessors. 
But all the same he treated Gorbachev in a more decent manner because Yeltsin fundamentally believed in democracy. 
So he left Gorbachev a private life that could also be lived in public. 
Putin, of course, did not accost the retired Yeltsin, but he didn’t have to. 
He simply ignored him while reversing his achievements in building a free Russia. 
Before Zubkov’s nomination, reports swirled that the next prime minister would become Putin’s presidential successor, with Sergei Ivanov, a current deputy prime minister, dubbed the most likely candidate. 
But Ivanov, who is perceived as “strong,” would provide unwelcome competition to Putin, who, after all, remains a “strong” president. 
Had he anointed Ivanov now, Putin’s power would already begin seeping away. 
The outgoing Fradkov, surprisingly, put the matter best when he explained why he had resigned: with elections approaching, Putin needed a free hand. 
So Zubkov’s nomination allows Putin to continue to keep his cards – and thus ultimate power in Russia – close to his chest. 
Of course, Zubkov will continue Fradkov’s “Yes, whatever you say Mr. President” management style. 
Moreover, his former position as head of the Federal Financial Monitoring Service will allow him to draw on a wealth of information to keep tabs on all possible enemies and competitors, perhaps turning them into new model Berezovsky’s, Gusinsky’s and Khodorkovsky’s, if necessary. 
The only question now is whether Zubkov, or his successor, will eventually succeed in turning Czar Vladimir into the same sort of non-person that Putin’s rivals have become. 

Kremlin Rules 
Long before Russia's Duma election on December 7th, one could predict the outcome: victory for the Edinstvo (Unity) party, President Vladimir Putin's main parliamentary ally. 
What was not predicted was the size of the victory for this so-called "party of power," or the exceedingly poor showing by the Communist Party (KPRF). 
In 1999, Unity's main rival was the Fatherland /All Russia bloc (OVR), led by ex-premier Yevgeny Primakov and Moscow Mayor Yuri Luzhkov, who at the time were very popular figures. 
But the government-controlled media subsequently launched fierce attacks against them, targeting Primakov especially, since he was considered a serious rival to Putin and a legitimate presidential contender. 
Since then, the situation changed markedly. 
The OVR first became an ally of the Unity party, and then merged with it into what became known as United Russia, helping it become this year's clear front-runner. 
So the government-controlled media took aim at another antagonist, the Communist Party, which apparently never expect an attack on this scale. 
Disoriented and bewildered, the party withered under the pressure of the media assault, which was mostly carried out on state-run TV channels. 
The election result showed that the government's strategy paid off handsomely. 
Indeed, the Communist vote collapsed to a mere 12.7%, down from 24% in 1999. 
But the Communists also have themselves to blame for their electoral debacle. 
Having won the most votes in two consecutive Duma elections, the Party now made a serious strategic blunder, exposing itself to attack by putting a number of major businessmen--or oligarchs--on its candidate list. 
They formed perfect targets. 
United Russia, on the other hand, based its campaign on the progress made during President Putin's tenure: notable economic growth and slight improvement in people's living standards. 
The party actively supports Putin, but refrained from appearing in televised debates, possibly because it has no charismatic leaders of its own who can excite the public with sharp polemics. 
A dull presentation could have adversely affected the party's rating. 
The refusal to accept any televised challenge, of course, aroused a lot of criticism in the media. 
But the election law does not require that every party take part in such events, so United Russia merely shrugged off the criticism. 
Most forecasts estimated that United Russia, led by such prominent politicians as Interior Minister Boris Gryzlov, Emergencies Minister Sergei Shoigu, and Moscow Mayor Yuri Luzhkov, could take up to 30% of the popular vote. 
Added to the winners in single-seat constituencies--half the total--this would ensure it a sturdy majority of 250 to 270 of the Duma's 450 seats. 
In the end, United Russia secured 37% of the vote, with the additional seats it gained in the single-seat constituencies assuring it an overwhelming parliamentary majority. 
This means that the pro-Kremlin bloc probably attained the two-thirds majority needed to change the constitution, which would allow it to grant Putin a third four-year term, although Putin himself ruled this out last June. 
Although the Communist leader, Gennady Zyuganov, accuses the Kremlin of rigging the vote, his party is--at long last--beginning to look like a spent force. 
But the strong showing by Vladimir Zhirinovsky's Liberal Democratic Party, or the LDPR, seems equally surprising. 
Of course, Zhirinovsky's national/socialist rhetoric has hidden his almost slavish subservience to the Kremlin. 
Yet his party now seems to have fixed itself on the political landscape. 
It has a committed electorate of its own, whose sentiments are responsive to Zhirinovsky's populist slogans, and a party apparatus staffed by committed workers. 
Russians are not surprised at the poor showing of the so-called reformist forces, the Union of Right-Wing Forces (SPS) and the liberal Yabloko party. 
The leaders of the two parties--Boris Nemtsov and Grigory Yavlinsky, respectively, failed at the campaign's start to find common ground. 
By splitting the "reform" vote, both parties failed to win any seats in the Duma because neither surpassed the 5% electoral threshold. 
The "reformist" bloc will be replaced by Rodina (Motherland), a new patriotic alliance that was created to take votes away from the Communists, and received 9.1% of the vote. 
Motherland's proclaimed policies, a heady brew of nationalism and socialism, are espoused by seasoned leaders, including the economist Sergei Glazyev, chairman of the Duma foreign affairs committee Dmitry Rogozin, and former Central Bank head Viktor Gerashchenko. 
Because United Russia will hold a parliamentary majority, opposition to executive authority should be much weaker than when the Communists formed the largest faction. 
For the first time since the Soviet collapse, the Kremlin will have firm parliamentary support. 
For better or for worse, the government now has ample opportunity to enact its desired reforms, possibly including constitutional changes. 
President Putin and his allies have every reason to rejoice. 
But as the ancient Greeks used to say, those whom the gods will destroy, they grant their wishes. 

Paul Krugman and the Obama Recovery 
NEW YORK – For several years, and often several times a month, the Nobel laureate economist and New York Times columnist and blogger Paul Krugman has delivered one main message to his loyal readers: deficit-cutting “austerians” (as he calls advocates of fiscal austerity) are deluded. 
Fiscal retrenchment amid weak private demand would lead to chronically high unemployment. 
Indeed, deficit cuts would court a reprise of 1937, when Franklin D. Roosevelt prematurely reduced the New Deal stimulus and thereby threw the United States back into recession. 
Well, Congress and the White House did indeed play the austerian card from mid-2011 onward. 
The federal budget deficit has declined from 8.4% of GDP in 2011 to a predicted 2.9% of GDP for all of 2014. 
And, according to the International Monetary Fund, the structural deficit (sometimes called the “full-employment deficit”), a measure of fiscal stimulus, has fallen from 7.8% of potential GDP to 4% of potential GDP from 2011 to 2014. 
Krugman has vigorously protested that deficit reduction has prolonged and even intensified what he repeatedly calls a “depression” (or sometimes a “low-grade depression”). 
Only fools like the United Kingdom’s leaders (who reminded him of the Three Stooges) could believe otherwise. 
Yet, rather than a new recession, or an ongoing depression, the US unemployment rate has fallen from 8.6% in November 2011 to 5.8% in November 2014. Real economic growth in 2011 stood at 1.6%, and the IMF expects it to be 2.2% for 2014 as a whole. 
GDP in the third quarter of 2014 grew at a vigorous 5% annual rate, suggesting that aggregate growth for all of 2015 will be above 3%. 
So much for Krugman’s predictions. 
Not one of his New York Times commentaries in the first half of 2013, when “austerian” deficit cutting was taking effect, forecast a major reduction in unemployment or that economic growth would recover to brisk rates. 
On the contrary, “the disastrous turn toward austerity has destroyed millions of jobs and ruined many lives,” he argued, with the US Congress exposing Americans to “the imminent threat of severe economic damage from short-term spending cuts.” 
As a result, “Full recovery still looks a very long way off,” he warned. 
“And I’m beginning to worry that it may never happen.” 
I raise all of this because Krugman took a victory lap in his end-of-2014 column on “The Obama Recovery.” 
The recovery, according to Krugman, has come not despite the austerity he railed against for years, but because we “seem to have stopped tightening the screws: Public spending isn’t surging, but at least it has stopped falling. 
And the economy is doing much better as a result.” 
That is an incredible claim. 
The budget deficit has been brought down sharply, and unemployment has declined. 
Yet Krugman now says that everything has turned out just as he predicted. 
In fact, Krugman has been conflating two distinct ideas as if both were components of “progressive” thinking. 
On one hand, he has been the “conscience of a liberal,” rightly focusing on how government can combat poverty, poor health, environmental degradation, rising inequality, and other social ills. 
I admire that side of Krugman’s writing, and, as I wrote in my book The Price of Civilization, I agree with him. 
On the other hand, Krugman has inexplicably taken up the mantle of crude aggregate-demand management, making it seem that favoring large budget deficits in recent years is also part of progressive economics. 
(Krugman’s position is sometimes called Keynesianism, but John Maynard Keynes knew much better than Krugman that we should not depend on mechanistic “demand multipliers” to set the unemployment rate.) 
Deficits were not increased enough in 2009 to escape from high unemployment, he insisted, and were falling dangerously fast after 2010. 
Obviously, recent trends – a significant decline in the unemployment rate and a reasonably high and accelerating rate of economic growth – cast doubt on Krugman’s macroeconomic diagnosis (though not on his progressive politics). 
And the same trends have been apparent in the United Kingdom, where Prime Minister David Cameron’s government has cut the structural budget deficit from 8.4% of potential GDP in 2010 to 4.1% in 2014, while the unemployment rate has fallen from 7.9% when Cameron took office to 6%, according to the most recent data for the fall of 2014. 
To be clear, I believe that we do need more government spending as a share of GDP – for education, infrastructure, low-carbon energy, research and development, and family benefits for low-income families. 
But we should pay for this through higher taxes on high incomes and high net worth, a carbon tax, and future tolls collected on new infrastructure. 
We need the liberal conscience, but without the chronic budget deficits. 
There is nothing progressive about large budget deficits and a rising debt-to-GDP ratio. 
After all, large deficits have no reliable effect on reducing unemployment, and deficit reduction can be consistent with falling unemployment. 
Krugman is a great economic theorist – and a great polemicist. 
But he should replace his polemical hat with his analytical one and reflect more deeply on recent experience: deficit-cutting accompanied by recovery, job creation, and lower unemployment. 
This should be an occasion for him to rethink his long-standing macroeconomic mantra, rather than claiming vindication for ideas that recent trends seem to contradict. 


Daring Europe to Innovate 
LUDWIGSHAFEN, GERMANY – Innovation plays a crucial role in creating sustainable economic growth. 
Yet we continue to see, particularly in the European Union, obstacles being placed in the way of those best positioned to invent new products, services, or ways of doing business. 
At the heart of the issue appears to be the fear of risk. 
But investors, managers, and entrepreneurs must take risks if their ideas stand any chance of achieving commercial success. 
Nowhere are these concerns more discussed, and less understood, than in Europe. 
Innovation has been placed at the heart of Europe 2020, the European Commission’s growth strategy for the EU. 
But, despite the fact that European scientific research is among the most advanced in the world, Europe lags behind its global competitors in its ability to bring these innovations to the market. 
Regardless of how one chooses to measure innovation, three conditions must be in place for it to flourish: a skilled, educated workforce; excellent information and communications technology infrastructure; and a supportive business environment. 
In other words, successful innovation requires a stable and growing economy, fresh ideas, and an absence of unnecessary and burdensome regulation. 
The role of government is crucial. 
And it is a role that the EU seems to have misunderstood in at least one important respect: its attitude toward risk. 
The EU has long-established institutions and processes for evaluating risk and ensuring that unacceptable risks are avoided. 
When policy is required but the science is unclear, regulatory decisions are increasingly based on the “precautionary principle,” which is designed to prevent situations in which serious harm could occur. 
However, there is no universally accepted interpretation of the precautionary principle. 
North America, for example, has established a good balance between precaution and proportion. 
In Europe, by contrast, greater weight is placed on the avoidance of risk, which is undermining private-sector confidence in investing in innovation. 
The EU’s goal – to protect human health and the environment – is laudable. 
But it is impossible to mitigate all risk, so aiming for this is not feasible. 
Rather, the precautionary principle should be used judiciously and rationally, balancing potential risks with the benefits that innovation and new technology might offer. 
This notion of risk underpins economic interactions. 
Moreover, a policy that strives to eliminate all risk carries risks of its own. 
A risk-free approach to innovation makes it hard to solve vital issues like ensuring food, water, and energy security for a growing population, or even ensuring that Europe remains technologically competitive. 
World-changing innovations – in transport, telecommunications, medicine, and much else – are almost always the result of taking calculated risks and balancing these with the benefits that new technologies can provide. 
Risk management, after all, is not simply a matter of accepting more or less risk. 
It is about having a better understanding of how risk works. 
When its nature is properly analyzed and tested, it can be effectively managed and even minimized. 
Unfortunately, this does not always appear to be the EU’s approach. 
In its regulatory processes, science-based arguments are increasingly losing out to public opinion, while possible opportunities are undervalued. 
We have seen this in the European Commission’s reluctance to decide how products based on green biotechnology may be used. 
But there are many similar examples of legal uncertainty threatening to undermine innovation and investment across a range of technologies and industries, including chemicals, consumer products, crop protection, electronics, nutrition, and pharmaceuticals. 
Given this regulatory environment, chief executives of 12 companies (including BASF), with a combined annual research-and-development budget of €21 billion ($28 billion), recently proposed the formal adoption of an “innovation principle” in European risk management and regulatory practice. 
The idea, conceived and developed by members of the European Risk Forum, is simple: Whenever precautionary legislation is under consideration, the impact on innovation should be fully taken into account in the policymaking process. 
The innovation principle does not set out to support innovation regardless of its impact on health or the environment. 
Where there is real danger, precautionary considerations should be uppermost. 
But the principle does seek to support an evidence-based approach, relying on sound science. 
By embracing it, Europe can dare to innovate. 

Kuwait’s Parliamentary Revolution 
The world has been transfixed by the victory of Hamas in the Palestinian election. 
But a different assertion of democratic and parliamentary power, this time in the Gulf sheikdom of Kuwait, which possesses 10% of world oil reserves, may prove to be equally important. 
Every sign indicates that the wave of democratization in Kuwait is irreversible, and the impact of these changes extends beyond Kuwait to all the other oil-rich Gulf countries, which are also ruled by emirs and sheikhs. 
Indeed, these rulers now have much to ponder. 
The death of Kuwait’s ruler, Sheikh Jaber al-Sabah, on January 15, 2006, was followed by unprecedented national disquiet, which led to the rapid abdication of his designated successor, Saad Al Sabah. 
Nothing like this had ever hit the Al Sabah family, which has ruled Kuwait for two centuries. 
Traditionally, the role of ruling Emir alternated (according to a tacit agreement) between two rival branches of the Al Sabah family – the Al Jaber and the Al Salem. 
The succession was always strictly a family affair, and any disputes remained behind closed doors. 
However, with Sheikh Jaber al-Sabah’s death, the succession was not only subjected to feverish public debate, but the Kuwaiti press and Parliament were key actors in determining the outcome. 
Kuwait’s political system is considered the most modern among the Arab Gulf sheikhdoms and monarchies, because all citizens – men and women alike – elect its parliament. 
Elections with universal suffrage, combined with a relatively free press, meant that the succession became a public issue, debated in the media and by academics for months as Sheikh Jaber was dying. 
With the taboo on discussing the succession broken, talk about the physical and mental fitness of the likely successor became commonplace, and members of the ruling family who objected to the prospect of being ruled by a severely incapacitated crown prince came to enjoy broad support. 
Thus, immediately after Jaber al-Sabah’s death, the succession became a national concern. 
What in the past would have been a straightforward palace coup spilled out onto the pages of newspapers and into the corridors of Parliament. 
The Crown Prince’s abdication became inevitable. 
The cabinet of ministers affirmed the succession of Sabah al-Sabah as the new ruler, which was then ratified by Parliament. 
For the region, this was an historic moment. 
For the first time, an Arab parliament had voted a head of state out of office and asserted its will in choosing the successor. 
Parliamentary supremacy, one of the key issues in any country’s democratization, appears to be at hand in Kuwait. 
Of course, Kuwait will now experience enormous tensions between the transparent rule of a true parliamentary government and the still powerful legacy of a hidden family-run state. 
But the old rule of force and intrigue by which other Gulf rulers have been deposed has been replaced by a modern principle – the Al Sabah have surrendered their exclusive control over the succession to the will of Parliament, which alone could provide the legitimacy that the new Emir needs. 
The consequences of this assertion of parliamentary authority will be enormous. 
Parliamentary ratification did not simply provide a rubber stamp to a palace coup; its approval was conditional. 
Emirs who need parliamentary approval to secure popular legitimacy must now reckon with the need to share power. 
In exchange for voting to pass over the unfit Crown Prince, Kuwait’s parliament is now demanding even more political and economic reforms, including the formal legalization of political parties, the separation of the position of prime minister from that of crown prince, and even for the prime minister to be chosen from outside the Al Sabah family. 
This was a true parliamentary revolution. 
According to Kuwait’s constitution, the new ruler has one year to appoint a crown prince, but he has to appoint a prime minister immediately. 
The delay is significant, because Kuwaitis are unaccustomed to this kind of parliamentary influence. 
The new Emir will now need to navigate skillfully between the Al Sabah family’s factions and a newly empowered parliament. 
The victory of Parliament in Kuwait’s succession crisis is likely to lead some of Kuwait’s neighboring autocracies to stiffen their resolve against modernity and democracy. 

Kuwaiti Democracy in Action 
Kuwait has just held its eleventh parliamentary election since independence in 1961. Though Kuwait is a monarchy, its parliamentary history has not been placid, and the election campaign reflected ongoing tensions between the royal family and segments of the electorate. 
Originally scheduled for October 2007, the election was brought forward to break a deadlock between the parliament and the government over the number of electoral districts in the country. 
Currently, there are 25 constituencies nationwide, but reformers have long argued that a smaller number – each with a larger number of voters – would be less susceptible to manipulation by the political elite. 
The 29 members of parliament who support a reduced number of constituencies were unable to agree with the government on a new number. 
As a result, the issue became the focus of a vigorous campaign by discontented Kuwaitis, who gathered in front of the National Assembly building and in universities to voice their criticisms. 
In response, the government removed the redistricting issue from parliament to the constitutional court – an attempt, reformers argued, to hold back change. 
When three members of parliament sought to question the Prime Minister – their right, under the Kuwaiti constitution – the parliament was dissolved and elections called. 
The rules of political life in Kuwait have been worked out over 300 years – since this small area emerged as a self-contained polity. 
The royal family is empowered to administer the country, but through consultation with different sectors, like tribal leaders or merchant groups. 
With independence in 1961, these rules were codified in a constitution. 
Compared to other Gulf monarchies, the Kuwaiti royal family has limited powers, though constitutional rules have frequently been ignored—charges of vote-rigging marred the 1967 election, and parliamentary dissolution has dotted the country’s history. 
Nevertheless, since the liberation of Kuwait following the Iraqi occupation in August 1990, the parliament has gained both stability and respect. 
The dissolutions of parliament in 1999 and 2006 were carried out according to the law, and elections were called in a timely fashion. 
Parliament retains the right to interrogate cabinet members, including the Prime Minister, on financial and administrative questions and has frequently passed motions of no confidence in government. 
More recently, with the death last December of the Emir, Sheikh Jabir al-Ahmad, parliamentary approval was exercised a key role in resolving succession debates among factions of the royal family. 
Overall, Kuwait has always had a lively political life, with freedom of expression and less political repression than is common in neighboring countries. 
Political violence has been rare. 
Though political parties have not been legalized, they are nonetheless active in parliament and public life. 
Kuwaiti life reflects the many and varied political trends throughout the Arab world, as the country’s open society and economic opportunities have made it a powerful magnet and regional safety valve since the 1950’s. 
With this election, Kuwaiti women participated in choosing the parliament for the first time. 
Though women have long been active in Kuwaiti public life, they were enfranchised only last year, after a long and difficult campaign, by a parliamentary vote, and accounted for just 28 of the 249 candidates. 
The voting population is 57% female, and commentators speculated on the likely impact of women voters. 
Would they follow the voting patterns of their husbands? 
Clearly, women demonstrated tremendous enthusiasm for the political process, taking part in large numbers in political rallies, and as campaign workers in a range of election activities. 
In the end, while a loose opposition coalition of pro-reform ex-MP’s, Islamists, and liberals gained a majority of the National Assembly’s 50 seats, no woman won. 
The electorate focused almost entirely on the question of electoral districts. 
Most Kuwaitis see this very technical issue as a way of pressing for reform. 
Major regional issues, like the war in Iraq or Iran’s nuclear program, were barely mentioned. 
Islamist candidates were in an awkward position, seeking support from women voters, whose participation they opposed. 
However, Islamists were among the 29 parliamentary deputies pushing for constituency reform, a fact that eased their dilemma. 
Support for reform comes from across the political spectrum, whereas opponents of reform paid a high price. 
Indeed, three members of the outgoing parliament who supported the government were not candidates, having lost in their tribal primaries. 
With pro-reform forces strengthening their position in the new parliament, the government has two choices. 
It can go along with electoral reform, or it can find an opportunity to dissolve the new parliament. 
Already, commentators are speculating on how long the new parliament will survive. 
Whatever the immediate outcome, the Kuwaiti government is facing a new political horizon. 
Women are now the majority of voters, and young people have taken up the reform banner. 
Democracy will push the ruling family forward. 

Kyoto’s Misplaced Priorities 
When the Kyoto treaty enters into force on February 16, the global warming community will undoubtedly congratulate itself: to do good they have secured the most expensive worldwide treaty ever. 
They have succeeded in making global warming a central moral test of our time. 
They were wrong to do so. 
Global warming is real and is caused by emissions of carbon dioxide (CO2). 
But existing climate models show we can do little about it. 
Even if everyone (including the United States) applied the Kyoto rules and stuck to them throughout the century, the change would be almost immeasurable, postponing warming for a mere six years in 2100 while costing at least $150 billion a year. 
Global warming will mainly harm developing countries, because they are poorer and therefore less able to handle climate changes. 
However, by 2100, even the most pessimistic forecasts from the UN expect the average person in the developing countries to be richer than now, and thus better able to cope. 
So Kyoto is basically a costly way of doing little for much richer people far in the future. 
We need to ask ourselves if this should be our first priority. 
Of course, in the best of all worlds, we would not need to choose our priorities. 
We could do all good things. We could win the war against hunger, end conflicts, stop communicable diseases, provide clean drinking water, improve education and halt climate change. 
But we can’t do everything. 
So we must ask the hard question: what should we do first? 
Some of the world’s top economists – including three Nobel Laureates – answered this question at the Copenhagen Consensus last May. 
They found that dealing with HIV/AIDS, hunger, free trade, and malaria were the world’s top priorities, where we could do the most good for our money. 
Moreover, they put urgent responses to climate change at the bottom of the list. 
In fact, the panel called these ventures – including Kyoto – “bad projects,” because they cost more than the good they do. 
As the economics of climate change has become ever clearer, warnings from the global warming community have become shriller. 
For example, the head of the UN Climate Panel says, “We are risking the ability of the human race to survive.” 
Such statements make headlines, but they are nonsense. 
For example: 
· At a recent meeting at Exeter in the UK, some participants warned of a 50-50 chance that the Gulf Stream winds could collapse within a century. 
Such a scenario looks great in the movie “The Day After Tomorrow,” but it is unsubstantiated. 
As one presenter at the conference summarized: “No models have shown a complete shutdown, or a net cooling over land areas. 
Hence a shutdown during the twenty-first century is regarded as unlikely.” 
· Recently, a coalition of prominent environmental and development organizations claimed that malaria would increase in a warmer world. 
This has some theoretical validity, but ignores malaria’s dependence on poor infrastructure and health care. 
Indeed, throughout the cold 1500-1800’s, malaria was a major disease in Europe, the US, and far into the Arctic Circle. 
Malaria infections didn’t end because it got colder (it actually got warmer), but because Europe and the US got rich and dealt with the problem. 
With developing countries getting richer over the century, malaria is similarly likely to decrease rather than increase. 
· We are told that sea levels will rise – by roughly 50 centimeters by 2100 in some scenarios. 
This is correct, and it will clearly cause problems in low-lying countries like Bangladesh. 
But the alarmists neglect to mention that sea levels rose through the twentieth century by 10-25 centimeters. 
Did anyone notice? 
The rise in the twenty-first century will be worse and should not be trivialized, but the Intergovernmental Panel on Climate Change estimates that the total cost of adaptation will be around 0.1% of GDP. 
The “end-of-civilization” argument is counterproductive to serious public debate. 
It makes us believe that we only have one choice. 
Yet the reality is that we can choose to make climate change our first priority, or we can choose to do a lot more good first. 
To say this is not to suggest laissez faire. Far from it. 
Thousands died in Haiti during recent hurricanes, but not in Florida, because Haitians are poor and cannot take preventive measures. 
Breaking the circle of poverty by addressing the most pressing issues of disease, hunger, and polluted water will not only do obvious good; it will also make people less vulnerable to the effects of climate change. 
We live in a world with limited resources, so caring more about some issues means caring less about others. 
If we have a moral obligation, it is to spend each dollar doing the most good that we possibly can. 
With Kyoto, the world will spend $150 billion a year on doing little good a century from now. 
In comparison, the UN estimates that half that amount could buy clean drinking water, sanitation, basic health care, and education for every single person in the world. 
Which is better? 
Global warming really is the moral test of our time, but not in the way its proponents imagine. 
We need to stop our obsession with global warming and start dealing with more pressing and tractable problems first. 

La Strada on Wall Street 
VIENNA – Apologists for neo-liberalism assume not only that states should be run like companies, but also that, as far as possible, they should not intervene in the economy. 
The market, they insist, regulates itself. 
But, more than 50 years ago, the Nobel laureate Paul Samuelson contradicted this idealization of markets in graphic terms: absolute freedom for the market will lead to Rockefeller’s dog getting the milk that a poor child needs for healthy development, not because of market failure, but because “goods are placed in the hands of those who pay the most for them.” 
This distributional quandary lies at the heart of the capitalist system, which is one of never-ending competition fueled by the drive to maximize profits. 
In such a world, there is no room for a social conscience. 
It is the state that, to a greater extent in some societies than in others, must fill the gap. 
The market economy is unsurpassed as a system for creating wealth, but only social compensation ensures that this wealth is distributed in a just manner. 
Europe’s social-market economies, far more than the Anglo-Saxon neo-liberal model, regard mitigating the inequalities created by markets as the state’s duty. 
In fact, the market economy can function only if the state does intervene. 
The US financial crisis demonstrates what happens when markets are given free rein. 
Rather than regulate themselves, market players destroy themselves, however much they might be marveled at as golden calves. 
Indeed, investment bankers transformed stock markets into a surreal circus. 
For the most part, they resembled high-wire artists juggling borrowed money without a safety net. 
They threatened to crash – until the state stepped in. 
In Fellini’s film “La Strada,” the circus artists lived on the margins of society; in the “Wall Street Circus,” they lived like gods, making millions. 
That’s over for a while. 
Wall Street has collapsed. 
The present crisis, the fall of Wall Street, is to neo-liberalism what the fall of the Berlin Wall in 1989 was to communism. 
The global dimension of this crisis surprisingly also has a positive side. 
The international community is now charged with thinking about how to reorganize the financial sector and minimize the risk of similar catastrophe in the future. 
Until now, a major part of the problem was countries’ unwillingness to cooperate. 
Previous demands for stricter regulations came to nothing because of financial sector opposition. 
When should this stance change if not now? 
A start needs to be made at the European Council meeting of the heads of state and government in Brussels in mid-October. 
It is crucial that the European Union accepts the challenge of the financial crisis at the highest level, draws the appropriate conclusions, and takes the logical next steps. 
So what lessons are to be learned from the failure of the neo-liberal economic model? 
First, markets need clear rules. 
Stronger regulation means legally binding, globally applicable rules and standards. 
While important areas of economic policy are subject to rules that allow penal sanctions, the financial sector has a special status that is no longer acceptable. 
Those areas of the financial sector that have suffered the most reputational damage are the ones least subject to regulation and supervision: the derivatives market, hedge funds and private equity funds, and the ratings agencies. 
Voluntary codes of good conduct have been a dismal failure. 
We urgently need globally applicable regulatory minimum standards similar to those, say, within the WTO. 
We need a democratically legitimized world finance organization, equipped with the necessary regulatory instruments, which would supervise major global financial institutions. 
This organization should also have authority to create conditions for greater transparency, and to implement better early-warning systems and instruments for crisis management. 
The newly created regulation need not apply to everyone. 
But only those financial institutions that subject themselves to these rules would be able to rely on the support of the public authorities in case of a crisis. 
This would ensure both fiscal stability and fiscal innovation – in contrast to the present situation, in which no one obeyed any rules and, when crisis erupted, taxpayers had to come to the rescue. 
Second, welfare-state institutions should be strengthened. 
The crisis has made clear that the provision of people’s elementary needs must not be made dependent on speculation and stock market curves. 
Expansion of public financing for pensions, nursing care, and health insurance is therefore crucial. 
Finally, we need a European economic stimulus program – a “Big Bargain” – and we need it now. 
The crisis in international financial markets has had a noticeable impact on Europe’s real economy. 
Some large EU countries are on the brink of recession. 
Japan in the early 1990’s waited too long to act and missed the right opportunity to enact countermeasures, which is why Japan has still not recovered from its long stagnation. 
Public investment in infrastructure (such as a massive expansion of the European railroad network), as well as climate protection and environmental technology, will be needed. 
To strengthen purchasing power and to stimulate consumption, tax cuts on low- and medium-income households are essential. 
Of course, EU member states should determine the concrete form that such economic stabilization programs take for themselves. 
But that shouldn’t stop European governments from working together closely. 
To be effective, any stimulus program will need Europe’s nations to act in concert. 

Labor in a World of Financial Capitalism 
The traditional hostility between labor unions and the world of finance should not obscure their common interest in using financial tools in an expansive and creative way. 
We live in an age of financial capitalism, and the only intelligent way forward – for unions and other workers’ associations – is for these bodies to help their members make increasingly sophisticated use of the tools of risk management. 
The traditional boundaries between labor and capital are becoming blurred. 
For example, companies increasingly augment standard wage packages with stock options, even for rank-and-file employees. 
In the United States, the Labor Department reports that in 2003, 14% of US workers in firms with 100 or more employees were offered stock options. 
Expect more such packages in the future. 
The problem is, most employees do not fully understand options or stocks and do not know how to evaluate them. 
A recent paper by MIT Professors Nittai Bergman and Derk Jenter suggests that management tends to award employee options when employees are excessively optimistic about the outlook for company stock – thereby in effect opportunistically substituting overpriced options for full pay. 
Unions and workers associations are the natural vehicles to monitor such behavior, but they must invest in the expertise to do so effectively. 
They should not stand in the way of compensation that includes stock options, or that otherwise create financial risks for their employees. 
But they should make sure that such programs are administered in employees’ interest, because companies that encourage their employees to hold options or to invest directly in the company’s stock are asking them to take on some of the company’s risks. 
To be sure, sharing ownership can help employee morale. 
But it also creates an unhealthy concentration of risks: not only the employee’s job, but also his assets now depend on the company’s fate. 
The scandal at Enron, in its final days, was that management prevented employees from selling their Enron shares while executives unloaded their own shares. 
Obviously, unions need to be alert to such bad behavior. 
More generally, they must examine employee ownership programs both sympathetically and analytically, in order to suggest ways to hedge the risks they create. 
The same is true of other financial tools. 
Labor unions have long pointed with satisfaction at hard-won contracts that specified a defined-benefit pension for their members. 
But these unions were often without the financial sophistication to judge whether the firm set aside sufficient capital to meet its commitments decades later. 
In the US, union failure to represent members’ interests adequately contributed to a major pension default at the Studebaker Corporation in 1963. 
The AFL-CIO, the United Auto Workers and the United Steel Workers then petitioned Congress – against strong opposition from business interests – to establish the Pension Benefit Guaranty Corporation in 1974 to insure private pensions against companies’ failure to honor them. 
Gradually, many countries, with prodding from their trade unions, now have some form of benefit protection plan for private pensions. 
The latest example is the United Kingdom, where trade unions have spurred the creation of the Pension Protection Fund, which will begin operating next year. 
But it is not clear that these plans will succeed fully. Declining stock markets and low interest rates, have left private pensions around the world more vulnerable than was expected. 
Moreover, the risks to pension funds may correlate with risks to other economic factors affecting specific groups of workers. 
This means that unions should not leave the complex financial problems of designing pensions entirely to governments. 
Local unions need to be involved, for the issues involved are specific to companies and workers, and cannot be resolved by governments alone. 
Indeed, the essence of labor unions is that they know the unique problems of a distinct group of workers, bring focused expertise on these problems, and thus intelligently represent their interests. 
In today’s complex financial economies, representing workers’ interests is not so simple as battling with management for a bigger share of the pie. 
Unions should instead negotiate with management the same way top executives do with their boards of directors when their complex compensation packages are worked out. 
Unfortunately, instead of learning how to think in financially sophisticated ways, we still see labor unions in Europe and elsewhere dwelling too much on job security for working people. 
But making it difficult for firms to lay off workers provides only an illusory benefit for workers, for it compromises companies’ ability to compete, and weakens their incentive to create jobs. 
The alignment of incentives lies at the heart of modern financial theory. 
Labor unions should negotiate with management about providing appropriate risk management to their employees in financial forms: the right kinds of insurance, options, and other investments to protect them realistically without guaranteeing their employment and without jeopardizing the productivity of the firm. 
Complex financial capitalism is here to stay, and we all have to learn to live with it. Union leaders must study finance rather than condemn it as evil. 
They must develop a cadre of professionals with a sophisticated understanding of risk management, and must work to educate their members in the financial subtleties of their specific circumstances. 

Labor in the Age of Robots 
DAVOS – Fears about the impact of technology on the labor market are nothing new. 
In the early nineteenth century, a group of English textile workers known as the Luddites worried that new technologies like power looms and spinning frames would cost them their jobs. 
They protested by smashing the machines. 
Today, anxiety that new technologies could destroy millions of jobs is as high as ever. 
In the midst of a major employment crisis, technology continues to reduce the labor needed for mass production, while the automation of routine legal and accounting tasks is hollowing out that sector of the job market as well. 
The science of robotics is revolutionizing manufacturing; every year, an additional 200,000 industrial robots come into use. 
In 2015, the total is expected to reach 1.5 million. 
Adapting the labor market to a world of increasingly automated workplaces will be one of the defining challenges of our era. 
Yet no country can afford to ignore the transformation. 
Globally, some 200 million people are unemployed, up 27 million since 2008. 
There is a critical need to anticipate coming technological changes and provide the global workforce with the education and skills needed to participate in the modern labor market. 
Worldwide, one-third of employers surveyed complain that they are unable to find workers with the right skills for existing vacancies. 
Efficient paths from training and education programs to the world of work must be built, so that skills can be matched to market demand. 
Government programs must be strengthened, and employers and trade unions must assume greater responsibility for investing in skills. 
They also must consult more closely with educators and policymakers – discussions that should be informed by labor-market information, performance reviews, and the availability of employment services. 
Whatever a country’s development level, investment in education and skills will increase the ability of its workforce to innovate and adapt to new technologies. 
Such investment can determine whether a country’s economic growth is broadly inclusive or leaves large segments of society behind. 
An abundant supply of workers who have been appropriately trained and can continue to learn boosts investor confidence and thus job growth. 
In addition to training the labor force for an age of further automation, sustainable economies must offer protections for workers in good times and bad. 
The nature of a worker’s relationship with his or her employer is changing. 
People entering the labor market are increasingly finding only short-term or temporary contracts; often, they are forced to take informal work or emigrate for a job. 
These trends are exacerbating income inequality. 
As a result, mitigation policies are necessary. 
Along with a robust system of unemployment benefits, social protections such as healthcare and pensions are essential for overall worker security and to ensure a healthy economy. 
And yet only 20% of the world’s population has adequate social-security coverage; more than half lack any coverage at all. 
That is why the work of the International Labor Organization, which was established in 1919, is still relevant today. 
In a world of increasingly automated workplaces and eroding employee-employer relationships, the values encoded in the ILO’s labor standards are more necessary than ever. 
The complex challenges facing workers worldwide will require complex solutions. 
In 2013, the ILO launched its Future of Work initiative, which seeks to identify and analyze incipient trends and provide a forum for discussion about what must be done to adapt to rapidly changing labor-market conditions. 
Our world has changed vastly over the past century – and not only because of technology. 
By 2050, the global population will surpass nine billion. 
The number of people aged 60 years and over will have tripled. 
Three-quarters of the elderly will be living in what are now developing countries, and the majority of them will be women. 
These demographic shifts will further revolutionize the labor market, social-security systems, economic development, and the world of employment. 
For all of the progress human society has made since the era of the Luddites, a simple truth persists: machines must strengthen, not weaken, our prospects for inclusive growth and broadly shared prosperity. 
We must ensure that the modern economy is a sustainable one, built on the principles of human dignity and the opportunity for decent work. 

Counting Africa’s Invisible Workers 
YAMOUSSOUKRO – The billions of dollars in aid delivered to Africa annually may do the continent much good, but it cannot deliver a solution to poverty. 
Only creating more high-quality jobs can do that. 
The question is how. 
Africa boasts a large and creative labor pool, buttressed by a youth population that is expected to double, to over 830 million, by 2050. 
That should be a boon for economies across the continent. 
But African policymakers confront a serious problem: they do not know how many people they are dealing with, where they live, or how they earn a living. 
Simply put, they don’t have enough data. 
In 46 of 54 African countries, official tracking of vital statistics such as birth, marriage, and death is limited. 
As the Mo Ibrahim Foundation reports, only “a third of all Africans live in a country where a census has been conducted since 2010,” and the census programs that do exist are often underfunded and unreliable. 
More than half of all Africans live in countries that have not conducted a labor-force survey in at least a decade. 
Meanwhile, young Africans are largely working in the informal economy, where they enter into ad hoc arrangements that lie beyond the purview of government regulation and taxation. 
They may be doing productive work, but in economies where informality is effectively institutionalized, owing to a lack of data-collection mechanisms. 
Without an accurate picture of the state of the labor market, governments are hamstrung in their ability to respond to the challenges afflicting it. 
Initiatives aimed at reducing youth unemployment, while numerous, can only be so effective if we don’t know which types of jobs already exist and which are needed. 
With an estimated 122 million people expected to join the African workforce by 2022, keeping up with labor trends – and delivering enough good jobs – will only become more difficult. 
Bringing the picture into sharper focus through improved data collection does not mean simply imitating the labor-tracking methods used in OECD countries, where the informal economy does not account for such a high share of employment. 
Instead, African governments, with the help of private-sector actors, must develop methods for understanding how the informal economy works and how it can be improved. 
Only then will it be possible to address unemployment and poverty effectively and unlock the potential of Africa’s youth. 
To be sure, some high-potential approaches are already apparent. 
The Alliance for a Green Revolution in Africa reports that, though the continent boasts 60% of the world’s uncultivated land, it spends $60 billion per year on food imports. 
Investing in the development of Africa’s agricultural resources is thus a no-brainer. 
Young people could play a central role in that effort. 
By identifying and investing in those parts of agricultural value chains where young people can contribute, African leaders can create decent formal job opportunities in, say, light manufacturing for relatively low-skill workers. 
Only a small amount of skills training would be required to lift workers – such as the 120 now employed at a tomato paste factory in Nigeria – from the bottom of the value chain. 
Another promising approach is exemplified by Johannesburg’s Vulindlel’ eJozi program, which aims to eliminate barriers to entry-level employment for young people by providing skills like digital literacy. 
Such skills enable young people to move not only out of the informal sector, but also out of undesirable formal jobs, such as in South Africa’s private-security industry, which employs more than 412,000 people. 
The industry has faced criticism for poor working conditions; even where that is not the case, it does not develop the types of skills that can support stable and sustainable economic growth. 
As more people gain the skills and access the opportunities to fill productive jobs in the formal sector, where they are registered and recognized, governments will get a better sense of the labor market. 
But to maximize the effectiveness of efforts to provide those skills and opportunities, not to mention ensuring that those who remain in the informal sector are not invisible, initiatives aimed directly at improving data collection are also needed. 
One such initiative is the Africa Programme on Accelerated Improvement of Civil Registration and Vital Statistics, which was formally launched in 2011. 
While it may not provide instant results, it begins to lay the groundwork for the development and implementation of programs based on hard data about African populations. 
Reducing unemployment and poverty are not the responsibility of governments alone. 
Private-sector actors and ordinary citizens can also help. 
For example, we can support informal activities, such as waste recycling, that give low-skill young people a chance to earn money. 
And we can encourage and facilitate apprenticeships that provide technical skills and opportunities for civic education. 
Africa has addressed complex and far-reaching problems before. 
For example, the HIV/AIDS epidemic, which once seemed insurmountable, has now largely been brought under control. 
The key to tackling that challenge was cooperation among governments, development partners, and local communities in collecting, processing, and using data to adjust strategies. 
We should be doing the same to address the job shortage. 
If Africa’s economies are to absorb the 122 million young people expected to enter the labor force in the next few years, we must get the accounting right – starting now. 

Reshaping the Labor Landscape 
DAVOS – As the global economy changes at an ever-quickening pace, the labor market in many countries is not merely struggling to keep up, but seems to have broken down in important ways. 
High unemployment coexists with unfilled jobs. 
Rising productivity fails to translate into higher wages. 
And, for many, upward mobility is beyond reach, even though the economy has begun to recover. 
Fortunately, change seems to be underway. 
Four global trends are reshaping the world of work, helping to resolve contradictions and overcome dysfunction in the labor market as companies, workers, and governments adapt to a new demographic, technological, and economic environment. 
The first trend is demographic. 
In much of the world, aging societies and declining birth rates mean that the days of abundant labor are coming to an end. 
Some 60% of the world’s population lives in countries with stagnant or shrinking workforces. 
China’s working-age population peaked in 2010; by 2050, more than a quarter of its people will be over 65 (today, just 8% are). 
In Germany, the labor force is projected to shrink by six million over the next 15 years. 
As labor becomes increasingly scarce, employers and policymakers are being forced to think differently about sourcing talent. 
In Japan, where a quarter of the population is older than 65, Prime Minister Shinzo Abe has championed a major effort to bring more women and older workers into the labor market. 
As a result, even though Japan’s working-age population, traditionally defined, has shrunk 8% over the past decade, the labor force decline totaled just 1%. 
Elsewhere, other strategies to fill the labor gap are emerging. 
Aerospace companies, faced with graying workforces, have pioneered flexible working hours, phased retirements, “encore careers,” and a slew of knowledge-transfer programs to train the next generation of employees. 
Companies that cannot find the talent they need in one country are using remote workplaces to employ people elsewhere. 
And firms are making attempts to attract underrepresented groups, including women, young people, minorities, people with disabilities, and migrants. 
At the same time, another trend, the rise of individual choice, is providing workers with unprecedented flexibility. 
With millions of job postings just a click away, it is easier to shop around for work; most millennials expect to change course several times during their careers. 
Rather than attempting to hang on to a job for life, the goal today is to remain employable – to develop the skills, experience, and expertise necessary to move on or up, regardless of the employer. 
As a result, wages and opportunities are increasingly being dictated by skills, rather than tenure. 
Those with sought-after talents have more bargaining power, are better able to manage their careers, and command higher salaries. 
Those without in-demand skills are struggling and feel disposable. 
So far, this abundance of choice has discouraged companies from spending resources on training employees, who might, after all, soon decide to join a competitor. 
However, as talent shortages loom, the need to retain employees could tip the balance back toward greater investment in professional development. 
Employers that provide learning opportunities will become a destination for talent. 
The third trend reshaping labor markets is rapid technological change. 
Few industries are safe from disruption. 
Automation, facilitated by better artificial intelligence, is poised to have a major impact on jobs. 
Up to 47% of the jobs that existed in the US in 2010 are highly likely to be computerized out of existence in the next two decades. 
If history is a guide, new industries and opportunities will replace those that are lost; nonetheless, the transition will be painful and could last decades. 
And yet, there is reason for optimism. 
Even as technology sweeps away industries, it is facilitating the emergence of new models that could help solve some of the problems in the labor market. 
PricewaterhouseCoopers estimates that the five main sectors of the sharing economy – peer-to-peer finance, online staffing, peer-to-peer accommodation, car sharing, and music video streaming – could grow from around $15 billion in revenue today to $335 billion by 2025. 
To be sure, the industry is small. 
But it has nonetheless unleashed a torrent of creativity focused on the basic question of how better to align supply and demand for labor in a faster-paced world. 
A fourth global trend evident in today’s labor market is the rapid embrace among technologically sophisticated employers of data-based approaches to human resources. 
Talent management has gone from being an art to a science, as organizations have applied big data and supply-chain techniques to recruiting and retention. 
With the proliferation of so-called people analytics – behavioral and intelligence tests, digital performance scorecards, and better information systems – companies know their workers like never before. 
It is easier to see where the best talent resides within a company, or where the gaps might be. 
Companies are using these data to think more strategically about how to source talent. 
For example, given the difficulty of staying up to speed with changing technology, firms are increasingly outsourcing information-technology management to third-party experts. 
This, in turn, creates new efficiencies, allowing cyber-security providers to monitor attacks against a wide range of clients and share strategies and solutions. 
Recruitment is another area in which companies are turning to outsourcing in order to obtain expertise and increase efficiency. 
In short, I am an optimist. 
The churning, difficult period in which we find ourselves will create new opportunities. 
The growing realization that labor markets have fundamentally and permanently changed will spur policymakers, employers, and workers to address new challenges in ways that benefit everyone. 
Big shifts are never easy, but when they are managed properly, they can make us stronger and better off. 

Labour’s Racism Trap 
NEW YORK – When the right accuses the left of anti-Semitism, there must be something curious going on. 
After all, Jew-hatred historically has been a right-wing pathology. 
But in Britain, Conservative politicians and right-wing papers like the Daily Telegraph are now in high dudgeon about the alleged anti-Semitism of some Labour MPs. 
Conservatives themselves are not immune to xenophobia, especially when it comes to Muslims or even fellow Europeans. 
But there is a reason for this hypocrisy, which has everything to do with perceptions of Israel. 
Anti-Semitism on the left is often a form of excessive zeal in opposing Israeli policies toward the Palestinians. 
When critics of the Israeli government speak of “the Zionists” instead of Israelis, you can be reasonably sure that they are zealots. 
The former mayor of London, Ken Livingstone, is a case in point. 
His assertion that Hitler was a kind of proto-Zionist is less a failed attempt to make a provocative historical point than a deliberate slur to discredit the very existence of Israel. 
When the Labour Party leader, Jeremy Corbyn, himself a fierce anti-Zionist, fails to see much wrong with a mural in London depicting evil, hook-nosed plutocrats playing Monopoly over the naked backs of suffering workers, one might be forgiven for seeing a link between Corbyn’s praise of Hamas and a more old-fashioned type of anti-Semitism. 
Perhaps this is unfair. 
It may be that Corbyn was just being obtuse. 
But there is no doubt that zealous anti-capitalism has sometimes veered into anti-Semitism on the left. 
This was true in late-nineteenth-century France, when Georges Sorel and the revolutionary Syndicalists saw Jews in the same terms as the muralist in London. 
It is still true of those who regard George Soros as the most villainous enemy of the toiling masses today. 
When speaking of the left, one has to make distinctions. 
In the United States, any Democrat who believes that the government should help the worst off is often called a leftist. 
But in Europe and elsewhere, not much remains of the class-based ideology that was once associated with socialism. 
There is little difference any longer between moderate social democrats and mainstream conservatives. 
What Corbyn and Livingstone represent is a sectarian hard left, driven largely by a fierce hostility to what they perceive as Western imperialism (or “neo-colonialism”), and racism against non-white people. 
The two countries that most clearly represent the evils of neo-colonialism and racism in the eyes of the sectarian left are Israel and the US. 
Indeed, because of America’s staunch support of Israel, especially now that President Donald Trump has given Binyamin Netanyahu’s government license to do anything it likes, Israeli oppression of the Palestinians is seen as a common US-Israeli enterprise. 
Washington and Jerusalem are seen as the twin capitals of Zionism. 
(Some might include New York and Hollywood, because of “Jewish money.”) 
There is ample reason to be critical of Israeli policies, and of US governments that blindly support them. 
It is no secret that many Israelis, including prominent members of Netanyahu’s cabinet, hold views on the Arabs that could fairly be described as racist. 
(Considering his recent remarks on the Holocaust, the same might be said about Mahmoud Abbas, the PLO leader.) 
And Trump’s perception of non-white people is not exactly friendly, either. 
But criticism is one thing. To view the US and Israel as the single most malevolent threats to mankind is another. 
For some zealots on the left, Zionism and US imperialism are so wicked that their avowed enemies must be the left’s friends. 
This is why some are happy to make excuses for Russian President Vladimir Putin’s actions, and even to take his propaganda at face value. 
What Livingstone and others may not realize is how close their image of the American-Zionist evil comes to the right-wing anti-Semitic tropes of the early twentieth century. 
Then, too, the US, and to some extent Britain, was associated with “Jewish money.” 
Then, too, people assumed that “Jewish power” was wielded from Washington and New York. 
The name Rothschild was used in the same way that Soros is now. 
The leadership of the Labour Party by the sectarian left is a recent phenomenon. 
Corbyn was always a marginal figure, an eccentric whose name was rarely heard outside his North London constituency. 
His ascent to party leader seemed almost as zany as Trump’s takeover of the Republican Party. 
And yet it makes a certain ideological sense. 
The Labour Party, like its left-wing counterparts elsewhere, once represented the interests of what was known as the working class. 
It supported strong trade unions and favored state ownership of key national institutions such as the railways and the postal system. 
Nationalized health care and public education were vital concerns. 
Many leftists were internationalists, too. 
In Israel’s early decades, when the left was still in power there, much of the Labour Party was in sympathy with Zionism. 
This began to change in the 1960s and 1970s. 
Not only had Israel become an occupying power ruling Palestinian territories conquered in two wars, but left-wing ideology in the West had begun to shift from class-based concerns to battling imperialism and racism. 
Because many leftists identified themselves as warriors against racism, they could not possibly see themselves as anti-Semitic, no matter how zealous their opposition to “the Zionists.” 
Indeed, their views on Zionism confirmed their identity as anti-racists. 
Meanwhile, a parallel shift happened on the right, in Israel, Europe, and the US. 
As Israeli governments became more militantly nationalist, xenophobes and chauvinists in the West became ardent supporters of Israel. 
And that is why British Tories, who once might have held less than friendly views of the Jewish people, can now in good conscience condemn Labour politicians as anti-Semites. 
After all, they love Israel, perhaps a little too much. 

Ladies First, Women Last 
NEW YORK – Many people still believe that the attacks of September 11, 2001, were not just acts of political terrorism, but part of a cultural war, a clash of civilizations. 
The two things that get people most excited in cultural conflicts are religion and sex, specifically the way that men treat women. 
They are of course intimately linked: religion is commonly used as a way to regulate sexual behavior and relations between the sexes. 
The cultural interpretation of 9/11 as a civilizational clash explains why a number of former leftists have joined conservatives in their hostility to Islam. 
In the past, most American leftists would have regarded the war in Afghanistan as a neo-imperialist venture. 
But, since 9/11, the tone has changed. 
The Taliban subjugated women, stopped them from being educated, and kept them wrapped in burqas. 
So a war against the Taliban and their guest, Osama bin Laden, could be construed as a war for female liberation. 
It is, in fact, unlikely that feminism played any role in President George W. Bush’s decision to take the United States to war. 
But cultural concerns allowed him to recruit quite a few unlikely allies. 
The response to 9/11 and to Dominique Strauss-Kahn’s recent encounter with an African chambermaid in a New York hotel have very little in common, except for one thing: once again, cultural conflict was invoked in a misleading way. 
Whatever happened between the former managing director of the International Monetary Fund and his accuser, the fact that he was arrested and paraded in front of the press as a criminal suspect has been much criticized in France. 
One allegation, made recently by a well-known French publicist, is that the arrest was typical of American puritanism. 
The French, he alleged, being from a Latin culture, have a more liberal understanding of sexual behavior. 
They are more tolerant of human frailties, and have a more refined appreciation of the art of seduction. 
More than that, the arrest of DSK was supposedly revenge for France’s protection of another man accused of sexual crimes, Roman Polanski, and for the French ban on the burqa. 
In other words, the DSK case was part of another clash of cultures over sex, and, if only tangentially, religion. 
One problem with the cultural argument is that it is often used to defend or excuse the behavior of the powerful against the weak. 
Taliban men no doubt believe that the subjugation of women is a cultural privilege, as well as a religious duty. 
Authoritarian leaders in Asia routinely claim that their countries are culturally unsuited to democracy. 
But even in the more liberal West – let alone in countries with less liberal traditions, such as Japan – culture comes to the rescue of the powerful more often than it protects the weak. 
Both Polanski and DSK were engaged in sexual activities with women who were far from being their equals, in age and social status, respectively. 
Understanding their “human frailties,” then, comes down to excusing the behavior of powerful men towards women with no power at all. 
The rather strict use of law in the US to regulate sexual behavior might reflect a puritanical culture, but it is more likely the result of cultural diversity. 
In a society of immigrants, people come from a wide variety of traditions and faiths, with very different views of sex and the treatment of women. 
Since Americans can’t rely on homogeneous mores, the law is the only way to regulate behavior. 
Old societies have customs and traditions; new ones have courts and legislatures. 
But that is not the whole answer, either. 
Sweden, a country of limited cultural diversity, has even more stringent laws on sexual behavior than the US. 
And France, beneath its veneer of republican equality, is culturally and ethnically diverse. 
One cannot expect the law to solve all cultural conflicts. 
But it can play a positive role as a tool of emancipation. 
At best, the law is a great equalizer. 
The end of the Western slave trade did not come because European culture changed, but because the British changed their laws. 
In Japan, sexual harassment of women has sometimes been excused (by Japanese males) to foreigners as part of Japanese culture. 
And the female victims often put up with it by thinking that this is true. 
No doubt many Afghan women in burqas are equally convinced that covering their faces is a cultural command – and therefore a natural duty. 
But more and more Japanese women are fighting back against unwelcome male attention, not by denying tradition or culture, but by going to a lawyer and suing. 
Their problem is not with sex, or the art of seduction, but with the abuse of power. 
Muslim women in strict authoritarian societies do not usually have the option of seeking the law’s protection. 
Men who wish to maintain their control over women will no doubt continue to use culture and religious tradition to justify their dominance. 
It would no doubt be better, especially for women, if the citizens of countries like Afghanistan were equal before the law. 
Likewise, it would be better if powerful Frenchmen were to stop using “Latin culture” as an excuse for abusing their social inferiors. 
But the solutions to these problems are political and legal. 
That is why DSK was arrested. 
As for women in Muslim countries, there may not be much that people in the West can do to improve their lot. 
But it is unlikely that much good will come from bombing them. 

Lady Macbeth of Pyongyang 
TOKYO – North Korea’s communist regime is, by most accounts, set to complete its second dynastic transfer of power, this time from Kim Jong-il, who has ruled since 1994, to his youngest son, Kim Jong-eun. 
The general assembly of North Korea’s Workers’ Party, now underway for the first time in 44 years, is the clearest sign yet that “Dear Leader” Kim, who is seriously ill, is passing the crown in the hermit kingdom founded by his father, Kim Il-sung. 
One reason why a dynastic succession is taking place is that Kim Il-sung created a national ideology, Juche, which mixes communism and autarky with a heavy dose of Confucian values. 
Confucianism exalts an idealized bond between father and son as the model for all human relations, including between ruler and ruled. 
So, just as a Confucian son’s absolute duty is to revere his father, the absolute duty of a Confucian subject is to revere the ruler. 
Moreover, Kim Jong-il, like his father, has consistently appointed members of his family to positions of power. 
Indeed, Kim Jong-eun, the third son of Kim Jong-il and his late consort Ko Young-hee, was mooted as his father’s successor almost a year ago. 
North Korean propagandists proclaim Kim Jong-eun “the Young General,” but whether he will exercise the same absolutist authority as his father is an open question. 
Not only is he young and inexperienced, but his aunt, Kim Kyong-hui, Kim Jong-il’s sister and the wife of the second-ranking figure in North Korea’s hierarchy, Chang Song-taek, may balk at power slipping through her fingers. 
Although rarely seen or heard, Kim Kyong-hui, born on May 30, 1946 to Kim Il-sung and his first wife Kim Jong-suk, has served in a range of key Workers’ Party positions, including deputy director of the International Department and director of the Light Industry Department. 
She became a member of the all-powerful Central Committee in 1988 – a post she retains to this day. 
Kim Kyong-hui’s birth mother died when she was four. 
After her father, Kim Il-sung, remarried, she was raised by various surrogates away from the family. 
Observing the relationship between her father and stepmother, and their affection toward her half brothers, she is said to have become embittered and developed a fierce personality. 
Indeed, Kim Jong-il is quoted as saying: “When my sister turns violent, no one can stop her. 
Even I can do nothing.” 
When Kim Jong-il started living with his second wife, Kim Kyong-hui sought to incite trouble, driven by a sense of rivalry. 
After marrying Chang Song-taek, she began living something of a hedonistic life herself, but she scrutinized her husband’s conduct minutely, flying into a jealous rage over the slightest signs of infidelity. 
Kim Jong-il has described his sister as “my only blood family whom I was asked to take care of by my mother till the moment she died.” 
Their mother, Kim Jong-suk, is said to have died from hemorrhaging while giving premature birth caused by her distress over Kim Il-sung’s love affair with Kim Song-ae. 
Kim Il-sung reportedly rushed to the hospital, but the door to her room was locked. 
When she died, her doctor and Kim Jong-il were the only people present. 
But Chan Giryok, who was Kim Jong-suk’s primary doctor and is now a doctor at Nagoya University in Japan, tells a different story. 
According to Chan, Kim Jong-suk was at Kim Il-sung’s Pyongyang home near the Soviet Embassy, quarreling with him. 
Watching from afar, the doctor saw Kim Il-sung holding a pistol. 
The doctor, who was a surgeon, not an obstetrician, questioned the wisdom of summoning him to treat excessive bleeding from a premature delivery. 
He believes that he was summoned to treat bleeding caused by something else. 
Kim Jong-il, who is known to have had a powerful attachment to his birth mother, cannot help but have been psychologically affected by witnessing his mother’s killing. 
From the moment of his mother’s death, he kept his young sister close to him at all times. 
Indeed, in a country where trust rarely exists, Kim Kyong-hui is the only blood relation whom Kim Jong-il has ever fully trusted. 
Moreover, the two share the same lineage of the Great Leader, or Suryong,linked to Kim Jong-suk on the maternal side, and are fully devoted to the absolute supremacy of the Suryong and hereditary succession. 
Speaking before the Central Committee after Kim Il-sung’s death, Kim Jong-il said, “Kim Kyong-hui is myself, the words of Kim Kyong-hui are my words, and instructions issued by Kim Kyong-hui are my instructions.” 
Kim Kyong-hui’s intent to exercise power after her brother’s passing is supported by rumors that she helped arrange a traffic accident in June that killed Ri Je-gang, a senior party official and perceived guardian of Kim Jong-eun who reportedly attempted to oust Kim Kyong-hui and her close allies from power. 
Whether true or not, such rumors indicate the magnitude of her influence. 
There is, indeed, a growing belief that Kim Jong-il might, at any moment, designate Kim Kyong-hui to serve as a caretaker for the third-generation successor after his death. 
But Kim Kyong-hui may have other plans, such as becoming Kim Jong-il’s successor herself. 
The threat from North Korea has always been that it might start another war, whether by miscalculation or design. 
But, even if the “Young General” or his aunt turn out not to be unhinged megalomaniacs, the looming changeover opens a new era of uncertainty, particularly given North Korea’s economic woes. 
Whether Kim Jong-eun or Kim Kyong-hui intend to soldier on in desperate isolation, or to bring in economic change, they lack the revolutionary credentials and grip on power needed to do so. 
So when Kim Jong-il passes from the scene, and political instability meets economic blight, the regime could fall apart. 
South Korean President Lee Myung-bak has wisely begun to prepare for that contingency by proposing a special “Unification Tax” to help pay the costs of the Kim dynasty’s eventual disintegration. 
Japan and the rest of Asia should prepare for that day as well. 

Cultural Vandalism in America 
STONY BROOK – Whenever I hear about Islamic State militants bulldozing archaeological treasures and smashing sculptures and statues, I think about the assault on the scientific process being carried out by US politicians. 
Our scientific infrastructure – the principal means by which we understand the world, identify and ward off threats, and pursue a better future – is coming under attack by lawmakers who regard science as an obstacle to achieving their goals, and thus as a target that must be eliminated. 
The comparison may seem over the top. 
Interfering with ideas, one might argue, is not in the same category as destroying precious objects, and elected officials tinkering with legislation cannot be compared to militants whose other activities include hacking off the hands and heads of innocent people. 
Anyone making such comparisons might seem to have fallen victim to the irrational political rhetoric that is already pervading America’s presidential election campaign. 
But consider this: In 2010, the North Carolina Coastal Resources Commission’s Science Panel, using advanced methods, estimated a sea-level rise that could threaten certain low-lying communities over the next century. 
State legislators responded by passing a bill that prohibited policymakers from using the panel’s findings, thereby undermining officials’ ability to fulfill their fundamental duty to protect their state’s coastline, resources, and citizens. 
At the national level, the US House of Representatives recently passed the America COMPETES Reauthorization Act of 2015, which would forbid the use of Department of Energy-funded research in policymaking. 
The language, which appears in a section on energy, was apparently inserted to protect oil and gas interests from findings about their activities’ impact on climate change. 
But if the bill is passed by the Senate and signed by the president, its implications would likely extend far beyond climate change, with officials unable to use any taxpayer-funded DOE research to protect US citizens. 
Meanwhile, Lamar Smith, a Texas Republican who sponsored the COMPETES Act, is continuing his two-year quest to use the House Committee on Science, Space, and Technology, which he chairs, to alter the peer-review and grant-making process at the National Science Foundation, effectively opening it up to congressional review. 
These are not cases of politicians disagreeing about whether or how to address threats like sea-level rise and climate change; those would be political issues, and appropriate topics of discussion within a democratic system. 
Instead, they are examples of politicians willfully blocking critical information relating to serious threats, for entirely partisan, if not personal, reasons. 
They have decided that policy should be based solely on what they have already chosen to believe, rather than empirical evidence obtained through the scientific process. 
Herein lies the link between US politicians and the Islamic State: both are engaging in ideologically motivated cultural destruction. 
The difference is that the politicians will not admit their ideological impulses. 
Instead, they justify their positions by sowing distrust in the scientific infrastructure that produced the findings they dislike and then offering thin arguments about “scientific uncertainty.” 
Not only is this disingenuous; it also prevents constructive discussion of important issues and, worse, calls into question the scientific processes and institutions on which modern civilization depends. 
To put it another way, suppose that your own personal intuited notion of how to travel obliges you to embark on a long car journey without basic supplies like a jack and a tire iron or any kind of map or navigation system. 
Before you leave, you delete the contact information for a roadside service provider from your cell phone, based on the unfounded belief that such providers are deceitful and self-interested. 
Finally, you take several others along for the journey, without informing them about how well (or poorly) equipped you are. 
According to US law, such actions would amount to “reckless endangerment” or “culpable negligence.” 
Yet politicians are taking citizens on precisely such a ride – and facing very little pushback. 
Fact-based arguments, such as those in a recent editorial in Science magazine, should be enough to compel US leaders to change their approach. 
But facts cannot compete with ideology. 
Indeed, any opposition – even when backed by empirical evidence – is portrayed as an attack on politicians’ own (superior) ideology, whether it be libertarian or informed by religious fundamentalism. 
Against this background, jarring – and potentially incendiary – comparisons, such as to the Islamic State, seem to be the only hope of exposing the scale of the damage these politicians are doing. 
Perhaps at the next debate among presidential candidates, participants should have to distinguish – from a moral standpoint – politicians attacking the scientific process from Islamic State militants destroying ancient artifacts. 
That should get the conversation moving. 

Securing Land Rights in Africa 
WASHINGTON, DC – Earlier this month, Liberian President and Nobel Peace Prize laureate Ellen Johnson Sirleaf warned that Africa would continue to be stalked by poverty, hunger, and famine until governments provide smallholder farmers with secure rights to land. 
She was speaking from experience, both personal and political. 
Sirleaf and her tiny West African country are perfect examples of the steep toll that insecure land rights take on individuals, communities, and countries. 
Disputes over land ownership were a key driver of Liberia’s bloody 14-year civil war. 
And overlapping claims to land continue to foment conflict and impede foreign investment. 
Not even the president is immune to weak land-tenure laws; squatters invaded a four-acre parcel that Sirleaf bought in 1979, and refused to move for years. 
Stories like these can be heard across the continent. 
According to the World Bank, more than 90% of Africa’s rural land is undocumented. 
Overlapping and conflicting land-management systems are the norm, as are inaccessible, out-of-date, incomplete, inaccurate, or nonexistent land records. 
But while dysfunctional systems of land tenure have no doubt cost African governments millions in foreign investment, they have hurt African farmers most directly. 
Africa’s small family farmers – already burdened by soil degradation, climate change, and resource competition fueled by surging populations – face an even more challenging bureaucratic hurdle: no paper to prove that the land they call home is theirs. 
Uncertain of their ability to control their farms into the next season, farmers’ planning horizons shrink. 
Instead of investing in terraced fields, planting trees, and buying high-quality fertilizer, Africa’s farmers seek to maximize short-term profits. 
This is particularly true of female farmers, who face an additional thicket of discriminatory land laws and customs. 
Studies show there is no way to reduce poverty, improve nutrition, or achieve other key development goals without strengthening land rights, especially for women. 
Secure rights to land are simply a prerequisite of development. 
In Tanzania, women with secure rights earn three times more than their landless counterparts. 
In Nepal, children whose mothers have secure land rights are 33% more likely to be well nourished. 
And in Zambia, in areas where women’s land rights are weak and HIV infection rates are high, women are less likely to make investments to improve harvests – even when their husbands are not HIV positive. 
These women anticipate that they will be forced off their land if and when they are widowed, and that expectation depresses farm investment, affecting harvests and family nutrition for years. 
Given that there are 400 million female farmers, such findings suggest the high global costs – measured in terms of lost productivity and unrealized economic potential – of insecure land rights for women. 
In Africa, the signs of insecure land rights are literally etched into the landscape. 
In some regions, poor recordkeeping and weak administrative structures have forced landowners to post notices in their fields or on their homes, warning prospective buyers that they may be duped into purchasing parcels from people who are not the legitimate owners. 
In many countries, there is simply no way to know who owns what piece of property. 
Communities with clear legal control over land manage those resources more assiduously than those with shaky tenure. 
The same can be said for individuals. 
In Ghana, farmers with strong land rights are 39% more likely to plant trees. 
In Ethiopia, farmers are 60% more likely to invest in preventing soil erosion when they have secure rights to their plots. 
But while the evidence is clear, nearly one billion people worldwide continue to lack secure rights to the land they rely on for a living. 
As the Cadasta Foundation and Habitat for Humanity’s Solid Ground campaign recently demonstrated in a new online survey, these uncertainties have far-reaching consequences. 
Weak land rights can limit farmers’ access to crop insurance, make it difficult for their children to register for school, and can even contribute to higher rates of suicide. 
Currently, Liberia’s Senate is considering legislation that would dramatically strengthen land rights for farmers, including female farmers. 
Many other countries in Africa (notably Rwanda and Zambia) and in Asia (including Myanmar and India) have done, or are planning to do, the same. 
These efforts should be supported, expedited, and replicated. 
Yet people are not waiting for their leaders to act. 
Innovative technologies are already providing a path forward for communities in countries with unwilling or incapable governments. 
Advances in GPS, drones, and cloud computing have given communities the ability to document land – with or without official recognition or support. 
Together with the Cadasta Foundation, communities from Nigeria to India are using hand-held devices to map property and support land claims with hard evidence, thereby allowing for incremental strengthening of tenure. 
Liberia’s drive to spearhead a continent-wide overhaul of land rights is welcome; leaders like Sirleaf clearly understand the challenges that come with weak land laws. 
But structural changes will take time. 
In the absence of more assertive government intervention, it will be up to communities and individuals to leapfrog conventional efforts and fill in the blank spaces on the map. 

Why Strengthening Land Rights Strengthens Development 
WASHINGTON, DC – For most of the world’s poor and vulnerable people, secure property rights, including land tenure, are a rarely accessible luxury. 
Unless this changes, the Sustainable Development Goals (SDGs) will be impossible to achieve. 
Land tenure determines who can use land, for how long, and under what conditions. 
Tenure arrangements may be based both on official laws and policies, and on informal customs. 
If those arrangements are secure, users of land have an incentive not just to implement best practices for their use of it (paying attention to, say, environmental impacts), but also to invest more. 
An international consensus has emerged regarding the importance of secure land tenure for development outcomes. 
In 2012, the Committee on World Food Security, based at the Food and Agriculture Organization of the United Nations, endorsed the Voluntary Guidelines on the Responsible Governance of Tenure as the global norm on this front. 
Yet the norm is not being applied widely enough. 
In fact, only 30% of the world’s population has legally registered rights to their land and homes, with the poor and politically marginalized especially likely to suffer from insecure tenure. 
In Romania, for example, many Roma have less secure farmland tenure than their non-Roma neighbors. 
Likewise, in Southeast Asia, hill tribes rarely have legal rights to their indigenous holdings, which are often located in state forests. 
In Zimbabwe, a customary divorce settlement may result in allocating all family lands and property (and even children) to the husband, with the wife left to return to her father or another male relative. 
In Sarajevo, thousands of apartments have been deemed illegal due to outdated urban plans and missing building permits, locking families’ most valuable assets outside the mainstream economy. 
By stifling economic growth, inadequate land-tenure systems perpetuate poverty and marginalization. 
But the opposite is also true: strong, properly enforced land rights can boost growth, reduce poverty, strengthen human capital, promote economic fairness (including gender equity), and support social progress more broadly. 
Moreover, secure land rights are essential to reduce disaster risk and build climate resilience, which is an urgent imperative at a time when climate change is already fueling more – and more frequent – extreme weather. 
When such disasters displace people and destroy their homes, properly maintained land records provide the baseline for compensation and reconstruction of shelters, and help affected communities rebuild better. 
Reflecting the importance of secure land ownership to the SDGs’ success, the World Bank Group is now working with developing countries to improve their land-tenure systems and expand the coverage of legally recognized and registered rights. 
For example, in Indonesia’s Kalimantan and Sumatra provinces, we are helping to promote the standardization of land rights, with particular attention to women and indigenous communities, while defining state forests’ boundaries using participatory methods for mapping and registration. 
Already, World Bank Group efforts have enabled one million hectares of indigenous land in Nicaragua – over 30% of the country’s territory – to be demarcated, titled, and registered, a process that has benefited some of the country’s most vulnerable groups. 
This initiative also aimed to improve Nicaragua’s capacity to respond promptly and effectively to emergencies. 
New projects are now being prepared in Mozambique and Tanzania to provide customary settlements with communal titles that will ensure legal recognition of their common holdings, thereby strengthening the protection and management of these assets. 
In the 2017-2019 period, the World Bank’s portfolio of investment lending for land administration and security of tenure is projected to grow by 39%. 
This is important progress. 
But realizing key SDG targets – which are fully aligned with the World Bank Group’s own twin goals of ending extreme poverty and boosting shared prosperity – will require a much larger investment program focused on strengthening land tenure across the developing world. 
To that end, the World Bank Group is engaging with partners at the local, national, and global levels to strengthen countries’ commitments and mobilize resources to achieve the ambitious target of achieving adequate land and property rights for all by 2030. 
Land is at the heart of development. 
Secure land tenure is thus vital to building the inclusive, resilient, and sustainable communities that will propel economic and social progress well into the future. 

Natural Solutions to Climate Change 
OXFORD – In response to climate change, land is key. 
Today, agriculture, forestry, and other land uses account for roughly a quarter of global greenhouse-gas emissions. 
But adopting sustainable land management strategies could provide more than one-third of the near-term emission reductions needed to keep warming well below the target – 2°C above pre-industrial levels – set by the Paris climate agreement. 
Conservation organizations like mine have long been working to balance the interaction between people and nature. 
But only recently have we fully grasped just how important land-use management is in addressing climate change. 
With the development of remote sensing, artificial intelligence, and biogeochemical modeling, we can better forecast outcomes, and develop strategies to manage and minimize adverse consequences. 
Some of the most promising ways to mitigate climate change are what we call “natural climate solutions”: the conservation, restoration, and improved management of land, in order to increase carbon storage or avoid greenhouse-gas emissions in landscapes worldwide. 
The full potential of these solutions is detailed in a new study produced by my organization, the Nature Conservancy, and 15 other leading institutions. 
Among the most important natural climate solutions is protecting “frontier forests” – pristine woodlands that serve as natural carbon sinks. 
Intact tropical and northern forests, as well as savannas and coastal ecosystems, store huge amounts of carbon accumulated over centuries. 
When these areas are disturbed, carbon is released. 
Preservation of frontier habitats also helps regulate water flows, reduces the risk of flooding, and maintains biodiversity. 
Reforestation is another important natural solution. 
Globally, an estimated two billion hectares (4.9 billion acres) of land has been deforested or degraded. 
Because trees are the best carbon-capture-and-storage technology the world has, reversing these numbers would bring a significant reduction in global carbon levels. 
We estimate that the world could capture three gigatons of CO2 annually – equivalent to taking more than 600 million cars off the roads – simply by planting more trees. 
A third category of natural solution is agricultural reform. 
From field to fork, the food sector is a major contributor to climate change through direct and indirect emissions, and by its often-negative effects on soil health and deforestation. 
Recognizing these risks, 23 global companies – including Nestlé, McDonald’s, Tesco, and Unilever – recently signed a commitment to halt deforestation in Brazil’s Cerrado savanna. 
The region, which covers a quarter of the country, has come under growing pressure from production of beef, soy, and other commodities, together with the associated infrastructure. 
As the Cerrado pledge demonstrates, when governments and businesses come together to address land-use challenges, the impact is potent. 
Natural climate solutions have the potential to reduce CO2 emissions by an estimated 11.3 billion tons a year – equal to a complete halt in burning oil, according to our study. 
One recent study calculated that if Brazil reached zero deforestation by 2030, it would add 0.6% of GDP, or about $15 billion, to its economy. 
Communities also reap secondary benefits – such as rural regeneration, improved food and water security, and coastal resilience – when natural climate solutions are implemented. 
Yet, despite the data supporting better land-use decision-making, something isn’t adding up. 
In 2016, the world witnessed a dramatic 51% increase in forest loss, equivalent to an area about the size of New Zealand. 
We need to buck this trend now, and help the world realize that land-use planning is not simply a conservation story. 
Some countries are moving in the right direction. 
The Indian government, for example, has set aside $6 billion for states to invest in forest restoration. 
In Indonesia, the government created a dedicated agency to protect and restore peatlands, bogs, and swamp-like ecosystems that have immense CO2 storage capabilities. 
But they are the exceptions. 
Of the 160 countries that committed to implementing the Paris climate agreement, only 36 have specified land-use management in their emissions-reduction strategies. 
Overcoming inertia will not be easy. 
Forests, farms, and coasts vary in size, type, and accessibility. 
Moreover, the lives of hundreds of millions of people are tied to these ecosystems, and projects that restore forest cover or improve soil health require focused planning, a massive undertaking for many governments. 
One way to get things moving, especially in the agricultural sector, would be to remove or redirect subsidies that encourage excessive consumption of fertilizers, water, or energy in food production. 
As Indian government officials reminded their peers during a World Trade Organization meeting earlier this year, meaningful agricultural reforms can begin only when rich countries reduce the “disproportionately large” subsidies they give their own farmers. 
Supporting innovation and entrepreneurship can also help power change. 
New processes and technologies in landscape planning, soil analysis, irrigation, and even alternative proteins such as plant-based meat are making agriculture and land use more sustainable. 
Similarly, changes in the construction industry, which is turning to more efficiently produced products like cross-laminated timber (CLT), can help reduce carbon pollution. 
Finally, financing options for natural climate solutions must be dramatically increased. 
While payments to conserve forests are starting to flow under the UN’s REDD+ program, and the Green Climate Fund has committed $500 million for forest protection payments, total public investment in sustainable land use remains inadequate. 
According to the Climate Policy Initiative, public financing for agriculture, forestry, and land-use mitigation attracted just $3 billion in 2014, compared to $49 billion for renewable energy generation and $26 billion for energy efficiency. 
At the UN climate change meeting that just concluded in Bonn, Germany, global leaders reaffirmed that the world cannot respond adequately to rising temperatures if governments continue ignoring how forests, farms, and coasts are managed. 
Now that there is a firm consensus, governments must act on it. 

Inside the Mind of the Mass Shooter 
LONDON – This weekend, Stephen Paddock opened fire on a country music festival in Las Vegas, Nevada, from an overlooking hotel, killing at least 59 people and injuring more than 500 others. 
Paddock, a 64-year-old former accountant with no criminal record, was ultimately found in his hotel room, dead, with some 23 guns, including more than ten assault weapons. 
Police later found an additional 19 firearms, explosives, and several thousands of rounds of ammunition in Paddock’s home. 
What the authorities have not yet found, however, is a motive. 
More details about Paddock’s mindset and objectives will probably come to light in the coming days. 
But so-called “lone wolf” mass shooters – individual perpetrators with no ties to any movement or ideology – are not a new phenomenon, and these episodes have offered important clues about the motivations and thought processes of mass shooters. 
Most mass shooters do not survive their own attacks; they either kill themselves or let police do the job. 
But those who have survived have shown some common features, with narcissistic personality disorder and paranoid schizophrenia being the two most frequent diagnoses. 
That was the case with Anders Breivik, the Norwegian far-right terrorist who, in 2011, detonated a van bomb that killed eight people, before shooting dead 69 participants in a youth summer camp. 
He remains in prison in Norway. 
A look at behavior prior to attacks reinforces this view. 
In The Wiley Handbook of the Psychology of Mass Shootings, Grant Duwe, the director of research and evaluation for the Minnesota Department of Corrections, examined 160 cases of mass shootings in the United States between 1915 and 2013. 
Duwe found that 60% of the perpetrators had either been diagnosed with a psychiatric disorder or exhibited signs of serious mental disturbance before the attack. 
About one third had contact with mental-health professionals, who had diagnosed them, most commonly, with paranoid schizophrenia. 
The second most common diagnosis was depression. 
Yet, given that most people who suffer from these disorders are harmless to the public, these diagnoses do not tell the whole story. According to Duwe, the difference may lie partly in an acute sense of being persecuted – and an acute desire for revenge. 
This view is corroborated by Paul Mullen, an Australian forensic psychiatrist. 
Based on a detailed investigation of five mass murderers whom he personally examined, Mullen concluded that such killers struggle to reconcile their own grandiose ideas of themselves with an inability to succeed at work or in relationships. 
The only explanation, they decide, is that others are out to sabotage them. 
In fact, Mullen’s study revealed that the path to mass murder is rather stereotypical. 
All of Mullen’s subjects had been bullied or socially excluded as children. 
They were all suspicious and rigid, qualities that helped to deepen their isolation. 
They constantly blamed their problems on others, believing that their community had rejected them; they failed to consider that they themselves were too wearisome or self-centered. 
Mullen’s subjects obsessively held grudges against anyone whom they viewed as part of the group or community that refused to accept them. 
They ruminated relentlessly over past humiliations, a habit that fueled resentment and, eventually, revenge fantasies, leading them to use mass murder to achieve infamy and to hurt those perceived to have hurt them – even if it meant a “welcome death” for themselves. 
Given this, there is usually a kind of warped logic to mass shooters’ choice of victims. 
In the case of school shootings, such as the Columbine High School massacre of 1999, that logic is clear: to punish those who have excluded the perpetrators socially. 
Likewise, workplace rampages are often triggered by a firing or layoff. 
But even in cases where the targets seem random, the logic usually emerges eventually, even if it is a matter of punishing an entire community or society. 
In Paddock’s case, many questions obviously remain unanswered, beginning with why he chose that particular concert to attack. 
But the contours of his story are beginning to emerge. 
Reinforcing the loner trope, one neighbor said that the “weird” Paddock “kept to himself”; living next to him was “like living next to nothing.” 
It has also been revealed that in 2012, Paddock filed a negligence lawsuit against a Las Vegas hotel where he had fallen; litigiousness can be a hallmark of the resentful and paranoid. 
Duwe argues that, contrary to popular belief, such gunmen do not “just snap.” 
Though roughly two-thirds of mass public shooters experience a traumatic event immediately before carrying out the attack – usually the loss of a job or relationship – most spend weeks or even years deliberating and preparing to get their revenge. 
In Paddock’s case, such quiet planning may explain the armory found in his home and hotel room, which he rented several days prior to the attack. 
After the massacre, more than half of mass public shooters either commit suicide directly or provoke the police into killing them. 
This rate is nearly ten times higher than for homicide offenders in general. 
Does this reveal, Duwe asks, just how mentally plagued these perpetrators are? 
Perhaps they believe they can no longer bear the agony of life; once they have “settled the score” for the perceived slights that have produced it, there is no reason left to live. 
Mullen argues that the script for this particular type of suicide has become entrenched in modern culture, and continues to attract willing lead actors. 
If we are unable to use the knowledge we have gleaned from past experience to prevent them from taking the stage, they will continue to take aim at audiences. 

Last Exit from Kabul? 
NEW DELHI – America’s war in Afghanistan is approaching a tipping point, with doubts about President Barack Obama’s strategy growing. 
Yet, after dispatching 21,000 additional troops to Afghanistan, Obama is considering sending another 14,000. 
Let’s be clear: America’s Afghan war is not winnable, even though Obama has redefined American goals from defeating the Taliban to preventing Al Qaeda from using Afghanistan as a base to launch attacks on the United States. 
But Al Qaeda is no longer a serious factor in the Afghan war, where the principal combatants are now the American military and the Taliban, with its associated militias and private armies. 
Rather than seeking to defeat the Taliban, the US has encouraged the Pakistani, Afghan, and Saudi intelligence services to hold proxy negotiations with the Taliban’s top leadership, holed up in the Pakistani city of Quetta. 
The US is fighting the wrong war. 
After America’s invasion drove Al Qaeda’s leaders from Afghanistan, Pakistan emerged as the main base and sanctuary for transnational terrorists. 
Support and sustenance for the Taliban and many other Afghan militants also comes from inside Pakistan. 
Despite this, Obama is pursuing a military surge in Afghanistan but an aid surge to Pakistan, which is now the single largest recipient of US assistance in the world. 
To defeat Al Qaeda, the US doesn’t need a troop buildup – certainly not in Afghanistan. 
Without a large ground force in Afghanistan or even major ground operations, the US can hold Al Qaeda’s remnants at bay in their havens in the mountainous tribal regions of Pakistan through covert operations, Predator drones, and cruise-missile attacks. 
And isn’t that what the CIA is doing already? 
Indeed, US intelligence experts believe that Al Qaeda already is badly fragmented and in no position to openly challenge American interests. 
According to the latest Annual Threat Assessment of the Intelligence Community released last February, “Because of the pressure we and our allies have put on Al Qaeda’s core leadership in Pakistan…Al Qaeda today is less capable and effective than it was a year ago.” 
Had Obama’s goal been to rout the Taliban, a further military surge may have made sense, because a resurgent Taliban can be defeated only through major ground operations, not by airstrikes and covert action alone. 
But if the US administration’s principal war target is not the Taliban but Al Qaeda remnants, why use a troop-intensive strategy based on protecting population centers to win grassroots support? 
In reality, what the Obama administration calls a “clear, hold, build” strategy is actually a “surge, bribe, run” strategy – except that the muddled nature of the mission and deepening US involvement undermine the “run” component. 
Before Afghanistan becomes a Vietnam-style quagmire, Obama must rethink his plan for another troop surge. 
Gradually drawing down US troop levels makes more sense, because what unites the disparate elements of the Taliban syndicate is a common opposition to foreign military presence. 
An American military exit from Afghanistan would not be a shot in the arm for the forces of global jihad, as many in the US seem to fear. 
On the contrary, it would remove the Taliban’s unifying element and unleash developments – a vicious power struggle in Afghanistan along sectarian and ethnic lines – whose significance would be largely internal or regional. 
The Taliban, with the active support of the Pakistani military, would certainly make a run for Kabul to replay the 1996 power grab. 
But it wouldn’t be easy, owing in part to the Taliban’s fragmentation, with the tail (private armies and militias) wagging the dog. 
Moreover, the non-Taliban and non-Pashtun forces are now stronger, more organized, and better prepared than in 1996 to resist any advance on Kabul, having been empowered by provincial autonomy or by the offices they still hold in the Afghan federal government. 
And, by retaining Afghan bases to carry out covert operations, Predator missions, and other airstrikes, the US would be able to unleash punitive power to prevent a Taliban takeover. 
After all, it was American air power, combined with the Northern Alliance’s ground operations, which ousted the Taliban in 2001. 
In fact, the most likely outcome of any Afghan power struggle triggered by an American withdrawal would be to formalize the present de facto partition of Afghanistan along ethnic lines – the direction in which Iraq, too, is headed. 
In this scenario, the Tajiks, Uzbeks, Hazaras, and other ethnic minorities would be able to ensure self-governance in the Afghan areas that they dominate, leaving the Pashtun lands on both sides of the British-drawn Durand Line in ferment. 
Thanks to ethnic polarization, the Durand Line, or the Afghanistan-Pakistan border, exists today only on maps. 
On the ground, it has little political and economic relevance, and it would be militarily impracticable to re-impose the line. 
As in Iraq, an American withdrawal would potentially unleash forces of Balkanization. 
That may sound disturbing, but it is probably an unstoppable consequence of the initial US invasion. 
An American pullout actually would aid the fight against international terrorism. 
Instead of remaining bogged down in Afghanistan and seeking to cajole and bribe the Pakistani military into ending their support for Islamic militants, the US would become free to pursue a broader, more balanced counterterrorism strategy. 
For example, the US would better appreciate the dangers to international security posed by Pakistani terror groups like Lashkar-e-Taiba and Jaish-e-Mohammed. 
The threat of an Islamist takeover of Pakistan comes not from the Taliban, but from groups that have long drawn support from the Pakistani army as part of a long-standing military-mullah alliance. 
That is where the focus of the fight should be. 

The Great Greek Bank Robbery 
ATHENS – Since 2008, bank bailouts have entailed a significant transfer of private losses to taxpayers in Europe and the United States. 
The latest Greek bank bailout constitutes a cautionary tale about how politics – in this case, Europe’s – is geared toward maximizing public losses for questionable private benefits. 
In 2012, the insolvent Greek state borrowed €41 billion ($45 billion, or 22% of Greece’s shrinking national income) from European taxpayers to recapitalize the country’s insolvent commercial banks. 
For an economy in the clutches of unsustainable debt, and the associated debt-deflation spiral, the new loan and the stringent austerity on which it was conditioned were a ball and chain. 
At least, Greeks were promised, this bailout would secure the country’s banks once and for all. 
In 2013, once that tranche of funds had been transferred by the European Financial Stability Facility (EFSF), the eurozone’s bailout fund, to its Greek franchise, the Hellenic Financial Stability Facility, the HFSF pumped approximately €40 billion into the four “systemic” banks in exchange for non-voting shares. 
A few months later, in the autumn of 2013, a second recapitalization was orchestrated, with a new share issue. 
To make the new shares attractive to private investors, Greece’s “troika” of official creditors (the International Monetary Fund, European Central Bank, and the European Commission) approved offering them at a remarkable 80% discount on the prices that the HFSF, on behalf of European taxpayers, had paid a few months earlier. 
Crucially, the HFSF was prevented from participating, imposing upon taxpayers a massive dilution of their equity stake. 
Sensing potential gains at taxpayers’ expense, foreign hedge funds rushed in to take advantage. 
As if to prove that it understood the impropriety involved, the Troika compelled Greece’s government to immunize the HFSF board members from criminal prosecution for not participating in the new share offer and for the resulting disappearance of half of the taxpayers’ €41 billion capital injection. 
The Troika celebrated the hedge funds’ interest as evidence that its bank bailout had inspired private-sector confidence. 
But the absence of long-term investors revealed that the capital inflow was purely speculative. 
Serious investors understood that the banks remained in serious trouble, despite the large injection of public funds. 
After all, Greece’s Great Depression had caused the share of non-performing loans (NPLs) to rise to 40%. 
In February 2014, months after the second recapitalization, the asset management company Blackrock reported that the burgeoning volume of NPLs necessitated a substantial third recapitalization. 
By June 2014, the IMF was leaking reports that more than €15 billion was needed to restore the banks’ capital – a great deal more money than was left in Greece’s second bailout package. 
By the end of 2014, with Greece’s second bailout running out of time and cash, and the government nursing another €22 billion of unfunded debt repayments for 2015, Troika officials were in no doubt. 
To maintain the pretense that the Greek “program” was on track, a third bailout was required. 
The problem with pushing through a third bailout was twofold. 
First, the Troika-friendly Greek government had staked its political survival on the pledge that the country’s second bailout would be completed by December 2014 and would be its last. 
Several eurozone governments had secured their parliaments’ agreement by making the same pledge. 
The fallout was that the government collapsed and, in January 2015, our Syriza government was elected with a mandate to challenge the very logic of these “bailouts.” 
As the new government’s finance minister, I was determined that any new bank recapitalization should avoid the pitfalls of the first two. 
New loans should be secured only after Greece’s debt had been rendered viable, and no new public funds should be injected into the commercial banks unless and until a special-purpose institution – a “bad bank” – was established to deal with their NPLs. 
Unfortunately, the Troika was not interested in a rational solution. 
Its aim was to crush a government that dared challenge it. 
And crush us it did by engineering a six-month-long bank run, shutting down the Greek banks in June, and causing Prime Minister Alexis Tsipras’s capitulation to the Troika’s third bailout loan in July. 
The first significant move was a third recapitalization of the banks in November. 
Taxpayers contributed another €6 billion, through the HFSF, but were again prevented from purchasing the shares offered to private investors. 
As a result, despite capital injections of approximately €47 billion (€41 billion in 2013 and another €6 billion in 2015), the taxpayer’s equity share dropped from more than 65% to less than 26%, while hedge funds and foreign investors (for example, John Paulson, Brookfield, Fairfax, Wellington, and Highfields) grabbed 74% of the banks’ equity for a mere €5.1 billion investment. 
Although hedge funds had lost money since 2013, the opportunity to taking over Greece’s entire banking system for such a paltry sum proved irresistibly tempting. 
The result is a banking system still awash in NPLs and buffeted by continuing recession. 
And with the latest round of recapitalization, the cost of the Troika’s determination to stick to the practice of extend-and-pretend bailout loans just got higher. 
Never before have taxpayers contributed so much to so few for so little. 

Latin America: Forgotten in the US Vote 
Berkeley -- As voters in the United States handicap the presidential race, Latin Americans can watch and imagine what a President Hillary Clinton, Barack Obama or John McCain might do for their countries. 
Which candidate is best for Latin America? 
Does it make any difference if Barak Obama or Hillary Clinton is the Democratic nominee and does it matter if one of them or the Republican John McCain wins in November? 
For decades, trade has been the modus operandi of U.S foreign policy in the region, but some administrations have had broader agendas. 
Remember Jimmy Carter’s human rights driven policy? 
Or the Reagan and Bush I era of interventionism that, depending on your point of view, either saved the region from revolutionaries or suppressed needed change. 
Like them or not, Carter and Reagan offered sharp contrasts in how they dealt with Latin America. 
In the last 16 years, however, the Democratic and Republican presidents Bill Clinton and George W. Bush have offered virtually the same take: free trade all the way. 
There are only the slightest of indications that Senators Obama and Clinton or even Senator McCain have any different intentions. 
So, trying to parse their positions to make a case for one over another is harder to do than guessing who will end up winning the World Cup. 
For now, the biggest Latin American issue for North Americans is the estimated 12 million undocumented immigrants in the U.S.—most of whom speak Spanish. 
Say what you want about free trade, but in many countries, humans have replaced sugar, bananas and coffee as the number one export. 
So, a first question for Latin America should be how do the candidates differ on treating the undocumented countrymen already in the US? 
Will the US let them stay and continue to send the billions in remittances? 
While the far right in the Republican Party would prefer these immigrants return home—a move that would be devastating to Latin America as well as the United States—all of the presidential candidates have clearer heads. 
McCain, Clinton and Obama support “comprehensive reform” — code words for the ying and yang of managing anti-immigrant sentiment here: give Americans some promises of secure borders and they’ll swallow giving the undocumented a path to citizenship. 
(No one mentions in this bargain, that the United States has already spent billions to secure ouitsr borders and nonetheless some 500,000 illegal immigrants a year continue to come, but that’s another story.) 
The most recent Congressional legislation makes the path to citizenship almost as difficult as the trip across the border, and all three candidates supported that bill. 
If looking for courage on immigration, however, Senator Obama, the son of an African father and an American mother, might have more than the others. 
He’s been the only candidate to defend the right of the undocumented to get a legal driver’s license – a proposal unpopular with many voters. 
Although it took a prostitution ring to bring the former Governor Eliot Spitzer down, his plan to give illegal immigrants the undocumented in New York driving licenses—what most experts say makes a whole lot of sense in terms of safer highways -- proved his first miscalculation. 
Even the then popular leader had to shelve it. 
So, absent any sense of vision — maybe that comes after the election — we’re back to trade that dominates what discussion there is of Latin America in the campaign. 
Although Clinton and Obama have been insistent that North America Free Trade Agreement (NAFTA) will be renegotiated around labor and environmental concerns -- even threatening to opt out of that trade deal — opting out is highly unlikely. 

Latin America After Bush 
Once again, America’s president has come up short in Latin America. 
Granted, President George W. Bush was well received by all his hosts in the five countries he visited, with traditional Latin American hospitality and cordiality. 
There were no major, unfortunate incidents; the constant protests were strident but not especially violent or well-attended; no significant slights or mishaps took place; and President Bush achieved what he probably was most interested in: sending a message back to the United States that he actually is interested in more than Iraq. 
He also accomplished, in a somewhat round-about way, another goal: showing the flag, so to speak, in the face of the mounting challenge from Venezuelan president Hugo Chávez, who, thanks to virtually unlimited supplies of oil dollars and Cuban doctors and foot-soldiers, is riding high across Latin America. 
Chávez baited Bush at almost every stop along the way, but the US leader evaded the provocations, and indeed, probably bested Chávez in the sense that an unpopular US president managed to dominate the agenda and take the battle of ideas directly to Latin American audiences, with whom the Venezuelans and the Cubans are in contact every day. 
Bush was also able to partly change the tone of the US message in the hemisphere: from free trade and fighting terrorism, to combating poverty and strengthening democracy and human rights. 
If Bush had made this trip several years ago, things would be different today. 
But everyone would also be in better shape today if Bush had been able to actually deliver on the main issues his interlocutors took up with him. 
Here, despite the photo-ops and the hugs and the local cuisine, the American president was simply not ready, willing or able, to give satisfaction to his colleagues, from capital to capital. 
In Brasil, President Luiz Ignacio da Silva Lula’s main issue, demand and hope was for a reduction or elimination in the US tariff on ethanol imports. 
Bush said no, since the tariff is congressionally mandated, and thus greatly diluted the importance of the bio-fuel cooperation agreement the two governments signed. 
In Uruguay, President Tabaré Vázquez went out on a limb simply by hosting Bush, given that his problems with his Chávez-friendly neighbor in Argentina, Nestor Kirchner, can only worsen as a result of these “dangerous” acquaintances. 
Vázquez needed some cover on the status of Urugayan immigrants in the US, and mainly, increases in quotas for its exports to the American market. 
Again, Bush left him hanging. 
Alvaro Uribe of Colombia was happy just to have a US Chief of State visit Bogotá; the last one to do so was Ronald Reagan in 1982. 
In fact, Bush’s was a brave gesture: despite Uribe’s success in combating drugs, paramilitaries and guerrillas, his capital is not an especially safe place. 
Bush also gave him his backing on human rights concerns, which, coming from the gentleman responsible – in the eyes of most of the world -- for Guantánamo and Abu Ghraib, is perhaps damning with faint praise. 
But most disappointingly for Uribe, though understandably, the US President was unable to bring with him guaranteed congressional support either for Colombia’s Free Trade Agreement (FTA) with the US, nor funding renewal for the so-called Plan Colombia. 
In Guatemala, once again, President Oscar Berger was obviously proud to receive Bush, but failed to obtain a commitment from him to stop the inhuman, hateful Homeland Security raids by US law enforcement officers against undocumented immigrants, exemplified by the detention and attempt at deportation, on the eve of Bush’s visit, of nearly 300 Guatemalans working at a Massachussetts, military vest factory. 
Where Bush fared best, perhaps, was in Mérida, Mexico, where Felipe Calderón not only received him as the gracious host Mexican presidents always are – though he rightly slammed his guest on the fence the US is building here and there along the two countries’ border-- but got in return what he needed, and wanted most. 
The American made a firm, explicit and apparently sincere commitment to lobby as strongly as possibly for what he calls “comprehensive immigration reform” and what in Mexico is commonly known as “the whole enchilada.” 
Whether Bush can deliver the goods is obviously open to question, but since Senate Majority Leader Harry Reid traveled to Mexico City two days later to make the same commitment, it seems that Mexico’s six years of vain efforts might finally prove fruitful. 
Needless to say, Calderón was thrilled, particularly because he had begun backing away from the emphasis his predecessor, Vicente Fox, placed on the immigration issue. 
Conversely, if Bush cannot come up with enough Republican moderates in the US Senate – they are actually already there, probably -- and in the US House of Representatives, the letdown and resentment in Mexico (as well as everywhere in Central America, the Caribbean, Peru, Ecuador and Colombia) will be immense. 
So where do the US and Latin America go from here? 
Several crucial decisions lay ahead. 
The first is for the US and the rest of the region to wholeheartedly support, and if possible reinforce, the democracy and human rights protection instruments developed over the years, given the precarious nature of democracy and respect for human rights in nations like Ecuador, Venezuela, Bolivia and others. 
Second, the White House must not only get the pending free trade agreements ratified by Congress, but should improve them, learning from the NAFTA experience, make them more poverty-sensitive, more environmentally- and labor-oriented, and provide more support for infrastructure and training. 
Third, and perhaps most importantly, Bush has to finally achieve the immigration reform he has promised for so long. 
Stop building fences – even if they do make good neighbors -- and cease the harassment of undocumented people in the US. 
It’s hateful, needless, and futile: as Bush said himself, the US will never, could never, and should never deport twelve million people, illegal or not. 

Latin America and the New Financial Architecture 
Argentina's ongoing crisis demonstrates, if demonstrations are still needed, that emerging market crises remain with us. 
Indeed, so frequent have such crises been over recent years that we seem almost to take them for granted. 
In the 120 months of the 1990s, 40 emerging markets (i.e., 33% of the world's developing countries), experienced serious financial distress. 
So it is time to ask: what viable steps have been taken to create a financial architecture able to contain and reduce this number? 
Real progress, I believe, has taken place, but it is insufficient and asymmetric. 
Positive developments include the expansion and adaptation of new IMF lending facilities for crisis prevention and management, as well as an increase in the IMF's total resources. 
Important institutional innovations have also been introduced, including creation of the Financial Stability Forum. 
Based on a British initiative and developed by Hans Tietmeier (former head of the Bundesbank), the Forum will attempt to identify sources of systemic risk and develop consistent financial regulation across different financial sectors and countries. 
The FSF was set up by the G-7 in early 1999. 
The Forum was initially made up of just the G-7 countries, but four new members - Australia, Holland, Hong Kong and Singapore - were added this year. 
In addition to national representatives, the Forum's members include international organizations concerned with financial stability. 
In its first year of operation, the Forum commissioned five working groups to examine issues affecting international financial stability, including highly leveraged institutions, capital flows and offshore financial centers. 
Yet, despite these developments, overall progress remains insufficient. 
An international financial system to support - not undermine - growth and development is what the times demand. 
The steps that need to be taken internationally for such a system to take root have already been mapped in what was achieved by individual countries over recent decades, when institutions, such as central banks and regulatory agencies, were created to help manage the rapid growth of private banks and financial markets. 
Drawing a parallel from this national evolution, developing a financial architecture to perform similar functions in the international arena is essential. 
The rapid, and seemingly ceaseless globalization of private capital makes this more urgent by the day. 
Such architecture requires: 
appropriate transparency and international regulation of loan and capital markets. 
Such regulation should discourage severe surges of short-term capital flows to developing countries because, when these are reversed, crisis usually follows; 
provision of sufficient official liquidity in when countries face distress. 
One valuable suggestion is to transform the IMF Contingency Credit Line, which has never been used since its creation two years ago. 
This Contingency Credit could be adapted so that any country could use it in times of crisis, provided it received a positive report in its annual consultation with the IMF; 
a general framework for working out a country's debt problems, to be activated when crises occur. 
Progress in reforming the international financial system is also disfigured by the fact that developing countries, most particularly those in Latin America, have not been allowed to participate sufficiently in the key discussions and institutions where decisions are made. 
For example, Latin American countries have little voice in the Basle Committees and in the Financial Stability Forum. 
But a Financial Stability Forum without the emerging economies of Latin America is a bit like Hamlet without the Prince! 
A more sensible policy would be to have a few emerging market countries participate - on a rotating basis - in this Forum. 
The issues discussed profoundly affect their economies. 
Moreover, they can offer valuable insights on financial instability as they have borne the brunt of recent crises. 
Across Latin America policymakers fear that if insufficient changes are made in the international financial architecture, there is a serious risk that frequent and costly crises will continue to occur. 
This would not only have deeply damaging economic and political effects for those countries, such as Argentina today, but could also threaten the public good of global financial stability. 

Latin America at a Crossroads 
Last year witnessed a decisive turn in Latin America. 
A growing number of countries in the region now seem determined to pursue their interests regardless of what the United States desires. 
José Miguel Insulza’s election as Secretary General of the Organization of American States, and the consequent defeat of the candidate supported by the Bush administration, emphatically demonstrated the decline of America’s continental leadership. 
The US not only lost control of the OAS, an organization that generally serves US interests, but also failed to get last month’s Summit of the Americas in Mar del Plata Argentina to endorse unanimously a declaration supporting America’s trade and political positions for the region. 
This rejection came about despite the summit be structured in such a way as to promote and defend those interests. 
Attempts throughout 2005 by the Bush administration to discipline Venezuela’s government also failed. 
President Bush was simply unable to get other governments to back to the policy of isolation he sought to impose on President Hugo Chavez’s government. 
America has also been frustrated in its desire to obtain regional support for its policy of direct involvement in the Colombia’s internal strife. 
Of course, not everything went against America. 
The election of the Colombian Luis Alberto Moreno as president of the Inter-American Development Bank had clear US backing. 
This means that the bank is likely continue its orthodox, neo-liberal policies. 
But a clear line in the sand has been drawn between Latin American countries that want to pursue regional integration on their own terms, and those who see hemispheric integration as directed by the US. 
Some countries – Mexico, Colombia, and Peru – appear to want a privileged direct relationship with America. 
Other countries – Bolivia, Chile, the countries of Central America – prefer regional solutions in which they have a clear and equal say. 
The latter group, for example, are generally supportive of the plan to build a Community of South American Nations, a scheme backed primarily by Argentina and Venezuela. 
The Mercosur countries don’t want a confrontation with anyone, including the US, but do seek a more just and democratic international system. 
But it is the ideological picture that presents the starkest contrasts. 
Indeed, there could be political consequences that could affect the entire region if the confrontation between Venezuela and the US worsens beyond today’s tense relations, or if there were an electoral victory for the Frente Sandinista de Liberación Nacional in Nicaragua, or for Evo Morales's Movimiento al Socialismo in Bolivia. 
The eventual formation of a triangle that links Cuba, Venezuela, and Nicaragua is likely to be considered a direct threat to regional stability by the United States, which would have dangerous consequence of putting Latin America atop the security agenda of the Bush administration. 
Yet you cannot see Latin America in 2005 only in terms of the region’s relations with the US. 
Deep concerns about the internal situation many countries who suffer almost permanent political and institutional crises, such as Haiti, Ecuador and Bolivia, abound. 
As the structural causes that have pushed these countries into near permanent states of crisis seem unlikely to be resolved anytime soon, there problems may well become linked to Latin America’s tense relations with the US. 
Indeed, local problems are likely to exacerbate regional tensioins. 
2005 saw the return of seemingly buried territorial disputes, such as defining the maritime limits between Chile and Peru, as well as the revanchist pressures that are mounting in Bolivia for recovering access to the sea that was lost in the 19th century, an urge strengthened by Bolivia’s growing willingness to perhaps use its gas exports as a pressure point. 
The dispute between Costa Rica and Nicaragua over navigation on the San Juan River, and the heated jurisdictional arguemnts between Colombia and Venezuela also help raise regional tempers. 
The result of all this tension is that Latin America is seeing its biggest arms race for decades, a sad trend when the region’s worst problems are poverty, inequality, and the marginalization of indigenous people. 
If these problems go unattended, destabilization will undoubtedly grow. 
One last problem is contributing to the region’s anxieties: massive migration. 
The problem is not just about illegal migration to the US, though those Americans who seek to play the anti-immigrant card do antagonize regional sensibilities unnecessarily. 
For migration – triggered by dire economic conditions – is also happening between Latin American countries. 
Keeping this peaceful will be a vexing problem for the region’s leaders in the months and years ahead. 
Across Latin America, if poverty and violence are not ameliorated, tensions are bound to grow. 
Latin America is truly at a crossroads: 2006 may well determine whether the continent lapses back into the sad days of chaotic past, who finds a new maturity to strike out on its own path to growth and stability. 

Latin America’s Moment 
NEW YORK – Much of the world’s attention is understandably focused on developments in the Middle East, Europe, and Asia. 
These regions represent the vast majority of global population and wealth, their geopolitics are the most stressful (and highly consequential), and in recent decades – if not centuries – they have accounted for most of what has constituted world history. 
But an unintended consequence of this focus is that many governments, corporations, and people are missing much of what is going on in Latin America. 
And much of what is going on in Latin America right now happens to be good. 
This may not seem obvious. 
Brazil, the region’s largest country, is in the middle of a severe political crisis; the incumbent president, Dilma Rousseff, may well be on trial while the Olympics are being staged in her country later this summer. 
Meanwhile, the economy shrank by nearly 4% in 2015 and is projected to contract by a similar margin this year. 
The impact of the Zika virus on public health is greater in Brazil than anywhere else. 
Corruption is endemic and has compromised nearly everyone in public life. 
But what is also extraordinary about Brazil is that all of this has thus far taken place without violence. 
Just as important, the political process is being conducted according to constitutional requirements and led by judges acting independently. 
Media of every sort are covering what is going on with great intensity. 
The ability to self-correct is essential for any country, and having it may be what saves Brazil from past mistakes and mismanagement. 
And, yes, Venezuela – a country blessed, or quite possibly cursed, with the largest hydrocarbon reserves in the world – is in far worse shape. 
The country’s economy and currency have plummeted along with the price of oil. 
Inflation has soared. 
Political dysfunction is severe, and civil unrest and large-scale internal violence cannot be ruled out. 
Yet even here there is a bit of good news. 
The political opposition won a large majority in the December 2015 parliamentary election. 
And lower oil prices may trigger further political change, ultimately ushering in a government that begins the process of making Venezuela a country of institutions and laws, not personality cults and abuse of power. 
More broadly, many of the most important trends in the region are on balance positive. 
Mexico, for decades a one-party state, is now a robust democracy that has experienced several rotations of political leadership through the ballot box. 
In addition, its economy is doing relatively well. 
To be sure, challenges exist, particularly when it comes to addressing drug-related crime and violence, but these problems can be managed with sustained effort. 
Colombia has emerged at long last from a prolonged civil conflict. 
Thanks in part to assistance from the United States, the government was strong enough to make it clear to the country’s FARC rebels that they could not shoot their way into power. 
The cease-fire is holding, and prospects for a peace agreement are good. 
Meanwhile, the economy is growing at a 3% annual rate, lower than in the recent past, but still higher than in many emerging economies. 
Argentina provides the most recent good news. 
The new government, in its first six months, has taken a number of difficult steps to restore international confidence. 
In no way does this minimize what the government must achieve to reduce inflation and restore sustainable growth, but there is a palpable sense that the country, now led by a talented team of technocrats, has turned the corner. 
This is good news – and not just for Argentina, because what happens there will affect thinking and behavior elsewhere, particularly in Brazil. 
Progress in Argentina would show that those who violate the law can be held accountable, that excessive state intervention in the economy leads to insolvency and promotes corruption, and that democracy and markets represent the future. 
Cuba in ten years is more likely to resemble its more politically and economically open neighbors than vice versa. 
Again, none of this is to say that Latin America lacks real problems and challenges. 
On the contrary, it has plenty of both. 
But for the most part, these are matters of political and economic governance, state capacity, and corruption within states. 
Missing almost entirely are problems stemming from relations between states – geopolitics – that so dominate and plague other parts of the world. 
This is a tremendous advantage, as it means that governments’ attention and resources can be focused on meeting domestic needs. 
The Middle East is unraveling. 
Asia is challenged by territorial disputes, the rise of Chinese power, and a reckless North Korea. 
Europe is all but overwhelmed by refugees, terror, and Russian revanchism. 
And Africa is being held back by civil conflicts, terrorism, and poor governance. 
Latin America, by contrast, looks pretty good. 
Indeed, if current trends persist, it could eventually replace Europe as the world region that others regard with more than a little admiration – or even envy. 

Getting Industrial Policy Right 
DAVOS – At a time of lackluster global economic growth, developing countries are dusting off some old strategies – particularly the use of industrial policy to drive the development of particular sectors and turn them into engines of growth and employment. 
But the history of such policies, particularly in Latin America and the Caribbean, is filled with failure and cautionary tales. 
In the 1950s and 1960s, many Latin American and Caribbean countries embraced industrial policy enthusiastically. 
By substituting imports with domestic production, relying on government planning to target priority sectors, and implementing selective trade protection (for example, by imposing tariffs, quotas, and import licensing), they attempted to accelerate their transitions from raw-materials suppliers to manufacturing-based economies. 
While East Asian countries like South Korea used such policies to enable selected industries to compete on a global scale, Latin American and Caribbean countries rarely got it right. 
Despite some notable successes, such as the aircraft manufacturer Embraer in Brazil and salmon farming in Chile, governments largely picked losers – not least because political pressure, not firms’ competitive potential, drove the selection process. 
In the 1980s and 1990s, Latin America abandoned such policies in favor of a more cautious approach. 
Rather than backing individual sectors, some countries promoted innovation with across-the-board subsidies and tax breaks, while opening their economies to foreign competition and embracing market-oriented reforms. 
But these changes, though necessary, were insufficient to deliver growth in productivity and output. 
Almost two decades later, with Latin American governments again exploring the potential of activist industrial policy, avoiding the mistakes of the past will require a thorough understanding of why previous attempts failed – and a concrete strategy to guide future efforts. 
A recent report by the Inter-American Development Bank (of which I am President) does precisely that. 
Beyond assessing what went wrong previously, the report identifies three fundamental questions that policymakers in any emerging economy should answer before pursuing industrial policy: 
· Is there a clear market failure that justifies government intervention? 
· Will the proposed policy be effective in remedying the market failure? 
· Does the country have the institutions necessary to execute the policy? 
Consider sectoral policies in Costa Rica and Argentina. 
In Costa Rica, the rice industry took the traditional route of lobbying for protection. 
Though there was no market failure to remedy, the government obliged, introducing high import tariffs and subsidies for powerful local growers; as a result, productivity declined. 
By contrast, farmers in the Argentine province of Entre Ríos requested that the National Institute of Agricultural Technology (INTA) ramp up research into new rice varieties, even agreeing to pay a tax to augment INTA’s research budget (thereby overcoming what economists call private-sector coordination problems). 
When a new rice variety was introduced, productivity soared. 
Unsurprisingly, the intervention in Argentina passed all three tests: the market suffered a coordination failure that was addressed effectively through public policy carried out by appropriate institutions. 
Instead of coddling an entire industry with subsidies or import restrictions, the provincial government and INTA provided a public good that bolstered production in a specific sector. 
Other successful examples of this approach include sanitary certifications of agricultural products and training programs for the software industry. 
Once governments identify an opportunity that passes these three tests, they are in a much better position to use measures like temporary subsidies or targeted incentives effectively. 
In Mexico’s Mayan Riviera, for example, public support for investments in lodging and transportation helped create a world-class tourist destination. 
Costa Rica, despite its rice-industry failure, has also had some success with such policies. 
When the medical-device industry was blocked from producing lucrative products like heart valves, owing to the lack of specialized firms to provide sterilization services, the government used incentives to attract such companies. 
As a result, exports of more sophisticated, higher-value-added medical devices soared. 
Ensuring adequate institutional capacity is essential to prevent private and political interests from shaping policy, as occurred in the 1950s and 1960s. 
Ireland, often praised for its success in picking winners, relied on the technical competence of its renowned Industrial Development Agency to safeguard the integrity and effectiveness of the selection process. 
Chile, despite possessing reasonably strong institutions, turned to a third party, the Boston Consulting Group, to ensure that the most promising sectors were selected objectively. 
Fostering industrial development is a complex challenge. 
Policymakers must periodically reassess their efforts and promptly abandon failures. 
There will be hits and misses, but, if officials consistently ask the right three questions, their chances of success will be much higher. 

Exit Latin America’s Left 
BOGOTA – The crushing defeat of the long-ruling Chavista government in Venezuela’s recent parliamentary election, together with the end of 12 years of Peronist rule in Argentina, mark the end of a cycle of left-wing hegemony in much of Latin America. 
But this is not a political watershed marking the renewal of ideological confrontation. 
Rather, it is a measured transition toward political pragmatism. 
And it is very good news. 
Perhaps the best evidence that this is not an ideologically-driven sea change is to be found in what triggered it: an economic downturn. 
For over a decade, the region relied on “Socialism of the Twenty-First Century,” which Venezuela’s late president, Hugo Chávez, used to galvanize groupings like the Bolivarian Alliance for the Peoples of Our America (ALBA) and Petrocaribe, an oil alliance including Caribbean states and Venezuela. 
But economic collapse, hyperinflation, and food shortages have destroyed faith in that system. 
It should be noted that the very same factors, largely the result of unforgiving global conditions, enabled Latin America’s leftist parties to win and consolidate power by blaming the market-oriented policies that preceded them. 
Brazilians elected Luiz Inácio Lula da Silva to the presidency in 2002, and Argentinians chose Néstor Kirchner in 2003. 
Financial meltdown restored the Institutional Revolutionary Party to power in Mexico in 2012, and Michelle Bachelet’s leftist Nueva Mayoría party won in Chile in 2013. 
Leftist governments then took advantage of a sustained commodities boom to increase spending on consumer subsidies and social welfare, without depending on international creditors. 
From 2003, the year of Kirchner’s election, to 2011, when his wife and successor Cristina Fernández de Kirchner was elected to her second term in a landslide, soybean prices rose by more than 7% annually, on average, boosting overall GDP growth. 
Likewise, Brazil’s economy, propelled by commodity exports of its own, grew by about 4.5% per year. 
This enabled the country, like Argentina, to fight extreme poverty and boost the purchasing power of an emerging middle class, which thus became deeply loyal to leftist governments. 
In Argentina, it took a 30% inflation rate, massive corruption scandals, and restrictions on foreign-currency purchases to bring about a slim majority for the center-right Mauricio Macri in the recent presidential election. 
The root cause of this reversal of fortune was a global environment that could no longer support high commodity prices. 
In particular, China’s slowing growth has weakened demand for Latin American commodities. 
In Ecuador, President Rafael Correa has become increasingly authoritarian – recently amending the constitution to enable him to run for a fourth term – in response to the impact of the shrinking economy on popular support for his “dictatorship of the heart.” 
In Venezuela, where oil represents 95% of export revenues, voters naturally turned on the ruling Socialist Party. 
While Chávez’s successor, Nicolás Maduro, remains president, the opposition now holds two-thirds of the seats in the National Assembly. 
Long before the Venezuelan election, Cuba’s government, which had become heavily dependent on Chavista largesse, was already taking pragmatic steps toward normalizing relations with the United States. 
Raúl and Fidel Castro – who know firsthand how the demise of the Soviet Union, Cuba’s main benefactor during the Cold War, affected their country – sensed the impending loss of Venezuela’s lavish subsidies and acted accordingly. 
Even in Chile – perhaps the best-run economy in the region, but still highly dependent on copper exports – Bachelet’s approval rating has plunged to unprecedented lows, threatening her ambitious agenda of constitutional and educational reforms. 
Add to that corruption scandals involving Bachelet’s son and weaknesses in the ruling center-left coalition, and the center right’s return to power in the 2017 presidential election seems increasingly likely. 
But elections are not the only means of impelling change. 
With the most severe economic slowdown in 25 years expanding the budget deficit to record levels, Brazilian President Dilma Rousseff has been forced to turn to austerity, including cuts in unemployment and welfare benefits. 
To be sure, massive corruption scandals have also severely eroded Rousseff’s standing, and are the key reason why she is now facing impeachment proceedings. 
But when the economy was growing, corruption was less politically explosive. 
Similarly, after Venezuela’s army made it clear that defending Chavismo was not worth opposing the people’s will, Maduro was forced to pledge that the revolution would now “pass into a new phase.” 
And even if Macri had not managed to win Argentina’s presidency, his opponent Daniel Scioli – who served as Vice President under Néstor Kirchner, but represents a more moderate Peronism – probably would have had to implement pragmatic policies aimed at boosting market confidence. 
Perhaps the final nail in the coffin of Latin American left-wing politics comes from Colombia, where President Juan Manuel Santos has made achieving peace with the Revolutionary Armed Forces of Colombia (FARC), Latin America’s oldest guerrilla group, his top priority. 
A right-leaning president, Santos won reelection in 2014 by emphasizing these peace efforts, which garnered him strong support from the left. 
Now, the two sides are on the cusp of a peace agreement, expected to be signed in March. 
Even more than current economic struggles, which are driven largely by global forces, peace in Colombia will reinforce for Latin American voters the benefits of pragmatism over ideology – something that even FARC has recognized. 
A new era of moderate, sensible policymaking could be what enables Latin America to diversify its economies and build more sustainable and inclusive prosperity. 

Capital Keeps Flowing into Latin America 
BOGOTÁ – Latin America – and South America, in particular – has been in crisis for years. 
Yet foreign capital, both direct and financial investment, has continued to flow into the region. 
This is unprecedented. 
In the past, the interruption of financial flows – or “sudden stops” – has been an essential feature of crises in Latin America and elsewhere in the developing world. 
The Latin American debt crisis of the 1980s brought an eight-year interruption. 
The Asian financial crisis that erupted in mid-1997 and subsequently spread across the emerging economies caused an interruption lasting six years. 
The interruption associated with the Great Depression of the 1930s lasted several decades. 
Yet these dynamics seem to be changing. 
After the collapse of the US investment bank Lehman Brothers in 2008, capital flows were interrupted for only about a year. 
Indeed, despite the magnitude of the initial shock, capital flows and risk margins had essentially normalized by 2009, when bond financing in Latin America began to surge, soon reaching triple the pre-2008 average. 
The shocks that have occurred since then have had an even smaller impact on financial flows. 
In 2013, the US Federal Reserve began to roll back its bond-buying program, and commodity prices collapsed in mid-2014. 
In late 2015 and early 2016, developments in China roiled financial markets. 
More recently, Donald Trump was elected US president, and the Fed moved forward with its first two interest-rate hikes. 
Yet the longest interruption in bond financing brought about by these shocks – which took place during the second half of 2015 – lasted just six months. 
The commodity-price collapse in 2014 caused Latin American risk spreads to grow, but only by 1.5 percentage points, which was about one-third the impact of the Lehman Brothers shock. 
More remarkably, the Fed’s two recent interest-rate hikes have had no perceptible impact on risk margins and financial flows, though higher rates have been transmitted to Latin America. 
Trump’s election increased Latin American risk margins by less than one percentage point, and that premium had disappeared by the end of the year. 
At the same time, all Latin American countries, with the exception of Venezuela, have retained access to private external financing. 
Brazil had access to capital markets even at the peak of its political crisis last year. 
Last April, Argentina pulled off the largest bond issue in Latin America’s history, after a settlement with “holdout” creditors from an earlier debt rescheduling ended its pariah status in markets. 
Ecuador has carried out several bond issues as well. 
During the first quarter of 2017, bond issuance in Latin America was up 53% year on year, and it came at a lower cost. 
Even Mexico, one of the main targets of Trump’s protectionist rhetoric, has suffered no adverse impact on its external financing. 
While Trump’s victory did trigger a depreciation of the Mexican peso, the exchange rate soon normalized and has returned to pre-election levels. 
Does this mean the days of sudden stops in external financing and abrupt capital-flow reversals are over? 
Not exactly. 
Latin America’s recent success at avoiding financing interruptions can be attributed to two main factors. 
The first is regional: Latin American countries experienced a sharp reduction in their debt ratios from 2003 to 2008. 
With the commodity boom during this period sustaining massive accumulation of foreign-exchange reserves, the region’s external debt, net of reserves, fell from more than 30% of GDP to less than 6%. 
The second factor is global. 
Low interest rates in developed countries since the financial crisis have made those markets less attractive to investors, who have sought higher yields in emerging economies. 
Whether Latin America can continue to avoid sudden stops in the face of new shocks depends on whether these conditions persist. 
As it stands, the region’s debt ratios are rising, but only moderately; on average, they remain well below the levels that prevailed at the beginning of this century. 
Adjustment policies have helped, no doubt at the cost of significant growth slowdowns and even recessions. 
Similarly, though developed-country interest rates will continue to rise until they are eventually normalized, the process is occurring slowly, even in the US. 
Latin America’s recent ability to avoid sudden stops in external financing is good news, and it seems likely to endure. 
This gives the region’s governments some macroeconomic breathing room, allowing them to avoid further contractionary policies and enabling their economies to participate in the global recovery that is now underway. 

Latin America’s Anti-Chávez Axis 
BRUSSELS – The rescue of Ingrid Betancourt and 14 other hostages who had been held for years by FARC guerrillas marks more than a turning point in Colombia’s long war against its drug-running, Marxist guerrillas. 
It also confirms the emergence of a new troika of Latin American leaders – Colombia’s President Alvaro Uribe, Brazilian President Luiz Inácio Lula da Silva, and Mexican President Felipe Calderón – who are set on finishing off Latin America’s destabilizing drug cartels and guerrilla movements, as well as isolating the region’s demagogic upstart, Venezuelan President Hugo Chávez. 
Uribe’s status as one of Latin America’s historic leaders was assured even before the rescue of Betancourt and the other hostages. 
Uribe won an unprecedented re-election two years ago with an absolute majority in the first round of the vote. 
But it is Uribe’s resolve not to negotiate with the FARC over kidnappings, and instead to pursue relentlessly the armed insurgency that murdered his father that has defined Uribe’s presidency. 
In the process, he transformed a country that was in the grip of drug barons and on the verge of becoming a failed state. 
The professionalism of Colombia’s armed forces, coupled with Uribe’s popularity and a growing economy, has delivered, for the first time in three decades, normality to Colombia’s cities and, increasingly, peace and the rule of law to much of its vast jungle regions. 
Uribe’s relentlessness has brought on waves of defections from the FARC, which is now down to 9,000 guerrillas from a peak of 16,000 in 2001. 
Indeed, many FARC defectors now prefer to fight for their cause at the ballot box under the new left-wing Polo Alternativo Democratico. 
But the benefits of Uribe’s apparent defeat of the FARC extend far beyond Colombia. 
The hostage rescue mission has also forced Chávez, still recovering from his failed power-grab referendum of last year (a moment when Chávez’s own army high command allegedly refused his demand to fudge the result) onto the defensive. 
The Uribe-Lula-Calderón axis appears set on keeping him there. 
Chávez is the loser not only because he had provided the FARC moral support (he once described them as “belligerents,” not terrorists, and publicly called Uribe an American stooge), but also because it is believed that he has been providing the FARC covert military support. 
That backing appeared to be part of Chávez’s “Bolivarian” socialist revolution, which has used Venezuela’s petrodollars to bankroll left-wing governments in Ecuador, Bolivia, and Cuba in the hope of building up a regional anti-American alliance. 
There were serious grounds over the last three years to believe that Latin America was going through one of its regular bouts of left-wing destabilization, given the rise of Bolivian President Evo Morales, Ecuador’s President Rafael Correa, and their ringleader, Chávez. 
But the recent worldwide increase in commodity prices has meant that the traditional regional powerhouses of Chile, Brazil, and Mexico have experienced economic booms of their own. 
This made it easier for Lula in particular to buck his socialist allies and distance himself from Chávez, having as recently as March 2008 backed Chávez following Colombia’s brief incursion into Ecuador which killed FARC Commander Raul Reyes. 
Calderón’s uncompromising hard line on drug dealers in Mexico, an unrelenting offensive that follows the precedent set by Uribe in dealing with the FARC, has also been helped because economic growth has muted domestic opposition. 
The emerging Uribe-Lula-Calderón troika has geo-strategic influence because things have started to change in Cuba ever since Fidel Castro formally handed over the presidency to his brother, Raúl. 
Latin America is obsessed with this transition, and Uribe, Calderón, and Lula have no intention of letting Chávez lead the way. 
Last January, Lula visited the island with a string of leading Brazilian businessmen and signed trade and investment deals worth $1 billion. 
Calderón, reversing his predecessor’s policy of speaking out against the lack of human rights in Cuba, has restored Mexico’s traditional close ties. 
Earlier this year, Mexico’s foreign minister renegotiated $400 million of debt on which Cuba had defaulted. 
Cultural exchanges have increased, and Calderón is expected to visit Havana soon. 
This closer embrace of Cuba mixes self-interest with calculation. 
Everywhere in Latin America, Cuba is a domestic political issue. 
Some commentators argue that in repairing relations, Uribe, Calderón, and Lula hope to mollify their left-wing opponents. 
Moreover, for both Uribe and Calderón, instability in Cuba could pose a domestic security threat. 
Both Brazil and Mexico see business opportunities on the island, especially since Raúl Castro has already made Cuba more open to foreign investment. 
But perhaps the most important reason for improving relations with Cuba is one that none of the three leaders will say in public: they see closer ties as a way of balancing the influence of Chávez, who has replaced the Soviet Union as Cuba’s main provider of aid. 
Unlike Chávez, Fidel’s fawning disciple, Uribe, Calderón, and Lula are quietly supporting political liberalization in Cuba, and believe that Raúl Castro also worries about Cuba’s dependence on Venezuela, as well as on China. 

Latin America’s Calm Before the Storm 
MEXICO CITY – The perpetual seesaw in Latin American geo-politics is more vibrant than ever. 
The so-called “Americas-1” countries – those that are either neutral in the confrontation between the United States and Venezuelan President Hugo Chávez (and Cuba), or openly opposed to the so-called “Bolivarian” governments of Bolivia, Cuba, Ecuador, Nicaragua, and Venezuela – are slowly advancing. 
The “Americas-2” radical left is receding moderately, yet it can still maintain its positions and defeat any attempts to roll back its influence. 
But the relative quiet in the ongoing ideological, political, and diplomatic conflict between the two groups of countries is only temporary. 
If anything, it is the calm before an approaching storm. 
The tide has turned in part because voters in recent elections seem to have shifted from the center left to the center right, or at least re-confirmed their more conservative convictions. 
In Chile, the businessman and center-right democrat Sebastián Piñera put an end to more than twenty years of center-left Concertación rule. 
But his domestic policies, constrained by the recent severe earthquake and his own small mandate, differ only slightly from those of his predecessors, at least for now. 
The main change is in foreign policy, where, at least nominally, Piñera has clearly transferred Chile from one camp to another. 
In Colombia, the situation is similar. 
The likely winner in the June 26 run-off election, Juan Manuel Santos, will pursue most of outgoing president Alvaro Uribe’s domestic policies, but might change course slightly in foreign affairs. 
He will probably be more aggressive in responding to neighboring Venezuela’s challenges, both on the border and throughout the region. 
Uribe has tended to walk back from the brink every time Chávez has provoked Colombia, and has never wanted to go after FARC guerrilla sanctuaries in Venezuela. 
Santos may be less willing to avoid confrontation, if only because the personal antipathy between the two leaders is immense. 
He will probably be more forceful at regional meetings in responding to Chávez, believing that Venezuelan support for the FARC guerrillas is too blatant to be overlooked, and that it is wiser to confront him sooner rather than later. 
Meanwhile, Nicaragua is too small and poor to represent a threat to anyone, but always generates problems beyond its size. 
President Daniel Ortega is seeking to remain in office more or less perpetually, and seems ready to perpetrate every type of stratagem, from electoral fraud to dissolving Congress and the judiciary, in order to achieve his aims. 
Sooner or later, this will constitute a major challenge to the hemispheric community. 
Is it willing to look the other way while a small nation destroys its democracy, violates human rights, and breaches its international covenants? 
If so, that hemispheric community will prove to be remarkably inconsistent, given a second conundrum: Honduras. 
Indeed, the Organization of American States (OAS) suspended Honduras last year because of the coup d’état that deposed and deported then-President Manuel Zelaya. 
Chávez and even the US went as far as imposing economic sanctions on the interim government in view of the interruption of democratic rule. 
As recently as June 7, the Bolivarian countries were able to block Honduras’ re-instatement into the OAS, despite the essentially free and fair elections that were held there last November. 
So, which is it going to be? 
Disregard the imminent democratic implosion of Nicaragua, and the absence of any type of democracy in Cuba? 
Or apply the same standard to Nicaragua, Cuba, and Venezuela that has been applied to Honduras? 
Unfortunately, the only two countries that could play a role in reforming the inter-American system and defusing the growing tensions between Colombia and Venezuela will, for different reasons, remain passive. 
Mexico is consumed by its failed drug war, which has cost more than 25,000 lives and, according to just published US government statistics, has deterred Colombian cocaine traffickers, but has fostered dramatic increases in Mexican production of heroin, marijuana, and methamphetamines. 
Mexican President Felipe Calderón has never wanted to entangle himself in Latin American disputes and ideological confrontations. 
As his term winds down (the next presidential elections are two years away), he will be even less inclined to involve Mexico in foreign adventures. 
Brazil is similarly paralyzed, partly because of its presidential election campaign, which is currently in full swing and will conclude only at the end of the year, and partly because of recent diplomatic setbacks. 
President Luiz Inácio Lula da Silva has sought to catapult his country onto the world stage as an emerging power, but he has not fared well. 
His chief goal – obtaining a permanent seat for Brazil on the United Nations Security Council – is more distant than ever, and his more modest aims have not met with greater success. 
Lula’s attempt, together with Turkey, to broker a deal between Iran and the West failed when the US convinced Russia and China, along with countries such as Mexico, to approve a new round of UN sanctions against Iran. 
Brazil ended up alone with Turkey voting against the sanctions, and without anything to show for its mediating efforts. 
Brazil has always been reluctant to involve itself in its neighbors’ domestic conflicts. 
Now that it ventured to the other side of the world and fared poorly, it is unlikely to want to pursue other futile projects, such as reforming the OAS, deterring further confrontation between Venezuela and Colombia, or ensuring free and fair elections in Nicaragua. 
So, while Latin America may continue to weather the global economic storm rather well, the region’s diplomatic peace and quiet is deceptive. 
Any number of rising tempests could end it. 

Latin America’s Corruption Challenge 
COPENHAGEN -- It is difficult to distinguish the consequences from the causes of the corruption that bedevils many Latin American and Caribbean nations. 
Corruption limits growth, but low growth itself encourages corruption and makes it difficult to improve government effectiveness. 
In any case, corruption alone is not the essential problem. 
Rather, it symbolizes and highlights underlying weaknesses in the operation of the state and its interactions with citizens and businesses. 
Some institutions are so vital that they produce either a competent and fair state if they function well or a corrupt, unfair, and ineffective state if they operate poorly. 
Cleaning up two such institutions – the public sector and the judiciary – should be a priority for many governments in the region. 
Surveys carried out in El Salvador, Nicaragua, Bolivia, and Paraguay in the last decade have shown that people exposed to corruption have less confidence in the political system and lower trust in other citizens. 
Nicaraguans were asked if the payment of bribes “facilitates getting things done in the bureaucracy.” 
Those who agreed that corruption worked had less respect for the political system’s legitimacy. 
A well-functioning bureaucracy is also necessary because it contributes to economic growth. 
Few of this region’s most important challenges can be tackled successfully unless the state can administer complex public programs. 
The sources of public administration failure include lack of professionalism in the civil service; vague, complex, and confusing legal rules; weak management of government finances; poor distribution of tasks across levels of government; lack of transparency in government processes, and the difficulty of holding officials accountable for their actions. 
Weaknesses in any or all of these areas create incentives for corruption, laziness, and incompetence. 
Increases in civil service salaries are not a sufficient policy response; structural reforms also are needed. 
Countries, with more independent and professional civil servants tend to have higher quality bureaucracies and less corruption. 
A well-functioning and competent judicial system is a necessary condition for establishing the rule of law. 
Organized crime levels are lower in countries with independent judiciaries. 
In Ecuador, judicial uncertainty and delays in contract enforcement deter investment. 
Another study based on in-depth interviews of Ecuadorian entrepreneurs suggested that investment would rise by 10% if the judiciary were on a par with the most effective court systems. 
A recent continent-wide survey by Latinobarometer found that between 20% and 40% of Latin Americans expressed “no confidence” in the judiciary. 
Researchers found that in Mexico, eight in ten court cases were abandoned. 
This figure suggests that going to court can be a thankless exercise, and that many disputes probably never reach court. 
A Peruvian survey revealed that the judiciary was the most corrupt institution. 
The incidence of bribery was high, with a staggering 42% of reported bribes paid to the judiciary. 
One way to improve the administration of public programs is to go to the root and change the way governments provide goods and services and manage programs. 
Placing an emphasis on automated, computer-based systems for procurement and revenue collection will go a long way to limit corruption. 
This reform should be packaged with a careful evaluation of the regulatory climate for business, designed to eliminate or streamline the rules. 
For example, although in Peru corruption was pervasive elsewhere, government reforms that lowered tax rates managed to increase tax revenue from 8.4% of GDP in 1991 to 12.3% in 1998, and increase the number of taxpayers from 895,000 in 1993 to 1,766,000 in 1999. 
Of course, not all programs are successful, but some effective cases of procurement and revenue reform have benefits 100 times higher than the costs. 
Even if gains were much lower, it is clear that this would be a sound investment in the region’s future. 
Government can also reduce corruption by limiting the reach of its activities. 
Latin America is currently experiencing a backlash against privatization, a trend that highlights the importance of public-sector reform. 
Privatization efforts are often highly salient politically and unpopular. 
Contracting out some activities to nonprofit/nongovernmental organizations should be considered along with improved external monitoring. 
For example, Guatemala contracted out primary care and nutrition services for 3.4 million people at a cost of US$6.25 per head. 
Studies show that benefits are higher than the costs. 
The performance of the bureaucracy would also be lifted by the provision of improved audit agencies and ombudsmen, and by grassroots monitoring corruption, with technical assistance and information provision allocated centrally by government or nongovernmental organizations. 
When it comes to the judiciary, it is clear that higher salaries for judges and clerks, better computer systems, and other technical equipment would improve the courts’ efficiency and performance. 
This would mean less wasted time and more clarity for litigants. 
Eliminating the red tape clogging the legal process would cost nothing, but potentially would have large benefits. 
Setting up a new, independent alternative dispute-resolution system outside the courts would cost something, but it would ensure quicker and more acceptable resolution of routine disputes. 
Colombia has successfully implemented an alternative judicial system using “Community Boards” that deal with land title disputes. 
Bureaucratic and judicial reform ought to have priority in most countries in Latin America. 
At the very least, there is a crisis of confidence, and, at worst, that lack of confidence is well deserved. 

Latin America’s Dysfunctional Democracy 
In Latin America, many people live with outstretched hands. 
Throughout the Hemisphere, paternalistic governments accustom people to receiving just enough to survive instead of participating in society. 
Across the region, politicians that writer Octavio Paz once referred to as “philanthropic ogres” create clients instead of citizens, people who expect instead of demand. 
Democratic Latin America limps sideways because it can’t run ahead. 
There are too many entry barriers to the poor, the innovative, and those without access to credit. 
There are too many walls erected against social mobility, competition, and fairness in politics and business. 
As a result, although Latin Americans can vote in a more democratic environment, they can’t compete in a globalized world. 
Standards of living fall, incomes stagnate, hopes are dampened. 
So people start to march in the streets in Bolivia. 
Or believe the promises of the populist President Hugo Chávez in Venezuela. 
Or think about a return to the one-party past in Mexico. 
Or yearn to toss all the bums out – a sentiment that now seems to be taking root in Brazil. 
Or to vote with their feet, as in Mexico, where one of every five men between the age of 26 and 35 lives in the United States. 
The region is both more democratic and more unequal than it was ten years ago. 
United by the right to vote, Latin Americans remain divided by poverty. 
Latin America’s economies are organized in a way that concentrates wealth in a few hands, but then leaves it untaxed, depriving governments of the resources needed to invest in their citizens’ human capital. 
Few governments in Latin America today have committed themselves to making such an investment. 
Instead, what Latin America’s people get in the democratic era is a lot of public works – bridges, highways, and massive structures that are designed to elicit short-term political support. 
In such projects, politicians manipulate and buy voters instead of truly representing them. 
Such distorted priorities reflect a simple reality: democracy in Latin America seems incapable of dismantling old networks of clienteles and their traditional power-sharing arrangements. 
The old elites remain, locked inside their gated communities, fending off the poor, whom they have no incentive to empower, because plentiful cheap labor is so beneficial to those who employ it. 
This means that broad swaths of the population don’t finish high school, don’t attend college, and don’t become empowered citizens of their own countries and the world. 
They remain at the service of socio-economic systems in which personal relationships matter more than qualifications and skill, in which positions are doled out on the basis of loyalty, not merit. 
Doors open to those with the right name and the right connections, and contracts are assigned with a slap on the back and the wink of an eye. 
State monopolies are sold to friends who then become multibillionaires, like Mexico’s Carlos Slim. 
Despite unrest in Bolivia, and populist politicians on the march, Latin America isn’t on the verge of an economic meltdown. 
Indeed, the region remains largely stable. 
But that isn’t enough to propel people from a tortilla factory to a software company, to create a broad middle class, and thus to assure social mobility. 
Democracy may be working well enough in terms of free and fair elections. 
But something else is malfunctioning, and it transcends particular presidents, whether the president is Venezuela’s populist Chávez, Mexico’s conservative Fox, or Brazil’s left-leaning Lula. 
It has to do with a deep, historic, structural reality. 
Latin America’s dysfunctional democracy is the result of a pattern of political and economic behavior that condemns Latin America to stagnation, independently of who governs. 
It stems from a pattern of postponed or partial structural reforms, of privatizations that benefit elites but hurt consumers. 
This has sustained a model that places more value on the extraction of resources than on the education and empowerment of people. 
Bountiful resources such as oil are a bane for democracy in developing countries, because when a government gets the revenues it needs by selling oil, it doesn’t need to collect taxes. 
Governments that don’t need to broaden their tax base have few incentives to respond to the needs of their people. 
Indeed, governments that are built on clientelism instead of citizenship don’t need to respond at all. 
They produce skin-deep democracies in which people have a vote but don’t really have a stake, in which wealth is increasingly concentrated and income disparities are harder to breach. 
Worse still, such governments – whether authoritarian or nominally democratic – turn their citizens into recipients instead of participants. 

Latin America’s Education Deficit 
China’s decision to end its decade-old policy of pegging the Yuan to the dollar has been greeted in Latin America with enthusiasm and optimism. 
It is argued across the continent that a more flexible exchange rate for the Yuan will reduce China’s unfair advantage in international markets. 
This, we are told, will make Latin America’s exports of manufactured goods more competitive internationally. 
But this optimism is misplaced. 
Despite the announced reforms, it is unlikely that there will be any significant exchange-rate flexibility in China’s currency. 
Indeed, China’s rulers have already stated that the new exchange-rate system will aim at maintaining currency stability. 
Its policy is tailored after that of Singapore, which has avoided large currency fluctuations – and has maintained a significantly more competitive exchange rate during the last three years than all of Latin America’s countries. 
This means that in order to compete successfully with China, Latin American countries will need to increase productivity growth. 
Unfortunately, the continent is not well positioned for these challenges. 
The main problem is the extremely low quality of the region’s educational system. 
According to several international educational studies conducted in recent years, Latin American countries rank at the bottom, particularly in mathematics and science. 
For example, tests administered by the OECD in 2003 found that Brazilian students ranked last in mathematics among 40 countries. 
In the same tests, Mexico was in 37th place, while Uruguay, the highest-ranked Latin American country, came in 35th. 
Latin American students performed especially poorly on the “problem solving” part of these tests. 
This reflects the old-fashioned nature of the region’s educational systems, which still emphasize memorization and rote learning. 
Sadly, results are not much better in reading ability; again, the Latin American nations were at the bottom of the 40-country sample. 
Similarly, according to the prestigious Trends in International Mathematics and Science Study (TIMSS), in 2003 Chile’s eighth graders ranked 39th out of 44 countries in mathematics; in science they did only slightly better, ranking 37th. 
Interestingly, many countries that performed better than Chile on these standardized tests have a lower income per capita. 
Latin America’s educational performance is equally weak at the university level. 
According to a 2004 survey by The Times of London, not a single Latin American university is ranked among the top 200 in the world. 
This contrasts sharply with China and India, both of which have several world-class universities, especially in science and engineering. 
Thailand, Turkey, and Singapore also have first-rate universities in the sciences, including biotechnology. 
If Latin America is to succeed and move towards prosperity, it needs to reform its educational system. 
A sustainable economic growth rate that helps reduce poverty and inequality can be achieved only with a skilled and innovative labor force. 
Reforms must aim at making grade school and high school teachers accountable. 
In addition, paying teachers according to performance must become the norm, while ineffective teachers should be dismissed. 
Moreover, competitive funding for research at the university level must be increased substantially. 
Implementing these reforms will require political courage and vision. 
In particular, politicians need to be willing to confront teachers’ unions, which have traditionally resisted reforms that introduce competition and accountability. 

Latin America’s Era of Milk and Honey 
Whenever signs of change appear in Latin America’s economies, people ask if the change will be transitory or permanent. 
Driven mainly by the almost insatiable appetites of China and India, a profound burst of growth has come to Latin America. 
Over the past five years, Chile’s GDP has been expanding 5% annually, Argentina’s by almost 9%, Venezuela’s by more than 10%, and the Andean Community’s by 6%. 
The continent’s aggregate growth, at 4.5%, is expected to lag behind the world average of 5% in 2007, but only because the largest countries, Mexico and Brazil, are growing more slowly. 
One regular aspect of post-war Latin America has been that such bonanzas have been undermined by large current account deficits, and thus indebtedness. 
But that is not happening this time. 
Latin America will finish 2007 with a current account surplus and growing foreign-currency reserves, insulating them from financial crisis. 
On the one hand, world trade is growing, and so are Latin America’s exports. 
On the other hand, the terms of trade have improved. 
High commodity prices have benefited producers of oil and gas (such as Venezuela and Bolivia) and minerals (such as Chile). 
Moreover, producers of foodstuffs (such as Argentina and Uruguay), which suffered for decades, are now gaining from notable biogenetic innovations that increased arable land area. 
There is also a surprising phenomenon that favors everyone: prices of technology-based capital assets imported by Latin America have been falling throughout the past decade. 
Another phenomenon is linked to the first. 
Structural deflationary pressures in the developed countries – such as highly debated increments of productivity in the United States – help the central banks to maintain price stability, which means that growing exports and high terms of trade have been accompanied by reasonably low interest rates. 
As long as this combination of factors lasts, the governments of Latin America can maintain fiscal discipline, despite higher spending, as rapid growth translates into greater revenues. 
Whereas Chile, for example, recorded a slight fiscal deficit in 2003, by 2006 it boasted an almost 8%-of-GDP surplus. 
With different tools – including a profound restructuring of its foreign debt – and less discipline, Argentina accomplished a similar fiscal turnaround. 
Likewise, thanks to the discovery of gas, Bolivia turned its 8%-of-GDP fiscal deficit in 2003 into a surplus of 1.2 of GDP in 2006. 
Of eleven of the region’s countries – the five MERCOSUR economies, the four Andean Community countries, plus Chile and Mexico – seven have had a fiscal surplus in 2006 and six will maintain it – less easily – in 2007. 
Of course, skeptics warn against excessive optimism, arguing that something similar occurred in the early 1970’s, ending in a deep crisis. 
But there is a key difference: whereas the economic stagnation and world-wide inflation of the 1970’s originated in the supply cartel of hydrocarbons producers, now it is the Asian latecomers in the process of industrialization that are driving growth, and inflation is a constant threat that never materializes. 
Meanwhile, each government, with its own style and political discourse, seeks to associate the state with the benefits of a globalization that, for the past few years, has been showing its generosity. 
The result is surprisingly orthodox: a sharp decline in Latin America’s average public and private foreign debt, from 44% to 21% of GDP between 2003 and 2007, in part because of the exchange rate appreciation generated by the foreign bonanza itself. 
It seems that the region’s popular left-wing nationalist governments have discovered that fiscal stability and reducing debt constitute the key to political autonomy and economic independence. 
If the neo-liberal Washington Consensus has been forgotten, perhaps it wasn’t because its tenets were misguided, but because the world offered an opportunity to realize the most important of them without having to suffer the humiliation of a shrinking economy. 


Latin America’s Forbidden Debates 
Twenty-five years ago, only Colombia, Costa Rica, and Venezuela were reasonably stable Latin American democracies. 
Today, what might be considered electoral democracies are found throughout the region. 
Indeed, at no time since independence has there been such a proliferation of democracy in Latin America. 
But what has been gained is never guaranteed. 
A military coup is not the only way to destroy a free society. 
As the political scientist Guillermo O’Donnell observed, democracy’s flame can also be extinguished gradually when dreams of justice and social progress fail to materialize. 
During the 25 years of the spectacular rise of Latin America democracy, per capita income has increased by a mere $300. 
Even in Chile, which enjoyed high economic growth and cut poverty in half, and Brazil, which lowered the percentage of citizens living below the poverty line by a third during the 1990’s, the concentration of wealth has increased. 
This isn’t for lack of structural reforms. 
At the same time that political changes helped spread democracy across Latin America, structural economic reforms were strengthened. 
Samuel Morley of the UN’s Economic Commission for Latin America and the Caribbean put together an index that graded reforms aimed at economic deregulation, trade liberalization, and opening up financial markets. 
Morley’s index, on a scale of zero to one, stood at 0.52 in 1977, but rose to 0.82 by 2000. 
Nevertheless, profound economic and political transformation in Latin America has masked a deep disparity between reforms and reality – indeed, between hopes and their fulfillment. 
Although this gap endangers the future of Latin American democracy, many Latin American leaders consider it apostasy to admit that living standards are little better today than they were during the era of dictators. 
Their first inclination is to defend these electoral democracies on the grounds they no longer engage in killing or in torture. 
But consider this: Amnesty International and the US State Department have three basic indicators of human rights — the right to life, the right to physical safety, and the right to freedom from political persecution. 
They use a scale of one to five, with one representing an optimal level of human rights and five indicating conditions of general terror. 
During 1977, the worst year for human rights violations, the average Latin American rate of terror stood at 3.0. 
In 2001, after two decades of democracy, it was 2.6. 
By contrast, the terror index for Western Europe was 1.1. 
Still, to insist that Latin American democracy has been a major disappointment would not merely be pessimistic; it would fail to recognize that the most important values of a free society include the capacity to change, to rectify, and to improve. 
The problem does not lie with our shortcomings, but with the way we choose to resolve them. 
The role of the state, the market, and the region’s place in the global economy all need urgent attention and discussion. 
Yet our leaders consider these subjects taboo. 
Our first challenge is to recognize that electoral government has failed to lead to a true democracy of the people. 
Our second challenge is to find the keys to open that door. 
Latin America seems to lack the will to establish a true people’s democracy, and it has tied itself to a narrow market economy whose bad outcomes are readily apparent to everyone. 
But government has a central role to play in the debate over the creation of democracy – one more important than its oversight of fiscal matters. 
Certainly, merely returning to big government will not resolve anything, because it is inefficient and generates the opposite but equivalent imbalance. 
Indeed, it may be that the framework for a state that can preside over a true democracy has yet to be created. 
The same may be said about the market economy. 
The Washington Consensus – with its emphasis on liberalization, deregulation, and privatization – does not forecast greater per capita income, nor does it eliminate poverty. 
It does, however, increase inequality. 
Does that mean we should abandon the market economy? 
No, because, simply put, political liberty cannot be separated from economic liberty. 
Ensuring Latin American nations’ autonomy in the global economy is yet another vital question that must be debated, because it is essential that national governments have the power to execute their citizens’ will. 
Thus, the commercial and political aspects of government’s responsibilities must be integrated. 
This does not require immediately creating new administrative structures, but skillful political coordination can and must be at the heart of this debate and ensuring its successful outcome. 
We cannot base our actions solely on commercial will, because that limits us to operating strictly at the whims of international markets. 
As the political scientist Samuel Huntington has said, “Business may bring communities closer but it cannot bring them into harmony.” 
Today, Latin American states need political agreements that protect them from becoming the victims of both North American unilateralism and the global economy. 
Failure to engage in critical debates about Latin American democracy will surely provide fertile ground for reviving the authoritarian fantasies of the past. 
If, on the other hand, political leaders lose their fear of debating important issues, Latin America can move forward. 
Having won some of their freedom, Latin America’s people should not be forced to pay the high price implied by their leaders’ failure to open forbidden issues to debate. 

Latin America’s Glossed Decade 
SANTIAGO – The Inter-American Development Bank declared last July that this would be “Latin America’s Decade.” 
A couple of months later, The Economist endorsed that idea, which has since been repeated by countless apologists and experts. 
There is nothing like a little economic growth to get pundits’ juices flowing. 
And Latin America is growing, by 6% last year and an estimated 4.75% in 2011, according to the International Monetary Fund. Compared with the region’s mostly sluggish performance over the last three decades, this looks like takeoff velocity. 
And, compared to the dismal recent record in North America and Europe, it looks positively supersonic. 
Latin America’s stock markets are up sharply since the crisis, as are property prices in those few countries that keep track of house values. 
No wonder so many are so excited. 
The mood about Latin America was equally optimistic at the start of the 1980’s. Bank loans from the US were plentiful, and countries like Argentina, Chile, and Uruguay were growing fast. 
But then Paul Volcker increased interest rates in the US, the dollars went home, most countries defaulted on their debts, and the 1980’s became a “lost decade” for Latin America. 
The early and mid-1990’s witnessed another wave of optimism. 
Commodity prices were high, external financing plentiful, and many Latin American countries grew. 
Having adopted the liberalizing reforms dictated by the Washington Consensus, Latin America was thought to have turned the corner. 
But then came Mexico’s Tequila Crisis in 1994, followed by the Asian meltdown, which hit Latin American economies hard. 
Brazil blew up in 1998, and Argentina melted down in 2001. 
I do not mean to suggest that Latin America is on the verge of another debt crisis – far from it. 
In many countries – including Brazil, Peru, and Colombia – macroeconomic management is far better than it was in the 1980’s or early 1990’s. 
But today’s situation shares two features with the earlier episodes of financial euphoria over Latin America: sky-high commodity prices and cheap international money. 
In fact, for many of the region’s countries, the terms of trade are higher and the relevant global interest rates lower than they have ever been. 
These factors, more than any virtuous policy change in recent years, are propelling growth. 
Indeed, today there are two Latin Americas: natural resource-rich South America and natural resource-poor Central America and Mexico. 
Not surprisingly, South America is growing much faster than its neighbors to the North – 4.4 versus 2.7% in 2010-11, according to a recent Inter-American Development Bank report. 
The report estimates that Argentina’s economy will expand by 6.1% in that period, while Costa Rica’s will grow by 3.8% and El Salvador’s by just 1.6%. 
Is there a single economist who believes that Argentina’s policies are almost four times better than El Salvador’s? 
Plentiful international capital is also making a difference. 
The financial markets’ recent darling is Brazil, which grew at a breakneck 7.5% pace in 2010, fueled by almost $100 billion in capital inflows. 
By the end of 2016, Brazil will have hosted both the World Cup and the Olympic Games. 
Few doubt Brazil’s primacy when it comes to soccer. 
But its economic competitiveness is another story. 
In this cup, Brazil does not even make it to the playoff round of 32, occupying 58th place in the competitiveness ranking of 139 countries compiled by the World Economic Forum. 
Ahead of Brazil one finds Montenegro, Mauritius, and Azerbaijan. 
In the past, episodes of dirt-cheap money and commodity prices on steroids ended badly for Latin America. 
Will this time be different? 
Pardon the economist’s stock answer: it all depends. 
First of all, it depends on whether countries can prevent financial bubbles from developing. 
The IMF recently asked in a report: “Are bubbly conditions taking hold?” 
After pointing to soaring credit growth in most South American countries (in Brazil, growth in mortgage lending exceeded 40% during 2010, more than tripling the stock of credit outstanding in 2007), the Fund concluded that “the current expansion does not yet rise to the level of a credit boom,” though “it would if the expansion were sustained for a prolonged period.” 
Notice the “not yet.” 
When a doctor says that a patient is “not yet” dead, family members should start to worry. 
In the same report, the IMF rang alarm bells over potential equity bubbles, pointing out that “stock prices are currently above trend levels in most countries, with signs of stretched valuations in a few countries (Chile, Colombia, and Peru).” 
In Chile, the report met with irate denials from the brokers and fund managers who make their living selling Chilean stocks to investors. 
Whether the current episode will end in tears also depends on fiscal policy. 
Once upon a time in Latin America, fiscal policies were extremely pro-cyclical: whenever commodity prices fell, governments lost access to capital markets, so they had to eliminate their deficits just when conditions called for fiscal expansion. 
This has slowly begun to change. 
With public debt much lower than in the past, several Latin American countries ran counter-cyclical deficits for the first time in 2009, thereby cushioning the domestic impact of the external blow from the global financial crisis. 
The problem is that governments in the region have yet to realize that countercyclical fiscal policy implies rowing against the current in both parts of the cycle: spending more when times are bad (the easy part) and spending less when times are good (the true test of virtue). 
Today, fiscal policy remains too expansionary in virtually every Latin American country. 
That fiscal impulse, coupled with high commodity prices and abundant credit, continues to fuel economic growth today – often at the expense of stability and growth tomorrow. 
Latin America’s time has finally come, too many pundits will keep saying. 
If only they were right. 

Latin America’s Leftist Mirage 
Ever since Deng Xiao Ping’s remark that “it’s not the color of the cat that matters, but whether it catches mice,” it has been clear that the old Cold War divisions of left and right, communism and democracy, were obsolete. 
Indeed, the China that Deng began to build in 1978 is now communist politically and capitalist economically. 
But the tendency to apply old labels remains strong, so that everyday we hear gross simplifications like the current one that holds that Latin America is now undergoing a powerful leftist wave. 
The basis for this idea is that the rise to power of Lula da Silva in Brazil, Hugo Chávez in Venezuela, Néstor Kirchner in Argentina, Tabaré Vásquez in Uruguay, and, most recently, Evo Morales in Bolivia and Michelle Bachelet in Chile show a socialist trend . 
But are all of them old-style leftists? 
Or do they practice old style populism? 
Just what is happening in Latin America? 
To start, we can rule out Chile from the supposed leftist surge, for it is a country ruled by a centrist coalition of Ricardo Lagos’s European-style socialists and the country’s historic Christian democrats. 
That President Bachelet comes from socialist roots does not change the nature of her government, which will follow the parameters of its predecessors, and will preside over the most open economy in the region, one integrated into the global market by free-trade agreements that extend from the United States to China. 
Nor can one argue that Brazil’s government under President Lula has not been characterized by moderation, following a more orthodox economic policy even than that of its predecessor, one based on fiscal discipline, budget surpluses, and an anti-inflationary monetary policy. 
In contrast to old leftist slogans against repaying foreign debt, Lula’s government has hurried to settle all of its IMF obligations in advance. 
The rallying call against paying foreign debt, which was ubiquitous in Latin America in the 1980’s, was buried when the Argentinean government did the same thing, committing one-third of its reserves to pay in advance its debts to the IMF. 
Even Nobel laureate Joseph Stiglitz has questioned whether these countries’ debt payment measures represent an exaggerated concession to neo-liberal orthodoxy. 
Uruguay’s government, too, has not deviated from the basic tenets of the policies of the conservative government that preceded it. 
It maintains the country’s improved relations with the IMF, and it has even approved an agreement with the US to guarantee investments. 
Even Bolivia’s government should not be regarded as a reincarnation of the continent’s old populism. 
President Evo Morales’s rise to power was inspired by historic discrimination against the indigenous majority, with the coca leaf as an emblem of an ancestral grudge. 
Although Morales campaigned on a promise to nationalize mineral resources, this has not happened yet, and, indeed, he now seems to be leaning towards partnerships with big state-owned energy companies, in the manner of Venezuela’s Pedevesa or Brazil’s Petrobras. 
Morales might yet turn more radical, but, for now, he represents a deep, ethnically inspired demand for historic justice, not a hard-left ideology. 
None of these governments openly speaks of socialism, much less Marxism. 
There is no planned collectivist economy, foreign investment is still sought, and, in general, the rules of liberal democracy still apply. 
Leaders may still think that “another world is possible,” but, while they use anti-globalization rhetoric, they pursue serious economic policies, even if more out of resignation than conviction. 
What all this means is that Latin America is not shifting left, but settling in the center. 
Even traditionally leftist parties like Brazil’s Partido dos Trabalhadores or Uruguay’s Frente Amplio have abandoned old Marxist ideals. 
Naturally, they declare friendship with Fidel Castro and seek his embrace to prevent old comrades from accusing them of betraying their legacy. 
But they go no further: Castro is fine for photo opportunities, but not for policy advice. 
Venezuela’s Chávez is another story. 
No doubt, his regime revels in all the historic forms of populism: messianic leadership, anti-American rhetoric, disregard for constitutional forms, drunken spending, and state-orchestrated popular mobilization to fill squares and jeer at supposed enemies. 
Chávez is riding a wave of high oil prices and is determined, with torrential verbosity, to exercise some sort of continental demagogic leadership. 
But, while Chávez-style populism appears to have made some headway in Peru, it is far from succeeding. 
In Colombia, everything indicates that President Álvaro Uribe, erroneously labeled a rightist because of his fight against his country’s guerrillas, will be re-elected. 
Oscar Arias is winning in Costa Rica. 
In Mexico, the presidency is up for grabs. 
In the meantime, Latin America’s economies will continue to benefit from the world boom in commodity markets, elections will remain normal, and life will go on in the political middle of the road. 

Latin America's Locust Years 
The bad news keeps coming in Latin America these days. 
Economic conditions worsen almost everywhere, social cohesion unravels and political instability mounts. 
Little wonder, since much of Latin America spent the last twenty years going nowhere. 
Assets were sold and national debts ballooned, but almost nothing lasting and beneficial was gained. 
Truly, these were years that the locusts ate. 
Over the past 20 years, annual per capita GDP growth in Latin America averaged 0.35%. 
At that pace, an economy would need 200 years to double in size. 
In Asia, the standard of living doubles every decade . 
With such anemic growth, how can Latin America expect to compete in world trade except through ever shrinking wages? 
Profound misgovernance, not bad luck, is to blame for economic stagnation. 
If Latin America does not change, it may increasingly look like Africa--a region of weak states with large informal economies and widespread poverty. 
Four factors have put it on this path. 
First, in Latin America's privatization gold rush, everything from public utilities to manufacturing companies went on the auction block. 
For a short time, asset sales helped balance national budgets, and also provided resources for sustaining consumption. 
In the end, the income from privatization delivered little in the way of better infrastructure or more competitive exports. 
Worse still, the sell-off of state assets was accompanied by massive external borrowing. 
In some cases, notably Argentina, borrowing by domestic buyers exhausted all available lines of credit. 
Other countries did not drop to Argentina's level, but creditworthiness is an issue almost everywhere in Latin America. 
Second, because reform has not delivered prosperity, the region has grown sick of reform. 
Capital inflows produced a wealth effect, but only while they lasted. 
When the money stopped flowing in, the wealth dried up. 
No sane politician will commit to another decade of structural reforms that will test the patience of ordinary Latin Americans beyond the limits of electoral survival. 
But without more and deeper reforms, there will be too few of the preconditions for economic growth that lure investment--without which no growth is possible. 
This development dilemma points to the third factor: ineffectual politics. 
Governments that operated along technocratic lines, and that viewed economic growth as a rising tide that lifts all boats, have vanished. 
In Argentina one bumbling president succeeds the next. 
Institutions are torn down, property rights are called into question, and a random and ever more corrupt redistribution effort is underway. 
Peru and Venezuela hardly look better; Brazil may soon follow the same course. 
The popularity of Lula Ignacia da Silva and his team, who lead opinion polls in the run-up to Brazil's presidential election, serves as a warning that much of the Latin American public is prepared to reject traditional governments. 
Lula and his party are so far outside the mainstream of economic thought and policy that capital has already begun fleeing--even though the election is months away. 
In Mexico, democratization has brought greater stability, but this could well prove ephemeral. 
The peso is now grossly overvalued. 
If the external balance deteriorates further, the economy will be in for a hard landing. 
For all the good news about Mexico's infant democracy, its president is beginning to justify the early fears about him: no vision, no Congress to work with, and no team that knows what to do. 
The last factor is the desperately low rate of saving that is endemic in the Americas. 
Indeed, this is the bottom line economically, for where there is little saving, there is little investment--and little basis for capital accumulation and productivity growth. 
Venezuela now pines for the fat OPEC years of the 1970s--which it missed, because it neglected to develop its oil industry. 
Argentina's wealth is now vacationing in Miami, perhaps for good. 
Brazil and Mexico are prime examples of countries that sold assets and borrowed rather than saved. 
The contrast with Asia is arresting. 
Consider China, where the saving and investment rates are near 40%, where the current account is in surplus and there is no public debt. 
Government institutions are market friendly and the population is well educated, disciplined, and flexible in its learning. 
Rewards for risk taking and initiative are immediate and highly motivating. 
To be sure, China remains a poor country. 
Its per capita GDP is only half that of Brazil. 
But with growth in China's coastal region running at possibly 15% per year, who can seriously doubt that in 15 years it will surpass Brazil? 
In China, for all of its massive problems, things continue to go right not least because of huge inflows of foreign direct investment and the imminent benefits of WTO membership. 
In Latin America, things continue to fall apart: governments backtrack on reform and the economy loses ground to the rest of the world. 
Latin America did well when soft money flowed in, but those times are largely over. 
So we should expect more bad economic, social, and political news in the years ahead. 
Demagogues like Venezuala's Hugo Chavez or Carlos Menem--an Argentine presidential candidate once again--may seem like a bad joke, but anyone who cares about Latin America's fate should not laughing. 


Latin America’s New Regionalism 
We live in a world crisscrossed by borders, drawn and redrawn throughout history, chosen by fancy or caprice, and all too often defended by bloodshed. 
They have always been imperfect, and today their flaws are visible in new ways. 
Waves of immigrants, driven from their homes by poverty and desperation, blend one nation’s struggles into another’s. 
Climate change caused by environmental destruction in one place can cause floods, storms, drought, and famine anyplace, and easy global travel means that diseases travel more quickly. 
Increasingly, we must recognize that our borders are not fortress walls. 
They are simply lines that we have sketched in the air. 
In short, no nation on this changing, shrinking planet can truly address its own problems in isolation. 
Nowhere is this more true than in Latin America and the Caribbean, where the uneven blows of history and varied national policies have resulted in a patchwork of fates for our many peoples. 
Today – sometimes across borders, sometimes within them – once-unthinkable wealth exists alongside extreme poverty and all its social ills. 
Ours is a region of cruel contrasts. 
Fortunately, many countries in this part of the world have recognized that regional welfare must be addressed as a regional challenge. 
I am proud to list Costa Rica among them. 
Our nation may be small, but our commitment to improving the well-being of this region is anything but. 
We have an important role to play in advancing the principles of sound knowledge, quality decision-making, and transparency. 
Costa Rica is the region’s most stable democracy, a place where peace, nature, and education are valued above all. 
While we rejoice in our successes, however, we have long recognized that our future is tied to our neighbors’ challenges, whether they include military conflicts, as was true 20 years ago, or hunger and disease, as is the case today. 
That’s why I am pleased that in October, the Inter-American Development Bank and the Copenhagen Consensus Center will host a conference in our capital, San José, inspired by the 2004 Copenhagen Consensus summit. 
At that previous meeting, a panel of the world’s leading economic thinkers was challenged to answer this question: if an extra $50 billion were spent improving the state of the world, how could the money be allocated to achieve the most good possible? 
Those analysts realized that most, if not all, of the solutions to the world’s biggest challenges depend on local or regional contexts. 
Therefore, the San José event will replace a global outlook with a regional one, with a new panel of experts focusing on the biggest challenges facing Latin America and the Caribbean. 
The challenges fall into ten categories – a familiar list of key issues in this part of the world: democracy, education, employment, the environment, fiscal problems, health, infrastructure, poverty and inequality, public administration, and crime. 
The experts will face obvious restrictions. 
Our resources are scarce. 
We cannot meet everyone’s demands, or solve all our problems at once. 
We must choose between various good ideas, however difficult this may be. 
The panel will produce a prioritized list of solutions that can serve as a set of guidelines for regional policymakers, helping us to be both ambitious and realistic. 
The “ Consulta de San José ,” as the event has been dubbed, will produce practical ideas that leaders can implement, and help us to identify and promote cost-efficient initiatives. 
Most importantly, however, it will serve to emphasize the importance of collective action. 
Working together with a genuine sense of regional community is a challenge in itself, but one well worth addressing. 
It has been said that “good fences make good neighbors.” 
There is undeniable wisdom in those words, but it is time to reevaluate what “good fences” really are. 
In today’s world, they must be low enough for us to shake our neighbor’s hand, understand his problems as we do our own, and find feasible solutions. 
They must be built with the knowledge that no fence, wall, or even an ocean or a continent can truly divide us from the problems of others. 
This is the spirit of the upcoming conference. 
I hope that spirit will spread far beyond San José, and that other regions will join us in recognizing that while our borders may define our territories, having the courage to reach across them defines our character – and, ultimately, our future success or failure. 

Latin America’s Next Growth Challenge 
Since 2003, Latin America’s economies have been thriving, with GDP, including estimates for 2006, up by 17% – an average annual growth rate of 4.3% and a 12% increase in per capita GDP. 
While impressive, this is only the second time in 25 years that Latin America experienced four consecutive years of positive economic growth. 
Will such good times continue? 
This recent growth has been fueled by a strong boom in commodity prices, including not only energy inputs such as oil, gas and coal, but also metals, minerals, and agricultural products. 
Growing demand for raw materials, owing to sharply increased industrial growth in Asia, particularly China and India, has benefited the terms of trade of many Latin American countries, and this is not expected to end anytime soon. 
Historically, fiscal profligacy tends to take hold at times like these, with windfall revenues wasted on extravagant public projects. 
But not this time ­– at least so far. 
In Latin America’s seven principal economies (Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela), which together account for almost 90% of regional GDP, annual economic growth averaged 6% in the third quarter of 2006, while industrial output was up by 8%. 
But their governments seem to be taking advantage of the bonanza to pay off pending external debt and increase their foreign reserves. 
Remarkably, responsible macroeconomic policy has followed a wave of populist/socialist electoral victories in recent years. 
Brazil, Chile, Ecuador, Nicaragua, and Venezuela elected socialist or populist/reformist presidential candidates in 2006, while Bolivia elected a populist indigenous president in 2005, Uruguay a socialist president the same year, and Argentina a leftist-centrist president in 2003. 
An increased degree of international financial independence is among the consequences of the raw materials bonanza. 
Countries such as Brazil and Argentina paid off their loans to the IMF ahead of time, while others are buying up their own debt in secondary markets. 
Increased liquidity in international capital markets also reduced the need to obtain multilateral financing, and with it the need to accept conditions like privatization of natural resources and deregulation of public utilities. 
But, for the most part, fiscal and monetary policies have so far not followed leaders’ rhetorical promises of deep structural reforms and redistribution to favor the indigenous and the poor. 
Even so, the danger of fiscal deficits and inflation persist in several countries. 
As a result, the new generation of leaders cannot introduce drastic structural reforms, badly needed in several countries, in a way that jeopardizes macroeconomic stability – without which none of their promises can be fulfilled. 
In fact, whereas economic growth in Latin America is often perceived as being very unequal – which explains the shift to the left – recent United Nations data puts the region in first place among all developing-country areas. 
Not only is the region’s economic performance strong; so is its score on the Human Development Index (HDI), which includes social indicators such as education and health. 
Indeed, while Latin America’s GDP per capita is lower than the world average, it surpasses all other developing regions, as well as the world average, in the main social indicators. 
Only one Latin American country (Haiti) appears in the group of low HDI countries, while the rest are in the medium and high HDI groups. 
Of the 30 Latin American countries included in this year’s report, only one-third have lower HDI rankings than GDP rankings, and only a few – those with the region’s greatest need for significant improvements in social infrastructure, particularly provision of health and education – show large discrepancies. 
But two risks to Latin America’s economic recovery loom large. 
First, with the current raw materials bonanza driving up prices of exported goods, the region is increasingly vulnerable to the so-called “Dutch disease,” whereby higher wages and prices spread throughout the economy, weakening competitiveness, particularly in industrial markets. 
With Asian manufacturing exporters penetrating markets worldwide, such a development would be highly damaging to Latin America’s growth prospects. 
Second, at a time when economic globalization is rendering national borders porous, political leaders may get carried away by their rhetoric of independence. 
All bonanzas end. 
If no adequate provisions are made to sustain global competitiveness, the economic, social, and political consequences could be dire. 

Disgruntled Democracies 
MEXICO CITY – In 2011 and 2012, tens of thousands of students demonstrated in Santiago, Chile, demanding greater access to higher education. 
Earlier this year, hundreds of thousands of Brazilians marched in São Paulo, Rio de Janeiro, and Belo Horizonte, calling for improved public-health services, better schools, and cheaper, more efficient public transport. 
And Colombians and Peruvians from all walks of life (especially peasants, farm owners, and mineworkers), as well as Mexican school teachers, now occupy the centers of Bogotá, Lima, and Mexico City, disrupting inhabitants’ daily lives and creating serious problems for the authorities. 
These countries, once models of economic hope and democratic promise in Latin America, have become examples of democracies without legitimacy or credibility. 
Although they have made significant social progress in recent years, they have become centers of popular unrest. 
And their presidents, despite their undeniable competence, are watching their approval ratings plummet. 
These paradoxes are both perplexing and revealing. For starters, they reflect an economic-growth problem. 
Chile’s economy has performed well over the past two years, despite low world copper prices; but its annual growth rate is nowhere near that of the previous 25 years. 
The economic balm applied to old social and cultural wounds is losing its effectiveness. 
Similarly, while Brazil’s economy remained relatively resilient after the 2009 recession, growth slowed almost to zero last year. 
Growth rates last year in Colombia and even Peru, which has performed better than any other Latin American country since 2000, also dropped significantly. 
And Mexico, the worst-performing of the five economies over the last 15 years, has outdone itself; this year, growth is expected to reach barely 1%, if that. 
At the same time, while all of these countries built the political and judicial institutions needed to consolidate their transitions to democracy – from Brazil’s in the mid-1980’s to Mexico’s in 2000 – these institutions have become (and in some cases always have been) remarkably insulated from popular demands. 
As a result, the protests took these countries’ seemingly responsive presidents by surprise. 
Indeed, Colombia’s Juan Manuel Santos Calderón and Brazil’s Dilma Rousseff – both skilled and experienced politicians – were utterly unprepared for their countries’ protests. 
Likewise, Mexico’s Enrique Peña Nieto and Peru’s Ollanta Humala, who have otherwise seemed to be perceptive leaders, failed to sense the gathering storm. 
As the Chilean economist and politician Carlos Ominami put it: “The children of democracy have become the prime movers of change; the social movement they represent lacks political leadership, and the country’s political forces have practically broken off all their connections to the social world.” 
This year, Chile will hold its sixth consecutive democratic election, with two women – former Labor Minister Evelyn Matthei and former center-left President Michelle Bachelet (both daughters of high-ranking military officers) – currently leading in the polls. 
Whoever wins will have to choose between deeply transforming Chile’s institutions and letting social unrest spin out of control. 
Brazil faces a similar trial, as next year’s soccer World Cup and the 2016 Summer Olympics test the resilience and adaptability of the social and macroeconomic frameworks that have shaped the country’s development for almost two decades. 
To be sure, pro-active anti-poverty programs, loose credit, a commodity-export boom, and heavy government spending (financed by an equally heavy tax burden) lifted millions out of poverty. 
But the expectations of the emerging middle class – including efficient infrastructure, high-quality education and health services, and well-paid jobs – have not been met. 
If they cannot even enter the luxurious new stadiums to see their national team play, they will not be happy. 
Similarly, although Mexico has experienced rapid population growth and significant standard-of-living improvements over the last 15 years, many believe that they are not getting what they deserve – or what they were promised. 
Teachers are furious at being blamed for the wretched state of the country’s education system and view Peña Nieto’s “educational reform” law as an excuse to limit the power of their unions while avoiding genuine institutional reform. 
Mexico City’s middle-class residents – who wield disproportionate influence countrywide – are also incensed, both at the teachers for disrupting their lives and at the federal and local authorities for failing to restore order. 
Against this background, the credibility of Mexico’s political institutions is rapidly eroding. 
But there is a more fundamental issue at play that stems from the accumulated imperfections of representative democracy in countries where social and economic conditions are less than ideal. 
When post-authoritarian excitement abounded and rapid economic growth prevailed, these imperfections were manageable; now, with the former fading and the latter a memory, they have become immense challenges. 
This problem transcends Latin America. 
As observers like Joshua Kurlantzick have pointed out, a global shift away from representative government, driven by increasingly disillusioned middle classes, is underway. 
For elected leaders, the dilemma is that there are no simple solutions – and little public patience for more complex ones. 

Latin America’s Reform Priorities 
SAN JOSE, COSTA RICA -- We seldom acknowledge that lack of knowledge – ignorance, if you like – impairs the spending decisions of policymakers and international aid organizations. 
Yet their priorities are often set in an ad hoc way with little regard for achieving the largest welfare gains possible. 
Recently, a rare attempt was made to improve the quality of decision-making in Latin America and the Caribbean. 
The Consulta de San José in Costa Rica asked a group of leading economic experts to rank solutions to the biggest challenges facing the region. 
For the first time, all the costs and benefits of more than 40 different policy options were laid out side-by-side. 
The results were eye-opening. 
Over three days, experts heard evidence about the region’s biggest challenges. 
It became clear that politicians often make decisions based on limited knowledge. 
They put money into unproven policy initiatives. 
There is no clear evidence, for example, that shows how we can actually improve the quality of education in schools. 
A program to provide teachers with monetary incentives and professional training was recently established in Mexico, but research shows no significant impact on educational outcomes. 
Domestic violence rates appear to be high in Latin America. 
The cost and damage is significant. 
Yet there is a disturbing lack of research to show what policy options have worked in the region. 
Latin American and Caribbean governments need to know how to raise educational quality and combat domestic violence. 
Having no proven strategies or relevant estimates of costs and benefits is frightening. 
Both for domestic violence and educational quality, the Consulta highlighted a need for urgent research. 
But the experts’ ranking of priorities also revealed some exciting and promising policy options. 
At the top, they rated early childhood development programs. 
There is a compelling case for increased public investment at the start of a child’s life. 
This could mean providing day-care services and preschool activities, improving hygiene and health services, or teaching parenting skills. 
Research shows that early childhood development programs in Latin America lead to higher levels of school readiness, enrollment, and academic performance. 
Mothers and older siblings become free to work or to further their own education. 
These programs should be emulated throughout the region. 
They are relatively cheap and have benefits between five and 19 times greater than the costs. 
The next most important strategy that the panel identified – better fiscal rules – may not seem sexy, but it is attractive because it effectively costs nothing. 
Though Latin America’s economies are doing well now thanks to reform and high commodity prices, there are underlying problems. 
The goal is to implement a comprehensive set of fiscal responsibility laws that curb the ability of legislatures and ministers to increase spending relentlessly. 
The rules need to impose limits on deficits, spending, and debt, and require transparency so that the public knows what’s going on. 
If matched by a genuine commitment to develop fiscal credibility, countries could increase their economic growth substantially. 
Third on the panel’s list is increased investment in the construction and maintenance of infrastructure. 
Most countries in Latin America and the Caribbean spend less than 2% of GDP on infrastructure, compared with 3% to 6% in China and Korea. 
Investment is particularly needed in the road network to build the arteries that bring jobs and prosperity: most of the extreme poor in Latin America’s rural communities live five kilometers or more from the nearest paved road. 
Other highly ranked policy options include the establishment of independent agencies to evaluate rigorously government spending programs, and more use of conditional cash transfer programs that provide regular payments to poor households for meeting conditions like sending children to school. 
At the bottom of the list, the expert panel gave very low rankings to the idea of restricting alcohol sales (as a proposed solution to health problems), educational voucher programs, and prison drug treatment and reintegration programs. 
This doesn’t mean that these policies don’t work, but that their benefits are much smaller than those of higher-ranked strategies. 
And there is debate about how effective some of them are. 
Educational voucher programs, for example, took a knock when careful analysis of a Chilean program found no positive effect on students’ performance. 
While climate change and biodiversity have become hot issues elsewhere, the panel concluded that the policy option of preserving rain forests to create carbon sinks would have international benefits but local costs, so these problems should properly be thought of as global issues rather than specifically Latin American ones. 
The Consulta succeeded in its goal of highlighting the most cost-effective ways to combat the region’s biggest problems. 
However, it also underscored the areas where politicians are fumbling in the dark without decent research, and created a yardstick against which we can now measure policymakers’ spending decisions. 

Latin America's Resilient Housing Market 
New York – As the consequences of the sub-prime mortgage meltdown in the United States spread through global markets, will one of the most positive trends in Latin America – the expansion of local credit markets, which has dramatically expanded access to homeownership throughout the region –be jeopardized? 
Big multinational banks and mortgage lenders have moved into markets across Latin America, providing financial services that allow lenders to better manage risk. 
Banks are creatively tapping into migrant worker remittances, multiple-family households, and other previously overlooked sources of potential income and creditworthiness. 
Similarly, the spread of microfinance lending has made capital available to borrowers who until recently were not seen as creditworthy. 
So far, the sub-prime crisis has had a limited direct impact on Latin America’s mortgage markets. 
In Mexico, the market for new low-and middle-income housing has grown rapidly, thanks to the creation of a market for residential mortgage securities in 2003. 
In the last quarter of 2007 alone, Mexican issuers sold $1.5 billion in new mortgage-backed securities – a significant portion of $4.4 billion outstanding – with only a slight drop in prices to reflect globally induced risk, according to the publication Asset Securitization Report . 
Chilean markets also have stayed relatively calm. 
These markets have been insulated in part because most investment in real estate-backed securities has come from local investors who often need to invest in local-currency markets. 
Most important, Latin America’s mortgage markets and homeowners are very different from those in the US. 
“It’s natural that the state of global markets will have some kind of ripple effect,” says Greg Kabance, managing director for Latin American structured finance at Fitch Ratings, the international credit ratings agency. 
“But Latin American countries, from a credit standpoint, are a lot better off than they have ever been to withstand turbulence and weather global market problems.” 
To their benefit, Latin American governments have applied the lessons of the past. 
Mexico’s “tequila crisis” of 1994-1995 forced many homeowners into default when the peso fell by 70% and interest rates soared. 
In Mexico, all mortgages carry fixed interest rates, unlike the infamous “exploding ARMs” that left US homeowners ruing their choice of adjustable-rate mortgages when interest rates rose. 
Mexican mortgages are indexed to inflation, but the state mortgage agency links that index to the minimum wage and makes up the difference if mortgage interest adjustments for inflation outpace wage growth. 
This protects both borrowers and lenders. 
Thus, although delinquency rates have risen slightly in Mexico since the mortgage market was created in 2003, only about 5% of mortgages are between 31 and 60 days late. Only 2% are between 61 and 90 days late. 
In the US, by contrast, 21% of adjustable-rate sub-prime mortgages are 90 days late or in foreclosure. 
Standard & Poor’s analyst Juan Pablo de Mollein points out that Mexico does not have a liquid secondary market where mortgage securities can be traded to buyers who are far removed from the original issuer. 
That tends to make buyers more cautious. 
The silver lining of past financial crises in Latin America is that most individuals carry far less debt than do Americans. 
In Mexico, for example, mortgage debt represents less than 10% of GDP, compared to about 50% of GDP in Europe and 82% of GDP in the US – a ratio that has increased more than fourfold in the last two decades. 
Latin America’s low personal debt levels have created an opportunity to build a constructive culture of borrowing while expanding economic opportunity. 
There is no doubt that the expansion of access to financial services has enormous positive potential, when handled responsibly. 
In his 2000 book The Mystery of Capital, Peruvian economist Hernando de Soto argued that access to credit is a powerful under-used force for development. 
He emphasized the crucial role of housing in allowing low-income individuals to raise capital that can be used for investment in small businesses, in education, or in other projects that can significantly improve standards of living over the medium to long term. 
But as the array of financial services available in Latin America expands, the danger of misuse rises. 
There is a clear lesson to be learned from the US, where easy credit created complacency on the part of authorities, opportunity for charlatans, and tragedy for those who lost or will lose their homes. 
Americans homeowners came to treat their houses as cash machines from which they withdrew equity lines of credit for consumption instead of investment. 
The dramatic run-up of home prices made it too easy to count on real estate values to continue to rise. 
Latin Americans have long regarded real estate as a long-term asset and as protection against inflation. 
With much lower inflation over the past two decades, other investment opportunities were better options, which helped to keep real estate values in check. 
At the same time, expanded access to credit has supported a building boom to meet vast untapped demand. 
Mexico alone is estimated to have a housing deficit of six million units. 
As the US and Europe lower interest rates to try to revive their economies and calm financial markets, the most significant impact of the sub-prime mortgage crisis for Latin America may turn out to be inflation. 
Ironically, then, the expanded access to mortgage lending that creates new homeowners in Latin America may end up protecting the region from the disaster that too-loose credit created in the US. 

Latin America’s Two Lefts 
A perception has been growing over the last few years – and picking up strength in recent months – that Latin America is swinging back to the left. 
The unimpressive – and sometimes dismal – results of economic reform seem to have generated a backlash that has elected leftist presidents across the continent, starting with Hugo Chávez’s victory in Venezuela at the end of the 1990’s, and continuing with those of Ricardo Lagos in Chile and Nestor Kirchner in Argentina, and more recently that of Luiz Inácio Lula da Silva in Brazil and Tabaré Vázquez in Uruguay. 
More left-wing victories seem to be in store in Mexico, Peru, and Bolivia. 
But while the premises underlying this broad trend are clear, Latin America’s voters are electing not one left, but two. 
To be sure, although 2004 was one of the region’s better years in terms of economic growth, the outcome of two decades of so-called structural reform remains disappointing. 
Inequality has increased, poverty has been reduced only slightly at best, employment remains stubbornly low, corruption, violence, crime, and political gridlock continue unabated, and foreign investment and free-trade agreements with the US have yet to deliver the goods. 
In these circumstances, a strong ideological and policy reaction against the pro-market “Washington Consensus,” with its emphasis on liberalization, deregulation, and privatization, is anything but a surprise. 
At the same time, however, that reaction is much less uniform and clear-cut than many observers believe. 
To begin with, those parties, leaders, and movements that have truly socialist and progressive roots – such as Lagos and his Socialist Party in Chile, Lula and the Workers’ Party in Brazil, and Vázquez in Uruguay – are following pragmatic, sensible and realistic paths. 
Their policies are remarkably similar to those of their predecessors; their respect for democracy is full-fledged and sincere. 
Their old school anti-Americanism has been tempered by years of exile, realism, and resignation. 
Conversely, leftist leaders who arise from a populist, purely nationalist past, with few ideological underpinnings – Chávez with his military background, Kirchner with his Peronist roots, and Mexico City mayor and presidential frontrunner Lopez Obrador, with his origins in the Institutional Revolutionary Party – has proven much less responsive to modernizing influences. 
For them, rhetoric is more important than substance and power is more important than how it is exercised. 
The despair of poor, provincial, and clientelistic constituencies is a tool rather than a problem, and belittling the US by aligning with Fidel Castro trumps promoting their countries’ real interests in the world. 
Secondly, the left in general – whether of socialist or populist origins – has “spoken loudly” and carried a “small stick,” so to speak. 
Actual policies, with the passing exception of Argentina’s negotiation with its international creditors – and the IMF, in particular – are remarkably similar to those of their predecessors. 
Chávez continues to invite foreign oil companies to drill in the Orinoco basin, Lula maintains hefty budget surpluses, Kirchner ultimately accepts IMF conditionality, and Lagos maintains unmatched relations with Chile’s highly conservative private sector. 
Overall, macroeconomic orthodoxy seems to be taking root. 
Indeed, it is only on the margins where Latin America’s left is striving to differ – and partly succeeding. 
The areas where this new and old left can make a difference include improving anti-poverty programs, expanding housing and property rights, effective land reform, developing education, science, and technology, and, perhaps most importantly, strengthening democracy, human rights, and the rule of law in a region where they have been woefully absent for decades. 
To succeed with this bold and necessary agenda, Latin America’s left must purge its dangerous and destructive nationalist and authoritarian strains. 
The new left, if it stays the course on modernization and reform, can be a boon to the region. 

Global Flows and Global Growth 
BERKELEY – A growing share of the world’s economic activity involves cross-border flows. 
But just how interconnected is the global economy? 
How are cross-border flows among activities, sectors, and countries changing? 
How do national economies rank in terms of their cross-border flows or “interconnectedness”? 
And what are the implications for business and policymakers? 
A new report from McKinsey Global Institute addresses these questions by analyzing the inflows and outflows of goods, services, finance, people, and data and communications for 195 countries over the past 20 years. 
Both aggregate data and micro examples confirm that the world has become more tightly linked, with cross-border flows increasing in scope and complexity – and embracing a larger number of countries and participants within them. 
Despite a significant contraction from 2007 to 2009, resulting from the deep global recession, the combined value of financial flows and trade in goods and services was 36% of global GDP in 2012 – 1.5 times higher than in 1980. 
The report also confirms that greater openness to global flows has been a significant source of economic growth for individual countries and worldwide. 
Overall, the research estimates that global flows have contributed 15-25% of global growth each year, with more interconnected countries receiving 40% more of the growth benefits than less interconnected ones. 
This is consistent with economic theory: interconnectedness fosters growth via productivity gains from specialization, scale, competition, and innovation. 
Cross-border flows of goods, including commodities, remain the largest category, growing at 11% per year during the last decade and surpassing their pre-recession peak in 2012. 
Today, more than 35% of goods cross national borders. 
Cross-border flows of services have also recovered to pre-recession levels and have been growing rapidly at 10% per year since 2002. 
Nonetheless, although services account for roughly two-thirds of world GDP, cross-border flows of services are less than one-quarter those of goods. 
Cross-border flows of finance are still 70% off their pre-recession peak, yet even at today’s depressed levels they account for more than one-third of all global financing. 
By contrast, the cross-border flow of people, measured by the percentage of people living outside their country of birth, is small, hovering around 2.7% since 1980. 
But cross-border movements of people for short-term purposes – tourism, work-related travel, and education, for example – have been growing by 3.5-4.8% annually during the last decade. 
And cross-border flows of data and communications have exploded, expanding by more than 50% per year since 2005. 
International telephone minutes have doubled, and cross-border Internet traffic has increased by 1,800%. 
Migration flows may not be gaining as a share of the world’s population, but as a result of digitization, people are more interconnected than ever before. 
Digitization is also transforming cross-border trade flows in three ways: the creation of digital goods and services, such as entertainment and products manufactured by 3D printers; so-called “digital wrappers,” including tracking devices for physical flows; and digital sales platforms, such as eBay and Alibaba. 
On eBay, for example, more than 90% of commercial sellers export products to other countries, compared to less than 25% of traditional small firms. 
Digital technologies are boosting global flows and competition, enabling even the smallest companies – and even individual entrepreneurs – to be “micro-multinationals.” 
Knowledge-intensive flows requiring relatively high levels of human capital and research and development are now larger than labor-intensive, capital-intensive, and resource-intensive flows and are growing faster than all three. 
Flows of low-value, labor-intensive goods like apparel are declining as a share of global flows, while flows of R&D-intensive products, such as pharmaceuticals and business services, are gaining share. 
By 2012, knowledge-intensive flows accounted for nearly half of the combined total value of flows of goods, services, and finance. 
This trend is an advantage for developed countries, which account for two-thirds of knowledge-intensive flows. 
China is the exception, claiming the second-largest share of flows (after the United States). 
Traditional measures of an individual country’s global interconnectedness compare the size of its global flows to its GDP. 
According to these measures, smaller countries with smaller domestic markets appear to be more interconnected than larger ones. 
But this approach is misleading, because it does not consider a country’s share of global flows. 
The McKinsey report’s index of global connectedness remedies this shortcoming by considering both the size of a country’s global flows relative to GDP and its overall share of global flows. 
The MGI Connectedness Index shows Germany, Hong Kong, and the US ranking first, second, and third, respectively. 
But some major economies fall well behind. 
Despite strong exports, South Korea and Japan rank 20th and 21st out of 85 countries, because they lag on immigration and cross-border Internet traffic. 
China, which ranks 25th, has a strong export engine and large capital inflows but ranks low on people and data flows. 
On average, emerging market economies rank lower than advanced economies, but several emerging market economies – including Morocco, India, Brazil, Saudi Arabia, and China – have improved their ranking significantly since the mid-1990’s. 
Today, emerging markets account for about 38% of global flows, triple their share in 1990. 
Yet a “digital divide” between developed and emerging economies persists in both data and communication flows and knowledge-intensive flows – and that gap does not appear to be closing. 
Emerging economies produce 40% of global output, and are home to 80% of the world’s population, yet they account for only 24% of cross-border Internet traffic. 
The economic gains of interconnectedness are significant, but so are the challenges. 
To capitalize on the opportunities of digitization and the shift to knowledge-intensive trade, countries must invest in talent and infrastructure; reduce barriers to cross-border flows of people and information, without jeopardizing their citizens’ privacy and security; and expose their producers to robust foreign competition while ameliorating the resulting costs of disruption for their communities and workers. 
If the gains from globalization are not widely shared, political support for greater openness to global flows will decline – as will the economic benefits that such flows create. 

Law and Order, Russian-Style 
Around the world, people worry that political freedom is disappearing in Vladimir Putin's Russia. 
Indeed, about the only people who are unconcerned about creeping authoritarianism in Russia are the Russians themselves. 
Russians seem to care less about political freedom than they do about social welfare - pensions, domestic violence, children's rights, or police brutality. 
In fact, most Russians are indifferent to the government's efforts to curtail press freedom and limit the right to protest. 
Such apathy makes my task as Russia's ombudsman, an office charged by the State Duma (parliament) with protecting political rights in Russia, difficult, if not impossible. 
The ombudsman acts as a bridge between the authorities and the people, seeking to resolve conflicts that arise between state bodies and citizens. 
My office is open not only to Russian citizens, but to foreigners and stateless people who feel their political rights have been compromised. 
The standards we apply are not only those contained in Russia's constitution, but also international legal principles and human rights norms, even if they sometimes contradict our constitution. 
For example, as ombudsman, I was opposed to curtailing the right of Russians to jury trials. 
Those who wanted to limit the use of juries supposedly feared a risk to state security in some instances. 
My office worked closely with the state to assure that, in most cases, juries are used. 
Similarly, my office defended the liberal weekly newspaper Novoe Vremya (New Times), which was being pressured by Moscow's city government on the pretext of a commercial dispute about a lease. 
That fight is not over, but after my intervention, Moscow's authorities must take into account the public's negative attitude to their effort to quash this publication. 
Of course, Russia provides far more headline-grabbling examples of political and human rights problems, such as the low-grade war in Chechnya or the Yukos affair. 
My office pays maximum attention to Chechnya, although this is not easy to do from Moscow. 
Indeed, I could spend all my time in Chechnya, but Russia has 89 regions with countless human rights issues to address. 
This is why I suggested to Putin that Chechnya have its own regional rights ombudsman who would spend all his time there. 
The new Chechen authorities seem to welcome this prospect. 
As to the Yukos affair, my office cannot intervene in any legal process until it is completed. 
Former Yukos CEO Mikhail Khodorkovsky's lawyers have sent a complaint to the European Court for Human Rights in Strasbourg. 
If Khodorkovsky disagrees with the final decision of the Russian courts, he will undoubtedly appeal to that court. 
Only then will I be able to express an opinion. 
Many observers nonetheless insist that those under criminal investigation should be released on bail instead of being kept in prison. 
Others say that this is not an option in Khodorkovsky's case - being very rich, he could easily jump bail and flee abroad. 
In fact, this is precisely what happened with other figures accused in the Yukos case. 
All of these serious human rights questions expose the fact that Russia's legal institutions remains half-formed. 
For example, the Duma has taken far too long to enact a law on lobbying, which in most developed democracies clearly defines what constitutes acceptable and unacceptable behavior. 
Khodorkovsky might not be in as much trouble if such precise laws existed. 
Unformed laws are directly related to unformed ideas. 
Human rights in Russia are often violated simply because people are not aware that they have some particular right. 
The most important strategic goal of my office is that people learn how to defend their rights better, and to make the authorities take the complaints of ordinary Russians into consideration. 
Sadly, most bureaucrats still look upon human rights values with disdain. 
But the real problem for my office is neither ignorance nor legal infirmity, it is that in an under-developed legal system such as Russia's, my authority is mostly personal, and requires help from the mass media. 
Because concepts of human rights remain rudimentary, the best that can be hoped for is that awareness will slowly begin to take hold. 
My tactical goal is thus to raise the public profile of the ombudsman's office, in order to win more respect and recognition by both citizens and the state. 
This will be all but impossible without cooperation with non-governmental human rights organizations in Russia. 
Indeed, I view one of my tasks as being to facilitate contacts between these groups and the authorities. 
The government's response to these efforts will be an important indicator of whether and to what extent Putin's administration intends to include human and political rights within its so-called "dictatorship of law." 

Le Défi Chinois 
NEW YORK – So far, discussions about whether or not China should revalue its currency, the renminbi, have focused almost exclusively on the impact of the currency’s exchange rate on China’s trade balance. 
But what would an appreciation of the renminbi do to China’s inward and outward foreign direct investment (FDI)? 
In evaluating China’s currency policy, the effects of any change on the trade balance are no more important than the potential consequences for inward FDI, which plays such a crucial role in China’s economic development, and China’s outward FDI, which is receiving increased attention worldwide. 
China has been the developing world’s largest recipient of FDI since the mid-1990s. 
Revaluation of the renminbi would make it more expensive for foreign firms to establish themselves (or expand) in China – the world’s most dynamic market – and would render exports of foreign affiliates, which account for 54% of total exports, less competitive internationally. 
On the other hand, the increased cost would be offset to some extent by lower-cost imported inputs, and foreign affiliates could expect to repatriate higher profits from sales in China in terms of their own currencies. 
But the most notable development of recent years has been the surge in China’s outward FDI since the government adopted its “go global” policy in 2000, encouraging Chinese firms to invest overseas. 
China’s outward FDI more than doubled in 2005-2007, from $12 billion to $27 billion, and then more than doubled again in 2008, to $56 billion. 
Outflows continued to rise to $57 billion in 2009, a time when global FDI flows had collapsed by 50%, making China the world’s fifth largest outward investor. 
The increasing international competitiveness of Chinese firms, together with government policy, has been the main driver of China’s skyrocketing outward FDI. 
The 20% revaluation of the renminbi against the US dollar in 2005-2008 undoubtedly facilitated this in the case of recipient countries whose currencies did not also appreciate against the dollar. 
China’s outward FDI is poised to increase sharply again in 2010, judging by the first half of the year, when it was rising at an annual rate of 44%. 
Revaluation would accelerate this trend. 
This is precisely what happened in Japan after the yen was revalued by over 50% against the dollar between 1985 and 1987, following the Plaza Accord. 
Japan’s outward FDI rocketed from $7 billion in 1984 to $20 billion in 1986, peaking at $48 billion in 1990. 
A renewed renminbi appreciation would boost China’s outward FDI growth even further by lowering the cost of overseas assets for Chinese firms, which operate in a fairly competitive market and have strong cash reserves from both retained earnings and large-scale state credit allocations. 
Like competitors elsewhere, they need to invest abroad to acquire a portfolio of local assets that give then better access to the markets, skills, technology, and natural resources that they need to protect and strengthen their international competitiveness. 
The revaluation effect would be reinforced by rising wage pressures inside China, which are already leading some labor-intensive Chinese firms to invest abroad (there are more than 700 Chinese affiliates in Vietnam alone). 
Some of these firms have been weighing whether to move production abroad or to inland provinces of China; revaluation could push them in the former direction. 
Because most of China’s outward FDI is from state-owned enterprises (SOEs), suspicions of non-commercial motivations are widespread. 
But there is no systematic evidence that China’s SOEs are driven by more than normal commercial considerations. 
At the same time, various private or semi-private entities have been investing abroad. 
As their operations are less visible, it is likely that their outward FDI, and therefore China’s total, is understated. 
Fears of Chinese overseas investment, as of Japanese and South Korean investment in the 1980s and 1990s – and, before that, of the great post-war U.S. multinationals, which the French writer Jean-Jacques Servan-Schreiber dubbed “le défi américain” in the 1960s – are misplaced. 
These investments were eventually accepted as making a contribution to their host countries. 
Similarly, the surge in China’s outward FDI is good for China and for host countries. 
Chinese FDI, like all FDI, can provide host countries with a bundle of tangible and intangible assets needed for economic growth and development. 
While a significant part of China’s outward FDI initially takes the form of trade-supporting FDI, it can be expected to lead relatively quickly to some production being shifted out of China, including to the US and Europe, thereby possibly reducing exports from China. 
Moreover, FDI, like trade, is a key means to integrate China into the world economy and make it a responsible stakeholder. 
Like their Japanese and South Korean counterparts, however, Chinese firms will have to learn how to operate in highly sophisticated developed-country markets, as well as in developing countries, where their investments in natural resources are expanding rapidly. 
They will also have to learn from the past mistakes of other multinationals. 
In particular, they need to establish a strong reputation as good corporate citizens, in addition to making a positive economic contribution to their host countries. 
The Chinese government can play a crucial role by adopting a code of conduct for all Chinese enterprises investing abroad, in line with internationally accepted norms and taking into account the increasing importance of sustainable FDI. 

Le défi Chinois6e3bd40146f86f4031f85308 
Thirty-five years ago Jean_Jacques Servan_Schreiber's "Le Défi Americain" (The American Challenge) claimed that Europe was in danger of becoming a branch office for American multinationals. 
A decade later, Japan's rising commercial challenge seemed paramount. 
Now China makes people nervous. 
But today's responses to China's economic challenge may be as misbegotten as yesterday's answers to le défi Americain . 
China in 2002 resembles nothing so much as Japan in the 1960s, when it was preparing to become a global competitor, with echoes of Dickensian England and America's "robber baron" era of the late 1800s, when the US first rose to global economic power. 
What is unprecedented is that something similar should occur in a Communist nation, or in one with such a massive population. 
The new China is symbolized by an electronics components factory in Shenzhen in the Pearl River (Zhu Jiang) Delta. 
When I visited it, the factory had 10,000 workers, each earning about $80 per month. 
All were young women. 
None wore eyeglasses. 
"Don't you have employees with bad eyesight?" I asked. 
The manager replied, "We fire them when their eyes go bad. 
They can find another job--that's not my problem." 
Indeed, those laid off generally do not return to peasant life, but become urban entrepreneurs in the service industries of China's new cities. 
China owes its growing dynamism partly to the central authorities' shrewd pursuit of well-timed and complementary development strategies. 
Less noticed than the 15-year process of gaining admission to the World Trade Organization has been the stabilization of the currency, the renminbi (RMB), pegged to the Hong Kong dollar since 1997, when the territory reverted to Chinese rule. 
By prohibiting exchange of RMB abroad, the central authorities prevented the currency fluctuations that in recent years wreaked havoc in other developing nations. 
But the real key to China's success is not found in Beijing, but at lower levels of government. 
In most regions, officials welcome foreign businesses--offering tax-free zones and other benefits--and unfettered competition as a means of strengthening their industries. 
More than 100,000 component manufacturers, mostly from Japan or Taiwan, have relocated to China's Pearl River and Yangtze River Delta regions, which always had cheap labor but now also have modern highways, port facilities, and communications links. 
Nearly $45 billion in foreign direct investment entered China in 2000, compared with about $10 billion for Japan and even less for Asia's tigers. 
Much of that money went directly into raising industrial productivity. 
A typical Chinese factory once consisted of rows of women at workbenches. 
Today factories are as modern, sophisticated, and automated as their Japanese counterparts, and their managers are mastering the skills needed to compete globally faster than in any other nation I have studied. 
China's regions learned to specialize by competing fiercely for foreign investors. 
Each has its cluster of component suppliers and professional service providers, with an infrastructure of transportation lines, communications networks, and research laboratories to support them. 
They are also developing links to the outside world independent of China's central government. 
Because China's domestic market is so huge, many companies have not yet turned their attention overseas. 
But they are poised to become the most capable and competitive original equipment manufacturers--producers of goods sold under other brand names-- that the world has ever seen. 
Malaysia and Thailand spent ten years building the expertise, production base, and infrastructure for precision metalworks that could sell components to Swiss watch manufacturers. 
Chinese firms took over that business in only a year. 
The same is happening with electronics and machinery. 
China is now doing to Asia what Japan did to the West 20 years ago. 
Suddenly, it is extremely difficult for a non-Chinese company to compete in any worldwide market with a strategy of low-cost, low-price commodities, even if those commodities are precision electronics components. 
Few commodities are out of reach for Chinese industry, because, unlike any other nation, it can simultaneously mobilize low-cost labor and high-tech automation. 
Singapore and Taiwan weathered Asia's 1997 financial crisis relatively unscathed, but their manufacturers are suffering now. 
Much of Taiwan's manufacturing sector has migrated across the Taiwan Strait--despite restrictions on direct contacts with the mainland--and Singapore is becoming a kind of Asian Switzerland, betting its prosperity on investments in China. 
Indonesia, the Philippines, and Thailand, which lack Singapore's resources, are likely to suffer deprivation, fragmentation, and unrest, to say nothing of countries such as Laos, Cambodia, and Myanmar. 
What does this Chinese juggernaut mean for Japan, Europe, the US, and other wealthy regions? 
For consumers, it is an unalloyed boon. 
Chinese industries will cut costs, raise quality, and propel innovation for most consumer and industrial products--not just because of their own efforts, but because global companies vying for position in China are putting their own best practices to use there. 
This will lead to a frenetic new wave of competition, but not between China, America, and Japan as monolithic entities. 
In each industry and region, companies will race to internalize China's new methods in order to beat their local and immediate competitors--just as US management methods have been internalized by companies around the world, including within China. 
Meanwhile, China's growth will pose a greater challenge to the global status quo, both diplomatically and economically, than, say, Islamic extremism. 
Politicians and businesspeople will complain. 
But consumers will have never had it so good, and they will demand the goods that China can provide better than any other nation. 
When we meet the enemy, we will discover that it is us. 

Who Is Marine Le Pen? 
PARIS – I vividly remember French presidential candidate Marine Le Pen’s first appearance on television. 
It was just before the 2002 presidential campaign, and I had to moderate a debate on French public television. 
For political balance, we needed a representative of the far-right National Front (FN), then led by Le Pen’s father, Jean-Marie Le Pen. 
Bruno Gollnisch, the manager of Jean-Marie’s campaign and his heir apparent, turned us down, offering to send Marine instead. 
It was obviously a trick played not just on a media viewed as hostile, but also on Le Pen herself – a rival whom Gollnisch resented for having been, in his view, unduly promoted by her father in the FN apparatus. 
Le Pen was a largely unknown 33-year-old lawyer with little practice, though she had an obvious instinct for the punch line. 
In the end, Gollnisch’s plan may have backfired: a few days after Le Pen’s appearance, the headline in a weekly magazine read, “What is new with the FN? 
Marine!” 
On April 21, 2002 – a date that still resonates in French political memory – the 73-year-old Jean-Marie received 17% of the vote in the first round of the presidential election, thus knocking the former socialist prime minister, Lionel Jospin, out of the second-round runoff. 
But citizens of all persuasions then rallied against Le Pen in a so-called “Republican front,” giving the conservative candidate Jacque Chirac a massive 82% of the vote. 
Fifteen years later, Marine Le Pen has outshone her father, convincing 21.3% of French voters to choose her to succeed François Hollande at the Elysée Palace. 
But, to win the second round, she will need to defeat Emmanuel Macron, the 39-year-old centrist who finished ahead of her in the first round, with 24% of the vote. 
That will be no easier for her than it was for her father. 
With both the Republican François Fillon and the Socialist Benoît Hamon quickly endorsing Macron after the first round – Hamon called Le Pen an “enemy of the Republic” – another “Republican front,” albeit a much smaller one, could well be emerging. 
But Le Pen is tough, and a great believer in her own destiny. 
Already, her efforts to revamp the FN’s image have transformed it from a fringe movement into a major political force. 
Although she abandoned a push to rebrand the FN “Bleu Marine,” owing to the original brand’s enduring appeal to its older voters, that approach reflects the personality cult that she has fostered, characterized by the suppression of dissent and even of her own niece, Marion Maréchal Le Pen, a rising political star. 
Le Pen’s success reflects a kind of ideological laundering, which she has conducted with her closest adviser, Florian Philippot, a polished, media-savvy “énarque,” who swears he decided to join Le Pen for her talent, not her ideology. 
Indeed, the pair has coated the FN with several layers of fresh paint – all blue, white, and red, of course. 
Early on, Le Pen would campaign like her father: using her heavy frame and heavy frown to intimidate opponents, forcing her smoker’s voice to make her point, never playing the “woman card.” 
But she eventually found out she could play another part. 
Thinner, better dressed, and more soft-spoken, she developed a kind of charisma that enabled her to appeal to a wider variety of supporters, from unemployed young people to the disenchanted middle class, from policemen wary of losing control to second- or third-generation immigrants who wanted to close France’s doors to foreigners. 
The process of “de-demonizing” the FN required Le Pen to drop not just the putrid rhetoric bequeathed by her father, but also her father himself. 
In the summer of 2015, Marine expelled Jean-Marie from the party he founded in 1972. 
The old man sued her in court, only to surrender a few months later. 
Of course, even as Le Pen has dropped the anti-Semitic blurbs, vocal nostalgia for Vichy France, proud reminiscences of the Algerian war, and even her own father, she has continued to fuel the populist bonfire. 
She has railed against immigration, Islam, globalization, multiculturalism, NATO, the elites, the “system,” the markets, the media, and, above all, the European Union – the monster supposedly responsible for all of France’s ills. 
Never mind that all 23 FN members of the European Parliament are paid with EU money, or that Le Pen herself is under a judicial investigation for misappropriating her MEPs’ subsidies. 
For many French, status anxiety, economic anger, and fear of terrorism are far more salient. 
Le Pen has also worked hard to build up her international status. 
In January, she waited in vain in New York, hoping to be embraced by Donald Trump – a man who, she said, had copied some of her own political formula to win the US presidency. 
In Moscow, she met with Russian President Vladimir Putin – not to ask for money, party officials were quick to point out, but to discuss the state of the world. 
Leading in opinion polls week after week, Le Pen and her new FN seemed to have things figured out. 
But, two weeks ago, the varnish began to crack. 
Her meetings became more electric, her discourse more brutal. 
Channeling her Holocaust-denying father, she claimed that France was not responsible for deporting Jews to Nazi concentration camps. 
Was it a Freudian slip, campaign fatigue, or a deliberate attempt to reassure old FN troopers that the chief had not gone astray? 
Whatever the case, some 7.6 million voters have now acknowledged Le Pen as the right person to lead France (a total probably boosted by a terrorist attack on the Champs Elysées three days before the vote). 
And while her combination of rebranding and rabble-rousing probably will not be enough to win her the presidency, she has already succeeded in transforming the face and the psyche of France for a long time to come. 

Leaders and Managers 
CAMBRIDGE – For the first time in decades, a United States senator will become the next American president as all three of the remaining candidates – Hillary Clinton, Barack Obama, and John McCain – are members of the Senate. 
While legislators have many leadership skills, their management ability is usually unproven. 
Senators manage a roughly 100-member staff, and a campaign staff of several hundreds. 
But can they manage an executive branch employing millions? 
Contemporary management theory tends to distinguish between leadership and management, and places greater emphasis on leaders. 
Managers are described as those who merely embrace processes and seek stability, while leaders tolerate risk and create change. 
Organizations need both, but leaders are more important. 
As one expert puts it, a guiding coalition with good managers but poor leaders will not succeed. 
Good leaders construct teams that combine these functions, making sure to hire subordinates who can compensate for the leader’s managerial deficiencies. 
More recently, there has been renewed interest in leaders as managers. 
After all, vision without implementation is ineffective. 
Leaders need enough managerial skill to assure that systems are in place to provide the information required for good decisions as well as effective implementation. 
An effective leader manages and shapes the context of decisions by creating and maintaining well-designed systems. 
Organizational skill is the ability to manage the structures, information flows, and reward systems of an institution or group. 
Leaders directly manage those who report to them, and they manage indirectly by establishing and maintaining systems for their institutions. 
This includes the encouragement of leadership at lower levels in their organizations. 
Good leaders must manage their inner circle of advisers to ensure an accurate flow of information and influence. 
They must avoid the “emperor’s trap” of hearing only about the beauty of their new clothes. 
Ironically, George W. Bush, the first president with an MBA, was weaker on this dimension than his father, who knew how to manage an able group of advisers. 
Stephen Hadley, Bush’s second National Security Adviser is quoted as saying about Bush’s first term, “I give us a ‘B-’ for policy development and a ‘D-’ for policy execution.” 
Experts argue that well designed systems are like stage directions in a play. 
They encourage actors to make correct entrances and exits without being told. 
But stage directions are not enough. 
People always try to bend systems to their own purposes, and good leaders play a critical role in maintaining their systems’ integrity. 
If top leaders do not monitor their systems to ensure that they are producing full and accurate information flows, the systems are likely to become distorted by the most powerful subordinates. 
For example, President George H. W. Bush’s National Security Adviser, Brent Scowcroft, made sure that powerful cabinet secretaries had full access to the president. 
Under Bush the younger, many of the same strong personalities were involved, but the formal National Security Council system became distorted, producing a truncated flow of information. 
Secretary of State Colin Powell’s chief of staff described the situation as furtive and camouflaged by the inefficiency of the formal decision-making process. 
Or, in the words of Army General Wayne Downing, who worked in the White House, “over the years, the interagency system has become so lethargic and dysfunctional that it inhibits the ability to apply the vast power of the US government on problems. 
You see this inability to synchronize in our operations in Iraq and in Afghanistan, across our foreign policy, and in our response to Katrina.” 
The organizational skills required for leaders as managers should not be confused with the efficiency or tidiness of a well-run organization. 
Nor should it be restricted to hierarchical bureaucratic organizations. 
Leaders of social movements also need to manage the inward and outward flows of information. 
In this broad sense, organization and management refer to leaders’ ability to ensure an accurate inflow and outflow of information for making and implementing decisions. 
Effectiveness is more important than efficiency. 
Franklin Roosevelt, for instance, ran an inefficient organization with overlapping jurisdictions and responsibilities. 
It was costly in many ways, but it assured him of multiple, competing flows of information. 
Roosevelt never thought that staffs had a monopoly on judgment or information, and has been described as seeking advice from anybody he could: cabinet members, congressmen, newspaper columnists, interest groups, citizens, and friends. 
Dwight Eisenhower ran an efficiently organized presidency that some at the time believed lacked leadership, but historians later discovered his hidden hand behind most important decisions. 
Ronald Reagan practiced extreme delegation, which worked when he had an able team in place, but turned into a disaster when Donald Regan, John Poindexter, and Oliver North took over. 
While Reagan excelled in vision, communication, and emotional intelligence, he lacked the skills of leadership as management. 
Successful leaders combine these skills so that unfiltered bad news can reach them and be acted upon promptly. 
Looking at the three senators running for president, John McCain has military experience, but as an aviator rather than a commander. 
Hillary Clinton has experience living close to decision-making in the White House, but not as the decision-maker. 
Barack Obama has experience living overseas and working as a community organizer in Chicago, but not in the executive branch. 
As elected legislators, all have demonstrated the “soft power” skills of attracting others to vote for them, but as for whether they will also be manager-leaders, the jury is still out. 

Restoring Trust in Leadership 
DAVOS – As is often the case, informal conversations at the World Economic Forum’s just-completed annual meeting in Davos, Switzerland, inevitably alluded to the Edelman Trust Barometer, an annual poll of public confidence in business, media, government, and nongovernmental organizations. 
After all, Davos participants are leaders in these fields, and the results of the most recent poll are chastening. 
In 2017, 71% of respondents globally considered government officials not credible or only somewhat credible, and 63% of respondents had the same dismal view of CEOs. 
This should not come as a surprise. 
Across dozens of countries, people have been airing their grievances against the status quo through social media, protests, consumer choice, and the ballot box. 
Societies and economies pay a high price when citizens do not have faith in public- and private-sector leaders. 
Distrust leads to political polarization, widespread anxiety about the future, and uncertainty in domestic affairs and international relations. 
And these symptoms then reinforce the loss of trust, creating a vicious circle. 
Clearly, citizens should be able to expect more from their leaders. 
To that end, as the deans of the Harvard Kennedy School and the Harvard Business School, respectively, we strive to impart the values of effective leadership to our students. 
We teach them that leadership is not about opportunism or winning at any cost. 
It is about advancing the common good and making a difference in the world. 
The most effective business leaders care about more than quarterly profits or beating the competition, just as the most effective government leaders care about more than winning the next election or grabbing headlines. 
In any domain, an effective leader looks out for everyone he or she serves, and adheres to a set of core values. 
If people in positions of power aspire to this vision of principled leadership – at work and in their own lives – trust in businesses, governments, and civic institutions can be restored around the world. 
But they will also need to consider the root causes of the problem. 
First and foremost, people simply do not trust their leaders always to speak honestly. 
To change that, the effective leader must show that he or she values truth and evidence above all else. 
By valuing truth, one forces oneself to make decisions based on sound reasons rather than self-interest. 
When tempted by self-interest, aspiring leaders should emulate figures known for their honesty and truth-telling, such as Warren Buffett or Winston Churchill. 
Beyond honesty, effective leadership also requires respect for individuals, regardless of their demographic background or past experiences. 
People understandably become disillusioned when their government or the business community doesn’t seem to value them, especially when such treatments stems from their gender, race, religion, sexual identity, or national origin. 
To prevent that from happening, public- and private-sector leaders should focus on building diverse and inclusive organizations, as Tim Cook has done since becoming the CEO of Apple. 
Moreover, respecting people means listening to their viewpoints and not talking past them, even when you disagree. 
Thus, an effective leader is one who promotes free speech, engages in civil discourse, and remains open to compromise. 
Even when a decision doesn’t go someone’s way, that person will want – and deserves – to be heard. 
The challenge for leaders, then, is to find ways to work with people who hold different opinions without abandoning their own core principles. 
One model for this style of leadership is Robert Zimmer, the president of the University of Chicago, who advocates for free and open speech even when the ideas being espoused are unpopular or distasteful. 
As Zimmer wrote in the University of Chicago Magazine in 2016, “Universities cannot be viewed as a sanctuary for comfort but rather as a crucible for confronting ideas.” 
Lastly, effective leadership means delivering excellent and responsive service to one’s customers or constituents, as Michael Bloomberg did as the mayor of New York. 
When people do not feel that their leaders are working in their interest or addressing genuine needs, they lose confidence. 
To restore it, government officials must build and defend robust civic institutions and political processes that serve the public interest; and businesses must ensure that they are working effectively for all of their stakeholders. 
Accordingly, public- and private-sector leaders should look for ways to help those who feel frustrated and left behind economically or socially. 
One good model is Year Up, a fast-growing nonprofit organization founded by Harvard Business School graduate Gerald Chertavian in 2000. 
Year Up helps disadvantaged urban youth acquire the skills they will need for higher education and professional careers. 
Another good model is Girls Who Code, which Harvard Kennedy School graduate Reshma Saujani founded in 2012 to address the tech sector’s gender gap. 
The success of these programs shows that when leaders focus on creating opportunities for people who have not been treated fairly, they can build more cohesive societies and equip more people to contribute productively to the economy. 
Looking ahead, governments, businesses, and civil-society organizations must put values-driven leadership at the heart of their missions. 

Learning Economic Dynamism 
Why are some of the world's most advanced economies--France, Germany, Italy, and Japan--suffering stagnant growth and high unemployment? 
More fundamentally, why do these countries seemingly fail to exercise the kind of economic leadership and innovation that their histories lead us to expect, especially in the innovative high technology sectors that most define our future? 
Weak economic performance in these countries is even more puzzling in view of the sharp drop in their birthrates decades ago. 
Their population pyramids are now skewed towards middle-aged people who are in their most productive years and relatively free from the burden of raising children. 
Their per capita living standards should thus be substantially higher than in the US, where swarms of kids must be attended to and where new investments must be made just to keep the capital stock growing in step with a swelling population. 
Of course, what is advantageous today may be problematic tomorrow: Europe and Japan will face severe problems when their demographic pyramids tilt towards the elderly, eliminating the temporary demographic advantage they have relative to the US today. 
But this isn't what ails their economies now . 
Edmund Phelps of Columbia University says that these slow-growing countries lack "dynamism," which he defines as a combination of entrepreneurial spirit and the financial institutions to channel it. 
Both spirit and the necessary financial institutions must be present to enable "creative destruction" - the force Joseph Schumpeter argued sixty years was the engine of capitalist prosperity - to be unleashed. 
But is this an accurate description of slow-growing countries? 
It is often said that continental Europe and Japan lack the strong risk-taking tradition that exists in America or the UK. 
But it is actually difficult to see much of a difference in fundamental human values or preferences between these countries and the US. 
A decade ago, Maxim Boycko of Russia, Vladimir Korobov of Ukraine, and I conducted a study of economic attitudes towards capitalism, comparing the US, Russia, Ukraine, Japan, East Germany, and West Germany. 
While some variation in attitudes towards markets and enterprise did exist, the biggest differences were situational, rather than attitudinal: people in some countries had lower expectations of success and thought that government regulations would stymie their activities. 
This--the effects of government policies on incentives--rather than basic cultural differences or weak financial institutions, is at the root of the sluggish growth seen in some advanced economies. 
Indeed, financial institutions, at least in some of the countries surveyed, are now among the most advanced in the world. 
The irrational exuberance of the late 1990's led to some setbacks in the development of new financial institutions. 
But only recently many slow growing countries were eager to develop venture capital markets and foster stock exchanges--France's Nouveau Marche, Germany's Neuer Markt, Italy's Nuovo Mercato, and Mothers in Japan--devoted to risky investments. 
These new stock exchanges, modeled on America's NASDAQ, ended up listing a lot of flimsy companies, and the collapse of share prices since 2000 caught them in the downdraft. 
The Neuer Markt no longer exists; the others are weak, if not moribund. 
But setbacks in the process of improving risk-taking are to be expected; it is important not to overreact to mistakes. 
Surely, the inadequacy of financial institutions is not what really retards the growth of these countries. 
So, what is the problem? 
A number of books have appeared in Europe this fall about the causes of Europe's weak economies. 
Of these, Hans-Werner Sinn's Ist Deutschland noch zu retten? (Can Germany Still Be Saved?) stands out for its cogent argument. 
Sinn argues that German sluggishness is largely the result of government-induced bad incentives--a problem that goes far beyond Germany's notoriously rigid labor market--and that, so far, Schröder's reforms do not go far enough to eliminate them. 
Sinn shows that the combined effects of the German tax and social welfare system virtually guarantee that no breadwinner in a family with two children can end up with less than €1,500 a month, even without working at all. 
This rate is well above, for example, the wage of unskilled labor in the iron and steel industry. 
In effect, Germany is telling its unskilled not to bother working. 
The effects of the social welfare system are especially striking in Eastern Germany, where benefits are at Western German levels, despite lagging far behind in economic development. 
Sinn estimates that an East German family on welfare can collect four times the average income of a family in Poland and six times the income of a family in Hungary. 
With such a hurdle to hiring workers, no wonder industry is reluctant to locate in the East and the region is supported by subsidies equal to 45% of its gross product. 
Because of these destructive incentives, Eastern Germany, Sinn argues, will remain a region of chronic unemployment, much like Italy's Mezzogiorno, which has been a drain on Italian finances for decades. 
Moreover, the draft European constitution will prohibit discrimination in social-welfare benefits against immigrants from other EU countries. 
If this provision is adopted, Sinn concludes, there will soon be "twenty Mezzogiornos in Europe." 
Sinn's proposals--adjustments in tax rates and welfare benefits--are technical and would have no immediate or dramatic effect on people's behavior. 
In the longer run, a system of good incentives must be created to change people's expectations of economic success and increase their opportunities to "learn by doing." 
Young people will better understand from their own experiences that taking responsibility for their economic lives pays off, that submitting to hard work and short-run risks is often wise and rewarding. 
Wherever this spirit takes root, financial sectors--and dynamic growth--will follow. 

Learning from America 
As the United States prepares to celebrate the inauguration of its first African-American president, it showcases again one of the best aspects of its national identity. 
Though it took more than 200 years to reach this point, foreign observers, especially in Europe, marvel at Barack Obama’s ascendancy. 
They recognize from their own relative marginalization of people of color or of immigrants that no French, German, Italian, or British Obama is on the horizon, and they wonder: how does America do it? 
America certainly has its flaws and its struggles over race and national identity, but it also has much to be proud of in terms of how it assimilates those with foreign or minority backgrounds. 
Obama’s example – and that of his newly formed cabinet, which includes many accomplished leaders from ethnic or racial “out-groups” – holds useful lessons for other nations, particularly in Western Europe. 
So what is it that America is doing right? 
First, America’s national story is different in essence from those of Western European nations. 
The French story is that of French-ness, the British story one of British-ness; by definition, newcomers are “less than” or “outside of” this narrative. 
But the American national drama is the drama of immigration: everyone, except Native Americans, came from somewhere else. 
All who are now part of the national elite have ancestors who came, often bedraggled and harassed, from somewhere else. 
Indeed, in America the qualities that lead people to become immigrants – initiative, ambition, risk-taking – are lionized. 
Immigrants are seen as arriving on a journey of continual reinvention, driven to exceed their opportunities in their countries of origin. 
By contrast, immigrants in Western Europe were invited to fill low-status jobs, creating a built-in incentive for natives to see them and their children as a servant class, incapable of entering, let alone leading, the larger society. 
Moreover, unlike America, Western Europe must live with the uneasy conscience stirred by immigrants whose very presence serves as a reminder of a history of colonialism. 
In this sense, the relationship between native-born and new Americans starts out “cleaner.” 
Second, Americans don’t demand that immigrants regard their cultural or ethnic background as being in contrast to or in opposition to their American-ness. 
Everyone gets to be hyphenated. 
By contrast, when identity is presented as being a stark choice, people often do not choose the identity of the host country that is being so inflexible. 
As a result, Britain, France, and The Netherlands contain deeply entrenched subcultures of alienated, radicalized Muslim youth. 
But, while they and other radical Muslims around the world may hate Americans, it is hard to imagine a more Americanized, suburbanized immigrant subculture than Muslim immigrants in the US. 
Rather then listening to radical clerics, they are busy assimilating, sending their kids to law and medical school, barbequing on weekends, and going to (American) football games – all while still maintaining devout ties to their religion and community. 
That has not changed since the 9/11 terrorist attacks, despite rising hostility toward US Muslims among native-born Americans, based the assumption that they could not assimilate (a charge often directed in the past at Jews in various countries). 
More generally, Americans view immigrants as being welcome to combine their culture of origin with their new American-ness, while immigrants see no conflict between their ethnicity and religion and their embrace of America. 
And, most significantly when it comes to assessing the ease of integration over time, they fully expect their kids to be completely, unhesitantly “American” – a promise that, by and large, is readily fulfilled. 
How different it is in Western Europe. 
Three generations after West Indians began immigrating en masse to the United Kingdom, Caribbean-descended Britons still doubt that their children or grandchildren will ever be seen as fully British. 
Turkish Gastarbeiter are still, two generations later, not seen as fully German. 
And the unrest of the children and grandchildren of Algerian, West African, and Moroccan immigrants in the French banlieues attest to France’s failure to assimilate its immigrant population, despite the Republic’s official egalitarian rhetoric. 
Third, and perhaps most importantly, Americans separate Church and State. 
As long as there is a Church of England, if you are Jewish or Muslim or Sikh, there is a subtle level at which you will simply not feel fully English. 
But because the US Founders – many of them descended from people fleeing official religious persecution – guaranteed that there would never be a state-sanctioned religion, no religious group in America, no matter how small, is made to feel marginalized. 
It is for this reason that Americans are not alarmed by visible symbols of different religions in public settings. 
It is assumed that since religion is a private matter for everyone, personal religious symbols are just that – personal. 
A Muslim girl who wears a headscarf in a public school is simply wearing a headscarf, not provocatively challenging a hegemonic social order. 
Fourth, America is defined in terms of a set of values that everyone can share, not as a lineage, a specific history, and a geographical area. 
Immigrant kids who go to US schools learn that America – ideally – is about freedom, aspiration, and tolerance. 
The history that they learn about their new home illustrates how the US fulfills (or falls short of) those ideals, whereas an immigrant schoolchild in Europe learns less about ideals and more about a monarchical lineage, a set of historical events, and a roster of “great men.” 
If Western Europe took a leaf from the US, it would be more peaceful within its own borders and better able to use the talents and leadership of its Turkish, Algerian, Caribbean, and other immigrants. 
Only then would we see a British, French, Dutch, or German Obama. 

After the Hurricanes 
NEW YORK – Hurricane Harvey has left in its wake upended lives and enormous property damage, estimated by some at $150-180 billion. But the rains that inundated the Texas coast for the better part of a week, and the hurricane that is about to hit South Florida, also raise deep questions about the United States’ economic system and politics. 
It is ironic, of course, that an event so related to climate change would occur in a state that is home to so many climate-change deniers – and where the economy depends so heavily on the fossil fuels that drive global warming. 
Of course, no particular climate event can be directly related to the increase in greenhouse gases in the atmosphere. 
But scientists have long predicted that such increases would boost not only average temperatures, but also weather variability – and especially the occurrence of extreme events such as Hurricane Harvey. 
As the Intergovernmental Panel on Climate Change concluded several years ago, “There is evidence that some extremes have changed as a result of anthropogenic influences, including increases in atmospheric concentrations of greenhouse gases.” 
Astrophysicist Adam Frank succinctly explained: “greater warmth means more moisture in the air which means stronger precipitation.” 
To be sure, Houston and Texas could not have done much by themselves about the increase in greenhouse gases, though they could have taken a more active role in pushing for strong climate policies. 
But local and state authorities could have done a far better job preparing for such events, which hit the area with some frequency. 
In responding to the hurricane – and in funding some of the repair – everyone turns to government, just as they did in the aftermath of the 2008 economic crisis. 
Again, it is ironic that this is now occurring in a part of the country where government and collective action are so frequently rebuked. 
It was no less ironic when the titans of US banking, having preached the neoliberal gospel of downsizing government and eliminating regulations that proscribed some of their most dangerous and anti-social activities, turned to government in their moment of need. 
There is an obvious lesson to be learned from such episodes: markets on their own are incapable of providing the protection that societies need. 
When markets fail, as they often do, collective action becomes imperative. 
And, as with financial crises, there is a need for preventive collective action to mitigate the impact of climate change. 
That means ensuring that buildings and infrastructure are constructed to withstand extreme events, and are not located in areas that are most vulnerable to severe damage. 
It also means protecting environmental systems, particularly wetlands, which can play an important role in absorbing the impact of storms. 
It means eliminating the risk that a natural disaster could lead to the discharge of dangerous chemicals, as happened in Houston. 
And it means having in place adequate response plans, including for evacuation. 
Effective government investments and strong regulations are needed to ensure each of these outcomes, regardless of the prevailing political culture in Texas and elsewhere. 
Without adequate regulations, individuals and firms have no incentive to take adequate precautions, because they know that much of the cost of extreme events will be borne by others. 
Without adequate public planning and regulation, including of the environment, flooding will be worse. 
Without disaster planning and adequate funding, any city can be caught in the dilemma in which Houston found itself: if it does not order an evacuation, many will die; but if it does order an evacuation, people will die in the ensuing chaos, and snarled traffic will prevent people from getting out. 
America and the world are paying a high price for devotion to the extreme anti-government ideology embraced by President Donald Trump and his Republican Party. 
The world is paying, because cumulative US greenhouse-gas emissions are greater than those from any other country; even today, the US is one of the world’s leaders in per capita greenhouse-gas emissions. 
But America is paying a high price as well: other countries, even poor developing countries, like Haiti and Ecuador, seem to have learned (often at great expense and only after some huge calamities) how to manage natural disasters better. 
After the destruction of New Orleans by Hurricane Katrina in 2005, the shutdown of much of New York City by Sandy in 2012, the devastation wrought on Texas by Harvey, and now the prospect of Irma pummeling Florida, the US can and should do better. 
It has the resources and skills to analyze these complex events and their consequences, and to formulate and implement regulations and investment programs that mitigate the adverse effects on lives and property. 
What America doesn’t have is a coherent view of government by those on the right, who, working with special interests that benefit from their extreme policies, continue to speak out of both sides of their mouth. 
Before a crisis, they resist regulations and oppose government investment and planning; afterwards, they demand – and receive – billions of dollars to compensate them for their losses, even those that could easily have been prevented. 
One can only hope that America, and other countries, will not need more natural persuasion before taking to heart the lessons of Hurricane Harvey. 

Learning from Lebanon 
NEW YORK – After watching the collapse of Lebanon’s government last week, it is hard not to think about efforts to build a stable Iraq. 
The two countries have so much in common. 
Both are volatile democracies where any political question can provoke not just intense debate, but also the threat of violence. 
Both countries have relative freedom of speech, at least relative to their Arab neighbors, and a multitude of political parties that are always ready to use it. 
Each faces a greater risk of manipulation by outsiders than other countries in the region. 
Iraq and Lebanon are also the Arab world’s most ethnically and religiously diverse countries. 
Though Lebanon has not conducted a reliable census in decades, its population is thought to be about 30% Sunni Muslim, 30% Shia Muslim, and 30% Christian, with Druze and others accounting for the rest. 
In Iraq, about 60% are Shia, 20% are Sunni Arabs, and 20% are Kurds, who are mostly Sunni. 
In both countries, representatives of each of these groups demand substantial political influence. 
But, as Lebanon turns to Saudi and Syrian mediators to help rebuild a governing coalition, Iraq moves forward with a tenuous unity government of its own. 
At times like these, the two countries’ similarities and differences can point Iraq’s leaders toward a stable democratic future. 
Despite this week’s turmoil in Beirut, Lebanon has an advantage that Iraqis should emulate. 
The personal freedoms that Lebanese citizens enjoy give their country a special resilience, and its cultural dynamism is the envy of young people throughout the Middle East. 
Though some of Iraq’s conservative local clerics wield considerable influence, its current leaders will resist any drive to transform the country into a socially repressive and isolated state. 
If Iraq is to keep the best of its next generation at home, cultural openness will be critically important. 
Second, Lebanon’s leaders were reminded again this week that their country can be governed only with some degree of consensus among the major factions. 
This principle is even more important in Iraq, where the Shia majority faces the constant temptation to punish Sunnis for years of repression under Saddam Hussein. 
In Lebanon, sectarian power-sharing is enshrined in the constitution. 
The president must always be a Maronite Christian, the prime minister a Sunni, and the speaker of parliament a Shia. 
This system, which codifies Lebanon’s factionalism, remains a subject of much controversy, but, by ensuring that no group can govern at the expense of others, it also reinforces baseline stability in a country built atop powerful religious and ethnic fault lines. 
Without opposition support, Lebanon’s government can do little more than manage the most basic day-to-day state functions, but the country is unlikely to relapse into civil war. 
In Iraq, sectarian power-sharing will remain less formal, and compromise won’t come easily to many of the country’s elected leaders. 
Each major faction is represented in government. 
Jalal Talabani, a Kurd, retains control of Iraq’s largely ceremonial presidency. 
Osama Nujaifi, a Sunni, has been elected speaker of Iraq’s parliament. 
But Shia leaders will lose their constituents’ support if they formally surrender any of the powers denied them for decades under Saddam. 
Government stability will remain a delicate balancing act. 
Prime Minister Nouri al-Maliki will have to manage relations with firebrand Shia cleric Moqtada al-Sadr and his followers, who can provoke unrest in southern Iraq if they feel under-served. 
In addition, the Kurds will expect to retain a veto over any proposal that might compromise Kurdish autonomy in the northern provinces. 
Then there are the Sunni Arabs. 
Support for Maliki’s government from Iraqiya, the multi-sectarian political coalition supported by most Sunnis, will remain in question. 
Iraqiya won the largest share of seats in the March 2010 parliamentary elections, yet its leader, former Prime Minister Ayad Allawi, will not return to his old job. 
Instead, he will lead the National Council for Strategic Policy, an institution charged with overseeing domestic security, but whose authority remains unclear. 
Nor is it clear whether Maliki will finally end the de-Baathification process – another major source of tension. 
Many Shia insist that the last vestiges of Saddam’s elite must be purged, but many Sunnis argue that the process is intended to bar them from good jobs and political influence. 
If Sunnis come to believe that Shia and Kurds intend to treat them as second-class citizens, they will have no stake in the success of Maliki’s government and could again begin to pursue their political interests by other means, provoking another surge of sectarian violence. 
Worse still, factional conflict would undermine further development of a post-Saddam Iraqi identity. 
Otherwise, the country’s various interest groups could, like Lebanon’s feuding factions, turn to outsiders to negotiate solutions to their problems. 
There are good reasons for Iraq to avoid Lebanon’s example in this respect. 
Even in the best of times, Lebanon muddles through with a politically dysfunctional government and an army that operates in the shadow of a large Shia-dominated militant organization. 
With the exception of Iran, none of Iraq’s neighbors wants to see that model in Iraq. 
Lebanon’s democracy often looks a lot like a train wreck, and the country has stumbled into armed conflict many times in recent years. 
But if Iraq’s leaders can create enough near-term stability to combine Lebanon’s openness and entrepreneurial energy with the revenue that comes from development of the country’s vast oil reserves – an advantage that Lebanon’s leaders can only envy – Iraq might one day offer citizens of neighboring states something they don’t have: a hopeful model for the future. 

Learning from Mexico 
On July 2, Mexico held a presidential election that triggered what has become a bitter political firefight. 
After conservative candidate Felipe Calderon was declared the winner by less than 1% of the vote, his populist rival, Andres Manuel Lopez Obrador, quickly claimed fraud. 
For the past two months, thousands of Lopez Obrador’s most fervent supporters have transformed the Zocalo, Mexico City’s central square, into a virtual sea of tents – the center of gravity of opposition to the official result. 
On September 1, dozens of opposition lawmakers created a primetime spectacle inside Mexico’s parliament by occupying the speaker’s podium, thereby denying outgoing President Vicente Fox the chance to deliver his final state of the nation address in person. 
Four days later, Mexico highest electoral court ruled that Fox had improperly interfered in the election but unanimously reaffirmed Calderon’s victory. 
Lopez Obrador has vowed to obstruct Calderon’s presidency from the moment he takes office on December 1. 
You learn a lot about a country’s underlying stability by how it responds to a crisis. 
Similar electoral conflicts unfolded in the United States in 2000 and in Ukraine in 2004. 
In the wake of fiercely contested presidential elections, large numbers of voters in each country questioned the legitimacy of the outcome. 
The nation’s highest courts were compelled to rule on demands for a ballot recount. 
But US political and economic stability was never in doubt in 2000, because public confidence in the country’s governing institutions allowed them to resolve the conflict peacefully. 
These institutions proved far more powerful than the political personalities involved. 
In Ukraine, on the other hand, public outrage, buttressed by international pressure, brought the government to a halt. 
In a second vote, the election’s loser was crowned the winner. 
But the initial euphoria that accompanied the so-called “Orange Revolution” quickly faded, and Ukraine is still dealing with the political and economic fallout. 
What, then, should we make of Mexico and its disputed election? 
Here, too, a large segment of the electorate told pollsters that they doubted the legitimacy of the official result. 
The judiciary rejected calls for a full recount, though they did examine roughly 9% of the ballots before ruling that the review indicated no challenge to the election’s outcome. 
Like Ukraine’s Viktor Yushchenko, who lost the initial vote in Ukraine, Lopez Obrador demanded that the result be overturned. 
Unlike Yushchenko, he was denied. 
But the good news for Mexicans is that their country’s political institutions have proven far more stable than did Ukraine’s. 
Despite Lopez Obrador’s best efforts to create chaos in the streets with public demonstrations involving hundreds of thousands of protesters, domestic and international confidence remains strong. 
The peso has barely budged since the election—a clear indication that investors have not lost faith in the country. 
Their resilience is important, because market fears of instability often become a self-fulfilling prophecy. 
The point is not that public confidence (or lack thereof) in an election outcome doesn’t matter. 
It does. 
But the broader picture – whether, as in Mexico, a country is able to continue to go about its business as its political institutions sort out the mess – matters far more. 
Unlike in Ukraine, investors have shrugged off the noisy demonstrations in Mexico City’s streets and remained focused on interest rates and fluctuations in the global economy. 
This suggests that governing principles and sturdy political institutions, not powerful individuals, have become the bedrock of Mexican governance. 
Indeed, while Lopez Obrador continues to denounce the outcome and has threatened to make Mexico ungovernable, Mexico’s growing middle class has taken the political conflict in stride. 
Many who supported Lopez Obrador’s candidacy do not support the post-election protests in his name. 
A recent poll in the newspaper Reforma found that Calderon would now defeat him by 19 percentage points. 
Voters may prefer Lopez Obrador, but they value Mexico’s stability above all. 
Moreover, during the political standoff, Calderon has worked behind the scenes to form an administration and to settle on a governing strategy. 
Aware that he must establish a greater sense of political legitimacy, his cabinet is likely to include representatives of other political parties. 
He will probably introduce measures to tackle poverty and create jobs. 
Calderon’s task will not be easy. 
Lopez Obrador and his supporters can be expected to work relentlessly to thwart his plans. 
But they are unlikely to derail his government. 
The underlying stability highlighted by Mexico’s post-election crisis is also evident elsewhere in Latin America. 
Whatever the potential for a leftward shift this year in some Latin American countries, others, including Mexico, Chile, and Brazil, are clearly less vulnerable to the type of populist rule we’ve seen in Venezuela and Bolivia. 
Elected leaders in these countries face institutional constraints – parliaments that check the powers of the executive and courts that check the powers of both – on their ability to shape policy. 
To be sure, political and market volatility in a broad range of emerging-market economies will continue. 
But some of them appear to have “graduated” toward a stability rooted in sustainable governance. 
Beyond Latin America, several Eastern European countries offer ready examples. 
In these states, regulatory and taxation issues now affect confidence more deeply and consistently than does political tension. 
Many in the media may not comprehend that yet. 
But markets do. 
Though Mexico’s election saga may continue to make headlines, its true significance is that it reveals just how politically sturdy a place Mexico has become. 

Learning from the Cold War 
NEW YORK – Every war is fought three times. 
First comes the political discussion over whether to start or enter it. 
Then comes the question of how to fight it. 
And, finally, there is consideration of what lessons should be learned from it. 
The Cold War, the third major conflict of the twentieth century, is no exception to this rule. 
All three phases can be identified, and all three triggered intense debate. 
There were, for example, those who questioned whether the Cold War was in fact necessary and whether the Soviet Union and Communism constituted a threat. 
Such “revisionists” were a distinct minority, which is a good thing, as there is no reason to believe that the Soviets and Communism were a benign force. 
As a result, the Cold War, a four-decade-long global struggle, became a reality. 
There was also an ongoing debate about how best to wage the Cold War throughout its history. 
The two principal schools of thought were “roll back” and “containment.” 
The former argued that nothing less than overthrowing communism – “regime-change” in today’s parlance – would do. 
The latter approach held that efforts to roll back Communism in the short run were too risky, given the Soviet nuclear arsenal, and that the United States and the West should content themselves with limiting the spread of Soviet power and influence. 
Containment prevailed, but this hardly settled the debate, as there were intense arguments both over where it should be applied (Vietnam, Central America, and the Middle East all come to mind) and how it should be carried out, i.e., the right mix of military force, covert action, diplomacy and arms control, and economic sanctions and assistance. 
And now, exactly 20 years after the Berlin Wall came down, we are well into the third phase – the debate over why the Cold War ended when it did and how it did. 
One school of thought maintains that the Cold War was won as a result of decades of sustained US and Western pressure on the Soviet Union and its allies. This pressure at various times took the form of US, British, and French nuclear programs; 
NATO’s willingness to counter Warsaw Pact deployments of both conventional military and tactical nuclear forces; the decision to defend South Korea against the North’s aggression; the arming of the mujahedeen in Afghanistan to bleed Soviet occupation forces; and the decision to build a costly missile-defense system aimed both at negating the Soviet Union’s principal military investment and bankrupting its government. 
A second and very different school of thought emphasizes less what the West did and more what the Soviet Union was. 
In this narrative, the Cold War was not so much won by the US and the West as lost by the Soviets, the inevitable result of Soviet economic weakness and political decay. 
Yet another perspective stresses that Western willingness to engage the Soviet Union as much as confront it played a major role in how history turned out. 
Détente helped to keep the competition from spilling over into conflict as it exposed the Communist world to Western ideas of freedom and capitalism along with their benefits. 
The Soviet and other top-heavy regimes increasingly found themselves losing the battle of ideas and, as a result, the support of their own citizens. 
All of these factors played a part. 
Western willingness to deny the Soviets success was an essential component of strategy. 
But this alone would not have been enough; indeed, the Cold War could well have turned hot if Western strategy had consisted only of military competition and confrontation. 
It was important to moderate the competition in order to allow pressure for change to build up from within the Soviet bloc. 
And it was important to expose the societies under Soviet control to their shortcomings and to the advantages of outside ideas. 
All of the above has implications for today’s challenges. 
To be sure, there is no global threat on the scale of the former Soviet Union, but there are dangerous challenges emanating from such countries as Iran and North Korea. 
What is required is a policy on the part of the global community that mixes military strength with a willingness to negotiate and interact, a policy of collective strength and collective flexibility. 
It is important here to keep in mind that containment, the dominant doctrine of the Cold War era, sought to push back against Soviet and Communist expansion – not just to limit the reach of Soviet power, but to frustrate it – in order to create a context in which the inherent flaws of communism and authoritarian rule would come to the fore. 
Mikhail Gorbachev could only have done what he did amidst a crisis of confidence. 
Today, the world needs to create similar crises of confidence in the minds of those ruling Iran and North Korea. 
The goal should be to limit what they can accomplish in the short term; to get them to change their policies in the medium term; and to set in motion forces that will bring about new and fundamentally different governments and societies in the long term. 

Learning Globalization From Football 
Football is not only the world’s most popular sport, but also probably its most globalized profession. 
It is inconceivable that Brazilian, Cameroonian, or Japanese doctors, computer scientists, blue-collar workers, or bank tellers could move from one country to another as easily as Brazilian, Cameroonian, or Japanese football players do. 
Indeed, London’s Arsenal football club is composed entirely of foreigners, including a French coach. 
Even the captain roles are no longer reserved for domestic players: Thierry Henry, a Frenchman, is Arsenal’s captain, Andriy Shevchenko, a Ukrainian, is often the captain of AC Milan, and Christiano Zanetti, an Argentine, is captain of Inter Milan. 
Similarly, dozens of South Americans and Africans play in Russian, Turkish, Polish, and various Southeast European leagues. 
Football thus provides a glimpse of how true globalization of labor would work. 
In football, as in other occupations, restrictions on labor mobility came entirely from the demand side. 
No limits were ever imposed on players’ movements, except by Communist countries. 
But the demand side was heavily regulated, owing to a rule that clubs could field no more than two foreign players in any single game. 
The Bosman ruling, named after a Belgian player who successfully challenged the rule’s application to players from other European Union countries, eroded the limit, which collapsed altogether under the onslaught of the richest European clubs’ demand for a free hand in hiring the best players, wherever they might be found. 
So wherever globalization and full commercialization reign supreme, there is an unmistakable concentration of quality and success. 
Consider the number of clubs that have qualified for the European Champions’ League top eight slots. 
If we look at five-year periods between 1967 and 1986, the number of different teams that qualified for the quarterfinals varied between 28 and 30. 
In the next two five-year periods, however, the number fell to 26, and in the most recent period (2000-2004), there were only 21. 
The bottom line is simple: fewer and fewer clubs are making it into the European elite. 
National leagues are similar. 
Since the English Premier League was started in 1992, only one championship was not won by Manchester United, Arsenal, or Chelsea. 
In Italy, all but two Serie A championships since 1991 have been won by either Juventus or AC Milan. 
In Spain, all but three championships since 1985 have been won by either Real Madrid or Barcelona. 
The reason for this concentration at the top is obvious: the richest clubs are now able to attract the best players in the world. 
Yet this has arguably been accompanied by improved quality in the game itself, owing to what economists call “increasing returns to scale.” 
When the best players play together, the quality of each, and of the team as a whole, increases exponentially. 
When Ronaldinho and Messi, or Kaka and Shevchenko, play together, their combined “output” (number of goals) is greater than the sum of goals that each would score if he played in a different club with less talented co-players. 
Free mobility of labor in other areas would probably produce the same effect. 
If doctors, computer specialists, or engineers (let alone the proverbial Polish plumbers!) were allowed to move freely, the concentration of talent in the richest countries would most likely increase. 
Inequality in the distribution of talent across countries would rise, even if total world output of goods and services, and their average quality, improved, as with football today. 
Poorer or smaller countries can hardly dream of winning a European championship, as Steaua (Romania), Red Star (Serbia), or Nottingham Forest (now languishing in the English third division) once did. 
But, while we see inequality and exclusion in club-level football, the opposite is true for competitions between national teams. 
The average winning margin among the top eight World Cup national teams has steadily decreased, from more than two goals in the 1950’s, to about 1.5 goals in the 1960’s, 1970’s and 1980’s, and only 0.88 goals in the 2002 World Cup. 
The same is true of all games played at the final tournament, not only those among the top eight national teams. 
The decrease in winning margins is all the more impressive because the World Cup has grown from 16 to 32 national teams – many of them new and rather inexperienced. 
Remarkably, they are not trounced by the traditional powerhouses. 
On the contrary, the elite eight teams of the last four World Cups have included two “newcomers ” that had never been quarterfinalists, such as Turkey and South Korea in 2002. 
There are again two reasons for this. 
First, free movement has meant that good players from small leagues improve much more than they would had they stayed home. 
A good Danish or Bulgarian player improves much faster if he joins Manchester United or Barcelona. 
Second, that improvement in quality was “captured” by national teams thanks to FIFA’s rule requiring players to play only for their national team. 
Eto’o can play for any Spanish, Italian, or English club, but in the national competitions, he can play only for Cameroon. 
In other words, FIFA has introduced an institutional rule that allows small countries (in the football sense) to capture some of the benefits of today’s higher-quality game, thereby partly reversing the “leg drain.” 
The same rule could be applied to other activities. 
Free movement of skilled labor could be accompanied by binding international requirements that migrants from poor countries spend, say, one year in five working in their countries of origin. 
They would bring home skills, technology, and connections that are as valuable as the skills that Eto’o, Essien, or Messi bring back to Cameroon, Ghana, or Argentina. 
Job placement would remain a problem, but the principle is sound: the world should learn from its most popular sport. 


Learning the Lessons of Iraq 
NEW YORK – The Iraq war has been replaced by the declining economy as the most important issue in America’s presidential election campaign, in part because Americans have come to believe that the tide has turned in Iraq: the troop “surge” has supposedly cowed the insurgents, bringing a decline in violence. 
The implications are clear: a show of power wins the day. 
It is precisely this kind of macho reasoning that led America to war in Iraq in the first place. 
The war was meant to demonstrate the strategic power of military might. 
Instead, the war showed its limitations. 
Moreover, the war undermined America’s real source of power – its moral authority. 
Recent events have reinforced the risks in the Bush administration’s approach. 
It was always clear that the timing of America’s departure from Iraq might not be its choice – unless it wanted to violate international law once again. 
Now, Iraq is demanding that American combat troops leave within twelve months, with all troops out in 2011. 
To be sure, the reduction in violence is welcome, and the surge in troops may have played some role. 
Yet the level of violence, were it taking place anywhere else in the world, would make headlines; only in Iraq have we become so inured to violence that it is a good day if only 25 civilians get killed. 
And the role of the troop surge in reducing violence in Iraq is not clear. 
Other factors were probably far more important, including buying off Sunni insurgents so that they fight with the United States against Al Qaeda. 
But that remains a dangerous strategy. 
The US should be working to create a strong, unified government, rather than strengthening sectarian militias. 
Now the Iraqi government has awakened to the dangers, and has begun arresting some of the leaders whom the American government has been supporting. 
The prospects of a stable future look increasingly dim. 
That is the key point: the surge was supposed to provide space for a political settlement, which would provide the foundations of long-term stability. 
That political settlement has not occurred. 
So, as with the arguments used to justify the war, and the measures of its success, the rationale behind surge, too, keeps shifting. 
Meanwhile, the military and economic opportunity costs of this misadventure become increasingly clear. 
Even if the US had achieved stability in Iraq, this would not have assured victory in the “war on terrorism,” let alone success in achieving broader strategic objectives. 
Things have not been going well in Afghanistan, to say the least, and Pakistan looks ever more unstable. 
Moreover, most analysts agree that at least part of the rationale behind Russia’s invasion of Georgia, reigniting fears of a new Cold War, was its confidence that, with America’s armed forces pre-occupied with two failing wars (and badly depleted because of a policy of not replacing military resources as fast as they are used up), there was little America could do in response. 
Russia’s calculations proved correct. 
Even the largest and richest country in the world has limited resources. 
The Iraq war has been financed entirely on credit; and partly because of that, the US national debt has increased by two-thirds in just eight years. 
But things keep getting worse: the deficit for 2009 alone is expected to be more than a half-trillion dollars, excluding the costs of financial bail-outs and the second stimulus package that almost all economists now say is urgently needed. 
The war, and the way it has been conducted, has reduced America’s room for maneuver, and will almost surely deepen and prolong the economic downturn. 
The belief that the surge was successful is especially dangerous because the Afghanistan war is going so poorly. 
America’s European allies are tiring of the endless battles and mounting casualties. 
Most European leaders are not as practiced in the art of deception as the Bush administration; they have greater difficulty hiding the numbers from their citizens. 
The British, for example, are well aware of the problems that they repeatedly encountered in their imperial era in Afghanistan. 
America will, of course, continue to put pressure on its allies, but democracy has a way of limiting the effectiveness of such pressure. 
Popular opposition to the Iraq war made it impossible for Mexico and Chile to give into American pressure at the United Nations to endorse the invasion; the citizens of these countries were proven right. 
But back in America, the belief that the surge “worked” is now leading many to argue that more troops are needed in Afghanistan. 
True, the war in Iraq distracted America’s attention from Afghanistan. 
But the failures in Iraq are a matter of strategy, not troop strength. 
It is time for America, and Europe, to learn the lessons of Iraq – or, rather, relearn the lessons of virtually every country that tries to occupy another and determine its future. 

Learning to Lead 
CAMBRIDGE – Public-opinion polls show that citizens in many democracies are unhappy with their leaders. 
This is particularly true in Great Britain, where a number of members of Parliament have used their housing allowances to enhance their income, sometimes legally and sometimes not. 
Some analysts predict that only half of Britain’s MPs will be returned in next year’s election. 
But, whatever the failures of particular British legislators, the issues go further than merely allowing voters to “throw the rascals out.” 
There is also a question of how successful leadership is taught and learned in a democracy. 
A successful democracy requires leadership to be widespread throughout government and civil society. 
Citizens who express concern about leadership need to learn not only how to judge it, but how to practice it themselves. 
Many observers say that leadership is an art rather than a science. 
Good leadership is situational. 
In my book The Powers to Lead , I call this skill “contextual intelligence.” 
The ability to mobilize a group effectively is certainly an art rather than a predictive science, and varies with situations, but that does not mean that it cannot be profitably studied and learned. 
Music and painting are based in part on innate skills, but also on training and practice. 
And artists can benefit not merely from studio courses, but also from art appreciation lessons that introduce them to the full repertoires and pallets of past masters. 
Learning leadership occurs in a variety of ways. 
Learning from experience is the most common and most powerful. 
It produces the tacit knowledge that is crucial in a crisis. 
But experience and intuition can be supplemented by analytics, which is the purpose of my book. 
As Mark Twain once observed, a cat that sits on a hot stove will not sit on a hot stove again, but it won’t sit on a cold one, either. 
Consequently, learning to analyze situations and contexts is an important leadership skill. 
The United States Army categorizes leadership learning under three words: “be, know, do.” 
“Be” refers to the shaping of character and values, and it comes partly from training and partly from experience. 
“Know” refers to analysis and skills, which can be trained. 
“Do” refers to action and requires both training and fieldwork. 
Most important, however, is experience and the emphasis on learning from mistakes and a continuous process that results from what the military calls “after-action reviews.” 
Learning can also occur in the classroom, whether through case studies, historical and analytic approaches, or experiential teaching that simulates situations that train students to increase self-awareness, distinguish their roles from their selves, and use their selves as a barometer for understanding a larger group. 
Similarly, students can learn from the results of scientific studies, limited though they may be, and by studying the range of behaviors and contexts that historical episodes can illuminate. 
In practice, of course, few people occupy top positions in groups or organizations. 
Most people “lead from the middle.” 
Effective leadership from the middle often requires attracting and persuading those above, below, and beside you. 
Indeed, leaders in the middle frequently find themselves in a policy vacuum, with few clear directives from the top. 
A passive follower keeps his head down, shuns risk, and avoids criticism. 
An opportunist uses the slack to feather his own nest rather than help the leader or the public. 
Bureaucratic entrepreneurs, on the other hand, take advantage of such opportunities to adjust and promote policies. 
The key moral question is whether, and at what point, their entrepreneurial activity exceed the bounds of policies set from the top. 
Since they lack the legitimate authority of elected or high-level appointed officials, bureaucratic entrepreneurs must remain cognizant of the need to balance initiative with loyalty. 
Leaders should encourage such entrepreneurship among their followers as a means of increasing their effectiveness. 
After all, the key to successful leadership is to surround oneself with good people, empower them by delegating authority, and then claim credit for their accomplishments. 
To make this formula work, however, requires a good deal of soft power. 
Without the soft power that produces attraction and loyalty to the leader’s goals, entrepreneurs run off in all directions and dissipate a group’s energies. 
With soft power, however, the energy of empowered followers strengthens leaders. 
Leadership is broadly distributed throughout healthy democracies, and all citizens need to learn more about what makes good and bad leaders. 
Potential leaders, in turn, can learn more about the sources and limits of the soft-power skills of emotional IQ, vision, and communication, as well as hard-power political and organizational skills. 
They must also better understand the nature of the contextual intelligence they will need to educate their hunches and sustain strategies of smart power. 
Most important, in today’s age of globalization, revolutionary information technology, and broadened participation, citizens in democracies must learn more about the nature and limits of the new demands on leadership. 

Learning to Leave Extremism 
BEIRUT – Report after report from the World Bank, United Nations Development Program, and the Arab League emphasize that the education deficit in the Arab world is among the main causes of its underdevelopment. 
With 5% of the world’s population and the bulk of the world’s oil and gas, the Arab world nonetheless lags behind most of the rest of the world, and suffers from what can best be termed “educational poverty.” 
Without dramatic improvement at all educational levels, unemployment, illiteracy, and income inequality will continue to worsen, and the region will remain a danger to itself and its neighbors. 
Even before the current economic recession, unemployment in the Arab world was estimated at 14% – the world’s highest average outside sub-Saharan Africa. 
Among young people and recent graduates, the figure is more than double. 
The Arab world also has the highest population growth rate in the world, with almost 40% of its population now below the age of 15. 
According to some estimates, the Arab world accounts for one-quarter of the world’s unemployment among the 15-24 age group. 
Just to keep up with the inflow of young people into the labor market, Arab economies will have to generate 100 million new jobs over the next 10 years, which will be impossible if education remains impoverished. 
Enrollment ratios in the Arab world have improved over the past decade, but Arab countries still have one of the lowest average net enrollment ratios in the developing world. 
About one-fifth of eligible children, more than seven million, are not in school, and 60% of these are girls. 
The average years of schooling for Arabs is less than half that for the East Asian countries. 
Not surprisingly, despite progress in recent decades, illiteracy remains at around 30% on average, and in some Arab countries reaches 50% and 60%. 
The quality of Arab education is also an obstacle. 
Today’s job market demands skills based on problem-solving, critical thinking, modern languages, and technology, but Arab educational systems generally remain traditional, rote-based, and authoritarian. 
Research throughout the world shows that education is a key prerequisite for sustainable growth. 
The East Asian tigers invested heavily in education, and it paid off in terms of a capable and modern workforce. 
By contrast, development in the Arab world, driven largely by oil revenues, has left the population under-educated and economically marginalized. 
Education is also important in the Arab context because of its special status in Islam, which, like Judaism and Christianity, is a religion of the book. 
The Gospel of St. John says, “In the Beginning was the Word”; the first word that was revealed to the prophet Muhammad by the Angel Gabriel was “Read…” Among the Prophet’s sayings is, “It is the duty of every Muslim man and woman to seek learning.” 
Moreover, Islam does not have a priesthood, just scholars. 
The Arab golden ages, in eleventh-century Baghdad and fourteenth-century Andalucía, are revered as periods of great learning. 
Schools and universities received large-scale support, and students and scholars traveled from city to city in pursuit of knowledge. 
After these golden ages, education fell into decline. 
By the 1970’s and 1980’s, the Arab world’s post-independence states had made great improvements in their education sector. 
But they did not have the resources to keep up with their own growing populations. 
The dramatic levels of investment of the 1950’s and 1960’s tapered off, with the result that too many children are now either outside the school system or are receiving a low-quality education that leaves them without basic literacy and numeracy skills. 
And there are still too many disparities based on gender, location, wealth, disability, and other markers of marginalization. 
What the West has most, and what the Arab world most needs, is education. 
It requires more schools and fewer guns; more universities and fewer aircraft carriers. 
The American University of Beirut, founded in 1866, has arguably done more to transform the Middle East in positive ways than any other comparable institution, yet it receives only $3 million in annual aid from the United States, which spends billions on armies and weaponry in the region. 
Indeed, the cost of a single month of western military spending in Iraq or Afghanistan would be enough to triple total aid for education in the Middle East. 
The cost of two cruise missiles would build a school, the cost of a Eurofighter a small university. 
Education can also have a fundamental effect on forming values. 
Radical Islamists recognized this long ago and plowed their resources into schools. 
Saudi Arabia recognized it in the 1970’s as it sought to expand its influence, and over the years the Kingdom has funded thousands of schools and colleges that teach its stringent brand of Wahhabi Islam. 
In Afghanistan and Pakistan, the radical vision is conveyed to the young in religious schools known as madrasas. 
Indeed, “Taliban” means “students.” 
The struggle for the future of the Arab and Muslim worlds that is being fought now will be won or lost not on the battlefield, but in the classroom. 

Leaving Baghdad 
The poison of terrorism has now ripped into the humanitarian work of the UN, with the tragic bombing of its Iraq mission's headquarters. 
Dozens of innocent people were killed, including one of the world's most accomplished peacemakers, Sergio Vieira de Mello. 
Predictably, President Bush re-stated his determination to wage war on terrorism. 
Other leaders declared that the UN should not abandon its mission. 
Yet the bombing raises political questions that demand answers. 
Rather than bolstering its military occupation, the US should leave Iraq, allowing the UN to continue its mission. 
In the early 20 th century, empires could suppress restive populations. 
No longer. 
Nationalist and anti-colonialist ideologies, supported by growing literacy and political mobilization, have long since made imperial rule virtually impossible. 
This is especially true in the Middle East, where anti-colonialism mixes with religious fundamentalism. 
It was foolhardy for the US to think it could put troops on the ground in Iraq without an extended period of violence and bloodshed. 
America's leaders believed that the US would be welcomed as liberators. 
The US government and many observers believe that if the US can just get basic services established in Baghdad, and perhaps catch Saddam Hussein, then the situation will quiet down. 
The goal seems to be to install a regime led by friends of the Pentagon, such as Ahmed Chalabi. 
That regime, in turn, is supposed to invite a longer stay by US troops, and to grant concessions to the US oil industry. 
But such a regime will never have legitimacy, and will be subject to assassinations, political upheaval, and terrorist attacks. 
In the end, it will squander human lives--such as the brave and dedicated workers of the UN--not to mention hundreds of billions of dollars. 
Shockingly, the US is now spending around $4 billion per month to station its troops in Iraq, while at the same time President Bush fights like crazy to keep America's contribution to the Global Fund to Fight AIDS, TB, and Malaria to no more than $200 million for an entire year. 
Many American voices are already saying that, whether or not the war in Iraq was a good idea, the US (and the UN) must now stay, to preserve national honor and to show that the US will not be scared away by terrorism. 
These responses to terrorist attacks resonate well with US public opinion. 
Nobody likes to be bullied, and no American wants the US to be frightened or coerced by the brutal and thuggish actions of car bombers. 
Yet the emotional response of digging in deeper simply compounds the political errors of the war itself. 
The US is not in a position to pacify Baghdad or to protect the UN or others that work alongside an occupying army, even those working in humanitarian activities. 
Terrorism in this case is not just a cowardly act; it is also a reflection of the poisoned politics of US military occupation. 
A political response is therefore needed. 
Malaysia, a successful and stable moderate Muslim country, has put the issue just right. 
Rather than defending the truly heroic work of the UN, Malaysia's Government correctly called on the US to leave Iraq. 
Foreign Minister Syed Hamid Albar wisely noted that ``[t]he security threat in Iraq will remain as long as the deep-rooted resentment of the people against the occupation is not dealt with in a fair and just manner. 
The UN should not be seen as part and parcel of the occupation.'' 
Even at this late date, with American soldiers being killed on a regular basis, and with the massive deaths resulting from the car bombing of the UN headquarters, the US resists greater UN authority, much less replacing US troops with UN-led forces. 
The Bush administration is sticking to its game plan. 
It is probably calculating that a few dozen casualties, or even a few hundred, will still be worth the greater prize--a US military presence in Iraq that looks over the disposition of more than 100 billion barrels of oil while breathing down the neck of Iraq's next door neighbor, Saudi Arabia. 
In the end, it will prove to be a false and misguided calculation. 
As long as US occupying forces remain, Iraq's politics are likely to remain unstable. 
Cooperation with the US will, by itself, increasingly become a disqualification for Iraqi political leaders seeking real support within their own communities. 
In the early 21 st century, merely providing electricity and running water will not prove enough to win the hearts and minds of the Iraqi people, even if the US figures out how to get these public services working. 
Iraqis will demand the dignity of government by Iraqis, while criminals and terrorists will prey on such sentiments by whatever means necessary. 
The US invasion was a grave mistake. 
Committing more soldiers will only compound the error. 
What is needed now is the quick withdrawal of US forces, and their temporary replacement by UN-led troops, which will hand power back to the Iraqi people. 

Can Lebanon Escape the Resource Curse? 
BEIRUT – After two and a half years without a president, Lebanon’s Parliament has elected Michel Aoun to the post. 
Now, Lebanon can turn its attention to oil and gas production, with policymakers’ expectations running high – verging on irrational exuberance – that an energy windfall will jumpstart the country’s economy, which has suffered from poor political and economic governance and the spillover effects from Syria’s civil war. 
Lebanon’s potential hydrocarbon wealth could indeed transform the country, as well as providing a model for other Middle Eastern energy producers to follow. 
But policymakers must be mindful of four major risks. 
For starters, oil and gas prices are volatile, and fossil fuels in general have an uncertain future. 
Oil and gas prices have declined by some 60% since June 2014, and it is unlikely that they will recover over the medium term. 
We are in the age of oil’s “new normal,” defined by plentiful alternative energy sources. 
Second, the size of Lebanon’s recoverable energy reserves is uncertain. 
Equally important, even under the most optimistic scenarios, the country’s capacity to manage oil and gas extraction, production, and distribution is uncertain as well. 
Third, ongoing territorial disputes in the region – and the absence of agreed maritime borders with Cyprus, Israel, and Syria – creates legal uncertainty about who owns and may exploit certain oil and gas blocks. 
Fourth, Lebanon’s leaders must deal with its dysfunctional politics and dismal governance, which are likely to frustrate any attempt to manage its natural resources transparently and sustainably. 
So, can Lebanon escape the curse of the “devil’s excrement” that has afflicted many of its Middle Eastern neighbors? 
The International Monetary Fund’s estimate of Lebanon’s potential oil and gas revenues optimistically assumes that production will start in 2021, reach full capacity by 2036, and continue until 2056. 
In this scenario, once production starts, resource revenues would constitute about 2.8% of Lebanon’s non-oil GDP, and would account for about 9% of government revenues at peak production, before gradually declining. 
But even if oil and gas blocks are auctioned off almost immediately, in 2017, and then successfully explored, the resulting revenues would not arrive until 2022 at the earliest. 
Manna from heaven is not about to fall on Lebanon. 
Meanwhile, Lebanon’s new leadership must address the government’s dismal fiscal predicament, including a 2016 budget deficit amounting to 8.1% of GDP and government debt totaling 144% of GDP – one of the highest public-debt ratios in the world. 
This means that Lebanon must undergo strong fiscal adjustments sooner, rather than later, and that any future oil and gas revenues will have to be heavily discounted. 
But Lebanon’s governance is the more critical issue, because the country must now build a foundation to manage its fossil-fuel wealth properly. 
The main lesson from other resource-rich countries is that, in the absence of good governance – strong institutions, the rule of law, effective regulations – Lebanon’s energy windfall will likely lead to more corruption, as special interests and politicians try to capture the rents for themselves. 
With Lebanese politics persistently in a quagmire, the new leadership must establish a sound fiscal regime and a robust governance framework to ensure transparency in energy exploitation and production, fiscal sustainability, and intergenerational equity. 
It can do so if it follows the right roadmap. 
First, to guarantee that Lebanon’s natural resources are prudently managed, the government should formally join the Extractive Industries Transparency Initiative. 
The EITI would require government agencies and companies to disclose information relating to hydrocarbon extraction and production. 
This would include contracts and licenses; details about how blocks – and exploration and production rights – are auctioned and awarded; revenue figures, to ensure that companies comply with the “Publish What You Pay” principle; environmental-impact studies (offshore and onshore); and reports on how the government allocates its revenues. 
Second, Lebanon should formally adopt the Natural Resource Charter. 
The Charter’s 12 precepts to guide stakeholders’ decision-making should be integrated into relevant legislation and regulations by the Lebanese government, Parliament, applicable regulatory agencies, and civil-society actors such as the Lebanon Oil and Gas Initiative. 
Third, Lebanon should establish an independent energy regulator, by making the Lebanese Petroleum Administration independent from the Ministry of Energy and Water and widen its mandate to manage Lebanon’s natural resources. 
Separation and independence from the ministry is needed to protect natural-resource management and decision-making from political interference. 
Finally, Lebanon should adopt a legal framework for setting long-term constraints on fiscal policy. 
In particular, government expenditure should be determined by an estimate of permanent income (including the sustainable contribution from resource revenues), while cyclical revenue would be saved in a sovereign-wealth fund. 
Similar to Chile and Norway’s well-known precedents, such a rule would stipulate that all energy-price windfalls automatically be saved, and that government spending be determined by cyclically adjusted tax revenues and a share of energy revenues. 
The stakes for Lebanon are high. 
A troubled country in a tumultuous region, it could transform itself if it soundly and efficiently manages its prospective oil and gas wealth. 
Or it could succumb to the curse, which would entrench the country’s waste, nepotism, corruption, and inequality. 
Lebanon’s oil and gas wealth belongs to all of its citizens, current and future. 
If the new leadership bases its decision-making on a national consensus – and under a governance framework that ensures transparency, disclosure, and accountability – the curse will be cast off. 
And others in the region might see such success as worthy of emulation. 

Lebanon Goes West 
BEIRUT – Lebanon’s voters have handed a clear defeat to the Hezbollah-led March 8 alliance. 
In a smoothly run and peaceful election, the pro-Western March 14 alliance emerged with a clear majority of 71 seats, compared to 58 seats for its rivals. 
The results elicited a nearly audible sigh of relief from Arab capitals, as well as from leaders in Europe and North America. 
The fear that the pro-Syrian and pro-Iranian March 8 alliance might secure a victory was palpable prior to the vote. 
Iran’s President Mahmoud Ahmadinejad had eagerly and publicly anticipated such an outcome. 
The March 14 Alliance’s victory is good news for Lebanon and the region, ensuring good relations with Lebanon’s Arab and Western friends, and constituting a quiet triumph for moderation and pragmatism over extremism and confrontation. 
It is also good news for the Obama administration, which had feared a regional setback soon after Obama’s historic address in Cairo on June 4. 
The election also brings a much needed measure of stability and legitimacy to the governing March 14 coalition, which comprises the mainly Sunni Future movement, led by Saad Hariri (son of slain former Prime Minister Rafik al Hariri), the Socialist party, led by Druze leader Walid Junblat, and a number of Christian parties. 
Although the March 14 coalition already controlled Parliament, its majority had been repeatedly attacked as the result of a severely skewed election law. 
Although the March 8 alliance lost the election, not all of its members were equally distressed by the results. 
Aside from Hezbollah, March 8 includes the more secular Shiite Amal movement and the Free Patriotic Movement, a large Christian group led by General Michel Aoun. 
Whereas Hezbollah and Amal swept the Shiite districts in the South and the Beqaa Valley, confirming their dominant position among Lebanon’s Shiites, Aoun delivered less than half the Christian votes. 
Hezbollah may be quite comfortable with the returns. 
Winning would have placed Hezbollah in a challenging position. 
Arab and international governments would have reacted negatively, and investor confidence in Lebanon would have been undermined, jeopardizing Lebanon’s political and economic relations. 
A victory for the March 8 alliance also would have strengthened Israel’s argument that Hezbollah dominates Lebanon, leaving the country more exposed to attack. 
Moreover, if the March 8 coalition had won, it would have largely been on the back of Christian voters delivered by Aoun, who might have then demanded the Lebanese presidency, which is reserved for a Christian. 
Neither Hezbollah nor Amal wanted this. 
With a March 14 victory, Hezbollah is more secure vis-à-vis Israeli attack or international isolation, can worry less about managing Lebanon’s economy and finances, and can maintain its alliance with Aoun without delivering him the Moon. 
Moving forward, the immediate challenge will be to form the next government. 
The March 14 alliance has said that it would welcome a national unity government with the March 8 coalition, but without the veto power that the opposition has been demanding. 
This wrangling is likely to take weeks, but is unlikely to come to blows or to reach a complete impasse. 
Neither side is interested in escalation or a breakdown. 
Their patrons in the region and internationally – Saudi Arabia, the United States, Syria, and Iran – are also more interested in negotiation than escalation at this point. 
On matters of national sovereignty, the new government must continue to build up the national army and police forces, negotiate with Hezbollah over the integration of its militia into the state security structure, and push for regional peace, which would strongly benefit Lebanon. 
With regard to economic and social policy, the government must manage the national debt while encouraging investment and employment and strengthening public education and health programs. 
The government must also move forward on further electoral reform, expand administrative decentralization, hold local elections in 2010, and come up with a credible program to combat rampant corruption. 
None of these challenges will be easy. 
Lebanon has undergone much in the past four years: the withdrawal of Syrian forces, a string of painful assassinations, a devastating 2006 war with Israel, a difficult battle between the Lebanese army and an entrenched terrorist group called Fateh al-Islam, a year and a half of institutional paralysis between late 2006 and early 2008, and a brief civil war in the streets of Beirut in May 2008. 
However, since then, Lebanon has put together a coalition government, regained security and stability, weathered the global economic crisis, and now organized a largely free and fair election. 
Much of this has been achieved through regional and international assistance, but on June 7 the Lebanese people, through the ballot box, proved that they hold ultimate decision-making power over the country’s precarious but potentially promising future. 

Lebanon’s Example to Iraq 
Iraq’s voters have spoken. 
Now a new government must be formed and a new constitution written. 
Lebanon, argues Paul Salem, may provide a guide for those Iraqis who seek a constitution that can reconcile the country’s Shi-ite, Sunni, Kurdish and Turkmen communities. 
Rebuilding a country devastated by war, riven by internal divisions, and plagued by foreign intervention in a part of the world as volatile as the Middle East is one of the most daunting tasks imaginable. 
Add to it a desire to create a democracy from scratch in a region characterized by authoritarian government and that task becomes almost impossible. 
But the challenge has been met before, in Lebanon after its nightmarishly long civil war (1975-1990). 
So perhaps there are lessons from that experience that can be applied in Iraq. 
Both Lebanon and Iraq comprise ancient communities living within the borders of states outlined in the 20th century. 
Although a strong sense of modern nationalism exists in both, ancient ethnic and religious communities play a critical role in shaping political identities and public life. 
Both countries also possess a fairly educated middle class and intelligentsia alongside more traditional elites. 
Both societies have a mixed history that included periods of peaceful, cooperative politics and periods of violence and bloodletting. 
One lesson from Lebanon’s recent history stands out above all others: in divided political societies such as Lebanon and Iraq, coalition democracy is preferable to majoritarian winner-takes-all democracy. 
In Lebanon, the danger of one community monopolizing power over others is avoided because the Lebanese constitution imposes permanent power-sharing arrangements on all major communities. 
These arrangements apply both to parliament and the executive branch. 
In Lebanon’s post-war parliament, seats are widely distributed among the various confessional communities, so that none feels excluded or fears losing political representation if it loses numerical superiority. 
In the executive branch, the council of ministers is balanced among Christians and Muslims in order to encourage, indeed force, cooperation and to avoid the risk of domination the fear of oppression by one group. 
In addition, the three major posts in government—the president of the republic, the prime minister, and the speaker of parliament—are counterbalanced in power and are also divided among the three largest communities. 
Moreover, coexistence and cooperation among the various communities is enshrined as a basic principle in Lebanon’s constitution. 
Promoting any policy or law that increases communal tension is unconstitutional. 
In Iraq, some of these steps have already been taken. 
The Governing Council and the interim Government are both coalition bodies of the Lebanese type, comprising studied proportions from the three main communities in Iraq—the Shia, the Sunni, and the Kurds. 
Iraq, however, still has neither a parliament nor a constitution. 
With regard to parliament, there is no need to follow Lebanon’s rigid apportionment of seats according to confessional identity. 
All the same, Iraq’s parliamentary electoral law should be drawn up to take two important factors into account: 
· First, districts should be drawn to ensure that all major communities in the country are amply represented in parliament and none feels left out; 
· Second, electoral districts should be multi-member districts and should, as far as is possible, include populations of more than one community in order to encourage cross-communal politics and the election of moderate politicians that can speak to all communities and that know how to resolve tensions among them. 
Until elections can be organized, it may be necessary to do what was done in Lebanon just after the war: appoint members to an interim Iraqi parliament. 
This could be described as a temporary advisory parliament, or ‘Shura Council,’ but it should include hundreds of figures from throughout the country and they should be selected through the Governing Council and interim Government after nationwide consultations. 
Such a large Shura Council would provide a broad Iraqi face and body to the interim administration. It would also serve to create the beginnings of Iraqi parliamentary and local politics in advance of the elections, which should be held as soon as possible. 
In terms of drawing up a new constitution, the Lebanese principle of government by power sharing must be a central pillar. 
Beyond the balance of representation in parliament and government, a balance might need to be struck between the highest offices of state. 
As in Lebanon, Iraqis might need to create a balance between the offices of president, prime minister, and speaker of parliament, and to agree that a leader of a different major community will occupy each. 
This would reinforce the need for inter-communal cooperation and minimize the risk of a return to any form of communal domination or dictatorship. 
As someone who knew Lebanon in its darkest hours—when Lebanon was a by-word for chaos, violence, and political hopelessness—and who saw its rapid reconstitution as a functioning participatory political system and its astonishing return to normalcy, I know that Iraq can be politically rebuilt. 
Like the Lebanese, Iraqis have suffered enough. 
By recognizing a permanent say in politics for all of the country’s mutually suspicious communities, Iraqis can pull back from the brink and build for themselves an Iraq worthy of their talents and their history. 

Lebanon’s Moment of Decision 
Lebanon is at a historic crossroad. 
It can choose to lead the Middle East into vibrant multi-sectarian democracy or slump back into corrupt local politics under foreign tutelage. 
The latter path could easily lead to civil strife and, perhaps, another civil war. 
At this very moment, Lebanon’s political leaders are meeting jointly for the first time in the country’s modern history without the interference of Syria, France, or the United States. 
Everyone from Saad Hariri, the son of our murdered Prime Minister Rafik Hariri, to Hizbullah’s leader, Hassan Nasrallah, is present to discuss openly the issues that divide the country, as are the leaders of Lebanon’s Shiia, Sunni, Greek Orthodox, Maronite Christian, and Druze communities. 
This national dialogue, held under security measures that have basically shut down central Beirut, began March 2 and is expected to last up to ten days. 
But one player is missing: Emile Lahoud, who claims Lebanon’s presidency as his by right of Syrian power. 
Lahoud’s absence is not surprising, as the discussions deal with the fate of his illegal presidency and how to break the deadlock that his continuance in office has imposed on the country. 
Indeed, just as Lahoud’s chair at the talks is vacant, so – in the eyes of the world and under the country’s 150-year old constitution – is Lebanon’s presidency. 
It has been vacant since September 2004 when Lahoud, backed by Syria, forced an extension of his six-year term on the Lebanese parliament, which elects the president. 
We Lebanese can already claim victory in our year-long non-violent fight for independence and democracy. 
We have succeeded in placing the issue of the presidency at center stage in Lebanese politics. 
Parliament Speaker Nabih Birri, Hizbullah Secretary General Hassan Nasrallah, and Michel Aoun, leader of the Free Patriotic Movement, remain reluctant participants in the search for a new head of state. 
Nevertheless, the election of a new, democratic, and lawful president has become accepted nationally as a necessary point of departure from the murderous path taken by the country with the extension of Lahoud’s mandate. 
This was clearly demonstrated on February 14, when roughly a million people assembled to commemorate the first anniversary of Rafik Hariri’s assassination. 
The crowd’s sole demand was that Lahoud step down. 
On that day, I urged Druze leader Walid Jumblatt and Future Movement leader Saad Hariri, a Sunni and the political heir of his slain father, to make this their paramount slogan. 
The democratic movement’s main objective is to bring about a non-violent, constitutional process to replace Lahoud with a new president in free and open elections. 
In this we have the clear support of the international community, with the United Nations Security Council giving its unanimous support to my demand for presidential elections. 
On January 23, the Security Council issued a statement expressing regret that the conduct of “free and fair presidential elections” had not yet been carried out in accordance with Security Council Resolution 1559, which was passed on the eve of Lahoud’s extension. 
At a historic gathering of the parliamentary majority on February 16, I presented a four-step process to complete, in a constitutional manner, our non-violent revolt against foreign power. 
First, the popular and parliamentary majority in Lebanon must declare that no solution is possible without the election of a new president. 
Second, a majority of parliamentarians must sign a petition declaring null and void the extension of Lahoud’s term. 
Third, the parliamentary majority must formally acknowledge Lahoud’s illegitimacy. 
Finally, Lebanon must elect a new president. 
With the national dialogue now underway, we are in the midst of phase three. 
If, during this dialogue, a consensus is reached on the need to elect a new president, so much the better. 
If not, phases three and four will be completed by other means. 
Lahoud has become irrelevant. 
Once the president’s illegitimacy is formally acknowledged by a majority of parliamentarians, all his acts will be considered beyond his constitutional powers, and the process of electing a new president will be firmly on track. 
This can only be reversed by violence, which is unlikely, so strong is the consensus that Lebanon needs a new president, and so ingrained is the rejection of force by all Lebanese. 
While we must be vigilant in preventing extremist groups from derailing the process, the best way to do so is to accelerate transformation at the top. 
As for me, I realize that in seeking Lebanon’s presidency, we must look to the future. 
That is why I offer a program that addresses such key issues as the effective representation of women in government, the need to urgently address environmental problems, to strengthen rule of law, transparency, and accountability, and to move toward universal suffrage in the election of top executive positions. 
I have also emphasized that Lebanon must develop its comparative advantages, particularly in education, banking, and services. 
All these issues have now become part of the national debate. 
Lebanon’s traditional political class may not like it, but, as more of its members are now recognizing, the momentum for a new kind of presidency will not be stopped. 

Lebanon’s New Status Quo 
BEIRUT – Hezbollah’s armed insurrection in May, which overran Beirut and other parts of Lebanon, has dealt a further blow to hopes of true state sovereignty in the country, strengthening Hezbollah and weakening the Western-backed government. 
But it also brought about a new political accord, negotiated in Doha, Qatar, providing for election of a president after a long stalemate, formation of a national unity government, a new election law, and a return to a national dialogue over relations between the state and non-state actors, particularly Hezbollah. 
There is much speculation about the reasoning behind the government’s decisions in May to dismiss the pro-Hezbollah chief of airport security and investigate Hezbollah’s private telecommunications network, which sparked the confrontations. 
The government had been under longstanding international pressure to honor at least some of its international commitments to contain Hezbollah, and it wrongly calculated that the group would only respond in a limited way. 
Most importantly, the government mistakenly reckoned that Hezbollah would not risk Shia-Sunni clashes in Beirut. 
Similar questions surround Hezbollah’s reasoning in unleashing large-scale action that risked sectarian warfare and jeopardized its moral high ground. 
But it has largely achieved its aims. 
Militarily, it has nipped in the bud any potential armed militia in West Beirut that could hinder its movement beyond the southern suburbs. 
It also secured key highways south and east of Beirut that Druze leader Walid Junblatt previously dominated and reasserted its access to the capital’s airport and seaports. 
Politically, Hezbollah abandoned its policy of waiting out the government, in favor of pushing it to the breaking point and quickly fashioning a new status quo. 
Now it has strong influence with the new president whom it helped bring to power, a blocking veto in the next government, and it has drawn a clear line in the sand regarding the untouchability of its arms and its communication and operational infrastructure. 
Hezbollah and its main backer, Iran, were motivated by two concerns: fear of the next Israeli attack, which Hezbollah believes is inevitable, and concern over Syrian-Israeli peace talks that, if successful, could leave Hezbollah without its main bridge to Iran. 
Hezbollah has been rearming and redeploying since the 2006 war; the actions of May further consolidate its position in and around Beirut. 
By reasserting its access to the airport and seaports, and by consolidating the political situation in the country, Hezbollah can better survive a shift in Syrian policy: the United States and Israel can no longer ask Syria to “deliver” Hezbollah as part of any peace deal over the Golan. 
Morever, by resuscitating the weak institutions of the Lebanese state, Hezbollah gains important political protection from external attack. 
It will be hard for Israel to launch a large-scale attack on Hezbollah if it is participating in a semi-stable Lebanese state headed by an internationally recognized president, with a pro-Western prime minister and a democratically elected parliament, teeming with tourists, and buffered by 10,000 UNIFIL troops in the south. 
In other words, Hezbollah’s survival strategy partly depends on the protective shell of a rickety Lebanese state. 
Hezbollah’s moves were clearly a defeat for the US and Saudi Arabia. 
However, when they saw that Hezbollah had limited demands and wanted Lebanon’s Western-backed coalition to continue to lead the government, they chose to make advantage out of adversity. 
The US and Saudi Arabia welcomed the Doha Agreement and the election of the new president, and Secretary of State Condoleezza Rice flew to Beirut to express US support for the president and the Lebanese state. 
Qatar’s role in bringing about a resolution, alongside that of Turkey in mediating Syrian-Israeli talks, signals a return to pragmatism in Middle East relations. 
It also indicates the dead-end to which the ideological politics of the US, Iran, and Saudi Arabia has led. 
Although the Doha agreement papers over serious political and institutional contradictions, it reinforces the emergence of a pragmatic approach toward managing the region’s crises. 
Lebanon now limps forward carrying the contradictions of internal and regional politics with it. 

Lebanon’s Time of Trial 
ISTANBUL – As Lebanon braces for the possible indictment of Hezbollah operatives for the murder of former Prime Minister Rafik Hariri, the country’s economy is wobbling. 
The International Monetary Fund’s Mission Report of March 2009, pointing to the country’s 30 years of chronic political tumult, concluded that “Lebanon will remain vulnerable to shocks for many years” to come. 
While welcoming the anti-crisis action plan of the government at that time, the Fund held no illusion that it would be up to the task. 
Later that year, however, the government of Saad Hariri, Rafik Hariri’s son, brought new hope, prompting the IMF to declare that it had “opened a new window of opportunity for invigorating economic reforms.” 
But the success of the planned reforms depends heavily on cooperation between Lebanon’s main political groups, the Sunni and the Shia, and there has been little of that so far. 
Indeed, the influence of outside powers remains a central part of the equation. 
The meeting last July in Beirut between Syria’s President al-Assad and Saudi King Abdullah was tagged as a sign of rapprochement between two Sunni antagonists. 
But one of its purposes was to obtain the Syrian-backed Hezbollah’s support for an IMF-style recovery program. 
It remains unclear whether or not that goal was fulfilled. 
Meanwhile, Lebanon’s main economic indicators show steady improvement: GNP increased from $21 billion in 2004 to $32 billion in 2009, inflation remains under control, foreign trade is balanced, and the unemployment rate is tolerable. 
Moreover, the Lebanese pound is pegged to the US dollar. 
According to the IMF, “the crisis did not directly affect the Lebanese economy, the banks are solid and the funds are flowing in.” 
But, although the World Bank classifies Lebanon as an “upper middle income” country, with a per capita GNP of $10,800, 28% of the population lives below the poverty line. 
As many of Lebanon’s poorest are Shia, this provides fertile ground for Hezbollah recruiters. 
Other economic shadows remain, with serious potential political implications. 
The IMF forecasts that the Hariri government should be able to tap capital markets to cover its financial needs for 2010. 
But the current budget relies on foreign aid to cover a $3 billion (10% of GNP) shortfall. 
The issue is not so much where the funds will come from as the amount itself. 
Lebanon’s growth rate, which has averaged 3.7% over the last 10 years, has been, according to the Fund, “lower and more volatile than (averaged) in the MENA [Middle East-North Africa] region.” 
Under these conditions, it is difficult to see how the country can ever offset the damage caused by the various wars of the 1975-2006 period, estimated to have caused $35 billion in damage. 
The “emergency post-conflict assistance” (under $100 million) provided by the IMF after the 2006 fighting with Israel fell well short of the amount needed to rebuild. 
The Lebanese government has been boasting about the US aid that it has received. 
But this assistance – military hardware and a five-year military training program – does not address the country’s fundamental economic problems. 
Moreover, although the World Bank accepted the country’s reconstruction program – called “Horizon 2000” – the money for it, from the European Investment Bank and Arab funds, has barely trickled in. 
In order to get further assistance, Lebanon urgently needs to strengthen its ties with the US, as well as those that it has been developing within the framework of EU Mediterranean Cooperation. 
Turkish Prime Minister Recep Tayyip Erdoğan, as part of his recent drive to become the de facto leader of the Sunni world, and as part of his “zero problems with neighbors” policy, has lifted visa requirements for Lebanese traveling to Turkey. 
But this did not prevent a decrease in Turkish-Lebanese trade last year. 
Worse, a bilateral free-trade agreement has not been finalized, despite seven years of negotiations. 
Yet this did not deter Turkey from organizing the Third Turkish-Arab Forum on July 10, 2010, with Syria, Jordan, and Lebanon. 
After much old-style “Nasserite” rhetoric, they decided to create the Close Neighbors Economic and Trade Association Council. 
While Turkey’s objective is a free-trade zone and economic integration between the four countries, Lebanon has been much more cautious. 
The Web site of its Ministry of Economy and Trade does not even mention such a plan (but does quote the Arab League’s anti-Israel Central Boycott Office). 
The four countries will hold their next meeting in Damascus this coming December to decide on further steps. 
But the three Arab states are already members of the Arab Free Trade Zone GAFTA, which normally prevents participation in another free-trade zone. 
Moreover, in 2009, the Lebanese set World Trade Organization membership as a priority, and the proposed new free-trade agreement may not advance that goal. 
Turkey, for its part, finds itself in a similar situation with its candidacy for the EU. 
Hariri’s government is set to keep its 71-member majority in Lebanon’s 128-seat parliament, helped by the 8% economic growth projected for this year. 
But there is always the risk that the IMF’s recommendations calling for more taxation – an increase in value-added tax and higher energy tariffs – together with Hezbollah’s recurring demands, might create a political earthquake. 
That earthquake could prove monumental, depending on how Hezbollah responds to any indictment over Hariri's murder. 

Is North Korea Opening for Business? 
SEOUL – North Korea’s system is failing. 
The country is facing severe energy constraints, and its economy has been stagnating since 1990, with annual per capita income, estimated at $1,800, amounting to slightly more than 5% of South Korea’s. 
Meanwhile, a food shortage has left 24 million North Koreans suffering from starvation, and more than 25 of every 1,000 infants die each year, compared to four in South Korea. 
In order to survive, the world’s most centralized and closed economy will have to open up. 
A more dynamic and prosperous North Korea – together with peace and stability on the Korean Peninsula – would serve the interests not only of North Korea itself, but also of neighboring countries and the broader international community. 
After all, North Korea’s sudden collapse or a military conflict on the peninsula would undermine regional security, while burdening neighboring countries with millions of refugees and hundreds of billions of dollars in reconstruction costs. 
This should spur international institutions and North Korea’s neighbors to provide the food aid, technical assistance, and direct investment that the country needs to escape its current predicament and make the transition to a market economy. 
But there remain significant obstacles to such cooperation – not least the North’s obscure and often-unpredictable politics, exemplified by the recent execution of its leader Kim Jong-un’s once-powerful uncle, Jang Song-thaek. 
The good news is that North Korea’s leadership seems to understand that its current troubles stem from its grossly inefficient economic system. 
In recent speeches, Kim has emphasized the need for economic reform and opening up to develop agriculture and labor-intensive manufacturing industries. 
Furthermore, in a bid to attract foreign investment, the government has announced the establishment of 14 new special economic zones. 
If only out of a sense of self-preservation, North Korean political and military leaders are likely to support this effort, as long as it does not undermine their power or national security. 
Officially, North Korea began opening up to foreign investors in 1984, when the government enacted the Foreign Joint Venture Law, following the success of a similar law in China. 
In 1993, North Korea continued this effort by establishing the Rajin-Sonbong special economic and trade zone. 
But these initiatives have yet to yield significant results, with foreign investors wary of operating in a country that lacks both economic-policy credibility and the physical and institutional infrastructure needed to support large-scale projects. 
North Korea now should follow the examples of Vietnam and China, pursuing reforms like deregulation, liberalization, privatization, and macroeconomic stabilization, while developing a new legal system and new institutions. 
Such market-based, outward-oriented economic policies are a prerequisite for long-term economic growth. 
The country certainly does not lack growth potential. 
While North Korea does not have the agricultural base that initially spurred reforms in China and Vietnam, geographical advantages like natural seaports and rich mineral resources enable it to pursue export-led growth. 
Moreover, the relative abundance of well-educated workers implies low initial wages and the ability to compete internationally in labor-intensive manufacturing activities – for example, in footwear, textiles and garments, and electronic assembly – which can form the basis for export-led industrialization. 
To this end, a significant share of North Korea’s military manpower, which currently amounts to more than 8.5% of the total labor force, could be used for more productive purposes. 
If the relevant conditions are satisfied, North Korea could capitalize on the “catch-up” effect, boosting growth further, because its low per capita income level would help to increase investment productivity and facilitate technology transfer from more developed economies. 
This implies a significant role for North Korea’s neighbors, especially South Korea and Japan. 
So far, however, the Kaesong Industrial Complex, operating with about 50,000 North Korean workers under South Korean management, is the only case of economic cooperation between the two Koreas. 
North and South Korea are natural trading partners. 
In 2012, inter-Korean trade amounted to $2 billion – only 0.2% of South Korea’s total trade, but 29% of North Korea’s. 
According to the economist Marcus Noland, normalized trade relations could increase South Korea’s share of the North’s trade volume to as much as 60%. 
With a strong commitment to economic reform and opening up – backed by robust international support – North Korea could emulate the success of East Asian economies like South Korea, experiencing annual growth of more than 5% for the next several decades. 
But there is more to North Korea’s situation than economics. 
The country is locked in a stalemate with the international community, which wants it to denuclearize and become a “normal” country. 
Unwilling to abandon its nuclear-weapons program, North Korea faces economic sanctions from the United States, with official aid and membership in institutions like the World Bank and the International Monetary Fund on hold. 
Given how unlikely North Korea is to denuclearize, at least in the immediate future, an alternative strategy is needed. 
The international community, especially South Korea, should support North Korea’s efforts to build a more open, market-based economy through expanded trade and investment, while continuing to work toward a compromise on denuclearization. 
The resulting prosperity and accessibility could, over time, bring about political change. 
For ordinary North Koreans, who are suffering the most under the current system, such a transformation could not be more urgent. 

South Korea’s Feminine Future 
SEOUL – Over the last half-century, South Korea has made considerable economic progress, with per capita income increasing from a mere $80 dollars in 1960 to more than $22,000 last year. 
But its potential for sustained growth is faltering, owing to the imminent decline of its working-age population – projected to fall by 25% by 2050 – and rising competition from China and other emerging economies. 
In order to improve its prospects, South Korea must pursue economic reform and restructuring, with an emphasis on maximizing its human-capital resources – especially women. 
South Korea’s success over the last five decades owes much to the rapid growth of its well-educated labor force. 
From 1960 to 2010, the share of adults with a secondary education soared from 20% to an impressive 87%. 
By boosting productivity, increasing returns on investment, and facilitating technological adaption and innovation, South Korea’s abundance of well-educated workers has served as the foundation for its export-oriented development strategy. 
But women remain underutilized, to the detriment of the entire economy. 
Indeed, any effective South Korean growth strategy must create more and better economic opportunities for women, in part by establishing more accommodating working environments and instituting a more diverse and flexible education system. 
To its credit, South Korea has built a relatively gender-equal society. 
The gender gap in enrollment in both secondary and higher education is very small; and women’s access to elite positions in law, medicine, and the civil service has increased considerably in recent years. 
The country elected its first female president, Park Geun-hye, in 2012. 
But a significant gender gap remains in terms of the return on human capital. 
According to OECD data, only 55% of South Korean women aged 15-64 are in the labor force, compared to an average of 65% in the advanced economies. 
South Korea’s male labor-force participation rate, by contrast, stands at about 77% – close to the OECD average of 79%. 
Women who have completed secondary or tertiary education are more likely to enter and remain in the labor market than their less educated counterparts. 
The labor-participation rate for women with post-secondary education is 64%, far exceeding the 35% rate for those with only a primary or middle-school education. 
But, even for South Korea’s most highly educated and capable female workers, child rearing is a major career obstacle. 
In fact, South Korean women participate in the labor force at roughly the average rate for the OECD while they are in their late twenties. 
The problem is that the rate drops sharply from 71% to 57% among women in their 30’s, as inflexible working environments and a lack of affordable childcare undermine their ability to continue investing in their careers. 
The good news is that Park’s government is working to change this. 
Indeed, its three-year plan for economic innovation, announced in February, aims to raise the female employment rate to 62% by 2017, through the provision of affordable, high-quality childcare facilities and expanded paid parental leave, among other measures. 
But it is less clear how the government will create additional jobs for women. 
It could, for example, split full-time jobs into multiple part-time positions, and offer incentives for workers to reduce their hours. 
But, given that South Korea’s workforce already includes a substantial share of non-regular workers, increasing temporary employment may not contribute to economic growth. 
A better approach would entail creating high-quality jobs in modern service industries. 
As it stands, while the services sector accounts for more than 70% of employment in South Korea, its productivity-growth rate remains much lower than that of the manufacturing sector. 
Too many people are working in traditional, low-productivity service industries, such as wholesale, retail trade, and restaurants, leaving modern, high-productivity services like communications, health, financial intermediation, and business services underdeveloped. 
It is also important to narrow the mismatch between women’s abilities and their career paths. 
The current system tends to reinforce gender roles, encouraging children to follow culturally framed paths, instead of nurturing their individual interests and potential. 
For example, female university students are much more likely to study humanities than the so-called “STEM” subjects (science, technology, engineering, and mathematics) – key drivers of productivity gains, innovation, and economic growth. 
Efforts by primary and secondary schools could help to foster more diverse interests among female students, giving talented young women the tools they need to make important contributions to key economic sectors. 
Of course, the potential of educated, empowered women to drive sustained economic growth is not limited to South Korea. 
Japanese Prime Minister Shinzo Abe, too, has identified increased female labor-force participation as critical to efforts to revive his country’s long-dormant economy. 
In South Korea, Japan, and elsewhere, developing and maximizing women’s potential will require comprehensive education and labor-market reforms, as well as structural change, particularly on the services side of the economy. 
The question is whether political leaders are ready to back their lofty pronouncements with decisive action. 

Financial Safety Nets for Asia 
SEOUL – Emerging economies are facing significant uncertainty and serious downside risks. 
One major source of instability is the looming reversal of the US Federal Reserve’s expansionary monetary policy – the prospect of which is generating volatility in global financial markets and threatening to disrupt emerging-economy growth. 
The Fed has signaled that its federal funds rate will remain near 0%, at least as long as unemployment exceeds 6.5% and inflation expectations remain well anchored. 
But when and how the Fed will begin tightening monetary policy remains unclear. 
What is certain is that, in making its decision, the Fed will not consider its policy’s spillover effects on the rest of the world, leaving affected countries’ policymakers and central bankers to deal with the fallout. 
Tighter US monetary policy could intensify the global credit shortage, thereby increasing pressure on Asia’s economic and financial systems. 
Overreaction and herding behavior by market participants could trigger a sudden reversal of capital inflows, with a severe dollar shortage – as occurred in 1997 and 2008 – straining Asian banks and corporations. 
These risks explain why the Fed’s mere suggestion of a potential move toward reducing its purchases of long-term asset (so-called quantitative easing) caused emerging-market currencies and asset prices to plummet this summer. 
They also underscore Asian economies’ need for stronger financial safety nets. 
The 2008 global financial crisis revealed fundamental flaws in the international monetary system, as the failure to ensure sufficient liquidity weighed heavily on emerging Asian economies. 
Since then, these countries have taken measures to safeguard the stability of their financial systems against volatile external shocks, strengthen financial supervision and regulation, and develop more effective macroeconomic frameworks, including better macro-prudential regulation and capital-control measures. 
But their heavy reliance on international trade and capital flows means that they remain vulnerable to severe financial spillovers from the United States. 
Moreover, since the 1997 Asian financial crisis, the region’s emerging economies have increased their holdings of foreign-exchange reserves, and now possess more than half of the world’s total. 
Seven of the world’s top ten reserve-holding economies are in Asia. 
But hoarding international reserves, mostly in the form of low-yielding short-term US Treasury securities, is expensive and inefficient. 
Some Asian economies, especially China, are also attempting to internationalize their currencies. 
Given China’s expanding global influence, the renminbi’s emergence as a new international currency is inevitable. 
For smaller economies, however, internationalization will be far more difficult. 
In their quest to ensure sufficient liquidity, Asian economies have also actively pursued currency-swap arrangements. 
Since 2008, China has signed 23 bilateral swap agreements, including one with South Korea. 
Japan expanded bilateral swap facilities with its Asian neighbors during the global financial crisis. 
And the ten ASEAN countries, together with China, Japan, and South Korea, have constructed a $240 billion regional reserve pool to provide short-term liquidity to members in an emergency. 
Such swaps should help Asian countries to cope with currency turmoil in the wake of a Fed policy reversal. 
But they remain untested and, given their relatively small volumes, cannot reassure markets or provide adequate emergency support to crisis countries, especially in the event of large-scale systemic shocks. 
The Fed, as the de facto global lender of last resort, can improve significantly the effectiveness of Asia’s financial safety nets by establishing currency-swap arrangements with emerging economies’ central banks during the policy-reversal process. 
In 2008, the Fed established currency-swap lines with the central banks of ten developed economies, including the eurozone, the United Kingdom, Japan, and Switzerland, and four emerging economies (Brazil, South Korea, Mexico, and Singapore). 
These arrangements, most of which ended in 2010, responded to strains in short-term credit markets and improved liquidity conditions during the crisis. 
The South Korean central bank’s $30 billion swap, though limited, averted a run on the won. 
Reestablishing the Fed’s swap arrangements with emerging economies would minimize negative spillovers during the coming monetary-policy reversal. 
Even an announcement by the Fed stating its willingness to do so would go a long way toward reassuring markets that emerging economies can avert a liquidity crisis. 
The swap lines would also serve American interests. 
After all, trouble in emerging economies would destabilize the entire global economy, threatening the fragile recoveries of advanced economies, including the US. 
And, given China’s rise, it is clearly in America’s interest to maintain a balance of economic power in Asia. 
Critics might cite the moral-hazard risk generated by liquidity support. 
But a well-designed framework that offers swap lines only to well-qualified emerging economies – and only temporarily – would diminish this risk substantially. 
In fact, some experts, such as the economist Edwin Truman, have proposed establishing an institutionalized global swap arrangement as a more effective and robust crisis-prevention mechanism – an idea that G-20 countries should consider. 
But creating such a system would take time. 
In the meantime, the Fed should take the initiative by re-establishing swap lines with advanced and emerging economies alike. 

India’s Chinese Dream 
SEOUL – In recent years, China and India have both emerged as global economic superpowers, with China leading the way. 
But, with Chinese growth slowing and the need for structural change becoming increasingly acute, will the economic-reform efforts of India’s new prime minister, Narendra Modi, enable the country to catch up? 
Since the 1980s, China has experienced unprecedented economic growth, fueled by abundant low-cost labor, high saving and investment rates, substantial market reforms, outward-oriented policies, and prudent macroeconomic management. 
Its leaders now hope to achieve high-income status by developing more technologically sophisticated industries. 
India’s economic performance has been less remarkable. 
Economic growth began to accelerate dramatically in the early 1990s, owing to trade liberalization and other economic reforms. 
Then reforms stalled, the fiscal and current-account deficits soared, and annual GDP growth fell to 4-5%. 
As a result, China has pulled ahead, with per capita income last year standing at $11,850 – more than double India’s $5,350. 
The question now is whether Modi’s push for faster growth can narrow the income gap in the coming decades. 
The most important factor working in India’s favor is its “demographic dividend.” 
In China, population aging and low fertility rates are already causing the prime working-age population, people aged 15-59, to decline. 
From 2015-2040, this group is expected to shrink by more than 115 million. Meanwhile, India’s prime working-age population will increase by 190 million. 
But favorable demographics alone will not bring about the kind of growth that has made China the world’s second-largest economy. 
India’s leaders must develop a comprehensive plan to eliminate barriers to economic competitiveness, expand employment opportunities in manufacturing, and improve workers’ education and skills. 
As it stands, India ranks 60th in the world for economic competitiveness – much lower than China, which, at 29th, is closing in on high-income countries like South Korea (25th) and France (23rd). 
The reasons for this are not difficult to discern: India performs poorly on the fundamental drivers of long-term economic prosperity. 
Indeed, despite steady improvements, public health and education levels remain low (102nd worldwide). 
Moreover, the lack of adequate transport, communication, and energy infrastructure (85th) is undermining India’s productivity growth. 
And India lags behind China in the efficiency of its product and labor markets (ranking 85th and 99th, respectively). 
Only by addressing these shortcomings can India attract sufficient investment and boost economic growth. 
At the same time, India should expand labor-intensive manufacturing, thereby creating employment opportunities for its growing pool of workers. 
Given that manufacturing contributes only 15% of India’s total output, compared to 31% in China, there is considerable room for growth. 
In a sense, India has the advantage of being able to learn from China. 
China transformed its agrarian economy by building a strong, labor-intensive industrial base, shifting workers from agriculture to manufacturing and construction, and improving productivity across all sectors. 
Today, the agricultural sector accounts for only one-third of total employment in China, compared to one-half in India. 
India’s structural transformation and sustainable growth will hinge on its efforts to build a flexible labor market, centered on the easing of outdated and complicated employment laws. 
The legal protections of workers in India’s formal sector exceed those of most developed countries, as well as China, with mandated requirements rising as the number of employees increases. 
As Jagdish Bhagwati and Arvind Panagariya have pointed out,excessive labor-market regulations deter Indian entrepreneurs from employing unskilled workers and developing labor-intensive manufacturing, implying that the Indian government should redouble its reform efforts in this area. 
Equally important, Indian workers – especially young people – need opportunities to upgrade their skills continuously. 
The McKinsey Global Institute estimates that, of the potential global oversupply of 90 million low-skilled workers in 2020, 27 million will be in India. 
Meanwhile, the country will face a shortage of 13 million medium-skilled workers. 
Despite India’s educational expansion, especially at the secondary and tertiary levels, its system of higher education, including technical and vocational education and training, remains inadequate. 
Though India’s public vocational education and training systems are well institutionalized, they lack the scale, curriculum, financing, and incentives needed to prepare young workers to meet the demands of rapid globalization and technological advancement. 
The good news is that Modi seems committed to boosting India’s competitiveness by improving its business climate. 
For example, he has already announced measures to promote foreign direct investment in insurance, defense, and telecommunications, including higher infrastructure spending and new tax incentives for savings and investment. 
India’s government will also sustain its predecessors’ efforts to strengthen vocational education and skills training. 
What Modi’s plan lacks is a strong focus on expanding India’s labor-intensive industries. 
That, together with the planned reforms, would enable India to seize the opportunities that arise with favorable demographics and achieve Chinese-style growth. 

What Comes After Lee Kuan Yew? 
LONDON – All political leaders worry about their legacies. 
Lee Kuan Yew, who presided over Singapore either directly or indirectly for more than a half-century – remaining influential right up to his death at 91 – had more time in power than most to do so. 
Several volumes of memoirs attest to Lee’s concern about his legacy, although Singapore’s extraordinary success under his leadership speaks for itself. 
Like him or not – and many did not – there is no denying the city-state’s remarkable and enduring prosperity and stability. 
Yet the effort put into those memoirs by the man who called himself “Minister Mentor” during his later years offers a clue about Lee’s ultimate concern. 
His legacy in terms of Singapore’s past success may be clear, but what about the future? 
That, of course, is one of the few things he could not control, beyond offering his teachings to future generations. 
Yet in one crucial respect – determining who Singapore’s new generation of leaders will be – the tight control that Lee exercised in the past may now make that future more difficult. 
The issue is certainly solvable, especially given an excellent education system and high-quality institutions of all kinds. 
But Lee’s own actions suggest that he harbored doubts. 
The succession to Lee was clear: after handing over the premiership in 1990 (at the surprisingly young age of 66) to a trusted associate, Goh Chok Tong, he groomed his eldest son, Brigadier-General Lee Hsien Loong, for the job. 
After serving as Singapore’s trade minister, finance minister, and deputy prime minister, Lee Hsien Loong took over the top post in 2004. 
What is unresolved is where power goes next, and how. 
Perhaps the answer will simply be that the ruling People’s Action Party will choose a successor in the conventional way. 
Certainly, Singapore’s cadre of talented and experienced officials and ministers is deep. 
Still, the question is an open one, owing to Lee Kuan Yew’s somewhat paradoxical sensitivity to the prominence of his family members in some of the country’s most senior posts. 
Lee fought many battles with the international media over their coverage of Singapore, especially from the mid-1980s onward, by which point the country’s success had become abundantly clear. 
As a Cambridge-trained lawyer, he was especially keen on using the law to browbeat his media (and political) critics, knowing full well that he had no serious chance of losing in Singapore’s own courts. 
During my time as the editor-in-chief of The Economist (1993-2006), I received such browbeatings on many occasions. 
What eventually became clear was that under no circumstances could Lee Kuan Yew countenance one particular word or concept: nepotism. 
After all, he had set up Singapore as an intensely meritocratic society, in which competition, under clear and accepted rules, was king. 
So when his own son became Prime Minister, and his daughter-in-law, Ho Ching, took the helm at Temasek, one of the state’s huge investment companies, any insinuation that they had done so on anything other than their own merit was unacceptable. 
Lee established a high-minded committee to establish that nepotism was not the reason, and then set about suing anyone who dared to suggest otherwise. 
Yet this abhorrence of nepotism was illogical – and Lee was generally nothing if not logical, even ruthlessly so – because in this case a perfectly good justification for it followed smoothly from his own analysis of Singapore. 
A tiny, multi-racial society ejected from Malaysia in 1965, Singapore was born in an atmosphere of vulnerability, lack of legitimacy and trust, and ethnic conflict. 
Up through the 1980s and 1990s, Lee often justified the continuation of authoritarian policies by reference to those communal riots, and to the ever-present possibility of a loss of social trust and a return to conflict. 
So, in passing the baton to his eldest son, he could be said to have dealt with that risk in the most logical way possible. 
If you trusted the founder of Singapore and thought him legitimate, who better to trust than the founder’s own son? 
Indeed, the father would remain on the scene, first as “Senior Minister” and then in his mentor role, and had made his son prove his abilities openly in a series of prominent positions. 
It worked, and Lee Hsien Loong has by all accounts done a good job as Prime Minister, whatever the explanation for his rise. 
There is no current risk to Singapore’s political stability, and the younger Lee is only 63 years old; he could remain in office for a long time to come. 
The question, though, remains: What happens next? 
Lee Kuan Yew dealt with the question of succession by deferring it. 
His son will need to provide the answer. 



What’s Been Stopping the Left? 
CAMBRIDGE – Why were democratic political systems not responsive early enough to the grievances that autocratic populists have successfully exploited – inequality and economic anxiety, decline of perceived social status, the chasm between elites and ordinary citizens? 
Had political parties, particularly of the center left, pursued a bolder agenda, perhaps the rise of right-wing, nativist political movements might have been averted. 
In principle, greater inequality produces a demand for more redistribution. 
Democratic politicians should respond by imposing higher taxes on the wealthy and spending the proceeds on the less well off. 
This intuition is formalized in a well-known paper in political economy by Allan Meltzer and Scott Richard: the wider the income gap between the median and average voter, the higher the taxes and the greater the redistribution. 
Yet in practice, democracies have moved in the opposite direction. 
The progressivity of income taxes has decreased, reliance on regressive consumption taxes has increased, and the taxation of capital has followed a global race to the bottom. 
Instead of boosting infrastructure investment, governments have pursued austerity policies that are particularly harmful to low-skill workers. 
Big banks and corporations have been bailed out, but households have not. 
In the United States, the minimum wage has not been adjusted sufficiently, allowing it to erode in real terms. 
Part of the reason for this, at least in the US, is that the Democratic Party’s embrace of identity politics (highlighting inclusiveness along lines of gender, race, and sexual orientation) and other socially liberal causes came at the expense of the bread-and-butter issues of incomes and jobs. 
As Robert Kuttner writes in a new book, the only thing missing from Hillary Clinton’s platform during the 2016 presidential election was social class. 
One explanation is that the Democrats (and center-left parties in Western Europe) became too cozy with big finance and large corporations. 
Kuttner describes how Democratic Party leaders made an explicit decision to reach out to the financial sector following President Ronald Reagan’s electoral victories in the 1980s. 
Big banks became particularly influential not just through their financial clout, but also through their control of key policymaking positions in Democratic administrations. 
The economic policies of the 1990s might have taken a different path if Bill Clinton had listened more to his labor secretary, Robert Reich, an academic and progressive policy advocate, and less to his Treasury secretary, Robert Rubin, a former Goldman Sachs executive. 
But vested interests go only so far in explaining the failure of the left. 
Ideas have played at least as important a role. 
After the supply-side shocks of the 1970s dissolved the Keynesian consensus of the postwar era, and progressive taxation and the European welfare state had gone out of fashion, the vacuum was filled by market fundamentalism (also called neoliberalism) of the type championed by Reagan and Margaret Thatcher. 
The new wave also appeared to have caught the electorate’s imagination. 
Instead of developing a credible alternative, politicians of the center left bought wholesale into the new disposition. 
Clinton’s New Democrats and Tony Blair’s New Labour acted as cheerleaders for globalization. 
The French socialists inexplicably became advocates of freeing up controls on international capital movements. 
Their only difference from the right was the sweeteners they promised in the form of more spending on social programs and education – which rarely became a reality. 
The French economist Thomas Piketty has recently documented an interesting transformation in the social base of left-wing parties. 
Until the late 1960s, the poor generally voted for parties of the left, while the wealthy voted for the right. 
Since then, left-wing parties have been increasingly captured by the well-educated elite, whom Piketty calls the “Brahmin Left,” to distinguish them from the “Merchant” class whose members still vote for right-wing parties. 
Piketty argues that this bifurcation of the elite has insulated the political system from redistributive demands. 
The Brahmin Left is not friendly to redistribution, because it believes in meritocracy – a world in which effort gets rewarded and low incomes are more likely to be the result of insufficient effort than poor luck. 
Ideas about how the world works have played a role among the non-elite as well, by dampening the demand for redistribution. 
Contrary to the implications of the Meltzer-Richard framework, ordinary American voters do not seem to be very interested in raising top marginal tax rates or in greater social transfers. This seems to be true even when they are aware of – and concerned by – the sharp rise in inequality. 
What explains this apparent paradox is these voters’ very low levels of trust in government’s ability to address inequality. 
One team of economists has found that respondents “primed” by references to lobbyists or the Wall Street bailout display significantly lower levels of support for anti-poverty policies. 
Trust in government has generally been declining in the US since the 1960s, with some ups and downs. 
There are similar trends in many European countries as well, especially in southern Europe. 
This suggests that progressive politicians who envisage an active government role in reshaping economic opportunities face an uphill battle in winning over the electorate. 
The fear of losing that battle may explain the timidity of the left’s response. 
Yet the lesson of recent studies is that beliefs about what the government can and should do are not immutable. 
They are susceptible to persuasion, experience, and changing circumstances. 
This is as true for elites as it is for non-elites. 
But a progressive left that is able to stand up to nativist politics will have to deliver a good story, in addition to good policies. 

Criminalizing Consent? 
LONDON – Canada’s Parliament is debating a new anti-prostitution bill. 
Entitled the “Protection of Communities and Exploited Persons Act,” the proposed legislation would criminalize the purchase of “sexual services.” 
For those who are uncertain about what might constitute a sexual service, the term is helpfully defined by Canada’s Department of Justice to include lap-dancing, but not stripping or “acts related to the production of pornography.” 
Canada is not alone in seeking to criminalize transactional sex between consenting adults. 
More than 120 countries criminalize some aspect of sex work or solicitation, including 13 that, like the Canadian bill, criminalize the customer, and eight where possession of a condom is deemed to be proof of sex work, and thus punishable. 
While the French Senate recently struck down a similar law, several European countries are pressing ahead. 
In February, the European Parliament adopted a resolution to outlaw the purchase of sexual services from anyone below the age of 21. 
The impact of such laws will be much more significant than many believe. 
Surveys across 54 countries worldwide have found that up to 14% of men in nationally representative samples – and a global average of 9-10% – report paying for sex in the past year. 
Similar population-based surveys among women find much smaller proportions selling sex. 
Efforts to regulate or ban the sex trade are hardly new. 
Religious and cultural proscriptions aimed at controlling sexual behavior have been around for millennia. 
Over time, however, the concept of what, when, where, and with whom sexual activity is permissible has changed – sometimes quite arbitrarily, depending on who is in power. 
As a result, laws governing sexual behavior are almost as varied as human sexuality itself. 
Many countries criminalize extra-marital sex. 
Moreover, more than 20 countries criminalize premarital sex between consenting adults, though in at least 34 countries, young people cannot marry until they are 20 – and, in one country, men need to be 29. 
Conversely, in more than 50 countries, a girl under 15 can be married off if her parents consent to it, even if she does not. 
The United Nations estimates that more than 14 million girls under the age of 18 – of whom one third are under 15 – get married each year. 
That is 39,000 girl brides every day. 
In three countries, a third of all girls are married by their 15th birthday. 
Laws governing sex among consenting adults can be similarly harsh. 
In 78 countries, homosexuality is prohibited, and in seven it is punishable by death. 
The damage caused by such repressive and restrictive laws is well documented, including, for example, an increased risk of HIV transmission among gay men. 
Do local cultural and religious values outweigh such concerns? 
A universal definition of sexual health and sexual rights is sorely needed. 
The UN has long attempted to define what constitutes a sexually healthy society. 
Over the past 40 years, expert committees convened by the World Health Organization have agreed that sexual health includes physical, emotional, mental, and social well-being in relation to sexuality, and is underpinned by respect for human rights and individual autonomy. 
But WHO has never proposed such a definition to its governing body, the World Health Assembly, presumably because some of its member states would reject the definition and the accompanying obligations to promote it domestically. 
Now, however, the world has an opportunity to move from criminalization to consent. 
With the debate on the post-2015 Sustainable Development Goals starting at last month’s UN General Assembly, an oblique reference to “ensuring access to services” can be fully explored. 
This would normally include sexual and reproductive health-care services such as family planning and treatment of sexually transmitted infections. 
Access to services, though important, is not synonymous with a view of sexuality founded on human rights and individual autonomy. 
Indeed, rights are mentioned only in relation to reproduction, and concern only girls and women. 
However, if consent becomes central to the issue of sexual health, all adults will have the right to make autonomous decisions about their sexuality. 
These sexual rights would include the right to choose one’s sexual partners; decide whether, when, and whom to marry; decline sexual advances; and even buy sex from another consenting adult. 
With rights come the responsibility to protect children who cannot legally consent; to ensure that sexual partners are not coerced; and to promote a safe and satisfying sex life for all. 
It is these rights and responsibilities that Canada and other countries should be enshrining in their laws. 
That would be a sexual service that no one should oppose. 

Legislating History 
NEW YORK -- In October, the Spanish parliament passed a Law on Historical Memory, which bans rallies and memorials celebrating the late dictator Francisco Franco. 
His Falangist regime will be officially denounced and its victims honored. 
There are plausible reasons for enacting such a law. 
Many people killed by the Fascists during the Spanish Civil War lie unremembered in mass graves. 
There is still a certain degree of nostalgia on the far right for Fanco’s dictatorship. 
People gathered at his tomb earlier this year chanted “We won the Civil War!”, while denouncing socialists and foreigners, especially Muslims. 
Reason enough, one might think, for Socialist Prime Minister José Luis Rodríguez Zapatero to use the law to exorcize the demons of dictatorship for the sake of democracy’s good health. 
But legislation is a blunt instrument for dealing with history. 
While historical discussion won’t be out of bounds in Spain, even banning ceremonies celebrating bygone days may go a step too far. 
The desire to control both past and present is, of course, a common feature of dictatorships. 
This can be done through false propaganda, distorting the truth, or suppressing the facts. 
Anyone in China who mentions what happened on Tiananmen Square (and many other places) in June 1989 will soon find himself in the less-than-tender embrace of the State Security Police. 
Indeed, much of what happened under Chairman Mao remains taboo. 
Spain, however, is a democracy. 
Sometimes the wounds of the past are so fresh that even democratic governments deliberately impose silence in order to foster unity. 
When Charles de Gaulle revived the French Republic after World War II, he ignored the history of Vichy France and Nazi collaboration by pretending that all French citizens had been good republican patriots. 
More truthful accounts, such as Marcel Ophuls’s magisterial documentary The Sorrow and the Pity (1968) were, to say the least, unwelcome. 
Ophuls’s film was not shown on French state television until 1981. 
After Franco’s death in 1975, Spain, too, treated its recent history with remarkable discretion. 
But memory won’t be denied. 
A new generation in France, born after the war, broke the public silence with a torrent of books and films on French collaboration in the Holocaust, as well as the collaborationist Vichy regime, sometimes in an almost inquisitorial spirit. 
The French historian Henri Russo dubbed this new attitude “the Vichy Syndrome.” 
Spain seems to be going through a similar process. 
Children of Franco’s victims are making up for their parents’ silence. 
Suddenly, the Civil War is everywhere, in books, television shows, movies, academic seminars, and now in the legislature, too. 
This is not only a European phenomenon. 
Nor is it a sign of creeping authoritarianism. 
On the contrary, it often comes with more democracy. 
When South Korea was ruled by military strongmen, Korean collaboration with Japanese colonial rule in the first half of the twentieth century was not discussed – partly because some of those strongmen, notably the late Park Chung Hee, had been collaborators themselves. 
Now, under President Roh Moo-hyun, a new Truth and Reconciliation Law has not only stimulated a thorough airing of historical grievances, but has also led to a hunt for past collaborators. 
Lists have been drawn up of people who played a significant role in the Japanese colonial regime, ranging from university professors to police chiefs – and extending even to their children, reflecting the Confucian belief that families are responsible for the behavior of their individual members. 
The fact that many family members, including Park Chung Hee’s daughter, Geon-hye, support the conservative opposition party is surely no coincidence. 
Opening up the past to public scrutiny is part of maintaining an open society. 
But when governments do so, history can easily become a weapon to be used against political opponents – and thus be as damaging as banning historical inquiries. 
This is a good reason for leaving historical debates to writers, journalists, filmmakers, and historians. 
Government intervention is justified only in a very limited sense. 
Many countries enact legislation to stop people from inciting others to commit violent acts, though some go further. 
For example, Nazi ideology and symbols are banned in Germany and Austria, and Holocaust denial is a crime in 13 countries, including France, Poland, and Belgium. 
Last year, the French parliament introduced a bill to proscribe denial of the Armenian genocide, too. 
But even if extreme caution is sometimes understandable, it may not be wise, as a matter of general principle, to ban abhorrent or simply cranky views of the past. Banning certain opinions, no matter how perverse, has the effect of elevating their proponents into dissidents. 
Last month, the British writer David Irving, who was jailed in Austria for Holocaust denial, had the bizarre distinction of defending free speech in a debate at the Oxford Union. 
While the Spanish Civil war was not on a par with the Holocaust, even bitter history leaves room for interpretation. 
Truth can be found only if people are free to pursue it. 
Many brave people have risked – or lost – their lives in defense of this freedom. 
It is right for a democracy to repudiate a dictatorship, and the new Spanish law is cautiously drafted, but it is better to leave people free to express even unsavory political sympathies, for legal bans don’t foster free thinking, they impede them. 

 

Legitimacy and Elections 
So Ukraine now has a legitimate government. 
Or does it? 
Viktor Yushchenko has been elected with 52% of the popular vote. 
His opponent received 44%. 
Observers confirm that infringements of the electoral rules were but minor. 
Yet questions remain. 
The defeated candidate, Viktor Yanukovych, contests the result. 
The country is deeply divided. 
Will the miners of Donetsk start the next revolution, this time in red against the orange of the protests staged by Yushchenko’s supporters against the original election with its clearly illegitimate result? 
Will there be a secession movement in eastern Ukraine? 
Legitimacy is a delicate, yet utterly important feature of stable democratic politics. 
It is also complicated. 
Was George W. Bush the legitimately elected President of the United States in his first term, having gained office only after America’s Supreme Court ordered an end to the Florida recount and with Bush having secured only a minority of the votes nationwide? 
Are the presidents of some former Soviet republics who seem to command 90% of the popular vote legitimately elected? 
Will the planned elections in Iraq be regarded as legitimate internally as well as externally? 
It is vital to remember that elections alone do not guarantee legitimacy, even if they are seen to be free and fair. 
Americans find it hard to understand this, as do others in the lucky democracies of the Anglo-Saxon world. 
For them, legitimacy simply means that voting and counting votes happens according to undisputed rules. 
What is legal, they think, is also legitimate. 
For many others in the world, however, at least two other questions remain. 
First, turnout is crucial: who has voted and who has not. 
The second question is whether there remains any systematic, potentially violent opposition to the outcome. 
The point about George W. Bush’s first term was that despite grumblings and continued vocal opposition, the result of the election of 2000 was generally accepted. 
Or consider Tony Blair’s “landslide victory” in 2001, when Labour won 40% of the vote with turnout of 60%. 
In effect, 25% of the total electorate gave him nearly two-thirds of the seats in the House of Commons. 
Did anyone doubt the legitimacy of the result? 
Not in Britain, nor among Britain’s partners. 
But there are not many countries where that would be true. 
Most others would – at the very least – demand a coalition government to reflect the existing diversity of views. 
Legitimacy by election is particularly problematic in countries with what might be called “endemic minorities.” 
In Canada, for example, it would be risky to overlook the special interests of Quebec. 
In Ukraine, the divergent interests of the country’s west and east have to be recognized if legitimacy is to be established. 
In Iraq, a technical majority in a wholly legal election is almost meaningless if the position of Sunni Muslims and Kurds is not explicitly recognized. 
The occupation powers are therefore right to be worried about an election in which massive abstention among Sunnis results in a large Shiite majority. 
So legitimacy is more than legality. 
It rests on what the people concerned believe to be real. 
At the very least, there has to be an absence of violent opposition, including the threat of secession. 
In Western countries, notably in the US, people tend to assume too much when it comes to bringing democracy – meaning elections in the first instance – to others. 
In particular, we assume an essentially homogenous electorate, so that even a low turnout does not involve any disadvantage for particular ethnic or cultural groups. 
We also assume an automatic acceptance of rules that in fact took a long time to become embedded even in the US. 
Without legitimacy, there can be no stability in any political system, and without elections – that is, an explicit expression of popular consent to the holders of power – there can be no legitimacy. 
But while free elections are a necessary condition of legitimacy, they are far from being sufficient to assure it. 
Constitutional arrangements must guarantee all entrenched groups a place in the countries’ political institutions. 
It is equally imperative to establish the rule of law, exercised by an independent and respected judiciary. 
We should remember this as we pursue the elusive objective of democracy in Iraq, so that we are not surprised if the upcoming election fails to generate a legitimate government. 

The Failure of Free-Market Finance 
LONDON – Five years after the collapse of the US investment bank Lehman Brothers, the world has still not addressed the fundamental cause of the subsequent financial crisis – an excess of debt. 
And that is why economic recovery has progressed much more slowly than anyone expected (in some countries, it has not come at all). 
Most economists, central bankers, and regulators not only failed to foresee the crisis, but also believed that financial stability was assured so long as inflation was low and stable. 
And, once the immediate crisis had been contained, we failed to foresee how painful its consequences would be. 
Official forecasts in the spring of 2009 anticipated neither a slow recovery nor that the initial crisis, which was essentially confined to the United States and the United Kingdom, would soon fuel a knock-on crisis in the eurozone. 
And market forces did not come close to predicting near-zero interest rates for five years (and counting). 
One reason for this lack of foresight was uncritical admiration of financial innovation; another was the inherently flawed structure of the eurozone. 
But the fundamental reason was the failure to understand that high debt burdens, relentlessly rising for several decades – in the private sector even more than in the public sector – were a major threat to economic stability. 
In 1960, UK household debt amounted to less than 15% of GDP; by 2008, the ratio was over 90%. 
In the US, total private credit grew from around 70% of GDP in 1945 to well over 200% in 2008. 
As long as the debt was in the private sector, most policymakers assumed that its impact was either neutral or benign. 
Indeed, as former Bank of England Governor Mervyn King has noted, “money, credit, and banks play no meaningful role” in much of modern macroeconomics. 
That assumption was dangerous, because debt contracts have important implications for economic stability. 
They are often created in excess, because in the upswing of economic cycles, risky loans look risk-free. 
And, once created, they introduce the rigidities of default and bankruptcy processes, with their potential for fire sales and business disruptions. 
Moreover, debt can drive cycles of over-investment, as described by Friedrich von Hayek. 
The Irish and Spanish property booms are prime examples of this. 
And debt can drive booms and busts in the price of existing assets: the UK housing market over the past few decades is a case in point. 
When times are good, rising leverage can make underlying problems seem to disappear. 
Indeed, subprime mortgage lending delivered illusory wealth increases to Americans at a time when they were suffering from stagnant or falling real wages. 
But in the post-crisis downswing, accumulated debts have a powerful depressive effect, because over-leveraged businesses and consumers cut investment and consumption in an attempt to pay down their debts. 
Japan’s lost decades after 1990 were the direct and inevitable consequence of the excessive leverage built up in the 1980’s. 
Faced with depressed private investment and consumption, rising fiscal deficits can play a useful role, offsetting the deflationary effects. 
But that simply shifts leverage to the public sector, with any reduction in the ratio of private debt to GDP more than matched by an increase in the public-debt ratio: witness the Irish and Spanish governments’ high and rising debt burdens. 
Private leverage levels, as much as the public-debt burden, must therefore be treated as crucial economic variables. 
Ignoring them before the crisis was a profound failure of economic science and policy, one for which many countries’ citizens have suffered dearly. 
Two questions follow. 
The first is how to navigate out of the current overhang of both private and public debt. 
There are no easy options. 
Paying down private and public debt simultaneously depresses growth. 
Rapid fiscal consolidation thus can be self-defeating. 
But offsetting fiscal austerity with ultra-easy monetary policies risks fueling a resurgence of private leverage in advanced economies and already has produced the dangerous spillover of rising leverage in emerging economies. 
Both realism and imaginative policy are required. 
It is obvious that Greece cannot pay back all of its debt. 
But it should also be obvious that Japan will never be able to generate a primary fiscal surplus large enough to repay its government debt in the normal sense of the word “repay.” 
Some combination of debt restructuring and permanent debt monetization (quantitative easing that is never reversed) will in some countries be unavoidable and appropriate. 
The second question is how to constrain leveraged growth in the future. 
Achieving this goal requires reforms with a different focus from those pursued so far. 
Fixing the “too big to fail” problem is certainly important, but the direct taxpayer costs of bank rescues were small change compared to the damage wreaked by the financial crisis. 
And a banking system that never received a taxpayer subsidy could still support excessive private-sector leverage. 
What is required is a wide-ranging policy response that combines more powerful countercyclical capital tools than currently planned under Basel 3, the restoration of quantitative reserve requirements to advanced-country central banks’ policy toolkits, and direct borrower constraints, such as maximum loan-to-income or loan-to-value limits, in residential and commercial real-estate lending. 
These policies would amount to a rejection of the pre-crisis orthodoxy that free markets are as valuable in finance as they are in other economic sectors. 
That orthodoxy failed. 
If we do not address the fundamental fact that free financial markets can generate harmful levels of private-sector leverage, we will not have learned the most important lesson of the 2008 crisis. 

What Lehman Brothers’ Failure Means Today 
PRINCETON – So far this year, the world has marked the 50th anniversary of the Prague Spring (and its suppression), the centennial of the end of World War I, and the bicentennial of Karl Marx’s birth. 
Against that backdrop, should one really care about the tenth anniversary of the collapse of Lehman Brothers? 
Yes, we should. 
Lehman may not have been a particularly large bank, and it probably was not even insolvent when it failed. 
Nonetheless, it nearly took down the global financial system and triggered the Great Recession. 
Lehman was transformative because it fundamentally altered people’s understanding of the world around them. 
After September 15, 2008, the fear of “another Lehman” and a deeper financial catastrophe put the United States on the path toward wide-ranging reform. 
And Lehman was constantly invoked during the European financial crisis that erupted after 2010, highlighting fears of a “death spiral” stemming from state bankruptcies and defaults. 
Since then, the scare story seems to have lost its effectiveness. 
In the US, banking reforms are now being undone; and in the European Union, government debt-to-GDP ratios are well above where they were in 2008. 
Still, for policymakers and opinion-shapers, the 2008 financial crisis produced three new grand narratives. 
First, after Lehman, the American economist Charles Kindleberger’s 1978 masterful book Manias, Panics, and Crashes met with a newfound popularity. 
Kindleberger had drawn explicitly from the American economist Hyman Minsky’s work on financial cycles, and his arguments were read as a warning against “market fundamentalism.” 
The second narrative was that Lehman’s failure had made the Wall Street crash of 1929 and the Great Depression newly relevant. 
Policymakers drew lessons from the interwar years, and successfully avoided a full repeat of that period. 
During the Great Depression, especially in Germany and the US, the prevailing attitude was that of then-US Secretary of the Treasury Andrew Mellon: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” 
By contrast, the response during the Great Recession was to use public debt to replace insecure private debt – an intervention that would prove sustainable only as long as interest rates remained low. 
The third narrative held that Lehman’s collapse augured the end of American capitalism. 
This butterfly-effect story was popular in every country that was tired of being bossed around by the US. 
As Germany’s then-finance minister, Peer Steinbrück, explained in September 2008: “The US will lose its status as the superpower of the global financial system, not abruptly but it will erode.” 
At first, the 2008 crisis was widely regarded as a quintessentially American disaster, owing to the country’s mix of testosterone-driven finance and penchant for promoting home ownership even for those who cannot afford it. 
Only gradually was it recognized as a truly transatlantic affair. 
As the economists Hyun Song Shin and Tamim Bayoumi subsequently show, badly regulated, oversized European banks played a key role in the build-up of risk throughout the financial system. 
Neither of the first two popular narratives is really correct. 
The crisis was not a market failure, but rather the product of opaque, dysfunctional non-market institutions that had become perversely intertwined. 
It exposed the problem of complexity – not of markets as such. 
Specifically, the reason that Lehman was such a problem was that it was not really a single corporation. 
It comprised some 7,000 separate entities in over 40 countries, all of which would need to go through a complex and costly valuation and bankruptcy process. 
This opacity, which was hardly unique to the US, created the sense that the world was close to another Great Depression when it really wasn’t. 
The crisis was the product of escalating short-termism in financial markets. 
While banks wanted to offload securitized products before they became toxic, other market participants were looking to win on short-term bets, paying little mind to the longer-term viability of the investment. 
In this sense, volatility was desirable, as it created new opportunities for gain. 
After Lehman collapsed, the twin narratives about “market failure” and “another Great Depression” had a massive effect on public perceptions, and fueled the third narrative, which actually happens to be true. 
America’s financial and political preeminence has in fact waned. 
The global primacy of the US was based on economic and political power, but it also depended on something more fundamental: trust in America’s capacity to deliver on its promises over the long term. 
The crisis undermined that trust, even though US economic and political power remained only slightly diminished. 
The deeper contagion was intellectual, not financial. 
Financial behavior does not occur in a vacuum. 
The same kind of short-term, hyperactive mindset that felled Lehman was also taking root in the rest of society at the time. 
Tellingly, the iPhone was introduced in June 2007, just as early signs of the impending crisis were coming into view. 
With the smartphone came all kinds of new possibilities. 
It added dynamism to inchoate social-media platforms like Facebook and Twitter. 
And it provided the basis for Tinder and other apps which have transformed the social life of millions, pushing dating further in the direction of short-termism and away from longer-term commitment. 
The new digital devices and platforms encouraged hyper-individualism. 
But they also affected political outlooks and behavior, by making it easier than ever to reinforce one’s own views while avoiding alternative opinions. 
One result, little wonder, is the online culture of demonization, abuse, harassment, and manipulation we see today. 
Much of today’s political volatility is a consequence of these new ways of thinking and communicating. 
Technology and finance adopted the same ethos: destroy continuity and glorify disruption. 
Lehman Brothers’ collapse revealed a flaw not just in finance, but in twenty-first-century politics and society. 
The irony is that, rather than forestalling an era of technologically driven short-termism, the subsequent crisis seems to have accelerated it. 

Lemon Banking 
Munich – After the 1982 debt crisis, the Savings & Loan crisis in the United States in the late 1980’s, and the Asian financial crisis of 1997, the sub-prime mortgage crisis is the fourth major banking crisis since World War II, and by far the biggest. 
According to the IMF, the total loss in terms of balance sheet write-offs will be nearly $1 trillion worldwide, of which the lion’s share probably will be borne by US financial institutions. 
Given that the combined equity capital stock of all US financial institutions is roughly $1.2 trillion dollars, this is a breathtaking sum. 
Why do banking crises happen? 
Are bank managers ignorant? 
Why do they underwrite risks that drive their banks to the brink of bankruptcy? 
The answer lies in a combination of a bad accounting system and various moral-hazard effects that were not contained by existing regulatory systems. 
The bad accounting system is the International Financial Reporting Standards (IFRS), which is now used by big companies throughout the world. 
The deficiency of IFRS is that it does not mitigate systemic contagion resulting from asset price movements. 
When asset prices move, firms that own these assets are forced to revalue them on their balance sheets quarter by quarter. 
The timely reporting of non-realized capital gains and losses makes the shares of the company that holds them volatile, sending shock waves through the financial system. 
An alternative would be a precautionary accounting system, like the one that all German companies used before the transition to IFRS began. 
In Germany’s traditional system, a company’s assets were evaluated according to the “lowest value principle”: the lower of an asset’s historical price and its current market price must be used for accounting purposes. 
This allowed managers to pursue more long-term goals and proved effective in blocking contagion effects. 
Indeed, it was a major reason for the German financial system’s stability. 
In the current crisis, three moral-hazard effects are particularly important. 
First, management pay depends too much on short-term share-price performance, probably owing to the excessive influence of investment banks on commercial banks’ policies. 
Given that investment banks can only attain high rates of return in a world with volatile asset prices and short-term performance goals, companies pressure their managers to follow suit. 
Second, banks’ assumption of excessive investment risks reflects their expectation that governments will bail them out if necessary. 
This was the case in the S&L crisis, where the government explicitly served as a deposit insurer. 
Banks could take on overly risky projects without scaring off investors because the government would step in as the lender of last resort. 
In the sub-prime crisis, a similar phenomenon was implicitly at work, with banks speculating that they were too big for governments to let them fail. 
The fact that the Bank of England bailed out Northern Rock and the US Federal Reserve saved Bear Stearns with $30 billion suggests that they were right. 
The third, and probably most important, moral hazard results from asymmetric information between banks and their lenders. 
Banks issue securities with attractive nominal interest rates but unknown repayment probability. 
Often, securities are created that are backed by sophisticated portfolios containing good and bad assets whose true risk cannot easily be assessed. 
In the current crisis, even the private rating agencies dramatically underestimated the risks involved, which helped lure international financial investors into purchasing mortgage-backed securities at exaggerated prices. 
So nothing stopped the banks from selling “lemon” bonds. 
Like used cars that break down right after they are sold, tomatoes and apples that look good but taste like water, or suits that quickly become threadbare, the seller could reduce the quality of the product and cut costs without the buyer’s knowledge. 
As low-quality products sell at the same price as high-quality products, the latter disappear from the market. 
In capital markets, the information asymmetry between buyers and sellers of securities is even more extreme, making it hugely tempting for banks to issue securities that increase their expected profits by reducing the repayment probability below what buyers expect. 
To do so, they develop complicated legal claim structures that hardly anyone can fully understand and operate with too little equity capital to cover the risks. 
This destroys the market for sound financial instruments, undermining the viability of the capitalist system. 
To address this problem, stricter banking regulation is needed in order to increase the probability of repayment, and hence the quality of securities. 
Financial products must be made transparent, off-balance sheet operations must be limited, and, above all, the scope of leveraged operations must be reduced by requiring higher equity-asset ratios. 
Banks often oppose higher equity-asset ratios, because equity capital is more expensive than debt capital. 
But this is precisely because of the lemon effect. 
The IMF, the G7 or a joint US-European body could be the right forum for determining new rules for financial markets aimed at enhancing the efficiency and stability of the world economy. 
By contrast, setting rules unilaterally would be a recipe for global disaster, because competition between governments to create advantages for their own banking sectors would merely reproduce the inadequate regulations that resulted in lemon banking in the first place. 

Less Bang for America’s Stimulus Buck 
MILAN – The run-up to the economic crisis in the United States was characterized by excessive leverage in financial institutions and the household sector, inflating an asset bubble that eventually collapsed and left balance sheets damaged to varying degrees. 
The aftermath involves resetting asset values, deleveraging, and rehabilitating balance sheets – resulting in today’s higher saving rate, significant shortfall in domestic demand, and sharp uptick in unemployment. 
So the most important question the US now faces is whether continued fiscal and monetary stimulus can, as some believe, help to right the economy. 
To be sure, at the height of the crisis, the combined effect of fiscal stimulus and massive monetary easing had a big impact in preventing a credit freeze and limiting the downward spiral in asset prices and real economic activity. 
But that period is over. 
The reason is simple: the pre-crisis period of consuming capital gains that turned out to be at least partly ephemeral inevitably led to a post-crisis period of inhibited spending, diminished demand, and higher unemployment. 
Counter-cyclical policy can moderate these negative effects, but it cannot undo the damage or accelerate the recovery beyond fairly strict limits. 
As a result, the benefits associated with deficit-financed boosts to household income are now being diminished by the propensity to save and rebuild net worth. 
On the business side, investment and employment follows demand once the inventory cycle has run its course. 
Until demand returns, business will remain in a cost-cutting mode. 
The bottom line is that deficit spending is now fighting a losing battle with an economy that is deleveraging and restructuring its balance sheets, its exports, and its microeconomic composition – in short, its future growth potential. 
That restructuring will occur, deficit spending or no deficit spending. 
So policy needs to acknowledge the fact that there are limits to how fast this restructuring can be accomplished. 
Attempting to exceed these speed limits not only risks damaging the fiscal balance and the dollar’s stability and resilience, but also may leave the economy and government finances highly vulnerable to future shocks that outweigh the quite modest short-term benefits of accelerated investment and employment. 
Demand will revive, but only slowly. 
True, asset prices have recovered enough to help balance sheets, but probably not enough to help consumption. 
The impact on consumption will largely have to wait until balance sheets, for both households and businesses, are more fully repaired. 
Higher foreign demand from today’s trade-surplus countries (China, Germany, and Japan, among others) could help restore some of the missing demand. 
But that involves structural change in those economies as well, and thus will take time. 
Moreover, responding to expanded foreign demand will require structural changes in the US economy, which will also take time. 
This is not to say that rebalancing global demand is unimportant. 
Quite the contrary. 
But achieving that goal has more to do with restoring the underpinnings of global growth over three to five years than it does with a short-term restoration of balance and employment in the advanced economies, especially the US. 
Today, the best way to use deficits and government debt is to focus on distributional issues, particularly the unemployed, both actual and potential. 
In an extended balance-sheet recession of this type, unemployment benefits need to be substantial and prolonged. 
The argument that this would discourage the unemployed from seeking work has merit in normal times, but not now. 
Today’s unemployment, after all, is structural, rather than the result of perverse incentives. 
Benefits should be expanded and extended for a limited, discretionary period. 
When structural barriers to employment have diminished, unemployment benefits should revert to their old norms. 
Doing this would not only reduce the unequal burden now being carried by the unemployed; it would also help to sustain consumption, and perhaps reduce some precautionary savings among those who fear losing their jobs in the future. 
Monetary policy is a more complex and difficult balancing act. 
A more aggressive interest-rate policy would likely reduce asset prices (or at least slow the rate of appreciation), increase adjustable-rate debt-service burdens, and trigger additional balance-sheet distress and disorderly deleveraging, such as foreclosures. 
All of this would slow the recovery, perhaps even causing it to stall. 
But there are consequences to abjuring this approach as well. 
Low-cost credit is unlikely to have a significant impact on consumption in the short run, but it can produce asset inflation and misallocations. 
Much of the rest of the world would prefer a stronger dollar, fewer capital inflows with a carry-trade flavor, and less need to manage their own currencies’ appreciation to avoid adverse consequences for their economies’ competitiveness. 
In short, the sort of monetary policy now being practiced for a fragile economy like the US will cause distortions in the global economy that require policy responses in many other countries. 
From a political point of view, the crisis has been portrayed as a failure of financial regulation, with irresponsible lending fueling a rapid rise in systemic risk. 
That leaves the rest of the real economy populated with people who feel like victims – albeit victims who, prior to the crisis, bought a lot of houses, vacations, TVs, and cars. 
Unfortunately, that perception pushes the policy response in the direction of too much remedial action, even when the marginal returns are low. 
What we most need now is support for the unemployed, stable government finances with a clearly communicated deficit-reduction plan, some truth-telling about medium-term growth prospects, and an orderly healing process in which balance sheets are restored mostly without government intervention. 


The Five Lessons of Populist Rule 
WARSAW – Jarosław Kaczyński, Poland’s de facto leader, has become, next to Donald Trump, an avatar of the populist threat to the Western democratic model. 
As we await Trump’s inauguration as US president on January 20, it is worth pondering the first year of populist rule in Poland. 
The results have run contrary to expectations. 
The conventional view of what awaits the US (and possibly France and the Netherlands) in 2017 is an erratic ruler who enacts contradictory policies that primarily benefit the rich. 
The poor will lose, because populists have no hope of restoring manufacturing jobs, despite their promises. 
And massive inflows of migrants and refugees will continue, because populists have no plan to address the problem’s root causes. 
In the end, populist governments, incapable of effective rule, will crumble and their leaders will either face impeachment or fail to win re-election. 
Kaczyński faced similar expectations. 
Liberal Poles thought that he would work for the benefit of the rich, create chaos, and quickly trip himself up – which is exactly what happened in 2005-2007, when Kaczyński’s Law and Justice Party (PiS) last governed Poland. 
But the liberals were wrong. 
PiS has transformed itself from an ideological nullity into a party that has managed to introduce shocking changes with record speed and efficiency. 
Other countries currently anticipating populist rule should take note of its key hallmarks. 
No to neoliberalism. 
In 2005-2007, PiS implemented neoliberal economic policies (for example, eliminating the highest income-tax bracket and the estate tax); this time, it has enacted the largest social transfers in Poland’s contemporary history. 
Parents receive a 500 złoty ($120) monthly benefit for every child after their first, or for all children in poorer families (the average net monthly income is about 2,900 złoty, though more than two-thirds of Poles earn less). 
As a result, the poverty rate has declined by 20-40%, and by 70-90% among children. 
The list goes on: In 2016, the government introduced free medication for people over the age of 75. 
The minimum-wage now exceeds what trade unions had sought. 
The retirement age has been reduced from 67 for both men and women to 60 for women and 65 for men. 
The government also plans tax relief for low-income taxpayers. 
The restoration of “order.” 
Independent institutions are the most important enemy of populism. 
Populist leaders are control freaks. 
For populists, it is liberal democracy that leads to chaos, which must be “put in order” by a “responsible government.” 
Media pluralism leads to informational chaos. 
An independent judiciary means legal chaos. 
Independent public administration creates institutional chaos. 
And a robust civil society is a recipe for chronic bickering and conflict. 
But populists believe that such chaos does not emerge by itself. 
It is the work of perfidious foreign powers and their domestic puppets. 
To “make Poland great again,” the nation’s heroes must defeat its traitors, who are not equal contenders for power. 
Populist leaders are thus obliged to limit their opponents’ rights. 
Indeed, their political ideal is not order, but rather the subordination of all independent bases of power that could challenge them: courts, media, business, cultural institutions, NGOs, and so forth. 
Electoral dictatorship. 
Populists know how to win elections, but their conception of democracy extends no further. 
On the contrary, populists view minority rights, separation of government powers, and independent media – all staples of liberalism – as an attack on majority rule, and therefore on democracy itself. 
The political ideal that a populist government strives for is essentially an elected dictatorship. 
And recent US experience suggests that this can be a sustainable model. 
After all, everything depends on how those in power decide to organize elections, which can include redrawing voting districts or altering the rules governing campaign finance or political advertisements. 
Elections can be falsified imperceptibly. 
Might makes right. 
Populists have benefited from disseminating fake news, slandering their opponents, and promising miracles that mainstream media treat as normal campaign claims. 
But it is a mistake to think that truth is an effective weapon against post-truth. 
In a post-truth world, it is power, not fact-checking, that is decisive. 
Whoever is most ruthless and has the fewest scruples wins. 
Populists are both unseemly and ascendant. 
Trump’s supporters, for example, have come to view tawdriness as evidence of credibility, whereas comity, truth, and reason are evidence of elitism. 
If people are worse off under liberal democracy, so much the worse for liberal democracy. 
Those who would resist populism must come to terms with the fact that truth is not enough. 
They must also display determination and ruthlessness, though without becoming the mirror image of their opponents. 
The current situation in Poland can serve as a useful example. 
After a year of retreating, the two largest opposition parties have begun to occupy the Sejm (Poland’s parliament) to protest an illegal vote on the state budget. 
They are laying a trap for Kaczyński’s government: back down or resort to violence. 
Either way, he loses. 
Nationalism is not dead. 
Unfortunately, what won’t lose, in Poland and elsewhere, is nationalism – the only ideology that has survived in the post-ideological era. 
By appealing to nationalist sentiment, populists have gained support everywhere, regardless of the economic system or situation, because it is being fueled externally, namely by the influx of migrants and refugees. 
Mainstream politicians, especially on the left, currently have no effective message on the issue. 
Opposing migration contradicts their ideals, while supporting it means electoral defeat. 
But the choice should be clear. 
Either populism’s opponents drastically change their rhetoric regarding migrants and refugees, or the populists will continue to rule. 
Migrants and refugees lose in either scenario, but in the second, so does liberal democracy. 
Such calculations are ugly – and, yes, corrosive of liberal values – but the populists, as we have seen, are capable of far nastier tradeoffs. 
After a year of populism in Poland, Kaczyński has succeeded in establishing control over two issues near and dear to voters: social transfers and immigration. 
As long as he controls these two bastions of voter sentiment, he is safe. 
Those who seek to oppose Trump – or France’s Marine Le Pen in April’s presidential election – can draw their own conclusions from that fact. 

QE Turns Ten 
NEW HAVEN – November 2018 will mark the tenth anniversary of quantitative easing (QE) — undoubtedly the boldest policy experiment in the modern history of central banking. 
The only thing comparable to QE was the US Federal Reserve’s anti-inflation campaign of 1979-1980, orchestrated by the Fed’s then-chair, Paul Volcker. 
But that earlier effort entailed a major adjustment in interest rates via conventional monetary policy. 
By contrast, the Fed’s QE balance-sheet adjustments were unconventional and, therefore, untested from the start. 
The American Enterprise Institute recently held a symposium to mark this important milestone, featuring QE’s architect, Ben Bernanke. 
What follows are some comments I offered in an accompanying panel session that focused on lessons learned from QE. 
The most important lesson pertains to traction — the link between Fed policy and its congressionally mandated objectives of maximum employment and price stability. 
On this count, the verdict on QE is mixed: The first tranche (QE1) was very successful in arresting a wrenching financial crisis in 2009. 
But the subsequent rounds (QE2 and QE3) were far less effective. 
The Fed mistakenly believed that what worked during the crisis would work equally well afterwards. 
An unprecedentedly weak economic recovery – roughly 2% annual growth over the past nine-plus years, versus a 4% norm in earlier cycles – says otherwise. 
Whatever the reason for the anemic recovery – a Japanese-like post-crisis balance-sheet recession or a 1930s style liquidity trap – the QE payback was disappointing. 
From November 2008 to November 2014, successive QE programs added $3.6 trillion to the Fed’s balance sheet, nearly 25% more than the $2.9 trillion expansion of nominal GDP over the same period. 
A comparable assessment of disappointing interest-rate effects is reflected in recent "event studies” research that calls into question the link between QE and ten-year Treasury yields. 
A second lesson speaks to addiction – namely, a real economy that became overly reliant on QE’s support of asset markets. 
The excess liquidity spawned by the Fed’s balance-sheet expansion not only spilled over into equity markets, but also provided support for the bond market. 
As such, monetary policy, rather than market-based fundamentals, increasingly shaped asset prices. 
In an era of weak income growth, QE-induced wealth effects from frothy asset markets provided offsetting support for crisis-battered US consumers. 
Unfortunately, along with this life support came the pain of withdrawal – not only for asset-dependent consumers and businesses in the United States, but also for foreign economies dependent on capital inflows driven by QE-distorted interest-rate spreads. 
The taper tantrum of 2013 and the current travails of Argentina, Brazil, and other emerging economies underscore the contagion of cross-market spillovers arising from the ebb and flow of QE. 
A third lesson concerns mounting income inequality. 
Wealth effects are for the wealthy, whether they are driven by market fundamentals or QE. 
According to the Congressional Budget Office, virtually all of the growth in pre-tax household income over the QE period (2009 to 2014) occurred in the upper decile of the US income distribution, where the Fed’s own Survey of Consumer Finances indicates that the bulk of equity holdings are concentrated. 
It is hardly a stretch to conclude that QE exacerbated America’s already severe income disparities. 
Fourth, QE blurs the distinction between fiscal and monetary policy. 
Fed purchases of government securities have tempered market-based discipline of federal spending. 
This is hardly a big deal when debt-service costs are repressed by persistently low interest rates. 
But with federal debt held by the public nearly doubling between 2008 and 2017 – from 39% to 76% of GDP – and likely to rise further in the years ahead, what is inconsequential today could take on considerably greater importance in an interest-rate environment that lacks the QE subsidy to Treasury financing. 
A fifth lesson pertains to the distinction between tactics and strategy. 
As lender of last resort, the Fed deserves great credit for stepping into the breach during a wrenching crisis. 
The problem, of course, is that the Fed also played a key role in condoning the pre-crisis froth that took the system to the brink. 
This raises a fundamental question: Do we want a reactive central bank that focuses on cleaning up the mess after a crisis erupts, or a pro-active central bank that leans against excesses before they spark crises? 
That question – whether to “lean or clean” – has fueled a raging debate in policy and academic circles. 
It has an important political economy component: Are independent central banks willing to force society to sacrifice growth in order to preserve financial stability? 
It also bears on the bubble-spotting debate. 
Yet as difficult as these problems are, they pale in comparison to the foregone output of America’s anemic post-crisis recovery. 
That raises two additional questions: Might a pro-active Fed have prevented the crisis from occurring in the first place? 
And should it be more aggressive in normalizing interest rates? 
The Fed’s preference for glacial normalization both in the early 2000s and now keeps monetary policy on emergency settings long after the emergency has passed. 
Doing so raises the distinct possibility that the Fed will lack the ammunition it will need to counter the inevitable next recession. 
And that could well make the lessons noted above all the more problematic for the US economy. 
Unsurprisingly, Bernanke offered a very different take on many of these issues at the AEI symposium. 
He argued that the Fed’s balance-sheet tools are merely extensions of its traditional approach, stressing that “conventional and unconventional monetary policy works through the same channels, with the same mechanism.” 
That is debatable. 
By conflating QE-induced wealth effects with the effects on borrowing costs that arise through conventional channels, Bernanke conveniently sweeps aside most of the risks described above – especially those pertaining to asset bubbles and excess leverage. 
Ten-year anniversaries are an opportunity for reflection and accountability. 
We can only hope that circumstances don’t require another unconventional policy experiment such as QE. 
But in the event of another crisis, it would pay to be especially mindful of QE’s shortcomings. 
Unlike Bernanke, I fear there is good reason to worry that the next experiment may not work out nearly as well. 

Lessons from a Divided Island 
CAMBRIDGE: Seven hundred miles off Florida’s coast lies one of the most impoverished places on earth. 
Hispaniola was Christopher Columbus’s first stop in the New World. 
Just a hour-and-a-half flight south of Miami, we might expect that island to be a tropical paradise and a favored spot for offshore US business. 
But reality is more cruel. 
Hispaniola is home to two nations. 
Haiti, on the western side, is the poorest country in the Americas. 
The Dominican Republic, to the east, is more successful, with six times Haiti’s average income. 
It too, however, experienced political and economic horrors until a breakthrough in the past decade. 
With President Jean-Bertrand Aristide returning to office in February, Haiti’s long cycle of poverty and violence could end, but only if Haiti and the US understand the lessons of Hispaniola’s tortured history. 
Hispaniola’s impoverishment has colonial era roots. 
Europeans colonized the Caribbean islands as sugar plantations, ruthlessly bringing African slaves by the millions to work, and die young, on those plantations. 
Tropical forests were cut down to expand the plantations. 
Hispaniola suffered the worst fate of deforestation, soil erosion, and collapse of agricultural productivity, especially on the Haitian side. 
After slavery ended, the once beautiful island could barely sustain the former slave populations because the soils were exhausted by overuse and erosion. 
Racism in America made conditions worse. 
America refused to recognize Haiti as an independent country until the 1860s, nearly six decades after Haiti’s slave rebellion successfully ended French colonial rule. 
Countries like Haiti and the Dominican Republic found themselves adrift, with uneducated populations barely surviving on subsistence agriculture. 
Their long-term needs required massive investment in health and education, as well as a shift to new kinds of economic activity. 
In the 20th century, profitable activities in the Caribbean included tourism, offshore banking, and labor-intensive manufacturing, especially of textiles and apparel and electronics. 
But the Haitian and Dominican dictatorships that ruled through most of these decades were incapable of attracting these businesses. 
The Dominican Republic, despite violence, dictatorship, and periodic invasions from the US, broke through recently to embark on a two-pronged development path: expanded health and education and a shift to profitable manufacturing and services activities. 
As a result, the Dominican Republic became one of the world’s fastest growing economies in the 1990s, with booming investments in tourism and in labor-intensive manufactures. 
In Haiti, however, misery deepened. 
America supported a series of brutal dictators uninterested in economic development. 
When the Duvalier dictatorship fell, America started promoting democratization in the mid-1980s, but violence ensued and the US imposed various economic sanctions. 
These chased away even the tiny levels of foreign investment that had come to Haiti. 
Jean Bertrand Aristide, a leader of Haiti’s poor, won election as President in 1990, only to be overturned by a military coup in 1991. 
Three years later, Aristide was returned to power through the support of the US military, but America allowed him to serve less than two years, on the grounds that his election in 1991 was for a term originally scheduled to end in 1996. 
After a five-year hiatus, he has won re-election as President. 
Haiti’s situation is fraught with peril. 
The few rich Haitians distrust Aristide. 
Aristide distrusts the rich because of their support for the coup that ousted him, and because of their traditional intransigence against reform. 
America’s political leadership is also divided. 
Despite Aristide’s undoubted popularity, he is viewed by many US conservatives with suspicion. 
Centuries of violence and poverty could finally yield to social and economic progress if all of the key actors rise above their bitter fights. 
President Aristide understands that his real fight is not with Haiti’s tiny rich community but against mass poverty. 
This fight requires large investments to create jobs and well as financial aid from America and the UN to fight disease, illiteracy, and environmental ills. 
Aristide should, and will, endorse this two-pronged strategy of business investment and human investments in health and education. 
Haiti’s elite should not view Aristide as the enemy. 
For Aristide’s mass popularity is not a threat to their wealth but an opportunity for reforms that can produce long-term economic development. 
The US should understand that Haiti cannot overcome its intense poverty on its own. 
Haiti requires urgent financial support to put children in schools, and to reduce diseases like tuberculosis and AIDS which now cripple and kill many. 
As Haiti’s first popular leader in decades, perhaps in history, President Aristide is the best chance for addressing these ills in a peaceful, effective, and democratic manner. 
Haiti is an extreme example of how a cycle of poverty, disease, and violence reproduces itself for generations. 
The path of economic development is not hard to see, but to get on that path, impoverished countries often require the good will and support of powerful neighbors, and usually luck as well. 
Haiti’s luck today is to have a popular and freely elected leader. 
When countries with tortured histories get this modicum of good fortune, the rich and powerful should seize the chance to help them develop. 

Lessons from America's Fiscal Recklessness 
George W. Bush has done more to wreck US economic policy than any other President in American history, exceeding even his mentor, Ronald Reagan. 
In just three years in office, he has destroyed a fragile political consensus that had taken a decade to construct, and that could take another decade to re-create. 
In doing so, Bush has risked America's long-term economic health and social stability. 
Because the long-term budgetary challenges that the US is so badly mismanaging are not unique, America's fiscal blunders provide important lessons for other countries. 
The main problem with fiscal policy is that politicians can easily make themselves temporarily popular by cutting taxes and increasing public spending while running up massive public debts, leaving repayment to the future. 
This trick can last a few years, but sooner rather than later budget deficits and growing public debt force a painful policy reversal. 
Yet a cynical politician can buy himself re-election and perhaps be in retirement when the crisis arrives. 
One would imagine that after hundreds of such episodes of fiscal irresponsibility around the world in recent decades, voters would be allergic to such tricks. 
Yet Bush is doing it again, buying popularity today by doling out massive tax cuts while simultaneously increasing military spending and even raising expenditure on education and health. 
The result is a budget deficit equivalent to more than 5% of GDP. 
What's worse is that America's long-term budgetary prospects were already troubling before Bush began his reckless policies. 
The US population is aging, so there will be a sharp increase in the costs of publicly funded health care and pension systems. 
Careful calculations show that future revenues under the tax policies favored by Bush are likely to fall tens of trillions of dollars short of the costs of public pensions, health care, and other fiscal spending expected by the public. 
At some point in the future, there will thus need to be steep increases in tax collections, sharp cuts in public spending, or both, to correct Bush's actions. 
So why does the public support his policies? 
Because the public has little understanding or concern about these long-term consequences, even though they will eventually hurt most Americans. 
The richest taxpayers are, of course, happy because they received the bulk of the tax cuts. 
Amazingly, the richest 5% of US taxpayers received almost half of the tax cuts, and these rich taxpayers clearly expect the other 95%--the middle class and the poor--to bear most of the future spending cuts and tax increases. 
Meanwhile, Bush has convinced many poor and middle-class voters that they should be happy, too, without telling them that they will have to pay for their small tax cuts with much larger cuts in future government services if his administration's policies prevail in the long term. 
If Americans had a political memory, they would understand that they already rode this fiscal "roller coaster" once in the past 20 years. 
Ronald Reagan also came to office promising massive tax cuts and large increases in military spending. 
The result was a huge budget deficit by the middle of the 1980's. 
Tax cuts made Reagan enormously popular and helped win him re-election in 1984. 
It then took over a decade--starting in Reagan's second term, and continuing through the terms of George Bush, Sr. and Bill Clinton--to get the budget back to surplus. 
Of course, this meant approving fresh tax increases, which cost George Bush, Sr. his re-election and led to the polarized politics of the 1990's. 
History will almost certainly repeat. 
Some right-wing ideologues in the Bush administration believe that today's budget deficits will eventually force government social spending to be cut sharply. 
They hope to dismantle programs such as Social Security and Medicare. 
But the US public strongly supports these social programs. 
So the right-wing strategy of cutting taxes first in order to force cuts in social programs later will fail, and eventually tax rates will have to rise. 
Others in the Bush administration argue that tax cuts are important for pulling the US out of recession. 
This argument is also mistaken. 
America's economy could have recovered without the tax cuts, and perhaps even more robustly. 
In any event, it is a huge mistake to base long-term tax policies on the short-run business cycle. 
There are two vital lessons for other countries. 
The first is that the looming US budget deficits will sooner or later limit America's international power. 
Americans supported the Iraq war only because they didn't have to pay for it with increased taxes. 
When Americans are forced to choose between foreign adventures and higher taxes, they will be much less likely to support expensive military operations abroad. 
Indeed, the US will be deeply divided internally as the public grapples with the fiscal mess left by Bush. 
The second lesson is that countries ought to plan their budgets taking into account the rising fiscal costs of an aging population. 
Long-term budgetary conditions are rarely in clear view of taxpayers or the parliament. 
Governments should be required to submit long-term budget assessments together with their annual budget proposals, in order to reduce the tendency towards short-run political manipulation of the budget. 
The US can serve as an early warning to other countries. 
The White House ought to provide others with the same caveat that magicians on television give their viewers: "Do not try this at home." 

Complacency in a Leaderless World 
DAVOS – The World Economic Forum’s annual meeting in Davos has lost some of its pre-crisis panache. 
After all, before the meltdown in 2008, the captains of finance and industry could trumpet the virtues of globalization, technology, and financial liberalization, which supposedly heralded a new era of relentless growth. 
The benefits would be shared by all, if only they would do “the right thing.” 
Those days are gone. 
But Davos remains a good place to get a sense of the global zeitgeist. 
It goes without saying that developing and emerging-market countries no longer look at the advanced countries as they once did. 
But a remark by one mining company executive from a developing country caught the spirit of change. 
In response to one development expert’s heartfelt despair that unfair trade treaties and unfulfilled promises of aid have cost the developed countries their moral authority, he retorted: “The West never had any moral authority.” 
Colonialism, slavery, the splintering of Africa into small countries, and a long history of resource exploitation may be matters of the distant past to the perpetrators, but not so to those who suffered as a result. 
If there is a single topic that concerned the assembled leaders the most, it is economic inequality. 
The shift in the debate from just a year ago seems dramatic: no one even mentions the notion of trickle-down economics anymore, and few are willing to argue that there is a close congruence between social contributions and private rewards. 
While the realization that America is not the land of opportunity that it has long claimed to be is as disconcerting to others as it is to Americans, inequality of opportunity at the global scale is even greater. 
One cannot really claim that the world is “flat” when a typical African receives investment in his or her human capital of a few hundred dollars, while rich Americans get a gift from their parents and society in excess of a half-million dollars. 
A high point of the meeting was the speech by Christine Lagarde, the International Monetary Fund’s managing director, who stressed the marked change in her institution, at least at the top: deep concern about women’s rights; renewed emphasis on the link between inequality and instability; and recognition that collective bargaining and minimum wages could play an important role in reducing inequality. 
If only the IMF programs in Greece and elsewhere fully reflected these sentiments! 
The Associated Press organized a sobering session on technology and unemployment: Can countries (particularly in the developed world) create new jobs – especially good jobs – in the face of modern technology that has replaced workers with robots and other machines in any task that can be routinized? 
Overall, the private sector in Europe and America has been unable to create many good jobs since the beginning of the current century. 
Even in China and other parts of the world with growing manufacturing sectors, productivity improvements – often related to job-killing automated processes – account for most of the growth in output. 
Those suffering the most are the young, whose life prospects will be badly hurt by the extended periods of unemployment that they face today. 
But most of those in Davos put aside these problems to celebrate the euro’s survival. 
The dominant note was one of complacency – or even optimism. 
The “Draghi put” – the notion that the European Central Bank, with its deep pockets, would and could do whatever necessary to save the euro and each of the crisis countries – seemed to have worked, at least for a while. 
The temporary calm provided some support for those who claimed that what was required, above all, was a restoration of confidence. 
The hope was that Draghi’s promises would be a costless way of providing that confidence, because they would never have to be fulfilled. 
Critics repeatedly pointed out that the fundamental contradictions had not been resolved, and that if the euro was to survive in the long run, there would have to be a fiscal and banking union, which would require morepolitical unification than most Europeans are willing to accept. 
But much of what was said in and around the meetings reflected a deep lack of solidarity. 
One very senior government official of a northern European country did not even put down his fork when interrupted by an earnest dinner companion who pointed out that many Spaniards now eat out of garbage cans. 
They should have reformed earlier, he replied, as he continued to eat his steak. 
IMF growth forecasts released during the Davos meeting highlight the extent to which the world has become decoupled: GDP growth in the advanced industrial countries is expected to be 1.4% this year, while developing countries continue to grow at a robust 5.5% annual rate. 
While Western leaders talked about a new emphasis on growth and employment, they offered no concrete policies backing these aspirations. 
In Europe, there was continued emphasis on austerity, with self-congratulations on the progress made so far, and a reaffirmation of resolve to continue along a course that has now plunged Europe as a whole into recession – and the United Kingdom into a triple-dip downturn. 
Perhaps the most optimistic note came from the emerging markets: while the risk of globalization was that it implied a new interdependence, so that flawed economic policies in the US and Europe could torpedo developing countries’ economies, the more successful emerging markets have managed globalization well enough to sustain growth in the face of failures in the West. 
With the US politically paralyzed by the Republicans’ infantile political tantrums, and Europe focused on ensuring the survival of the ill-conceived euro project, the lack of global leadership was a major complaint at Davos. 
In the last 25 years, we have moved from a world dominated by two superpowers to one dominated by one, and now to a leaderless, multi-polar world. 
While we may talk about the G-7, or G-8, or G-20, the more apt description is G-0. 
We will have to learn how to live, and thrive, in this new world. 

The Detroit Syndrome 
SINGAPORE – When the city of Detroit filed for bankruptcy last week, it became the largest such filing in United States history. 
Detroit’s population has dropped from 1.8 million in 1950, when it was America’s fifth-largest city, to less than 700,000 today. 
Its industrial base lies shattered. 
And yet we live in a world where cities have never had it so good. 
More than half of the world’s population is urban, for the first time in history, and urban hubs generate an estimated 80% of global GDP. 
These proportions will rise even higher as emerging-market countries urbanize rapidly. 
So, what can the world learn from Detroit’s plight? 
As recently as the 1990’s, many experts were suggesting that technology would make cities irrelevant. 
It was believed that the Internet and mobile communications, then infant technologies, would make it unnecessary for people to live in crowded and expensive urban hubs. 
Instead, cities like New York and London have experienced sharp increases in population since 1990, after decades of decline. 
One factor that has helped cities is the nature of twenty-first century life. 
Previously, life in developed countries was based on daily routines: people went to work in offices and factories, returned home to eat dinner with their families, watched their favorite television programs, went to sleep, and repeated the cycle when they awoke. 
Such regular cycles no longer apply to most peoples’ lives. 
In the course of a work day, people mix and match many activities – they may work at a desk, but they may also meet a friend for lunch, go to the gym, do chores, travel on business, shop online, and so on. 
Similarly, time at home is no longer clearly demarcated, with people working online or participating in conference calls even as they manage their family life. 
We have discovered that this multi-tasking life is best done in cities, which concentrate a multiplicity of hard amenities – airports, shops, schools, parks, and sports facilities – as well as soft amenities like clubs, bars, and restaurants. 
Another factor is that cities have increased in importance as hubs for innovation and creativity. 
Until the nineteenth century, innovation was carried out mostly by generalists and tinkerers, which meant that the accumulation of new knowledge was slow, but that its diffusion across different fields was rapid. 
In the twentieth century, knowledge creation became the job of specialists, which accelerated knowledge creation but retarded inter-disciplinary application. 
But recent studies have shown that this source of innovation is rapidly decelerating (the productivity of an American research worker may now be less than 15% of a similar researcher in 1950). 
Instead, innovation is increasingly based on mixing and matching knowledge from different specializations. 
Certain cities are ideally suited for this, because they concentrate different kinds of human capital and encourage random interactions between people with different knowledge and skills. 
The problem with this post-industrial urban model is that it strongly favors generalist cities that can cluster different kinds of soft and hard amenities and human capital. 
Indeed, the growth dynamic can be so strong for some successful cities that they can hollow out smaller rivals (for example, London vis-à-vis the cities of northern England). 
Some specialist cities could also do well in this world. 
But, as Detroit, with its long dependence on the automotive industry, demonstrates, cities that are dependent on a single industry or on a temporary location advantage may fare extremely poorly. 
All of this has important implications for emerging economies. 
As it transformed itself into the “factory of the world,” the share of China’s urban population jumped from 26.4% in 1990 to around 53% today. 
The big, cosmopolitan cities of Beijing and Shanghai have grown dramatically, but the bulk of the urban migration has been to cookie-cutter small and medium-size industrial towns that have mushroomed over the last decade. 
By clustering industrial infrastructure and using the hukou system of city-specific residency permits, the authorities have been able to control the process surprisingly well. 
This process of urban growth, however, is about to unravel. 
As China shifts its economic model away from heavy infrastructure investment and bulk manufacturing, many of these small industrial cities will lose their core industry. 
This will happen at a time when the country’s skewed demographics causes the workforce to shrink and the flow of migration from rural areas to cities to slow (the rural population now disproportionately comprises the elderly). 
Meanwhile, the post-industrial attractions of cities like Shanghai and Beijing will attract the more talented and better-educated children of today’s industrial workers. 
Unlike rural migrants heading for industrial jobs, it will be much more difficult to guide educated and creative professionals using the hukou system. 
The boom in the successful cities, therefore, will hollow out human capital from less attractive industrial hubs, which will then fall into a vicious cycle of decay and falling productivity. 
Stories like Detroit’s have played out several times in developed countries during the last half-century. 
And, as the fate of Mexico’s northern towns suggests, emerging economies are not immune from this process. 
That is why China needs to prepare for this moment. 
Rather than building ever more cookie-cutter industrial towns, China needs to refit and upgrade its existing cities. 
As its population begins to shrink, it may even be worthwhile to shut down unviable cities and consolidate. 
Detroit’s fate should serve as a warning, not only for China, but for the next generation of urbanizing countries (for example, India) as well. 


How to Steal the Populists’ Clothes 
OXFORD – “Don’t get mad, get even.” 
That aphorism needs to become the new norm in democratic politics across Europe, Latin America, Asia, and Africa. 
Rather than complaining about populist successes, established political parties should take a page from the populist playbook. 
Three lessons, in particular, cry out for attention. 
The first lesson is to connect to the people you wish to represent by learning about them and winning their trust. 
The time when politicians could rely on party machines, focus groups, and traditional polling is over. 
The complacent assumption that people will always vote along party or class lines is obsolete. 
In France’s presidential and parliamentary elections last year, support for both the center-left Socialist Party and the center-right Républicains collapsed. 
Likewise, established political parties suffered humiliating defeats in Italy’s election last month. 
After a decade of economic malaise, voters are skeptical of mainstream politicians who offer rote promises of growth and improved standards of living. 
In the eyes of disenchanted workers, those in power have simply been feathering their own nests. 
Even in many of the world’s strongest economies, workers are earning less in real terms than they did ten years ago. 
To quote the head of the OECD, they are “back at work, but out of pocket.” 
In the United States, 56% of households report declining household incomes. 
At the same time, the twin threats of automation and outsourcing have made employment more precarious, and sapped workers’ bargaining power. 
Who is to blame for this state of affairs? 
Those who vote for populists clearly hold establishment politicians responsible, and they may not be wrong in doing so. Contrary to popular belief, recent research finds that technology is not the primary driver of labor’s declining share of income. 
Rather, the worsening plight of workers is due to lost bargaining power and union density, welfare-state retrenchment, offshoring, and the growth of the financial sector as a share of the economy. 
Another important factor is tax policy. 
According to a report in the Financial Times, the effective tax rates“paid by the world’s 10 biggest public companies by market capitalization in each of nine sectors” have fallen by nearly one-third since 2000, from 34% to 24%. 
And since 2008, personal income-tax rates across all countries have increased by 6%, on average. 
Against this backdrop, the emergence of populist parties and politicians should come as no surprise. 
When a majority of people becomes poorer, there will be stark consequences at the ballot box. 
And yet, in one country after another, the political establishment has been remarkably slow to recognize this. 
Consider Brazil, where campaigning is in full swing for the general election this October. 
As always, establishment politicians are campaigning on promises of fiscal prudence and economic growth, neither of which resonates with the 50 million Brazilians – nearly a quarter of the population – living below the poverty line, on household incomes that average $387.07 per month. 
Meanwhile, the populist presidential candidate, Jair Bolsonaro, proposes giving every Brazilian a gun so they can defend themselves. 
To the elites, this sounds (and is) preposterous. 
But for Brazilians who worry about their own safety, he is at least showing that he understands their top concern. 
Knowing what matters to your voters is basic electoral politics. 
Before winning the French presidency and a parliamentary majority last year, Emmanuel Macron’s La République En Marche ! – building on a strategy pioneered by former US President Barack Obama’s successful campaigns – sent volunteers across the country to listen to voters’ concerns. 
A second lesson from today’s populists is to use simple, intuitive messaging to signal your goals. 
Yes, slogans like “I’ll protect your jobs” and “Make America great again” sound simplistic. 
But where are the sophisticated alternatives? 
Talk of economic growth works only when people are enjoying the benefits of that growth. 
During periods of slow or inequitable growth, politicians must offer more direct responses to what people are feeling. 
In the United Kingdom’s Brexit referendum, the Remain campaign, phlegmatically led by then-Prime Minister David Cameron’s government, argued that leaving the European Union would result in lower GDP, lost trade, and disruption to the financial sector. 
Such arguments completely missed what concerned most voters. 
By contrast, the Brexiteers promised to “take back control” of the UK’s borders and claimed – falsely – that the National Health Service would enjoy a windfall of £350 million ($490 million) per week. 
All told, establishment politicians seem to be at a loss. 
Academics, pundits, and political, business, and civil-society leaders have been far too slow to articulate new economic and social policies that have broad-based appeal. 
To be sure, that is not easy to do. 
It takes self-reflection and clarity of vision. 
But, first and foremost, it takes a commitment of time and energy to understand the plight of the electorate and to frame solutions in a clear, simple way. 
The third lesson from the populist playbook is to be bold. 
In difficult times, people are seeking a transformational vision of the future, not slight improvements. 
After 30 years of pragmatism and incremental change, it is time for a new tone. 
Recall that in 1945, Winston Churchill, having delivered victory for Britain in World War II, lost the general election. 
The winner, Clement Attlee, promised what was effectively a new social contract for war-weary Britons still living under rations. 
His government went on to provide free universal health care, unemployment insurance, pensions, decent housing, and secure jobs in nationalized industries. 
And all this was done with the national debt still at 250% of GDP. 
The audacity of Attlee’s vision has no modern-day parallel. 
And that is our biggest problem. 

Lessons from the Black Tsunami 
The world has been horrified at America’s response to Hurricane Katrina and its aftermath in New Orleans. 
Four years after the terrorist attacks of September 2001, and with billions of dollars allegedly spent on “preparedness” for another emergency, America has shown the world that it was not prepared – even for an event that came with ample warning. 
The difference between the Tsunami in Asia last December and what is coming to be called the Black Tsunami in America – because it brought so much devastation to the poor, mostly black, people of Louisiana – is striking. 
The Asian disaster showed the ability of those affected to overcome long-standing rifts, as Aceh rebels put down their arms in common cause with the rest of Indonesia. 
By contrast, the disaster in New Orleans – and elsewhere along America’s Gulf Coast – exposed and aggravated such rifts. 
The Bush administration’s response to the hurricane confirmed the suspicion among blacks that, while they might send their boys to fight America’s wars, they had not only been left behind in America’s prosperity, but that there was neither understanding nor concern when they needed it most. 
An evacuation was ordered, but no means to do so were provided for the poor. 
When help came, it was, as one New York Times columnist noted, like the Titanic: the rich and powerful got out first. 
I was in Thailand right after the Tsunami, and I saw that country’s impressive response. 
The Thais flew consular and embassy officials to the affected areas, aware of the sense of helplessness among those stranded far from home. 
America kept foreign officials from coming to the aid of their nationals in New Orleans – embarrassed, perhaps, at what they would see. 
Even the richest country in the world has limited resources. 
If it gives tax cuts to the rich, it will have less to spend on repairing levees; if it deploys the National Guard and reserves to fight a hopeless war in Iraq, there will be fewer resources at home to cope with a domestic crisis. 
Choices must be made, and choices matter. 
Shortsighted politicians like Bush often skimp on long-term investments in favor of short-term advantage. 
He recently signed a lavish infrastructure bill that included, among other payoffs to political supporters, an infamous bridge to nowhere in Alaska. 
Money that could have been used to save thousands of lives was spent to win votes. 
Seldom do the “chickens come home to roost” as quickly as they have in recent years – an ill-conceived war, attempted on the cheap, has not brought peace to the Middle East. 
Now America has had to pay the price for ignoring loud warnings about the weakened levees of New Orleans. 
Clearly, nothing could have spared New Orleans completely from Katrina’s impact, but the devastation could certainly have been lessened. 
Markets, for all their virtues, often do not work well in a crisis. 
Indeed, the market mechanism is often revolting to behold in emergencies. 
The market did not respond to the need for evacuation by sending in huge convoys of buses to get people out; in some places, it did respond by tripling hotel prices in neighboring areas, which, while reflecting the marked change in supply and demand, is reviled as price gouging. 
Such behavior is so odious because it brings little allocative benefit – no significant increase in supply in the short run – and carries a huge distributive cost, as those with resources take advantage of those without. 
The Nobel Prize-winning economist Amartya Sen has emphasized that most famines are associated not with a shortage of food, but the failure to get food to the people who need it, largely because they lack purchasing power. 
America, the richest country in the world, clearly had the resources to evacuate New Orleans. 
Bush simply forgot the poor – the tens, perhaps hundreds of thousands, who simply did not have the resources to pay for their own evacuation. 
When you’re poor, you don’t have a credit card, and most of the stranded were especially strapped for funds because it was the end of the month. 
But even if they had had the money, it is not obvious that markets would have responded quickly enough to provide the needed supply; in times of crisis, they often simply don’t. 
That’s one of the reasons why the military does not use a price system to allocate resources. 
Last January, after the tsunami, in response to widespread calls for an early warning system, I observed that the world had been given an early warning on global warming. 
The rest of the world has begun to take heed, but Bush, having ignored warnings about Al Qaeda’s plans prior to September 11, 2001, and having not only ignored the warnings about New Orleans levees, but actually gutted funding to shore them, has not led America to do likewise. 
Scientists increasingly believe that global warming will be accompanied by larger climatic disturbances. 
Recent evidence is at least consistent with that hypothesis. 
Perhaps Bush had hoped that the consequences of global warming would be felt long after he left office – and would be felt more by poor, low-lying, tropical countries like Bangladesh than by a rich country astride the temperate zones. 
Yet there is perhaps a silver lining in the clouds over New Orleans. 
Perhaps America, and especially Bush, will be persuaded to join the rest of the world in the fight against poverty and to protect our planet’s environment. 
In facing and planning for disasters, whether natural or man-made, we must do more than hope and pray for the best. 

 

 

Lessons from the Kaczyńskis' Poland 
The defeat of the Kaczyński twins’ Law and Justice Party (PiS) in Poland brought sighs of relief across Europe. 
But, as Donald Tusk’s new government assumes office it is important to learn the lessons that their defeat holds for all of us. 
Many governments waste good economic times by postponing the reforms needed to build a prosperous future. 
The PiS-led government, elected in 2005, inherited a fast-growing economy, but did nothing to strengthen that legacy. 
Instead, privatization was blocked, while fiscal reforms and deregulation remained paper proposals. 
Indeed, the Kaczyński government embarked on a program of anti-reform. 
The separation of powers (an independent judiciary and central bank) was undermined in favor of a “strong” state. 
The PiS captured the public media, the general prosecutor’s office was politicized, and, with the use of the media, was turned into a tool of party propaganda aimed at showing that Poland was ruled by malicious hidden forces, known as the układ , which cheated Poles and kept them poor. 
Anyone who disagreed with this diagnosis or criticized the PiS’s methods, particularly those used by its leader, Jarosław Kaczyński, was promptly classified as belonging to the układ . 
No one was spared. 
Indeed, Lech Wałęsa and Władysław Bartoszewski, the Polish Mandela, were ruthlessly attacked. 
Contrary to popular cliché, PiS’s victory in 2005 did not result from “reform fatigue,” since there were not many reforms implemented in 2000-2005 (except for an ambitious but partially blocked attempt at fiscal consolidation). 
This explanation seems dubious elsewhere, too. 
In Slovakia, the reformist leader Mikuláš Dzurinda won the 1998 elections after having implemented a tough stabilization program, and he could have continued to govern after the 2006 elections if not for disagreements in his coalition. 
In the Czech Republic, a reformist government was elected in 2006, and in Hungary, political divisions rather than reform fatigue dominates electoral campaigns. 
Of course, it is not easy for reformers to win elections. 
On the contrary, reforms usually are undertaken only when the signs of an impending crisis are so strong that it is increasingly difficult to ignore them, or after the crisis has already “educated” voters. 
(However, if the crisis follows reforms, populist politicians may win by blaming the reforms, instead of their incomplete nature, as in Argentina.) 
Reformers can win elections if they are better at public communication than the populists. 
Bad policies are, more often than not, easier to sell than good ones. 
In Poland in 2005, the issue was mainly corruption. 
The PiS jumped on the anticorruption bandwagon and strengthened its appeal by linking the fight against corruption to the vision of hidden forces supposedly perverting Polish society and democracy. 
If not for that, the results of the 2005 elections would most likely have been quite different. 
To criticize anticorruption campaigns is risky, because words can be twisted to imply indifference. 
Therefore, let me first present my anticorruption credentials: as Deputy Prime Minister in 1999 I was the first Polish politician to ask the World Bank to prepare a report on corruption in Poland and ways to eradicate it. 
In my public life, I emphasized eliminating discretionary regulations – the main source of both inefficiency and corruption. 
But we should not be blind to what can happen when political demagogues hijack the anticorruption card. 
Interestingly, all the available measures of actual corruption were already declining before the Kaczyński twins were elected. 
For example, the index of the frequency of paying bribes, calculated by the World Bank and EBRD, was 2.7 in 1999 and 2.03 in 2005 (the value of 1 is the minimum). 
The corruption tax (the percentage of sales paid in bribes) declined from 1.22% in 2002 to 0.7% in 2005. 
Poland now has a huge gap between the levels of perceived and actual corruption. 
On perception, it fares much worse than Slovakia, the Czech Republic, Hungary, and Greece, while it fares better – or at least not worse – on indicators of actual corruption. 
For example, the percentage of respondents admitting to paying bribes in 2006 was 5% in Poland and 17% in the Czech Republic and Greece. 
The index of the frequency of paying bribes in 2005 was 2.03 in Poland, 2.22 in Slovakia, 2.09 in the Czech Republic, and 2.37 in Greece. 
The corruption tax in 2005 was 0.7% in Poland, 0.93% in Slovakia, and 0.63% in Hungary. 
Of course, Poles should not settle for today’s levels of corruption. 
Instead, the battle with corruption should aim at removing its root causes: the scope of the discretionary public sector and the suppression of market forces. 
This is the only path that promises both less corruption and more economic growth. 
Combating corruption through increased punitive action, while leaving intact a bloated and discretionary public sector, will only paralyze public officials, delay important decisions, and play into the hands of cynical demagogues and political fanatics. 

Lessons From the North 
Fewer debates over economics would be needed if the world spent more time examining what actually works and what does not. 
Almost everywhere, debate has raged about how to combine market forces and social security. 
The left calls for an expansion of social protection; the right says that doing so would undermine economic growth and widen fiscal deficits. 
But the debate can be moved forward by examining the successful economies of Denmark, Finland, Iceland, the Netherlands, Norway, and Sweden. 
While no regional experience is directly transferable, the Nordic countries have successfully combined social welfare with high income levels, solid economic growth, and macroeconomic stability. 
They have also achieved high standards of governance. 
To be sure, there are also differences among the Nordic states, with social welfare spending the highest in Denmark, the Netherlands, Norway, and Sweden, and a bit lower in Finland and Iceland. 
Nevertheless, whereas the taxes at the national level in the United States are equal to around 20% of GNP, in the Nordic countries the ratio is more than 30%. 
High taxation supports comprehensive national health care, education, pensions, and other social services, resulting in low levels of poverty and a relatively narrow income gap between the richest and poorest households. 
In the US, the poorest 20% of households receive just 5% of total income, putting their income at around one-fourth of the national average. 
In the Nordic countries, by contrast, the poorest 20% of households receive nearly 10% of total income, putting them at roughly one-half of the national average. 
American conservatives argue that a large public sector is subject to inefficiency and mismanagement, corruption, and bureaucratic abuse, while the taxation needed to support it blunts economic efficiency. 
But each of these propositions is refuted by the Nordic experience. 
Consider the claims of inefficiency and waste. 
As a result of government-funded national health insurance, the Nordic countries have a higher life expectancy and a lower infant mortality rate than the US. 
Life expectancy is close to 80 years in the Nordic countries, compared to 78 years in the US, where the government does not guarantee national health insurance and millions of families are too poor to pay for it on their own. 
Ironically, the heavy reliance on the private sector in the US system is so inefficient that Americans pay a larger share of GNP for health (14%) than do the Nordic countries (11%), but get less. 
Similarly, although social welfare spending is lower in the US than in the Nordic countries, its budget deficit as a share of national income is much larger. 
The US spends less in the public sector, but it taxes even less than it spends. 
Nor has high taxation in the Nordic countries impeded economic performance. 
Rather than relying mainly on income taxation, as in the US, the Nordic countries rely on value-added taxation, which provides a relatively high amount of revenue with relatively low rates of evasion and few distortions to the economy. 
The Nordic experience also belies conservatives’ claim that a large social welfare state weakens incentives to work and save. 
National saving in the Nordic countries averages more than 20% of national income, compared to around 10% in the US. 
Moreover, economic growth in the Nordic countries has been similar to that in the US in recent years. 
Income levels are higher on average in the US, but mainly because the Nordic countries work fewer hours per week. 
In any case, all of the Nordic countries have very high incomes, and Norway’s per capita income actually exceeds the US. 
Several factors appear to explain the Nordic countries’ economic success. 
Taxation is broad-based and relatively non-distorting, while open international trade, market forces, and private ownership of industry are relied on to maintain incentives. 
The Nordic countries are not “socialist” economies, based on state ownership and planning, but “social welfare” economies, based on private ownership and markets, with public provision of social protection. 
Importantly, they invest heavily in higher education and in science and technology, so they remain at the cutting edge of high-technology industries. 
Half a century ago, the free-market economist Friedrich von Hayek argued that a large public sector would threaten democracy itself, putting European countries on a “road to serfdom.” 
Yet the Nordic states have thrived, not suffered, from a large social welfare state, with much less public-sector corruption and far higher levels of voter participation than in the US. 
According to Transparency International, the Nordic countries have the world’s least corrupt political systems (with Iceland and Finland ranking as the least corrupt), while the US, with its big money politics, is fairly far down on the list. 
But how replicable are the Nordic successes? 
These countries have small populations, easy access to international trade, natural resources, and peaceful neighbors. 
Most notably, they are ethnically homogeneous, so that social divisions are more amenable to compromise. 
However, this means that the challenge of maintaining a strong social welfare state in ethnically and racially diverse societies such as the US is not economic, but one of promoting respect and inclusiveness. 

Lessons from the Tsunami 
There are many lessons that emerge from the tsunami that brought such devastation and loss of life to Asia. 
It demonstrated the power of globalization, as television brought vivid pictures of the destruction to homes around the world. 
Indeed, it is at times like this that the world truly does seem like a global village. 
Of course, it seemed to take somewhat longer for news of the extent of the disaster to reach the Crawford, Texas, ranch of President Bush. 
But, in the end, he decided to interrupt his vacation and offer amounts of aid that were successively revised upwards, in a global competition which promised to benefit those who were desperate for help. 
America’s aid still appeared niggardly when compared with the amounts offered by countries with a fraction of America’s economic wealth. 
Lightly populated Australia offered more than twice America’s assistance, Japan promised almost 50% more, and Europe pledged more than five times as much. 
This led many observers to reflect on the fact that the world’s richest country was in general the most miserly in foreign assistance – all the more so in comparison to the amount it spends on war and defense. 
The disaster was international, so it was appropriate that the United Nations take the lead in coordinating the relief effort. 
Unfortunately, in an effort that was widely seen as another attempt to undermine multilateralism, the US tried to lead a “core group” driving the assistance program, ignoring ongoing efforts within the region and at the UN. 
Whatever America’s motive, it later wisely decided to join the UN effort. 
The Bush administration’s face-saving rhetoric that it had rushed to push together the core group in the absence of other efforts was quietly let to pass. 
The response of some countries within the region was truly impressive, showing how far they had come in establishing efficient and effective governments. 
Myriad details were addressed: Thailand flew ambassadors to the affected part of the country to help attend to the needs of their citizens, helped those who lost their money and passports return home, provided health care for the injured, set up systems to identify bodies, and dealt with the difficulties posed by shortages of body bags and the lack of cold storage facilities. 
Countries, like Thailand, that felt that they could handle the finances on their own asked that assistance be directed to others. 
They did ask one thing: a reduction of tariff barriers and greater access to markets abroad. 
They didn’t want a handout, only a chance to earn income. 
The response, at least at the time of this column’s writing, has mostly been deafening silence. 
On the other hand, the G-7 made a truly important contribution in offering debt relief. 
This is especially important for Indonesia, which must service a debt of $132 billion (of which $70 billion is owed to public creditors or guaranteed by government agencies). 
Even without the tsunami, this debt burden would have been an enormous hindrance to the country’s development as it finally recovers from the aftermath of the 1997 financial crisis. 
Indeed, there is a compelling case to be made for Indonesian debt relief in any case, given that much of the debt was incurred in loans to the corrupt Suharto government. 
Lenders knew, or should have known, that not all of the money was going to help Indonesian development. 
Moreover, some of the debt was incurred as part of the 1997-1998 crisis, which was aggravated and deepened by IMF-imposed policies. 
No one pretends that we can prevent or alter the forces of nature. 
Rather, we have to learn to cope with them. 
There are now calls for improved tsunami early warning systems. 
But in one area, global warming, we have already received an early warning. 
Most countries have recognized this, coming together in Rio and Kyoto to do something about it—not enough, but the Kyoto protocol was intended only as a start. 
Sadly, global warming will likely destroy some of the same countries ravaged by the tsunami. 
Low lying islands like the Maldives will become submerged. 
We are, however, still not a global village. 
After first disputing that there was scientific evidence of the problem, the largest polluter in the world, the US, is now simply refusing to do anything about it (other than preaching voluntary restraint—of which there is little evidence, at least in America). 
The international community has yet to figure out what to do with an aberrant member who fails to live up to its responsibilities as a global citizen. 
Optimists say that technology will solve the problem. 
Realists observe that in the long race between the environment and technology, it appears that technology has so far been losing. 
Nature, as we have learned from the tsunami, has its own timetable. 
Unless we learn how to respect it, we will all miss the boat. 

Two Policy Prescriptions for the Global Crisis 
WASHINGTON, DC – One thing that experts know, and that non-experts do not, is that they know less than non-experts think they do. 
This much was evident at the just-completed Spring Meetings of the International Monetary Fund and the World Bank Group – three intense days of talks that brought together finance ministers, central bankers, and other policymakers. 
Our economic expertise is limited in fundamental ways. 
Consider monetary and fiscal policies. 
Despite decades of careful data collection and mathematical and statistical research, on many large questions we have little more than rules of thumb. 
For example, we know that we should lower interest rates and inject liquidity to fight stagnation, and that we should raise policy rates and banks’ cash-reserve ratios to stifle inflation. 
Sometimes we rely on our judgment in combining interest-rate action with open-market operations. 
But the fact remains that our understanding of these policies’ mechanics is rudimentary. 
These rules of thumb work (at least tolerably so) as a result of evolution. 
Over time, the wrong moves are penalized, and their users either learn by watching others or disappear. 
We get our monetary and fiscal policies right the same way that birds build their nests right. 
As with all behaviors shaped by evolution, when the environment changes, there is a risk that existing adaptations become dysfunctional. 
This has been the fate of some of our standard macroeconomic policies. 
The formation of the eurozone and a half-century of relentless globalization have altered the global economic landscape, rendering once-proven policies ineffective. 
When Sweden’s Riksbank was founded in 1668, followed by the Bank of England in 1694, the motivation was that a single economy should have a single central bank. 
Over the next three centuries, as the benefits of instituting a monopoly over money creation became more widely recognized, a slew of central banks were established, one for each politically bounded economy. 
What was not anticipated was that globalization would erode these boundaries. 
As a result, we have returned to a past from which we tried to escape – a single economy, in this case the world, with multiple money-creating authorities. 
This is clearly maladaptive, and it explains why the massive injections of liquidity by advanced-country central banks are failing to jump-start economies and create more jobs. 
After all, in a globalized economy, much of this liquidity spills across political boundaries, giving rise to inflationary pressures in distant lands and precipitating the risk of currency wars, while unemployment at home remains dangerously high, threatening to erode workers’ skills. 
The long-run damage could be devastating. 
What was evident at the World Bank/IMF Spring Meetings was that virtually all policymakers are distressed and no one has a complete answer. 
Neither do I. But here are two simple ideas that could help to mitigate the crisis. 
First, in the absence of a single global central-banking authority, a modicum of monetary-policy coordination among major economies is required. 
We need a group of the major economies – call it “G Major” – that announces monetary policies in a coordinated fashion. 
To see why, consider the case of Japan. 
Japanese policymakers have good reason to try to promote some inflation and even correct some of the yen’s secular appreciation over the last six or seven years. 
But, in today’s unilateral world, other central banks would soon respond by injecting liquidity, prompting the Bank of Japan to act again. 
These actions are usually justified as policies for boosting domestic demand, but they end up fueling a surrogate, low-grade currency war. 
If, however, the G Major economies issued quarterly announcements of significant upcoming policy changes – for example, a small round of quantitative easing by country X, a larger liquidity injection by countries Y and Z, and so on – markets would be reassured that a currency war was not being fought. 
Exchange-rate movements would be minimal and only as intended, and volatility would be contained, because tit-for-tat injections would no longer occur and speculation would wane. 
Moreover, liquidity injections would be likely to have a greater impact on demand, because synchronization would reduce leakage across national boundaries. 
The second recommendation pertains to the mechanics of liquidity injection, much of which takes place nowadays – in Europe, Japan, and elsewhere – through asset purchases. 
The US Federal Reserve, for example, is currently purchasing assets (many of them mortgage-backed) worth $85 billion each month. 
Liquidity injections and low interest rates have a microeconomic effect that has received little attention: they lower the cost of capital vis-à-vis the cost of labor, which causes a relative decline in demand for labor. 
This is very likely exacerbating the unemployment problem; it certainly is not mitigating it. 
One solution is to channel part of the liquidity injections toward countering this factor-cost asymmetry. 
Thus, for every $100 of new liquidity, we could use $60 to purchase assets and the remainder to give firms a marginal job-creation subsidy, which could be especially effective in economies with flexible labor markets that enable short-term hiring. 
Even if the employment subsidy were offered only for, say, one year, firms would be tempted to use more labor during this time. 
And, because the current bout of high unemployment is self-reinforcing, once the equilibrium is broken for a while, the economy could move to a higher-employment equilibrium permanently, without the need for any further government support. 
This prescription has one problem. 
Asset purchases have no balance-sheet effect, because assets replace money. 
Subsidizing labor, by contrast, is a pure injection of liquidity. 
However, for precisely that reason, an employment subsidy is likely to be more effective in boosting demand, which implies that a smaller injection of this kind is likely to boost demand as much as a larger asset purchase would. 
Among the few certainties in crafting economic policy is the need to adapt to external change. 
Our challenge is like that of Industrial Revolution-era moths, which adapted to their new soot-laden environment by becoming darker (and thus better able to hide from predators). 
In a globalized economy, national policymakers should not be left circling light bulbs. 

Lessons from Tiananmen 
NEW YORK – It is a chilling thought that exactly twenty years after the “Tiananmen Massacre” few young citizens of the People’s Republic of China have much idea of what happened on that occasion. 
Many unarmed Chinese citizens were killed by People’s Liberation Army troops on June 4, 1989, not only in the vicinity of Tiananmen Square, but in cities all over China. 
Most were not students, who started the peaceful demonstrations against corruption and autocracy, but ordinary workers, the sort of people a Communist Party ought to be standing up for. 
Young people don’t know, because most parents have shut up about it, lest they get themselves and their children in trouble, and because the subject is never mentioned in the official Chinese media; it is a taboo. 
Websites mentioning the events of 1989 are closed down. 
Emails are intercepted. 
People who still insist on talking about it in public are frequently arrested. 
Zhao Ziyang was General Secretary of the Communist Party in 1989. 
Although no democrat himself, his sympathies were with the student demonstrators. 
Because he opposed the hard-liners in his own government, he was put under house arrest until his death in 2005, and his memoirs had to be smuggled out of the country on cassettes, disguised as Peking Opera recordings. 
They have just been published in English and Chinese, but cannot be legally distributed in China. 
Zhao’s book will doubtlessly inspire more debates on what lessons we should draw from “June Fourth.” 
These are necessary debates. 
If only they could take place in China. 
One strong school of thought that emerged almost as soon as the killing began in 1989, is that the more radical student leaders had been reckless. 
It should have been clear to them that a violent crackdown was inevitable. 
By provoking the regime, the students derailed any chance of slow political reform, which their more moderate elders had carefully set in train. 
Indeed, so proponents of this school often add, China was not yet ready for democracy. 
And mass demonstrations certainly were not going to achieve it. 
Indeed, the radical student leaders had no more understanding of democracy than the Communist leaders they opposed. 
Life in the capital, and many Chinese cities, had been severely disrupted. 
The Chinese government was heavy-handed, to be sure, but had a perfect right to restore order in the streets. 
If the student leaders had really wanted to take over the government, and use violence to do so, this theory would be convincing. 
Violent revolutions are rarely followed by liberal regimes. 
There is, however, no evidence that even the most radical students ever had such ambitions, and the demonstrations had been entirely peaceful. 
All the demonstrators had asked for was free speech, dialogue with the government, independent unions, and an end to official corruption. 
As to whether the demonstrations were doomed to end in failure and bloodshed, this too is easy to say in hindsight. 
History may never repeat itself precisely, but certain patterns can be discerned. 
Demonstrations alone almost never topple a regime, but they can do so in combination with other political shifts, which can happen suddenly. 
When East Germans protested against their Communist autocrats in 1989, they were not assured of success either. 
Indeed, some Party bosses wanted to bring out the tanks, just like their comrades in Beijing. 
But when Mikhail Gorbachev refused to support a German crackdown, a mixture of overwhelming public protest and government bungling brought down the Berlin Wall. 
South Korean students filling the streets of Seoul in 1986 could not have ended the authoritarian military government either. 
Again, it was a combination of events – pressure from the United States, the impending Olympic Games, and the presence of plausible opposition politicians – that did it. 
The students on Tiananmen Square could not have known what was going on inside the closed Communist regime. 
There were serious splits, but no one could have known exactly what the end results would be. 
In the event, Zhao Ziyang’s conciliatory approach, which might have led to concessions, which in turn might have opened possibilities for a more open political system, lost out. 
Hardliners, who refused to give up their monopoly on power, won. 
Would Zhao have prevailed, had the students retreated? 
Unlikely. 
In any case, it was not the place of the students, or the workers who supported them, to back any particular faction in the government. 
They lacked the authority. 
They were not politicians. 
All they asked for was more freedom. 
And this should be the main lesson to draw from those Spring days in Beijing, and Shanghai, and Guangzhou, and many other places: Chinese have as much right as any other people to speak freely, without fear of arrest, to elect their own leaders, and to have laws that apply to everyone, even to the leaders themselves. 
On June 4, 1989, thousands of Chinese were killed for demanding less than that. 
The best way to remember them is to reaffirm their right to liberties that millions of people, in the West, and in many parts of Asia, take for granted. 
The worst way is to blame a few students who insisted on that right until it was too late. 

The Lessons of America’s Election 
STANFORD – Donald Trump’s surprise election as the 45th president of the United States has spawned a cottage industry of election post-mortems and predictions, in America and abroad. 
Some correlate Trump’s victory with a broader trend toward populism in the West, and, in particular, in Europe, exemplified in the United Kingdom’s vote in June to leave the European Union. 
Others focus on Trump’s appeal as an outsider, capable of disrupting the political system in a way that his opponent, former Secretary of State Hillary Clinton – a consummate insider – never could. 
There may be something to these explanations, particularly the latter. 
But there is more to the story. 
In the months preceding the election, the mainstream media, pundits, and pollsters kept repeating that Trump had an extremely narrow path to victory. 
What they failed to recognize was the extent of economic anxiety felt by working-class families in key states, owing to the dislocations caused by technology and globalization. 
But, as I highlighted two months before the election, those frustrations were far-reaching, as was the sense of being ignored and left behind – and it was Trump who finally made that group feel seen. 
That is why I recognized the possibility of a Trump upset, despite Clinton’s significant lead in the polls (five points, just before the election). 
And an upset is what happened. 
Trump narrowly won states that Republicans had not won in decades (Wisconsin, Michigan, and Pennsylvania), and won big in usually closely contested Ohio. 
In fact, Republicans secured a broad victory. 
The party retained control of the Senate, even though more than twice as many Republican seats were up for reelection than Democratic seats, and it lost just a handful of House seats, far fewer than the 20 predicted. 
Moreover, the Republicans now control 33 governorships, compared to 16 for the Democrats, and have expanded their already-large majorities in state legislatures. 
Now, talk has turned from the impending implosion of the Republican Party to the repudiation, disarray, and bleak future prospects of the Democrats. 
Since the election, Trump has moved quickly to assert himself. 
Republicans, even those who opposed Trump during the campaign, have coalesced behind him. 
Meanwhile, the Democrats in government – most notably President Barack Obama – have largely echoed Clinton’s gracious concession-speech injunction that Trump should be given an opportunity to lead. 
The US election’s unexpected outcome holds four key lessons, applicable to all advanced democracies. 
First, growth beats redistribution. 
Clinton’s barely discussed economic plan was to expand Obama’s left-leaning agenda, so that it looked more like the socialism of her opponent in the Democratic primary, Vermont Senator Bernie Sanders. 
Higher taxes for the wealthy, together with more “free” (taxpayer-paid) services, was, she argued, the best route to combating inequality. 
Trump, by contrast, hammered home messages about jobs and incomes. 
Though the media almost exclusively covered his most hyperbolic and controversial statements, it was largely his economic message that won him support. 
People want hope for a better future – and that comes from rising incomes, not from an extra government-issued slice of the pie. 
The second lesson concerns the risk of dismissing, let alone condescending to, voters. 
From the start, Clinton was not broadly liked. 
Revelations during the campaign – for example, that, in a 2015 speech, she had said that “deep-seated cultural codes, religious beliefs, and structural biases have to be changed” to secure women’s reproductive and other rights – reinforced fears that she would push too progressive a social agenda. 
Recognizing these shortcomings, Clinton tried to win the election by making Trump unacceptable. 
But her remarks that half of Trump’s supporters belonged to a “basket of deplorables” – that they were racist, sexist, homophobic, xenophobic, Islamophobic – reinforced the impression that she and her party looked down on Trump voters as morally contemptible and even stupid. 
Such statements could well have pushed some undecided voters to decide against Clinton. 
The third lesson is that a society’s capacity to absorb rapid change is limited. 
When technological progress and globalization, not to mention social and cultural change, outpace people’s ability to adapt, they become too jarring, disruptive, and overwhelming. 
Many voters – not just in America – also fret over terrorism and immigration, especially in combination with these rapid changes. 
Add to that concerns about America’s growing opioid epidemic and a tedious and intolerant form of political correctness, and, for many, change did not look like progress. 
If democratic political systems do not find ways to ease transitions, provide shock absorbers, and accept heterodox attitudes and values without condemnation, voters will push back. 
The final lesson relates to the danger of the ideological echo chamber. 
The repeated claim by shocked Clinton voters that no one they knew voted for Trump reveals the extent to which too many people – Republicans as well as Democrats – live in social, economic, informational, cultural, and communication bubbles. 
Declining trust in national media, combined with a proliferation of Internet communication, has created a world where the news people read is often created with the goal of “going viral,” not informing the public; the result can barely be called news at all. 
Moreover, the information people see is often filtered, so that they are exposed only to ideas that reflect or reinforce their own. 
(The corollary with this online world is that, as Trump and Clinton discovered, we are all just one hack away from YouTube or WikiLeaks, cable news or talk radio, fame or infamy.) 
These developments undermine people’s capacity to engage in informed, rational discussions, let alone debates, with those who have different perspectives, values, or economic interests. 
Even universities, which are supposed to foster knowledge-sharing and spirited debate, are now suppressing it, for example by spinelessly rescinding speaking invitations to almost anyone that some group or another considers objectionable. 
When we fail to engage in such debates – when people choose “safe spaces” over tough discussions – we lose our best chance of building consensus on how to solve at least some of our societies’ pressing problems. 

A Better Way to Fight Climate Change 
NEW YORK – Of all major world regions, Europe has worked the hardest to implement policies aimed at countering human-caused climate change. 
Yet the cornerstone of Europe’s approach – a continent-wide emissions trading system for the greenhouse gases that cause climate change – is in trouble. 
That experience suggests a better strategy for both Europe and the rest of the world. 
The basic story of human-caused climate change is becoming clearer to the global public. 
Several gases, including carbon dioxide, methane, and nitrous oxide, warm the planet as their concentrations in the atmosphere increase. 
As the world economy grows, so do emissions of these gases, accelerating the pace of human-caused climate change. 
The main greenhouse gas is carbon dioxide. 
Most CO2 emissions result from the burning of fossil fuels – coal, oil, and natural gas – for energy, global consumption of which is rising as the world economy grows. 
As a result, we are on a path to very dangerous levels of CO2 in the atmosphere. 
Twenty years ago, the world agreed to reduce sharply emissions of CO2 and other greenhouse gases, but little progress has been made. 
Instead, the rapid growth of the emerging economies, especially coal-burning China, has caused global CO2 emissions to soar. 
Dangerous changes in climate have already begun. 
If the world continues on its current trajectory, global temperatures will eventually rise by several degrees centigrade, causing higher sea levels, mega-storms, severe heat waves, massive crop failures, extreme droughts, heavy flooding, and a sharp loss of biodiversity. 
Yet changing the world’s energy system is a daunting challenge, because fossil fuels are so deeply embedded in the workings of the global economy. 
Oil provides the main fuel for transportation worldwide. 
Coal and gas are burned in huge and growing amounts to produce electricity and to provide energy for industry. 
How, then, can we sustain worldwide economic progress while cutting back sharply on carbon emissions? 
There are essentially two solutions, but neither has been deployed on a large scale. 
The first is to shift massively from fossil fuels to renewable energy sources, especially wind power and solar power. 
Some countries will also continue to use nuclear power. 
(Hydroelectric power generation emits no CO2, but there are only a few remaining places in the world where it can be expanded without major environmental or social costs.) 
The second solution is to capture CO2 emissions for storage underground. 
But this technology, called carbon capture and sequestration (CCS), is not yet proven on a large scale. 
One approach is to capture the CO2 at the power plant as the coal or gas is burned. 
Another is to capture it directly from the air using specially designed chemical processes. 
Either way, CCS will require significant investment in further research and development before it becomes a viable technology. 
The big problem is time. 
If we had a century to change the world’s energy system, we could feel reasonably secure. 
Yet we must complete most of the transformation to low-carbon energy by mid-century. 
This is extraordinarily difficult given the long transition period needed to overhaul the world’s energy infrastructure, including not only power plants, transmission lines, and transport systems, but also homes and commercial buildings. 
Few economic regions have made much progress in this transformation. 
In fact, the United States is now investing heavily in natural gas without recognizing or caring that its shale-gas boom, based on new hydraulic-fracturing technology, is likely to make matters worse. 
Even if the US economy shifts from coal to natural gas, America’s coal will probably be exported for use elsewhere in the world. 
In any event, natural gas, though somewhat less carbon-intensive than coal, is a fossil fuel; burning it will cause unacceptable climate damage. 
Only Europe has tried to make a serious shift away from carbon emissions, creating a system that requires each industrial emitter to obtain a permit for each ton of CO2 emissions. 
Because these permits trade at a market price, companies have an incentive to reduce their emissions, thereby requiring them to buy fewer permits or enabling them to sell excess permits for a profit. 
The problem is that the permits’ market price has plummeted in the midst of Europe’s economic slowdown. 
Permits that used to sell for more than $30 per ton before the crisis now trade for under $10. 
At this low price, companies have little incentive to cut back on their CO2 emissions – and little faith that a market-based incentive will return. 
As a result, much of European industry continues on a business-as-usual energy path, even as Europe tries to lead the world in this transformation. 
But there is a much better strategy than tradable permits. 
Each region of the world should introduce a tax on CO2 emissions that starts low today and increases gradually and predictably in the future. 
Part of the tax revenue should be channeled into subsidies for new low-carbon energy sources like wind and solar, and to cover the costs of developing CCS. 
These subsidies could start fairly high and decline gradually over time, as the tax on CO2 emissions rises and the costs of new energy technologies fall with more experience and innovation. 
With a long-term and predictable carbon tax and subsidy system, the world would move systematically toward low-carbon energy, greater energy efficiency, and CCS. 
Time is short. The need for all major world regions to adopt practical and far-sighted energy policies is more urgent than ever. 

Aleppo’s Sobering Lessons 
NEW YORK – The fall of Aleppo to forces loyal to Syrian President Bashar al-Assad is neither the end of the beginning nor the beginning of the end of Syria’s five-and-a-half-year-old civil war – a war that is also a proxy, regional, and to some extent global conflict. 
The next major battle will be fought in Idlib province; the only question is when. 
And even after that, the war will continue to fester in various parts of what will remain a divided country. 
Even so, now is a good time to take stock and focus on what has been learned, if only to learn from it. 
Little in history is inevitable, and the outcome in Syria is the result of what governments, groups, and individuals chose to do – and what they chose not to do. 
Indeed, not acting in Syria has proved to be as consequential as acting. 
At no point was this clearer than when the United States did not fulfill its threat to make Assad’s government pay for its use of chemical weapons. 
That proved to be a missed opportunity not only to alter the momentum of the conflict, but also to underscore the principle that any government that uses weapons of mass destruction will regret it. 
Enforcement, after all, is essential to the effectiveness of future deterrence. 
Deriving additional lessons requires going back to 2011, when peaceful anti-government protesters were met with deadly force, leading US President Barack Obama and others to demand that Assad step down. 
Here, too, no action or resources backed the strong rhetoric. 
The emergence of such a wide gap between means and ends almost always dooms a policy to failure. 
This is especially so when the goal is regime change, and when the incumbent regime represents a substantial minority of a divided population. 
These circumstances tend to give rise to winner-take-all – and loser-lose-all – struggles. 
Not surprisingly, those with the most to lose tend to conduct the fight with enormous tenacity. 
Scholars of international relations often write about the perceived limits to the utility of military force. 
But Syria shows that military force can be decisive – especially when applied in massive doses, with little concern for the number of civilians killed or displaced. Russia, Iran, and Assad’s government all demonstrated what large-scale and often indiscriminate use of military force could accomplish. 
Another casualty of the Syria conflict is the term “international community.” 
In fact, there is little in the way of a global community of thought or action. 
And, with more than 500,000 dead and another ten million displaced in Syria, the much-vaunted doctrine of the “responsibility to protect” (R2P) has been exposed as well. 
Adopted unanimously by the United Nations General Assembly in 2005 (partly in response to Rwanda’s genocide a decade earlier), R2P was premised on the notion that governments are obliged to protect their citizens from physical harm. 
When they are unable or unwilling to do so, according to R2P, other governments are obliged to intervene to protect those being subjected to harm. 
If any government failed to meet the R2P norm, it was Syria’s. 
But the international intervention that came about was not designed to protect innocent lives or to weaken the government’s hold on power; instead, it was designed to ensure that the government prevailed. 
And it succeeded. 
The international community did only somewhat better when it came to responding to the massive refugee crisis caused by the war. 
The fact that many countries have been unwilling to open their borders to meaningful numbers of asylum-seekers highlights the reality that the best refugee policy is one that prevents innocent men, women, and children from becoming refugees in the first place. 
Diplomatic efforts failed to achieve much in the way of saving Aleppo or its inhabitants, and they are no more likely to bring an end to the war. 
However talented and committed diplomats may be, diplomacy tends to reflect, not create, realities on the ground. 
Future diplomatic efforts to bring about an end to the fighting or a particular political outcome will succeed only to the extent that the military balance and trends allow. 
Looking ahead, Assad’s government will remain in place and in control of much, but not all, of the country. 
Various Sunni terrorist groups, less radical Sunni rebels, proxy forces such as Hezbollah, the Turkish army, Syrian Kurdish forces, and others will compete for control of particular regions. 
Outsiders, such as the US, would be well advised to accept this reality for the immediate future and focus their energies on stabilizing areas liberated from the Islamic State, protecting civilian populations, developing political and military ties with non-terrorist Sunni groups, and forging local cease-fires to prevent further Aleppos. 
The goal of bringing about a transition to a different and more broad-based government should be maintained. 
But that is a long-term proposition. 
The lesson of the last five and a half years must be taken to heart: those who engage Syria with limited will and limited means must set limited goals if they are to accomplish even a limited amount of good. 

What the Crisis in Venezuela Reveals 
NEW YORK – The New York Times recently reported that US President Donald Trump’s administration had held meetings with rebellious Venezuelan military officers who were plotting to overthrow Nicolás Maduro’s government. 
In the end, US policymakers backed off the idea; but, not surprisingly, the reaction to the article was mostly negative. 
To be sure, there are good reasons to oppose a US-supported coup in Venezuela. 
Many of those likely to be involved would have unsavory reputations, given their ties to the drug trade and their record of human-rights violations. 
A coup would almost certainly fail, giving an already repressive government a new justification to crack down on its opponents. 
Another option would be an armed intervention led by Venezuela’s neighbors. They are adversely affected by the flow of refugees, which already numbers 2-4 million and is growing at a rate of 50,000-100,000 per month. 
If these countries took the lead, they would not have the political baggage of a US-led military operation. 
But this scenario, too, can be ruled out, owing to the regional bias against military interventions and the fact that Venezuela’s neighbors lack the means to carry one out. 
Venezuela is roughly twice the size of Iraq, has as many as 100,000 armed citizens, and is riddled with Cuban intelligence officers assisting the regime. 
Intervention would not be a cakewalk. 
Critics of intervention favor imposing additional sanctions on top officials. This is warranted, but there is no reason to believe that doing so will be decisive, especially with China providing massive amounts of credit with no strings attached. 
A second suggestion, to provide meaningful support to refugees, would be expensive; admitting more is not a realistic option for many countries. 
And such policies address symptoms, not their cause. 
Venezuela’s future is bleak. 
The economy has shrunk by half in the last five years; oil production is down by a similar percentage. 
Infrastructure is crumbling. 
Inflation is approaching one million percent. 
Poverty is prevalent in a country that once was among the region’s wealthiest and sits atop the world’s largest oil reserves. 
Crime is rampant, the health-care system is broken, and hunger is widespread. 
Maduro, who recently gained a second six-year term as president in what most observers judged to be a sham election, has created a new constituent assembly (to bypass the opposition-controlled National Assembly) that is writing a new constitution that would further cement dictatorship. 
There are reports of arbitrary arrests and torture. 
I keep returning to a question I have raised publicly and in private in recent months: How much worse do things in Venezuela have to become before the world would be prepared to act? 
How many more people must lose their lives? 
How many more must become refugees? 
To such questions there seem to be no answers. 
But at some point, avoiding them becomes untenable. 
Denial is not a strategy. 
In the meantime, though, we have clarity on at least three matters: 
First, the Responsibility to Protect doctrine, or R2P, which the UN General Assembly unanimously adopted in 2005, in response to the world’s inaction as nearly one million men, women, and children were slaughtered in Rwanda, is essentially dead. 
China and Russia have stopped supporting it after the Western intervention in Libya in 2011, having come to view R2P as a pretext for regime change. 
The world has done little but watch or, worse, participate in the destruction of Syria, where more than 500,000 people have lost their lives and a majority of the population has been forced to leave their homes. 
This is a great tragedy, not just for obvious humanitarian reasons, but also because R2P introduced an important principle: that sovereignty entails obligations as well as rights, and that when these obligations go unmet, governments forfeit some of their sovereign rights. 
Such a principle is needed in a world where much of what occurs inside countries affects the interests of others beyond their borders, often in fundamental ways. 
Second, governments are losing the war against crime, gangs, and cartels. 
Latin America is home to less than 10% of the world’s population, but accounts for approximately one-third of all murders. 
Unless this changes, the best people will understandably flee, as will investment. 
Economic growth will slow or disappear altogether. 
This is a vicious cycle, not a virtuous one. 
Governments will have to build up police and military forces. 
At the same time, outside countries with a stake in the region will need to assist, much as was done with Colombia in recent decades when it faced a serious armed challenge from within. 
Third, Latin America needs to reform existing regional bodies, beginning with the Organization of American States, or develop new forms of regional cooperation. 
The requirement of consensus before action can be taken is a recipe for dithering. 
Related to the last two points is a need to rethink the region’s security. 
Latin America has largely avoided the geopolitics and wars that have plagued other parts of the world. 
But this holiday from history has ended. 
The threats to internal stability are large and growing; and, as Venezuela shows, when internal order breaks down, regional stability is put at risk by refugee flows, gangs, and drug cartels. 
It is time for the region’s leaders to face up to their fast-deteriorating security environment before it overwhelms them. 

Lessons of the Lebanon War 
Wars are won not only on battlefields, but also in people’s minds. 
So, while Hezbollah has not decisively won its current war with Israel, by maintaining its ability to fight in the face of the might of the Israeli army, it has captured the imagination of Arabs, restoring lost pride in the same way as the Egyptian Army’s crossing of the Suez Canal in the war of 1973 did. 
Restored pride was central to Anwar Sadat’s eventual decision to go to Jerusalem and regain the entire Sinai Peninsula for Egypt. 
Although ordinary Lebanese have paid a huge human, economic, and infrastructural price, Hezbollah has made it clear to the Israelis that they can no longer take their military predominance for granted. 
The limits of military power have been exposed. Moreover, the madness of war has been clearly demonstrated to all, and, once the current fighting is over, both sides are now more likely to be cautious about actions that might push their peoples and countries into war once more. 
How this war is concluded will likely change the ways in which both Israel and the international community deal with the fundamental national aspirations of Arab peoples. 
Holding Arab land and prisoners indefinitely will no longer be an asset but a terrible burden. 
Conventional thinking in the Middle East has largely been built on Israel’s overwhelming military strength, together with the disunity and lack of purpose of Arab leaders. 
But, in less than two months, the almost mythic power of the region’s most powerful army has been dented, and Hassan Nasrallah, Hezbollah’s leader, has come across as a steadfast and determined leader, in sharp contrast to the usual behavior of heads of Arab government. 
The question now is whether this determination can bring about the type of surprising breakthrough to peace that Sadat’s newfound prestige in 1973 yielded. 
Ironically instead of weakening Lebanon, one clear winner of this war is the unity and independent will of Lebanon. 
Whether or not the war in Lebanon has helped or hurt the Palestinians is unclear. 
Because most media attention has shifted to Lebanon, the Israelis have had a free hand to continue pressing the Palestinians without international protest. 
Palestinians continue to be killed on a daily basis not only in Gaza but also in Nablus, in the West Bank. 
More than 170 Palestinians have died since the violence began in June. 
Yet the connection between the two wars has not gone unnoticed. 
In the United States, President George W. Bush and Secretary of State Condoleezza Rice see the problems as linked, as does British Prime Minister Tony Blair. 
Indeed, the crises in Lebanon and Gaza have brought about a realization that two festering issues – Arab prisoners in Israel, and Israeli unilateralism – must be resolved if there is to be any hope of a return to the peace process. 
Given that both conflicts were triggered by the kidnapping of Israeli soldiers to be traded for Arab prisoners, Israel must now realize that holding Arabs indefinitely in prison can only beget violence. 
Israel’s National Security Advisor, Giora Eiland, appears to have recognized this even before the violence began. 
In May, he is said to have advised Israeli Prime Minister Yehud Olmert that Israel should hand over the disputed Sheba Farms area on the border with Lebanon and Syria, as well as returning Lebanese prisoners. 
Olmert reportedly did not see the need. 
But holding 300 Lebanese and nearly 10,000 Palestinians – all of the first group and many of the second group without charge or trial – has proven to be a major source of irritation to the Arab peoples of the region. 
One group of prisoners that will likely benefit from the current situation are Jordanians held in Israeli jails. 
Jordan, a US ally and one of the two Arab countries with a peace agreement with Israel, previously failed to secure the release of its 30 prisoners. 
They are now likely to be the first ones set free. 
Important as they are, however, the prisoners are not the crux of the matter. 
The real issue is the unilateralism that has been adopted by the major parties that have ruled Israel. 
Both the uncoordinated withdrawals from south Lebanon (by the Labor party after 22 years of occupation) and from Gaza (by Likud after 39 years of occupation) proved that you can’t simply evacuate an area and forget about it. 
The population left behind must have secure governments and institutions in place. 
On the most basic level, for example, the people of south Lebanon needed maps of where Israel had laid mines, but these were never provided. 
The unilateralism that Israelis overwhelmingly voted for in their recent election is based on the idea that security can somehow be achieved by erecting physical walls and barriers. 
The barrage of Hezbollah and Hamas rockets has shown the folly of such thinking. 
And, although the West Bank has not been used to launch rockets against Israel, there is no reason why the Palestinians who reside there will not resort to such weapons if walls continue to be built deep inside their territories and Israel continues to act with arrogance towards them. 
Soldiers are the first to recognize that military power is of limited value in achieving long-term peace. 
It is past time that political leaders on both sides, especially moderate ones, also come to understand this. 
They need to work together through negotiations to solve problems that simply cannot and should not be solved by brute force. 

Let A Hundred Theories Bloom 
BUDAPEST – The economic and financial crisis has been a telling moment for the economics profession, for it has put many long-standing ideas to the test. 
If science is defined by its ability to forecast the future, the failure of much of the economics profession to see the crisis coming should be a cause of great concern. 
But there is, in fact, a much greater diversity of ideas within the economics profession than is often realized. 
This year’s Nobel laureates in economics are two scholars whose life work explored alternative approaches. 
Economics has generated a wealth of ideas, many of which argue that markets are not necessarily either efficient or stable, or that the economy, and our society, is not well described by the standard models of competitive equilibrium used by a majority of economists. 
Behavioral economics, for example, emphasizes that market participants often act in ways that cannot easily be reconciled with rationality. 
Similarly, modern information economics shows that even if markets are competitive, they are almost never efficient when information is imperfect or asymmetric (some people know something that others do not, as in the recent financial debacle) – that is, always . 
A long line of research has shown that even using the models of the so-called “rational expectations” school of economics, markets might not behave stably, and that there can be price bubbles. 
The crisis has, indeed, provided ample evidence that investors are far from rational; but the flaws in the rational expectations line of reasoning—hidden assumptions such as that all investors have the same information—had been exposed well before the crisis. 
Just as the crisis has reinvigorated thinking about the need for regulation, so it has given new impetus to the exploration of alternative strands of thought that would provide better insights into how our complex economic system functions – and perhaps also to the search for policies that might avert a recurrence of the recent calamity. 
Fortunately, while some economists were pushing the idea of self-regulating, fully efficient markets that always remain at full employment, other economists and social scientists have been exploring a variety of different approaches. 
These include agent-based models that emphasize the diversity of circumstances; network models, which focus on the complex interrelations among firms (such as those that enable bankruptcy cascades); a fresh look at the neglected work of Hyman Minsky on financial crises (which have increased in frequency since deregulation began three decades ago); and innovation models, which attempt to explain the dynamics of growth. 
Much of the most exciting work in economics now underway extends the boundary of economics to include work by psychologists, political scientists, and sociologists. 
We have much to learn, too, from economic history. 
For all the fanfare surrounding financial innovation, this crisis is remarkably similar to past financial crises, except that the complexity of new financial products reduced transparency, aggravating fear about what might happen should there not be a massive public bailout. 
Ideas matter, as much or perhaps even more than self-interest. 
Our regulators and elected officials were politically captured – special interests in the financial markets gained a great deal from rampant deregulation and the failure to adapt the regulatory structure to the new products. 
But our regulators and politicians also suffered from intellectual capture. 
They need a wider and more robust portfolio of ideas to draw upon. 
That is why the recent announcement by George Soros at the Central European University in Budapest of the creation of a well-funded Initiative for New Economic Thinking (INET) to help support these is so exciting. 
Research grants, symposia, conferences, and a new journal – all will help encourage new ideas and collaborative efforts to flourish. 
INET has been given complete freedom – with respect to both content and strategy – and one hopes that it will draw further support from other sources. 
Its only commitment is to “new economic thinking,” in the broadest sense. 
Last month, Soros assembled a remarkable group of economic luminaries, from across the spectrum of the profession –theory to policy, left to right, young and old, establishment and counter-establishment—to discuss the need and prospects for such an initiative, and how it might best proceed. 
For the past three decades, one strand within the economics profession was constructing models that assumed that markets worked perfectly. 
This assumption overshadowed a wide body of research that helped explain why markets often work imperfectly – why, indeed, there are widespread market failures. 
The marketplace for ideas also often works in a way that is less than ideal. 
In a world of human fallibility and imperfect understanding of the complexity of the economy, INET holds out the promise of the pursuit of alternative strands of thought – and thereby at least ameliorating this costly market imperfection. 

Let a Thousand Capitalisms Bloom 
CAMBRIDGE: The global financial crisis that recently brought the world economy to its knees appears to have abated. 
Time to reflect on how we ensure that similar crises do not erupt again. 
Practically all discussion on institutional reform in the world economy is predicated on the idea that our objective is a functioning global capitalist system. 
This approach takes it for granted that an integrated world market will deliver the goods as long as we contain its excesses and imbalances. 
The policy challenge within this frame of reference is: how do we make the world safe for free trade in goods, services, and capital? 
No good answer to this question exists because the idea of global capitalism is inherently impracticable. 
Capitalism is a national phenomenon. 
The real policy challenge is: how do we make the world safe for different brands of national capitalism to prosper side by side? 
Until we address this question, we are not going to come to grips with the real issues and provide workable solutions to our global predicament. 
Markets are not self-regulating, self-stabilizing, and self-legitimating. 
That is why every functioning society has regulatory bodies that set the rules of competition, monetary and fiscal institutions that perform stabilizing functions, and social insurance schemes, transfer policies, and other social arrangements that bring market outcomes into conformity with a society’s preferences regarding the distribution of risks and rewards. 
None of these institutions exists at the global level. 
Creating supranational institutions adequate to the task would require not only a willingness to give up national sovereignty but a considerable degree of convergence in national preferences regarding what constitutes a desirable set of social arrangements. 
Neither is about to happen: there are as many working models of successful capitalism as there are advanced industrial countries. 
What, then, would an international system of national capitalisms look like? 
First, in common with today’s regime, the system would adhere to multilateral procedures and the most-favored-nation principle. 
Second, the system would aim at low, but not necessarily zero levels of trade barriers in goods and services. 
Governments would not be required to reduce or eliminate controls on capital flows—especially of the short-term kind. 
Neither would they be asked to harmonize behind-the-border policies in such areas as industrial regulation, taxation, labor rules, or environmental standards. 
Third, the rules of the game would allow countries to reimpose restrictions at the border when not doing so would jeopardize a legitimate national objective. 
Concern for the environmental implications of trade, humanitarian objections, or adjustment difficulties might all constitute grounds for an opt-out of this kind. 
Governments exercising this option would have to follow guidelines that would be negotiated multilaterally. 
If this sounds radical, consider the fact that the monetary/trade regime of the immediate postwar period was founded on almost identical principles. 
Harry Dexter White and John Maynard Keynes, the architects of the Bretton Woods system, did not contemplate a regime whose main purpose was to maximize the international flow of goods and capital. 
They sought a system that would prevent nations from exporting their economic difficulties to their trading partners and which would avoid the problems of the interwar period: destabilizing capital flows, excessively volatile currencies, and an eventual descent into bilateralism and protectionism. 
These international rules left enough space for national development efforts to proceed along successful but divergent paths. 
Western Europe chose to integrate within itself and to erect an extensive welfare state. 
Japan caught up with the West with its own distinctive brand of capitalism, combining a dynamic export sector with an inefficient and protected set of activities in services and agriculture. 
China began to grow by leaps and bounds once it recognized the importance of private initiative, even though it flouted every other rule in the guidebook. 
Much of the rest of East Asia generated an economic miracle relying on industrial policies that have since been banned by the WTO. 
What was radical, with hindsight, was the turn that events took during the 1980s. 
The Reagan and Thatcher "revolutions" presaged an era of market fundamentalism that ignored the need to embed markets in social and political institutions. 
Market fundamentalism spawned a series of myths and half-truths: that freeing up international markets was the surest way to global prosperity; that free capital flows would allocate resources efficiently around the globe; that international financial markets would "discipline" governments to adopt more sound monetary and fiscal policies; and that all of this could happen without significant inequities, economic instability, or disruptions to domestic social arrangements. 
Neither history nor recent evidence provides much support for any of these propositions. 
No matter. 
Suddenly, the U.S. began to act as if the Japanese retail distribution system or its longshoremen labor practices were a matter for bilateral negotiation, on the grounds that these may have some impact on trade. 
The WTO struck down U.S. import prohibitions enacted pursuant to its endangered species act because of concern that an open trading regime might otherwise be compromised. 
Emerging market economies were told to remove controls on international capital flows upon joining the OECD. 
Governments fell all over each other competing for foreign investors. 
Trade and foreign investment began to trump everything else. 
The cumulative effect has been market instability and the erosion of the public legitimacy of the international economic system. 
Any set of ground rules for the world economy that is predicated on the Holy Grail of global capitalism, as a regime of complete free trade would be, is bound to disappoint badly. 
It is far more productive to strive for something that has worked very well in the past and remains attainable: a regime of peaceful coexistence among national capitalisms. 

Let A Thousand Growth Models Bloom 
Over recent decades a simplistic view about the fundamentals that govern the theory and practice of development has taken root. 
Stated nakedly, this view holds that growth requires two things: foreign technology and good institutions. 
Failure to grow can be attributed to either (or both) of two pathologies. 
Call one the "protection" pathology, in which governments stymie progress by reducing access to foreign investment and technology. 
The other pathology is "corruption," where political leaders fail to respect property rights and the rule of law. 
The natural remedies for these pathologies are claimed to be economic openness and improved governance. 
Reforms focused on governance and openness thus became the cornerstones of development strategy in virtually every country during the last fifteen years. 
Experience presents an awkward fit (at best) with this conception. 
Consider Latin America, where there has been greater enthusiasm for the so-called "Washington Consensus" on growth than in any other corner of the world. 
By the standards of the consensus view, policymaking in Latin America was better in the 1990s than ever before, nonetheless few countries in the region grew faster than in the period before 1980. 
Or consider more successful countries. 
Some of the most important - South Korea and Taiwan since the early 1960s, China since the late 1970s, India since the early 1980s - have done extremely well under heterodox arrangements. 
All emphasized exports; none grossly violated property rights. 
Their strategies bear only passing similarity to today's consensus. 
South Korea and Taiwan retained high levels of protection for a long time, and made active use of industrial policies. 
China's reforms are marked by partial liberalization, two-track pricing, limited deregulation, financial restraint, an unorthodox legal regime, and the absence of clear private property rights. 
India barely reformed its cumbersome trade and industrial regime before its economy took off in the 1980s. 
These and other success stories share one thing: they are instances of growth strategies that combine orthodoxy with local heresies - unconventional institutional innovations that relax constraints on growth at least cost to the social and political fabric. 
Of course, heterodoxy does not always produce payoffs. 
Most countries with protected economies and lax protection of property rights languish. 
But the fact that some of the world's most successful economies prospered while doing things that are not in the rule-book is something that cannot be dismissed easily. 
To grasp the conventional view's deficiencies, begin with the problem of technology adoption. 
Learning what a country is (or can be) good at producing is a key challenge. 
Neither economic nor management theory is of much help in helping entrepreneurs (or the state) choose appropriate investments among the range of modern-sector activities. 
Yet making the right investment decisions is essential to growth, because they determine the pattern of specialization. 
Today's intellectual property regime protects innovators in advanced countries by issuing temporary monopolies, i.e., patents. 
But the investor in the developing country who figures out that an existing good can be produced profitably at home and sets up a model for others to emulate does not normally get such protection, even though the social returns can be high. 
Laissez-faire is not the optimal solution here, just as it is not in the case of research and development of new products. 
Desirable government policy consists of a carrots and stick: encouraging investment and entrepreneurship in the modern sector ex ante, but, equally important, rationalizing production and driving out poor performers ex post. 
Institutional arrangements also have large elements of specificity. 
Discovering which institutions are suitable to local conditions requires experimentation. 
Reforms that succeed in one setting may do poorly or fail in other settings. 
Two-track reform worked well in Deng's China but not in Gorbachev's Soviet Union. 
Import-substitution fostered competitive industries in Brazil, but not in Argentina. 
Gradualism may be appropriate to India, not Chile. 
Specificity helps explain why successful countries -China, South Korea, Taiwan, and Chile among others - usually combine unorthodox elements with orthodox policies. 
It may also account for why important institutional differences persist among advanced countries in areas such as the public sector's role, the nature of legal systems, corporate governance, financial markets, labor markets, and social insurance mechanisms. 
It is not that economic principles work differently in different places, or need to be tailored to local conditions. 
An important distinction between economic principles and their institutional embodiment is that most key economic principles are institution-free. 
Incentives, competition, hard-budget constraints, sound money, fiscal sustainability, property rights are central to the ways in which economists think about policy and its reform. 
But these principles do not demand specific institutional solutions. 
Property rights can be implemented through common law, civil law, or, for that matter, Chinese-style socialism. 
Competition can be maintained by a combination of free entry and laissez-faire, or by a well-functioning regulatory authority. 
Macroeconomic stability can be achieved under a variety of fiscal institutions. 
Because policymakers operate in second-best environments, optimal reform trajectories - even in apparently straightforward cases such as price reform - cannot be designed without due regard to prevailing conditions and without weighing the consequences for multiple distorted margins. 
Neither technology nor good institutions can be acquired without significant domestic adaptations. 
Those adaptations require a pro-active role for the state and civil society, and collaborative strategies that foster entrepreneurship and institution building. 
What the world needs right now is less consensus and more experimentation in the service of such strategies. 


Let Afghans Lead Afghan Reform 
NEW YORK – Although the outcome remains uncertain, Afghanistan’s presidential election has demonstrated that the Afghan people yearn for more accountable leadership. 
But it is no less clear that this aspiration is far from being met, and that the country’s poor governance is laying a dangerously weak foundation for international engagement. 
The United States and its allies cannot succeed in Afghanistan unless the Afghan government itself succeeds. 
Despite the US Congress’s appropriate calls to establish benchmarks for American progress in Afghanistan, too few people are calling for the Afghan government to articulate its goals for improving governance and accountability, and how it plans to meet them. 
Until it does and international support is conditioned on Afghan progress in realizing goals set by Afghans, the country’s state institutions will continue to lose credibility. 
Meaningful success in Afghanistan will become elusive at any level of funding or international troop presence. 
Today, many parts of the Afghan state are rotting from within. 
Systemic corruption can be found at all levels. 
A large number of government officials, including members of President Hamid Karzai’s own family, are alleged to be involved in trafficking narcotics, timber, gems, and other illicit goods. 
Karzai’s pardoning of drug traffickers with indirect ties to his re-election campaign also raised fundamental questions about his government’s commitment to the rule of law. 
Afghans themselves are not solely to blame for this state of affairs. 
The US and the international community focused far too little on building a suitable structure of governance after the 2001 intervention. In the name of short-term expediency, too little was done to sack corrupt governors and police, or to counter involvement by high-level officials in the narcotics trade. 
Whatever the causes, official corruption is creating a situation in which many Afghans fear the rapaciousness of the government nearly as much as they dislike the Taliban, which can now credibly claim the ability to provide security and swift justice in the areas they control, albeit at a very high price. 
All things being equal, Afghans would prefer security under any regime other than the Taliban. 
Democracy and the rule of law could conceivably be an effective alternative to what the Taliban offer, but the government cannot credibly claim to provide either, not to mention basic services, on a consistent basis. 
And, because the international community still pays the government’s bills, many Afghans assume that donors support endemic corruption. 
Given increasing public wariness about Afghanistan in the US and elsewhere, and the countries’ overwhelming reliance on international largesse, it would be tempting to follow the usual route by developing internationally-generated goals and then engaging with Afghan leaders to explore how best to achieve them. 
Such a process will not succeed. 
Corruption can be addressed only if the Afghan government itself takes primary responsibility for addressing it. 
The best way to help make Afghanistan’s government more accountable to its people over the long term is by working to strengthen Afghan democracy, but this level of accountability is still far off – and Afghanistan desperately needs better governance now. 
To foster accountability in the near term, the international community should call on the next Afghan administration to establish its own goals for good governance and lay out benchmarks to measure progress. 
If the international community believes that these goals are correct, assistance should continue to be provided as long as the benchmarks are being met. 
If they are not, assistance could be scaled back to avoid having international funds continue to support corrupt practices. 
Afghanistan is a sovereign state, and its government has the authority do what it wants. 
But the international community is not obliged to finance official corruption. 
Internally generated reform is the only reform that can work, and it cannot occur if Afghan officials take international assistance for granted or see themselves as subordinate actors in their own reform process. 
Unless adequately addressed, official corruption will fatally undermine conditions in Afghanistan and make the continuation of international support unsustainable and success impossible. 
The time has come for the Afghan government to take the lead in fighting corruption, and for the international community to make clear that it will not provide a blank check for anything less. 

Let Africa Into the Carbon Market 
The G8 summit earlier this year focused on Africa and climate change because the two issues are linked: Africa is particularly vulnerable to the effects of climate change and therefore must be supported to adapt to it. 
Adaptation to climate change is critical worldwide, but nowhere as much as in Africa, where exposure to natural disasters is higher than in most other regions. 
Aside from adaptation, Africa can also play a role in mitigating climate change through more sustainable forest and land management. 
Rural populations from Africa have the capacity to compete and export greenhouse-gas emission-reduction credits generated by forestry and agriculture activities that improve their livelihoods, ameliorate local environmental problems, and increase communities’ ability to cope with climate change. 
However, in order to fulfill that promise, the industrialized world must give Africa a chance through the emerging international carbon market. 
The best approach would be for Europe, Japan, and Canada to buy certificates of biological carbon sequestration from Africa as part of their efforts to meet their obligations under the Kyoto Protocol. 
Under the Clean Development Mechanism (CDM) of the Kyoto Protocol, industrialized countries (so-called “Annex I countries”) have the right to purchase certificates of carbon sequestration from reforestation projects undertaken in developing countries and use them to offset up to 1% of their 1990 greenhouse-gas emissions from industry, transport and housing. 
Although this represents a small fraction of the effort needed from industrialized countries to fulfill the Kyoto Protocol’s goals by 2012, it would help significantly in improving forest and land use in Africa. 
Europe, in particular, can demonstrate its commitment to mitigating climate change and promoting economic development in Africa by filling its 1% quota of credits from reforestation projects. This requires modifying some of the rules governing its own internal carbon market, the EU Emission Trading Scheme (EU ETS). 
Under current EU ETS rules, carbon credits generated by forestry projects undertaken in the CDM currently have no value, despite their obvious climate, environmental, and social benefits. 
This is because the so-called “linking directive” – the regulation authorizing EU firms to import Certified Emission Reductions from CDM projects – bans credits from any forestry project. 
Unsurprisingly, no European firm is currently interested in purchasing such credits. 
Even European governments, which are not tied by the EU ETS ban, purchase very few. 
The EU ETS’s exclusion of carbon credits from forestry projects will remain in force at least until 2008, with the question of whether to include them subsequently set to be revisited next year. 
The European Commission will submit a report for consideration by the European Parliament and the Council of Ministers by June 30, 2006. 
Preserving the European bias against credits from forest projects is not justified, as positive experience emerging from the first land-use projects will show. 
In the Doha trade negotiations, industrialized nations accepted the need to liberalize their agricultural markets by reducing subsidies to domestic producers and tariff barriers on agricultural imports. 
So why not liberalize the carbon market as well – a move that would help, not hurt, domestic producers? 
It would also help if all the parties to the Kyoto Protocol amended the post-2012 CDM rules. 
In particular, three changes are necessary: the relaxation of the 1% rule, the expansion of eligibility criteria to include more than just reforestation, and the removal of the 60-year replacement rule (which mandates the replacement of temporary with permanent credits after 60 years, regardless of the state of the underlying forests). 
The first change would enable Annex I countries to satisfy a greater share of their increasing climate responsibilities using credits from land-use projects implemented in non-Annex I countries. The second change would allow forestry and land-use projects that are eligible to issue carbon credits to include such activities as re-vegetation, forest restoration, and improved agricultural management. 
The third change would eliminate a perverse rule, by which parties to CDM contracts can liquidate forests to buy replacement credits. 
The responsibility for reforming the emerging carbon market does not lie solely with the North. 
All parties to the Kyoto Protocol, including African nations, have a unique opportunity to influence the post-2012 debate and defend the inclusion of land-use projects in the emerging carbon market. 

Let Developing Nations Rule 
CAMBRIDGE – There is a silver lining for developing nations in the present crisis, for they will emerge with a much bigger say in the institutions that govern economic globalization. 
Once the dust settles, China, India, Brazil, South Korea, and a handful of other “emerging” nations will be able to exercise greater influence over the way that multilateral economic institutions are run, and will be in a better position to push for reforms that reflect their interests. 
There are two related reasons for this. 
First, the financial crisis has weakened the United States and Europe. 
They will be unwilling or unable to provide the kind of leadership that sustained multilateralism in the decades that followed World War II. 
Developing nations will have to step up to fill the gap. 
Second, the relative weight and importance of developing nations in the global economy will have risen even more. 
Many of the West’s leading financial institutions – those that have not been nationalized – as well some important industrial enterprises, will remain at the mercy of capital from China or the Gulf states. 
In trade, the current round of global negotiations has demonstrated that if rich nations want developing nations to cooperate, they will need to let them shape the rules of the game. 
To make the best of this outcome, developing nations will have to have a good sense of their interests and priorities. 
So, what should they seek? 
First, they should push for new rules that make financial crises less likely and their consequences less severe. 
Left to their own devices, global financial markets provide too much credit at too cheap a price in good times, and too little credit in bad times. 
The only effective response is counter-cyclical capital-account management: discouraging foreign borrowing during economic upswings and preventing capital flight during downswings. 
So, instead of frowning on capital controls and pushing for financial openness, the International Monetary Fund should be in the business of actively helping countries implement such policies. 
It should also enlarge its emergency credit lines to act more as a lender of last resort to developing nations hit by financial whiplash. 
The crisis is an opportunity to achieve greater transparency on all fronts, including banking practices in rich countries that facilitate tax evasion in developing nations. 
Wealthy citizens in the developing world evade more than $100 billion worth of taxes in their home countries each year, thanks to bank accounts in Zurich, Miami, London, and elsewhere. 
Developing countries’ governments should request and be given information about their nationals’ accounts. 
Developing nations should also push for a Tobin tax – a tax on global foreign currency transactions. 
Set at a low enough level – say, 0.25% – such a tax would have little adverse effect on the global economy while raising considerable revenue. 
At worst, the efficiency costs would be minor; at best, the tax would discourage excessive short-term speculation. 
The revenues collected – easily hundreds of billions of dollars annually – could be spent on global public goods such as development assistance, vaccines for tropical diseases, and the greening of technologies in use in the developing world. 
The administrative difficulties in implementing a Tobin tax are not insurmountable, as long as all major advanced countries go along. 
It would then be possible to get offshore financial centers to cooperate by threatening to isolate them. 
Developing nations also need to enshrine the notion of “policy space” in the World Trade Organization. 
The goal would be to ensure that developing countries can employ the kind of trade and industrial policies needed to restructure and diversify their economies and set the stage for economic growth. 
All countries that have successfully globalized have used such policies, many of which (e.g., subsidies, domestic-content rules, reverse engineering of patented products) are currently not allowed under WTO rules. 
Policy space is also required to ensure that important social and political ends – such as food security – are compatible with international trade rules. 
Developing nations should argue that recognizing these economic and political realities makes the global trade regime not weaker and more susceptible to protectionism, but healthier and more sustainable. 
But with increased power comes increased responsibility. 
Developing nations will need to be more understanding and responsive to legitimate concerns in rich countries, and be more willing to pay for some global public goods. 
Capital-exporting developing nations should be willing to accept greater transparency in the operation of sovereign wealth funds and pledge not to use them for political purposes. 
The largest developing nations – China, India, and Russia – will need to shoulder some of the burden of reducing greenhouse-gas emissions. 
Similarly, developing nations must understand that policy space is a two-way street. 
In countries like the US, where the middle class has reaped few of the benefits of globalization in the last quarter-century, trade policy will be under severe pressure to provide some redress. 
President-elect Barack Obama made the plight of the middle class a central plank of his successful campaign. 
His chief economic adviser, Larry Summers, has also been vocal of late on globalization’s adverse impact on workers. 
It will not do much for good for developing countries to raise the specter of protectionism each time such concerns are voiced. 
Political and economic reality demands a more nuanced and cooperative approach. 
Developing countries should say no to obvious trade protectionism, but they should be willing to negotiate to avoid regulatory races to the bottom in such areas as labor standards or corporate taxation. 
This is in their long-term self-interest. 
Without support from the middle classes of rich nations, it will be difficult to maintain a global trade regime as open as the one we have had in recent years. 

Let Finance Skeptics Take Over 
CAMBRIDGE – The race is on to fill the most important economic policy position in the world. 
United States Federal Reserve Chairman Ben Bernanke’s term ends in January, and President Barack Obama must decide before then: either re-appoint Bernanke or go with someone else – the names most often mentioned are Larry Summers and Janet Yellen – with more solid Democratic credentials. 
It is a decision of momentous consequence not just for the US, but also for the world economy. 
As guardians of the nation’s money supply and setters of short-term interest rates, central bankers have always played a critical role. 
Lower the interest rate too much, and inflation and monetary instability result. 
Raise it too much, and the economy slides into recession and unemployment. 
Monetary policy is hardly a science, so a good central banker must be humble. 
He must appreciate the limits of his understanding and of the efficacy of the tools at his disposal. 
Yet he cannot afford to be perceived as indecisive, which would only invite destabilizing financial speculation. 
Indeed, as important as their functions are, in recent decades central banks have become even more significant as a consequence of the development of financial markets. 
Even when not formally designated as such, central banks have become the guardians of financial-market sanity. 
The dangers of failing at this task have been made painfully clear in the sub-prime mortgage debacle. 
Under Obama’s proposed new rules, the Fed will have even larger responsibilities, and will be charged with averting financial crises and ensuring that banks are not taking on too much risk. 
This is a job at which former Fed Chairman Alan Greenspan proved to be a spectacular failure. 
His blind spot on financial-market excesses – the little “flaw” in his thinking, as he later termed – left him oblivious to the dangers of Wall Street titans’ financial innovations. 
As a member of the Fed’s Board of Governors under Greenspan during 2002-2005, Bernanke can also be faulted for having played along. 
The Fed chairman exerts global influence not only through monetary policy, but also through his words. 
He sets the tone for policy discussions and helps shape the belief system within which policymakers around the world operate. 
What hampered Greenspan and Bernanke as financial regulators was that they were excessively in awe of Wall Street and what it does. 
They operated under the assumption that what is good for Wall Street is good for Main Street. 
This will no doubt change as a result of the crisis, even if Bernanke remains at the helm. 
But what the world needs is a Fed chairman who is instinctively skeptical of financial markets and their social value. 
Here are some of the lies that the finance industry tells itself and others, and which any new Fed chairman will need to resist. 
Prices set by financial markets are the right ones for allocating capital and other resources to their most productive uses . 
That is what textbooks and financiers tell you, but we have now many reasons to be wary. 
In the language of economists, there are far too many “market failures” in finance for these prices to be a good guide for resource allocation. 
There are “agency problems” that drive a wedge between the interests of the owners of capital and the interests of bank CEOs and other finance executives. 
Asymmetric information between sellers and buyers of financial products can easily leave buyers vulnerable to abuse, as we saw with mortgage-backed securities. 
Implicit or explicit bail-out guarantees, moreover, induce too much risk-taking. 
Large financial intermediaries endanger the entire financial system when they use the wrong risk model and make bad decisions. 
Regulation is at best a partial remedy for such problems. 
So the prices that financial markets generate are as likely to send the wrong signals as they are to send the right ones. 
Financial markets discipline governments. 
This is one of the most commonly stated benefits of financial markets, yet the claim is patently false. 
When markets are in a euphoric state, they are in no position to exert discipline on any borrower, let alone a government with a reasonable credit rating. 
If in doubt, ask scores of emerging-market governments that had no difficulty borrowing in international markets, typically in the run-up to an eventual payments crisis. 
In many of these cases – Turkey during the 1990’s is a good example – financial markets enabled irresponsible governments to embark on unsustainable borrowing sprees. 
When “market discipline” comes, it is usually too late, too severe, and applied indiscriminately. 
The spread of financial markets is an unmitigated good. 
Well, no. 
Financial globalization was supposed to have enabled poor, undercapitalized countries to gain access to the savings of rich countries. 
It was supposed to have promoted risk-sharing globally. 
In fact, neither expectation was fulfilled. 
In the years before the financial crash, capital moved from poor countries to rich countries, rather than vice versa. 
(This may not have been a bad thing, since it turns out that large (net) borrowers in international markets tend to grow less rapidly than others.) 
And economic volatility has actually increased in emerging markets under financial globalization, owing in part to frequent financial crises spawned by mobile capital. 
Financial innovation is a great engine of productivity growth and economic well-being . 
Again, no. 
Imagine that we had asked five years ago for examples of really useful kinds of financial innovation. 
We would have heard about a long-list of mortgage-related instruments, which supposedly made financing available to home buyers who would not have been able to purchase homes otherwise. 
We now know where that led us. 
The truth lies closer to Paul Volcker’s view that for most people the automated teller machine (ATM) has brought bigger benefits than any financially-engineered bond. 
The world economy has been run for too long by finance enthusiasts. 


Let’s Get Real About Money 
Throughout the world, people suffer from a serious perception error that has inhibited them from taking concrete steps to protect themselves from inflation or deflation. 
The error is called the “money illusion ” – the belief that a nominal unit of currency is the best measure of value, even though its real value is unstable. 
Historically, failure to protect against inflation or deflation has helped spur calamitous outcomes. 
When spectacular inflation hit Germany in 1923, it wiped out the real value of the (unhedged and unindexed) life savings and social-security benefits of millions of people, whose anger contributed to the rise of Nazism. 
Similarly, spectacular deflation in many countries around the world in the early 1930’s magnified the real value of (unhedged and unindexed) debts, leading to millions of defaults and widespread bank failures. 
Deflation also magnified the real value of wages and salaries, thereby fueling layoffs and unemployment. 
Failure to hedge or index brought us the Great Depression. 
Much of Japan’s economic malaise in recent years also reflects (unhedged and unindexed) debts magnified by deflation since 1999. 
In 2003, an IMF study raised the specter of Japan-like problems around the world, and listed thirteen countries, including, China, Germany, Singapore, and Poland, with a moderate to high risk of deflation. 
Yet, in the face of overwhelming evidence of the importance of inflation or deflation risk, most people – even in countries that have been warned – generally still have not taken steps to protect themselves. 
Given widespread apathy about changes in consumer prices, the modest success of a new market to hedge inflation risk, the European inflation futures market at the Chicago Mercantile Exchange (CME), is noteworthy. 
Since September, this new market has traded the Eurozone’s Harmonized Index of Consumer Prices, or HICP – a contract that traders call the “hiccup.” 
By purchasing or selling it, companies and individuals can protect themselves against losses stemming from changes in the value of their currency. 
The open interest recently was 355 contracts, with a notional value of €355 million. 
This is a real beginning, and we should encourage such contracts to grow in order to help billions of people hedge their inflation and deflation risks. 
But this promising start follows a long trail of failures to create inflation futures, owing to the public’s lack of interest. 
This failure can be explained only by the money illusion, which ultimately is connected with what psychologists call “framing.” 
How a concept is framed, the context and associations with which it is presented, affect human judgments enormously. 
A tax called a “death tax” is regarded very differently from a tax called an “inheritance tax,” even though the two are really identical. 
The money illusion occurs because we are accustomed to economic values almost always being framed in terms of money. 
For years, I have been arguing that national governments should take some simple steps to reframe economic quantities and help the public overcome the money illusion. 
They could merely create an indexed unit of account to replace currency for measuring economic quantities and defining prices. 
The unit would be nothing more than a consumer price index, given a simple name, and published daily, so that people could use this unit and its name to quote prices in real terms. 
This would help reframe public thinking, which is all a government really needs to do. 
It would be easy and virtually costless. 
Indexed units of account are not a new idea; 
Chile’s government led the way in 1967 by creating the Unidad de Fomento (UF), and other Latin American countries have followed suit. 
Despite the unit’s technical-sounding name, people in Chile seem to have learned to think in terms of the UF instead of the peso for important contracts. 
Following Chile’s example, governments also could redefine the tax system in terms of the units of account rather than currency. 
That way, people who fill out tax forms would have to learn the units of account. 
As a side benefit, the tax system would be automatically, fully, and transparently indexed to inflation. 
In my 2003 book The New Financial Order, I proposed that such units be called “baskets,” since a consumer price index is the price of a representative market basket of goods and services. 
That name is very simple, and it conveys a new conceptual framing: by promising to pay someone so many baskets at a future date, one is promising to pay in market baskets of goods and services. 
Of course, the actual payment will be made in ordinary currency at the contemporaneous exchange rate, based on the consumer price index, between baskets and the currency. 
What if people really got used to expressing quantities in baskets? 
Wouldn’t futures contracts sound completely different if they were reframed as contracts for ”baskets” instead of “hiccups?” 
A futures market for the complete market basket that consumers buy certainly rings with importance. 
Ultimately, the advance of information technology will be the salvation of ideas like the CME’s inflation futures market and indexed units of account. 
Inflation futures appear to be gaining hold in part because the new contract is traded on an efficient electronic market (the Globex system) that allows futures contracts to get going without the initial splash that is required by open-outcry pit-based futures markets. 
Indeed, this is also why an American exchange can make a market for European inflation; with new information technology, it no longer matters where people live. 
This should help popularize indexed units of account, too, since computer technology can now handle all the calculations involved in translating them into currency. 
The sooner this happens, the sooner one more scourge of financial instability will be behind us. 

Let the Doha Round Fail 
Imagine that the world’s trade ministers simply walk away from their forthcoming Hong Kong meeting of the World Trade Organization (WTO) with this simple declaration: “We failed to reach an agreement; we’ll try to do better next time.” 
This would bring the so-called Doha “Development” Round to an unsuccessful conclusion, but it would be no disaster. 
Talk to World Bank and WTO officials, and you will get an earful of inflated claims about the benefits that a successful Doha round would bring. 
These officials often make it sound as if the livelihood of hundreds of millions of poor people in developing nations hangs in the balance. 
Look closer at these claims, and you find that they are built on sand. 
The World Bank’s most recent estimate is that complete trade liberalization (including in manufactures and by developing nations themselves) would produce a net gain to the developing world of half a percentage point of their income. 
But that hasn’t stopped the Bank doing its best to hide this meager impact behind impressive-sounding claims. 
The fact is that the world economy is more open today than it has ever been, and will remain so even if the Doha talks collapse. 
Most developing nations have opened themselves significantly to foreign trade and no longer employ the most damaging policies of the past (such as quantitative restrictions on imports). 
The political balance in these countries has tilted decisively in favor of pro-trade groups with an outward-looking orientation. 
In the advanced countries, trade barriers for manufactured goods and many services are at a historic low. 
It would be hard to identify any poor country whose development prospects are seriously blocked by restrictions on market access abroad. 
Any country with a sensible development strategy has the opportunity to make its economy grow, with assistance from trade. 
But what about agriculture? 
Don’t the farm subsidies and other forms of support in the United States and European Union undercut the livelihood of millions of poor farmers? 
Wouldn’t phasing them out make a big dent in world poverty? 
The reality is that the global impact of agricultural liberalization in rich countries would be relatively small and highly uneven. 
These policies may hurt agricultural producers elsewhere, but they also benefit poor urban consumers. 
The balance depends on the poverty profile of individual countries and on whether they are food exporters or importers. 
Of course, there would be some big gainers from agricultural reform, but they are chiefly consumers and taxpayers in rich countries. 
Some large middle-income food exporters (such as Brazil and Argentina) would also reap gains. 
Such outcomes are not unimportant, but they represent a far cry from the picture painted by free-trade fundamentalists. 
Indeed the only serious risk from the Doha round’s “failure” is that rich countries would take their own rhetoric seriously and react in unproductive ways that prove self-fulfilling. 
The US, in particular, could intensify its pursuit of bilateral deals, by which it is able to impose increasingly inappropriate policy priorities on smaller nations. 
The silver lining in an amicable break-up of the trade talks is that it would give negotiators a chance to focus on issues that are of much greater significance to developing nations. 
The next time around, trade talks should take up the two most glaring omissions to date: 
There remains a possibility that trade negotiators will patch together a last-minute deal in Hong Kong and emerge claiming victory. 
We will then end up with an agreement that will have been wildly oversold and is certain to lead to disappointment in the future – especially in developing nations. 
We will also have given up the opportunity to have a real development round next time around. 
Sometimes there is no success like failure. 
The Doha round is a case in point. 

Let the Good Times Roll Again? 
CAMBRIDGE – Goldman Sachs announced this month plans to provide bonuses at record levels, and there are widespread expectations that bonuses and pay in many other firms will rise substantially this year. 
Should the good times start rolling again so soon? 
Not without reform. 
Indeed, one key lesson of the financial crisis is that an overhaul of executive compensation must be high on the policy agenda. 
Indeed, pay arrangements were a major contributing factor to the excessive risk-taking by financial institutions that helped bring about the financial crisis. 
By rewarding executives for risky behavior, and by insulating them from some of the adverse consequences of that behavior, pay arrangements for financial-sector bosses produced perverse incentives, encouraging them to gamble. 
One major factor that induced excessive risk-taking is that firms’ standard pay arrangements reward executives for short-term gains, even when those gains are subsequently reversed. 
Although the financial sector lost more than half of its stock-market value during the last five years, executives were still able to cash out, prior to the stock market implosion, large amounts of equity compensation and bonus compensation. 
Such pay structures gave executives excessive incentives to seek short-term gains – say, by making lending and investment decisions that would improve short-term earnings – even when doing so would increase the risks of an implosion later on. 
Jesse Fried and I warned about this short-term distortion five years ago, in our book Pay without Performance . 
Following the crisis, this problem has become widely recognized, including by business leaders such as Goldman Sachs’ CEO Lloyd Blankfein. 
But it still needs to be effectively addressed: Goldman’s recent decision to provide record bonuses as a reward for performance in the last two quarters, for example, is a step in the wrong direction. 
To avoid rewards for short-term performance and focus on long-term results, pay structures need to be re-designed. 
As far as equity-based compensation is concerned, executives should not be allowed to cash out options and shares given to them for a period of, say, five years after the time of “vesting” – that is, the point at which the options and shares have been “earned“ and may not be taken away from the executive. 
An executive’s inability to cash out shares and options for a substantial period would tie his or her payoff to long-term shareholder value. 
The length of this period should be fixed, and should not depend on actions or conditions that are at least partly under executives’ control. 
By contrast, prohibiting executives from cashing out shares and options until they leave the firm would provide executives who have accumulated shares and options with a large monetary value with counter-productive incentives to depart. 
Similarly, bonus compensation should be redesigned to reward long-term performance. 
For starters, the use of bonuses based on one-year results should be discouraged. 
Furthermore, bonuses should not be paid immediately, but rather placed in a company account for several years and adjusted downward if the company subsequently learns that the reason for awarding a bonus no longer holds up. 
In addition to the excessive focus on short-term results, a second important source of incentives to take excessive risks has thus far received little attention. 
The payoffs of financial-sector executives were tied to highly leveraged bets on the value of their firms’ capital. 
Executives’ interests were tied to the value of their firms’ common shares – or even to the value of options on such shares. 
As a result, executives were not exposed to the potential negative consequences that large losses could bring about for preferred shareholders, bondholders, and the government as a guarantor of deposits. 
These structures provided executives with incentives to give insufficient weight to the possibility of large losses, which in turn motivated executives to take excessive risks. 
To address this distortion, the payoffs of financial executives should be tied not to the long-term value of their firms’ common shares but to the long-term value of a broader basket of securities. 
This basket should include, at the very least, preferred shares and bonds. 
Such structures would provide incentives to take risks that are closer to the optimal level. 
Reforming pay arrangements in ways such as those proposed here would help ensure that firms and the economy don’t suffer in the future from the excessive risk-taking that has contributed to bringing about the financial crisis. 
A thorough overhaul of compensation structures must be an important element of the new financial order. 


Let The Serbs Try Milosevic 
A lot has been happening in Yugoslavia recently, much of it surprising. 
After some procrastination and an initial failed attempt, Milosevic has been arrested, without bloodshed, though not without danger. 
The peaceful vote in Montenegro last weekend may presage conflict and difficult decisions about independence, but chances are strong that the parties will settle these matters by talking rather than fighting. 
These are great steps forward, and they show that despite brainwashing and the complicity of many Serbs in the crimes of the Milosevic regime, democracy and open society have a chance of taking root in what remains of Yugoslavia. 
One key decision facing Serbia, and its new authorities, is whether Milosevic should be extradited to The Hague. 
There seems to be almost universal agreement that he should, and international pressure is being applied on President Kostunica to comply. 
But the decision may have life-and-death ramifications for Serbia’s future. 
Many who agree that Milosevic is a war criminal now think that we should listen to the voices coming from Belgrade and their cry that Milosevic should face trial before his own people. 
Ultimate moral responsibility for what was done by Milosevic rests with Serbia’s people. 
They brought him to power, albeit not in a way that conforms precisely with democratic norms; they supported him, even when he led them into genocidal crimes and to defeat after defeat. 
Finally, they brought him down, and the new democratic leadership in Belgrade has, at no little risk to its own position and standing, arrested him. 
That arrest could well have ended in a bloodbath that might have destabilized a still insecure democratic government. 
Yugoslavia's new leadership should now be allowed to deal with Milosevic in a way that promotes democracy within Yugoslavia. 
His crimes should be judged by his own people – not by an international tribunal. 
In this way the trial will gain more legitimacy and credibility, especially among the many Serbs who still need to be educated in order to realize the true extent of Milosevic's crimes. 
Most importantly, by dealing with Milosevic, the Serbs, many of whom supported his regime, will be forced to confront their own behavior and deal with their own consciences. 
Only through this process will Serbia be able to rejoin the ranks of free and healthy European nations. 
If the trial is held before distant judges, sitting in a far�away capital, applying a not very transparent and somehow abstract code of law, many Serbs will see this not as a trial of Milosevic, but as victors’ justice meted out to the Serbian nation. 
They will be wrong. 
Nonetheless, political trials (and war crime trials are always political trials) must not only punish, but also teach. 
The lessons from any trial of Milosevic should be taught to Serbia's citizens by Serbian judges, within a normative system that most Serbs accept as legitimate. 
The international hue and cry for Milosevic to be brought to The Hague, regardless of political consequences, is understandable. 
Yet this pressure is unwise, and somewhat hypocritical. 
After all, the peacekeeping forces in Bosnia can, should they decide to act, arrest Radovan Karadzic and General Ratko Mladic, the leaders of the Bosnian Serbs who have been indicted by the Hague Tribunal. 
They have not done so, and show no signs of doing so. 
Why this inaction? 
Clearly, political reasons are at the root of this: the British, US and French governments are reluctant to risk the lives of their own soldiers in order to bring these arch�criminals to justice. 
Indeed, Karadzic and Mladic have evaded arrest for years; indeed, since the Dayton peace accords were signed. 
Shouldn't equal consideration for the political constraints faced by President Kostunica and the sensitivities of the Serbian people be given? 
Is it really worth the risk of destabilizing Yugoslavia's infant democracy to carry out trials that Yugoslavia's government shows every sign of being able to carry out? 
That there will now be a Truth and Reconciliation Commission in Belgrade suggests that the current Yugoslav leadership understands that it needs to heal the wounds inflicted on its own people by the murderous Milosevic regime. 
Let the international community show the same compassion and understanding to the Serbian people it applies when it has to decide whether to risk its own soldiers in an attempt to apprehend Karadzic and Mladic. 

Letter from Palestine 
Are Israelis and Palestinians really ready to strike a peace agreement? 
Events have certainly moved at a brisk pace in recent months, with one obstacle after another to a lasting deal seeming to come down. 
Yasir Arafat’s death was followed by the choice of his successor in a direct election with universal suffrage, which was accompanied by Israel’s decision – one unique in the world – to help, not hinder the democratic process in territories it occupies. 
As a result, no one doubts Palestinian President Mahmoud Abbas’s legitimacy. 
Moreover, with Israeli Prime Minister Ariel Sharon’s announcement of his intention to withdraw Israel’s army unilaterally from Gaza, the occupation itself is once again an open question, offering opportunities for further progress. 
Indeed, Egyptian President Hosni Mubarak’s support for the Gaza withdrawal has helped open the door to real negotiations. 
Such an impressive sequence of events has not been seen for a long time in that troubled region. 
As a result, many – in and outside the Middle East – have become optimistic again. 
Even Sharon ventures a few favorable comments, and American diplomats express visible sighs of relief that progress toward peace can at last be made. 
I can attest to the gathering momentum towards peace, having just returned from Palestine, where I led a nearly five-week mission of European Union observers, the largest ever put in place by the EU. 
The mission was 260-strong on the day of the election and the counting of the vote, while 40 of us had been there for the whole five-week period. 
My testimony about the election is categorical: the circumstances were difficult, but the voting was unconstrained and without cheating. 
Given the conditions, the 60% voter turnout was astonishing. 
There can be no doubt that Abbas was democratically elected. 
Nor is there any doubt that the Palestinian people made a choice for democracy, which entails a choice for a negotiated peace with Israel. 
But this leaves out the terrorists, who have not made this choice. 
They are not numerous, but they are very dangerous. 
Only genuine progress towards a just peace settlement will neutralize them as a political force. 
There is no question that current conditions present a unique window of opportunity. 
But we must keep in mind the major difficulties that can limit our ability to seize this opportunity, and the international community must make these difficulties very clear to both parties. 
The first difficulty is that, although Sharon evidently intends to go through with his military withdrawal from Gaza, he is vague about what he wants to achieve in future negotiations. 
Indeed, he has never made the slightest allusion to the idea of including the West Bank and Jerusalem in such negotiations. 
But, for the Palestinians, there can be no negotiations that do not include both issues. 
The second difficulty concerns the fact that Sharon has always appeared to believe that it is within the means of the Palestinian Authority to eradicate all terrorism arising from Palestinian territories and aimed at Israel. 
However, all external observers know very well that this is not the case, even if Abbas can undoubtedly succeed in reducing the level and number of attacks. 
In order for the Palestinian people as a whole to cease to glorify, support, and shelter terrorists, they need to discover real hope for a new life for themselves. 
That, in turn, depends on an economic recovery in the occupied territories and a belief that concrete steps toward a negotiated political solution are being taken. 
The creation of such hope now depends exclusively on Israel, which must act immediately to boost the many Palestinians who yearn for peace, rather than insisting on a total disappearance of terrorism. 
Delay will only retard terrorism’s disappearance. 
The third difficulty concerns the fact that, on both sides, most religious authorities, rabbis and imams alike, have maintained a hard-line stance. 
They continue to preach that the respective “taboos” of their communities, the very issues that block all efforts to make peace – in particular, the status of Jerusalem and the right of “return” to Israel for Palestinian refugees – are untouchable and non-negotiable. 
To make these religious authorities acknowledge their responsibility is a duty that all of international civil society, including religious leaders, must embrace. 
None of this is undoable. 
All of it will be demanding. 
But a chance to achieve real, lasting peace between Israelis and Palestinians has clearly arrived. 
We must all seize this moment. 

Letting Killers Guard Human Rights 
If it were not so profoundly sad, it would qualify as the sick joke of the millennium: Libya has been elected to chair the United Nations Commission on Human Rights! 
When Caligula appointed his horse to the Senate, the horse at least did not have blood on its hoofs. 
The procedure, of course, was perfectly legal: the chairmanship rotates every year from one global region to another. 
This year it was Africa's turn to nominate the chairman, and they nominated Libya. 
Only the US and Canada voted against. 
To their everlasting shame, European countries abstained. 
It is a telling commentary on the moral bankruptcy of the UN that this decision comes at so delicate a time for the organization. 
President Bush has challenged the UN to show its seriousness about its own mandatory decisions about Iraq: otherwise it may meet the same ignominious end as the League of Nations, which proved impotent in the 1930's when confronted with the aggressive policies of Nazi Germany and fascist Italy. 
To have Libya elected at this moment to chair the UN body responsible for human rights hardly helps support either the legitimacy or the moral authority of the world body. 
Let us remember: Libya is a totalitarian tyranny; its leader, Muammar Ghaddafi, combines sometimes erratic behavior with extremist policies, supporting dictators all over the world. 
He heads one of the world's most oppressive regimes, where there is no pretense at elections and where dissent is instantly crushed. 
Under his rule, Libya has supported terrorist organizations worldwide--from the IRA to various Palestinian extremist groups. 
It remains under UN sanctions for its role in the downing of a Pan Am passenger flight over Lockerbie, Scotland, a decade ago. 
In the last decade, the position of the UN as a symbol of the ideals of a peaceful world community has been steadily eroded. 
It proved utterly unable to stop the wars in the Balkans; and in at least one case--Srebrenica--a Dutch UN peacekeeping force stood by and witnessed the worst massacre in post-1945 Europe, as Bosnian Serbs murdered around 6,000 defenseless Muslim men. 
A Dutch commission of enquiry later admitted that the UN Dutch battalion was, in fact, complicit in that war crime. 
In Rwanda, once the genocide started, the UN official responsible for peacekeeping operations ordered the evacuation of UN forces from the country, leaving the field wide open to the bloodiest genocidal massacre since World War II. 
That UN official's name is Kofi Annan. 
It is a depressing, pathetic record, which the UN is trying--probably in vain--to redeem by appearing, in the Iraq crisis, as the voice of reason and international legitimacy. 
But at a time when UN inspections in Iraq seem like sending the Salvation Army to clear out a band of gangsters, raising Libya to head the Human Rights Commission may go down in history as the definitive failure of an organization whose life started with so much hope. 
Organizations usually don't die--and certainly there is too much raison d'etat to make certain that the UN will continue to hobble on. 
But it will be a mere shadow of what it should, and could, be. 
Today's UN gives hypocrisy a bad name. 

Networked Development 
STOCKHOLM – The challenges that the world faces in the twenty-first century are systemic and global in nature. 
There will be no easy answers to any of them, but one thing is clear: we need transformative solutions that are scalable. 
Incremental measures will only distract us from the scope of the challenges that we confront. 
One of the best examples of scale is the mobile telecommunications industry. 
There are now 6.4 billion mobile phone subscriptions, with the number expected to increase to 9.3 billion by 2017 or 2018. 
Ericsson estimates that by 2018, 85% of the world’s population will have access to mobile-broadband coverage via 3G networks, and 50% will have 4G. 
In this context, the near ubiquity of mobile networks has created a new paradigm for sustainable development, putting technological advances at the forefront of policymaking. 
Technology is enabling us to share, collaborate, and exchange knowledge in entirely new ways, creating a dynamic shift in mindset. 
A new society – what we call the Networked Society – is emerging. 
And in the Networked Society, we have an obligation to ensure that we exploit mobile and broadband technologies not just for collaboration and entertainment, but also for sustainable development. 
Connectivity is a basic enabler of economic growth and improved quality of life, and there is a strong business case for investing in broadband to optimize the delivery of essential services in education, health care, safety, and security, and to redefine urban landscapes through intelligent electricity grids and more efficient transportation. 
In 2000, when the United Nations Millennium Development Goals (MDGs) were established, broadband was in its infancy, and most of these benefits had not even been imagined. 
Today, as world leaders consider the post-2015 development agenda, we cannot overlook the importance of including broadband as a key part of the infrastructure needed to achieve future goals. 
The economic benefits of broadband are immense. 
A 10% increase in broadband penetration can add a full percentage point to sustainable GDP growth, and doubling broadband speed increases GDP by 0.3% on average. 
Moreover, mobile commerce – expected to reach $800 billion worldwide by 2016 – has enormous potential to improve social and financial inclusion. 
Likewise, cloud computing is already starting to revolutionize the way content is delivered and accessed both by teachers and students. 
An example of this is the cloud-based solution for schools developed by Ericsson in the Connect To Learn program. 
By addressing the challenges of access and quality of education, Connect To Learn – a collaborative effort between Ericsson, Columbia University’s Earth Institute, and Millennium Promise – identifies strategies to integrate teachers’ professional development with twenty-first-century tools and practices in classrooms. 
As for health care, half could be delivered remotely and more efficiently. 
Evidence of this can be seen in the Millennium Villages Project, where mobile communications have had a particularly significant impact on health care: improved response times to emergencies, reduced isolation, and better training and equipment for health-care workers. 
Building on this success, the One Million Community Health Workers campaign was recently launched to expand community health-worker programs in Sub-Saharan Africa by the end of 2015. 
With the use of the latest communications technology and diagnostic testing materials, the health workers will be able to link the rural poor to the broader system of doctors, nurses, hospitals, and clinics. 
These transformations are the result of both scale and innovation. 
But they have been set in motion without concentrated government efforts. 
If these examples were deliberately and specifically considered by the 110 countries that have national broadband plans (and those that still do not), we would be much more likely to achieve the positive transformations that we all want. 
This shift in awareness among policymakers will be crucial not just for socio-economic improvement, but also for creating a low-carbon economy, which will require moving from the energy-intensive physical infrastructure of the last century to the connected, information-based infrastructure of the twenty-first century. 
We need a new paradigm that enables us to decouple GDP growth from CO2 emissions, thereby ensuring further poverty reduction without causing greater environmental damage. 
The potential is there, but too often government talks to government and industry talks to industry. 
Public-private partnerships are essential to solving these shared challenges. 
Development agencies, NGOs, and the private sector should work more effectively together to create scalable and maintainable solutions. 
Two forums are making great strides. 
One is the Broadband Commission, which advocates for broadband as a key infrastructure of the twenty-first century. 
The other is the UN’s Sustainable Development Solutions Network (SDSN), which seeks to leverage the private sector’s wealth of resources – its innovative capacity, research and development, management skills, and know-how – to turn policy ideas into reality. 
Already, industries that have traditionally operated independently – from energy to utilities to transportation – are moving quickly toward cross-sector collaboration, radically altering the business environment, and creating opportunities for new low-carbon business models to thrive. 
With concentrated public-private efforts, and proactive governments like those of Sweden, Australia, and India, to name a few, the Networked Society will produce transformative solutions that lift billions of people out of poverty and help us to sustain our planet. 
We may not be able to imagine what the future holds, but we know that the Networked Society will shape its possibilities. 

Leveraging the World Bank’s Capital Increase 
PARIS – In April, governments from around the world agreed to a $13 billion capital increase for the World Bank Group, sending a clear signal that multilateralism is far from dead. 
The additional funding will strengthen the WBG’s capacity to support development projects around the world. 
But it also raises critical questions about how best to deploy the new funds and raise public capital in the future. 
Meeting the 2030 United Nations Sustainable Development Goals (SDGs), as well as the WBG’s own goal of taking development finance from “from billions to trillions,” requires maximizing the potential of the latest capital increase. 
And to do that will require building a new architecture for development finance, so that a multitude of actors operating with limited resources have incentives to optimize performance, pursue joint action, and avoid duplicating one another’s efforts. 
A new framework will force all stakeholders – including the WBG, regional development banks, bilateral agencies, the European Investment Bank (EIB), and other institutions – to reexamine their role in the larger system. 
We know from past experience that by strengthening the WBG, the use of public and private capital in development finance could become more fragmented. 
To avoid that outcome, we need a system that motivates diverse parties to work together transparently. 
A key focus should be on reinforcing the “billions-to-trillions” approach, which focuses on mobilizing private-sector capital and ensuring the best use of public-sector capital. 
Accordingly, the increase in public money must not be allowed to deter private-sector contributions through hidden competition or a “crowding out” effect. 
Addressing these concerns will require a more clearly defined division of labor when it comes to allocating risks and responsibilities. 
Moreover, it is time to rethink official development assistance (aid from governments), which remains crucial for alleviating poverty, protecting human dignity, and financing basic services for people in places where no other financial resources are available. 
Owing to limited investment in the SDGs, ODA must be deployed in such a way that it attracts additional financing, or channels existing resources through blended-finance (public-private) mechanisms. 
As majority shareholders in the multilateral development-bank system, the largest contributors of ODA have a key role to play in aligning public- and private-sector incentives. 
By coming together, they can steer the international community toward a system based on shared goals and collective responsibility. 
The WBG’s capital increase offers reassurance at a critical moment for multilateralism. 
But it should not be treated as an excuse to stop innovating, or to take the easy route of relying solely on public capital, while avoiding the difficult task of pursuing blended-finance approaches. 
Rather, we must seize the moment to address the sources of fragility, conflict, and violence around the world, and to create an encouraging environment for more private-sector investment. 
Only by maintaining the current momentum can we move the SDG agenda forward. 
Until now, blended-finance mechanisms for mobilizing private capital have been used mostly in relatively stable middle-income countries. 
According to a recent OECD study, nearly 43% of the private finance raised by such mechanisms between 2012 and 2015 was used in upper-middle-income countries, while only 7% was put to work in the least-developed countries. 
It is vitally important to expand the use of blended finance in fragile and low-income countries. 
Development banks’ private-sector arms will need to do more to target their capital outlays in ways that mitigate risk and attract private-sector capital, rather than inadvertently crowding it out. 
The world is just a few years into the SDG agenda. 
But it is already clear that achieving it will require new incentives for public and private actors to direct investments toward those who are at risk of being left behind. 
That means creating a system in which public funds are consistently targeted at the right areas, and for the right purposes. 
At a time of populist agitation against multilateral institutions, the WBG’s capital increase is a notable achievement in itself. 
But the current political environment makes it all the more important that we get the next phase of development finance right. 
We must stay focused on building and maintaining a cohesive architecture for meeting the SDGs and other international commitments, such as those embodied in the Paris climate agreement. 
Change will not happen on its own. 
So, rather than being at the mercy of global financial flows, we must harness finance as a tool for achieving our goals. 
Doing so will require genuine, long-term engagement on the part of “shareholders,” and pressure from engaged citizens the world over. 

Russia and America at the Oscars 
NEW YORK – Oscar has spoken. 
Neither Leviathan, the Russian film nominated for the best Foreign Language Film, nor American Sniper, nominated for Best Picture, won. 
Yet both, in a way, are the most representative films of the year, as each captures the essence of why Russia and the United States now seem doomed to wage a new Cold War. 
Following Russia's invasion of Ukraine, Leviathan faced an uphill public-relations battle. 
But Leviathan's bleak portrait of contemporary Russian life actually confirms many of the reasons why Americans have been largely dubious about Russia's ability to reform following communism's collapse. 
That doubt has been reflected in popular culture. 
Since 1991, Hollywood has documented American mistrust of post-Soviet Russia in a series of films – for example, The Saint, Air Force One, The Golden Compass of 2006, Salt, and The November Man. 
Russian President Vladimir Putin's thuggish foreign policy has proved these Russophobes right, so nominating Leviathan, the superb biopsy of his regime, seemed only right. 
And, though Oscar did not anoint Leviathan, the film deserves all of the accolades it has received. 
Directed by Andrey Zvyagintsev in an eerie style that one might call the “realism of despair," the film is both epic and deeply nuanced. 
The title harks back to the book of Job and recalls Herman Melville's Moby Dick. 
Set in a small town on the Barents Sea, Leviathan shows that there is no escape, not even in the Arctic, from the Moscow-centric state and its hypocritical doppelganger, the Orthodox Church. 
The giant skeleton of a whale – possibly Leviathan itself – is beached on the shoreline, along with the carcasses of old boats, beneath a severe gray sky that frames a human landscape of political abuse, adultery, lawlessness, and the cynicism of all-powerful priests. 
The story, akin to Alexander Solzhenitsyn's ambitious 1962 masterpiece One Day in the Life of Ivan Denisovich, steadily indicts the corruption of state power – a power ever-willing to kill and to align itself with an even more corrupt power, the Orthodox Church. 
Like communism, which once promised absolution for the worst crimes in exchange for loyalty, Russia's current state religion allows, even encourages, misdeeds – including murder – so long as one is loyal to God. 
Nikolai, Leviathan's hotheaded main character, sees his life consumed by the fight to save his seashore property from the town's mayor. 
“I'll kill him if he builds a palace here," shouts Nikolai, in a reference to current Russian leaders' proclivity for erecting garish monuments to their personal splendor: Putin's Italianate palace on the Black sea, for example, allegedly cost more than $1 billion. 
At the end of his struggle, Nikolai's life is ruined. 
His wife is killed, and he stands accused of murdering her for an affair she briefly had with his friend. 
At the end, we learn that Nikolai was persecuted to make room not for the mayor's palace, but for a cathedral. 
Even the Russian clichés – tragedy stemming from overweening power, vodka, swearing, shooting, and shouting – only strengthen the film's extraordinary depiction of the local effects of distant and devastating forces. 
This is Russian politics at its most debased. 
In Stalin's time, the masterpieces of, say, Boris Pasternak or Dmitri Shostakovich were entrusted to give artistic voice to a silenced civil society. 
So it is ironic that Leviathan was partly financed by Russia's culture ministry – and telling that the Russian authorities had no interest in its winning at the Oscars. 
Indeed, Culture Minister Vladimir Medinsky recently criticized the film for its darkness and pessimism. 
American Sniper, directed by Clint Eastwood, reflects US mores as much as Leviathan reflects the current Russian Zeitgeist. 
But, where Leviathan examines Putin's Russia with the unflinching eye of a surgeon, American Sniper merely trumpets supposed national values with no consideration of their application around the world. 
During four tours in Iraq as a soldier/missionary, a stand-up Texan, Chris Kyle (played by Bradley Cooper) becomes known as Legend, a killer with a savior complex. 
American Sniper, loosely based on Kyle's memoir, touts the frontier mentality – a neo-cowboy movie made by a former cowboy-movie star. 
Just as Leviathan shows a Russia caught in the throes of a political nightmare, American Sniper shows a country trapped by its heroic mythology – defined in countless Western movies – of rugged individualism at home and defense of freedom and order abroad. 
But the world has changed, and many no longer view America's global role as an expression of its unique innocence and goodness. 
Given everything we have learned about the Iraq War – false claims about weapons of mass destruction, nonexistent links between Saddam Hussein and Al Qaeda, and so on – Eastwood's film comes across as a work of marketing, not reflection and contemplation. 
Eastwood has merely updated his earlier films – think The Outlaw Josey Wales or Pale Rider – with their unwavering conviction that America's god of righteousness must prevail. 
In short, American Sniper fails where Leviathan succeeds. 

Greening the New Industrial Revolution 
VIENNA – Manufacturing industries present society with a dilemma. 
A healthy manufacturing sector helps an economy to grow, thereby raising living standards – an especially important goal for developing countries. 
But, as factories try to meet ever-growing consumer demand, they deplete the world’s natural resources and pollute the environment. 
For some, the world now faces a stark choice between rising prosperity and a cleaner, more sustainable environment. 
In fact, with new technology and fresh thinking, policymakers can strike a durable balance between these competing interests. 
In developed countries, consumers are increasingly recognizing that, while their material well-being may be higher than ever, their quality of life suffers if the environment is damaged. 
For poorer countries, such concerns are dismissed as a rich-world luxury. 
Industrial expansion is the best way to eradicate poverty, and must surely trump environmental concerns. 
No government, rich or poor, can ignore the imperative to encourage economic growth. 
The manufacturing sector creates jobs, makes affordable products for cash-strapped consumers, produces vital tax revenue that can be used to support social goals, and brings in foreign currency in the form of export revenue. 
In short, a well-run manufacturing sector spreads wealth across society. 
However, trying to satisfy the seemingly endless material demands of consumers at all levels of the economic pyramid has placed an unmanageable burden on the natural world. 
Resources are being consumed more quickly than the planet can replace them. 
The manufacturing sector is particularly voracious, devouring over half of all raw materials, around 30% of the world’s energy, and 20% of its water. 
In the process, it produces too much waste for our fragile ecosystems to absorb. 
Now, public opinion is starting to turn against what is increasingly perceived as plunder on a global scale. 
Policymakers may not be able to compel citizens to ration their consumption. 
But governments can encourage manufacturers to change how they operate, so that they use fewer resources and eliminate unnecessary waste. 
Technological innovation and recyclable inputs can make a huge difference to the way the world produces and consumes. 
Like the dramatic changes once wrought by mass production, there is similar potential in the development and application of 3D printing, biotechnology, nanotechnology, and other resource-efficient technologies. 
And management thinkers from the late C. K. Prahalad to Jaideep Prabhu have shown how industry can be reconfigured to produce high-quality products cheaply and cleanly. 
Indeed, these technologies and management ideas amount to something of a new industrial revolution – though one that will be very different from the Industrial Revolution that made Great Britain the dominant world power in the nineteenth century and helped it build a global empire. 
The current transformation will be more democratic, spreading through global supply chains and modern communications to all countries that are integrated into the global economy. 
And it will be characterized by partnerships between government, the private sector, and civil society. 
Our challenge, and our historic opportunity, is to recognize this potential and find ways for diverse groups to collaborate and realize it. 
A Green Industry Conference held recently in Guangzhou, China – following similar events in Manila in 2009 and Tokyo in 2011 – provides a template for this kind of broad cooperation. 
Delegates shared best practices, discussed ways to accelerate change in a range of sectors, and sought innovative solutions to old management problems. 
No one need be left out of this revolution. 
Even countries with abundant natural resources do not have to fear the shift to a greener world. 
By adopting new economic models, their large but finite reserves will not be rendered useless; they will simply last longer. 
At the same time, countries facing shortages will gain greatly from being able to reduce their own resource needs. 
Businesses, too, have been quick to adopt new practices. 
Many now routinely monitor and report on their environmental impact. 
Some are even starting to organize around new industrial concepts such as the “circular economy,” which focuses on reducing waste through multiple rounds of recycling. 
This revolution may have been borne out of necessity; but, with ingenuity and cooperation, it will prove to be profitable, over the long run, for countries, manufacturers, and consumers worldwide. 

Liberal Totalitarianism 
LISBON – It used to be an axiom of liberalism that freedom meant inalienable self-ownership. 
You were your own property. 
You could lease yourself to an employer for a limited period, and for a mutually agreed price, but your property rights over yourself could not be bought or sold. 
Over the past two centuries, this liberal individualist perspective legitimized capitalism as a “natural” system populated by free agents. 
A capacity to fence off a part of one’s life, and to remain sovereign and self-driven within those boundaries, was paramount to the liberal conception of the free agent and his or her relationship with the public sphere. 
To exercise freedom, individuals needed a safe haven within which to develop as genuine persons before relating – and transacting – with others. 
Once constituted, our personhood was to be enhanced by commerce and industry – networks of collaboration across our personal havens, constructed and revised to satisfy our material and spiritual needs. 
But the dividing line between personhood and the external world upon which liberal individualism based its concepts of autonomy, self-ownership, and, ultimately, freedom could not be maintained. 
The first breach appeared as industrial products became passé and were replaced by brands that captured the public’s attention, admiration, and desire. 
Before long, branding took a radical new turn, imparting “personality” to objects. 
Once brands acquired personalities (boosting consumer loyalty immensely and profits accordingly), individuals felt compelled to re-imagine themselves as brands. 
And today, with colleagues, employers, clients, detractors, and “friends” constantly surveying our online life, we are under incessant pressure to evolve into a bundle of activities, images, and dispositions that amounts to an attractive, sellable brand. 
The personal space essential to the autonomous development of an authentic self – the condition that makes inalienable self-ownership possible – is now almost gone. 
The habitat of liberalism is disappearing. 
That habitat’s clear demarcation of private and public spheres also divided leisure from work. 
One need not be a radical critic of capitalism to see that the right to a time when one is not for sale is all but gone, too. 
Consider young people striking out in the world today. 
For the most part, those without a trust fund or generous unearned income end up in one of two categories. 
The many are condemned to labor under zero-hour contracts and wages so low that they must work all available hours to make ends meet, rendering offensive any talk of personal time, space, or freedom. 
The rest are told that, to avoid falling into this soul-destroying “precariat,” they must invest in their own brand every waking hour of every day. 
As if in a Panopticon, they cannot hide from the attention of those who might give them a break (or know others who might). 
Before posting any tweet, watching any movie, sharing any photograph or chat message, they must remain mindful of the networks they please or alienate. 
When lucky enough to be granted a job interview, and land the job, the interviewer alludes immediately to their expendability. “We want you to be true to yourself, to follow your passions, even if this means we must let you go!” they are told. 
So they redouble their efforts to discover “passions” that future employers may appreciate, and to locate that mythical “true” self that people in positions of power tell them is somewhere inside them. 
Their quest knows no bounds and respects no limits. 
John Maynard Keynes once famously used the example of a beauty contest to explain the impossibility of ever knowing the “true” value of shares. 
Stock-market participants are uninterested in judging who the prettiest contestant is. 
Instead, their choice is based on a prediction of who average opinion believes is the prettiest, and what average opinion thinks average opinion is – thus ending up like cats chasing after their own tails. 
Keynes’s beauty contest sheds light on the tragedy of many young people today. 
They try to work out what average opinion among opinion-makers believes is the most attractive of their own potential “true” selves, and simultaneously struggle to manufacture this “true” self online and offline, at work and at home – indeed, everywhere and always. 
Entire industries of counselors and coaches, and varied ecosystems of substances and self-help, have emerged to guide them on this quest. 
The irony is that liberal individualism seems to have been defeated by a totalitarianism that is neither fascist nor communist, but which grew out of its own success at legitimizing the encroachment of branding and commodification into our personal space. 
To defeat it, and thus rescue the liberal idea of freedom as self-ownership, may require a comprehensive reconfiguration of property rights over the increasingly digitized instruments of production, distribution, collaboration, and communication. 
Would it not be a splendid paradox if, 200 years after the birth of Karl Marx, we decided that, in order to save liberalism, we must return to the idea that freedom demands the end of unfettered commodification and the socialization of property rights over capital goods? 

Liberia Now, Zimbabwe Next? 
President Charles Taylor's resignation from Liberia's presidency and his exile in Nigeria is not only a welcome relief for the war-torn land he so misruled, but also perhaps a bellwether for other discredited dictators. 
Indeed, Zimbabwe's elderly President Robert Mugabe, who is 79, must now be reckoning with the inevitability of his own political demise. 
True, no rebel troops are yet besieging Harare, no US warship with 2000 marines hovers on the horizon, and President George W. Bush has not demanded that President Robert Mugabe step down after 23 years in office. 
But there are nonetheless striking similarities in the crises that have bedeviled the two African nations. 
Those similarities are providing Zimbabwe's citizens with the hope that they may soon see the back of Mugabe. 
Before going into exile, Taylor turned over the presidency to his long-time ally, Vice President Moses Z. Blah, who is to rule until a new transitional government takes over. 
Similarly, Mugabe is known to favor transferring power to an interim government led by his long-time ally, Emmerson Mnangagwa, if he decides that the time has come to step down. 
Like Blah, Mnangagwa is widely unpopular, and he lost his parliamentary seat in the 2001 general election. 
Mugabe, however, immediately appointed Mnangagwa, who is much feared and often linked to allegations of corruption, as Speaker of Parliament. 
Moreover, like his West African counterpart, Mugabe has presided over a decaying economy and a restless population. 
His regime survives only through a ruthless campaign of terror conducted by the army, of which Mugabe is commander-in-chief; the police force, whose commander publicly declares political allegiance to Mugabe; the dreaded Central Intelligence Organization, which Mnangagwa headed for many years; and, of late, the ill-trained and brutal youth militia, whose loyalty to the ruling party is unflinching. 
In Liberia, Bush called for Taylor's resignation as a precondition for constructive dialogue and a more active involvement by the US in seeking a peaceful solution to the 15 years of internecine war that ruined the country's economy and infrastructure, as well inciting wars in most of its neighbors. 
In Zimbabwe, Bush has not said or done anything so drastic. 
But US Secretary of State Colin Powell has accused Mugabe of ``violent misrule'' and called his government a ``ruthless regime.'' 
According to Powell, ``If leaders on the continent do not do more to convince President Robert Mugabe to respect the rule of law and enter into a dialogue with the political opposition, he and his cronies will drag Zimbabwe down until there is nothing left to ruin.'' 
Zimbabweans were surprised, therefore, when Bush, during his recent tour of Africa, expressed satisfaction with the negotiations said to be taking place between Mugabe's Zanu PF party and its arch-rival, the Movement for Democratic Change (MDC), led by opposition leader Morgan Tsvangirai. 
Bush expressed satisfaction with the mediating role played by South African President Thabo Mbeki, whose ineffectual ``quiet diplomacy'' has left Zimbabweans both weary and suspicious. 
In an emotional address during a ceremony earlier this month to commemorate heroes of Zimbabwe's war of liberation from white minority rule, Mugabe warned the opposition: ``Those who would go together with our enemies abroad cannot at the same time want to march alongside us as our partners in the nation-building efforts that are underway.'' 
Mr. Taylor and Mr. Mugabe both blame the West for their countries' woes. 
Mr. Mugabe routinely denounces the MDC as ``the enemy,'' claiming that the party is controlled by the British and American governments, who are allegedly hell-bent on re-colonizing Zimbabwe. 
President Mbeki was one of the three heads of state present at the handover ceremony from Taylor to Blah in Monrovia, Liberia's capital. 
He may have had more than the departing Taylor in mind when he said, ``It has indeed been a shameful thing that, as Africans, we have killed ourselves for such a long time.'' 
Mbeki's own brother, Moeletsi Mbeki, who heads the South Africa Institute for International Affairs, has a more forthright view of the political mayhem in Zimbabwe and the tardy pace of efforts to arrest the situation. ``Here's a guy breaking all the rules of democracy,'' he says, referring to Mugabe, ``and no African government is stepping forward and saying, `It's time for you to go.''' 
It is to be hoped that Taylor's departure heralds the beginning of a new African era, in which Africa's rulers stop protecting the continent's dictators because they would rather incur the wrath of faceless citizens than expel a dictator from among their ranks. 
If so, leaders such as Mbeki will emerge as heroes for a new Africa, where intervention in neighboring states will protect the millions on the continent who remain subjugated by elderly dictators like Mugabe, who have exploited their position as anti-colonial liberation leaders, and younger, free-booting adventurers like Taylor. 
Only then will Africa's tolerance for tyrants be ended. 

Liberty and Music 
NEW YORK – North Korea, officially known as the Democratic People’s Republic of Korea, is one of the world’s most oppressive, closed, and vicious dictatorships. 
It is perhaps the last living example of pure totalitarianism – control of the state over every aspect of human life. 
Is such a place the right venue for a Western orchestra? 
Can one imagine the New York Philharmonic, which performed to great acclaim in Pyongyang, entertaining Stalin or Hitler? 
All totalitarian systems have one thing in common: by crushing all forms of political expression except adulation of the regime, they make everything political. 
There is no such thing in North Korea as non-political sports or culture. 
So there is no question that the invitation to the New York Philharmonic was meant to burnish the prestige of a regime, ruled by The Dear Leader, Kim Jong-Il, whose standing is so low – even in neighboring China – that it needs all the burnishing it can get. 
Interviews with some of the musicians revealed an awareness of this. 
A violinist was quoted as saying that “a lot of us are…not buying into this party line that music transcends the political.” 
She was “sure that it [would] be used by Pyongyang and our own government in attempting to make political points.” 
The conductor, Lorin Maazel, who chose a program of Wagner, Dvorak, Gershwin, and Bernstein, was less cynical. 
The concert, he said, would “take on a momentum of its own,” and have a positive effect on North Korean society. 
Well, he would say that, wouldn’t he? 
But could he possibly be right? 
No one, not even Maazel, pretends that one concert by a great Western orchestra can blow a dictatorship away, but authoritarians’ wariness of the subversive power of music dates back to Plato’s Republic . 
In Plato’s view, music, if not strictly controlled, inflames the passions and makes people unruly. 
He wanted to limit musical expression to sounds that were conducive to harmony and order. 
This, more or less, has been the line taken by dictatorships as well. 
The officially prescribed musical diet of North Koreans consists of patriotic hymns to the Communist Party, odes to the Dear Leader, to his father, the Great Leader, Kim Il-Song, and to the heroic spirit of the Korean people. 
Almost nothing else is permitted – except in the inner sanctum of the rulers themselves. 
The Dear Leader’s son, Kim Jong-chol, is said to be a fan of Eric Clapton. 
An invitation has now gone out to the British rock star to perform in North Korea, which really would be something new. 
Rock music was severely restricted in Communist dictatorships, just as jazz was in Nazi Germany, for all the Platonic reasons: uncontrolled passions were seen as a threat to the perfect order of the state. 
Precisely because of this, “forbidden” music was politicized. 
Subversive youths in Hitler’s Germany – the “Swing Jugend” – secretly listened to jazz. 
The air of Czechoslovakia in 1968 was electric with the imported sounds of the Rolling Stones and Frank Zappa’s Mothers of Invention. 
After the Soviet tanks put an end to the Prague Spring, a Russian policeman threatened one young Czech that he would “beat the Zappa music out” of him. 
Václav Havel was a fan of Zappa. 
So was a Czech rock band called the Plastic People of the Universe, who so upset the commissars that they were thrown in prison ­­– not because they were engaged in political activities, but because, as their singer, Milan Hlavsa, put it, “we just wanted to do what we liked doing.” 
Of course, that was the point. 
Hlavsa and his long-haired fans, celebrated in Tom Stoppard’s brilliant play, Rock n’Roll , didn’t want the state to spoil their party. 
They didn’t care what the commissars thought. 
They wanted to dance to their own tunes. 
Obviously, Dvorak and Wagner are not Zappa and the Stones. 
And if Clapton came to Pyongyang at the government’s guest, he might not have enough “street cred” left to light the fuse of rebellion. 
When the Stones themselves finally performed in China, in 2003, they agreed to cut some of their racier numbers from the program, because, as their local promoter put it, “They know there are differences between Chinese and Western cultures. 
They don’t want to do anything against the Chinese government.” 
So much for the spirit of 1968. 
Nevertheless, Maazel may have a point. 
Performing good music in North Korea just might have a positive effect. 
Stalin’s empire needed no foreign classical orchestras. 
They had enough of their own. 
China no longer needed the Stones, either. 
There are plenty of rock bands in China already. 
But the stranglehold of North Korea’s dictatorship is based on total isolation. 
For half a century, the North Koreans have been deprived of any art, ideas, or music not authorized by the state. 
They were told that North Korea was a heroic little country besieged by Satanic enemies, led by the United States. 
This permanent diet of paranoia has created something akin to a nationwide insane asylum, where ignorance, terror, and suspicion rule. 
In such conditions, even a conventional program of classical music by the New York Philharmonic comes as a gust of fresh air. 
It may not topple the dictatorship, but it will offer some solace to those who are forced to live in it. 
And that, for the time being, is a good enough reason to play. 

Liberty’s Revolutionary Muse 
Great social thinkers almost always start out as polarizing figures, admired by some and scorned by others, until their radical challenge to how we understand the world finally prevails. 
Milton Friedman was a giant among modern social thinkers for at least two reasons. 
First, he profoundly influenced not only his own field of economics, but also the social sciences more broadly. 
Second, judging by historical experience, his influence on public opinion and economic policymaking improved countless lives for the better. 
For decades, Friedman remained stranded in the intellectual wilderness, spurning the postwar Keynesian consensus that governments should use fiscal policy to manage aggregate demand – a view that sustained statist economic policies through the 1970’s. 
Indeed, in the context of his age, Friedman was a true intellectual revolutionary, combining rigorous academic research and gracefully written popular books and journalism to argue for free-market policies – and to affirm the link, defended by writers from Adam Smith to Friedrich von Hayek, between economic freedom and political liberty. 
In economics, Friedman revived and developed the monetarist theory that the quantity of money in circulation is the main determinant of how economies perform. 
In his masterpiece A Monetary History of the United States, 1867-1960 (written with Anna Schwartz), he famously attributed recessions, including the Great Depression of the 1930’s, to a decline in the money supply. 
Likewise, he argued that it was an oversupply of money that caused inflation. 
In the 1960’s, Friedman showed that Keynesian demand management through government spending constantly increased the money supply, accelerating wage and price growth. 
Together with Edmund Phelps – this year’s Nobel Prize laureate – he proved that there is no stable tradeoff between unemployment and inflation. 
Any attempt to use expansionary government policies to drive unemployment below a certain level, they demonstrated, would fuel inflationary expectations and undermine both economic growth and employment. 
That analysis both anticipated and explained the combination of rising inflation and rising unemployment of the 1970’s that came to be known as “stagflation.” 
Friedman was the catalyst for a profound shift in how governments conduct economic policy. 
Rather than fiscal stimulation and control, the main tool of economic management nowadays is monetary policies conducted by independent central banks. 
Keynesian demand management was thus displaced by a new understanding – which we owe largely to Friedman – that pursuing fiscal discipline and price stability is the best guarantee of macroeconomic sustainability. 
Equally important were Friedman’s contributions to influencing public opinion through works that addressed the role of the state in society. 
Alongside Hayek, his colleague at the University of Chicago, Friedman launched a more general intellectual assault on Keynesianism, arguing that any government permitted to regulate the economy in the name of equality posed a threat to individual liberty. 
In his Newsweek columns published between 1966 and 1983, and in his books Capitalism and Freedom , Free to Choose , and The Tyranny of the Status Quo (written with his wife, Rose), Friedman offered a vision of liberty that was both appealing and achievable. 
Indeed, Free to Choose – later the basis of a popular television series that he hosted – was published illegally in Poland in the 1980’s, helping to inspire me, and many others, to dream of a future of freedom during the darkest years of communist rule. 
With remarkable clarity, his popular writings advanced a compelling political philosophy, together with concrete policy proposals. 
For example, he pioneered the idea of school vouchers, arguing that private competition would ensure better educational performance than government systems. 
Friedman’s views made him a guiding light for economic conservatives worldwide. 
His influence on Margaret Thatcher’s government helped transform Britain from a post-industrial basket case dominated by class struggle into Europe’s dominant economic power. 
When Vietnam launched free-market reforms in the 1980’s, senior government officials pored over his writings. 
He also initiated the now common practice of measuring and comparing political and economic freedom across countries, helping to shape opinion in countries that are viewed as limiting freedom. 
But Friedman’s consistent anti-statism also led him to embrace positions that ran afoul of many conservatives’ political sensibilities, underscoring the intellectual honesty that was the hallmark of his career. 
For example, his opposition to governments’ authority to prohibit or regulate human behavior extended to licensing requirements for doctors and car drivers, as well as to anti-drug laws, which he believed operated as a subsidy to organized crime. 
Likewise, he expended considerable effort agitating against America’s military draft. 
Although he did not win all his intellectual battles, rarely can it be said with as much certainty that a man was great, and that the work that he has left behind will retain enduring influence. 
I live in a Poland that is now free, and I consider Milton Friedman to be one of the main intellectual architects of our liberty. 

Libya After Qaddafi 
BENGHAZI – Middle Eastern autocrats routinely warn their people of rivers of blood, Western occupation, poverty, chaos, and Al Qaeda if their regimes are toppled. 
Those threats were heard in Tunisia, Egypt, Yemen, Bahrain, Syria, and – rendered in black-comedy style – in Libya. 
But there is a strong belief across the region that the costs of removing autocracies, as high as they might be, are low compared to the damage inflicted by the current rulers. 
In short, freedom is worth the price. 
In Libya, four scenarios may negatively affect prospects for democratization: civil/tribal war, military rule, becoming “stuck in transition,” and partition. 
Given the high price Libyans have paid, those scenarios should be prevented rather than cured. 
The civil/tribal war scenario is the worst risk. 
Egypt’s revolutionaries understood this. 
When sectarian violence erupted there following the removal of Hosni Mubarak, the revolutionary coalitions adopted the slogan, “You won’t gloat over this, Mubarak.” 
Repressive dictatorships cannot win free and fair elections. 
But they can use extreme violence to consolidate their control over the state, its people, and its institutions. 
So, to win, Libya’s Colonel Muammar el-Qaddafi has deliberately and successfully turned a civil-resistance campaign into an armed conflict. 
That will have ramifications in the post-authoritarian context. 
A study published by Columbia University on civil resistance has shown that the probability of a country relapsing into civil war following a successful anti-dictatorship armed campaign is 43%, versus 28% when the campaign is unarmed. 
According to the same study, which was based on 323 cases of armed and unarmed opposition campaigns between 1900 and 2006, the likelihood of democratic transition within five years following a successful armed opposition campaign is only 3%, compared to 51% when campaigns were unarmed. 
Libya, of course, can survive the gloomy prospect of post-authoritarian civil war. 
But this requires containing tribal and regional polarization, as well as the rivalries between the Interim National Council (INC) and the Military Council (MC), and between senior military commanders. 
Violent polarization has developed not only between Eastern and Western tribes, but also between some of the Western tribes. 
Last month, for example, armed clashes erupted between rebels in al-Zintan and the villagers of al-Rayyaniya, 15 kilometers away. 
Six people were killed – a reminder of what can happen if violent polarization continues between neighboring towns and villages. 
Vendetta politics is not unknown in Libya, and, in an armed society comprising more than 120 tribes – including around 30 with significant numbers and resources – it can become extremely dangerous. 
Another negative scenario is military rule. 
Several figures from the “free officers” – the group that plotted the 1969 coup against the monarchy – are leading the INC. 
They include General Abd al-Fattah Younis, General Soliman Mahmoud, Colonel Khalifa Haftar, Major Mohamed Najm, and others. 
Those figures hold a mix of historical legitimacy, for participating in the 1969 coup, and current legitimacy, for helping the 17th February revolution. 
They also belong to several large tribes, guaranteeing wide tribal representation if a military council were to take power, as in Egypt. 
Unlike Egypt, however, whoever takes power in Libya will not necessarily inherit poor economic conditions that could threaten their legitimacy and undermine their popularity. 
This might lead a group of senior officers to rule directly, especially if victory in Libya comes militarily. 
A move by army officers in Tripoli against Qaddafi and his sons might end the conflict, with military commanders getting the credit – and the political capital. 
But four decades of military-based dictatorship may be enough for Libyans, a majority of whom never really benefited from their country’s wealth or potential. 
When it comes to producing terrorists and undocumented immigrants – two critical issues for Europe – Arab military dictators have an inglorious record. 
Algeria in the 1990’s is a potent reminder of this, and Western governments do not want the vicious cycle of repressive autocrats producing violent theocrats and refugees to restart. 
Getting “stuck in transition” is a third possible scenario, with Libya remaining in a “gray zone” – neither a fully-fledged democracy nor a dictatorship, but “semi-free.” 
This means regular elections, a democratic constitution, and civil society, coupled with electoral fraud, skewed representation, human rights violations, and restrictions on civil liberties. 
Getting stuck in transition usually kills the momentum for democratic change, and widespread corruption, weak state institutions, and lack of security serve to reinforce a myth of the “just autocrat.” 
Vladimir Putin’s rule in Russia illustrates this outcome. 
Unfortunately, a study published in the Journal of Democracy showed that out of the 100 countries that were designated “in transition” between 1970 and 2000, only 20 became fully democratic (for example, Chile, Argentina, Poland, and Taiwan). 
Five relapsed into brutal dictatorships (including Uzbekistan, Algeria, Turkmenistan, and Belarus), while the rest were stuck somewhere in transition. 
Given Libya’s lack of democratic experience, some view this as a likely outcome in the post-Qaddafi era. 
But Libya is not the only country that has tried to move from dictatorship to democracy with weak institutions and strong tribal identities. 
Albania, Mongolia, and India successfully passed more complicated tests – and offer some useful lessons in democratic transitions under unfavourable conditions. 
The fourth scenario is partition, with the old three-province, Ottoman-style setup commonly mentioned: Cyrenaica (east), Fezzan (south), and Tripolitania (west). 
Cyrenaica is Qaddafi-free, Tripolitania is not, and Fezzan did not fully join the revolution. 
But the administrative borders of these districts were never fully established, and they have changed at least eight times since 1951. 
In 2007, Libya had 22 sha‘biya (administrative districts), not three. 
All of these scenarios will be affected by outcomes in Egypt and Tunisia. 
In the case of democratic transitions, a success nearby often helps at home. 
Either country, or both, could offer Libya successful transition models, erecting an important obstacle to military dictatorship or civil war. 

Libya Calling 
VALLETTA, MALTA – The recent signing in Tripoli of “a comprehensive claims settlement” between the United States and Libya marks a new beginning not only in US-Libya relations, but between Libya and the rest of the world. 
The agreement provides a process for compensating the victims of attacks ranging from the 1988 bombing of Pan Am Flight 103 over Lockerbie, Scotland, to the US air strikes on Tripoli and Benghazi in 1986. 
It thus removes a final hurdle to Libya establishing normal diplomatic and economic relations with the West and opens the way for US Secretary of State Condoleezza Rice’s visit to Tripoli this week. 
The Joint Statement, while clinically welcoming the agreement, states that both parties “thereby turn their focus to the future of their bilateral relationship,” underscoring “the benefits an expansion of ties would provide for both countries as well as for the American and Libyan peoples.” 
This is a far cry from recent years, when staying at a Libyan-owned hotel would make you subject to a US felony charge! 
Clearly, the way is now open for US-Libya relations to move forward in the same way that the release of a group of Bulgarian nurses, who were jailed in Libya on charges of deliberately infecting Libyan children with AIDS, unblocked European Union-Libya relations. 
Indeed, Libya has also just strengthened its relations with the EU: Seif al-Islam Gaddafi, the son of Libya’s long-serving ruler, Muammar al-Gaddafi, recently declared that soon the two sides should be able to sign an Association agreement, giving Libyan goods access to European markets. 
In his effort to restore seemingly irreparably damaged relations with the West, Gaddafi has played the oil and gas cards that he holds extremely well. 
Indeed, the West’s hunger for energy brought invitations for Libya’s leader to visit France, Spain, and Portugal within the past year. 
This opening is welcome, because Libya remains heavily engaged with the other countries of the Sahel, and across Africa in general, as well as with Arab states. 
A more development-minded Libya could help dampen tensions in these vital regions. 
Indeed, Gaddafi’s emphatic call for Libya to embrace the market economy could have a sort of revolutionary domino effect among North Africa’s “dirigiste” economies, improving the chances for a revitalization of plans to open and integrate the Maghreb Union economies. 
Libya’s newfound engagement with the US and the EU represents not only a major shift in its international policies and diplomatic posture, but also a major internal reorientation, because the country now wants to develop an economy that is not exclusively based on oil. 
Indeed, like so many post-communist countries over the past 20 years, Libya is now making the gradual and at times painful transition to a market economy. 
Given that Islamic fundamentalism breeds in economic despair, Libya’s rulers seem to want to take particular care that this process does not create an underclass of victims who might fall prey to the call of religious fanatics. 
Of course, it is unrealistic and naïve to expect that the changes now underway in Libya will result in a rapid transition to European-style democracy. 
Libyan politics will undoubtedly continue to be based on Gaddafi’s “Green Book” and “people power,” as expressed in its People’s Congress. 
But Gaddafi now seems to want to reconcile his teachings and rule with a more open economy, including foreign direct investment and market-based competition. 
Internally, Libya has launched a “Go East” policy, so that development does not become clustered only in its oil and gas regions and around the capital of Tripoli. 
It wants, in particular, to ensure that the people and tribes in its Eastern “Cyrenaica” territories centered in Benghazi have a chance to develop equally with the rest of the country. 
A bulwark of secular government and anti-fundamentalism in a North Africa that is struggling to contain the spread of Islamic extremism, Libya is of strategic importance to Europe and the US beyond its oil riches, notwithstanding the overwhelming significance of its energy resources. 
Fully aware of its growing importance in an oil-starved world, Libya will use that advantage to the full and it will no doubt guard, with Gaddafi at the forefront, its sovereign rights vociferously and assiduously. 
Nevertheless, drawing Libya deeper into international discourse, despite the possibility of roadblocks along the way, is a strategic decision that, now that it has been taken, the West must pursue with patience, perseverance, and constant nurturing. 

Libya’s Jihadist Minority 
DOHA – “They are armed, I am not going to fight a losing battle and kill my men over a demolished shrine,” said Fawzi Abd al-‘Aali, the former Libyan interior minister, before he “resigned” last August. 
He was referring to the armed Salafi groups that were accused of destroying Sufi shrines. 
One of the accused groups was the Ansar al-Shariah Brigade, which was quick to support the demolition, but denied any responsibility for it. 
Ahmed Jibril, Libya’s deputy ambassador to London, has now accused the Brigade, headed by Muhammed Ali Al-Zahawy, of perpetrating the attack on the US Consulate in Benghazi, which killed the American ambassador, Christopher Stevens, and three other US personnel, as well as Libyan guards. 
Others have quickly embraced and promoted Jibril’s allegation. 
But the picture is more complex. 
The Brigade denied responsibility in a written statement, as well as in a brief interview with its spokesperson, who at the time was in charge of guarding Al Jala Hospital in Benghazi. 
Like its statement on the destruction of Sufi shrines, it denied involvement in the attack on the US Consulate, but stressed the gravity of the insult against the Prophet that putatively triggered it. 
The Brigade attracted public attention last June as well, when around 300 armed members staged a rally in Benghazi, sparking outrage among Libyans. 
“We wanted to send a message to the General National Council members,” according to Hashim Al-Nawa‘, one of the Brigade’s commanders. “They should not come near the Shariah. 
It should be above the constitution, and not an article for referendum.” 
But was the Ansar al-Shariah Brigade really behind the attack on the US Consulate? 
The nature of Libya’s post-revolution armed Islamist forces is by no means straightforward. 
Salafi jihadism is not an organization, but an ideological trend based on the core belief that armed tactics of all kinds are the most effective – and, in some versions, the most legitimate – method of bringing about social and political change. 
Last year, its adherents did play an important role in the removal of Libya’s brutal dictator, Colonel Muammar el-Qaddafi. 
Many subsequently matured politically, revised their worldview, and shifted from armed to unarmed activism, forming political parties and contesting elections. 
The Libyan Islamic Fighting Group, for example, has produced two main political parties. 
Al Watan (The Homeland) is led by former LIFG and Tripoli Military Council commander Abd al-Hakim Belhaj. 
The other, Al Umma al-Wasat (The Central Nation), is led by Sami al-Saadi, the group’s former chief ideologist, and Abd al-Wahad Qaid, an LIFG military commander and the brother of the deceased Al Qaeda commander Hasan Qaid (Abu Yahya al-Libi). 
Both parties fared poorly in the election in July of a new General National Congress, with only Qaid winning a seat. 
Indeed, the GNC elections were in many ways a defeat for Libya’s non-violent Salafi parties(such as Al Asala), as well as for the post-jihadists. 
Other armed Islamist formations, including Salafi groups, accepted integration into Libya’s new state institutions, such as the Supreme Security Committee (interior ministry) and the Libyan Shield Force (defense ministry). 
The National Guard, headed by the former LIFG deputy leader, Khaled al-Sharif, absorbed more than 30 brigades, mostly from the west and southwest. 
But several armed formations, such as Ansar al-Shariah and the Imprisoned Sheikh Omar Abd al-Rahman Brigades, still reject the transition to party politics and integration into state institutions. 
These organizations are numerous, but small. 
Some were not invited – or given sufficient incentive – to join official bodies. 
“Nobody asked us to join the army or the police,” Sufian bin Qumu, Ansar al-Shariah’s commander in Derna and a former Guantánamo detainee, said in an interview last April. “They did not even give me or any of my men a reward for fighting.” 
Bin Qumu has a small paramilitary force training in the Bou Musafir forest on the outskirts of Derna. 
He insists that if the head of the boy scouts or the city’s clan leaders asked him to disband the training camp, he would do so. 
The tragic death of Stevens and his colleagues has engendered wide public outrage in Libya, adding to the isolation and de-legitimization of the armed groups. 
Dozens of Libyan activist groups have uploaded videos paying tribute to Stevens, as well as issuing statements against terrorism and Al Qaeda. 
One of the Muslim Brothers’ Web sites includes such a statement, and Libya’s Grand Mufti, Sheikh Sadeq al-Gheriani, also condemned the attack. 
Two issues remain critical in Libya to prevent future tragedies. 
The first is the need to capitalize on public support and continue the disarmament, demobilization, and reintegration process that started under the National Transitional Council but was never completed. 
Second, the government must enhance its communication strategy. 
Arab Spring governments condemned the outrageous movie smearing the Prophet of Islam, but they should have stressed that American official and unofficial bodies had nothing to do with the film’s production. 
Collective punishment and targeting the innocent is forbidden in the Koran in more than 20 verses: “That no burdened person (with sins) shall bear the burden (sins) of another” (The Star Chapter 53:38). 

Libya’s Lord of the Flies 
LONDON – “I am a glory that will not be abandoned by Libya, the Arabs, the United States, and Latin America…revolution, revolution, let the attack begin,” said the self-described King of African Kings, Dean of Arab Leaders, and Imam of all Muslims, Colonel Muammar al-Qaddafi. 
The statement summarizes the Libyan regime’s extremely repressive response to the popular uprising against Qaddafi’s 42-year dictatorship. 
But Qaddafi’s tactics have boxed him in. 
Should he be defeated, finding refuge abroad, as Tunisia’s former President Zine el Abidine Ben Ali did, will be difficult. 
And internal exile, such as that currently afforded Hosni Mubarak, will be impossible. 
Although the regime’s capacity to commit large-scale massacres has shrunk, Qaddafi’s defeat will come at a high cost in terms of human life. 
In an extreme scenario, the regime could use chemical weapons, as Saddam Hussein did against the Kurds of Halabja in 1988, or it could launch an intensive aerial bombardment campaign, as Syria’s Hafez al-Assad’s did in Hama in 1982. 
At that point, international intervention would be more likely than ever. 
One and a half million Egyptians and many other foreign nationals, including British citizens, are in Libya and now are in an extremely vulnerable position. 
In his first speech during the crisis, Saif al-Islam al-Qaddafi, the Colonel’s supposedly “moderate” son, alleged an international conspiracy against the regime, involving Egyptians, Tunisians, and other foreign agents. 
The response of father and son has been to incite violence against foreigners. 
Another possible scenario is a move by the army, or a significant part of it, against Qaddafi and his sons. 
The problem is that the Libyan army has not been able to act cohesively since the protests began, in contrast to the Egyptian and Tunisian armed forces. 
Senior and junior army officers have defected, often with their troops, to the regime’s opponents. 
Two air-force pilots diverted to Malta, followed by a navy warship – all in defiance of Qaddafi’s orders to bomb the eastern city of Benghazi. 
But, at least so far, there have been no splits reported among the Revolutionary Committees, Qaddafi’s diehard loyalists, who are estimated to total around 20,000 fighters. 
The same is true of Brigade 32, which is headed by another of Qaddafi’s seven sons, Khamis al-Qaddafi. 
This brigade is in charge of protecting the Bab al-Aziziya area in Tripoli, where the Colonel lives in his ersatz Bedouin tent. 
Libyan military Intelligence, headed by Abdullah al-Sonosi, the Internal Security Forces, led by al-Tuhami Khaled, and the Jamahiriya Security Apparatus also remain intact, with no reported splits. 
True, the deep, ingrained rivalry and mistrust between Libya’s military-security apparatuses is likely to give rise to splits that will be a key factor in undermining the regime. 
But, overall, the Libyan army’s tribal nature and allegiances prevent it from functioning as a single unit, either in backing Qaddafi, or in joining the revolt against him. 
Tribal allegiances will play a pivotal role if Qaddafi is defeated in the coming days. 
Historical rivalries, vendettas, and weapons are widespread among Libya’s tribesmen, which suggest that tribal warfare in the post-Qaddafi era is likely. 
Yet signs from Libya’s East, now a “Qaddafi-free” zone, indicate otherwise. 
Of course, inter-tribal rivalries are strong in eastern Libya. 
But the level of organization and coordination among those leading the rebellion has been quite impressive. 
Security, medical, and other committees were rapidly established, just as similar rudimentary institutions of order were created in Egypt by rebellious protesters a few weeks ago. 
Moreover, when Ahmed Qaddaf al-Dam and Said Rashwan, two leading figures in the regime, visited Egypt and attempted to recruit tribes with Libyan branches to attack the Qaddafi-free East from Egypt’s western desert, they came away with nothing. 
Awlad Ali and the other tribes refused the generous bribes offered to them. 
Libyan civil society is not as developed as its Egyptian and Tunisian counterparts, which further suggests that Qaddafi’s downfall could result in tribal warfare. 
But the lessons of Iraq’s bloody post-Saddam civil war were learned across the Arab world, and the dedication and maturity of Tunisian and Egyptian youth has become a model for other Arabs seeking freedom and dignity. 
Libya’s people may be more politically mature and sophisticated than many observers believe. 
The international community has a fundamental legal duty towards Libya. 
The names of those who head the forces responsible for the killings that have occurred are well known. 
If generals and colonels like Abdullah al-Sonosi, Abdullah Mansour, and al-Tuhami Khaled, as well as Qaddafi and his sons, were placed on international watch lists, or if arrest warrants were issued against them, many of their subordinates would think twice before ordering their soldiers to shoot or bombard. 
The West has known about crimes against humanity and terrorist plots committed by Qaddafi’s regime for decades, most notably the June 1996 Abu Selim massacre, in which more than 1,200 political prisoners were gunned down after protesting against prison conditions. 
Yet there was no international inquiry, mainly because oil interests trumped moral outrage. 
The West owes it to Libyans to protect them from another massacre. 
So far, the Obama administration and European leaders have said all the right words. 
But words are not enough; it is time for concrete action. 

Libya’s Shadow on Sovereign Wealth Funds 
NEW YORK – As Libya’s citizens rebuild their lives and economy, undoing the corruption in the Libyan Investment Authority (LIA), the sovereign wealth fund in which Muammar el-Qaddafi’s regime allegedly stashed and misused Libya’s oil wealth, is becoming a priority. 
The National Transitional Council is debating who should take over Libya’s Central Bank and the LIA’s assets – an especially important decision, given that oil production is not expected to return to pre-war levels for several years. 
Regardless of how the Libyan government eventually handles the LIA, all sovereign wealth funds – and their advisers and fundraisers – can learn several important lessons. 
Of course, no one should infer from the Libyan case that other SWFs across the board are riddled with corruption and conflicts of interest. 
The LIA has always been exceptional; indeed, several indices that rank SWFs on transparency, accountability, and governance issues have traditionally given only Iran a lower ranking. 
Yet, while hard cases tend to make bad law and it is too early to judge, the LIA should be a wake-up call for corporations and funds both in the Middle East and around the globe. 
First, governments should better clarify the sources of funding behind each particular investment. 
Private funding that turns out to be public funding tied to the ruling family or government ministers presents different political and financial risks and should therefore be valued differently. 
Second, the Libyan crisis has crystallized the problem of corporate shares owned by sovereign governments. 
When the United States and the European Union decided to impose sanctions on the Libyan regime, including freezing shares owned by the LIA in European and American companies, many executives at these companies were surprised by how dramatically their firms were affected by the ownership structure. 
Clearly, the liquidity of the shares and the perception of a lack of diligence on the part of corporate managers matters mightily. 
Third, the LIA saga highlights SWFs’ potential cumulative effect on the stability of global markets. 
All SWFs can respond to global political events by quickly withdrawing funds invested abroad. 
As one of the WikiLeaks documents revealed, American diplomats lobbied the Libyan government during the financial crisis to keep funds in US banks, and to invest directly in a troubled US financial institution. 
In this case, the Libyans did not respond by withdrawing a large amount of funds, but that could happen in the future. 
Some argue that SWFs’ home governments and host countries have too many mutual interests – including the stability of the financial system and maintaining the US dollar as the world’s reserve currency – to threaten global markets. 
That is true, on average and in normal times, but what happens if many SWFs, responding to sudden uncertainty and volatility, pull back at the same time for diplomatic or commercial reasons? 
Individually rational behavior is often collectively suicidal. 
Finally, the Libyan case and the Dubai debt crisis of 2009 might increase suspicion in the developed world and lead to protectionism against SWFs, especially those from North Africa and the Gulf. 
The free flow of capital from these regions’ SWFs to corporations in the advanced countries is crucial in order to balance the global economy and provide liquidity to financial markets, especially given the prospect of another recession in the West. 
Both home and host states will have to make sure that the current conflict over the LIA will not impede this important process. 
But are we being fair by comparing the various regions’ SWFs and expecting them to adhere to Western standards? 
The current efforts to restructure Libya’s Central Bank and LIA will affect markets’ perceptions of other sovereign players in the region. 
Bahrain and Dubai come to mind. 
Although recent reports of the International Working Group of sovereign funds have indicated the difficulties in applying uniform governance standards, several measures are needed in order to bring Libya back to global capital markets. 
Despite the unique status of Libya’s economy and political system today, scrutinizing the process of investment in foreign companies, as well as defining the nature of the relationships between the Libyan regime and fund management, is necessary to ensure healthy commercial relations between sovereigns and their portfolio investments. 
Large allocations based on pragmatic political concerns, such as Libya-Italy relations, or cronyism should be reevaluated in the light of better and stronger governance practices. 
Both governments and corporations should internalize the message and learn from the Libyan example. 
The alternative may be too expensive for shareholders and citizens alike. 

Libya’s Transition to Transition 
SIRTE, LIBYA – Although Libyans are now celebrating the first anniversary of the revolution that toppled Muammar el-Qaddafi, they are increasingly frustrated with their new leaders. 
Libyans complain that the interim government, known as the National Transitional Council (NTC), has not moved quickly enough to purge and prosecute senior Qaddafi officials, or to rein in the militias that overthrew his regime. 
Though the NTC is dedicated to implementing Libyans’ demands, it lacks the technical capacity and time necessary to do so before the elections tentatively scheduled for this coming summer. 
Facing such constraints, it must concentrate on a small number of important initiatives, before turning power over to an elected government. 
Political experience has never been a prerequisite for NTC membership. 
One representative was named to the Council because he defected with his MIG fighter plane 20 years ago. 
Other members were previously political prisoners or exiled dissidents. 
Unseasoned in the art of politics, the NTC frequently lacks the foresight needed to make critical decisions. 
During last year’s eight-month revolution, the NTC concentrated on overthrowing Qaddafi, gaining international recognition, and securing access to frozen Libyan assets. 
Those tasks left little room for attention to planning a post-Qaddafi Libya. 
Today, the NTC simply does not have the human resources to consolidate the transition. 
Libya has never been blessed with a professional bureaucracy like that of neighboring Egypt. 
Qaddafi frequently farmed out power to municipalities and citizens in an attempt to bypass the civil servants who consistently thwarted his grandiose plans. 
And almost two decades of international sanctions prevented a generation of Libyans from gaining the necessary technical skills by studying at Western universities. 
Even the oil sector – the lifeline of the Libyan economy, accounting for 95% of the country’s foreign-currency earnings – suffers from a shortage of professional managers. 
According to an American diplomatic cable released by WikiLeaks, “Libyans put forward for employment with foreign (oil) companies often lack formal qualifications or applicable practical experience.” 
Instead of injecting new blood into senior government posts during his 42 years in power, Qaddafi merely shuffled cronies between ministries. 
His last foreign-intelligence chief, Abu Zayd Dorda, epitomizes this trend. 
During his 30-year political career, Dorda held numerous cabinet portfolios, ranging from agriculture to economics to municipalities. 
Dorda later served as Speaker of Parliament, Prime Minister, and Ambassador to the United Nations. 
Today, the NTC is hard-pressed to find competent, politically untainted bureaucrats to fill its ministries. 
But that does not concern most Libyans, who are clamoring for the dismissal of Qaddafi loyalists. 
One name on the tip of many tongues here is Central Bank Governor Sadiq al-Kabir. 
Others, such as Libya’s former ambassador to France, Omar Brebesh, were found dead, apparently tortured by a militia that spearheaded the campaign to overthrow Qaddafi. 
Lack of skilled civil servants is also making it difficult for the NTC to push through the changes that Libyans are demanding. 
The Council is not ready to try senior Qaddafi officials, many of whom are now in the custody of militias, because the existing justice system was never tasked with prosecuting political cases. 
Such trials were held in revolutionary courts staffed by Qaddafi zealots and operating outside the formal judiciary. 
With no prospect for a fair trial in the foreseeable future, Qaddafi officials languish in jails. 
Such bureaucratic inertia does not sit well with the many Libyans who are still undecided about the revolution. 
But it is not only a shortage of capable public servants that hamstrings the NTC. 
Just as pressing are the time constraints under which it is operating. 
Since its inception last February, the NTC has consistently declared itself to be a transitional body that would cede power to an elected government once the country was liberated. 
With elections set to be held no later than June 23, the Council has less than four months to prepare Libya for its first free vote in sixty years. 
As a result, the NTC simply does not have the time necessary to implement the changes the Libyan people expect. 
It will not be able to disband the myriad militias that are destabilizing the country, because it cannot find their fighters the vocational training that it hopes will entice them to return to civilian life. 
It will fall on an elected government to carry out these reforms. 
With the NTC confronting so many dilemmas with so little time, it must concentrate on a small number of key issues that can be resolved before it hands over power. 
The Council needs to focus on establishing some degree of rule of law, and on curbing militia abuses. 
It must respect and protect individual rights in order to demonstrate to Libyans that the type of arbitrary justice that characterized the Qaddafi era will not be tolerated. 
The NTC may not be able to solve all of Libya’s problems. 
But, by chipping away at the mountain of challenges that the country faces, it can ease the burdens that will confront the elected government that emerges from the popular vote in June. 

Libya’s Unwilling Revolutionaries 
TRIPOLI – Egypt is not the only place where the bright hopes of the Arab Spring are fading. 
From attacks against Western governments to ethnic clashes in remote desert oases, Libya’s revolution is faltering. 
The blame for Libya’s current travails rests largely with the interim government that led the uprising. 
The National Transitional Council refuses to make difficult decisions, instead palming them off to a future elected government. 
The NTC has preserved much of the institutional paralysis and knee-jerk behavior typical of Colonel Muammar al-Qaddafi’s overthrown regime. 
If the Libyan revolution is to succeed, the country’s new leaders must make a clean break with the spirit of the past. 
During his 42 years in power, Qaddafi surrounded himself with advisers who were companions from his youth, supplemented by a small coterie of technocrats. 
As a result, the leaders of the revolt that overthrew him have little government experience. 
And, in a country where any political activity was considered treasonous, many expected the neophyte NTC to stumble early and often. 
And so it has. 
Indeed, the revolution was never a smooth affair. 
When fighters failed to defeat loyalist forces on their own, outside powers were compelled to intervene. 
Later, the NTC was unable to impose discipline on the myriad militias that formed to fight Qaddafi’s troops, or even to direct foreign weapons efficiently to the fledgling Libyan National Army. 
When the military chief of staff was assassinated in July under mysterious circumstances, the NTC could not offer concrete answers to an angry public. 
With no access to Libyan assets frozen abroad, it frequently paid salaries weeks in arrears. 
While the battle against Qaddafi was still raging, Libyans considered it unpatriotic to point out the NTC’s weaknesses. 
Today, however, those flaws have been magnified by its paralysis. 
The NTC deliberates rather than decides. 
The two-thirds majority required to pass legislation means that many bills die after extensive debate. 
Many NTC members believe that the Council lacks the legitimacy to make tough choices. 
They argue that the NTC should limit itself to serving as a caretaker government, implementing only the most essential decisions until elected officials take office. 
As a result, the NTC and the cabinet that it appointed, known as the executive committee, merely want to pass the baton of authority. 
Hesitant to leave a large imprint in their wake, some ministries have no budgets, and ministers are reluctant to sign deals with foreign firms. 
But, beyond the question of the proper role of custodian governments lies the indecisiveness of the NTC’s leaders, who simply prefer to defer to others. 
When a colonel recently asked NTC Chairman Mustafa Abdel-Jalil why he has not moved to merge the militias into a national army, Abdel-Jalil replied, “I head the legislative branch. 
You must speak with the executive (committee).” 
Other senior Libyan officials suffer from the same managerial torpor. 
The NTC’s first prime minister, Mahmud Jibril, was praised by the international community for his vision. 
But much like Abdel-Jalil, Jibril proved unable to make decisions. 
The NTC’s paralysis is clearly reflected in the trial of Qaddafi’s son, Saif al-Islam el-Qaddafi. 
Though considered the most prized captive of the ancien regime, the Council has made little progress in prosecuting him. 
Ahmad Jihani, Libya’s representative to the International Criminal Court, recently told me that, “we as Libyans cannot begin Saif’s trial. 
There is no central power to prosecute him.” 
The ICC prosecutor echoed his sentiments in a June 5 legal brief, noting that “the Government of Libya may be unable to move the case forward.” 
With no progress toward trying Qaddafi for war crimes, the NTC is holding him on the innocuous charge of failure to possess a camel license. 
Bureaucrats lament ministerial dithering. “Everyday people come with ideas to demobilize the fighters and integrate them into society,” notes an official in the Labor Ministry, referring to the most pressing problem facing the NTC. 
“But, with no one to make a decision, all of these plans just sit on our desks.” 
One reason for this inertia can be found in Libya’s prevailing political culture. 
For decades, Qaddafi personally reviewed every agreement worth more than $200 million and often chose which foreign firms would receive contracts. 
When he devolved ministerial planning to bureaucrats in 2008, many were not pleased. 
“Unused to planning and possessed of limited human capacity, senior officials in the ministries are very nervous,” an American diplomatic cable released by WikiLeaks reported. 
Libya’s new leaders suffer from something worse than foot-dragging. 
They are falling back on the same facile, prefabricated responses that Qaddafi used to demonize his domestic and international opponents for four decades. 
For example, when eastern Libyans recently announced the formation of an interim regional council as a first step toward declaring a federalist state, Abdel-Jalil alleged “the beginning of a conspiracy against Libya” in the brewing crisis between the country’s provinces. 
“Some Arab nations, unfortunately, have supported and encouraged this to happen,” he said. 
But Abdel-Jalil named no specific foreign powers and offered no proof to support his allegations, which sounded much like Qaddafi’s frequent rants against “imperialist-Zionist plots.” 
After an eight-month revolution that devastated the country, Libyans are demanding real reforms. 

The Trump Reversal the World Needs 
MADRID – Six years after the fall of Colonel Muammar el-Qaddafi, Libya remains mired in conflict and political chaos. 
Devoid of any central authority or national security structure, the Libyan state now exists only in name. 
It is time for a new approach – one that the United States should actively support. 
To be sure, Libya does have an internationally recognized government: the Tripoli-based Government of National Accord (GNA), born of the December 2015 Libyan Political Agreement, signed in Skhirat, Morocco, under the auspices of the United Nations. 
But not only did that government receive a vote of no confidence from the Tobruk-based House of Representatives last August; it is being actively challenged by another Tripoli-based entity, the General National Congress (GNC), controlled largely by Islamist groups. 
The bottom line is that Libya is now run by myriad mafia-style criminal groups and armed militias. 
Their allegiance is divided among the two competing governments, al-Qaeda, and the Islamic State (ISIS), which views the country as a province of its dwindling caliphate and an important refuge for members escaping the war in Syria and Iraq. 
Uncontrolled waves of migration from the country are now breaking across the Mediterranean into Europe. 
Instead of resolving the Libyan conflict, the 2015 agreement merely reshaped it. 
The cumbersome text created a “presidency council” tasked with appointing a national unity government and an advisory council of ex-GNC members. 
Its underlying objective was to secure an inclusive transition to democratic governance and territorial integration. 
But the strategy set out in the Libyan Political Agreement has proved to be utterly unworkable. 
Perhaps that should not be surprising: the agreement represents a striking lack of historical perspective and cultural sensitivity. 
Libya’s colonial and post-colonial history reflects a resistance to centralized institutions. 
As a result, the country lacks a shared national identity – a reality that the current civil war has aggravated. 
Statehood came about in 1951 only through a constitution that balanced centralized power with extensive autonomy for Libya’s historic regions, Cyrenaica, Tripolitania, and Fezzan. 
Under the 1951 constitution, the federal monarchy was led by King Idris as-Senussi, the architect of modern Libya and grandson of the dynasty’s founder. 
As chief of state, Sanussi appointed a prime minister and a council of ministers, accountable to both the king and the Chamber of Deputies, the lower house of a bicameral legislature. 
To reflect the country’s regional structure, the upper house of the legislature, the Senate, comprised eight representatives from each of the three historic regions. 
The national capital alternated between Tripoli and Benghazi. 
But the Libyan Political Agreement of 2015 was not based on the legacy of the 1951 constitution. 
Instead, it sought a source of legitimacy in the chaotic legacy of the current civil war. 
And it failed to recognize the importance of some decentralization. 
As a result, it was bound to fail. 
What is the alternative? 
Libya is in no condition to run general elections. 
But a transitory head of state could be elected in a grand assembly of tribal leaders and notables, on the model of the Afghan Loya Jirga. 
A decision about whether to reinstitute monarchy in Libya could be deferred, though there seems to be a case for it. 
The belief that hereditary rulers embody legitimate government and possess a religious sanction – as in Morocco, Saudi Arabia, Jordan, and the Gulf dynasties – may be the only principle of political authority that survived the turmoil of the Arab Spring. 
The Arab monarchies’ religious, even divine, basis of legitimacy proved sturdier than that of the Arab republics – Egypt, Syria, Yemen, Libya, and Tunisia – where secular governments’ reliance on rigged elections and a repressive state apparatus eroded their authority. 
And, indeed, in none of the kingdoms did the Arab Spring protests aim at toppling the monarchy; the struggle was always and everywhere for reform. 
The figure of the priest-king maintains a kind of intangible authority in many Arab societies. 
A secular version of that authority was also crucial in Spain’s transition to democracy in the 1970s, and remains fundamental to other Western constitutional monarchies. 
For Libya, recovering the collective memory of its foundation around the trinity of state, dynasty, and religion – the House of Senussi represents a religious Sufi order in neighboring countries – may well be the key to enabling peace and reconstruction. 
If the decision to reinstate the monarchy were made, there are pretenders available: princes from the House of Senussi who now live in exile in Europe. 
Of course, reinstating such a system, based on the legacy of the 1951 constitution, would be no panacea for Libya, not least because the country has become a theater for competition among regional and global powers. 
Field Marshal Khalifa Haftar, the strongman at the service of the House of Representatives (and at the service of his own political ambition to become a Libyan version of Egypt’s Abdel Fattah el-Sisi), now enjoys the support of Egypt and Russia. 
Russia has deployed forces along the Egypt-Libya border, and even hosted Haftar on the aircraft carrier Admiral Kuznetsov. 
As in Syria, Russian President Vladimir Putin pretends that his efforts in Libya, clearly intended to advance his own strategic interests – such as securing control of Libya’s colossal oil fields – are intended to support the “fight against terrorism.” 
All of this gives Haftar leverage, and he would not support any agreement that would challenge his Libyan National Army or the House of Representatives’ authority. 
The best way to offset that leverage may be to get another major power involved: the United States. 
But US President Donald Trump recently rebuffed Italian Prime Minister Paulo Gentiloni’s suggestion that he should assume an active role in Libya, working with Europe to support the country’s reconstruction. 
If the US wants to stem the rise of an extremist haven at Europe’s gates and prevent Libya from becoming another Russian playground, Trump will need to change his mind, and engage with his Western allies in state building in Libya. 
There are a few situations around the world – and this is one – where Trump’s unprecedented foreign-policy reversals might actually produce a positive outcome. 

Life After Pax Americana 
NEW YORK – The post-1945 order constructed by the US in Europe and East Asia has been fraying at the edges for some time now. 
President Donald Trump’s decision to withdraw the United States from the Paris climate agreement has only hastened its unraveling. 
For the first time since the early years of General Charles de Gaulle’s presidency in France, a major Western leader – German Chancellor Angela Merkel – has stated openly that Europe can no longer rely on US leadership. 
This might seem ironic, coming from a German and a confirmed Atlanticist, but it is actually fitting, because Germany, in its transformation from a murderous dictatorship into a peaceful liberal democracy, needed the US more than any country. 
Perhaps we should be sanguine about the gradual end of Pax Americana. 
No imperial system lasts forever. 
An international order that made complete sense when the world was emerging from the ruins of World War II, only to enter a long Cold War between two nuclear superpowers, may no longer be adequate, and may stand in the way of better arrangements. 
NATO’s purpose, in the blunt phrase of its first secretary general, Lord Hastings Ismay, was to “keep the Americans in, the Russians out, and the Germans down.” 
But Germany no longer needs to be kept “down,” and there is some debate whether Russia should have been kept “out” after the collapse of the Soviet Union. 
And Trump is right about one thing, even if he expresses it crudely: Europe, as well as Japan, has become too dependent on American military power. 
This dependence on the US for collective security does not make American allies exactly into colonies. 
And the US is not formally an imperial power. 
But aspects of a common late imperial dilemma are visible in both East Asia and Western Europe today. 
If the US were to give up its leadership role too quickly, chaos might follow and less benign powers might jump into the vacuum. 
But if the US-led system remains in place for too long, it will prevent American dependencies from taking more responsibility for their security. 
When imperial arrangements are dissolved, violence often results. The Armenian genocide accompanied the demise of Ottoman power. 
Murderous anti-Semitism and radical nationalism followed the fall of the Austro-Hungarian Empire. 
Something similar happened when Josip Broz Tito’s little Balkan empire of Yugoslavia fell apart. 
More than a million Hindus and Muslims lost their lives in horrific sectarian violence when the British Raj left a partitioned country to its devices. 
This is not an argument in favor of imperialism. 
But the age of Trump should make us ready to face the consequences once the US-led post-1945 order comes to an end. 
American leadership has obviously been a flawed enterprise, resulting in unnecessary wars, and the support of too many unsavory allies in the struggle with Communism. 
But there have been many positive factors, too. 
Western Europe, Japan, and even, belatedly, South Korea and Taiwan, were able to become free and prosperous under the protection of the US. 
Despite the excesses of anti-Communism, US dominance has also acted as a brake on ideological extremism. 
Neither Communism, nor variations of fascism, or indeed radical nationalism, had much of a chance to develop in Europe under Pax Americana. 
Recent elections in the Netherlands and France suggest that Trump may be serving as a deterrent, rather than a boost, to populist extremism in Europe. 
But if the populist wave were to become bigger and more brutal, there is nobody in Washington now to discourage it. 
In Japan, dependence on the US, and anxiety about Communism, has marginalized the left and kept a conservative party more or less permanently in power. 
But the extremes of Japanese revanchism were also kept in check. 
This may no longer be so easy, once the US is no longer seen as a reliable protector and fear of China turns into a panic. 
Unlike some of her predecessors as Chancellor, Merkel, who grew up in East Germany, is wary of Russia’s strategic designs. 
There is no doubt that Russia and China will benefit, at least in the short term, from America’s abdication of leadership. 
Some people are not too bothered by this. 
Russia is closer to Berlin or even Paris than Washington or New York. 
There is a great deal of money to be made by cozying up to the Russian and Chinese regimes (as the US president knows only too well). 
And the chance that either Russia or China would invade NATO countries or Japan might be slim. 
But there will be a price to pay for increased vulnerability to Chinese and Russian encroachments. 
No matter how irksome American dominance might have been, or how much people deplored some of the destructive wars that the US unleashed, criticism of US policies, presidents, and even cultural practices was not only permissible, but seen as a healthy sign of liberal democracy. 
This was one of the “common values” that held the West together. 
The same will not be true in a world dominated by China. 
Criticism will quickly lead to repercussions, especially in the economic sphere. 
Hollywood studios are already censoring the content of movies expected to make money in the Chinese market. 
Western news media, eager to maintain access to Moscow or Beijing, will be under increasing pressure to be careful about what they print or broadcast. 
This will hurt our own societies, which are built on the principles of openness and freedom of expression. 
So even if the end of Pax Americana does not result in military invasions, or world wars, we should ready ourselves for a time when we might recall the American Empire with fond nostalgia. 

Life After Power 
Next week's Commonwealth heads of government summit in Nigeria is a make or break moment for the New Partnership for Africa's Development (NEPAD), the initiative designed by Africans to modernize Africa's governments and economies. 
Zimbabwe's ongoing economic decline under the misrule of President Robert Mugabe has raised doubts about NEPAD's key innovation, its self-monitoring instrument, the African Peer Review Mechanism. 
For, if Mugabe can be let off the hook, will NEPAD's peer review process ever work? 
The question is a legitimate one, because when African initiatives fail, they usually fail because of a lack of political will to follow through on commitments and declarations. 
The stark inability of Africa's leaders to constructively criticize their peers contributes mightily to this. 
One cause often proposed for this damaging phenomenon is the emphasis that many African cultures place on mutual respect. 
But mutual respect does not preclude telling people the truth. 
Africa's great hope is that its "new generation" leaders--most prominently President Olusegun Obasanjo of Nigeria and President Thabo Mbeki of South Africa, who helped spearhead NEPAD's peer review process in the first place--acknowledge this fact. 
So far, 16 countries have voluntarily acceded to the peer review process: Algeria, Burkina Faso, Cameroon, Republic of Congo, Ethiopia, Gabon, Ghana, Kenya, Mali, Mauritius, Mozambique, Nigeria, Rwanda, Senegal, South Africa, and Uganda have declared their readiness to submit to scrutiny by their peers in what now constitutes the African Peer Review (APR) Forum. 
The first two countries to be reviewed will be Ghana and South Africa. 
A Panel of Eminent Persons and a Secretariat to oversee the process is now in place. 
Review work, it is hoped, will begin early in the new year. 
But given the lack of criticism of Mugabe's misrule, some critics wonder, justifiably, whether the review process will ever tackle Africa's most egregious blights--misbegotten leadership and corruption. 
Arguably, one of the most encouraging features of NEPAD is its recognition and public admission that without proper governance institutions in place, Africa will remain, poor, marginalized, and conflict ridden. 
The question now, however, is whether NEPAD will address the greatest cause of conflict and corruption in Africa: one-man rule. 
Will NEPAD insist on mechanisms for the periodic and peaceful change of political leadership in member countries? 
Will it block leaders from changing their countries' constitutions to allow them to seek re-election after their term limits are over? 
NEPAD's credibility and ultimate success rests on the answers to these questions. 
A cursory glance at most of the conflict-ridden countries in Africa shows that monopolization of political power over extended periods of time has not only helped institutionalize corruption, as leaders surround themselves with trusted relatives and cronies, but has also been a major cause of coups and conflict. 
Notable examples include Mobutu in Zaire (now the Democratic Republic of Congo), Siaka Stevens in Sierra Leone, Samuel Doe in Liberia, Siad Barre in Somalia, and Haile Selassie and Mengistu Haile Mariam in Ethiopia. 
Indeed, there is no shortage of potentially explosive situations. 
In Togo, President Gnassingbe Eyadema has been in power for 38 years and, just last December, amended the constitution to allow him to seek further re-election. 
In Guinea, an ailing Lansana Conteh--in power since 1984--did the same thing last year. 
In Zimbabwe, Mugabe hangs tenaciously to power after 23 years. 
All these states are in peril of sliding into violent conflict. 
So are countries like Gabon and Cameroon--both members of the APR Forum--where Omar Bongo and Paul Biya, respectively, have been in power for decades. 
Helping leaders to imagine a life after power is one of the surest ways of ridding Africa of conflict and a great deal of corruption, and putting the continent firmly on the path to sustainable peace and development. 
If leaders and their close associates and cronies in high places know that there will be life after power--a period in which questions of accountability will inevitably be raised--they will act more carefully and responsibly while in office. 
The realization that leaders are likely to step down some day may also make potentially militant groups more patient. 
The few African countries that already have such institutions in place--among them South Africa, Kenya, Nigeria, Ghana, Zambia, and Senegal--are clearly moving in the right direction. 
The improving quality of life in all those countries shows that such reforms work. 

Life Made to Order 
MELBOURNE – In the sixteenth century, the alchemist Paracelsus offered a recipe for creating a living being that began with putting sperm into putrefying “venter equinus.” 
This is usually translated as “horse manure,” but the Latin “venter” means abdomen or uterus. 
So occultists now will no doubt have a fine time with the fact that Craig Venter was the driving force behind the team of scientists that last month announced that they had created a synthetic form of life: a bacterium with a genome designed and created from chemicals in a laboratory. 
The new bacterium, nicknamed “Synthia,” replicates and produces proteins. 
By any reasonable definition, it is alive. 
Although it is very similar to a natural bacterium from which it was largely copied, the creators put distinctive strings of DNA into its genome to prove that it is not a natural object. 
These strings spell out, in code, a Web site address, the names of the researchers, and apt quotations, such as Richard Feynman’s “What I cannot build, I cannot understand.” 
For some years now, synthetic biology has been looming as the next big issue in bioethics. 
The scientists at the J. Craig Venter Institute expected to be told that they were “playing God,” and they were not disappointed. 
Yes, if one believes that life was created by God, then this comes as close to “playing God” as humans have come, so far. 
Well-known University of Pennsylvania bioethicist Art Caplan says that the achievement ranks as a discovery of historic significance, because it “would seem to extinguish the argument that life requires a special force or power to exist.” 
Asked about the significance of what the team had done, Venter described it as bringing about “a giant philosophical change in how we view life.” 
Others have pointed out that, although the team produced a synthetic genome, they put it into a cell from another bacterium, replacing that cell’s DNA. 
We have yet to build a living organism entirely from bottles of chemicals, so anyone who believes in a “life force” that only a divine being could imbue into inert matter will no doubt continue to believe in it. 
At a more practical level, Venter said, the team’s work has produced “a very powerful set of tools” for redesigning life. 
He has been criticized for the fact that the research was funded by Synthetic Genomics, a company that he cofounded, which will hold the intellectual property rights resulting from the research – and has already filed for 13 patents related to it. 
But the work has taken 20 scientists a decade to complete, at an estimated cost of $40 million, and commercial investors are an obvious source for such funds. 
Others object that living things should not be patented. 
That battle was lost in 1980, when the United States Supreme Court decided that a genetically modified micro-organism designed to clean up oil spills could be patented. (Obviously, given the damage caused by the BP spill in the Gulf of Mexico, there is still some work to be done on that particular organism.) 
Patenting life was taken a step further in 1984, when Harvard University successfully applied for a patent on its “oncomouse,” a laboratory mouse specifically designed to get cancer easily, so that it would be more useful as a research tool. 
There are good grounds for objecting to turning a sentient being into a patented laboratory tool, but it is not so easy to see why patent law should not cover newly designed bacteria or algae, which can feel nothing and may be as useful as any other invention. 
Indeed, Synthia’s very existence challenges the distinction between living and artificial that underlies much of the opposition to “patenting life” – though pointing this out is not to approve the granting of sweeping patents that prevent other scientists from making their own discoveries in this important new field. 
As for the likely usefulness of synthetic bacteria, the fact that Synthia’s birth had to compete for headlines with news of the world’s worst-ever oil spill made the point more effectively than any public-relations effort could have done. 
One day, we may be able to design bacteria that can quickly, safely, and effectively clean up oil spills. 
And, according to Venter, if his team’s new technology had been available last year, it would have been possible to produce a vaccine to protect ourselves against H1N1 influenza in 24 hours, rather than several weeks. 
The most exciting prospect held out by Venter, however, is a form of algae that can absorb carbon dioxide from the atmosphere and use it to create diesel fuel or gasoline. 
Synthetic Genomics has a $600 million agreement with ExxonMobil to obtain fuel from algae. 
Obviously, the release of any synthetic organism must be carefully regulated, just like the release of any genetically modified organism. 
But any risk must be weighed against other grave threats that we face. 
For example, international climate-change negotiations appear to have reached an impasse, and public skepticism about global warming is rising, even as the scientific evidence continues to show that it is real and will endanger the lives of billions of people. 
In such circumstances, the admittedly very real risks of synthetic biology seem decisively outweighed by the hope that it may enable us to avert a looming environmental catastrophe. 

A Life that Mattered 
PRINCETON – On January 1, Derek Parfit, one of the greatest philosophers of my generation, died. 
Just a year earlier, in a poll on a leading philosophy website, Parfit had been voted the most important living Anglophone philosopher. 
Of all the philosophers I have known since I began to study the subject more than 50 years ago, Parfit was the closest to a genius. 
Getting into a philosophical argument with him was like playing chess with a grandmaster: he had already thought of every response I could make to his arguments, considered several possible replies, and knew the objections to each reply as well as the best counters to those objections. 
Parfit was not a household name. 
Few people outside the world of academic philosophy have read anything he wrote. 
Nor did he appear on television, although late in life, he spoke about effective altruism, and two of those talks can be seen online. 
He also published very little before his first book, Reasons and Persons, came out in 1984, when he was 42 years old. 
His readers then had to wait another 27 years for his second book, On What Matters, unless they were able to read one of the drafts that Parfit circulated in order to receive suggestions for improvement. 
To say that Parfit wrote only two books, however, is misleading. 
Reasons and Persons brings together novel ideas on three separate topics. 
First, he discusses theories of rational action. 
Is it rational always to act in our own interests, or to act in accordance with our present desires, or to bring about the best consequences for everyone, timelessly? 
The second topic is personal identity. 
Whereas we commonly take the distinction between our self and others as an all-or-nothing matter, because we assume that we are the same person throughout our life, Parfit argued that our identity changes over time as the psychological connections between our earlier and later selves alter. 
Parfit found this view liberating: “Other people are closer,” he wrote, “I am less concerned about the rest of my own life and more concerned about the lives of others.” 
In the final part of the book, Parfit asked: What is the optimum population for a country, or a planet? 
Should we aim for the greatest possible total quantity of happiness, or the highest average level of happiness? 
Assuming that the average level of happiness is positive, these choices will diverge if increasing the planet’s population will reduce the average, but not by enough to offset the fact that now more happy people exist. 
In thinking about this question, we can put aside the environmental constraints that provide reasons for not increasing the population, because Parfit is trying to get at an underlying question of value. 
He shows that both the “total” and “average” answers have paradoxical or counter-intuitive implications. 
But then, so does every other answer that has been proposed since Parfit revived the problem and other philosophers began to offer their own solutions. 
If Reasons and Persons could easily have been three separate books, On What Matters really is: the first two volumes were published in 2011, while a third, in press when Parfit died, has just appeared. 
In this monumental work, totaling about 1,900 pages, Parfit challenges the idea – almost universally assumed by economists, and by many philosophers from David Hume onward – that the role of reason is to tell us how to get what we want, but not to tell us what to want. 
On the contrary, Parfit argued, desires can be irrational. 
It is, for example, irrational to wish to avoid agonizing pain every day of the week except any future Tuesday. 
In order to show that there can be objective truths in ethics, Parfit boldly sought to reconcile three major normative theories: Kantianism, contractualism, and consequentialism. 
Adherents of each of these theories are, Parfit suggested, “climbing the same mountain on different sides,” taking their own routes to a common element of truth in each theory. 
In On What Matters, Volume Three, Parfit again tried to reconcile three major theories, this time theories about the nature of ethics, and the basis on which one might call an ethical judgment “true.” 
Parfit was not only a remarkable philosopher; he was also extraordinarily generous with the resource that was most precious to him: his time. 
So concerned was he about not wasting time that he read philosophy while brushing his teeth, and his wardrobe was full of identical shirts and suits so that he would not have to think about what to wear. 
Yet when students or colleagues sent him work, he would read it and, whether he agreed with it or not, write detailed comments, sometimes longer than the work itself. 
I benefited from that, as did countless others. 
I will let Parfit have the last word. 
At a time when many people are despairing about current political trends, the penultimate paragraph of On What Matters, Volume Three encourages us to take a longer and more optimistic perspective: 
“Life can be wonderful as well as terrible, and we shall increasingly have the power to make life good. 
Since human history may be only just beginning, we can expect that future humans, or supra-humans, may achieve some great goods that we cannot now even imagine. 
In Nietzsche’s words, there has never been such a new dawn and clear horizon, and such an open sea.” 


Light At The End Of Colombia's Tunnel? 
Despite dire predictions about Colombia's future, the peace process with the FARC (Revolutionary Armed Forces of Colombia) has recently been strengthened, primarily through the work of President Andrés Pastrana, but the guerrillas have contributed too. 
It is now possible to speak of moving from a dishonest peace process tainted by violent ambushes and stalling tactics toward real peace. 
Indeed, agreement on a bilateral cease-fire is expected before April. 
After twenty years of peace talks that achieved next to nothing, in 1998, Colombia's public, sickened by assassinations, massacres, and kidnappings, required the then newly-elected President Pastrana to re-energize the search for peace. 
To do so, the government took a big risk and conceded to the FARC a territory the size of Switzerland to control. 
The three years of desultory talks that resulted, however, achieved little. 
So President Pastrana abandoned the politics of concession in favor of a firm hand. 
The government told the guerillas either to negotiate seriously or see the Colombian military move into the FARC's territory. 
The FARC leaders were stunned by the president's resolve. 
Despite Pastrana's vigorous pronouncements, the guerillas believed that the President would back down as he had so frequently in the past. 
Instead, to the FARC's astonishment, the government's plan to retake control of the region was serious. 
Given the Pastrana government's new resolve, the FARC had no option but to yield. 
But more than a stern line in the peace talks spurred this promising outcome. 
Another contributing factor is the fact that Colombia's armed forces have been thoroughly reorganized and restructured in recent years. 
This modernization was due not only to a series of defense ministers committed to reform, but to the nation's improving financial circumstances and American military assistance provided under the rubric of the ``Plan Colombia.'' 
Due to these improvements, the superior tactical position that the FARC had achieved during the administration of Pastrana's predecessor, Ernesto Samper, which had resulted in serious military setbacks and the abduction of hundreds of soldiers and officials, was reversed. 
The FARC, which had begun to transform itself from a guerilla force into a regular army, was forced to return to guerilla warfare. 
Renewal of Colombia's Air Force and Marine Corps, an increase in the number of professional soldiers, and improvement in communication and mobilization systems all put the FARC increasingly on the defensive. 
In tandem with these domestic initiatives was a change in the international climate, for the events of September 11th had produced a completely new situation that opposed using violence as a political tool. 
This matters here because Colombia contains the second largest number of terrorist organizations on the US State Department's blacklist. 
(The Palestinians are first, hosting six such groups.) 
The Colombian groups include not only the FARC but the smaller ELN (National Army of Liberation) and the extreme right wing AUC (United Colombian Self-Defense). 
The changed international environment saw the European Union strip guerilla organizations of their visas and blocked their entry into EU countries of those who continued to carry out abductions. 
Mexico, which provides an overseas home to the largest overseas FARC delegation, threatened to expel the FARC if the group failed to advance the peace process. 
As frustration grew among ordinary Colombians about the use of violence, the FARC became ever more wary of completely antagonizing the country's civilians. 
Most Colombians now view the guerillas' armed actions not as a way to advance social change, but as the cause of recession and unemployment. 
In fact, less than 2% of Colombians approve of the guerillas. 
In the last month, Colombia witnessed a startling change in civic protests against violence: civilians, long the victims of guerillas acts, poured into the streets in protest, filling them with flags, musical groups, and songs calling for an end to the war. 
Men and women, young and old, defied the guerillas' bullets. 
Some prevented villages from being taken over by the FARC; some forced the guerillas to abandon urban areas. 
Here was a telling sign: the people confronting the very guerillas who purported to represent them. 
Change also took place within the FARC. 
Within the confines of its demilitarized zone FARC members were becoming ``sedentary guerillas'' who could not easily return to the jungles. 
The FARC had acquired a hospital system, an arms factory, airplane landing strips, helicopters and small airplanes, and a communications system - resources that did not want to abandon. 
Realizing the increasingly sedentary nature of the guerrillas gave the government confidence that its threat to overrun the demilitarized zone would bring the FARC back to serious negotiations. 
But the failed peace talks of the past decades had depleted the faculty of both parties (guerillas and government) to agree on a major accord. 
So a ``third'' party, as in the wars in El Salvador or Guatemala of the 1980s, became indispensable as a conduit to mediate between the two. 
That ``third'' party is composed of three actors: a UN delegate; the ambassadors of the ten countries that make up a group of friendly nations backing the peace process, and the Catholic Church. 
All of these factors contributed to bringing the FARC back to the negotiating table for the first serious discussions in twenty years. 
With presidential elections approaching, both sides will likely feel heavy pressure to make progress now. 

Light in Congo’s Darkness? 
NEW YORK – Perhaps no country on earth – not even Iraq, Afghanistan, or Sudan – has suffered more gravely from armed conflict in the past decade and a half than the Democratic Republic of the Congo. 
Several million people have died either directly in armed struggle or from forced displacement and the resulting health consequences. 
The main causes of the fighting that has afflicted the DRC for so long have been competition for control of that impoverished country’s vast natural resources and neighboring Rwanda’s effort to wipe out what it sees as a potential threat posed by perpetrators of the 1994 genocide who took refuge in the DRC. 
Several other African states – Angola, Namibia, Uganda, and Zimbabwe – have also at times participated in armed combat within the DRC, either directly or through proxy militias. 
Suffering continues even in parts of the country where peace has been restored, manifested in the epidemic of sexual violence, much of it committed by former combatants, that has swept the country. 
In these dismal circumstances, a recent development has provided a rare ray of hope: the extraordinary mobilization of Congolese civil society in defense of the DRC’s nascent democratic institutions. 
No fewer than 210 Congolese nongovernmental organizations, including those enjoying the widest recognition and respect across the country, recently joined in challenging President Joseph Kabila’s attempt to take control of the National Assembly (the lower house of Parliament) that came into office after historic elections in 2006. 
The episode that brought together Congolese civil society was Kabila’s insistence in March on forcing the resignation of Vital Kamerhe, the Speaker of the National Assembly. 
Kamerhe had antagonized Kabila by criticizing his secret deal with President Paul Kagame of Rwanda that resulted in joint military operations earlier in the year against a Rwandan rebel force operating in the DRC. 
Kamerhe’s supposed offense was diverging from the official party line, thereby weakening Kabila’s standing with the Congolese public. 
What is most important about this episode is that it demonstrates the determination by groups representing a substantial share of Congolese society to pursue democratic development. 
The National Assembly plays a key role in attempting to improve governance in the country. 
It has had a crucial role in the effort to regularize the mining industry so that the DRC’s mineral wealth may be used to improve living standards, rather than only to enrich local warlords and the foreign governments and corporate interests allied with them. 
The international community has a lot at stake in the Congo. 
Its rain forest, threatened by timber companies that have made deals with some of the militias, plays an important part in slowing global warming. 
Its copper, cobalt, tin, and coltan (columbite-tantalite) are essential for many industries. 
The United Nation peacekeeping force in the Congo, MONUC, is the UN’s largest and most expensive intervention anywhere in the world. 
International humanitarian assistance groups are deeply engaged in the DRC, and it is a substantial recipient of international assistance. 
Above all, the Congo matters because of the continuing violence, wretched poverty, and misery of most of its nearly 70 million people. 
The attempt by Congolese civil society to foster democratic development may be the best thing that has happened in the country in a long time. 
It deserves the attention and support of all those who seek a better future for a vast country that has long endured plunder and misrule. 

Lights Out? 
RIO DE JANEIRO – When it comes to all things “green, ” common sense seems to have been abandoned. 
Our failure to think clearly about such matters would be amusing if the potential consequences were not so serious. 
Consider the recent “lights out” campaign that supposedly should energize the world about the problems of climate change by urging citizens in 27 big cities to turn out their lights for an hour. 
With scores of companies and municipalities signing up, and even the monarchies of Denmark and Sweden turning off the lights in their many palaces, the World Wildlife Fund quickly called it an amazing success. 
Newspapers around the world dutifully wrote feel-good stories about how engaged environmentalists celebrated as the lights went out around the world. 
Nobody, it seemed, wanted to spoil the party by pointing that the event was immensely futile, that it highlighted a horrible metaphor, or that it caused much higher overall pollution. 
Danish newspapers – coincidentally in the native country of the story of the Emperor’s New Clothes – happily quoted the WWF regarding the event’s overwhelming success. 
But the entire savings (assuming people didn’t use more energy later in the night to make up for lost time) amounted to just ten tons of CO2 – equivalent to just one Dane’s annual emissions for a full year. 
Measuring the avoided climate impact for the indefinite future, the entire combined efforts of the Queen, many companies, and the city halls of Copenhagen and other cities yielded $20 worth of good. 
Are pointless gestures really the way to secure a greener future? 
And what sort of message does turning out the lights send? 
As some conservative commentators like to point out, the environmental movement has indeed become a dark force, not metaphorically, but literally. 
Indeed, urging us to sit in darkness will probably only make us realize how unlikely it is that we will ever be convinced to give up the advantages of fossil fuels. 
Curiously, nobody suggested that the “lights out” campaign should also mean no air conditioning, telephones, Internet, movies, hot food, warm coffee, or cold drinks – not to mention the loss of security when street lights and traffic signals don’t work. 
Perhaps recruiting support would have been much harder had the Danes also had to turn off their heat. 
Ironically, the lights-out campaign also implies much greater energy inefficiency and dramatically higher levels of air pollution. 
When asked to extinguish electric lights, most people around the world would turn to candlelight instead. 
Candles are cozy and seem oh-so-natural. 
Yet, when measured by the light they generate, candles are almost 100 times less efficient than incandescent light bulbs, and more than 300 times less efficient than fluorescent lights. 
Moreover, candles create massive amounts of highly damaging indoor particulate air pollution, which in the United States is estimated to kill more than a 100,000 people each year. 
Candles can easily create indoor air pollution that is 10-100 times the level of outdoor air pollution caused by cars, industry, and electricity production. 
Measured against the relative decrease in air pollution from the reduced fossil fuel energy production, candles increase health-damaging air pollution 1,000-10,000-fold. 
Unfortunately, the lights-out campaign exemplifies the state of much of our environmental debate. 
We are spoon fed stories that fit preconceived frameworks. 
For example, the recent breakup of a massive glacier in the Antarctic supposedly proves the mounting effects of global warming. 
But we don’t hear that the area was ice-free, possibly just some 400 years ago, without the help of global warming. 
We don’t hear that the Wilkins glacier makes up less than 0.01% of Antarctica. 
Nor do we hear that the Antarctic is experiencing record sea ice coverage since satellite measurements began. 
Likewise, we all heard Al Gore talking about the dramatic hurricane years of 2004 and 2005, but we’ve heard almost nothing about the complete absence of hurricane damage in 2006 and 2007. The insurance company Lloyds of London has now begun to fret that the absence of natural disasters is putting a squeeze on its premiums. 
We are endlessly presented with stories of soaring temperatures, but over the past year, we’ve experienced the single fastest temperature change ever recorded, and it’s been downward. 
In January, Hong Kong was gripped by its second-longest cold spell since 1885. 
This year’s storms in central and southern China produced the worst winter weather in a half-century. 
Snow fell on Baghdad for the first time in living memory. 
When we get a distorted picture, we are likely to make wrong choices. 
Nowhere is this clearer than with the lights-out campaign. 
Doing virtually no good while dramatically decreasing energy efficiency and increasing air pollution merely threatens any hope for enlightened public policy. 

Like Father, Like Son 
LONDON – “The enemy of yesterday is the friend of today....[I]t was a real war, but those brothers are free men now.” 
Thus spoke Saif al-Islam al-Qaddafi in March 2010, referring to the leaders of the Libyan Islamic Fighting Group (LIFG), an armed organization that had attempted to assassinate his father, Muammar al-Qaddafi, three times in the mid-1990’s. 
This may seem surprising. 
A few days ago, the very same man promised Libyans a “sea of blood” if his father’s regime was toppled. 
Indeed, Saif al-Islam, an elegant, soft-spoken graduate of the London School of Economics, has now become a prime suspect in massive crimes against humanity. 
People like me, who study the tactics of Arab dictatorships and the causes of their persistence, are less surprised, if at all, by this turn of events. 
Arab authoritarian regimes, unlike others that have given way to democracy, are incapable of self-reform; they have, however, mastered the tactics needed to prolong the life spans of their aging despotisms. 
Creation of a Hydra-headed security apparatus, mass-murder of opponents (both real and imagined), widespread torture, and sustained censorship and repression are some of the common tactics used by Qaddafi, former Egyptian President Hosni Mubarak, former Tunisian President Zine el-Abidine Ben Ali, Syrian President Bashar al-Assad, and other Arab autocrats. 
But Qaddafi’s regime became an international pariah mainly for a series of terrorist plots abroad, not for crimes against humanity committed against Libyans. 
Oil interests and the regime’s “dovish” face in recent years successfully extended its life. 
Qaddafi’s dovish period coincided with the rise to prominence of his second son, Saif al-Islam, and his sister Ayesha, the latter becoming a goodwill ambassador for the United Nations. 
Saif cultivated a reputation for being a “reformer”: he called for a national-reconciliation process with opposition groups, supposedly liberalized the media, supported charity and development initiatives, and most importantly, became a face that the West could talk to. 
The two public fronts for those initiatives were Libya Tomorrow and the al-Qaddafi Foundation for Development. 
Behind them, however, Libyan Military Intelligence, headed by Abdullah al-Sanosi, was giving conditional support and setting the general direction for their activities. 
The “reforms” proposed by Saif al-Islam included releasing some political prisoners, especially those, like the LIFG, who declared their allegiance to Qaddafi’s regime. 
But concrete steps leading to government transparency and accountability, such as inquiries into oil wealth and state expenditures, or serious investigation of crimes against humanity, were all beyond his will and imagination. 
Despite the cosmetic nature of the “reforms,” other regime factions, most notably those led by Saif al-Islam’s brothers Mutassim, al-Sa’adi, and Khamis, challenged them. 
Behind the brothers were other security agencies: the Internal Security Forces, the Revolutionary Committees, and, to a lesser extent, the Jamahiriya Security Apparatus (Foreign Intelligence). 
When I visited Tripoli in March 2010 for a “national reconciliation” conference, the conflicting statements given by Saif al-Islam and security officials surprised me. 
The head of Internal Security Forces, Colonel al-Tuhami Khaled, another principal suspect in the crimes currently being committed against Libyans, refused to call the process a “reconciliation.” 
For him, it was “repentance from heresy.” 
Given the recent wave of uprisings, it is more evident than ever that any “reform” initiatives undertaken in the Arab world previously were aimed only at sustaining repressive dictatorships and escaping punishment for criminal abuse of power. 
The reform “debate” within these regimes boiled down to a struggle between different branches of the security-military apparatus over the best way to preserve the status quo. 
Arabs, of course, have known for years that their rulers were beyond reform. 
That is why, in order to have a chance to catch up with the rest of the free, developed world, many of them are now risking their lives to remove those regimes. 
What is happening today in the Arab world is history in the making, written in the blood, sweat, and tears of the victims of decades of violent repression. 
When asked by a journalist what I would like to say to Saif al-Islam if I were ever to meet him again, I replied: “I hope to see you in the International Criminal Court, beside Mubarak and Ben Ali.” 
Millions of Arabs of my generation and younger would probably give the same answer if asked what should become of the men who controlled their present and sought to destroy their future. 

The Real Lima Deal 
LIMA – It was the agreement that everyone wanted, yet that no one much likes. 
This year’s annual United Nations climate-change conference in Lima, Peru, finally concluded in the early hours of Sunday morning, more than 24 hours after the scheduled close, after fierce argument in the final days. 
Negotiators from 196 countries patched together a compromise that keeps the world on course to a new global climate agreement in Paris next year; but almost everyone was left unhappy with some provision or another. 
Many critics of the deal, however, have missed the point. 
The Lima deal is weak in many respects. 
But it also represents a fundamental breakthrough for shaping a comprehensive global climate regime. 
The Lima conference had two goals. 
The first was to adopt an outline of the text of the 2015 Paris agreement. 
This goal was achieved – but only by creating a huge 37-page document containing every possible option that countries may want to see in next year’s deal. 
Delegates did not attempt to negotiate between the various options, taking to heart the old maxim “Why do today what you can put off until tomorrow?” 
That negotiation has been left to the five sessions of talks scheduled for 2015, starting in February. 
Given the divergence among the positions included in the Lima text, arriving at a draft fit for signing in Paris next December will be a huge task. 
The second goal was to agree on the terms under which countries will devise their national commitments – officially, their “intended nationally determined contributions” (INDCs) – in 2015. 
Here, the compromises were sharply felt. 
Developing countries wanted the INDCs to include plans for adaptation to climate change as well as emissions cuts, and they wanted developed countries to include financial support for poorer countries. 
Instead, no commitments to new money were made, and the inclusion of adaptation plans will be optional, not compulsory. 
Meanwhile, developed countries wanted all countries to provide standardized information on their emissions targets and plans, to ensure transparency and comparability. 
The key elements were agreed on, but only in the form of guidance, not as requirements. 
Likewise, the proposal by the European Union and the United States that countries’ plans be subject to some kind of assessment was dropped from the final text. 
But the aggregate effect of all countries’ plans will be calculated, allowing evaluation next year of whether the world has done enough to limit average global warming to the agreed ceiling of 2º Celsius. 
It almost certainly will have not. 
For many of the agreement’s critics, particularly those in the environmental movement, these compromises made the Lima deal an excessively “bottom-up” agreement. 
Countries have too much latitude to make whatever commitments they want, relatively unconstrained by a common set of “top-down” rules imposed by the agreement. 
Such critics worry that this will make it harder to persuade countries to cut emissions further when it becomes clear that their collective efforts are not enough, and that it may even allow some countries to use irregular accounting methods. 
But this overlooks the Lima agreement’s greatest accomplishment: It ends the longstanding division of the world into only two kinds of countries, developed and developing. 
Ever since the original UN Framework Convention on Climate Change was signed in 1992, countries’ obligations have been defined according to their level of development in that year. 
The rich so-called “Annex 1” countries have had compulsory obligations, while poorer “non-Annex 1” countries merely have been required to make voluntary efforts. 
Over the last 22 years, that binary distinction has looked increasingly obsolete, as the larger developing countries, such as China and Brazil, have emerged as economic superpowers and major greenhouse-gas emitters. 
For this reason, the developed world has long wanted to replace the “firewall” between the two historic groupings with a form of differentiation that better reflects the contemporary world. 
But the developing countries – including major powers like China – have insisted that it remain. 
No longer. 
The Lima agreement creates obligations for countries without regard for the distinction between Annex 1 and non-Annex 1. 
Rather, it uses a new phrase drawn from the recent agreement between the US and China: countries’ responsibilities will be based on “common but differentiated responsibilities and respective capabilities in light of different national circumstances.” 
The firewall has been breached. 
In theory, the Lima agreement on INDCs does not determine the shape of the long-term Paris agreement. 
So another fierce battle on this issue can be expected next year. 
But the vast majority of developing countries – including China and Brazil – are happy with the new regime. 
So it is impossible to imagine the binary model being restored – and those countries that opposed the change know it, which is why the final two days in Lima were so fiercely fought. 
The Lima conference has shown just how hard the negotiations in Paris next year will be, despite recent optimism about global progress. 
But one highly significant decision has now effectively been made. 
Abandoning the rigid distinction between developed and developing countries paves the way toward an agreement that all countries, including the US and China, can sign. 

Corralling the Info-Monopolists 
MEDFORD, MASSACHUSETTS – In a modern capitalist economy, we celebrate innovations that produce market power, but fear the risks of unchecked dominance. 
Nowhere are those risks more apparent than with today’s information-technology monopolies. 
The question of how to encourage transformational, market-dominating innovations while limiting the abuse of market power long precedes the digital age. 
In the United States, the story of Walmart founder Sam Walton is a case in point. 
The World War II veteran went from small-town variety-store franchise owner to multi-billionaire mogul, presiding over what would become the world’s largest private employer. 
It is a stirring tale of audacity and enterprise, which included innovations – such as establishing distribution centers in sparsely populated regions and building up global supply chains – that business students worldwide now study. 
And the huge profits Walmart generates for its owners are dwarfed by the value it provides to its customers, who rely on the low prices made possible by the company’s ability to buy and sell on a massive scale. 
Yet Walmart also stands accused of desolating downtowns, impersonalizing shopping, and depriving small retailers of their livelihoods. 
In the future, Walmart could use its market power to squeeze customers (though another, more ambitious behemoth, Amazon, would likely get in the way). 
So far, Americans have largely tolerated – and even applauded – the creative destruction associated with business innovation, and have been cautious in limiting potential abuses. 
Despite rules prohibiting “predatory” pricing and “anti-competitive” mergers, price wars and acquisitions that increase market leaders’ power are permitted in practice. 
Legally mandated breakups – such as of Standard Oil in 1911 and AT&T in 1982 – are rare, and regulating prices charged by “natural monopolies” (such as electric utilities) is uncommon. 
This innovation-favoring approach has helped to make the US a nursery of world-dominating businesses, and it has not changed with the digital revolution, either. 
The “info-monopolists” Google and Facebook, faced with few regulatory obstacles, have created unprecedented value for consumers – and have secured massive market power for themselves. 
These companies have eviscerated traditional media, though many of the losers were themselves oligopolists or monopolists. 
When they dominated the airwaves, the US television networks ABC, CBS, and NBC charged advertisers steep rates. 
The one or two newspapers that dominated in each city or town avoided cutthroat price competition. 
This helps to explain why the struggles of traditional media – many owned by wealthy families or conglomerates – have spurred even less of a backlash than did Walmart’s decimation of independently owned retailers. 
Unimpeded growth has no doubt helped to increase the value that Google and Facebook can offer. 
The more Google searches are conducted, the better the results. 
The more people who use Facebook, the more reason there is to join. 
This attracts advertisers, whose payments fund investments in improved technology and added features. 
But unchecked market power creates opportunities for abuse, particularly with regard to user privacy. 
Unlike television networks or newspapers, these digital behemoths don’t merely give advertisers an audience; they tailor ads to individual consumers. 
This is not a benign difference, because in order to tailor ads effectively – thereby maximizing their value to advertisers (and thus profits for the platform) – these companies collect a huge amount of personal data from their users. 
Perhaps because most users don’t know the details of which data are being collected, they have so far shown a surprisingly high tolerance for online surveillance. 
Most would be outraged if a mega-discounter bugged shopping carts to find out what should be pitched to a specific customer at the checkout counter, even if it helped keep prices low, and machines, not humans, did the eavesdropping. 
Yet most users never bother to read, say, Facebook’s terms of service before clicking “agree,” and are indifferent to how much surveillance is being carried out. 
In fact, extensive tracking has become the new normal. 
The question is no longer whether Facebook should monetize users’ personal data, but whether it should be required to pay users for their data or even charge users a fee to opt out of data collection. 
But it is not at all clear that these companies can be trusted with the data they collect. 
Despite Facebook’s insistence that it does not sell data to advertisers, the company was recently found to have allowed nearly 90 million users’ data to be harvested by the political consultancy Cambridge Analytica. 
And subsequent testimony before the US Congress by Facebook founder and CEO Mark Zuckerberg did not prove particularly reassuring, given the lack of real information that he provided. 
Members of Congress – many of whom have received campaign contributions from Facebook – largely limited themselves to denouncing Facebook’s carelessness, and Zuckerberg earnestly promised to invest more in security. 
But could the data that Facebook or Google accumulates ever really be safe? 
No matter how much one spends on protecting large databases, it is farfetched to believe that nobody inside or outside such a massive and complex organization could breach it. 
America’s own National Security Agency could not prevent Edward Snowden, a low-level contractor, from walking off with a trove of state secrets on a thumb drive. 
In some cases, such as health care or banking, the public benefits of digitally stored data justify the risks. 
But, for the most part, limiting data collection is a much safer bet than relying on data protection. 
Ensuring that today’s info-monopolists can legally collect only a very limited amount of personal data – say, what newspapers receive about their subscribers – would protect users, without fatally diminishing the platforms’ appeal to advertisers. 
Without such limitations, the risks these platforms pose may, in users’ eyes, begin to outweigh their benefits – a development that could have political implications as far-reaching as the info-monopolists’ economic rise. 

Global Citizens, National Shirkers 
CAMBRIDGE – Last October, British Prime Minister Theresa May shocked many when she disparaged the idea of global citizenship. 
“If you believe you’re a citizen of the world,” she said, “you’re a citizen of nowhere.” 
Her statement was met with derision and alarm in the financial media and among liberal commentators. 
“The most useful form of citizenship these days,” one analyst lectured her, “is one dedicated not only to the wellbeing of a Berkshire parish, say, but to the planet.” 
The Economist called it an “illiberal” turn. 
A scholar accused her of repudiating Enlightenment values and warned of “echoes of 1933” in her speech. 
I know what a “global citizen” looks like: I see a perfect specimen every time I pass a mirror. 
I grew up in one country, live in another, and carry the passports of both. 
I write on global economics, and my work takes me to far-flung places. 
I spend more time traveling in other countries than I do within either country that claims me as a citizen. 
Most of my close colleagues at work are similarly foreign-born. 
I devour international news, while my local paper remains unopened most weeks. 
In sports, I have no clue how my home teams are doing, but I am a devoted fan of a football team on the other side of the Atlantic. 
And yet May’s statement strikes a chord. 
It contains an essential truth – the disregard of which says much about how we – the world’s financial, political, and technocratic elite – distanced ourselves from our compatriots and lost their trust. 
Start first with the actual meaning of the word “citizen.” 
The Oxford English Dictionary defines it as “a legally recognized subject or national of a state or commonwealth.” 
Hence citizenship presumes an established polity – “a state or commonwealth” – of which one is a member. 
Countries have such polities; the world does not. 
Proponents of global citizenship quickly concede that they do not have a literal meaning in mind. 
They are thinking figuratively. 
Technological revolutions in communications and economic globalization have brought citizens of different countries together, they argue. 
The world has shrunk, and we must act bearing the global implications in mind. 
And besides, we all carry multiple, overlapping identities. 
Global citizenship does not – and need not – crowd out parochial or national responsibilities. 
All well and good. 
But what do global citizens really do? 
Real citizenship entails interacting and deliberating with other citizens in a shared political community. 
It means holding decision-makers to account and participating in politics to shape the policy outcomes. 
In the process, my ideas about desirable ends and means are confronted with and tested against those of my fellow citizens. 
Global citizens do not have similar rights or responsibilities. 
No one is accountable to them, and there is no one to whom they must justify themselves. 
At best, they form communities with like-minded individuals from other countries. 
Their counterparts are not citizens everywhere but self-designated “global citizens” in other countries. 
Of course, global citizens have access to their domestic political systems to push their ideas through. 
But political representatives are elected to advance the interests of the people who put them in office. 
National governments are meant to look out for national interests, and rightly so. 
This does not exclude the possibility that constituents might act with enlightened self-interest, by taking into account the consequences of domestic action for others. 
But what happens when the welfare of local residents comes into conflict with the wellbeing of foreigners – as it often does? 
Isn’t disregard of their compatriots in such situations precisely what gives so-called cosmopolitan elites their bad name? 
Global citizens worry that the interests of the global commons may be harmed when each government pursues its own narrow interest. 
This is certainly a concern with issues that truly concern the global commons, such as climate change or pandemics. 
But in most economic areas – taxes, trade policy, financial stability, fiscal and monetary management – what makes sense from a global perspective also makes sense from a domestic perspective. 
Economics teaches that countries should maintain open economic borders, sound prudential regulation and full-employment policies, not because these are good for other countries, but because they serve to enlarge the domestic economic pie. 
Of course, policy failures – for example, protectionism – do occur in all of these areas. 
But these reflect poor domestic governance, not a lack of cosmopolitanism. 
They result either from policy elites’ inability to convince domestic constituencies of the benefits of the alternative, or from their unwillingness to make adjustments to ensure that everyone does indeed benefit. 
Hiding behind cosmopolitanism in such instances – when pushing for trade agreements, for example – is a poor substitute for winning policy battles on their merits. 
And it devalues the currency of cosmopolitanism when we truly need it, as we do in the fight against global warming. 
Few have expounded on the tension between our various identities – local, national, global – as insightfully as the philosopher Kwame Anthony Appiah. 
In this age of “planetary challenges and interconnection between countries,” he wrote in response to May’s statement, “the need has never been greater for a sense of a shared human fate.” 
It is hard to disagree. 
Yet cosmopolitans often come across like the character from Fyodor Dostoyevsky’s The Brothers Karamazov who discovers that the more he loves humanity in general, the less he loves people in particular. 
Global citizens should be wary that their lofty goals do not turn into an excuse for shirking their duties toward their compatriots. 
We have to live in the world we have, with all its political divisions, and not the world we wish we had. 
The best way to serve global interests is to live up to our responsibilities within the political institutions that matter: those that exist. 

Macron’s Real Limits 
FRANKFURT – When Emmanuel Macron was recently interviewed by two very aggressive journalists, the result was not exactly the “ideal speech situation” cherished by Jürgen Habermas, the towering German philosopher and great supporter of the French president. 
But, despite being repeatedly interrupted, Macron fared very well. 
Always concrete and willing, if necessary, to delve into the minutiae of an issue, Macron was clearly on top of his game. 
He needed no speaking notes, as he also admirably demonstrated in his speech condemning nationalism and populism at the European Parliament a few days later. 
His meeting with German Chancellor Angela Merkel in Berlin that same week, however, was much different in both tone and substance. 
Most important, it demonstrated the limits of the méthode Macron: Seemingly compelling oratory does not necessarily translate into feasible policies. 
Politics, at its core, reflects the interplay of interests at the national level. 
And that is precisely where Macron’s ideas about re-designing Europe’s institutional architecture arrive at an impasse. 
His proposals are too numerous and vague to judge, and they do not account for the state of debate at the national level, where skepticism is on the rise. 
Being positive about Europe comes at a cost. 
For northern Europeans, two prospects raise particular concern: risk sharing (for example, in underwriting retail bank deposits) and a eurozone budget. 
Of course, a fragmented banking system complicates a single monetary policy. 
Some academic economists, as well as the rare policymaker (such as the late Tommaso Padoa-Schioppa), called for centralized supervision of financial institutions long before the euro crisis erupted. 
At least in some respects, such “Europeanization” of supervision has been established, with the European Central Bank serving as the eurozone’s banking watchdog and the Single Resolution Board dealing with vulnerable banks. 
But guaranteeing retail deposits remains a task for the eurozone’s individual member states. 
Hence, the quality of those guarantees varies, with some members vulnerable to bank runs. 
But in northern Europeans’ (quite reasonable) view, insurance after an accident has occurred (think of non-performing loans) is a form of redistribution that shifts the burden to innocent bystanders (in this case, northern taxpayers). 
As German and Dutch officials, in particular, have argued, banks’ financial health must be addressed before completion of European banking union can take place. 
Europeanization of deposit insurance would also mean that eurozone member states would, if push came to shove, lose any authority over banking politics. 
A eurozone institution, democratically accountable, would have to be charged with this. 
But it is in regard to the proposed eurozone budget that Macron’s ideas are the least specific. 
And it is here where political resistance is the strongest – again, for reasons that are not difficult to understand. 
A common eurozone budget has been presented as both a stabilizing mechanism and an investment tool. 
But, under normal circumstances, national public-sector budgets already perform the stabilizing role automatically – through unemployment insurance, progressive taxation, and the like – and this is a derived role, not the primary objective. 
What is needed is a security valve for eurozone countries that face temporary – and particularly difficult – challenges. 
And an investment budget has little to do with the purpose of a stabilizing mechanism: to cushion economic shocks. 
So the substance of Macron’s economic-policy suggestions is, frankly, confusing. 
And even if Merkel were to embrace them, she would be an easy target for political attack (and not just from the opposition Alternative für Deutschland, but also from within her Christian Democratic Union and its sister party, the Christian Social Union, not to mention the Social Democrats). 
There is no avoiding the national political dimension in the EU, given that every leader needs to be elected, and that most want to be re-elected. 
Merkel’s idea of establishing a eurozone super committee that would partly substitute for the Eurogroup of eurozone finance ministers – which Dutch Prime Minister Mark Rutte already proposed, to no avail – would complicate things even further. 
Yes, such a committee would bring Merkel the added political benefit of constraining the influence of Social Democrat Olaf Scholz, her Vice-Chancellor and finance minister. 
But, in terms of substance, there was no need for her proposal. 
Scholz immediately endorsed the schwarze Null (balanced budget) of his predecessor, Wolfgang Schäuble. 
Given the German public’s deep-rooted sentiment in favor of fiscal probity, anything else would have been politically self-defeating. 
Indeed, with even Macron pursuing it, the schwarze Null has come back with a vengeance. 
But that does not make it a less flimsy economic concept, one that cannot be found in any economics textbook. 
This is the fundamental problem of the méthode Macron: his policy pronouncements – vague to the point of not being implementable – somehow lack the courage of his European convictions. 
Proposals by the French Treasury (from 2014!), for example, presented much more detailed policy options to achieve the ends that Macron appears to seek, as did proposals developed by Italian Finance Minister Pier Carlo Padoan in 2015. 
Macron’s method is also marked by a strong reliance on an intergovernmental approach, which most likely reflects his understanding of French voters’ current mood. 
At least in this respect, the exchange between Macron and his two impertinent interlocutors last week was highly enlightening. 
The self-declared representatives of French society’s deep frustration did not touch on European issues at all. 
They did so for a reason. 
Many French do not hold “Europe” (meaning the European Commission in Brussels) in high standing, and, as the 2005 referendum on a European constitution showed, that has been true for some time. 
So any vote based on the ideas sketched in Macron’s various speeches is unlikely to turn out favorably. 
In this context, Merkel’s insistence on the need to amend the Treaty on the European Union – which would require referenda in the member states – to establish Macron’s proposed European Monetary Fund is a barely hidden way of saying “Nein.” 
Macron’s commitment to disinterested dialogue, à la Habermas, is admirable. 
But unless and until he gets his hands as dirty with European politics as he seems willing to do for the sake of domestic French reforms, those dialogues will remain ephemeral, if not just plain hot air. 

The Limits to Green Growth 
BERLIN – In recent years, the push to build a “green economy” that can deliver the world from continual environmental and economic crisis and usher in a new era of sustainable growth has been gathering force. 
But the push has been a source of unexpected controversy, with many predicting little more than business as usual with a coat of green paint. 
Will reconciling environmental and economic imperatives be harder than we think? 
In a word, yes. 
The mainstream perception is that the green economy will enable us to break free from our dependence on fossil fuels, without sacrificing growth. 
Many argue that the shift to a green economy can even spur new growth. 
But, as appealing as this idea is, it is not realistic, as we show in our new book Inside the Green Economy. 
To be sure, it is possible for a genuinely “green” economy to be prosperous. 
But the model that prevails today focuses on quick and easy solutions. 
Moreover, it reasserts the primacy of economics, thereby failing to recognize the depth of the transformation that is required. 
Instead of rethinking our economies with a view to adapting their functioning to environmental limits and imperatives, today’s green economy seeks to redefine nature, in order to adapt it to existing economic systems. 
We now attach a monetary value to nature and add it to our balance sheets, with the protection of “natural capital,” such as ecosystem services, offsetting environmental degradation, gauged by the global abstract currency of carbon metrics. 
New market-based mechanisms, such as the trading of biodiversity credits, exemplify this approach. 
None of this prevents the destruction of nature; it simply reorganizes that destruction along market lines. 
As a result of this narrow approach, current conceptions of the green economy have so many blind spots that the entire enterprise should be regarded as largely a matter of faith. 
The most powerful talisman is technological innovation, which justifies simply waiting for a cure-all invention to come along. 
But, though new ideas and innovations are obviously vital to address complex challenges, environmental or otherwise, they are neither automatic nor inevitable. 
Innovation, particularly technological innovation, is always shaped by its protagonists’ interests and activities, so it must be judged in its social, cultural, and environmental context. 
If the relevant actors are not working to champion transformative technologies, the results of innovation can reinforce the status quo, often by extending the life of products and systems that are not fit to address society’s needs. 
Consider the automotive industry. 
Though it produces increasingly fuel-efficient engines, it puts them in larger, more powerful, and heavier vehicles than ever before, eating up efficiency gains through the so-called “rebound effect.” 
And it faces the temptation to spend more energy learning to manipulate emissions readings, as Volkswagen did, than on developing genuinely “green” vehicles. 
Biofuels are not the answer, either. 
In fact, the use of biomass wreaks ecological and social havoc in developing economies, while de facto extending the lifetime of an obsolete combustion technology. 
Clearly, the automotive industry cannot be blindly trusted to spearhead the radical reorganization, away from private vehicles, that is needed in the transport sector. 
And that is exactly the point. 
If we are to decouple economic growth from energy consumption and achieve real resource efficiency in a world of nine billion, much less ensure justice for all, we cannot let the economy lead the way. 
Instead, we must view the green transformation as a political task. 
Only a political approach can manage, through genuinely representative institutions, differences of opinion and interest, guided by the kind of open debate, engaging civil society, that is vital to a pluralistic democracy. 
Of course, not all countries are pluralistic democracies. 
In many that aren’t (and even in some that claim to be), those who campaign for a more socially, economically, and ecologically equitable world face severe repression. 
If they are to fulfill their indispensable role in driving forward the transformation that is needed, democratic countries must put respect for basic human rights, such as freedom of speech and peaceful assembly, at the top of their foreign-policy agendas. 
These basic rights are the normative foundation upon which transformative strategies will have to be negotiated. 
After all, the biggest obstacle to the socio-ecological transformation that the world needs is not, in the end, technological; much of what is required, from organic farming to networked mobility systems that don’t rely on private vehicles, is already within reach. 
The real problem is the lack of political will to implement and scale up those innovations opposed by vested economic interests. 
The challenge is thus to overcome these minority interests and ensure the protection of the broader public good – a task that is often left to civil society. 
Some might argue that calling for radical transformation, rather than incremental change, is inappropriate. 
At a time when the world faces so many pressing challenges, from economic stagnation to political upheaval to massive refugee flows, any progress toward sustainability should be viewed as a victory. 
Pragmatic, politically feasible solutions to the environmental crisis should be celebrated, not criticized. 
But this view implicitly underestimates the seriousness of the environmental crisis that the world faces, and assumes linear change when the needed transformation will be non-linear. 
While some features of the green economy – resource conservation, the transition to renewable energies, specific technological innovations, and effective economic incentives, such as taxes – are undeniably important, they do not add up to the large-scale change needed to protect the interests of present and future generations. 
The task that the world’s democracies face today is to continue the project of modernity, embracing the latest knowledge about planetary boundaries, while advancing broad democratic participation and reducing poverty and social injustice. 
This is no small undertaking, and requires passion and tenacity. 
But it is not beyond our capacity. 
The first step is to recognize the constraints that the “green economy” places on thought and action. 


The Two Rabbits of International Trade 
SEOUL – If you chase two rabbits at once, the old saying goes, both will escape. 
And yet this is precisely what many governments are required to do: pursue both growth and distributional fairness. 
The two objectives, though not incompatible, are entirely different from one another, and few policy tools can simultaneously help to achieve both. 
This idea matters a lot in trade policy. 
Much theoretical and empirical research demonstrates that opening trade can spur a country’s GDP growth. 
But increasing a pie’s size does not guarantee that it will be shared fairly. 
Often, the incremental growth that comes with a trade opening is unevenly shared; moreover, in many cases, some receive a smaller share than they did before. 
Here is where government must intervene using its traditional tools, taxation and redistribution, as well as complementary policies such as social safety nets and adjustment assistance. 
Similarly, from a global perspective, opening trade can contribute to the world’s overall economic growth, but does not guarantee that the benefits will be fairly distributed among countries. 
Some say that no country loses, in absolute terms, from opening trade; otherwise, they would not participate in free-trade deals. 
Still, the uneven distribution of the benefits created by a global trade opening means that some countries, especially the least developed, gain little in comparative terms, and are possibly even hurt. 
This explains growing concern about the role of trade in development, despite the obvious fact that increased global trade has lifted hundreds of millions of people out of poverty in recent decades. 
Unlike individual countries, there is no central authority that can enforce redistribution of wealth around the globe, so the problem of fairness must be addressed through the development mandates embedded in trade negotiations. 
A key aspect of these development concerns is identifying the appropriate balance in any trade agreement. 
“Special and differential treatment” is the technical term used in trade negotiations to indicate that the balance must be tilted toward developing countries, with the extent of this treatment to be decided by the parties to the talks. 
But, while the tendency in current trade negotiations to allow developing countries to open their markets less than others helps to achieve more balance, it may undermine the original goals of enhancing efficiency and boosting growth. 
Furthermore, it fails to encourage more South-South trade. 
And, in the end, this focus on the defensive side of trade liberalization makes negotiations more difficult. 
For example, one of the critical issues blocking progress on the World Trade Organization’s Doha Development Agenda of global free-trade talks centers on the extent to which major developing countries should open their markets. 
A better method of seeking balance is to give developing countries greater access to global markets, including those of other developing countries. 
Yet, as of now, there is neither the will nor the energy to adopt this approach. 
And, for developing countries that lack supply-side capacity, greater access to the global market is a moot point, as they remain far from even considering what size their share of it should be. 
This raises another concern. 
Because “aid for trade” – assistance for developing countries that aims to ease their trade-related constraints – takes the form of financial support, a practical issue is whether donors can maintain their level of funding, given today’s economic difficulties. 
Moreover, an intrinsic and often neglected problem is how to divide management of aid-and-trade schemes among international and domestic institutions. 
Among the major multilateral institutions, the WTO maintains jurisdiction over trade. 
It is the World Bank and the International Monetary Fund that are better equipped to deal with aid issues. 
Within member governments, relations with the WTO are usually the responsibility of the trade or foreign ministry, while multilateral financial institutions, including the regional development banks, are generally the responsibility of the finance ministry. 
Thus, aid for trade, one of the key tasks on the WTO agenda, has weak institutional links to trade negotiations. 
In fact, it might be more accurate to say that it is wholly separate. 
The practicable solution is more effective coordination among the relevant institutions. 
The Marrakesh Agreement, which established the WTO as the successor to the General Agreement on Tariffs and Trade in 1994, sets out the purpose of achieving greater coherence between the WTO and other international agencies. 
One particularly noteworthy initiative is the Enhanced Integrated Framework for least-developed countries, which encompasses extensive engagement and coordination among partner agencies, including the IMF, the United Nations Conference on Trade and Development, the World Bank, and the WTO. 
A more ambitious approach would be to link aid and trade explicitly. 
A concrete funding mechanism in trade agreements warrants serious consideration, particularly in areas such as the WTO’s trade-facilitation negotiations, where capacity-building in developing countries is a key issue. 
Nonetheless, requiring donations from member countries would be a step in the wrong direction; the WTO is not an aid agency. 
Rather, WTO trade agreements could establish effective links with multilateral and regional development banks, thereby helping to realize the principle of closer international coordination set out in the Marrakesh Agreement. 
The two rabbits of international trade can be caught. 
But doing so requires innovative approaches that help to ensure that trade serves developing countries, rather than vice versa. 

The Liquidity Time Bomb 
NEW YORK – A paradox has emerged in the financial markets of the advanced economies since the 2008 global financial crisis. 
Unconventional monetary policies have created a massive overhang of liquidity. 
But a series of recent shocks suggests that macro liquidity has become linked with severe market illiquidity. 
Policy interest rates are near zero (and sometimes below it) in most advanced economies, and the monetary base (money created by central banks in the form of cash and liquid commercial-bank reserves) has soared – doubling, tripling, and, in the United States, quadrupling relative to the pre-crisis period. 
This has kept short- and long-term interest rates low (and even negative in some cases, such as Europe and Japan), reduced the volatility of bond markets, and lifted many asset prices (including equities, real estate, and fixed-income private- and public-sector bonds). 
And yet investors have reason to be concerned. 
Their fears started with the “flash crash” of May 2010, when, in a matter of 30 minutes, major US stock indices fell by almost 10%, before recovering rapidly. 
Then came the “taper tantrum” in the spring of 2013, when US long-term interest rates shot up by 100 basis points after then-Fed Chairman Ben Bernanke hinted at an end to the Fed’s monthly purchases of long-term securities. 
Likewise, in October 2014, US Treasury yields plummeted by almost 40 basis points in minutes, which statisticians argue should occur only once in three billion years. 
The latest episode came just last month, when, in the space of a few days, ten-year German bond yields went from five basis points to almost 80. 
These events have fueled fears that, even very deep and liquid markets – such as US stocks and government bonds in the US and Germany – may not be liquid enough. 
So what accounts for the combination of macro liquidity and market illiquidity? 
For starters, in equity markets, high-frequency traders (HFTs), who use algorithmic computer programs to follow market trends, account for a larger share of transactions. 
This creates, no surprise, herding behavior. 
Indeed, trading in the US nowadays is concentrated at the beginning and the last hour of the trading day, when HFTs are most active; for the rest of the day, markets are illiquid, with few transactions. 
A second cause lies in the fact that fixed-income assets – such as government, corporate, and emerging-market bonds – are not traded in more liquid exchanges, as stocks are. 
Instead, they are traded mostly over the counter in illiquid markets. 
Third, not only is fixed income more illiquid, but now most of these instruments – which have grown enormously in number, owing to the mushrooming issuance of private and public debts before and after the financial crisis – are held in open-ended funds that allow investors to exit overnight. 
Imagine a bank that invests in illiquid assets but allows depositors to redeem their cash overnight: if a run on these funds occurs, the need to sell the illiquid assets can push their price very low very fast, in what is effectively a fire sale. 
Fourth, before the 2008 crisis, banks were market makers in fixed-income instruments. 
They held large inventories of these assets, thus providing liquidity and smoothing excess price volatility. 
But, with new regulations punishing such trading (via higher capital charges), banks and other financial institutions have reduced their market-making activity. 
So, in times of surprise that move bond prices and yields, the banks are not present to act as stabilizers. 
In short, though central banks’ creation of macro liquidity may keep bond yields low and reduce volatility, it has also led to crowded trades (herding on market trends, exacerbated by HFTs) and more investment in illiquid bond funds, while tighter regulation means that market makers are missing in action. 
As a result, when surprises occur – for example, the Fed signals an earlier-than-expected exit from zero interest rates, oil prices spike, or eurozone growth starts to pick up – the re-rating of stocks and especially bonds can be abrupt and dramatic: everyone caught in the same crowded trades needs to get out fast. 
Herding in the opposite direction occurs, but, because many investments are in illiquid funds and the traditional market makers who smoothed volatility are nowhere to be found, the sellers are forced into fire sales. 
This combination of macro liquidity and market illiquidity is a time bomb. 
So far, it has led only to volatile flash crashes and sudden changes in bond yields and stock prices. 
But, over time, the longer central banks create liquidity to suppress short-run volatility, the more they will feed price bubbles in equity, bond, and other asset markets. 
As more investors pile into overvalued, increasingly illiquid assets – such as bonds – the risk of a long-term crash increases. 
This is the paradoxical result of the policy response to the financial crisis. 
Macro liquidity is feeding booms and bubbles; but market illiquidity will eventually trigger a bust and collapse. 

What is Italy Saying? 
NEW YORK – The outcome of the Italian elections should send a clear message to Europe’s leaders: the austerity policies that they have pursued are being rejected by voters. 
The European project, as idealistic as it was, was always a top-down endeavor. 
But it is another matter altogether to encourage technocrats to run countries, seemingly circumventing democratic processes, and foist upon them policies that lead to widespread public misery. 
While Europe’s leaders shy away from the word, the reality is that much of the European Union is in depression. 
The loss of output in Italy since the beginning of the crisis is as great as it was in the 1930’s. 
Greece’s youth unemployment rate now exceeds 60%, and Spain’s is above 50%. 
With the destruction of human capital, Europe’s social fabric is tearing, and its future is being thrown into jeopardy. 
The economy’s doctors say that the patient must stay the course. 
Political leaders who suggest otherwise are labeled as populists. 
The reality, though, is that the cure is not working, and there is no hope that it will – that is, without being worse than the disease. 
Indeed, it will take a decade or more to recover the losses incurred in this austerity process. 
In short, it is neither populism nor shortsightedness that has led citizens to reject the policies that have been imposed on them. 
It is an understanding that these policies are deeply misguided. 
Europe’s talents and resources – its physical, human, and natural capital – are the same today as they were before the crisis began. 
The problem is that the prescriptions being imposed are leading to massive underutilization of these resources. 
Whatever Europe’s problem, a response that entails waste on this scale cannot be the solution. 
The simplistic diagnosis of Europe’s woes – that the crisis countries were living beyond their means – is clearly at least partly wrong. 
Spain and Ireland had fiscal surpluses and low debt/GDP ratios before the crisis. 
If Greece were the only problem, Europe could have handled it easily. 
An alternative set of well-discussed policies could work. 
Europe needs greater fiscal federalism, not just centralized oversight of national budgets. 
To be sure, Europe may not need the two-to-one ratio of federal to state spending found in the United States; but it clearly needs far more European-level expenditure, unlike the current miniscule EU budget (whittled down further by austerity advocates). 
A banking union, too, is needed. 
But it needs to be a real union, with common deposit insurance and common resolution procedures, as well as common supervision. 
There will also have to be Eurobonds, or an equivalent instrument. 
European leaders recognize that, without growth, debt burdens will continue to grow, and that austerity by itself is an anti-growth strategy. 
Yet years have gone by, and no growth strategy is on the table, though its components are well known: policies that address Europe’s internal imbalances and Germany’s huge external surplus, which now is on par with China’s (and more than twice as high relative to GDP). 
Concretely, that means wage increases in Germany and industrial policies that promote exports and productivity in Europe’s peripheral economies. 
What will not work, at least for most eurozone countries, is internal devaluation – that is, forcing down wages and prices – as this would increase the debt burden for households, firms, and governments (which overwhelmingly hold euro-denominated debts). 
And, with adjustments in different sectors occurring at different speeds, deflation would fuel massive distortions in the economy. 
If internal devaluation were the solution, the gold standard would not have been a problem in the Great Depression. 
Internal devaluation, combined with austerity and the single-market principle (which facilitates capital flight and the hemorrhaging of banking systems) is a toxic combination. 
The European project was, and is, a great political idea. 
It has the potential to promote both prosperity and peace. 
But, rather than enhancing solidarity within Europe, it is sowing seeds of discord within and between countries. 
Europe’s leaders repeatedly vow to do everything necessary to save the euro. 
European Central Bank President Mario Draghi’s promise to do “whatever it takes” has succeeded in providing a temporary calm. 
But Germany has consistently rejected every policy that would provide a long-term solution. 
The Germans, it seems, will do everything except what is needed. 
Of course, the Germans have reluctantly come to accept the necessity of a banking union that includes common deposit insurance. 
But the pace with which they accede to such reforms is out of kilter with the markets. 
Banking systems in several countries are already on life support. 
How many more will be in intensive care before a banking union becomes a reality? 
Yes, Europe needs structural reform, as austerity advocates insist. 
But it is structural reform of the eurozone’s institutional arrangements, not reforms within individual countries, that will have the greatest impact. 
Unless Europe is willing to make those reforms, it may have to let the euro die to save itself. 
The EU’s Economic and Monetary Union was a means to an end, not an end in itself. 
The European electorate seems to have recognized that, under current arrangements, the euro is undermining the very purposes for which it was supposedly created. 
That is the simple truth that Europe’s leaders have yet to grasp. 

Little Big Men 
CAMBRIDGE – History is often written in terms of military heroes, but the enormous potential of human leadership ranges from Attila the Hun to Mother Teresa. 
Most everyday leaders remain unheralded. 
The role of heroic leadership in war leads to overemphasis of command and control and hard military power. 
In America today, the presidential debate is between Senator John McCain, a war hero, and Senator Barack Obama, a former community organizer. 
The image of the warrior leader lingers in modern times. 
The writer Robert Kaplan points to the birth of a new “warrior class as cruel as ever and better armed” ranging from Russian Mafiosi and Latin American drug kingpins to terrorists who glorify violence just as ancient Greeks did in the sacking of Troy. 
Kaplan argues that modern leaders must respond in kind, and that modern leadership will demand a pagan ethos rooted in the past. 
Smart warriors, however, know how to lead with more than just the use of force. 
Soldiers sometimes joke that their job description is simple: “kill people and break things.” 
But, as the United States discovered in Iraq, hearts and minds also matter, and smart warriors need the soft power of attraction as well as the hard power of coercion. 
Indeed, an oversimplified image of warrior-style leadership in President George W. Bush’s first term caused costly setbacks for America’s role in the world. 
It is not a manly modern Achilles who makes the best warrior leader in today’s communication age. 
Military leadership today requires political and managerial skills. 
Many autocratic rulers – in Zimbabwe, Myanmar, Belarus, and elsewhere – still lead the old-fashioned way. 
They combine fear with corruption to maintain kleptocracies dominated by “the big man” and his coterie. 
A good portion of the world is ruled this way. 
Some theorists try to explain this with an “alpha male theory of leadership.” 
The psychiatrist Arnold M. Ludwig, for example, argues that just as male monkeys, chimps, or apes automatically begin to assume more responsibility for their particular community once they attain the dominant status of alpha male, human rulers do so as well. 
But such socio-biological explanations of leadership are of only limited value. 
Thus far, no leadership gene has been identified, and studies of identical and fraternal male twins find that only a third of their difference in occupying formal leadership roles can be explained by genetic factors. 
While this suggests that inbred characteristics influence the extent to which people play particular roles, it leaves a lot of room for learned behavior to influence outcomes. 
Even so, one effect of the traditional heroic warrior approach to leadership has been to support the belief that leaders are born rather than made, and that nature is more important than nurture. 
The search for the essential traits of a leader dominated the field of leadership studies until the late 1940’s, and remains common in popular discourse today. 
A tall handsome person enters a room, draws attention, and “looks like a leader.” 
Various studies show that tall men are often favored, and that corporate CEOs are taller than average. 
But some of the most powerful leaders in history, such as Napoleon, Stalin, and Deng Xiaoping were little over five feet tall. 
The traits-centered approach has not vanished from studies of leadership, but it has been broadened and made more flexible. 
Traits have come to be seen as consistent patterns of personality rather than inherited characteristics. 
This definition mixes nature and nurture, and means that “traits” can to some extent be learned rather than merely inherited. 
We talk about leaders being more energetic, more risk-taking, more optimistic, more persuasive, and more empathetic than other people. 
These traits, however, are affected partly by a leader’s genetic makeup and partly by the environments in which the traits were learned and developed. 
A persuasive experiment recently demonstrated the interaction between nature and nurture. 
A group of employers was asked to hire workers who had been ranked by their looks. 
If the employers saw only the resumés, beauty had no impact on hiring. 
Surprisingly, however, when telephone interviews were included in the process, beautiful people did better, even though they were unseen by the employers. 
A lifetime of social reinforcement based on their genetically given looks may have encoded into their voice patterns a tone of confidence that could be projected over the phone. 
Nature and nurture became thoroughly intertwined. 
Genetics and biology matter in human leadership, but they do not determine it in the way that the traditional heroic warrior approach to leadership suggests. 
The “big man” type of leader works in societies based on networks of tribal cultures that rely on personal and family honor and loyalty. 
But such social structures are not well adapted for coping with today’s complex information-based world. 
In modern societies, institutional constraints such as constitutions and impersonal legal systems circumscribe such heroic figures. 
Societies that rely on heroic leaders are slow to develop the civil society and broad social capital that are necessary for leading in a modern networked world. 
Modern leadership turns out to be less about who you are or how you were born than about what you have learned and what you do as part of a group. 
Nature and nurture intertwine, but nurture is much more important in the modern world than the heroic paradigm acknowledges. 
Modern information societies require us to go beyond the “big man” approach to leadership. 
It will be interesting to see how these classical stereotypes play out in the American presidential competition this year. 

Little England and Not-so-Great Britain 
AMSTERDAM – As an Anglo-Dutchman – British mother, Dutch father – I cannot help but take Brexit rather personally. 
I’m not a wholehearted Euro-enthusiast, but a European Union without Britain feels like losing a limb in a terrible accident. 
Not all my fellow citizens are unhappy. 
The Dutch anti-EU, anti-Muslim demagogue Geert Wilders tweeted: “Hurrah for the British! 
Now it is our turn.” 
This kind of sentiment is more alarming, and more ominous, than Brexit’s implications for the future of the British economy. 
The urge to destroy can be contagious. 
The United Kingdom’s image has changed literally overnight. 
For more than 200 years, Britain represented a certain ideal of liberty and tolerance (at least for many Europeans; Indians might have taken a somewhat different view). 
Anglophiles admired Britain for many reasons, including its relative openness to refugees from illiberal continental regimes. 
It was a place where a man of Sephardic Jewish origin, Benjamin Disraeli, could become Prime Minister. 
And it stood up to Hitler virtually alone in 1940. 
The Hungarian-born writer Arthur Koestler, a former Communist who knew all about European political catastrophes, and was almost executed by Spanish fascists, escaped to Britain in 1940. 
He called his adoptive country the “Davos for internally bruised veterans of the totalitarian age.” 
My generation, born not long after the war, grew up with myths based on truth, promoted in comic books and Hollywood movies: myths of Spitfires fighting Messerschmitts over the home counties, of Winston Churchill’s growling defiance, and Scottish bagpipers walking onto the beaches of Normandy. 
The image of Britain as a country of freedom was boosted further by the youth culture of the 1960s. 
Spitfire pilots were replaced as vigorous symbols of liberty by the Beatles, the Rolling Stones, and the Kinks, whose music swept across Europe and the United States like a gust of fresh air. 
Having a British mother filled me with a naive and undeserved sense of pride. 
For me, despite its industrial decline, shrinking global influence, and increasingly inept football, something about Britain always remained best. 
There were, of course, many reasons why 52% of those who voted backed the “Leave” campaign. 
There are reasonable grounds for victims of industrial decline to feel aggrieved. 
Neither the left nor the right looked after the interests of the old working class in busted mining towns, rusting ports, and decaying smokestack cities. 
When those left behind by globalization and London’s Big Bang complained that immigrants were making it even harder to find jobs, they were too easily dismissed as racists. 
But this cannot excuse an ugly strain of English nationalism, whipped up by Nigel Farage’s UK Independence Party and cynically exploited by the Conservative Party’s Brexiteers, led by former London Mayor Boris Johnson and Michael Gove, the justice secretary in Prime Minister David Cameron’s cabinet. 
English xenophobia has thrived especially in areas where foreigners are rarely seen. 
London, where most foreigners live, voted to remain in the EU by a wide margin. 
Rural Cornwall, which benefits hugely from EU subsidies, voted to leave. 
The most sickening irony for a European of my age and disposition lies in the way narrow-minded and dispiriting nationalism is so often expressed. 
Bigotry against immigrants is cloaked in the very symbols of freedom that we grew up admiring, including film clips of Spitfires and references to Churchill’s finest hour. 
The wilder Brexiteers – shaven heads, national flag tattoos – resemble the English football hooligans infesting European stadiums with their particular brand of violence. 
But the genteel ladies and gentlemen in the shires of Little England, cheering the lies of Farage and Johnson with the kind of ecstasy once reserved for British rock stars abroad, are no less disquieting. 
Many Brexiteers will say that there is no contradiction. 
The wartime symbols were not misplaced at all. 
To them, the argument for leaving the EU is no less about freedom than World War II was. 
“Brussels,” after all, is a dictatorship, they say, and the British – or, rather, the English – are standing up for democracy. 
Millions of Europeans, we are told, agree with them. 
It is indeed true that many Europeans take this view. 
But most are followers of Marine Le Pen, Geert Wilders, and other populist rabble-rousers, who promote plebiscites to undermine elected governments and abuse popular fears and resentments to clear their own paths to power. 
The EU is not a democracy; nor does it pretend to be one. 
But European decisions are still made by sovereign – and, more important, elected – national governments after endless deliberation. 
This process is often opaque and leaves much to be desired. 
But the liberties of Europeans will not be better served by blowing up the institutions that were carefully constructed in the ruins of the last calamitous European war. 
If Brexit triggers a Europe-wide revolt against liberal elites, it would be the first time in history that Britain leads a wave of illiberalism in Europe. 
This would be a great tragedy – for Britain, for Europe, and for a world in which most of the major powers already are turning toward increasingly illiberal politics. 
The final irony is that the last hope for turning this tide and preserving the freedoms for which so much blood was shed probably now lies with Germany, the country that my generation grew up hating as the symbol of bloody tyranny. 
But, so far at least, the Germans appear to have learned the lessons of history better than a disturbing number of Brits. 

Justice for Litvinenko 
LONDON – In 2006, Alexander Litvinenko, a former officer of Russia’s Federal Security Service (FSB), the KGB’s successor, was poisoned in London with radioactive polonium-210. 
For the last decade, his widow, Marina Litvinenko, has waged an uphill battle to get a measure of justice for her husband. 
Now, finally, she has prevailed. 
Litvinenko had to stand up not only to the Kremlin, which was accused of sending two agents to London to carry out the assassination, but also to the United Kingdom’s government, which was wary of spoiling its relationship with Russia. 
At one point three years ago, she stood in tears on the steps of the Royal Courts of Justice, where judges had refused to protect her from the potentially high legal costs if she failed to compel the government to hold an inquiry. 
But in the end, Litvinenko got her day – actually, 34 days – in court. 
And on January 21, Sir Robert Owen, chairman of the public inquiry, announced his verdict: It is “beyond doubt” that the FSB agents Andrei Lugovoi and Dmitry Kovtun carried out the assassination, which was “probably approved” by Russian President Vladimir Putin. 
The evidence against Lugovoi and Kovtun came mostly from the police file, which established a “polonium trail” left by the pair around London. 
Very high levels of contamination were noted, particularly in the lavatory next to the bar where Litvinenko drank the poisoned tea and in the two bathrooms in the hotel rooms where the assassins stayed. 
Litvinenko never visited any of these three places, where the assassins apparently disposed of the unused toxin. 
A witness testified that Kovtun had declared, before the hit, that he was on a mission to “kill a traitor” with “a very expensive poison.” 
The inquiry found that the assassins failed twice before fulfilling their mission. 
On October 16, with most of the radioactive material spilling onto the tablecloth, Litvinenko ingested only a small dose, and on October 26, all of the Po-210 spilled on the floor of Lugovoi’s hotel bathroom. 
Finally, on November 1, they managed to give Litvinenko the lethal dose, causing his death 22 days later. 
Though Po-210 obviously leaves a trail, it is difficult to detect unless one is looking for it, as it emanates rare alpha radiation, which is not readily detectable by conventional hospital and police equipment like Geiger counters. 
It was not until three weeks after the poisoning, just hours before his death, that Litvinenko was tested for alpha-emitters. 
As for the role of the Russian state, that evidence came from MI6, the British secret service, and was presented in a closed session of the inquiry. 
Although the evidence has not been made public, the Daily Telegraph reports that the US National Security Agency provided the British authorities with intercepts of electronic communications between the assassins and their handlers in Moscow. 
The argument implicating Putin comes from expert testimony that such an order could not have been issued without his approval. 
The obvious question is why. 
Here, Owen was less precise, listing several factors that could have put Litvinenko in Putin’s crosshairs, including his defection to the UK in 2000, his close relationship with Putin’s arch-enemy, Boris Berezovsky, and his allegations of FSB complicity in the terror bombings that propelled Putin to power in 1999. 
Litvinenko’s blog post calling Putin the “Kremlin pedophile” in response to the president’s bizarre decision to kiss an unknown boy’s stomach in full view of the world’s media could also have fueled the Kremlin���s ire. 
But the most plausible motive for the assassination relates to Litvinenko’s plan to testify about Putin’s ties to Spain-based Russian organized crime – ties that dated back to the 1990s, when Putin was Deputy Mayor of St. Petersburg. 
With Litvinenko scheduled to provide official evidence to a prosecutor in Madrid just one week after his poisoning, the apparent haste and persistence of Lugovoi and Kovtun is easy to understand. 
Had he made it to Madrid, Litvinenko’s deposition would have focused on the business connections between the bosses of the so-called Tambov crime syndicate and members of Putin’s inner circle. 
It is these Putin cronies who now face targeted sanctions by the United States and the European Union over Russia’s recent adventures in Ukraine. 
Their illicit enrichment is reflected in a recent statement by the White House that they consider Putin “corrupt.” 
Not surprisingly, the Kremlin has lashed out at the White House for the accusations, just as it has at the UK government for the Litvinenko inquiry, whose findings, though “a joke,” would “poison” Britain’s relationship with Russia. 
As usual, the Kremlin is attempting to avoid accountability by spewing disinformation and claiming that the West is persecuting Russia. 
State-controlled media even offered an alternate (and utterly baseless) theory: Litvinenko was “accidentally poisoned” while handling polonium for MI6. 
In Litvinenko’s case, the accused are unlikely to face many real-world consequences. 
Putin is immune from any kind of prosecution, and he refuses to extradite Lugovoi and Kovtun to face murder charges. 
The UK’s response has included granting Marina Litvinenko a closed-door meeting with Home Secretary Theresa May and freezing the suspects’ assets. 
But, while Prime Minister David Cameron condemned the killing, he also spoke of keeping lines of communication open because the UK “needs Russia” for a settlement in Syria. 
As a result, the punishment will not fit the crime. 
Nonetheless, the importance of revealing the truth cannot be overestimated – not just for the sake of the victim, but also to make clear what Putin’s regime is capable of doing. 
This case –the first-ever terrorist attack in a Western capital using a radioactive weapon – will be remembered as a hallmark of Putin’s ruthless and corrupt reign. 

Did Liu Xiaobo Die for Nothing? 
HONG KONG – The relatively sudden death of Liu Xiaobo, the imprisoned Chinese dissident and Nobel Peace Prize laureate, amounted to a great loss. 
It also sent a strong message: the Chinese Communist Party (CCP) leadership is committed to defending its political monopoly by any means and at any cost. 
The 61-year-old Liu, a former literary critic and high-profile champion of human rights and non-violent resistance, spent the last eight years of his life behind bars on trumped-up charges of “subversion.” 
His real offense was to call for democracy in China. 
Even before his imprisonment, he faced constant police surveillance and harassment. 
When he was awarded the Nobel in 2010, the Chinese authorities not only prevented his family from traveling to Oslo to accept the prize; they placed his wife under house arrest. 
The Chinese government’s final affront against Liu came last month, when it denied his request to receive treatment for advanced liver cancer. 
It was an act of senseless cruelty – one that led to Liu’s death, in police custody, barely a month after he received his diagnosis. 
The last time a Nobel laureate met such a fate was in 1938, when the German pacifist Carl von Ossietzky died in Nazi detention. 
It might seem inexplicable that China, which has spent a fortune in recent years to project “soft power” abroad, would be willing to place itself in such company. 
But, as much as they aspire to a leading role on the world stage, China’s leaders want to suppress dissent even more. 
And they probably expected little reaction from Western democracies, many of which are now in disarray. 
So far, that calculation seems to have been correct. 
The authorities’ mistreatment of a revered advocate for human rights and democracy elicited some grumblings in Western capitals, with leaders like German Chancellor Angela Merkel lamenting the death of a “courageous fighter.” 
But no major Western leader has publicly denounced the Chinese government’s conduct. 
Moreover, by denying Liu’s dying wish to live his final days in freedom abroad, the government avoided an embarrassing spectacle: a public funeral for Liu attended by tens of thousands of his supporters and admirers. 
Liu’s tomb would have become a political monument, an eternal symbol of defiance against autocratic rule. 
Meanwhile, China’s censors have worked overtime to ensure that Liu’s death is a non-event. 
The Chinese regime could have withstood such embarrassment, just as it could have survived an international uproar. 
The CCP remains a political behemoth, with nearly 90 million members, and its capacity to defend its power is vast. 
Decades of rising living standards have boosted the CCP’s legitimacy to an extent few could have imagined back in 1989, when Liu first rose to prominence at the Tiananmen Square protests. 
But the CCP regime is far from invincible. 
On the contrary, it suffers from some fundamental weaknesses – beginning at the highest level of government. 
Under President Xi Jinping, the “collective leadership” that has prevailed since the death of Mao Zedong has increasingly been replaced by strongman rule. 
Xi’s political purge, conducted as an anti-corruption campaign, has lately been reinvigorated, leaving the rank and file of the party-state demoralized by the disappearance of their perks and fearful of becoming the next target. 
As the unity of the political elite erodes, the regime becomes increasingly fragile. 
Slowing income growth is undermining the regime further. 
The promise of rising material prosperity forms the foundation of the CCP’s claim to legitimacy. 
Yet the investment-driven growth model that has enabled China’s economic miracle over the last 30 years has run its course. 
The backlash against globalization in recent years, reflected in Brexit and the election of US President Donald Trump, introduces an additional element of uncertainty to China’s economic future. 
China’s leaders may be attempting to shift toward domestic consumption-led growth, but the reality is that the economy remains heavily dependent on exports. 
If protectionism takes hold in China’s key overseas markets, the country’s economic prospects – and thus the CCP’s legitimacy – could quickly decline. 
Ironically, as decades of economic growth strengthened the CCP’s position, rising prosperity also created favorable structural conditions for a democratic transition. 
In fact, China has already reached the per capita income level at which nearly all autocracies in non-oil producing states fall from power. 
Of course, when economic growth falters, as is now the case, the CCP can turn to ruthless repression and appeals to nationalism to fend off challenges to its hold on power. 
But the effectiveness of such an approach is limited. 
The economic and moral costs of escalating repression would eventually lead to domestic turmoil that not even the world’s most powerful one-party state could conceal. 
Against this background, it seems clear that, far from a sign of strength, the Chinese regime’s mistreatment of Liu amounted to an indication of its weakness, insecurity, and fear. 
At some point, probably within the next two decades, the combination of internal rot and external pressure from a population demanding freedom will bring down one-party rule in China – and, one hopes, usher in the kind of open society that Liu fought for all his life. 

Live Earth, Deaf to Reality 
The organizers of next Saturday’s Live Earth concerts hope that the entire world will hear a crystal clear message: climate change is the most critical threat facing the planet. 
Planned by former US Vice President Al Gore, Live Earth will be the biggest, most mass-marketed show of celebrity activism in history. 
But making global warming the world’s top priority means that we shuffle other major challenges down our “to do” list. 
Some climate change activists actually acknowledge this: Australian author Tim Flannery recently told an interviewer that climate change is “the only issue we should worry about for the next decade.” 
Tell that to the four million people starving to death, to the three million victims of HIV/AIDS, or to the billions of people who lack access to clean drinking water. 
Human-caused climate change deserves attention – and it has gotten it, thanks to Gore, Flannery, and others. 
Even before a single note has been played in the “awareness-raising” concerts, much of the developed world believes that global warming is the planet’s biggest problem. 
Yet, the world faces many other vast challenges. 
Whether we like it or not, we have limited money and a limited attention span for global causes. 
We should focus first on achieving the most good for the most people. 
The Copenhagen Consensus project brought together top-class thinkers, including four Nobel Laureate economists, to examine what we could achieve with a $50 billion investment designed to “do good” for the planet. 
They examined the best research available and concluded that projects requiring a relatively small investment – getting micro-nutrients to those suffering from malnutrition, providing more resources for HIV/AIDS prevention, making a proper effort to get drinking water to those who lack it – would do far more good than the billions of dollars we could spend reducing carbon emissions to combat climate change. 
Carbon reduction activists argue that focusing exclusively on climate change will bring many benefits. 
They point out, for example, that malaria deaths will climb along with temperatures, because potentially killer mosquitoes thrive in warmer areas. 
And they would be right. 
But it’s not as simple as the bumper sticker slogan “Fight climate change and ward off malaria.” 
If America and Australia are somehow inspired by the Live Earth concerts to sign the Kyoto Protocol, temperatures would rise by slightly less. 
The number of people at risk of malaria would be reduced by about 0.2% by 2085. 
Yet the cost of the Kyoto Protocol would be a staggering $180 billion a year. 
In other words, climate change campaigners believe we should spend $180 billion to save just 1,000 lives a year. 
For much less money, we could save 850,000 lives each and every year. 
We know that dissemination of mosquito nets and malaria prevention programs could cut malaria incidence in half by 2015 for about $3 billion annually – less than 2% of the cost of Kyoto. 
The choice is stark. 
Some will argue that the real problem is that the Kyoto Protocol isn’t strong enough. 
But, as I point out in my forthcoming book Cool It, even if we could stop global warming right now – which is impossible – we could reduce malaria infections by only 3.2% by 2085. 
Should we not worry more about the 100% infected now, whom we can help much better, more cheaply, and with much greater effect? 
When we look at the evidence, we discover again and again that the best solutions to the world’s biggest challenges aren’t the ones we hear about the most. 
We could save many more lives during extreme weather events, for example, by insisting on hurricane-resistant building standards than we would by committing to Live Earth’s target of a 90% reduction in carbon emissions by 2050. 
This would be easier, much less costly, and ultimately do far more good. 
Indeed, the Copenhagen Consensus experts discovered that for every dollar invested in Kyoto-style battling climate change, we could do up to 120 times more good with in numerous other areas. 
It’s honorable that the Live Earth organizers are so concerned about the far-off future, but you have to wonder why there is so little concern about the much-worse present. 
I don’t want to stop anyone from caring about climate change, only to encourage a sense of perspective. 
There is a massive amount of good that we can do through practical, affordable approaches like HIV/AIDS education, malaria prevention, and the provision of micro-nutrients or clean water. 
This is the message I would like to ring out: we should focus on the best ideas first. 
This Saturday, unfortunately, that is not what we’ll hear. 

Live Long and Prosper 
Living a long time is one of our deepest wishes, and medical and economic progress offers the hope that it will be fulfilled. 
Some scientists say that the average human lifespan could reach 90 years or more by mid-century. 
But what if our wish is granted? 
What good is a longer life if we cannot maintain our standard of living? 
The fundamental difficulty in planning for enhanced longevity is that we do not know whether it will really happen. 
Life expectancy might well be only 80 years by mid-century – about where it is now in advanced countries – if medical progress is disappointing or is offset by new threats or hazards. 
If we make provisions for long lives that are cut short, we will have wasted huge amounts of precious economic resources. 
But if we fail to make provisions for lives that are longer, many elderly people will be condemned to poverty. 
The whole direction of any country’s economy depends on longevity. 
A huge number of elderly people would mean a lot of people wanting to live in certain locations, seeking certain kinds of living quarters, and consuming certain kinds of services. 
The types of corporations that will succeed, the buildings that are constructed, and the research and development that will be needed all depend on the demographics of demand. 
This is true of the global economy as well. 
In his 2005 book The Future for Investors , Jeremy Siegel argues that differences across countries in longevity will interact with differences in wealth levels to form a fundamental determinant of economic relations among countries. 
Trade flows may be driven substantially by longevity: countries expecting a relatively large number of elderly in the future should be running trade surpluses now and deficits later. 
Retired people need life annuities – contracts that offer a stable income stream for as long as they live – to insure against the risk of outliving their wealth. 
If there were no longevity risk – that is, if the probability of dying at each age in the future were reliably known – then pension funds could easily offer life annuities to large numbers of people by investing their assets in bonds of various maturities in order to pay out just the right amount each year. 
But pension funds cannot do this, because they risk running out of money if, on average, people turn out to live longer than expected. 
For people retiring at age 60, the difference between living to 80 and living to 90 is enormous: in the latter case, their pensions would have to pay benefits for 50% longer. 
As a result, private companies do not offer life annuities at attractive rates, because they cannot be reasonably sure that they can fulfill their promises unless they are significantly overcapitalized. 
Fortunately, financial markets are beginning to address longevity risk. 
In November 2004, the European Investment Bank (EIB), working with the private bank BNP Paribas, announced that it would issue the world’s first long-term longevity bond. 
The bonds, with a maturity of 25 years, pay out an annual sum of £50 million multiplied by the percentage of the English and Welsh male population aged 65 in 2003 that is still alive in a given year (subject to a slight data lag). 
For example, if 80% of the men are still alive ten years after issuance, the bonds will pay out £40 million. 
If only 40% of the men are still alive after twenty years, the bonds will pay out £20 million. 
BNP Paribas hoped to place the bonds with UK pension funds, but so far the issue has not been fully subscribed. 
Most of the likely buyers are slow to make up their minds, since trustees, fund managers, consultants, and employer sponsors must all become comfortable that the new concept is consistent with their fiduciary obligations. 
Moreover, it is not clear that the EIB can get further help from reinsurers in managing the risks it assumes by issuing such bonds because reinsurers do not yet see how they can fully hedge the risks involved. 
The slow launch of longevity bonds ultimately reflects a fundamental question: can we genuinely reduce the impact of longevity risk? 
If everyone is affected by longevity risk in the same way, then no matter what the price of a longevity bond, everyone should logically want to be on the same side of the contracts – all buyers at one price, all issuers at another. 
No difference means no market. 
But, in fact, we are not all affected by longevity risk in the same way. 
Life insurance companies, drug firms, businesses providing services for the elderly, and investors in retirement real estate would all benefit from increased longevity, while defined-benefit pension plans and annuity providers would lose. 
Less affluent individuals are also more threatened by longevity than those for whom living longer mainly means leaving a smaller inheritance to their children. Indeed, countries with higher birth rates are less exposed to longevity risk in the next half-century or so than countries with low birth rates. 
We thus need a large and liquid market for longevity risk so that these different groups can creatively share their risks with each other. 
In fact, creating such a market is the most important step we can take to address longevity risk, for we could then discover its true price, allowing myriad business decisions involving longevity to be made more efficiently. 
There is virtually no history of the price behavior of longevity bonds, so discovering their buyers and sellers, and the prices that clear the market, will take some time. 
But longevity bonds, while only experimental today, will eventually become vitally important to the world economy. 


Living in History 
LONDON – I recently took part in a public debate with Paul Keating, Australia’s former prime minister. 
He is an interesting man, a genuine intellectual driven by his inner demons both to flay those who pay insufficient credit to his transformational role in Australian politics and to expose what he regards as waffle and myths. 
This regularly engulfs him in controversy, but it can serve an educational purpose. 
Recently, for example, he denounced the idea that Australian sacrifices in the Gallipoli campaign of 1916 during World War I had somehow made and redeemed his nation. 
For him, Australian came of age later, at Kokoda, often called Australia’s Thermopylae, when a small group of young soldiers resisted the advance of Japanese army divisions that seemed set to take Port Moresby in Papua New Guinea and threaten the Australian continent. 
Keating believed that the fighting at Kokoda represented the real birth pains of an independent Australia, not some colonial appendage of Britain created to serve imperial purposes in the Far East. 
I would not dare to challenge the sensitivities of Australians about their own history. 
I like their country too much for that. 
But Keating’s remarks raise a general question about history that goes to the heart of the sense of identity that binds every community. 
Most countries fabricate at least some of their history; or they simply whitewash the bits that do not match their heroic idea of themselves. 
My own country, for example, invented much of what it means to be British in order to accommodate Scotland in the eighteenth century to the idea of rule from England, and to persuade the whole of the United Kingdom that it should not object to being ruled by German kings. 
For my entire adult life, Britain’s sense of its place in the world has been largely defined by Winston Churchill’s leadership during World War II and his views of our role in the world when that war was over. 
He and other political leaders were keen on a united Europe. 
But it was meant for others. 
Britain was not to be part of it. 
History had written a different role for us – sovereign, independent, detached from continental entanglements, and, if not an equal of America, then at least a senior, faithful adjutant. 
A little more sharp-eyed honesty about Britain’s real weight in the post-war world might have enabled us British to play a more central role in Europe’s affairs, molding the emerging European Union more closely to our own national interests. 
So, when you get history wrong, it can skew your own strategic choices. 
But, worse than that, blindness to what really happened in the past can distort the development of your society. 
Sooner or later, the healthiest societies face up to what they have been – good and bad – and grow in decency and self-confidence as a result. 
Germany has done that admirably. 
In the last couple of years, I have seen two painfully honest German films – “Downfall,” about the last days of Hitler, and “The Lives of Others,” about the operations of the former East Germany’s secret police (the Stasi). 
Since those dark days, Germany has developed as a healthy vibrant democracy. 
Others still have trouble confronting their own history. 
Russia stumbles over Stalin and his legacy of evil. 
China turns away from a reappraisal of Mao or an honest account of what happened at Tiananmen in 1989. Some Japanese still want to write or believe fairy tales about their pre-war and wartime history, which has hugely complicated Japan’s efforts to find a confident and lasting reconciliation with China. 
By contrast, consider the way France and Germany have buried the hatchet and learned to live in peace and trust. 
It is this extraordinary, historic act that made possible the reconstruction and successful development of Europe over the last half-century. 
There are at least three lessons to draw from these musings of a one-time university history student. 
First, history teaches you about today as well as yesterday. 
The English writer G.K. Chesterton once wrote, “The disadvantage of men not knowing the past is that they do not know the present.” 
Second, in order to understand how to cope with the problems that plague us – from terrorism to nuclear proliferation – it is sensible to know how and whence they emerged. 
Why are we faced today with worldwide economic blizzards? 
How do today’s problems compare with the 1929 financial crash and the depression that followed it? 
What does history tell us about the consequences of the protectionist response to those events? 
Finally, while nation states remain the basic building blocs in international affairs, and loyalty to your nation – patriotism – is a fine thing, crude nationalism can be deeply destructive. 
“My country right or wrong” is the parent of much misery. 
Rigorous historical enquiry can save us from blindness about who we are and what we can do. 
Historical debate is a sign of a healthy society. 
So three cheers for Keating, right or wrong. 

Living on a Volcano 
As I write this, violent clashes with the police have been going on for nearly two weeks in the suburbs of Paris and other French cities, with cars being set on fire at a rate of nearly 1,000 per night. 
Why is this happening? 
How far can it go? 
The existence of thousands of unemployed young people, without income or roots, idle and knowing only violence to express their quest for recognition, is not particularly French. 
Everyone remembers the Watts, Newark, and Detroit riots in the United States in the 1960’s, and the riots in Liverpool in the UK in the early 1980’s, as well as in Bradford, Oldham, and Burnley in recent years. 
Likewise, France witnessed riots in Vaux-en-Velin, near Lyon, 20 years ago. 
So it is important to distinguish what is common to many developed countries and what is specific to France. 
All the developed economies have undergone profound changes over the last 30 years. 
We have gone from managerial to stockowner capitalism, from economies with large doses of state direction to far more deregulated markets, from the active and expansive social policies of the 1960s’ and 1970’s to a world in which such spending is constantly shrinking. 
Although wealth has been growing constantly – GDP has more than doubled in the last 50 years – the share of wages in the total has diminished by 10%, even while millions of the rich have become much richer. 
Everywhere, this has meant massive pauperization of the least favored part of the population. 
In rich countries, mass poverty, which seemed to have been eliminated around 1980, has reappeared. 
Access to good education, and even more so to the labor market, is increasingly restricted for many young people, especially those who come from poor or single-parent families or from minority ethnic backgrounds, languages, or religions. 
These people feel rejected and unrecognized. 
“Because they want to break us, we will break everything” is the motto that best expresses their mood. 
There are untold reservoirs of social violence in all of our lands. 
But against this shared background, France exhibits some important distinctive features. 
First, demography: for the last 50 years France has had much higher fertility rates than the rest of Europe – 1.9 children per woman, compared to the European average of 1.6 and the German or Spanish rates of 1.3. 
In Germany, every generation entering the labor market is smaller than the one exiting it. 
In France, by contrast, 200,000 to 300,000 more people enter the labor market than leave it in each generation – and this does not include immigration, which, although slowing recently, represents a large number of job seekers. 
As rates of economic growth have declined, this has meant growing unemployment. 
Then there is geography: France’s massive urban concentration around the capital – Paris and its suburbs contain nearly 20% of the population – is unique in Europe. 
The sheer number of confused and disoriented young people has overwhelmed the French system’s capacity to integrate them – even though its capacity in this regard is, in fact, impressive. 
Indeed, France has opened its public educational system to an extraordinary degree, refusing all group rights to minorities, but vigorously affirming personal rights, including full access to all social services, regardless of language, religion, or skin color. 
The system is cracking, but only because of the limits of its absorptive capacity, not because of its core principles. 
In these circumstances, every French politician has known for the last 20 years that France has been living with a growing risk that isolated incidents might coalesce into a critical mass of violence. 
The task of social workers and police, therefore, is to try to resolve – quickly and discreetly – each particular incident, in order to dampen the revolt. 
What needs to be done also has been well known since 20 years ago, when a nonpartisan report by a cross-party group of big-city mayors unanimously agreed on measures to be taken: efficient repression, highly developed social prevention, a permanent local police presence, and a renewed effort at reintegrating delinquents. 
The difficulty with implementing this policy has been that its preventive aspects – social support and reintegration of delinquents – appear to the frightened population living in the affected areas as being “soft on crime” and overly generous. 
But for the past three years, France has had a government that no longer believes that a socially oriented urban policy works. 
It believes only in repression and says so openly. 
As a result, local police forces have been reduced from 20,000 to 11,000, while the national riot police (CRS) have been reinforced. 
France is now experiencing a practical demonstration of this insane and totally inefficient policy, with the Minister of the Interior, Nicolas Sarkozy, providing a telling illustration of the new orientation when he described the rebellious young as “scum.” 
It was the proverbial match thrown by a careless smoker into a parched forest. 
The young responded with a vengeance to Sarkozy’s provocation. 
The main risk now is that events in the suburbs of large French cities will serve as an example to other young people, whether in the less urban areas of France or in other European countries, who feel socially excluded and are, perhaps, just as prone to violent outbursts. 
Solving the problems underlying the French revolt will require time, discretion, mutual respect, community-based social and police work – rather than a centralized, repressive approach – and a lot of money. 
But France is by no means the only country that should be worried. 

Living Under Occupation 
by Ralf Dahrendorf 
When I hear Americans such as US National Security Adviser Condoleeza Rice compare the occupation of Iraq with that of Germany (and sometimes Japan) after WWII, distant memories flood in, for I am a child of that experience. 
Indeed, in the twelve months following the unconditional surrender of Hitler's Nazi regime in May 1945, I lived under serial Russian, American, and British occupation. 
Sometimes I think of myself as an expert in comparative occupation studies. 
The first conclusion I draw from such experience is this: everything depends on who the occupying power is. 
When Soviet troops invaded Berlin at the end of April 1945 many of us went into the streets to welcome them. 
Such enthusiasm did not last long. 
One day, Red Army tanks turned from the main street in our quarter towards the crowd. 
When the crowd dispersed, the soldiers started looting, raping, and pillaging. 
This continued for only a few days, but fear of the occupying Soviets never left even as they began to distribute food and set up a rudimentary administration. 
It soon became clear that they were in fact creating another dictatorship in place of the one they had removed. 
In July, when Americans replaced the Soviets in our Berlin district, this changed. 
True, my beloved wristwatch (which I had miraculously saved throughout the weeks of Soviet occupation) was taken from me by an American soldier on my way home from school. 
But it soon became clear that this occupation held out hope of a better future. 
This was even more evident when a few months later my family moved from Berlin to Hamburg, then under British occupation. 
Suddenly, non-fraternization with Germans--the American rule--was replaced by frequent contacts aimed at re-education, especially of the young. 
In those months, the seeds of my conversion to all things British were planted, which flowered decades later in my becoming a British citizen. 
Such differences matter no less in Iraq today, and have done so from the first days of the occupation, when the British took Basra and the Americans Baghdad. 
But another difference is even more important. 
When Germany was occupied, the old regime's defeat was total, utterly beyond dispute. 
After five and a half years of war no one doubted the inevitability of occupation. 
That was different after Germany's Blitzkrieg against Poland. 
When my school was sent to the Polish spa in the town of Zakopane, we were obviously enemies, unwanted in every respect. 
Soon a quarantine was imposed to prevent us from misbehaving towards the local people and, above all, to protect us from their wrath. 
I can still feel, with shame, the sense of being not only unwanted but of being an illegitimate invader in a proud country. 
It could be argued that the Iraq war was too short, certainly too short for Iraqis to feel, as we Germans did, that the occupation was inevitable and bound to last for a long time. 
While Iraqis may be pleased to be rid of a murderous regime, they had little time to get accustomed to the notion of being an occupied country. 
In Germany, we thought for a while that the occupation would last forever, and that we perhaps deserved no better. 
I doubt whether many Iraqis share that feeling. 
But the most important aspect of the German experience was the sense of where the occupation would lead. 
In the old Soviet zone, it soon became clear that it would lead to a totalitarian satellite regime. 
Those who could left the Soviet zone and settled in the West; those who could not faced the sullen existence of subjects rather than citizens. 
In the Western zones, a different set of expectations soon prevailed. 
As the occupying armies were replaced by civilian officials as administrators, and Germans were recruited to help them, the silver lining of Western democracy became more and more noticeable. 
Again, differences mattered. 
In the French zone (so I learned later), the signs were less hopeful. 
More than that, there were hints of a desire for annexation, with the Saar region actually separated from Germany for a time. 
In the American zone the process was slower and controls were stricter than in the British zone, where local politicians were soon entrusted with power. 
On the other hand, economic life flourished earlier in the American zone, whereas the British tried to extract direct benefits by, for example, dismantling steel works and bringing the parts to Britain. 
In retrospect, that turned out to be a blessing for Germany. 
A reviving Germany built modern factories, whereas the occupiers were saddled with old ones. 
But Germany revived because the Western occupation forces made clear their intention to let it do so, and helped indigenous forces on their way. 
After initial uncertainties, there was soon a clear and widely recognised vision of where the country should go. 
Western Germany's occupation forces not only set an example of how this vision could be achieved, but found the right people and the right institutions to bring about reconstruction and progress. 
In principle, this can be accomplished elsewhere. 
In practice however, one cannot help wondering whether the German experience resulted from a unique set of circumstances, or at any rate one not easily reproduced under the vastly different conditions of today's Iraq. 

Living with Insecurity 
I have often wondered why Karl Popper ended the dramatic peroration of the first volume of his Open Society and Its Enemies with the sentence: "We must go on into the unknown, the uncertain and insecure, using what reason we have to plan for both security and freedom." 
Is not freedom enough? 
Why put security on the same level as that supreme value? 
Then one remembers that Popper was writing in the final years of World War II. 
Looking around the world in 2004, you begin to understand Popper's motive: freedom always means living with risk, but without security, risk means only threats, not opportunities. 
Examples abound. 
Things in Iraq may not be as bad as the daily news of bomb attacks make events there sound; but it is clear that there will be no lasting progress towards a liberal order in that country without basic security. 
Afghanistan's story is even more complex, though the same is true there. 
But who provides security, and how? 
In Europe and the West, there is the string of terrorist acts - from those on the US in 2001 to the pre-election bombings in Madrid - to think about. 
London's Mayor and police chief have jointly warned that terrorist attacks in the city are "inevitable." 
Almost every day there are new warnings, with heavily armed policemen in the streets, concrete barriers appearing in front of embassies and public buildings, stricter controls at airports and elsewhere - each a daily reminder of the insecurity that surrounds us. 
Nor is it only bombs that add to life's general uncertainties. 
Gradually, awareness is setting in that global warming is not just a gloom and doom fantasy. 
Social changes add to such insecurities. 
All at once we seem to hear two demographic time-bombs ticking: the continuing population explosion in parts of the third world, and the astonishing rate of aging in the first world. 
What will this mean for social policy? 
How will mass migration affect countries' cultural heritage? 
There is also a widespread sense of economic insecurity. 
No sooner is an upturn announced than it falters. 
At any rate, employment seems to have become decoupled from growth. 
Millions worry about their jobs - and thus the quality of their lives - in addition to fearing for their personal security. 
Such examples serve to show that the most disquieting aspect of today's insecurity may well be the diversity of its sources, and that there are no clear explanations and simple solutions. 
Even a formula like "war on terror" simplifies a more complex phenomenon. 
So what should we do? 
Perhaps we should look at Popper again and remember his advice: to use what reason we have to tackle our insecurities. 
In many cases this requires drastic measures, particularly insofar as our physical security is concerned. 
But while it is hard to deny that such measures are necessary, it is no less necessary to remember the other half of the phrase: "security and freedom." 
Checks on security measures that curtail the freedoms that give our lives dignity are as imperative as protection. 
Such checks can take many forms. 
One is to make all such measures temporary by giving these new laws and regulations "sunset clauses" that limit their duration. 
Security must not become a pretext for the suspending and destroying the liberal order. 
A second requirement is that we look ahead more effectively. 
It is not necessary for us to wait for great catastrophes to occur if we can see them coming. 
Holland does not have to sink into the North Sea before we do something about the world's climate; pensions do not have to decline to near-zero before social policies are adjusted. 
A third need is to preserve, and in many cases to recreate, what one might call islands of security. 
Globalization must become "glo c alization": there is value in the relative certainties of local communities, small companies, human associations. 
Such islands are not sheltered and protected spaces, but models for others. 
They prove that up to a point security can be provided without loss of freedom. 
There remains the most fundamental issue of attitude. 
It is debatable whether governments should ever frighten their citizens by painting the horror scenario of "inevitable" attack. 
The truth - to quote Popper again - is that "we must go on into the unknown, the uncertain and insecure," come what may. 
Today's instabilities may be unusually varied and severe, but human life is one of ceaseless uncertainty at all times. 
Such uncertainty can lead to a frozen state of near-entropy. 
More frequently, uncertainty leads to someone claiming to know how to eliminate it - frequently through arbitrary powers that benefit but a few. 
False gods have always profited from a widespread sense of insecurity. 
Against them, an active effort to tackle the risks around us is the only answer. 
Perhaps we need a new Enlightenment to spread the confidence we need to live with insecurity in freedom. 

Anti-Semitism From the Left 
NEW YORK – The former London mayor and left-wing Labour politician Ken Livingstone has been suspended from his party for claiming that Hitler was a Zionist in the early 1930s. 
According to Livingstone, “before he went mad and ended up killing six million Jews,” Hitler had merely wanted to expel them from their own countries to Palestine. 
And that, supposedly, made him a Zionist. 
Historically, this is nonsense: Hitler never promoted Palestine as a Jewish state. 
And the implication that the Führer’s hatred of the Jews put him on the same side as Jews who wished to build their own state to escape from violent anti-Semitism is offensive, to say the least. 
But Livingstone was probably being sincere when he said in his defense that “a real anti-Semite doesn’t just hate the Jews in Israel, they hate their Jewish neighbor...It’s a physical loathing.” 
Hating Jews in Israel is fine, then, because they are “Zionists,” and the sentiment isn’t visceral. 
Jeremy Corbyn, the left-wing leader of Livingstone's party, was no doubt equally sincere when he said that anti-Semitism could not possibly be a problem on the left, because Labour has always been “anti-racist.” 
It is a common conceit among leftists in Europe that racial prejudice, including anti-Semitism, is a uniquely right-wing phenomenon. 
This probably goes back to the Dreyfus affair of the late nineteenth century. 
When the French army captain Alfred Dreyfus was falsely accused of treason in a rigged trial in 1894, French society was divided between mostly conservative anti-Dreyfusards and liberal defenders of the Jewish officer. 
The conservatives were often staunch Roman Catholics, who felt deeply uncomfortable with the secular French Republic, which they associated with liberals and Jews. 
Reactionary French anti-Semitism, however, reflected a wider trend in twentieth-century Europe. 
Blood-and-soil nationalists, right-wing Christians, fanatical anti-Bolshevists, and authoritarians obsessed with social order were often anti-Semitic. 
Jews fared best under leftist governments. 
This makes it easy to forget that a streak of anti-Semitism has always tainted the left as well. 
Stalin was of course notorious for persecuting Jews, or “rootless cosmopolitans” as he called them, whom he regarded as natural agents of capitalism and traitors to the Soviet Union. 
But well before Stalin, Karl Marx himself, although Jewish by birth, set the tone for a vicious type of anti-Semitism that infected the left, especially in France. 
It was Marx who wrote, “Money is the jealous God of Israel,” and that Hebrew was “the muse of stock exchange quotations.” 
Marx was not oblivious to the dangers of anti-Semitism. 
He simply thought they would go away once the worker’s paradise had been established. 
In this, he was clearly mistaken. 
When the state of Israel was founded in 1948, the Soviet Union and leftists in general were quite sympathetic. 
For several decades, socialists of Russian and Polish extraction dominated Israeli politics. 
Zionism was not yet regarded as a noxious form of racism, along with apartheid in South Africa. 
There was no need to “hate the Jews in Israel.” 
Things began to change in the early 1970s, after the occupation of the West Bank and other Arab territories. 
Two intifadas later, the Israeli left finally lost its grip, and the right took over. 
Israel became increasingly associated with the very things leftists had always opposed: colonialism, oppression of a minority, militarism, and chauvinism. 
For some people, it was perhaps a relief that they could hate Jews again, this time under the guise of high-minded principles. 
At the same time, and for much the same reasons, Israel became popular on the right. 
People who might have been fervent anti-Semites not so long ago are now great champions of Israel. 
They applaud the Israeli government’s tough line with the Palestinians. 
Israel, in a common right-wing view, is a bastion of “Judeo-Christian civilization” in the “war against Islam.” 
As the Dutch demagogue Geert Wilders once put it: “When the flag of Israel no longer flies over the walls of Jerusalem, the West will no longer be free.” 
It is remarkable how often the old anti-Semitic tropes turn up in the rhetoric of these cheerleaders for Israel. 
But this time it is Muslims, not Jews, who are the target. 
Muslims in the West, we are repeatedly told, can never be loyal citizens. 
They always stick to their own kind. 
They will lie to people outside their faith. 
They are naturally treacherous, a fifth column, bent on world domination. 
Their religion is incompatible with Western values. 
And so forth. 
The genuine threats coming from a violent revolutionary movement within the Islamic world can make such assertions seem plausible to many people. 
But, in most cases, they should be recognized for what they are: tired old prejudices meant to exclude an unpopular minority from mainstream society. 
Islamist violence only helps to boost the politics of hatred and fear. 
Many Western warriors in the so-called war against Islam are nothing but our modern-day anti-Dreyfusards. 
None of this excuses the vile language of Livingstone and others like him. 
Left-wing anti-Semitism is as toxic as the right-wing variety. 
But the role of Israel in Western political debate shows how prejudices can shift from one group to another, while the underlying sentiments remain exactly the same. 

Local Science for Large Disasters 
The earth produces a reliable stream of disasters. 
Some, like AIDS, are chronic; others, like earthquakes or hurricane Katrina, are sudden displays of natural force. 
In each case, it is expected that a well-financed relief effort will descend from a wealthier region. 
But importing assistance may not only be less effective; it might actually cause more damage in the long run. 
When a tsunami hits, the first impulse is to bring in First-World experts. 
Rescue is the initial priority, followed by ensuring food, shelter, and medical aid. 
It is just a matter of getting things done, and it must be done the most effective way, so the operations occur according to the institutional philosophies of donor countries. 
But siphoning the habits of one culture into another during a rebuilding process can trigger societal changes that are almost as damaging as the disaster itself, as happened in a small fishing villages in the Philippines in the late 1970’s. 
In 1978, Typhoon Rita wiped out the fleet of handmade wooden fishing boats in a group of sea-dependant Philippine communities. 
Relief was fast and effective, consisting first of subsistence aid, followed by “restoration” of the fishing fleet. 
The old boats, which rotted every few years, were replaced by modern fiberglass versions with small gasoline engines. 
At the time, this was touted as a textbook case of doing things right. 
The fishing economy rebounded and flourished – but only for about ten years. 
After that, the entire society collapsed. 
Over thousands of years, the culture had come to depend on the central role of boat builders. 
They were the anchor of society, acting in effect as priests, teachers, and judges. 
Subsistence flowed according to their goodwill and was supported by conventions of sharing and trust. 
After the relief effort, this complex human balance was replaced by a cash economy, and the power brokers became those who could dole out the rare, precious petrol. 
An entire culture was effectively destroyed by efficient relief. 
This scenario has been repeated over and over in diverse contexts. 
The first impulse is to solve problems in the most established manner. But, lacking sensitivity to local dynamics, the outcome is severely compromised. 
The solution seems simple: create and subsidize small science centers in regions at risk of disaster. 
The primary objective of these centers would be “normal” science, with missions and profiles that feed from their local context. 
At-risk regions would develop culturally appropriate ways to deal with the catastrophes most likely to affect them. 
In addition, local talent would be nurtured in its home context. 
This philosophy would benefit places like New Orleans as much as Phuket in Thailand. 
Indeed, while it might seem as though there would be no problem of cultural transposition in the case of Hurricane Katrina, an examination of the tragedy reveals otherwise. 
It has been overwhelmingly observed that the worst-hit people in New Orleans were poor African-Americans living in the city’s low-lying districts. 
To be sure, many of these inner-city residents simply lacked the resources to evacuate easily. 
But it is beginning to emerge that many also preferred to stay in a social environment that they trusted rather than fleeing to safer, but foreign, surroundings. 
Critics also cite the diversion of infrastructure funds and Louisiana National Guard troops to Iraq as contributing causes to the emergency. 
These factors clearly played a role, but, overall, if a body of scientifically inclined people from the inner city had been involved in flood control and evacuation planning, the consequences of hurricane Katrina would certainly have been managed more effectively. 
By contrast, the inappropriateness of transplanting troops from Iraq into an emergency rescue operation is obvious. 
The fight against AIDS – a battle that depends heavily on social modification – highlights in perhaps the clearest way the problems that always occur when local culture is ignored. 
Societal mechanisms simply cannot be adjusted without a crisp, practiced understanding of a culture. 
And this cannot be merely intuitive. 
It must be scientific, that is, based on the best methods and models. 
For this reason, there should be two points of contact during a catastrophe. 
Groups of critical thinkers – the “experts” – should be on hand to advise on how to avoid second-order disasters. 
Even though many of them might not have studied the local culture, they can nonetheless provide guidance that has been informed by the world’s most expensive infrastructure. 
At the same time, relief efforts should be managed by a local science center that is known and trusted by those in danger. 
The implications of this approach extend far beyond disaster relief. 
A robust scientific establishment is the root of any economy, and there will be no real development in the Third World without it. 
An investment in local science is therefore a direct infusion into a community’s growth potential, one that eventually will reward investors with new breakthroughs. 
After all, nothing is better for innovation than a scientist working outside conventional institutions, solving a problem that will save his or her family. 

Locust Capitalism 
Germany invented socialism. 
Karl Marx and Friedrich Engels were Germans. 
The Social Democratic movement that shaped the modern European welfare state also originated in Germany. 
Although the country profited greatly from its reintegration into the world trading system after World War II, Germany never really came to terms with Anglo-Saxon capitalism and skepticism about it still runs deep. 
Now, with Germany’s economy no longer functioning smoothly, capital moving abroad, and unemployment rising, criticism of capitalism is again gaining momentum. 
The public is upset about top managers’ salaries and the fact that big German companies fire workers despite record profits. 
In response, the government has urged managers to publish their incomes and abolished the bank secrecy laws that were once considered sacrosanct. 
This new critique of capitalism recently culminated in a series of attacks by the leader of the Social Democratic Party, Franz Müntefering. 
He accused entrepreneurs who outsource production to low-wage countries of showing excessive greed and lack of social responsibility, and he compared the managers of international equity funds to a plague of locusts that occupy companies, exploit them, and move on after their destructive work is done. 
These attacks brought Müntefering vast public support and triggered a major debate. 
Germany’s media largely supports the critique. 
Günter Grass, a Nobel Prize winner in literature, joined the chorus of critics, complaining about the fading of political power in a time of globalization. 
He ridiculed today’s conditions as “stock market-defined liberty.” 
Opposition leaders do not like the subject, but they avoid challenging it. 
Only a few economic journalists and university professors are willing to object. 
One Jewish professor at a Munich university actually compared Müntefering’s language to Nazi slogans. 
Entrepreneurs and managers swallow their anger and show their disapproval only by silently speeding up their relocation decisions. 
But Müntefering has a point. 
Abolition of taxes on realized capital gains increased the sales of shares enormously. 
International equity funds stepped in, providing companies with urgently needed liquidity while disentangling the traditional ownership network. 
Germany, Inc. is on its last legs. 
The good news is that Germany’s overblown conglomerates are being scaled down to an efficient size and that the capital market is able to do its job, improving the allocation of resources. 
The bad news is that financial capital is moving abroad to finance other overblown conglomerates. 
In net terms, though, there may be more growth worldwide as well as in Germany. 
Whatever the case, for many Germans the capitalist allocation processes they are seeing make no sense. 
There were times when German capitalism was shown greater respect. 
In the postwar period, Germany’s economic miracle calmed skeptics of capitalism. 
Starting with extremely low wages and an underdeveloped currency, German workers succeeded in competing against the world. 
Wages rose rapidly and most Germans experienced growing prosperity. 
Ludwig Erhard’s liberal economic approach worked and the socialist ideas found in the party programs of the Social Democrats and Christian Democrats were forgotten. 
During the 1970’s, Germans went overboard, confusing capitalism with self-service shops. 
They began to expand their welfare state, pushing the government’s share in GDP from 39% to 49% and welcoming union-proposed double-digit wage increases. 
The signs of the fading miracle became visible when Japanese competitors and other Asian Tigers succeeded in wiping out substantial parts of Germany’s labor-intensive textile, optical products, and precision engineering industries. 
Nevertheless, the public still believed in perpetual growth. 
Only after the Iron Curtain’s fall and the establishment of market economies in ex-communist countries did the lack of competitiveness of German workers become apparent. 
The country with the highest labor costs in the world was confronted with low-wage competitors next door. 
Wage costs in the ten new EU member countries are still only one-seventh their level in western Germany; wage costs in Rumania and Bulgaria are one-tenth. 
Chinese wages are even lower, at just 4% of the western German average. 
German firms reacted by outsourcing the labor-intensive parts of their production chains and curtailing their investment in Germany. 
The share of net investment in GNP is now the second lowest in all OECD countries. 
Because investment is so low, net capital exports from Germany are nearly 4% of GDP. 
Now unemployment is Germany’s biggest problem, standing at a postwar record. 
This alarms the public and incites anger against capitalists who do not reinvest their profits. 
Müntefering simply caught the popular mood in developing his theory of locust capitalism. 
But this useless reaction to the laws of the global market economy hides the fact that Germany’s problems are largely a result of an overblown welfare state and extremely aggressive union policies over the last thirty years. 
Even Marx knew that the iron laws of economics could not be overcome by wishful thinking. 
Müntefering should have consulted his party’s forefather more carefully before opening his mouth. 

London vs. the Eurozone 
LONDON – Ever since the United Kingdom joined the European Economic Community in 1973, after the French withdrew Charles de Gaulle’s veto of its membership, Britain’s relationship with the European integration process has been strained. 
The British are reluctant Europeans, for historical and cultural reasons. 
For centuries, British foreign policy strove to avoid permanent European entanglements; but, most importantly, it aimed to prevent a single continental power from achieving dominance – especially if that power happened to be France. 
In the meantime, the British colonized large portions of the globe. 
Later, after the sun set on their empire, they tried to maintain a “special relationship” with the United States. 
Joining the European Union was not an affirmation of belief in European integration, but rather a reluctant recognition that the transatlantic strategy had run its course. 
British public opinion concerning the EU has since remained lukewarm, at best. 
In recent years, having opted-out of the single currency and the Schengen area (which allows Europeans to cross borders without passports), the UK has distanced itself from important EU initiatives. 
Nonetheless, Prime Minister David Cameron surprised everyone by vetoing a new EU treaty on December 9 – a first for the UK since joining the Union – leaving the other 26 member states to press ahead with greater fiscal integration on their own. 
More surprisingly, the negotiations broke down over arcane details of financial regulation. 
For example, Cameron wanted to strike a “red line” through the proposal to subject the planned Deposit Guarantee Scheme Directive to the Qualified Majority Voting procedure (meaning that no member state would have veto power). 
Cameron also objected to the requirement that third-country financial firms in London without business in other EU states be required to hold a “single passport,” which would enable them to operate in any member country, but would also require them to submit to Europe-wide regulations. 
These points are not entirely insignificant, but I would not care to explain them to a meeting of ordinary voters puzzled about Britain’s new European policy. 
So why has financial regulation become the unlikely casus belli between the UK and its partners? 
The explanation is partly political. 
Cameron’s Conservative Party includes members who have been spoiling for a fight with the EU for a long time. 
For them, any excuse will do, and EU Internal Market Commissioner Michel Barnier has provided them with ammunition by pursuing what many see as an excessively restrictive regulatory agenda. 
When horse-trading for Commission jobs took place in 2009, former UK Prime Minister Gordon Brown was warned of the danger of allowing the French to hold the Internal Market post. 
But he chose instead to bid for the EU foreign-policy job for his Labour Party ally, Baroness Ashton. 
When Barnier was appointed, French President Nicolas Sarkozy described it as a “defeat for Anglo-Saxon capitalism.” 
And so it has proved – though perhaps not in the way he envisaged. 
But beneath the politics, there are other substantial conflicts between the UK and its continental neighbors. 
Barnier favors European directives that impose uniform rules for all member states – so called “maximum harmonization” measures. 
Previously, EU directives tended to impose minimum standards, which individual countries could supplement if they wished. 
They could outlaw initiatives that the UK holds dear, such as new rules to ring-fence retail banks’ subsidiaries and impose higher capital requirements on them. 
The governor of the Bank of England, Mervyn King, has voiced his anxieties on that point. 
British officials are also deeply concerned about measures that would oblige clearinghouses that transact their business primarily in euros to be located within the single-currency area. 
Indeed, the British government was already taking the European Central Bank to court to challenge that policy before the treaty veto. 
They may have a point; arguably, the ECB’s proposal is inconsistent with single-market principles. 
The key point of contention, however, is the pan-European Financial Transactions Tax, which the European Commission proposed with support from both Sarkozy and German Chancellor Angela Merkel. 
From a UK perspective, the FTT is highly unattractive. 
Between 60% and 70% of the revenue would be raised in London, yet the EU would spend most of the money to shore up eurozone finances. 
For Britons, this idea stirs sentiments akin to what Germans might feel if the EU proposed a new tax on liverwurst, with the proceeds to go into the central pot. 
They also point out that, unless an FTT were agreed globally, financial companies would quickly migrate from London to New York. 
This is Cameron’s best argument on the financial front. 
But he did not deploy it strongly, for the simple reason that tax policies in Europe are still subject to the unanimity rule. 
In other words, Britain can block the proposed FTT without a special protocol. 
This lends weight to the argument that Cameron’s veto was essentially a political move, intended to bolster his domestic support. 
That is a big gamble, given that the UK now appears to be shuffling towards the EU exit. 
Certainly, the new status quo looks unsustainable, with 26 countries moving towards greater integration while the 27th remains aloof. 
How will financial firms react? 
Will they be pleased that London has stamped its collective foot, even though Cameron’s regulatory demands were not accepted? 
Or will some simply begin to contact real-estate agents to line up office space in Paris or Frankfurt? 
The game – London versus the eurozone – has only just begun. 
It will make for fascinating viewing in the months and years to come. 

The Global Economy in 2067 
NEW YORK – The world is experiencing a slow-motion economic crisis – one that, most experts agree, will continue for the foreseeable future. 
The global economy has grown in fits and starts since the economic crisis of 2008 – one of the longest recorded stagnations of the modern era. 
In virtually all middle- and high-income countries, wages (as a share of GDP) have been steadily declining for nearly 40 years. 
But what about the next 50? 
Today, the situation certainly looks bleak. 
Economic stagnation and widening inequality have contributed to a surge in xenophobia and nationalism in the advanced countries, exemplified by the United Kingdom’s vote to exit the European Union and the election of US President Donald Trump – and now his decision to withdraw from the Paris climate agreement. 
Meanwhile, large parts of the developing world – notably, the Middle East and North Africa – have been embroiled in conflict, with some teetering on the edge of state failure. 
But while such turbulence is likely to continue for the near future, there is little consensus on what lies beyond that. 
To be sure, long-run forecasting is usually a fool’s errand. 
In 1930, in similarly troubled times, none other than John Maynard Keynes tried his hand at it, with the famous essay “Economic Possibilities for our Grandchildren.” 
He got his forecast wrong. 
Nonetheless, Keynes’s attempt surely sets a respectable precedent for economic future gazing. 
So here I go: in 50 years, I predict that the world economy is likely (though not guaranteed) to be thriving, with global GDP growing by as much as 20% per year, and income and consumption doubling every four years or so. 
At first, this scenario probably seems farfetched. 
After all, the global economy currently is growing at a rate of just 3% annually (a bit worse, in the last few years). 
But it wouldn’t be the first time global economic growth accelerated to previously unimaginable levels. 
From 1500 to 1820, according to data collected by the late Angus Maddison, the world’s annual growth rate was just 0.32%, with large sections of the world experiencing no growth at all. 
In China, annual per capita income stood at $600 throughout this period. 
For someone living at that time, today’s disappointing 3% growth rate would have been inconceivable. 
How could they anticipate the Industrial Revolution, which lifted average annual global growth to 2.25% from 1820 to 2003? 
Today, it is the Digital Revolution that promises to lift growth to new heights. 
Indeed, we are in the midst of dramatic technological breakthroughs, with advances in digital technology connecting all corners of the world. 
As a result, workers are not just becoming more productive; they are gaining greater access to employment. 
Individuals in developing countries, for example, are now able to work for multinational companies. 
The upshot is that more workers are participating in the labor market. 
The economic effects of this trend have not been all positive. 
In the United States, for example, the average real (inflation-adjusted) wage has barely risen, even as unemployment has fallen to 4.3%. 
By enabling lower-wage workers abroad – and, increasingly, machines – to do more jobs, technology has reinforced this “maximum wage ceiling.” 
The key to breaking through this ceiling is to change the kinds of work in which people are engaged. 
Through improved education and training, as well as more effective redistribution, we can facilitate more creative work – from art to scientific research – which machines will not be able to do in the foreseeable future. 
Though such work may seem wasteful, owing to the number of people and amount of time it takes to secure one major achievement or breakthrough, one such achievement or breakthrough is all it takes to create enough value to boost everybody’s standard of living. 
And, indeed, as the creative sector grows, growth will pick up substantially. 
This outcome is likely, but it is not certain. 
Ensuring it will require fundamental changes to our economies and societies. 
For one thing, we must work to smooth workers’ transition to more creative endeavors. 
This will require fundamental changes to education systems, including retraining for adults. 
It will also require policies and programs that provide some financial cushion to displaced workers; otherwise, the owners of machines and equity will seize on technological disruptions to capture an even larger share of the economic pie. 
Within countries, this can be achieved through some form of profit sharing, with, say, 15-20% of a country’s total profits “owned” by the working classes. 
Consumption patterns will also need to change. 
If, as overall consumption doubles every four years, we also double the number of cars on the road or miles that jets fly, we will quickly exceed the planet’s limits. 
This is all the more true given that rising life expectancies will not only compound population growth, but also increase the share of elderly people. 
The right incentives will be needed to ensure that a large share of our wealth is directed at improving health and achieving environmental sustainability. 
If we do not manage such policy shifts in the coming years, the world economy will probably swing to the other extreme over the next 50 years. 
In such a scenario, 2067 would be marked by even greater inequality, conflict, and chaos, with voters continuing to choose leaders who take advantage of their fears and grievances. 
What I believe can be ruled out is a middle ground, with the world looking roughly like it has over the last 30-40 years. 
In 1967, the world saw big innovations in economics (the world’s first ATM was installed outside London that June) and health (the world’s first successful heart transplant was performed in South Africa in December). 
If 2067 is to be a fitting centenary for these breakthroughs, the current turmoil must motivate world leaders to work to develop and implement the novel policies we need to create a more prosperous, equitable, and stable future. 

The Long-Term Investment Challenge 
PARIS – As the deepest economic crisis of our lifetimes stretches into its seventh year, most OECD countries are continuing to underperform. 
This year, GDP growth in the world’s advanced economies is expected to average 2%, compared to 3.2% worldwide. 
And 2016 is shaping up to be no better, with output in the OECD growing by 2.5%, while the rest of the world’s GDP expands at a 3.8% rate – close to the pre-crisis average. 
But the long-term economic prospects of the global economy as a whole look gloomy. 
As societies in many OECD countries age, and catch-up growth in large emerging economies begins to wind down, global GDP growth is expected to fall from its annual average of 3.6% in the 2010-2020 period to an estimated 2.4% in 2050-2060. 
This slump may be inevitable, but it can be mitigated. 
Implementing policies to facilitate and reward long-term investments will be key to exiting the current crisis and boosting the world’s growth potential. 
Investments, both public and private, are needed to foster green growth, support innovation and entrepreneurship, contribute to closing the inequality gaps that have widened during the crisis, and help build the skills that are essential for more resilient economies and more inclusive societies. 
And, though meeting these needs will require transformational changes in the behavior of governments and investors, the payoff will be significant. 
In short, as we argued during the OECD Forum and annual Ministerial Council Meeting last week, this time we need to promote investments that focus on people and the planet. 
The list of structural challenges facing countries around the globe is a long one. 
But efforts to overcome at least four – high unemployment, an aging workforce, climate change, and infrastructure deficiencies – would benefit significantly from policies promoting long-term investments. 
Addressing the unemployment crisis, which has been particularly burdensome for the young, will require not only a strong recovery, but also a renewed focus on the development of skills. 
Investment in high-quality vocational education and training and work-based learning will be essential. 
These types of investments continue to be beneficial throughout a worker’s life, as exposure to new skills and knowledge allows him or her to adapt to an evolving technological and business environment. 
Empowering today’s workers will also help meet the challenges resulting from aging populations. 
Moreover, an increased focus on long-term investment will help resolve the conflicts traditionally associated with addressing climate change and building infrastructure. 
One requires cuts in the emission of greenhouse gases; the other has tended to promote the combustion of fossil fuels for transport and energy. 
The solution is relatively simple, provided the presence of political will: By putting a price on carbon and repealing policies that incentivize fossil-fuel consumption, investments can be channeled into the creation of a low-carbon economy, including the necessary clean-energy infrastructure. 
In order to encourage private investors to pursue long-term, responsible projects, governments need to promote consistent policies and frameworks. 
In addition to immediate uncertainties, investors are being held back by a shortage of incentives and a surplus of factors that reduce returns. 
These include restrictive regulations that reduce firms’ ability to undertake new activities or enter new markets, especially across borders. 
The OECD’s updated Policy Framework for Investment provides a blueprint for the promotion of investment and responsible business conduct. 
Governments will also have to facilitate the participation of institutional investors. 
The challenge of long-term investment cannot be resolved without attracting more diverse and private sources of finance. 
In 2013, institutional investors in OECD countries alone held more than $57 trillion in assets, and pension funds collected around $1 trillion in new contributions. 
Tools that could be used to leverage institutional investments include public-private partnerships to develop clear and transparent project pipelines for major green infrastructure projects, green banks and green bonds, and instruments that mitigate risk and enhance the availability of credit. 
Regulations for international accounting and funding will have to be examined to identify policies that inadvertently discourage institutional investors from putting their resources into longer-term, illiquid assets. 
Finally, public equity markets will have to be strengthened. 
Savings must be channeled to firms that need capital for innovation and sustainable job creation. 
Today, however, the quality of corporate-governance frameworks worldwide is challenged by the growing complexity of investment chains and the dominance of passive and short-term investment strategies. 
In a globally interdependent world, a better financial and investment system cannot be achieved on a country-by-country basis. 
There may be no one-size-fits-all model for economic development, but, without global standards and complementary regulations, the long-term outlook for the world economy will remain bleak. 

Look East Again, Europe 
The EU's historic decision to admit eight former communist countries as members must not be create a new division between Eurasia's haves and have nots. 
Instead, the Union needs to turn its attention further east - to its new neighbours and the other countries of the former Soviet Union. 
The EU spent 9billion euros between 1999 and 2002 to prepare Central European and Baltic candidate countries for membership - 10 times the amount it spent on Central Asia's impoverished non-candidate countries. 
The EU will spend over 30billion euros integrating its new members into the Union. 
It is in the EU's economic and security interests to extend that generosity further eastward to assist the development of stable market-economies in Central Asia, the Caucasus and other CIS countries. 
Poverty and under-development undermine security and democracy. 
They fuel cross-border organised crime, trafficking in human beings and illicit migration, as well as the drugs trade, religious extremism and terrorism. 
Afghanistan is a stark warning of what happens when the world turns its back on an impoverished country in a volatile region. 
Expanding Europe's common economic space to all territories of the former Soviet bloc will contribute to security and prosperity across the region. 
In many respects, the former Soviet republics are less well-placed than their former communist neighbours to the West to cope with the transition to a market economy. 
For some, indeed, the challenges look almost insurmountable. 
In Georgia, Moldova, Tajikistan and Ukraine, for example, per capita GDP is now less than half of the dire levels achieved under communism. 
Economic discrepancies are growing. 
Foreign direct investment in 1991-2001 averaged $1,400 per capita in the eight former communist EU candidate countries. It was only $198 per capita in the CIS. 
Recent studies by the European Bank for Reconstruction and Development (EBRD), the World Bank and the CASE Foundation show that geographical distance from centres of development, mountainous terrain, lack of "market memory"- recent historical experience of an entrepreneurial tradition - and failures of economic policy are the main causes of the lack of recovery after the collapse of the Soviet-era economy. 
Let me add another: Western assistance to EU non-candidate countries is neither comprehensive nor systematic. 
It is scattered, sporadic and uncoordinated, leaving many areas uncovered. 
It is too modest. 
All of this is in sharp contrast with the treatment given the EU candidates. They were assisted by thousands of experts in adopting the EU's legendary, 80,000-page "acquis communautaire ." legislative package. 
For the first time in EU history, they received pre-accession funding to help overcome costly hurdles. 
If such massive assistance was necessary to restore the market economy to Western Europe's closest neighbours, who spent "only" 45 years under Communism, how much greater is the challenge of building modern economies from scratch in remote lands like Kyrgyzstan or Tajikistan? 
These countries never experienced modern market arrangements. 
For 70 years, their contacts with the West were stifled by the Soviet system. 
No matter how hard they try - and Kyrgyzstan has certainly tried - they are doomed to fail without co-ordinated, well-designed and adequate assistance. 
Some good news is on the way. 
The EU is doubling its TACIS program in Central Asia. 
President Bush wants Congress to fund $5 billion of assistance over three years to the world's poorest countries. 
Foreign ministers of the 55-nation Organization for Security and Co-operation in Europe (OSCE) decided last month in Porto to develop a new strategy for economic and environmental co-operation in the Euro-Atlantic area so as to address security threats resulting from the growing inequalities between countries of this region. 
But this will not suffice. 
From my perspective at the OSCE, it is clear that far more needs to be done: 
The EU's technical capacity, which has been preoccupied by enlargement, could be redirected towards assistance for the non-candidate countries of Euro-Asia. 
Building the institutions of a market economy should be the main focus, not alignment with expensive EU standards in food production or the environment; 
The EU should gradually phase out its Common Agricultural Policy, which primarily benefits owners of large farms, and instead develop new instruments of financial assistance for its own poor regions and its new neighbours; 
Current EU members and successful candidate countries could make available large-scale training programmes in market-relevant disciplines for the young generation in CIS countries; 
Taking as a model the Stability Pact in the Balkans, the EU could offer concrete incentives, such as economic assistance and the prospect of closer integration, to stimulate parties to end unresolved regional conflicts in the Caucasus, Transdniestria and Central Asia; 
The main actors providing international assistance - including the World Bank, International Monetary Fund, EBRD, the EU itself and the United Nations Development Programme - should ensure a minimum level of co-ordination to avoid duplication and waste. 
The OSCE, with field offices in all the countries concerned, could play a useful role here. 
By preventing a new division of the Euro-Asian region into successes and failures, the EU will make a substantial investment in its own long-term security. 

Look East To Save Europe's Social Market 
As expansion of the EU approaches, many Europeans see in it only things to be feared: masses of economic migrants, and poor countries demanding subsidies. 
But Europe's new eastern members can also act as a beacon for the Union, as Jacques Rupnik suggests. 
It is often argued that Continental Europe's social and economic model, which seeks to combine competitiveness with solidarity, is the glue that binds the European Union together, as well as distinguishing Europe from the American (or Anglo-Saxon) free-market model. 
Clearly, Europe's answer to globalization is that certain spheres of social life-say, healthcare, education, the environment, or culture-cannot be left to the whip of the market. 
On the surface it seems that Europe's steady integration proceeded in parallel with the development of the welfare state. 
But this is misleading: the European social model is, in fact, part and parcel of the identity of the EU member states more than of the EU per se. 
Some, indeed, suggest that the EU often acts to erode the welfare state. 
This fear contributed to the reluctance of countries like Denmark and Sweden to embrace greater European integration. 
In both countries, majorities voted against adopting the euro because they feared that national welfare norms would become curtailed. 
So, across Europe, a key question is this: what is the future of the European "social market" model? 
Can it survive once the Union expands from 15 members to 25? 
Many EU members look at the newcomers from Central and Eastern Europe and see countries that largely try to adhere to the liberal, free-market model. 
Having spent a decade dismantling the debris of state socialism, most of these countries chafe at the idea of importing the European social market's idea of solidarity via the EU. 
Their position goes beyond political philosophy. 
A bit of opportunism is also at work, for they undoubtedly also oppose EU regulation of taxation and social norms, adoption of which would deny them their comparative advantage for Western investors. 
With zero growth and 10% unemployment, Western Europe's "Rhineland model" is no longer what countries seeking to undertake root-and-branch social and economic reform want to emulate. 
If Europe's social market model is to survive enlargement, it must find a way to expand eastward with the EU. 
But this can be accomplished only if the model is reformed in the West. 
Two factors could help the EU move in the right direction. 
First, the newcomers share a problem that undermined the social market model in Western Europe: demographic decline and, consequently, the prospect of soaring health and pension costs. 
The populations of the Czech Republic, Hungary, Poland, and Estonia are aging and declining just as quickly as the populations of Spain or Italy. 
So the need to reform health and pension systems is similar in all of these countries. 
Second, public attitudes toward the social market system are remarkably similar in both Eastern and Western Europe. 
According to the Pew Global Attitude survey, there is a significant degree of convergence between East-Central Europeans and West Europeans concerning the balance between the market and a state-guaranteed social safety net. 
If the newcomers are to embrace the social market model, that model must operate throughout the EU and offer to them what it offered new EU members in the past. 
Sadly, this is not yet the case. 
Instead, EU enlargement is being carried out according to what might be described as the principle of "asymmetrical integration." 
The asymmetry facilitated an eastward transfer of EU norms and institutional convergence, but no commensurate transfer of resources. 
EU regulatory power has taken precedence over its redistributive powers. 
But the Union's regulatory authority is likely to be accepted by the accession countries only if it remains tied to the redistributionist ethic at the heart of the EU's social model. 
Regulation without redistribution could undermine the EU's legitimacy among the newcomers. 
A report for the Chair of the EU Commission by a team of experts led by Jacques Sapir argued explicitly for a reorientation of the Union's "cohesion" policies eastwards, i.e. , in favor of those who most need them. 
Clearly, if the social market model is to expand eastward - thereby ensuring its viability within the whole Union - this is the only viable alternative. 
But this idea threatens current beneficiaries of EU redistributive policies, namely Spain (which now gets over a third of Union cohesion funds) and Greece (which gets about a fifth), as well as Ireland. 
Countries that benefited most from European solidarity over the past twenty years are thus the least eager to share with their poor Eastern relations. 
The old European social model is in tatters. 
Its reform - or, rather, its re-invention - implies redefining what solidarity means, within both the member states and the EU as a whole. 
But for reform to succeed, a little old-fashioned solidarity extended Eastwards now is the best way to ensure the commitment of the EU's newest members to European integration. 

Look North, Sarkozy 
In gearing up to take France on a new economic course, French president Nicolas Sarkozy’s choices are not confined to Anglo-American neo-liberalism and the dying French model of social protection. 
There are other viable alternatives, one of which is the German model. 
Germany, after all, is now one of the fastest growing countries in the euro zone. 
So it must be doing something right. 
That “something” is being competitive in world markets. 
German competitiveness did not just happen. 
It is the result of enormous corporate re-structuring over the past several years, which increased labor productivity, and of German trade unions’ willingness to accept modest wage increases. 
It took several years for trade union restraint to flower into robust competitiveness, but flower it did. 
Even in the current period of growing optimism about the German economy, the nation’s trade unions are showing themselves to be moderate. 
IG Metall, Germany’s largest industrial union, which bargains for 3.4 million metal, electronics, and car workers, looks ready to accept an estimated 3.3% annual wage increase for 2007 and 2008 – a settlement generally considered to be “balanced and justifiable.” 
Public sector unions also can affect a nation’s competitiveness in global markets, albeit indirectly. 
In recent years, they too have been co-operative in Germany, though there is some concern that next year’s big wage negotiations could be difficult. 
The German example is highly relevant for France and Sarkozy at this critical juncture. 
Whereas many argue that France can move forward only by adopting the Anglo-American neo-liberal model, Germany’s success clearly demonstrates that the claim that only the free market can produce prosperity is bogus. 
An enlightened corporate state, where unions fully support growth and competitiveness objectives, can deliver the economic goods as well as more de-centralized systems. 
(Sweden is another country that proves this point.) 
Particularly important for Sarkozy – a politician who wants to get things done – is that the German model can be implemented in France with the right sort of political leadership. 
Transforming France into a second America, on the other hand, is no more than a pie-in-the-sky dream that would be certain to end in failure and disarray – and that few French want in any event. 
There are encouraging initial signs that Sarkozy is ignoring calls from the neo- liberal camp for revolutionary change. 
The fact that he has picked the moderate Francois Fillon as prime minister indicates that he is interested in obtaining real results, and that he thus plans to take the evolutionary route rather than tilting at the windmills of revolutionary change. 
A further lesson for Sarkozy from Germany is that an enlightened corporate state needs supportive political leadership as well as accommodating trade unions. 
German Chancellor Angela Merkel doesn’t make speeches attacking the strong euro and the European Central Bank’s price stability mandate. 
On the contrary, she supports an independent ECB and has let Germany’s trade unions and companies know that they will have to live with a strong currency and an anti-inflationary monetary policy. 
This does not mean that Merkel is a free market capitalist – there is little evidence of that. 
Rather, she simply understands that for an economy that needs to stay competitive, bad-mouthing the euro and the ECB sends the wrong signals. 
Sarkozy’s behavior during the presidential campaign was scandalous in this regard. 
He consistently blamed France’s poor export performance on the strong euro, favoring a politically subservient ECB whose mandate should include economic growth as well as price stability. 
His attacks on ECB President Jean-Claude Trichet were often vicious and quite personal. 
They also are at odds with improving French competitiveness. 
Why should the French undertake painful reforms when their newly elected leader has just promised to protect them from a strong currency and further interest rate increases? 
Why not simply wait for Sarkozy to get the euro down and the ECB to lower interest rates? 
According to Trichet, Sarkozy has reversed course since winning the election, and no longer will press the ECB to broaden its mandate. 
Let us hope that Trichet is right. 
What Sarkozy has announced so far is his intention to cut income taxes, reform public sector unions, and give tax breaks for overtime work. 
These are precisely the sorts of step-by-step reform measures – both beneficial and feasible – that the new French president should be pursuing. 
Sarkozy’s first foreign trip as France’s new president was to visit Chancellor Merkel. 
Let’s hope that he listened attentively. 
A new Franco-German axis that makes France more competitive is just what Europe needs. 

Looking Beyond the Tribalism Taboo 
A few days before Easter, people in Ghana, a heavily Christian country, were shocked by violence between members of the Dagomb, an Islamic tribe. 
Members of one extended family within the Dagomb organized the murder of the tribe's own chief. 
The killing caused Ghana's government to declare a national emergency, and triggered an outcry over the curse of tribalism. 
Africa has long suffered under the belief that passionate tribal attachments are inefficient, irresponsible, and inhumane. 
Ever since they colonized Africa, Europeans have railed against tribalism, whilst simultaneously pitting one tribe against another whenever this suited their purposes. 
In drawing Africa's internal borders, imperialists ignored tribal differences, leaving some densely populated countries, such as Nigeria, without a dominant tribe or splitting famously cohesive tribes, such as the Ewe, between two countries (Ghana and Togo). 
By ignoring tribal affinities, Europeans hoped to create an Africa whose allegiance was to nation first and tribe second (or not at all). 
Africa's independence leaders of the late 1950s and early 1960s essentially opposed tribal power. 
They sought to limit the authority of tribal chiefs and to use their powers over schools, land, and jobs to weaken, if not altogether eradicate, tribal consciousness. 
Ghana's Dagomb conflict illustrates why governments should tread carefully with tribal loyalties. 
The beheaded chief was appointed by Ghana's previous government in clear violation of traditional power structures. 
With a new government in power, the chief's enemies seized the opportunity to redress the wrong, providing a reminder of the perils of prior efforts to de-tribalize Africa. 
De-tribalization was always a doomed project. 
During my twenty years of working in aid and development in Africa, I have lived in and examined five countries: Ghana, Ethiopia, Sierra Leone, Sudan, and Egypt. 
All of their borders are works of European fiction, attempts to impose a monolithic image on areas honeycombed with diversity. 
In Ghana one does not find Ghanaians; one finds Asante, Ewe, Ga, and Dagomb. 
In Ethiopia, rather than Ethiopians, you meet Amhars, Oromos, and Tigrinians. 
So it goes across the continent. 
Despite the best efforts of nationalists and pan-Africanists, nation-state identities have not taken root. 
African hearts beat to a tribal rhythm. 
People are more open about this than they once were, but a legacy of disapproval towards those who espouse tribal loyalties lingers. 
Yet these loyalties are deepening. 
Sub-Saharan Africa may be stuck with its political boundaries, but national identities remain less important than tribal ones. 
Colonialists and African independence leaders erred when they ignored tribal preferences, rather than celebrating them and making them the cornerstone of a healthy democracy. 
Tribes have their dark side, of course. 
Tribal claims by Hutus against Tutsis (a rivalry long manipulated by Rwanda's colonial rulers) incited genocide and still scar neighboring Burundi. 
In Nigeria, the Ibo--who fought Africa's first post-independence war of secession in the name of tribalism--remain an uneasy, defiant minority. 
Tribal affiliations powerfully influence political, social, and economic life in many other African countries as well. 
When decisions are made about who gets what aid in times of hardship, it is no surprise that ruling tribes get more than those out of power. 
Viewed through the rosy spectacles of nation-statehood, this may look like corruption. 
But from an ethnic point of view, those in power owe no allegiance to a nation-state identity. 
They have strong ties to their own peoples and it is their duty to ensure that they prosper before other tribes. 
Of the tribes who lack access to power, many are poorer today than at independence, despite the billions of dollars spent in their name. 
So foreigners ignore tribal loyalties at their peril. 
In Africa, the revival of ethnicity, which is the more civilized term that Westerners use to describe their own tribal allegiances, is at the core of social change today. 
In this regard, Africans are in step with the rest of the ethnocentric world. 
Failure to transcend tribalism suggests that Africans must learn to use their tribal loyalties for the good of their countries. 
Signs exist that this is happening. 
Many African nations are experimenting with ways of sharing power with tribal associations that often dominate local government. 
Africans living outside their home countries, especially those in the US or Europe, find that they often can effectively invest in their homelands by drawing on tribal ties. 
Consider the Ghanaian member of the FraFra tribe who returned from a period abroad intent on helping his group, which is a tiny minority in the country. 
The FraFra live a day's drive from Accra, Ghana's capital, and tend to be overlooked by the national government. 
The returnee has built schools and health clinics. 
He also insists that the local schools teach the FraFra language. 
Paradoxically, accepting the reality of tribal, or ethnic, power lays the foundation for national unity by letting each group first sort out its own priorities. 
Only then can members of different tribes interact with each other in a common space--and from a position of strength and respect. 

Losing Latin America 
When is the United States going to wake up to what is happening in Latin America? 
The growing influence of Venezuela’s leftist president, Hugo Chávez, is casting a dark shadow over the region. 
Some countries – Chile, Columbia, and Costa Rica, for example – remain committed to progressive growth-oriented and democratic regimes. 
But over the past year, allies of Chávez have come to power in countries like Ecuador and Bolivia, and just missed winning in a few others. 
In Mexico, Chávez’s admirer Andrés Manuel López Obrador would have seized the presidency, possibly for life, had he convinced just a quarter percent more Mexicans voters to support him. 
With almost everyone else in the world successfully pursuing more flexible market-oriented economies, why is Latin America veering dangerously in another direction? 
Is it because some voters do not realize that the region has been enjoying greater economic stability than it has in decades? 
Is it because they don’t appreciate having single-digit inflation, down from a regional average of more than 300% 12 years ago? 
Fortunately, at least half the voters in the region appreciate these improvements; otherwise, the situation would be far worse. 
Nevertheless, a growing schism between left and right has led to a distressing level of policy paralysis. 
This is nowhere more apparent than in Mexico, the region’s second largest economy after Brazil. 
Despite its enviable location next door to the rich and booming US, Mexico’s growth has ranged from poor to tepid since its economic crisis a decade ago. 
Why hasn’t Mexico benefited more from the 1992 North American Free Trade agreement? 
Part of the problem is the emergence of China, whose ultra-low wages provide tough competition for Mexico, where wages are merely very low. 
But Mexico’s real obstacle is a political system unable to achieve any consensus on essential economic reforms. 
The new president, Felipe Calderón, has spoken of the need to break up Mexico’s monopolies. 
Where will he start, telephones or tortillas? 
There is all too much choice. 
Peasants toil inefficiently on tiny plots of land, in a form of disguised unemployment similar to that seen in rural China. 
The state-owned oil company, which accounts for a major chunk of government revenue, is hugely inefficient, and invests far too little in new equipment and technology. 
Crime abounds. 
International comparisons of corruption are not flattering. 
Worst of all, the election loser, López Obrador, seems willing to throw the country into turmoil rather than accept the constitutional legitimacy of his defeat. 
So how is the US planning to react? 
By following through on plans to build a 2,000-mile wall across its southern border. 
Brazil, meanwhile, has exhibited commendable political and macroeconomic stability. 
Yet, if Brazil is to enjoy growth above the modest levels of the past few years, the country badly needs to reform its labor laws, open itself more to foreign trade, and improve the quality of its primary education system. 
With Latin America’s two largest economies in a holding pattern on reform, it is that much more difficult for even the region’s high flyers, such as Chile, to achieve escape velocity into a sustained high growth orbit. 
Mind you, even the weak growth of the last few years in Latin America marks the region’s best performance since the 1970’s, and incomes are actually catching up slowly to those in the US, Europe, and Japan. 
Nevertheless, Latin America remains the slowest growing of any of the world’s developing regions. 
It is not only China and India that are growing faster. 
Central Europe, Central Asia, and the violence-ridden Middle East are growing faster, too. 
Even Sub-Saharan Africa, with its wars and famines, has enjoyed more rapid growth in the past few years. 
Does the pied piper of Venezuela offer a fairer and better way to grow? 
Unfortunately, no. 
Venezuela is merely being pulled along in China’s tailwind thanks to high oil prices. 
When oil prices collapse, as they will at some point over the next few years, Venezuela’s economy will collapse with them. 
Over the long run, commodity exporters need to innovate just as much as manufacturers do in order to maintain profitability. 
With Venezuelan oil production still running far below its level when Chávez took over, there is little doubt about how this story will end. 
In today’s hyper-competitive global economy, there is no reliable “third way” for countries to avoid continued liberalization and market-oriented reforms. 
Instead, the current installment of Latin American socialism is all too likely to produce a re-run of tragic episodes from the past. 
In this context, the US’s inexplicable indifference towards the region is both naïve and dangerous. 
The incoming Democratic US Congress has signaled that free trade deals with Peru and Columbia need to be “renegotiated.” 
What kind of message does that send to the US’s few remaining allies in the region? 
If Americans don’t start embracing their friends in Latin America, it may take a generation to undo the damage. 

Losing the Foreign Investment Race 
Latin America is in serious trouble when it comes to foreign direct investment (FDI). 
True, inward FDI reached about $70 billion in 2006, but this is below the 1998-1999 peak, and a large share came from Latin American firms investing in neighboring countries, whereas inflows from Europe and the United States have fallen. 
Many companies are withdrawing from the region, and large investments from China, particularly in Brazil, though promised, have failed to materialize. 
At its peak in the 1970’s, and again in the 1990’s, Latin America’s share of total global FDI reached 17%. 
Now it is only 8% (in 2006), after averaging 11% over the previous five years. 
Among developing countries, Latin America’s share of global FDI also fell dramatically, from 40-50% in the 1970’s to about half that in 2006. 
Redressing the problems of high unemployment and large informal sectors – where almost half of all goods and services are produced – is perhaps the region’s most urgent policy challenge, particularly because most investment and growth by domestic firms is related to high commodity prices, which do little to create new jobs. 
Likewise, FDI inflows have been expanding only in resource-intensive sectors, while falling in services and practically stagnating in manufacturing. 
What is lacking are effective government policies to attract high-quality FDI, particularly for exports, which could have a multiplier effect domestically, creating both direct and indirect employment. 
But, in addition to the right legal and regulatory framework to ensure appropriate links to the national economy – which is also lacking in most of the region – the search for desirable investors requires an effective foreign investment promotion agency. 
To change the way Latin American countries sell themselves to foreign investors is a creative challenge. Selling goods for export and selling the country to foreign investors is very different. 
As Padraic White, a pioneer in this field who headed the Irish Industrial Development Agency (IDA-Ireland) from 1980 to 1990 argues, FDI promotion requires imagination and the ability to think innovatively. 
As White points out, promoters of FDI are not selling a product, which the country’s embassies abroad may be able to do. 
The sales technique should be based on fiscal and regulatory concepts and be expressed in legal and financial jargon, which only experts can do. 
For this reason, FDI has to be promoted separately from domestic investment and exports. 
Furthermore, foreign investors do not want to deal with diplomats or civil servants. 
They want to talk to private-sector experts who understand the technical and financial needs of their companies or sectors. 
Yet, except for Costa Rica’s foreign investment promotion agency, CINDE, modeled after the IDA-Ireland, none of Latin America’s FDI promotion agencies have succeeded in adopting best practices. 
Many promote both foreign and domestic investment, despite the failure of such institutional arrangements in the past. 
Ireland, for example, had to separate the two functions before it became successful. 
Moreover, most FDI promotion agencies in the region lack the minimum financial and human resources needed in order to be effective, owing to governments’ lack of political will to support them and to eliminate parallel processes that confuse investors. 
An effective FDI promotion agency must be headed by an executive director with strong credentials and an excellent reputation in the private sector, supplemented by good international contacts and fluency in English. 
Just as importantly, there cannot be any conflict of interest (or even the perception of such a conflict) with other personal or political activities, past or present. 
The executive director should put together a team of analysts located in critical locations abroad and able to conduct business intelligence. 
This requires investigation of markets and trends, and identification of specific firms that would be desirable for the clusters or niches that the country wants to promote. 
The team will also need “promoters” in these locations, with public-relations expertise and technical knowledge of the country and the clusters. 
Finally, the team will need local “service providers” with technical knowledge of specific clusters to support foreign investors once they have located in the country, thereby ensuring that they remain and expand. 
International competition for investors is brutal, so waiting for them to fall from the sky is not an option. 
Without the right strategy, Latin America will continue to fall behind. 

Losing Turkey 
OXFORD -- Turkey has long been a haven of geo-political stability. 
But, since 2003, Turkey’s virtually unquestioned alliance with the United States has undergone a profound re-evaluation, due to the Iraq War, and the Turkish consensus on its decades-long EU candidacy has begun to wobble, owing to EU dithering. 
Given Turkey’s central role not only in maintaining peace in the volatile Caucasus region but also in promoting peace in the Middle East – the talks now underway between Syria and Israel are, after all, being conducted with Turkish mediation – neglecting Turkey is not only foolish, it is dangerous. 
Both the dominant Justice and Development Party (AKP) and its secular rivals remain publicly committed to pursuing EU membership, but in practice doubts have emerged. 
French President Nicolas Sarkozy’s insistence that a referendum should be held on Turkey’s admission suggests that years of painful adjustment to EU norms will never produce the payoff of membership. 
The US and the EU are evidently convinced that Turkey has nowhere else to go. 
The Turks, they think, will fatalistically accept any snub. 
But this cozy assumption overlooks a tectonic shift in Turkey’s geo-political position. 
Immediately after the collapse of the Soviet Union, Turkey looked to the newly-independent central Asian states in a mood of pan-Turkic romanticism. 
These ancestral homelands exercised a hold on Turkish imaginations, but today it is business opportunities, energy resources, and other practical matters rather than ethnic unity that are creating a loose Turkic “commonwealth.” 
Most striking is Turkey’s renewal of relations with Russia without damaging its ties to the newly independent post-Soviet states. 
Turkey’s ancient antagonism toward Russia briefly revived when the Soviet Union imploded. 
In the early 1990’s, some Turkish generals saw the humiliation of Russian troops in Chechnya as part of a long-awaited revenge. 
But, while Russia (and Iran) were once Turkey’s great geo-political rivals, today they are export markets and energy suppliers. 
Energy is the key to Turkey’s new geo-political position. 
Its industry and population are growing dynamically, so its energy demands are producing geo-political synergy with Russia and Iran, neither of which can afford to cut the flow of oil and gas without provoking a massive internal crisis. 
Meanwhile, as Turkey’s attitude toward its neighbors has changed, its governing elite has watched the EU embrace ex-communist countries with far shakier market economies and shorter democratic records. 
As one Turkish general put it, “If we had joined the Warsaw Pact rather than NATO, we would be in the EU by now.” 
Last summer’s re-election of Prime Minister Recep Tayyip Erdogan’s AKP, followed by the election of Abdullah Gul as the first president whose wife wears a headscarf, seemed to confirm the fears of anti-Islamic Europeans. 
Yet, even if many AKP activists and voters are devout Muslims, Erdogan and Gul remain committed to European integration. 
Time is running out, however, for them to satisfy their supporters and silence their critics by achieving it. 
The problem is that the AKP’s victories, together with America’s courting of Erdogan and Gul, have triggered a crisis of direction among Turkey’s once-dominant secular and pro-western elite. 
Even if the AKP can rely on the allegiance of millions of voters and swarms of new members anxious to join the winning side, the secularists are deeply entrenched in Turkey’s institutions, universities, media, and business. 
But both ordinary AKP supporters and disillusioned secularists are now suspicious of America’s actions and motives in the region. 
Key military figures’ tacit backing for the Turkish Parliament’s refusal to endorse the March 2003 US-led invasion of Iraq suggests that Turkish nationalism could unite the AKP’s rank-and-file MPs with their otherwise implacable foes in the secular camp. 
If the EU were to snub Turkey openly over membership, or if America were to seem too lax on the Kurdish problem in Northern Iraq, a huge swathe of the two camps could well unite. 
Turkey’s links with Israel, for example, have been strained by Israeli investment in Kurdistan. 
While Shimon Peres made a gesture of reconciliation by choosing Ankara as the setting for the first speech by an Israeli president to the parliament of a predominantly Muslim country, Israel’s concerns about Iran are far more serious than are Turkey’s. 
Israel’s two most irreconcilable enemies, Iran and Syria, are in fact among the most vocal supporters of Turkey’s hard-line stance towards the Kurds. 
America’s conquest of Iraq de-stabilized Turkey’s Western orientation more than the US cares to admit. 

Lost Horizon 
In the film "Groundhog Day," Bill Murray plays a hapless TV weatherman who seems condemned to endlessly relive the same day over and over again, no matter what he does. 
The process of justifying long-term basic research in the life sciences often seems like just such a repetitive loop. 
The case is made, evidence is marshaled, some projects may be saved, but the next morning we find that policies and initiatives continue their inexorable march toward goals that are short-term and practical. 
Not that there's anything wrong with it! 
But that is not where scientific breakthroughs come from, and it is not where ultimate cost-effectiveness comes from. 
The irony is that with federal and private funding of science at an all-time high, and with a record number of researchers working at laboratory benches, there is a narrowing of research activities and a shortening of the time horizon. 
Back in the 1970s, when life science research was a relatively small enterprise by today's standards, the renowned cardiologist Julius Comroe made the case for basic research to the US Congress in the form of an unbiased statistical survey of medical breakthroughs. 
He took 10 major medical advances of the previous three decades, agreed upon by a panel of 70 clinicians and an equal number of scientists, engineers and administrators. 
The advances included heart surgery, drug treatment of high blood pressure, chemotherapy for cancer, and prevention of polio. 
Comroe traced the origins of these advances back to the breakthrough discoveries that made them possible. 
After sifting through 2,500 published research reports, they identified 529 "key" papers, of which nearly two-thirds were basic in nature--defined as "research to determine mechanisms by which living organisms function." 
Their survey stands as solid scientific evidence in favor of basic research in life sciences. 
There is no reason to believe that this fundamental truth has changed since then. 
Why? 
The answer lies in the nature of scientific mystery. 
If it is a mystery, we cannot know what the answer will be ahead of time, nor where that answer will come. 
Roentgen undertook experiments with X-rays in order to study the structure of the atom and found, to everyone's surprise, that X-rays also made living tissue transparent. 
The Human Genome Project is often cited as an example of foresight and investment in the future. 
In one sense it does represent an exception, but in another, it is akin to the Apollo space program as a one-time, massive investment for one specific, long-range goal. 
It is also credited, however, as an advanced technology that makes old-time approaches obsolete. 
A recent scientific report belies this notion. 
Last month, the Icelandic biotech company, deCODE Genetics, Inc., published a map of the human genome. 
Its findings are based on applying traditional gene mapping strategies to humans, making use of Iceland's unique historical circumstances of having a relatively isolated population, derived from a small founder group, with little immigration and extensive genealogical records. 
Their report contains substantial corrections of the genome map generated a year earlier by the high tech DNA sequencing efforts of Celera Genomics, Inc. and a large public consortium of labs. 
The Icelandic gene map would not have been possible but for the ground-breaking work that generated the first gene map in the fruit fly Drosophila 90 years ago. 
Today, deCODE followed essentially the same gene-mapping approach worked out in the fruit fly, one which could never have been discovered if humans were the only subjects studied. 
Back when Comroe made his study of medical advances, he was directing his arguments to the public and their elected representatives. 
There was scant need to convince scientists of the importance of basic research. 
One unforeseen consequence of the hefty budgets now devoted to science is that such vast funds have increased the pressure for practical outcomes. 
The more money, the greater the need to show usable results. 
So there is a growing incentive to medical-ize, practical-ize and commercialize the research projects because these have greater currency--they get picked up by the news media and get preferential treatment in the initiatives that emanate from funding agencies. 
They have a shorter apparent time horizon, and the path towards their goal is apparently clear. 
One may dispute whether these appearances have any underlying reality, but whether they do or not, this defines the best strategy to get money. 
Areas of research as esoteric and fundamental as fruit fly genetics have even succumbed. 
Genetic studies of the fruit fly have produced many breakthrough discoveries, three of which earned Nobel prizes--one early on for the discovery that genes are carried by chromosomes, another subsequently for the discovery that mutations can be produced by X-rays, and a third more recently for discovery of the genes underlying formation of the embryonic body plan. 
None was motivated by a wish for practicality; all three had enormous practical and medical payback. 
Today's climate has spawned fruit fly research projects on cocaine and alcohol abuse, degenerative aging, and disease models for Parkinson's and Alzheimer's. 
Such efforts are not intrinsically bad, but a problem arises if the climate begins to obscure the value of the research defined by Comroe as aimed at "mechanisms by which living organisms function." 
Despite record levels of money and personnel, the playing field for asking basic questions has shrunk. 
It is essential that we remember where and how our greatest advances arose. 
It requires only that we have faith in the notion that what worked in the past will continue to work in the future. 
Otherwise, we may find ourselves falling victim to the ultimate irony of spending more and more money with less and less of value to show for it. 

Loving America’s Deficits 
With the weak dollar hanging like the sword of Damocles over the global economy, almost everyone laments America’s spendthrift habits. 
But did it ever occur to anybody how hard Americans must work to make everyone else look good? 
Thanks to America’s gaping trade deficits, the biggest headache of every developing country finance minister nowadays is trying to keep his or her country’s currency from going up too fast against the dollar. 
When was the last time that happened? 
Chronic debt-crisis countries from Mexico to Russia to South Korea are all fighting off capital inflows from investors looking for an exit as the dollar collapses. 
Ordinarily, as the world comes out of a downturn and global interest rates rise, at least one or two emerging market countries suffers a spectacular blowup. 
Not likely this time, at least for the next year. 
True, policy in some countries has improved markedly. 
Brazil and Turkey, for example, have each instituted market-friendly policies that have made their economies more flexible and growth more durable. 
But can the same be said for Mexico, where reform has stalled, or for Russia, where reforms have been reversed? 
America’s reckless deficit spending is making all their currencies look like good investments for 2005. 
So non-Americans should be more appreciative of America’s deficits. 
Do people think it is easy for a 12-trillion-dollar economy to spend beyond its means year after year just to prop up other countries’ reputations for stability? 
It isn’t. 
Going deep into debt when you have that much money to spend takes a lot of hard work. 
Start with the American consumer, who consumes everything on earth (helping the United States eat up 25% of world oil production) but saves essentially nothing. 
Thanks to America’s gold-plated financial system, its consumers can buy fancy cars with almost no down payment. 
They can borrow more and more each year against the value of their homes, and spend every cent. 
They can retire earlier and earlier on their smaller and smaller savings. 
It takes nerve and energy to live like that. 
Of course, the US government does its share, too, and more. 
When President George W. Bush took office in 2001, he was staring at giant budget surpluses as far as the eye could see. 
It was hard work engineering a five-trillion-dollar deterioration in America’s fiscal position. 
Cutting taxes was easy, but hiking spending on virtually every program involves a lot of legislation. 
Sure, the decision to invade Iraq was a big help in pushing the country’s finances off a cliff, but that is far from the whole story. 
So why is the world so ungrateful? 
Maybe some Europeans and Japanese are upset that they have consistently earned such poor returns on their US investments. 
Part of the problem has been the sinking dollar, which makes dollar investments look bad when translated into yen or euro. 
Part of the blame also lies with bad market timing. 
Many Europeans bought into the US stock market at its peak in 1999 and 2000, only to find themselves selling at steep discounts after the collapse of 2001. 
The same happened to the Japanese in real estate. 
Japanese financiers bought up pricey trophy properties like Rockefeller Center in New York and the Pebble Beach Golf Club in California, and then had to sell later at rock-bottom prices. 
These investment failures have been great for Americans, who owe a lot less to foreigners than they would otherwise. 
Unfortunately, this cannot go on forever. 
Foreigners are either going to start earning much better returns in the US, pushing American debt levels into unsustainable territory, or else they will pull back and invest elsewhere. 
Either way, the dollar collapse has to continue. 
So how low can the dollar sink? 
By my calculations, the dollar still needs to go down another 15% if the US trade deficit is to go back towards balance. 
Ideally, Asian currencies would rise much more than 15% while European currencies would rise less. 
Unfortunately, there is a real danger that we may see the opposite, with the euro going to $1.50 or beyond. 
Governments may try to resist the fall of the dollar, but in today’s world of deep and fluid capital markets, they will not succeed indefinitely, even in Asia. 
Moreover, although US policy is making everyone else look good for now, things might not be so comfortable if the dollar collapse leads to skyrocketing interest rates and a sustained global slowdown. 
Some of the countries that look so strong today may suddenly experience the kind of financial crises that they thought they had left behind. 
Even if countries avoid the immediate blow of a dollar collapse, they still have to watch for a boomerang effect. 
Exchange rates have a nasty habit of overshooting their equilibrium values, then knifing back on countries, especially those who have been spending too much based on inflated income valuations. 
OK, so maybe it is too soon for the world to start toasting America’s insane consumption patterns. 
Even so, isn’t it generous of the Americans to make everyone else look so sober and frugal, if only for the moment? 

Alpha, Beta, and Beyond 
NEW YORK – Even in normal times, individual and institutional investors alike have a hard time figuring out where to invest and in what. 
Should one invest more in advanced or emerging economies? 
And which ones? 
How does one decide when, and in what way, to rebalance one’s portfolio? 
Obviously, these choices become harder still in abnormal times, when major global changes occur and central banks follow unconventional policies. 
But a new, low-cost approach promises to ease the challenge confronting investors in normal and abnormal times alike. 
In the asset management industry, there have traditionally been two types of investment strategies: passive and active. 
The passive approach includes investment in indices that track specific benchmarks, say, the S&P 500 for the United States or an index of advanced economies or emerging-market equities. 
In effect, one buys the index of the market. 
Passivity is a low-cost approach – tracking a benchmark requires no work. 
But it yields only the sum of the good, the bad, and the ugly, because it cannot tell you whether to buy advanced economies or emerging markets, and which countries within each group will do better. 
You invest in a basket of all countries or specific regions, and what you get is referred to as “beta” – the average market return. 
By contrast, the active approach entrusts investment to a professional portfolio manager. 
The idea is that a professional manager who chooses assets and markets in which to invest can outperform the average return of buying the whole market. 
These funds are supposed to get you “alpha”: absolute superior returns, rather than the market “beta.” 
The problems with this approach are many. 
Professionally managed investment funds are expensive, because managers trade a lot and are paid hefty fees. 
Moreover, most active managers – indeed, 95% of them – underperform their investment benchmarks, and their returns are volatile and risky. 
Moreover, superior investment managers change over time, so that past performance is no guarantee of future performance. 
And some of these managers – like hedge funds – are not available to average investors. 
As a result, actively managed funds typically do worse than passive funds, with returns after fees even lower and riskier. 
Indeed, not only are active “alpha” strategies often worse than beta ones; some are actually disguised beta strategies (because they follow market trends) – just with more leverage and thus more risk and volatility. 
But a third investment approach, known as “smart” (or “enhanced”) beta, has become more popular recently. 
Suppose that you could follow quantitative rules that allowed you to weed out the bad apples, say, the countries likely to perform badly and thus have low stock returns over time. 
If you weed out most of the bad and the ugly, you end up picking more of the good apples – and do better than average. 
To keep costs low, smart beta strategies need to be passive. 
Thus, adherence to specific rules replaces an expensive manager in choosing the good apples and avoiding the bad and ugly ones. 
For example, my economic research firm has a quantitative model, updated every three months, that ranks 174 countries on more than 200 economic, financial, political, and other factors to derive a measure or score of these countries’ medium-term attractiveness to investors. 
This approach provides strong signals concerning which countries will perform poorly or experience crises and which will achieve superior economic and financial results. 
Weeding out the bad and the ugly based on these scores, and thus picking more of the good apples, has been shown to provide higher returns with lower risk than actively managed alpha or passive beta funds. 
And, as the rankings change over time to reflect countries’ improving or worsening fundamentals, the equity markets that “smart beta” investors choose change accordingly. 
With better returns than passive beta funds at a lower cost than actively managed funds, smart beta vehicles are increasingly available and becoming more popular. 
(Full disclosure: my firm, together with a large global financial institution, is launching a series of tradable equity indices for stock markets of advanced economies and emerging markets, using a smart beta approach). 
Given that this strategy can be applied to stocks, bonds, currencies, and many other asset classes, smart beta could be the future of asset management. 
Whether one is investing in normal or abnormal times, applying a scientific, low-cost approach to get a basket with a higher-than-average share of good apples does seem like a sensible approach. 

Is Another Debt Crisis On the Way? 
WASHINGTON, DC – Economic growth is accelerating across most of the world. 
Yet the world’s total gross debt-to-GDP ratio has reached nearly 250%, up from 210% before the global economic crisis nearly a decade ago, despite post-crisis efforts by regulators in many important economies to drive the banking sector to deleverage. 
This has raised doubts about the sustainability of the recovery, with some arguing that a rise in interest rates could trigger another global crisis. 
But how likely is that to happen? 
To answer this question, one must recall that debt is both a liability and an asset. 
In a closed economy – and we don’t owe anything to non-Earthlings – overall debt and the corresponding assets necessarily cancel each other out. 
So what really matters is the composition of debts and liabilities – or, to put it simply, who owes what to whom. 
High public-sector debt, for example, signals the possible need for tax increases – the opposite of the tax legislation being advanced by Republican legislators in the United States – and/or higher interest rates (real or nominal, depending on monetary policy and inflation). 
If debt is owed largely to foreign lenders, interest-rate risk is compounded by exchange-rate risk. 
For private-sector debt, much depends on its type: the hedging sort, where a debtor’s cash flow covers all obligations; the speculative type, where cash flow covers interest only; or the Ponzi kind, where cash flow does not even cover that. 
As the late American economist Hyman Minsky explained, the higher the share of debt that falls into the speculative or Ponzi categories, the higher the risk that a confidence shock will trigger a sudden wave of deleveraging that quickly morphs into a full-blown financial crisis. 
For both public- and private-sector debt, maturities also play an important role. 
Longer maturities leave more time for adjustment, lowering the risk of a confidence shock. 
Yet while it makes little sense to focus on simple aggregate figures, both public institutions and private researchers tend to do precisely that. 
Consider the coverage of the Greek debt crisis. 
Headlines tracked the debt-to-GDP ratio’s climb from 100% in 2007 to 180% this year, yet little attention was paid to private-sector debt. 
And, in fact, as foreign public creditors replaced private debt holders and interest rates were lowered, Greece’s overall debt, while still high, became more sustainable. 
Its continued sustainability will depend partly on the trajectory of Greece’s GDP – the denominator in the debt ratio. 
A similar mistake is made in assessing China’s debts, about which the world is most concerned. 
The figures are certainly daunting: China’s debt-to-GDP ratio now stands at about 250%, with private-sector debt amounting to about 210% of GDP. 
But about two-thirds of the private-sector debt that is defined as bank loans and corporate bonds is actually held by state-owned enterprises and local-government entities. 
The central government has considerable control over both. 
For China, the biggest risk probably lies in the shadow banking sector, on which reliable data are not available. 
On the other hand, a significant share of the growth in private debt ratios in recent years may be a result of the “formalization” of parts of the shadow banking system – a trend that would bode well for economic stability. 
And there is more good news for China. 
Most Chinese debt is held in renminbi; the country possesses massive foreign-exchange reserves of close to $3 trillion; and capital controls are still effective, despite having been eased in recent years. 
The country’s leaders thus have a public-policy war chest that they can use to cushion against financial turmoil. 
Among the rest of the emerging economies, there are some sources of concern. 
But, overall, the situation is relatively stable. 
Though private-sector debt has lately been rising, its levels remain tolerable. 
And public-sector debt has been growing only moderately, relative to GDP. 
As for the advanced economies, there is little reason to believe that a debt crisis is around the corner in Japan. 
In the US, public debt is set to increase, thanks to the impending tax overhaul; but the blow will be cushioned, at least for the next year or two, by continued growth acceleration. 
And though low-quality assets held by the banking system are likely to impede Europe’s recovery, they are unlikely to spark a financial crisis. 
In short, the world does not seem to face much risk of a debt crisis in the short term. 
On the contrary, the stage seems to be set for continued increases in asset valuations and demand-driven growth. 
That said, geopolitical risks should not be discounted. 
While markets tend to shrug off localized political crises and even larger geopolitical challenges, some dramas may be set to spin out of control. 
In particular, the North Korean nuclear threat remains acute, with the possibility of a sudden escalation raising the risk of conflict between the US and China. 
The Middle East remains another source of serious instability, with tensions in the Gulf having intensified to the point that hostilities between Iran and Saudi Arabia and/or turmoil within Saudi Arabia are not unthinkable. 
In this case, it is Russia that might end up clashing with the US. 
Even barring such a major geopolitical upheaval, which would severely damage the global economy’s prospects in the short run, serious medium- and long-term risks loom. 
Rising income inequality, exacerbated by the mismatch between skills and jobs in the digital age, will impede growth, unless a wide array of difficult structural reforms are implemented, including reforms aimed at constraining climate change. 
As long as the geopolitical situation remains manageable, policymakers should have time to implement the needed structural reforms. 
But the window of opportunity will not stay open forever. 
If policymakers waste time on trickle-down sophistry, as is happening in the US, the world may be headed for severe economic distress. 

The Inflation Puzzle 
CAMBRIDGE – The low rate of inflation in the United States is a puzzle, especially to economists who focus on the relationship between inflation and changes in the monetary base. 
After all, in the past, increases and decreases in the growth rate of the monetary base (currency in circulation plus commercial banks’ reserves held at the central bank) produced – or at least were accompanied by – rises and falls in the inflation rate. 
And, because the monetary base is controlled directly by the central bank, and is not created by commercial banks, many believe that it is the best measure of the impact of monetary policy. 
For example, the US monetary base rose at an annual rate of 9% from 1985 to 1995, and then slowed to 6% in the next decade. 
This decelerating monetary growth was accompanied by a slowdown in the pace of inflation. 
The consumer price index (CPI) rose at a 3.5% rate from 1985 to 1995, and then slowed to just 2.5% in the decade to 2005. 
But then the link between the monetary base and the rate of inflation was severed. 
From 2005 to 2015, the monetary base soared at an annual rate of 17.8%, whereas the CPI increased at an annual rate of just 1.9%. 
To explain this abrupt and radical change requires examining more closely the relationship between the monetary base and inflation, and understanding the changing role of the reserves that commercial banks hold at the Federal Reserve. 
When banks make loans, they create deposits for borrowers, who draw on these funds to make purchases. 
That generally transfers the deposits from the lending bank to another bank. 
Banks are required by law to maintain reserves at the Fed in proportion to the checkable deposits on their books. 
So an increase in reserves allows commercial banks to create more of such deposits. 
That means they can make more loans, giving borrowers more funds to spend. 
The increased spending leads to higher employment, an increase in capacity utilization, and, eventually, upward pressure on wages and prices. 
To increase commercial banks’ reserves, the Fed historically used open-market operations, buying Treasury bills from them. 
The banks exchanged an interest-paying Treasury bill for a reserve deposit at the Fed that historically did not earn any interest. 
That made sense only if the bank used the reserves to back up expanded lending and deposits. 
A bank that that did not need the additional reserves could of course lend them to another bank that did, earning interest at the federal funds rate on that interbank loan. 
Essentially all of the increased reserves ended up being “used” to support increased commercial lending. 
All of this changed in 2008, when a legislative reform allowed the Fed to pay interest on excess reserves. 
The commercial banks could sell Treasury bills and longer-term bonds to the Fed, receive reserves in exchange, and earn a small but very safe return on those reserves. 
That gave the Fed the ability in 2010 to begin its massive monthly purchases of long-term bonds and mortgage-backed securities. 
This quantitative easing (QE) allowed the Fed to drive down long-term interest rates directly, leading to a rise in the stock market and to a recovery in prices of owner-occupied homes. 
The resulting rise in household wealth boosted consumer spending and revived residential construction. 
And businesses responded to this by stepping up the pace of investment. 
Although a link between the Fed’s creation of reserves and the subsequent increase in spending remained, its magnitude changed dramatically. 
The Fed increased its securities holdings from less than $1 trillion in 2007 to more than $4 trillion today. 
But, rather than being used to facilitate increased commercial bank lending and deposits, the additional reserves created in this process were held at the Fed – simply the by-product of the effort, via QE, to drive down long-term interest rates and increase household wealth. 
That brings us back to the apparent puzzle of low inflation. 
The overall CPI is actually slightly lower now than it was a year ago, implying a negative inflation rate. 
A major reason is the decline in gasoline and other energy prices. 
The energy component of the CPI fell over the last 12 months by 19%. 
The so-called “core” CPI, which excludes volatile energy and food prices, rose (though only by 1.8%). 
Moreover, the dollar’s appreciation relative to other currencies has reduced import costs, putting competitive pressure on domestic firms to reduce prices. 
That is clearly reflected in the difference between the -0.2% annual inflation rate for goods and the 2.5% rate for services (over the past 12 months). 
Nonetheless, inflation will head higher in the year ahead. 
Labor markets have tightened significantly, with the overall unemployment rate down to 5.4%. 
The unemployment rate among those who have been unemployed for less than six months – a key indicator of inflation pressure – is down to 3.8%. 
And the unemployment rate among college graduates is just 2.7%. 
As a result, total compensation per hour is rising more rapidly, with the annual rate increasing to 3.1% in the first quarter of 2015, from 2.5% in 2014 as a whole and 1.1% in 2013. 
These higher wage costs are not showing up yet in overall inflation because of the countervailing impact of energy prices and import costs. 
But, as these temporary influences fall away in the coming year, overall price inflation will begin to increase more rapidly. 
Indeed, the inflation risk is on the upside, especially if the Fed sticks to its plan to keep its real short-term interest rate negative until the end of 2016 and to raise it to one percentage point only by the end of 2017. 
If inflation does rise faster than the Fed expects, it may be forced to increase interest rates rapidly, with adverse effects on financial markets and potentially on the broader economy. 

The Oil Price Opportunity 
WASHINGTON, DC – The sharp drop in the price of crude oil since late June has been grabbing headlines worldwide – and producing a lot of contradictory explanations. 
Some attribute the fall largely to declining global growth expectations. 
Others focus on the expansion of America’s oil and gas production. 
Still others suspect a tacit agreement between Saudi Arabia and the United States aimed at, among other things, weakening political rivals like Russia and Iran. 
Regardless of the reason for the price drop – probably to be found in some combination of these factors – the consequences are the same. 
Though, as International Monetary Fund Managing Director Christine Lagarde has noted, lower oil prices may boost overall global growth, with the oil-importing advanced economies gaining the most, the impact on efforts to combat climate change could be devastating. 
Indeed, a sustained decline in oil prices would not only make renewable energy sources less competitive now; it would impede their future competitiveness by discouraging research and investment. 
More generally, it would reduce the incentive for consumers, companies, and governments to pursue more energy-efficient practices. 
Even if we remained on our current trajectory, keeping temperatures from rising more than 2º Celsius above pre-industrial levels – the threshold beyond which the most disruptive consequences of climate change would be triggered – would be next to impossible to achieve. 
As the Intergovernmental Panel on Climate Change’s most recent report reinforced, we cannot afford a slowdown in progress. 
Of course, climate science is not precise; instead, it works in terms of probability ranges. 
But uncertain estimates do not mean that the risk is any less acute. 
World leaders increasingly seem to recognize this in theory, including at the just-concluded climate-change meeting in Lima, Peru. 
But they continue to depend on non-binding commitments – leaving the world on a dangerous climate trajectory. 
A sharp decline in oil prices does, however, provide a rare political opportunity to introduce more carbon pricing. 
After all, one of the major arguments against a “carbon tax” has been that it would make energy more expensive. 
Even assurances that the revenue from such a tax would be refunded to taxpayers were inadequate to overcome political resistance, particularly in the US. 
But, with declining oil prices now exerting downward pressure on oil substitutes, a carbon tax could be introduced without raising the price of energy for consumers. 
Policymakers must simply be willing to forego some of the short-term stimulus effects of cheaper energy. 
In fact, with low enough prices, consumers could still benefit from lower energy costs – just not quite as much as they are now. 
The structure of a carbon-pricing scheme remains up for discussion. 
One option would be to introduce flexible pricing, tied to the price of oil. 
For example, for every $5 decline in the price per barrel, the carbon tax could be raised by a specified amount; for every $5 increase, the tax could be lowered by, say, two-thirds of that amount. 
The carbon price would thus increase over time – the optimal outcome, according to growth models that account for climate constraints. 
At the same time, it would buffer consumers from oil-price volatility, thereby stabilizing their energy spending. 
Finally, and perhaps most important, such an approach would be more politically attractive than a fixed carbon tax, especially if it is introduced at a time of sharply declining oil prices. 
In short, world leaders must take advantage of falling oil prices to move beyond indirect carbon pricing – achieved through the prices of carbon-emitting substances – to an explicit carbon tax that can help steer the world onto a more sustainable growth path. 
Crucially, in order to make a real impact, carbon-pricing schemes would have to be introduced in all major economies. 
Of course, given the multitude of existing taxes, fees, and subsidies on energy products in various countries, the goal of aligning the effective cost of carbon with its most economically efficient level would take time to achieve. 
But introducing a modest, flexible carbon tax in major economies would be an important first step. 
Today’s environment of falling oil prices enables the world to take that step. 
It should be modest, so that it is politically feasible; flexible, so that it helps stabilize user prices; and it should increase over time, to place the global economy on a more sustainable path. 
Most important, it should be implemented quickly. 
After all, this window of opportunity will not remain open for very long. 

Nothing Natural About the Natural Rate of Unemployment 
NEW YORK – Why is unemployment so low in countries where inflation remains subdued? 
For economists, this is a fundamental question. 
And when economists confront a fundamental question, fundamental disagreement often follows. 
I was one of the rebel economists of the 1960s who rejected the macroeconomics we were taught in the 1950s – the “Keynesian” theory developed by J.R. Hicks, A.W. Phillips and James Tobin, according to which aggregate demand drove everything. 
High unemployment was caused only by deficient demand, and low unemployment only by abnormally high demand. 
This bothered us, because the basic economic theory we were taught – the theory built by Alfred Marshall, Knut Wicksell, and Robert Solow – said everything was driven by structural forces. 
Faster technological progress and a greater preference to work or to save were to be welcomed, because they would boost the supply of labor and capital – and thus employment and investment. 
But the Keynesians maintained that structural forces were bad, because they cost people their jobs, unless policymakers manufactured enough demand to match the increase in supply. 
A conclusion we drew was that, at the very least, the path of an economy, measured by conventional macroeconomic variables of unemployment, inflation, and output growth, is not fully determined by aggregate demand. 
Structural forces matter. 
Keynesians’ claim that “demand” is all-powerful – that it alone increases employment and thus investment and even growth – was groundless. Yet they continue to repeat it. 
The structuralist perspective on macroeconomic behavior led to the concept that came to be called the “natural” rate of unemployment, borrowing from the notion, which arose in Europe during the interwar years, of a “natural” interest rate. 
Yet the term “natural” was misleading. 
The basic idea of the structuralist approach is that while market forces are always fluctuating, the unemployment rate actually has a homing tendency. 
If it is, say, below its “natural” level, it will rise toward this level – and the rate of inflation will pick up. 
(Of course, a fresh shock to demand could send unemployment back up and reduce inflation; but the “natural rate” always exerts its centripetal force.) 
But there is a complication I have long emphasized. 
The “natural rate” itself may be pushed up or pulled down by structural shifts. 
Moreover, shifts in human attitudes and norms may also have an impact. 
Yet a curious development has posed a challenge to this view. 
America and the eurozone are in the midst of a boom. 
In America, unemployment has reached very low levels and shows no sign of rising back to its former natural rate – whatever its new level may be. 
With no more evidence than that, a structuralist model would predict an inflation rate that is already elevated and rising – and the inflation rate is not running high, even though the US Federal Reserve has flooded the economy with liquidity. 
In the eurozone, too, unemployment is falling, yet inflation rates are still low there, too. 
What explains the paradox of low unemployment despite low inflation (or vice versa)? 
So far, economists – structuralists as well as diehard Keynesians – have been stumped. 
The answer must be that the “natural rate” is not a constant of nature, like the speed of light. 
Certainly, it could be moved by structural forces, whether technological or demographic. 
It is possible, for example, that demographic trends are slowing wage growth and reducing the natural rate. 
From the 1970s to the late 2000s, demography was essentially a dormant issue. 
Now, the baby boomers are retiring from relatively high-wage jobs while young people, who start at relatively low wages, are still pouring in to the labor market. 
This slows the growth of wage rates at a given unemployment rate, leading to lower unemployment at a given rate of wage growth. 
More interesting is the possible effect of people’s values and attitudes, and their hopes and fears about the unknown and unknowable, on the natural rate. 
Here we are entering terra incognita. 
For me, a compelling hypothesis is that workers, shaken by the 2008 financial crisis and the deep recession that resulted, have grown afraid to demand promotions or to search for better-paying employers – despite the ease of finding work in the recently tight labor market. 
A corollary hypothesis is that employers, disturbed by the extremely slow growth of productivity, especially in the past ten years, have grown leery of granting pay raises – despite the return of demand to pre-crisis proportions. 
I have also argued, based on a model of mine, that as the return of a strong dollar by early 2015 threatened to inundate American markets with imports, firms became scared to supply more output at the same price. 
Or else they supplied the same output as before at reduced prices. 
And they refused to raise employees’ wages. 
In short, more competition created “super-employment” – low unemployment and low inflation. 
All this does not mean there is no natural unemployment rate, only that there is nothing natural about it. 
There never was. 

When Inequality Kills 
NEW YORK – This week, Angus Deaton will receive the Nobel Memorial Prize in Economics “for his analysis of consumption, poverty, and welfare.” 
Deservedly so. 
Indeed, soon after the award was announced in October, Deaton published some startling work with Anne Case in the Proceedings of the National Academy of Sciences – research that is at least as newsworthy as the Nobel ceremony. 
Analyzing a vast amount of data about health and deaths among Americans, Case and Deaton showed declining life expectancy and health for middle-aged white Americans, especially those with a high school education or less. 
Among the causes were suicide, drugs, and alcoholism. 
America prides itself on being one of the world’s most prosperous countries, and can boast that in every recent year except one (2009) per capita GDP has increased. 
And a sign of prosperity is supposed to be good health and longevity. 
But, while the US spends more money per capita on medical care than almost any other country (and more as a percentage of GDP), it is far from topping the world in life expectancy. 
France, for example, spends less than 12% of its GDP on medical care, compared to 17% in the US. 
Yet Americans can expect to live three full years less than the French. 
For years, many Americans explained away this gap. 
The US is a more heterogeneous society, they argued, and the gap supposedly reflected the huge difference in average life expectancy between African Americans and white Americans. 
The racial gap in health is, of course, all too real. 
According to a study published in 2014, life expectancy for African Americans is some four years lower for women and more than five years lower for men, relative to whites. 
This disparity, however, is hardly just an innocuous result of a more heterogeneous society. 
It is a symptom of America’s disgrace: pervasive discrimination against African Americans, reflected in median household income that is less than 60% that of white households. 
The effects of lower income are exacerbated by the fact that the US is the only advanced country not to recognize access to health care as a basic right. 
Some white Americans, however, have attempted to shift the blame for dying younger to African Americans themselves, citing their “lifestyles.” 
It is perhaps true that unhealthy habits are more concentrated among poor Americans, a disproportionate number of whom are black. 
But these habits themselves are a consequence of economic conditions, not to mention the stresses of racism. 
The Case-Deaton results show that such theories will no longer do. 
America is becoming a more divided society – divided not only between whites and African Americans, but also between the 1% and the rest, and between the highly educated and the less educated, regardless of race. 
And the gap can now be measured not just in wages, but also in early deaths. 
White Americans, too, are dying earlier as their incomes decline. 
This evidence is hardly a shock to those of us studying inequality in America. 
The median income of a full-time male employee is lower than it was 40 years ago. 
Wages of male high school graduates have plummeted by some 19% in the period studied by Case and Deaton. 
To stay above water, many Americans borrowed from banks at usurious interest rates. 
In 2005, President George W. Bush’s administration made it far more difficult for households to declare bankruptcy and write off debt. 
Then came the financial crisis, which cost millions of Americans their jobs and homes. 
When unemployment insurance, designed for short-term bouts of joblessness in a full-employment world, ran out, they were left to fend for themselves, with no safety net (beyond food stamps), while the government bailed out the banks that had caused the crisis. 
The basic perquisites of a middle-class life were increasingly beyond the reach of a growing share of Americans. 
The Great Recession had shown their vulnerability. 
Those who had invested in the stock market saw much of their wealth wiped out; those who had put their money in safe government bonds saw retirement income diminish to near zero, as the Fed relentlessly drove down both short- and long-term interest rates. 
With college tuition soaring, the only way their children could get the education that would provide a modicum of hope was to borrow; but, with education loans virtually never dischargeable, student debt seemed even worse than other forms of debt. 
There was no way that this mounting financial pressure could not have placed middle-class Americans and their families under greater stress. 
And it is not surprising that this has been reflected in higher rates of drug abuse, alcoholism, and suicide. 
I was chief economist of the World Bank in the late 1990s, when we began to receive similarly depressing news from Russia. 
Our data showed that GDP had fallen some 30% since the collapse of the Soviet Union. 
But we weren’t confident in our measurements. 
Data showing that male life expectancy was declining, even as it was increasing in the rest of the world, confirmed the impression that things were not going very well in Russia, especially outside of the major cities. 
The international Commission on the Measurement of Economic Performance and Social Progress, which I co-chaired and on which Deaton served, had earlier emphasized that GDP often is not a good measure of a society’s wellbeing. 
These new data on white Americans’ declining health status confirms this conclusion. 
The world’s quintessential middle-class society is on the way to becoming its first former middle-class society. 

Corporate America’s Health-Care Gambit 
LUND, SWEDEN – In late January, Amazon, Berkshire Hathaway, and JPMorgan Chase announced plans to create a company that would help their employees in the United States obtain heath care “at a reasonable cost.” 
While details remain sparse, the potential impact is already known: with a combined global workforce of more than one million people, the partnership could overhaul how health care is organized and delivered in the US and beyond. 
By creating a joint venture “free from profit-making incentives and constraints,” the initiative aims to do something remarkable: put patients first. 
According to Berkshire Hathaway CEO Warren Buffett, the goal is to rein in ballooning health-care costs – a “hungry tapeworm on the American economy,” as he put it – while enhancing patient satisfaction and outcomes. 
Today, most of the US health-care industry is profit-driven, and this is reflected in nearly every decision, from which drugs get developed to who gets insured. 
But in a country that spends roughly 18% of its GDP on health care, yet lags far beyond other rich countries in health outcomes, something is clearly amiss. 
It is into this dysfunctional environment that the three corporate giants are intervening. 
Europeans are particularly interested in how this new partnership evolves, if only because it represents a bold approach in the struggle to lower health-care costs. 
European health-care regulators are often hesitant to implement structural reforms. 
Although authorities in some countries have explored innovative management models, such as patient-centered care and value-based medicine, the basic structures have remained unchanged for decades. 
Shakeups like the one being discussed in the US get everyone thinking. 
Still, despite the proposal’s promise, big questions remain. 
Most important, what does “reasonable cost” mean, and how might a system be organized to deliver it? 
In a statement announcing the partnership, Buffett was surprisingly candid in how undeveloped the idea is. 
“Our group does not come to this problem with answers,” he conceded, only with a shared ambition to find them. 
Maybe I can help. 
Based on my research and experience, I would suggest that three key objectives must be assigned top priority if the initiative is to succeed. 
The first is to hold down administrative costs. 
In 2015, OECD countries spent an average of 3.2% of their total health-care expenditures on administration and bureaucracy; in the US, it was a staggering 8.3%. 
Although health care requires managerial overhead, in many countries, outdated tools hurt efficiency. 
Any reform that promises better information management – like improved patient records systems – would be worth considering. 
Moreover, if the new venture brings big-data analysis and artificial intelligence applications to the clerical side of health care, total spending will naturally decline, and lower prices can be passed on to patients and payers. 
Second, a reasonably priced system is one that focuses only on essential care. 
Modern health-care systems deliver a range of services, but they also typically offer more than is necessary. 
For example, many systems in Europe are integrated into the welfare system, an approach that raises expectations about which services should be provided. 
By using different models of strategic purchasing and cost sharing, and by being more transparent about which services are covered, users could more accurately align their expectations with reality. 
Any new system that eliminates unnecessary care and focuses on what is really needed for patient wellbeing would also be more reasonably priced. 
Finally, those designing the Amazon-Berkshire Hathaway-JPMorgan health-care company must emphasize preventive medicine. 
Today, some of the world’s most common killers – such as cardiovascular illnesses and certain cancers – are preventable; as technology advances, doctors will be able to diagnose and treat these diseases even faster. 
To be sure, preventive medicine is not easily incorporated into health-care strategies, which is why OECD countries typically don’t spend significantly on it. 
In fact, many countries allocate more to administration than disease prevention and wellness initiatives. 
But it is undeniable that early diagnosis reduces overall treatment costs, and if future health systems are to be priced fairly, they must integrate health promotion. 
No matter what becomes of the proposed health-care company, the very fact that corporate America is considering this type of intervention will resonate around the world. 
Even if the effort is only partly successful, the money saved is likely to encourage further innovation. 

The Two Best Ways to Reduce Infant Mortality 
BANGKOK – One of the more ambitious targets of the United Nations Sustainable Development Goals (SDGs) is the commitment to end preventable deaths of newborns and children over the next decade. 
If this target is met, by 2030 no country will have a neonatal mortality rate above 12 deaths per 1,000 births – a quarter of the current rate in parts of Sub-Saharan Africa. 
Given the magnitude of the challenge, huge investments will be needed in health-care infrastructure and planning. 
Perhaps the most effective way to reduce infant mortality would be to encourage uptake of two readily available resources: maternal vaccinations and breast milk. 
Protecting children from early deaths begins before they are born. 
When a woman is vaccinated against common illnesses like influenza, her body creates antibodies that recognize viruses and boost natural defenses against pathogens. 
When she becomes pregnant, these protective proteins are transferred to her baby across the placenta. 
Remarkably, the benefits continue after birth. 
For example, while the flu shot is not approved for infants younger than six months old, clinical trials have shown that children born to mothers who have been vaccinated are better protected against the illness. 
In one study of mothers and their babies in Bangladesh, researchers recorded a staggering 63% reduction in influenza cases among infants born to vaccinated mothers, a 36% reduction in the number of serious respiratory illnesses for mothers, and a 29% reduction in such illnesses among infants. 
Maternal immunization against the flu also helps protect infants from pneumonia, a common cause of childhood mortality. 
A 2018 analysis of flu-vaccine trials conducted in Nepal, Mali, and South Africa found that infants were 20% less likely to develop pneumonia if their mothers had been inoculated. 
Children too young to be completely vaccinated against Streptococcus pneumoniae and influenza were the biggest beneficiaries. 
Armed with data from these and other studies, governments in low-income countries should be able to plan smarter immunization campaigns and substantially lower rates of infant morbidity and mortality. 
The second way to reduce childhood mortality, breastfeeding, arguably has a greater impact. 
Breast milk is the perfect nutrition for a baby, providing all the proteins, fats, vitamins, minerals, and enzymes that a young body needs to stay healthy. 
Best of all, mothers create new antibodies in real time, which help strengthen young immune systems. 
Unfortunately, rates of breastfeeding and breast-milk consumption are well below desired levels. 
Only 40% of infants worldwide are breastfed exclusively until they are at least six months old, as the World Health Organization (WHO) recommends. 
The reasons are complex, but in many countries, lack of education, together with aggressive marketing by makers of baby formula, has contributed to a decline in breastfeeding. 
Recently, the United States has been accused of siding with the formula industry by opposing a WHO resolution in support of breastfeeding. 
Convincing mothers to breastfeed should be easier. 
For starters, breastfed babies are less likely to contract ear infections and meningitis, or to suffer gastrointestinal illnesses and diarrhea. 
These advantages continue for as long as a baby is breastfed. 
Mothers also benefit from breastfeeding. 
Research shows that women who have breastfed during their lives are less likely to develop non-communicable diseases like cardiovascular illness, breast cancer, and type 2 diabetes. 
Many of these gains derive from the fact that breastfeeding helps break down the extra fat that accumulates in a woman’s body during pregnancy. 
In fact, producing milk for a single infant burns as much as 500 calories a day. 
Even though the majority of new mothers are able to breastfeed, not all women can produce enough milk, owing to exhaustion, depression, or physical weakness following postpartum surgery. 
Some mothers are simply unable to meet their child’s needs, while others lack the medical or social support to navigate the logistics of breastfeeding. 
Nonetheless, for those who can supply their babies with at least six months of breast milk, the benefits are significant. 
If the international community is serious about meeting the health targets set by the SDGs, it must redouble its efforts to encourage more mothers to be vaccinated against preventable illnesses and to feed their newborns breast milk. 
These two practices alone could do more to reduce infant mortality than just about any other global health initiative. 

Lucky Little Countries? 
AMSTERDAM – Western Europe’s small democracies have, on the whole, been exceptionally fortunate. 
Freer and richer than almost anywhere else in the world, countries such as Holland, Belgium, and Switzerland would seem to have little to worry about. 
This is why the world normally hears less about them than about Afghanistan, say, or Kosovo. 
Yet all three have been much in the news of late – and not for happy reasons. 
The most successful political force in Switzerland today is Christoph Blocher’s Swiss People’s Party. 
The party’s propaganda material tells its story. 
A poster shows three white sheep kicking a black sheep off the Swiss flag. 
And images of junkies and Muslim women in headscarves are contrasted in a promotional movie with idyllic pictures of Alpine scenery and efficient banks – the People’s Party’s Switzerland. 
Vlaams Belang, the Flemish nationalist party, may not be the biggest party in Belgium, but it has done well in local elections. 
Like the Swiss People’s Party, Vlaams Belang feeds on popular resentment of immigrants – especially Muslim immigrants – of the European Union, and, of course, of the French-speaking Walloons, from whom the Flemish nationalists would like a divorce. 
This last sentiment is posing a serious threat to Belgium’s survival. 
Although the Dutch government is still managed mostly by mainstream, steady-as-you-go Christian Democrats, right-wing populism is growing. 
Geert Wilders’ Freedom Party wants to ban the Koran, halt Muslim immigration, and deprive delinquents with an immigrant background of Dutch citizenship. 
The new Proud of the Netherlands Movement, led by Rita Verdonk, the former Minister of Integration, promotes a somewhat more respectable version of this hard line. 
These parties and movements share a sense that native-born citizens have been let down by liberal political elites, who seem unable or unwilling to stem the tide of immigration, crime, and Islamist militancy, as well as the erosion of national sovereignty by EU bureaucracy and global capitalism. 
Such fears are by no means confined to Europe’s small countries. 
Nicolas Sarkozy’s election in France has at least something to do with similar feelings. 
But anxieties about being swamped by foreigners and dominated by outside powers are more acute in smaller countries, whose political elites seem particularly impotent. 
The Dutch case is the most surprising, because, unlike Belgium, the Netherlands has no significant tradition of right-wing populism. 
Nor does it share Switzerland’s insularity. 
On the contrary, the Dutch pride themselves on their openness and hospitality to foreigners. 
The case of Somalia-born Ayaan Hirsi Ali, the bestselling author of Infidel , best illustrates both the popular resentments and the relative openness that mark contemporary Dutch society. 
Much criticism and even abuse has been heaped on the Dutch for the way her adopted country has treated her. 
She has received death threats from Muslim extremists ever since she renounced – indeed, denounced – her Muslim faith, and was forced to live as a virtual fugitive, albeit under the protection of the Dutch state. 
Before moving to the United States, she was forced out of her apartment in The Hague by complaining neighbors, and almost deprived of her passport. 
Now that she is a permanent US resident, the Dutch government no longer wants to pay for her protection. 
Commentators in the US and elsewhere have accused the Dutch of “unacceptable cowardice.” 
Salman Rushdie called her “the first refugee from Western Europe since the Holocaust.” 
French intellectuals, never shy of public posturing, are campaigning to give her French citizenship. 
The way the Dutch government handled the affair was not elegant, to say the least. 
But I’m not sure how many governments do pay for the protection of private citizens who live permanently abroad. 
The US doesn’t pay to protect its citizens who are under threat even at home. 
It is easy to voice contempt of the Dutch government. 
But what has been lost in all the commentary is the nature of Hirsi Ali’s rise to prominence. 
It is hard to imagine many countries where a young African woman could become a famous member of parliament only ten years after seeking asylum. 
But the reasons for her rise are not entirely salubrious. 
Whatever the merits – and they are considerable – of her arguments against the bigotry of Islamic or African customs, especially those concerning the treatment of women, she lent respectability to bigotry of a different kind: the native resentment of foreigners, and Muslims in particular. 
Indeed, contrary to what some commentators have written, it wasn’t cowardly liberals who hounded Hirsi Ali out of the country because of her politically incorrect views about Islam. 
She was betrayed by her own former ally, Rita Verdonk, and a variety of Dutch xenophobes, who don’t like an outspoken black female immigrant from Somalia any more than they like Muslims. 
But the truth in these matters counts for less than the emotions. 
And the emotions in this case betray an element of Schadenfreude: look at how even the Dutch, always boasting of their superior tolerance and liberalism, have responded like cowards when their principles are truly tested. 
It is true that the Dutch, proud and comfortable inside their narrow borders, have, like the Swiss, often viewed the outside world with a degree of smugness. 
And for this they are now being punished. 
That, too, is the natural fate of being a lucky little country in Western Europe. 

Lucky Putin, Unlucky Yeltsin 
Russian President Vladimir Putin’s assertive foreign policy stance of recent years reflects the confidence that comes with a booming economy. 
In 1999, the year before Putin succeeded Boris Yeltsin as president, Russia’s GDP was a paltry $200 billion. 
By last year, it had reached $1 trillion. 
Real growth has averaged 7% for eight years, and real incomes have grown by roughly 10% per year. 
Russia’s budget surplus has stood at more than 7% of GDP in the last two years, public debt has dwindled to only 8% of GDP, from 100% in 1999, and the current account surplus has averaged at 10% of GDP for the last eight years. 
But Russia’s stellar economic performance has little to do with Putin’s policy, and a lot to do with the reforms Yeltsin embraced. 
By 1998, Russia already had achieved a critical mass of markets and private enterprise, while the financial crash of that year worked like a catharsis, forcing the government to abolish enterprise subsidies that underpinned a devastating budget deficit of some 9% of GDP. 
Moreover, world oil prices that had fallen to $10 a barrel started rising toward the stratosphere. 
The whole success story thus was in place in early 1999, one year before Putin entered the stage. 
To be sure, Putin should be praised for substantial economic reforms during his first three years. 
A new tax code was adopted, with lower and fewer taxes, notably a flat income tax of 13%. 
The civil code was completed, a new customs code was enacted, and substantial judicial reform was implemented. 
At the same time, however, Putin has systematically eliminated the rudimentary democracy Yeltsin had build. 
One television channel after another was taken over by the state under various pretexts, as were major newspapers. 
Opposition candidates and parties were denied registration for the slightest formal complaint. 
Falsification of elections became the rule. 
Many prominent Russians favored the Pinochet model of authoritarian politics and liberal economics. 
But growing authoritarianism also hit business. 
In October 2003, Putin cracked down on Mikhail Khodorkovsky, the CEO and main owner of Yukos oil, Russia’s most valuable company, who was thrown into prison on dubious charges of tax fraud after backing Putin’s political opponents. 
Moreover, Putin’s associates wanted Yukos’ wealth, which was confiscated by the state oil company Rosneft through lawless taxation, leaving Putin’s tax reform and judicial reform in tatters and severely undermining property rights. 
In fact, since 2003, Putin’s main economic policy has been re-nationalization. 
Well-run private companies have been more or less forced to sell out to state-dominated companies. 
Gazprom is buying up oil (Sibneft), gas, and power companies at knockdown prices, reinforcing its monopoly. 
That, in turn, allows Gazprom to boost its profitability through price increases, despite stagnant production. 
Indeed, with state companies now producing one-third of Russia’s oil, output growth has plummeted, as owners of private enterprises – the source of dynamism in the sector – are now afraid to invest in new capacity. 
Among foreign investors, both Shell and TNK-BP are being pushed out by Gazprom in their main gas fields in Russia. 
Beyond oil and gas, Russia’s arms export agency, Rosoboronexport, has just seized Avtovaz, the giant dysfunctional Soviet car factory, and VSMPO-Avisma, Russia’s big titanium company, while all aircraft production has been concentrated in one state company. 
The government cheers this re-nationalization, although it has reduced Russia’s industrial growth from 8.3% in 2004 to 4% in the last two years. 
Similarly, inefficient state banks – far inferior to private banks even in Kazakhstan or Ukraine – dominate the banking system. 
The not very profitable state-owned Vneshtorgbank, for example, is on a buying spree, aggravating the quality of Russian banking. 
Increasingly, Russia’s oil surpluses drive economic growth through rising investment, which boosts construction and consumption, in turn benefiting retail trade and finance. 
With personal incomes rising strongly, poverty is declining, while 68% of Russia’s college-age youth now attend universities. 
But other social indicators are unimpressive. 
Life expectancy for men is stuck at 59. 
The murder rate is even higher under Putin than it was under Yeltsin, as is the traffic death rate. 
None of the big public systems – education, health care, or the military – has been reformed, and the regime shows little interest in doing so. 
Instead, the Kremlin is preoccupied with the profitability and value of the state-dominated companies that it controls. 
Not surprisingly, all corruption indicators have been rising since Putin took over from Yeltsin, whereas they are falling in most post-communist countries. 
Although corruption is pervasive, no top official has been prosecuted. 
Putin and his KGB friends from St. Petersburg sit safely on all this wealth, thanks to their authoritarian governance and control over all security organs. 
Such a powerful apparatus cannot retire to a quiet life in a dacha as Yeltsin did – it would have to privatize everything first – which implies that Putin has no choice but to remain in office, regardless of what he says about not seeking a third presidential term. 
But if he holds on to power contrary to the constitution, his popularity could easily collapse, especially as his economic policy has thrived on luck, not reform. 

The People’s Corporations 
LONDON – Two big power shifts are occurring around the world today. 
First, corporate power is growing relative to that of governments. 
Second, ordinary people are also gaining greater influence. What does it mean that these seemingly contradictory shifts are happening simultaneously? 
There is, no doubt, more power in the hands of companies than ever before. 
People who have not been popularly elected control more and more of our daily lives – from entertainment and energy supplies to schools, railways, and postal services. 
At the same time, the speed of technological innovation is outpacing that of legislation, meaning that corporate activities are routinely entering seemingly gray areas devoid of regulation. 
But, counterbalancing this trend, people now have the means and opportunities to ensure that companies’ behavior does not go unchecked. 
They are becoming more educated and aware of how companies operate, and they are more proactive and outspoken when they believe a company has crossed the line. 
The public increasingly acts as the conscience of companies and industries, asking hard questions and holding them to account. 
In the past several years, more effective means of collective action – such as social media, open publishing platforms, and online video sharing – have given people more levers to pull. 
As people pursue boycotts and disinvestment, lobby for legislation, and activate social-media campaigns with growing sophistication, they are increasingly able to influence companies’ operational and strategic decision-making, thereby imposing checks and balances on today’s enormous accretions of private power. 
For some companies, this has come as a thunderbolt. 
Consider the British Petroleum oil spill in the Gulf of Mexico in 2010. 
The BP spill was one of the first instances in which companies were forced to contend with the power of social media – and in which people realized the potential of the tools at their disposal. 
Like most companies at the time, BP was accustomed to communicating with traditional seats of power – the White House, the Kremlin, and so on – and to doing so via traditional modes of communication, such as briefing carefully selected journalists and distributing precisely worded press releases. 
The Gulf oil spill changed all of that. 
Communities united around an issue and found a voice on Facebook. 
There was a massive conversation going on, and BP was neither a part of it nor able to control it via traditional communication-management methods. 
Since then, there has been a marked increase in this sort of direct action. 
Social media spread ideas in an immediate and unfettered manner. 
A document, an image, or a video is shared, and suddenly what was secret or shielded is globally exposed. 
And, though wrong or false information spreads just as quickly as true information, corrections are often swift as well. 
For younger people today, using social media as a tool for activism is second nature. 
They are fluent in using YouTube, Twitter, Facebook, and Reddit to communicate and create a community around an idea, issue, or objection – and to nurture the growth of a small group into a mass movement. And older people are not far behind. 
As corporate power rises, holding companies to account becomes increasingly important. 
The scope of accountability must expand as well, in order to affect the behavior of executives and non-executives alike. 
And companies’ board members will be increasingly held to account for how well they hold senior management to account. 
With all of that comes a culture of questioning that which was previously unquestioned – including how companies are run and whether an organization’s actions are ethical. 
Any action can be questioned by anyone, and if others find it interesting or important, the question will spread – and not just within a small community or a specialist group, but more broadly and around the world. 
This shift has changed the nature of activism and collective action. 
It has also made for new kinds of allies, with activist investors like Carl Icahn tweeting their intentions and markets responding. 
Likewise, those who in other circumstances might see activist investors as natural adversaries can agree with the positions that they take, such as concerns about executive compensation or corporate social responsibility. 
Activist investors can write open letters that may not be picked up by mainstream media outlets, but that can go viral on Twitter or Reddit. 
This is often enough to make boards and executive committees sit up and take notice. 
Corporate leaders who embrace this new reality, view it as an opportunity, and resist the inclination to “manage” or avoid issues will have a competitive advantage. 
They will not regard meeting people where they are as a way to manipulate them, but as an opportunity to hear what they are saying. 
Their first impulse will not be to figure out how to use modern means of direct communication to persuade customers, employees, and other stakeholders to think and do the things that they want them to think and do. 
Instead, they will make real changes – and they will be better off for it. 
Companies make our cars, our phones, and our children’s textbooks – and exercise increasing control over the daily lives and destinies of people worldwide, not only those who use their products, but also those who work for them and those who live in the communities where they are based. 
If companies do not take seriously the responsibility that comes with their great and growing power, people will be there to remind them. 

The Blatterball Diaries 
LONDON – The World Cup has concluded with its usual flourish, and much of the world, as usual, couldn’t help but get caught up in the excitement of it all – which is exactly the outcome that Sepp Blatter wants. 
Blatter, the president of FIFA, the Cup’s organizing body, wants the afterglow of an exciting month of play to blot out the corruption and backroom deals – and, most recently, a ticket scandal – that have roiled his tenure. 
Times were very different in 1998, when Blatter took up his role. 
Social media did not exist, and the Internet had not yet become a means of spreading the views of the voiceless and disenfranchised. 
Nor was the culture of shareholder activism and corporate social responsibility as strong as it is today. 
As BP, GM, and Royal Bank of Scotland have discovered, the world is watching, talking, and no longer willing to accept the old way of conducting business. 
FIFA has two problems. 
One is a straightforward lack of compliance with accepted business practices. 
Allegations of wrongdoing range from match-fixing and bribery among members of FIFA’s Executive Committee to questions about how Qatar was chosen to host the World Cup in 2022. 
The second problem is arguably more serious, for it is epiphenomenal: the damage that unethical behavior has done to the ideal of fair play. 
When people see an institution that relates to something that they feel passionate about failing so publicly to abide by simple rules, they lose faith not only in that institution, but also in the idea that good governance is achievable at all. 
The message sent, and understood, is that some institutions – of all kinds – are immune from scrutiny and can play by their own rules. 
The code of conduct on the field – where we expect players to give their all under clear rules that are swiftly enforced by independent referees – is fundamentally the same as what we expect from governing bodies off the field. 
In this sense, FIFA is not a special case: All non-profit and for-profit organizations around the world are expected to abide by this code of conduct. 
And that is why FIFA’s problems are unlikely to fade from view. 
They must be addressed head-on, with a clean sweep of its leadership and a complete overhaul of its governance structures. 
FIFA is as complex as any large multinational private or public organization; how it is governed must reflect that. 
For starters, FIFA must introduce truly independent board members to the governance process – people who will ask hard questions and challenge the organization’s executives. 
Governance solely by association members has not worked – and, by encouraging a lack of transparency, may have made FIFA more vulnerable to the problems it now faces. 
No organization that holds so much public influence and importance should be able to operate as a black box. 
Likewise, FIFA must introduce and adhere to clearer term limits for its president and board members, starting with Blatter – and with immediate effect. 
More effective checks and balances will not come easily; but they will not come at all without champions. 
Before the World Cup began, some representatives of FIFA member associations spoke up in opposition to the status quo. 
It will now be seen whether their actions reflect their words. 
There are other glimmers of hope. 
In the world of for-profit companies, investors are increasingly demanding better corporate-governance standards and more diverse boards that include independent members. 
They are taking a much more active and public role in speaking out against bribery, corruption, and excessive pay packages, and in favor of corporate social responsibility and fair labor practices. 
If their calls go unheeded, they vote at the annual general meeting – or with their feet. 
FIFA’s sponsors must hold FIFA similarly to account, and there are signs that some are finally beginning – albeit tentatively – to speak out. 
If they don’t, sponsors will leave themselves exposed to a consumer backlash as FIFA’s poor reputation rubs off on their brands. 
Customers are savvier than ever before, and they, too, can vote with their feet. 
Ultimately, however, change starts at the top. 
Consider what a change in leadership has done for the Roman Catholic Church: Pope Francis is transforming an institution that was thought to be so byzantine, opaque, and intractable that change was all but impossible. 
If the Catholic Church can change, so can the church of football. 
There is another lesson here: good leadership also consists in knowing when to step down. 
If Blatter genuinely cares about FIFA, he knows that remaining there would mean dragging the organization further into disrepute, damaging whatever positive contributions he has made, and quite possibly being forced to leave under a cloud. 
The caption to a picture of Blatter on page six of FIFA’s 2013 financial report reads: “We have reached very high levels of accountability, transparency, and financial control.” 
The problem is that no one believes it. 
FIFA desperately needs to restore its public credibility. 
That can happen only after the necessary changes at the top and throughout the organization have been achieved. 

Lula and the Politics of the Precipice 
Two weeks after his triumph, Luiz Inácio "Lula" da Silva's resounding electoral victory in Brazil is still raising eyebrows on the right and expectations among Latin America's long dispirited leftists. 
His triumph represents both the symbols and realities of today's Latin America. 
It symbolizes the impatience of voters who see chronic problems remain unsolved, and it highlights the pervasive belief that right-wing governments are chronically corrupt. 
As the fog of leftist celebration and the chorus of rightwing laments dissipate, the outlines of what Lula can and cannot do are becoming more clear. 
No question: the past ten or twelve years in Latin America represented a turning point for democracy in the region. 
Honest elections were held almost everywhere, and these delivered a whole new generation of political actors. 
Moreover, presidents and former presidents were jailed or interrogated for corruption in Argentina, Venezuela, Brazil, as well as in Central America's small republics. 
Over all this time, however, the new political players and the old parties of the left failed to articulate any coherent alternative social/economic agenda to compete with the prevailing liberal one. 
One reason they did not is that political parties across Latin America are divided and decrepit. 
In Central America, they continuously fragment into ever smaller units that fight for insignificant positions of authority and irrelevant representation. 
The only party in the region with a concrete political agenda is El Salvador's right-wing ARENA party, which has won three elections in a row and appears likely to win a fourth. 
Elsewhere, that sad pattern of fragmentation has taken hold: Peronismo in Argentina and the Christian Democratic factions of Venezuela, Colombia, and Chile all are politically weak amalgamations. 
Despite ten years of privatization programs, deepening trade liberalization, and state apparatuses cut to one-third of their former size in many countries, growth rates failed to deliver the desired social benefits. 
Squalor persists while competitive markets press the region to cut costs on the backs of the poor. 
Movements and parties of the left have simply failed to offer an alternative and more just model to this. 
All they can manage is the hot air of anti-globalization rants that lack any concrete social agenda. 
Lula's victory offers an opportunity to reconsider the neoliberal answers that hold sway despite their failures. 
But this reconsideration must find new answers within fiscal and budgetary constraints, and Lula knows it. 
For the left, his victory is an incentive to come up with realistic alternatives to the tried and failed liberal nostrums, and the discredited state socialism that was abandoned a decade ago. 
Finding answers that work won't be easy. 
Latin American populists have always sought quick fixes that fail to solve underlying problems. 
Lula won because he shunned populism's easy answers, and seemed to demonstrate a determination to achieve a strategic, rather than a mere tactical political victory. 
By penetrating the political establishment with progressives who can talk the language of free markets and by questioning, not rejecting outright, economic and social issues such as free trade and capital movement across borders, Lula succeeded in not frightening the daylights out of Brazil's richest people, as President Chavez did in Venezuela. 
He will need to keep them calm if he is to succeed. 
In dealing with the outside world, Brazil's size gives it a better hand than other, smaller Latin American countries. 
All the same, the cards Lula must play are not good because his economy is in recession. 
Budget tightening will continue. 
Jose Barrionuevo, a financial analyst at Barclays Capital, recently stressed that Brazil's immediate challenge is likely to be a further decline in the value of the real , driving up inflation and unemployment, and thus further dissipating Lula's bargaining power with America and the outside world. 
But Brazil's size need not go for nought. 
Unlike other leaders, Lula can press the US over its hypocritical and protectionist agricultural policies, thus testing President Bush's commitment to freeing trade in agriculture. 
If Bush is to stand for freeing trade here, he will need pressure from Brazil because US farm lobbies are gearing up to keep Latin America's agricultural exports under the same strict controls they have faced for years. 
An active Brazil can inspire smaller players, like Chile and the Central America countries, to push America as well. 
Although President Bush might wish to demonize Lula, the sheer scale of Lula's triumph at the polls means that America won't be able to delegitimize the Brazilian president in this way. 
All the same, Brazil's election was viewed by many in the Bush administration as presaging a rebirth of socialism ("communism" to some). 
Many US conservatives see Lula as a hardcore socialist unable to compromise, and refuse to recognize that he has changed significantly. 
America must shed these ideological blinkers and deal realistically with the real Lula, not the bogeyman some Bush advisors have invented. 
Latin America is watching Lula's attempt to bring a social conscience to modern economic policies with hope and trepidation. 
If he succeeds, a moderate democratic left will become a realistic prospect in the region. 
This means that the pendulum swings in power between right and left that Americans and Europeans take for granted will become not only possible but probable. 
For too long, Latin America has practiced the politics of the precipice. 
Every political change seemed to present a jump into the unknown. 
Succeed, and Lula may bring Latin America the politics of the plateau, one where democratic change is merely an alternation, not an abyss. 
Everyone on the right and left should want that. 

Lula in the Shadow of Chávez 
To many on Wall Street, the US State Department, and the IMF, the specter of Ché Guevara and past legions of bearded, bandana-wearing commandantés is haunting Latin America. 
Not without reason. Left-leaning military officers have been on a roll lately. 
But another ghost haunts the continent: economic ignorance about Latin America in the capitals of the West. 
Brazil's new President Luiz Inacio Lula da Silva was elected with the same great expectations that brought the ex-paratrooper and coup leader Hugo Chávez to power in Venezuela three years ago. 
But it would be unwise to paint President Lula as a dangerous populist just because his political base resembles that of the wayward Chávez. 
President Lula's poorest supporters undoubtedly expect him to transform Brazil from the world's most unequal society into a modern social democracy. 
His middle-class backers are no less eager to see their living standards grow. 
But despite these expectations, Lula is unlikely to pursue anything like the chaotic "Bolivarian Revolution" Chávez unleashed. 
Expectations are always the hardest thing for leftist leaders to manage. 
For example, Lula's Workers' Party, which rejected pension reforms submitted by the previous Cardoso administration, expects Lula to preserve far more of the scheme than former President Cardoso believed possible. 
More demanding are the expectations of speculators and investors in New York and London. 
They expect Lula to accomplish the equivalent of Nixon's trip to China--to be the leftist who hard-headedly balances Brazil's budget, eliminates foreign investors' fear of debt repudiation via hyperinflation, and gives them fat capital gains on their Brazilian stocks and bonds. 
Unlike in Venezuela, there is a viable scenario in which both visions--macroeconomic orthodoxy and greater social justice--can be realized. 
Suppose Brazilian interest rates stabilize at a high but not astronomical 10%, the economy grows at 4% per year, and the government achieves a "primary surplus"--a surplus of taxes over program spending--equivalent to 4% of GDP. 
These are all feasible targets; if they are met, then Brazil's government debt will be a stable 60% of GDP. 
Once investors see that Brazil's fiscal policy is sustainable, and they see continued low interest rates in the industrial core, Brazil will look more attractive. 
Foreign direct investment will flow in, bringing more access to world-class technology and further boosting economic growth. 
Soon, Brazil's government would find itself able to roll over its short-term debt on more favorable terms, as interest rates drop below 10%. 
Reduced debt-service costs would mean that the debt/GDP ratio would start to fall, and government spending on infrastructure, education, healthcare, and redistribution could rise. 
Reduced government debt would also means more money available for private investment, providing a further boost to labor productivity. 
But all of this would require extraordinary patience on the part of the Workers' Party and its supporters, whose hopes must be deferred as immediate priority is given to appeasing the bond market. 
Will Lula have sufficient command over Brazilian politics to keep his supporters and political cadres happy with promises of jam tomorrow when it is clear that there will be no bread today? 
Indeed, a strategy of bond-market appeasement places may turn out to be futile, because it places a huge bet on the rationality of global financial markets. 
But the people in New York and London who set interest rates know little about Brazil. 
They know that Ipanema is a beach, that the Amazon is a river, that ex-US Treasury Secretary Paul O'Neill worried that money loaned to Brazil would re-appear in numbered European bank accounts, and that Lula is a president without administrative experience who heads a party with "workers" in its name. 
Remember, these are the type of people who once thought that selling dog food over the internet was a brilliant business strategy, and that by 2010 Qualcomm would be able to sell two mobile phones a year to everyone in the northern hemisphere. 
If such people cannot be appeased, or if they panic for no particular reason, then everything goes down the drain. 
Lula becomes a failure and Brazil loses another decade as its economy sinks into a depression of uncertain length and suffers inflation of uncertain magnitude. 
Once upon a time, Lula would have been able to rely on broad international support, as Cardoso did. 
The Clinton Administration and the IMF educated financial markets about countries that they believed were following sound policies and that had bright long-run growth prospects. 
The US Treasury under Robert Rubin and Larry Summers was unafraid to join the IMF in betting the store on Mexico, Thailand, Korea, and Brazil when they thought the odds were favorable. 
Perhaps this assurance of broad international support made it prudent--or at least less imprudent--to appease the financial markets first. 
It is not at all clear that the Bush Administration and today's IMF can offer similar support. 
So Lula's odds do not look particularly high. 
But they still look better than the odds attached to any alternative political-economic strategy--and certainly than anything being offered by khaki-clad would-be commandantés. 


Lumpy Labor 
LONDON – As the world recovers from the Great Recession, it has become increasingly difficult to discern the true trend of events. 
On the one hand, we measure recovery by our success in regaining pre-recession levels of growth, output, and employment. 
On the other hand, there is a disquieting sense that today’s “new normal” may be slower growth and higher levels of unemployment. 
So the challenge now is to formulate policies to provide work for all who want it in economies that, as currently organized, may not be able to do so. 
This issue is much more acute in developed than in developing countries, though interdependence makes it, to some extent, a common problem. 
The problem has two aspects. 
As countries become more prosperous, one would expect their growth rates to slow. 
In earlier times, growth was fueled by capital scarcity: capital investment attracted a high rate of return, and this created a virtuous circle of saving and investment. 
Today, capital in the developed world is abundant; the saving ratio declines as people consume more; and production shifts increasingly to services, where productivity gains are limited. 
So economic growth – the rise in real incomes – slows. 
This was already happening before the Great Recession, so generating full-time jobs that pay decent wages was becoming ever more difficult. 
Hence the growth of casual, discontinuous, part-time jobs. 
The other aspect of the problem is the long-term increase in technology-driven unemployment, largely owing to automation. 
In one way, this is a sign of economic progress: the output of each unit of labor is constantly rising. 
But it also means that fewer units of labor are needed to produce the same quantity of goods. 
The market’s solution is to re-deploy displaced labor to services. 
But many branches of the service sector are a sink of dead-end, no-hope jobs. 
Immigration exacerbates both aspects of the problem. 
A large part of migration, especially within the European Union, is casual – here today, gone tomorrow, with none of the costs associated with full-time hiring. 
This makes it attractive to employers, but it is low-productivity work, and it increases the difficulty of finding steady employment for the majority of a country’s workforce. 
So, are we doomed to a jobless recovery? 
Is the future one in which jobs are so scarce that many workers will have to accept a pittance to find any employment, and become increasingly dependent on social transfers as market-clearing wages fall below the subsistence level? 
Or should Western societies anticipate another round of technological wizardry, like the Internet revolution, which will produce a new wave of job creation and prosperity? 
It would be foolish to rule out the last possibility a priori. 
Capitalism has a genius for reinventing itself. 
It has seen off all of its challengers, and there are no new ones in sight. 
Moreover, no one can predict the discovery of new knowledge; if they could, it would already have been discovered. 
But there is also a more troubling possibility: if, by proceeding on our current profligate path, we succeed in making natural resources scarce, we will require a new wave of technology, regardless of the cost, to rescue us from calamity. 
But let’s put these grim prospects aside, and ponder what a civilized solution to the problem of technology-driven unemployment would look like. 
The answer, surely, is work-sharing. 
To the Anglo-American economist, any such proposal is anathema, because it smacks of the dreaded “lump of labor” fallacy – the idea, once popular in trade-union circles, that there exists only a certain amount of work, and it should be shared out fairly. 
Of course, this is a fallacy when resources are scarce, but even economists never thought that growth would continue forever. 
The discipline’s founders expected that, at some point in the future, mankind would attain a “stationary state” of zero growth. 
Then we would require only a certain amount of work – much less than we perform now – to satisfy all reasonable needs. 
The choice would then be between limitless technology-driven unemployment and sharing out the work that needed to be done. 
Only a workaholic would prefer the first solution. 
Unfortunately, such people seem to be in charge of policy in the United States and Britain. 
Many other European countries are adopting the second solution. 
Work-sharing schemes, in many different forms, are becoming the norm in Holland and Denmark, and have made inroads in France and Germany. 
The key element in any such approach is to separate work from income. 
A Danish law enacted in 1993 recognizes a right to work discontinuously, while also recognizing people’s right to a continuous income. 
It allows employees to choose a “sabbatical” year, which could be divided into shorter periods, every four or seven years. 
Unemployed people would take the place of those on leave, who, for their part, would receive 70% of the unemployment benefit they would get if they lost their jobs (typically, 90% of one’s salary). 
Danish unions have managed to use such statutory individual rights to reduce the working hours of entire company workforces, and thus increase the number of permanent jobs. 
The idea of a universal basic income, paid to all citizens, independent of their position in the labor market, is a logical next step. 
This will not be everyone’s cup of tea. 
And, as I suggested above, all schemes aimed at easing the burden of work and increasing the amount of leisure risk falling victim to our genius for conjuring up new disasters. 
After all, both capitalism and economics need scarcity to justify their existence, and will not give it up readily. 

Lying Politicians 
The suspicion that politicians are inclined to tell lies is as old as politics itself. 
Yet when a politician is caught in a lie, the consequences are often dire, at least in democratic countries. 
Indeed, proving that a politician is a liar is just about the only way to get rid of him or her quickly and terminally, which is why the attempt is so attractive to political opponents. 
But what, exactly, is a lie in politics? 
Few cases are as clear-cut as that of Anneli Jaatteenmaki, whose short-lived stint as Finland's first woman prime minister recently came to an end. She had attacked her predecessor during the election campaign for being fork-tongued about Iraq, saying one thing to US President George W. Bush and another to the Finnish people. 
Her knowledge was based on Finnish foreign office records. 
Had she seen them? 
She began to equivocate and in the end said that she had not. 
When the opposite was proven and a secret document was found in her possession, she had to go. 
Another campaigner under investigation by his parliament for being ``economical with the truth'' is German Chancellor Gerhard Schröder. But his case is very different. 
The opposition, still smarting from its narrow defeat in last autumn's election, accuses him of not having told the truth about Germany's weak economy and the consequences for the national budget. 
Almost a year after the election, a parliamentary committee of inquiry is still interviewing ``witnesses.'' 
But it does not look as if it can get very far. 
At most, deputies will be able to offer the public a fresh example of a favorite trick in politics: to tell the truth was told and nothing but the truth, but not exactly the whole truth. 
The most serious current case concerns President Bush and British Prime Minister Tony Blair. 
In fact, the charges of lying concern only Blair, for Bush has (so far) been absolved of all possible sins in view of the apparent success of the Iraq campaign. 
But Blair is under heavy fire from his parliament's Foreign Affairs Committee for having overstated the threat posed by Saddam Hussein. 
Intelligence dossiers (it is claimed) were ``sexed up'' by Blair's underlings. 
More particularly, there was no evidence for the prime minister's claim that the Iraqi dictator could have launched ``WMD's'', as weapons of mass destruction are now called, ``within 45 minutes''. 
Does it matter whether this claim was strictly true or not? 
Don't we know from past evidence that Saddam Hussein was prepared to develop WMD's and to use them if the occasion presented itself? 
Are not the reasons for the war overtaken by its reality? 
In the end, is this really a question of lying? 
In the British case, the answer is not so simple. 
In the middle of his second term, Tony Blair is going through a bad patch. 
Opponents within his own party are increasingly replacing the ineffectual Tory opposition. 
Blair is much more vulnerable than he was a year ago, and he must tread softly if he does not want to lose further support. 
But there is another point. 
The reasons given for the war in Iraq were never entirely clear. 
WMD's in Saddam's possession were but one in a sequence of arguments. 
There was also, at least in the US, the desire to avenge the terrorist attacks on New York and Washington, as well as geopolitical interests. 
Tony Blair also expressed moral outrage at the way the Iraqi dictator had behaved toward his own people in making the case for regime change. 
Supporters of the war--often reluctant in any case--had picked up one or the other of these arguments, and if they focused on WMD's, they now feel betrayed. 
The two cabinet ministers who resigned over the affair, Robin Cook and Clare Short, want their own revenge and thus continue to attack Blair for his ``lies.'' 
So far, Blair has proven his resilience to such charges. 
Indeed, he has gone on the counter-attack, notably against the BBC, which had not exactly supported the war with enthusiasm. 
But does the uncertainty now circling Blair like a vulture now smell the appetizingly foul scent of a lie? 
Or is it more a question of a prime minister losing the trust of his people, including some his erstwhile friends and allies? 
Trust is a vital commodity for all politicians. Once lost, it is difficult to regain. 
Blair has used the ``Trust me!'' pose often, not least in the case of the war in Iraq. 
In any case, one does not have to be found out as a liar to lose such trust. It is sufficient that clouds of doubt develop. 
Indeed, a politician's reputation can be damaged even if no one doubts the truthfulness of his statements. It suffices if people feel that he is trying to mislead them, or even that he has not got things clear in his own mind. 
A leader can tell the truth, nothing but the truth, but less than the whole truth and yet still be trusted. 
Once a politician has lost trust however, people will no longer believe him even if he tells the truth. 

A Life Lived for Human Rights 
NEW YORK – In her 1993 memoir, The Thaw Generation: Coming of Age in the Post-Stalin Era, Lyudmila Alexeyeva points out that there is no good Russian word for “dissident.” 
A term that was sometimes used in its place translates as “otherwise thinkers.” 
Over time, the Soviet press adopted the English term, referring to disidenty. 
Alexeyeva, who died this month at the age of 91, certainly fell into that category. 
A historian by training, Alexeyeva was widely recognized as Russia’s foremost human-rights advocate. 
In 1976, 20 years after Nikita Khrushchev’s “secret speech” denouncing Stalin’s crimes, Alexeyeva was among the founders of the Moscow Helsinki Group, focused on monitoring Soviet compliance with the Helsinki Accords, which had been concluded the previous year by 35 governments from Europe and North America. 
The goal of the Accords, largely the result of the Soviet Union’s initiative, was to improve relations between the Cold War antagonists – and, for Soviet leader Leonid Brezhnev, to formalize international recognition of post-World War II national borders. 
The Soviets were so eager for an agreement that they accepted provisions that, barely noticed at the time, incorporated the principal post-WWII international human-rights norms. 
Through the Helsinki Accords, the Soviet Union effectively agreed to be bound by the 1948 Universal Declaration of Human Rights, which it had previously refused to endorse. 
Brezhnev was so pleased that he had gotten the Helsinki Accords approved that he had the text published in full in the Communist Party’s official newspaper, Pravda. 
That is how Alexeyeva and her fellow disidenty noticed the human-rights provisions of the agreement. 
So they established the Moscow Helsinki Group to monitor the Soviet government’s compliance and report violations. 
The tiny organization had an outsize historic significance. 
According to Robert Gates, who became Director of the CIA in 1991, in the midst of the Soviet Union’s death throes, those who monitored compliance with the Helsinki Accords may have done more to bring down the Soviet empire than the CIA itself. 
Of course, the Kremlin did not take the Moscow Helsinki Group’s actions lightly. 
Members of the group – including its chair, physicist Yuri Orlov – were imprisoned. 
Alexeyeva was given the choice of prison or exile, and chose exile in the United States, where she continued to play an important role in defending human rights in the Soviet Union. 
At that time, a couple of colleagues and I responded to the imprisonment of the Moscow Helsinki Group’s members, as well as other disidenty, by establishing Helsinki Watch, a US-based organization focused on freeing them. 
Alexeyeva was invaluable to our efforts, as she delivered for us detailed, reliable information on what was happening to her comrades. 
Over the next decade, as Helsinki Watch evolved into the globally recognized group Human Rights Watch, Alexeyeva’s contributions continued to bear fruit. 
As an historian, she was committed to getting the facts right and ensuring that we had sufficient context. 
Her approach helped to shape Human Rights Watch’s research methodology, which has proved vital to our reputation for responding to developments not only rapidly, but also appropriately, based on accurate information. 
As director of the nascent Human Rights Watch, I relied heavily on Alexeyeva, who also became my friend. 
In the late 1980s, when Mikhail Gorbachev began freeing disidenty from prison, Alexeyeva returned to Moscow, where she revived the Moscow Helsinki Group, which had been forced to suspend its activities in 1982, because almost all of its members had been in prison or exile. 
Since then, the organization has done battle with the Russian government time and again, including standing up to the ever-more despotic Vladimir Putin. 
Under Putin, the challenge of upholding human rights in Russia has remained acute. 
The Kremlin has effectively prohibited some foreign donors, including the Open Society Foundations, from issuing grants in Russia, and has implemented a requirement that organizations receiving any foreign funding declare themselves to be “foreign agents” – essentially, spies. 
Such policies have hit the Moscow Helsinki Group hard, because it was forced to choose losing much of its funding and, in turn, its staff. 
Yet the group has persisted. 
Though Alexeyeva criticized Putin, he manifested a grudging respect for her, perhaps because he viewed her as a Russian patriot. 
On one occasion, Putin’s annual meeting with human-rights leaders coincided with her birthday, so he brought her a bouquet of flowers. 
He congratulated her again on her 90th birthday. 
I doubt that Alexeyeva was much moved by such gestures. 
But they reflect the respect she commanded, and her commitment to conducting herself in a civil manner even when dealing with her opponents. 
She knew what she stood for, and so do the many people who benefited from her tireless efforts to protect human rights. 


Macron Takes Aim at European Politics 
LONDON – Until the terrorist attack at a market in southern France on March 23, French President Emmanuel Macron had been planning to launch a new European-level political campaign. 
Though the official rollout has now been postponed, Macron’s latest project remains central to his presidency and to his conception of power. 
Macron’s “La Grande Marche pour l’Europe” will mimic the program that toppled France’s dominant political parties and transformed his La République En Marche ! movement into a political force in 2017. 
Over the course of six weeks, he will dispatch ten ministers and 200 parliamentarians to survey the French people’s views on Europe and European issues. 
The results will then be considered in developing a platform that can beat populist and Euroskeptic parties in the 2019 European Parliament election. 
Macron has persuaded all other EU member states (with the exception of Hungary and the United Kingdom) to conduct similar public consultations, which he hopes will lay the groundwork for the EU-level reforms he proposed in major speeches in Athens and at the Sorbonne last year. 
To understand the full scope of Macron’s ambitions, we should consider the principles that underpin his worldview and guide his approach to politics. 
Few are better acquainted with Macron’s thinking than French historian and philosopher François Dosse. 
Dosse not only taught Macron at Sciences Po in the late 1990s, but also introduced him to his intellectual mentor, French philosopher Paul Ricoeur, for whom Macron worked as a research assistant for two years. 
Dosse recently published a book about Macron and Ricoeur titled Le Philosophe et le President. 
A few weeks ago, I met with him in his Paris apartment to discuss his latest work, and he explained Macron’s approach to European reform as a combination of two fundamental Ricoeurian concepts. 
The first is “consensus dissensuel.” 
This may sound like a highfalutin version of “having one’s cake and eating it.” 
But, according to Dosse, it is really about drawing strength from the opposition between two conflicting viewpoints, unlike a Hegelian approach, which seeks synthesis between two poles. 
Macron’s embrace of the Ricoeurian model is evident in his frequent use of the phrase “en même temps” (“at the same time”) when describing parallel domestic-reform proposals. 
Similarly, Macron’s vision for Europe seems to reconcile the irreconcilable: his plan is both to preserve member states’ sovereignty and deepen EU integration. 
Institutionally, this means supporting supranational bodies while also allowing for more flexibility in areas where national governments, rather than Brussels, are better positioned to solve problems. 
On defense policy, Macron wants to work within existing EU treaties, and he supports proposals for a Permanent Structured Cooperation (PESCO) agreement and a European Defense Fund. 
But he also hopes to move beyond the current EU and even NATO frameworks to establish a European Intervention Initiative (EII), which would operate alongside British, US, and other allied expeditionary forces. 
On migration, Macron wants both to secure Europe’s external borders and ensure that the burden of taking in refugees is shared across the EU. 
In the short term, he is pushing for an agreement among member states on refugee quotas. 
But, in the long run, he supports greater harmonization of asylum systems, or even the creation of a central EU asylum agency. 
Macron also hopes to reconcile opposite ideas with respect to the euro. 
While pushing for reforms within France that will reduce the risks of financial contagion, he is also calling for a common eurozone budget and finance ministry to make the monetary union more resilient to future shocks. 
Beyond these areas, Macron wants to boost innovation in the digital sphere, by establishing a European version of the United States’ Defense Advanced Research Projects Agency (DARPA). 
At the same time, he wants to protect national sovereignty in the digital age through regulations and a common fiscal approach. 
The second Ricoeurian concept underpinning Macron’s worldview is the idea of a European “refoundation.” 
Whereas the first wave of European integration was largely limited to economics, Macron now wants to focus on politics and culture, starting with the European Parliament election next year. 
When Macron looks at the EU political stage, he sees stale cartel parties that are just as ripe for disruption as France’s mainstream parties were in 2017. 
For example, he has mocked the center-right European People’s Party (EPP), asking how any parliamentary group can call itself Christian Democratic when it includes the parties of former Italian Prime Minister Silvio Berlusconi and Hungarian Prime Minister Viktor Orbán. 
Macron also recognizes that the decline of the center left in Europe – along with the impending post-Brexit exodus of UK Labour Party MPs – has left a large void that needs to be filled. 
To that end, he has considered creating a Europe-wide “En Marche !” movement that could nominate its own Spitzenkandidat to the European Commission presidency. 
In fact, there has already been some talk of positioning European Commissioner for Competition Margrethe Vestager for that role. 
Initially, the Macronistes had planned to recruit defectors from other party groups, and then ally with the left-leaning Alliance of Liberals and Democrats for Europe. 
But the creation of a European En Marche ! could mean that they will try to edge out the ALDE, too. 
At any rate, German Chancellor Angela Merkel will insist on a conservative candidate for the Commission presidency, so Macron might try to use that as a bargaining chip for concessions on other issues. 
Much remains to be seen, but it is already clear that Macron has brought a new kind of thinking to European politics. 
In his view, sovereignty in Europe can really be exercised only at the level of the EU. 
He is taking France from the Fifth Republic to a Sixth Republic that is no longer strictly franco-francaise, but truly European. 

The Center Left and Globalization 
WASHINGTON, DC – Popular uprisings across France are threatening to shatter the hope that so many had placed in French President Emmanuel Macron after his election in May 2017. 
With his party, La République En Marche !, having secured an absolute parliamentary majority, Macron promised to pursue difficult reforms not just in France, but also within the European Union. 
But now he is facing the biggest crisis of his presidency. 
Revitalization of the EU has long depended on a strong French leader capable of overhauling the country’s economy. 
Before the proposed fuel tax that brought the Yellow Vests into the streets last month, Macron had managed to overcome opposition to a series of labor-market reforms. 
Though politically difficult, the reforms were necessary to bring the budget deficit below 3% of GDP, in accordance with EU rules, and modernize France’s generous social-security system in the face of disruptive new technologies. 
As I (Derviş) argued in May, the traditional center right and center left are too deeply embedded in European political life to be erased by an upstart political movement like Macron’s. 
So, for Macron to retain his popularity, he must cooperate with or somehow subsume either the center right or the center left. 
In the first round of the 2017 presidential election, two-thirds of France’s center-left electorate voted for Macron. 
Still, he had two avenues open to him when he took office. 
The first was to adopt the center right’s agenda and pursue labor-market, tax, and investment policies that would “adapt” France to “capitalist” globalization. 
Somewhat surprisingly, this is the route he initially chose, quickly becoming the darling of the business-oriented international press. 
The other avenue would have required Macron to build on a pre-existing but vague conception of left-wing internationalism. 
In practice, that would mean pursuing policies to help the middle class, while updating an obsolete center-left program to account for the effects of disruptive technologies and business models. 
As the economist Dani Rodrik has long argued, more globalization requires a larger state, in order to compensate those displaced by free trade, capital-account liberalization, and so forth. 
Without compensation, there is no guarantee that globalization will maintain broad public acceptance. 
This is not to say France can do without center-right reforms. 
The budget absolutely does matter, and reducing deficits will always require unpopular spending cuts and tax increases. 
Likewise, the French labor market tends to benefit insiders, thus making it harder for everyone else to find a job. 
And the state-owned rail system was in desperate need of an overhaul. 
In his first year and a half in office, Macron started to tackle these problems, and managed to deliver a budget in line with EU deficit rules. 
The problem is that in pursuing these reforms, Macron abandoned his core center-left constituency. 
Step by step, his reforms seemed consistently to benefit the rich. 
And so, when it was announced that his government would increase the tax on diesel fuel, middle- and working-class commuters took to the streets. 
With polls showing that around 70% of the French support the Yellow Vest protesters, Macron was forced to retreat. 
Was there a full-fledged center-left alternative that Macron could have pursued instead? 
The short answer is no. 
Reformers concerned primarily with income and wealth inequality, environmental sustainability, and democracy are still trying to figure out what a left-wing approach to globalization should look like. 
Unlike neoliberalism, which is clear in its policy prescriptions, a center-left approach must offer an entirely new social contract to address the effects of technological disruption, deepening globalization, and climate change. 
More to the point, the left must understand that it cannot win this battle by focusing on domestic policymaking alone. 
Technological innovations and the global networks that facilitate their diffusion cannot be reversed or unraveled; at best, they can be slowed down. 
But those who resist change will end up less competitive in the economy of the future. 
The only real choice, then, is to move ahead, but also with social-welfare reforms to protect every citizen and to compensate the losers. 
Sufficient resources must also be available to facilitate learning and new careers. 
Needless to say, a new center-left social contract will require substantial public resources, wisely deployed, often by local governments. 
At the same time, governments will have to cooperate to prevent international blackmail in the form of tax and regulatory arbitrage. 
Unmanaged globalization encourages capital and high-income earners to flock to low-tax jurisdictions, depriving governments of the revenues needed to maintain social-security systems. 
Fortunately, the G20 has begun to recognize this as a problem. 
But much more work needs to be done to adapt tax, health-care, and education systems to a global economy in which tech giants are developing new forms of monopoly power. 
These efforts will require a lot of new thinking. 
For their part, center-left leaders must start exploring ideas for radical and innovative new governance platforms at both the national and international levels. 
They could do worse than to read the historian Yuval Noah Harari’s new book, 21 Lessons for the 21st Century, which offers a blueprint for addressing collective challenges like climate change and nuclear proliferation. 
The world is undergoing a technological revolution that has the potential to benefit us all. 
But much will depend on whether there is leadership to manage the coming disruptions. 
The alternative is to risk updated versions of the twentieth century’s political catastrophes and world wars. 
Either way, Macron is a bellwether, because what happens in France will not stay in France. 


France’s Anti-Populist Populist 
WARSAW – Democrats of all stripes have been celebrating the prospect that the pro-European centrist Emmanuel Macron – not the far-right National Front’s Marine Le Pen – will be France’s next president. 
But while Macron’s victory is good news, it does not augur the defeat of populism in Europe. 
On the contrary, Macron represents a kind of “enlightened populism” that comes with its own set of problems. 
Macron’s candidacy, like Le Pen’s, was a rebuke to France’s mainstream political parties. 
He persuaded voters with his promise of a Scandinavian-style combination of economic liberalism and a flexible welfare state. 
But it may be time to concede that Scandinavia is unique, and programs that succeed there may not be replicable elsewhere. 
Nonetheless, Macron’s populism may not be altogether a bad thing in the short term. 
Perhaps, in France and elsewhere nowadays, only a populist can beat a populist. 
If so, Macron’s enlightened populism certainly is preferable to the nationalist populism that Le Pen espouses. 
The question is whether enlightened populism can play a role in steering political systems away from populism altogether – and toward real solutions to their countries’ problems. 
The only true antidote to populism – the only real way to resolve the problems that ordinary people are facing – is greater political globalization. 
After all, it is economic globalization without political globalization that produces nationalism. 
Populists promise to halt economic globalization; in reality, they can stop (or reverse) only political globalization. 
So the rise of populists to power creates a self-reinforcing dynamic, in which nationalism becomes increasingly salient. 
Yet, as Macron proves, not all populism need be nationalist. 
Historically, left-wing populism has been more common than its right-wing variant, the strength of which in the West nowadays reflects the perception, in the eyes of many citizens, that the left has become elitist. 
There is, therefore, a case to be made that populism can be taken back from the nationalists and used to advance European integration and political globalization. 
But, despite widespread enthusiasm about Macron’s victory, most of us remain subconscious fatalists on the matter of political globalization. 
Who today believes in global democracy, or even in the United States of Europe? 
Long before the current wave of nationalist populism, Europeans rejected a cautious European constitution. 
Compared to this earlier ambition, even the most daring of Macron’s proposals for eurozone integration is in fact a minor revision. 
German Chancellor Angela Merkel, after congratulating Macron, made clear that she will consider no fiscal-policy changes – a stance that precludes a common eurozone treasury. 
Past experience with enlightened populism reinforces this somewhat bleak perspective. 
Enlightened populism’s founding father was Donald Tusk, the former Polish prime minister who is now President of the European Council. 
Before he became Poland’s prime minister, Tusk, like Macron, left a mainstream party to establish his own popular movement, Civic Platform. 
And, like Macron’s En Marche !, that movement emphasized youth, optimism, and the promise of harnessing people’s talents and energies. 
As prime minister, Tusk would respond to questions about his political vision by quipping that anyone who experienced visions should go see a doctor. 
He selected people from both the left and the right to staff his government (an approach reflected in Macron’s claim that his brand of politics transcends the left-right divide). 
Tusk assembled a kaleidoscope of views and people, and he shook the kaleidoscope whenever there was a need for a new perspective. 
But Tusk, like Macron, faced a formidable challenge from nationalist populism, which in Poland came in the form of the Law and Justice (PiS) party, led by the late Lech Kaczyński and his twin brother Jarosław, who today is Poland’s de facto leader. 
Even after Tusk came to power, it was the Kaczyńskis who shaped the agenda and tone of Polish political debate. 
With Tusk forced to remain on the defensive, Polish politics came to consist of the PiS and the anti-PiS. 
Macron may find himself in a similar situation, characterized by three key risks. 
First, Le Pen – who, in her concession speech, called on “patriots” to commit to “the decisive battle that lies ahead” – may continue to set the tone of the political debate. 
In that case, Macron could be forced to concentrate on managing a cordon sanitaire comprising those whose perspectives converge only on one issue: opposition to Le Pen. 
Second, the pressure to stop Le Pen could compel Macron to abandon bold reforms, rather than risk driving away more voters than he can afford to lose and opening the way for Le Pen and the National Front to strengthen their position. 
In Poland, reforms were realized despite politics, not thanks to politics. 
Rather than implementing an ambitious agenda, Tusk’s policy amounted to “keeping warm water in the taps.” 
Macron could end up doing the same. 
Third, Macron could inadvertently help to bring the National Front to power. 
The existing political division between right and wrong, rather than between right and left, can become a self-fulfilling prophecy. 
Even the best politician is bound to make a mistake at some point, or simply to bore the electorate. 
If Le Pen remains Macron’s primary opponent, it is only a matter of time before she will reach for power as Kaczyński did, and ruin her country. 
Macron is thus both the bulwark against Le Pen and the guarantor of her success. 
Only a proper division into left and right can guarantee the survival of liberal democracy, as it gives voters multiple safe choices. 
But the elements of such a structure are possible only within a political community that enjoys economic sovereignty, and that will not be possible until we have political globalization. 
And everything comes full circle. 
To discern whether we are seeing the high tide or ebb tide of populism in Europe, the results of individual elections mean little. 
The focus must remain on the structural factors – above all, economic globalization in the absence of political globalization – underpinning the rise of populism. 
And in this regard, nothing has changed. 

How Macron Can Unite Europe 
MUNICH – Emmanuel Macron’s victory in the French presidential election sent a wave of relief and euphoria across Europe. 
But now a reality check is in order, because we do not yet know how the new president intends to restore the French economy. 
The country suffers from an unemployment rate of nearly 10%, and its manufacturing sector is still operating 12% below its level before the 2008 global financial crisis. 
Macron has indicated that he does not want to increase the retirement age, change the 35-hour workweek, or make it easier for firms to dismiss workers. 
At the same time, he wants northern eurozone countries to send money to southern countries, to protect French financial and economic markets in these regions. 
This is an admittedly broad-brush portrayal of the program that got Macron elected, but it is nonetheless to the point. 
What else could he possibly mean when he calls for a newly created eurozone finance ministry that can accrue jointly guaranteed debt and collect its own taxes. 
What about when he asks for common eurozone deposit protection and unemployment insurance? 
The motive behind these ideas is all too obvious: support the domestic economy at others’ expense. 
Macron also supports proposals for a new eurozone parliament, proclaiming a two-tier Europe. 
But that is simply a recipe for splitting up the European Union. 
Turning the eurozone into a transfer union with its own parliament would only deepen the divide between the eurozone countries and the EU’s northern and eastern member states: Denmark, Sweden, Poland, the Czech Republic, Croatia, Hungary, Romania, and Bulgaria. 
Because most of those countries will not join a European transfer union, they would be cut off permanently. 
As Donald Tusk, the Polish President of the European Council, has wryly observed, we already had a two-tier Europe up until 1989, and we should not wish for a return to that arrangement. 
German policymakers, for their part, could not easily help Macron bifurcate the EU even if they wanted to, because Germany’s constitution grants the Bundestag the inalienable authority to manage the country’s fiscal affairs. 
Even if every single member of the Bundestag agreed to transfer part of its fiscal sovereignty to a European-level institution, such a decision could still be made only through a formal referendum. 
Germany’s powerful Constitutional Court has already made it clear that eurozone bailouts and other interventions represent the outer limits of what is possible under Germany’s Basic Law. 
The court may have deferred to the European Court of Justice on the question of the European Central Bank’s “outright monetary transactions” scheme; but it will not be able to do the same with respect to fiscal sovereignty, because the constitution is clear, and the ECJ has no standing to interpret German constitutional law. 
That being said, it is important that European integration moves forward. 
There is still much work to do to improve the EU’s cross-border traffic routes, and to strengthen its security partnerships. 
Indeed, Europe should take a lesson from the wars of the twentieth century and do away with national armies altogether. 
Only then will Europe’s union for peace become a reality, and not just a platitude invoked by politicians. 
During the post-war era, European heads of state drafted a treaty to establish a Western European defense community. 
But the proposal fell through in 1954, owing to a veto by France’s National Assembly, against the recommendation of Charles de Gaulle, the legendary post-war president. 
Later, the United Kingdom opposed a joint European military. 
But the UK will no longer be a part of the EU, at least for the foreseeable future; and France has a young, dynamic new president. 
So it is time to try again. 
The German people can probably be persuaded to agree to this form of integration, in the same referendum that will have to be held, anyway, to approve Macron’s fiscal plans. 
The same can be said for the people of Eastern Europe. 
By pursuing true political integration based on a common army and security partnership for the entire EU, Macron can guarantee his place in the history books. 
To achieve this goal, however, he will have to break from the precedent set by his predecessors, who always categorically ruled out a political union. 
And he will have to acknowledge Germany’s concerns that by establishing a fiscal union now, Europe would lose the opportunity to pursue a political union in the future. 
Combining Europe’s military forces under a joint command is the only way forward. 
Creating a fiscal union without a political union would forever block the road to European unification, and set the people of Europe against one another more than the euro ever did. 
No one who wants to build a union for peace can afford to permit, much less encourage, that outcome. 

Lessons from the Anti-Globalists 
NEW YORK – The likely victory of Emmanuel Macron in the French presidential election has elicited a global sigh of relief. 
At least Europe is not going down the protectionist path that President Donald Trump is forcing the United States to take. 
But advocates of globalization should keep the champagne on ice: protectionists and advocates of “illiberal democracy” are on the rise in many other countries. 
And the fact that an open bigot and habitual liar could get as many votes as Trump did in the US, and that the far-right Marine Le Pen will be in the run-off vote with Macron on May 7, should be deeply worrying. 
Some assume that Trump’s poor management and obvious incompetence should be enough to dent enthusiasm for populist nostrums elsewhere. 
Likewise, the US Rust Belt voters who supported Trump will almost certainly be worse off in four years, and rational voters surely will understand this. 
But it would be a mistake to conclude that discontent with the global economy – at least how it treats large numbers of those in (or formerly in) the middle class – has crested. 
If the developed liberal democracies maintain status quo policies, displaced workers will continue to be alienated. 
Many will feel that at least Trump, Le Pen, and their ilk profess to feel their pain. 
The idea that voters will turn against protectionism and populism of their own accord may be no more than cosmopolitan wishful thinking. 
Advocates of liberal market economies need to grasp that many reforms and technological advances may leave some groups – possibly large groups – worse off. 
In principle, these changes increase economic efficiency, enabling the winners to compensate the losers. 
But if the losers remain worse off, why should they support globalization and pro-market policies? 
Indeed, it is in their self-interest to turn to politicians who oppose these changes. 
So the lesson should be obvious: In the absence of progressive policies, including strong social-welfare programs, job retraining, and other forms of assistance for individuals and communities left behind by globalization, Trumpian politicians may become a permanent feature of the landscape. 
The costs imposed by such politicians are high for all of us, even if they do not fully achieve their protectionist and nativist ambitions, because they prey on fear, inflame bigotry, and thrive on a dangerously polarized us-versus-them approach to governance. 
Trump has leveled his Twitter attacks against Mexico, China, Germany, Canada, and many others – and the list is sure to grow the longer he is in office. 
Le Pen has targeted Muslims, but her recent comments denying French responsibility for rounding up Jews during World War II revealed her lingering anti-Semitism. 
Deep and perhaps irreparable national cleavages may be the result. 
In the US, Trump has already diminished respect for the presidency and will most likely leave behind a more divided country. 
We must not forget that before the dawn of the Enlightenment, with its embrace of science and freedom, incomes and living standards were stagnant for centuries. 
But Trump, Le Pen, and the other populists represent the antithesis of Enlightenment values. 
Without blushing, Trump cites “alternative facts,” denies the scientific method, and proposes massive budget cuts for public research, including on climate change, which he believes is a hoax. 
The protectionism advocated by Trump, Le Pen, and others poses a similar threat to the world economy. 
For three-quarters of a century, there has been an attempt to create a rules-based global economic order, in which goods, services, people, and ideas could move more freely across borders. 
To the applause from his fellow populists, Trump has thrown a hand grenade into that structure. 
Given the insistence of Trump and his acolytes that borders do matter, businesses will think twice as they construct global supply chains. 
The resulting uncertainty will discourage investment, especially cross-border investment, which will diminish the momentum for a global rules-based system. 
With less invested in the system, advocates for such a system will have less incentive to push for it. 
This will be troublesome for the entire world. 
Like it or not, humanity will remain globally connected, facing common problems like climate change and the threat of terrorism. 
The ability and incentive to work cooperatively to solve these problems must be strengthened, not weakened. 
The lesson of all of this is something that Scandinavian countries learned long ago. 
The region’s small countries understood that openness was the key to rapid economic growth and prosperity. 
But if they were to remain open and democratic, their citizens had to be convinced that significant segments of society would not be left behind. 
The welfare state thus became integral to the success of the Scandinavian countries. 
They understood that the only sustainable prosperity is shared prosperity. 
It is a lesson that the US and the rest of Europe must now learn. 

How Macron Keeps Winning 
PARIS – Emmanuel Macron’s one-man revolution in French and European politics continued this weekend, as he will soon be able to add a huge parliamentary majority to his cause, if the results from the first round of the French parliamentary election hold. 
Such an outcome appears to be very likely. 
Eliminating the old “right-left” divide in French politics by uniting “reformists” of the left, the right, and the center, was the challenge that Macron set for himself when he created his En Marche! movement in April 2016 as part of his bid for the French presidency. 
The result of the first round of elections to the National Assembly is the clearest indication yet of how successful Macron has been in recasting French politics. 
Support for France’s two main traditional parties, Les Républicains on the right (which won 21.6% of votes cast in the first round) and the Socialist Party (down to a mere 9.5%), has fallen to levels unseen in the history of the French Fifth Republic. 
And backing for the far-right National Front, whose leader, Marine Le Pen, lost to Macron in the presidential election, fell to a mere 13.2% in the first round. 
If the second round of voting next Sunday confirms projections, Macron’s new centrist party, La République en Marche! 
(LREM), could end up with between 400 and 445 of the National Assembly’s 577 seats. 
How can a party with about 32.3% of the votes in the first round win in such a landslide in the second round? 
The explanation is that only candidates winning more than 12.5% of registered voters in the first round can participate in the second. 
The low turnout (less than 50%) for the first round means that two candidates at most can make it to the second round, where the candidate with the highest number of votes will win. 
This means that in nearly all districts the second round will be a duel between Macron’s LREM and another party. 
Where the other party is on the right, left-wing parties and voters will support Macron. 
Where the other party is on the left, it is the right-wing parties and voters who will support Macron. 
This year’s voting departed markedly from previous National Assembly elections in several other key respects, beyond the support shown for Macron’s new political grouping. 
For starters, more than a third of current MPs opted out. 
Their withdrawal has opened the door to a new generation of politicians, with a significant number, particularly on Macron’s party list, coming from civil society, rather than from other elected or public-sector positions. 
Second, the historically large majority of seats that LREM is set to win, owing to low turnout and the 12.5% threshold for going on to the second round of voting, means that a new and very different French political landscape is emerging. 
French politics is now crystallizing around a strong center, while the two parties of the left and right that traditionally have formed both the government and the main opposition have been swept to the margins. 
For decades the Socialists and the parties of the right, now grouped in Les Républicains, have failed to deliver the economic reforms – and thus the economic growth – that France badly needs. 
For most French, the traditional parties have come to symbolize a lack of transparency, chronic unethical behavior, and a focus on internal party fights at the expense of the national interest. 
Now French voters have rebuffed them. 
Third, the reconstruction of the French political landscape goes far beyond the radical changes likely to occur in the distribution of National Assembly seats that will occur once the second round is complete. 
Some future MPs from the two traditional parties, as well as others, will almost certainly buck their own party leaders to vote for Macron’s planned reforms. 
Indeed, more than 30 members of the National Assembly from Les Républicains, as well as a few key figures from the Socialists, already have made it known that they will be supporting Macron’s reform program. 
All of this suggests that Macron will emerge from the second round of the parliamentary election with the strong majority that he needs to embark with confidence on a program to transform France. 
And the program he envisages offers a viable opportunity – the best in recent memory – to reform France’s economy in ways that will foster innovation-led growth while offering better social protection and education to French citizens. 
Macron is raring to get started on that agenda. 
The first two major reforms that his government will seek to implement entail an overhaul of the labor market and a tightening of rules on ethics in the public sector. 
But they will likely be just the start of the most dynamic program of reform that France has seen since Charles de Gaulle occupied the Élysée Palace. 

The Macron Doctrine? 
PARIS – French President Emmanuel Macron invited Russian President Vladimir Putin to Paris as his first foreign guest, while US President Donald Trump will attend this year’s Bastille Day celebrations. 
By reaching out to two world leaders who made no secret of their hope that he would never make it to the Élysée Palace, Macron has set the stage for a new and ambitious French foreign policy. 
The message Macron is sending is that he will remain open to new opportunities for compromise – talking to anyone who is willing, but without glossing over disagreements. 
His foreign policy seeks to restore France’s central position on the world stage, while remaining firmly committed to Europe. 
Macron’s foreign-policy effectiveness will depend on his ability to bring about a domestic economic turnaround – a lesson learned from Macron’s predecessor François Hollande. 
Beyond a military intervention against Islamist militants in Mali, Hollande achieved little on the international stage, precisely because he lacked credibility at home, owing to France’s economic weakness. 
It is too early to tell whether Macron will succeed where Hollande failed. 
But it is already clear that Macron possesses some valuable skills and attributes that his predecessor lacked: undeniable charisma, an ability to connect with foreign leaders (thanks partly to his fluent English), a solid grasp of global issues, and a drive to implement economic reform. 
Macron will also benefit from external factors. 
For starters, the economic situation not only in France, but throughout Europe, has recently improved substantially. 
Moreover, France and Germany seem to be converging on a large number of global issues. 
Add to that the United Kingdom’s self-isolation and Trump’s erratic “America first” polices, and Macron is in a strong position to establish himself as a key champion of multilateralism. 
Of course, even if Macron does guide an economic turnaround, France will have neither the means nor the ambition to supplant the US on the world stage. 
But Macron does want France to exercise more influence over the international system – an ambition that is underscored by the way he addresses Putin and Trump. 
Just a couple of weeks after his election, Macron slammed Russian state-owned media for employing “lying propaganda” to smear him during the campaign – while standing right next to Putin himself. 
No French leader since Charles de Gaulle would have dared to stand up to Russia in such a public way. 
From Macron’s perspective, however, the disagreements that will shape the bilateral relationship had to be laid out, and a clear power dynamic established, before dialogue could occur. 
The major test of the Russia-France relationship lies in Syria – an issue that, so far, Macron has handled skillfully. 
He intentionally set aside the question of whether Syrian President Bashar al-Assad would remain in power (as Putin wants) or be deposed (as the US and others desire), but also made it clear that France would intervene militarily if Assad were to use chemical weapons again. 
It is not yet clear whether Macron’s approach will succeed; but France has reestablished itself, at least for now, as a player in Syria. 
As for Trump, Macron’s disagreement with him mostly concerns multilateral issues. 
France and Europe place much stock in multilateralism, which supports burden sharing. 
The Trump administration’s tendency toward trade protectionism – not to mention financial deregulation – is therefore a source of serious concern. 
But it is Trump’s commitment to withdraw from the Paris climate agreement that is most problematic to Macron, who plans to work with German Chancellor Angela Merkel to bring about a US reversal. 
If this effort succeeds, Macron will have established France as an effective advocate and practitioner of multilateralism. 
Macron has another objective with regard to Trump: to prevent disagreements from undermining their ability to pursue shared interests, especially in the fight against terrorism. 
In Syria, for example, the French and US positions are rather closely aligned, and Trump has already shown more willingness than his predecessor, Barack Obama, to enforce a “red line” on the use of chemical weapons. 
But Trump’s Syria policy remains confused, with few clear lines having really been drawn and significant discrepancies between the claims of Trump and his own cabinet. 
Of course, Trump’s threats of disengagement from NATO also worry France. 
But France has always sought to maintain a capacity for strategic autonomy, and Macron hopes that the weakening of the US strategic guarantee will convince Europeans, who have long lagged on the establishment of a stronger common defense posture, to do the same. 
Considerable economic, strategic, and cultural obstacles to the emergence of a European defense posture no doubt remain, including among those within some French industrial circles who oppose open tenders for defense contracts. 
But there are signs of progress. 
Most notably, the European Commission has for the first time decided to offer European funding for key military programs, especially in research and development. 
It will take time to marshal not just the money, but also (and more challenging) the political will. 
But rising uncertainty over America’s reliability – together with the departure of the UK, which has long opposed European defense, from the European Union – has already spurred Germany to acknowledge the need for progress. 
And, of course, progress for Europe is progress for France, as Europe acts as a multiplier of its national power. 
There is not yet a “Macron Doctrine.” 
But Macron’s foreign policy goals are coming into focus: increase France’s credibility by reversing its economic decline; bolster the Franco-German axis in Europe; strengthen Europe’s role in the world; and engage with everyone. 
It is a realist approach – but certainly not a cynical one. 

The Two Pillars of French Economic Reform 
PARIS – The French government has just announced the guidelines for a new labor code, its first major reform to boost France’s economy, by giving more flexibility to companies to adapt to the marketplace. 
The second major reform sought by President Emmanuel Macron’s cabinet – an overhaul of the French state – is set to follow. 
The changes to the labor code have four goals. 
First, direct negotiations between employers and employees in small and medium-size firms (accounting for 55% of the workforce) would be facilitated by allowing such companies to negotiate with elected representatives not mandated by the trade unions. 
Second, social dialogue within larger firms would be simplified by merging separate workers’ committees (for hygiene, health, safety, and so on) into a central body. 
Third, collective bargaining over wages and employment would be decentralized from national to sectoral and/or firm level. 
Finally, laying off employees would become easier and more predictable, in particular with the introduction of upper and lower levels on payouts issued by labor courts. 
The reform of the labor code will soon be accompanied by reforms of the unemployment insurance and job training systems. 
On the former, the government will take over from the unions, in order to provide unemployment benefits to all categories of workers, including the self-employed and those who voluntarily quit their current job to search for a new one. 
The cost of reforming unemployment insurance, however, is estimated at €3-5 billion ($3.6-6 billion), which may prove difficult to square with 2018 budget plans, which foresee a €20 billion cut in spending. 
Altogether, the labor market reform is intended to reconcile more flexibility for firms to hire and shed workers – which is needed in an economy where growth is driven by innovation and creative destruction – with more income security and more training for the unemployed. 
The French labor market currently suffers from a huge divide between qualified workers under long-term contracts and low-skill workers who shuttle constantly between unemployment and short-term jobs. 
The government’s reform is meant to close this divide by increasing social mobility. 
The second pillar of Macron’s economic program, reform of the state, has two major components: a revamp of fiscal policy and an overhaul of the public spending system. 
Here, too, the reform aims to address four main long-standing problems. 
First, capital income is too heavily taxed in France, compared to other developed countries, which discourages innovation and entrepreneurship. 
Second, public money is not invested in the most cost-effective and growth-enhancing way. 
Third, France suffers from a multiplicity of administrative layers, which generates inefficiencies and redundancies in the provision of public services. 
Finally, France remains a highly corporatist country, with a multiplicity of health, pension, and family subsidy systems; in an innovation-driven economy where individuals are likely to change jobs and sectors repeatedly over their lifetime, this bureaucratic thicket becomes a source of inefficiency and risk. 
On the fiscal front, Macron has made two important moves. 
First, on the revenue side, capital income would be taxed at a flat 30% rate, whereas before capital was taxed more than labor. 
Second, the wealth tax on non-real-estate assets will be eliminated – a move meant to encourage entrepreneurs and innovators. 
The government has not yet decided on a precise course of action for spending, although Macron and his team are looking closely at the reforms carried out by Canada and Sweden in the 1990s. 
In particular, the government may decide to reduce the number of civil servants by eliminating some administrative layers of regional and local government, and by delegating some administrative tasks to autonomous agencies. 
Moreover, the government may – and should – merge all existing pensions schemes into a single system (as it should with the social security, health insurance, and family subsidy systems). 
This would enable the government to invest in education, unemployment insurance, and innovation, while abiding by its European budgetary commitments. 
After decades during which France experienced slow growth, high unemployment, industrial decline, and rigid corporatist institutions blocking all attempts at reform, a new hope for change has emerged. 
Decisions made in the coming year will tell us whether this hope is to be fulfilled. 

A Magic Wand for France? 
WASHINGTON, DC – Last month, Emmanuel Macron pulled the proverbial rabbit from the electoral hat. 
Against the odds, the independent centrist won the French presidency by a decisive margin, beating the far-right populist Marine Le Pen – and vanquishing the old guard of the French establishment along the way. 
Now, for his latest trick, Macron looks set to secure a huge majority in the French National Assembly. 
But whether Macron, a political newcomer, is more than an electoral wizard will depend on the success, or failure, of the economic program that his government enacts. 
Friends of France, and of a united Europe, were no doubt relieved by Macron’s victory. 
And in the early days of his presidency, the French public is behind him, too; recent polling puts his approval rating at 62%. 
Yet goodwill can dissipate quickly, which is why Macron must move to capitalize on his early mandate by implementing reforms of fiscal policy, taxation, the labor market, and education, to name but a few areas where change is long overdue. 
France’s most immediate problems are anemic growth and inadequate job creation. 
For the last 12 years, France’s GDP has increased by barely 1% a year, less than the mediocre uptick in the European Union as a whole, while unemployment currently hovers just above 10%. 
Only five EU countries – Croatia, Italy, Cyprus, Spain, and Greece – have higher unemployment rates. 
During Macron’s first five-year term, therefore, he should focus on raising France’s GDP growth to an average of at least 2% a year, and reducing unemployment to below 6%. 
The easiest way to achieve both goals would be to focus on where France is underperforming relative to other EU countries. 
Part of the unemployment challenge is tied to hidden costs. 
France has some of the highest labor costs for hourly employees in the EU, and a natural consequence is tepid hiring. 
With inequality also growing, many French are rightly upset that labor is taxed much more than capital gains. 
Indeed, France’s payroll taxes amount to 19% of GDP – far exceeding the EU average of 13%. 
This is a particularly pernicious tax, because only employers are affected by it. 
It should therefore be the first tax Macron moves to cut. 
Likewise, government spending, at 57% of GDP – is the highest in the EU, where the average is 47%. 
This burden is excessive, and significantly hinders economic growth. 
The government should work to reduce these expenditures (its bloated social-protection programs in particular) by at least one percentage point a year. 
Corporate taxes are another area ripe for reform. 
With its rate of 33%, France has one of the highest profit taxes on corporations in Europe. 
But its revenues from these taxes, 2.6% of GDP, are in line with the EU average. 
France could afford to reduce its profit tax rate to 25%, as Macron has proposed, without losing significant tax revenues. 
On nearly every fiscal metric, France is an outlier (along with Finland and Belgium, which have also underperformed in recent years). 
And given that France, it now seems clear, has not benefited from loose policy, Macron should be able to forge a consensus on cutting taxes and expenditures. 
Indeed, reducing the fiscal burden on the economy will be the key to turning things around. 
But France also needs more complex structural reforms, the most urgent one being liberalization and simplification of the country’s complex labor code, which makes it too difficult to hire and lay off workers. 
The most vulnerable are often those who are the least integrated into the economy, especially the young and immigrants. 
Most European countries suffer from this problem, but France’s youth unemployment rate, at 26%, is significantly higher than the EU average of 19.6%. 
The simplification of the labor code should be negotiated with social partners to mitigate or even avoid strikes and protests. 
Finally, France’s education system needs major attention. 
The OECD rates French high school students as just about average among the world’s developed economies. 
France, like many other European countries, has much room for improvement in preparing its young people for the job market. 
The situation appears even worse for French universities. 
According to the Times Higher Education Supplement, which ranks universities worldwide, France’s top university, the École Normale Supérieure, ranks just 66th in the world. 
Without reform of higher education, France cannot be remotely competitive with British and American institutions. 
The French government can carry out all of these reforms unilaterally, without the EU. 
But the EU could help France’s economy by promoting various markets. 
Free trade in services is one of the original four EU freedoms; today, however, the single market for services works poorly. 
France has much to gain from further liberalization in its domestic services market. 
And the EU’s digital market is a bonanza waiting be won, though France’s participation is surprisingly limited. 
Improved access to venture capital, which liberalization of financial services would facilitate, could help. 
Macron’s victory – and the likely parliamentary landslide for his LREM – has presented France with a great opportunity. 
But, given the scope and scale of the needed reforms, the president’s political honeymoon will be short. 
He must deliver results quickly, or his magic will soon fail him – and French voters will make him disappear. 



France Returns to Europe 
PARIS – It will take time to understand the full implications of the French presidential election’s outcome. 
And yet we already know that Emmanuel Macron’s victory is symbolically significant not just for France, but for Europe generally. 
For starters, Macron’s victory represents a break from the populist wave that has swept across Europe. 
Since the United Kingdom’s Brexit referendum and US President Donald Trump’s election last year, populism has posed an existential threat to the European Union. 
And while Macron’s victory does not mean that the populist threat has been eliminated, it does show that such forces can be contained. 
And the fact that populism has been contained in France bodes well for other European countries. 
Macron’s election also matters because it will probably change the world’s current perception of France. 
Under Macron’s predecessor, François Hollande, France pursued a policy of diplomatic activism, whereby it made substantial contributions to the fight against Islamist expansionism in Africa – particularly in Mali – and against the Islamic State. 
But Hollande lacked charisma, and his foreign-policy activism threw into sharp relief France’s faltering economy, which has weakened its standing on the world stage. 
This has been particularly evident at the European level, where the increasing disequilibrium between France and Germany has made it impossible for France to counter Germany’s austerity policies. 
I witnessed this firsthand as an adviser to Manuel Valls, who served as Prime Minister in Hollande’s government. 
One of Macron’s advantages is that he understands an essential point: any reorientation of French policy vis-à-vis Europe requires strengthening France’s economy. 
Unlike many left-wing leaders who prefer to attack Europe and blame the EU for all domestic ills, Macron believes that France has been weakened by its own failure to implement structural reforms. 
Indeed, among eurozone countries, France has below-average economic growth and some of the weakest policies for fighting unemployment. 
What is new about Macron is that he was able to clearly articulate this argument during the campaign, whereas most other political leaders today have expediently avoided defending Europe. 
Macron believes that without deep economic reforms, it will be impossible to change the situation in Europe, or to restore balance to Franco-German relations. 
But no one should regard Macron’s election as a panacea that will magically resolve all disagreements between France and Germany. 
There are significant differences between the two countries’ visions for the future of economic governance in the eurozone. 
And, contrary to popular misconceptions, France today may be even more inclined toward federalism than Germany is. 
While France has called for a true eurozone budget, Germany still favors a simple European monetary fund, to be used only for emergencies. 
The Germans do not want to tie their hands by creating a European budget, because they do not really want to become more economically integrated with Europe. 
Macron, for his part, supports deeper European integration, because he knows that it is the only way to loosen Germany’s stranglehold on EU policymaking. 
But, unlike his predecessors, especially former President Nicolas Sarkozy, Macron does not want merely to create the appearance of parity between France and Germany. 
Rather, he views genuine parity as the basis for strengthening France’s economic power. 
Thus, one should not exclude the possibility that if France does indeed rebound under Macron’s leadership, Franco-German relations might become tenser. 
In Macron’s view, France must make changes if it wants Germany to do the same. 
By implementing urgently needed reforms at home, Macron’s government will be able to insist that Germany finally take action to address the EU’s economic malaise. 
As proof of his resolve, Macron will probably propose a reform of France’s labor code as soon as the new National Assembly is elected in June. 
If the reform passes, it will boost investor confidence and shatter the image of a sick France. 
But while Europe is Macron’s strategic priority, he will need to address other issues as well, such as France’s relationship with Russia. 
Here again, Macron stood out from the other presidential candidates by promising to stand up to Russian President Vladimir Putin. 
This is noteworthy, given France’s traditional Russophilia, historical fascination with strongmen, and hostility toward the idea of a transatlantic community. 
Macron will obviously try to engage with Putin’s government. 
But he will not forget Russia’s interference in France’s internal affairs. 
The Kremlin was almost certainly behind the cyber attack against Macron’s campaign in the final hours of the election, and it was openly supportive of his opponent, the far-right National Front leader Marine Le Pen. 
To be sure, a country’s foreign policy is shaped by long-term factors that transcend elections and presidencies. 
The central tenets of French foreign policy will not change in the coming years. 
But Macron will take advantage of his position as the very young leader of a very old country. 
With his vision for France and a crystal-clear pro-EU agenda, Macron could become the leader who revives Europe’s economy and rebalances Franco-German relations. 
To do so, he will need to revive France’s historical role as a diplomatic and military leader in Europe. 
If he succeeds, a stronger Europe will emerge – a development that promises to benefit the entire world. 

Can Macron Pull it Off? 
CAMBRIDGE – Emmanuel Macron’s victory over Marine Le Pen was much-needed good news for anyone who favors open, liberal democratic societies over their nativist, xenophobic counterparts. 
But the battle against right-wing populism is far from won. 
Le Pen received more than a third of the second-round vote, even though only one party other than her own National Front – Nicolas Dupont-Aignan’s small Debout la France – gave her any backing. 
And turnout was apparently sharply down from previous presidential elections, indicating a large number of disaffected voters. 
If Macron fails during the next five years, Le Pen will be back with a vengeance, and nativist populists will gain strength in Europe and elsewhere. 
As a candidate, Macron was helped in this age of anti-establishment politics by the fact that he stood outside traditional political parties. 
As president, however, that same fact is a singular disadvantage. 
His political movement, En Marche !, is only a year old. 
He will have to build from scratch a legislative majority following the National Assembly elections next month. 
Macron’s economic ideas resist easy characterization. 
During the presidential campaign, he was frequently accused of lacking specifics. 
To many on the left and the extreme right, he is a neoliberal, with little to distinguish himself from the mainstream policies of austerity that failed Europe and brought it to its current political impasse. 
The French economist Thomas Piketty, who supported the socialist candidate Benoît Hamon, described Macron as representing “yesterday’s Europe.” 
Many of Macron’s economic plans do indeed have a neoliberal flavor. 
He has vowed to lower the corporate tax rate from 33.5% to 25%, cut 120,000 civil service jobs, keep the government deficit below the EU limit of 3% of GDP, and increase labor-market flexibility (a euphemism for making it easier for firms to fire workers). 
But he has promised to maintain pension benefits, and his preferred social model appears to be Nordic-style flexicurity – a combination of high levels of economic security with market-based incentives. 
None of these steps will do much – certainly not in the short run – to address the key challenge that will define Macron’s presidency: creating jobs. 
As Martin Sandbu notes, employment was the French electorate’s top concern and should be the new administration’s top priority. 
Since the eurozone crisis, French unemployment has remained high, at 10% – and close to 25% for people under 25 years old. 
There is virtually no evidence that liberalizing labor markets will increase employment, unless the French economy receives a significant boost in aggregate demand as well. 
This is where the other component of Macron’s economic program comes into play. 
He has proposed a five-year, €50 billion ($54.4 billion) stimulus plan, which would include investments in infrastructure and green technologies, along with expanded training for the unemployed. 
But, given that this is barely more than 2% of France’s annual GDP, the stimulus plan on its own may not do too much to lift overall employment. 
Macron’s more ambitious idea is to take a big leap toward a eurozone fiscal union, with a common treasury and a single finance minister. 
This would enable, in his view, permanent fiscal transfers from the stronger countries to countries that are disadvantaged by the eurozone’s common monetary policy. 
The eurozone budget would be financed by contributions from member states’ tax receipts. 
A separate eurozone parliament would provide political oversight and accountability. 
Such fiscal unification would make it possible for countries like France to increase infrastructure spending and boost job creation without busting fiscal ceilings. 
A fiscal union backed up by deeper political integration makes eminent sense. 
At least it represents a coherent path out of the eurozone’s present no man’s land. 
But Macron’s unabashedly Europeanist policies are not just a matter of politics or principle. 
They are also critical to the success of his economic program. 
Without either greater fiscal flexibility or transfers from the rest of the eurozone, France is unlikely to get out of its employment funk soon. 
The success of Macron’s presidency thus depends to a large extent on European cooperation. 
And that brings us to Germany. 
Angela Merkel’s initial reaction to the election’s outcome was not encouraging. 
She congratulated Macron, who “carries the hopes of millions of French people,” but she also stated that she would not consider changes in eurozone fiscal rules. 
Even if Merkel (or a future government under Martin Schulz) were more willing, there is the problem of the German electorate. 
Having portrayed the eurozone crisis not as a problem of interdependence, but as a morality tale – thrifty, hard-working Germans pitted against profligate, duplicitous debtors – German politicians will not have an easy time bringing their voters along on any common fiscal project. 
Anticipating the German reaction, Macron has countered it: “You cannot say I am for a strong Europe and globalization, but over my dead body for a transfer union.” 
That, he believes, is a recipe for disintegration and reactionary politics: “Without transfers, you will not allow the periphery to converge and will create political divergence towards extremists.” 
France may not be in the European periphery, but Macron’s message to Germany is clear: Either you help me out and we build a true union – economic, fiscal, and eventually political – or we will be run over by the extremist onslaught. 
Macron is almost certainly right. 
For the sake of France, Europe, and the rest of the world, we must hope that his victory is followed by a German change of heart. 

Macron’s Mission 
PRINCETON – The centrist Emmanuel Macron’s success in the first round of the French presidential election is likely to re-energize Europe. 
Unlike the other candidates, Macron does not just recognize the need for radical change to the European Union; he supports bringing it through Europe-wide cooperation. 
But Macron’s plurality of the popular vote was narrow, and a much larger share of French voters showed support for a very different political vision. 
It is a vision of nostalgia and isolation espoused by Macron’s rival in the second round, the far-right National Front’s Marine Le Pen. 
Her slogan – “on est chez nous” (we are at home) – underscores her focus on enclosing France in a national cocoon that resists “wild globalization.” 
But Le Pen was not alone in promoting this vision. 
One of the candidates who finished fourth, the far-left Jean-Luc Mélenchon, also built his candidacy on simplistic economic populism. 
For example, like Le Pen, he promised a radical reduction in the retirement age, without explaining how to finance it. 
And both appealed to Germanophobia, focusing on the European debt crisis and Germany’s insistence on austerity. 
Le Pen accuses Macron of aspiring to be Vice-Chancellor of Europe, under German Chancellor Angela Merkel, while proudly declaring herself to be the “anti-Merkel.” 
Mélenchon claims that Germany is motivated by radical individualism, neoliberalism, and the economic interests of an aging population. 
Even if Macron wins the second round, as expected, he will have to address what drove more than 40% of French voters to support this anti-European vision in the first round. 
And if he is to reinvigorate support for Europe, he should consider what made Europe attractive in the past – and how it lost its allure. 
When Europe was most obviously attractive, it was regarded as a way of purging what was bad and corrupt from national traditions. 
In the 1950s, as two very old men, German Chancellor Konrad Adenauer and French President Charles de Gaulle, moved to reinvent their respective countries, they examined how their vaunted traditions had been undermined by their own elites. 
Germany had been devastated by Nazism, which, in Adenauer’s view, had been forced on the country by Prussian aristocrats and militarists. 
In France, according to de Gaulle, the elites weakened the country, before voting to overthrow the Republic in the aftermath of military defeat. 
But, unlike today, the post-war anti-elite backlash did not cause countries to turn inward. 
On the contrary, de Gaulle believed that France’s deep historical wounds could be healed only through engagement with Germany. 
As he put it, “Germany is a great people that triumphed, and then was crushed. 
France is a great people that was crushed, and then associated itself in Vichy with the triumph of another.” 
And he believed that only he could bring about France’s reconciliation with Germany, because only he could “raise Germany from her decadence.” 
With the euro crisis, however, the limits of that reconciliation came to the fore, as did the issue of national decadence. 
Germany and France clearly needed one another, but found it difficult to understand each other. 
European policymaking after 2010 was practically a bilateral affair, involving a dominant France and a more dominant Germany. 
Much like the events of 1940, the euro crisis reflected bad management and bad judgment, and it came to be viewed as a betrayal by the elites. 
This time, however, it was the European elites – and the national elites who empowered them – who were blamed. 
The eurozone became the focus of dispute, owing to the constraints that it imposed on member countries. 
As the crisis progressed, the single currency began to feel like a straitjacket, and voters increasingly became convinced that escaping it would solve the problems that had emerged while bound by it. 
Interestingly, the eurozone’s debtors and creditors alike share this sentiment. 
Of course, southern Europe, including France, feels ensnared in a low-competitiveness scenario of high unemployment and stagnant income growth. 
But even northern Europe – and especially Germany – feels trapped. 
Despite being portrayed as the eurozone’s major beneficiary, Germany’s trade gains are lower than many assume, especially when struggling southern European countries are importing fewer German goods. 
What many Germans see, instead, are the financial claims against southern European countries building up in the eurozone’s TARGET2 payments system. 
This situation, in which both sides feel trapped, can be viewed as a variant of the famous master–slave dialectic in Georg W.F. Hegel’s Phenomenology of Spirit: both sides are equally bound. 
The slave is not recognized as fully human, or as an equal of the master, and is not free. 
The master is free, but does not feel recognized as a human by the slave. 
The master is constantly worried by the fragility of the relationship, and by the fact that the slave is building up an alternative universe of values, in which the master is not represented. 
The task ahead for a President Macron would therefore be to achieve a kind of Hegelian transcendence, through a process much like that which de Gaulle described in the 1960s. 
France needs Germany to serve as a model of a social market economy, capable of creating new non-governmental jobs. 
Germany needs France in order to assert its own place in the world, including from a security perspective. 
Reconciling these economic and security imperatives is painful, because it means confronting the weaknesses and errors of the past head-on. 
But it is necessary. 
France and Germany must again welcome each other chez nous. 

Macron’s Labor Gambit 
CAMBRIDGE –At the end of August, French president Emmanuel Macron unveiled the labor-market overhaul that will make or break his presidency – and may well determine the future of the eurozone. 
His goal is to bring down France’s stubbornly high rate of unemployment, just a shade below 10%, and energize an economy that badly needs a kick-start. 
Labor reform has long been on France’s agenda. 
Practically every French administration in recent memory has tried to rewrite the country’s gargantuan labor code, typically failing in the face of trade union protests. 
Macron makes no bones about what he is up against: he has described it as a Copernican revolution. 
But this time may well be different. 
Even though the country’s second-largest union has called a general strike, indications are that Macron will have the political support he needs. 
Macron’s reforms aim at increasing what is euphemistically called labor-market flexibility. 
The proposed reforms would make it easier for firms to dismiss employees, decentralize bargaining between employers and workers in small firms (by eliminating sector-level agreements), and introduce a ceiling on indemnity for wrongful dismissal, providing firms relief from the unpredictability of damages awarded through arbitration. 
Moreover, the reforms remove a requirement that linked mass layoffs at large companies to such firms’ global profitability; companies will now be permitted to fire workers solely on the basis of domestic profitability. 
The logic behind Macron’s labor-market reforms has driven the structural-reform agenda of policy economists and international institutions ranging from the International Monetary Fund to the OECD during the last three decades. 
Greater flexibility, according to this view, will enable French firms to adjust more efficiently to changing market conditions, which in turn will make them more competitive and dynamic, giving the French economy a boost. 
The idea that making it easier to fire workers will reduce, rather than increase, unemployment is not as crazy as it may sound. 
If the costs of firing workers are prohibitively high, firms may not hire additional workers in a market upturn, for fear that they will be unable to reduce their labor costs in a future downturn. 
Firing costs are hiring costs, as economists like to say. 
Reduce firing costs, and you reduce hiring costs, too. 
Whether a reduction in firing costs does boost employment depends on the balance of those two offsetting factors. 
The outcome turns on whether firms are more constrained by the hiring costs or by the firing costs. 
In good times, when firms want to expand, it is the hiring costs that bind, and making it easier to fire workers will remove a key impediment to investment and capacity expansion. 
In more pessimistic times, reducing firing costs will simply lead to more dismissals. 
Which of these factors prevails depends on the state of aggregate demand and the “animal spirits” of employers. 
This ambiguity explains why it has proved difficult to establish a clear empirical relationship between employment protection and labor-market performance, despite the enthusiasm of many economists and policymakers for flexibility-enhancing reforms. 
There is considerable evidence that strong employment protection laws do reduce job turnover – the number of hires and fires. 
But when it comes to overall employment and unemployment levels, “the jury is still out,” as a recent survey shows. 
The comparative record gives us little confidence that the French reforms will produce a boost in employment. 
France is thought to have particularly cumbersome labor laws. 
Yet many of the economies with which it competes have similarly strong labor-market protections. 
In fact, according to the OECD’s indicators of employment protection, German and Dutch workers under permanent contracts enjoy even greater security than French workers do. 
(Where the French system seems especially restrictive is with respect to temporary contracts.) 
By some measures, France was second only to Germany in terms of labor-market deregulation before the global financial crisis. 
Yet unemployment levels in Germany and the Netherlands are a fraction of those prevailing in France. 
The real difference between these economies is that Germany and the Netherlands, unlike France, run large current-account surpluses. 
This means that their economies receive a large boost from foreign demand. 
France, by contrast, has a small current-account deficit. 
Might reforms that increase labor-market flexibility give French industry a similar lift? 
Perhaps. 
But that will require a sharp increase in French industrialists’ animal spirits. 
Psychology may eventually play a greater role than the details of the reforms themselves. 
In such a technocratic discussion, it is easy to forget that what economists call “labor-market rigidities” are in fact a crucial component of the social bargain in advanced capitalist economies. 
They provide income and employment security for workers whose lives might otherwise be subject to tumultuous upheavals. 
And, as the Italian economist Giuseppe Bertola notes, they can be efficient even from a strictly economic perspective, because they facilitate the smoothing of labor incomes. 
Macron’s entourage has been wisely telling anyone who will listen not to expect too much from the new labor code. 
The economics of the reforms suggest that they are unlikely to make a big difference on their own. 
The trouble is that Macron has too few arrows in his quiver when it comes to lifting French economic growth. 
In terms of macroeconomic policy, his hands are tied in the eurozone, and there is little prospect that Germany will help by boosting its investment and spending. 
So, whether Macron likes it or not, his presidency is likely to be judged by the economic and political repercussions of his labor reforms. 

Macron the Maverick 
WASHINGTON, DC – Marine Le Pen, the leader of France’s far-right National Front, may be a charter member of what New America Senior Fellow Scott Malcomson calls the “Nationalist International.” 
But she is not the only “maverick” who is polling well in the run-up to her country’s presidential election this spring. 
Emmanuel Macron is also a maverick, but of a very different type. 
After serving as Minister of the Economy, Industry, and Digital Affairs under French President François Hollande, he launched his own political movement, En Marche!, and is running for president as an independent. 
Macron is only 39, and has never been a party politician. 
As recently as three months ago, few observers gave him a chance. 
But he quickly assembled a strong team, and has rallied support among younger voters. 
Macron has been polling around 20% for the election’s first round in April. 
That appears insufficient to advance to the election’s second round in May, when the top two candidates will face off to determine the winner. 
The first-round front-runners have been Le Pen, hovering at around 27% in the polls, and François Fillon, who served as Prime Minister under former President Nicolas Sarkozy. 
But Fillon’s candidacy is now in doubt, following allegations that he employed his wife and children in fictitious positions while serving in the National Assembly. 
Meanwhile, left-wing candidate Benoît Hamon has surged in the polls since winning the Socialist Party primary, and is now approaching 20%. 
Although Macron has positioned himself against the old left and the old right, he is neither a left- or right-wing populist, nor a traditional centrist. 
He hails from the left emotionally and intellectually, but he rejects traditional “class politics.” 
Macron is campaigning for votes from all parts of society. 
He has reached out to workers who feel betrayed by the “system” and threatened by globalization and new technologies; and to teachers and health-care professionals who recognize that public education and health-care services need deep reforms to sustain the social solidarity that they underpinned in the past. 
But he is also seeking support from innovators and entrepreneurs, who want a freer regulatory environment and improved access to resources. 
He has not yet formulated a full program. 
But Jean Pisani-Ferry, one of the best policy economists in France, recently resigned as director of the government think tank France Stratégie to become Macron’s program director. 
So far, Macron has emphasized a type of social solidarity that makes more social benefits universal and portable, while advocating more preventive health care. 
He views such social policies as complementary, not counter, to growth-enhancing measures, and is calling for more support for innovative business. 
In contrast to other mavericks, Macron’s campaign will be positive. 
He will likely avoid vituperative attacks on other candidates, and make the case that France has more to gain from cooperative reforms than from declaring war on “experts,” the press, capital owners, union workers, immigrants, or other specific groups. 
Macron is thus a foil to today’s populists. 
By employing fact-based arguments and appeals to humanist and democratic values, he is trying to modernize and rejuvenate the left – his “home” – as well as parts of the right. 
And he is a strong believer in Europe who supports proposals to establish a eurozone finance minister. 
In today’s Europe, there are countries that want to integrate more closely on the basis of the euro, and countries that favor a looser cooperative structure. 
The United Kingdom, for example, is leaving the European Union, but may want to maintain a European continental partnership, as described by a group of influential Europeans. 
Such an approach resembles what I previously described as “two Europes in one.” 
Macron envisions a more integrated Europe based on subsidiarity. 
He advocates local decision-making whenever possible and effective, but also supports national and European-level decision-making where this is appropriate; the key is that processes should be flexible and enable citizen participation. 
He recognizes that shared sovereignty will make Europe more influential, thereby empowering its citizens. 
And he views globalization as a good thing, but understands that it must be managed through durable, efficient international agreements and institutions. 
The opinion polls are currently bouncing wildly, owing to the Fillon scandal and a surge in support for Hamon among left-wing voters outside of the Socialist Party. 
But if Macron qualifies for the second round, he will pose a greater threat to Le Pen than an outright left-wing candidate would. 
He could be the one to upset the Nationalist International’s applecart. 
Indeed, a Macron victory could launch a counter-trend to the populism that is sweeping the globe, by giving hope to all who are sympathetic to the left or right, but anxious about populism and hyper-nationalism. 
The alternative could be a Le Pen victory, and a further step back toward the 1930s, when too many countries turned their back on international cooperation and collective solutions to shared problems. 
After the UK’s Brexit referendum and the US presidential election in 2016, the French presidential election could now be a tipping point. 
It is still a long time until the first-round vote in late April, and we have learned to expect surprises and not to put too much faith in early polls. 
But it seems that the unusual candidate Macron, rather than the populist mavericks to whom we have become accustomed, could win out. 

Is the Shine Off Macron? 
GENEVA – Emmanuel Macron is on a winning streak. 
Within a year, he has gone from inexperienced political underdog, with no establishment backing, to President of the French Republic and leader of a newly created political party with an impressive parliamentary majority. 
Can he keep it up? 
Macron owes his recent success not just to good luck, but also to his ability to build on any break that came his way. 
For voters who were feeling mistrustful of the political establishment, he managed to provide an appealing option that did not require a move to the fringes, whether right or left. 
He came to be seen as a smart disruptor of the disruptive populists. 
Macron’s economic program was particularly clever, as it responded impeccably to more than a decade of analyses of the ills afflicting the French economy. 
He committed to freeing up the famously ossified labor market and alleviating an excessive and entrepreneurship-stifling tax burden. He also pledged to shrink France’s unwieldy state, which now spends 57% of GDP per year, by reducing cumbersome regulations and rationalizing the outdated welfare system. 
After his election, Macron upheld his reputation as a breath of fresh air, building a government composed of young people from all walks of life – inexperienced, maybe, but enthusiastic and smart. 
Those who had long lamented France’s economic decline could not believe the miracle taking shape before their eyes. 
But great expectations can herald great disappointment. 
And early signals from the Macron administration are disquieting. 
While the promised labor-market reform is well underway, and could be adopted as early as September, the administration’s macroeconomic program, articulated by Prime Minister Édouard Philippe, is a serious disappointment. 
Philippe has announced that he plans to cut public spending by a mere three percentage points of GDP over five years. 
He has postponed several clever pro-growth tax cuts, some until the end of Macron’s current term of office in 2022. 
A couple of days later, Macron changed tack and brought some of these cuts a bit forward. 
Yet he intends to carry out in 2018 a general tax increase that was presented as a partial offset to the cuts. 
In defense of this approach, Philippe cites the official national-accounts watchdog, the Cour des Comptes, which has reported serious budget overruns for 2017 – a result of disingenuous electoral promises by the departing president, François Hollande. 
The newcomers must therefore bring the deficit back down to 3% of GDP, as promised last year to France’s European partners. 
It is, Philippe insists, a matter of credibility. 
But pleasing the bean counters in Brussels or Berlin threatens to undermine France’s incipient economic recovery – and, in turn, support for the country’s new president – at a moment when important and, at times, unpopular reforms must be pushed through. 
(As it stands, per capita GDP is now only slightly above its pre-crisis level, and unemployment began a slow decline just last year.) 
European leaders would probably prefer a little deficit slippage to the loss of popular support for France’s pro-Europe president, provided public spending is reduced. 
Macron must understand all of this. 
So why he is taking such a macroeconomic risk? 
And, perhaps more important, is this indicative of what the rest of his presidency will look like? 
The most positive interpretation assumes that Macron has decided to focus on deep and courageous reforms, while approaching macroeconomic issues with caution, much like his predecessors, Nicolas Sarkozy and Hollande. 
Both initially rejected austerity only to end up adopting it. 
But Sarkozy and Hollande saw their public opinion ratings drop precipitously after their embrace of austerity. 
Does Macron think that his luck will continue, bringing, say, a stronger economic recovery than currently foreseen? 
Or does he simply believe that he is in a stronger position to survive disappointing growth and unemployment outcomes than his predecessors? 
In other words, is Macron being driven by faith or hubris? 
The most disquieting interpretation of Macron’s decision-making is that he is already captured by his own administration. 
Top French civil servants of the kind that he has assembled traditionally share two characteristics: they are overly cautious and they have a poor understanding of macroeconomic strategy. 
Given this, it seems likely that many in Macron’s administration take the European agreements very seriously, even too seriously, and are repelled by the idea of vigorous spending cuts, because their power is related to the size of the purse they control. 
If this reading is correct, the French government will remain top-heavy, and the tax burden will remain suffocating. 
But there is a third possibility: Macron believes that, to advance his vision for the European Union, he must act impeccably on the European stage, meeting the most stringent German standards. 
That approach would be reasonable if Macron really had a new vision for the EU. 
During the electoral campaign, he mostly just rehashed the traditional French view: a common European government and a eurozone finance minister, with a separate budget to finance public investment. 
Most other EU countries have already rejected that vision, and many believe that not even France itself would agree to the transfers of sovereignty that such reforms would imply. 
In any case, the EU is not at the point where it can discuss such radical steps, as its top priority still must be to fix what is broken: a half-baked banking union, a non-functioning Stability and Growth Pact, excessive regulation, and an empty immigration policy. 
Macron’s rapid ascent reflected his ability to say the right thing in the right circumstances. 
But it also meant that he moved into the Élysée Palace without having shown who he really is. 
One hopes that he turns out to be the man reflected in that well-thought-out economic program on which he campaigned, not the one reflected in his macroeconomic policies since taking power. 

Can Europe Sustain the Macron Moment? 
STOCKHOLM – At the start of 2017, many feared that the European project would experience a near-breakdown within the next year. 
The United Kingdom had decided to leave the European Union, the United States had elected a president who cheered the Brexiteers on, and populists running in the French and German elections posed a clear danger to European integration. 
As we approach the start of 2018, the picture is very different. 
The European project has not only survived, but may be gaining new momentum. 
At least within the bubble of EU institutions in Brussels, one senses a newfound confidence. 
More than anyone else, French President Emmanuel Macron is at the center of this turnaround. 
His post-election victory speech in May was accompanied by the EU anthem, Beethoven’s “Ode to Joy” – a strong symbolic gesture. 
Since then, Macron has launched or proposed one initiative after another to strengthen EU institutions, while taking a lead in European foreign policy. 
With German Chancellor Angela Merkel struggling to form a government after September’s general election, all eyes are now on Macron. 
The changing mood in Europe over the past year has been influenced by three factors in particular. 
The first is Brexit, which is undeniably causing problems for the British – and in turn causing most Europeans to begin to understand the extent to which their economies and societies are intertwined. 
The once-glorious country of Great Britain is now in a state of political agony as it tries to sort out the politics, economics, and logistics of leaving the bloc. 
It is unlikely that voters in any other member state will envy the British experience. 
The second factor is Donald Trump, whose US administration has a lower standing in Europe than any other in recorded history. 
According to one recent poll, Germans now regard Trump as a greater threat to their country’s interests abroad than Russian President Vladimir Putin or North Korean dictator Kim Jong-un. 
In a true race to the bottom, Trump is ahead. 
Over the past year, European leaders have accepted that Europe will have to take more responsibility for its own affairs. 
After a vexing encounter with Trump at the G7 summit in Italy in May, Merkel summed up a sentiment that most other European leaders now share. 
“We Europeans must fight for our own future and destiny,” she said in an unscripted outburst at a campaign stop. “We Europeans truly have to take our fate into our own hands.” 
The third factor is Putin’s Russia, which has continued to meddle in Western elections and act aggressively in Ukraine. 
All told, the “BTP effect” – Brexit, Trump, Putin – has convinced even skeptical Europeans that EU-level cooperation is necessary. 
But, in addition to the impetus of the BTP effect, Europe is being propelled by stronger economic growth. 
The dark days of the euro crisis have begun to fade into memory, as has the refugee crisis of late 2015, which had a profound political effect on Germany, Sweden, and other countries. 
Although the huge task of deepening EU integration remains unfinished, the political and economic conditions for seeing that process through have improved. 
At the same time, the EU has suddenly emerged as the preserver of the liberal world order. 
In September, the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada entered into force. 
And, since then, the EU has moved closer to finalizing an even more important trade agreement with Japan, and, separately, with the founding countries of Mercosur – Argentina, Brazil, Paraguay, and Uruguay. 
Britain may be leaving, but the rest of the world seems to be lining up to make deals with the EU. 
Still, there is no room for complacency. 
Despite many positive developments, governance is becoming more complicated within certain European countries, owing to an increasingly fractured political landscape. 
In Germany, forming a new government after an election used to be a straightforward affair. 
But now the country could be under a caretaker government until March, with little clarity about what sort of government will emerge. 
In the meantime, Germany can hardly play its customary role as Europe’s anchor of stability. 
In the Danubian lands of Hungary, Austria, and Bavaria, nationalism is on the rise. 
And in Italy, few would dare to offer any solid predictions of what will happen in the next general election, which must be held before May 20, 2018. 
Moreover, Europeans cannot rely indefinitely on the low interest rates that have contributed to the current recovery. 
EU leaders will need to push much harder for structural reforms than they have so far. 
Although Spain has revived its economy with important reforms, and Macron has tackled France’s notoriously Byzantine labor code, the EU is still struggling on many fronts. 
For example, despite Estonia’s heroic efforts to create a digital-reform agenda during its presidency of the Council of the EU, far more needs to be done in that area. 
Next year will be the last chance to pursue EU-level reforms before a fateful year of reckoning begins. 
In March 2019, Britain will leave the EU, with or without a divorce agreement. 
Then, in May, come elections to the European Parliament, and new leaders will be appointed for the EU’s core institutions. 
Before we know it, Jean-Claude Juncker’s presidency of the European Commission will be over. 
Macron is anxiously awaiting a new government in Berlin. 
As things stand, it is far from clear that the next German coalition will support his EU-reform agenda. 
And, with each passing day, the European Commission will be running out of time to pursue any new initiatives that could realistically be finalized before 2019. 
So, while the gloom and doom of 2016 may have receded, it could all too easily return. 
Sustaining the momentum generated by Macron’s election in France and realizing the promise that it holds will require decisive action in the months ahead. 

Macron’s Internationalism and the New Politics 
WASHINGTON, DC – French President Emmanuel Macron’s state visit to the United States last month was a study in contrasts. 
Despite the friendly dynamic, Macron’s agenda and rhetoric were almost diametrically opposed to US President Donald Trump’s. 
But Macron’s leadership is subject to an even more fundamental challenge; how he manages it could point the way forward for liberal-democratic politics. 
Addressing the US Congress in English, Macron articulated a staunchly internationalist worldview, calling for stronger international institutions, a recommitment to the rules-based system of international trade, and a general embrace of globalization. 
With regard to Iran, he reiterated the need to preserve the 2015 nuclear deal, from which Trump has just withdrawn, though he did call for complementary agreements on topics that the existing agreement does not address. 
Macron has also signaled that he will pursue a pan-European campaign for the 2019 European Parliament election. 
As a democrat, he believes that the deepening of the European Union must go hand in hand with the development of a truly European political space. 
At a time of much hand-wringing over the decline of liberalism, the future of social democracy, the rise of nationalism, and the backlash against globalization, Macron’s unapologetically internationalist stance is notable. 
In fact, Macron has taken a leap into the unknown of the West’s “new politics,” a terrain no longer defined entirely by competition between large center-right and center-left parties. 
But is politics really turning the page on the traditional right-left cleavage? 
It would be wrong to describe Macron, who served as a minister in his predecessor François Hollande’s Socialist government, simply as a centrist. 
Although he has moved toward the center, he did not join one of the small traditional centrist parties, but instead created his own “movement.” 
Early on, Macron described that movement – which he called En Marche ! – as “neither on the right nor on the left” – avoiding the term “centrist.” 
Now, he says it is on “both the right and the left,” signaling his desire to win over traditional center-left and center-right voters. 
If the traditional left-right divide is blurring, however, the question is what will replace it. 
With globalization at the center of political debate in most countries, it may seem that the answer is a division between cosmopolitan and parochial forces. 
According to this interpretation, Macron leads France’s pro-globalization (and pro-European) movement, and those who oppose him, on the right or the left, are linked by a shared opposition to economic openness. 
And, indeed, the far right and the far left are espousing similar economic messages. 
Meanwhile, existing center-left and center-right political parties – in France and throughout the West – tend to comprise internationally oriented factions and those who are more suspicious of globalization. 
If globalization is becoming the main electoral cleavage in Western countries, these two camps, the logic goes, are likely to split and form new political families. 
Yet, while I believe there will be some movement in this direction, the traditional left-right cleavage seems unlikely to disappear. 
Traditional parties will continue to debate issues concerning income distribution, including the progressivity of tax systems and the proper scope and aims of social policy. 
The globalization “platform” alone will not be robust enough to define a large political party. 
This means that in the coming years, Macron will have to align himself more closely with either the center-right or the center-left. 
The particular circumstances that enabled his electoral victory in 2017 – a discredited center-left, and a center-right candidate disqualified by scandal – will not reproduce themselves. 
He will have to become an internationalist left-leaning leader or an internationalist right-leaning one. 
Only one of those appears to be a tenable option. 
The traditional policies of the center-right would not easily be compatible with a strong internationalist bent. 
If globalization, in its various dimensions, is to be backed by a popular majority, it will have to be accompanied by modernized social policies that provide effective help to those who need it. 
At a time of continuous economic disruption, this will be all the more important. 
Economic openness demands social solidarity. 
That does not means protecting specific jobs from trade competition or technological innovation. 
It means assisting people to adapt to continuous change, by providing all citizens with the necessary resources, such as education, accessible health care, and transitional support. 
In short, a popular pro-globalization stance must be accompanied by a new social contract – backed by public resources – that appeals to a large majority. 
Otherwise, the siren song of neo-nationalism will be difficult to resist. 
While completing the necessary tax and labor-market reforms on which he has embarked, Macron will need to address this challenge. 
In the current political paradigm shift, those who favor openness will outshine nationalist unilateralism only by adopting as their primary objective a modernized approach to social solidarity. 

Macron and the Piranhas 
PARIS – The faults of Alexandre Benalla, a former top security aide to French President Emmanuel Macron who was caught on video beating up a demonstrator on May 1, are inexcusable. 
And it is well understood that Macron committed several errors of judgment by trusting for too long a young, inexperienced, showy bruiser who imagined himself to be a cop or a hooligan. 
Credit is owed to the journalists who compelled the Elysée Palace to end two and a half months of culpable silence and cut ties with Benalla. 
But beyond this scandal lies a more chilling sequence of events. 
Paralyzed by Macron’s steady drumbeat of important reforms, his opponents found in the Benalla scandal, at long last, a good fight to fight. 
But no one should revel in the fact that it was far-right leader Marine Le Pen and far-left leader Jean-Luc Mélénchon who led the attacks on Macron for his silence about his thuggish aide. 
There was something deeply hypocritical in the spectacle of these old warhorses, who rely so often on their own redneck guerrillas, defending the police against the “militias.” 
Who are Le Pen and Mélénchon trying to kid in feigning concern for public civility when they only fan resentment and hostility? 
In an article published last Sunday in the French weekly Le Journal du Dimanche, officials in Mélénchon’s party, La France Insoumise (France Unbowed), smugly and cynically discuss plans to “raise the tone,” “hit” rival X or Y, “obtain” top-secret information on “article 40 of the code of criminal procedure,” and render the crisis sufficiently “important” to “damage the president.” 
But, however much the Vichyist Le Pen and the Maduro-manqué Mélénchon might wish otherwise, the Benalla affair is no Watergate. 
It was a blunder that was quickly revealed by the press, triggering several judicial investigations and police inquiries, as well as a parliamentary commission requiring the appearance of the interior minister himself. 
With the state and government acting with such alacrity, covering up nothing, this is no grave scandal that should threaten a government. 
Macron’s underestimation of Benalla’s violence was a serious error, but it was not what Mélénchon, in an interview with Le Monde, called “an open door to a form of barbarism” and it certainly did not justify the subsequent paralysis of Parliament. 
And no citizen should rejoice in Mélénchon’s subsequent statement saying that he “disapproves” of “parliamentary institutions” and approves of those who “destroy them” and do “the work in our place.” 
More alarming still is the stampede that followed. 
An 11-second clip from the original video of Benalla beating a demonstrator played in a loop on the news channels, running nearly simultaneously with grotesque speculations about the private life of the presidential couple. 
In Hans Christian Andersen’s fable, the emperor had no clothes; he was not stripped of them. 
And this band of political piranhas decided not to leave the least scrap of flesh on Macron. 
We know this scene all too well. 
Our world has been animated by base desires and reactive immediateness for some time now. 
Nor is it new that the public, puffed up by the winds of the web as if by nationalist mantras, seems to have lost the inclination to be the people of a real, functioning democracy. 
But rarely, it seems to me, has the abyss been plumbed so quickly. 
For the first time, the hysteria of certain media and commentators reached fever pitch almost immediately. 
Le Parisien, for example,ran the headline, “An Overly Special Adviser,” accompanied by a supporting suggestive photo, while public intellectual Michel Onfray’s blog described Benalla as “the favorite of the king” and “physically the closest” to him. 
The humming of tweets and Facebook forums became the hunger cries of a carnivorous chorus, motivated by one obsession: Devour Macron. 
It is difficult not to think of a special sort of sans-culottes, devoid of a soul, drunk on themselves and cruelty. 
Confronted with a world turning wild and the rise of “democratatorships” and demagogues, there are too few leaders working to hold the line against Vladimir Putin’s Russia, fascism in Hungary and Poland, and the political earthquakes triggered by US President Donald Trump. 
Macron is one of them. 
We can disagree with him on railway reform or the migrant crisis, on tomorrow’s budget or future spending cuts, on his indifference to former political veterans, or his obsession with being on the cutting edge. 
But, in a Europe adrift and a world on the edge of the abyss, we cannot take away from him the virtue of being one of the last who – partly owing to his famous “arrogance” – is capable of resisting the new nationalist international. 
Still, the populists smell blood in the water. 
Perhaps politicians of the traditional French right – for example Christian Jacob, Laurent Wauquiez, and Éric Ciotti – should concern themselves more with the state of the world than with today’s summer scandal. 
That is their decision. 
I have made mine. 
Faced with looming chaos and increasing devastation in Europe and beyond, I say to myself, and must say aloud: Benalla is a small fish. 
Focusing on him will only benefit the piranhas. 

Emmanuel Macron and the Post-Revolutionary Idea 
PARIS – No, Parisian voters are not “vomitatious,” as the pathetic Henri Guaino proclaimed Monday after losing his seat in the National Assembly. 
Staying home from the polls, which we have been told for 30 years benefits the National Front, cannot now be used to explain the surge of La République en Marche!, French President Emmanuel Macron’s new political party. 
And no, Macron is not beginning a dictatorial career at 39, any more than Charles de Gaulle did at 67. 
In short, pretty much nothing said about French politics in the last few days explains the apparent landslide that began with the first round of legislative elections on Sunday. 
And the riot of news since Sunday is so much tinnitus to those who, for years now, have preferred to hear nothing. 
So what is happening? 
How did Macron, a political novice seemingly fated to preside over a thousand and one shaky coalitions, score the unprecedented achievement of ushering some 400 deputies into the 577-seat National Assembly under the banner of what was still, just a few months ago, virtually a party of one? 
First, of course, there is virtuosity, the quality that, as Hannah Arendt described in her commentary on Aristotle’s Nicomachean Ethics, artists and politicians shared. 
Next, there was the very mediocrity of the populists (Marine Le Pen on the right, and Jean-Luc Mélenchon on the left) who found themselves sucked down the drain of their own France-firstism. 
But the main factor behind Macron’s success, I believe, is the structural change that I described a decade ago in Left in Dark Times. 
That change has now reached its apogee. 
It all began with the French Revolution. 
To put it more precisely, everything turns on the French invention of the concept of “revolution,” which quickly rose to the summit of our political thinking, like a fixed star, with the rest of the stars arranging themselves around it. 
Those favorably inclined toward the revolutionary perspective gathered on the left; on the right assembled those who viewed revolution as a permanent threat and worked to counter it. 
But then, in the short span of time between the Chinese revolution of 1949 and the Cambodian nightmare of 1975-1979, a discovery was made: the more radical the revolution, the more bloody and barbaric it becomes. 
Revolution, it had now become clear, was not just difficult or elusive or impossible; it was downright detestable. 
The fixed star grew darker and became a black hole that swallowed its own light and that of lesser stars. 
At a certain point, the entire political system would implode. 
We are at that point now. 
This is not the first time that the left-right divide has been blurred in France. 
It happened more or less at Valmy, at the time of the Dreyfus Affair, during the Vichy government, and around the issue of colonialism. 
But it was in Cambodia’s faraway killing fields of 40 years ago that revolutionary reason and imagination were smashed to bits and neutralized. 
And it was the prolonged shock, the slow explosion and the blast effect that accompanied it, the systematic invalidation of the divisions, disputes, and, ultimately, designations that made up the “French exception” that Macron’s triumphs have brought to an end. 
A thousand questions immediately arise: How will those swept to power under Macron’s banner behave? 
If they are drunk with victory, from what direction, when, and at whose hand will come the necessary sobering slap? 
How, when, and where will the counterweights that are indispensable to the proper functioning of a democracy appear? 
There’s more. 
Where is the West headed? 
By what compass, toward what horizon? 
“At the same time” – the balancing of opposing facts and ideas – has been a staple of Macron’s phrasebook. 
But how long can “at-the-same-time-ism” suffice as a policy? 
If we are really at the end of the historical epoch that began in 1789, will we be returned to the Age of Enlightenment? 
Or to the moment before the Enlightenment when a new sense of natural rights and the concomitant Republican ideal took hold? 
Will we rewrite Leviathan or, what amounts to the same thing, the Peace of Westphalia, without this time having to pass through the tragic radicalization of Europe and the brewing or raging of world wars? 
Whatever the future holds, the central fact is abundantly clear: Macron has seen what his predecessors only glimpsed. 
He is the instrument or the foil of a long-term event taking shape before our eyes. 
And to him now falls the task of rebuilding upon a ruined field, of working to ensure that the end of a certain way of conceiving politics does not mean the end of politics as such. 
It is incumbent upon Macron, along with those who elected him and those who voted against him or, worse, abstained, to do the best thing that one can do in dark times: to imagine, invent, and embody the art of “beginnings” which Arendt believed to be the beating heart of public action. 

Emmanuel Macron, the Novel 
PARIS – Emmanuel Macron’s victory in the French presidential election could be mistaken for the plot of a novel that no publisher would accept. 
And then the one who finally does, finds himself with a runaway bestseller. 
An incumbent president, François Hollande, decides, for the first time in modern French history, not to seek reelection. 
A group of conservative bigwigs, including a former president, pick each other off, opening the field for a candidate, François Fillon, whom everyone believes to be above reproach, until his past catches up with him. 
The governing Socialists, after sucker-punching their prime minister, Manuel Valls, split their support between an apparatchik, Benoît Hamon, who earns his single-digit finish in the first round, and a radical leftist, Jean-Luc Mélenchon, who trick-or-treats as a revolutionary and worships dictators and his own hologram, but stumbles on the threshold of the second round. 
The far-right candidate, Marine Le Pen, then commits a sort of public suicide at the end of the main presidential debate. 
Like a character in a farce, she drops the mask of respectability that her handlers had made her wear and, after an embarrassing rhetorical striptease, reveals the face of the leader of a die-hard fascist party. 
Then, at the last minute, the Macron campaign’s computers were hacked, releasing a trove of emails revealing that members of the candidate’s party had engaged in nefarious activities, like paying their employees, reserving tables at restaurants, and exchanging files for each other to read. 
And in a fatal tweet, Le Pen’s top aide seems to link himself to a cyber attack most likely conceived, if not executed, several thousand kilometers to the east. 
And, at the end of these implausible twists and turns, at the moment of truth in a drama that has stretched to a new limit the “willing suspension of disbelief” that Coleridge believed “constitutes poetic faith,” a young man, practically unknown a year ago, accedes to the presidency of France. 
Well before the detailed history of this campaign – disastrous and magnificent, senseless and miraculous – is written, France’s new president will have to confront the challenges posed by circumstances of his victory. 
He will have to get things done while convincing us that he can get things done. 
And he will have to keep in mind that rejection of Le Pen is not the same thing as endorsement of his program. 
From the first hours of his term, Macron will have to apply himself to the task of truth and unity that, as a perceptive reader of the Christian philosopher Paul Ricoeur, he made the focus of his campaign. 
And he will have to resist those of his supporters who, in the heady glow of victory, would have him be both demiurge and thaumaturge. 
Like the eleventh-century Danish King Canute, who commanded the waves not to strike his throne, and then, setting his throne on the beach, demonstrated the fragility of his empire to the flatterers and dreamers who imagined him to be master of the universe, Macron will have to behave modestly. 
As he did with the workers at a Whirlpool plant in northern France, he must bring the work of politics back to its right and reasonable proportions. 
But we are not yet at that point. 
For the time being, my only wish is to greet a man who, with a throw of the dice, abolished chance and the hazards of the road before him to become Europe’s youngest president. 
Not that youth has ever been a convincing argument on its own. 
Like the rest of us, I am aware of the warning from Ecclesiastes to the country whose king is a child. 
But I also know, as Machiavelli knew, that there is in the enthusiasm of youth, in its bold drive, in its furia, its virtù, in its desire, something to which fate may cede more readily. 
Was that not the case, in 1789, with the French revolutionaries Hoche and Saint-Just, with Bonaparte the first and Napoleon III (until Macron, the youngest president in the history of France)? 
Was it not also the case with Benazir Bhutto, Joan of Arc, John F. Kennedy, and Theodore Roosevelt? 
And I know that there are too many forms of conservatism in this country, too many potential blockages and thromboses, too many fanatics who swore as one, before Macron’s election, to spurn the banker who would be president and to fling him from the Tarpeian Rock. 
I know that there are too many populists on the left (notably the bitter Mélenchon) and on the right (the pathetic Nicolas Dupont-Aignan skittering away from the cameras Friday night after leaving the cathedral in Reims, where France’s kings were crowned), who, under a fig leaf of scorn for finance, betray the true spirit of France. 
I know that the sad passions slumbering in those forms are so virulent that it has become nearly impossible for them to make room for the shared ideals that are the social bonds of republican democracy. 
And I know that there is, in the enthusiasm of today’s winner, in his joy, in his youthful optimism (an optimism at once measured, fervent, and didactic), something that responds to the malaise of French civilization. 
The seemingly interminable moment between two electoral rounds, a moment in which France seemed to waver, has passed. 
Now begins the open combat between those who believe that freedom lives and those who have already buried it. 
Both sides have shown their hands. 
The democratic world needs Macron to succeed. 

MAD No More? 
MOSCOW – Two years ago this month in Prague, US President Barack Obama put forward his visionary idea of the world free of nuclear weapons. 
A year ago, a new strategic arms treaty between Russia and the US was signed in the same city. 
Now the worldwide wave of support for a full ban on nuclear weapons, or “nuclear zero,” is being transformed into a debate about nuclear deterrence. 
Indeed, the four American strategists who first called for “nuclear zero” – Henry Kissinger, George Shultz, William Perry, and Sam Nunn – have partly backtracked, and are now calling for an end to the doctrine of “mutual assured destruction.” 
Unfortunately, their suggestions for accomplishing this are unclear. 
Their only concrete proposal is asymmetrical cuts of tactical nuclear weapons by Russia and the US. 
But tactical weapons are not a serious threat to anybody. 
Moreover, Russia is not interested in reducing this part of its nuclear arsenal significantly. 
It needs such weapons to compensate psychologically for NATO’s preponderance – a reversal of the Cold War epoch – in conventional forces. 
More importantly, Russia considers these weapons insurance against the possibility of Chinese conventional superiority. 
I firmly doubt the need to dispense with deterrence. 
After all, it worked successfully for decades: the unprecedented geostrategic, military, and ideological confrontation of the Cold War never escalated into open, head-to-head warfare. 
The existence of nuclear weapons also curbed the conventional arms race. 
The most important function of nuclear weapons during the Cold War – though little spoken of at the time – proved to be “self-deterrence.” 
Of course, each side considered itself peaceful, and would not admit that it, too, had to be deterred. 
But the danger that any conflict could escalate into a nuclear confrontation prevented reckless and dangerous behavior on both sides on more than one occasion. 
With communism’s collapse and Russia temporarily disabled, self-deterrence softened, and the US ran off the rails as the global hyperpower. 
It behaved in ways that would have been unthinkable before – for example, its attacks on Yugoslavia, Afghanistan, and Iraq. 
The latter two wars have been politically self-defeating for the US, in addition to costing it trillions of dollars. 
America is no less militarily powerful nowadays than previously, but it does not look so strong to the wider world. 
Nuclear deterrence and “mutually assured destruction” would be passé only if we assumed that we – people, countries, and humankind at large – had become so ideal and humane that we no longer needed self-deterrence. 
But, unfortunately, we are not such people, and nuclear weapons have played – and continue to play – a civilizing role in international relations: their use would be so horrible that we tailor our behavior accordingly. 
As a result, we have little fear of World War III nowadays, even though unprecedentedly rapid changes in the global balance of power are creating classic conditions for unleashing it. 
After all, the mere possession of nuclear weapons, even if aimed at each other, does not turn countries into enemies. 
Russian and Chinese strategists assume that part of their countries’ nuclear potential may be targeted at the other side. 
But this does not spoil their remarkable bilateral relations; on the contrary, it improves them. 
Russia, with its formal nuclear superiority, has no serious fears regarding China’s military buildup. 
In this sense, nuclear weapons facilitate normal international relations, just like a good fence helps build good neighborly relations. 
Russia and the US must seek to build relations such as now exist between Russia and China, Russia and France, or the US, France, and the United Kingdom. 
Limited arms reductions might be useful for improving relations. 
But arms-control talks are built upon the concept of the balance of forces, which is a sure recipe for reviving confrontational and militaristic thinking. 
The talks on pan-European missile-defense cooperation might come in handy. 
While missile defense is most likely unnecessary, given the absence of any serious threat, the Obama administration and other American realists – who are aware of the impossibility and uselessness of creating a multi-layered anti-ballistic missile (ABM) system – need such talks. 
They must at least pretend that they intend to build it, in order to appease America’s powerful nuclear “isolationists,” who long for the past golden age of US strategic invulnerability. 
Talk about creating regional, cooperative ABM systems might be helpful in preventing the development of long-range missiles by Europe’s neighbors. 
It might also help Russia and the US overcome their old habit of viewing each other as enemies. 
But what is really needed is effective cooperation where it counts the most: containing the increasing instability in the Greater Middle East, ensuring that Afghanistan does not turn into yet another regional cancer, and preventing a chain reaction of nuclear proliferation in the region. 
So far, only the US and Russia – with the assistance, one hopes, of China, India, and EU – can hope to address these problems more or less effectively. 
They can offer security guarantees to responsible countries in the region. 
Sooner or later, peace will have to be imposed upon the Israelis and the Palestinians, who have proven to be incapable of reaching a settlement on their own. 
Similarly, Russia and the US need cooperation, not farcical rivalry, in developing new sea routes and possible energy deposits in the Arctic, and in interacting with China and other Asia-Pacific countries in joint development of the resource potential of Siberia and Russia’s Far East. 
Russia will not be able to develop the region on its own. 
And developing it with China alone could prove to be a dangerous strategy. 
But if the two countries fail to overcome their bad old habits of mutual suspicion, their remaining – quite powerful – nuclear arsenals will continue to serve deterrence and self-deterrence. 
As long as we remain unable to make ourselves think and act in a civilized way, we can – indeed, we must – ensure that we do not become barbaric. 

Madmen in Authority 
PRINCETON – In The General Theory of Employment, Interest, and Money, John Maynard Keynes famously worried that, “Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.” 
Yet even without prescriptive theories, feigning “frenzy” or madness can also be a plausible, powerful, and rather contagious negotiating strategy. 
In the early 1970s, US President Richard Nixon adopted the tactic to convince the North Vietnamese that he had his finger on the “nuclear button,” and that they had better negotiate a deal to end the war – or else. And in 1986, President Ronald Reagan met with Mikhail Gorbachev in Reykjavik and surprised him by proposing that the United States and the Soviet Union both destroy all of their nuclear weapons. 
Whether a crisis is escalating or de-escalating, the madman strategy’s effectiveness seems to depend on the extent to which a political leader’s “insanity” is ambiguous – so much so that even historians won’t know where to draw the line between sincerity and artifice. 
With President Donald Trump’s on-again, off-again approach to a nuclear summit with North Korea, along with his bluster over new sanctions against Iran, the madman strategy seems to have made a dramatic comeback. 
It is now being adopted by many other leaders, and quickly spilling over into new domains, including debates about reforming the European monetary and political system. 
Recently, the eurozone debt crisis, dormant since 2012, has looked as though it could erupt again. 
With interest rates so low, the Italian government’s massive public debt has appeared sustainable. 
But with financial markets increasingly jittery over political developments in Italy, it is easy to imagine a world in which interest rates rise and remain elevated, in which case the Italian debt could pose a serious threat to the eurozone, and even to the global economy. 
Investors’ fear of another eurozone debt crisis have been spiking since the populist Five Star Movement and right-wing League party failed to form a government after months of post-election gridlock. 
The M5S/League coalition, which won a combined parliamentary majority in the March 4 election, have clearly taken a page out of the Trump playbook, hoping to use Italy’s debt to extract concessions from the EU. 
Will it work? 
The first, and most basic, component of the madman strategy is an ability to introduce a level of uncertainty that is damaging to other countries. 
This is why the strategy doesn’t really work for smaller countries, as Greece’s new government in 2015 quickly learned after dabbling in brinkmanship with its European creditors. 
Assuming a country is big enough to rattle global markets (as Italy clearly is), three other factors determine the success of a madman strategy. 
For starters, its government must be able to convince everyone else that it is being driven toward “insane” acts by voters. 
The idea is that it is actually irrational for a democratically elected government to act prudently if doing so means inviting punishment from voters who are committed to myopic but deeply felt positions. 
In the case of Italy, populists capitalized on voters’ disenchantment with a center-left party whose pro-European stance had failed to deliver results. 
There must also be a visible division between “hawks” and “doves” within the madman government. 
In any negotiation, the other parties will offer concessions to strengthen the doves, knowing full well that a failure to do so will enrage the hawks, who will then move forward with their doomsday plans. 
With Trump, this dynamic exists within a single personality that is prone to violent, unpredictable swings between openness and anger. 
But it also exists within Trump’s cabinet, with John Bolton, the hardline national security adviser, playing the role of the hawk. 
In the case of the M5S/League coalition, a hawk was needed as a counterweight to Italy’s pro-EU president, Sergio Mattarella. 
That is why the populists’ choice for Minister of Economy and Finance was Paolo Savona, an 81-year-old economist whom the former Italian economy minister Vincenzo Visco has described as “radically and suicidally anti-German.” 
When Mattarella rejected the nomination, the M5S/League quit the talks, precipitating the current crisis. 
Finally, to succeed, a madman government needs to have a plausible war plan for causing a general disruption. 
For example, the M5S/League coalition suggested that it might issue a parallel currency, which lent further credibility to its threat of pursuing fiscal expansion in defiance of EU rules. 
As more governments, parties, and leaders come to imitate the madman strategy, the scope for agreement in any negotiation will narrow, and will become more likely. 
In fact, hardline German economists have already responded to Italy’s political crisis by circulating petitions to block any eurozone reform that could be regarded as a concession. 
But exposing the dangers of the madman strategy will not be enough to defeat it. 
Voters also must be convinced that better alternatives are available, and that European integration can still safeguard their interests. 
In the months before Italy’s next election and the EU parliamentary elections in May 2019, EU leaders will have some – but not much – time to show that European integration is about more than political paralysis and economic stagnation. 
Otherwise, we might soon be reacquainted with the madman strategy’s grim side. 
Before his abdication in 1918, German Kaiser Wilhelm II did not need to pretend to be unstable; he really was. 
With a penchant for saber-rattling speeches and outrageous newspaper interviews, he had something in common with America’s Tweeter-in-Chief. 
In another disturbing historical parallel, he often boasted about his ability to reach agreements with the Russian and British monarchs, to whom he was related. 
In the event, as the crisis of diplomacy was escalating in July 1914, he suddenly announced a grand new peace initiative. 
But it was too late. 
The game of chicken had spread, and the world’s leading powers hurtled together toward catastrophe. 

Madonna and Africa’s Children 
Madonna usually only makes headlines in the world’s tabloids. 
But her adoption of a boy from Malawi whose mother had died and whose farmer father could not feed him has filled opinion pages in serious papers everywhere. 
Her decision has raised the profile of Malawi, home to recurrent food shortages and seasonal famines. 
A crucial experiment is now underway in Malawi and other places that may help to expand farm output so that other poor farmers need not surrender their children for adoption. 
In the past few years, there has been a sea change in attitudes among African governments towards the importance of farming. 
Once pushing industrialization at the expense of agriculture, African leaders routinely ignored ordinary farmers. 
Now they are showing a new respect for tillers of the land, realizing that the fastest way out of extreme poverty for ordinary people is to increase both farm output and crop prices. 
Yet getting farmers to grow the right crops, and more of them, is easier said than done. 
Farmers lack the money for crucial inputs such as fertilizer. 
They also lack critical skills. 
Sadly, African governments have failed miserably in teaching farmers improved methods. 
In Malawi, for example, where nearly everyone farms for a living, a confidential study by the British government this year found that “the agricultural extension service has collapsed,” a victim of the same bureaucratic ineptitude and petty corruption that undermines public services throughout this poor country. 
The costs of the government’s failure to support farmers can be seen in the stunted bodies of children and the poor diets of adults, even in a year when Malawi is witnessing bumper harvests of corn, the country’s staple. 
“Where are we going to get proteins?” Philere Nkhoma, an adviser to farmers in Malawi, asks. 
“Let’s have milk. 
Let’s have meat. 
Let’s have eggs.” 
In pursuit of protein-rich meals, Nkhoma is pushing her cluster of villages, representing a thousand households in all, to begin raising chickens for eggs and meat, cows for milk, and “exotic” vegetables such as cabbage for vitamins. 
Her can-do attitude is matched by remarkable energy. 
In the space of just three weeks, she visited 96 villages to promote chicken-raising. 
To be sure, Nkhoma’s ideas about how to transform the lives of peasant farmers in Africa are not new. 
Experts have been preaching crop diversity, irrigation, and improved soil nutrients for decades. 
What has been missing, however, are energetic extension workers, brimming with pride in their own people and passion for new approaches. 
Nkhoma is one of the best front-line farm advisers in Malawi, which is why she works on the country’s United Nations-sponsored Millennium Village, one of only 12 in Africa. 
Nkhoma’s own story mirrors the shift in the status of farming in Africa. 
She is part of a new generation of urban Africans committed to integrating farmers and markets – and to getting their hands dirty. 
“The field is my office,” she says. 
After working for more than ten years as a government farm adviser and accomplishing little, she was chosen by a foreign donor to gain a bachelor’s degree in agriculture. 
After graduation, she joined the Millennium Village project, which gives her wide latitude to innovate, together with the resources to set in motion her inspired plans. 
“If you have an energetic extension worker, you only need to change the mindset of the people,” she says. 
“When that happens, change can occur very quickly. 
But you must have the resources, the support. 
If you don’t have the resources, all your work is for nothing.” 
That’s where the UN and the economist Jeffrey Sachs come in. 
Sachs has raised about $150 million for the villages, enough for five years of support. 
Each household in the project receives about $100 a year in seeds, fertilizers, and other supports. 
Sachs knows the freebies to farmers guarantee gains in the short run, but he’s convinced that African villagers, once freed from “the poverty trap,” can thrive on their own. 
Nkhoma wants this dream of global technocrats to become a reality for her fellow Malawians. 
She recognizes that any lasting transformation in African agriculture will take place, not only village by village, but also farmer by farmer. 
“Even if you teach people in groups, they experience their problems individually,” she says. 
“So I must help them one by one.” 
Personal assistance is “time consuming,” she admits, but it is individuals who “make the difference.” 
The same is true of advisers like Nkhoma. 
African farmers need improved technologies and better access to agricultural markets in Europe and the United States. 
Instead of more Madonnas, who in the glare of global publicity saves a lone child’s life, Africa needs more Nkhomas: passionate cheerleaders with deep local knowledge and a willingness to stand alongside peasants in the fields in order to grow food for all the other children. 

Madonna and Child 
In October, hundreds of millions of people all over the world learned about a one-year-old boy from Malawi called David. 
A month before, it seems safe to assume, many of these people had never heard of his native land, a landlocked African nation of about 13 million people bordering Mozambique, Zambia, and Tanzania. 
Suddenly, David became the world’s best-known Malawian because it was his good fortune to be adopted by Madonna, the pop star who is to TV cameras what honey is to bears. 
But was it really good fortune? 
David’s father, Yohane Banda, suddenly in the media spotlight, said he had not understood that his son no longer belonged to him and might never return to Malawi. 
Madonna says that that is not what Banda said earlier, although she does not speak his language. 
Was it good for the boy, people asked, to be separated from his father? 
Human rights advocates began court action to demand his return. 
David’s mother is dead. 
After her death, his father, a villager who grows vegetables and gets other work when he can, was unable to care for him, and placed him in an orphanage. 
There, until Madonna came into contact with him, he was living with about 500 other children. 
Largely due to Malawi’s HIV/AIDS epidemic, the country has a million such orphans. 
Resources at the orphanages are limited, and many of the children there do not live to their fifth birthday. 
Madonna said that when she met David, he had severe pneumonia and was breathing with difficulty. 
Malawi is one of the world’s least developed countries, with an infant mortality rate of 94 per thousand and a life expectancy at birth of 41 years. 
Of the adult population, about one in seven have HIV/AIDS. 
Left in the orphanage, there is no reason to think that David would have done better than the average Malawian. 
Most likely, he would have done worse. 
In an interview, David’s father did not deny that his son would be better off with Madonna, and he refused to support the human rights activists seeking David’s return. 
That seems a wise decision. 
Admittedly, David will be cut off from his cultural roots. 
Although Madonna has said that she will bring him back to Malawi to see his father again, he will scarcely be able to feel at home there. 
His mother tongue will be English; if he ever learns to speak his father’s language, it will be as a foreigner. 
Nor will he be entirely at home in London, especially in the circles in which Madonna moves. 
A black child in a largely white world, he will always be “the orphan Madonna adopted.” 
The difficulties of living in such circumstances, however, are surely less daunting than the hazards David would have faced had he stayed in the orphanage – assuming that he would have survived at all. 
But there is a broader issue at stake in David’s case. 
In adopting a child from a poor country, Madonna is following an example set by other celebrities like Mia Farrow, Ewan McGregor, and Angelina Jolie. 
Do such adoptions achieve anything more than helping the individual children adopted? 
Adopting children from developing countries does not address the causes of poverty. 
Despite the high rate of HIV/AIDS infections, Malawi’s population, like that of many developing nations, is growing rapidly. 
It is projected to surpass 19 million by 2025. 
That will put more pressure on the country’s already limited stock of agricultural land. 
Educating young Malawians, especially girls, and making contraceptives widely available, would do much more to slow population growth than a few inter-country adoptions. 
To her credit, Madonna is doing more than adopting David. 
Her project, “Raising Malawi” ( www.raisingmalawi.com ), will help other orphans. 
More importantly, with other partners, Raising Malawi collects funds for agricultural assistance, medical care, and education for villagers as well. 
Along with Angelina Jolie, Bono, George Soros, and many others, Raising Malawi is assisting Millennium Promise ( www.millenniumpromise.org ), an organization founded by the prominent Columbia University economist Jeffrey Sachs. 
The promises of the United Nations Millennium Summit, signed by all the world’s leaders, included halving extreme poverty, halting the spread of HIV/AIDS, and providing primary education for all children by 2015. 
Although good progress in meeting these goals has been made in Asia, in Africa there are now 140 million more people living in extreme poverty than there were in 1990. 
Skeptics doubt that foreign aid really helps. 
Millennium Promise seeks to respond to that skepticism one village at a time. 
By selecting particular villages and providing basic health care, bed nets to stop malaria, primary education, better seeds, and other agricultural assistance, the organization aims to show that well-designed, comprehensive aid plans can, at relatively modest cost, raise people out of poverty. 
One can only regret that the media seem less interested in this exciting and momentous story, which has the potential to help millions of children, than in Madonna’s adoption of a single Malawian infant. 

Mahmoud Abbas’s Bad Neighborhood 
With Gaza poised on the brink of civil war, pity poor Mahmoud Abbas, who took over as president of the Palestinian Authority two and a half years ago, after the death of Yasser Arafat. 
An academic by profession, Abbas has tried mightily to lead the Palestinian people with civility, adherence to democratic principles, and public disdain for violence. 
He never had a chance. 
Palestinian rivals, both from his own Fatah party and from the Islamists of Hamas, as well as the Israelis, perceived Abbas’s civility as weakness. 
Abbas introduced a totally different style of management from that of Arafat. 
Dressed in his military suit until his last day, Abu Ammar (Arafat’s revolutionary nom de guerre) did not believe that it was time to become a civilian president while the Israeli occupation continued. 
Dressed in a suit and tie, Abbas introduced professional Western-style management to the presidency, but had no idea what to do with grass-roots militants. 
One of the first comments I heard from journalists was that Abbas, a family man, went home at lunchtime and worked regular business hours. 
His other name, Abu Mazen, is not a revolutionary name but reflects the practice of naming a person as the father of his eldest son. 
Abbas’s son, Mazen, runs a local advertising agency. 
In his attempt to counter Arafat’s political corruption and micromanagement, Abbas lost whatever chance he had to maintain the loyalty of the Fatah leadership, newly appointed PA officials, security personnel, and, most importantly, local militants. 
Calling for national elections, while politically correct, was political suicide, for he lacked any idea of the possible outcome and did very little to ensure the discipline of Fatah. 
An attempt at a primary to choose Fatah candidates backfired, owing to fraud and the losers’ refusal to honor the results. 
Rival Fatah candidates then split the party’s vote, allowing Hamas an easy victory. 
Negotiations with the Israelis was one area where Abbas, who led the Oslo process that saw the creation of the Palestinian Authority, thought he could do well. 
But, unlike Oslo, when Abbas was working under Arafat and able to project power from that base, as Palestinian president he was both negotiator and supposedly the center of power. 
The Israelis discerned Abbas’s weakness early on, and once Hamas was elected in a landslide, had little incentive to help him despite the prodding of the United States. 
Not only was Abbas politically weak, with few friends among Fatah militants, but he also didn’t show much interest in what was happening in Gaza. 
He spent as little time as he could there, preferring his Ramallah office on the West Bank and spending time with visiting politicians and meeting world leaders there or abroad. 
And, while he was technically the commander-in-chief of the Palestinian forces, these forces lacked the will to stand up to Hamas’s growing power. 
The economic siege on Palestine after the Hamas victory further weakened Abbas. 
With no salaries to pay teachers (or even the security services), his ability to influence even his own presidential guard was severely limited. 
During a meeting, which I attended, with a delegation from the International Press Institute to obtain the release of the BBC journalist Alan Johnston, abducted in Gaza in March, Abbas explained the PA’s inability and weakness. 
Soldiers march on their stomachs, he said, and complained that his own forces have not been able to renew their equipment or obtain badly needed ammunition for seven years. 
Ironically, the Israelis and the world community, which had basically frozen Palestinian finances, wanted Abbas to continue to control the security forces, despite Fatah’s loss in the parliamentary elections. 
Israel and the US led a virtual blockade on Palestine, with Israel refusing to return collected taxes and the US pressing world banks not to recognize the signature of the Palestinian finance minister. 
The nominal reason is Hamas’s refusal to recognize Israel. 
But most Arab countries also don’t recognize Israel, and yet the banking world deals with them normally. 
A compromise power-sharing agreement brokered by the Saudis initially seemed to be a solution. 
According to the Mecca agreement signed last February, Hamas would give up important ministries such as finance, interior, and foreign affairs, while Abbas would ensure the end of the economic siege. 
Four months later, however, the siege has not been lifted, and the Hamas ministers (such as former Foreign Minister Mahmoud Zahhar and Interior Minster Said Siyam) who were forced out now feel betrayed and are demanding their jobs back. 
If the Israelis and the international community want Abbas to remain in power, they must change their approach dramatically, by lifting the economic siege and providing his presidency with military and political support. 
And, if the Israelis are convinced that Abbas is too weak to do anything, they can help the Palestinians by releasing the Fatah strongman, Marwan Barghouti, from an Israeli jail. 
Otherwise, Abbas will be left with no alternative but to follow the advice of a leading Palestinian professor, Ali Jirbawi, who suggested simply that Abbas should dissolve the Palestinian Authority and return power to the Israelis, who remain legally and practically responsible for the areas they occupied in 1967. 

Measuring Inclusive Growth 
WASHINGTON, DC – When the Millennium Development Goals (MDG) deadline expires next year, the world will be able to point to several important achievements since their launch in 2000. 
Extreme poverty has been halved during this period; an estimated 100 million slum-dwellers have gained access to safe drinking water, and millions to health care; and large numbers of girls are now receiving an education. 
But considerable unfinished business and significant performance discrepancies remain. 
The post-2015 development agenda will continue where the MDGs left off, while adding further objectives relating to inclusion, sustainability, jobs, growth, and governance. 
The success of the coming Sustainable Development Goals (SDGs) will depend on how new programs are developed, implemented, and measured. 
Strong economic growth enables people to improve their lives and creates space for new ideas to thrive. 
But such growth is often accompanied by environmental degradation, which diminishes human health and quality of life, threatens water supplies, and compromises ecosystems, impeding growth for future generations. 
Moreover, short-term growth that erodes natural capital is vulnerable to boom-and-bust cycles, and can cause people who live close to the poverty line to fall far below it. 
Taking a longer-term view of growth and accounting for social, economic, and environmental equity must be a top priority for the post-2015 development agenda. 
Discussion of the SDGs is now taking into consideration the need to incorporate food, water, and energy security, together with urban planning and biodiversity. 
But translating prospective goals into actions at the country level will not be feasible without measurable and meaningful indicators to guide policy and measure progress. 
One method of measurement is “natural capital accounting,” which assesses the value of natural resources in development planning and national accounts, just as a family would account for their home’s value – and the cost of maintaining it – when deciding how much of their regular income to consume. 
A recent World Economic Forum report proposes a “dashboard” for inclusive and sustainable growth. 
This model brings together natural capital accounting, a human-opportunity index, a gender-gap index, measures of public investment as a percentage of GDP, a competitiveness index, indicators of shared prosperity, and disaggregated unemployment data. 
A World Bank-led partnership, Wealth Accounting and the Valuation of Ecosystem Services (WAVES), shows governments how certain behavior depletes natural assets, and how natural capital accounting can help to establish more sustainable development policies. 
Following a campaign at the 2012 Rio+20 Summit, 70 governments, including those representing 40 middle- and low-income countries, endorsed natural capital accounting. 
The method has already been put to good use around the world. 
“Forest accounts,” for example, have revealed that Guatemala has the fastest deforestation rate in Central and South America, with most uncontrolled logging being carried by households for their cooking needs. 
This information has spurred the Guatemalan government to review the country’s forestry law, and to fund new strategies to control firewood use, prevent unauthorized logging, and encourage families to use alternative energy sources. 
Botswana’s attempts to diversify its economy are constrained by water shortages; but “water accounts” are helping the government to identify sectors – including agriculture, mining, and tourism – that can grow with minimal water consumption. 
In the Philippines, where 60% of GDP is generated by industries and associated services in the Laguna Lake region of Metro Manila, pollution and siltation has already reduced the lake’s depth by one third. 
“Ecosystem accounts” have become instrumental in determining how better to manage this resource. 
These accounts are also being used to improve forest management in the Indian state of Himachal Pradesh, where forests are a vital resource for two major growth sectors, tourism and hydropower generation. 
These experiences are vital in shaping the post-2015 development agenda. 
Incorporating sustainability forces governments and businesses to consider the environmental impact of their decisions. 
A UN report calls on all governments to adopt natural capital accounting so that their sustainability efforts can be consistent, accurate, and comparable over the long term. 
Institutionalizing sustainability in this way will make it an intrinsic part of day-to-day governance. 
Only by shifting to a broader understanding of growth and development can the world address the pressing problems of inequality and sustainability. 
Placing that understanding at the heart of the SDGs will help to improve the health and wellbeing of all societies long into the future. 


Data and Development 
WASHINGTON, DC – Since the turn of the century, the international development community has rallied behind the Millennium Development Goals, which set specific targets in eight key areas, including poverty, child mortality, and disease, to be achieved by 2015. 
In formulating the post-2015 development agenda, measuring the MDGs’ successes – and identifying where progress has lagged – is critically important. 
And that demands more and better data. 
To be sure, international institutions and many developing countries have invested significantly in improving data collection to track better their performance against MDG targets. 
In 2003, only four countries had two data points for 16 or more of the 22 principal MDG indicators; by last year, that figure had soared to 118 countries. 
But development data remain a scarce resource in the developing world. 
Given their value in measuring – and propelling – social and economic progress, this shortage must be addressed urgently. 
A catalyst is needed to expand the production and use of development data. 
With this in mind, the high-level panel on the post-2015 development agenda is right to call for a global “data revolution.” 
The meteoric rise of digital technologies has changed the global landscape since 2000, when the MDGs were launched. 
Remote sensing, information gathered from online activity, and crowd-sourced data from mobile phones can complement traditional methods of gathering statistics. 
This technology-driven shift in the way people create, curate, share, and apply data should be reflected in development efforts for two reasons. 
First, policymakers are eager to attain more up-to-date data that can guide their efforts. 
Second, these data can also help drive innovation and civic engagement, by enabling the development of new and more effective goods and services. 
However, there is a caveat. 
The size and complexity of these datasets require specialized analytical skills (which remain in short supply), as well as more research and experimentation. 
Increasing the quantity, quality, availability, and usability of data for development requires addressing the market failures that lead to gaps in data use and coverage in developing countries. 
This means that as technology, data, and data users and providers make rapid advances, cooperation among diverse actors – governments, national statistics offices, donor agencies, global and local NGOs, academic and research institutions, the private sector and others – will be needed. 
In this spirit of cooperation, the major multilateral development institutions – the African Development Bank, the Asian Development Bank, the Inter-American Development Bank, the International Monetary Fund, the Islamic Development Bank, the United Nations, and the World Bank – have already begun to strengthen their joint efforts in producing and sharing development data. 
And the effort has already borne fruit. 
But there is much more to be done. 
Through new forms of collaboration, developing-country statistical agencies should aim to improve data coverage and quality, while leveraging technology to make data easier to manage, use, and access. 
More (and more reliable) data could also improve decision-making by helping policymakers to understand specific social, economic, and environmental issues. 
Better gender statistics could provide a more detailed understanding of women’s access to justice, education, and finance; improved measures of poverty and inequality could reveal how the benefits of economic growth are distributed; and natural capital accounting could uncover the value of resource endowments, thereby helping to ensure that they are used in a rational and sustainable manner. 
Obviously, data related to issues that directly affect the wellbeing of people and the planet are essential for effective policymaking. 
Making such data open and accessible should be viewed as a basic condition of ensuring people’s ability to hold governments accountable and thus participate in decisions that affect their lives. 
The more resources that are devoted to achieving this goal, the more effective the post-2015 development agenda will be. 



Saudi Arabia’s Pilgrimage to Pakistan 
LONDON – Over the last few years, Saudi Arabia has become increasingly estranged from its long-time protector, the United States. 
It viewed America’s backing for Hosni Mubarak’s fall from power in Egypt – and its subsequent acceptance of the Muslim Brotherhood government – as a betrayal. 
Then came US President Barack Obama’s refusal to enforce his “red line” in Syria, after President Bashar al-Assad’s regime unleashed poison gas on its opponents. 
But the final straw was America’s support for the recent interim agreement on Iran’s nuclear program. 
Saudi Arabia’s mounting distrust of the US matters, because whenever the Kingdom has felt an existential threat – and it regards Iran’s regional ambitions as such a threat – it has relied on an external power to protect it. 
But if it can no longer rely on the US, where can the Kingdom turn for sufficient military muscle? 
The answer seems to be Pakistan, a country that the rest of the world views as on the verge of becoming a failed state. 
Pakistan has previously served the Kingdom’s interests by sending military and security assistance during times of stress. 
Saudi Arabia received some 30,000 Pakistani soldiers in 1979, at the time of Iran’s Islamic Revolution. 
And these troops remained in the Kingdom until the mid-1980’s. 
The Saudis also employed thousands of Pakistani soldiers during the 1991 Gulf War. 
And, at the beginning of 2014, Foreign Minister Saud Al-Faisal and Crown Prince Salman visited Islamabad to renew the two countries’ military agreements on joint arms production. 
The visit was also intended to lay the groundwork to bring 30,000 Pakistani soldiers and military advisers to the Kingdom. 
Why Pakistan, and why now? 
The Saudi rulers view Pakistan as one of three regional powers, along with Iran and Turkey, capable of having a decisive impact on the Middle East. 
An alliance with Shia Iran – the Kingdom’s supreme ideological enemy, and one with regional hegemonic ambitions – is out of the question. 
Turkey, for its part, is regarded as a competitor for the mantle of Sunni Muslim leadership – a position long held by the Ottoman Empire. 
The frequent description of Turkish Prime Minister Recep Tayyip Erdoğan as harboring “neo-Ottoman” ambitions for his country clearly implicates this rivalry. 
It was the Ottomans who brought down two historical Saudi/Wahhabi states. 
The first such state (1745-1818) was destroyed by Egypt’s Mehmet Ali with Ottoman support; the second (1824-1891) was also defeated by the Ottomans. 
By contrast, the Kingdom has no problematic history with Pakistan. 
On the contrary, the Saudis have bankrolled the Pakistani state, and proved a generous host to its current prime minister, Mian Nawaz Sharif, during his long exile following the military coup that toppled his government in 1999. 
Indeed, Saudi Arabia has invested heavily in Pakistan since the early years of its independence. 
Given that Pakistan was founded in 1947 on a religious basis, it is not surprising that its leaders sought support from the source of Islam, Mecca, then under Saudi rule. 
The Kingdom, in turn, exported its Wahhabi teachings to the “Land of the Pure,” ultimately fueling the Islamic extremism and sectarian violence of the Taliban and others. 
Saudi Arabia also invested in Pakistan’s nuclear weapons program, the so-called Sunni Bomb, by directly financing the research of A. Q. Khan, the father of the Pakistani effort. 
The Kingdom’s hope of directly benefiting from Pakistan’s nuclear capabilities was blocked in 2003, when the US discovered the prospect of a transfer of knowledge and more. 
Moreover, the forces that the Pakistan has sent to the Kingdom over the years have been perceived as generally loyal. 
Although up to 30% of the Pakistani army are Shia, the Saudis will only accept Sunni soldiers, and Pakistan has happily provided them as mercenaries, sent on rotation and treated as guest workers. 
Part of the Saudi plan today is to use Pakistanis as the backbone for a new Gulf Cooperation Council (GCC) joint military force. 
Pakistani forces under Saudi command were used in operations to quell Shia uprisings in Bahrain in 2011, and the Saudis now want a standby force ready to put down Islamist and Shia provocations whenever and wherever they may appear in the Gulf. 
In the event of an existential threat in the region, in particular a confrontation with Iran, Pakistan would offer the Kingdom a form of deadly protection denied it by the West. 
So to what extent can Pakistan really enhance Saudi Arabia’s security, particularly in a war against Iran? 
Pakistan is badly fractured, with domestic terrorism running rampant. 
Its military lacks the capacity to intervene in Saudi Arabia’s defense while maintaining not only domestic security, but also readiness for war against India (an obsession of Pakistani generals). 
Moreover, Pakistan’s substantial Shia population might join the ranks of the violently disaffected if the military backed the Saudis in a sectarian war. 
And the Pakistan People’s Party, now in opposition but still a powerful domestic force, shares interests with Iran. 
So, although the strategic value of closer military ties with Pakistan seems highly questionable, Saudi Arabia has little choice. 
The GCC is in fact disintegrating, following Qatar’s ouster for supporting the Muslim Brotherhood and Oman’s voluntary departure from the group. 
That, together with the Kingdom’s deepening distrust of the US, is fueling a growing sense of isolation. 
Pakistan may not be anyone’s idea of an ally when facing an existential threat; for Saudi Arabia, however, it is an idea whose time has come. 

Make or Break for Europe's Constitution 
The challenge for the EU now is to refocus itself on the priorities of today and tomorrow. 
It needs to connect better with its own citizens, to renew their support by showing that Europeans working together can foster growth and jobs, fight international crime, and secure a clean environment. 
The Union needs to play a more active role in the wider world, not in pursuit of selfish interests, but in promoting the universal values on which it is founded. 
Most of all, the enlarged Union needs a constitutional and institutional framework that fits its ambitions. 
For thirty months, governments and parliamentarians have been working on a new constitution for Europe. 
An exceptional draft was prepared by the convention chaired by former French President Valéry Giscard d'Estaing. 
It is the task of national governments - of me and my colleagues in the European Council - to finish the job. 
We meet in Brussels this week, and our overriding priority is to reach agreement on the constitution. 
Consensus on most of the draft has existed for some time. 
There is no dispute about the EU's values and objectives, about inclusion of the Charter of Fundamental Rights, or about simplifying legislative processes. 
These are all major advances. 
But national governments inevitably have a particular interest in the powers of EU institutions in such key areas as foreign policy, criminal law, and taxation. 
These are the issues on which final agreement now needs to be reached. 
Through months of bilateral contact and negotiation among ministers, we have succeeded in whittling down the outstanding issues to a point where a fair and balanced overall package is achievable. 
As in any negotiation, the key ingredients are timing and political will. 
People simply weren't ready last December when a first attempt was made to finalize agreement. 
The European Council's decision in March to finish the negotiations during the Irish presidency sent a powerful signal of our determination to break the stalemate. 
In the last month, I have met all of my colleagues face to face, in their capitals. 
We speak often. 
I detect no slackening of resolve. 
In fact, there is a sense that we cannot afford to fail. 
In a challenging period for the Union, it needs to show that, when the chips are down, its members can make collective but difficult decisions in the common interest. 
The basic institutional balances between the Commission, the Council and the European Parliament are not in question. 
But the EU's institutions need to be modernized. 
Greater continuity and focus will be provided through the creation of a full-time chairman of the European Council and an EU Foreign Minister, and there is to be a three-country team presidency of other Council formations. 
There is also now an acceptance that the voting system within the European Council should be based on a double majority of population and member states. 
This is logical, transparent, and representative. 
But the precise arrangements for double majority voting need to be calibrated in a way that respects the particular concerns of all member states, while still ensuring that the new system is more efficient than its predecessor. 
I believe that we can settle this most difficult question in an equitable way. 
The task of the Commission is to drive forward the EU's agenda in the common interest. 
There is a developing consensus that 'representativeness' and legitimacy can be achieved by including nationals of all member states in the next two Commissions, with a move thereafter to a fixed smaller number based on strictly equal rotation. 
There is also a need to ensure that the citizens of all member states, big and small, are adequately and appropriately represented in the European Parliament. 
The constitution envisages further expanding the parliament's important functions, both legislative and budgetary, in partnership with the member states. 
In fact, for the first time, a significant watchdog role is being assigned to national parliaments. 
These arrangements will preserve the EU's unique institutional essence - the balances between its institutions and among member states - while offering the prospect of greater effectiveness, efficiency, and transparency. 
The constitution will see a further major advance in the use of majority voting, which is necessary in an EU of 25 (and soon more) members. 
But a few topics will have to remain subject to unanimous decision, given their special nature. 
I believe we are close to a balanced agreement on this. 
Too often, the complex issues involved in this kind of negotiation are presented as a battle between one country and another, or between competing ideologies. 
From my own long experience of negotiation, I know that talk of winners and losers is not just unhelpful, but misleading. 
Everyone must compromise, but they must also see their own hopes and concerns reflected in a final text. 
If we succeed this week, it will be a triumph for the EU. 
Europe is a confluence of different traditions and histories, of independent sovereign states. 
But we are united in our belief that sharing sovereignty and working together is the best - indeed, the only - way forward. 
Adopting a constitution means consolidating the end of the bitter divisions of the past, and a chance to build a Union that works for our 450 million people. 

Make Politics, Not War, in Iraq 
The United States is once again learning the limits of military power. 
In Iraq, America has unrivaled control of the air, but can’t hold the ground. 
Its mere presence incites violence. 
While President George W. Bush believes that he has protected Americans by “taking the war to the enemy,” more than 1,700 Americans have died in the Iraq war, which also has provoked terrorist attacks on US allies. 
The horrific London bombings probably were inspired by Britain’s co-leadership of the war. 
The Bush administration’s mistake, of course, is to neglect politics in its war calculations, or to follow blindly the dictum that war is politics by other means. 
In fact, most war is a failure of politics, a failure of political imagination. 
Given their self-righteousness and lack of historical and cultural awareness, Bush and his advisors believed that invading Iraq would be easy, that Saddam Hussein’s military would crumble, and that the US would be welcomed as a liberator. 
They failed to comprehend that Iraq has long been an occupied and externally manipulated country. 
As a result, Iraqis understandably regard the American-led occupation as just another episode of outside exploitation. 
It is widely accepted that oil, not terror, was the original motivation of the war – a war planned by Mr. Bush’s senior advisors during the 1990’s, and made possible by their accession to power in 2001. Through the 1990’s, US Vice President Dick Cheney and others made clear that Saddam’s reign threatened America’s oil security by forcing over-reliance on Saudi Arabia. 
Iraq’s vast reserves, went the argument, could not be developed safely until Saddam was deposed. 
The September 11, 2001, terrorist attacks in the US provided the green light, not the underlying motivation. 
The Iraqis sense all of this. 
Bush’s refusal to set a deadline for withdrawing troops is not taken as a sign of resolve, but as a statement of America’s intent to remain in Iraq, establish a puppet regime, control the country’s oil and set up permanent military bases. 
That won’t work. 
There are simply too many real political forces on the ground in Iraq for America to manage, and these forces are increasingly demanding a timetable for US withdrawal, as are legions of Iraqis in the course of public protests and mosque worships. 
Every time the US reiterates its refusal to set a deadline for withdrawal, it simply stokes political opposition, not to mention the insurgency. 
There are too many Iraqis ready to fight and die to oppose the American presence. 
Only politics, not arms, can calm the scene. 
Vietnam is a true precedent here. 
Vietnamese deaths and casualties outnumbered American deaths and casualties by perhaps 20 to one, but the US still could not subdue the nationalist adversary that they faced. 
The US could bomb Vietnam’s cities to rubble, as it can Iraq’s cities, but this solves nothing, claims vast numbers of innocent lives, and confirms the view of Americans as occupiers. 
All of this has an economic angle as well. 
American foreign policy doctrine states that US national security rests on three pillars: defense, diplomacy, and development. 
Economic aid for poor nations is crucial, because poverty provides the tinder for violence, conflict, and even terrorism. 
Yet diplomacy and development take a distant second and third place behind defense – or more accurately, military – approaches in US foreign policy spending. 
The US will devote approximately $500 billion, or 5% of GNP, to military spending this year – half of the world’s total. 
In other words, the US spends as much on arms as the rest of the world combined. 
By contrast, the US spends just $18 billion, roughly 0.16% of GNP, on development aid. 
In Europe, by contrast, military spending is roughly 2% of GNP, while development aid is around 0.4% of GNP and on a rising path to reach 0.7% of GNP by 2015. 
If the US would pursue politics rather than war, it would understand that more development spending and a commercial approach to Asia, Africa, and the Middle East, rather than the current military approach, would best serve American interests. 
Bombing Libya did not bring Muammar Qadaffi “in from the cold.” 
Peaceful diplomacy did the job, showing Qadaffi that reopening diplomatic relations with the West and abandoning Libya’s nuclear ambitions would be advantageous for its own future and that of the country. 
The same approach would have been far less expensive and more promising vis-à-vis Saddam Hussein. 
Vast sums – and millions of lives – would have been saved if that approach had been tried with Ho Chi Minh in the 1950’s. 
No one doubts that intelligence operations and police actions are needed to fight terrorists. 
But the war in Iraq and enormous military expenditures are quite another matter. 
The American military can protect the US from conventional military attack, and it can keep the high seas open, ensuring the flow of oil and other vital commodities. 
But it can’t protect the US from politics. 
For that, Americans need to be smarter, investing in peaceful development rather than military bases in long-abused lands. 
The US should leave Iraq quickly. 
After that, it can and should use its political and economic weight to help manage a complex and difficult situation that is significantly, though not exclusively, of its own making. 
America’s sway in Iraq will be limited, but leaving now would actually make it more effective than it is now, and at much less cost in terms of money and American, allied, and Iraqi lives. 


Making a Market for Scientific Research 
Scientific advances are the fundamental cause of economic progress, and yet many nations often apparently hope to piggyback on discoveries made in more scientifically-advanced countries. 
This is the most practical and efficient strategy in the early stages of development. 
But, to reach the advanced stages of economic growth, a country needs scientific research at home. 
Every government tries to encourage scientific research through education in science. 
But education by itself is of only limited use here. 
After all, science is a form of enterprise, requiring a sophisticated organization of resources and workers, an adventuresome attitude, and a willingness to take risks for possibly great rewards. 
Normally, the market fosters the advance of entrepreneurial endeavors. 
Were such a market for science to exist, scientists would form enterprises, just like businesses, the best of which would succeed, while others would fail. 
The problem is that basic scientific research is mostly a public good that cannot be withheld from those who use it and which seeps into the body of scientific know-how in unanticipated ways. 
But if there is no market that impersonally values and rewards scientific achievement, how are good scientific projects to be selected and rewarded without the great waste that often accompanies non-market, bureaucratic solutions to the problems of provision of public goods? 
There is a danger that scientific establishments may degenerate into fiefdoms controlled by scientific mandarins who dominate major state-funded university departments and laboratories. 
Indeed, scientists in a number of countries, some with past scientific glories, may already recognize this malady in their own institutions today. 
The price their countries pay is a more sclerotic and slowly growing economy. 
No perfect substitutes for the market in the area of scientific discovery exist, but a good surrogate, which enables scientists to compete effectively, is the system of peer review , i.e., the anonymous evaluation of research by scientific colleagues. 
Top scientists, sheltered by anonymity, can usually spot originality and can judge which scientific ideas have real value. 
Peer review grew out of the first two scientific journals, the Journal des Sçavans in France and the Philosophical Transactions of the Royal Society in England, both founded in 1665. 
These journals cast a wide net for the best research and relied on leading experts to evaluate ideas. 
But their support of scientific research was limited to publication. 
In the 1940's, Vannevar Bush, a dean at the Massachusetts Institute of Technology and science advisor to President Roosevelt, advocated the creation of a government agency that would dramatically expand the impact of peer review by using it to allocate significant financial support to research enterprises. 
In his 1945 book Science, the Endless Frontier , Bush argued that basic scientific research needs substantial and stable financial support; that support should be potentially available to all researchers; and that peer review should ultimately decide how and to whom funds are allocated. 
Those who dispense money, he argued, should look only at new research ideas, not at the organizational charts of research institutions. 
His book led to the creation, in 1950, of the US National Science Foundation (NSF), a major factor underlying America scientific success. 
The use of anonymous peer review to assess proposals and allocate financial support for scientific research is increasingly achieving recognition around the world. 
Most major countries now have some kind of agency that issues general calls for proposals and uses peer review to evaluate them. 
Problems remain, however, in making newly established peer-review systems work well. 
Smaller countries face difficulties in ensuring anonymity: the number of qualified scientists within a specific field may be so small that researchers can easily guess who reviews which proposals, and powerful figures can retaliate for negative evaluations of their unpromising research ideas. 
This is an important reason why the proposed European Research Council is a good idea. 
Modeled after the NSF, it would augment the science foundations of individual European countries, creating a much larger research organization - one that draws from a larger pool of proposals. 
The size of the market for peer review is not the only issue. 
Countries with politicized universities, or universities where bosses with powerful connections outside academia run the research enterprise, find it difficult to fund the best scientists. 
The same is true in systems where there is a strong sense of bureaucratic entitlement. 
Japan is an example of a country where the science establishment has been insufficiently reformed. 
Government bureaucrats used to target industrial research in the old days, but these efforts have been largely abandoned since the stock market collapse. 
The government then increased funding for basic research and created "centers of excellence" at universities, but it failed to dismantle the koza system, in which powerful senior professors often dominate research departments. 
Greater progress is being made in Germany, where, despite popular opposition to an elitist university system such as in the US, Chancellor Gerhard Schroeder called last year for German universities to become much more competitive with each other. 
Similar changes can be expected in other countries, as the importance of scientific competition and entrepreneurship becomes better understood. 
Policies that allow scientists to compete for resources nurture creative competition and allow people to construct appropriate incentives and risk-management structures. 
They are part of a worldwide trend whereby natural and culturally specific obstacles to a competitive and financially sophisticated marketplace for scientific research are gradually removed. 
There can be no free market for basic science in the literal sense of the term. 
But the benefits of markets can and should be pursued by other means. 

Making Culture Count 
Constitutions express a political community's history, culture, values, and political convictions. 
The Constitution for Europe now being written is no different. 
It cannot create the common bonds that define Europe and hold it together. 
It can only reflect and be animated by them. 
Today, however, the cohesive forces that held Europe together for two generations have lost some (if not all) of their strength. 
Since the collapse of the Soviet Union, peace and liberty are more or less taken for granted. 
Economic integration has advanced so far that a return to the national rivalries that twice led the continent into suicidal warfare is unthinkable. 
The postwar search for affluence, too, has lost much of its allure. 
In Germany and other member states, economic growth no longer seems certain. 
Citizens are increasingly wary of the idea of economic and social progress. 
Public debate instead highlights the need for restricting government activities and reducing social transfers. 
Enlargement of the European Union from 15 to 25 members will mean that for decades Europeans will need to live with greater material inequalities. 
To be sure, lower standards of living having always existed between Europe's east and west. 
During Europe's Cold War division, that gap widened considerably. 
With enlargement, those differences can no longer be hidden. 
German reunification provides a sobering example in dealing with this problem. 
If the enlarged EU were to attempt on a Europe-wide scale what Germany did for its eastern lands, current EU members would need to transfer roughly 4% of their combined GDP to the new member states for at least a decade. 
Politics will make such transfers impossible, but even if that were not the case, the new members lack the political, economic, social, and administrative infrastructure to absorb them. 
Thus, the time needed to narrow the gap between Europe's east and west will be measured in generations, not years. 
If the ties that have bound Europe together for two generations are fraying, what alternative bonds can be found? 
Late in his life Jean Monnet said that, were he to begin European integration again, he would start with culture. 
But secularization, rationalization, and atomization of civil and social life, and the steady expansion of government into every social sphere, have lead to a privatization of culture and religion, reducing their potential to stimulate feelings of community, identity, and solidarity. 
If the EU is to be durable, it must place greater emphasis on its cultural heritage. 
Because of Europe's multiplicity of languages, no one language can serve as a strong element of identity. 
Of course, English is developing into a lingua franca. 
But as a lingua franca it is limited to serving as a technical or professional language, not the language of a community. 
When it comes to real cultural identity, Europe's true "common language" is composed of its musical, literary, artistic, and architectural traditions-the cultural substance perceived by all as European. 
The cultivation, constant renewal, development, and protection of this cultural identity must be a key common European task. 
This common cultural substance is the foundation on which European nations and states are built. 
Yet it is not produced by state action. 
The state can support its development, preservation, and renewal, but cannot compel its existence. 
People primarily determine the extent to which culture flourishes. 
So cultural cohesion in Europe will have to grow from the bottom up. 
But European individuals and civil societies find it hard to assert their autonomy in the face of the state. 
The great European experiment will succeed only if Europe's citizens limit the scope of the state's claims on society and its resources, thus redefining those areas of self-government and autonomy where responsible community life and cultural activities flourish. 
It is in these areas, however, that the constitutional drafts emerging in Brussels are wanting. 
Consider the EU's Charter of Fundamental Rights. 
Rather than limiting itself to basic human rights, the Charter dilutes them by engaging in detailed regulation of labor standards, social laws, and pronouncements that reflect industrial-age experience rather than address the future. 
To promote such "rights" as fundamental will more likely perpetuate the status quo than help shape Europe's future. 
In this sense, the Charter is reactionary: if it is included in the constitution, it will impede the development of rights and responsibilities appropriate to the future. 
Europe's new constitution will be accepted as a guarantee of freedom and lawful government only if it results from a broad public dialogue reflecting the common cultural and moral assumptions that bind Europeans together. 
If it is to last, it will not be enough for it to be conceived in the light only of today's experience. 
If the Constitution is to guide Europeans through periods of change and yet unknown threats, its roots must reach the foundations of European history and identity as they are embodied in the shared culture that Europe's citizens freely acknowledge as their own. 

Making European Defense a Reality 
BRUSSELS – Anyone reflecting on the value, weight, and relevance of today’s European military forces for global affairs needs to keep two crucial questions in mind: Where do we want to go? 
What do we want to achieve? 
The EU’s goal is to be a global player with its own foreign policy, one shared by its 27 member states. 
Any effective foreign policy clearly needs to rely on effective military and civilian resources. 
But this goal does not mean that the EU will compete with NATO. 
Whereas NATO is a political-military alliance, the EU endorses the development of a community of national destinies. 
Moreover, NATO benefits from the military might of a dominant nation, while the EU must depend on the shared voluntary efforts of its members. 
For two key reasons, it would be more correct to say that NATO and the European Security and Defense Policy (ESDP) are complementary. 
First, certain countries turn specifically to Europe for help. 
Whether in sub-Saharan Africa or the Middle East, their populations and governments are more inclined – for political, historical, or cultural reasons – to request European rather than NATO assistance. 
Conversely, there are certain long-term crises, such as those provoked by terrorism, for which NATO is better placed to act. 
For example, given its member states’ current resources, the EU, acting alone, would be unable to ensure a Western commitment in Afghanistan. 
At the same time, the governments of Chad and the Central African Republic would never have accepted NATO’s intervention to help resolve the Darfur crisis. 
Second, the EU is building its crisis management know-how on the basis of a global approach. 
Military resources are only one tool among many others, and, generally speaking, their deployment is clearly defined, limited in time, and coordinated with civilian action. 
As a result, the EU doesn’t need the articulated military structure that NATO possesses. 
The recent creation in Brussels of the Civilian Planning Conduct Capability, based on a system comparable to that of a military chain of command, demonstrates – and, above all, guarantees – cohesive action. 
In the same way, EUFOR military commanders regularly and frequently exchange information with the heads of such EU civil missions as the EUPOL police mission, the EUSEC security reform mission, the EUJUST justice mission, and so on, including, if present, the European Commission’s own representatives. 
Being able to act militarily requires capable, flexible forces that are suited to their mission. 
Their essential tasks should be movement, information gathering, and, if necessary, combat. 
Moreover, their main qualities should be resistance – the ability to hold out – and the psychological resilience to deal successfully with an “intense” situation and to respond to it by exerting the best possible control. 
This implies a high level of cohesion, which in the case of multinational forces is not guaranteed. 
But the EU’s “Battlegroups” are a first response to this requirement. 
As multinational forces that are built either on regional affiliations or strong bilateral relations, they bestow a “European” label on military resources while guaranteeing efficiency in the field. 
Where necessary, they can be supported by air and maritime rapid response assets, and thus constitute a fully-fledged military resource for armed intervention. 
However, although about 15 Battlegroups have been created – two of which are, at any time, on permanent call for six months – none has actually been deployed since the Artemis “prototype” mission to the Democratic Republic of Congo in 2003. 
As time passes, a concept without real commitment in the field may eventually raise suspicions about its relevance. 
The EU also suffers from a well-known lack of capacity in strategic air transport, in-theater air transport, and combat support. 
The European Defense Agency has a very important role to play in proposing and running programs to address these shortfalls. 
The Capability Development Plan, which the EDA is developing in close collaboration with the EU Military Committee, aims to foster and improve solidarity in terms of capability, which is what Europe needs. 
There are other areas in which we must make progress if the EU’s military resources are to be brought into line with its political ambitions. 
One urgent need is simplification of our operational planning and the manner in which we conduct operations. 
Finally, as all of the EU’s 27 member states are now trying to reduce public spending in sustainable ways, financing for military operations, without which nothing is possible, requires a new approach. 
Those member states that are most heavily involved in an operation, in terms of both human resources and military equipment, are penalized by the financial burden that this commitment places on their national budgets. 
Political solidarity must be underpinned by effective financial solidarity. 
As an integral part of the CFSP, today’s ESDP and tomorrow’s Common Security and Defense Policy will work only if the member states responsible for implementing them allocate the resources that they need. 
This implies a Europe-based approach that takes precedence over national considerations once national and European-level foreign policies are unified. 

Making Globalization Work for All 
We are now in a one-year countdown to establish a new approach to globalization. 
In September 2005, world leaders will meet at the UN to review the progress made since the Millennium Assembly in September 2000, when they pledged to support a set of ambitious objectives - the Millennium Development Goals ­- to help the world's poorest people escape poverty, hunger, disease, and illiteracy. 
Setting goals was the easy part. 
When they return next fall, world leaders must decide on how to achieve them. 
Fortunately, a proposal by UK Chancellor Gordon Brown might provide the needed global breakthrough. 
Here is the problem: globalization offers people everywhere the chance to escape extreme poverty, but it is not working in many parts of the developing world. 
While China and India grow rapidly, most of Africa is stagnating. 
Similarly, large parts of Latin America and Central Asia are experiencing rising, not falling, rates of poverty. 
In most cases, geography plays an important role in success or failure. 
The big development success stories are places like Shanghai, port cities with ready access to world markets. 
The biggest development failures tend to be in rural areas far from the coast. 
Communities living in mountainous areas, such as in the Andes, or Central Asia, or the highlands of East Africa, are especially isolated. 
Geographical isolation is even more extreme if the country is landlocked, like Bolivia, Afghanistan, Ethiopia, or Burkina Faso. 
In addition to isolation, other problems include droughts in Africa, where farmers depend on rainfall rather than irrigation, and high disease burdens in tropical countries suffering from malaria, dengue fever, and other killer diseases. 
All of these problems are solvable, but they are not being solved in many places. 
Instead of hearing more lectures from the IMF about cutting budgets, poor countries need larger budgets to pay for the required investments - roads, power supplies, ports, schools, and health clinics - to jump-start economic growth. 
The IMF should spend less time telling the poorest of the poor to cut their spending, and more time telling rich countries to give more money to help the poor meet their investment needs. 
Rich countries have promised more help for years, but continue to renege. 
Thirty-five years ago, they promised to give 0.7% of their GNP to poor countries as development aid. 
Instead they give 0.25% - a shortfall that amounts to $120 billion per year. 
The United States causes half the total shortfall. 
If the US lived up to its pledge of 0.7% of GNP in donor aid, it would be giving $75 billion per year. 
Instead, it gives around $15 billion. 
The US could easily afford to do more. 
The Bush administration gave $250 billion per year in tax cuts to the richest Americans, raised military spending by $150 billion per year, and then turned to the poorest people of the world and told them that there is no money available to meet America's promise. 
None of this makes sense for global security, or even for the financial interests of donor countries. 
The failures of economic development in the Andes, Central Asia, and Africa contribute to global instability, local insurrections and violence, drug trafficking, and bases for terrorism. 
Military approaches alone will not work, because the root of the problem is the vulnerability of poor, hungry people to the prophets of hate. 
If donors keep giving only a little bit of help, but not enough to solve the problems of the poorest countries, these countries will never escape poverty's grip. 
By financing a much higher level of investment in the next few years, rich countries would give poor countries the chance to achieve economic growth - promising an eventual end to further aid. 
Chancellor Brown's proposal - an initiative called the International Finance Facility (IFF) - does precisely this. 
The idea of the IFF is to guarantee that donor countries double their aid levels during the next decade, so that well-governed poor countries can make the investments they need to achieve the Millennium Development Goals. 
Brown is exactly right: let's put Africa and other impoverished regions on a path of sustained economic growth by frontloading the aid during the period until 2015. 
Great Britain has made the Millennium Development Goals, and hence the IFF, the centerpiece of the G-8 Summit, which will be held in Scotland next July. 
French President Jacques Chirac has joined Blair and Brown in a bold call for rich countries to honor their promises to the poor. 
The richest countries - the US, Germany, and Japan - must join this vital initiative. 
Building a more peaceful and prosperous world is in everyone's best interest. 

Making Globalization Work 
I have written repeatedly about the problems of globalization: an unfair global trade regime that impedes development; an unstable global financial system that results in recurrent crises, with poor countries repeatedly finding themselves burdened with unsustainable debt; and a global intellectual property regime that denies access to affordable life-saving drugs, even as AIDS ravages the developing world. 
I have also written about globalization’s anomalies: money should flow from rich to poor countries, but in recent years it has been going in the opposite direction. 
While the rich are better able to bear the risks of currency and interest-rate fluctuations, it is the poor who bear the brunt of this volatility. 
Indeed, I have complained so loudly and vociferously about the problems of globalization that many have wrongly concluded that I belong to the anti-globalization movement. 
But I believe that globalization has enormous potential – as long as it is properly managed. 
Some 70 years ago, during the Great Depression, John Maynard Keynes formulated his theory of unemployment, which described how government action could help restore full employment. 
While conservatives vilified him, Keynes actually did more to save the capitalist system than all the pro-market financiers put together. 
Had the conservatives been followed, the Great Depression would have been even worse and the demand for an alternative to capitalism would have grown stronger. 
By the same token, unless we recognize and address the problems of globalization, it will be difficult to sustain. 
Globalization is not inevitable: there have been setbacks before, and there can be setbacks again. 
Globalization’s advocates are right that it has the potential to raise everyone’s living standards. 
But it has not done that. 
The questions posed by young French workers, who wonder how globalization will make them better off if it means accepting lower wages and weaker job protection, can no longer be ignored. 
Nor can such questions be answered with the wistful hope that everyone will someday benefit. 
As Keynes pointed out, in the long run, we are all dead. 
Growing inequality in the advanced industrial countries was a long-predicted but seldom advertised consequence of globalization. 
Full economic integration implies the equalization of unskilled wages everywhere in the world, and, though we are nowhere near attaining this “goal,” the downward pressure on those at the bottom is evident. 
To the extent that changes in technology have contributed to the near stagnation of real wages for low-skilled workers in the United States and elsewhere for the past three decades, there is little that citizens can do. 
But they can do something about globalization. 
Economic theory does not say that everyone will win from globalization, but only that the net gains will be positive, and that the winners can therefore compensate the losers and still come out ahead. 
But conservatives have argued that in order to remain competitive in a global world, taxes must be cut and the welfare state reduced. 
This has been done in the US, where taxes have become less progressive, with tax cuts given to the winners – those who benefit from both globalization and technological changes. 
As a result, the US and others following its example are becoming rich countries with poor people. 
But the Scandinavian countries have shown that there is another way. 
Of course, government, like the private sector, must strive for efficiency. 
But investments in education and research, together with a strong social safety net, can lead to a more productive and competitive economy, with more security and higher living standards for all. 
A strong safety net and an economy close to full employment provides a conducive environment for all stakeholders – workers, investors, and entrepreneurs – to engage in the risk-taking that new investments and firms require. 
The problem is that economic globalization has outpaced the globalization of politics and mindsets. 
We have become more interdependent, increasing the need to act together, but we do not have the institutional frameworks for doing this effectively and democratically. 
Never has the need for international organizations like the IMF, the World Bank, and the World Trade Organization been greater, and seldom has confidence in these institutions been lower. 
The world’s lone superpower, the US, has demonstrated its disdain for supranational institutions and worked assiduously to undermine them. 
The looming failure of the Development Round of trade talks and the long delay in the United Nations Security Council’s demand for a ceasefire in Lebanon are but the latest examples of America’s contempt for multilateral initiatives. 
Enhancing our understanding of globalization’s problems will help us to formulate remedies – some small, some large – aimed at both providing symptomatic relief and addressing the underlying causes. 
There is a broad array of policies that can benefit people in both developing and developed countries, thereby providing globalization with the popular legitimacy that it currently lacks. 
In other words, globalization can be changed; indeed, it is clear that it will be changed. 
The question is whether change will be forced upon us by a crisis or result from careful, democratic deliberation and debate. 
Crisis-driven change risks producing a backlash against globalization, or a haphazard reshaping of it, thus merely setting the stage for more problems later on. 
By contrast, taking control of the process holds out the possibility of remaking globalization, so that it at last lives up to its potential and its promise: higher living standards for everyone in the world. 

Making Growth Green 
When the world's leaders met at the Millennium Summit four years ago, they agreed on a set of goals aimed at cutting global poverty in half by 2015. They also set targets for the environment, because they understood its centrality to long-term economic growth, human development, and the stability of the planet. 
The problem is that today, ten years shy of when the 2015 goals are to be met, progress on the environment is alarmingly slow. 
So much more is possible. 
The phase-out of ozone depleting substances through the Montreal Protocol, for instance, shows what can be done when the international community works together. 
Thanks to the protocol, it is estimated that up to 20 million cases of skin cancer, and 130 million eye cataracts, will be avoided. 
This kind of success should encourage us. 
But now we need to match our action with the scale of the challenge. 
Our world is not only unbalanced, but endangered. 
Deforestation is increasing, with almost 100 million hectares lost in the last decade alone - much of it due to millions of poor farmers in Africa and Latin America being forced to cut down trees because they have no other access to land or energy sources. 
At the same time, carbon dioxide emissions are rising: the European Union's target is to cut greenhouse gas emissions by 8% by 2010; but with current policies, only 0.5% will be achieved. 
Of the world's species, 12% of birds, 24% of mammals, and 30% of fish are either vulnerable or in immediate danger of extinction. 
The environmental challenge is even more stark in developing countries, where five billion of the earth's six billion people live. 
In these nations, the environment is linked directly to human development - and to poverty. 
More than a billion people in developing countries lack access to clean water; more than two billion have no access to basic sanitation. 
Five to six million people, mostly children, die every year due to waterborne diseases, such as diarrhea, and air pollution. 
On current trends, the millennium targets for the environment will not be met. 
What needs to be done? 
As a starting point, we must recognize the fundamental imbalance in the global environmental equation. 
Richer countries do much of the environmental damage. 
Accounting for only 15% of the world's population, they cause 50% of global carbon dioxide emissions - with all their implications for climate change. 
But the poorer countries pay much of the "costs" - losing up to 8% of their GDP per year due to environmental degradation, as well as suffering devastating effects on health and human welfare. 
Rich countries' larger contribution to environmental damage means that they must shoulder greater responsibility for fixing the problem. 
That means changing the way they produce and consume energy - reducing subsidies, ensuring appropriate pricing, and adequately taxing environmentally damaging products. 
It also means providing more resources to developing countries for environmental conservation. 
Between 1990 and 2000, financing for environmental concerns followed roughly the same path as overall development assistance flows: it stagnated. 
Aid for the environment averaged about $2 billion per year - far short of what the international community, first at the Rio Summit in 1992 and then at the Johannesburg Summit ten years later, said was needed. 
In terms of global priorities, this figure compares with the $900 billion that the world currently commits to military expenditures each year. 
If the war on environmental degradation is to be won, we need a major turnaround. 
Three areas can help speed progress: 
· Developed countries must set the example by moving toward environmentally friendly production and consumption patterns, including more control of greenhouse gas emissions and use of innovative mechanisms such as Carbon Funds to buy offsets (reductions in greenhouse gases) from developing countries. 
Richer countries must also increase bilateral and multilateral aid commitments. 
Reversing the declining trend in contributions to the Global Environment Facility would be a good start. 
Since its inception in 1991, GEF funding has declined by almost 10 % as a share of the combined GDP of the 38 contributing nations; 
· Developing countries must improve their policies governing the critical sectors of water, energy, transport and trade, including pricing policies. 
This would help reduce consumption of scarce natural resources. 
Beyond this, environmental concerns must be integrated more fully into development policymaking. 
· The international community must make a much more serious commitment to renewable energy, efficiency, and other environmentally friendly energy sources. 
A business-as-usual approach would mean that by 2030 carbon dioxide emissions would be 70 % higher than today, and renewable energy would account for a mere 4% of total energy usage, up from 2% now. 
We need the kind of common effort launched a generation ago in agriculture that led to the Green Revolution. 
Another two billion people will be added to global population over the next 25 years - the vast majority in poorer nations - with huge demands for energy and economic growth. 
If that growth is not achieved in an environmentally sustainable way, its effects on poverty and human well-being will be disastrous. 
It will be too late 25 years from now to make the right choices. 
For the sake of our children and our children's children, we must act now. 


Making Industrial Policy Work 
GENEVA – Industrial policy (IP) is back – or rather, back in fashion. 
Of course, it never really went away, even in countries formally adhering to free-market principles. 
But the post-crisis world – in which government intervention in the economy has gained greater legitimacy – will see more of it. 
Likewise, China’s success, and the temptation to bandwagon on its development model, has reinvigorated IP’s appeal, as have better policy tools and greater experience of what works and what doesn’t – a point well argued by Justin Lin of the World Bank. 
Indeed, a debate in The Economist last year, led by professors Josh Lerner and Dani Rodrik of Harvard University, ended with 72% of voters expressing faith in the merits of IP. 
Policymakers seem to be of the same opinion, and not just in developing countries, judging by the EU’s launch of its 2020 flagship last year and the United States’ green energy policy. 
But, for developing countries, the old dangers of IP continue to apply. 
First, policymakers often get it wrong, both when picking which industries to support and in implementing support mechanisms. 
Second, policymakers are prone to “capture” by vested interests, especially in relatively weak policy environments, leading to favoritism, inefficiency, and waste. 
Moreover, compared to IP’s previous Golden Age, there are several new risks nowadays. 
The first concerns the temptation to follow China’s lead unquestioningly. 
Policymakers must recognize that the Chinese model includes features peculiar to its gradual introduction of market mechanisms – which, compared to IP’s new converts, represents a move in the opposite ideological direction. 
Indeed, China’s growth rate has been boosted over the last two decades by the country’s demographic and land-resource “bonuses,” which enabled it to maximize the benefits of globalization. 
Many other developing countries simply cannot emulate this success in all respects; they must formulate plans specific to their own natural endowments, institutions, and business environments. 
The second risk stems from the globalized character of virtually every industry commonly considered a candidate for support. 
Whereas the original concept of IP involved shielding industries from international competition, today’s world requires integrating local productive capacity in global value chains. 
That implies the need for policies based on exposing industries to international competition. 
The third risk is that industrial policies run afoul of international commitments and obligations. These include not only World Trade Organization rules, but also proliferating regional and bilateral trade and investment agreements – all of which have sharply reduced the scope for IP formulation by limiting options for protecting and supporting industries and businesses selectively. 
Despite these additional dangers, none of the major multilateral development institutions could easily argue today that developing countries should not formulate a development strategy that envisions sector-specific sources of economic growth, priorities for industrial development, and government support of such development with fiscal, financial, and regulatory measures. 
So, how should developing-country policymakers go about it? 
Pick the right winners. 
Industrial policies must be based on a country’s factor endowments, and should build on concrete opportunities to integrate industries and firms in global value chains – for example, by deepening existing linkages with international production networks and export markets – while avoiding overinvestment in international growth laggards. 
Moreover, policymakers should consider which industries deliver the biggest development bang for the buck: export-generating industries do not always have the greatest impact on employment and value added. 
Domestic industries, including services, which often account for more than half of value added even in developing economies, should not be neglected. 
Be prepared to let losers go. 
Even the most obvious choices for IP support, seemingly sure winners, will sometimes disappoint in today’s uncertain economic environment. 
Governments should recognize mistakes and withdraw support before it becomes entrenched or too costly. 
Investment policies should extend to both domestic and foreign direct investment. 
In particular, this means nurturing international competitiveness by focusing on industry productivity, not just on support for domestic players. 
Similarly, technology policies should encompass both domestic development and technology transfer. 
And enterprise development policies should address linkages with multinational firms. 
In today’s world, development objectives can realistically be met by supporting industrial growth, not only domestic industrial growth. 
Because international trade and investment regimes ensure access to foreign markets and investors, they are a prerequisite for industrial policy. 
Even so, developing-country policymakers can build some measure of freedom into new trade and investment agreements. 
At the same time, they should focus on those IP measures that run the least risk of clashing with international obligations: regulatory facilitation rather than restrictions, investment in infrastructure rather than in specific economic activities, and fiscal incentives that are accessible to all. 
Finally, policymakers in developing and developed countries alike must recognize that global economic governance discussions cannot focus exclusively on monetary and exchange-rate issues. 
As more countries embrace IP, competition and conflict is bound to intensify. 
Avoiding a global race to the bottom in regulatory standards, a race to the top in incentives, or a return to protectionism, will require better global coordination. 

Making it to the Euro 
The upcoming enlargement of the European Union in May is a major focus not only for governments in the acceding countries, but also for their central banks. Upon entry, they will become members of the European Central Bank, which means that the new members are expected to take active steps towards fulfilling the necessary conditions for future admission into the eurozone. 
Even though actual enlargement of the eurozone remains in the relatively distant future - the earliest possible date being January 2007 - the accession countries must prepare their entry strategies well in advance. 
This is why in most accession countries last year, central banks and governments stepped up co-operation on defining joint positions on adopting the euro. 
Similarly, there were intense debates within the EU, culminating with the adoption of the ECB's Policy Position on Exchange Rate Issues Relating to the Acceding Countries. 
The Policy Position expressed the ECB Governing Council's stance on membership of the exchange rate mechanism (ERM II), a key precondition for future eurozone entry. 
Debate was heated. 
The accession countries had to decide the optimal timing for eurozone enlargement - a difficult task, because economic theory gives no clear answers in this respect, and because several accession countries are wrestling with fiscal imbalances well above the Maastricht Treaty's ceiling of 3% of GDP. 
The EU side, for its part, had to address the problem of how to balance fairness of treatment between old and new eurozone members with ensuring a smooth enlargement. 
There may be a certain trade-off between these two aspects, since the EU's accession criteria were defined at a time when the eurozone did not exist and when best practices in exchange rate and monetary policy regimes differed from current ones. 
Nevertheless, a broad consensus has emerged on a number of issues. 
First, most people have learned that no universal solution is optimal for all accession countries. There are many country-specific conditions, such as current economic performance, the monetary policy regime, and the fiscal stance. 
In this respect, the accession countries can be divided into two broad groups. 
On one side are small countries - for example, the Baltic states - which use devices such as currency boards to peg their exchange rates to the euro. 
These countries have proven that they can live without their own monetary policies without severe tensions. 
There is thus no reason to caution them against fast eurozone accession or to force them to change their exchange rate regimes before entry. 
So EU institutions are right to acknowledge currency boards as being consistent with the ERM II regime, even though they have at the same time reserved the discretion to assess each country on a case-by-case basis. 
On the other hand, it is clear that the roadmap to the eurozone might be completely different for the larger accession countries with floating exchange rates and inflation-targeting monetary policy regimes. 
A second area of consensus has emerged from frequent debates on the potential conflict between nominal and real economic convergence between the EU accession countries and the current member states. 
But most accession countries have already achieved substantial progress in lowering inflation and nominal interest rates. 
Moreover, many empirical analyses show that real convergence should not be a serious obstacle to enlargement. 
Thus the main emphasis has shifted to structural, financial, and cyclical convergence, in line with economic theory on so-called "optimum currency areas." 
It is typically found that the degree of convergence is very high in terms of foreign trade, capital flows, and banking sector integration, while cyclical convergence and labor mobility have been low so far. 
Important differences exist, though, among the individual countries even in this respect. 
Third, although the Central European countries originally announced different target dates for eurozone accession, their plans have now moved closer together, usually ranging between 2008 and 2010. 
The biggest practical constraint they face is their public budgets. 
Many countries - including the Czech Republic, Hungary, and Poland - run large budget deficits and need to implement medium-term reforms to make their pension systems sustainable and to overhaul overly generous social security systems. 
Given the political sensitivity of these issues, fiscal consolidation will be challenging. 
Fourth, it is vital that EU institutions have spoken more openly about the convergence criteria. 
Most critically, the ECB has de-emphasized in its Policy Position the former ±2.25% fluctuation band in the ERM II as the criterion for assessing exchange rate stability. 
This corresponds to the view shared by many accession countries that such a narrow band would increase the risks in managing the run-up to adopting the euro. 
Instead, exchange rate stability will be assessed according to economic fundamentals and countries' economic policy mix, rather than by rigidly applying mechanical rules. 
Finally, the ECB has proposed a reform of the voting mechanism in its Governing Council, introducing a cap on the number of voting members. 
Even though many, including myself, do not see it as an optimal final solution, it is an important compromise that will allow eurozone enlargement to start. 
The work done during 2003 brought eurozone enlargement much closer. 
Some countries may proceed faster, especially those with hard pegs against the euro, while for others the years 2008-2010 seem to be a more realistic target. 
But in most cases, entry strategies have been set, serving as important stabilizers for financial markets and economic agents. 

Making Old Age Less Safe 
It is almost an optical illusion: looming on Japan’s horizon, and on Europe’s and on America’s, is a pensions crisis. 
The problem is real, though exaggerated. 
The illusion is in some of the plans being devised to deal with it. 
The main question is whether privatizing pension systems, as President George W. Bush has proposed for Social Security in the United States, would solve the problem or merely make matters worse. 
With many countries pondering whether to adopt variants of the Bush plan, the question requires careful examination. 
By itself, privatization is clearly not the solution. 
America’s troubled private pension system – now several hundred billion dollars in debt – already appears headed for a government bailout. 
There was a time when privatization – allowing individuals to set up individual savings accounts – seemed better than Social Security, which invests in lower-yielding Treasury bills. 
Advocates of privatization argued that funds would do much better if invested in stocks, predicting a return of 9%. 
But the stock market does not guarantee returns; it does not even guarantee that the stock values will keep up with inflation – and there have been periods in which they have not. 
America’s Social Security system insulates individuals against the vagaries of the market and inflation, providing a form of insurance that the private market does not offer. 
It does so with remarkable efficiency. 
The costs of managing the Social Security system are far smaller than those likely to be associated with privatized accounts. 
This is understandable: private investment firms spend an enormous amount on marketing and salaries. 
It is possible that to reduce these transactions costs, Bush will propose restricting choice, which was the main argument for privatization in the first place. 
But these limited kinds of choices – for example, a T-bill fund with 90% in T-bills and 10% in an indexed stock fund – could easily be introduced into the public social security system. 
Bush says that reform is urgently needed, because the system will be insolvent in about a quarter-century. 
But the problem depends on America’s growth rate: if the growth rates of the late 1990’s return, there is no problem. 
Even if there is a problem, it can easily be fixed; spending a fraction of the money that went into Bush’s two tax cuts would have fixed Social Security for 75 years; slight benefit cuts, adjusting the age of retirement, or minor adjustments in the level of contributions could fix the system permanently. 
Moreover, Bush’s proposals won’t fix social security – unless they are accompanied by drastic benefit cuts. 
For how could they? 
He proposes diverting almost a third of the Social Security tax to private accounts. 
That means less money coming in. 
If benefits are not reduced, the gap between receipts and expenditures will increase. 
One doesn’t need a Nobel Prize to figure that out. 
So privatization would not protect retirees against the Social Security system’s insolvency; it would merely add enormously to today’s fiscal deficit, because partial privatization entails diverting money to private funds that would have been used to close the gap between government expenditures and revenue. 
The anticipated increase in the fiscal deficit is striking: the central plan discussed by Bush’s Council of Economic Advisers would – according to the Council’s own estimates – increase America’s fiscal deficit by $2 trillion over the next decade. 
Advocates of privatization claim to believe in markets, but they are proposing budget gimmickry that would move those losses off the books, as if markets could be easily fooled. 
America and the world should remember: Argentina’s privatization of its pension system was at the center of its recent fiscal woes. 
Had Argentina not privatized, its budget would have been roughly in balance. 
The US is starting on its privatization venture with a fiscal deficit of 4% of GDP. 
Privatization advocates insist, however, that investments in stocks would yield sufficiently higher returns to provide individuals the same retirement income as before, with the surplus used to fill the gap. 
But if markets are working well, then returns will be higher only because risk is higher. 
There is still no free lunch in economics. 
With higher risk, there is a chance that, 40 years from now, many individuals will find themselves with less than they need to retire. 
But if one really thinks that free lunches exist, there is still no reason to privatize: government could get the additional returns by investing in the stock market itself. 
Indeed, President Clinton proposed doing just that. 
With increased transaction costs, worsening solvency for the system, increased budget deficits, and decreasing benefits and security for retirees, why the drive for privatization? 
One reason is the interest financial markets have in grabbing a piece of all those transactions costs. 
A second is the Bush administration’s ideological hostility to the modest amount of wealth redistribution implied by the public system. 
America’s Social Security program has been so successful in reducing poverty because the poor get back a little more than they contribute, and the rich get back a little less. 
Even with Social Security’s mildly redistributive effect, poverty and inequality in America are increasing. 
Privatization will only make matters worse. 
Bush has tried to scare America about the magnitude of the problem, and he has tried to fool America about how privatization would solve it. 
The Social Security deficit pales by comparison with the deficits created by Bush’s huge tax cuts for upper-income Americans or in comparison with the deficit in Medicare, which provides health care for the aged. 
Why has he ignored these problems? 
Is there another agenda? 

Making or Breaking Europe 
Sweden's thumbs down to the Euro strips bare the fundamental choice now facing Europe. 
Slowly, very slowly, the European Union is approaching the moment of truth when its members must decide what kind of a Union they want. 
Do they want a politically integrated Union, perhaps developing eventually into a true federation? 
Or do they want a loose economic club, based essentially on a single economic market, with a few optional add-ons of a political nature? 
This question has faced the EU from its beginning, and until now member governments answered it by proceeding at the pace of the most reluctant. 
But that may be changing. 
This year, or next year, it may at last become clear that the gulf between federalists and nationalists is too deep to be bridged. 
At that point, the federalists will see whether they can find a way to go ahead on their own. 
If they do, there will be a two-speed Europe, with a politically integrated inner core and others more loosely associated on the outside. 
The idea of a two-speed or variable-geometry Union, has long been debated, mainly as a way of finessing the Euro-skeptical foot-dragging of successive British governments. 
Mostly, these debates tended to reach the morose conclusion that a two-speed Europe would be hopelessly difficult to negotiate. 
Then, thank goodness, the idea of a variable-geometry Union seemed to lose urgency when Tony Blair came to power. 
What is now reviving the idea of variable geometry is the prospect of the EU's massive enlargement with the admission of ten new members from Eastern Europe and the Mediterranean, multiplied by the political crisis within Europe over the American war against Iraq. 
Everyone knows that a much larger EU must be more integrated politically if it is not to grind to a halt through sheer weight of numbers. 
This is a question of simple arithmetic, not ideology. 
To deal with this problem, a draft EU constitution was submitted to member governments earlier this year, which would (among other things) expand the role of majority voting. 
Formal negotiations on that draft start next month. 
Unfortunately, it is increasingly clear that some peripheral EU members and many of the new members intend to revise the draft treaty, which they fear goes too far toward political integration. 
Some small countries do not like the idea of a permanent President of the Council of Ministers, which they fear will strengthen the influence of big countries at their expense. 
Some middle-sized countries, like Spain and Poland, do not like the proposed majority voting rules, which would operate according to population weights. 
Some small countries do not like streamlining the Commission, and the proposed cutback in the number of Commissioners from member states. 
Neutrals, like Finland and Austria, are opposed to plans for closer defense cooperation. 
And so on. 
These concerns are understandable; and it is particularly understandable that the new member states from Eastern Europe, who have no experience of voluntary integration--and far too much experience of involuntary integration--are apprehensive about some aspects of the draft constitution. 
The problem is that if governments start to amend the draft constitution, the whole thing is liable to unravel. 
It is hard to guess in advance the consequences of such a failure. 
This will depend on how failure plays out in the conference room. 
But if the negotiations break down because new members, or small countries, or middle-sized countries, or the neutrals, resist the reforms necessary to make the enlarged EU viable, it is a certainty that those member states in favor of closer integration, essentially the six original founding members (France, Germany, the three Benelux countries, and perhaps Italy) will start to work seriously on ways of building an alternative structure. 
This is the real significance of last Sunday's ballot, when the Swedish people voted, by a surprisingly large margin, against joining the Euro. 
They were not voting against the Euro, they were voting against more Europe. 
Sweden's government wanted the country to join, because it was afraid of the consequences of staying outside. 
But the government balked at arguing for it on political grounds. 
The Swedes have always been half-hearted about the political aspects of EU membership. 
But they could hardly be expected to vote for Euro membership on purely economic grounds at a time when the Swedish economy was doing better than the Euro economy. 
The same is true of Britain. 
Tony Blair wants Britain to join the Euro, because he does not want to be excluded from the European core. 
But he pretends that this is an economic question, because he dare not argue, and does not believe in, the case for more political integration. 
Some observers argue that Britain's prospects for joining the Euro have been damaged by the Swedish No vote or by the domestic fall-out after the war against Iraq. 
But this is simplistic and wrong. 
Tony Blair will not take Britain into the Euro because he cannot articulate the only real case for membership, which is political. 
Even if he did articulate this case, he would not persuade the British people, who have been conditioned by 50 years of Euro-skepticism from their political leaders. 
If the negotiation of a new EU Constitution is to have any chance of success, it may be decided on Saturday, at a meeting between Tony Blair of Britain, Chancellor Gerhard Schröder of Germany, and President Jacques Chirac of France. 
Britain's relations with the other two states were seriously damaged by Blair's unconditional support for America's illegal war against Iraq. 
One point of Saturday's meeting will be to mend fences on the next steps in Iraq. 
But Blair's deeper purpose will be to try to ensure that if negotiations on the EU Constitution break down, Britain is not stranded permanently in the outer ring of a two-speed Europe. 

Making Peace Between Darwinism and Christianity 
Are science and religion fated to mutual enmity? 
Every schoolchild learns how Galileo was forced to his knees to recant his belief that the earth revolves around the sun, or how the Church was up in arms again in 1859, when Charles Darwin published On the Origin of Species , arguing that all living organisms, including humans, result from a long, slow process of evolution. 
Today, especially in America, many Christians, so-called Creationists, still argue that mankind's origins are to be found in the early chapters of Genesis, not in any scientific discovery. 
But the interplay of evolution and religion is more complex than opposition and conflict. 
Evolutionary ideas are born of religion. 
The ancient Greeks had no idea of progress, directional time, and linear history, culminating in humankind. 
This concept is a legacy of Judeo-Christianity, and in the 18 th century the earliest evolutionists--people like Charles Darwin's grandfather, Erasmus--framed their ideas within the context of this religious account of origins. 
Darwin himself was much influenced by Christian ideas, especially where we least expect it: in his belief in natural selection--the bane of the Church--as evolution's motive force. 
Darwin argued that more organisms are born than can survive and reproduce; that this leads to a struggle for existence; and that success in this struggle partly reflects the physical and behavioral differences between the winners and the losers. 
The winners are those that are well adapted to their environment--that is, they develop features that help them to survive and reproduce. 
Behind Darwin's emphasis on adaptation lay his Christian upbringing. 
One traditional argument for the existence of God, the so-called "argument from design," stresses that organic parts are adapted, and argues that the only way they could have come into being is through the workings of some kind of intelligence. 
The eye, for example, is like a telescope. 
Since telescopes have telescope makers, the eye must have an eye maker--the Great Optician in the Sky. 
Darwin accepted the design-like nature of organisms and their parts. 
But rather than the Christian God, he appealed to the scientific concept of natural selection. 
Science and religion still wrestle over the legacy of Darwin's theory of evolution through natural selection. 
As the well-known Oxford biologist Richard Dawkins notoriously remarked, "Although atheism might have been logically tenable before Darwin, Darwin made it possible to be an intellectually fulfilled atheist." 
Without natural selection, the appeal to God made sense. 
But after Darwin and natural selection, we have a non-God-driven explanation for adaptation, making it possible to be a non-believer, even in the face of design-like organisms and their parts. 
But Dawkins goes further and argues that if one is a follower of Darwin, then sensibly one ought to be an atheist. 
Dawkins agrees with the Creationists on one thing: the incompatibility of Darwinism and Christianity. 
In his book River out of Eden , he writes, "The universe we observe has precisely the properties we should expect if there is, at bottom, no design, no purpose, no evil and no good, nothing but blind, pitiless indifference." 
Elsewhere he attacks religion directly: "The kinds of views of the universe which religious people have traditionally embraced have been puny, pathetic, and measly in comparison to the way the universe actually is. 
The universe presented by organized religions is a poky little medieval universe, and extremely limited." 
Now, I, for one, am not quite sure how poky the medieval universe actually was. 
Most thinkers back then accepted the Arab estimates that the universe was two hundred million miles across, which is enough room to swing quite a few cats--or Oxford atheists! 
But obviously, whether or not you do believe in the existence of the Christian God (or any other kind of god), Dawkins's gloomy conclusions do not follow. 
You may not have to be a Christian in the light of Darwinism, but this does not mean that you cannot be one. 
In fact, Pope John Paul II, a man not usually described as soft in his religious commitments, has openly endorsed evolution, even Darwinism. 
True, he demands a special intervention for the arrival of human souls, but souls (if such there be) are hardly scientific concepts anyway. 
People like Dawkins, and the Creationists for that matter, make a mistake about the purposes of science and religion. 
Science tries to tell us about the physical world and how it works. 
Religion aims at giving a meaning to the world and to our place in it. 
Science asks immediate questions. Religion asks ultimate questions. 
There is no conflict here, except when people mistakenly think that questions from one domain demand answers from the other. 
Science and religion, evolution and Christianity, need not conflict, but only if each knows its place in human affairs--and stays within these boundaries. 

Making Sense of the Climate Impasse 
NEW YORK – All signs suggest that the planet is still hurtling headlong toward climatic disaster. 
The United States’ National Oceanographic and Atmospheric Administration has issued its “State of the Climate Report” covering January-May. 
The first five months of this year were the warmest on record going back to 1880. 
May was the warmest month ever. 
Intense heat waves are currently hitting many parts of the world. 
Yet still we fail to act. 
There are several reasons for this, and we should understand them in order to break today’s deadlock. 
First, the economic challenge of controlling human-induced climate change is truly complex. 
Human-induced climate change stems from two principal sources of emissions of greenhouse gases (mainly carbon dioxide, methane, and nitrous oxide): fossil-fuel use for energy and agriculture (including deforestation to create new farmland and pastureland). 
Changing the world’s energy and agricultural systems is no small matter. 
It is not enough to just wave our hands and declare that climate change is an emergency. 
We need a practical strategy for overhauling two economic sectors that stand at the center of the global economy and involve the entire world’s population. 
The second major challenge in addressing climate change is the complexity of the science itself. 
Today’s understanding of Earth’s climate and the human-induced component of climate change is the result of extremely difficult scientific work involving many thousands of scientists in all parts of the world. 
This scientific understanding is incomplete, and there remain significant uncertainties about the precise magnitudes, timing, and dangers of climate change. 
The general public naturally has a hard time grappling with this complexity and uncertainty, especially since the changes in climate are occurring over a timetable of decades and centuries, rather than months and years. 
Moreover, year-to-year and even decade-to-decade natural variations in climate are intermixed with human-induced climate change, making it even more difficult to target damaging behavior. 
This has given rise to a third problem in addressing climate change, which stems from a combination of the economic implications of the issue and the uncertainty that surrounds it. 
This is reflected in the brutal, destructive campaign against climate science by powerful vested interests and ideologues, apparently aimed at creating an atmosphere of ignorance and confusion. 
The Wall Street Journal, for example, America’s leading business newspaper, has run an aggressive editorial campaign against climate science for decades. 
The individuals involved in this campaign are not only scientifically uninformed, but show absolutely no interest in becoming better informed. 
They have turned down repeated offers by climate scientists to meet and conduct serious discussions about the issues. 
Major oil companies and other big corporate interests also are playing this game, and have financed disreputable public-relations campaigns against climate science. 
Their general approach is to exaggerate the uncertainties of climate science and to leave the impression that climate scientists are engaged in some kind of conspiracy to frighten the public. 
It is an absurd charge, but absurd charges can curry public support if presented in a slick, well-funded format. 
If we add up these three factors – the enormous economic challenge of reducing greenhouse gases, the complexity of climate science, and deliberate campaigns to confuse the public and discredit the science – we arrive at the fourth and over-arching problem: US politicians’ unwillingness or inability to formulate a sensible climate-change policy. 
The US bears disproportionate responsibility for inaction on climate change, because it was long the world’s largest emitter of greenhouse gases, until last year, when China overtook it. 
Even today, per capita US emissions are more than four times higher than China’s. 
Yet, despite America’s central role in global emissions, the US Senate has done nothing about climate change since ratifying the United Nations climate change treaty 16 years ago. 
When Barack Obama was elected US president, there was hope for progress. 
Yet, while it is clear that Obama would like to move forward on the issue, so far he has pursued a failed strategy of negotiating with senators and key industries to try to forge an agreement. 
Yet the special interest groups have dominated the process, and Obama has failed to make any headway. 
The Obama administration should have tried – and should still try – an alternative approach. 
Instead of negotiating with vested interests in the backrooms of the White House and Congress, Obama should present a coherent plan to the American people. 
He should propose a sound strategy over the next 20 years for reducing America’s dependence on fossil fuels, converting to electric vehicles, and expanding non-carbon energy sources such as solar and wind power. 
He could then present an estimated price tag for phasing in these changes over time, and demonstrate that the costs would be modest compared to the enormous benefits. 
Strangely, despite being a candidate of change, Obama has not taken the approach of presenting real plans of action for change. 
His administration is trapped more and more in the paralyzing grip of special-interest groups. 
Whether this is an intended outcome, so that Obama and his party can continue to mobilize large campaign contributions, or the result of poor decision-making is difficult to determine – and may reflect a bit of both. 
What is clear is that we are courting disaster as a result. 
Nature doesn’t care about our political machinations. 
And nature is telling us that our current economic model is dangerous and self-defeating. 
Unless we find some real global leadership in the next few years, we will learn that lesson in the hardest ways possible. 

Making the IMF and World Bank Work for the Poor 
The World Bank has long proclaimed its dream of “a world free from poverty.” 
Likewise, the International Monetary Fund may arguably desire “a world free from financial crisis.” 
These are crucial and daunting objectives, but they are too narrow for the twenty-first century. 
To remain relevant, the Bretton Woods institutions must fully adapt to the needs of the world’s rapidly emerging countries, and they can begin that process at this spring’s IMF-World Bank meetings in Washington. 
As many now acknowledge, the IMF should look beyond managing financial crises and start addressing non-cooperative economic behaviors – notably in the monetary field. 
The international community would gain from the IMF’s becoming a center of joint-monitoring and permanent dialogue among the world’s rich, poor and emerging nations. 
But for that to happen, the latter two need a greater say. 
Fortunately, such reform is at last on the agenda. 
Last autumn’s IMF-World Bank meetings approved an increase in voting quotas for some of the most under-represented emerging economies: China, Mexico, South Korea, and Turkey. 
A second round of adjustment will need to involve other fast-paced economies without crushing the voice of the poorest. 
As for the World Bank, it does not need to “reposition” itself so much as to root itself in emerging countries, as does the development aid industry in general. 
The international community must resist shortsighted calls to withdraw from middle-income nations on the ground that they could now “go it alone.” 
When it comes to global governance, communicable diseases, climate change, or threats to biodiversity, these countries’ importance speaks for itself. 
They account for 44% of people living with HIV/AIDS, 47% of global CO2 emissions, and 52% of the planet’s protected natural areas. 
The international community simply cannot leave them to their own devices on such crucial issues without jeopardizing its own future. 
Fighting poverty is a non-negotiable objective. 
But it cannot be the sole purpose of international aid, nor of the World Bank. 
In fact, a genuine commitment to poverty reduction implies working with these countries. 
They are home to 70% of the population that lives on less than $2 a day, facing massive unemployment, gross inequalities, lack of infrastructure, regional imbalances, and a litany of other challenges. 
Some critics argue that lending public money to middle-income countries is no longer necessary, due to their access to financial markets. 
True, private capital flows have surged in the wake of global liberalization and these countries’ privatization schemes. 
But private capital flows have proven to be volatile and prone to sudden interruptions, as exemplified by the Asian and Russian financial crises of the late 1990’s, or more recently by investors pulling out from infrastructure sectors. 
Another line of suspicion against public lending is that it crowds out private investment. 
However, an increasing body of evidence documents the positive impact of public investment on productivity and economic growth. 
It suggests complementarity rather than substitutability between private and public funds. 
Detractors ultimately fall back on the argument that multilateral lending to middle-income countries is waning along with demand. 
But, while loan volumes have decreased by a third since the last financial crisis, this is only a return to normalcy. 
After an all-time high due to emergency aid to countries like South Korea or Argentina, lending is back to its trend line of around $25 billion a year. 
While lending by the World Bank did fall below its mid-1990’s level, it is growing again, reflecting the expansion of regional multilateral banks and a policy pendulum that is swinging back to publicly-financed infrastructure projects. 
This does not mean that business as usual should be good enough for the World Bank. 
Its products need to be adapted. 
With decentralization taking place in many emerging economies, sub-national authorities are taking on more responsibilities. 
The Bank should be able to work with them in the absence of sovereign guarantees, and increase its loan offerings in local currencies, since these partners cannot afford currency risk. 
To further “crowd in ” the private sector, insurance and guarantees can help. 
Beyond this, more financial engineering is needed to draw upon the creativity of financial markets. 
Finally, as David de Ferranti, a former World Bank vice-president, has pointed out, the Bank should expand its intellectual partnerships and engage with the highly trained professionals, consulting firms, and research institutions that emerging countries now boast. 
The Bank must be open to local invention if it is to be accepted by and relevant to middle-income nations. 
In terms of purchasing power parity, per capita income in middle-income countries is still about 15% of that of developed nations. 
The time has not yet come to shake hands and part company. 
Convergence is on the way, but minimizing its global costs requires redesigning the Bretton Woods institutions to meet the challenges faced by emerging countries. 

Making the UN Fit for Democracy 
The war in Iraq raised starkly the question of the international order, in particular about the role of the UN. 
Many regard the UN's role as the guarantor of international law and legitimacy as self-evident, and now argue that its stature, undermined by the US-led invasion, must be quickly restored if the rule of law is to prevail internationally. 
But to be a genuine locus of international legitimacy, the UN must become a different organization--one secure in its own legitimacy and able to function without the endless delays, vetoes, indecisiveness, and unwillingness to ensure respect for its decisions. 
The UN was born as a community of nations committed to safeguard and promote the values at the heart of the fight against Nazism and Fascism. 
At its origin--with only 50 signatories of its Charter--the UN was a rather exclusive club of countries. 
Indeed, Article 53 of the Charter defined the formerly fascist Axis countries as "enemy states" of the UN, so that Italy had to wait until 1955 to become a member. Japan joined only in 1956 and Germany in 1973. 
The UN Charter was, above all, a manifesto of nations committed to freedom and justice. 
It also contained a series of specific political objectives: decolonization and self-determination of peoples, social progress, and the promotion of fundamental human rights. 
But with the onset of the Cold War and the emergence of the non-aligned movement, the intentions of the UN's founding fathers were progressively thwarted. 
Indeed, we are so far today from the original spirit of the UN Charter that it seems normal for dictatorships to sit in judgment of democracies and for Libya to chair the Commission for Human Rights. 
The Charter empowered the UN to react to threats to peace and international order arising from non-member states, including a requirement--never implemented--that signatories provide "military contingents under the command of the Military Staff Committee, composed of the Chiefs of Staff of the permanent members." 
In this context, the veto power conferred on the victors of World War Two was not concerned with "internal" conflicts among the member states; it extended only to threats to peace from countries outside the UN consensus. 
Over time the UN was transformed by two factors. 
First, the presence of dictatorships among the permanent members of the Security Council caused paralysis and made many of provisions of the Charter dead letters. 
Second, the rise of the non-aligned movement, founded by Zhou En Lai, Nehru, and Tito in 1955, launched a sort of substitute ideology for the UN. It emphatically reaffirmed the principle of non-interference in states' internal affairs and this principle's primacy over the rights of individuals enshrined in Article 1 of the Charter. 
The non-aligned movement also stood for the principle of including in the UN, as a matter of right, all sovereign countries. 
This turned the UN from a club of countries that share the same values into an amorphous forum of the international community--an indistinct body that never investigates the democratic credentials of its members. 
Today's UN, which entrusts the protection of fundamental human rights to countries that are themselves among the prime violators of these rights, is no longer acceptable. 
We must modify not only the working mechanisms of the UN, but also its composition. 
What is needed is a "World Organization of Democracies," devoted to promoting the original values of the UN, including democracy, the rule of law, and respect for human rights. 
Such a UN could follow the organizational model of the WTO, for example, or the Council of Europe. 
The latter is worth emulating because admission and continued membership are conditioned on respect for specific democratic standards. 
Countries from the former Soviet bloc, for example, had to adapt their legislation to these standards in order to join. 
The same should hold with respect to the new UN: to join and remain a UN member would require respecting the international commitments undertaken by each state, beginning with the UN Charter and the Universal Declaration of Human Rights. 
In recent years, a number of countries, often after painful reforms, have become democratic, showing that it is possible to "globalize" democracy as well as trade. 
Yet other countries remain stubbornly outside this emerging democratic order, and some democracies may be moving toward authoritarianism. 
Shouldn't these attributes have an impact on their international status? 
The UN must be re-founded on the basis of its original principles. 
The standard for admission should not be a country's mere existence, but its fulfillment of certain criteria of democratic governance. 
Like the European Union, the UN should possess mechanisms to suspend or even expel members that fail to respect democratic norms. 
Only a re-founded UN will have the legitimacy necessary to react credibly to threats to peace and promote freedom and human rights. 
That re-founding should start without delay. 
A good place to begin would be to form, before the next General Assembly, a caucus of democratic states to coordinate their actions and establish common positions. 

A Global Plan to End Malaria 
ABU DHABI – No one should die from a preventable disease. 
Yet preventable diseases kill two million children every year, many of whom are too poor to afford proper treatment. 
The majority of these deaths are either treatable with existing medicines, or avoidable in the first place. 
Malaria, a life-threatening disease transmitted by mosquitos, is one of these illnesses. 
Less than a century ago, families everywhere – including across North America and Europe – lived in fear of a mosquito bite. 
Malaria not only took the lives of children and adults; it perpetuated poverty and limited global economic growth, preventing millions from reaching their full potential. 
Today, more than 30 countries have eliminated the malaria parasite, and at least ten more are on track to do so by 2020. 
Despite this, malaria remains a leading cause of death for children under five in Sub-Saharan Africa, taking the life of a child every two minutes. 
Malaria is also expensive, costing Africa’s economy some $12 billion per year. 
Despite many decades of intense research and development efforts, with more than 20 possible vaccines currently being evaluated, there is still no commercially available inoculation against malaria. 
However, there are a number of preventive measures that can contribute to reducing the risk of infection. 
These include using insecticide-treated bed nets, spraying indoor walls with insecticides, and focusing prophylactic measures on the most vulnerable groups. 
Today, we have a window of opportunity to build on what has already been accomplished, by highlighting and supporting initiatives and research efforts that could eradicate malaria. 
For example, researchers at the Johns Hopkins Bloomberg School of Public Health’s Malaria Research Institute have discovered how resistance to the malaria parasite can spread in a mosquito population. 
The findings could pave the way for the development of self-propagating malaria-control strategies, mitigating the need for continuous application of insecticides and reliance on bed nets. 
Another important initiative that deserves support is the World Health Organization’s “vector control” guidelines, which offer strategies for controlling the mosquitos, flies, and bugs that transmit disease. 
The WHO’s plan provides a new strategy to strengthen vector control worldwide through increased capacity, improved surveillance, better coordination, and integrated action across sectors and diseases. 
Global health efforts should support efforts by countries where malaria is endemic to develop and improve vector-control strategies. 
We also need to consider how changing global environments are affecting the occurrence of malaria. 
For example, because deforestation creates favorable conditions for mosquitos by producing ditches and puddles, which are more likely to pool less acidic water that is conducive to mosquito larvae development, countries with elevated forest loss tend to have higher rates of malaria. 
Deforestation also leads to reduced absorption of rainfall, which increases the volume of standing water. 
In the United Arab Emirates, we believe that eliminating disease is central to global development. 
If people are given the opportunity to lead healthy lives, they can get an education, contribute to the economy, and look after their families, generating a multiplier effect that further boosts prosperity and development. 
We also believe in adopting a holistic approach, one that includes securing financial commitments, promoting research and innovation through infrastructure development, and regularly convening global champions to maintain momentum and share ideas. 
For disease eradication, partnership is essential. 
That is why Sheikh Mohammed bin Zayed, the Abu Dhabi Crown Prince, has contributed $30 million to the Roll Back Malaria partnership, the preeminent global framework for action against malaria. 
I am proud to sit on the board of Roll Back Malaria, because I believe that diversity of leadership perspectives is vital to finding solutions to combat the disease, particularly as we begin a bold new chapter in the quest to eliminate it. 
The landscape of leaders supporting global health is expanding, and now represents populations around the world. 
This is important, because partnerships like Roll Back Malaria must work globally to save the greatest possible number of lives. 
We hope to encourage further global collaboration this week, as Abu Dhabi convenes more than 200 leaders in disease eradication at a forum called Reaching the Last Mile. 
This meeting aims to share insights and best practices on how to map, control, or eliminate preventable diseases, including innovations that could ultimately bring an end to malaria globally. 
In the twentieth century, we managed to eradicate a disease, smallpox, for the first time in history. 
Complete eradication, elimination, or control of disease is complex, and that is particularly true of malaria. 
A few years ago, we thought that elimination of malaria was beyond our reach, but together the world has made tremendous progress. 
Between 2000 and 2015, public-health interventions saved the lives of 6.2 million people, 5.9 million of whom were children under the age of five. 
By 2020, an estimated $6.4 billion will be needed each year to fund the global fight to eliminate malaria.This will be a difficult feat, but together we can create a future without the disease – a brighter and more stable future for millions of vulnerable people, with more opportunities for generations to come. 

Malaria’s Deadly Comeback 
SINGAPORE – The dramatic drop in malaria deaths since the beginning of the century is one of the great public-health success stories of recent years. 
Thanks to concerted investments in prevention, diagnosis, and treatment, the number of people killed by the disease each year has declined 60% since 2000, saving more than six million lives. 
And yet, even as the dream of eliminating malaria seems closer to becoming reality, growing drug resistance is threatening these remarkable gains. 
Resistance to the most effective antimalarial medicine, artemisinin, has emerged in Cambodia and is spreading across the Mekong Delta region. 
Without effective and timely action, this new, resistant form of malaria will become widespread – a pattern that has already occurred twice with older malaria medicines. 
Governments, international organizations, civil-society groups, and companies must take urgent steps to prevent an epidemic of resistant malaria and stop a painful episode from recurring. 
In order to delay the spread of resistance long enough to allow new drugs to come onstream, an urgent short-term objective must be achieved: preventing resistance from taking hold in South and Southeast Asia and spreading elsewhere. 
If history is any guide, artemisinin resistance could move into India and onward to Sub-Saharan Africa and the rest of the world, putting millions of lives at risk and jeopardizing decades of progress. 
In the 1950s, resistance to another medicine, chloroquine, emerged along the Thai-Cambodia border. 
The same thing then happened in the 1970s with sulphadoxine-pyrimethamine (SP). 
From Southeast Asia, resistance to chloroquine and SP spread to India, and from there to Africa and much of the rest of the world. 
Millions have died as a result, most of them young African children. 
The consequences of widespread artemisinin resistance would be similarly devastating. 
Even the most conservative estimates paint a grim picture. 
One study found that its spread could result in more than 116,000 additional deaths each year and roughly $417 million in associated medical costs and productivity losses – above and beyond the $12 billion in productivity losses malaria already costs Sub-Saharan Africa each year. 
Despite broad-based concern over the past eight years, artemisinin resistance has not been contained. 
On the contrary, it has now been detected in Cambodia, Vietnam, Laos, Thailand, and Myanmar, on India’s eastern border. 
There has been a welcome increase in donor support, notably the Regional Artemisinin-resistance Initiative, funded by a $100-million grant from The Global Fund to Fight AIDS, Tuberculosis, and Malaria. 
But the slow strengthening of conventional control interventions is not proving capable of outpacing the spread of resistance. 
To end malaria, we need a united global front against the drivers of resistance. 
In addition to efforts to contain artemisinin resistance in the Greater Mekong sub-region, action is needed farther afield. 
According to the World Health Organization, as of November 2015, national health authorities in six African countries and Colombia had not yet withdrawn their marketing authorizations for oral artemisinin monotherapies – an important driver of resistance. 
Stronger commitments from the private sector will be needed as well. 
As of December 2015, 21 drug manufacturers contacted by the WHO had not yet agreed to stop producing oral artemisinin monotherapies. 
More than two-thirds of these companies are located in Asia. 
Research-based pharmaceutical companies must also invest in the next generation of antimalarial medicines. 
While many artemisinin-based treatments remain effective, at some point they will need to be replaced – or risk becoming part of the problem. 
Through a public-private partnership with the Singapore Economic Development Board, the Novartis Institute for Tropical Diseases has led the formation of a research consortium with this precise aim. 
The effort has already yielded two promising new antimalarial drug candidates currently in Phase 2 clinical trials – new classes of compounds that treat malaria in different ways from current therapies and thus have the potential to combat emerging drug resistance. 
More broadly, product development partnerships, such as the Drugs for Neglected Diseases initiative and the Medicines for Malaria Venture, are bringing together academic, pharmaceutical, and funding partners to deliver potential new treatments for neglected diseases. 
These collaborations can shepherd promising compounds through the lengthy and expensive process of drug development and approval. 
Two other antimalarial compounds in Phase 2 clinical trials are currently being developed with support from Medicines for Malaria Venture – one with Takeda Pharmaceuticals and the US National Institutes of Health, and another with the French pharmaceutical company Sanofi. 
We may be winning many battles against malaria, but familiar warning signs indicate we could lose the war. 
The spread of artemisinin resistance in Asia today threatens the lives of children in Africa tomorrow. 
That’s why we need effective action to prevent the spread of artemisinin resistance, including urgent investments in the next generation of antimalarial treatments. 
If we do not heed the history of malaria, we may be doomed to repeat it. 

Staying on Track to End Malaria 
BASEL – Ending an epidemic is a marathon undertaking, and in the case of malaria, we are nearing the finish line. 
But we will need to keep up the momentum. 
Over the past few decades, governments, nongovernmental organizations, and the private sector have broken new ground in the science of treating malaria, and have channeled extraordinary resources toward the cause. 
The investments have paid off: the global malaria mortality rate fell by 60% between 2000 and 2015. 
Still, mounting challenges such as drug and insecticide resistance threaten to reverse the progress we have made. 
For two consecutive years now, malaria deaths have risen, while funding has flatlined. 
This year’s World Malaria Day (April 25) should thus spur a redoubling of our efforts. 
Eradicating malaria will require new medical and health-policy solutions as well as stronger political will. 
My company, Novartis, has been active in Africa for the past two decades, providing antimalarials and working with governments to support health-care systems. 
During that time, we have learned that we need more first-hand information from malaria experts operating on the front lines of the fight. 
To that end, we commissioned the study Malaria Futures for Africa, co-chaired by Richard Kamwi, ambassador of the intergovernmental organization Eliminate 8, and Bob Snow of the KEMRI-Wellcome Trust program and the University of Oxford. 
The study compiles advice from ministers of health, heads of national malaria control programs, academics, and community leaders across 14 African countries, all of whom offer critical insights about important challenges and opportunities in the fight against the disease. 
One of the study’s clearest takeaways is that we need to arm ourselves against the rising threat of drug and insecticide resistance by investing in research and development for next-generation antimalarial treatments. 
Malaria-bearing mosquitoes have developed a resistance to commonly used insecticides in 61 countries around the world. 
And in Southeast Asia, some strains of the malaria parasite itself have begun to develop a resistance to artemisinin, the basic component in standard treatments. 
Without a concerted response from the global health community, drug-resistant strains of malaria could spread to Africa and cause more than 100,000 new deaths per year. 
To avert this outcome, we must invest more in innovative public-private partnerships like GAVI, the Medicines for Malaria Venture, and the Wellcome Trust, all of which are working to develop new prevention and treatment tools. 
Another key insight from the study is that we need to make better use of the tools we already have. 
A child dies from malaria every two minutes, on average, yet only one in five infected children receives the appropriate treatment. 
Nearly a decade ago, Novartis helped develop the gold standard in pediatric antimalarial medicine, and we have donated more than 350 million doses since 2009. 
But the persistence of deaths from malaria shows that treatment is not reaching every child in need. 
Clearly, we need to expand access to medicine, not just through ad hoc measures, but by building the capacity of health-care systems. 
That is why the next chapter of global health development must focus on improving the delivery of care. 
Since 2000, the global health community has saved millions of lives by responding to specific epidemics like HIV, tuberculosis, and malaria. 
But these efforts must now be fully integrated into national health systems to ensure that all patients are consistently receiving high-quality care. 
Progress will require eliminating shortages of doctors and nurses, adopting electronic recordkeeping, and strengthening the availability and quality of primary care. 
These measures would help not just in the fight against infectious diseases, but also in the ongoing effort to treat chronic diseases, which are imposing an additional disease burden on many developing countries. 
Needless to say, improving health-care systems will require more resources and firm leadership, particularly in the countries most affected by malaria. 
And, as almost all of the study participants made clear, we need to move beyond traditional donor-funding mechanisms to tap into domestic resources. 
Ghana is one of the countries that is leading the way on this front. 
In response to dwindling donor funds, the Ghanaian government brought the country’s private-sector leaders together to launch the Ghana Malaria Foundation, which currently is working to fill urgent funding gaps, but will eventually help lead a sustainable, domestic effort to eliminate malaria from the country. 
This is a challenging moment in the fight against malaria. 
But it’s also a moment of opportunity. 
For its part, Novartis recently announced that it will invest more than $100 million in antimalarial R&D over the next five years, to help contain emerging resistant strains of the disease. 
Our focus now is on completing clinical trials for two promising new antimalarial drug candidates. 
While these therapies are being developed, we are also working on a strategy to ensure that patients in malaria-endemic countries can afford them, and to improve the effectiveness of our response by identifying areas where malaria takes the greatest toll. 
The fight against malaria has been a multi-decade marathon. 
Through the United Nations Sustainable Development Goals, the world has formally committed to ending the malaria epidemic by 2030. 
That objective is within sight, but we cannot count on our current approach to carry us across the finish line. 
Rather, we need to listen to those on the front lines and heed their calls for a renewed commitment to ending malaria. 
By investing in next-generation tools and building sustainable health-care systems, we can consign this disease to the history books once and for all. 

Malaya and Sri Lanka: Communal Politics or Communal War? 
Sri Lanka's bitter war of terror - one that practically invented the infamy of the suicide bomber - had been showing signs of abating of late. 
But a bitter power struggle between Sri Lanka's President Chandrika Kumaratunga and Prime Minister Ranil Wickremesinghe, and a schism among the rebel Tamil tigers, now threatens to reignite the violence. 
Their political duel was aggravated recently when the President, wary that her prime ministerial rival was "too soft" in dealing with the rebel Tamil Tigers, sacked three ministers and took over their portfolios. 
Now she has dissolved parliament and set new elections for April, three years before they are due. 
Having lived through the Malayan war of 1947-1960, I often wonder why Sri Lanka's war has been so much more difficult to end. 
On the surface, much about those two wars seem similar. 
In Malaya, ethnic Chinese fought British and Malay regiments and police, which is roughly comparable to the Tamils' fight against the Sinhalese in Sri Lanka. 
Like the Tamil Tigers, the Malayan Communists were also damned as terrorists, but the casualties they inflicted were small compared to the mass killings caused by both sides in Sri Lanka's war. 
Back then, Malaysia's ethnic tensions produced communal riots in which both Chinese and Malays were killed. 
These, however, were never allowed to degenerate into the outright communal slaughter that the war in Sri Lanka has often produced. 
Could Sri Lanka have learned anything from the Malayan experience? 
Could the Malayan military strategy to contain the rebellion have been imported? 
British experts from the Malayan emergency tried to help the Americans in Vietnam - obviously without success. 
Of course, one reason for that failure is that the South Vietnamese were not different enough from the North Vietnamese for the Malayan formula of identifying and isolating rebel communities by race to work. 
But Sri Lanka's war, with its ethnic origins, is closer to the Malayan experience and so this strategy could, perhaps, have been tested. 
A second similarity comes from the fact that the British were the imperial power in both countries. 
At independence, national leaders in both countries inherited similar sets of laws and administrative practices. 
Indeed, at the time Ceylon (now Sri Lanka) achieved independence, it was far more committed to democracy and the common-law legal system than Malaya. 
So why did multi-communal politics ultimately work in Malaya, and then in both Malaysia and Singapore, and fail so badly in Ceylon? 
One key reason must be the historical experience of the Sinhalese. 
For two thousand years, they had to defend themselves against attacks by expansionist Tamil kingdoms from the Indian mainland. 
As I traveled around the island admiring its ancient capitals, notably the ones sacked by Tamil kings, and Buddhist shrines set up to counter the impact of Hinduism, I began to understand the traumas endured by the Sinhalese. 
Sadly, the Tamils now living in the Jaffna districts in the northern and eastern parts of the island are probably descended from Tamils who were also victims of the same external attacks. 
Another factor arose from the fact that Tamils, on the whole, had been open to a succession of Portuguese, Dutch, and British administrations from the 16th century onwards, while most Sinhalese lived under their own king in the Kandyan kingdom until the 19th century. 
In particular, the Buddhist priests, who are the guardians of the faith and have wielded much influence in Sri Lanka politics since the mid-1950's, were the least touched by foreign rule. 
They are determined to limit Hindu Tamil power in Sri Lankan affairs and encourage the country's leaders to make few concessions to Tamil autonomy. 
Furthermore, the degree of rigidity in inter-ethnic negotiations since the rise to power of the Bandaranaike family (of which the current President is a member) was accompanied by a series of ideological struggles among Sinhalese politicians, not least those led by various socialist and communist parties. 
This ongoing disunity among the Sinhalese contributed to making Sri Lanka's governments much more fragile than those that succeeded the British in Kuala Lumpur and Singapore. 
What was decisively different between Ceylon and Malaya, however, is found in the fact that, in Ceylon, both major communities consider themselves to be natives, having both lived on the land they hold for over twenty centuries. 
In contrast, the Malay Peninsula, including the island of Singapore, was the land of the Malays (Tanah Melayu) before the first Chinese and Indian immigrants came and settled there. 
The British, who did not depose the Malay rulers as they did the Singhalese king in Kandy, made sure that the native position of the Malays was constitutionally secure from the start. 
Once the Chinese recognized their place as newcomers, they had to accept that becoming full nationals of the new nation state was a status that needed to be earned. 
Although most Chinese in Malaysia now feel that they deserve the full rights of citizenship, they have not insisted on absolute equality. 
In any case, they never claim to be indigenous to any particular locale, not even in Singapore, where ethnic Chinese make up three-quarters of the population. 
Sri Lanka's tragedy reminds us how many things can go wrong when old Asian polities seek to establish modern nation states. 
It becomes even more difficult when the complex historical baggage calls for sensitivity and tolerance while the protagonists are determined to see every concession as surrender. 

Will Malaysia’s Islamization Change Course? 
PENANG – Malaysia is just a few months or even weeks away from its most contentious election in decades. 
Mahathir Mohamad – Malaysia’s longest-serving prime minister, whose rule ended in 2003 – is, at 92, working with opposition figures he once repressed to prevent his former protégé, the controversial Prime Minister Najib Razak, from securing another term. 
But breaking the 61-year winning streak of Mahathir’s former party, the United Malays National Organization (UMNO), will not be easy. 
In fact, the pundits are still betting on Najib, with one pollster predicting that the incumbent could regain a two-thirds parliamentary majority, enabling him to amend the constitution. 
Mahathir has just a few months to change the political dynamic, by leading the opposition coalition, Pakatan Harapan (PH), and replacing the Pan-Malaysia Islamic Party (PAS) with his new party, the Malaysia United Indigenous Party (PPBM), as the primary alternative to UMNO. 
While the PAS has only about 15% electoral support, it has managed to push the UMNO to implement elements of its nationalist-religious agenda. 
A strong enough showing by PH in the next election, however, would expose the PAS as politically dispensable, potentially freeing Malaysia from a toxic game of Islamist one-upmanship. 
The impact of that game should not be underestimated. 
In recent years, religious intolerance has been on the rise in once-secular Malaysia. 
For example, the Arabic word for God, Allah, widely used by Arab and Indonesian Christians, is now reserved for Muslim use only. 
More alarming, the Home Ministry has banned a wide range of books, from the Indonesian translation of Charles Darwin’s On the Origin of Species to the writings of the Islam-friendly Western scholars John Esposito and Karen Armstrong. 
The rise of a strict and exclusivist Islam in Malaysia reflects international trends and domestic dynamics. 
Ethnic-majority Malays – who were marginalized during colonial times, but now enjoy constitutionally guaranteed preferential treatment in the economy and education – must, by definition, be Muslim. 
The persistence of their favored status hinges on the UMNO’s political dominance, or so UMNO claims. 
While early UMNO leaders were anti-clerical, the party’s success in eliminating its leftist and liberal rivals left PAS as the face of the Malay opposition. 
When the modernist Mahathir came to power in 1981, Islamism became the PAS’s most effective ideological weapon against the UMNO. 
And, indeed, the PAS leader, Hadi Awang, then a young and charismatic cleric, advocated a radical stance, labeling any Muslim who supported the UMNO an “infidel,” because the UMNO government had supposedly “perpetuated the colonial constitution, infidel laws, and pre-Islamic rules.” 
Hadi’s message helped to create a deep divide between the two “kinds” of Muslims, to the extent that villages would have two mosques, two cemeteries, and two clerics to lead prayers and officiate at ceremonies. 
But where Hadi did the most damage was in undermining the legitimacy of Malaysia’s post-colonial state and social structures. 
When Malaysia was under British rule, it faced mass immigration of ethnic Chinese and Indians, and the emergence of a Christian native minority on the island of Borneo. 
From a Muslim nationalist’s perspective, pluralism – together with secularism and democracy – were colonial impositions. Full decolonization would demand restoration of the dominance of Islam and Muslims. 
According to this narrative, the Ottoman Empire offers a model of segregated, unequal, but peaceful co-existence of multiple ethno-religious communities. 
Minorities lived autonomously in their “millets,” not as equal citizens, but as “dhimmis” (protected minorities). 
Having once championed the establishment of a full-fledged Islamic state, the PAS now demands at least expanding Sharia law and elevating the status of the Syariah court system, which now has limited jurisdiction over Muslims’ personal and family matters, to that of the civil courts. 
As the PAS’s brand of Muslim religious nationalism has increasingly overridden the UMNO’s Malay ethno-nationalism, these goals have gained the support of a growing number of Muslims. 
While not known to be religious, Mahathir shrewdly co-opted Hadi’s more charismatic and visionary contemporary, Anwar Ibrahim, in 1982 to spearhead the UMNO’s own Islamization projects. 
From Islamic higher education to Islamic banking to religious bureaucracy, Mahathir and Anwar stole the PAS’s religious thunder – that is, until the UMNO split. 
In 1998, Mahathir imprisoned Anwar, who had tried to replace him. 
After that, the PAS absorbed many of Anwar’s followers, expanding its influence from its stronghold in the north to the entire country. 
Since the 2013 election, when Najib lost the popular vote but clung to power, thanks to electoral gerrymandering, he has worked to bring Hadi on side, for example, by facilitating the potential introduction of harsh hudud punishments (mandated by God under Islamic law) for crimes like adultery, drinking, and apostasy. 
It was a Machiavellian masterstroke that not only drew the PAS out of the opposition coalition, but also led Hadi to defend the scandal-plagued Najib. 
The PAS has announced plans to contest about 60% of parliamentary constituencies. 
This may siphon Malay votes from PH, giving the UMNO many narrow victories. 
If the turnout among Malays is low, PH will suffer more than Najib, who could end up winning more seats with even fewer votes than in 2013. 
As for the PAS, its continued political relevance hinges on eliminating the threat posed by Mahathir and its own splinter party, Amanah, formed by pro-Anwar moderates. 
If Mahathir cannot secure one-third of the seats in parliament, the PAS can claim that it is indispensable, even if it loses every constituency. 
In such a scenario, no Malay opposition leader would dare denounce the PAS’s Muslim nationalism. 
The UMNO, despite its electoral victory, would have even less of the moral courage needed to block the PAS agenda. 
If Mahathir does secure one-third of the parliament, Malaysian politics will undergo significant changes, even if the UMNO remains technically in charge. 
If Amanah can supplant the PAS as the main Islamic party, the trend toward religious extremism would likely be reversed. 
And if the PPBM is established as a rival defender of Malays’ favored status, the UMNO would lose its monopoly on the issue, making Malay politics more competitive. 
So far, Malaysia’s nonagenarian comeback kid has been making inroads in many UMNO and PAS constituencies. 
But Malays alone will not decide the outcome of his battle with the PAS and Najib. 
As many marginal constituencies are ethnically mixed, low turnout among non-Malays may help the PAS – and hurt Malaysia. 

Malaysia Goes Islamic 
SINGAPORE – In Malaysia’s current political climate, it is no longer possible to distinguish Islamic radicals from Islamic moderates. 
Despite official boasting about the country’s diverse population and commitment to pluralism, Islam and the government have essentially merged. 
For two decades, the ruling United Malays National Organization (UMNO) government invested enormous public resources in building up a network of Islamic institutions. 
The government’s initial intention was to deflect radical demands for an extreme version of Islamic governance. 
Over time, however, the effort to out-do its critics led the UMNO to over-Islamicize the state. 
The UMNO’s program has put Sharia law, Sharia courts, and an extensive Islamic bureaucracy in place, a collective effort that has taken on a life of its own. 
The number of Islamic laws instituted has quadrupled in just over ten years. 
After Iran or Saudi Arabia, Malaysia’s Sharia court system is probably the most extensive in the Muslim world, and the accompanying bureaucracy is not only big but has more bite than the national parliament. 
Islamic laws in Malaysia are based on religious doctrine but codified and passed as statutes by state parliaments. 
Not much debate attends their enactment, because a fear of heresy keeps most critics from questioning anything deemed Islamic. 
While the UMNO still trumpets its Islamic advocacy, the party is facing difficult choices, particularly as it wishes to maintain foreign investment in an increasingly polarized environment. 
For example, Minister of Home Affairs Hishamuddin Hussein recently held a press conference to support Muslims who demonstrated against the construction of a Hindu temple in their neighborhood. 
The protestors paraded a severed, bloodied cow’s head in the street, then spat and stomped on it. 
This was an offense to Malaysia’s Hindus, who consider the cow a sacred animal. 
Just a week earlier, a young mother by the name of Kartika was sentenced by Malaysia’s Sharia court to six lashes by cane and fined $1500 after she was caught drinking beer at a hotel. 
Although the sentence is still in limbo, Hussein publicized his acceptance of the punishment by inviting the official floggers to his office to demonstrate how an Islamic caning would be carried out. 
They used a chair as a mock target, leaving him satisfied that Islamic caning can be appropriately used as a punishment for women. 
Ironically, Hishamuddin Hussein is far from an Islamic hard-liner. 
The son of Malaysia’s third prime minister and a cousin of the current prime minister, he is widely considered modern, moderate, and cosmopolitan. 
A true hard-liner is Nik Aziz, the chief minister of Kelantan state, who is also the spiritual leader of Malaysia’s largest Islamic party, PAS, which now controls two state governments. 
However, Aziz opposed the anti-Hindu protest, even calling a group of anti-Muslim protestors in the United Kingdom more civilized in their approach. 
Hence, it is no longer accurate to think of the PAS as a fundamentalist party and the UMNO as moderate. 
Party strategies are leading them in unexpected directions. 
The UMNO’s more radical turn is being matched by the PAS’s attempts at moderation. 
The PAS is aiming for the most unlikely of voters: non-Muslims, who account for 40% of Malaysia’s population and are increasingly alienated from the UMNO. 
The UMNO, meanwhile, is intent on dividing the opposition coalition, of which the PAS is a member. 
The coalition is currently led by former Deputy Prime Minister Anwar Ibrahim, and has picked up political momentum from real gains in last year’s general election. 
Concerned by its losses, the UMNO has staked a claim to the defense of Islam in Malaysia. 
The “cow head” protest, which was led by UMNO members, quickly fuelled racially-charged manipulation of public sentiment. 
The formula is simple: portray Islam as being threatened by infidels, and then have the UMNO ride to the rescue of the besieged Muslim community. 
The caning of Kartika, on the other hand, is not an example of political manipulation, and for this reason is perhaps even more worrisome. 
Her sentence was roundly supported by modernist Muslim intellectuals, who insisted that the punishment was justly applied and cannot be questioned because it has divine sanction. 
These are not politicians, but former idealists who are happy that their goals of Islamicizing the state are being realized. 
Most are anti-UMNO and support the PAS. 
As a result, the UMNO finds itself squeezed between an Islamic lobby that presses for greater “Talibanization” of the country and the rising voices of international critics, who cannot be ignored, because the party needs both radical supporters and foreign investors to stay in power. 
Balancing these two constituencies is becoming increasingly difficult for the UMNO. 
Islamic politics has now taken on a life of its own. 
But the opposition will also be forced to figure out the role of religion in Malaysia, if ever they get an opportunity to form a government. 
As a young Islamic radical, Anwar Ibrahim used to ask: How does one Islamicize government? 

Malaysia’s Opposition Reborn 
In Malaysia’s recent elections, opposition parties managed their strongest showing since the country gained its independence from Britain in 1957, cutting the ruling coalition’s parliamentary majority to below two-thirds. 
Where the country’s newly invigorated democracy goes from here rests with one man, Anwar Ibrahim, the deputy prime minister sacked by former premier Mahathir Mohamad and later jailed. 
Anwar can finally make the opposition a credible check on the National Front ruling coalition, but knows that he will never become prime minister this way. 
No one, after all, expects the opposition to win enough seats to form a government in the conceivable future. 
He can allow himself to be wooed back by his former party, the United Malays National Organization (UMNO), the National Front’s leading member. 
UMNO is widely believed to have held talks with Anwar before. 
Now, more than ever, it needs Anwar to reestablish its credibility. 
And, to become prime minister, Anwar needs UMNO. 
Arguably, being inside UMNO and the government would allow Anwar to better institute the reforms he has so ardently advocated. 
But, before all that, Anwar needs to get himself elected to parliament again. 
Because of his prison term, Anwar was not able to run in the latest election. 
Instead, he acted as the de facto leader of a loose alliance between the three leading opposition forces – the Democratic Action Party (DAP), the Justice Party, and the Islamist PAS. 
Political restrictions on Anwar, however, end next month, and an MP from his Justice Party – probably his wife – is expected to step aside to allow him to run in a by-election. 
If Anwar were to marry his leadership and charisma to the opposition’s newfound heft in the federal legislature – 82 MPs, compared with 20 in the last parliament – serious policy alternatives to the government’s might be expected. 
Until now, the opposition has chiefly acted as an irritant, and voters viewed debates as entertainment, rather than as exchanges that informed policy. 
For the same reason, policy platforms have never been important for the opposition in elections. 
Many who voted for the DAP on Saturday, for example, are unlikely to have known or cared about what the party stood for. 
Traditionally, people voted for the DAP or the Justice Party to show their displeasure with the National Front. 
Indeed, if ideas were important, a leftist party like the DAP would have found it difficult to cooperate with the PAS. 
But cooperate they did. 
All this changes now that the National Front no longer has a two-thirds majority – which had allowed it to amend the constitution 40 times in 50 years. 
Parliament now will have to pay attention to any serious policy that the opposition proposes. 
But serious opposition will require serious leadership. 
Strong leadership also is needed to protect the interests of the five states in which the opposition has now won control for the first time. 
Because the federal government disburses fiscal allocations to Malaysia’s 13 states, the government will be tempted to squeeze opposition-held states. 
Thus, they will need strong advocacy at the federal level to ensure they receive their fair due. 
What makes the National Front’s loss particularly dramatic has been its defeat in the state legislatures of Penang, Selangor, Perak, and Kedah – large states with important industrial bases. 
(Kelantan state, however, was always expected to continue to be held by PAS.) 
Urban and middle-class voters such as those in Penang – a predominantly Chinese state with strong opposition sentiment – had always voted to keep the state legislature under the National Front in order to ensure continued funding, while sending opposition candidates to parliament to “pester” the National Front there. 
This calculation has been abandoned, reflecting deep dissatisfaction with Prime Minister Abdullah Badawi’s administration and impatience for change. 
Malaysia is now at a crossroads. 
For five decades, its democracy has not been premised on a daily test of ideas – whether between political parties or through grassroots engagement – that is then confirmed at the ballot box. 
There is still a newfound opportunity to improve governance, but only Anwar has the experience to provide that direction, because no one else in the opposition has worked in government at such a senior level as he has. 
That said, it is also likely that the UMNO, in its hour of crisis, will try to recruit Anwar. 

India’s Choice in the Maldives 
NEW DELHI – The Maldives – that beautiful Indian Ocean country comprising more than 1,000 coral islands – is known the world over as a tranquil and luxurious travel destination. 
But the country is now being roiled by a political crisis so severe that international advisories are cautioning against travel there. 
The rule of law in the Maldives has been steadily deteriorating ever since President Abdulla Yameen came to power in 2013. 
The situation escalated sharply earlier this month, when Yameen refused to comply with the Supreme Court’s unanimous order quashing the convictions, which he had engineered, of nine opposition figures – including the exiled former president, Mohamed Nasheed – on terrorism charges. 
Instead of freeing those whose sentences were nullified, Yameen declared a state of emergency and jailed two of the Supreme Court’s five judges, including the chief justice. 
To be sure, authoritarianism is not new to the Maldives. 
Indeed, Nasheed is the only democratically elected, non-autocratic president the country has had since it gained independence from Britain in 1965. 
His tenure lasted just over three years, until, in 2012, he was forced at gunpoint to resign. 
But the Maldives’ sordid politics is having an increasingly far-reaching impact, not least because it is closely linked to radical Islam. 
On the day Nasheed was overthrown, Islamists ransacked the Maldives’ main museum, smashing priceless Buddhist and Hindu statues and erasing all evidence of the country’s pre-Islamic roots. 
On a per capita basis, the Maldives has sent the highest number of foreign fighters to support terrorist groups in Syria and Iraq. 
Moreover, the Maldives sits astride critical shipping lanes in the Indian Ocean, making it vital to security in the region. 
As a result, the country’s deteriorating political conditions are increasingly capturing the international community’s attention. 
Democratic powers, from the United States to India, are calling upon the United Nations to intervene in the crisis, while China, seeking to advance its own interests in the Indian Ocean, is defending the graft-tainted Yameen. 
The increasingly close relationship between China and the Maldives represents a significant shift from the past, when India was the country’s primary regional partner. 
Maldivians are mainly of Indian and Sri Lankan origin, and have strong cultural and economic ties to those countries. Their country has traditionally been viewed as part of India’s sphere of influence. 
But, in recent years, China has been eroding India’s influence in the Maldives, as part of its effort to build its “string of pearls”: a chain of military installations and economic projects aimed at projecting Chinese power in the Indian Ocean. 
Just as China recently secured the Sri Lankan port of Hambantota on a 99-year lease, it has, according to Nasheed, quietly acquired 17 islands in the heavily indebted Maldives for investment purposes. 
But, betraying its strategic objectives, China has also sent warships to visit the Maldives. 
If China, which has stepped up military pressure on India along their Himalayan frontier, turned one of the Maldivian islands into a naval base, it would effectively open a maritime front against India – a milestone in China’s strategic encirclement of its neighbor. 
The Maldivian crisis thus is a defining moment for India. 
Will India intervene militarily, as Nasheed and other Maldivian opposition leaders have requested, or will it allow Yameen to continue to enable China to pursue its strategic objectives in the region? 
There is some precedent for an Indian military intervention in the Maldives. 
In 1988, India snuffed out a coup attempt against the autocratic Maumoon Abdul Gayoom engineered by a Maldivian businessman with the aid of armed mercenaries, especially Sri Lankan Tamil separatists. 
Thanks to India’s swift military action, Gayoom would hold onto power for another two decades. 
Yet when the country’s first and only democratically elected president beseeched India in 2012 to rescue him from the Islamist forces laying siege to his office, India looked the other way. 
India’s government felt betrayed by Nasheed’s own burgeoning relationship with China. 
Not only had Nasheed awarded China its first infrastructure contracts; just three months before his ouster, he had inaugurated the new Chinese embassy in the capital, Malé, on the same day that India’s then-prime minister, Manmohan Singh, arrived for a regional summit. 
Today, an Indian intervention could be dicey, not least because no legitimate authority is inviting India to send in forces. 
Indian paratroopers could gain effective control of Malé within a few hours. 
But what would the endgame be? 
Amid rising Islamist influence and shifting political allegiances among the handful of powerful families that dominate the Maldives’ economy and politics, finding reliable allies committed to – much less capable of – protecting democratic freedoms would prove a daunting challenge. 
Moreover, even if Yameen were ousted and the country held a democratic election, it is unlikely that China’s influence could be contained. 
As the experiences of Bangladesh, Myanmar, Nepal, and Sri Lanka illustrate, China has outmaneuvered India diplomatically, even when dealing with democratically elected governments. 
Indeed, it did so in the Maldives itself, with Nasheed. 
Because the country’s debt will continue to rise, regardless of its leadership, China will retain its favorite source of leverage. 
India, with its proximity and historical ties to the Maldives, may seem to hold a strong hand. 
But it has a lot to lose if it aggravates an already volatile political situation in its maritime backyard by intervening militarily. 
India’s best option is to hold out a credible threat of military action, while imposing, together with other democratic powers, economic sanctions that undercut support for Yameen among the Maldivian elite, many of whom own the luxury resorts that now have far too many empty rooms. 
With them on side, perhaps the international community would be able to ensure that the presidential election scheduled for later this year is fair and inclusive – and supervised by the UN. 
That is the only way to end the crisis, and restore peace to an Indian Ocean paradise. 

Mali and the Islamic Reformation 
PARIS – Mali is a landlocked West African country of 15 million people, covering 1,240,000 square kilometers (478,800 square miles), three-quarters of it desert. 
In the fourteenth century, the powerful Mali Empire included parts of modern-day Senegal, Guinea, and Niger. 
Defeated and divided, it became a French colony in the nineteenth century, regaining independence in 1960. 
Mali’s population is diverse: desert nomads, notably Tuaregs, in the north, and a majority of sedentary black populations in the south. 
Many languages are spoken, but Islam, to which almost 95% of the population adheres, is a unifying factor. 
Agriculture is the main economic activity, notably in the vast internal delta of the Niger River, home to many tribes, including the Dogon, a people remarkable for their sculpture and architecture. 
Long a military dictatorship, Mali became an African democratic success story from 1991 to 2012, before a coup crippled its rudimentary public institutions. 
In the north, Tuaregs traveling to Mauritania, Algeria and Niger, were particularly weakened by persistent drought and the collapse of the caravan economy. 
Many have turned to weapons, slave, or gold trafficking; some are demanding independence. 
In the wake of the ferocious religious war that tore Algeria apart in the 1990’s, a great number of Muslim fundamentalist Arabs fled south to the vast Sahara that covers part of Mali. 
Then, in 2011, Western-backed regime change in Libya toppled Colonel Muammar el-Qaddafi and drove more fundamentalists to flee into the desert – but not before they had gotten their hands on a significant part of Qaddafi’s heavy weaponry, as well as many vehicles. 
These fundamentalists, becoming bandits of sorts, came to terms with the nomadic traffickers. 
All, including the traffickers, ended up embracing the fundamentalist rhetoric of revenge against infidels. 
In January 2013, these groups formed a convoy of several hundred pick-ups and ATVs, armed with heavy machineguns. 
The desert cities of Gao, Kidal, and Timbuktu quickly fell to them. 
Islamic monuments, including some of Timbuktu’s glories, were destroyed. 
Sharia law was applied; women who were never forced to do so before had to wear the veil. 
The convoys even threatened Bamako, the capital, composed mostly of black Africans. 
In a panic, acting President Dioncounda Traoré, a colonel from the south, called upon the French authorities to enforce a bilateral defense agreement, though he had contributed to the coup that drove the legally elected former president, Amadou Toumani Touré, into exile, causing the state to collapse and straining relations with France. 
France has no interest in Mali other than the protection of its citizens and the stability of the Sahel region. 
Indeed, France withdrew all of its permanently based military forces from Mali years ago. 
And, with fewer than a thousand French citizens still living in Mali, even its pragmatic interest is relatively slight. 
Although isolated, French President François Hollande courageously decided to respond firmly to Traoré’s call for help. 
In France, everyone understood and approved. 
Few suggest that French military intervention was a means to recapture its colonial empire. 
And the United States – indifferent to the integrity of the Malian state and the welfare of its citizens in normal circumstances – was aware of the possibility that Mali’s vast territory could fall under fundamentalist/terrorist control. 
So it decided to take part in the transport, communications, logistical, and intelligence components of the French-led operation. 
For similar reasons, Great Britain, though allergic to any common European defense policy, offered two planes. 
As for Europe, it did nothing – which was foreseeable. 
France performed marvelously. 
In just a few days, it managed to send in nearly 3,000 men, heavily armed and efficiently motorized. 
Gao, Kidal, and Timbuktu were recaptured; 
Bamako was saved. 
The fundamentalists, having lost most of their vehicles and arms to French aerial bombing, fled headlong into the desert. 
French troops are now set to return home. 
But, with thousands of fundamentalist killers in the desert, now poorly motorized but still armed, should they do so? 
Mali, of course, is not the only country facing a fundamentalist insurrection. 
Such violence is typical of Islam’s contemporary crisis. 
The learned, cultured, and radiant traditions of earlier centuries seem to have vanished. 
Having missed their economic takeoff, many Muslim-majority countries appear open to the call of Islamist fundamentalism. 
These countries now require painful, far-reaching reforms to attain economic prosperity, a goal that presupposes cultural change as well. 
In Christianity, the Reformation was essential to forging democracy and capitalism. 
But, in contemporary Islam, the powerful have always managed to eliminate would-be reformers. 
As a result, the Islamic world is mostly weak, partly colonized, humiliated, and economically powerless. 
Oil benefits a handful of princes. 
Despite their travails, only a few thousand of the world’s 1.5 billion Muslims have embraced the extremist project of killing infidels and moderates. 
But, amid the resulting political and religious confusion – and, because religious authorities remain silent in the face of Islamist rhetoric – no Muslim state can solve its problems domestically. 
External help is needed. 
Mali was the first to ask for it, with local religious authorities supporting the government’s request for military assistance from France. 
Now Mali’s army must be reconstituted, its police trained, and its government restructured. 
This, too, will be possible only if religious authorities back the necessary reforms. 
But, as in Mali, the task of assisting reform in Muslim states is not for France alone. 
It is the responsibility of the West as a whole. 

The Many Faces of Malnutrition 
ABUJA – If you happen to be sitting with two other people right now, chances are one of you is malnourished. 
And you might not even know it. 
Yes, that’s right: one in three people worldwide suffer from malnutrition, and it does not always look the way one might expect. 
From the two billion adults who carry too much weight to the 159 million children with stunted growth, malnutrition takes many forms. 
As a doctor, I see women who appear healthy, but who suffer from anemia, owing partly to low iron intake. 
And I see relatively able-bodied men with big bellies, which elevate their risk for heart disease. 
West Africa is home to some of the world’s highest rates of malnutrition. 
That includes the most obvious “face” of the condition: roughly 9% of West African children under five are wasted, or too thin for their height. 
At its most severe, wasting is fatal. 
But West Africa also suffers from many other forms of malnutrition. 
One-third of children under five in the region are stunted (too short for their age), a condition with irreversible effects on cognitive development. 
According to the Cost of Hunger in Africa studies, stunted children across the continent receive up to 3.6 fewer years of schooling than well-nourished children. 
The problem does not affect only children. 
Half of all women of reproductive age in West Africa are anemic. 
Not only does anemia contribute to almost one-fifth of global maternal deaths; babies born to anemic women are also more likely to be underweight. 
The result is a vicious cycle of poor health. 
Perhaps the least obvious face of malnutrition is not undernutrition, but excessive weight and obesity. 
Today, 31% of adults in West Africa are overweight or obese. 
In Nigeria, my home country, the share is 33%. 
Beyond heart disease, that extra weight raises the risk of diabetes, high blood pressure, stroke, and more. 
Malnutrition also has serious economic consequences. 
The 2016 Global Nutrition Report estimates that, across Africa, malnutrition results in a loss of 11% of GDP – more than the annual losses brought about by the 2008-2010 global financial crisis. 
On an individual level, adults who were stunted in their childhood – a condition that has affected nearly 70% of the working population in some areas – often face a diminished capacity to work and earn a living, owing to the developmental challenges they faced. 
The effects of wasting on human development and economic progress are almost as profound. 
The imperative to tackle malnutrition could not be clearer. 
Yet progress has been mixed, particularly in West Africa. 
To be sure, some countries have had impressive success, thanks to decisive government action. 
In just a decade, Ghana cut stunting by nearly half, partly through investment in areas that affect nutrition, such as agriculture and social protection. 
Niger’s government halved the number of deaths of children under the age of five over a similar period, by making specific budget and operational decisions to tackle severe wasting. 
But other countries have hardly made a dent in the malnutrition problem. 
In Togo, stunting rates have barely moved in the last decade. 
In Mali and Guinea, wasting is on the rise. 
And these countries are not alone. 
Many other African countries may be poised to start writing their own success stories. 
Côte D’Ivoire has positioned itself to reduce stunting, while Senegal is close to being on track to address wasting. 
In both countries, extra investment – both political and financial – could have an outsize impact. 
Yet donors and governments remain reluctant to provide the needed funding. 
According to the 2016 Global Nutrition Report, donor funds for nutrition-focused interventions are stagnating at $1 billion. 
Nine West African governments spend, on average, just over 1% of their budgets on nutrition. 
And yet nutrition is one of the best investments we can make, with every $1 invested in nutrition yielding $16 in returns. 
In many countries, such as India, obesity-related illnesses like heart disease are consuming up to 30% of families’ annual incomes. 
Unless African governments start making smart choices and smart investments, the continent may face a similar fate. 
Many African governments have set out ambitious goals relating to security, stability, and long-term economic prosperity. 
Nutrition is critical to achieving any of them. 
It is central to our continent’s development, and should thus be a high priority for our policymakers. 
Millions of lives depend on it. 

Man or Monster? 
PHNOM PENH -- The appearance of the first former Khmer Rouge leader in a special hybrid court established in Cambodia to bring that movement’s surviving leaders to justice provoked a question on which the tribunal’s integrity will depend: should an accused mass murderer be released from prison pending his trial? 
Kaing Guek Eav, commonly known as “Duch,” presided over the deaths of more than 14,000 people at S-21, a former Phnom Penh high school turned into a torture center. 
He is one of five former senior Khmer Rouge leaders who will be made to answer for their roles during Pol Pot’s genocide, in which an estimated 1.7 million Cambodians perished. 
Until recently, Duch was the only one imprisoned, after being exposed in 1999. 
The court – with its improbable blend of Cambodian and foreign judges and attorneys as well as laws – is meant to be a model for judicial reform and independent justice in a country where impunity has long been the rule. 
The five red-robed judges who preside over the Extraordinary Chambers in the Courts of Cambodia (the tribunal’s official name) are the final arbiters of Duch’s detention, but the question they are now considering belongs as much to the people of Cambodia as it does to the court. 
Should mass murderers be afforded the same rights as everyone else? 
One of my aunts has a strong opinion on the matter. 
Khmer Rouge soldiers beat her father to death, and she remembers being shot at for sport by communist cadres as she and dozens of other peasants scuttled up a mountainside. 
She now lives one block from S-21. 
“Human rights are for humans,” she said emphatically when I asked her about Duch's case. 
“He is a monster.” 
I once believed that, too. 
When I first visited Duch’s house of horrors in 1990, I was 15 and full of wonder about the country where I was born but had never lived. 
My family escaped the Khmer Rouge on April 17, 1975, the day they claimed victory. 
When my mother and I journeyed home to reunite with relatives who had survived the genocide, S-21 (also known as Tuol Sleng) was among our first stops. 
By then, the torture facility had been turned into a museum. 
I remember feeling claustrophobic as I walked down its narrow halls and into classrooms turned into crude cellblocks. 
The air was stale but heavy with the stench of death in interrogation chambers, barren save for a single bed frame, shackles, and a chair. 
Flecks of dried blood peeled up from the floor. 
This was a place where fingernails of countless victims were ripped out, where others were strung upside down and dunked in barrels of water, where many were brutalized with metal prongs and batons. 
This was a place of utter brokenness. 
This was Duch’s place. 
Mostly, I remember the hundreds of black and white mug shots of prisoners and victims that covered every inch of the walls – a ghastly montage of human suffering that haunts me to this day. 
I couldn’t help but think: this was somebody’s daughter, somebody’s son. 
This was somebody’s mother or sister or brother. 
Back then, I thought: What monster could do such things? 
Now, that monster was sitting in a courtroom, looking scared and meek as prosecutors catalogued his alleged war crimes. 
Sitting in the packed auditorium where snatches of Duch’s face flash by on a movie screen, I’m struck by what I see: a face that belongs to someone. 
This alleged perpetrator of unspeakable misdeeds is, like his victims, someone’s son, someone’s brother, someone’s father. 
This might have been only a fleeting thought had I not seen Duch’s family members, who attended the hearings. 
Hang Seav Heang, 28, described the defendant as a gentle man, a good father. 
One of his sisters said he was a caring, protective brother, and that she would always love him. 
Outside the courtroom and in the community, most of the Khmers I talked to were, like my aunt, quick to categorize Duch as something other than human. 
Duch must have thought much the same thing about his victims when he ordered them to their deaths. 
When we start to see each other as less than human, we respond with inhuman acts. 
It is this narrow, black-and-white view of humanity that has perpetuated a cycle of violence in Cambodia, where raging mobs beat to death robbery suspects and young mistresses suffer acid attacks by jealous wives. 
To say that Duch is a monster who does not deserve rights ignores the gray area between good and evil, between man and monster, where anything is possible. 
This trial is about that gray area, about that place in us all where morality decays and evil takes root and grows, the way mold prevails given the right conditions. 
Each of us carries this potential for rot. 
There is no dispute that Duch violated the rights of thousands of Khmers. 
But if the basic premise of these trials is to uphold human rights, then we are obliged to extend that same principle to Duch. 
What does it say to the country and the world if a court convened to mete out justice flouts the law? 
Isn’t lawlessness the plague we are finally trying to eradicate in Cambodia? 
The judges have offered no indication when they will make a decision. 
And no one would blame them for taking their time to consider their options. 
This is, after all, the court’s first test of fairness before the trials of Duch and four of Pol Pot’s other henchmen begin next year. 
We all want justice, but that justice should not come at the cost of our humanity. 


Trump’s Manafort Problem 
WASHINGTON, DC – As the first criminal trial of a major figure in US President Donald Trump’s 2016 election campaign got under way in Virginia last week, observers have wondered to what extent not only Paul Manafort, his campaign manager for a crucial period, but also Trump himself is in the dock. 
Manafort has been charged for his own alleged financial crimes – tax fraud, money laundering, and making false statements to investigators. 
Having earned many millions of dollars working for dictators and thugs around the world, including Ferdinand Marcos in the Philippines and Jonas Savimbi in Angola, in recent decades he made much of his fortune working for Russian oligarchs and the Russian-backed former president of Ukraine, Viktor Yanukovych. 
After Manafort and his minions helped Yanukovych defeat former Prime Minister Yuliya Tymoshenko in the 2010 presidential election, Yanukovych had her imprisoned on trumped-up charges, with help from a legal brief prepared – at Manafort’s bidding – by the prominent American law firm Skadden Arps. 
The case was handled by one of the firm’s partners, Gregory B. Craig, who had briefly served as President Barack Obama’s White House counsel. 
US Special Counsel Robert Mueller has referred Craig’s role to the US Attorney for the Southern District of New York for further investigation. 
Yanukovych was overthrown by a popular revolt in 2014 and fled to Russia. 
The prosecutors on Mueller’s team in the Virginia case opened the trial with a description of Manafort’s extravagant tastes, including a custom-made $15,000 ostrich-skin jacket (think leather that has caught the measles). 
He also paid nearly $20,000 for a python jacket, but the ostrich jacket, with white satin lining, caught the public’s imagination. 
Manafort also maintained several expensive homes – in northern Virginia, Brooklyn, the Hamptons, Palm Beach Gardens, and of course Trump Tower. 
While the judge would not allow photos of all this magnificence to be shown in the courtroom – noting, with some justification, that the purpose of stressing it was to embarrass the defendant – the point about Manafort’s greed and ostentatiousness was made. 
But the prosecutors’ real goal was to show that Manafort paid for these goods – nearly $1 million in suits from the world’s most expensive tailors, high-priced antique rugs, lamps, and electronic equipment – by wire transfers from offshore bank accounts, such as one in Cyprus. 
At least one supplier said that Manafort was their only customer who operated that way. 
Manafort’s attorneys, who appeared to have the weaker hand, tried to blame the suspicious transactions on his longtime deputy, Rick Gates, who, after being indicted, chose to cooperate with Mueller. 
But this defense – the adult equivalent of “the dog ate my homework” – quickly fell apart. 
Manafort’s former bookkeeper testified that he had been personally involved in these transactions, and an accountant testified that Manafort himself had altered his tax returns, hid income as loans (saving $500,000 one year), and failed to inform his accountants about his offshore accounts. 
Gates is to testify this week. 
When Manafort went to work on Trump’s campaign in late March 2016, all appeared normal. 
He had worked for previous mainstream Republican candidates such as Robert Dole, Gerald Ford, and Ronald Reagan; more important, he appeared to be the only traditional Republican operative willing to work for the candidate. 
He was also a former business partner of Republican operative Roger Stone, who remained close to Trump. 
(Mueller’s spotlight is now moving toward Stone.) 
But the Trump campaign vetted its new chairman less diligently than most people do when hiring a house cleaner. 
Manafort offered to work for Trump for free – he eagerly sought the job – but it turns out that he was dead broke at the time. 
There could be only one explanation: the Trump connection might turn out to be highly lucrative. 
Not only might Manafort attract future clients, but he could also help himself with his former wealthy Russian backers – most of them closely connected with the Kremlin – through the campaign itself. 
At the time he took the job, Manafort was indebted to the Russian oligarch Oleg Deripaska, an aluminum tycoon close to President Vladimir Putin, to the tune of $19 million. 
Deripaska, who is subject to US sanctions, had previously maintained a $10 million annual contract with Manafort. 
Like other Russian oligarchs, Deripaska is not known to deal gently with people who displease him. 
After he took the job, Manafort emailed a Ukraine-based employee, “How do we use [this] to get whole?” 
Manafort also offered to brief Deripaska about what was going on in the Trump campaign. 
Manafort’s role in the campaign was to help Trump sew up the nomination and run the Republican Party convention, at which Trump’s victory would become official. 
One matter under investigation is the Trump campaign’s role in ensuring that the Republican platform contained no provisions backing arms supplies for Ukraine – which mainstream Republicans supported, but Russia of course opposed. 
Manafort was forced out of the Trump campaign in August 2016. 
By this point, his relationship with Trump had unraveled (as most of Trump’s non-family relationships eventually do), the polls were moving against Trump amid internal chaos, and press reports pointed to off-the-books payments to him by pro-Russian Ukrainians. 
While Manafort’s trial – the first of two he faces – does not directly involve Trump (at least so far), it is believed to be one of the things agitating Trump, who has seemed even more unhinged than usual lately. 
It has compounded Trump’s sense that Mueller is closing in on him. 
A report by Mueller on Trump’s attempts to obstruct the investigation is expected soon – timed to fall well ahead of the US midterm elections in November. 
(Mueller wants to avoid any perception of political meddling like that created by former FBI director James Comey, who is widely seen as having hurt Hillary Clinton’s presidential campaign in 2016.) 
Under normal circumstances, an American politician would be in trouble for having employed a figure as compromised as Manafort. 
The ongoing Trump-Russia scandal ranks among the country’s most famous – including the Teapot Dome affair of the 1920s, the collapse of the energy giant Enron in the early 2000s, and more recently Bernie Madoff’s Wall Street Ponzi scheme – and it is all the more menacing for involving a hostile power. 
But the current circumstances are anything but normal. 
So far, Trump is talking as if he had barely met Manafort. 
But as Manafort’s trial unfolds, Trump will almost certainly have to change his story. 

Managing Big Data’s Big Risks 
NEW YORK – In the last 15 years, we have witnessed an explosion in the amount of digital data available – from the Internet, social media, scientific equipment, smart phones, surveillance cameras, and many other sources – and in the computer technologies used to process it. 
“Big Data,” as it is known, will undoubtedly deliver important scientific, technological, and medical advances. 
But Big Data also poses serious risks if it is misused or abused. 
Already, major innovations such as Internet search engines, machine translation, and image labeling have relied on applying machine-learning techniques to vast data sets. 
And, in the near-future, Big Data could significantly improve government policymaking, social-welfare programs, and scholarship. 
But having more data is no substitute for having high-quality data. 
For example, a recent article in Nature reports that election pollsters in the United States are struggling to obtain representative samples of the population, because they are legally permitted to call only landline telephones, whereas Americans increasingly rely on cellphones. 
And while one can find countless political opinions on social media, these aren’t reliably representative of voters, either. 
In fact, a substantial share of tweets and Facebook posts about politics are computer-generated. 
In recent years, automated programs based on biased data sets have caused numerous scandals. 
For example, last April, when a college student searched Google images for “unprofessional hairstyles for work,” the results showed mostly pictures of black people; when the student changed the first search term to “professional,” Google returned mostly pictures of white people. 
But this was not the result of bias on the part of Google’s programmers; rather, it reflected how people had labeled pictures on the Internet. 
A Big Data program that used this search result to evaluate hiring and promotion decisions might penalize black candidates who resembled the pictures in the results for “unprofessional hairstyles,” thereby perpetuating traditional social biases. 
And this isn’t just a hypothetical possibility. 
Last year, a ProPublica investigation of “recidivism risk models” demonstrated that a widely used methodology to determine sentences for convicted criminals systematically overestimates the likelihood that black defendants will commit crimes in the future, and underestimates the risk that white defendants will do so. 
Another hazard of Big Data is that it can be gamed. 
When people know that a data set is being used to make important decisions that will affect them, they have an incentive to tip the scales in their favor. 
For example, teachers who are judged according to their students’ test scores may be more likely to “teach to the test,” or even to cheat. 
Similarly, college administrators who want to move their institutions up in the US News and World Reports rankings have made unwise decisions, such as investing in extravagant gyms at the expense of academics. 
Worse, they have made grotesquely unethical decisions, such as the effort by Mount Saint Mary’s University to boost its “retention rate” by identifying and expelling weaker students in the first few weeks of school. 
Even Google’s search engine is not immune. 
Despite being driven by an enormous amount of data overseen by some of the world’s top data scientists, its results are susceptible to “search-engine optimization” and manipulation, such as “Google bombing,” “spamdexing,” and other methods serving parochial interests. 
A third hazard is privacy violations, because so much of the data now available contains personal information. 
In recent years, enormous collections of confidential data have been stolen from commercial and government sites; and researchers have shown how people’s political opinions or even sexual preferences can be accurately gleaned from seemingly innocuous online postings, such as movie reviews – even when they are published pseudonymously. 
Finally, Big Data poses a challenge for accountability. 
Someone who feels that he or she has been treated unfairly by an algorithm’s decision often has no way to appeal it, either because specific results cannot be interpreted, or because the people who have written the algorithm refuse to provide details about how it works. 
And while governments or corporations might intimidate anyone who objects by describing their algorithms as “mathematical” or “scientific,” they, too, are often awed by their creations’ behavior. 
The European Union recently adopted a measure guaranteeing people affected by algorithms a “right to an explanation”; but only time will tell how this will work in practice. 
When people who are harmed by Big Data have no avenues for recourse, the results can be toxic and far-reaching, as data scientist Cathy O’Neil demonstrates in her recent book Weapons of Math Destruction. 
The good news is that the hazards of Big Data can be largely avoided. 
But they won’t be unless we zealously protect people’s privacy, detect and correct unfairness, use algorithmic recommendations prudently, and maintain a rigorous understanding of algorithms’ inner workings and the data that informs their decisions. 

Transatlantic Trade-Offs 
LONDON – Almost two decades after the idea was first mooted, the United States and the European Union agreed last week to begin negotiating a Transatlantic Trade and Investment Partnership (TTIP). 
The partnership’s launch – which should occur at the beginning of 2015 – has been presented as a much-needed “deficit-free stimulus” that would boost US and EU GDP by 0.5% annually, while helping to increase employment on both sides of the Atlantic. 
While both parties aim to eliminate remaining tariffs on bilateral trade, they are particularly eager to reduce the thicket of non-tariff barriers – mainly competing technical and sanitary standards and regulations �� that have stifled development of the bilateral economic relationship. 
Closer regulatory cooperation may also help the US and the EU to confront what business leaders view as increasingly unfair competition from China both at home and abroad. 
But can the TTIP live up to the hype? 
Tellingly, the High-Level Working Group on Jobs and Growth, which was tasked with identifying the policies and measures that should define the negotiations, has recommended a more conservative approach. 
Indeed, the Group’s final report, released earlier this month, states that the agreement “should be designed to evolve over time,” moving “progressively toward a more integrated transatlantic marketplace.” 
Specifically, the group recommends establishing “an on-going mechanism for improved dialogue and cooperation” on regulatory issues and non-tariff barriers, as well as a “framework for identifying opportunities for…future regulatory cooperation.” 
Such caution is warranted, given that some of the main principles that drive the two parties’ regulatory approaches are vastly different – and sometimes at odds with one another. 
For example, the EU has long been committed to the “precautionary principle,” which prevents products that may harm human health from entering the EU market – even if the scientific evidence is not yet conclusive. 
This principle underpins the EU’s refusal to import genetically modified (GM) foods from the US, where they are widely consumed. 
But senior members of the US Congress have stressed that a successful agreement must include opening the EU market to all US agricultural products. 
Another potential area of contention – conflicting notions of personal privacy – could inhibit the two sides’ ability to accomplish their shared goal of opening up the digital market. 
In recent weeks, major US technology companies, including Google and Facebook, have been accused of aggressively lobbying the European Parliament to suspend plans to intensify privacy rules in the EU. 
A third challenge is rooted in Europe’s deeply held skepticism of financial markets. 
The day after US President Barack Obama announced the launch of the TTIP negotiations, the European Commission released its blueprint for a Eurozone Financial Transaction Tax that would impose new costs on US banks operating in EU markets. 
Other cases in which barriers to transatlantic trade and investment conceal conflicting objectives and deep-rooted attitudes include France’s protection of its cherished audiovisual sector and America’s desire to continue to block European penetration of its iconic airline industry. 
Negotiators will also have to overcome significant structural obstacles. 
As the European Commission struggles to secure a clear negotiating mandate from all 27 member states, the US will face its own internal coordination problems. 
European countries succeeded in creating the Single Market in 1992 not by harmonizing all of their standards and regulations, but by agreeing to recognize one another’s. 
If a product is approved for sale in one EU member state, it is considered safe enough to be sold in another. 
A similar policy of “mutual recognition” could be the key to successful US-EU trade negotiations, but only if both parties can overcome the biases that are built into their regulatory and political systems. 
Such barriers are particularly pronounced in the US, where Congress oversees the legal framework within which federal regulatory agencies – such as the Environmental Protection Agency and the Food and Drug Administration – operate. 
Not only do the US administration and its federal agencies have to accept that a safety standard established and tested in Frankfurt or Athens is equivalent to its US counterpart; congressional committees must agree. 
For its part, the EU would have to reconsider, for example, its policy on GM foods. 
The EU overcame national biases to establish the Single Market by instituting a process of legally binding qualified majority voting, whereby individual member states could be outvoted on specific regulations. 
But such an approach cannot be replicated to break the inevitable logjams of transatlantic regulatory negotiations. 
Faced with such significant obstacles, it is not surprising that the High-Level Working Group has settled on a more modest measure of success for TTIP negotiations. 
But this does not negate the partnership’s value. 
Although transatlantic tariffs average only 3-5% (with higher peaks for some sensitive products), tariff elimination would have a significant impact, given that bilateral trade totals $650 billion annually. 
Simplifying customs procedures and opening up markets for public procurement could bring further benefits. 
And establishing a formal mechanism for transatlantic regulatory consultation will eventually pay off, one sector at a time. 
The TTIP that is signed in 2015 may not be the revolutionary and comprehensive agreement for which many observers are hoping. 
But it remains a crucial step toward a more integrated transatlantic marketplace. 

Managing Iraq's Oil 
In recent months, Iraq's oil production has grown to more than two million barrels per day. 
At this rate, current oil output and oil exports now exceed post-invasion predictions. Experts had argued that funding shortages, lack of security, the problems of stabilizing a legitimate government, and technology shortfalls would severely limit Iraq's output. 
Despite the odds, Iraq's daily output reached a post-invasion record of 2.5 million barrels in March. 
A number of factors enabled Iraq to increase its output. 
Most significantly, the Bush administration gave Iraq $2.3 billion to restore its oil production. 
After the invasion, no one expected Iraq to get loans, let alone outright grants. 
Instead, $2.3 billion was invested directly into the Iraqi oil sector. 
To protect the oil fields and other facilities, the Americans dedicated a massive, overwhelming force of soldiers and private contractors. 
The level of protection was unprecedented even compared to Saddam's regime. 
On the technical side, the Bush administration hired the world's best oil service companies to revamp Iraq's technologically challenged oil fields. 
They still have a long way to go, but significant improvements are already evident. 
Moreover, the war didn't change the quality of Iraqi fields, which are still among the richest in the world and can produce oil with relatively little effort and investment. 
Finally, high oil prices in the past 12 months provided an unexpectedly large windfall to the Iraqi budget, allowing for the financing of other sectors without slighting the oil industry. 
High prices also enabled the Coalition Provisional Authority to add even more private security personnel to protect refineries and pipelines. 
Granting Iraq the money to restore its oil industry was one of the best post-war decisions that the Bush administration has made. 
The money allowed Iraq to begin to address security, production, and technology issues throughout its oil system. 
But the question remains: will output growth continue following the transfer of sovereignty to an Iraqi government at the end of June? 
Despite massive injections of funds and unprecedented security, insurgents have still managed to halt or reduce oil production and exports several times since the invasion. 
The bombing of a pipeline or other oil facility somewhere in Iraq remains almost a daily occurrence, and the transfer of power has not reduced these attacks so far. 
Like the Bush administration and Saddam himself, the insurgents understand that whoever controls Iraqi oil controls Iraq's destiny. 
The new Iraqi government, even supported by US military might, will simply not be able to guarantee a predictable flow of oil, and output will remain quite volatile. 
At the same time, maintaining the flow of funds into the Iraqi oil sector is essential, not only for its growth, but for its very survival. 
Money brings technological regeneration as well as security. 
Under even the best circumstances for Iraq, with oil prices remaining high, the funds available to maintain and modernize the oil industry are limited. 
If oil prices decline in the future, the oil industry will suffer severely. 
This makes for an interesting relationship between Iraq and Saudi Arabia. 
Only Saudi Arabia can manage the global output of oil in such a way that will make room for Iraqi oil and keep prices high. 
In contrast, only Saudi Arabia can flood the market and reduce prices far below their current level. 
A decline in oil revenues could be devastating to the fledgling Iraqi government. Current oil revenues are barely enough to cover state expenses, let alone pay for reconstruction, debt, and war reparations. 
Even if President Bush wins reelection, it is highly unlikely that the US will make another outright grant to a sovereign Iraq. 
Theoretically, international loans could be an alternative, but who would lend to an unstable government, let alone a government whose legitimacy has not been fully established? 
Likewise, privatization is out of the picture for now. 
The new government will have to make do and chart a slow path for its oil recovery, just as Saddam's regime did. 
At the same time, the logic of renewed American support for the Iraqi oil industry remains powerful. 
Normal financing is not forthcoming. Only grants from the US will reduce output volatility. 
Saddam's regime caused most of the volatility in the oil market in the last 30 years. 
In fact, every peak in oil prices since 1973 was caused by an event related to Iraq. 
One would hope that his removal would reduce market volatility and stabilize oil prices. 
Unfortunately, Iraq appears set to continue to be a major source of high oil prices, owing to highly erratic output. 
For the foreseeable future, one of the principal outcomes of the invasion of Iraq will be greater volatility and thus higher prices. 

Managing Risk to Save the Poor 
The G-8 finance ministers have agreed to cancel $40 billion of debt owed by eighteen of the world’s poorest countries. 
This is a triumph for common sense. 
But, at only $238 per person in the eighteen countries, debt relief alone is hardly enough to help the poor. 
Fortunately, other efforts will complement the developed countries’ increased generosity. 
The most notable is a significant movement towards providing finely focused risk-management services to the poor, which could ultimately prove to be worth far more than $40 billion. 
We tend to think that new risk-management products, such as novel types of insurance or financial derivatives, will primarily interest the rich, or at least relatively wealthy people. 
In fact, new risk-management products are being developed for some of the poorest people in Africa, Asia, and Latin America. 
It is important to recognize that the world’s poorest people are not the same people from year to year. 
Good fortune and bad fortune alternate randomly, and the poorest people are particularly vulnerable when misfortune – like a hurricane in a fishing village – strikes. 
So risk management, by smoothing out bumps in income, can be extremely important in alleviating the effects of poverty. 
Moreover, if unmanaged, risk destroys the prospect of economic growth. 
Without risk management, poor people will not experiment with new crops or more productive methods, because any mistake could be disastrous. 
For example, in subsistence rural areas, a bad harvest may lead to starvation before the next year’s crop is in. 
More typically, it leads “merely” to a sudden collapse in the economic base, leading to years of hardship in the future. 
If a poor family in subsistence farming receives no help during the year after a bad harvest, its members may eat their beasts of burden, cut down the trees that provide nutrients to the soil, sell whatever farming equipment they have, and even eat the seeds that were set aside for planting the following season. 
Providing money when it is needed is essential. 
Unfortunately, according to Joanna Syroka of the World Bank’s Commodity Risk Management Group, official foreign aid and private charity tends to arrive too late, often after starvation has actually begun, and long after the families have taken extreme measures, consuming their capital to survive. 
While the aid may keep them alive, they are left economically paralyzed for years to come. 
Syroka and her colleagues are striving to promote the use of modern financial technology to make sure that aid arrives in time – and in sufficient volume – to avert such outcomes. 
The old tool for managing farmers’ risks is crop insurance, which responds directly to the failure of a crop. 
But crop insurance suffers from what economists call a “moral hazard,” because it reduces farmers’ incentives to ensure the crop’s success. 
The farmer may neglect the crop or refuse to invest in saving a failing crop if he knows that a payout is forthcoming. 
The farmer may even plant a crop that he knows will fail. 
This is why private crop insurers are in short supply, and why crop insurance often requires expensive government subsidies. 
But insurance technology is improving, aided by improved information technology. 
The moral hazard implicit in crop insurance can be addressed by making payouts depend not on the actual crop failure but on the bad weather that caused it. 
Since the farmer cannot influence the weather, there is no moral hazard. 
In the past, weather insurance could not manage a farmer’s risk effectively because we could not measure well enough the effects of weather on crops. 
For insurance to be effective as a risk-management device, weather must be measured at a finely-detailed local level, and the correct measurements must be taken at the correct time. 
Crops are especially vulnerable at certain times, for example, when seeds begin germinating or when bad weather the previous year puts perennials at risk. 
Today, weather insurance uses an expanded number of sophisticated weather stations and deep knowledge of the science of agriculture to measure weather’s effects on local agriculture. 
Different crops are affected differently, and weather insurance must take account of a farm’s various crops and when they were planted – complexities that modern information technology can solve. 
Many companies are already involved in offering improved weather insurance to poor farmers, with notable successes from ICICI Lombard and BASIX in India, and from the International Finance Corporation and the insurance company Credo Classic in Ukraine. 
Similar work is underway in Africa, led by the World Bank and in Central America various countries’ governments are collaborating with the Inter-American Development Bank and the Central American Bank for Economic Integration. 
The number of agencies and governments involved in the movement towards sophisticated risks management for the poor is inspiring. 
At the same time, the application of risk-management technology, insurance, and finance requires little of stretched foreign-aid budgets: a relatively small number of office workers, cell phones, and computers. 
With the ongoing revolution in information and communications technology, the phones and computers will cost less and less, even as the costs of many commodities needed for development grow. 
Jeffrey Sachs’s new book The End of Poverty argues that with proper help from advanced countries the world could see the end of poverty as we know it in coming decades, prompting some to describe him as a starry-eyed idealist. 
But if we take account of both the increased generosity of rich nations and the application of improved financial and insurance technology, he just might be right. 

Managing the Earth 
Sometime in the next twenty years, the relationship between human beings and the natural world is going to change, profoundly and forever. 
It won't happen suddenly, but current scientific developments will make change inevitable. 
Like it or not, ready or not, these scientific developments are putting us on the road to becoming the managers of the global ecosystem, rather than just a participant in it. 
I like to think about this coming revolution in historical terms. 
For most of the three and a half million years that beings we might call "human" have walked the Earth, they were unambiguously part of the natural system. 
The iron laws of evolution governed their survival, and those who couldn't compete died early and were soon forgotten. 
Our only defenses against a hostile world were primitive stone tools and fire - a minimal kind of protection at best. 
Then, about 10,000 years ago, something extraordinary happened. 
Somewhere in the Taurus mountains in what is now Turkey, a group of people, probably women, began to develop a new set of technologies that would change the way that human beings interacted with their environment. 
We call these technologies "agriculture," and, for the first time, they gave human beings the power to move outside the laws of natural selection. 
No longer would our ancestors have to content themselves with the food that nature offered - they could start to grow their own, far surpassing nature's meager supply. 
Since the birth of agriculture, human history has been a steady progression of further liberation from the restraints of nature. 
Instead of generating power using human and animal muscles, we developed machines that could liberate sunlight stored in coal and oil. 
Instead of relying on natural defenses against diseases, we developed antibiotics and the other tools of modern medicine. 
The result is that human beings are no longer really a part of nature - the survival of our species no longer depends on our ability to compete in the Darwinian jungle. 
We depend on our social structure and technology, rather than on our genes. 
Today, we are poised to take another giant step, one that will bring us back into the natural system of our planet rather than remove us farther from it. 
For the first time in history, we are starting to understand how the living things around us work, how all the pieces fit together. 
Some of these advances are theoretical, allowing us to build computer models of complex systems like continent-wide forests or entire oceans. 
Others are more mundane, involving long-term experiments and observation of smaller ecosystems, such as plots of prairie grass or swamplands. 
Finally, of course, we have the spectacular advances in our knowledge of genomics, the science that lets us understand the basic mechanisms that operate inside all living systems, including humans. 
Together these new areas of science will allow us to manage the ecosystems on our planet, predicting the effects of human interventions, anticipating the flow of natural cycles. 
We truly have the power to become the managers of planet Earth. 
This is not a responsibility we can shirk. 
The analogy I like to use involves the homely example of caring for a suburban lawn. 
You can decide to mow the grass, in which case you produce one kind of ecosystem, one kind of future. 
Or you can decide not to mow the grass, in which case you produce another kind of ecosystem, another kind of future. 
Either way, your actions determine what happens to the lawn. 
The one thing you cannot do is fail to decide. 
No matter what you do, even if you decide to do nothing, the future of the lawn depends on you. 
In fact, our relation to the planet will be like that of a gardener to a garden. 
The gardener doesn't destroy his plants indiscriminately, but he does regularly pull up weeds. 
The gardener doesn't "conquer" his or her plants, but studies them to produce the garden that is desired. 
Most importantly, the gardener does not manage the garden for the sake of the plants, but for some other goal - to raise food, produce flowers, or just to look pretty. 
In the same way, human beings are on the brink of being able to manage the planet, and the decisions we make will determine what the future of the planet will be. 
Given the phenomenal rate at which science advances these days, it is not too early to start thinking about how we are going to handle this awesome new responsibility. 

Managing the Global Migration Crisis 
Debates about immigration nowadays tend to concentrate on the impact newcomers have on social cohesion. 
Advocates of a more open policy argue that populations are aging and workforces are diminishing, so greater immigration is needed to sustain high living standards. 
Their opponents focus on the disruptive effects of immigration, particularly among the most vulnerable citizens in countries that already suffer from high unemployment. 
But what is needed is a deeper and more global perspective than either side allows. 
Between 1800 and 1950 Europe's population increased by 269%, from 203 million to 547 million, as the continent experienced extraordinary economic change, social upheaval, and political turmoil. 
Emigration from Europe was the continent's critical safety valve, without which the pressure placed on populations and states would have been unsustainable. 
During these 150 years, Europeans emigrated en masse to Latin America, driving its population up by 50 million, to North America, which saw an increase of 75 million, and to Oceania, where the population rose by 11 million. 
Surplus rural folk could find land to till in the New World's vast frontiers or industrial employment in its growing cities. 
The most adventurous and ambitious could seek fame and fortune in the colonies of Africa and Asia. 
But emigration was more than merely a safety valve; it contributed to Europe's material and cultural wealth as well. 
The remittances of Italian seasonal laborers in Argentina prevented backward rural villages in southern Italy from slipping into grinding poverty. 
Markets throughout the world were opened to exports of European goods and capital. 
At the same time, major shifts began occurring in the Third World, and accelerated in the post-war decades: independence in India, liberation in China, decolonization in Asia and Africa, nation building and industrialization in Latin America. 
These changes fuel massive population increases. 
Between 1950 and 2050, Africa's population is projected to soar by 800%, from 221 million to nearly 1. 8 billion, Asia's by 375%, from 1.4 billion to 5.3 billion, and Latin America's by 484%, from 167 million to 809 million. 
Even faster growth will take place in the coming decades. 
Between 2000 and 2010, 700 million young people will enter developing country labor markets, more than the entire labor force of today's industrial world. 
The situation of Indonesia is revealing. 
Thirty percent of its population of 230 million is below age 15, so Indonesia's economy needs to grow at 8% simply to absorb the new workers. 
But Indonesia is currently growing at only about half that rate. 
Sociopolitical conditions in developing countries where demographic growth outpaces economic growth--the situation throughout the Middle East and North Africa--are bound to deteriorate rapidly in the years ahead. 
So today's entry barriers, particularly in Europe, will produce ever-increasing waves of illegal immigration, with all the crime, corruption, and suffering that this implies. 
(Money to be made from the illegal traffic in people, by some estimates, already outstrips the profits of the illegal drug trade.) 
Current trends point toward greater instability, including war. 
To manage this situation, no panaceas are on offer, and no miracles expected. 
The following prescriptions may, however, help avert a disaster: 
· Rich countries, particularly in Europe, must dismantle trade barriers to exports from developing countries and cease dumping subsidized agricultural products; 
· OECD countries should honor the target of allocating the equivalent of 0.7% of GDP annually to foreign aid; 
· The volume of foreign direct investment (FDI) in developing countries needs to be greatly increased and more evenly spread. 
About 80% of FDI in developing countries worldwide goes to just five economies: China, Hong Kong, Korea, Brazil, and Mexico. 
The lesson of the last decade is that money flowing to constructive investments in developing countries would have yielded higher returns than all the Enrons, WorldComs, and Vivendis, while laying the basis for dynamic indigenous development; 
· More emphasis must be placed on dramatically improving the quality of governance in developing countries. 
Wherever demographic growth outstrips economic growth, the fault lies primarily with corrupt and inefficient regimes and the obstacles they put in the way of entrepreneurship and wealth creation. 
As a result, wealthy Middle Easterners, for example, invest their capital in developed countries, not at home; 
· Europe must open its doors far more widely. 
This is not merely a question of increasing the rate of legal immigration, but also of strengthening the quality of integration . 
If properly managed, the economic benefits will be significant both for the developing world (higher remittances, but also greater opportunities for learning and experience) and rich countries (a younger, dynamic, and often entrepreneurial workforce). 
None of these tasks will be easy to accomplish. 
But it is imperative that world leaders pursue such positive globalization strategies, rather than the negative, defensive, and protectionist policies that are so universally on offer today. 
Otherwise, they risk plunging their citizens into a period of violence, destruction, and disintegration that could last several decades, and recall the horrors of the first half of the 20 th century. 

Managing the Politics of Water 
AMMAN – This year’s World Water Day, on March 22, provides an opportunity to highlight what in many countries has become a grim reality: The availability of fresh water is increasingly a defining strategic factor in regional and global affairs. 
Unless water resources are managed with extraordinary care, the consequences could be devastating. 
Last year, the United Nations World Water Development Report once again highlighted how the growing gap between supply and demand could create conflict. 
The World Economic Forum has ranked water crises as the most worrying global threat, more dangerous than terrorist attacks or financial meltdowns, and more likely to occur than the use of weapons of mass destruction. 
And research by the Strategic Foresight Group has shown the importance of wise management: Countries engaged in the joint stewardship of water resources are exceedingly unlikely to go to war. 
The Middle East serves as a tragic example of what can happen when regional cooperation is lacking. 
Iraq, Syria, and Turkey have fought over every cubic meter of the Tigris and Euphrates rivers. 
All have lost as a result. 
Non-state actors control important parts of the two river basins. 
And water shortages have aggravated the region’s refugee crisis (itself the apotheosis of poor governance). 
The bitterest part of the tragedy is that it could have been avoided. 
In 2010, at the West Asia-North Africa Forum in Amman, we proposed the creation of “circles of cooperation,” which would have institutionalized collaboration among Iraq, Jordan, Lebanon, Syria, and Turkey on water and environmental issues. 
A similar arrangement would have helped manage environmental resources shared by Jordan, Israel, and Palestine. 
If a supranational organization had been created, it could have introduced joint strategies to manage drought, coordinate crop patterns, develop common standards to monitor river flows, and implement investment plans to create livelihoods and develop water-treatment technologies. 
Other regions have done exactly that. 
Countries sharing rivers in Africa, Southeast Asia, and Latin America have recognized that national interests and regional stability can be mutually reinforcing if human needs are given priority over chauvinism. 
Last fall, the international community adopted the UN’s Sustainable Development Goals, which promise to “ensure availability and sustainable management of water and sanitation for all.” 
Part of this pledge is a commitment to “expand international cooperation.” 
Those in charge of implementing this commitment must bear in mind that water cooperation is not merely about signing treaties and holding meetings. 
It also entails jointly planning infrastructure projects, managing floods and droughts, developing an integrated strategy to combat climate change, ensuring the quality of water courses, and holding regular summits to negotiate tradeoffs between water and other public goods. 
The Water Cooperation Quotient, a measure of collaboration created by the Strategic Foresight Group, can help countries sharing river basins and lakes monitor the intensity of their cooperation. 
Out of 263 shared river basins, only a quarter benefit from properly functioning collaborative organizations. 
It is crucial that such organizations be extended to cover every shared river basin in the world by the SDGs’ target year, 2030. 
For poor people in the developing world, such transboundary cooperation generates significant dividends. 
When countries agree on the construction and management of critical infrastructure, there are no delays. 
Costs are saved. 
Benefits are shared in an optimum way. 
If all developing countries with shared river basins embraced transboundary cooperation, their GDP growth easily could rise by a percentage point. 
The international community should encourage countries to embrace such cooperation by creating financial instruments that make concessional and preferential funds available. 
A global Marshall Plan for shared river basins might at first seem like an expensive proposition; but the cost of inaction – consider the threat to Europe alone posed by massive refugee inflows – easily could be several orders of magnitude higher. 
Likewise, the international community should act promptly to save critical water infrastructure from acts of violence and terrorism. 
Many rivers, including the Tigris and the Euphrates, have been and continue to be cradles of human civilization. 
The UN should consider creating special peacekeeping forces to protect them. 
Finally, international law should be designed to prevent, not just resolve, conflicts. 
In particular, a robust global treaty is needed to regulate emissions into bodies of water. 
Today, most disagreements over water concern the quantity parties are to receive. 
In the future, conflicts will increasingly be about water quality, as irrigation practices, industrialization, and urbanization contribute to rising pollution levels. 
World Water Day is the ideal occasion to launch a new agenda for water wisdom. 
But every day must be a day when we work together to manage one of the planet’s most important resources. 

Getting Cities Right 
WASHINGTON, DC – The developing world is experiencing rapid urbanization, with the number of city dwellers set to reach four billion in 2030 – double its 2000 level. 
But unplanned and uncoordinated urban development is risky, threatening to replace migrants’ hopes for a better life with unsanitary living conditions, joblessness, and high exposure to natural disasters. 
In many respects, urbanization is rational. 
After all, cities are the hubs of prosperity, where more than 80% of global economic activity is concentrated. 
And their density facilitates the delivery of public services, including education, health care, and basic services. 
Indeed, it costs $0.70-0.80 per cubic meter to provide piped water in urban areas, compared to $2 in sparsely populated areas. 
But the high concentration of assets and people, especially in coastal areas, is an economic liability, with around $3 trillion in assets at risk from natural hazards. 
Vulnerability will increase further over the next two decades, as cities triple their built-up land, to 600,000 square kilometers, often without basic infrastructure or policies to prevent construction and settlement on disaster-prone and vulnerable sites. 
To get urbanization right, policymakers must take urgent action to build sustainable cities. 
Through effective land-use management, they can provide reliable and affordable access to basic services, education, housing, transport, and health care to growing urban populations, while minimizing the carbon footprint. 
This entails, first and foremost, abandoning the perception of a tradeoff between “building more cities” to accommodate rapid urban growth and “building cities right” to enhance social and environmental outcomes. 
In fact, evidence shows that building cities right generates near-term benefits, while reducing the longer-term costs associated with sprawl, congestion, pollution, and climate change. 
The alternative – building cities around a low-density, individual-vehicle transportation model – will leave urban planners struggling to increase density and develop public-transport systems later, a challenge that the United States is currently facing. 
A new World Bank report provides a practical agenda for building sustainable cities. 
The framework – which emerged from a three-year effort to develop a foundation of credible facts and analysis from countries with diverse urban experiences, such as Uganda, China, India, and South Korea – can help policymakers to understand the obstacles to urbanization and to identify politically, technically, and fiscally feasible policy options. 
This framework reflects three main aspects of urban development: planning, connecting, and financing. 
A major finding is that, regardless of the level or speed of urbanization, planning for land-use management should be the top priority. 
By clearly defining property rights and implementing effective land-use systems that are coordinated with infrastructure, particularly transport, policymakers can help cities to attract private investment, connect people with jobs, reduce environmental and social risks, and decrease vulnerability to natural hazards. 
With urban growth in developing countries likely to occur largely in secondary cities, the opportunity is still open (but closing fast) to shape urban design to ensure that, for example, residents do not spend half of each day commuting to and from work. 
While no single model for managing rapid urbanization exists, positive examples offer some guidance. 
For example, Seoul’s population more than tripled from 1960 to 2000. 
South Korean policymakers, anticipating the challenges, strengthened institutions for valuing and pricing land, trained a cadre of appraisers to ensure transparency in the valuation process, and publicly disseminated land-value information. 
At the same time, the government supported construction of high-rise residential buildings capable of housing the growing urban population and developed multiple transport modes, including highways, rail networks, and subway lines, which have helped to connect people with employment opportunities within and among cities. 
Likewise, leaders in Singapore and Japan treated public transport as a crucial aspect of land-use plans. 
As a result, they boast some of the world’s lowest energy consumption as a share of GDP. 
In order to encourage citizens to use public transport, policymakers in Tokyo reduced subsidies for private cars, so that driving one became five times costlier than using public transport. 
Complementary investment in high-speed inter-city transport has reduced travel times between Japan’s two largest agglomerations, Tokyo and Osaka, which are 314 miles apart, to less than two and a half hours, thus integrating labor and housing markets and enhancing productivity. 
Of course, financing rapid urban development requires significant capital outlays to build efficient systems for transport, water provision, solid waste management, and sewage removal and treatment. 
But, as these investments bolster economic growth, increased tax revenues would imply more sustainable financing, as would local governments’ ability to leverage land markets and approach local-currency debt markets. 
In Mumbai, the auction of 13 hectares of land in the new financial center, the Bandra-Kurla Complex, generated $1.2 billion. 
This amounts to more than ten times the Mumbai Metropolitan Region Development Authority’s total expenditure in 2005, and six times the total value of municipal bonds issued by all local governments and utilities in India in more than a decade. 
Similarly, in Istanbul, the auction of an old bus station and government building in 2007 generated $1.5 billion – more than the city’s total expenditures and infrastructure investments in 2005. 
And Colombia’s finance ministry has developed Findeter, a bond bank that finances regional urban infrastructure projects by providing resources to financial intermediaries that allocate them to subnational authorities. 
By building sustainable cities, policymakers can support social and economic development, while minimizing environmental damage. 
Managing urbanization as it occurs, rather than struggling to fix cities later, is an opportunity that developing-country leaders should not miss. 

The Age of Blowback Terror 
NEW DELHI – World powers have often been known to intervene, overtly and covertly, to overthrow other countries’ governments, install pliant regimes, and then prop up those regimes, even with military action. 
But, more often than not, what seems like a good idea in the short term often brings about disastrous unintended consequences, with intervention causing countries to dissolve into conflict, and intervening powers emerging as targets of violence. 
That sequence is starkly apparent today, as countries that have meddled in the Middle East face a surge in terrorist attacks. 
Last month, Salman Ramadan Abedi – a 22-year-old British-born son of Libyan immigrants – carried out a suicide bombing at the concert of the American pop star Ariana Grande in Manchester, England. 
The bombing – the worst terrorist attack in the United Kingdom in more than a decade – can be described only as blowback from the activities of the UK and its allies in Libya, where external intervention has given rise to a battle-worn terrorist haven. 
The UK has not just actively aided jihadists in Libya; it encouraged foreign fighters, including British Libyans, to get involved in the NATO-led operation that toppled Colonel Muammar el-Qaddafi’s regime in 2011. 
Among those fighters was Abedi’s father, a longtime member of the al-Qaeda-linked Libyan Islamic Fighting Group, whose functionaries were imprisoned or forced into exile during Qaddafi’s rule. 
The elder Abedi returned to Libya six years ago to fight alongside a new Western-backed Islamist militia known as the Tripoli Brigade. 
His son had recently returned from a visit to Libya when he carried out the Manchester Arena attack. 
This was not the first time a former “Islamic holy warrior” passed jihadism to his Western-born son. 
Omar Saddiqui Mateen, who carried out last June’s Pulse nightclub shooting in Orlando, Florida – the deadliest single-day mass shooting in US history – also drew inspiration from his father, who fought with the US-backed mujahedeen forces that drove the Soviet Union out of Afghanistan in the 1980s. 
In fact, the United States’ activities in Afghanistan at that time may be the single biggest source of blowback terrorism today. 
With the help of Pakistan’s Inter-Services Intelligence agency and Saudi Arabia’s money, the CIA staged what remains the largest covert operation in its history, training and arming thousands of anti-Soviet insurgents. 
The US also spent $50 million on a “jihad literacy” project to inspire Afghans to fight the Soviet “infidels” and to portray the CIA-trained guerrillas as “holy warriors.” 
After the Soviets left, however, many of those holy warriors ended up forming al-Qaeda, the Taliban, and other terrorist groups. 
Some, such as Osama bin Laden, remained in the Afghanistan-Pakistan belt, turning it into a base for organizing international terrorism, like the September 11, 2001, attacks in the US. 
Others returned to their home countries – from Egypt to the Philippines – to wage terror campaigns against what they viewed as Western-tainted governments. 
“We helped to create the problem that we are now fighting,” then-Secretary of State Hillary Clinton admitted in 2010. 
Yet the US – indeed, the entire West – seems not to have learned its lesson. 
Clinton herself was instrumental in coaxing a hesitant President Barack Obama to back military action to depose Qaddafi in Libya. 
As a result, just as President George W. Bush will be remembered for the unraveling of Iraq, one of Obama’s central legacies is the mayhem in Libya. 
In Syria, the CIA is again supporting supposedly “moderate” jihadist rebel factions, many of which have links to groups like al-Qaeda. 
Russia, for its part, has been propping up its client, President Bashar al-Assad – and experiencing blowback of its own, exemplified by the 2015 downing of a Russian airliner over the Sinai Peninsula. 
Russia has also been seeking to use the Taliban to tie down the US militarily in Afghanistan. 
As for Europe, two jihadist citadels – Syria and Libya – now sit on its doorstep, and the blowback from its past interventions, exemplified by terrorist attacks in France, Germany, and the UK, is intensifying. 
Meanwhile, Bin Laden’s favorite son, Hamza bin Laden, is seeking to revive al-Qaeda’s global network. 
Of course, regional powers, too, have had plenty to do with perpetuating the cycle of chaos and conflict in the Middle East. 
Saudi Arabia may have fallen out with a fellow jihad-bankrolling state, Qatar, but it continues to engage in a brutal proxy war with Iran in Yemen, which has brought that country, like Iraq and Libya, to the brink of state failure. 
Moreover, Saudi Arabia has been the chief exporter of intolerant and extremist Wahhabi Islam since the second half of the Cold War. 
Western powers, which viewed Wahhabism as an antidote to communism and the 1979 Shia “revolution” in Iran, tacitly encouraged it. 
Ultimately, Wahhabi fanaticism became the basis of modern Sunni Islamist terror, and Saudi Arabia itself is now threatened by its own creation. 
Pakistan – another major state sponsor of terrorism – is also seeing its chickens coming home to roost, with a spate of terrorist attacks. 
It is high time for a new approach. 
Recognizing that arming or supporting Islamist radicals anywhere ultimately fuels international terrorism, such alliances of convenience should be avoided. 
In general, Western powers should resist the temptation to intervene at all. 
Instead, they should work systematically to discredit what British Prime Minister Theresa May has called “the evil ideology of Islamist extremism.” 
On this front, US President Donald Trump has already sent the wrong message. 
On his first foreign trip, he visited Saudi Arabia, a decadent theocracy where, ironically, he opened the Global Center for Combating Extremist Ideology. 
As the US and its allies continue to face terrorist blowback, one hopes that Trump comes to his senses, and helps to turn the seemingly interminable War on Terror that Bush launched in 2001 into a battle that can actually be won. 

Manchester’s Bright Future 
MANCHESTER – I am a proud Mancunian (as the people of Manchester are known), despite the fact I haven’t lived here permanently since I left school for university when I was 18. 
I was born in St. Mary’s hospital near the city center, was raised in a pleasant suburb in South Manchester, and attended a normal primary and junior school in a nearby, tougher neighborhood, before attending Burnage for secondary school. 
Thirty-eight years after I attended Burnage, so too, apparently, did Salman Abedi, the suspected Manchester Arena bomber. 
The atrocity carried out by Abedi, for which the Islamic State has claimed credit, is probably worse than the dreadful bombing by the Irish Republican Army that destroyed parts of the city center 21 years ago, an event that many believe played a key role in Manchester’s renaissance. 
At least in that case, the bombers gave a 90-minute warning that helped avoid loss of life. 
Abedi’s barbaric act, by contrast, killed at least 22 people, many of them children. 
In recent years, I have been heavily involved in the policy aspects of this great city’s economic revival. 
I chaired an economic advisory group to the Greater Manchester Council, and then served as Chair of the Cities Growth Commission, which advocated for the “Northern Powerhouse,” a program to link the cities of the British north into a cohesive economic unit. 
Subsequently, I briefly joined David Cameron’s government, to help implement the early stages of the Northern Powerhouse. 
I have never attended a concert at the Manchester Arena, but it appears to be a great venue for the city. 
Just as Manchester Airport has emerged as a transport hub serving the Northern Powerhouse, the arena plays a similar role in terms of live entertainment. 
As the sad reports about those affected indicate, attendees came from many parts of northern England (and beyond). 
In the past couple of years, Manchester has received much praise for its economic revival, including its position at the geographic heart of the Northern Powerhouse, and I am sure this will continue. 
Employment levels and the regional PMI business surveys indicate that, for most of the past two years, economic momentum has been stronger in North West England than in the country as a whole, including London. 
Whether this is because of the Northern Powerhouse policy is difficult to infer; whatever the reason, it is hugely welcome and important to sustain. 
To my occasional irritation, many people still wonder what exactly the Northern Powerhouse is. 
At its core, it represents the economic geography that lies within Liverpool to the west, Sheffield to the East, and Leeds to the northeast, with Manchester in the middle. 
The distance from Manchester to the center of any of those other cities is less than 40 miles (64 kilometers), which is shorter than the London Underground’s Central, Piccadilly, or District lines. 
If the 7-8 million people who live in those cities – and in the numerous towns, villages, and other areas between them – can be connected via infrastructure, they can act as a single unit in terms of their roles as consumers and producers. 
The Northern Powerhouse would then be a genuine structural game changer for Britain’s economy. 
Indeed, along with London, it would be a second dynamic economic zone that registers on a global scale. 
It is this simple premise that led the previous government to place my ideas at the core of its economic policies, and why the Northern Powerhouse has become so attractive to business here in the United Kingdom and overseas. 
It is a thrilling prospect, and, despite being less than three years old, it is showing signs of progress. 
In fact, given the broader economic benefits of agglomeration, the Northern Powerhouse mantra can be extended to the whole of the North of England, not least to include Hull and the North East. 
But it is what I often inelegantly call “Man-Sheff-Leeds-Pool” that distinguishes the Northern Powerhouse, and Manchester, which sits at the heart of it, is certainly among the early beneficiaries. 
Despite this, I have frequently said to local policy leaders, business people, those from the philanthropic world, and others that unless the areas lying outside the immediate vicinity of central Manchester benefit from regional dynamism, Greater Manchester’s success will be far from complete. 
Anyone who looks little more than a mile north, south, east, or west of Manchester’s Albert Square – never mind slightly less adjacent parts such as Oldham and Rochdale – can see that much needs to be improved, including education, skills training, and inclusiveness, in order to ensure long-term success. 
Whatever the warped motive of the 22-year-old Abedi, who evidently blew himself up along with the innocent victims, his reprehensible act will not tarnish Manchester’s bright, hopeful future. 
I do not claim to understand the world of terrorism, but I do know that those who live in and around Manchester and other cities need to feel part of their community and share its aspirations. 
Residents who identify with their community are less likely to harm it – and more likely to contribute actively to its renewed vigor. 
Now more than ever, Manchester needs the vision that the Northern Powerhouse provides. 
It is a vision that other cities and regions would do well to emulate. 


Manufacturing Scientific Uncertainty 
For decades, the tobacco industry manufactured more than just cigarettes. 
While aggressively marketing tobacco products, they also waged a successful public relations campaign designed to create uncertainty about the destructive and lethal characteristics of their products. 
Though discovery of these efforts has come too late for many tobacco smokers, documents unearthed in lawsuits have revealed concerted efforts to avoid the imposition of government regulation by attacking public health science and scientists. 
There are few scientific challenges more complex than understanding the causes of disease in humans. 
Scientists cannot feed toxic chemicals to people, for example, to see what doses cause cancer. 
Instead, scientists must harness the “natural experiments” in which exposures have already occurred. 
To be sure, in the laboratory, scientists use animals in controlled experimental conditions to investigate the workings of toxic agents. 
But, like epidemiological evidence, laboratory studies have many uncertainties, and scientists must extrapolate from study-specific evidence to make judgments about causation and recommend protective measures. 
Absolute certainty is rarely an option. 
Nevertheless, much scientific “uncertainty” about the causes of disease is not real, but manufactured. 
Years ago, a tobacco executive unwisely committed to paper the perfect slogan for his industry’s disinformation campaign: “Doubt is our product.” 
For 50 years, tobacco companies employed a stable of scientists to assert (sometimes under oath) that they did not believe there was conclusive evidence that smoking cigarettes causes lung cancer. 
Less well known, but following the same pattern, are efforts being mounted to question studies documenting the adverse health effects of exposure to lead, mercury, vinyl chloride, chromium, beryllium, benzene, and a long list of pesticides and other toxic chemicals. 
Polluters and manufacturers of dangerous products hire experts in what they call “product defense” to dissect every study whose findings they oppose, highlighting flaws and inconsistencies. 
In many cases, they won’t deny that a relationship exists between the exposure and the disease, but are quick to proclaim that “the evidence is inconclusive.” 
These industries have learned that by focusing the debate on uncertainties in the science (and the need for more research), it is possible to avoid a debate on public policy. 
This can delay for years the expenditures required to protect people’s health and the environment. 
Nowadays, the most well known (and probably best financed) campaign to manufacture scientific doubt is being waged by the fossil fuel industry in an effort to impugn scientists’ work on issues related to climate change. 
When confronted by an overwhelming worldwide scientific consensus on the contribution of human activity to global warming over the past century, the industry and its political allies follow the tobacco road. 
Evidence of this surfaced when Frank Luntz, a leading Republican political consultant, sent a strategy memo to his clients in 2002. 
Luntz asserted that “ The scientific debate remains open. 
Voters believe that there is no consensus about global warming in the scientific community. 
Should the public come to believe that the scientific issues are settled, their views about global warming will change accordingly.” 
In parallel to their attempts to delay or prevent regulation through assertions of scientific uncertainty, polluters and manufacturers of hazardous products have promoted the “junk science” movement, which attempts to influence public opinion by ridiculing scientists whose research threatens powerful interests, irrespective of the quality of that scientist’s research. 
“Junk science” advocates allege that many scientific studies (and even scientific methods) used in the regulatory and legal arenas are fundamentally flawed, contradictory, or incomplete. 
Every first-year public health student is taught how John Snow stopped a cholera epidemic in London. 
During a ten-day period in September 1854, during which more than 500 Londoners died from the disease, Snow used a city map to mark the location of each household with a case of cholera. 
He determined that Londoners who drank from one particular water source were at the highest risk for the disease, and he recommended removal of the handle from the pump supplying drinking water from that source. 
By using the best evidence available at the time, hundreds of additional deaths were avoided. 
If government officials in London had demanded absolute certainty, the epidemic might have continued for another 30 years until the cholera bacterium was identified. 
The manufacturing of scientific uncertainty endangers the public’s health, as well as programs to protect public health and to compensate victims. 
It is time to return to first principles: use the best science available, but do not demand certainty where it does not exist. 

Many Laws, Little Justice in China 
The image on the computer screen is shocking: a man, lying on a hospital bed, his head bandaged, with long trickles of blood running from the top of his scalp. 
The man, now sitting next to me, explains with a bit of understatement, “Of course I must continue to have faith in the Chinese legal system, although I must admit that this incident has somewhat dampened my optimism.” 
The “incident” occurred last December, as he and another attorney traveled to prepare the re-trial of a blind, self-taught legal activist. 
That activist had been framed by local authorities after he had denounced abuses by the local family planning authorities. 
As the two lawyers were traveling on a bus, a gang of men, some of them wielding metal pipes, boarded it and brutally assaulted them. 
The injuries proved minor, but the incident embodies the paradox of China’s legal system: over the past two decades, China has enacted hundreds of laws and elevated “ruling the country according to law” to ideological and constitutional prominence. 
Legal awareness in society has soared to unprecedented levels. 
Last week, China finally enshrined private property by passing the long-awaited property rights law, in what the government called “significant progress in promoting rule of law in the country.” 
Yet access to justice remains tightly constrained, courts are still controlled by the Communist Party of China (CPC), and lawyers involved in litigation against local state agencies remain highly vulnerable to retaliation by state and non-state actors. 
Reprisals range from suspension of lawyers’ licenses by the judicial bureaus to physical intimidation or assault by criminal elements. 
After their attackers left, the two lawyers made repeated calls to the police to report the incident, but police did nothing beyond take the call. 
Formal complaints to the justice ministry and the national bar association weren’t even acknowledged, let alone answered. 
Ever since Deng Xiaoping ushered in the “reform and opening” era in 1978, the Chinese leadership has seen the legal system as an instrument to carry out state policies. 
But as China’s society progressively emancipated itself from direct state control – with the notable exception of sectors viewed by the CPC as crucial to maintaining its monopoly on power – citizens increasingly appealed to the law for protection against arbitrary administrative interference and to limit the bureaucracy’s discretionary powers. 
In turn, the government encouraged the idea that ordinary citizens had legal rights as a way to ensure social stability, check petty corruption, and channel social grievances through a party-controlled mechanism. 
The new property rights law undoubtedly offers stronger protection to Chinese citizens, in particular homeowners, by equalizing the legal status of private and state property. 
Greater predictability and clarity in the property system is likely to bring economic benefits, reassure international investors, and signal the leadership’s determination to pursue further economic reforms. 
Perhaps more importantly, the law indirectly consolidates, at least in theory, the concept of a private sphere in Chinese society: a physical and legal area protected from arbitrary state intervention that could potentially serve as a basis for demanding greater political participation. 
What the new law will not do, however, is address the most serious property rights disputes: land seizures and forced evictions for urban redevelopment. 
Most of these protests stem from acts by local officials that were already clearly illegal under existing Chinese law. 
The real problem is to make officials respect legality. 
With little oversight from the central government, and no independent judiciary or a free press to hold them accountable, local authorities in rural areas are often a law unto themselves. 
According to China’s Ministry of Land Resources, there were more than 90,000 cases of illegal land transfers last year, yet there were precious few prosecutions. 
Local courts, whose judges are appointed and paid by the local government, often simply refuse to file cases that challenge official decisions. 
In the few cases where a court rules in favor of the plaintiffs, the judgments often remain un-enforced. 
When lawyers and legal activists try to help villagers or evicted residents to fight through the legal system, they often become victims of retaliation. 
Because people cannot get justice through the courts, unrest has skyrocketed nationwide in recent years: official statistics record more than 200 protests a day, four times the number a decade ago. 
The central authorities have recognized the link between abuses, unrest, and the need to develop legal services for preventing the escalation of disputes. 
Wen Jiabao, China’s Premier, acknowledged last year that protests in the countryside were caused by “some localities [that] are unlawfully occupying farmers’ land” and promised “effective legal services and legal aid so as to provide effective help to people who have difficulty filing lawsuits.” 
But reality doesn’t match official rhetoric. 
In the past year, three prominent lawyers and rights activists were arrested. 
Administrative restrictions on lawyers were tightened to discourage class action or multiple plaintiff suits – typically cases against arbitrary or corrupt government actions – and to facilitate local authorities’ intervention and control over cases. 
And the media were prohibited from reporting cases involving land disputes and forced evictions. 
The new property law won’t be the breakthrough for rights protection that the government claims it is until it is matched by increased access to justice for ordinary citizens. 
The government is fortunate to have my lawyer friend’s faith in the legal system, but now it must earn ordinary citizens’ trust by enacting reforms. 
Removing constraints on lawyers and ensuring that they are not attacked with impunity would be a good place to start. 

Mao, the False God 
Should Chairman Mao’s huge portrait still hang above the front gate of Tiananmen Square? 
Should China’s ruling party still call itself Communist? 
These are not idle questions. 
Unless and until China’s leaders answer both questions with a simple “No” they will continue to have blood on their hands and a tainted legitimacy. 
Many Chinese do not accept communist rule precisely because the Communist Party denies its past, (and remains) unapologetic about its cruelty. 
This is one reason why China has a Taiwan “problem.” 
The Chinese Communists insist that being Chinese means accepting the political reality of a sole Communist sovereign. 
Indeed, many Taiwanese think that, if being Chinese means accepting all that goes under the name of Mao Zedong and the Chinese Communist Party, they will gladly deny their “Chineseness” than assume some of that shame. 
Similarly, while a recent poll found that 70% of Hong Kong’s people are proud of being ethnic Chinese, a similar percentage are ashamed of the conduct of the mainland government. Their message to the government in Beijing is this: you cannot take away our ethnicity but you have soiled our dignity through your barbarism. 
Enshrined in the Chinese Communist Party’s constitution are the following words: “Mao Zedong, the Party’s chief representative, created Mao Zedong Thought, which has been proved correct by practice and based on which the Communist Party developed the basic system of socialism economically, politically, and culturally after the founding of the People’s Republic.” 
But how “correct” was Mao? 
In her devastating new book Mao: The Unknown Story , Jung Chang (author of the international bestseller Wild Swans ) exposes startling new details that prove beyond doubt that Mao was a tyrannical, cruel hypocrite whose disregard for human lives and suffering surpassed that of even Stalin and Hitler. 
Her catalogue of Mao’s “correct practice” is numbing in its immorality and bloodthirstiness. 
To help finance his communist movement in the 1930’s, Mao squeezed poor peasant families with any assets in the “Red” zone he controlled. 
Many “counter-revolutionary” families were forced out of their homes to live in buffalo sheds so that their meager assets could be requisitioned. 
While hiding out in the caves of Yenan, Mao became a distributor of opium. 
Contrary to myths that he and his insurgents lived frugally during the Yenan days, they lived well on trading profits. 
After the Nationalist government collapsed in 1949, Mao’s “New China” emerged. 
Almost immediately, he launched another campaign to suppress “counter-revolutionaries,” berating one province for “being too lenient, not killing enough.” 
Killing “enemies” was not the sole purpose. Mao wanted to instill obedience by having as many people as possible witness the terror. 
As he put it in 1951, “Many places don’t dare to kill counter-revolutionaries on a grand scale with big publicity. 
This situation must be changed.” 
In Beijing millions of inhabitants were ordered to witness some 30,000 sentencing and execution rallies during the early 1950’s. 
Indeed, in 1950 and 1951 an estimated three million people perished by execution, torture, or suicide. 
Masses of Chinese were sent to work camps, where prisoners endured harsh physical labor to “reform” their “bourgeois” habits and thoughts. 
In any given year, roughly 10 million such “laborers” existed. During Mao’s rule, an estimated 27 million died in the camps. 
Close to 38 million people died of starvation and overwork during the infamous Great Leap Forward (1958-61) to catch up with the West. Mao’s reaction? 
“With all these projects, half of China may well have to die. If not half, one-third, or one-tenth – 50 million – die….but you can’t blame me when people die.” 
Mao launched the Cultural Revolution (1965-76) to take revenge against those who opposed his mad programs. 
Millions more died. 
Mao also ordered the country to destroy the “Four Olds”: old ideas, old culture, old customs, and old habits. 
As a result, his Red Guards destroyed ancient books, priceless antiques, monuments across the land, and nearly all Buddhist monasteries in Tibet. 
In all, it is estimated that more than 70 million people died in the “New China” Mao and the present Communist Party leaders so proudly proclaim as their accomplishment. 
When Japanese Prime Minister Kakuei Tanaka went to China in 1974, he bowed deeply to the Chairman, apologizing for the suffering that invading Japanese had caused. Mao famously said: “No need to apologize. 
We should thank you instead. Without your invasion, we Communists would not have won.” 
What about today’s “New New China,” with its skyscrapers, modern highways, and unbridled capitalism? 
The reality is not as gleaming as it first looks. Annual per capita GDP in Shanghai, China’s showcase city, remains, at $3,000, a small fraction of the levels in Taiwan and Hong Kong. 
Fifty years of communist misrule have left what was once the most advanced city in Asia a distant also-ran. 
China’s communist rulers must own up to their history and drop Mao and the communist legacy. 
The country needs a new constitution – one that enshrines genuine democracy. 
China’s people have long been ready for this. 
Maintaining the false label of communism while reviving capitalism and insisting that Mao, for all his mistakes and crimes, was 70% “correct” is the bedrock of the moral corruption that afflicts China today. 
It is as if the Nazis were still in power, with the current leaders claiming that Hitler was only 30% wrong. 
China deserves better; it requires better in order to reclaim the glory that was China. 

Mao’s China at 60 
LONDON – Every country is shaped by its history, but countries fabricate and rewrite their histories, too. 
The story of how we became who we are needs to accommodate our sense of tribal solidarity and accomplishment. 
Our triumphs and virtues are exaggerated; our villains externalized; our failings covered up. 
All this makes the study of history potentially insurrectionary, but hugely valuable. 
Good historians encourage us to be honest about ourselves. 
They destroy our self-delusions. 
This is especially true of our flawed heroes, as we see today with the Chinese Communist Party’s treatment of Mao Zedong. 
Sixty years ago this October, Mao stood on the rostrum of Tiananmen, the Gate of Heavenly Peace in Beijing, and declared the founding of the People’s Republic. 
That moment marked the end of years of war and terrible hardship; the revolution had been won through blood, sacrifice, heroism, the mistakes of enemies, and the manipulative assistance of Stalin, who purported to be a friend. 
The decades of rapacious war lords, greedy imperialists, and Japanese invaders were over; 
China could stand up – though much misery still lay ahead as Mao’s tyranny put down its roots. 
Verdicts on Mao differ wildly. 
For hard-line Communists, he was a hero three times over – historical, patriotic, and world-class. 
For the brave and charismatic dissident Wei Jingsheng, Mao “cast virtually the whole of China into a state of violence, duplicity, and poverty.” 
The Communist Party’s official verdict, undoubtedly the product of fierce ideological disputes, is that he was a great Marxist and revolutionary, whose “gross mistakes” during the Cultural Revolution were outweighed by his contribution to China. 
“His merits,” it argues, “are primary and his errors secondary.” 
China’s Communist Party will not tolerate any questioning of this assessment. 
Mao’s establishment of authority over China, his injection of patriotic pride into a land that had been appallingly sundered and humiliated by external and internal forces for a century and a half, and his romantic legend as a global revolutionary leader – all contribute to the moral and political legitimacy for which China’s leaders search. 
What they cannot gain through democratic elections they acquire through the history of the revolution and today’s economic triumphs. 
But the dark side of Mao cannot be totally expunged. 
Too many people remember what happened. 
It is an intimate part of their family stories. 
There was the Great Leap Forward, which led to mass starvation and perhaps as many as 38 million deaths. 
Then the madness of the Cultural Revolution, when millions suffered terribly, many died, and many more behaved disgracefully as Mao sought to destroy those who had rescued China from his earlier follies. 
Jung Chang’s famous biography of Mao, published in 2005, recounts those awful events in the sort of bleak detail that makes Communist propagandists nervous – and some academic Sinologists critical that Mao’s achievements go too little recognized. 
Mao is certainly a more interesting figure than were many tyrants – a poet, an intellectual, a student of history as well as a serial philanderer, who, according to his doctor, Li Zhisui, liked to swim in water, not bathe in it. 
I know of no better, more fascinating “warts and all” portrait of any political leader than Li’s book, The Private Life of Chairman Mao . 
I remember being told a story about China that gives credence to the Communist leadership’s generous verdict on Mao. 
The mother of a Chinese journalist (now living outside the country) had been one of those who returned after 1949 to her homeland with her husband and family from a comfortable life at an American university. 
They regarded returning as their patriotic duty. 
The family sacrificed everything. 
They were hit by round after round of Mao’s tyrannical campaigns against “Rightists,” beginning with the silencing of critics after the Hundred Flowers Movement in 1956. 
The family lived in penury. 
The father died from ill-treatment during the Cultural Revolution. 
But the mother never complained. 
She believed that her family’s sacrifices were justified by the liberation and rise of China. 
Towards the end of her life, this mood changed. 
She saw in the 1990’s the beginning of China’s economic ascent – the early years of spectacular growth. 
She witnessed the return of the greed and corruption that she believed had destroyed the Kuomintang in the 1930’s and 1940’s. 
Why, she asked herself, had her family suffered so much if it was only to prepare the way for this? 
Yet it is China’s economic renaissance – some of whose effects so disturbed this patriotic old woman – which has been the most remarkable event in recent world history. 
The economic turnaround began under the leadership of Deng Xiaoping, who had survived Mao’s purges to follow in his footsteps and become the architect of China’s rise as a world power. 
The hundreds of millions of Chinese who have been lifted out of poverty as a result of Deng’s reforms will in time regard him as a greater hero than Mao. 
But, whatever Mao’s terrible failings, during his years of absolute power there was a sense of common purpose and solidarity that went with shared hardship. 
Maoism was a curious and unique mixture of class warfare and socialist leveling, all enunciated by a man who believed that individuals – or at least Mao himself – could shape history rather than be formed by its tides and currents. 
This creed has clearly not survived its creator. 
Pragmatism with a Leninist face is the order of the day. 
The glories of getting rich have overwhelmed the deprivations of patriotic self-sacrifice. 
Mao made China proud. Deng made it prosperous. 
What happens next? 
For all our sakes, I hope that the future does not derail China’s economic progress, though it will be a surprise if it does not challenge its arthritic and adamantine political system. 

Maradona: Priest and Victim of a Dark Argentine Ritual 
At the edge of death, but still clinging to life, Diego Maradona seems these days both priest and victim of a tragic Argentine ritual. 
Intense and long suffering, Argentines know how to create universal heroes like Eva Perón and Ché Guevara. 
The Argentine football star nearly rose to that lofty pedestal. 
Evita and Ché were serious people throughout their public careers. 
They gave themselves over to huge, dangerous, and heroic deeds. 
They fought to change the world and they willingly carried the burdens of legions of people on their shoulders. 
Both demanded too much from their fragile health. 
Death at an early age ended their lives. 
Political failure killed Ché, and illness took Evita's life, possibly saving her from the kind of political calamity that befell her husband a few years later. 
For both, early death elevated their stature in the alchemy of history. 
The old never make good heroes. 
Early death evokes a beautiful destiny interrupted before its pinnacle - and hence before it tumbles into inevitable collapse. 
However irrational, this is a powerful idea. 
So what we celebrate in these tragic heroes are people much like us, but with an uncommon talent and capacity to lend historical resonance to their destiny. 
We celebrate them as individuals who demonstrate how far we can travel in life, how beautiful human beings can actually be. 
But to be effective in the cause of heroism, the hero must die promptly. 
Maradona, however, is no tragic hero. 
He is a hero of happiness. 
His battles were in a decidedly popular art. 
His was a theatrical performance staged in a marvelous setting; and his victories were triumphs of beauty and intelligence. 
His expulsion from the 1982 World Cup for illegal drug use placed him, in the public's mind, on the path to tragedy, but the long cord of death, already tugging at him, had put him there years before. 
Like Evita and Ché, he bore the people's burden of expectation on his shoulders. 
True, his task was lighter, but that didn't lessen the weight of the burden. 
Maradona's helpless soul was suffocated by the people's obsessive and suffocating love; at the same time, he couldn't live without that addictive drug. 
He was a prisoner of both his genius and his insatiable need for the Argentine public's love. 
Now that he's no longer playing football, Argentines demand even more. 
They want to hear him speak, to know his stories, to feel his presence. 
But life, unlike football, has more difficult consequences than losing a game. 
Maradona fails to understand this. 
He fails to face his addictions - to the fast life and to his not always healthy, but always demanding and unreal relationship with Argentines. 
Each time, he moves a little closer toward death. 
He likes to proclaim, "I'm only a football player. I'm no role model for anyone." 
But no one hears him. 
Instead, photographers stake out his hospital room, seeking to show us our hero in his struggle with death. 
There he is, vulnerable, fat, and weak, but we expect strength. 
Maradona has been condemned to lie naked in front of millions of his fans, and his country has been condemned to pursue and reclaim him with its suffocating passion. 
So tragic a ritual can have no good end. 
But it tells us something about Argentine heroes and their fans. 
The ritual tells us that we are desperately zealous people, seeking mirrors that show our heroes as beautiful, youthful, and exceptional; that we are fascinated with a form of death that freezes our illusions into permanent images, like Evita's embalmed corpse. 
Poor Maradona. 
We, his fellow Argentines, bear ancient sorrows as well as new ones. 
We have not yet properly mourned, nor reflected upon, our nation's systematic fall into poverty; nor the disappearance of former President Carlos Saúl Menem's mirage of a First World Argentina; nor our institutions' loss of legitimacy; nor our corruption and our violence. 
I don't blame Maradona for staying away from the country in the last few years. 
There is enough sorrow in Argentina without him. 
Sadly, he has now become the victim of our collective sorrow. 
It's no surprise that his health has grown worse since his return. 
Even when he could scarcely breathe with the help of an automatic respirator, Argentines wanted him to assume his role in their dark ritual: "Show us a good time, bring our hearts some fun." 
Near the hospital, in the clear air, on a street of the sad city that invented the tango, the dark ceremony is nearing completion, just as if it were taking place in a temple. 
Messages, snatches of diary entries, and photos are plastered on the hospital's walls. 
Many people gather outside; some pray; others have built pagan altars. 
The songs of Fito Paéz, another popular artist, rise through the air, accompanied by the necessary melancholy intoned by the crowds. 
This seems a desperate farewell: 
"Show us a good time, bring our hearts some fun." 
But what can our hero do at this hour? 
He's preoccupied with his own enlarged heart, which, though weary, continues to beat. 
I have some advice for you, Diego: now that the hospital has discharged you, pack your bags and head for the airport. 

The Philippines’ Chinese Invaders 
MANILA – Ironic. 
That is how Sultan Abdul Hamidullah Atar described the planned rehabilitation of Marawi, the capital of Lanao del Sur province on the Philippine island of Mindanao, a year after the Maute Group, also known as the Islamic State of Lanao, launched an attack on the city on May 23, 2017. 
The five-month battle that followed resulted in the death of more than 1,000 people and displaced 360,000 more. 
Marawi’s people, called Maranaos, are fiercely independent. 
Like the rest of the Moros (as the Muslim peoples of Mindanao are known), the Maranaos (or “People of the Lake,” because they have built their lives and homes by Lake Lanao) were never conquered or colonized by the Spanish, the Americans, or the Japanese, as opposed to other Filipinos from the Luzon and Visayas regions. 
But now, as Atar noted, they view the participation of Chinese firms in the rehabilitation of Marawi as an intrusion, if not outright invasion. 
A consortium composed of five Chinese firms and four Filipino partner companies has submitted a master plan for rebuilding the conflict-torn city. 
The master plan aims to transform the main battleground in Marawi City – which, prior to the siege, was known for its bustling trade, grand mosques, and dynamic madrassas – into a tourist destination. 
The $328 million plan, covering 250-hectares, is modern and glitzy, with sprawling walkways, grandiose waterfront resorts, Instagram-worthy parks and plazas, an eco-trail, and a convention hall. 
But the Maranaos say it’s not Marawi. 
It does not capture their culture, tradition, or identity as historic weavers and traders, as the People of the Lake. 
“We do not want beautification,” one displaced Maranao matriarch said. 
What Maranaos want is the chance to be allowed to rebuild their houses. 
They have their own vision; their own planners, architects, and engineers; and their own manpower. 
The problem with the master plan, according to civil-society groups, is that it was reportedly developed without meaningful consultation with other stakeholders. 
On March 30, hundreds of Maranaos held a peaceful protest to demand that they be included in the plan’s formulation. 
The potential entry of Chinese firms in the massive rehabilitation of Marawi City is the latest major venture for China in the Philippines. 
Just this April, the Chinese companies Shanghai GeoHarbour Group, Jovo Group, and Zhongfa group signed multibillion-dollar agreements with the Philippine government for land reclamation, construction of liquefied natural gas (LNG) terminals, and thermal energy projects. 
The increasing presence of Chinese firms in the Philippines is a result of President Rodrigo Duterte’s pivot to China in October 2017. 
Invoking the country’s need for an “independent foreign policy,” he threatened to scuttle his country’s military agreement with its longtime ally, the United States, and vowed to work with China instead. 
Since then, Chinese money and firms have poured into the country, vying to build infrastructure. 
In 2017, investments from China reached $31 million; by April 2018, an additional $9.5 billion was expected, creating 10,800 jobs for Filipinos in tourism, agriculture, and e-commerce. 
China State Construction Engineering Corporation Limited, the government-run firm vying for the contract to rebuild Marawi City, is among the world’s largest 100 publicly traded companies, with market capitalization of $43.2 billion in 2017. But the company also was blacklisted by the World Bank in 2009 for colluding with three other Chinese companies in a $33-million road project in the Philippines. 
Duterte reasons that he can do more for Filipinos – at least his own constituents – by welcoming Chinese investment to build infrastructure across the country. 
He has also concluded that it is not worth resisting China’s claims to large parts of the South China Sea, notwithstanding a 2016 international court ruling rejecting those claims. 
He has said publicly that the Philippines is no match for China’s military might. 
Thus far, Duterte’s gamble appears to be paying off. 
His popularity among Filipinos remains high, with a net satisfaction rating of 56% for the first quarter of 2018. 
The Marawi City protests, however, signal a more complex long-term dynamic, one that is playing out in parts of Africa and Latin America where China has made deals with national governments. 
Chinese money strengthens local elites and often fuels corruption. 
Chinese firms hire mostly Chinese workers. 
And Chinese plans proceed independently of local culture and input. 
Over time, locals who are shut out become increasingly fed up. 
The recent history of Marawi is a cautionary tale. 
The Maute Group, which was led by Isnilon Hapilon, the emir of ISIS in Southeast Asia, and former Moro Islamic Liberation Front members Abdullah and Omar, exploited long-term resentment of outsiders and discrimination against Moros in their recruitment materials. 
Failure to include moderate Maranaos in the reconstruction of their own city and its governance could fan the flames of radicalism again. 
More generally, accepting Chinese money on Chinese terms fuels grievances against a type of economic imperialism with which the US government and American companies operating across the developing world in the twentieth century are all too familiar. 
Sooner or later, resistance movements build under a nationalist flag; expropriations ensue. 
And in an era in which open data and global anti-corruption movements are gaining strength, shady deals will be exposed much more quickly. 
For the People of the Lake, Marawi is not just another concession for China. 
It is their home. 
Those attachments create emotions and energy that the Philippine government ignores at its peril. 

Sanctions Blowback 
BERLIN – With the crisis in Ukraine intensifying, the United States and the European Union are locked in a battle of wills – and sanctions – with Russia. 
Indeed, in retaliation for the intensification of Western financial sanctions, Russia has announced a ban on food and agricultural imports from the US and the EU. 
But the real threat to the West lies in the potential impact of a financial crisis sparked by its own sanctions against Russia. 
Consider Russia’s 1998 financial crisis. 
In August of that year, then-President Boris Yeltsin declared, “There will be no devaluation – that is firm and definite.” 
Three days later, the ruble was devalued, and Russian financial markets went into a tailspin. 
With capital pouring out of the country, the Russian government was forced to restructure its debt, and the economy entered a deep recession. 
Though Russia was relatively insignificant financially, its crisis had far-reaching consequences. 
Among the worst affected was Argentina; the Russian crisis exacerbated a decline in investors’ confidence in emerging markets that culminated in Argentina’s sovereign default less than four years later. 
Even the US and Europe were not immune, with the collapse of the major hedge fund Long-Term Capital Management (LTCM) fueling anxiety about the viability of many other financial institutions. 
Today’s financial dramas bear a striking resemblance to this experience. 
Argentina has technically defaulted; American and European financial institutions and markets are jittery; and Russia is promising that the sanctions it faces will have no impact on its economy. 
The most obvious similarity is Russian President Vladimir Putin’s assertions that his country can weather any and all Western sanctions. 
That may be wishful thinking. 
In fact, barring most major Russian banks from operating freely in Western capital markets could affect the entire Russian economy, not just the banks themselves. 
And the central bank’s decision to raise interest rates to buttress the ruble may lead to much tighter credit conditions for companies and households, pushing the Russian economy into recession this year and next. 
The problem with financial sanctions is that no one knows precisely how they will unfold – especially in an economy as large as Russia’s. 
If they prove to be more effective than intended, they will pose a serious threat to global financial stability. 
The restrictions on Russian banks operating in Europe and the US appear modest. 
The banks can still access money markets, cover their short-term financing needs, and count on the central bank for support. 
But investors’ risk appetite could easily shift, spurring them to withdraw large amounts of capital. 
Though Russia’s public debt is modest, its foreign-exchange reserves large, and its economy much stronger than in 1998, once the herd is running, it is impossible to stop it. 
Europe’s banks have extended almost €200 billion ($268 billion) in loans to Russian institutions and firms, and hold a significant share of Russia’s euro-denominated assets, making them especially vulnerable. 
Moreover, the eurozone’s current stress tests may well reveal significant capital holes in major European banks in the coming months. 
Having just emerged from a deep recession, financial disruptions could easily cause Europe to slide back into recession, particularly given the eurozone economy’s close links to Russia via trade and energy. 
Compounding the problem, no one truly understands the precise connections among Russian and European institutions and markets. 
The collapse of LTCM in 1998 was completely unexpected. 
Is Europe today prepared to deal with a similar failure of an important financial institution? 
The financial sanctions on Russia are not targeted, temporary, or fully credible. 
If they affect Russia’s entire economy, hitting ordinary citizens the hardest, popular support for Putin’s regime may solidify further. 
Of course, an economic slowdown could erode Putin’s popular support, which is based on the gains in living standards made under his leadership. 
In that case, Putin’s response could be even more damaging. 
Another problem is that implementing sanctions that cannot be reversed quickly removes the incentive for Russia to return to the negotiating table, especially because the threat of an escalation of financial sanctions lacks credibility, given the risk to European and US financial stability. 
Once these sanctions begin to bite, no one can say who will be hurt – or how badly. 
And, as Russia’s experience in 1998, and Argentina’s after 2002, demonstrated, the process of restoring confidence among market participants is a long and painful one. 
These concerns do not mean that the US and the EU should not impose sanctions on Russia for its illegal annexation of Crimea and continuing efforts to destabilize eastern Ukraine. 
But sanctions that hit the real side of the Russian economy – such as energy, natural resources, and the military – could provide a better solution. 
Though such sanctions may not work as quickly, they would be targeted, temporary, and credible, enabling the US and Europe to control – and adjust – the impact on the Russian leadership and economy. 
In any case, US and European leaders must recognize that all sanctions will have costs – many of them unexpected – for both sides. 
If they are not willing to risk global financial stability in an unpredictable game of chicken with Putin, perhaps it would be wise to re-think the composition of the sanctions that they impose. 


Sanctions on the Installment Plan 
WARSAW – Western leaders remain undecided about their next steps in trying to stop Russia’s aggression toward Ukraine. 
But one thing has become abundantly clear: their timid efforts so far – personal sanctions, an embargo on weapons exports, and the temporary suspension of Russia’s G-8 membership – have proved to be far from adequate to convince Russian President Vladimir Putin to back down. 
Fortunately, there is a simple solution: a European Union embargo on imports of Russian raw materials, especially oil and gas. 
Just how manageable would an import embargo be? 
There are, of course, good reasons why the EU has not taken this step already. 
Europe depends on Russian energy supplies, and European banks and businesses are highly exposed to Russia. 
But, with a carefully calibrated strategy, damage to Europe’s economy could be avoided. 
More to the point, Europe does not really have a choice. 
As Putin’s desire to establish himself in Russian history as an imperial aggrandizer – alongside Ivan the Terrible, Catherine the Great, and Lenin – becomes increasingly apparent, so does the need for decisive action from the EU. 
Indeed, unless Putin is stopped, his appetite is likely to become even more voracious, turning toward the Baltic States, Moldova, or Central Asia – with increasingly serious consequences for European security. 
Unlike the weak strategy that the EU has been pursuing so far, an embargo on Russian oil and gas would put real pressure on Russia. 
Energy accounts for 70% of Russia’s export earnings and half of its budget revenue – money that is used to finance the military, nationalist state-owned media, cyber wars, the fifth column in Ukraine and other countries, and the lavish lifestyles of the country’s elites, including Putin. 
Given Europe’s dependence on Russian energy supplies, imports could not be cut off all at once. 
Instead, the embargo should be introduced incrementally. 
The first step would be to subject all purchases of Russian fuel to import quotas, a well-tested tool in the EU, where it is often used for imports of agricultural products from third countries. 
In the embargo’s first year, companies importing Russian energy would be required to obtain licenses for the amount that they have imported to date. 
Each subsequent year, the import quota would be reduced by 5%, so that the EU’s total annual imports of Russian energy would be reduced by half within a decade. 
This approach would enable European economies to adjust gradually to the new conditions, while giving them time to search for new energy sources, improve conservation, and reduce consumption. 
The prospect of such a drastic reduction in its export revenues would be sobering for the Kremlin, especially given the difficulty of finding alternative markets. 
The Chinese, for example, are already driving a hard bargain; the knowledge that Russia has no other option would give them even more leverage in negotiations. 
The EU, for its part, can survive the impact of an embargo. 
Russia accounts for some 30% of the EU’s total imports of raw materials and roughly 20% of its gas and oil. 
But it accounts for only 12% of the EU’s overall energy consumption, meaning that, over the next ten years, the EU would have to supplement only about 6% of the energy it consumes. 
That is a small price to pay to dampen Russia’s imperial ambitions and thus enhance European security. 
The problem is that the cost would not be shared equally across Europe, owing to EU member states’ different levels of dependence on Russian energy. 
Indeed, some countries – such as the Baltic states, Poland, and Slovakia – have long-term commitments with Russia, and thus would need more time to meet the requirements of the embargo. 
Fortunately, this problem, too, can be resolved. 
Once the EU issues the import quotas, companies should be allowed to trade them, allowing them to optimize the adaptation process. 
Moreover, the EU should work to improve the flow of energy supplies across its internal borders, helping member states closer to Russia to compensate for the losses incurred by higher fuel prices. 
Meanwhile, European countries should intensify efforts to diversify their energy supplies, which should include higher imports from allies like the United States and a significant increase in renewable energy’s share of consumption. 
Decreasing imports of Russian energy would prove far more damaging for Russia than it would for the EU. 
Indeed, it is the easiest and probably the most effective way to force Russia to comply with international norms – and no one would have to fire a single shot. 

The World Economy’s Impossible Demand 
WARSAW – The global economy’s glory days are surely over. 
Yet policymakers continue to focus on short-term demand management in the hope of resurrecting the heady growth rates enjoyed before the 2008-09 financial crisis. 
This is a mistake. 
When one analyzes the neo-classical growth factors – labor, capital, and total factor productivity – it is doubtful whether stimulating demand can be sustainable over the longer term, or even serve as an effective short-term policy. 
Consider each of those growth factors. 
Over the next 15 years, demographic changes will reverse, or at least slow, labor-supply growth everywhere except Africa, the Middle East, and South Central Asia. 
Europe, Japan, the United States, and eventually China and East Asia will face labor shortages. 
Although large-scale migration from labor-surplus regions to deficit regions would benefit recipient economies, it would almost certainly trigger popular resistance, especially in Europe and East Asia, making it difficult to support. 
Increasing the labor-force participation rate, especially among women and the elderly, might ease tight labor markets, but this alone would be insufficient to counter the decline in working-age populations. 
The world economy cannot count on higher investment levels either. 
The global investment/GDP ratio, especially in advanced economies, has been gradually declining over the past 30 years, and there is no obvious reason why it would pick up again in the medium to long-term. 
Until recently, falling investment in the developed world had been offset by rapid increases in investment in emerging markets, mostly in Asia. 
But high rates of investment there are also unsustainable. 
As in Japan, China’s investment rate (running at almost 50% of GDP since 2009) will decline as its per capita income rises. 
The third engine of growth, total factor productivity, will also be unable to maintain the relentless gains witnessed from the late 1990’s to the mid-2000’s. 
During this time, the global economy benefited from the confluence of several unique developments: an information and communications revolution; a “peace dividend” resulting from the end of the Cold War; and the implementation of market reforms in many former communist and other developing economies. 
Moreover, global growth received a further boost from the completion of the Uruguay Round of free-trade negotiations in 1994 and the overall liberalization of capital flows. 
It is difficult to point to any growth impetus of similar magnitude – whether innovation or public policy – in today’s economy. 
No new technological revolution appears to be on the horizon. 
The World Trade Organization produced only a limited agreement in Bali in December, despite 12 years of negotiations, while numerous bilateral and regional free-trade agreements might even reduce world trade overall. 
Worse, in the wake of the 2008 financial crisis, sluggish growth and high unemployment in developed countries have fueled demands for more protectionism. 
Thus, the financial liberalization of the 1990’s and early 2000’s is also under threat. 
The far-reaching macroeconomic and political reforms of the post-Cold War era also seem to have run their course. 
The easy gains have already been banked; any further structural change will take longer to agree and be tougher to implement. 
Thus, with supply-side factors no longer driving global growth, we must reassess our expectations of what monetary and fiscal policies can achieve. 
If actual growth is already close to potential growth, then continuing the current fiscal and monetary stimulus will only create more bubbles, exacerbate sovereign-debt problems, and, by reducing the pool of global savings available to finance private investment, undercut long-term growth prospects. 
Instead, policymakers should focus on removing their economies’ structural and institutional bottlenecks. 
In advanced markets, these stem largely from a declining and aging population, labor-market rigidities, an unaffordable welfare state, high and distorting taxes, and government indebtedness. 
The list of growth obstacles in emerging markets is even longer: corruption and weak rule of law, state capture, organized crime, poor infrastructure, an unskilled workforce, limited access to finance, and too much state ownership. 
In addition, markets of all sizes and levels of development continue to suffer from protectionism, restrictions on foreign capital flows, rising economic populism, and profligate or poorly targeted welfare programs. 
If these problems can be addressed, both globally and at the national level, we can end the dangerous fiscal and monetary expansionism on which the world economy has come to rely and allow growth to be sustained over the long term – though at lower rates than in recent years. 


Why Big Oil Should Kill Itself 
LONDON – Now that oil prices have settled into a long-term range of $30-50 per barrel (as described here a year ago), energy users everywhere are enjoying an annual income boost worth more than $2 trillion. 
The net result will almost certainly accelerate global growth, because the beneficiaries of this enormous income redistribution are mostly lower- and middle-income households that spend all they earn. 
Of course, there will be some big losers – mainly governments in oil-producing countries, which will run down reserves and borrow in financial markets for as long as possible, rather than cut public spending. 
That, after all, is politicians’ preferred approach, especially when they are fighting wars, defying geopolitical pressures, or confronting popular revolts. 
But not all producers will lose equally. 
One group really is cutting back sharply: Western oil companies, which have announced investment reductions worth about $200 billion this year. That has contributed to the weakness of stock markets worldwide; yet, paradoxically, oil companies’ shareholders could end up benefiting handsomely from the new era of cheap oil. 
Just one condition must be met. 
The managements of leading energy companies must face economic reality and abandon their wasteful obsession with finding new oil. 
The 75 biggest oil companies are still investing more than $650 billion annually to find and extract fossil fuels in ever more challenging environments. 
This has been one of the greatest misallocations of capital in history – economically feasible only because of artificial monopoly prices. 
But the monopoly has fallen on hard times. 
Assuming that a combination of shale development, environmental pressure, and advances in clean energy keep the OPEC cartel paralyzed, oil will now trade like any other commodity in a normal competitive market, as it did from 1986 to 2005. 
As investors appreciate this new reality, they will focus on a basic principle of economics: “marginal cost pricing.” 
In a normal competitive market, prices will be set by the cost of producing an extra barrel from the cheapest oilfields with spare capacity. 
This means that all the reserves in Saudi Arabia, Iran, Iraq, Russia, and Central Asia would have to be fully developed and exhausted before anyone even bothered exploring under the Arctic ice cap or deep in the Gulf of Mexico or hundreds of miles off the Brazilian coast. 
Of course, the real world is never as simple as an economics textbook. 
Geopolitical tensions, transport costs, and infrastructure bottlenecks mean that oil-consuming countries are willing to pay a premium for energy security, including the accumulation of strategic supplies on their own territory. 
Nonetheless, with OPEC on the ropes, the broad principle applies: ExxonMobil, Shell, and BP can no longer hope to compete with Saudi, Iranian, or Russian companies, which now have exclusive access to reserves that can be extracted with nothing more sophisticated than nineteenth-century “nodding donkeys.” 
Iran, for example, claims to produce oil for only $1 a barrel. 
Its readily accessible reserves – second only in the Middle East to Saudi Arabia’s –will be rapidly developed once international economic sanctions are lifted. 
For Western oil companies,the rational strategy will be to stop oil exploration and seek profits by providing equipment, geological knowhow, and new technologies such as hydraulic fracturing (“fracking”) to oil-producing countries. 
But their ultimate goal should be to sell their existing oil reserves as quickly as possible and distribute the resulting tsunami of cash to their shareholders until all of their low-cost oilfields run dry. 
That is precisely the strategy of self-liquidation that tobacco companies used, to the benefit of their shareholders. 
If oil managements refuse to put themselves out of business in the same way, activist shareholders or corporate raiders could do it for them. 
If a consortium of private-equity investors raised the $118 billion needed to buy BP at its current share price, it could immediately start to liquidate 10.5 billion barrels of proven reserves worth over $360 billion, even at today’s “depressed” price of $36 a barrel. 
There are two reasons why this has not happened – yet. 
Oil company managements still believe, with quasi-religious fervor, in perpetually rising demand and prices. 
So they prefer to waste money seeking new reserves instead of maximizing shareholders’ cash payouts. 
And they contemptuously dismiss the only other plausible strategy: an investment shift from oil exploration to new energy technologies that will eventually replace fossil fuels. 
Redirecting just half the $50 billion that oil companies are likely to spend this year on exploring for new reserves would more than double the $10 billion for clean-energy research announced this month by 20 governments at the Paris climate-change conference. 
The financial returns from such investment would almost certainly be far higher than from oil exploration. 
Yet, as one BP director replied when I asked why his company continued to risk deep-water drilling, instead of investing in alternative energy: “We are a drilling business, and that is our expertise. 
Why should we spend our time and money competing in new technology with General Electric or Toshiba?” 
As long as OPEC’s output restrictions and expansion of cheap Middle Eastern oilfields sheltered Western oil companies from marginal-cost pricing, such complacency was understandable. 
But the Saudis and other OPEC governments now seem to recognize that output restrictions merely cede market share to American frackers and other higher-cost producers, while environmental pressures and advances in clean energy transform much of their oil into a worthless “stranded asset” that can never be used or sold. 
Mark Carney, Governor of the Bank of England, has warned that the stranded-asset problem could threaten global financial stability if the “carbon budgets” implied by global and regional climate deals render worthless fossil-fuel reserves that oil companies’ balance sheets currently value at trillions of dollars. 
This environmental pressure is now interacting with technological progress, reducing prices for solar energy to near-parity with fossil fuels. 
As technology continues to improve and environmental restrictions tighten, it seems inevitable that much of the world’s proven oil reserves will be left where they are, like most of the world’s coal. 
Sheikh Zaki Yamani, the longtime Saudi oil minister, knew this back in the 1980s. 
“The Stone Age did not end,” he warned his compatriots, “because the cavemen ran out of stone.” 
OPEC seems finally to have absorbed this message and realized that the Oil Age is ending. 
Western oil companies need to wake up to the same reality, stop exploring, and either innovate or liquidate. 

Marginalizing Malaria 
SAN FRANCISCO – Last fall, Bill and Melinda Gates sent shock waves through the global health community when they announced the audacious goal of eradicating human malaria from the face of the planet. 
Nothing less, they urged, would be enough. 
Heated debate immediately erupted, with some experienced practitioners questioning the feasibility of such a goal. 
These skeptics pointed to the first Global Eradication Program, an ambitious effort in the 1950’s to clear malaria from many areas of the world (Africa was excluded). 
Despite initial progress, eradication programs crumbled as donors, governments, and populations grew tired and turned their attention elsewhere, allowing malaria to resurge to devastating levels. 
No one is suggesting a return to the failed strategies of the first eradication program. 
The Gates Foundation has sensibly begun to facilitate consultations with leading scientists on accelerating the development of potent new tools, and is already funding the development of a vaccine, as well as new drugs and diagnostics. 
At the same time, the Roll Back Malaria Partnership has recently launched a long-term Global Action Plan to unify the actions of the malaria community and spur additional investment. 
All agree that eradication is decades away. 
Yet, while total eradication is beyond the horizon, and new tools are needed to get there, there is much that can be achieved in the near term with our current armory. 
Recent success in countries such as Ethiopia and Rwanda in expanding access to impregnated bed nets and slashing malaria rates is building confidence that the disease can be dramatically reduced around the world and, in some areas, eliminated entirely. 
To realize this opportunity, a sound strategy must rapidly be developed and executed. 
In a recent article in the British scientific journal The Lancet , Oliver Sabot and I proposed such a strategy. 
The approach is simple: a redoubled effort to reduce infections and deaths rapidly in the malaria “heartland” (i.e., equatorial Africa and a handful of other areas around the world) should be accompanied by a campaign to roll back the disease from its current margins. 
Malaria has natural limits, determined by latitude, altitude and, in some cases, human intervention. 
The countries at the fringe of this zone typically benefit from a range of factors that make complete elimination of malaria possible, including lower transmission of the disease, stronger health systems, and relative national wealth. 
Most importantly, these countries are not surrounded by malaria. 
As they successfully eliminate malaria, they will provide a new malaria-free anchor that will enable their neighbors, which have been pursuing aggressive control measures in the interim, to embark on their own eradication campaigns. 
In this way, malaria will literally be rolled back from its current borders. 
This strategy has begun to emerge organically, without prompting from the global community. 
In the Pacific, Vanuatu and the Solomon Islands, at the far southeastern margin of the malaria endemic zone, have embarked on an eradication campaign with support from the Australian government. 
Across the globe, the Southern Africa Development Community has set a goal of eliminating malaria from its four southernmost members – Botswana, Namibia, South Africa, and Swaziland – by 2015. 
To do so, they are in active discussions with their northern neighbors, and innovative cross-border collaborations are being developed, building on the model of the highly successful partnership between Mozambique, South Africa, and Swaziland. 
Other malaria margins where eradication efforts are underway are China, the Philippines, and Central America. 
More than one million people die each year from malaria, most of them are children. 
Yet malaria is a preventable and treatable disease. 
The task of eliminating malaria, country by country, and eventually reaching global eradication, is underway. 
This time, we must not rest until it is completed. 

The Dark Side of Physics 
PASADENA – Almost a century ago, the first galaxy beyond our own was discovered, and within a decade the theory that the universe is expanding was first proposed. 
Since then, astounding technological developments have contributed to revolutionary progress in physics, astronomy, cosmology, and the life sciences. 
Today, physics stands at a new threshold. 
On July 4, 2012, the international physics community witnessed a monumental discovery in the history of high-energy physics: a Higgs boson. 
The long-hypothesized Higgs boson is the necessary component that validates the Standard Model of elementary particles as a “blueprint” for the real universe. 
The Higgs boson provides mass for these particles; without it, the physical world, as we understand it, would have no atoms, chemistry, or life. 
Finding what was, until then, just a theoretical prediction required one of the largest and most complex scientific undertakings ever attempted: the creation of the particle accelerator, the Large Hadron Collider, near Geneva. 
The research carried out at the LHC is now likely to steer our understanding of the universe from the smallest elementary particles to our study of cosmology. 
From 2010 to 2012, the LHC produced the highest-energy proton-proton collisions ever; and even higher-energy collisions are anticipated in 2015. 
Physicists had long expected the LHC to reveal a new sector of particles and fields associated with “electroweak symmetry breaking” and the dark matter of the universe. 
Two major experimental observations underpinned this expectation. 
The first was the masses of the W and Z bosons – the messengers of the weak nuclear interactions, responsible, for example, for the shining sun. 
The second was a large set of astrophysical observations, pointing to the necessity of a gravitational “scaffolding” in the universe: that is, the dark matter needed to prevent the stars and galaxies from flying apart. 
Although the Higgs discovery may help us to understand the source of elementary particles’ mass (including its own), nature has surprised us in two further respects. 
First, the measured mass of the Higgs boson renders the full theory “metastable” in the absence of any new physics phenomena. 
In other words, the universe might have other, more energetically favorable configurations. 
Second, the LHC data seem to disfavor, though not exclude, the most aesthetically and mathematically pleasing new physics phenomenon, “supersymmetry,” which was theorized along with the Higgs boson before its actual discovery and is necessary to address quantum corrections. 
The persistence of the dark-matter conundrum, in combination with these considerations, might alter our fundamental ideas and predictions about what might follow the discovery. 
New ideas are now being formulated about the Higgs boson itself, opening a direct portal to the dark matter of the universe. 
A concerted experimental and theoretical program has taken shape in the fields of particle physics, cosmology, astrophysics, and gravitational physics to discover a dark-matter particle candidate in the next decade or so. 
What is at stake are paradigms that have held for the past 76 years, and that have been supported recently by spectacular measurements of the cosmos. 
Some in the world of physics might call this a crisis. 
However, it is quite common for a theory to lack experimental backing. 
All research into the universe and the physical world struggles to achieve a complete understanding. 
In that sense, we are in perpetual crisis and at the threshold of discovery. 
It might be fairer to describe physics as being at a turning point or a crossroads. 
Physics provides the evolving core framework on which other fields of science are built. 
And now, with the technological armory and plethora of data currently available, science can go far beyond any previous expectation and extrapolation. 
Indeed, in coming decades, everything will be susceptible to major revision as new cross-disciplines – and undisciplined threads of study – emerge. 
Quantum engineering teams are already springing up in academic and research institutes all around the world. 
The merging of computer science and engineering with neuroscience has already produced results that not long ago belonged only to science fiction. 
Nature can seem complex, haphazard, and tricky; and it can strike us as simple, symmetrical, and beautiful. 
Either way, the quantum universe will continue to surprise us. 

Patriotism in the Age of Globalization 
LONDON – The new fault line in politics, according to Marine Le Pen, leader of France’s far-right National Front, is between globalists and patriots. 
It is an argument similar to those being made by euroskeptics in the United Kingdom and Republican presidential candidate Donald Trump in the United States. 
It is, however, as false as it is dangerous. 
Judging by the results of the second and final round of France’s regional elections on December 13, it is also an argument that French voters, at least, roundly rejected. 
They cast 73% of their ballots for the National Front’s rivals, depriving the party of even a single victory. 
Le Pen accused the mainstream parties of ganging up on her, describing their cooperation as a denial of democracy. 
Her argument is, of course, a classic example of sour grapes; the entire point of a two-round voting system is to force parties and their supporters to seek a consensus and form partnerships. 
Unless and until the National Front finds a way to win allies, it will not achieve an electoral breakthrough. 
(The same is likely to prove true about Trump.) 
That is not to say that Le Pen’s claim – that those who vote for her party are the only true patriots – should be casually dismissed. 
She has homed in on a powerful message, one with the potential to attract supporters from other parties. 
That’s why it must be rebutted, both in France and elsewhere. 
The assumption underlying such nationalist bombast – that a country’s interests are better served by being closed rather than open – is extremely dangerous. 
The belief that openness is treason and closure is patriotic is a rejection of the entire post-1945 framework of politics and policy in the developed world. 
It is an attempt to turn back the clock to the interwar period, when the focus was on closing off: imposing onerous trade restrictions and persecuting or expelling minority groups. 
This was true even in the United States, which enacted the most restrictive immigration laws since the country’s founding. 
The postwar years marked a complete change of direction, as countries opened up, allowing freer flows of trade, capital, ideas, and people. 
This process became known as globalization only after China and India joined in during the 1980s, but it had started long before. 
It was globalization, after all, that created what in France became known as Les Trente Glorieuses – the 30 glorious years of rapidly rising living standards following the end of WWII. 
Le Pen and her fellow populists claim that globalization was either an act of foolish generosity that helped the rest of the world at the expense of the nation, or a phenomenon that benefited only the elites and not ordinary people. 
For them, patriotism means being harder-headed about protecting the national interest and adopting more democratic policies that help the working masses, not jet-setting fat cats. 
The second part of this argument – that the interests of ordinary people have been subordinated to those of the elite – must be heard and responded to. 
A democracy in which a majority feels neglected or exploited is not sustainable. 
Either the government or the entire system will be overturned. 
Elected officials clearly need to find answers to high unemployment and declining living standards. 
What mainstream parties need to be make clear, however, is that the answers to those problems do not lie in closing borders or minds. 
There is no example, anywhere in history, of a society or an economy that has prospered over the long term by rejecting globalism. 
Moreover, though openness may not guarantee prosperity, it has always been a prerequisite for growth. 
To be sure, the optimal amount of openness is a matter of debate. 
But the bigger, more productive arguments are about how to shape education, labor markets, scientific research, and social-welfare policies in order to help societies adapt to the world around them. 
The patriotic choice – the national interest – has always consisted in crafting domestic policies that best take advantage of globalization. 
For mainstream parties in France, the Conservatives in the UK, and Trump’s more internationally minded Republican rivals in the US, there is nothing to be gained from copying the arguments of their extremist counterparts. 
Doing so would yield crucial ground in the political battle over how best to serve the country and its people. 
Mainstream parties must reclaim the mantle of patriotism and redefine the national interest accordingly. 
In today’s world, the national interest lies in managing openness – not in throwing it away. 

Mario Draghi’s Guns of August 
WASHINGTON, DC – August has been a dangerous month in European history, but this year it could be the turning point for the eurozone – and perhaps for the world economy. 
On July 26, Mario Draghi, President of the European Central Bank, declared that his institution would do “whatever it takes” to preserve the euro, and added: “Believe me, it will be enough.” 
Draghi’s strong – indeed, unprecedented – statement was widely interpreted as signaling that the ECB would soon revive its bond-purchase program, focusing on Spanish debt in particular. 
Stock markets around the world soared. 
Jens Weidemann of the Bundesbank immediately expressed reservations, but the next day German Chancellor Angela Merkel and French President François Hollande issued a joint statement expressing their determination “to do everything in order to protect the eurozone.” 
I recently argued that the ECB, working with the nascent European Stability Mechanism (ESM), was the only institution that could save the eurozone. 
It could do so by buying Italian and Spanish bonds in the secondary market with the pre-announced intention of keeping their sovereign interest rates below a certain threshold for a certain time. 
It is likely that Draghi’s statement will indeed be followed by ECB purchases of Spanish (and Italian) sovereign bonds. 
A man like Draghi would not have issued such a statement without believing that he could follow through on it. 
But, if this is to become a decisive turning point in the eurozone crisis, three things must happen. 
First, the ECB’s renewed bond purchases must express the clear intention of reducing sovereign interest rates to sustainable levels, which are at least 200 basis points below their July averages. 
A high-level German diplomat reportedly dismissed Spain’s 6.5-7% interest rates recently, on the grounds that Spain borrowed at nearly the same rates in the 1990’s. 
But that statement, amazingly, ignored Spain’s higher pre-euro inflation – thus confusing real and nominal rates – and more rapid GDP growth. 
For countries that are following agreed reform programs, the ECB should commit itself to bringing down interest rates to levels compatible with projected inflation and growth rates, and announce how long (say, nine months) this will continue. 
A sporadic program without such announced objectives is unlikely to work, and could even be counterproductive, as private investors might well demand even higher returns because the growing ECB share of the debt would be considered senior, augmenting their risk. 
That would not happen if the ECB announced – and demonstrated – its determination to bring down interest rates, whatever it takes, for a significant period of time. 
Doing so would allow the eurozone to establish the institutional and legal means to achieve greater cooperation and integration, as agreed at the European Council’s meeting in June. 
The second thing that must happen is that eurozone leaders and parliaments, with the cooperation of the courts, must be seen to push ahead with institutional reforms to establish not only the ESM, but also a banking union and partial debt mutualization. 
But, while greater merging of economic sovereignty is the only long-term solution to the eurozone’s woes, such reforms cannot happen very quickly, which is why the ECB’s role is so crucial. 
The eurozone can no longer sustain continued uncertainty and high real interest rates in the peripheral countries, so the ECB must provide a solid and credible bridge to the future. 
Finally, the adjustment programs themselves must be carefully re-calibrated. 
It should be clear by now that excessive, front-loaded austerity measures tend to be self-defeating, because they trigger a downward spiral of output, employment, and tax revenues. 
Indeed, the International Monetary Fund’s most recent report on the eurozone says as much (if cautiously). 
The pace of deficit reduction must be slowed, particularly in Spain, because output is determined in the short run by demand, and private demand cannot replace public demand until a degree of faith in the future is restored. 
This move toward support of effective demand must be combined with the kind of structural reforms that will allow more rapid, supply-side growth in the longer term. 
If these three steps – an ECB bond-buying program to hold down sovereign interest rates, concrete progress on establishing a real economic union, and realistic revision of current adjustment programs – could be achieved as a package, the resources that the ECB would need to use for its bond purchases would drop, because credibility would be restored. 
Even if there is further bad news for Europe – from Greece, for example, or from a sharper-than-expected slowdown in China – the eurozone could begin to move out of crisis mode this month. 
But that is possible only if, this time, the “big bazooka” really is put in place. 
Otherwise, the eurozone’s position – financially, politically, and socially – will soon become undefendable. 

Brilliant Blunders 
BALTIMORE – Thomas Edison is reputed to have said, “I have not failed. 
I’ve just found 10,000 ways that won’t work.” 
This statement sums up a fundamental – but often misunderstood – truth about scientific inquiry. 
Progress in science – as in any creative discipline – is not a direct march to the answer, but a complex, zigzag path, involving many false starts and blind alleys. 
Blunders are not only inevitable; they are essential to innovative thinking, because they point the way for other explorers. 
One may wonder whether today’s highly competitive, funding-starved scientific atmosphere, in which publications and citations have become a primary criterion for success, can accommodate such mistakes. 
The simple answer is yes. 
Indeed, they are as important as ever – and not only in academia. 
In fact, the entire scientific method is based on the notion that discovering what does not work is vital to learning what does. 
Any scientific theory must be falsifiable – that is, based on existing observations or experimental results. 
For a theory to be considered scientific, it must yield specific predictions of future observations or experimental results. 
If those observations or results contradict the predictions, the theory is discarded, or at least must be modified. 
The mistakes that are integral to scientific progress are not those that result from haste, sloppiness, or inexperience. 
Rather, they are the mistakes that arise from thoughtful, meticulous experimentation based on bold ideas – the kind of ideas that can lead to major breakthroughs. 
Fred Hoyle, one of the twentieth century’s greatest astrophysicists, provided a perfect example of such a “brilliant blunder.” 
Hoyle and two of his colleagues proposed what became known as the Steady State model of the universe, according to which the universe did not evolve following the so-called “big bang” (a term that Hoyle coined); instead, it was constant, remaining the same throughout eternity. 
The idea was brilliantly elegant: just as our universe is homogeneous (the same at every point in space) and isotropic (looking the same in all directions), it remains the same at every point in time. 
While the Steady State theory was eventually falsified – our universe is expanding, and it most likely started from a big bang – it energized the entire field of cosmology, because it brought into sharp focus the questions that had to be addressed. 
In fact, currently fashionable models of the multiverse – the concept that our universe is but one of a huge ensemble of universes – are consistent with the idea that they are collectively in a kind of steady state. 
The nineteenth-century physicist William Thomson, later known as Lord Kelvin, made his own brilliant blunder when he calculated that the Earth was less than 100 million years old – about fifty times younger than the age deduced from modern radiometric measurements. 
Though Kelvin’s estimate was seriously flawed, the effort remains central to the history of knowledge, because it applied real science – the laws of physics – to what had long been a subject of vague speculation. 
Kelvin’s insights helped to launch a fruitful dialogue between geologists and physicists – a dialogue that eventually resolved even problems related to the length of time needed for Darwin’s theory of evolution to operate. 
And the oversight that warped Kelvin’s estimate – the possibility that fluid motion could efficiently transport heat within the Earth’s interior – turned out to be critical to understanding plate tectonics and continental drift. 
Startup companies exemplify the potential benefits of risk-taking. 
While only about 49% of manufacturing startups and 37% of information startups survive for four or more years, those that do have managed to produce breakthrough innovations. 
Tom Watson, Jr., who led IBM through decades of strong growth, is known for having supported brilliant blunders. 
As he put it, “We should have the courage to take risks when they are thoughtful risks….We must forgive mistakes which have been made because someone was trying to act aggressively in the company’s interest.” 
Funding agencies for academic research should adopt a similar philosophy, awarding a certain share of financing to thoughtful, unconventional proposals – those deemed risky, owing to a relatively low probability of success, but that could lead to important discoveries. 
Such a scheme would create opportunities to take advantage of serendipity – a major component of scientific discovery. 
Until about a decade ago, the Space Telescope Science Institute adopted a similar policy for allocating observation time for the Hubble Space Telescope. 
In addition, each year, the institute’s director was allotted a certain amount of discretionary time to grant to special projects that he or she deemed worthwhile. 
In 1995, Robert Williams used that time to take a major risk: he aimed the telescope at a seemingly uninteresting area for nearly ten days. 
The result was an image of more than 3,000 galaxies some 12 billion light-years away – the so-called Hubble Deep Field. 
Likewise, closer to home, as many as half of our discoveries of new medicines have originated from accidents. 
For example, isoniazid was initially tested as a tuberculosis drug; iproniazid, one of its derivatives, later proved to be effective in the treatment of depression. 
Space for brilliant blunders is vital to achieving the kind of creative breakthroughs that drive scientific progress. 
It is time for funding institutions to recognize that. 


The Bank of England’s Knockout Artist 
LONDON – In Canada, if you say you come from London, the natives often ask if you mean London, Ontario, or London, England. 
I always find the question somewhat irritating, perhaps revealing the persistence of an arrogant imperial mindset. 
But soon, perhaps, they will no longer need to ask: in London, we are all Canadians now. 
With what one commentator described as “his rock star looks and PR charm,” Mark Carney, the former governor of the Bank of Canada, has taken the city by storm in his first weeks as Governor of the Bank of England. 
Change is the order of the day at the Old Lady of Threadneedle Street. 
Out goes the fusty old inflation-targeting regime, with its fixation on the consumer price index and disregard for financial-sector imbalances. 
In comes a brave new world of “state-contingent threshold-based forward guidance,” complete with three conditional “knockouts” that would cause the guidance to be changed. 
We have had to learn a whole new lexicon of central-bank speak. 
These are heady times at the BoE (in the heart of the financial district of Ontario-on-Thames). 
The simple point that Carney made in his first policy pronouncement was that interest rates will remain unchanged, and the BoE’s variant of quantitative easing will remain in place, at least until unemployment falls below 7% (from its current rate of 7.8%). 
Though it all sounded straightforward, markets were confused. 
The pound initially fell sharply, and then recovered, while long-term government borrowing rates have risen by around 30 basis points. 
This outcome may not have been what the new governor intended, but it is perhaps not surprising. 
Though forward guidance is a useful part of the modern central banker’s tool kit, the Anglo-Canadian version on display in London is highly complex, mainly because it has been shoehorned into a policy framework designed for another purpose. 
There are four related problems. 
The first is that the United Kingdom retains policymaking by committee. 
To his credit, Carney has succeeded in persuading most of his new colleagues on the Monetary Policy Committee (MPC) to sign up to the new approach (we now know there was one holdout). 
That could not be taken for granted. 
Their views have often been split in recent years. 
But individual voting remains in place, so Carney is not in sole charge of policymaking, as he was at the Bank of Canada. 
Any future commitments are conditional on keeping a majority of the committee in line. 
That leads to the second problem: the so-called knockouts – the other factors that can change the direction of policy – are clearly matters of judgment, not of fact. 
The first knockout would occur if, “in the MPC’s view, it is more likely than not that CPI inflation 18 to 24 months ahead will be 0.5 percentage points or more above the 2% target.” 
The second is that “medium-term inflation expectations no longer remain sufficiently well anchored.” 
There is plenty of scope for different judgments on both issues, neither of which lends itself to definitive answers based on solid numbers. 
And, sadly, when it comes to forecasting inflation, the BoE’s record has not been very good. 
The final knockout – which would occur if “the Financial Policy Committee (FPC) judges that the stance of monetary policy poses a significant threat to financial stability” – points to the third problem. 
The FPC is part of the complex new UK regulatory structure, in which the former Financial Services Authority has been split in two: a prudential and business-conduct regulator and a new body to monitor financial stability. 
The new FPC must give its advice publicly to the MPC when it has concerns. 
The FPC, it should be emphasized, is chaired by the BoE’s governor, so there is an element of smoke and mirrors here. 
But its composition is different from that of the MPC, so its view on a particular policy stance may be different as well, and here, too, the governor has only one vote. 
Some argue that it would have been simpler to merge the two, and the unwieldiness of the new means of articulating policy suggests that this might indeed have been a good idea. 
The BoE’s governor is now in the odd position of being invited to knock himself out – and in public, too. 
That would be fun to watch. 
The fourth problem is the most fundamental. 
The government has chosen not to change the BoE’s formal mandate. 
Its prime objective remains price stability, with real-economy factors relegated to the second order of importance. 
By contrast, the US Federal Reserve has a dual mandate: price stability and full employment. 
Of course it must continuously balance the two, but both have equal weight. 
It is the failure of the UK government to amend the statute that dictates the complex structure of knockouts that the BoE’s ingenious staff has been obliged to devise. 
The unemployment threshold, linked to forward guidance, can be seen as a backdoor way of adding a second objective. 
But one would surely not start from there if that were the long-term policy aim. 
It would have been far clearer to address the issue head on and change the BoE’s mandate. 
That would have painted the new regime with a veneer of democratic legitimacy, giving it greater authority. 
The government, however, decided not to open up the issue in parliament. 
The objectives of the new monetary-policy approach are admirable. 
The UK economy, while moving forward, is still operating well below capacity. 
But to keep all these balls in the air, and avoid knocking himself out, Carney will need all the creativity and agility of that other great Canadian export – Cirque du Soleil. 


Privacy Since Snowden 
LONDON – A year has passed since the American former intelligence contractor Edward J. Snowden began revealing the massive scope of Internet surveillance by the US National Security Agency. 
His disclosures have elicited public outrage and sharp rebukes from close US allies like Germany, upending rosy assumptions about how free and secure the Internet and telecommunications networks really are. 
Singlehandedly, Snowden has changed how people regard their phones, tablets, and laptops, and sparked a public debate about the protection of personal data. 
What his revelations have not done is bring about significant reforms. 
To be sure, US President Barack Obama, spurred by an alliance between civil-society organizations and the technology industry, has taken some action. 
In a January speech, and an accompanying presidential policy directive, Obama ordered American spies to recognize that “all persons should be treated with dignity and respect, regardless of their nationality or wherever they might reside, and that all persons have legitimate privacy interests in the handling of their personal information.” 
Some specific advances, unprecedented in the shadowy world of intelligence agencies, have accompanied this rhetorical commitment to privacy. 
When technology companies sued the government to release details about intelligence requests, the Obama administration compromised, supporting a settlement that allows for more detailed reporting. 
Under this agreement, companies have the option of publishing figures on data requests by intelligence agencies in ranges of 250 or 1,000, depending on the degree of disaggregation of the types of orders. 
Though this represents a step forward, it is far from adequate, with gaping loopholes that prohibit reporting on some of the most notorious NSA programs, such as the dragnet collection of phone records under section 215 of the USA PATRIOT Act. 
Moreover, Obama has demurred on the most significant recommendations of the independent review group that he appointed. 
And the “USA FREEDOM Act,” which was meant to stop the mass collection of Americans’ phone records, is being diluted by a set of amendments that would enable the government to continue collecting metadata on millions of individuals, without their consent. 
This metadata – covering whom we talk to, when, and for how long – can reveal as much about our private lives as the content itself. 
Worse, relative to the rest of the world, the US has taken the strongest action since the Snowden revelations began. 
Of course, Snowden exposed more about the US government’s surveillance activities than any other country. 
But the documents also included egregious examples of overreach by the Government Communications Headquarters, the United Kingdom’s signals intelligence agency, and information about intelligence sharing in the so-called “Five Eyes” network of the US, the UK, Canada, Australia, and New Zealand. 
The agreements that govern the pooling and exchange of intelligence among these governments remain closely guarded secrets. 
In the UK, public and parliamentary debate on surveillance practices has been minimal, at best. 
And not only does Canadian law prohibit companies from reporting virtually any information about government requests for data; 
Prime Minister Stephen Harper has nominated a lawyer who spent his career advising intelligence agencies to serve as an official privacy commissioner, raising the ire of activists. 
Some countries have even intensified their surveillance activities. 
Immediately following the Snowden revelations, the French government snuck into a military appropriations bill the authority to increase government surveillance of the Internet dramatically, including for “commercial” reasons. 
The European Parliament’s criticism of the mass surveillance practiced by the UK, Sweden, France, and Germany (and potentially soon by the Netherlands) seems not to carry much weight for national governments. 
With the 800th anniversary of Magna Carta this month, Snowden’s revelations have also fueled a new movement to create country-specific Internet “bills of rights” establishing the principles of privacy, free speech, and responsible anonymity. 
In a stirring speech at the United Nations last September, Brazilian President Dilma Rousseff placed her country at the forefront of this movement by promoting Brazil’s historic Marco Civil bill. 
But the proposed bill included the requirement that Internet companies keep their servers in Brazil – purportedly to protect information from American intelligence agencies’ prying eyes – while easing access to these data for Brazil’s own law-enforcement and security agencies. 
Fortunately, Brazil’s legislators kept these provisions out of the final Marco Civil, which was adopted in April. 
Alas, other governments are threatening to impose similar forced data-localization requirements. 
Such rules run not only contrary to the fundamental principles of an open and interconnected Internet infrastructure; they also create new privacy risks. 
And they do nothing to solve the basic problem of restricting government access to personal data held by private companies. 
How companies worldwide respond to Snowden’s revelations will have a profound impact on their users’ rights. 
So far, some have taken the right approach, pressing for greater transparency, while strengthening encryption on their networks to keep intelligence agencies out. 
Companies throughout the information and communication technology sector have started to make transparency reports an industry standard. 
But more telecommunications companies and hardware manufacturers should join Internet companies and privacy rights advocates to build a broad reform coalition. 
A year ago, Snowden alerted the world to governments’ egregious violation of people’s privacy. 
It is up to the technology industry, civil-society organizations, and the general public to keep governments honest in pursuing much-needed reforms. 
Only then can the Internet provide the boon to freedom that it has long promised. 

An Earnest Proposal for Tackling AMR 
LONDON – Under Article 50 of the Treaty of Lisbon, the United Kingdom will leave the European Union on March 29, 2019. 
Presuming that it does (but even if it does not), the UK government should continue to lead the charge against antimicrobial resistance (AMR), as it has in the past. 
Specifically, it is time for the UK to join with pharmaceutical companies in piloting a new model of finance for investment in research and development of new antibiotics. 
Over the course of my professional life, one of the most rewarding roles that I ever had was between late 2014 and September 2016, when I chaired an independent Review on AMR under the government of then-Prime Minister David Cameron. 
We were confronting a serious challenge to global health and prosperity, and our efforts were appreciated around the world. 
Soon thereafter, the United Nations General Assembly issued a high-level political declaration on AMR, and the topic was placed on the agenda at the G20. 
Even more recently, the Health and Social Care Committee of the UK House of Commons published an updated report on AMR, in which it called for more substantive policies to encourage the production of new drugs. 
And this more or less coincided with the publication of The People’s Prescription: Re-imagining Health Innovation to Deliver Public Value, a report from the UCL Institute for Innovation and Public Purpose (IIPP) that calls on governments to “adopt a mission-oriented approach” to bring more drugs to market. 
This added attention is most welcome. 
As I pointed out at an event for the launch of the IIPP report, the original Review on AMR was emphatic about the need for more financing at the early stages of new drug development. 
And, as it happens, this is an area where there has been genuine progress, thanks largely to financing from the US Department of Health and Human Services’ Biomedical Advanced Research and Development Authority and the Wellcome Trust. 
Moreover, government and philanthropic contributions are enticing some private businesses, and thus more AMR researchers, into the field. 
Without the initial outlays from the US, the UK, China, and other governments, one doubts that private capital would have ventured into this area. 
Recent developments show that when the right conditions are put in place, there can indeed be a market for developing new antibiotics. 
Better yet, we still have other ways to strengthen incentives. 
There are now a number of academic studies showing that a $1 billion annual prize could bring a host of new antibiotics down the pipeline in the coming years. 
Most of the recent academic proposals are in keeping with the model of “market-entry rewards” that we recommended in the original Review. 
I would add only that such prizes should come with certain conditions regarding the marketing and pricing of new drugs, especially in low-income countries. 
If the amount of money that has been pledged for early-stage funding is sustained over the next five years, the total could reach the $2 billion that we recommended in the Review. 
Yet, despite this momentum, no government has announced any plans to finance a market-entry reward. 
Similarly, while there has been endless talk among pharmaceutical-industry executives about the need to bring new antibiotics through clinical trials and to the market, there has been absolutely no substantive action. 
Even worse, of the few companies that were already in the antibiotics business, some have actually exited the market since the Review was published; and still more seem to be heading in that direction. 
Clearly, now is the time to introduce a market-entry reward. 
With this proposal in mind, I have been meeting with a number of relevant stakeholders in the UK, including committed MPs such as Kevin Hollinrake and officials at the Department of Health and the Association of the British Pharmaceutical Industry. 
I can report that all of the key public-sector stakeholders do want market-entry rewards; and I have even detected a slightly more serious attitude among industry leaders. 
I can only hope they are being sincere. 
At a time when capitalism increasingly seems to serve the interests of the few at the expense of the many, they should think about who would bear the blame if we were to start running out of effective antibiotics. 
Assuming that everyone is on board, I would propose that instead of expecting the government to put up the whole $1 billion for a market-entry reward – and in order to avoid inviting a revocation of industry-friendly regulations – British pharmaceutical companies should come together to contribute 50%. 
Imagine how encouraging it would be to see industry leaders standing next to the prime minister to announce the rollout of a jointly financed award for the creation of life-saving antibiotics. 
To be sure, as my Review colleagues and I note in Superbugs: An Arms Race Against Bacteria, this proposal amounts to a mild form of “pay or play” capitalism. 
But it would also be a win-win for global public health. 

Overcoming Market Obstacles to New Antibiotics 
LONDON – From the strict perspective of some investors, astute financial management by a company to bolster its share price is a good thing. 
By this narrow logic, when it comes to the pharmaceutical industry, we should be unconcerned if drug firms’ share prices are boosted not by new discoveries, but by financial maneuvers, such as share buybacks or tax inversion. 
But the pharmaceutical industry is not an industry like any other. 
It is intrinsically bound up with the public good, having historically provided the medical innovation that is essential to society’s ability to fight disease. 
Furthermore, while patients are the consumers, the actual buyers are often governments. 
Even in the United States, public purchasers account for at least 40% of the prescription drug market. 
Governments also bankroll much of the research underlying the industry’s profits. 
The US government is the world’s largest funder of medical research and development; globally, taxpayers finance a third of spending on health research. 
So it should come as no surprise when policymakers insist that the industry’s efforts at innovation be channeled into areas that provide the most benefit to taxpayers and patients, rather than those – like financial maneuvers – that might be most profitable for the industry in the short term. 
The pharmaceutical industry is at its best when private profitability and social good coincide, as it does when useful new drugs attract large market shares. 
But, unfortunately, that is not always the case – and the results can be tragic. 
In the field of antibiotics development, in particular, the divergence between profit-seeking behavior and the public good is taking the world to the brink of crisis. 
When antibiotics first entered into common use in the 1940s, previously dangerous conditions, such as pneumonia or infected cuts, became benign conditions that could be treated easily. 
Antibiotics underpin modern medicine; without them, surgery or chemotherapy become much riskier. 
But antibiotics lose their effectiveness over time. 
And whereas previous generations of scientists quickly found new substitutes, today, in many cases, doctors are down to their last line of defense. 
For a range of infections – including strains of pneumonia, E. coli, and gonorrhea – there are no replacements in reserve. 
One would think this would cause drug companies and their investors to compete to develop new antibiotics. 
But much of the pharmaceutical industry has abandoned this pursuit. 
Developing new antibiotics is difficult and expensive – and, crucially, far less profitable than investments in other important fields, such as cancer and diabetes. 
Part of the problem is these drugs’ unique importance. 
Companies are not always able to recoup their investments by setting a high price on patented antibiotics. 
When a new antibiotic is discovered, public health authorities rightly want to keep it in reserve, insisting that it be used only when all other options have failed. 
As a result, a new antibiotic may not become widely used until after its patent has expired and its inventors are forced to compete with generic manufacturers. 
In January, the pharmaceutical industry took a big step toward solving this problem when more than 100 companies and trade associations from more than 20 countries signed a declaration calling on governments to adopt a new model of antibiotic development. 
As part of this new model, the signatories committed themselves to provide access to new drugs for all those who need them, increase investment in R&D that meets global public health needs, and help slow the development of drug resistance in humans and animals. 
Governments should encourage and enable the industry to meet these objectives. 
One way would to be adopt a proposal I made last year and introduce rewards of $1 billion or more to those who develop the most-needed types of antibiotics. 
Such an approach would balance commercial returns with affordability, global access, and conservation, while saving governments money in the long run. 
Using this approach to restock the antibiotics pipeline would cost roughly $25 billion over ten years. Shared among G-20 governments, this is very little money, and would be a remarkably good investment – especially given that antibiotic resistance currently costs the US health-care system alone about $20 billion per year. 
Governments could introduce incentives for antibiotics R&D, paid for with their existing funding streams or new funding streams that are innovative and self-sustaining. 
One option would be a small access-to-market fee that could be collected by pharmaceutical regulators in large markets. 
This system recognizes that antibiotics are a shared and exhaustible resource on which the viability of a range of other pharmaceutical products and medical devices – from chemotherapy to joint replacements – depends. 
It is comparable to approaches in sectors such as energy, water, or fisheries, where regulatory tools are used to ensure that shared resources and infrastructure are managed and replenished in the interests of both consumers and the producers whose businesses rely on them. 
The necessary $2.5 billion per year would amount to just 0.25% of global pharmaceutical sales – hardly a strain on an industry that is, by and large, in sound financial health. 
And the scheme would be particularly attractive if it could be implemented on a pay-or-play basis, whereby companies could choose whether to invest in R&D or to contribute to a fund rewarding those whose efforts result in the desired drugs. 
It is time to turn ideas into effective action and solve the problem of drug resistance. 
To do that, companies and governments must recognize that antibiotics are not a commodity like any other. 

Market Solutions, the Environment, and Morocco 
Experiments with market_based mechanisms -- for example, eco-tourism or the trading of factory emissions -- have multiplied over the past decade. 
Across Africa, these approaches often aim for a "win_win" outcome: the poor benefit and resources are conserved. 
But the actual net effects of these programs are poorly understood. 
The theory behind market_based conservation strategies is simple: create markets for derivative products in order to increase the value that local people place on the resource, thus inducing them to conserve it. 
With this logic in mind, several groups seeking to protect Morocco's unique argan forests enthusiastically embraced commercialization of argan oil. 
The results should make other Africans cautious about the potential of market_based approaches to their environmental/development problems. 
The argan tree is a unique, ecologically important component of southwest Morocco's arid ecosystem. 
During the 20th century, nearly half the argan forest disappeared due to demand for high quality charcoal and conversion of land to agriculture. 
In recognition of persistent threats to the argan forest, as well as of its uniqueness, UNESCO inducted these forests into the World Biosphere Reserve Network in 1999. 
Berber tribes have relied for centuries on argan oil, which is extracted from the nuts inside the argan fruit, as a key component of their diet and as an element of traditional medicine. 
In the early 1990s, chemical analyses confirmed the oil's valuable nutritional and dermatological properties -- including as a treatment for acne, wrinkles, and light wounds. 
This science attracted the attention of development, conservation groups, and entrepreneurs alike. 
Since then, there has been a sharp expansion in demand for argan oil. 
Galénique, Yves Rocher, and Colgate Palmolive began marketing argan oil_based moisturizers. 
The demand for edible argan oil likewise expanded rapidly. 
It now graces the menus of upscale restaurants in New York, London, and Paris. 
Specialty shops and Internet vendors sell the oil for upwards of $200 per liter. 
Yet, even when local people appear well-placed to benefit from commercializing a resource, this activity does not inevitably fuel local development and reduce poverty. 
Indeed, despite rising global demand for argan oil products, most local people continue to receive less than $5 per liter of the oil. 
What went wrong? 
Restrictions on market access due to poor roads, insufficient electricity, and limited access to investment financing excluded most locals from the new argan oil markets. 
Specifically, because product commercialization for new, high_end consumers required new processing methods and distribution channels, most gains went to Moroccans and others from beyond the argan forest area who overcame capital and infrastructure barriers to entering the mechanized, high_end market. 
The benefits to local people have been largely derivative, due to the higher prices mechanical processors pay for fruit. 
But even these latter benefits have been distributed unequally. 
Due to their greater access to argan fruit markets, households in wealthier, low forest density regions sell relatively more fruit, illustrating how factors such as market structure determine which villages benefit. 
Poorer households also are more likely to purchase argan fruit, making them net losers as prices rise. 
Moreover, commercialization of argan oil creates mixed conservation incentives. 
Locals who do benefit from commercialization invest some of their increased wealth in livestock, which bodes poorly for the forest. 
More troubling still, local people respond to increasing argan fruit prices with more aggressive harvesting techniques. 
During the harvest, nearly all of the fruit is now collected, leaving little hope for natural regeneration. 
In the short_term, then, quasi_private tracts of the forest stand to benefit from commercialization, while communally exploited tracts will be degraded further. 
After all, locals are more apt to invest in enclosures to protect their mature trees, while ignoring the need to tend to trees in village commons. 
Spontaneous reforestation by locals is also unlikely, because the tree grows too slowly to make the required investments remunerative. 
The paradox is obvious: the biology of the argan tree and the organization of markets for argan products may cause their commercialization to harm the forest in the long run. 
Although Morocco's argan oil provides a cautionary tale about the efficacy of market_based conservation strategies, all hope for market approaches to conservation is not lost. 
Argan oil cooperatives, for example, have sprung up in some areas to allow local producers to participate more directly in high_value markets. 
While such cooperatives are difficult to organize, preliminary evidence suggests that they are probably worth the effort and could play a limited role in improving the efficacy of market_based strategies. 
In short, only when their many practical limitations are appreciated and addressed will market_based approaches contribute to conservation and development objectives. 
There are no assurances that any resulting increase in the value of a natural resource will actually improve the welfare of poor host populations. 
Indeed, the process of commercialization can readily induce changes in production, processing, and distribution that exclude the poor. 
Even where this is not the case, natural constraints may continue to impede local investments in conservation. 
Market values can motivate scientific research; they cannot directly alter the biology of a resource. 

The Global Economy’s New Abnormal 
NEW YORK – Since the beginning of the year, the world economy has faced a new bout of severe financial market volatility, marked by sharply falling prices for equities and other risky assets. 
A variety of factors are at work: concerns about a hard landing for the Chinese economy; worries that growth in the United States is faltering at a time when the Fed has begun raising interest rates; fears of escalating Saudi-Iranian conflict; and signs – most notably plummeting oil and commodity prices – of severe weakness in global demand. 
And there’s more. 
The fall in oil prices – together with market illiquidity, the rise in the leverage of US energy firms and that of energy firms and fragile sovereigns in oil-exporting economies – is stoking fears of serious credit events (defaults) and systemic crisis in credit markets. 
And then there are the seemingly never-ending worries about Europe, with a British exit (Brexit) from the European Union becoming more likely, while populist parties of the right and the left gain ground across the continent. 
These risks are being magnified by some grim medium-term trends implying pervasive mediocre growth. 
Indeed, the world economy in 2016 will continue to be characterized by a New Abnormal in terms of output, economic policies, inflation, and the behavior of key asset prices and financial markets. 
So what, exactly, is it that makes today’s global economy abnormal? 
First, potential growth in developed and emerging countries has fallen because of the burden of high private and public debts, rapid aging (which implies higher savings and lower investment), and a variety of uncertainties holding back capital spending. 
Moreover, many technological innovations have not translated into higher productivity growth, the pace of structural reforms remains slow, and protracted cyclical stagnation has eroded the skills base and that of physical capital. 
Second, actual growth has been anemic and below its potential trend, owing to the painful process of deleveraging underway, first in the US, then in Europe, and now in highly leveraged emerging markets. 
Third, economic policies – especially monetary policies – have become increasingly unconventional. 
Indeed, the distinction between monetary and fiscal policy has become increasingly blurred. 
Ten years ago, who had heard of terms such as ZIRP (zero-interest-rate policy), QE (quantitative easing), CE (credit easing), FG (forward guidance), NDR (negative deposit rates), or UFXInt (unsterilized FX intervention)? 
No one, because they didn’t exist. 
But now these unconventional monetary-policy tools are the norm in most advanced economies – and even in some emerging-market ones. 
And recent actions and signals from the European Central Bank and the Bank of Japan reinforce the view that more unconventional policies are to come. 
Some alleged that these unconventional monetary policies – and the accompanying ballooning of central banks’ balance sheets – were a form of debasement of fiat currencies. 
The result, they argued, would be runaway inflation (if not hyperinflation), a sharp rise in long-term interest rates, a collapse in the value of the US dollar, a spike in the price of gold and other commodities, and the replacement of debased fiat currencies with cryptocurrencies such as bitcoin. 
Instead – and this is the fourth aberration – inflation is still too low and falling in advanced economies, despite central banks’ unconventional policies and surging balance sheets. 
The challenge for central banks is to try to boost inflation, if not avoid outright deflation. 
At the same time, long-term interest rates have continued to come down in recent years; the value of the dollar has surged; gold and commodity prices have fallen sharply; and bitcoin was the worst performing currency of 2014-2015. 
The reason ultra-low inflation remains a problem is that the traditional causal link between the money supply and prices has been broken. 
One reason for this is that banks are hoarding the additional money supply in the form of excess reserves, rather than lending it (in economic terms, the velocity of money has collapsed). 
Moreover, unemployment rates remain high, giving workers little bargaining power. 
And a large amount of slack remains in many countries’ product markets, with large output gaps and low pricing power for firms (an excess-capacity problem exacerbated by Chinese overinvestment). 
And now, following a massive decline in housing prices in countries that experienced a boom and bust, oil, energy and other commodity prices have collapsed. 
Call this the fifth anomaly – the result of China’s slowdown, the surge in supplies of energy and industrial metals (following successful exploration and overinvestment in new capacity), and the strong dollar, which weakens commodity prices. 
The recent market turmoil has started the deflation of the global asset bubble wrought by QE, though the expansion of unconventional monetary policies may feed it for a while longer. 
The real economy in most advanced and emerging economies is seriously ill, and yet, until recently, financial markets soared to greater highs, supported by central banks’ additional easing. 
The question is how long Wall Street and Main Street can diverge. 
In fact, this divergence is one aspect of the final abnormality. 
The other is that financial markets haven’t reacted very much, at least so far, to growing geopolitical risks either, including those stemming from the Middle East, Europe’s identity crisis, rising tensions in Asia, and the lingering risks of a more aggressive Russia. 
Again, how long can this state of affairs – in which markets not only ignore the real economy, but also discount political risk – be sustained? 
Welcome to the New Abnormal for growth, inflation, monetary policies, and asset prices, and make yourself at home. 
It looks like we’ll be here for a while. 

Marketing Nationalism in China 
Explanations abound for the fevered anti-Japanese protests that broke out across China last month. 
From the Chinese perspective, of course, the blame falls on the Japanese government for its reluctance to apologize for the crimes Japan committed in WW II. 
But the Chinese media also played an ignominious role, publishing slanted articles on Japan that helped to fan the fire. 
Nationalism has been a prominent element in Chinese media in recent years. 
Strident articles critical of the United States, Japan, and Taiwan appear with increasing frequency and receive ever more prominent placement. 
Many see the government’s hand behind this trend, but focusing on official influence risks overlooking how market pressures have pushed China’s media in this direction. 
Before China began opening its economy in 1978, all newspapers and magazines were “Party newspapers” and “Party magazines.” 
Media bosses were appointed and controlled by the government. 
Journalists and editors were, in effect, government officials. 
Needless to say, all operating costs were born by the Communist Party and the state, and nobody was much concerned about making money. 
The main concern was not attracting readers, listeners, and viewers, but avoiding political mistakes. 
For newspapers and magazines, circulation was guaranteed by the government, which urged people to “study the Party newspapers” and forced work units to buy them. 
Radio and TV enjoyed the same built-in audience. 
In the 30 years following the establishment of the People’s Republic of China, no media outlet ran even a single commercial advertisement. 
As Deng Xiaoping’s reforms evolved, and especially after Deng’s “tour of the South” in 1992, when he signaled permission for high-speed marketization of the economy, China’s media changed beyond recognition. 
Whereas in 1978 there were only 186 newspapers and a handful of magazines and broadcast outlets, today China has roughly 2,200 newspapers, 9,000 magazines, 1,000 radio stations, and 420 TV stations, plus a growing proliferation of cable TV outlets. 
Most of these outlets no longer receive full financial support from the government and must rely on advertising revenue to survive and grow. 
What topics do consumers most care about? 
One is government corruption. 
As economic inequities and social conflict in China have grown more acute, ordinary people have become increasingly angry. 
In these circumstances, many on the business side of the Chinese media regard critical reports on crime and official corruption as a powerful weapon in the fight for greater market share and profitability. 
Owing to great sensitivity about stories that cast China’s leadership in a bad light, these popular reports are frequently banned, editors are fired, and media outlets that publish or broadcast them are often punished. 
In some cases, they are shut down. 
Prevented from criticizing the country’s leaders and reporting fully and objectively on domestic affairs, China’s media often finds it expedient to turn its critical gaze outwards. 
This is politically safe, since, in one sense, to criticize the outside world, especially countries such as Japan and the US, is to praise China’s government. 
It is also profitable. 
Even as China’s position in the world continues to rise and its people become more self-confident, China’s history of weakness before the Western powers and Japan sustains a “victim culture” that leaves most Chinese sensitive to any foreign challenge. 
Publishing jingoistic, anti-foreign articles plays to national sensitivities that always simmer, and thus can easily be brought to a boil, with obvious benefits for the bottom line. 
A personal anecdote serves to illustrate how the market, as much as government censorship by the Department of Propaganda and the Press and Publications Administration, is often responsible for this type of editorial decision. 
A few years ago, the editors of a Beijing-based weekly with which I am acquainted were deadlocked over which article to put on their front page. 
The choice was between a minor story critical of Taiwan and a larger piece about a domestic issue of potentially historic significance. 
Unable to get his staff to reach a consensus, the chief executive decided to ask the newspaper’s distributor for his opinion. 
The distributor had not graduated from high school, but he knew readers’ tastes well. 
“Condemn Taiwan, of course,” he said. 
The chief executive issued his order accordingly. 
While reports that cater to the sometimes virulent nationalist sentiments of readers, viewers, and listeners can succeed in garnering a larger market share – as in any other capitalist country – they can also mislead. 
The media may make money, but as the recent anti-Japan protests suggests, an excess of such market-driven jingoism can damage a nation’s interests and international standing. 
As the old Chinese expression goes, qihu, nanxia : “Once one gets on the back of a tiger, it is hard to get off.” 

Markets vs. Market Psychology 
The sharp one-day drop in the Chinese stock market on February 27 apparently had an enduring negative effect on major stock markets around the world. 
By the time the exchange closed at 7:00 GMT that Tuesday, the Shanghai Composite Index had fallen 8.8% for the day – the biggest one-day fall in China in ten years. 
A cascade of declines in other countries immediately followed. 
In Singapore, the Straits Times Index was down 2.3% when the market closed. 
In Bombay, the Sensex 30 fell by 1.3% that day at the market’s closing. 
In Moscow, the RTSI index was down by 3.3% at its closing bell. 
In London, the FTSE 100 was off by 2.3% when trading ended that day. 
In Sao Paolo, the Bovespa index was down by 6.6%, and in New York the Dow Jones Industrial Average was down by 3.3%, when those markets closed at 21:00 GMT. 
These were significant declines – larger one-day drops in the Dow, for example, have occurred only 35 times since January 1950, or about once every twenty months. 
Moreover, two weeks later, all these markets outside of China were down from 4.3% to 7.8% compared to their close on February 26. 
This large and enduring effect has surprised many, since the “story” about the Chinese drop – that the trigger was a rumor that China’s government, concerned about speculation, planned to impose controls on the stock market – seems to have no logical relevance elsewhere. 
But, unless one believes that stock markets move only in response to information about economic fundamentals, there really is no reason to be surprised. 
One-day drops in important stock markets have always had enduring and general effects, owing to market psychology. 
Given the international preoccupation with China’s economic success, the country is now a highly salient market to investors all over the world. 
If history is any guide, markets can be severely destabilized by one-day drops, which make powerful stories that have more psychological salience to investors than much larger drops that occur over longer time intervals. 
For example, people were really agitated when the Dow dropped 3.8% on December 6, 1928, nearly a year before the famous 13.5% crash on Monday, October 29, 1929. 
Nowadays, of course, no one remembers that one-day slide in 1928, but, from the participants’ perspective, it was an enormous event. 
Newspapers the next day described it as “one of the severest declines the market has ever gone through,” and “the worst money scare since July 1, 1920.” 
No news story that day discussed economic fundamentals or gave a clear indication of the cause of the decline, relying instead on sensational prose – “the house that Jack built threatened to topple over” and “traders were quaking in their boots.” 
But the December 6, 1928, event began a sequence of increasingly severe one-day drops in the Dow over the course of the following year. 
Despite a generally rising market, the Dow fell by 3.6% on February 7, 1929, 4.1% on March 25, 4.2% on May 22, 4% on May 27 and August 9, 4.2% on October 3, and 6.3% on October 23, before the infamous “Black Monday” crash. 
On each occasion, newspaper accounts further established the 1929 market psychology. 
The story was always that speculation in the markets had government leaders worried, which is, of course, essentially the same story that we heard from China on February 27. 
The historical parallels do not stop there. 
On September 11, 1986, the Dow dropped 4.6%, the steepest one-day decline since May 28, 1962. 
This was followed the next day by a further 1.9% decline, and then, over succeeding months, by a series of sharp one-day drops that were precursors to the 22.6% collapse on October 19, 1987 – the largest-ever one-day correction. 
At the time of the September 11-12, 1986, event, I thought very hard about what could have caused it. 
Media accounts were vague, with the respectable story pointing to the “rekindling of inflation fears,” which, in fact, was not news. 
I wondered what people were really thinking, apart from what could be read in the newspapers. 
Immediately afterward, I sent out a short questionnaire to 175 institutional investors and 125 individual investors in the United States. 
I asked, “Can you remember any reason to buy or sell that you thought about on those days? 
(Please try hard to remember. Don’t cite something you thought or talked about later).” 
The response rate was 38%, and no reason was repeated by more than three respondents, except the stock-market drop itself. 
This, and a more elaborate questionnaire that I sent out after the next “Black Monday” crash on October 19, 1987, convinced me that nothing more sensible is occurring than just what newspapers describe: speculators, responding to changing market prices, and fearing further changes in the same direction, simply decide to bail out. 
The actual decision to do so often can wait until the next stimulus, that is, the next day that a big drop occurs – hence, the possibility of a sequence of large one-day declines. 
Unfortunately, this behavioral theory of stock market movements is not amenable to easy quantification and forecasting. 
After February 27, 2007, it looked as if the markets were settling down, and the VIX measure of stock market volatility had fallen back nearly to earlier levels. 
But then a 2% fall in the Dow on March 13 pushed the VIX back up. 
The bright side is that one-day stock market declines occur more commonly as isolated events with no long-term repercussions. 
So investors must now hope that the latest episode will be forgotten – unless and until hope succumbs to market psychology. 

Marriage Counseling for America and Europe 
Disputes between the United States and Europe are nothing new, as past tensions over Korea, Suez, and Vietnam demonstrate. 
But these earlier disputes occurred within a very different geopolitical context – the Cold War – and the bygone intellectual and political framework of containment. 
This context and framework disciplined transatlantic ties. 
Europeans and Americans alike recognized the need to limit and manage their differences in order to conserve their ability to deter and, if necessary, to defeat the Soviet Union. 
The Cold War’s end changed everything. 
Can the winning alliance survive its own success? 
The fundamental features of the post-Cold War geopolitical context are relatively clear. 
They include American strategic primacy; massive and rapid cross-border flows of people, technology, goods, services, ideas, germs, money, arms, e-mails, carbon dioxide, and just about anything else; and relatively peaceful relations among the major powers – the US, China, Japan, Russia, India, and an increasingly integrated and enlarged Europe. 
But if the geopolitical context is clear, the intellectual and political framework – the successor to containment – is not. 
The challenge for Europeans and Americans today could hardly be greater: to cooperate in a very different context than the one for which the relationship and its institutions were designed – and to do so without any agreement on a new strategic framework. 
Cooperation is possible. 
In 1990, Europeans and Americans joined forces to reverse Iraq’s invasion and occupation of Kuwait. 
Later in the decade, Europeans and Americans combined to stop ethnic conflict in Bosnia and Kosovo. 
Europeans and Americans also worked to enlarge NATO and collaborated against terrorism in Afghanistan. 
But recent rifts over a range of issues – including the International Criminal Court, the Kyoto Protocol, the ABM Treaty, and the role of the UN – are impossible to ignore. 
Europeans tend to believe that the US is uncritically supportive of Israel and insufficiently sympathetic to Palestinian rights. 
Even when Americans and Europeans agree in principle, such as on trade, this does not always translate into practice. 
Most pronounced have been disagreements over how to deal with what the US terms “rogue actors” – Iran, North Korea, Syria, Libya, and Saddam Hussein’s Iraq. 
Europeans lean toward dialogue and incentives, the US toward isolation and penalties. 
Bridging these differences will not be easy, even though the US, for all its power, needs partners to fight terrorism, nuclear weapons proliferation, and global climate change. 
But Europe, too, has a stake in maintaining the transatlantic bond, for there is no guarantee that it will remain an island of stability and prosperity. 
European integration cannot become all-consuming; a parochial Europe is vulnerable to unsettled regional conflicts and to globalization’s challenges. 
Translating mutual recognition of this into reality will require intellectual honesty and political investment on both sides of the Atlantic. 
Europeans must shed their illusions about what they can accomplish in the world on their own. 
Loose talk about resurrecting a multi-polar world is just that – loose talk. 
It is neither feasible nor desirable for Europe to establish itself as a geopolitical equal or competitor of the US. 
Europe must develop greater military capabilities, not to become a major power on par with the US, but so that it can act as America’s partner if it so chooses and to pursue its own goals. 
A division of labor whereby the US employs military force and Europe uses other policy instruments will gradually divide the US from Europe. 
Europeans also must admit that effective diplomacy requires not only dialogue and incentives, but credibility – a willingness to use sanctions and military force, if need be. 
Americans, for their part, must accept that a strong Europe will not be content to simply do America’s bidding. 
The US should support European integration, because a strong Europe is at least a potential strategic partner, whereas a weak Europe is not. 
Indeed, the sort of troop-intensive nation-building exercises taking place in Iraq and Afghanistan are hardly unique; they are sure to be repeated, and European contributions will be required. 
That American troops are being withdrawn from Korea and sent to Iraq is both unfortunate and revealing. 
But genuine consultation will be necessary. 
Consultation cannot consist of simply informing others of what has already been decided, not adapting policies, and yet still expecting support. 
Nor can consultations on how to deal with today’s central global challenges wait until a crisis. 
Most importantly, the US and Europe must learn how to disagree. 
The best guideline is to not permit disagreements to spill over and complicate or infect the relationship. 
Such “compartmentalization” is as essential now as it was during the Cold War. 
In order to limit the consequences of disagreement, Americans should explain their position and offer alternatives when a proposed international arrangement is deemed undesirable. 
Likewise, the US must employ incentives as well as penalties – and not sequence its diplomacy so that a problem country must meet every requirement before it can receive meaningful benefits. 
Europeans, too, have special responsibilities. 
There is a profound difference between not supporting an undertaking deemed essential by the US and working actively to block it. 
The latter is inconsistent with being an ally. 
European leaders also must do more to stem rising anti-Americanism, so that they remain able to work with the US when they judge it to be desirable. 
We are entering a new and different era of US-European relations. 
There will be issues arising where Americans and Europeans see things differently and are attracted to different prescriptions. 
But transatlantic relations – no less than relations among the 25 members of the EU or the 26 members of NATO – cannot be an all-or-nothing proposition, lest they run the risk of becoming nothing. 

Saving Retirement 
CAMBRIDGE – Public pension programs around the world are in financial trouble. 
Because of continuing increases in life expectancy, the number of eligible retirees is rising more rapidly than the tax revenue available to finance benefits. 
In the United States, the Congressional Budget Office projects the relative cost of the Social Security program’s old-age pension benefits to rise by more than a quarter over the next 25 years, from 4.9% of GDP today to 6.2% in 2038. 
Because the taxes that are earmarked to support Social Security do not automatically rise faster than GDP, either the growth rate of benefits must be reduced or tax rates must be increased. 
One reason for the rapid rise in benefits stems from how they are adjusted for inflation. 
Under current US law, retirees’ benefits are automatically adjusted to account for increases in the traditional consumer price index (CPI). 
But experts have long understood that the CPI overstates the true increase in the cost of living, and that the resulting over-indexing of benefits should be fixed. 
Part of the problem is that the CPI does not reflect how consumers change the composition of their purchases over time as relative prices change. 
President Barack Obama’s administration initially followed expert advice and suggested that the traditional CPI be replaced by a more accurate measure known as the chain-weighted CPI. 
Although this would reduce the annual rate of increase in benefits by only about 0.25%, outlays for Social Security and other inflation-indexed programs over the next ten years would be more than $200 billion lower. 
Applying the chain-weighted CPI to tax-bracket adjustments would raise more than $100 billion over the same period. 
But there is another, more fundamental reason why the traditional CPI overstates the true rise in the cost of living: It does not accurately reflect the introduction of new goods and services or improvements in the quality of existing goods and services. 
So it is unfortunate that Obama recently withdrew his proposal to change the traditional index, preferring the political gesture of “protecting Social Security benefits” to the more responsible policy of correcting the way that benefits and taxes reflect rising prices. 
But the more important reform for stabilizing the financing of Social Security pension benefits is to adjust the benefits for the rise in life expectancy. 
When the US created its Social Security program in the 1930’s, the legislation specified that benefits would be paid to retirees at age 65. 
Life expectancy at age 65 rose after that by about one year per decade. 
Today, life expectancy at age 65 is about six years higher than it was in 1940. 
The increase in the number of retirement years put Social Security in financial trouble. 
The US Congress responded in 1983 by gradually raising the age for full benefits from 65 to 67. 
Individuals who want to retire as early as 62 can still do so with an actuarially fair reduction in their benefits. 
Alternatively, they can work longer and receive higher benefits. 
Of course, the decision to increase the age for full benefits was never going to be politically popular. 
Congress was therefore careful to delay the start of the gradual adjustment, applying it only to those below the age of 45 at the time of the legislation, with the higher retirement age to be fully phased in only in 2027. 
As a result, the public was generally unaware during the decade after the 1983 legislation that the age for full benefits would eventually rise. 
When pollsters asked voters whether they would favor an increase in the Social Security retirement age to improve the program’s financial stability, the response was overwhelmingly negative. 
But here is the politically important fact: At no time did any member of Congress propose that the legislation be changed to delay or eliminate the rise in the eligibility age for full benefits. 
Congress acted responsibly to slow the growth of benefits, even though reversing the increase in the eligibility age would have been politically popular. 
Since the 1983 legislation was enacted, life expectancy at age 67 has increased by another three years, bringing it to 85. 
There is every reason to expect life expectancy to continue to rise in the future at the rate of one year per decade. 
The obvious solution to the current and future Social Security financing problem is to reprise the 1983 legislation by gradually raising the age for full benefits from 67 to 70, with appropriate actuarial adjustments for earlier and later retirements. 
Because life expectancy at age 67 is roughly 18 years, this would be equivalent to reducing average lifetime benefits by one-sixth (the present value of the benefit reduction is actually higher, given that the reduction comes at the start of the retirement period). 
It would be even better to avoid future political posturing by enacting legislation now that automatically raises the eligibility age for full benefits in such a way that average life expectancy at that threshold is kept constant, at 15 years. 
Some experts object on principle to an increase in the eligibility age for full benefits, because some low-income groups do not experience the same one-year-per-decade rise in life expectancy. 
A simple solution to that problem would be to relate the age at which full benefits are paid to each individual’s average lifetime earnings. 
A more fundamental reform would be to shift from a pure pay-as-you-go system to a mixed system that combines the current benefits with investment-based personal retirement accounts. 
Such investment-based annuities would be a natural supplement to the lower pay-as-you-go benefits that would result from raising the eligibility age for full benefits. 
Obviously, retirees deserve advance notice before benefits are reduced. 
That is why it is important for the US – and for many countries around the world – to act now to make the changes needed to stabilize future pension finances. 

A Healthy Path to Chinese Consumption Growth 
CAMBRIDGE – China’s economic policymakers want to shift the country’s production away from exports and heavy industry, and to increase the share of consumption in GDP. 
A relatively simple institutional change to encourage health-care insurance could do much to promote the latter goal. 
A higher level of consumer spending would raise the average Chinese family’s standard of living, a primary component of what China’s leaders now call the “Chinese Dream.” 
Faster growth in consumer spending would also reverse the recent slowdown in GDP growth, providing the extra demand needed to create employment for the millions of Chinese who are leaving agriculture and the millions more who are graduating from the country’s universities. 
Consumer spending in China now accounts for just 36% of GDP, about half the consumption share of GDP in the United States and Western Europe. 
This remarkably low level reflects both the small share of household income in total GDP and the high rate of household saving. 
Chinese officials hope that higher household incomes will boost consumer spending, as the tightening labor market causes wages to rise and as urbanization shifts workers from low-productivity farm work to higher-wage employment in the cities. 
Reducing the share of income that Chinese households save could also raise consumer spending faster and more easily. 
The high rate of household saving in China reflects many factors, including the risk of job loss and the lack of a reliable government pension program. 
But the main reason why Chinese households save so much of their relatively low salaries is to ensure that they have the funds to meet high medical costs if a family member requires surgery or other inpatient care. 
People save so much because insurance is so inadequate. 
The government’s universal health-care insurance is very rudimentary, and private health insurance is not widely available. 
So households accumulate large amounts of cash as a hedge against the possibility that those funds will be needed some day for hospital care. 
Private health insurance would make such excessive saving unnecessary by pooling relatively small premiums from individuals – or from their employers – and then paying out to those who are hit with large medical bills. 
Thus, by encouraging the purchase of health insurance by individuals or employers, the Chinese government could reduce significantly the overall household saving rate. 
Individuals who have such insurance would be better off, because they would not face the risk of large medical bills and would be able to spend more on other forms of consumption. 
The most direct way to encourage the purchase of health insurance would be to exclude employer payments for such insurance from employees’ taxable income. 
That has been a very effective incentive for the purchase of private insurance in the United States and Britain. 
Tax benefits could also be extended to individual purchases of health insurance by allowing individuals to deduct the premiums that they pay from their taxable incomes. 
Tax incentives are now used in China to encourage employer plans for retirement saving. 
The Chinese government recently modified the tax law to exclude employers’ contributions to employee pension plans from taxable income and to allow the funds in those plans to accumulate tax-free. 
This tax-favored employee saving plan is a good substitute for more comprehensive social-security pensions, but it has had the undesirable effect of increasing household saving, rather than increasing consumer spending. 
By contrast, a similar tax rule to exempt employer payments for health insurance would reduce national saving by causing employees to substitute health insurance for large personal cash accumulations. 
If the Chinese government does use this approach to stimulate the purchase of insurance, it should limit the favorable tax treatment to insurance for expensive medical conditions like surgery or the treatment of diabetes. 
In other words, tax-favored health-insurance policies should have high deductibles. 
It is the fear of having to pay for expensive medical conditions that now drives individuals to accumulate substantial cash reserves. 
And focusing the favorable tax treatment on such major risk insurance would reduce the wasteful distortion to spend more on minor health conditions that do not stimulate household saving and do not need insurance protection. 
A general expansion of health insurance would also lead to an increase in the provision of hospital services. 
Private providers will enter the market when they see that insurance has increased demand for such services. 
And the Chinese government will be able to expand the provision of health services without having to pay for them, because consumers’ insurance will be available to pick up the tab. 
In short, favorable tax treatment of the purchase of insurance for major medical costs would reduce the national saving rate, increase consumer spending, lower the public’s anxiety about the cost of treatment, and increase the quantity of health care. 
The sooner the authorities act, the faster the Chinese Dream will be realized. 

Fighting the Fed 
CAMBRIDGE – The US Federal Reserve is battling with members of Congress over a proposed law, the Federal Reserve Accountability and Transparency Act, that would require the Fed to use a formal rule to guide monetary policy. 
The Fed fears that the law would limit its independence, while the bill’s proponents argue that it would produce more predictable growth with low inflation. 
Who is right? 
In order to understand the conflict, it is useful to compare the Fed’s independence with that of the Bank of England and the European Central Bank. 
In Britain, the BoE has “instrument independence” but not “target independence.” 
The head of the Treasury sets a goal for the inflation rate and leaves it to the BoE to decide which policies will achieve that goal. 
If the target is missed by more than one percentage point on either side, the BoE’s governor must send an open letter to the head of the Treasury explaining why (and what the Bank proposes to do about it). 
By contrast, the Maastricht Treaty tasked the ECB with maintaining “price stability,” but left it free to provide its own operational definition. 
The ECB defined price stability to be annual inflation of less than but close to 2%. 
Given the structure of the European Monetary Union, there is no government oversight of the ECB, which thus has both “target independence” and “instrument independence,” though restrictions preclude specific policies. 
The Fed is “independent,” but only in a very special sense: vis-à-vis the government’s executive branch. 
While the US president can instruct administrative agencies like the Commerce Department or the Treasury Department to take specific actions (as long as they do not conflict with valid legislation), the administration cannot tell the Fed how to manage interest rates, reserve requirements, or any other aspects of monetary policy. 
But, though the Fed is independent of the White House, it is not independent of Congress. 
The Fed was created by Congressional legislation that now stipulates a “dual mandate” of price stability and maximum employment. 
It is up to the Fed to formulate operational definitions of these goals and the policies it will pursue to achieve them. 
The proposed legislation would affect both “target” and “instrument” independence. 
The Fed decided to define price stability as a “two percent annual inflation over the medium term of the price index of consumer expenditures.” 
For the past 12 months, that rate of increase has been about 1.5%. 
While full employment has not been defined, many economists believe it is equivalent to an unemployment rate of about 5.5%. 
The most recent rate was 6.1%. 
Reflecting the fear that the Fed’s current policy of sustained low interest rates will lead to higher inflation, the law would require the Fed to adopt a formal procedure for setting its key short-term interest rate, the “federal funds rate.” 
More specifically, the law suggests a specific interest-rate rule (the Reference Policy Rule) while giving the Fed the opportunity to adopt a different rule if it explains to Congress why it prefers the alternative. 
The Reference Policy Rule is essentially the rule first proposed in 1993 by John Taylor of Stanford University, based on his statistical estimate of what the Fed appeared to have been doing under Paul Volcker and Alan Greenspan during a period of both low inflation and low unemployment. 
It states that the federal funds rate should be 2% plus the current inflation rate plus one-half of the difference between current and target inflation and one-half of the percentage difference between current and full-employment GDP. 
All of this implies that if the economy is at full employment and targeted inflation, the federal funds rate should equal 2% plus the rate of inflation. 
It should be higher if the inflation rate is above the target level and lower if current GDP is less than the full-employment level. 
Given uncertainty about the level of full-employment GDP, this rule still leaves the Fed substantial discretion. The Fed could argue that the gap between current and full-employment GDP is larger than the 6.1% unemployment rate implies, owing to the large number of part-time workers who would prefer full-time employment and the sharp decline in the labor force participation rate. 
If the GDP gap is 4%, as a recent Congressional Budget Office estimate implied, the Taylor rule would indicate an optimal federal funds rate of about 1.25% (2 + 1.5 – 0.25 – 2), compared to the current rate of only 0.1%. 
While the federal funds rate may be heading to 1% over the next 12 or 18 months, by then the narrowing GDP gap will imply an even higher Taylor-rule interest rate. And, complicating things further, given US banks’ vast holdings of excess reserves as a result of the Fed’s bond-buying policies (quantitative easing), the federal funds rate is no longer the key policy rate that it once was. 
Instead, the Fed will be focusing on the interest rate on excess reserves. 
The proposed legislation is full of excessive and impossible requirements, and the Republican-controlled House of Representatives may not be able to pass it, even in modified form. 
Even if it does, it will not get through the Democratic-controlled Senate. 
But if the Republicans hold a Senate majority after the next election, some form of legislation requiring a monetary-policy rule could land on the president’s desk. 
He or she might veto it, but a Republican president after the 2016 election might not. 
The Fed no doubt fears that if the principle of requiring a formal rule is accepted, Congress could tighten the requirement, forcing a more restrictive monetary policy. 
That is why the new Fed chair, Janet Yellen, forcefully opposed such legislation in recent congressional testimony. 
One thing is certain: The bill will put pressure on the Fed to pay more attention to inflation, avoiding a persistent rate above its own 2% target. 
Otherwise, the Fed’s operational independence could be restricted, forcing it to focus its policies more sharply on its inflation mandate. 

The Greek Budget Myth 
CAMBRIDGE – Recently, newspaper headlines declared that Greece would have a balanced budget for 2013 as a whole. 
The news came as quite a shock: Recall that when Greek officials came clean about the true state of their country’s public finances in 2010, the budget deficit was more than 10% of GDP – a moment of statistical honesty that triggered the eurozone debt crisis. 
It seemed too good to be true that the Greek deficit would be completely eliminated in just three years. 
In fact, it is too good to be true. 
Any reader who went beyond the headlines soon discovered that the prediction of a zero budget deficit was in fact misleading. 
The International Monetary Fund was predicting only that Greece would have a zero “primary” budget deficit in 2013. 
A “primary” budget deficit (or surplus) is the difference between a government’s outlays for everything excluding the interest payments that it must pay on its debt and its receipts from taxes and other charges. 
In the case of Greece, the interest payments apply to government debt held by Greek individuals and institutions, as well as to government debt held by the IMF, the European Central Bank, and other foreign lenders. 
The overall budget deficit is still predicted to be 4.1% of Greece’s GDP in 2013 – a substantial improvement compared to 2010 but still far from fiscal balance. 
The difference between the overall deficit and the primary deficit implies that the interest on the Greek national debt this year will be 4.1% of GDP. 
Moreover, the Greek government’s interest payments are exceptionally low. 
Given that its debt will still be about 170% of GDP this year, the 4.1%-of-GDP interest bill implies that the Greek government pays an average interest rate of just 2.4% – far less than the nearly 9% rate that the market is now charging on ten-year Greek government bonds. 
The difference reflects a combination of the lower rate on short-term debt and the highly favorable terms on which Greece is now able to borrow from official lenders at the IMF and the ECB. 
If Greece had to borrow at the market interest rate on ten-year bonds, its deficit would rise by 6.5% of the Greek government debt or 11% of GDP. 
In this case, the overall Greek deficit would be about 15% of GDP, putting its debt on a rapidly exploding path. 
Greece’s economic weakness increases the current level of the deficit. 
Five years of declining GDP have depressed tax receipts and increased transfer payments. 
The IMF estimates that these cyclical effects on revenue and outlays have raised the overall deficit by nearly 5% of Greek GDP. 
On a cyclically adjusted basis, Greece’s overall budget would show a surplus of 0.6% of GDP this year. 
This also implies that if Greece could escape from its current recession, its national debt would decline, both absolutely and as a share of GDP. 
More generally, the national debt of any country grows by the size of its budget deficit or declines by the size of its budget surplus. 
Even an economy with an overall budget deficit will have a declining government debt/GDP ratio if the growth rate of its nominal GDP exceeds that of its debt. 
For Greece, with an overall deficit of 4.1% of GDP and a debt/GDP ratio of 170%, the debt ratio would fall if the combination of inflation and real (inflation-adjusted) GDP growth exceeded 2.4%. 
Stated differently, now that Greece has achieved a zero primary budget deficit, its debt burden will decline if its nominal growth rate exceeds the average interest that it pays on its government debt. 
Budget deficits and the resulting national debt are important not only in themselves; they also contribute to a country’s current-account deficit, which is the difference between its level of domestic investment by businesses and households in structures and equipment and the amount that it saves to finance those investments. 
That amount, which includes the saving of businesses and households, is reduced by the amount that the government borrows. 
In the case of Greece, the saving of businesses and households exceeds the level of investment in businesses and housing by just enough to outweigh the dissaving by the government, resulting in a very small current-account surplus. 
Stated differently, Greece is now able to finance its current level of consumption and investment, including government and private spending, without relying on capital inflows from the rest of the world. 
Looking ahead, the IMF predicts that Greece will have a gradually rising primary surplus and a gradually declining overall deficit over the next several years. 
But, unless Greece is able to increase its rate of economic growth, the budget will remain in deficit and the debt will remain at nearly its current share of GDP. 

Obamacare’s Fatal Flaw 
CAMBRIDGE – Obamacare, officially known as the Patient Protection and Affordable Care Act, is the health-insurance program enacted by US President Barack Obama and Congressional Democrats over the unanimous opposition of congressional Republicans. 
It was designed to cover those Americans without private or public health insurance – about 15% of the US population. 
Opponents of Obamacare have failed to stop it in the courts and, more recently, in Congress. 
The program was therefore formally launched on October 1. 
Although it has been hampered by a wide range of computer problems and other technical difficulties, the program is likely to be operating by sometime in 2014. 
The big question is whether it will function as intended and survive permanently. 
There is a serious risk that it will not. 
The potentially fatal flaw in Obamacare is the very same feature that appeals most to its supporters: the ability of even those with a serious preexisting health condition to buy insurance at the standard premium. 
That feature will encourage those who are not ill to become or remain uninsured until they have a potentially costly medical diagnosis. 
The resulting shift in enrollment away from low-cost healthy patients to those with predictably high costs will raise insurance companies’ cost per insured person, driving up the premiums that they must charge. 
As premiums rise, even more relatively healthy individuals will be encouraged to forego insurance until illness strikes, causing average costs and premiums to rise further. 
With this in mind, Obamacare’s drafters made the purchase of insurance “mandatory.” 
More specifically, employers with more than 50 employees will be required after 2014 to purchase an approved insurance policy for their “full-time” employees. 
Individuals who do not receive insurance from their employers are required to purchase insurance on their own, with low-income buyers receiving a government subsidy. 
But neither the employer mandate nor the personal requirement is likely to prove effective. 
Employers can avoid the mandate by reducing an employee’s workweek to less than 30 hours (which the law defines as full-time employment). 
But even for full-time employees, firms can opt to pay a relatively small fine rather than provide insurance. 
That fine is $2,000 per employee, much less than the current average premium of $16,000 for employer-provided family policies. 
Not providing insurance and paying the fine is a particularly attractive option for a firm if its employees have incomes that entitle them to the government subsidies (which are now available to anyone whose income is below four times the poverty level). 
Rather than incur the cost of the premium for an approved policy, a smart employer can pay the fine for not providing insurance and increase employees’ pay by enough so that they have more spendable cash after purchasing the subsidized insurance policy. 
Even after both payments, employers can be better off financially. 
News reports indicate that many employers are already taking such steps. 
But the biggest danger to Obamacare’s survival is that many individuals who do not receive insurance from their employer will choose not to insure themselves and will instead pay the fine of just 1% of income (rising permanently after 2015 to 2.5%). 
The preferred alternative for these individuals is to wait to buy insurance until they are ill and are facing large medical bills. 
That wait-to-insure strategy makes sense if the medical condition is a chronic disease like diabetes or a condition requiring surgery, like cancer or a hernia. 
In either case, the individual would be able to purchase insurance after he or she receives the diagnosis. 
But what about conditions like a heart attack or injuries sustained in an automobile accident? 
In those cases, the individual would not have time to purchase the health insurance that the law allows. 
If they are not insured in advance, they will face major hospital bills that could cause serious financial hardship or even cause them not to receive needed care. 
Anyone contemplating that prospect might choose to forego the wait-to-insure strategy and enroll immediately. 
But private insurance companies could solve that problem by creating a new type of “emergency insurance” that would make enrolling now unnecessary and allow individuals to take advantage of the wait-to-insure option. 
Such insurance would cover the costs that a patient would incur after a medical event that left no time to purchase the policies offered in the Obamacare insurance exchanges. 
Emergency insurance might also cover the cost of care until the “open enrollment” period for purchasing insurance at the end of each year (if political pressure does not lead to the repeal of that temporary barrier to insurance). 
This type of insurance is very different from existing high-deductible policies. 
Given the very limited scope and unpredictable nature of the conditions that it would cover, the premium for such a policy would be very low. 
It would not satisfy the broad coverage requirements that Obamacare mandates, forcing individuals to pay the relatively small penalty for being uninsured and to incur the subsequent cost of buying a full policy if one is needed later. 
But the combination of emergency insurance and the wait-to-insure strategy would still be financially preferable for many individuals, and the number would grow as premiums are driven higher. 
Employers with a large number of full-time employees could encourage their existing insurance companies to create the emergency policies. 
They might even choose to self-insure the emergency risk for their employees. 
The “wait-to-insure” option could cause the number of insured individuals to decline rapidly as premiums rise for those who remain insured. 
In this scenario, the unraveling of Obamacare could lead to renewed political pressure from the left for a European-style single-payer health-care system. 
But it might also provide an opportunity for a better plan: eliminate the current enormously expensive tax subsidy for employer-financed insurance and use the revenue savings to subsidize everyone to buy comprehensive private insurance policies with income-related copayments. 
That restructuring of insurance would simultaneously protect individuals, increase labor mobility, and help to control health-care costs. 

Bringing It Back Home 
CAMBRIDGE – An increasing number of American companies are making plans to shift their headquarters to Europe. 
These so-called “inversions” would reduce these companies’ total tax bill by allowing them to escape from the United States’ uniquely unfavorable corporate tax rules. 
So what should US policymakers do? 
President Barack Obama’s administration is seeking to block corporate inversion through administrative measures that may not hold up in US courts. 
It would be far better to develop a bipartisan legislative plan aimed at removing the temptation to shift corporate headquarters in the first place. 
Such a plan, if attractive to US multinational corporations, could result in a shift in employment and production to the US and higher tax revenue. 
Under current law, US corporate profits are taxed at a rate of 35% – the highest rate among OECD countries, where the average is 25%. 
That tax is paid on profits earned in the US and on repatriated profits earned by US companies’ foreign subsidiaries. 
For example, the subsidiary of a US firm that operates in Ireland pays the Irish corporate tax of 12.5% on the profits earned in that country. 
If it repatriates the after-tax profits, it pays a 22.5% tax (the difference between the 35% US rate and the 12.5% tax that it already paid to the Irish government). 
But if it reinvests the profits in Ireland – or in any other country – no further tax must be paid. 
Not surprisingly, American firms prefer to leave those profits abroad, either in financial instruments or by investing in new or existing subsidiaries. 
As a result, American companies now hold abroad roughly $2 trillion in profits that have never been subject to US tax. 
All other OECD countries treat the profits of their companies’ foreign subsidiaries very differently, relying on the so-called “territorial” method of taxing foreign earnings. 
For example, a French firm that invests in Ireland pays the 12.5% Irish corporate tax but is then free to repatriate the after-tax profits with a tax of less than 5%. 
America’s current tax system adversely affects the US economy in several ways. 
The extra tax that US firms pay if they repatriate profits raises their cost of capital, thus reducing their ability to compete in international markets. 
Foreign firms can also outbid their US counterparts in acquiring new high-tech firms in other countries. 
And when a foreign firm acquires a US company, it pays US tax on the profits earned in the US but not on the profits earned by that firm’s other foreign subsidiaries, thus lowering its total tax bill. 
A shift to a territorial system of taxation would remove the disadvantages faced by American multinational corporations and encourage them to reinvest their overseas profits at home, increasing US employment and profits. 
Because only a small share of overseas profits is now repatriated, the US government would lose very little tax revenue by shifting to a territorial system. 
A few years ago, the US Treasury Department estimated that shifting to a territorial system would reduce corporate tax revenue by only $130 billion over ten years. 
It would also be desirable to reduce the US corporate tax rate gradually, bringing it closer to the 25% OECD average. 
That, too, would encourage more repatriation of overseas earnings. 
Given that American companies have large amounts of profits abroad that have never been subject to US tax, the transition could even be carried out in a way that raises net revenue. 
In exchange for shifting to a territorial system and reducing the tax rate, the federal government could tax all of these untaxed past earnings at a low rate to be paid over a ten-year period. 
Companies would then be free to repatriate their pre-existing earnings without paying any additional tax, while future foreign earnings could, as in other countries, be repatriated by paying a low 5% tax. 
A 10% tax on those existing accumulated foreign earnings would raise about $200 billion over the ten years. 
A 15% tax would raise $300 billion. The choice of tax rate would be part of the negotiation over how far to reduce the overall US corporate tax rate. 
For example, with a 10% tax, a company with $500 million of accumulated overseas earnings would incur a tax liability of $50 million, to be paid over ten years. 
It could repatriate $500 million at any time with no additional tax liability. 
Repatriation of any earnings in excess of $500 million would be subject to a 5% tax. 
The shift to a territorial system and a lower corporate tax rate would appeal to American multinational corporations even if they had to pay a 10-15% tax on accumulated past earnings. 
If Obama is looking for an opportunity to negotiate a bipartisan deal that would strengthen the US economy and increase employment, he should seriously consider such a package of reforms. 

The Future of American Growth 
CAMBRIDGE – The near-term outlook for the US economy has improved, owing to the sharp increase in household wealth in 2013, together with the end of the fiscal drag caused by the increase in tax rates in 2012. 
The United States now has a chance to raise real (inflation-adjusted) per capita GDP faster than the feeble 1.7% average rate recorded during the four years since growth resumed in the summer of 2009. 
Of course, significantly faster GDP growth in 2014 is not guaranteed. 
For starters, achieving it requires overcoming the negative impact of the jump in long-term interest rates that followed the Federal Reserve’s announcement last June that it would likely end its asset-purchase program this year. 
Moreover, the cloud of rising budget deficits at the end of the decade – and exploding national debt after that – is also discouraging investment and consumer spending. 
But let’s look beyond 2014 and ask what will happen to US economic growth over the longer term. 
The Congressional Budget Office (CBO) projects that real per capita GDP growth will slow from an annual rate of 2.1% in the 40 years before the start of the recent recession to just 1.6% between 2023 and 2088. 
The primary reason for the projected slowdown is the decrease in employment relative to the population, which reflects the aging of American society, a lower birth rate, and a decelerating rise in women’s participation in the labor force. 
While the number of persons working increased by 1.6% per year, on average, from 1970 to 2010, the CBO forecasts that the rate of annual employment growth will fall to just 0.4% in the coming decades. 
A drop in annual growth of real per capita GDP from 2.1% to 1.6% looks like a substantial decline. 
But even if these figures are taken at face value as an indication of future living standards, they do not support the common worry that the children of today’s generation will not be as well off as their parents. 
An annual per capita growth rate of 1.6% means that a child born today will have a real income that, on average, is 60% higher at age 30 than his or her parents had at the same age. 
Of course, not everyone will experience the average rate of growth. 
Some will outperform the average 60% rise over the next three decades, and some will not reach that level. 
But a 30-year-old in 2044 who experiences only half the average growth rate will still have a real income that is nearly 30% higher than the average in 2014. 
But things are even better than those numbers imply. 
Although government statisticians do their best to gauge the rise in real GDP through time, there are two problems that are very difficult to overcome in measuring real incomes: increases in the quality of goods and services, and the introduction of new ones. 
I believe that both of these problems cause the official measure of real GDP growth to understate the true growth of the standard of living that real GDP is supposed to indicate. 
Consider the problem of accounting for quality improvements. 
If I pay the same price for some product or service this year as I did last year, but the quality of the product or service is better, my standard of living has increased. 
The same is true if the price rises but the quality increases even more. 
Unfortunately, a government statistician cannot judge the increase in quality of everything from restaurant meals to medical care. 
So looking only at the cost of a meal or of a day in the hospital causes an overestimate in the price index and an underestimate of the rise in the real standard of living. 
The problem of taking new products into account is even more difficult. 
Virtually everyone around us uses a smart phone, a laptop computer, or a tablet. 
We know what these cost and how much they add to the total nominal value of GDP. 
But how much more than the standard retail price would individuals pay to keep these “must-have” products? 
Likewise, what is the value to patients of laparoscopic surgery or drugs that relieve anxiety or prevent heart attacks? 
In short, I am convinced that the real standard of living produced by the goods and services that we buy is increasing faster than our official data reveal. 
That is true now, and it is likely to continue to be true in the future. 
That is not a reason for complacency. 
The US can and should adopt policies that will cause real incomes to rise even faster. 
But that is a subject for a future column. 

New Hope for India 
CAMBRIDGE – India’s recent general election could be the most important positive economic event of 2014. 
Indian voters decisively rejected the Congress party, which had governed India virtually without interruption since it gained independence from Britain in 1947. 
They are likely to be happy they did. 
Sonia Gandhi, the head of Congress and the widow of former Prime Minister Rajiv Gandhi, has been the power behind the throne since 1998, turning Prime Minister Manmohan Singh into little more than a figurehead. 
Under her leadership, Congress has pursued a populist agenda that increased transfer payments and reduced India’s annual economic-growth rate to less than 4% in 2013. 
GDP per capita is still only about $4,000, less than half the level in China. 
The newly elected prime minister, Narendra Modi, campaigned on a platform that promises to deliver to India as a whole the rapid growth in employment and income that the state of Gujarat achieved when he was its chief minister. 
Under Modi’s leadership, Gujarat became a business-friendly state that expanded economic activity, and attracted business investment from both Indian and overseas companies. 
A remarkable feature of the recent election is that Modi’s Bharatiya Janata Party (BJP) received an absolute majority in the national parliament, an almost unprecedented achievement in India. 
As a result, Modi will not have to compromise with the other national or regional parties to pursue his legislative agenda. 
Two key officials will help Modi manage his economic program. 
The new finance minister, Arun Jaitley, is an experienced political leader who served in ministerial positions in previous BJP governments. 
Jaitley is also known as a strategic thinker who is sympathetic to business interests. 
The head of the Reserve Bank of India (the central bank) will continue to be Raghuram Rajan, a distinguished economist who has already shown his desire to reduce India’s near-double-digit annual inflation rate, and to reform some of the inherited counterproductive restrictions on the country’s financial sector. 
The measures needed to stimulate economic growth will take time to implement and to produce results. 
But anyone who wants to see whether the new government is acting to achieve faster long-term growth should examine whether progress is being made in the following ten policy areas. 
Education. 
Although India has excellent institutions of higher education and technology, only a small share of the population can take advantage of the opportunities they offer, because primary and secondary education is so inadequate. 
Only 60% of the adult population can read and write at an elementary level. 
Teachers themselves are poorly educated, and many are so unmotivated that they do not even show up at the schools where they are supposed to work. 
Infrastructure. 
India needs better roads and ports to enable efficient transport of products domestically and to the rest of the world. 
The recent expansion of private airlines and airports shows what private firms in this sector can accomplish. 
Fiscal consolidation. 
Large budget deficits are absorbing the national savings that should be used to expand business investment, and are increasing the national debt that will have to be financed by future taxes. 
Privatization. 
The enterprises owned by the Indian government in manufacturing and other sectors operate inefficiently and often produce losses that absorb national saving. 
Selling off these enterprises would contribute directly to accelerating the pace of economic growth. 
Removal of subsidies. 
Subsidized electricity and fuel leads to wasteful overconsumption and contributes to the fiscal deficit. 
Though these subsidies are politically difficult to eliminate, they should be replaced by cash transfers, which can now be done efficiently in India, owing to a remarkable new system of fingerprint-based cash transfers. 
Agricultural reform. 
In the current system, the government buys, warehouses, and distributes agricultural products. 
As a result, an enormous amount of goods are spoiled in storage, while production incentives are misdirected. 
Agricultural markets should be privatized. 
Property rights and zoning. 
Anyone who visits Mumbai or other major Indian cities sees how zoning restrictions cause misuse of urban land and limit modernization. 
Ambiguous property rights, especially to agricultural land, prevent industrialization in rural areas. 
Relaxing limits on foreign investment. 
Foreign firms are now barred from majority ownership of banks and insurance companies. 
Relaxing such restrictions would strengthen the financial sector and play an important role in economic growth. 
Tax reform. 
India’s complex system of national and state sales taxes distorts domestic trade. 
Replacing these taxes with a national value-added tax and using revenue-sharing to the states has been long debated and should now be enacted. 
Corruption. 
Major cases of high-level corruption have undermined economic confidence and impeded official decision-making. 
India is also handicapped by small-scale corruption, with bribery a common feature of all forms of business and personal transactions. 
The government should crack down on instances of high-level graft and use the new system of cash transfers to limit the scope of petty corruption. 
The Indian stock market is up about 20% this year in anticipation of stronger growth and rising profits. 
Now it is up to Modi and the BJP to show that they can deliver on their campaign promises. 

A Weaker Euro for a Stronger Europe 
CAMBRIDGE – Despite the recent upturn in some of its member countries, the eurozone’s economy remains in the doldrums, with the overall rate of annual GDP growth this year likely to be only slightly higher than 1%. 
Even Germany’s growth rate is below 2%, while GDP is still declining in France, Italy, and Spain. 
And this slow rate of growth has kept the eurozone’s total unemployment rate at a painfully high 12%. 
Slow growth and high unemployment are not the eurozone’s only problems. 
The annual inflation rate, at just 0.5%, is now so close to zero that even a minor shock could push it into negative territory and trigger a downward price spiral. 
Deflation would weaken aggregate demand by raising the real (inflation-adjusted) value of household and corporate debt, and by increasing real interest rates. 
Lower demand could, in turn, cause the fall in prices to accelerate, sending prices into a dangerous tailspin. 
There are few if any panaceas in economics. 
But a sharp decline in the euro’s exchange rate – say, by 15% – would remedy many of the eurozone’s current economic problems. 
A weaker euro would raise the cost of imports and the potential prices of exports, thus pushing up the eurozone’s overall inflation rate. 
Devaluation would also boost average eurozone GDP growth by stimulating exports and encouraging Europeans to substitute domestically produced goods and services for imported items. 
Although competitiveness within the eurozone would be unaffected, a weaker euro would significantly improve the external balance with the rest of the world, which accounts for about half of eurozone trade. 
European Central Bank President Mario Draghi has emphasized his concern that the euro’s rise over the past three years has increased the risk of deflation. 
But it was his famous declaration in July 2012 that the ECB would do “whatever it takes” to preserve the euro that, while successful in reducing interest rates in the distressed countries of the eurozone periphery, also contributed to the euro’s current strength. 
Today, neither Draghi’s recent statements nor the prospect of an American-style program of large-scale asset purchases (also known as quantitative easing) has caused the euro to weaken or the inflation rate to move back toward the target level of 2%. 
So the operative question is how to reduce the euro’s relative value while maintaining the perception of stability that Draghi helped to establish in 2012. 
Because quantitative easing by the ECB has been advocated as a way to weaken the euro, it is worthwhile to examine the impact of its use by the Federal Reserve on the value of the dollar and the inflation rate in the United States. 
The short answer is that it did very little to affect either. 
The real trade-weighted value of the dollar is now at the same level that it was in 2007, before the onset of the Great Recession. 
It rose briefly during the peak crisis year of 2008, as global investors sought the safe haven of dollar-denominated assets, but retreated during 2009 to its previous level. 
The dollar’s value then remained relatively stable during more than three years of quantitative easing – and actually rose during 2013, when the Fed’s asset purchases reached a high of more than $1 trillion. 
Of course, other factors influenced the dollar’s value during this period as well. 
Nonetheless, the behavior of the dollar’s exchange rate during the period of quantitative easing offers no support for the proposed use of large-scale asset purchases by the ECB as a way to bring about euro depreciation. 
The Fed’s quantitative easing also did not cause an increase in the rate of inflation. 
The consumer price index rose by 1.6% in 2010, when quantitative easing began, then increased somewhat faster in 2011 and 2012, before dropping back to a gain of just 1.5% in 2013, the peak year for asset purchases. 
If the ECB wants to reduce the value of the euro and increase the eurozone’s near-term inflation rate, the only reliable way to do so may be by direct intervention in the currency market – that is, selling euros and buying a basket of other currencies. 
While direct intervention to weaken the euro would create challenges in other parts of the world, policymakers in the US and elsewhere should recognize the importance of a more competitive euro to the future of the European economy. 

Looking Up in 2014? 
CAMBRIDGE – For the past six years, I have been skeptical about the standard optimistic forecasts of the pace of US economic growth in the year ahead. 
Where most forecasters and policy officials saw green shoots and reasons for confidence, I saw strong headwinds that would cause an economic downturn and then a subpar recovery. 
But I think the evidence for 2014 is more balanced. 
Although there are serious risks facing the US economy in the coming year, there is also a good chance that growth will be substantially stronger than it has been since before the recession began. 
The economy was still expanding in the late summer of 2007, when I spoke at the US Federal Reserve’s annual Jackson Hole conference about serious risks to the economic outlook. 
I warned that house prices had begun to fall in the summer of 2006 from dangerously high levels, implying a future collapse of construction activity and large losses of household wealth. 
Reduced household wealth would lead, in turn, to lower consumer spending, further depressing GDP. 
I also stressed that financial markets had become dysfunctional. 
Banks and other financial institutions had doubts about the value of various asset-backed securities on their own balance sheets and on those of potential counterparties. 
No one knew the real value of credit-default swaps and of the various tranches of collateralized debt obligations. 
Financial institutions were therefore reluctant to lend to other financial institutions. 
With credit flows disrupted, the economy could not continue to expand. 
Moreover, I warned that the Fed was too complacent and should be reducing sharply the federal funds rate, which was above 5%. 
The economy peaked a few months later, and the Fed began aggressive easing in 2008. 
Although the Fed and the US Treasury cooperated in addressing financial-market dysfunction, this was not enough to restore solid economic growth. 
The restoration of normalcy to financial markets and lower interest rates did cause an economic upturn in the summer of 2009, leading many forecasters and market participants to expect a typical rapid post-recession recovery. 
I warned that the upturn would be much more tepid than expected: unlike previous business cycles, the recession that began at the end of 2007 was not caused by high interest rates, so lowering rates would have little impact. 
US President Barack Obama’s new administration announced a three-year fiscal package intended to stimulate aggregate demand. 
Administration officials and others predicted that fiscal stimulus would cause the economy to rebound, as it had in the past. 
But the fiscal package was not very effective. 
It was too small to close the output gap, leaving continued downward pressure on demand. 
Much of the “stimulus” merely financed increased spending by state governments that would have been paid for in other ways. 
Other parts of the stimulus went to individuals, but, given the nature of the fiscal package, increased transfers and spending added more to the national debt than to GDP. 
When the Fed saw how weak the upturn remained, it launched a strategy of “unconventional monetary policy,” combining large-scale purchases of long-term securities (quantitative easing) with promises to keep the short-term federal funds rate extremely low for an extended period of time. 
The goal was to encourage portfolio investors to shift into equities and other assets, with the resulting increase in their prices pushing up household wealth and consumer spending. 
Lower long-term rates were also expected to reduce the cost of mortgage credit, raising the value of homes. 
The Fed and others were again overly optimistic about the extent to which these policies would boost GDP growth. 
Despite the fall in long-term interest rates, house prices reached bottom only in 2012, and the stock market did not rise faster than corporate earnings until 2013. 
The economy therefore limped along year after year, with real GDP in the final quarter of each year less than 2% higher than it had been a year earlier. 
Employment grew more slowly than the population, and annual real-wage increases averaged only about 1%. 
Fortunately, the outlook may now be changing for the better. 
Real GDP growth reached 4.1% in the third quarter of 2013, and fourth-quarter growth appears to have been relatively strong, driven by a dramatic rise in housing starts and industrial production. 
The sharp increases in the prices of homes and equities contributed to a roughly $6 trillion rise in real household wealth in the 12 months ending in September 2013 – a harbinger of increased consumer spending (at least by higher-wealth households) in 2014. 
There are, of course, risks to the pace of expansion in the coming year. 
Nearly half of 2013 third-quarter GDP growth was inventory accumulation, implying that final sales rose by only about 2.5%. 
Businesses worry about the potential for higher corporate taxes, especially if the Republican Party loses its majority in the US House of Representatives. 
Although fiscal deficits are temporarily down, the combination of population aging and higher future interest rates will cause the national debt to rise faster than GDP by the end of the decade. 
And debt and equity markets may not continue to respond benignly to the Fed’s wind-down of quantitative easing. 
So there is still much to worry about. 
But the US economy has a better chance of achieving a significantly higher real growth rate in the coming year than at any time since the downturn began. 

Why the Fed Will Go Faster 
CAMBRIDGE – The US Federal Reserve has emphasized that its monetary policy will be determined by what economic indicators show. 
But it would require some extremely unlikely data to change the Fed’s implicit plan to end its purchases of long-term assets (so-called quantitative easing) in October 2014 and to start raising the federal funds rate from its current near-zero level sometime in the first half of 2015. 
The financial markets are obsessed with anticipating whether rates will rise in March or June. 
Although my own best guess is that the Fed will start to raise rates in March, the starting date is less important than the pace of the rate increase and where the rate will be by the end of 2015. 
There is a substantial range of views among the members of the rate-setting Federal Open Market Committee. 
The midpoint of the opinions recorded at most recent FOMC meeting implies a federal funds rate of 1.25-1.5% at the end of 2015. 
Even by the end of 2016, the midpoint of the range is less than 3%. 
In my judgment, such rates would be too low. 
At a time when inflation is already close to 2% or higher, depending on how it is measured, the real federal funds rate would be at zero at the end of 2015. 
Instead of ensuring price stability, monetary policy would be feeding a further increase in the inflation rate. 
Although it is possible to argue about the precise appropriate level of the fed funds rate, the Fed’s own analysis points to a long-term rate of about 4% when the long-term inflation rate is 2%. 
The most recent value of the consumer price index was up 1.7% year on year, and the 12-month figure would have been even higher but for the anomalous decline in the most recent month. 
In the second quarter of this year, the annualized inflation rate was 4%. 
The Fed prefers to measure inflation by the price index for personal consumption expenditure. 
Its relaxed attitude about inflation reflects its focus on the longer-term past, with PCE inflation at just 1.5% for the 12 months to August of this year, the same as the “core” PCE inflation rate, which excludes food and energy. 
But PCE inflation has also been rising, with the most recent quarterly value at 2.3% year on year in the April-June period. 
So if price stability were the Fed’s only goal, the federal funds rate should now be close to 4%. 
The Fed’s rationale for continuing its ultra-easy monetary policy is that its “dual mandate” requires it to be concerned with employment as well. 
Its monthly statements emphasize that there is still “a significant underutilization of labor resources,” reflecting not only the 6.1% unemployment rate, but also the millions of part-time employees seeking a full-time job and those who are not officially counted as unemployed because they are not actively looking for work. 
The Fed is certainly correct that current labor-market conditions imply significant economic waste and personal hardship. 
But economists debate the extent to which these conditions reflect a cyclical demand shortfall or more structural problems that a monetary stimulus cannot remedy. 
A recent study by a team of Fed economists concluded that nearly all of the current decline in the labor-force participation rate reflects the aging of the population and other structural causes. 
Recent research also indicates that increases in demand that would cause a further reduction in the current unemployment rate would boost the inflation rate. 
An important study co-authored by Alan Krueger of Princeton University, who served as Chairman of President Obama’s Council of Economic Advisers until last year, showed that the inflation rate reflects the level of short-term unemployment (lasting less than six months), rather than the overall unemployment rate. 
Longer-term unemployment implies a waste of potential output and a source of personal suffering, but it does not have an impact on the rate of inflation. 
Krueger’s analysis indicates that the rate of inflation begins to increase when the short-term unemployment rate falls to 4-4.5%. 
With short-term unemployment currently at 4.2%, the inflation rate is indeed rising, and Krueger’s research suggests that it will increase further in the months ahead. 
Similar studies by Robert Gordon of Northwestern University and by Glenn Rudebusch and John Williams of the San Francisco Federal Reserve Bank point to the same conclusion about the role of short-term unemployment and the irrelevance of long-term unemployment in the inflation process. 
While not all researchers agree with this analysis, I think the evidence is strong enough to represent a warning to the Fed and to market participants. 
Indeed, I would not be surprised by a continued rise in the inflation rate in 2015. 
In that case, the Fed is likely to raise the federal funds rate more rapidly and to a higher year-end level than its recent statements imply. 

America’s Move to Faster Growth 
CAMBRIDGE – Last December, I speculated that GDP growth in the United States would rise in 2014 from the subpar 2% annual rate of the previous four years to about 3%, effectively doubling the per capita growth rate. 
Now that the US economy is past the impact of the terrible weather during the first months of the year, output appears to be on track to grow at a healthy pace. 
The primary driver of this year’s faster GDP growth is the $10 trillion rise in household wealth that occurred in 2013. 
According to the Federal Reserve, that increase reflected a $2 trillion increase in the value of homes and an $8 trillion rise in the value of shares, unincorporated businesses, and other net financial assets. 
As former Fed Chair Ben Bernanke explained when he launched large-scale asset purchases, or quantitative easing, that increase in wealth – and the resulting rise in consumer spending – was the intended result. 
Past experience suggests that each $100 increase in household wealth leads to a gradual rise in consumer spending until the spending level has increased by about $4. 
That implies that the $10 trillion wealth gain will raise the annual level of consumer spending by some $400 billion, or roughly 2.5% of GDP. 
Even if less than half of that increase occurs in 2014, it will be enough to raise the total GDP growth rate by one percentage point. 
The data show that a significant increase in consumption already is happening. 
Real personal consumption expenditures rose at a 3% rate from the fourth quarter of 2013 to the first quarter of this year. 
Within the first quarter, the monthly increase in real consumer spending accelerated from just 0.1% in January to 0.4% in February and 0.7% in March. 
That was faster than the 0.3% monthly growth in real personal disposable income during this period, highlighting the importance of wealth as a driver of spending. 
Another indication of the role of wealth in fueling higher consumer spending is the decline in the household saving rate. 
Total household saving as a percentage of disposable income fell from about 6% in 2011 and 2012 to just 3.8% in the most recent quarter. 
Housing starts are also responding to the increase in wealth. 
The number of housing starts and the value of residential construction fell after the Fed’s announced withdrawal from quantitative easing caused interest rates on mortgages to rise. 
But that has turned around, with housing starts in April up 26% year on year. 
And sales of both new and existing homes have recently been rising more rapidly as well. 
Higher consumer spending and increased residential investment boosted demand for labor, resulting in a rise in payroll employment of 288,000 in April, up from a monthly average of less than 200,000 earlier in the year. 
If that continues, it will lead to a faster rate of increase in household incomes and spending. 
The favorable effect of the increase in household wealth is being reinforced this year by the improved fiscal position. 
The economy in 2013 was held back by tax increases, government spending cuts mandated by the sequester process, the temporary government shutdown, and the possibility that a binding debt ceiling would require further cuts in government outlays. 
Though the prospect of a rising deficit and national debt in the longer term remains, the two-year budget agreement enacted by the US Congress means that the economy will not be subject to such negative fiscal shocks in 2014 or 2015. 
The key challenge confronting the economy in the next two years will be faced by the Fed, which must control the inflationary pressures that could emerge as commercial banks respond to a healthier economy by increasing lending to businesses and households. 
The commercial banks have a great deal of liquidity, in the form of excess reserve deposits at the Fed, which could make inflationary lending a significant risk. 
The banks are now content to leave those funds at the Fed, where they earn a mere 0.25% because they are risk-free, completely liquid, and unburdened by capital requirements. 
The alternative is to lend commercially at relatively low interest rates, with less liquidity, more risk, and the need to provide capital. 
But the time will come when the banks will want to use their excess reserves to support more profitable lending. 
The Fed will then need to raise the interest rate that it pays on excess reserves to limit the extent to which the commercial banks can draw down those reserves to create additional lending and deposits. 
That will be a difficult balancing act. 
If the interest rate is raised too little, banks will use more reserves to support lending, leading to higher inflation. 
If the interest rate is raised too much, economic activity will be constrained and growth could fizzle. 
The situation now has diverged from the traditional scenario in which the Fed controlled the banks’ use of reserves by adjusting the federal funds rate (the rate at which banks lend their reserves to one another). 
The principle difference is that the Fed will now have to pay the interest on the nearly $2.5 trillion of excess reserves that it holds. 
The US economy is now on a favorable path of expansion. 
But keeping it there will be a major challenge for the Fed in the year ahead. 

Silicon Valley’s Spy Problem 
DAVIS, CALIFORNIA – In a recent letter to US President Barack Obama, the CEO of Cisco Systems, John Chambers, requested that the National Security Agency stop intercepting the company’s products to install devices for spying on foreign customers. 
This is the latest in a series of revelations of how US information-technology firms have been enlisted, knowingly or otherwise, in the “war on terror” – revelations that are threatening the American IT sector’s global dominance. 
Since the scale of the NSA’s Internet eavesdropping came to light, governments and large companies outside of the United States are questioning the capacity of American IT firms to guarantee their products’ security. 
America’s central position in the world’s information economy, which seemed secure just two years ago, is now under threat – a fact that should raise serious concerns for every entrepreneur, executive, employee, and venture capitalist in the American industry. 
There is more than a little irony in this turn of events. 
America’s global IT leadership, after all, can be traced directly to its national security apparatus. 
Following World War II, and especially after the Soviet Union’s launch of the Sputnik satellite in 1957, the US made massive investments in electrical engineering and, later, computer science. 
Cost-plus contracting allowed what were then small technology firms like Hewlett-Packard and Fairchild Semiconductor to charge the Department of Defense for the price of research and development that none could pay on its own. 
This enabled the firms to create technology products that eventually created entire new markets and economic sectors. 
The US government also made massive, continuous investments in university-based research, boosting the country’s supply of engineers and scientists. 
These highly trained people created countless new technologies, including computer graphics, semiconductors, networking equipment, groundbreaking software, and the Internet itself. 
In fact, the US government remains a critical supporter of scientific and engineering research to this day. 
In 2012, the defense department invested $1.3 billion in electrical engineering and computer science alone, while the National Science Foundation invested another $900 million. The US military has provided a particularly large amount of funding to university researchers in computer security and encryption. 
With so many of America’s top entrepreneurs, executives, and researchers having received support from the defense department, it is no surprise that Google’s founders and executives, for example, have exchanged friendly emails with NSA officials. 
Professional and personal connections made recruiting corporate leaders to the anti-terror war relatively easy. 
Few, it seems, considered the potential consequences of their participation. 
The resulting relationship between Silicon Valley and Washington, DC, is remarkable for its longevity and depth. 
For example, the database software giant Oracle has been rumored to maintain close ties with the CIA. 
Similarly, the partly CIA-funded Keyhole, Inc., was among the acquisitions that produced Google Maps. 
The CIA’s Silicon Valley venture-capital operation, In-Q-Tel is meant to ensure that the interests of America’s national security apparatus are implanted in technology startups. 
The consequence of these ties is that America’s IT industry has become an agent of the national security state. 
This undermines consumers’ faith in firms’ willingness or ability to guarantee their privacy, while making it difficult for companies to claim the moral high ground when, say, China’s government restricts their domestic operations. 
Given that America’s IT sector is so far ahead globally, the impact of these perceptions will remain largely localized in the short term. 
But, as European and Asian IT firms catch up, America’s advantage will gradually deteriorate. 
Foreign customers’ search for alternatives is underway in both existing and emerging industries. 
For example, Oracle is experiencing a slowdown in the Asia-Pacific region, where its main competitor, the German company SAP, is thriving. 
And the competition that Cisco faces from Huawei of China is what likely drove Chambers’ recent appeal to Obama. 
In one of the newest IT fields, cloud computing, where US firms are pioneers, firms and entrepreneurs in many countries are exploring the creation of non-US alternatives. 
Preventing this self-inflicted threat to America’s IT preeminence will require strong action by US political leaders, who are responsible for this dangerous trend. 
First and foremost, Obama, with support from Congress, must demand the release of all information regarding interactions between national security agencies and American IT firms. 
Furthermore, corporations and privacy advocates should be encouraged to use the court system to challenge government requests to install spy software in commercial products. 
If the government’s agents break privacy laws, at home or abroad, the Department of Justice should prosecute them to the full extent of the law. 
Given how extensively the NSA’s activities have degraded global trust in America’s government and IT sector, nothing less than complete transparency is required. 
It is time for US leaders to place the well-being of the high-tech wealth machine – which cost US taxpayers tens of billions of dollars to build – above the illusory notion that the only route to safety is unfettered access to the world’s digital traffic. 

Learning from Martin Luther About Technological Disruption 
GENEVA – Five hundred years ago this week, a little-known priest and university lecturer in theology did something unremarkable for his time: he nailed a petition to a door, demanding an academic debate on the Catholic Church’s practice of selling “indulgences” – promises that the buyer or a relative would spend less time in purgatory after they died. 
Today, Martin Luther’s “95 Theses,” posted at the Castle Church in Wittenberg, Germany (he simultaneously sent a copy to his boss, Cardinal Albrecht von Brandenburg), are widely recognized as the spark that started the Protestant Reformation. 
Within a year, Luther had become one of Europe’s most famous people, and his ideas – which challenged not only Church practice and the Pope’s authority, but ultimately man’s relationship with God – had begun to reconfigure systems of power and identity in ways that are still felt today. 
What made Luther’s actions so momentous? 
After all, calls for reforming the Church had been occurring regularly for centuries. 
As the historian Diarmaid MacCulloch writes in A History of Christianity: The First Three Thousand Years, the two centuries before Luther featured near-constant challenges to papal supremacy on issues of philosophy, theology, and politics. 
How did the concerns of a minor theologian in Saxony lead to widespread religious and political upheaval? 
A central piece of the puzzle is the role of emerging technology. 
A few decades before Luther developed his argument, a German blacksmith named Johannes Gutenberg had invented a new system of movable-type printing, allowing the reproduction of the written word at greater speeds and lower costs than the laborious and less-durable woodblock approach. 
The printing press was a revolutionary – and exponential – technology for the dissemination of ideas. 
In 1455, the “Gutenberg Bible” was printed at a rate of roughly 200 pages per day, significantly more than the 30 pages per day that a well-trained scribe could produce. 
By Luther’s time, the daily printing rate of a single press had increased to roughly 1,500 single-sided sheets. 
Improved printing efficiency, combined with steep declines in cost, led to a dramatic increase in access to the written word between 1450 and 1500, even though only an estimated 6% of the population was literate. 
Luther quickly grasped the potential of the printing press to spread his message, effectively inventing new forms of publishing that were short, clear, and written in German, the language of the people. 
Perhaps Luther’s most enduring personal contribution came via his translation of the Bible from Greek and Hebrew into German. 
He was determined to “speak as men do in the marketplace,” and more than 100,000 copies of the “Luther Bible” were printed in Wittenberg over the following decades, compared to just 180 copies of the Latin Gutenberg Bible. 
This new use of printing technology to produce short, punchy pamphlets in the vernacular transformed the industry itself. 
In the decade before Luther’s theses, Wittenberg printers published, on average, just eight books annually, all in Latin and aimed at local university audiences. 
But, according to the British historian Andrew Pettegree, between 1517 and Luther’s death in 1546, local publishers “turned out at least 2,721 works” – and average of “91 books per year,” representing some three million individual copies. 
Pettegree calculates that a third of all books published during this period were written by Luther himself, and that the pace of publishing continued to increase after his death. 
Luther effectively published a piece of writing every two weeks – for 25 years. 
The printing press greatly expanded the accessibility of the religious controversy that Luther helped fuel, galvanizing the revolt against the Church. 
Research by the economic historian Jared Rubin indicates that the mere presence of a printing press in a city before 1500 greatly increased the likelihood that the city would become Protestant by 1530. 
In other words, the closer you lived to a printing press, the more likely you were to change the way you viewed your relationship with the Church, the most powerful institution of the time, and with God. 
There are at least two contemporary lessons to be drawn from this technological disruption. 
For starters, in the context of the modern era’s “Fourth Industrial Revolution” – which Klaus Schwab of the World Economic Forum defines as a fusion of technologies blending the physical, digital, and biological spheres – it is tempting to assess which technologies could be the next printing press. 
Those who stand to lose from them might even move to defend the status quo, as the Council of Trent did in 1546, when it banned the printing and sale of any Bible versions other than the official Latin Vulgate, without Church approval. 
But perhaps the most enduring lesson of Luther’s call for a scholarly debate – and his use of technology to deliver his views – is that it failed. 
Instead of a series of public discussions about the Church’s evolving authority, the Protestant Reformation became a bitter battle played out via mass communication, splitting not just a religious institution but also an entire region. 
Worse, it became a means to justify centuries of atrocities, and triggered the Thirty Years’ War, the deadliest religious conflict in European history. 
The question today is how we can ensure that new technologies support constructive debate. 
The world remains full of heresies that threaten our identities and cherished institutions; the difficulty is to view them not as ideas that must be violently suppressed, but as opportunities to understand where and how current institutions are excluding people or failing to deliver promised benefits. 
Calls for more constructive engagement may sound facile, naive, or even morally precarious. 
But the alternative is not just the hardening of divisions and estrangement of communities; it is widespread dehumanization, a tendency that current technologies seem to encourage. 
Today’s Fourth Industrial Revolution could be an opportunity to reform our relationship with technology, amplifying the best of human nature. 
To grasp it, however, societies will need a subtler understanding of the interplay of identity, power, and technology than they managed during Luther’s time. 

A New Model for New Europe 
WARSAW – Five years ago, Central and Eastern Europe was home to one of the world’s most impressive growth stories. 
Annual GDP growth was close to 5%, just behind China and India. 
Foreign direct investment poured into Bulgaria, Croatia, the Czech Republic, Hungary, Poland, Romania, Slovakia, and Slovenia at a rate of more than $40 billion per year. 
One in six cars sold in greater Europe was being exported from factories in the region. 
Productivity and per capita GDP were rising briskly, narrowing the gap with Western Europe. 
But the region has struggled to regain momentum since the global financial crisis and subsequent recession. 
Economic-growth rates have fallen to less than a third of their pre-crisis levels. 
Foreign direct investment, which plunged 75% from 2008 to 2009, has only partly recovered. 
Indeed, the region appears to have dropped off the radar of global businesses and investors. 
Yet our new research finds that the attributes that had made the region so attractive remain intact. 
Growth and FDI inflows are still depressed, but, overall, the region has weathered the crisis in relatively good shape. 
In most countries, public debt as a share of GDP has not exceeded 60% since 2004 – in stark contrast to many of the 15 countries that were members of the European Union prior to that year. 
And it remains the case that these countries collectively boast a highly educated labor force and wage levels that are 75% lower, on average, than in the EU-15 economies. 
At the same time, the region shared in some of the same excesses – notably in the property market – that helped to bring about the crisis. 
In Romania, real-estate prices rose 23% annually from 2004 to 2007. 
And, despite substantial improvement in the business environment throughout the region, these economies rank behind their EU-15 neighbors on corruption (though they are doing better than other emerging economies, including China, India, Brazil, and Russia). 
More important, the crisis exposed significant weaknesses in the region’s economic model: over-reliance on exports to Western Europe and a high level of consumption relative to other developing regions, fueled by borrowing and heavy reliance on FDI to fund capital investment. 
But Central and Eastern Europe can fashion a new model that we believe would enable a return to GDP growth rates of 4-5%. 
This model has three major components: expanding and upgrading exports; raising productivity in sectors where it is weak; and reviving FDI while developing ways for the region’s economies to fund more of their own growth through higher domestic saving. 
The region has a major opportunity to raise the value of its exports of goods and services. 
For example, it is well-positioned to become a regional food-processing hub for greater Europe and beyond. 
The region’s wage rates are still sufficiently low that sausages made in Poland and sold in Berlin cost about 40% less than those made in Hamburg. 
The region is already a net exporter of “knowledge-intensive” goods such as automobiles and aerospace products. 
It could move into even more sophisticated areas with additional investment in education and further development of industry clusters such as Dolina Lotnicza (Aviation Valley) in southeastern Poland. 
One promising opportunity lies in knowledge-intensive services. 
Led by Poland, the region is an increasingly important location for outsourcing and offshoring work. 
Its outsourcing industry is growing twice as fast as India’s. 
But there could be even greater scope for growth, given two trends in Asia: rising wage costs and increasing concern among Western outsourcing customers about persistent cultural and language issues. 
Central and Eastern Europe is well placed to benefit from these trends, given its strong language skills and cultural familiarity with European and North American clients. 
The region is also many time zones closer to European and US clients than firms in Asia. 
Several sectors are also ripe for productivity improvement. 
In construction, which is a highly informal sector, productivity is 31% below EU-15 levels. 
Productivity is also low in agriculture, owing to the predominance of small farms that are not highly mechanized. 
Opening up the agricultural sector to foreign investment would help to scale up average farm sizes and introduce more modern methods. 
“Network” industries, such as electric utilities and rail systems, have been partly privatized in most of the region. 
Opening them more fully to competition and market incentives would help to raise productivity in these industries. 
To reduce reliance on borrowing for consumption and the vagaries of FDI inflows, the region’s domestic saving rates must be raised once demand picks up. 
Pension reform and further development of financial markets would help. 
Implementing the components of this growth model for Central and Eastern Europe will require further reforms aimed at making it easier to do business and strengthening protections for investors. 
The region’s economies should also invest significantly more in infrastructure and address the effects of aging, which could clip 0.7% from annual growth rates in the coming decade. 
Getting more women into the work force would be one way to raise labor-force participation to EU-15 levels and avoid soaring dependency ratios. 
Central and Eastern Europe will inevitably be in the global spotlight this year. 
The 25th anniversary of the fall of the Iron Curtain and the 10th anniversary of the accession to the EU of the Czech Republic, Hungary, Poland, Slovakia, and Slovenia provide an opportunity for the region to showcase how far it has come in the last quarter-century. 
But realizing the region’s considerable potential for further success will require a fresh approach to growth. 

The Infrastructure Solution 
TORONTO – “Infrastructure, by the nature of the word,” former US Secretary of State Madeleine Albright said in February 2013, “is basic to the functioning of societies.” 
And yet infrastructure has arguably been the forgotten economic issue of the twenty-first century. 
Indeed, failure to make the right infrastructure investments has impaired many countries’ potential to boost economic growth and employment. 
Though the debate about infrastructure tends to focus on the need for more money and more creative financing, the real problem is not insufficient investment. 
Rather, the built environment is deteriorating as a result of a fragmented approach to infrastructure planning, finance, delivery, and operation, which emphasizes cost, asset class, and geographical location. 
Developing a new approach – based on a broad, systemic perspective – should become a top priority of those with the capacity to deliver change, including CEOs and senior public officials. 
That is precisely what McKinsey’s Global Infrastructure Initiative, which held its second meeting in Rio de Janeiro last month, aims to do, by promoting practical global solutions aimed at raising the productivity and efficiency of every aspect of infrastructure. 
Without such solutions, an estimated $57 trillion of infrastructure investment would be needed in 2013-2030, just to keep pace with GDP growth. 
That is more than the value of the entire existing stock of infrastructure. 
More productive infrastructure could reduce the world’s infrastructure bill by 40%, or $1 trillion annually – savings that could boost economic growth by about 3%, or more than $3 trillion, by 2030. 
This would facilitate higher infrastructure investment, with an increase equivalent to 1% of GDP translating into an additional 3.4 million jobs in India, 1.5 million in the United States, 1.3 million in Brazil, and 700,000 in Indonesia. 
Increasing infrastructure’s productivity begins in the planning phase. 
A more pragmatic approach to selecting infrastructure projects in which to invest – including a systematic evaluation of costs and benefits, based on precise criteria that account for broader economic and social objectives – could save the world $200 billion annually. 
Some countries are already reaping the benefits of such an approach. 
South Korea’s Public and Private Infrastructure Investment Management Center has reduced infrastructure spending by 35%; today, officials reject 46% of the proposed projects they review, compared to 3% previously. 
Similarly, the United Kingdom established a cost-review program that identified 40 major projects for prioritization, reformed overall planning processes, and then created a cabinet sub-committee to ensure faster delivery of projects, thereby cutting infrastructure spending by 15%. 
And Chile’s National Public Investment System evaluates all proposed public projects using standard forms, procedures, and metrics – and rejects as many as 35%. 
Additional opportunities for savings – to the tune of $400 billion annually – lie in more streamlined delivery of infrastructure projects. 
There is massive scope to accelerate approvals and land acquisition, structure contracts to encourage innovation and savings, and improve collaboration with contractors. 
In Australia, the state of New South Wales cut approval times by 11% in just one year. 
And one Scandinavian road authority reduced overall spending by 15% by updating design standards, adopting lean construction techniques, and taking advantage of bundled and international sourcing. 
Opportunities to save are not limited to new capacity. 
Governments could save $400 billion annually simply by increasing the efficiency and productivity of existing infrastructure. 
For example, smart grids could cut power infrastructure costs by $2-6 billion annually in the US, while reducing costly outages. 
Similarly, intelligent transportation systems for roads can double or triple the use of an asset – typically at a fraction of the cost of adding the equivalent in physical capacity. 
The UK’s intelligent transport system on the M42 motorway has reduced journey times by 25%, accidents by 50%, pollution by 10%, and fuel consumption by 4%. 
Congestion pricing can also reduce the need for new capacity, while providing significant savings in terms of fuel costs and time. 
Such a charge has enabled the City of London to cut congestion by 30%. 
None of these solutions is particularly earth-shattering. 
They simply require a less fragmented approach within government, and more cooperation between the public and private sectors. 
This goal is achievable in rich and poor countries alike. 
Switzerland’s Department of the Environment, Transport, Energy, and Communications, for example, incorporates national goals, set by the Federal Council, into a unified infrastructure strategy that accounts for the needs of specific sectors. 
Likewise, Rwanda’s Ministry of Infrastructure coordinates the activities of other ministries and public agencies – ensuring that infrastructure strategies align with the East African Community’s regional integration plans – and monitors downstream delivery and operations. 
Governments must recognize that the private sector can provide more than infrastructure financing; it can also offer know-how in the planning, construction, and operation phases. 
Chile, the Philippines, South Africa, South Korea, and Taiwan are all developing frameworks that expand the role of private players in planning projects. 
Infrastructure increases economies’ competitiveness, while providing the physical framework for people’s lives. 
Policymakers’ goal should be to ensure that infrastructure realizes its full potential, so that the people who depend on it can realize theirs. 


The Arab World’s Options 
AMMAN – When the Arab awakening began in 2011, its primary goal should have been to advance pluralism and democracy – causes that were neglected in the Arab world’s first, anti-colonial awakening in the twentieth century. 
But, after three years of struggle, the process has only just begun. 
Will the second Arab awakening finally achieve its goals? 
The answer depends on which of three models Arab countries use to guide their transition: an inclusive, far-sighted model that aims to build consensus; a winner-take-all approach that excludes large segments of the population; or a stop-at-nothing approach focused on regime survival. 
These models reflect the vast differences among Arab countries’ current circumstances and prospects for the future. 
The strongest example of the inclusive model is Tunisia, where former opponents have formed a coalition government, without military interference. 
Of course, the process was not easy. 
But, after a tense struggle, Tunisians recognized that cooperation was the only way forward. 
In February, Tunisia adopted the Arab world’s most progressive constitution, which establishes equality between men and women, provides for peaceful alternation of government, and recognizes the right of citizens to be without religious belief – an unprecedented move in the region, supported by both Islamist and secular forces. 
Tunisia’s experience embodies the commitment to pluralism and democracy for which the second Arab awakening stands. 
Fortunately, Tunisia is not alone in following this path. 
Both Yemen and Morocco have undertaken a relatively inclusive political process, with Yemen pursuing a national dialogue and Morocco forming a coalition government. 
But this model had failed to take hold in several other countries. 
Consider Egypt, which has been pursuing the second, exclusionary approach, with all parties believing that they have a monopoly on the truth and thus can ignore or suppress their opponents. 
Egypt’s Islamists, led by the Muslim Brotherhood, adopted this philosophy while they were in power; the secular forces that ousted them in last July’s military coup are now taking the same approach. 
In short, Egyptian politics has become a zero-sum game – and the sum has truly been zero. 
The country remains plagued by security threats, economic chaos, and political instability – problems of such a scale that neither camp can solve them alone. 
If leaders on both sides do not begin to work together, Egypt’s awakening will remain a distant dream, with ordinary citizens suffering the social and economic consequences. 
But it is the third approach – exemplified by Syria – that is the most destructive. 
President Bashar al-Assad’s regime will stop at nothing to win what has become a game of survival. 
Meanwhile, the opposition remains fragmented, leaving a security vacuum that radical groups – made up largely of foreign fighters – have been exploiting. 
The result has been a horrific civil war, which has already led to at least 150,000 deaths and forced millions to flee their homes, with no end in sight. 
The stark differences between these three models and their outcomes offer a clear lesson: inclusiveness is the only route to stability. 
With the right approach, any country can succeed in building a better future. 
Of course, the path taken by the second Arab awakening has not been defined entirely by national boundaries. 
Long-held taboos have been eased throughout the Arab world. 
Specifically, the two forces that have long dominated the political scene – secular, often military or military-backed rulers, and the religious opposition – have lost their unassailable status; today, they are increasingly subject to the kind of criticism that characterizes democratic systems. 
In many Arab countries, it is even acceptable to be a liberal. 
But, while the rigid social systems that long impeded progress have broken down in many Arab countries over the last three years, with liberalism becoming a more acceptable worldview, the experiences of Egypt and Syria demonstrate that the goals of the second Arab awakening are not universally shared. 
Old rivalries, ideological preoccupations, and unproductive habits continue to block efforts to find real solutions to socioeconomic problems. 
Arab societies deserve better. 
As Tunisia has shown, if they embrace the politics of pluralism and inclusiveness, they will get it. 

Marxism, Back From the Grave in Uruguay 
MONTEVIDEO: Across Latin America, comrades and caudillos are supposedly consigned to the dustbin of history. 
Only Cuba holds out against the continent's push toward democracy and open economies. 
Marx, however, is far from dead; not least in Uruguay, and perhaps not elsewhere. 
Jorge Batlle, taking office as President March 1, must bear this in mind. 
In last year's presidential elections, Tabaré Vázquez, the Left's charismatic leader, easily won the first round, though not by enough votes to avoid a second round run off. 
Suspense gripped the country. 
Jorge Batlle, representing the long dominant Colorado party, needed solid support from the rival Blanco party to overcome Vázquez. 
After 150 years of feuding, that support seemed as likely as the Capulets rescuing the Montagues. 
Called "red" and "white" after the colored ribbons on their hats – worn since the 1830s to avoid being shot at by one's own side – the Colorados and Blancos are nowadays divided by little ideologically. 
But could ancestral wounds be forgotten? 
No one knew. 
Pollsters predicted a technical draw. 
Fear of the Left overcame history's open wounds: Batlle won by 7%, implying that almost all Blancos flocked to him. Uruguay's voters divided along lines of ideology, not old loyalties. 
That divide is likely to deepen, and be repeated at the next election. But – and here's the rub – next time there may be no second round. 
Statisticians suggest that, on a ceteris paribus basis, the Left will attain an absolute majority in the first round in five years.What sort of a Left is on the march in Uruguay? 
The Left's rank and file is faceless, with Communists, former guerrillas, and other radical fellow travelers marching side-by-side with a moderate majority of Social and Christian Democrats. 
Unlike in Chile, where modernized Socialists recently secured the presidency for the first time since the coup against Allende, even Uruguay's moderate Leftists cling to a passionate militancy, Cuba, and Che Guevara. 
Looking at the Left's leadership – dominated by Tabaré Vázquez and a few others – there is an undoubted and longstanding commitment to Marxism-Leninism. 
Of late, that ideology is kept in cold storage, but never disavowed. 
Those commitments, no matter how hidden, spell trouble in the future. 
What incited the Left's rise? 
Not current economics. 
Uruguay suffered cruel stagnation from the middle 1950s to the 1970s, brought about by rampant protectionism, irresponsible public finance, and tight exchange controls. 
All this was long ago. 
Leftist support has surged at a time when growth averages something like 3% per year in real terms, and is coupled with the most egalitarian income distribution in Latin America, as well as relatively high government spending for social purposes. 
Yet a pervasive malaise grips Uruguay, prompting people to seek systemic change. 
The irony of this yearning is that, instead of encouraging policies that would get the economy humming, discontent drives many voters back to the tried and failed policies of the past. 
Uruguay is often credited (debited?) with establishing the first welfare state in Latin America. 
In 1915 it mandated the first 48-hour week seen anywhere in the world. 
Labor market regulation became an almost annual event, stifling innovation. 
State-owned commercial banks account for half the financial system; all large companies are State monopolies, bureaucratically staffed and poorly managed. 
There is no room for an equities market. 
Careers in business are rare. 
Ambitious young people seek their fortunes abroad. 
A paramount figure in shaping the country was José Batlle, the president elect's great-uncle. 
A populist, twice president, he frowned on foreign investment, favored small firms, wanted large ones nationalized, and disparaged entrepreneurship. 
Like Marx, he believed that profits resulted from labor's exploitation. 
Instead of revolution, he looked to social legislation to put things right. 
The elder Batlle was revered in his lifetime and beyond. 
His faction eventually absorbed the entire Colorado Party. 
Unwittingly, the Blancos borrowed his ideology. 
Paradoxically, today's Left benefits from a nostalgia for those Colorado times, when Uruguay's wealth made the elder Batlle's populism possible. 
Daunting challenges face Batlle's great-nephew. 
If he is merely competent, he will likely end up handing over power to the Left, and thus risks being remembered as Uruguay's Kerenski. 
To prevent that fate, he must battle the sprawling bureaucracy and the State's financial/ industrial empire. 
Suffocating regulations must be lifted. 
A clash with powerful unions awaits. 
The choice facing President Batlle is to be either a Kerenski or a Thatcher. 
Five earlier presidential bids by Jorge Batlle failed, many believe, because he promised daring, free-market ideas that frightened voters. 
During his victorious campaign his advisors kept his mouth shut on everything but trivialities. 
Since his election, he has said little more. 
The few announced appointments have won lukewarm nods but no enthusiasm from those looking for bold leadership. 
President Batlle doesn't have time to dither; if he wants to hold off the hard Left, the economy must turn right before the next election. 
Real modernization and real growth are the only things that will block Uruguay's unmodernized Left from power next time. 

Europe’s Educational Evolution 
DUBLIN – Europe is grappling with great challenges – too great for any one country to address. 
Facing economic crisis, widespread unemployment, and rising competition from developing economies, Europe must adjust to technological advances and new modes of working – all while an aging population puts increasing strain on exhausted public budgets. 
In this fragile context, the European Union must focus on education in order to nurture people’s talents and potential, and thus to spur economic and social recovery. 
Education holds the key not only to better jobs and stronger GDP growth, but also to the cultural, political, and social development that is needed to ensure that citizens are well-rounded and grounded enough to lead at the local, national, and international levels. 
By focusing on the right policies, EU leaders can ensure that Europeans’ education enables them to be articulate global citizens and potent economic actors. 
The good news is that European leaders seem to recognize the value of the pursuit of knowledge. 
When allocating funds in the 2014-2020 European budget, EU governments wisely decided to increase funding for education and research – the only areas in which they did so. 
This commitment to safeguarding education and research funding should be reflected at all levels of policymaking. 
Moreover, in order to drive Europe’s transformation into a hub of responsible innovation and ethically sound production, policymakers must ensure that higher-education institutions equip students with cutting-edge knowledge and high-level flexible skills grounded in shared values. 
This means developing differentiated education systems, ranging from vocational schools to doctoral programs, and giving students access to international experience, which can expose them to opportunities beyond national frontiers. 
For example, the Erasmus program, which enables university students to study or work abroad as part of their degree, broadens participants’ outlook while enhancing their willingness and ability to go where the jobs are. 
Such programs also enrich local students and offer valuable insights to professors about other traditions of higher education. 
Furthermore, EU leaders must recognize that high-quality instruction is as central to universities as, say, pioneering research. 
As it stands, while everyone agrees that researchers need extensive training, the prevailing assumption is that great teachers are born and great teaching just happens – a view that is hampering education at all levels. 
Improving the quality of instruction in higher education is at the focus of the first report to the European Commission by the High-Level Group on the Modernization of Higher Education (of which I am President). 
Among the report’s 16 recommendations is to develop quality teaching through compulsory continuous professional training, and to recognize and reward achievement. 
This approach would give educators the skills and motivation that they require to provide the kind of education that Europe needs. 
Another crucial issue – and the topic of the group’s next report – concerns new modes of delivering education, such as Massive Open Online Courses (MOOCs). 
In fact, some claim that a revolution in the way knowledge and information is created and transmitted is imminent. 
While these new modes of delivery are undoubtedly transforming education, especially higher education, what is happening may be more evolution than revolution. 
In other words, rather than bringing about the end of brick-and-mortar education, MOOCs and other innovations will spur the progression to so-called “click-and-mortar” education. 
This suggests that the group’s recommendations in this area will include complementary improvements to existing formal and non-formal systems, as well as mechanisms for reviving lifelong learning in higher education. 
For students, the foundations for success must be laid early, beginning with pre-primary and primary education. 
And policymakers must recognize the risk of perpetuating a digital divide that favors those who are already advantaged. 
Studies show, for example, that the vast majority of participants in MOOCs – which have been praised for their supposed accessibility – already have higher-education qualifications. 
Europe’s leaders must work to ensure that new modes of delivering education translate into better opportunities for a broader range of people. 
The pace and scope of technological progress makes predicting impending developments, and how they will affect education, virtually impossible. 
Regardless of which new technologies arise, however, education will boil down to teachers and students. 
Providing tools and opportunities that support the evolution of their respective roles is essential to creating a labor force capable of adapting to changing circumstances. 
That is the real challenge facing Europe. 

From San Francisco to the South China Sea 
OSAKA – Territorial and maritime disputes among China, Taiwan, and several Southeast Asian countries are roiling the South China Sea region, with little prospect of resolution anytime soon. 
But the current uneasy status quo may be tenable, so long as the parties embrace serious confidence-building measures through multilateral forums while maintaining effective deterrence vis-à-vis China and a commitment not to use offensive force. 
Naturally, China is eager to exclude interference by extra-regional great powers, particularly the United States, preferring bilateral negotiations with weaker regional claimants that it can more easily dominate. 
Extra-regional powers, however, cite the United Nations Convention on the Law of Sea – specifically, the freedom of navigation and the right of innocent passage – to justify their involvement. 
Given that the South China Sea disputes stem from overlapping claims to “exclusive economic zones,” not open ocean, the UN convention is not entirely relevant. 
But another international agreement does provide some guidance for settling these disputes: the San Francisco Peace Treaty, which entered into force in 1952 and officially ended World War II in the Asia-Pacific region. 
Under the treaty, Japan renounced its sovereignty claims over the Spratly and the Paracel Islands, but did not reassign them to any single country. 
As a result, these islands remain legally under the collective custody of the treaty’s 48 other parties – including two claimants to the islands, the Philippines and Vietnam. 
China – then in the third year of Mao Zedong’s rule – was not even invited to participate in the peace conference. 
Although Mao’s communists had clearly won the civil war and secured control of mainland China, the conference organizers disagreed about which government – Mao’s People’s Republic of China (PRC) in Beijing, or Chiang Kai-shek’s Republic of China (ROC) in Taipei – truly represented China. 
As a result, the PRC denies that it is legally bound by the treaty. 
But the treaty applies to the PRC indirectly through the ROC-Japan bilateral peace treaty of 1952, which was signed just hours before the San Francisco Treaty entered into effect and reaffirmed its terms – especially Japan’s renunciation of Taiwan. 
Indeed, the San Francisco Treaty required that the ROC-Japan treaty be consistent with it, thereby preventing Japan from assigning in its treaty with the ROC any additional right or title to any country other than the parties to the San Francisco Treaty. 
As a result, Japan is unable to recognize Taiwan as part of PRC sovereign territory. 
To be sure, the San Francisco Treaty per se is not legally binding for the PRC. 
But, for Japan, the PRC has clearly succeeded the ROC in Taiwan, as demonstrated by the 1972 Japan-PRC Joint Communiqué, on the basis of which the bilateral Treaty of Peace and Friendship was concluded six years later. 
When Japan shifted its diplomatic recognition from the ROC to the PRC, it recognized the latter as the “sole legal government of China.” 
Given that Japan was not recognizing China as a new state – international recognition of the Chinese state had existed without interruption since the ROC government emerged in 1912 – the PRC effectively accepted the rights and obligations of the previous government. 
Moreover, Japan did not recognize Taiwan as part of China, on the grounds that doing so would infringe on its obligations under the San Francisco Treaty. 
While Japan fully “understood” and “respected” the PRC’s declaration that Taiwan was an “inalienable” part of its territory, it did not recognize the claim in accordance with international law. 
The two countries simply agreed to disagree over Taiwan’s legal status. 
In other words, Japan renounced Taiwan without reassigning it. 
To date, China has been silent about the implications of the San Francisco Treaty for its claims in the South China Sea. 
This may simply reflect a dearth of international legal expertise in this field or the state of China’s segmented, stove-piped policy communities. 
But it could also stem from concerns that using the treaty’s legal reasoning, which conflicts with China’s stance on Taiwan, to resolve today’s territorial disputes would undermine its credibility and weaken its position. 
If left unchecked, China may use the South China Sea disputes to gain effective hegemony over weaker claimants. 
All parties to the disputes, including China, can cite geographic and historical connections to the islands to back their claims, but none of them has solid legal title under the San Francisco Treaty. 
The US and other extra-regional powers should take advantage of this fact, invoking their latent collective custody of the Spratly and the Paracel Islands in accordance with the San Francisco Treaty, and internationalize separate bilateral diplomatic processes between China and regional claimants. 
The treaty’s parties could even hold a conference to deliberate on the matter. 
Given that it would exclude China, such a discussion alone would be a game changer. 

How Humans Cause Mass Extinctions 
STANFORD – There is no doubt that Earth is undergoing the sixth mass extinction in its history – the first since the cataclysm that wiped out the dinosaurs some 65 million years ago. 
According to one recent study, species are going extinct between ten and several thousand times faster than they did during stable periods in the planet’s history, and populations within species are vanishing hundreds or thousands of times faster than that. 
By one estimate, Earth has lost half of its wildlife during the past 40 years. 
There is also no doubt about the cause: We are it. 
We are in the process of killing off our only known companions in the universe, many of them beautiful and all of them intricate and interesting. 
This is a tragedy, even for those who may not care about the loss of wildlife. 
The species that are so rapidly disappearing provide human beings with indispensable ecosystem services: regulating the climate, maintaining soil fertility, pollinating crops and defending them from pests, filtering fresh water, and supplying food. 
The cause of this great acceleration in the loss of the planet’s biodiversity is clear: rapidly expanding human activity, driven by worsening overpopulation and increasing per capita consumption. 
We are destroying habitats to make way for farms, pastures, roads, and cities. 
Our pollution is disrupting the climate and poisoning the land, water, and air. 
We are transporting invasive organisms around the globe and overharvesting commercially or nutritionally valuable plants and animals. 
The more people there are, the more of Earth’s productive resources must be mobilized to support them. 
More people means more wild land must be put under the plow or converted to urban infrastructure to support sprawling cities like Manila, Chengdu, New Delhi, and San Jose. 
More people means greater demand for fossil fuels, which means more greenhouse gases flowing into the atmosphere, perhaps the single greatest extinction threat of all. 
Meanwhile, more of Canada needs to be destroyed to extract low-grade petroleum from oil sands and more of the United States needs to be fracked. 
More people also means the production of more computers and more mobile phones, along with more mining operations for the rare earths needed to make them. 
It means more pesticides, detergents, antibiotics, glues, lubricants, preservatives, and plastics, many of which contain compounds that mimic mammalian hormones. 
Indeed, it means more microscopic plastic particles in the biosphere – particles that may be toxic or accumulate toxins on their surfaces. 
As a result, all living things – us included – have been plunged into a sickening poisonous stew, with organisms that are unable to adapt pushed further toward extinction. 
With each new person, the problem gets worse. 
Since human beings are intelligent, they tend to use the most accessible resources first. 
They settle the richest, most productive land, drink the nearest, cleanest water, and tap the easiest-to-reach energy sources. 
And so as new people arrive, food is produced on less fertile, more fragile land. 
Water is transported further or purified. 
Energy is produced from more marginal sources. 
In short, each new person joining the global population disproportionately adds more stress to the planet and its systems, causing more environmental damage and driving more species to extinction than members of earlier generations. 
To see this phenomenon at work, consider the oil industry. 
When the first well was drilled in Pennsylvania in 1859, it penetrated less than 70 feet into the soil before hitting oil. 
By comparison, the well drilled by Deepwater Horizon, which famously blew up in the Gulf of Mexico in 2010, began a mile beneath the water’s surface and drilled a few miles into the rock before finding oil. 
This required a huge amount of energy, and when the well blew, it was far harder to contain, causing large-scale, ongoing damage to the biodiversity of the Gulf and the adjacent shorelines, as well as to numerous local economies. 
The situation can be summarized simply. 
The world’s expanding human population is in competition with the populations of most other animals (exceptions include rats, cattle, cats, dogs, and cockroaches). 
Through the expansion of agriculture, we are now appropriating roughly half of the energy from the sun used to produce food for all animals – and our needs are only growing. 
With the world’s most dominant animal – us – taking half the cake, it is little wonder that the millions of species left fighting over the other half have begun to disappear rapidly. 
This is not just a moral tragedy; it is an existential threat. 
Mass extinctions will deprive us of many of the ecosystem services on which our civilization depends. 
Our population bomb has already claimed its first casualties. 
They will not be the last. 

Economists versus the Economy 
LONDON – Let’s be honest: no one knows what is happening in the world economy today. 
Recovery from the collapse of 2008 has been unexpectedly slow. 
Are we on the road to full health or mired in “secular stagnation”? 
Is globalization coming or going? 
Policymakers don’t know what to do. 
They press the usual (and unusual) levers and nothing happens. 
Quantitative easing was supposed to bring inflation “back to target.” 
It didn’t. 
Fiscal contraction was supposed to restore confidence. 
It didn’t. 
Earlier this month, Mark Carney, Governor of the Bank of England, delivered a speech called “The Specter of Monetarism.” 
Of course, monetarism was supposed to save us from the specter of Keynesianism! 
With virtually no usable macroeconomic tools, the default position is “structural reform.” 
But no one agrees on what it entails. 
Meanwhile, crackpot leaders are stirring discontented voters. 
Economies, it seems, have escaped from the grasp of those supposed to manage them, with politics in hot pursuit. 
Before 2008, the experts thought they had things under control. 
Yes, there was a bubble in the housing market, but it was no worse, current Fed Chair Janet Yellen said in 2005, than a “good-sized bump in the road.” 
So why did they miss the storm? 
This was exactly the question Queen Elizabeth of Britain asked a group of economists in 2008. 
Most of them wrung their hands. 
It was “a failure of the collective imagination of many bright people,” they explained. 
But some economists supported a dissenting – and much more damning – verdict, one that focused on the failure of economics education. 
Most economics students are not required to study psychology, philosophy, history, or politics. 
They are spoon-fed models of the economy, based on unreal assumptions, and tested on their competence in solving mathematical equations. 
They are never given the mental tools to grasp the whole picture. 
This takes us back to John Stuart Mill, the great nineteenth-century economist and philosopher, who believed that nobody can be a good economist if he or she is just an economist. 
To be sure, most academic disciplines have become highly specialized since Mill’s day; and, since the collapse of theology, no field of study has aimed to understand the human condition as a whole. 
But no branch of human inquiry has cut itself off from the whole – and from the other social sciences – more than economics. 
This is not because of its subject matter. 
On the contrary, the business of earning a living still fills the greater part of our lives and thoughts. 
Economics – how markets works, why they sometimes break down, how to estimate the costs of a project properly – ought to be of interest to most people. 
In fact, the field repels all but connoisseurs of fanciful formal models. 
This is not because economics prizes logical argument, which is an essential check on faulty reasoning. 
The real trouble is that it is cut off from the common understanding of how things work, or should work. 
Economists claim to make precise what is vague, and are convinced that economics is superior to all other disciplines, because the objectivity of money enables it to measure historical forces exactly, rather than approximately. 
Not surprisingly, economists’ favored image of the economy is that of a machine. 
The renowned American economist Irving Fisher actually built an elaborate hydraulic machine with pumps and levers, allowing him to demonstrate visually how equilibrium prices in the market adjust in response to changes in supply or demand. 
If you believe that economies are like machines, you are likely to view economic problems as essentially mathematical problems. 
The efficient state of the economy, general equilibrium, is a solution to a system of simultaneous equations. 
Deviations from equilibrium are “frictions,” mere “bumps in the road”; barring them, outcomes are pre-determined and optimal. 
Unfortunately, the frictions that disrupt the machine’s smooth operation are human beings. 
One can understand why economists trained in this way were seduced by financial models that implied that banks had virtually eliminated risk. 
Good economists have always understood that this method has severe limitations. 
They use their discipline as a kind of mental hygiene to protect against the grossest errors in thinking. 
John Maynard Keynes warned his students against trying to “precise everything away.” 
There is no formal model in his great book The General Theory of Employment, Interest, and Money. 
He chose to leave the mathematical formalization to others, because he wanted his readers (fellow economists, not the general public) to catch the “intuition” of what he was saying. 
Joseph Schumpeter and Friedrich Hayek, the two most famous Austrian economists of the last century, also attacked the view of the economy as a machine. 
Schumpeter argued that a capitalist economy develops through unceasing destruction of old relationships. 
For Hayek, the magic of the market is not that it grinds out a system of general equilibrium, but that it coordinates the disparate plans of countless individuals in a world of dispersed knowledge. 
What unites the great economists, and many other good ones, is a broad education and outlook. 
This gives them access to many different ways of understanding the economy. 
The giants of earlier generations knew a lot of things besides economics. 
Keynes graduated in mathematics, but was steeped in the classics (and studied economics for less than a year before starting to teach it). 
Schumpeter got his PhD in law; Hayek’s were in law and political science, and he also studied philosophy, psychology, and brain anatomy. 
Today’s professional economists, by contrast, have studied almost nothing but economics. 
They don’t even read the classics of their own discipline. 
Economic history comes, if at all, from data sets. 
Philosophy, which could teach them about the limits of the economic method, is a closed book. 
Mathematics, demanding and seductive, has monopolized their mental horizons. 
The economists are the idiots savants of our time. 

Brazil’s Own Goals 
RIO DE JANEIRO – Ready or not, Brazil is rolling out the welcome mat for sports fans from around the world. 
As soon as the clock winds down on the final FIFA World Cup soccer match in July, the country will resume preparations to host the 2016 Summer Olympics. 
But, even as Brazil steps into the international spotlight, it maintains considerable barriers to the global economy, damaging its prospects for future growth and prosperity. 
In a world that is constantly becoming more interconnected, Brazil risks being left behind. 
Brazil has risen to become the world’s seventh-largest economy, propelled by a commodities boom, a demographic dividend, and rising consumption. 
Yet it ranks 95th in per capita GDP. 
This disparity can be at least partly explained by its 43rd-place ranking for “connectedness” in terms of flows of goods, services, finance, people, and data and communications. 
Sealing itself off from the bracing effects of global competition is sapping Brazil of much-needed momentum, with serious consequences for households, most of which have experienced only modest income growth in recent years. 
While Brazil has halved its official poverty rate since 2003, prohibitively high consumer-goods prices and astronomical credit-card interest rates (averaging 145%) have prevented many of those who have escaped poverty from attaining middle-class lifestyles. 
In order to lift half of the still-vulnerable population into the middle class, Brazil will need 4.2% annual GDP growth, on average, through 2030 – a target that can be met by tripling productivity growth. 
That may be an ambitious goal, but it is achievable, especially if Brazil becomes more deeply integrated into global markets and multinational production networks. 
In fact, an assessment of how global connections affect economic growth suggests that, by pursuing deeper engagement with the world, Brazil could boost its average annual rate of GDP growth by up to 1.25 percentage points. 
That would propel the economy roughly one-third of the way toward higher incomes and better living standards. 
With global connectivity undergoing a profound transformation, now is the time to establish key partnerships and claim market shares. 
In doing so, Brazil would gain access to innumerable opportunities for growth. 
It would also reap the benefits of global competition, which would compel local firms to seek greater efficiency by implementing lean processes, investing in research and development, or adopting the latest technologies. 
Global exposure makes supply chains more dynamic and enables companies to absorb more of the innovations, technologies, and ideas that are constantly emerging worldwide. 
For decades, Brazil’s economic policy has drawn on the strength of its huge domestic market and protected local industries through a complex system of subsidies, taxes, and tariffs. 
But exports are equivalent to only 13% of GDP, far below the level in India (24%) or Mexico (33%). 
Furthermore, the sharp appreciation of the real’s exchange rate – driven by high global commodities prices – has diminished export competitiveness. 
As a result, from 2005 to 2012, Brazil’s $20 billion trade surplus in manufactured goods swung to a $45 billion deficit. To boost exports, Brazil will have to develop distinctive skills and capabilities, particularly in industries adjacent to commodities. 
Despite efforts to liberalize trade, reform has been uneven. 
In the heavily protected automotive industry, high import tariffs have encouraged foreign automakers to establish factories in Brazil. 
But their productivity remains low; auto plants in Mexico, for example, produce twice as many vehicles per worker. 
And Brazil exports only a small share of the vehicles that it produces. 
This contrasts sharply with Brazil’s success in developing innovative and globally competitive aerospace and agricultural sectors. 
One critical difference was the authorities’ emphasis on boosting R&D in these sectors before reducing the government’s direct role. 
Brazil’s trade in goods also suffers from the country’s inadequate transportation and communications networks. 
The rail system is limited, and only 14% of roads are paved, which is not surprising, given that Brazil’s investment in infrastructure averaged only 2.2% of GDP in 2000-2011 – well below the global average. 
Brazil can improve on this record by using profits from the offshore oil fields that it is currently developing. 
As for trade in services – an area where performance has been lackluster, at best – Brazil would benefit considerably from increased foreign-language proficiency, which would enable more Brazilians to conduct business abroad. 
Tourism also offers significant growth potential, particularly if Brazil can build on the rare opportunity presented by hosting the World Cup and the Olympics. 
Brazil’s connectedness agenda should also include efforts to attract more foreign talent. 
Skilled migrants have been essential to the growth of some of the world’s leading hubs of technology and innovation – from Silicon Valley to Ireland, India, and Taiwan. 
Today, only 0.5% of Brazil’s workforce is foreign-born, compared to more than 5% in the early 1900s. 
Brazil also lags in terms of data and communication flows, partly because a large share of the population lacks Internet access. 
With improved digital links, Brazil would gain new opportunities to improve productivity and innovation. 
What better place than Brazil, with its large and growing consumer market, to incubate the next Facebook? 
If that sounds farfetched, consider this: Instagram co-founder Mike Krieger is a Brazilian who left home to find his fortune in San Francisco. 
This month, the World Cup is bringing the world to Brazil. 
It is up to Brazil to invite it to stay. 

Mattarella’s Line in the Sand 
PARIS – A deep political crisis has erupted in Italy since President Sergio Mattarella’s refusal to appoint Paolo Savona, a declared Euroskeptic, as minister of economy and finance in the coalition government proposed by the leaders of the Five Star Movement (M5S) and the League, the two anti-system parties that emerged as winners of the March general election. 
Savona had openly advocated preparing a “plan B” for an exit from the single currency, and Mattarella argued that his appointment could have led to precisely that outcome. 
Mattarella’s decision immediately provoked a furor. 
M5S leader Luigi Di Maio called for the president to be impeached, but later withdrew this request. 
The League’s Matteo Salvini called for new elections, which he said would be a referendum on the freedom or slavery of Italy. 
And in France, Marine Le Pen, the far-right leader who campaigned for the French presidency last year on a promise to leave the euro, denounced what she called a “coup d’état.” 
This is not the first time that continued euro membership has become a major political issue. 
In Greece in 2015, it was, at least implicitly, part of the debate over the acceptance of the conditions for financial assistance. 
In France in 2017, Le Pen and Emmanuel Macron explicitly debated it during the presidential campaign. 
But this is the first time that the euro has been the direct source of a legal dispute over the appointment of a government. 
A sudden rise in government bond rates reflects the anxiety in financial markets. 
But, first and foremost, the crisis raises an issue of interpretation. 
Does Mattarella’s decision mean voters cannot call into question euro membership? 
What is the resulting scope for democratic choice? 
These are fundamental issues of far-reaching consequence for all European citizens. 
Mattarella was explicit about his motivations. 
He did not object to Italians’ right to question euro membership, but he argued that this required an open debate, based on serious, in-depth analysis, whereas the issue had not been brought up in the electoral campaign. 
As Prime Minister-designate Giuseppe Conte and the party leaders behind him refused to propose any other candidate for the post, the president concluded that his constitutional duty was to refuse to endorse the appointment. 
In doing so, Mattarella drew a line separating constitutional choices from political choices. 
His logic was that political choices can be made freely by a government that commands a parliamentary majority, and that the president has no right to question such choices. 
Constitutional choices, by contrast, require a different type of decision-making procedure – one that ensures that voters are adequately informed about the potential consequences of their decision. 
Absent such a debate, Mattarella reasoned, the president’s duty is to preserve the status quo and to prevent a consequential choice from being driven by self-fulfilling market expectations. 
As a matter of principle, this distinction makes considerable sense. 
In virtually all democracies, constitutions protect fundamental human rights, define the nature of the political regime, and assign responsibilities to the various levels of government. 
These provisions cannot – fortunately – be changed by a simple majority vote in parliament. 
Constitutions can be amended, of course, but often only slowly, and always only by a supermajority or, in some countries, a referendum. 
This inertia gives citizens a guarantee that their deep preferences will be upheld. 
This raises two questions. 
First, which are the truly constitutional matters? 
In Europe, membership in the EU is part of many countries’ fundamental law. 
Exit cannot be decided by parliament through ordinary procedure. 
But the constitutional scope is broader: legally speaking, all provisions of the EU treaties fall within it. 
And this is where the trouble starts. 
It would obviously be absurd to object to a political debate over EU treaty provisions regarding, say, fisheries or telecoms, or even the fiscal framework. 
Such provisions should belong to ordinary legislation (to define this distinction more clearly was one of the goals of the failed constitutional treaty of 2005). 
But, instead of providing a precise delineation, the legal frontier between constitutional and ordinary provisions creates political confusion. 
Citizens can be forgiven for not having a clear idea of what belongs to which category. 
Second, what type of decision procedure should apply to truly constitutional choices? 
Article 50 of the Treaty of Lisbon, as we have seen, enables the EU to decide how to manage the United Kingdom’s decision to leave. 
But most countries do not have an article in their own constitution that defines how to decide whether to terminate EU or euro membership. 
Harvard’s Kenneth Rogoff dubbed the UK’s reliance on a simple-majority referendum to end a 55-year-old partnership “Russian roulette for republics,” because the procedure did not include the checks and balances that such a consequential decision should have required. 
As long as membership in the EU and the euro commanded wide consensus, these distinctions were a matter of interest only for legal experts. 
This is no longer the case, and the debate about them is unlikely to end soon. 
It is therefore time to make the distinction between genuinely constitutional and non-constitutional European commitments an explicit part of the political order of our countries. 
The Italian president’s dividing line is correct in principle: because the common currency is a fundamental social institution, because of the bonds with partner countries that it involves, and because of the major financial, economic, and geopolitical consequences of a potential exit, euro membership must belong to the constitutional realm. 
But Mattarella’s stance would have been more easily accepted had it been made explicit early on. 
The fact that his decision was announced only when a conflict erupted between the presidency and the leaders of the parliamentary majority has created doubt about its legitimacy and has offered his opponents an opportunity to claim the moral high ground. 
The vital task confronting Europe is to reconcile citizens’ right to make radical choices with the need to ensure that decisions leading to constitutional upheaval are subject to sufficient, and sufficiently informed, public deliberation that results in an unambiguous, time-consistent expression of the people’s will. 
The EU and the euro must not be constitutional cages; nor should they be subject to ill-considered decisions. 
Striking the right balance demands procedures that command the required legitimacy. 

The Path to Altruism 
SHECHEN, NEPAL – “Cooperation,” the Harvard University biologist Martin Nowak has written, is “the architect of creativity throughout evolution, from cells to multicellular creatures to anthills to villages to cities.” 
As mankind now tries to solve new, global challenges, we must also find new ways to cooperate. 
The basis for this cooperation must be altruism. 
The desire to help others without consideration for ourselves is not just a noble ideal. 
Selflessness raises the quality and elevates the meaning of our lives, and that of our descendants; in fact, our very survival may even depend on it. 
We must have the insight to recognize this, and the audacity to say so. 
Humanity faces three monumental challenges: ensuring everyone decent living conditions, improving life satisfaction, and protecting our planet. 
Traditional cost-benefit analysis struggles to reconcile these demands, because they span different time frames. 
We worry about the state of the economy from year to year; but we consider our happiness over the course of a lifetime, while our concern for the environment will mainly benefit future generations. 
But an altruistic approach requires few trade-offs. 
A considerate investor will never speculate recklessly with his clients’ life savings, despite the potential gain for himself. 
A caring citizen will always think first how his actions affect his community. 
A selfless generation will exercise care with the planet, precisely in order to leave a livable world to its children. 
Altruism makes us all better off. 
This vision of the world may seem idealistic. 
After all, psychology, economics, and evolutionary biology have often claimed that humans share an essentially selfish nature. 
But research over the past 30 years indicates that true altruism does exist and can extend beyond kin and community to encompass the welfare of humans generally – and that of other species. 
Moreover, the altruist does not have to suffer for his good deeds; on the contrary, he often benefits indirectly from them, while the selfish actor often creates misery for himself as well as others. 
Studies have also shown that an individual can learn to be altruistic. 
Neuroscientists have identified three components of altruism that anyone can develop as acquired skills: empathy (understanding and sharing the feelings of another), loving kindness (the wish to spread happiness), and compassion (a desire to relieve the suffering of another). 
Societies, too, can become more altruistic (and may even enjoy an evolutionary advantage over their more selfish counterparts). 
Research on the evolution of cultures suggests that human values can change more quickly than our genes. 
Thus, if we are to engender a more caring world, we must first recognize the importance of altruism – and then cultivate it among individuals and promote cultural change in our societies. 
Nowhere is the need to cultivate this recognition clearer than it is in our economic system. 
The unrealistic pursuit of endless quantitative growth places intolerable strains on our planet and widens inequalities. 
But reversing that growth would create other problems; forcing people to compete for diminishing assets and resources would spread unemployment, poverty, and even violence. 
So a balance must be struck: the global community must lift 1.5 billion people out of poverty, while the excesses of the world’s richest consumers – which cause the vast majority of ecological degradation – must be limited. 
We need not impose more taxes to achieve this, but we can persuade the wealthy that the eternal pursuit of material gain is both unsustainable and unnecessary for their own quality of life. 
This concept of “sustainable harmony” can be promoted by publishing indices of personal well-being and environmental preservation, alongside standard GDP data. 
The government of Bhutan, for example, already accounts for the “social wealth” and “natural wealth” of its people, in addition to its GDP figures. 
We could also establish a stock exchange, alongside traditional securities markets, comprising so-called ethical organizations, such as social enterprises, cooperative banks, microcredit agencies, and fair-trade groups. 
Several initiatives – for example, in Brazil, South Africa, and the United Kingdom – have already taken small steps in this direction. 
Small steps lead to big changes. 
As the value of altruism becomes increasingly obvious, the new approach will spread through the economy, benefiting all of society, future generations, and the planet, too. 

Addicted to Putin 
MOSCOW – Watching Russia’s worrying trajectory under President Vladimir Putin, many foreign observers ask how a leader who is so apparently driving his country toward the abyss can remain so popular. 
The answer is simple: Putin’s supporters – that is, a hefty majority of Russians – do not see the danger ahead. 
According to the independent Levada Center, Putin’s approval rating increased from 65% in January to 80% in March, immediately after Russia’s annexation of Crimea. 
The rate reached its peak in early August, at 87%, when many believed that Russia and Ukraine were on the brink of all-out war. 
Though it fell after that, to 84% in early September, the drop is within the margin of error. 
In other words, there is no basis to claim that Putin’s approval rating is declining. 
Putin’s startlingly high popularity certainly cannot be attributed to a positive view of state structures in general. 
Like most people, Russians are generally dismissive of bureaucracy. 
They give low grades to specific agencies, consider most officials to be corrupt, and rate the government’s performance on most issues as mediocre, at best. 
Instead, Russians’ approval of Putin is rooted in the fact that there is no alternative. 
The Russian political field has been carefully cleared of all competition. 
Approval ratings in this context are not tools for comparing politicians’ performance and prospects, and thus for compelling them to do better or risk being voted out in the next election. 
Rather, they are a reservoir of the population’s hopes and fears. 
During his first two terms, Putin was a strong source of hope, owing largely to the rapid increase in Russians’ incomes. 
In 2012, this growth began to wane – and so did Putin’s popularity. 
His 63-65% approval rating prior to the annexation of Crimea appeared high by Western standards, but was low compared to his previous record – and dangerously close to levels that would threaten his leadership. 
After all, an authoritarian regime built around a charismatic leader requires more than middling public support if it is to avoid unrest and violence. 
In an attempt to recapture his former popularity, Putin implemented salary increases for teachers, doctors, and police officers, putting regional budgets under strain in the process. 
But higher incomes did not translate into improvements in people’s standard of living or the quality of public services, leaving Putin’s approval rating flat, with some of his opponents even taking to the streets to protest his leadership. 
And, contrary to the regime’s expectations, the Winter Olympics in Sochi also failed to revive Putin’s popularity. 
With the economy showing no sign of recovering the robust growth rates that had bolstered Putin’s popularity in the past, regaining support would have required undertaking the daunting task of fulfilling citizens’ demands for better education, improved health-care services, and more affordable housing. 
For Putin, the timing of the political eruption in Ukraine – with protesters eventually forcing the Kremlin-supported president, Viktor Yanukovych, to flee the country – could not have been more ominous. 
Quashing perceptions of Putin as a “loser” in Ukraine became a top priority in Moscow. 
The strategy that emerged, beginning with the annexation of Crimea, delivered results almost immediately. 
The Russian public moved into “emergency mode,” with Putin’s approval rating soaring above 80%. 
In such a politically charged context, the sociologist Boris Dubin observed, symbolic acts are more compelling than, say, economic considerations. 
Indeed, complaints about stagnating incomes and poor public services gave way to displays of unqualified support for the government, with citizens declaring their willingness to shoulder the costs of confronting the West. 
Why did the Russian public accept confrontation so easily? 
Sharply divisive official rhetoric and the evocation of war imagery by state-owned media certainly played a role. 
But there is another, less obvious factor at work: Russia’s lack of debt. 
It is easier to get carried away when not much is keeping you anchored. 
According to the professional services firm Deloitte, mortgage debt in Russia is 20 times lower, on average, than in the European Union. 
And the National Agency for Financial Studies reports that only 2% of Russians are prepared to take on a mortgage, owing largely to the uncertainty that plagues the market. 
For Western societies – weighed down by credits, contracts, and other obligations – conflict is extremely costly, so they tend to resist it, and even turn on leaders who suggest it. 
Ordinary Russians, by contrast, are willing to pin their hopes on a single charismatic figure, not only because they have fewer promising alternatives, but also because they face fewer constraints in doing so. 
In this sense, Russians have come to depend on their belief in Putin as much as he depends on their support. 
Instead of serving as a source of stability, as it did in the past, this mutual dependence is driving Russia toward political and economic isolation – with serious consequences for ordinary Russians’ livelihoods. 
Sooner or later, Putin’s approval rating will plummet. 
The challenge facing Russians is to ensure that, when it does, they have broken their destructive dependence on belief in him. 
(Foreign observers, too, should abandon the habit of focusing all of their attention on the person at the top.) 
In the meantime, no one can predict the ends to which Putin will go to prop up his presidency. 

No-Brainer Sustainable Development 
BUDAPEST – The 2030 United Nations Sustainable Development Goals have among their objectives primary-school education for all children, jobs for all adults, and an end to hunger and poverty. 
These are noble aspirations – but very expensive. 
Can we really afford them all? 
The OECD has estimated that meeting all 17 SDGs, which comprise 169 specific development targets, would cost $3.3-4.5 trillion annually – about the same as the United States’ 2016 federal budget, and far more than the nearly $132 billion spent globally on overseas development aid last year. 
In fact, just providing universal primary education would require at least $17 billion of additional spending per year, and a UN General Assembly intergovernmental committee estimates that eradicating poverty would require annual investments in infrastructure of $5-7 trillion globally. 
In truth, estimates vary because nobody is quite sure how much the SDGs will cost. 
Meanwhile, donor countries are unlikely to provide meaningful increases in development funding anytime soon. 
In the United Kingdom, voters want to renege on a previous foreign-aid commitment – amounting to 0.7% of GDP – by a margin of two to one. 
In the United States, Republican presidential candidate Donald Trump has said that the federal government should “stop sending foreign aid to countries that hate us.” 
And in Australia, the government has already slashed its aid budget to an all-time low, measured against gross national income. 
If we can’t count on full funding for every SDG, then we should spend what we have wisely, and not spend more on investments that historically yield low returns. 
For example, in education, investing in smaller class sizes and higher teacher salaries has not had any significant impact on student test scores. 
Another area that promises more than it delivers is “climate aid,” which allocates development funds to efforts to mitigate the effects of global warming. 
Too often, this funding serves a cosmetic purpose – making donors appear environmentally friendly – rather than effecting genuine change. 
Indeed, while climate-aid schemes proliferate, many countries are still wasting billions to reduce gas prices artificially. 
In 2014, spending on fossil-fuel subsidies amounted to $20-30 billion in China, Egypt, Venezuela, and Algeria; $40 billion in Russia and India; and $70 billion in Iran and Saudi Arabia. 
Among the many energy-related objectives of the SDGs, the call to end fossil-fuel subsidies is a no-brainer. 
Economists at the think tank I lead estimate that every dollar diverted from energy subsidies could generate at least $15 in benefits to society. 
Ending these subsidies would reduce CO2 emissions, air pollution, and automobile congestion. 
More important, it would free up money for other areas like health and nutrition, where simple measures can have a massive impact relative to their cost. 
For example, while malaria killed more than 400,000 people last year, insecticidal nets to guard against malaria-carrying mosquitoes are effective for two to three years, and cost less than $10 to manufacture and distribute. 
All told, a single case of clinical malaria can be averted for as little as $11. 
According to the charity evaluator Givewell, the Against Malaria Foundation saves a child’s life with every $3,500 it spends, and one study in Kenya even found that as little as $1,000 spent on bed-net distribution can prevent a child’s death. 
The typical American worker spends that much every year on coffee. 
A small outlay can save one person from suffering through a painful fever, headaches, debilitating malaise, vomiting, and other symptoms of malaria; and it can save a community from lost economic productivity, because kids miss fewer days in school, and adults miss work less often. 
And it can save hundreds of thousands of lives. 
Our economists estimate that investing to reduce the incidence of malaria by 50% yields a 35-fold return in benefits to society. 
Another simple and effective health-care intervention is to make aspirin more widely available, so that it can be taken at the onset of heart attacks to prevent death. 
The cost per treated case of providing this cheap drug alongside clinical visits and diagnostic tests is just $13-15, which means that we could reach 75% of the population in low- and middle-income countries for just $3.5 billion. 
That is roughly a fifth of what Brazil spent to host the Summer Olympic Games in Rio de Janeiro this year. 
Likewise, basic nutritional interventions – especially for pregnant women and infants – can have far-reaching effects for individuals and communities. 
Adequate nutrition improves a child’s long-term health, educational performance, and future earnings. 
Investing in nutrition is another no-brainer: measures such as salt iodization, and iron and folic acid and vitamin A supplementation can cost just a few cents annually per recipient. 
Similarly, deworming treatments and vaccination are inexpensive, effective, and have a high return on investment. 
While we should not only look for “bargains” in the SDGs, we absolutely should look for where a dollar is best spent. 
It will be great if we can increase funding, but it would be foolish to think that development-aid money will multiply overnight, or that the UN’s massive, quixotic development agenda has the resources to remain on track. 
In fact, to persuade high-income countries – and their taxpayers – to increase their development-aid outlays, we will have to be more mindful of costs and benefits, and recognize that not all development targets are equal. 
When we can completely transform someone’s life for pennies, we should accept that small victory before pursuing grand projects with even grander price tags and no guarantee of success. 
Where money is lacking, common sense shouldn’t be. 

May Day Madness 
May 1, 2006, is a crucial date for Europe, for it is the deadline for implementing the European Union’s directive on freedom of movement into national law. 
Most countries have already changed their immigration laws, or have promised to do so before the deadline. 
Only Belgium, Italy, Finland, and Luxemburg lag behind. 
True, some of the old EU countries have opted for a prohibition of labor migration during a transition period that is initially set at two years and may be extended to April 2011. 
However, this prohibition does not apply to people who are self-employed or not working. 
Such people already enjoy full freedom of free migration today. 
While the directive’s rules governing migration of employed and self-employed people hardly differ from previous EU law, the migration and social-welfare rights of non-working EU citizens have been significantly extended. 
According to the directive, every EU citizen has the right to a residence permit for up to five years in any member state, followed by the right to permanent residence. 
In principle, even inactive immigrants will then be eligible for social-welfare benefits, just like nationals. 
The directive contains safeguards to limit potential abuse of welfare-state benefits during the first five years, including proof of health insurance coverage and a requirement that sufficient “resources” be shown when a residence permit of up to five years is requested. 
But it is not clear what these resources are meant to be. 
According to the directive’s preamble, the state cannot cite insufficient assets as a reason to refuse a residence permit, as this would be inadmissible discrimination. 
In theory, the resource requirement must be tailored to the individual circumstances of the immigrant. 
In practice, however, financial means in the form of assets or regular income are uniformly required from all immigrants, regardless of their individual characteristics. 
Nevertheless, even during the five-year period, an immigrant will enjoy greater rights. 
If he becomes indigent after receiving a residence permit, he cannot automatically be returned to his home country, as was possible before. 
Instead, the welfare state must make its services available to him. 
Only “unreasonable” claims may be refused, but the state will bear the burden of proving unreasonableness. 
Nor can the duration of the residence permit be shortened simply because the immigrant claims welfare assistance. 
When the five years of legal residence are completed, an immigrant automatically gains the inalienable right to permanent residence. 
The host country cannot deny this right even if an immigrant has no health insurance and no resources to live on. 
The immigrant will be fully eligible for all benefits the host country offers its domestic residents. 
The incentives to make use of the new directive will be especially strong for East Europeans. 
Today, average nominal wages in the eight post-communist EU countries are about one-fifth of the West European level and often only a quarter to a half of Western levels of social assistance. 
The real differences in living standards are not quite as large, but they are a temptation nonetheless. 
This will be particularly true for Bulgarians and Rumanians, who are invited to join the EU in 2007. 
Currently their nominal wages are only about 7% of the West European average. 
Western Europe has already experienced three decades of indirect migration into the welfare state, as social benefits have created artificially high wages for the unskilled, simultaneously fueling excessive immigration and unemployment. 
Immigrants have crowded out domestic residents who prefer the benefits to engaging in low-wage competition with the newcomers. 
The directive on free movement implies a new era of direct migration into West European welfare states. 
The result may be an erosion of these welfare states themselves. 
As no West European state wants welfare immigration, and because they are unable to discriminate between nationals and EU immigrants, they will begin to reduce their services. 
Europe will enter an extended period of competitive deterrence, during which it will gradually abandon its old social values. 
To be sure, countervailing political forces will press for harmonization of Europe’s social-welfare systems. 
The draft EU constitution, which failed in the French and Dutch referenda last year, breathes the spirit of this approach. 
Unfortunately, harmonization would probably apply to wage replacement payments, implying uniform minimum wage constraints for EU countries. 
Given the EU’s economic heterogeneity, this outcome would likely boost unemployment. 
There is still time to avert these frightening effects. 
But, to do so, the directive on free movement must be changed, so that the right to immigrate does not automatically imply a right to social benefits. 
If the home country were to remain responsible for welfare services to non-working immigrants, the erosion of West European welfare states that the theory of systems competition predicts could be halted. 
But that would mean a substantial change in the direction of EU social policies, including revision of the draft constitution. 

The Crown Prince’s New Clothes 
PARIS – This June, Bahrain, Egypt, Libya, the Maldives, Saudi Arabia, the United Arab Emirates, and Yemen cut diplomatic and economic ties with Qatar. 
This Gulf crisis will, one way or another, come to an end. 
But whether that end will be good for the chief instigator of the crisis, Saudi Arabian Crown Prince Mohammed bin Salman (MBS), remains to be seen. 
An extreme but unlikely solution to the crisis could come in the form of military-enforced regime change, whereby the Emir of Qatar, Sheikh Tamim bin Hamad Al-Thani, would be replaced by a more pliant member of the Al-Thani family. 
In a more likely scenario, Qatar may stop providing sanctuary for a few members of the Muslim Brotherhood and Hamas, and discreetly promise to rein in Al Jazeera, its state-funded television network, which broadcasts throughout the region. 
In the latter scenario, diplomats from Kuwait and Oman, who are mediating the dispute, would hold themselves up as peacemakers, and MBS would claim to be a statesman. 
Western governments worried about the price of oil and the future of America’s Al Udeid Air Base in Qatar would rest easier, at least until the next Gulf crisis. 
But if MBS continues to pursue headstrong policies, and Qatar keeps using its oil wealth to punch above its weight in regional politics, such a crisis may not be all that far off. 
The latest Saudi-Qatari contretemps is hardly an example of the “Thucydides trap,” in which an incumbent hegemon is tempted to suppress a rival whose power is approaching its own. 
Saudi Arabia is host to around 32 million people, one-third of whom are foreign workers; Qatar is host to just 2.6 million people, 90% of whom are foreign. 
Instead, at the heart of the matter is a semi-paranoid conviction among Saudi Arabia’s Sunni Arab leaders that Iran – which is predominantly Shia and non-Arab – is vying for superpower status in the Middle East. 
The Saudis are convinced that Qatar is aiding Iran in this quest, even though Qatar’s leaders share the Saudis’ Wahhabi brand of Islam. 
Of course, Saudi Arabia has some grounds for suspicion. 
After the Iranian Revolution in 1979, Ayatollah Ruhollah Khomeini advocated revolution throughout the Muslim world. 
A generation later, Iran has a foothold in Iraq, Lebanon, Syria, and Yemen, where it is helping Houthi rebels disrupt MBS’s ill-considered foray into that country. 
And now that Saudi Arabia has imposed a blockade on Qatar, Iran has come to the country’s aid, delivering food and allowing Qatar Airways to use its airspace. 
It is worth asking whether MBS is misreading political and economic realities. 
Having been invested with unprecedented powers as the favorite son of King Salman, has he bitten off more than he can chew? 
MBS has been Saudi Arabia’s minister of defense since January 2015. 
But Saudi Arabia’s war in Yemen, now two years old, has become a humanitarian disaster, complete with a naval blockade that has led to widespread famine and 500,000 cases of cholera. 
Meanwhile, in the civil war in Syria, the Saudis (and the Qataris) have backed several unsavory Islamist groups, but still have not managed to topple Syrian President Bashar al-Assad’s regime. 
In the region’s balance of power, the Saudi-sponsored anti-Assad alliance – with America providing air support – pales in comparison to the alliance that Assad’s Shia-affiliated Alawite regime has made with Iran and Russia. 
MBS is facing even greater challenges at home. 
As the world’s petro-state par excellence, Saudi Arabia has long mollified the Saudi populace with dollops of welfare spending. 
Meanwhile, it has sustained the Wahhabi clerical establishment’s loyalty by keeping social changes to a minimum. 
But with oil prices remaining relatively low, the Kingdom can no longer rely on its traditional policy of buying friends and buying off enemies. 
To his credit, MBS recognizes that things must change. 
Saudi Arabia’s financial reserves are diminishing, and younger Saudis – whose numbers have quadrupled in the past 30 years – want more freedoms, and will need jobs outside of the oil sector. 
To address these issues, MBS came up with “Vision 2030,” a bold but not necessarily realistic plan to diversify the economy, privatize part of the national oil company, Aramco, and expand the private sector. 
In addition, MBS apparently has a plan to create hedonistic tourist resorts to rival those of Dubai. 
Given the problems abroad and grumbling at home, where some in the Saudi royal family resent his meteoric ascent, MBS now needs to prove that he has the maturity and experience to lead. 
Here, he may receive help from an unlikely source. 
At the end of July, MBS hosted Muqtada al-Sadr, the leader of Iraq’s most powerful Shia militia, for his first visit to Saudi Arabia since 2006. 
And earlier this year, Iraqi Prime Minister Haider al-Abadi paid a visit to Saudi Arabia, just after the Saudi foreign and energy ministers made trips to Baghdad. 
These trips – the first such delegations between the two countries in decades – suggest that Iraq and Saudi Arabia might be forging a new, mutually beneficial relationship. 
With closer ties to Saudi Arabia, Iraq’s leaders could free themselves from Iran’s overbearing grip on their decision-making, leverage Saudi Arabia’s influence over Iraq’s Sunni tribes, and procure Saudi investments to rebuild Mosul following its recapture from the Islamic State (ISIS). 
Saudi Arabia, for its part, stands to gain from Iraq’s success against ISIS, a sworn enemy of the House of Saud, and from its help in calming Shia dissent in Saudi Arabia’s oil-rich eastern province. 
At the same time, MBS would be able to portray himself as a strategic thinker who is capable of bridging old Arab divides, and limiting Iran’s influence in the region. 
Still, many questions remain. 
It is unclear when the disastrous operation in Yemen will end, or whether Iran and Turkey will continue undermining the blockade on Qatar. 
And it remains to be seen if Qatar will cave to Saudi Arabia and the other Gulf states’ demands – especially the call for Al Jazeera to be shut down. 
In any case, none of these developments seems imminent, so the 31-year-old crown prince will have to learn to temper his impetuosity. 
As the Arab proverb puts it, patience is the key to happiness. 

Saudi Arabia’s Game of Thrones 
PRINCETON – Saudi Arabia’s King Salman has just replaced the 57-year-old Muhammad bin Nayif with his 31-year-old son, Mohammed bin Salman, as crown prince, completing a process of power centralization that began with Salman’s accession to the throne in January 2015. 
Prince Mohammed, commonly known as MBS in Western circles, is the king’s favorite son. 
By appointing him as crown prince, Salman, who is now 81, has signaled a clear break from a decades-old tradition of building consensus among the leading sons of the Saudi state’s founder, the late King Abdulaziz Ibn Saud. 
In structural terms, Saudi Arabia is no longer a power-sharing gerontocracy. 
It has returned to the absolute monarchy that it was under Ibn Saud himself. 
Power is concentrated entirely in the hands of the king, who has delegated most of it to his son, the new crown prince. 
In practical terms, MBS’s rise will streamline decision-making, and mitigate the political risks that are inherent in any system of multiple, competing power centers. 
There is now absolute clarity on the questions of succession and where power lies. 
But while this new arrangement certainly has its advantages, it also has potential pitfalls, because far-reaching decisions could go unquestioned and unchallenged. 
When Salman dies, MBS will become king, and will most likely rule Saudi Arabia for many decades, leaving his imprint on the country’s social, religious, and economic life. 
His rise to power – which started in 2009, when he became an adviser to his father, who was then governor of Riyadh Province – has been meteoric. 
But being named crown prince is his most impressive achievement to date. 
MBS has won a race to the throne that included hundreds of princes, most of whom are older and more experienced – and all of whom feel entitled to rule. 
To be sure, the king’s favoritism clearly gave MBS a leg up; but that alone does not explain his success. 
MBS had to rely on his wit, guile, and force of personality to consolidate power and assert his authority over key sectors of Saudi society. 
These include the royal family itself; the bureaucracy and technocratic elites; the media and intelligentsia; the massive national oil company, Saudi Aramco; and the religious establishment and its various institutions. 
Moreover, MBS managed all of this while still formally adhering to the Saudi royal family’s strict protocols and elaborate codes of hierarchy. 
This helps to explain why the transition from one crown prince to another appeared to go so smoothly. 
In a widely distributed video clip, MBS can be seen falling to his knees to kiss the just-dismissed incumbent crown prince’s hand. 
But it is Nayif who formally offers his allegiance to MBS, leaving no doubt about where power lies. 
MBS’s second great achievement has been in foreign policy, where he has been able to prove his capabilities to his father. 
MBS took the initiative to reach out to US President Donald Trump and his team immediately after the US presidential election in November 2016, and his efforts paid off, culminating in Trump’s visit to Riyadh in May 2017. 
Trump’s visit was a major victory for Saudi Arabia. 
US-Saudi relations had reached a nadir during former US President Barack Obama’s tenure, but they have now been reset. 
During his visit, Trump emphasized the importance of the US-Saudi strategic relationship, offered his full support in Saudi Arabia’s rivalry with Iran for regional primacy, and signed various business and investment deals worth many billions of dollars. 
MBS, who is nothing if not ambitious, has set two broad goals for Saudi Arabia. 
The first, which he outlines in a program called Vision 2030, is to diversify the Saudi economy, by reducing its heavy dependence on oil revenues, and creating good jobs outside of the oil sector. 
MBS is convinced that Saudi Arabia’s vast oil reserves will be far less valuable in the future, owing to the rise of alternative fuels and renewable-energy technologies. 
Under Vision 2030, MBS will try to monetize the upfront value of Saudi Arabia’s oil reserves as much as possible. 
These proceeds will then be allocated to developing the country’s non-oil sectors, and invested in offshore assets to offset the inevitable loss in oil revenues. 
To that end, MBS is keen on privatizing part of Saudi Aramco through an initial public offering in 2018. 
MBS’s second major goal is to turn Saudi Arabia into a regional military hegemon that can stand up to external threats, not least Iran. 
To do this, he will have to make his country far less dependent on US military protection, on which it has relied since 1945. 
It will take a decade or more to accomplish each of the new crown prince’s goals. 
But now that MBS’s power base is finally secure, he seems to have every intention of carrying them out. 

McCain, Obama, and Hot Air 
WASHINGTON, DC – Whatever the outcome of the United States’ presidential election, climate change policy will be transformed. 
Both candidates have placed great importance on global warming. 
Republican John McCain believes that it presents “a test of foresight, of political courage, and of the unselfish concern that one generation owes to the next,” while Democrat Barack Obama calls it “one of the greatest moral challenges of our generation.” 
It remains far from clear, however, whether the shift in rhetoric and policy will move the planet any closer to embracing the best response. 
Both McCain and Obama could leave future generations lumbered with the costs of major cuts in carbon emissions – without major cuts in temperatures. 
Both politicians are keen to tap into voters’ concerns about global warming. 
McCain launched a television commercial declaring that he had “stood up to President George Bush” on global warming. 
If elected, Obama plans to count on former vice president and passionate campaigner Al Gore to help “lead the fight” against warming. 
Each would introduce aggressive targets for reductions in greenhouse gas emissions. 
Obama’s plan would reduce emissions by 80% below 1990 levels by 2050, while McCain aims to ensure that emissions are 60% lower by then. 
Both would achieve these ambitious cuts by the same method: a cap-and-trade system that imposes limits on industry emissions and forces businesses to buy rights to any additional emissions. 
A cap-and-trade system can seem like a neat market solution. 
In fact, it is worse than a straightforward carbon tax. 
With a tax, the costs are obvious. 
With a cap-and-trade system, the costs – in terms of jobs, household consumption, and economic growth – are hidden, shifted around, and not easy to estimate, though models indicate they will run into trillions of dollars. 
Not everybody would lose. 
Some big businesses in privileged positions would make a fortune from exploiting this rather rigged market. 
And politicians would have an opportunity to control the number and distribution of emission permits and the flow of billions of dollars in subsidies and sweeteners. 
This is a very expensive, unwieldy way to achieve a very small reduction in temperatures. 
The Warner-Lieberman bill on climate change – a piece of legislation which was recently abandoned in the US Senate but is seen as a precursor of future policy – would have postponed the temperature increase in 2050 by about two years. 
Recently, the Copenhagen Consensus project gathered eight of the world’s top economists – including five Nobel laureates – to examine research on the best ways to tackle 10 global challenges: air pollution, conflict, disease, global warming, hunger and malnutrition, lack of education, gender inequity, lack of water and sanitation, terrorism, and trade barriers. 
Their goal was to create a prioritized list showing how money could best be spent combating these problems. 
The panel concluded that the least-effective use of resources would come from simply cutting CO2 emissions. 
A lead author of the Intergovernmental Panel on Climate Change – the group that shared last year’s Nobel Peace Prize with Gore – told the experts that spending $800 billion over 100 years solely on mitigating emissions would reduce inevitable temperature increases by just 0.4 degrees Fahrenheit by the end of this century. 
Even accounting for the key environmental damage from warming, we would lose money, with avoided damages of just $685 billion for our $800 billion investment. 
The expert panel concluded that investing in research and development into low-carbon energy would be a much sounder, more effective option – an effort that both McCain and Obama support. 
But this, not carbon emissions, should be the core of their climate change policy. 
Currently, low-carbon energy solutions are prohibitively expensive. 
The typical cost of cutting a ton of CO2 is now about $20, but the damage from a ton of carbon in the atmosphere is about $2. 
So we need to reduce by roughly ten-fold the cost of cutting emissions. 
We can achieve this by spending dramatically more researching and developing low-carbon energy. 
The US could provide leadership by committing to spending 0.05% of its GDP exploring non-carbon-emitting energy technologies – wind, wave, or solar power – or capturing CO2 emissions from power plants. 
It would then have the moral authority to demand that other nations do the same. 

Lessons From an Age of Progress 
WASHINGTON, DC – Imagine that you are a committed internationalist during a tumultuous period in global politics, and you are now grappling with the outcome of a nail-bitingly close US presidential election. 
The winner is a Republican who ran partly on a message of foreign-policy retrenchment, against a Democrat who represented continuity with the outgoing administration. 
Now imagine that the incoming administration collaborates with other countries to help save 25 million lives over the next 15 years. 
Until this last part, the scenario probably felt all too current for many readers, a large number of whom are still adjusting to the reality of Donald Trump’s presidency. 
But this is also how many people felt back in 2001, when George W. Bush beat Al Gore, following an extraordinary Supreme Court decision that ended the vote recount in Florida. 
There are certainly limits to any comparison between then and now; but it is worth noting that much of the world seemed mired in chaos in the early 2000s, too. 
Many regions were beset by economic crisis, and political protests met world leaders whenever they gathered. 
The United States government’s policy toward the Middle East was squarely at odds with that of the United Nations, and violent extremism was on the rise. 
It was against this backdrop that roughly 25 million lives – mostly children under age five and people infected with HIV/AIDS – were saved, owing to accelerated progress in global development from around 2001, early in the Bush administration, to 2015, near the end of Barack Obama’s second term. 
My Brookings Institution colleague Krista Rasmussen and I recently published a study that assesses the changing pace of progress during the era of the Millennium Development Goals, which world leaders established in 2000 to tackle by 2015 the most severe problems associated with global poverty. 
We found that roughly two-thirds of the lives saved during this period were in Africa, while around one-fifth were in China and India, and the remainder were spread around the rest of the developing world. 
Progress accelerated in other areas as well. 
Since 2000, at least 59 million more children have completed primary school than would have if 1990s trends had continued; and more than 470 million additional people were lifted out of extreme poverty than would have been if the pace of improvement from 1990 to 2002 had continued. 
Unfortunately, we found that progress toward other goals has been less impressive. 
While the world made major gains in tackling hunger and expanding access to drinking water, it did not significantly improve upon what could have been expected relative to 1990s trends. 
And with respect to sanitation – namely, having access to a toilet – the already slow rate of progress has not accelerated. 
These results point to three key lessons for navigating today’s uncertain geopolitical waters. 
First, the past need not be prologue: breakthroughs are always possible, even when they are unexpected. 
In the early 2000s, prospects for improved international cooperation were bleak. 
In December 1999, mass protests now known as the “Battle in Seattle” prevented a World Trade Organization Ministerial Conference from finishing its proceedings. 
And in July 2001, a protester was shot dead amid riots outside the G8 summit in Genoa, Italy. 
But better angels prevailed, and the world came together to take action on life-or-death global health issues. 
Second, breakthroughs are typically driven by pragmatic technical efforts to disrupt the status quo. 
For example, rapid progress on global health emerged from scientific discoveries and large investments in innovative new institutions. 
These include the Global Fund to Fight AIDS, Tuberculosis, and Malaria; the Global Alliance for Vaccines and Immunizations (now known as Gavi, the Vaccine Alliance); the US President’s Emergency Plan for AIDS Relief; and many public-private collaborations seeded by the Bill and Melinda Gates Foundation, among others. 
Third, political leaders can play a pivotal role in pushing for new approaches and solutions to global problems. 
Who in early 2001 could have guessed that Bush – who would later lead the US into a devastating war in Iraq – would become a hero in the global fight against AIDS and malaria? 
The Bush administration ultimately allocated much more to foreign-aid budgets than Bill Clinton did during his two presidential terms. 
These three lessons should be applied to the next frontier of global challenges. 
In 2015, all countries agreed to a new set of ambitious Sustainable Development Goals, to be achieved by 2030. 
The SDGs aim to eliminate extreme poverty and hunger, reduce inequalities within and between countries, and ensure a sustainable future for our planet. 
Many people consider these objectives to be too ambitious, given the daunting problems in the world today. 
But achieving these goals is essential for improving living standards everywhere. 
Despite how disordered the world feels in 2017, the potential for renewed progress at any given moment is greater than most people think possible. 
Realizing this potential requires certain key ingredients, such as institutional and disruptive innovations in science and business. 
And it requires that politicians of all stripes do their part. 
When the right elements come together, the potential for human achievement is enormous. 
That is why it is reasonable to hope that the next round of victories in global development will turn out to be even more impressive than the last. 

The Meaning of Brexit 
NEW YORK – The Brexit vote was a triple protest: against surging immigration, City of London bankers, and European Union institutions, in that order. 
It will have major consequences. 
Donald Trump’s campaign for the US presidency will receive a huge boost, as will other anti-immigrant populist politicians. 
Moreover, leaving the EU will wound the British economy, and could well push Scotland to leave the United Kingdom – to say nothing of Brexit’s ramifications for the future of European integration. 
Brexit is thus a watershed event that signals the need for a new kind of globalization, one that could be far superior to the status quo that was rejected at the British polls. 
At its core, Brexit reflects a pervasive phenomenon in the high-income world: rising support for populist parties campaigning for a clampdown on immigration. 
Roughly half the population in Europe and the United States, generally working-class voters, believes that immigration is out of control, posing a threat to public order and cultural norms. 
In the middle of the Brexit campaign in May, it was reported that the UK had net immigration of 333,000 persons in 2015, more than triple the government’s previously announced target of 100,000. 
That news came on top of the Syrian refugee crisis, terrorist attacks by Syrian migrants and disaffected children of earlier immigrants, and highly publicized reports of assaults on women and girls by migrants in Germany and elsewhere. 
In the US, Trump backers similarly rail against the country’s estimated 11 million undocumented residents, mainly Hispanic, who overwhelmingly live peaceful and productive lives, but without proper visas or work permits. 
For many Trump supporters, the crucial fact about the recent attack in Orlando is that the perpetrator was the son of Muslim immigrants from Afghanistan and acted in the name of anti-American sentiment (though committing mass murder with semi-automatic weapons is, alas, all too American). 
Warnings that Brexit would lower income levels were either dismissed outright, wrongly, as mere fearmongering, or weighed against the Leavers’ greater interest in border control. 
A major factor, however, was implicit class warfare. 
Working-class “Leave” voters reasoned that most or all of the income losses would in any event be borne by the rich, and especially the despised bankers of the City of London. 
Americans disdain Wall Street and its greedy and often criminal behavior at least as much as the British working class disdains the City of London. 
This, too, suggests a campaign advantage for Trump over his opponent in November, Hillary Clinton, whose candidacy is heavily financed by Wall Street. 
Clinton should take note and distance herself from Wall Street. 
In the UK, these two powerful political currents – rejection of immigration and class warfare – were joined by the widespread sentiment that EU institutions are dysfunctional. 
They surely are. 
One need only cite the last six years of mismanagement of the Greek crisis by self-serving, shortsighted European politicians. 
The continuing eurozone turmoil was, understandably, enough to put off millions of UK voters. 
The short-run consequences of Brexit are already clear: the pound has plummeted to a 31-year low. 
In the near term, the City of London will face major uncertainties, job losses, and a collapse of bonuses. 
Property values in London will cool. 
The possible longer-run knock-on effects in Europe – including likely Scottish independence; possible Catalonian independence; a breakdown of free movement of people in the EU; a surge in anti-immigrant politics (including the possible election of Trump and France’s Marine Le Pen) – are enormous. 
Other countries might hold referendums of their own, and some may choose to leave. 
In Europe, the call to punish Britain pour encourager les autres – to warn those contemplating the same – is already rising. 
This is European politics at its stupidest (also very much on display vis-à-vis Greece). 
The remaining EU should, instead, reflect on its obvious failings and fix them. 
Punishing Britain – by, say, denying it access to Europe’s single market – would only lead to the continued unraveling of the EU. 
So what should be done? 
I would suggest several measures, both to reduce the risks of catastrophic feedback loops in the short term and to maximize the benefits of reform in the long term. 
First, stop the refugee surge by ending the Syrian war immediately. 
This can be accomplished by ending the CIA-Saudi alliance to overthrow Bashar al-Assad, thereby enabling Assad (with Russian and Iranian backing) to defeat the Islamic State and stabilize Syria (with a similar approach in neighboring Iraq). 
America’s addiction to regime change (in Afghanistan, Iraq, Libya, and Syria) is the deep cause of Europe’s refugee crisis. 
End the addiction, and the recent refugees could return home. 
Second, stop NATO’s expansion to Ukraine and Georgia. 
The new Cold War with Russia is another US-contrived blunder with plenty of European naiveté attached. Closing the door on NATO expansion would make it possible to ease tensions and normalize relations with Russia, stabilize Ukraine, and restore focus on the European economy and the European project. 
Third, don’t punish Britain. 
Instead, police national and EU borders to stop illegal migrants. 
This is not xenophobia, racism, or fanaticism. 
It is common sense that countries with the world’s most generous social-welfare provisions (Western Europe) must say no to millions (indeed hundreds of millions) of would-be migrants. 
The same is true for the US. 
Fourth, restore a sense of fairness and opportunity for the disaffected working class and those whose livelihoods have been undermined by financial crises and the outsourcing of jobs. 
This means following the social-democratic ethos of pursuing ample social spending for health, education, training, apprenticeships, and family support, financed by taxing the rich and closing tax havens, which are gutting public revenues and exacerbating economic injustice. 
It also means finally giving Greece debt relief, thereby ending the long-running eurozone crisis. 
Fifth, focus resources, including additional aid, on economic development, rather than war, in low-income countries. 
Uncontrolled migration from today’s poor and conflict-ridden regions will become overwhelming, regardless of migration policies, if climate change, extreme poverty, and lack of skills and education undermine the development potential of Africa, Central America and the Caribbean, the Middle East, and Central Asia. 
All of this underscores the need to shift from a strategy of war to one of sustainable development, especially by the US and Europe. 
Walls and fences won’t stop millions of migrants fleeing violence, extreme poverty, hunger, disease, droughts, floods, and other ills. 
Only global cooperation can do that. 

America’s Lethal Fear of Science 
NEW YORK – A rare, deadly, and highly contagious disease is spreading across the United States, having infected more than 100 people since the beginning of the year, with thousands more at risk. 
This is not the doomsday Ebola scenario that so many were envisioning when the first case in the US was diagnosed five months ago. 
The resurgence is of the measles – a disease that the US Centers for Disease Control and Prevention declared eradicated in 2000, thanks to a highly effective and safe vaccine. 
What went wrong? 
Since 2000, measles cases in the US have been attributed largely to travelers bringing the disease into the country. 
In recent years, however, measles has become increasingly common, with the number of cases climbing above 150 in 2013, and then jumping to 644 last year – the most cases recorded in a single year since the late 1990s. 
This year already appears likely to top that record. 
The upsurge in cases can be explained largely by the increase in the number of unvaccinated children. 
Americans are learning the hard way that scientifically baseless skepticism about the safety of vaccines is extremely dangerous. 
Measles may have a lower mortality rate than Ebola, but its potential to inflict suffering and death – especially on young children – remains considerable. 
Indeed, before vaccination made measles a rarity, the disease was widely feared, killing thousands of children every year. 
The tragic irony of vaccination in America is that it has become a victim of its own success. 
As the number of people who have witnessed firsthand the effects of measles and other childhood diseases – such as mumps, rubella, polio, and whooping cough – has declined, so has society’s commitment to keeping them away. 
Even after panicked claims that vaccines cause visible conditions like autism were proved to be nonsense, they remain more compelling than the threat of a disease that people have never seen or do not remember. 
Of course, vaccinations can have some side effects, such as a rash, fatigue, headache, or a fever. 
But claims that significant, permanent damage resulting from vaccines is widespread are entirely unfounded. 
Andrew Wakefield first claimed that there was a relationship between the measles, mumps, and rubella vaccine and autism in 1998. But it soon came to light that he had falsified his evidence, and his “research” was retracted. 
Wakefield was later banned from practicing medicine in his home country, the United Kingdom, for “serious professional misconduct.” 
But the damage had been done. 
Despite Wakefield’s ostracism from the medical community and the exposure of his deceptions – not to mention numerous scientific studies that did not find any link whatsoever between vaccines and autism – he has retained a devoted following in the US. 
Making matters worse, irresponsible and ignorant celebrities have seized upon his lies, using their access to the media to spread conspiracy theories and propaganda against vaccinations. 
As a result, vaccination rates continue to decline – and in some communities, especially in California and Oregon, they have plummeted. 
From 1996 to 2015, there was a six-fold increase in the rate of vaccine exemptions for students entering elementary school in California. 
This has contributed to the spread not only of measles, but also of whooping cough and mumps. 
Parents argue that vaccination, like all other decisions about how to raise and care for their children, should be their choice. 
But, when it comes to vaccination, one family’s poor judgment can mean sickness or even death for another’s. 
When enough members of a community are vaccinated, a sort of “immunity buffer” is created, adding an extra layer of protection for vaccinated individuals, while shielding those who are not eligible for particular vaccines, such as infants or people with compromised immune systems – individuals for whom disease-mortality rates are highest. 
This phenomenon is called “herd immunity,” and it has been vital to vaccines’ effectiveness. 
This is not the first time that the American public has allowed fear to dictate public policy. 
Just a few months ago, Americans were terrified that Ebola could take hold in their country. 
Rather than providing responsible leadership, politicians like New Jersey Governor Chris Christie and Senator Rand Paul of Kentucky stoked the panic in an effort to win support in advance of last November’s midterm elections. 
Experts’ attempts to impress upon Americans how difficult Ebola is to transmit, and how unlikely an Ebola epidemic in the US was, fell largely on deaf ears. 
Today, Americans are again refusing to heed experts’ advice – only, this time, they really are facing a serious threat. 
Worse, politicians like Christie and Paul have tacitly (or not so tacitly) supported parents who choose not to vaccinate their children, regardless of the scientific consensus that such parents are contributing to a genuine public health crisis. 
Paul – who is, ironically, a physician – went so far as to mention the many children he knew who suffered “profound mental disorders” after having had vaccinations, indulging the anti-vaccination advocates who might support him politically, while stopping short of making a false scientific claim. 
(By his logic, vaccines make people taller, too; after all, nearly every child I have known has grown taller after being vaccinated.) 
The scientific method is perhaps the greatest arbiter of truth humanity has ever devised. 
We must trust in it to help make sense of an uncertain world, and to help us determine how best to nourish and protect our children and ourselves. 
When parents are allowed – or, worse, encouraged – to choose fear over science, we all pay the price. 

The Economic Policy Trump Should Pursue 
LONDON – As Donald Trump assumes the US presidency, a group of 35 prominent international business leaders, led by Unilever CEO Paul Polman and me, is stepping forward to defend open markets, endorse the fight against climate change, and demand a massive push against global inequality. 
These are the core elements of what we believe is the only viable economic strategy for the United States and the world. 
Recent electoral outcomes, including Trump’s election, highlight the intensifying economic grievances of many households across the developed world. 
In the 20 years before the 2008 financial crisis, unprecedented globalization raised incomes for just about everyone. 
The incomes of the poorest third of humanity rose by 40-70%, and those of the middle third increased by 80%. 
The top 1% did even better – so much better, in fact, that the business elite is now facing a powerful backlash. 
And yet the incomes of a crucial group – lower middle-income households – barely rose at all. 
And, since 2008, this same group has borne the brunt of austerity. 
Unsurprisingly, its members feel “left behind” by globalization – and are now demanding change. 
Trump’s administration might be tempted to address this group’s problems in isolation, with inward-looking policies targeting specific industries, or by attempting to limit trade competition. 
But the problems facing these households are not isolated. 
Rather, they stem from the social and environmental limits now reached by the prevailing model of economic growth – and the version of globalization that this model has underpinned. 
Ignoring this reality and implementing narrow and nationalistic solutions would only make matters worse. 
Socially, the relative hardship in the US Rust Belt, where support for Trump was integral to his victory, is an unintended consequence of a rapidly expanding global labor market that leaves workers almost everywhere vulnerable – even in emerging economies whose workers have seemed like the “winners” of globalization in recent decades. 
Countries and regions competing to attract corporate investment make weak negotiators and weak defenders of high labor standards. 
On the environmental front, the evidence is dire. 
Human activity has already pushed the planet beyond four of its nine physical safety boundaries, including those for climate change and loss of biosphere integrity. 
The rapidly rising costs of environmental damage are restricting economic growth, making the relaxation of environmental protections a false economy. 
For example, damage to ecosystems and biodiversity caused by current practices in the food and agriculture sector alone could cost the equivalent of 18% of global economic output by 2050, up from around 3% in 2008. 
In emerging markets, especially in Asia, rapid economic expansion has brought life-threatening smog and constant gridlock to cities unable to expand their infrastructure fast enough. 
Tackling the world’s environmental and ecological problems, and improving the lot of those who have been left behind, will require public action, such as that which I oversaw in my roles at the World Bank, the United Nations, and the British government. 
But it will also demand the participation of business. 
In my own career, I have seen firsthand that the growth fueled by business competition in a globalizing world can do far more to combat poverty, hunger, and disease than government-funded programs alone. 
But when that competition is not conducted responsibly, the opposite can happen – and, in many cases, it has. 
In seizing the opportunities of globalization, businesses have often neglected the developed-world workers they leave behind, while subjecting developing-country workers to extraordinary deprivation. 
Moreover, individual businesses have often lobbied against and evaded environmental protections that are indisputably in our collective interest. 
Today, I am encouraged to see that a fast-growing group of business leaders recognize that the greater freedoms and wealth they gain from globalization imply greater responsibility for labor and the environment. 
We expect our strategy to ensure continued globalization – in a revised form that is more sustainable and inclusive – to attract more such leaders to the cause. 
The framework of our strategy is already in place, in the form of the 17 Sustainable Development Goals that were agreed by UN member states in 2015. 
Achieving these goals will mean decent pay, working conditions, and safety nets for all participants in the global labor market, as well as safeguarding the environment. 
The SDGs also promise to provide a level playing field for growth-boosting competition. 
Across the four major sectors we considered in detail, we saw high-return business opportunities arising from the strategy, fueling an increase in annual global GDP of at least $12 trillion. 
Other changes we advocate – especially the creation of prices for resources that reflect their full social and environmental costs – will ensure that future economic growth protects both workers and the planet. 
Securing these outcomes won’t be easy, because it will require a new social contract among governments, businesses, and civil society. 
To succeed, all parties must view themselves as collaborators in a win-win deal, rather than adversaries in a zero-sum game. 
All the evidence indicates that only a more sustainable, open, and inclusive world economy can support an environmentally secure, economically prosperous, and socially just future for humanity. 
As for the US, this strategy aligns with Trump’s own declared priorities. 
Not only does it offer the most promising solution to the economic grievances of his core supporters; it also entails a surge in infrastructure spending, much like the one Trump has already promised. 
Instead of using fiscal stimulus in a vain effort to revive failed smokestack industries and old energy sources, Trump’s administration – and the world – should place its bets on a low-carbon future. 
Plenty of businesses surely would get on board. 

Measuring the Value of Free 
LONDON – Reliable economic statistics are a vital public good. 
They are essential to effective policymaking, business planning, and the electorate’s ability to hold decision-makers to account. 
And yet the methods we use to measure our economies are becoming increasingly out of date. 
The statistical conventions on which we base our estimates were adopted a half-century ago, at a time when the economy was producing relatively similar physical goods. 
Today’s economy is radically different and changing rapidly – the result of technological innovation, the rising value of intangible, knowledge-based assets, and the internationalization of economic activity. 
In light of these challenges, UK Chancellor of the Exchequer George Osborne asked me ten months ago to assess the United Kingdom’s current and future statistical needs. 
While my research focused on the UK, the challenges of producing relevant, high-quality economic statistics are the same in many countries. 
Recent technological advances have radically altered the way people conduct their lives, both at work and at play. 
The advances in computing power underpinning the digital revolution have led not only to rapid quality improvements and product innovation, but also to new, connectivity-driven ways of exchanging and providing services. 
One particular challenge for economic measurement stems from the fact that an increasing share of consumption comprises digital products delivered at a zero price or funded through alternative means, such as advertising. 
While free virtual goods clearly have value to consumers, they are entirely excluded from GDP, in accordance with internationally accepted statistical standards. 
As a result, our measurements may not be capturing a growing share of economic activity. 
Consider the music industry. 
Downloads and streaming services have now largely replaced CDs, the dominant medium in the 1990s. 
And yet the money has not followed; the industry’s revenues and margins have both plummeted. 
As a result, its contribution to GDP (as we currently measure it) may be falling, even as the quantity and quality of services are increasing. 
Two methods can give us a rough estimate how much digital economic activity we are failing to capture in our measurements. 
We can use average wages to estimate the value of the time people spend online using free digital products, or we can adjust telecommunication services output to account for the rapid growth in Internet traffic. 
Both approaches suggest that accounting for these types of activities could add between one-third and two-thirds of a percentage point to the average annual growth rate of the UK economy over the past decade. 
The digital revolution is also disrupting traditional business models. 
The reduced search and matching costs offered by a range of online platforms are unlocking the market for skills (known as the “gig economy”) and the market for underutilized assets (known as the “sharing economy”). 
This, too, causes conceptual and practical measurement challenges for established GDP calculus. 
The traditional statistical distinction between productive firms and consuming households leaves little room to account for households as value creators. 
Measuring GDP, it turns out, is like trying to hit a moving target. 
The digital revolution is likely to be followed by yet another wave of disruptive technology, including advances in materials science, artificial intelligence, and genetic engineering. 
As the economy evolves, so must the frame of reference for the statistics we use to measure it. 
Consequently, internationally agreed statistical standards will almost always be somewhat out of date or incomplete, as they are bound to lag behind changes in the economy. 
National statistical offices should explore measurement issues that go beyond the prevailing standards, rather than use compliance as an excuse for their failure to innovate. 
One solution would be to establish a continuing program of research into the measurement implications of emerging economic trends, conducting one-off studies at first to gauge their potential quantitative importance. 
This could then guide the development of experimental statistics capturing the new phenomena. 
New techniques of collecting and analyzing big data, such as web scraping, text-mining, and machine learning, provide an opportunity for statisticians. 
Governments already hold some administrative data, but their use for statistical purposes often requires legislative changes. 
Unlocking this trove of information would extend statistical samples to near-census size, increase their timeliness and accuracy, and reduce the respondent costs to businesses and households. 
Ensuring that data accurately reflect a changing economy is one of the hardest tasks faced by national statistical institutes worldwide. 
Success requires not only understanding the limitations of traditional measurements, but also developing a curious and self-critical workforce that can collaborate with partners in academia, industry, the public sector, and other national statistical institutes to develop more appropriate methods. 
The UK is by no means alone in facing these challenges. 
But we need to act quickly. 
Otherwise, the speed of economic change will render our statistics irrelevant to modern life. 

Measuring the Revolutionary Wave 
NEW YORK – A prediction three months ago that popular protests would soon topple a dictatorship in Tunisia, sweep Hosni Mubarak from power in Egypt, provoke civil war in Muammar el-Qaddafi’s Libya, and rattle regimes from Morocco to Yemen would have drawn serious skepticism. 
We knew that the tinder was dry, but we could never know how or when, exactly, it would combust. 
Now that it has, how far can the flames spread? 
Some commentators have taken to calling this moment the “Arab Spring,” an awakening that might permanently cripple autocracy in the Middle East. 
The contagion effect seems clear. 
Countries across the region have large numbers of young people and too few jobs. 
Food prices are rising. 
Corruption fuels anger. 
In Egypt, young people, inspired by satellite television images and empowered by modern communications, lit and fed the fire. 
Given the easy availability of these technologies, their ability to catalyze protest might transcend borders once thought impregnable. 
But, with their survival at stake, authoritarian regimes are good at spotting threats in the neighborhood and adapting to meet them. 
Though satellite television, mobile phones, and online social networking can force some authoritarians to become more responsive to popular demands, governments can also use these technologies to identify and isolate threats, monitor communications among activists, and transmit messages of their own. 
Or, when necessary, they can simply turn them off. 
More to the point, the protests now roiling the Arab world have little to do with the “Prague Spring” of 1968 or the revolutions that swept through Eastern Europe in 1989. 
Unlike Cold War-era East Germans, Czechs, and Poles, protesters in today’s Middle East are not unified by opposition to foreign control. 
To be sure, many Arab young people blame America for bolstering the local dictator, but their resentment doesn’t begin to compare with anti-Soviet attitudes in the Warsaw Pact. 
Arab youth have no Soviet Union to cast off – and no Europe to join. 
Instead, today’s Middle East is most usefully compared to the increasingly restive former Soviet republics of a few years ago. 
In 2003, a “Rose Revolution” in Georgia elevated a younger generation led by a president without ties to Soviet communism. 
Mikhail Saakashvili remains in power, though a brutal four-day war with Russia in 2008 sharply limited Georgia’s ability to influence events beyond its borders. 
In Ukraine, the “Orange Revolution” in 2004 overturned the results of a rigged election, sidelining Viktor Yanukovych in favor of Viktor Yushchenko. 
But in 2010, with Yushchenko’s popularity at an all-time low, Yanukovych won a vote that international observers pronounced free and fair. 
In Kyrgyzstan in 2005, the “Tulip Revolution” forced the ouster of Askar Akayev. 
Hastily held elections lifted Kurmanbek Bakiyev to the presidency. 
Yet, in 2010, a new round of protests forced Bakiyev from power. 
As in the Middle East, each of these upheavals reflected the willingness of many people to risk their lives and livelihoods to topple a corrupt government that could or would not generate opportunity and prosperity for them. 
All three arrived like bolts from the blue. 
So far, their main lasting effect has been to frighten neighboring autocrats into action. 
Governments in Armenia, Azerbaijan, Belarus, and Uzbekistan have infiltrated and undermined civil-society organizations, kicked out Western observers and aid workers, and leaned on local courts to guarantee favorable election-related rulings. 
Uzbekistan, in particular, has proven its willingness to brutalize protesters. 
The wealthiest of the post-Soviet states, Russia and Kazakhstan, took similar preemptive steps against instability that never came. 
As in Georgia and Ukraine, Tunisia and Egypt will have new governments to grapple with old problems. 
Other Arab regimes are now spending their way back to stability with money that most former Soviet states didn’t have. 
Some have enough cash for new subsidies and direct handouts, as well as to pay their military and security forces more and reinforce their tools and methods of crowd control. 
Threats to the wealthier Persian Gulf states, in particular, are exaggerated. 
Bahrain, the world’s only Shia-majority country governed by a Sunni monarch, remains on edge. 
But King Hamad bin Isa Al Khalifa can continue to count on help from his deep-pocketed friends in Saudi Arabia, who are determined to prevent Bahrain’s unrest from spilling over into their country’s oil-rich Eastern Province, where most Saudi Shia live. 
In the end, Bahrain’s Shia majority will likely gain more rights and political representation, as well as cash payments and jobs, but Khalifa will remain in charge. 
There is even less risk in Saudi Arabia itself, where King Abdullah recently promised more than $130 billion in stimulus spending. 
The few Saudi demonstrations appear populated almost entirely by minority Shia, who find little sympathy among majority Sunnis, and by foreign construction workers petitioning for higher wages and better working conditions. 
Syria’s President Bashar al-Assad has more domestic support than recent media accounts of unrest in the country’s south suggest. 
Nor does Iran’s government appear to face real danger. 
The brutal crackdown on post-election protests in 2009 demonstrated the regime’s determination to maintain order by any means necessary. 
For the moment, most of Iran’s opposition will continue to try to change the country from within the limits of the current system. 
In the Middle East, only in Yemen is unrest likely to bring about another regime change. 
Outside of Libya, where violent stalemate could continue for some time, embattled North African regimes also will muddle through. 
Protests in Morocco have not cut into King Mohammad’s broad popular support, and promises of economic and political reform will probably satisfy opposition parties for the time being. 
In Algeria, demonstrations have lost momentum, and President Abdelaziz Bouteflika can rely on his military to keep diehard activists in check. 
The Arab Spring has upended assumptions about popular patience in the region. 
A new chapter has begun. 
But we must never overestimate the ability of new governments to solve old problems – or underestimate the ingenuity and brutality of the old regimes. 


Media Capture in the Digital Age 
NEW YORK – The last couple of years have not been good for freedom of expression. 
The governments of Poland, Hungary, and Turkey have become increasingly authoritarian and – like leaders in the Balkans, China, and Russia – increasingly eager to control public discourse. 
In the United States, too, President Donald Trump relentlessly attempts to discredit the news media, and his administration is unprecedentedly inaccessible to the press. 
The age of censors physically redacting newspapers, as I have seen in Vietnam and Myanmar, is mostly over. 
But, as recent developments show, press freedom remains highly vulnerable, as governments and “vested interests networked with politics,” in the words of the political scientist Alina Mungiu-Pippidi, engage in a kind of soft control that can be described as “media capture.” 
Economists used the term “capture” after the financial crisis of 2008 to describe how regulators, who often came from (and returned to) the industry they were supposed to oversee, failed to police the sector properly. 
Media capture works in much the same way, with political leaders either owning media outlets outright (think of Italy’s Silvio Berlusconi) or ensuring that media leaders are loyal to them, whether through cronyism or punishment. 
One of the first orders of business for Poland’s far-right government, led unofficially by Jarosław Kaczyński, was to adopt a new media law allowing it to hire and fire the heads of public broadcasting networks. 
In Turkey, President Recep Tayyip Erdoğan’s government has jailed critical journalists – such as the well-known columnist Ahmet Altan and his brother Mehmet, a professor – and closed down or seized control of media companies, using fear to shape reporting. 
In a less extreme version of Erdoğan’s approach, Trump bullies his critics, such as CNN and The New York Times, encouraging others, such as the Wall Street Journal, to treat him favorably. 
Elsewhere, government cronies do the bullying: in South Africa, the politically connected Gupta family has targeted former Business Day and Financial Mail editor Peter Bruce for criticizing President Jacob Zuma. 
Leaders may also try to control the narrative by denying access to potentially critical media organizations, as has occurred in the US and, more aggressively, in crisis-ridden Venezuela under President Nicolás Maduro. 
Such media capture is vital to enable governments – especially those pursuing what could be unpopular policies – to sustain public support. 
Trump’s campaign against the “fake news media” has enabled him to retain the loyalty of much of his base, despite revelations that would have buried any other US politician. 
Just as media capture shapes public perceptions, it can also shape economic outcomes. 
The economist Maria Petrova argues that media capture can fuel inequality, particularly if the rich are doing the capturing (rather than politicians, who can often be voted out of office). 
Likewise, Giacomo Corneo of the Free University of Berlin believes that increased economic concentration makes media bias more likely. 
Media capture is not a new phenomenon. 
But the Internet was supposed to free us from it, at least those in countries without overt online censorship. 
As entry barriers fell, the proliferation of media outlets, it was believed, would make it difficult to capture them all. 
Even if some outlets were captured, the media could still be an effective watchdog, so long as there was sufficient diversity. 
This expectation was reinforced by the assumption that more competition could lead to higher-quality news. 
But the opposite may have happened. 
The rise of digital media rendered traditional media outlets’ business models untenable. 
Advertisers migrated to the Internet, where slots are cheap, and consumers, with seemingly infinite free options, became less willing to pay for content. 
As a result, traditional media have endured precipitous declines in revenue and large-scale job losses. 
Dwindling resources undermined the quality of reporting, especially because many cash-strapped outlets, as Science Po’s Julia Cagé argues, tried to appeal to as broad an audience as possible. 
The need to chase clicks on sites like Facebook, Twitter, and Google eroded the ability of legacy media owners to perform their traditional role in ensuring accountability. 
Declining media revenues promoted capture in another key way: it shifted the incentive for owning a media outlet. 
If a newspaper will not provide much in the way of economic returns, the main inducement for purchasing or running one becomes influence. 
The billionaire American casino owner Sheldon Adelson, for example, didn’t purchase The Las Vegas Review-Journal in 2015 or capture Israeli media for the money. 
As the media landscape increasingly lends itself to capture, political and corporate accountability will only decline. 
That is why the Center for International Media Assistance has just released a new report shining a spotlight on the phenomenon – and calling for solutions. 
Free and healthy news media are essential to a well-functioning democracy. 
If we are to protect the latter, we must defend the former at all costs. 

Learning from Russia’s Other Media War 
WASHINGTON, DC – Misinformation and propaganda have been around for as long as mass communication. 
What has changed is the speed and scale of the delivery. 
Social media platforms have intensified the spread of pseudoscience and conspiracy theories, threatening democratic institutions in frightening new ways. 
One only has to Google “Russia” and “Trump” to see the impact of so-called fake news on democracy. 
But the best way to fight disinformation may be to follow the example set by Ukraine, a country that has faced its own barrage of Russian-funded deceit. 
Around the world, people who believe that facts still matter are fighting back. 
US news organizations are fortifying their positions by emphasizing core journalistic practices such as source verification and fact checking. 
Independent verifiers and fact checkers have also become important resources for the public. 
But as the line between news producer and consumer blurs, it is becoming increasingly difficult to navigate the swamp of misinformation. 
While a number of new initiatives – such as the News Literacy Project’s Checkology training courses, and Factitious, an online game that tests users’ ability to identify fake news – are trying to bolster the public’s filtering capacity, the impact has so far been limited. 
Owing to confirmation bias, exposure to concepts that conflict with ingrained beliefs may entrench assumptions, rather than leading us to revise them. 
And, in a media landscape where even politicians rely on data mining and neuroscience to craft messages based on voters’ state of mind, it is hard to separate truth from falsehood. 
Against this background, training in “media literacy” – skills to help analyze and evaluate news – has become almost sexy. 
Media literacy programs have been around for decades in the US, focusing on issues like media bias and the impact of violence on children. 
But media literacy for today’s world means equipping people of all ages with the means to navigate an increasingly convoluted information ecosystem. 
And, as my organization’s recent experience in Ukraine demonstrates, formal training in media literacy may be the best means of winning the war on state-sponsored, politically motivated propaganda. 
Russia’s propaganda war on Ukraine – a well funded, widely distributed, and highly sophisticated media drive meant to undermine the Ukrainian government’s legitimacy – has been ongoing for years. 
The Russian effort has been so aggressive that, in 2015, the Ukrainian government reportedly warned officials at Facebook and within the US government that a similar strategy could be used against the US. 
Facebook appears to have dismissed that warning, but media development organizations like mine did not. 
In October 2015, experts from IREX – backed by funding from the Canadian government and the support of local Ukrainian organizations – launched a nine-month media literacy-training course called Learn to Discern (L2D). 
Through skills-based workshops and fake news awareness campaigns, we sought to equip citizens with tools to identify Russia’s fabricated stories. 
The results were encouraging. 
Program participants reported gaining a deeper appreciation of what is needed to consume news wisely. 
For example, when we surveyed people at the beginning of the course, only 21% said that they “almost always” crosschecked the news they consume, a troubling rate for a country where trust in media is low but consumption is high. 
After the training, the percentage surged to 81%. 
We also found that the program produced ripple effects: 91% of trainees shared the knowledge they received with an average of six people, such as family members and co-workers. 
An estimated 90,000 Ukrainians were reached indirectly. 
The L2D training drew on principles developed in the US, but built the methodology from the ground up. 
Collaborating with Ukrainian experts, we incorporated actual media consumption, sharing, and production patterns into the course design. 
Most important, we imparted critical thinking skills, teaching participants how to select and process media, not what to consume. 
L2D trainers worked across peer networks, building knowledge and skills on the basis of trusted relationships. 
Research shows that loyalty to social groups, plus shared identity and values, have an outsize influence on what we discern to be true. 
Perhaps the program’s most innovative feature was its focus on teaching consumers how to detect emotional manipulation, and how to disengage from such information. 
In a country where emotions regarding Russian influence run high, this skill is essential. 
Long after L2D formally ended, trainers have continued running programs independently, reflecting growth in demand for their services. 
Surveys conducted this year indicate that trainees, too, remain engaged in combating the fake news phenomenon in their country. 
Our experience in Ukraine demonstrates that a multi-layered approach, working at the levels of critical thinking, individual and group psychology, and social trust, provides a better defense against fake news than simple fact checking. 
Clearly, more work must be done to boost healthy skepticism among news consumers and increase demand for factual information. 
But media literacy training, if organized with local needs in mind, can help. 
As disinformation amplifies threats to democracy, and the debate about how to defuse fake news intensifies, consumers can take comfort in knowing that with a little practice, it is possible to discern fact from well-concealed fiction. 

A Cautionary Tale for Media Regulators 
QUITO – To understand the possible consequences of US President Donald Trump’s constant denunciations of the press, one need look no further than Ecuador, where former President Rafael Correa’s government attacked the news media for years. 
During his 2007-2017 presidency, Correa implemented a raft of measures aimed at stifling press freedom. 
And, like Trump, he regularly used the media as a whipping boy to rally his supporters. 
In 2015, Correa managed to pass a constitutional amendment re-categorizing communications as a public service, like water or electricity, thereby allowing for more state control over speech. 
And with the stated goal of ensuring “balanced media coverage,” he pushed through the 2013 Ecuadorian Communication Law, and enacted additional regulations allowing the government to crack down on journalists with fines, forced public apologies, and even prison sentences. 
Like Trump, Correa would sometimes go on television or radio programs to denounce journalists by name; and his government repeatedly took news organizations to court. 
For example, Correa brought an $80 million lawsuit against El Universo, one of the country’s major newspapers. 
In the end, the paper was forced to pay $40 million in exchange for a “pardon.” 
With the spread of disinformation online fueling distrust of the media and other institutions, regulations to police some kinds of speech may seem like a good idea. 
Clearly, major distribution platforms like Facebook need to be more heavily regulated. 
But, in some cases, laws enacted in the “public interest” can actually work against it. 
And at the same time, laws meant to support legitimate journalism usually offer only scant protection against those who are determined to act in bad faith. 
I learned this first-hand when I accompanied a group from the Committee to Protect Journalists (CPJ) on a recent trip to Ecuador. 
From speaking to Ecuadorian journalists, it is clear that most of Correa’s media policies and enforcement practices crossed the line into outright censorship. 
News outlets that did not provide ample coverage of government statements were fined, as were outlets that did not recirculate foreign press reports that were favorable to the government or critical of opposition figures. 
On some occasions, news outlets were even forced to print or air lengthy dissenting statements from government officials who disliked their treatment in the media. 
Ecuador’s experience shows how laws that seem reasonable on paper – such as those guaranteeing subjects of news stories a “right to reply” – can easily be abused. 
According to Ecuadorian journalists, government officials often refuse to speak to reporters because they know that, should a story about them appear, they can simply force the outlet to publish a long, unedited statement of their own. 
And though news outlets may appeal in “right to reply” cases, doing so can lead to lengthy and costly lawsuits. 
Similarly, laws affording ordinary citizens the right to complain about press reports are easily gamed. 
Government officials routinely find “ordinary citizens” to file complaints against media organizations on their behalf. 
Ecuador’s current president, Lenín Moreno, has promised to ease the country’s media restrictions. 
And in a recent meeting with the CPJ, Ecuadorian Secretary of Communication Andrés Michelena said the government plans to reform the Ecuadorian Communications Law this year. 
Still, as the journalists we met noted, the structure and language of the law have not changed. 
In general, Latin American media tend to be captured by elites, with wealthy owners whose interests are represented in how the news is reported. 
This is why many of the leftist politicians who came to power in the last two decades pledged to make media more representative of voiceless and marginalized communities. 
For example, in Argentina, certain forms of cross ownership were banned. 
In other countries, underrepresented indigenous communities were given cameras and broadcast licenses. 
And in some cases, governments have interrupted programming on privately owned television stations to issue political statements. 
Under Correa, the government even assumed editorial management of the country’s oldest newspaper, El Telégrafo. 
In Ecuador, what started as a move toward media diversity ten years ago has ended up eliminating much of the country’s capacity for investigative and critical reporting. 
This does not bode well for the country’s future. 
Aggressive, fact-based journalism is a public good. 
As the fourth estate, the media holds governments and corporations accountable by reporting on corruption, environmental degradation, and other violations of the public trust. 
But in Ecuador, journalists now must fear the consequences of doing their jobs. 
Like many Latin American countries, Ecuador is deeply polarized. 
Correa still has many supporters on the left who point to his government’s stunning achievements in reducing poverty and boosting health and education spending. 
They say that the corruption during Correa’s presidency was no worse than under previous governments, and they applaud his government’s efforts to rein in the media, which they view as dishonest and representative of right-wing, corporate interests. 
There is a lesson here for the US and other countries where distrust of the media is growing. 
Since the revelations that Facebook and Twitter played a key role in disseminating false information and sowing mistrust and racial tension in the 2016 US election, a growing chorus has called for stricter regulations. 
But such regulations can be difficult to implement fairly, and can have unintended consequences. 
Ecuador has learned the hard way that if combating misinformation means the loss of in-depth, factual reporting and a media that can play a watchdog role, then the price is too high. 
Let us hope that this lesson is taken on board not just in Ecuador, but in democracies worldwide. 

Supporting the Developing World’s Health Innovators 
DHAKA – In 2012, the London Declaration on Neglected Tropical Diseases signaled a bold new vision for international cooperation, in which networking and globalization could underpin efforts in the global South to eradicate deadly diseases that disproportionately affect the poorest communities. 
The London Declaration – the largest global public-health collaboration to date – helped to foster trust in the rules-based global order that emerged after World War II. 
But this hard-earned trust is now in grave danger as populist forces across the Western world take aim at their countries’ foreign-aid commitments. 
In particular, President Donald Trump has announced sweeping cuts to the United States’ international aid budget, in order to appease economically frustrated US voters who want their tax money spent at home. 
What this approach fails to recognize is that the long-term rewards of supporting medical research in the global South far outweigh the short-term costs. 
As a Bangladeshi researcher at the International Centre for Diarrhoeal Disease Research, Bangladesh (icddr,b), I have been intimately involved in local efforts to eradicate visceral leishmaniasis (VL, also known as kala-azar), one of the diseases covered by the London Declaration. 
Thanks to generous support from international donors, I have been able to conduct path-breaking research in the field. 
Back in 2006, through research funded by the World Health Organization’s Special Programme for Research and Training in Tropical Diseases (TDR), I found virtually no sandfly-control initiatives in place in districts where VL – spread by a single species of sandfly – was endemic. 
That realization was a wake-up call to policymakers and led to the initiation of sandfly-control efforts throughout the country. 
Years later, as part of UBS Optimus Foundation-funded research into household-level insect-control methods, my team found that a novel technology – durable wall linings soaked with the insecticide deltamethrin – was effective at killing sandflies for up to a year after application. 
We are currently testing other durable insect-control solutions, including wall paints blended with three different insecticides. 
This work has implications beyond VL – and beyond Bangladesh. 
Indoor spraying remains the most widely used method of household insect control worldwide. 
But in isolated rural communities, the solutions that we are researching may be more robust, convenient, and effective against not just sandflies, but also other kinds of disease-carrying insects, such as Zika-infected mosquitos. 
I have also been engaged in research on novel types of VL transmission. 
After recovering from VL, many patients in Bangladesh go on to develop a condition known as macular post-kala-azar dermal leishmaniasis. 
In order to find out whether PKDL patients can act as a reservoir for VL – and therefore boost our capacity to eradicate the disease – my team and I have set up an insectarium to breed sterile sandflies. 
Our insectarium – funded by the Drugs for Neglected Diseases Initiative and the Spanish Foundation for International Cooperation – is one of just seven in the world (with the majority located in developed countries). 
It amounts to a permanent and valuable resource for research into vector control and disease transmission in Bangladesh. 
Already, the insectarium has facilitated important progress. 
Recent pilot experiments showed that macular PKDL can act as a source of infection, with the results published in the journal Clinical Infectious Diseases. 
We are also using the insectarium to test insecticide resistance and susceptibility in captive sandflies – research that will support the optimization of sandfly-control strategies throughout the Indian subcontinent. 
Of course, a key element of any strategy to eradicate disease is early and effective diagnosis. 
When it comes to VL, standard diagnoses rely on the detection of circulating antibodies in blood or urine. 
But, because antibodies persist in the blood even after recovery, this method falsely identifies healthy, non-contagious patients as needing treatment. 
While a DNA-based diagnostic test provides more accurate results, the methods currently used rely on expensive equipment like thermal cyclers and functioning cold chains. 
So my team went to work to develop a system for enabling DNA-based diagnosis in low-resource settings. 
Using an isothermal DNA amplification method, called recombinase polymerase amplification, we developed a cold-chain-independent method for detecting VL, which we then incorporated into a solar-powered mobile “lab suitcase” that can be used easily in rural settings. 
We are now trying to repurpose that suitcase, so that it can also enable the diagnosis of typhoid fever and tuberculosis, further revolutionizing disease surveillance in poor and rural communities. 
In other words, the development of cold-chain-independent disease detection, like the rest of our research and innovations, has far-reaching implications for global health. 
Yet all of the success we have achieved over the last two decades is now at risk. 
Donor agencies, facing reduced aid from major players like the US, could be forced to withdraw funding for the kind of research described here. 
With Bangladesh unable to pick up the slack, life-saving projects like ours will collapse; the long-term resources we have developed, from the insectarium to new diagnostic devices, will have to be abandoned; and the developing world’s poorest communities will suffer. 
More is at stake than generosity. 
Aid donors accrue important benefits from financing scientific research in the global South, beginning with reinforcement of the trust that underpins the fragile international order on which we all depend. 
More directly, supporting the development of low-cost health innovations could play a vital role in reducing the now-colossal health-care expenditure of advanced countries like the US. 
Those savings could, in the long term, easily offset the cost of supporting the life-saving work of organizations like icddr,b. 

Reversing the Medical Brain Drain 
GRENADA – With physicians already scarce worldwide, demand for foreign-born doctors in the United States and the United Kingdom is stretching developing and middle-income countries’ medical resources to the breaking point. 
In the US, for example, the shortfall of physicians could grow to nearly 95,000 by 2025, equivalent to 43% of all doctors working today. 
When doctors are in short supply, the US and UK turn to countries like the Philippines to close the gap. 
But this leaves the Philippines with its own significant shortage of medical professionals. 
The situation across Africa is no better. 
In Kenya, more than 50% of all doctors are now practicing overseas, leaving just 20 physicians per 100,000 in the population. 
By contrast, the United Kingdom has 270 doctors per 100,000 people. 
To be sure, there is nothing wrong with doctors spending time working and training overseas; on the contrary, practicing in a variety of health-care systems is critical for producing experienced, well-rounded physicians. 
The fundamental problem is that medical staff and students are leaving the developing world en masse to train in countries like the US and UK, and then never returning to work in their own communities. 
Moreover, supplier countries often pay for that medical education directly or indirectly, without ever receiving any of the benefits. 
To reverse this trend, we must allow medical students to train in world-class clinical settings, while encouraging them to return to practice in their home countries. 
This will not be easy, in part because practicing in developed countries is far more lucrative than practicing in the developing world, and doctors overwhelmingly prefer to work in the countries where they have trained. 
Any effort to stop the one-way flow of medical talent from developing countries will have to address these factors. 
For starters, we should focus on where medical training happens. 
Students could complete their preclinical training, and a portion of their clinical training, in their country of origin, and then be given the option of completing a temporary clinical-training stint in the US or the UK. 
Residency programs are the last stage of the medical-training process, and they often determine doctors’ preferred practice setting. 
When doctors from the developing world complete their residency programs in the US and UK, they rarely return home. 
In fact, they are often given strong incentives to stay: permanent-visa status and a valid license to practice medicine. 
Low- and middle-income countries should thus provide more residency programs, and the US and the UK, which bear some responsibility for the current doctor-supply imbalance, should assist them with funding and know-how. 
We also need to address the financial incentives that lure an unsustainably large number of developing-world doctors overseas in the first place, perhaps by obliging emigrating physicians whose home-country governments financed their medical-school training to pay the cost before allowing them practice medicine overseas. 
Thus, doctors would become liable for the value of their subsidized training when they elect to work abroad. 
This condition could be imposed through a well-constructed scholarship system that embodies the slogan: “pay it back if you don’t come back.” 
Under this system, fewer students who intend to work permanently overseas will accept government subsidies, and more money will be available for students who wish to practice in their country of origin, or for investments in health-care infrastructure. 
Trinidad has successfully implemented such a strategy – doctors who train overseas are required to return home for five years in exchange for their government scholarships – and the US has a similar program meant to encourage students to practice in particular geographical areas around the country. 
At St. George’s University, where I am President and CEO, we have the CityDoctors Scholarship program, whereby New York City students who receive full-tuition scholarships to medical school must return to practice in New York City’s public hospital system for five years after their training. 
If they do not return, they must repay the scholarship as if it were a loan. 
Medical-training programs in developing countries should also be considering how they can better direct future doctors toward meeting domestic needs. 
Students overwhelmingly come from affluent backgrounds, which often means they are from the biggest cities. 
More should be recruited from rural areas – which often have the greatest shortages – and then be trained in the settings where they are most needed. 
By broadening the geographical and socioeconomic talent base and identifying good candidates sooner, we could increase the likelihood that students will return to practice in their local communities. 
We all have something to gain from globally sustainable medical-training practices, which will ensure that all countries’ health-care needs are met. 
For developing countries there is no other way forward. 

Meeting Medvedev 
LONDON – In 2001, George W. Bush claimed that he had looked into Vladimir Putin’s eyes and found a soulmate for the West. 
Putin then proceeded to restore authoritarian rule in Russia. 
Today, Western leaders may well be about to repeat the same mistake with Dmitry Medvedev. 
Sunday’s election was a coronation rather than a competition. 
Medvedev’s only opponents were has-beens from the 1990’s like Vladimir Zhirinovsky, who long ago converted himself from proto-fascist into a Kremlin loyalist, and Andrey Bogdanov, an ersatz “democrat” permitted to run by the Kremlin in order to dupe the West into thinking that a real contest was taking place. 
It is therefore surprising that Medvedev should be hailed by so many in the West as a “liberal.” 
Is this just because we have been maneuvered into fearing someone worse, a sabre-rattling silovik (past or present member of the security services), like former Defense Minister Sergey Ivanov? 
Or does Medvedev represent a genuine opportunity to unfreeze the current mini-Cold War between Russia and the West? 
Medvedev is indeed personable. 
Putin’s background was in the KGB, while Medvedev is a lawyer who has attacked Russia’s “legal nihilism” and denounced the fashionable concept of “sovereign democracy.” 
Medvedev is familiar to the business world after seven years as Chairman of the Board of Gazprom. 
He can talk the talk at Davos. 
He wears nice suits. 
He does not look like an archetypal post-Soviet bureaucrat or KGB agent. 
He is a big fan of 1970’s rockers Deep Purple. 
But we need to understand the system that made Medvedev before rushing to embrace a new face that may turn out to be only a cosmetic improvement. 
Russia’s problem is not that it is an imperfect democracy, but that its governance is corrupted by so-called “political technology.” 
This involves more than just stuffing the ballot box. 
Political technology means secretly sponsoring fake politicians like Bogdanov, setting up fake NGO’s and “patriotic” youth movements like Nashi (Ours) to prevent a Russian version of Ukraine’s Orange Revolution, and mobilizing voters against a carefully scripted “enemy.” 
In 1996, the enemy was the Communists; in 1999-2000, the Chechens; in 2003-04, the “oligarchs.” 
Now it is us – the supposedly hostile West and the threat posed by “color revolutions” to Russia’s hard-won stability. 
Medvedev himself may find some or all of this distasteful, but Russia now has an entire industry of political manipulation that is hardly likely to disappear overnight. 
We also need to understand the mechanics of Russian succession politics. 
In the Russian context, “liberal” does not mean little more than opposing the siloviki . 
It means being in a different clan, at a different part of the feeding trough. 
The uncertainties of the succession have created a covert war for property and influence between a handful of different clans, but the system cannot afford an outright winner. 
In recent months, the most powerful clan, led by Deputy Head of Kremlin Administration Igor Sechin, whose company, Rosneft, received the biggest chunk of Yukos in 2004, has threatened to engulf the others. 
Another company, Russneft, worth an estimated $8-9 billion, seems to be heading its way, after its owner, Mikhail Gutseriyev, was evicted by the same recipe of legal threats and tax liens that was used against Yukos, and after the mysterious death of his son in a car crash. 
There are rumors that Sechin’s clan has designs on Russia’s Stabilization Fund, which soaring energy prices have pumped up to over $140 billion. In other words, rebalancing the system, not any sudden desire to reverse the increasingly illiberal course Russia has taken since 2003, was the key reason for choosing Medvedev. 
Putin’s ambition to stay in power as prime minister is also rooted in this rebalancing act. 
He needs to stay on as Medvedev’s “minder” to keep any one clan from dominating the others. Medvedev and the siloviki heartily dislike each other. 
Sechin and Ivanov will be watching him closely for any signs of weakness. 
Medvedev will not become his own man until he can cut free. Putin himself honored his succession deal with Boris Yeltsin for about three years. 
It is often forgotten that Yeltsin loyalists like Alexander Voloshin and former Prime Minister Mikhail Kasyanov survived in office until the Yukos affair of 2003-04. 
Medvedev may one day have his own Yukos moment, but we should not assume that he is an independent player until he does. European governments can therefore welcome Medvedev’s election, but their response should be carefully calibrated to the real changes he will be able to make. 
Europe should avoid repeating the over-reaction of many leaders when Putin succeeded the ailing Yeltsin in 2000. 

Closing Africa’s Agricultural Gender Gap 
SEATTLE – Africa’s GDP is now growing faster than any other continent’s. 
When many people think about the engines driving that growth, they imagine commodities like oil, gold, and cocoa, or maybe industries like banking and telecommunications. 
I think of a woman named Joyce Sandir. 
Joyce is a farmer who grows bananas, vegetables, and maize on a small plot of land in rural Tanzania. 
When I met her in 2012, she had just harvested her first crop of maize grown from a seed specifically adapted for Tanzania’s climate. 
Even during a bad crop year that caused many of Joyce’s vegetables to wither and die, her maize crop flourished. 
Without it, her family might have risked going hungry. 
Instead, the maize harvest ensured that Joyce’s family had enough to eat – and even enough extra income for Joyce to pay her children’s school fees. 
As Joyce’s story demonstrates, agriculture is crucial to Africa’s future. 
Farmers make up 70% of Africa’s workforce. 
They are the foundation of its economy, and the key to triggering its broader growth. 
Research shows that increasing agricultural productivity is the most effective way to reduce poverty in sub-Saharan Africa. 
In fact, agriculture offers the continent its best opportunity to turn a vicious cycle of poverty into a virtuous cycle of development. 
That is why leaders and policymakers from across the continent have declared 2014 Africa’s Year of Agriculture and Food Security. 
Joyce’s story is relevant for another reason, too. 
She is important to Africa’s future not only because she is a farmer, but also because she is a woman. 
At the Gates Foundation, I spend a lot of my time understanding the many ways that women and girls drive development forward: by investing in their children’s nutrition, basic health, and education – and also by providing farm labor. 
What I am now learning is that if Africa hopes to spark an agricultural transformation, countries will first need to remove one of the main barriers holding the sector back: a pervasive gender gap. 
This gap is not about the number of women farmers. 
In fact, roughly half of Africa’s farmers are women. 
The gap is one of productivity. 
Across the continent, farms controlled by women tend to produce less per hectare than farms controlled by men. 
The world has had evidence of this gender gap since at least 2011, but only limited data about its scope, shape, and causes. 
To help us better understand the problem, the World Bank and the ONE Campaign recently conducted an unprecedented analysis of the challenges facing women farmers. 
Their report highlights one stark fact from the start: The gender gap is real, and in some cases it is extreme. 
When we compare male and female farmers with similar land sizes across similar settings, the productivity gap can be as high as 66%, as it is in Niger. 
Previously, experts believed that women’s farms produced less because women have less access to inputs like fertilizer, water, and even information. 
But we now know that the story is much more complicated. 
With the new data in hand, we can see that, surprisingly, the productivity gap persists even when women have equal access to inputs. 
The precise reasons vary from country to country – but many of them stem from entrenched cultural norms that prevent women from reaching their full potential. 
For example, the report found that women face obstacles mobilizing the labor they need to help their farms flourish. 
Women usually have more childcare and household responsibilities than men, which make it difficult for them to devote as much time to farm work, or even to supervise hired labor. 
The problem is compounded by the fact that women are also likely to have less income to hire laborers in the first place. 
Fortunately, the new data do not just map the complexity and depth of the problem; they also point to concrete opportunities to develop gender-responsive policies that will help unlock the promise of all of Africa’s farmers. 
In some places, that may mean teaching agricultural extension workers how to make their messages more relevant to female audiences, or encouraging them to visit when women are most likely to be at home. 
In other places, it may mean increasing women’s access to markets, or introducing labor-saving tools to help them get the highest yield from their land. 
It may also require establishing community childcare centers, so that women farmers have the option to spend more time farming. 
In every case, it will require African policymakers to start recognizing women farmers as the essential economic partners that they are. 
This June, leaders from all over Africa will meet in Malabo, Equatorial Guinea, to set the agenda for agricultural policy in the next decade. 
If Africa’s agricultural sector is to achieve its promise – and if Africa’s economic growth is to continue – policymakers should take into account the needs of farmers like Joyce. 
Hers is a success story that can – and must – be replicated across the continent. 

Meltdowns and Fallouts 
BRUSSELS – The metaphors used during the financial crisis of 2008-2009 – earthquake, tsunami, meltdown, black swan, and fallout – are back with a vengeance, but now they are being recycled literally. 
In fact, the financial crisis and the nuclear crisis at the Fukushima nuclear-power plant in Japan share at least four similarities: 
· The “black swan” metaphor suggests that these events reflect difficulty in correctly assessing risks in complex systems. 
· Regulators proved unable to forecast and prevent the crisis. 
· The “fallout” is potentially cross-border in nature. 
· The costs incurred by the imprudent companies will be partly socialized. 
The 9.0-magnitude earthquake that struck Japan is, of course, a highly exceptional event – an event so rare that its probability cannot be well assessed with models based on limited historic data. 
Events with very low probability but high impact – so-called “tail risks” – have also been at the heart of the financial crisis. 
One cause of the financial crisis was financial institutions’ appetite for selecting (and in some cases, creating) products with above-average returns in normal times but excessive losses in exceptional cases. 
Old nuclear-power plants in seismic zones have a similar payoff structure. 
Moreover, both the financial and nuclear risk models seem to not have correctly appreciated the correlations between different risks. 
While financial institutions tried to mitigate risks by bundling subprime mortgages, Fukushima’s cooling system was able to cope with either a blackout and an earthquake or a tsunami. 
But, in both cases, the failure probabilities were correlated, and their joint occurrence led to catastrophe. 
Both nuclear and financial “meltdowns” tend to leave behind “fallout.” 
In the Japanese case, only wind and the lack of a land border prevented a major impact on neighboring countries. 
In continental Europe, many reactors are within 100 miles (161 kilometers) of another country’s territory. 
So a nuclear accident in Europe would likely have cross-border consequences. 
But, like financial regulation, nuclear regulation in the EU, even with its Euratom treaty, is still essentially national. 
And, given the deep disparities in nuclear power’s importance for European economies, consensus on regulatory harmonization is hard to reach. 
France, for example, will remain dependent on its nuclear-generating capacity, which will continue to account for the largest share of its electricity. 
Italy, on the other hand, might wish for a zero-nuclear risk environment, as it does not produce electricity from nuclear power but is surrounded (within about 100 miles) by one Slovene, one Swiss, and six French nuclear-power plants. 
French reluctance to subject its nuclear plants to European regulation determined by its nuclear-skeptical neighbors is comparable to British efforts to prevent major European harmonization of financial-market rules, owing to the importance of its financial sector. 
Another similarity between Japan’s current crisis and the recent financial crisis is that the false risk assessment was largely due to the asymmetric distribution of social welfare and individual cost implied by more effective risk mitigation. 
Both Lehman Brothers and Tokyo Electric Power Company (TEPCO) were able to increase their profits as long as the risk they were willing to accept did not materialize. 
Their management certainly benefited as long as everything went well. 
When crisis hit, however, the cost of the meltdown exceeded the companies’ equity and thus had to be socialized. 
So there is a structural failure in coping with complex private activities that risk leading to large societal damage. 
In fact, this is well understood – and is the reason why we have regulators for most such systems. 
But, prior to both Japan’s nuclear crisis and the financial crisis, regulators were unable to prevent the risk. 
America’s SEC did not require more capital or halt risky practices at the big investment banks. 
Japan’s nuclear regulator did not enforce stricter security rules. 
There are several reasons for this regulatory failure, including the inability to acquire and process all relevant data, the political difficulty of enforcing strict judgments, and the difficulty of modeling tail risks. 
Consequently, relying on low failure probabilities, national policies, the caution of private actors, and monitoring by regulators seems to be insufficient to prevent catastrophe. 
So what should be done? 
As in finance, ensuring that the originator of a risk pays the cost seems to be the most sensible approach. 
If each nuclear-power plant was obliged to insure against the risk that it imposes on society (within and outside the country of its location), it would face the true economic cost of its activities. 
In this ideal world, insurance for individual plants would be linked to factors that can and cannot be influenced, such as location in a densely populated area and the local population’s risk-averseness. 
Furthermore, risk assessment should be linked to individual plants’ risk factors, such as location in a seismic zone, secondary containment, safety redundancies, etc. Plants in densely populated areas with lower safety standards, for example, would face higher insurance costs, which could lead to a self-selected phase-out of the riskiest plants. 
Implementation of such a scheme is unlikely, however. 
First, it is virtually impossible to assess individual plants’ risk profiles correctly. 
Second, such a scheme would impose large costs on only a few companies in a few countries. 
Their governments would fight hard to protect these companies from being required to pay for the societal risks that they represent. 
This likely outcome mirrors the initiative for a European or global banking fund to insure against the next financial crisis. 
In both cases, however, perfect insurance could nonetheless serve as a valid benchmark to guide the choice of policies to implement. 
Moving towards this benchmark could be aided by two measures: first, a phase-out of nuclear power plants not according to their age, but to their risk profile, however schematically this is calculated; and, second, introduction of mandatory cross-national insurance for nuclear accidents. 
Under such a scheme, the Soviet Union in 1986, for example, would have been required to pay for the costs that the Chernobyl accident imposed on European farmers and health-care systems. 
Implementing these improvements will be difficult, to be sure. 
As with the financial sector, however, crisis can be the mother of reform. 

Melting Pot or Economic Meltdown 
Worried about an invasion of migrant workers from the new member states of Central and Eastern Europe, the old EU members have erected high barriers in order to prevent the flow. 
Despite the open market rhetoric of the EU, for most citizens of the new member states free labor mobility will not be a reality for the next seven years at least. 
This is a politically understandable but flawed policy. 
One of the key achievements of the European Union is mobility of goods and inputs. 
Without this, what kind of a union would the EU be? 
Otherwise, what, precisely, do the new countries get out of membership other than the nagging intrusions of the Brussels bureaucracy? 
Given the high hopes that preceded ascension to the EU, and the stingy attitude of the Union to its new members, it should not surprise anyone if an anti-European reaction soon starts to brew in these countries. 
So the cure is as bad as the disease: discrimination against the new members creates political problems of its own for the Union. 
The real question is whether there is a disease at all. 
Should Western Europe really be worried about an enormous flow of new immigrants? 
In fact, estimates of potential migration flows from East to West are relatively small. 
According to An agenda for a growing Europe , a report published by Oxford University Press in 2004 for the European Commission, 250,000 to 450,000 workers will go West during the first one to two years, followed by around 100,000 to 200,000 annually thereafter. 
Over the first decade, the cumulative number of migrants might amount to between 1.5 and four million, that is, 2.4% to 5% of the total population in the new member states - and a tiny fraction of the total population in the current Union. 
Aging populations and lower fertility rates in the new member states might result in even smaller flows. 
There is another, less obvious, reason why the EU's policy on migration is flawed. 
As Mircea Geoana, Romania's bright young Minister of Foreign Affairs, recently put it: "If the EU waits another seven or ten years before it opens up, the workers it will receive from my country will be the least qualified, peasants and individuals with low human capital: by then, the doctors, the architects and the engineers will all have migrated to the United States." 
Indeed, this is precisely what happened with the Russians: the most qualified have already gone to the US. 
Europe has been unable to attract much more than a few disreputable oligarchs, who migrated to the French Riviera, and a handful of lively street singers. 
Western Europe is increasingly inhabited by aging populations that have lost the incentive and enthusiasm to work hard, take risks, and be ambitious. 
Without an inflow of new blood and new ideas, the old Continent's economic future looks bleak. 
Just look at the US: where would America be if it had introduced barriers to entry to various waves of new immigrants and remained confined to Anglo Saxon settlers? 
To be sure, managing a melting pot is not easy, and many of America's social problems are related to difficult race relations. 
But New York and Los Angeles, the two most ethnically diverse cities in the US, are also America's leaders in business and in the arts. 
Nothing comes easy in this world: if the Union cannot manage a multicultural society in Europe, then it ought to prepare itself for permanent stagnation. 
So long as the Union's borders remain closed, there is also a risk that foreign investment will fly over Western Europe and land in Central and Eastern Europe, where people are willing to work longer hours, market regulations are less intrusive, and human capital is relatively high, because Communist schools were good at technical training. 
These countries have opened their markets to foreign investors - and foreign investors are responding eagerly. 
Given Western Europe's growing need for labor in the years ahead, the question is not whether to have immigration, but only where that immigration is going to come from. 
Will it be the legal immigration of easily assimilated people from Central and Eastern Europe, or illegal immigration from the Maghreb? 


Memoirs of an Anti-Semite 
Romania's most vicious anti-Semitic and ultra-nationalist politician, Corneliu Vadim Tudor, is trying hard to persuade people that he has changed his ways. 
For most journalists and political pundits in Romania, this self-proclaimed Damascene conversion looks like just another political farce from someone with unrivaled histrionic gifts. 
If Tudor were a mere political clown, the question of whether or not he still hates Jews would not matter. 
But Tudor is a political power to be reckoned with. 
As parliamentary and presidential elections loom, everyone wants to figure out just what he is up to. 
Tudor was ex-dictator Nicolae Ceausescu's court poet. 
He supported the Securitate (Romania's communist-era secret police) and praised Ceausescu's patriotism. 
When communism collapsed, he blamed every shortcoming in the reform process on "foreigners" - meaning the West, Romania's ethnic Hungarian minority, and especially the Jews. 
Indeed, he developed a cult for Marshall Ion Antonescu, Romania's dictator between 1940-1944 and Hitler's ally, who was responsible of ordering the massacre of about 200,000 Jews. 
The violence of Tudor's rhetoric, directed against everybody who opposed him, rose to heights not seen since the Fascist era. 
In 1990, Tudor set up a weekly magazine through which he incited vicious and reactionary campaigns. 
Soon after he founded the extreme nationalist Greater Romania Party (PRM), as well as a so-called "national treason list," on which almost every notable political and cultural figure had his or her place. 
He threatened (or promised) that criminals would be herded into stadiums and machine-gunned should he come to power. 
Although Tudor faced innumerable lawsuits for libel, he could not be silenced. 
In the 2000 general election, as the ruling center-right coalition imploded, the PRM received about 20% of the popular vote, becoming the second-largest party in parliament. 
Tudor subsequently finished second in the presidential election. 
Then, suddenly, a few months ago, Tudor announced that he had undergone a religious experience and had changed his mind about the Jews. 
He admitted that he had been anti-Semitic, but he claimed that God had opened his eyes and that he now loved Jews as much as he used to hate them. 
Indeed, he began apologizing for his earlier anti-Semitic hate speech. 
The man who once said that he could "well imagine world culture without Jews" now claimed to realize how quintessential the Jews are for world culture. 
He announced that he had hired Eyal Arad, a well-known Israeli spin-doctor, to run his presidential campaign. 
"The Jews" were not his enemies any more, he said; they were even working for him. 
But Tudor didn't stop with prolix apologies. 
He soon sponsored the unveiling of a bust of the assassinated Israeli premier Yitzak Rabin at Brasov in Transylvania. 
For the occasion, Tudor wore a yarmulke and spoke about his "philo-Semitism" for more than two hours . 
Other PRM representatives, provided with yarmulkes by Tudor, shuffled their feet awkwardly. 
A chorus sang Romanian and Jewish songs and everybody expressed the vow that Vadim would be the "next and the first Christian President" of Romania, the yarmulke notwithstanding! 
Next, Tudor headed a PRM delegation to lay a wreath at Auschwitz, where the one-time Holocaust denier declared that Jews had been exterminated in Romania. 
What lies behind this political opportunism? 
Tudor knows that his electoral success in 2000 belongs to the past. 
At the local elections held in June, the PRM did poorly. 
The really big battle this November will be joined by the Social Democrats (PDSR) and by the centrist alliance Democratic Alliance. 
Tudor has no chance of becoming "the first Christian President of Romania." 
His only chance of gaining even a share of power is to join in a future coalition, and for this he has to look semi-respectable. 
In fact, Tudor's strategy may work, because the ex-communist PDSR, led by President Ion Iliescu and Prime Minister Adrian Nastase, will probably not oppose such an alliance if it is necessary to give them a majority after November's general election. 
They are desperate to cling to power, no matter what, and so are unlikely to question Tudor's democratic pedigree. 
After all, they governed together with the PRM from1992 to 1996. 
Yet, there is a hitch: Romania is due to join the EU in 2007, and with the PRM in the government but branded as an extremist, anti-Semitic party, the integration process could be derailed. 
No EU government will want to invite into the club an administration that contains Romania's far uglier version of Le Pen and Haider. 
This is why Tudor desperately needs a patina of democratic respectability. 
Tudor seems to hope that by putting on a yarmulke and repenting his anti-Semitism, he will deceive a few naive Western politicians. 
But no one should be fooled. 
Despite his political zigzags, Tudor has been extremely consistent. 
He has always thought and written that "the Jews" brought capitalism, communism, spiritualism, alcoholism, decadent Hollywood movies, and pornography to Romania. 
But saying that publicly won't work anymore, not because Romanians do not think this way (many certainly do), but because the political class from left to right wants to be part of Europe and won't associate with anyone who puts that desire at risk. 
So Tudor's embrace of the Jews is a conversion of convenience. 
If Paris was worth a mass to the French kings of old, Bucharest is worth a yarmulke to Tudor. 

Closing the Middle East’s Education Gender Gap 
FEZ – When it comes to gender parity, the Middle East and North Africa (MENA) is lagging behind most of the rest of the world. 
This is undermining the prospects not just of women and girls, but of entire countries as well. 
And in no area is this reality more acute than in education. 
In many MENA countries today, virtually everyone’s education is suffering, owing to decades of conflict, displacement, and economic malaise. 
In South Sudan, for example, at least 2.2 million children are not in school – one of the highest rates globally, according to a new report by the Global Initiative on Out-of-School Children. 
In many parts of the region – particularly rural, deprived, and overpopulated areas – even children who are in school do not receive a quality education. 
But it is girls who bear the brunt of the problem, as they comprise the majority of out-of-school children. 
Given the many social and economic benefits associated with higher school attendance by girls – including faster GDP growth, reduced poverty, fewer child marriages, lower fertility, and better child health – the need to address the gender gap in education is obvious. 
The first step is identifying what underlies the gap. 
In some countries, educational opportunities simply are not offered to girls as readily as to boys. 
This is difficult to address, not least because women are often excluded from high-level decision-making. 
But even where there is no official constraint, girls’ attendance rates are disproportionately affected by a wide range of factors, which UNESCO’s Institute of Statistics groups into two categories. 
The first group includes socioeconomic factors (such as poverty and child marriage) and cultural factors (such as parents’ level of education, local attitudes toward girls’ education, women’s expected role in society, and religious beliefs). 
The second group covers political and institutional factors, such as education policies determining budget allocation, quality of syllabi, stereotypes in curricula and textbooks, distance from home, adequacy of sanitation facilities, teachers’ attitudes and practices, and school security. 
For the same reasons, girls who do get an education might still be at a disadvantage relative to boys. 
A family may, for example, send a boy to a higher-quality private school, while a girl would attend the nearest public school, even if it is of lower quality, because it views a girl’s education as less important to her – and the family’s – future. 
That makes the United Nations Development Programme’s prediction that schools in many MENA countries will increasingly be split into public and private all the more worrying. 
Such a split, as is happening in Morocco, exacerbates inequality across the board, as the wealthy minority has access to very expensive private schools, while the rest are left to attend lower-quality government schools. 
But it is likely to hurt girls the most. 
To be sure, not all MENA countries have a wide gender gap in education. 
In Bahrain, the majority of the top 10% of high school graduates are girls, and more women attend university than men. 
This is no accident. 
Bahrain, along with Jordan and Tunisia, has made significant political and financial commitments to boosting education, resulting in remarkable progress toward reducing illiteracy and closing the gender gap. 
If other MENA countries are to follow suit, they will similarly have to make a sustained political commitment, pursuing major legal and policy reforms focused on guaranteeing equal access to all levels of education. 
In many countries, broader initiatives aimed at improving access to quality education for low-income families and rural populations will also be needed, though these , too, should include special attention to gender disparities. 
In the meantime, campaigns to raise awareness of gender issues among decision-makers, teachers, parents, students, and the general public are needed to push back against deeply entrenched discriminatory attitudes. 
Such campaigns should carry over to school curricula, as existing curricula often perpetuate traditional gender roles that deny women the opportunity to make their own decisions. 
Finally, wealthy countries within and outside the MENA region can step in to support the efforts of their lower-income counterparts to improve education overall, while closing the gender gap. 
Ensuring accountability, by tracking and reporting progress, will be vital to this effort. 
Broadening access to quality education is the most rewarding investment a country can make. 
For the sake of their countries’ economic and social development, not to mention the wellbeing of their women and girls, MENA governments should put closing the education gender gap at the top of their agendas. 


A Sustainable Economy for the Arab World 
WASHINGTON, DC – In recent decades, millions of people in the Arab world have been lifted out of extreme poverty. 
But progress is now at risk of slowing, or even reversing, owing to a vicious circle of economic failure and violent disorder. 
To prevent such an outcome, Arab countries must move fast to build a more sustainable economy, underpinned by greater private-sector creativity and vitality, improved public services, and the creation of regional and global public goods. 
The first step toward achieving this is to recognize the scale and nature of the potential barriers to success. 
Arab countries today are faced with slow overall GDP growth and tightening fiscal constraints. 
Disparities in access to education, training, and health care – partly a reflection of those fiscal constraints – exacerbate already rising inequality. 
As we have seen in the region, such circumstances can fuel political polarization and violent conflict, with the concomitant displacement, loss of life, destruction of infrastructure, and staggering economic costs. 
While economic development is no guarantor of peace, development failures do often contribute to extremism and violence, as popular anger combines with a loss of institutional legitimacy. 
The existence of nearby conflicts, which can have destabilizing spillover effects, heightens the risk of unrest. 
Technological innovation can be part of the solution for Arab economies; but the accompanying disruption of markets and livelihoods raises its own challenges. 
Equally difficult to manage are risks like climate change and pandemics, which transcend borders and thus cannot be addressed by any single country. 
Overcoming these challenges will not be easy. 
The key to success will be smart cooperation: between the public and private sectors; between government and civil society; among countries; and between countries and international organizations. 
One of those international organizations is the World Bank Group, which engages with countries to help protect the poor and vulnerable, improve resilience to refugee and migration shocks, and ensure inclusive and accountable service delivery. 
We also work to strengthen the private sector, so that it can create jobs and opportunities for young people throughout the Arab world. 
And we promote other kinds of cooperation, particularly regional cooperation on shared public goods and in sectors like education, water, energy, and climate change. 
A major goal of cooperation must also be to raise funding. 
Official development assistance (ODA), which last year stood at $142 billion, will never be sufficient to meet the region’s extraordinary financing needs, even if it is combined with government resources. 
To put this into context, ODA for 2015 amounted to just one-third of Germany’s annual health-care bill. 
The United Nations trade arm, UNCTAD, estimates that, to reach the Sustainable Development Goals (SDGs), the world will have to close a $2.5 trillion gap – annually. 
To achieve this, we must use innovative mechanisms to leverage and mobilize global funds, especially from the private sector. 
Fortunately, the private sector has trillions of dollars that it can shift toward the effort to build a more sustainable economy and, specifically, to achieve the SDGs. 
But it needs encouragement, which the World Bank Group has attempted to provide, using concessional financing, investment guarantees, and matching investments. 
We have also worked to encourage countries to improve the policy and regulatory environment for development and growth, thereby becoming more attractive destinations for private-sector resources. 
But more must be done to encourage the private sector to invest in sustainable development. 
For starters, businesses need purpose. 
As a recent report by Deloitte points out, companies should be able to articulate a clear purpose that is connected to a wider social, environmental, or even economic goal. 
That purpose can act as a compass for the business, influencing its organizational culture and values, and guiding stakeholders’ individual and collective behavior. 
Of course, a sense of purpose alone won’t drive the private sector to shift investment toward sustainability. 
The Business and Sustainable Development Commission (BSDC) has reported that investments in the SDGs bring enormous returns, including new opportunities, massive efficiency gains, impetus for innovation, and improved reputations. 
Once companies recognize these benefits and decide to adopt a purpose-driven approach, they need help monitoring and reporting outcomes. 
Specifically, they need a transparent framework that enables them more easily to share information about progress on their long-term economic, social, and environmental objectives. 
There are efforts underway to create such a framework, but much more needs to be done to create the right incentives for businesses to participate. 
The ranks of businesses supporting the transition to a sustainable economy are growing. 
But, to complete that transition, particularly in Arab countries, many more companies and other private-sector entities will need to step up. 
Of course, their pledges must be reflected and reinforced by commitments from governments, multilateral institutions, and civil society. 
The road ahead is fraught with difficulties, but the Arab world has overcome similarly daunting challenges in the past. 
Now as much as ever, the region has the people, resources, and opportunity to thrive. 

Defeating Meningitis in Africa 
SEATTLE – Africa’s progress in fighting meningitis A is one of the best-kept secrets in global health. 
Thanks to the development and deployment of a low-cost vaccine, the lives of hundreds of thousands of children have been saved, and communities that might otherwise have been devastated by the illness are thriving. 
Meningococcal A meningitis is a bacterial infection of the thin lining surrounding the brain and spinal cord, and it can be deadly. 
For more than a century, epidemics have swept across 26 countries in Sub-Saharan Africa, killing and disabling tens of thousands of primarily young people every year. 
The disease is highly feared on the continent; it can kill within hours or leave its victims with severe brain damage. 
Outbreaks usually occur at the beginning of the calendar year, when dry winds from the Sahara Desert begin blowing southward. 
The 1996-1997 epidemic resulted in more than 250,000 cases and 25,000 deaths in Sub-Saharan Africa, many of them children. 
Of those who survived, one in four were left with permanent disabilities, including paralysis, blindness, hearing loss, seizures, and brain damage. 
The impact of meningitis A on families and communities is devastating. 
In order to pay for treatment, many families are forced to sell the assets they need to sustain their livelihoods: livestock, seed stock, and tools. 
Furthermore, the disabilities caused by the infection can leave survivors less able to earn income or care for themselves and their families. 
Whole communities can be plunged into deeper levels of poverty as health-care workers struggle to contain outbreaks. 
The suffering caused by the disease served as an impetus for action. 
Sixteen years ago, African health ministers, the international health NGO PATH, the World Health Organization (WHO), the Serum Institute of India, the Bill & Melinda Gates Foundation, and dozens of other partners formed the Meningitis Vaccine Project (MVP). 
The mission was simple: to develop an affordable vaccine to fight meningitis A in Africa. 
The project was successful. 
In less than ten years, the MenAfriVac vaccine was launched and has produced an immediate and dramatic break in the cycle of meningitis A epidemics. 
I was in Burkina Faso for the vaccine’s introduction in December 2010. 
I was worried whether anyone would show up. 
But when I met the minister of health the day before the launch and asked him what his biggest concern was, he gave me a surprising answer: “Crowd control.” 
He was right. 
Huge crowds formed at every immunization site, standing in line in the hot sun, eager to receive protection against the deadly disease. 
It was, quite literally, a state event, with the president in attendance. 
The first vaccination campaign reached virtually everyone in the country aged 1-29. 
In the five years since then, more than 235 million people have been immunized across Sub-Saharan Africa. 
By 2020, the vaccine is expected to protect more than 400 million people – preventing one million cases of meningitis A, 150,000 deaths from the disease, and 250,000 cases of severe disability among survivors. 
The MVP stands as a powerful example of what is possible when African leaders and experts from across the spectrum of global health work together. 
Strong, temporary partnerships, with a focused goal, can have truly catalytic effects. 
But the work is far from over. 
Last year, the WHO approved MenAfriVac for use in regular vaccine schedules, making it possible for millions more to be protected. 
The stakes are high. 
Universal access to immunization is a cornerstone of health, development, and economic growth. 
Recognizing this, several African countries are already making plans to roll out meningitis – and other – vaccines into routine immunization systems this year. 
The task before African leaders is to ensure a smooth and full transition from mass vaccination campaigns to routine immunization. 
Last week, government officials assembled in Ethiopia for the first-ever Ministerial Conference on Immunization in Africa, where they re-committed to ensuring that everyone on the continent has access to the vaccines they need. 
This will require further investment in immunization, improved data collection and analytics, new tools and approaches, and most importantly, strong partnerships. 
We must build on the legacy of the MVP and work toward a world in which every child receives the life-saving vaccines they need to survive and thrive. 

Facing Down Mental Illness 
DAVOS – Contrary to common perception, mental illness is a problem that is neither new nor unique to the developed world. 
What we call schizophrenia and bipolar disorder are recognizable in literature dating back to ancient Greece, and The Anatomy of Melancholy, published in 1621 by the English scholar Robert Burton, remains one of the most astute descriptions of depression. 
Today, low- and middle-income countries account for most of the morbidity and 75% of the suicides that result from mental illness. 
What is new, and encouraging, is the heightened attention now being given to the problem. 
Last year at Davos, I helped launch a new Global Agenda Council on Mental Health, after a study by the World Economic Forum and Harvard School of Public Health projected that the global economic costs of mental illness over the next two decades would exceed the costs of cancer, diabetes, and respiratory ailments combined. 
With the stakes so high, the human and economic case for leaders to take mental health seriously is clearly compelling. 
As policymakers act, they would be wise to bear in mind that mental disorders are brain disorders. 
Too many people dismiss mental illnesses as problems of character or lack of will, rather than recognizing them as serious, often fatal, medical disorders. 
The brain is a bodily organ just like any other. 
We should no more blame a person for a malfunctioning brain than for a malfunctioning pancreas, liver, or heart. 
People with brain disorders deserve exactly the same level and quality of medical care as we expect when confronted with disorders of any other part of the body. 
Consider depression, the most common mental illness, which must be distinguished from the sadness, disappointment, or frustration we all experience in our lives. 
William Styron’s 1989 memoir, Darkness Visible, rightly calls “depression” a weak word for a debilitating condition that is marked by hopelessness, helplessness, and dread. 
In extreme forms, depression can be so disabling that the thought of getting out of bed or making a phone call becomes overwhelming. 
Functioning effectively at the workplace can be intensely challenging, which is reflected in the growing recognition of a condition known as “presenteeism,” a variation on “absenteeism”: depressed employees are physically present but mentally absent. 
Mental illnesses can often lead to other health problems. 
Brain disorders like depression and schizophrenia greatly increase the risk of developing chronic ailments, such as cardiovascular and respiratory diseases. 
People with mental illnesses and substance-abuse issues are at increased risk of infectious diseases like HIV/AIDS. 
Furthermore, mental disorders have a profound impact on the outcome of other illnesses. 
After a heart attack, for example, the prognosis depends on the presence or absence of depression more than on virtually any measure of cardiac function. 
That is why health-care policymakers should embrace a simple adage: “no health without mental health.” 
Indeed, mental illnesses can be as fatal as physical ones. 
Suicide causes more deaths than homicide. 
Around 7% of people with major depressive disorder will take their own lives. 
Globally, more than 800,000 people kill themselves every year. 
The number of people scarred by a loved one’s death is much greater; every suicide has many victims. 
Tackling the problem will require innovative approaches. 
It is not enough simply to make treatment available. 
People with psychotic disorders may deny that they are ill, and those suffering from depression may be too consumed by self-loathing to feel worthy of help. 
Even in the developed world, it is estimated that only about half of all people suffering from depression are diagnosed and treated. 
According to the World Health Organization, in developing countries, 76-85% of people with severe mental disorders are not treated. 
We need sensitive ways to identify those at risk and to help those who are most disabled. 
Not everybody with a mental illness needs expensive drugs, hospital care, or even direct access to highly trained psychiatrists. 
We may not have the equivalent of a vaccine for measles or a bed net for malaria, but low-cost, highly effective interventions are possible for most people either at risk for, or already suffering from, a mental illness. 
In low-resource environments, local residents or family members can be trained to provide brief, effective psychotherapies that treat moderate forms of depression or anxiety. 
Phone- or Internet-based therapy can be used as well. 
That said, it should be acknowledged that treatments for mental illness remain far from infallible. 
Of those who get help, only about half receive the right treatment, and about half of those receiving treatment regress. 
The only way to improve these percentages is to deepen our understanding of normal and abnormal brain functioning. 
We need research to develop better treatments for brain disorders in general, and for mental illnesses in particular. 
Fortunately, some important initiatives launched in the last year are moving us in the right direction. 
In April, the United States National Institutes of Health introduced a ten-year BRAIN Initiative, joining similar efforts in the European Union, Israel, Japan, China, Australia, and Canada. 
We have also seen unprecedented levels of support from philanthropists. 
In the US, for example, $650 million was donated recently to the Stanley Center for Psychiatric Research. 
In the United Kingdom, a new charity, MQ, is awarding funds for research on psychological treatments. 
Breakthroughs in biomedical research offer hope that cures for brain disorders will be found. 
By broadening access to existing treatments and investing in research to develop new therapies, we can aspire to eliminate one of the oldest and most widespread causes of human misery. 

Mercantilism Reconsidered 
CAMBRIDGE – A businessman walks into a government minister’s office and says he needs help. 
What should the minister do? 
Invite him in for a cup of coffee and ask how the government can be of help? 
Or throw him out, on the principle that government should not be handing out favors to business? 
This question constitutes a Rorschach test for policymakers and economists. 
On one side are free-market enthusiasts and neo-classical economists, who believe in a stark separation between state and business. 
In their view, the government’s role is to establish clear rules and regulations and then let businesses sink or swim on their own. 
Public officials should hold private interests at arm’s length and never cozy up to them. 
It is consumers, not producers, who are king. 
This view reflects a venerable tradition that goes back to Adam Smith and continues a proud existence in today’s economics textbooks. 
It is also the dominant perspective of governance in the United States, Britain, and other societies organized along Anglo-American lines – even though actual practice often deviates from idealized principles. 
On the other side are what we may call corporatists or neo-mercantilists, who view an alliance between government and business as critical to good economic performance and social harmony. 
In this model, the economy needs a state that eagerly lends an ear to business, and, when necessary, greases the wheels of commerce by providing incentives, subsidies, and other discretionary benefits. 
Because investment and job creation ensure economic prosperity, the objective of government policy should be to make producers happy. 
Rigid rules and distant policymakers merely suffocate the animal spirits of the business class. 
This view reflects an even older tradition that goes back to the mercantilist practices of the seventeenth century. 
Mercantilists believed in an active economic role for the state – to promote exports, discourage finished imports, and establish trade monopolies that would enrich business and the crown alike. 
This idea survives today in the practices of Asian export superpowers (most notably China). 
Adam Smith and his followers decisively won the intellectual battle between these two models of capitalism. 
But the facts on the ground tell a more ambiguous story. 
The growth champions of the past few decades – Japan in the 1950’s and 1960’s, South Korea from the 1960’s to the 1980’s, and China since the early 1980’s – have all had activist governments collaborating closely with large business. 
All aggressively promoted investment and exports while discouraging (or remaining agnostic about) imports. 
China’s pursuit of a high-saving, large-trade-surplus economy in recent years embodies mercantilist teachings. 
Early mercantilism deserves a rethink too. 
It is doubtful that the great expansion of intercontinental trade in the sixteenth and seventeenth centuries would have been possible without the incentives that states provided, such as monopoly charters. 
As many economic historians argue, the trade networks and profits that mercantilism provided for Britain may have been critical in launching the country’s industrial revolution around the middle of the eighteenth century. 
None of this is to idealize mercantilist practices, whose harmful effects are easy to see. 
Governments can too easily end up in the pockets of business, resulting in cronyism and rent-seeking instead of economic growth. 
Even when initially successful, government intervention in favor of business can outlive its usefulness and become ossified. 
The pursuit of trade surpluses inevitably triggers conflicts with trade partners, and the effectiveness of mercantilist policies depends in part on the absence of similar policies elsewhere. 
Moreover, unilateral mercantilism is no guarantee of success. 
The Chinese-US trade relationship may have seemed like a marriage made in heaven – between practitioners of the mercantilist and liberal models, respectively – but in hindsight it is clear that it merely led to a blowup. 
As a result, China will have to make important changes to its economic strategy, a necessity for which it has yet to prepare itself. 
Nonetheless, the mercantilist mindset provides policymakers with some important advantages: better feedback about the constraints and opportunities that private economic activity faces, and the ability to create a sense of national purpose around economic goals. 
There is much that liberals can learn from it. 
Indeed, the inability to see the advantages of close state-business relations is the blind spot of modern economic liberalism. 
Just look at how the search for the causes of the financial crisis has played out in the US. 
Current conventional wisdom places the blame squarely on the close ties that developed between policymakers and the financial industry in recent decades. 
For textbook liberals, the state should have kept its distance, acting purely as Platonic guardians of consumer sovereignty. 
But the problem is not that government listened too much to Wall Street; rather, the problem is that it didn’t listen enough to Main Street, where the real producers and innovators were. 
That is how untested economic theories about efficient markets and self-regulation could substitute for common sense, enabling financial interests to gain hegemony, while leaving everyone else, including governments, to pick up the pieces. 

The Promise of Bank Mergers 
BARCELONA – The banking business has fallen on hard times. 
The combination of persistent low interest rates, increasing regulatory compliance costs, and the rise of new competitors taking advantage of financial technologies (fintech for short) has produced, in Europe in particular, excess capacity and low profitability – and a strong temptation to merge. 
In a difficult market, mergers – by enabling banks to cut costs, share information-technology platforms, and increase market power, thereby relieving pressure on margins and rebuilding capital – make sense. 
And the banks know it. 
Witness the recent merger talks between Deutsche Bank and Commerzbank, both of which have faced huge declines in market capitalization. 
So a wave of mergers may be on the way. 
The question is whether that approach really can solve banks’ problems and benefit society. 
To be sure, mergers and acquisitions are not always a matter of escaping trouble. 
In fact, M&A activity – both the number and size of transactions – was picking up before the 2008 global financial crisis, including across borders within and beyond the eurozone. 
After peaking in 2007, such activity diminished, as domestic restructuring took precedence, particularly in countries such as Greece and Spain, which had to implement difficult adjustment programs. 
Moreover, the M&A approach does not always work. 
In October 2007, a consortium formed by the Royal Bank of Scotland, Fortis, and Banco Santander acquired ABN AMRO – the world’s biggest bank takeover to date. 
RBS and Fortis failed soon after and had to be rescued. 
Nonetheless, supervisory bodies favor mergers to save banks in trouble. 
Competition authorities tend to be more reluctant, recognizing the danger that large-scale mergers can consolidate an anti-competitive market structure, while creating even more “too big to fail” banks that may cause financial instability in the future. 
But they are often overruled or compelled to acquiesce. 
The US Department of Justice agreed to the merger between Wells Fargo and Wachovia, among others, soon after the 2008 financial crisis, and the UK Office of Fair Trade was overruled in the merging of HBOS and Lloyds. 
Competition is not the only source of merger-related tension among authorities. There is also friction between national supervisors, who prefer domestic mergers, and supranational supervisors, who prefer cross-border mergers within their jurisdiction (the eurozone, in the European Central Bank’s case). 
The benefits of cross-border consolidation are that market power is diluted in a large market, and more diversification is obtained, though these gains come at the price of weakened cost synergies. 
From the banks’ perspective, cross-border mergers may potentially be the better option, as long as they occur within a single supervisory framework. 
That way, they can benefit from common supervision and resolution. 
The eurozone’s new supervisory framework, supervised by the ECB and possessing a common resolution authority, reflects this recognition of the benefits of cross-border mergers. 
But Europe lags when it comes to such mergers, owing to a broader lack of financial integration. 
Indeed, in the European Union, member countries’ own banks tend to be the dominant players in the domestic market – say, BNP Paribas in France or UniCredit in Italy. 
In the United States, by contrast, the same large banks – such as Bank of America, JPMorgan Chase, and Wells Fargo – tend to dominate a large number of different states. 
US banks have had more space to diversify. 
For European banks – which must navigate vast differences in culture, language, and law in pursuing cross-border mergers – this has been much more difficult, especially because many of them also need to cut overcapacity drastically. 
As a result, in the near term, European banks are more likely to pursue domestic – or, at most, regional – consolidation. 
For the United Kingdom, which voted in June to “Brexit” the EU, the situation is particularly complicated. 
The UK long benefited from an open policy on acquisitions by foreign banks, which allowed, for example, the Spanish Santander Group to bid for Britain’s Abbey National in 2001. 
But Brexit will probably move supervision of UK-based banks out of the EU framework, raising the cost of cross-border deals and implying a loss to British consumers. 
As the UK banking sector’s competitiveness suffers, the temptation to return to the kind of light-touch regulation that enabled the crisis in the first place could intensify. 
As for the rest of Europe’s banks, now might be the time to consider the merger option. 
Mergers are no silver bullet, but they could help to alleviate serious problems relatively quickly – though, in the longer term, the banks would still have to tackle the legacy of heavy and rigid structures and rebuild their reputations, with a strong focus on consumer service and fairness. 
At the same time, if a merger strategy is to work for the good of society, competition must be preserved. 
If incumbents simply continue to get larger, blocking new competitors from entering the market, they will end up facing intrusive regulatory compliance programs and higher capital requirements. 
New market entrants would have more flexibility and thus might be able to offer new, more appealing deals to customers. 
This is why bank supervision and competition policy must work in tandem to ensure a level playing field. 
On one hand, regulations must apply to all firms performing banking functions, including new fintech institutions. 
On the other hand, implicit subsidies to too-big-to-fail banks must be dropped. 
Bank mergers hold much promise, particularly in Europe. 
To realize their potential will require the right policy mix, focused on consumer protection and fair competition. 
Europe’s banks and banking authorities will need to step up their game. 

The Great Leader Revival 
LONDON – Two hundred years have passed since the battle of Waterloo, where Napoleon’s calamitous defeat made such a huge dent in his country’s self-image that General Charles de Gaulle, in his history of the French army, simply omitted it. 
Nonetheless, Napoleon, like de Gaulle, would both easily make it onto any list of history’s great leaders – assuming, of course, that one considers “greatness” to be an individual trait. 
Marx and Tolstoy would say that there is no such thing as a “great leader.” 
For Marx, the class struggle in France created the circumstances in which a “grotesque mediocrity” – that is, Napoleon – was morphed into a hero. 
As far as Tolstoy was concerned, Napoleon was not a particularly good general, and was carried to victory by the courage and commitment of all of the individual French soldiers who won the Battle of Borodino. 
Whether or not Napoleon was great, the question remains whether any leader could merit that description. 
And if so, who? 
There seem to be two particularly important criteria for great leadership, both noted by the political philosopher Isaiah Berlin. 
First, does the leader recognize which way the winds of history are blowing? 
Otto von Bismarck did, as did his fellow German Konrad Adenauer; both, in Bismarck’s memorable phrase, could hear “the rustle of God’s cloak.” 
Second, does a leader have important choices to make? Of course, if decisions are forced upon a leader, he or she cannot really be credited with (or blamed for) them. 
So the key is that the leader has the opportunity to consider alternatives, and choose the right one for his or her country. 
This is why de Gaulle is almost certain to be on any list of great leaders. 
Almost single-handedly, he rescued France from the relegation zone after World War II. 
After returning to power in 1958, he rescued his country a second time, putting down two attempted coups, ending the war in Algeria, and inspiring the Fifth Republic’s constitution. 
Much like British Prime Minister Winston Churchill, de Gaulle gave the French a new worldview that established their place in the post-war global order. 
In fact, the worldviews that de Gaulle and Churchill established for their countries turned out to be a little too influential. 
Their successors continued to perceive the world – and their countries’ role in it – in ways that constrained rational discussion and distorted decision-making for years. 
As a result, no subsequent leader of either country has matched them. 
But there is one other British prime minister who may come close: Margaret Thatcher, a highly contentious figure, who was loved by some and loathed by others. 
Even her resignation, 25 years ago this year, was spurred by a mutiny in her own cabinet and party. 
But one does not need to be universally liked – or even likable – to be a great leader. 
And the fact is that not even Thatcher’s detractors can deny her impact. 
Beyond being the first woman prime minister in Britain, and among the first anywhere, Thatcher helped to reverse Britain’s economic decline. 
Her assault on excessively powerful trade unions, moreover, made Britain governable, at a time when the country seemed to be slipping into drift and disorder. 
Given this, she is certainly a candidate for “great leader” status. 
Similarly, China’s Deng Xiaoping may qualify as a great leader, despite having a record that is far from squeaky clean. 
Beyond undertaking dark deeds as one of Mao’s lieutenants, Deng played a decisive role in ordering the massacre in Tiananmen Square in 1989. 
But Deng also unleashed the market, setting the country on the path toward unprecedented growth and prosperity that ultimately lifted hundreds of millions of Chinese out of poverty. 
Many would regard Lee Kuan Yew, Singapore’s founder and longtime prime minister, as great, though he probably would have welcomed the opportunity to test his mettle in a larger arena. 
And, in fact, it seems that size does affect one’s ability to secure great-leader status. 
I mean no insult to the House of Luxembourg when I say that it is unlikely that a great leader will emerge from that tiny country, especially given its generally uncontentious politics. 
The United States is certainly big enough to produce great leaders. 
And some presidents have indeed done great things. 
Harry Truman and Dwight Eisenhower – no intellectual giants, to be sure – showed excellent judgment as they established the post-war international order that has supported peace in much of the world for decades. 
Others, including Ronald Reagan and Bill Clinton, have had great gifts – say, the ability to inspire or a talent for persuasion. 
John F. Kennedy was a little of both. 
He did one great thing: resolving the Cuban Missile Crisis. 
And his gift for motivating people was unmatched; indeed, it outlasted him, with his assassination cementing a powerful legacy. 
In Africa, there has been no great figure since the death of South African President Nelson Mandela, who combined courage, authority, and magnanimity in graceful abundance. 
In fact, he is among the most charismatic and charming leaders I have met; the other two – former United Nations Secretary-General Kofi Annan and former US Secretary of State Colin Powell – also are either African or African-American. 
And what of today? 
The only contemporary European who can lay claim to the mantle of greatness is German Chancellor Angela Merkel, the European Union’s de facto leader. 
Like former Chancellor Helmut Kohl, she tends to be underestimated at first, but gets the big decisions right. 
Kohl delivered generous terms for German reunification; 
Merkel has stood up to Russian President Vladimir Putin on his interventionism in Ukraine, and she has taken a generous approach to the migration crisis. 
Marx and Tolstoy were, I believe, wrong. 
Political leadership – and the men and women who exercise it – can make a real difference, for better or worse. 
Merkel is today’s leading example of that, as she provides the direction Europe needs to tackle the challenging existential crisis that it faces. 

Angela Merkel’s New Germany 
BERLIN – German Chancellor Angela Merkel’s Christian Democratic Union (CDU) may have won a majority in September’s federal election, but that does not mean that the country’s future is clear. 
What emerges as Merkel seeks to form a new coalition with the Greens and the Free Democrats will not only shape Germany’s economic trajectory over the next four years; it will also determine the fate of the country’s transformation into a truly open society. 
In less than a generation, Germany, once the sick man of Europe, has emerged as a global economic powerhouse. 
But the truth is that Germany’s current economic success is less the result of good policies than of favorable external conditions, especially in Europe, which ensured strong demand for German exports. 
To be sure, important domestic economic reforms enabled Germany to take advantage of external demand. 
But they were undertaken long before Merkel came to power, and few meaningful economic reforms have been implemented during her 12-year tenure. 
For example, domestic private investment remains weak, partly owing to overregulated services and heavy bureaucratic burdens. 
Moreover, as the German government has preached austerity to its neighbors, it has increased social spending on pensions and transfers, all while allowing net public investment to turn negative. 
The much-needed overhaul of the tax system once hyped by the CDU has failed to materialize. 
And, though employment has increased during Merkel’s tenure, job creation has not succeeded in reducing the low-income segment of the labor market. 
The parties most likely to form the next government – the CDU (and its Bavarian sister party, the Christian Social Union), the Greens, and the Free Democrats – are now fighting over how best to use Germany’s large fiscal surpluses to serve their respective constituents. 
Whatever decision they make, Germany’s economic performance is likely to remain strong, at least in terms of trade and a balanced budget. 
The real test of the so-called Jamaica coalition (named for the parties’ colors) lies elsewhere. 
What Merkel has lacked in economic-policy achievements, she has made up for in bringing about social change. 
Under her leadership, Germany has become the open society it is today. 
But it is also an increasingly divided society. 
As it stands, some 20% of Germany’s population of 82 million has a migrant background, and close to five million are Muslim. 
This multiculturalism is reflected in changing perspectives on the part of all Germans. 
Four out of five Germans now consider Islam and homosexuality to be part of German society; three out of four say the same about migrants and refugees. 
And Germany has one of the most pro-European populations on the continent. 
The last three governments, all led by Merkel, have contributed mightily to this transformation. 
Critics call Merkel the first social democratic chancellor from a conservative party, because she has embraced many progressive policies, while preaching stability and traditional values. 
Arguably her most important decision – which almost cost her the chancellorship, but might ultimately shape her legacy – was her 2015 decision to accept, despite fierce opposition from many in her own party, almost 1.5 million asylum-seekers and push for their integration into German society. 
Germany’s Merkel-led governments have also supported early childhood education and children’s rights, while overseeing substantial progress on gender equality. 
Broader, more flexible access to the labor market, expansion of early childhood facilities, and financial incentives have driven an increase in female labor-force participation to more than 70%, one of the highest in the industrialized world. 
The current German government also implemented a 30% quota for women on supervisory boards of large companies, as well as a wage transparency law aimed at reducing the country’s gender pay gap, which is still a whopping 21%. 
While Merkel did not spearhead these reforms – not least because she had to avoid alienating those in her party who viewed them negatively – she offered tacit support. 
Similarly, though Merkel herself voted earlier this year against legalizing gay marriage, which many in her party do not support, she accepted graciously the Bundestag’s decision, declaring that she hoped the vote would not only promote “respect between different opinions,” but also bring “more social cohesion and peace.” 
Ultimately, it is Merkel’s talent at bridging social and political divides that has made Germany’s transformation into an open society possible. 
And this, not economic policy, might ultimately become the greatest achievement of her chancellorship. 
In some ways, Germany has already moved beyond the point of no return on its path toward openness, owing to Merkel’s 2015 refugee policy. 
Yet there are enormous challenges ahead. 
Beyond the technical and social challenges associated with the successful integration of refugees, there is a need for greater tolerance toward Islam and diversity more generally on the part of all Germans. 
Further changes to family and gender policies and an overhaul of the education system will also be needed. 
As Germany continues to debate what it means to be German, the outcome of the current coalition negotiations will determine whether Merkel’s next government confronts these challenges effectively. 
If it does, Merkel will be remembered as the architect of a new German society. 

Angela Merkel’s Moment of Truth 
BERLIN – In the last two weeks, the two crises confronting Europe – in Ukraine and Greece – both escalated. 
In each case, Germany and its chancellor, Angela Merkel, were at the heart of efforts to achieve a diplomatic resolution. 
This is a new role for Germany, and the country is not yet accustomed to it. 
The latest attempt to halt the war in eastern Ukraine by diplomatic means had an even shorter shelf life than the first attempt last September. 
The new accord – concluded, like the previous one, in Minsk – de facto recognized that Ukraine has been split by military means. 
But just where the dividing line is remains unclear, because Russian President Vladimir Putin may yet attempt to capture the strategic port of Mariupol on the Sea of Azov, thereby enabling the Kremlin to create a land bridge between Russia and the Crimea peninsula. 
Moreover, capturing Mariupol would keep open the option of conquering southern Ukraine, including Odessa, and extending Russian control all the way to Transnistria, Russia's illegal enclave in Moldova. 
Through the continued use of military force, Putin has achieved the main aim of Russia's policy: control over eastern Ukraine and ongoing destabilization of the country as a whole. 
Indeed, Minsk II is merely a reflection of facts on the ground. 
The question remains, however, whether it would have been smarter to let the one power that Putin takes seriously – the United States – conduct the negotiations. 
Given Putin's low regard for Europe, this will most likely become unavoidable, sooner or later. 
Still, despite the risks involved, it is important that Germany and France, in coordination with the European Union and the US, undertook this diplomatic effort. 
Though the Minsk II initiative exposed Europe's meager political clout, it also confirmed the indispensability of Franco-German cooperation, as well as Germany's changed role within the EU. 
Merkel herself reflects this changed role. 
Her ten years in power were largely characterized by a new German Biedermeier era. 
The sun was shining on Germany and its economy, and Merkel regarded it as her highest duty to maintain citizens' sense of wellbeing by not disturbing them with politics. 
But Germany's new significance in Europe has put a brutal end to Merkel's neo-Biedermeier era. 
She no longer defines her policies in terms of “small steps"; now she takes strategic threats seriously and confronts them head-on. 
This is also true of the Greek crisis, in which Merkel – despite her public image in southern Europe – was not aligned with the hawks in her party and administration. 
Indeed, Merkel seems to be well aware of the unmanageable risks of a Greek exit from the euro – although it remains to be seen whether she can muster the determination to revise the failed austerity policy imposed on Greece. 
Without such a revision aimed at boosting growth, Europe will remain alarmingly weak both internally and externally. 
Given Russia's attack on Ukraine, this is a dismal prospect, because internal weakness and external threats are directly linked. 
Greece has also shown that the euro crisis is less a financial crisis than a sovereignty crisis. 
With the recent election of the anti-austerity Syriza party, Greek voters stood up against external control over their country by the “troika" (the European Commission, the European Central Bank, and the International Monetary Fund), Germany, or anyone else. 
Yet if Greece is to be saved from bankruptcy, it will have only foreign taxpayers' money to thank for it. 
And it will be nearly impossible to convince European taxpayers and governments to provide further billions of euros without verifiable guarantees and the necessary reforms. 
The Greek conflict shows that Europe's monetary union is not working because one country's democratically legitimized sovereignty has run up against other countries' democratically legitimized sovereignty. 
Nation-states and a monetary union do not sit well together. 
But it is not hard to understand that, should “Grexit" occur, the only geopolitical winner would be Russia, whereas in Europe, everyone stands to lose. 
Though the geopolitical risks have, so far, barely figured in the German debate, they greatly outweigh any domestic policy risks of finally coming clean with the German public. 
Greece, Germans should be told, will remain a eurozone member, and preserving the euro will require further steps toward integration, up to and including transfers and debt mutualization, provided that the appropriate institutions for this are established. 
Such a step will require courage, but the alternatives – continuation of the eurozone crisis or a return to a system of nation-states – are far less attractive. (Germany has a new national-conservative party whose leaders' declared aim is to pursue a pre-1914 foreign policy.) 
In view of the dramatic global changes and the direct military threat to Europe posed by Putin's Russia, these alternatives are no alternative at all, and the Greek “problem" looks insignificant. 
Merkel and French President François Hollande should seize the initiative once again and finally put the eurozone on a sound footing. 
Germany will have to loosen its beloved purse strings, and France will have to surrender some of its precious political sovereignty. 
The alternative is to stand by idly and watch Europe's nationalists become stronger, while the European integration project, despite six decades of success, staggers ever closer to the abyss. 

Merkel in China 
NEW DELHI – German Chancellor Angela Merkel’s second visit to China in a year comes against the backdrop of dire forecasts of a difficult September for the eurozone. 
Mindful of such concerns and persistent pessimism in global financial markets, Merkel is now taking bold political initiatives at home and overseas. 
Indeed, her China trip should be seen as an effort to assert leadership across the eurozone. 
At home, Merkel recently sent out a clear message to her critics that Germany must pay a price for eurozone leadership. 
She cautioned her colleagues against loose talk about a “Grexit” – Greece’s exit from the eurozone – and assured visiting Greek Prime Minister Antonis Samaras that Germany remained committed to his country’s membership of the eurozone. 
While it required courage to take such a tough stance, doing so helped to bolster her position at home and throughout the eurozone. 
There is now no doubt that Merkel is willing to commit Germany to the cause of preserving both the European Union and the eurozone, and that she will work to achieve that goal. 
If she succeeds, she will emerge as the first great European leader of the twenty-first century. 
This stance suggests that Merkel appreciates the essence of the argument that François Heisbourg, the chairman of the council of the International Institute for Strategic Studies (IISS), advanced in a recent essay: a federal arrangement does not fall apart because of problems at the periphery but because of “failure at the heart of the system.” 
Merkel has come to terms with Germany’s position – and that it must act to preserve the unity of the whole. 
The eurozone (and probably the EU) cannot be saved in Greece or Finland if it cannot be saved in Germany. 
Committing Germany to that objective is precisely what Merkel has defined as her political goal for the rest of her term in office. 
Within hours of declaring her leadership at home, Merkel announced her visit to Beijing. 
The timing was highly significant: Merkel goes to China, the emerging global power, after declaring her own commitment to strengthening the eurozone, if not the EU as a whole, as a credible pole of an emerging multipolar world. 
In recognition of Germany’s growing significance, Chinese Prime Minister Wen Jiabao welcomed a delegation of German business leaders to Beijing this May with the words: “Stronger Chinese-German cooperation is good for the two countries, good for China-EU relations, and good for world prosperity and stability. 
The strategic dimension of Chinese-German relations, therefore, can only be strengthened, not weakened.” 
There are several dimensions to the bilateral relationship. 
Germany needs both China’s markets and the funds that its government can deploy to purchase German and European bonds. 
It also has more than 7,500 enterprises operating in China, with gross investment totaling $18.5 billion. 
Moreover, Germany has sold $15 billion worth of technology to China, and bilateral trade hit a high of $169 billion in 2011, accounting for 30% of total China-EU trade. 
The two countries have set a bilateral trade target of $280 billion for 2015. 
Trade, however, is not the only immediate concern. 
Far more important, especially for Germany, is to get China to invest in and hold its bonds. 
In mid-August, at the First IISS Oberoi Lecture in Mumbai, Klaus Regling, the CEO of the European Financial Stability Facility, underscored the importance of Chinese demand for EFSF bonds and China’s role in stabilizing the eurozone. 
Regling also revealed that there is now increased and frequent coordination between monetary authorities in the United States, Germany, and China, drawing attention to the fact that the “old Triad” of the dollar, euro, and yen may now have been replaced by a “new Triad” of the dollar, euro, and Chinese renminbi. 
While Regling spoke of an emerging “multipolar monetary system,” his remarks clearly indicated the functioning of a “tripolar” system. 
Lying at two ends of that monetary triangle, the eurozone and China have acquired a geopolitical stake in helping each other. 
Hans Kundnani and Jonas Parello-Plesner of the European Council on Foreign Relations view the China-Germany relationship as one that will shape the overall China-EU relationship. 
Like many strategic analysts, they worry whether Germany, in pursuit of purely short-term economic interests, might forsake long-term strategic interests and concerns about human rights, environmental problems, press freedoms, and other political and geopolitical issues. 
It is significant, therefore, that German political parties have emphasized the need for Merkel to raise such matters in her talks with Chinese leaders. 
However, Merkel’s focus may well remain on trade, investment, and currency flows. 
After all, unless she can turn around the eurozone, her rising profile at home and in Europe could easily wither. 
What this means is that to secure German leadership of Europe, and her own leadership of Germany, Merkel has to “walk on two legs,” so to speak. 
She needs to balance both geo-economic and geopolitical factors – both interests and values – in advancing Germany’s relations with China. 

Are Europe’s Populists Calling the Shots? 
BERLIN – In 2011, Italian Prime Minister Silvio Berlusconi was forced from office by French President Nicolas Sarkozy and German Chancellor Angela Merkel, and replaced by Mario Monti, an able technocrat who looked like he had been designed in a laboratory by the European Commission and Goldman Sachs. 
But now the boot is on the other foot. 
An extraordinary populist coalition comprising Hungarian Prime Minister Viktor Orbán, Austrian Chancellor Sebastian Kurz, Italian Minister of the Interior Matteo Salvini, and German Federal Minister of the Interior Horst Seehofer is threating to oust Merkel over her migration policies. 
In an attempt to shore up her position, Merkel recently held a summit with French President Emmanuel Macron at Meseberg Castle outside of Berlin, where she agreed to a European Union reform agenda that would seem to go beyond most Europhiles’ wildest dreams. 
But the Meseberg summit itself looked more like a Franco-German conclave than a relaunch of the European project. 
Macron is trying to protect Merkel from the rebellious forces within her own governing coalition, and both leaders are acting like they are still the masters of the universe. 
Yet for all their talk of transforming the European Stability Mechanism into a European Monetary Fund and reining in the Italian government’s behavior on refugees, one gets the sense that it is the populists who are calling the shots. 
The era when Germany could resolve European crises by effectively making domestic political decisions for other member states seems to have ended. 
In the current standoff, it is Merkel’s Germany that is now the spielball (“playing ball”). 
Decisions that may determine the fate of her government are being made in Rome, Sofia, and other capitals on the European Union’s periphery. 
This shifting balance of power is most evident in Merkel’s eagerness to meet with Orbán at an EU summit in early July, just three months after she refused to congratulate him on his reelection. 
Since then, several factors have changed the state of play in European politics. 
For starters, Seehofer’s Christian Social Union, the Bavarian sister party to Merkel’s Christian Democratic Union, is preparing to fend off the far-right Alternative für Deutschland in regional elections this October. 
The CSU regularly hosts Orbán at its party meetings, and he and Seehofer have been in close contact throughout the refugee crisis. 
Second, Kurz, in a coalition with the populist Freedom Party of Austria (FPÖ), recently declared that overhauling EU migration policies would be a top priority for Austria during its presidency of the Council of the European Union. 
And, third, in early June, Italy’s Five Star Movement and Salvini’s right-wing League party formed a government that combined two very different strands of populism. 
In doing so, they have created a template for left-wing anti-austerity populists and right-wing anti-immigration populists to forge similar alliances in other member states – including Germany. 
As interior minister, Salvini has taken a hard line on migration, not least by turning away vessels carrying asylum seekers rescued from the Mediterranean. 
And his approach is inspiring Seehofer and Kurz – ever the opportunists – to double down on their own immigration proposals. 
As Germany’s interior minister, Seehofer wants to start turning away asylum seekers who have already registered in other member states. 
This has pitted him against Merkel, who would prefer to forge an EU-level agreement to fix Europe’s asylum system. 
Earlier this month, just as Merkel and Seehofer’s dispute was heating up, Kurz made an appearance in Berlin, where he called for Austria, Hungary, Italy, and Germany – or, at least, Germany’s interior ministry – to form an “axis of the willing” on migration. 
Kurz also tried to undercut Merkel in early 2016, when he was serving as Austria’s foreign minister. 
Appearing on live German television, he declared that he would close the Balkan route for refugees fleeing Syria for Northern Europe. 
Merkel was able to fend off this earlier attempt at domestic interference. 
But today, both Europe and Germany’s divisions have widened, and she must find a way to bridge the gaps. 
For example, while Dutch Prime Minister Mark Rutte has doubled down on his opposition to a eurozone “transfer union,” Merkel has agreed, in principle, to Macron’s proposal for a joint eurozone budget. 
Yet Germany is caught in the middle of the “fiscally responsible” Hanseatic League (Northern Europe), the anti-immigration Visegrád Group (the Czech Republic, Hungary, Poland, and Slovakia), and anti-austerity forces in the southern eurozone. 
In an earlier era, a strong, visionary chancellor could have exploited the fact that these different currents are all present on the German political scene. 
In fact, after Russia’s annexation of Crimea in 2014, Merkel herself was able to forge domestic compromises that worked for the entire continent. 
But the key difference between then and now is that the US government no longer has an interest in a strong, united Europe – or in global stability, for that matter. 
After the annexation of Crimea, Merkel could count on then-US President Barack Obama’s support. 
The same cannot be said for President Donald Trump or Richard Grenell, his chosen ambassador to Germany, both of whom are actively undermining Merkel’s domestic credibility. 
Of course, Merkel cannot be written off yet. 
After 13 years in power, she has shown herself to be extraordinarily resilient and capable of facing down ambitious macho men. 
Seehofer, Kurz, Salvini, Orbán, and Trump would all do well not to underestimate her. 
Still, Europe is at a critical juncture. 
Those who favor deeper integration and openness have wasted a lot of time, while populists and nationalists have marshaled their forces. 
After their summit at Meseberg Castle, one can only wonder if Macron and Merkel are ready for an extended siege. 

German Foreign Policy Comes of Age 
BERLIN – Germany’s reunification, nearly 25 years ago, once again placed at the heart of Europe a large power whose location, economic potential, and, yes, history, raised suspicions of revived hegemonic ambitions. 
Major European leaders at the time – including Giulio Andreotti, Margaret Thatcher, and François Mitterrand – worried that Germany might seek to revise the results of the two world wars. 
In German political circles in 1990, the very idea would have seemed monstrous and absurd. 
But the end of Germany’s partition also meant the end of the Cold War’s bipolar world order; and, as the world confronts an accumulation of dangerous regional crises and tensions (in Ukraine, the Middle East, and East Asia), the absence of a new order has become dangerously apparent. 
Worries about the return of history’s ghosts so far have been unfounded, at least as far as Germany is concerned. 
Though the global financial crisis and its effects on Europe have de facto turned Germany into an economic hegemon, it is not a role that the government sought or relishes. 
The reunited Germany remains a peaceful democracy, recognizes all neighboring borders, and remains firmly anchored in NATO and the European Union. 
But, while Germany today poses no threat to its neighbors or the European order, this obviously was not always so. 
For the first 70 years after its unification in 1871, Germany sought to enforce – more or less alone and against France – its political and military dominance in Europe. 
Failure in WWI led to radicalization under Adolf Hitler, which ended in total defeat and Germany’s partition. 
West Germany, founded in 1949, was anything but a sovereign power in foreign-policy terms. 
The start of the Cold War meant the young West German democracy’s firm integration into the western bloc, under the tutelage of the three Western Allies – Britain, France, and America. 
Integration with the West took precedence over German unity. 
Neutrality in exchange for reunification did not have the support of a majority in the Federal Republic, and certainly not of the Allied powers. 
But successful integration with the West presupposed reconciliation with France, the old enemy and neighbor. 
Germany also had to overcome the moral catastrophe of Nazism. 
Its core foreign-policy concern was to regain the respect of the international community, and, ultimately, to retain the possibility of eventual reunification. 
These goals formed the basis of the Federal Republic’s support for European integration, its approach to the Eastern Bloc (Ostpolitik), and reconciliation with former enemies and the victims of Nazism – particularly the Jews. 
When reunification came, on October 3, 1990, Germany regained full sovereignty. 
It has been trying to figure out how to use it ever since. 
Europe’s main power could no longer claim a special role within NATO and abstain from all military operations beyond its territory. 
To do so could have created a strategic vacuum in the heart of Europe and raised questions about whether the country was perhaps again pursuing its own route, this time between East and West. 
Germany thus had to find a way forward that satisfied both the pacifism of a large majority of the German public and the military requirements of NATO. 
The fragility of Germany’s foreign-policy foundations was to become clear during the aftermath of the 2008 financial crisis. 
Though the main democratic parties agreed after 1990 that continuity and predictability in German foreign policy were essential, it was Germany that opposed a European response to the crisis and insisted on national solutions that would be coordinated by the EU. 
As Europe’s strongest economy, Germany suddenly was forced to lead. 
But it knew no better than to impose the lessons of its own experience – particularly a concern for price stability that harks back to interwar hyperinflation – on the rest of Europe. 
Germany’s government still confuses the successful recipes of the Federal Republic with the very different needs of a continental economy’s leading power. 
As a result, the EU has been in a permanent crisis, characterized by economic stagnation and high unemployment. 
But Russia’s return to militarism in Europe’s east now seems to be bringing about a gradual shift. 
Suddenly, the security of Germany’s own territory is at stake again. 
Indeed, Russian President Vladimir Putin’s policies imply a direct threat to the EU’s most fundamental principles, which have defined German foreign policy for decades. 
It is no coincidence that one of Putin’s central aims is to disengage Germany from the West (or at least to neutralize it). 
But German Chancellor Angela Merkel has undergone a remarkable transformation. 
Though she has remained willing to talk to the Kremlin, her commitment to Western unity has been unwavering. 
This was clear in a recent speech in Sydney, in which she broke with the “policy of small steps” that had guided her in the post-2008 euro crisis. 
She clearly named the threat that Putin poses to Europe – precisely because the threat is not confined to Ukraine. 
It was a remarkable speech. 
And it provides room for hope that, faced with the current crises in the EU and in Eastern Europe, German foreign policy may finally be finding its feet. 

Merkel’s Comeuppance is Europe’s – and the World’s – Misfortune 
JOHANNESBURG – One of the most common mistakes European leaders make in interpreting US President Donald Trump’s hostility toward America’s traditional allies, or the alacrity of his administration’s efforts to blow up the international order, is to assume that all of this is unprecedented. 
Nothing could be further from the truth. 
“My philosophy is that all foreigners are out to screw us, and it’s our job to screw them first.” 
Thus argued John Connally, then-US Secretary of the Treasury, in 1971, in his successful bid to convince President Richard Nixon that the time had come to punish Europe by pulling the plug from the Bretton Woods system. 
Likewise, Trump would certainly agree that, “balancing the requirements of a stable international system against the desirability of retaining freedom of action for national policy,” the US wisely “opted for the latter.” 
That was Paul Volcker, then the president of the New York Federal Reserve, referring to Nixon’s decision in a speech seven years later. 
The future Chair of the US Federal Reserve further declared that a “controlled disintegration in the world economy …[was] a legitimate objective for the 1980s.” 
What distinguishes today’s situation from the one Europe faced in the 1970s is the Weimar-like implosion of Europe’s political center. 
In the 1970s, America’s financial assault on Germany, France, and Britain (for example, by floating the dollar) was met by a united European establishment. 
By contrast, today’s defenders of the European status quo must fight on two fronts: against Trump’s encroachments and, within Europe, against the likes of Matteo Salvini and Luigi di Maio, the rising stars of Italian politics who, despite their parliamentary majority, were denied the right to form a government by the country’s besieged pro-establishment president. 
The US announcement of tariffs on steel and aluminum imports, while ostensibly aimed at China, was also the latest signal to Europe that the Trump administration’s “America First” rhetoric must be taken seriously. 
Next came the US withdrawal from the Iran nuclear deal, which offered Trump yet another splendid opportunity to luxuriate in Europe’s powerlessness, and especially that of German Chancellor Angela Merkel. 
Forced to insist that Germany, the European Union’s most populous country and its largest economy, would uphold the Iran deal, Merkel found herself immediately humiliated as one German company after another pulled out of Iran. 
All were unwilling to challenge US financial might or to forfeit the tax cuts Trump had delivered to almost 5,000 German companies with a combined balance sheet of $600 billion. 
And, before the Iran shock had been absorbed, the US threatened a 25% import tariff on cars, which would shave at least $5 billion annually from German exporters’ revenues. 
Grave as these setbacks may be, the scale of Germany’s difficulties can be comprehended only once their causal link with developments in Italy is grasped. 
Just as it is Trump’s aim to overturn the global system from which Germany has benefited for decades, Salvini and di Maio see the disintegration of the euro as a welcome development and a boon to their anti-immigration campaign. 
Just over three years ago, when I was negotiating on behalf of Greece with the German government to end the combination of unsustainable loans and hyper-austerity that are still crushing my country, I warned my interlocutors at a Eurogroup meeting of eurozone finance ministers: 
“If you insist on policies that condemn whole populations to a combination of permanent stagnation and humiliation, you will soon have to deal not with Europeanist leftists like us but, instead, with anti-Europeanist xenophobes who see it as their vocation to disintegrate the European Union.” 
That is precisely what is happening now. 
Having vetoed much-needed EU reforms, Merkel’s successive governments guaranteed Europe’s fragmentation. 
Germany’s establishment media are now referring to the Italian economist whose appointment as finance minister was vetoed by the president as “Italy’s Varoufakis.” 
That moniker obscures a fundamental difference: I wanted to keep Greece in the eurozone sustainably and was clashing with Germany’s leaders in favor of the debt restructuring that would make this possible. 
By crushing our Europeanist government in the summer of 2015, Germany sowed the seeds of today’s bitter harvest: a majority in Italy’s parliament that dreams of exiting the euro. 
The causal link between Germany’s two political headaches has an economic basis. 
Trump understands one thing well: Germany and the eurozone are at his mercy, owing to their increasing dependence on large net exports to the US and the rest of the world. 
And this dependence has grown inexorably as a result of the austerity policies that were first tried out in Greece and then implemented in Italy and elsewhere. 
To see the link, recall the “fiscal compact” to eliminate structural budget deficits that Germany insisted upon as a condition of agreeing to bailout loans for distressed governments and banks. 
Then note that this pan-European austerity drive took place against the backdrop of massive excess savings over investment. 
Finally, note that large excess savings and balanced government budgets necessarily mean large trade surpluses – and thus the increasing reliance of Germany, and Europe, on massive net exports to the United States and Asia. 
In other words, the same incompetent policies that gave rise to the xenophobic, anti-Europeanist Italian government also bolstered Trump’s power over Merkel. 
Europe’s inability to get its own house in order has engendered a new Italian majority that is planning to expel a half-million migrants, blowing fresh winds into the sails of militant racists in Hungary, Poland, France, Britain, the Netherlands, and, of course, Germany itself. 
Meanwhile, with Europe too enfeebled to tame Trump, the US will aim to force China to deregulate its financial and tech sectors. 
If it succeeds, at least 15% of China’s national income will gush out of the country, adding to the deflationary forces that are breeding political monsters in Europe and in the US. 
All of this was predictable – and in fact was predicted. 
So no one should be surprised by the position in which Merkel and Europe find themselves today. 
But only a dangerous fool would celebrate. 

Angela Merkel’s Tragedy 
BERLIN – What we care about most is often our undoing. 
So it was for Angela Merkel, who recently announced her intention to step down as leader of the Christian Democratic Union (CDU) in December and as Germany’s chancellor in 2021. 
History placed Merkel amid raging storms: a series of eurozone crises that drove wedges between Europeans; economic tensions at home that fueled social fragmentation; and the largest migration wave since World War II, which intensified European and domestic anxieties. 
But, rather than rocking the boat, risking her survival, she chose temporary fixes that let the vulnerabilities fester. 
Perhaps her nail-biting ascent to the chancellorship conditioned her. 
In the September 2005 election, she enjoyed a large early lead in opinion polls. 
Then-Chancellor Gerhard Schröder had failed to bring down the unemployment rate, which stood at almost 12%, and his Social Democratic Party had lost a string of state elections. 
Yet Merkel’s poor communication of her policy priorities, together with a lackluster debate performance, nearly cost her the election. 
In subsequent elections, Merkel refused to campaign on substantive policy matters. 
In 2009, her campaign was deliberately boring and banal, embracing – however reluctantly – her opponents’ characterization of her as a “Mutti,” an unflattering stereotype of a mother managing the family home. 
In 2013, she bolstered the Mutti image with the slogan “You know me.” 
Having established no clear policy platform, Merkel has governed largely without a mandate. 
After each election, various interest groups have hoped that she would adopt a position favorably aligned with their particular preferences. 
But she knew that refusing to do so was precisely what had enabled her to survive. 
Merkel’s preference for muddling through has been apparent in her approach to eurozone reform. 
She has long known that fixing the monetary union would require her to issue a politically risky call for financial sacrifice by Germans. 
The call was risky, because the former Chancellor Helmut Kohl, the man who single-handedly carried the euro across the finish line, had promised that no sacrifice would be required. 
Hence, for fear of alienating Germans, Merkel has consistently done the minimum to hold the eurozone together. 
She agreed – after an agonizing delay – to a joint European Union-International Monetary Fund lending package to Greece in May 2010. 
That led to the creation of a more permanent bailout facility, the European Stability Mechanism. 
Moreover, during the euro’s existential crisis in July 2012, Merkel supported European Central Bank President Mario Draghi’s initiative to create an “outright monetary transactions” mechanism, whereby the ECB could purchase the bonds of struggling eurozone countries. 
Although these fixes helped to prevent the eurozone from collapsing, they were not enough to ensure the monetary union’s long-term resilience – a failing that has left the eurozone vulnerable to Italy’s brewing crisis. 
Merkel was felled by the one principled stand she took. 
In 2015, with Europe being inundated by asylum seekers and economic migrants, Merkel announced an open-door policy for Syrian refugees. 
When Hungary’s nationalist prime minister, Viktor Orbán, suggested that Germany should build a fence to keep migrants out, she flashed rare (and raw) emotion. 
Recalling her East German upbringing, she said, “I lived a long time behind a fence. 
It is not something I wish to do again.” 
Merkel’s humanity won her praise from the international community. 
But, at home, opposition to her refugee policy gathered momentum. 
The Alternative für Deutschland (AfD), created in February 2013 to oppose the euro, gained a new lease on life as a strident nationalist anti-migration party, siphoning supporters from Merkel’s CDU and its Bavarian sister party, the Christian Social Union (CSU). 
In 2016, Merkel successfully eased migration pressure on Europe by securing a deal to keep migrants in Turkey. 
But the deal remains highly controversial, not least because of humanitarian concerns. 
With the same model being applied elsewhere, migrants are at increasing risk. 
Although Merkel’s characteristically dull campaign approach won her a fourth term as chancellor last year, her electoral base has weakened considerably – a trend that has been reinforced by domestic economic failures. 
Merkel has to cope with the legacy of Schröder’s controversial labor-market and welfare reforms, which, among other things, made it easier to fire workers and, by reducing unemployment benefits, forced many unemployed people to take insecure jobs with few benefits. 
The reforms helped to reduce the jobless rate, but at the cost of stagnant inflation-adjusted wages and widespread personal financial stress. 
To be sure, rising inequality, wage stagnation, and working-class frustration are evident across the developed world. 
Merkel, like her counterparts elsewhere, did little to address the problems. 
This is not because Merkel lacked vision: in April 2010, she described a Germany powered by improved education and innovation. 
Only a society that advanced technologically, she concluded, could provide decent opportunities for all. 
But, unwilling to challenge the domestic political consensus on fiscal austerity, Merkel refused to invest in Germany’s future, say, by repairing decaying infrastructure and upgrading educational opportunities. 
Instead, she made flailing efforts to protect the increasingly obsolete diesel technology base of Germany’s car producers. 
Such delays in reinvigorating the country’s auto industry could drag down the entire economy. 
Merkel’s failure to reverse social fragmentation led to rising support for the AfD. 
In the 2017 election, AfD voters tended to be men between the ages of 30 and 59 with only secondary education or vocational training, working blue-collar jobs – often with little job security – in small cities and rural areas. 
Many such voters once supported the CDU and CSU, but were attracted by the AfD’s nationalist, xenophobic platform. 
The CDU has been weakened, and Merkel’s hold over her own party has eroded. 
It is time for her to step down. 
Merkel held the ship steady, but the storms continued to rage. 
Amid continuing widespread popular frustration and political turmoil, future chancellors could easily be swept away. 

Escaping the Bear Hug 
PRAGUE – Three former Soviet republics – Georgia, Moldova, and Ukraine – have now signed association agreements with the European Union, despite Russia’s sometimes brutal attempts to obstruct the process. 
This is certainly a promising development for these countries, all of which have struggled to achieve stability since the Soviet Union’s dissolution. 
But it would be naive to think that Russia will give up so easily. 
As Ukraine’s ongoing crisis has demonstrated yet again, former Soviet republics that attempt to make geopolitical decisions without the Kremlin’s assent do not remain intact for long. 
In Georgia, the breakaway regions of Abkhazia and South Ossetia have had de facto independence since receiving Russian recognition in 2008. 
Today, the prospect of their return seems more distant than ever. 
For its part, Moldova has been struggling for two decades to assert control over the breakaway Transnistria region. 
Moreover, in February, the tiny autonomous region of Gagauzia, with its indigenous Turkic population, announced through a Russia-backed referendum that it has the right to secede if Moldova “loses its statehood.” 
The danger now is that pro-secession leaders may twist the loss of sovereignty supposedly inherent in association with the EU into precisely such a claim. 
Beyond discouraging former Soviet republics from pursuing deeper ties with the EU, Russia has created a sort of “EU” of its own: the Eurasian Economic Union. 
In May, the leaders of Russia, Belarus, and Kazakhstan established the EaEU by signing a treaty that will enter into effect next year, assuming that all three countries’ parliaments ratify it. 
Russian President Vladimir Putin has insisted that the EaEU is not intended to function as a “resurrected” Soviet Union, but that any former Soviet republic is free to join. 
And some are eager to do so. 
According to a recent poll, some 80% of Kazakhs support Putin, and about 70% back Kazakhstan’s EaEU membership. 
Though some countries have persevered in the face of Russia’s threats to bring separatist, ethnic, or other problems to their doorstep should they choose integration with the EU, others have responded to the pressure. 
In September, Armenia, which has been locked in a conflict with neighboring Azerbaijan over the breakaway region of Nagorno-Karabakh for more than two decades, suddenly halted its integration talks with the EU and announced its intention to join Russia-led structures. 
Kyrgyzstan, one of the poorest post-Soviet countries in Central Asia, has no obvious separatism-related problems, though it struggles with ethnic tensions in its south, where clashes between local Uzbeks and Kyrgyz in 2010 left more than 400 people dead. 
This month, the country closed the United States’ military transit center near Bishkek, and declared its intention to join the customs union that preceded the EaEU by the end of this year. 
The Kremlin is using other mechanisms to exert additional pressure on former Soviet republics. 
Russia’s foreign ministry has just announced that, as of January 1, citizens of post-Soviet countries that are not members of the customs union and the EaEU will no longer be allowed to enter Russia without passports. 
This will likely soon be followed by visa requirements for these countries’ citizens, which for some would pose a major challenge. 
For example, the remittances that the estimated 1.5 million Tajiks who live and work in Russia send to their families back home are critical to Tajikistan’s economy. 
Likewise, in April, Putin signed legislation simplifying the procedure for Russian speakers in former Soviet republics to obtain Russian citizenship. 
The law, enacted just a month after Russia’s annexation of Crimea, was undoubtedly intended to provide a legal basis for expediting the citizenship-application process for residents of Crimea and the rest of eastern Ukraine. 
But it may enable millions of other Russian-speaking citizens of EaEU member countries to become Russian citizens, and it could be used to apply pressure on countries like Estonia and Latvia, which have large Russophone populations. 
But the EaEU’s development is not proceeding entirely according to Putin’s plan. 
At a recent Eurasian Economic Commission session in Sochi, Belarus and Kazakhstan rejected the Kremlin’s proposal to introduce customs duties for goods imported from Ukraine if the country signed the EU association agreement. 
The Belarusian government considers it to be Ukraine’s sovereign right to sign agreements with the EU – a flat contradiction of Russia’s stance – and appears likely to introduce customs fees of its own for electronic goods imported from Russia. 
As it stands, the EaEU seems to have two major goals: to obstruct the integration of former Soviet republics into the West, and to help secure Putin’s power. 
Economic advancement does not appear to be on the agenda. 
Unless it somehow manages to deliver tangible economic benefits anyway, the EaEU seems destined to become another failed institutional initiative, like the Commonwealth of Independent States, the Russian-Belarusian Union State, or the Central Asian Union. 
It may even accelerate Russia’s internal decay. 

The Mexican Paradox 
CAMBRIDGE – Few economies pose as big a paradox as Mexico’s. 
Emerging from a series of macroeconomic crises in the mid-1990s, Mexico undertook bold reforms that should have put it on track for rapid economic growth. 
It embraced macroeconomic prudence, liberalized its economic policies, signed the North American Free Trade Agreement (NAFTA), invested in education, and implemented innovative policies to combat poverty. 
In many respects, these reforms paid off. Macroeconomic stability was achieved, domestic investment rose by two percentage points of GDP, and average educational attainment increased by nearly three years. 
Perhaps the most visible gains were on the external front. 
Exports jumped from 5% to 30% of GDP, and the GDP share of inward foreign direct investment tripled. 
But where it counts – in overall productivity and economic growth – the story is one of substantial disappointment. 
Since 1996, per capita economic growth has averaged well below 1.5%, and total factor productivity has stagnated or declined. 
If ever there was a country that was destined to be the poster child of the new orthodoxy in economic development, it was Mexico. 
Instead, the country fell behind even its Latin American peers. 
Why? 
A large part of the answer has to do with the Mexican economy’s extreme dualism – a problem that has been called the “two Mexicos.” 
The bulk of Mexican workers remain employed in “informal” firms – especially firms in which employees are not on salaried contracts – where productivity is a fraction of the level in large, modern firms that are integrated into the world economy. 
What is striking is that this dualism has worsened during the period of Mexico’s liberalizing reforms. 
Research by one of us (Levy) shows that informal firms have absorbed a growing share of the economy’s resources. 
The cumulative growth of employment between 1998 and 2013 in the informal sector was a whopping 115%, compared to 6% in the formal economy. 
For capital, cumulative growth was 134% for the informal sector and 9% for the formal sector. 
Mexico does not seem to lack economic dynamism. 
A considerable number of new firms are the main source of employment growth. 
But this churn does not seem to be of the kind that increases overall productivity. 
Evidence shows that many low-productivity firms survive, while high-productivity firms die. 
Productive heterogeneity, and the misallocation that goes with it, has been increasing in commerce, services, and manufacturing alike. 
As a result, the economy’s overall productivity has been stagnant or declining. 
It is not entirely clear why structural change has, perversely, reduced growth. 
One possible explanation is Mexico’s parallel system of social insurance. 
Firms and workers in the formal sector must pay for health insurance, pensions, and other employee benefits. 
But, because workers undervalue these benefits, the result is pure tax on formal employment. 
By contrast, when firms and workers are informal, workers receive a similar bundle of health and pension benefits for free. 
The result is that formal employment is unwittingly penalized, whereas informal employment is subsidized. 
Another possibility, which can accompany the first one, is that Mexico’s rapid opening to imports has bifurcated its economy between a relatively small number of technologically advanced, globally competitive winners, and a growing segment of firms, particularly in services and retail trade, that serve as the residual source of employment. 
In the absence of productive development policies of the type used in East Asia, modern firms may have not been able to expand rapidly enough. 
The beneficiaries of globalization are typically those countries that complemented it with a strategy to promote new activities, policies that favored the real economy over finance, and sequential reforms that emphasized high-productivity employment. 
Whichever of these stories is correct, it seems clear that Mexico’s growth problem is not the result of macroeconomic instability, the absence of foreign competition, or lack of human capital. 
In fact, returns to education have been falling partly because the supply of skilled workers has outpaced demand, as most informal firms do not require them. 
In the end, the effects of efficiency-minded reforms have been offset by factors – social insurance policies and market imperfections – that systematically channel too many resources to informal firms and create obstacles to formal firms. 
Given the inflammatory rhetoric of US President Donald Trump, discussion in Mexico is understandably revolving around the renegotiation of NAFTA. 
But if policymakers are to avoid missing the mark, after that process is completed, they must turn their attention to the structural factors that are depressing Mexico’s growth. 
There are two broad lessons here for other developing countries. 
First, for too long, these economies have been obsessed with opening to international trade, attracting foreign direct investment, liberalizing prices, and achieving macroeconomic stabilization. 
These reforms work, typically in conjunction with others, when they promote productivity-enhancing structural transformation. 
When they do not, or when other policies perversely counter them, the results will be disappointing. 
The second lesson is that countries need to pay close attention to how social insurance policies affect the behavior of firms and workers. 
Good intentions aside, the result may be that the low productivity segment of the economy is subsidized, while the high productivity segment is taxed. 
Mexico has shown that successful growth strategies cannot be built on ready-made blueprints. 
Rather, they require targeted, country-specific reforms that remove actual obstacles to the expansion of modern sectors, and social policies that are compatible with structural transformation. 


Saving Emerging Markets From Trump 
MEXICO CITY – It is easy to sympathize with Mexico now that US President Donald Trump has turned that country into a political piñata. 
If Trump gets his way, Mexico’s northern border will feature a “big, beautiful wall,” and the North American Free Trade Agreement, which is crucial to Mexico’s economy, will be renegotiated to satisfy an “America first” agenda. 
And if that were not enough, Mexican capital and currency markets will bear the brunt of the pain from unstable US monetary and fiscal policy. 
But Mexico is not alone, and its experience is relevant for all emerging economies, because Trump has called into question the entire framework of global trade and openness. 
In fact, judging by Trump’s performance at the recent G7 summit in Sicily, we can expect to see him continue his attack on globalization at the G20 summit in Hamburg this week. 
Few countries have embraced globalization more wholeheartedly than Mexico, which is now one of the most open economies in the world. 
Emerging economies in general have pursued export-led growth strategies similar to that of the Asian Tigers (Hong Kong, Singapore, South Korea, and Taiwan). 
But Mexico has gone further, by embracing manufacturing as a way to diversify its economy away from oil extraction. 
Unfortunately, Mexico and many other emerging economies began adopting these policies just as China’s great opening-up was accelerating. 
Mexico’s traditionally strong industries, such as textiles, could not compete and were essentially wiped out; and incipient industries that had once shown great promise, such as consumer electronics, were crushed. 
The China shock did eventually recede, but Mexico never fully regained its competitiveness. 
If there is one exception, it is the automobile industry, which is heavily dependent on open borders with the US. 
All told, trade with the US accounts for more than 80% of Mexican exports and 25% of its GDP, up from 10% before NAFTA. 
Accordingly, weak US growth in the wake of the 2008 financial crisis has hurt Mexican industry, and falling oil prices have amplified that pain. 
In recent years, Mexico’s growth rate has been far below potential. 
Although labor productivity significantly increased under NAFTA, total factor productivity – a better measure of long-term competitiveness – has been constant, and sometimes negative, for 25 years. 
According to Santiago Levy of the Inter-American Development Bank, the range of productivity among Mexican firms has widened dramatically during the NAFTA years. 
While the number of high-productivity firms has increased, the number of low-productivity firms has increased more. 
Worse, Levy finds that surviving firms do not create more jobs, while new firms that do create jobs are often less efficient than those they are replacing. 
For Levy, informality and illegality are at the root of this phenomenon in Mexico, and may also help to explain what has happened in other emerging economies struggling to move from middle- to high-income status. 
In a 2012 working paper, Levy draws a crucial distinction between formal and informal firms, and their respective productivity. 
Based on census data, he finds that in Mexico, “the majority of firms are informal but legal,” and concludes that surviving firms have adapted by converting salaried jobs that are covered by government employment insurance into non-salaried work. 
By “informalizing,” incumbents can outcompete new entrants, who then exit the market, having wasted significant resources. 
Levy’s apt name for this process is “destructive creation,” as opposed to “creative destruction,” which is a key driver of productivity, particularly as economies move closer to the technology frontier. 
To its credit, Mexico, like many other emerging economies, has undertaken significant reform. 
Talented Mexican technocrats, most of them trained in the US, have made substantial improvements to the country’s macroeconomic framework, and helped it weather recent storms. 
Although Trump’s attacks pushed the peso down by as much as 50%, inflation has increased by only a few percentage points since his election. 
The problem, as Levy shows, is that Mexico’s competitiveness-enhancing reforms have not gotten to the root of the productivity problem. 
Although Mexico exports more than all other Latin American countries combined, its export sectors’ efficiency gains have been offset by policies that systematically funnel resources toward low-productivity firms with non-salaried workers. 
These policies can be found across emerging economies. 
But in Mexico, they are deeply rooted in the country’s laws and institutions, and social subsidies and micro-lending schemes have reinforced them. 
It is understandable that the Mexican government would want to protect non-salaried workers, but it seems to have done so at the expense of productivity growth. 
Imperfect institutions and weak state capacity are common features in most emerging economies, but their effects are reflected in different ways. 
Mexico, for example, has a large illicit narcotics industry that is fueled by US demand. 
The Mexican drug trade fuels corruption and loss of life on a scale that, today, is second only to the conflict in Syria. 
It is increasingly clear that the war on drugs cannot succeed. 
Worse, it undermines the functioning of government, most recently that led by President Enrique Peña Nieto. 
What Mexico needs now is not sympathy, but predictable US policies. 
If all parties come to the table in good faith, NAFTA actually can be renegotiated to serve everyone better. 
A border wall, however, is not in anyone’s interest. 
More people move from the US to Mexico than the other way around; if anything, the US needs more newcomers to help make up for labor shortages, particularly in the care sector. 
And commonsense US drug policies would probably do more than anything else to help Mexico develop. 
Still, it is ultimately up to Mexico to confront its productivity and inclusive-growth challenges. 
Mexico is now among the most unequal emerging economies in the world. 
In China, by contrast, income inequality is decreasing, thanks to rising wages and the provision of improved health insurance and other services to workers. 
If Peña Nieto’s government cannot deliver more growth for more of Mexico’s people, the country Trump loves to malign might end up with a Trump of its own – and a leftist one at that. 

Mexico’s Powerful Energy Reforms 
MEXICO CITY – Mexico is poised to become Latin America’s economic star in the coming decade. 
The government’s recent reform of the energy sector will contribute directly to economic performance by reducing the cost of manufacturing. 
In the context of the North American Free Trade Agreement (NAFTA), the resulting increase in manufacturing competitiveness promises to boost Mexico’s growth substantially. 
Until the government adopted the necessary constitutional amendment and enacted the associated enabling legislation, Mexico’s energy sector was entirely state-owned. 
The sector’s most important component, Pemex, owned all of Mexico’s oil and gas reserves, and was exclusively responsible for exploration, production, and retail distribution. 
Electricity production and distribution, too, was entirely in the hands of the government. 
Pemex’s limited technical know-how meant that it could not fully develop and exploit Mexico’s vast oil and gas resources. 
There are substantial oil reserves that require deep-water drilling technology that the company lacks. 
There are also old wells that have stopped producing but that could be made productive again with modern technologies. 
And there are potential gas and oil fields that can be tapped only with the new technologies of fracking and horizontal drilling. 
Until the reform, energy reserves had long been regarded as a national patrimony that could be developed only by Pemex. 
Because the constitution prohibited any direct or indirect foreign ownership, there was no way to provide incentives for foreign firms to share their technology. 
But that foreign technology offered such important potential gains that President Enrique Peña Nieto was able to marshal a majority in the Mexican congress to amend the constitution and pass legislation that will bring foreign energy firms to the country. 
Opening the energy sector completes the agenda of economic integration that began when NAFTA was approved in 1994. 
That agreement transformed Mexico from a very closed economy with few manufacturing exports into an economy that is now closely linked with the United States. 
The expansion of Mexican oil and gas production will consolidate those links and contribute to North American energy independence. 
Mexico’s manufactured exports have increased tenfold since NAFTA began, with roughly 80% now going to the US. 
Many multinational US companies have located plants in Mexico as part of their overall production process, which is closely tied to inputs sourced domestically. 
Indeed, manufacturing relations between the US and Mexico are such that some 40% of the value added in Mexican exports to the US is actually of US origin. 
The new energy reforms will also allow Mexico to benefit from lower-cost gas from Canada. 
The price of gas in the US and Canada is only about half the current price in Mexico (and less than half the price in Europe and Asia). 
Mexican access to cheaper gas will boost Mexican petrochemical industries and lower energy costs for manufacturing. 
Experts estimate that the cost of electricity to Mexican manufacturers could fall by as much as 20%. 
Privatizing Pemex and the national electric company will also allow trained, professional managers to replace state bureaucrats and bring an end to trade unions’ current major role in the management process. 
Furthermore, privatization will remove the constraints on investment that the government budget has imposed on Pemex and the electric company. 
Even before the energy-sector reforms, Mexico had been pursuing sound macroeconomic policies for a considerable period of time. 
As a result, the country has benefited from low inflation, small fiscal deficits, and manageable current-account deficits. 
And, though Mexico operates a free-floating exchange-rate regime, the peso’s value against the dollar has been stable. 
None of this is to deny that Mexico still must confront other significant problems. 
For example, primary and secondary education needs improvements that the teachers’ unions are blocking, and criminal activity, much of it drug-related, makes personal security a serious concern throughout the country. 
But, despite such problems, the energy and electricity reforms, and the deeper links with the US and Canada that they imply, promises to accelerate Mexico’s growth rate, boost employment and income, and thus raise Mexicans’ standard of living. 

Facing the Fourth Industrial Revolution 
MEXICO CITY – The current era of innovation, in which cutting-edge technologies are disrupting entire economic sectors at a breathtaking rate, has been called the Fourth Industrial Revolution. 
It is also the theme of the World Economic Forum’s annual meeting this week in Davos, Switzerland – and rightly so. 
In the coming years, the scope and pace of innovation will transform how we produce, distribute, and consume. 
To maximize the benefits, we must take steps now to prepare our economies and societies, with a focus on three key areas: education, the business environment, and connectivity. 
Human capital is vital to an economy’s success, and Mexico is no exception. 
That is why my government is focusing so heavily on improving education at all levels. 
For example, we recently launched “Education Infrastructure Notes,” private investment vehicles that will allow us to channel roughly $3 billion to improve elementary-school facilities within the next three years. 
In addition, during the current school year, we have delivered tablet computers to almost half of Mexico’s 2.3 million fifth-graders. 
We are also working to ensure that current and future generations gain the skills they will need to thrive in an evolving labor market. 
Last year, more than 110,000 students in Mexico earned degrees in areas such as engineering, manufacturing, and construction – a higher figure than in some of the most developed countries, including France, Germany, and the United Kingdom. 
To reinforce this progress, we are also increasing public investment in science and technology at universities and public research centers throughout the country. 
In the last three years alone, the number of scholars in our National Researchers System has increased by 26%, and we have almost doubled public expenditure on research, development, and innovation. 
Recognizing the vital importance of the linkages among government, industry, and academia, we have also increased the number of technology-transfer offices to support the development of new products and businesses in areas such as biotechnology, energy, and information technologies. 
At the same time, we are working tirelessly to improve the business and investment environment. 
For starters, we have made major strides toward macroeconomic stability. 
Our central bank has established an independent monetary policy that ensures price stability and low inflation; in fact, in November, the annual inflation rate, at 2.21%, was the lowest in Mexico’s history. 
And our debt remains low and diversified. 
The debt-to-GDP ratio for 2015 is expected to stand at 46.9% – well below the Latin American average of 55.6% – and should stabilize at 47.8% in the coming year. 
We have also pursued energy reform, which has lowered electricity costs, eliminated monthly increases in gasoline prices, and expanded gas pipelines throughout the country, thereby boosting competitiveness. 
For the first time in decades, all energy-sector activities are open to private capital – a strategy that will attract an estimated $12.6 billion in investment every year. 
Similarly, enabling foreign investment in the telecommunications sector has lowered prices for landline and cellular services, while improving quality and coverage. 
Given that micro, small, and medium-size enterprises are the main drivers of Mexico’s economy, we are using digital tools to make it quicker and easier for entrepreneurs to start their own businesses, while facilitating their access to commercial bank funding. 
Our Young Credit Program gives entrepreneurs a loan of up to $9,000; for those seeking to consolidate an ongoing business, the total may be as much as $150,000. 
The third key step to prepare our economy for the Fourth Industrial Revolution is connectivity. 
Mexico is one of the few countries that formally recognize the right of its people to a broadband Internet connection. 
So far, we have established 65,000 public places, such as schools, libraries, and squares, with broadband connections. 
This will help us to reach our goal of providing high-speed Internet service to 70% of households and 85% of micro, small, and medium-size businesses. 
But connectivity is not only digital; physical infrastructure is also vital. 
Already, Mexico is a manufacturing powerhouse and one of the world’s top sellers of goods like television sets, vehicles, auto parts, computers, and mobile phones. 
Improved infrastructure would enable us to boost the value and variety of our export-oriented industries. 
That is why we are channeling more than $460 billion toward building and modernizing thousands of kilometers of roads and highways, as well as expanding and improving our mass transit and railway systems. 
Other large-scale infrastructure projects include a new international airport in Mexico City and seaport development that will almost double existing capacity on the Pacific Ocean and the Gulf of Mexico. 
In the long run, we will make Mexico a world-class logistics platform. 
Finally, Mexico is committed to continue boosting foreign trade, a powerful growth engine. 
Over the last three years, we have expanded our network of free-trade agreements to include the Pacific Alliance and, more recently, the Trans-Pacific Partnership. 
That will make a total of 13 free-trade agreements, providing preferential access to 52 countries with 1.3 billion potential consumers. 
Our government has already made critical decisions to prepare Mexico’s economy for what lies ahead – and is backing them up with concrete action. 
We must build on this progress to address outstanding challenges, including rising demand for a wide range of specialized knowledge professionals and an urgent need to improve connectivity, especially in remote rural areas (where 9% of Mexico’s population lives). 
We must give our citizens and businesses the tools they need to take advantage of the opportunities that the Fourth Industrial Revolution creates, and ensure that future generations, too, can reach their full potential in a rapidly changing world. 

Mexico is Burning 
MEXICO CITY – The last time Mexico experienced a political crisis more serious than the one it is undergoing today was in 1994, when a group of so-called Zapatista guerrillas staged a semi-armed uprising in the southern state of Chiapas. 
The president’s handpicked successor was assassinated, and, as if that was not enough, the value of the peso had plummeted by nearly 70%. 
Today’s crisis is not quite as bad, but it is getting close. 
In December 2012, President Enrique Peña Nieto took office under inauspicious circumstances. 
He was elected with just 38% of the vote, without a majority in either house of Congress, and with the opposition in control of Mexico City, the capital. 
The presidential runner-up, opposition leader Andrés Manuel López Obrador, questioned the results of the election. 
Peña Nieto faced serious challenges. 
His Institutional Revolutionary Party (PRI) had governed Mexico for 70 years, until it was swept out of power in 2000. 
A large majority of Mexican voters continued to suspect it of corruption, authoritarianism, and economic incompetence. 
Peña Nieto’s predecessor, Felipe Calderón, had bequeathed him a war on drugs that had already caused more than 60,000 deaths; at least another 22,000 Mexicans were missing. 
At first, it looked like Peña Nieto would be able to turn things around. 
He cut a deal with both opposition parties – the center-right National Action Party (PAN) and the center-left Party of the Democratic Revolution (PRD) – and proceeded to win significant legislative changes. 
He was hailed as a world-class reformer. 
The country was living the “Mexican Moment,” as his handlers labeled it, and appeared to be on the verge of fulfilling, at long last, its great promise. 
Two years on, success seems to be slipping through Peña Nieto’s hands. 
The country and its increasingly grey-haired president are experiencing one tragedy, scandal, or disappointment after another. 
The price of oil, from which the government obtains one-third of its revenue, has plunged 40% in six months. 
With last year’s economic growth expected to be 2%, following just 1.1% growth in 2013, Mexico will barely have grown faster during the first third of Peña Nieto’s six-year term than it did during the last quarter-century. 
Meanwhile, a pact Peña Nieto made with his predecessor is returning to haunt him. 
In exchange for support in the Senate for energy-sector reform, he gave Calderón and his aides a tacit blanket pardon for any conceivable misdeeds committed by Calderón’s presidential administration. 
This hurts Peña Nieto’s image in exactly the areas in which Mexicans most mistrust their leaders: violence and graft. 
The massacre of 22 civilians by the army last June in Tlatlaya, a small town west of Mexico City, and the disappearance and subsequent murder and incineration of 43 students, also close to the capital, was not a new type of development in Mexico. 
Extrajudicial executions and disappearances were common under Calderón. 
But this time something snapped. 
Protests erupted across Mexico. 
The government mishandled both episodes, believing that they would blow over. 
Peña Nieto has yet to visit Iguala, the town where the students were abducted and murdered. 
He waited a month after they disappeared before meeting with their parents, and spent a week in China and Australia in the middle of the crisis. 
Meanwhile, charges of corruption have been piling up. 
Just hours after Peña Nieto canceled a contract with a Chinese railroad company to build a fast train north of Mexico City, it was revealed that his wife had acquired an ostentatious home – thanks to a mortgage extended to her by the Mexican partner of the Chinese railway firm. 
The conflict of interest was so brazen, even by Mexican standards, that the first lady – a popular former telenovela actress – quickly announced that she would sell the mansion. 
Then, in early December, the Wall Street Journal revealed that Peña Nieto’s finance minister, Luis Videgaray, had also purchased a home in late 2012, just before taking office, from the same contractor, with a similar mortgage. 
On the second anniversary of Peña Nieto’s inauguration, his approval rating had dwindled to 39%, with 58% of the public disapproving of his performance. 
Peña Nieto has tried to soldier through the crisis by promising reforms aimed at improving security and strengthening the rule of law. 
The trouble with this strategy is what no Mexican president has been willing to acknowledge: the country has never experienced the rule of law. 
Before the advent of democracy in 2000, order was imposed by the iron hand of a corrupt, authoritarian state. 
When its grip was loosened, any semblance of law and order disappeared. 
Unless and until this is recognized, reforms in this area will lack credibility for Mexicans and foreign investors alike, and thus are unlikely to be effective. 
Unfortunately, Peña Nieto, whose party ruled Mexico in the bad old days, is unlikely to be the president who breaks the mold. 
Mexico was once accustomed to crises (even if it hasn’t had one for 20 years); but they typically erupted at the end of a presidential term. 
Peña Nieto has four more years in office, and he is constrained by the political elite that brought him to power from implementing the drastic measures – a cabinet reshuffle, criminal accountability for corruption and human-rights violations, and radical judicial reforms – that Mexico needs. 
But the alternative could be worse: a populist backlash that destroys much of what Mexico has achieved over the last two decades. 

Mexico Gets Its Own Trump 
MEXICO CITY – US President Donald Trump has been the world’s worst headache for the past 18 months, and arguably no country has suffered more than Mexico. 
Of the three main contenders in Mexico’s just-completed presidential election, none was as ill-prepared as the winner, Andrés Manuel López Obrador – AMLO, as he is known – to manage the bully in the White House. 
Nonetheless, the Mexican people have chosen him, and he will have to deal with Trump for much (if not all) of his six years in office. 
Mexico’s relations with the United States were not a central campaign topic, nor will they figure among AMLO’s priorities. 
But they will surely affect Mexicans more than most other issues. 
There are similarities between AMLO and Trump. 
Both appear to be sincere economic nationalists: Trump hopes to make the US self-sufficient in aluminum and steel, while AMLO seeks the same for Mexico in corn, wheat, beef, pork, and lumber. 
Both disapprove of trade treaties, although they temper their aversion with pragmatic selectivity: Trump left the Trans-Pacific Partnership, but not the North American Free Trade Agreement (for now), while AMLO says he will continue to re-negotiate NAFTA with the US and Canada along the lines pursued by the current president, Enrique Peña Nieto. 
Each man profoundly dislikes the other’s country and panders to their nationalist supporters, who occasionally take their deep-rooted passions to extremes. 
But both know that they must negotiate, accommodate, and conciliate on-the-ground realities. 
Despite these resemblances – or precisely because of them – Trump and AMLO are almost certain to plunge US-Mexican relations to new depths of suspicion and strain, as objective factors and subjective fervors aggravate old tensions and fuel new ones. 
Trade, immigration, drugs, security, and regional issues will continue to dominate the bilateral agenda, and on all these fronts, AMLO will face the most adversarial US president in nearly a century. 
On trade and tariffs, while AMLO’s specific stances are unknown, many of his economic proposals contradict the letter or the spirit of NAFTA. 
Establishing floor prices for many agricultural products, and ensuring that Mexico produces what it consumes, runs counter to many NAFTA provisions – and to Trump’s goal of reducing the bilateral US trade deficit. 
AMLO, who will take office only on December 1, has pledged to uphold the treaty and continue talks to revise it. 
Even in the best case, however, the changing of the guard will delay any final agreement and ratification by the three countries. 
In the meantime, Trump’s constant threats to withdraw from NAFTA or impose new tariffs – for example, on Mexican automobile exports to the US – will inevitably irritate Mexico’s new leaders. 
Immigration will probably be an even touchier subject. 
Trump’s insistence on building a wall along the entire border, the rising number of Mexicans deported from the US heartland, Central American migrants crossing Mexico, separate detention of immigrant children, and Trump’s diplomatic and rhetorical pressure on all these fronts will not make things easier. 
Peña Nieto’s kowtowing to the US on most of these matters, ever since he invited then-candidate Trump to Mexico City at the height of the presidential campaign, will logically lead AMLO to distinguish himself as much as possible by standing up to Trump as often as he can, if only symbolically. 
Peña Nieto warned that he would use immigration and security as bargaining chips in pursuit of a holistic approach to all issues on the bilateral agenda. 
He never did. 
Once AMLO moves beyond his simplistic views and understands the complexity of the issues involved, he will be tempted to do what Peña Nieto dared not. 
Mexico can use a number of tools on immigration, such as loosening controls on its southern border with Guatemala or refusing admission to deportees from the US unless American authorities can corroborate their Mexican nationality. 
With midterm elections coming in November, and the 2020 presidential campaign just around the corner, Trump will find it difficult to desist from stoking his supporters’ nativist animus. 
The war on drugs is at a similar crossroad. 
The opioid crisis in the US shows no sign of abating, and a significant share of the heroin and fentanyl it consumes comes from Mexico, directly or in transit. 
Conversely, a growing number of US states are legalizing medical and/or recreational marijuana; 
Canada has done the same. 
While AMLO is highly conservative on these matters and opposes any kind of legalization, he will find it difficult to maintain previous levels of cooperation with the US on drug enforcement. 
The public’s animosity toward Trump and resentment of the covert, intrusive, and probably illegal nature of the collaboration instituted by his two predecessors will not easily allow it. 
AMLO has insinuated that he believes in some sort of amnesty for small-time marijuana and poppy growers, though not for kingpins. 
But the line between them is not always clear. 
The peasants in Guerrero cultivate amapola for the cartels, not for their own livelihood. 
And the US Drug Enforcement Administration will not look kindly on any backtracking from previous Mexican presidents’ commitments to continue waging a costly, bloody, and futile war of choice on drugs in Mexico. 
There are other issues on the US-Mexican agenda, of course, ranging from intelligence sharing and counter-terrorism to regional crises such as Venezuela, Nicaragua, and possibly Cuba. 
AMLO will almost certainly maintain Mexican cooperation on the first set of issues, while retreating to Mexico’s traditional and archaic anti-interventionist stance on regional diplomacy. 
But Trump cares more about security than he does about Venezuelan President Nicolás Maduro or Nicaragua’s Daniel Ortega, so a real rupture here may be avoided. 
The hunger for change in Mexico, and the outgoing administration’s incompetence and loss of credibility, probably made AMLO’s victory inevitable. 
Now Mexicans will have to face the consequences of their choice, just as their country – more than most – must face the consequences of the choice the US made in 2016. 

Mexico Breaking Good? 
MEXICO CITY – For a glimpse of the average American’s understanding of the relationship between the United States and Mexico, one only has to watch the critically acclaimed television series Breaking Bad. 
Set in Albuquerque, New Mexico, a few hundred miles from the border, the series chronicles the rise and fall of Walter White, a high school chemistry teacher who becomes a methamphetamine tycoon. 
Most of the characters on the US side of the border are portrayed with sympathy and depth. 
The main protagonist’s step-by-step descent into the drug underworld unfolds with such subtlety that each individual decision he makes along the way seems almost reasonable. 
Unfortunately, the other side of the border receives more superficial treatment. 
In one scene, two Mexican hit men ruthlessly slaughter a dozen innocent compatriots who could bear witness to their border crossing. 
In another episode, members of the Mexican Federal Police are seen assaulting a drug lord in his hacienda, with the implication that they are only doing the bidding of a rival dealer. 
“Breaking Bad” is brilliant television, but it is regrettable that so many Americans see only this side of things. 
Mexico has profound security problems in some regions, but it is also a country that just might be on the threshold of a huge political and economic transformation. 
Indeed, for a couple of years now, Mexico’s GDP growth rates have been near the top of the OECD, and recently above Brazil’s. 
Rather than continue fighting (as in the US) after a heated presidential election, Mexico’s major political parties appear poised to cooperate on a number of critical structural reforms that could energize economic growth for decades to come. 
The agenda includes an expansion of the tax base to reduce dependency on oil, an initiative to increase competition in media and telecommunications, and a constitutional change that will permit the state-owned oil company Pemex to enter into joint ventures with foreign firms. 
This last reform is critical, because much of Mexico’s geology is very similar to that of the southwestern US. 
In principle, Mexico’s economy should be benefiting from the same shale-gas revolution that is providing a huge boost to the US, where natural-gas prices are now less than one-quarter of what Europeans pay. 
Mexico is already enjoying a manufacturing boom that has increased its exports to the US, following a long secular decline. 
With China’s wages soaring and rising oil prices driving up shipping costs, production in Mexico is suddenly looking much more attractive, even taking security concerns into account. 
Of course, any number of things can go wrong. 
First and foremost, the political elite might suddenly back away from essential structural reforms, and the Mexican business community’s current optimism could collapse. 
It wouldn’t be the first time. 
There is also a risk that foreign investors, who already are starting to like Mexico, might come to love it a little too much. 
A huge influx of capital could lead to a significant appreciation of the peso’s exchange rate, causing an increase in Mexico’s currently very attractive labor costs. 
Or the US could slip into recession (though modest growth is certainly the central scenario nowadays). 
Then there is the matter of security, which constitutes a huge tax on business in many parts of Mexico. 
For example, one important achievement of former President Felipe Calderón’s administration was to push through a 140-mile highway connecting the interior city of Durango and the Pacific port at Mazatlán. 
Traversing extremely rough terrain with 200 tunnels and bridges, it promises to cut the transit time by three or four hours. 
Except for the weather, the highway has the feel of Switzerland. 
But the new road has raised concerns, particularly in the US, that it could serve as a smuggling route for drugs and weapons, so the military feels obliged to set up checkpoints. 
Unfortunately, early anecdotal evidence suggests that these safeguards may ultimately slow down traffic by roughly the same amount of time that the project was meant to speed it up! 
Mexican leaders acknowledge the country’s internal problems, but place three of them at America’s doorstep. 
First and foremost, the US generates the huge demand for illicit drugs that sustains the entire Latin American mafia, just as the US experiment with alcohol prohibition in the 1920’s fueled the rise of gangsters like Al Capone. 
No one knows precisely the Mexican drug cartels’ annual profits, but they certainly amount to billions of dollars. 
Second, the US, with its incredibly lax restrictions on gun purchases, serves as a veritable arms depot for rich Mexican drug lords. 
True, they could arguably acquire similar weapons elsewhere, but not necessarily as cheaply and conveniently. 
Finally, the US could do more to curtail money laundering. 
One simple step would be to restrict the circulation of $100 bills, which are mostly used in the underground economy. 
Many of the problems that characterize the complex US-Mexican relationship will be ameliorated if Mexico can sustain rapid economic growth. 
Net immigration to the US, which has already tapered off, might reverse. 
The US stands to benefit as much as Mexico if conditions south of the border begin breaking good. 

Mexico's Labyrinth of Uncertainty 
What makes countries grow is perhaps the most fascinating issue in economics, and one of tremendous political-indeed, geopolitical-importance as well. 
In pondering this question, the case of Mexico-neither an economic tiger like China or Singapore nor a sluggard like many African and Carribean countries-may be especially instructive. 
On a recent trip to Mexico I spoke to many Mexicans about the state of their economy and about their hopes for the future. 
I asked about their long-term expectations, and about their thoughts concerning Mexico's economic prospects in the decades ahead. 
What I heard suggested that the dominant feeling for most Mexicans is one of a great uncertainty about their future-perhaps the very uncertainty at the root of our imperfect knowledge about growth in general. 
Mexicans seem to believe that they could be living at close to US living standards in another few decades. 
But they find it equally likely that their living standards might drop even lower than they are today. 
This mixture of optimism and fear applies to everyone, Mexican businesses and Mexican families alike. 
People do have strong reasons to be optimistic. 
The 1994 North American Free Trade Agreement (NAFTA) between Mexico, the US, and Canada helped Mexico's economy recover quickly from the 1994-95 peso crisis. 
Indeed, NAFTA membership has proven to be so popular that Mexico's government has forged many other free trade agreements, including one with the EU in 2000. 
So Mexico's current economic slowdown appears to reflect nothing more than weak global conditions. 
In fact, the economy has shown signs of recovery recently. 
If these are sustained, Mexico should soon find itself on a solid upward path. 
Once again, Mexicans can thank NAFTA for the quick recovery. 
True, NAFTA is only an economic-not a political - union, and no symbolic gesture like the creation of a common currency is contemplated. 
But the obvious advantages of economic integration with the prosperous US are no less important to Mexico's economic stability and development than accession to the EU is for countries like Poland, Latvia, or Slovakia. 
Indeed, the most important benefit of NAFTA for Mexico is that it represents a long-term commitment among the three member countries to work together. 
With over 20 million Mexicans in the US already, and with Hispanic voters so potent a political force that President Bush makes a show of speaking Spanish, that commitment appears genuine. 
But alongside those strong grounds for optimism are significant worries. 
As Pedro Aspe, a much-admired former finance minister, emphasized to me, NAFTA did give a sudden boost to Mexico's economy at the outset. 
Labor productivity soared, as Mexicans were forced to adapt to the rules of the US economy in order to compete. 
But that improvement appears to have been only a so-called "impact effect." 
Mexican productivity growth has since fallen back to its levels in the 1980's. 
Mexicans also point to their economy's disappointing growth on a per capita basis since 1982. 
Twenty years is a long time to have almost no economic growth. 
It was also a time when many Mexicans were abandoning their economy and leaving to work in the US. 
The situation would have been even worse had this safety valve not been in place 
Meanwhile, China, a country with more than ten times Mexico's population, managed to grow spectacularly in this period. 
Why, Mexicans ask, should their country's growth have been so disappointing-and this just as they were establishing free-market institutions, privatizing assets, and developing a more robust democracy? 
China's one-child policy must have been an advantage for its per capita GDP growth, allowing more time to be spent on business activities rather than childrearing. 
But Mexico has recently also shown a sharp decline in population growth rates, as Mexican women opt for more birth control and smaller families. 
Mexicans' obsession with China is no accident. 
China's much lower labor costs mean that Mexican jobs and income levels are directly at risk. 
Mexican autoworkers earn three times as much as Chinese autoworkers. 
So Mexico's auto industry must make huge advances in productivity if it is to maintain the same wage level in the future. 
Part of Mexico's problem is due to suffering two major financial crises since 1982: the Less-Developed-Country Debt crisis of the early 1980's and the peso crisis of 1994-95. 
Both were random hits generated by sudden shifts in investor confidence; both represented big setbacks that required years to recover from fully. 
Worse, no one can be sure that such setbacks will not occur again. 
Confidence crises beget the risk of further confidence crises. 
More political and legal change is needed if confidence is to have a more solid footing. 
For example, corruption in all economic sectors-as well as government and labor unions-impedes growth by destroying trust. 
This means that personal and family connections mean a lot more in Mexican business than they do elsewhere, which prevents people from moving freely through the economy to exploit their personal talents. 
Mexicans generally do not want to go to college abroad because they would miss opportunities to form the necessary bonds with other Mexicans. 
But if corruption were reduced and social trust strengthened, such inhibitions would become irrelevant, and investor confidence would rise. 
Moreover, though Mexico elected its first president, Vicente Fox, from an opposition party after 71 years of one-party rule, this new democratic government appears ineffective. 
No party has a majority in the Chamber of Deputies. 
Political bickering seems to take priority over action. 
Disaffection with an ineffective government might lead voters to acquiesce in a more authoritarian government. 
Little wonder, then, that Mexicans express fundamental uncertainty about where their country is heading. 
That uncertainty will be a major factor in how Mexico's economy does or does not develop. 

Mexico's Machismo Machine 
Monica rummages frantically in her bag as we dine at a Mexico City restaurant. 
She pulls out her cell phone and checks for messages. 
"Is anything wrong?" I ask. 
"No, it's nothing," she smiles, "just my husband. 
He becomes upset if he calls and I don't answer. 
I'm always supposed to have my cell phone on--he likes to know where I am." 
"You mean he likes to keep track of you," I say, and she laughs. 
As Monica explains, sheepishly, that Esteban is actually open-minded, it dawns on me that I've been hearing a lot of similar stories recently, from female friends and patients. 
The cell phone has become a new way for men to keep tabs on their wives, calling them and pressuring them to come home as soon as possible. 
Machismo might be out of fashion in today's Mexico, but control is definitely in. 
You rarely hear of men not allowing their wives to study, work, or go out during the day. 
Almost 40% of working-age women hold jobs, school and university enrollment is evenly split between the sexes, and the average wage differential, whereby women earn about 70% of what men make, is comparable to that of industrialized nations. 
Women are increasingly aware of their rights, demanding equal treatment in the workplace and in politics. 
Under these conditions, machismo mutated. 
Nowadays, it relies more on psychological coercion and control than on discrimination or physical constraints. 
In a sense, machismo has gone underground. 
Deeply buried within our daily customs, it is all but invisible among the educated classes--invisible, but ever present. 
Women may be considered equal in many areas, but men remain more equal. 
In Mexico, women's time is not their own. 
When they go out, spend money, see friends, they are still expected to render accounts. 
Fathers, brothers, boyfriends, and husbands feel entitled to a detailed explanation of their everyday activities--but refuse to be questioned about their own. 
At home, men can say, "Don't bother me now, I'm watching TV"; women can't, because they are expected to be available, day and night, for their husband and children. 
These double standards form a pillar of today's machismo. 
Of course, it is far more evident in the privacy of the home than in the workplace or in public. 
Surveys show that men are willing to go to the supermarket once a week or mind the children for a while; but they refuse to iron, sew, chop vegetables, or clean the oven or toilet, because these tasks are considered unmanly. 
Men help out, but within rigidly defined parameters. 
This division of labor in all areas of life means that men and women remain surprisingly inept at tasks assigned to the other sex. 
We see educated men who don't know how to make a cup of coffee, and professional women with no idea about how to change a fuse. 
Men know little about babies; women know little about checkbooks--because they aren't supposed to. 
So machismo creates people with only half the skills that modern life requires. 
Far from creating a healthy complementarity between the sexes, it perpetuates dependence on both sides and creates widespread inefficiency. 
Part of the problem is the deep-seated assumption that women are meant to attend to men's needs. 
From the moment of their birth, men are surrounded by the constant care of women. 
Mothers, aunts, grandmothers, sisters, and later girlfriends, wives, and daughters are expected to fulfill--even anticipate--a man's every desire. 
Mothers tell little girls to "attend" their brothers, while little boys are instructed to "watch over" their sisters. 
This non-stop pampering is aggravated by female domestic servants, ranging from the high society governess to the part-time maid of a middle-class family. 
Servants, indeed, are a bulwark of Mexican machismo. 
Though they allow women to go out and work, they ensure that men continue to be pampered like oriental potentates, never lifting a finger in the home. 
Where wives and daughters now refuse to drop everything to prepare lunch for the man of the house, the maid takes up the slack. 
The implications of these attitudes and behaviors go beyond the domestic sphere. 
Pampered Mexican boys grow into men accustomed to being obeyed instantly, who feel entitled to special attention, refuse to negotiate with those whom they consider inferior, and reject any form of criticism. 
The men who dominate public life often fit this mold: they are demanding, impatient, intolerant, and self-centered. 
There is an inescapable contradiction between machismo and our supposed transition to democracy. 
As Monica sums it up with mock exasperation after our lunch, twice interrupted by her husband, "This machismo business doesn't make sense any more. 
How can we continue to be governed by men who have never set foot in a supermarket?" 

Mexico’s New President 
CAMBRIDGE: With Vincente Fox assuming Mexico’s Presidency on December 1, Mexico celebrates much more than a simple leadership transition. 
For the first time in its history, Mexico is on the verge of four simultaneous accomplishments: real democracy, economic prosperity, social cohesion, and good relations with the United States. 
Mexico’s mood is palpable: high expectations that the country will escape its past demons - instability, corruption, and massive social divisions - to become a dynamic society built upon strong, distinctive cultures, social inclusion, and a growing role in the world. 
Few Mexicans could be sure that the previously ruling party, the PRI, would relinquish power after 71 years of continuous rule. 
Yet when Fox defeated the PRI candidate this summer, Mexicans were treated to a peaceful transition of power based on an honest count at the ballot box. 
Much credit for this goes to outgoing President Ernesto Zedillo, last in line of a dozen PRI presidents. 
Zedillo championed democratic reforms during his term, enabling the elections and political transition to proceed smoothly. 
Zedillo bequeaths an economy in remarkably strong shape, thanks mostly to the North American Free Trade Agreement (NAFTA), the free-trade arrangements that link the economies of Canada, Mexico, and the US. 
NAFTA came into force on January 1, 1994. 
Ironically, Mexico fell into a temporary financial crisis later that same year, the result not of the trade agreement, but of a sudden reversal in capital flows to Mexico - the kind of crisis that hit East Asia three years later. 
NAFTA became the main mechanism for Mexico to overcome the crisis, as its economy dramatically multiplied exports to the US, achieving an export-led economic recovery. 
The US/Mexican economic relationship may be the world’s most important example of how rich and poor economies can be harmonized for mutual benefit. 
Under NAFTA, US firms are flocking across the 2,000-mile Mexican border in order to set up operations in Mexico to benefit from lower wage levels, and hence lower production costs. 
In recent years, Mexico has been able to attract more than $10 billion per year of foreign direct investment into Mexico, mainly from US multinational firms. 
US firms bring their technologies and capital goods into Mexico, and then make final products in Mexico which are re-exported to the US economy. 
Under these arrangements, Mexico’s overall exports have grown from around $40 billion in 1990 to an estimated $140 billion in 1999. 
In the process Mexico has also shifted from being dependent on oil earnings to becoming a diversified exporter of manufactured goods. 
With a democratic transition and an economy primed for growth on the basis of inward investments into Mexico and an export boom to the US, President Fox assumes power at a time of great promise. 
He carries with him into office the goodwill of most of the country, impressed by Fox’s sincerity, intelligence, and eagerness to lead Mexico in an open and professional manner. 
Fox lived up to this promise with his choice of cabinet ministers. 
To an amazing extent, he reached out to experts in many areas, choosing professionals of impeccable reputations for probity and accomplishment, rather than politicians eager for patronage. 
Of course expertise is only part of the story of good governance. 
These new cabinet ministers will have to show that they can be effective in politics in the best sense as well as – building coalitions, gaining public support, and helping to galvanize the public’s current optimism into practical programs. 
The Fox Administration will benefit from a basically sound framework for Mexican economic growth, in which Mexico’s economic prosperity will emerge in part from increasing economic integration with Canada and the US. 
President Fox will be the first to acknowledge that NAFTA is just part of the story. 
After seventy-one years of one party rule in Mexico, and decades of under-investment in key areas of Mexican economic life, there remains much to accomplish. 
The first goal is to create the rule of law in Mexico. 
Decades of lawlessness have given Mexico a corrupt judicial system, lack of legal protection for minority groups, massive tax evasion, organized crime, and police viewed more as a threat than source of protection. 
Part of the problem can indeed be addressed by honest leadership and a more democratic system. 
Part of the problem, alas, may lie beyond Mexico’s control. 
America’s insatiable demand for cocaine has made Mexico a transit route from South American producers. 
The US treats its drug problem in criminal terms, trying to use police and military tactics to block drug supplies. 
This has been a losing battle, but has dramatically increased violence and corruption in Mexico by ensuring that drug trafficking is a lucrative business. 
The US would help Mexico by focusing on drug treatment and reducing demand and much less on military and police solutions. 
Fox’s second goal should be to prepare Mexicans for life in the global knowledge economy. 
One key to competitiveness will be high levels of education for a broad population. 
Mexico still has low levels of enrolment for secondary school and only around 16% of the university-aged population is enrolled in high education. 
Universal access to secondary school for rich and poor alike, and a rapidly rising proportion of students going to University must be the goal. 
Mexico also ranks very low in comparison with high-income countries in the quality of its science and mathematics education, and its efforts in scientific research. 
For example, Mexico spends only around one-third of one percent of GNP on research and development, while Korea (as a comparison) spends more than 2% of GNP on research and development. 
Other major goals include upgrading health care, reforming financial markets, and aiming to reduce the high levels of income inequality. 
Also, Mexico needs to diversify its economy, so that it is not completely dependent on US prosperity. 
But despite the huge challenges ahead, the basic message is clear. 
With the arrival of the Fox Administration, Mexico’s chances for democracy and prosperity are the best they’ve been at any time in Mexico’s modern history. 


Mexico’s Paradox of Reform 
Sometimes no reform is better than the wrong type of reform. 
That seems to be the case in Mexico, which recently passed new tax and electoral laws – but not the ones the country needs. 
While tax reform was high on President Felipe Calderón’s agenda during last year’s presidential campaign, electoral reform was not. 
Instead, it has been imposed upon him by a strange and extreme version of political horse-trading. 
Opposition legislators wanted electoral reform, but no new taxes; the administration wanted more revenues, but no new election laws. 
Both sides got part of what they wanted, and Mexico got the short end of the stick. 
An alternative minimum tax was established, along with a slight increase in gasoline taxes, but both were so watered down that they barely add up to anything. 
According to the government’s own figures, they equal just 1% of GDP – a pathetic increase in an economy with one of Latin America’s lowest tax takes. 
Meanwhile, the three main parties – the National Action Party (PAN), the Institutional Revolutionary Party (PRI), and the Party of the Democratic Revolution (PRD) – united in order to keep newcomers out of the electoral arena. 
They evicted the Federal Electoral Institute (IFE) directors, who organized last year’s presidential vote; strengthened the ban on independent candidates; made it practically impossible to create new parties; and established a series of arbitrary, quasi-Stalinist restrictions on the content of campaign advertising, speeches, and exchanges among candidates. 
All of these changes were rammed through the Congress as constitutional amendments, exempting them from appeals to the courts. 
The one positive feature of the reforms – a scheme aimed at ensuring equal radio and television airtime for parties during electoral campaigns – was tainted by serious legislative omissions. 
Given the absence of any regulation regarding fairness in news coverage of campaigns, the blatant corruption of many news organizations, and the absence of a current affairs program on national, prime-time television, banning the purchase of airtime merely erects an insurmountable barrier to potential new political entrants. 
Against this backdrop, the ejection of the IFE directors stands out all the more glaringly. 
While the IFE undoubtedly committed several serious public-relations mistakes during last year’s election, it remains one of Mexico’s most respected institutions, with credibility ratings that are regularly double or triple those of Congress and the three political parties. 
The IFE shepherded Mexico through several crisis in 2006, when the PRD’s presidential candidate, Andrés Manuel López Obrador, refused to accept his razor-thin margin of defeat and took his battle to the streets. 
Now, the same people who certified that last year’s vote was free and fair, and that Calderón had indeed won, are being fired for exactly that reason. 
Their removal, as everyone in Mexico acknowledges, is a sop to the PRI and the PRD in exchange for Calderón’s miserly tax reform. 
Bismarck was right when he said one should never look too closely at how laws and sausages are made. 
Unfortunately, the attack on the IFE’s autonomy is not an isolated event in Latin America. 
Although independent central banks have been crucial in helping the region achieve macroeconomic stability over the past two decades, they, like electoral authorities, are being subjected to increasing pressure. 
Venezuelan Preseident Hugo Chávez has openly proposed abolishing the central bank’s independence, submitting a constitutional reform that would allow him to use the country’s international reserves as he sees fit. 
Likewise, electoral commissions there and in Bolivia, Ecuador, Nicaragua, and, according to some accounts, in Argentina are being packed with political loyalists. 
Mexico now seems poised to join this dubious club. 
It shouldn’t, and if anyone should know that, it is Calderón. 
It is understandable that he wishes to distinguish himself from his predecessor, Vicente Fox, who was unable to get meaningful reforms through Congress. 
But it is not reasonable to do so by proposing a cure that is worse than the disease. 

Mexico’s War of Choice 
MEXICO CITY – Three years ago this month, Mexican President Felipe Calderón donned military fatigues and declared a full-scale war on drugs, ordering the Army into Mexico’s streets, highways, and villages. 
Back then, Calderón received broad support, both domestically and from abroad, for what was viewed as a brave, overdue, and necessary decision. 
Tangible results were predicted to come soon. 
Moreover, George W. Bush’s administration quickly promised American support – the so-called Mérida Initiative, signed in February, 2007 – and public-opinion polls showed that Calderón had, in one fell swoop, left behind the travails of his close and questioned electoral victory, gaining the trust of the Mexican people. 
But today, things look very different. 
At a recent debate with, among others, Fareed Zakaria of Newsweek and CNN, Asa Hutchison, the former head of the United States Drug Enforcement Agency, the main question was whether the US was to blame for Mexico’s drug war. 
I pointed out that neither the US nor Mexico was to blame; only Calderón was. 
Just like Bush’s invasion of Iraq, Mexico’s drug war was a war of choice. 
It was a war that Calderón should not have declared, that cannot be won, and that is doing enormous damage to Mexico. 
Today, a growing number of Mexicans shares this view. 
As the war drags on, positive results are nowhere to be seen, while violence in the country is escalating. 
On December 9, for example, according to the daily newspaper Reforma , 40 people died in firefights between police and army forces and the drug cartels. 
More than 6,500 fatalities will have occurred this year alone, topping last year’s total, which was double that in 2007. 
I believe that Calderón declared this war because he felt the need to legitimize himself before Mexico’s people, given the doubts surrounding his victory in the 2006 presidential election – doubts that his supporters, like me, never shared. 
And I believe that it is unwinnable because it fails to comply with the tenets of the Powell Doctrine, elaborated 18 years ago by Colin Powell, then Chairman of the US Joint Chiefs of Staff, in relation to the first Gulf War. 
Powell enumerated four conditions that must be satisfied in order to succeed in a military operation. 
One was deployment of overwhelming force, which the Mexican military lacks. 
Another was definable victory, which one never has in a war on drugs (a term first used by Richard Nixon in the late 1960’s). 
The third condition was an exit strategy at the outset, which Calderón lacks, because he can neither withdraw in defeat in his own country, nor withdraw and declare victory. 
Calderón still does enjoy the support of the public – Powell’s fourth condition – but he is beginning to lose it. 
Over the past three years, more than 15,000 Mexicans have died in the drug war. 
Human Rights Watch, Amnesty International, and the United Nations Human Rights Council Universal Peer Review have all documented, with more or less evidence and precision, a proliferation of abuses and an absence of accountability for them. 
Of the more than 220,000 people arrested on drug charges since Calderón took office, three-quarters have been released. 
Only 5% of the remaining 60,000 or so have been tried and sentenced. 
Meanwhile, acreage used for poppy and marijuana production has risen, according to the US government, to 6,900 and 8,900 hectares, respectively. 
Restrictions on the transshipment of cocaine from South America to the US have made only a dent in street prices, which spiked in 2008 but have stabilized in 2009 at levels well below their historical highs in the 1990’s. 
According to the US government’s International Narcotics Control Strategy Report (INCSR), opium, heroin, and marijuana seizures have decreased since Calderón began his drug war, and drug production in Mexico is on the rise. 
In 2008, according to the US State Department, potential heroin production reached 18 metric tons, up from 13 metric tons in 2006, as production of opium gum rose to 149 metric tons, from 110 metric tons. 
Cannabis production grew by 300 metric tons over this period, to 15,800 metric tons. 
In other words, since Calderón began his war on drugs, more Mexican drugs are on the market, not less. 
There is no easy way out of this quagmire. 
The National Police Force that Mexico’s last three presidents – Ernesto Zedillo, Vicente Fox and Calderón – have tried to build is still far from ready to replace the Army in drug-enforcement tasks. 
American assistance, as a US General Accounting Office report made clear in early December, is barely trickling in. 
Indeed, by some accounts, only 2% of the projected $1.3 billion in aid has been disbursed. 
Perhaps the least bad solution would be to proceed by default: gradually allow the drug war to vanish from television screens and newspapers, and have its place taken by other wars: on poverty, on petty crime, and for economic growth. 

Mexico Steps Beyond the Labyrinth of Solitude 
Where Iraq is concerned, Mexico's foreign policy doesn't seem to please anyone in Mexico. 
Opposition groups here applaud President Vincente Fox's recent anti-American stance in the UN Security Council, while Mexican businessmen oppose it. 
With the US seeking to line up nine votes in the security council in favor of declaring Iraq in "material breach" of Security Council resolution 1441, Mexico's stance toward the US will become vital in the coming days and weeks. 
But Mexicans themselves are divided about what to do. 
Some Mexicans congratulate President Fox for not caving in to US pressure to cast a vote in the Security Council for war, while others argue that he should. 
The debate over Iraq in Mexico reveals a deep divide between those who seek closer ties with the US, and those wary of that possibility. 
These polarized positions reflect an uncomfortable reality. 
Almost a decade into a free trade agreement that institutionalized integration, most Mexicans still don't know how to behave toward Americans. 
They don't know whether to love them or hate them, support them or denounce them, foster a close relationship or remain distant neighbors. 
These opposing postures--and the pressures they bring to bear on President Fox--are place the country in the dilemma of either fighting against or kowtowing to its neighbor to the North. 
At the same time, it is apparent that Mexico must redefine the bilateral relationship according to the country's specific needs and interests on a case-by-case basis. 
Sometimes Mexico should open the door to neighborly requests and sometimes it should refuse them. 
As in all close relationships, there will be ups and downs, issues that unite and issues that divide. 
Mexico and the US don't need to be the worst of enemies or the best of friends; they can just be neighbors. 
In the Security Council vote on Resolution 1441, Mexico initially supported the French position, and ultimately contributed to moderating America's position. 
By opposing a resolution that was unacceptable, Mexico helped craft one that was acceptable. 
In distancing itself from the US, Mexico was able to reach out to the broader world. 
By rejecting a unilateral stance, Mexico enabled a multilateral outcome. 
In effect, Mexico told the US: "I can criticize you first, and help you later." 
However small, however limited, Mexico played a valuable role. 
Indeed, Mexico is slowly learning how to carry out a dual task: to defend its national interests and also be part of the international community, to support the US at times and oppose it at others. 
Many Mexicans--and Americans--find this shift difficult to understand. 
What Octavio Paz once called Mexico's "labyrinth of solitude" toward the world beyond its borders was built on a sense of inferiority and a propensity for passivity. 
As he put it: "We are not secure people." 
Where the wider world is concerned, this meant that Mexicans were too often afraid to act; they opted for stoicism and resignation instead of planning and action. 
For many years, Mexico avoided service on the Security Council, thinking that a seat there would entail many costs and few benefits. 
But Mexico today does have interests--including the price of oil--and being on the Security Council allows it to defend them. 
Mexico should use its current position in the Security Council to send a message: the country has matured and its foreign policy has matured with it. 
If Mexico votes against a US-sponsored resolution pushing for the use of force in Iraq in the next several days, the US shouldn't interpret the decision as a knee-jerk nationalistic response, but rather as a reflection of Mexico's interests. 
In this instance, Mexico prefers multilateralism to unilateralism, and peaceful disarmament over military might, because Mexico's interests diverge from those of the US. 
More broadly, the US must accept that times have changed and that Mexico cannot be simply classified as either an historic antagonist that has to be bought off or an unconditional ally that can be taken for granted. 
Nor, of course, should the direction of Mexico's vote ultimately be determined by allegiance to an anti-American axis. 
Mexican foreign policy must not be driven by the resentments of the past but by the pursuit of concrete interests in the future. 
Mexico should show that it is possible to be in favor of multilateralism without being against the US. 
Mexico has spent the last 150 years defining itself in opposition to America. 
Now the time has come to think differently. 
As a democratic state with an elected government, Mexico should feel self-confident enough to fight for its interests as they evolve, independently of American approval or disapproval. 
That task is a difficult one, but it is unavoidable. 
As Paz warned: "We live, as the rest of the planet, a decisive and mortal moment, orphans of the past and with a future to invent." 

Emerging Markets’ Submerging Currencies 
MUNICH – For many emerging economies, 2014 has gotten off to a grim start. 
Concern over the Chinese economy’s marked slowdown and the Argentine peso’s steep slide against the US dollar has triggered heavy selling pressure on an array of emerging-market currencies. 
But the current volatility does not portend sustained weaker growth in emerging economies as a whole. 
Differentiation is needed, and that is what financial markets are now doing. 
The scale of the battering varies widely from country to country. 
For example, the problems currently dogging Argentina are anything but a surprise. 
On the contrary, they are the near-inevitable result of years of policy mismanagement that has spawned high inflation, a badly overvalued currency, and massive erosion of foreign reserves. 
By contrast, the currencies of Central and Eastern Europe’s emerging markets have remained relatively stable. 
For example, thanks to Poland’s robust economic performance, the złoty has essentially maintained its exchange rate against the euro, slipping 2.2% since the start of the year (as of the beginning of February). 
The Hungarian forint lost slightly more than 5% against the single currency over the same period, but this is less sharp than in the past, when the country’s macroeconomic problems made the exchange rate far more sensitive to shifts in market sentiment. 
The stabilization of the eurozone economy and the reduction of imbalances have helped to improve the growth outlook for Central and Eastern European countries. 
Furthermore, most of these countries have made progress taming their own imbalances. 
By contrast, the Russian ruble has continued its lengthy nosedive this year, tumbling by more than 5.5% against the euro by the beginning of February. 
The reasons are mainly homegrown: a poor investment climate, heavy capital outflows, and a shriveling current-account surplus. 
A look at Latin America also reveals wide regional differences. 
The Argentine peso, the region’s main culprit, has plummeted by 19% this year against the US dollar. 
In Brazil, the real’s losses in 2014 have been comparatively mild, but this comes on the heels of the hefty depreciation last year. 
Capital is also heading for the exit in Mexico and Chile. 
The region’s reliance on commodities is fraying nerves. 
If Chinese economic growth turns out to be weaker than expected, commodity prices and exports are likely to fall, undermining Latin American countries’ growth. 
However, with global industrial-production indicators climbing since the second half of 2013, pointing especially to improvements in the advanced economies, gloomy forecasts for commodity markets seem off the mark. 
So far, Asian currency losses have been limited. 
The South Korean won has experienced the largest slide, with a loss of 3% from the start of the year to the beginning of February (though this comes in the wake of a protracted upward trend). 
The Indian and Indonesian currencies have been weathering the storm quite well, but both fell steeply last year. 
The Indian rupee, burdened by a chronic current-account deficit, stubbornly high inflation, and a sharp slowdown in growth, lost 11% year on year by the end of 2013. 
Paradoxically, China, the country currently under the brightest spotlight, is the only major emerging economy whose currency rose slightly against the US dollar in January. 
Given the enormous challenges that China faces – from rebalancing its growth model to addressing credit and real-estate bubbles – this is remarkable. 
Chinese officials are poised to tighten monetary policy and impose regulatory measures to curb debt momentum, which is bound to mean sacrificing short-term economic growth in order to put growth back on a stable footing. 
Evidently, the markets think the authorities are up to the task. 
Turkey, a country whose enormous growth potential is marred by major imbalances, has not been so fortunate. 
The Turkish lira is being pilloried, sliding more than 7% against the euro in January and 24% since the middle of last year. 
But Turkey’s vulnerability to an abrupt shift in financial markets from risk-on to risk-off was foreseeable. 
Yawning current-account deficits (funded mainly by short-term capital inflows), domestic political uncertainty, and past episodes of unorthodox monetary policy have all undermined investor confidence in recent months. 
As in China, the necessary adjustment processes will weigh on short-term growth, though the medium- and long-term outlook is positive. 
The financial markets are evidently punishing the currencies of countries that, due to macroeconomic imbalances or political instability, are susceptible to external shocks of any kind. 
Indeed, some players fear that the spiral of depreciation, higher inflation, and rising interest rates could broaden out into a full-scale crisis of confidence. 
But, while the further withdrawal of capital cannot be ruled out, not all investors swim with the tide. 
With prices in the affected countries at a much more favorable level, confidence-building policy measures could quickly encourage forward-looking investors to test the water. 
Broadly speaking, devaluations can help boost competitiveness and reduce external deficits. 
But in the short term, they can exacerbate economic problems by inciting higher wage demands, fueling inflationary pressure, and boosting external-financing costs. 
In these circumstances, monetary policy must perform a balancing act. 
In order to counter a devaluation-fueled rise in domestic inflation, the central bank needs to raise key interest rates – but without throttling the economy. 
Policymakers are more likely to succeed to the extent that domestic reforms address macroeconomic imbalances and other obstacles to long-term growth. 

Combating Konzo 
EAST LANSING, MICHIGAN – Too many preventable diseases, from AIDS to yellow fever, have long afflicted Sub-Saharan Africa. 
But eradicating them requires an understanding of the disease in question, money, education, government support, planning, and, not least, an interest from the community and the wider world in solving the problem. 
Consider a preventable disease that most people have never heard of: konzo, a permanent, irreversible, upper-motor neuron disorder, common in rural areas of Sub-Saharan Africa that rely on the bitter varieties of the cassava plant as a staple crop. 
Konzo occurs when cassava tubers are not properly prepared before consumption, which usually requires soaking them until they ferment and then drying them in the sun to allow for the breakdown of cyanogenic compounds. 
Hundreds or thousands of people in a village region can be affected with every outbreak. 
Konzo is especially common in the Democratic Republic of the Congo, the Central African Republic, Mozambique, and Tanzania, and often follows droughts or conflicts, when food is scarce. 
Women and children are the worst affected, especially during times of economic hardship, when they have the least access to meat, beans, and other sources of sulfur amino acids necessary for the liver to detoxify cyanide in the body. 
The effects are not easy to miss. 
The World Health Organization defines konzo as a visible spastic abnormality of gait while walking or running; a history of onset within one week in a formerly healthy person, followed by a non-progressive course; and exaggerated jerking of the knees or ankles without signs of spinal disease. 
Konzo’s severity varies. 
According to the WHO’s 1996 classification, the disease is deemed mild when the victim does not need to use walking aids regularly; moderate when one or two sticks or crutches are used; and severe when he or she is bedridden or unable to walk without support. 
Because konzo was initially characterized as a pure upper-motor neuron disease confined to motor pathways in the central nervous system, it was suggested that the cognitive effects were minimal. 
But electrophysiological evidence later emerged suggesting that higher-level brain functioning may be affected as well. 
In documenting neurocognitive impairments in children with konzo, my colleagues and I also noted sub-clinical symptoms even in konzo-free children living in konzo-affected households, a finding based on their performance on more specialized neurocognitive tests of memory and learning. 
These subtler symptoms may constitute a pre-konzo condition, providing a warning that a child is approaching the disease’s threshold. 
Thus, the neurocognitive effects documented for non-konzo children in konzo-affected households and communities make it all the more important to ensure food safety in regions dependent on bitter varieties of cassava with high levels of cyanogenic compounds. 
To this end, the Bill and Melinda Gates Foundation has supported research leading to the development of nontoxic, high-yield varieties of cassava. 
These genetically engineered strains can thrive even in degraded soil, so that people no longer have to turn to the more toxic varieties. 
But disseminating these safer strains is proving difficult. 
Konzo-affected regions lack the agricultural, educational, and public-health capacity and infrastructure needed to implement the necessary changes. 
For the same reasons, these regions fail to diversify their food staples to include safer crops such as millet, maize, or beans. 
Because there is no cure for the neurological damage that konzo causes, the battle against the disease must focus on prevention. 
While that means continuing to demonstrate the benefits of new strains of cassava and other staples, the first priority must be to educate people, especially village women, about the hazards of eating unprocessed cassava, and to teach them how to prepare it safely. 
Using culturally appropriate social marketing, similar to those used in anti-HIV education, the message can be spread through social networks, mobile phones, radio, and television. 
To be sure, communities in affected regions have long followed safe, traditional practices. 
But they may be unaware of why these practices are so important, and therefore of the consequences of not adhering to them. 
Especially during times of upheaval and increased food scarcity, soaking the peeled tubers for three days until fermentation, and then sun-drying them for a day, might seem like an unaffordable luxury. 
It is not. 
Millions are at risk of konzo, and outbreaks can occur at any time. 
The neurological injury can be debilitating, and it is permanent. 
Because we know how to prevent it, we are obliged to act. 

The Climate-Change Agenda Heats Up 
LONDON – For many people around the world this year, the weather has become anything but a topic for small talk. 
Typhoon Haiyan in the Philippines, America’s record-breaking freeze, California’s year-long drought, and flooding in Europe have put the long-term dangers of climate change back on the political agenda. 
In response, United Nations Secretary-General Ban Ki-moon has sent an urgent letter to government, business, civil society, and finance leaders, urging them to attend a special Climate Summit in New York in September. 
The event will be the first time that world leaders have met to discuss global warming since the UN’s fateful Copenhagen climate-change summit in 2009. 
Amid high expectations – and subsequent recriminations – that meeting failed to achieve a comprehensive, legally-binding agreement to reduce greenhouse-gas emissions. 
So, at September’s summit, leaders will be asked to re-boot the diplomatic process. 
The goal is a new agreement in 2015 to prevent average global temperatures from rising by two degrees Celsius, the level that the international community has deemed “dangerous” to human society. 
At first sight, that looks like a hard task. 
Since Copenhagen, climate change has slipped down the global agenda, as the restoration of economic growth, voter concern about jobs and living standards, and violent conflict in key trouble spots have taken precedence. 
But the tide may be turning. 
More people are grasping the true extent of the dangers ahead. 
In its latest authoritative assessment, the Intergovernmental Panel on Climate Change (IPCC) concluded last year that scientists are now 95% certain that human activities are the principal cause of rising temperatures. 
Over the next two months the IPCC will release further reports detailing the human and economic impacts of probable climate change and the costs and benefits of combating it. 
US Secretary of State John Kerry recently described climate change as “perhaps the world’s most fearsome weapon of mass destruction,” warning of “a tipping-point of no return.” 
Few serious commentators now dispute the science. 
So the key question now is how the world’s leaders will respond. 
There are grounds for cautious optimism. 
First, New York will not be like Copenhagen. 
Leaders are not being asked to negotiate a new agreement themselves; that job will remain with their professional negotiators and environment ministers. 
Moreover, the process will not be concluded this year but at the UN climate conference in Paris in December 2015. 
That provides plenty of time to translate political commitments made in New York into a legally-binding accord. 
Second, the world’s two largest greenhouse-gas emitters, the United States and China, are now more committed to action than they were five years ago. 
US President Barack Obama has announced a far-reaching plan that authorizes the Environment Protection Agency to take dramatic measures in the next few months to limit power-station emissions, virtually ending coal-fired electricity generation altogether. 
In China, worsening air pollution and growing concerns about energy security have led the government to consider a cap on coal use and an absolute reduction in emissions within the next 10-15 years. 
The government is experimenting with carbon pricing, and investing heavily in low-carbon wind, solar, and nuclear energy. 
Further, the two countries are actively cooperating. 
Last year Obama and Chinese President Xi Jinping committed to phase out hydrofluorcarbons, a potent greenhouse gas. 
In February, they announced their intention to work together on climate policy – a marked contrast to Sino-US tensions over Pacific security and trade issues. 
With the European Union also preparing to commit to new 2030 climate targets, hopes for a global deal are rising. 
A third cause for optimism is the re-appraisal of climate-change economics. 
Five years ago, policies aimed at cutting greenhouse-gas emissions were seen as a cost burden on the economy. 
Negotiations were therefore a zero-sum game, with countries seeking to minimize their obligations while asking others to do more. 
However, new evidence may be altering the economic calculus. 
According to research conducted by the Global Commission on the Economy and Climate, far from hurting the economy, well-designed climate policy may actually boost growth. 
Chaired by former Mexican President Felipe Calderón and comprising former prime ministers, presidents, and finance ministers, the Commission is analyzing how investments in clean-energy infrastructure, agricultural productivity, and urban transport could stimulate sluggish economies. 
Its conclusions will be presented at September’s summit; if accepted, the Commission’s work could mark a turning point, transforming the way in which climate policy is perceived by the world’s economic policymakers. 
None of this guarantees success. 
Powerful vested interests – not least the world’s fossil-fuel industries – will no doubt seek to limit progress, and most governments are not yet focused on the problem. 
But one thing is certain: the reality of climate change is making it impossible to ignore. 

Modi’s Mandate 
WASHINGTON, DC – In an impressive exercise in democracy, 550 million eligible voters participated in India’s 16th general election. 
The new prime minister will be Narendra Modi of the conservative Bharatiya Janata Party (BJP), who presided over rapid economic growth in his 13 years as Chief Minister of the state of Gujarat, on India’s northwest coast. 
Modi won because most Indians believe that he can deliver more rapid growth in the country as a whole. 
The election once again demonstrated how different in political terms India is from its giant neighbor, autocratic China. 
Now, however, the new government must try to match the superior economic progress that China has achieved over the last three decades. 
To do so, it will have to foster, in a different political context, two key ingredients of China’s economic success. 
The first ingredient is a robust industrial sector composed of manufacturing industries that use unskilled labor, which would offer a route out of poverty for India’s hundreds of millions of rural laborers and their families. 
It is the route that China, and other countries before it, has taken. 
In India, by contrast, the underdevelopment of the industrial sector has kept the country from realizing its full economic potential. 
The second ingredient is the infrastructure that all economic growth requires: roads, bridges, ports, and schools, as well as reliable supplies of electricity and clean water. 
Poor infrastructure constrains the industry that India does have. 
Factories need reliable supplies of power to operate effectively, good roads and railways to source inputs and distribute products, and, if they are to export those products, ports for cargo ships and airports for high-value items and business travel. 
China has these things in abundance. India does not. 
Power outages are routine in India, nearly half the country’s households lack any electricity at all, and modern highways are scarce. 
While a trucker in the United States can haul a load a thousand miles in about 20 hours, in India the equivalent trip takes 4-5 days. 
The underlying cause of these two shortcomings is one of the fundamental features of Indian democracy, and indeed of all democracies: the power of minorities. 
In democracies, people are free to organize themselves, and often do so on the basis of common economic interests. 
Such groups work politically to bring benefits to their members, but the benefits can come at the expense of the general welfare – and in India they have blocked the development of low-skilled industries and high-quality infrastructure. 
While India abounds in workers with low (or no) skills, laws governing employment make it all but impossible for large firms to fire workers, discouraging them from hiring in the first place. 
The most efficient companies tend to avoid precisely the industries that could, if established on a large scale, lift millions of Indians out of poverty. 
Similarly, laws restricting the use of land make it difficult to build facilities such as factories and hotels, which could employ large numbers of people. 
It is a particular kind of interest group – trade unions – that promotes and defends the laws that discourage large firms from entering industries that employ unskilled workers. 
While these laws benefit union members, who make up a very small fraction of the total workforce, they penalize India as a whole. 
Other interest groups obstruct the growth of employment-creating businesses. 
Local protesters, for example, sometimes prevent the use of land for industrial and other commercial purposes. 
Political minorities also inhibit the construction of infrastructure and the development of the educational system that India needs by using the democratic process to divert resources to themselves, which then cannot be used to build roads or pay teachers. 
Subsidies of various kinds, all of them legislative achievements of interest groups, account for fully 2.4% of the country’s GDP. 
The Indian bureaucracy itself is a large, powerful, and voracious interest group. 
Its salaries consume resources that would be better devoted to more productive uses. 
Special-interest spending leads to budget deficits, while the borrowing needed to finance these deficits drains yet more money from infrastructure and education. 
Modi’s new government cannot – indeed, must not – abolish the democratic rules that permit minorities to flourish. 
With its various ethnic groups, religions, castes, and 30 languages used by more than a million native speakers each (and another 105 spoken by at least 10,000 people), India is more culturally diverse than the entire European Union – but with twice as many people. 
Without the emphasis on compromise, peaceful dispute resolution, and minority rights inherent to democracy, a united India could not exist. 
So Modi’s challenge is to overcome the obstacles to growth-promoting polices using democratic methods. 
Here, the election has brought good news: the growing strength of India’s growing middle class, a potent ally in the cause of pursuing the needed economic reforms. 
That middle class consists of propertied, salaried people, many of them young, who see government as an impersonal enforcer of the law and a neutral arbiter of disputes, rather than as a source of funds and favors. 
The votes of such people helped Modi win the election. 
His success in office will depend on how well he can harness the power of the middle class to overcome the political obstacles to the economic growth that its members demand. 

Small Countries’ Big Successes 
ZURICH – Scotland’s vote on independence from the United Kingdom has spurred widespread debate about the secession of small states, such as Slovenia and Croatia in 1991, or the independence drive today in Spain’s autonomous region of Catalonia. 
But the narrow focus on the political and economic implications for Scotland and the UK – or, for that matter, the referendum’s decisive pro-union outcome – should not overshadow one of the more overlooked geopolitical trends of our time: the rise of small countries. 
Roughly 75% of today’s small countries were formed in the last 70 years, mostly as a result of broader democratic transitions and in tandem with trade growth and globalization. 
Their successes and failures are more germane to current discussions than, say, the fiscal implications of Scottish independence. 
The lessons to be learned from these cases are useful not only to new and potentially new small countries. 
Relatively young small countries in Africa, the Caribbean, and the Middle East can also benefit by examining the secrets of Singapore’s success, the causes and effects of Ireland’s property bubble, and Denmark’s decision to build strong counter-terrorism capabilities, despite its relative safety. 
Indeed, such considerations can help them to chart a path to economic prosperity and social cohesion. 
Of course, in learning from one another, countries must always be careful to avoid the “folly of imitation.” 
The Nordic countries, for example, have benefited significantly from deeply entrenched social, legal, and political characteristics that are not easy to transfer to their developing-country counterparts. 
Moreover, young small countries must recognize that building the institutions and economies to which they aspire will take time. 
In fact, age may well be the most important factor in small-country performance, with per capita GDP in small countries that were established before 1945 some four times larger than in their newer counterparts. 
More established small countries also lead the rankings in other metrics. 
For example, they occupy nearly half of the top 20 positions in the United Nations Human Development Index. 
In general, older small countries outstrip medium-size and large countries in terms of economic and social performance, openness to international trade, and enthusiasm for globalization – features that younger countries should work to promote. 
But small countries’ economic growth is often more volatile – a tendency that younger states must learn to contain if they are to prosper in the long term. 
The question of “large” or “small” government is less relevant, despite the impression given by heated debates in large countries like the United States. 
Overall government expenditure is only weakly correlated with the size of the government. A better proxy would be public-sector salaries – the only area where large countries appear to benefit from economies of scale. 
Smaller countries spend more, as a percentage of GDP, on education and health care – another habit that new small countries would do well to uphold. 
Indeed, there is a strong positive correlation between the pace of economic growth and “intangible infrastructure” – the combination of education, health care, technology, and the rule of law that promotes the development of human capital and enables businesses to grow efficiently. 
Small countries account for seven of the top ten countries for intangible infrastructure. 
Add to that measures like the quality of institutions, suitability to thrive in a globalized world, stability of economic output, and level of human development, and one can generate a country strength index, in which 13 of the top 20 performers are small, with the most successful being Switzerland, Singapore, Denmark, Ireland, and Norway. 
A cluster of larger countries is led by Australia, the Netherlands, and the UK. 
Other “resilient” small countries include Finland, Austria, Sweden, and New Zealand. 
To be sure, there is a clear “old European” bias here. 
Developing small states like Croatia, Oman, Kuwait, and Uruguay may consider exhortations to emulate countries like Switzerland and Norway to be impractical. 
But a useful set of priorities can be gleaned from their experiences. 
Specifically, small developing countries should focus on building institutions, such as central banks and finance ministries, that explicitly seek to minimize the macroeconomic volatility associated with globalization. 
They should also advance the rule of law, develop strong and efficient public education and health-care systems, and encourage domestic industry to emphasize return, rather than cost of capital, as their guiding metric. 
Beyond emulation, small countries can help one another through direct alliances. 
Surprisingly, very few such alliances exist, with many small countries – especially developing ones – cultivating close ties with “big brother” countries or immersing themselves in regional federal structures. 
The risk, of course, is that their voices become drowned out by larger entities, impeding their ability to do what is best for their own citizens. 
In a fast-changing geopolitical and economic environment – characterized by challenges like interest-rate rises spurred by high debt levels; competitive corporate-tax reductions; changing immigration patterns; and a possible slowdown in the pace of globalization – small countries must be able to identify and assess risks, and adjust their strategies accordingly. 
Indeed, even without full independence, this is precisely what Scotland, which has been promised even greater autonomy within the UK than it already has, will have to do if it is to succeed. 


What's Ailing France? 
PARIS – France is gravely ill. 
So ill, in fact, that Standard & Poor’s recently cut its sovereign-credit rating – the country’s second downgrade in less than two years. 
The decision was accompanied by warnings that the budgetary and structural reforms that President François Hollande’s administration has implemented over the last year have been inadequate to improve France’s medium-term growth prospects. 
Now, the pressure is on for structural reforms covering everything from labor markets to taxation. 
While the S&P downgrade was unexpected, it was not exactly shocking. 
The recent downturn in France’s industrial output has created large trade deficits, and is undermining the competitiveness of small and medium-size enterprises. 
Unemployment stands at about 11%, with a record-high 3.3 million workers registered as jobless in October. 
At the same time, political crisis is impeding the government’s pursuit of difficult reforms. 
French leaders have demonstrated an inability to communicate effectively or apply past experiences in analyzing current threats. 
Instead, they are resorting to diversionary tactics by engaging in overblown rhetorical battles about minor controversies. 
But they cannot ignore their problems forever, and the consequences of delaying the reforms that France needs could be catastrophic. 
And yet, viewed from a broader perspective, France’s problems are largely symptoms of a disease that is affecting the entire global economy (including the European Union’s southern members). 
In recent decades, unfettered capitalism has produced significant mutations worldwide. 
For starters, industrialism has become obsolete. 
In the advanced countries, the market for first-time purchases of mass-market goods like cars, refrigerators, and televisions is saturated, while the secondary market for used and reconditioned goods has become much less dynamic, undermining employment in repairs and renovations. 
With no industrial good that still requires a large-scale labor force – and the communications and services industries unable to fill the gap – employment is shrinking and economic growth is stagnating. 
The second mutation stems from excessive shareholder dominance, which has been on the rise for more than three decades. 
Gathered into pension, investment, and hedge funds, shareholders can place considerable pressure on companies to extract dividends, using performance-based bonuses to gain executive support for their preferred policies. 
This has led to excessive workforce externalization, high rates of CEO turnover, takeover bids, and restructurings of all kinds – all which have far-reaching consequences. 
In OECD countries, the share of salaries in GDP has fallen by about ten percentage points, on average, to roughly 57%. 
Cumulative figures for the last 30 years vary from $200-300 trillion. 
For this reason, consumption – the main driver of economic growth – has stagnated since 2000, while unemployment rates have risen almost everywhere, creating instability that affects even those who still have jobs. 
Capitalism’s third mutation is the extreme financialization of economies and societies. 
Financial and industrial managers are compensated at a level that most of the world would struggle even to imagine. 
And the unrestrained expansion of financial markets, notably the proliferation of derivatives, led directly to the crisis that engulfed the Western banking system in 2007-2008. 
Governments, in order to contain the fallout of the crisis, ran up public debt, including in countries whose balance sheets had already been weakened significantly by declining GDP growth. 
In many countries – particularly in Southern Europe – bleak economic circumstances are generating social tension, political apathy, civil unrest, and delinquency. 
The persistent specter of climate change only compounds public anxiety. 
This is obviously not the ideal environment for France – not to mention the struggling economies of Southern Europe – to implement difficult structural reforms. 
But, by changing its economic doctrine, Europe can improve its prospects considerably. 
Instead of remaining on the German-led path of orthodoxy – which, through counter-productive austerity and deflation (forcing down domestic wages and prices), has turned stabilization into recession – Europe must develop a growth-based strategy to overcome the crisis once and for all. 
Many economists, including the Nobel laureates Paul Krugman and Joseph Stiglitz, advocate precisely such a policy change for Europe. 
Only by heeding their recommendations, and demonstrating a shared capacity for – and commitment to – long-term thinking, can France and its troubled southern European neighbors finally begin to recover enough strength to do what they must for their long-term health. 

The Age of Violence 
PARIS – Global problems are rarely straightforward. 
But, in general, careful analysis of their various facets leads to some understanding of their causes and, in turn, to reasonably promising solutions. 
Indeed, the opportunity to analyze such problems regularly is precisely what makes my role as a columnist so gratifying. 
Lately, however, promising solutions have been increasingly elusive. 
Simply put, much of the world is mired in conflict, with little hope of escape. 
In Ukraine, violent clashes between pro-Russian separatists and the police are just the latest development in the country’s deteriorating security situation. 
Syria remains locked in a brutal civil war. 
And tensions between Israel and Iran over the latter’s nuclear program – not to mention Israel’s decades-old conflict with Palestine – are exacerbating instability in the Middle East, where ten countries, taken together, have become the world’s largest market for weapons, purchasing more new arms annually than China. 
Several African countries – Mali, Central African Republic, South Sudan, and Somalia – are engulfed in permanent civil war, leaving citizens without potable water, much less schools, hospitals, and other social infrastructure. 
In Nigeria, the Islamic militia Boko Haram – a glorified gang of criminals – brings disgrace on the Prophet, in the name of whom they abducted more than 200 schoolgirls to sell or use as sex slaves. 
In Asia, China’s military buildup and increasingly assertive approach in pursuing its territorial claims in the South and East China seas – which overlap with claims by Japan, the Philippines, South Korea, and Vietnam – is raising concerns among its regional neighbors. 
It does not help that China’s economic growth, which provided a powerful boost to the region’s smaller economies in recent decades, has slowed considerably. 
China is not the only major emerging economy experiencing diminished growth. 
Brazil, too, is suffering from slow growth, not to mention stubborn inflation and mounting deficits. 
Meanwhile, Latin American countries like Mexico and Colombia remain under threat from drug cartels that sometimes are better armed than the police or the military. 
Meanwhile, in the European Union, an election has come to a close. 
But it was an election for nothing; the outcome merely reinforced the growing divide between pro-Europeans and Euro-skeptic populist parties. 
While the global economy may seem to be recovering from the recent crises, it remains fraught with risk, stemming from the $750 trillion in liquidity – up $50 trillion since 2006 – sloshing around in speculative markets. 
This capital does not finance investments or fuel economic growth; its sole purpose is to reap enormous but unpredictable profits for a select few. 
This bubble, like all bubbles, will burst, triggering a much more severe crisis than that of 2008. 
At least event organizers are keeping busy. 
The United Nations is preparing its 21st climate conference, to be held in Paris in 2015, with world leaders knowing full well that it, too, will end in failure to conclude a comprehensive global agreement. 
Given the scale of the world’s ecological challenges, our leaders’ incapacity to cooperate effectively on the environment could not be more problematic. 
For example, at the current rate, the world’s fish resources will be extinguished in the next half-century. 
Yet Russia, Ukraine, and China recently opposed the establishment of Protected Marine Areas, which are critical to the survival of numerous species. 
We have only one planet, and we must learn to coexist on it. 
Yet the overwhelming feeling is one of chaos and degradation. 
We cannot afford to wait for world leaders to solve our problems any longer. 
The global public must unite to compel decision-makers to take real action aimed at overcoming obstacles to peace, harmony, and sustainability. 
The first obstacle is international law’s lack of enforcement authority. 
While respecting individual countries’ sovereignty is vital, so is accountability – and that requires some international authority to monitor and punish crimes. 
The good news is that the global public is increasingly supportive of international intervention in some cases. 
But it must go further, demanding that any treaty should include a provision for surveillance and sanctions; that a country’s right to veto intervention be limited according to the amount of time that has passed and the issue at stake; and that measures to protect populations be decided upon by majority vote. 
The second major obstacle is the intellectual demise of what could be called “the science of economics.” 
Nowadays, the banking industry shapes decision-making worldwide, exemplified in its enduring right to unlimited speculation and its capacity to capture profits that are unmatched by any other industry, especially for its senior managers, while exposing the world to overwhelming risk. 
Instead of allowing a single self-interested sector to dictate the economy’s functioning, policymakers must determine precisely what the acceptable balance is between risky speculative activities and financial stability – and ensure that the financial sector adheres to it. 
Governments’ emphasis should always be on reducing unemployment, instability, and inequality. 
The third major obstacle to global peace and prosperity is the disappearance of ethics from the functioning of states and markets. 
Governments and multilateral bodies like the UN have gradually been discredited, along with the value systems on which they are based. 
While major religions retain some value-based authority, most have remained largely silent on the real political, economic, environmental, and security challenges that the world faces. 
Why do Christian churches continue to focus on people’s private behaviors and not on the rules of the social and economic game? 
Why does the Chief Rabbinate of Israel never discuss peace, much less make a statement on what, in the eyes of God, should have priority: a piece of land or millions of human lives? 
Why do Muslim authorities so rarely condemn crimes supposedly committed in the name of the Prophet? 
Perhaps that will change, too. 
Pope Francis, for example, appears to be leading the Catholic Church in the direction of greater social engagement. 
It is the global public’s duty to take the same route. 

Taming Europe’s Banks 
PARIS – Last month, the European Commission unveiled its much-anticipated blueprint for banking reform, aimed at reining in risk-taking by the European Union’s largest banks. 
But the proposal has met significant resistance, with some warning that it would erode European banks’ competitiveness, and others arguing that it is inadequate to mitigate banking risks effectively. How this debate unfolds will have profound implications for the EU’s future. 
According to Michel Barnier, the EU commissioner spearheading the reform effort, the proposed measures – including regulatory authority to divide banks’ riskier trading activities from their deposit-taking business, and a ban on proprietary trading by the largest banks – would enhance financial stability and protect taxpayers. 
But the draft regulation falls far short of the recommendations made by a high-level expert group in 2012, which included an impermeable wall between banks’ speculative-trading business and their retail and commercial banking activities. 
Nonetheless, many claim that Barnier’s proposal goes too far. 
Perhaps the strongest reaction came from Bank of France Governor Christian Noyer, who called the proposals “irresponsible and contrary to the interests of the European economy.” 
The positions taken in this complex debate do not align neatly with the traditional left-right political spectrum. 
Barnier is a center-right Frenchman recommending more public control over private banking activities. 
(Indeed, stricter banking regulation has been endorsed by all.) 
And, while Noyer’s position at the central bank makes him independent, he is championing banking-sector autonomy in a country led by a left-wing government. 
What is at stake is Europe’s capacity to avoid another financial meltdown – one that could be even more devastating than the 2007 crisis. 
Of course, to some degree, a capitalist system will always be vulnerable to shocks and crises. 
The question is how to respond to them to minimize the fallout, while bolstering the system’s resilience. 
In 1929, a crisis among speculating capitalists prompted poorly conceived and excessive reactions, leading to a deep and prolonged depression. 
Less than four years later, US President Franklin D. Roosevelt’s newly elected government passed the Glass-Steagall Act, which prohibited commercial banks from trading securities with clients’ deposits. 
By forbidding investment banks from holding cash deposits, Glass-Steagall helped to support more than a half-century of financial stability after World War II. 
This – together with the gold exchange standard, which ensured that credit did not exceed the economy’s productive capacity – contributed to sustained global economic growth. 
Everything changed in 1971, when US President Richard Nixon, unable to contain the fiscal deficit resulting from spending on the Vietnam War and expanded social-welfare programs, abolished the dollar’s direct convertibility to gold. 
The resulting exchange-rate, interest-rate, and commodity-price volatility continues to this day. 
The financial sector has since made every effort to design instruments that protect against price fluctuations, to transform private debt into tradable financial securities, and to gain access to speculative markets. 
But these efforts were conducive to fraud and delinquency, and thus spurred a wave of new financial crises – in Europe in 1992, in Asia in 1997, and in Russia in 1998 – as well as a recession in Europe and the United States in the early 2000’s. 
Two other destabilizing developments emerged in the last quarter of the twentieth century: a strong incentive to use debt to prop up demand, and a shift toward financing public debt through private institutions at market prices, under the pretext of fighting inflation. 
These trends boosted public-debt burdens, while flooding the global financial system with liquidity generated by private banking activities that were unconnected to transactions in the real economy. 
As a result, by 2006, global liquidity amounted to more than twice the value of world GDP. 
Add to that the American financial sector’s untenable subprime and securitization activities, and it is not surprising that the next two years brought the global financial system to the brink of outright collapse. 
To prevent the crash from triggering another Great Depression, governments intervened with massive taxpayer-funded bailouts, causing public-debt burdens to swell further, reaching unsustainable levels in many developed economies. 
Making matters worse, the US, the United Kingdom, and Japan began implementing quantitative-easing policies – that is, they began printing money – in an attempt to sustain GDP growth. 
Through all of this, governments have strengthened bank regulation only slightly, leaving key issues like liquidity creation, exposure to derivatives, and tax avoidance largely unaddressed. 
Today, 98% of the $750 trillion in global liquidity is in speculative markets. 
Like all bubbles, this one is bound to burst. 
The European Commission has acknowledged the danger, declaring that the only way to mitigate it is to separate the real economy from speculative markets by preventing banks from being involved in both. 
But, according to Noyer, such a move would not work in the eurozone, where banks’ profits depend largely on their risky activities. 
If those activities move to the UK, the eurozone economy will suffer considerably. 
From a short-term perspective, Noyer’s position is largely correct. 
But the profits that would be lost remain lower than the potential costs of another major financial crisis. 
The eurozone’s member states should never again have to face such costs. 

Micro-Europe 
STOCKHOLM – With the United States crippled by Wall Street’s collapse, this should be Europe’s moment. 
Yet the European Union’s role in the world is weakening; it is listened to less today than it was 15 years ago. 
As Singapore’s Kishore Mahbubani, a prominent Asian diplomat and academic, puts it, “Europeans are irrelevant to the world’s great issues, obsessed by internal process, culturally arrogant, craven in the face of the US, and blind to the rise of Asia.” 
If Europe is to gain a more important role in global leadership, it must reverse its long-term economic decline. 
Consider the evidence of that decline: 
· Ownership : After centuries in which European corporations dominated the developing world, the trend is reversing. 
Indian, Middle Eastern, and other investors are buying up European steel mills and carmakers. 
In coming years, watch out for China and Russia. 
· Exchange rates : When the dollar slumped a year ago and eroded European competitiveness still further, both the European-led International Monetary Fund and the European Central Bank proved impotent. 
Instead, European leaders flew cap in hand to China to ask for support. 
While the dollar has risen recently against the euro, Europeans did not influence this. 
· Banks : When American and Swiss banks hit the wall, nobody approached Europe for support. 
Instead, bank leaders pleaded with the Middle East, Singapore, and China to throw a lifeline. 
Once Europe’s own banks became infected, euroskeptic British leadership was needed to overcome French and German dithering. 
European institutions remained on the sidelines. 
Of course, Europe’s growing irrelevance is not entirely self-inflicted. 
Emerging-market countries have increased their share of the world economy, giving them a more important voice in international relations. 
But it is not others that prevent euro-zone growth from climbing above 3%, or that are causing the EU-15’s share of the world economy to dwindle, from 19.5% of global GDP in 1994 to 16% last year. 
Despite its Lisbon agenda, EU enlargement, and the coming of the euro, Europe’s overall economic performance has not improved because it has neglected many basic and everyday issues. 
Three examples come to mind. 
First, the EU still spends far more of its resources subsidizing declining sectors than preparing for the future. 
Although research funding is rising, it accounts for just 4.7% of EU spending, compared to 31.7% for agriculture. 
Second, Europe has failed to introduce an independent European Research Council to ensure that funding is allocated on the basis of scientific merit. 
Too much of the money earmarked for research goes to prestige projects with limited or no connection to science, like Galileo or the European Institute of Technology. 
Third, European resources are fragmented, and this hampers European competitiveness. 
The weak and diluted EU Takeover Directive, adopted after more than a decade of debate, fails to facilitate the cross-border mergers within Europe that are needed to build world champions. 
And company-based social benefits in some leading European countries weaken corporate flexibility by locking in labor. 
Yet there are a number of areas of consensus where the EU can push ahead. 
Enlargement has made far-away countries our neighbors. 
They need access to our markets, and we should not turn them away. 
We should expand the European single market in order to boost growth and avoid new divisions. 
This means leveraging unglamorous tools like tariffs, industrial standards, market regulation, and cooperation in research and education in our relations with countries like Russia and Egypt, just as we have done with Norway and Switzerland. 
Many citizens believe that European cooperation benefits only the privileged, and that workers and pensioners face higher taxes because cross-border integration has helped the rich find ways to avoid paying their fair share on interest and capital gains. 
Common rules to eliminate cross-border tax evasion, and thus erase this perception, should become a priority. 
Participation in a common financial market should not be allowed for free riders who refuse to share information. 
Cooperation with havens like Liechtenstein or Monaco should be ruled out unless they accept that within the common market all citizens must pay taxes where they live, according to the rules of that country. 
Policy coherence within the EU must also be improved. 
The motivation to implement further reforms of the internal market has weakened, leading to a situation in which even decisions by EU leaders at their European Council meetings can go ignored. 
Developments that are fundamental to European competitiveness, like an EU-wide patent, have proved impossible to achieve. 
The EU’s goal of spending 1% of GDP on research by 2010 will not be met by any member state. 
Too often, special interests are allowed to overrule common European interests. 
Europe needs to curb subsidies for old and dying industries, and to invest the money saved in future-oriented sectors. 
The last thing Europe needs is to reinforce unnecessary centralization. 
A dynamic and successful Europe is not a one-size-fits-all Europe, and European integration must not become a goal in itself, but a means to create sustainable prosperity. 
Nor do we need cosmetic efforts to pursue EU-wide policies to combat the current crisis, when it is obvious that we have failed to act together. 
Strengthening Europe means encouraging growth-enhancing policies, rather than focusing on who gets the most benefits from EU funds or institutions. 
This is particularly important in the area of worker protection. 
Europe’s citizens are unlikely to support measures to strengthen the EU if this means that working conditions can no longer be decided locally. 
Yet the European Court has fueled frustrations by undercutting local labor practices in notable recent cases concerning workers employed in Sweden and in Germany. 
Europe, to be blunt, must devote more energy in the years ahead to addressing its micro challenges rather than to promoting grand ideas. 
If we stick to that principle, the EU will have a much better chance of regaining global influence. 

Microbiology's World Wide Web 
All the fashionable talk nowadays about computer “viruses” explains what these culprits do by forging an analogy to their biological namesakes. 
But it is equally enlightening to portray the biosphere of real, living microbes as a world wide web of informational exchange. 
Indeed, microbes exchange information with each other and their environment, with DNA serving as the packets of data going every which way. 
Microbes differ from computer viruses because they not only spread but evolve, and do so at a faster pace than their hosts. 
Microbes are in fact well designed to exploit this difference to their advantage in the war that occasionally erupts between them and other species - a war we see as disease and death. 
It is the microbe’s capacity to transfer information to other organisms that makes the analogy with the World Wide Web plausible. 
Like computer viruses, many living viruses can integrate (download) their own DNA into their host’s genetic material (the genome), and this can be copied and passed on. 
Indeed, even our own, human, evolution is partly explained by these encounters with microbes. Many segments of human DNA originated from historical encounters with a particular type of viruses, known as retroviruses, which “downloaded” their information into human cells and integrated it into human DNA. 
The field of molecular genetics, which began in 1944, when DNA was proven to be the mechanism by which inherited characteristics are passed on, brought microbes to the center of many biological investigations. 
Systems composed of microbes are often the most convenient models to study evolution in a laboratory. 
What makes the evolution of microbes so intriguing - and worrisome - is their combination of vast populations and intense fluctuations within those populations. 
Some microbes possess a gene that enhances their variability, and this allows them to mutate at different rates in response to factors in the environment - something larger organisms rarely do. 
Also, while more advanced life forms, like humans, cannot mate with members of other species, microbial evolution is less constrained by this “species barrier.” 
Indeed, through a processes known as Aplasmid transfer,” microbes can exchange biological innovations among themselves, including - most importantly and dangerously - resistance to antibiotics, which one species of microbes can pass on to another. 
The sheer number of microbes and their ability to exchange information is a formula for high-speed evolution. 
Populations of microbes fluctuate by many billions on a daily basis as they move between their host organisms and encounter antibiotics, antibodies, drought, or other natural hazards to which their genetic evolution may respond. 
A simple comparison of the pace of the evolution of microbes and their multicellular hosts suggests a millionfold or billionfold advantage to the microbe. 
One year in the life of a microbe, indeed, easily surpasses the ages it took for all mammals to evolve! 
By that measure, mankind is playing out of its evolutionary league. 
Indeed, many complex species lost the war with microbes to become extinct. 
Human history, too, has been marked by catastrophic microbe-caused plagues. 
While humanity has survived all these microbe-inspired disasters so far, maintaining our survival in a world in which germs/viruses and their hosts continuously interact in new ways will require us to think in innovative ways as well, and to bring ever more sophisticated technical wit and social intelligence to the contest. 
In my recent work, I explore the implications of this gross imbalance in the evolutionary pace of humans as compared to microbes and viruses. 
Had the entire evolutionary drive of microbes been directed at optimizing their virulence and lethality, larger species would not have survived such murderous competition. 
But, of course, neither would many microbes have survived, because they depend on other species for their habitat. 
Despite the fact that microbes do not ordinarily seek to maximize their virulence, most research on infectious disease focuses on the mechanisms by which the harmful effects of microbes are felt, as well as on the ways in which host organisms adapt (mainly through the immune system) to fight that virulence. 
Very little attention has been given to the microbes’ internal mechanisms for sustaining themselves as inhabitants within their hosts, which includes the interest the microbe shares with its host in controlling and limiting the damage it does. 
After all, microbes reside in their hosts in order to gain from the exchange. 
Startling examples show that a microbe’s goal is, indeed, joint survival with its host. 
In some cases, the host’s immune system is even manipulated by one parasite in order to enhance the host's resistance to super-infection by rival, invading parasites. 
We may thus have to learn how to exploit these synergies and use the weapons that microbes provide us, rather than look at them only as mortal enemies marked for peremptory extermination. 
Just as scientists study entire ecological systems to see how the various parts interact, we must regard the human body as an extended genome. 
Its parts consist of the nuclear DNA genome (karyome), a chondriome (mitochondria), and what I call the microbiome: the menagerie of the body’s attendant microbes. 
We must study the microbes that we carry within us and on our surfaces as part of a shared embodiment. 
If you can't beat them, join them! the old saying goes, and for better and worse our fates are joined with the microbes that share our bodies. 
We can and will benefit from a deeper understanding of just how they work within and with us. 

Microfinancing Climate Resilience 
LONDON – Vulnerable communities face the brunt of climate change – from rising sea levels and extreme weather events to prolonged severe droughts and flooding. 
According to the World Bank, without effective mitigation measures, climate change could push more than 100 million people into poverty by 2030. 
To help the most vulnerable communities become more resilient to the effects of climate change, financial institutions should support small and medium-size enterprises. 
In emerging economies, SMEs account for as much as 45% of employment and up to 33% of GDP – and these numbers are significantly higher when informal SMEs are included. 
When an SME builds up its own climate resilience, it can have cascading effects in the community around it. 
Unfortunately, SME owners generally have trouble securing bank loans, and instead must turn to informal lending and alternative funding sources to support their businesses. 
According to the World Bank, 50% of formal SMEs lack access to formal credit, and the total credit gap for both formal and informal SMEs is as high as $2.6 trillion worldwide. 
While the gap varies considerably among regions, it is particularly wide in Africa and Asia. 
Microfinance can close this gap by providing the small loans that SMEs need to get off the ground and thrive. 
According to the OECD, microfinance institutions, including national foreign-aid agencies, banks, credit unions, and nonprofit organizations, already provide basic financial services to more than 100 million of the world’s enterprising poor, 90% of them women. 
The role of microfinance in boosting SMEs’ climate-change resilience needs to be more fully defined. 
In Africa, Asia, and Latin America, microfinance has enabled SMEs to invest in drought-resistant crops, build better irrigation systems, and purchase climate insurance to protect incomes when crops fail because of too much – or too little – rainfall. 
These projects already have a proven track record. 
According to a review by the OECD, 43% of microfinance activities in Bangladesh in 2010 had strengthened the resilience of communities. 
These projects include lending programs for weather-resistant housing and drought- and salt-tolerant seeds, and they enhanced climate-change resilience. 
In Nepal, microfinance is supporting disaster relief and preparedness, crop diversification, and improved access to irrigation. 
Microfinance can also help SMEs transition to low-carbon business models, by financing their efforts to adopt renewable energy sources and shift to sustainable production and supply chains. 
Microfinance is not the only solution, and it certainly has its critics. 
To allay concerns about money being poorly spent, microfinance institutions should reward SME owners who use loans to finance climate-change resilience and renewable-energy projects. 
This need not be an act of corporate social responsibility. 
In fact, according to the Business and Sustainable Development Commission, which I chair, such an approach is in microfinance institutions’ own self-interest. 
The private sector should understand that the climate crisis is also an opportunity, especially with regard to SMEs. 
In fact, some in the private sector already recognize this. 
GSMA – a trade group that represents hundreds of telecoms operators, and whose director general, Mats Granryd, is a member of the Business Commission – and its members are facilitating microfinance in rural areas. 
With mobile phones, farmers can quickly find information ranging from seed prices to weather patterns, and have immediate access to the funds they need to complete transactions. 
This mobile-enabled information leads to better decision-making, saving the farmers money and boosting their resilience to extreme-weather patterns and droughts. 
And of course mobile providers benefit as well from operating in an expanded rural market. 
There are also opportunities in peer-to-peer lending networks, whereby online services match lenders directly with borrowers. 
P2P micro-lending platforms such as lendwithcare.org, Lendico, and RainFin have proved popular, and could re-energize the microfinance community and provide wider access to loans for SMEs in developing countries. 
Financial products like weather derivatives – which insure the harvests and enterprises of SMEs and some of the world’s poorest people – also have potential. 
If the world is serious about mitigating the worst effects of climate change, especially its disproportionate impact on vulnerable communities, both the public and private sectors should support efforts to extend microfinancing to SMEs. 
Those on the front line of protecting lives and livelihoods can’t go it alone. 

The Arab World’s Vanishing Christians 
PRINCETON – This Christmas, like every Christmas, thousands of pilgrims and tourists will travel to the Middle East to celebrate the holiday in the land of the Bible. 
In Bethlehem, the birthplace of Jesus, the Latin Patriarch of Jerusalem will lead a midnight mass, while in Syria – where some Christians still speak dialects of Aramaic, similar to the ancient language Jesus spoke – celebrations are likely to be subdued, curtailed by the dangers of a war that is tearing the country apart. 
At a time when the Middle East is aflame with sectarian strife, the observance of the Christian holiday is a sad reminder that the region’s distinctive religious, ethnic, and cultural diversity is rapidly disappearing. 
At the beginning of the twentieth century, Christians made up roughly 20% of the Arab world. 
In certain areas – including southern Egypt, the mountains of Lebanon, and southeastern Anatolia – they formed an absolute majority. 
Today, just 5% of the Arab world is Christian, and many of those who remain are leaving, forced out by persecution and war. 
Jews, too – once a vital presence in cities like Cairo, Damascus, and Baghdad – have all but disappeared from the predominantly Muslim parts of the Middle East, relocating to Israel, Europe, and North America. 
Even in Muslim communities, diversity has been dwindling. 
In cities like Beirut and Baghdad, mixed neighborhoods have been homogenized, as Sunni and Shia seek shelter from sectarian attacks and civil war. 
The waning of diversity in the Middle East goes back more than a century, to the bouts of ethnic and religious cleansing that took place during the Ottoman Empire, including the murder and displacement of 1.5 million Armenian and Syriac Christians in eastern Anatolia. 
After the empire’s collapse in 1918, the rise of Arab nationalism placed Arabic language and culture at the center of political identity, thereby disenfranchising many non-Arab ethnic groups, including Kurds, Jews, and Syriacs. 
Many Greeks who had been living in Egypt for generations, for example, lost their livelihoods in the 1950s, when President Gamal Abdel Nasser, the great standard-bearer of pan-Arabism, nationalized privately owned businesses and industries. 
Others were forced to flee the country altogether. 
The rise of political Islam following the Arab-Israeli Six-Day War in 1967 dealt another blow to religious minorities. 
By promoting Islamic revival as a solution to the region’s ills, Islamism led to the marginalization of non-Muslims, including groups that had played outsize roles in the region’s economic, cultural, and political life for centuries. 
As a result, in places like Egypt, Christians have faced harsh social discrimination and violence, sometimes at the hands of the nominally secular state. 
The Arab Spring upheavals have given rise to grave new challenges to cultural and religious diversity in the Middle East. 
Many of the authoritarian regimes now under threat of collapse cultivated the support of minorities. 
This was especially true in Syria, where the Alawite-dominated Baath Party fostered ties to Christians and other small communities by presenting itself as a bulwark of secularism and stability in the face of a supposedly threatening Sunni majority. 
Now that Syria’s Sunnis have risen up against their Alawite rulers, Christians’ loyalty to the regime has become a liability, even a danger. 
In some corners, Christians are regarded as complicit in the government’s brutal crackdown, making them targets for attack. 
The rise of the Islamic State over the last year has sparked even more violence against minorities. 
Powered by a fundamentalist Wahhabi ideology and a boundless appetite for bloodshed, the Islamic State seeks a return to an imagined pre-modern caliphate that subjugates Shia and treats non-Muslims as second-class citizens. 
When the Islamic State captures a city, its fighters give Christians the choice of paying a medieval tax known as the jizya, converting to Islam, or being killed. 
Many simply flee. 
The Yazidis of northern Iraq – whose plight on Mount Sinjar was much publicized this past summer – are even less lucky. 
The Islamic State regards them as pagans, and therefore, undeserving of the protections traditionally accorded to Christians or Jews under Islamic law. 
As a result, many Yazidis are murdered or enslaved. 
In addition to persecuting minorities, the Islamic State has set about erasing all physical traces of religious diversity. 
Its forces have demolished Sufi shrines, Shia mosques, Christian churches, and ancient monuments they consider to be remnants of a corrupt and profane past. 
Western governments’ protection of ethnic and religious minorities in the region has been a controversial matter for more than a century, and it remains so today. 
Many Sunnis, for example, accuse America of favoritism: the United States intervenes to protect Kurds, Yazidis, and Christians in northern Iraq, they say, but does little to stop the slaughter of hundreds of thousands of Sunnis in Syria. 
In fact, America’s complicated history of church-state relations at home has made it reluctant to intervene on the part of any religious groups abroad, especially when the population is small. 
The end of diversity in the Middle East is a tragedy not only for those who have died, fled, or suffered. 
The region as a whole will be worse off as a result of their absence. 
Minorities have historically served as brokers between the Middle East and the outside world, and if they disappear, the region will lose an important class of cultural, economic, and intellectual leaders. 
How a society handles ethnic and religious diversity can tell us a great deal about its capacity to negotiate disagreements and transform pluralism from a liability into an asset. 
Yet diversity is all too often considered a source of weakness in the Middle East. 
It should be considered a strength, and one that is worth protecting. 

Managing Compromise in the Middle East 
CAIRO – The Middle East, and especially the Arab world, is experiencing a period of fundamental change and even more fundamental challenges. 
But the region’s ability to meet the many challenges that it faces has been complicated by national, regional, and international disagreements about what form change – both across the region and in individual societies – should take. 
The international community undoubtedly has a central role to play in supporting social and economic reform in the region, and in assisting governments to find both the will and the way to undertake the necessary changes. 
But it is far more important that Arabs themselves adopt a forward-looking perspective in reckoning with the challenges that they face, and that they take charge of their own destiny. 
That much became clear with the Arab Spring revolts in 2011. 
Even though the region was already being transformed by demographic changes, including rapid population growth, urbanization, and a spike in unemployed, university-educated young adults, the eruption of protests took many Middle Eastern and North African countries by surprise. 
Arab youths were a major force behind demands for change. 
So, too, were new digital technologies that freed up information and facilitated communication among ordinary citizens, essentially dismantling the monopolies that many governments held on knowledge and connectivity. 
But the greatest reasons for disruption have been rooted in the inability of Arab governments and societies to manage effectively the changes sweeping the region, and their excessive dependence on foreign countries to ensure their security. 
Many governments, having grown sclerotic and rigid, were quickly outpaced by social and geopolitical forces beyond their control, and have proved unable or unwilling to adapt to any trend challenging the status quo. 
This also reflects the fact that central features in many governments’ domestic and regional agendas are not even of their own making, but were imposed from outside the region. 
To move to a more effective, proactive form of governance, Middle Eastern countries need to create a space for genuine politics and civil-society initiatives that redistribute power and foster cooperation. 
The region is facing problems that are simply too complex and deep-rooted to be addressed with isolated, top-down solutions. 
The creativity within Arab societies must be tapped. 
Some countries will need economic and social support to create the necessary domestic conditions, while others will need to address outstanding geopolitical issues. 
Consider Tunisia, which many people outside the Middle East see as one of the region’s greatest recent success stories. 
To be sure, political factions in Tunisia have set a good example by often compromising with one another in order to create a viable governance structure; but domestic social and sectarian grievances are still very much a part of Tunisian politics. 
The Tunisian government must tread carefully, and it cannot assume that all of its citizens are satisfied with the new arrangements. 
Creating the space for national, municipal, and even tribal leaders to engage politically is especially important for the region’s more unstable countries, which must, as a first step, limit the availability of weapons that can be used to challenge the authority of legitimate governments. 
For example, establishing a functioning government in Libya will require international assistance, including a joint force comprising the United Nations, the Arab League, and the African Union, as well as an arrangement among Algeria, Egypt, and Tunisia to monitor and control borders and maritime access. 
Egypt is undergoing its own fundamental sociopolitical transformation. 
Lacking a culture of political compromise, the breakdown of central authority in 2011 was not surprising. 
Egypt now must restore a broad, constitution-based consensus on the fundamental economic and social rules of the game, which will require all stakeholders in government and civil society to demonstrate a real willingness to reach agreements that account for the legitimate needs of everyone. 
To help things along, Egyptians should seek ways to use new technologies to include all constituencies in the debates that must shape this process. 
Syria – which has become a true humanitarian disaster, with no end in sight – poses the most severe test of the region’s ability to compromise and reconcile. 
Because the conflict is so complex, it will allow no clear military victor. 
Not even the great powers that are now involved there, the United States and Russia, can manage the transition to peace alone. 
Of course, the US and Russia will be indispensable to guide the reshaping of the political and military landscape, through sanctions, military force, or the power of political persuasion. 
But any viable and lasting peace in Syria will require the cooperation of a large number of actors. 
Specifically, it will require a multidimensional bargain: between the US and Russia; among Gulf states, especially Saudi Arabia and Iran; and between the Syrian opposition and supporters of President Bashar al-Assad’s regime. 
The need for broad cooperation is apparent across the region, where problems are deep-seated and, therefore, cannot be resolved with simple, quick fixes. 
Dynamic, peaceful societies will never emerge across the Middle East unless all of their citizens embrace the lost art of compromise and embark on a consensual process of nation building. 
This will undoubtedly take time and patience, and it will require governments to determine their own destiny and deter regional adventurism by some Arab states. 
To help the region meet the myriad challenges it faces, the international community should pursue a three-pronged approach: first by strengthening Middle Eastern countries’ governing institutions and putting them on a path toward self-sufficiency; second, by committing unconditionally to preserve and respect the region’s nation-state system; and third, by launching a concerted effort to end the violence in the region and create the conditions for new political processes to get off the ground. 
Bloodshed, division, and hopelessness sow the seeds for terrorism and extremism. 
Consensus building, compromise, and cooperation within and among Middle Eastern and Arab societies must be the watchwords for banishing those destructive forces from our lives. 

The Best Investments We Can Make 
DUBAI – The desire to make a difference is born of a fundamental belief in something greater than ourselves, and by the concern that we all have for the wellbeing of our fellow humans. 
As an Arab woman, I find it impossible to sit back and watch – or worse, turn away – as parts of the Middle East suffer through such a difficult time in the region’s already troubled history. 
Millions of innocent people have been displaced from their homes, and millions more are being driven across national borders into an uncertain and unstable future. 
Their need for help is clear. 
To be sure, we can only do so much as individuals. 
But by uniting around common goals, we have the power to create effective initiatives, and improve lives. 
And I have always believed that education and social entrepreneurship are two areas where we can have the greatest sustainable, long-term impact. 
Together, these sectors create opportunities at every level of society, from refugees who are unable to complete their studies, to professionals seeking to further their career prospects or pursue an innovative vision. 
The ongoing conflict in Syria has driven a vast number of refugees into camps that have evolved from temporary dwellings into makeshift cities. 
A prime example is the Za’atari Camp in Jordan, which now hosts 80,000 residents; but similar camps can be found in Lebanon and other countries around the region. 
Mass forced migration is not just a challenge for Syria’s immediate neighbors. 
As refugee flows have turned a local crisis into a global issue, Europe’s political, economic, and social fabric has been tested, too. 
When refugees are torn away from their daily lives, they lose the chance to pursue an education. 
To address this problem, organizations such as the Unite Lebanon Youth Project (ULYP) are now identifying children from refugee camps who have the potential to complete their formal education and influence those around them. 
With an education, these young people will be better equipped to effect positive change in their communities, now and in the future. 
The ULYP has close ties to prestigious institutions such as the American University of Beirut, which has long been regarded as an incubator for successful entrepreneurs in the region. 
The ULYP, which I support by funding annual scholarships, acknowledges that education is neither the only solution nor a quick fix. 
Accordingly, the project takes a long-term approach, and makes investments in individuals who one day could benefit larger communities. 
After all, it is better to teach people to fish than simply to feed them. 
Similarly, after someone has been empowered with the knowledge and financing to start their own company, they can start thinking about the greater good – at which point the true value of entrepreneurship becomes apparent. 
Entrepreneurship is powered by dreams and aspirations, vision and ideas. 
And although financial support is important, it is not the only ingredient in the recipe for success. 
Entrepreneurs also need access to talented mentors and support networks. 
It was with this idea in mind that I joined the board of Endeavor UAE, a global nonprofit from the United States that empowers entrepreneurs around the world. 
Endeavor’s beneficiaries are not run-of-the-mill businesspeople, but rather those with the potential to become role models. 
We support individuals who can inspire their colleagues and peers, and improve their communities. 
Not every entrepreneur will be successful. 
But by giving the brightest young business leaders financial support and access to a global network of mentors, we can help them realize their potential to transform the economies of entire countries. 
Moreover, this creates a virtuous circle, because today’s entrepreneurs can identify the entrepreneurs of tomorrow, and furnish them with the capital they need to change lives in the future. 
I have always believed that with success comes a responsibility to think about the wider world. 
In July 2015, I returned to my alma mater, the London Business School, to launch a scholarship that will support students in the MBA and Executive MBA programs. 
In the same way that a Palestinian or Syrian refugee might complete their studies through the ULYP, or a young innovator might receive guidance through Endeavor, I hope that LBS students will be empowered to build a better future for us all. 
We live in an ever more interconnected global economy, and on an increasingly unequal and unstable planet. 
Our goal should not be just to make money, but also to make a difference. 

Closing the Middle East’s Education Deficit 
NILE DELTA – About 60 miles north of Cairo’s Tahrir Square – the epicenter of the Egyptian uprising in 2011 – there is a secondary school students call “the prison.” 
A deformed box of concrete packed with dilapidated classrooms, the school is pockmarked with age and neglect. 
One teacher in the sleepy Nile Delta village morbidly quips that it doubles as a morgue. 
“We never saw a revolution here,” he said a few months ago, withholding his name for fear of losing his job. “A lot of the hope we had is now dead…it was killed.” 
The plight of Egypt’s public schools is a critical indicator of how Egypt’s revolution has failed its people. 
Outside observers saw the popular rebellion against Hosni Mubarak’s regime as a struggle for democracy over dictatorship; the generals who once again rule Egypt portray it as a fight for secularism that was hijacked by radical Islam. 
In fact, it was a revolt for human dignity, for a better life for ordinary citizens. 
Without education, that hope is stillborn, not only in Egypt but across the Middle East. 
According to the United Nations, ongoing conflicts in the Middle East and North Africa are depriving more than 13 million children of an education. 
But it’s not just in war-torn Syria and Yemen where youth are systematically neglected; shortcomings abound in relatively stable countries such as Egypt and Jordan. 
Inadequate education goes hand in hand with the region’s unemployment crisis. 
According to the International Labor Organization, the Middle East had the world's highest youth unemployment rates in 2014, with 46% of women and 24% of men out of work. 
This toxic combination of poor education and high youth unemployment leaves millions of young people lingering in a purgatory that American University professor Diane Singerman calls “waithood.” 
The term describes the prolonged adolescence that young people must endure until they can afford marriage, the region’s institutional and cultural gateway to societal recognition, not to mention sexual activity. 
Unfortunately, governments and international institutions regard education and unemployment as development issues, not political or security issues. 
The US gives Egypt $1.3 billion in annual military aid (second only to Israel), but just $250 million for civilian projects and programs. 
Supporters of military assistance argue that weapons systems are needed to fight affiliates of Al Qaeda and the so-called Islamic State in the Sinai and to maintain American influence with Egypt’s generals. 
Yet, unless Egyptian youth have hope and opportunity, security assistance is only a Band-Aid. 
Long-term security depends on a government’s willingness to provide adequate public goods and services. 
Suppose the United States and the International Monetary Fund conditioned military and financial assistance to Egypt on straightforward measures of educational progress. 
At the aggregate level, Egypt could improve its performance in global rankings. 
In the World Economic Forum’s latest report on global competitiveness, Egypt was ranked 139th out of 140 countries for quality of primary education. 
Other changes, such as reducing the need for and the cost of private tutoring, would make a material difference in the lives of ordinary Egyptians. 
In Manshiyat Naser, one of Cairo’s poorest neighborhoods, young people like 18-year-old Ashraf Khalil have been studying for Thanaweya Amma, the infamous national secondary school examination. 
Their results will mean the difference between a coveted university spot and a life of second-class citizenry in a country with almost no social mobility. 
“Things are actually worse since the revolution,” Khalil said while hopping on a minibus to a nearby wealthy residential compound where he gardens. 
He’s trying to make enough money to hire a private tutor for the exam. 
Indeed, private tutoring has become the de facto Egyptian education system. 
Some teachers have admitted off the record that they teach the bare minimum in class, so that they can profit from the same students in private lessons. 
According to some estimates, Egyptian families spend more than $1 billion on private tutoring to compensate for poor education – a cost that often amounts to almost a quarter of household income. 
The US and European governments, which have a vital interest in the stability and prosperity of countries throughout the Middle East and North Africa, could also marshal and support consortia of private investors. 
A few years ago, the Egyptian investor Ahmed Alfi started a virtual classroom called Nafham (Arabic for “We understand”). 
In an effort to reduce the country’s dependence on private tutoring, the web-based startup provides crowd-sourced educational videos. 
The service now has 500,000 users and offers a Syrian curriculum to service the 50% of that country’s refugee youth who are out of school. 
But Alfi says it’s been challenging to find outside funding, and he is not alone. 
Last April, Abdul Aziz al-Ghurair, a billionaire businessman from the United Arab Emirates, launched the Arab world’s largest education fund, allocating $1.14 billion in grants for underserved youth from the region. 
According to Maysa Jalbout, CEO of the Abdulla al-Ghurair Foundation for Education, the fund hopes to provide scholarships for 15,000 Middle Eastern students over the next ten years. 
Beginning in September, students will receive financial assistance to attend the region’s top four universities; eventually, study at international universities will be funded as well. 
But individual initiatives are not enough. 
“Efforts need to be systematic and institutionalized,” Jalbout explains. “No one fund can fix these problems….[W]e need all hands on deck.” 
For that to happen, the education of Middle Eastern youth must be regarded as a strategic issue, worthy of just as much global foreign-policy attention as the fight against extremist groups. 
The region should be armed with pens, not just swords. 

Education Innovation in the Middle East 
LONDON – Supporting the millions of newly displaced people of the Middle East demands resources far beyond the capacity of the United Nations, and is a continuous humanitarian-aid challenge for companies, foundations, and public-sector donors. 
While UN peacekeepers are financed by a system of “assessed contributions,” humanitarian aid depends on voluntary donations. 
Education, which is prioritized below basic survival needs like food and shelter, all too often gets left behind. 
This failure is far more dangerous than it might seem at first glance. 
In fact, we now confront an education crisis that threatens to leave a lost generation of young people without any hope for a better future. 
The majority of Syria’s six million displaced children remain out of school, while around 250,000 young people miss out on a college education. 
In war-torn Yemen and Iraq, millions more children are also missing out on school. 
Some may go through all their school-age years without ever entering a classroom. 
But thanks to the Platform for Education in Emergencies Response, charities, philanthropists, and foundations can unite to help refugee students find higher-education opportunities, and to provide safe havens for lecturers and professors persecuted by Syrian President Bashar al-Assad’s regime. 
PEER will connect college-ready Syrian refugees with refugee-ready colleges, and it will eventually be a web-based higher-education conduit for displaced students at all grade levels worldwide. 
PEER is being supported by the Institute of International Education and the Catalyst Foundation for Universal Education, an education charity founded by former New York University President John Sexton. 
Beyond PEER, the Catalyst Foundation is also looking at projects to improve school auditing, spur social-impact investing in the education sector, and introduce curricula to encourage inter-faith coexistence in the Middle East and worldwide. 
Schools are the first places where we can promote inclusive citizenship in Middle Eastern countries. 
With this in mind, the Catalyst Foundation is assessing pilot civic-education projects in the region – as well as in Eastern Europe, Africa, and the United States – to determine how school curricula can best cultivate inter-faith understanding. 
A large generation of young people growing up in the Middle East and North Africa – soon to number 200 million – would be well served by an educational model that fosters cultural coexistence, especially during a time when certain politicians in the West deny that coexistence is possible. 
A model curriculum need not be limited to teaching the Golden Rule or making optimistic appeals to universal religious axioms. 
It should also support courses that teach pupils that diversity is a strength and a public good for their societies. 
That is what the Catalyst Foundation hopes to do. 
The proposal is to work with some half-dozen pilot schools, including a secondary school in the United Arab Emirates, high schools in the US and Europe, and a secondary school in Lebanon that is taking in Syrian refugee students. 
Lebanon is a particularly important participant in this project. 
Despite its long history of political, social, and religious divisions, all nine-year-old pupils are introduced to a school curriculum that emphasizes to all children – whether Shia, Sunni, or Christian – the worth and dignity of all faiths and the common ground between them. 
The Lebanese model is a good starting point for developing a framework that can be used worldwide. 
The Catalyst Foundation’s curriculum is likely to include universal themes to prompt youths from very different national, religious, and cultural backgrounds to interact with one another, online or in person, by sharing their own insights and experiences. 
The goal is to foster cultural and religious understanding and dialogue among young people at a critical stage of their education, with the hope that they will grow up to become their countries’ and communities’ leaders. 
Indeed, reformers have many opportunities to create new virtuous cycles across the Middle East’s education sectors, and they should take a lesson from Sir Ronald Cohen’s pioneering work in social-impact investing, and social enterprise as a whole. 
Education-sector social entrepreneurs now have more financing tools at their disposal than ever before – from venture capital to targeted-investment funds and other new asset classes – and they can play an important role in bringing the Middle East’s classrooms into the twenty-first century. 
Too many past ideas that have emerged from the nonprofit sector have stalled, owing to a lack of finance. 
The Catalyst Foundation aims to provide seed capital for education start-ups and to help them scale up successful programs. 
For anyone who cares about education in the Middle East, our task is clear: to furnish millions of poor and vulnerable young people with the support they need to transform and improve their lives through learning. 
As the Catalyst Foundation intends to show, a little social enterprise can go a long way. 

The Rise and Fall of Middle Eastern Health Systems 
SEATTLE – Much of the progress in the Arab countries of the Middle East and North Africa in recent decades appears to have been reversed by the political unrest and civil wars afflicting the region. 
This reversal is especially visible in the health systems of Egypt, Jordan, Libya, Syria, Tunisia, and Yemen, which previously had been steadily improving. 
Before 2010, these countries were experiencing increased life expectancy as well as reduced infectious disease burdens and infant and maternal mortality. 
Today, however, disruptions to their health systems have compounded the trauma and misery that have arisen from the region’s many conflicts. 
This is clear from a recent study that I co-authored for The Lancet, which examined data from the Global Burden of Disease Study 2013 to determine the effects of health-system deterioration in Eastern Mediterranean countries. 
We found that projected life expectancy has declined across the board since 2010. 
For example, if the 1990-2008 rate of increase for life expectancy in Syria had continued apace, it would have been five years higher for women and six years higher for men than it is now. 
In Libya, life expectancy declined by six years for women and nine years for men. 
And in Egypt, Tunisia, and Yemen, it declined by .25 years between 2010 and 2013. 
The larger drop in life expectancy in Syria and Libya is to be expected, given the civil wars in those countries. 
The United Nations Special Envoy in Syria estimates that 400,000 people have died in that country in the last five years as a result of the violence. 
Moreover, the turmoil has had less obvious, but equally alarming, downstream effects. 
For example, after declining at an average annual rate of 5.6% between 1990 and 2010, Syria’s infant mortality rate has risen by 9.3% in recent years. 
In war-torn countries, the destruction of infrastructure is generally indiscriminate. 
Despite international resolutions prohibiting attacks on health-care facilities, such attacks are a regular occurrence. 
Moreover, amid war and severe social unrest, medical and mental-health professionals often flee to safer environments, depriving those left behind – regardless of their status or income – of basic treatment for everything from physical injuries to drug and alcohol abuse. 
In fact, conflicts in the region are especially hazardous for people suffering from mental illness and substance abuse. 
The rate of total disease burden for psychological and drug-use disorders, measured in life years, increased from 4% in 1990 to more than 7% in 2013, with some countries seeing more dramatic increases than others. 
With the unrest yet to come to an end, the impact will be even higher in 2016. 
Negative health trends are apparent even in countries that have been experiencing economic growth. 
Both Qatar and the United Arab Emirates are experiencing increased drug and alcohol use, suggesting that the stress of mere proximity to violence elsewhere, combined with increasing openness and massive growth in illicit drug production in conflict zones such as Afghanistan, could push people toward substance abuse as a coping mechanism. 
Areas neighboring these zones are also increasingly burdened by the largest refugee crisis in 70 years. 
The flood of people into camps in Lebanon and Jordan has overwhelmed sanitation measures, leading to outbreaks of infectious diseases and resurgence in some areas of diseases that had been nearly eradicated, such as polio among Syrian refugees in Iraq. 
Most countries absorbing refugees are simply not equipped to deal with such a massive influx of people who need health and social services. 
The rapid deterioration of health-care systems in the Middle East and North Africa in the last half-decade is alarming. 
But the progress many countries in the region made in prior decades provides grounds for hope that it can be reversed. 
Larger investments in education, diagnosis, and treatment, for example, would help to reduce the stigma of mental illness that persists in many Arab countries. 
But a resumption of progress in the region is impossible without political solutions that reduce violence and social unrest. 
As we conclude in our study, “a healthy Eastern Mediterranean Region is a politically stable Eastern Mediterranean Region from which the whole world will benefit.” 
Stabilizing a country riven by conflict is a prerequisite for improving its health-care system. 
Once such stability is achieved, regional and local efforts should be accelerated to improve disease prevention and health-care infrastructure, and to put the region back on a path toward providing better, healthier lives for its people. 

Middle East Integration 
The attempts now being made to revive the “road map” to a final settlement of the Palestinian-Israeli conflict and the creation of a Palestinian state are at only a preliminary stage. 
The recent international conference in London, aimed at supporting reforms in the Palestinian Authority and shoring up support for renewed negotiations with Israel, is one of those preliminary efforts. 
I suggest, however, that it is not mediation that is needed: what the Palestinians need now are partners. 
In their conflict with Israel, their natural and historical partner has always been Jordan. 
That partnership was never broken. 
Articles 3 and 8 of Jordan’s peace treaty with Israel refer explicitly to the refugee problem as one of the major issues still to be resolved, as well as citing the unresolved status of trans-border arrangements and of Jerusalem. 
Jordan is not outside the peace process, but an essential part of it. 
The original road map sketched out at the Madrid Conference in 1991 envisaged two stages: the final settlement of disputes between the Palestinians and Israel, and the permanent settlement of regional conflicts. 
Jordan’s participation in both stages is crucial. 
Indeed, the interests of the inhabitants of the three areas – Palestine, Jordan, and Israel – are so intertwined that their representatives will have no choice but to come to terms with one another if negotiations are to succeed. 
For example, the refugee problem cannot be separated from wider problems concerning the integration of all inhabitants of Palestine, Jordan, and Israel – where the refugees are most numerous – into civil societies where they may enjoy equal legal status and equal access to economic and cultural opportunities. 
Such integration cannot be achieved on a unilateral basis but only by programs adopted by the host and donor countries in co-operation with each other; nor can it be achieved in conditions where there is complete political and administrative separation between the populations which places them under exclusive controls and fails to acknowledge the human needs of community and conviviality. 
The economic and social development of the three areas demands an integrated approach to the exploitation of energy and other natural resources, particularly water. 
Without agreements on the conditions of such exploitation there will remain imbalances of living conditions and the persistence of rival claims with their potential for future conflicts. 
A recognized community of water and energy interests and programs for their joint exploitation, for example in the rift valley, may lead, as was the motivation for the first stage of European integration, to a wider integration on a wider scale in the region. 
The status of Jerusalem is still an unresolved question on both the local and international scenes. 
That question was specifically listed in the Jordanian-Israel Peace Treaty. 
The recognition by the three parties of the primacy of the moral and spiritual over the political importance of the city could lead to arrangements on the ground which satisfy the legitimate claims of the three Abrahamic faiths, and subsume the eventual political status of the city to this moral authority. 
The alternative to an accepted resolution of their problems by the three parties is the permanent fragmentation of the Holy Land, which can only lead to more confrontation and violent conflicts. 
The shadow of such fragmentation, with its unfathomable perils, now hangs over Iraq. 
In this troubled part of the world, the choice is, quite simply, one between regionalism and barbarism. 

Breaking the Middle East’s Cycle of Terror 
FEZ – In July, Iraqi Prime Minister Haider al-Abadi announced that the Islamic State (ISIS) had been driven out of Mosul, the country’s second-largest city, which it captured three years ago. 
Sooner or later, it will also lose Raqqa, the capital of its self-styled caliphate – and the last true city under its control. 
But these defeats do not mean the downfall of ISIS, much less Islamist terrorism, or that the Middle East’s most acute conflicts will be resolved anytime soon. 
To be sure, the fading dream of an Islamic caliphate will weaken the ability of ISIS and kindred groups to recruit disaffected youth. 
Already, the flow of foreign would-be jihadists crossing from Turkey into Syria to join ISIS has plunged, from 2,000 per month to about 50. 
But such groups still have powerful lures at their disposal. 
Most fundamentally, they are able to offer disillusioned young people a sense of purpose and belonging. 
The fact that this purpose entails murder, terror, and mayhem may make it all the more appealing among frustrated and resentful youth. 
Despite recent setbacks, writing off the threat posed by ISIS is as unwarranted as it is premature. 
Consider the history of al-Qaeda, which proves that even if a state that nourishes a terrorist group fails, a radical ideology can continue to fuel violence near and far. 
The group’s leaders must simply adjust their methods, in order to continue attracting recruits and planning attacks from outside the borders of a friendly sovereign state. 
To that end, in Iraq, terrorist groups will continue to exploit sectarianism, which had divided the country long before the United States invaded it in 2003. 
More broadly, they can capitalize on escalating tensions between Sunni and Shia Muslims to attract alienated young Sunnis. 
This increasingly dangerous dynamic is apparent in the decision of Egypt, Saudi Arabia, and the United Arab Emirates to cut diplomatic ties with Qatar, owing to its alleged ties with regional terrorist groups and Iran, Saudi Arabia’s main rival for regional influence. 
It is also visible in the devastating proxy war in Yemen, which has become a key battleground in the Saudi-Iranian power struggle. 
Against this background, it seems likely that ISIS, from its scattered bases in Egypt’s Sinai Peninsula, Iraq, Libya, and Yemen, will be able to continue planning and executing terrorist attacks in the Middle East and beyond. 
But there are ways to avoid such an outcome – or at least minimize the damage. 
For starters, governments and non-governmental actors in the Arab world must sever all financial ties to terrorist groups. 
Beyond official transfers, this means halting private efforts by individual citizens to fund terror. 
States in the region already have harsh legal codes; governments should enforce them more effectively against those who finance terror. 
At the same time, religious and political leaders must loudly condemn the violent Islamist ideology that nurtures jihadist movements, spurning them with the same vigor that they reserve for challengers to their own authority. 
Qui tacet consentire videtur (silence means consent). 
In this case, tacit consent emboldens terrorist actors, with deadly results. 
The countries of the Middle East have become associated with extremist ideologies and terror the world over. 
If they are to recover their reputations, and restore the health of their societies and economies, they must act decisively to weaken the allure of terrorist recruiters. 
Algeria, Morocco, and Tunisia have all made some moves in this direction, but they cannot do it alone. 
Like these countries, others in the Middle East must not allow themselves to be lulled into complacency by the ostensible fall of ISIS as a territorial entity. 
Ultimately, the only way to break the cycle of terror and violence in the Arab world is to resolve the conflicts within Islam. 
To reach that point, however, the region’s governments must urgently pursue a two-prong strategy of interdiction and condemnation. 

A Middle East Health-Care Revolution 
CAIRO – On a recent visit to Jordan and Egypt, as part of a trade mission led by the United States Department of Commerce, I was struck by the potential for the surrounding region to become a major hub for cutting-edge medicine. 
With the right policy mix and enough political will, the Middle East could become an important part of the world for health-care research. 
In particular, it has a critical role to play regarding pharmaceutical clinical trials designed to investigate the influence of patients’ region of ancestry on the safety, efficacy, and effectiveness of treatments. 
As our understanding of genetics expands, it is becoming clear that our ancestral origins play a key role in determining the efficacy of certain medicines. 
For example, studies have shown that patients of European ancestry respond better to beta blockers and ACE inhibitors than those of African descent. 
And continental origins are often considered when selecting optimal antihypertensive and cardiovascular drug therapy. 
Another example is warfarin, an anticoagulant. 
Research has found that patients of African descent require higher doses than those of European origins; patients with Asian ancestry require lower doses. 
Studies of tacrolimus, a drug used to prevent organ rejection in transplant patients, indicate that African-American patients require higher doses than their white peers. 
Genetic research has also expanded our understanding of diseases. 
For example, research by the US Agency for International Development (USAID) found that epidermolysis bullosa, a debilitating inherited skin disorder, has a different genetic signature in patients from the Middle East than in those from other parts of the world. 
As our understanding of diseases grows, more research is needed to determine the effectiveness of sophisticated new medicines in specific patient populations around the world. 
Such investigations are already underway in some regions. 
In Asia, the Human Genome Organization established the Pan-Asian Population Genomics Initiative to study genetic diversity and evaluate variations in drug response in the region. 
In Mexico, the Institute for Genomic Medicine is genotyping the country’s entire population. 
Establishing a similar effort in the Middle East will require collaboration among pharmaceutical companies, academic institutions, non-profit organizations, governments, and health-care providers. 
Organizations like USAID and the US Naval Medical Research Center, which are already conducting clinical research in the region, could become valuable partners in coordinating and managing trials. 
The first step that the Middle East can take is to align regulations across the region, with countries agreeing on the parameters for testing drugs’ safety and efficacy in the local population. 
Clinical activity is increasing across the Middle East, and the health-care ecosystem needed to support research is growing in size and sophistication. 
And yet, when it comes to new treatments, regulatory bodies in the region generally follow decisions made by the US Food and Drug Administration (FDA) and the European Medicines Agency (EMA), without extensively studying a drug’s safety and efficacy on local patients. 
Approvals must take place on a national level, but regional leadership will be necessary. 
Jordan, for example, has a sophisticated health-care system and a thriving medical tourism sector. 
It is also the site of an increasing number of clinical trials. 
As such, it is well placed to set the standard for research required to show a drug’s safety and efficacy in patients of Middle Eastern ancestry. 
It is important to move quickly. 
The incidence of chronic diseases is increasing rapidly across the Middle East. 
According to the International Diabetes Federation, rates of diabetes in the Middle East and North Africa will rise 96.2% by 2035, with the United Arab Emirates, Oman, and Qatar predicted to have the highest growth rates. 
Likewise, the World Health Organization estimates that more than a quarter of adults in Egypt have hypertension, while cardiovascular diseases account for 35% of all deaths in Jordan. 
Developing new, more effective treatments will be crucial to addressing these challenges before health-care costs spiral out of control. 
The Middle East is best known for its ancient historical sites, political instability, and abundant natural resources. 
But, by developing its ability to make medical advances, the region could become a world leader in deepening our understanding of the role of genetics in the safety and efficacy of medical treatments. 

The Middle East Meltdown and Global Risk 
NEW YORK – Among today’s geopolitical risks, none is greater than the long arc of instability stretching from the Maghreb to the Afghanistan-Pakistan border. 
With the Arab Spring an increasingly distant memory, the instability along this arc is deepening. 
Indeed, of the three initial Arab Spring countries, Libya has become a failed state, Egypt has returned to authoritarian rule, and Tunisia is being economically and politically destabilized by terrorist attacks. 
The violence and instability of North Africa is now spreading into Sub-Saharan Africa, with the Sahel – one of the world’s poorest and most environmentally damaged regions – now gripped by jihadism, which is also seeping into the Horn of Africa to its east. 
And, as in Libya, civil wars are raging in Iraq, Syria, Yemen, and Somalia, all of which increasingly look like failed states. 
The region’s turmoil (which the United States and its allies, in their pursuit of regime change in Iraq, Libya, Syria, Egypt and elsewhere, helped to fuel) is also undermining previously secure states. 
The influx of refugees from Syria and Iraq is destabilizing Jordan, Lebanon, and now even Turkey, which is becoming increasingly authoritarian under President Recep Tayyip Erdoğan. 
Meanwhile, with the conflict between Israel and the Palestinians unresolved, Hamas in Gaza and Hezbollah in Lebanon represent a chronic threat of violent clashes with Israel. 
In this fluid regional environment, a great proxy struggle for regional dominance between Sunni Saudi Arabia and Shia Iran is playing out violently in Iraq, Syria, Yemen, Bahrain, and Lebanon. 
And while the recent nuclear deal with Iran may reduce the proliferation risk, the lifting of economic sanctions on Iran will provide its leaders with more financial resources to support their Shia proxies. 
Further east, Afghanistan (where the resurgent Taliban could return to power) and Pakistan (where domestic Islamists pose a continued security threat) risk becoming semi-failed states. 
And yet, remarkably, even as most of the region began to burn, oil prices collapsed. 
In the past, geopolitical instability in the region triggered three global recessions. 
The 1973 Yom Kippur War between Israel and the Arab states caused an oil embargo that tripled prices and led to the stagflation (high unemployment plus inflation) of 1974-1975. 
The Iranian revolution of 1979 led to another embargo and price shock that triggered the global stagflation of 1980-1982. 
And the Iraq invasion of Kuwait in 1990 led to another spike in oil prices that triggered the US and global recession of 1990-1991. 
This time around, instability in the Middle East is far more severe and widespread. 
But there appears to be no “fear premium” on oil prices; on the contrary, oil prices have declined sharply since 2014. 
Why? 
Perhaps the most important reason is that, unlike in the past, the turmoil in the Middle East has not caused a supply shock. 
Even in the parts of Iraq now controlled by the Islamic State, oil production continues, with output smuggled and sold in foreign markets. 
And the prospect that sanctions on Iran’s oil exports will be phased out implies significant inflows of foreign direct investment aimed at increasing production and export capacity. 
Indeed, there is a global glut of oil. 
In North America, the shale-energy revolution in the US, Canada’s oil sands, and the prospect of more onshore and offshore oil production in Mexico (now that its energy sector is open to private and foreign investment) have made the continent less dependent on Middle East supplies. 
Moreover, South America holds vast hydrocarbon reserves, from Colombia all the way to Argentina, as does East Africa, from Kenya all the way to Mozambique. 
With the US on the way to achieving energy independence, there is a risk that America and its Western allies will consider the Middle East less strategically important. 
That belief is wishful thinking: a burning Middle East can destabilize the world in many ways. 
First, some of these conflicts may yet lead to an actual supply disruption, as in 1973, 1979, and 1990. 
Second, civil wars that turn millions of people into refugees will destabilize Europe economically and socially, which is bound to hit the global economy hard. 
And the economies and societies of frontline states like Lebanon, Jordan, and Turkey, already under severe stress from absorbing millions of such refugees, face even greater risks. 
Third, prolonged misery and hopelessness for millions of Arab young people will create a new generation of desperate jihadists who blame the West for their despair. 
Some will undoubtedly find their way to Europe and the US and stage terrorist attacks. 
So, if the West ignores the Middle East or addresses the region’s problems only through military means (the US has spent $2 trillion in its Afghan and Iraqi wars, only to create more instability), rather than relying on diplomacy and financial resources to support growth and job creation, the region’s instability will only worsen. 
Such a choice would haunt the US and Europe – and thus the global economy – for decades to come. 

Middle East Modesty 
“Ripeness is all,” concludes Edgar in King Lear . 
I will leave it to Shakespeare scholars to decipher what he had in mind. 
But for diplomats and historians, understanding the concept of ripeness is central to their jobs: it refers to how ready a negotiation or conflict is to be resolved. 
This may sound academic, but it is anything but. 
The United States and the three other members of the Quartet – the European Union, Russia, and the United Nations – are planning to convene many of the parties to the Israeli-Arab conflict at a meeting near Washington in November. 
The problem is that the conflict is not even close to being ripe for resolution. 
Ignoring this reality will lead to failure, if not catastrophe. 
Ripeness has several elements: there must be a formula for the parties involved to adopt, a diplomatic process to get them to that point, and protagonists who are able and willing to make a deal. 
It is not clear that any of these conditions exist in today’s Middle East. 
Much has been said or written about what “final status” or peace between Israel and the Palestinians would look like, but important differences remain regarding borders, the status of Jerusalem and its holy places, the rights of refugees, the future of Israeli settlements, and security arrangements. 
There is also a question of process. 
Who should be involved in negotiations? 
What issues should be on the agenda? 
What sort of activities, including violence and settlement activity, are to be precluded while negotiations take place? 
Most critical, though, is the condition of local leadership. 
Palestinian Authority President Mahmoud Abbas may want to sign a peace accord with Israel, but there is little evidence that he is in a position to do so. 
He has lost all authority in Gaza, and has a tenuous hold over the West Bank. 
If Palestine were a state, it would be judged to have failed. 
Israeli Prime Minister Ehud Olmert is in a stronger but still uncertain position. 
His coalition government survives mainly because many members of Israel’s parliament know that they would lose their seats in an early election. 
It is an open question whether the most that Olmert would likely be able and willing to offer would meet the least that Abbas would be able to accept. 
Trying to end the Middle East conflict in such a climate would be futile. 
Worse yet, failure would strengthen those on both sides of the dispute who argue that diplomacy is a waste of time. 
So what, then, should be done? 
First, it is important that expectations be kept modest. 
“Success” needs to be defined narrowly. 
Calls for an agreement on the most controversial elements of a final peace settlement are unrealistic. 
Simply agreeing to an agenda for follow-up meetings would be an accomplishment. 
Here, and elsewhere, the US will need to take the lead; the parties cannot be expected to reach consensus by themselves. 
Second, it is essential that this meeting be the start of a serious process, not a one-time event. 
Rigid timetables that history suggests would not be met should be eschewed. 
But no one should walk away doubting the determination of the US and other members of the Quartet to see this process succeed as quickly as possible. 
Third, diplomacy cannot survive, much less thrive, amidst a deterioration of the day-to-day circumstances on the ground. 
More than anything else, Palestinians must come to associate peace and diplomacy with improvement in their living conditions. 
This requires improved security, inflows of aid and investment, and the curtailment of land expropriations that deny the promise of statehood. 
Israelis require and also deserve improved security. 
Fourth, a path must be provided for those who did not attend the meeting to join the process at a later date. 
The most critical barrier for Hamas and others should be a clear commitment to forego armed violence in the pursuit of political ends. 
Fifth, the Palestinian leadership cannot be expected to take risks for peace without political protection. 
This means that Arab governments, led by Egypt and Jordan, but including Saudi Arabia and other members of the Arab League, must publicly declare their willingness to support a peace that is based on coexistence with Israel. 
It would also help if those countries in a position to do so underscored their preparedness to make funds available to help build a Palestinian state and to resettle both refugees and those living in settlements that are vacated under any peace accord. 
For some, this approach will seem overly modest. 
But this is not yet the time for great ambition. 
The context for peace in the Middle East has deteriorated sharply in the seven years since the Clinton administration last convened the parties. 
Today’s Israeli and Palestinian leaders are far weaker than their predecessors; 
Hamas controls Gaza; 
Iran is more influential; additional settlements and a fence have been built; and the US is bogged down in Iraq and has lost standing throughout the region. 
This is not an argument for drift. 
Neglect in the Middle East is rarely benign. 
But it is vital that new efforts do not cause more harm than good. 
Avoiding failure is sometimes a better objective than achieving great success. 
This is one such occasion. 
Today’s diplomats could do worse than recall the warning of the great French statesman Talleyrand: “ Surtout, messieurs, point de zéle .” 
Above all, not too much zeal. 

A New Economy for the Middle East and North Africa 
WASHINGTON, DC – Countries in the Middle East and North Africa (MENA) possess all of the ingredients they need to leapfrog into the digital future. 
They have large, well-educated youth populations that have already adopted new digital and mobile technologies on a wide scale. 
That combination has immense potential to drive future growth and job creation. 
But will it? 
Public spending, the region’s historical engine of development, has reached its limit. 
Because the public sector can no longer absorb the swelling ranks of university graduates, the MENA region now has one of the world’s highest rates of youth unemployment. 
The digital economy holds the promise of a new way forward, but it is still in its infancy, and young people face obstacles in putting technology to productive use. 
Although the Internet and hand-held devices are ubiquitous throughout the region, they are currently used for accessing social media, rather than for launching new enterprises. 
But there are green shoots emerging. 
For example, the ride-hailing app Careem has grown from a start-up to a billion-dollar company, creating thousands of jobs in more than 90 cities in the MENA region and in Pakistan and Turkey. 
And new digital platforms are already connecting job seekers and employers, providing vocational training, and hosting start-up incubators. 
The challenge now is to create the conditions for these green shoots to grow and multiply. 
The first, essential step is for MENA countries to become “learning societies,” a phrase coined by the Nobel laureate economist Joseph E. Stiglitz to describe countries in which shared knowledge leads to increased innovation. 
This, in turn, fosters development; and in the case of MENA, it could lead to the creation of a vibrant digital service economy. 
To get there, education systems will need to change. 
For the region’s young people, the curriculum is more often a source of frustration than advancement. 
The concept of a “skills premium” – the difference in wages between skilled and unskilled workers – dictates that higher educational attainment should lead to higher compensation and more secure employment. 
Yet in the MENA region, the opposite has happened: university graduates are far more likely to be unemployed than are workers with only a basic education. 
Two factors work against the region’s young people. 
First, schools are still geared toward channeling graduates into large public sectors, which means they place less emphasis on fields such as mathematics and science. 
Second, bloated public sectors are crowding out the private sector, which would otherwise be a larger provider of high-skill, high-wage jobs. 
Because the future economy will need technologically capable workers, curricula should be reoriented toward STEM (science, technology, engineering, and mathematics) subjects and away from the social studies that were long prized by public-sector employers. 
Moreover, education systems should focus on encouraging greater openness to innovation and risk-taking – a significant departure from the attitudes reproduced under a system of public-sector patronage. 
Specifically, moving toward an innovative “learning society” will require students to hone their critical-thinking and managerial skills within collaborative work arrangements. 
In addition to skills, the digital economy will also need technical infrastructure. 
Connectivity is a prerequisite for the delivery of new mobile and digital services in e-commerce, vocational training, health care, and finance, all of which could substantially increase overall welfare. 
Countries in the region thus need to focus on expanding broadband Internet access. 
Education and Internet infrastructure geared toward productive use would provide the foundation of a new economy. 
But ensuring sustained growth in the region will require improving its financial systems as well. 
A digital economy depends on payment systems that are not just easy to use and widely available, but also trustworthy. 
Developing effective peer-to-peer payments that require no financial intermediary like a bank will be crucial for ensuring that digital platforms for ride sharing, on-demand tasks, and other services can thrive. 
Outside of the Gulf Cooperation Council countries, which have relatively advanced payment systems, the quality of financial services in the MENA region currently lags behind most of the rest of the world. 
Barring improvements to the financial system, and to the banking sector in particular, the potential of the region’s vast human capital will not be realized. 
Lastly, governments will need to develop an approach to regulation that encourages, rather than stifles, innovation. 
To be sure, ensuring confidence, especially in financial systems, is essential; but regulation must be balanced with policies to boost competition, so that start-ups can easily enter the market and test new ideas. 
There needs to be more space for more companies like Careem to emerge. 
Policymakers should look to Kenya’s model of light but effective regulation, which has fostered the rapid growth of the peer-to-peer payment system M-Pesa. 
Seizing the opportunities that the digital economy offers the MENA region will require a big push. 
Policymakers will need to work on multiple fronts, while making the best use of all available tools. 
The sooner they start, the greater the chance that today’s young people can overcome economic exclusion and gain more opportunities to realize their – and their region’s – full potential. 


Middle East Peace by Any Means Available 
RAMALLAH – Something is happening with the Middle East conflict, but it is hard to say what. 
A breakthrough appears to be at hand, though all the parties still seem to be clinging to their traditional positions. 
The Arab League gave the go-ahead to indirect Palestinian-Israeli talks, and the various Palestinian leadership forums have approved the resumption of talks. 
Even the usually boisterous Palestinian negotiator Saeb Erekat has toned down his rhetoric, and Palestinian President Mahmoud Abbas gave an optimistic interview to Israel TV. 
But Israel has not publicly agreed to the American and Palestinian request to rescind the settlement construction in Jerusalem approved during US Vice President Joe Biden’s recent visit to Israel. 
On the contrary, Israeli officials, denying the Palestinians’ assertion that a secret US-Israel agreement exists, clearly intend to continue building Jewish homes in occupied East Jerusalem. 
So what is going on? 
For starters, we are again moving into what Henry Kissinger called the realm of “constructive ambiguity.” 
Palestinians have been assured via a message from President Barack Obama, delivered by his special envoy George Mitchell, that the Israelis will not carry out any “provocations” during the coming four months of indirect negotiations. 
Pressed to clarify, the Palestinians admitted that there is no written promise to this effect. 
But, on a recent trip to Israel, White House adviser Dan Shapiro is said to have been reassured that the Israelis will not embarrass their American friends. 
In exchange, Shapiro handed the ultra-orthodox leader of Israel’s Shas party an invitation to the White House. 
Mitchell gave a similar invitation to Abbas. 
Palestinians understand that without pressure little change will take place. 
They have also clearly understood the folly of violent resistance, and have made a dramatic shift to nonviolent action – with the acceptance (and possibly encouragement) of the international community – in order to maintain pressure on the occupiers. 
The PLO’s main faction, Fatah, made this shift at their sixth congress, held in Bethlehem last winter after a 20-year hiatus. 
Senior PLO officials have participated in demonstrations and protest activities, with some being injured and Executive Committee member Abbas Zaki imprisoned for a couple of days. 
Other senior Fatah officials have been banned from travel outside the West Bank, owing largely to their involvement in nonviolent protests. 
In addition to nonviolent activities, Palestinian state-building efforts have been put in high gear. 
Salam Fayyad, the energetic Western-trained Palestinian prime minister, has implemented a detailed blueprint for declaring a de facto Palestinian state by August 2011. 
While state-building is handled by the civilian Palestinian Authority, political efforts are handled by the PLO, whose chairman, Abbas, is the head of Fatah as well as the Palestinian Authority’s president. 
Abbas and his negotiating team, headed by Erekat, have been successful in securing the support of all members of the Arab League. 
The PLO has succeeded in obtaining European support for a unilateral Palestinian declaration of statehood. 
The only obstacle remaining to Palestinian leaders are the Americans. 
When Palestinians asked Mitchell for assurances that the US would support such a statehood declaration if talks failed, Mitchell responded that such a commitment would make negotiations pointless. 
Instead, the Americans have their own ideas about how to achieve a breakthrough, especially with Israel, which the Obama administration believes is now the major obstacle. 
To effect change in Israel, the Americans are launching various trial balloons. 
One is that, if the current process fails, Obama might issue his own plan, which many expect would be a near-carbon copy of the proposal made by Bill Clinton’s administration in its last days ten years ago. 
At the time, Palestinian and Israeli negotiators were quoted as saying that the two sides had never been closer to an agreement. 
A US peace plan that is fair and reasonable would certainly have many ordinary Israelis and Palestinians cheering. 
It could cause some major damage to right-wing Israeli political forces that came to power as a result of eight years of former US president George Bush’s so-called war on terror. 
Hiding behind that anti-Islamic façade, the Israelis have found it easy to stonewall all reasonable peace efforts, including the 2002 Arab peace plan, according to which Arab states and Muslim-majority countries agreed to normalize relations with Israel if it withdrew from areas occupied in 1967. 
The plan also gave Israel a role equal to that of the Palestinians in resolving the refugee issue. 
It called for the “achievement of a just solution to the Palestinian refugee problem to be agreed upon in accordance with UN General Assembly Resolution 194.” 
Yet another US trial balloon has been the suggestion that if all of the above fails, the Americans might suggest that the Arab-Israeli conflict be resolved through the convening of an international conference. 
Such a conference is in fact listed in the “road map” as part of phase III in the talks. 
Until now, Israelis and Palestinians have insisted on various “red lines” that they proclaimed they would never cross. 
The coming months will show whether these public postures are negotiable, with obvious consequences for both parties and their relationship with the international community, especially the US. 

Training the Middle East’s Future Health-Care Professionals 
BOSTON – The Middle East’s public-health challenges are enormous, especially when one accounts for the region’s transient population of refugees and guest workers. 
The refugee population alone now numbers in the millions, and is straining health-care systems in Jordan, Lebanon, and Turkey nearly to the breaking point. 
Affluent Gulf Cooperation Council countries would be mistaken to assume that they are exempt from their neighbors’ public-health problems. 
While GCC countries have made major improvements in hygiene and maternal and child health, they form the global epicenter of chronic non-communicable diseases – such as obesity, diabetes, heart disease, and, increasingly, cancer – that result from lifestyle and diet. 
Worse still, GCC countries’ national health systems have a shortage of local clinicians and trained professionals working in local public-health services. 
This results in high turnover owing to overwork, and an increased need for foreign health-care workers to fill sorely needed positions. 
GCC policymakers have been right to focus on increasing access and subsidies for quality health care. 
But the fair distribution of health-care services across native and migrant populations is often a thorny policy issue. 
And now policymakers must also devote more attention to the health-care workforce itself, to ensure that it is properly educated and trained for the challenges that await the region. 
Training programs in GCC national health systems today do not focus nearly enough on innovation or systems thinking to improve efficiency and effectiveness. 
If clinicians and health-care workers do not receive multidisciplinary training, they will be unequipped to recognize and address local public-health needs throughout the region. 
Specifically, to improve delivery of services and care, GCC countries will need to develop a new policy framework that spans both the education and public-health sectors. 
Higher education has expanded rapidly in the Middle East over the past decade. 
Governments have created educational free-trade zones – such as the “Knowledge Villages” and “Education Cities” in the United Arab Emirates and Qatar, respectively – and invested billions of dollars in new and existing universities, such as in Saudi Arabia. 
As a result, new universities, research institutions, and educational programs have attracted scholars and other professionals to the region. 
However, too few local students – and far too few young men – are pursuing public-health careers. 
While the overall number of students studying public health is increasing, most come from outside the region, which will only intensify GCC countries’ current over-dependency on foreign workers. 
Many of the region’s universities have put a premium on innovation, which bodes well for improving health-care services. 
But, though public health is a major regional challenge, so far universities have been placing far greater emphasis on subjects in engineering and technological fields. 
Within health-care education itself, according to my own analysis of local institutions, students are learning to treat individual medical conditions, but they are not learning enough about larger public-health issues, and current curricula do not expose students to issues affecting refugees, migrants, or the wider population. 
While institutions such as Weill Cornell in Qatar and the Gulf University of Science and Technology in Kuwait have launched innovative research and training programs that focus on these types of health challenges, much more is needed. 
Another problem is that the region’s education and training programs do not encourage enough systemic thinking. 
Worldwide, public-health policy is moving toward more multidisciplinary integration of engineering, medicine, social and management science, and the humanities. 
By not yet embracing an integrated approach, GCC institutions risk falling behind the global standard. 
Technology and new approaches to public health are important; but they will be ineffective if they are not tailored to meet the real needs of local people. 
This is why GCC countries should encourage and invest in technological development at the local level, and create room for engineers to work with local public-health professionals. 
Such partnerships are necessary for confronting the infectious and chronic diseases that threaten communities throughout the region, and they have the added benefit of providing entrepreneurial opportunities for the region’s youth. 
Middle Eastern countries need fully integrated, innovation-oriented frameworks for training health-care professionals, so that they can address their current public-health challenges and prepare for new, unexpected ones, such as Middle East respiratory syndrome (commonly referred to as MERS), Ebola, and other infectious diseases that can appear with little or no forewarning. 
The Middle East’s population will continue to grow; but whether the region will also grow in global importance as a hub for trade and economic development will depend in part on its governments’ ability to reform public-health education and practice. 

The Middle East Must Lead on Refugees 
FEZ – Since 2012, more than 12 million migrants and refugees have landed in Europe, the Middle East, and North Africa. 
The result has been an escalating political and humanitarian crisis – and increasingly heated debate about how to address it. 
In Europe, the debate is characterized by dissent and division, exemplified by the United Kingdom’s recent vote to leave the European Union – an outcome that was shaped largely by overblown fears about immigration. 
With EU member states failing to agree on how to secure external borders, much less what to do with the refugees who have already arrived, an effective, unified response has proved elusive. 
In the Middle East, the refugee debate is not nearly as loud, but it is no less passionate. Jordan, a country of 6.5 million, now hosts more than 1.4 million, mostly Syrian, refugees. 
Lebanon’s 1.5 million Syrian refugees represent nearly one-third of the country’s population of 4.7 million. 
Turkey, with some 75 million citizens, now hosts 2.7 million Syrian refugees, about 30% of whom live in 22 government-run camps near the Syrian border. 
With most of the refugees originating in the Middle East – especially Syria, but also Afghanistan, Iraq, Yemen, and Libya – the fact that the region is shouldering the overwhelming share of the burden is not surprising. 
But not all Middle Eastern countries have done enough. 
The Gulf countries, despite their vast oil wealth, have taken in hardly any refugees; they contend that, because they are not parties to the 1951 United Nations Refugee Convention, they have no obligation to do so. 
The United Arab Emirates, for example, has taken in just over 200,000 Syrian nationals since the Syrian crisis began in 2011. 
Egypt, Tunisia, Morocco, and Algeria permit Syrian refugees to enter, but provide no support to those who do; there are no refugees camps in these countries. 
Meanwhile, their neighbors are straining under the weight of the crisis. 
Already, Jordan’s social-welfare budget is reaching a breaking point, spurring social tensions. 
Schools in both Jordan and Lebanon were overcrowded even before the refugees arrived; now they are bursting at the seams. 
Even the refugees who work in Jordan and Lebanon are creating problems, as they inadvertently suppress wages for lower-skill jobs. 
Turkey’s government has delivered more than $8 billion in aid; by contrast, the EU has delivered only a small share of the €3.2 billion ($3.6 billion) it pledged last November. 
With host countries overstretched, it is unsurprising that refugees live in rough conditions, whether in camps or very poor neighborhoods, with no amenities or sanitation. 
Hundreds of thousands of refugees are unemployed, including the most highly skilled among them, whose qualifications are often not recognized. 
As a result, forced labor, slavery, prostitution, and social exclusion are on the rise. 
Keeping the migrants largely in the Middle East is critical – not least to prevent them from drowning in the Mediterranean in their attempt to reach Europe. 
The Turkey-EU agreement concluded last March – according to which non-refugee migrants who reach the EU are sent to Turkey – has helped, contributing to a sharp decline in the number of migrants arriving in Greece. 
But much more needs to be done – and Middle Eastern countries should take the lead. 
Most urgently, the wealthy Gulf states should provide more funding to the countries that are hosting the most refugees, thereby enabling them to begin improving living conditions for those seeking safety. 
Then, in order to develop a more comprehensive solution that keeps countries stable and ensures that refugees receive adequate protection, deeper collaboration among governments, as well as with the private sector and civil-society organizations across the region, is needed. 
The problem is that there is no consensus in the Middle East, either among governments or civil society, about how to respond to the crisis. To break the impasse, one or two bold and far-sighted leaders need to remind their citizens of their countries’ legal and, perhaps more important, moral duties to the refugees. 
The Islamic tradition of protecting the welfare of the poor can provide the language and legitimacy needed to inspire citizens to do their part. 
In my book New Horizons of Muslim Diaspora in North America and Europe, I argue against the conventional wisdom that migrants and refugees are a threat to the Middle East’s security and development. 
Just like in the developed countries of the West, migrants in the Middle East can offer untold contributions to their host societies. 
We just need to let them. 
Above all, the refugees’ basic needs must be met. 
Decent living conditions – including housing, nutrition, and health care – must be guaranteed, in addition to educational and employment opportunities. 
If a few countries continue to shoulder the entire burden, however, it will be virtually impossible to meet the refugees’ needs. 
Given this, the region needs to develop a mechanism for distributing refugees more fairly across countries, something like the EU’s quota system. 
Standardized and streamlined procedures for handling asylum applications must also be implemented. 
Even if all of this is achieved, a truly sustainable solution to the refugee crisis will not come until Syria is at peace, and order is restored in failing states across the Middle East. 
That is why it is so important for the region’s governments to play a bigger and more assertive role in tackling the violence and instability that lies at the root of the crisis. 
We cannot afford to wait for outside powers to resolve our most pressing problems. 
Our governments must invest heavily in our neighbors’ stability, including by bringing the Syrian peace process to a successful conclusion, and in the wellbeing of all of our citizens. 


A New Century for the Middle East 
NEW YORK – The United States, the European Union, and Western-led institutions such as the World Bank repeatedly ask why the Middle East can’t govern itself. 
The question is asked honestly but without much self-awareness. 
After all, the single most important impediment to good governance in the region has been its lack of self-governance: The region’s political institutions have been crippled as a result of repeated US and European intervention dating back to World War I, and in some places even earlier. 
One century is enough. 
The year 2016 should mark the start of a new century of homegrown Middle Eastern politics focused urgently on the challenges of sustainable development. 
The Middle East’s fate during the last 100 years was cast in November 1914, when the Ottoman Empire chose the losing side in World War I. The result was the empire’s dismantling, with the victorious powers, Britain and France, grabbing hegemonic control over its remnants. 
Britain, already in control of Egypt since 1882, took effective control of governments in today’s Iraq, Jordan, Israel and Palestine, and Saudi Arabia, while France, already in control of much of North Africa, took control of Lebanon and Syria. 
Formal League of Nations mandates and other instruments of hegemony were exercised to ensure British and French power over oil, ports, shipping lanes, and local leaders’ foreign policies. 
In what would become Saudi Arabia, Britain backed the Wahhabi fundamentalism of Ibn Saud over the Arab nationalism of the Hashemite Hejaz. 
After World War II, the US picked up the interventionist mantle, following a CIA-backed military coup in Syria in 1949 with another CIA operation to topple Iran’s Mohammad Mossadegh in 1953 (to keep the West in control of the country’s oil). 
The same behavior has continued up to the present day: the overthrow of Libya’s Muammar el-Qaddafi in 2011, the toppling of Egypt’s Mohamed Morsi in 2013, and the ongoing war against Syria’s Bashar al-Assad. 
For almost seven decades, the US and its allies have repeatedly intervened (or supported internally-led coups) to oust governments that were not sufficiently under their thumb. 
The West also armed the entire region through hundreds of billions of dollars in weapons sales. 
The US established military bases throughout the region, and repeated failed operations by the CIA have left massive supplies of armaments in the hands of violent foes of the US and Europe. 
So, when Western leaders ask Arabs and others in the region why they can’t govern themselves, they should be prepared for the answer: “For a full century, your interventions have undermined democratic institutions (by rejecting the results of the ballot box in Algeria, Palestine, Egypt, and elsewhere); stoked repeated and now chronic wars; armed the most violent jihadists for your cynical bidding; and created a killing field that today stretches from Bamako to Kabul.” 
What, then, should be done to bring about a new Middle East? 
I would propose five principles. 
First, and most important, the US should end covert CIA operations aimed at toppling or destabilizing governments anywhere in the world. 
The CIA was created in 1947 with two mandates, one valid (intelligence gathering) and the other disastrous (covert operations to overthrow regimes deemed “hostile” to US interests). 
The US president can and should, by executive order, terminate CIA covert operations – and thereby end the legacy of blowback and mayhem that they have sustained, most notably in the Middle East. 
Second, the US should pursue its sometimes-valid foreign-policy objectives in the region through the United Nations Security Council. 
The current approach of building US-led “coalitions of the willing” has not only failed; it has also meant that even valid US objectives such as stopping the Islamic State are blocked by geopolitical rivalries. 
The US would gain much by putting its foreign-policy initiatives to the test of Security Council votes. 
When the Security Council rejected war in Iraq in 2003, the US would have been wise to abstain from invading. 
When Russia, a veto-wielding permanent member of the Council, opposed the US-backed overthrow of Syrian President Bashar al-Assad, the US would have been wise to abstain from covert operations to topple him. 
And now, the entire Security Council would coalesce around a global (but not a US) plan to fight the Islamic State. 
Third, the US and Europe should accept the reality that democracy in the Middle East will produce many Islamist victories at the ballot box. 
Many of the elected Islamist regimes will fail, as many poorly performing governments do. 
They will be overturned at the next ballot, or in the streets, or even by local generals. 
But the repeated efforts of Britain, France, and the US to keep all Islamist governments out of power only block political maturation in the region, without actually succeeding or providing long-term benefits. 
Fourth, homegrown leaders from the Sahel through North Africa and the Middle East to Central Asia should recognize that the most important challenge facing the Islamic world today is the quality of education. 
The region lags far behind its middle-income counterparts in science, math, technology innovation, entrepreneurship, small business development, and (therefore) job creation. 
Without high-quality education, there is little prospect for economic prosperity and political stability anywhere. 
Finally, the region should address its exceptional vulnerability to environmental degradation and its overdependence on hydrocarbons, especially in view of the global shift to low-carbon energy. 
The Muslim-majority region from West Africa to Central Asia is the world’s largest populous dry region, a 5,000-mile (8,000 kilometers) swath of water stress, desertification, rising temperatures, and food insecurity. 
These are the true challenges facing the Middle East. 
The Sunni-Shia divide, Assad’s political future, and doctrinal disputes are of decidedly lesser long-term importance to the region than the unmet need for quality education, job skills, advanced technologies, and sustainable development. 
The many brave and progressive thinkers in the Islamic world should help to awaken their societies to this reality, and people of goodwill around the world should help them to do it through peaceful cooperation and the end of imperial-style wars and manipulation. 

The Arab World’s Water Insecurity 
BERLIN – Nowhere is freshwater scarcer than in the Arab world. 
The region is home to most of the world’s poorest states or territories in terms of water resources, including Bahrain, Djibouti, Gaza, Jordan, Kuwait, Libya, Qatar, Saudi Arabia, and the United Arab Emirates. 
This shortage – exacerbated by exploding populations, depletion and degradation of natural ecosystems, and popular discontent – is casting a shadow over these countries’ future. 
There is no shortage of challenges facing the Arab world. 
Given that many Arab states are modern constructs invented by departing colonial powers, and therefore lack cohesive historical identities, their state structures often lack strong foundations. 
Add to that external and internal pressures – including from surging Islamism, civil wars, and mass migration from conflict zones – and the future of several Arab countries appears uncertain. 
What few seem to recognize is how water scarcity contributes to this cycle of violence. 
One key trigger of the Arab Spring uprisings – rising food prices – was directly connected to the region’s worsening water crisis. 
Water also fuels tensions between countries. 
Saudi Arabia and Jordan, for example, are engaged in a silent race to pump the al-Disi aquifer, which they share. 
Water can even be wielded as a weapon. 
In Syria, the Islamic State has seized control of the upstream basins of the two main rivers, the Tigris and the Euphrates. 
The fact that nearly half of all Arabs depend on freshwater inflows from non-Arab countries, including Turkey and the upstream states on the Nile River, may serve to exacerbate water insecurity further. 
Sky-high fertility rates are another source of stress. 
According to a United Nations report, average annual water availability in the Arab world could fall to 460 cubic meters per capita – less than half the water-poverty threshold of 1,000 cubic meters. 
In this scenario, water extraction will become even more unsustainable than it already is, with already-limited stores depleted faster than ever – a situation that could fuel further turmoil. 
Finally, many countries offer subsidies on water, not to mention gasoline and food, in an effort to “buy” social peace. 
But such subsidies encourage profligate practices, accelerating water-resource depletion and environmental degradation. 
In short, the Arab world is increasingly trapped in a vicious cycle. 
Environmental, demographic, and economic pressures aggravate water scarcity, and the resulting unemployment and insecurity fuels social unrest, political turmoil, and extremism. 
Governments respond with increased subsidies on water and other resources, deepening the environmental challenges that exacerbate scarcity and lead to unrest. 
Urgent action is needed to break the cycle. 
For starters, countries should phase out the production of water-intensive crops. 
Grains, oilseeds, and beef should be imported from water-rich countries, where they can be produced more efficiently and sustainably. 
For the crops that Arab countries continue to produce, the introduction of more advanced technologies and best practices from around the world could help to reduce water use. 
Membrane and distillation technologies can be used to purify degraded or contaminated water, reclaim wastewater, and desalinate brackish or ocean water. 
Highly efficient drip irrigation can boost the region’s fruit and vegetable production, without excessive water use. 
Another important step would be to expand and strengthen water infrastructure to address seasonal imbalances in water availability, make distribution more efficient, and harvest rainwater, thereby opening up an additional source of supply. 
Jordan, with Israeli collaboration and European Union aid, is creating a Red Sea-Dead Sea pipeline, a conduit that would desalinate Red Sea water, in order to provide potable water to Jordan, Israel, and the Palestinian territories, and then funnel the brine to the dying Dead Sea. 
Improved water management is also crucial. 
One way to achieve this is to price water more appropriately, which would create an incentive to prevent wastage and conserve supplies. 
While subsidies need not be eliminated completely, they should be targeted at smaller-scale farmers or other high-need workers and redesigned so that they, too, provide incentives for water conservation and efficiency. 
Of course, wealthier, more stable countries like Saudi Arabia, Qatar, Kuwait, and the UAE are better placed than conflict-torn countries like Yemen, Libya, and Iraq to address the rapidly intensifying water crisis they face. 
But, in order to break the cycle of violence and insecurity, all countries will ultimately have to step up to improve water management and protect ecosystems. 
Otherwise, their water woes – along with internal unrest – will only worsen. 

Watering the Middle East 
FEZ – The United Nations World Water Development Report confirms what many already know: hundreds of thousands of people in the Middle East and North Africa (MENA) – especially in Algeria, Jordan, Libya, Morocco, Palestine, Sudan, Syria, and Yemen – have faced the worst water shortages in decades in 2016. 
This is the last thing the region needs, as it works toward economic growth and diversification. 
Multiple factors have contributed to the current situation, including climate change, desertification, water pollution, and misuse of natural resources. 
Inadequate information, education, and communication exacerbate many of these challenges, as it reinforces a lack of awareness of – much less commitment to – environmentally friendly practices. 
Add to that inadequate disaster-risk reduction and management by governments – many of which are dealing with other conflicts and crises – and the situation has become truly dire. 
Algeria, for example, has been experiencing its worst drought in five decades. 
With much of the country’s agriculture relying heavily on rainfall, owing to underdeveloped infrastructure, cereal yields are down 40% this year. 
Despite its vast oil and gas wealth, Algeria has failed to ensure sufficient affordable water resources for its population, not to mention adequate employment opportunities. 
As a result, the country is now being rocked by popular protests. 
Libya has faced even greater instability, wrought by years of internal conflict. 
The resultant power cuts and fuel scarcity undermined water distribution in the country. 
Last summer, the UN had to procure some five million liters of water from neighboring countries to meet the country’s needs. 
In Jordan, water shortages occur with devastating frequency, particularly in larger cities like Amman. 
Jordan is estimated to have enough water reserves to support two million people. 
Yet its population is more than six million, not including the 1.5 million Syrian refugees who currently reside in the country. 
In times of shortage, it is the refugees who are likely to be among the first to feel the effects. 
Water supplies in many refugee camps, in both Jordan and Lebanon, have been cut to a minimum – a decision that affects millions of people who are already enduring scorching temperatures. 
At Rukban, a refugee camp on Jordan’s joint border with Syria and Iraq, more than 85,500 residents each receive barely five liters per day for cooking, drinking, and washing. 
The situation in Yemen is similarly grim. Racked by sectarian violence and civil war, the country has no functioning government to manage water resources. 
The capital, Sanaa, could run dry in ten years. 
And, with half of Yemen’s population lacking access to clean water, crops are failing and disease is spreading. 
The UN estimates that 14,000 children under the age of five die of malnutrition and diarrhea each year. 
Meanwhile, farmers are drilling deeper than ever for water – some wells are 500 meters deep – without any regulation. 
Effective government intervention may be a long way off in Yemen, but it is feasible – indeed, imperative – in other MENA countries. 
For starters, national governments must work to modernize agricultural practices, including by training farmers and introducing more efficient irrigation tools. 
Reducing farmers’ dependence on rainfall is essential. 
Some countries – namely, Morocco and Jordan – have already taken some important steps in this direction. 
Morocco’s government, in particular, has made substantial efforts to develop its water resources, including through dam-building. 
But there is a still a long way to go. 
Water-distribution efficiency in Morocco remains low – just 60% for irrigation. 
For a country that has experienced more than 20 droughts in 35 years, that is a serious problem. 
The good news is that the African Development Bank recently approved a loan of more than €88 million ($98.7 million) to fund a project aimed at improving the quality of water distribution. 
This points to a crucial insight: no one country can do it alone. 
Regional and international cooperation is badly needed. 
MENA countries must support one another in implementing programs modeled on what has worked elsewhere. 
Moreover, additional investment – financed from domestic and international sources – should be allocated to repairing aging water infrastructure, as well as new projects, such as well-designed dams and water reservoirs. 
And stronger efforts must be made to safeguard existing water resources. 
Here, the public has an important role to play. 
But citizens first must be made aware not only of how to use water more sensibly, but also of how to protect against climate-related disaster risk. 
For the private sector and NGOs, upgrading water management in the MENA region presents a major opportunity to invest in water-services delivery and related technology. 
The regional market for enhanced local sanitation and water-related services is estimated to be worth over $200 billion. Projects aimed at meeting this demand are a smart investment. 
But it is up to governments to take the first steps. 
If they do not take action to preserve water reserves and standardize supply, the most defenseless populations will continue to suffer, a situation that can easily lead to unrest – or worse. 
Indeed, if nothing is done to address the water challenges facing the MENA region, those challenges may fuel future wars. 
At the next meeting of the Conference of the Parties to the UN Framework Convention on Climate Change, to be held in Morocco in November, water should be at the top of the agenda. 
Given that more than 80% of the national contributions to the fight against climate change from the countries of the global South focus on water challenges, coordinated action by governments and international actors can no longer be postponed. 


Midwives Deliver Lives 
TORONTO – The past few decades have brought incredible progress for women and children’s health. 
Since 1990, preventable child deaths have declined by 50%, and maternal mortality has fallen by 45%. 
But far too many mothers and newborns are still dying from preventable causes. 
With access to qualified midwives, many of their lives could be saved. 
Each year, one million children, on average, still die during their first day of life; more than million babies are stillborn; and more than 300,000 mothers die during pregnancy and childbirth – a death toll exceeding the entire population of Namibia. 
A majority of these deaths – 56%, to be precise – are preventable. 
If all women had access to a midwife during pregnancy and labor, not to mention facilities equipped to provide basic emergency care, one million lives would be saved every year. 
And yet midwifery is still chronically neglected and underfunded by governments and communities around the world. 
As birth attendants, midwives are ideally positioned to save the lives of mothers and children during childbirth. 
A midwife with the right skills and training can provide 87% of the essential health care needed during pregnancy and following birth. 
And the care they provide is high quality and comprehensive across health contexts. 
Whether you are an American billionaire or a smallholder farmer in Tanzania, a skilled midwife can provide you with expert support that is unlike that of any other health professional. 
Midwives’ services extend far beyond pregnancy and birth to include essential education, health monitoring, and primary care for babies, adolescents, and mothers throughout the life cycle. 
Midwives are also a front line of defense against disease. 
They provide information about reproductive health, which can help stop the spread of HIV and other sexually transmitted diseases, and about hygiene and healthy lifestyles; and they are often the ones who administer and monitor the vaccination and immunization of expectant mothers, newborns, and infants. 
Moreover, midwives’ integrated, frontline approach helps them bridge the gap between isolated rural health centers and the communities they serve. 
Owing to their unique training and deployment, midwives are often the pillars upon which universal health-care coverage rests. 
Given that midwives are such a practical and affordable solution to many maternal- and community-health problems, it is baffling that world leaders who claim to stand for women and children’s safety do not give midwifery more political support. 
And this is not just a problem in low- and middle-income countries. 
High-income countries such as Canada have also struggled to recruit and fund enough midwives to meet demand. 
This has to change. 
Worldwide, 350,000 more midwives are needed to bridge the gap between the health-care haves and have-nots. 
And, from a fiscal standpoint, midwifery is an extremely cost-effective way to achieve that goal. 
Policies and funding to support midwife education, training, and regulation can produce up to a sixteenfold return on investment, because when midwives are involved in pregnancy and childbirth, mothers are less likely to require expensive emergency interventions such as caesarean sections. 
The fact that governments and civil-society organizations have given midwives such short shrift is as surprising as it is disappointing. 
All governments that value their citizens, and all citizens who value their families, should favor policies to expand this area of health care. 
With the proper resources, midwives will save lives before, during, and after a woman gives birth, and health-care outcomes will be improved across the board. 
To bring more attention to midwives’ unique role, the International Confederation of Midwives is gathering this week in Toronto, Canada, for its 31st Triennial Congress. 
For nearly 100 years, the ICM has advocated for women by supporting the midwives who protect them. 
We cannot rest until we have addressed the millions of lives that are still lost each year in pregnancy, childbirth, and early life. 
That is why we are asking governments and donors around the world to give midwifery the attention that it deserves as a commonsense solution to a global health problem. 
World leaders need to stand up for those who support women and children when they are most vulnerable. 
It is time to give them the resources they need to continue performing their essential work. 
After all, midwives do not just deliver babies; they deliver lives. 

Migration Is Development 
LONDON – In September 2000, the United Nations Millennium Development Goals rallied the international community behind a shared vision. 
The MDGs, which expire in 2015, signaled a new era of global cooperation, and triggered real progress in terms of lifting millions of people out of extreme poverty, improving health and access to education, and empowering women. 
The eight original MDGs, which include reducing child mortality and achieving universal primary education, are lauded for their simplicity and measurability. 
They took an abstract, outsize challenge and distilled it into achievable ends. 
But, as Albert Einstein loved to say, “Not everything that counts can be counted, and not everything that can be counted counts.” 
Today, it is important that we not become trapped by what worked in the past. 
To succeed, the post-2015 agenda must break the original mold. 
It must be grounded in a fuller narrative about how development occurs – a narrative that accounts for complex issues such as migration. 
Otherwise, the global development agenda could lose its relevance, and thus its grip on stakeholders. 
It is perhaps understandable that the original MDGs did not mention either internal or international migration. 
These are politically sensitive topics that could have polarized, rather than united, the international community. 
Moreover, our empirical understanding of how migration interacts with development was limited at the time; there was little data with which to shape measurable goals. 
Yet migration is the original strategyfor people seeking to escape poverty, mitigate risk, and build a better life. 
It has been with us since the dawn of mankind, and its economic impact today is massive. 
Migrant remittances exceed the value of all overseas development aid combined, to say nothing of the taxes that migrants pay, the investments they make, and the trade they stimulate. 
As we consider the next-generation development agenda, it is also critical to understand that migration was a vital force in achieving the original MDGs. 
There are an estimated 215 million international migrants today – a number expected to grow to 400 million by 2040 – and another 740 million internal migrants who have moved from rural to urban areas within countries. 
Each typically supports many family members back home, which also helps to lift entire communities. 
In Bangladesh, for example, just 13% of households that receive remittances from abroad are below the poverty line, compared to 34% of non-remittance-receiving households. 
Evidence from Latin America, Africa, South Asia, and elsewhere shows that remittances reduce the depth and severity of poverty, and that the additional income is disproportionately spent on education and health. 
In rural Pakistan, remittances are associated with higher school enrollment, especially for girls. 
The list goes on. 
Beyond the data, there is no greater symbol of the world’s growing interdependence than the movement of people. 
If we can make meaningful economic progress in the coming generations, one of the pivotal reasons will be that people are allowed to move more freely. 
Advanced countries, with their adverse demographic trends, need migrants, as do developing countries – not only for migrants’ economic contributions, but also for the social and cultural diversity that they bring. 
This is not to deny that migration has downsides. 
But migration is here to stay, and it is growing. 
There can be no return to a monoethnic past, so successful societies will need to adapt to diversity. 
Typically, development experts regard migration as a sign of failure: if development policies work, people should not want to move. 
Accordingly, migration has been viewed as a problem to be solved – not as a solution to a problem. 
But migration should not be considered good or bad; it is simply natural to the human condition. 
People migrate from poor countries, from middle-income countries, and from rich countries. 
They go from north to south, south to north, south to south, and north to north. 
The likeliest outcome of the debate on the post-2015 global development agenda will be something between the MDG-style approach – concrete, measurable targets for reducing extreme poverty – and the emerging sustainable development narrative, which emphasizes the complex forces of interdependence, such as migration and climate change. 
In the imperfect world of politics, this middle ground would be a positive outcome. 
Fortunately, the type of measurable outcomes that the MDGs have thus far demanded are being developed for migration. 
The overarching goal is to design a roadmap that can take us from today’s poorly managed, exploitative system of human mobility to one that is well managed, protects migrant rights, and plans for the consequences and opportunities of migration. 
An ideal result would focus attention on the need to reduce the barriers to all kinds of human mobility – both internal and across national borders – by lowering its economic and social costs. 
Such an agenda includes simple measures, like reducing fees for visas, and more complex reforms, like allowing migrants to switch employers without penalty and increasing the proportion of migrants who enjoy legal protections and labor rights. 
The bottom line is that making migration part of the world’s development strategy will have a meaningful impact on the lives of migrants, affording them greater access to rights and to the fruits of their labor. 
Perhaps even more important, it could change public perceptions of migrants, so that they are viewed as a blessing rather than a scourge. 

Our Duty to Migrants and Refugees 
DHAKA – The indefinite ban on Syrian refugees imposed by the United States has cast a bright spotlight on one of the great challenges of our time. 
What should we do with the millions of refugees fleeing war and persecution around the world? 
The scale of today’s refugee crisis is staggering: worldwide, an unprecedented 65 million people have been forced to flee from their homes; and, in 2016 alone, over 7,500 migrants – men, women, and children – died while desperately trying to reach safety, of which 5,083 perished in the Mediterranean Sea. 
In the Andaman Sea, thousands of migrants have been stranded on boats without a port of disembarkation, while traffickers hold them for ransom; similar vulnerabilities have been observed in the Sahel, the Horn of Africa, and the Central American corridor. 
Meanwhile, anti-migrant sentiment in host countries is reaching fever pitch. 
Instead of building trust, many politicians have been sowing fear, and calling for ethnic or religious discrimination against those who have been forced from their homelands. 
Rather than promoting safe and orderly migration, many countries are proposing policies to reduce or stop migration altogether. 
In this political climate, some politicians have tried to downplay their legal and humanitarian obligations toward refugees and migrants by lumping them together, implying that none of them deserves protection. 
Others, meanwhile, have reluctantly acknowledged their countries’ duty to accept refugees, but then declare that all economic migrants must leave. 
But both groups are our collective responsibility. 
Under the 1951 Refugee Convention, the international community has a legal duty to uphold the rights of displaced people. 
And, under the 1990 Convention on Migrants’ Rights, countries are morally and politically obligated to address vulnerable migrants’ needs. 
Indeed, as part of the United Nations Sustainable Development Goals for 2030, world leaders identified refugees, the internally displaced, and migrants as vulnerable populations that deserve protection. 
Specifically, they pledged to cooperate in order “to ensure safe, orderly, and regular migration involving full respect for human rights and the humane treatment of migrants regardless of migration status, of refugees, and of displaced persons.” 
No reasonable person should want to halt human mobility. 
Migrants, after all, bring immense benefits to their host countries, as well as to their countries of origin. 
And yet no one can deny the challenge posed by irregular flows of migrants and refugees – who often travel together in a form of “mixed migration.” 
People who embark on irregular journeys are extremely vulnerable, regardless of whether they are refugees or migrants. 
And by resorting to unofficial channels and circumventing the legal obligations for crossing borders, they also inadvertently undermine the rule of law. 
Many are forced to solicit smugglers’ services, in turn contributing to organized crime. 
Ultimately, the challenges that migrants and refugees face, and the help they need from governments and the international community, are very similar, though, of course, international law assures refugees additional protections, including non-refoulement. 
Last September, world leaders attending the UN Summit on Refugees and Migrants recognized these similarities for the first time. 
At the end of the summit, delegates adopted the New York Declaration, which includes commitments to address migrants and refugees’ common needs and challenges, and outlines processes for developing global compacts to share responsibility for helping refugees, and to ensure safe, orderly, and regular migration. 
The ongoing migrant and refugee crisis demands a new, comprehensive, and coherent global-governance framework. 
It is time to address mobility as a whole, and in all forms, regardless of whether people are moving for reasons beyond their control, such as a natural disaster, or in pursuit of opportunities to improve their lives. 
Today’s migrant and refugee flows are an inseparable part of a complex new geopolitical reality, and they can no longer be addressed effectively as discrete issues. 
The international community has agreed to develop separate compacts for each, but it also must ensure that the processes for doing so are closely coordinated. 
Only by explicitly acknowledging the linkages between migrants and refugee flows can we ensure that all UN member states agree to adhere to both compacts, and participate in a coherent, systematic response to vulnerable people’s needs. 
Moving forward, we must be open, inclusive, and bold in our approach, and we should look beyond business as usual or institutional mandates. 
We have a unique opportunity to develop a comprehensive framework for addressing human mobility in all its dimensions – whether refugees and migrants who are forced to move, and who may resort to irregular means or smuggling, or those who go through official channels in search of a better life. 
By working together toward a coherent solution, we can significantly improve the global governance of human mobility. 
This is our only realistic option for helping people on the move and strengthening the communities they will eventually call home. 

Migration Fact vs. Migration Fiction 
LONDON – Migration continues to dominate political debate in many countries. 
Rightly so: the issue affects economies and societies worldwide. 
But public opinion on this crucial topic tends to be shaped by emotions, rather than facts. 
The result is a lack of open and effective dialogue about migration’s risks – or its many benefits. 
Populist leaders, in particular, have been eager to manipulate the migration debate, using inflated figures and other gross exaggerations to stoke popular fears. 
Such incendiary rhetoric directly hurts immigrants, even those who have long lived in their new country. 
In the United Kingdom, reported hate crimes against immigrants surged 42% year on year in the run-up to and aftermath of June’s Brexit referendum. 
But the impact of anti-immigrant sentiment extends far beyond national borders. 
If populist fear-mongering drives their countries to embrace exclusionary, protectionist policies, the effect on the global economy – and the livelihoods of millions of people around the world – would be disastrous. 
It is now up to rational political leaders and mass media to reintroduce facts into the debate. 
They must publicize the actual figures for migration flows, both into and out of their countries. 
They must make clear to citizens that many of the problems for which immigrants are blamed are not actually their fault. 
And they must highlight immigrants’ large social and economic contributions. 
The Brexit vote was driven by a distorted picture – eagerly painted by tabloid newspapers and populist politicians – of a country overflowing with migrants. 
And, in fact, surveys show that in most countries, residents greatly overestimate the number of migrants in their midst. 
In some Eastern European countries, Muslim migrants are perceived as being up to 70 times more numerous than they are. 
The truth is that the share of people living outside their countries of origin has barely increased in recent decades, standing around 3% of the nearly 7.5 billion people alive today. 
In the last five years, 36.5 million people – just 0.5% of the global population – have left their native lands. 
It is a myth that all developing-country citizens seek to reach wealthy Western societies. 
Those who do migrate are far more likely to stay in their own region. 
Less than 1% of Africans have relocated to Europe. 
Meanwhile, plenty of advanced-country citizens – including 4.9 million UK nationals – are represented in global migration figures. 
Claims that migrants are a drain on national budgets are similarly inaccurate. 
In the UK, immigrants generate more in taxes than they draw in benefits. 
In fact, many advanced countries need migrants. 
Of the ten countries with the highest share of people over the age of 65, nine are in Europe. 
While industrialized countries often suffer a shortage of low-skill workers – Hungary recently acknowledged that it needs 250,000 foreign workers to fill the gaps in its labor market – immigrants are not necessarily uneducated. 
In 2010, 29% of immigrants to the OECD had university degrees. 
Beyond contributing to host economies as workers, entrepreneurs, investors, and taxpayers, migrants (and refugees) support development in their countries of origin through remittances. 
Indeed, remittances account for a significant share of GDP in many developing countries, and are often the largest source of foreign-currency earnings. 
Not only do remittances help pay for critical imports; by improving the balance of payments, they allow countries to borrow at lower interest rates in private capital markets. 
Of course, there are challenges associated with migration. 
But they can be overcome. 
The refugee crisis in the Mediterranean, which has spurred panic across Europe, could have been addressed effectively with coordinated international action, as occurred in the past. 
In the 1970s and 1980s, the international community rallied to resettle more than a million Vietnamese. 
In the 1990s, when the Balkan conflicts displaced almost four million people, Europe stood up and helped. 
But the political atmosphere today is less welcoming. 
Donald Trump, the Republican US presidential nominee, portrays Syrian refugees fleeing for their lives as a security threat, despite the thorough screening procedures implemented by the current administration, which has committed to taking 10,000 Syrian refugees by the end of the fiscal year. 
Hungary is set to hold a referendum in October on EU refugee quotas. 
As advanced countries fight to keep out asylum-seekers – in Hungary’s case, just a few thousand – developing countries are housing millions of them. 
Five countries that together constitute less than 2% of global GDP – Turkey, Jordan, Pakistan, Lebanon, and South Africa – provide shelter to almost half of the world’s refugees. 
The world’s six wealthiest countries – the US, China, Japan, Germany, France, and the UK – account for 60% of global GDP, but they hosted fewer than 9% of all refugees last year. 
This is no accident. 
From 2010 to 2014, European states spent more than €1 billion ($1.1 billion) on walls and borders. 
These attempts to “regain control” by erecting new barriers force migrants into the hands of exploitative smugglers and undermine trade and cooperation. 
As it stands, only 7,200 of the 22,504 non-European refugees that the EU pledged last year to resettle have arrived. 
Thousands of unaccompanied children, the most vulnerable of migrants, have yet to find a place. 
Beyond the legal obligations of all signatories of the 1951 Refugee Convention, this is a test of humane values and decency – one that the so-called advanced countries are largely failing. 
It is time for these countries to recognize that the best way to ensure orderly migration is to open legal channels for refugees and migrants. 
As for integration, some of the practical hurdles can be overcome through more local investment and more coherent policies across government departments. 
People have always moved, either by choice or when forced by circumstances. 
This will not change. 
It is time to stop resisting it and, armed with facts, start managing it. 

Sex and Populism 
BRUSSELS – The rate at which migrants are arriving has diminished considerably almost everywhere in Europe since the huge inflows seen in 2015. 
Yet migration continues to dominate political debate throughout the European Union. 
This suggests that populist, anti-immigrant sentiment is not actually being driven by claims that mainstream politicians cannot defend Europe’s frontiers. 
The decline in new arrivals to Europe began well before anti-immigrant political leaders took power in Italy or immigration pressure nearly toppled Germany’s ruling coalition. 
It is largely the result of EU efforts, such as the agreement with Turkey to prevent Syrians from crossing into Greece, its cooperation with Libyan militias, and the massive pressure it has placed on the Sahara transit states to close their borders. 
Thanks to these measures, Europe has become a de facto fortress against migration. 
So why does immigration remain at the top of many Europeans’ minds? 
The answer could be economic: those who arrived in 2015-2016 have already created labor-market imbalances, with low-skill immigrants increasingly competing for jobs with low-skill citizens. 
And it is true that in most of Europe, hostility toward foreigners runs deepest among low-skill workers. 
But there are reasons to believe that more than economic issues are at stake. 
For starters, anti-migration (more accurately, anti-foreigner) sentiment is beginning to be expressed violently, not just in Italy, where there have been several instances of shootings aimed at migrants, but even in generally well-ordered Germany. 
In the eastern German city of Chemnitz, violent clashes broke out recently between right-wing protesters and police and counter-demonstrators, following the killing of a German by two young men from Iraq and Syria. 
Support for the right-wing Alternative für Deutschland (AfD) party is strong in Chemnitz and the wider region, with most of the attacks on foreigners having occurred in the new Länder of the former East Germany. 
Crime and unemployment cannot explain this eruption. 
Chemnitz is home to fewer foreigners than many similar-size German towns, and crime is generally under control there. 
Moreover, unemployment – which is declining throughout Germany – is not particularly high in Chemnitz, standing at 7%. 
But there is another potential explanation, rooted in evolutionary psychology. 
One trend that is rarely mentioned in migration discussions is the rise in the share of men among refugees and asylum-seekers. 
In the last three years, men – many of whom are aged 18-35 – comprised more than two-thirds of all people seeking protection in Germany. 
Whereas the total number of refugees as a share of Germany’s total population is small (2.5%), refugees form a far larger share of Germany’s young male population. 
The impact is particularly noticeable in eastern Germany, which already suffered from a gender imbalance – the male-to-female ratio among the younger cohorts approaches 115:100 in most parts of the region – because educated women have a much higher propensity than men to move to western Germany for higher-paid jobs. 
As a result, a significant share of eastern Germany’s young male population has little chance of finding a partner and starting a family. 
Research shows that when there are significantly more men than women, the increased competition for female partners can lend itself to violence. 
One study links polygamy, which leaves low-status males without wives, to civil wars. 
The implication is that hostility toward foreigners in eastern Germany – and perhaps across Europe – may be rooted partly in a primordial defensive response by local men, who want to protect their territory, including “their” women, from other men. 
It is probably not a coincidence that Chemnitz, which has shown a readiness to vote for extremist parties , has the highest male-to-female ratio among 20-40-year-olds in all of Germany. 
Not all men are affected equally by this state of affairs. 
Since women tend to “marry up,” or find partners with higher socioeconomic status, it is less educated and poorer men whose romantic prospects are most affected by an influx of male asylum-seekers. 
And, indeed, less educated and poorer groups tend to show the most opposition to migration. 
Notably, the problems created by gender imbalances cannot be solved with better education or more income redistribution, because mating preferences are relative, not absolute. 
Those among the native population with the lowest incomes and education levels will always be worse off, if they have to compete with a large number of young male immigrants. 
To be sure, gender imbalances are not the only driver of anti-immigrant sentiment, let alone populism more broadly. 
But evolutionary psychology, which stresses competition for females, can add another dimension to our understanding of these phenomena, while helping us to predict when and where civil strife might erupt. 
There is little that can be done to change gender imbalances in a particular place. 
But, even if the problem cannot be “solved,” understanding it might help to limit the damage, not least by enabling leaders to avoid policies that are either not useful or would exacerbate tensions. 
For example, restricting family reunion (to limit the number of foreigners) might make matters worse, because the male asylum-seekers would be more likely to be single and seek partners in the local population. 
Countries like Germany that have recently admitted a large number of young male refugees will have to manage the fallout of the resulting societal shifts. 
Doing so effectively requires their leaders to recognize that those shifts are not just a matter of economics. 

The Future of Migration Governance 
DHAKA – We live in a rapidly evolving, hyper-connected world, where goods, capital, and people are more mobile than ever before. 
But, whereas countries have shown a willingness to cooperate on exchanging goods and capital, the international community has shown little appetite for improving how it governs human mobility. 
After the wide-scale persecution and displacement of people in World War II, world leaders took the bold step of crafting the 1951 Refugee Convention. 
In doing so, they relinquished a measure of national sovereignty – by accepting the principle of non-refoulement – in order to promote global solidarity toward refugees. 
On the other hand, country leaders saw migration as something temporary that could be managed ad hoc, through unilateral or bilateral agreements primarily designed to fill specific labor-market needs in developed economies. 
In hindsight, it is now clear that this approach was inadequate for dealing with the upsurge in human mobility that came with global and regional economic integration. 
When writing about guest workers in Switzerland, Swiss playwright Max Frisch once observed that, “We asked for workers. 
We got people instead.” 
He meant that migrants are not goods that can be exported or imported, and they should not be exploited as if they were. 
Migrants are human beings with rights, and they are motivated by a complex combination of personal desires, fears, and familial obligations. 
Many migrants are searching for jobs because they have missed out on globalization’s unequally distributed gains, and they see no future for themselves if they remain where they are; countless others have been displaced by conflicts or natural disasters. 
Today, ungoverned migration is threatening geopolitical stability, burdening border controls, and creating chaos around the world. 
The current mechanisms for managing migration have clearly failed to meet existing needs. 
The world needs a new, comprehensive global-governance framework to address all issues relating to human mobility. 
Achieving such an outcome is Bangladesh’s primary objective as Chair of the 2016 Global Forum on Migration and Development (GFMD), which culminates with the Ninth Annual Forum Meeting in Dhaka on December 10-12. 
In 2015, as part of the United Nations Sustainable Development Goals for 2030, world leaders pledged to cooperate on migration issues and to “facilitate orderly, safe, regular and responsible migration.” 
The SDGs acknowledge migrants’ positive contribution to inclusive growth and sustainable development, and it is high time that our leaders follow through on their promises. 
Sadly, governments worldwide have become preoccupied with deterring migration and restricting people’s movement, rather than creating safe, dignified channels for human mobility. 
Unsurprisingly, this obsession with control has had little impact on irregular migration flows, because it runs counter to the pull of market forces and the push of personal aspirations. 
Populist politicians have taken advantage of the current situation by politicizing migration and scapegoating migrants for socioeconomic problems such as unemployment, welfare-system strains, and deteriorating social cohesion. 
But there is still room for hope. 
When world leaders gathered at the UN Summit for Refugees and Migrants on September 19, they reaffirmed migrants’ human rights and committed to strengthening global governance on this issue. 
At the center of the summit’s unanimously adopted New York Declaration is a commitment to develop two global compacts: to share responsibility for taking in refugees, and to ensure orderly, safe, regular, and responsible migration. 
The government of Bangladesh proposed the second compact in April 2016. 
That compact, which will be adopted at an inter-governmental conference in 2018, offers an historic opportunity to improve the way governments and other stakeholders cooperate on migration. 
Building walls and discriminating against migrants or refugees on the basis of ethnicity or religion is antithetical to the 2030 SDG agenda, which aims to free people from the shackles of poverty, reduce inequality, and promote shared prosperity. 
The international community must now ensure that the new global compacts promote these broad ambitions. 
This will require national governments and global-governance institutions to implement bold policies that make migration both easier and more orderly. 
It will also require them to protect migrants and refugees’ rights, prevent ethnic or religious discrimination, and provide emergency assistance when needed. 
And it will encourage them to maximize migrants’ positive economic impact on both their new countries and their countries of origin, by reducing financial and human costs and integrating newcomers into the labor market. 
To achieve the best outcome, the two global compacts will need to be pursued in a coordinated fashion, and treated as two parts of a single framework for governing migration. 
In 2017, governments will begin to negotiate the details of this future framework. 
This may include a legally binding convention; a political declaration of principles to guide conduct; or operational commitments with goals, targets, and indicators of success, combined with a robust monitoring mechanism. 
These options should not be seen as mutually exclusive. 
If diplomacy prevails, and international arrangements are crafted carefully, one could imagine an outcome similar to the 2015 Paris climate agreement: binding commitments in some areas, non-binding guiding principles in others, and a shared promise by member states to take concrete action and to report their progress regularly. 
Such an approach would help to guarantee effectiveness. 
As the Chair of the GFMD, Bangladesh will communicate the Dhaka summit’s recommendations to countries’ negotiators. 
We will push for an agreement among political leaders at the inter-governmental conference in 2018 that vastly improves how migration is managed. 
With international cooperation, we can unleash the full social and economic potential of migration. 
And, in doing so, we will make migrants safer, societies more harmonious, and economies more prosperous. 

The Case for Secret Diplomacy 
CAMBRIDGE – When New Jersey Senator Robert Menendez announced that he will oppose Mike Pompeo’s nomination to US Secretary of State, he explained that he would do so because Pompeo, currently Director of the CIA, had failed to disclose that he had traveled to North Korea over Easter weekend as President Donald Trump’s envoy. 
For Menendez, the audacity and secrecy of the Trump administration’s preparations for a planned summit between Trump and North Korean leader Kim Jong-un was unacceptable. 
“Now I don’t expect diplomacy to be negotiated out in the open,” Menendez said in a recent speech, “but I do expect for someone who is the nominee to be Secretary of State, when he speaks with committee leadership and is asked specific questions about North Korea, to share some insights about such a visit. 
I believe our nation’s top diplomat must be forthright.” 
The US constitution assigns senators the responsibility to confirm, by majority vote, the president’s cabinet nominees. 
America’s founders sought to ensure that individuals serving in high positions of public trust would be well qualified, not just in the judgment of a single individual, but after thoughtful review by an independently elected Senate. 
In exercising their constitutional duty, senators should consider carefully their criteria for providing what the constitution calls “advice and consent.” 
There are many good reasons why senators may decide to support or oppose Pompeo’s nomination. 
But Pompeo’s withholding of the fact that he was engaged in secret diplomacy is not one of them. 
To be sure, despite being a mainstay of US foreign policy, secret diplomacy has always had its critics. 
Some argue that it is a type of deception that undermines the transparency and accountability on which American democracy is based. 
Others do not oppose secret diplomacy per se, but they believe that maintaining a reasonable degree of democratic accountability requires that a small subset of congressional leaders be informed. 
In criticizing Pompeo for failing to be “forthright” even with the “committee leadership,” Menendez expressed both of these concerns. 
Yet the history of secret diplomacy, under Republican and Democratic administrations alike, clearly illustrates its benefits. 
The most important diplomatic breakthrough of the Cold War, the opening to China, began with secret negotiations between Henry Kissinger, then President Richard Nixon’s national security adviser, and Chinese Premier Zhou Enlai. 
Kissinger’s top-secret trip to Beijing in 1971 laid the groundwork for Nixon’s historic visit the following year. 
And the warming of Sino-US relations helped widen divisions between China and America’s Cold War adversary, the Soviet Union. 
Likewise, President Barack Obama’s signature diplomatic achievement, the 2015 Iran nuclear deal, could not have been achieved without secret talks. 
In March 2013, Obama sent two senior State Department officials, William J. Burns and Jake Sullivan, to begin secret conversations with the Iranians in Oman. 
Given that diplomatic relations between the two countries had been severed for more than 30 years, and that each country was radioactive in the domestic politics of the other, holding preliminary negotiations in public would have been a non-starter. 
Soon enough, the secret conversations led US officials to conclude that the Iranians were serious about entering into formal talks. 
In secret, US and Iranian negotiators worked on an outline of what would ultimately become the Joint Comprehensive Plan of Action. 
The JCPOA blocked all of Iran’s major pathways to becoming a nuclear power, by preventing the country from reprocessing plutonium or enriching uranium to weapons-grade levels. 
It also eliminated two-thirds of Iran’s centrifuges and 98% of its stockpile of enriched uranium; and it established the most intrusive verification and inspection regime ever negotiated. 
But as difficult as the talks with Iran were, negotiating with Kim’s Hermit Kingdom will be harder still. 
The United States and North Korea are technically still at war, because a formal peace treaty has not been concluded since the 1950-1953 Korean War, which ended with a ceasefire and an armistice. 
Moreover, every past denuclearization agreement between the two countries has collapsed, and, since Trump took office, he and Kim have been lobbing insults and threats at each other. 
In this context, sending a secret envoy to Pyongyang to lay the groundwork for productive negotiations is precisely what the US should be doing. 
Even so, there is still the question of why that envoy would not inform Senate foreign-policy leaders of his work, especially when he is seeking to become America’s chief diplomat. 
One answer is that the Trump administration probably believes that informing Congress would make the secret negotiations no longer a secret. 
During the past year’s investigation of possible collusion between the Trump campaign and Russia ahead of the 2016 US presidential election, Congress has leaked like a sieve, and many congressional Democrats have made it clear that they will “resist” Trump at every turn. 
Thus, it was reasonable for Pompeo to fear that knowledge of his secret talks would be leaked in an effort to undermine the summit and deny the administration a potential political victory. 
Transparency and accountability are still important American norms. 
But the history of US diplomacy has shown that secrecy often is essential for success. 
And besides, the constitution gives the president wide latitude in foreign policy. 
That is why even some of Menendez’s Democratic colleagues, who may oppose Pompeo on policy grounds, cheered the news of his visit to North Korea. 
As Connecticut Senator Chris Murphy put it, “I’ll just be honest with you, I’m glad there is someone at a high level in the Trump administration talking to the North Koreans about what may be the parameters of this meeting.” 
Murphy is right. 
There are valid reasons to oppose a nominee for Secretary of State. 
But a failure to disclose secret preparatory talks for the most important presidential summit of the century is not one of them. 

Mikhail Gorbachev and the End of the Cold War 
Earlier this month, Mikhail Gorbachev celebrated his 75th birthday with a concert and conference at his foundation in Moscow. 
Unfortunately, he is not popular with the Russian people, who blame him for the loss of Soviet power. 
But, as Gorbachev has replied to those who shout abuse at him, “Remember, I am the one who gave you the right to shout.” 
When he came to power in 1985, Gorbachev tried to discipline the Soviet people as a way to overcome economic stagnation. 
When discipline failed to solve the problem, he launched perestroika (“restructuring”). 
And when bureaucrats continually thwarted his orders, he used glasnost, or open discussion and democratization. 
But once glasnost let people say what they thought, many people said, “We want out.” 
By December 1991, the Soviet Union ceased to exist. 
Gorbachev’s foreign policy, which he called “new thinking,” also contributed to the Cold War’s end. 
Gorbachev said that security was a game from which all could benefit through cooperation. 
Rather than try to build as many nuclear weapons as possible, he proclaimed a doctrine of “sufficiency,” holding only a minimal number for protection. 
He also believed that Soviet control over an empire in Eastern Europe was costing too much and providing too little benefit, and that the invasion of Afghanistan had been a costly disaster. 
By the summer of 1989, East Europeans were given more degrees of freedom. 
Gorbachev refused to sanction the use of force to put down demonstrations. 
By November, the Berlin Wall had fallen. 
Some of these events stemmed from Gorbachev’s miscalculations. 
After all, he wanted to reform communism, not replace it. 
But his reforms snowballed into a revolution driven from below rather than controlled from above. 
In trying to repair communism, he punched a hole in it. 
Like a hole in a dam, once pent-up pressure began to escape, it widened the opening and tore apart the system. 
By contrast, if the Communist Party’s Politburo had chosen one of Gorbachev’s hard-line competitors in 1985, it is plausible that the declining Soviet Union could have held on for another decade or so. 
It did not have to collapse so quickly. 
Gorbachev’s humanitarian tinkering contributed greatly to the timing. 
But there were also deeper causes for the Soviet demise. 
One was the “soft” power of liberal ideas, whose spread was aided by the growth of transnational communications and contacts, while the demonstration effect of Western economic success gave them additional appeal. 
In addition, the huge Soviet defense budget began to undermine other aspects of Soviet society. 
Health care deteriorated and the mortality rate increased (the only developed country where that occurred). 
Eventually, even the military became aware of the tremendous burden caused by imperial overstretch. 
Ultimately, the deepest causes of the Soviet collapse were the decline of communist ideology and economic failure. 
This would have happened even without Gorbachev. 
In the early Cold War, communism and the Soviet Union had considerable soft power. 
Many communists led the resistance against fascism in Europe, and many people believed that communism was the wave of the future. 
But Soviet soft power was undercut by the exposure of Stalin’s crimes in 1956, and by the repression in Hungary in 1956, Czechoslovakia in 1968, and Poland in 1981. 
Although in theory communism aimed to establish a system of class justice, Lenin’s heirs maintained domestic power through a brutal security apparatus involving lethal purges, gulags, broad censorship, and ubiquitous informants. 
The net effect of these brutal measures was a general loss of faith in the system. 
The Soviet economy’s decline, meanwhile, reflected the diminished ability of central planning to respond to global economic change. 
Stalin had created a command economy that emphasized heavy manufacturing and smokestack industries, making it highly inflexible – all thumbs and no fingers. 
As the economist Joseph Schumpeter pointed out, capitalism is “creative destruction,” a way of responding flexibly to major waves of technological change. 
At the end of the twentieth century, the major technological change of the third industrial revolution was the growing role of information as the scarcest resource in an economy. 
The Soviet system was particularly inept at handling information. 
The deep secrecy of its political system meant that the flow of information was slow and cumbersome. 
Economic globalization created turmoil throughout the world at the end of the twentieth century, but the Western market economies were able to re-allocate labor to services, restructure their heavy industries, and switch to computers. 
The Soviet Union could not keep up. 
Indeed, when Gorbachev came to power in 1985, there were 50,000 personal computers in the Soviet Union; in the US, there were 30 million. 
Four years later, there were about 400,000 personal computers in the Soviet Union, and 40 million in the US. 
According to one Soviet economist, by the late 1980’s, only 8% of Soviet industry was globally competitive. 
It is difficult for a country to remain a superpower when the world doesn’t want 92% of what it produces. 
The lessons for today are clear. 
While military power remains important, it is a mistake for any country to discount the role of economic power and soft power. 
But it is also a mistake to discount the importance of leaders with humanitarian values. 
The Soviet Union may have been doomed, but the world has Gorbachev to thank for the fact that the empire he oversaw ended without a bloody conflagration. 


Militarizing the Andes 
While the world’s attention is riveted on Iraq, the Colombia Plan, developed by the United States to fight drugs and left-wing guerrillas in Colombia, may soon be applied as a general strategy across the nations of the Andes, if not all of Latin America. 
Colombia, it seems, is only mentioned nowadays in connection with President Alvaro Uribe’s re-election bid later this month. 
As a result, the spread of the Colombia Plan, despite its meager and ambivalent results, has remained obscured. 
When it was unveiled in 2000, the Colombia Plan had a double rationale: to slash narcotics production and exports while strengthening Colombia’s counterinsurgency campaign against the Revolutionary Armed Forces of Colombia (FARC) rebels. 
Back then, the US saw Colombia as hosting two increasingly interwoven threats, which, without a successful military response, heralded the grim prospect of Colombia becoming a failed state. 
Indeed, despite receiving almost $1.4 billion from the US between 1989 and 1999 to fight drug trafficking, Colombia had not reduced the problem. 
Worse still, the economic, territorial, and military insurgency of the FARC guerrillas was growing stronger. 
Indeed, between 1995 and 1998, the Colombian army suffered its worst setbacks – including casualties, captures, and ambushes – in the four decades of the insurgency. 
With the attacks of September 11, 2001, and the response of the Bush administration, the “war against terrorism” became relevant to Colombia. 
As a result, the failed three-year dialogue between the government of Andrés Pastrana, Uribe’s predecessor, and FARC was buried in February 2002, with the conflict definitively internationalized through massive and indirect US intervention. 
Between 2000 and 2005, Washington paid out nearly $4 billion to Colombia, with approximately 75% of the total going to the military and the police, and increased its presence in the country with 800 soldiers and 600 private security contractors. 
Indeed, Colombia is now the fifth largest recipient of US aid in the world. 
US policy was (and remains) aimed primarily at the “war on drugs,” to be fought mainly by Colombians themselves. 
But the “war on terrorism” in Latin America has also fallen to the Colombians, with a US rear guard backing up the Colombian state in order to avoid American casualties on a new front, and an overextension of US military commitments. 
When evaluated as an anti-narcotics strategy, the Colombia Plan’s failure is self-evident. 
Even though the Colombian government chemically eradicated 523,000 hectares of coca between 2000 and 2004, 114,000 hectares of coca remained under cultivation last year. 
Likewise, although Uribe’s government approved the extradition of 304 Colombian nationals and 11 foreigners (most to the US) between 2002 and 2005, drugs-linked organized crime continues to thrive and expand in Colombia. 
Of course, the large cartels no longer exist. 
Instead, the business has become more “democratic” with the multiplication of so-called “boutique cartels.” 
This has created an even greater diversity of drugs (natural and synthetic) at lower prices and higher purity than fifteen years ago, during the heyday of the Medellin drug barons. 
The results of the Colombia Plan’s counter-insurgency effort are equally mixed. 
The military strengthening of Colombia in the last five years has been massive, with the offensive capacity, geographic deployment, and public credibility of the armed forces much greater than before. 
Until 2002, some 3,000 kidnappings were reported each year in Colombia; by 2005, the government had reduced that figure to less than 1,000. 
Between 2000 and 2004, the National Liberation Army (ELN) was seriously weakened, and the FARC retreated to a smaller area, notably reducing its combat potential. 
However, while ELN may be strategically beaten, the FARC is not. 
On the contrary, since 2005, the FARC has been escalating its attacks. 
Moreover, Colombia has not effectively recovered territorial sovereignty in areas controlled by armed right-wing groups like the United Self Defenses of Colombia. 
The implicit immunity from prosecution these groups received in exchange for their demobilization has done little to help. 
So, after five years, the Colombia Plan, a part of two simultaneous global wars – against drugs and terrorism – has produced only uncertain and scanty results. 
Yet this has not led to any official questioning of tactics. 
On the contrary, both the US and the Uribe government regard what has happened in Colombia as “model” to be emulated across the Andes in order to prevent other countries in the region from becoming failed states. 
In fact, this “model” is already being applied in the region. 
In Ecuador, the US has deployed its military power through the renovation of the Manta military base. 
The US continues to pressure Peru’s government to shoot down planes supposedly linked to drug trafficking, and is trying to convince Evo Morales’s new government in Bolivia to continue a failed “war on drugs.” 
But, as in Colombia, the effort to militarize the “war on drugs” and the “war on terrorism” seems likely only to generate more disorder. 

Milosevic and Hussein: Trial by Farce 
Trials of war criminals were once serious business. 
Recall the photographs of Herman Goering and Rudolf Hess sitting glumly in the dock at Nuremberg. 
Some Nazi leaders were even hanged after relatively short but fair trials. 
Nowadays, legal proceedings against the world's most wicked leaders have become farce. 
The trial of Saddam Hussein and his Ba’athist cronies offers an ongoing series of embarrassments. 
The defendants try one antic after another, and Hussein shows every form of contempt possible except “mooning” the judge. 
It is hard to expect an outcome that will appear legitimate in the eyes of Iraqis or the world. 
Meanwhile, Slobodan Milosevic’s trial morphed into a funeral after four boring years of testimony and a sunken cost of more than $200 million. 
In Cambodia, the United Nations and the government have dickered for almost a decade about how to bring surviving Khmer Rouge figures to trial. 
The mass killers who took power in the twentieth century were doomed to being killed in popular revolts or to being tried for their crimes – that is, if they did not die in power. 
Who can be proud that Romania’s last Communist boss, Nicolai Ceaucescu, and his wife were shot without even the semblance of a fair trial? 
The formal trappings of a real court always seem better than instant justice, even if the end result is also death. 
Today there are two plausible ways to proceed against a deposed tyrant. 
A nation could put its own former leaders on trial, as the Argentines did in the 1980’s with the generals responsible for the disappearance of more than 5,000 fellow citizens. 
At the international level, the Nuremberg model remains available to generate further trials, though under the dubious conditions that victorious powers sometimes impose liability for crimes, such as “crimes against humanity” that were are not properly defined at the time they are committed. 
There was a time when we could see the advantages of both national and international trials. 
Home grown trials enabled the local community to work out its grief by participating closely in the process. 
As judges and juries, the defendant’s compatriots could also bring greater sensitivity to the assessment of guilt because they appreciated the tough conditions under which a deposed dictator made his decisions. 
Argentina’s trial of the generals was a successful ritual in the painstaking transition from military junta to democracy, but the experience ended with weeping self-doubt. 
Even after conviction, the generals were sufficiently strong to exact a termination of the trials and then a pardon from the succeeding president. 
Argentine politics is still embroiled in the legal consequences of those trials of 20 years ago. 
At the international level, the UN Security Council’s decision to establish the International Criminal Tribunal for the Former Yugoslavia (ICTY) was also greeted with great confidence. 
The ICTY did make several foundational decisions under the leadership of Antonio Cassese. 
But then the judges had the misfortune of realizing their fondest dream – trying in their court the arch-villain Slobodan Milosevic. 
It is not clear how the Serbs would have handled Milosevic in a local trial. 
A lot would have depended on the political party that controlled the court. 
At the international level, the fear was not of too much politics but of too much law. 
Milosevic’s trial had to be more than fair, it had to be an emblem of UN Justice. 
Thus Milosevic was allowed to defend himself – a huge mistake in terms of the trial’s length and efficiency. 
There was no limit on the number of witnesses the prosecution called to testify about the same gruesome story of Serbian aggression and brutality. 
It will take many months to determine what went wrong and why the trial lasted a scandalous four years. 
My hunch is that the court’s well-meaning officials were too influenced by the South African Peace and Reconciliation Commission, a model touted in law schools as the desired alternative to retributive justice. 
In the South African proceedings the most important question was not the future of the defendant but the past of the victims. 
Every victim was encouraged to tell his story and the defendant listened. 
In the case of massacres endured in the twentieth century, such storytelling can last decades. 
Encouraging victims to speak and then giving the defendant the right to filibuster the proceedings by touting his merits as a political leader amounts to a formula for infinite delay. 
One lesson we have learned from both the Milosevic and Hussein trials is that one should not put men or women on trial in order to terminate their charismatic appeal. 
They will turn the trial around – particularly if they are allowed to defend themselves – and use the courtroom to vindicate their careers. 
Tyrants should be tried only after they are clearly defeated. 
Ironically, it was an advantage of the Nuremberg courts that they were staffed by the representatives of the victorious powers. 
They were a constant reminder to Goering, Hess, and their henchmen that the Allies were in charge, that the Nazis were irreversibly defeated. 
Punishing the guilty, rather than shaping the way history would be written, was always the clear objective of the trial. 
The tragedy of the Milosevic and Hussein trials is that the “i”s of history were not yet fully dotted and history itself was on trial. 
The resulting hesitancy of those in charge gave rise to procedures – both international and national – that facilitated fantasies of vindication and return. 
In the case of Hussein, that fantasy may yet become real. 

Milosevic's Divide and Mis-rule 
BELGRADE: Slobodan Milosevic may be the most despised man in Serbia, but leaders of the country's opposition can barely hide their hatred for each other. 
Indeed, as Vuk Draskovic, the leader of the largest opposition group, tried to hijack last week's massive protest of 100,000 in Belgrade (a rally he had previously shunned), security men from Draskovic's Serbian Renewal Movement and Zoran Djindjic's Democratic Party openly scuffled. 
Forging a united front against the regime seems as remote as ever. 
The feuds and incompetence of the Serbian opposition are the main reasons why Milosevic still rules. 
Since the expulsion of a quarter-of-a-million Serbs from Krajina by the Croatian Army in the summer of 1995, less than one-third of the electorate has backed him. 
But the vanity, greed, and perpetual scheming of the opposition's leaders has left them easy prey for Milosevic's schemes of divide-and-misrule. 
Because of this political failure, many fear that Serbia faces civil war. 
Yet the abyss can be avoided. 
While the Serbian police force is huge and well-armed, it is ill-trained and psychologically ill-prepared to suppress mass demonstrations. 
In the Army, only the top generals are unconditionally loyal to Milosevic; most of the officer corps is embittered at the lost Kosovo war and at Milosevic's dismissive treatment of them, particularly their low pay. 
Last but not least, it is not obvious that Milosevic is prepared to resort to large scale violence within Serbia. 
As opposed to his dealings with non-Serbs, this wily authoritarian's preferred methods of domestic political struggle are unscrupulous manipulation of friend and foe, bribery, propaganda, and electoral fraud. 
Almost sixty years-old and in power for more than a decade, he is unlikely to change. 
After all, although many believed that his indictment by the Hague War Crimes Tribunal, announced during the bombing of Serbia, would make him fight to the bitter end, he yet accepted unconditional surrender. 
Here is Milosevic's Achilles heel. 
The irony of last Thursday's opposition rally is that it took place in front of Belgrade's federal parliament, for it is in parliament and not the streets that Milosevic can be challenged. 
In this regard, it is a pity that Montenegro's pro-Western president Milo Djukanovic has chosen a separatist path, rather than help Serbia's opposition. 
For Djukanovic holds a possible key to eviscerating Milosevic's stranglehold on government. 
Because there are no direct elections for the top two federal offices in what remains of Yugoslavia, Serbia and Montenegro agreed in 1992 to share them. 
If the Yugoslav president is Serbian, the premier must be from Montenegro. 
The trouble with current premier Momcilo Bulatovic is that his party gained fewer votes in Montenegro's elections than Djukanovic's party. He got his job because Milosevic fiddled. 
Almost all Serb opposition leaders agree with Djukanovic's complaint that the federal government is illegitimate because of this state of affairs. 
Djukanovic prefers an illegitimate federal government because it strengthens his argument for secession. 
But if he were to work with Serbia's opposition (by pledging, say, to postpone Montenegro's bid for independence if a legitimate prime minister is named), and focus public protests on installing a new premier, Yugoslavia could rid itself of Milosevic in a rather elegant way. 
Since the Constitution of Yugoslavia gives little power to the president, a new premier from Montenegro could adopt the opposition's agenda. 
Milosevic would be squeezed into a ceremonial presidential role. 
Once Milosevic was stripped of real power, his Socialist Party would seek a new leader; the road would be open for Milosevic's removal. 
Djukanovic is a perfect figure to lead the opposition because, as a Montenegin, he poses no threat to the career ambitions within Serbia of Draskovic, Djindjic, and retired General Momcilo Perisic. 
But Djukanovic keeps the Serbian opposition at a distance. 
So many opposition politicians hope to get rid of Milosevic through street protests. 
The most vocal advocate of this is Mladjan Dinkic, the energetic leader of an economic think tank called G 17. 
He argues that street protests should combine with a general strike. 
Parliament would then vote Milosevic and the government out and appoint a government of experts. 
These would struggle with Serbia's problem for one year, then withdraw from public life. 
Elections would be held and democratic politics would begin. 
The naive part of this plan is the assumption that MPs from Milosevic's Socialist Party, the Yugoslav United Left (the small but influential party of Mrs. Milosevic) and Vojislav Seselj's ultra-nationalist Radical Party, would vote against their government and for a new one from which they could not benefit. 
Even if this miracle were to happen, who can prevent these MPs from voting against the new government in a few months or only a few weeks time? 
Finally, Serbs like leaders who can inspire and communicate with them. 
They would never follow unknown technocrats. 
The governing coalition of President Milosevic seems ready to accept early elections. 
Perhaps it fears that its popularity will further decline, and would prefer to go into elections while it still has the advantages of counting the votes, controlling state television, and establishing electoral districts. 
That part of the opposition led by Draskovic also wants elections, but doesn't reject the idea of an interim government. 
This, Draskovic says, should result from a compromise between Milosevic and the opposition. 
Draskovic is right. 
Unless Montenegro's Djukanovic can be prevailed upon to work with the opposition in order to strip Milosevic of power by stripping him of his puppet prime minister, elections and compromises are the way to a democratic Serbia. 
Street protests should concentrate on getting from Milosevic fair conditions for elections and acceptance of international monitoring (but, needless to say, not from NATO countries). 
In this way, even without joining into a coalition, opposition parties could get a majority of seats in parliament. 
What the new government would then look like is difficult to know, but it certain that Milosevic would not be its leader. 

Milosevic's Long Shadow 
Six weeks into his war crimes trial in the Hague - a process expected to last two years - Slobodan Milosevic still casts a long shadow over Serbia. 
Last weekend's arrest of Serbia's Vice-Prime Minister Momcilo Perisic and a senior US diplomat on espionage charges is but a hint of this. 
Whether or not Perisic provided confidential military information to the American remains to be seen, but the fact that Serbia's Prime Minister Zoran Djindjic demanded Perisic's resignation suggests that, at the least, Perisic overstepped the acceptable limits of contacts with foreign diplomats. 
In any case, this reflects the open wound that the Milosevic trial is for Serbia. 
Djindjic accuses the Yugoslav National Army, controlled by President Vojislav Kostunica, of meddling in politics with these arrests. 
Kostunica says that the military was doing its job. 
Djindjic's problems are compounded because Perisic seems an unlikely reformer. 
A general during the Croatian War, a Croat court sentenced Perisic, in absentia, for war crimes. 
Later he became Milosevic's chief of staff and joined the opposition when Milosevic began to lose his grip on power. 
The possible connection between Perisic's arrest and Milosevic's trial is this: Perisic might have been attempting to give information about the Army's involvement in actions of interest to the Hague prosecutors. 
Perisic's motives are many: a desire to take revenge on his former colleagues, or to destabilize Kostunica and/or to secure a promise that he will not be indicted by the Hague Tribunal. 
If this last is true, it will help confirm Serb suspicions that the Hague process stinks of politics. 
But a clear majority of Serbs are already convinced of this. 
So when Serbian politicians seek public support to extradite indicted Serbs to the Hague, they never say that justice demands such an action or that the Hague is providing a necessary national moral catharsis. 
Instead, they use the language of realpolitik and remind us that we are too weak to challenge the West, and that our economy - devastated by war, sanctions and NATO bombing - desperately needs the loans and credits that come under the condition that extraditions to the Hague are made. 
Why do Serbs react in this way? 
Many think that the Serbs remain what they have so long been: paranoid, self-pitying nationalists in denial about their guilt. 
Undoubtedly, some truth exists here. 
But it is not the whole truth. 
Many Western observers and journalists report Milosevic's trial in a lazy way. 
Because Milosevic is obviously guilty and can defend himself in open court, they fail to look for imperfections. 
Rejoice that justice is served appears to be the mantra. An evil man is getting his just deserts. 
But take, for example, last week's confrontation between Milosevic and Paddy Ashdown. 
The Western media presented Lord Ashdown as a reliable witness of Serbian atrocities against Albanian civilians. 
In 1998 he personally warned Milosevic that if such continued, NATO's intervention was inevitable. 
Serbian attention was drawn to other points made by Ashdown. 
He called the Kosovo Liberation Army (KLA) a terrorist organization. 
So Serbs now ask why no Albanian guerilla is on trial. 
Ashdown also revealed how Croatian president Franjo Tudjman said at a dinner party in 1995 that Milosevic and he had agreed to carve up Bosnia. 
Again, Serbs ask, why wasn't Tudjman ever indicted and why, when he died in 1999, did Western diplomats attend his funeral. 
Moreover, no Albanian witness dared mention KLA crimes. 
On the witness stand these Albanians often appeared to Serbs as foolish or disingenuous or both. 
For most Serbs, any lie or avoidance of a clear answer was proof that the entire testimony was false. 
Though many Western journalists think differently, Milosevic is no hero to Serbs. 
They are impressed that in many, perhaps most cross-examinations of the witnesses, he seems to win, and they like it when he fights to prove that he and his people were victims of NATO and KLA terrorists backed by the West. 
He also appears shrewd and tough. 
That he is cold and callous when discussing victims - not only Albanian, but Serbian too - Serbs tend to overlook. 
None of this helps Milosevic and his Socialist Party in opinion polls. 
Serbs consider him incompetent and responsible for their defeats of the 1990s, not least for making Serbia the country with largest refugee population in Europe - around 700,000. 
This view is unlikely to change, no matter how much bravura Milosevic's defense portays. 
But if Milosevic and his followers are finished for good, he may yet succeed in completely compromising the tribunal. 
For years to come Serbs will retain a cynical view of Western justice and look at the West with fear and hostility. 
What Milosevic's trial is succeeding in doing is turning many Serbs against Djindjic's 18-party coalition government. 
A hyper-pragmatic politician, Djindjic's primary interest is economics, and so he is willing to cooperate completely with the tribunal. 
But with his reforms since Milosevic's rule collapsed the economy has improved only slightly. 
Western moral admonitions were not accompanied with real generosity, and little aid has arrived. 
Cooperating with the Hague, it seems, brings only pain, humiliation and shame. 
President Kostunica also accepts the need to cooperate with the Hague but is more concerned to protect the country's sovereignty and preserve a semblance of national dignity. 
If Djindjic is blamed for a lack of scruples, Kostunica appears as an anachronistic and rather conservative nationalist (though no one accuses him of extremism). 
If elections were held tomorrow, Kostunica would clearly defeat Djindjic, and the Hague would be one of the main reasons. 
Milosevic is gone, but so long as his trial is perceived as a show trial and not real justice, he will continue to distort our democracy. 

Milosevic’s Trial Was Not in Vain 
Slobodan Milosevic cheated justice, and by doing so demonstrated the futility of attempting to deal with war crimes and crimes against humanity through international prosecutions. 
That, at least, is the conclusion that some people have reached after Milosevic’s death in a Hague prison: the fact that he was able to drag out his trial for four years and still escape a verdict is considered proof that the international community is wasting its resources by putting such people on trial for their misdeeds. 
Even the most dedicated partisans of international justice concede that the International Criminal Tribunal for the Former Yugoslavia (ICTY) has had many shortcomings. 
All those associated with it were new to such proceedings, and had to learn on the job, as there had been no such bodies since the courts at Nuremberg and Tokyo after World War II. 
Moreover, the post-WWII bodies were tribunals in which the war’s victors judged the losers, and those prosecuted were already in custody. 
The ICTY, by contrast, has no capacity of its own to arrest defendants. 
It must rely on persuasion to secure cooperation by others – cooperation that is still being withheld in the case of the two most notorious defendants from the Bosnian War, Radovan Karadzic and Ratko Mladic.. 
Until Tony Blair and Robin Cook became, respectively, Prime Minister and Foreign Secretary of the United Kingdom in 1997, four years after the ICTY was established, NATO troops in Bosnia failed to arrest indicted suspects even when they ran into them. 
By now, of course, 133 defendants from all parties to the wars in ex-Yugoslavia have appeared before the Tribunal, charged with war crimes, crimes against humanity, and even genocide. 
These are highly complex cases, frequently involving not only novel issues under international law, but also thousands of witnesses – often traumatized by their suffering – dispersed to many lands, the constant need for high-quality simultaneous translations, and disruptive tactics by some defendants. 
Yet the proceedings against 85 of them, including appeals, have been completed. 
In trying them, the ICTY has been a model of fairness at all times. 
The mountains of evidence in its records make the horrendous crimes committed in the wars in ex-Yugoslavia comparable in the extent of their documentation to those by the Nazis. 
Inevitable efforts by demagogues to revise the history of what took place in ex-Yugoslavia in the 1990’s will be complicated by the availability of that evidence, including the facts compiled during the Milosevic trial. 
Far from being a failure, the ICTY has inspired the establishment of several other such courts, including those for Rwanda, Sierra Leone, Cambodia, and the permanent International Criminal Court. 
Even heads of state have not escaped these bodies. 
Milosevic, the former president of Yugoslavia, and then Serbia, died in prison. 
Biljana Plavsic, the President of the Bosnian Serb Republic after Karadzic, expressed remorse for her crimes, pled guilty, and is serving a prison sentence. 
Jean Kambanda, former Prime Minister of Rwanda, pled guilty to crimes against humanity and genocide and is serving a life sentence in prison. 
We are thus slowly reaching the point where some of those contemplating crimes such as those committed by Slobodan Milosevic must recognize that one day they could be held accountable. 
Charles Taylor was President of Liberia when the Tribunal for Sierra Leone indicted him. 
He had to flee his country, paving the way for the democratic transition that resulted in the recent election of Ellen Johnson Sirleaf. 
Taylor still faces the prospect of trial and, another former dictator, Saddam Hussein, is now on trial before a national court in Iraq. 
Persisting on the path of international justice will continue to require substantial resources. 
Great as they are, the costs are trivial in comparison to the expense of humanitarian aid, international military intervention, and reconstruction assistance. 
Most important, of course, is the need to prevent the suffering caused by the crimes that lead to international prosecutions; and when those crimes cannot be prevented, we must provide some comfort and redress to the victims and their families by doing justice. 
Of course, the slow, tortuous process of international justice is often frustrating to the victims. 
But it would be worse if those responsible for great crimes got away with it, as happened all too often in the past. 
In the wake of Milosevic’s death, Karadzic and Mladic should be brought before the ICTY, both to reinforce its work and to demonstrate to their victims that the international community is resolved not to allow their suffering to be forgotten. 
The ICTY’s mission is as valid and as vital as ever: to show that the era of impunity for some of humanity’s worst crimes is coming to an end. 

How Parasites Pull the Strings 
LIVERPOOL – Science fiction has long explored the terrifying possibility that we are devoid of free will, and that some unpleasant creature could control our minds or turn us into plodding zombies. 
But mind control is not just a literary trope. 
It is also a common method by which parasites gain access to environments where they can grow, reproduce, and complete their life cycles. 
Consider the fungus Cordyceps, which interferes with the behavior of ants in tropical rainforests in such a way as to make them climb high into the vegetation, and latch onto a leaf to die. 
The fungus then reproduces by dropping its spores all over the forest floor, to infect more ants below. 
Similarly, a virus that infects gypsy moth larvae prompts them to climb en masse to the tops of trees to die. 
The virus then multiplies, and rains viral particles down on the forest floor. 
These parasites make their hosts seek a higher elevation, which expands the reach of their infectious spores or particles. 
But other species can induce far more complex behaviors. 
Nematomorph worms, for example, infect crickets, and drive them to commit suicide by jumping into various water sources, be it a puddle or swimming pool. 
It is precisely in such aquatic environments that nematomorph worms reproduce and complete their life cycles. 
And parasites’ mind-control abilities are not limited to invertebrates. 
Consider the rabies virus, which is transmitted among dogs, humans, and other mammals by biting. 
To maximize its chances of spreading to another host, the virus actually alters its host’s mind to turn it into an angry, slavering, biting machine that will chomp at anything it encounters. 
Another species that can affect human behavior is the protozoan parasite Toxoplasma gondii, the causal agent of Toxoplasmosis.T. gondii is extremely common, with an infection rate of 15-85% across different countries, depending on climate and diet. 
Whereas Brazil and France have infection rates of around 80%, Japan’s is only 7%. 
T. gondii can find its way to humans through farm animals such as pigs, cows, and sheep. 
And, as it happens, raw-meat dishes are more common in French and Brazilian cuisines. 
But T. gondii naturally targets cats, by way of rats whose behavior it has altered. 
Namely, the microbe increases the likelihood of its host rat being eaten by a cat, by reducing the rat’s natural fear of light (photophobia) and cat urine. 
Humans, too, can experience alarming behavioral changes after becoming infected by T. gondii. 
Infected men can become jealous, distrusting of others, disrespectful of established rules, and less risk-averse; as a result, they are almost three times more likely to be involved in a car accident. 
Infected women, meanwhile, can become either suicidal or more warm-hearted, insecure, and moralistic. 
Moreover, there is evidence that a T. gondii infection could play a role in mental disorders. 
More than 40 studies have shown that people suffering from schizophrenia test positive for T. gondii antibodies, indicating that they may have been previously infected. 
And T. gondii has also been tied to dementia, autism, Parkinson’s disease, and brain cancer. 
How can these puppet-master parasites control the brains of such diverse invertebrate and vertebrate species? 
One possibility is that they can change the levels of neurotransmitters such as dopamine and serotonin in the brain. 
Neurotransmitters are ancient molecules that have been conserved through the ages of evolution, and they are known to influence behavior. 
Thanks to genomics and proteomics, we have begun to understand the role that neurotransmitters play in allowing parasites to manipulate host behavior. 
When researchers analyzed the T. gondii genome, they found the precursor to dopamine synthesis, L-DOPA, suggesting that the parasite might be able to synthesize and secrete dopamine directly into a host’s brain. 
This would explain why rats infected with T. gondii have higher levels of dopamine, and why dopamine inhibitors can suppress their parasite-induced behavior. 
Parasites that infect invertebrates can also manipulate neurotransmitter levels. 
For example, the emerald cockroach wasp injects its cockroach host with a venomous cocktail that contains the neurotransmitter octopamine. 
This puts the cockroach into a sleep-like state, at which point the wasp drags it off to its lair and lays eggs in its abdomen. 
And like T. gondii in rats, acanthocephalan worms (also known as spiny-headed worms) overrides the natural photophobia of their freshwater crustacean hosts. 
As the crustacean gravitates toward the surface of the water, it is eaten by a duck, at which point the worm completes its lifecycle. 
Researchers have found that when uninfected amphipods are injected with serotonin, they spend more time near the surface of the water, as if they had been infected. 
And protein analysis of grasshoppers infected with nematomorph worms shows a change in the proteins that are involved in releasing neurotransmitters. 
We are only just beginning to understand how these diverse puppet-master parasites can manipulate invertebrate and vertebrate behavior. 
But we already know that pulling on the strings of neurotransmitters is one common method. 
If further research vindicates some of the more seemingly outlandish imaginings of science fiction, it wouldn’t be the first time. 

Mind the Gap 
Within today’s booming world economy, most developing countries have been growing rapidly. 
Yet this has not diminished the pressure to reduce the yawning gap in income between developed and developing countries that has shaped global debates for over a half-century. 
International inequalities, while large three decades ago, have worsened ever since. 
The most disturbing feature of this trend is the high number of “growth collapses” during the last decades of the twentieth century, with only a few developing economies (East Asia, India) able to sustain high growth rates. 
But there is another international income divergence that demands attention. 
Since 1980, the world has witnessed a widening income gap among developing countries. 
As underscored by a recent United Nations report, World Economic and Social Survey 2006 , this “dual divergence” holds four key lessons for economic growth in the developing world. 
First, success and failure in achieving sustained economic growth appear to be concentrated in time and space. 
This means that the growth of individual developing countries depends not only on their domestic economic policies – the focus of debates on economic development in recent decades. 
It also depends on factors beyond the control of individual countries: global economic conditions and regional economic environments. 
Indeed, the recent boom in some parts of the developing world shows exactly that. 
Second, while pushing the technological frontier is the crucial element of growth in industrial countries, what matters for developing countries is transforming production and export structures, particularly by shifting resources to activities with higher levels of productivity. 
The key to achieving this is the capacity to diversify domestic production by generating new activities, strengthening economic linkages within the country, and creating new domestic technological capabilities. 
Building industrial and modern service sectors is critical for successful diversification. 
Conversely, de-industrialization and concentration of growth in informal service activities is a proven recipe for failure, as has been demonstrated by the sad experiences of most developing countries in recent decades. 
The form of integration into world markets also plays a central role in economic diversification. 
Countries that integrate into dynamic world markets for manufactures and services perform better than those that specialize in natural-resource intensive sectors. 
But exports are not the only key factor: even more important are the export sector’s links with other domestic sectors. 
Pure extraction of mineral resources, as well as maquila -type manufacturing – common in Mexico and Central America – generate little additional demand for domestic industries and thus have only limited growth effects. 
A successful export strategy hinges not on how much countries export, but on what they export and how their export sectors are integrated with other domestic economic activities. 
The same is true of foreign direct investment (FDI). 
Countries that benefit most from FDI are those whose domestic firms and institutions also benefit, and thus those that have the requisite absorptive capacity. 
Third, macroeconomic stability, investment, and growth are mutually reinforcing. 
But maintaining stability involves not only keeping inflation low, but also, and crucially, avoiding large swings in economic activity, external imbalances, and financial crises. 
This explains why, in a world where developing countries are faced with increasing shocks, macroeconomic policies aimed at smoothing the business cycle (that is, counter-cyclical macro-economic policies) play a vital role in economic growth. 
In recent decades, however, macroeconomic policy in most developing countries has become more pro-cyclical , largely exacerbating the volatility of international financial markets and commodity prices. 
Pro-cyclical fiscal adjustment tends to encourage a short-term orientation towards economic policy, which limits long-term investments in infrastructure and human capital, thus constraining growth. 
More fiscal space can be created by improving governance and strengthening the tax base, and, for the poorest countries, by achieving additional stable official development assistance (ODA) channeled through national budgets. 
Indeed, when ODA is not determined by geopolitics, it can have a strong positive effect on long-term growth, essentially because it supports investment in infrastructure and human development. 
Finally, institutional reform encompasses more than creating markets and guaranteeing property rights. 
It also includes creating the regulatory and institutional framework that markets require to function well, providing necessary public goods and guaranteeing the fairness of rules. 
“Big bangs” in institutional reform, however, may generate more harm than good. 
Minor and gradual institutional change can have a powerful impact on growth if it is perceived as initiating further credible reform. 
So what will it take to start closing international income gaps without damaging development prospects globally? 
We need to maintain a stable, growing world economy with international trade rules that are truly development-oriented – the great expectation of the current (but so far frustrated) trade negotiations. 
This should be matched by the creation of “supply capacities” in developing countries, which requires production and trade sector policies that encourage structural transformation. 
We must also open up more space for counter-cyclical macroeconomic policies, approaching price stability less as an objective in itself than as an intermediate goal on the path to economic growth and employment creation. 
We need to ensure sustained levels of public spending to make the necessary investments in infrastructure and human capital, and to increase ODA channeled through the budgets of poor countries. 
Last but not least, we should promote gradual, home-made, and country-specific institutional reforms. 
By pursuing an aggressive, yet flexible, agenda for domestic development, facilitated by international cooperation and rules that guarantee the appropriate “policy space” for developing countries, we can reduce global income inequality. 
If we mind the gap, we can make the leap to a better, more inclusive form of globalization. 

Mind the Neighbors 
PRINCETON – The conventional wisdom last week on whether Syria would comply with former United Nations Secretary-General Kofi Annan’s ceasefire plan was that it was up to Russia. 
We were reverting to Cold War politics, in which the West was unwilling to use force and Russia was willing to keep arming and supporting its client. 
Thus, Russia held the trump card: the choice of how much pressure it was willing to put on Syrian President Bashar al-Assad to comply with the plan. 
If this view were correct, Iran would surely be holding an equally powerful hand. 
Annan, after all, traveled to Tehran as well. 
Traditional balance-of-power geopolitics, it seems, is alive and well. 
But this is, at best, a partial view that obscures as much as it reveals. 
In particular, it misses the crucial and growing importance of regional politics and institutions. 
A longer-term resolution of the Syrian crisis depends as much on Turkey and the Arab League as it does on the United States, Europe, and Russia. 
Consider what else happened last week: Turkey’s government made clear that it would turn to new measures if Annan’s plan does not produce results. 
Turkish officials have been issuing similar proclamations for months, but now Syrian troops have fired into Turkey, chasing Free Syrian Army rebels who fled across the border, while the number of Syrian civilian refugees has increased sharply. 
Last week, Prime Minister Recep Tayyip Erdoğan raised the stakes dramatically with talk of having “many options,” and by adding: “Also, NATO has responsibilities to do with Turkey’s borders, according to Article 5.” 
Article 5 of the NATO treaty stipulates that an attack on one NATO member is to be considered an attack on all, and that all will come to the member’s aid. 
Of course, other NATO members could disagree that Syria has in fact attacked Turkey, but if Turkey were to invoke Article 5, a refusal to offer assistance could have unpleasant consequences for the alliance as a whole. 
And Assad knows full well that it will be impossible to avoid further border incidents unless he is prepared to allow the Free Syrian Army to use Turkey as a safe zone. 
The significance of Article 5 is that if a credible case can be made that Turkey and its allies are acting in self-defense, they do not need to seek the UN Security Council’s approval. 
That makes Erdoğan’s suggestion a game-changer, forcing Assad to reckon with the prospect of a de facto militarily-enforced safe zone for the civilian opposition. 
The deeper point here is that regional organizations, including NATO, provide the first level of legality and legitimacy required for a successful use of force. 
The US would not have supported intervention in Libya if the Arab League had not supported a no-fly zone and been willing to go to the UN on that basis. 
Indeed, assuming that Assad does not start bulldozing entire cities, I cannot imagine any circumstances under which the US would support even limited military intervention in Syria without public approval by the Arab League and Turkey. 
That is why we have seen a game of “after you” with respect to Syria, with the Turks saying that they need Western support, the US saying that it needs regional support, and both saying that they need UN support. 
Looking beyond the Middle East, Africa provides the best evidence for a geopolitics based as much on regional powers and institutions as on traditional great powers. 
While Annan has been trying his diplomatic best to resolve Syria’s crisis, upheavals in Senegal, Mali, Malawi, and Guinea-Bissau have been swiftly addressed by other regional powers. 
In particular, the African Union (AU) has acted repeatedly in the name of enforcing the African Charter on Democracy, Elections, and Governance. 
In Senegal, simmering violence accompanied recent elections in which President Abdoulaye Wade was allowed to stand for an unprecedented third term. 
The first round forced Wade into a run-off with Macky Sall, at which point the AU promptly sent an Elections Observer Mission, drawn from 18 African countries, to assess whether the elections were legal and the results “reflected the will of the Senegalese people.” 
We cannot be sure what impact the mission had on Wade’s ultimate decision to concede defeat to Sall, but knowing that the region was watching must have focused his mind. 
The situation in Mali is more complicated, for it involves an ongoing secessionist movement, as well as a coup on March 21. 
But, after the coup the AU and the Economic Community of West African States (ECOWAS), backed by the UN, immediately suspended Mali’s membership in the AU, imposed economic and diplomatic sanctions on the country, and placed travel restrictions on coup leaders. 
Just over two weeks later, ECOWAS announced that it had reached an agreement with the coup leaders to return the government to civilian rule in exchange for lifting the sanctions. 
Likewise, AU President Jean Ping condemned a coup in Guinea-Bissau in early April immediately and in the strongest terms. 
Those who interpret all moves on the international stage in terms of states’ eternal jockeying for power and prestige will never lack for evidence. 
The way in which the Saudi-Iranian rivalry is playing out in Syria is a prominent example. 
But countries’ desire to stop mass murder in their neighborhood, or to enforce regional norms, has its own force. 
Increasingly, when a regional institution will not act, powers from outside the region find it difficult to intervene. 
And, when a region does unite on a course of action, intervention by outside powers becomes either less necessary or more effective. 

China’s Measured Embrace of India 
BEIJING – Chinese President Xi Jinping’s three-day visit to India, the main leg of a recent tour of Central and South Asia, sheds new light on China’s emerging approach to its neighbors, particularly Asia’s other giant. 
Recent subtle changes in Sino-Indian relations could prove to be enormously consequential for the world in the coming decades. 
Under Xi, China is adopting a new grand strategy which can be called “dual rebalancing”: implementing bold domestic reforms to regain economic momentum while overhauling China’s global posture and diplomacy, focusing on sources of risk in its near abroad. 
The Silk Road Economic Belt, which is focused on Central Asia, and the 21st Century Maritime Silk Road, which concentrates on the countries bordering the Indian Ocean’s shipping lanes, are leading initiatives on China’s foreign-policy agenda. 
Their success will depend, in large part, on whether China gets support from other great powers, specifically Russia in Central Asia and India in South Asia. 
China understands that India’s position on the world stage has been strengthening since the beginning of this century. 
India’s new prime minister, Narendra Modi, an aspirational and authoritative leader from Gujarat, one of the country’s most developed states, has promised to bring India’s economy out of a half-decade funk, enhance the living standards of his country’s have-nots, and boost the country’s standing as a global power. 
The trick for Chinese policy is to reconcile Modi’s ambitions with China’s strategic goals. 
Since Modi came to power, India has been basking in the adulation of major powers like Japan and the United States. 
Partly motivated by a desire to counterbalance China’s rising geopolitical influence, Japan and the US have sought to draw India into a multilateral alliance consisting of democratic countries in the Asia-Pacific region. 
Indeed, Japanese Prime Minister Shinzo Abe has vowed to forge a “democratic security diamond” with the US, Australia, and India. 
During Modi’s visit to Japan in early September, Abe offered to invest $35 billion in Indian infrastructure projects over five years, accelerate negotiations on civil nuclear deals, and boost bilateral maritime security cooperation. 
The two sides agreed to build up a “Special Strategic and Global Partnership,” leaving Chinese strategists to wrestle with the implications of deeper India-Japan ties. 
Likewise, despite an on-again off-again relationship with India since Bill Clinton’s presidency, the US continues to view the country as a “natural ally.” 
US cabinet members – Secretary of State John Kerry and Secretary of Defense Chuck Hagel – both visited India in recent months to try and woo Modi by promising improved economic and strategic ties. 
In the last three years, the US has surpassed Russia as India’s largest arms supplier. 
Modi’s government is desperate to diversity its sources of advanced weapons and become self-reliant in defense production. 
Barack Obama’s administration is now expected to do whatever it can to strengthen relations with India during Modi’s upcoming visit to Washington. 
As Nicholas Burns, a former under-secretary of state, has argued, US strategic interests in the century ahead will align more closely with India’s than with those of any other continental Asian power, making India central to America’s strategic rebalancing toward Asia. 
Xi is confident that China can understand and satisfy many of Modi’s needs better than regional rivals like Japan. 
But China should not underestimate India’s determination to uphold its strategic autonomy in Asia’s shifting geopolitical landscape. 
During Xi’s visit, the two leaders signed 15 agreements in the fields of trade, finance, and culture. 
Xi committed China to invest $20 billion in India over the next five years, particularly to modernize India’s decrepit and overused railway system. 
This compares with just $400 million, or 0.18% of India’s inward foreign investment, in Chinese investment from 2000 to 2014. 
China also promised to establish two industrial parks, in Gujarat and Maharashtra, as well as provide greater market access to Indian products, in an effort to allay India’s worries over the widening bilateral trade deficit, which has soared from $1 billion in 2001 to more than $40 billion today. 
Modi’s efforts to revive market-oriented reform and improve the country’s business environment will help to attract Chinese corporations eager to capitalize on India’s vast labor force, varied skill base, and geographical advantages. 
In addition, China wants to strengthen cooperation with India in regional and global affairs. 
India is likely soon to gain full membership in the Shanghai Cooperation Organization, the club of Central Asian and Asian states formed after the breakup of the Soviet Union. 
India’s “Connect Central Asia policy,” and its efforts to build a North-South Transit Corridor, would benefit development in Central Asia, a region of major concern to China, because it abuts the restless Chinese province of Xinjiang. 
As major aid providers and investors in Afghanistan, China and India also have common interests in stabilizing that country, and countering religious extremism and terrorism after NATO troops leave. 
Moreover, the two countries share similar interests in reshaping global economic governance, particularly by further strengthening cooperation among the BRICS (Brazil, Russia, India, China, and South Africa) and ensuring that climate change is addressed in a way that does not impede growth. 
But India’s lingering bitterness over the 1962 war with China remains. 
On many occasions, Modi has voiced suspicions about China’s growing footprint in disputed border areas. 
India’s sensitivity to potential Chinese encirclement is similar to China’s fears of encirclement by the US and its allies. 
That is why China is unlikely to develop its relations with India and Pakistan (with which China still values its all-weather partnership) on separate tracks, as the US did during the Bush administration. 
Xi’s visit to India strongly suggests that China is determined to engage with Modi in ways that are intended to inhibit the bilateral rivalry from intensifying. 
But, despite Xi’s investment pledges, it is far from certain that Asia’s two giants, both with growing global aspirations, can bridge the differences that continue to burden their relationship. 

The Power of Mini-Grids 
HARARE – Despite impressive economic development in recent years, Africa still lags far behind on energy, with almost two-thirds of the continent’s citizens lacking access to electricity. 
While getting more power to the people is an important goal, extending electricity grids is expensive and slow. 
Meanwhile, off-grid options may not be sufficient to meet people’s energy needs. 
Fortunately, there is a third approach that can help fill in the gaps: mini-grids. 
Mini-grids are essentially localized electricity networks that supply several users, whether households or businesses. 
They can be grid-connected, but they do not have to be. 
And, as a new report from the Africa Progress Panel (of which one of the authors is a member) shows – and as another report by the Rocky Mountain Institute underscores – mini-grids are an important piece of Africa’s energy puzzle. 
Mini-grids can have a major competitive advantage over grid extension in rural and remote areas, because they can provide electricity more quickly and at much lower cost. 
Because mini-grids require less capital investment than grid expansion, it can be easier to secure financing for them, meaning that they can electrify communities that might have to wait years for a grid connection. 
Mini-grids also have a distinct advantage over off-grid systems: greater power generation. 
Productivity-enhancing farm machinery, for example, usually requires more power than off-grid household systems can provide. 
Moreover, mini-grids can be used to increase the resilience of existing electricity systems. 
Power cuts on the main grid can affect a large number of businesses and households, and it can be difficult to restore services quickly. 
Mini-grids can ensure that consumers retain access to power when the grid suffers interruptions. 
Despite these benefits, the potential of mini-grids to help address Africa’s energy challenge has yet to be tapped. 
Reliance on mini-grids is expanding more slowly than in other world regions, with Africa being more likely to implement off-grid systems. 
One obstacle is the lack of proven commercial business models and adequate and appropriate forms of financing. 
Another is that policy frameworks often are not accommodating. 
And many developers and operators lack the requisite knowledge and experience. 
The situation is ripe for change. 
With the United Nations sustainable development agenda ambitiously targeting universal access to energy by 2030, policymakers are paying more attention to electrification, and development-finance institutions and partners are making more funding available. 
Meanwhile, the cost of renewable energy is falling; energy efficiency is improving, both for generating equipment and for the machines to be powered; and innovative digital technologies are facilitating the management of electricity services. 
A flexible solution like mini-grids is well suited to this context. 
As it stands, mini-grids in Africa are mostly diesel or hydropower systems. 
Yet mini-grids can – and increasingly do –take the form of solar PV and hybrid systems, with hybrid systems being particularly promising. 
Diesel systems face the risk of fuel-supply disruptions or cost increases, while renewable-energy generation can vary according to weather and season. 
Hybrid systems that combine diesel with solar or wind power mitigate these risks. 
Mini-grids are flexible in other ways, too. 
Mini-grids may or may not be connected to the national grid. 
They can be operated privately, by utilities, on a community basis, or according to a public-private model. 
And they can sell electricity to retail consumers, utilities, or both. 
So how can African governments use the potential of mini-grids to help expand energy access? 
As recent experience in the United States has shown, early adoption of technical innovations, particularly of digital management tools, could enable mini-grid business models to become more cost-efficient. 
New technologies could even enable mini-grid providers to develop entirely new organizational models for electricity systems that are more effective and resilient than the conventional utility-based approach. 
Experience in the US, as well as in Asia, also underscores the importance of favorable government policy and regulations, including capital subsidies. 
The challenge, of course, will be for each African government to design a mini-grid strategy around the options and models that work locally. 
That means setting appropriate tariffs and establishing a coherent framework of technical, financial, and procedural regulations. 
It also requires building up the necessary skills and capacities in the labor force. 
In developing their electricity systems, most African countries will have to consider and combine many different models and options. 
For many, mini-grids can play an important role. 
If African governments embrace diversity in the way electricity is generated and distributed, they could provide modern energy to millions of people, while placing the continent at the forefront of a global energy transformation. 

The Greening of the Miners 
LONDON – Donald Trump’s presidency in the United States has turned mining – and the coal industry in particular – into a political cause célèbre over the last year. 
In June, during his first White House cabinet meeting, Trump suggested that his energy policies were putting miners back to work and transforming a troubled sector of the economy. 
But Trump is mistaken to think that championing the cause of miners and paying respect to a difficult profession will be sufficient to make mining sustainable. 
To achieve that, a far more complex set of interdependencies must be navigated. 
Debates about mining and the environment are often framed in terms of a “nexus” between extraction of a resource and the introduction of other resources into the extraction process. 
The forthcoming Routledge Handbook of the Resource Nexus, which I co-edited, defines the term as the relationship between two or more naturally occurring materials that are used as inputs in a system that provides services to humans. 
In the case of coal, the “nexus” is between the rock and the huge amounts of water and energy needed to mine it. 
For decision-makers, understanding this linkage is critical to effective resource and land-use management. 
According to research from 2014, there is an inverse relationship between the grade of ore and the amount of water and energy used to extract it. 
In other words, misreading how inputs and outputs interact could have profound environmental consequences. 
Moreover, because many renewable energy technologies are built with mined metals and minerals, the global mining industry will play a key role in the transition to a low-carbon future. 
Photovoltaic cells may draw energy from the sun, but they are manufactured from cadmium, selenium, and tellurium. 
The same goes for wind turbines, which are fashioned from copious amounts of cobalt, copper, and rare-earth oxides. 
Navigating the mining industry’s resource nexus will require new governance models that can balance extraction practices with emerging energy needs – like those envisioned by the UN’s Sustainable Development Goals (SDGs). 
Value creation, profit maximization, and competitiveness must also be measured against the greater public good. 
Some within the global mining industry have recognized that the winds are changing. 
According to a recent survey of industry practices by CDP, a non-profit energy and environmental consultancy, mining companies from Australia to Brazil are beginning to extract resources while reducing their environmental footprint. 
Nonetheless, if the interests of the public, and the planet, are to be protected, the world cannot rely on the business decisions of mining companies alone. 
Four key changes are needed to ensure that the industry’s greening trend continues. 
First, mining needs an innovation overhaul. 
Declining ore grades require the industry to become more energy- and resource-efficient to remain profitable. 
And, because water scarcity is among the top challenges facing the industry, eco-friendly solutions are often more viable than conventional ones. 
In Chile, for example, copper mines have been forced to start using desalinated water for extraction, while Sweden’s Boliden sources up to 42% of its energy needs from renewables. 
Mining companies elsewhere learn from these examples. 
Second, product diversification must start now. 
With the Paris climate agreement a year old, the transformation of global fossil-fuel markets is only a matter of time. 
Companies with a large portfolio of fossil fuels, like coal, will soon face severe uncertainty related to stranded assets, and investors may change their risk assessments accordingly. 
Large mining companies can prepare for this shift by moving from fossil fuels to other materials, such as iron ore, copper, bauxite, cobalt, rare earth elements, and lithium, as well as mineral fertilizers, which will be needed in large quantities to meet the SDGs’ targets for global hunger eradication. 
Phasing out coal during times of latent overproduction might even be done at a profit. 
Third, the world needs a better means of assessing mining’s ecological risks. 
Although the industry’s environmental footprint is smaller than that of agriculture and urbanization, extracting materials from the ground can still permanently harm ecosystems and lead to biodiversity loss. 
To protect sensitive areas, greater global coordination is needed in the selection of suitable mining sites. 
Integrated assessments of subsoil assets, groundwater, and biosphere integrity would also help, as would guidelines for sustainable resource consumption. 
Finally, the mining sector must better integrate its value chains to create more economic opportunities downstream. 
Establishing models of material flows – such as the ones existing for aluminum and steel – and linking them with “circular economy” strategies, such as waste reduction and reuse, would be a good start. 
A more radical change could come from a serious engagement in markets for secondary materials. 
“Urban mining” – the salvaging, processing, and delivery of reusable materials from demolition sites – could also be better integrated into current core activities. 
The global mining industry is on the verge of transforming itself from fossil-fuel extraction to supplying materials for a greener energy future. 
But this “greening” is the result of hard work, innovation, and a complex understanding of the resource nexus. 
Whatever America’s coal-happy president may believe, it is not the result of political platitudes. 

Hunting Tigers in China 
CLAREMONT, CALIFORNIA – In the boldest move yet since President Xi Jinping launched his anti-corruption campaign, China has announced the start of a formal investigation into “serious disciplinary violations” by one of the Chinese Communist Party’s most senior figures, Zhou Yongkang. 
Though rumors of Zhou’s political demise had been circulating for nearly a year, anyone familiar with Chinese political intrigue knew that, until the CCP made it official, Zhou’s many powerful patrons and cronies could still save him. 
Now it is official: a “mega-tiger” has been brought down. 
But is that what China really needs? 
Since 2012, when Xi began “hunting tigers,” as he put it, three dozen government ministers, provincial governors, and other high-level officials have fallen into his net. 
But Zhou is no ordinary tiger. 
A former member of the Politburo Standing Committee, the CCP’s top decision-making body, Zhou was considered untouchable. 
Since the end of the Cultural Revolution, the CCP has adhered to the implicit rule that members of the Politburo Standing Committee, sitting or retired, enjoy immunity from criminal prosecution. 
Some have, of course, been purged in power struggles, such as the one that led to the fall of Hua Guofeng, Mao’s immediate successor, in the early 1980s. 
But the defeated have typically retired quietly, and never faced formal corruption charges. 
Given this history, the prosecution of Zhou is a watershed event – far more significant than the riveting trial of the disgraced former Chongqing Communist Party Secretary Bo Xilai a year ago. 
It unambiguously demonstrates Xi’s personal authority and political resolve. 
But the question remains: What exactly does Xi hope to achieve with China’s most fearsome anti-corruption campaign in more than three decades? 
The conventional wisdom is that the threat of prosecution serves Xi’s goals of consolidating power and compelling the bureaucracy to implement economic reforms that run counter to its interests. 
The two prongs of Xi’s political strategy – cleansing the Party and reinvigorating China’s economy – are thus complementary and interdependent. 
This strategy has considerable merit. 
But even the Machiavellian dictum that a ruler should encourage his citizens’ fear rather than their love can go only so far. 
The most successful political leaders are skilled coalition-builders. 
Consider Deng Xiaoping, China’s most successful reformer (the Tiananmen Square massacre of 1989 notwithstanding). 
The grand coalition that he forged, against all odds, upon his return to power in 1979 was essential to bringing about the economic transformation that followed. 
The question today is thus not whether Xi has amassed enough authority to effect change in China (he has), but whether he has built a coalition capable of advancing his declared goal of reviving pro-market reforms. 
And, so far, the answer seems to be no. 
Since taking over the presidency, Xi’s actions have been both resolute and contradictory. 
On one hand, he has been aggressively pursuing “tigers” and “flies” (lower-level officials), while curbing, at least temporarily, the privileges enjoyed by Chinese officials. 
On the other hand, he has launched an equally ferocious campaign against political liberalization, arresting and jailing leading human-rights activists and cracking down on China’s once-vibrant social media. 
The risks of waging a two-front war are obvious. 
If Xi’s fight against corruption is genuine, it will engender fear and resentment among the Chinese bureaucracy. 
While officials feign compliance with Xi’s economic-reform agenda, they will seek any opportunity to stymie it. 
The absence of significant real progress since Xi unveiled his economic blueprint last November suggests that this is already happening. 
At the same time, Xi’s tough stance against political reform is diminishing hope among liberals. 
Of course, this group – including intellectuals, social activists, journalists, and progressive private entrepreneurs – has little institutional power. 
What it does have is the capacity to influence ordinary Chinese – making them a valuable addition to a pro-reform coalition. 
Deng recognized this potential in the 1980s; unless Xi follows suit, he will find it increasingly difficult to rally the public behind his vision for China’s future. 
This is not to say that caging Zhou was not a good move. 
But Xi must now shift his focus from bagging another quarry to winning over new and perhaps unexpected allies. 
His long-term success – and that of China – depends on it. 

China’s Plenum Test 
TOKYO – There is something odd and disturbing about the conventional wisdom surrounding the upcoming Third Plenum of the 18th Central Committee of the Chinese Communist Party (CCP). 
As the November 9-12 conclave draws near, the international community’s attention seems to be focused mainly on technocratic policy changes deemed essential to restructuring China’s state-dominated economy and reenergizing growth. 
Will the government liberalize interest rates or loosen capital controls? 
How will the fiscal system be revamped? 
Will land reform be part of the package? 
The list of such questions goes on. 
Outside China, the prevalent view among business leaders is that President Xi Jinping’s new administration has consolidated its power and acquired enough authority to push through far-reaching economic reforms. 
He and his colleagues need only to get the specific policies right. 
On the surface, such thinking may seem reasonable. 
In China’s top-down political system, a unified leadership is seen as fully capable of forcing the bureaucracy to comply with its wishes. 
With Xi’s anti-corruption campaign in full swing, and the example of Bo Xilai’s imprisonment serving as a warning to the new president’s adversaries (no matter how senior they are), Chinese officials at all levels, it is widely believed, are likely to toe the line. 
Unfortunately, this view is both too sanguine and naïve. 
It overestimates the effectiveness of anti-corruption campaigns in contemporary China (there have been many in the last three decades), and it overlooks the political sources of the country’s economic slowdown. 
While Xi’s efforts to cleanse the rot inside the Chinese party-state should be applauded, it is no less important to recognize their limits. 
So far, Xi’s campaign has remained a conventional affair involving selective prosecution. 
Given the central government’s well-known inability to enforce its policies at the local level and the prevalence of tight-knit patronage networks in Chinese provinces and cities, it is unrealistic to expect that the current anti-corruption drive will produce significantly better results than in the past. 
Indeed, the fight against corruption is at war with itself, because Xi is simultaneously seeking to buttress one-party rule. 
But it is precisely the absence of effective checks on the exercise of power that encourages and sustains rampant corruption in the first place. 
Optimism about the CCP’s ability to push through market-oriented reforms also ignores the real obstacles to future growth and prosperity, which do not include a lack of economic ideas or policy expertise; on the contrary, it is well known – even obvious – what kind of economic reforms are needed. 
What prevents China from pursuing these reforms is a combination of opposition from powerful entrenched interest groups – state-owned enterprises, local governments, the economic-policy bureaucracy, and family members of political elites and well-connected businessmen – and flawed political institutions. 
Unless Xi and his colleagues demonstrate their resolve to overcome such opposition and launch comprehensive reforms, their chances of success are not high. 
Compared with the two previous breakthroughs in reforming China’s economy, in 1978 and 1992, Xi faces a different environment and a much tougher challenge. 
Opponents of Deng Xiaoping’s reforms were ideologically driven; they had no personal stake in the Maoist political economy. 
Defeating them required building a winning coalition within the party, discrediting the communist ideology, and rallying public support, all of which Deng did. 
Today, by contrast, members of the ruling elite benefit directly and immensely from the state-dominated economy. 
Market-oriented reform, by leveling the competitive playing field, would hurt their interests and reduce their privileges, making fierce opposition likely. 
Only by mobilizing pressure outside the party-state can these insiders be forced to accept some of the decentralizing and liberalizing reforms that China’s economy needs. 
At that point, China will have a better chance of improving its legal institutions, increasing political accountability, strengthening protection of private property rights, and making the government genuinely – in Mao’s words – “serve the people.” 
Without real and significant political change, technocratic reform proposals will treat only the symptoms of China’s economic malaise, without addressing its underlying institutional causes. 
In assessing the outcome of the Third Plenum, what observers should really be looking for is evidence of a bold strategy for political reform. 
If Xi and his colleagues produce no credible sign of such a commitment, everything else will be eyewash – and skepticism about China’s fate under their leadership eventually will be vindicated. 


Misery Loves Inflation Targeters’ Company 
TOKYO – The United States, Europe, and Japan are all making positive economic strides. 
In the US, the unemployment rate is falling, and now stands at just over 4%. 
Unemployment remains high in the eurozone, at close to 9%, but that still represents significant progress from the past decade or so. 
And Japan has achieved virtually full employment, with labor demand so high that new graduates are able not just to find jobs, but to choose them. 
Yet there is one key area where progress seems to be lagging: inflation. 
While the US consumer price index reached 2.2% in October, the European Central Bank and the Bank of Japan have so far been unable to meet their targets of roughly 2% inflation, with the eurozone’s average annual price growth hovering around 1.5% and Japan’s firmly lodged in the 1% range. 
There are good reasons to strive to meet the inflation target. 
Money markets would be rid of near-zero interest rates. 
Concerns about currency appreciation damaging export competitiveness would be assuaged, as globalization and artificial intelligence continue to create competition for workers. 
And the expansionary monetary policy pursued by the world’s major central banks in recent years would be vindicated. 
Yet when it comes to ordinary people’s wellbeing, meeting the inflation target is not always the best option. 
Of course, reining in high inflation is beneficial, as it preserves the value of existing money. 
But raising below-target inflation to 2% leaves people worse off, as it causes their savings to lose value continuously, thereby undermining their prosperity. 
The late Arthur Okun, who was one of my professors at Yale before serving as Chair of US President Lyndon Johnson’s Council of Economic Advisers, created the so-called misery index, which goes beyond headline GDP growth or the unemployment rate to provide insight into how the average citizen is faring economically. 
Okun’s index – the sum of the inflation and unemployment rates – is based on the assumption that an increase in inflation, like an increase in unemployment, creates economic and social costs for a country. 
The reality is that the inflation target is a means to an end – to facilitate full employment and faster GDP growth – not an end in itself. 
And, at least in Japan, substantial progress toward that end has been made, despite the failure to meet the Bank of Japan’s inflation target. 
Signs of full employment in the market for permanent workers could set the stage for a moderate wage-price increase. 
That was not the case before 2013, when the implementation of Japanese Prime Minister Shinzo Abe’s economic-reform program, so-called Abenomics, ended a period of austere monetary policy. 
But this has not deterred critics of Abenomics from harping on the non-fulfillment of the inflation target. 
The question is why. 
Not long ago, I posed that question to a monetary-policy authority (whose name I am not at liberty to divulge). 
Rather than provide a straightforward answer, he replied that it was “tricky,” finally landing on the statement that, no matter how low the unemployment rate, the inflation target should be pursued. 
This kind of thinking is common among economists, particularly the generation swept up by the “rational expectations” revolution in macroeconomics. 
This cohort views economics as the study of models, in which agents’ expectations can be assumed to be rational and consistent with the model. 
From this perspective, inflation expectations can be assumed to be either ideal predictions of the future, or at the very least rational ones, with their accuracy and precision undermined only by limitations in information received by economic actors. 
Older economists thought differently, assuming that most economic outcomes in the real world are the result of behavior that is at least partly irrational, meaning that expectations should be viewed more as reasonable possibilities than near-certainties. 
Because I belong to the generation taught by old sages – Lawrence Klein, Franco Modigliani, and James Tobin – I think this is a worthwhile assessment – one that should be applied to today’s discussions about monetary policy and inflation. 
While it is important to recognize the merits of inflation targeting, the misery index, too, has a role to play in helping us to assess the state of our economies – and the success of our policies. 

Mismanaging Missile Defense 
Missile defense has suddenly emerged as a divisive issue in Europe. 
Rather than enhancing European security, the Bush administration’s plan to deploy elements of a missile defense system in Poland and the Czech Republic threatens to increase strains with Russia and deepen divisions with America’s European allies, particularly those in Eastern Europe, where support for US polices has been strongest. 
The growing opposition to the US missile defense deployment is rooted in the way in which America has managed – or rather mismanaged – the presentation of its deployment plans. 
First, US officials did not lay the political and psychological groundwork for deployment. 
They assumed that Czech and Polish leaders – who were strongly pro-American – would willingly agree to deployment, and that public opinion in both countries would go along with whatever the governments decided. 
But America failed to develop a coherent public rationale for its planned deployment of a system designed to destroy a missile fired by a rogue regime. 
As a result, the Czech and Polish governments were unable to answer fundamental questions about the costs and benefits of the deployment for Polish and Czech national security. 
This allowed skeptics and opponents of missile defense to gain the upper hand in the internal debates in both countries. 
Second, US officials initially tended to view missile defense largely as a technological issue divorced from its political context. 
For most Europeans, however, the military-technical issues are less important than the broader political implications of deployment for European stability and security. 
The initial American briefings to European allies ignored this fact. 
Third, America underestimated the role of public opinion in Poland and the Czech Republic. 
US officials assumed that it was sufficient to have the consent of the governments and failed to recognize the degree to which these countries have become increasingly “Europeanized” in the last decade. 
Membership in the European Union has resulted in the proliferation of ties to Europe at many levels, as well as a major influx of EU money. 
This has had an enormous impact on public attitudes in Eastern Europe. 
In Poland, a big gap exists between the government’s attitude and that of the population regarding the EU. 
The Polish government is dominated by Euro-skeptics and has pursued a highly nationalistic policy that has often antagonized EU officials. 
Ordinary Poles, by contrast, are strongly pro-European. 
According to recent polls, 80% of the population supports Poland’s membership in the EU – the highest in Europe. 
Fourth, American officials have tended to assume that the countries of Eastern Europe will remain staunchly pro-American and automatically support US policy. 
That was true five years ago, but it is much less true today. 
As Eastern European countries become more closely integrated into the EU, they increasingly have to calculate the impact of their policies on relations with Europe. 
At the same time, the war in Iraq and abuses associated with it have tarnished America’s image in Eastern Europe. 
This is true even in Poland, which is the most pro-American country in the region. 
The Polish government strongly supported the US in Iraq, sending the third largest contingent of forces, after the US and Great Britain. 
However, Polish public opinion, like public opinion in Western Europe, was overwhelmingly opposed to the Iraq invasion. 
Moreover, many Poles feel they have little to show for the government’s support. 
As former Polish Defense Minister Radek Sikorski noted recently, there is a sense among many Poles that the US takes Poland for granted. 
Sikorski’s argument shocked many US officials, because he is considered one of the most pro-American politicians in Poland. 
But it reflects a widespread sentiment among many Poles, including those who are staunch supporters of close ties to the US. 
Unlike the Iraq operation, the planned missile defense deployment will almost certainly require approval by the Polish parliament. This approval cannot be taken for granted. 
The government will need to explain to a skeptical Polish population and parliament why the deployment is in Poland’s national interest – not just America’s interest – and how it enhances Polish security. 
Simply saying, “because the Americans want it” will not be enough. 
The US can still win the missile debate in Europe, but only if it stops treating missile defense primarily as a technological issue and addresses the broader political concerns that are driving the debate among European publics, including those in Eastern Europe. 

Missiles, Mickey Mouse, and North Korea 
PYONGYANG: The most predicable thing about North Korea is its unpredictability. 
One day last week saw the son of its “Dear Leader” Kim Jong Il arrested while entering Japan on a false passport (supposedly to take his son to Tokyo’s Disneyland), the next day brought a promise to maintain its moratorium on missile testing until 2003 as well as continue sales of missile technologies to countries like Iran. 
But there is a second, unchanging element in North Korean affairs: its basket-case economy. 
One million people may have died in the North Korean famine of 1995 to 1997. Now the World Food Program fears that another famine is looming – the country’s agricultural output will likely fall to 1.8 million tons of grain, far short of the 4.8 million tons needed to supply the meagre ration of 7ounces a day (half the daily allowance for those in UN refugee camps) ordinary North Koreans receive. 
Making matters worse, national food stocks ran out in January and South Korean food aid will run out this month. 
While the World Food Programme feeds North Korea's six million children, 17 million adults must fend for themselves. 
(A "military first" programme ensures diverts most supplies to North Korea’s huge standing army and bureaucracy.) 
To survive, many North Koreans forage for edible roots and leaves and make soups from cabbage stalks and vegetable waste. 
Those who survive will be more malnourished than ever, and the percent of children whose growth is stunted will increase from today’s two thirds. 
North Korea’s next mini-harvest is not due until late June. 
But that harvest will not even be as good as last year’s abysmal one. 
At the same time, South Korea will reduce the amount of fertiliser it provides for rice planting from 300,000 tons to 200,000 tons. 
But even that reduced level of aid was disputed by people in Seoul, who argued that conditions on improved North/South relations needed to be attached. 
These appalling conditions result from North Korea's bizarre form of socialism known as "juche.” 
Invented by Kim Jong Il’s father, North Korea’s current leader has continued to promote “juche” in almost 900 books and articles. 
Despite shunning Marxism/Leninism in favour of "juche" in 1967, the Soviet subsidies kept North Korea’s economy above water until 1991. 
Weakened by the collapse of the USSR, the economy was sent into a tailspin after successive floods and droughts in 1995, 1996 and 1997. Although he avoids talking about it at home, even Kim Jung Il may now believe that "juche" is a losing philosophy. 
So he has turned to China for advice. 
Specific "how to" advice is what Kim wants from China. 
During his first of two missions to China last year, Kim Jung Il asked President Jiang Zemin about how to move towards a market economy yet maintain an authoritarian dictatorship. 
My pleasure, said President Jiang. 
First, firmly suppress political dissent as soon as it emerges. 
Second, examine our stock exchanges and special economic zones. 
On his second trip to China, which followed Kim Jung Il’s historic meeting with President Kim Dae Jung of South Korea last June, North Korea’s leader was taken to Shanghai by Premier Zhu Rongji and shown its stock exchange and the vast Pudong development zone. 
No one doubts that Jiang Zemin knows how to maintain an authoritarian regime. 
But is he the best source of advice on how to turn North Korea’s economy around? 
Probably not: North Korea is not China. 
The policies that transformed in China over the last two decades are unlikely to work in North Korea. 
It will be along time before the “Dear Leader” will be able to convince his followers that a stock market, with its demand for corporatization and even privatisation, is at all connected to the primary stage of "juche.” 
Convincing themselves that reform was unavoidable was one of the major feats of China’s leadership under Deng. 
In China, economic zones – especially the five Special Economic Zones and the Pudong area of Shanghai – work because, from their inception, they were envisioned as laboratories for economic, social, and even political experiments. 
The main contribution of the zones was to experiment with market forces in a limited, and therefore politically acceptable, way before applying their lessons across the country. 
Deng Xiao Ping, who gave the zones the go-ahead, understood that by opening China’s economy to the outside world, the zones would inevitably permit "mosquitoes" to fly into China. 
He accepted this risk as the price to be paid in order to improve the economic welfare of ordinary Chinese. 
He was right: mosquitoes did fly in, bringing corruption, criminal activities, progressive and liberal ideas and – perhaps most importantly – an awareness of what life is like in the rest of the world. 
Life in North Korea, however, is hermetically sealed. 
The only radios permitted in North Korea can only be tuned to North Korean stations. 
Few North Koreans are permitted to visit Pyongyang, their country’s capital, whereas millions of Chinese travel and study abroad each year. 
Indeed, when North Korea approached Swedish academics to request training in business management, they insisted that the training take place in conditions as near to those prevailing in North Korea as possible. 
So the training will take place, not in Stockholm or some other open city, but in communist Hanoi. 
From Kim Jong Il down, North Korea’s leadership shows little or no awareness of the "mosquitoes" that opening up the economy and will bring in. 
Unlike Deng, they will not find them acceptable. 
Cabbage stalk soup and grass salad, sad to say, are likely to dominate the diet of North Korea’s long-suffering people for a long time yet. 

Missiles, Oil, and Europe Re-Divided 
As if things weren’t bad enough for Europe after the French and Dutch “No” to the European Union Constitution, a new divisive issue now threatens to strain Europe’s cohesion. 
The United States wants to establish an anti-missile defense system that is supposed to protect America and parts of Europe against missiles from the Middle East. 
The American missiles are to be stationed in Poland, with a radar system to be set up in the Czech Republic. 
Russia is up in arms about the US plan. 
A month ago, Russian President Vladimir Putin made a fiery speech against the project during the Munich Conference on Security Policy. 
The US representatives were perplexed; the Europeans were shocked. 
Now the US says it has reached agreement with Poland and the Czech Republic to study the concrete details of the stationing of the necessary defense systems. 
Once again, Europe is shocked: the two great powers of the Cold War seem not to be taking Brussels seriously. 
Are we threatened with a new arms race between Russia and the US, with Europe once again the theater of their rivalry? 
Indeed, is a new Cold War looming? 
There is no reason to panic about America’s proposed anti-missile defense system. 
Nor can the political climate, old differences, and the by-no-means new power rivalry between Russia and the US justify pessimism. 
No doubt, Russia has regained strength from high oil and gas prices, and it is reclaiming its position as an independent global actor. 
Putin’s policies are popular in Russia, which of course does not make them right. 
But, in criticizing Putin, the West should be mindful of his domestic support. 
Russia’s return to the world stage means that new and old rivalries will develop and may even intensify in the future. 
But we are light years away from a new Cold War. 
There is now no longer any ideological hostility between Russia and the West. 
Estrangement? 
Yes. 
But hostility? 
No. 
Eleven defensive US missiles in Poland will not threaten Russia's security. 
And they will not mark the beginning of a new arms race. 
But it is also hard to understand, why the US needs this decision now. 
Timing? 
Priorities? 
The US policy seems unreasonable. 
The threat from Iran, against which the missiles are to defend, is still far away and can be avoided by diplomatic means. 
In fact, the West needs Russia’s cooperation on almost every important international issue of the day, be it North Korea, Iran, Iraq, the Middle East, South Caucasus, Central Asia, Kosovo, Darfur, climate change, energy security, or nuclear non-proliferation. 
For some time now, American policy towards Russia has been anything but consistent. 
Apparently, the US can’t decide whether to treat Russia as a rival power or a difficult partner. 
It would be in America’s interest, with Iraq, Iran, and the broader Middle East as its foreign-policy priorities, to pursue the partnership option. 
Europe’s policy towards Russia is in even worse shape. 
Indeed, it increasingly resembles a chicken farm after a fox has broken in. 
And now, with the US announcement that it will build the anti-missile defense system on a bilateral basis with Poland and the Czech Republic, there is also a hawk circling overhead. 
Confusion and panic are spreading in Europe. 
What is most frightening about all this is not the American anti-missile project or Putin’s rhetorical muscle-flexing, but rather the increasingly dramatic European weakness that the episode has exposed. 
The EU has been working for a decade on a common foreign and security policy. 
So how can discussion of an issue as crucial as the establishment of an American anti-missile defense system in Europe be ignored at the EU level, with no attempt being made to find a joint European position? 
An anti-missile defense system in Europe is a European, not a bilateral, issue. 
However important NATO may be, it would be a dramatic admission of its own helplessness and insignificance if the EU were to remain silent on this crucial issue for Europe’s future. 
Europe’s weakness becomes even more obvious given that it is not at all clear whether the American missile defense system will ever work. 
This doubtful project is not worth a serious division of Europe! 
But bilateral treatment of the issue threatens to do just that: to divide Europe along the same fault lines as did the war in Iraq. 
All the while, Moscow is playing a game of “divide and rule” by exploiting Europe’s dependence on Russian oil and gas supplies. 
As the EU’s Russia policy is blocked by the Polish government’s intransigence, Russia blithely continues to sign more bilateral treaties with individual EU member states, most recently with Greece and Bulgaria. 
The only effective answer that Europeans can give to the Kremlin is to adopt a common energy policy that will hinder any further division of Europe. 
This will not be easy to achieve, but the EU has accomplished more difficult tasks in the past. 
The EU must develop a common position with respect to all significant, strategic issues in its foreign relations. 
Otherwise, Europe will be at the mercy of the interests of others. 
No European country – not even the Big Three (France, Great Britain, and Germany) – can any longer assert its central foreign policy interests alone, outside of the common European framework. 
So any weakening of the EU in its foreign relations entails a corresponding weakening of the member states’ individual interests. 
Everyone agrees to a “Europe of Common Values.” 
What we need now is a “Europe of Common Interests.” 
Objectively, it is already a reality. 
Subjectively, the only remaining question is this: how long will it take before Europe’s governments finally start taking it into account? 

Misusing the Inaction Argument 
SAN JOSÉ, COSTA RICA – One commonly repeated argument for doing something about climate change sounds compelling, but turns out to be almost fraudulent. 
It is based on comparing the cost of action with the cost of inaction, and almost every major politician in the world uses it. 
The president of the European Commission, José Manuel Barroso, for example, used this argument when he presented the European Union’s proposal to tackle climate change earlier this year. 
The EU promised to cut its CO2 emissions by 20% by 2020, at a cost that the Commission’s own estimates put at about 0.5% of GDP, or roughly €60 billion per year. 
This is obviously a hefty price tag – at least a 50% increase in the total cost of the EU – and it will likely be much higher (the Commission has previously estimated the cost to be double its current estimate). 
But Barroso’s punchline was that “the cost is low compared to the high price of inaction.” 
In fact, he forecasted that the price of doing nothing “could even approach 20% of GDP.” 
(Never mind that this cost estimate is probably wildly overestimated – most models show about 3% damages.) 
So there you have it. 
Of course, politicians should be willing to spend 0.5% of GDP to avoid a 20% cost of GDP. 
This sounds eminently sensible – until you realize that Barroso is comparing two entirely different issues. 
The 0.5%-of-GDP expense will reduce emissions ever so slightly (if everyone in the EU actually fulfills their requirements for the rest of the century, global emissions will fall by about 4%). 
This would reduce the temperature increase expected by the end of the century by just five-hundredths of a degree Celsius (nine-hundredths Fahrenheit). 
Thus, the EU’s immensely ambitious program will not stop or even significantly impact global warming. 
In other words, if Barroso fears costs of 20% of GDP in the year 2100, the 0.5% payment every year of this century will do virtually nothing to change that cost. 
We would still have to pay by the end of the century, only now we would also have made ourselves poorer in the 90 years preceding it. 
The sleight of hand works because we assume that the action will cancel all the effects of inaction, whereas of course, nothing like that is true. 
This becomes much clearer if we substitute much smaller action than Barroso envisions. 
For example, say that the EU decides to put up a diamond-studded wind turbine at the Berlaymont headquarters, which will save one ton of CO2 each year. 
The cost will be $1 billion, but the EU says that this is incredibly cheap when compared to the cost of inaction on climate change, which will run into the trillions. 
It should be obvious that the $1 billion windmill doesn’t negate the trillions of dollars of damage from climate change that we still have to pay by the end of the century. 
The EU’s argument is similar to advising a man with a gangrenous leg that paying $50,000 for an aspirin is a good deal because the cost compares favorably to the cost of inaction, which is losing the leg. 
Of course, the aspirin doesn’t prevent that outcome. 
The inaction argument is really terribly negligent, because it causes us to recommend aspirin and lose sight of smarter actions that might actually save the leg. 
Likewise, it is negligent to focus on inefficiently cutting CO2 now because of costs in the distant future that in reality will not be avoided. 
It stops us from focusing on long-term strategies like investment in energy R&D that would actually solve climate change and at a much lower cost. 
If Barroso were alone, perhaps we could let his statement go, but the same argument is used again and again by influential politicians. 
Germany’s Angela Merkel says it “makes economic sense” to cut CO2, because the “the economic consequences of inaction will be dramatic for us all.” 
Australia’s Kevin Rudd agrees that “the cost of inaction will be far greater than the cost of action.” 
United Nations Secretary General Ban Ki-Moon has gone on record with the exact same words. 
In the United States, both John McCain and Barack Obama use the cost of inaction as a pivotal reason to support carbon cuts. 
California senator Diane Feinstein argues that we should curb carbon emissions because the Sierra snowpack, which accounts for much of California’s drinking water, will be reduced by 40% by 2050 due to global warming. 
What she fails to tell us is that even a substantial reduction in emissions – at a high cost – will have an immeasurable effect on snowmelt by 2050. 
Instead, we should perhaps invest in water storage facilities. 
Likewise, when politicians fret that we will lose a significant proportion of polar bears by 2050, they use it as an argument for cutting carbon, but forget to tell us that doing so will have no measurable effect on polar bear populations. 
Instead, we should perhaps stop shooting the 300 polar bears we hunt each year. 
The inaction argument makes us spend vast resources on policies that will do virtually nothing to deal with climate change, thereby diverting those resources from policies that could actually make an impact. 
We would never accept medical practitioners advising ultra-expensive and ineffective aspirins for gangrene because the cost of aspirin outweighs the cost of losing the leg. 
Why, then, should we tolerate such fallacious arguments when debating the costliest public policy decision in the history of mankind? 

Will the IMF Lose Ukraine? 
BOSTON – An incumbent trying to win an election in a stagnating economy must stimulate growth. 
This is one the most basic principles of modern politics. 
And yet the West, which wants to help its allies in Ukraine’s interim government win the general election on May 25, seems to have forgotten it. 
Instead, plans are underway to impose on Ukraine the biggest austerity package Eastern Europe has ever seen. 
This is no way to win votes. 
After the Russian-imposed chaos, the International Monetary Fund is planning to inflict its own chaos on Ukraine. 
It is time to remind the IMF that political stability, not a controversial raft of emergency reforms, must be the top priority. 
The IMF has long sought to impose a range of economic “reforms” on Ukraine. 
Some are reasonable; others are not – and the IMF’s track record in Ukraine is weak. 
Some of the reforms the IMF previously tried to get Ukraine to adopt, like pension privatization, were tried in other countries and ditched. 
The IMF does not always get it right. 
Today, its main blind spot in Ukraine has concerned consumer subsidies and transfer payments. 
It is true that Ukrainian households need to be weaned off absurdly large energy subsidies, which amounted to 7.5% of GDP in 2012. 
But, in a cold country where most of the population needs heating subsidies to survive and massive investments are required to increase energy efficiency, abruptly withdrawing support to households is politically unfeasible. 
No government that cuts heating subsidies suddenly will survive. 
The subsidies must be phased out and compensated by targeted cash benefits – the Ukrainian government estimates that it will cost €100 billion ($139 billion) to fix its energy policy – and these reforms need to be enacted after the upcoming election. 
In addition, one-third of official income in Ukraine comes from government “transfer” payments of various sorts, but mainly pensions paid to elderly women, given that the country’s men rarely live much beyond the official retirement age. 
These women often use their pensions to subsidize their children and grandchildren. 
As a result, a majority of the country benefits from government transfer payments, and many households cannot do without them. 
Yet cutting them ahead of the election – or announcing sharp cuts – is exactly what the IMF wants and what the interim Ukrainian government plans to do; in the words of Prime Minister Arseniy Yatsenyuk, “We don’t have any other options.” 
Yatsenyuk may be willing to sign away his political future, but the West should not let him do it. 
Not now. 
The IMF and Western governments need to give Ukraine some breathing room. 
Ukraine’s economy was growing rapidly in the years before the global financial crisis, driven by exports of basic industrial goods, such as steel. 
Any emergency financial package must enable the government to survive through the May election and signal a commitment to reviving economic growth. 
The international financial institutions should then turn their attention to crafting an aid package that does not require the budget to be balanced on the backs of the poor. 
Instead of cutting consumer subsidies, the IMF could help Ukraine to improve tax collection. 
More than half of the economy is unofficial and untaxed. 
Oligarchs can be asked to contribute to any program as a condition of support for their regions or industries. 
And the IMF can come up with clever ways to encourage energy efficiency, for example, by designing a tax credit for households that purchase high-quality heaters. 
No successful Eastern European government has been asked to impose a dramatic austerity and reform program prior to democratic elections; it would be utter folly to start now. 
In Poland, the region’s star reformer, and elsewhere in post-communist Europe, citizens were asked to make the sacrifices that economic reform requires only after the government had gained a popular mandate. 
Ukraine is still a step away from this politically. 
If the IMF insists that the interim Ukrainian government impose austerity immediately, the country will be forced to break uncertain new ground at a particularly dangerous time. 
In short, the Western strategy for Ukraine should be to stimulate the Ukrainian economy until the May election and then negotiate a package of reforms with the government that emerges. 
Emergency economic reforms can wait two months; 
Ukraine’s unity and stability cannot. 


Managing Europe’s Perfect Storm 
NEW YORK – The Chinese often point out that in their language the character for crisis and opportunity are one and the same. 
But, while it is indeed true that crisis and opportunity often go hand in hand, it is difficult to see much opportunity in Europe’s current circumstances. 
One reason the current situation facing Europe is so difficult is that it was so unexpected. 
Here we are, 70 years after the end of World War II, a quarter-century after the end of the Cold War, and some two decades after the Balkan wars, and suddenly Europe’s political, economic, and strategic future seems much more uncertain than anyone predicted as recently as a year ago. 
Another reason to be worried is that Europe faces not one crisis, but several. 
The first is economic: not just the current reality of slow growth, but the prospect that slow growth will continue without respite, owing above all to policies that often discourage businesses from investing and hiring. 
The rise of populist political parties of both the left and the right across the continent attests to popular frustrations and fears. 
Making matters worse for Europe’s economy was the decision taken decades back to introduce a common currency without a common fiscal policy. 
Discipline disappeared at the national level in many countries; Greece was the most recent casualty, but it is unlikely to be the last. 
The second crisis results from Russian actions in Ukraine. 
There is no prospect of Russia giving up Crimea, and questions about its intentions in eastern Ukraine and the Baltics are mounting. 
The result is the return of geopolitics to Europe at a time when defense spending is modest and public support for armed intervention is largely absent. 
The third, and most pressing, crisis is the result of massive flows of migrants from the Middle East and elsewhere into Europe. 
The flood of people is exposing new rifts among EU members, raising questions about the principle of open borders and free movement that has long been at the core of the EU. 
Germany and a few other countries have stepped up to the challenge in ways that are admirable but unsustainable. 
Some 8,000 refugees a day – a modern day Volkerwanderung – are entering Germany, partly because of harsh conditions back home, and partly because of Germany’s willingness to take them in. 
The challenge of caring for, employing, and integrating such numbers will soon run up against the limits of physical capacity, financial resources, and public tolerance. 
It is obvious that public policy cannot succeed if it is focused on the consequences, rather than the causes, of the refugee crisis. 
The change that would have the greatest positive impact would be the emergence of a new government in Damascus that was acceptable to the bulk of the Syrian people and a satisfactory partner for the United States and Europe. 
Unfortunately, this seems likely to come about only with the blessing of Russia and Iran, both of which appear more inclined to increase their support for President Bashar al-Assad than to work for his removal. 
Other steps, however, would improve the situation. 
Increased international financial support for countries in Europe or the Middle East hosting large numbers of refugees is one. 
Ideally, such funding would help persuade more countries to follow Germany’s example. 
Another useful development would be the creation of enclaves inside Syria where people could gather with some expectation of security. 
Such enclaves would require local support from Kurdish forces or select Arab tribes, with military backing by the US and others. 
A new comprehensive arrangement with Turkey is also needed to reduce the flow of jihadist recruits to Syria and the number of refugees heading north. 
Turkey would receive financial and military assistance in exchange for asserting greater control over its borders, while the question of Turkey’s long-term relationship with Europe would be set aside until the crisis passed. 
The US has a special obligation to help. 
Both by what it has done and what it has failed to do in Iraq, Syria, and elsewhere in the Middle East, American foreign policy bears more than a little responsibility for outcomes that have led to the refugee exodus. 
The US also has a strategic interest in helping Germany and Europe contend with this crisis. 
Europe still constitutes a quarter of the world’s economy and remains one of America’s principal geopolitical partners. 
A Europe overwhelmed by a demographic challenge, in addition to its economic and security challenges, would be neither able nor willing to be an effective ally. 
In all of this, time is of the essence. 
Europe – and Germany in particular – cannot sustain the status quo. 
Waiting for a solution to the Syrian situation is no answer; while lesser steps will not resolve Europe’s predicament, they could make it manageable. 

Mitt Romney and America’s Four Deficits 
BERKELEY – The United States is beset by four deficits: a fiscal deficit, a jobs deficit, a deficit in public investment, and an opportunity deficit. 
The budget proposals put forward by presidential candidate Mitt Romney and his running mate, Paul Ryan, could reduce the fiscal deficit, but would exacerbate the other three. 
To be sure, Romney and Ryan have failed to provide specifics about how they would reduce the fiscal deficit, relying on “trust me” assertions. 
But the overarching direction of their proposals is clear: more tax cuts, disproportionately benefiting those at the top, coupled with significantly lower non-defense discretionary spending, disproportionately hurting everybody else – and weakening the economy’s growth prospects. 
Despite 30 months of private-sector job growth, the US still confronts a large jobs deficit. 
The unemployment rate remains more than two percentage points above the “normal” rate (when the economy is operating near capacity). 
Moreover, the labor-force participation rate remains near historic lows. 
More than 11 million additional jobs are needed to return the US to its pre-recession employment level. 
At the current pace of recovery, that is more than eight years away. 
In the meantime, persistent high unemployment reduces the economy’s growth potential by robbing today’s workers of skills and experience. 
When weak aggregate demand causes the economy to operate far below its potential, cuts in government spending enlarge the jobs deficit. 
Indeed, in his recent speech in Jackson Hole, Wyoming, US Federal Reserve Chairman Ben Bernanke warned that such cuts significantly inhibit job creation. 
Without revealing which programs he would reduce, Romney promises to slash federal spending by more than $500 billion in 2016, capping it at 20% of GDP thereafter. 
He also promises an immediate 5% cut in non-defense discretionary spending in 2013, on top of the huge cuts already scheduled to take effect. 
And he has ruled out additional temporary fiscal measures aimed at job creation, like President Barack Obama’s proposals for additional grants to states and additional infrastructure spending. 
Romney acknowledges that large spending cuts, along with the scheduled expiration of tax cuts at the end of this year, could throw the economy back into recession in 2013. But he vows to steer the economy from the fiscal cliff by extending the tax cuts enacted under George W. Bush, doubling down with a further 20% across-the-board cut in income-tax rates and cutting the corporate rate from 35% to 25%. 
With the possible exception of the extension of the Bush-era tax cuts, these changes would take considerable time to implement. 
Even when enacted, their near-term effects on job creation would be minimal. 
An across-the-board reduction in tax rates performs poorly in terms of budgetary effectiveness (the number of jobs created per dollar of foregone revenue). 
Payroll-tax relief and spending on programs like food stamps and unemployment compensation are much more effective. 
Romney overstates his tax proposals’ long-term growth effects as well. 
Reducing individual tax rates and taxes on savings and investment at best fosters modest increases in employment, work effort, and income. 
Despite the Bush-era tax cuts, the 2001-2007 expansion was the worst of the post-war period in terms of investment, employment, wage, and GDP growth. 
Job creation and growth were much stronger following President Bill Clinton’s tax increases in the 1990’s. 
Moreover, if all of Romney’s additional tax cuts were financed in a revenue-neutral way, as he promises, only the composition of taxes would change; the overall tax share of GDP would not. 
There is no evidence that this would significantly boost growth, as Romney claims. 
Based on what Romney has told us, we can conclude that his plan would exacerbate the public-investment deficit as well. 
Romney’s vow to cap federal spending at 20% of GDP by 2016, while maintaining defense spending at 4% of GDP and leaving both Social Security and Medicare unchanged for those 55 or older, implies exempting more than 50% of government spending from cuts for the next decade. 
So, to hit the 20% cap, spending on everything else would have to be slashed by an average of roughly 40% by 2016 and 57% by 2022. 
Everything else includes government investments in three major areas on which growth and high-wage jobs depend: education, infrastructure, and research. 
These areas account for less than 8% of federal spending, and their share has been declining steadily. 
Under Romney, it would plummet to new lows. 
Everything else also includes spending on programs that help low-income families, like food stamps, student grants, and Medicaid. 
The Center on Budget and Policy Priorities finds that almost two-thirds of the Ryan budget’s spending cuts would come from such programs. 
Romney offers few specifics, but simple arithmetic shows that his plan would require even deeper cuts in these programs than Ryan’s plan would. 
Meanwhile, Romney’s plan would actually increase taxes on middle-income families. 
His plan would pay for lower income-tax rates by eliminating tax deductions like those for charitable giving and mortgages, while maintaining tax preferences for saving and investment. 
But there are not enough tax breaks for the rich to cover another 20% reduction in their income-tax rate. 
That is why the nonpartisan Tax Policy Center found that Romney’s plan would cut overall taxes for households with incomes above $200,000, but would require an average annual tax increase of at least $2,000 for households with incomes between $100,000 and $200,000. 
Romney’s budget plan would also make the federal tax-and-transfer system considerably less progressive, thereby worsening income inequality, which is already at its highest level since the Great Depression. 
Rising income inequality fuels a growing opportunity deficit for children born into poor and middle-income families, reflected in disparities in educational attainment by family background, and a decline in intergenerational mobility. 
Under Romney, the opportunity deficit would widen, robbing the country of future talent and productivity. 
Romney has provided few details about his deficit-reduction plan. 
But, based on what he has revealed, we know that it would increase the jobs deficit, the investment deficit, and the opportunity deficit, with negative consequences for future growth and prosperity. 

Mitt Romney’s Reality Check 
NEW YORK – There is a kind of war underway in the United States nowadays between fact and fantasy. 
President Barack Obama’s re-election marked a victory, limited but unmistakable, for the cause of fact. 
Events in the days leading up to America’s presidential election provided a stark illustration of the struggle. 
Among senior aides to Republican challenger Mitt Romney, a belief developed that he was on the cusp of victory. 
Their conviction had no basis in poll results. 
Nevertheless, the feeling grew so strong that aides began to address Romney as “Mr. President.” 
But wanting that to be true was not enough for them to make it true. 
It would be as close to becoming President as Romney would get, and he apparently wanted to enjoy it while he could, however prematurely. 
Then, on election night, when the television networks projected Romney’s defeat in Ohio and therefore Barack Obama’s re-election, the Romney campaign, in a further denial of fact, refused to accept the result. 
A very awkward hour passed before he accepted reality and made a gracious concession speech. 
The same disregard for reality has been the hallmark not only of the Republican campaign but of the entire Republican Party in recent times. 
When the Bureau of Labor Statistics issued a report in October showing that the national unemployment rate remained “essentially unchanged at 7.9%,” Republican operatives sought to discredit the highly respected BLS. 
When polls showed that Romney was falling behind President Barack Obama, they sought to discredit the polls. 
When the non-partisan Congressional Research Service reported that a Republican tax plan would do nothing to foster economic growth, Republican Senators muscled the CRS into withdrawing its report. 
These refusals to accept matters of plain fact reflect a still wider pattern. 
Increasingly, the Republican Party, once a fairly normal political party, has granted itself a license to live in an alternate reality – a world in which George W. Bush did find the weapons of mass destruction that he had thought were in Iraq; tax cuts eliminate budget deficits; 
Obama is not only a Muslim but was born in Kenya and thus should be disqualified from the presidency; and global warming is a hoax concocted by a cabal of socialist scientists. 
(The Democrats, for their part, have had one foot in the camp of unreality as well.) 
Of all of the Republicans’ unreal beliefs, their full-throated denial of human-induced climate change was surely the most consequential. 
After all, if left unchecked, global warming has the potential to degrade and destroy the climactic conditions that underlay and made possible the rise of human civilization over the last ten millennia. 
Romney, as governor of Massachusetts, had expressed belief in the reality of global warming. 
As a presidential candidate, however, he joined the deniers – a switch made clear when he accepted the party’s nomination in Tampa, Florida, in August. 
“President Obama promised to begin to slow the rise of the oceans,” Romney told the Republican convention, and then paused, with the expectant smile of a comedian waiting for the audience to catch on to the joke. 
It did. 
Laughter broke and built. 
Romney let it grow, then delivered the punch line: “And to heal the planet.” 
The crowd cracked up. 
It was perhaps the most memorable and lamentable moment in a lamentable campaign – a moment that, in the history now to be written of humanity’s effort to preserve a livable planet, is destined for immortal notoriety. 
There was an astonishing sequel. 
Eight weeks later, Hurricane Sandy struck the New Jersey shore and New York City. 
Its 14-foot surge of seawater was backed by the sea-level rise already caused by a century of global warming, and the storm’s sweep and intensity was fueled by a warming planet’s warmer ocean waters. 
That tide of reality – what Alexander Solzhenitsyn once called “the pitiless crowbar of events”— burst the closed bubble of Romney’s campaign, its walls breached as decisively as those of lower Manhattan and Far Rockaway. 
In the contest between fact and fantasy, fact suddenly had a powerful ally. 
The political map was subtly but consequentially redrawn. 
Obama swung into action, now not just a suspect candidate but a trusted president whose services were sorely needed by the battered population of the East Coast. 
Eight of ten voters, as polls showed, viewed his performance favorably, and many declared that the impression influenced their vote. 
In a surprising, politically potent twist, New Jersey’s governor, Chris Christie, who had been the keynote speaker at the Republican convention at which Romney had mocked the dangers of global warming, turned out to be one of those impressed with Obama’s performance, and said so publicly. 
The American political world – not only Republicans, but also Democrats (albeit to a lesser extent) – had fenced out huge, ominous realities. 
But those realities, as if listening and responding, entered the fray. 
They voted early, and they may very well have swayed the outcome. 
Earth spoke, and Americans, for once, listened. 

Mitt Romney’s Fair Share 
NEW YORK – Mitt Romney’s income taxes have become a major issue in the American presidential campaign. 
Is this just petty politics, or does it really matter? 
In fact, it does matter – and not just for Americans. 
A major theme of the underlying political debate in the United States is the role of the state and the need for collective action. 
The private sector, while central in a modern economy, cannot ensure its success alone. 
For example, the financial crisis that began in 2008 demonstrated the need for adequate regulation. 
Moreover, beyond effective regulation (including ensuring a level playing field for competition), modern economies are founded on technological innovation, which in turn presupposes basic research funded by government. 
This is an example of a public good – things from which we all benefit, but that would be undersupplied (or not supplied at all) were we to rely on the private sector. 
Conservative politicians in the US underestimate the importance of publicly provided education, technology, and infrastructure. 
Economies in which government provides these public goods perform far better than those in which it does not. 
But public goods must be paid for, and it is imperative that everyone pays their fair share. 
While there may be disagreement about what that entails, those at the top of the income distribution who pay 15% of their reported income (money accruing in tax shelters in the Cayman Islands and other tax havens may not be reported to US authorities) clearly are not paying their fair share. 
There is an old adage that a fish rots from the head. 
If presidents and those around them do not pay their fair share of taxes, how can we expect that anyone else will? 
And if no one does, how can we expect to finance the public goods that we need? 
Democracies rely on a spirit of trust and cooperation in paying taxes. 
If every individual devoted as much energy and resources as the rich do to avoiding their fair share of taxes, the tax system either would collapse, or would have to be replaced by a far more intrusive and coercive scheme. 
Both alternatives are unacceptable. 
More broadly, a market economy could not work if every contract had to be enforced through legal action. 
But trust and cooperation can survive only if there is a belief that the system is fair. 
Recent research has shown that a belief that the economic system is unfair undermines both cooperation and effort. 
Yet, increasingly, Americans are coming to believe that their economic system is unfair; and the tax system is emblematic of that sense of injustice. 
The billionaire investor Warren Buffett argues that he should pay only the taxes that he must, but that there is something fundamentally wrong with a system that taxes his income at a lower rate than his secretary is required to pay. 
He is right. 
Romney might be forgiven were he to take a similar position. 
Indeed, it might be a Nixon-in-China moment: a wealthy politician at the pinnacle of power advocating higher taxes for the rich could change the course of history. 
But Romney has not chosen to do so. 
He evidently does not recognize that a system that taxes speculation at a lower rate than hard work distorts the economy. 
Indeed, much of the money that accrues to those at the top is what economists call rents, which arise not from increasing the size of the economic pie, but from grabbing a larger slice of the existing pie. 
Those at the top include a disproportionate number of monopolists who increase their income by restricting production and engaging in anti-competitive practices; CEOs who exploit deficiencies in corporate-governance laws to grab a larger share of corporate revenues for themselves (leaving less for workers); and bankers who have engaged in predatory lending and abusive credit-card practices (often targeting poor and middle-class households). 
It is perhaps no accident that rent-seeking and inequality have increased as top tax rates have fallen, regulations have been eviscerated, and enforcement of existing rules has been weakened: the opportunity and returns from rent-seeking have increased. 
Today, a deficiency of aggregate demand afflicts almost all advanced countries, leading to high unemployment, lower wages, greater inequality, and – coming full, vicious circle – constrained consumption. 
There is now a growing recognition of the link between inequality and economic instability and weakness. 
There is another vicious circle: Economic inequality translates into political inequality, which in turn reinforces the former, including through a tax system that allows people like Romney – who insists that he has been subject to an income-tax rate of “at least 13%” for the last ten years – not to pay their fair share. 
The resulting economic inequality – a result of politics as much as market forces – contributes to today’s overall economic weakness. 
Romney may not be a tax evader; only a thorough investigation by the US Internal Revenue Service could reach that conclusion. 
But, given that the top US marginal income-tax rate is 35%, he certainly is a tax avoider on a grand scale. 
And, of course, the problem is not just Romney; writ large, his level of tax avoidance makes it difficult to finance the public goods without which a modern economy cannot flourish. 
But, even more important, tax avoidance on Romney’s scale undermines belief in the system’s fundamental fairness, and thus weakens the bonds that hold a society together. 

Did Hamas Win? 
GAZA CITY – This summer’s 51-day war on Gaza left more than 2,100 Palestinians dead, over 11,000 injured, and vast areas of devastation that will take years to rebuild. 
After the third Israeli war on Gaza in less than six years, many Palestinians are questioning the purpose of continuing to fight – and hoping for a solution that does not increase their suffering. 
Can Hamas, with its newly acquired position at the forefront of Palestinian politics, provide such a solution? 
Before the latest war erupted, Hamas was politically isolated. 
It had lost traditional allies in Syria, Iran, and Hezbollah. 
Most damaging, the ouster of former Egyptian President Mohamed Morsi’s Muslim Brotherhood government had deprived Hamas of its lifeline of supplies and armaments. 
Egypt’s military regime, led by General Abdel Fattah el-Sisi, has been unrelentingly hostile toward Hamas, blaming it for the fighting in Sinai between the army and insurgent groups. 
Egypt even mounted an operation to destroy the tunnels between Gaza and Sinai, isolating Gaza completely. 
Hamas faced an intensifying crisis. 
Unable to pay the salaries of more than 40,000 public employees in Gaza, it was being slowly strangled by the Israeli and Egyptian authorities. 
And the unity government that it established with the Palestinian Authority in June brought no relief. 
With nothing to lose, Hamas decided that another round of fighting with Israel was the only way to shake things up. 
Despite its modest military capabilities, Hamas managed to hold out for 51 days – and, in the process, place itself at the center of Palestinian and regional politics. 
Israel, by contrast, failed to achieve any of its goals – beginning with restoring its deterrent capacity. 
Indeed, despite Israel’s best efforts, Hamas continued to launch long-range missiles at major populated areas from Haifa in the north to Ashkelon and Dimona in the south, and it repeatedly crossed Israeli lines using underground tunnels. 
Such achievements shattered the indomitable image of the Israeli army, exposing a weakness that other radical Islamist groups may attempt to exploit. 
Against this background, it is perhaps unsurprising that Hamas managed to compel most Israelis living in areas adjacent to Gaza to flee, with many Israelis accusing their government of failing to protect its citizens adequately. 
In short, the war in Gaza shook the status quo. 
It did not, however, bring about any progress toward resolving the outstanding issues underlying the dispute between Israel and Hamas, or change the conditions that spurred the latest conflict in the first place. 
Israel did agree to terms much like those that ended its last assault on Gaza in 2012; but that agreement was never implemented. 
Israel is now expected, for example, to ease its blockade of Gaza and allow the transport of humanitarian and construction supplies. 
But more complicated issues, such as the release of Palestinian prisoners and the establishment of a Gaza airport and seaport, will be left for next month’s discussions. 
And there is no guarantee that Israel will accede to Hamas’s demands without disarming Gaza. 
The stakes for Hamas could not be higher. 
By breaking Gaza’s political isolation, the ceasefire has fueled hope of relief from economic and financial deprivation. 
Given Hamas’s leading role, it will be held accountable not only for the success of Gaza’s reconstruction, but also for any further delays in Palestinian reconciliation. 
Hamas also faces pressure from the international community, which, despite supporting the Palestinians’ demand for an end to the Israeli siege and blockade, is adamant that Israel’s security concerns also be addressed. 
As United Nations Secretary-General Ban Ki-moon warned, “Any peace effort that does not tackle the root causes of the crisis will do little other than set the stage for the next cycle of violence.” 
In other words, achieving a lasting peace deal will require compromises from both sides – the kind of compromises that Hamas has long resisted. 
For its part, the international community must embrace Hamas’s involvement in the pursuit of a peaceful settlement of the Palestine-Israel conflict. 
Former Israeli President Shimon Peres once said, “The real challenge is to transform any crisis, however large, into new opportunities for action.” 
It is time for all of the relevant actors in the conflict between Israel and Palestine to address this challenge, and to take concrete, productive, and creative action to bring peace to Gaza at last. 
Hamas has proved its staying power. 
After decades of standoffs and stalemate, perhaps it can focus less on its own survival and more on helping to achieve a just and lasting peace. 


The Promise of Digital Finance 
BERKELEY – An economic development revolution lies literally in the palm of a single hand. 
As mobile phones and digital technologies rapidly spread around the world, their implications for economic development, and particularly finance, have yet to be fully realized. 
The sooner that changes, the better for people worldwide. 
In emerging economies today, two billion people – 45% of all adults – do not have a formal account at a bank, financial institution, or with a mobile-money provider. 
The “unbanked” rate is even higher for women, the poor, and people living in rural areas. 
Moreover, at least 200 million small- and medium-size enterprises lack sufficient credit, or have no access to credit at all. 
Entrepreneurship, investment, and economic growth suffer when savings are stored outside the financial system, and credit is scarce and expensive. 
Fortunately, according to a recent report by the McKinsey Global Institute (MGI), digital technologies – starting with mobile phones – can rapidly fix this problem and foster faster, more inclusive growth. 
Mobile phones and the Internet can reduce the need for cash and bypass traditional brick-and-mortar channels. 
This dramatically reduces financial-service providers’ costs, and makes their services more convenient and accessible for users – especially low-income users in remote locations. 
MGI estimates that if digital finance is widely adopted, it could add $3.7 trillion to emerging countries’ GDP by 2025. 
That amounts to a 6% increase above business as usual. 
In low-income countries with very low financial inclusion rates, such as Nigeria, Ethiopia, and India, GDP could increase by as much as 12%. 
Digital finance can boost GDP in several ways. 
Nearly two-thirds of the expected growth would come from increased productivity, because businesses, financial-service providers, and government organizations would be able to operate much more efficiently if they did not have to rely on cash and paper recordkeeping. 
Another one-third would come from increased investment throughout the economy, as personal and business savings were moved into the formal financial system, and then mobilized to provide more credit. 
The remaining gains would come from people working more hours – the time they would have spent traveling to bank branches and waiting in queues. 
As for financial inclusion, digital finance has two positive effects. 
First, it expands access. 
In emerging markets in 2014, only about 55% of adults had a bank or financial-services account, but nearly 80% had a mobile phone. 
That 25-percentage-point gap could be closed by making mobile banking and digital wallets a reality. 
But a gender gap will also have to be closed: worldwide, about 200 million fewer women than men have mobile phones or Internet access. 
Second, digital finance reduces costs: MGI estimates that it would cost financial-service providers 80-90% less – about $10 per year, compared to the $100 per year it costs today – to offer customers digital accounts than accounts through traditional bank branches. 
Using purely digital channels thus makes it feasible to meet the needs of low-income customers. 
Financial inclusion becomes profitable for providers even when account balances and transactions are small. 
With digital finance, as many as 1.6 billion unbanked people – more than half of whom are women – could gain access to financial services, shifting about $4.2 trillion in cash and savings currently held in informal vehicles into the formal financial system. 
This would allow for an additional $2.1 trillion to be extended as credit to individuals and small businesses. 
Businesses could also save on labor costs, to the tune of 25 billion hours annually, by swapping cash transactions for digital payments. 
And governments could take in an additional $110 billion every year – to invest in growth-enhancing public goods like education – because digital channels make tax collection cheaper and more reliable. 
New mobile-money services are already demonstrating digital finance’s potential. 
In Kenya, M-Pesa – which transforms one’s phone into a mobile wallet – has leveraged powerful network effects to bring about a vast expansion in the share of adults using digital financial services. 
That share grew from zero to 40% in just three years, and had risen to 68% by the end of last year. 
Traditional financial-services accounts tend to grow at the pace of national income, but M-Pesa’s adoption rate has been dramatically faster, demonstrating that digital finance can achieve significant market penetration rapidly even in the world’s poorest countries. 
But such success stories do not happen in a vacuum. 
For starters, everyone needs a mobile phone with an affordable data plan. 
While businesses can help, it is incumbent upon governments and non-governmental organizations to extend mobile networks to low-return areas and remote populations. 
Governments must also ensure that networks between banks and telecommunications companies are interoperable; otherwise, widespread use of mobile phones for financial services and payments would be impossible. 
Governments must establish universally accepted forms of identity as well, so that service providers can control fraud. 
In emerging economies, one in five people are unregistered, compared to only one in ten in advanced economies. 
Nearly 20% of unbanked women in emerging countries do not have the documentation necessary to open a bank account. 
Even when people have recognized IDs, they must be amenable to digital authentication. 
Digital IDs that use microchips, fingerprints, or iris scans could prove useful – and are already gaining popularity – in emerging economies. 
Finally, governments must implement regulations that strike a balance between protecting investors and consumers, and giving banks, retailers, and financial-technology and telecommunications companies room to compete and innovate. 
Because regulations often shut out non-bank competitors, governments should consider a tiered approach, whereby businesses without a full banking license can provide basic financial products to customers with smaller accounts. 
A good model for this is the United Kingdom’s “regulatory sandbox” for financial-technology companies, which imposes lower regulatory requirements on emerging players until they reach a certain size. 
Financial inclusion is vital for inclusive economic growth and gender equality, and it has assumed a prominent role in global development efforts, with the World Bank aiming for universal financial inclusion by 2020. 
With billions of people in emerging economies already using mobile phones, digital finance makes this goal achievable. 

Mobilizing Africa's Governments to Fight HIV/AIDS 
Last year a Nigerian team of HIV/AIDS experts performed what many thought to be a miracle: they submitted a well-designed, thoughtfully written, and locally developed proposal to the Global Fund to Fight AIDS, Tuberculosis, and Malaria. 
The objective was to take successful pilot projects--including a nascent national anti-retroviral therapy (ARV) program--and expand them to cover thousands of patients. 
Dr. Suritiri Fola, one of a handful of AIDS experts in Nigeria's Federal Ministry of Health, was, at age 32, directing the national ARV program. 
Dr. Fola was expert at doing a lot with a little. 
His constraints were overwhelming: antiquated technology, deteriorating or non-existent physical infrastructure, and an anachronistic health bureaucracy. 
To compose Nigeria's ARV proposal, he typed on a creaky old computer on loan from a colleague. 
Fola had minimal support from colleagues to overcome the obstacles and frustrations he faced daily. 
Yet the Global Fund approved his proposal without reservation, and it committed to backing his efforts with $18 million over the next two years. 
For the first time, he would have sufficient staff, medicines, and training to put thousands on ARV therapy. 
Even so, Fola's ideal plan will reach only a small portion of those who need therapy. 
In poor countries like Nigeria, the battle against AIDS demands an array of medical personnel, clinics, and medicines that simply do not exist. 
The creation of the Global Fund to Fight AIDS, Tuberculosis and Malaria, together with US President George W. Bush's recent proposal to add $10 billion in funds to fight HIV/AIDS, mean that the financial weapons needed to wage the fight against this epidemic are beginning to arrive. 
But spending billions instead of millions will not be enough to get the job done. 
Generating and harnessing top level political commitment to engage societies ravaged by HIV/AIDS is critical to fighting this battle successfully. 
Until recently, Africa's poorest countries have been failing on this count. 
As a result, dedicated professionals like Fola have found their task insurmountable. 
If a country were at war and knew that one-third of its population were certain to perish in the next ten years, its leaders would most likely declare a state of emergency and commit every resource at their command to averting that outcome. 
Yet, in many African countries, HIV/AIDS is not at the top of the national agenda. 
Ministers of Health continue to discuss the threat of HIV/AIDS in the same breath with cancer, diabetes, and heart disease. 
Unfortunately, even the promise of additional funding cannot overcome governmental intransigence. 
In one southern African country, a leadership group comprising representing the ministry of health, local non-governmental organizations, as well as multi-lateral and bi-lateral aid groups, created a proposal for the Global Fund. 
When they voted on the components to be included in the country's submission, the HIV/AIDS and tuberculosis plans were accepted but the malaria component was rejected due to its low quality. 
The health ministry representative responsible for the malaria component was a crony of the health minister and complained about his proposal's rejection. 
In a fury, the Minister of Health pulled rank over the leadership group and announced, "If the malaria proposal is not submitted, no proposal will be submitted." 
The threat was carried out: this country has put forward no proposal. 
Everyone working in these countries--whether in the private or public sector--must now place the fight against HIV/AIDS front and center. 
It is not wild-eyed extremism to insist that every conversation with an African leader should discuss what they are doing to win the battle against HIV/AIDS. 
But more than conversation is needed. 
Governments must change their ways. 
The proper, efficient use of the expected influx of international funds demands a powerful political commitment from government at the highest level. 
Much of what must be done entails not the rebuilding of atrophied or destroyed institutions, but rather the establishment of institutions that never existed. 
New medical schools, clinics, communications lines, and training centers for medical personnel and counselors must be built. 
Only when public health is deemed the highest priority will such infrastructure be created (or enhanced) and funds channeled to the neediest areas. 
Without such a commitment, incoming funds will be mishandled, allocated ineffectively, or remain unspent. 
Too often, leaders issue empty promises and offer unrealistic targets that only heighten pressure on over-stretched program directors. 
Ministries of health cannot go it alone. 
Presidents must pressure their planning, education, and finance ministers to work with the health ministry and other key stakeholders to create a national plan that focuses the government's energies. 
They must hold their public health leaders accountable for their actions and demand results. 
Cementing and focusing political leadership will take time. 
But if there's one lesson the HIV/AIDS virus has taught public health officials, it is that waiting only creates opportunities for the epidemic that will cost us millions of lives. 
Delay is an ally of no one but the disease. 
A towering myth in the fight against HIV/AIDS is that high-quality local talent does not exist. 
Dr. Fola, a leader in the fight against AIDS in Nigeria, died in an automobile accident last May. 
But he proved that such capacity exists, albeit in small numbers. 
If donor countries provide adequate financial and technical resources, and recipient governments offer the necessary financial and political commitment, a generation of Folas will be found to carry the fight forward. 

How to Mobilize Private Capital for Climate Action 
BEIJING – The conclusion of the United Nations Intergovernmental Panel on Climate Change’s most recent report is stark: climate action is far more urgent than previously believed, and it must include a wide range of initiatives, from improved regulation to continued technological innovation. 
But without massive amounts of long-term “patient” capital – which only institutional investors can muster – it will be impossible to transform energy systems fast enough to mitigate the risk of ecological, economic, and social disaster. 
Technically, institutional investors – such as pension funds, sovereign wealth funds, and insurance companies – hold sufficient financial firepower to address climate change, and some are seeking to align their portfolios with the UN Sustainable Development Goals (SDGs). 
In OECD countries alone, institutional investors control an estimated $92 trillion in assets. 
Annual official development assistance by multilateral finance institutions (MFIs) and governments amounts to just 0.16% of that – about $145 billion. 
But, as commercial actors, institutional investors’ primary objective is to maximize financial returns. 
Even as some purge their portfolios of carbon-intensive companies, they generally consider investing in new clean-energy infrastructure projects to be too risky, particularly in emerging markets. 
To finance the SDGs, including clean-energy infrastructure, MFIs have committed to mobilizing capital from private investors. 
This mobilization takes place largely through so-called blended finance, whereby MFIs and other public finance institutions use their own capital to crowd in private financing. 
But institutional investors have been largely absent from multilateral blended-finance initiatives, which have, in turn, failed to achieve a scale relevant to climate change. 
So what will it take to mobilize the needed capital from institutional investors? 
A recent paper by researchers at Stanford and Maastricht universities suggests focusing on three recent developments in the global financial sector. 
First, a growing number of institutional investors are reducing their dependence on financial intermediaries. 
Institutional investors have traditionally outsourced their investments to investment management firms, whose performance is generally assessed on a quarterly basis. 
Yet the investment horizon for infrastructure, including clean-energy infrastructure, is often more than 20 years. 
From the perspective of blended finance, traditional financial intermediaries, with their short-term biases, constitute a bottleneck between institutional investors and MFIs. 
The elimination of such intermediaries could thus provide new opportunities for direct cooperation between institutional investors and MFIs, as it enables the former to focus more on investment in long-term assets. 
Second, many institutional investors are establishing collaborative platforms to enable cost-sharing on deal sourcing, due diligence, and other stages of the investment process. 
Each of these platforms represents a very large amount of long-term capital. 
But, with few exceptions, they do not include MFIs. 
Third, there are new types of local strategic investors that can be highly effective at mobilizing private capital, including from institutional backers. 
Over the last decade, at least 20 countries have established state-sponsored strategic investment funds to co-invest in infrastructure projects with private-sector partners. 
Other countries have established green banks, whose domestic focus reflects the fact that 90% of private climate-finance investments are made within the capital’s country of origin. 
The strategic investment funds that have successfully mobilized private capital are structured much like private investment organizations. 
They emphasize the independence and integrity of the investment decision-making process; and their boards and board committees have a high share of independent directors selected for their financial and business expertise. 
Some funds, such as India’s National Investment and Infrastructure Fund, are owned mainly by private and institutional investors, with the government in a minority position. 
Managed by finance professionals recruited from the private sector, these strategic funds invest primarily in equity, and take an active role in structuring and arranging new deals. 
Because they are linked to local government and business networks, they are in a strong position to mitigate local risk. 
MFIs, by contrast, tend to emphasize country representation on their boards, leaving these boards with less financial-sector expertise in the relevant sectors. 
At the management and staff level, the private-sector branches of MFIs frequently have expertise in a wide range of areas. 
Despite this, MFI boards – unlike their private counterparts – generally do not establish a broad investment policy or delegate decisions on individual infrastructure projects to an independent investment committee; instead, they themselves make the decisions on capital allocation. 
Given MFIs’ bureaucratic structures and frequently cumbersome procedures, institutional investors tend to be skeptical about them. 
Institutional investors often consider the projects MFIs pitch to be too small, too risky, or not profitable enough, and they worry that, if something goes wrong, MFIs’ bureaucracies will not permit them to address it swiftly. 
Whereas MFIs have expanded their offers of risk mitigation for investors, they overwhelmingly remain providers of debt. 
Crucially, they invest very little in infrastructure equity. 
This is a significant distinction, because whereas equity investors frequently take an active role in structuring and arranging new infrastructure projects, providers of debt and risk mitigation generally engage once a project is fully documented and confirmed as “bankable.” 
To achieve their goal of mobilizing private-sector capital, MFIs need to engage on institutional investors’ collaborative platforms, and address these investors’ concerns. 
This means helping them to assess and mitigate risk in new regions and sectors where green infrastructure is needed, if appropriate in cooperation with local strategic investment funds and green banks. 
By developing the capacity to assess and bear risk on commercial terms, traditionally risk-averse MFIs could engage more productively with institutional investors. 
And by building up the capacity to undertake equity investment in clean-energy infrastructure, MFIs could increase their capacity to engage with institutional investors at relevant stages of the infrastructure-investment cycle. 
Simply put, in order to mobilize institutional capital effectively, MFIs will need to start functioning more like private investment organizations, even as they fulfill a policy-defined mandate. 
This is a tall order; the OECD has suggested that efficient private capital mobilization may require a culture change within MFIs. 
But, if we are to curb climate change and achieve the SDGs, it could be the only way for MFIs to mobilize institutional investor capital at any relevant scale. 

The Masses Are Mobilizing for Climate Leadership 
LONDON – This year, extreme weather conditions have ravaged our planet, subjecting vulnerable communities around the world to the ever-increasing impacts of climate change. 
With each passing day, we learn more about – and experience directly – the dangerous consequences of extracting and burning fossil fuels. 
Floods, droughts, and wildfires are becoming deadlier, and weather patterns more severe. 
Later this year, the Intergovernmental Panel on Climate Change (IPCC), the United Nations’ scientific taskforce on the subject, will deliver its first major report in four years. 
It will outline in detail the devastating consequences that await us if we do not keep average global temperatures within 1.5°C of the pre-industrial level. 
Despite existing government and industry commitments, we have already reached the 1°C mark, and the impacts are terrible. 
We need urgent change. 
Fortunately, immediate action to reduce greenhouse-gas emissions confers immediate benefits. 
When eight coal- and oil-fired power plants were retired in California between 2001 and 2011, the fertility rate in mothers living close to each facility increased within just one year. 
To usher in a new era of clean air and better health, communities around the world are speaking out, making it clear to decision-makers that a fossil-fuel-free economy is what the public wants. 
They will continue to demand action to keep fossil fuels in the ground, and to deploy more just and sustainable forms of energy. 
The science on climate change is sound, the technologies for addressing it are already available, and the necessary financing is being mobilized. 
In addition, a rapidly growing social movement has been inspired by the universal benefits of a clean energy future: people are ready to be the change they want to see in the world. 
Rise for Climate, a global mobilization of 250,000 people taking part in over 900 events in 95 countries took place on September 8. 
It has set the tone for a series of upcoming political events to address climate change, including this month’s Global Climate Action Summit, the One Planet Summit, and the UN Climate Change Conference in Poland (COP24) this December. 
In each case, policymakers will be challenged to recognize the unvarnished reality of the climate crisis and step up their actions to tackle it. 
What this international mobilization of cities, civil-society groups, businesses, and individuals across five continents shows is that people power works. 
It has been the driving force behind civil-rights victories from the abolition of chattel slavery to the contemporary movement to secure the rights and dignity of LGBQT people. 
And it has emerged at key moments in the effort to combat climate change – an effort that is very much a part of that larger struggle for justice. 
In 2014, the first People’s Climate March in New York brought together 400,000 people, and set the stage for escalating interventions around the world in the years to follow. 
Civil society helped convince world leaders to sign the Paris climate agreement in 2015, and they have brought pressure to bear on the policymakers responsible for meeting national emissions-reduction targets. 
Meanwhile, individuals and civil-society groups continue to demand that companies, universities, and other institutions divest from fossil fuels and invest in renewable energy. 
These movements have created the space for forward-thinking politicians to take action. 
Nevertheless, the climate crisis continues to grow, demonstrating that we still have a long way to go. 
This year alone, catastrophicheat waves have stricken North Africa, Europe, Japan, Pakistan, Australia, and Argentina. 
Deadly wildfires have taken lives and destroyed billions of dollars worth of property in Greece, Sweden, the United States, and Russia. 
Droughts have struck in Kenya and Somalia; and Afghanistan and South Africa have suffered major water shortages. 
Hawaii, India, Oman, and Yemen have been wracked by severe storms and flooding. And ice in the Bering Sea has reached record lows. 
April marked the 400th consecutive month of global temperatures above the twentieth century average. 
All people have a responsibility to step up and demand urgent action. 
Only by coming together can we build a groundswell of support for climate leadership and create the right momentum to secure a fast transition to a sustainable and equitable world. 

The Changing Development Order 
DUBAI – The Millennium Development Goals established a successful framework for the world to address fundamental social issues such as poverty, health, hunger, and education. 
As discussions commence on the shape and scope of the global development agenda that will succeed the MDGs, which expire in 2015, it would be helpful to consider the role of the private sector and rethink the international community’s overall approach to development. 
Economic development is the best way – indeed, the only way – to achieve sustainable poverty reduction. 
It creates a virtuous circle. 
Growth creates jobs, and jobs reduce poverty. 
The private sector has a key role to play. 
Private-sector capital flows now dwarf traditional public-sector aid flows. 
For example, of the $200 billion in total US resources dedicated to development in 2010, 87% came from private flows. 
By contrast, in the 1960’s, official overseas development assistance accounted for 70% of capital flows into developing countries. 
A similar picture prevails globally. 
Domestic resource mobilization, remittances from expatriate workers, private debt and equity flows, and philanthropic contributions exceed official international aid by a wide margin. 
Private flows are no longer the tail, but the dog that wags the development agenda. 
Nonetheless, much of the development-policy community remains stuck in the distant past. 
For example, policymakers insist on the importance of “public-private partnerships” and argue that the private sector needs “to learn to work with the public sector.” 
But today’s reality would be better described as “private-philanthropic-public partnerships” (expressed in that order to reflect each component’s relative importance), or “P-4.” 
We need to persuade public institutions to focus on how to work better with their private counterparts, not vice versa, because the public and private sectors have a shared interest in accelerating economic development and ensuring that everyone benefits from globalization. 
This is not meant to diminish the important role played by the public sector, which alone can create the conditions – the rule of law, sound macroeconomic policies, and good regulatory regimes – needed for the private sector to flourish. 
For example, they catalyze the development of supportive property and customs regimes, including the establishment of credit bureaus and laws to protect creditors’ rights – all necessary prerequisites to channel financing flows. 
Possibly the biggest prize in aligning private- and public-sector development efforts lies in the relatively unexplored area of blended finance. 
We have barely scratched the surface in integrating the efforts of development finance institutions (DFIs) with private and philanthropic initiatives, which could make the whole greater than the sum of its parts. 
A World Economic Forum study estimates that, when aligned, an annual increase of only $36 billion in public-sector investment in climate change could be leveraged to 16 times that amount by mobilizing $570 billion of private capital. 
In fact, to improve alignment and reflect the new P-4 order, government agencies and DFIs should be encouraged to establish explicit targets for leveraging private capital. 
Particularly in an age of lean governments and public austerity, success in meeting such targets should become a key performance indicator. 
What should the private sector do better? 
While there are many examples of responsible companies that want to “do well by doing good,” sustainability and development goals are not always integrated into businesses’ core agenda. 
Total shareholder return (TSR) and corporate social responsibility (CSR) often seem completely divorced from each other. 
The thinking, mostly implicit, is that maximizing TSR by polluting the environment is acceptable as long as some compensating contributions are made to CSR initiatives – the corporate equivalent of bathing in the Ganges to wash away one’s sins. 
We need a new standard that requires companies to report not just their financial metrics, but also their performance on social, developmental, and environmental issues. 
For maximum impact, and in order to restore public trust in corporations, the standards must be global, clear, and consistent. 
The other reality of the post-MDG world is the multi-directionality of development flows. 
Traditionally, development flows were unidirectional, going from the wealthy North to the impoverished South. 
But the world order has changed. 
Emerging markets and developing countries now account for 50% of global GDP and 75% of global growth, and demographics will further accentuate the shift in the center of economic gravity. 
“Southern” countries such as Brazil, China, and India, to name only a few, are enhancing their contributions to overseas development. 
Domestic resources and diaspora remittances are increasingly funding development. 
As countries become less reliant on traditional sources of financing, they are less likely to follow foreign diktats blindly. 
Indeed, people in developing countries are increasingly demanding a stronger voice in determining what is good for them. 
The North’s old “we know what is good for you” approach, however well-informed or well-intentioned, will no longer work. 
A more inclusive approach that reflects local conditions and preferences is essential. 
The P-4 approach reflects the new global realities and seeks to leverage the best qualities of the private, philanthropic, and public sectors. 

Models of Madness 
Mental health services around the world are largely based on the assumption that being upset or disoriented is a sort of condition like medical illnesses. 
Here in Australasia, we imported this perspective from overseas, actively suppressing more holistic Maori and Aboriginal understandings about human distress. 
We did so despite numerous studies that show that recovery rates from “mental illness” in “underdeveloped” countries are far superior to those in “advanced” societies. 
Nowadays, more and more problems are being redefined as “disorders” or “illnesses,” supposedly caused by genetic predispositions and biochemical imbalances. 
Life events are relegated to mere triggers of an underlying biological time bomb. 
Thus, feeling very sad has become “depressive disorder.” 
Worrying too much is “anxiety disorder.” 
Being painfully shy has become “avoidant personality disorder.” 
Beating up people is “intermittent explosive disorder.” 
Excessive gambling, drinking, drug use, or eating are also illnesses. 
The same applies to having too little food, sleep, or sex. 
Our Diagnostic and Statistical Manual of Mental Disorders has 886 pages of such illnesses. 
Unusual or undesirable behaviors are called “symptoms” and the labels are “diagnoses.” 
Our children are labeled, too. 
Being bad at math has become “mathematics disorder.” 
Ignoring other people’s feelings (once called being naughty) means that the child is suffering from “conduct disorder.” 
If this includes getting angry at grownups, he or she (usually he) has “oppositional defiant disorder.” 
A “diagnosis” frequently in the news is “attention-deficit/hyperactivity disorder.” 
The “symptoms” include fidgeting, losing things, talking excessively, and difficulty playing quietly or taking turns. 
Of course some children sometimes have problems. 
But does anyone help them? 
Perhaps it sometimes conceals the causes, while locating the problem entirely within the child, who is often stigmatized as a result. 
Indeed, making lists of behaviors, applying medical-sounding labels to people who manifest them, and then using the presence of those behaviors to prove that a person has the illness in question is scientifically meaningless. 
It tells us nothing about causes or solutions. 
How did this simplistic, certainly unscientific, and frequently damaging approach gain such dominance? 
First, it is tempting to avoid facing the painful events in our lives that might be the cause of our difficulties. 
If we just accept the diagnosis on offer, nobody is to blame. 
Nobody needs do anything differently – except take the tablets. 
We were just unlucky enough to get the “illness.” 
Second, a model of individual pathology is invaluable to politicians. 
They don’t need to spend money on prevention programs to address the psycho-social problems –overwhelming stress, poverty, discrimination, child neglect and abuse, and loneliness, to name but a few – that research has repeatedly demonstrated play a large role in undermining mental health. 
Third, exciting developments in technologies for studying our brains and genes have created the hope that we are about to discover the biological causes of, and solutions to, human misery and confusion. 
Finally, a new player has entered the nature-nurture debate. 
The pharmaceutical industry, fueled by our desire for quick fixes, has effectively deployed its considerable power to promulgate the notion of “disorders” and “illnesses” in all domains of our lives. 
The fundamental purpose of drug companies is to produce profits for shareholders. 
Naturally, they encourage us to diagnose eating, sleeping, or feeling too much (or too little) as illnesses requiring a chemical cure. 
Having listened for 20 years to people unfortunate enough to be labeled “schizophrenic,” considered to be the most extreme form of “mental illness,” and having subsequently researched the causes of hallucinations and delusions for ten years, I believe that the public understands madness better than we experts. 
Surveys of public opinion all over the world find that most people believe that emotional problems, including those deemed severe, such as hearing voices, are primarily caused by bad things happening to us rather than by faulty brains or genes. 
The public also favors psycho-social approaches, such as talking to someone and getting advice, or help finding friends or a job, rather than drugs, electro-shocks, or admission to psychiatric hospital. 
Some experts, however, dismiss these views as “mental health illiteracy.” 
They continue to insist that mental illness is an illness like any other, despite many studies showing that the more we adopt this medical model, the more prejudiced and frightened we become. 
Mental health services should offer something more than having our feelings chemically suppressed, or having our children’s difficulties sitting still controlled by amphetamines (which, apart from teaching children that problems are best solved with drugs, stunt growth by an average of one centimeter per year). 
A wide range of effective treatments are available that don’t cause weight gain, sexual dysfunction, diabetes, memory loss, or addiction. 
Funders and policymakers who keep up with the relevant research are slowly beginning to introduce more talking therapies (such as cognitive therapy and trauma-focused counseling), more alternatives to hospitalization, more culturally appropriate services, more family-focused therapy and, most importantly, more genuine consultation with service users about what actually works. 
If these new treatments aren’t used more frequently, this isn’t because they don’t work. 
The main obstacle is that they won’t increase the profits of drug companies, on which, in the absence of adequate government funding, our professional organizations, conferences, journals, research, and teaching institutions have become so dependent. 

The Future of Force 
MUNICH – At the World Economic Forum’s recent annual meeting in Davos, I participated in a panel of defense leaders to discuss the future of the military. 
The issue we addressed is a critical one: What kind of war should militaries today be preparing to fight? 
Governments have a very poor track record when it comes to answering this question. 
After the Vietnam War, for example, the United States’ armed forces suppressed what it had learned about counter-insurgency, only to rediscover it the hard way in Iraq and Afghanistan. 
America’s military interventions in these countries exemplify another key challenge of modern warfare. 
As outgoing US Secretary of Defense Chuck Hagel pointed out in a recent interview, in war, “things can get out of control, and drift and wander” in ways that can cause a military to fall into a more “accelerated” use of force than was initially anticipated. 
Against this background, the notion that force alone can transform conflict-riven societies in the Middle East and elsewhere is a dangerous fallacy. 
But, while war and force may be down, they are not out. 
They are simply evolving according to a new “generation” of rules and tactics. 
The first generation of modern warfare comprised battles fought with massed manpower, using Napoleonic line and column formations. 
The second, which culminated in World War I, was driven by massed firepower, and is expressed in the saying, reportedly coined at the Battle of Verdun in 1916, “artillery conquers, infantry occupies.” 
And the third generation – perfected by Germany with the “blitzkrieg” method employed in World War II – emphasized maneuver over force, with militaries using infiltration to bypass the enemy and collapse its force from the rear, rather than attacking frontally. 
Fourth-generation warfare takes this decentralized approach one step further, with no definable fronts at all. 
Instead, it focuses on the enemy’s society, reaching deep into its territory to destroy political will. 
One might even add a fifth generation, in which technologies like drones and offensive cyber tactics allow soldiers to remain a continent away from their civilian targets. 
While particular generational delineations are somewhat arbitrary, they reflect an important trend: the blurring of the military front and the civilian rear. 
Accelerating this shift is the replacement of interstate war by armed conflict involving non-state actors such as insurgent groups, terrorist networks, militias, and criminal organizations. 
Confusing matters further is the overlap among these groups, with some even receiving state support. 
The Revolutionary Armed Forces of Colombia – Latin America’s oldest guerilla group – formed alliances with narcotics cartels. 
Some Taliban groups in Afghanistan and elsewhere developed close ties with transnational Al Qaeda terrorists. 
The insurgents in eastern Ukraine are fighting alongside Russian troops (bearing no insignias). 
Such organizations often take advantage of states that lack the legitimacy or capacity to administer their own territory effectively, launching a mix of political and armed operations that, over time, give them coercive control over local populations. 
The result is what General Sir Rupert Smith, a former British commander in Northern Ireland and the Balkans, called “war among the people” – a kind of struggle that is rarely decided on conventional battlefields by traditional armies. 
These hybrid wars are fought using a wide variety of weapons – not all of which have firepower. 
With cameras in every cell phone and photo-editing software on every computer – not to mention the prevalence of social media – the information contest has become a critical aspect of modern warfare, exemplified in the current wars in Syria and Ukraine. 
In hybrid warfare, conventional and unconventional forces, combatants and civilians, physical destruction and information manipulation become thoroughly intertwined. 
In Lebanon in 2006, Hezbollah fought Israel through well-trained cells that combined propaganda, conventional military tactics, and rockets launched from densely populated civilian areas, achieving what many in the region considered a political victory. 
More recently, Hamas and Israel have conducted air and land operations in the densely populated Gaza Strip. 
This kind of warfare emerged largely in response to America’s overwhelming conventional military advantage after the Soviet Union’s collapse, underscored by its victory in the 1991 Iraq War, with only 148 American casualties, and its intervention in the 1999 conflict in Kosovo, in which no American lives were lost. 
In the face of this asymmetry, America’s opponents – both state and non-state actors – began to emphasize unconventional tactics. 
In China, for example, military planners developed a strategy of “unrestricted warfare” that combines electronic, diplomatic, cyber, terrorist-proxy, economic, and propaganda tools to deceive and exhaust US systems. 
As one Chinese military official put it, “the first rule of unrestricted warfare is that there are no rules.” 
For their part, terrorist groups, recognizing that they cannot defeat a conventional military in a direct war, attempt to use governments’ own power against them. 
With violent theatrics, Osama bin Laden outraged and provoked the US, driving it to overreact in ways that destroyed its credibility, weakened its alliances in the Muslim world, and ultimately exhausted its military – and, in a sense, its society. 
The Islamic State is now employing a similar strategy, mixing ruthless military operations with an incendiary social-media campaign, punctuated by photos and videos of brutal executions, including the beheading of US and other Western citizens. 
These efforts have mobilized the Islamic State’s enemies, while inspiring a growing number of discontented individuals and groups to self-recruit to its banner. 
The unpredictable evolution of warfare poses a serious challenge for defense planners. 
For some weak states, internal threats provide clear objectives. 
The US, for its part, must balance continued support for its conventional military forces, which remain an important deterrent in Asia and Europe, with investment in a broad portfolio of alternative capabilities that conflicts in the Middle East require. 
At a time of unprecedented change, the US – and other major powers – must be ready for anything. 

Modernization à la Carte? 
BERLIN -- Two centuries ago the American and French Revolutions brought forth the natural law concept of inalienable human rights. 
However, it took nearly two centuries of wars, political and social disasters, and decolonization before this idea became globally accepted, at least in theory. 
In the beginning, the idea of human rights was limited to domestic politics. 
In international relations, power, not right, continued to be the only thing that mattered: the traditional concept of state sovereignty focused exclusively on power, i.e., on control over people and territory, and protected the state’s authority, regardless of whether its enforcement was civilized or brutal, democratic or authoritarian. 
The Nuremberg Trials of the German war criminals after World War II marked the first important change in the world’s understanding of the concept of sovereignty. 
For the first time, an entire state leadership was put on trial for its crimes, as its representatives and henchmen were brought to justice. 
The Nuremberg Trials and, in parallel, the creation of the United Nations and its Universal Declaration of Human Rights, signaled the growing importance of law in international relations. 
Sovereignty was no longer based solely on power, but increasingly on law and respect for the rights of citizens. 
This process was largely frozen during the five decades of the Cold War. 
But human rights and the rule of law began to re-emerge as a theme of Western policy, especially in the wake of the Helsinki Conference on European Security and Cooperation and its use by the administration of US President Jimmy Carter, as well as by numerous non-governmental advocates protesting the treatment of Soviet dissidents. 
The next big step was the emergence of the concept of humanitarian intervention after the genocide in Rwanda and the Balkan wars in the 1990’s. As a result, international law came to recognize the “right of protection” against governmental arbitrariness and states’ crimes against their own people, even though enforcement remains quite uncertain. 
Finally, the same developments in politics and international law led to the creation of the International Court of Justice. 
With its establishment, resulting from long and terrible experience, the basic idea of modernity – that the power of states and their rulers should be subject to the rule of higher law, thus placing individual rights above state sovereignty – has taken a great step forward. 
This development was anything but accidental. 
In the face of the totalitarian challenges of fascism and communism in the twentieth century, Europe and the United States have become aware that the rule of law, separation of powers, and democracy decisively determine foreign policy and matter greatly from the point of view of international security. 
Democracies have proved to be much more peaceful than authoritarian regimes and dictatorships. 
But the progress achieved so far is again under threat. 
China’s rise and Russia’s resurgence suggest that there is no necessary link between economic development, on the one hand, and political and cultural modernization, on the other. 
In particular, China’s breathtaking economic success seems to point to the existence of viable authoritarian alternatives to the Western idea that freedom, democracy, the rule of law, and the market economy are bound together. 
Indeed, China appears to suggest that selective modernization is possible (modernization à la carte, so to speak), allowing states to choose to implement only those elements of modernity – technology, economics, infrastructure, political institutions, and values – that they like. 
But modernization à la carte is an illusion. 
Its proponents forget the experience of the first half of the twentieth century, when authoritarian modernization was tried in both Germany and Russia –with disastrous results. 
In the medium term, modernity is indivisible: you can have all of it or none. 
The deep technological and social changes unleashed by the forces of modernity create tensions that, in the end, cannot be resolved without appropriate normative and institutional responses. 
China and Russia today are no exceptions. 
The symptoms of the disease of selective modernization are clearly discernible in both countries in the form of ubiquitous corruption. 
China, for example, faces increasing export difficulties because of deficient control of the safety of its products, which is largely the result of corruption. 
Without a commitment to a free press and an independent judiciary, these difficulties will only intensify. 
Before too long, Russia’s “managed” (read: authoritarian) modernization will also have to allow for the rule of law and a functioning separation of powers, or the country will remain dependent on oil and gas prices and mired in a brutal struggle for power, influence, and money. 
Moreover, neither oil and gas deposits nor imperialist policies will stop Russia’s decline. 
Without functioning democratic institutions, Russia’s second attempt at selective modernization will fail just as certainly as its previous, Soviet incarnation did. 
In the globalized world of the twenty-first century, in which crises in one part of the world spread like wildfire to others, selective modernization, based on suppression of the conflicts and tensions that modernization generates, is likely to be even more dangerous. 
Indeed, while the greatest threats to peace once came from power politics and economic rivalry, they now increasingly derive from the regional and global repercussions of the political and social disintegration of stable countries, a decline of their normative and institutional systems, and new totalitarian ideologies. 
This is why the opposition between so-called “realists” and “idealists” in foreign policy, and between proponents of “hard” and “soft” power, is proving to be a thing of the past. 
To be sure, states are still following traditional interest-oriented policies. 
But such policies will be less and less able to guarantee peace and stability in the future. 
In the twenty-first century, human rights and security will be inextricably intertwined. 
Such is the outcome of globalization, i.e., the mutual dependence of 6.5 billion people in a single global economy and system of states. 

Modernization Versus Westernization 
Everyone nowadays seems obsessed about the question as to whether or not Islam can be reconciled with modernization. 
In discussing this issue, what constitutes modernization is often confused with westernization. Understanding the difference is vital. 
India's encounter with the West over the past three centuries underscores the distinction between the two processes - modernization and Westernization - that are often assumed to be synonymous. 
In fact, modernization does not entail Westernization, as the example of contemporary Japan demonstrates. 
Whereas modernization entails a change in belief about the way the material world operates, Westernization entails a change in cosmological beliefs about the way that one should live. 
Like China and unlike Japan, India resisted changes in its ancient beliefs about the way the world works (and should work) which modernization entails. 
Instead, like many Islamic countries today, India wrongly believed Gandhi's doctrine that modernization necessarily means Westernization. 
Fitfully, and under the influence of the British Raj, parts of the economy and society were modernized during the second half of the 19 th century of laissez-faire and free trade. 
Some of the traditional literary castes also embraced Westernization. 
British policy turned India into a pioneer of Third World industrialization, with an economy increasingly based on domestic capital and entrepreneurship combined with imported technology. 
But modernization stalled when protectionist pressures from Lancashire and the exigencies of Imperial finance led the British to abandon free trade and laissez faire . 
At the same time, Westernization fueled the rise of a nationalist movement. 
The introduction of income taxes and UK labor laws in the late 19 th century led to nearly a century of mounting state intervention in the economy, a process that accelerated after independence. 
This damaged India's growth prospects and hopes of alleviating its ancient scourge of mass poverty. 
The breakdown of the global economy in the first half of the 20 th century in the wake of the First World War further eroded India's incipient integration into the world economy during the British Raj. 
Finally, beginning with the economic reforms of 1991, India at last rejected inward-looking policies, returning to where it left off at the end of the 19 th century. 
We now have a fairly clear quantitative picture of the performance of the Indian economy throughout this period. 
During the 130 years from 1868 until 1999-2000, per capita income more than tripled, as national income increased by a factor of eight while the population grew nearly five-fold. 
This suggests that the age-old combination of economic stagnation and cultural stability that I call the "Hindu Equilibrium" seems finally to have been broken. 
But on closer inspection, it turns out that this was largely due to the economic performance of the last two decades. 
The sub-period from 1868-1900 saw the beginning of industrialization and India's partial integration into the world economy under the Raj. 
National income did not stagnate, as nationalist historians once maintained, but grew modestly, at an average annual rate of 1.1%. 
Growth was fastest from 1870-1890, followed by large fluctuations in output. 
A fairly low rate of population growth ensured a modest annual rise in per capita income of about 0.7% during this period. 
The second sub-period, 1900-1945, saw the breakdown of the global economy and the start of India's population explosion. 
Growth of per capita income decelerated between 1902 and 1930 and declined further in the last fifteen years of British rule until 1947. 
After 1920, this was due entirely to the rise in population growth, to 1.22 % per year, which outpaced fairly high output growth throughout the decade until 1930. 
Over this entire 45-year sub-period, output grew at just above 1% annually--the same rate as under the Raj--but yearly population growth soared to 0.8%, causing virtual stagnation of per capita income. 
The third sub-period, 1950-1980, marked the heyday of economic planning. 
Infrastructure investment - which had been difficult for the embattled British Raj to finance--suddenly boomed. 
This, together with high agricultural growth rates, led to a dramatic rise in output, which increased at an annual average rate of 4.5%. 
But the demographic explosion that began in the 1920's had by now driven the rate of population growth up to 3% per year, so that annual per capita income grew by only 1.5%. 
A departure from what the late Raj Krishna dubbed the "Hindu rate of growth" came only in the fourth sub-period, from 1980-1999. 
Partial economic liberalization, undertaken by the Rajiv Gandhi government in the mid-1980s, and the more substantial Narasimha Rao-Manmohan Singh economic reforms in 1991, boosted national income growth to an average annual rate of 6.8%. 
At the same time, yearly population growth slowed to an average of 2.3%, so that per capita income rose at an impressive annual rate of 4.5%, making a dent in India's mass structural poverty for the first time in millennia. 
If India can now complete the unfinished business of fully integrating into the global economy, there is no reason why it cannot improve upon its impressive recent growth performance. 
If it succeeds, Nehru's pledge, on the eve of Indian independence, "to wipe every tear from every eye," will finally be redeemed. 
India's Economic Performance : 1868-2000 
Year Per Capita Income 
(at 1948-49 prices- Rs.) Population 
(million) 
1868 176 209 
1900 213 238 
1945 244 319 
1950 221 359 
1980 318 679 
1999-00 602 991 
Average Annual Growth Rates (per cent per annum) 
1868-2000 1868-1900 1900-1945 1950-1980 1980-2000 
per capita income 2.6 0.7 0.3 1.5 4.5 
population 3.6 0.4 0.8 3.0 2.3 
national income 6.2 1.1 1.1 4.5 6.8 

Modernizing Multilateralism 
WASHINGTON, DC – 2008 will be remembered as a year of extraordinary turmoil. 
The financial crisis came on the heels of food and fuel crises. 
Now the world is in the midst of an economic crisis, which will lead to many job losses. 
Virtually no country has escaped. 
We are moving into a new danger zone, with heightened risks to exports and investment, to credit, banking systems, budgets, and balances of payments. 
In 2009, we may see the first decline in global trade since 1982. 
As always, the poor are the most defenseless. 
For developing countries, tighter credit conditions and much weaker growth mean that governments are less able to meet education and health goals, and to invest in the infrastructure needed to sustain growth. 
Remittances are drying up. 
Already 100 million people have been driven into poverty as a result of high food and fuel prices, and current estimates suggest that every 1% decline in developing-country growth rates pushes an additional 20 million people into poverty. 
Countries are trying to break the credit freeze, bolster financial institutions, ease interest rates, strengthen safety nets, and revive consumption and investment in order to boost business, enable people to work, and lay the foundation for future growth. 
These steps will be most effective if countries act in concert, in a mutually supportive way. 
Economic nationalism that seeks gains from the disadvantage of others will trigger ever more dangers. 
Global challenges require global solutions. 
In October, I called for modernizing multilateralism and markets to better reflect the changing world economy and to enable countries to act in concert to address interconnected problems. 
Looking beyond the old G-7 system, we need a twenty-first-century approach to multilateralism through the dynamism of a flexible network, not new hierarchies of a fixed or static system. ampnbsp; 
The new multilateralism must maximize the strengths of interdependent and overlapping actors and institutions, public and private. 
It should reach beyond the traditional focus on finance and trade, to include other pressing economic and political issues: development, energy, climate change, and stabilizing fragile and post-conflict states. 
It needs to draw together existing international institutions, with their expertise and resources, to reform them when necessary, and encourage effective cooperation and common action. 
Multilateralism, at its best, is a means for solving problems among countries, with the group at the table willing and able to take constructive action together. 
It needs to draw its strength – and legitimacy – from both broader participation and by achieving results. 
November’s G-20 summit brought to the table for the first time the rising powers as active stakeholders to address the global financial crisis. 
They agreed to a good agenda, but the true test will be the follow-up. 
It is a positive step that leaders of major developed economies are now meeting with leaders from the rising economic powers. 
But the poorest developing countries must not be left out in the cold. 
We will not solve this crisis, or put in place sustainable long-term solutions, by accepting a two-tier world. 
The goal must be to build an inclusive and sustainable globalization. 
Trillions of dollars are now being spent on a financial rescue in the developed world. 
By comparison, about $100 billion a year is currently being spent on overseas aid. 
We need a “human” rescue as well as a financial rescue. 
In this environment, the global commitment to provide development assistance to the poorest countries must be paramount.ampnbsp; 
At the World Bank Group, we are scaling up our financial support for those in need. 
We are speeding up grants and long-term, interest-free loans to the world’s 78 poorest countries, half of them in Africa. 
Donors last year pledged $42 billion over three years for the World Bank’s fund for these countries, the International Development Association (IDA).ampnbsp; 
This money is vital if we are to meet the Millennium Development Goals. 
In addition, the Bank’s lending arm to developing countries, the International Bank for Reconstruction and Development (IBRD), could make new commitments of more than $35 billion this fiscal year – almost triple last year’s – and up to $100 billion over the next three years. 
This increase is aimed at protecting the poorest and most vulnerable from harm, supporting countries that face borrowing problems because of broken credit markets, and helping to sustain investments upon which recovery and long-term development will depend. 
Our private sector arm, the International Finance Corporation (IFC), is launching or expanding three facilities to help the private sector, expected to total around $30 billion over the next three years. 
They will address high-priority problems that have emerged in recent months: expanding trade finance, recapitalizing banks in poorer countries, and sustaining infrastructure investment by helping viable projects facing a liquidity crisis.ampnbsp; 
At the same time, we will continue special efforts to counter malnutrition and hunger, and provide energy to the poor.ampnbsp; 
Our newly launched $6 billion Climate Investment Funds will build practical experience with technology, forestation, and adaptation to support the United Nations negotiations on climate change and assist developing countries. 
As the world digs out of the current financial and economic hole, we need to look further ahead. 
Today’s crises reflect the lightning speed of an interconnected world.ampnbsp; 
The factors that produced this globalization offer great opportunities to overcome poverty, increase opportunity, and open societies.ampnbsp; 
But we will need a new multilateralism to expand the availability of these benefits to all. 

Modernizing the Middle East’s Economies 
AMMAN – Rather than speak of the Middle East or the Arab world, I increasingly prefer to use the term WANA, meaning West Asia-North Africa. 
But, whatever we choose to call it, the danger is that the global economic crisis is providing an almost perfect alibi for governments and others in the region to continue with “business as usual,” when what is needed is a loud wake-up call. 
The global economic crisis has merely helped to mask chronic structural imbalances within the region. 
Over-dependence on aid and oil revenues characterizes almost all the economies of WANA. 
Indeed, it is no exaggeration to say that they represent a form of life-support system. 
The problem of how to wean these countries off this addiction seems to be insurmountable. 
For the “Dutch disease” and a rentier spirit prevail in WANA, and have affected oil-producing and non-oil-producing countries, ranging from migrant workers’ remittances and financial investment flows from the oil countries (mainly into real estate) to stock-exchange bubbles and foreign aid. 
A side-effect of this has been the widening of income gaps, both within and between the WANA countries. 
Political scientists tell us that rentier economies, or economies that depend on oil and foreign aid, stimulate greed and grievances. 
Indeed, oil rents eventually weaken state institutions, and this hollowing out of the state often gives rise to growing discontent. 
In a non-oil economy, labor is the main engine of wealth. 
But in a rentier economy, huge revenues from oil or external financial transfers actually create a disincentive to work. 
Wealth and work are de-linked, and this applies to most industrial and agricultural activities. 
Social and political mobility become extremely limited, and societies turn from production to consumption. 
This helps to explain the high level of unemployment in the Arab world. 
According to World Bank figures, the Middle East North Africa (MENA) region suffered a 25% fall in per capita incomes during the last 25 years of the twentieth century, when oil prices were low. 
In this decade, thanks to record-high oil prices, GDP growth rates soared. 
A recent study by India’s Strategic Foresight Group entitled The Cost of Conflict in the Middle East suggested that the past 20 years of conflict have cost WANA countries some $12 trillion. 
Rent-seeking tends to lead to policy failure in the form of intense political competition aimed at gaining short-term access to revenues and benefits, as opposed to political competition over what policies might be in the long-term public interest. 
The politics of greed and grievance replace more far-sighted policymaking. 
So what, then, are the possible policy options? 
The absence of a modern industrial base diminishes the WANA economies’ ability to absorb the surplus generated by oil revenues. 
As a result, many countries have established sovereign wealth funds to invest their surpluses in international markets. 
These funds’ managers rightly complain that insufficient investment opportunities exist in the region in agriculture and manufacturing. 
The question is how to increase the absorptive capacity of the region and build a modern industrial base. 
A precondition for any effective change is a shift in policy orientation from the national to the regional level. 
For this to be made concrete, new instruments are needed, such as a Regional Stabilization Fund, a Water and Energy Community, regional social cohesion, and a regional industrial policy. 
Without a regional focus, WANA countries risk sleepwalking into conflict and more pronounced economic decline. 
Indeed, funds for “needy countries” may never reach the neediest of individuals, such as internally displaced or stateless persons, because no one takes responsibility for them. 
How can this be done? 
Three years ago, the Commission on Legal Empowerment of the Poor considered ways of empowering the “bottom billion” by expanding and deepening the means by which they could pull themselves out of poverty. 
Its 2008 report Making the Law Work for Everyone argues that legal empowerment is not about aid, but about policy and institutional reforms that expand the legal opportunities and protection of the poor. 
It is an example of the methodology urgently needed to initiate a paradigm shift in WANA. 
The nations of WANA missed the first industrial revolution based on coal and the steam engine, and then the second industrial revolution based on oil and the internal combustion engine. 
The silver lining is that the absence of a modern industrial base means that, unlike more developed economies, WANA has no ailing industries to rescue. 
But what is needed now are policies that will allow WANA to join the third industrial revolution – the post-carbon economy of renewable energy and the fuel-cell plug-in car. 

 

Taming India’s Elite 
NEW DELHI – It has been more than a year and a half since Indian Prime Minister Narendra Modi came to power on a promise to build a new India, one founded on a radical break with the past. 
It is still too early to gauge the impact of his economic and foreign policies, but there is one area where his government is making palpable progress: taming India’s entrenched elite. 
India has a population of 1.2 billion people, but it has long been dominated by a tiny elite: a couple of hundred extended families, totaling perhaps 4,000-5,000 people. 
Many countries have powerful elites with outsize influence, but in India, dynastic elites control the top echelons in every sphere of public life: politics, business, the media, and even Bollywood. 
Many of these dynasties have roots that stretch back to the colonial era, implying at least seven decades of dominance. 
Every point of leverage – from government contracts and industrial licenses to national awards – is used to maintain this ecosystem of power. 
Over time, ties of patronage and marriage have fused these dynasties into a discernable class, concentrated in central New Delhi, with a few pockets in Mumbai and a small presence in other parts of the country. 
Exclusive English-language schools, holiday homes in Goa, and summers in London or Switzerland have given them a shared world-view. 
Occasionally, new faces are admitted, but only if they do not interfere with the system’s perpetuation. 
Unsurprisingly, the result has been the creation of a class of people with a strong sense of entitlement, who react to even minor challenges by closing ranks. 
They flaunt their power so often (usually with some variant of the phrase, “Do you not know who I am?”) that even those who do not “belong” sometimes use similar lines to try to bluff their way out of trouble. 
One of Modi’s more symbolic blows to the old establishment has been his government’s success in evicting high-status squatters from hundreds of government bungalows in central Delhi. 
Few of the occupants of these sprawling official residences had the right to live in them. 
In some cases, they had been there for generations; when faced with eviction notices, some families argued that the bungalows had effectively become memorials to their famous ancestors and that they should thus be allowed to remain. 
An even more visible change is the sudden increase in criminal charges – ranging from corruption to sexual offenses – being filed against members of the old elite. 
The homes of several senior civil servants have been raided recently as part of corruption investigations, and serious accusations of sexual harassment have been leveled against India’s top environmentalist, Rajendra Pachauri, who headed the United Nations Intergovernmental Panel on Climate Change when it received the Nobel Peace Prize. 
Meanwhile, banks have begun to demand repayment from large borrowers accustomed to having their loans rolled over. 
Vijay Mallya, a businessman famous for his colorful lifestyle and string of failed ventures, is being investigated as a willful defaulter. 
Much of this would have been unthinkable until a few months ago. 
And, inevitably, many accuse the government of carrying out political vendettas. 
On December 19, Sonia Gandhi, President of the Congress party, and her son, Rahul Gandhi, the party’s vice president, were forced to appear in court on corruption charges. 
In response, their party’s MPs brought legislative activity to a halt for days. 
The two were quickly released on bail. 
The case against the Gandhis – as well as many other high-profile investigations – is likely to drag on for years. 
And, of course, in some cases the accused will be exonerated. 
But the very fact that members of the old elite can be investigated and questioned is undeniable progress in a country where they have long enjoyed impunity. 
What remains to be seen is whether Modi is able to cement these gains. 
The elite can be remarkably resilient, retaining the power to strike back at the first sign of weakness. 
History – from post-revolutionary France to modern Thailand – has repeatedly shown that it is a mistake to write off the old establishment. 

Who Should Control India’s Central Bank? 
NEW DELHI – The Reserve Bank of India (RBI) is locked in a bitter public feud with the administration of Prime Minister Narendra Modi over Modi’s attempts to encroach on the central bank’s independence. 
In fact, the government’s actions are a serious problem, but not for the reason many people seem to think. 
An independent central bank is widely regarded nowadays as a pillar of a modern economy. 
But the concept of central-bank independence is relatively recent – and deeply flawed. 
After all, a central bank performs critical functions – controlling an economy’s base money supply, setting interest rates, regulating banking activities and credit volume, and acting as lender of last resort – that cannot be carried out independently of fiscal and other economic policies. 
Support for central-bank independence rests on two assumptions: that the only objective of monetary policy should be price stability, and that efforts on this front should be insulated from the political pressure faced by governments seeking to meet multiple goals, such as employment gains, financial inclusion, and a stable exchange rate. 
The upshot, however, is that central banks end up answering to financial markets, rather than to governments that are accountable to the public. 
But the Modi government’s actions are not intended to link monetary policy to smart fiscal and economic policies, in order to serve the needs of the public more effectively. 
Instead, they amount to a short-sighted attempt to strengthen the position of the ruling Bharatiya Janata Party ahead of upcoming elections. 
The BJP is under severe pressure. 
Despite rapid GDP growth, the Indian economy is fragile. 
Formal employment growth is slow or stagnant, the current-account deficit is rising, and capital flows are volatile. 
Producers and consumers are confronting a grave liquidity shortage, and, with banks struggling to manage their growing portfolios of non-performing assets, credit flows have been drying up. 
As a result, investment continues to decline, and many small and medium-size enterprises – the backbone of the economy – are on the brink of collapse. 
These problems have been building for more than 15 years, since successive governments began forcing state-run commercial banks to engage in long-term lending that should have been the preserve of development banks (which were eliminated during India’s economic liberalization). 
Other sorts of crony lending were also encouraged, reflected in the fact that fewer than 5,000 large borrowers accounted for 90% of total non-preforming assets – and more than half of all Indian bank loans – at the end of March. 
The recent bankruptcy of the major shadow lender IL&FS has exacerbated the credit squeeze. 
Modi’s government may not have created these problems, but it has not done anything to resolve them, either, despite its lofty promises to ensure rapid employment growth, root out corruption, and clean up the banking system. 
Its demonetization project, which entailed the invalidation of high-value notes, was a disaster, inflicting enormous damage on citizens – especially the 81% of workers who earn their living in the informal sector – without making so much as a dent in corruption. 
The poorly designed and implemented Goods and Services Tax created further chaos and economic disruption. 
With elections looming, Modi’s government hopes to stimulate the economy and revive investment with a big public spending spree. 
But this would require the release of more credit – a condition that the central bank, focused on cleaning up existing bad debts and forcing banks to act more prudently, has repeatedly disregarded. 
Instead, for the first time in independent India’s history, Modi’s government invoked Section 7 of the RBI Act, which empowers the government to issue directions to the central bank. 
Those directions include easing restrictions on lending by “stressed” banks, amending prudential norms to allow more lending, providing a single-window facility for loans to small enterprises without due diligence, and relaxing limits on a single company’s foreign portfolio holdings of corporate debt. 
The government also wants to dip directly into the RBI’s reserves to finance its own expenditure. 
This prompted a sharp response from RBI Deputy Governor Viral Acharya, who publicly declared that, should the government infringe on the RBI’s autonomy by “raiding” its balance sheet, it would face the wrath of financial markets. 
The response contrasts sharply with RBI Governor Urjit Patel’s meek acceptance of demonetization, despite not having been briefed on the plan in advance. 
Patel even acquiesced when the government scapegoated the RBI for the project’s failure. 
Acharya’s rejection of the government’s demands is all the more surprising, given the RBI’s own role in allowing the proliferation of non-performing assets. 
Even the US Federal Reserve has acknowledged that if the central bank is partly responsible for a crisis, it must be willing to contribute to the resolution, both by letting the government monetize some of its deficit and by expanding its own balance sheet. 
As it stands, the government has big business in its corner. 
Presumably, many large firms with unpaid debts want access to fresh credit, though the list of large corporate “willful defaulters” submitted to the Modi government four years ago by Patel’s predecessor, Raghuram Rajan, remains secret, despite parliamentary requests and Supreme Court directives to release it. 
We do know that some of India’s business heavyweights, such as the Tata and Adani groups, are also hoping to benefit from a plan to forgive power-sector loans. 
The standoff between the Modi government and the RBI is not problematic because of the risk of infringing on central-bank independence; it is problematic because the Modi government is not fighting to protect the larger public interest, but rather to revive irresponsible bank lending, protect its cronies, and win votes. 
And yet, when things go south, it may well be the RBI that is left holding the bag. 

Egypt’s Democratic Dictator? 
CAIRO – Mohamed Morsi, Egypt’s first-ever elected civilian president, recently granted himself sweeping temporary powers in order, he claims, to attain the objectives of the revolution that overthrew Hosni Mubarak’s dictatorship. 
But the decrees incited strong opposition from many of the revolutionary forces that helped to overthrow Mubarak (as well as from forces loyal to him), with protests erupting anew in Cairo’s Tahrir Square. 
Morsi has thus been put in the odd position of having to defend his decision against the protesters while simultaneously making common cause with them. 
“I share your dream of a constitution for all Egyptians and with three separate powers: executive, legislative, and judicial,” he told his opponents. “Whoever wants Egyptians to lose this opportunity, I will stop him.” 
So, was Morsi’s “auto-coup” necessary to realize the revolution’s avowedly democratic goals? 
The new Constitutional Declaration, the Revolution Protection Law, and the new presidential decrees have several aims: 
· To remove the public prosecutor, a Mubarak-era holdover who failed to convict dozens of that regime’s officials who had been charged with corruption and/or abuse of power; 
· To protect the remaining elected and indirectly elected institutions (all of which have an Islamist majority) from dissolution by Constitutional Court judges (mostly Mubarak-era holdovers); 
· To bring about retrials of Mubarak’s security generals; 
· To compensate and provide pensions for the victims of repression during and after the revolution. 
While most Egyptians may support Morsi’s aims, a dramatic expansion of presidential power in order to attain them was, for many, a step too far. 
Given Egypt’s extreme polarization and distrust between its Islamist and secular forces, Morsi should have anticipated the protests. 
Suspicion of the powerful, after all, has been one of the revolution’s animating factors. 
Another is a “zero-sum” attitude: any achievement by Morsi is perceived by his opponents as a loss. 
The anti-Morsi forces are sharply divided ideologically and politically. 
Nobel laureate Mohamed ElBaradei, a liberal reformer, has little in common with Ahmed El-Zind, the head of the Judges Club and a Mubarak loyalist. 
But the anti-Morsi forces that backed the revolution regard the price of cleansing the judiciary as too high, arguing that the constitutional declaration will lead to dictatorship. 
Indeed, the declaration protects presidential decrees from judicial review (although Morsi stipulated that it pertains only to “sovereignty” matters, and stressed its temporary nature). 
It also gives the president emergency-like power to fight vague threats, such as those “endangering the life of the nation.” 
Only if the new draft constitution is upheld in a popular referendum on December 15 will these provisions be annulled. 
But the opposition factions have not been adhering to democratic principles, either. 
Mostly comprising electoral losers and remnants of Mubarak’s regime, some aim to topple Morsi, not just get him to backtrack on his decree. 
ElBaradei, for example, “expects” the army to do its national duty and intervene if “things get out of hand” – hardly a compelling democratic stance, given the army’s track record. 
Morsi’s decrees have undoubtedly polarized Egyptian politics further. 
The worst-case scenario is street clashes between pro- and anti-Morsi hardliners. 
Historically, such clashes have often sparked civil war (for example, Spain in 1936 or Tajikistan in 1992) or brutal military coups (as in Indonesia in 1965 and Turkey in 1980). 
For Morsi and his supporters, it was imperative to neutralize the Constitutional Court judges, whose ruling last June dissolved the first freely elected, post-revolution People’s Assembly (the parliament’s lower house). 
According to the Morsi camp, the politicized Court intended to dissolve the Consultative Council (the upper house) and the Constitutional Assembly, as some of its judges publicly hinted. 
Likewise, the sacked public prosecutor had failed to present any solid evidence against those of Mubarak’s security chiefs and officers who were accused of killing protestors, leading to acquittals for almost all of them. 
As a president who was elected with only a 51.7% majority, Morsi needs to be sensitive to the demands of his supporters, mainly the Islamists and revolutionaries victimized by the security forces. 
But, for many revolutionaries, there were other ways to sack a tainted prosecutor and cleanse the judiciary. 
For example, a new law regulating the judiciary has been a demand of the revolution since its early weeks. 
For Morsi, the dilemma was that the Constitutional Court could strike down the law, rendering the effort meaningless. 
He had already backed off twice: once in July 2012, when he abandoned his effort, under pressure from the Supreme Council of the Armed Forces, to reinstate the elected parliament; and once when he tried to remove the public prosecutor by making him Egypt’s ambassador to the Holy See. 
Morsi’s “Constitutional Declaration” was a decisive – though undemocratic, polarizing, and thus politically costly – step to break the impasse. 
And, while such decrees have led to dictatorships, not democracies, in other countries undergoing political transition, none had a politicized judicial entity that played the role of spoiler in the democratization process. 
Indeed, almost two years after the revolution began, Egypt’s security forces have not been reformed in any meaningful way. 
Now, Morsi, in his effort to force out the prosecutor, will have to avoid opening another front with the Mubarak-era security generals, whom he will need to protect state institutions and maintain a minimum level of public security. 
The security sector may, it seems, emerge from this crisis as the only winner. 
It will enforce the rule of law, but only for a price. 
That price will be reflected in the constitution, as well as in the unwritten rules of Egypt’s new politics. 

The End of the Two-State Solution 
BANGALORE – US Secretary of State John Kerry’s valiant effort to save the Israeli-Palestinian peace process is about to end in failure. 
Though achieving a substantive settlement was always a pipe dream, this latest disappointment will render the United States unable to preserve even the façade of a “peace process” that was all process and no peace. 
And that might not be such a bad thing. 
The negotiations are failing for several reasons, beginning with Israel’s continued colonization of lands occupied in 1967, despite opposition from the international community, including the US. 
If anything, Israel has accelerated settlement construction since the latest round of talks began, while escalating its demands, especially regarding the stationing of Israeli troops in the Jordan Valley. 
Releasing a few dozen Palestinian prisoners is no substitute for genuine concessions on these contentious issues. 
Making matters worse, the US has continually refrained from using its substantial leverage to compel Israel to change course, owing to the domestic political strength of the pro-Israel lobby, especially the American Israel Public Affairs Committee. 
Tellingly, Kerry appointed Martin Indyk – a British-born Australian citizen, who began his political career in the US working for AIPAC in the early 1980s – as the principal US facilitator. 
Another obstacle to a peace agreement has been the division between Hamas-controlled Gaza and the Fatah-controlled West Bank. 
This, too, is rooted in American and Israeli intransigence – specifically, their refusal to accept Hamas’s victory in the 2006 election and recognize the group as the legitimate Palestinian representative. 
This policy encouraged Fatah not to cede any power to Hamas in the West Bank, engendering the split in occupied Palestine. 
In the latest round of negotiations, however, this division has not been a major obstacle, because Hamas remained on the sidelines – neither participating nor seeking to play a spoiler role. 
This decision may have stemmed from an assumption that the talks would collapse, thereby discrediting the Fatah-dominated Palestinian Authority. 
Regardless, the division among Palestinians cannot be blamed for the talks’ failure this time. 
This brings us back to Israel’s continued colonization of Palestinian land, which all but excludes the possibility of a two-state solution. 
Add to that the Israeli right’s insistence that no concessions are possible on territorial issues, Jerusalem, or the Palestinians’ right of return, and it is clear that Kerry never really had a chance. 
Perhaps the clearest indication of Israel’s obstinacy came from its economy minister, Naftali Bennett, last July. 
“The idea that a Palestinian state should be established within the Land of Israel has reached a dead end,” he declared. “The most important thing for the Land of Israel is to build and build and build [Jewish settlements].” 
Paradoxically, the discerning Palestinian observer may find comfort in America’s failure to stop Israel from expanding its settlements (and thus effectively annexing a growing share of Palestinian land), for it ends the charade on which the peace process has been based. 
The most likely outcome now is the establishment of a single unified country within the borders of the 1922 British Mandate for Palestine, including all of present-day Israel and the occupied territories. 
In other words, Israel and Palestine are moving inexorably toward the establishment of a binational state between the Jordan River and the Mediterranean Sea. 
Such a state will be based on one of two mutually exclusive principles: equal rights for all of its inhabitants or some form of apartheid, characterized by Jewish control and Palestinian subordination. 
The problem for Palestinians is that Jewish Israelis would have more clout in directing this unified state’s development, and they are unlikely to choose equality on their own. 
After all, granting equal political and civil rights to all citizens would diminish the country’s exclusivist Jewish character, reversing Zionist goals and achievements – an outcome that most of Israel’s Jewish population would reject. 
Calling the country “Israel” would be inadequate to moderate this resistance. 
The international community would probably respond to the emergence of an apartheid state with opprobrium and ostracize Israel, regardless of American protests. 
Moreover, conflict within such a country would be bound to spill over its borders, possibly sparking a major regional conflagration. 
This would have serious consequences for the US and other staunch Western supporters of Israel that have major strategic and economic interests in the region. 
It is time, therefore, for the US to rethink its policy toward the Israel-Palestine conflict. 
Instead of pursuing the mirage of a two-state solution, the US should use its leverage in the region to clear the way for the emergence of a binational, democratic state that guarantees full political and civil equality for all of its inhabitants. 
This may not be an ideal solution for any of the parties to the Israel-Palestine conflict, but it is far better than the alternative: an apartheid state that is likely to further destabilize the Middle East and lead to a never-ending cycle of conflict in the region. 

The Intellectual Battle Against ISIS 
DUBAI – The global financial crisis taught the world how profoundly interdependent our economies have become. 
In today’s crisis of extremism, we must recognize that we are just as interdependent for our security, as is clear in the current struggle to defeat ISIS. 
If we are to prevent ISIS from teaching us this lesson the hard way, we must acknowledge that we cannot extinguish the fires of fanaticism by force alone. 
The world must unite behind a holistic drive to discredit the ideology that gives extremists their power, and to restore hope and dignity to those whom they would recruit. 
ISIS certainly can – and will – be defeated militarily by the international coalition that is now assembling and which the UAE is actively supporting. 
But military containment is only a partial solution. 
Lasting peace requires three other ingredients: winning the battle of ideas; upgrading weak governance; and supporting grassroots human development. 
Such a solution must begin with concerted international political will. 
Not a single politician in North America, Europe, Africa, or Asia can afford to ignore events in the Middle East. 
A globalized threat requires a globalized response. 
Everyone will feel the heat, because such flames know no borders; indeed, ISIS has recruited members of at least 80 nationalities. 
ISIS is a barbaric and brutal organization. 
It represents neither Islam nor humanity’s most basic values. 
Nonetheless, it has emerged, spread, and resisted those who oppose it. 
What we are fighting is not just a terrorist organization, but the embodiment of a malicious ideology that must be defeated intellectually. 
I consider this ideology to be the greatest danger that the world will face in the next decade. 
Its seeds are growing in Europe, the United States, Asia, and elsewhere. 
With its twisted religious overtones, this pre-packaged franchise of hate is available for any terrorist group to adopt. 
It carries the power to mobilize thousands of desperate, vindictive, or angry young people and use them to strike at the foundations of civilization. 
The ideology fueling ISIS has much in common with that of Al Qaeda and its affiliates in Nigeria, Pakistan, Afghanistan, Somalia, Yemen, North Africa, and the Arabian Peninsula. 
What most worries me is that a decade ago, such an ideology was all that Al Qaeda needed to destabilize the world, even from a primitive base in the caves of Afghanistan. 
Today, under ISIS, adherents have access to technology, finance, a huge land base, and an international jihadist network. 
Far from being defeated, their ideology of rage and hate has become stricter, more pernicious, and more widespread. 
The destruction of terrorist groups is not enough to bring lasting peace. 
We must also strike at the root to deprive their dangerous ideology of the power to rise again among people left vulnerable by an environment of hopelessness and desperation. 
And, on this note, let us be positive. 
The solution has three components. 
The first is to counter malignant ideas with enlightened thinking, open minds, and an attitude of tolerance and acceptance. 
This approach arises from our Islamic religion, which calls for peace, honors life, values dignity, promotes human development, and directs us to do good to others. 
Only one thing can stop a suicidal youth who is ready to die for ISIS: a stronger ideology that guides him onto the right path and convinces him that God created us to improve our world, not to destroy it. 
We can look to our neighbors in Saudi Arabia for their great successes in de-radicalizing many young people through counseling centers and programs. 
In this battle of minds, it is thinkers and scientists of spiritual and intellectual stature among Muslims who are best placed to lead the charge. 
The second component is support for governments’ efforts to create stable institutions that can deliver real services to their people. 
It should be clear to everyone that the rapid growth of ISIS was fueled by the Syrian and Iraqi governments’ failings: the former made war on its own people, and the latter promoted sectarian division. 
When governments fail to address instability, legitimate grievances, and persistent serious challenges, they create an ideal environment for hateful ideologies to incubate – and for terrorist organizations to fill the vacuum of legitimacy. 
The final component is to address urgently the black holes in human development that afflict many areas of the Middle East. 
This is not only an Arab responsibility, but also an international responsibility, because providing grassroots opportunity and a better quality of life for the people of this region is guaranteed to ameliorate our shared problems of instability and conflict. 
We have a critical need for long-term projects and initiatives to eliminate poverty, improve education and health, build infrastructure, and create economic opportunities. 
Sustainable development is the most sustainable answer to terrorism. 
Our region is home to more than 200 million young people. 
We have the opportunity to inspire them with hope and to direct their energies toward improving their lives and the lives of those around them. 
If we fail, we will abandon them to emptiness, unemployment, and the malicious ideologies of terrorism. 
Every day that we take a step toward delivering economic development, creating jobs, and raising standards of living, we undermine the ideologies of fear and hate that feed on hopelessness. 
We starve terrorist organizations of their reason to exist. 
I am optimistic, because I know that the people of the Middle East possess a power of hope and a desire for stability and prosperity that are stronger and more enduring than opportunistic and destructive ideas. 
There is no power stronger than that of hope for a better life. 

The Brain Regain 
DUBAI – In 1968, while studying at the Mons Officer Cadet School in the United Kingdom, I needed to visit a hospital. 
There I met a doctor who, to my surprise, spoke fluent Arabic. 
I learned that he was new to the UK, so I asked if he intended to stay long or return home. 
He replied with an Arabic saying that translates as: “My home is where I can eat.” 
That doctor’s words stayed with me for many years, because they underscored the contradiction between our idealized view of “home” and the harsh realities of life that push talented people to leave their homes. 
The doctor was a classic case of the “brain drain” phenomenon that has afflicted developing countries for decades. 
These countries spend scarce resources educating doctors, engineers, and scientists, in the hope that they will become engines of prosperity. 
Then we watch with dismay as they migrate to the West, taking with them the promise of their talent. 
It is, of course, everyone’s right to choose a better life, wherever in the world they wish. 
We understand why they go. 
Talent is drawn – like a magnet – to opportunity. 
For the countries left behind, however, it feels like an endless vicious cycle: they need talent to create opportunity; but without opportunity, talent gravitates to the bright lights of the West. 
Indeed, the United Nations and the OECD report that migration for work has risen by one-third since 2000. 
One in nine university graduates from Africa now lives and works in the West. 
Many will not return: skilled workers are six times more likely to stay away. 
But now something remarkable is happening. 
In some countries, the brain drain has reversed its flow. 
The causes are fascinating, and there is reason to be optimistic that the vicious cycle can be broken, transforming the balance of hope and opportunity between developing and developed economies. 
A new study by LinkedIn, the world’s largest online professional network and recruitment platform, has measured the net international movement of talent among its members. 
Topping the list as a destination for talent is my own country, the United Arab Emirates, with a net talent gain of 1.3% of the workforce in 2013. 
Other net “talent magnets” include Saudi Arabia, Nigeria, South Africa, India, and Brazil. 
Most interesting, fewer than one-third of net talent importers are developed countries. 
In fact, the top talent exporters in this study are Spain, the UK, France, the United States, Italy, and Ireland. 
Rich countries that until recently had been tempting away our brightest minds are now sending us their own. 
Of course, this is only one study, and many poor countries still suffer from a chronic talent exodus. 
OECD data show that many countries in Africa and Latin America have migration rates for graduates above 50%. 
We do know that brain drain is often a function of safety and security as much as economic opportunity. 
Part of the tragedy playing out in Middle Eastern countries beset by conflict and instability is that if only their most talented sons and daughters could apply their skills at home, they would become part of the solution: agents of peace through development. 
This makes it all the more important to examine how some developing countries succeeded in reversing the outward flow. 
The basic ingredient is opportunity. 
Talent flows naturally to countries that create an environment for economic growth; that make life easy for enterprise; that attract and welcome investment; and that nurture a culture of achievement. 
Skills are attracted to challenge and possibility. 
Opportunity on this scale is becoming a scarce commodity in many parts of the West. 
But this is not the case in the developing world – at least among countries with the appetite and determination to deploy strong governance and continually raise their competitiveness. 
Second, quality of life matters greatly. 
A generation ago, many talented individuals would consider working outside the West a “hardship posting.” 
Today, standards of living in the UAE, for example, are among the highest in the world. 
We have shown that the business of reversing brain drain is also the business of creating a better life for citizens and residents. 
Building happiness is, after all, the primary business of good government everywhere. 
Ours is a story of great hope for the Middle East in particular, where generations of conflict and despair have driven high levels of outward migration. 
I have always argued that, besides good governance, the best solutions to the divisions and strife of the Arab world lie in grassroots development and economic opportunity. 
Now, we have shown that it is possible to reverse the forces that had driven away our most talented young people. 
Another source of hope is that this turnaround can happen remarkably quickly. 
Research shows that small countries suffer disproportionately from brain drain. 
But we have shown that even for a small country like the UAE, and even in a region divided by conflict, it is worth building an island of opportunity. 
But let me be clear: reversing brain drain is about more than plugging a leak. 
It means turning a vicious cycle into a virtuous one. 
By attracting the best talent from around the world, we can create a vibrant and diverse society that fuels innovation and prosperity – which in turn attracts still more talent. 
To make this work, we must believe in people. 
Human beings – their ideas, innovations, dreams, and connections – are the capital of the future. 
In this sense, the “brain regain” is not so much an achievement in itself as it is a leading indicator of development, because where great minds go today, great things will happen tomorrow. 

The BIS Bashers 
PRAGUE – It might seem an unlikely proposition, but central banking has become exciting. 
This is not necessarily a welcome development. 
Decisions taken by the leading monetary authorities since the 2008-2009 global financial crisis have been unorthodox, creative, and at times risky. 
Their high-stakes choices today will affect the global economy for decades to come. 
Moreover, central bankers have become more vocal in expressing strongly held positions in the mass media, as if seeking to win over popular opinion. 
It is a potent and dangerous mix. 
In this environment, sober, informed voices, like that of the Bank for International Settlements, the central bank of central banks, should also be given a fair hearing. 
Unfortunately, many central bankers have sought to marginalize the BIS rather than engage with it. 
One of the most contentious debates has been over when to end the “unconventional” monetary-policy measures that were introduced in the aftermath of the financial crisis to ensure that banks continued to lend, thereby stimulating growth and averting deflation. 
Some central bankers now worry that ending these measures prematurely will tip the economy back into recession. 
Yet others fear that the current strategy, though originally intended to prevent an economic collapse, is now sowing the seeds of future instability, including the emergence of another asset-price bubble. 
In their efforts to resolve such dilemmas, policymakers are also wrestling over whether to focus on traditional monetary tools such as interest rates, or make greater use of so-called “macro-prudential measures,” such as capital add-ons and buffers or adjustments to banks’ loan-to-value ratios. 
At the heart of the debate – currently being conducted within leading economies’ treasuries and central banks, as well as in supranational bodies such as the International Monetary Fund and the BIS – is the relationship between monetary policy and financial stability. 
The BIS, for example, has suggested that financial stability is closely connected with monetary policy, and has advised policymakers to start weaning their economies off of easy money sooner rather than later. 
Central bankers, however, seem to want to try macro-prudential tools first (and sometimes exclusively). 
It is unusual to witness a clash of views among monetary policymakers that is so radical and clear-cut that it has grabbed wider political and media attention. 
And, under the public spotlight, some central bankers have sought to downplay the BIS’s assessment, arguing that it is all too easy to issue far-reaching policy recommendations when one suffers none of the consequences should one’s prescription turn out to be wrong. 
To be sure, a country’s domestic economic circumstances, and the tools available to policymakers, should guide policy. 
And, though monetary tightening may well be advisable in some economies, it might be inappropriate in others. 
But the harsh reactions to the BIS’s analysis seem misplaced and unfair. 
It is always difficult to find the right monetary-policy stance for any given economy at a given moment. 
Central banks employ an army of experts to try to get it right, and other institutions are seldom so well resourced to present equally sophisticated counter-arguments. 
The BIS, however, is one of the few organizations that not only has the necessary research and analytical capabilities, but also a track record of making good calls. 
One should not forget – as many central bankers appear to have done – that the BIS was one of the first to warn of the dangers of financial excesses, several years before the 2008 crisis. 
The BIS has a right to be heard. 
It exists not just to represent central banks, but also to offer ideas and intellectual feedback. 
Indeed, it serves policymakers well by challenging, debating, and perhaps swaying opinion. 
Rather than bash the BIS, monetary authorities should be grateful for the informed perspectives that it provides. 


Closing the Skills Gap 
WASHINGTON, DC – In an age of skyrocketing unemployment, it may seem reasonable to assume that companies do not have to worry about finding workers. 
But a recent McKinsey survey of more than 2,800 employers worldwide has underscored just how flawed that perception is. 
Four out of ten employers said that they cannot find workers to fill entry-level positions in their firms, with more than one-third of respondents saying that their businesses are suffering from a lack of appropriate skills in the labor market. 
Meanwhile, young people worldwide are struggling to find jobs. 
While the eurozone crisis helps to explain why more than half of young people in Greece and Spain are unemployed, rapidly growing economies like South Africa and Nigeria are experiencing similar rates of youth joblessness. 
In the Middle East and North Africa, one in three young people are unemployed. 
And, in the United States, roughly half of bachelor’s degree-holders under the age of 25 were jobless or underemployed upon graduation last year. 
All of this points to the costly skills mismatch at play in today’s economy. 
In the US alone, the opportunity cost of failing to improve education would amount to $1.7 trillion by 2030. 
Similarly, by bridging its growing skills gap, China could augment its GDP by $250 billion by 2020. 
So why isn’t more being done to ensure that young people acquire the skills they need? 
The problem is rooted in divergent perceptions among the various players in the labor market. 
More than 70% of the educational institutions surveyed by McKinsey believe that their graduates are ready for the job market; more than half of employers and young people disagree. 
Closing this gap requires that educators and employers work together more closely. 
Employers should communicate their requirements to educators; educators need to give their graduates the tools that will enable them to meet these requirements. 
The problem is missed connections, so the solution is to make more of them. 
But such synchronization will not be easy to achieve. 
One-third of employers never interact with education providers, while only 15% do so once a month or more. 
Both sides would benefit from building strong reciprocal ties, with employers telling educators what they need (and even helping to design curricula and offering their employees as faculty) and educators providing students with practical experience and hands-on learning. 
In fact, some promising initiatives are underway. 
Many employers in the auto, tourism, advanced manufacturing, and shipbuilding industries have taken to “pre-hiring” young people – that is, guaranteeing them a job if they complete a rigorous training program. 
A useful example is the cooperation between Brazil’s state-owned energy giant Petrobras and Prominp – a coalition of government agencies, businesses, trade associations, and labor unions – aimed at unleashing the full potential of the country’s oil and gas sector. 
First, Petrobras and Prominp develop a five-year personnel projection in specific skill areas, such as shipyard welding, pipefitting, and petroleum engineering. 
Prominp then identifies an education provider to co-develop an appropriate curriculum with selected companies and train 30,000 people annually. 
Petrobras pays 90% of the costs, and the government covers the rest. 
But such initiatives remain too few in number and too narrow in scope to resolve the global skills mismatch. 
Moreover, developing effective programs requires far more data about young people’s journey from education to employment than is currently available. 
Governments can play a critical role in collecting the data needed to determine which skills are in demand and what kind of training is effective. 
For example, Colombia’s Labor Observatory tracks students’ progress – including where they attended university, what they studied, when and where they were first employed, what their starting salaries were, and whether they were promoted – for up to five years after graduation. 
Prospective students can use this information to gain a far more accurate picture of their future prospects. 
Of course, young people must become proactive if such schemes are to be effective. 
Fewer than half of the young people that McKinsey surveyed claimed to have even basic knowledge of average wages or the prevalence of job opportunities in their chosen field. 
Little wonder, then, that half of them were not convinced that their post-secondary studies had improved their employment opportunities. 
Students must take ownership of their education. 
Before enrolling in an academic or vocational program, prospective students should research job-placement rates and learn how and how often the institution interacts with employers. 
Furthermore, they should gain a comprehensive understanding of how they can build and demonstrate applied skills in their chosen field. 
More generally, they should use existing labor-market data to make better-informed choices. 
If the world continues on its current course, labor-market imbalances will worsen significantly in the coming years. 
Indeed, the world faces a potential shortage of 30-40 million college-educated workers in 2020, and a potential surplus of 95 million low-skilled workers. 
The economic benefits of rebalancing the global labor market are compelling; the human costs of failing to do so are enormous. 
The imperative for businesses, educators, governments, and young people to take action could not be stronger. 

 

Central Bankers’ Shifting Goalposts 
BRUSSELS – The theme of this year’s meeting of the world’s central bankers in Jackson Hole, Wyoming, had little to do with monetary policy. 
“Fostering a Dynamic Global Economy” is, of course, an important topic. 
But it is telling that the European Central Bank chose, for its own annual gathering, a similar “non-monetary” topic (“Investment and Growth in Advanced Countries”). 
There is nothing wrong with central bankers considering challenges in areas like growth, trade, and investment. 
But central banks were made independent precisely because it was understood that they would be held accountable for achieving their own objective of maintaining price stability, regardless of the economy’s underlying growth rate. 
So why is it that central bankers would rather look at external issues than focus on their own area of responsibility? 
The answer, it seems, is that they cannot quite explain their current approach. 
Conditions today are very favorable for monetary policymaking, particularly for the ECB – as a brief look at history makes clear. 
Since the creation of the Economic and Monetary Union (EMU) in January 1999, the ECB has been solely responsible for determining the EMU’s monetary policy. 
(Although national currencies remained in circulation until 2002, exchange rates were “irrevocably” fixed from 1999.) 
The ECB’s job was hard from the beginning. 
After all, when the euro was born, global financial markets were in turmoil, owing to the Asian crisis of 1997 and the Russian default of 1998. 
The VIX index, which measures stock-market volatility, had hit 44% in August 1998, and during the euro’s first few years, it hovered around 25-30%, compared to around 12% today. 
While unemployment in the eurozone was declining, the rate was close to 10%, and it remained higher than today’s level, 9.3%, for all of 1999. 
From a monetary-policy perspective, there was also a need to cope with the deflationary legacy of financial crisis. 
Indeed, when the eurozone was established, prices were increasing by less than 2%, and headline inflation was stuck at around 1%. 
Those two key indicators of monetary policy are at almost exactly the same levels today, but financial markets are significantly more settled now than they were then. 
In 1999, despite slightly below-target inflation, high unemployment, and financial-market volatility, the ECB Governing Council did not even consider zero or negative interest rates, much less unconventional policy measures. 
Instead, its first action, in 1999, was to fix the main policy rate at 2%. 
Over the course of that year, the ECB did cut the benchmark rate by 50 basis points, to the then-unprecedented level of 1.5%. 
But it did so just to give the economy a chance to recover. 
After a few months, it reversed course, putting the year-end policy rate back at 2%. 
Over the next year, the rate was raised to 3.75%, even though inflation had not accelerated by more than a few dozen basis points. 
Today, the ECB is facing a much more comfortable situation. 
While inflation is undershooting the 2% target by a similar amount, the labor market appears to be in much better shape. 
But is it? 
It is widely assumed that a deep recession induces many of the unemployed to leave the labor market, because looking for a job seems useless. 
If many such discouraged workers have left the labor market, a recovery of the unemployment rate to pre-recession levels can be misleading. 
That is why the unemployment rate needs to be considered in conjunction with the labor-force participation rate. 
By that measure, the eurozone is actually doing much better today than in 1999. 
With the labor-force participation rate five percentage points higher that it was back then, it seems clear that fewer workers have been discouraged from job-seeking today than at the start of the EMU, and thus that there is less underused potential in the economy. 
Against this background, it is difficult to explain why the ECB continues to insist that unconventional monetary-policy measures – such as negative rates and continued bond purchases – are needed. 
The long-term inflation outlook might be somewhat more uncertain today. 
But can a few dozen basis points in (poorly measured) long-term inflation expectations justify the need for massive quantitative easing and a policy rate 250 points lower than it was at a time of weaker market fundamentals? 
This incongruity is not limited to Europe. 
In the United States, too, one finds a similar combination of inflation and unemployment today and two decades ago. 
In 1999, a core inflation rate of around 2%, combined with unemployment below 5%, justified a federal funds rate of 5% (and a “normal” balance sheet). 
Today, the Federal Reserve has kept its benchmark rate below 1.5% – 350 basis points lower than in 1999 – and has postponed any reduction in its bloated balance sheet. 
In Japan, inflation is now higher than it was in the wake of the Asian financial crisis; unemployment is at its lowest level in 50 years; and the labor-force participation rate continues to reach record highs. 
Yet Japan, like the US and Europe, continues to display a quixotic tendency to tilt at deflation windmills, with rock-bottom interest rates and purchases of massive amounts of government debt. 
Central bankers surely wish for a dynamic global economy. 
But that is not something they can influence much. 
Rather than discussing unrelated issues, they should be focused on explaining why their goalposts have shifted so much – and whether it is time to start moving them back. 

The Mystery of the Missing Inflation 
NEW YORK – Since the summer of 2016, the global economy has been in a period of moderate expansion, with the growth rate accelerating gradually. 
What has not picked up, at least in the advanced economies, is inflation. 
The question is why. 
In the United States, Europe, Japan, and other developed economies, the recent growth acceleration has been driven by an increase in aggregate demand, a result of continued expansionary monetary and fiscal policies, as well as higher business and consumer confidence. 
That confidence has been driven by a decline in financial and economic risk, together with the containment of geopolitical risks, which, as a result, have so far had little impact on economies and markets. 
Because stronger demand means less slack in product and labor markets, the recent growth acceleration in the advanced economies would be expected to bring with it a pickup in inflation. 
Yet core inflation has fallen in the US this year and remains stubbornly low in Europe and Japan. 
This creates a dilemma for major central banks – beginning with the US Federal Reserve and the European Central Bank – attempting to phase out unconventional monetary policies: they have secured higher growth, but are still not hitting their target of a 2% annual inflation rate. 
One possible explanation for the mysterious combination of stronger growth and low inflation is that, in addition to stronger aggregate demand, developed economies have been experiencing positive supply shocks. 
Such shocks may come in many forms. 
Globalization keeps cheap goods and services flowing from China and other emerging markets. 
Weaker unions and workers’ reduced bargaining power have flattened out the Phillips curve, with low structural unemployment producing little wage inflation. 
Oil and commodity prices are low or declining. 
And technological innovations, starting with a new Internet revolution, are reducing the costs of goods and services. 
Standard economic theory suggests that the correct monetary-policy response to such positive supply shocks depends on their persistence. 
If a shock is temporary, central banks should not react to it; they should normalize monetary policy, because eventually the shock will wear off naturally and, with tighter product and labor markets, inflation will rise. 
If, however, the shock is permanent, central banks should ease monetary conditions; otherwise, they will never be able to reach their inflation target. 
This is not news to central banks. 
The Fed has justified its decision to start normalizing rates, despite below-target core inflation, by arguing that the inflation-weakening supply-side shocks are temporary. 
Likewise, the ECB is preparing to taper its bond purchases in 2018, under the assumption that inflation will rise in due course. 
If policymakers are incorrect in assuming that the positive supply shocks holding down inflation are temporary, policy normalization may be the wrong approach, and unconventional policies should be sustained for longer. 
But it may also mean the opposite: if the shocks are permanent or more persistent than expected, normalization must be pursued even more quickly, because we have already reached a “new normal” for inflation. 
This is the view taken by the Bank for International Settlements, which argues that it is time to lower the inflation target from 2% to 0% – the rate that can now be expected, given permanent supply shocks. 
Trying to achieve 2% inflation in a context of such shocks, the BIS warns, would lead to excessively easy monetary policies, which would put upward pressure on prices of risk assets, and, ultimately, inflate dangerous bubbles. 
According to this logic, central banks should normalize policy sooner, and at a faster pace, to prevent another financial crisis. 
Most advanced-country central banks don’t agree with the BIS. 
They believe that, should asset-price inflation emerge, it can be contained with macroprudential credit policies, rather than monetary policy. 
Of course, advanced-country central banks hope such asset inflation won’t appear at all, because inflation is being suppressed by temporary supply shocks, and thus will increase as soon as product and labor markets tighten. 
But, faced with the possibility that today’s low inflation may be caused by permanent supply shocks, they are also unwilling to ease more now. 
So, even though central banks aren’t willing to give up on their formal 2% inflation target, they are willing to prolong the timeline for achieving it, as they have already done time and again, effectively conceding that inflation may stay low for longer. 
Otherwise, they would need to sustain for much longer their unconventional monetary policies, including quantitative easing and negative policy rates – an approach with which most central banks (with the possible exception of the Bank of Japan) are not comfortable. 
This central bank patience risks de-anchoring inflation expectations downward. 
But continuing for much longer with unconventional monetary policies also carries the risk of undesirable asset-price inflation, excessive credit growth, and bubbles. 
As long as uncertainty over the causes of low inflation remains, central banks will have to balance these competing risks. 

The Coming Financial Volatility 
LONDON – Bond investors are from Mars, and central bankers are from Venus – or so suggests the bond market’s negative reaction to signals that the exceptional monetary-policy accommodation of the last decade is winding down. 
Risky asset markets, however, are ignoring the red flags that the bond markets are waving. 
Are they right? 
Today, inflation remains low in much of the developed world. 
But previously dovish central banks in countries like the United States and the United Kingdom are itching to roll back the accommodative monetary policies that they have pursued since the eruption of the global financial crisis of 2008. 
Inflation-targeting central banks assume that, when inflation expectations are stable, changes in inflation stem from changes in the amount of slack in the economy. 
When slack diminishes – as is happening now, with unemployment now well below average levels over the business cycle (and at multi-decade lows in the US and the UK) – inflation will eventually rise. 
Already, these central banks have maintained loose monetary policies for much longer than in the past, in order to offset the headwinds to growth and inflation that the financial crisis produced. 
Yet they know from past asset bubbles that leaving monetary policy too loose for too long risks digging an ever deeper hole, with natural interest rates and potential growth ending up even lower in the next cycle. 
So are investors in risky asset markets right to be so complacent? 
For now, there can be no definitive answer. 
But the record from past periods of calm suggests that, when cross-asset market volatility is low, de-risking is prudent. 
To be sure, investors would have greater cause for concern if there were clearer signs of excessive risk-taking in financial markets and the real economy – the kind of excess that craves the monetary-policy punch. 
Because periods of asset-price euphoria – exemplified by the dotcom and real-estate bubbles of 2000-2008 – typically feature exceptionally loose monetary policy, central banks are now trying to extend the business cycle by removing monetary accommodation in a gradual and predictable manner. 
But asset-price bubbles also tend to feature new innovations that entice markets and central banks into believing that this time really is different. 
In the post-crisis context, the most likely justification for higher asset-price valuations is the global decline in the “price” of savings (the natural rate of interest), or R-star. 
If corporate earnings grow as a function of trend growth (the underlying rate of growth), but funding costs remain a function of an even lower R-star, then equity multiples should be higher than in the past on a structural basis, and credit spreads should generally be tighter. 
But, while this argument appears accurate today, investors have at least two reasons to be worried. 
First, to the extent that the gap between trend growth and natural rates drives up asset valuations, marginal changes in that gap should lead to changes in those valuations. 
If central banks were simply altering short-term interest rates – the traditional tool of monetary policy – as they have done in the past, this would be less of a concern. 
But, in the present cycle, central banks have become far more dependent on indirect tools – namely, long-term interest rates. 
The effects of such tools are shaped by investor expectations, and are thus prone to sudden and extreme shifts. 
In 2013, for example, the US Federal Reserve’s suggestion that it would begin to taper off one of its quantitative easing programs triggered a “taper tantrum,” with money pouring out of the bond market and bond yields rising substantially. 
The second key cause for concern is that higher valuations do not necessarily mean higher returns or better volatility-adjusted returns. 
Even if the positive gap between potential growth and natural interest rates justifies higher asset valuations, lower potential growth denotes lower returns across asset classes. 
As interest rates rise toward the natural rate, financial conditions should tighten, and risky asset valuations should fall. 
Central banks want this tightening to come about gradually, but the brief history of unconventional monetary policy suggests that asset re-pricing tends to occur abruptly – sometimes disruptively so. 
Why, then, don’t investors take advantage of extremely low volatility to buy cheap insurance? 
Markets do not explode every time volatility is low, but volatility has always been extremely low when markets have exploded. 
Insurance is needed most when imbalances become extreme. 
Equity and credit valuations are not cheap; but they are not egregiously expensive, either. 
Here on Earth, central bankers and bond investors have something in common: both worry that the current period of extremely low volatility is neither sustainable nor desirable. 
After all, lower combinations of fixed income, foreign exchange, and equity volatility have been seen three times before: just prior to the onset of the global financial crisis, in the month preceding the taper tantrum, and in the summer of 2014. 
In short, there is no doubt that volatility will eventually rise to normal levels. 
For investors today, the lesson is clear: reducing the scale of risk exposure is the right way forward. 

Money, Politics, and Opposition to Bush 
Money and its role in American politics is a subject of constant debate. 
Despite many attempts at reform, the funds spent on US national elections grow every time voters go to the polls. 
Many believe that essentially unlimited private money favors the Republicans. 
Billionaire and philanthropist George Soros, a proponent of reform, has been accused of hypocrisy because of his large financial contributions in connection with the upcoming presidential election. 
In this article, Soros explains his reasons, and his views on the subject of money in politics. 
I and a number of other wealthy Americans are contributing millions of dollars to grass-roots organizations engaged in the 2004 presidential election. 
We are deeply concerned with the direction in which the Bush administration is taking the United States and the world. 
If Americans reject the president's policies at the polls, America can write off the Bush Doctrine as a temporary aberration and resume its rightful place in the world. 
If American voters endorse those policies, the US shall have to live with the hostility of the world and endure a vicious cycle of escalating violence. 
In this effort, I have committed $10 million to 'America Coming Together, (ACT)' a grass-roots get-out-the-vote operation, and $2.5 million to the 'MoveOn.org Voter Fund,' a popular Internet advocacy group that is airing advertisements to highlight the administration's misdeeds. 
This is a pittance in comparison with money raised and spent by US conservative groups. 
Rather than a debate on the issues, there's been a lot of name-calling about my donations by such groups as the Republican National Committee and the National Rifle Association. 
In an attempt to taint the groups I support and intimidate other donors, they imply that my contributions are illegitimate or that I have somehow broken the law. 
In fact, I have scrupulously abided by both the letter and the spirit of the law. 
Both 'America Coming Together' and the 'MoveOn.org Voter Fund' are organizations that, according to a specific reference in the US tax code are entitled to receive unlimited contributions from individuals. 
Both groups are fully transparent about their motives and activities. 
Both file detailed and frequent reports with government regulators. 
America's most recent campaign finance law attempts to limit the influence that special interests can gain by financing candidates and so level the playing field between the Republican and Democratic parties. 
My contributions are made in that spirit. 
President Bush has a huge fundraising advantage because he has figured out a clever way to raise money. 
He relies on donors he calls "Pioneers," who collect $100,000 apiece in campaign contributions in increments that fall within the legal limit of $2,000 that any individual can give, and on those he calls "Rangers," who collect at least $200,000. 
Many of these Pioneers and Rangers are corporate officials who are well situated to raise funds from their business associates, bundle them together and pass them along with tracking numbers to ensure proper "credit" to each individual donor of $2,000. 
Thus they are buying the same level of access and influence for their corporate interests that they previously obtained with their own and corporate funds. 
With the help of these Pioneers and Rangers, President Bush is on track to collect $200 million. 
To counter the fundraising advantage obtained by this strategy, I have contributed to independent organizations that by law are forbidden to coordinate their activities with the political parties or candidates. 
That law minimizes or eliminates the ability to purchase influence in exchange for my contribution. 
Moreover, I don't seek such influence. 
My contributions are made in what I believe to be the common interest. 
ACT is working to register voters, and MoveOn is getting more people engaged in the national debate over Bush's policies. 
I recognize that the system is imperfect, and I wish there were a different way to level the playing field. 
Making contributions to ACT and the MoveOn.org Voter Fund is the best approach I have found. 
I have been an advocate of campaign finance reform for almost a decade, including the legal defense of the current legislation. 
I recognize that every new regulation has unintended adverse consequences, but this does not mean reform should be abandoned. 
Clearly, the rules need to be updated in the light of the 2004 experience. 
Some good proposals have already surfaced, including one from the major sponsors of the current campaign finance legislation. 
This bill should be supported. 
Among other measures, it calls for an increase in the federal match for small contributions and would raise the spending limit for candidates who accept public funding to $75 million -- changes that would reduce the bias toward big-money donors. 
Free airtime for candidates is also important. 
This would reduce the cost of campaigns and the distorting effect of commercials. 
Full disclosure and transparency are clearly beneficial. 
It is important that people know where financial support is coming from. 
I have been open about my contributions, and I welcome the debate they have sparked. 
In the meantime, as the debate continues, my contributions help to ensure that the money spent by those trying to reelect President Bush doesn't overwhelm the process. 

Money Can't Buy Reform 
MOSCOW: A big squeeze is on in Moscow, as President Putin seeks to drill the country's wayward regions into line with Kremlin policies. 
Soon a squeeze of a different type will be put on the West, as the Kremlin bids for new international loans. 
With the IMF and Russia engaged in talks over such loans, and as the summit of the Group of Eight (G8) big industrial countries approaches, the time is ripe to assess a decade of economic cooperation between Russia and the West. 
The verdict may determine the success of Vladimir Putin's presidency. 
Until recently, flashy aid packages for Russia were fashionable. 
For seven years the G8 and the IMF shipped billions of dollars to Russia and Western banks surged into Moscow. 
All of them made every mistake imaginable, then wrote off or reduced the debts owed to them. 
Russian and foreign investors alike were duped by the Kremlin's debt pyramid schemes. 
The only concrete things to result from the vast inflow of money are to be found in Russian-owned villas on the French Riviera, a money-laundering scandal at the Bank of New York, and the secret Swiss accounts of Kremlin officials. 
Ten years and $20 billion dollars of official debt later, indeed, Russia's economy remains a shambles. 
Faith in the ruble is negligible: 70% of business transactions are conducted in dollars. 
Indeed, Russia's dollar money supply is much larger in value than its ruble money supply. 
It is as if Russia is a rogue subsidiary of America's monetary system. 
For a credible banking system remains the stuff of dreams; external debt and corruption are as high as ever, and capital flight continues unabated. 
And I have not even mentioned such minor things as tax reform, pension reform, and privatizing land ownership. 
Despite all this, it is boasted that Russia's economy is rebounding. 
But no economics diploma is needed to understand that today's upturn results mostly from a fourfold devaluation of the ruble and big increases in prices for commodities such as oil. 
Sadly, history suggests that when oil prices rise everybody starts lending Russia money again, bringing reform to a standstill. 
Nobody in Russia - aside from a few corrupt officials - is grateful for this aid. 
Antipathy toward the West, especially among young people, deepened as corruption spread. 
Everyone notices that the capital which fled Russia ended up in Western banks; no one hears of money being hidden in North Korea. 
A new president, however, means a new beginning, the right time to sort out the rot. 
I am not sure that President Putin will assemble a talented government. 
His early appointments are no worse, and little different, indeed, than Yeltsin's final cabinet. 
Putin's administration may lack informed economic leadership and the resolve needed to get Russia on track. 
Still, President Putin has a unique chance to reform because of his reputation for competence and his support in the Duma and among regional governors. 
Change, however, cannot be made in Moscow alone. 
Over the years, Western aid came with a double standard. 
Early on, Western and IMF officials overlooked fundamental economic axioms they would never neglect at home. They turned a blind eye when corrupt loans-for-shares deals or rigged privatizations appeared. 
Such continuous and willful blindness helped corruption to thrive and a tiny group of oligarchs gain control of the economy. 
Corruption will abate, and the rule of law take hold, only when the West holds Russia to global standards. 
This is why the attitudes of the IMF and the G8 matter. 
What they must do is simple: 
- make Russia play by the rules. 
Don't make exceptions for political reasons. 
Propose only policies Western governments would follow themselves. 
No double standards. 
Let there be less diplomatic doublespeak and more hardheaded finance ministry number crunching in Western policy toward Russia; 
- concentrate on the private sector. 
Most financial and other assistance to the Kremlin failed abysmally. 
A few billion dollars here or there is no big deal for G8 countries, but it matters to Russia because the corruptive influence is enormous. 
Dealing with Russia's infant private sector may be risky, but it is a matter of assessing the professionalism of credit officers rather than testing the honesty of politicians; 
- concentrate on people. 
Imagine if, after 1993, $20 billion of Western aid had been spent sending 150,000 Russian students abroad to university. 
They would have transformed Russia more than all the aid programs put together. 
Some would even have been grateful. 
In July, President Putin goes to the G8 summit in Okinawa to "make his ones" in the world of summit diplomacy. 
The new German boss of the IMF is, so far, making the right noises in negotiations with the Kremlin. 
The time seems right to leave behind the scandals and stupidities of the past. 
For the West cannot buy economic reform, and Russia cannot import reformers. Russians must do the dirty work themselves. 
Russia must demand that it not be mocked by patronizing Western applause for its parody of reform. 
It should not be given new loans and debt reductions if it fails to implement sensible programs. 
Psychologists call such a stance tough love. 
Only when the West adopts a similar posture will Russia stop being a special case, baffling both experts as well as itself. 
The Beatles used to sing that "Money can't buy love." 
It can't buy effective reform, either. 

Money for Nothing 
COPENHAGEN – When it comes to global warming, we have plenty of hot rhetoric but very little cool reason. 
This matters immensely, because the Kyoto Protocol is already among the most expensive global public policies ever enacted, and the follow-up in Copenhagen in late 2009 promises to break all records. 
We better get it right, but right now we’re more likely to pay for virtually nothing. 
A good example is the European Union’s newly instituted policy of cutting CO2 emissions by 20% by 2020. 
Of course, it is always easier to promise than to deliver – a concern that is especially relevant in the EU. 
Yet, even if the promise is kept, will the benefit outweigh the cost? 
Curiously, but not surprisingly, this is not discussed very much. 
A 20% reduction in the EU’s CO2 emissions, vigorously enforced throughout this century, would merely postpone temperature increases due to global warming by two years at the end of the century, from 2100 to 2102 – a negligible change. 
Yet the cost would be anything but negligible. 
The EU’s own estimate is about €60 billion annually , which is almost certainly a vast underestimate (its previous estimate was almost twice as much), since it requires the EU to make the reductions in the smartest way possible. 
However, the EU doesn’t just want to cut emissions in the smartest possible way, but also to increase the share of renewable energy in the Union by 20% by 2020. 
This increase has no separate climate effect, since we’ve already promised to cut emissions by 20%. 
However, it does manage to make a poor policy decision dramatically worse. 
The debate in my native Denmark is instructive, as the relevant government ministries have outlined what this decision will end up costing here, which in turn suggests the total cost for the EU. 
The annual cost of an increase in renewable energy of less than 20% (18 percentage points) – and five years later, by 2025 – will be more than €2.5 billion. 
And the benefit? 
If Denmark sticks to this decision throughout the rest of this century, it will spend more than €200 billion to postpone global warming by five days. 
Is that a sensible decision? 
The total advantage to the world (measured according to all relevant criteria, such as lives saved, agricultural production increased, wetlands preserved, etc.) from Denmark’s policy would be about €11 million. 
Or, for every euro spent, we would do a bit less than half a cent worth of good. 
To put this in perspective, €2.5 billion could double the number of hospitals in Denmark. 
And, if we really wanted to benefit the world, €2 billion could halve the number of malaria infections, saving 850 million lives this century. 
People in the affected countries would live much better and become more productive, benefiting their children and grandchildren in 2100. 
The last €500 million could fund an eight-fold increase in research and development aimed at improving CO2-efficient energy technologies, enabling everyone in the long run to reduce emissions much more dramatically, and at much lower cost. 
So, should we halve malaria while dramatically increasing the possibility of solving global warming in the medium term? 
Or should we make a pledge that does 2,000 times less good and barely alters the global climate? 
It gets worse. 
The €2.5 billion estimate assumes that politicians pick the cheapest renewable energy alternative. 
Yet Danish politicians seem intent on choosing much more expensive solutions, implying a two-fold (or more) increase in cost. 
The opposition – trying to trump the government – insists on an almost 40% increase in renewable energy, at a cost of almost €10 billion annually, with every euro doing just €0.025 worth of good for the world. 
Using the Danish figures to calculate EU-wide costs, the total is likely to be more than €150 billion annually, with every euro doing just half a cent worth of good. 
And this assumes that politicians pick the best options, and that oppositions don’t try to out-do their governments. 
The same money could triple the global development aid budget. 
It could easily provide clean drinking water, sanitation, education, and health care to every human being on the planet, while increasing CO2-reducing R&D ten-fold. 
The EU’s goal of a 20% reduction by 2020 is an incredibly expensive way to signal good intentions. 
But wouldn’t we rather do real good? 

The People’s Climate 
BERLIN – The People’s Climate March on September 21 was a watershed for the emerging global climate movement, with more than 400,000 people taking to the streets of New York City. 
But New York was only the tip of an iceberg. 
People in 166 countries, from Argentina to Australia, participated in more than 2,800 events and rallies. 
Two million activists demanded through an online petition that governments shift to 100% clean energy. 
For the first time since the fated 2009 Copenhagen Climate Change Conference, virtual climate activism moved into the real world. 
Why? 
Citizens worry about the impact of climate change, and they know that fossil fuels are the problem. 
They have come to recognize that powerful interests are blocking the necessary shift to clean energy, and they simply no longer trust that their governments are doing enough to stand up for the future of the planet. 
This was reflected not only in the record number of people who participated, but also in the diversity of the marchers – urban activists, indigenous groups, adherents of different faiths and political viewpoints, and, most conspicuously, old and young. 
People today draw natural connections between climate change and daily life. 
Teachers stood for schools that run on renewable energy, women supported healthier agriculture, grandmothers demanded clean air for their grandchildren, unions want a green job transition, and city mayors want investments in energy-efficient buildings. 
Five years after the Copenhagen conference failed, governments finally need to act responsibly. 
This week’s climate summit, hosted by United Nations Secretary-General Ban Ki-moon, was aimed at increasing the momentum for action by gathering government, business, and civil-society leaders. 
The aim was to create favorable conditions for governments to negotiate a climate deal in Paris in 2015. And, though the UN cannot enforce the promises that leaders made, the summit catalyzed a popular demonstration that has moved the political spotlight back to the climate-change challenge, where it is likely to remain until governments take credible action. 
What has changed since 2009 is the degree of concern about the impact of climate change. 
In the interim, New Yorkers faced Hurricane Sandy, while Typhoon Haiyan devastated the Philippines. 
Climate records continue to be broken worldwide. 
In 2014 alone, ordinary people suffered from heat waves in Australia, floods in Pakistan, and droughts in Central America, while the collapse of the West Antarctic ice sheet has been shown to be irreversible. 
As a result, the global debate has shifted from the costs of action to the costs of inaction. 
And, though the costs of climate damage are staggering, scientific research indicates that mitigation costs are manageable. 
That has become apparent in the growth of renewable energy generation. 
People want clean energy, the technologies are available and profitable, and, with millions of people lacking access to reliable power, the emergence of renewable sources is a lifesaver. 
Global wind and solar energy capacity has tripled since 2009, and renewable energy now provides more than one-fifth of the world’s electricity supply. 
Indeed, every second megawatt of new electricity that is added globally is green, implying that the share of renewable energy could reach 50% in 2030. 
Clean energy is a game changer, because it puts power over power back into the hands of citizens, posing a direct challenge to the fossil-fuel industry. 
The obvious next step in the fight against climate change is to phase out all subsidies for that industry. 
This week’s UN climate summit may not affect the course of negotiations for an international climate agreement. 
But it has put the focus back where it should be: real people demanding real change from their governments. 
Citizens have shown that they are committed and will speak up. 
The People’s Climate March was only the beginning. 


Should China Deleverage? 
BEIJING – China’s mounting debt problem recently moved into the spotlight when Moody’s downgraded the country’s sovereign rating. 
But was the downgrade really warranted? 
Though China’s overall debt-to-GDP ratio is not an outlier among emerging-market economies, and its levels of household and government debt are moderate, its corporate debt-to-GDP ratio, at 170%, is the highest in the world, twice as large as that of the United States. 
China’s corporate leverage (debt-to-equity) ratio is also very high, and rising. 
A high and rising debt-to-GDP ratio, which goes hand in hand with a high and rising leverage ratio, can lead to financial crisis through three channels. 
The first is the deterioration of the quality of financial institutions’ assets, and the decline in the price of those assets. 
With institutions forced by mark-to-market accounting to write off an equal amount of equity, the leverage ratio rises, leading to a further deterioration in asset quality and decline in asset prices. 
The second channel is refusal by investors, concerned about the rising leverage ratio, to roll over short-term debt. 
This causes the money market to seize up, forcing banks and other financial institutions to tighten credit and raise interest rates, thereby further weakening borrowers’ debt-service capacity. 
Defaults proliferate and the volume of nonperforming loans rises. 
The third way a high debt-to-GDP ratio can lead to crisis is by driving banks and nonbank financial institutions, unable to secure sufficient capital, into bankruptcy. 
In this case, the public could panic and withdraw their cash, fueling a run on deposits that could lead to the collapse of the entire financial system. 
But none of these scenarios seems like a real risk for China, at least not in the foreseeable future. 
China is, after all, a highly frugal country, with gross savings totaling 48% of GDP. 
As a result, loanable funds are abundant, and funding costs can be kept low. 
Therefore, China has more scope than other countries to maintain a high debt-to-GDP ratio. 
Moreover, because China’s debt consists overwhelmingly of loans by state-owned banks to state-owned enterprises, depositors and investors feel confident (rightly or wrongly) that their assets carry an implicit government guarantee. 
And not only is the government’s fiscal position relatively strong; it also has $3 trillion in foreign-exchange reserves – a sum that far exceeds China’s overseas debts. 
China’s government could, if it so chose, bail out banks in trouble, preventing contagious bankruptcies. 
Mitigating the debt risk further, China’s capital account remains largely closed, enabling the government to block capital flight and gain sufficient time to deal with unexpected financial events. 
It helps, too, that the People’s Bank of China stands ready to inject liquidity into the money market whenever necessary. 
None of this is to say that China’s high level of corporate debt is not a cause for concern. 
But it does imply that deleveraging may not be as urgent as many seem to think, especially at a time when China has another, more pressing policy imperative to pursue – one that could be undermined by rapid deleveraging. 
For years, China has been in the grips of overcapacity-driven deflation. 
The producer-price index (PPI) has declined in year-on-year terms for 54 consecutive months, while the annual rise in the consumer-price index (CPI) is hovering around 1.5%. 
In October 2016, PPI growth turned positive, suggesting that the debt-deflationary spiral may have been broken. 
But, after a few good months, the sequential growth rate of PPI has turned negative again, suggesting that now is no time to test fate on deflation. 
This is all the more true at a time when the government is clamping down on runaway real-estate prices – an effort that is likely to deter investment, thereby weakening economic growth in the next six months. 
In this context, a wrong move could tip China back into a debt-deflationary spiral – which would pose a more acute threat to China’s economic stability than the risks stemming from the debt-to-GDP ratio. 
Still, Moody’s points out, China’s debt-to-GDP ratio is a serious problem. 
Moreover, to justify its downgrade, it argues that the government’s efforts to maintain robust growth will result in sustained policy stimulus, which will contribute to even higher debt throughout the economy. 
But this reading fails to distinguish between the long-term trend of the debt-to-GDP ratio when the economy grows at its potential rate and the real-time debt-to-GDP ratio when the economy grows at a below-potential rate. 
When an economy is growing at roughly its potential rate, as China’s is today, it makes no sense to lower the growth target below that rate. 
To be sure, China does have reason to implement economic stimulus. 
The overcapacity that, until recently, dominated the Chinese economy was rooted partly in a lack of aggregate demand (and partly in wasteful overinvestment). 
In an ideal world, China’s government could respond by stimulating household consumption. 
But, in the absence of further reforms in areas like social security, growth in consumer spending is bound to be slow. 
In the meantime, the government must rely on an expansionary fiscal policy to encourage infrastructure investment, even if it means raising the debt-to-GDP ratio. 
Such an initiative should also entail improved financing opportunities – including lower borrowing costs – for small and medium-size enterprises. 
Meanwhile, the rise in the corporate debt-to-GDP ratio could be stemmed by efforts to improve capital efficiency, boost enterprise profitability, narrow the difference between credit flows and credit-financed investment, increase the share of equity finance, and align the real interest rate with the natural interest rate. 
There is no doubt that China’s debts – especially its corporate debts – are a serious problem, and must be curbed. 
But China must balance that imperative with the more urgent need to maintain a growth rate more or less in line with potential, and prevent the economy from being tipped back into a debt-deflationary spiral. 
So far, China has managed to juggle these two imperatives. 
One hopes that it has time to address the challenges before it drops a ball. 

Moon’s South Korean Ostpolitik 
SEOUL – Moon Jae-in of the Democratic Party of Korea has just been elected South Korea’s new president. 
This is the second conservative-to-liberal transition of power in the country’s democratic history. 
It began unexpectedly last October, with the eruption of a corruption scandal involving then-President Park Geun-hye, culminating in her impeachment and removal from office earlier this year. 
Although Park’s ouster was painful, it also demonstrated the resilience of South Korea’s democracy. 
Moon will take office at a time of heightened tensions with North Korea. 
To understand what kind of policy he will pursue requires familiarity with liberal foreign-policy thinking in South Korea since the 1998-2003 presidency of Kim Dae-jung. 
Kim had watched the Cold War come to a peaceful end in Europe, and he wanted to bring his own country’s ongoing confrontation with the communist North to a similarly nonviolent conclusion. 
So he pursued direct engagement with North Korea, and his “Sunshine Policy” was taken up by his successor, Roh Moo-hyun. 
Before he died in 2009, Roh (under whom I served as Foreign Minister) was a political mentor and close friend to Moon. 
German reunification, preceded by West Germany’s policy of direct engagement, or Ostpolitik, with East Germany in the last decades of the Cold War, was a source of profound inspiration for Kim. 
Former German Chancellor Willy Brandt began pursuing Ostpolitik in earnest in the 1970s, and Helmut Kohl maintained the policy after he came to power in 1982. 
Although Ostpolitik could not change the East German regime’s nature, it did make East Germany heavily dependent on West Germany, and gave Kohl significant political leverage during the reunification process. 
Of course, most Korean liberals recognize that North Korea is not East Germany, which never threatened West Germany or the United States with nuclear weapons. 
But Moon and his supporters nonetheless find it regrettable that conservative South Korean presidents since Lee Myung-bak did not maintain the Sunshine Policy, as Kohl had done with Ostpolitik. 
If they had, North Korea might have become more dependent on South Korea than on China, in which case US and South Korean leaders would not have to plead constantly with China to rein in the North Korean regime. 
South Korea’s liberals also recognize that the strategic situation has changed significantly since the Kim and early Roh eras, when North Korea had not yet become a de facto nuclear state. 
To realize his liberal dream of national unification, Moon will have to confront a much larger challenge than anything his predecessors faced. 
Moon will still pursue his dream, but he will do so prudently, and with an eye toward geopolitical realities. 
In a recent interview with the Washington Post, he made it clear that he sees South Korea’s alliance with the US as the bedrock of its diplomacy, and promised not to begin talks with North Korea without first consulting the US. 
But, beyond formal talks, he could also try to engage with the North by reviving inter-Korean cooperation on health or environmental issues, which fall outside the scope of international sanctions. 
Over the last nine years, conservative presidents – especially Park – cut all contacts with North Korea to try to push it toward denuclearization. 
South Korean liberals argue that this policy compromised the national goal of peaceful reunification, by turning it into an empty slogan. 
They believe that maintaining inter-Korean relations will lay the groundwork for reunifying the Peninsula, just as Ostpolitik did in Germany. 
Thus, Moon will most likely pursue a two-pronged strategy that pairs denuclearization with engagement and preparations for eventual reunification. 
Moon has acknowledged that strong sanctions will be necessary to bring North Korea to the negotiating table. 
So his government will have no fundamental disagreement with the US, especially now that Secretary of State Rex Tillerson has said that the US is not seeking regime change in North Korea. 
Moon will also have more flexibility than his conservative predecessors to accommodate a US-led Iran-style deal aimed at freezing North Korea’s nuclear and missile activities. 
But if US President Donald Trump tries to make South Korea pay for America’s recently deployed Terminal High Altitude Area Defense (THAAD) anti-missile system, Moon will have to refuse. 
Otherwise, he would face a serious domestic backlash from both the left and the right. 
A final but crucial issue is China, with which Korea has had a bitter history. 
China has intervened whenever it has viewed the Korean Peninsula as a potential beachhead for an invading maritime power. 
China intervened in 1592, when Japan prepared to attack the Ming Dynasty by first subduing Chosŏn Dynasty Korea. 
It happened again during the Sino-Japanese War of 1894, and then during the Korean War in the early 1950’s. 
Despite this history, Korean liberals recognize that Chinese cooperation will be necessary for achieving reunification. 
Accordingly, Moon’s government will have to maintain a rock-solid alliance with the US while trying to improve relations with China, which have cooled since South Korea decided to host the THAAD system. 
Moon might try to soothe Chinese concerns by suggesting that the system is temporary, and could be removed, pending North Korean denuclearization. 
Those who predict that a Moon presidency will disrupt South Korean relations with the US and Japan are surely mistaken. 
After all, it was during the liberal Roh presidency that South Korea concluded the South Korea-US Free Trade Agreement, allowed for US troops to be redeployed within its borders, and dispatched its own troops to fight alongside the US in Iraq. 
Moon will affirm that legacy and attempt to revive another, an updated and renewed version of the Sunshine Policy, which embodies South Korea’s most fundamental long-term aspiration. 

Can J-nomics Save South Korea’s Economy? 
SEOUL – South Korea’s new president, Moon Jae-in, a former human-rights lawyer representing the center-left Democratic Party, has his work cut out for him. 
Though North Korea’s increasingly provocative behavior will likely continue to dominate headlines, the success of Moon’s presidency will hinge largely upon his economic policies. 
The good news for Moon is that both the global and South Korean economies are showing signs of recovery. 
Korean exports, led by semiconductors and petrochemicals, have recorded positive growth for sixth consecutive months. 
In April, total exports were 24% higher than a year earlier. 
The main stock price index has returned to its all-time high. 
Of course, North Korea’s behavior, beyond its obvious security implications, has an impact on South Korea’s economy. 
But an easing of regional tensions – a process that could begin in meetings with US President Donald Trump and Chinese President Xi Jinping and possibly progress to the resumption of talks with North Korea – would lead to recovery in consumer and business sentiment. 
That recovery, however, would be constrained by the deeply embedded structural problems that continue to beset South Korea’s economy. 
Far from fostering new and innovative enterprises, the country’s economic system remains dominated by giant politically connected, family-owned conglomerates, the chaebol. 
Stagnant productivity in the services sector has hampered overall productivity growth, while the skills mismatch has worsened, with the education system failing to prepare students for a rapidly evolving labor market. 
So far, government policies have done little to increase growth potential and jobs. 
Policymakers have also failed to boost the efficiency of the public and financial sectors, or to address mounting demographic pressures caused by low birth rates and rapid population aging. 
Moon hopes to change that with a three-prong strategy he calls “J-nomics.” 
The first prong is public-sector job creation. 
Specifically, in order to lower the youth unemployment rate, which currently stands at 11.2%, Moon pledges to create 810,000 jobs in the public sector – including 174,000 civil-service positions in national security and public safety and 340,000 in social services – over the next five years. 
He has also promised to convert 300,000 irregular public-sector workers into permanent employees. 
The second prong of J-nomics is an expansion of the social safety net for Koreans of all ages. 
Moon has pledged to provide monthly subsidies worth 100,000 won ($88) to parents with a child up to five years of age. 
Unemployed young people (aged 18-34) would receive 300,000 won per month, as would anyone 65 or older who is in the bottom 70% of the income distribution. 
Moon also plans to expand state-run daycare centers and extend parental leave, thereby easing the burden of childcare on families. 
The third prong of J-nomics is chaebol reform, aimed at limiting the conglomerates’ dominance. 
To this end, Moon has vowed to separate politics from business, including by ending the long-standing practice of granting government pardons to convicted chaebol bosses – a move that most immediately affects Samsung Group Vice Chairman Lee Jae-yong, who is currently jailed and standing trial for bribery and embezzlement. 
Moon also promises stricter regulations to prevent chaebols from entering financial businesses and recklessly expanding into sectors better suited to smaller firms. 
And, in order to give minor shareholders more influence, he plans to introduce a cumulative voting system for electing companies’ boards of directors. 
But, after nine years of conservative rule, Moon will not be able simply to swoop in and implement his agenda. 
In fact, with his Democratic Party holding only 40% of the 299 seats in the National Assembly, he will have to win support from centrist parties and even the conservative opposition. 
Moreover, he will need broader public backing. 
To succeed, Moon will have to reexamine carefully the effectiveness and feasibility of his campaign promises, identify the most promising measures, and avoid the most obvious pitfalls. 
When it comes to public-sector job creation, for example, the main problem to consider is the long-term financial burden that such large-scale hiring could create. 
A better approach might be for the government to create fewer jobs in the public sector and work harder to encourage private companies to hire more young people, such as by providing financial incentives. 
Moon’s government can also contribute to private-sector job creation by easing regulations, helping small- and medium-size businesses to thrive, and ensuring a flexible labor market, in which full-time employment is not excessively protected and performance-based wage increases are applied. 
Yet youth unemployment is far from South Korea’s biggest employment-related challenge. 
After all, in just six years, the number of young people (aged 20-29) in South Korea is expected to decline sharply, by as much as 390,000. 
The bigger challenge is the labor shortage that will emerge when the “baby boomers” retire in a few years. 
To overcome it, South Korea will need a comprehensive plan for the continued development of its human resources, including expanded vocational education and training for young job seekers. 
It will also need a strategy for raising the birth rate, including by promoting more flexible working environments, affordable and quality childcare, and paid parental leave. 
As for the expansion of the social safety net, J-nomics is not very clear on how to finance it. 
The government plans to raise the top rate of personal income tax; reduce most deductions, especially for large enterprises; and perhaps even increase the corporate-tax rate. 
But such tax reforms are likely to face strong resistance: about half of all South Korean households and businesses paid no income or corporate tax in 2014. 
Finally, there are real doubts about how far Moon can go on chaebol reform. 
Previous administrations have failed to reform chaebol ownership structures or curb their market power. 
With his party holding far less than a majority in the National Assembly, Moon may have a hard time breaking the mold. 
After the political scandal that led to the impeachment of Moon’s predecessor, there is growing public momentum for reform in South Korea. 
One hopes that Moon makes the most of it. 

Moral Dilemmas for Fannie and Freddie 
NEW HAVEN – The United States government’s takeover of mortgage giants Fannie Mae and Freddie Mac constitutes a huge bailout of these institutions’ creditors, whose losses have ballooned as house prices continue to plummet. 
With the government now fully guaranteeing Fannie’s and Freddie’s debts, American taxpayers will have to pay for everything not covered by their creditors’ inadequate capital. 
Why is this bailout happening in the world’s most avowedly capitalist country? 
Don’t venerable capitalist principles imply that anyone who believed in the real estate bubble and who invested in Fannie and Freddie must accept their losses? 
Is it fair that innocent taxpayers must now pay for their mistakes? 
The answers to such questions would be obvious if the moral issues in the current financial crisis were clear-cut. 
But they are not. 
Most importantly, it is not clear that the bailout will actually impose any net costs on US taxpayers, since it may prevent further systemic effects that bring down the financial sector and, with it, the world economy. 
Just because systemic effects are difficult to quantify does not mean that they are not real. 
The bonds issued by Fannie and Freddie were widely thought to carry an implicit US government guarantee. 
Even though there was no official guarantee, the US government’s failure to come to the rescue could destroy confidence in government debt, and, by association, other financial paper as well. 
The issues go far beyond the US economy. 
The global economy has been driven in recent years by remarkable speculative asset booms and busts, which bring into the equation questions of confidence and trust, as well as fairness. 
Similar housing booms in many other countries are now ending, and they may face the pain – and the moral dilemmas – that the US economy is now experiencing. 
Moreover, housing markets are not the only issue. 
So are stock markets. 
The Shanghai Composite in China rose by a factor of five in real terms from 2005 to 2007, and then lost two-thirds of its real value. 
The Sensex in India rose by a factor of five in real terms over 2003 to 2007, and has since lost a third of its value. 
Similar stock market booms and busts have occurred in many other countries. 
While they lasted, the booms that preceded these busts caused these economies to overheat. 
Now that the booms have been reversed, a decline in confidence could engulf the world economy, throwing it into recession. 
To prevent that, some selective bailouts will likely be needed, not to support the market but to deal with injustices. 
There is no accurate science of confidence, no way of knowing how people will react to a failure to help when markets collapse. 
People’s reactions to these events depend on their emotions and their sense of justice. 
The booms and busts have caused great redistributions of wealth. 
People who bought into the stock market or housing market did either well or poorly, depending on their timing. 
People will judge the fairness of these outcomes in terms of what they were told, and what kinds of implicit promises they inferred. 
What were people in all these countries told about the markets in which they invested? 
Was it all really truthful? 
Unfortunately, there is no way to find out. 
Policymakers can provide only general responses, not deal with all cases individually. 
We do know that recent economic growth in many countries has been spectacular. 
But were investments in their markets oversold? 
Did cynical salespeople in these and other countries lead people to believe that the boom times would produce wealth for everyone? 
To be sure, while there may have been much “cheap talk” – general advice with disclaimers – most of the losers in this game are not starving. 
But we cannot blithely conclude that all the losses should be allowed to stand in full force. 
The gnawing problem is one of “good faith.” 
Economies prosper only on the perception that “good faith” exists. 
The current situation, in which speculative booms have driven the world economy – and, having collapsed, are now driving it into recession – suggests that there may have been a lot of bad faith by people promoting certain investments. 
Consider investors in Fannie and Freddie bonds. 
While the US government never officially promised to bail them out, it did create a special agency, the Office of Federal Housing Enterprise Oversight, which was to assess their strength in an annual report. 
But this agency never even acknowledged that there was a housing bubble. 
Government leaders gave no warnings. 
So can we really say that investors must suffer the full consequences of any losses? 
How can this be fair? 
The world is discovering capitalism and its power to transform economies. 
But capitalism relies on good faith. 
A perception of unfair treatment can be deadly to economic growth, because it means that people will lose trust in businesses, and hence be less willing to offer to them their precious capital and labor. 
Is that outcome morally superior to a bailout? 

What Drives Moral Progress? 
DAVOS – What would happen if the ancient Greek philosopher Plato partook in contemporary dialogues about the types of questions that he first posed, and that continue to vex us? 
In my view, he would have many new questions – including about our increasingly psychological approach to philosophical discussion. 
Plato would probably head to a leading global technology hub: Google’s California headquarters. 
There, he might fall into a discussion with a software engineer about, say, whether ethical questions can be answered through crowdsourcing. 
He would probably love the idea of the information cloud – so abstract, so Platonic – and find Google to be the ideal tool to catch up on the vast scientific and technical advances of the last couple of millennia. 
But Plato would probably be most amazed by the world’s moral progress. 
After all, he believed that being a “philosopher” meant assuming the responsibilities of moral reformer. 
Yet, though morality was always at the center of his thinking, many of the moral truths that we now take for granted never occurred to him. 
For example, though Plato opposed the enslavement of Greeks, he – like every other ancient Greek – condoned the enslavement of “barbarians” (non-Greeks). 
Today, by contrast, even an emphatically non-philosophical person – say, Plato’s “media escort” – could easily explain why slavery is wrong: “A person is a person. 
Everybody’s life is just as important as anybody else’s.” 
As obvious as this conclusion might seem, the world has taken millennia to reach it – and, in many ways, has yet to accept it fully. 
Nonetheless, we can now collectively look back at our slave-owning, wife-beating, child-brutalizing, heretic-burning, colonizing forebears and wonder how even the most profoundly moral among them failed to see that they should not behave that way. 
What drove this progress? 
Plato held that moral progress is essentially an intellectual process, driven by reasoned arguments – a stance that many of the most influential moral philosophers, from Baruch Spinoza and Immanuel Kant to John Rawls and Peter Singer, have supported. 
Yet many other philosophers have rejected the autocracy of reason in humans’ moral lives, agreeing with David Hume’s assertion that “reason, in itself, is perfectly inert.” 
They believe that no purely abstract argument can get us to do anything that we do not want to do. 
If a reasoned argument cannot move us, what can? 
One simple answer stands out: emotions. 
Moral emotions, notably empathy, can accomplish what no bloodless ratiocination can: they make us feel – and thus want to account for – the experience of others. 
The more we feel, the more we care – and the more moral our motivations. 
In short, a stronger sense of empathy spurs moral progress. 
With this shift in focus from reason to emotion, moral philosophy is increasingly giving way to moral psychology, which, by incorporating ideas from evolutionary biology, has more and more to say about human nature and our moral lives. 
It all comes down to natural selection. 
Moral emotions like empathy are as much an outcome of the blind workings of adaptation as our upright stance and opposable thumbs – traits that are entrenched in a species through the proliferation of particular genes. 
We humans are most strongly empathetic toward those who share the greatest proportion of our genes: our children, our parents, our siblings, and, by lessening gradations, our extended family and tribe. 
Our empathy toward them might even drive us to make sacrifices that jeopardize our individual survival, but that makes perfect sense in terms of preserving our shared genes. 
Of course, empathy is not the only part of our inherited nature that shapes our behavior toward others. 
In fact, there is also a compelling evolutionary explanation for xenophobia. 
Humans evolved from primates who formed communities that worked together to survive. 
Given the obvious benefits of having access to more territory in which to gather and hunt, outsiders – particularly those who bear characteristics that mark them as genetically distant – were treated as foes. 
In this sense, the notion of “us versus them” has been fundamental to human evolution, and it continues to shape our interactions. 
Just as both empathy and xenophobia can be explained by natural selection, both can be modulated by cultural factors. 
But do they have equal claims to being moral emotions? 
Within the strict domain of moral psychology, they do. 
After all, a psychological telling of the story of our moral development provides no basis for encouraging us to dampen one natural inclination and nurture another. 
But moral psychology does not have to tell the whole story. 
There is no reason why we cannot have moral psychology and moral philosophy: moral psychology to explain why moral progress is both possible and painfully slow, and moral philosophy to clarify what constitutes moral progress and to push us in the appropriate direction. 
We are reasoning, deliberating human beings, and our genes are not the masters of our fate. 
We should not become so enthralled by the explanatory power of the behavioral sciences that we succumb to the belief that moral progress is predetermined. 
Psychology tells a diminished story that leaves out our past moral advances and the hard argumentative work required to expand those advances in the future. 
Plato would reject this view. 
So should we. 

Morals and the Meltdown 
LONDON – After World War I, H.G. Wells wrote that a race was on between morality and destruction. 
Humanity had to abandon its warlike ways, Wells said, or technology would decimate it. 
Economic writing, however, conveyed a completely different world. 
Here technology was deservedly king. 
Prometheus was a benevolent monarch who scattered the fruits of progress among his people. 
In the economists’ world, morality should not seek to control technology, but should adapt to its demands. 
Only by doing so could economic growth be assured and poverty eliminated. 
Traditional morality faded away as technology multiplied productive power. 
We have clung to this faith in technological salvation as the old faiths waned and technology became ever more inventive. 
Our faith in the market – for the market is the midwife of technological invention – was a result of this. 
In the name of this faith, we have embraced globalization, the widest possible extension of the market economy. 
For the sake of globalization, communities are de-natured, jobs off-shored, and skills continually re-configured. 
We are told by its apostles that the wholesale impairment of most of what gave meaning to life is necessary to achieve an “efficient allocation of capital” and a “reduction in transaction costs.” 
Moralities that resist this logic are branded “obstacles to progress.” 
Protection – the duty the strong owe to the weak – becomes Protectionism, an evil thing that breeds war and corruption. 
That today’s global financial meltdown is the direct consequence of the West’s worship of false gods is a proposition that cannot be discussed, much less acknowledged. 
One of its leading deities is the “efficient market hypothesis” – the belief that the market accurately prices all trades at each moment in time, ruling out booms and slumps, manias and panics. 
Theological language that might have decried the credit crunch as the “wages of sin,” a come-uppance for prodigious profligacy, has become unusable. 
But consider the way in which the term “debt” (the original sin against God, with Satan as the great loan shark) has become “leverage,” a metaphor from engineering that has turned the classical injunction against “getting into debt” into a virtual duty to be “highly leveraged.” 
To be in debt feeds the double temptation of getting what we want as quickly as possible as well as getting “something for nothing.” 
Financial innovation has enlarged both temptations. 
Mathematical whiz kids developed new financial instruments, which, by promising to rob debt of its sting, broke down the barriers of prudence and self-restraint. 
The great economist Hyman Minsky’s “merchants of debt” sold their toxic products not only to the credulous and ignorant, but also to greedy corporations and supposedly savvy individuals. 
The result was a global explosion of “Ponzi” finance – named after the notorious Italian-American swindler Charles Ponzi – which purported to make such paper as safe and valuable as houses. 
By contrast, the virtuous Chinese, who save a large proportion of their incomes, were castigated by Western economists for their failure to understand that their duty to humanity was to spend. 
The key theoretical point in the transition to a debt-fueled economy was the redefinition of uncertainty as risk. 
This was the main achievement of mathematical economics. 
Whereas guarding against uncertainty had traditionally been a moral issue, hedging against risk is a purely technical question. 
The main uncertainty in life – the destination of one’s immortal soul – nudges one toward morality. 
Even the existence of mundane uncertainty gives rise to conventions and rules of thumb that embody the best of human experience in dealing with the unknown. 
The abolition of uncertainty abolishes the need for moral rules. 
Future events could now be decomposed into calculable risks, and strategies and instruments could be developed to satisfy the full range of “risk preferences.” 
Moreover, because competition between financial intermediaries steadily drives down the “price of risk,” the future became (in theory) virtually risk-free. 
This monstrous conceit of contemporary economics has brought the world to the edge of disaster. 
Obviously, the traditional moral taboos surrounding money had to be loosened for capitalism to get going centuries ago. 
For example, the classical prohibition on usury was softened from a ban on charging interest on all loans to a ban on charging interest on loans for which the lender had no alternative use, i.e., for charging interest on “hoards” or cash balances. 
Without the development of debt finance, the world would be a lot poorer than it is. 
Yet going from one extreme (keeping one’s spare cash under the bed) to the other (lending out money one does not have) is to cut out the sensible middle. 
The prudential supervision regime initiated by the Bank of Spain in response to the Spanish banking crises of the 1980’s and 1990’s shows what a sensible middle way might look like. 
Spanish banks are required to increase their deposits in proportion to their lending and set aside capital against assets in their off-balance sheets. 
With little incentive to manufacture “structured investment vehicles,” few Spanish banks created them, thereby avoiding excessive leverage. 
As a result, Spanish banks typically make provision to cover 150% of bad debts whereas British banks cover only 80-100%, and Spanish homebuyers must pay between 20% and 30% deposit on a house, whereas 100% mortgages have routinely been given in the United States and the United Kingdom in recent years. 
H.G. Wells was only partly right: the race between morality and destruction encompasses not just war, but economic life as well. 
As long as we rely on technical fixes to plug moral gaps and governments rush in with rescue packages that enable the merry-go-round to start up again, we are bound to keep lurching from frenzy to frenzy, punctuated by intervals of collapse. 

Hard Lessons from Genoa 
GENOA – Is our infrastructure safe? 
In the aftermath of the collapse of the Morandi Bridge in Genoa, this is the question on everybody’s mind. 
Of course, we could argue that disasters like this are one-offs, and even believe that they may be peculiar to Italy – a country where infrastructure projects are often fertile ground for corruption. 
But we would only be fooling ourselves. 
In Western Europe and the United States, bridges, roads, and railways built in the 1950s and 1960s during the post-war reconstruction and economic boom are now old, obsolete, and overused. 
Does any developed economy have a long-term strategy to manage its essential infrastructure? 
Are risks being correctly assessed and mitigated? 
What are the trade-offs between maintaining and replacing infrastructure approaching the end of its life? 
And how can citizens influence the public debate about who should pay for infrastructure and where it should be built? 
Italy and other advanced economies need policies that strategically and sustainably connect infrastructure plans that local and central governments have produced over the years. 
They need to assess the resources and assets that will be required in the years ahead. 
And they should highlight the social value, rather than only the immediate financial returns, of essential infrastructure. 
Upgrading trains and railway networks, for example, creates efficiencies in terms of both commuting time and environmental impact, with positive effects on many communities. 
For this, the public debate should be shifted: from short-term to long-term impact and from individual to collective value. 
When construction of the Morandi Bridge began in 1963, governments were actively involved in infrastructure investment and in managing – and owning – key public utilities. 
Tax revenues funded building and maintenance, while the private sector was involved at some point in the construction phase. 
There was even scope for financial innovation. 
The first-ever Eurobond was issued in 1963 by Autostrade, Italy’s motorway network and the company now implicated in the collapse of the Morandi Bridge. 
In those years, the Italian economy was expanding, in real terms, at an annual rate of 5.3%, on average, and infrastructure investment made a significant contribution to GDP growth. 
Genoa was a major industrial city, with steelworks and shipbuilding, and one of Europe’s main ports. 
Then, when demand-management policies went out of fashion, so did government’s role in long-term infrastructure planning and market coordination. 
Given the fiscal excesses of the 1970s and the need to control public spending, the alleged neutrality of the market was preferred to government intervention as a mechanism to allocate taxpayers’ money. 
With the growing public debt (at approximately 132% of GDP, Italy’s sovereign debt is one of the world’s largest) leading to an embrace of neoliberalism, the result was the privatization of many infrastructure projects. 
While the allocation mechanisms have improved, putting most infrastructure in private hands has made it more difficult to plan for the very long term – a half-century and longer – and to assume the risks intrinsic to large projects. 
Private investors’ shorter time horizon relative to the public sector has given rise to the “curse of good enough,” with incentives skewed toward maintaining rather than replacing and upgrading infrastructure. 
A modern infrastructure policy will have to address two critical questions. 
The first is who will pay for infrastructure construction. 
Financing by the central government through tax revenues might be unfair to those who never use such infrastructure, or do not directly benefit from it because they live in other areas. 
In that case, should the local authority pick up the cost, or should projects be financed through public-private partnerships, with tolls charged to users? 
Each solution requires a careful assessment of trade-offs and public-policy priorities. 
The second question concerns where to build new infrastructure. 
The alternative to the overused Morandi Bridge involves the construction of a new road link around Genoa’s north edge. 
For years, local residents and politicians – including members of the ruling Five Star Movement – have opposed this plan. 
The Morandi Bridge was inaugurated in 1967 with great pomp by Italy’s president. 
Back then, political capital was built around such projects – and not only because of patronage and corruption. 
Nowadays, modern democracies seem stuck around the trade-off between collective benefits from infrastructure and individual rights, and large projects are often the kiss of death for a politician’s career. 
“Not in my backyard” epitomizes local residents’ demand not to be subjected to the disruptions such projects inevitably entail. 
But these demands have resulted in many infrastructure projects – such as the third runway at Heathrow or the high-speed railway between Turin and Lyon – being postponed for years. 
Thus, for the public sector, too, the default mode has been to maintain old infrastructure as long as possible. 
High-quality infrastructure is essential to economic sustainability and prosperity. 
Without healthy public debate that focuses on projects’ costs and benefits, on collective responsibilities and individual rights, and on the trade-offs that the different choices imply, infrastructure hits the headline only when disasters strike, triggering a cascade of accusations, recrimination, and political opportunism. 
With the can continuing to be kicked down the road while existing infrastructure approaches its expiration date, we can expect many more such headlines in the not-too-distant future. 

More Bad News at the IMF 
CAMBRIDGE: Bad news is all the IMF has been getting in the last year. 
First came a divisive fight over naming a new Managing Director: Germany pushed a little known and unqualified bureaucrat and failed to have him accepted. 
In the end, Chancellor Schroder was given a fig leaf to hide his embarrassment in the form of the present managing director, Horst Kohler, whose main qualification for the job is being German, unlike his two predecessors De Larosiere and Camdessus, who were distinguished French inspecteusr de finances, i.e. they belonged to the cream of cream in the bureaucratic elite of France. 
The next slap came from criticism by American Republicans of the IMF’s strategy as nothing but unending bailouts. 
That criticism was enshrined in the Meltzer Report, which now hangs even more ominously over the IMF because the Republicans now rule in Washington. 
America’s Congress has never had much sympathy for the IMF. 
Democrats question tough-minded programs; Republicans criticize bailouts; nobody has anything constructive to offer. 
But criticism of the IMF not only comes from the American right. 
A few shots across the bow came from inside the community, from just across the street at the World Bank. The most notable barrage here was the affaire Stiglitz, when the World Bank’s chief economist accused the IMF of malpractice, gaining applause from bad economists and failed policy makers worldwide. 
The latest hits have just happened. 
First came the resignation of IMF chief economist Michael Mussa, a formidable University of Chicago-educated economist renowned for good judgment. 
He predicted most of the crises that came along but that did not raise his popularity with the IMF’s board. 
Mussa was also remarkable for a flamboyant presentation of his views, which was hard for some IMF folk to tolerate in so stuffy environment. 
The final hit is comes in the form of the resignation of the IMF’s first deputy managing director, Stanley Fischer, who was in charge of assuring continuity and good sense as well as staff morale. 
These two departures come on top of a steady exodus of talent to Wall Street in recent years. 
So the IMF is at a cross roads, it is weak in leadership, weak on economics knowledge at its top, weak in the support it gets from its member countries. 
The IMF has become a household word, but one with unfavorable connotations. 
Ask any undergraduate about the IMF and the answer, however vague, is invariably negative. 
Ask any leftist activist, and the IMF competes with greedy multinationals as the lowest form of life. 
Part of this negative assessment is inevitable: by the time a country comes to the IMF it is on its way to the economic emergency room. 
Radical surgery usually follows. 
The fact that recovery does come is noted less than the time spent in hospital. 
IMF policies are criticized more than the awful policies that incited a country to collapse in the first place. 
Turkey today is a case in point, or Russia, or Asia in 1997-98. 
What can the IMF do? 
Little by itself, of course, because it is governed by its member countries and that means the US, Europe (which does not speak with one voice), and Japan (which has no voice). 
The most important issue now is the Fischer succession. 
The right person should not necessarily be an American as that would unduly limit the choice and risks bringing an appointment more distinguished by ideology than competence. 
Doling out top international jobs by nationality is a terrible practice and choosing Fischer’s replacement presents a wonderful opportunity to make a break with this routine. 
The successful appointee should be, above all, an effective administrator and a top economist experienced in policymaking. 
But the IMF must also reinvent itself to become far more focused; it may not be able to change its image but it can become more effective. 
There are two ways to do this: 
- resist the temptation of mission creep: the IMF is widening its focus to poverty issues, corruption issues, environment issues, governance issues. 
All these are important, all these are remotely affected by IMF policies, none of them can get around the central truth that a country which has hit the ropes needs to practice austerity. 
The IMF is well advised to stay away from the details and not stretch its little political capital to so broad a range of issues with an inevitable failure in satisfying the whole range of partners in an ever-wider dialogue; 
- increase transparency. 
The IMF staff must begin to report, publicly and for everyone to see, the shortcomings in countries' balance sheets and currency strategies because these are invariably the causes of collapse. 
Over and over again, Turkey being the latest example, the IMF is mute for too long. 
The IMF board must learn that muzzling the IMF staff contributes to crisis by postponing a reckoning. 
The IMF is an important part of the international financial architecture, but it is in great need of repair. 
It needs a strong and respected leadership in the top ranks and it needs a refocusing of its mission and a shift from emergency operations to preventive medicine. 
Because the IMF is at a crossroads, now is the time for serious reforms, not a quick fix. 

A More Dangerous Globalism 
PRINCETON – “America first,” thumps Donald Trump. 
“Britain first,” say the advocates of Brexit. 
“France first,” crows Marine Le Pen and her National Front. 
“Russia first,” proclaims Vladimir Putin’s Kremlin. 
With so much emphasis on national sovereignty nowadays, globalization appears doomed. 
It’s not. 
The struggle playing out today is not one of globalism versus anti-globalism. 
Rather, the world is poised between two models of integration: one is multilateral and internationalist; the other is bilateral and imperialist. 
Throughout the modern age, the world has seesawed between them. 
Since 1945, internationalists have had the upper hand. 
They advocate cooperation and multilateral institutions to promote global public goods like peace, security, financial stability, and environmental sustainability. 
Theirs is a model that constrains national sovereignty by binding states to shared norms, conventions, and treaties. 
The year 2016 tipped the scales toward bilateralists, who regard national sovereignty as an end in itself. 
The fewer external constraints, the better: peace and security result from a balance of great powers. 
Theirs is a model that favors the strong and punishes the weak, and that rewards competitors at the expense of cooperators. 
For most of the nineteenth century, integration was a hybrid of internationalism and imperialism. 
Free trade became gospel, mass migration was welcomed, and countries embraced new global norms, like the First Geneva Convention, concluded in 1864 to cover the treatment of the sick and wounded on the battlefield. 
Globalizers could also be bullies: the 1842 Treaty of Nanking between Britain and China subordinated the Middle Kingdom to the West. 
And bilateral imperialism’s ugliest face was reflected in Europeans’ carve-up of Africa into exclusive possessions. 
In the most horrific period in human history, bilateralism had the upper hand. 
Between 1914 and 1945, the pursuit of national grandeur led to ruinous economic rivalry and mass violence. 
The Wall Street crash of 1929 kicked the legs out from under a struggling international order. 
Country after country turned inward; by 1933, world trade collapsed to one-third its 1929 level. 
Fueled by racism and fears of overcrowding, globalism turned predatory: powerful countries imposed uneven trade pacts on neighbors and partners, or simply overran them. 
Japan set its sights on Manchuria in 1931 to create a puppet state, and invaded China in 1937. 
The Soviets dealt with Russian borderlands in the same spirit. 
The Nazis forced treaties on weaker neighbors and seized others, then sought to depopulate Slavic lands to make way for Teutonic settlers. 
The brutality of bilateralism prompted US President Franklin Delano Roosevelt and British Prime Minister Winston Churchill to draft the Atlantic Charter in 1941. 
A blueprint for a post-war order, it declared that freedom was the cornerstone of peace and that bilateralism had to be curbed. 
No more grabbing. 
No more tariff bullying. 
Freedom of the seas. 
What came of the Allies’ victory in World War II and the Atlantic Charter was a Global New Deal: by agreeing to play by international rules and institutions, countries could participate in the post-war bonanza. 
European integration was at the core of this experiment in multilateral globalism; with Franco-German reconciliation, Europe, a chronic conflict zone, became a region of exemplary cooperators. 
Restraining national sovereignty allowed global trade, investment, and migration to buoy post-war prosperity. 
Billions escaped poverty. 
Relative peace was maintained. 
But the Global New Deal seems to have run its course. 
For too many people, the world became messy, risky, stultifying, and threatening – the opposite of what the Atlantic Charter envisioned. 
After 1980, global integration was accompanied by rising domestic inequality. 
While the horizon of opportunities widened for educated cosmopolitans in big cities, the bonds between citizens weakened as national social contracts were dismantled. 
As the blurring of global divides deepened domestic cleavages, the stage was set for bilateralists to come storming back. 
In the wings, leaders like Russian President Vladimir Putin yearned for a return to a world of muscular sovereignty, unrestrained by multilateral niceties. 
They now have more company in key countries. 
Two days after his inauguration, Trump announced that the US would have “another chance” to seize Iraqi oil. 
He then withdrew the US from the Trans-Pacific Partnership trade deal and vowed to re-negotiate the North American Free Trade Agreement. 
The future of the hard-won Paris climate agreement is now in doubt. 
Charges of currency manipulation and threats of protectionist measures have intensified. 
With the UK, which gave the world free trade in the 1840s, having now decided to go it alone, the old Atlantic Charter allies are putting national sovereignty ahead of global public goods. 
Now the global spotlight turns to France and its looming presidential election. 
At stake is the sputtering Franco-German engine that has driven European integration and kept it at the center of the post-war multilateral system. 
A victory for Le Pen in early May would spell the end of the EU, leaving German Chancellor Angela Merkel as the final pillar of a crumbling world order. 
The country most refashioned by post-1945 internationalism would be its last bastion, surrounded by bilateralists in France, the UK, and Russia, with its main patron, the US, in the hands of nativists. 
Imagine the scene a few weeks after a Le Pen victory, when the G7 leaders gather in a gilded hotel in Taormina, Sicily. 
The US and Canada are feuding over NAFTA. 
The UK is squabbling with France and Germany over Brexit. 
Japan is reeling from the demise of the TPP. 
And, as they turn their backs on global commitments, refugees, drowning by the boatload in the surrounding sea, provide an epitaph for a bygone era. 

Japan’s “Land of Opportunity” 
TOKYO – Not many companies headquartered in Tokyo can boast about their diversity. 
Twenty years ago, when I founded Rakuten as an ambitious Internet and e-commerce startup, we were just like most Japanese firms – small, and dominated by mostly male Japanese talent. 
But today, with over 10,000 employees – 40% of whom are women – from 70 countries, we are among the largest online retailers in the world. 
It is our diversity that has made us so successful. 
As recently as five years ago, Rakuten was still predominantly a Japanese team. 
But in March 2010, in a move I believe was key to our subsequent growth, I announced “Englishnization,” a plan to make English our corporate language within two years. 
The goal was to lay the groundwork for global expansion in an industry that competes aggressively for Internet-savvy talent. 
When I announced Englishnization, only 10% of our workforce was proficient in English. 
Unsurprisingly, some on my team were apprehensive; others, especially those outside the firm, thought I was a little crazy. 
But, just seven years later, titans of corporate Japan are seeking our advice in how to build a global brand headquartered in the Japanese capital. 
As we tell them, opening doors to international talent has been a game changer for us. 
And it could have a similar impact on other Japanese companies. 
Consider the experience of the United States, to which Japanese companies have long looked for inspiration. 
I was fortunate enough to study in the US, and grew up admiring American creativity, entrepreneurship, and, above all, the country’s openness to outsiders. 
In particular, the diverse and dynamic Silicon Valley, where many tech leaders and thinkers are immigrants themselves, is a powerful engine of innovation for our company. 
Drawn by the region’s culture and expertise, Rakuten opened its US headquarters in the San Francisco Bay Area in 2011. 
Today, however, the values that have made the US a paragon of diversity and entrepreneurship are being challenged. 
President Donald Trump is attempting to cut immigration, including by building a wall on the border with Mexico, all while employing distressing rhetoric against Muslims and other minority groups. 
This is not the way to a brighter future. 
As for Rakuten, while we will continue to invest heavily in our US headquarters, we are also investing in growth at home, in order to lure more foreign talent to an open and Internet-savvy Japan – one that, in some ways, is moving in the opposite direction of the US. 
In fact, Trump’s position on immigration is already encouraging smart young Asians and Europeans to look to Japan as an alternative “land of opportunity.” 
If Japan opens its doors to more of these workers, the country and the world will benefit. 
The challenge posed by Japan’s declining population is well known. 
The number of Japanese living in the country fell for a sixth straight year in 2016, declining by 299,000, to 125 million people. 
In this context, Japan needs more foreign talent to help sustain economic growth. 
But there remains some resistance to such openness. 
Throughout history, the Japanese people have viewed foreigners as sources of social unrest and threats to national identity. 
The Japanese word for “foreigner” – gaijin – comprises the words for “outside” and “person.” 
The implication is that non-Japanese people can never truly understand Japanese culture. 
Nonetheless, some progress has been made. 
Last year, Prime Minister Shinzo Abe’s government expanded the types of jobs that skilled foreign workers could hold in Japan, and the annual inflow of foreign residents to Japan has since increased. 
An estimated 136,000 foreign residents moved to Japan in 2016, a 40% jump from the year before. 
And over the last half-decade, Japan’s expatriate population has surged to 2.4 million, an increase of 500,000 foreigners. 
While these figures are impressive, they remain insufficient. 
The Japan Association of New Economy, which I helped to establish, has concluded that if Japanese companies are to compete internationally, they need to be able to recruit from a larger pool of talent. 
There are a number of useful options to advance this goal and boost workplace diversity in Japan. 
One would be to simplify procedures for talented foreign nationals to obtain resident status. 
Another would be to create new visa categories to enable foreign entrepreneurs to reside in Japan and build their businesses. 
Additionally, entrepreneurs and engineers who possess skills essential for Japan’s growth could be offered bold income and resident tax breaks. 
Finally, corporate tax breaks, such as long-term carryover of net losses, could be offered to foreign entrepreneurs establishing companies in Japan. 
I founded Rakuten as a Japanese company, fueled by a desire to use the Internet to empower retailers of all sizes from throughout the country. 
But today, my company is part of a Japanese vanguard working to attract more foreigners. 
About 80% of our new engineering hires are non-Japanese. 
Their ideas, skills, and energy are vital to Rakuten’s global push. 
Japanese society must take a page out of America’s (old) playbook, and warm to the idea that immigration and integration are vital to our future. 
Over time, other Japanese companies will have no choice but to follow Rakuten’s path by broadening their own hiring practices. 
Trump’s America may be willing to wall itself off from the world, but in Japan, where talent is in short supply, our only option is to tear the walls down. 

Financial Globalization 2.0 
WASHINGTON, DC – In the decade since the financial crisis began in August 2007, the contours of global finance have shifted dramatically. 
The total value of cross-border capital flows has shrunk by 65% over the last ten years, a decline that reflects, in particular, the sharp reduction in international banking activities. 
The question for us is what figures like these can tell us about the health of global finance today. 
Are they evidence that “financial globalization” – the international movement of capital – has lurched into reverse? 
And if it has, would that be such a bad thing? 
The current retrenchment reflects greater risk aversion and awareness since the bubble began to burst in late 2007. 
But, according to new research from the McKinsey Global Institute, what is emerging is a more resilient version of global financial integration. 
Before the crisis, cross-border banking surged as many of the world’s largest banks expanded internationally, lending more to one another and investing in other foreign assets. 
After the creation of the euro, for example, eurozone banks expanded significantly. 
Foreign claims held by eurozone banks (and their subsidiaries) soared from $6.6 trillion in 2000 to $23.4 trillion in 2007. 
Most important, a majority of that growth was within the eurozone itself, where an integrated European banking market was emerging, leading some to believe that a common currency and shared rules meant country risk had almost disappeared. 
What is clear today is that many institutions were simply engaging in herd mentality, rather than executing prudent business strategies. 
Then, stung by the financial meltdown in the United States, and subsequently by the eurozone’s own crisis, the major global banks reduced their foreign presence, selling off some businesses, exiting others, and allowing maturing loans to expire. 
Since 2007, global banks have sold at least $2 trillion of assets. 
Swiss, British, and American banks have all been part of the retreat, but eurozone banks are at its epicenter. 
Since the crisis began, eurozone banks have reduced foreign claims by $7.3 trillion, or 45%. 
Nearly half of that is a shrinking portfolio among eurozone borrowers, particularly banks. 
The perception that lending within the currency area was quasi-domestic has fallen apart. 
As the financial crisis evolved, private-sector involvement – through “haircuts” and “bailing in” – became a threatening option. 
From a risk perspective, domestic markets – where banks had the advantage of scale and market knowledge – became comparatively more attractive. 
In Germany, for example, the ratio of foreign to total assets at the three largest banks flipped, from 65% in 2007 to 33% in 2016. 
This was not simply a matter of shrinking the overall balance sheet; domestic assets grew by 70% during the same period. 
What has emerged in the eurozone and beyond is a potentially more stable financial system, at least where banking is concerned. 
Banks have been required to rebuild their capital, and new rules on liquidity have reduced leverage and vulnerability. 
Stress testing and resolution preparedness – the sector’s so-called living wills – have created significant disincentives to complexity. 
All of this has made foreign operations less attractive as well. 
A more diverse mix of cross-border capital flows also indicates greater stability. 
While total annual flows of cross-border lending have fallen by two thirds, foreign direct investment has held up better. 
FDI is by far the most stable type of capital flow, reflecting long-term strategic decisions by companies. 
Equity-related positions (FDI plus portfolio investments) now account for 69% of cross-border capital flows, up from 36% in 2007. 
One final measure of stability is that global imbalances, including aggregate capital- and financial-account balances, are shrinking. 
In 2016, these imbalances had fallen to 1.7% of global GDP, from 2.5% in 2007. 
Moreover, the remaining deficits and surpluses are spread over a larger number of countries than before the crisis. 
In 2005, the US absorbed 67% of global net capital flows. 
By 2016, that share had fallen by half. 
China, meanwhile, accounted for 16% of the world’s net capital surplus in 2005; last year it was only 1%. 
And, with only a few exceptions, like Germany and the Netherlands, imbalances have also declined within the eurozone. 
Today, developing countries have become capital importers once more. 
None of this should invite complacency. 
A more tightly woven global financial system inevitably comes with a higher risk of contagion. 
Excesses can always return; indeed, equity and real-estate markets in some advanced economies are rising to new highs, despite mediocre growth prospects. 
Volatility in gross capital flows also remains a concern. 
Since 2010, one third of developing countries and two thirds of advanced economies have faced large fluctuations in total capital inflows. 
Lending flows are particularly unstable; more than 60% of countries have experienced some degree of annual fluctuation, with the median shift equal to 7.7% of GDP for advanced economies, and 3% of GDP for developing countries. 
Some observers argue that more should be done to contain risk in the system; to the extent that risk has simply shifted from banks to shadow banks, they may be right. 
But, overall, signs of greater resilience and increased stability are everywhere. 
Actions taken over the last ten years therefore imply less fragility when the next crisis hits, as it surely will. 

More Trade, Less Hunger 
GENEVA – The recent sharp spike in food prices and growing concerns about food security have sparked anxiety worldwide. 
The possibility of being unable to put food on the table fills parents with a deep sense of foreboding. 
And, because the world’s poorest people spend a higher proportion of their income on food, they are the worst affected, raising the risk that years of progress in reducing poverty could be reversed. 
The seemingly unalterable factors generating these record-setting rises in food prices – a shift to higher protein diets in many countries, growing populations, greater use of biofuels, and climate change – suggest that elevated food prices are here to stay. 
In the absence of solutions that alleviate growing pressure on supplies, hunger and malnutrition will increase. 
Clearly, investment in food production must be increased in the medium and longer term. 
But there is a policy prescription available to leaders today that could help remove supply-side obstacles: more trade. 
This proposal may puzzle some, but the logic is straightforward and irrefutable. 
Trade is the transmission belt through which supply adjusts to demand. 
It allows food to travel from lands of plenty to lands of little. 
It allows countries that can produce food efficiently to ship it to those which face resource limitations that hinder food production. 
For example, access to international food supplies allowed Saudi Arabia to abandon its 30-year program of subsidies for domestic wheat production. 
Given the financial burden of the program, and, more importantly, the cost in scarce water, the Saudis decided to phase out the subsidies entirely by 2016. 
When the transmission belt of international trade that underlies such decisions is disrupted, the result is market turbulence. 
This is why Indonesia, one of the world’s largest producers of rice and maize, recently decided to reduce trade barriers to agriculture imports. 
Today, trade in agricultural products is exposed to far greater distortion than is trade in other goods. 
Trade-distorting subsidies, high import tariffs, and export restrictions act as sand in the gears of the transmission belt and make it more difficult and expensive to bring food to the market – and thus to the family table. 
Export restrictions, for example, play a direct role in aggravating food crises. 
Indeed, some analysts believe that such restrictions were a principal cause of food-price rises in 2008. 
According to the United Nations Food and Agriculture Organization, they were the single most important reason behind the skyrocketing price of rice in 2008, when international trade in rice declined by about 7% (to two million tons) from its record 2007. 
Similarly, the 2010-2011 price rise for cereals is closely linked to the export restrictions imposed by Russia and Ukraine after both countries were hit by severe drought. 
Most people are surprised to learn how shallow international grain markets truly are. 
Only 7% of global rice production is traded internationally, while only 18% of wheat production and 13% of maize is exported. 
Additional restraints on trade are a serious threat to net-food-importing countries, where governments worry that such measures could lead to starvation. 
Those who impose these restrictions follow a shared logic: they do not wish to see their own populations starve. 
So the question is: which alternative policies could allow them to meet this goal? 
The answer to that question consists in more food production globally, more and stronger social safety nets, more food aid, and, possibly, larger food reserves. 
A conclusion to the Doha Round of global trade negotiations could constitute part of the medium- to long-term response to food-price crises, by removing many of the restrictions and distortions that have muddied the supply-side picture. 
A Doha agreement would greatly reduce rich-world subsidies, which have stymied the developing world’s production capacity, and have pushed developing-country producers completely out of the market for certain commodities. 
The worst kind of subsidies – export subsidies – would be eliminated. 
A Doha agreement would also bring down tariffs, although with certain “flexibilities,” thereby increasing consumers’ access to food. 
Globally, more food would be produced where it can be produced more efficiently, thereby creating a more equitable, level international playing field. 
To put it simply: when it comes to tackling food security, trade is part of the solution, not part of the problem. 

More Walls to Fall 
MOSCOW – The German people, and the whole world alongside them, are celebrating a landmark date in history, the 20th anniversary of the fall of the Berlin Wall. 
Not many events remain in the collective memory as a watershed that divides two distinct periods. 
The dismantling of the Berlin Wall – that stark, concrete symbol of a world divided into hostile camps – is such a defining moment. 
The fall of the Berlin Wall brought hope and opportunity to people everywhere, and provided the 1980’s with a truly jubilant finale. 
That is something to think about as this decade draws to a close – and as the chance for humanity to take another momentous leap forward appears to be slipping away. 
The road to the end of the Cold War was certainly not easy, or universally welcomed at the time, but it is for just this reason that its lessons remain relevant. 
In the 1980’s, the world was at a historic crossroads. 
The East-West arms race had created an explosive situation. 
Nuclear deterrents could have failed at any moment. 
We were heading for disaster, while stifling creativity and development. 
Today, another planetary threat has emerged. 
The climate crisis is the new wall that divides us from our future, and current leaders are vastly underestimating the urgency, and potentially catastrophic scale, of the emergency. 
People used to joke that we will struggle for peace until there is nothing left on the planet; the threat of climate change makes this prophesy more literal than ever. 
Comparisons with the period immediately before the Berlin Wall came down are striking. 
Like 20 years ago, we face a threat to global security and our very existence that no one nation can deal with alone. And, again, it is the people who are calling for change. 
Just as the German people declared their will for unity, the world’s citizens today are demanding that action be taken to tackle climate change and redress the deep injustices that surround it. 
Twenty years ago, key world leaders demonstrated resolve, faced up to opposition and immense pressure, and the Wall came down. 
It remains to be seen whether today’s leaders will do the same. 
Addressing climate change demands a paradigm shift on a scale akin to that required to end the Cold War. 
But we need a “circuit-breaker” to escape from the business-as-usual approach that currently dominates the political agenda. 
It was the transformation brought about by perestroika and glasnost that set the stage for the quantum leap to freedom for the Soviet Union and Eastern Europe, and opened the way for the democratic revolution that saved history. 
Climate change is complex and closely entwined with a host of other challenges, but a similar breakthrough in our values and priorities is needed. 
There is not just one wall to topple, but many. 
There is the wall between those states that are already industrialized and those that do not want to be held back in their economic development. 
There is the wall between those who cause climate change and those who suffer the consequences. 
There is the wall between those who heed the scientific evidence and those who pander to vested interests. 
And there is the wall between the citizens who are changing their own behavior and want strong global action, and the leaders who are so far letting them down. 
In 1989, incredible changes that were deemed impossible just a few years earlier were implemented. 
But this was no accident. 
The changes resonated with the hopes of the time, and leaders responded. 
We brought down the Berlin Wall in the belief that future generations would be able to solve challenges together. 
Today, looking at the cavernous gulf between rich and poor, the irresponsibility that caused the global financial crisis, and the weak and divided responses to climate change, I feel bitter. 
The opportunity to build a safer, fairer, and more united world has been largely squandered. 
To echo the demand made of me by my late friend and sparring partner President Ronald Reagan: Mr. Obama, Mr. Hu, Mr. Singh, and, back in Berlin, Ms. Merkel and her European counterparts, “Tear down this wall!” 
For this is your Wall, your defining moment. 
You cannot dodge the call of history. 
I appeal to heads of state and government to come in person to the climate change conference in Copenhagen this December and dismantle the wall. 
The people of the world expect you to deliver. 

Europe’s Refugee Scandal 
LONDON – It has long been known that the Moria refugee camp on the Greek island of Lesbos is plagued by overcrowding, unsanitary conditions, and rampant violence, including riots that have left many injured. 
But when aid workers reported in April that children as young as ten were attempting suicide, another tragic facet of the refugee crisis was highlighted: 30 million children around the world are currently displaced, many in appalling conditions. 
The crisis is not just putting them in danger today; it is threatening to destroy their futures. 
In the Moria camp, children live in fear. 
Recent riots have displaced hundreds of camp residents and badly injured several. 
This is traumatizing for children who are with their families, but even more so for the many who are unaccompanied. 
Making matters worse, many children lack even basic shelter, with thousands of families crammed into cheap donated tents that often aren’t even waterproof. 
Last winter, three people died of carbon monoxide poisoning while trying to stay warm. 
But the challenges these children face extend far beyond the short term. 
Even if refugee children eventually manage to get somewhere safe, their prospects are bleak, because most will never have a chance to go to school – a reality that will severely undermine their ability to find gainful employment. 
At last count, there were 1,729 children in Moria, more than 1,000 of whom are of school age. 
The number recently increased as a huge surge in boat landings brought 834 new arrivals to the camp last week alone. 
None attends public school, and the Greek government has yet to allow them access to any of the formal education programs that were established for asylum seekers. 
The best option available to Moria’s refugee children are cramped informal education centers, where high teacher turnover is a serious problem. 
Yet not even this option is available to all, as the existing centers can provide education to only 500 children per day – less than half the school-age population. 
And that number may be set to fall: the largest informal education center, run by UNICEF, is set to close in December, because the €30,000 ($34,900) per month needed to operate it cannot be found. 
But there may be hope for refugees stuck in Moria. 
Greek officials have given the Ministry of Migration 30 days to improve conditions in the camp or close it down. 
The move is long overdue. 
This is not to diminish the momentous challenge Greece faces. 
Already struggling under the weight of austerity, the country has had to cope with 1.1 million refugee arrivals since 2014, and hundreds more refugees continue to arrive on the shores of Lesbos every day. 
This has been devastating for the small island, whose tourist industry has been decimated. 
With the rest of the European Union effectively closed to refugees in Greece, camps on the mainland have filled up. 
But Moria is still operating at 3-4 times its official capacity. 
The European Commission has allocated more than €1.5 billion to Greece since 2015 to manage the refugee crisis and says that additional emergency support is on offer. 
Where exactly past funds have gone is now the subject of searching questions by Sebastian Leape, a volunteer who spent recent weeks in the camp. 
Inadequate support for refugees is not just a problem in Greece, with refugee camps in many countries having come under scrutiny for poor conditions. 
As United Nations High Commissioner for Refugees Filippo Grandi has acknowledged, this includes a dearth of educational opportunities. 
Fewer than half of school-age refugee children worldwide attend school; not even one in four make it to secondary school; and under 1% go on to pursue a higher education. 
Countries where there are large populations of refugees need enough funding to enable them to give refugee children access to local schools. 
The Education Cannot Wait fund was established to close the education-financing gap for such children. 
Led by Yasmine Sherif, the fund coordinates with the UN and its humanitarian agencies, both financially and organizationally, to ensure that every refugee boy and girl has the opportunity to get an education. 
Long-term educational and employment needs have historically been undervalued in humanitarian planning. 
But, as much as refugees need proper food, shelter, and health care today, they also need the knowledge and tools to build new lives and contribute to society tomorrow, whether in their home country or in a new one. 
It is in the best interest of all of us to ensure that they gain the skills they need. 

Renewable Energy and Middle East Economic Renewal 
FEZ – The global oil-price bust has devastated economies across the Middle East and North Africa. 
Having seen severe price declines in the past, many leaders in the region may be tempted to wait for prices to rise again. 
But this collapse is different, and governments need new energy and development strategies. 
Morocco’s drive to become a regional renewable-energy powerhouse offers a real option for economic development in other Arab countries. 
Morocco has been investing in large-scale renewable-energy projects for some time; but only now are these investments coming online. 
Perhaps the most impressive is the gigantic Noor-1 solar-energy compound, located in the Moroccan desert near Ouarzazate. 
Opened on February 4, Noor-1 uses highly advanced technology to store energy for use at night and on cloudy days. 
Considered the largest solar power plant in the world, Noor-1 is expected to produce enough energy for more than a million people, with extra power eventually to be exported to Europe and Africa, according to the World Bank. 
Given that Morocco imports around 97% of its energy supply, and possesses no oil or natural gas deposits of its own, the government has viewed developing renewable energy as the only way to ensure the country’s continuing economic development. 
This is an insight others in the region should heed. 
The Noor-1 project, covering an area of more than 4.5 square kilometers (1.7 square miles) with 500,000 curved mirrors – some as high as 12 meters – cost around $700 million. 
But it is intended to be only one part of a huge solar compound extending over 30 square kilometers. 
Indeed, by 2018, three more plants, Noor-II, Noor-III, and Noor-Midelt will be constructed, using a combination of technologies, including thermosolar and photovoltaic. 
The project will generate up to 2,000 megawatts daily by 2020, helping to reduce the development gap between urban and rural areas. 
Of course, the project has demanded huge sums in investment. 
Of the $9 billion project’s financing, some $1 billion has come from a German investment bank, $400 million from the World Bank, and $596 million from the European Investment Bank. 
The rest of the funding has come from Morocco’s government as part of its national development strategy. 
In the near future, Morocco will also develop a wind program with a capacity of at least 2,000 MW daily, and a 2,000 MW hydropower project. 
These could provide the country with 42% of its total electricity production. 
This represents an unparalleled proportion of renewable energy at both the regional and the international levels. 
Already, the Tarfaya Wind Farm, positioned on Morocco’s Southern Atlantic Coast, is Africa’s biggest. 
With 131 turbines and a daily capacity of more than 300 MW, Tarfaya will help reduce Morocco’s carbon dioxide emissions by 900,000 tons annually, and cut the country’s annual oil import bill by more than $190 million. 
Despite this focus on renewables, Morocco has not gone cold turkey on traditional energy sources. 
Over the next five years, the authorities will set up the infrastructure needed to make liquefied natural gas (LNG) more accessible to domestic industries. 
This is a huge endeavor, as it also includes a port with an LNG dock and a 400-kilometer pipeline. 
This remarkable project will cost another $4.5 billion, all of which will come from the private sector. 
With demand for electricity, mostly from the country’s expanding industries, rising by 7% annually, Morocco’s government has long known that it could not sit still. 
Today, 90% of the Moroccan population is connected to the grid, up dramatically from the 1990s, when that figure stood at just 18%. 
Over this period, the country’s investments in electrification rose to more than $3 billion annually. 
Morocco’s government is convinced that reform and development will confirm its emergence as a regional leader and gateway to Africa. 
Increased access to renewable energy will mean that all companies will have sufficient power to meet their needs, which is essential to the country’s ability to diversify its economy. 
Investors are aware of Morocco’s exceptional geographic position and its political stability in a region all too often held back by uncertainty. 
The country’s giant solar complex and other investments will help boost the country’s energy independence, reduce costs, and expand access to power. 
Others in Africa and the Middle East should take note. 

Morocco’s Veiled Feminists 
It is often assumed that modern feminism has no place, and thus can make little headway, in societies undergoing a religious revival, particularly in the Islamic world. 
But the real progress made in recent years on women’s rights in Morocco suggests otherwise: a unique combination of activism by secular and religious women, the calculations of political parties, and a significant role for the King has led to real progress. 
Pioneering Moroccan feminists began their work soon after independence in 1956. 
By and large representative of a liberal perspective, they nonetheless recognized the importance of Islam throughout Moroccan society. 
As a result, they took care to frame their demands in ways that provided a measure of Islamic identity. 
This first generation of Moroccan feminists was guided by a key insight: the interactions of men and women were not dictated by religion, but by social practices that had often used religion as a means of reinforcement. 
For example, women and their sexual purity were linked with the honor of men and their families – a connection that was defended by grounding it in Islam. 
For these activists, such linkages were intended to maintain control over women, and were part of Moroccan society, not Islam. 
By the 1990’s, Morocco was feeling the impact of the Iranian Revolution and America’s post-Cold War emergence as the sole global superpower. 
Like many Muslim countries in this new era, Morocco began to experience a revitalization of political Islam. 
This threatened the authority of the King, who had overseen the religious establishment, as well as feminists’ efforts to moderate Morocco’s Family Law, which had been based on a rigid view of religious teachings. 
But the same de-centralization of authority that had empowered Islamist movements also empowered Moroccan women. 
Better educated and more in touch with global currents through the media or their own travel, women began participating in Moroccan political debates. 
They challenged the disparities in legal treatment of women, broached new ideas concerning the role of women in Moroccan society, and questioned practices that had long been understood as Islamic. 
Their strategy shifted as well, focusing on the growing importance of religious values in shaping societies and global relations. 
As a result, the veil became a mechanism for making their presence felt publicly and gaining credibility within religious debates. 
Over the past decade, the number of Moroccan women taking an active role in Islamist associations or political parties increased dramatically. 
The growing significance of the veil also highlighted important differences between men and women in Morocco. 
For many men, Islamist or not, the veil remains a sign of Islamic affiliation and traditional piety. 
For many women, however, the veil is a token of liberation – an indication that they have engaged with the Moroccan public in ways that reflect their own sense of religious practice. 
Liberal Moroccan feminists understand this use of the veil by many Moroccan women, and they have encouraged a dialogue with veiled activists from the Islamist camp. 
The signs of cooperation have been clear: increasing use of Arabic, rather than French, discussions that incorporate real knowledge of Islamic scripture, and recognition that Islam remains distinct from traditional practices. 
At the same time, liberal feminists began to invest more effort in civic associations, rather than political parties. 
This broadened their focus to Moroccan society as a whole and questions of how people could be empowered to improve their lives. 
As a result, liberal feminists have increased their influence among both decision makers and religious women. 
All of this comes at a time of greater political openness and democratization: the first ever socialist government in 1998, a younger and more open King – described by democrats of both sexes of Morocco’s “first feminist” – who took the throne in 1999, and a quota system that brought 35 women into the Parliament in 2002. 
This Parliament enacted a new Family Law in 2004 that mandates full equality between men and women as “head of household,” full authority for state courts in matters of divorce, creation of special family courts, and the possibility of maternal custody in the event of divorce. 
Thus, in Morocco, it is difficult to speak of separate “secular” and “Islamic” feminisms. 
Women are increasingly making the argument that they have been deliberately excluded from a full role in society not because Islam prescribes it, but because Islam was revealed in a deeply patriarchal social context. 
Feminist interpretations of religious texts – encouraged by increasing numbers of women in prominent religious positions – continue to challenge traditionalists of all stripes. 
The women’s movement in Morocco – which now bridges secular and religious communities – is setting an example of the power of social thought in a traditional society. 
Re-visiting traditional interpretations of Scripture is not the end of the story. 
Out of this ferment, Morocco has not only revised its Family Law, but also fundamental laws governing nationality, media ownership, and political organizations. 
Women’s advocacy has also shaped a new approach to poverty alleviation in Morocco, in the form of the National Initiative for Human Development, which integrates efforts to improve education with better sanitation and housing. 
It is no exaggeration to say that the Moroccan women’s movement has become the cutting edge of reform, engaging Islamization, modernization, democratization, and feminism. 

Moscow and the Middle East 
Iran’s influence in the Middle East is being strengthened not only because of the opportunities created by the frustration of US power in Iraq, but because of the diplomatic protection it has been receiving from China, and most importantly, from Russia. 
With President Putin recently completing a Middle East tour to flex Russia’s diplomatic muscles and sell arms, now is a good moment to assess his country’s influence in the region. 
Russia, by wielding the threat of its Security Council veto, spent much of the past two years whittling away the proposed list of sanctions that might be slapped on Iran for its refusal to honor its commitments to the International Atomic Energy Agency over its nuclear program. 
As a result, the sanctions that have been imposed by the UN Security Council are so tepid that they are unlikely to be effective. 
Russia sees its relations with Iran as a means to leverage its influence in wider Middle East diplomacy, where the US has successfully sought to exclude the Kremlin from influence since the end of the Cold War. 
Russia’s other selfish aim has been to exempt from sanctions the Bushehr nuclear-reactor project it is building for Iran, and to ward off a UN-sponsored financial squeeze on Iran that might put at risk the profits Russia hopes to earn from providing nuclear fuel for the reactor, which is due to be commissioned late this year. 
Russian President Vladimir Putin argues that Iran, unlike North Korea, has not expelled IAEA nuclear inspectors, quit the Non-Proliferation Treaty (NPT) or tested a weapon — so it should be dealt with gently. 
But without making Iran weigh real costs against its nuclear plans, Iran will have little reason to consider the suspension of uranium enrichment and plutonium dabbling (both are usable for nuclear fuel-making but abusable for bomb-making) that the Europeans and the United States have made a condition for serious negotiations to take place. 
Russia trades heavily with Iran, which is another reason it is wary of sanctions on that country. 
But America has been leaning on foreign banks to curb their dealings with Iran. 
Last month, it added five companies (four in China, and another in the US but representing a Chinese outfit) to its list of those fingered for assisting Iran's weapons program and thus banned from doing business with American companies. 
There is a growing fear in Moscow that the US administration is now looking at Russian companies with similar ties to Iran and its nuclear ambitions. 
Russian policy, based on immediate monetary gain and a hope of diplomatic influence, is dangerously short-sighted. 
(Ukraine, for its part, opted not to participate in building the Bushehr reactor.) 
If suspicions are correct that Iran has been secretly learning how to build and trigger a nuclear device, and also to shape a missile cone to carry such a warhead (as well as publicly developing nuclear-capable, far-flying missiles), then once it has fully mastered uranium enrichment it will soon be poised to break out at short notice, at a moment of its choosing, from the NPT’s limits. 
By enfeebling diplomacy, Russia is taking the world into more dangerous territory. 
This is doubly short-sighted as a nuclear armed Iran on Russia’s border is not in Russia’s national interest, particularly with Russia’s own 20 million Muslim citizens becoming increasingly radicalized. 
Indeed, Russia’s Muslim population is the only part of the Russian population that is growing, which means that Muslims will become a bigger and bigger factor in Russian domestic politics in the decades ahead. 
That Iran is often seen as a principle backer of the Chechen separatists is also testimony to the truly short-sighted nature of Russian policy. 
But in its quest to enhance its great power prestige today, Russia seems willing to sacrifice its long term security interests in the region for immediate diplomatic gratification. 
And it is doing so not only in respect to Iran. 
The big question about Turkmenistan today is whether the vacuum left by Niyazov/Turkmanbashi’s death will allow Islamic extremism to spill over from neighbouring Iran and Afghanistan. 
But the only thing that Russia appears to be concerned about is that, whatever successor regime emerges, it is willing to do the Kremlin’s bidding. 
Russia has long had the upper hand in Turkmenistan. 
Most of Turkmenistan's gas is exported through the Russian pipeline system. 
Gazprom, the Russian state giant, buys gas at relatively low prices, and then distributes it in Russia or sells it at a profit elsewhere in Europe. 
Israel, like Turkey and the US, must be hoping that Turkmenistan’s new rulers will seek to diversify gas distribution by adopting a project to build a gas pipeline beneath the Caspian Sea. 
But diversification is also needed in that country’s politics, because the only opposition that has any strength in the country is worryingly Islamic fundamentalist. 
Russia has had centuries of influence in the Middle East and Central Asia, much of which used to be incorporated in the Russian and Soviet empires. 
It could serve as a powerful force for good in the region, if it stops seeking short term advantage and begins to act in its own long term interests, which will best be served by a prosperous, non-nuclear armed Iran, and a far more open Turkmenistan. 

The End of Malaria? 
WASHINGTON, DC – For those on the frontline of the battle against malaria, news of the development of a vaccine against the parasite is an exciting development. 
In 2013, the disease was responsible for 584,000 deaths, nearly 90% of them in Sub-Saharan Africa; some 78% of its victims are children under the age of five. 
In the 97 countries in which malaria is endemic, it ravages the economic productivity of those who can least afford it: poor people with limited access to treatment and care. 
In July, the European Medicines Agency approved RTS,S – a vaccine also known by its trade name, Mosquirix – for use in children from six weeks to 17 months old. 
The global health community has long appreciated the importance of a vaccine in reducing the disease’s burden, and the World Health Organization is expected to make an announcement in November about the use of Mosquirix in countries where malaria is endemic, some 30 excruciating years after researchers at the pharmaceutical company GlaxoSmithKline (GSK) began working on the vaccine. 
The approval is a significant step in the right direction for the prevention and control of malaria. 
It is also a testament to the enduring power of social philanthropy, partnerships, and international collaborations. 
However, many questions about the vaccine’s deployment – and its integration into the health systems of some of the world’s poorest countries – remain to be answered. 
Cost is probably the most important issue. 
Many of the people who most need the new vaccine are poor. 
It remains to be seen whether “equity pricing” will be feasible, considering the millions of dollars invested into research and development. 
GSK has said that Mosquirix will be offered “not for profit”; but the pharmaceutical company still must break even. 
And who will actually pay? 
Many African governments have shown some willingness to invest in public health infrastructure in the past; but a political commitment to the vaccine could mean redirection of resources from other important tools, including rapid test kits, cheap drugs, safe insecticides, and long-lasting insecticidal bed nets. 
International non-governmental organizations and private foundations have collaborated with the public sector in the fight against malaria, providing funds and bringing attention to the issue. 
It might be asking too much to expect them to pay for the vaccine. 
There are also questions about some countries’ capacity to distribute the vaccine, as well as uncertainty about how it will hold up under real-world conditions. 
For example, the testing for Mosquirix did not account for the possibility that parents would neglect to use insecticide-treated nets for their children because of a false sense of safety and security provided by the vaccine. 
Moreover, in order to maintain the vaccine’s efficacy, a booster needs to be delivered after the initial three doses. 
Without it, effectiveness drops to non-protective levels. 
Will governments really be willing to spend millions of dollars on this? 
Finally, many parents in Sub-Saharan Africa currently do not immunize their children for a variety of reasons, including distrust of health officials and ignorance. 
The polio vaccine faced an uphill battle in Nigeria, and the new malaria vaccine could suffer a similar fate. 
Governments will have to decide whether to make its use compulsory or provide incentives for those who choose to vaccinate their children. 
The approval of Mosquirix opens a promising new phase in the fight against malaria. 
But serious challenges abound. 
To meet them, African countries must initiate, develop, and support homegrown research capacity and leaner models for delivering care. 
Research and investment in physical and social infrastructure must be a high priority as well. 
In the time it has taken to read this article, five children will have died from malaria. 
Ten years from now, that statistic could be no more than a bad memory, thanks to Mosquirix. 
At the very least, the world now has a new weapon in the fight to reduce the disease’s toll. 

Killing Killer Mosquitoes 
SINGAPORE – Mosquitoes may be tiny, but they have a powerful bite. 
They spread a number of diseases – such as chikungunya, dengue, malaria, yellow fever, West Nile fever, and Zika virus – which together kill millions of people each year. 
Malaria alone is one of the world’s top infectious killers (behind only tuberculosis and AIDS), responsible for 429,000 deaths in 2015. 
Given the scale and scope of the problem, stronger action to eliminate mosquitos – and the diseases they carry – is a development imperative. 
The World Health Organization ranks mosquitoes among the top threats to public health, especially in developing countries. 
As a graphic on Bill Gates’ blog last year highlighted, mosquitos are responsible for 830,000 human deaths annually – 250,000 more than are caused by our fellow humans. 
Beyond the massive human costs, mosquito-borne diseases carry large economic costs. 
For an infected individual, those costs include treatment and hospital expenses, transportation to and from a health clinic or hospital, time spent out of work, and insect sprays or bed nets to protect against more disease-spreading mosquito bites. 
For countries, mosquito-borne diseases cost millions – even billions – of dollars each year. 
Governments must fund mosquito-control and prevention programs, from the use of insecticides to the distribution of mosquito nets, as well as public-education campaigns and vaccination initiatives. 
(Although there is no widely available vaccine for malaria, three countries are set to take part in a pilot immunization program starting in 2018, and some mosquito-borne diseases – such as yellow fever, Japanese encephalitis, and dengue – are vaccine-preventable.) 
Governments may also have to compensate communities affected by epidemics, fund research to treat illness or prevent future outbreaks, cover increased health-care costs, and sustain programs to help patients. 
Meanwhile, the economy suffers from reduced productivity. 
Eradicating mosquito-transmitted diseases must therefore be a top priority, eliciting not just effective government stewardship, but also the involvement of civil society, private-sector engagement, and the participation of affected communities. 
Beyond effective collaboration, success will demand improved surveillance and greater innovation, particularly in diagnostics, drugs and vaccines, insecticides, and vector control. 
The good news is that, on vector control – that is, mosquito eradication – promising innovations are already emerging. 
One such innovation uses a bacterium called Wolbachia, either to stop deadly viruses from growing or to reduce mosquito populations. 
Wolbachia is present in about 60% of species of insects, including some mosquitoes. 
One species where Wolbachia is not present naturally is the Aedes aegypti mosquito, which is responsible for transmitting human viruses like dengue, chikungunya, yellow fever, and Zika. 
Studies show that when Wolbachia is introduced into the Aedes aegypti mosquito, it can prevent the growth of human viruses within the insect. 
Another approach would be to release a large number of male mosquitos with the Wolbachia bacteria; females with which they mate would be unable to reproduce. 
Another innovation is a vaccine called AGS-v, developed by the London-based pharmaceutical company SEEK to provide broad protection against a range of mosquito-borne diseases. 
The vaccine is designed to trigger an immune response to mosquito saliva, thereby preventing infection from whatever virus the saliva contains. 
As with Wolbachia, researchers believe that AGS-v could also curb mosquito populations. 
After a mosquito takes a blood meal from a vaccinated person, the antibodies may attack the mosquito’s salivary proteins, affecting its ability to feed and to lay eggs – and thereby leading to its premature death. 
Phase I clinical trials of the vaccine, sponsored and funded by the National Institute of Allergy and Infectious Diseases, began in February. 
A third innovation is essentially a smart mosquito trap, capable of capturing only the mosquito species capable of spreading the Zika virus and other diseases. 
Part of Microsoft’s Project Premonition research initiative, the prototype trap uses an infrared light beam to identify specific mosquito species with more than 80% accuracy. 
When the trap captures a mosquito of interest, it saves related data, such as the time, temperature, humidity, and light levels, in order to enhance researchers’ understanding of mosquito behavior and, thus, their ability to address potential outbreaks. 
Such innovations promise to accelerate substantially efforts to curb deadly mosquito-borne diseases. 
The question is the extent to which they will be applied. 
After all, far more basic measures that individuals can take to protect themselves and their families are not being implemented nearly enough. 
For example, because mosquitos need water to breed, people should be removing puddles or other collections of standing water around their homes, puncturing unused tires, regularly cleaning birdbaths, and draining swimming pools. 
Liquid larvicides can be applied directly to water using backpack sprayers, and introducing fish into ponds, particularly in residential areas, can also help to eliminate larvae. 
As for adult mosquitoes, keeping grass and shrubs short limits resting places, thereby helping to control populations. 
Window and door screens should be installed and maintained, and the outdoors should be avoided in the morning and evening, when mosquitos tend to be most active. 
Long-sleeve shirts, long pants, and insect repellants can help minimize bites when staying inside isn’t an option. 
Such techniques aren’t foolproof, but they can go a long way toward protecting individuals. 
But people need to use them. 
And, for that, information must be shared widely, and the relevant tools made available to the public. 
Last month marked the 120th anniversary of the discovery that female mosquitoes transmit malaria among humans. 
Since then, malaria and other mosquito-borne diseases have been controlled and even eliminated in the developed world. 
Yet, in developing countries, the fight is far from over. 

Mothers of the Disappeared 
WASHINGTON, DC – “We were seeking justice. 
We wanted to prevent disappearance, for it to end. 
Unfortunately, I still see girls disappearing. 
I don’t want to be negative, but I don’t know when this will stop,” said Paula Flores of Juárez, Mexico, on July 3, 2016, 18 years after the disappearance and murder of her daughter, María Sagrario González Flores. 
Women like Flores, especially mothers of victims of violence, are constantly at the forefront of human-rights activism on issues like forced disappearance, femicide, and abuses by the military. 
Where state institutions or elected officials fail to take action against such violence, these women have filled a vacuum, challenging traditional gender roles in the process. 
Demanding justice in Mexico, a country where 98% of crimes fail to result in convictions, is no easy task. 
The country’s activist mothers and grandmothers follow in the Latin American tradition of predecessors like the Mothers of the Plaza de Mayo, who in 1977 began to march in front of the presidential palace in Buenos Aires, Argentina, to protest the mass disappearance of children under the military dictatorship. They marched weekly for years, forcing public discussion of human rights abuses under the dictatorship. 
The Plaza de Mayo mothers inspired similar groups from Africa to Serbia to Los Angeles, and brought them together in the mid-1990s as the International Gathering of Mothers and Women in Struggle. 
As Professor Marguerite Bouvard of Brandeis University documented in her 1996 book Women Reshaping Human Rights, women’s groups more generally have played a critical role in the human-rights movement, pursuing economic, social, and cultural justice and emphasizing the importance of human dignity and mutual respect among citizens and between citizens and the state. 
Even among women’s groups, however, mothers have a special place. 
They operate in countries that typically refuse to recognize the agency of women beyond the role of mothers, wives, and daughters. 
They use their given role as a badge of moral authority, taking their voices and their truth out of the home and into the streets to fight not for abstract concepts of justice, but for sons and daughters with names and histories. 
When renowned Honduran activist Berta Cáceres was murdered on March 3, 2016, it was her mother, Austra Bertha Flores Lopez, a midwife and social activist, who took the lead in holding the Honduran state responsible for her death. 
In the United States, mothers have been active in protesting police brutality in the Black Lives Matter movement. 
In India, they have marched to raise awareness of widespread sexual assault. 
And in Colombia, they have been active in the peace process, ensuring that the proposed agreement to end the FARC insurgency focuses on the lives of women. 
Flores and her fellow activists have committed themselves to a long road. 
In 2007, Mexico’s government adopted the General Law on Women’s Access to a Life Free of Violence, which defined and codified the term femicide in Mexico. 
But it had to be ratified by each of Mexico’s 31 states, and only the more liberal states did so. 
In 2009, mothers and activists brought the case of the “Cotton Field” femicides – eight girls and women whose bodies were discovered in Juárez in 2001 – before the Inter-American Court of Human Rights. 
The Court charged the government with failing to investigate the murders properly, and required the government to construct a monument to the victims and compensate families for their loss. 
For many mothers like Paula, change is measured in decades. 
But their work continues. 
In 2014, 43 students from the Ayotzinapa Rural Teacher’s College were on buses heading to Mexico City to join protesters on the anniversary of the 1968 Tlatelolco Massacre (in which up to 300 students were killed ten days before the opening of the Olympic Games). 
Local police stopped them near an army checkpoint. 
They were “disappeared” in what appears to have been a coordinated state action to silence young activists. 
It was mothers who immediately organized and took action to demand justice. 
During the 2016 clashes in the Mexican state of Oaxaca between the military and teachers protesting educational reforms, the military killed ten people, including 19-year-old Jesús Cadena Sánchez. 
“I went to look for my son where I heard shots fired. 
I was so desperate to find my son that I did not care about myself,” recounted Sánchez’s mother. 
August 30 was the International Day of the Victims of Forced Disappearance. 
Around Mexico, mothers of victims of disappearance and femicide organized protests. 
In Juárez, mothers marched to demand that governor-elect Javier Corral adopt policies to prevent forced disappearance. 
These mothers refuse to allow their children to be forgotten. 
Paula Flores founded a kindergarten in her neighborhood, Lomas de Poleo, named after the Carmelite martyr María Sagrario. 
She recently worked with a local artist to design a mural of Sagrario in front of her house. 
She and her daughter Guillermina have for years organized groups of mothers to paint crosses around the city at sites where girls and women have disappeared, a visual reminder of a problem that the city has failed to address for two decades. 
When the crosses fade, the mothers repaint them. 
Other mothers’ groups march wearing shirts or holding posters with the faces of their missing children. 
The writ of habeas corpus is one of the first and oldest protections in Western legal systems, requiring jailers – those who “have the body” – to provide a reason for the prisoner’s detention. 
If a citizen disappears due to another citizen’s actions, the kidnapper or murderer must be brought to account. 
Mothers bring a direct, emotional, and personal component to this age-old struggle, insisting on their children’s existence as citizens and human beings whose rights must be upheld. 

Motor City Meltdown 
WASHINGTON, DC – The financial crisis that began in 2007 has been persistently marked by muddled thinking and haphazard policymaking. 
Now, the United States Treasury is headed for a mistake of historic and catastrophic proportions by refusing to bail out America’s Big Three automakers. 
Make no mistake. 
If Detroit’s Big Three go bankrupt, the perfect storm really will have arrived with a collapse in both the real economy and the financial sector. 
This threat means that the financial bailout funds authorized by Congress can legitimately be used to support the automakers. 
Treasury’s refusal to do so is a monumental blunder that risks a general meltdown, the consequences of which will extend far beyond America’s shores. 
Proponents of a bailout for the Big Three have emphasized the enormous job losses associated with a bankruptcy scenario, including not only jobs directly provided by the automakers, but also jobs with parts suppliers, auto dealers, and in the transport and advertising industries. 
These job losses will then be multiplied locally and nationally. 
Lost wages will reduce consumption, causing additional job cuts, while factory closures will reduce investment, hitting employment in capital goods industries. 
Lost incomes will also drive down tax revenues, resulting in public-sector employment cutbacks. 
Moreover, the automakers are essential for closing the trade deficit, and their demise could bring another surge in imports. 
The automakers are also the backbone of American manufacturing, driving advances in manufacturing technology that will be needed if America is to be a world leader in the coming “green” transportation revolution. 
Additionally, the Big Three are vital to national security, supplying important military transportation assets. 
Lastly, bankruptcy will impose massive costs on the government’s Pension Benefit Guaranty Corporation (PBGC), further worsening the fiscal outlook. 
All of this is true. 
But missing from this array of arguments is the damage a bankruptcy of the Big Three would do to financial markets. 
In one fell swoop, the hard-won gains in stabilizing the financial system would be blown away. 
The Big Three and their auto finance associates (such as GMAC) are huge debtors whose liabilities are held throughout the financial system. 
If they go bankrupt, the insurance industry, which is likely a large holder of these debts, would quickly enter a spiral of collapse. 
Pension funds would also be hit, imposing further costs on the PBGC. 
But the greatest damage may come from the credit default swaps (CDS) market that brought down AIG. 
Huge bets have undoubtedly been placed on the bonds of GM, Ford, Chrysler, and GMAC, and bankruptcy will be a CDS triggering event requiring repayment of these bonds. 
Moreover, a Big Three bankruptcy will bankrupt other companies, risking a cascade of financial damage as their bonds and equities fall in value and further CDS events are triggered. 
This is the nightmare outcome that risks replicating the Crash of 1929. 
Opposition to the bailout is bringing back to the surface the worst of the conservative economic thought that got America and the world into this mess in the first place. 
The opposition of the Federal Reserve and Treasury to hands-on intervention meant that they were slow to understand that merely ring-fencing the commercial banks could not save the financial system. 
Now, they are failing to understand the financial significance of the Big Three. 
Conservative animus toward trade unions is also once again on display. 
But it is union weakness that has caused wages to stagnate and forced America to rely on debt and asset price inflation as the engines of growth. 
Another conservative accusation is that a bailout would infringe free-trade rules. 
But it is these rules that have fostered the trade deficits that have destabilized and undermined the American economy. 
The reality is that world trade would suffer far greater damage from the global economic fallout of a Big Three bankruptcy. 
Lastly, conservatives have trotted out the old moral hazard story in order to argue that a bailout would turn American manufacturing into a permanent beggar of government funds. 
In fact, business has always lobbied Congress for favors and tax breaks, and the Lehman Brothers experience proved the foolishness of confusing parables about moral hazard with crisis management. 
There are undoubtedly colossal problems in Detroit, and the bosses of the Big Three automakers could never be convicted of an excess of imagination. 
Economic policy has also contributed to their current condition as trade agreements and an over-valued dollar promoted auto imports, and incoherent energy and environmental policy stifled innovation. 
All of this must be fixed. 
But sacrificing the Big Three automakers will accomplish nothing while risking a tragic economic depression. 

Moving Beyond Mexico’s Crisis 
As the crisis over Mexico’s disputed presidential election continues, questions are being raised not only about the conduct of the seemingly defeated candidate, Andrés Manuel López Obrador, but also about Mexico’s presidential system. 
Is “presidentialism” as practiced in Mexico part of the problem? 
Felipe Calderón of the center-right ruling party, the National Action Party (PAN), is currently leading in the vote count, which must be confirmed by September. 
The next scheduled presidential election is not until 2012, as are elections to the Senate, whose assent is needed for most legislation. 
Thus, Calderón and his party allies, with 41% of the Senate seats, can never have a majority during his six-year term, and will also have a minority in the lower chamber, where the PAN holds only 43% of the seats, until at least 2009. 
If the street protests and legal challenges being mounted by López Obrador succeed, he will be in an even weaker position. López Obrador’s center-left Democratic Revolutionary Party (PRD), together with allied small parties, holds 31% of the Senate, and slightly less than one-third of the lower chamber. 
This means that for the first three years of a presidency brought to power amidst great popular demands, López Obrador would be able to enact little reform legislation. 
Moreover, he would not even be able to veto hostile legislation, because he would be the first president in Mexico’s modern history not to have the one-third of seats in at least one chamber of the legislature necessary to sustain a presidential veto. 
So, whoever wins the election will have a partial minority in the legislature for his entire six-year term, and his legitimacy will be questioned by large segments of the electorate. 
In fact, since 1985, fifteen Latin American presidents – most without legislative majorities – have not finished their term. 
No one would want Mexico to add to that total, or to witness the emergence of serious anti-democratic tendencies. 
Could the current standoff lead to such an outcome? 
Mexico’s transition to democracy between 1977-2000 was aided by a series of constitutional reforms that contributed to the emergence of the widely credible Federal Election Institute (IFE). 
To date, neither the IFE nor any major international monitor, has alleged widespread electoral fraud. 
Moreover, each of the seven judges on Mexico’s Federal Election Tribunal was individually approved by two-thirds majorities in the Senate, which included the PAN and the PRD. 
The Election Tribunal’s decision to recount only 9% of the ballot boxes cannot be reversed without more evidence of wrongdoing. 
If more evidence emerges, democratic prudence councils a complete recount. 
In the United States, the Supreme Court opted against a recount in Florida in 2000, fueling widespread doubts about the legitimacy of the result. 
The stakes could be even higher in Mexico. 
Whatever the result of a recount, the winner would command enhanced legitimacy. 
But the new president, whoever he may be, would still lack a legislative majority. 
In other words, the current crisis reflects a deeper, constitutional flaw. 
There are three classic models of democratic executives: pure parliamentarism, as in Britain; semi-presidentialism, as in Charles De Gaulle’s French Fifth Republic; and pure presidentialism, as in the US. 
Interestingly, whereas Britain, France, and the US have not altered their models, many other successful democracies have introduced major changes in order to prevent dangerous problems with how the “pure” variant functions in the local context. 
In interwar Europe, parliamentarism in many countries was plagued by frequent votes of no confidence, bringing down governments and leaving states rudderless for long periods. 
After World War II, many countries with parliamentary systems reduced the likelihood of such instability by adopting the so-called “constructive vote of no confidence.” 
Before a no confidence vote can be held, agreement must be reached on a new government majority to take its place. 
These majorities are often constituted by complex coalitions of three or more parties that concur on a minimum program. 
Since the new government could also fall unless it retains a legislative majority, parliamentary systems have important “coalition requiring” and “coalition sustaining” incentives. 
The semi-presidential model has also produced variants. 
The most perilous outcome under this model is when neither the president nor the prime minister has a majority, which has never occurred in France, but has occurred in postcommunist countries such as Russia and Ukraine. 
In such circumstances, presidents have abused their powers and created “super-presidential semi-presidential” authoritarian regimes. 
To prevent this, Portugal, Poland, Lithuania, Slovenia, and recently Croatia and Ukraine reduced the constitutional powers of the directly elected president and increased the parliament’s powers. 
Mexico’s crisis is the ideal time to consider new variants of presidentialism. 
One alternative, called “parliamentarized presidentialism,” retains direct presidential elections, which many societies still demand. 
If a candidate emerges with at least 50.1% of the popular vote, he or she is declared president. 
In these circumstances, the model functions as classic presidentialism (even if it does not produce legislative majorities). 
If, however, no candidate receives 50.1% of the popular vote, the elected legislature chooses the president, who thus would begin his term with a legislative majority. 
Unlike a directly elected president in classic presidentialism, such a legislatively produced president could be voted out by a “constructive vote of no confidence,” leaving incumbents subject to “coalition requiring” and “coalition sustaining” incentives. 
Of course, there is no guarantee that such a system would bring greater democratic stability to countries like Mexico, but it would provide many more mechanisms to resolve crises than are currently available. 
There is much more thinking to be done. 
Now is the time to do it. 


Moving Pictures 
CANNES – This year’s Cannes Film Festival was marked by a profound contrast between what unfolded along La Croisette, the palm-lined sweep of pedestrian walkway that stretches between swathes of luxury hotels and the azure Mediterranean, and the films debuting onscreen. 
Outside all was glitter, excess, posturing, and brand names. 
Young women in five-inch heels and revealing clothing prowled for wealthy men – or were imported by them to decorate boats and premiere parties. 
Every night, the parade of stars up the red carpet, flanked by photographers, played out like a relic of a more ritualistic time. 
Inside the Palais, the hulking brutalist structure where the films are screened, this year’s lineup was filled with tales of ordinary people, or poor people, struggling with the fallout of the global issues that increasingly unite us – or confronting painful political conflicts that official histories had laid to rest. 
If in the past Cannes showcased films telling a hundred different kinds of stories, this year’s offerings made clear that in an increasingly flattened and wired world, there is really only one story – with a hundred different inflections. 
Thai cinema’s gifted young director Apichatpong Weerasethakul’s film, Uncle Boonmee Who Can Recall His Past Lives, won the Palme d’Or. 
It is a Spanish-German-French-British-Thai co-production, the kind of international collaborative effort we are increasingly seeing in film – a form of cross-border collaboration that should point the way to other forms of global civil-society projects. 
The film, whose production was slowed by the “red shirt” revolt in Thailand, deals in part with themes of past violence. 
At one point, the project – which is also part of a massive art installation – refers to the history of a village: local teenagers recount that, “Soldiers once occupied this place. 
They killed and tortured villagers and forced them to flee to the jungle.” 
Poetry, by South Korean director Lee Chang-Dong, also deals with a family reconciling themselves through pain to a prior conflict. 
It tells the story of an elderly woman who is forced to face her past as a torturer. 
Other films address a conflict that is closer to home here in France. 
Outside the Law, directed by Rachid Bouchareb, narrates the story of the massacre at Setif, Algeria, in May 1945. 
The film tracks the events surrounding three Algerian brothers over a 35-year period, and brings to light aspects of the massacre that had been considered taboo in France. 
Strikingly, Outside the Law is a Franco-Algerian production, and it has already caused political controversy: it was denounced by Lionnel Luca, a French deputy who is, as one French periodical put it, “nostalgic for a French Algeria.” 
The film actually sparked a noisy protest along La Croisette, with French veterans defensively and aggressively singing “La Marseillaise,” even as couples dressed in black tie and gowns swept in a parallel path to the evening's festivities. 
In response, the mayor of Cannes organized a ceremony to commemorate all victims of the French-Algerian conflict. 
Still another film reawakens not-so-distant American history and casts it in a radically altered light: Doug Liman’s Fair Game reinterprets the Valerie Plame/Joe Wilson scandal of 2003, and reveals that Plame was far from being a glorified secretary, as the Bush administration had portrayed her. 
On the contrary, she led a team that intercepted components of nuclear weapons at their source, whisked them away to the United States, altered them slightly so that they would not work, and replaced them. 
So the Bush administration’s leak of her identity ended not just her career, but also a sensitive program that had kept us all safe. 
Other films simply tell stories of people who are not usually portrayed by film. 
Los Labios, an Argentine project directed by Santiago Loza and Ivan Fund, simply follows three government-funded nurses who go to a rural area to serve the needs of the impoverished local population. 
It humbly tracks their accounting of cases of malnourishment, alcoholism, diseases of poverty, and the ravages of unemployment and inadequate medical care. 
Similarly, Sergei Loznitsa’s My Joy simply explores the life of a Ukrainian truck driver named Georgy, who gets lost and finds himself in an archetypal Russian village, where he is drawn into daily life. 
This is a real cinema of humility – the directors again and again have chosen to take seriously the dramas and struggles of ordinary people and find the heroism or tragedy therein. 
What does it all mean? 
The many movies that critically revise settled national narratives suggest that people are no longer willing to accept history that has been crafted by elites for their own purposes. 
In most cases, the directors researched their own films by interviewing sources who were close to the action, or close to the main events at a grassroots level. 
That is an exciting development, though initially it implies a messier historical narrative. 
In Bouchareb’s film, for example, there is not a unified story of the occupation of Algeria, but many points of view that a young French teenager (or French-Algerian teenager) can witness and draw from. 
That is surely good, especially in an open society. 
So is the focus of other films on the struggles of ordinary people. 
To be sure, simply championing populism for its own sake – a Stalinist or New Left reflex – makes for bad art. 
But the flattening of the world has led to a flattening of the kinds of people who can be seen as heroes or seekers. 
By bringing these subjects into focus, great film directors have gained a larger and more representative world of stories from which to work their magic. 

Mr. Hu Goes to Washington 
LONDON – President Hu Jintao will travel to the United States for his third official visit as China’s leader on January 19. 
It may be his last before he hands over power to his apparently designated successor, Vice President Xi Jinping, in 2012 – coincidentally the same year that President Barack Obama will be campaigning for a second term in the White House. 
According to Forbes Magazine, Hu is the most powerful man in the world. 
Leaving aside the fact that power at the top is much more bureaucratically institutionalized in China than it was in Mao Zedong’s day (a good thing), certainly this visit is hugely important. 
Indeed, the US-China relationship will be the most significant bilateral engagement in shaping the course of the twenty-first century. 
At the heart of globalization has been the emergence of fast-growing economies, most notably Brazil, India, and, above all, China. 
The US, of course, remains the world’s only superpower – militarily, economically, politically, and culturally. 
While the world’s democracies are not slow to criticize American leadership, they know that they rely on the US in tackling most serious global problems. 
Without America, nothing much gets done. 
But China now has enough commercial clout, backed by more than $2 trillion in foreign-exchange reserves, to play a decisive role in advancing or impeding global problem-solving, from the G-20 agenda to efforts to rein in North Korea’s nuclear ambitions. 
China is far too big to be taken for granted, and it wants to be shown the respect that it associates with being an ancient civilization that has contributed so much to human progress. 
For the rest of us, the key question is whether America and China will be increasingly acrimonious competitors or cooperative partners, albeit with very different political systems. 
Will they fight to dominate the century, or to make it more peaceful and prosperous? 
China has become surprisingly maladroit in handling the US and its Asian neighbors in recent months. 
Its leaders seem to have interpreted Obama’s attempts to engage with them, down-playing bilateral aggravations, as a sign of American weakness in the wake of Wall Street’s crash and military reverses in Iraq and Afghanistan. 
Arrogance has replaced sophisticated modesty. 
What else can explain the treatment of Obama on his first trip to China and during the disastrous 2009 climate-change conference in Copenhagen, where a relatively minor Chinese official wagged his finger in the face of the US president? 
China’s official behavior following the award of the Nobel Peace Prize to Liu Xiaobo turned an embarrassment into a public-diplomacy disaster, and China’s neighbors have been disturbed by Chinese efforts to throw its weight around. 
Japan, Vietnam, and even Singapore have reacted with consternation, highlighting the need for America to remain the principal guarantor of stability in Asia. 
It is surprising that this has happened under Hu, a cautious and intelligent man. 
Maybe this behavior is attributable to the imminent leadership change, with an aggressive faction in the Communist Party Politburo and Central Committee needing to be mollified. 
There must be some explanation for China choosing this moment even for an unnecessary and ham-fisted row with the Vatican. 
So the stakes in Washington are high for President Hu. 
He will hear for himself the strength of American arguments about trade and the renminbi’s exchange rate. 
He will be able to point out, at least in private, that if you look at the real effective exchange rate – taking account of the impact on export prices of rising labor costs – the renminbi-dollar gap is a lot less important than China’s critics suggest. 
But he must also provide some real evidence that China is opening its markets as domestic consumption grows, and that it recognizes that a sustainable global recovery requires adjustments in China as well as America to redress international imbalances. 
On the security front, China should show that it shares the nervousness in America, Europe, and the Middle East about the nuclear ambitions of North Korea and Iran. 
It is not enough to hope for the best. 
No one doubts that North Korea is responsible for its own delinquent behavior. 
But China’s public failure to distance itself from the North’s military provocations has undermined its credibility in efforts to defuse the crisis. 
More important, China must make clear that it will support tougher sanctions on Iran – and help to implement them – if the Iranian regime continues to lie about its nuclear program. 
Iran’s oil and gas should not blind China to the dangers to its neighborhood and the entire world if the Islamic Republic develops a nuclear weapon. 
China deserves to be treated seriously as a major player in global governance. 
But, in order to secure the status that it desires, it must demonstrate that it understands that partnership is a two-way street. 

Ms. Europe or Frau Germania? 
BERLIN – Just what is the matter with Angela Merkel? 
Only a short while ago, she was celebrated as “Ms. Europe”; now, she increasingly gives the impression of being Frau Germania. 
Instead of providing resolute leadership in the global financial and economic crisis, the European Union’s largest economy is withdrawing into its shell. 
Germany has always been the motor of European integration, in accordance with its political and economic interests. 
Every post-World War II government has always been willing to harness Germany’s financial strength to further that aim, i.e., to foot the bill for Europe. 
The motto was simple: Germany gives and profits in turn. 
Should Germany spurn the first part of this formula, the European project would suffer serious damage – and so will German national interests. 
Yet this is the direction in which Chancellor Merkel seems to be heading. 
Indeed, in the wake of the Greek crisis, Merkel spoke publicly of the need to be able to exclude eurozone members that do not play by the rules. 
Does she seriously believe that the euro and the EU would survive such punitive action? 
Instead of ideas for strengthening the solidarity and stability of the eurozone, absurd proposals are floated in Berlin. 
The idea that Germany would show financial solidarity with weakened eurozone members only if they accept draconian stabilization measures is similarly unrealistic. 
Such measures would only exacerbate deflation in these countries, which are the most important markets for German exports. 
What is essential is the right combination of stability and financial aid, even if the latter is unpopular with the German public. 
To be sure, eurozone member states also needed the courage to respond to the crisis of confidence confronting the common currency with concerted action for tighter control of national budgets and improved cooperation. 
As a first step, however, Greece must be given help, through the financial solidarity of EU governments. 
On the other hand, foreign criticism of Germany for running a current-account surplus similar to China’s is unfounded. 
Such criticism disregards two important differences: first, unlike China, Germany, as a member of the eurozone, cannot undervalue its currency. 
Second, German “exports” go mainly to the EU. 
To demand that Germany should stop increasing its competitiveness, or even reduce it, is simply bizarre. 
From 1990 to 2005, Germany struggled with high unemployment, slow growth, and low competitiveness, and Europe’s economy suffered as a result. 
Recovery was difficult to achieve, but the Common Market has profited from Germany’s renewed competitiveness. 
The crucial point is not the German economy’s renewed strength, but whether Germany will use this strength in Europe’s interest or its own. 
Unfortunately, Merkel seems to have decided on the second option, because it entails fewer domestic political risks. 
The responsibility for the current conflict within the EU rests with eurozone governments, but primarily with Germany and France, the zone’s two strongest economies. 
Rather than lead, the Franco-German couple is constantly, and publicly, at each other’s throats. 
While today’s quarrel is about who should pay for restructuring Greece, the real issue is the latent distrust between the two partners, which carries the danger of a permanent estrangement. 
From the German point of view, France only wants to solve its national budget and debt problems at Germany’s expense, simultaneously weakening Germany’s competitiveness. 
The French government, on the other hand, fears that the Germans’ commitment to eurozone stability is a ploy aimed at pushing France into a corner and leaving it behind economically. 
Since the global crisis erupted in the fall of 2008, both Merkel and French President Nicolas Sarkozy have been faced with threats that their political majorities might disappear if they put aside their national interests in favor of a European compromise. 
France has no chance of meeting Germany’s stabilization objectives unless Sarkozy wants to forget about re-election. 
Merkel would cause outrage among her conservative voters (as well as court defeat at the German Constitutional Court in Karlsruhe) should she agree to a more free-spending policy, including any direct financial assistance for Greece. 
Soon, Helmut Kohl, Europe’s Honorary Citizen and Germany’s Chancellor of Reunification, will be celebrating his 80th birthday. 
As is usual on such occasions, there will be a lot of lofty speeches about Europe. 
But, in view of the current situation, we can safely ignore these. 
What Europe needs in this serious crisis are statesmen and women of Kohl’s caliber, not domestic politicians! 
As the big economic and political winner of the eurozone, Germany, in particular, cannot let a serious crisis of confidence threaten the European project, because nearly two-thirds of its exports go to the EU. 
Ever since the collapse of Lehman Brothers in September 2008, it has been clear that the global crisis would challenge the EU and the euro, because Europe lacks a common government and fiscal policy. 
Coordination within the eurozone – above all between its most important economies, France and Germany – is therefore all the more important. 
It is in Berlin and Paris, first and foremost, that the crisis-management strategy for the eurozone must be decided. 

Mubarak’s Last Laugh? 
CAIRO – August 3, 2011, will be remembered as a historic day in Egypt. 
Former President Hosni Mubarak was put on public trial, together with his two sons and his ex-interior minister, General Habib el-Adly. 
The repercussions for Egypt, indeed for the entire Arab world, will be profound. 
This is not the first time that an Arab dictator has been put on trial. 
Saddam Hussein and Zine El Abidine Ben Ali preceded Mubarak in the dock. 
Hussein was tried with the help of a United States-led coalition; 
Ben Ali was tried and convicted in absentia, after fleeing to Saudi Arabia. 
But in Egypt, “It was done exclusively by Egyptians for Egypt,” as a friend put it to me. “That is why we are so proud of it.” 
But the run-up to the trial was contentious. 
On July 29, many organizations staged a large protest in Cairo’s Tahrir to highlight the unity of Egypt’s revolutionaries (whose demands included a public trial of Mubarak). 
Instead, the protest exposed the dramatic polarization between Islamists and secularists since Mubarak’s ouster. 
Moreover, it revealed the potent capacity of Egypt’s Salafis to mobilize supporters, who were the overwhelming majority in Tahrir Square that day. 
Other groups, including the leftist April 6 Youth Movement and the multi-ideological Coalition of the Revolution’s Youth, looked minute and insignificant. 
As a result, many secular activists ended their week-long sit-in and withdrew from Tahrir Square. 
Ironically, this was what the ruling Supreme Council of the Armed Forces (SCAF) wanted, and it was achieved at no cost in violence or military tribunals. 
Chants of “islamiyya, islamiyya” (Islamic, Islamic) were enough. 
With no representative institutions and the military in control of the country, street mobilization has become the main tool of Egyptian politics. 
Following the March 19 referendum, in which most Islamists campaigned for a package of constitutional amendments and got 77% support, secularists took to the streets, mobilizing behind their own demands. 
Those demands were mostly uncontroversial for Egypt’s revolutionaries, including Islamists: the release of political prisoners; a halt to military tribunals for civilians; prosecution of the murderers of protesters (many of whom are senior police officers); a purge of corrupt Mubarak allies from the police force; and a public trial for Mubarak and his regime’s top henchmen. 
But then came some controversial demands. 
Fearing that elections might bring an Islamist majority to Parliament and to the assembly that will write a new constitution, most secularists demanded supra-constitutional principles (akin to a bill of rights, with a few twists) or a constitution to be enforced by the SCAF before elections. 
They staged street demonstrations, mobilized media pressure, and lobbied the SCAF. 
It worked. 
The SCAF announced that it is forming a body of constitutional experts to craft several versions of a potential constitution. 
Obviously, the SCAF has its own calculations, which probably have less to do with protecting a liberal Egypt than with protecting the military’s financial independence and shielding itself from accountability to civilian institutions. 
The secularists’ gains were a wake-up call for the Islamists, and they responded en masse on July 29. 
But Egypt’s old-line Muslim Brotherhood, with all of its factions, tendencies, and offshoots, no longer appears to be the country’s dominant Islamist force, as Salafis challenge the Brotherhood’s traditional hegemony. 
The Salafis are defined in part by their strict theological orthodoxy. 
Their belief in the superiority of literal interpretations of Islamic texts and their deep animosity towards religious innovation (broadly defined) reflect their certainty that the first three generations of Muslims possessed the best understanding of Islam, and should provide guidance for future generations. 
But Salafism is also a powerful source of personal identity, shaped and reinforced by a common form of dress and style of beard, a high degree of social conservatism, and a generally negative (but nuanced) perception of liberal individualism. 
“I raise my head high as I am an Egyptian, and I raise my head even higher as I am a Salafi,” an assistant of a leading Salafi sheikh proudly told me. 
At the same time, Salafis’ social origins, organizational structures, political behavior, and even their views on democracy, violence, and state authority, are quite varied. 
Decentralized organization, multiple leaderships, and conflicting ideological stances make the Salafi trend amorphous, volatile, and susceptible to manipulation and infiltration. 
That has been the pattern observed in Algeria, Saudi Arabia, and Yemen. 
Egypt may follow. 
At the moment, Egyptian liberals’ main concern should be their popular appeal and ability to mobilize support, rather than picking fights with the Salafis and trying to enforce a constitution by any means, democratic or not. 
During its transition period (1988-1991), Algeria’s secularists crafted a pluralist constitution that excluded religious parties. 
Yet, when parliamentary elections were held in 1991 – more than two years after the constitution was adopted – the Islamic Salvation Front still won. 
The Algerian secularists’ strategy of exclusion, fraud, cheating, and gerrymandering backfired badly: Islamists were perceived as victims, while secularists – with some exceptions – were cast as unprincipled opportunists. 
Enforcing a secular constitution before elections does not guarantee a secular outcome. 
Popular support does. 
Unity among the former revolutionary opposition is critical for the success of any democratic transition, and Egypt is no exception. 
The public trial of Mubarak shows what united demands can achieve. 
Egyptian and other Arab revolutionaries should therefore keep the lessons of July 29 and August 3 in minds. 
Unity now can bring justice and freedom later. 
Polarization will bring neither. 

Mubarak’s Odious Debts 
NEW YORK – A glance at Egypt’s public finances reveals a disturbing fact: the interest that the country pays on its foreign loans is larger than its budget for education, healthcare, and housing combined. 
Indeed, these debt-service costs alone account for 22% of the Egyptian government’s total expenditures. 
The impact has become impossible to ignore. 
With growing political uncertainty and a slowing economy, Egypt is likely to witness decreasing government revenues, increasing demands for urgent spending, and rising interest rates on government borrowing. 
This could lead to a fiscal catastrophe for the government at the very moment when the country is attempting a complicated political transition. 
Egypt’s public debt is around 80% of GDP, very close to the 90% level that economists Kenneth Rogoff and Carmen Reinhart identify as a harbinger of slower growth and heightened vulnerability to financial and fiscal crises. 
Egyptians need only glance north, at the European debt crisis, to understand they should sort out their debt problem now, rather than waiting until it reaches Greek proportions. 
This debt was incurred during the 30-year reign of the deposed president, Hosni Mubarak. 
In international law, debt that is incurred without the consent of the people, and that is not used to their benefit, is referred to as “odious”; as such, it is not considered transferable to successor regimes. 
The reasoning is simple and logical: if someone fraudulently borrows money in my name, I am not expected to pay it back, and neither should a country’s population when an unrepresentative leader borrows in their name and to their detriment. 
For three decades, Mubarak’s borrowing only enriched him and his ruling clique while impoverishing and repressing the rest of Egypt. 
Corruption was rife, but not just the covert type: public money was openly used to support many businesses under flimsy pretexts like “fostering economic growth” and “creating employment.” 
Along with regulatory capture, this harmed competitiveness, market openness, and Egypt’s small and medium-size businesses. 
The beneficiaries of this largesse are now mostly sitting in prison awaiting trial. 
The rest of Egypt, however, only felt this money in the form of an ever-expanding state apparatus that solidified Mubarak’s rule, crushed dissent, and repressed millions. 
When Egyptians rose up against Mubarak in January, they were confronted by weapons paid for with borrowed money. 
Is it fair to expect Egyptians to continue paying for their previous repression and impoverishment at the hands of Mubarak and his cronies? 
Since this money clearly benefited Mubarak but not his people, should it not be Mubarak, rather than his victims, who is held responsible for it? 
The type of regime Mubarak was running had been clear for many years, and it was also clear how the money was being used. 
A prudent lender should have considered these facts before making the loans. 
So the banks and international institutions that lent money to Mubarak should bear the responsibility of their choice to bankroll his repressive regime. 
The new Egypt should make a clean break with Mubarak and his creditors, and let them sort out their business among themselves without involving the Egyptian people. 
The Egyptian government’s only role should be to help liquidate Mubarak assets for repayment should the need arise. 
This would be not only fair, but it also would teach an important lesson to those who bankroll dictators – a lesson that is likely to have an immediate positive impact worldwide. 
Lenders to a repressive regime will no longer expect these debts to be repaid by its successors, immediately making lenders worldwide careful about lending to them. 
An Egyptian precedent would bring awareness and sobriety to an entire generation of lenders that is not accustomed to considering this type of risk, and that may even be unfamiliar with the doctrine of odious debt. 
Repressive regimes would find it harder to borrow, which would, in turn, make it harder for them to repress their people, and make it easier and cheaper for responsible and legitimate governments to secure important funding when they need it. 
Transferring liability for foreign debt to Mubarak should not have negative economic consequences for Egypt in the long run. 
This move should not be understood as a move towards fiscal recklessness, but as a one-time break from it. 
With a smaller debt burden and interest payments, Egypt’s fiscal position would improve significantly, and threats to economic growth would recede. 
Foreign lenders’ resulting caution would prevent future Egyptian governments from irresponsibly saddling their populace with debt. 
Perhaps most importantly, the days of borrowing to build a large state security apparatus would be gone for good – worldwide. 
For the sake of Egyptians and people living under tyranny everywhere, Egypt’s government must take a brave stand. 

Muddling Out of Freefall 
NEW YORK – Defeat in the Massachusetts senatorial election has deprived America’s Democrats of the 60 votes needed to pass health-care reform and other legislation, and it has changed American politics – at least for the moment. 
But what does that vote say about American voters and the economy? 
It does not herald a shift to the right, as some pundits suggest. 
Rather, the message it sends is the same as that sent by voters to President Bill Clinton 17 years ago: “It’s the economy, stupid!” and “Jobs, jobs, jobs.” 
Indeed, on the other side of the United States from Massachusetts, voters in Oregon passed a referendum supporting a tax increase. 
The US economy is in a mess – even if growth has resumed, and bankers are once again receiving huge bonuses. 
More than one out of six Americans who would like a full-time job cannot get one; and 40% of the unemployed have been out of a job for more than six months. 
As Europe learned long ago, hardship increases with the length of unemployment, as job skills and prospects deteriorate and savings gets wiped out. 
The 2.5-3.5 million foreclosures expected this year will exceed those of 2009, and the year began with what is expected to be the first of many large commercial real-estate bankruptcies. 
Even the Congressional Budget Office is predicting that it will be the middle of the decade before unemployment returns to more normal levels, as America experiences its own version of “Japanese malaise.” 
As I wrote in my new book Freefall , President Barack Obama took a big gamble at the start of his administration. 
Instead of the marked change that his campaign had promised, he kept many of the same officials and maintained the same “trickle down” strategy to confront the financial crisis. 
Providing enough money to the banks was, his team seemed to say, the best way to help ordinary homeowners and workers. 
When America reformed its welfare programs for the poor under Clinton, it put conditions on recipients: they had to look for a job or enroll in training programs. 
But when the banks received welfare benefits, no conditions were imposed on them. 
Had Obama’s attempt at muddling through worked, it would have avoided some big philosophical battles. 
But it didn’t work, and it has been a long time since popular antipathy to banks has been so great. 
Obama wanted to bridge the divides among Americans that George W. Bush had opened. 
But now those divides are wider. 
His attempts to please everyone, so evident in the last few weeks, are likely to mollify no one. 
Deficit hawks – especially among the bankers who laid low during the government bailout of their institutions, but who have now come back with a vengeance – use worries about the growing deficit to justify cutbacks in spending. 
But these views on how to run the economy are no better than the bankers’ approach to running their own institutions. 
Cutting spending now will weaken the economy. 
So long as spending goes to investments yielding a modest return of 6%, the long-term debt will be reduced, even as the short-term deficit increases, owing to the higher tax revenues generated by the larger output in the short run and the more rapid growth in the long run. 
Trying to “square the circle” between the need to stimulate the economy and please the deficit hawks, Obama has proposed deficit reductions that, while alienating liberal democrats, were too small to please the hawks. 
Other gestures to help struggling middle-class Americans may show where his heart is, but are too small to make a meaningful difference. 
Three things can make a difference: a second stimulus, stemming the tide of housing foreclosures by addressing the roughly 25% of mortgages that are worth more than the value the house, and reshaping our financial system to rein in the banks. 
There was a moment a year ago when Obama, with his enormous political capital, might have been able to achieve this ambitious agenda, and, building on these successes, go on to deal with America’s other problems. 
But anger about the bailout, confusion between the bailout (which didn’t restart lending, as it was supposed to do) and the stimulus (which did what it was supposed to do, but was too small), and disappointment about mounting job losses, has vastly circumscribed his room for maneuver. 
Indeed, there is even skepticism about whether Obama will be able to push through his welcome and long overdue efforts to curtail the too-big-to-fail banks and their reckless risk-taking. 
And, without that, more likely than not, the economy will face another crisis in the not-too-distant future. 
Most Americans, however, are focused on today’s downturn, not tomorrow’s. 
Growth over the next two years is expected to be so anemic that it will barely be able to create enough jobs for new entrants to the labor force, let alone to return unemployment to an acceptable level. 
Unfettered markets may have caused this calamity, and markets by themselves won’t get us out, at least any time soon. 

Fifty Shades of Trump 
WASHINGTON, DC – Last week was a most unusual one for President Donald Trump’s administration. 
There was no high-level firing: the only dismissal of any note was that of the White House aide in charge of homeland security, who was forced out at the behest of John Bolton, who had just taken over as Trump’s third national security adviser in 15 months. 
Nonetheless, it may well have been the most turbulent week yet of Trump’s presidency. 
Bolton’s appointment was enough to set much of Washington trembling with fear that he would reinforce Trump’s most pugnacious views, for example, that the 2015 Iran nuclear agreement should be scrapped. 
Still, it has been widely speculated that Bolton, reportedly a bureaucratic whiz, was outmaneuvered by Defense Secretary James Mattis on the question of how far to take the military attack on Syria in retaliation for the latest use of chemical weapons by Bashar al-Assad’s government against its own people. 
In the end, the attacks by the US, the United Kingdom, and France were restricted to targets believed to be chemical weapons and storage facilities. 
Questions are being raised in the Senate about the suitability of Mike Pompeo, a hardliner on Muslims and Russia, to succeed Rex Tillerson as Secretary of State. 
And with Bolton now ensconced in the West Wing, the consensus is that only Mattis stands between Trump and military overreach. 
(Mattis supports the Iran deal.) 
Trump’s most peculiar recent personnel move – part of an ever-growing list of dismissals – was to fire David Shulkin as head of the Veterans Administration, a Leviathan of an agency, and nominate his personal physician for the job. 
The number of pending nominations for high-level positions ahead of November’s midterm congressional elections is believed to be one reason for Trump’s reluctance to fire his most controversial appointee, Scott Pruitt, the head of the Environmental Protection Agency. 
Pruitt’s determination to reverse the EPA’s achievements in reducing air and water pollution, especially regulations adopted during Barack Obama’s presidency, bespeaks Trump’s own resentment of Obama. 
In addition, major polluting industries are enthusiastic about Pruitt. 
The problem is that in an administration filled with grifters and experts at indulging in first-class air travel and other comforts at taxpayers’ expense, Pruitt is probably the champ. 
Trump blows hot and cold on Pruitt, and observers have learned not to predict what he might do with regard to any aspect of policy and personnel. 
That is also true of the question creating the most tension: whether Trump will try to end the investigation into whether he or his campaign conspired with Russians to try to swing the 2016 election in his favor. 
The evidence of such collusion is mounting. 
Trump, according to many observers, has absorbed the idea that firing Special Counsel Robert Mueller, who is leading the probe, wouldn’t go down well at all. 
The supine congressional Republicans, terrified of Trump and his base of devoted supporters, are actually beginning to show some spine and are moving toward backing a resolution that would protect Mueller, who is supported by a large majority of the public. 
But Trump and his closest congressional allies are still trying to undermine the investigation by smearing the FBI, which is implementing it, and Justice Department officials who are overseeing the FBI’s work. 
Trump has hinted that he may fire Deputy Attorney General Rod Rosenstein, who presides over the investigation. 
The president remains furious that Attorney General Jeff Sessions, who was Trump’s sole Senate backer from early in the 2016 campaign, has recused himself from the investigation. 
When Trump gets particularly angry, he remains so, exhibiting his rage in unexpected ways. 
It seems that nothing has made him angrier than the FBI’s extraordinary April 9 raid on the office, home, and hotel room of Michael Cohen, his principal personal attorney and fixer. 
Ostensibly, the FBI acted because Cohen had been involved in the most lurid aspects of Trump’s public career. 
But Cohen might also have been involved in a 2016 conspiracy with Russia, and his own business affairs are under investigation. 
Since early this year, it has seemed possible that Trump might be brought down not by his and his campaign’s possible dealings with Russia, but by a pulchritudinous adult film star whose professional name is Stormy Daniels (her real name is Stephanie Clifford). 
Daniels and her aggressive attorney are fearless toward Trump, on whose behalf Cohen arranged to pay her $130,000 shortly before the election to keep quiet about her one-time liaison with Trump, which occurred early in his marriage to Melania Trump and four months after the birth of his son, Barron. 
One question raised by the deal is whether the $130,000, which Cohen says he paid out of his own pocket without Trump’s knowledge, amounted to an illegal campaign contribution. 
Another mystery is why Trump, who has been less bothered by revelations of a longer affair at around the same time with a former Playboy model, seems particularly terrified of Daniels. 
Unusually for him, he has refused to comment or tweet about her. 
At week’s end, a memoir by former FBI director James Comey, whose firing by Trump led to Mueller’s appointment, began to leak, also arousing Trump’s ire. 
He called Comey a “weak and untruthful slime ball,” and, as has happened before, his attack on the author of an unflattering book helped propel it to the top of the bestseller list before it was officially released. 
The attack on Syria seems to have distracted public attention from Trump’s scandals only temporarily, given Comey’s coming high-profile book tour. 
But there is a growing sense that what Mueller is in the process of getting on Cohen may present the greatest danger of all to the president. 

The Shape of Charges to Come? 
WASHINGTON, DC – When the news broke last week about the specific documents sought by Robert Mueller, the special counsel heading the federal investigation into Russia’s role in the 2016 election and whether Donald Trump’s campaign colluded with the Kremlin, a chill fell over Trump’s already jittery White House. 
The documents to be turned over covered some familiar events that could well lead to Trump being charged with obstruction of justice, or might show that his campaign was, at the very least, interested in playing with the Russians. 
The possible or even likely obstruction charge would derive from Trump’s various efforts to block the investigation. 
In particular, Trump asked FBI director James Comey to go easy in his investigation of retired General Michael Flynn, the former national security adviser whom Trump reluctantly fired, ostensibly because he had lied to Vice President Mike Pence about the nature of post-election telephone calls with the Russian ambassador. 
Pence then reassured the country that Flynn and the ambassador had simply exchanged small talk, such as Christmas greetings. 
In fact, they had discussed the possibility of Trump lifting sanctions that outgoing President Barack Obama had imposed on Russia as punishment for its interference in the election. 
Mueller no doubt wants to know if Trump was aware of or consented to Flynn’s discussions. 
Trump also asked senior US intelligence figures to try to convince Comey to go easy on Flynn. 
One mystery is why Trump was so anxious to protect Flynn. 
Does Flynn have compromising information about the president? 
Then there was Trump’s firing of Comey in May, followed by misleading statements from White House aides regarding why he had done so. 
But then Trump blurted out in a television interview that when he fired Comey, he had in mind “this Russia thing.” 
The next day, at a meeting in the Oval Office, Trump told senior Russian officials that firing Comey had relieved “great pressure” on him. 
It’s definitely not a good idea, as Richard Nixon learned during the Watergate scandal, for a president to fire his own investigator. 
Trump’s firing of Comey saddled him with Mueller, a former FBI director in Democratic and Republican administrations, praised by politicians in both parties for his integrity. 
Trump is just one of the people at risk of criminal charges as a result of Mueller’s investigation. 
Others in Mueller’s sights are Trump’s former campaign chairman, Paul Manafort, and Trump’s son-in-law, Jared Kushner. 
Kushner and his wife, Ivanka Trump (said to be the president’s favorite child), have offices in the White House, and Kushner is involved in an absurdly broad array of issues, from resolving the Israel-Palestine conflict to reorganizing the federal government. 
Mueller has hired experts on financial crime – an ominous development for other targets. 
While Mueller is investigating Kushner’s campaign activities, he is also understood to be taking a close look at Kushner’s immense real estate business. 
A few years ago, Kushner and his father bought the most expensive building in New York City, 666 Fifth Avenue, leaving them enormously indebted and unable to finance the mortgage. 
Jared Kushner’s eagerness to secure the large sums needed to stay afloat has led him to seek foreign lenders, including a Russian banker close to Vladimir Putin. 
Mueller is also known to be putting the squeeze on Manafort, a lobbyist and political consultant with a history of helping dictators. 
One of his most infamous clients was the pro-Russian Viktor Yanukovych, who, upon winning the presidency of Ukraine, imprisoned his main rival, the previous prime minister, on trumped-up charges. 
Mueller’s team is poring over Manafort’s business dealings – projects around the world, debts, funds stashed in foreign tax shelters, suspected money laundering, and more. 
To put pressure on Manafort, Mueller even staged a pre-dawn raid on his home in northern Virginia and let him know that he’ll be indicted – presumably to persuade him to give up information about Trump. 
Although Manafort was dropped from the Trump campaign last August, following embarrassing news stories about his work in Ukraine, Trump, acting against the advice of aides, continued to talk with Manafort into the early months of his presidency. 
Also, it was recently revealed that in 2016, while Manafort was still campaign chair, he offered to conduct briefings for a Russian oligarch about the presidential campaign. Campaign chairs are usually too busy for such a task. 
Mueller obviously hopes to “flip” both Flynn and Manafort. 
And the president’s son, Donald Trump Jr., is also at risk in the sprawling scandal. 
Of particular interest to Mueller is a meeting held in Trump Tower in June 2016, between the Trump campaign’s top brass and a Russian lawyer with close Kremlin ties, who had offered Donald Jr. some dirt on Hillary Clinton, a prospect that excited the candidate’s son. 
(“I love it,” he emailed in response.) 
Donald Jr. first described the meeting as having been a discussion about adoptions of Russian babies by Americans (which Russian President Vladimir Putin banned in 2012). 
In fact, there had been a discussion of the sanctions and other matters of interest to Russia. 
Though Kushner and Donald Jr. said nothing came of the meeting, that has not been established. 
Mueller is also interested in Trump’s role in crafting, on Air Force One on his way back from Europe, a statement that once again misled the public about what was discussed at the Trump Tower meeting with the Russians. 
For more than a year, Trump has been adamant that he has no business interests in Russia and has received no loans from the country. 
But his softness toward Putin remains puzzling. 
Recently, it was discovered that Trump’s business had been trying to build an enormous Trump Tower in Moscow, an effort that continued into his candidacy, before being dropped for lack of permits and land. 
The attention paid to Mueller’s Russia investigation waxes and wanes in Washington, DC. 
But the inquiry won’t stop until Mueller is satisfied that he knows all he needs to know. 

The Drug Industry’s Poison Pills 
BOSTON – One does not need to spend a lifetime in the global health-care sector to appreciate that substandard or counterfeit drugs are a major public-health hazard. 
These bogus products have infiltrated pharmaceutical supply chains from Azerbaijan to Zambia, wrecking the most promising programs to control, manage, and eradicate deadly diseases. 
Yet little is being done to stop this criminal activity. 
Growing up in Pakistan, I realized how vital it was for my mother, like any educated parent, to know which drugs and pharmacies could be trusted. 
Little has changed since then. 
Local pharmacists from Lahore to Lusaka continue to sell a variety of brands of the same drug at different prices; and shopkeepers are called upon to give a candid opinion of their benefits and shortcomings. 
Unfortunately, the problem runs a lot deeper than a few bad drugs sold at the corner pharmacy. 
Around $75 billion of substandard drugs are sold annually, causing an estimated 100,000 deaths worldwide, and making many more people seriously ill. 
The trade in inferior drugs also undermines fragile public-health systems in poor countries. 
As well as killing consumers, the effects of bad drugs can be passed from parent to child, and even create new drug-resistant strains of diseases that threaten us all. 
Yet the fight against substandard drugs has never been taken as seriously as other global health crises such as malaria, HIV, or maternal and infant mortality. 
This may be because there is no obvious solution. 
But, in seeking answers, we must first acknowledge that the issue is larger than just counterfeit medicines. 
Many legitimate manufacturers worldwide, whether through complacency or incompetence, lack adequate quality controls. 
In some cases, deficient storage and refrigeration systems turn safe medicines into dangerous substances. 
Unfortunately, those drug makers then take advantage of developing countries’ weak or poorly implemented legislation and corrupt officials to pass their products through local supply chains and into shops. 
Public ignorance or apathy means that those responsible are able to avoid prosecution. 
The technical expertise and equipment needed to detect inferior products is usually beyond the financial reach of many developing countries. 
But there are low-cost alternatives. 
One approach, for example, would be to include on packaging a “scratch code” that includes a phone number for consumers to call in order to check that the batch number matches an authentic product. 
But, while this approach would certainly help to catch counterfeits, it would miss the substandard or degraded products made by legitimate firms, which are tested only by the consumer – and often at great cost in terms of health risks. 
It is therefore imperative to develop new detection technologies that will work in poorer countries, and that complement existing systems such as bar codes. 
Detection technology must be capable of analyzing all forms of a drug – whether powder, pill, capsule, or syrup – and of detecting several different grades of quality, not just the junk. 
It must be simple, affordable, adaptable, and scalable; and it must work at all stages of distribution, whether at customs, in hospitals, or in remote villages. 
But technology alone will not be enough. 
Regulators, hospitals, and drug-safety authorities must take the lead, rather than placing the burden on often poor and uneducated citizens who are struggling to care for loved ones. 
The search for new, sustainable solutions, requires at least three initiatives. 
First, we must encourage innovation by offering research grants to support small initiatives or large-scale projects (like campaigns to fight HIV, malaria, and maternal mortality). 
Ideally, an international group would coordinate and develop all of the ideas and products, and take them from the laboratory to the field. 
Second, we need to harness the creativity and commitment of young students, so that they understand the devastating impact of bad pharmaceuticals and become motivated to make a difference in people’s lives. 
Third, we must make use of the media. 
Just as the world cries foul when an illegal shipment of ivory is uncovered, we must launch campaigns in the press, on television, and online to bring to account any trader, state official, or company caught selling or promoting low-quality drugs. 
In this way, we will remind those in the industry of a fundamental premise: their most precious commodity is not a blockbuster drug, but the public’s trust. 
If drug makers and pharmacists cannot protect their customers’ health, they cannot protect their business. 

The Promise of Multi-Shift Schooling 
ISLAMABAD – The need to uphold the right to education has gotten a lot of attention in recent years. 
Ensuring “inclusive and equitable quality education” for all is one of the 17 Sustainable Development Goals agreed upon by world leaders in 2015. 
But achieving this goal by the SDGs’ 2030 target date will require us to make smart use of limited resources. 
The scale of the challenge is enormous. 
In Pakistan, for example, an estimated 22.8 million children are out of school, of which 78% are aged 10-16. 
A staggering 44% of Pakistani children who complete their primary education drop out, rather than moving on to secondary school. 
The problem is not that children do not want to study. 
Instead, as UNICEF and UNESCO point out, the problem is largely one of supply-side barriers, from a lack of accessible schools (whether because they are too full or too far) to the incompatibility of livelihoods (such as harvesting schedules) and school timetables. 
In recent years, a number of initiatives have been launched to help address such failures. 
Among them is a program implemented in the Punjab and Khyber Pakhtunkhwa provinces of Pakistan called Sustainable Transition and Retention in Delivering Education (STRIDE), which focuses on removing the barriers students face in moving on from primary to higher levels of education. 
In its first year, the STRIDE pilot project covered four districts, giving a second chance to some 8,000 young people. 
Based on positive initial results, it is now being scaled up to include two more districts of Khyber Pakhtunkhwa. 
The key to success will be to continue to use data to ensure that planning, financing, and service delivery are context-specific. 
Data show major discrepancies among villages and districts in terms of student transition and retention. 
While an outsider might simply blame the students, a more careful look at the evidence could show that there is no secondary school nearby or that the nearest school is already at capacity. 
That is what happened to Gul Muhammad, a 22-year-old husband and father of two from the Kohat district of Khyber Pakhtunkhwa province. 
To stay in school after completing the eighth grade seven years ago, Gul would have had to commute over six miles each way. 
That was too long a distance to travel daily on foot, but he lacked the resources to make the trek by wagon or bus. 
So Gul decided to work with his father on a farm, hoping that he would be able to continue his studies on his own during his free time. 
As time went by, he began to wonder whether he would ever set foot in a school again, and worried that if he ever did, his age could be an impediment to learning. 
Thanks to STRIDE, however, Gul started high school in September 2017. 
To facilitate his commute, he received a free bicycle. 
More important, he has been able to take advantage of “second-shift schooling”: classes start in the afternoon, enabling students to continue to work in the morning. 
Second-shift schooling is a lifeline for working students. 
For example, in Brazil, a three-shift system was introduced for upper secondary education, enabling young people to adjust their school schedules according to their work obligations. 
The OECD reports that in 2013, 43% of students were taking advantage of the night-shift option, while working full-time. 
Furthermore, multi-shift schooling gives local teachers the opportunity to increase their earnings by working in the evenings, while making the most of existing educational infrastructure. 
According to UNESCO, the case for second-shift schooling is particularly strong in developing countries, where suitable land is often scarce, driving up the cost of new schools. 
As part of STRIDE, 180 schools in the provinces of Punjab and Khyber Pakhtunkhwa have added a second shift, saving around $12 million in construction costs. 
Then there is a case such as Lebanon, where the influx of refugee children from neighboring Syria has overstretched the school system. 
These children would have lost years of education – and hope for a better future – had Lebanon’s schools not introduced a second shift to accommodate them. 
The international community agrees that every person has the right to a quality education. 
And while there is no consensus about how to uphold that right, two imperatives seem obvious. 
First, given the wide variety of supply-side factors affecting people’s access to education, solutions must be adapted to local needs and conditions. 
Second, with public budgets stretched thin, officials must make the most of available resources. 
Multi-shift schooling satisfies both of these principles. 
There is no more convincing evidence than Gul. 
Not long ago, he had almost lost hope that he would ever return to school. 
Now, he has cleared his ninth-grade examinations and is in the tenth grade. 
A second shift gave him – and can give millions more young people like him – a second chance. 

Ban the Burkini? 
MELBOURNE – My parents came to Australia as refugees, fleeing Nazi persecution after Hitler annexed Austria. 
They arrived in a country eager to assimilate immigrants into its dominant Anglo-Irish culture. 
When my parents spoke German on a tram, they were told: “We speak English here!” 
Assimilation of that kind has long disappeared from Australian government policy, replaced by a largely successful form of multiculturalism that encourages immigrants to retain their distinct traditions and languages. 
The “burkini” – a swimsuit that covers the body from the top of the head to the feet, though not the face – is one aspect of that multiculturalism. 
It was invented by a Muslim woman in Sydney to enable observant Muslim girls to join their school friends and other children in the beach activities that are an important part of Australian summers. 
Australians find it hard to fathom why some French seaside towns should seek to ban the burkini. 
Without swimming costumes that comply with their religious beliefs, observant families would not permit their girls to go to the beach. 
That would reinforce, rather than reduce, ethnic and religious divides. 
The burkini bans in France (some of which have since been overturned by courts) follow other French restrictions on clothing and ornamentation. 
Students in public schools cannot wear conspicuous religious symbols, which is usually interpreted to prohibit the headscarves worn by Islamic women, as well as the yarmulkes (skullcaps) worn by Jewish boys and large crosses worn by Christians. 
A full face veil – a burqa or niqab – cannot legally be worn anywhere in public. 
France is often seen as a special case, because of its long history of strict separation of church and state. 
But last month, Germany’s interior minister, Thomas de Maizière, proposed banning the burqa from public places such as government offices, schools, universities, and courtrooms, raising the possibility of such prohibitions spreading beyond France. 
It is, de Maizière said, “an integration issue,” and Angela Merkel, the German Chancellor, agreed: “From my point of view, a woman who is entirely veiled has hardly any chance at integrating.” 
The pendulum is therefore swinging back toward assimilation, and the key question is how far that swing should go. 
Should a country that accepts immigrants also allow them to retain all their cultural and religious practices, even those that are contrary to values that most of the country’s people consider central to their own way of life? 
The right to cultural or religious practice cannot be absolute. 
At a minimum, that right reaches its limit when such practices may harm others. 
For example, children must be educated, and even if the state permits home schooling, it is entitled to set standards regarding the knowledge and skills that must be taught. 
In extreme cases, like forms of female genital mutilation intended to reduce sexual pleasure, almost no one supports allowing immigrants to adhere to tradition in their new country. 
In France, it has been argued that allowing burkinis to be worn on beaches tacitly endorses the repression of women. 
To require women to cover their heads, arms, and legs when men are not similarly required is a form of discrimination. 
But where are we to draw a line between the widely, if not universally, accepted requirement that women must cover their breasts (also not required of men), and the greater degree of coverage of the female body required by several religions, including Islam? 
It is also dubious that integration is best served by banning religious dress in public schools. 
At least as long as private religious schools are permitted, this is likely to cause observant Muslims and Jews to send their children to private schools. 
If we really want a secular, integrated society, there is an argument for requiring every child to attend a public school; but in most Western societies, that argument has been lost. 
If a society is to be more than a collection of discrete individuals or groups living within common territorial boundaries, we can reasonably want a degree of integration that enables people to mix and work together. 
We should reject cultural relativism – the example of female genital mutilation is enough to show that not all cultural practices are defensible. 
A society is justified in saying to immigrants: “You are welcome here, and we encourage you to preserve and promote many aspects of your culture, but there are some core values that you must accept.” 
The difficult question is to determine what these core values should be. 
Not harming others is a minimum, but racial and sexual equality should also be part of the core. 
That becomes tricky when women themselves accept restricted opportunities because of their religious beliefs. 
They may be the victims of a repressive ideology, but Islam is not the only religion that teaches, in at least some of its forms, that women’s role in life is different from that of men. 
John Stuart Mill, the great nineteenth-century liberal, thought that society should use criminal law only to prevent harm to others, but he did not think that the state had to be neutral vis-à-vis different cultures. 
On the contrary, he thought society has, and should use, the many means of education and persuasion available to it, in order to counter false beliefs and encourage people to find the best forms of living. 
Mill would argue that if we allow sufficient time for immigrants to be exposed to the influences of education and proximity to different ways of life, they will make good choices. 
Given how little confidence we can have in other options, that path remains worth trying. 

Multilateral Engagement for Energy Security 
Our global need for energy reliability binds us together as surely as the global network that delivers it; a failure in one part of our network will inevitably affect everyone. 
Local interests and persistent conflicts that sit astride our networks, including the as yet unresolved issue of Russian gas supply to Ukraine and Europe, have again raised the specter of energy being used as a weapon to gain political leverage. 
Energy security is at the top of the agenda of the G-8 meeting hosted by President Vladimir Putin in Saint Petersburg. 
The G-8 has correctly identified the key economic issue, energy interdependence, and now is the time for focused multilateral engagement on this issue. 
For some countries that are blessed with vast supplies of oil and gas, the use of energy exports to reward friends and punish foes seems a tempting option. 
Today, however, it is more likely to prove disruptive to friend and foe alike, as well as damaging to those countries that indulge this temptation. 
Energy embargoes have generally proven counterproductive. 
The price rises that followed OPEC’s oil embargoes of the 1970’s were unsustainable and led to conservation efforts and expansion of non-OPEC production. 
As a result, OPEC’s share of world oil exports dropped sharply in the twelve years following the embargo of 1973-1974. 
Experience has taught us that transparency and price stability is in everyone's interest. 
Pursuit of these principals while encouraging the development of global markets is essential to greater overall growth prospects for the world economy. 
So when Russia sought earlier this year to quadruple the price of its gas exports to Ukraine, it argued that it was simply demanding market rates. 
The message sounded fair and it did, for a short time, appeal to some policymakers and investors not fully apprised of the situation. 
To be clear, measured price changes implemented over time was never in dispute; indeed, some internal price adjustments for Ukraine were in order. 
Unfortunately for Russia’s neighbors, it is not the market that determines what price is paid for Russia’s gas or transport; it is Gazprom and its chairman, Dmitry Medvedev, who is also the Russian government’s First Deputy Prime Minister. 
The price charged by Gazprom for each country bordering Russia is different and is largely determined by political relationships with the Kremlin. 
Economically speaking, gas supply and transport prices are more correlated to political relationships than to fundamental supply-demand or gas transport basis calculations. 
Ukraine was threatened with an immediate quadrupling of its prices – or interruption of its gas supply - as a result of it new-found independence from Russia during the Orange Revolution. 
Georgia, also feeling the wrath of Moscow following the Rose Revolution, faced potentially harmful price increases as well. 
Belarus, however, still in strong alignment with the Kremlin, continues to enjoy highly subsidized gas. 
Of course, Ukraine was not the only country put at risk by this brinksmanship; suppliers such as Turkmenistan, geographically locked into transit requirements through Russia, also suffer. 
And for the consuming nations of Western and Central Europe, the price effects and supply disruption anxieties were of significant consequence. 
Immediate multilateral intervention by the European Union and the United States probably are what probably caused Gazprom to turn the gas back on. 
Natural gas may be the commodity most vulnerable to event-driven supply disruptions. 
The fixed interconnected pipelines lock producers and consumers in a near-exclusive embrace. 
Diversification in natural gas transportations is a long-term cross-border asset development proposition requiring enormous investment and political commitment on a multilateral level. 
Many solutions are already under consideration: new gas storage capacity, increased efficiency, expansion of domestic production of both oil and gas, and alternative energy supplies such as coal-bed methane. 
Additionally, a market in tradable liquefied natural gas (LNG) is rapidly emerging. 
It is more feasible to diversify the supply chain, albeit incrementally, by importing gas from distant producers rather than from monopolistic suppliers next door. 
All of these efforts together will soften shocks somewhat and create more energy self-sufficiency. 
Yet more is required. 
First, G-8 leaders should consider implementing standards in energy transactions requiring open and transparent contracts in line with best practices in business. 
It is important to dilute the global impact of local politicians pursuing non‑energy agendas, or simply their own limited interests. 
We see these problems today in state-owned firms in Latin America, political unrest in Africa, tensions in the Middle East or through opaque business intermediaries, as in the questionable gas deal between Ukraine and Russia, known now as RUE (RosUkrEnergo). 
In the end, energy security for all of us in Europe requires recognizing that the linked nature of our supply and transmission systems makes us interdependent. 
This is where an “Energy Alliance” of consumers and suppliers could be useful, starting with the nations of Europe helping to guarantee the energy supplies of others in a major disruption. 
The Energy Charter, which emphasizes market access and transparency, is a laudable effort but it is not sufficient for those moments of crisis; our markets are not yet well enough equipped to deal with event-driven disruptions. 
The Energy Charter might be a vehicle for this collective energy security, if deepened and broadened. 
It is our duty as leaders to chart a course for a secure energy future. 
Tolerance of questionable dealing today for the sake of political expediency will cost more in the future for us all. 
When the inevitable conflict occurs, public confidence, political credibility and market reliability are needlessly sacrificed – this has clearly occurred for Russia and for Ukraine. 
Threats to energy security must be challenged and resolved on a multilateral basis, with all stakeholders present. 
The interdependent nature of our energy infrastructure requires a multilateral approach. 
We are all depending on it. 

Can Multilateralism Adapt? 
FLORENCE – Rewind to the late 1990s. 
After an eight-decade-long hiatus, the global economy was being reunified. 
Economic openness was the order of the day. 
Finance was being liberalized. 
The nascent Internet would soon give everyone on the planet equal access to information. 
To manage ever-growing interdependence, new international institutions were developed. 
The World Trade Organization was brought to life. 
A binding climate agreement, the Kyoto Protocol, had just been finalized. 
The message was clear: globalization was not just about liberalizing flows of goods, services and capital but about establishing the rules and institutions required to steer markets, foster cooperation, and deliver global public goods. 
Now fast-forward to 2018. 
Despite a decade of talks, the global trade negotiations launched in 2001 have gotten nowhere. 
The Internet has become fragmented and could break up further. 
Financial regionalism is on the rise. 
The global effort to combat climate change rests on a collection of non-binding agreements, from which the United States has withdrawn. 
Yes, the WTO is still there, but it is increasingly ineffective. 
US President Donald Trump, who does not hide his contempt for multilateral rules, is attempting to block its dispute settlement system. 
The United States pretends against all evidence that imports of BMWs are a threat to national security. 
China is brutally ordered – outside any multilateral framework – to import more, export less, cut subsidies, refrain from purchasing US tech companies, and respect intellectual property rights. 
The very principles of multilateralism, a key pillar of global governance, seem to have become a relic from a distant past. 
What happened? 
Trump, for sure. 
The 45th US president campaigned for the job like a bull in a china shop, vowing to destroy the edifice of international order built and maintained by all of his predecessors since Franklin Roosevelt. 
Since taking office, he has been true to his word, withdrawing from one international agreement after another and imposing import tariffs on friends and adversaries alike. 
Still, let’s face it: today’s problems did not start with Trump. 
It was not Trump who, in 2009, killed the Copenhagen negotiation on a climate agreement. 
It was not Trump who is to blame for the failure of the Doha trade round. 
It was not Trump who told Asia to secede from the global financial safety net managed by the International Monetary Fund. 
Before Trump, problems were dealt with more politely. 
But they were there. 
There is no shortage of explanations. 
An important one is that many participants in the international system are having second thoughts about globalization. 
A widespread perception in advanced countries is that the rents from technological innovation are being eroded precipitously. 
The US factory worker of yesterday owed his standard of living to these rents. 
But as the economist Richard Baldwin brilliantly shows in The Great Convergence, technology has become more accessible, production processes have been segmented, and many of the rents have gone. 
A second explanation is that the US strategy toward Russia and China has failed. 
In the 1990s, Presidents George H.W. Bush and Bill Clinton thought that the international order would help transform Russia and China into “market democracies.” 
But neither Russia nor China has converged politically. 
China is converging in terms of GDP and sophistication, but its economic system remains apart. 
As Mark Wu of Harvard argued in a 2016 paper, although market forces play a strong role in its economy, coordination by the state (and control by the Communist Party) remains pervasive. 
China has invented its own economic rules. 
Third, the US is unsure that a rules-based system offers the best framework to manage its rivalry with China. 
True, a multilateral system may help the incumbent hegemon and the rising power avoid falling into the so-called “Thucydides’ trap” of military confrontation. 
But the growing perception in the US is that multilateralism puts more constraints on its own behavior than on China’s. 
Finally, global rules look increasingly outdated. 
Whereas some of their underlying principles – starting with the simple idea that issues are addressed multilaterally rather than bilaterally – are as strong as ever, others were conceived for a world that no longer exists. 
Established trade negotiation practices make little sense in a world of global value chains and sophisticated services. 
And categorizing countries by their development level is losing its usefulness, given that some of them combine first-class global companies and pockets of economic backwardness. 
But inertia is considerable, if only because consensus is required to change the rules. 
So what should be done? 
One option is to preserve the existing order to the greatest extent possible. 
This was the approach adopted after Trump withdrew the US from the Paris climate agreement: the other signatories continue to abide by it. 
The advantages of this approach are that it contains the damage from one country’s peculiar behavior. 
But, to the extent that the US attitude is a symptom, the conservationist approach does not address the disease. 
A second option is to use the crisis as an opportunity for reform. 
The EU, China, and a few others – including, one hopes, the US at some point – should be the ones to take the initiative, salvaging those aspects of the old multilateralism that remain useful, but fusing them into new arrangements that are fairer, more flexible, and more appropriate for today’s world. 
This strategy would have the advantage of identifying and absorbing the lessons offered by the exhaustion of traditional arrangements and the emergence of new ones. 
But is there enough leadership and enough political will to go beyond empty, face-saving compromises? 
The downside risk is that failed reform could lead to a complete unraveling of the global system. 
In the end, the solution is neither to cultivate the nostalgia of yesterday’s order nor to place hope in loose, ineffective forms of international cooperation. 
International collective action requires rules, because flexibility and goodwill alone cannot tackle hard problems. 
The narrow path ahead is to determine, on a case-by-case basis, the minimum requirements of effective collective action, and to forge agreement on reforms that fulfill these conditions. 
For those who believe that such a path exists, there is no time to lose in finding it. 

A Fragmented Multilateralism? 
WASHINGTON, DC – Amid ongoing attacks by US President Donald Trump, the battle for the future of multilateralism has commenced. 
Previous demands for pragmatic reforms have escalated into pressure for the wholesale transformation – or even total destruction – of the global framework of multilateral institutions. 
Trump seems to prefer a “system” in which bilateral deals replace the multilateral rules-based order. 
As the US is still the world’s most advanced (and one of the largest in terms of market prices) economy in the world, he believes America can get the best “deal” by negotiating alone, unbound by international rules – a view that extends to military affairs. 
Although multilateralism had made substantial progress since the end of the Second World War, there was a need for continuous reform, owing to changes in the structure of the world economy. 
By the late 1990s, emerging-market economies had grown in size and market share, overtaking the “Quad” (the US, Canada, the European Union, and Japan), which had dominated the General Agreement on Tariffs and Trade and the GATT’s successor, the World Trade Organization. 
A similar change in “economic weight” affected the International Monetary Fund and the World Bank. 
At the heart of this change was the spectacular growth of China. 
In the case of the WTO, the sheer number of developing countries that had joined also made adjustment necessary. 
The inability to conclude the Doha Round of negotiations, after 14 years of talks, was a symptom of the problem. 
In the 2010s, a system emerged in which mega-regional trade negotiations – most importantly, those for the Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment Partnership, and other “minilateral” negotiations took place outside the WTO framework. 
Trump’s attacks, coming after the failure of the Doha Round, may lead to the end of a functional WTO. 
But the debate about the WTO’s fate is part of a wider discussion concerning multilateralism, which includes the United Nations, the G20, and the IMF. 
At the risk of oversimplifying, three alternative “systems” appear to be possible. 
The first alternative is a system dominated by bilateral deals, in which international rules and international law are absent. 
This would apply not only to trade, but also to the many “behind the borders” regulatory issues that have become part of trade negotiations. 
It would also minimize the roles of the IMF and the Financial Stability Board, and end the G20-led multilateral effort to prevent a race to the bottom by corporations' tax optimization strategies. 
In its extreme form, this vision becomes one in which the “law of the jungle” prevails. 
The second alternative is the current system, in which countries use global multilateralism to enforce common rules. 
This system includes many regional organizations; at the top of the system, however, sit global multilateral institutions such as the IMF, the World Bank, and the WTO, with the aim of formulating global rules and standards. 
Finally, one can envision a system in which the attempt to establish global rules is abandoned, but regional or like-minded country groupings formulate their own sets of rules. 
This kind of system would accommodate the differences in preferences countries may have. 
In theory, it should be easy to conceive of two different regulatory systems that reflect, for example, the different priorities that the US and the EU assign to privacy. 
In practice, however, implementing two different systems would be complicated, given the deep interaction between the US and the EU, and has proven difficult in the case of the EU’s General Data Protection Regulation. 
The first system discards all the efforts to provide global public goods and manage spillover effects, including those that have occurred over the last few decades. 
Countries would become players in a game of back-and-forth retaliation that creates losses even for the strongest, which would also likely lead to military conflict. 
It is exactly what the leaders of the victorious powers after World War II tried to avoid. 
But rejection of the “law of the jungle” does not mean that everything is working well under the existing institutions and rules. 
There is a clear demand for some differentiation in rules and standards to accommodate varying preferences. 
Does this mean we should adopt the third system, a fragmented multilateralism, with not much room for global institutions? 
Once one has thought through the degree of interdependence, not only of the world’s economies, but of the world’s societies, it becomes clear that a strongly fragmented system would be unable to deliver the sought-after global public goods and benefits. 
There certainly is room for regional groupings or for like-minded countries to organize themselves. 
Our global institutions often do not follow the principle of subsidiarity. 
Having said that, the need for global rules, such as those concerning climate, will increase with new technologies. 
We are at the beginning of a cognitive revolution that can only reinforce global challenges. 
Cybersecurity requires global action. 
An area which we are just beginning to think about, genetic engineering, will require global rules and restraints. 
In the military field, we have the nuclear non-proliferation treaty; soon we will need a treaty aimed at limiting the use of robot soldiers moved by artificial intelligence. 
In fact, more generally, the use of artificial intelligence will also require what might be called a new global ethics. 
Cooperation among likeminded or geographically proximate countries should certainly be encouraged. 
But that is no substitute for global rules and standards that are required to confront the world’s existing and emerging challenges. 

Learning to Love a Multipolar World 
NEW YORK – American foreign policy is at a crossroads. 
The United States has been an expanding power since its start in 1789. 
It battled its way across North America in the nineteenth century and gained global dominance in the second half of the twentieth. 
But now, facing China’s rise, India’s dynamism, Africa’s soaring populations and economic stirrings, Russia’s refusal to bend to its will, its own inability to control events in the Middle East, and Latin America’s determination to be free of its de facto hegemony, US power has reached its limits. 
One path for the US is global cooperation. 
The other is a burst of militarism in response to frustrated ambitions. 
The future of the US, and of the world, hangs on this choice. 
Global cooperation is doubly vital. 
Only cooperation can deliver peace and the escape from a useless, dangerous, and ultimately bankrupting new arms race, this time including cyber-weapons, space weapons, and next-generation nuclear weapons. 
And only cooperation can enable humanity to face up to urgent planetary challenges, including the destruction of biodiversity, the poisoning of the oceans, and the threat posed by global warming to the world’s food supply, vast drylands, and heavily populated coastal regions. 
Yet global cooperation means the willingness to reach agreements with other countries, not simply to make unilateral demands of them. 
And the US is in the habit of making demands, not making compromises. 
When a state feels destined to rule – as with ancient Rome, the Chinese “Middle Kingdom” centuries ago, the British Empire from 1750 to 1950, and the US since World War II – compromise is hardly a part of its political vocabulary. 
As former US President George W. Bush succinctly put it, “You’re either with us or against us.” 
Not surprisingly, then, the US is finding it hard to accept the clear global limits that it is confronting. 
In the wake of the Cold War, Russia was supposed to fall in line; but President Vladimir Putin did not oblige. 
Likewise, rather than bringing stability on US terms, America’s covert and overt wars in Afghanistan, Iraq, Syria, Libya, South Sudan, and elsewhere created a firestorm stretching across the greater Middle East. 
China was supposed to show gratitude and deference to the US for the right to catch up from 150 years of abuse by Western imperial powers and Japan. 
Instead, China has the audacity to think that it is an Asian power with responsibilities of its own. 
There is a fundamental reason, of course, for these limits. 
At WWII’s end, the US was the only major power not destroyed by the war. 
It led the world in science, technology, and infrastructure. 
It constituted perhaps 30% of the world economy and formed the cutting edge of every high-tech sector. 
It organized the postwar international order: the United Nations, the Bretton Woods institutions, the Marshall Plan, the reconstruction of Japan, and more. 
Under that order, the rest of the world has closed much of the vast technological, educational, and infrastructural gap with the US. 
As economists say, global growth has been “convergent,” meaning that poorer countries have been catching up. 
The share of the world economy represented by the US has declined by roughly half (to around 16% currently). 
China now has a larger economy in absolute terms than the US, though still only around one-fourth the size in per capita terms. 
None of this catching up was a perfidious trick against the US or at its expense. 
It was a matter of basic economics: given peace, trade, and a global flow of ideas, poorer countries can get ahead. 
This tendency is to be welcomed, not shunned. 
But if the global leader’s mindset is one of domination, the results of catch-up growth will look threatening, which is how many US “security strategists” view them. 
Suddenly, open trade, long championed by the US, looks like a dire threat to its continued dominance. 
Fear-mongers are calling for the US to close itself off to Chinese goods and Chinese companies, claiming that global trade itself undermines American supremacy. 
My former Harvard colleague and leading US diplomat Robert Blackwill and former State Department adviser Ashley Tellis expressed their unease in a report published last year. 
The US has consistently pursued a grand strategy “focused on acquiring and maintaining preeminent power over various rivals,” they wrote, and “primacy ought to remain the central objective of US grand strategy in the twenty-first century.” 
But “China’s rise thus far has already bred geopolitical, military, economic, and ideological challenges to US power, US allies, and the US-dominated international order,” Blackwill and Tellis noted. 
“Its continued, even if uneven, success in the future would further undermine US national interests.” 
US President-elect Donald Trump’s newly named trade adviser Peter Navarro agrees. 
“Whenever we buy products made in China,” he wrote last year of the US and its allies, “we as consumers are helping to finance a Chinese military buildup that may well mean to do us and our countries harm.” 
With just 4.4% of the world’s population and a falling share of world output, the US might try to hang on to its delusion of global dominance through a new arms race and protectionist trade policies. 
Doing so would unite the world against US arrogance and the new US military threat. 
The US would sooner rather than later bankrupt itself in a classic case of “imperial overreach.” 
The only sane way forward for the US is vigorous and open global cooperation to realize the potential of twenty-first-century science and technology to slash poverty, disease, and environmental threats. 
A multipolar world can be stable, prosperous, and secure. 
The rise of many regional powers is not a threat to the US, but an opportunity for a new era of prosperity and constructive problem solving. 

Cities for Migrants 
CORK – In many countries, particularly in Europe, immigration is increasingly framed as a security issue. 
Mainstream politicians, bowing to pressure from fear-mongering populists, are calling for tighter restrictions, and some countries are openly flouting their legal obligation and moral responsibility to provide protection to refugees fleeing conflict. 
But the news is not all bad. 
Even as corrosive political discourse impedes effective action at the national and international levels, at the municipal level, progressive and effective immigrant-integration initiatives are flourishing. 
Mayors and local administrators are building social and physical infrastructure that supports the reception of migrants and refugees into local communities. 
For them, the newcomers are not just statistics; they are real people – and potentially productive members of the local community. 
The key to tapping their potential, city officials recognize, is a well-managed integration process. 
Of course, such a process is complex, and can raise concerns among residents. 
New arrivals often place significant pressure on urban centers, particularly cities that are already struggling with scarce resources. 
The challenges – from providing access to decent housing and health care to ensuring that transport networks and schools can cope with growing demand – are numerous and daunting. 
That is why a proactive approach – not to mention plenty of ingenuity – is so important. 
And that is precisely what many city administrators are demonstrating. 
With New York City’s municipal identity card, iDNYC, all residents, regardless of their status, gain access to a variety of services. 
In São Paulo, immigrants can contribute to public-policy discussions through a participatory council. 
The Barcelona municipal council, as part of a broader social-cohesion plan, launched the “anti-rumor campaign,” which uses a comic book series to combat negative stereotypes about migrants. 
Collaborating with local businesses, municipal leaders have also channeled resources toward promoting entrepreneurship and work training for migrants. 
In Auckland, New Zealand, where one-third of the population is foreign-born, the Omega project, inspired by a Canadian initiative, matches new migrants with skilled mentors and offers paid internships. 
In London, the Bike Project refurbishes discarded bicycles, and gives them to migrants to serve as affordable transportation. 
There are thousands more projects like these, helping migrants and refugees to build new lives in their new communities. 
Better still, initiatives are no longer confined to individual cities. 
Municipal leaders and local authorities are increasingly forming alliances with counterparts around the world to find solutions to common problems, share best practices, and turn the challenges of integration into new opportunities. 
For example, police officers from Toronto, a highly multicultural city, have trained their counterparts from Amsterdam in community outreach. 
The Mayoral Forum on Mobility, Migration, and Development, a United Nations-supported platform, aims to advance precisely this kind of dialogue and cooperation among the world’s mayors, municipal leaders, and regional authorities. 
Launched in 2014 in Barcelona, the forum, which meets annually, operates on the principle that healthy and sustainable urban centers – a key component of any country’s dynamism and success – depend on the equal rights, duties, and opportunities of its residents. 
The forum also encourages the international community to engage with cities as “key actors in discussions and decision-making processes on the design of migration policies.” 
After all, cities – which already house more than half of the world’s population, a share that will rise to 66% by 2050 – have plenty of experience integrating new residents, both from abroad and from rural areas. 
The problem is that, despite devolution of power to local governments – a developed-country trend that is spreading to the developing world – many cities still operate with limited resources and authority to act. 
This must change – an imperative that the Vatican recently highlighted. 
When the Pontifical Academy of Sciences announced that it would organize a summit on refugees and migrants later this year, it stressed that mayors “must be provided with the ability to meet the needs, accommodate, and regularize all types of migrants or refugees.” 
National and international debates about migration are deeply flawed, owing to their focus on security – and so are the policies that result from them. 
If municipal authorities – which have proved their willingness and ability to tackle the nuts and bolts of integration in innovative ways – were empowered to play a more active role in crafting immigration policies, everyone would benefit. 

Muppets and Middle East Peace 
NEW YORK – Can furry puppets in Day-Glo colors provide the lessons we need to calm the fires of the Israeli-Palestinian conflict? 
The Muppet empire is now worldwide. 
Those who grew up with the children’s educational TV show Sesame Street know that it gives five-year-olds easy-to-take lessons in literacy, numeracy, and social skills. 
But Sesame Street has a loftier agenda, finding partners in the developing world – including Saudi Arabia, South Africa, and Pakistan – to bring the fuzzy little creatures, with their message of peace and tolerance, to local audiences. 
A new documentary, “When Muppets Dream of Peace,” tracks the harrowing joint production of Sesame Street in Israel and Palestine, with a Jordanian production team brought in to help facilitate. 
This program, like so many educational or cultural Israeli-Palestinian partnerships, began in starry-eyed idealism. 
But, based on the film – and on a recent panel discussion with the filmmakers and a Muppets spokesman in New York City – it was undermined by a common flaw in such partnerships. 
The original plan – like with so many of these programs – was based on a notion of parity: Israeli and Palestinian production teams would work together. 
But the Palestinian partners vetoed that idea – “We aren’t there yet,” they explained. 
Could they have a stand-alone Palestinian Sesame Street? 
No funding for that, came the reply. 
The Palestinian team finally agreed to parallel productions with a major “cultural exchange” element – rather than creating segments together, they would produce a series with Palestinian Muppets and adults that also incorporated cartoons and mini-documentaries produced by the Israelis and Jordanians. 
The other two teams would do likewise. 
Some unifying characters – such as an Arab- Israeli girl who explains each “side” to the other – would create a measure of continuity. 
The New York-based management wanted the Palestinians and Israelis to portray each other in a humanizing way. 
Again, the Palestinians resisted. 
Rather than focus on creating scenarios that showed Israelis – even Israeli kids – in a positive light, they wanted to focus on showing Palestinian culture in a positive light, portraying Palestinian youths as role models, and providing images to kids that offered alternatives to violence. 
But then reality intervened again. 
A suicide bomber attacked in Israel, and, in retaliation, the Israel Defense Forces took over Ramallah, where the tiny Palestinian Sesame Street studio was located. 
Day after day, the talented Palestinian team of animators, puppeteers, designers, cameramen, and producers could not get to work – even as the Israeli team was churning out their own material in a brightly lit, well-funded studio in Tel Aviv. 
Then the IDF occupied the TV station itself and destroyed it, along with the team’s computers and cameras. 
The documentary’s footage of shot-out computer screens and piles of smashed printers and cameras – under graffiti reading “Palestine Never” – makes one despair. 
Meanwhile, New York was growing impatient, letting the Palestinian team know that their segments were late – and, under what was essentially a military occupation, the Palestinians began to rethink whether this was the right kind of project to which to devote their energies. 
The New York producer overseeing the project, a single mother, was reluctant initially to visit Ramallah – so the Palestinian team’s inability to produce their segments on time was, like so many aspects of the Palestinian experience, hidden behind a barrier of fear, not fully witnessed, and thus not fully comprehended. 
The co-production has ended. 
But there is a Palestinian Sesame Street and an Israeli Sesame Street, and there are positive Arab-Israeli characters in the Israeli version. 
And the creators of these programs, together with the filmmakers behind “When Muppets Dream of Peace,” offer important lessons for all of us. One quote from a Palestinian TV production team member stayed with me: “This is a shotgun wedding,” he explained when he was advocating for a Palestine-only Sesame Street. 
“And we want a divorce.” 
The Palestinian team is utterly indistinguishable, superficially, from their European or Israeli counterparts: they are hip, young, talented, sophisticated, and more than anything they want to work to create a positive environment for their kids – or at least a psychological respite from the reality of occupation, violence, and war. 
But how often does the outside world – even the best-intentioned donors and program creators – reach out to Palestinian civil society on its own terms, without insisting on that “shotgun wedding?” 
How often are resources invested in Palestinian films, books, newspapers, high schools, dance troupes, teachers, etc. without requiring the recipients to make friendly gestures to Israel? 
Many civil-society elements in the Muslim world have turned their backs on possible partnerships with Israeli counterparts. 
One Egyptian actor was boycotted at home for merely appearing in Cannes with an Israeli actress. 
But I am certain that the more intently outsiders invest in Palestinian civil society on its own terms, the less exasperated the Palestinian intelligentsia – and the Muslim world – will become with the often-coerced terms of Palestine's creativity. 
A vibrant Palestinian civil society could become more flexible and open toward possible partnerships – including more natural, holistic Israeli-Palestinian joint ventures – thus benefiting the region as a whole. 
The Muppets have taught generations of kids worldwide how to count to ten and share cookies. 
In the 1970’s in the United States, they taught us about an interracial couple on Sesame Street. 
In South Africa, the creators asked for – and got – a puppet that was an HIV-positive child, since acceptance of such kids was a lesson that local educators told the New York team they needed to teach. 

Musharraf and the Jihad Industry 
General Pervez Musharraf is poised to rule Pakistan for another five years. 
Not because he wants to, he says, but because no one but he can reform Pakistan. 
General Musharraf is the third Pakistani general in fifty years to seize power proclaiming a self-anointed reform agenda. 
Each time the United States and its allies nodded in agreement. 
But Musharraf is no Gorbachev, nor is he Kamal Ataturk, who pushed internal reform on their societies after recognizing the rot within. 
All of Musharraf's attempts at reform resulted from international pressure. 
Feeble at best, they have invariably avoided the type of structural changes Pakistan needs if it is ever to break out of its recurring, worsening crisis. 
Given General Musharraf's diminishing domestic popularity, some fear for his survival. 
But a real threat "from the street" seems most unlikely. 
The public, disillusioned by the kleptocratic regimes of Benazir Bhutto and Nawaz Sharif that preceded Musharraf, is far too wretched and ambivalent to rise up. 
Moreover, militant groups cannot match the state's firepower. 
While intrigues and coups are possible, Musharraf's survival is likely because he will not threaten the enormous powers and privileges of the institution he heads and which is the only one that can seriously threaten him--Pakistan's military. 
All countries have armies, but in Pakistan the army has a country. 
Defense expenditures consume between one-third and one-half of the national budget. 
In recent decades, senior military officers have been transformed into powerful landlords through grants of choice agricultural lands and real estate. 
Retired officers head many, if not most, public corporations. 
This garrison economy is increasingly unsustainable, as Pakistan's poor multiply and the economy falters. 
While the army has always been the most powerful political force in Pakistan, it has undergone important changes in the decades since independence. 
The army's British colonial traditions were slowly Americanized during the Cold War. 
With his coup in 1977, General Zia ul Haq injected a messianic zeal to redefine Pakistan as an Islamic state governed by Sharia (Islamic Law). 
"Islam, Pakistan, Jihad" became emblazoned on banners at Pakistani army recruitment centers, beards proliferated, promotions went with piety, and few could be seen to miss Friday prayers. 
A new ethos was created; this was to be an army not just for Pakistan, but for the greater glory of Islam. 
It was, after all, a different historical epoch. 
The global jihad industry, financed by the US and Saudi Arabia, welcomed it. 
But today, the army's jihad philosophy lies buried under the rubble of the World Trade Center. 
When faced by a US bent upon bloody vengeance, an acute institutional sense of survival sent the military establishment scurrying to join the US-led coalition and take up arms against its former creation, the Taliban and their Amir-ul-Momineen (leader of the pious). 
It was a straightforward betrayal, resisted only by a few senior officers with an Islamic bent. 
They were quickly rendered irrelevant. 
General Musharraf knew the alternative. 
In all likelihood the Americans would "have done an Iraq on Pakistan," as one highly placed member of the foreign ministry conceded to me in the week after September 11 th . 
He was probably right. 
The internal contradictions of Pakistan's volte face are now being exposed as the army's bloody encounters with Al-Qaida become more frequent, casualties mount, and hostile tribal reaction to joint US/Pakistani search-and-destroy operations on the western border increases. 
Officers and soldiers are asking, What is the purpose of the current campaign? 
To die in Kashmir officially qualifies a soldier or officer as a "shaheed" (martyr). 
But is fighting America's war a jihad, and are soldiers slain by Al-Qaida or other former allies also martyrs? 
Since official certification of martyrdom is tied to land grants and compensation to families, this question carries very real material significance. 
Inevitably the anger--visible or otherwise--at having to fight America's war against Al-Qaida and the Taliban focuses on Musharraf, a man who received high praise from the United Jihad Council after incursions and battles fought against India around Kargil in Kashmir two years ago. 
Right-wing religious groups in Pakistan warmly welcomed Musharraf's successful coup. 
But today he lives in mortal danger, aware that he is silently stalked by the forces that once sided with him. 
Ironically, fate has yoked his survival to George W. Bush, who could not recall the name of this Pakistani leader at the time of the US presidential elections. 
Seeking to make permanent his coup, Musharraf has proposed amendments to Pakistan's constitution. 
A new National Security Council would formalize the army's political domination of Pakistani society, with the armed forces chiefs having the power to sack the Prime Minister and dismiss an elected Parliament. 
All of this in the name of "reform," of course. 
But if Pakistan is to overcome its double challenge of escaping its army's Bonapartism and winning the war against jihadists, the military--not just society--must be reformed. 
The imperatives are clear: first, the army must accept that the social and economic needs of Pakistan's people come first and that it must be downsized to live within Pakistan's means. 
Second, the army must focus upon defending Pakistan's frontiers while accepting that there can be only a political, not a military, solution for Kashmir. 
Surely, given all that Pakistan stands to gain from genuine reform, this is not too much to ask. 

Musharraf’s Ambiguous Legacy 
Pakistani President Pervez Musharraf’s resignation brings to an end one of the more interesting curiosities of subcontinental politics: for more than four years, Pakistan had a president who was born in India, while India had a Prime Minister (Manmohan Singh) who was born in Pakistan. 
Since the two countries’ separation is now more than six decades old, that anomaly is unlikely to be repeated. 
But it is not the only reason Indians are greeting Musharraf’s exit with mixed feelings. 
Musharraf was someone who was easy to hate across the border. 
He had, after all, risen to the top of the military on the back of the Pakistani army’s Islamist elements, who came into their own (in what had previously been a rather Anglophile, British- and American-trained officer corps) during the decade-long reign of a fundamentalist military ruler, General Muhammad Zia-ul-Haq. 
Indeed, though Musharraf displayed an urbane image, enjoyed his Scotch, and admired Turkey, he was not one of the Pakistani secularists so admired by Indian liberals. 
Instead, he cultivated a reputation as an anti-Indian hardliner. 
The fact that his family had fled India upon Partition gave him an additional chip on his shoulder: it was widely said that he saw relations with India as a series of opportunities to wreak vengeance for what his family had suffered in the refugee upheavals of 1947. 
As Chief of the Army Staff, Musharraf directed the disastrous Kargil invasion of 1999, when Pakistan sent its soldiers surreptitiously across the cease-fire lines to capture strategically vital heights overlooking a key Indian road. 
Musharraf was recorded by Indian intelligence boasting about the action on an open telephone line during a visit to Beijing. 
Because the invasion was manifestly illegal and provocative, Pakistan denied that official soldiers were involved, with the result that when they were repulsed, at great cost to both sides, Musharraf refused to accept his own soldiers’ bodies. 
It was a low point in Indo-Pakistan relations, and no one in Delhi was prepared to trust Musharraf ever again. 
Within months, however, Musharraf had conducted a coup against the hapless Nawaz Sharif, and a year later declared himself president, a title meant to enhance his stature when he visited India for peace talks in July 2001. 
But Musharraf had come to power as the patron of the jihadi s his army was financing, equipping, and training for their forays into Indian territory, and few in New Delhi thought genuine peace could be made with such a duplicitous man. 
Then came 9/11, when – under intense pressure from the United States to support American retaliation in Afghanistan or face the consequences – he was forced to disown his protégés. 
The Taliban, under whose rule Osama bin Laden had found a safe haven, had been created (and, in crucial battles, led) by Pakistan’s Inter-Services Intelligence (ISI). 
Now, Musharraf, in order to preserve his country’s alliance with the world’s sole superpower (and his country’s largest donor), had to betray his own. 
For at least two years, though, Musharraf tried to have it both ways, cracking down at America’s behest on the Islamists on Pakistan’s western border with Afghanistan while sponsoring them on the eastern border with India. 
A Pakistani-sponsored jihadi attack on India’s Parliament in December 2001 nearly provoked all-out war. 
But the double game proved unsustainable: the Islamists were less inclined than their now-ambivalent patron to draw sophistical distinctions between one kind of enemy and another. 
The result was two assassination attempts against Musharraf in December 2003. 
If Musharraf had previously been unwilling to choose sides, the attempts to kill him finally showed him which side he had to be on. 
From then on, Musharraf seems genuinely to have tried to clamp down on the Frankenstein’s monster that he had sustained as an instrument of Pakistani policy. 
For roughly four years, he represented the best that the West and India could hope for in a Pakistani leader – someone with military authority, who seemed convinced that his own survival, and the interests of his state, demanded a clampdown on terrorism. 
“I never thought I’d say this,” one senior national security figure in New Delhi said to me, “but Pervez Musharraf…may be India’s best hope for peace with Pakistan.” 
It could not last indefinitely. 
The first problems arose in the lawless “federally administered tribal areas” (FATA) in western Pakistan. 
Musharraf, concerned at all costs to avoid any military action that might provoke a tribal rebellion against his forces, tried to buy himself more political space by cutting deals with insurgent leaders in the FATA, signing peace agreements with the very chiefs his army should have been pursuing. 
Meanwhile, internal difficulties worsened. 
As anti-Musharraf sentiment grew within Pakistan, and repressive measures aimed at the judiciary and the press cost him ever more support among the intelligentsia, his hold on power began to slip. 
His effort to cut a deal with Benazir Bhutto was a final attempt to remain in office through the election of a civilian leader acceptable to the public (and the West). 
Her assassination by Islamist elements foreclosed that option. 
Musharraf’s fraying authority made him less effective and, indeed, less useful: the Taliban re-emerged in strength on Pakistan’s Afghan border, and his own ISI was proved to have been involved in the bombing of India’s embassy in Kabul. 
By the summer of 2008, both the West and India were facing a Pakistan again in the grip of chaos, its border areas in Islamist hands and its ISI out of the control of the elected civilian government. 
The prospects of an implosion of effective governmental authority in Pakistan are strong, and the consequences would be dire. 
But, by the time Musharraf resigned, he had already lost the ability to do anything about it. 

Musharraf’s Last Act? 
Desperate to hold onto power, Pervez Musharraf has discarded Pakistan’s constitutional framework and declared a state of emergency. 
His goal? 
To stifle the independent judiciary and free media. 
Artfully, though shamelessly, he has tried to sell this action as an effort to bring about stability and help fight the war on terror more effectively. 
Nothing could be further from the truth. 
If Pakistan’s history is any indicator, his decision to impose martial law may prove to be the proverbial straw that breaks the camel’s back. 
General Musharraf appeared on the national scene on October 12, 1999, when he ousted an elected government and announced an ambitious “nation-building” project. 
Many Pakistanis, disillusioned with Pakistan’s political class, remained mute, thinking that he might deliver. 
The September 11, 2001, terrorist attacks on America brought Musharraf into the international limelight as he agreed to ditch the Taliban and support the United States-led war on terror. 
Musharraf clamped down on some religious militants operating inside Pakistan and also on those fighting Indian forces in Kashmir. 
As a result, Pakistan was rewarded with American financial assistance and arms. 
In furtherance of his re-alignment, Musharraf sent the Pakistani army into the tribal areas bordering Afghanistan for the first time since Pakistan’s independence. 
Operations there against Taliban and al-Qaeda forces brought mixed results. 
Although the US viewed Musharraf as an agent of change, he has never achieved domestic political legitimacy, and his policies were seen as rife with contradictions. 
For example, he made alliances with Islamist political forces (who in 2004 voted for constitutional changes legitimizing his position and actions). 
At the same time, he sidelined moderate, mainstream political leaders while claiming that he stood for “enlightened moderation.” 
A series of ill-planned military operations in the tribal areas further complicated the situation in the volatile border region. 
Last March, Musharraf took his boldest step, removing the Chief Justice of the Supreme Court, Iftikhar Chaudhry. 
To the surprise of many, the country’s legal community organized a nation-wide movement to restore the Chief Justice to his post. 
Hundreds of thousands of ordinary people demanded the rule of law and the supremacy of the constitution, emboldening the judiciary and changing the country’s political dynamic. 
In a historic ruling that Musharraf had little choice but to accept, the Supreme Court itself reinstated the Chief Justice in July. 
Subsequently, the energized judiciary continued ruling against government decisions, embarrassing the government – especially its intelligence agencies. 
Government officials were held accountable for actions that were usually beyond the reach of the law, ranging from brutal beatings of journalists, to illegal confinement for “national security.” 
Musharraf and his political allies tried to adjust to this new reality, but their patience ran out when the Supreme Court took up petitions against Musharraf’s decision to run for president. 
According to the constitution (originally promulgated in 1973 by an elected parliament), a serving military official cannot run for an elected office. 
Musharraf was not ready to give up his military post, but also wanted to be a civilian president. 
While he announced that he would leave his military position “if” he was elected president, his track record of reneging on his promises haunted the judiciary. 
The proceedings of the court over the last few weeks made Musharraf jittery. 
The decision of the 11-member bench might easily have gone against him. 
Legally cornered, Musharraf has now decided to abandon constitutionality, removing the leading judges of the Supreme Court and provincial high courts and putting curbs on the media. 
Lawyers, human rights activists, and political leaders have since been arrested. 
There is widespread public resentment in response to these moves. 
Rather than taking responsibility for the deteriorating security situation (as evidenced by regular suicide bomb attacks) and the increasing Talibanization of the tribal areas, Musharraf has tried to blame the judiciary and media. 
To be sure, in some cases, judicial activism was obvious (though within the realm of constitutional law), and the media also made mistakes; but by no stretch of the imagination can these be linked to religious extremism or support for militancy. 
It is unlikely that Musharraf’s latest gambit will succeed, as his popular support is at its lowest ebb. 
Pakistan’s armed forces – repeated targets of suicide bombers – have become demoralized. 
It is difficult to imagine them standing with Musharraf should civil conflict erupt. 
Nor can a weak, embattled, and disoriented Musharraf be expected to fight Islamic militancy effectively or bring political stability to Pakistan. 
Opposition political parties are drawing closer together, and former Prime Minister Benazir Bhutto, despite progress in her power-sharing negotiations with Musharraf, has strongly condemned his actions. 
Human rights bodies, media associations, and lawyers’ organizations are expected to defy the emergency, which will pit them against the security forces. 
Terrorists may also benefit by attacking a preoccupied army and political forces aligned with Musharraf. 
In the event of sustained protests and potential violence, top military commanders may decide to send Musharraf home – a decision that would not be unprecedented in Pakistan’s chronically turbulent history. 


Toward a New Islamic Golden Age 
SHARJAH – The Muslim world’s past contributions to science and education were extraordinary. 
The Islamic “golden age” – during which scholarship and learning flourished across the Muslim world – lasted many centuries, and included the establishment of the world’s first universities. 
Today, however, Muslim-majority countries lag well behind the rest of the world in terms of education and research. 
This must change if the region is to provide modern jobs and better lives to its booming population and keep up with global development. 
As it stands, only one university from the Muslim world – Turkey’s Middle East Technical University – makes the top 100 in an international ranking, and only a dozen or so can be found in the top 400 in various other lists. 
While there are no international standardized tests in science and math at the university level, fourth-, eighth-, and tenth-grade students in the Muslim world test below the global average in these subjects, according to the Trends in International Mathematics and Science Study and the Program for International Student Assessment. 
And the gap with students elsewhere is widening. 
Moreover, research output – as measured by publications and citations in international journals, as well as patents – is disproportionately low relative to population and financial capabilities. 
Muslim countries spend, on average, only about 0.5% of their GDP on research and development, compared to the global average of 1.78% of GDP and the OECD average of above 2%. 
The number of people working in science fields in the Muslim world is also well below the global average. 
Eighteen months ago, a nongovernmental, nonpartisan task force of international experts – convened by the Muslim World Science Initiative and the Malaysian Industry-Government Group for High Technology, and coordinated by me – set out to explore the sorry state of science in the Muslim world and determine how universities could help to improve the situation. 
A better understanding of the various issues and possible remedies could enable science to flourish again in the Muslim world, with far-reaching benefits for its economies and societies. 
Our review of the state of science at universities in the Muslim world took into account not just budgets and research, but also issues like the status of women in science studies and careers. 
Moreover, we conducted a thorough review – the first of its kind – of how science is taught at universities in the Muslim world, including pedagogical methods, textbooks, language of instruction, censorship of “controversial” topics (such as the theory of evolution), and the role of religion in science classes. 
In a just-released report, the task force concludes that, though the overall state of science in the Muslim world remains poor, much can be done to improve it effectively and efficiently. 
The task force offers specific recommendations for academic institutions, national policymaking bodies, and other stakeholders, such as science academies, industry associations, and civil-society organizations. 
For academic institutions, one major goal should be to build students’ capacity for creative thinking and critical inquiry. 
To this end, the task force recommends broadening the education of science-focused students to include humanities, social sciences, languages, and communication. 
At the same time, it calls for the adoption of internationally tried and true teaching methods, particularly “inquiry-based” and “active-learning” approaches. 
Of course, such a shift would require professors to receive training in these methods. 
Professors should also be encouraged to dedicate themselves to writing textbooks and conducting science outreach, not just publishing more papers. 
This recommendation may be surprising, given the Muslim world’s low research productivity. 
But the reality is that such efforts will produce more real-world benefits than a single-minded focus on publication, which can inadvertently encourage plagiarism and junk science. 
The task force has recommended that national policymaking bodies grant universities more space to innovate (especially in curricula) and evolve (in research programs and collaborations), each in its own way, according to its strengths and weaknesses. 
And it has called on all institutions to embrace meritocracy and shun gimmicks likes paying for “collaborations” to boost publications. 
A quick rankings boost is never worth the risk of reputational damage in the longer term. 
These steps require a bottom-up program of change. 
That is why the task force has now put out an open call for universities across the Muslim world to join a voluntary Network of Excellence of Universities for Science (NEXUS). 
Overseen by the task force, this self-selected peer group – comprising university administrators and faculty who recognize that change must start from within – will implement the steps that the task force has devised. 
The hope is that once the first group of universities’ efforts begin to bear fruit, more institutions will join. 
The resulting momentum will create pressure for ministries, regulators, and other policymaking bodies – which may be the most resistant to change – to take complementary steps. 
Universities are hubs of research, critical thinking, and lively debate, where the next generation is not only exposed to established facts and theories, but also learns to dissect ideas, pinpoint flaws, and help enrich and expand our knowledge base. 
At a time when the Muslim world is facing unprecedented challenges, the importance of creating a healthy academic environment cannot be overstated. 

Rebuilding the Muslim House of Wisdom 
GUILDFORD – Muslim governments know that economic growth, military power, and national security benefit greatly from technological advances. 
Many of them have sharply increased funding for science and education in recent years. 
And yet, in the view of many – especially in the West – the Muslim world still seems to prefer to remain disengaged from modern science. 
These skeptics are not entirely wrong. 
Muslim-majority countries spend, on average, less than 0.5% of their GDP on research and development, compared with five times that in the advanced economies. 
They also have fewer than ten scientists, engineers, and technicians per thousand residents, compared to the global average of 40 – and 140 in the developed world. 
And even these figures tend to understate the problem, which is less about spending money or employing researchers than about the basic quality of the science being produced. 
To be sure, one should not be overly hasty in singling out Muslim countries for criticism; even in the supposedly “enlightened” West, an alarmingly high proportion of the population regards science with suspicion or fear. 
And yet, in many parts of the Muslim world, science faces a unique challenge; it is seen as a secular – if not atheist – Western construct. 
Too many Muslims have forgotten – or never learned about – the brilliant scientific contributions made by Islamic scholars a thousand years ago. 
They do not regard modern science as indifferent or neutral with respect to Islamic teaching. 
Indeed, some prominent Islamic writers have even argued that scientific disciplines such as cosmology actually undermine the Islamic belief system. 
According to the Muslim philosopher Osman Bakar, science comes under attack on the grounds that it “seeks to explain natural phenomena without recourse to spiritual or metaphysical causes, but rather in terms of natural or material causes alone.” 
Bakar is of course entirely correct. 
Seeking to explain natural phenomena without recourse to metaphysics is exactly what science is about. 
But it is difficult to think of a better defense of it than the one offered almost exactly 1,000 years ago by the 11th-century Persian Muslim polymath Abu Rayhan al-Birūni. 
“It is knowledge, in general, which is pursued solely by man, and which is pursued for the sake of knowledge itself, because its acquisition is truly delightful, and is unlike the pleasures desirable from other pursuits,” al-Birūni wrote. “For the good cannot be brought forth, and evil cannot be avoided, except by knowledge.” 
Fortunately, a growing number of Muslims today would agree. 
And, given the tension and polarization between the Islamic world and the West, it is not surprising that many feel indignant when accused of being culturally or intellectually unequipped for competitiveness in science and technology. 
Indeed, that is why governments across the Muslim world are increasing their R&D budgets sharply. 
But throwing money at the problem is no panacea. 
Scientists do require adequate financing, of course, but competing globally requires more than just the latest shiny equipment. 
The entire infrastructure of the research environment needs to be addressed. 
That means not only ensuring that laboratory technicians understand how to use and maintain the equipment, but also – and far more important – nurturing the intellectual freedom, skepticism, and courage to ask heterodox questions on which scientific progress depends. 
If the Muslim world is to become a center of innovation again, it is useful to recall the Islamic “golden age” that stretched from the eighth century well into the fifteenth. 
For example, the year 2021 will mark a millennium since the publication of Ibn al-Haytham’s Book of Optics, one of the most important texts in the history of science. 
Written more than 600 years before the birth of Isaac Newton, al-Haytham’s work is widely regarded as one of the earliest examples of the modern scientific method. 
Among the most famous of this era’s intellectual epicenters was Baghdad’s House of Wisdom, at the time the largest repository of books in the world. 
Historians may bicker over whether such an academy truly existed and what function it served; but such arguments are less relevant than the symbolic power it still holds in the Islamic world. 
When Gulf state leaders talk about their multi-billion-dollar visions of creating a new House of Wisdom, they are not concerned about whether the original was just a modest library that a caliph inherited from his father. 
They want to reanimate the spirit of free inquiry that has been lost in Islamic culture and that urgently needs to be recovered. 
To achieve that, daunting challenges remain to be overcome. 
Many countries devote an unusually large share of research funding toward military technology, a phenomenon driven more by geopolitics and the unfolding tragedies in the Middle East than by a thirst for pure knowledge. 
The brightest young scientists and engineers in Syria have more pressing matters on their minds than basic research and innovation. 
And few in the Arab world are likely to view advances in Iranian nuclear technology with the same equanimity as developments in Malaysia’s software industry. 
But it is nonetheless important to recognize how much Muslim countries could contribute to humankind by nurturing once again the spirit of curiosity that drives scientific inquiry – whether to marvel at divine creation or just to try to understand why things are the way they are. 

The Mullah-Led Development Model 
ISLAMABAD – A longstanding debate in economics – and among social scientists more broadly – centers on how best to deliver international aid to developing countries. 
Should these countries’ governments rely on top-down wisdom from donor capitals? 
Or should they focus more on funding bottom-up solutions dictated by recipients? 
With the Trump administration proposing to cut the US State Department’s budget and reduce the amount of money various US agencies allocate to the world’s poorest, this debate is taking on a new urgency. 
And a response from the Islamic world – the recipient of much of America’s aid in recent years – may hold important lessons for devising the best way forward. 
Simply put, Western countries’ current approach is not working. 
This can be seen most clearly in my country, Pakistan. 
Despite massive increases in aid dollars in recent years, including billions authorized by former President Barack Obama, those of us on the ground are largely cut out of the delivery process. 
There are roughly 70 separate local aid offices and 40 international NGOs involved in providing aid to Pakistanis. 
But most decisions about how to spend the money they receive are made outside the country. 
Aid recipient countries like Pakistan are at the bottom of the international development food chain. 
Budgets are prepared in offices far from the intended site of delivery, and bilateral and multilateral programs often establish priorities (like health care, schooling, or poverty reduction) without much input from the receiving country. 
Yet, because beneficiary governments are so hungry for aid dollars, they are usually all too eager to follow the agendas prepared by donors and their contractors. 
They say yes to the conditions and the studies and the evaluations. 
And they acquiesce when told where and how to allocate funds. 
Local partners can only pick up the crumbs at the end of a long process involving too many “experts,” making recipients feel disenfranchised and unable to see a better future. 
But, rather than simply cutting aid, as the Trump administration seems intent on doing, what the US should consider is reordering how – not if – it delivers aid. 
And it is here, in the bottom-up approach being tested in parts of the Islamic world, that important lessons can be gleaned. 
The void created by the shortcomings of Western aid programs has produced homegrown solutions in places like Pakistan, where socially minded, entrepreneurial religious leaders – mullahs – are increasingly making their presence felt. 
These key community members offer Muslims a clearer vision of a better life than Western aid agencies ever could. 
People relate to mullahs and believe in what they are offering. 
This trust is something Western donors have never placed a premium on earning. 
In Pakistan, mullahs raise funds from their communities and from official and private donors in the wealthy oil-producing countries. 
Unlike funding from, say, the US Agency for International Development, recipients are not burdened with consultancy fees or mandatory spending evaluations. 
There are no policy matrices, controlled surveys, or field reports to file. 
There is just cash, raised through a religious channel and funneled directly to the programs and communities that need it. 
Throughout the Muslim world, self-motivated, entrepreneurial mullahs have operated without bureaucrats and hardship allowances, five-star hotels, or business-class tickets. 
Not all of their efforts are altruistic; in a few instances, crowd-funding and informal networks have benefited terrorism. 
Just like American voters who supported Trump, not every Muslim is an assiduous fact-checker. 
But in the vast majority of cases, mullah-led efforts have raised cash for schools, hospitals, and other services that Western aid money has failed to deliver, while shaping how Muslim communities develop. 
Demand for this alternative vision of aid has increased with the evident failure of the modernization-based development paradigm. 
While Western experts peddling bureaucratized solutions enforced superficial modernity, based on dress, language, and lifestyles, many Muslims saw no real benefit in the form of expanded economic opportunity and greater social mobility. 
So they sought, and established, their own solutions. 
The economist William Easterly has argued that the best way to reform international development is to shift money from top-down “experts” to “bottom-up searchers – like Nobel Peace Prize winner and microcredit pioneer Muhammad Yunus – who keep experimenting until they find something that works for the poor on the ground.” 
That, I would argue, is exactly what mullahs are doing in the Islamic world. 
Development is most successful when it emerges from solutions that are identified, tested, and sustained locally, not when Western agencies and technocrats spend huge sums on top-down approaches. 
Today, a new breed of Muslim “searchers” is offering bottom-up development solutions. 
As the mullah-led development model continues to spread in the Muslim world, “experts” in the West would do well to understand the reasons for its success. 

My Body, My Capital? 
LONDON -- In the 1960’s, feminists coined the slogan, “Our bodies, our selves.” 
But that liberating sentiment has recently undergone an ironic twist. 
As an anonymous American woman, justifying her decision to undergo cosmetic surgery, put it, “All we have in life is ourselves, and what we can put out there every day for the world to see… Me is all I got.” 
The French commentator Hervé Juvin extolled this new attitude towards the body in his 2005 surprise bestseller, L’avènement du corps (The Coming of the Body) . 
Plastic surgery, the implantation of biochips, piercings – all emblazon the belief that our bodies are our unique property. 
At the same time, Juvin asserts, because everyone has a body, property has suddenly become democratized. 
We appear to live in a time that has witnessed the absolute failure of the grand Enlightenment dreams of linear progress, universal peace, and equality between rich and poor. 
Together with widespread hostility to organized religion, manifested in such hugely popular books as Richard Dawkins’s The God Delusion , disappointment with social ideals means that we turn inward. 
In the absence of a belief in eternal life, everything becomes invested in this life, this body. 
Long life is our desire, eternal youth our supposed right, and the myth of the body without origin or limits our new religion. 
That might be why governments are so widely seen to have a positive duty to promote stem cell research and other forms of medical progress. 
Biotechnology industries flourish, with state sanction and support, because they add extra value to the body, the object of supreme worth to us. 
Indeed, the infinite renewal of the body isn’t confined to superficial repairs through cosmetic surgery. 
External substitutes for organic structures can be surgically implanted, breaking down the barrier between the body and the outside world. 
At the same time, tissue removed from the body enters into commerce and trade as a commodity like any other, in the form of stem cell lines, human eggs, and other “products.” 
The American law professor James Boyle believes that we can grasp the way in which the body has become an object of trade by likening it to the historical process of enclosure. 
In eighteenth-century Britain, land, which was previously a public resource, was “enclosed” by private owners. 
Freed of feudal-style legal restrictions on transfer of ownership and of traditional rights held by commoners who used communal land to pasture their animals, landholdings could now be sold to raise capital, which helped to finance the industrial revolution. 
In modern biotechnology, Boyle thinks, things previously outside the market-once thought to be impossible to commodify-are becoming routinely privatized. 
One in five human genes is now patented, even though the human genome might be thought to be our common heritage. 
And although Boyle doesn’t mention this latest development, umbilical cord blood, taken in the final stage of labor, is now banked by profit-making firms as a potential – though unlikely – source of stem cells for the baby. 
In biomedicine, a series of legal cases have generated powerful momentum toward the transfer of rights over the body and its component parts from the individual “owner” to corporations and research institutions. 
So the body has entered the market, becoming capital, just as land did, though not everyone benefits, any more than the dispossessed commoners grew wealthy during the agricultural enclosures. 
Most people are shocked when they learn that one-fifth of the human genome has been patented, mostly by private firms. 
But why be so surprised? 
After all, female bodies have been subject to various forms of property-holding over many centuries and in many societies. 
Women’s bodies are used to sell everything from cars to pop music, of course. 
But female tissue has been objectified and commodified in much more profound ways, in legal systems from Athens onwards. 
While men were also made into objects of ownership and trade, as slaves, in general women were much more likely to be treated as commodities in non-slave-owning systems. 
Once a woman had given her initial consent to the marriage “contract,” she had no right to retract her consent to sexual relations – ever. 
There are clear parallels between that situation and the way in which the common law has offered little redress to patients who have tried to claim property rights in tissue taken from them, or to activists seeking to limit the powers of Big Biotech over human genetic patents. 
All bodies are assumed to be “open access” now, just as women’s have always been. 
But the assault on freedom is perceived as such only when it begins to apply to men. 
It took a long time for people to notice that women’s eggs were required in large quantities for stem cell technologies: a phenomenon I call “the lady vanishes.” 
The stem cell debates often seem to be premised on the assumption that only the status of the embryo matters. 
Many people are still unaware that women’s eggs are a crucial part of “therapeutic cloning.” 
By contrast, genetic patenting, which affects both sexes, has (rightly) generated a huge scholarly literature and a very vigorous popular debate. 
Just a coincidence? 
The new enclosures of the genetic commons or of body tissue threaten to extend the objectification and commodification of the body to both sexes. 
Everyone has a female body now, or, more properly, a feminized body. 
Rather than holding an investment in our bodies, we’re all at risk of becoming capital: my body, but somebody else’s capital. 

My Journey with Che 
For millions of young people around the world, their introduction to Ernesto Che Guevara will be Gael Garia Bernal as Che and Rodrigo De la Serna as his friend Alberto, kicking back the stand of an overloaded motorcycle, hopping aboard, and lumbering north on an 8,000-mile journey through South America in the film version of Che's Motorcycle Diaries . 
For those of us in Cuba old enough to take a similar trip, our journey with Che, the young man with the funny accent and starred beret, began with less romance. 
"Pioneros por el comunismo, seremos como el Che! 
(Pioneers for Communism, like Che we shall be!)," we repeated day after day before starting class. 
The chant became so tedious that inevitably, the class clown would ask if the incantation would end up turning us all into asthmatics, as Che was. 
Che's life and deeds all became part of a modern bible for young Cubans. Even if we wanted to reject what was force-fed in chants or poems like "Che Comandante," it was hard to resist the charm and passion that came from his letters and diaries. 
In his speeches, I discovered the brilliant Che, mercilessly railing against inefficiency, false politics, and double standards. 
"If we lack organization, the ideas, after the impetus of the first moment, lose their effectiveness, fall into the basic routines and conformity, and become simply a memory," he once said. 
I looked around our island and wondered: was anyone listening? 
I discovered the Che who scribbled love poems and coveted his solitude. 
I wanted to sit with him for a beer and a cigarette to talk about his love for chess or his favorite books. 
With the crisis of the 1990's brought on by the collapse of our Soviet patron, many Cubans returned to what Che said about economics, and admit the value of what is achieved with effort. 
We felt once again the integrity of what it's like to share the burden of a common predicament. 
The value of our homemade solutions increased to some who had always favored ideas imported from the East. 
Then Che's face flooded our lives, staring at us from T-shirts, banners, walls, and key rings, with a look as vigilant as those on the faces in the murals of the Committees for the Defense of the Revolution. 
The solemn face that Alberto Korda caught in his photographs became tough and unsympathetic. 
He stopped being San Ernesto de la Izquierda, the saint or talisman who delivered us from injustice. 
Instead, he rose like the flag of the trivial in a global mass culture - a sign associated with consumer tastes in fashion, music, and drugs. 
To rediscover the Che who could inspire, I returned to the young Ernesto of Che's diary. 
I thought again about how on his trip through Latin America, he acquired his revolutionary ideals, clarified certain questions, and added more. 
I loved how he was brave enough to postpone his life for a while to find his own answers. 
Today, a photo of Che's image displayed on the façade of Cuba's Interior Ministry is a must-have for tourists. 
Visitors leave and continue their imaginary leftist lives with full refrigerators. 
We Cubans remain, in charge of keeping the flame alive. 
I wonder, Ernesto, what you would have turned into had you lived? 
An archetype feeding the legend? 
A general talking down to us with reprimands? 
A favorite leader? 
A twenty-first century Quixote tilting at the windmills of canned politics? 
A postcard? 
A repressor of feelings? 
Or just another dinosaur? 

My Plan to Drop the Bomb 
NEW YORK – The destruction of Hiroshima and Nagasaki in 1945 marked an end and a beginning. 
The close of the Second World War ushered in a Cold War, with a precarious peace based on the threat of mutually assured destruction. 
Today the world is at another turning point. 
The assumption that nuclear weapons are indispensable to keeping the peace is crumbling. 
Disarmament is back on the global agenda – and not a moment too soon. 
A groundswell of new international initiatives will soon emerge to move this agenda forward. 
The Cold War’s end, twenty years ago this autumn, was supposed to provide a peace dividend. 
Instead, we find ourselves still facing serious nuclear threats. 
Some stem from the persistence of more than 20,000 nuclear weapons and the contagious doctrine of nuclear deterrence. 
Others relate to nuclear tests—more than a dozen in the post-Cold War era, aggravated by the constant testing of long-range missiles. 
Still others arise from concerns that more countries or even terrorists might be seeking the bomb. 
For decades, we believed that the terrible effects of nuclear weapons would be sufficient to prevent their use. 
The superpowers were likened to a pair of scorpions in a bottle, each knowing a first strike would be suicidal. 
Today’s expanding nest of scorpions, however, means that no one is safe. 
The Presidents of the Russian Federation and the United States—holders of the largest nuclear arsenals—recognize this. 
They have endorsed the goal of a world free of nuclear weapons, most recently at their Moscow summit, and are seeking new reductions. 
Many efforts are underway worldwide to achieve this goal. 
Earlier this year, the 65-member Conference on Disarmament—the forum that produces multilateral disarmament treaties—broke a deadlock and agreed to negotiations on a fissile material treaty. 
Other issues it will discuss include nuclear disarmament and security assurances for non-nuclear-weapon states. 
In addition, Australia and Japan have launched a major international commission on nuclear non-proliferation and disarmament. 
My own multimedia “WMD—WeMustDisarm!” campaign, which will culminate on the International Day of Peace (21 September), will reinforce growing calls for disarmament by former statesmen and grassroots campaigns, such as “Global Zero.” 
These calls will get a further boost in September when civil society groups gather in Mexico City for a UN-sponsored conference on disarmament and development. 

My Speech to the Finance Graduates 
NEW HAVEN – At this time of year, at graduation ceremonies in America and elsewhere, those about to leave university often hear some final words of advice before receiving their diplomas. 
To those interested in pursuing careers in finance – or related careers in insurance, accounting, auditing, law, or corporate management – I submit the following address: 
Best of luck to you as you leave the academy for your chosen professions in finance. 
Over the course of your careers, Wall Street and its kindred institutions will need you. 
Your training in financial theory, economics, mathematics, and statistics will serve you well. 
But your lessons in history, philosophy, and literature will be just as important, because it is vital not only that you have the right tools, but also that you never lose sight of the purposes and overriding social goals of finance. 
Unless you have been studying at the bottom of the ocean, you know that the financial sector has come under severe criticism – much of it justified – for thrusting the world economy into its worst crisis since the Great Depression. 
And you need only check in with some of your classmates who have populated the Occupy movements around the world to sense the widespread resentment of financiers and the top 1% of income earners to whom they largely cater (and often belong). 
While some of this criticism may be over-stated or misplaced, it nonetheless underscores the need to reform financial institutions and practices. 
Finance has long been central to thriving market democracies, which is why its current problems need to be addressed. 
With your improved sense of our interconnectedness and diverse needs, you can do that. 
Indeed, it is the real professional challenge ahead of you, and you should embrace it as an opportunity. 
Young finance professionals need to familiarize themselves with the history of banking, and recognize that it is at its best when it serves ever-broadening spheres of society. 
Here, the savings-bank movement in the United Kingdom and Europe in the nineteenth century, and the microfinance movement pioneered by the Grameen Bank in Bangladesh in the twentieth century, comes to mind. 
Today, the best way forward is to update financial and communications technology to offer a full array of enlightened banking services to the lower middle class and the poor. 
Graduates going into mortgage banking are faced with a different, but equally vital, challenge: to design new, more flexible loans that will better help homeowners to weather the kind of economic turbulence that has buried millions of people today in debt. 
Young investment bankers, for their part, have a great opportunity to devise more participatory forms of venture capital – embodied in the new crowd-funding Web sites – to spur the growth of innovative new small businesses. 
Meanwhile, opportunities will abound for rookie insurance professionals to devise new ways to hedge risks that real people worry about, and that really matter – those involving their jobs, livelihoods, and home values. 
Beyond investment banks and brokerage houses, modern finance has a public and governmental dimension, which clearly needs reinventing in the wake of the recent financial crisis. 
Setting the rules of the game for a robust, socially useful financial sector has never been more important. 
Recent graduates are needed in legislative and administrative agencies to analyze the legal infrastructure of finance, and regulate it so that it produces the greatest results for society. 
A new generation of political leaders needs to understand the importance of financial literacy and find ways to supply citizens with the legal and financial advice that they need. 
Meanwhile, economic policymakers face the great challenge of designing new financial institutions, such as pension systems and public entitlements based on the solid grounding of intergenerational risk-sharing. 
Those of you deciding to pursue careers as economists and finance scholars need to develop a better understanding of asset bubbles – and better ways to communicate this understanding to the finance profession and to the public. 
As much as Wall Street had a hand in the current crisis, it began as a broadly held belief that housing prices could not fall – a belief that fueled a full-blown social contagion. 
Learning how to spot such bubbles and deal with them before they infect entire economies will be a major challenge for the next generation of finance scholars. 
Equipped with sophisticated financial ideas ranging from the capital asset pricing model to intricate options-pricing formulas, you are certainly and justifiably interested in building materially rewarding careers. 
There is no shame in this, and your financial success will reflect to a large degree your effectiveness in producing strong results for the firms that employ you. 
But, however imperceptibly, the rewards for success on Wall Street, and in finance more generally, are changing, just as the definition of finance must change if is to reclaim its stature in society and the trust of citizens and leaders. 
Finance, at its best, does not merely manage risk, but also acts as the steward of society’s assets and an advocate of its deepest goals. 
Beyond compensation, the next generation of finance professionals will be paid its truest rewards in the satisfaction that comes with the gains made in democratizing finance – extending its benefits into corners of society where they are most needed. 
This is a new challenge for a new generation, and will require all of the imagination and skill that you can bring to bear. 
Good luck in reinventing finance. 

ASEAN and the Rohingya Crisis 
DHAKA – The worsening plight of Muslim Rohingya communities in Myanmar’s Rakhine state could soon imperil the country’s government, as well as the reputation of its leader, the Nobel Peace Prize laureate Daw Aung San Suu Kyi. 
The crisis has been escalating since last October, when Myanmar’s military launched an offensive in which 130 Rohingya were killed, and dozens of their buildings were torched. 
At the time, the military’s leaders claimed that the attack was part of an effort to locate unidentified insurgents who were thought to be responsible for the slayings on October 9 of nine policemen at three border posts in the district of Maungdaw. 
According to a Human Rights Watch analysis of satellite images, still more Rohingya villages were destroyed over the course of nine days in November, bringing the number of buildings razed to 1,250; meanwhile, 30,000 people have reportedly been displaced. 
The United Nations considers the stateless Rohingya to be among the world’s most persecuted minorities. 
Now, other countries in an otherwise stable region are becoming embroiled in the crisis; indeed, countries such as Bangladesh, Thailand, and Indonesia are increasingly feeling the spillover effects, as Rohingya seek asylum within their borders. 
The persecution of the Rohingya can no longer be described as merely a domestic problem for Myanmar. 
ASEAN has been criticized for approaching the Rohingya issue too cautiously, and for failing to recognize that the ongoing conflict could divide the bloc along ethno-religious lines. 
The region’s population is 60% Muslim, 18% Buddhist, and 17% Christian; continued discrimination against the Rohingya already has become a rallying cry for sympathetic Islamic extremist groups in countries that provide asylum. 
This is an especially grave risk for Muslim-majority countries such as Indonesia. 
The fleeing Rohingya live in deplorable conditions when they reach host countries, and they have been involved in chronic skirmishes with security forces. 
Facing constant struggle and ongoing food shortages, the Rohingya are prime targets for terrorist recruiting. 
Not surprisingly, Islamic extremist groups have already posted online videos calling for jihad against Myanmar; and Indonesian authorities recently arrested two militants who were allegedly plotting an attack on Myanmar’s embassy in Jakarta. 
As the Rohingya crisis deepens, more regional and international extremist groups will undoubtedly use it as a convenient tool to gain sympathy, recruit new members, and raise funds. 
ASEAN leaders must formulate an effective diplomatic solution to the crisis to prevent it from fueling more extremism in the region and disrupting trade and people’s livelihoods. 
The much-heralded “ASEAN Way,” whereby member states adhere to quiet diplomacy and principled non-intervention, served the bloc well on the economic front in its first decades of existence. 
But as international criticism mounts, the ineffectiveness of a “see no evil, hear no evil” strategy for addressing internal issues should now be obvious. 
Malaysia seems to recognize this. 
At the recent ASEAN foreign ministers’ meeting in Yangon, it called for the coordination of humanitarian aid and an investigation into alleged atrocities committed against Rohingya. 
Following the meeting, Myanmar showed willingness to grant humanitarian access and to keep the ASEAN members informed. 
It is time for ASEAN to heed this call, shifting its mode of operation, so that mature democracies such as Singapore and Malaysia – which rank high in human-development indices – can become responsible global leaders, and expand their humanitarian problem-solving capacities. 
ASEAN needs to grow into a strong, politically accountable, European Union-style community. 
To do that, it must find peaceful yet effective ways to mitigate what is now a regional humanitarian crisis. 
According to unofficial estimates, there could now be as many as 500,000 Rohingya refugees in Bangladesh alone. 
Since the latest military intervention, another 20,000 Rohingya have arrived. 
This puts Bangladesh, which already struggles to provide basic services to its own 170 million citizens, in an extremely difficult position. 
Already, Myanmar’s Deputy Minister of Foreign Affairs has visited Dhaka for talks. 
And a three-member team of Myanmar’s Advisory Commission on Rakhine State visited the Rohingya slums in Bangladesh’s coastal area bordering Rakhine state. 
ASEAN could help here. 
Member states such as Singapore enjoy friendly relations with both Myanmar and Bangladesh, and thus could provide a platform for the two countries to come together and arrive at permanent solutions to a decades-old problem. 
But first ASEAN must decide to pull its political weight, and to expend some of its political capital, to bring about a just, long-term settlement. 
If it does, it can serve as an honest broker between Myanmar, Bangladesh, and, most importantly, representatives of the Rohingya community, who have suffered persecution for long enough. 

Five Steps to Peace in Myanmar 
CANBERRA – The humanitarian crisis afflicting Myanmar’s Muslim Rohingya has damaged the country’s political stability and shattered its image as a country moving toward democracy. 
Moreover, it has tarnished the reputation of the government’s de facto leader, the Nobel Peace Prize laureate Aung San Suu Kyi; called into question the crisis-management credentials of ASEAN and the United Nations; and made a mockery of international institutions for conflict prevention. 
And yet, for all the woe, a resolution remains possible; to achieve it, five steps must be taken without delay. 
First and foremost, the killings and atrocities must stop, which will be as difficult as it is necessary. 
Myanmar’s military has engaged in a sustained campaign of ethnic cleansing, with the primary goal of expelling the Rohingya from the country. 
Although these actions cannot be undone, further bloodshed and targeted evictions can and should cease. 
For that to happen, however, Rohingya extremists must be contained. 
Contrary to the prevailing narrative in the West, the Myanmar military was provoked, after insurgents staged a series of attacks on police and army posts in August. 
Exploiting a history of armed clashes between Buddhists and Muslims in Rakhine State, the Arakan Rohingya Salvation Army (ARSA) has assumed leadership of an increasingly violent campaign. 
The problem, of course, has been the disproportionate use of force by the military, which retaliated against ARSA strikes by launching a scorched-earth campaign that has killed as many as 3,000. 
Soldiers have burned entire Rohingya villages, engaged in sexual violence, destroyed mosques, and provoked mass displacement. 
The UN High Commissioner for Human Rights, Zeid Ra’ad Al Hussein, says it is “a textbook example of ethnic cleansing,” while UN Secretary-General António Guterres has called the crisis “catastrophic.” 
Suu Kyi, meanwhile, has failed to exercise any moral authority, sounding instead like an apologist when she insists that “a huge iceberg of misinformation” is “promoting the interest of the terrorists.” 
She is, no doubt, sandwiched between an autonomous military that retains complete control over the country’s security services, and a Buddhist-majority population with deeply rooted anti-Muslim prejudices. 
But, that predicament does not excuse her failure to condemn what is happening under her watch. 
To be sure, Suu Kyi’s government resents the idealistic but partisan statements often issued by Western leaders and UN representatives. 
Rohingya extremists have long-established links with foreign jihadists, including those of the Islamic State. 
Complicating the military’s position, ARSA is, according to the International Crisis Group, commanded by Saudi-based insurgents with extensive experience in guerrilla warfare. 
Few Westerners grasp the challenges faced by decision-makers in developing countries confronting extremism from insurgents and terrorists. 
It is precisely these concerns that have made it difficult for Myanmar to break the cycle of violence. 
Bangladesh and India have refused to resettle Rohingya refugees permanently, largely because they fear that jihadists could be among them. 
Indian intelligence agencies have linked ARSA to the Pakistani jihadist group Lashkar-e-Taiba. 
Similarly, China’s government has supported Myanmar’s efforts to protect its national security. 
As part of its Belt and Road Initiative, China is investing $7.3 billion in a port project in Rakhine, which may lead China to block any attempt in the UN Security Council to censure Myanmar for its actions. 
This tangled web of interests, coupled with the government’s failure, means that responsibility for protecting all of Myanmar’s people now falls to ASEAN or the UN. 
Once hostilities cease, the second step toward ensuring long-term peace will be the repatriation of refugees, which could prove to be a logistical nightmare. 
According to UN figures, at the end of September some 700,000 Rohingya refugees had crossed into Bangladesh, with more than half arriving since late August. 
And Myanmar’s military has mined the border with Bangladesh to stop them from returning. 
Assuming that the issues of violence and refugees can be addressed, Myanmar must grant international humanitarian access to the affected regions. 
ASEAN, which demonstrated its capabilities in the wake of Cyclone Nargis in 2008, is well positioned to take the lead in shaping a regional response. 
ASEAN could also coordinate with the UN in managing emergency personnel. 
The fourth step is to hold enablers of the atrocities accountable. 
Myanmar’s government must undertake – or permit ASEAN or the UN to do so on its behalf – an independent and impartial investigation into the killings, identify the perpetrators, and subject them to transparent and credible prosecution. 
If this cannot be done domestically, the matter must be referred to the International Criminal Court. 
Finally, the government that Suu Kyi leads must repeal or amend all discriminatory laws and end official anti-Rohingya discrimination. 
With 1.1 million members, the Rohingya are one of the world’s largest stateless ethnic groups. 
Most came to Myanmar as part of the expansion of the British Empire, after the Burmese king was defeated in 1826, but are still considered to be illegal Bengali immigrants. 
The 1982 citizenship law did not recognize them as one of the country’s 135 ethnic groups, and they have severely limited access to health care, education, and employment, in addition to facing restrictions on their freedom of movement. 
Myanmar’s democratic transition remains fragile, with civil-military relations, poverty, economic growth, and governance competing for attention. 
But the cessation of hostilities and resolution of the Rohingya crisis must take precedence. 
The report issued in August by the Rakhine Advisory Commission, led by former UN Secretary-General Kofi Annan, offers one possible path forward. 
These five steps will not heal all wounds or end every grievance. 
But they can help ease the suffering by discouraging further atrocities, deterring violent extremism, and improving border security. 
At the moment, this may be the best-possible outcome. 

The Continuing Mystery of Life’s Building Blocks 
GARRISON, NEW YORK – Imagine for a moment that you have come across a trove of marvelous devices left by an ancient civilization. 
These mysterious instruments vary widely in size and complexity, but they all share a few wondrous capabilities. 
If you want to understand how they work, it makes sense to start with the simplest and smallest device, then systematically carve off pieces until it stops working. 
Eventually, everything that is inessential will be gone, and you will be left with only the components necessary for it to perform its basic functions. 
And then, once you figure out what each of those pieces does, you will have your answer. 
This is roughly the journey of discovery that the American biotechnologist J. Craig Venter and his colleagues have been taking for the past two decades – only their marvelous devices are not archeological remains, but living organisms. 
And the pieces they are trying to understand are the genes that we share with all other forms of autonomous, reproductive life. 
In a recent paper in the journal Science, Venter and his colleagues announced that they had created the smallest living and reproducing organism. 
Their creation – called JCVI-syn3.0 – is a simple cell, with only the genes that are essential for life; it has a smaller genome than any autonomously replicating organism found in nature, larger only than those found in viruses and other entities that rely on hosts for essential functions. 
Venter and his team created their organism through a process of trial and error. 
They began by using their knowledge of biology to deduce the minimum set of genes that would be required for life. 
That approach failed. 
So, instead, they took an existing organism and began to whittle it down. 
They started with the genome of Mycoplasma mycoides, a parasitic bacteria that infects cattle and goats, and also a close relative of Mycoplasma genitalium, which has the fewest genes – just 525 – known among free-living bacteria. 
The team broke the M.mycoides genome into eight fragments and began deleting genes one by one. 
If the reconstructed organism failed to thrive, the gene was left in. 
If it did not appear to matter, it stayed out. 
In the end, 473 genes were required for the organism to thrive. 
(Humans, by comparison, have roughly 20,000 genes.) 
The most important result of the Venter team’s work was to reveal how little we know about the basic biology of life. 
Most of the 473 genes take care of housekeeping: They make proteins, keep DNA in good repair, and are responsible for the cell’s membrane and cytoplasm. 
But there are 149 genes whose function is unknown. 
In other words, the purpose of nearly one-third of the genes needed to keep the organism alive, well, and reproducing remains a mystery. 
Of the 149 genes with unknown functions, 70 have a structure that at least hints at their role in the cell. 
But we know nothing about the other 79, except that in these organisms, in this environment, life is impossible without them. 
Moreover, as Venter and his colleagues acknowledge, if the team began with a different microbe, or grew it in a different environment, the set of necessary genes would be different. 
So their genome is a minimal genome, not the minimal genome. 
All of this implies many exciting discoveries ahead. 
And yet, when it comes to practical, commercial objectives, the news is considerably more sobering. 
One of the primary goals of synthetic biology has been to create a platform, or chassis, to use as a foundation for building organisms designed for specific tasks. 
Just as Volkswagen uses its A5 platform to build 19 different vehicles, from luxury Audi A3s to small SUVs and budget models, a biological chassis would be a minimal microbial platform onto which could be bolted genetic instructions to make drugs, biofuels, cosmetics, or whatever one desires. 
With the publication of the Science paper, two challenges become evident. 
The first is that biology is complicated. 
As Venter’s work shows, we do not yet have a sufficient grasp of the essentials of basic biology to design and build a cell. 
Genes do not function like fenders or brakes; they cannot be mounted on a chassis to perform a function independently of other components. 
Genes interact – amplifying, dampening, or even silencing one another. 
And those effects, in turn, influence still other genes. 
Genomes, it turns out, function less like machines than like ecosystems with multitudinous relationships and complex feedback loops. 
Adding genomic parts to a synthetic organism in order to achieve a predictable result may be far more difficult than proponents of the chassis model have assumed. 
The second challenge regards the competition. 
When Venter and his team began their effort, genetic engineers had tools that were powerful but, by modern standards, crude. 
In recent years, scientists have found ways to edit genes with far greater precision. 
The most prominent, known as CRISPR Cas9, cuts DNA with remarkable (though not perfect) accuracy. 
As a result, gene editing has emerged as an alternative strategy to the chassis model for tailoring microbes to make useful products. 
It is impossible to know whether synthetic organisms like Venter’s JCVI-syn 3.0 or gene-editing techniques will prove to be commercially dominant in biotechnology – or indeed whether some other method will supplant both. 
We can be confident, however, that our knowledge of basic biology will deepen, and that our growing ability to manipulate living organisms will confront us with increasingly serious ethical considerations. 

The Western Illusion of Chinese Innovation 
VANCOUVER – Over the past two decades, China has been achieving rapid technological progress, thanks in no small part to its massive investment in research and development, which totaled some 2.2% of its GDP last year. 
Yet China is nowhere near the technological frontier. 
In fact, the distance separating it from that frontier is far greater than most people recognize. 
In the West, many economists and observers now portray China as a fierce competitor for global technological supremacy. 
They believe that the Chinese state’s capacity is enabling the country, through top-down industrial policies, to stand virtually shoulder-to-shoulder with Europe and the US. 
Harvard economics professor and former US Treasury Secretary Larry Summers, for example, declared last March at a Beijing conference that it is a “historical wonder” that China, where per capita income amounts to just 22% that of the United States, could have the world’s cutting-edge technology and technological giants. 
The US Trade Representative, in a March report, presented the “Made in China 2025” plan – a 2015 blueprint for upgrading China’s manufacturing capacity – as proof that the country is seeking to displace the US in high-tech industries that it considers strategic, such as robotics. 
Moreover, the USTR report asserts, China has happily played the game on its own, and has violated current global rules to achieve its goals. 
Indeed, many Westerners warn that China is planning to use its technology-based power to impose an entirely new set of rules that is inconsistent with those long enforced by the West. 
This is a serious misrepresentation. 
While it is true that digital technologies are transforming China’s economy, this reflects the implementation of mobile-Internet-enabled business models more than the development of cutting-edge technologies, and it affects consumption patterns more than, say, manufacturing. 
This kind of transformation is hardly unique to China, though it is occurring particularly rapidly here, thanks to a huge consumer market and weak financial regulation. 
Furthermore, it is not so obvious that these changes have anything to do with the government’s industrial policies. 
On the contrary, the growth of China’s Internet economy has been driven largely by the entrepreneurship of privately owned companies like Alibaba and Tencent. 
In fact, Western observers – not just the media, but also academics and government leaders, including US President Donald Trump – have fundamentally misunderstood the nature and exaggerated the role of China’s policies for developing strategic and high-tech industries. 
Contrary to popular belief, these policies do little more than help lower the entry cost for firms and enhance competition. 
In fact, such policies encourage excessive entry, and the resulting competition and lack of protection for existing firms have been constantly criticized in China. 
Therefore, if China relies on effective industrial policies, they would not create much unfairness in terms of global rules. 
Having said that, what are China’s actual technological prospects? 
The Chinese are certainly fast learners. 
Over the last 30 years, Chinese manufacturers have proved adept at seizing opportunities to emulate, adapt, and diffuse new technologies. 
But technological advances in the Chinese business sector occur at the bottom of the smile curve, and core-technology owners have extracted most of the added value from Chinese manufacturing. 
For example, in Danyang, a county of Jiangsu Province that is a production hub of optical lenses for global markets, manufacturers can produce the most sophisticated models. 
Yet they lack the core software to produce, say, progressive lenses, so they must pay a fixed royalty to a US company for each progressive lens they make. 
Likewise, China’s automobile manufacturers still import their assembly lines from developed countries. 
Clearly, there is a big difference between applying digital technologies to consumer-oriented business models and becoming a world leader in developing and producing hard technology. 
The latter goal will demand sustained investment of time, human capital, and financial resources in sectors with long basic R&D cycles (such as pharmaceuticals). 
Given this, China probably remains 15-20 years away from matching the R&D input of, say, Japan or South Korea, and when it comes to output – the more important factor – it is much further behind. 
While China can accelerate progress by attracting creative talent and strengthening incentives for long-term research, there are no real shortcuts when it comes to achieving the gradual shift from learning to innovating. 
Here, universities have a pivotal role to play, not only by training new scientific and technological talent, but also by conducting basic research. 
This means moving beyond the focus on increasing the sheer number of students and placing greater emphasis on quality of education. 
None of this can happen overnight. 
Indeed, as China learned from the failure of the Great Leap Forward in the 1950s, a genuine economic transformation cannot – and therefore should not – be rushed. 

The Myth of China’s Forced Technology Transfer 
BEIJING – Even as observers in developed countries criticize US President Donald Trump’s use of blunt tools such as tariffs against China, many believe that he is responding to a real problem. 
China, they argue, really is engaging in unfair trading practices. 
But is it? 
One of the chief complaints against China is that it relies on what US authorities call “forced technology transfer”: foreign companies seeking access to the Chinese market are required to share their intellectual property with a domestic “partner.” 
But the word “forced” suggests a degree of coercion that does not make economic sense. 
American and European companies do not have to invest in China; if they choose to do so, knowing that it will require them to share their technology, it is because they still expect to earn a profit. 
The technology-transfer requirement should help foreign companies secure better deals with Chinese firms, which will include the technology’s value in their overall appraisal of a foreign investor’s contribution to a joint venture. 
In exchange, the local partner and local government eager to foster growth would provide cheap land, infrastructure, tax exemptions, or loans on favorable terms. 
In short, the transferred technology is priced into any foreign direct investment (FDI). 
This is reflected in the continued high profitability of companies with foreign investors. 
It is only natural that American and European companies declare in surveys that they would be better off had they not been “forced” to transfer their technology. 
But these statements assume that the terms on which the initial investment was made would be the same without the technology transfer, and that is not the case. 
Of course, if technology transfer were not a requirement, the most efficient investment deal in many cases would involve a licensing agreement or the payment of royalties. 
But that should be only a secondary consideration, because the present value of the foregone licensing fees or royalties would figure implicitly in any investment deal. 
But while the costs to Western companies imposed by the technology-transfer requirement are probably being vastly overstated, so, too, are the benefits that the policy brings to China. 
So why do the Chinese authorities insist on linking market access to technology transfer? 
China’s main official argument is that, as a developing country, domestic firms are at a disadvantage vis-à-vis foreign investors, which possess advanced technologies that the local companies do not understand. 
But while this argument may hold water in some of the less developed countries that use it to justify restrictive FDI regimes, China’s technological capabilities have exploded over the last couple of decades. 
In fact, China’s expenditure on research and development is now higher both as a percentage of GDP and in absolute terms than the level in Europe and many other OECD countries. 
With the country’s capacity for indigenous R&D – not to mention technological absorption – having progressed substantially, there is little need to continue protecting Chinese “infant” industries. 
It is this progress that has driven Western companies to become more vocal in their complaints about “forced” technology transfer. 
Previously, they were more willing to transfer their technology, based on the expectation that Chinese competitors would be unable to adapt and master it, anyway. 
With China now producing more graduates with bachelor’s degrees in science and engineering than the US and Europe combined, that expectation is no longer tenable. 
Despite rising resistance to technology transfer, however, the Chinese authorities remain reluctant to abandon their policy, probably for much the same reason the US is angry: they overestimate its impact. 
They fail to recognize that Western companies might be offering worse terms to Chinese partners than they would if they could keep their technology and use licensing agreements instead. 
Yet these other forms of technology transfer are already becoming increasingly prevalent: recorded royalties payments from China have skyrocketed, and now amount to close to $30 billion per year. 
With China now second only to the US in terms of paying for foreign technology, it is clear that a large and growing share of technology transfer is not “forced.” 
For Trump, however, that may not be the point. 
What his administration is really worried about is that China is about to surpass the US and lock down technological leadership in a number of sectors considered critical for national security (on both sides of the Pacific). 
Yet forcing China to eliminate its technology-transfer requirements will not change this. 
An end to that policy may actually be in China’s best interests. 
The US and China account for a large share of global trade, but they do not dominate the global economy. 
The bilateral trade war will be won by the side that can gain the support of the neutral powers (such as Europe and Japan) by appearing more reasonable. 
For China, this would mean abolishing all restrictions on foreign ownership, including the requirement that technology be shared, rather than licensed. 
Such a move would underscore the strength of the Chinese economy, without costing China nearly as much as its leaders or US policymakers seem to think. 
Perhaps more important, it would force the US either to stop its China bashing or to admit that the underlying motivation is not economics, but geopolitical rivalry. 

The “Next Eleven” and the World Economy 
LONDON – On a recent holiday in Vietnam, Cambodia, and Laos, I couldn’t resist thinking about these countries’ economic potential and ongoing policy challenges. 
After all, in 2005, my Goldman Sachs colleagues and I had listed Vietnam as one of the Next Eleven (N-11) – all countries with the potential to become important economies during this century. 
Vietnam reported that its real (inflation-adjusted) GDP growth was 7.4% in the latest quarter, outpacing China. 
And, according to the World Bank’s forecast, Vietnam, along with Cambodia and Laos, is on track to maintain a similar level of growth for the year. 
The N-11 never acquired the cachet of the BRIC acronym, which I coined in 2001 to describe a bloc of emerging economies (Brazil, Russia, India, and China) that stood to have a significant impact on the world economy in the future. 
The N-11 countries weren’t at the level of the BRICs, but nor was either acronym intended to be an investment theme. 
Rather, N-11 was simply a label we applied to the next 11 most populous, highest-potential emerging economies after the BRICs. 
Around the time that we published the 2005 paper “How Solid are the BRICs?”, in which we first identified the N-11, I often joked that we chose 11 simply because it was the number of players on a soccer team. 
When others would point out that we had excluded more populous countries such as Congo and Ethiopia, I would muse that Ethiopia could be the N-11’s Ole Gunnar Solskjaer, in reference to Manchester United’s brilliant sub-in scorer during the 1990s. 
Then as now, the N-11 comprised a mixed bag: South Korea, Mexico, Indonesia, Turkey, Iran, Egypt, Nigeria, the Philippines, Pakistan, Bangladesh, and Vietnam. 
These countries have extremely diverse economic and social conditions, and very different levels of wealth. 
For example, South Koreans now enjoy a standard of living similar to that in the European Union, which makes many analysts’ persistent categorization of South Korea as an “emerging economy” all the more baffling. 
Meanwhile, Mexico’s and Turkey’s levels of wealth haven’t come anywhere near that of South Korea, and yet they are considerably wealthier than the rest of the N-11, some of which remain among the poorest countries in the world. 
At the same time, Asian N-11 countries such as the Philippines and Vietnam have grown significantly since 2005, while Mexico’s performance has been somewhat disappointing, and Egypt’s even more so. 
Collectively, the N-11 comprises some 1.5 billion people, and its current nominal GDP is around $6.5 trillion. 
In other words, while its population is slightly larger than that of China or India, its economy is about half the size of China’s, but larger than Japan’s and more than twice the size of India’s. 
These divergences help to explain why a number of new acronymic groupings have since been carved out of the N-11, including the MINT (Mexico, Indonesia, Nigeria, Turkey) and the MIST (swapping in South Korea for Nigeria). 
I didn’t devise these groupings, but I have come to be associated with them, having produced a BBC radio documentary on the MINT countries in 2014. 
At any rate, they were in keeping with earlier points I had raised; namely, that by 2010, Mexico, Indonesia, South Korea, and Turkey would each account for more than 1% of global GDP. 
Eight years later, the MIST economies still have a chance to account for around 2-3% of world GDP in the future. 
None is likely to reach the size of any of the BRIC economies, except, perhaps, Russia. 
Owing to its current problems, Russia’s GDP is now around the same size as South Korea’s. 
If it doesn’t sort itself out soon, its GDP could fall below that of Mexico, or even Indonesia. 
Of the other seven N-11 economies, Nigeria, Vietnam, and perhaps Iran stand out for having the most potential. 
Still, each faces serious obstacles to becoming a $1 trillion economy, never mind accounting for 2-3% of world GDP. 
Looking beyond each of these countries’ individual prospects, what is important for economic observers and investment professionals to understand is that the N-11 as a bloc has grown by around 4.5% so far this decade, after growing by almost 4% in the previous decade. 
Given the size of its output, the N-11’s growth is contributing significantly to the world economy, alongside the primary drivers of China and India. 
I kept reminding myself of this fact while traveling around Vietnam, where my tranquility was repeatedly interrupted by blaring headlines about US President Donald Trump’s tweets and escalating violence in the Middle East. 
Before heading to Vietnam, I had the privilege of writing a review for Nature of Factfulness: Ten Reasons We’re Wrong About the World – and Why Things Are Better Than You Think, a brilliant book by the late physician Hans Rosling, which his daughter published posthumously this year. 
Factfulness is one of just a few recent works to focus on the remarkably positive things happening in the world. 
Rosling, along with Harvard University’s Steven Pinker, was right to be optimistic. 
An unblinkered view of the world reveals many promising signs, especially for the global economy. 

Carbon Majors and Climate Justice 
BONN – A groundbreaking study published last November revealed that the activities of a mere 90 producers of coal, oil and gas, and cement – dubbed the “carbon majors” – have led to 63% of all CO2 emissions since the Industrial Revolution. 
The report was released just weeks after Typhoon Haiyan (or Yolanda as it was known locally) tore through the Tacloban region in the Philippines. 
With unprecedented wind speeds of 315 kilometers (196 miles) per hour, the storm killed 6,300 people, left four million homeless, and caused more than $2 billion of damage. 
Haiyan and its devastation became a rallying cry for delegates at the subsequent United Nations climate-change conference in Warsaw. 
In response, they agreed to establish an international mechanism to address climate-change-related “loss and damage,” to be applied in countries that are unable to adapt or protect themselves from the worst effects of global warming. 
Those most vulnerable to climate change are often least responsible for its causes, and have the fewest resources to deal with its consequences. 
Contrast this with the carbon majors, which have made huge fortunes from the fossil fuels that are largely responsible for climate change. 
In 2013, the combined profits of just four majors – Chevron, ExxonMobil, BP, and Shell – topped $94 billion. 
This colossal return was possible only because these companies externalize their products’ highest cost – the climate devastation borne by the poor and vulnerable. 
It seems only fair and reasonable, therefore, that all fossil-fuel entities, but especially the carbon majors, pay a levy on each ton of coal, barrel of oil, or cubic meter of gas they produce to a new International Mechanism for Loss and Damage, which would help to fund efforts to address the worst effects of climate change. 
Furthermore, given that the effects of climate change today are the result of past emissions, the carbon majors should pay a historical levy, too. 
If set initially at a relatively low $2 per ton of carbon, these levies could raise $50 billion annually, though the rate should increase each year. 
The revenues could support vulnerable countries’ efforts to develop long term plans to deal with climate change, as well as finance pilot projects aimed at minimizing loss and damage, sharing information, and replicating best practices. 
They could fund the monitoring and forecasting of slow-onset and extreme-weather events, enabling authorities and the public to prepare more effectively for an impending disaster. 
And the money could cover loss-and-damage risk premiums on individual, local, national, regional, or international insurance policies. 
Governments would collect the levies from the carbon majors, perhaps when they collect royalties and other extraction-related fees, and deposit the money with the international mechanism. 
If the new levy were added to existing fees, it would strengthen the price signal driving a shift away from fossil fuels and toward renewables. 
This fossil-fuel levy would be entirely compatible with the norms established by the United Nations Framework Convention on Climate Change and with the “polluter pays” and “do no harm” principles of international law, according to which organizations are required to pay for the damage that they cause. 
Indeed, the arrangement would be similar to existing regimes, such as those covering oil-spill compensation or nuclear damage. 
But paying the cost of one’s damage, though necessary, is far from sufficient. 
After all, a compensation levy should not imply that the carbon majors have effectively bought a right to pollute. 
We must also work to stop inflicting harm on the most vulnerable people (and on ourselves). 
When the world’s governments meet at the UN climate-change conference in Paris in 2015, they must agree on ways to phase out net greenhouse-gas emissions and stop burning fossil fuels by mid-century. 
According to Carbon Tracker, 80% of fossil-fuel reserves must remain in the ground if we are to avoid catastrophic climate change. 
Even at today’s “low” level of climate change, the devastation is already all too real. 
It is real for the Philippines citizens mourning relatives and trying to rebuild homes and lives; for the Pacific Islanders growing crops in containers, importing drinking water, and building sea walls to protect their islands from the encroaching ocean; and for hungry farmers in the Sahel. 
And it is a growing reality for millions of other vulnerable people worldwide. 
These people deserve the world’s support – not just moral support, but genuine help in the form of effective, properly funded mechanisms designed to prevent, or at least alleviate, the climate-related hardships inflicted upon them by past and present industrialization. 
For the carbon majors, the time to pay up has arrived. 

Learning from Namibia 
WINDHOEK – Sandwiched between Angola and South Africa, Namibia suffered mightily during the long struggle against apartheid. 
Yet, since winning independence from South Africa in 1990, this country of 2.4 million people has achieved enormous gains, especially in the last couple of years. 
A big reason for Namibia’s success has been the government’s focus on education. 
While people in advanced countries take for granted free primary and secondary education, in many poor countries, secondary education, and even primary schools, require tuition. 
Indeed, governments are often advised to impose tuition as a form of “cost recovery.” 
In Namibia, however, public primary education is free; and, as of the current school year, so is public secondary education. 
Namibia’s government is also proactive in other important ways. 
Malaria eradication efforts have reduced annual cases by 97% in about a decade. 
Bucking the global trend of increasing inequality, Namibia’s Gini coefficient (the standard measure of inequality in an income distribution) has fallen by some 15 points since 1993 (admittedly from one of the highest levels in the world). 
And the poverty rate has been more than halved, from 69% in 1993 to under 30%, with extreme poverty (the number of people living on less than $1.90 a day) falling by a similar margin, from just under 53% to less than 23%. 
Namibia also has Africa’s highest ranking for press freedom from Reporters Without Borders – well ahead of the United States and other wealthy economies. 
The country also has favorable ratings – among the highest in Africa – on Transparency International’s Corruption Perceptions Index. 
Even as commodity prices have been falling, Namibia has managed to maintain strong GDP growth – an estimated 4.5% in 2015, following average growth of nearly 4.2% from 1991-2014. 
At the same time, its debt-to-GDP ratio, at around 25%, is less than a third of the debt ratio in Europe or the US. 
Of course, Namibia has its problems. 
The unemployment rate, at least as conventionally measured, remains stubbornly high, at nearly 28%. 
And, like other countries in the region, it faces a high level of HIV/AIDS – nearly 17% of the population are HIV-positive. 
The World Bank classifies Namibia as upper middle income, but the authorities insist that theirs is in fact a developing country. 
Namibia certainly has some of the difficulties we associate with less-developed economies. 
It has to develop a very large and arid country with a small population. 
This includes isolated desert communities of nomadic hunter-gatherers, who somehow must be integrated into a modern society without losing their identity. 
Integrating people who a quarter-century ago were on the fringes of the global economy would be an enormous task for any country. 
For Namibia, it is even harder: as much as any country in the world, it is confronting head-on the effects of climate change. 
Nonetheless, Namibia has taken these problems in stride as it creates a diversified economy and cohesive society. 
Remarkably, rival political factions of the country’s freedom struggle have come together to work for the common good. 
Indeed, Namibia provides low-cost health care not only for its own citizens, but also for its neighbors. 
Some 15-20% of health-care visits in the north of Namibia are Angolan citizens. 
The manager of the hotel where we stayed, just across the border, regularly sends a little boat across the crocodile-infested river to bring over Angolans who want to buy provisions at the hotel canteen or see the visiting Namibian health-care workers. 
No one in Namibia talks about building a wall between their country and its poor and corrupt neighbors. 
Rather, the Namibians we met understand that you can’t pick your neighbors, so it’s best to work with them by sharing scarce water resources, cooperating on regional health efforts, encouraging investment, and exchanging students. 
Moreover, Namibia’s government has wisely understood that abundant natural resources can easily become a curse, enriching a few at the expense of the many. 
The authorities know that unless Namibia’s natural wealth is invested in infrastructure and its people’s productive capacities, resource exhaustion will leave the country poorer, not richer. 
They also know that it would be irresponsible not to garner for Namibians the most possible from the country’s resources, and are rethinking investment laws and revisiting mining contracts to ensure that that is the case. 
Transparency is crucial to this process, which is why the government’s strong support of press freedom is so important. 
As President Hage Geingob told us, the press often says things that he doesn’t like. 
But, having fought for freedom from apartheid South Africa, Geingob says, Namibia must defend the freedoms it won. 
Besides, Geingob recognizes how transparency protects him from demands for favors from corporate and other interest groups. 
Not all of Namibia’s key resources are finite. 
Some – like fisheries – are renewable, and the government is working hard to preserve and enhance them. 
Most important, unlike most other resource-dependent economies, it has succeeded in diversifying the economy – to the point that services account for more than 60% of its GDP, with tourism leading the way. 
Every year, more than a million foreign tourists visit the country. 
That is not surprising. 
Namibia is one of the most beautiful places in the world, and its people cultivate its environment and protect its animals. 
About 100 years ago, the colonialists – the “1%” of their time – enjoyed hunting for sport and decimated the rhino and elephant population. 
Now local scientists are bringing animals back to the Skeleton Coast and other parts of the country. 
Ironically, some funding for this comes from today’s 1%, who donate to the cause. 
Namibia shows that even countries that start with serious disadvantages – extremes of racism, colonialism, inequality, and underdevelopment – can chart a path toward shared prosperity. 
Its achievement deserves international recognition – and emulation. 

America’s Neglected Financial Children 
WASHINGTON, DC – This week, the US Congress again failed to approve a modest appropriation that would have shored up financing for the International Monetary Fund and given China and other emerging economies greater responsibility there. 
Support for the IMF may seem arcane, but it has important implications for America’s global role – and the signs are not good. 
Indeed, if there was ever a moment for Congressional approval of the IMF reform package, this was it: the measure would have greatly increased the IMF’s ability to support Ukraine, a key American objective, at a much lower cost than the alternative of a US bilateral credit guarantee. 
The failed measure involved only a transfer of previous US commitments from a supplementary account to the IMF’s core funding source, at virtually no cost to taxpayers. 
Congressional approval would have implemented a deal, concluded at the G-20’s Seoul Summit in 2010, to double the Fund’s lending capacity. 
Under the agreement, which US President Barack Obama’s administration shepherded through tough negotiations, America would remain the IMF’s largest single shareholder, retaining its veto over major decisions. 
But, fearing a backlash, the Obama administration tried to gain Congressional backing only at the last minute – and as quietly as possible. 
A few years ago, the US displayed a similar lack of commitment to another US-dominated international institution: the World Bank. 
After the global financial crisis, the Bank lacked enough capital to boost lending beyond pre-crisis levels. 
But the US was not particularly interested in a larger World Bank; instead of using its considerable influence – reflected in its power to appoint the Bank’s president – to create a stronger institution capable of responding to new demands, it went along with what became a modest Bank recapitalization. 
In fact, the US and its European allies are rumored to have rejected several major emerging economies’ quiet offers to provide additional funding, possibly to avoid diluting their own capital. 
This contrasts sharply with the experience of two large regional multilateral lenders: the Inter-American Development Bank and the African Development Bank. 
Whereas wealthy countries hold the most World Bank shares, borrowing countries hold a slight majority of the shares (and the presidency) at the regional banks. 
Their leaders pressed hard – and successfully – for substantial capital increases. 
America’s recent failure to champion the international financial institutions represents a reversal of its approach during the latter half of the twentieth century, when it invested heavily in securing and maintaining their effectiveness. 
US leaders understood that these institutions enabled America to pursue its own foreign-policy preferences and commercial interests in a more open and stable global economy. 
The end of the Cold War undercut the foreign-policy logic behind America’s backing, as increasing globalization of trade and investment made economic support for developing countries seem less necessary as a way to expand markets. 
Moreover, the terrorist attacks of September 11, 2001, made non-state actors and so-called “failing” states with troubling sectarian and ethnic conflicts a new security concern. 
In those settings, the US, reasonably enough, did not view traditional investment support from the IMF and World Bank as a high priority. 
Finally, the global financial crisis put considerable strain on the US economy, intensifying pressure on lawmakers to undertake policies aimed at boosting domestic GDP growth and creating jobs. 
To this end, the White House is investing enormous effort and political capital in two major trade deals – the Trans-Atlantic Trade and Investment Partnership and the Trans-Pacific Partnership – despite domestic opposition. 
But, while America’s economic woes and hyper-polarized political climate have undoubtedly contributed to the decision to favor controversial trade deals over international financial institutions that the US created and nurtured, what is really driving the policy shift are fundamental geopolitical changes. 
In short, an internationally diminished US is loath to relinquish its dominance of global institutions, yet unwilling to shoulder the associated financial and political costs. 
By contrast, the US market’s enduring weight amplifies America’s bargaining power in plurilateral trade agreements, which also serve the country’s immediate commercial interests. 
Indeed, such deals offer the promise of new export markets, “good” jobs, and rules that lock in US competitive advantages. 
At the same time, they can help to contain China’s economic power and strategic influence in Asia. 
As the issuer of the world’s dominant reserve currency, the US can manage without the IMF in the short run, using the Federal Reserve to provide liquidity to countries where it has core political interests, as it did after the 2008 crisis. 
And World Bank lending is helping the middle-income countries that are increasingly competing with the US in global trade, while boosting demand for private – that is, American – capital. 
The US is like an aging parent; it is no longer willing to invest much in the family business, but remains averse to ceding control to its increasingly mature children. 
Resentful and restless, the children are seeking opportunities elsewhere – to the detriment of the family firm. 
China has nearly two dozen currency-swap arrangements, which serve as an alternative to IMF liquidity support. 
India just signed a $50 billion swap deal with Japan. 
Over time, these arrangements will erode the US dollar’s role as the world’s leading reserve currency. 
Furthermore, the major emerging economies – Brazil, Russia, India, China, and South Africa – plan to establish their own development bank, and many African countries now count on China to fund infrastructure investments. 
In Latin America, the Andean Development Bank lends more to its members for infrastructure projects than the World Bank – at higher cost, but with less hassle. 
The World Bank’s diminished role will ultimately undermine America’s ability to advance its view that development is a function of open markets and democratic accountability. 
Strong and effective global financial institutions are still very much in America’s interest. 
But, without US leadership, the global role of the IMF and the World Bank will erode gradually – as will their usefulness to the US. 

In Defense of World Government 
WASHINGTON, DC – Unlike in the past, there probably will not be large protests at the upcoming Annual Meetings of the International Monetary Fund and the World Bank, or at the subsequent World Trade Organization meeting of trade ministers in Bali. 
But that is not because these international institutions are perceived as effective and legitimate. 
It is because, compared to a decade ago, they are seen as too small and impotent in the face of larger market forces to bother about. 
The 2008 global financial crisis and its aftermath have caused a loss of faith not only in markets, but also in the ability of democratic governments to ensure that the benefits of market-led growth are widely shared. 
On economic, financial, tax, trade, and climate issues, many people around the world are fearful or angry, believing that a worldwide cabal of bankers, corporations, and G-20 elites uses insider deals to monopolize the benefits of globalization. 
But few people – whether ordinary citizens or internationally oriented economists – recognize that our seemingly weak and ineffectual multilateral institutions are the world’s best hope for managing and democratizing the global market. 
Only these institutions are capable of preventing the elite capture and insider rents that are putting global prosperity at long-term risk. 
To be sure, a growing number of mainstream economists are paying attention to the costs of unfettered global markets. 
There is greater concern that cross-border capital mobility makes it harder to collect taxes and enforce financial regulations at home; and that trade agreements, combined with global supply chains, are exacerbating job losses in developed economies. 
Likewise, global integration means that eurozone distress threatens the US economy, while the US debt-ceiling standoff threatens financial markets everywhere. 
Yet many economists are as ambivalent about “global” rules and institutions as ordinary people are. 
They worry that international bodies, lacking democratic oversight, make it easier for the rich, powerful, and well connected to run things to their own advantage. 
Dani Rodrik’s 2011 book The Globalization Paradox criticizes globalization enthusiasts for wanting full liberalization of foreign trade and capital movements; he argues that when democratically established social arrangements clash with the demands of globalization, national priorities should take precedence. 
True, global “government” can go too far – for example, when WTO rules conflict with sensible local environmental safeguards, or when IMF requirements for developing-country borrowers narrow the scope for creative heterodoxy in growth and poverty-reducing policies. 
It is also true that countries dependent on official aid and IMF loans can face unwarranted pressure to conform to outsiders’ wrongheaded policy views – from premature opening of capital markets in Asia in the 1990’s to force-fed austerity in Greece and Spain today. 
But there is a more positive way to look at the issue. 
Sometimes, even powerful sovereign states use global commitments to help them lock in sensible policies that might otherwise be difficult to initiate and sustain. 
A 2009 G-20 agreement to refrain from protectionism in the aftermath of the global financial crisis helped to fend off protectionism. 
Today, a G-8 or G-20 agreement on exchanges of tax information could help to shore up national revenue bases and the reputations of governments for tax fairness. 
Less obviously, when governments provide funding for the IMF, they can side-step domestic political resistance to assisting countries in trouble and to rules that yield benefits only in the long term. 
Indeed, embedding fair rules on trade, finance, development, climate change, and other issues in the major global institutions such as the IMF and the World Bank is more important than ever, given the rise of China and other emerging-market economies. 
With these new powers seeking a place at the geopolitical table, they and the older powers can benefit from mutually agreed global “containment” of their domestic parochialism and short-sightedness. 
In other words, global rules and institutions can make it easier and more likely that all involved will hew to their own citizens’ broader interests – and thus to the global commonweal as well. 
For example, pledges to cut carbon emissions, while lacking any enforcement mechanism, may be helping countries to do the right thing for their own citizens’ children and grandchildren. 
Moreover, fair global rules can help to “democratize” the global market, especially if they are embedded in institutions with a degree of autonomy for highly professional staff who can act with some independence from short-term political pressures. 
It should come as no surprise that the anti-globalists’ erstwhile punching bags – the World Bank and, increasingly, the IMF and the WTO – are more open and transparent than many of their member states. 
They thus provide a vehicle for ordinary people to lobby for fairer rules and policies, not only in their own countries but also in others. 
One example of this was the citizen-based movement that fought WTO intellectual-property rules, adopted at the behest of the US and other rich countries, that were sustaining high prices for anti-AIDS drugs in Africa. 
The campaign succeeded, resulting in changes that dramatically increased poor countries’ access to such drugs. 
Ultimately, as I argue in greater detail in a paper for the Global Citizens Foundation, ordinary people are better off with global institutions, notwithstanding their weakness relative to their most powerful sovereign members and their lack of legitimacy relative to their democratic members. 
Of course, a world “government” could never have democratic legitimacy; for this reason, it is a scary idea. 
But, like a socialist utopia or pure libertarianism, the idea of world government can illuminate a sensible path for capturing the benefits of a more effective global polity. 
Given a fully interdependent global market, we should worry less about the risk of bad rules and policies from imperfect global institutions and more about how to exploit these institutions’ potential to lock in policies at home and abroad that minimize risks and maximize opportunities for people everywhere. 

India’s Fiscal Fortune 
CAMBRIDGE – Indian Prime Minister Narendra Modi's government must be feeling lucky. 
The decline in world commodity prices, led by crude oil, has made managing the national budget easier. 
And now, after the Central Statistics Office revised its methodology for calculating GDP data, that task has become easier still. 
According to the CSO, as a result of the methodological change, annual output growth in the second quarter of 2014 stood at 8.2%, up sharply from the original estimate of 5.3%. 
Based on the revised GDP figures, India is expected to average 7.4% growth in the fiscal year ending March 2015. 
Moreover, the country is projected to grow at an 8-8.5% rate in the next fiscal year. 
No budget changes could generate such a marked, cost-free acceleration in growth. 
It is fair to say that the usually staid statistics department stole the thunder from this year's budget. 
Nonetheless, Finance Minister Arun Jaitley's budget succeeds on several fronts – not least in its alignment of vision and implementation. 
Specifically, it advances the government's vision of a pro-growth agenda that enhances the ease of doing business in India, while targeting better delivery mechanisms for welfare schemes. 
On the expenditure side, the budget is expansionary, scaling up investment spending dramatically, introducing new welfare programs, and increasing credit for various sectors. 
While there is no significant effort to cap spending on some of the largest fiscal programs, including the National Rural Employment Guarantee Act (which guarantees 100 days of wages to rural households) or the fertilizer subsidy, measures to improve implementation and reduce leakage are being put in place. 
Though the budget mentions disinvestment in loss-making public-sector units, the budget conveys no sense of urgency on this front. 
With private investment remaining weak, owing to the corporate sector's heavy debt burden and banks' huge volume of bad assets, the government has clearly decided to jumpstart the process through infrastructure spending. 
But India's infrastructure needs far exceed what the government can spend. 
In this sense, the new “plug and play" scheme for public-private partnerships, whereby “all clearances and linkages will be in place before the project is awarded," is a major improvement over the previous PPP model. 
The budget's success will be determined by how these public-sector investments play out, which in turn will depend on other policies, especially the Land Acquisition Bill (designed to enable industrial development in rural areas), which has already run into trouble. 
Moreover, government investment and allocation of resources has long been tainted by corruption, and Modi's government has yet to show that it can implement the budget's promises in a transparent and sustainable manner. 
On the tax side, there is one major announcement: a reduction of the corporate-tax rate from 30% to 25% over the next four years, thereby encouraging private-sector investment. 
The implementation of the Goods and Services Tax – a form of value-added tax on which the government has made admirable progress – would be a major accomplishment and a huge boost for the economy. 
Despite raising expenditure substantially, however, the budget relies mainly on growth and improved tax collection to keep the country's fiscal deficit within reasonable limits. 
Of the budget's many proposed measures to boost inflows of foreign investment, one appears risky from a macro-prudential perspective. 
The government would “do away with the distinction between different types of foreign investments, especially between foreign portfolio investments and foreign direct investments, and replace them with composite caps." 
There are many reasons to treat the two types of investment differently. 
Portfolio investment, often called “hot money" because of its volatile nature, can increase the economy's vulnerability to the vagaries of international finance. 
Foreign direct investment, on the other hand, is far more stable and driven by domestic fundamentals. 
With interest rates set to rise in the United States this year, volatility in international capital markets can be expected to increase. 
In this context, it would be prudent to maintain the distinction between portfolio and FDI. 
In general, the budget plan addresses the major issues facing India's economy. 
But translating good intentions into desired outcomes will depend crucially on the government's ability to push through complementary and urgently needed reforms on hot-button regulatory issues like land, labor, and the environment. 
In any case, the budget sends a clear signal about the Modi government's intentions. 
At least in the near term, it is shifting its practice of “minimal government and maximum governance" to one of “moderate government and maximum governance." 

Reinventing Photosynthesis 
PASADENA – For decades, the development of renewable energy – and the policy debates that surround it – has focused largely on electricity generation. 
But more than 60% of the world’s energy is provided directly by chemical (mainly fossil) fuels, with no intermediate conversion to electricity. 
No realistic effort to combat global warming by cutting carbon emissions can ignore this fundamental constraint. 
Indeed, in the United States and other industrialized countries, many applications that rely on fossil fuels (such as air transport or aluminum production) cannot be reconfigured to use electrical power. 
Moreover, fossil fuels are required to produce electricity as well, both to meet demand and to compensate for the intermittency of renewable energy systems such as wind or solar power. 
Is there really a scalable, low-carbon alternative? 
One promising approach is artificial photosynthesis, which uses non-biological materials to produce fuels directly from sunlight. 
The sun is a nearly inexhaustible energy source, while energy stored in the form of chemical bonds – like those found in fossil fuels – is accessible, efficient, and convenient. 
Artificial photosynthesis combines these features in a viable technology that promises energy security, environmental sustainability, and economic stability. 
While natural photosynthesis provides a complex, elegant blueprint for the production of chemical fuels from sunlight, it has significant performance limitations. 
Only about one-tenth of the sun’s peak energy is used; annualized net energy-conversion efficiencies are less than 1%; significant amounts of energy are expended internally to regenerate and maintain the exquisite molecular machinery of photosynthesis; and the energy is stored in chemical fuels that are incompatible with existing energy systems. 
However, artificial photosynthesis, inspired by its natural variant, has demonstrated a potential for far superior performance, and provides energy in a form that can be used in our current energy infrastructure. 
Moreover, a fully artificial system would not require arable land or potable water, nor would it force a choice between food and fuel production in land use. 
Existing energy technologies already can be combined to generate chemical fuels efficiently, though indirectly, from sunlight, but not yet in a configuration that is simultaneously practical, scalable, and economically feasible. 
Likewise, the overall efficiency of a fully integrated sunlight-to-fuel energy-conversion system can be more than ten times greater than the most energy-efficient biological systems, but the capital costs are too high for commercial deployment. 
Researchers’ top priority must therefore be to develop a solar-fuel generator that combines cost-effective scalability with robustness and efficiency. 
The key to creating such a system lies in using earth-abundant materials that can perform the essential functions of absorbing light and facilitating fuel-forming chemical reactions. 
Just as chlorophyll serves to absorb light in natural photosynthesis, suitable materials are needed to capture and convert sunlight in artificial systems. 
Although silicon’s light-absorbing properties are suitable for photovoltaic devices, the near-0.5 volts that it generates is too weak to split water in a solar-fuel generator. 
An artificial system also requires catalysts to facilitate the efficient production of chemical fuels. 
These catalysts must be highly active, stable, and, for global scalability, composed of earth-abundant elements, such as iron, nickel, or cobalt, not the scarce metals now used, such as ruthenium or iridium. 
In addition, the system components must be integrated in a manner that ensures that they all function optimally under a common set of operating conditions. 
A deployable system must also incorporate cost-effective architectures, manufacturing processes, and installation methods. 
Most important, such systems must work safely. 
In most implementations of artificial photosynthesis, energy-rich fuels are co-produced with oxygen, resulting in dangerous explosive mixtures. 
Membranes, or other physical and chemical barriers, must be developed in order to isolate the products from one another in a reliable fashion. 
Such partitions would also eliminate the need for complex peripheral processing equipment that would be necessary to separate the products prior to use in most applications. 
So, what would an artificial photosynthetic system look like? 
The template is not a solar panel connected to an electrolysis unit, but rather a thin roll of sandwiched plastic-like layers, much like the high-performance fabrics found in rain jackets, that can be unfurled as needed. 
The top material would absorb the water and carbon dioxide from the air, and the next, light-absorbing layer would harness the sun’s energy to produce the fuel. 
Separated by the membrane, the fuel would not be vented to the air but instead would wick out through the bottom of the material into a collector tank for use on demand in our existing energy-supply infrastructure. 
Ideally, solar-fuel generation should offer flexibility in the types of chemical fuels that can be produced from sunlight. 
In its simplest incarnation, water is split into hydrogen and oxygen gases. 
The hydrogen could be converted into a liquid fuel by upgrading biofuels, for example, or it could be reacted with carbon dioxide from flue gas or otherwise processed to produce liquid fuels for use in transportation applications. 
Alternatively, catalysts, as in natural photosynthetic systems, could directly reduce carbon dioxide, in this case to methanol or methane. 
The most effective systems would be able to offer either gaseous or liquid fuels. 
Recent advances in nanoscience, materials science, chemistry, and physics have provided the tools needed to make rapid progress in this field. 
The ultimate prize is a clean-energy technology that is within reach and that could provide the basis for a safe, secure, and sustainable energy future. 

The Sovereignty that Really Matters 
MADRID – In his famous “political trilemma of the world economy,” Harvard economist Dani Rodrik boldly claims that global economic integration, the nation-state, and democracy cannot coexist. 
At best, we can combine two of the three, but always at the expense of one. 
Until recently, the so-called Washington Consensus, with its emphasis on liberalization, deregulation, and privatization, shaped economic policy worldwide. 
While the 2008 global financial crisis eroded its credibility, the G20 countries quickly agreed to avoid the protectionist policies against which the consensus stood. 
Meanwhile, the European Union remained (and remains) the only democratic experiment on a supranational level, taking pride in its promising advances, despite being burdened by multiple defects. 
In other words, economic integration, anchored in the nation-state, remained in favor globally, while democracy was made secondary to international market dynamics. 
But 2016 marked a turning point, though we still do not know toward what. 
A “Beijing Consensus” has emerged, which some view as an alternative model of development based on greater government intervention. 
But it was the Brexit vote and the election of Donald Trump as US president that really reflected the move to upend the long-established balance among globalization, the nation-state, and democracy. 
“Let’s take back control” was the Brexiteers’ winning slogan, expressing a sentiment that clearly resonated with the slim majority of British voters who supported withdrawal from the EU. 
Likewise, many Trump voters were convinced that the accumulated powers of Wall Street, transnational players, and even other countries had to be reined in to “make America great again.” 
It would not be wise to scorn this diagnosis, to which Rodrik himself subscribes (at least in part), just because one dislikes the proposals put forward by Trump and some of the Conservative proponents of Brexit. 
Their approach consists in hindering globalization – while maintaining or even enhancing other aspects of the Washington Consensus, such as financial deregulation – and strengthening democracy through the nation-state. 
In his first appearance before the United Nations General Assembly, Trump delivered a 42-minute speech in which he used the words “sovereignty” or “sovereign” 21 times –an average of once every two minutes. 
And in Europe, the United Kingdom is not the only country to be carried away by a neo-Westphalian current: Poland and Hungary are in its grip as well. 
Even the Catalan pro-independence movement, headed by various parties, most of which would not feel comfortable being labeled “anti-globalization,” follows a similar logic of retreat into nationalism. 
All of these forces overestimate their capacity to dilute or circumvent existing economic integration, which has been strengthened in recent decades by the rapid development of cross-border value chains. 
Unless these forces reverse course, they are more likely to dilute the influence that their nation-states (or the states they seek to create) might be able to wield over globalization. 
In short, an increase in formal sovereignty could paradoxically result in a loss of effective sovereignty, which is the kind that really matters. 
Consider Britain: by exiting the EU, the British will have no say over what is, far and away, their most important export market. 
As for Catalonia, a supposedly pro-independence and pro-sovereignty movement could end up creating a polity that is less sovereign and more at the mercy of international events. 
Just a week after Trump’s UN speech, French President Emmanuel Macron presented his vision of Europe’s future in an address at the Sorbonne. 
Macron also mentioned the word “sovereign” repeatedly, making it clear that it forms the basis of his vision for Europe. 
But, unlike populists, he favors an effective and inclusive sovereignty, European in scope and supported by two more key pillars: unity and democracy. 
Relations between states are driven by cooperation, competition, and confrontation. 
There is little doubt that a certain degree of confrontation will always be present internationally. 
But the EU has clearly demonstrated that its incidence can be reduced by exponentially increasing the opportunity cost of conflictive dynamics. 
Unfortunately, the movements that understand sovereignty in isolationist terms usually revert to extreme nationalism, which is not given to promoting the common spaces that allow international society to prosper. 
The preference of some countries to isolate themselves within their borders is anachronistic and self-defeating, but it would be a serious mistake for others, fearing contagion, to respond by avoiding engagement with these states. 
The spirit of cooperation, along with constructive competition, should structure relations between all players that possess international legitimacy. 
Even in states that have succumbed to reductionist discourses, much of the population has not. 
Such is the case of the 48% of British voters who opposed Brexit, or the 49% of Turks who voted “no” to expanding the Turkish presidency’s powers, implicitly rejecting a narrative that used the EU as a scapegoat. 
Many of these voters would surely be disappointed if the EU turned its back on them. 
The vitality of international society depends on dialogue. 
And, to avoid perpetuating the deficiencies of the Washington Consensus, which were revealed with such clarity in 2016, this dialogue must occur within the framework of a common and democratic public sphere. 
If we cultivate this common public sphere, reducing the pre-eminence of the nation-state, we could advance step by step toward the least explored side of the triad described by Rodrik: global democracy. 
Of course, a universal democracy would be a very difficult objective to achieve (Rodrik himself rules it out). 
But, with technological development and the multiplication of economic and cultural synapses, it is not a chimera. 
In this sense, the EU has already forged a new path, one that aims to expand democracy beyond the realm of the nation-state. 
For Europe, as well as for other regions, it is a path worth following. 

The French Rally to the Republic 
PARIS – Before the second round of France’s regional elections on Sunday, most predictions suggested that five, perhaps six, of the country’s regional governments would fall into the hands of the National Front (FN). 
But the French people pulled themselves together and turned out to vote in much greater numbers than anyone expected. 
The result is that a xenophobic, racist party, one hostile to everything essential to the spirit and greatness of France, was defeated in all of the contests that it was supposed to win. 
Some will express surprise at this strange country, which is never so great as when it is on the edge of a cliff. 
They will worry – and they are right to worry – that a situation of extreme peril, a veritable threat to the nation, was required before the French recovered their senses and took the path of reason. 
And they will regret that the French are not the prosaic sort of people who know how to be themselves at normal cruising speed, without having to hear a cannonball whistle past. 
But that is how it is. 
And I, like many others, will not try to hide my satisfaction at seeing the smug scoundrels of the FN break down and resume speaking in their historic register, with their authentic voice, which is one of hatred and mob rage. 
This, truly, was a victory for the republic – a triumph of popular resistance. 
The French turned out, en masse, to say that they did not want to see the Le Pen gang take possession of their regions. 
That is the most important lesson from Sunday’s vote, and it is a reassuring one. 
But what caused the nation to right itself? 
Obviously, nothing happened between the elections’ first and second rounds that addressed the “malaise” of the French people. 
Nor was any particular promise made in response to the “hard questions” raised by FN voters just a week earlier. 
No. 
What we saw, instead, was a moral surge among the French – an act of self-defense by the body politic. 
Between the two rounds, the following simple idea sank in among the electorate: The National Front can revamp its façade all it wants, but it has never been, is not, and can never be a normal party. 
For how long have France’s moral and political authorities been telling us that “stigmatization” of the National Front doesn’t work, that it strengthens the party instead of weakening it? 
Well, that was wrong 20 years ago, and it is still wrong. 
It cannot be repeated often enough that when the moral left and right have been strong, when groups like SOS Racisme set boundaries that are bright and clear, the FN has been contained electorally. 
But when those boundary lines are blurred, when the dikes crumble and the antiracist watchdogs allow themselves to be intimidated or lower their guard, the FN tries to make itself at home. 
The same is true today. 
The happy surprise of the regional vote owes absolutely nothing to accommodations with the FN by major parties that supposedly “heard the message” of “angry” voters (rhetoric that they relentlessly drummed into us). 
On the contrary, a sufficient number of voters came to understand that in that very anger – in its spokespeople and in the words used to express it – lurked a threat to the republic, to democracy, and to the nation’s fundamental values. 
That is the second lesson. 
What awaits us tomorrow? 
How can we be sure that the FN wave, having receded, will not regain strength and break with even greater destructive force in the upcoming presidential election? 
Better “unemployment figures” will be required, no doubt. 
Faster “growth,” certainly. 
We will also need “efforts” and “gestures” directed toward the one-third of people under 30 and the nearly one-half of industrial and service workers who are said to have expressed their “frustration” and “anxiety” by voting for the FN. 
Fine. 
But none of that will ever be a substitute for leaders taking the moral high ground and restoring to our public discourse its lost luster. 
No strategy will work if it is implemented by mediocrities who, in a political comedy as dishonorable as it is vain, rush to the television studios to declare, hand over heart, that they have heard the voters “loud and clear.” 
The key will be for French leaders to say – as loudly as possible and as often as necessary – that there is no answer to the “hard questions” as the FN poses them. 
And, like it or not, it must be said not only to the FN’s leaders, but also to its voters. 
There have been other times in France’s history when entire segments of the electorate have ejected themselves from the game, without the rest of the players rushing over to beg them to get back on the field. 
Georges Clémenceau, Jean Jaurès, and Raymond Poincaré, at the outset of the twentieth century, did not pander to the nearly half of the electorate that, during the Dreyfus Affair, had exiled themselves from the republic. 
Nor did Charles de Gaulle have any qualms about telling the proponents of French Algeria that, in the end, he did not understand them. 
Nor did Pierre Mendès France in the 1950s hesitate to tell the Communists that he didn’t want their votes to support his government. 
France must now recall these great moments in its republican tradition and hold them up as a model for today’s leaders. 
For what will be needed to hold the territory that the republic nearly lost to the FN is political courage of a sort that, for the moment, is in short supply. 

Nationalism Will Go Bankrupt 
ROME – Nationalism versus globalism, not populism versus elitism, appears to be this decade’s defining political conflict. 
Almost wherever we look – at the United States or Italy or Germany or Britain, not to mention China, Russia, and India – an upsurge of national feeling has become the main driving force of political events. 
By contrast, the supposed rebellion of “common people” against elites has not been much in evidence. 
Billionaires have taken over US politics under President Donald Trump; unelected professors run the “populist” Italian government; and all over the world, taxes have been slashed on the ever-rising incomes of financiers, technologists, and corporate managers. 
Meanwhile, ordinary workers have resigned themselves to the reality that high-quality housing, education, and even health care are hopelessly beyond their reach. 
The dominance of nationalism over egalitarianism is particularly striking in Italy and Britain, two countries once famous for their phlegmatic sense of national identity. 
Flags in Britain are notable for their absence even on government buildings, and until the Brexit referendum the people there were so relaxed about their nationhood that they could not even be bothered to agree on the country’s name: the United Kingdom, Britain, or England, Wales, and Scotland. 
Italians were even less nationalistic. 
Since the European Union’s founding, Italians have been the biggest proponents of federalism, with opinion polls showing that, until recently, voters had more trust in EU leaders in Brussels than in their own government in Rome. 
Italians are passionate about their culture, history, food, and football, but their patriotism has mostly been directed to regions and cities, not to the nation state. 
They prefer to be ruled from Brussels than from Rome. 
The far-right League party, the junior member in Italy’s new coalition government, was still called the Northern League until this year. 
One of its favorite slogans was “Garibaldi did not unite Italy; he divided Africa,” and its main political demand was the country’s abolition. 
Instead, the party demanded the creation of a new country called Padania that would separate the prosperous northern regions from the corruption and poverty of Rome and points south. 
What, then, explains the sudden dominance of nationalism? 
There is not much positively patriotic about the new nationalism in Italy, Britain, or even the US. 
Instead, the upsurge of national feeling seems largely a xenophobic phenomenon, as famously defined by the Czech-American sociologist Karl Deutsch: “A nation is a group of people linked together by a common error about their ancestry and a common dislike of their neighbors.” 
Hard times – low wages, inequality, regional deprivation, and post-crisis austerity – provoke a hunt for scapegoats, and foreigners are always a tempting target. 
There is nothing patriotic about Trump’s belligerence against Mexican immigrants and Canadian imports, or the nativist policies of the new Italian government, or Theresa May’s most famous statement after becoming UK Prime Minister: “If you believe you are a citizen of the world, you are a citizen of nowhere. 
You don’t understand what citizenship means.” 
Now for some good news for those of us still proud to be “citizens of the world”: The xenophobic effort to blame economic hardship on foreigners is doomed to failure. 
Consider the post-crisis effort to divert popular anger about the collapse of market fundamentalist economics onto “greedy bankers.” 
This ultimately failed, in part because bankers have huge resources to defend themselves, which foreigners generally do not. 
But banker-bashing failed to assuage public anger mainly because attacking finance did nothing to boost wages, diminish inequality, or reverse social neglect. 
The same will be true of the current attacks on foreign influence, whether through immigration or trade. 
Britain, for example, is gradually waking up to the fact that European issues have nothing to do with the genuine political grievances that motivated a large part of the “Leave” vote. 
Instead, the Brexit negotiations will now dominate and distract British politics for many years, or even decades. And Britain’s nationalist confrontation with the rest of Europe will offer politicians of all parties endless excuses for failing to improve everyday life. 
In the months or years ahead, voters in the US and Italy will learn the same lesson. 
There, too, scapegoating foreign influences, whether through trade or immigration, will do nothing to lift living standards or address the sources of political discontent. 
Italy has legitimate grievances against the EU: hypocritical and inequitable policies on asylum and sea rescues, self-defeating fiscal rules, and economically illiterate financial policies. 
But the new government is also exploiting the nationalist upsurge to attack reforms that have nothing to do with Europe and are vital to Italy’s economic success. 
Successive Italian governments since the financial crisis have gradually laid the foundations for pension, labor market, and banking reforms. 
These changes have created the conditions for economic recovery, which began last year, following a decade of recession; but they have been politically unpopular and are now being denounced as symbols of elitist foreign oppression. 
If the new government abandons all three reform projects, Italians can also abandon hope of economic recovery, perhaps for another decade. 
The US will also discover that attacking foreign interests is no panacea and can make hardship worse. 
Trump thinks his measures against imports from China, Germany, and Canada will hurt these trading partners and create American jobs. 
This might have been true when the US economy was suffering weak growth and deflation. 
But in a world of strong demand and rising inflation, German and Chinese exporters will find new markets for their products, whereas US manufacturers will struggle to replace foreign suppliers. 
BMW and Huawei will be just fine, whereas tariffs will act as a tax on American consumers, through higher prices, and on American workers, businesses, and homeowners, through rising interest rates. 
The opposite of populist nationalism is not globalist elitism; it is economic realism. 
And in the end, reality will win. 

The Paradox of Identity Politics 
BARCELONA – The United Kingdom’s recent general election provided a clear example of how the question of national identity is reshaping Europe’s political landscape. 
The Scottish National Party, embodying a left-wing version of identity politics, wiped out Labour in Scotland, allowing the Conservatives to gain an absolute majority in Parliament. 
The government of Prime Minister David Cameron – who has focused on British identity, rather than the UK’s common destiny with Europe – will undoubtedly hold a referendum on the UK’s continued membership in the European Union, with unpredictable consequences. 
For decades, political debate in Europe focused largely on economic institutions and policies. 
Conservatives argued for a private sector-driven economy, unfettered markets, low taxes, reduced government spending, and limited public goods. 
Liberals and social democrats supported a private-ownership economy, markets, European integration, and increased trade, tempered by substantially redistributive taxes and transfers, a strong social safety net, and some public ownership in areas such as infrastructure and finance. 
In this bi-polar system, the parties differed on the nuances of economic policy, but broadly agreed on democratic values, the European project, and the need to adapt to and manage globalization, rather than reject it wholesale. 
But, with the growing success of appeals to identity and renewed ethnic or religious nationalism, that is changing. 
Are the ghosts of the early and mid-twentieth century returning? 
The question is particularly relevant for Europe, but it also has global significance. 
In the Middle East, for example, identity politics is manifesting itself in its most sinister form: a chaotic and violent clash between Sunni and Shia Muslims, exemplified by the rise of the Islamic State. 
Loyalty to a perceived identity can have innocuous and enriching components, such as, say, the promotion of a regional language. 
The problem with identity politics is that it places the “in” group at odds with the perceived “other” – an approach that can easily foster chauvinism, invidious discrimination, and open antagonism. 
One major reason for the resurgence of identity politics in Europe is globalization, which has limited the capacity of countries or peoples to control their economies. 
Indeed, the global economy has become so interconnected, and world markets so powerful, that there appears to be little scope for national policies to disrupt hyper-mobile capital flows. 
While globalization has helped to boost overall prosperity, it has been most beneficial for those who form the new global elite. 
Meanwhile, many people in Europe face greater economic insecurity, owing to new technologies or competition from lower-cost workers elsewhere. 
Unless they can upgrade their knowledge and skills – and, in some cases, move to a new industry or location – they face constrained economic opportunities. 
These disadvantaged groups are particularly large in the countries that were hit hardest by the recent global financial crisis and now struggle with high unemployment. 
But even people who are relatively prosperous are frustrated by some features of globalization. 
They may oppose the use of their taxes to “subsidize” poorer people who do not share their identity, such as immigrants, French-speaking Belgians, southern Italians, or Greeks. 
When it comes to trade protectionism, European integration, and economic globalization, those on the far right and the far left often share the same views. 
In France, for example, many supporters of the National Front voted communist 30 years ago. 
And, indeed, the National Front’s economic program is rather similar to that of the Left Front (an electoral bloc comprising the French Communist Party and the Left Party). 
Of course, when it comes to immigration and human rights, the internationalist ideological tradition of socialism prevents extreme nationalist and racist discourse on the far left. 
But, given that these parties are competing with the far right for the same disenchanted voters, their humanism on these issues has become a severe political handicap, which may explain why the extreme right has lately been more successful electorally. 
Meanwhile, the rise of identity-driven political movements presents a huge challenge for Europe’s traditional political parties. 
Mainstream conservatives, widely perceived as being in thrall to the economic interests of the wealthy, must find ways to appear populist – but without sounding too much like their far-right competitors on immigration and human rights. 
Cameron has succeeded in this delicate balancing act – and has been rewarded by voters. 
Mainstream Republicans in the United States, pressured by the more extreme forces within their party, face a similar challenge. 
For center-left parties, the task is even more daunting. 
They must offer voters a realistic economic program that is market-friendly and open to international trade, while promising tangible benefits to the poorer 60-70% of the population who are understandably frustrated with their lack of economic progress. 
If a left party’s economic policy is perceived as a weak copy of the right’s agenda, the poorest segments of the population will gravitate to chauvinist forces and their false promises of protection from the consequences of globalization. 
The upcoming elections in Spain, Turkey, Denmark, and Portugal – not to mention next year’s US presidential election – will present their own versions of these challenges. 
The left, in particular, will have to defend the principles of equality and democracy, while finding ways to manage irreversible globalization, including through international cooperation. 
The great paradox is that if the rise of identity politics continues, governments will be even less able to address the problems that are fueling it. 


In Defense of Nationalism 
TEL AVIV – The “threat” of nationalism seems ubiquitous. 
Described mostly in pejorative terms, the ideology is now synonymous with xenophobia, populism, authoritarianism, and illiberalism. 
Last month, French President Emmanuel Macron blamed excessive nationalism for stoking the fires of World War I, and warned that “old demons” threatened a return to “chaos and death.” 
Given such rhetoric, it is easy to assume that nationalism, in all its forms, should be relegated to the dustbin of history. 
Even intellectuals have lost the ability to hold a nuanced debate about nationalism’s virtues as well as its vices. 
But a recent book by the Israeli historian Yuval Noah Harari offers an opportunity to correct this imbalance. 
In 21 Lessons for the 21st Century, Harari poses an important question: Can nationalism address the problems of a globalized world, “or is it an escapist indulgence that may doom humankind and the entire biosphere to disaster?” 
Harari’s answer is not surprising; by framing his discussion with a litany of ecological, nuclear, and technological challenges, he concludes that nationalism will only lead to conflict and disaster. 
And yet Harari’s analysis is biased toward global concerns. 
Dirty air crosses national borders, nuclear war would affect the entire planet, and artificial intelligence is changing people’s lives around the world. 
But there is another way to think about nationalism: in the context of challenges that must be addressed at local and national levels – such as economic inequality, political instability, social schisms, and weak governance. 
If Harari had started with a more parochial list of problems, his verdict on nationalism could have been very different. 
The economist Thomas Piketty has observed that the nation-state facilitated the development of the “social state”: the system of services that strengthens equality and improves quality of life. 
For anyone who considers social, economic, and political challenges to be in urgent need of remedy – as I do – it makes sense that national sentiment would be revived to secure social cohesion in the service of a “social state.” 
But even if we accept Harari’s list, his conclusions are still hasty. 
For example, while it would be tempting for a leader confronting ecological or nuclear disaster to devote less attention to domestic social issues, effective global cooperation depends on strong individual states. 
This is especially true now, when the effectiveness of global institutions has never been in greater doubt. 
Harari is obviously correct on one point: no country can face down global challenges alone. 
But it would be wrong to conclude that individual states are redundant. 
The fact that countries are not powerful enough to make a global difference is not proof that there are other political entities that can replace them. 
To be fair, Harari does acknowledge nationalism’s role in governance. 
For example, he writes that it would be a mistake to assume that a world devoid of nationalism would automatically be peaceful and liberal. 
On the contrary, such a world would probably descend into “tribal chaos.” 
Comparing stable and successful democracies like Sweden, Germany, and Switzerland, which “enjoy a strong sense of nationality,” to “countries lacking robust national bonds,” including Afghanistan, Somalia, and the Democratic Republic of the Congo, Harari comes to the conclusion that nationalism is a necessary component of political stability. 
One can thus conclude that it is too dangerous to let go of nationalism. 
Like any political ideology, nationalism has many faces, some uglier than others. 
Brute anti-globalism is a prime example. 
Countries that embrace this brand of nationalism stir unnecessary conflict and undermine the possibility of cross-national collaboration. 
But other forms of nationalism that better balance the local and the global are beneficial and worthy of affirmation. 
Not only can nationalism help fortify well-functioning states; it can also serve as a tool to foster solidarity in government efforts to address localized social challenges, fight social and economic inequalities, and take care of social groups that have been left behind. 
As such it is better not to abandon nationalism, but rather to channel its beneficent features to recreate the social state. 
Of course, critics are right to denounce chauvinism and hate. 
But to reject nationalism tout court is facile. 
It is up to intellectuals to recognize this and frame the arguments that can help governments strike the right balance between national, regional, and global commitments. 

Donald Trump and the New Economic Order 
HONG KONG – Since the end of World War II, the hierarchy of economic priorities has been relatively clear. 
At the top was creating an open, innovative, and dynamic market-driven global economy, in which all countries can (in principal) thrive and grow. 
Coming in second – one might even say a distant second – was generating vigorous, sustainable, and inclusive national growth patterns. 
No more. 
In fact, a reversal seems to be underway. 
Achieving strong inclusive national-level growth to revive a declining middle class, kick-start stagnant incomes, and curtail high youth unemployment is now taking precedence. 
Mutually beneficial international arrangements governing flows of goods, capital, technology, and people (the four key flows in the global economy) are appropriate only when they reinforce – or, at least, don’t undermine – progress on meeting the highest priority. 
This reversal became apparent in June, when Britons – including those who benefit significantly from the existing open economic and financial system – voted to leave the European Union, based on what might be called the sovereignty principle. 
EU institutions were perceived to be undermining Britain’s capacity to boost its own economy, regulate immigration, and control its destiny. 
A similar view has been animating nationalist and populist political movements across Europe, many of which believe that supra-national arrangements should come second to domestic prosperity. 
The EU – which actually does, in its current configuration, leave its member governments short of policy tools to meet their citizens’ evolving needs – is an easy target. 
But even without such institutional arrangements, there is a sense that emphasizing international markets and linkages can hamper a country’s capacity to advance its own interests. 
Donald Trump’s victory in the United States’ presidential election made that abundantly clear. 
In keeping with Trump’s main campaign slogan, “Make America Great Again,” it was his “America first” comments that were most revealing. 
While Trump might pursue mutually beneficial bilateral agreements, one can expect that they will be subordinated to domestic priorities, especially distributional aims, and supported only insofar as they are consistent with these priorities. 
Developed-country voters’ frustration with the old market-driven global economic architecture is not unfounded. 
That order did allow powerful forces, at times beyond the control of elected officials and policymakers, to shape national economies. 
It may be true that some of that order’s elites chose to ignore the adverse distributional and employment-related consequences of the old order, while reaping the benefits. 
But it is also true that the old order, taken as sacrosanct, hampered elites’ capacity to address such problems, even if they tried. 
This was not always the case. 
In the wake of WWII, the US, motivated partly by the Cold War, helped to create the old order by facilitating economic recovery in the West and, over time, creating growth opportunities for developing countries. 
For 30 years or so, the distributional aspects of the global growth patterns that these efforts underpinned were positive, both for individual countries and for the world as a whole. 
Compared with anything that came before, the post-war order was a boon for inclusiveness. 
But nothing lasts forever. 
As inequality across countries has declined, inequality within countries has surged – to the point that the reversal of priorities was probably inevitable. 
Now that the reversal has arrived, so have the consequences. 
While it is difficult to say precisely what those will be, some seem fairly clear. 
For starters, the US will be more reluctant to absorb a disproportionate share of the cost of providing global public goods. 
While other countries will eventually pick up the slack, there will be a transition period of unknown duration, during which the supply of such goods may decline, potentially undermining stability. 
For example, the terms of engagement in NATO are likely to be renegotiated. 
Multilateralism – long enabled by the same sort of asymmetric contribution, though typically proportionate to countries’ income and wealth – will also lose steam, as the trend toward bilateral and regional trade and investment agreements accelerates. 
Trump is likely to be a leading proponent of this tack; in fact, even regional trade deals may be ruled out, as his opposition to ratifying the 12-country Trans-Pacific Partnership suggests. 
This creates an opportunity for China to lead the establishment of a trade pact for Asia – an opportunity that Chinese leaders are already set to seize. 
In conjunction with its “one belt, one road” strategy and its creation of the Asian Infrastructure Investment Bank, China’s influence in the region will expand significantly as a result. 
Meanwhile, for developing countries that lack China’s economic might, the trend away from multilateralism could hurt. 
Whereas poor and less-developed countries found opportunities to grow and prosper under the old order, they will struggle to negotiate effectively on a bilateral basis. 
The hope is that the world will recognize its collective interest in keeping development pathways open for poorer countries, both for these countries’ benefit and for the sake of international peace and security. 
Beyond trade, technology is another powerful global force that is likely to be treated differently in the new order, becoming subject to more national-level regulations. 
Cyber threats will all but require some regulations and will demand evolving policy interventions. 
But other threats – for example, the fake news that has proliferated in the West (and, in particular, in the US during the presidential campaign) – may also call for a more hands-on approach. 
And the adoption of work-displacing digital technologies may need to be paced, so that the economy’s structural adjustment can keep up. 
The new emphasis on national interests clearly has costs and risks. 
But it may also bring important benefits. 
A global economic order sitting atop a crumbling foundation – in terms of democratic support and national political and social cohesion – is not stable. 
As long as people’s identities are mainly organized, as they are now, around citizenship in nation-states, a country-first approach may be the most effective. 
Like it or not, we are about to find out. 

Nationalists and Globalists 
WASHINGTON, DC – The Dutch election was the first bright spot in a while for people in Europe and the United States who are deeply worried that the backlash against globalization will bring even more white “Judeo-Christian” nationalist parties to power. 
Dutch Prime Minister Mark Rutte defeated the anti-Islam candidate Geert Wilders, who has called for closing Dutch borders, shutting mosques, and banning the Koran. 
The standard way of describing political forces ranging from Viktor Orbán’s Fidesz party in Hungary to Marine Le Pen’s National Front in France to Donald Trump’s supporters in the United States is “populist.” 
Populism means a politics of the people, juxtaposed against a politics of the elites. 
But in the US at least, Trump’s ideology – which has little to do with traditional Republican conservatism – frames the axis of division not as the many versus the few, but as nationalists versus globalists. 
In the first issue of American Affairs, a new conservative journal dedicated to “exploring the true content of our common citizenship,” Georgetown University Professor Joshua Mitchell writes that for “several generations conservatives have thought that the domestic enemy was progressivism. 
Now they imagine they face a new problem: populism.” 
In fact, Mitchell argues, what is really happening is not a mass movement of the people, but a “revolt in the name of national sovereignty.”A revolt in the name of a connected nation, of citizens connected to one another, to their “towns, cities, states, and nation.” 
As Mitchell depicts it, theirs is a grounded nationalism, rooted in the wealth of voluntary associations that Alexis de Tocqueville identified as the American antidote to the abstract rational universalism of both the French and the American revolutions. 
The key point here is the relationship between borders, culture, and connection. 
By maintaining sovereignty at the national rather than the global level, borders can be defended and communities defined and maintained. 
If those borders dissolve, what binds human beings to one another is no longer their community or their common cultures, but only their identity. 
Thus, Mitchell argues, globalism and identity politics go together, and both are detached from national identity. 
Being labeled a rootless globalist is always dangerous, as the Jewish people know all too well. 
The leading Soviet anti-Semitic slur was “rootless cosmopolitan,” a term used to refer to Jewish intellectuals and one that Vladimir Putin would be perfectly comfortable with today as he revives a Russian nationalism based on the Russian Orthodox Church, Mother Russia, and Slavic peasant culture. 
Back in the US, many Trump supporters also excoriate globalists for what they experience as sneering disdain. 
They rage against what they perceive as the moral sanctimony – indeed the righteousness – of the left. 
Sam Altman, the CEO of a prestigious start-up incubator in Silicon Valley, spent several months after the presidential election traveling across the US and talking to Trump voters. 
When the conversation turned to the reactions of the left to Trump’s victory, many of his interlocutors argued that “the left is more intolerant than the right.” 
Altman observes that this view “came up a lot, with real animosity in otherwise pleasant conversations.” 
He quotes one person saying, “Stop calling us racists. 
Stop calling us idiots. 
We aren’t. 
Listen to us when we try to tell you why we aren’t. 
Oh, and stop making fun of us.” 
That perceived combination of arrogance and ridicule fans irritation into rage and revenge fantasies. 
Current White House advisers have a similar reaction. 
A new profile of Kellyanne Conway, Trump’s campaign manager turned White House counselor, notes that she has not “forgotten how people treated her back when they thought she was a sure loser. 
Their attitude wasn’t one of outright rudeness or contempt; it was so much worse than that. 
It was syrupy condescension—the smarmy, indulgent niceness of people who think they’re better than you.” 
So much of higher education is about learning how to question and manage emotion. 
First-year law school students in the US learn how to suppress their natural intuitions of justice – a defective car caused an accident that injured a child severely; surely the manufacturer should pay – in favor of carefully reasoned analysis of the costs and benefits to society as a whole. 
That training often means that highly educated “elites,” who socialize primarily with one another, either forget or willfully ignore the role of emotion in politics – except to the extent that campaign consultants produce an endless supply of gauzy “feel-good” political commercials. 
Feelings of being disconnected and despised, however, are powerful emotions, strong enough to twist facts into a dark alternate reality. 
It is critical to look beyond a simple story of populism, of masses versus elites. 
A narrative of grounded, connected nationalism versus sanctimonious free-floating globalism is one that will generate support and staying power even among many well-educated people. 
The right response is not to deny the existence or legitimacy of a desire to stay grounded amid tumultuous change, or love of country and culture, much less to look down on the less educated. 
It is to build a new narrative of patriotism, culture, connection, and inclusion. 
Even if Wilders lost this month and Le Pen loses in May, they and their supporters will not be going away. 

The New Xenophobia 
OXFORD – Democratic governments in the West are increasingly losing their bearings. 
From the shift toward illiberalism in Poland and Hungary to the Brexit vote in the United Kingdom and Donald Trump’s victory in the United States’ presidential election, a particularly lethal strain of populism is infecting societies – and it is spreading. 
The appeal of populism is straightforward. 
Faced with stagnant wages and a declining quality of life, people feel frustrated – all the more so when their leaders keep telling them that things are getting better. 
Then the populist appears and promises to shake things up, to defend the interests of the “people” (though really only some of them), and offers something arguably more attractive than feasible solutions: scapegoats. 
At the top of the list of scapegoats are the “elites” – established political parties and corporate leaders. 
Rather than protecting the “people” from economic pressure and insecurity, this group, the populist declares, thrives on the people’s pain. 
By advancing globalization – by forcing ever-more openness down the people’s throat – they have accumulated massive wealth, which they then protect through tax avoidance, offshoring, and other schemes. 
But it is not just the elites who are blamed. 
Yes, they have betrayed the people. 
But one way they do so is by foisting upon the people equal rights and opportunities for minorities, immigrants, and foreigners, who “steal” jobs, threaten national security, and undermine traditional ways of life. 
Trump won the US presidency partly because of his pledges to deport millions of undocumented immigrants and ban Muslims from entering the country. 
The Brexiteers promised to end free immigration from the European Union. 
After the vote, Britain’s Home Secretary Amber Rudd suggested that firms hiring foreigners should be named and shamed. 
Today’s populism advances a toxic new xenophobia, one that threatens to fracture our societies. 
For politicians, it offers an easy means of quickly transforming people’s fear and powerlessness into an intoxicating mix of anger and authority. 
It persuades intimidated (often elderly) voters that, in the parlance of the Brexiteers, they can “take back control” of their lives and their countries, primarily by rejecting foreigners. 
Demography makes the new xenophobia particularly dangerous. 
In much of the West, societies are becoming increasingly diverse. 
Hispanics now account for 17.6% of the US population. 
One-third of Londoners were born outside the UK. 
In France, an estimated 10% of the population is Muslim. 
And an estimated 20% of Germany’s population have some immigrant background. 
In this context, when politicians campaign for votes by advancing antagonistic and divisive identity politics, they sow the seeds of animosity, mistrust, and violence within their own societies. 
When candidates repeatedly call Muslims dangerous, for example, no one should be surprised by a surge in anti-Muslim hate crimes, as has occurred in the wake of both the Brexit vote and Trump’s victory. 
Such divided societies require a rising level of coercion and force to control. 
Diversity should be a strength, one that helps societies to flourish. 
That is why it is so important to combat the new xenophobia. 
One way is by encouraging and enabling social mixing, interaction, and deliberation among diverse groups. 
Extensive psychological research shows that intergroup contact reduces people’s sense of threat, heightening the possibilities for building trust across society. 
If community centers, schools, and public locations are places where people of different religions, cultures, and race meet, xenophobia is less likely to take root. 
Even living in an area where others mix can help. 
This is why the new xenophobia has largely been resisted in Europe’s most diverse cities. 
A second way to combat the new xenophobia is to reinforce the protection of civil liberties. 
This means upholding the rule of law, even in the face of terrorist threats, and ensuring the independence of judges. 
Yet, lately, there have been ominous moves in the opposite direction. 
Leaders in Hungary and Poland have been dismantling constitutional protections; 
France has used a lengthy state of emergency to suspend rights; and British and American politicians have publicly denigrated judges. 
Democracy was toppled by xenophobes in the 1930s not because of the strength of the anti-democratic parties, but because of democratic leaders’ failure to uphold their countries’ constitutions. 
A third way to fight the new xenophobia is through innovation. 
For example, though the Internet is often viewed as a great equalizer, social media are contributing to fragmentation. 
The content to which people are exposed is filtered, whether through self-selection or algorithms. 
The result is echo chambers in which like-minded people reinforce shared convictions, creating increasingly polarized silos. 
But, if social media platforms were reconfigured in innovative ways, they could have the opposite impact, creating spaces for citizens from diverse backgrounds to interact. 
The threat posed by the new xenophobia should not be underestimated. 
Today, no less than in the past, the rejection of diversity is tantamount to the rejection of democracy. 
That is why it must be defended, before its opponents gain any more ground. 

NATO After Istanbul 
Last week, the heads of state and government of NATO's 26 member nations gathered in Istanbul for a major summit. 
The symbolism of a city that bridges two continents was especially appropriate. 
In Istanbul, we not only reinforced the alliance's vital transatlantic link, but also built bridges of cooperation to other regions. 
After the discord over Iraq, the summit demonstrated a new momentum in transatlantic security cooperation, and reinforced NATO's role as the major instrument for that cooperation. 
The key decisions that we took at the summit make this very clear. 
First, Afghanistan. 
NATO decided in Istanbul to expand its stabilising presence. 
We will increase the number of Provincial Reconstruction Teams in order to support the expansion of the central government's authority and facilitate development and reconstruction. 
We will also provide enhanced support for the forthcoming elections, which are crucial to ensuring long-term peace and stability and making sure that the country will never again become a safe haven for terrorists. 
Second, Iraq. 
At the request of Prime Minister Iyad Allawi, NATO decided to offer to help train Iraqi security forces. 
In addition to our continued support for Poland in its leadership of the multinational division in Iraq, NATO will now play a distinct role in helping Iraq. 
That this decision was taken in conjunction with the transfer of authority to a new Iraqi Government only adds to its significance. 
The Allies affirmed unambiguously that a stable Iraq is in their common interest and that NATO is part of achieving this. 
Training is an area that is critical to Iraq's stability, and one in which NATO has valuable experience and expertise to share. 
Third, the Balkans. 
While our presence in Kosovo remains unchanged, the much improved security situation in Bosnia and Herzegovina allows us to conclude our successful SFOR mission there by the end of this year. 
The European Union will then follow with a mission of its own, and we will support the EU in this endeavor. 
But NATO will retain a presence in Sarajevo, in particular to help Bosnia and Herzegovina with defense reform. 
We want to welcome this country, as well as Serbia and Montenegro, into our Partnership for Peace program as soon as they meet the relevant criteria, which include full cooperation with the International Criminal Tribunal for the former Yugoslavia. 
Fourth, military transformation. 
The allies decided to accelerate their efforts to equip NATO with the forces and technologies it needs to perform twenty-first century missions, from the Balkans to Afghanistan. 
The NATO Response Force will soon achieve its initial operational capability, and our new Multinational Defense Battalion to deal with chemical, biological, radiological and nuclear threats is already fully operational - all ideas proposed by the United States, and implemented rapidly by the alliance. 
In addition, we endorsed on several measures to strengthen the link between political agreement to commence operations and the provision of the necessary forces, including through usability targets and changes to NATO's planning processes. 
Fifth, NATO enlargement and partnership. 
Although the Istanbul summit was the first to include NATO's seven new member countries-Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia, and Slovenia-we gave a strong signal that the door remains open, and encouraged those who want to join to continue pursuing the reforms needed to make themselves ready for membership. 
We also launched a new phase in our relations with partner countries: opportunities for more individualized cooperation, a greater emphasis on defense reform, and a stronger focus on the Caucasus and Central Asia. 
Furthermore, we welcomed the interest shown by Russia and Ukraine in contributing to "Active Endeavor," our anti-terrorist naval operation in the Mediterranean, as another sign of the growing strategic value of our partnership with these countries. 
Finally, the Mediterranean and the broader Middle East. 
NATO decided in Istanbul to reach out to new regions of strategic importance, in particular the broader Middle East. 
No other region's development will affect our security more profoundly in coming years. 
We need a coherent transatlantic effort to engage this region, and NATO will be part of that effort. 
We agreed to strengthen our Mediterranean Dialogue with seven countries in North Africa and the Middle East and to transform it into a genuine partnership. 
We also launched the "Istanbul Cooperation Initiative," to offer practical security-related cooperation to countries in the broader Middle East. 
Several members of the Gulf Cooperation Council have already expressed an interest in working together with NATO, so we are off to a good start. 
The NATO Istanbul summit was a strong demonstration of an Atlanticism that looks to the challenges of today and tomorrow and is prepared to tackle security challenges wherever they emerge. 
The summit gave NATO more political and military means to project stability where it matters. 
Most importantly, the summit reaffirmed the role of the transatlantic community of democratic nations and shared values as the most powerful force for shaping our future. 

NATO after Riga 
When the Soviet Union collapsed, many predicted the end of the North Atlantic Treaty Organization (NATO). 
Yet a few weeks ago, NATO held its summit meeting in the Latvian capital of Riga, formerly part of the USSR. 
NATO was created in 1949 as an alliance to contain Soviet power. 
Its focus was on Western Europe, and, as one joke went, it was designed to keep the Russians out, the Germans down, and the Americans in. 
But that Cold War world is long gone. 
Germany is a democracy firmly anchored in the European Union, and there is no threat of Soviet tanks sweeping across the North German plains. 
NATO survived by transforming itself. 
While some Central European members that were formerly occupied by the USSR continue to see NATO as a political insurance policy against a revival of Russian ambitions, NATO is no longer aimed against Russia. 
In fact, Russian officers are welcome to participate in military exercises and to visit NATO headquarters under the Partnership for Peace program. 
Residual suspicions and Russian pride limit the NATO-Russia agreement, but the organization is no longer focused on Russia. 
One major task that NATO performed in the first decade after the Cold War was to attract the newly freed countries of Central Europe toward the West, with the prospect of membership conditioned on meeting democratic standards. 
Another important task was to help bring stability to the troubled Balkan region after the breakup of Yugoslavia and the resultant wars in Bosnia and Kosovo. 
NATO peacekeeping operations have been a stabilizing factor in the region. 
For example, NATO and EU diplomacy prevented ethnic conflict in Macedonia from erupting into a crisis. 
While these actions were important, many observers argued that NATO would have to look beyond Europe. 
A common quip was that NATO would have to go “out of area or out of business.” 
This became particularly important after the Al Qaeda attacks on September 11, 2001, shifted the focus of American foreign policy toward transnational terrorism. 
The European members of NATO responded by invoking the Article 5 mutual defense clause of the NATO charter and coming to the aid of the US in Afghanistan, where today there are 32,000 NATO troops. 
Because they train together, NATO countries can operate effectively even when not all members of the organization are officially involved. 
For example, NATO did not conduct the Gulf War in 1991 or the initial Afghan campaign, but NATO planning and training meant that members could cooperate effectively when called upon to do so. 
At the same time, NATO after Riga faces a number of problems. 
Europe split over the American invasion of Iraq, and there is no political will to involve NATO there. 
The new relationship with Russia needs careful management, and rapid extension of membership to former Soviet republics like Ukraine and Georgia could prove difficult. 
In military terms, European countries need to spend more on secure communications, airlift capabilities, special operations, and dealing with chemical and biological battlefields in order to be able to fight the war on terrorism effectively. 
France is concerned that America’s influence in NATO is too large, and opposes a global role in which NATO establishes special partnerships with Australia, New Zealand, Japan, and other countries. 
The French worry that NATO’s global ambition, particularly in East Asia, could produce friction with China. 
But by far the biggest problem that NATO faces today is Afghanistan. 
Hamid Karzai’s government remains weak, and the economy continues to be heavily dependent upon opium production. 
The Taliban and Al Qaeda networks are re-emerging as political and military threats. 
Many NATO countries with troops in Afghanistan have “national caveats” that restrict how their troops may be used. 
While the Riga summit relaxed some of these caveats to allow assistance to allies in dire circumstances, Britain, Canada, the Netherlands, and the US are doing most of the fighting in southern Afghanistan, while French, German, and Italian troops are deployed in the quieter north. 
It is difficult to see how NATO can succeed in stabilizing Afghanistan unless it is willing to commit more troops and give commanders more flexibility. 
Success will also require more funds for reconstruction, development, and alternatives to opium poppy cultivation. 
Governments in Europe and the US are concerned about budget problems, but in a larger perspective, providing significantly greater resources to Afghanistan now may turn out to save more funds later. 
One of the great costs of the Bush administration’s mistaken Iraq policy has been to divert attention and resources away from the just war in Afghanistan. 
If only a small portion of the money and forces invested in Iraq had been devoted to Afghanistan, the current threat of a resurgent Taliban and Al Qaeda might not be so great. 
Unfortunately, Iraq is draining all the oxygen out of the policy process in Washington. 
Few people are focused on saving NATO from a significant failure in its first major test outside of Europe. 

NATO and Romania's Nightmares 
Hundreds of thousands of Romanians cheered President Bush as he welcomed us into NATO, and we meant it. 
Just like we meant it when we cheered Nicolae Ceausescu - both when he spoke and when he was executed. 
We are good at cheering. 
What we are not good at is understanding what we are cheering for. 
Our new NATO membership sounds great, but we really don't know why. 
In 1998, Radu Vasile, then Romania's Prime Minister, visited Israel. 
Vasile expressed interest in purchasing Israeli military helicopters. 
Israel's President Ezer Weizmann, a former pilot, responded: "You must have serious enemies if you need these helicopters. 
Who are they?" 
"Not at all," Vasile answered, "we're at peace with our neighbours...our frontiers are secure. 
But we need up-to-date aircraft ... to join NATO.' 
"So," Weizmann said, "you don't have any enemies after all! 
But don't worry: NATO will find enemies for you!" 
Most Romanians see NATO membership as a huge national victory, but some wonder if there is truth in Weizmann's joke: because, if the rationale for entering a military alliance is that you feel threatened, entering NATO is nonsense. 
For the first time in its troubled history, Romania has nothing to fear from its neighbours. 
Russia, "the hereditary enemy," now seems far away and consumed by its domestic troubles. 
Hungary, the other "hereditary enemy," is a fellow NATO ally; relations with Ukraine are nasty, but peaceful. 
Bulgaria is too small to matter; and Yugoslavia's wars are over. 
Even so, the country must now, year after year, increase its military expenses so that it can begin to approximate NATO standards. 
That will be a hard thing to do for an economy whose recent economic growth, though real, remains shaky. 
Unlike joining the EU, which can provide important development funds, joining NATO means only sacrifice. 
Given our poverty, spending more money on military equipment seems irresponsible. 
Although 73% of Romanians approve of entering NATO, less than 20% agree with Romanian participation in a war against Iraq. 
No matter how inconsistent such attitudes appear to be, they remain widespread and cannot be overlooked, because they suggest that people here conceive of NATO as a protective umbrella, not something to which they must contribute. 
Romania's security problems are not external, but internal, for the enemies of Romania establishing a stable, democratic-liberal government are the Romanian people themselves. 
Democracy here is a reality, but a delicate one. 
Too many dictatorships have accustomed Romanians with habits of obedience, conformity and irresponsibility. 
The ruling PSD (Social Democrat) government is efficient, but has a worrying record of corruption, non-transparency, and of using its power to influence judicial decisions. 
The second largest party - Greater Romania Party - is a half-fascist, xenophobic, anti-Semitic party, whose leader - a populist radical - received 22% of the vote in last year's elections. 
How can NATO help with this? 
Directly, it can do nothing; indirectly, it can do a lot. 
NATO is no longer only a military alliance. 
Instead, it is now a military-political alliance that sets democratic standards for new members and aspirants. 
No Romanian government can neglect these standards. 
Such openly thuggish rulers as Kuchma of Ukraine or Lukashenka of Belarus, are almost impossible to imagine in Romania nowadays. 
Moreover, joining NATO means subsuming Romania's military and intelligence services under NATO command (i.e. American) control, thus any attempt at staging a coup, or stirring up trouble between Romanians and our sizeable Hungarian minority, can be prevented. 
The more tightly bound to the democratic world a country like Romania is, the less likely it is to experience dramatic social or political unrest or to eviscerate its democratic system. 
NATO fixes hard limits on the autonomy of local political elites to do what they want. 
Of course, NATO cannot safeguard democracy alone and it is no panacea for our many social and political illnesses; yet it can act (and has already done so during the process of admission) as an incentive for governments and parties to behave responsibly and to abide by the rule of law. 
This is vital because, in the past, when Romania's political elites enjoyed too much autonomy or real national sovereignty, they abused it. 
Ceausescu's rule demonstrates this. 
The "room to maneuver" he carved from the Warsaw Pact with the support of the West brought no benefits to the Romanian people. 
It only increased the opportunity for Ceausescu's clan and cronies to act arbitrarily, making the lives of most citizens hell. 
Comparatively, the Hungarians, the Polish and the Bulgarians, whose governments were much more dependent on the Soviets, were better off. 
So, it is not joining NATO the military alliance that will benefit Romania. 
What matters is Romania's integration into a strong international organisation, which will curb its sovereignty. 
Entering NATO marks a formal acknowledgement that Romania (or Bulgaria, or Hungary, or Poland for that matter) is surrendering its claims to unlimited sovereignty, and to all the dreams of grandeur that go with it. 
In the past, those dreams brought only underdevelopment, dictatorship, nationalism and untold amounts of suffering. 
Killing that dream will prevent us from reliving our political nightmares. 

 

Taking Trump Seriously About NATO 
WARSAW – A Donald Trump presidency would be a catastrophe for NATO and the West. 
Aside from threatening to withdraw the United States from the North American Free Trade Agreement and to start a trade war with China, Trump praises Russian President Vladimir Putin and suggests that America should not honor its commitment to defend its NATO allies unless they pay more for that protection. 
Although Trump’s chances are slipping away by the day, the European Union should consider his candidacy a wake-up call regarding its own defense. 
The EU’s total GDP is slightly higher than America’s, yet it contributes only 25% of NATO’s defense budget, while the US accounts for 72%, and Canada and Turkey supply the rest. 
If Russia attempted a conventional incursion into NATO territory, and was defeated, it might consider launching a nuclear first strike in Europe. 
After all, unlike the Soviet Union, Russia has not ruled out the offensive use of nuclear weapons. 
In such a scenario, America’s nuclear umbrella would amount to Europe’s only credible protection. 
But if the US retaliated against a Russian nuclear strike, it would risk facing a Russian counterstrike on its own territories or forces. 
Such is the grim logic of mutually assured destruction. 
Why should the US risk so much for a continent that gives short shrift to its own conventional defense capabilities? 
This is not an unreasonable question to ask, and where previous US presidents have feared to tread, a populist demagogue has rushed in. 
One problem is that NATO members’ commitment to spend at least 2% of its GDP on defense is not nearly enough. 
The US spends 3.5% of its GDP on defense, and there is no reason why the EU should be spending less than the US, given the manifold threats it faces, from Russia to terrorist incitement by the Islamic State. 
Moreover, most European NATO countries’ defense spending falls short of the obligatory 2% of GDP, with only the United Kingdom, Poland, Greece, and Estonia maintaining defense spending at or above that level. 
This complacency has become so entrenched that an agreement at the 2014 NATO summit in Newport, Wales, that no member would cut defense spending any further – and another agreement this year to meet the 2% target – was seen as a major breakthrough. 
The problem is not that EU countries are inherently unreliable. 
It’s that they have tied their hands with fiscal austerity. 
I experienced this firsthand as Poland’s finance minister during and after the 2008 financial crisis. 
On two occasions when I suddenly had to cut spending to comply with the EU’s Stability and Growth Pact (SGP), a 1997 agreement among EU member states to enforce fiscal responsibility, I had few options other than to cut the defense budget. 
Fortunately, Poland’s 1998 Public Finance Act requires that 1.95% of GDP be spent on defense. So, after the immediate crisis was over, Polish defense spending returned to its NATO-mandated level. 
This points to a possible solution: the US should restructure the NATO collective-defense commitment so that it is self-policing – what economists call “incentive-compatible.” 
Some have argued that EU countries’ defense spending should be excluded from the SGP. 
France has long pushed for this, but Germany – which spends a meager 1.2% of its GDP on defense – opposes it, claiming that it would open a Pandora’s box of other demands and exclusions. 
In 2015, then-Polish Prime Minister Ewa Kopacz proposed that if the full defense budget could not be excluded from the SGP, at least increases in defense spending up to the 2%-of-GDP NATO commitment should be exempted for one year. Poland would not have benefited, because it had already fulfilled the NATO requirement; but the change would have made it easier for other European members to meet their commitments. 
Germany rejected the Polish proposal – again on the grounds of Pandora’s box. 
But, if anything, Kopacz’s proposal was too modest. 
Global politics has become even more precarious since last year. 
With the US looking more toward Asia, where China’s unilateral assertion of territorial claims in the South China Sea has jeopardized regional stability, it may become stretched too thin to provide a credible deterrent to Russian aggression, especially when it takes the form of unconventional, hybrid attacks. 
The EU should respond to these changing geopolitical dynamics by adopting the Polish proposal and extending it for more than one year. 
The SGP should exempt increases in general defense spending for five years, and increases in spending on equipment procurement for ten years. 
And that’s not all: the European Commission should be able to waive the 2%-of-GDP limit on the exemption for increases in defence expenditure up to the NATO target, depending on external security risks and economic needs in individual countries or the EU as a whole. 
This change will not be easy, but the US must insist on it, despite continued German resistance in the name of supposed fiscal rectitude. 
Germany, which has loudly demanded that Greece keep its promises to the EU, is now standing in the way of NATO members’ ability to meet their commitments to collective defense. 
Worse still, Germany’s misguided imposition of austerity on the eurozone has undermined European political cohesion, thereby opening the door for Russian revanchism and aggression. 
Trump is right about one thing: NATO allies should pull their weight. 
But that message should be sent to Germany, not Estonia. 
The US should tell Germany – in the same no-nonsense terms that Germany used with Greece – that it cannot defer to the US for its security while undermining Western unity to protect its taxpayers from possible intra-eurozone liabilities. 
As the EU’s de facto leader, Germany should be making it easier, not harder, for NATO members to meet their obligations to collective defense. 
It can start by embracing the Polish proposal – and it should move forward from there. 

NATO Must Be Saved 
Whoever thought that NATO - that most successful expression of transatlantic solidarity - had found new cohesion after the divisive Iraq crisis should visit the alliance's headquarters. 
True, the Istanbul summit in late June produced a veneer of harmony, and NATO headquarters is, as usual, busying itself with frequent meetings of now 26 national delegations, innumerable committees, and the mountains of printed paper it churns out. 
Something essential, however, is missing: NATO's spirit. 
Many, if not most, of the members no longer recognize NATO as central to their national interest. 
As one high official puts it, the organization is like the old and bruised car one keeps for as long as it functions but will dump when repairs get too costly. 
There is still some use to be had from the old vehicle: it leads some 6000 troops in Afghanistan, assures a fragile security in Kosovo, and may, as was decided by NATO in June, be helpful in training Iraqi forces. 
NATO is still nice to have around. 
But, with the exception of those who have only just joined, few governments on either side of the Atlantic seem to fear major disaster if it gently faded away. 
That, not the falling-out among major allies over the Iraq War, is the cause for the deep crisis the modern world's oldest and most successful alliance now finds itself in. 
The policy differences over America's Iraq adventure exacerbated the crisis, but also obscured its true cause. 
This explains why neither the US, nor its opponents or supporters in Europe, ever sought a thorough discussion of the operation in the NATO Council before, during, or after the Iraq war - they realized their views were already too far apart to be reconciled. 
That is also why the modest efforts now being undertaken by the alliance to assist America in trying to stabilize Iraq will not stitch NATO back together again. 
To be sure, the US administration has now asked all of NATO for help, in marked contrast to its haughty claim only two years ago that NATO as such no longer mattered; not membership in the alliance, but a particular military mission, would henceforth define the coalition. 
Yet, for most of the allies, this new approach is merely tactical, a sign of Yankee pragmatism when the situation demands it, not of a change of heart on the part of the Bush administration to rebuild NATO as the central plank of the transatlantic partnership. 
Nor do European governments display any such urge. 
Summit communiqués have become modest if wordy affairs. 
Even where members have committed themselves to a joint operation, as in Afghanistan, NATO's able new Secretary General, former Dutch foreign minister Jaap de Hoop Scheffer, has to plead for a few helicopters here, a few hundred men there, like the manager of an impoverished football association trying to put together a team. 
NATO's crisis of confidence and cohesion stems from the Cold War's end, not from the turbulences of the Iraq War. 
The alliance can claim important achievements over the past 15 years: it helped to stabilize Europe as it enlarged to 26 members, almost double the Cold War number; it kept the Balkan conflict under control; it even accepted a role in extra-European security contingencies such as Afghanistan. 
But NATO has failed the most important test, namely to ensure that its members continue to see its success as essential to their interests. 
That they no longer do so is deeply disturbing. 
It reflects less on the shortcomings of the organization than on the shortsightedness of its members. 
True, their security from military attack is currently no longer at stake. 
But NATO is more than just a defense pact. 
Like no other institution, NATO embodies Atlantic cohesion, something that remains essential for any Western effort to promote a degree of international order. 
NATO links Europe to the world's most powerful country and uniquely ties the United States to a common procedure of consultation and cooperation. 
Moreover, it is the only organization capable of generating international military operations for the many stability-building tasks that lie ahead. 
European governments, therefore, are crazy not to support NATO. 
To watch it wither is at best frivolous, at worst dangerous. 
Instead of blaming the Bush administration and hoping for a change of government in the US, European members need to make NATO their own concern again. 
This does not imply kowtowing to every American view and whim or foregoing efforts to strengthen European defense cooperation. 
It does mean undertaking to make NATO again the place where both sides of the Atlantic develop a common approach to the dangers of this world. 
Unfortunately, most European governments merely shrug their shoulders when the issue is raised. 
That dangerous indifference is the most serious sign of NATO's crisis. 

NATO Must Prevail 
DENVER – US Secretary of Defense Robert Gates’s recent prognosis of a “dim” and “dismal” future for NATO has triggered much debate, but it could well prove optimistic. 
June, it turns out, marks another milestone on the alliance’s uncertain path: its operation in Libya has now surpassed in length the one in Kosovo 12 years ago. 
After 78 days in 1999, Serbia’s Slobodan Milosevic gave up, while Libya’s Col. Muammar el-Qaddafi has yet to get the message – and may in fact be getting the wrong message. 
For those of us who were engaged in the Kosovo crisis, the Libya intervention seems like déjà vu. 
In the skies of Serbia and Kosovo, NATO warplanes attacked target after target, not to support the liberation of territory or in furtherance of a strategic bombing campaign, but rather to change Milosevic’s mind. 
To be sure, denying Milosevic the means to engage in “ethnic cleansing” was added as a rationale in the days after the campaign began, but the real purpose was to convince him that he had to allow NATO forces into Kosovo. 
It was a classic strategy/policy mismatch. 
No war is without its list of false assumptions, and the Kosovo campaign had its share. Perhaps the most important was the memorable – but erroneous – view that Milosevic would give up after a few days of bombing. 
Instead, like many a leader in such circumstances, he entered a bunker, both figuratively and literally, and stayed there with little communication. Meanwhile, NATO planners desperately sought to identify targets that would either deny him the means of ethnic cleansing, or, more often, encourage him to reconsider his position. 
The intervention had its low points, perhaps none lower than the bombing of the Chinese Embassy, which was misidentified as a building that housed Serbian security assets – instruments of repression against Kosovo. 
There were also moments of great concern about whether the allies would be willing to stay the course as the days, weeks, and months passed, with no end in sight. 
Surely, those engaged in Libya today are feeling some of those same pressures. 
Back in March 1999, few NATO leaders doubted that removing Milosevic from Kosovo by force was the right thing to do. 
Nor was there much doubt that the leaders of Europe and the United States had made a good-faith effort to convince Milosevic through negotiations and peaceful means. 
War was a last resort. 
Indeed, by March 1999, the decision to go to war was understood to be correct, because all other possibilities had been exhausted. 
The nineteenth-century Prussian military theorist Carl von Clausewitz is (too) often cited for his dictum that war is a continuation of politics by other means. But a more pertinent thought of his came to mind during those days of decision: war is a serious means to serious ends. 
Nobody involved in the Kosovo operation thought otherwise, or entertained the idea that NATO could give up. 
That is why NATO began to assemble a ground component. 
Ground troops ultimately proved unnecessary, but failure was not an option. 
Nor can it be an option today. 
In Libya, there is also a strategy/policy mismatch. 
The policy is to remove Qaddafi from power. 
The strategy – that is, the mandate for the means – is to protect civilians. The latter will not ensure the success of the former. 
This gap is beginning to close as NATO begins to deploy assets, such as attack helicopters, aimed more directly and boldly at the real goal of removing Qaddafi from power. 
But far more needs to be done to ensure success. 
Complaints about the fecklessness of the rebels are not going to help. Libya’s opposition is what it is. 
Gates has appropriately focused on the question of NATO’s financial sustainability. 
As European military leaders engaged in the operation discuss publicly the limitations of their budgets, it is easy to see why he raised the issue. (Note to European military leaders: please don’t signal to Qaddafi that you are running out of bombs.) 
But another point made by Gates is far more serious: lack of political will. 
Some countries with needed capabilities have not brought them to the fight, and others have not even provided political support. This à la carte approach is how NATO has always worked. 
What is new is the possibility that NATO will fail. 
The alliance’s reluctant warriors ought to consider that risk as they stand on the sideline. 
These are difficult days for NATO, as Gates, in the twilight of his illustrious tenure, has pointed out. 
A decision was made to engage militarily in a situation of arguably marginal interest, but now all of the allies must understand that they are using serious means to a serious end. 
All of the countries that took the decision to intervene in Libya, including the US, must conduct themselves with a sense of renewed vigor, and with the understanding that NATO – whatever its shortcomings and shortfalls – must prevail. 

A Baltic Test for European Arms Control 
BERLIN – Since Russia’s annexation of Crimea in early 2014, its political and military relations with the West have deteriorated sharply. 
Russian military redeployments, exercises, and threats have increased insecurity across Europe. 
NATO has responded by increasing its military presence in Central Europe, fueling fears of encirclement in the Kremlin. 
To head off the risk of an arms race or military confrontation, both sides must urgently agree to reciprocal measures to limit military capabilities and engage in arms control. 
Of course, Russia and NATO have very different ideas about a peaceful and stable European security order. 
But the same was true during the Cold War, and the two sides made progress by using arms-control instruments to manage their relationship and mitigate the risk of war. 
Today, however, there is substantial disagreement among NATO members about the preconditions, content, and format of possible arms-control talks with Russia. 
Last August, German Foreign Minister Frank-Walter Steinmeier suggested that all interested countries in Europe should attempt to “re-launch” arms control in Europe “as a tried and tested means of risk reduction, transparency, and confidence building between Russia and the West.” 
Such a “structured dialogue,” Steinmeier argued, should move beyond existing agreements. 
Six weeks later, the United States robustly rejected that proposal, asserting that, as long as Russia remains on its current course, there is “simply no basis” for new arms-control talks. 
Instead, the US argues, existing agreements should be revitalized. 
Germany’s proposal may well be too ambitious. 
But America’s proposal is not ambitious enough, and, perhaps more important, it ignores the failure of past attempts to modernize key accords, such as the Treaty on Conventional Forces in Europe and the Open Skies Treaty. 
A better approach – more feasible than Germany’s and more effective than America’s – would be a push by both countries for Steinmeier-style arms control in just one European region: the Baltic rim. 
Since Russia’s 2014 annexation of Crimea, mistrust between NATO and non-NATO members in the Baltic region has intensified, making that region particularly vulnerable to conflict. 
NATO now must strike a balance between, on one hand, meaningful reassurance for its own Baltic and Central European members and deterrence vis-à-vis Russia, and, on the other hand, continued cooperation and dialogue with Russia. 
In this sense, the Baltic Sea region could become a proving ground for political strategies to ease tensions between NATO and Russia. 
NATO has always considered deterrence and arms control to be two pillars of a strategy for maintaining European stability. 
For this reason, re-launching arms control for the Baltic Sea region not need affect existing deterrence measures, including the rotating presence of four NATO battalions in the Baltic states and Poland. 
Unilateral troop reductions are not where the arms-control negotiation process should begin. 
Instead, that process should begin with a structured conversation on topics of concern for regional actors. 
After all, dialogue is not only a soft policy instrument for handling matters like trade or environmental cooperation; it is also essential to any security policy that looks beyond deterrence. 
The goal should be confidence-building measures and agreed limits on military capabilities. 
Arms control depends on transparency. 
Fortunately, NATO, as an actor with a defensive conventional-force posture in the Baltic region, has plenty of reason to support transparency. 
The aggressor gains an advantage from concealment and secrecy – hallmarks of the “hybrid” warfare that the Baltics have feared, particularly since Russia’s invasion of Ukraine. 
Against this background, NATO should pursue a new arms-control dialogue with the goal of boosting transparency concerning military capabilities relevant for unconventional warfare and providing early warning of destabilizing moves that are not quite acts of war. 
Given Russia’s conventional superiority in the Baltic region, NATO would not have to worry that such an effort would inadvertently end up weakening the region’s security. 
It is less clear whether Russia would be interested in such a dialogue, though the Kremlin should want to mitigate the risk of unintended military escalation. 
The Deep Cuts Commission, comprising US, German, and Russian arms-control experts, recently made some concrete proposals to address the challenge at hand. 
For example, the commission recommends arrangements to ensure that any movements and exercises of military units are reported. 
They also propose measures to avoid unintended military incidents and accidents. 
And they urge NATO members to take Russia up on its proposal of an agreement on the activation of aircraft transponders, particularly during flights over the Baltic region. 
All of these efforts could be buttressed by a dialogue on military strategies among the Baltic states themselves. 
Such a conversation should be convened by think tanks, ideally in neutral Finland or Sweden, rather than in an official format. 
Like an arms-control dialogue between NATO and Russia, that effort would provide reassurance, without undermining deterrence. 
Efforts to promote sub-regional arms control would also enhance European security in general, complementing efforts to establish the parameters of a new comprehensive security system for Europe. 
What works in the Baltic region could be adjusted and applied on a larger scale. 
Arms control is not an imperative for tranquil times or a reward for reassuring behavior; it is a tool for building – or rebuilding – trust between adversaries. 
To use it effectively, each side must first gain some insight into the other’s perspective and intentions – an effort in which semi-official talks can play an important role. 
Because Russian reticence about engaging in a dialogue would point to a desire to rely on military surprises in the future, even a failed dialogue would benefit NATO and the Baltic states. 
It would certainly be better than nothing. 

NATO’s Dangerous Afghan Dream 
NEW DELHI – The agreement at the NATO summit meeting in Lisbon on a transition plan to help end the war in Afghanistan within the next four years raises troubling questions about regional security and the global fight against transnational terrorism. 
As the US and other coalition partners gradually wind down their combat role, Afghan security forces – to number 300,000 after crash training of new recruits – are to take their place. 
But these local forces are unlikely to be able to hold the country together. 
The most likely post-war scenario is a partition of Afghanistan, with the Taliban calling the shots in the Pashtun-dominated south and east, and the non-Pashtun northern and western regions retaining their current de facto autonomy. 
Regionally, there is likely to be greater turmoil. 
The withdrawal of NATO forces before the job is done will leave India on the front lines to face the brunt of greater terror from the Afghanistan-Pakistan belt. 
In fact, NATO’s retreat is expected to embolden jihadists in the region – and beyond it – to stage transnational attacks. 
The 2014 withdrawal plan, however, comes as no surprise, given US President Barack Obama’s expressed desire to end combat operations in Afghanistan. 
Indeed, his defense secretary, Robert Gates, made clear last year that the US will now seek to contain terrorism regionally rather than defeat it. 
The transition plan cements that strategic shift. 
The problem, however, is that the US war effort is already faltering, with Afghan President Hamid Karzai exploring the possibility of cutting his own deals with the Taliban and other warlords. 
And that is largely the result of Obama’s botched strategy, whose twin troop surges were designed not to rout the Taliban militarily, but to strike a political deal with them from a position of strength. 
But, as CIA director Leon Panetta admitted, “We have seen no evidence that [the Taliban] are truly interested in reconciliation.” 
Why would the Taliban be interested in negotiating a deal with the Americans, given Obama’s public declaration, just weeks after coming to office, that he was interested in a military exit from Afghanistan? 
The Afghan Taliban and their sponsors, the Pakistan military, simply want to wait out the Americans. 
Last year, with the stroke of his pen, Obama ended his predecessor’s “global war on terror.” 
But renaming it a “struggle” or a “strategic challenge” has not changed the grim realities on the ground. 
The US has been lucky to escape further terrorist strikes since September 11, 2001, despite several attempts. 
By contrast, India’s location next to the Af-Pak has left it far more vulnerable, and the country has since suffered a series of major attacks – from the assault on its parliament in December 2001 to the terrorist siege of Mumbai in 2008. 
Afghanistan and Pakistan, two artificially created states with no roots in history, have searched endlessly for a national identity. 
Today, they have emerged as the global epicenter of transnational terrorism and the heroin trade. 
Although Pakistan is now the largest recipient of US aid in the world, the Failed States Index2010, created by Foreign Policy and the Fund for Peace, ranks the country 10th, between Guinea and Haiti. 
Unlike in other failed states, however, in Pakistan state-nurtured terrorism and state-supported nuclear smuggling uniquely intersect. 
To compound the situation, the political border between Afghanistan and Pakistan has now ceased to exist in practice. 
The 2,640-kilometer Durand Line, a British-colonial invention that divided the large Pashtun community when it was established in 1893 as the border between British-led India and Afghanistan, has long been despised and rejected by Afghanistan. 
Today, the Durand Line exists only on maps. 
On the ground, it has little political, ethnic, or economic relevance, even as the Af-Pak region has become a magnet for the world’s jihadists. 
A de facto Pashtunistan, long sought by Pashtuns, has now grown up on the ruins of an ongoing Islamist militancy, but without any political authority in charge. 
The disappearance of the Af-Pak political border seems irreversible, undermining Pakistan’s own territorial integrity. 
Yet, as if the forces of terror could be neatly boxed in, the US has scaled back its objective to contain terrorism regionally – a strategy that promises to keep the Af-Pak problem a festering threat to global security. 
Indeed, NATO’s withdrawal plan is likely to lead to a realignment of ethnic forces, and thus to greater volatility. 
Afghanistan is not Vietnam. 
A withdrawal of US and other NATO troops will not mean the end of the war, because the enemy will continue to target Western interests, wherever they may be. 
The hope that terrorism can be regionally contained is a dangerous exercise in self-delusion. 

NATO’s Dangerous Signals 
COPENHAGEN – Two dangerous signals were sent from NATO’s Bucharest summit. 
The first was that Russia has reestablished a “sphere of interest” in Europe, where countries are no longer allowed to pursue their own goals without Moscow accepting them. 
The other was that all NATO member states are free to blackmail their partners into supporting their own narrow goals. 
The first signal was sent when Ukraine and Georgia were denied the “Membership Action Plan” (MAP) that they sought. 
Several European heavyweights, led by Germany and France, said no, despite strong support for the idea from the United States. 
The second signal was sent when Greece successfully vetoed membership for Macedonia, a move that reflected the two countries’ unresolved conflict over Macedonia’s name (which Greece insists must be Former Yugoslav Republic Of Macedonia – FYROM – one of the most disgraceful acronyms harassing international politics today). 
The dispute with Macedonia goes back to the early 1990’s, when Yugoslavia collapsed into independent states. 
Greece vehemently opposed its tiny northern neighbor – with only two million inhabitants – using the name Macedonia and symbols from the days of Alexander the Great in its flag and crest. 
Macedonia at one point agreed to design a new flag and remove the symbols, as well as to amend its constitution to clarify that it had no territorial claims on Greece, but it flatly refused to live under one of the tongue-twisting names suggested by its bigger neighbor. 
So there you are: a Greek veto on Macedonia’s national aspirations until it has chosen a name that does not make the Greeks shiver in fear of aggression from the north. 
It sounds ridiculous, but there is another, often overlooked, aspect to the dispute: by behaving as it has, Greece is demonstrating a lack of confidence in its NATO partners. 
With Macedonia in NATO, any adventurous policy that undermined regional stability would certainly be stopped in its tracks. 
If the Greeks cannot see that, their partners must let them know that there is a price for their obstructive behavior. 
The problem with Ukraine and Georgia is far more serious. 
In a sense, Russia has behaved like Greece in claiming that NATO enlargement threatens its security. 
That is nonsense, and Russia knows it. 
But the Kremlin has found that behaving like a spoiled child gets results: the right to influence developments in ex-Soviet countries. 
In other words, Russia is being allowed to re-assert its “sphere of influence” – a concept that should have been superceded by that of “Europe Whole and Free,” which the entire European Union appeared to have embraced when communism collapsed. 
But no: 1989 was not the end of history. 
History threatens to return. 
European opponents of a MAP for Ukraine and Georgia argue that neither country is ready for NATO membership. 
Too many question marks about their national unity are said to exist, too many internal conflicts linger, and their records on political and judicial reforms are supposedly dubious. 
But the MAP process does not imply an automatic right to NATO membership. 
On the contrary, MAPs would put heavy demands on Ukraine and Georgia. 
Both would have to answer a lot of difficult questions and convince others that they are able to live up to NATO’s democratic requirements before being allowed to join. 
Therefore, it would also be in Russia’s interest to see such a process started. 
Russia has valid concerns regarding the huge Russian-speaking minorities in both countries, and these concerns are best dealt within the framework of the MAP process, where the Organization for Security and Cooperation in Europe’s very strict rules on treatment of minorities provide the benchmark. 
Indeed, the MAP process ensured protections for Russian minorities in Estonia, Latvia, and Lithuania – all ex-Soviet republics that are now NATO members. 
The crux of the matter is Europe’s lack of political will to forge a unified stand toward Russia. 
This has led Russia to pursue a classic “divide and rule” strategy by tempting some big European countries into bilateral agreements – particularly on energy issues – that preclude a common EU position. 
This is sad – both for Russia and Europeans – because it strengthens the hand of those in Moscow who want to pursue a policy of national pride rather than national interest, and it weakens the possibilities of establishing a real common European foreign and security policy. 
But it is saddest for the countries that are once again being left out in the cold. 
NATO is supposed to be a beacon for countries struggling to establish democracy and freedom. 
The Bucharest summit suggests that the beacon has been switched off. 

Nato's Next Moves East 
BERLIN: Nato’s next summit will take place in Prague in the winter of 2002 – that is, if President Bush doesn’t call his allies together before then. 
But the questions to be answered leading up to the summit are already clear: which, if any, country will be asked to join Nato; when will any new member join? 
Whatever decisions are taken, it is also clear that preparatory work must begin as soon as possible, and at least before the end of the year. 
All this is different from 1997, when Poland, Hungary and the Czech Republic joined Nato. 
Back then, the outcome of the Madrid summit that agreed to their membership was uncertain until the final moments. 
That uncertainty ended when America succeeded in limiting invitations to three chosen countries, surprising those Alliance members who supported other candidates. 
Today, the most important issue facing Nato concerns whether or not to admit the Baltic states – Estonia, Latvia, and Lithuania – now, after some delay, or never. 
Turning down or delaying Baltic state membership will be seen as a concession to Russia; acting in their favor will be regarded by Moscow as a slap-in-the-face. 
No matter what decision Nato takes, containing the negative fall-out – in Russia or the Baltics – will not be easy. 
So a surprise conclusion in the manner of Madrid will only make matters worse, because careful preparations will be needed to contain the damage, and too much time will be lost if everything is put off until the meeting in Prague. 
Some Nato members hope to evade these problems altogether through delay. 
Why not postpone enlargement, they ask, until some of the states demanding to join Nato have gained EU membership, where elements of their security concerns may be met? 
But postponement is not a viable option, for the following reasons: 
- Russia itself placed membership for the Baltic three atop Nato’s agenda. 
Time and again Moscow has thundered that Nato’s first eastward enlargement must be its last. 
Bringing the Baltic states into Nato, Russia claims, would severely compromise its security (for that read Russian self-esteem). 
The strength of these protests, however, will make dawdling over Nato enlargement appear as a kowtow to President Putin; 
- The West promised to continue enlargement at the Washington Summit of April 1999. 
Back then Nato heads-of-state welcomed the progress of various candidate countries, commending the Baltic states in particular. 
Nato’s leaders also promised to revisit enlargement by 2002 at the latest. 
So they cannot repeat the same formula in Prague and remain credible in both Russia and Eastern Europe; 
- EU enlargement takes time while Nato enlargement is relatively speedy. 
Were negotiations over EU-admission of the Baltics near conclusion, postponing Nato-membership could be justified because the EU, with its new defense identity, is now both a security and prosperity union. 
As EU members, the Baltic states would indirectly come under Nato’s security shield, making explicit membership unnecessary perhaps. 
Unfortunately, years will elapse before negotiations over EU membership will conclude and be ratified. 
Stalling until that time is postponement by other means. 
- At the Cold War’s end, Nato redefined itself as a stability network for all the Euro-Atlantic community, which includes Eastern Europe’s new democracies. 
Arguments which say that, because no direct security risk exists there is no need for a Nato guarantee of the Baltics – a view that sometimes gains attention in Berlin – break with this redefinition. 
Even if some Nato members want to distance themselves from this strategy, the Bush Administration unambiguously supports Nato’s role as a stability network. 
Neither putative EU membership nor today’s favorable security conditions justify postponing enlargement. 
Diplomatic tricks cannot finesse the issue. 
Nato must either say “Yes” or “No” to the Baltic states. 
(To be precise, Nato must treat the applications of all three Baltic countries together. 
If only one were invited to join as a symbol of western determination, Russia would interpret this as appeasement, not steadfastness) 
If Nato says “Yes” to the Baltics, it must make both Moscow and the Baltic three understand that enlargement is meant to increase stability along Russia’s western border, not threaten Russia. 
As a signal to both, Nato’s military presence in the Baltics should be kept to a minimum. 
In addition, the prospect of a democratic Russia eventually joining Nato might be openly acknowledged. 
Both must be done before any new enlargement is announced. 
If Nato rejects the Baltic states it will need to prevent Moscow from interpreting that decision as confirmation that Estonia, Latvia, and Lithuania remain locked within Russia’s sphere of influence and that its Great Power posturing has paid off. 
Both inferences are potentially disastrous, not only for relations between West and Eastern Europe but, more importantly, for relations between Russia and the West. 
Russia must be persuaded to confirm – explicitly and formally – the right of the Baltics, on their own, to choose their allies. 
In view of Moscow’s insistence that it will never accept such a decision, this will not be easy. 
Moreover, if Nato membership for the Baltics is rejected, they will need reassurance that the West will assist them, concretely, should their security be put at risk. 
Admission or postponement are both legitimate decisions. 
But each will require considerable early efforts to reduce their fall-out. 
In weighing these options, admission of the Baltic countries quickly seems the better solution. 
Efforts to contain the damage caused by postponement will likely be far more demanding than any effort needed to ease tension after enlargement is announced. 
Moreover, at the next Summit following Prague, the Baltics must be at any rate be granted what, in view of their history, they have every right to demand: to be part of a stability alliance that is a matter of course for western democracies. 

NATO's Transformation 
Can NATO play a role in the struggle against international terrorism? 
Will the Atlantic Alliance be able to defend our safety and security in a radically altered strategic environment? 
Can the old dog learn new tricks? 
Next week, NATO heads of state and government will answer these questions with an unequivocal "yes." 
The months since the terrorist attacks on New York and Washington have been characterized by intense transatlantic debate. 
No holds were barred. 
Some Americans argued that the US no longer needed allies. 
Some Europeans argued that the US was irreversibly bent on unilateralism. 
Both views are wrong, and the Prague NATO summit will demonstrate why. 
The summit will bring home to even the greatest skeptics that when it comes to managing our long-term security, there is no alternative to Europe and North America acting together. 
Tackling Terrorism: The events of September 11 th , 2001 clearly invalidated the conventional wisdom that terrorists want a lot of people watching, not a lot of people dead. 
Once a largely domestic concern, terrorism has become a major threat to international security. 
This is why NATO will help tackle terrorism. 
The invocation of NATO's collective self-defense obligation on September 12 th , 2001 was only the beginning. 
A new NATO military concept for defense against terrorism will now follow, supported by the development of specific counter-terrorism capabilities. 
We will further increase our cooperation in preventing the spread of weapons of mass destruction and in dealing with the consequences should prevention fail. 
In short, NATO will become the focus for coordinating and planning the multinational military contribution to our defense against terrorism and other new threats. 
Enhancing Military Capabilities: Military capability is the crucial underpinning of our safety and security. 
It translates directly into political credibility. 
But we need capabilities that are different from those needed during the Cold War. 
We need forces that react more quickly, reach further, and can remain in the field longer. 
Enhancing NATO's capabilities will thus prove to be the litmus test for the future of the Alliance. 
NATO will pass this test. 
A new NATO Response Force will bring together the most advanced forces within the Alliance for taking ultra-quick action against new security threats. 
We will address shortfalls in our military posture through specific national commitments. 
Re-prioritization, less duplication, and better armaments cooperation are further steps that will ensure that the Alliance retains its military edge. 
We will also see to it that our efforts tie in with steps by the European Union to bolster its military capabilities. 
Inviting New Members: The venue of the Prague summit--the capital of one of NATO's most recent member states--is a powerful symbol of the Alliance's success in advancing Europe's unification. 
But this job is not yet complete. 
That is why, at Prague, we will invite additional countries to join. 
This will end Europe's Cold War division for good and foreclose any return to the darker chapters of the continent's past. 
Admission of new members will repeat the positive experience of the last enlargement round. 
Countries that will receive invitations to join NATO during the Prague Summit will have had years of experience working with the Alliance as partners, notably in bringing peace and stability to the Balkans and Southeast Europe. 
Moreover, each will have benefited from several years of NATO-assisted defense reform. 
They will thus be net security contributors rather than mere consumers, making our Alliance even stronger. 
Deepening Partnerships: The attacks of "9/11" were masterminded by a Saudi who lived in Central Asia, planned by people from the Eastern and Southern shores of the Mediterranean living in Western Europe, and carried out in North America. 
These facts illustrate better than anything the need for security partnerships that extend to Central Asia and across the Mediterranean. 
These partnership mechanisms already exist. 
At Prague, we will make them even more effective. 
We will focus much more on combating terrorism together. We will intensify our cooperation on security sector reform. 
By enabling meetings in more flexible formats, we will make our partnership mechanisms even more responsive to the interests and concerns of each individual partner country. 
Enhancing NATO-Russia Relations : Once upon a time, most people in the West looked at Russia as part of the security problem. 
No longer. 
Today, in a strategic environment marked by terrorism and the proliferation of weapons of mass destruction, Russia is very much part of the solution. 
If the Prague summit will not showcase any grand new initiative, it is simply because we already launched a new NATO-Russia relationship last May at our special summit in Rome. 
The new NATO-Russia Council created in Rome offers us an effective and flexible mechanism for joint analysis, joint decisions, and even joint action. 
Much has already been achieved over the past six months to transform the political message of Rome into practical cooperation. 
It was Henry Kissinger who argued after the terrorist attacks on New York and Washington of 2001 that tragedy could be turned into opportunity. 
NATO has been heeding this insight. 
With stronger capabilities, new members, and deepened partnerships, the Alliance will demonstrate that it remains the premier instrument to address current and future security challenges. 
At Prague, this message will ring out loud and clear. 


Nato to Lebanon – but on one condition 
The current discussion surrounding an international force for southern Lebanon has focused almost exclusively on which countries and organizations – NATO, the European Union, the United Nations – will provide the troops. 
This is an important issue, to be sure, but the real question concerns the changes that Israel must undertake in exchange for this force being put in place and assuming the risk of such a mission. 
No international force will simply protect Israel from Hezbollah rockets while Israel continues its current strategy. 
After all, the recent military escalation in the region is at least partly due to that strategy. 
If an international force simply allows Ehud Olmert’s government to pursue its plans further, the countries that provide troops for the international force will not only be seen as rubberstamping Israeli policy, but will also be dragged into its failure. 
To criticize Israel’s strategy as flawed is not to condone the acts of Hamas or Hezbollah or to deny Israel’s right to self-defense. 
It is merely to point out what should be obvious: Israel’s efforts to find a unilateral solution to its security problems – whether occupation, withdrawal, or separation – have failed. 
Unilateral occupation without commitment to a viable Palestinian state has produced only the intifada and suicide bombers. 
Unilateral withdrawal from Gaza without the prior establishment of a local authority to maintain order has only led to renewed intervention. 
And the “security fence,” which was to allow for unilateral separation, may hold back suicide bombers but not modern missiles of the kind currently employed by Hezbollah. 
So far, the only lesson Israel seems to have drawn from its failed strategies is that it must extend and intensify the use of unilateral force: re-invade Gaza, devastate Lebanon, and threaten Syria and, by implication, Iran, which the Israeli government hints, had a hand in orchestrating the recent crisis. 
It takes little foresight, however, to predict that more force will not produce more security for Israel. 
The policy, reminiscent of terrorist stratagems, of bombing civilians in order to force the hands of their leaders will only strengthen the radicals and boost their popular support. 
It will not hide the fact that Israel has run out of unilateral options. 
Israel has so far been unwilling to accept this fact. 
Instead, its leaders hope that a robust international force in southern Lebanon will provide protection for northern Israel, leaving them with a free hand to deal unilaterally with Gaza and the West Bank, while committing the international community to Israel’s failed unilateralism. 
To join such an international force under these conditions would be irresponsible. 
Countries that contribute troops would appear to be siding unequivocally with Israel, thereby losing all credibility with Israel’s adversaries. 
They would also risk being drawn into renewed Israeli operations against Hezbollah and its backers. 
Most important, they would forego what may be the last chance to promote a consensual peace. 
So the prior condition for setting up and joining an international force for Southern Lebanon must be that Israel renews its commitment to the “road map” and negotiations with the Palestinians for a viable Palestinian state. 
With this aim in mind, it must enter into talks with democratically elected Palestinian representatives. 
True, such talks will be difficult, and they may not succeed. 
But that can no longer be an argument against diplomacy now that Israeli unilateralism has once again proven to be a strategic blind alley. 
Only an Israel seriously willing to seek security through agreement, not one that wants to impose her security on her neighborhood by fiat, can be partner to an international effort to bring stability to Lebanon and beyond. 
Of course, some countries, not least the US, would oppose making such a reversal in Israeli policy a condition of creating an international force and consensus in NATO, the EU, or the UN may not be found or, if it were to emerge, Israel might simply refuse to abide. 
Both prospects would be reason enough for staying away from the project altogether. 
Creating an international force for southern Lebanon makes sense only as an investment in regional peace, not as an appendix to Israel’s current strategy. 

Mother Nature vs. Climate Change 
MARRAKESH – Wetlands, forests, and oceans absorb and store carbon, which makes them a vital asset for countries pursuing the Paris climate agreement’s targets for reducing CO2 emissions. 
So how can we use them most effectively? 
The Paris accord was concluded by 196 governments last December, and came into force earlier this month. 
Now, its signatories are meeting in Marrakesh, Morocco, for the annual United Nations climate change conference. 
Several conference events specifically focus on how countries can use natural systems to meet their CO2-reduction targets. 
While the climate-change challenge is immense, so, too, is the opportunity to accelerate sustainable development and ensure a better future for everyone on the planet. 
Under the Paris agreement, governments have committed to reducing their carbon emissions drastically, in order to keep global warming below 2°C. The vast majority of signatory countries have already presented national action plans for achieving this goal, and these plans will become more ambitious over time. 
These Nationally Determined Contributions include renewable-energy targets and proposals for sustainable transportation, energy efficiency, and education. 
In addition, countries should consider adopting policies to manage natural capital better. 
The Paris agreement itself recognizes the important role that natural ecosystems play in limiting the amount of carbon in the atmosphere, and governments should not neglect such powerful tools. 
Governments will need to take action to conserve existing ecosystems – and restore and expand degraded ecosystems – in people-friendly ways. 
This is particularly true of wetlands, which include all land areas – such as lakes, floodplains, peatlands, mangroves, and coral reefs – that are covered with water, either seasonally or permanently. 
Peatlands are particularly important. 
Though they cover only 3% of the world’s total surface area, they store twice as much carbon as all forests combined. 
Peatland soils are composed of carbon – in the form of decomposed plant material – that has accumulated for thousands of years; and when peatlands are drained or burned, that carbon is released into the atmosphere. 
In fact, draining peatlands releases two times more carbon into the atmosphere than the aviation industry does. 
In 2015, fires raged across Indonesia’s forested peatlands, raising concerns worldwide about how much carbon was being released into the atmosphere, to say nothing of the far-reaching health effects. 
Indonesia’s government estimates that peatland fires and deforestation alone account for more than 60% of the country’s total greenhouse-gas emissions. 
Conserving and restoring peatlands could significantly reduce global CO2 emissions, which is why, in 2015, the Nordic Council of Ministers announced a commitment to preserve the region’s peatlands. 
Almost half of Nordic countries’ peatlands have been lost, and this ecosystem degradation contributes 25% of their total carbon emissions. 
The Paris agreement entered fully into force in less than a year. 
This indicates that there is global momentum for concrete action to address the causes of climate change, as well as its effects, such as the disastrous floods, water shortages, and droughts already afflicting many countries. 
That sense of urgency is not surprising. 
According to UN-Water, 90% of all natural hazards are water-related, and they will increase in frequency and intensity as climate change worsens. 
But natural systems can mitigate them: wetlands act as sponges that reduce flooding and delay the onset of droughts; and mangroves, salt marshes, and coral reefs all act as buffers that protect against storm surges. 
And wetlands, oceans, and forests do far more than just absorb and store carbon; they also provide fresh water, and are a food source for nearly three billion people. 
Countries have a readymade platform that they can use for their future wetland-conservation efforts. 
The Ramsar Convention on Wetlands, an intergovernmental treaty under which 169 countries have committed to conserve and sustainably manage their wetlands, is an ideal vehicle for help them reach their CO2-reduction targets, as well as meet the UN Sustainable Development Goals for 2030. 
The Paris agreement’s long-term objective is to achieve climate neutrality – no net greenhouse-gas emissions – in the second half of this century. 
Climate neutrality is necessary to keep global warming below 2°C; to reach it, we must reduce emissions to the point that they can be fully and easily absorbed by nature. 
This was the natural cycle for millions of years before anthropogenic climate change began. 
Climate neutrality can be achieved through political willpower, imaginative policies, new green technologies and clean-energy sources, and a multi-trillion-dollar shift in investment toward sustainable economic sectors and infrastructure. 
In addition, these measures’ success requires cost-effective investment in conservation efforts and expansion of natural capital. 
Only nature-based systems such as wetlands and forests can truly guarantee success – and a clean, prosperous future. 

Sovereign Environmental Risk 
NAIROBI – Until the global financial crisis erupted four years ago, sovereign bonds had traditionally been viewed as reliable, virtually risk-free investments. 
Since then, they have looked far less safe. 
And many observers within and outside the financial sector have begun to question the models upon which credit-rating agencies, investment firms, and others rely to price the risks tied to such securities. 
At the same time, it is increasingly obvious that any reform of risk models must factor in environmental implications and natural-resource scarcity. 
Indeed, a recent investment report underlined that the fall in prices in the twentieth century for 33 important commodities – including aluminum, palm oil, and wheat – has been entirely offset in the decade since 2002, when commodity prices tripled. 
It is likely that growing natural-resource scarcities are driving a paradigm shift, with potentially profound implications for economies – and thus for sovereign-debt risk – worldwide. 
Indeed, many countries are already experiencing an increase in import prices for biological resources. 
Financial markets can no longer overlook how ecosystems and the multitrillion-dollar services and products that they provide – ranging from water supplies, carbon storage, and timber to the healthy soils needed for crop production – underpin economic performance. 
In addition, we are living in a world in which over-exploitation of natural resources, unsustainable consumption, and the condition of many ecosystems have become incompatible with accelerating demographic growth, as the human population increases from seven billion today to well over nine billion by 2050. 
Studies such as the The Millennium Ecosystem Assessment and The Economics of Ecosystems and Biodiversity (TEEB), conducted on behalf of the G-8, have improved our understanding of the economic, ecological, and social value of the goods and services provided by ecosystems, and have proposed better methods for pricing them. 
Yet this new thinking has yet to influence significantly the behavior of bond investors and rating agencies. 
Some might assume that bond markets are shielded from the effects of climate change, ecosystem degradation, and water scarcity. 
With more than $40 trillion of sovereign debt in global markets at any given time, that is a very high-risk game. 
In order to address the gap between reality and perception, the United Nations Environment Program Finance Initiative (UNEP FI) and the Global Footprint Network (GFN), together with a number of institutional investors, investment managers, and information providers, have launched E-RISC, or Environmental Risk in Sovereign Credit analysis. 
The project will take center stage at a gathering of investors in London on November 19, providing an early glimpse of how environmental criteria can be factored into sovereign-risk models and hence into the credit ratings assigned to sovereign bonds. 
E-RISC highlights the situation in several countries – including Brazil, France, India, Turkey, and Japan – demonstrating how importers and exporters of natural resources such as timber, fish, and crops are being exposed to the increasing volatility that accompanies rising global resource scarcity. 
Indeed, the E-RISC report estimates that a 10% variation in commodity prices can lead to changes in a country’s trade balance amounting to more than 0.5% of GDP. 
Meanwhile, the economic consequences of environmental degradation can be severe. 
The report estimates that a 10% reduction in the productive capacity of soils and freshwater areas alone could lead to a reduction in the trade balance equivalent to more than 4% of GDP. 
Clearly, environmental risks are potentially large enough to affect countries’ economies in ways that could influence their willingness or ability to repay sovereign debt. 
In addition, these risks vary widely across countries, including countries whose current credit ratings suggest similar levels of sovereign risk. 
This suggests that the findings and methodologies applied in the E-RISC project bring added value to traditional sovereign-risk analysis, by providing insights into relevant but currently unaccounted-for parameters. 
Credit-rating agencies, institutional investors, and asset managers are encouraged to see how such factors can be incorporated into their own risk models. 
The time has come for a better understanding of the connection between environmental and natural-resource risk and sovereign credit risk. 
Only then will investors, rating agencies, and governments be able to plan over the medium to long term with the knowledge needed to ensure long-term economic growth and stability. 

Naturalized Killers 
The arrest of 17 people in Canada on terrorist charges underscores, across the West, a growing sense of dread and inevitability that is rooted in the homegrown nature of the threat. 
But what do we really know about these killers among us? 
We know, of course, the broad outline of their all-encompassing fundamentalism, and we have some vague ideas about Al Qaeda as a decentralized network of cells in many countries that seeks to acquire chemical, biological, and perhaps even nuclear weapons. 
We also know their leaders’ long-term goals: seize power in Muslim countries and attack the Western states that support secular regimes in the Islamic world. 
Finally, we also know that the leaders of this fanatical tide are few, but now have the sympathy of millions of ordinary Muslims. 
There have always been fanatical individuals ready to die and kill in the name of their beliefs. 
But they seem far more dangerous nowadays as a result of technological advances that have “democratized” bomb making. 
After all, as the London and Madrid bombings demonstrated, a cell phone is all that is needed to time an explosion – or a series of explosions – with deadly efficiency. 
Our freedoms and social fluidity also contribute to the threat. 
People move about the globe cheaply and with relative ease. 
Immigrants can establish themselves in new societies, and in democratic states they can live completely free of supervision. 
Our freedoms are their tools. 
So how do we fight such an amorphous enemy? 
President George W. Bush has demonstrated one way not to do it: his invasion and occupation of Iraq show that directly attacking Muslim states only fuels fanaticism. 
Of course, civilized countries should not give up the fight against extremist Islam because of the bloodshed in Iraq; but we must recognize that war, occupation, and forced submission to military power have merely caused mass humiliation and resentment among many ordinary Muslims – emotions that are then channeled into terrorist networks. 
Prime Minister Tony Blair can loudly proclaim that the London bombings of July last year are unrelated to Britain’s participation in the Iraq war, but the terrorists themselves, once arrested, said exactly the opposite. 
Indeed, here is how one of the Madrid bombers described the psychological preparation to which he had been submitted: his leader “made us watch DVDs showing pictures of war in Iraq, mostly pictures of women and children killed by American and British soldiers.” 
There is also no shortage of images of abused prisoners at the Abu Ghraib prison or the prison camp at Guantanamo Bay, which have likewise done more to recruit new adherents to Islamic fanaticism than any sermon in a radical mosque. 
Simply put, bombs dropped from several thousands meters do not kill less indiscriminately than explosive charges placed in train cars. 
Acknowledging this is not to excuse terrorism, but it is a first step toward understanding terrorism’s underlying causes, and thus toward their elimination. 
Above all, it is to acknowledge that democratic societies must use both political and police tactics in confronting fanatical terrorists. 
Politics is necessary for the simple reason that occupying armies and police cannot force hundreds of millions of Muslims to shed their hostility. 
Political action implies actually leaving Iraq quickly and finding a fair solution to the Palestinian conflict, which in turn requires ending the occupation of all Palestinian territories. 
Of course, extinguishing these hot spots will not erode the fanaticism of diehard and suicidal activists; nor will it rid us of the avidity and hatred that is so evident among the leaders of Islamic rage. 
But it will deprive them of the masses of sympathetic Muslims who view the fanatics as the only people seeking to defend “Islamic” values and oppressed Muslim peoples. 
Policing is the second part of any effective strategy. 
Greater efforts at infiltrating terror networks are needed, as is a deeper knowledge of the social structures created by the terrorists, in order to block their financial support. 
This may mean eliminating shadowy “tax havens,” tapping phone lines, and identifying individuals considered highly dangerous. 
Police actions must be merciless, even if this means more controls and surveillance. 
It is precisely to prevent the development of a collective security fear that we need to alter the equilibrium between security and freedom. 
While the European Union lags behind the US in terms of conventional weapons, its capacity to fight terrorism is probably higher. 
For historical reasons, Europe benefits from a political maturity that has allowed it to avoid Bush’s Manichean worldview, which has merely reinforced, rather than undermined, the enemy’s fanaticism. 
Moreover, for geographical reasons, Europe also benefits from a better knowledge of Arab and Muslim countries and extensive familiarity with their populations. 
The West can and must prevail in this fight and in the defense of the values that it cherishes. 
It might even find, along the way, a new and urgently needed motivation to reinforce its fraying unity. 

Nature's Warnings to the Johannesburg Summiteers 
Nature's awesome powers have been on frightening display lately. 
As world leaders gather in Johannesburg to discuss global environmental threats, many parts of the planet are battered by floods, droughts, harvest failures, massive forest fires, and even new diseases. 
Man's relationship to nature is a theme as old as our species, but that relationship is changing in complex ways. 
The most important result of the Johannesburg Summit should be a recognition that more scientific research and much more global cooperation is needed. 
Floods and droughts have been scourges from ancient times, yet the frequency, size, and economic impact of these disasters has grown in recent years. 
Insurance claims against natural disasters rose to unprecedented levels during the 1990s, suggesting that the social costs of environmental upheavals have intensified. 
Climate shocks such as the fierce El Nino of 1997-98 played a major role in recent economic upheavals. 
Indonesia and Ecuador, among other countries, succumbed to financial crises in 1997-98 that were linked (in part) to agricultural crises caused by the severe El Nino. 
Part of the growing climate effect results from our sheer numbers. 
Largely as a result of technological successes in the past 200 years, the human population has grown seven-fold since 1800, from around 900 million in 1800 to more than 6 billion people today, crowding humanity into vulnerable spots throughout the world. 
More than 2 billion of the world's 6 billion people live within 100 kilometers of a coastline, and so are vulnerable to ocean storms, flooding, and rising sea levels due to global warming. 
Hundreds of millions more live in fragile habitats on the steep slopes of mountains, or in semi-deserts, or in rain-fed regions where crops fail regularly when rain doesn't arrive. 
Human beings are also changing the environment everywhere, often in ways that make societies more vulnerable. 
This is especially the case in impoverished countries. 
The increasing population density in rural Africa, with its intensification of farming, is leading to massive soil depletion. 
When drought comes to Southern Africa, as it has this year, tens of millions of impoverished peasant families struggle for survival. 
Because African poverty contributed to the uncontrolled spread of AIDS, the combination of climate shocks and epidemic disease is devastating. 
Millions of AIDS orphans in Southern Africa live with grandparents too old and weak to produce food or to secure it. 
Because of the onset of the El Nino, it's likely that the drought will continue into the coming year. 
The most remarkable feature of these environmental changes is that they are not limited to local environments. 
For the first time in human history, human society is undermining the environment at the global scale, through climate change, extinctions, and degraded ecosystems. 
Man-made global warming, caused mainly by fossil-fuel burning in rich countries, may well be a factor in the frequency and severity of major droughts, floods, and tropical storms. 
The frequency and intensity of the El Nino cycle in the past 25 years may also be the result of global warming. 
China's heavy floods in recent years are partly the result, it seems, of the excessive melting of mountain snows on the Tibetan Plateau, which was caused by higher temperatures. 
These growing environmental risks are complex. 
The effects of environmental change may occur only after many years and may be felt halfway around the world. 
Or the effects may be indirect. 
Land use changes, say, can amplify the spread of infectious diseases by changing the mix of species or the ways that animals and humans interact. 
Politicians are inept at handling such problems, so environmental risks continue to grow without adequate changes in public policy. 
When disasters hit (such as this year's droughts or floods), politicians cannot be held accountable for mistakes made over the course of many decades. 
The summit in Johannesburg can draw the world's attention to these pressing problems. 
Even if the summit produces few specific results, it can make a difference if three demands are made of the summiteers: 
we should insist that the world's politicians recognize the overwhelming scientific evidence that points to the major environmental perils humanity faces; 
we should press these leaders to invest more public money in basic environmental research and in the development of new technologies to address environmental risks. 
For example, investments in research on alternative energy systems that can limit global warming are vital; 
third, we should insist that our politicians agree to greater international environmental cooperation, lest the neglectful and shortsighted policies within each nation end up destroying the global ecosystem. 

Navigating Lebanon’s Political Minefield 
On the face of it, the donor conference of Western and oil-rich Arab nations in Paris this week merely continues the work of two previous multilateral conferences in 2001 and 2002, aimed at helping Lebanon to rebuild its infrastructure after years of civil war and Israeli occupation and to tackle its massive debt. 
This time, donors will additionally help offset the $3.5 billion in direct and indirect losses caused by last summer’s war between Israel and Hezbollah, and the further rise of debt to $40.6 billion, a staggering 180% of Lebanon’s GDP. 
The agenda appears straightforward, but “Paris III” has acquired a barely concealed political purpose: to bolster the government of Lebanese Prime Minister Fouad Siniora in the face of a powerful domestic challenge led by Hezbollah, and by extension to curb the influence of Hezbollah’s regional backers, Syria and Iran. 
The West should tread carefully. 
There is a real risk that it will become entangled as a partisan actor in Lebanese domestic politics. 
Nor should it seek to play into the regional agendas of Saudi Arabia, Egypt, and Jordan – hardly paragons of democracy – which are anxious to confront what they portray as a menacing “arc” of Shi’a Muslim power extending from Iran to Lebanon via Syria, and in Iraq. 
Consider this. 
The United States and France, which have taken the West’s lead on Lebanon, have both confirmed the “democratic and constitutional nature” of the Siniora government. 
This is true, but only up to a point, for Lebanon’s confessional-based political system assigns the Shi’a, who make up close to 40% of the population, only 21% of parliamentary seats. 
The Sunnis, who comprise at most 20% of the population, are given the state office with the greatest executive power, that of prime minister. 
Furthermore, the Sunni-based, anti-Syrian Future Movement to which Siniora belongs effectively extended this inequity into the present parliament when it overrode the opposition and insisted on conducting the 2005 general elections on the basis of the Electoral Law gerrymandered by Syria in 2000. 
The West should therefore be wary of dismissing the Lebanese opposition out of hand as the cat’s paw of Syria and Iran. 
Rather, it should welcome proposals by Arab League mediators for immediate electoral reform and early parliamentary elections. 
At the same time, it should expect the opposition to endorse the establishment of an international tribunal to adjudicate the matter of the assassination of former Prime Minister Rafiq Hariri, albeit after clarifying and narrowing the current excessively broad United Nations rules governing the investigation. 
The West should also recognize that the constituencies of Hezbollah and its allied, largely Christian, Free Patriotic Movement, led by presidential contender Michel Aoun, will be hit hardest by many of Siniora’s proposed economic and administrative reforms, such as lifting fuel subsidies and sharply raising value added tax. 
Already the 200,000-member Federation of Labour Unions has joined the opposition bandwagon, and Siniora’s proposals will further fuel grassroots populist nationalism. 
All this might be seen as a predictable, conservative reaction to urgently needed reforms, were it not for the poor track record of the Sunni economic establishment, which for many years adapted well enough to Syrian domination. 
Part of Hariri’s legacy was the award of quasi-monopolistic licences to cronies – for mobile telephones, for example – and the sale of government debt at highly profitable rates to local banks in which had a direct interest. 
So were the profligate borrow-and-spend policies and the use of public-sector hiring to co-opt political factions, both of which resulted in Lebanon’s massive debt problem. 
Yet the real challenge for Western policy in Lebanon is neither constitutional reform nor establishment of the Hariri tribunal. 
The Siniora government and the opposition are likely to reach a compromise within the next few months, probably on the basis of some variant of Arab League proposals. 
The tougher challenge is to solve the Gordian knot that binds Hezbollah (and the issue of its disarmament), Syria, and Israel together in a fateful triangle. 
In short, the West needs to pre-empt a resumption of hostilities in Lebanon by seeking unconditional talks between Syria and Israel over the Golan Heights. 
Failing that, Paris III will represent a sidestepping of the key political issues that must be addressed, and thus merely stock up trouble for the future. 

Need Versus Greed 
NEW YORK – India’s great moral leader Mohandas Gandhi famously said that there is enough on Earth for everybody’s need, but not enough for everybody’s greed. 
Today, Gandhi’s insight is being put to the test as never before. 
The world is hitting global limits in its use of resources. 
We are feeling the shocks each day in catastrophic floods, droughts, and storms – and in the resulting surge in prices in the marketplace. 
Our fate now depends on whether we cooperate or fall victim to self-defeating greed. 
The limits to the global economy are new, resulting from the unprecedented size of the world’s population and the unprecedented spread of economic growth to nearly the entire world. 
There are now seven billion people on the planet, compared to just three billion a half-century ago. 
Today, average per capita income is $10,000, with the rich world averaging around $40,000 and the developing world around $4,000. 
That means that the world economy is now producing around $70 trillion in total annual output, compared to around $10 trillion in 1960. 
China’s economy is growing at around 10% annually. 
India’s is growing at nearly the same rate. 
Africa, long the world’s slowest-growing region, is now averaging roughly 5% annual GDP growth. 
Overall, the developing countries are growing at around 7% per year, and the developed economies at around 2%, yielding a global average of around 4.5%. 
This is very good news in many ways. Rapid economic growth in developing countries is helping to alleviate poverty. 
In China, for example, extreme poverty has been cut from well over half of the population 30 years ago to around 10% or less today. 
Yet there is another side to the global growth story that we must understand clearly. 
With the world economy growing at 4-5% per year, it will be on a path to double in size in less than 20 years. 
Today’s $70 trillion world economy will be at $140 trillion before 2030, and $280 trillion before 2050 if we extrapolate from today’s growth rate. 
Our planet will not physically support this exponential economic growth if we let greed take the upper hand. 
Even today, the weight of the world economy is already crushing nature, rapidly depleting the supplies of fossil-fuel energy resources that nature created over millions of years, while the resulting climate change has led to massive instabilities in terms of rainfall, temperature, and extreme storms. 
We see these pressures every day in the marketplace. 
Oil prices have surged to more than $100 per barrel, as China, India, and other oil-importing countries join the United States in a massive scramble to buy up supplies, especially from the Middle East. 
Food prices, too, are at historical highs, contributing to poverty and political unrest. 
On the one hand, there are more mouths to feed, and with greater purchasing power on average. 
On the other hand, heat waves, droughts, floods, and other disasters induced by climate change are destroying crops and reducing the supplies of grains on world markets. 
In recent months, massive droughts have struck the grain-producing regions of Russia and Ukraine, and enormous floods have hit Brazil and Australia; now, another drought is menacing northern China’s grain belt. 
There is something else hidden from view that is very dangerous. 
In many populous parts of the world, including the grain-growing regions of northern India, northern China, and the American Midwest, farmers are tapping into groundwater to irrigate their crops. 
The great aquifers that supply water for irrigation are being depleted. 
In some places in India, the water table has been falling by several meters annually in recent years. 
Some deep wells are approaching the point of exhaustion, with salinity set to rise as ocean water infiltrates the aquifer. 
A calamity is inevitable unless we change. 
And here is where Gandhi comes in. 
If our societies are run according to the greed principle, with the rich doing everything to get richer, the growing resource crisis will lead to a widening divide between the rich and the poor – and quite possibly to an increasingly violent struggle for survival. 
The rich will try to use their power to commandeer more land, more water, and more energy for themselves, and many will support violent means to do so, if necessary. 
The US has already followed a strategy of militarization in the Middle East in the naïve hope that such an approach can ensure secure energy supplies. 
Now competition for those supplies is intensifying, as China, India, and others bid for the same (depleting) resources. 
An analogous power grab is being attempted in Africa. 
The rise in food prices is leading to a land grab, as powerful politicians sell foreign investors massive tracts of farmland, brushing aside the traditional land rights of poor smallholders. 
Foreign investors hope to use large mechanized farms to produce output for export, leaving little or nothing for the local populations. 
Everywhere in the leading countries – the US, the United Kingdom, China, India, and elsewhere – the rich have enjoyed soaring incomes and growing political power. 
The US economy has been taken over by billionaires, the oil industry, and other key sectors. 
The same trends threaten the emerging economies, where wealth and corruption are on the rise. 
If greed dominates, the engine of economic growth will deplete our resources, push the poor aside, and drive us into a deep social, political, and economic crisis. 
The alternative is a path of political and social cooperation, both within countries and internationally. 
There will be enough resources and prosperity to go around if we convert our economies to renewable energy sources, sustainable agricultural practices, and reasonable taxation of the rich. 
This is the path to shared prosperity through improved technologies, political fairness, and ethical awareness. 

Needed: Global Leadership for the Poorest of the Poor 
CAMBRIDGE: Times are tough for the world's poorest countries. 
Always marginalized in the world economic system, these countries are facing even more neglect than usual. 
After a breakdown in diplomatic approaches, the rich world is busy dropping bombs on Serbia, at a cost of billions of dollars per month, and will no doubt devote billions more to cleaning up and fixing the damage from the bombs once a diplomatic settlement is made finally. 
Meanwhile, the poor countries are told that there is little left for them. 
Debt relief for the poorest of the poor is likely to continue at a grossly insufficient pace, even with new proposals that will be launched at the G-8 summit. 
And many of the key international institutions that could actually help the poor countries are seeing their budgets relentlessly cut. 
A recent spectacle in Geneva was particularly egregious. 
The World Health Organization, the leading institution charged with protecting global public health, has made very important reforms in the past year under the new leadership of Dr. Gro Bruntland, the former Norwegian Prime Minister. 
On the basis of those reforms, and a new WHO agenda on global health, Dr. Bruntland made the extremely modest request that the core WHO budget from the donor countries should be raised sufficiently to absorb rising costs due to inflation and exchange rate changes. 
Yet even this modest request was rejected by donor governments. 
The WHO will continue to be squeezed for funds, while the urgency of its mission rises by the day. 
This decision, promoted mainly by the United States, reflects the sad dereliction of U.S. leadership evident in so many parts of the world. 
The Clinton Administration has failed to pay U.S. back dues to the U.N., partly because of Republican opposition in the Senate, but partly because the Clinton administration simply hasn't been willing to champion worthy U.N. activities as a priority for the U.S. On the one side the U.S. presses for reforms at the U.N. agencies, but when they happen, as at the WHO, the reforms are met with U.S. calls for still more budget stringency. 
The result is a continuing disaster for the poorest countries, where the burden of infectious disease is rising starkly, in diseases ranging from Malaria, to HIV/AIDs and Tuberculosis. 
But rich countries, including the U.S., should not kid themselves. 
Microbes do not respect national borders and do not wait for passport checks. 
The alarming rise in infectious diseases will burden the whole world, not just the poorest countries. 
The sad irony is that recent scientific advances in biology and information technology actually make possible the development and use of innovative tools to face these killer diseases. 
Vaccine technology has leaped forward in the past decade. 
Vaccines for all three of these dread diseases are within scientific reach, but will requires some billions of dollars to bring through the research and development stages to actual use. 
Yet even at a cost of a few billion dollars, the human benefits per dollar saved would be among the greatest contributions possible for humanity. 
After all, the $10 billion or so in costs of bombing Kosovo this spring could probably have paid for the needed scientific work over the next few years on all three vaccines! 
In area after area, including global climate change, public health, international debt relief, financial system reform, the neglect of the rich countries, and especially of the U.S., will sadly come home to roost. 
The attention span of the rich world is too focused and too limited. 
Our willingness to spend money seems to be much greater for war than for peaceful and preventative solutions to the great problems facing humanity, and especially facing the poorest of the poor. 
It is urgent time for international leadership on these issues. 

The Politics of Negative Interest Rates 
ATHENS – Objects of desire come at a cost. 
Only bad things, like toxic waste, have a negative price, the equivalent of a fee payable to anyone willing to make them disappear. 
Does this mean that negative interest rates embody a new perspective on money – that it has gone “bad”? 
In market economies, money is the measure of the value of goods and services. 
And the interest rate is the price of that metric – of money itself. 
When the price is zero, it makes no difference whether money is kept under a mattress or lent, because there is no cost to holding or borrowing cash. 
But how can the price of money – which, after all, makes the world go round, or, as Karl Marx put it, “transforms all my incapacities into their contrary” – be zero? 
And how can it possibly ever become negative, as it now is in much of the global economy, with the world’s moneyed people “bribing” governments to borrow from them more than $5.5 trillion? 
The answer can only be of a type that economists loathe: philosophical, political, and thus irreducible to neat positivist explanation. 
In other words, the answer must concern the essence of money. 
In a farmers’ market, sellers with many unsold potatoes start dropping the price until a level is reached (possibly very low, but still positive) at which all of the potatoes are bought. 
In contrast, since the 2008 global financial crisis, every time the price of money has been reduced, demand for it falls and excess savings rise. 
Clearly, money is not like potatoes or any other well-defined “thing.” 
To understand how money can be our societies’ supreme good while fetching a negative price, it helps to start with the realization that, unlike potatoes, money has no intrinsic private value. 
Its utility comes from what its holder can make others do. 
Money, to recall Lenin’s definition of politics, is about “who does what to whom.” 
Imagine you are an entrepreneur with money in the bank, or have a bank eager to lend large sums to invest in your business. 
You spend sleepless nights wondering whether you should invest in a new product – that is, whether you should exploit your access to money to cause an array of others to work on your behalf. In our current Great Deflation, what worries you most is your customers’ future purchasing power and sentiment. 
Will they be able and willing to buy your new product at high enough prices and quantities? 
Suppose that, sleep-deprived, you then switch on the radio or TV only to hear that US Federal Reserve Chair Janet Yellen and European Central Bank President Mario Draghi are considering reducing interest rates further. 
Will you rejoice at the prospect that your financing costs will fall? 
Will you be motivated to invest your own money now that it earns lower (perhaps even negative) interest? 
No and no. 
Your reaction is most likely to be one of alarm: “Oh, my God! 
If Janet and Mario are considering another interest-rate cut, they must have good reason to believe that demand will remain low!” 
So you abandon your investment plan. 
“Better to borrow money at almost no cost,” you think, “and buy back a few more of my company’s shares, boost their price, earn more on the stock exchange, and bank the profits for the rainy days that are coming.” 
And so it is that the price of money falls, even as the supply of it burgeons. 
Central bankers who never predicted the Great Deflation are now busily trying to find a way out with economic and econometric models that could never explain it, let alone point to solutions. 
Unwilling to question the political dogma that central banks must be apolitical, they refuse to think of money as more than a “thing.” 
And so they continue the search for a technocratic fix to a problem crying out for a philosophically astute political solution. 
It’s a futile quest. 
Once the price of money (interest rates) hit zero, central banks tried buying mountains of public and private debt from commercial banks to give them an incentive to lend freely. 
The ECB went so far as to pay banks to lend to business while, at the same time, punishing them for not lending (via negative interest rates for excess reserves). 
But bankers and businesses, viewing these measures as desperate responses to self-fulfilling deflationary expectations, went on an investment strike, while using the central-bank money to inflate the prices of their own assets (stocks, art, real estate, and so forth). 
This did nothing to defeat the Great Deflation; it only made the rich richer, an outcome that somehow reinforced central bankers’ belief in central bank independence. 
Not all central bankers, thankfully, are incapable of responding creatively to the Great Deflation. 
Andy Haldane, Chief Economist at the Bank of England, has courageously suggested that all money should become digital, which would permit real-time negative interest rates to be imposed on all of us, thus forcing everyone to spend at once. 
John Williams, President and CEO of the Federal Reserve Bank of San Francisco, recently argued that the Great Deflation could be beaten only by targeting the price level and nominal national income simultaneously – a New Deal-like approach featuring joint action by the Fed and the government. 
What separates these central bankers from the herd is their readiness to jettison the myth of independent monetary policy, to accept that money is the most political of commodities, to challenge the sanctity of cash, and to concede that defeating the Great Deflation requires a progressive policy agenda. 
Simone Weil once said, “If you want to know what a man is really like, take notice of how he acts when he loses money.” 
Likewise, if we want to know what our societies are really like, we must take notice of how they react to negative interest rates. 

The Negative Way to Growth? 
NEW YORK – Monetary policy has become increasingly unconventional in the last six years, with central banks implementing zero-interest-rate policies, quantitative easing, credit easing, forward guidance, and unlimited exchange-rate intervention. 
But now we have come to the most unconventional policy tool of them all: negative nominal interest rates. 
Such rates currently prevail in the eurozone, Switzerland, Denmark, and Sweden. 
And it is not just short-term policy rates that are now negative in nominal terms: about $3 trillion of assets in Europe and Japan, at maturities as long as ten years (in the case of Swiss government bonds), now have negative interest rates. 
At first blush, this seems absurd: Why would anyone want to lend money for a negative nominal return when they could simply hold on to the cash and at least not lose in nominal terms? 
In fact, investors have long accepted real (inflation-adjusted) negative returns. 
When you hold a checking or current account in your bank at a zero interest rate – as most people do in advanced economies – the real return is negative (the nominal zero return minus inflation): a year from now, your cash balances buy you less goods than they do today. 
And if you consider the fees that many banks impose on these accounts, the effective nominal return was already negative even before central banks went for negative nominal rates. 
In other words, negative nominal rates merely make your return more negative than it already was. 
Investors accept negative returns for the convenience of holding cash balances, so, in a sense, there is nothing new about negative nominal interest rates. 
Moreover, if deflation were to become entrenched in the eurozone and other parts of the world, a negative nominal return could be associated with a positive real return. 
That has been the story for the last 20 years in Japan, owing to persistent deflation and near-zero interest rates on many assets. 
One still might think that it makes sense to hold cash directly, rather than holding an asset with a negative return. 
But holding cash can be risky, as Greek savers, worried about the safety of their bank deposits, learned after stuffing it into their mattresses and walls: the number of armed home robberies rose sharply, and some cash was devoured by rodents. 
So, if you include the costs of holding cash safely – and include the benefits of check writing – it makes sense to accept a negative return. 
Beyond retail savers, banks that are holding cash in excess of required reserves have no choice but to accept the negative interest rates that central banks impose; indeed, they could not hold, manage, and transfer those excess reserves if they were held as cash, rather than in a negative-yielding account with the central bank. 
Of course, this is true only so long as the nominal interest rate is not too negative; otherwise, switching to cash – despite the storage and safety costs – starts to make more sense. 
But why would investors accept a negative nominal return for three, five, or even ten years? 
In Switzerland and Denmark, investors want exposure to a currency that is expected to appreciate in nominal terms. 
If you were holding Swiss franc assets at a negative nominal return right before its central bank abandoned its euro peg in mid-January, you could have made a 20% return overnight; a negative nominal return is a small price to pay for a large capital gain. 
And yet negative bonds yields are also occurring in countries and regions where the currency is depreciating and likely to depreciate further, including Germany, other parts of the eurozone core, and Japan. 
So, why are investors holding such assets? 
Many long-term investors, like insurance companies and pension funds, have no alternative, as they are required to hold safer bonds. 
Of course, negative returns make their balance sheets shakier: a defined-benefit pension plan needs positive returns to break even, and when most of its assets yield a negative nominal return, such results become increasingly difficult to achieve. 
But, given such investors' long-term liabilities (claims and benefits), their mandate is to invest mostly in bonds, which are less risky than stocks or other volatile assets. 
Even if their nominal returns are negative, they must defer to safety. 
Moreover, in a “risk-off" environment, when investors are risk-averse or when equities and other risky assets are subject to market and/or credit uncertainty, it may be better to hold negative-yielding bonds than riskier and more volatile assets. 
Over time, of course, negative nominal and real returns may lead savers to save less and spend more. 
And that is precisely the goal of negative interest rates: In a world where supply outstrips demand and too much saving chases too few productive investments, the equilibrium interest rate is low, if not negative. 
Indeed, if the advanced economies were to suffer from secular stagnation, a world with negative interest rates on both short- and long-term bonds could become the new normal. 
To avoid that, central banks and fiscal authorities need to pursue policies to jump-start growth and induce positive inflation. 
Paradoxically, that implies a period of negative interest rates to induce savers to save less and spend more. 
But it also requires fiscal stimulus, especially public investment in productive infrastructure projects, which yield higher returns than the bonds used to finance them. 
The longer such policies are postponed, the longer we may inhabit the inverted world of negative nominal interest rates. 

What’s Wrong With Negative Rates? 
NEW YORK – I wrote at the beginning of January that economic conditions this year were set to be as weak as in 2015, which was the worst year since the global financial crisis erupted in 2008. 
And, as has happened repeatedly over the last decade, a few months into the year, others’ more optimistic forecasts are being revised downward. 
The underlying problem – which has plagued the global economy since the crisis, but has worsened slightly – is lack of global aggregate demand. 
Now, in response, the European Central Bank (ECB) has stepped up its stimulus, joining the Bank of Japan and a couple of other central banks in showing that the “zero lower bound” – the inability of interest rates to become negative – is a boundary only in the imagination of conventional economists. 
And yet, in none of the economies attempting the unorthodox experiment of negative interest rates has there been a return to growth and full employment. 
In some cases, the outcome has been unexpected: Some lending rates have actually increased. 
It should have been apparent that most central banks’ pre-crisis models – both the formal models and the mental models that guide policymakers’ thinking – were badly wrong. 
None predicted the crisis; and in very few of these economies has a semblance of full employment been restored. 
The ECB famously raised interest rates twice in 2011, just as the euro crisis was worsening and unemployment was increasing to double-digit levels, bringing deflation ever closer. 
They continued to use the old discredited models, perhaps slightly modified. 
In these models, the interest rate is the key policy tool, to be dialed up and down to ensure good economic performance. 
If a positive interest rate doesn’t suffice, then a negative interest rate should do the trick. 
It hasn’t. 
In many economies – including Europe and the United States – real (inflation-adjusted) interest rates have been negative, sometimes as much as -2%. 
And yet, as real interest rates have fallen, business investment has stagnated. 
According to the OECD, the percentage of GDP invested in a category that is mostly plant and equipment has fallen in both Europe and the US in recent years. 
(In the US, it fell from 8.4% in 2000 to 6.8% in 2014; in the EU, it fell from 7.5% to 5.7% over the same period.) 
Other data provide a similar picture. 
Clearly, the idea that large corporations precisely calculate the interest rate at which they are willing to undertake investment – and that they would be willing to undertake a large number of projects if only interest rates were lowered by another 25 basis points – is absurd. 
More realistically, large corporations are sitting on hundreds of billions of dollars – indeed, trillions if aggregated across the advanced economies – because they already have too much capacity. 
Why build more simply because the interest rate has moved down a little? 
The small and medium-size enterprises (SMEs) that are willing to borrow couldn’t get access to credit before the ECB went negative, and they can’t now. 
Simply put, most firms – and especially SMEs – can’t borrow easily at the T-bill rate. 
They don’t borrow on capital markets. 
They borrow from banks. 
And there is a large difference (spread) between the interest rates the banks set and the T-bill rate. 
Moreover, banks ration. 
They may refuse to lend to some firms. 
In other cases, they demand collateral (often real estate). 
It may come as a shock to non-economists, but banks play no role in the standard economic model that monetary policymakers have used for the last couple of decades. 
Of course, if there were no banks, there would be no central banks, either; but cognitive dissonance has seldom shaken central bankers’ confidence in their models. 
The fact is that the eurozone’s structure and the ECB’s policies have ensured that banks in the underperforming countries, and especially in the crisis countries, are very weak. 
Deposits have left, and the austerity policies demanded by Germany are prolonging the aggregate-demand shortfall and sustaining high unemployment. 
In these circumstances, lending is risky, and banks have neither the appetite nor ability to lend, particularly to SMEs (which typically generate the highest number of jobs). 
A decrease in the real interest rate – that on government bonds – to -3% or even -4% will make little or no difference. 
Negative interest rates hurt banks’ balance sheets, with the “wealth effect” on banks overwhelming the small increase in incentives to lend. 
Unless policymakers are careful, lending rates could increase and credit availability decline. 
There are three further problems. 
First, low interest rates encourage firms to invest in more capital-intensive technologies, resulting in demand for labor falling in the longer term, even as unemployment declines in the short term. 
Second, older people who depend on interest income, hurt further, cut their consumption more deeply than those who benefit – rich owners of equity – increase theirs, undermining aggregate demand today. 
Third, the perhaps irrational but widely documented search for yield implies that many investors will shift their portfolios toward riskier assets, exposing the economy to greater financial instability. 
What central banks should be doing is focusing on the flow of credit, which means restoring and maintaining local banks’ ability and willingness to lend to SMEs. 
Instead, throughout the world, central banks have focused on the systemically significant banks, the financial institutions whose excessive risk taking and abusive practices caused the 2008 crisis. 
But a large number of small banks in the aggregate are systemically significant – especially if one is concerned about restoring investment, employment, and growth. 
The big lesson from all of this is captured by the familiar adage, “garbage in, garbage out.” 
If central banks continue to use the wrong models, they will continue to do the wrong thing. 
Of course, even in the best of circumstances, monetary policy’s ability to restore a slumping economy to full employment may be limited. 
But relying on the wrong model prevents central bankers from contributing what they can – and may even make a bad situation worse. 

The Neglected Solution to the TB Crisis 
BOSTON/GENEVA – In an age of rapid technological innovation, it is shameful that almost two million people will die from tuberculosis this year because they are too poor to afford treatment. 
Indeed, the reason why TB continues to take lives is simple: indifference. 
This indifference stems from the deadly delusion that TB is a disease of the past – a delusion that has persisted, even as 10.4 million people contracted TB in 2016. 
TB patients are generally powerless to demand the world’s attention. 
Though the disease can strike anyone, it disproportionately afflicts marginalized and vulnerable populations in places like refugee camps, slums, and prisons. 
Another delusion is that we have ample treatments to fight TB, even as it continues to mutate. 
But multidrug-resistant TB is a serious threat. 
It is sometimes called “Ebola with wings”: while the two pathogens have similar death rates, MDR-TB is airborne and spreads more easily. 
The current treatment for MDR-TB includes a regimen of toxic drugs – some requiring painful, daily injections – that can last for up to two years. 
The treatment options for TB have scarcely evolved in decades. 
Whereas the research and development pipelines for HIV/AIDS and hepatitis C continue to deliver results, the R&D pipeline for TB lags far behind. 
But that’s not the whole story. 
In the last four years, TB care should have been revolutionized. 
After 50 years without a single new TB drug being developed, two – bedaquiline and delamanid – were approved in quick succession. 
This should have been an historic moment in the fight against TB, especially for drug-resistant patients. 
One would have expected a broad coalition of health authorities, health-care providers, standard-setting bodies, insurers, and manufacturers to rush to the aid of the patients most in need of these new drugs. 
But no such response emerged. 
Instead, the new medicines have mostly gathered dust on warehouse shelves. 
Since they were approved for use, a paltry 5% of patients in need have benefited from them. 
The latest figures for delamanid, in particular, are appalling: after four years, a mere 1,247 patients worldwide have been treated with the drug. 
We would know, because many of these patients were treated in our programs, and in countries where Médecins Sans Frontières and Partners in Health have been pushing for the registration and uptake of new medicines. 
In partnership with Interactive Research and Development and with support from Unitaid – which channels funding from a painless airline tax toward addressing neglected health problems afflicting the poor – we launched the endTB initiative to accelerate use of the new drugs in 17 countries facing TB epidemics. 
It is a sorry situation when nongovernmental organizations, rather than governments, academic institutions, and drug companies, must push for the use of available new drugs. 
We took action because cash-strapped national TB programs tend to be conservative about adopting new treatments, and because pharmaceutical manufacturers have little incentive to bring their drugs to market in poorer countries. 
The evidence we have gathered so far indicates that when the new drugs are used, hard-to-treat TB patients are likelier to recover, and often do so more quickly. 
Given the scale of the global TB crisis, endTB’s work is a drop in the ocean. 
Yet it offers a glimpse into the failing response at large: an appalling lack of political will, imagination, and urgency that leaves millions to die on our generation’s watch. 
This September, the United Nations will host its first high-level meeting on the TB crisis. 
UN member states should use the occasion to pledge a radical increase in funding for TB programs around the world, and to overhaul an R&D model that has proved unfit for purpose. 
Otherwise, the event will be remembered as yet another meaningless gathering – one that left tens of millions to suffer in the clutches of the world’s deadliest infection. 
Specifically, what we need are simpler, quicker, and cheaper ways to test and treat TB, especially in remote and impoverished settings. 
We need better tools to prevent infections in the first place, and to kill latent infections before they kill us. 
And, of course, we need a robust pipeline of drugs to ward off TB and its resistant forms. 
In the meantime, the governments of TB-stricken countries must use the tools they already have – for example, by doing more to ensure that new treatments like bedaquiline and delamanid are made available to those who need them. 
A UN meeting is a golden opportunity to make progress. 
Although it will not solve the TB crisis overnight, it is a chance finally to elevate TB to the World Health Organization-designated status of a “public health emergency of international concern,” as was done in wake of the Ebola and Zika outbreaks. 
The urgency of the TB crisis is well known to medical experts, and certainly to patients and their families. 
Standard treatments are failing as we speak, and millions of people are silently being infected and falling ill. 
In the twenty-first century, that should be a source of deep shame for us all. 

Enlisting Women in Africa’s Health Fight 
BRAZZAVILLE – Neglected Tropical Diseases (NTDs) disproportionately affect women and girls. 
Female genital schistosomiasis (FGS) alone causes severe pain, bleeding, and lesions in more than 16 million women and girls in Sub-Saharan Africa. 
Beyond causing widespread physical suffering, NTDs have a severe long-term socioeconomic impact on millions of women and girls. 
Women who have been scarred or disfigured from diseases such as FGS and lymphatic filariasis are often stigmatized to the point that they are unable to marry or are abandoned by their spouses. 
And even though disfigurement and social stigma are not lethal conditions, they can cause or exacerbate psychological disorders and limit the opportunities women and girls have. 
Since 2000, enough pharmaceuticals for five billion preventive treatments against NTDs have been donated. 
And many people now recognize that controlling, and eventually eliminating, NTDs will be essential for achieving the Sustainable Development Goals, which apply to such diverse areas as nutrition, education, health, water, sanitation and hygiene, and economic growth. 
Because the SDGs are based on the principle of “leaving no one behind,” they cannot be considered a success until they have been met everywhere, and for all people – including women and girls. 
SDG 5, in particular, calls for the world to “achieve gender equality and empower all women and girls” by 2030. 
Gender equity applies to both sexes, but special attention is needed to improve conditions for women and girls. 
In Africa, women are often disenfranchised, even though they account for more than half of the continent’s population. 
To ensure that they are not forgotten, we need to improve our understanding of how gendered power relationships operate, and address those social dynamics head on. 
Because women and girls in their childbearing years suffer disproportionately from the health and social effects of NTDs, it is critically important that they be included in any large-scale health-policy interventions that are proposed. 
And, beyond making women the focus of NTD programs, we should acknowledge that they will play a central role in advancing the sustainable development agenda. 
We need to empower women and girls to promote and lead social-mobilization efforts in Africa. 
Women are front-line partners for public-health advocates who are working to make essential medicines available across the continent. 
Moreover, women can help to control NTD vectors at the source, by ensuring that all members of their community are complying with anti-NTD drug distribution and treatment programs. 
Ongoing efforts to control and eliminate NTDs in Africa have made some progress. 
But the time has come to develop more innovative policy tools. 
We urgently need integrated, inter-programmatic, and inter-sectoral approaches that address NTDs’ social, economic, and etiological dynamics. 
And we will need the full participation of the most vulnerable communities. 
Without that, no program aimed at ultimately eradicating NTDs can succeed. 
This year marks the fifth anniversary of the World Health Organization’s Roadmap to eliminate NTDs, and of the London Declaration on Neglected Tropical Diseases. 
It is encouraging to see that the international community is recognizing not only the disproportionate burden that NTDs place on women, but also the essential role that women play in controlling and eradicating these diseases. 
Now that an ever-growing international partnership has emerged, we have a unique opportunity to put an end to these debilitating diseases once and for all. 
In 2016, the WHO Regional Office for Africa launched the Expanded Special Project for Elimination of Neglected Tropical Diseases (ESPEN), which provides African countries with technical assistance and fundraising tools to fight the five NTDs that can be preempted with preventive chemotherapy: onchocerciasis, lymphatic filariasis, schistosomiasis, soil-transmitted helminthiasis, and trachoma. 
ESPEN is an effort to bring together governments, the global public-health community, and other stakeholders. 
Our goal is to strengthen partnerships that are designed specifically to eliminate NTDs. 
Toward that end, ESPEN is actively supporting national-level anti-NTD programs that have been established to break the cycle of poverty that NTDs cause and sustain. 
As the WHO works toward achieving the SDGs, we will continue to foster participatory approaches that include the most vulnerable populations – especially women and girls – in the fight against disease. 
Ultimately, the only way to ensure long-term success is to empower those who are most affected. 

Marginalized People’s Neglected Diseases 
WASHINGTON, DC – When Pope Francis visited the United States in September, he delivered historic addresses to the US Congress and the United Nations General Assembly. 
Building on the sentiments of his encyclical letter, Laudato Si’, Francis highlighted the international community’s responsibility to respond to human suffering, such as that faced by refugees and those living in extreme poverty, and called for global solidarity in order to overcome social exclusion and inequality. 
The pope’s entreaties should make us turn our attention to every aspect of human suffering, especially those that affect the most marginalized people. 
One of these is neglected tropical diseases (NTDs). 
This group of parasitic and related infections – including lymphatic filariasis (or elephantiasis), intestinal worms, and schistosomiasis – is a scourge of poverty. 
These illnesses afflict approximately 1.4 billion people per year, including more than 500 million children, causing untold pain and suffering and, through lost productivity, contributing to the cycle of poverty. 
Over the past decade, the international community has made important progress against NTDs. 
For example, the generosity of major pharmaceutical companies, which provide medicines free of charge, has enabled treatment programs to be scaled up. 
But, unfortunately, despite encouraging signs of progress, barely 40% of people at risk for these preventable diseases receive the medicine they require. 
Well over a billion people still do not have access to treatments for potentially debilitating conditions that cost less than $0.50 per person to deliver. 
This is not only a serious medical issue; it is also a grave moral problem, one that those of us who work with the poor confront every day. 
The reason for the international community’s failure to solve this problem is as simple as it is ugly: for the most part, NTDs afflict only the poorest and most overlooked people. 
As Francis put it in Laudato Si’ “There is little in the way of clear awareness of problems which especially affect the excluded.” 
Indeed, “they are mentioned in international political and economic discussions, but one often has the impression that their problems are brought up as an afterthought.” 
The pope’s historic visit to the US came at an important time. 
Congress was finalizing spending bills for fiscal year 2016, and the UN was completing its work on the Sustainable Development Goals (SDGs), setting targets that will guide development policy for the next 15 years. 
Both organizations would do well to heed the pontiff’s words. 
It is critical that the US continue its strong leadership on NTDs by maintaining funding for treatment programs in the federal budget, this year and in the years to come. 
As Francis reminded members of Congress, “How much has been done in these first years of the third millennium to raise people out of extreme poverty! 
I know that you share my conviction that much more still needs to be done, and that in times of crisis and economic hardship a spirit of global solidarity must not be lost.” 
On the international level, we are encouraged that UN members were inspired to assign high priority to the fight against NTDs in the post-2015 development agenda. 
In particular, a global indicator for NTDs – the “number of people requiring interventions against neglected tropical diseases” – was included in the SDGs’ monitoring framework. 
This will help to ensure that NTDs are finally given the attention they deserve over the next 15 years. 
One of the most basic steps we can take to overcome what Francis calls “the globalization of indifference” is to come together in support of decisive, measurable action against NTDs. 
Introducing a global metric to mark our progress on the path to controlling and eliminating them for good is a true demonstration of our solidarity with the poor. 
In his UN speech, Francis reminded us of a crucial point: “Above and beyond our plans and programs, we are dealing with real men and women who live, struggle and suffer, and are often forced to live in great poverty, deprived of all rights.” 
If, with all of our technological advances and unprecedented private-sector donations, we cannot change the predicament of the poorest people for mere pennies per person, how can we truly expect to overcome the more challenging, costlier health and development challenges we face? 


Neither Conspiracy Nor Benevolence: The Miracle Of 
WARSAW: Ten years ago this month the first partially free elections in any Communist country were held in Poland: a crucial step on the road that began with the rise of Solidarity in 1980 and ended with the fall of the Wall in Berlin and the ultimate collapse of the Soviet system. 
Those Polish elections were the result of a compromise hammered out during weeks of "Round Table" negotiations between the leaders of the Communist party and representatives of the Solidarity trade union. 
Paradoxically, however, the elections that ultimately ushered in the first non-communist government were not originally favored by the Solidarity negotiating team. 
Later, the negotiations became an object of heated debate among politicians and commentators in Poland. 
Two myths came to the fore. 
The first concerned the benevolence of the Communist leaders who had supposedly ceded their power to the opposition at the moment democracy became possible. 
The second was about a conspiracy between the Reds and "Pinkos"-- the Communist leaders and the "soft" leftists who represented Solidarity at the Round Table talks -- that supposedly saved the Communists from total disgrace and allowed them to stage a comeback as a new party of the Left. 
Both myths are just that: myths. 
A compromise - and this is, of course, what the Round Table was - is usually a result of some weakness on both sides. 
In 1989, the Communists had managed to make illegal and contain, but not to stamp out, Solidarity. 
A wave of strikes in May and August of 1988 brought home to Poland's politburo that the strategy of repression they had pursued since the introduction of martial law in 1981 was a failure. 
Solidarity, though weakened, proved to be a permanent fixture in Polish politics. 
To achieve social peace, the Communists had to talk to Solidarity. 
But Solidarity was weak too. 
True, it had tremendous trumps in its hand: its great international visibility, widespread public support, and a Polish pope. 
Solidarity could count on the logic of Gorbachev's recent reforms in the neighboring Soviet Union, the perennial inefficiency of the communist economic system, and the unwillingness of the government, under General Jaruzelski, to go back to the martial law regime. 
Despite all of this, Solidarity was weak and we were pretending to be much stronger than we knew we were. 
Of the millions who joined in 1980, only some 10-20 thousand were active throughout the country. 
Solidarity urgently needed to become legal again, to substitute a lasting institutional reality for its still enduring existence as a national myth. 
The Communists at first hoped to coopt some Solidarity activists, without legalizing the movement. 
They offered to talk about a political compromise that would bring some new people into the Parliament, provided real "radicals," like Jacek Kuron or myself, were kept out. 
But for us the legalization of Solidarity and its right to choose its own representatives were nonnegotiable demands - and Lech Walesa held firm on this until the Communists relented. 
After heated debates, we were prepared to pay what we saw as a very high price for the legalization of Solidarity as a movement. 
We saw participation in parliamentary elections not as a victory, but as a legitimation of the regime. 
The Communists wanted a political system that would allow them to continue in power, with us as a fig leaf, and we were willing to give them some of that for the chance of having Solidarity legal again and of beginning a new process of legal change. 
What nobody anticipated was that the crushing defeat of the Communists at the polls for all but one of the seats we were allowed to contest made it impossible for the Communists to form a new government, even if the numerical majorities were still on their side. 
The elections we originally saw as a concession turned out to be an integral instrument of our victory. 
I remember well the inaugural session of the Round Table talks. 
Bronislaw Geremek browbeat me into putting on a suit and a tie. 
Embarrassed and furious - my attire made me a butt of Walesa's mocking remarks - I walked up the stairs of the palace where the talks were to be held. 
At the top of the steps stood General Kiszczak, the same man who, as Minister of Internal Affairs, held me in jail only a little more than two years earlier, and against whom I had written a series of articles, smuggled from jail and published in the West, in which I did not mince words to express what I thought about him. 
I tried to hide behind others and dodge greeting him in front of TV cameras and the press. 
But he stood there until the last person had passed and personally welcomed every guest. 
I thus had to publicly shake hands with the head of the political police. 
He behaved with great class and easily dismissed all the insults I had heaped on him only a short time before. 
Still, I had a keen appreciation of the strangeness of my position. 
Next to me stood my friends and long time comrades in jail and Solidarity underground: Jacek Kuron, Zbigniew Bujak, Wladyslaw Frasyniuk... 
I was conscious of a historical transition, which I could not quite define. 
But I understood one thing: the democratic opposition was stepping over the threshold of legality. 
I could see that the historical chance for my country was beginning in an act of compromise. 



Neo-Liberalism Meets Neo-Confucianism 
The West has dominated the world ever since the industrial revolution. 
Today that dominance seems threatened by the East Asian heirs to Confucianism, the ideology par excellence of state cohesion. 
Centuries of inculcation with Confucianism was as important to the rise of East Asia’s hyper-growth economies as the conjunction of Protestantism and the rise of capitalism was to the west. 
Confucianism’s tenets still provide an inner compass to most East Asians in a post-Confucian age, just as Biblical admonitions remain standards for the West in a post-religious age. 
The basic thrust of Confucianism has changed little since Confucius’s disciples recorded his aphorisms a generation before Socrates. 
Indeed, Confucianism became the official ideology of the Chinese state two centuries before the birth of Christ. 
Confucianism was essentially a philosophical justification of government by benevolent bureaucracy under a virtuous ruler. 
Virtue ensured harmony between man and nature, as well as obedience within a stratified society. 
As one Confucian classic put it: Possessing virtue will give the ruler the people. 
Possessing the people will give him the territory. 
Possessing the territory will give him its wealth. 
Possessing the wealth, he will have resources for expenditure. 
Virtue is the root; wealth is the result. 
During the neo-Confucian renaissance of the eleventh and twelfth centuries, a metaphysical dimension was added to fill a gap exposed by Buddhism’s inroads into China. 
Thereafter, a good Confucian could, with untroubled conscience, scorn the Buddhist renunciation of the world. 
This restatement of fundamental precepts restored Confucianism to a primacy in China and neighboring states that remained unchallenged for 700 years. 
Neo-Confucianism provided the basic ideology for China’s admiring neighbors – Japan, Korea, and Vietnam – until the advent of the West. 
Its tenets were highly appropriate to the settled, sophisticated agrarian civilizations of pre-nineteenth-century East Asia, for they knitted together society and polity in a manner calculated to promote stability and harmony. 
The ultimate guarantee of harmony was the ruler’s justness, which permitted him to enjoy the “mandate of heaven”; the people had a right, indeed an obligation, to rebel against a tyrant. 
But while the ethical basis of Neo-Confucianism was crucial, the Chinese also understood the need for a morally motivated bureaucracy, and thus perfected in the seventh century the world’s first examination system for selecting bureaucrats, with the Confucian canon as the syllabus. 
Of course, the Neo-Confucian system was not immune to mankind’s appetites. 
Many Confucian emperors were brutal. 
Yet stability was achieved. 
There was only one change of dynasty in China between 1368 and the end of the imperial era in 1911. 
The Tokugawa Shoguns, who completed the reunification of Japan in 1600, remained in power for more than two and a half centuries. 
In Korea, the Yi dynasty ruled from 1382 until the Japanese conquest of 1910. 
Periodic civil strife and rebellion were not eliminated, but only in Vietnam was the longevity of a dynasty a cloak for inextinguishable internecine warfare. 
Like a happy and secure childhood, Confucian civilization bestowed upon its practitioners the self-confidence to meet the challenge of the West. 
Since Confucianism was essentially an agnostic ideology, concerned with the management of the visible world, the post-Confucians experienced little of the spiritual angst that afflicted Hindus, Muslims, and Christians in their collision with the “materialism” of industrial society. 
Confucian civic culture also provided the basis for a long history of successful self-government. 
East Asians entered the modern world of nation states in self-consciously discrete secular units. 
By contrast, the Indian subcontinent, with two major religions and a dozen major linguistic groups, was united in modern times only under British rule. 
Applied learning is the key to the post-Confucian states’ success. 
Confucian literati, shunning manual labor, grew their fingernails long, but they never displayed antipathy towards the world of affairs. 
The Chinese myth of success was the bright peasant boy whose village clubbed together to educate him and whose subsequent success resulted in the elevation of all who had helped him on his way into the civil service. 
Ideally, state and family were mirror images. 
The emperor was the supreme paterfamilias, his benevolent rule reciprocated by the obedience of his ministers and subjects, while family members were fixed in their appropriate hierarchical relationships. 
Families and nations that obeyed together stayed together. 
Meiji Japan grasped the advantages of making the nation a macrocosm of the family. 
An imperial order in 1890 outlined the objectives of education: the Confucian concepts of loyalty, obedience, and filial piety were to be transferred from the family to the nation. 
At about the same time, the Chinese scholar Yen Fu – whose translations of Adam Smith, John Stuart Mill, Herbert Spencer, and Montesquieu were read even by the young Mao – also concluded that filial piety fostered habits of disciplined subordination to authority that could be applied to the factory and the polity. 
During the past century, the post-Confucian states have accustomed themselves to a pluralistic world of theoretically equal nation states. 
But it is difficult to know how deep that adjustment has gone. 
If the West is perceived to be attempting to maintain the leadership it snatched 200 years ago by industrializing first, thereby denying the post-Confucians the fruits of their dynamism permanently, the Chinese, in particular, will conclude that pluralism is eyewash and that the West’s worldview in fact replicates their traditional one. 
Today’s trade and currency battles would then become a Kulturkampf. 
In a few decades, when China’s economy equals America’s in size, the winner will be hard to pick. 
Better for the West to accept equality now – and struggle to maintain it. 

Neo-liberalism's Argentine Failure 
It opened up its economy to world trade and international capital; it sought to guarantee low inflation and sound money. It strove to improve its legal system so that decisions would accord with general rules and foster confidence that contracts would be enforced--whether or not a bribe had been paid. 
It failed. 
This is not to say that the 1990s, even with their aftermath leading into the terrible summer of 2002, were catastrophic. 
Life was clearly worse during the Dirty War of the 1970s, when an army with no honor threw women out of helicopters into the South Atlantic, and urban guerrillas shot people because... because... well, just because! 
The 1980s were hardly better. 
Starting with a full-fledged debt crisis triggered by a massive rise in both US interest rates and the value of the American dollar, the decade ended with domestically-generated hyperinflation, causing Argentina to fall a decade further behind the world's leading economies. 
In the 1990s, by contrast, Argentina's GDP per capita grow by 25% from trough to peak--only to lose this entire income gain over the past four years. 
Until late last winter, Argentina's problems seemed merely an unpleasant but temporary bump, in the same way that the 1994-1995 Mexican "tequila" crisis or the East Asian crises of 1997-1998 proved to be only temporary interruptions, not watersheds. 
Such optimism is impossible today, and there is little hope that the country's recent meltdown is only temporary. 
The establishment view--say, in US Treasury Undersecretary John Taylor's office--is that Argentina's collapse is the fault of its politicians. 
I half-agree with this view. 
Argentine leaders were repeatedly warned that keeping the exchange rate constant and fixing the peso's value against the US dollar risked sending the economy into recession if the dollar gained value. 
Argentine politicians were also warned that their peso policy could not be sustained unless the ratio of national debt to GDP was falling. 
Yet during the boom years of 1993-1998, public spending outran taxes enough to push Argentina's debt-to-GDP ratio from 29 to 44%. 
When the dollar appreciated and recession came, politicians with too little statesmanship to balance the budget in good times turned out to have too little courage to balance the budget when times turned hard. 
The coup de grâce was delivered by the government's decision (when the crisis came) to keep bank deposits fixed in dollars and to change debts owed to banks into pesos, thereby bankrupting the country's financial system with a single stroke of the pen. 
The establishment position is that if any of these three disastrous policies had not been implemented, Argentina would not have fallen into crisis, or at worst it would have suffered a small tequila-style crisis. 
Argentina's 1990's neo-liberal program was nearly idiot-proof, according to this view, but Argentine politicians turned out to form a large and ingenious class of idiots. 
There is, however, another way of looking at the Argentine tragedy. 
It is based on the observation that the country's political system has long performed in a predictable way, consistently producing governments that promise more than they can deliver. 
They promise rich oligarchs that they will not collect much in taxes. 
They promise workers and consumers generous social insurance. 
They promise rapid economic development, generous infrastructure spending, cushy low-work jobs for the politically connected, and so forth. 
Taken together, these promises mean that claims on national product always exceed 100% of the total. 
Popular demands that the government fulfills all of them cannot possibly be met. 
Add to this an unfair distribution of income and wealth, lack of social comity between the working and middle classes, and a long tradition of political violence, and you have the recipe for a politics of all-against-all. 
The basic political fight about how wealth should be distributed in Argentina remains unresolved. 
Any political force that tries to curb the bidding by promising only what it can deliver is doomed to defeat. 
So in Argentina big government deficits are a law of nature, a fact of life. 
Hence Argentine interest rates can be low and affordable only for rare, short periods. 
Everyone knew that Argentina's political system generates chronic deficits, and this meant that interest payments on the debt were likely to explode. 
Because the dynamics of Argentine debt were so unstable, a hard-currency exchange-rate peg could not last. 
Free access to international capital markets and dollar-denominated bank accounts meant that when the exchange-rate peg finally collided with the deficit-producing logic of Argentine politics, the result could be nothing short of catastrophic. 
Had today's crisis been finessed, had Argentina another decade of rapid growth, its conflicts over wealth distribution might have moderated. 
After all, Europe before WWII possessed the nastiest politics on earth: rioting right-wing mobs in France, general strikes in Britain, civil war in Spain, fascism in Italy, and the Nazis' vicious consolidation of power in Germany. 
Yet postwar Western Europe encountered no public problems that could not be resolved in ways that preserved sound money and growth. 
I half-agree with this view, too. 
Yes, Argentina's government made huge mistakes; its politicians sinned against the gods of monetary economics. 
But did the punishment need to be so swift and so severe? 

The Political Roots of Falling Wage Growth 
NEW DELHI – It’s now official: workers around the world are falling behind. 
The International Labor Organization’s (ILO) latest Global Wage Report finds that, excluding China, real (inflation-adjusted) wages grew at an annual rate of just 1.1% in 2017, down from 1.8% in 2016. 
That is the slowest pace since 2008. 
In the advanced G20 economies, average real wages grew by a mere 0.4% in 2017, compared to 1.7% growth in 2015. 
While real wages were up by 0.7% in the United States (versus 2.2% in 2015), they stagnated in Europe, where small increases in some countries were offset by declines in France, Germany, Italy, and Spain. 
The slowdown in “success stories” like Germany and the US is particularly surprising, given the former’s expanding current-account surpluses and the latter’s falling unemployment and tight labor markets. 
In emerging markets, average wage growth in 2017, at 4.3%, was faster than in the advanced G20 economies, but still slower than the previous year (4.9%). 
Asia enjoyed the fastest real wage growth, owing largely to China and a few smaller countries such as Cambodia, Sri Lanka, and Myanmar. 
But, overall, wage growth in Asian economies mostly decelerated in 2017. 
And in Latin America and Africa, several countries experienced real-wage declines. 
Moreover, the ILO report finds that the gap between wage growth and labor productivity remained wide in 2017. 
In many countries, labor’s share of national income is still below the levels of the early 1990s. 
That raises an obvious question: Given the global output recovery of recent years, why have conditions for workers in most parts of the world not improved commensurately? 
Neither of the usual suspects, trade and technology, is entirely to blame. 
To be sure, large labor-surplus economies’ deepening integration into the global market, together with increased reliance on automation and artificial intelligence, has weakened workers’ bargaining power and shifted labor demand into very specific and limited sectors. 
But these factors alone do not explain the lack of material progress for most workers. 
The real reason workers are getting a raw deal is not so much economic as institutional and political. 
From country to country, legislation and court judgments are increasingly trampling on long-recognized labor rights. 
For example, governments focused solely on improving “labor-market flexibility” have pursued policies that privilege employers’ interests over those of workers, not least by undercutting workers’ ability to organize. 
An obsession with fiscal consolidation and austerity has prevented the kind of social spending that could expand public employment and improve workers’ conditions. 
And the current regulatory environment increasingly allows for large corporations to wield power without accountability, resulting in higher monopoly rents and greater bargaining power. 
In short, neoliberalism’s intellectual capture of economic policymaking across a wide range of countries, is resulting in the exclusion of most wage earners from the gains of economic growth. 
But this was not inevitable. 
China, after all, has achieved rapid wage growth, and the share of national income accruing to labor is rising, despite the country’s pursuit of trade and rapid labor-displacing technologies. 
China’s success may vindicate a model advanced by the late Nobel laureate economist W. Arthur Lewis, which explains how employment in new, more productive sectors can absorb surplus labor and push up wages over all. 
But, more to the point, China has augmented this effect through systematic state policies designed to improve labor conditions. 
As a result, the average nominal minimum wage in China nearly doubled between 2011 and 2018, and wages for workers in state-owned enterprises rose even faster. 
At the same time, the government has expanded other forms of social protections for workers, all while pursuing industrial policies geared toward boosting innovation and productivity growth, thus moving the country up the global value chain. 
True, China’s political economy is unusual. 
The government’s concern for workers’ wellbeing could simply reflect the Communist Party of China’s need to secure its domestic political position. 
In that case, it has forged a Faustian social bargain that is typical of East Asian autocracies. 
Still, if China can buck the trend of declining wage growth, other countries can, too. 
First, though, economic policymakers around the world will have to shake off the neoliberal paradigm, which has left them incapable of imagining alternative policy approaches. 
As a political project, neoliberalism has run its course. 
If workers are going to partake in the gains of growth once again, governments will need to start adopting more progressive policy alternatives. 
Fortunately, the ILO and the United Nations Conference on Trade and Development have begun to put more sensible policies back on the agenda, as have some politicians in the US, the United Kingdom, and elsewhere. 
But ensuring that the economy serves the bulk of society will require a much bigger push across the board. 

Nepal's Remarkable Peace 
KATMANDU – Nepal’s Maoist leader, Pushpa Kamal Dahal, known as “Prachanda,” has now been sworn in as the first prime minister of the Federal Democratic Republic of Nepal, having won an overwhelming vote in the Constituent Assembly elected in April. 
The Assembly’s opening action had been to vote almost unanimously to abolish the 239-year-old monarchy, and in June former King Gyanendra Shah departed from the palace, remaining in the country as an ordinary citizen. 
Nepal fleetingly made headlines after the 2001 palace massacre of the previous monarch and his family. 
Its bloody ten-year civil war, however, was seldom in the international limelight. 
So, too, the country’s unique peace process has rarely gained outside attention since the guns fell silent two years ago. 
Yet, amid too many continuing conflicts and failing peace processes around the world, a success story deserves to be recognized and supported. 
I came to Nepal in mid-2005, when human rights violations committed by both sides in the armed conflict, together with Gyanendra’s crackdown on democratic rights as he seized absolute power, led the international community to support a monitoring presence from the United Nations High Commissioner for Human Rights. 
With no end in sight to a war with thousands of civilian victims, and democracy far from the horizon, nobody could have foreseen how Nepal’s people would express their demand for peace and change. 
The turning point was the April 2006 people’s movement, when hundreds of thousands took to the streets for nineteen successive days. 
The king was compelled to hand power back to the political parties, while a peace agreement emerged that ended the conflict, bringing the Maoists into an interim parliament and government and promising elections to a Constituent Assembly. 
The people’s movement also took the lid off social pressures often disregarded by Nepal’s elites. 
Although established as a unitary Hindu kingdom, with politics directed from the Himalayan foothills, today around half the population live in the fertile southern plains and more than one-third are from over 50 indigenous, largely non-Hindu communities. 
Others are also historically marginalized from the social and political life of the nation, notably the Dalits, sometimes known as “untouchables,” who are at the bottom of the Hindu caste system. 
For these groups, the restoration of democracy was a step toward social transformation, enabling them to participate more equally in the life of the country. 
Given that the elections to the Constituent Assembly needed to ensure their representation, a complex system of quotas was devised. 
Along with the success of socially diverse candidates fielded by the Maoists, the Constituent Assembly that was elected in April represents an unprecedented array of marginalized groups. 
Women, too, had been almost invisible in political life – and, indeed, in the peace process. 
Now nearly one-third of the Constituent Assembly’s members are women – the highest proportion in South Asia and fourteenth place in the world for nationally elected bodies. 
The challenges that face Prime Minister Prachanda, the incoming coalition government, and the Constituent Assembly, are immense, and trust is fragile. 
The Nepali Congress Party, for example, has chosen to remain in opposition, dubious of the Maoists’ commitment to democratic politics. 
Nowhere in the world is the transformation of an armed insurgent group into a peaceful political movement quick or easy. 
The Maoists enter the government still with their own army – confined to cantonments, with their weapons stored under UN monitoring – and a Young Communist League that has persistently acted outside the law. 
Commitments to resolve the future of the Maoist combatants, along with what the peace agreements call the “democratization” of the state army, must now be implemented. 
But the biggest challenges go to the roots of the insurgency: poverty, injustice, and discrimination. 
One cost of the conflict has been the retreat of local governance and arrested development in a desperately poor country where over 80% of the population lives in rural districts. 
Moreover, as Nepal aspires to become a federal democratic republic, expectations are high among diverse groups for greater control of their lives and resources. 
But what federalism will mean in practice, taking account of the geographic and ethnic peculiarities of Nepal, remains elusive and potentially divisive. 
Reaching a national consensus will be a formidable task for the Constituent Assembly, and meanwhile the Nepali people cannot be expected to wait patiently until a new constitution is drafted to see real improvement in their daily lives. 
But there is reason to be hopeful. 
Nepal’s peace process has been truly indigenous: it has not been mediated or managed by any external party. 
The UN has encouraged and facilitated the process – through quiet good offices during the last years of the conflict, human rights monitoring, assistance to the Constituent Assembly election, and monitoring arms and armies during the transition. 
The Maoist and non-Maoist parties have asked the UN to maintain a political presence while the issue of the former combatants is resolved, and we stand ready to support peace-building, recovery, and long-term development. 
But the world, too, must be generous and steady in assisting Nepal to sustain the still fragile success of a remarkable peace process. 

The Net-Zero Imperative 
OXFORD – The world has reached an historic agreement on climate change. 
The deal concluded at the United Nations Climate Change Conference in Paris commits countries to take steps to limit warming to “well below” 2º Celsius relative to pre-industrial levels and to pursue “efforts” to limit warming to 1.5ºC. 
It also obliges developed countries to provide $100 billion per year in assistance to developing countries. 
But, unfortunately, the final negotiations dropped the one number that truly matters for the future of our planet: zero. 
That is the net amount of carbon dioxide we can emit if we are ever to stabilize the planet’s temperature at any level. 
Zero, none, nada. 
The Earth’s atmosphere-ocean system is like a bathtub filling up with CO2 and other greenhouse gases: The higher the level, the warmer the planet will be. 
The emissions tap must be turned off once the bathtub reaches a level associated with a certain level of warming – say, 2ºC, above which, scientists nearly unanimously agree, the risks become severe, tipping points become possible, and civilization’s ability to adapt is not guaranteed. 
Otherwise, the atmospheric bathtub will keep being filled, warming the planet 3º, 4º, 5º, and so on, until emissions eventually stop – or we go extinct. 
The sooner we turn off the tap, the lower the temperature at which the climate stabilizes, the less risk we will face, and the lower the cost we will incur in adapting to a warmer planet. 
Only about half the CO2 we dump into the atmosphere stays there – the rest is quickly redistributed into the oceans and biosphere. 
But, as the oceans become increasingly saturated and able to absorb less, the amount that is redistributed is declining. 
Likewise, warming temperatures cause soils to release more CO2, causing yet more warming. 
The only way to get CO2 out of the bathtub once it’s there is, almost literally, to bail it out. 
There are natural processes that “re-fossilize” CO2, but they are far too slow to matter. 
Carbon capture and storage (CCS) technology takes CO2 out of emissions from coal- and gas-powered generating plants and sequesters it underground. 
While this does not do anything about the existing CO2 in the bathtub, CCS is technically capable of reducing emissions from coal and gas close to zero. 
But it remains very expensive, and efforts to develop the technology at scale have moved slowly. 
From large-scale CCS, it is only a small step to take existing CO2 from the air and sequester it. 
But “CO2 disposal” technologies are still at a relatively early stage of development. 
If we continue on our current path, the scale on which they would have to operate would be formidable. 
So we are in a race. 
Can we turn the tap to zero net emissions before the tub hits a level that takes us above the 2ºC threshold set in Paris? 
In fact, even that level may not be low enough. 
As the Paris agreement recognizes, many scientists believe that warming above 1.5ºC is risky and that adaptation to it will be extremely expensive, particularly for developing countries and island states. 
The good news is that if we somehow stopped all emissions today, temperatures would continue to rise only for a decade or so, before stabilizing. 
But with the emissions tap still on high, we are rapidly running out of room in the tub. 
We can emit less than half of our historical CO2 emissions to date before we probably exceed the 2ºC threshold. 
On our current course, we will reach that point by 2040-2050. 
This is why most scientists and a growing number of business leaders and investors are calling for a clear goal that emissions must go to net-zero before warming reaches 2ºC. 
In May 2015, the International Chamber of Commerce and CEOs from around the world called for a zero emissions goal. 
In Paris, leading investors and Bank of England Governor Mark Carney, along with Bloomberg CEO Michael Bloomberg, also endorsed net-zero emissions, citing systemic risks to the financial system from climate change. 
It is a goal that sends an unambiguous signal that CO2-emitting industries will either have to change or die, and that the future lies with zero-emissions technologies and businesses. 
While the net-zero objective was dropped by the negotiators in Paris, it should be endorsed by individual countries in their plans, reinforced by the G-20, and eventually enshrined in the UN agreement. 
For the planet, it is zero or bust. 

The Myth of Net-Zero Emissions 
BERLIN – The emissions from burning coal, oil, and gas are heating up our planet at such a rapid rate that increasingly volatile and dangerous climate conditions seem almost inevitable. 
Clearly, we have to reduce emissions fast, while developing alternative energy sources that allow us to leave fossil fuels in the ground. 
This imperative is almost shockingly straightforward. 
Yet climate change has been subject to so much political inertia, false information, and wishful thinking for the last few decades that we continue to see ineffective or impossible solutions, rather than an effort to address root causes. 
Often these “solutions” are based on non-existent or risky new technologies. 
This approach is highly expedient, for it threatens neither business as usual nor socioeconomic orthodoxy. 
But climate models that depend on elusive technologies weaken the imperative to enact the deep structural changes that are needed to avoid climate catastrophe. 
The latest such “solution” to emerge is “net-zero emissions,” which depends on so-called “carbon capture and storage.” 
Though the technology still faces more than a few shortcomings, Intergovernmental Panel on Climate Change (IPCC) Chairman Rajendar Pachauri issued a deeply problematic statement last month, saying that, “With CCS it is entirely possible for fossil fuels to continue to be used on a large scale.” 
To be fair, the IPCC’s latest assessment report highlights the imperative of cutting CO2 emissions drastically to avoid exceeding the world’s small – and still risky – carbon budget. 
But to shift from clear-cut goals like “zero emissions,” “full decarbonization,” and “100% renewable energy” to the far hazier objective of net-zero emissions is to adopt a dangerous stance. 
Indeed, the net-zero idea implies that the world can continue to produce emissions, as long as there is a way to “offset” them. 
So, instead of embarking immediately on a radical emissions-reduction trajectory, we can continue to emit massive amounts of CO2 – and even establish new coal plants – while claiming to be taking climate action by “supporting” the development of CCS technology. 
It is apparently irrelevant that such technology might not work, is riddled with practical challenges, and carries the risk of future leakage, which would have major social and environmental consequences. 
Bioenergy with Carbon Capture and Storage is the poster child for the new “overshoot approach” of net-zero emissions. 
BECCS entails planting a huge amount of grass and trees, burning the biomass to generate electricity, capturing the CO2 that is emitted, and pumping it into geological reservoirs underground. 
BECCS would have enormous development implications, provoking large-scale land grabs, most likely from relatively poor people. 
This is not some farfetched scenario; rising demand for biofuels has spurred devastating land grabs in developing countries for many years. 
It would take a lot more land to offset a substantial share of CO2 emissions. 
Indeed, an estimated 218-990 million hectares would have to be converted to switchgrass to sequester one billion tons of carbon using BECCS. 
That is 14-65 times the amount of land the United States uses to grow corn for ethanol. 
Nitrous-oxide emissions from the vast amount of fertilizer that would be required to grow the switchgrass could be enough to exacerbate climate change. 
Then there are the CO2 emissions from producing synthetic fertilizers; clearing trees, shrubs, and grass from hundreds of millions of hectares of land; destroying large reservoirs of soil carbon; and transporting and processing the switchgrass. 
Even more problematic is the revelation that CCS and BECCS would most likely be used for “enhanced oil recovery,” with compressed CO2 pumped into old oil wells for storage, thereby creating a financial incentive to recover more oil. 
The US Department of Energy estimates that such methods could make 67 billion barrels of oil – three times the volume of proven US oil reserves – economically recoverable. 
Indeed, given the money at stake, enhanced oil recovery could actually be one of the motives behind the push for CCS. 
In any case, no form of CCS advances the goal of a structural shift toward full decarbonization, which is what social movements, academics, ordinary citizens, and even some politicians are increasingly demanding. 
They are prepared to accept the inconveniences and sacrifices that will arise during the transition; indeed, they view the challenge of creating a zero-carbon economy as an opportunity to renew and improve their societies and communities. 
Dangerous, elusive, and pie-in-the-sky technologies have no place in such an effort. 
A clear understanding of the climate crisis expands the range of potential solutions considerably. 
For example, by banning new coal plants and shifting fossil-fuel subsidies toward the financing of renewable energy through feed-in tariffs, sustainable energy could be brought to billions of people worldwide, while reducing fossil-fuel dependency. 
While such innovative and practical solutions are prevented from being scaled up, billions of dollars are pumped into subsidies that reinforce the status quo. 
The only way to reform the system and make real progress toward mitigating climate change is to work to eliminate fossil fuels completely. 
Vague goals based on nebulous technologies simply will not work. 


Bibi Goes to Washington 
NEW YORK – Why did he do it? 
What possessed Israeli Prime Minister Binyamin “Bibi" Netanyahu to accept an invitation from the Republicans in the US Congress to come and attack President Barack Obama's policy on Iran without letting the White House know? 
Netanyahu claims that his was “a fateful, even historic mission" to voice his concern for the fate of Israel and all Jews. 
But we already knew about his concerns – and that many Jews, in the US and elsewhere, do not feel that he was speaking for them. 
Did Netanyahu crave the applause of his Republican supporters? 
Is he gambling on the chance of a Republican presidency in 2016? 
If so, he got the applause; but, given the current polls, the latter motive would be quite a gamble. 
Or was Netanyahu simply using the US Congress as a venue for his own campaign to keep his job? 
Did he wish to impress voters back home with a starring role on a world stage? 
This, too, would seem to be a gamble: many Israelis, however worried they might be about an Iranian nuclear bomb, have been highly critical of Netanyahu's provocation of Obama, and of many Jewish Democrats. 
Two former Mossad directors joined a chorus of Israelis in arguing that he should no longer be prime minister. 
Meir Dagan, who resigned as the Israeli intelligence chief in 2011, called Bibi's grandstanding in Washington “destructive to the future and security of Israel." 
Whatever his motives, Netanyahu has achieved what no Israeli leader ever has: not only infuriating the US president (who was already quite angry with him), but also earning the public rebuke of people who would normally have supported any Israeli leader, whatever they might have thought in private. 
If an Israeli prime minister cannot even count on the backing of a man like Abraham Foxman, the national director of the Anti-Defamation League, he is in trouble. 
By forcing Americans – and not just Jews or Democrats – to choose between their loyalty to Israel and the president of their own country, Netanyahu has punched a large hole in Americans' normally bipartisan support for Israel. 
This is not to say that US politicians have always agreed with Israeli policies. 
But few have thought it worth their while to express their criticism in public. 
The benefits of doing so rarely outweigh the costs: lost campaign contributions, accusations of anti-Semitism, charges of betraying a close ally (“the only democracy in the Middle East"), and so on. 
The fact that Israel could always count on US backing, especially on such public occasions as congressional speeches by an Israeli leader, only confirmed the assumption of many people around the world that Israel and the US are joined like Siamese twins. 
Some think that Israel is the cat's paw of the US; others believe it is the other way around. 
In the spirit of that notorious nineteenth-century czarist forgery, The Protocols of the Elders of Zion, anti-Semites think “the Jews" run the US government, Wall Street, and the media. 
Such beliefs, of course, have been around for much longer than the modern state of Israel. 
Nineteenth- and twentieth-century European nationalists often regarded the US as the natural home for capitalists and “rootless cosmopolitans" without any loyalty to their native soil. 
Only money ruled in America, it was thought, so that meant that the Jews ruled. 
Though it was Stalin who used the phrase “rootless cosmopolitans" to describe unwanted Jews, anti-Semites believed that Jews were natural Bolsheviks and probably pulled the strings in the Soviet Union, too. 
It was widely assumed than Jews, whether capitalist or communist, knew no allegiance except to their own people; after 1948, that increasingly came to mean the state of Israel. 
By claiming to be the leader of all Jewish people, wherever they live, Netanyahu has only strengthened that notion. 
In fact, the US was not always as pro-Israel as it is today. 
The French were Israel's greatest supporters until President Charles de Gaulle turned away from the Jewish state after the Six-Day War in 1967. 
America's subsequent patronage of Israel had less to do with evangelical passion for the Holy Land, or a spontaneous love for the Jewish people, than with the Cold War. 
But over time, especially in conservative political discourse, criticism of Israel increasingly came to be regarded as not just anti-Semitic but also anti-American. 
There is some truth to this view. 
The old anti-Semitic myth about America being run by Jews has not completely disappeared – especially (but by no means only) in the Middle East. 
But the almost automatic identification in Washington of US interests with Israel's has made it difficult to criticize either country without criticizing the other. 
Now, by openly seeking to undermine the US president, Netanyahu is breaking that link. 
He has made it easier for American Jews, even those who feel a deep devotion to Israel, to be critical of its leaders. 
This will also make it less costly for American politicians to oppose Israeli policies with which they disagree. 
Some might see this as a defeat for Israel. 
In fact, the opposite may be true. 
Bibi's ill-considered trip to Washington might be the best thing that could have happen to Israel. 
It is in neither country's interest to be seen as the other's pawn. 
And a tougher US stance toward its ally might force the Israelis to try harder to come to terms with the Palestinians. 
This is not what Netanyahu intended. 
But it might end up being his greatest achievement. 

Bibi’s Faustian Bargain 
JERUSALEM – On February 13, after an investigation that began in 2016, the Israeli police recommended charges against Prime Minister Binyamin Netanyahu for bribery, fraud, and breach of trust. 
Now, the spotlight is on Attorney General Avichai Mandelblit, who must decide whether to issue a formal indictment against a man who has become virtually synonymous with modern Israeli politics. 
If the current government survives until the summer of 2019, Netanyahu will become Israel’s longest-serving leader. 
At the moment, it is far from certain he will last until then. 
Since returning as prime minister in March 2009 – he first held the job from June 1996 until July 1999 – Netanyahu has overseen unprecedented economic growth and a series of diplomatic feats. 
At the same time, extreme divisiveness has become a political hallmark of his tenure, and the drumbeat of potential war in Syria, Lebanon, and Gaza has grown deafening. 
How Netanyahu’s political predicament plays out will dictate which narrative prevails. 
The just-completed police inquiries – code-named “Case 1000” and “Case 2000” – are not the only legal challenges Netanyahu faces; other corruption probes are ongoing. 
The ripple effect of these scandals – which include allegations of accepting some $300,000 in gifts over the course of a decade – could engulf an already-fragile political dynamic in Israel, where rivals within Netanyahu’s coalition hold tremendous sway over him and his Likud faction. 
Members of Netanyahu’s government are wary about deciding their leader’s fate prematurely. 
But they are also monitoring carefully which way the political winds are blowing. 
None of his ministers is particularly interested in new elections, but no one wants to go down with a sinking ship. 
The dilemmas faced by Moshe Kahlon, the finance minister, and Naftali Bennett, the education minister, are instructive. 
Each currently wields a degree of influence that would not be guaranteed in a new Knesset (parliament). 
So, as crisis envelops Netanyahu, members of his government are focused on amassing enough accomplishments to appeal to the electorate on their own merit. 
As the slow-motion political tragedy gathers pace, Netanyahu is rallying his troops to defend his innocence and deter any foe from hastening his demise. 
But distancing themselves from the perception of wrongdoing will be essential to his cabinet colleagues’ ability to realize their own long-term political aspirations, especially if calls for resignation grow louder. 
The danger of this predicament is that it could make Netanyahu amenable to the demands of his coalition’s more ambitious factions. 
For example, hawks advocating for a more spirited response to Iranian-sponsored aggression in the Golan Heights will be emboldened, as will those insisting on more construction of Jewish settlements in the West Bank. 
Ultra-orthodox powerbrokers will also pressure Netanyahu not to accommodate liberal expressions of Judaism in Israel. 
Any one of these groups could instigate a revolt and compel their Knesset representatives to bring down Netanyahu’s government. 
Amid such pressure, the cost of Netanyahu’s political survival could be steep. 
Complicating all of this is – somewhat ironically – Netanyahu’s relationship with US President Donald Trump. 
The Israeli government has been feeling invincible in the United States – buoyed by the Trump administration’s decisions to recognize Jerusalem as Israel’s capital and move its embassy there, as well as its open hostility to the 2015 Iran nuclear deal. 
But today, that confidence is waning. 
The Trump administration’s red line was apparently crossed this month, when a White House spokesman issued a rare rebuke of Netanyahu, dismissing reports that US officials had discussed an annexation plan for the West Bank with their Israeli counterparts. 
If this scolding does represent growing discord, any hardline tilt in Israel could further strain the country’s relationship with the US. 
Netanyahu is no political neophyte; he knows exactly what kind of dilemma he faces. 
If he goes against his principles and surrenders to the aggressive demands of his coalition, he will be compromising his allegiance to the office he holds and the country he governs. 
But if he resists the temptation to pander, it could very well mean his downfall. 
The stakes have never been higher, both for Netanyahu, and for the state that, at the moment, he continues to lead. 

Netanyahu’s Border War 
TEL AVIV – Binyamin Netanyahu’s furious rejection of US President Barack Obama’s proposal to use the 1967 borders as the basis for a two-state solution to the Israeli-Palestinian dispute – frontiers that he called “utterly indefensible” – reflects not only the Israeli prime minister’s poor statesmanship, but also his antiquated military philosophy. 
In an era of ballistic missiles and other weapons of mass destruction, and in which the planned Palestinian state is supposed to be demilitarized, why is it so vital for Israel to see its army “sit along the Jordan River”? 
If such a tripwire is really necessary, why shouldn’t a reliable international force carry out that task? 
And how can hundreds of isolated settlements spread amidst a hostile Palestinian population ever be considered a strategic asset? 
Netanyahu should, perhaps, have studied the lessons of the 1973 Yom Kippur war on the Golan Heights before denouncing Obama’s idea. 
When the war started, the first thing the Israeli army command sought was the evacuation of the area’s settlements, which Israel’s generals knew would quickly become an impossible burden, and an obstacle to maneuver, for their troops. 
Indeed, the last war that Israel won “elegantly” – in the way that Netanyahu imagines that wars should be won – began from the supposedly “indefensible” 1967 lines. 
That is no accident. 
Israel’s occupation of Arab lands in that war, and its subsequent deployment of military forces amidst the Arab population of the West Bank and close to the powerful military machines of Egypt in the south and Syria in the north, exposed it to Palestinian terrorism from the east. 
At the same time, occupation denied Israel’s army the advantage of a buffer – the demilitarized zones that were the key to the 1967 victory against both Egypt and Syria. 
For borders to be defensible, they need first to be legitimate and internationally recognized. 
But Netanyahu does not really trust “the gentiles” to supply that type of international recognition of Israel’s borders, not even when America is behind him, and not even when Israel today has the most powerful military capabilities in the Middle East. 
The son of a renowned historian who served as the personal secretary of Zeev Jabotinski, the founder of the Zionist right, Netanyahu absorbed from childhood his father’s interpretation of Jewish history as a series of tragedies. 
The lesson was simple: the gentiles cannot be relied upon, for Jewish history is one of betrayal and extermination at their hands. 
The only remedy to our fragile existence in the Diaspora lies in the return to the Biblical Land of Israel. 
Our Arab neighbors should never be trusted; hence, as Jabotinski preached, the new Israeli nation must erect an Iron Wall of Jewish power to deter its enemies forever. 
To be fair, such an existential philosophy was not the right’s monopoly. 
The legendary General Moshe Dayan, who was born in a socialist Kibbutz on the shores of the Sea of Galilee, was no less a skeptic about the chances of coexisting with the Arabs. 
A gifted orator, this is how he put it in a eulogy to a fallen soldier in 1956: 
“Let us not be deterred from seeing the loathing that is inflaming and filling the lives of the hundreds of thousands of Arabs who live around us. 
Let us not avert our eyes lest our arms weaken….This is the fate of our generation, this is our life choice, to be prepared and armed, strong and determined, lest the sword be stricken from our fist and our lives cut down….We are a generation of settlers, and, without the steel helmet and the cannon’s fire, we will not be able to plant a tree and build a home.” 
Yet the same Dayan, who in 1970 said that “the only peace negotiations are those where we settle the land and we build, and we settle, and from time to time we go to war,” was forced by cruel reality to admit that the best security to which Israel can aspire is that based on peace with its neighbors. 
Eventually, he became the architect of a historic peace with Egypt. 
His book Are We Truly Condemned to Live by the Sword to Eternity? marked the transformation of the soldier into a statesman. 
If Netanyahu is ever to lead a historic reconciliation with the Palestinian people, he should start by endorsing a courageous, almost post-Zionist insight reflected in Dayan’s 1956 eulogy. 
Fully aware of the bitter legacy of Palestinian disinheritance following the 1948 war, Dayan refused to blame the murderers. 
On the contrary, he understood their “burning hatred.” 
Unfortunately, Israel today has a prime minister with the mentality of a platoon commander who nonetheless likes to cast himself as a latter day Churchill fighting the forces of evil bent on destroying the Third Jewish Temple. 
Of course, a great leader must always have a sense of history. 
But, as the French philosopher Paul Valéry put it, history, “the science of things which are not repeated,” is also “the most dangerous product which the chemistry of the intellect has ever evolved,” especially when manipulated by politicians. 
Menachem Begin, a hawkish predecessor of Netanyahu as prime minister, once had the insolence to say to the great historian Yaakov Talmon that, “when it comes to the twentieth century, I am more an expert than you are.” 
Talmon responded with “The Fatherland is Imperiled,” a pivotal article whose conclusions are as relevant today as they were in 1981. 
Not until occupation ends, Israel lives within internationally recognized borders, and the Palestinians recover their dignity as a nation will the Jewish state’s existence be finally secured. 

Netanyahu’s Choice 
Ramallah – As the summit between US President Barack Obama and Israeli Prime Minister Benjamin Netanyahu approaches, most of the discussion has focused on whether or not the newly elected Israeli leader will finally say that he backs a two-state solution. 
This is the wrong approach. 
Israelis should not determine the status of the Palestinian entity, nor should Palestinians have a say in what Israelis call their own state. 
The only question that Obama should ask Netanyahu is, When will Israel quit the occupied Palestinian territories? 
Attempts at obfuscation – whether by talking about an “economic peace,” or insisting that Arabs recognize the Jewishness of the state of Israel – should not be allowed to derail the goal of ending the inadmissible occupation. 
During Obama’s first meeting with a Middle East leader, a simple and courageous Arab plan was outlined. 
Empowered by Arab leaders, Jordan’s King Abdullah II officially presented the peace plan devised by the Arab League and the Organization of Islamic States. 
Despite the Israeli wars on Lebanon and Gaza, Arabs offered normal relations with Israel once it quits the lands that it occupied in 1967. 
The plan also calls for a “fair” and “agreed upon” resolution of the Palestinian refugee problem. 
The fact that Israelis and Palestinians need to agree on a solution of the refugee issue neutralizes unwarranted Israeli fears about the demographic threat posed by the Palestinians’ right of return. 
Last summer, when he was shown a poster with 57 flags representing the Arab and Islamic countries that will normalize relations with Israel, then candidate Obama told Palestinian President Mahmoud Abbas that the Israelis would be “crazy” to reject that plan. 
Obama’s impressive signals since taking office – telephoning Arab leaders before European allies, appointing special envoy George Mitchell and speaking on Al-Arabiyeh for his first interview – reflect a different approach from the staid and unimaginative past. 
The US has repeatedly opposed the 1967 Israeli occupation of Palestinian territories and has called for its end. 
It has consistently voiced disapproval of settlement activities. 
Leaders of both major US parties have articulated a policy that calls for a viable, contiguous Palestinian state on the lands occupied in 1967. 
The US has also opposed Israel’s unilateral annexation of East Jerusalem, and – along with every country on the planet – refused to recognize the application of Israeli law to residents of East Jerusalem. 
Yet Israel's actions on the ground have gone counter to American and international positions. 
The newly established Israeli government refuses even to pay lip service to the internationally accepted requirements for peace. 
On the other hand, the freely elected Palestinian leadership faces international boycott until it accepts a solution that the Netanyahu government rejects. 
Among the international community's demands of Israel has been a total freeze on all settlement activity, including expansion and natural growth. 
Freezing settlement will certainly be a central focus of the robust diplomacy of Mitchell and his team. 
Mitchell, who was deeply involved in crafting the settlements language of the Mitchell Report of 2001, understands the capacity of the settlements to destroy the prospect for a two-state solution. 
Jerusalem is another on-the-ground issue that will be a litmus test for the Obama administration. 
Demolition of Palestinian houses and Israeli provocations in East Jerusalem highlight the need to confront this issue without delay. 
The focus of Pope Benedict XVI’s visit to the Middle East was Jerusalem’s importance to Christians, Muslims, and Jews, so that attempts to Judaize the Holy City must stop immediately. 
A third imperative for Palestinians is to reunite the Gaza Strip and the West Bank. 
Irrespective of the outcome of the internal Palestinian dialogue taking place in Cairo, there is a need to reconnect Palestinians. 
There is no excuse why Palestinians living in either remaining sliver of Mandatory Palestine should be barred from traveling to the other part of the occupied Palestinian territories. 
Israeli officials’ claims that barring the movement of people and goods is required for security reasons do not withstand scrutiny. 
Under the leadership of US General Keith Dayton (Mitchell’s security deputy), the most vigorous security checks can be made to allow such travel. 
With renewed peace talks, results must be stressed over endless process. 
The last failed promise by President George W. Bush came at Annapolis in late 2007, when he vowed that an independent, viable, and contiguous Palestinian state would be created before the end of his term. 
More than four decades after United Nations Security Council resolution 242, occupying land by force, illegal construction of exclusive Jewish settlements, and restrictions on movement continue unabated. 
Time is no longer on the side of those who favor two states. 
The Obama administration must seize the initiative and insist that Netanyahu unequivocally support Israeli withdrawal from the Occupied Territories – the sine qua non for a two-state solution. 
Otherwise, tension looms in the Israeli-American relationship, and calls for one state with equal rights for all will begin to drown out older ideological visions, as settlement activity forecloses the prospect of two states. 

Netanyahu the Palestinian 
PHILADELPHIA – In January, Israeli voters will go to the polls for an election that promises to hand Prime Minister Binyamin Netanyahu a renewed mandate. 
Few prospects are more loathsome to the Israeli left, US President Barack Obama’s administration, most European leaders, or many American Jews. 
But no one regards the prospect of another Netanyahu government with more anguish than the Palestinians. 
In the Arab-Israeli conflict’s long, tortured history, they have reviled no Israeli prime minister – with the possible exception of Ariel Sharon – more than Netanyahu. 
The reason is simple: he is one of them. 
Literally, of course, he is not. 
But, unlike previous Israeli prime ministers (again, with the possible exception of Sharon), Netanyahu has emulated the Palestinian political strategy of sumud, or steadfastness. 
The philosophy of sumud is rooted in Palestinians’ implacable belief in the righteousness of their cause and the justness of their methods. 
It operates both passively and actively in Palestinian culture, demanding stubbornness and tolerating ruthlessness, violence, and duplicity. 
At sumud’s core lies the unswerving, blinkered view that Israel is illegitimate and its duration limited. 
As a result, Palestinian leaders have for decades mobilized their society to outlast Israel. 
Indoctrination begins at a young age through family, education, and media, and later encourages more aggressive resistance, including terrorism. 
In other words, Palestinians are playing a long game. 
But plans for a functioning Palestinian state that do not depend on foreign aid have been conspicuously absent, save for the recent efforts of Palestinian Authority Prime Minister Salam Fayyad. 
Netanyahu’s version of sumud is evident in his policies and rhetoric, which focus on Israel’s legitimacy, necessity, and permanence. Indeed, his speeches frequently offer lessons in Jewish history, while casting the “Holy Land” as both a Jewish right and an Israeli national symbol. 
Addressing the United Nations in September, Netanyahu highlighted his core message for all, especially Israelis: “Three thousand years ago, King David reigned over the Jewish state in our eternal capital, Jerusalem. 
I say that to all those who proclaim that the Jewish state has no roots in our region, and that it will soon disappear.” 
Such rhetoric compliments a long-term strategy of strengthening Israeli control over core areas, especially Jerusalem and its suburbs. 
Indeed, while settlement-building in the West Bank has slackened, it continues. 
Moreover, aggressive counter-terrorism activities and the separation barrier have decisively reduced cross-border attacks, containing mounting pressure in Palestine as the conflict remains on the back burner. 
And Netanyahu continues to oversee economic expansion and improved foreign relations, despite hostile rhetoric from Europe and elsewhere. 
The Palestinians seem to recognize Netanyahu’s variety of sumud for what it is. 
His steadfastness – and declining international interest in their struggle, as the world’s focus shifts to the Arab Spring’s Islamist winter – stymies any advance toward an agreement. 
The US is, perhaps, equally frustrated. 
Israeli prime ministers are supposed to come in two varieties: heavily accented Eastern European men and grizzled military officers who talk a good game before acquiescing to the latest American or international demands for concessions, talks, and aid. 
While previous prime ministers like Menachem Begin and Yitzhak Shamir were not averse to lecturing, they lacked strategic cunning. 
Netanyahu’s unwillingness to compromise disconcerts, confuses, and often enrages Americans. 
His relentless disquisitions on Israel’s strategic environment, security requirements, red lines, and Jewish history are offset only by conciliatory talk about reopening negotiations, which are immediately reject by the Palestinians, who, like him, fear showing weakness. 
Furthermore, Netanyahu’s unsentimental assessment of the Middle East does not line up with that of the Obama administration – in thrall to its collapsing romance with moderate Islamists – and its devoted supporters among Jewish Americans. 
These groups do not understand Netanyahu, who proclaims Jewish rights, defends his country’s interests, and hints at conciliation but gives up little – much like a traditional Arab leader. 
Despite considerable Israeli disgust with Netanyahu’s party, allies, and policies, no credible rival exists. 
Israelis grudgingly accept that the country and its geopolitical situation are relatively stable, especially in view of its immediate neighborhood – a burning Syria, a smoldering Egypt, and a volatile Lebanon. 
Moreover, those variables that could upend Netanyahu’s re-election – the situation in Gaza and Lebanon, for example, or deteriorating conditions in Sinai and Jordan, any of which could drag Israel into unwanted military operations – now appear unlikely to influence the outcome. 
As a result, Netanyahu’s position is strong. 
The Palestinians initiated a zero-sum game that has given him the upper hand. 
By using the Palestinians’ own strategy, he has cornered them. 
After all, genuine peace efforts by the Palestinians – based on a two-state solution with no “right of return” for post-1948 refugees – would enrage Hamas and revive factional violence, adding another self-defeat to an already long list. 
With such help from the Palestinians – for example, Hamas bitterly castigated Palestinian President Mahmoud Abbas recently after he inadvertently implied giving up the right of return – Netanyahu may well rule Israel and Palestine for the foreseeable future. 

Netanyahu’s Useless Demand 
HAIFA – Ever since the Six Day War of June 1967, a small number of Israelis, not all on the left, supported the idea of two states as a solution to the Israeli-Palestinian conflict. 
Most of their compatriots rejected it, as did the Palestinians. 
Israelis justified their stance with this question: Just when did the Palestinians become a nation deserving of statehood? 
The Palestinians were asking in return: Why should the Jews, a religious community dispersed around the world, have their own state? 
A lot of water had to pass under the bridge before the idea of a two-state solution, whether as a moral or a practical matter, began to filter into the Israeli and Palestinian political and ideological environments. 
People gradually became accustomed to the expression “Palestinian state,” and those who embraced it received support and gained prestige on the international scene. 
After the Labor leaders Shimon Peres, Yitzhak Rabin, and Ehud Barak embraced the two-state concept, there came the first tentative movements in that direction from Likud members: Tzipi Livni, Ehud Olmert, and Ariel Sharon. 
Now, from the very bastion of the right, came Benjamin Netanyahu. 
We can congratulate ourselves: better late than never! 
We are all aware that the road toward the realization of this dream is full of obstacles and difficulties, both on the Israeli and the Palestinian side. 
I believe that some of the preconditions posed by the Israeli prime minister in his recent, widely reported speech are fully justified. 
Others, however, are useless and only complicate further an already complex and problematic situation. 
Netanyahu’s demand that the future Palestinian state be demilitarized is just, reasonable, and necessary. 
One look at a map is enough to understand this. 
Even Egypt, a great and sovereign nation, accepted demilitarization of Sinai as a part of its peace process with Israel. 
Indeed, demilitarization of Sinai is one of the fundamental elements of the stability of Egypt’s peace with Israel. 
Other great and independent countries, such as Japan, Germany, and Austria, have been subjected for decades to limitations on their acquisition of certain weapons and military equipment. 
Similarly, the refusal of Palestinian refugees’ claim to a right of return to Israel proper is understandable, logical, and just. 
What sense would it make to bring back millions of Palestinians into a state whose character and symbols are foreign to them – a state where the majority belongs to another ethnic group? 
Are they to go back to homes and farms that no longer exist? 
These refugees could much more properly establish themselves in the new state of Palestine, their mother country, among their compatriots, under a Palestinian flag and Palestinian authority, merely 30 kilometers from the homes and farms that they abandoned, or from which they were expelled, more than 60 years ago. 
But the other condition demanded by Netanyahu, that the Palestinians recognize the right of the Jewish people to their own state, or the existence of the Jewish nation, is completely arbitrary. 
In my opinion, it is superfluous to ask the Palestinians to recognize the nationhood of a people with thousands of years of history and a state that maintains diplomatic relations with 150 countries around the world. 
A demand of this kind was not made of Egypt or Jordan when Israel signed peace agreements with those countries, and it constitutes an entirely useless obstacle on the road to peace with the Palestinians. 
It will be more than sufficient to ask the Palestinians to recognize the legitimacy of the state of Israel, a state whose territorial boundaries and political identity are known to all. 
On our part, we also will be recognizing not so much the Palestinian people, which one day may merge with the people of Jordan, as an independent and sovereign Palestinian state within the 1967 borders. 
Framing the issue in this way makes sense for two reasons. 
First, the question of Jewish nationality is, in fact, very complicated, even for Jews themselves, as many consider themselves Jewish only in a religious sense. 
Second, the Palestinians’ refusal to recognize Israel as a Jewish state is motivated by, among other things, the presence of a Palestinian minority in Israel. 
But relations between Israel’s Jewish majority and Arab minority is an internal, delicate question in which it is not wise to involve Palestinians outside of Israel. 
For more than 60 years, the two groups have managed to live together in an acceptable manner, confronting with relative dignity the inferno of terrorism and the occupation of the West Bank and Gaza strip. 
With the advent of peace, we all hope that this bond will become consolidated around a common Israeli citizenship. 
There will be enough problems in negotiating the creation of a Palestinian state, so we should avoid adding other, gratuitous obstacles. 
Let’s focus on resolving the most important of the problems – demilitarization, settlements, borders, and refugees – and allow the reality of peace to leave behind, or postpone until the distant future, the solution of problems that are essentially historical and theological. 

Networked Leaders 
CAMBRIDGE – In an environment of mobile phones, computers, and Web sites such as MySpace, Facebook, and LinkedIn, it is commonplace to say that we live in a networked world. 
But different networks provide new forms of power, and require different styles of leadership. 
Barack Obama understands this; indeed, it helped to secure his victory. 
While Obama was hardly the first American politician to use the Internet, he was the most effective in using new technology to raise money from small donors, energize and coordinate volunteers, and convey his messages directly to voters. 
Now he is faced with the question of how to use networks to govern. 
Networks come in many shapes and sizes. 
Some create strong ties, while others produce weak ties. 
Think of the difference between friendships and acquaintances. 
Valuable information is more likely to be shared by friends than among acquaintances. 
But weak ties extend further and provide more novel, innovative, and non-redundant information. 
Networks based on strong ties produce the power of loyalty, but may become cliques that re-circulate conventional wisdom. 
They may succumb to “group think.” 
That is why the diversity in Obama’s cabinet choices is important. 
He has been compared to Abraham Lincoln in his willingness to include rivals as well as friends on his team. 
Weak ties, such as one finds on the Internet, are more effective than strong ties for providing the necessary information to link diverse groups together in a cooperative manner. 
In other words, weak networks are part of the glue that holds diverse societies together. 
They are also�the basis of democratic leadership. 
The greatest democratic politicians have a large capacity for shallow friendships. 
As leaders increasingly need to understand the relationship of networks to power, they will have to adapt strategies and create teams that benefit from both strong and weak ties. 
Information creates power, and more people have more information today than at any time in human history. 
Technology “democratizes” social and political processes and, for better and worse, institutions play less of a mediating role. 
In fact, the basic concept that is sometimes called “Web 2.0” rests on the idea of user-based content bubbling up from below rather than descending from the top of a traditional information hierarchy. 
Institutions like Wikipedia and Linux are examples of social production that involve very different roles for leaders than do their traditional counterparts, Encyclopedia Britannica and Microsoft. 
Now governments are experimenting with similar means to create and distribute information, but they still have a long way to go. 
Governments have traditionally been very hierarchical, but the information revolution is affecting the structure of organizations. 
Hierarchies are becoming flatter and embedded in fluid networks of contacts. 
White-collar knowledge workers respond to different incentives and political appeals than do blue-collar industrial workers. 
Polls show that people today are less deferential to authority in organizations and politics. 
In business, too, networks are becoming more important. 
In some cases, one can orchestrate a complex network simply with carefully specified contracts. 
But the friction of normal life usually creates ambiguities that cannot be fully met in advance. 
In describing the success of the Toyota and Linux networks, the Boston Consulting Group concludes that the hard power of monetary carrots and accountability sticks motivates people to perform narrow, specified tasks, but that the soft power of admiration and applause are far more effective stimulants of extraordinary behavior. 
Traditional business leadership styles have become less effective. 
According to Sam Palmisano, the CEO of IBM, hierarchical, command-and-control approaches simply do not work anymore. 
They impede information flows inside companies, hampering the fluid and collaborative nature of work today. 
A study of a major “bricks and clicks” company (one that combines offline and online operations) found that distributed leadership was essential. 
In the Internet environment, the traditional view of a leader being decisively in control is difficult to reconcile with reality. 
Instead, effective leadership depends on the use of multiple leaders for capable decision-making. 
Harvard Business School professor John Quelch writes that “business success increasingly depends on the subtleties of soft power.” 
Former President George W. Bush called himself “the decider,” but leadership today is more collaborative and integrative than that implies. 
One management expert summarizes recent studies as describing an increase in the use of more participative processes. In other words, the Internet age requires new styles of leadership in which attractive soft power must supplement the traditional hard power of command. 
In a networked world, leadership is more like being in the middle of the circle and attracting others than being “king of the mountain” and issuing orders to subordinates down below. 
Barack Obama understands this networked dimension of leadership and the importance of the soft power of attraction. 
Not only did he successfully use networks in his campaign; he has continued to use the Internet to reach out to citizens. 
He has supplemented his major television and radio speeches with Internet-based video clips on YouTube, and his political style has been marked by reaching out in a bipartisan fashion to broad circles of political leaders. 
While it is still too early in his presidency to judge the outcome, it is clear that he is attempting to change processes and adapt leadership to a more networked world. 

Fighting Cybercrime with Neuro-Diversity 
LONDON – Cybersecurity is one of the defining challenges of the digital age. 
Everyone, from households to businesses to governments, has a stake in protecting our era’s most valuable commodity: data. 
The question is how that can be achieved. 
The scale of the challenge should not be underestimated. 
With attackers becoming increasingly nimble and innovative, armed with an increasingly diverse array of weapons, cyber-attacks are happening at a faster pace and with greater sophistication than ever before. 
The security team of my company, BT, a network operator and Internet service provider, detects 100,000 malware samples every day – that’s more than one per second. 
Creative thinking among cyber attackers demands creative thinking among those of us fending them off. 
Here, the first step is ensuring that there are enough talented and trained individuals engaged in the fight. 
After all, according to a recent survey by the International Data Corporation, 97% of organizations have concerns about their security skills. 
By 2022, another study estimates, there will be 1.8 million vacant cybersecurity jobs. 
Amid this critical shortage of security specialists, it is imperative that we develop new approaches to attracting, educating, and retaining talented individuals, in order to create a deep pool of highly skilled cyber experts prepared to beat cybercriminals at their own game. 
The key to success is diversity of talents and perspectives. 
This includes neurological diversity, such as that represented by those with autism, Asperger syndrome, and attention-deficit disorder. 
People with Asperger syndrome or autism, for example, tend to think more literally and systematically, making them particularly adept at mathematics and pattern recognition – critical skills for cybersecurity. 
The problem is that neurologically exceptional people tend to be disadvantaged by the traditional interview process, which relies heavily on good verbal communication skills. 
As a result, such people often struggle to find employment, and even when they do find a job, their work environment may not be able to support them adequately. 
The United Kingdom’s National Autistic Society reports that just 16% of autistic adults in Britain have full-time paid employment, and only 32% have any kind of paid work, compared to 47% for disabled people and 80% for non-disabled people. 
This highlights the scale of the challenge faced by such candidates, as well as the vast untapped resource that they represent. 
Recognizing the potential of neurological diversity to contribute to strengthening cybersecurity, we at BT have reframed how we interact with candidates during interviews. 
We encourage them to talk about their interests, rather than expecting them simply to answer typical questions about their employment goals or to list their strengths and weaknesses. 
This approach has already been applied with great success by the likes of Microsoft, Amazon, and SAP in the areas of coding and software development, and by the UK’s GCHQ intelligence and security organization, one of the country’s biggest employers of autistic people. 
Of course, an updated approach to interviewing candidates will not work for everyone. 
But it is a start. 
More broadly, we must do more not just to expand the opportunities available to neurologically exceptional candidates, but also to ensure that these opportunities are well publicized. 
Delivering this change will require leadership by – and cooperation between – government and business. 
I am pleased to say that, on this front, BT is already taking a leading role, including by working with the British government on their Cyber Discovery program, a special initiative to attract schoolchildren into the cyber industry, and through our own apprenticeship programs. 
In the digital age, neuro-diversity should be viewed as a competitive advantage, not a hindrance. 
We now have a chance to invest in talented people who are often left behind when it comes to work, benefiting them, business, and society as a whole. 
By recognizing and developing the skills of this widely overlooked talent pool, we can address a critical skills shortage in our economies and enhance our ability to fight cybercrime. 
Such opportunities are not to be missed. 

New Alliances for a New Century 
In 1970, I traveled to Egypt as part of a delegation representing the United States at the funeral of President Gamal Abdel Nasser. 
Back then, Egypt was closely aligned with the Soviet Union. 
When we arrived in Cairo, it seemed that everywhere one looked there was evidence of the Soviet presence – Soviet tanks, missiles, and troops. 
During the visit, we were scheduled to meet with Anwar Sadat. 
No one in our delegation was sure what to expect, given the uneasy relations between our two countries at the time. 
To our surprise, Sadat told us that he, in fact, had respect for the US. 
The reason? 
As a young military officer, he had visited our country and had had an excellent experience. 
And, indeed, within two years of taking power, Sadat expelled the Soviets from Egypt and began to build a friendship with the US that, despite challenges and periodic differences, has proven important and valuable ever since. 
I mention the importance of these military-to-military relationships because the US in this new century is undergoing a significant transformation of its military arrangements and partnerships around the globe – necessary adjustments based on the new realities, and new threats, that have emerged since the end of the Cold War. 
It is important to note that since 2001, the US has probably done more things, with more nations, in more constructive ways, and in more parts of the world, than at any other time in its history. 
In the wake of the September 11, 2001, terrorist attacks, President George W. Bush helped fashion and lead the largest coalition in history – 80-plus nations – to fight the global war on terror. 
Furthermore, roughly 60 nations are currently cooperating in the Proliferation Security Initiative to prevent dangerous weapons and materials from being transported to terrorists or outlaw regimes. 
There has been a rethinking of the structure and role of our traditional military alliances, including the North Atlantic Treaty Organization, which is setting up a new NATO Response Force and has moved outside Europe for the first time with the International Security Assistance Force in Afghanistan. 
The focus of attention today is on Iraq and Afghanistan. 
But in future decades, priorities will change. 
And much of what we may be called on to do in the future will likely be determined by choices made by others. 
Consider Russia, a nation with vast natural resources, an educated population, and a rich heritage of scientific and cultural achievements. 
Like Americans and others around the world, they are threatened by violent extremism. 
Russia is a partner with the US on some security issues, and our overall relationship is the best it has been in decades. 
But in other ways Russia has been unhelpful – using energy resources as a political weapon, for example, and in their resistance to positive political changes in neighboring countries. 
The same holds true for China. 
The Chinese people are educated and talented, and their country has great potential, with high economic growth rates and an industrious work force. 
Nonetheless, some aspects of Chinese behavior remain unsettling and complicate our relationship. 
Last year, a US Department of Defense report noted that China’s defense expenditures appear to be much higher than acknowledged by the Chinese government. 
Coupled with a notable lack of transparency, this understandably concerns China’s neighbors. 
In addition to the choices that these and other countries make, America’s own choices will be an important factor determining what kind of future it faces. 
From time to time, US public sentiment has opposed playing an active role in the world and fulfilling our commitments to allies – and, indeed, to the cause of freedom. 
In the early 1970’s, as US ambassador to NATO, I remember having to fly back from Europe to testify against legislation in our Congress that would have pulled US troops out of Western Europe and NATO, just as the Soviet Union was in the midst of a huge military buildup. 
Today, nations that were members of the Soviet Union’s Warsaw Pact, as well as some of the former Soviet Republics – countries that we used to call “captive nations” – are valued members of NATO and represent some of our most stalwart allies in the War on Terror. 
This did not happen by accident or by chance. 
Looking forward, I am convinced that if we have the wisdom, courage, and strength to adjust long-standing strategic arrangements, embrace new partners, and, above all, persevere in the face of adversity and difficulty, we will see a similar victory in this “long war” against violence extremism and the other threats that may emerge in an uncertain new century. 

New and True Europeans 
The fiasco of the European Union’s summit in Brussels has brought into sharp relief differences in attitudes between most new member countries from East Central Europe and the “old” members. 
Perhaps surprisingly for many, such differences were not played out according to the expected script, in which the new members would be ruthlessly pragmatic, and demanding as much EU money as they could get, while most Western countries would in the end tone down their national egoism in favor of the decades-old ideals of European integration. 
In the end, it was the EU’s eastern flank—the supposedly money-hungry and immature democracies—that called most loudly for a compromise in the name of salvaging political integration, while most of the old European democracies ruthlessly fought for their own “national interests.” 
In view of some big countries’ intense national egoism, the failure to agree on the EU’s 2007-2013 budget could have ominous political consequences for Europe. 
Statements by new EU members’ leaders at the summit indicated that they were aware of such a possibility. 
They were worried about the EU’s future—certainly more so than their Western counterparts. 
Some warned that the rejection of the European Constitution in the French and the Dutch referendums, combined with the summit’s decision effectively to suspend the ratification process and its failure to agree on EU finances, could trigger a serious political crisis in the EU. 
This is why most new members were ultimately willing to support Luxembourg’s proposed compromise, under which the budget would be only 1.06% of the EU’s overall GDP and Great Britain’s annual rebate would be frozen at €4.6 billion. 
Indeed, just before the ultimate collapse of the talks, five new members, including the Czech Republic and Slovakia, agreed to an even more radical plan, under which the budget would be only 1% of the EU’s GDP. 
Cynics may argue that the new member countries could afford to make such concessions because they would end up with hefty EU subsidies anyway. 
The net contributors to the EU budget were the ones who stood to lose the most. 
Viewed in strictly economic terms, it is not surprising that Great Britain would not give up its rebate, while France would reject attempts to cut farm subsidies. 
But what is surprising is that it was the old, experienced European democracies that so blithely ignored the political dangers stemming from the potential revival of intense nationalism on the European continent, while it was the new, inexperienced democracies from Europe’s east that called for caution. 
Perhaps this was because the eastern countries’ attitudes are more driven by recent historical memories and experiences. 
In a mere 15 years, all of these countries have endured economic and political changes unprecedented in their scope and speed in the history of Europe. 
For most of these countries, EU membership was not merely a ticket to economic prosperity, paid for by rich EU old-timers. 
On the contrary, they knew that they would have to do most of the work themselves—albeit under EU guidance and with the help of EU know-how. 
Perhaps this is one reason why many in East Central Europe believe that EU funds, while helpful, are less important than being part of a united Europe, with the expanded opportunities that its common rules imply. 
Moreover, the EU offers the small countries sandwiched between Germany and Russia a degree of political stability and security that they never had in modern history. 
The rest they can manage on their own. 
In contrast, West European states do no longer seem so concerned with the political dimension of European integration. 
They take it for granted and are more concerned with their domestic constituencies. 
Perhaps understandably, most citizens of West European states—accustomed to the political stability and economic prosperity of the last several decades—do not want to give up the benefits that the European integration process has brought to them. 
The French, for example, do not want to lose farm subsidies, just as they are not eager to give more money to the new members, whose reformed economies are taking away French jobs. 
British leeriness about giving up the EU rebate in the face of what is perceived as French egoism is equally understandable—despite the fact that this stance harms the enlargement process, which Great Britain otherwise supports. 
Even so, East Central Europeans, who are still recovering from the terrible political calamities caused by Europe’s historical demons, find the intensity of their Western counterparts’ national egoism a bit frightening. 
Europe’s history is full of catastrophes that were produced by the shortsightedness of national political elites. 
How many times have European leaders thought they had things under control, only to unleash the demons again? 
This is not to suggest, of course, that just because the EU cannot agree on a budget or a constitution Europe is approaching yet another historical calamity. 
But caution is in order, and the political elites of big national states, in particular, should ponder whether they are not overplaying their hands once again. 
Although the collapse of the common currency area owing to political squabbles seems unlikely at this point, it cannot be ruled out entirely. 
Obviously, we also cannot completely rule out the possibility of a subsequent weakening or disintegration of Europe’s common political structures. 
For the small, economically still-fragile states of East Central Europe, a Europe of national states, once again fighting ruthlessly for their own interests, is a nightmare. 
But it should be a nightmare scenario for all European states. 
Perhaps those in the West should listen more to their new partners. 
By agreeing to significant compromises, the leaders of some new member states were, among other things, trying to show that rekindling strong national egoism in Europe is a dangerous, if not uncontrollable, game. 

The New Anti-Semitism 
NEW YORK – Those who have been telling us that Islam, not just revolutionary Islamism, is a lethal threat to Western civilization should now feel satisfied: the President of the United States, and his main advisers, agree with them. 
In the tweeted words of Donald Trump’s National Security Adviser, General Mike Flynn: “Fear of Muslims is rational.” 
Stephen Bannon, the former executive chairman of the alt-right Breitbart News who is Trump’s chief political strategist and a member of the National Security Council, has stated that the “Judeo-Christian” West is engaged in a global war with Islam. 
Trump has promised to put “America first,” borrowing the slogan of American isolationists in the 1930s, whose most famous spokesman, the aviator Charles Lindbergh, was a notorious anti-Semite who blamed Jews and liberals for pulling the US into a war with Hitler, a man whom he admired. 
Lindbergh believed that, “We can have peace and security only so long…as we guard ourselves against attack by foreign armies and dilution by foreign races.” 
So “America first” has racism in its DNA. 
Are the views concerning Islam that are now entrenched in the White House in any way similar to the anti-Semitism of the 1930s? 
Have Bannon, Flynn, and Trump simply updated old prejudices, and replaced one set of Semites with another? 
Perhaps they were not even replaced. 
Trump’s failure to mention Jews or anti-Semitism in his statement on Holocaust Remembrance Day seemed distinctly odd. 
And his campaign’s warning against prominent Jews, such as George Soros, who were claimed to be part of a global conspiracy to undermine America, did not go unnoticed. 
Still, there are some obvious differences between the 1930s and our time. 
There was no revolutionary movement among Jews then, committing atrocities in the name of their faith. 
Nor were there any states with Jewish majorities that were hostile to the West. 
But the similarities between anti-Semitism then and now are glaring. 
One chilling give-away is the use of biological language in the perception of the enemy. 
Hitler spoke of Jews as a toxic “racial germ.” 
The title of one widely distributed Nazi pamphlet was “The Jew as World Parasite.” 
Frank Gaffney, an influential figure in Trump’s ethnic nationalist circles, spoke of Muslims as “termites,” who “hollow out the structure of the civil society and other institutions.” 
Once human beings are categorized as parasites, germs, or noxious termites, the conclusion that they must be destroyed to defend social health is not far off. 
There may be another difference, however, between the persecution of Jews and contemporary hostility to Muslims. 
Prewar anti-Semitism was directed not just at religious Jews, but also – and perhaps especially – at assimilated Jews, who were no longer easy to identify in any way as distinct. 
Prejudice against Muslims would appear to be less racial, and more cultural and religious. 
But even this difference might be more apparent than real. 
Nineteenth- and twentieth- century anti-Semites assumed that a Jew was always a Jew, no matter what he or she professed to believe. Jews would always be loyal to their own kind. 
Judaism was seen not as a spiritual faith, but as a political culture, which was by definition incompatible with Western civilization and its institutions. 
This culture was in the blood of the Jews. To defend it, Jews would always lie to Gentiles. 
These views long preceded the Nazis. 
In fact, they were the reasons why the learned authors of independent Norway’s first constitution, drafted in 1814, prohibited Jews from becoming citizens. 
The case for exclusion was based on a defense of Enlightenment principles: Jewish culture and beliefs would inevitably undermine Norway’s liberal democracy. 
Today’s enemies of Islam often use precisely this argument: Muslims lie to infidels. 
Their religion is not spiritual, but political. 
They might look moderate, but that is a lie. 
What we must fear, in Gaffney’s words, is “this stealthy, subversive kind of jihad.” 
But even if the underlying fears and prejudices about Muslim and Jewish conspiracies are similar, the consequences are likely to be quite different. 
Jews, alleged by the Nazis to pose an existential threat to Germany, could be persecuted – and later murdered en masse – with total impunity. 
Apart from a few small desperate rebellions, there was no way for Jews to resist Nazi power. 
The brutal violence of revolutionary Islamism, on the other hand, cannot be dismissed. 
Acts of Islamist terror in Western countries can be prevented only through good intelligence and police work, particularly in Muslim communities. 
But if all Muslims are antagonized and humiliated, terrorism will become a great deal worse. 
And what a “global war on Islam” will do to the highly combustible politics in the Middle East and Africa can easily be guessed. 
In that case, the “clash of civilizations” that exists in the minds of Islamist terrorists, as well as some of their most ardent enemies, would no longer be a fantasy; it could actually come to pass. 
Whether Trump’s crusaders are lighting fires without quite knowing what they are doing, or whether they might actually wish for a conflagration, is not yet clear. 
Crass ignorance cannot be underestimated in these circles. 
But it is perhaps not too cynical to imagine that Trump’s ideologues do wish to see blood. 
Islamist violence will be met by emergency laws, state-sanctioned torture, and limits on civil rights – in a word, authoritarianism. 
This might be what Trump wants. 
But it certainly is not the outcome that most Americans, including some of those who voted for him, would wish for. 

Getting Anxiety Right 
NEW YORK – When researchers want to evaluate the efficacy of new anxiety treatments, the traditional approach is to study how rats or mice behave in uncomfortable or stressful situations. 
Rodents shun brightly lit, open spaces, where, in the wild, they would become easy prey. 
So their natural tendency in a test apparatus is to find areas that are poorly illuminated or close to walls. 
The longer a medicated animal spends in areas in which it is unprotected, the more effective the drug is judged to be in treating anxiety. 
But the drugs that have resulted from this approach are not actually very good at making people feel less anxious. 
Neither patients nor their therapists consider the available options – including benzodiazepines like Valium and selective serotonin reuptake inhibitors like Prozac or Zoloft – as adequate treatments for anxiety. 
After decades of research, some of the big pharmaceutical companies are raising the white flag and cutting back on efforts to develop new anti-anxiety drugs. 
But we cannot afford to give up on treatment for the so-called anxiety disorders, which encompass problems related to both fear and anxiety. 
Feelings of fear occur when a possible source of harm is nearby or likely to present itself, while feelings of anxiety usually involve the possibility of harm in the future. 
Worldwide, the lifetime prevalence of anxiety disorders is about 15%, and the cost to society is enormous. 
In the late 1990s, it was estimated that the economic burden of anxiety totaled more than $40 billion. 
The total cost is most likely significantly higher, because many anxiety disorders are never diagnosed. 
Counter-intuitively, the reason that the most frequently prescribed anxiety medications don’t address the underlying problem is that they are working exactly as they should – according to the criteria used to design them. 
Most treatments based on studies using mice or rats do make anxiety disorders easier to live with. 
What they fail to do is actually make people less fearful or anxious. 
The reason for this is simple. 
The brain systems that control behavioral responses in threatening situations are similar in rodents and humans, and involve older areas deep in the brain that work nonconsciously (for example, the amygdala). 
On the other hand, the systems that produce conscious experiences, including feelings of fear and anxiety, involve evolutionarily new regions of the neocortex that are especially well developed in the human brain and poorly developed in rodents. 
Conscious feelings are also dependent on our unique linguistic capacities – our ability to conceptualize and name our inner experiences. 
It is telling that the English language has more than three dozen words for gradations of fear and anxiety: worry, concern, apprehension, unease, disquietude, inquietude, angst, misgiving, nervousness, tension, and so forth. 
Consequently, though animal studies are useful in predicting how a drug will affect nonconsciously controlled symptoms triggered by threatening stimuli, they are less effective when it comes to conscious feelings of fear or anxiety. 
The drugs we have can help patients who, in order to avoid situations that inspire fear or anxiety, such as crowded subways or being judged by their peers or superiors, have stopped going to work. 
Just as medicated rats are less behaviorally inhibited (more able to tolerate bright, open spaces), medicated anxiety sufferers are more likely to be able to return to their jobs. 
But, because the treatments do not directly address conscious brain processes, the anxiety itself does not always go away. 
If treatments are to become more effective, our approaches will need to become more nuanced. 
We will need to treat the systems that operate nonconsciously differently from those that result in conscious experiences. 
This doesn’t necessarily mean better drugs. 
Nonconscious responses can also be treated with exposure therapy, in which repeated interaction with a threatening stimulus is orchestrated in order to dampen its psychological effects. 
Findings about how conscious and nonconscious brain systems work may enable us to make exposure therapy more effective. 
The basic idea is that the symptoms involving nonconscious processes should be targeted separately from those involving conscious processes. 
I suggest the following sequence. 
Start with nonconscious exposures (using subliminal stimulation to bypass conscious thoughts and feelings that can be aroused and interfere with the exposure process) to dampen the response of areas like the amygdala. 
Once the nonconscious systems are under control, use conscious exposures to treat conscious symptoms. 
Finally, employ more traditional psychotherapies: Verbal interactions with the therapist aimed at helping patients work on changing beliefs, reevaluate memories, encourage acceptance of one’s circumstances, acquire coping strategies, and so on. 
There is also a place for drugs in this approach, but not as a long-term solution. 
Rather, drugs can be used to make the exposure treatment more effective (the pharmaceutical d-cycloserine has shown some promise in this regard). 
The effectiveness of an approach that recognizes that different brain systems control different symptoms has yet to be properly evaluated, but research suggests that it should work. 
It would also be noninvasive and would require only a repurposing of frequently used procedures. 
Given the magnitude of the problem, a stone so easily reached should not be left unturned. 

Upgrading International Development Cooperation 
PARIS – These are hard times for international cooperation. 
With rising protectionism, burgeoning trade disputes, and a troubling lack of concern for shared interests like climate change, the world seems to be turning its back on multilateralism. 
And yet cooperation remains one of our best hopes for addressing humanity’s most complex development-related challenges. 
Just as the Marshall Plan rebuilt a war-ravaged Europe and the Millennium Development Goals lifted some 471 million people out of extreme poverty, the international development agenda can still deliver results thanks to the combined potential of the 2030 Agenda for Sustainable Development, the Addis Ababa Action Agenda, and the Paris climate agreement. 
But this agenda cannot continue using traditional thinking and tools to account for countries that are no longer defined as “developing” or “most in need” because they passed a certain threshold in terms of average per-capita income. 
This challenge is particularly acute in Latin America and the Caribbean, where many countries have achieved greater GDP per capita, but still face significant vulnerabilities and structural obstacles to long-term prosperity. 
How can the international community help countries like these convert income gains into sustainable development gains? 
How can these countries’ experiences and lessons learned be shared with countries in similar situations? 
The answer, we believe, is to adopt a new and better set of tools to assess challenges and implement solutions – an approach we call “development in transition.” 
Under this framework, four key areas call for immediate and sustained attention. 
First, stakeholders must change how they evaluate progress. 
Commonly used income-related gauges, like per capita GDP, are too narrow to capture the complexities of a country’s development status, and that is why new approaches and methodologies are needed. 
Measures of wellbeing and structural gaps, for example, paint a better picture of socioeconomic health, which must include the environment. 
Data on quality of life, sustainability, health care, education, and other metrics are better guides to development planning than income levels alone. 
Second, because there is no one-size-fits-all approach to human development, countries must develop strategies that are tailored to their needs. 
Moreover, effective development planning requires participatory processes that capture inputs from regional and local actors and are sensitive to the collective global good. 
The best plans combine national ambitions with recognition of local economic realities and include priorities and trade-offs that allow governments at all levels to be flexible with implementation. 
To maintain coherence and foster international cooperation, they must be anchored to the 2030 Agenda. 
Third, countries must solve the funding quandary that occurs as development progresses. 
When economies achieve higher income levels, they often must confront decreasing flows of official development assistance and other sources of capital. 
But, because many countries have relatively low tax-to-GDP ratios, mobilizing domestic resources for development spending can be difficult and may require international cooperation to design and implement fiscal reforms to maintain macroeconomic stability while improving socioeconomic health. 
Finally, the world needs new forms of cooperation. 
In many areas, regional and international governance systems have supplanted bilateralism. 
Countries should deepen existing partnerships and strive to create new ones. 
Options for enhanced engagement include South-South and triangular cooperation, knowledge sharing, technology transfers, and peer-to-peer policy dialogues. 
For the first time, the 2030 Agenda provides a universally accepted measurement set so all countries can communicate within the same parameters. 
In the spirit of reform, our organizations have joined forces to establish the Regional Facility for Development in Transition for Latin America and the Caribbean, an initiative designed to help the region’s countries meet their development goals as they move toward higher income levels. 
The facility, which was created to assist countries as they identify, design, and implement solutions in pursuit of the United Nations Sustainable Development Goals, may be an important step on the road to next year’s Second High-level United Nations Conference on South-South Cooperation (BAPA+40) in Buenos Aires. 
But to succeed in improving development outcomes, countries must be motivated by more than self-interest. 
As UN Secretary-General António Guterres noted in May, at the 37th Session of the UN Economic Commission for Latin America and the Caribbean, one of the best ways to do that is to redefine the parameters of development itself. 
We could not agree more. 
In an era when the benefits of multilateralism are being questioned precisely as we draw closer to the planet’s ecological limits, income inequality is growing, and innovation and technology are transforming how people learn and work, the world needs a more equitable and cooperative approach to globalization. 
And one of the best ways to deliver it is with a sustainable development model that leaves no one behind. 

How Data Can Save Children’s Lives 
SEATTLE – In an age in which data are more plentiful and accessible than ever before, we are accustomed to basing our decisions on as much evidence as we can gather. 
The more important the decision, the keener we are to ensure that our research is thorough and our information is accurate. 
And yet, when it comes to what is arguably one of the most important decisions we face today, we have very little data. 
As part of the Sustainable Development Goals, adopted by the United Nations last September, the international community has pledged to end preventable deaths of children under the age of five by 2030. 
And yet, in the regions with the highest mortality rates, we lack the most basic information about why children die. 
We know that infectious diseases cause the most deaths, but we do not know which ones. 
When it comes to deciding how best to allocate our resources, we are effectively flying blind. 
Since 1990, we have halved child mortality worldwide; but nearly six million children under the age of five still die from preventable causes. 
Four out of five child deaths occur in Sub-Saharan Africa or South Asia, regions where there are few doctors and even fewer pathologists. 
Standard medical investigations of the causes of death are rare. 
In many cases, there is no official death record at all. 
When the cause of death is investigated, it is almost exclusively through a “verbal autopsy.” 
Parents are asked, typically three months after their loss, about the circumstances surrounding their child’s death. 
But while they may be able to report that their baby suffered from rapid breathing or diarrhea, they have no way of identifying the cause of these symptoms. 
The problem is aggravated when it comes to the nearly 45% of deaths that occur during the first month of life. 
In these cases, the cause of death is often recorded simply as a “neonatal death,” a label that provides no hint as to what caused the illness. 
This information is useless and cannot help prevent other families from suffering the same tragedy. 
Experience from successful health campaigns, such as eradicating polio or controlling Ebola, shows that while early progress can be achieved relatively easily, lasting results require enormous efforts and very accurate surveillance data. 
It is to collect this crucial information that the Child Health and Mortality Prevention Surveillance – or CHAMPS – program has been launched. 
The CHAMPS program – a long-term initiative led by the Emory Global Health Institute, with partners including the International Association of National Public Health Institutes, US Centers for Disease Control and Prevention, and the Task Force for Global Health – eventually will involve some 20 sites in areas with the highest child mortality rates. 
This will allow us to record causes of death more accurately and track progress as vaccination campaigns and other measures are introduced. 
These sites will rely on a new technique that allows tiny samples of key organs, such as the liver or lungs, to be extracted with a needle, causing minimal damage to the body of a deceased child. 
The samples will then be sent for analysis to strengthened local labs and reference centers to provide a more accurate and complete picture of all causes of death. 
There are many possible interventions – such as providing folic acid to prevent birth defects, introducing new vaccines, or treating infections earlier – that we know could have an impact on child mortality. 
CHAMPS will provide the information needed to prioritize these measures. 
Furthermore, each site will help build the capacity of partner countries’ public health systems, providing valuable data and technical support that will have an impact far beyond helping to reduce child mortality. 
For example, the surveillance centers will generate the data needed to tackle infectious diseases, provide early warning of epidemics, and generally improve global health. 
The CHAMPS initiative is still in its early days. 
The sites – six of which are being funded by the Bill & Melinda Gates Foundation through an initial $73 million grant for the first three years – are just being established. 
More partners and more funding will be needed to expand the network and maintain it over the long term. 
And it will take time for the benefits to become clear. 
But early results are encouraging. 
Worries that parents would be reluctant to allow postmortem tests on their children have proved unfounded. 
On the contrary, our experience so far shows that parents are very interested in finding out what killed their children. 
At a well-established pilot site in Soweto, South Africa, both mothers and fathers are returning to learn the results of the testing – an unprecedented level of interest. 
I believe that CHAMPS’ work may have the greatest impact of anything in which I have been involved in my 20 years in public health. 
By accurately tracking the causes of child mortality, we can target treatments more precisely and usher in a new era – one in which preventable child deaths really will be a thing of the past. 

A New Beginning for Greece – and Europe 
KIEL – Greece is in urgent need of clear thinking. 
The only reason the country has not long since defaulted on its debts is that the European Central Bank continues to provide funds to the Greek central bank through its emergency liquidity assistance (ELA) scheme. 
The Greek central bank, in turn, lends money to the country’s commercial banks, which lend it to Greek citizens and foreign creditors. 
The problem is that both groups of borrowers have been transferring large sums of money to other countries. 
The result is that overdraft credits to the Greek central bank have grown by nearly €1 billion a day in recent months. 
If Greece defaults and leaves the eurozone, these overdrafts will not be repaid. 
ELA funding assumes that the Greek economy is temporarily illiquid, but not insolvent. 
This assumption is patently false. 
Despite all the pain Greece has suffered – a 30% drop in aggregate demand since the last cyclical peak and a rise in unemployment to more than 25% of the workforce – the Greek economy is still nowhere near competitive enough to repay its debts. 
Part of the reason is that corruption remains high and administrative capacity to levy taxes remains woefully limited. 
Meanwhile, low-income Greek households have borne the brunt of austerity. 
In short, the mess continues. 
But allowing Greece to default and still remain in the eurozone is not an option: it would signal that other eurozone countries could amass huge debts, funded by the ECB, without having any intention of repaying. 
Fiscal responsibility in the eurozone would be fatally undermined. 
Yet forcing a defaulting Greece out of the eurozone – against its will – is not an option, either: it would plunge the country into economic, social, and political instability, and there would doubtless be serious repercussions beyond the country’s borders. 
In my judgment, there are only two viable options left. 
The first – and more desirable – is for the ECB to assess realistically Greece’s lack of solvency and so stop providing ELA funds to its banking system. 
This would precipitate a payment crisis for Greece. 
But, recognizing the impending disaster, Greece would genuinely commit itself to the structural reforms that are in its own long-term interests: boosting the labor market’s flexibility, selling state-owned enterprises that most other European countries have already placed in private hands, and spending less on public-sector bureaucracy. 
At the same time, Greece would ensure that these reforms do not hurt the poorest by introducing active labor-market policies (such as subsidies to train and hire the long-term unemployed). 
Furthermore, Greece would commit itself to an automatically implemented fiscal plan, specifying the long-run ratio of national debt to GDP, the convergence rate to this ratio, and the degree of fiscal counter-cyclicality. 
So much for what Greece must do. 
In return, its creditors would agree to another one-time debt write-off – large enough to enable Greece realistically to repay its debts in the future, but small enough to avoid unnecessary transfers of credit. 
Greece would remain within the eurozone, having lost some of its fiscal and structural sovereignty. 
If this first option is not taken – the likely outcome, given the current game of political brinkmanship – Greece will default. 
But that could set the stage for the second option, which I would call the “New Beginning Program.” 
Under this program, creditor countries would write off Greece’s debts, on the condition that the country left the eurozone voluntarily. 
This would give Greece the opportunity to start afresh from outside the monetary union: it could restructure its economy without outside interference, and could be ready to re-enter the eurozone at a later point under new conditions – this time without false statistical pretenses or unrealistic expectations. 
Such an option would allow the Greek government to make a new start in stimulating competition, fighting corruption, and otherwise building a basis for long-term growth. 
This would not be easy, but it would no longer be a process that Greece finds humiliating and creditor countries find exasperating. 
This second option would be less desirable than the first. 
The speculative uncertainties associated with a “Grexit” might well threaten other eurozone economies (for example, Cyprus and Portugal), while Greece, with a devalued drachma, would find it painfully expensive to import the capital goods it needs to generate a broad base of high-wage jobs. 
But the second option would also be a new beginning for the whole eurozone. 
Its member states would accept that monetary union is impossible without fiscal and structural coordination. 
The minimum fiscal coordination needed would involve automatically implemented national plans, formulated by each government in advance. 
As a counterpart, structural coordination must, at a minimum, focus European Union funds on countries with long-term current-account deficits, the aim being to improve their competitiveness through investments in their human capital. 
Given that its current arrangements are neither credible nor sustainable, the eurozone needs this “new beginning,” regardless of which option Greece eventually takes. 

From Brexit to Breferendum 
LONDON – If something is impossible, it does not happen. 
If a country votes to make two plus two equal five, this “democratic decision” will eventually be overridden by the rules of arithmetic, no matter how large the majority or how loudly “The People have spoken.” 
This is the story now playing out in Britain as Theresa May’s government stumbles toward the final act of the Brexit tragi-comedy. 
In 2016, the British people voted to leave the European Union while keeping “the exact same benefits” they enjoyed as EU members. 
David Davis, May’s former minister responsible for negotiating Brexit with the EU, used that phrase repeatedly in Parliament, and it was then taken up enthusiastically by May herself. 
The promises by former foreign secretary Boris Johnson, the chief Brexit campaigner, were even more fulsome: Britons would have complete freedom to live, work, and study throughout Europe; untrammeled access to the EU single market; and full participation in whatever political institutions a post-Brexit government might feel like cherry-picking from the EU orchard. 
In short, the 2016 referendum was a vote for two plus two equals five. 
The consequences of this self-delusion are now becoming obvious, as Britain’s government finds itself unable to get a parliamentary majority for any realistic Brexit plan. 
If this situation persists, Britain will have only one alternative: another referendum to reconsider the impossible result of the 2016 vote. 
The Times now estimates that there is a 50% probability of such a referendum. 
When Justine Greening, one of May’s recently sacked cabinet ministers, became the first senior Conservative to propose this option, the objections raised to it were no longer about the principle of a second referendum, but about the difficulty of deciding the right question and method of casting votes. 
A new referendum is rising to the top of Britain’s political agenda because of the self-defeating behavior of the Conservative Party’s hardline Brexiteers. 
When Davis and Johnson resigned from May’s cabinet, chaotic parliamentary rebellions – from both the Euroskeptic and pro-European factions of the party – ensued. 
As a result, the main opposition Labour Party now sees a realistic chance of bringing down May’s government and triggering a general election by uniting with either hardline Brexiteers or pro-European Conservative rebels to kill whatever Brexit plan May ultimately puts to Parliament. 
Labour opposition makes every Brexit option almost certain to be blocked. 
Start with the threat of a “no deal” rupture, whereby Britain would crash out of the EU with no agreement at all on a new relationship. 
This is now totally implausible, because all of Britain’s opposition parties, plus the clear majority of Conservative MPs whose primary loyalty is to business interests, would block it. 
Almost as improbable is a “hard Brexit,” in which Britain and Europe agree to an orderly separation, but with no preferential arrangements for future trade. 
This, too, would be voted down by all the opposition parties, along with dozens of centrist Conservatives. 
Some of the Brexit hardliners also would oppose any such agreed separation, because it would force Britain to pay a large EU exit fee and to follow European rules for an open border with Ireland, in exchange for no commercial privileges at all. 
May’s latest plan for a more cooperative “soft Brexit” now also faces insuperable opposition from Johnson and Davis, plus several dozen followers. 
These hardliners have denounced May’s new plan as “Brexit in Name Only” and a plot to turn Britain into an EU “vassal state.” 
Labour is now willing to enter an unholy alliance with them in the hope of precipitating a government collapse. 
This leaves one final option: a parliamentary rebellion to stop Brexit. 
“Exit Brexit” is the official policy of the Liberals, the Greens, and the Scottish National Party. 
But all serious Brexiteers, plus the vast majority of Conservative MPs and the Labour leadership, who feel obliged to follow the “instructions” of the 2016 referendum obviously will not support this option. 
If May finds herself unable to muster a parliamentary majority for any version of Brexit, resignation and a general election will not be her only recourse. 
One goal unites all the Conservative factions, regardless of their views on Europe: to avoid a general election and the risk of Labour winning power. 
This means that May could attach a referendum proposal to her preferred version of Brexit, justifiably claiming that Parliament’s response to the 2016 referendum should either be ratified or rejected by another popular vote. 
The criminal investigations launched recently into illegal spending by Johnson’s official Leave campaign, and allegations of Russian funding for former UK Independence Party leader Nigel Farage’s parallel campaign further justify a final referendum. 
The Labour leadership would probably oppose a new referendum, because it would derail their efforts to force a general election. 
But, crucially, the Liberals and Scottish Nationalists would enthusiastically support a referendum as long as it offered voters the option of keeping Britain in the EU. 
As a result, May would have no trouble assembling a parliamentary majority for a legislative package that bundled her Brexit plan with a referendum to decide between it and the status quo alternative of remaining in the EU. 
Logic suggests that such a referendum would reverse the 2016 decision to leave the EU, because any specific Brexit proposal presented by the government would be far less attractive than the utopian delusions that managed to secure only a narrow majority two years ago. 
But, by next year, the British people could be so angry with Europe that they vote Leave again. 
If so, Brexit could go ahead on whatever terms May negotiates, and nobody could complain about the consequences or costs. 
Whatever the outcome, voters would have made an honest choice between genuinely and properly articulated options. 
That would be true democracy, instead of the demagoguery of two plus two equals five. 

Cold War II 
NEW YORK – The Cold War lasted four decades, in many ways both beginning and ending in Berlin. 
The good news is that it stayed cold – largely because nuclear weapons introduced a discipline missing from previous great-power rivalries – and that the United States, together with its European and Asian allies, emerged victorious, owing to sustained political, economic, and military effort that a top-heavy Soviet Union ultimately could not match. 
A quarter-century after the end of the Cold War, we unexpectedly find ourselves in a second one. 
It is both different and familiar. 
Russia is no longer a superpower, but rather a country of some 145 million people with an economy dependent on the price of oil and gas and no political ideology to offer the world. 
Even so, it remains one of two major nuclear-weapons states, has a permanent seat on the UN Security Council, and is willing to use its military, energy, and cyber capabilities to support friends and weaken neighbors and adversaries. 
This state of affairs was anything but inevitable. 
The end of the Cold War was expected to usher in a new era of friendly Russian ties with the United States and Europe. 
It was widely thought that post-communist Russia would focus on economic and political development. 
And relations got off to a good start when Russia, rather than standing by its long-time client Iraq, cooperated with the US in reversing Saddam Hussein’s invasion of Kuwait. 
The goodwill did not last. 
Just why will be a matter of debate among historians for decades to come. 
Some observers will blame successive US presidents, pointing to a lack of economic support extended to a struggling Russia, and even more to NATO enlargement, which, by treating Russia as a potential adversary, increased the odds it would become one. 
It is true that the US could and should have been more generous as Russia made its painful transition to a market economy in the 1990s. 
Nor is it clear that NATO enlargement was preferable to other security arrangements for Europe that would have included Russia. 
That said, the lion’s share of the responsibility for the emergence of a second Cold War is Russia’s, and above all Vladimir Putin’s. 
Like many of his predecessors, Putin viewed the US-dominated world order as a threat to his rule and to what he regarded as his country’s rightful place in the world. 
Russia in recent years has used armed force to seize, occupy, and annex Crimea, in the process violating the fundamental principle of international law that borders may not be changed by armed force. 
Putin continues to use military or covert means to destabilize Eastern Ukraine, Georgia, and parts of the Balkans. 
And Russia employed military force in particularly brutal ways in Syria to prop up Bashar al-Assad’s appalling regime. 
Putin’s Russia also went to great lengths, in the words of US Special Counsel Robert Mueller, to carry out “fraud and deceit for the purpose of interfering with the US political and electoral processes, including the presidential election of 2016.” 
Heads of US intelligence agencies have made clear that they expect further such efforts between now and the midterm congressional elections in November. 
As Russia has become a revisionist country, with few if any qualms about overturning the status quo by whatever means it judges necessary, shoring up Europe’s defense and providing lethal arms to Ukraine is a sensible response. 
But what more should the US do, beyond reducing the vulnerability of voting machines and requiring technology firms to take steps to prevent foreign governments from trying to influence US politics? 
First, Americans must recognize that defense is not enough. 
Congress is right to call for additional sanctions, and Donald Trump is wrong to refuse to implement sanctions that Congress has already passed. 
The US government also needs to find its voice and criticize a Russian regime that arrests its opponents and reportedly murders journalists. 
If Trump, for whatever reason, continues to coddle Russia, then Congress, the media, foundations, and academics should publicly detail the corruption that characterizes Putin’s rule. 
Circulating such information might increase internal opposition to Putin, persuade him to hold off on further interference in US and European politics, and, over time, buttress more responsible forces within Russia. 
At the same time, the objective should not be to end what little remains of the US-Russian relationship, which is already in worse shape than it was for much of the first Cold War. 
Diplomatic cooperation should be sought whenever it is possible and in America’s interest. 
Russia may well be willing to stop interfering in Eastern Ukraine in exchange for a degree of sanctions relief, if it could be assured that ethnic Russians there would not face reprisals. 
Likewise, the Kremlin has no interest in a military escalation in Syria that would increase the relatively modest cost of its intervention there. 
At the same time, Russian support is needed to tighten sanctions against North Korea. 
And maintaining arms-control arrangements and avoiding a new nuclear arms race would be in the interest of both countries. 
There is thus a case for regular diplomatic meetings, cultural and academic exchanges, and visits to Russia by congressional delegations – not as a favor, but as a means to make clear that many Americans are open to a more normal relationship with Russia if it acts with greater restraint. 
The US and its partners have a large stake in greater Russian restraint while Putin remains in power – and in a Russia characterized by other than Putinism after he is gone. 


A Better Economic Plan for Japan 
NEW YORK – It’s been a quarter-century since Japan’s asset bubble burst – and a quarter-century of malaise as one “lost decade” has followed another. 
Some of the criticism of its economic policies is unwarranted. 
Growth is not an objective in itself; we should be concerned with standards of living. 
Japan is ahead of the curve in curbing population growth, and productivity has been increasing. 
Growth in output per working-age person, especially since 2008, has been higher than in the United States, and much higher than in Europe. 
Still, the Japanese believe they can do better. 
I agree. 
Japan has problems on both the supply and the demand side, and in both the real economy and finance. 
To address them, it needs an economic program that is more likely to work than the measures policymakers have recently adopted – and which have failed to achieve their inflation target, restore confidence, or boost growth to the level desired. 
For starters, a large carbon tax, if accompanied by “green finance,” would stimulate enormous investment to retrofit the economy. 
Almost surely, this stimulus would exceed the contractionary effect of money being taken out of the system and the negative wealth effect of the decreased value of “carbon assets.” 
The adverse wealth effect from the decrease in the value of carbon assets would be small; and, with the capital stock badly out of sync with the new price system, the investment unleashed would be large, unless there were bottlenecks in closing the gap. 
In that case, the money generated by the tax could be used to reduce government debt; otherwise, it could be used to finance investments in technology and education – including supply-side measures to improve the productivity of Japan’s service sector. 
These expenditures could simultaneously stimulate the economy in ways that would finally pull it out of deflation. 
Many outsiders worry about Japan’s debt, which is easy to service at the low interest rates prevailing today, but would not be if rates increased to more normal levels. 
While I don’t see that happening anytime soon, Japan could undertake two policies to inoculate itself against such concerns. 
First, it could exchange some of its debt for perpetuities, bonds that are never repaid, but pay a (small) interest rate each year. 
This would shift the risk entirely off the government’s books. 
Some might worry that this would be inflationary; but in Japan’s upside-down economy, inflation is exactly what’s needed. 
I believe worries about a sudden increase in interest rates are greatly overblown; but, out of an abundance of caution, the government could exchange say 5% of its debt every year, unless and until excessive inflationary pressures appeared. 
Alternatively, the government could exchange the debt for non-interest bearing money – the long-feared monetization of government debt. 
Even if monetary finance was more likely to boost inflation than the exchange of debt for interest-bearing perpetuities, this is hardly an argument against it: it is only an argument for going more slowly. 
The second way Japan could protect itself from an interest-rate spike starts from the recognition that a large share of the money the government owes it owes to itself. 
Many on Wall Street don’t seem to understand that what matters is the net debt – what the government owes to the rest of society. 
If the government repaid the money it owes to itself – netting it out, in effect – no one would know the difference. 
But those on Wall Street who look only at the headline debt-to-GDP ratio would suddenly feel better about Japan. 
If after all of this, there is still evidence of a lack of demand, the government could reduce its consumer taxes, increase investment tax credits, expand programs to help low- and middle-income households, or invest more in technology and education, financing all of this by issuing money. 
Again, old economics would worry about inflation; but Japan wants those “fears” to come true. 
Japan does have more than a demand-side problem. 
Data on output per hour worked suggest a supply-side problem, most clearly manifested in the service sector, where the impressive ingenuity seen in so many manufacturing industries typically is nowhere in evidence. 
A natural niche for Japan would be technology developments in the service sector – such as the development of diagnostic instruments in the health-care industry. 
Prime Minister Shinzo Abe, however, has taken a very different approach, supporting the Trans-Pacific Partnership trade deal with the US and ten other Pacific Rim countries. 
Abe believes that the TPP would force needed reforms in domestic agriculture (though, interestingly, no one in the US thinks it would help the US move away from its highly distortionary agricultural policies). 
In fact, such reforms would have a miniscule effect on GDP, simply because agriculture is a very small part of output. 
Nonetheless, such reforms remain desirable and provide another arena in which young Japanese could show their ingenuity (though the TPP is not the best way to bring that about). 
On the other hand, Abe is right to pursue policies to integrate women more fully and equally into the labor force. 
If successful, such measures should provide a boost to both productivity and growth. 
Even after a quarter-century of stagnation, Japan remains the world’s third-largest single economy. 
Policies that can help raise standards of living there will stimulate demand and growth elsewhere in the global economy. 
Equally important, just as it has shared its innovative goods and technologies with the world, Japan could end up exporting successful policies, with the same or similar measures increasing standards of living in other advanced countries as well. 



New Europe Catches Old Europe’s Cold 
LONDON – As governments across Western Europe began bailing out banks and their depositors, Eastern Europeans watched nervously, unsure about what the global financial storm would mean for them. 
Now that the storm has hit, the fragile bonds of European solidarity are being tested. 
Two countries – Hungary and Ukraine – have already asked for large packages of support. 
Several more could do so over the next month if frozen credit markets do not thaw. 
If the situation continues until the end of the year, which cannot be ruled out, many more countries could experience serious banking crises. 
Over the last two decades, Eastern Europe has undertaken wide-ranging reforms and embraced global financial integration. 
Foreign, mostly European, banks have entered these markets with unprecedented speed and force. 
These banks have increasingly reached out to more risky small- and medium-sized enterprises and helped people buy their own houses and start new businesses. 
But successful financial development is now coming back to haunt these countries. 
Until now, the countries of emerging Europe withstood the global financial squeeze remarkably well, coping with the slowdown in important export markets and increased borrowing costs. 
But no open economy can resist a complete shutdown of the lending markets. 
Perhaps they became too dependent on cheap credit, but they were not alone in this respect. 
Some foreign banks are now withdrawing liquid funds from subsidiaries in emerging Europe. 
According to the National Bank of Russia, foreign banks withdrew more than $10 billion in that country in September alone. 
Other central banks make similar claims. 
To be fair, Raiffeisen International has announced that it was supporting its Ukrainian subsidiary, Bank Aval, with an additional €180 million. 
Whether other parent banks active in the region stand by their subsidiaries depends on how severe the crisis in Western Europe becomes. 
But the Western European bailout packages could make the situation in emerging Europe worse. 
While most parent banks in the region are likely to benefit from these measures, this does not necessarily translate into support for their foreign subsidiaries. 
In fact, there is a serious risk that these bailouts will come at the expense of Eastern Europe. 
Several governments have declared that taxpayer money cannot go into operations abroad. 
Governments in emerging Europe should, of course, play their part in stabilizing their financial systems. 
But at this point there are severe limits to what they can do. 
Most do not have the financial clout to counter the extraordinary pressures from financial markets. 
An offer by Hungary’s government to extend a general guarantee of deposits or to ensure liquidity in interbank markets has limited credibility. 
To survive this crisis, emerging Europe needs support from outside. 
First and foremost, West European leaders must ensure that the crisis is resolved at the core, and many observers doubt that they have done enough. 
Second, they must prevent the crisis measures already taken from discriminating against subsidiaries in Central and Eastern Europe, independently of whether they are within or outside the European Union. 
Third, they must combine forces, as in Hungary, with international financial institutions in supporting these economies. 
Georgia’s experiences following its recent war with Russia offer a possible model. 
The International Monetary Fund provided an emergency credit line to support the currency, the World Bank coordinated the relief effort (much of it financed by the United States and the EU), and the European Bank for Reconstruction and Development used its knowledge and resources to lead the effort to save the financial system. 
The Georgia package is not a done deal, and circumstances elsewhere are different, but it shows that standard instruments can go a long way. 
Yet more resources and new instruments will be needed. 
The case of Hungary shows that the EU can tweak an existing instrument – balance-of-payment support – and use it creatively. 
For non-EU countries, like Turkey and Ukraine, innovative ideas are also urgently needed. 
There should be no doubt about what is at stake. 
It is has been little noticed, but in the last few years, Eastern Europe, including Russia, surpassed the US and the United Kingdom as the euro zone’s most important export markets. 
Many of these markets now face slowdown or even negative growth. 
Moreover, Western European companies have invested on a previously unimaginable scale. 
There is a serious risk that, if the crisis becomes even worse, East European governments will see no alternative but to nationalize some institutions, particularly some of the foreign-controlled banks. 
But, even more importantly, decades of financial development and broad economic reforms could unravel. 
As in Western Europe and the US, governments will again play a larger role in the economy, but state involvement has different connotations in these former socialist economies, particularly as they now face a backlash against financial development and against reformers. 
As if this was not enough, Western governments and businesses should ponder what kind of offers may come from Russian sources, private or public, for distressed banks and companies. 
No doubt with strings attached. 

New Europe’s Old Problems 
The riots in Budapest, incited by leaked tapes that show Prime Minister Ferenc Gyurcsany openly admitting that his government had lied for over a year about the country’s dire finances, are but the latest evidence that things are going seriously wrong across Eastern Europe. 
Last June, the Slovaks evicted the government that brought the country out of the international isolation and economic malaise that it had suffered under the autocratic regime of Vladimir Meciar. 
Mikulas Dzurinda, whose reforms provided the country with growth and economic stability, was replaced by Robert Fico, a leftist who, having forged an alliance with Meciar and a neo-fascist party, has also adopted a worrisomely populist tone. 
That same month, Hungary reelected Gyurcsany, who had pursued a supposedly reformist program, but also oversaw a massive accumulation of public debt. 
Earlier plans to adopt the euro quickly have now been shelved, with the target date pushed back to 2011 or 2012. 
But even that may be wishful thinking. 
Meanwhile, financial markets fret about the country’s budget deficit and talk of a serious crisis. 
Meanwhile, the Czechs managed to elect a perfectly hung parliament. 
Prime Minister Mirek Topolanek is an advocate of urgently needed reforms, but he lacks a parliamentary majority and is pressing for a fresh general election in the first half of 2007. 
With no means of stemming election-year fiscal expansion, the Czechs, too, have been forced to abandon their 2010 target date for euro adoption. 
Then consider Poland, where the Kaczynski twins, who hold the presidency and the prime ministership, have allied themselves with populist, xenophobic, and anti-Semitic parties. 
One of their priorities is to attack the central bank and slander its governor, Leszek Balcerowicz, the iconic father of Poland’s economic transformation, with accusations that echo those of the Stalinist era. 
So much for the region’s “big four” countries. 
But bad news is emerging from the smaller countries as well, including the Baltic states. 
Across Central and Eastern Europe, the scene is almost universally depressing. 
When so much goes wrong at the same time, it is tempting to look for a common cause. 
One factor that is often cited is “reform fatigue.” 
In barely 15 years, these countries have moved from central planning and economic backwardness to “normal” market economies with impressive GDP growth. 
But rapid change is always unnerving, and not everyone has emerged better off. 
Above all, uncertainty has become the norm, in contrast to the gray but predictable future offered by the old communist regimes. 
Today, many people now long for that period, which they see as less driven by material values. 
Communist parties, more or less reformed as socialists, appeal to a surprising number of voters. 
In some countries, like Slovakia and Poland, far-right nationalist parties provide another alternative, by offering the soothing appeal of traditional values and familiar enemies. 
Reform fatigue implies that Central and Eastern Europe needs a respite to catch its breath. 
But another explanation of recent developments in the region begins by noting that post-communist reforms were largely dictated from outside, as a condition of admission to the European Union. 
With membership achieved and EU money starting to pour in, leaders feel secure enough to let economic policy slip. 
Thus, budget deficits are the rule, and where they are largest, as in the Czech Republic and Hungary, they have gained priority over euro adoption. 
Indeed, only Slovenia has been admitted to join the euro area in 2007, the earliest possible date. 
Estonia and Lithuania applied as well, but were refused entry. 
There is some truth in both explanations of Eastern Europe’s backsliding. 
But what is the phenomenon that such explanations are supposed to clarify? 
There has been no general tilt to the right or left in the region. 
Reforms that are attacked in one country continue to guide others. 
Nevertheless, the EU’s newest members share some key features. 
Most importantly, they inherited from the Soviet era bloated and inefficient public sectors, which they are finding hard to downsize and professionalize. 
The private sector has been entirely rebuilt and is vibrant, but it cannot remain competitive if fiscal demands are not reduced – a familiar problem in Europe as a whole. 
For now, the tension has been left unresolved, leading to high budget deficits. 
But the EU’s new member countries have no access to any safety net. 
They could well squander the significant transfers that they receive through the agricultural and structural funds, as many previous EU recipients did. 
If they abandon macroeconomic discipline, as Hungary and possibly the Czech Republic may be doing, they alone will face the consequences. 
Being outside the euro area, their currencies would fall, undermining growth in purchasing power and living standards. 
As they are economically small, the rest of the EU would barely shudder. 
Fortunately, the main lesson to emerge from the region’s current troubles is that economies adapt faster than polities to changing conditions. 
Growth has been strong; while it could have been stronger under more favorable policies, only huge mistakes could break the rise in living standards, given the region’s productivity gains. 
Western Europe went through a similar phase of economic development in the 1950’s and 1960’s; now it is Central and Eastern Europe’s turn. 
Sadly, then as now, countries never seem to learn from others’ mistakes. 

The Renewal of Europe’s Center? 
PRINCETON – British Prime Minister Theresa May, French President Emmanuel Macron, and German Chancellor Angela Merkel are different in many ways. 
May unexpectedly assumed her position last year after the Brexit vote, when her predecessor, David Cameron, resigned. 
Macron has even less experience: the presidency, which he just took over last month, is his first-ever elected position. 
Meanwhile, Merkel has served as chancellor since 2005 (and a parliamentarian since 1991), making her Europe’s longest-serving head of government. 
But these three European leaders also have a lot in common. 
They are all in a relatively strong position domestically. 
Indeed, May and Merkel both appear likely to win their countries’ general elections this week and in September, respectively, and Macron secured a decisive victory in France. 
More important, they are all building a new type of politics to fill the gap left by the decline in traditional political parties’ influence. 
The new political paradigm is founded on a kind of centrist populism, which blends support for globalization with a healthy dose of social protection and a generous pinch of patriotism. 
And it is highly personal. 
May is unambiguously the key attraction in the British election, and her divided Conservative Party is now downplaying the party label. 
Merkel, too, has become the central figure in a changing Christian Democratic Union party, which lacks alternative leaders. 
Macron created his own party. 
This particular political revolution has been largely missed by commentators, who have tended to misinterpret the weakness of traditional parties, particularly those of the center left, as a fundamental threat to democracy. 
The rise of right-wing and illiberal populism in almost every major industrial country over the last year has reinforced this perception. 
But the right-wing populist tide may now be on its way out, having proven less contagious and less easily internationalized than many expected. 
The explanation probably lies partly in the United States’ experience since electing Donald Trump as its president – an experience that Europeans seem to have little interest in emulating. 
In fact, Europe’s Trump-supporting nationalists, Geert Wilders in the Netherlands and Marine Le Pen in France, attracted far fewer votes than opinion polls anticipated. 
This suggests that Europeans are not eager to go to political extremes so much as they are frustrated with a particular mode of political behavior. 
In the second half of the twentieth century, a stable pattern emerged in most developed countries, with power alternating between center-right and center-left parties. 
The parties may have looked like bitter rivals, but they resembled each other in that they did not appeal to extremes, but fought for the political center. 
Their tax policies, for example, involved some redistribution, but nothing too radical in either direction. 
By the 1990s, however, that dynamic was strained by the impact of globalization and voters’ fear of job losses to cheaper labor abroad. 
In response to the challenges raised by greater economic openness, center-left parties linked globalization with liberal stances on social issues. 
But that updated form of social democracy – called “New Labour” in the United Kingdom – had little to offer center-left parties’ traditional core voters, who began to look for alternatives, just as some of their center-right counterparts did. 
Yet they were not, it now seems clear, necessarily seeking a radical approach. 
After all, when offered a new version of moderate politics, many embraced it. 
The new centrist political mix harkens back to the days before hyper-globalization. 
Indeed, as May, Merkel, and Macron remake politics in their respective countries, they are all standing firmly on national tradition. 
May’s Conservative rejection of extreme economic liberalism as “untrammeled free markets” and “selfish individualism,” for example, recalls traditional British paternalism. 
Her promises to improve the health system, curb exorbitant pay packages of top executives, and deliver more social housing (which tenants could then purchase) looks reassuringly familiar, even old-fashioned (especially when viewed alongside her pledge to let Parliament vote to lift a nearly two-decade-old ban on fox hunting). 
Macron represents a different tradition, deeply embedded in the French national psyche but largely lost in recent presidencies. 
He focuses on France’s tradition as a modern and dynamic country with high-quality engineering schools and prestige infrastructure projects. 
The French president he most closely resembles is Valéry Giscard d’Estaing, who also tried to style himself not as a Gaullist, but as a modernizer who would (literally) speed up the national anthem. 
Merkel is traditional in a characteristically German way: she deliberately emphasizes pragmatic action over ideology. 
She is most like Giscard’s counterpart among German chancellors, the social democrat Helmut Schmidt, who also broke with his party and emphasized management and competence. 
In fact, the promise of individual competence is a critical element of this new European politics. 
May is portrayed as the only person who can be trusted to negotiate Brexit. 
Macron is uniquely qualified to work with Germany and the European Union. 
Merkel is a safe pair of hands. 
But the challenges facing May, Macron, and Merkel would be difficult for even the most competent leader. 
They begin with Brexit negotiations and, for France and Germany, continue to difficult reforms of the eurozone and the EU. 
While Brexit, by removing an anti-integrationist country power from the EU, may well give a greater impetus to Franco-German cooperation, it will do nothing to remove many formidable obstacles to progress. 
The reality is that the new politics that has taken over three major European countries remains fundamentally fragile. 
It lacks institutional support, in the form of a strong political party, which it may be incapable of acquiring, given its focus on heroic leaders. 
And, given the combination of complex agendas and high expectations, those leaders may fail. 
Europe’s political center, now masterfully riding a wave of confidence, could suddenly find itself high and dry. 

A Strategy to Unite and Safeguard Europe 
BRUSSELS – The purpose – and even the survival – of the European Union is being questioned as never before. 
In fact, Europe’s citizens and the world need a strong EU now more than ever. 
Europe’s wider region has become less stable and more insecure in recent years. 
Moreover, the crises within and beyond the EU’s borders are directly affecting the lives of all European citizens. 
In challenging times such as these, a strong EU is one that thinks strategically, shares a vision, and acts together. 
In the wake of the United Kingdom’s vote to “Brexit” the EU, we Europeans will indeed have to rethink how our Union works; but we know very well what we need to work for. 
We know what our principles, interests, and priorities are. 
This is no time for political uncertainty. 
The EU needs a strategy that marries a shared vision to common action. 
None of the EU’s member states, acting alone, has the strength to address the threats that Europe faces. 
Nor can they seize the opportunities presented by today’s global economy alone. 
But as a Union of more than a half-billion citizens, Europe’s potential is unparalleled. 
Our diplomatic network is broad and deep, covering every corner of the globe. 
Economically, we are in the world’s G3, alongside China and the United States. 
We are the top trading partner and foreign investor for almost every country in the world. 
Together, the EU’s member states invest more in development cooperation than the rest of the world combined. 
It is also clear, though, that we in Europe are not making full use of this potential, at least not yet. 
A vast majority of our citizens understands that we need to take collective responsibility for our role in the world. 
Our partners, too, expect the EU to play a major role, including as a global security provider. 
The EU can deliver on its citizens’ needs and make its partnerships work only if we all act together – EU institutions and national governments, at all levels, united. 
This is exactly the aim of the Global Strategy for European Foreign and Security Policy, which I recently presented to the leaders of the member states and to the European Commission and European Council. 
This Strategy, the EU’s first in over a decade, focuses on defense capabilities and anti-terrorism as much as on job opportunities, social inclusion, and human rights. 
It deals with peace building and the resilience of states and societies in and around Europe. 
The EU has always prided itself on its soft power – and it will continue to do so, because we are the best in this field. 
But the idea that Europe is an exclusively “civilian power” does not do justice to an evolving reality. 
For example, the EU currently conducts 17 military and civilian operations around the world. 
In places as far afield as Afghanistan and Congo, Georgia and the Sahel, Moldova, Somalia, and the Mediterranean, thousands of men and women serve under the European flag. 
For today’s Europe, soft and hard power go hand in hand. 
The Strategy nurtures the ambition of strategic autonomy for the EU, which is necessary to promote our citizens’ common interests, as well as our principles and values. 
Yet we know that such priorities are best served when we are not alone, and in an international system based on multilateralism and rules, not on global policemen and lone warriors. 
This is why the EU will continue to deepen the transatlantic bond and our partnership with NATO, while also connecting to new players and exploring new formats to advance our Strategy. 
The EU will invest in regional institutions, and in cooperation within and among regions. 
And we will promote global governance reforms that can meet this century’s challenges. 
As we do this, we will engage in a practical and principled way, sharing global responsibilities with our partners and contributing to their strengths. 
Two decades of spreading global uncertainties have taught us a clear lesson: my neighbor’s weaknesses and my partner’s weaknesses are my own weaknesses. 
So we will move beyond the illusion that international politics can be a zero-sum game. 
Acting with resolution in this way will make each of the EU’s member states – and each citizen of our Union – better off. 
But all the goals outlined here can be achieved only by a truly united and committed Europe. 
Joining all our cultures together to achieve our shared goals and serve our common interests is a daily challenge, but it is also our greatest strength: diversity is what makes us strong. 
Our interests are indeed common European interests, and the only way to serve them is by common means. 
That is why all Europeans, and all EU member states, have a collective responsibility to strengthen our Union. 
The people of Europe need unity of purpose and action among our member states. 
A fragile world calls for a more confident and responsible EU, equipped with an outward- and forward-looking foreign and security policy. 
The new Global Strategy will guide us as we work toward a Union that truly meets its citizens’ needs, hopes, and aspirations; a Union that builds on the success of 70 years of peace; and a Union strong enough to contribute to peace and security in our region and worldwide. 

Innovation in Development Finance 
ROME – More than four decades ago, the world’s wealthiest countries pledged that at least 0.7% of their GDP would be devoted to official development assistance (ODA). 
But fewer than a half-dozen countries have actually met this goal. 
In fact, ODA disbursements have not been stable, reliable, or reflective of need, and doubts about their effectiveness linger. 
ODA declined significantly after the Cold War, dropping to 0.22% of developed countries’ combined GDP in 1997-2001, before rising again after the September 11, 2001, terrorist attacks in the United States and the International Conference on Financing for Development in Monterrey, Mexico, the following year. 
Then, as developed-country governments imposed strict fiscal austerity in the wake of the global economic crisis, ODA fell again, to 0.31% of GDP in 2010-2011. 
But, since the Monterrey conference, major additional development-finance needs have been identified, including aid-for-trade schemes and financing for climate-change mitigation and adaptation. 
And, while the Leading Group on Innovative Financing for Development – which includes 63 governments, as well as international organizations and civil-society groups – has contributed to significant progress in the last decade, the definition of innovative development finance remains in dispute. 
Indeed, critics contend that the international taxes – for example, on carbon emissions – that the Leading Group has identified as a potential source of finance infringe on national sovereignty. 
Moreover, the sources of finance do not necessarily determine how the funds are allocated, let alone how they are ultimately used. 
For example, although the so-called Tobin tax (a small levy on financial transactions) was originally intended to fund development assistance, a version of it was recently adopted in Europe in order to supplement national budget revenues. 
Of course, such “off-label” uses of innovations in development finance do not discredit them. 
The UN’s 2012 World Economic and Social Survey on new development finance discusses various existing and proposed innovations in financing, intermediation, and disbursement. 
Aside from allocating and trading greenhouse-gas (mainly carbon or “carbon equivalent”) emissions allowances, “solidarity levies” could be imposed on airplane tickets, and taxes imposed on aviation or ship fuel. 
Another proposal involves creating new international liquidity by issuing special drawing rights (international reserve assets maintained by the International Monetary Fund). 
The resulting funds, as well as those from existing unused SDRs, would be allocated or re-allocated to development projects and leveraged to augment investment resources. 
Yet another scheme would deploy royalties for natural-resource extraction from the global commons, such as Antarctica and other areas beyond “exclusive [national] economic zones.” 
Some initiatives are already underway. For example, the project (RED) is a corporate campaign that aims to raise money for The Global Fund to Fight AIDS, Tuberculosis, and Malaria by donating a portion of proceeds from consumer products branded with the cause. 
While some are critical of the disparity between what these “altruistic” companies spend on advertising and the amount of money that they actually raise, such “cause marketing” could prove to be an effective mechanism for generating additional development finance. 
Furthermore, some proposals entail no additional funds. 
Development-finance flows could be restructured, so that they are channeled through mechanisms like the International Finance Facility for Immunization, which binds ODA commitments over a long period and securitizes them in order to generate funds for immediate use. 
Similarly, debt-conversion schemes such as Debt2Health and debt-for-nature swaps would allow countries to redirect debt-service payments to development projects. 
Some worthwhile new risk-management proposals include advance commitments for new vaccines, subsidies to drug manufacturers to make their products more affordable, and regionally pooled catastrophe insurance. 
Over the last six years, roughly $6 billion has been allotted to innovative sources of financing, compared to current annual ODA of more than $120 billion – and far less than the almost $20 trillion committed by G-20 countries to economic recovery (including bailouts) since 2008. But some recent proposals promise to raise far more resources for sustainable development. 
An internationally coordinated carbon tax could raise $250 billion annually, while a small financial-transaction tax could raise another $40 billion. 
Likewise, regular SDR emissions to keep pace with the growth of global liquidity could yield roughly $100 billion annually for international development cooperation. 
Such emissions would reduce demand for US Treasury bonds and other liquid assets of preferred currencies. 
At the same time, if the world’s most powerful countries stopped promoting full capital-account liberalization, developing countries would feel less pressure to protect themselves by accumulating foreign-exchange reserves. 
By investing the funds in development projects instead, they could address both savings and foreign-exchange constraints. 
Finally, innovative strategies are needed to align development finance with national development goals, transforming the multilateral system operationally so that it works more effectively with stakeholders on the ground. 
One model is the Montreal Protocol on Substances that Deplete the Ozone Layer, which has succeeded spectacularly in reducing levels of chlorofluorocarbons, highlighting the continued potential of inclusive multilateralism. 

The New Fiscal Reality 
PARIS – “When the facts change, I change my mind. 
What do you do, sir?” 
This, reportedly, is how Keynes replied to the criticism that he had changed his position on the policy response to the Great Depression. 
Pragmatism of this sort is not that common: policy views are often characterized by considerable inertia. 
Too frequently, today’s perspectives remain shaped by yesterday’s facts. 
Fiscal policy is a case in point. 
Facts have changed in two significant ways. 
First, for sovereign states long-term borrowing costs are exceptionally low. 
At end-October, the annual yield for government bonds issued by France, a country with public debt approaching 100% of GDP, was 0.5% for ten-year bonds and 1.6% for 50-year bonds. 
Italy and Spain, both of which faced investors’ reluctance five years ago, have also been able to tap the market for 50-year bonds. 
As long as high demand for government debt securities lasts (a subject of debate among economists), it offers an unprecedented opportunity to finance public investment. 
A key factor in determining whether to borrow is the difference between the rate of nominal GDP growth and the interest rate: if it is negative, debt can easily be repaid, because nominal income grows faster than the interest burden. 
Using the (fairly miserable) past as a yardstick, it is hard to believe that French nominal GDP will increase by less than 0.5% annually over the next ten years: from 2005 to 2015, nominal growth averaged 2.1%. 
So low interest rates are an opportunity that should not be missed. 
The second way facts have changed is that output growth has been disappointing. 
In its latest World Economic Outlook, the International Monetary Fund noted that, despite the drop in oil prices and favorable monetary conditions, output and investment in advanced countries have consistently remained below expectations over the last two years. 
The outlook for the eurozone is especially underwhelming: the IMF expects output growth to slow from 2% in 2015 to 1.7% in 2016 and 1.5% in 2017. 
With the European Central Bank’s asset-purchase program close to reaching its limits, an investment-oriented fiscal stimulus would help reverse this weakening. 
It would also help reverse the slump in public investment experienced by several countries as a consequence of fiscal austerity in recent years. 
But, while facts have changed, minds have not. 
On average, governments are using the gains implied by lower interest rates to spend a bit more or to reduce taxes, rather than to launch comprehensive investment programs. 
The IMF expects the structural fiscal balance for the eurozone to be roughly the same level in 2017 as in 2014. 
The same applies to the United States. 
Some countries, like the United Kingdom, are still in a fiscal tightening phase. 
Italy is in an expansionary phase, but it is facing criticism from the European Union for non-compliance with its commitments under the Stability and Growth Pact (SGP). 
Overall, there is no discernible momentum in either direction. 
But is there really fiscal space for action? 
With gross public debt close to 100% of GDP in the US, the UK, and the eurozone, and much higher in Japan (though net debt is less frightening), there is admittedly cause for concern. 
Market sentiment can change quickly, and some European governments remember how precipitously they were forced to change course in 2010-2011, after having embarked on fiscal expansion. 
It would be unwise to assume that low interest rates will last forever and simply relax fiscal discipline. 
The solution is an approach that combines, on one hand, the continuation of fiscal consolidation, with a view to putting the debt-to-GDP ratio on a steadily declining path, and, on the other hand, special investment programs financed at exceptionally low interest rates. 
This would serve the medium-term goal of public-finance sustainability, while treating the interest-rate level as a one-off windfall that can be used to address priority investments and strengthen growth potential. 
There are several types of investments worth undertaking. 
In some countries – especially the US – infrastructure is in need of a significant upgrade. 
In others, like Spain or France, human capital should be given priority, with an emphasis on improving school performance and the skills of the labor force. 
For countries that must invest in reforms, budgetary support would help overcome political obstacles to institutional transformation. 
Mitigation of climate change through investment in renewable energy, insulation of buildings, and low-carbon transportation networks is an overwhelming requirement in virtually all countries. 
In several areas, well-chosen investment – for example, upgrades of equipment and information systems in health care – could even reduce future public spending, thereby strengthening long-term fiscal positions. 
In the EU, it is sometimes argued that the way to trigger these investments is to exclude capital spending from the SGP and monitor only the balance for current spending. 
This would not be the appropriate solution. 
Brick-and-mortar public investment is often less valuable than spending on education or institutional improvement, and can end up financing “white elephants” of dubious social worth. 
Moreover, there are few arguments for treating capital spending separately under normal economic conditions. 
What applies to the current zero-interest rate environment should not be made permanent. 
Rather, governments should borrow now to finance special physical and institutional investment programs to be carried out over the next few years. 
These programs should be given defined goals and be subject to strict governance. 
In the EU, they should be exempt from SGP rules, but subject to an assessment by the European Commission that they contribute to improving growth and fiscal sustainability in the medium term. 
And they should be designed in such a way that they can be interrupted if bond-market conditions normalize and interest rates return to historical levels. 
We should not be hostage to a false choice between budgetary responsibility and economic revitalization. 
The facts have changed. 
We can do both. 

The New Generation Gap 
NEW YORK – Something interesting has emerged in voting patterns on both sides of the Atlantic: Young people are voting in ways that are markedly different from their elders. 
A great divide appears to have opened up, based not so much on income, education, or gender as on the voters’ generation. 
There are good reasons for this divide. 
The lives of both old and young, as they are now lived, are different. 
Their pasts are different, and so are their prospects. 
The Cold War, for example, was over even before some were born and while others were still children. 
Words like socialism do not convey the meaning they once did. 
If socialism means creating a society where shared concerns are not given short shrift – where people care about other people and the environment in which they live – so be it. 
Yes, there may have been failed experiments under that rubric a quarter- or half-century ago; but today’s experiments bear no resemblance to those of the past. 
So the failure of those past experiments says nothing about the new ones. 
Older upper-middle-class Americans and Europeans have had a good life. 
When they entered the labor force, well-compensated jobs were waiting for them. 
The question they asked was what they wanted to do, not how long they would have to live with their parents before they got a job that enabled them to move out. 
That generation expected to have job security, to marry young, to buy a house – perhaps a summer house, too – and finally retire with reasonable security. 
Overall, they expected to be better off than their parents. 
While today’s older generation encountered bumps along the way, for the most part, their expectations were met. 
They may have made more on capital gains on their homes than from working. 
They almost surely found that strange, but they willingly accepted the gift of our speculative markets, and often gave themselves credit for buying in the right place at the right time. 
Today, the expectations of young people, wherever they are in the income distribution, are the opposite. 
They face job insecurity throughout their lives. 
On average, many college graduates will search for months before they find a job – often only after having taken one or two unpaid internships. 
And they count themselves lucky, because they know that their poorer counterparts, some of whom did better in school, cannot afford to spend a year or two without income, and do not have the connections to get an internship in the first place. 
Today’s young university graduates are burdened with debt – the poorer they are, the more they owe. 
So they do not ask what job they would like; they simply ask what job will enable them to pay their college loans, which often will burden them for 20 years or more. 
Likewise, buying a home is a distant dream. 
These struggles mean that young people are not thinking much about retirement. 
If they did, they would only be frightened by how much they will need to accumulate to live a decent life (beyond bare social security), given the likely persistence of rock-bottom interest rates. 
In short, today’s young people view the world through the lens of intergenerational fairness. 
The children of the upper middle class may do well in the end, because they will inherit wealth from their parents. 
While they may not like this kind of dependence, they dislike even more the alternative: a “fresh start” in which the cards are stacked against their attainment of anything approaching what was once viewed as a basic middle-class lifestyle. 
These inequities cannot easily be explained away. 
It isn’t as if these young people didn’t work hard: these hardships affect those who spent long hours studying, excelled in school, and did everything “right.” 
The sense of social injustice – that the economic game is rigged – is enhanced as they see the bankers who brought on the financial crisis, the cause of the economy’s continuing malaise, walk away with mega-bonuses, with almost no one being held accountable for their wrongdoing. 
Massive fraud was committed, but somehow, no one actually perpetrated it. 
Political elites promised that “reforms” would bring unprecedented prosperity. 
And they did, but only for the top 1%. 
Everyone else, including the young, got unprecedented insecurity. 
These three realities – social injustice on an unprecedented scale, massive inequities, and a loss of trust in elites – define our political moment, and rightly so. 
More of the same is not an answer. 
That is why the center-left and center-right parties in Europe are losing. 
America is in a strange position: while the Republican presidential candidates compete on demagoguery, with ill-thought-through proposals that would make matters worse, both of the Democratic candidates are proposing changes which – if they could only get them through Congress – would make a real difference. 
Were the reforms put forward by Hillary Clinton or Bernie Sanders adopted, the financial system’s ability to prey on those already leading a precarious life would be curbed. 
And both have proposals for deep reforms that would change how America finances higher education. 
But more needs to be done to make home ownership possible not just for those with parents who can give them a down payment, and to make retirement security possible, given the vagaries of the stock market and the near-zero-interest world we have entered. 
Most important, the young will not find a smooth path into the job market unless the economy is performing much better. 
The “official” unemployment rate in the United States, at 4.9%, masks much higher levels of disguised unemployment, which, at the very least, are holding down wages. 
But we won’t be able to fix the problem if we don’t recognize it. 
Our young do. 
They perceive the absence of intergenerational justice, and they are right to be angry. 

The End of Little Germany? 
LONDON – At long last, Germany is ready to swear in a new government. 
After five months of political wrangling, the Social Democrats (SPD) and the Christian Democratic Union – together with the CDU’s Bavarian sister party, the Christian Social Union – have formed a government coalition. 
But in the process of reaching that agreement, something has shifted in German political debate. 
Germany has long enjoyed the luxury of pretending to be something it is not: a small country. 
At the time of the election last year, there was hardly any public debate about the European Union and Germany’s role in it. 
Chancellor Angela Merkel’s then-comfortable lead in opinion polls confirmed her instinct that German voters did not want to be bothered with discussions about Europe’s future. 
And, despite being the former president of the European Parliament, then-SPD leader Martin Schulz also focused almost entirely on domestic issues. 
But the election of US President Donald Trump, the reform agenda of French President Emmanuel Macron, and, to a lesser extent, the United Kingdom’s vote to leave the EU, have focused minds across Germany. 
If Europe is to meet its many challenges, Germany needs to question some of its longstanding assumptions. 
It needs a clear European agenda, one that dispenses with small-nation thinking. 
To be sure, Germany’s historical narratives and political preferences limit the options available to any government. 
But there are still realistic steps that the incoming German government can take to serve the European and global good. 
Will the new coalition be up to the task? 
The Europe chapter in the coalition agreement between CDU/CSU and the SPD has been framed in Germany as an answer to Macron’s eurozone reform proposals. 
But those who were hoping for a fundamental change in economic policy will likely be disappointed. 
The new government might talk about restarting the EU’s Franco-German engine of reform, but it is unlikely to support proposals for debt mutualization or the creation of a sizeable common budget. 
But it can and should pursue other measures. 
Germany could accept – and even promote – the idea that fiscal policy should be more counter-cyclical at the national level. 
It should also stop dragging its feet on the eurozone banking union and make the capital markets union a high political priority. 
It could make a bold offer on European deposit insurance and a common fiscal backstop for the Eurozone’s Single Resolution Fund, which steps in when banks collapse and are wound up. 
It could tie that offer to a thorough clean-up of the European banking system, especially in Italy, and to tough rules on creditor bail-ins. 
Germany must also tackle its large savings surplus, which is unbefitting Europe’s largest economy. 
To boost consumption, low-income earners need to be relieved of their excessively high tax burden. 
Germany’s labor-market institutions leave many service workers without much bargaining power or protection, thereby creating one of the largest low-wage sectors in Europe. 
German savers could also do with a low-fee public wealth fund, which could boost equity investments both in Germany and across borders, while reducing German demand for international safe assets. 
With the finance ministry in SPD hands, a greater emphasis on public investment, rather than tax cuts and further reductions in public debt, has also become a possibility. 
Germans are beginning to grow tired of the decade-long ideology-driven pursuit of lower deficits. 
The country’s constitutional fiscal rule, known as the debt brake, does allow for higher public spending. 
Slight economic overheating as a result of higher private and public investment would help boost wages and import demand, which might help reduce Germany’s current-account surplus. 
The new German government should also develop a new trade policy that recognizes and is willing to use the country’s economic clout, and that of the EU, more strategically. 
The increasingly protectionist tone of the Trump administration presents a perfect opportunity for Germany to step into the breach. 
The US will soon impose tariffs on all steel and aluminum imports, and this requires a firm European response. 
It is notable that the German debate about the US-EU Transatlantic Trade and Investment Partnership was focused primarily on consumer rights and protecting domestic regulations and standards. 
But narrow economic goals such as these, to which a small country would give priority, no longer suffice for today’s German neo-hegemon. 
The same is true of overly optimistic support for a form of trade multilateralism that has largely run its course. 
Instead, the incoming German government needs to develop a trade policy that supports economic reforms and social standards, while promoting market economics and the rule of law in its neighborhood. 
Germany could also be doing more to push the rest of Europe to be more forceful at the World Trade Organization on social rights, environmental protection, fair taxation, and improved political standards. 
These proposals require German politicians to shift the debate. 
As the eurozone’s dominant country, Germany needs to make sure that the bloc benefits all of its members and is a stabilizing force in the world economy. 
Germany must finally start thinking of itself as the major economic player it is, and behave accordingly – preferably before new ministers settle into old routines. 

New-Model Development Finance 
WASHINGTON, DC – China’s success in establishing the Asian Infrastructure Investment Bank has been widely regarded as a diplomatic fiasco for the United States. 
After discouraging all US allies from joining the AIIB, President Barack Obama’s administration watched as Great Britain led a raft of Western European countries, followed by Australia and South Korea, into doing just that. 
Worse, the Obama administration found itself in the position of trying to block Chinese efforts to create a regional financial institution after the US itself was unable to deliver on promises to give China and other major emerging economies a greater say in the governance of the International Monetary Fund. 
The administration had pushed European countries to accept less representation on the IMF Board and increase China’s voting share from 3.65% to 6.07%, only to prove unable to win the support of the US Congress. 
Once again, Obama found himself stymied abroad because of political paralysis at home. 
From a geopolitical perspective, China’s AIIB initiative is a bold and successful gambit in what Ely Ratner, a senior fellow at the Center for a New American Security, describes as “an institutional competition for global governance that has now officially begun.” 
China will control a majority of the voting shares in the AIIB, initially capitalized at $100 billion. Unless the Western victors of World War II can update the rules and institutions that underpinned the post-war international order, they will find themselves in a world with multiple competing regional orders and even dueling multilateral institutions. 
From the point of view of developing countries in need of capital, competing banks probably look like a good thing. 
Developing-country governments will be only too pleased to borrow without the pesky conditions that the World Bank and existing regional development banks typically attach to their loans. 
And, as a region, East Asia will now get more of the roughly $8 trillion that the Asian Development Bank has estimated that the region will need to keep growing through 2020. 
But what about the impact on actual development, the likelihood that individual citizens of poor countries will live richer, healthier, more educated lives? 
World Bank conditionality often includes provisions on human rights and environmental protections that make it more difficult for governments bent on growth at any cost to run roughshod over their people. 
Competition is good, but unregulated competition typically ends up in a race to the bottom. 
China’s establishment of the AIIB is the latest sign of a broader move away from the view that aid to developing countries is best provided in the form of massive government-to-government transfers. 
Power and wealth are not only diffusing across the international system, but also within states, such that corporations, foundations, wealthy individuals, private investment funds, civil-society groups, and most recently, municipal governments all have a role to play in development. 
Consider the second Quadrennial Diplomacy and Development Review, released last month by the State Department and the US Agency for International Development. 
The QDDR emphasizes a “new model of development,” one based on the recognition “that the United States is one of many actors, and that countries require investments from multiple sources to achieve sustained and inclusive economic growth.” 
Initiatives such as Feed the Future, the US Global Development Lab, and Power Africa combine “local ownership, private investment, innovation, multi-stakeholder partnerships, and mutual accountability.” 
This new model moves beyond the mantra of “public-private partnership.” 
It genuinely leverages multiple sources of money and expertise in broad coalitions pursuing the same big goal. 
Power Africa, for example, includes six US government agencies: the Overseas Private Investment Corporation, the US Export-Import Bank, the US Trade and Development Corporation, the Millennium Challenge Corporation, and the US African Development Foundation. 
Together, they will commit more than $7 billion over five years in financing, trade credits, insurance, small business grants, and direct government support to the energy sector in six partner countries. 
Those investments will leverage billions in private-sector commitments, starting with more than $9 billion from a range of companies, including General Electric. 
Power Africa takes a “transaction-centered approach,” creating teams to align incentives among “host governments, the private sector, and donors.” 
Unlike big government-to-government transfers, which can often end up in the pockets of officials, the point is to ensure that deals actually get done and investments flow to their intended destination. 
This pragmatic focus on results is equally evident in the QDDR’s emphasis on working with mayors around the world on issues like climate change. 
Targeting government officials with the incentives and ability to make a difference in regulating emissions on the ground yields results much more quickly than negotiations on an international treaty. 
Skeptics will say that the US is simply making a virtue of necessity. 
The federal government no longer has billions of dollars to dole out to foreign governments, while China is far more centralized and less beholden to its taxpayers. 
China and its partners in the AIIB can thus build the big things – roads, bridges, dams, railroads and ports – that unquestionably power an economy and that citizens notice, but that the US, and for that matter the World Bank, no longer funds. 
The days of the Marshall Plan are long gone. 
That criticism contains some truth. 
But, over the longer term, the new US model of development is actually far more resilient and sustainable than the old government-to-government model. 
Only societies with thriving sectors free of government control can participate in these broad coalitions of public, private, and civic actors. 
Corporations, foundations, and civil-society groups, in turn, are much more likely to forge lasting ties with their counterparts in local communities in the host countries – relationships that will survive changes of government and fiscal turbulence. 
Overall, the AIIB is a positive development. 
More money aimed at helping poor countries become middle-income countries and at middle-income countries to help them provide transport, energy, and communication for their people is a good thing. 
But the Asian way is not the only way. 

The New Global Youth Movement 
LONDON – The recent March for Our Lives in the United States inspired millions not just across America, but also around the world. 
Until the nationwide demonstrations on March 24, most people thought that little new could be added to the conversation about the seemingly endless rounds of gun killings. 
Yet the brave and moving way in which, out of their anguish and pain, young people told the world that decisions on gun laws and safe schools are too important to be left to adults who had let them down has reshaped the political landscape, perhaps permanently and fundamentally. 
It’s not just in America that a youth-led revolution is coming alive. 
Around the world, young people are becoming a power in their own right. 
Millions of young people are now engaged in what has become the civil-rights struggle of our time – the fight for every child’s right to go to school, and to do so in safety. 
In India, the Global March Against Child Labor has mobilized hundreds of thousands of young people, who have walked millions of miles demanding an end to child labor and the right to go to school. 
Likewise, in Bangladesh, starting in the remote Nilphamari district, thousands of girls have driven forward the “wedding busters” movement to create “child marriage-free zones.” 
Inspired by the Girls Not Brides movement, and at the risk of beatings and sometimes murder, schoolgirls have united to defy their own parents to prevent forced marriages that would cut short their childhood and deprive them of an education. 
And, in Nigeria, the group Youth Advocates for Change marched through the capital Abuja in 2015 demanding safe schools and proper police and army protection against the terrorist extremists of Boko Haram (whose name means “Western education is a sin”). 
The picture is clear: we are in the midst of a fight for freedom that has gone global. 
It includes girls in India demonstrating against police inaction over sexual assaults; Pakistani schoolchildren marching through Lahore after the latest Taliban attack on schools; young people on the streets of Cameroon’s capital, Yaoundé, supporting refugees; and Yemeni students demonstrating against a war that has destroyed hundreds of schools and left two million children with no education. 
The global youth uprising has intensified this year. 
In January, 40 million children and adults in India protested against child marriage by forming a human chain stretching more than 8,000 miles, woven through village after village in Bihar state. 
In February, Peruvian students were fired upon in Lima as they demonstrated against what they called the “Youth Slave Law,” which would employ students as unpaid interns. 
And thousands of students have taken to the streets in Honduras and India to oppose the rising cost of higher education. 
These new movements reflect our current digital age, in which young people can increasingly connect with one another in their own countries and across borders. 
In doing so, they are exposing the gap between the promise of opportunity and the grim reality of unequal chances – especially for girls, who comprise the majority of the 260 million children worldwide who are not in school, and the majority of the 400 million children who finish their education by the age of 11 or 12. 
Indeed, half the worlds’ children – some 800 million – finish school without any of the qualifications needed for the workforce of tomorrow. 
Many are condemned years before they reach the official school-leaving age to child labor, child marriage, or even to child trafficking. 
Young people’s new message of defiance and hope for real change echoes the compelling plea for environmental action by a 12-year-old girl, Severn Cullis-Suzuki, at the 1992 Rio de Janeiro Earth Summit. 
It was Cullis-Suzuki who brought a low-key conference to its feet – and started to bring a skeptical world to its senses – when she said that the environment was too important a matter to be entrusted to adults. 
The older generation, having failed to deliver a sustainable environment, could not be permitted to ruin the chances and opportunities of the next generation. 
And an even more powerful message is coming from young people today: that their right to education is too important to be entrusted to the adults who have failed to deliver. 
Almost a century ago, Eglantyne Jebb, who founded Save the Children, said that the only language everybody could understand was the cry of a child. 
But the cries of children have all too often been swept aside, and even the most progressive among us have acted as if children are silent observers, to be seen but not heard, passive objects of our actions. 
If the enduring image from a century ago is one of helpless children waiting to be protected and pitied, then the image remembered by the next generation will be radically different. 
As young people connect, communicate, and assert their rights, their cries are less likely to be tearful pleas for charity than defiant marches demanding justice. 
In the next few days, young people in Pakistan, where seven million school-age children are denied the chance to attend school, will launch a petition demanding the right to education. 
Their plea will be backed at the G20 Argentina Summit this November, when 700 Global Youth Ambassadors from 90 countries, mobilized through the Theirworld charity, call on world leaders to support a new International Finance Facility for Education – a multi-billion fund dedicated to enabling all children to go to school. 
It is an important moment – both inspiring and chastening for those of us who were children of a 1960s cultural revolution that failed to fulfill its promise, and now find ourselves overtaken by new movements with far more global potential for good. 
The torch is not being passed to a new generation; this new generation has had to seize it. 
They deserve our support. 


New Hope on Climate Change 
The world has taken an important step toward controlling climate change by agreeing to the Bali Action Plan at the global negotiations in Indonesia earlier this month. 
The plan may not look like much, since it basically committed the world to more talking rather than specific actions, but I am optimistic for three reasons. 
First, the world was sufficiently united that it forced the United States to end its intransigence. 
Second, the road map marks a sensible balance of considerations. 
And, third, realistic solutions are possible, which will allow the world to combine economic development and control of greenhouse gases. 
The first step at Bali was to break the deadlock that has crippled the global response to climate change since the signing of the Kyoto Protocol a decade ago. 
This time the world united, even booing the US lead negotiator until she reversed position and agreed to sign the Bali Action Plan. 
Likewise, the unwillingness of major developing countries such as China and India to sign on to a plan also seems to be ending, though considerable work remains to craft a global agreement to which both rich and poor countries can agree. 
Doing so requires balancing many concerns. 
First, we must stabilize greenhouse gases in order to avoid dangerous human interference in the climate system – the key goal of the 1992 United Nations Framework Convention on Climate Change, the global treaty under which the Bali negotiations took place. 
Second, we must accomplish this while leaving room for continued rapid economic development and poverty reduction. 
Poor countries do not and will not accept a system of climate control that condemns them to continued poverty. 
Third, we must help countries adapt to the climate change that is already occurring and that will intensify in the future. 
The Bali Action Plan addresses all three concerns. 
The plan’s main point is to establish an Ad Hoc Working Group to reach a detailed global agreement by 2009 that will set “measurable, reportable, and verifiable” commitments to reduce greenhouse-gas emissions. 
Such commitments are to be taken in the context of “sustainable development,” meaning that “economic and social development and poverty reduction are global priorities.” 
The plan also calls for knowledge transfer to enable poor countries to adopt environmentally sound technologies. 
The great question, of course, is whether stabilization of greenhouse gases, continued economic development, and adaptation to climate change can be achieved simultaneously. 
Using our current technologies, no; but if we develop and rapidly adopt new technologies that are within our scientific reach, yes. 
The most important challenge is to reduce, and eventually nearly eliminate, carbon dioxide emissions from burning fossil fuels such as oil, natural gas, and coal. 
These fuels are at the core of the modern world economy, supplying around four-fifths of the world’s commercial energy. 
Such emissions can be eliminated by either shifting to renewable forms of energy or reducing the emissions from fossil fuels. 
The key insight is that roughly 75% of our fossil fuel use goes for just a few purposes: to produce electricity and heat at power plants, to drive automobiles, to heat buildings, and to power a few key industries such as refineries, petrochemicals, cement, and steel. We need new environmentally sound technologies in each of these sectors. 
For example, power plants can adopt solar energy or capture and safely dispose of the carbon dioxide they produce with fossil fuels – as can large factories. 
Automobiles can be engineered for much greater mileage through hybrid technology combining battery power and gasoline. 
Buildings can reduce their heating needs through improved insulation, or by converting from heating oil to electricity produced by clean technology. 
According to the best economic and engineering estimates, if each key economic sector develops and adopts environmentally sound technologies in the coming decades, the world will be able to reduce carbon emissions dramatically for less than 1% of annual global income, thereby avoiding long-term damage that would cost far more. 
In other words, the world can combine economic growth with declining emissions of carbon dioxide. 
And rich countries will be able to afford to help poor countries pay for the new, cleaner technologies. 
To reach agreement by 2009, we must move beyond current generalities by which rich and poor countries argue about who should be blamed for climate change and who should pay the costs. 
We will need a true global business plan that spells out how the new technologies are developed, tested, and adopted on an expedited basis worldwide. 
We must ensure that all countries adopt a verifiable strategy for environmentally sound technology, and that rich countries fulfill the Bali Action Plan’s promise to provide “financial and other incentives” to enable poor countries to adopt the new technologies. 
With so many crises afflicting our world, there is perhaps cynicism that yet another global conference did little more than promise to continue talking. 
But let’s see the positive message instead: 190 countries agreed on a sensible plan, and the underlying science and technology gives us realistic hopes for achieving it. 
There is considerable and difficult work ahead, but the situation is better as a result of the deliberations in Bali. 
Now it’s time to role up our sleeves and achieve what we’ve promised. 

A New Grand Coalition for Germany – and Europe 
NEW YORK – Friends of Germany and Europe around the world have been breathing a sigh of relief at the newfound willingness of Germany’s Christian Democrats and Social Democrats (SPD) to discuss reprising their grand coalition government. 
The world needs a strong and forward-looking Germany in a dynamic European Union. 
A new grand coalition working alongside French President Emmanuel Macron’s government would make that possible. 
The SPD’s initial decision to go into opposition after its poor election result in September may have been sincere, and even strategically sound. 
But it is not timely. 
Diplomacy almost everywhere is fractured. 
The United States is reckoning with a psychologically unstable president, a plutocratic cabinet, and a Republican congressional majority. 
Europe is in the throes of multiple economic, social, political, and institutional crises. 
China, by contrast, is dynamic and outward-looking – providing good reason for the EU to assume vigorous leadership and engage in constructive partnerships with China on key initiatives (such as sustainable infrastructure across Eurasia). 
In short, this is a critical time for Germany and Europe to provide vision, stability, and global leadership. 
And that imperative extends to Chancellor Angela Merkel’s Christian Democratic Union (CDU), its Bavarian sister party, the Christian Social Union (CSU), and the SPD. 
But the CDU/CSU and the SPD need to do more than merely extend the previous government, which was too parochial in outlook and temperament. 
The world and Europe need an outward-looking Germany that offers more institutional and financial innovation, so that Europe can be a true counterpart to the US and China on global affairs. 
I say this as someone who believes firmly in Europe’s commitment and pioneering statecraft when it comes to sustainable development, the core requirement of our time. 
Economic growth that is socially inclusive and environmentally sustainable is a very European idea, one that has now been embraced globally in the United Nations’ 2030 Agenda and its 17 Sustainable Development Goals, as well as in the 2015 Paris climate agreement. 
Europe’s experience with social democracy and Christian democracy made this global vision possible. 
But now that its agenda has been adopted worldwide, Europe’s leadership in fulfilling it has become essential. 
A grand coalition government in Germany must help put Europe in a position to lead. 
French President Emmanuel Macron has offered some important ideas: a European finance minister; Eurobonds to finance a new European investment program; more emphasis on innovation; a financial transactions tax to fund increased aid to Africa, where Europe has a strategic interest in long-term development; and tax harmonization more generally, before the US triggers a global race to the bottom on taxing corporations and the rich. 
Contrary to the Germans who oppose such ideas, a European finance minister and Eurobonds would not and should not lead to fiscal profligacy, but rather to a revival of investment-led green growth in Europe. 
China has proposed the Belt and Road Initiative to build green infrastructure linking Southeast Asia and Central Asia with Europe. 
This is the time for Europe to offer the same bold vision, creating a partnership with China to renovate Eurasia’s infrastructure for a low-carbon future. 
If Europe plays its cards right, Europe’s (and China’s) scientific and technical excellence would flourish under such a vision. 
If not, we will all be driving Chinese electric vehicles charged by Chinese photovoltaic cells in the future, while Germany’s automotive industry will become a historical footnote. 
A European finance minister would, moreover, finally end Europe’s self-inflicted agony in the aftermath of the 2008 financial crisis. 
As difficult as it is to believe, Greece’s crisis continues to this day, at Great Depression scale, ten years after the onset of the crisis. 
This is because Europe has been unable, and Germany unwilling, to clean up the financial mess (including Greece’s unpayable debts) in a fair and forward-looking manner (akin to the 1953 London Agreement on German External Debts, as Germany’s friends have repeatedly reminded it). 
If Germany won’t help to lead on this issue, Europe as a whole will face a prolonged crisis with severe social, economic, and political repercussions. 
In three weeks, Macron will convene world leaders in Paris on the second anniversary of the climate accord. 
France should certainly take a bow here, but so should Germany. 
During Germany’s G20 Presidency, Merkel kept 19 of the 20members of the G20 firmly committed to the Paris agreement, despite US President Donald Trump’s disgraceful attempt to wreck it. 
Yes, the corruption of US politics (especially campaign funding by the oil and gas industry) threatened the global consensus on climate change. 
But Germany stood firm. 
The new coalition should also ensure that the country’s Energiewende (“energy transition”) delivers on the 2020 targets set by previous governments. 
These achievable and important commitments should not be a bargaining chip in coalition talks. 
A CDU/CSU-SPD alliance, working with France and the rest of Europe, could and should do much more on climate change. 
Most important, Europe needs a comprehensive energy plan to decarbonize fully by 2050. 
This will require a zero-carbon smart power grid that extends across the continent and taps into the wind and solar power not only of southern Europe but also of North Africa and the eastern Mediterranean. 
Once again, Eurobonds, a green partnership with China, and unity within Europe could make all the difference. 
Such an alliance would also enable a new foreign policy for Europe, one that promotes peace and sustainable development, underpinned by new security arrangements that do not depend so heavily on the US. 
Europe, a magnet for hundreds of millions of would-be economic migrants, could, should, and I believe would regain control of its borders, allowing it to strengthen and enforce necessary limits on migration. 
The political terms of a new grand coalition government, it would seem, are clear. 
The SPD should hold out for ministerial leadership on economic and financial policy, while the CDU/CSU holds the chancellorship. 
That would be a true coalition, not one that could bury the SPD politically or deny it the means to push for a truly green, inclusive, EU-wide, sustainable development agenda. 
With Merkel and SPD leader Martin Schulz in the lead, the German government would be in excellent, responsible, and experienced hands. 
Germany’s friends and admirers, and all supporters of global sustainable development, are hoping for this breakthrough. 

Beyond GDP 
INCHEON – Just under ten years ago, the International Commission on the Measurement of Economic Performance and Social Progress issued its report, Mismeasuring Our Lives: Why GDP Doesn’t Add Up.The title summed it up: GDP is not a good measure of wellbeing. 
What we measure affects what we do, and if we measure the wrong thing, we will do the wrong thing. 
If we focus only on material wellbeing – on, say, the production of goods, rather than on health, education, and the environment – we become distorted in the same way that these measures are distorted; we become more materialistic. 
We were more than pleased with the reception of our report, which spurred an international movement of academics, civil society, and governments to construct and employ metrics that reflected a broader conception of wellbeing. 
The OECD has constructed a Better Life Index, containing a range of metrics that better reflect what constitutes and leads to wellbeing. 
It also supported a successor to the Commission, the High Level Expert Group on the Measurement of Economic Performance and Social Progress. 
Last week, at the OECD’s sixth World Forum on Statistics, Knowledge, and Policy in Incheon, South Korea, the Group issued its report, Beyond GDP: Measuring What Counts for Economic and Social Performance. 
The new report highlights several topics, like trust and insecurity, which had been only briefly addressed by Mismeasuring Our Lives, and explores several others, like inequality and sustainability, more deeply. 
And it explains how inadequate metrics have led to deficient policies in many areas. 
Better indicators would have revealed the highly negative and possibly long-lasting effects of the deep post-2008 downturn on productivity and wellbeing, in which case policymakers might not have been so enamored of austerity, which lowered fiscal deficits, but reduced national wealth, properly measured, even more. 
Political outcomes in the United States and many other countries in recent years have reflected the state of insecurity in which many ordinary citizens live, and to which GDP pays scant attention. 
A range of policies focused narrowly on GDP and fiscal prudence has fueled this insecurity. 
Consider the effects of pension “reforms” that force individuals to bear more risk, or of labor-market “reforms” that, in the name of boosting “flexibility,” weaken workers’ bargaining position by giving employers more freedom to fire them, leading in turn to lower wages and more insecurity. 
Better metrics would, at the minimum, weigh these costs against the benefits, possibly compelling policymakers to accompany such changes with others that enhance security and equality. 
Spurred on by Scotland, a small group of countries has now formed the Wellbeing Economy Alliance. 
The hope is that governments putting wellbeing at the center of their agenda will redirect their budgets accordingly. 
For example, a New Zealand government focused on wellbeing would direct more of its attention and resources to childhood poverty. 
Better metrics would also become an important diagnostic tool, helping countries both identify problems before matters spiral out of control and select the right tools to address them. 
Had the US, for example, focused more on health, rather than just on GDP, the decline in life expectancy among those without a college education, and especially among those in America’s deindustrialized regions, would have been apparent years ago. 
Likewise, metrics of equality of opportunity have only recently exposed the hypocrisy of America’s claim to be a land of opportunity: Yes, anyone can get ahead, so long as they are born of rich, white parents. 
The data reveal that the US is riddled with so-called inequality traps: Those born at the bottom are likely to remain there. 
If we are to eliminate these inequality traps, we first have to know that they exist, and then ascertain what creates and sustains them. 
A little more than a quarter-century ago, US President Bill Clinton ran on a platform of “putting people first.” 
It is remarkable how difficult it is to do that, even in a democracy. 
Corporate and other special interests always seek to ensure that their interests come first. 
The massive US tax cut enacted by the Trump administration at this time last year is an example, par excellence. 
Ordinary people – the dwindling but still vast middle class – must bear a tax increase, and millions will lose health insurance, in order to finance a tax cut for billionaires and corporations. 
If we want to put people first, we have to know what matters to them, what improves their wellbeing, and how we can supply more of whatever that is. 
The Beyond GDP measurement agenda will continue to play a critical role in helping us achieve these crucial goals. 

New Model China 
China's leaders are gathered for their annual retreat at the seaside resort of Beidaihe. 
They, and the world at large, are focusing on the succession to President Jiang Zemin and Premier Zhu Rongji. 
What sort of China will Jiang's successors inherit? 
Kenichi Ohmae offers his analysis. 
Over the coming decades, China will become a thoroughly new form of political and economic entity. 
Brutally competitive in both politics and world markets, innovative and resilient, China will be more dominant than any nation save America. 
Such a shift in the global balance of power occurs only about once every century and is comparable to the emergence of the US as a world power a century ago. 
The magnitude of this change is due, in part, to a radical and rapid shift in China's governance. 
Because of its suddenness, it is tempting to write this shift off as a fluke. 
But China's restructuring is permanent and will affect every aspect of its national life, as well as its global standing. 
The People's Republic now embodies two systems: the centralized, autocratic Communist administration, dominated by an outdated ideology and military interests, and the decentralized free-market economic regime. 
Whether deliberately or not, China is reorganizing itself to balance central authority and common purpose with decentralized freedom, in the same way that nimble companies balance home-office and divisional control. 
The result is an entirely new geopolitical model--the country as corporation. 
Call the new China "Chung-hua, Inc." ( Chunghua translates as "China" and actually means "the prosperous center of the universe.") 
Like many corporations, China is moving most decisionmaking to the "business unit" level--semi-autonomous, self-governing economic region-states that compete fiercely against each other for capital, technology, and human resources (just as America's states do). 
This new, decentralized free-market regime currently encompasses only a small part of China's vast territory, and many Chinese officials still refuse to acknowledge its existence. 
Indeed, only seven years ago, the word federation was banned from the Chinese language; companies like Federal Transport or Federation Merchants were required to change their names. 
Today, China has the most federal governance structure of any large nation except the US. 
Two broad categories of region-states exist. 
The first are relatively small, composed of cities and their surrounding areas, generally with a population of 5-7 million people. 
Some of these--Shenzhen, Shanghai, Dalian, Tianjin, Shenyang, Xiamen, Qingdao, and Suzhou--are now growing economically at a rate of 15-20% per year--faster than such Asian "tigers" as Malaysia, Taiwan, Thailand, and Korea ever did. 
These smaller region-states, in turn, are propelling the growth of larger mega-regions, with populations approaching 100 million each. 
The mega-regions, which tend to share common dialects, ethnic identities, and histories, are becoming economic powerhouses in their own right. 
If they were separate nations, five of them--the Yangtze Delta, the Northeastern Tristates area (formerly known as Manchuria), the Pearl River Delta, the Beijing-Tianjin corridor, and Shandong--would rank among Asia's ten largest economies. 
Regional governments have also been toughened up by the Chung-hua , Inc. ethic. 
Most officials are appointed, not elected, but their posts are not sinecures. 
Not only are they held to targets of 7% annual economic growth or better (like many corporate executives), they must also improve environmental quality, build better infrastructure, and reduce local crime levels. 
In October 2001, a half-dozen bureaucrats were expelled from one of China's major cities for not meeting their economic growth and security targets. 
Local officials are often considered heroes, not oppressors. 
In January 2001, Bo Xhi Lai, then mayor of Dalian, was promoted to governor of Liaoning province. 
Thousands of women, many in tears, spontaneously came to a park to bid him farewell. 
During his nine-year tenure, Dalian evolved from a ramshackle port into one of the cleanest and most prosperous cities in Asia. 
It now has a street life more vibrant than Singapore, a layout reminiscent of Paris before the automobile, and a reputation among Japanese tourists for high-quality hotels, transportation, and restaurants. 
All of this is taking place in a nation where Communist ideology remains strong and that remains in many respects a military dictatorship which threatens to conquer Taiwan by force, as well as uses North Korea, Pakistan, and Libya as stalking horses for weapons development. 
Introduction of foreign companies, technologies, and unfettered mobility for corporations and people would all be viewed as a threat to the Communist system if it were publicly acknowledged. 
Instead, China's highest officials publicly insist that they run the most centrally controlled government in the world, with full authority to appoint or dismiss mayors, governments, and bureaucrats. 
Strictly speaking, they are right. 
But they dare not overrun the open, commercial ethic of China's region-states--the source of their country's prosperity. 
So debates about China should not be cast as a simple matter of right or wrong, but of when and how. 
Politically, China is comparable to the US in 1800: an emerging nation with high ideals but widespread poverty and many practices that others find intolerable. 
A decade or two of economic freedom and growth will give China's people an appetite for self-determination and participation that may surprise the rest of us. 
Already, some village leaders are elected; this may slowly spread to regional officials, and then upward to the central government. 
Even top communists appear to acknowledge and embrace change. 
Recently, China's head of state, Jiang Zemin, said that the Communist Party "represents" every good aspect of China, including wealthy capitalists, not just the poor, the exploited, and the proletariat. 
We should not be surprised if soon--perhaps at the Party's 2002 General Assembly--China's leaders formally call for a new doctrine to match its new model. 

New Rules for the Monetary Game 
NEW DELHI – Our world is facing an increasingly dangerous situation. 
Both advanced and emerging economies need to grow in order to ease domestic political tensions. 
And yet few are. 
If governments respond by enacting policies that divert growth from other countries, this “beggar my neighbor” tactic will simply foster instability elsewhere. 
What we need, therefore, are new rules of the game. 
Why is it proving to be so hard to restore pre-Great Recession growth rates? 
The immediate answer is that the boom preceding the global financial crisis of 2008 left advanced economies with an overhang of growth-inhibiting debt. 
While the remedy may be to write down debt to revive demand, it is uncertain whether write-downs are politically feasible or the resulting demand sustainable. 
Moreover, structural factors like population aging and low productivity growth – which were previously masked by debt-fueled demand – may be hampering the recovery. 
Politicians know that structural reforms – to increase competition, foster innovation, and drive institutional change – are the way to tackle structural impediments to growth. 
But they know that, while the pain from reform is immediate, gains are typically delayed and their beneficiaries uncertain. 
As Jean-Claude Juncker, then Luxembourg’s prime minister, said at the height of the euro crisis, “We all know what to do; we just don't know how to get re-elected after we’ve done it!” 
Central bankers face a different problem: inflation that is flirting with the lower bound of their mandate. 
With interest rates already very low, advanced economies’ central bankers know that they must go beyond ordinary monetary policy – or lose credibility on inflation. 
They feel that they cannot claim to be out of tools. 
If all else fails, there is always the “helicopter drop,” whereby the central bank prints money and sprays it on the streets to create inflation (more prosaically, it sends a check to every citizen, perhaps more to the poor, who are likelier to spend it). 
But they can also employ a range of other unconventional tools more aggressively, from asset purchases (so-called quantitative easing) to negative interest rates. 
But do such policies achieve their goal of strengthening demand and growth? 
Monetary policy works by influencing public expectations. 
If an ever more aggressive policy convinces the public that calamity is around the corner, households may save rather than spend. 
That tendency will be even greater if the public senses that the consequences (distorted asset prices, high government debt, etc.) eventually must be reversed. 
Conversely, if people were convinced that policies would never change, they might splurge again on assets and take on excessive debt, helping the central bank achieve its objectives in the short run. 
But policy inevitably changes, and the shifts in asset prices would create enormous dislocation when it does. 
Beyond the domestic impacts, all monetary policies have external “spillover” effects. 
In normal circumstances, if a country reduces domestic interest rates to boost domestic consumption and investment, its exchange rate depreciates, too, helping exports. 
Today’s circumstances, however, are not normal. 
Domestic demand may not respond to unconventional policy. 
Moreover, facing distorted domestic bond prices stemming from unconventional policy, pension funds and insurance companies may look to buy them in less distorted markets abroad. 
Such a search for yield will depreciate the exchange rate further – and increase the risk of competitive devaluations that leave no country better off. 
As matters stand, central banks in developed countries find all sorts of ways to justify their policies, without acknowledging the unmentionable – that the exchange rate may be the primary channel of transmission. 
If so, what we need are monetary rules that prevent a central bank’s domestic mandate from trumping a country’s international responsibility. 
To use a traffic analogy, policies with few adverse spillovers should be rated “green”; those that should be used temporarily could be rated “orange”; and policies that should be avoided at all times would be “red.” 
If a policy has positive effects on both home and foreign countries, it would definitely be green. 
A policy could also be green if it jump-starts the home economy with only temporary negative spillovers for the foreign economy (the policy will still be good for the foreign economy by eventually boosting the home economy’s demand for imports). 
An example of a red policy would be when unconventional monetary policies do little to boost a country’s domestic demand – but lead to large capital outflows that provoke asset-price bubbles in emerging markets. 
There will be plenty of gray areas (or orange, to stick to the analogy). 
A policy that has large positive effects for a big economy might have small negative effects for the rest of the world and yet still be positive overall for global welfare. 
Such a policy would be permissible for some time, but not on a sustained basis. 
We are far from having clear agreement on the color of policies today, even with the best data, models, and empirical work. 
So we must begin a discussion. 
We could start with background papers from eminent academics and move on to multilateral institutions such as the International Monetary Fund and the G-20. 
There will be a lot of fuzziness initially, but discussion will lead in time to better models and data – and will push policymakers to stay out of the clearly red. 
Arguably, what I have in mind will eventually require a new international agreement along the lines of Bretton Woods, and some reinterpretation of the mandates of internationally influential central banks. 
But we already have a basis for discussion. 
The IMF’s Article IV states: “In particular, each member shall … avoid manipulating exchange rates or the international monetary system in order to prevent effective balance-of-payments adjustment or to gain unfair competitive advantage over other members…” 
Setting the rules will take time. 
But the international community has a choice. 
We can pretend all is well with the global monetary non-system and hope that nothing goes spectacularly wrong. 
Or we can start building a system fit for the integrated world of the twenty-first century. 
This article is based on work with Dr. Prachi Mishra at the Reserve Bank of India. 

The Curing Machine 
VIRGINIA BEACH – Last year, the Nobel Prize in Medicine was awarded for a discovery that took 44 years to develop, and involved two different research teams. 
The breakthrough promises new kinds of diagnosis and therapy, but what if such insights could be developed by computers in minutes, rather than decades? 
The recent appearance of a new coronavirus, which has killed nine people in the United Kingdom and the Middle East, is a reminder that novel treatments are sometimes needed in a hurry. 
With different modeling abstractions, it might be possible to build an artificial-intelligence system (AI) that could design new treatments. 
That system would suggest surprising, effective therapies, because it would understand disease in ways that are difficult for humans to imagine. 
The notion seems like science fiction: everyone knows that AI is not particularly clever. 
In order to build a “curing machine” of this kind, at least one far-reaching innovation is needed: a better way of modeling entire systems, which would deliver new conceptual tools to both biology and computer science. 
In both fields, the conventional approach has been reductionist, with problems modeled at the level of their most basic components. 
While this makes it possible to build “expert systems” that reason in narrow domains, or to design search engines that can find discrete facts, we are no closer to AI that reasons the way that we do – in and across multiple contexts, including time. 
AI cannot integrate information about seemingly distinct processes, such as chemical, physiological, and psychological events, or anticipate novel outcomes. 
We do these things over dinner. 
Novelty is key. 
To build a curing machine, we would need a way for computers to assemble concepts so that unexpected arrangements could emerge. 
In biology, there has been a similar reductionist approach, best exemplified by the Human Genome Project, which catalogued the molecular “recipe” for every aspect of the body, in order to discover how the most basic pieces interacted. 
Alas, the expected revolution in therapies is yet to occur. 
Worldwide, total annual investment in biomedical research is about $110 billion. 
HIV alone attracts many billions per year. 
Yet, despite 25 years of intense investment in structural biology, we remain unable to move from understanding molecules to an understanding of whole systems. 
A model of the dynamics between multiple processes – chemical, physiological, and psychological – would lend new insight into how diseases operate. 
Consider, for example, the sense of smell. 
The nasal cavity is unique, as the only place where brain cells (neurons) are directly exposed to the environment. 
If we model smell on local terms, we can trace how nasal neurons interact with scent particles, sending signals through a network of other neurons to the brain. 
We have good abstractions in structural biology to describe this. 
But these neurons are also part of an adaptive, regenerative system. 
Sensory neurons die a programmed death; you literally have a new sense of smell every month. 
Modeling it requires the consideration of more than just local signaling. 
Neurons operate as a cooperative group: more arrive at the location than are needed for a simple replacement. 
In order to facilitate the replacement, the extras become part of a dialog with surrounding cells, and others deep in the brain, then sacrifice themselves. 
To explain why they voluntarily die, we would need a new system-level vocabulary. 
It does not stop there. 
When your neurons are replaced, they change. 
If you are newly in love (or experience a trauma) and a scent is associated with it, you may develop a heightened sensitivity to that scent. 
Your physio-cognitive apparatus evolves. 
This process interests researchers enormously, because it is one of only two contexts in which neural regeneration occurs. 
If it were understood, it could lead to cures for many crippling diseases, both neurological (like Parkinson’s and Alzheimer’s) and degenerative (including those, like cancer, associated with aging). 
One way to understand how this higher-level coherence emerges is to study it in a more accessible form. 
As it happens, there is a naturally occurring information structure in which the needed behaviors are easier to observe and explain. 
That structure can be found in stories. 
Stories are remarkable for the way that they allow us to comprehend new concepts, and continue to make sense of them, even when they involve numerous contexts and unexpected associations. 
We take the resulting narrative effects for granted: surprise endings, intriguing situations, and a compulsion to read or watch until the finish. 
If models of biology and AI included these dynamics, they would demonstrate how unexpected elements can emerge from an evolving coherence. 
Indeed, incorporating this principle into both fields could result in new diagnostic capabilities and new forms of individualized treatment, with a different therapy designed for each person. 
An infection such as the coronavirus is currently countered with a vaccine tailored to block it. 
But what if there was a way to “tune” bodies to reject all infections? 
For example, there are a few cases of natural immunity to HIV, but we are unable to understand why. 
The challenge in biomedical and computational research is to model the dynamics between diverse processes at the level of whole systems. 
Once we can do this, we are much more likely to develop AI tools that are capable of unexpected breakthroughs in understanding how the body supports and resists illness. 

East Asia’s Turning Point 
NEW DELHI – Political transitions in East Asia promise to mark a defining moment in the region’s jittery geopolitics. 
After the ascension in China of Xi Jinping, regarded by the People’s Liberation Army (PLA) as its own man, Japan seems set to swing to the right in its impending election – an outcome likely to fuel nationalist passion on both sides of the Sino-Japanese rivalry. 
Japan’s expected rightward turn comes more than three years after voters put the left-leaning Democratic Party of Japan (DPJ) in power. 
By contrast, South Korea’s election – scheduled for December 19, just three days after the Japanese go to the polls – could take that country to the left, after the nearly five-year rule of rightist President Lee Myung-bak, who proved to be a polarizing leader. 
These political transitions could compound East Asia’s challenges, which include the need to institute a regional balance of power and dispense with historical baggage that weighs down interstate relationships, particularly among China, Japan, and South Korea. 
Booming trade in the region has failed to mute or moderate territorial and other disputes; on the contrary, it has only sharpened regional geopolitics and unleashed high-stakes brinkmanship. 
Economic interdependence cannot deliver regional stability unless rival states undertake genuine efforts to mend their political relations. 
The scandals surrounding the top aides to Lee – nicknamed “the Bulldozer” from his career as a construction industry executive – have complicated matters for the ruling Saenuri Party’s candidate, Park Geun-hye, and buoyed the hopes of her leftist rival, Moon Jae-in of the Democratic United Party. 
Park is the daughter of former president, General Park Chung-hee, who seized power in a military coup in 1961. 
Reining in South Korea’s powerful chaebol (family-run conglomerates) has become a key issue in the presidential election, with even Park favoring tighter control over them, although it was her father’s regime that helped build them with generous government support. 
Her populist stance on the chaebol suggests that, if elected, she might similarly pander to nationalist sentiment by taking a tough stance against Japan, especially to play down her father’s service in Japan’s military while Korea was under Japanese colonial rule. 
But, even if Moon becomes president, the new strains in South Korea’s relationship with Japan, owing to the revival of historical issues, may not be easy to mend. 
Earlier this year, Lee, at the last minute, canceled the scheduled signing of the “General Security of Military Information Agreement” with Japan, which would have established military intelligence-sharing between the two countries, both US allies, for the first time. 
Lee also scrapped a bilateral plan to finalize a military-related Acquisition and Cross-Servicing Agreement. 
Weeks later, he provocatively visited the contested islets known as the Dokdo Islands in South Korea (which controls them) and the Takeshima Islands in Japan. 
China, meanwhile, has cast a long shadow over the Japanese parliamentary elections. 
In recent months, China has launched a new war of attrition by sending patrol ships frequently to the waters around the Japanese-controlled Senkaku islands, which China calls Diaoyu. 
This physical assertiveness followed often-violent anti-Japanese protests in China in September, while a continuing informal boycott of Japanese goods has led to a sharp fall in Japan’s exports to China, raising the risk of another Japanese recession. 
The DPJ’s 2009 election victory had been expected to lead to a noticeable warming of Japan’s ties with China. 
After all, the DPJ came to power on a promise to balance Japan’s dependence on the US with closer ties with the People’s Republic. 
But its bridge-building agenda foundered on growing Chinese assertiveness, leading successive DPJ governments to bolster Japan’s security ties with the US. 
China’s behavior has fueled a nationalist backlash in Japan, helping to turn hawkish, marginal politicians like Shintaro Ishihara into important mainstream figures. 
Japan may be in economic decline, but it is rising politically. 
Indeed, Albert del Rosario, the foreign minister of the Philippines, which was under Japanese occupation during WWII, now strongly supports a re-armed Japan as a counterweight to China. 
But the resurgence of nationalism in Japan is only fanning Chinese nationalism, creating a vicious circle from which the two countries are finding it difficult to escape. 
Shinzo Abe of the Liberal Democratic Party, who is likely to become Japan’s next prime minister, has vowed to take a tougher line on Senkaku and other disputes with China. 
More important, the LDP has called for revising Article 9 of Japan’s US-imposed post-1945 constitution, which renounces war. 
The risks posed by increasing nationalism and militarism to regional peace have already been highlighted by the rise of a new Chinese dynasty of “princelings,” or sons of revolutionary heroes who have widespread contacts in the military. 
The real winner from the recent appointment of the conservative-dominated, seven-member Politburo Standing Committee is the PLA, whose rising clout has underpinned China’s increasingly assertive foreign policy. 
In fact, what distinguishes Xi from China’s other civilian leaders is his strong relationship with the PLA. 
As Xi rose through the Communist Party ranks, he forged close military ties as a reservist, assuming leadership of a provincial garrison and serving as a key aide to a defense minister. 
His wife, Peng Liyuan, is also linked to the military, having served as a civilian member of the army’s musical troupe, and carries an honorary rank of general. 
Against this background, the central challenge for East Asia’s major economies – particularly Japan and South Korea – is to resolve the historical issues that are preventing them from charting a more stable and prosperous future. 

Controlling Cyber Conflict 
LAS VEGAS – When cyber-security professionals were polled recently at their annual BlackHat conference in Las Vegas, 60% said they expected the United States to suffer a successful attack against its critical infrastructure in the next two years. 
And US politics remains convulsed by the aftermath of Russian cyber interference in the 2016 election. 
Are cyber-attacks the wave of the future, or can norms be developed to control international cyber conflict? 
We can learn from the history of the nuclear age. 
While cyber and nuclear technologies are vastly different, the process by which society learns to cope with a highly disruptive technology shows instructive similarities. 
It took states about two decades to reach the first cooperative agreements in the nuclear era. 
If one dates the cyber-security problem not from the beginning of the Internet in the 1970s, but from the late 1990s, when burgeoning participation made the Internet the substrate for economic and military interdependence (and thus increased our vulnerability), cooperation is now at about the two-decade mark. 
The first efforts in the nuclear era were unsuccessful United Nations-centered treaties. 
In 1946, the US proposed the Baruch plan for UN control of nuclear energy, and the Soviet Union promptly rejected locking itself into a position of technological inferiority. 
It was not until after the Cuban Missile Crisis in 1962 that a first arms control agreement, the Limited Test Ban Treaty, was signed, in 1963. 
The Nuclear Non-Proliferation Treaty followed in 1968, and the bilateral US-USSR Strategic Arms Limitation Treaty in 1972. 
In the cyber field, Russia proposed a UN treaty to ban electronic and information weapons (including propaganda) in 1999. 
With China and other members of the Shanghai Cooperation Organization, it has continued to push for a broad UN-based treaty. 
The US resisted what it saw as an effort to limit American capabilities, and continues to regard a broad treaty as unverifiable and deceptive. 
Instead, the US, Russia, and 13 other states agreed that the UN Secretary General should appoint a Group of Governmental Experts (GGE), which first met in 2004. 
That group initially produced meager results; but, by July 2015, it issued a report, endorsed by the G20, that proposed norms for limiting conflict and confidence-building measures. 
Groups of experts are not uncommon in the UN process, but only rarely does their work rise from the UN’s basement to a summit of the world’s 20 most powerful states. 
But while the GGE’s success was extraordinary, last month it failed and was unable to issue a consensus report for 2017. 
The GGE process has limitations. 
The participants are technically advisers to the UN Secretary General rather than fully empowered national negotiators. 
Over the years, as the number of GGE member states increased from the original 15 to 20 and then to 25, the group became more unwieldy, and political issues became more intrusive. 
According to one diplomat who has been central to the process, some 70 countries have expressed interest in participating. 
But as the numbers expand, the difficulty of reaching agreement increases. 
There is a wide range of views about the future of the GGE process. 
A first draft of a new report existed at the beginning of this year, and the able German chairman argued that the group should not rewrite the 2015 report, but try to say more about the steps that states should take in peacetime. 
Some states suggested new norms to address data integrity and maintenance of the Internet’s core structures. 
There was general agreement about confidence-building measures and the need to strengthen capacity. 
The US and like-minded states pressed for further clarification of the earlier agreement that international laws of armed conflict, including the right of self-defense, apply in cyber space, but China, Russia, and their allies were reluctant to agree. 
And the deterioration in US-Russian relations soured the political climate. 
Moreover, whereas some states hope to revive the GGE process or enlarge it into a broader UN process, others are skeptical, and believe that future progress will be limited to discussions among like-minded states, rather than leading to universal agreements. 
Norms that may be ripe for discussion outside the GGE process could include protected status for the core functions of the Internet; supply-chain standards and liability for the Internet of Things; treatment of election processes as protected infrastructure; and, more broadly, norms for issues such as crime and information warfare. 
All of these are among the topics that may be considered by the new informal Global Commission on Stability in Cyberspace established early this year and chaired by former Estonian Foreign Minister Marina Kaljurand. 
Progress on the next steps of norm formation will require simultaneous use of many different formats, both private and governmental. 
For example, the 2015 agreement between China and the US to limit industrial cyber espionage was a bilateral accord that was later taken up by the G20. 
In some cases, the development of norms among like-minded states can attract adherence by others at a later point. 
In others, such as the Internet of Things, norms for security standards may benefit from leadership by the private sector or non-profit stakeholders in establishing codes of conduct. 
And progress in some areas need not wait for others. 
A regime of norms may be more robust when linkages are not too tight, and an over-arching UN treaty would harm such flexibility at this point. 
Expansion of participation is important for the acceptance of norms, but progress will require action on many fronts. 
Given this, the failure of the GGE in July 2017 should not be viewed as the end of the process. 

Unconventional Monetary Policy on Stilts 
NEW YORK – With most advanced economies experiencing anemic recoveries from the 2008 financial crisis, their central banks have been forced to move from conventional monetary policy – reducing policy rates via open-market purchases of short-term government bonds – to a range of unconventional policies. 
Although the zero nominal bound on interest rates – previously only a theoretical possibility – had been reached and zero-interest-rate policy (ZIRP) had been implemented, growth remained anemic. 
So central banks embraced measures that didn’t even exist in their policy toolkit a decade ago. 
And now they are poised to do so again. 
The list of unconventional measures has been extensive. 
There was quantitative easing (QE), or purchases of long-term government bonds, once short-term rates were already zero. 
This was accompanied by credit easing (CE), which took the form of central-bank purchases of private or semi-private assets – such as mortgage- and other asset-backed securities, covered bonds, corporate bonds, real-estate trust funds, and even equities via exchange-traded funds. 
The aim was to reduce private credit spreads (the difference between yields on private assets and those on government bonds of similar maturity) and to boost, directly and indirectly, the price of other risky assets such as equities and real estate. 
Then there was “forward guidance” (FG), the commitment to keep policy rates at zero for longer than economic fundamentals justified, thereby further reducing shorter-term interest rates. 
For example, committing to maintain zero policy rates for, say, three years implies that interest rates on securities with up to a three-year maturity should also fall to zero, given that medium-term interest rates are based on expectations concerning short-term rates over the next three years. 
Capping things off, there was unsterilized currency-market intervention to boost exports via a weaker currency. 
These policies did indeed reduce long- and medium-term interest rates on government securities and mortgage bonds. 
They also narrowed credit spreads on private assets, boosted the stock market, weakened the currency, and reduced real interest rates by increasing inflation expectations. 
So they were partly effective. 
Still, in most advanced economies, growth (and inflation) remained stubbornly low. 
There was no shortage of reasons for this. 
Given deleveraging from high private and public debts, unconventional monetary policies could prevent severe recessions and outright deflation; but they could not bring about robust growth and 2% inflation. 
Moreover, the policy mix was suboptimal. 
While monetary policy can play an important role in boosting growth and inflation, structural policies are needed to increase potential growth and keep firms, households, banks, and government from turning into zombies, chronically unable to spend because of too much debt. 
And fiscal policies were also necessary to support aggregate demand. 
Unfortunately, the political economy of most structural reforms – with their front-loaded costs and back-loaded benefits – implies that they occur only slowly. 
At the same time, fiscal policy has been constrained in some countries by high deficits and debts (which jeopardize market access), and in others (the eurozone, the United Kingdom, and the United States, for example) by a political backlash against further fiscal stimulus, leading to austerity measures that undermine short-term growth. 
So, like it or not, central banks became and still are the only game in town when it comes to supporting aggregate demand, lifting employment, and preventing deflation. 
As a result, unconventional monetary policies – entrenched now for almost a decade – have themselves become conventional. 
And, in view of persistent lackluster growth and deflation risk in most advanced economies, monetary policymakers will have to continue their lonely fight with a new set of “unconventional unconventional” monetary policies. 
Some have already been implemented. 
For example, negative interest policy rates (NIRPs) are now standard in Switzerland, Sweden, Denmark, the eurozone, and Japan, where the excess reserves that banks hold with central banks as a result of QE are taxed with a negative rate. 
Policymakers have shifted from working on the quantity of money (QE, CE, and foreign-exchange intervention) to working on the price of money (first ZIRP, then FG, and now NIRP). 
Nominal interest rates are now negative not only for overnight debt, but also for ten-year government bonds. 
Indeed, about $6 trillion worth of government bonds around the world today have negative nominal yields. 
The next stage of unconventional unconventional monetary policy – if the risks of recession, deflation and financial crisis sharply increase – could have three components. 
First, central banks could tax cash to prevent banks from attempting to avoid the negative-rate tax on excess reserves. 
With banks unable to switch into cash (thereby earning zero rates), central banks could go even more negative with policy rates. 
Second, QE could evolve into a “helicopter drop” of money or direct monetary financing by central banks of larger fiscal deficits. 
Indeed, the recent market buzz has been about the benefits of permanent monetization of public deficits and debt. 
Moreover, while QE has benefited holders of financial assets by boosting the prices of stocks, bonds, and real estate, it has also fueled rising inequality. 
A helicopter drop (through tax cuts or transfers financed by newly printed money) would put money directly into the hands of households, boosting consumption. 
Third, credit easing by central banks, or purchases of private assets, could broaden significantly. 
Think of direct purchases of stocks, high-risk corporate bonds, and banks’ bad loans. 
If unconventional unconventional monetary policies sound a little crazy, it’s worth remembering that the same was said about “conventional unconventional” policies just a few years ago. 
And if current conditions in the advanced economies remain entrenched a decade from now, helicopter drops, debt monetization, and taxation of cash may turn out to be the new QE, CE, FG, ZIRP, and NIRP. 
Desperate times call for desperate measures. 

New Rules for A New Economy 
Economic progress is more than a matter of markets and technological innovation. 
As an economy's structure changes, government policies must change as well, or economic development will be stunted. 
Consider the British agricultural revolution before 1800, which was an essential prerequisite for the industrial revolution that followed. 
The enclosure movement extinguished common rights to land and allowed landowners (at the cost of great suffering, to be sure) to experiment with new, more productive techniques. 
Had institutions and laws not changed, that particular economic transformation would have not happened. 
Or look at the US at the 19th century's end--«the furnace where the future was being forged,» as Leon Trotsky called it. 
Mass production, large corporations, a continent_wide market, and electric power could not come to pass without institutional and legal changes that underlay the economic transformation. 
Federal preemption of state law forged the country into a single market. 
Without a new legal regime, limited-liability companies (necessary to raise capital for large undertakings) could not exist. 
Antitrust laws made certain that the enormous economies of scale of the large corporation were not achieved at the price of eliminating competition. 
It did not have to happen this way. 
In Europe there was no continental market because of national tariffs, and fewer economies of scale were attained. 
In Germany, with no antitrust policy, there was no brake on the cartelization of industry, which made the average German poorer and the distribution of wealth more skewed. 
What legal and institutional changes are needed now to make the economy flourish as the changes produced by computers take hold? 
To answer we need to look into what is really new in the «new economy.» 
Perhaps the biggest change is that the most important product of the new economy--information--is not «rival»: my consumption of it does not detract from yours. 
If I am wearing my shoes, you cannot wear them. 
But if I am informed, or have access to software, you can also be informed and have access to the same software, without detracting from my use. 
Non-rival goods may have high «fixed» costs, i.e., it may cost a lot to bring them to market. 
But the «marginal» cost--the cost of making them available to one more consumer--is low or nothing at all. 
The «new economy's» products also have «network effects.» 
A single fax machine is a hunk of metal best used as a door stop. 
100,000 fax machines make possible ten billion different connections. 
This is known as Metcalfe's law: the number of connections, and thus the network's utility, rises not proportionately, but exponentially. 
These characteristics have crucial implications. 
The old economy is driven by negative feedback: rising demand leads to higher prices, which leads producers to produce more and consumers to buy less, which restores an equilibrium at a lower level of demand. 
By contrast, in an information economy, feedback is often positive: rising demand produces higher efficiency, higher returns, and lower prices, leading to yet higher demand. 
The opportunity is that growth may snowball. 
But if we are to take advantage of the «new economy's» potential, markets must be as large as possible. 
Larger networks and larger production lines over which to amortize high initial fixed costs will then generate cascading benefits. 
Hence, governments must work to reduce trade barriers, improve infrastructure, and remove barriers to access. 
In particular, globalization will become increasingly critical for economic growth, especially for small economies. 
An industry with high fixed costs and near_zero variable costs has another characteristic: it tends to monopolize. 
The rule_of_thumb in high technology has been that the market leader makes a fortune, the first_runner_up breaks even, and everyone else goes bankrupt. 
The only sustainable competition becomes competition for the leading position in the next generation. 
Good public policy in such an environment needs to ensure that monopolists in one generation do not retard innovation in the next generation, and that monopoly profits from the provision of essential services are not too large (although they need to be large enough to reward past investments). 
The «new economy» may change our view of monopoly in yet another way. 
Most economists regard price discrimination as evil--a way for monopolists to increase profits. 
But in the «new economy,» price discrimination may enable a firm to make a profit by charging high prices in its well_off core market, and to add to that profit--while increasing social utility--by charging low prices to the poor. 
For example, the reason why pharmaceutical companies charge high prices in poor countries is trivial: they fear re-importation of low_priced drugs into the rich countries. 
The loss in profits from poor countries is small relative to gray_market re-importation risks, but the cost for poor countries is high. 
Government help to segment the market, so that rich-country customers pay the fixed costs, while poor country customers pay close to the low marginal cost, may add to world welfare. 
The most critical issues revolve around intellectual property. 
How might markets and competition spur applied knowledge in the field of information goods? 
One response is to reinforce the rights of «owners.» 
But the new economy's most important innovations require progress in basic science, which must be widely disseminated because knowledge is a cumulative enterprise. 
Thus, intellectual property rights can jeopardize the web of scientific discourse that makes research and development effective. 
Strong protection of intellectual property also allows high monopoly profits and the pricing of goods at levels much higher than their marginal cost (which, in the «new economy,» is often close to zero). 
Clearly, government has a large role to play here, but we know too little about how to devise policies and institutions that would reconcile the seemingly contradictory objectives of encouraging entrepreneurship and providing incentives for innovation, while assuring marginal-cost pricing and the cumulative process of scientific research. 
New institutions in this area are perhaps the greatest challenge posed by the «new economy.» 
It will be no surprise that one of the authors is thinking hard about the role that heavily_endowed non_profit educational institutions can play in resolving the dilemmas of innovation and intellectual property in the new economy. 

New Rules for Finance At Last 
PARIS – The World Monetary and Economic Conference took place in London 76 years ago, in June 1933, with 66 countries meeting to put an end to the unfolding monetary disorder and trade wars while trying to draw the lessons of the Great Depression. 
When it was over, the negotiators admitted failure. 
On April 2, 2009, world leaders will head to London again to find a solution to a financial and economic crisis as dire as that of 1929. 
We cannot let history repeat itself. 
If collective inaction prevails, we risk a return to the political and economic woes of the 1930’s, which paved the way to a devastating world conflict. 
Of course, we must respond to both the weakening economy and financial instability in a virtual state of emergency. 
This is why stimulus packages and financial rescue plans were for the first time adopted concomitantly in Europe, the United States, and some large Asian countries. 
At the G-20 finance ministers meeting on March 14, all of our countries did their best and made massive efforts to repair their economic machinery as fast as possible. 
The policies chosen are different, but all states favor solutions that seem most appropriate to them. 
All are daring and realistic regarding the tasks that await us. 
Like its partners, France has launched significant stimulus measures, with a plan announced by President Nicolas Sarkozy last December, as well as public investments and early repayment of government debt. 
If we also take into account the strengthening of social services and legal policies launched last month, France’s stimulus in 2009 totals more than 2% of its GDP, with committed future outflows equaling the US. 
Moreover, the impact of automatic stabilizers – which enable the government to mobilize more or less fiscal resources, depending on economic conditions – is more powerful in Western Europe than in most of the Anglo-Saxon countries. 
Yet America’s macroeconomic situation seems worse than Europe’s in terms of consumption, banking, or employment and housing markets. 
But, as both Sarkozy and US President Barack Obama have insisted, we must go further. 
Economic stimulus will work efficiently only if confidence is restored. 
And confidence can be restored only if the financial system is fully overhauled. 
We obviously need to strike at the root of the problem, which requires us to redefine the basic principles of the system. 
It would be counterproductive to focus on treating the symptoms, only to realize later that the unprecedented budgets for structural policies are neither economically efficient nor politically acceptable. 
At the Washington Summit last November, the EU suggested a basic principle: all markets, all territories, and all actors putting the global financial system at risk should be monitored. 
This principle, to which all agreed, must be enforced even if it upsets old habits and comfortable incomes. 
I am especially convinced that we must closely monitor actors in financial markets such as hedge funds. 
Although hedge funds sometimes account for 50% of market transactions, they are not registered or subject to rules on transparency. 
This is not sustainable. 
Fighting for transparency also implies confronting states that refuse to collaborate on financial issues at a global level or to combat money laundering or prevent financial risks. 
We cannot build a safer system if we do not raise global requirements and if we tolerate non-compliance with the rules. 
Together with Germany, France intends to draw up a list of uncooperative countries and to design a tool kit of appropriate sanctions. 
New auditing standards must reflect an overhauled financial architecture that focuses on transparency. 
The aim of such standards must be to attenuate the impact of financial failure, not amplify it, as has occurred in the crisis. 
Indeed, the rating agencies, whose malfunctions contributed to the crisis, must be regulated. 
We demand an easy policy: stricter rules (especially when fighting conflicts of interest), a specific rating scale for complex products, and regular publication of their returns. 
Europe followed this path when preparing, under the recent French presidency, a European regulation that will soon be adopted. 
We expect all of our partners to do the same. 
Responsibility must be put back at the heart of a system that has sunk into excess. 
The methods used to pay market operators reflected our collective mistakes. 
We yielded to short-term incentives, and everything seemed to conspire to push us to accepting excessive risks. 
We must revise compensation schemes and delay bonus payments until the long-term profitability of a firm’s investments is known. 
Finally, we must express our solidarity for emerging and poor countries. 
Weakened by this crisis, they are the first to suffer from the cuts in financial flows. 
The international financial institutions must support them massively, and also have the resources needed to foresee global unbalances and prevent crises, rather than respond only when events become urgent. 
France and its European partners, in particular Germany, with which we worked in tight collaboration, will suggest all these points to the G-20. 
Indeed, just as a national fiscal stimulus is less efficient than a coordinated effort, strengthening financial regulations without combating the laxity that prevails elsewhere makes no sense in a globalized world. 
We should not delude ourselves; we cannot solve all the problems of this crisis in the coming days. 
We must, however, reach several objectives and give clear signs of a true collective ambition. 
History has shown how risky it is to miss some opportunities. 
On April 2, France and Europe will be present. 

New Rules for Hot Money 
NEW YORK – Capital flows to emerging-market economies have been on a boom-bust merry-go-round for decades. 
In the past year, the world has seen another boom, with a tsunami of capital, portfolio equity, and fixed-income investments surging into emerging-market countries perceived as having strong macroeconomic, policy, and financial fundamentals. 
Such inflows are driven in part by short-term cyclical factors (interest-rate differentials and a wall of liquidity chasing higher-yielding assets as zero policy rates and more quantitative easing reduce opportunities in the sluggish advanced economies). 
But longer-term secular factors also play a role. 
These include emerging markets’ long-term growth differentials relative to advanced economies; investors’ greater willingness to diversify beyond their home markets; and the expectation of long-term nominal and real appreciation of emerging-market currencies. 
Given all this, the most critical policy question in emerging markets today is how to respond to inflows that will inevitably drive up their exchange rates and threaten export-led growth. 
The first option is to do nothing and allow the currency to appreciate. 
This may be the right response if the inflows and upward pressure on the exchange rate are driven by fundamental factors (a current-account surplus, an undervalued currency, a large and persistent growth differential). 
But, in many cases, inflows are driven by short-term factors, fads, and irrational exuberance, which can lead to an overvalued currency, the crowding out of non-traditional export sectors or import-competing sectors, a loss of competitiveness, and eventually a large current-account deficit and thus tighter external constraints on growth. 
This problem is exacerbated by the fact that the world’s biggest exporter, China, is aggressively intervening to minimize any appreciation of the renminbi. 
If China doesn’t allow the renminbi to strengthen, other emerging markets will remain wary of letting their currencies appreciate too much and lose competitiveness. 
If allowing a currency to appreciate freely is costly, the second option is unsterilized foreign-exchange intervention. 
This is effective in stemming upward exchange-rate pressure, but it feeds the beast: it exacerbates overheating in already fast-growing emerging markets, causing inflation and leading to excessive credit growth, which can fuel dangerous asset bubbles. 
The third option is sterilized intervention. 
This prevents monetary and credit growth, but, by keeping interest-rate differentials high, sterilized intervention feeds carry-trade inflows, thus contributing to the problem that it was supposed to solve. 
The fourth option is to impose capital controls on inflows (or liberalize controls on outflows). 
Leaving aside the issue of whether or not such controls are “leaky,” evidence suggests that controls on inflows of short-term “hot money” do not affect the overall amount of capital inflows. 
Thus, such controls are ineffective in reducing short-term cyclical pressure on the currency to appreciate. 
The fifth option is to tighten fiscal policy and reduce budget deficits with the aim of lowering the high interest rates that drive the inflows. 
But sounder fiscal policy might lead to even higher inflows as the country’s external balance and sovereign-risk outlook improve. 
A sixth option – especially where a country has carried out partially sterilized intervention to prevent excessive currency appreciation – is to reduce the risk of credit and asset bubbles by imposing prudential supervision of the financial system. 
This should be aimed at restraining excessive credit growth, which the monetary growth that follows currency intervention would otherwise cause. 
However, direct controls on credit growth, while necessary, are often leaky and not very binding in practice. 
The final option is massive, large-scale, and permanent sterilized intervention – or, equivalently, the use of sovereign wealth funds or other fiscal-stabilization mechanisms – to accumulate the foreign assets needed to compensate for the effects on the currency’s value brought about by long-term inflows. 
The argument for this option is that long-term secular factors are important drivers of capital inflows, as advanced-economy investors discover that they are underweight in emerging-market assets and reduce their portfolios’ “home bias.” 
Sterilized intervention usually doesn’t work: if assets in advanced economies and emerging markets remain perfectly substitutable, inflows will continue as long as interest-rate differentials persist. 
But the demand for emerging-market assets is neither infinite nor perfectly substitutable for the assets of advanced economies – even for given interest-rate differentials – because these assets have very different liquidity and credit risks. 
This means that at some point large-scale, persistent sterilized foreign-exchange intervention – amounting to several percentage points of GDP – would satisfy the additional demand for emerging-market assets and stop the inflows, even if interest-rate differentials remain. 
As sterilization induces issuance of domestic assets, global investors’ desire for diversification would be met without causing excessive currency appreciation, with all its collateral damage, in emerging markets. 
Of course, currency appreciation should not be prevented altogether. 
When justified by economic fundamentals, the exchange rate should be allowed to rise gradually. 

New Security Laws Increase Hong Kong's Insecurity 
No news is not necessarily good news for Hong Kong. 
Before its reunification with mainland China, many people expected the former British colony to grab headlines as Beijing progressively stripped its freedoms. 
Instead, Hong Kong mostly vanished from the world's news radar after 1997. Five years since its handover, and contrary to expectation, Hong Kong retains its rights. 
But this could be changing. 
C.H. Tung, Hong Kong's Chief Executive, began his second term last year by proposing new security laws, causing a few news blips of worry. 
The legislation is meant to comply with Article 23 of the Basic Law, the mini-constitution that governs Hong Kong and that requires the government to enact laws against treason, sedition, subversion, and theft of national secrets. 
Article 23 has been a sensitive issue from the moment Hong Kong was returned to China, because its inclusion in the Basic Law came in the wake of the Hong Kong population's strong support for the 1989 pro-democracy movement in Beijing. 
To maintain political stability, both the Chinese and Hong Kong governments willingly shelved the issue during Tung's first term. 
With his re-election, they abruptly decided that they had waited long enough and would enact the Article 23 security laws before mid-2003. 
Vague in wording and unnecessarily broad in scope, the new laws sparked widespread fear that Article 23 will lead to curtailment of basic rights. 
Lawyers warn of a threat to individual liberty and due process. 
Journalists argue that defending the public's interest sometimes requires reporting state secrets. 
Teachers worry that banning possession of seditious materials will undermine academic freedom. 
Religious and sociopolitical associations fear that their global ties will be severed and their existence threatened if their counterparts abroad are declared subversive in mainland China. 
Hong Kong's people do not reject all security legislation. 
They only demand that the proposed laws be less arbitrary and that their scope be minimized. 
But government officials merely reiterate the political righteousness of the proposed anti-subversion laws. 
In one of the more desperate and egregious examples, Regina Ip, the Secretary for Security, attributed Hitler's rise to power to flaws in the workings of democracy. 
The government, she hints, will correct similar flaws. 
Heated exchanges between the authorities and opponents of the laws led many to believe that the devil is, indeed, in the details. 
What has emerged is an almost unanimous demand that the Tung government publish a detailed draft of the laws for one more round of consultation. 
The government, under intense pressure from Beijing to enact the blessed version, calls this unnecessary. 
Blocked in their efforts to change the law through consultation, Hong Kong's people have taken to the streets. 
At one demonstration, 60,000 participants marched against Article 23--the largest protests in Hong Kong since the 1989 pro-democracy demonstrations. 
A counter-demonstration mobilized by pro-China forces drew a smaller crowd. 
The government claims extensive support, but opinion polls consistently show that an overwhelming majority of Hong Kong's people oppose the legislation. 
The three-month consultation period before any piece of legislation enters into force ended in December. 
Will the Tung government consider opposing views in redrafting the Article 23 laws? 
Given the undemocratic nature of the Legislative Council, it is almost certain that the government has enough votes to pass almost any law it wants. 
But the seriousness of the current situation extends beyond particular laws, no matter how noxious they may be. 
Slighting public opinion in so direct a way will have more far-reaching implications for Hong Kong's future. 
First, Tung's repeated policy failures over the last five years caused public confidence in his administration to evaporate. 
Ignoring public opinion concerning an issue as critical as the security laws will only alienate the middle class further and deepen a festering crisis of legitimacy. 
Second, Hong Kong has an international image to maintain, and in international politics what is perceived is often as important as what really happens. 
The bottom line is that Hong Kong's image as an open society has been tarnished, with criticism coming from international rights organizations, academics, and the global media. 
This damage will become permanent if those who oppose the security laws go completely unheeded. 
Finally, Hong Kong represents a test of the "one country, two systems" model proclaimed in 1997, and thus of the feasibility of China's applying the same scheme to its reunification plans for Taiwan. 
The prevailing attitude in Taiwan toward reunification is highly skeptical; enactment of strict security laws in Hong Kong will hardly be seen as reassuring. 
Hong Kong's people have spoken. 
They are waiting to be heard. 
A shortsighted decision on the part of the Tung government will have serious negative repercussions not only in Hong Kong, but for Taiwan and around the world. 
Any ruler in his right mind should be concerned whether making such a move will not ultimately harm rather than advance his interests. 

Will New Technologies Help or Harm Developing Countries? 
CAMBRIDGE – New technologies reduce the prices of goods and services to which they are applied. 
They also lead to the creation of new products. 
Consumers benefit from these improvements, regardless of whether they live in rich or poor countries. 
Mobile phones are a clear example of the deep impact of some new technologies. 
In a clear case of technological leapfrogging, they have given poor people in developing countries access to long-distance communications without the need for costly investments in landlines and other infrastructure. 
Likewise, mobile banking provided through cell phones has enabled access to financial services in remote areas without bank branches. 
These are instances of technology improving the lives of poor people. 
But for technology to make a real and sustained contribution to development, it must not only provide better and cheaper products; it must also lead to more higher-paying jobs. 
In other words, it must help poor people in their role as producers as well as consumers. 
A model of growth that the economist Tyler Cowen has called “cell phones instead of automobile factories” raises the obvious question: How do people in the developing world afford to purchase cell phones in the first place? 
Consider again the examples of mobile telephony and banking. 
Because communications and finance are inputs into production, they are to some extent producer services as well as consumer services. 
For example, a well-known study has documented how the spread of mobile phones in the Indian state of Kerala enabled fishermen to arbitrage price differences across local markets, increasing their profits by 8% on average as a result. 
Kenya’s ubiquitous mobile banking service M-Pesa appears to have enabled poor women to move out of subsistence agriculture into non-farm businesses, providing a significant bump up the income ladder at the very bottom. 
New digital technologies have been playing an important role in transforming large-scale farming in Latin America and elsewhere. 
Big data, GPS, drones, and high-speed communication have enabled improved extension services; optimized irrigation and pesticide and fertilizer use; provided early-warning systems; and enabled better quality control and more efficient logistics and supply-chain management. 
These improvements raise farm productivity and facilitate diversification into non-traditional crops with higher returns. 
The introduction of these new technologies in production in developing countries often takes place through global value chains (GVCs). 
In principle, GVCs benefit these economies by easing entry into global markets. 
Yet big questions surround the possibilities created by these new technologies. 
Are the productivity gains large enough? 
Can they diffuse sufficiently quickly throughout the rest of the economy? 
Any optimism about the scale of GVCs’ contribution must be tempered by three sobering facts. 
First, the expansion of GVCs seems to have ground to a halt in recent years. 
Second, developing-country participation in GVCs – and indeed in world trade in general – has remained quite limited, with the notable exception of certain Asian countries. 
Third, and perhaps most worrisome, the domestic employment consequences of recent trade and technological trends have been disappointing. 
Upon closer inspection, GVCs and new technologies exhibit features that limit the upside to – and may even undermine – developing countries’ economic performance. 
One such feature is an overall bias in favor of skills and other capabilities. 
This bias reduces developing countries’ comparative advantage in traditionally labor-intensive manufacturing (and other) activities, and decreases their gains from trade. 
Second, GVCs make it harder for low-income countries to use their labor-cost advantage to offset their technological disadvantage, by reducing their ability to substitute unskilled labor for other production inputs. 
These two features reinforce and compound each other. 
The evidence to date, on the employment and trade fronts, is that the disadvantages may have more than offset the advantages. 
The usual response to these concerns is to stress the importance of building up complementary skills and capabilities. 
Developing countries must upgrade their educational systems and technical training, improve their business environment, and enhance their logistics and transport networks in order to make fuller use of new technologies, goes the oft-heard refrain. 
But pointing out that developing countries need to advance on all those dimensions is neither news nor helpful development advice. 
It is akin to saying that development requires development. 
Trade and technology present an opportunity when they are able to leverage existing capabilities, and thereby provide a more direct and reliable path to development. 
When they demand complementary and costly investments, they are no longer a shortcut around manufacturing-led development. 
Compare the new technologies with the traditional model of industrialization, which has been a powerful engine of economic growth in developing countries. 
First, manufacturing is tradable, which means domestic output is not constrained by demand (and incomes) at home. 
Second, manufacturing know-how was relatively easy to transfer across countries and, in particular, from rich to poor economies. 
Third, manufacturing did not make large demands on skills. 
These three characteristics collectively made manufacturing a fantastic escalator to higher incomes for developing countries. 
New technologies present a very different picture in terms of the ease of transferring know-how and the skill requirements they imply. 
As a result, their net impact on low-income countries looks considerably more uncertain. 

Micro, Macro, Meso, and Meta Economics 
HONG KONG – Given the crisis weighing down the world economy and financial markets, it is not surprising that a substantive reconsideration of the principles of modern economics is underway. 
The profession’s dissident voices, it seems, are finally reaching a wider audience. 
For example, the Nobel laureate Ronald H. Coase has complained that microeconomics is filled with black-box models that fail to study the actual contractual relations between firms and markets. 
He pointed out that when transaction costs are low and property rights are well defined, innovative private contracts might solve collective-action problems such as pollution; but policymakers rely largely on fiscal instruments, owing to economists’ obsession with simplistic price theory. 
Another Nobel laureate, Paul Krugman, has claimed that macroeconomics over the last three decades has been useless at best and harmful at worst. 
He argues that economists became blind to catastrophic macro failure because they mistook the beauty or elegance of theoretical models for truth. 
Both Coase and Krugman bemoan the neglect of their profession’s patrimony – a tradition dating at least to Adam Smith – that valued grand and unifying theories of political economy and moral philosophy. 
The contemporary obsession with reductionist and mechanical models seems to have driven the profession from theory toward ideology, putting it out of touch with the real economy. 
The simplicity and elegance of micro and macro models make them useful in explaining the price mechanism and the balance or imbalance of key aggregate economic variables. 
But both models are unable to describe or analyze the actual behavior of key market participants. 
For example, the textbook theory of the firm does not examine the structure of corporate contracts, and delegates the study of assets, liabilities, incomes, and expenditures to “accounting.” 
How can firms be understood without examining the corporate contracts that bring together their stakeholders – that is, their shareholders, bankers, suppliers, customers, and employees – whose complex relationships are manifested in companies’ balance sheets and transaction flows? 
In concentrating on production and consumption flows, national accounts aggregate or net out such data, thus neglecting the importance of financing and balance-sheet leverage and fragilities. 
Indeed, today’s mainstream micro- and macroeconomic models are insufficient for exploring the dynamic and complex interactions among humans, institutions, and nature in our real economy. 
They fail to answer what Paul Samuelson identified as the key questions for economics – what, how, and for whom are goods and services produced, delivered and sold – and rarely deal with “where” and “when,” either. 
The division of economics into macroeconomics (the study of economic performance, structure, behavior, and decision-making at the national, regional, or global level) and microeconomics (the study of resource allocation by households and firms) is fundamentally incomplete and misleading. 
But there are at least two other divisions in economics that have been neglected: meso-economics and meta-economics. 
Meso-economics studies the institutional aspects of the economy that are not captured by micro or macroeconomics. 
By presupposing perfect competition, complete information, and zero transaction costs, neoclassical economics assumes away the need for institutions like courts, parties, and religions to deal with the economic problems that people, firms, and countries face. 
By contrast, the economists Kurt Dopfer, John Foster, and Jason Potts have developed a Macro-Meso-Micro theory of evolutionary economics in which “an economic system is a population of rules, a structure of rules, and a process of rules.” 
The most important feature of a meso-economic framework is to study the actual web of contracts, formal or informal, in family, corporate, market, civil, and social institutions. 
Doing so provides a natural linkage between micro and macro, because the micro-level rules and institutions typically imply macro-level consequences. 
Meta-economics goes still further, by studying deeper functional aspects of the economy, understood as a complex, interactive, and holistic living system. 
It asks questions like why an economy is more competitive and sustainable than others, how and why institutions’ governance structures evolve, and how China developed four global-scale supply chains in manufacturing, infrastructure, finance, and government services within such a short period of time. 
In order to study the deep hidden principles behind human behavior, meta-economics requires us to adopt an open-minded, systemic, and evolutionary approach, and to recognize the real economy as a complex living system within other systems. 
This is difficult, because official statistics mismeasure – or simply miss – many of the real economy’s hidden rules and practices. 
For example, measurements of GDP currently neglect the costs of natural-resource replacement, pollution, and the destruction of biodiversity. 
Furthermore, it is common to assume in public policy that what is not easily measured statistically is insignificant or does not exist. 
Static, linear, and closed analyses applied to open, non-linear, dynamic, and interconnected systems are bound to be faulty and incomplete. 
The British economist Fritz Schumacher understood that human institutions, as complex structures with dynamic governance, require systemic analysis. 
He defined meta-economics as the humanizing of economics by accounting for the imperative of a sustainable environment; thus, he included elements of moral philosophy, psychology, anthropology, and sociology that transcend the boundaries of profit maximization and individual rationality. 
Similarly, Eric Beinhocker, at the newly established Institute for New Economic Thinking, argues for “a new way of seeing and understanding the economic world.” 
Such an approach requires incorporating psychology, anthropology, sociology, history, physics, biology, mathematics, computer science, and other disciplines that study complex adaptive systems. 
We believe that the framework of “micro-macro-meso-meta-economics” – what we call “systemnomics” – is a more complete way to analyze human economies, understood as complex living systems evolving within dynamically changing complex natural systems. 
This is a particularly useful framework for analyzing the evolution of ancient but re-emerging economies such as China and India, which are large enough to have a profound impact on other economies and on our natural environment. 

Taking the Offensive Against Tuberculosis 
SOLNA, SWEDEN – Tuberculosis is one of the world’s deadliest diseases. 
In 2013 alone, it accounted for 1.5 million deaths, including one-fifth of adult deaths in low-income countries. 
Although the estimated number of people contracting TB annually is decreasing, the decline has been very slow. 
And, given the increasing prevalence of multidrug-resistant TB, the trend could be reversed. 
Nonetheless, the world now has a narrow window of opportunity to eradicate TB. 
Taking advantage of it will require the rapid development and dissemination of effective diagnostic tools, novel drug treatments, and innovative vaccines, in conjunction with efforts to ensure that health-care systems are equipped to deliver the right care. 
This will be no easy feat. 
The good news is that the international community seems eager to act. 
The World Health Organization’s post-2015 Global TB Strategy, which was endorsed by the World Health Assembly in May 2014, aims to eradicate TB by 2035. 
The Sustainable Development Goals, which will be formally adopted in September by the United Nations’ 193 member states, foresee achieving that objective five years sooner. 
To stem the development and spread of drug-resistant TB requires a two-pronged global effort: ensuring early detection and adequate treatment of patients with drug-sensitive TB, and finding new ways to treat patients infected with drug-resistant strains. 
The problem is that existing tools for TB diagnosis, treatment, and prevention have severe limitations. 
For starters, there is no fast point-of-care diagnostic test for TB. 
In low-income countries, the dominant diagnostic method is sputum microscopy, an outdated approach that fails to detect TB in about half of all infected patients, with an even lower success rate for young children and patients co-infected with HIV. 
Indeed, no more than one in ten children with TB is diagnosed by sputum microscopy. 
Moreover, for patients infected with multi-drug-resistant TB, treatment with the currently available drugs is successful only half the time, even under the best conditions. 
And the therapeutic process is tough, lasting at least two years and involving up to 14,600 pills and hundreds of injections – with severe side effects. 
New TB drugs with novel mechanisms of action are badly needed, not only to treat multi-drug resistant TB, but also to shorten the treatment time for drug-sensitive TB. 
Here, there is some promising news: Bedaquiline recently became the first new TB drug to be approved by the US Food and Drug Administration in 40 years. 
But Bedaquiline has yet to prove its capacity to treat drug-resistant TB effectively, and there are very few other candidates in the pipeline. 
Similar problems arise in prevention. 
The Bacille de Calmette et Guérin (BCG) vaccine – the only one available for the disease, and the main pillar of TB prevention – is only partly effective. 
Indeed, while it protects children from the worst forms of the disease, it does not protect anyone against the most common variant, pulmonary TB. 
As a result, it has done little to reduce the number of TB cases. 
And, although several new vaccine candidates have passed preliminary clinical tests, BCG will remain the only available vaccine for years to come. 
The challenges are clearly formidable. 
But, with millions of lives at stake, backing down is not an option. 
It comes down to research – a fact that the WHO global strategy recognizes. 
But scaling up investment in diagnostic tools and treatments for TB costs more money than has been allocated. 
Of the estimated €1.73 billion ($2 billion) that is needed annually for research and development, only €589 million was invested in 2013. 
Making matters worse, critical donor funding – provided by a very limited number of actors, mostly government agencies and philanthropic groups in OECD countries – fell by nearly 10% last year. 
At present, a single philanthropic donor, the Bill & Melinda Gates Foundation, supports more than 25% of research on new tools to fight TB. 
As for the private sector, pharmaceutical companies have been withdrawing from TB research, as part of a general trend away from anti-infective drugs toward the development of new drugs for chronic illnesses. 
Pfizer exited TB research in 2012, followed by AstraZeneca in 2013 and Novartis last year. 
Closing the funding gap and ending the scourge of TB will require the involvement of more – and more diverse – donors. 
If the private sector is unwilling to do its part, it is up to governments to step in with a sustained commitment – manifested in direct contributions, as well as efforts to create the right incentives – to achieving the SDG target to which they have agreed. 
In short, eradicating the TB epidemic presupposes efforts to ensure that health-care systems are capable of delivering the right care. 
And the right care requires rapid development and dissemination of new tools, including quick point-of-care diagnostic tests, safe and fast-acting drugs, and an effective TB vaccine. 

Suffer the Children, Suffer the Country 
NEW YORK – Children are every country’s most vital resource. 
This is true not just morally, but also economically. 
Investing in the health, education, and skills of children offers the highest economic returns to a country. 
A new study by the UN Children’s Fund (UNICEF) shows which high-income countries are doing well when it comes to making these investments – and which are doing poorly. 
The report, Child Well-Being in Rich Countries, takes a holistic view of the conditions of children in the United States, Canada, and Europe – 29 countries in all. 
The top-ranked countries, where children are best off, are the social democracies of Western Europe. 
The Netherlands heads the list, followed by Norway, Iceland, Finland, Sweden, and Germany. 
At the bottom one finds a major surprise: the US, the richest large economy in the world, is in 26th place, followed by three much poorer countries: Lithuania, Latvia, and Romania. 
France and the United Kingdom are ranked in the middle. 
The study assesses children’s well-being in terms of material conditions (related to household-income levels); health and safety; education; risky behavior (such as excessive alcohol consumption); and physical environment, including housing conditions. 
Although the study is limited to high-income countries, national governments – and even cities – in other parts of the world should replicate it to analyze their own children’s well-being. 
The gaps between the northern European countries and the US are the most telling. 
Northern European countries generally provide cash support to families to ensure that all children are raised in decent conditions, and they undertake ambitious social programs to provide high-quality day care, pre-school, and primary and secondary education. 
Moreover, all children are well covered by effective health-care systems. 
The US, with its individualist, free-market ideology, is very different. 
There is little cash support for families. 
Government programs supposedly provide a social safety net, but politicians are, in fact, largely indifferent to the well-being of the poor, because poor voters turn out in lower numbers and do not finance America’s expensive election campaigns. 
Indeed, the evidence strongly suggests that US politicians tend to listen and respond only to their richer constituents. 
The so-called safety net has suffered accordingly, as have America’s poor. 
The differences between the social democracies and the US show up strongly in category after category. 
In the social democracies, less than 10% of children grow up in relative poverty (meaning households with less than half of the country’s median income). 
In the US, the rate of relative poverty exceeds 20%. 
American children suffer far more from low birth weight (a major danger signal for later life); being overweight at ages 11, 13, and 15; and very high rates of teenage fertility. 
There are around 35 births for every 1,000 girls aged 15-19, compared to fewer than ten per thousand in the northern European countries. 
Likewise, US children face considerably more violence in society than children in other high-income countries do. 
That may not be surprising, but it is deeply troubling, because children’s exposure to violence is a major threat to their physical, emotional, and cognitive development. 
Homicide rates in the US are roughly five times higher than in northern Europe. 
One fascinating aspect of the UNICEF study is its use of what is now called “subjective well-being.” 
This means asking a person directly about his or her life satisfaction. 
There have been many recent studies of the subjective well-being of adults around the world. 
But I know of no comparable research in which children were asked directly about their sense of well-being – a very smart question indeed. 
Here, the evidence suggests that northern Europe’s children generally appreciate their remarkable advantages. 
The children were asked to rate their “life satisfaction” on an 11-step ladder. 
In the Netherlands, a remarkable 95% of children set their rating at six or higher. 
In the US, the proportion is much lower, at around 84%. 
These subjective rankings also correlate highly with the children’s reported quality of interactions with their peers and parents. 
Some 80% of Dutch children report their classmates to be “kind and helpful,” compared to just 56% of American children. 
The costs to the US of allowing so many of its children to grow up in poverty, poor health, poor schools, and poor housing are staggering. 
A shocking proportion ends up serving time in prison – especially in the case of non-white poor children. 
Even those fortunate not to fall into the trap of America’s vast prison system often end up unemployed and even unemployable, without the skills needed to obtain and keep a decent job. 
Americans have been blinded to these calamitous mistakes partly by a long history of racism, as well as by a misplaced faith in “rugged individualism.” 
For example, some white families have opposed public financing for education, because they believe that their tax money goes disproportionately to help poorer non-white students. 
The result, however, is that everybody loses. 
Schools underperform; poverty remains high; and the resulting high rates of unemployment and crime impose huge financial and social costs on US society. 
The UNICEF findings are powerful. 
High national incomes are not enough to ensure children’s well-being. 
Societies that have a strong commitment to equal opportunity for all of their children – and that are prepared to invest public funds on their behalf – end up with much better outcomes. 
Every country should compare the conditions of its young people with those reported by UNICEF, and use the results to help guide expanded investment in their children’s well-being. 

A New Vision for the World Bank 
LIMA – Finance ministers, central bankers, and development economists are gathering in Lima, Peru, for the World Bank’s annual meetings, where the debate will focus on how the institution’s agenda fits our changing world. 
Holding the event in a developing country represents a welcome shift from the usual Washington, DC venue. 
Now, the Bank should make some other important shifts: It should reframe its mission and undertake new tasks, while its biggest shareholder, the United States, should rethink its role in the organization. 
The World Bank’s current mission – to end extreme poverty within a generation and boost shared prosperity – is undoubtedly important. 
But, by reframing that mission to emphasize support for member governments’ pursuit of inclusive and sustainable growth, the Bank could do even more good. 
Such an approach would reflect and reinforce the recently adopted Sustainable Development Goals (SDGs), which will guide global development efforts until 2030. 
And, far from excluding the current goal of ending poverty, it would embrace poverty reduction as an outcome of building stable, prosperous societies, in which citizens, through their taxes, are able and willing to fund capable and responsive states that honor agreed global standards and rules. 
Such a reframed mission would align the World Bank more closely with its founders’ original vision of a “global credit cooperative” generating benefits for all members through collective action. 
That vision was built on a simple and brilliant idea: to borrow against the secure capital of creditor members (at the time, primarily the US) and lend to members where investment capital was scarce and returns would be high. 
That idea took advantage of the positive externality associated with borrowing costs as low as those merited by the credit risk of any single creditor (or lower). 
A return to that original dynamic would be good for everyone, from creditor countries (which would benefit from a more stable global system) to borrowers (whose economies would enjoy faster growth and poverty reduction). 
Moreover, re-casting the World Bank’s mission in this way taps the Bank’s distinct comparative advantage relative to the dozens of bilateral aid agencies and hundreds of non-governmental organizations that work in developing countries. 
This makes the Bank’s involvement particularly valuable. 
The World Bank has knowledge and experience in sectors as diverse as infrastructure, agriculture, health, education, pensions, and financial regulation. 
It has the ability to deploy a variety of financing and risk-sharing instruments in support of both private and public investment. 
And its staff possesses unparalleled expertise about individual countries, including insight into the difficult local politics that sometimes inhibit the reforms needed to ensure returns on investment. 
In adapting its mission to twenty-first-century needs, the World Bank should also take on the responsibility of providing development-relevant global public goods. 
Today, the biggest risks to stable and prosperous societies – such as unabated climate change, overwhelming pandemics, and the rise of antimicrobial resistance – are global in nature, and therefore need to be addressed collectively. 
Given that the returns on investment in development-relevant global public goods are collectively high, but remain limited on a country-by-country basis, this is an ideal area of focus for the World Bank as a global cooperative. 
Specifically, the Bank should become a prime mover in fostering investments to promote environmental sustainability; supporting research in agriculture, health, and clean energy; and collecting and analyzing economic and social data. 
Of course, it need not assume responsibility for providing all of these public goods. 
But it can help by setting priorities, raising and channeling funds, and assessing the impact of relevant investments. 
To succeed, the Bank must broaden its toolkit beyond country-specific loans – the key instrument on which it has relied for seven decades. 
For this, it needs a clear mandate from member countries, as well as new instruments for financial and technical assistance that are geared toward the provision of development-relevant global public goods. 
The final internal shift that must occur involves just one member: the US. 
During the last half-century, America has been a reasonably good steward of international stability – a kind of benign bully operating in the collective interest. 
But while the US remains an economic and military superpower, other countries are catching up fast. 
And the US seems unwilling to make space for them, as evidenced by its resistance to the establishment of the Chinese-led Asian Infrastructure Investment Bank. 
The US should recognize that, while still globally powerful, it must now lead more by influence and persuasion, and less by holding fast to the rules and customs set 70 years ago, when it was, for all practical purposes, the sole creditor backing the creation of new international financial institutions. 
So in Lima this week, the discussion of China’s economic health and the Fed’s timetable for interest rate hikes must be accompanied by a genuine debate on the need for these three shifts. 
With a reframed mission, an updated agenda, and a more inclusive US, the Bank would be well positioned to play a pivotal role in advancing the kind of development the world needs now. 

New World, Less Order 
Looking back to the revolutions that shook Europe and the world 15 years ago this month, we should rejoice in what has been gained - freedom, democracy, and transcendence of Europe's 40-year division. 
But we should also take stock of missed opportunities in the wake of the Cold War's peaceful end. 
Ultimately, the end of the Cold War came because of the revolution underway in the Soviet Union. But the pro-democratic policies of glasnost and perestroika that I unveiled in the mid-1980's did not appear out of thin air. 
They arose from Nikita Khrushchev's reforms of the 1950's and 1960's, and from Alexei Kosygin's reforms later on. 
Many people now view such efforts to "renew" the socialist system - to make it actually work for the people - as having been doomed from the start. 
But these earlier reforms were in fact more difficult to undertake than the ones that I launched in the 1980's and 1990's. 
During my presidency, we had to nurture a democratic atmosphere, but this was possible only because fear was no longer overpowering. 
We also tried to curtail the arms race and address other areas of conflict between East and West. 
But the Berlin Wall remained, standing in the heart of Europe as a symbol of division. 
When Chancellor Helmut Kohl and I talked about this in July 1989, we thought that the time had not come to end the division of Germany. 
Dismantling the Wall, we agreed, would likely be an issue for the twenty-first century. 
Of course, the German people decided otherwise; they took history into their own hands by insisting that the Wall come down. 
The rest of Eastern and Central Europe quickly followed, knocking down their own barriers to freedom. 
My conception of my role as Soviet president compelled me not to intervene. 
I believed that I could not open our country while dictating to others. 
Indeed, from my first appearance as General Secretary of the USSR, at the funeral of my predecessor, Constantine Chernyenko, I said that every country should be responsible for its own politics. 
So the fall of the Berlin Wall less than half a decade later was a consequence of these thoughts. 
(But, even here, my ideas and policies were not novel: in 1955 Khrushchev talked - albeit in a very different context - about uniting two Germanys.) 
My task, as I saw it, was to ensure Central and Eastern Europe's peaceful return to full sovereignty with a minimum of Soviet interference. 
To the surprise and delight of the world, the changes did take place peacefully almost everywhere. 
But did the Cold War's end merely make the world a more dangerous place - one of terrorism, insecurity, uncertainty, and growing disparities of wealth? 
My response is to remind people what terrors the Cold War held. 
The threat of nuclear Armageddon was real, with three trillion dollars spent on the arms race that could have been used to help the world's poor. 
On the other hand, an opportunity to create a safer, more secure post-Cold War world was lost. 
In the 1980's, when the communist-capitalist confrontation ended, there was a chance to create a "new world order." 
But the collapse of the Soviet Union meant that there was no negotiated settlement of this new order. 
As a result, the subsequent spurt of globalization has proceeded with no one steering the wheel - and thus with no means to implement new thinking for a better world. 
We Russians obviously bear the most responsibility for the USSR's collapse, but America should also be called to account. 
When change came, instead of following a slow democratic process, Russia replaced its discredited communist model overnight with a Harvard-designed blueprint that was also unfit for the country. 
Eventually, the plan threw the country on its back. 
This was no US-led conspiracy, but the collapse of the Soviet Union was convenient for America. 
The US conceived of itself as the Cold War's winner, and winners, it seems, make the rules. 
The Iraq war proves this: a new American empire is asserting itself. 
The victor of the Cold War now expects other nations to indulge its philosophy of self-righteousness. 
Unfortunately, this type of old thinking breeds more crises than it can ever resolve. 
Indeed, unilateral policies can never succeed in a global world defined more and more by shared concerns rather than national interests. 
So, fifteen years after the fall of the Berlin Wall, the world remains more in need of new thinking than ever. 
We need a new world order that benefits all, a global civil society that will help fight terrorism. 
We know that bombs and special operations alone won't make us safer, for we must fight the poverty that breeds terrorism. 
That is no easy task. 
On the contrary, as in 1989, we are faced with the urgent need for change and responsible leadership. 

New Year, Same Crisis 
DAVOS – The measures introduced by the European Central Bank last December, especially the Long Term Refinancing Operation (LTRO), have relieved the liquidity problems of European banks, but have not cured the financing disadvantage of the highly indebted member states. 
Since high-risk premiums on government bonds endanger the capital adequacy of banks, half a solution is not enough. 
Indeed, that supposed solution leaves half the eurozone relegated to the status of Third World countries that have become highly indebted in a foreign currency. 
Instead of the International Monetary Fund, it is Germany that is acting as the taskmaster imposing tough fiscal discipline on them. 
This will generate both economic and political tensions that could destroy the European Union. 
I have proposed a plan that would allow Italy and Spain to refinance their debt by issuing treasury bills at around 1%. 
I named it in memory of my friend Tomasso Padoa-Schioppa, who, as Italy’s central banker in the 1990’s, helped to stabilize that country’s finances. 
The plan is rather complicated, but it is legally and technically sound. 
I describe it in detail in my new book Financial Turmoil in Europe and the United States. 
European authorities rejected my plan in favor of the LTRO. 
The difference between the two schemes is that mine would provide instant relief to Italy and Spain. 
By contrast, the LTRO allows Italian and Spanish banks to engage in a very profitable and practically riskless arbitrage, but has kept government bonds hovering on the edge of a precipice – although the last few days brought some relief. 
My proposal is to use the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) to insure the European Central Bank against the solvency risk on any newly issued Italian or Spanish treasury bills that it may buy from commercial banks. 
This would allow the European Banking Authority to treat these various T-bills as the equivalent of cash, because they could be sold to the ECB at any time. 
Banks would then find it advantageous to hold their surplus liquidity in the form of T-bills as long as these bills yielded more than bank deposits held at the ECB. 
Italy and Spain would then be able to refinance their debt at close to the ECB’s deposit rate, which is currently 1% on mandatory reserves and 25 basis points on excess-reserve accounts. 
This would greatly improve the sustainability of these countries’ debt. 
Italy, for instance, would see its average borrowing cost decline from the current 4.3%. 
Confidence would gradually return, yields on outstanding bonds would decline, banks would no longer be penalized for owning Italian government bonds, and Italy would gradually regain access to the market at more reasonable interest rates. 
One obvious objection to this strategy is that it would reduce the average maturity of Italian and Spanish debt. 
I believe that, on the contrary, this would be an advantage in the current exceptional circumstances, because it would keep the Italian and Spanish governments on a short leash; no country concerned could afford to lose the ECB facility. 
In the case of Italy, the short leash would dissuade former Prime Minister Silvio Berlusconi from seeking to topple Mario Monti’s new government (which has only a fragile majority), because if Berlusconi precipitated an election, the electorate would punish him. 
This would help to reestablish political stability and accelerate Italy’s return to the market. 
My proposal fulfills both the letter and the spirit of Article 123 of the Lisbon Treaty. 
The ECB’s task is to provide liquidity to banks, while the EFSF and ESM are designed to absorb solvency risk. 
The ECB would not be facilitating additional borrowing by member countries; it would merely allow them to refinance their debt at a lower cost. 
Together, the ECB and the EFSF could do what the ECB cannot do on its own. 
This would provide temporary relief from a fatal flaw in the euro design’s until the member countries devise a more permanent solution. 
The EFSF would have practically unlimited capacity to insure eurozone T-bills in this way, because no country could default as long as the scheme was in operation. 
Nor could a country abuse the privilege, lest it be automatically withdrawn, causing the country’s cost of borrowing to rise immediately. 
For the first time in this crisis, the European authorities would undertake an operation for which they have more than sufficient resources. 
Coming as a positive surprise to the markets, it would reverse their mood. 
After all, markets do have moods; indeed, that is what the authorities have to learn in order to deal with financial crises. 
Contrary to the current discourse, the long-term solution must provide a stimulus to get Europe out of a deflationary vicious circle – structural reform alone will not do it. 
The stimulus must come from the EU, because individual countries will be under strict fiscal discipline. 
It will have to be guaranteed jointly and severally – and that means eurobonds in one guise or another. 

New Year’s Hope against Hope 
NEW YORK – The time has come for New Year’s resolutions, a moment of reflection. 
When the last year hasn’t gone so well, it is a time for hope that the next year will be better. 
For Europe and the United States, 2010 was a year of disappointment. 
It’s been three years since the bubble broke, and more than two since Lehman Brothers’ collapse. 
In 2009, we were pulled back from the brink of depression, and 2010 was supposed to be the year of transition: as the economy got back on its feet, stimulus spending could smoothly be brought down. 
Growth, it was thought, might slow slightly in 2011, but it would be a minor bump on the way to robust recovery. 
We could then look back at the Great Recession as a bad dream; the market economy – supported by prudent government action – would have shown its resilience. 
In fact, 2010 was a nightmare. 
The crises in Ireland and Greece called into question the euro’s viability and raised the prospect of a debt default. 
On both sides of the Atlantic, unemployment remained stubbornly high, at around 10%. 
Even though 10% of US households with mortgages had already lost their homes, the pace of foreclosures appeared to be increasing – or would have, were it not for legal snafus that raised doubts about America’s vaunted “rule of law.” 
Unfortunately, the New Year’s resolutions made in Europe and America were the wrong ones. 
The response to the private-sector failures and profligacy that had caused the crisis was to demand public-sector austerity! 
The consequence will almost surely be a slower recovery and an even longer delay before unemployment falls to acceptable levels. 
There will also be a decline in competitiveness. 
While China has kept its economy going by making investments in education, technology, and infrastructure, Europe and America have been cutting back. 
It has become fashionable among politicians to preach the virtues of pain and suffering, no doubt because those bearing the brunt of it are those with little voice – the poor and future generations. 
To get the economy going, some people will, in fact, have to bear some pain, but the increasingly skewed income distribution gives clear guidance to whom this should be: Approximately a quarter of all income in the US now goes to the top 1%, while most Americans’ income is lower today than it was a dozen years ago. 
Simply put, most Americans didn’t share in what many called the Great Moderation, but was really the Mother of All Bubbles. 
So, should innocent victims and those who gained nothing from fake prosperity really be made to pay even more? 
Europe and America have the same talented people, the same resources, and the same capital that they had before the recession. 
They may have overvalued some of these assets; but the assets are, by and large, still there. 
Private financial markets misallocated capital on a massive scale in the years before the crisis, and the waste resulting from underutilization of resources has been even greater since the crisis began. 
The question is, how do we get these resources back to work? 
Debt restructuring – writing down the debts of homeowners and, in some cases, governments – will be key. 
It will eventually happen. 
But delay is very costly – and largely unnecessary. 
Banks never wanted to admit to their bad loans, and now they don’t want to recognize the losses, at least not until they can adequately recapitalize themselves through their trading profits and the large spread between their high lending rates and rock-bottom borrowing costs. 
The financial sector will press governments to ensure full repayment, even when it leads to massive social waste, huge unemployment, and high social distress – and even when it is a consequence of their own mistakes in lending. 
But, as we know from experience, there is life after debt restructuring. 
No one would wish the trauma that Argentina went through in 1999-2002 on any other country. 
But the country also suffered in the years before the crisis – years of IMF bailouts and austerity –from high unemployment and poverty rates and low and negative growth. 
Since the debt restructuring and currency devaluation, Argentina has had years of extraordinarily rapid GDP growth, with the annual rate averaging nearly 9% from 2003 to 2007. 
By 2009, national income was twice what it was at the nadir of the crisis, in 2002, and more than 75% above its pre-crisis peak. 
Likewise, Argentina’s poverty rate has fallen by some three-quarters from its crisis peak, and the country weathered the global financial crisis far better than the US did –unemployment is high, but still only around 8%. 
We could only conjecture what would have happened if it had not postponed the day of reckoning for so long – or if it had tried to put it off further. 
So this is my hope for the New Year: we stop paying attention to the so-called financial wizards who got us into this mess – and who are now calling for austerity and delayed restructuring – and start using a little common sense. 
If there is pain to be borne, the brunt of it should be felt by those responsible for the crisis, and those who benefited most from the bubble that preceded it. 

New York, the Dada Capital 
I am looking down on Central Park and recall from half-a-century ago in a small town in Northern Romania a tall, white-haired man proclaiming his poem, “The Colors Red and Black.” 
Gazing over the park, I remember those Stalinist era verses: 
In New York, everything is beautiful. 
Heroes come, heroes go. 
Children, born for Sing-Sing, 
cover the streets like pellagra 
Yellow karate-blood 
pulses through each building. 
In the harbor the Statue of Liberty! 
Behind her elevated falsehood 
Yankee ghosts howl at the moon 
tormented as if from pellagra 
by the colors red and black. 
The red of the Revolution, of course, and the black of the oppressed race. 
Cliché was the common currency of all Communist dictatorships, but they had the opposite effect to what the regime intended, for they cast an aura of forbidden fruit around the slandered New World metropolis, making it seem a glowing Olympus of modernity, an urban Everest of adventure. 
The few trips I was allowed to take as a citizen of Socialist Romania did, of course, have moments of rapture for me, novice that I was. 
Yet New York remained a dream, so foreign and distant that I never imagined I would have the chance to compare illusion with reality. 
My eventual escape to New York had nothing to do with tourism. 
Sudden terror before this omnipresent, all-devouring monster was soon overtaken by fascination. 
The critic Irving Howe, a New Yorker of long standing, tried to temper my enthusiasm. 
“To enjoy this city you need a good apartment and a certain salary.” 
I was living in a miserable hotel in a rundown neighborhood, consumed with a newcomer’s neurotic insecurity. 
Yet I found everything irresistible, the city’s rhythms and colors, its contrasts and surprises. 
That Walt Whitman and Mark Twain, Herman Melville, Henry James, and John Dos Passos had lived here, that Enescu, Brancusi, or Eugen Ionesco had been successful here in no way raised my hopes. 
Life in and with this city was as hypnotic as a drug. 
Over the last seventeen years this addiction was established through daily negotiations with life’s routine. 
New York’s metabolism filled me with its energy and its toxins. 
Although I felt that I, an exile in the land of exiles, belonged ever more to a world to which no one can really be said to belong, on September 11, 2001, I was finally able to proclaim, “I am a New Yorker,” just as President Kennedy had declared himself a Berliner when that former National Socialist capital was in danger of becoming a Communist capital. 
The Old Testament tells how work on the tower in Shinar, in ancient Babylon, was disrupted because man aspired to reach the heavens and divinity. 
Suddenly the builders could no longer understand each other. 
Different languages divided them. 
In present-day Babylon in Chinatown, in Little Italy, in Russian Brighton Beach, and in the alleys and byways of New York, all the world’s languages are spoken. 
The builders of the twin towers, whatever their native tongues, wanted to be Americans, citizens of the New World, the towers they built symbolizing the stature of freedom. 
The attack on the towers of Babel was unexpected but not unpredictable in so far as it represented the hatred of Allah’s fanatical followers for the symbols of modernity. 
In the World Trade Center, human creativity and collaboration were universally codified. 
Of course, the building lacked poetry. 
Yet, the towers could have been a symbol of worldwide poetry, not commerce. 
As the Surrealist poet André Breton said, “It is above all our differences that unite us.” 
Surprisingly, for such an extensive, cynically efficient cluster of humanity, the city displayed surprising civility and solidarity during and after the attacks. 
It immediately regained its strength, its sense of humor, and its industriousness. 
After September 11, 2001, skyscrapers, clubs, and restaurants of all kinds sprang up like mushrooms, with almost more vitality than before. 
Moreover, the city refused to give its votes to a president who exploited its disaster for political gain. 
Romania is often called the Land of Dada, not because one of its sons, Tristan Tzara, was a founder of Surrealism, but because of the absurdity and paradoxes of its daily life, particularly in its politics. 
In exile, I immediately identified with another capital of Dada, the “cosmic republic, that speaks all languages in a universal dialect,” as Johannes Baader put it. 
Here, the old and the new are accomplices in celebrating life “in all its incomprehensibility” – exactly the subversiveness that the Dadaists loved. 
A famous map painted by my friend and compatriot Saul Steinberg depicts the global village as seen from Manhattan: the distance from the Hudson River to the Pacific Ocean is the same as the distance from Ninth to Tenth Avenue on the Upper West Side, and somewhere beyond the calm ocean float Russia, China, and Japan. 
Saul’s other maps evoke his past: Milan, the city of his youth, Zurich, where Dada got its explosive start, and the Romanian city Buzau, where he was born. 
A map of my own fate would encompass Bukovina as my native land, the Transdnistrian concentration camp of my childhood, the Communist labor camp Periprava where my father’s identity was altered, the Bucharest of my student years and my adulthood, Berlin, my exile’s starting point, and finally New York, where my exile found its residence. 
This fate is its own “Babel,” a confused mixture of memories and places. 
Here on the Upper West Side, in the middle of a triangle formed by Central Park, Lincoln Center, and the Hudson River, I was once in the habit of beginning each day with an exotic act of devotion, a ritual of humility. 
I now had a good apartment and a certain salary, so Irving Howe’s conditions for life in the city were fulfilled. 
From my window, I watched the Rubbish Gangster: shaven head, bull neck, and swollen nose, from which dangled mucus-incrusted strands of hair, his short arms bursting with criminal power. 
Every day, at the same hour, he appeared with his metal trunk stuffed with all that he had collected from street corner garbage cans; it was as if he wanted to ensnare me with his street sorcery so that I could see the city’s unfathomable contrasts. 
The writer, caught up in the shelter of solitude, does not have much time to wander about. 
His neighborhood is his world, the geography of his calendar. 
Luckily, the streets of New York offer extraordinary spectacles wherever one is. 
In the Bronx or in Soho, in Washington Square or Times Square, in front of the New York Public Library or near a hot dog stand, across all the planets’ races, the banal vies with the exceptional for one’s attention. 
All faces, ages, and events, sooner or later, can be found here. 
Routine increases banality and thoughtlessness; the personal disappears. 
You pursue your business here as only New Yorkers can, but every once in a while you look up and wonder, “How did I get here?” 
Or, rather, “How on earth did mankind come so far?” 
I often look at New York’s architecture as if looking at an art book. 
On my way home from Bard College, where I teach, I am greeted by the George Washington Bridge majestically suspended over the Hudson River. 
It is a glorious welcome, even in fog. 
The same is true of the skyline. 
Approach the city and you see the urban center of the world – a hard and harried place, marked by social contrasts as dizzying as its skyscrapers and with a sense of transience as elevated as its buildings. 
Its workforce labors round the clock and its inventiveness, energy, and diversity counter provincialism with scorn. 
Like America itself, although so utterly different, New York can only be comprehended “synthetically.” 
This festively incoherent capital of Dada is a spectacular fusion of freedom and pragmatism. 
Misery and magnificence, seduction and neurosis create and recreate the dynamic, unmistakable spectrum of New York life. 
In this city you learn to limit yourself. 
It is impossible to take in at once all of the innumerable symphonic or jazz concerts, or parades celebrating ethnic or sexual minorities. 
You can’t attend all the lectures, panel discussions, and auctions where everyday dramas and dreams are bartered. 
You can’t sit in all the taxis driven by those loquacious ambassadors from India and Russia and Haiti, from Pakistan and Ghana and Guatemala. 
At best you can grab a mere crumb of this frenetic global kaleidoscope. 
In the end, in New York you own nothing more than the instant, the now, the right now. 
Again I look over Central Park. “Dada covers things with an artificial tenderness,” wrote Tzara. 

The Return of the Newspaper 
BANGKOK – Social media are no longer the new kid on the block, but in 2016, platforms like Twitter and Facebook looked poised to nudge traditional newspapers into obsolescence. 
Following President Donald Trump’s victory in the United States, it seemed that the mainstream media had not only lost the plot, but had also lost their relevance. 
Trump led the multi-pronged attack on traditional news media, and newspapers in particular. 
But many members of the press were also quick to declare that their own character limit had been reached. 
Accused of being elitist and out of sync with readers, newspapers’ reactions ranged from self-flagellation to repentance for the election result. 
Flummoxed by the clobbering from all sides, pundits who could not get the Trump election right prophesied that declining sales, falling readership, and flagging credibility heralded the demise of the newspaper, as we have known it. 
But more than one year later, it is clear that Trump’s victory did not mean any such thing. 
On the contrary, his ascendancy has made the newspaper business more relevant than ever. 
The most remarkable media story of 2017 may have been how Trump inadvertently made newspapers great again. 
Newspapers achieved this remarkable turnaround by doing what they do best: investigative journalism and breaking stories. 
Since November 2016, and particularly since Trump’s inauguration in January last year, newspapers have led with stories ranging from conflicts of interest involving Trump’s son-in-law, Jared Kushner, to evidence that the president’s former national security adviser, Michael Flynn, met with former Russian Ambassador Sergey Kislyak. 
These tales of political intrigue competed for attention with lurid allegations of sexual misconduct by Hollywood producer Harvey Weinstein, US Senate candidate Roy Moore, and other powerful men. 
And the pummeling of Trump with inconvenient facts has not been limited to Russia’s meddling in the election. 
It is important to remember that newspapers’ investments in rapid-response investigative teams, long-form stories, and data-driven journalism are possible only because more people are paying for their news, especially through digital subscriptions. 
Millennials in the West, dismayed by the surge in “fake news,” are helping reverse declining circulations in major markets. 
Growth trends are even more pronounced in the Asia Pacific region, where readers in China and India are leading a return to traditional newspapers. 
Of course, newspapers’ post-election rebound was not entirely their own doing; it was also facilitated by social media’s failure to consolidate its gains. 
Blinkered by the illusion of having snatched whatever influence newspapers commanded, social media’s mavens bungled their attempts to dethrone the older medium. 
Instead of breaking stories, they took to drafting manifestos, like Facebook founder Mark Zuckerberg’s 5,700-word jeremiad about nothing in particular. 
And, while there was a time when 140 characters may have been more appealing than 700-word opinion pieces, brevity is no longer enough. 
(Nor, for that matter, is lengthy incoherence). 
Having abducted the truth, social media were at a loss about what to do with it. 
They did not innovate by, for example, following the lead of BuzzFeed, a once-notorious “clickbait” factory that soon expanded into serious reportage and long-form journalism. 
After the US election, BuzzFeed shook up the media industry by publishing the Steele dossier, a collection of private intelligence on Trump gathered by a former British MI6 officer. 
A few months later, it produced an 8,500-word expose on Milo Yiannopoulos, a former star commentator for Breitbart News. 
The Columbia Journalism Review called the article “groundbreaking,” though recent squabbles with CNN indicate a certain reluctance to accept BuzzFeed as a legitimate news organization – and, potentially, even the emergence of a new media war. 
Meanwhile, most major social media platforms continued to feature whatever presidential nonsense interested or amused their users, like analyzing “covfefe.” 
This has led many to assume that Trump himself drives the social media agenda. 
Perhaps he does. 
But Trump’s ad nauseam tweets about failing newspapers and fake news have also spurred more reasonable consumers to embrace newspapers as a bastion of anti-Trumpism. 
In other words, newspapers’ revival is a visceral, if partisan, response to social media in the Trump era. 
Trump, the upstart, is leading the battle against the media Brahmins, buoyed by a fellow disruptor, social media. 
But Trump’s campaign is a losing one. 
Newspapers have gained allies even on Capitol Hill. 
When Congress grills executives from Facebook, Twitter, and Google, glee is evident in news headlines. 
To add insult to social media’s injury, it is newspaper articles that are being relentlessly quoted in congressional testimony. 
For example, former FBI Director James Comey’s memo on his interactions with Trump, which led to the hiring of a special prosecutor to investigate the Trump campaign’s connections to Russia, was leaked to The New York Times. 
As calls to rein in social media grow, it is the world’s newspapers – until very recently thought to be on the ropes – that have provided the reporting needed to convince policymakers to act. 
Because social media companies, for all their power and potential, never developed the journalistic capacities needed to displace traditional news media, the pendulum has changed direction. 

Can the Euro Be Saved? 
NEW YORK – The euro may be approaching another crisis. 
Italy, the eurozone’s third largest economy, has chosen what can at best be described as a Euroskeptic government. 
This should surprise no one. 
The backlash in Italy is another predictable (and predicted) episode in the long saga of a poorly designed currency arrangement, in which the dominant power, Germany, impedes the necessary reforms and insists on policies that exacerbate the inherent problems, using rhetoric seemingly intended to inflame passions. 
Italy has been performing poorly since the euro’s launch. 
Its real (inflation-adjusted) GDP in 2016 was the same as it was in 2001. 
But the eurozone as a whole has not been doing well, either. 
From 2008 to 2016, its real GDP increased by just 3% in total. 
In 2000, a year after the euro was introduced, the US economy was only 13% larger than the eurozone; by 2016 it was 26% larger. 
After real growth of around 2.4% in 2017 – not enough to reverse the damage of a decade of malaise – the eurozone economy is faltering again. 
If one country does poorly, blame the country; if many countries are doing poorly, blame the system. 
And as I put it in my book The Euro: How a Common Currency Threatens the Future of Europe, the euro was a system almost designed to fail. 
It took away governments’ main adjustment mechanisms (interest and exchange rates); and, rather than creating new institutions to help countries cope with the diverse situations in which they find themselves, it imposed new strictures – often based on discredited economic and political theories – on deficits, debt, and even structural policies. 
The euro was supposed to bring shared prosperity, which would enhance solidarity and advance the goal of European integration. 
In fact, it has done just the opposite, slowing growth and sowing discord. 
The problem is not a shortage of ideas about how to move forward. 
French President Emmanuel Macron, in two speeches, at the Sorbonne last September, and when he received the Charlemagne Prize for European Unity in May, has articulated a clear vision for Europe’s future. 
But German Chancellor Angela Merkel has effectively thrown cold water on his proposals, suggesting, for example, risibly small amounts of money for investment in areas that urgently need it. 
In my book, I emphasized the urgent need for a common deposit insurance scheme, to prevent runs against banking systems in weak countries. 
Germany seems to recognize the importance of a banking union for the functioning of a single currency, but, like St. Augustine, its response has been, “O Lord, make me pure, but not yet.” 
Banking union apparently is a reform to be undertaken sometime in the future, never mind how much damage is done in the present. 
The central problem in a currency area is how to correct exchange-rate misalignments like the one now affecting Italy. 
Germany’s answer is to put the burden on the weak countries already suffering from high unemployment and low growth rates. 
We know where this leads: more pain, more suffering, more unemployment, and even slower growth. 
Even if growth eventually recovers, GDP never reaches the level it would have attained had a more sensible strategy been pursued. 
The alternative is to shift more of the burden of adjustment on the strong countries, with higher wages and stronger demand supported by government investment programs. 
We have seen the first and second acts of this play many times already. 
A new government is elected, promising to do a better job negotiating with the Germans to end austerity and design a more reasonable structural reform program. 
If the Germans budge at all, it is not enough to change the economic course. 
Anti-German sentiment increases, and any government, whether center-left or center-right, that hints at necessary reforms is thrown out of office. 
Anti-establishment parties gain. 
Gridlock emerges. 
Across the eurozone, political leaders are moving into a state of paralysis: citizens want to remain in the EU, but also want an end to austerity and the return of prosperity. 
They are told they can’t have both. 
Ever hopeful of a change of heart in northern Europe, troubled governments stay the course, and the suffering of their people increases. 
Portuguese Prime Minister António Costa’s socialist-led government is the exception to this pattern. 
Costa managed to lead his country back to growth (2.7% in 2017) and achieve a high degree of popularity (44% of Portuguese thought the government was performing above expectations in April 2018). 
Italy may prove to be another exception – though in a very different sense. 
There, anti-euro sentiment is coming from both the left and the right. 
With his far-right League party now in power, Matteo Salvini, the party’s leader and an experienced politician, might actually carry out the kinds of threats that neophytes elsewhere were afraid to implement. 
Italy is large enough, with enough good and creative economists, to manage a de facto departure – establishing in effect a flexible dual currency that could help restore prosperity. 
This would violate euro rules, but the burden of a de jure departure, with all of its consequences, would be shifted to Brussels and Frankfurt, with Italy counting on EU paralysis to prevent the final break. 
Whatever the outcome, the eurozone will be left in tatters. 
It doesn’t have to come to this. 
Germany and other countries in northern Europe can save the euro by showing more humanity and more flexibility. 
But, having watched the first acts of this play so many times, I am not counting on them to change the plot. 


Globalizing the Fed 
OXFORD – Should the United States worry about whether its monetary policy is wreaking havoc on emerging and developing countries (EMDCs)? 
That was the question faced by the Federal Reserve at the height of its quantitative-easing program, when its monthly purchases of long-term assets drove yield-hungry investors into these countries, causing their currencies and asset prices to rise. 
And it is still a pressing question today, now that the Fed is winding down its asset purchases, causing capital flows to reverse and leaving many EMDCs high and dry. 
Contrary to what most observers seem to believe, the answer does not lie in scrutinizing the Federal Reserve’s mandate or debating the record of developing-country policymakers. 
Rather, the question concerns whether, and how, the US wants to lead in the global economy. 
If the US wants to preserve an open, stable global financial order, it cannot afford to ignore the current turmoil in emerging markets. 
Since talk of “tapering” began last year, a growing number of EMDCs have come under pressure: their currencies are depreciating, capital is fleeing, and their central bankers are left with the unenviable task of combating a domestic growth slowdown while maintaining external stability. 
The incipient recovery in the advanced economies appears to be sparking widespread instability, from Argentina to Turkey to India. 
To be sure, some of the EMDCs’ recent struggles are rooted in homegrown weaknesses. 
But domestic politics is only part of the story. 
Indeed, some countries with strong economic fundamentals and responsible macroeconomic policies – such as Mexico – are still suffering. 
Just as successive rounds of monetary-policy loosening in the US and the EU caused large shifts in EMDCs’ financial conditions and asset prices that were largely unrelated to underlying fundamentals, so the current instability in many EMDCs is driven more by the unwinding of these policies than by domestic factors. 
So, is there anything EMDCs can do to avoid being buffeted by flooding and receding waves of international capital? 
Compared to a decade or two ago, EMDCs (at least theoretically) have an expanded toolkit at their disposal. 
These instruments – including measures aimed at capital-flow management, currency-market interventions (either sterilized or unsterilized), macro-prudential financial regulation, and the accumulation of reserves – provide some room for maneuver. 
Yet these tools are costly, technically complicated, and – even when executed perfectly – not always effective. 
Moreover, while even the International Monetary Fund has come around to supporting the use of capital-flow measures under certain conditions, many rich countries continue to push for provisions in trade and investment agreements – for example, the Trans-Pacific Partnership – that would bar any use of capital controls. 
So EMDCs find themselves in a real bind. 
The domestic instruments at their disposal are of limited use in coping with overwhelming global capital flows driven by monetary-policy decisions made in faraway capitals. 
Yet simply sitting back and watching their currencies gyrate as capital races in and out is both economically and politically untenable. 
One can imagine several scenarios. 
EMDCs might increasingly insulate themselves by erecting walls to foreign capital and closing themselves off from world markets: a reversal of globalization. 
Alternatively, EMDCs might turn to powerful new patrons – namely China – to support and shield them from global market swings that are beyond their control. 
In a third scenario, the US pays greater heed to its interest in sustaining an open international financial order and works to alleviate the dilemmas posed by the mismatch between globally-integrated financial flows and nationally-determined monetary policy. 
The US obviously would be best served by encouraging the third of these scenarios and discouraging the first two. 
But the more indifference the US shows to EMDCs’ fluctuating fortunes, the more it pushes them toward one of the alternatives. 
Insular monetary policy in the US will be met with insular monetary policy abroad; and everyone will be left worse off. 
What can the US do to ensure that major markets remain open to it? 
Earlier this month, the G-20 called for US policy to be more “carefully calibrated and clearly communicated.” 
This is not enough. 
The US needs to keep providing swap lines to EMDCs in need of dollar liquidity, engage in meaningful formal and informal monetary consultative processes, and support countries’ own regional arrangements, such as the Chiang Mai Initiative. 
Moreover, US trade negotiators need to stop insisting that countries give up their right to use measures to protect themselves from the unfortunate consequences of US monetary policy. 
Crucially, the US also needs to stop withholding consent for the IMF to reform and deploy additional resources from all countries. 
Recent US monetary-policy measures and statements have reflected the belief that America’s stake in EMDCs’ financial stability is limited to the extent to which volatility poses a risk to the near-term US economic outlook. 
This shortsighted strategy runs counter to the US government’s broader geopolitical and economic goals. 
The US benefits incalculably from an open global financial order, which is now at risk. 
A monetary policy that acknowledges today’s interdependence would protect America’s long-term interests. 

Ukraine Versus the Vultures 
OXFORD – Amid all of its other troubles, Ukraine cannot pay its creditors. 
The country needs more money, serious reform, and a rescheduling of its debt. 
Yet even the best efforts by the International Monetary Fund, the United States, and the European Union to achieve this will be hobbled by investment agreements that they themselves have pressed on Ukraine and many other emerging economies. 
Indeed, Ukraine could be left facing a string of complex and costly legal cases. 
In recent years, shrewd creditor lawyers have argued that investment treaties give bondholders the same rights as foreign direct investors, and have smuggled sovereign-debt cases into international arbitration proceedings wherever they have found investment treaties with broad, open-ended definitions. 
The recent experiences of Argentina, Greece, and Cyprus highlight the “blowback” on sovereign-debt restructuring. 
The first such case was Abaclat and Others v. Argentine Republic, which started in 2008. 
Thousands of Italian bondholders refused Argentina’s debt-restructuring deal, successfully arguing that the Italy-Argentina investment treaty gave them the right to pursue compensation through investor-state arbitration. 
Resolving a sovereign-debt crisis requires a collective agreement by creditors, which can be achieved only by individual investors’ incentive to try to grab their money and run. 
That is why investment treaties that leave an opening for holdouts are counterproductive. 
In national jurisdictions, a bankruptcy mechanism is used to corral creditors. 
But no such mechanism exists at the international level. 
The IMF proposed one in 2002; but, in the face of concerted lobbying by investors, the scheme was rebuffed and instead an agreement was reached to use collective action clauses (CACs) in debt contracts. 
The Eurogroup, for example, has declared that all eurozone sovereign bonds issued after January 1, 2013, should include CACs, which render a government’s debt-restructuring proposal legally binding on all bondholders if a majority of bondholders accept the deal. 
When these clauses work, they streamline debt restructurings. 
In the Greek case, CACs were retroactively inserted into all Greek-law debt. 
This allowed for a faster and more orderly restructuring than otherwise would have been possible. 
The troika – the IMF, the European Central Bank, and the European Commission – encouraged the Greek government to insert the collective action clauses. 
Yet now that very maneuver is being challenged as expropriation in international arbitration. 
The same could easily happen to Ukraine, which has ratified more than 50 investment treaties. 
Their relevant clauses are similar – often identical – to those in Greece’s investment treaties, enshrining broad, open-ended definitions of investment that do not exclude sovereign debt. 
Moreover, many of the treaties provide investors with direct access to arbitration. 
So what can be done? 
For starters, the countries that have investment treaties with Ukraine can add annexes making it explicitly clear that sovereign debt is excluded. 
Renegotiating more than 50 treaties would be unwieldy, but Ukraine would benefit enormously by renegotiating just one: the US-Ukraine investment treaty. 
By some estimates, more than 20% of Ukrainian government debt was recently purchased by a single American investment fund, Franklin Templeton Investments, specializing in distressed debt. 
So, before the blowback begins, policymakers would do well to heed the strong precedent for excluding sovereign debt from a US investment treaty. 
Although US investment treaties are uniform on most issues, they have remarkably diverse approaches to sovereign debt. 
Chapter 11 of the North American Free Trade Agreement explicitly excludes sovereign debt. 
Similarly, the US-Uruguay Bilateral Investment Treaty and the US-Peru Trade Promotion Agreement both have annexes that effectively exclude sovereign debt. 
For US policymakers, the decision to add an annex excluding sovereign debt is a tough choice. 
On the one hand, US investment treaties are designed to secure the strongest possible protection for US investors overseas. 
To remove investment protection – at a time of instability and insecure property rights, no less – is antithetical to the purpose of such treaties. 
Given the political and security imperatives of the crisis in Ukraine, however, the alternative is worse. 
Doing nothing means allowing US investment funds to pursue enormous compensation cases – likely in the billions of dollars – against a future Ukrainian administration, which, even in the best-case scenario, will be on weak domestic political footing and already saddled with an unpopular austerity program and loan-repayment schedule. 
This outcome would be more than a public-relations nightmare; with Russia beckoning, it might well hasten geostrategic disaster. 
Ideally, the world would have a well-functioning international mechanism for sovereign-bond restructuring. 
We are far from that. 
Yet before the cameras turn away from Ukraine, officials and leaders can ensure that a future administration there is not left facing bondholders one by one in international arbitration proceedings. 
The US and Western Europe have an overriding strategic interest in patching this hole in the international financial architecture, and preventing their private investment funds from aggressively seeking compensation from a future Ukrainian administration. 
To do otherwise risks far more than financial loss. 

Civilizing the Marketplace of Ideas 
CAMBRIDGE – “When men have realized that time has upset many fighting faiths,” US Supreme Court Justice Oliver Wendell Holmes wrote in a famous dissenting opinion in 1919, “they may come to believe…that the ultimate good desired is better reached by free trade in ideas – that the best test of truth is the power of the thought to get itself accepted in the competition of the market, and that truth is the only ground upon which their wishes safely can be carried out.” 
Like any market, however, the marketplace of ideas needs regulation: in particular, its participants should be bound by norms of honesty, humility, and civility. 
Moreover, every idea-trader should adhere to these principles. 
Of course, politicians through the ages have polluted the marketplace of ideas with invective. 
But in American politics, surprisingly, there has been progress. 
According to a study by the Annenberg Public Policy Center, there has been less incivility in Congress in recent years than in the 1990’s or the 1940’s. 
Republican Senator Ted Cruz was widely condemned for his aggressive questioning of incoming Defense Secretary Chuck Hagel back in January. 
But casting aspersions on a nominee’s patriotism was the norm in the McCarthy era; it is less common today. 
Academia, by contrast, appears to be moving in the opposite direction. 
A “social science” like economics is supposed to be free of partisan vitriol. Yet economists now routinely stoop to ad hominem attacks and inflammatory polemics. 
As economists go, they do not come much mightier or more influential than Paul Krugman. 
A Nobel laureate who teaches at Princeton University, Krugman is also a columnist for the New York Times, whose commentaries and blog, “The Conscience of a Liberal,” are read with an almost religious fervor by liberal (in the American sense) economists and journalists around the world. 
He is a Twitter superstar, with more than a million followers. 
A dozen ardent epigones blog in sync with him, re-posting the wisdom of the master. 
Many people today naively believe that the Internet is an unmitigated boon for free speech. 
They underestimate the extent to which such a concentration of online power corrupts, just as surely as all forms of power corrupt. 
Since Krugman and I began debating fiscal and monetary policy back in 2009, I have become increasingly alarmed by the way he abuses his power. 
Last week, I resolved to speak out in a three-article series, published squarely in the heart of the liberal blogosphere, the Huffington Post. 
As historians are trained to do, I based my argument on the archives. 
By quoting his past writings, I showed, first, that Krugman’s repeated claims to have been “right about everything” in his economic commentary are false. 
Although (like many others) he identified a housing bubble in 2006, he did not foresee the financial chain reaction that would fuel a global crisis. 
Having failed to predict the US crisis, he then incorrectly predicted the imminent disintegration of Europe’s monetary union, publishing more than 20 statements on that subject in 2011 and 2012. 
He has never admitted these errors; on the contrary, he has retrospectively exaggerated his own prescience. 
Second, Krugman’s claim that a vastly larger fiscal stimulus would have generated a more rapid economic recovery in the US depends entirely on conjecture. 
But the macroeconomic model on which he bases his claim can hardly be called reliable, given its manifest failures to predict either the crisis or the euro’s survival. 
Moreover, at least one of his pre-crisis columns flatly contradicts his view today that current – or even higher – levels of federal debt carry no risk whatsoever. 
So he has no right to claim, as he has, “a stunning victory” in “an epic intellectual debate.” 
Finally – and most important – even if Krugman had been “right about everything,” there would still be no justification for the numerous crude and often personal attacks he has made on those who disagree with him. 
Words like “cockroach,” “delusional,” “derp,” “dope,” “fool,” “knave,” “mendacious idiot,” and “zombie” have no place in civilized debate. 
I consider myself lucky that he has called me only a “poseur,” a “whiner,” “inane” – and, last week, a “troll.” 
Far from engaging in Holmes’s free trade in ideas, Krugman has been the intellectual equivalent of a robber baron, exploiting his power to the point of driving decent people away from the public sphere – particularly younger scholars, who understandably dread a “takedown” by the “Invincible Krugtron.” 
My preferred solution would be accountability. 
But I have given up hope that the New York Times will perform its proper editorial function. 
So, instead, I would suggest the intellectual equivalent of an antitrust law. 
For every word that Krugman publishes, he must henceforth commit to having first read at least a hundred words by other writers. 
I cannot guarantee that reading more widely will teach him honesty, humility, and civility. 
But it will at least reduce his unjustifiably large share of the marketplace of economic ideas. 
As a Supreme Court justice, of course, Holmes opposed antitrust regulations. 
But his arguments in this area failed his own “test of truth,” for they lacked “the power…to get…accepted in the competition of the market.” 
Holmes accepted defeat with his customary grace. 
It is high time that Krugman – right or wrong – learned to behave that way, too. 

Education’s Buy-Down Option 
WASHINGTON, DC – Last year was an important one for developing countries, if only because the world was reminded of the true value of education there. 
Indeed, Malala Yousafzai, the young Pakistani girl who spoke up for children’s right to go to school – even after surviving an assassination attempt by the Taliban – served poignant notice that not educating a child in the developing world is significantly more costly than doing so. 
With education squarely in the spotlight, new trends are gaining momentum, many of them merging with “innovative finance” – a concept much beloved by development policymakers and practitioners in difficult economic times. 
In particular, the emergence of so-called loan buy-downs could encourage financing for education from reluctant donor countries. 
A loan buy-down is a transaction in which a third party pays down part of a loan by softening its terms or reducing the principal outstanding, thereby releasing the borrowing country from all or some of its future repayment obligations. 
Because the buy-down is triggered by achievement of a pre-defined target, such transactions promote results-based financing, bringing about quantifiable reforms that otherwise might not have been realized. 
Appropriately defined triggers thus address one of the main criticisms of international aid. 
They also encourage borrowers to invest in projects with long-run returns that may not be politically attractive, such as teacher training. 
Unfortunately, the education sector still lags behind others in harnessing the potential of innovative development finance – and loan buy-downs are no exception. 
As a result, the few examples of buy-downs so far have mainly been for health initiatives. 
The Partnership for Polio Eradication Project in Nigeria and Pakistan – launched in 2003 by the World Bank, the Bill and Melinda Gates Foundation, Rotary International, and the United Nations Foundation – is a prime example of how a buy-down program can concentrate global efforts on a single issue and yield benefits for all parties. 
The Bank provided upfront long-term zero-interest loans for the purchase of oral polio vaccines in Nigeria and Pakistan, while the other three organizations covered all service and commitment charges associated with the loans. 
At the end of the project – that is, when an independent performance audit determines that the vaccines arrived on time for the campaign, and immunization coverage has reached at least 80% – the partnership will buy down the Bank’s loans. 
The World Bank will then cancel the credit and release the recipients from any future liability. 
Loan buy-downs could mitigate dwindling flows of official development assistance (ODA) for education in low-income countries, which declined by 10% from 2010 to 2011 – and by 5% for basic education. 
This reflects lower spending by seven of the 11 major bilateral donors. 
The Netherlands led the way, slashing its aid to basic education by 36%, outpacing even the 31% cut by crisis-ridden Spain. 
Japan, too, reduced its aid by 30%, while France and Canada cut their assistance by 25% and 21%, respectively. 
Elsewhere, the United States lowered its budget by 13%, and Norway by 4%. 
Given that the Netherlands has long been a key supporter of basic education, its decision to phase out its education programs was particularly notable. 
But, beyond aid reductions, donors may also make it more difficult for borrowing countries to repay the aid funds they owe (this is not limited to loans for education). 
And some donors – such as France, Germany, and the European Investment Bank – are lobbying the OECD Development Assistance Committee to count unsubsidized loans as official development assistance to enable them to meet their ODA targets. 
This reverses the trend over the last few decades toward grant-based financing, especially for basic education. 
But education, a crucial public good, should not be left behind in the pursuit of non-grant-based aid. 
Loan buy-downs can help keep the education sector “competitive,” and could prove to be a mechanism to leverage extra resources for education, for which capital-strapped countries may not be willing to borrow otherwise. 
Despite the potential benefits, the many unanswered questions about buy-downs limit their application. 
Which countries would be willing to participate, either as borrowers or lenders? 
What kinds of triggers should be specified for mobilizing buy-down funds? 
How would it be decided whether these targets had been met? 
With such questions in mind, Results for Development Institute has prepared a study for the Global Partnership for Education (GPE), analyzing the buy-down model’s use in other sectors and considering ways to apply it to education. 
The report focuses on which countries have the right combination of basic education needs and borrowing potential. 
Moreover, it examines how the buy-down triggers could catalyze results, as well as the operational issues that might arise. 
As a next step, the report proposes a pilot program and consultations with borrowers, lenders, and funders to resolve enduring questions about their application. 
That is a sensible approach. 
Buy-downs may prove to be the solution needed to ensure adequate and stable assistance to education in developing countries. 
It is time to find out. 

Nicolas Sarkozy’s French Lessons 
France has chosen – and it has chosen decisively. 
The next French president will be Nicolas Sarkozy, elected with 53.1% of the popular vote, with turnout, at 84.8%, the highest since 1981. 
This election is particularly rich in lessons. 
France was said to be to be a country mired in apathy and increasingly uninterested in politics. 
For the last 20 years, the number of citizens who registered to vote had been declining and the number of registered voters who stayed home had been increasing. 
Among those who voted, the number who cast their votes for the parties of the extreme right or the extreme left – that is, parties unsuited for government – was steadily rising. 
All this changed in the two rounds of this year’s election. 
The first lesson, then, is that France is re-politicizing. 
With voter turnout beating all European records, France’s new president will have unusually strong legitimacy. 
Second, and equally important, the extremist vote is weakening. 
Support for Jean-Marie Le Pen’s quasi-fascist National Front fell from 18% in 2002 to 10% this time around, representing an important gain in democratic stabilization. 
Likewise, the extreme left, which together put up six presidential candidates, was politically annihilated. 
Only one Trotskyite candidate received more than 4% of the vote, while the rest – including the French Communist party, which for more than 30 years received a stable 20% of the vote – gained less than 2%. 
It is the end of an adventure that was not at all good for France. 
The third key feature of the election was the emergence of a centrist constituency seeking to distinguish – indeed, separate – itself from the right. 
This is a critical development in France. 
The brave candidate of the new center, François Bayrou, managed to triple his support relative to 2002, gaining 17% of the vote, although this was not enough to place him in the second round. 
It was still too early in terms of the development of French political culture for the formation of an alliance between Bayrou and the Socialist candidate, Ségolène Royal – a proposal that I made before the elections. 
The absence of an agreement between Royal and Bayrou to back the first-round winner in the run-off with Sarkozy largely explains the ultimate defeat of both. 
But this is understandable. 
Historically, the Socialist Party has no tradition of coalition governments, much less of looking for coalition partners to its right. 
That day will come, but its arrival will require more time. 
The fourth lesson follows from Sarkozy’s stance as a classical ultra-liberal. 
While he is very French in his upbringing and education – he does not speak English! – he is nevertheless neither a Jacobin nor a Gaullist. 
Indeed, the Gaullist tradition ends with him. 
Sarkozy made public his disagreement with outgoing President Jacques Chirac about the French position against the American-led war in Iraq. 
President George W. Bush, who was the first to congratulate Sarkozy, has a new ally in Europe. 
Sarkozy believes in the efficiency of markets and will shy away from state intervention in the economy. 
He will thus contribute to a reconciliation of the hitherto nationalist French right and modern conservatism as it is practiced elsewhere. 
The fifth lesson may be the most serious. 
The French left, represented by the Socialists, has suffered its third consecutive defeat in a presidential election. 
Given the erosion of the right’s power and Sarkozy’s not very attractive personality, the road was wide open for the Socialists to win. 
The disastrous failure of the left has many causes. 
But the most important one, in my view, was the absence of a clear strategy on the part of the Socialists, who consistently refuse to make the choices that have gradually been accepted by international social democracy, embodied today in the Party of European Socialists. 
The international left has opted for a reformist course, including, where necessary, coalition governments with centrist partners. 
The reformist option fully accepts the internationalization of today’s market economy. 
The French Socialist Party’s lingering statism, ethnocentrism, and reluctance to accept coalitions with movements to its right reflects its violent and troubled history and the long intellectual domination of the French Communists. 
But these features constitute an obstacle to the Socialists’ becoming the party of government, and were reflected in their electoral program, which was full of uncertainty and indifferent with respect to Europe and the broader international context. 
The voters did not find it credible. 
This lesson is so evident that the French Socialist Party now faces a clear choice. 
Either it modernizes its program to come closer to international social democracy, or it enters a period of slow and prolonged decline. 
The Socialists now have no choice but to engage in a debate that is certain to be loud and contentious. 
But the outcome is far less clear. 

Nigeria: Debt or Democracy? 
CAMBRIDGE: When poor, heavily indebted countries are struggling to make their way from dictatorship to democracy, the actions of rich countries can be decisive. 
If rich countries insist on debt repayments and austerity measures, they are likely to destroy the social stability needed for a new democracy to take root. 
Greed, short-sightedness, and general unconcern among rich countries, however, should never be underestimated. 
In recent weeks, European countries – and apparently the IMF – have been rejecting the pleas of Nigeria's new democracy to grant it debt reduction. 
Instead, they say, Nigeria should increase its debt servicing this year, and should abandon its call for debt reduction. 
The French Government, as organizer of the creditor committee of governments (the so-called Paris Club)bears most responsibility for this egregious policy, but many other governments and international agencies share the blame. 
You would think that France, the United Kingdom, the United States, and the IMF would be more aware of recent history. 
Seven years ago, Nigeria was on a rocky and treacherous course to democratization. 
A caretaker government was charged with overseeing the transition to national elections in early 1994. 
Yet in late 1993, the IMF and World Bank pressured Nigeria to eliminate subsidies on domestic petroleum products as part of austerity moves insisted on by its creditors. 
The timing could not have been worse. 
Elimination of fuel subsidies caused riots and widespread strikes against the transition government, which gave an excuse for Nigeria's generals to re-assert military control. 
It would take six long years under rapacious military rule before Nigeria received another chance at democracy. 
Last year, Nigeria celebrated a remarkable escape from dictatorship. 
After the brutal and hyper-corrupt military ruler General Sani Abacha – who suddenly dropped dead – the military sullenly agreed to another national election. 
The election brought to power the remarkable Olusegun Obasanjo, a nationally unifying figure of impeccable democratic credentials, and an internationally respected Nigerian. 
It was President Obasanjo, who as head of the military in the late 1970s, successfully led an earlier transition to democracy. 
But the challenges facing the new state are awesome. 
The country remains impoverished, ethnically divided, and with collapsed social services after years of military-led corruption and plunder. 
A spiralling AIDS epidemic could swamp the whole society. 
Already, life expectancy has declined from around 58 years to 54 years as a result of AIDS. 
Western nations cynically claim that Nigeria is a rich country and should therefore be held to its debt service payments. 
If they believe this, they are simply foolish. 
Even though Nigeria is a considerable oil producer, of around 2 million barrels per day, because there is a vast population of 120 million people, income per Nigerian from this oil is only around $100/ $150 per year. 
And because oil constitutes more than 90% of the country's exports, oil income is all that Nigerians have to live on in the world economy. 
The result is an average income per person (counting the oil plus the non-oil economy) of around $300 per person per year, making Nigeria one of the poorest countries in the world. 
Social conditions are abysmal, in line with such poverty. 
There is massive disease, low life expectancy, high malnutrition, and low school attendance. 
History could now repeat itself. 
Reportedly, Nigeria is being pushed to increase debt service payments. 
So far, creditors reject Nigeria's calls for debt reduction, and instead offer Nigeria the phony solution of "debt rescheduling." 
This means that Nigeria would be able to postpone some payments, but will be charged full market interest rates on the postponement, and is expected to eventually pay off the debts in full. 
Nigeria is supposed to agree to these terms to win a small new loan from the IMF, which itself will be on commercial terms. 
With behavior like this, it's hard to believe much of the words coming out of Washington, London, Paris, and Berlin about their new commitment to Africa and the new commitment to poverty reduction in the poorest countries. 
Either there is a total disconnect between the political leaders voicing these words and their treasuries and finance ministries, or it's all a cynical game for rich countries to enjoy the bounty of booming wealth and prosperity while doing precious little for the rest of the world. 
My own guess is that conservative finance ministries in rich countries, and the IMF staff as well, are blind to the political ramifications of their actions. 

Polio’s Last Stand 
GENEVA – It has been a tough year for Nigeria. 
In the last 12 months, the country has suffered attacks by child suicide bombers and brutal massacres by Boko Haram. 
The vast majority of the 276 schoolgirls abducted in Chibok last year are still missing. 
And yet, during this time, despite such horrors, Nigeria has quietly managed to achieve something truly remarkable: an entire year without a single new case of wild polio. 
This is a great achievement for Nigeria and all of its partners in the effort to eradicate the disease. 
Less than 30 years ago, polio plagued 125 countries, paralyzing 1,000 children a day. 
Until now, there were only three countries where the virus was still considered endemic: Afghanistan, Pakistan, and Nigeria. 
Health officials wait three years before declaring a country polio-free, but the one-year milestone in Nigeria raises hopes that we may have already seen the last case of wild polio in the country – and the whole of Africa. 
In addition to the logistical challenge of reaching every child in Africa’s most populated country, the Nigerian polio-eradication campaign has had to overcome security issues, opposition by religious fundamentalists, and rampant corruption. 
The fact that a country as troubled as Nigeria could pull off such an important feat is cause for celebration and provides grounds for optimism, not only in the fight against polio, but for global health efforts in general. 
Nigeria’s success shows that it is possible to bring the miracles of modern medicine to the world’s most marginalized and hard-to-reach children. 
This has huge implications for the reduction of childhood mortality. 
The children that had previously not been reached with polio vaccines live in communities with little or no access to routine immunization, maternal healthcare, nutritional supplements, deworming, or malaria prevention. 
They are the children who are most at risk of dying before they reach their fifth birthday. 
Nigeria’s success in reaching these children is the result of the efforts of thousands of dedicated local volunteers, some of whom lost their lives in the process. Since 2012, there has been nearly a fivefold increase in the number of volunteers involved in mobilizing communities during immunization campaigns. 
Meanwhile, government, global health organizations like the World Health Organization and UNICEF, civil-society organizations, and community leaders, all working together, managed to identify and bridge the gaps that have historically impaired access to polio vaccines. 
In early 2012, for example, Nigeria’s government established dedicated emergency operations centers to coordinate data flow, facilitate decision-making, and improve accountability within the program. 
With support from Gavi, the Vaccine Alliance, Nigeria also installed more than 1,600 solar-powered refrigerators, which are critical to ensuring that vaccines remain safe and effective during their long journey through the distribution chain. 
These investments in physical and social infrastructure provide a means of protecting children from a range of diseases. 
Already, polio workers in Nigeria are spending more than half their time providing unrelated but vital health services. 
The infrastructure has helped introduce new vaccines – such as pneumococcal conjugate vaccines, which protect against pneumonia, the biggest killer of children under the age of five – and increased coverage of routine immunization against measles and rubella. 
Thanks to the emergency operations centers, this infrastructure even helped to stop the Ebola outbreak in Nigeria in 2014, by enabling contact tracing and surveillance. 
These efforts have the additional benefit of ensuring that Nigeria cements its polio-free status. 
The health infrastructure put in place during the eradication campaign has enabled the deployment of injectable polio vaccines, which will complement the oral vaccines in ensuring that the virus does not return. 
This was also the pattern in India, the most recent country to be declared officially free of polio, with no cases since 2010. 
The infrastructure put in place to deliver polio vaccines there is now being used to increase coverage of routine immunization, like the 5-in-1 pentavalent vaccine. 
India can now wind down its polio-eradication campaigns, but still maintain its polio-free status. 
So far, in 2015, only 34 cases of polio have been documented worldwide – the majority of them in Pakistan. 
There is now a very real prospect that we could see the last ever case of wild polio – a disease that once threatened millions of people – before the end of 2016. 
To eradicate the disease, however, we will have to build on successes like Nigeria’s and strengthen routine immunization efforts. 
The end of polio should mark not just the defeat of a terrible disease, but also the beginning of a new phase in the effort to reduce childhood suffering and death, the benefits of which will be felt for generations to come. 

Nigeria's Battle of the Generals 
Nigeria has never held successful civilian-run elections. 
The last one, which returned President Shehu Shagari and his National Party of Nigeria to power in 1983, was marked by widespread violence and vote-rigging. 
Three months later, the Army staged a coup--Nigeria's fifth since independence in 1960. 
Governance has never been easy in Nigeria, a conglomerate of over 150 million people and some 250 ethnic or language groups. 
Not all share the same vision of Nigeria's future, and they are exceptionally vigorous in disputing what it should be. 
Civic virtue is rare. 
No leader can be expected to run this giant of Africa as if it were Singapore. 
Nigerians once again fear that chaos will accompany the second elections since the Army returned power to civilians in May 1999. 
Legislative elections will be held on April 12th, followed by the presidential election a week later. 
Opposing President Olusegun Obasanjo, a retired general seeking a second term on the platform of the People's Democratic Party (PDP), is Muhammadu Buhari, another retired general, from the All Nigeria People's Party (ANPP). 
General Buhari led the coup against Shagari in 1983. 
Two other candidates stand out. Emeka Odumegwu-Ojukwu is an Oxford-trained historian and retired army officer who led the Biafran secessionist attempt in 1967, which plunged the country into civil war. 
Gani Fawehinmi, a fiery lawyer who made his name as a human rights campaigner under military rule, is the candidate of the National Conscience Party (NCP). The PDP and ANPP are broadly center-right parties, while the NCP styles itself as the "party of the poor" and espouses social democratic policies. 
In reality, however, the election is a straightforward fight between Obasanjo, a born-again Christian from the Yoruba southwest, and Buhari, an ascetic Muslim from the Hausa-Fulani-dominated north. 
So far, bleak predictions that the campaign would split Nigerians along Islamic/Christian lines, triggering sectarian violence before the voting, have not come to pass. 
Buhari, whose running mate is a Christian, has toned down his support for Shari'ah, the strict Islamic legal system adopted by 12 northern states over the past three years. 
While taking care not to anger northern voters by openly distancing himself from Shari'ah, Buhari pledges to uphold the nation's secular constitution. 
The power behind Obasanjo is his Vice President, Abubakar Atiku, a northern Muslim. 
Atiku, a formidable political operator, is positioning himself for his own presidential bid in 2007. 
Atiku's huge influence balances the perceived Christian-millenarian strain of Obasanjo's presidency. 
Faced with meeting the constitutional requirement of getting votes from each state in the Federation, the candidates and their handlers have gone out of their way to avoid taking positions that ruffle feathers. 
This is not to say that parochial sentiments are unimportant. 
The Alliance for Democracy, the dominant Yoruba party, is not fielding a candidate because it does not want to divide the Yoruba vote and deny victory to Obasanjo, their kinsman. 
Nevertheless, Nigerians have seen little of the crude "vote for my tribe" politicking that doomed previous attempts at democratic rule. 
Still, political violence has increased as the campaign enters its final stage. 
Marshall Harry, an ANPP chieftain and General Buhari's point man in the volatile Niger delta region, was murdered on March 5th. 
Thugs killed an ANPP senatorial candidate in the east a few days later. 
Moreover, communal violence has combined with deep-seated local resentment against western oil companies to render the oil-rich delta a battlefront. 
Youth of the Ijo tribe demand that the government redraw local government boundaries, which they claim favor the Itsekiri, a rival group, before the elections. 
Violent clashes between the two groups have left hundreds dead and wounded. 
The presence of federal troops did not stop the warring factions from disrupting oil production, forcing Chevron/Texaco and Shell--which account for more than half of Nigeria's daily oil production--to suspend operations. 
Some calm has returned, and oil production is resuming. 
But the lethal mix of poverty, youth unemployment, and the mesmerizing spectacle of millions of petrodollars flowing out of the delta and into the pockets of the powerful, casts a long shadow. 
Ethnic militias are also making a show of strength elsewhere in the south, mainly among the Igbo and the Yoruba, whose political elites call for greater political and fiscal autonomy. 
Federal authorities have curbed their excesses so far, but in the heady, chaotic atmosphere surrounding the elections, uncertainty prevails. 
Rattled, leading politicians from all the parties met in Abuja, the capital, and promised to eschew violence and intimidation during the elections--an encouraging sign that the political class is keen not to repeat the coup-inciting mistakes of the past. 
Of course, the army is in no hurry to seize power. 
Revulsion for military rule runs deep. 
Ordinary Nigerians hold the "Khaki Boys," as army officers are derisively called, responsible for today's wrecked economy and social malaise. 
But four years of democratic rule have not brought Nigerians much relief, with the majority still living below the poverty line. 
Obasanjo's government has no clear idea about how to address the nation's key problems--an ailing, oil-dependent economy hobbled by $30 billion in external debt, a deeply flawed unitary constitution forced on a socially-diverse people by the military in 1999, and an exploding youth population. 
If Buhari beats Obasanjo, he is unlikely to do better. 
Ordinary Nigerians, brutalized by a dizzying succession of corrupt and inept military juntas, have, like a drowning man, clutched at "democracy" as their lifeline. 
This hope alone keeps the country from disintegrating into a thousand warring parts. 

Nigeria’s Lost Chance 
Nigeria’s first attempt since independence in 1960 to transfer power from one civilian government to another has just ended – farcically. 
Indeed, the presidential election degenerated into a crude exercise in ballot rigging and voter intimidation. 
As a result, the victory of Umaru Yar’Adua, the candidate of the ruling Peoples Democratic Party and President Olusegun Obasanjo’s hand-picked successor, is now hotly disputed. 
The major opposition candidates – Muhammadu Buhari of the All Nigeria Peoples Party (ANPP), Patrick Utomi of the African Democratic Party (ADP), Atiku Abubakar of the Action Congress (AC), and Orji Uzor Kalu of the Progressive Peoples Alliance (PPA) – reject the results and are calling on Nigerians to protest peacefully. 
Both local and Western election monitors have said that the poll fell far below acceptable standards. 
Although American officials had said that the United States would not support Obasanjo if the election were flawed, it was an open secret long before polling began that the PDP would manipulate the outcome to remain in power. 
Obasanjo made it clear that he considered the election a “do or die affair” and would hand over power only to Yar’Adua. 
Even so, the scale and brazenness of the fraud were unprecedented, indicating Obasanjo’s desperation. 
Obasanjo is understandably anxious. 
Last May, the National Assembly slapped down his attempt to re-write the constitution in order to remain in office beyond the stipulated two terms. 
His effort to use corruption charges to exclude from the election his vice president, Atiku Abububar, with whom he had been feuding since 2004, also failed when the Supreme Court ruled that Abububar’s name had to be restored to the ballot. 
Moreover, Obasanjo has a long and sorry track record when it comes to elections. 
In his first incarnation as military head of state in the late 1970’s, he had a relatively free hand to shape the outcome of the 1979 elections. 
He gave power to Shehu Shagari, the presidential candidate of the National Party of Nigeria, who was widely viewed as incompetent and yoked to feudal interests in Nigeria’s Muslim north. 
The Shagari government quickly became mired in corruption and inefficiency, plunging the country into debt and a vicious cycle of unemployment, declining productivity, and social unrest. 
So the military, which had terminated the First Republic in January 1966 with a bloody coup, returned to power in December 1983 and did not quit until 1999, when pro-democracy forces, galvanized by economic decline and reports of military graft, forced the democratic elections that brought back Obasanjo to power. 
Obasanjo’s eight years in office did not resolve Nigeria’s economic and political problems – key among them a new political framework to fit the country’s social diversity. 
And, given its past performance, it is unlikely that the PDP will allow for a new and cleaner vote. 
Buhari, the ANPP candidate, has asked the National Assembly to begin impeachment proceedings against Obasanjo. 
Some prominent Nigerians have also suggested that if the electoral crisis is not resolved before Obasanjo steps down on May 29, the chief justice should take over as interim president and organize new elections. 
Buhari has wide support in the north and Abubakar has a formidable and well-resourced party machine; but mutual distrust run deep in both camps. 
If they unite in their moment of adversity and take their grievance into the streets, they will have to confront the generals, notorious for their disregard of civil rights and liberties. 
Obasanjo retains the backing of the army, some of whose members openly participated in stuffing ballot boxes and intimidating the opposition. 
Any significant move to tackle the PDP machine will likely need to come from the Senate and its president, Ken Nnamani, who played a key role in thwarting Obasanjo’s quest for a third term. 
Nnamani’s sudden decision to recall the lawmakers in the wake of the vote may be the first step in this direction. 
But impeachment proceedings are not likely to be concluded before Obasanjo quits on May 29. 
The Supreme Court has a new chief justice whose ruling in the Abubakar case demonstrated that he could be counted on to intervene on the side of fair play, but it is not clear what constitutional instrument could be used to resolve the election crisis before the hand-over date. 
So once again, democracy in Nigeria is at a knife’s edge. 
Armed militias in the Niger Delta are becoming bolder. 
The price of Nigerian crude is rising, a sure sign that the world sees instability ahead. 
Only swift and firm intervention from impartial external parties working in concert with the National Assembly and the courts can avert a looming disaster. 

Nigeria’s Resurgent Oil Diplomacy 
Russia is not alone in seeing oil as a means to transform its global standing. 
Nowadays, the mantra of President Umar Yar’Adua, who took power in June 2007, following controversial elections, is to transform the country into one of the world’s 20 largest economies by 2020. 
Yar’Adua and his Peoples Democratic Party (PDP) are struggling to stamp their authority on an unwieldy and restive country of 140 million people, and the government views rapid growth as a means to achieving that aim. 
Nigerians can use a dose of hope. 
Olusegun Obasanjo, who became Nigeria’s first elected president in 1999 after nearly two decades of military dictatorship, left vast swathes of the country trapped in poverty when he handed power to Yar’Adua last year. 
With oil reaching $100 dollars per barrel, and energy-hungry giants like the United States and China beating a path to Nigeria’s door, Africa’s leading oil producer wants to use petrodollars to cure the country’s economic ills and flex its muscles in the international arena. 
While riding the crest of the last oil boom in the late 1970’s, Nigeria’s military leaders nationalized the assets of British Petroleum and became champions of pan-African co-operation, financing several African liberation movements. 
The interests of the West and Nigeria repeatedly clashed, but Nigeria always stood its ground. 
Inept government and economic decline in the 1980’s and 1990’s obliged Nigeria’s leaders to focus on problems closer to home, like the civil wars in Liberia and Sierra Leone. 
But old habits die hard. 
Nigeria has always sought a leadership role in Africa and its diaspora. 
Even in the turbulent 1990’s, when Nigeria was temporarily suspended from the British Commonwealth following the execution of minority rights campaigner Ken Saro-Wiwa by General Sani Abacha’s regime, the governing elite sought to achieve Nigeria’s “rightful” place in global affairs. 
There are now signs of a resurgent oil-driven foreign policy. 
Last October, Yar’Adua joined South Africa and Libya in opposing US plans to deploy AFRICOM, its new African regional military command, on the continent. 
He then asked Nigeria’s National Assembly to write off $13 million of Liberia’s $43 million bilateral debt after Liberian President Ellen Johnson-Sirleaf withdrew her offer to host the new command. 
Nigerian officials are careful to disavow any link between this financial gift and Johnson’s turn away from AFRICOM. 
Nor do they voice their concern that AFRICOM could be part of an American effort to exert control on West Africa’s oil-producing countries. 
But, in confidential briefings, Nigeria has strongly hinted that it will not tolerate any foreign incursions on a vital and strategic resource in its own backyard. 
Domestically, the renewed flexing of Nigeria’s foreign policy muscles is being played out in the ongoing face-off between the new National Energy Council, which reports to the President, and Western oil companies, led by Shell’s Nigerian subsidiary, over when to end production-related gas flaring. 
The government insists on a January 2008 deadline, but the companies complain that the government’s reluctance to fund its share of operating costs fully and rising political violence in the Niger Delta make this deadline unrealistic, and want it extended three years. 
The Department of Petroleum Resources (DPR), the regulatory agency for the oil industry, has dismissed these claims, vowing to impose hefty fines on companies that flout the deadline. 
In the early 1990’s, desperately short of hard currency, Nigeria negotiated contracts permitting the oil companies to develop new fields and recoup their investment before sharing profits. 
Now, following the companies’ discovery of massive reserves, technocrats appointed by Yar’Adua to take charge of oil policy want Nigeria to get a larger slice of the pie. 
That also means ending government co-financing of operating costs and demanding that the oil companies tap capital markets to bridge the shortfall. 
Moreover, Tony Chukwueke, the DPR’s head, has announced plans to create an African version of Petronas, Malaysia’s state-run oil company, and transform the sclerotic Nigerian National Petroleum Corporation into a powerful oil-producing firm that can dominate the market in the Gulf of Guinea and other emerging regions. 
Intense Western pressure has been brought to bear on Yar’Adua to re-consider the January deadline. 
His election is being challenged in court by other candidates, and Western backing could play a role in stabilizing his government. 
But his advisers, some of whom played a key role in shaping Nigeria’s foreign policy in the 1970’s, are keen to use the gas-flaring issue to demonstrate Yar’Adua’s resolve and standing as a pan-African leader. 
But, as in the 1970’s, the success of Nigerian diplomacy will depend on the government’s ability to win legitimacy at home. 
That will require repairing and improving damaged infrastructure, generating economic prosperity, running efficient social services, and taming the unrest in the delta region. 
It is not yet clear whether Yar’Adua’s government can meet these challenges. 

Nigeria’s Road to Ruin 
With so much political friction in Iran and Iraq, it is easy to overlook the growing unrest in Nigeria, the world’s eighth-largest oil exporter. 
But Nigeria’s mounting social and political problems reveal how violence and uncertainty in yet another major energy producer is driving foreign investors out and global oil prices up. 
Nigerian President Olusegun Obasanjo appears poised to try to amend the country’s constitution to allow himself a chance at a third term. 
To that end, he has marginalized many of his political rivals. 
Vice President Atiku Abubakar – a likely presidential aspirant in 2007 – has been harassed and isolated. 
Ministers suspected of less than full loyalty have been sidelined. 
But Obasanjo’s adversaries have joined the battle, and the president lacks the two-thirds majority needed in both the federal and state legislatures to remain in power after next year. 
Two former Nigerian presidents, Generals Muhammadu Buhari and Ibrahim Babangida, publicly oppose Obasanjo’s constitutional meddling, and several governors of Nigeria’s Muslim-dominated northern states have made clear that they are determined to see Obasanjo off when his term expires in 2007. 
As a result, the uncertainty surrounding Obasanjo’s plans is increasing sectional tensions. 
At stake is the cohesion of a state that many argue is yet another example of an artificial nation cobbled together by Europeans who did not understand their creation’s social, tribal, and religious forces. 
Northern governors oppose a third term for Obasanjo because they believe it is now their turn to choose Nigeria’s president under a deal, struck with their southern counterparts when democracy was introduced in 1999, for regional rotation of the presidency. 
Southern governors argue that control of the presidency should remain with the south for years to come, because the north controlled the country during more than three decades of dictatorship. 
Indeed, even southern governors who are not reliable Obasanjo allies appear determined to maintain their influence within the central government by ensuring that the country’s next president is a southerner. 
For the moment, Obasanjo offers them their best opportunity to realize that goal. 
Last December, 16 of Nigeria’s 17 southern governors signed the “Enugu Declaration” in support of the constitutional amendment that would permit him a third term. 
This is a bad time for Nigeria’s federal government to face these distractions. 
The Niger Delta region, home to most of Nigeria’s oil and many of its poor people, is in turmoil. 
In October 2004, violence in the region forced Obasanjo’s government to negotiate with militia leader Asari Dokubu, after his men attacked a series of Royal Dutch Shell oil facilities and threatened to “burn down the area.” 
In December 2004, Dokubu’s militias took 75 oil workers hostage and forced Shell to shut down about 10% of the country’s oil supply. 
Dokubu then forced Obasanjo into a peace deal. 
The deal did not last long. 
After Dokubu renewed threats to oil infrastructure last September, he was arrested on sedition charges and now faces the possibility of execution or life in prison. 
Dokubu’s allies have responded with new attacks. 
A splinter group, the Movement for the Emancipation of the Niger Delta, has claimed credit for several recent attacks and kidnappings of foreign workers, and says it will not retreat until Delta states gain control of the revenue produced by locally extracted oil. 
There are also fears that the splintering of Dokubu’s militias has created fertile ground in the Delta for Islamist groups. 
A few weeks ago, a previously unknown organization called “The Martyr’s Brigade” claimed credit for attacks on Delta pipelines, raising concerns among multinationals that mercenary resistance in the region is becoming ideological. 
Whatever the motivations of the various groups, a surge of militia attacks and kidnappings over the past several weeks has now shut down roughly 20% of Nigeria’s oil exports and killed dozens of people. 
Shell has closed key facilities in the Delta after the abduction of several workers. 
Once a verdict is reached in Dokubu’s trial, probably this summer, violence is expected to intensify. 
In addition, religious violence sparked by the Danish cartoons mocking the prophet Muhammad ripped through Nigeria in February. 
Angry Muslim and Christian mobs burned churches and mosques, killing dozens of people in a series of attacks and reprisals that have deepened the sectional divide between the Muslim north and the Christian south. 
If all this turmoil weren’t enough, the discovery of avian flu in the northern provinces further undermines political stability. 
Obasanjo has called on Muslim farmers in the area to cull their birds, a key source of protein in a region where malnutrition is a constant threat. 
In some ways, Nigeria is plagued with the same problems facing Iraq. 
Various ethnic and religious groups, based in different regions, are battling for oil revenue and political clout. 
As in Iraq, the conflict could provoke large-scale bloodletting. 
Yet, unlike Iraq, Nigeria has a recent history of relatively stable democratic governance. 
The country’s factions each have good reason to compromise before the conflict comes to a head. 
Northern governors could, for example, offer the southern states a larger share of Nigeria's oil revenue in exchange for their support for a northern president. 
But achieving such a compromise won’t be a smooth or predictable process. 
On the contrary, the risks of extended political instability and further large-scale disruptions to Nigeria’s oil output will remain high, at a time when the world can least afford it. 

Nigeria’s Sick Man Democracy 
How sick is Nigerian president Umaru Yar’Adua? 
In May, he admitted during a live television broadcast that he suffers from a kidney ailment, but sought to quell rumors that he was terminally ill by insisting that fears for his health are greatly exaggerated and politically motivated. 
There are plenty of world leaders in less-than-perfect health. 
But the stakes are especially high in Nigeria, where Yar’Adua embodies the country’s delicate political balance. 
With the fall of Nigeria’s dictatorship and the introduction of democracy in 1999, governors in the mainly Muslim northern provinces believed they had struck a deal with their southern counterparts on a regional rotation of the country’s presidency. 
In 2007, arguing that it was their turn to choose a chief executive, they bitterly opposed a bid by then-President Olusegun Obasanjo, a southerner and a Christian, to rewrite Nigeria’s constitution in hopes of winning a third term. 
Southern governors countered that the north had controlled the country through more than three decades of authoritarian rule and that a southerner should hold the presidency for years to come. 
Tensions mounted. 
Once it became clear that his gambit would fail, Obasanjo found a compromise: he named a man he trusted, Yar’Adua, a little-known northern governor and devout Muslim, as his preferred successor. 
In April 2007, Yar’Adua won a disputed landslide presidential victory. 
Western and African observers charged that widespread vote-rigging had tainted the official result, and Nigeria’s Supreme Court has yet to rule on challenges to the election’s legality. 
But Yar’Adua shrugged off charges of electoral fraud, and in the first days of his presidency, he drew praise, both at home and abroad, for promises to tackle corruption and pursue an agreement with militia groups in the oil-rich, violence-plagued Niger Delta region. 
In reaching out to armed groups like the Movement for Emancipation of the Niger Delta (MEND), one of his primary assets has been his vice president, Goodluck Jonathan, a native of the area. 
Pacifying the Delta is vitally important, because Nigeria, the world’s eighth-largest oil producer, earns 86% of its export revenue from oil. 
Attacks on pipelines have recently intensified ahead of a planned summit meeting between the government and various militia leaders, as small groups of militants stage attacks on oil infrastructure in the Delta to establish their relevance and win a potentially lucrative seat at the negotiating table. 
The summit is likely to generate an agreement and positive media coverage, but northern Muslim members of parliament could complicate efforts to implement the deal. 
The Nigerian government could use some good news. 
Electricity shortages have intensified on Yar’Adua’s watch, producing blackouts in many areas of the country and darkening the foreign investment climate. 
Rising food and energy prices pushed inflation up to 9.7% in May, from 8.2% in April. 
Corruption investigations launched by Yar’Adua’s government have uncovered broader and deeper problems than many knew existed. 
A battle between the president and legislature over control of federal spending has not been fully resolved. 
For foreign investors, the greatest near-term concern may be a broad range of attacks from parliament and some of Yar’Adua’s economic advisors on Charles Soludo, the central bank governor, who is widely credited for Nigeria’s improved economic performance in the past several years. 
Under Obasanjo, Soludo initiated much needed banking reforms and argued strenuously that Nigeria should pay its foreign debt. 
But Soludo’s recent decision to create a sovereign wealth fund has ignited a firestorm. 
Lawmakers complain they weren’t consulted. 
Northern Muslims wonder why Soludo, a southern Christian, believes the government should horde excess cash that could be spent to relieve poverty among their constituents. 
A favorite of the West, Soludo may not survive the year. 
With so many challenges ahead, Nigeria can ill afford an ailing president. 
Yar’Adua insists that he’s fine and that his trips to Germany for medical treatment, during the election campaign last year and again this April, have been unfairly politicized. 
But there are plenty of unanswered questions about his kidney condition and rumors that he may even have Churg-Strauss Syndrome, a life-threatening autoimmune disease. 
The true state of his health may matter less than public fears that he’s hiding something. 
Yar’Adua’s health worries are creating risks to Nigeria’s stability that run far beyond questions about the Niger Delta or any single political issue. 
If Yar’Adua were to die in office, his vice president would succeed him – returning the presidency to a southern Christian. 
Nigeria’s northern Muslims are highly unlikely to accept that result without protest. 
There is no reason to believe that Goodluck Jonathan will preemptively resign, and removing him from office if he assumes the presidency might well stoke unprecedented violence in the Delta. 
Given the political friction and violence generated by last year’s election campaign, new balloting would prove a less-than-appealing prospect. 
Only Umaru Yar’Adua’s doctors know for sure how sick he is. 
But as answers begin to emerge, we will learn much more about the health of Nigeria’s fragile democracy. 

Nigerian Democracy Grows Up 
ABUJA – Nigeria’s legislative elections, to be followed by a presidential poll on April 16, indicate that the ruling Peoples’ Democratic Party (PDP) has lost its near-total grip on the country’s politics. 
Of the four main opposition parties that fielded candidates for the 469 parliamentary seats in contention, the Action Congress of Nigeria (ACN) took the bulk of the votes in the southwest of the country, felling such PDP stalwarts as House speaker Dimeji Bankole and Senator Iyabo Obasanjo-Bello, daughter of former President Olusegun Obasanjo. 
The PDP did, however, fend off challenge in the oil-producing Niger Delta, President Goodluck Jonathan’s home region. 
It also held its own in the predominantly Igbo southeast and the middle belt, home to several small ethnic groups. 
Bitter controversy marked Jonathan’s ascension to power in May 2010, following the death of President Umaru Yar’Adua after only three years in office. 
Some PDP politicians in the Muslim north insisted that their region be allowed to present a candidate, as Obasanjo, who was viewed as representing the Christian south, had served eight years. 
They were rebuffed. 
The party then hemorrhaged influential members, particularly in the north. 
Analysts predicted that a large share of the region’s votes would go to the Congress for Progressive Change (CPC), led by Muhammadu Buhari, a northern Muslim from the state of Katsina. 
Buhari is also the party’s presidential candidate. 
The CPC won the majority of the seats in Katsina, but the PDP still managed to maintain its dominance of that volatile region’s politics. 
The parliamentary polls, originally scheduled for April 2 but postponed a week after the Independent National Electoral Commission (INEC) failed to print adequate ballot papers and other election materials, took place in an atmosphere of fear, violence, and uncertainty. 
Bombs went off in the INEC office in Suleja, near the federal capital, on the eve of the polling, killing several election officials. 
Explosions in Maiduguri, a large city in the northeast where Boko Haram, a violent Muslim sect, remains a threatening presence despite a 2009 government crackdown, forced many voters to stay home. 
Seventy-four million Nigerians were registered to vote, but turnout was far below that. 
Attahiru Jega, a university teacher and chairman of the INEC from August 2010, overhauled a sclerotic and corrupt election machinery, put in place a new and credible voting register, and retrained and deployed his staff to 120,000 polling stations in a vast country – all in six months. 
The election was always going to be a challenge, all the more so because, following the end of military rule in 1999, Nigerian politicians had become habituated to rigging polls. 
After all, the 2007 election that brought Yar’Adua to power – the PDP’s third straight “victory” – was judged by local and international observers to be the worst in the country’s history. 
Indeed, prior to the vote earlier this month, Nigeria had settled into a rut of “electoral authoritarianism.” 
The all-powerful PDP, relying on its control of the security agencies, the considerable oil revenues to which the president and his retinue had untrammeled access, and an intricate patronage network radiating through the local councils of Nigeria’s 36 states, seemed set to govern indefinitely. 
Elections had become a hollow ritual, matters of public policy were not important campaign issues, and the opposition was divided, poorly funded, and unable to devise a strategy to cut the PDP juggernaut to size. 
To President Jonathan’s credit, he delivered clean elections. 
As the INEC proceeded to implement an elaborate device to check potential vote riggers, he stood his ground and backed Jega, even as hawks within his party began to mutter that Jega was a “dangerous radical” whom the president should sack. 
Opposition parties found their feet, and the PDP’s power monopoly was finally broken – but not obliterated. 
In fact, Jonathan and the PDP look set to turn in a good performance in the presidential polls. 
The CPC’s poor showing in the North’s parliamentary polls could be an indication that the region’s influential conservative politicians, whom Buhari took on when, as an army general, he toppled the Second Republic in a bloodless coup in December 1983, have neither forgiven nor forgotten. 
Talks are ongoing between the CPC, the ACN, which is fielding Nuhu Ribadu, the former anti-corruption czar as presidential candidate, and the All Nigeria Peoples Party, a minor party running Ibrahim Shekarau as its nominee, to field a joint candidate. 
Buhari has more name recognition nationwide than the other two, but Ribadu’s ACN outperformed the CPC during in the parliamentary election. 
So who will step aside for whom remains unclear. 
If, however, the opposition parties resolve their differences and manage to stitch together a firm common platform, they could force Jonathan into a runoff. 
That the elections were held at all – and without violent conflict between the country’s north and south – is a remarkable achievement. 
The country’s mounting problems – rampant official corruption, decaying social and physical infrastructure, and growing ethnic and religious insurgencies in the northeast, central region, the southeast, and Niger Delta – are yet to be seriously tackled. 
Nevertheless, ordinary Nigerians hope that the presidential election this week, and governorship and state-assembly polls on April 26, will put into office politicians who will, at long last, take on these challenges. 
As the parliamentary elections showed, it is time that Nigerians receive democracy’s dividend: a government that reflects their interests and responds to their demands. 

Power Without Purpose 
MOSCOW – For more than two decades, August has been the cruelest month for Russian leaders. 
The August 1991 coup led to the departure of President Mikhail Gorbachev and the end of the Soviet Union. 
The August 1998 debt default and ruble collapse laid waste to President Boris Yeltsin’s free-market reforms and resulted in the sacking of his prime minister, Sergei Kiriyenko. 
The following August, a sick and feeble Yeltsin announced that Vladimir Putin, the fourth prime minister in a year, would soon take over as President. 
Four years later, in August 2003, a Kremlin-inspired tax raid against Russia’s leading oligarch, Mikhail Khodorkovsky, followed by the confiscation of his oil company, Yukos, demonstrated what Putin meant by the “dictatorship of law.” 
This late-summer curse now precedes a “December of misery” – at least for democracy activists. 
In December 2011, mass protests against Putin’s election-fixing and upcoming third presidential term simply fizzled out. 
Likewise, December 2013 (the unlucky “Devil’s Dozen” according to superstitious Russians) was full of omens. 
The month began with international calls to boycott February’s Winter Olympics in Sochi in protest against a Kremlin-sanctioned law banning “gay propaganda.” 
This was followed by political turmoil in neighboring Ukraine, where protesters tried, and once again failed, to topple their anti-democratic leaders. 
The year ended with two suicide bombings in Volgograd, which claimed dozens of lives. 
In attacking Volgograd, formerly Czaritsyn (city of the czars) and later Stalingrad (the symbol of Soviet wartime perseverance), the terrorists – most likely Chechen Islamic fundamentalists – could hardly have picked a more emblematic Russian city. 
Moreover, in December, Putin made high-profile use of that most imperial of prerogatives, the presidential pardon, to bestow freedom on, among others, Khodorkovsky (who had spent a decade behind bars) and two members of the protest punk band Pussy Riot. 
These apparent acts of mercy were presented as the wise acts of a benevolent modern czar ruling in the name of traditional values and repulsed by Western decadence – never mind that it was Western governments that had pressed most persistently for their release. 
Indeed, Putin’s real motivation for the pardons had nothing to do with any traditional concept of law and order, much less with a move toward democracy. 
Rather, by freeing his opponents, he sought to appease foreign critics before the upcoming Olympics. 
And, to some degree, he has succeeded; despite the transparent self-interest underlying the pardons, his critics are starting to speak of a Putin “thaw.” 
It appears that sometime last summer, Putin realized that his usual approach to public relations – kissing tigers, “discovering” sunken treasure, and bare-chested horse-riding in the Siberian taiga – was hackneyed and inappropriate for a world leader. 
So, like the good KGB apparatchik that he was, he refocused his attention on exploiting his opponents’ weaknesses – particularly those of US President Barack Obama. 
That tactic has been successful, at least insofar as it has created buzz about a “resurgent Russia.” 
In his now customary New Year’s address, a preening Putin celebrated 2013 by recalling how Russia had outplayed the US and Western Europe. 
Without being too specific, he noted Russia’s asylum offer to former US intelligence contractor Edward J. Snowden last summer; his deal to dispose of Syria’s chemical weapons, thereby preventing the US from striking Russia’s ally; and Ukraine’s return to Russia’s sphere of influence after its rejection – under Kremlin pressure – of an association agreement with the European Union. 
But, as the “inhumane acts of terrorism” (as Putin himself put it) in Volgograd demonstrate, tactical victories do not always lead to strategic success. 
Putin’s attempt to pacify the North Caucuses by installing the brutal Ramzan Kadyrov as Head of the Chechen Republic has brought little more than a fragile, de facto truce that has left Russia as vulnerable as ever to terrorism. 
Even Putin’s latest pet project – proving that Russia can host an Olympics as successfully as Beijing or London – could easily backfire. 
Russia’s potential medal haul might generate a national feel-good moment, but only if the Sochi games proceed smoothly and safely. 
The risk is that the greater their success, the more likely it is that Chechen and other insurgents will seek more targets, at an even more terrible human cost. 
By suppressing opposition in Moscow, Grozny, and elsewhere, Putin has only put a lid on a boiling pot. 
Part of the Kremlin’s difficulty stems from its remarkable lack of vision – a fundamental failure to understand what Russia is, will be, or can become. 
We know that it is no longer an economic power (oil reserves notwithstanding). 
Nor is it a match for the US, or even China, in international affairs. 
But it is far from clear what Russia wants to become: a reinvented empire, a new autocracy, a “sovereign” democracy, or perhaps something else. 
A century ago, the month of August marked the start of a conflagration in Europe whose catastrophic effects continue to shape Russia. 
In 1913, simmering imperial tensions in the Balkans seemed to have subsided, and yet 1914 marked the start of the Great War. 
My hope for 2014 is that Putin’s hubris will not lead Russia down a similar road. 

Russia’s Crimean Shore? 
MOSCOW – In his 1979 novel The Island of Crimea, Vasily Aksyonov imagined the region’s flourishing independence from the Soviet Union. 
Aksyonov, a dissident writer who emigrated to America shortly after the book’s samizdat (underground) publication, is now lauded as a prophet. 
But his prophecy has been turned on its head: Today’s Crimea does not want independence from Ukraine; it wants continued dependence on Russia. 
Traditionally the gem in the imperial crown, a lavish playground of czars and Soviet commissars – and, more important, the home of the Russian Navy’s Black Sea Fleet – Crimea became part of Ukraine under Nikita Khrushchev in 1954. 
After the Soviet Union collapsed in 1991, Russian President Boris Yeltsin apparently forgot to claim it back, so Ukraine kept a territory in which nearly 60% of the two million inhabitants identify as Russians. 
In defense of Khrushchev (my great-grandfather), whether Crimea was part of Russia or Ukraine hardly mattered. 
After all, they were all part of the Soviet empire. But in the last 20 years, Russia has sought to retake the peninsula. 
The Kremlin has been rumored to expedite passport applications for Crimean residents, and its allies – for example, Aleksei Chalyi, Sevastopol’s new mayor – populate its political offices. 
And now Ukraine’s fugitive ex-president, Viktor Yanukovych, is reported to have taken refuge there as well. 
Busy with the Sochi Olympics and wary of an international debacle, Russian President Vladimir Putin maintained almost complete public silence as Ukraine’s crisis reached its bloody crescendo. 
In fact, Putin’s manipulation of Yanukovych – forcing him to renege in November on Ukraine’s plan to sign an Association Agreement with the European Union, and to enact a harsh anti-protest law the following month – ended in disgrace for the Kremlin: Kyiv is now firmly in the hands of pro-Western forces. 
But the seemingly spontaneous resolve of some Crimean Russians to rejoin Mother Russia is allowing Putin to wipe some of the egg off his face. 
After all, pleas from Crimea for fraternal Russian support appear to justify Putin’s backing for the dithering, venal, and now widely despised Yanukovych. 
So the big question now is whether Putin will seize on the restiveness of Russians in Crimea (and eastern Ukrainian cities like Kharkiv) to recover parts of former Soviet territory, as he did with Georgia’s Abkhazia and South Ossetia regions after the 2008 war. 
If so, the long-term strategic costs could be enormous. 
The Northern Caucasus and its vicinity already is a tinderbox; acquiring more territory with disaffected Muslims would undoubtedly yield further security challenges. 
After all, the formerly Ottoman Crimea has long been home to the Tatars, who bear a massive historical grudge against the Kremlin, owing to their forced removal by Stalin to the Central Asian steppes. 
Today, they compose 12-20% of the Crimean population (depending on who is counting); but, threatened by Putin’s repressive policies toward other Muslims, they might well renew their call for all Tatars to return. 
If more Tatars do settle in Crimea, Russia’s neo-imperial project, already facing an Islamist insurgency in Chechnya and Dagestan, would become all but untenable. 
That much should be clear to virtually everyone, if not to Putin, whose obsession with short-term tactical victories – which usually take the form of poking the United States in the eye – can also be seen in Syria. 
Putin’s gains there – arranging for chemical disarmament by June of this year, or orchestrating the Geneva talks on ending the civil war – have no beneficial endgame for Russia. 
The Geneva conference ended earlier this month in a stalemate between President Bashar al-Assad’s government and its opponents. 
The regime’s request to delay the elimination of its chemical-weapons arsenal has created a new disagreement, with Russia, China, and Iran calling for a flexible timetable, while the US and the European Union continue to insist on the June deadline. 
In the meantime, Russia is increasingly loathed across the Middle East, including in strategically important Turkey, for backing the murderous Assad. 
Investing in incompetent or brutal partners is Putin’s signature diplomatic trait. 
But perhaps even he has come to understand that backing such people is doomed to failure. 
A breakthrough of sorts may have come this past weekend when, after vetoing three previous resolutions, Russia finally agreed with Western and Arab-backed calls for Syria’s government and opposition forces to provide immediate access to humanitarian aid. 
Or perhaps the possibility of regaining full sovereignty over Crimea has led Putin to reconsider the value of retaining Syria’s Mediterranean port of Tartus for the Russian Navy. 
But Putin’s greatest strategic derangement concerns China. 
Voting with Russia against the West to keep Assad in power does not make the world’s most populous country a reliable partner. 
If China concludes that its geopolitical interests, particularly in dealing with the US, would be best served by detaching itself from Putin, it will not hesitate to do so. 
Moreover, China still regards large chunks of Russian Siberia as its own stolen territory. 
If there is one objective that unites the Chinese political establishment, it is recovery of lost territory, no matter how long it takes. 
President Xi Jinping may smile and tell Putin how similar they are, but he will happily move to subordinate Russia with every passing year. 
If anything, Russia needs Europe and America if it is to confront successfully its many challenges, particularly that posed by China. 
Instead, Putin takes perverse pride in his persistent efforts to alienate the West. 
His former Ukrainian proxy, Yanukovych, could attest to the catastrophic stupidity of this policy. 

The Silver Fox of Dictatorship and Democracy 
MOSCOW – Throughout his years in power, Eduard Shevardnadze was known as the “silver fox,” a man who seemed to glide effortlessly from leader of Soviet Georgia and Kremlin Politburo member to Mikhail Gorbachev’s reform-minded foreign minister, before reemerging as post-Soviet Georgia’s pro-Western president, ironically opposing Gorbachev. 
He regarded himself as a hero who liberated Georgia from Russia’s tight embrace. 
He was also one of the most corrupt politicians his country ever saw. 
By the end of his life, Shevardnadze had become a political pariah in Georgia, the West, and Russia, where he was viewed as an architect of the Soviet Union’s dissolution. 
Yet, even if he was largely forgotten after the Rose Revolution of 2003, when he was ousted by his one-time protégé, Mikheil Saakashvili, his cunning and skill at manipulating political forces still enabled him to manage his legacy to his advantage. 
The staunchly pro-American Saakashvili launched successful economic reforms and an all-out assault on police corruption, though he, too, eventually was accused of taking bribes and indulging autocratic impulses. 
Having come to power in the revolt that overthrew the corrupt Shevardnadze, he resorted to the same Soviet-style techniques – intimidating and discrediting opponents, dispersing dissenters by force – to keep his opponents at bay. 
The question Georgians have been asking ever since is whether Shevardnadze was really overthrown at all. 
Knowing the extent of his unpopularity in 2003, many believe that he was ready to leave power but needed a successor who would ensure that his legacy (and his wealth) survived. 
To be sure, Saakashvili became famous as Georgia’s justice minister for submitting corruption charges against the Shevardnadze family, and early in his presidency was able to reclaim for the state $15 million dollars of the Shevardnadze fortune. 
But Saakashvili’s government never touched Shevardnadze and his family. 
Regardless of whether this theory is true, its persistence lies at the core of Shevardnadze’s legacy. 
Throughout his career, he was known to play all sides, at times threatening his resignation, only to stay on – or accusing enemies of assassination plots, only to stay alive. 
In the 1970s, he would flatter Soviet leader Leonid Brezhnev with spectacular displays of fealty to the Kremlin, only to meet with protesting Georgian students in support of their right, in opposition to the Kremlin’s wishes, to speak Georgian, not Russian, as a state language. 
Everything at which Georgians excelled under Shevardnadze in the Soviet era – entrepreneurship, education, and culture – was greatly neglected by him in the 1990s. 
Similarly, whereas tens of thousands of functionaries were indicted for corruption or lost their jobs under his leadership in the 1970s, the post-Soviet Shevardnadze of the 1990s reportedly joked that he should have arrested himself, but that he deserved his wealth for his priceless political contribution. 
In 1999, during the New York celebrations marking the tenth anniversary of the fall of the Berlin Wall, I myself heard Shevardnadze assert that Georgia had given the twentieth century two historic figures: “One who erected the Iron Curtain [Joseph Stalin], and one who tore it down” – meaning himself. 
Surely, Shevardnadze’s political skills were worthy of another great Soviet politician from the Caucasus, the Armenian Anastas Mikoyan, once Stalin’s trusted trade minister and later Nikita Khrushchev’s fellow anti-Stalinist and deputy prime minister. 
Mikoyan, as one joke had it, left the Kremlin one day in heavy rain and refused to share a colleague’s umbrella. 
“It’s ok,” he said, “I will walk between the raindrops.” 
Likewise, Shevardnadze resigned as General Secretary of the Communist Party of Georgia in the 1980s, ostensibly in protest against Soviet rule, only to be appointed Soviet Foreign Minister by Gorbachev. 
Having gained the trust of Western leaders and overseen the dismantling of the Soviet empire in Eastern Europe, he then resigned in 1990, declaring that Russia – under Gorbachev – was returning to dictatorship. 
That pose as democracy’s guardian earned Shevardnadze independent Georgia’s presidency at a time when the country was vulnerable to civil war. 
He held the post for 11 years. 
Was Shevardnadze ever honest? 
Was he a democrat or a despot? 
The reality of the times was that he was both. 
His death brings closer the end of the Gorbachev generation of reform communists, those who – like Shevardnadze and the late Boris Yeltsin – presented a stark contrast in the late 1980s to the dour Brezhnev-era hard-liners, spurring (mostly inadvertently) the collapse of the Soviet empire and the long transition to democracy. 
As Russian President Vladimir Putin’s corrupt and authoritarian rule demonstrates every day, that transition is far from finished. 
Yet there is some good news. 
Last year, Georgia elected its new president, Giorgi Margvelashvili, through a peaceful and legitimate process; earlier this summer, the country signed a European Union Association Agreement, implying closer connections to the West. 
None of this would have been possible without Shevardnadze’s decades-long career of cunning, yet brave, political triangulation. 

Russia’s Potemkin Olympic Village 
MOSCOW – Remember the year 2007? 
Russia was starting to look like a world power again. 
Its economy was growing at a record 8.5% annual rate. 
Political life had stabilized. 
Support for President Vladimir Putin was stratospheric. 
The decade-long Chechen rebellion seemed to have been suppressed. 
And, to top it off, the International Olympic Committee awarded the 2014 Winter Games to Russia’s Black Sea resort, Sochi. 
In many respects, it was a strange choice of venue: sunny Sochi has beautiful mountains but little or no snow. 
It is also 850 miles south of Moscow, with few direct flights from Europe, while the trip from the United States can involve up to four legs. 
But in 2007, Russians were becoming more optimistic about their future. 
Addressing the Olympic Committee, Putin argued that awarding Russia the Games would not only allow it to showcase its post-Soviet achievements; it would also help the country through its political and economic transition. 
Nothing seemed too difficult for Putin, even mouthing unnecessary democratic platitudes for an Olympic committee whose members had already awarded the 2008 Summer Olympics to Beijing. 
But, once construction got underway, the realities of modern Russia could not be so easily hidden. 
The colossal project, which cost more than $50 billion – more than all previous Winter Olympics combined – was expected to turn Sochi into a sporting paradise, packed with arenas and a new airport. 
Instead, corruption and construction accidents have plagued preparations, with hotels still unfinished just days before the opening ceremony. 
Delay and waste are common in Olympic preparations (Greece in 2004 is an obvious example, and Brazil in 2016 appears to be experiencing similar problems). 
But Russia is proving to be an unsuitable host for other reasons. 
For starters, there are concerns about Putin’s own political legitimacy. 
His controversial and unconstitutional re-election to a third presidential term was condemned internationally and triggered anti-government protests across Russia. 
Putin responded to those he considers political enemies by arresting and jailing protesters, including the all-girl rock band Pussy Riot, following “show trials” (with the Olympics approaching, there have been recent “show pardons”). 
Such episodes have contributed to a general air of intolerance across Russia, fueled in no small part by Kremlin-incited chauvinism. 
A government sponsored anti-gay propaganda law, which indiscriminately criminalizes same-sex couples, has caused outrage abroad. 
Local activists have even advised gay athletes not to display signs of their sexual orientation while in Russia. 
Similarly, though the Olympics should be an occasion for national pride, foreign – and in particular American – athletes have been told to avoid showing their team colors when outside the grounds. 
In fact, they have been warned not to wander beyond Sochi’s “ring of steel” security perimeter and the watchful gaze of black-and-gray-clad police officers, even though Olympians typically like to explore local sights. 
None of this engenders a sense of Olympic solidarity and international friendship. 
And it gets worse. 
The authorities must also contend with threats from Islamist insurgents from Chechnya, who are now operating in other North Caucasian republics, a mere 200 miles from Sochi. 
The “black widows” – wives of Islamist fighters killed in the Kremlin’s “pacification” campaign – are believed to be preparing retaliatory suicide missions at airports, train stations, and on buses. 
The last time Russia hosted the Olympics – the 1980 Summer Games in Moscow – the US and its allies staged a boycott in response to the Soviet invasion of Afghanistan. 
And yet the Soviet Union was a superpower, stagnant but stable. 
Its totalitarian secrecy, gargantuan military-industrial complex, ever-present KGB handlers, and apparent disdain for material comforts (at least for ordinary Russians) gave the Communist hegemon a perverse mystique that made even a simple visit to Red Square a trip to remember. 
However much the country was hated or feared, one could not deny that is was a major player on the world stage. 
Not so today. 
Putin’s Russia is weak, tawdry, and corrupt – and underserving as an Olympic host. 
The atmosphere surrounding the Sochi Games reflects many of Russia’s worst traits. 
In the immortal words of former Prime Minister Viktor Chernomyrdin, describing the country’s economic transition of the 1990’s: “We hoped for the best, but things turned out as usual.” 
Even assuming that the Sochi Games pass off successfully, and that, despite the security restrictions and official bigotry, athletes and visitors enjoy their stay, will Russia’s brief display of national pride really be worth the financial and political cost? 
Or will Russians wake up six months from now and say, “Yes, our country has a fancy ski resort – at the beach.” 

Putin’s Tipping Point? 
NEW YORK – When incompetence in the Kremlin turns murderous, its incumbents can begin to tremble. 
As news of the downing of Malaysia Airlines Flight 17 over Ukraine trickled into Russia, people with a long memory recalled the Soviet Union’s attack, 31 years ago this September, on Korean Air Lines Flight 007, and its political consequences. 
Back then, the Kremlin first lied to the world by saying that it had nothing to do with the missing KAL plane. 
Later it claimed that the South Korean jet was on an American spy mission. 
But, within the Soviet leadership, the incident was a tipping point. 
It ended the career of Marshal Nikolai Ogarkov, Chief of the General Staff and a hardliner of the hardest sort, whose inconsistent and unconvincing efforts to justify the downing of the plane proved deeply embarrassing to the Kremlin. 
Ogarkov’s ineptness (and inept mendacity), together with the mounting failure since 1979 of the Soviet Union’s war in Afghanistan, exposed the system’s advanced decrepitude. 
The stagnation that had begun during Leonid Brezhnev’s rule deepened after his death in 1982. 
His successors, first the KGB’s Yuri Andropov and then the Communist Party Central Committee’s Konstantin Chernenko, not only had one foot in the grave when they came to power, but were also completely unequipped to reform the Soviet Union. 
The huge loss of life in Afghanistan (equal to the United States’ losses in Vietnam, but in a far shorter period of time) already suggested to many that the Kremlin was becoming a danger to itself; the attack on a civilian airliner seemed to confirm that emerging view. 
It was this realization that spurred Mikhail Gorbachev’s rise to power, as well as support among the leadership for Gorbachev’s reformist policies of perestroika and glasnost. 
Of course, history is not destiny, but one can be sure that at least some in Russian President Vladimir Putin’s entourage, if not Putin himself, have been thinking about Ogarkov’s failure and its impact on the Soviet elite. 
After all, Kremlin leaders, Putin included, define themselves through what was, not what could be. 
Indeed, Putin’s rationale for annexing Crimea closely resembles Brezhnev’s reasoning for invading Afghanistan: to confound enemies seeking to surround the country. 
In 2004, speaking to Russian veterans about the Afghan invasion, Putin explained that there were legitimate geopolitical reasons to protect the Soviet Central Asian border, just as in March he cited security concerns to justify his Ukrainian land grab. 
In the Brezhnev era, expansionist policies reflected the country’s new energy-derived wealth. 
Putin’s military build-up and modernization of the past decade was also fueled by energy exports. 
But Russia’s latest energy windfall has masked Putin’s incompetent economic management, with growth and government revenues now entirely reliant on the hydrocarbons sector. 
Moreover, Putin’s incompetence extends far beyond the economy. 
His security forces remain brutal and unaccountable; in some parts of the country, they have merged with criminal gangs. 
His managed judiciary provides no comfort to ordinary people; and the country’s military installations, submarines, oilrigs, mining shafts, hospitals, and retirement homes regularly blow up, collapse, or sink, owing to neglect and zero liability. 
When public support for Putin’s annexation of Crimea wanes – as it will – his failings will shine more starkly in the light of the MH17 catastrophe. 
If the Russian state functioned well, Putin could continue to withstand pressure from opposition leaders. 
But the opposition’s charge that Putin’s regime is composed of “swindlers and thieves” will resonate more strongly, because Russians can now see the results all around them. 
By making himself, in effect, the state, Putin, like the gerontocracy that collapsed with Gorbachev’s rise, is increasingly viewed as responsible for all state failures. 
And though thoughtful Russians may be hostages to Putin’s arrogance and blunders, the rest of the world is not. 
Indeed, his partners – particularly the other BRICS countries (Brazil, India, China, and South Africa) – are now unlikely to be able to turn a blind eye to his contempt for international law and for his neighbors’ national sovereignty, as they did during their recent Brazilian summit. 
And Europe’s last blinders about Putin seem to have fallen, with the result that serious sanctions are almost certain to be imposed. 
Putin is only 61, a decade younger than the leaders who led the Soviet Union to the precipice, and the constitution permits him to remain in power for at least another ten years. 
But with GDP up by just 1.3% in 2013 – and with sanctions likely to hasten the economy’s decline – patriotic pride will not be able to shield him much longer. 
By overplaying its hand in Afghanistan and lying to the world about the downing of KAL 007, the Soviet regime exposed and accelerated the rot that made its collapse inevitable. 
There is no reason to believe in a different fate for Putin’s effort to re-establish Russia as an imperial power. 

Putin the Perónist 
MOSCOW – Russian President Vladimir Putin has been compared to many strongmen of the past – Joseph Stalin, Leonid Brezhnev, and Chile’s Augusto Pinochet, to name a few. 
But, after nearly 14 years in power, perhaps the best comparison now may be a transgender cross between the former Argentine leader Juan Perón and his legendary wife, Eva (“Evita”). 
In the early 1940’s, Colonel Perón, as Minister of Labor and Secretary of War, was a “gray cardinal” to Argentina’s rulers. 
Before communism collapsed in 1989, Colonel Putin, also memorably gray, was a devoted KGB operative, entrusted with spreading disinformation and recruiting Soviet and foreign agents in East Germany. 
At the labor ministry, Perón initiated social reforms, including welfare benefits for the poor. 
Although his motivation, at least in part, may have been a desire for social justice, Perón was, in effect, bribing the beneficiaries to support his own rise to power and wealth. 
With his beautiful and outspoken wife – a “woman of the people” – at his side, Perón was able to persuade voters in 1946 that, as President, he would fundamentally change the country. 
He was as good as his word. 
Perón’s government nationalized banks and railroads, increased the minimum wage and improved living standards, reduced the national debt (for a while at least), and revived the economy. 
Argentina became less reliant on foreign trade, though the move toward autarky eventually undermined growth, causing the country to lose its position among the world’s richest. 
During this period, Perón also undermined freedom of speech, fair elections, and other essential aspects of democracy. 
He and his emotional wife spoke publicly against bourgeois injustices and luxury, while secretly amassing a private fortune. 
Finally, Perón was ousted in 1955, three years after the death of Evita, his greatest propagandist. 
Like Perón a half-century before, Putin promised in 2000 to tame the unbridled capitalism that had run wild under his predecessor, Boris Yeltsin. 
He pledged to restore a sense of dignity to a country that had just lost its empire and suffered a severe economic contraction during the early years of the post-communist transition. 
Putin renationalized, or rather brought under Kremlin control, the oil, gas, and other industries that had been privatized in the 1990’s. 
Buoyed by high world energy prices, he was able to pay the back wages and pensions that Yeltsin’s cash-strapped government still owed to miners, railroad workers, and teachers. 
As with Perón, citizens were bribed into backing the regime. 
But, with oil and gas revenues flowing into state coffers, Putin started to fill his own pockets. 
His personal wealth – including palaces, yachts, watches, and cars – has been estimated at $40-70 billion. 
Although he insists that his riches consist not of money and assets, but of the trust of his people, few Russians doubt that he is one of the world’s wealthiest men. 
As with Perón’s presidency, Putin’s began well. 
The public adored the new strongman as he flexed Russia’s political muscle abroad, punished the “dishonest” Yeltsin-era oligarchs, restricted the “irresponsible” media, and re-centralized power. 
Until recently, Putin’s resemblance to Evita was not so obvious (though his regular Botox treatments have given him the look that she took on after she was embalmed). 
But the similarities are becoming increasingly evident. 
Her passionate “messages for the suffering” resonated with Argentina’s poor in the way that Putin’s macho swagger appeals to a majority of Russians, mostly from the country’s hinterland and provincial cities. 
Evita and Putin also share a streak of pettiness. 
Evita ruined the life of anyone who appeared to doubt her image as Argentina’s “godmother.” 
Putin takes revenge on anyone – whether the oligarch-cum-political prisoner Mikhail Khodorkovsky, members of the rock band Pussy Riot, or ordinary citizens joining anti-Kremlin protests – who challenges his status as “father of the nation.” 
Perhaps not coincidentally, capital flight is on the rise, and around 300,000 Russians – including many of the best educated – leave the country every year. 
Now Ukraine, where President Viktor Yanukovych’s decision not to sign an association agreement with the European Union has mobilized millions of protesters, represents Russia’s moment of truth. 
While many cheer the “Euromaidan,” many others insist that Ukraine must maintain close ties with Russia. 
Putin, who played the role of puppeteer in Yanukovych’s decision to keep his country within the Russian orbit, hypocritically blames external forces for Ukraine’s political crisis. 
Yet the more the world mocks Putin’s exhibitionism, the more support he gains from Russians yearning for a return to superpower status. 
Likewise, when Evita was dying of cancer, graffiti appeared all over Buenos Aires, declaring, “Long Live Cancer!” 
But many continued to idolize her for helping the poor, regardless of how self-serving she had become. 
The same strange brew of mockery and adoration characterizes Russia’s Putin era as well. 
Perón’s final years may offer a worrying parallel. 
He returned to power in 1973, 18 years after his ouster, bringing back Evita’s embalmed body for Argentines to adore once more. 
He died the following year, leaving the government in the hands of his third wife, Isabel, whose mismanagement of the economy incited guerrilla violence and a military coup within two years. 
Yet today, according to the Latin America scholar Michael Cohen, “most of Argentine society is Perónist….Perón delivered a welfare state from which the current middle class benefits.” 
Similarly, the majority of Russians approve of Putin’s version of state capitalism, and many appreciate his largesse. 
I once believed that Putin’s demise might resemble the sudden and bloody fall of Lavrenti Beria, Stalin’s all-powerful security chief, who was finished off by the arbitrary system of justice that he helped to create. 
What now seems more likely, due to the dependence of a majority of Russians on state handouts, is that when Russia’s leader finally leaves the stage, Putinism, like Perónism, will survive, with a bizarre half-life lasting decades. 


No, You Can’t 
COPENHAGEN – Several thousand officials from 194 countries just gathered in Cancún, Mexico, for yet another global climate summit. 
Dissatisfied with the pace of climate diplomacy, many individuals are now wondering what they can do about climate change on their own. 
For years now, climate activists from Al Gore to Leonardo DiCaprio have argued that individual actions like driving more economical cars and using more efficient light bulbs are a crucial element in the effort to address global warming. 
The United Nations’ climate panel and the International Energy Agency both echo this sentiment, insisting that higher energy efficiency could reduce energy consumption by up to 30% – making improved efficiency an effective remedy for climate change. 
But is this really true? 
Here’s something to think about. 
Back in the early 1970’s, the average American expended roughly 70 million British thermal units per year to heat, cool, and power his or her home. 
Since then, of course, we have made great strides in energy efficiency. 
As The Washington Post recently reported, dishwashers now use 45% less power than they did two decades ago, and refrigerators 51% less. 
So how much energy do Americans use in their homes today? 
On a per capita basis, the figure is roughly what it was 40 years ago: 70 million BTUs. 
This surprising lack of change is the result of something economists call the “rebound effect.” 
It’s a phenomenon familiar to urban planners, who long ago discovered that building more roads doesn’t ease traffic jams – it merely encourages more people to get in their cars and drive. 
The underlying principle is a decidedly counterintuitive fact of life. 
You might think that learning to use something more efficiently will result in your using less of it, but the opposite is true: the more efficient we get at using something, the more of it we are likely to use. 
Efficiency doesn’t reduce consumption; it increases it. 
The Breakthrough Institute recently highlighted on its blog some startling – and important – research findings along these lines, published in August in The Journal of Physics by energy economist Harry Saunders and four colleagues from the US Department of Energy’s Sandia National Laboratories. 
As Saunders noted in a summary on the blog, he and his colleagues, drawing on “300 years of evidence,” found that, “as lighting becomes more energy efficient, and thus cheaper, we use ever-more of it.” 
For this reason, the proportion of resources that we expend on lighting has remained virtually unchanged for the past three centuries, at about 0.72% of gross domestic product. 
As Saunders and his colleagues observe in their journal article, “This was the case in the UK in 1700, is the case in the undeveloped world not on grid electricity in modern times, and is the case for the developed world in modern times using the most advanced lighting technologies.” 
The conclusion that Saunders and his co-authors draw from this is both surprising and hard to dispute: rather than shrinking our electricity use, the introduction of ever more efficient lighting technologies is much more likely to lead to “massive…growth in the consumption of light.” 
It’s difficult to overstate what these findings mean for climate policy. 
In a nutshell, they tell us that, while increasing energy efficiency is undoubtedly a good thing, it is most assuredly not a remedy for global warming. 
Or, as Saunders puts it, “energy efficiency may be a net positive in increasing economic productivity and growth, but should not be relied upon as a way to reduce energy consumption and thus greenhouse gas emissions.” 
This is not an argument that should encourage anyone to go out and buy a Hummer. 
But we shouldn’t fool ourselves into thinking that swapping our current car for a Prius, or replacing our incandescent lights with energy-efficient fluorescent bulbs, will strike a meaningful blow against climate change. 
The real fix to this problem will come when governments focus on research and development aimed at boosting the proportion of green energy sources in overall consumption. 
It may be reassuring to believe there are cheap and easy things we can do as individuals to stop global warming, or that the answer is to continue chasing a chimerical global agreement on carbon cuts, as in Cancún. 
But the real action that we can take is to press our politicians to put smarter ideas on the table. 

No to Academic Normalization of Trump 
CAMBRIDGE – The University of Virginia recently faced a storm of protest after its Miller Center of Public Affairs appointed President Donald Trump’s former Director of Legislative Affairs, Marc Short, to a one-year position as Senior Fellow. 
Two faculty members severed ties with the center, and a petition to reverse the decision has gathered nearly 4,000 signatures. 
A similar protest erupted at my home institution last year, when Corey Lewandowski, a one-time campaign manager for Trump, was appointed a fellow at Harvard’s Institute of Politics. 
The Trump administration confronts universities with a serious dilemma. 
On one hand, universities must be open to diverse viewpoints, including those that conflict with mainstream opinion or may seem threatening to specific groups. 
Students and faculty who share Trump’s viewpoint should be free to speak without censorship. 
Universities must remain fora for free inquiry and debate. 
Moreover, schools and institutes of public affairs must offer student and faculty opportunities to engage with the policymakers of the day. 
On the other hand, there is the danger of normalizing and legitimizing what can only be described as an odious presidency. 
Trump violates on a daily basis the norms on which liberal democracy rests. 
He undermines freedom of the media and independence of the judiciary, upholds racism and sectarianism, and promotes prejudice. 
He blithely utters one falsehood after another. 
Those who serve with him are necessarily tainted by the experience. 
Trump’s close associates and political appointees are his enablers – regardless of their personal merits and how much they try to disassociate themselves from Trump’s utterances. 
Qualities like “intelligence,” “effectiveness,” “integrity,” and “collegiality” – words used by Miller Center Director William J. Antholis to justify Short’s appointment – have little to commend them when they are deployed to advance an illiberal political agenda. 
The stain extends beyond political operatives and covers economic policymakers as well. 
Trump’s cabinet members and high-level appointees share collective responsibility for propping up a shameful presidency. 
They deserve opprobrium not merely because they hold cranky views on, say, the trade deficit or economic relations with China, but also, and more importantly, because their continued service makes them fully complicit in Trump’s behavior. 
Academic institutions must therefore tread a narrow path. 
They cannot turn their backs on Trump and his entourage, nor ignore their views. Otherwise, they would be stifling debate. 
This would run counter to what universities stand for. As a pragmatic matter, it would also backfire, by giving the Trump camp another opportunity to demonize the “liberal elite.” 
But clear rules of engagement are necessary. 
The most important principle to uphold is the distinction between hearing someone and honoring someone. 
Trump’s immediate circle and senior appointees should be welcome for discussion and debate. 
They should be treated in a civil manner when they show up. But they should not be accorded the degree of respect or deference that their seniority and government positions would normally merit. 
We do not, after all, have a normal administration that can be served honorably. 
This means no honorific titles (fellow, senior fellow), no named lectures, no keynote speeches headlining conferences or events. 
While individual faculty members and student groups should be free to invite Trump appointees to speak on campus, as a rule such invitations should not be issued by senior university officers. 
And lectures and presentations should always provide an opportunity for vigorous questioning and debate. 
Without two-way interaction, there is no learning or understanding; there is only preaching. 
Administration officials who simply want to make a statement and escape searching interrogation should not be welcome. 
Students and faculty who sympathize with Trump may perceive such practices as discriminatory. 
But there is no conflict between encouraging free speech and exchange of views, which these rules are meant to support, and the university making its own values clear. 
Like other organizations, universities have the right to determine their practices in accordance with their values. 
These practices may diverge from what specific subgroups within them would like to see, either because there are contending values or because there are differences on the practicalities of how to realize them. 
For example, some students may believe that requirements for a certain course of study are too stringent or that examinations are a waste of time. 
Universities allow free debate about such matters. 
But they reserve the right to set the rules on concentration requirements and exams. 
In doing so, they send an important signal to the rest of society about their teaching philosophy and pedagogical values. 
Allowing full debate of Trumpism while refusing to honor it would be no different. 
Universities should uphold both free inquiry and the values of liberal democracy. 
The first calls for unhindered exchange and interaction with Trumpist views. 
The second requires that the engagement be carefully calibrated, with not even a semblance of honor or recognition bestowed on those serving an administration that so grossly violates liberal democratic norms. 

The Assad Dead End 
PARIS – Forget principles and morality. 
Forget, or try to forget, the quarter-million deaths for which Bashar al-Assad is responsible, directly or indirectly, since choosing to respond with violence to a peaceful uprising of the Syrian people. 
Set aside the fact that Assad’s forces have caused 10-15 times more civilian deaths thus far than the Islamic State, whose horrific execution videos have overshadowed the Syrian dictator’s invisible massacres. 
But even if you can purge all of this from your thoughts, a policy for Syria that posits Assad as an “alternative” to the Islamic State is simply not viable. 
Assad, after all, literally unleashed the Islamic State’s current savagery: in May 2011, he released hundreds of Islamic radicals from prison, quickly supplying the infant group with fighters and leaders. 
He then methodically shelled positions held by moderate rebels, while no less methodically sparing the Islamic State’s stronghold in Raqqa. 
And then, in mid-2014, he allowed Iraqi elements of the Islamic State to find sanctuary in eastern Syria. 
In other words, Assad created the monster that he is now pretending to fight. 
Is all that not a little much for a potential ally? 
Can working with Assad possibly provide a sound basis for what is supposed to be a common effort? 
The bottom line is that Assad has no interest in winning. 
The man who now holds himself up as civilization’s last bulwark against the Islamic State is also the last man who wants to see it eliminated. 
After all, does a chess player, even a bad one, intentionally sacrifice his most powerful piece? 
Do any of us ever tear up our insurance policies? 
Do we really believe that Assad and his cronies are too stupid to have realized that their political survival depends on that of the Islamic State and on maintaining themselves as the keepers of the gate through which the rest of us must pass to wage war against it? 
“Of course not,” the advocates of working with him concede. “But let’s take a two-step approach. 
Let’s defeat the Islamic State and then worry about Assad.” 
But this, too, assumes that dictators are more stupid than they really are. 
Worse, it ignores that politics follows its own logic, or at least its own dynamics. 
What the sorcerer’s apprentices who want to work with Assad ignore is that they would most likely have a great deal of trouble, when the time comes, distancing themselves from an ally who would not be shy about claiming his share of the victory. 
As a result, jihadism would rush back in, though perhaps in a different guise. 
“Bashar al-Assad is the Syrian state,” the same people say. “And we must not commit the fatal error of destroying the state.” 
But this argument is not valid, either. 
The state has already failed: Assad's regime controls only a fifth of Syria’s territory, and the remaining four-fifths will never willingly resubmit to its terrifying control. 
If the regime prevails, Syria’s citizens will continue to flee in droves to Turkey, Lebanon, and Europe. 
In fact, Assad’s regime cares so little for its pseudo-state that it abandons its own soldiers caught beyond the territory it controls, as occurred in Tabqa, near Raqqa. 
Baathist Syria, whatever its friends in the Kremlin and elsewhere say, is dead and buried. 
And no military trompe l’œil can revive it. 
But the supposed realists refuse to accept reality. 
Just as it was necessary to ally with Stalin to defeat Hitler, they claim, we should not be afraid to play the Assad card to rid ourselves of the Islamic State. 
Yes, jihadism is the fascism of our day, infected with plans, ideas, and a will to purity comparable to those of the Nazis. 
I was one of the first to suggest the comparison some 20 years ago. 
And yet it is absurd to compare the power of the two phenomena, or to suggest that in the confrontation with the butchers of Mosul and Palmyra, the democracies face a strategic challenge analogous to that of the Nazi Wehrmacht. 
This historical leap is possible only for people whose political irresponsibility is matched by their proclivity for lazy analogy. 
Make no mistake: the Islamic State is strong. 
But it is not so strong as to leave those who would fight it with only the politics of the lesser of two evils. 
The West must decide what to do. 
In the aftermath of last week’s peace talks in Vienna – which convened the United States, Russia, Iran, China, Egypt, Turkey, Saudi Arabia and other Gulf states, Jordan, Lebanon, and key European Union members – that question becomes increasingly difficult. 
Should we equip what remains of the Free Syrian Army? 
Should we deal with the few remaining Alawite leaders whose hands are not stained with blood, or those members of Assad’s clan who chose exile early and thus were not involved in the massacres? 
Perhaps there is still time to bring together, on neutral ground, some of the elements that comprised the old Syria. 
Or perhaps more radical solutions – of the type implemented in Germany and Japan after World War II – are now required. 
All of these paths remain open, but they are narrowing. 
And none of them depends on the political survival of Bashar al-Assad. 

No Blank Check for Paulson 
NEW YORK – US Treasury Secretary Hank Paulson’s $700billion rescue package has run into difficulty on Capitol Hill. 
Rightly so: it is ill-conceived. 
Congress would be abdicating its responsibility if it gave the Treasury secretary a blank cheque. 
The bill submitted to Congress even had language in it that would exempt the secretary’s decisions from review by any court or administrative agency - the ultimate fulfillment of the Bush administration’s dream of a unitary executive. 
Paulson’s record does not inspire the confidence necessary to give him discretion over $700billion. 
His actions last week brought on the crisis that makes rescue necessary. 
On Monday he allowed Lehman Brothers to fail and refused to make government funds available to save AIG. 
By Tuesday he had to reverse himself and provide an $85billion loan to AIG on punitive terms. 
The demise of Lehman disrupted the commercial paper market. 
A large money market fund “broke the buck” and investment banks that relied on the commercial paper market had difficulty financing their operations. 
By Thursday a run on money market funds was in full swing and we came as close to a meltdown as at any time since the 1930s. 
Paulson reversed again and proposed a systemic rescue. 
Paulson had gotten a blank cheque from Congress once before. 
That was to deal with Fannie Mae and Freddie Mac. 
His solution landed the housing market in the worst of all worlds: their managements knew that if the blank cheques were filled out they would lose their jobs, so they retrenched and made mortgages more expensive and less available. 
Within a few weeks the market forced Paulson’s hand and he had to take them over. 
Paulson’s proposal to purchase distressed mortgage-related securities poses a classic problem of asymmetric information. 
The securities are hard to value but the sellers know more about them than the buyer: in any auction process the Treasury would end up with the dregs. 
The proposal is also rife with latent conflict of interest issues. 
Unless the Treasury overpays for the securities, the scheme would not bring relief. 
But if the scheme is used to bail out insolvent banks, what will the taxpayers get in return? 
Barack Obama has outlined four conditions that ought to be imposed: an upside for the taxpayers as well as a downside; a bipartisan board to oversee the process; help for homeowners as well as the holders of the mortgages; and some limits on the compensation of those who benefit from taxpayers’ money. 
These are the right principles. 
They could be applied more effectively by capitalizing the institutions that are burdened by distressed securities directly rather than by relieving them of the distressed securities. 
The injection of government funds would be much less problematic if it were applied to the equity rather than the balance sheet. $700billion in preferred stock with warrants may be sufficient to make up the hole created by the bursting of the housing bubble. 
By contrast, the addition of $700billion on the demand side may not be sufficient to arrest the decline of housing prices. 
Something also needs to be done on the supply side. 
To prevent housing prices from overshooting on the downside, the number of foreclosures has to be kept to a minimum. 
The terms of mortgages need to be adjusted to the homeowners’ ability to pay. 
The rescue package leaves this task undone. 
Making the necessary modifications is a delicate task rendered more difficult by the fact that many mortgages have been sliced up and repackaged in the form of collateralized debt obligations. 
The holders of the various slices have conflicting interests. 
It would take too long to work out the conflicts to include a mortgage modification scheme in the rescue package. 
The package can, however, prepare the ground by modifying bankruptcy law as it relates to principal residences. 
Now that the crisis has been unleashed, a large-scale rescue package is probably indispensable if the crisis is to be brought under control. 
Rebuilding the depleted balance sheets of the banking system is the right way to go. 
Not every bank deserves to be saved, but the experts at the Federal Reserve, with proper supervision, can be counted on to make the right judgments. 
Managements that are reluctant to accept the consequences of past mistakes could be penalized by depriving them of the Fed’s credit facilities. 
Making government funds available should also encourage the private sector to participate in recapitalizing the banking sector and bringing the financial crisis to a close. 

No Brexit for a Eurozone Britain? 
ATHENS – “You can check out any time you like, but you can never leave.” 
Prior to the 2016 Brexit referendum, I borrowed this line from the Eagles’ 1976 hit “Hotel California” as an argument against Britain exiting the European Union. 
I told audiences up and down Britain that if they voted to leave the EU, they would end up more entangled with the EU Commission than ever before. 
As British Prime Minister Theresa May is finding out, disentangling a member state from the EU is an arduous and complex undertaking. 
But how much harder would Brexit have been had the United Kingdom adopted the euro back in 2000? 
For starters, the people of Britain would never have been consulted on whether they wanted to check out of the EU. 
In a hypothetical eurozone Britain, the very announcement of a referendum on membership would have triggered a bank run. 
Given Britain’s chronic trade and current-account deficits, an exit from the euro would have necessarily caused a decline in the international value of UK bank deposits. 
Foreseeing this, depositors would have responded to the announcement of a referendum by immediately withdrawing their euros in cash or by wiring them to Frankfurt, Paris, New York, or elsewhere. 
And, foreseeing that reaction, no British prime minister, not even David Cameron, would have dared announce a Brexit referendum. 
Looking further back, what would the effect of 16 years in the eurozone have been on the relative strength of Leavers and Remainers within the Conservative Party? 
What would Britain’s economic circumstances have been like prior to 2016 had the euro been the UK’s currency? 
Would the political pressure to hold the referendum in 2016 have been weaker had Britain shared the same currency as Germany, France, and Greece? 
As with all counterfactuals, we are treading on thin ice here. 
Nevertheless, it is not difficult to sketch a plausible economic past for a UK that, hypothetically, entered the eurozone in 2000. 
In October 1990, the UK joined the euro’s precursor, the European Exchange Rate Mechanism (ERM), which kept the exchange rates between Europe’s major currencies within tight bands, which were increasingly tightened before locking the various currencies into a single one. 
The commitment to keep the pound close to the Deutsche Mark impelled the Bank of England to keep interest rates high, leading to the 1991 recession. 
To continue in the ERM, countries like Britain and Italy would have had to subject their populations to recessionary depths similar to that which Greece plumbed after 2010. 
In September 1992, on Black Wednesday, the pound sterling and the Italian lira fell out of the ERM as money markets bet against the survival of what the Conservative peer Norman Tebbit once ridiculed as the “eternal recession mechanism.” 
Italy, its ruling class determined to exchange the lira for the euro at all costs, immediately returned to a debauched version of the ERM. 
But the UK government steered clear, with the psychological and political impact of its humiliation proving even more significant than the financial losses incurred by the BoE. 
But following Labour’s victory in 1997, Prime Minister Tony Blair was keen to bring the euro to Britain and was prevented only by Chancellor of the Exchequer Gordon Brown’s tactical procrastination and eventual refusal to give up the pound. 
In short, the UK could have ended up a eurozone member state. 
If it had, the effects on the British economy would have been minimal for nearly a decade – in contrast to the real effects of its short-lived membership of the ERM in 1990-2. 
The reason is that, by the mid-1990s, financialization had gone berserk everywhere at once: in Wall Street, the City of London, Frankfurt, and Paris. 
Except for the interlude following the collapse of the dot-com bubble in 2001, growth in the UK and continental Europe was supercharged by the oodles of paper assets, functioning as quasi-money, produced by banks. 
During that audacious upswing, when even Greece was growing at 5% per year, a euro-denominated UK would have proceeded more or less as it did under the pound all the way to the 2007-2008 financial crisis. 
It was only then, once the bubble had burst, that the eurozone’s draconian constraints began to bite. 
With the BoE at liberty to create as many billions of pounds as it deemed fit to reflate the City and back the government’s bank nationalization and monetary stabilization drive, Britain escaped the crisis with a single-year recession (2008-2009) amounting to a loss of 5.15% in national income. 
Had London found itself in the clasp of the European Central Bank’s policies in the 2008-2012 period, Britain’s large trade and budget deficits, in conjunction with massive bailouts for the City, would have made the Greek, Irish, Portuguese, and Spanish bailouts look like child’s play. 
If the EU followed the same playbook in the case of the UK, it would have demanded levels of austerity and bailout loans that would have been politically unacceptable on both sides of the English Channel. 
Something would have to give. 
Either the British government would have, overnight, declared its exit from the euro, without a referendum or even a parliamentary vote, or Germany and France would have had to agree to scrap immediately the ECB’s prohibition of monetary financing. 
In both cases, the EU would have become unrecognizable. 
Either Brexit would have triggered a cascade that would soon cause Germany to withdraw from the euro, leading to the EU’s collapse, or the EU would have become a fiscal union overnight, leading to a political dynamic very different from the one experienced since 2008. 
So, had Britain adopted the euro, two things would have happened with certainty: there would be no UK referendum on EU membership, and Greece would not be the domino that fell first. 
The interesting question is: How would those who support Brexit today feel had Germany and France moved to scrap the current rules and usher in a fully-fledged fiscal union? 
One can only speculate, but one fact remains clear: between 2008-2016 there would be no flood of EU nationals migrating to Britain to take jobs maintained by the BoE’s money creation drive at a time when the ECB was engineering a depression on the continent. 
If a fully-fledged fiscal union had emerged in 2008, the absence of EU immigration would have denied the Brexiteers a powerful rallying cry in 2016. 
By that point, exiting the EU would be as absurd as California striking out on its own today. 

No Brexit 
LONDON – Among the multiple existential challenges facing the European Union this year – refugees, populist politics, German-inspired austerity, government bankruptcy in Greece and perhaps Portugal – one crisis is well on its way to resolution. 
Britain will not vote to leave the EU. 
This confident prediction may seem to be contradicted by polls showing roughly 50% support for “Brexit” in the June referendum. 
And British public opinion may move even further in the “Out” direction for a while longer, as euroskeptics ridicule the “new deal” for Britain agreed at the EU summit on February 19. 
Nonetheless, it is probably time for the world to stop worrying. 
The politics and economics of the question virtually guarantee that British voters will back EU membership, even though this may not become apparent in public opinion polls until a few weeks, or even days, before the vote. 
To understand the dynamics that strongly favor an “In” vote, start with the politics. 
Until this month’s deal, Britain’s leaders were not seriously making the case against Brexit. 
After all, Prime Minister David Cameron and his government had to pretend that they would contemplate a breakup if the EU rejected their demands. 
Under these circumstances, it was impossible for either Labour politicians or business leaders to advocate an EU deal that Cameron himself was not yet ready to promote. 
The Out lobby therefore enjoyed a virtual monopoly of public attention. 
This situation may briefly persist, even though the EU deal has now been agreed, because Cameron has no wish to antagonize his party’s implacable euroskeptics until it is absolutely necessary; but as the referendum approaches, this political imbalance will abruptly reverse. 
One reason is Cameron’s decision to release his ministers from party discipline during the referendum campaign. 
Initially viewed as a sign of weakness, Cameron’s move has turned out to be a masterstroke. 
Having been offered the freedom to “vote your conscience” on the EU deal, most significant Conservative politicians – with the notable exceptions of Boris Johnson and Michael Gove – have come around to supporting Cameron. 
As a result, the Out campaign has been left effectively leaderless and has already split into two rival factions – one driven mainly by anti-immigrant and protectionist sentiment, the other determined to concentrate on neoliberal economics and free trade. 
It can be confidently predicted that as the political tide turns, the British media and business opinion will follow, mainly because of direct financial interests. 
For example, Rupert Murdoch, whose outlets dominate the media landscape, needs membership in the EU single market to consolidate his satellite TV businesses in Britain, Germany, and Italy. 
Another powerful motivator for Murdoch, as well as for other media proprietors and business leaders, is to be on the winning side and to maintain good relations with Cameron, unless they see overwhelming evidence that he will lose. 
That brings us to the main reason for ignoring current opinion polls: Only when Britain starts seriously debating the costs and benefits of leaving the EU – and this may not happen until a few weeks before the referendum – will voters realize that Brexit would mean huge economic costs for Britain and no political benefits whatsoever. 
The economic challenges of Brexit would be overwhelming. 
The Out campaign’s main economic argument – that Britain’s huge trade deficit is a secret weapon, because the EU would have more to lose than Britain from a breakdown in trade relations – is flatly wrong. 
Britain would need to negotiate access to the European single market for its service industries, whereas EU manufacturers would automatically enjoy virtually unlimited rights to sell whatever they wanted in Britain under global World Trade Organization rules. 
Margaret Thatcher was the first to realize that Britain’s specialization in services – not only finance, but also law, accountancy, media, architecture, pharmaceutical research and so on – makes membership in the EU single market critical. 
It makes little economic difference to Germany, France, or Italy whether Britain is an EU member or simply in the WTO. 
Britain would therefore need an EU association agreement, similar to those negotiated with Switzerland or Norway, the only two significant European economies outside the EU. 
From the EU’s perspective, the terms of any British deal would have to be at least as stringent as those in the existing association agreements. 
To grant easier terms would immediately force matching concessions to Switzerland and Norway. 
Worse still, any special favors for Britain would set a precedent and tempt other lukewarm EU members to make exit threats and demand renegotiation. 
Among the conditions accepted by Norway and Switzerland that the EU would surely regard as non-negotiable are four that completely negate the political objectives of Brexit. 
Norway and Switzerland must abide by all EU single market standards and regulations, without any say in their formulation. 
They agree to translate all relevant EU laws into their domestic legislation without consulting domestic voters. 
They contribute substantially to the EU budget. 
And they must accept unlimited EU immigration, resulting in a higher share of EU immigrants in the Swiss and Norwegian populations than in the UK. 
If Britain rejected these encroachments on national sovereignty, its service industries would be locked out of the single market. 
The French, German, and Irish governments would be particularly delighted to see UK-based banks and hedge funds shackled by EU regulations, and UK-based businesses involved in asset management, insurance, accountancy, law, and media forced to transfer their jobs, head offices, and tax payments to Paris, Frankfurt, or Dublin. 
When confronted with this exodus of high-value service jobs and businesses, Britain would surely balk and accept the intrusive regulations entailed by Swiss and Norwegian-style EU association agreements. 
Ultimately, Brexit would not only force a disruptive renegotiation of economic relations; it would also lead to a loss of political sovereignty for Britain. 
Or maybe just for England, given that Scotland would probably leave the UK and rejoin the EU, taking many of London’s service jobs to Edinburgh in the process. 
Once Britain’s political, business, and media leaders start drawing attention to these hard facts of life after Brexit, we can be confident that voters will decide to stay in the EU. 

No Development, No Peace 
Anyone interested in peacemaking, poverty reduction, and Africa’s future should read the new United Nations Environment Program (UNEP) report Sudan: Post-Conflict Environmental Assessment . 
This may sound like a technical report on Sudan’s environment, but it is much more. 
It is a vivid study of how the natural environment, poverty, and population growth can interact to provoke terrible human-made disasters like the violence in Darfur. 
When a war erupts, as in Darfur, most policymakers look for a political explanation and a political solution. 
This is understandable, but it misses a basic point. 
By understanding the role of geography, climate, and population growth in the conflict, we can find more realistic solutions than if we stick with politics alone. 
Extreme poverty is a major cause, and predictor, of violence. 
The world’s poorest places, like Darfur, are much more likely to go to war than richer places. 
This is not only common sense, but has been verified by studies and statistical analyses. 
In the UNEP’s words, “There is a very strong link between land degradation, desertification, and conflict in Darfur.” 
Extreme poverty has several effects on conflict. 
First, it leads to desperation among parts of the population. 
Competing groups struggle to stay alive in the face of a shortage of food, water, pasture land, and other basic needs. 
Second, the government loses legitimacy and the support of its citizens. 
Third, the government may be captured by one faction or another, and then use violent means to suppress rivals. 
Darfur, the poorest part of a very poor country, fits that dire pattern. 
Livelihoods are supported by semi-nomadic livestock-rearing in the north and subsistence farming in the south. 
It is far from ports and international trade, lacks basic infrastructure such as roads and electricity, and is extremely arid. 
It has become even drier in recent decades because of a decline in rainfall, which is probably the result, at least in part, of man-made climate change, caused mostly by energy use in rich countries. 
Declining rainfall contributed directly or indirectly to crop failures, the encroachment of the desert into pasturelands, the decline of water and grassland for livestock, and massive deforestation. 
Rapid population growth – from around one million in 1920 to around seven million today – made all of this far more deadly by slashing living standards. 
The result has been increasing conflict between pastoralists and farmers, and the migration of populations from the north to the south. 
After years of simmering conflicts, clashes broke out in 2003 between rival ethnic and political groups, and between Darfur rebels and the national government, which in turn has supported brutal militias in “scorched earth” policies, leading to massive death and displacement. 
While international diplomacy focused on peacekeeping and on humanitarian efforts to save the lives of displaced and desperate people, peace in Darfur can be neither achieved nor sustained until the underlying crises of poverty, environmental degradation, declining access to water, and chronic hunger are addressed. 
Stationing soldiers will not pacify hungry, impoverished, and desperate people. 
Only with improved access to food, water, health care, schools, and income-generating livelihoods can peace be achieved. 
The people of Darfur, Sudan’s government, and international development institutions should urgently search for common ground to find a path out of desperate violence through Darfur’s economic development, helped and supported by the outside world. 
The UNEP report, and experiences elsewhere in Africa, suggests how to promote economic development in Darfur. 
Both people and livestock need assured water supplies. 
In some areas, this can be obtained through boreholes that tap underground aquifers. 
In other areas, rivers or seasonal surface runoff can be used for irrigation. 
In still other areas, longer-distance water pipelines might be needed. 
In all cases, the world community will have to help pay the tab, since Sudan is too poor to bear the burden on its own. 
With outside help, Darfur could increase the productivity of its livestock through improved breeds, veterinary care, collection of fodder, and other strategies. 
A meat industry could be developed in which Darfur’s pastoralists would multiply their incomes by selling whole animals, meat products, processed goods (such as leather), dairy products, and more. 
The Middle East is a potentially lucrative nearby market. 
To build this export market, Darfur will need help with transport and storage, cell phone coverage, power, veterinary care, and technical advice. 
Social services, including health care and disease control, education, and adult literacy programs should also be promoted. 
Living standards could be improved significantly and rapidly through low-cost targeted investments in malaria control, school feeding programs, rainwater harvesting for drinking water, mobile health clinics, and boreholes for livestock and irrigation in appropriate locations. 
Cell phone coverage could revolutionize communications for sparse populations in Darfur’s vast territory, with major benefits for livelihoods, physical survival, and the maintenance of family ties. 
The only way to sustainable peace is through sustainable development. 
If we are to reduce the risk of war, we must help impoverished people everywhere, not only in Darfur, to meet their basic needs, protect their natural environments, and get onto the ladder of economic development. 

No Diseases for Old Men 
PRINCETON – Pneumonia used to be called “the old man’s friend” because it often brought a fairly swift and painless end to a life that was already of poor quality and would otherwise have continued to decline. 
Now a study of severely demented patients in Boston-area nursing homes shows that the “friend” is often being fought with antibiotics. 
Such practices raise the obvious question: are we routinely treating illnesses because we can, rather than because we ought to? 
The study, carried out by Erika D’Agata and Susan Mitchell and recently published in the Archives of Internal Medicine, showed that over 18 months, two-thirds of 214 severely demented patients were treated with antibiotics. 
The mean age of these patients was 85. 
On the Test for Severe Impairment, where scores can range from zero to 24, three-quarters of these patients scored zero. 
Their ability to communicate verbally ranged from non-existent to minimal. 
It isn’t clear that using antibiotics in these circumstances prolongs life, but even if it did, one would have to ask: what is the point? 
How many people want their lives to be prolonged if they are incontinent, need to be fed by others, can no longer walk, and their mental capacities have irreversibly deteriorated so that they can neither speak nor recognize their children? 
In many cases, the antibiotics were administered intravenously, which can cause discomfort. 
The interests of patients should come first, but when it is dubious that continued treatment is in a patient’s interests and there is no way to find out what the patients wants, or would have wanted, it is reasonable to consider other factors, including the views of the family and the cost to the community. 
Medicare costs for beneficiaries with Alzheimer’s disease were $91 billion in 2005, and are expected to increase to $160 billion by 2010. 
(For comparison, in 2005 the United States spent $27 billion on foreign aid.) 
Moreover, D’Agata and Mitchell suggest that the use of so many antibiotics by patients with dementia carries a different kind of cost: it exacerbates the growing problem of antibiotic-resistant bacteria, putting other patients at risk. 
Pneumonia also has not been able to play its friendly role for 84-year-old Samuel Golubchuk of Winnipeg, Canada, who for years has had limited physical and mental capacities as a result of a brain injury. 
Golubchuk’s doctors thought it best not to prolong his life, but his children, arguing that discontinuing life-support would violate their Orthodox Jewish beliefs, obtained a court order compelling the doctors to keep their father alive. 
So, for the past three months, Golubchuk has had a tube down his throat to help him breathe and another in his stomach to feed him. 
He does not speak or get out of bed. 
How much awareness he has is in dispute. 
His case will now go to trial, and how long that will take is unclear. 
Normally, when patients are unable to make decisions about their treatment, the family’s wishes should be given great weight. 
But a family’s wishes should not override doctors’ ethical responsibility to act in the best interests of their patients. 
Golubchuk’s children argue that he interacts with them. 
But establishing their father’s awareness could be a double-edged sword, since it could also mean that keeping him alive is pointless torture, and it is in his best interests to be allowed to die peacefully. 
The other important issue raised by Golubchuk’s case is how far a publicly-funded health care system such as Canada’s has to go to satisfy the family’s wishes. 
When a family seeks treatment that, in the professional judgment of the physicians, is not in the patient’s best interests, the answer should be: not far at all. 
If Golubchuk’s children can convince the court that their father is not suffering, the court might reasonably order the hospital to grant them custody of their father. 
They can then decide for themselves, at their own expense, how much further treatment he should have. 
What the court should not do is order the hospital to continue to care for Golubchuk against the better judgment of its health care professionals. 
Canada’s taxpayers are not required to support the religious beliefs held by their fellow-citizens. 

No Escape from Empire’s Graveyard 
NEW DELHI – With the stage set for secret talks in Qatar between the United States and the Taliban, US President Barack Obama’s strategy for a phased exit from war-ravaged Afghanistan is now being couched in nice-sounding terms that hide more than they reveal. 
In seeking a Faustian bargain with the Taliban, Obama risks repeating US policy mistakes that now haunt regional and international security. 
Since coming to office, Obamahas pursued an Afghan strategy that can be summed up in three words: surge, bribe, and run. 
The military mission has now entered the “run” part, or what euphemistically is being called the “transition to 2014.” 
The central objective is to cut a deal with the Taliban so that the US and its NATO partners exit the “graveyard of empires” without losing face. 
This approach – aimed more at withdrawing forces as soon as possible than at ensuring enduring peace and regional stability – is being dressed up as “reconciliation,” with Qatar, Germany, and the United Kingdom getting lead roles in facilitating a settlement. 
Yet what stands out is how little the US has learned from the past. 
In critical respects, it is beginning to repeat its own mistakes, whether by creating or funding new local militias in Afghanistan, or by striving to come to terms with the Taliban. 
As with the covert war that the US waged in the 1980’s in Afghanistan against Soviet military intervention, so, too, have short-term interests driven US policy in the current overt war. 
To be sure, any leader must work to extricate his country from a protracted war, so Obama is right to seek an end to this one. 
But he was not right in laying out his cards in public and emboldening the enemy. 
Within weeks of assuming office, Obama publicly declared his intention to withdraw US forces from Afghanistan, before he even asked his team to work out a strategy. 
A troop surge that lasted up to 2010 was designed not to rout the Taliban militarily, but to strike a political deal with the enemy from a position of strength. 
Yet, even before the surge began, its purpose was undercut by the exit plan, followed by a publicly announced troop drawdown, stretching from 2011 to 2014. 
A withdrawing power that first announces a phased exit and then pursues deal-making with the enemy undermines its regional leverage. 
It speaks for itself that the sharp deterioration in US ties with the Pakistani military has occurred since the drawdown timetable was unveiled. 
The phased exit encouraged Pakistani generals to play hardball. 
Worse, there is still no clear US strategy on how to ensure that the endgame does not undermine Western interests or further destabilize the region. 
The US envoy to the region, Marc Grossman, has already held a series of secret meetings with the Taliban. 
Qatar has been chosen as the seat of fresh US-Taliban negotiations in order to keep the still-skeptical Afghan government at arm’s length (despite the pretense of “Afghan-led” talks), and to insulate the Taliban negotiators from Pakistani and Saudi pressure. 
Meanwhile, even as a civil-military showdown in Pakistan compounds Washington’s regional challenges, the new US push to contain Iran threatens to fuel greater turbulence in neighboring Afghanistan. 
In truth, US policy on the Taliban, at whose birth the CIA played midwife, is coming full circle for the second time in little more than 15 years. 
The Clinton administration acquiesced in the Taliban’s ascension to power in 1996 and turned a blind eye as that thuggish militia, in league with Pakistan’s Inter-Services Intelligence, fostered narcotics trafficking and swelled the ranks of Afghan war alumni waging transnational terrorism. 
With the terror attacks of September 11, 2001, however, the chickens came home to roost. 
In declaring war on the Taliban, US policy came full circle. 
Now, US policy, with its frantic search for a deal with the Taliban, is about to complete another orbit. 
Indeed, the Qatar-based negotiations highlight why the US political leadership has deliberately refrained from decapitating the Taliban. 
The US military has had ample opportunities (and still has) to eliminate the Taliban’s Rahbari Shura, or leadership council, often called the Quetta Shura because it relocated to that Pakistani city. 
Yet, tellingly, the US has not carried out a single drone, air, or ground strike in or around Quetta. 
All of the US strikes have occurred farther north, in Pakistan’s tribal Waziristan region, although the leadership of the Afghan Taliban and of its allied groups, like the Haqqani network and the Hekmatyar band, is not holed up there. 
Like the US occupation of Iraq, the NATO war in Afghanistan will leave behind an ethnically fractured country. 
Just as Iraq today is, for all intents and purposes, ethnically partitioned, it will be difficult to establish a post-2014 government in Kabul whose writ runs across Afghanistan. 
And, just as the 1973 US-North Vietnam agreements were negotiated after the South Vietnamese regime was shut out of the talks, the US today is shutting out the Afghan government, even as it compels President Hamid Karzai to lend support and appears ready to meet a Taliban demand to transfer five incarcerated Taliban leaders from Guantánamo Bay. 
These negotiations, in which the US is seeking the creation of ceasefire zones to facilitate its forces’ withdrawal, can only undercut the legitimacy of the Karzai government and bring the Quetta Shura back to center stage. 
But Afghanistan is not Vietnam. 
An end to NATO combat operations will not mean the end of the war, because the enemy will target Western interests wherever they may be. 
America’s fond hope to contain terrorism regionally promises instead to ensure that Afghanistan and Pakistan remain a festering threat to regional and global security. 

No Exceptions 
LONDON – Anyone who has read The Yacoubian Building, a novel published in 2002 by the Egyptian author Alaa-al-Aswany, will regard the revolution in Egypt as long overdue. 
The novel’s readers will not have been astonished by the ease with which the rotting hulk of Hosni Mubarak’s regime was dashed against the rocks, nor by the spirit and courage of those who engineered this extraordinary piece of history. 
First things first: it is a very funny and perceptive book about the characters occupying a fashionable Cairo apartment block (which really exists) and squatting in hovels on its roof. 
Like the crumbling “Majestic” hotel in J. G. Farrell’s novel Troubles, about the end of British rule in southern Ireland, the eponymous apartment block was a metaphor for the state, and its inhabitants are figures representative of different aspects of Mubarak’s Egypt. 
I suppose that censors never have much of a sense of humor, and that irony and parody are usually beyond their intellectual grasp. 
But I did find it curious that The Yacoubian Building was not banned in Egypt – or in other Arab countries – and that subsequently it was turned into a popular and widely shown film. 
Al-Aswany told his readers so very clearly what was wrong with modern Egypt, while also demonstrating that, despite the corruption and the dead hand of the security police, Cairenes fizzed with personality and showed a feisty urban grace. 
So, now that the Yacoubian state has come tumbling down, the most interesting question is not “Why did it happen?” but “Why did it not happen before?” 
For years, we in the West – shame on us – talked up democracy around the world, but, despite the occasional gentle slap on the wrist of Arab despots, we accepted that there was an Arab exception to the desire for freedom and accountability. 
We allowed convenient cultural stereotyping to sustain what we believed was the expedient pursuit of our national interest. 
While research by the Pew Centers suggested that the aspirations of families in the Middle East were similar to those elsewhere, many of us went along with the comfortable delusion that Muslim-majority societies couldn’t manage and didn’t want democracy. 
Did no one visit Turkey or Indonesia? 
This stance conveniently avoided rows with oil dictators. 
Moreover, provided they were not too troublesome politically over Israel, they could earn a well-paid seat at our table. 
They didn’t have to like Israel, provided that they weren’t too rude about America’s pro-Israel bias and its refusal to accept that insisting on Israel’s inalienable right to exist was not the same as allowing Israel to do whatever it wanted. 
Many Arabs themselves knew what was wrong with their region. 
Back in the early 2000’s, the United Nations Development Program published two reports by Arab public servants and academics that examined the factors underlying the economic stagnation of much of the Middle East. 
In too many countries, they found women were marginalized (though, to be fair, not in Tunisia), education was dominated by religion, and government was autocratic, unaccountable, and corrupt. 
Despite all the oil and gas below the desert sand, growth lagged and unemployment soared. 
Young men and women throughout the region found their hopes dashed, and sometimes turned to militant Islam as the only alternative to a repressive state. 
What happens next? 
Well, perhaps for a start, those of us who live in democracies will resist future suggestions that this or that country is immune to the charms of liberty, the rule of law, and representative government. 
If there is no “Arab exception,” there is no “China exception,” either. 
More immediately, we in the West should avoid the conceit that we were somehow the heroic behind-the-scenes progenitors of fundamental change in Tunisia and Egypt. 
Instead of talking a great game about democracy – for which we would earn Arabs’ justified contempt – we should offer with humility and generosity practical assistance in managing the change to more open societies. 
The European Union, for example, has been light on assisting the development of the rule of law, good policing, and representative institutions in the Arab world, despite a development and political compact with its governments. 
For countries that want such assistance, there is quite a lot of money in the EU’s pockets for this sort of work. 
We should also understand that the climate has changed in regard to the “non-process” that has failed so lamentably to deliver Middle East peace. 
Israel’s failure in recent years to negotiate seriously and responsibly with the Palestinians means that it will now have to consider its diplomatic options against the background of an Arab world in which governments will be obliged to listen more closely to their citizens’ views on Palestine. 
America’s military commander in Afghanistan, General David Petraeus, and others have drawn attention to the damaging impact of America’s pro-Israel bias on its interests in some of the world’s most geopolitically sensitive regions. 
Maybe now they will gain the hearing that they deserve. 
For all the gloom with which 2010 ended, the new decade has begun with a glorious example of the indefatigable courage of the human spirit. 
What lies ahead will not be easy. 
But better and more hopeful? 

Don’t Fear a Rising Dollar 
LONDON – The US Federal Reserve is almost certain to start raising interest rates when the policy-setting Federal Open Markets Committee next meets, on December 16. 
How worried should businesses, investors, and policymakers around the world be about the end of near-zero interest rates and the start of the first monetary-tightening cycle since 2004-2008? 
Janet Yellen, the Fed chair, has repeatedly said that the impending sequence of rate hikes will be much slower than previous monetary cycles, and predicts that it will end at a lower peak level. 
While central bankers cannot always be trusted when they make such promises, since their jobs often require them deliberately to mislead investors, there are good reasons to believe that the Fed’s commitment to “lower for longer” interest rates is sincere. 
The Fed’s overriding objective is to lift inflation and ensure that it remains above 2%. 
To do this, Yellen will have to keep interest rates very low, even after inflation starts rising, just as her predecessor Paul Volcker had to keep interest rates in the 1980s very high, even after inflation started falling. 
This policy reversal follows logically from the inversion of central banks’ objectives, both in America and around the world, since the 2008 crisis. 
In the 1980s, Volcker’s historic responsibility was to reduce inflation and prevent it from ever rising again to dangerously high levels. 
Today, Yellen’s historic responsibility is to increase inflation and prevent it from ever falling again to dangerously low levels. 
Under these conditions, the direct economic effects of the Fed’s move should be minimal. 
It is hard to imagine many businesses, consumers, or homeowners changing their behavior because of a quarter-point change in short-term interest rates, especially if long-term rates hardly move. 
And even assuming that interest rates reach 1-1.5% by the end of 2016, they will still be very low by historic standards, both in absolute terms and relative to inflation. 
The media and official publications from the International Monetary Fund and other institutions have raised dire warnings about the impact of the Fed’s first move on financial markets and other economies. 
Many Asian and Latin America countries, in particular, are considered vulnerable to a reversal of the capital inflows from which they benefited when US interest rates were at rock-bottom levels. 
But, as an empirical matter, these fears are hard to understand. 
The imminent US rate hike is perhaps the most predictable, and predicted, event in economic history. 
Nobody will be caught unawares if the Fed acts next month, as many investors were in February 1994 and June 2004, the only previous occasions remotely comparable to the current one. 
And even in those cases, stock markets barely reacted to the Fed tightening, while bond-market volatility proved short-lived. 
But what about currencies? 
The dollar is almost universally expected to appreciate when US interest rates start rising, especially because the EU and Japan will continue easing monetary conditions for many months, even years. 
This fear of a stronger dollar is the real reason for concern, bordering on panic, in many emerging economies and at the IMF. 
A significant strengthening of the dollar would indeed cause serious problems for emerging economies where businesses and governments have taken on large dollar-denominated debts and currency devaluation threatens to spin out of control. 
Fortunately, the market consensus concerning the dollar’s inevitable rise as US interest rates increase is almost certainly wrong, for three reasons. 
First, the divergence of monetary policies between the US and other major economies is already universally understood and expected. 
Thus, the interest-rate differential, like the US rate hike itself, should already be priced into currency values. 
Moreover, monetary policy is not the only determinant of exchange rates. 
Trade deficits and surpluses also matter, as do stock-market and property valuations, the cyclical outlook for corporate profits, and positive or negative surprises for economic growth and inflation. 
On most of these grounds, the dollar has been the world’s most attractive currency since 2009; but as economic recovery spreads from the US to Japan and Europe, the tables are starting to turn. 
Finally, the widely assumed correlation between monetary policy and currency values does not stand up to empirical examination. 
In some cases, currencies move in the same direction as monetary policy – for example, when the yen dropped in response to the Bank of Japan’s 2013 quantitative easing. 
But in other cases the opposite happens, for example when the euro and the pound both strengthened after their central banks began quantitative easing. 
For the US, the evidence has been very mixed. 
Looking at the monetary tightening that began in February 1994 and June 2004, the dollar strengthened substantially in both cases before the first rate hike, but then weakened by around 8% (as gauged by the Fed’s dollar index) in the subsequent six months. 
Over the next 2-3 years, the dollar index remained consistently below its level on the day of the first rate hike. 
For currency traders, therefore, the last two cycles of Fed tightening turned out to be classic examples of “buy on the rumor; sell on the news.” 
Of course, past performance is no guarantee of future results, and two cases do not constitute a statistically significant sample. 
Just because the dollar weakened twice during the last two periods of Fed tightening does not prove that the same thing will happen again. 
But it does mean that a rise in the dollar is not automatic or inevitable if the Fed raises interest rates next month. 
The globally disruptive effects of US monetary tightening – a rapidly rising dollar, capital outflows from emerging markets, financial distress for international dollar borrowers, and chaotic currency devaluations in Asia and Latin America – may loom less large in next year’s economic outlook than in a rear-view glimpse of 2015. 

No Licenses to Kill 
NEW YORK – In the last year, we endured a remarkable experience; after the bankruptcy of Lehman Brothers in September 2008, financial markets actually collapsed and required artificial life support. 
Nothing like this had happened since the Great Depression of the 1930’s. 
What made this collapse so remarkable is that it was not caused by some external factor, but originated within the financial system itself and spread from there throughout the global economy. 
This was almost completely unexpected, as the prevailing view was that financial markets are self-correcting. 
We now know that they are not. 
But, having gone too far in deregulating markets, we must resist a natural tendency to overcompensate. 
While markets are imperfect, regulators are not only human but bureaucratic and subject to political influence. 
Therefore, new regulations should be kept to a minimum. 
Three principles should guide reform. 
First and foremost, financial authorities must accept responsibility for preventing asset bubbles from growing too big. 
Former United States Federal Reserve Chairman Alan Greenspan and others have argued that if markets can’t recognize bubbles, neither can regulators. 
Even so, financial authorities must accept the assignment: while they are bound to be wrong, feedback from the markets will tell them whether they have done too much or too little. 
They can then correct their mistakes. 
Second, controlling asset bubbles requires control not only of the money supply, but also of the availability of credit. 
The best-known tools for this are margin requirements and minimum capital requirements. 
Similarly, financial authorities should vary the loan-to-value ratio on commercial and residential mortgages for risk-weighting purposes in order to forestall real estate bubbles. 
Regulators may also have to revive old tools. 
For example, we had no financial crises when central banks instructed commercial banks to limit their lending to particular economic sectors that they believed were overheating, such as real estate or consumer loans. 
The Chinese authorities do it today, and they also set the minimum deposits banks must maintain with the central bank. 
Or consider the Internet bubble, which Greenspan recognized early but then did nothing to address. 
He rightly believed that reducing the money supply would have been too blunt an instrument to use. 
But he could have devised more specific measures, such as asking the Securities and Exchange Commission to freeze new share issues, because equity leveraging was fueling the bubble. 
The Internet bubble was unusual in this regard. 
Usually, it is credit that provides the leverage, and credit is by nature reflexive. 
That is, an increase in the willingness to lend tends to increase the value of the collateral, and also improves the borrowers’ performance, thereby encouraging a relaxation of credit criteria. 
Bubbles recur, especially in real estate, because this reflexive relationship is repeatedly ignored. 
This brings me to my third point: we must reconceptualize the meaning of market risk. 
According to conventional theory, markets tend towards equilibrium, function without any discontinuity in the sequence of prices, and deviations occur in a random fashion. 
As a result, market risks can be equated with the risks confronting individual market participants. 
As long as they manage their risks properly, regulators should be happy. 
But markets are subject to imbalances that individual participants may ignore if they think they can offload their positions on someone else. 
Regulators, by contrast, cannot ignore these imbalances, because if too many participants are on the same side, positions cannot be liquidated without causing a discontinuity or, worse, financial collapse. 
Thus, there is systemic market risk, and unregulated securitization of banking assets, which was the main cause of the recent collapse, adds to it. 
To avert a repetition, securities held by banks must carry a much higher risk rating than they currently do. 
Banks must pay for their implicit government guarantee by using less leverage and accepting restrictions on how they invest depositors’ money. 
At a minimum, proprietary trading ought to be financed by banks’ own capital. 
If a bank is too big to fail, regulators should go even further, and regulate proprietary traders’ compensation packages to ensure that risks and rewards are properly aligned. 
Hedge funds and other large investors must also be closely monitored to ensure that they don’t build up dangerous imbalances. 
Moreover, the issuance and trading of derivatives ought to be at least as strictly regulated as that of stocks. 
Regulators should insist that traded derivatives are homogenous, standardized, and transparent. 
Some derivatives, particularly credit default swaps should not be traded at all. 
To see why, note that being long and selling short in the stock market has an asymmetric risk/reward profile. 
Losing on a long position reduces one’s risk exposure, while losing on a short position increases it, so one can be more patient being long and wrong than being short and wrong. 
Now, the CDS market offers a convenient way of shorting bonds, but the risk/reward asymmetry works in the opposite way. 
Shorting bonds by purchasing a CDS contract carries limited risk but almost unlimited profit potential, whereas selling a CDS contract offers limited profits but practically unlimited risks. 
This encourages short-side speculation, which places downward pressure on the underlying bonds. 
The negative effect is reinforced by the fact that, because CDS contracts are tradable, they tend to be priced as warrants, which can be sold at any time, rather than as options, which would require an actual default to be cashed in. 
People buy CDS contracts not because they expect a default, but because they expect the CDS to appreciate in response to adverse developments. 
That is what destroyed AIG, and what led to the recent bankruptcy of Abitibi-Bowater and the pending bankruptcy of General Motors. 
In both cases, because some bondholders owned CDS contracts, they stood to gain more from bankruptcy than from reorganization. 
Purchasing CDS contracts is like buying insurance on someone else’s life and owning a license to kill him. 
It is the job of regulators to ensure that no one is ever granted such a license. 

No More Genocidal Evasions 
"Never again," declared the world in the wake of the Holocaust. 
Yet, the motto of the half-century since, at least insofar as the world's response to genocide is concerned, might better be stated as "Again and again." Or, at any rate: "Never mind." 
Indeed, whenever genocide begins, the world's usual response - especially that of Western leaders - is to turn away. 
From Hitler's attempted eradication of Europe's Jews to the Rwandan Hutus' extermination of the Tutsi in 1994, policymakers balked at intervening politically, economically, or militarily to obstruct such targeted destructions of minorities. 
For the most part, they have even refrained from denouncing the perpetrators, clinging to a sham neutrality or taking shelter in the fog of "imperfect information." 
Millions of innocent Bengalis, Cambodians, Kurds, Bosnians and Rwandans paid the price for this inaction, as did millions of Jews and Armenians earlier in the 20th century. 
That price, however, is also exacted from the rest of us, because when extremists are allowed to wipe out their neighbors, the victimized often become radicalized and militarized; they look to settle old scores not only against the perpetrators of genocide, but against those who abetted them. 
Many in the Islamic world today cite years of European and American inaction in Bosnia as one root of their resentment. 
Would-be killers themselves learn that hate and mass murder are legitimate, or at least effective, tools of statecraft. 
Western governments winked at Saddam Hussein when he gassed the Kurds of northern Iraq in 1987-88, but his agents may yet turn the chemicals he tested there on targets in Berlin, London, or Washington. 
Even when genocide remains contained within borders, the violence eventually tends to spill over into neighboring states, igniting regional wars, undermining global stability, and eventually costing billions as the world starts to tend to the humanitarian byproducts of slaughter. 
With genocide a real looming possibility in Burundi, Chechnya, Indonesia, Sudan, and elsewhere, what is to be done? 
To start, Western leaders should stop pointing fingers and take responsibility for their moral and strategic failings. 
Countries avoid action by claiming that it is someone else's job to lead. 
The US pleads over-extension, that it can't be "the world's policeman." 
Europe faults the "world's sole superpower" for standing idly by and then does nothing itself. 
Both claims are partly right. 
America probably lacks the capacity - and the will - to intervene militarily wherever the threat of genocide arises. 
The US record is marred by denial and absence of leadership, except when American strategic interests (Kosovo) or a president's domestic political concerns (eventually, Bosnia) become imperiled. 
In their criticisms of the US, however, European leaders often speak as if they have done better. 
Wrong. 
Indeed, while Saddam Hussein attacked the Kurds, European governments were selling him weapons. 
If not for US resistance, John Major and Francois Mitterrand would likely have handed Bosnia over to the Serbs in 1993. 
Moreover, Dutch peacekeepers failed to put up a fight or even sound a meaningful alarm when the Serbs stormed the town of Srebrenica, when some seven thousand Muslim men and boys might have been saved. 
In Rwanda, France armed the genocidal Hutu regime, and Belgium pulled out its peacekeepers though they were reporting corpses piling up like cordwood in Kigali. 
In the few instances where the US took steps to alter the behavior of repressive states, Europe's governments and peoples expressed open skepticism about the sincerity of America's humanitarian motives. 
But critics of the US can't have it both ways. 
Those who fault America, say, for its non-intervention in Rwanda and its intervention in Kosovo have not reckoned with the inconsistency of their own position, which is highlighted by a grim counter-factual. 
Had America deployed troops to Rwanda early in that genocide, as innumerable critics (themselves silent at the time) argue retrospectively, dozens, maybe even hundreds, of Rwandans would likely have perished as the US intervened. 
Would these critics have accepted this or, instead, would they have condemned the US? 
The latter, more likely. 
General Dallaire, the UN commander in Rwanda who appealed for authority to confront the genocidaires , would also now likely be known as a trigger-happy alarmist. 
And we would never know about the 800,000 Rwandans that had been saved . 
Similarly, imperfect though NATO's bombing in Kosovo was, can anyone imagine how many Kosovar lives would have been lost had NATO remained on the sidelines? 
Why focus on the prospect of further genocides now, when the threat of genocide seems secondary, say, to the War on Terror? 
Because, alas, if history is any predictor, another eruption of the genocidal impulse will not be long in coming. 
So the brief surcease we are enjoying is precisely the time when everyone (not just Americans and Europeans, but Japanese, Australians, South Africans-and Latin Americans and Asians and Africans generally) need to steel ourselves for the moment when that eruption occurs. 
Specifically, we must steel ourselves against our tendency to evade and shift responsibility. 
Genocide prevention is a burden that will not be carried unless it is shared. 
The world's leaders need to declare prevention of genocide not only in the interest of mankind in general, but in their own national interests. 
They must ready their publics and undertake the coordinated contingency military planning to ensure that "Never again" no longer simply means, say, "Never again will Hutus be permitted to kill Tutsis in Rwanda between April and July 1994." 

Don’t Cry Over Dead Trade Agreements 
CAMBRIDGE – The seven decades since the end of World War II were an era of trade agreements. 
The world’s major economies were in a perpetual state of trade negotiations, concluding two major global multilateral deals: the General Agreement on Tariffs and Trade (GATT) and the treaty establishing the World Trade Organization. 
In addition, more than 500 bilateral and regional trade agreements were signed – the vast majority of them since the WTO replaced the GATT in 1995. 
The populist revolts of 2016 will almost certainly put an end to this hectic deal-making. 
While developing countries may pursue smaller trade agreements, the two major deals on the table, the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP), are as good as dead after the election of Donald Trump as US president. 
We should not mourn their passing. 
What purpose do trade agreements really serve? 
The answer would seem obvious: countries negotiate trade agreements to achieve freer trade. 
But the reality is considerably more complex. 
It’s not just that today’s trade agreements extend to many other policy areas, such as health and safety regulations, patents and copyrights, capital-account regulations, and investor rights. 
It’s also unclear whether they really have much to do with free trade. 
The standard economic case for trade is a domestic one. 
There will be winners and losers, but trade liberalization enlarges the size of the economic pie at home. 
Trade is good for us, and we should remove impediments to it for our own sake – not to help other countries. 
So open trade requires no cosmopolitanism; it just needs the necessary domestic adjustments to ensure that all (or at least politically powerful) groups can partake in the overall benefits. 
For economies that are small in world markets, the story ends here. 
They have no need for trade agreements, because free trade is in their best interest to begin with (and they have no bargaining leverage over larger countries). 
Economists see a case for trade agreements for large countries because these countries can manipulate their terms of trade – the world prices of the goods they export and import. 
For example, by imposing an import tariff on, say, steel, the United States can reduce the prices at which Chinese producers sell their products. 
Or, by taxing aircraft exports, the US can raise the prices that foreigners have to pay. 
A trade agreement that prohibits such beggar-thy-neighbor policies can be useful to all countries, because, in its absence, they could all end up collectively worse off. 
But it is difficult to square this rationale with what happens under actual trade agreements. 
Even though the US does impose import duties on Chinese steel (and many other products), the motive hardly seems to be to lower the world price of steel. 
Left to its own devices, the US would much rather subsidize Boeing’s exports – as it often has – than tax them. 
Indeed, WTO rules prohibit export subsidies – which, economically speaking, are enrich-thy-neighbor policies – while placing no direct restraints on export taxes. 
So economics doesn’t take us too far in understanding trade agreements. 
Politics seems a more promising avenue: US trade policies in steel and aircraft are probably better explained by policymakers’ desire to help those specific industries – both of which have a powerful lobbying presence in Washington, DC – than by their overall economic consequences. 
Trade agreements, their proponents often argue, can help rein in such wasteful policies by making it harder for governments to dispense special favors to politically connected industries. 
But this argument has a blind spot. 
If trade policies are largely shaped by political lobbying, wouldn’t international trade negotiations similarly be at the mercy of those same lobbies? 
And can trade rules written by a combination of domestic and foreign lobbies, rather than by domestic lobbies alone, guarantee a better outcome? 
To be sure, domestic lobbies may not get everything they want when they have to contend with foreign lobbies. 
Then again, common interests among industry groups in different countries may lead to policies that enshrine rent-seeking globally. 
When trade agreements were largely about import tariffs, negotiated exchange of market access generally produced lower import barriers – an example of the benefits of lobbies acting as counterweights to one another. 
But there are certainly plenty of examples of international collusion among special interests as well. 
The WTO’s prohibition on export subsidies has no real economic rationale, as I have already noted. 
The rules on anti-dumping are similarly explicitly protectionist in intent. 
Such perverse cases have proliferated more recently. 
Newer trade agreements incorporate rules on “intellectual property,” capital flows, and investment protections that are mainly designed to generate and preserve profits for financial institutions and multinational enterprises at the expense of other legitimate policy goals. 
These rules provide special protections to foreign investors that often come into conflict with public health or environmental regulations. 
They make it harder for developing countries to access technology, manage volatile capital flows, and diversify their economies through industrial policies. 
Trade policies driven by domestic political lobbying and special interests are beggar-thyself policies. 
They may have beggar-thy-neighbor consequences, but that is not their motive. 
They reflect power asymmetries and political failures within societies. 
International trade agreements can contribute only in limited ways to remedying such domestic political failures, and sometimes they aggravate those failures. 
Addressing beggar-thyself policies requires improving domestic governance, not establishing international rules. 
Let us keep this in mind as we bemoan the passing of the era of trade agreements. 
If we manage our own economies well, new trade agreements will be largely redundant. 


A New Trump? 
WASHINGTON, DC – It’s generally agreed in Washington, DC, that President Donald Trump’s presidency is entering a new phase. 
Defining just what that phase is, is proving to be problematic. 
The widespread expectation was that the removal of Stephen Bannon – the former White House chief adviser and resident avatar of white American nationalism – would make the administration run more smoothly, mitigate (though not eliminate) infighting, and reduce the number of leaks. 
The internal warfare may be quieter since John Kelly took over as White House Chief of Staff and imposed more order in the West Wing. 
But so long as Trump is president, orderliness will not be the White House’s chief characteristic. 
In fact, Trump remains in frequent contact with Bannon, who is back in charge at Breitbart News. 
Inevitably, by early September, after Kelly had been on the job for all of five weeks, Trump was chafing under his new chief of staff’s restrictions. 
Kelly has imposed tight controls over who may enter the Oval Office, listens in on most of Trump’s phone calls during office hours, and controls what pieces of paper reach the president’s desk, thus eliminating the highly ideological screeds that some staff members used to slip him. 
The problem is that Trump likes disorder; that’s how he had run his business, and he doesn’t take well to being managed. 
He liked having favored people wandering into his office as they chose, and it’s been his managerial creed to play people off each other. 
Nor does he bother to control his temper when dealing with aides. 
Even Kelly, an ex-Marine Corps general, has come under the lash of Trump’s tongue. 
Observers now take bets on when Kelly will decide he’s had enough. 
I’ve never known a White House where so much depends on who has incurred the president’s ire. 
Gary Cohn, the former Goldman Sachs president and chief operating officer who serves as Trump’s chief economic adviser, is the latest to be frozen out. 
Cohn’s sin was to let it be known publicly that he almost resigned following the violence last month in Charlottesville, Va., when Trump equated white supremacist and neo-Nazi demonstrators, many of them armed, with those who opposed them. 
Actually, one can have some sympathy for a president with an aide who wants to have it both ways, as Cohn did – letting his apparent anguish be known without acting on it. 
But there can be problems when a president chooses to disregard his chief economic adviser. 
Cohn has been seen as one of the administration’s more moderate voices, and he has wanted to succeed Janet Yellen as chair of the US Federal Reserve. 
Speculation about the possibility of a “new Trump” peaked in early September, when the president suddenly cut a deal with Democratic congressional leaders. 
Trump agreed with House Minority Leader Nancy Pelosi, and her Senate counterpart, Chuck Schumer, on how to increase the federal debt limit, which Congress must raise each year as spending increases, and extend appropriations to keep the government running (because Congress routinely fails to write appropriations bills on time). 
Both items were tied to a special appropriation in the wake of Hurricane Harvey to pay for recovery efforts. 
(The larger Hurricane Irma hadn’t yet hit.) 
In the midst of the discussion at the Oval Office meeting with Pelosi and Schumer, Trump interrupted Treasury Secretary Steve Mnuchin as he was defending the Republicans’ position that these issues should be put off for 18 months, until after the 2018 congressional elections. 
The Democrats had argued that the increase in the debt ceiling and extension of appropriations should last for only three months, thus forcing the Republicans to take electorally risky votes before the 2018 elections. 
Before the meeting, House Speaker Paul Ryan had adamantly rejected the Democrats’ proposal. 
But suddenly, without notifying even his own aides, Trump went for it. 
The author of The Art of the Deal had accepted the Democrats’ opening position. 
Commentators went into overdrive, imbuing the episode with broad significance: Trump was now not a Republican but an Independent. 
He might start a third party. 
His move marked the beginning of a new way of governing. 
In fact, Trump merely saw an opportunity and took it. 
With no real legislative achievements to claim, he did something. 
The Republican congressional leaders, Ryan and Senate Majority Leader Mitch McConnell, had been in bad odor with Trump for a while, because they had been unable to deliver on his legislative agenda. 
He was embarrassed and angered at their failure to repeal and replace the Affordable Care Act, or Obamacare. 
(Trump didn’t recognize his own contributions to the debacle.) 
On many issues, Trump lacks a governing majority in the Senate. 
Overlooked in all the excitement over Trump’s lining up with Democratic leaders was that the issue at hand concerned legislative timing, not substance. 
And the subsequent fevered discussions about Trump’s core beliefs – maybe he was a crypto-Democrat, who had, after all, donated to Democratic candidates at one time and sympathized with Democratic positions (such as on abortion) – missed the point. 
Trump harbors no particular political philosophy; he’s an opportunist who craves publicity and praise. 
But his maverick behavior might turn out to be self-perpetuating. 
For all his contempt for the “dishonest media,” Trump was ecstatic about the positive press coverage his bipartisan move received. 
And that might lure him to try for more. 

No Pause, Please 
Pressure is building on the European Central Bank to pause from further increases in interest rates after the New Year. The ECB must not give in. 
So far, the credibility of Europe’s central bank has been sufficient to firmly anchor inflationary expectations. But to pause now when Europe’s economic strength continues at a robust pace carries with it an un-necessary risk to price stability. 
Even though 2006 has been an excellent growth year for Europe, real interest rates—interest rates expressed in terms of goods and services as opposed to money—have not budged from the beginning of the year. This means Europe’s monetary policy continues to stimulate economic growth despite the fact that, by December, money rates will have been raised 150 basis points during 2006. 
With real rates so low, a pause at the New Year would be pre-mature. 
Some of the pressure for a pause has to do with the French presidential elections this spring. A rate increase during the election period clearly would make the central bank even more of an issue in the French campaign than already is the case. 
This is not good. 
Still, the ECB can’t go on hold simply because the French—or anyone else-- are having an election (though the bank could be sensitive to the need to pick an appropriate month should a rate adjustment be needed during the election season.) 
Politics must take a back seat when it comes to monetary policy decisions—otherwise, inflationary expectations won’t be firmly anchored for very long. 
A second argument put forth for a pause is the increase in the value-added tax in Germany from 16 to 19% at the beginning of next year. 
The argument for a pause is that the central bank may want to wait and see how much damage, if any, the VAT hike imposes on the German economy before continuing on with the process of rate hikes. 
But for an inflation-fighting central bank like the ECB, the risks from a pre-mature pause are greater than those from pausing too late. 
With the ECB in its current tightening mode, “better too late than too early” must be its rule of thumb. 
Finally, and perhaps most important, there is the powerful example of the US Federal Reserve. 
Because the Fed has decided to pause, there is substantial pressure -- coming both from inside and outside the ECB -- that Europe’s central bank follow suit. 
The effect of Fed’s policies on other central banks should not be underestimated. 
ECB critics already claim there has been a certain “follow the Fed” quality to ECB monetary decisions, notwithstanding clear differences between the two central banks over the role the money supply should play in monetary policy decisions. 
When the Fed dramatically cut interest rates to fight recession, so did the ECB. 
When the Fed kept interest at unusually low levels for an extended period of time, so did the ECB. 
And when the Fed decided to exit this strategy and raise rates in a steady and predictable fashion, so did the ECB. 
This, by the way, may not be mere copycat, but an attempt by Europe’s central bankers, wary of exchange rate volatility, to loosely co-ordinate interest rates to promote stable exchange rates. 
But stabilizing the euro by following the Fed carries with it an unnecessary risk for price stability. 
Europe and the United States are at different phases of the business and interest rate cycles. 
When the Fed paused, the US economy was in a more mature phase of the business cycle -- and the weight of accumulated interest rate increases greater—than presently is the case in Europe. 
This made pausing in order to see whether past rate hikes sufficiently slow the economy to moderate inflationary pressures a good bet for the US. 
It is not a good bet for Europe, however, where growth momentum remains strong despite some recent backing and filling after the torrid pace of the second quarter, where interest rates remain too low and money supply growth too high. 
“No Pause Please, We’re Europeans!” is the proper ECB response to those advocating a break after the New Year even if the euro does go up a bit as a result. 

Globalization Is the Only Answer 
WASHINGTON, DC – The Brexit referendum in the United Kingdom and the presidential race in the United States have shown, among other things, that public distrust of global integration is on the rise. 
That distrust could derail new trade agreements currently in the works, and prevent future ones from being initiated. 
The danger implied by this scenario should not be underestimated. 
Isolationism and protectionism, if taken too far, would break the trade-based economic engine that has delivered peace and prosperity to the world for decades. 
As a former trade minister for Costa Rica, I know how difficult it is for countries – developed and developing alike – to craft trade policies that deliver benefits to all of their people. 
But just because managing the effects of globalization is difficult does not mean we should throw our hands up and quit. 
In the developing world, trade has delivered high growth and technological progress. According to the World Bank, since 1990 trade has helped to halve the number of people living in extreme poverty. 
But these gains, while impressive, are not necessarily permanent. 
If high-income countries close themselves – and their consumers – off from global markets, the world’s poorest people will suffer the most. 
Trade thrives in an open environment of willing participants acting in good faith and governed by clear rules. 
Short of this, the forces of globalization can turn cooperation into conflict. 
That’s why policymakers should focus on four areas. 
First, countries should dismantle protectionist measures they have in place, and make a firm commitment not to implement policies that distort global markets. 
Second, countries should come together to update the international rules governing trade to account for changing economic conditions, and effectively implement negotiated agreements. 
Third, individual countries and institutions such as the World Trade Organization should work together to eliminate barriers that increase trade costs. 
In particular, they must abolish agricultural subsidies, remove restrictions on trade in services, improve connectivity, facilitate cross-border trade and investment, and increase trade finance. 
Finally, and most important, wealthy countries should support developing countries’ efforts to integrate themselves further into the global economy. 
Given trade’s record of reducing poverty, this is a moral imperative; it is also indispensable for peace and stability. 
To be sure, trade must deliver for all countries and for all people, from factory workers suffering plant closures in Europe or the United States to subsistence farmers trapped in informal economies in Africa and South Asia. 
But those who suggest that trade is a zero-sum game are simply avoiding the hard questions: Who should bear the painful dislocation costs from trade and new technologies? 
What policies will enable dislocated people to pursue new opportunities? 
How can countries maintain productivity-led growth in an age of frequent and sudden disruption? 
The challenges of global integration are not new, but nor can they be ignored. 
Policymakers should mind the lessons of economic history. 
Above all, they should bear in mind that even during past periods of rapid technological change, far more people benefited from free and open trade than from protectionist barriers. 
No country in today’s world can seal itself off from foreign goods, services, capital, ideas, or people. 
Instead leaders should foster more commerce to include more people. 
They can do so by adopting international rules to manage openness and interdependency; establishing stronger social safety nets; investing in innovation, education and skills-training, and infrastructure; and creating a more conducive regulatory environment for businesses and entrepreneurs to foster stronger and more inclusive growth. 
No country can deliver long-term prosperity to its people on its own. 
Closer international cooperation and economic integration is the only way forward. 

Big Danger at the Lower Bound 
CAMBRIDGE – Markets nowadays are fixated on how high the US Federal Reserve will raise interest rates in the next 12 months. 
This is dangerously shortsighted: the real concern ought to be how far it could cut rates in the next deep recession. 
Given that the Fed may struggle just to get its base interest rate up to 2% over the coming year, there will be very little room to cut if a recession hits. 
Fed chair Janet Yellen tried to reassure markets in a speech at the end of August, suggesting that a combination of massive government bond purchases and forward guidance on interest-rate policy could achieve the same stimulus as cutting the overnight rate to minus 6%, were negative interest rates possible. 
She might be right, but most economists are skeptical that the Fed’s unconventional policy tools are nearly so effective. 
There are other ideas that might be tried. 
For example, the Fed could follow the Bank of Japan’s recent move to target the ten-year interest rate instead of the very short-term one it usually focuses on. 
The idea is that even if very short-term interest rates are zero, longer-term rates are still positive. 
The rate on ten-year US Treasury bonds was about 1.8% at the end of October. 
That approach might work for a while. 
But there is also a significant risk that it might eventually blow up, just the way pegged exchange rates tend to work for a while and then cause a catastrophe. 
If the Fed could be highly credible in its plan to hold down the ten-year interest rate, it could probably get away without having to intervene too much in markets, whose participants would normally be too scared to fight the world’s most powerful central bank. 
But imagine that markets started to have doubts, and that the Fed was forced to intervene massively by purchasing a huge percentage of total government debt. 
This would leave the Fed extremely vulnerable to enormous losses should global forces suddenly drive up equilibrium interest rates, with the US government then compelled to pay much higher interest rates to roll over its debt. 
The two best ideas for dealing with the zero bound on interest rates seem off-limits for the moment. 
The optimal approach would be to implement all of the various legal, tax, and institutional changes needed to take interest rates significantly negative, thereby eliminating the zero bound. 
This requires preventing people from responding by hoarding paper currency; but, as I have explained recently, this is not so difficult. 
True, early experimentation with negative interest-rate policy in Japan and Europe has caused some disenchantment. But the shortcomings there mostly reflect the fact that central banks cannot by themselves implement the necessary policies to make a negative interest rate policy fully effective. 
The other approach, first analyzed by Fed economists in the mid-1990s, would be to raise the target inflation rate from 2% to 4%. 
The idea is that this would eventually raise the profile of all interest rates by two percentage points, thereby leaving that much extra room to cut. 
Several central banks, including the Fed, have considered moving to a higher inflation target. 
But such a move has several significant drawbacks. 
The main problem is that a shift of this magnitude risks undermining hard-won central bank credibility; after all, central banks have been promising to deliver 2% inflation for a couple of decades now, and that level is deeply embedded in long-term financial contracts. 
Moreover, as was true during the 2008 financial crisis, simply being able to take interest rates 2% lower probably might not be enough. 
In fact, many estimates suggest that the Fed might well have liked to cut rates 4% or 5% more than it did, but could not go lower once the interest rate hit zero. 
A third shortcoming is that, after an adjustment period, wages and contracts are more likely to adjust more frequently than they would with a 2% inflation target, making monetary policy less effective. 
And, finally, higher inflation causes distortions to relative prices and to the tax system – distortions that have potentially significant costs, and not just in recessions. 
If ideas like negative interest rates and higher inflation targets sound dangerously radical, well, radical is relative. 
Unless central banks figure out a convincing way to address their paralysis at the zero bound, there is likely to be a continuing barrage of outside-the-box proposals that are far more radical. 
For example, the University of California at Berkeley economist Barry Eichengreen has argued that protectionism can be a helpful way to create inflation when central banks are stuck at the zero bound. 
Several economists, including Lawrence Summers and Paul Krugman, have warned that structural reform to increase productivity might be counterproductive when central banks are paralyzed, precisely because it lowers prices. 
Of course, there is always fiscal policy to provide economic stimulus. 
But it is extremely undesirable for government spending to have to be as volatile as it would be if it had to cover for the ineffectiveness of monetary policy. 
There may not be enough time before the next deep recession to lay the groundwork for effective negative-interest-rate policy or to phase in a higher inflation target. 
But that is no excuse for not starting to look hard at these options, especially if the alternatives are likely to be far more problematic. 

No Safe Havens for Dirty Money 
PARIS – In difficult economic times like these, one principle should be given the same prominence as the headline-grabbing issues of high deficits and austerity packages. 
That principle can be captured in just a few words: “Everyone must play by the rules.” 
The global financial crisis has served to show that there is little tolerance nowadays for people who cheat. 
And, since the onset of the crisis, the G-20 countries – with France (and the United States) as driving forces – have been pressing for better regulation, governance, and accountability. 
No safe havens for tax evasion. 
No safe havens for money laundering and terrorism financing, and no safe havens for “cozy financial regulation.” 
These principles are clearly what people in the developed world want to see enforced. 
In tough times such as these, money matters. 
For the developing world, however, there is another dimension to the phrase “play by the rules.” 
People there want to see an end to the safe havens that allow corrupt officials to steal public money and stash it abroad. 
So we would add: no safe havens for proceeds from corruption. 
On the tax side, there has clearly been progress. 
France imposed on its banks strong transparency and reporting requirements for banking activities in tax havens, in addition to the international standard for information exchange. 
Others have demonstrated leadership in pursuing companies that pay kickbacks and bribes to foreign officials. 
But recovering the billions of dollars stolen by corrupt leaders and officials in the developing world has so far proved to be a lengthy process. 
The World Bank Group, together with the United Nations Office on Drugs and Crime, is working on the Stolen Asset Recovery (StAR) initiative to go after corrupt gains and help spur action to return looted assets to their legitimate owners: the people in the affected developing country. 
France, the United Kingdom, Australia, Sweden, Norway, and Switzerland all support this urgent agenda, and agree that impunity for this type of global crime can no longer be tolerated. 
Abuse of public authority for private gain is not acceptable. 
These issues of tax havens, looted funds, bribery, and corruption are at the nexus of the urgent need to foster openness and transparency in financial transactions, and to ensure accountability at the global level. 
Now is the time to build momentum and deliver lasting results. 
Corruption – under any form or circumstance – is a cancer that cripples developed and developing economies alike. 
It undermines economic growth. 
It is a crime that produces particularly damaging consequences in the developing world. 
By conservative estimates, every year around $20 billion to $40 billion is stolen from developing countries through bribery, misappropriation of funds, and corrupt practices. 
The lost opportunities are enormous. 
In the developing world, $20 billion could finance 48,000 kilometers of two-lane paved roads, or provide treatment for 120 million people with HIV/AIDS for a full year. 
Success is possible. 
Switzerland repatriated $684 million of former President Ferdinand Marcos’ money to the Philippines and $700million of General Sani Abacha’s funds to Nigeria, and, with other nations, returned to Peru more than $180 million stolen by former government official Vladimiro Montesinos. 
So, as world leaders convene at the G-20 and other forums in the coming weeks to discuss the economic crisis, stimulus plans, financial regulation, and development, the fight against corruption should remain a full part of the multilateral agenda. 
But not all G-20 countries have yet ratified UNCAC – the United Nations Convention against Corruption – which provides a framework for countries to develop their own laws to stamp out the use of safe havens for criminals stealing from the developing world. 
The G-20 has called for more forceful action against corruption. 
We must now go further. 
Countries that have not signed the convention should quickly do so. 
Those countries that have signed and ratified UNCAC now need to implement it. 
Financial institutions should also not do business with non-cooperative jurisdictions – areas that don’t comply with the rules. 
Civil society should agitate for action and accountability. 
Fighting corruption is vital, not simply because it is the right thing to do, but because failing to do so affects us all. 
We now live in a different world where developing countries are a fundamental source of growth, as well as being importers of capital goods and services from developed countries. 
When corruption hurts partners with that level of clout, it hurts you, too. 



No Time for a Trade War 
NEW YORK – The battle with the United States over China’s exchange rate continues. 
When the Great Recession began, many worried that protectionism would rear its ugly head. 
True, G-20 leaders promised that they had learned the lessons of the Great Depression. 
But 17 of the G-20’s members introduced protectionist measures just months after the first summit in November 2008. The “Buy American” provision in the United States’ stimulus bill got the most attention. 
Still, protectionism was contained, partly due to the World Trade Organization. 
Continuing economic weakness in the advanced economies risks a new round of protectionism. 
In America, for example, more than one in six workers who would like a full-time job can’t find one. 
These were among the risks associated with America’s insufficient stimulus, which was designed to placate members of Congress as much as it was to revive the economy. 
With soaring deficits, a second stimulus appears unlikely, and, with monetary policy at its limits and inflation hawks being barely kept at bay, there is little hope of help from that department, either. 
So protectionism is taking pride of place. 
The US Treasury has been charged by Congress to assess whether China is a “currency manipulator.” 
Although President Obama has now delayed for some months when Treasury Secretary Timothy Geithner must issue his report, the very concept of “currency manipulation” itself is flawed: all governments take actions that directly or indirectly affect the exchange rate. 
Reckless budget deficits can lead to a weak currency; so can low interest rates. 
Until the recent crisis in Greece, the US benefited from a weak dollar/euro exchange rate. 
Should Europeans have accused the US of “manipulating” the exchange rate to expand exports at its expense? 
Although US politicians focus on the bilateral trade deficit with China – which is persistently large – what matters is the multilateral balance. 
When demands for China to adjust its exchange rate began during George W. Bush’s administration, its multilateral trade surplus was small. 
More recently, however, China has been running a large multilateral surplus as well. 
Saudi Arabia also has a bilateral and multilateral surplus: Americans want its oil, and Saudis want fewer US products. 
Even in absolute value, Saudi Arabia’s multilateral merchandise surplus of $212 billion in 2008 dwarfs China’s $175 billion surplus; as a percentage of GDP, Saudi Arabia’s current-account surplus, at 11.5% of GDP, is more than twice that of China. 
Saudi Arabia’s surplus would be far higher were it not for US armaments exports. 
In a global economy with deficient aggregate demand, current-account surpluses are a problem. 
But China’s current-account surplus is actually less than the combined figure for Japan and Germany; as a percentage of GDP, it is 5%, compared to Germany’s 5.2%. 
Many factors other than exchange rates affect a country’s trade balance. 
A key determinant is national savings. 
America’s multilateral trade deficit will not be significantly narrowed until America saves significantly more; while the Great Recession induced higher household savings (which were near zero), this has been more than offset by the increased government deficits. 
Adjustment in the exchange rate is likely simply to shift to where America buys its textiles and apparel – from Bangladesh or Sri Lanka, rather than China. 
Meanwhile, an increase in the exchange rate is likely to contribute to inequality in China, as its poor farmers face increasing competition from America’s highly subsidized farms. 
This is the real trade distortion in the global economy – one in which millions of poor people in developing countries are hurt as America helps some of the world’s richest farmers. 
During the 1997-1998 Asian financial crisis, the renminbi’s stability played an important role in stabilizing the region. 
So, too, the renminbi’s stability has helped the region maintain strong growth, from which the world as a whole benefits. 
Some argue that China needs to adjust its exchange rate to prevent inflation or bubbles. 
Inflation remains contained, but, more to the point, China’s government has an arsenal of other weapons (from taxes on capital inflows and capital-gains taxes to a variety of monetary instruments) at its disposal. 
But exchange rates do affect the pattern of growth, and it is in China’s own interest to restructure and move away from high dependence on export-led growth. 
China recognizes that its currency needs to appreciate over the long run, and politicizing the speed at which it does so has been counterproductive. 
(Since it began revaluing its exchange rate in July 2005, the adjustment has been half or more of what most experts think is required.) 
Moreover, starting a bilateral confrontation is unwise. 
Since China’s multilateral surplus is the economic issue and many countries are concerned about it, the US should seek a multilateral, rules-based solution. 
Imposing unilateral duties after unilaterally labeling China a “currency manipulator” would undermine the multilateral system, with little payoff. 
China might respond by imposing duties on those American products effectively directly or indirectly subsidized by America’s massive bailouts of its banks and car companies. 
No one wins from a trade war. 
So America should be wary of igniting one in the midst of an uncertain global recovery – as popular as it might be with politicians whose constituents are justly concerned about high unemployment, and as easy as it is to look for blame elsewhere. 

No Time for Complacency 
LONDON – After years of rapid growth, the countries of Eastern Europe have been especially hard hit by the world financial crisis. 
Some required billions of dollars of international support. 
Even those countries that were better prepared were made painfully aware of the after-effects of crisis: export markets collapsed, commodity prices fell, and credit markets seized up. 
In many countries, economic output sank dramatically, more so than in Europe’s west. 
This decline seems to have stopped, and the most recent data indicate that the bottom may have been reached. 
Yet it is premature to declare the crisis over, because much of the impact and many of the consequences of the crisis have yet to be felt. 
We must reckon with a huge increase in bankruptcies – as well as with impaired credit markets and high unemployment. 
This, in turn, will place a burden on national budgets and banking systems – and will challenge politicians across the region. 
A number of countries have already been forced into drastic budget cuts, which have had a knock-on effect on standards of living. 
One must add structural problems to this mix – problems that have not been dealt with since the crisis erupted. 
For Eastern Europe, this boils down to four major areas: (1) an overdependence on natural resources; (2) export imbalances, in terms of product mix and foreign markets; (3) small, inadequate capital markets; and (4) inefficient production and use of energy. 
But the past 12 months have also underscored Eastern Europe’s strengths. 
Twenty years after the fall of the Iron Curtain, the countries of the east are more integrated into international markets than ever before. 
This brought strong growth rates in good times. 
In times of crisis it had a negative impact – although integration has prevented currency collapse or the write-off of national debt, occurrences that we have witnessed during previous crises in emerging markets. 
The IMF, the World Bank, and other international financial institutions, such as the European Investment Bank and the European Bank for Reconstruction and Development, as well as the European Central Bank and the European Commission, have worked together to stabilize the situation. 
The G20 has led the way on the international level. 
Cooperation and coordination of this kind and at this level were unattainable during earlier financial crises. 
Another difference with past financial downturns in emerging markets is that investments in the EBRD region – Eastern Europe, Southeastern Europe, Turkey, and the former Soviet Union – have turned out to be long term, rather than short-term or speculative. 
Western entrepreneurs and investors have increasingly come to view Europe’s east as a part of a (now broader) domestic market and have behaved with a longer-term view. 
This has brought the region much needed stability. 
A healthy banking and financial sector is crucial for stability. 
International cooperation has succeeded in preventing banks headquartered in Western Europe, with extensive branch networks in the Eastern Europe, from pulling out. 
Yet serious problems remain. 
An unwillingness to lend and expensive loans in foreign currencies are a real burden to eastern balance sheets. 
That is why it has become so difficult for small and medium-sized companies to get new loans or to refinance existing loans. 
The EBRD has experienced the change in market conditions first-hand. 
We have implemented an anti-crisis program that has concentrated on the financial sector, the real economy, and especially important infrastructure investments, particularly in the crucial area of energy efficiency. 
Demand for our loans and project finance is higher than ever: in the first nine months of 2009, we have invested more than €6 billion, twice as much as we did in the same period a year ago. 
Yet the EBRD does more than make much-needed loans. 
Our investments are aimed at the development and support of market economies across the region. 
We work with the private sector and not in competition with it. 
We mobilize private financing for public goods, such as infrastructure. 
Our investments are aimed at overcoming structural problems that have plagued the region. 
This crisis has shown that the need for adequately capitalized public institutions is enormous. 
This will remain the case for the foreseeable future. 
For years to come, the private banking sector will be preoccupied with the consequences of the financial crisis. 
As a result, investors value a strong public partner now more than ever before. 
The current economic situation has pushed the EBRD to its limits. 
It is for this reason that I have suggested a capital increase to the shareholders of the bank – to €30 billion from the current €20 billion. 
This would mean that the EBRD could invest up to €10 billion annually over the next five years, enabling us to continue to fulfill our role, providing vital backing and financial support to Eastern Europe and the private sector. 
Such investment is more necessary than ever, even at a time of gradual economic recovery. 

No Time for Nostalgia 
France and Germany have every reason to celebrate the miracle of their friendship, sealed forty years ago by the Elysée Treaty. 
But they have no reason to be satisfied with its current condition. 
Neither has Europe. 
For most of modern history, the Franco-German antagonism-the two countries' so-called "hereditary enmity"-haunted Europe and the world. 
In his famous University of Zurich speech in 1946, Winston Churchill urged that "The first step in the re-creation of the European Family must be a partnership between France and Germany." 
Franco-German reconciliation, guided by the leadership of men like General Charles de Gaulle and Konrad Adenauer, made post-war Europe's amazing successes possible. 
The last landmark in the Franco-German partnership was the Treaty of Maastricht, concluded in 1991. 
Reunited Germany surrendered its beloved currency, the Deutsche Mark, to boost European integration, but also to calm French fears that Germany was poised to establish monetary hegemony over the continent. 
However, the legendary tandems of the past-de Gaulle and Adenauer, Valéry Giscard d'Estaing and Helmut Schmidt, François Mitterrand and Helmut Kohl-have not been succeeded by a comparable duo. 
This is not only a problem of personal chemistry between Jacques Chirac and Gerhard Schröder. 
The deeper cause of recent estrangement and national rivalry has been German reunification, which disturbed the bilateral balance. 
Until 1990, France-or, rather, much of its political class-tacitly agreed with Nobel laureate François Mauriac's famous confession: "I love Germany so much that I prefer it to be split into two parts ." ("J'aime tellement l'Allemagne que je préfère qu'il y en ait deux .") 
Germany's division created a rough demographic parity between French and West Germans. 
By contrast, reunited Germany has some 80 million people, France only 60 million. 
Moreover, a "balance of imbalance" promoted a sense of equality. 
While West Germany's economy was stronger, France was a nuclear power and a permanent, veto-wielding, member of the UN Security Council. 
Germany long ago renounced possession of nuclear weapons, and it is unlikely to become a permanent member of the Security Council soon. 
Yet, from a French perspective, eastward enlargement of the EU augments Germany's weight. 
The future "Europe of 27" (or 28, with Turkey, but not counting the post-Yugoslav republics and Albania) will be very different from the "Europe of Six" that de Gaulle and Adenauer oversaw. 
Berlin's geographical position in the EU of tomorrow now seems more central, with Paris on the fringe. 
Moreover, whereas German Chancellors' tone towards the French government had always been moderate, Schröder's behavior has been assertive, with the EU's Nice summit in December 2000 driving Franco-German relations to a forty-year low point. 
Chirac insisted on absolute parity of votes between France and Germany in the EU Council of Ministers, ignoring their demographic disparity. 
Schröder did not seem to grasp the enormous symbolic relevance his partner attached to the issue. 
More importantly, the Nice meeting showed how far French and German ideas about European integration had drifted apart. 
While France prefers an intergovernmental approach, Germany remains prepared to transfer more national sovereignty to the Brussels. 
Now, like a squabbling old couple, France and Germany are using the their wedding anniversary as an opportunity to revive their partnership. 
Chirac and Schröder gave a foretaste of what that means in practice when they made a joint proposal that the EU be led by a twin-presidency: a European Council president (chosen by the heads of government), and a Commission president (elected by the European parliament). 
This compromise attempts to square the circle by combining the intergovernmental and unionist approaches. 
Both governments seem convinced that more Franco-German summitry (now including joint sessions of their cabinets) will remedy their marital crisis. 
Likewise, the extravagance of the jubilee celebrations in Versailles-far more pompous than the modest ceremony in the Elysée 40 years ago-will be inversely proportional to their political relevance. 
The real problem is that revitalizing the Franco-German alliance must be based on a pro-European agenda, rather than each simply sticking to bad national habits. 
Unfortunately, there are worrying signs that this is happening. 
For example, France remains unwilling to accept a fundamental reform of the EU's Common Agricultural Policy (CAP), of which it is the chief beneficiary. 
Last fall, Germany, the largest contributor to the EU budget, accepted a compromise prolonging the present CAP for a decade. 
As a result, farmers in future member countries will only receive 25% of West European levels of direct payments when they join in 2004, reaching parity only in 2013. 
Germany, for its part, is better at signing agreements on enhanced defense cooperation among Europeans than it is at honoring them. 
It recently refused to purchase the full number of Airbus troop transport planes that it had promised to buy. 
Most importantly, the political determination needed to begin long overdue social-welfare and labor-market reforms is weak in both countries. 
This is not only a domestic issue. 
As the most important Euro countries, France and Germany have a special responsibility for the health of Europe's economy and the credibility of its currency. 
So let France and Germany enjoy their celebration in Versailles. 
When the party is over, hard choices must be made. 
No more time for nostalgia. 

No Time to Slacken 
PITTSBURGH – Almost six months ago, at a moment of great alarm about the global financial and economic crisis, G-20 leaders met for a historic summit in London. 
Their collective commitments to stimulate, regulate and restructure global economic activity helped to calm nerves around the world. 
Many of the problems that spurred the London summit remain real. 
Anxiety levels may have come down, in board rooms and stock markets, but the daily drama for survival continues. 
Indeed, for many people it has deepened, in the villages and streets of the world’s least-developed countries – particularly in Africa. 
The United Nations and the World Bank predict that the direct and indirect effects of the economic meltdown will be felt in the developing world for a long time to come. 
Jobs have gone, incomes have been lost and opportunities foregone. 
Tens of millions of people have been added to the hundreds of millions already below the poverty line, reversing progress toward attaining the world’s Millennium Development Goals. 
The London G-20 meeting recognized that the world’s poorest countries and people should not be penalized by a crisis for which they were not responsible. 
With this in mind, the G-20 leaders set out an ambitious agenda for an inclusive and wide-ranging response. 
If the Pittsburgh summit is not to be an anticlimactic end to the G-20’s ascendancy as a forum for decisive action, the momentum generated must be maintained. 
Four issues provide the opportunity to do so. 
First, G-20 leaders need to follow through with the commitments they’ve made to a Global Plan for Recovery and Reform. 
Having recognized its “collective responsibility to mitigate the social impact of the crisis and minimize long-lasting damage to global potential,” the group now needs to review how much support has reached or become accessible to developing countries. 
There are some encouraging signs. 
For example, in July, the International Monetary Fund commendably announced a substantial increase in concessional lending to least-developed countries. 
Several of them, including Ethiopia, Malawi and South Africa, have already been allocated Special Drawing Rights to help them cope with the economic crisis. 
But some vulnerable countries are still struggling to finance countercyclical investment and expanded social protection services. 
It raises questions about the stringencies of the World Bank’s eligibility criteria and allocation models which can prevent support of the most needy. 
This underscores the case for a second area of action – ensuring that developing countries, including least-developed countries, have a greater say in global financial institutions, and strengthening regional bodies such as the African Development Bank. An equitable and fair global architecture means not only giving a greater say to the major emerging economies. 
It also means systematically including other developing countries. 
The Bretton Woods Institutions such as the World Bank and IMF themselves recognize that becoming more inclusive would make them more relevant to the reality and diversity of today’s global community and more effective as vehicles for addressing climate change adaptation and poverty reduction. 
But the pace of change needs to be speeded up, ensuring that the IMF in particular is able to adapt to post-crisis challenges. 
This calls for a broadening of the IMF’s surveillance mandate beyond macroeconomic and monetary policies so that it can deal with wider financial and regulatory issues. 
It means establishing a very high-level political council to take strategic decisions critical to global stability. 
And it also requires reforming the voting system to ensure decisions command the support of the majority of members. 
Architectural and institutional reform has to be complemented by a third achievement: agreement on a timetable for tackling the variety of biased trade rules, bloated subsidy regimes, intellectual property rules and other forms of market distortion which heavily disadvantage the developing world. 
Here the G-20 could play a particularly constructive role, especially when it comes to the revival of the Doha Trade Round, the reduction of duties, tariffs and quotas on exports from the least-developed countries, and the gradual elimination of domestic subsidies. 
Lastly, the G-20 could also help drive momentum on climate change. 
Its members represent the vast majority of global greenhouse gas emissions; agreement among them at Pittsburgh would go a long way towards ensuring that December’s international Climate Change Conference in Copenhagen does not end in hot air. 
Progress is needed on emission-reduction targets and on sharing knowledge and technology more widely. 
We also have to find a way to provide funding for adaptation and mitigation – to protect people from the impact of climate change and enable economies to grow while holding down pollution levels – while guarding against trade protection in the name of climate change mitigation. 
The challenges of our time are many, complex and intertwined. 

No to Green Fundamentalism 
BORDEAUX – Climatology and its emphasis on global warming is a comparatively recent addition to science. 
Yet, despite the relative youth of this research, a clear consensus has emerged: climate change – for which human activity is significantly, though not exclusively, responsible – now threatens our way of life, so we must develop the means to combat it. 
But I also believe that the fundamentalist approach that can be sensed in certain circles is skirting the limits of the acceptable. 
How can fundamentalists advocate limiting economic growth as a solution to the problem of global warming when there are men, women, and children in their hundreds of millions, all over the world, who still lead lives of abject poverty and are in desperate need of help? 
People in poor parts of the world have a right to economic development so that they can produce their own food, gain access to clean water, live in adequate shelter, and have all the benefits represented by hospitals and schools. 
These are essential human rights, and they can be realized only through economic growth, not stagnation. 
At the twentieth century’s start, only one person in ten lived in a town or city. 
Today that figure is one in two – 3.3 billion people, according to United Nations statistics – and the percentage of urban dwellers is expected to reach 70% by 2050. 
Cities, then, represent the most important development challenge of all. 
As cities continue to grow and spread across the world, reducing energy consumption and improving our quality of life require us to ensure that their inhabitants can travel relatively short distances to work 
The common expression in France that great rivers are created out of tiny streams captures the sort of strategy for countering global warming through sustainable development that I believe could be effective. 
Local actions that are then developed as part of an exchange between cities could have a global impact in the long term. 
That is why I am keen to encourage local initiatives that have a global perspective. 
Among the issues raised at the Copenhagen climate conference last December was the EU member states’ failure to perfect a post-Kyoto international system for fighting global warming. 
Fortunately, though, things have changed since then, with the 110 countries responsible for 80% of greenhouse-gas emissions – including India, China, and Brazil – now giving their support to the Copenhagen agreement. 
But it is important not to stop there. 
We must try to ensure that future climate-change meetings, like the Cancún summit this winter, are fully exploited as an opportunity to transform well-intentioned declarations into international agreements that apply to developed and developing countries alike. 
The Copenhagen agreement envisages the world’s industrialized nations financing emissions reduction and other necessary adjustments in developing countries through a $30 billion aid package, which will rise to $100 billion between now and 2020. 
But the agreement fails to specify who will undertake what costs. 
Instead, the agreement limits itself to responding to the widely accepted goal of keeping carbon-dioxide levels below 450 parts per million, and the rise in average global temperature below 2°C. But are these targets realistic? 
If not, we must bear in mind the warning of the Stern Report that failure to act now would make taking action in the future much more costly. 
That all countries taking part in the political process on climate change should be treated equally has ensured that Europe still exerts a good deal of influence. 
Things have clearly moved on from Copenhagen, when the priority was to reach agreement between those countries that have been chiefly responsible for global warming. 
And if my own country, France, has failed to set a good example to developing countries by equivocating over the terms of a carbon tax, then perhaps the time has come for its national carbon footprint to be linked with the European trading system for CO2. 
The sad truth, though, is that the solution of mixing quotas and taxes will not deliver results quickly enough to bring about a genuine and immediate move to low-carbon or even carbon-free economies. 
Ever since Copenhagen, a majority of the main greenhouse-gas-emitting countries have been setting out ambitious goals – without hedging them with restrictive conditions. 
At the same time, new mechanisms are being put in place to measure and evaluate emissions, which will allow much clearer comparisons between countries. 
What remains to be done is to share these efforts in a way that is fair and manageable for all countries. 
Will we, then, manage to sign a legal and binding agreement in Cancún? 
Will we be able to implement cooperation mechanisms between countries such as the UN’s Collaborative Program on Reducing Emissions from Deforestation and Forest Degradation in Developing Countries – the REDD program – so as to prevent deforestation and encourage technology transfer and financing? 
This is the real challenge, and although it may prove ambitious, many countries will arrive at the Cancún conference with renewed hope for the future, thanks to the progress made since Copenhagen. 

What Now for America? 
NEW YORK – At least it wasn’t a disaster. 
If the Democrats had failed to secure a majority in the US House of Representatives, President Donald Trump would have felt almighty, with all the dire consequences that would entail. 
But the Republicans still control the Senate, and that means that the judiciary, including the Supreme Court, will be pushed further to the right. 
And the election of Republican governors in major states like Ohio and Florida means that electoral districts can be finessed to boost Trump’s reelection chances in 2020. 
One of the most common political clichés ahead of these midterm elections was that they were a “battle for America’s soul.” 
It is easy to imagine Republicans and Democrats standing for two different versions of the country: one is overwhelmingly white, modestly educated, not very young, strong in rural areas, often male, and proud to own guns; the other is better educated, younger, urban, racially diverse, more female, and keen to control guns. 
These are caricatures, but they express a very recognizable reality. 
Though both sides believe they are patriotic Americans, their idea of patriotism could not be more different. 
The writer James Baldwin put the case for “progressive” patriotism well: he loved America more than any country in the world, and for that reason insisted on the right to criticize her perpetually. 
Trumpian patriots would have denounced Baldwin as a traitor. 
The big temptation for the Democrats, now that they have won control of the House, is to make the most of what they see as their greatest strengths: racial and gender diversity, and a shared loathing of Trump. 
This would be a logical position. 
Trump is indeed dreadful, and the Democrats could legitimately claim that older, rural white men are less representative of America today than the young, the urban, the nonwhite, and newly empowered women. 
And yet, to focus the Democratic agenda on Trump and diversity would be a mistake. 
There will be pressure, especially from younger Democrats, fired up by their success, to impeach the president. 
But as long as the Senate, which would have to convict him, is in Republican hands, an indictment by the House would be practically meaningless. 
Even if impeached, he would still be president, and Republicans would be inclined to defend him even more fiercely. 
It is certainly a good thing to have more women and nonwhite, non-Christian representatives in the legislature. 
This provides a refreshing and necessary contrast to the Republican Party, which has remade itself in the image of its leader: angry, white, and often openly racist. 
But to fight Trump’s identity politics with an equally aggressive form of identity politics would make political tribalism worse, and could make it harder for the Democrats to win national elections. 
There is always a danger that the Democrats will be divided, with younger radicals pitting themselves against the mostly white establishment. 
But the Republicans, who seem utterly united behind their leader, have a problem, too. 
The socially liberal, highly educated Republicans who used to be the backbone of the party have been pushed so far to the margins that they are almost invisible. 
John McCain was perhaps the last of those Mohicans. 
The Democrats should capitalize on that. 
And the way to do it would be to put less stress on sexual, racial, or gender identity, and more on the economy. 
This might seem a naive strategy during an economic boom, when Republicans can boast of record-low unemployment. 
But even many traditional laissez-faire conservatives should recognize that a yawning divide between rich and poor is not good for business. 
Henry Ford, who was not a fount of wisdom on many matters, recognized that if you want to sell cars, you have to put enough money into people’s pockets so that they can buy them. 
This, too, is an issue close to America’s conflicted soul. 
For some, American identity is based on red-blooded capitalist enterprise and rugged individualism, unhindered by excessive government regulation in the pursuit of material happiness. 
But for others, America stands on an ideal of greater social justice and economic equality – which nowadays should include a commitment to address climate change (a barely-discussed issue in the midterms), given that global warming will harm the poor more than the rich. 
There have been boom times for the very wealthy, such as the Gilded Age in the late nineteenth century, when 2% of American households owned more than a third of the country’s wealth, or indeed our own time, when the top 1% owns almost half the wealth. 
And there have been periods of reform, when governments tried to redress the balance. 
The most famous example is Franklin D. Roosevelt’s New Deal in the 1930s. 
It is clearly time for New Deal II. 
Instead of promising more tax breaks for the richest citizens, a more equitable fiscal policy could pay for necessary bridges and other public goods and services that would improve everyone’s life. 
Affordable health care for all citizens is a mark of a civilized society. 
The US is still a long way from that goal. 
The same is true of high-quality public education. 
It is grotesque that so many people who stand to benefit from such “socialist” policies are still persuaded to vote against them because they are supposedly “un-American.” 
Concentrating on egalitarianism would appeal to liberals, of course, but it should not alienate moderate voters either, because more equality would be good for the economy. 
And it might even persuade some angry, poor Trump supporters to recognize that his pseudo-populism is not about helping the left-behind folks in Rust Belt cities and rural hinterlands. 
It is about giving even more money to the very few. 
The Democrats’ core message for the next two years should be that in a plutocracy, everyone else loses. 

No Velvet Transition 
CAMBRIDGE: It is easy to idealize revolutions that happen somewhere else. 
Across the West, people have been celebrating the tenth anniversary of the end of communism as the war won without firing a shot. 
Across the former Soviet empire, genuine euphoria is tempered by ten hard years of change. 
Some things happened as expected: Hungary is doing better than most, Estonia outpaced the rest of the Soviet Union, and Southern Europe is in trouble. 
But surprises also abound. 
Everybody's "basket case" of 1989, Poland, became the region's dynamo. 
The Czech Republic – everyone's favorite – went from Velvet revolution to muddied reformer. 
Russia has been the biggest puzzle. 
It avoided the abyss that was widely predicted by the now unemployed Kremlinologists. 
But Russia also refused to become "normal." 
I myself thought that communism's collapse would deliver quicker social rejuvenation in Russia, although I argued from the start that Russia's road would be a hard slog, and that the country required substantial financial help from the West. 
Despite the variety of transitions underway, there are some durable lessons that can probably be drawn by now from the experience of the postcommunist transitions: 
• Markets work, but require a solid legal framework to function 
Where the legal framework could be changed quickly, as in eliminating price controls and a myriad of subsidies, or assuring currency convertibility, market forces began to work quickly and efficiently. 
Reforms unleashed the beneficial forces of supply and demand, as Poland's experience made dramatically evident, and brought an end to the endemic shortages of the old regime. 
But when the new legal framework demanded the creation of working state institutions that took time to create, quick reforms often had less than the desired effect. 
Speedy privatization, for example, especially the mass voucher schemes in Czechoslovakia, Russia, and many other former Soviet countries, did not work. 
Transferring title from state to private hands did not create enough real ownership. 
What is worse, when privatization was rushed through, the result was massive corruption, managerial plunder, and paralysis at the firm level. 
Although some abuses could have been lessened, the main reason for failure was that reform of the state did not keep pace with economic reforms. 
• Initial conditions matter in economic restructuring 
Some surprises of the postcommunist transition needn't have been such, if the different starting points had been properly considered. 
Poland's chaos in the 1980s, for example, may have created the basis for rapid growth in the 1990s, because the dead hand of central planning had already been cut off when the reforms began. 
Where central planning was alive, as in Czechoslovakia, it may have made it more difficult to break the mold of loss-making state enterprises. 
In largely agricultural China, huge state industrial enterprises had been less important, so their reform could have been postponed, and reliance could be placed on "starting afresh." 
But in the more "advanced" socialist countries, such as Russia, where 90% of the population was employed in state-owned industries, restructuring the state sector – a much harder job in many ways – was a necessity, and an obstacle to quick recovery. 
• Civil society is critical to successful transformation 
Even when governments have good intentions, they tend to be corrupted, if power is unchecked. 
Constitutions provide modest checks, but private associations of professionals, religions, and regions – the heart of civil society – provide the deeper balance. 
Stalinist purges in Russia left no independent institutions to stop the depredations of corrupt officials, managers, and the state. 
In Poland, by contrast, Communism never managed to destroy the Catholic Church or prevent the rise of the Solidarity movement. 
(Stalin once complained that establishing party rule there was like putting a saddle on a cow.) 
Solidarity unionists, even if they often opposed many specific policy proposals, stopped firm managers from stealing assets; and the Church provided a force with which all governments to reckon. 
• Geography is an important factor 
It is fashionable today to stress the global nature of the world's problems. 
But geography has not ceased to matter. 
The closer a postcommunist country was to the European Union, the more successful and dynamic has been the transformation. 
Countries such as Poland, Hungary, the Czech Republic, Slovakia, Slovenia, Croatia, and the Baltic States, have done much better at attracting foreign investment, expanding exports, and stimulating economic growth than those whose markets were at a greater remove from the European Union. 
Just as U.S. firms go next door to Mexico, German firms head for the immediate neighborhood to the East. 
• History casts a long shadow 
1989 was supposed to be a fresh start, the awakening from a nightmare. 
But 1989 also awakened ancient antipathies and mythologies that had been repressed in the Communist era. 
Who would have thought that in the late 20th century Serbian mythologies over the Battle of Kosovo of 1389 could galvanize a population behind the murderous nationalism of Slobodan Milosevic? 
• Assistance from developed countries can make a big difference 
Blame for failures does rest, in part, on the West, which was nonchalant in its efforts and stingy with its purse. 
Poland is the exception that suggests what might have been. 
Here the West helped with initial balance of payments funds and later with debt cancellation. 
Compare this with what happened in Russia, which was denied vitally needed funds and lasting debt relief. 
Many American politicians and citizens felt that the U.S. had no business helping a former rival nation that still had more than 10,000 nuclear warheads. 
What aid was given was a mere drop in the bucket when set against Russia's gargantuan financial and social needs. 
The final irony? The IMF actually provided most of its funds, but after reformers had been thrown out of office and Russia's kleptocracy had revealed itself! 

No War, No Famine 
STOCKHOLM: Two hundred years ago in his essay “Perpetual Peace” Immanuel Kant imagined a future “union of liberal republics.” 
In 1795, however, liberal republics were abstract ideas. 
Yet Kant imagined our present reality of flourishing liberal democracies. 
Moreover, Kant’s idea of perpetual peace seems even less far-fetched because no democracy has ever made war on another. 
Indeed, “No War Between Democracies” is as close as we are likely to get to an immutable diplomatic law. 
Scholars have demonstrated the truth of this. 
Professor R J Rummel of the University of Hawaii investigated 353 pairs of combatants between 1816 and 1991. 
Democracy fought non-democracy in 155 cases. 
Dictatorship fought dictatorship in 198 cases. 
He found no examples of democracies at war with each other. 
Some pedants quibble, claiming that exceptions exist. 
Study the details, however, and you find that the conflict in question was either some type of civil war or in which one participant was not a real democracy (Germany in 1914), or that the number of people killed was too low to call the conflict a war at all. 
This is no mere statistical error or lucky coincidence. 
In a democracy it would be almost impossible to secure sufficient public support for a military confrontation with another democracy. 
Democratic peoples know and trust each other. 
Democratic governments find it natural to negotiate with one another. 
The costs humanity has paid in waiting for Kant’s vision to near reality is horrific and was exacted in places other than the battlefield. 
Between 1900 and 1987 about 170 million people were killed for political reasons not involving war. 
Totalitarian states murdered 138 million out of those 170 million. 
Authoritarian countries killed another 28 million. 
Democracies killed about 2 million people, primarily through intentional bombing of civilian targets. 
No matter how controversial examples of democratic excess are, however, they do not change the overall picture. 
Most of this slaughter was triggered by Marxism/Leninism’s fusion of absolutist ideology with absolute power. 
To paraphrase Lord Acton’s dictum: power kills and absolute power kills absolutely. 
Many people reached other conclusions. 
When Marxists were strong and liberalism weak, writers, politicians, political parties, and newspapers often told us: democracy is unimportant for the Third World. 
Freedom in such countries is a “formality.” 
Far more urgent is not going hungry. 
So, we were lectured: liberalism is no solution for developing countries. 
“Don’t measure others by our yardsticks,” a leading Swedish playright/novelist wrote as Pol Pot’s regime exterminated a quarter of Cambodia’s population. 
What he meant was that the mass murder of Cambodians was not deplorable in the same way as the mass murder of Europeans is. 
This is inverted racism: you pretend to respect other peoples when, in fact, you despise them. 
Indeed, those in the West who praised Mao, Castro or Honecker seldom wanted to import their terror. 
Try introducing the slightest limitation on free speech in any Western country and you will meet storms of protest from those who seldom champion it in Third World nations. 
Oppression is only acceptable for others. 
Hypocrisy, of course, is not confined to the West. 
When leaders in, say, Singapore, Malaysia and mainland China talk about “Asian values” to romanticize their regimes, they, too, challenge the values of democracy. 
But Taiwan’s former President Lee Teng-hui thinks these arguments thin alibis for anti-democratic policies. 
When it comes to human rights, says Mr. Lee, there are no special Asian values. 
Freedom is a universal value. 
Despite communism’s collapse, assaults on liberalism remain. 
Amartya Sen, a Nobel Laureate in economics, demonstrated empirically that no famine - mass starvation leading to mass death - ever occurred in a democratically governed country. 
During the Bengal famine of 1943, two to three million people died from hunger. 
That happened under British rule. 
Since India became independent in 1947 with a multiparty democratic system, the country has never suffered such a disaster. 
Undernourishment, malnutrition, crop failures, and food scarcities have occurred, but there have been no famines. 
Compare that with Mao’s “Great Leap Forward” of 1958-1961 when 30 million Chinese died of hunger. 
That’s ten times the number of Indians who died in the gigantic starvation of British India less than twenty years before. 
Sen also examined various African countries that experienced crop failures and food shortages. 
Governments under democratic pressures usually act forcefully and decently on such occasions; people under dictatorial regimes are often hit by government-induced and manipulated famines. 
Where political opposition and a free press are active, governments cannot neglect thousands of people starving to death. 
When opposition is silenced and mass media voices only the dictator’s propaganda, millions of people dying from famine can be kept secret and/or ignored. 
Elie Wiesel, survivor of Auschwitz and Buchenwald and a Nobel Peace Laureate, once said: “Let us remember the heroes of Warsaw, the martyrs of Treblinka, the children of Auschwitz. 
They fought alone, they suffered alone, they lived alone, but they did not die alone, for something in all of us died with them”. 
What died with them? 
My answer is this: the idea that there are limits to human cruelty. 
Now we recognize that there are no limits. 
Knowing empirically the benefits in terms of peace and human welfare which democracy delivers, we must reaffirm our commitment to, and the necessity of, spreading Kant’s vision. 

 

Nobel Injustice 
SINGAPORE – Martti Ahtisaari is a great man. 
He deserves the Nobel Peace Prize for his life work. 
But it was a mistake for the Norwegian Nobel Committee to cite his work in Aceh as a reason for giving him the prize. 
As a recent story by Agence France Presse put it, Ahtisaari’s “most notable achievement was overseeing the 2005 reconciliation of the Indonesian government and the Free Aceh Movement rebels, bringing an end to a three-decade-old conflict that killed some 15,000 people.” 
But it was Indonesia’s people and leaders who should have received the Nobel Peace Prize for the Aceh political miracle. 
More fundamentally, the mentioning of Aceh in this Nobel citation raises serious questions about the mental maps used by the Nobel Prize Committee in making these awards. 
The committee members increasingly seem to be prisoners of the past. 
They continue to assume that we live in an era of Western domination of world history. 
But that era is over. 
Increasingly, the rest of the world has gone from being objects of world history to becoming its subjects. 
By giving the Nobel Peace Prize to the Indonesians instead of a European mediator for Aceh, the Nobel Prize Committee would have recognized that the world has changed. 
Three other big benefits would also have resulted from giving the award to an Indonesian. 
First, the West associates the Islamic world with violence and instability. 
Few believe that Muslims are capable of solving their political problems by themselves. 
But this is precisely what the Aceh story was all about. 
Two key Indonesian leaders, President Susilo Bambang Yudhoyono and Vice President Jusuf Kalla, showed remarkable political skill and courage in working out the peace deal for Aceh. 
A Nobel Peace Prize for them would have shown the West that Muslims can be good peacemakers and, equally important, it would have sent a message of hope to the Islamic populations of the world that have seen their self-esteem eroded by stories of failure. 
Aceh was essentially a spectacular Muslim success story. 
Hence, the Nobel Peace Prize Committee has squandered a valuable opportunity to send out a message of hope to the world’s 1.2 billion Muslims, one that would have rid the world of the grand global illusion that peacemaking is a “white man’s burden.” 

Japan’s Coming Political Earthquake 
OSAKA – Japan is now confronting challenges at home and abroad that are as serious as any it has had to face since World War II’s end. 
Yet the Japanese public is displaying remarkable apathy. 
The country’s two major political parties, the governing Democratic Party of Japan (DPJ) and the Liberal Democratic Party (LDP) recently chose their leaders, yet ordinary Japanese responded with a collective shrug. 
But Japan’s political system is unlikely to remain a matter of popular indifference for much longer. 
The DPJ first came to power in September 2009, with an ambitious program promising comprehensive administrative reform, no tax increases, and a freer hand in Japan’s alliance with the United States. 
But, owing to the party’s inexperience and incompetence at every level of policymaking – shortcomings that were compounded by the unprecedented devastation of the great earthquake of March 11, 2011 – the first two DPJ governments, under Yukio Hatoyama and Naoto Kan, ended with those pledges in tatters. 
Consequently, several dozen legislators, led by the perpetual rebel Ichiro Ozawa, defected from the DPJ, forming a new rump opposition party. 
The DPJ has now reelected incumbent Prime Minister Yoshihiko Noda as its president, despite his very low public-approval rating. 
With a thin majority in the lower house and a narrow plurality in the upper house (which has adopted a censure resolution against Noda), the DPJ on its own is unable to pass fiscal and other legislation essential to running a government. 
As a result, the prime minister is barely muddling through – and only by agreeing with the major opposition parties to dissolve the lower house. 
Though he has not specified exactly when he will do so, the endgame for the DPJ government has begun. 
Yet the rival LDP, which had governed almost uninterruptedly for several decades until 2009, has proven itself to be an ineffective opposition party. 
Unable to overcome popular distrust, owing to its longstanding symbiosis with the bureaucrats and subservience to the US, the LDP has been incapable of holding the DPJ accountable in the legislature. 
Instead, the LDP, having failed to reinvigorate itself and attract allies, has occasionally taken a buck-passing approach, such as permitting the DPJ to pass an unpopular but inevitable and necessary increase in the consumption tax. 
In an effort to enhance popular support for the party, the LDP presidential campaign took advantage of a heightened sense of crisis centered on Japan’s territorial disputes with Russia, South Korea, and, most recently and alarmingly, China. 
The party chose as its leader former Prime Minister Shinzo Abe, who is known as the hardest of hardliners on nationalist matters, but who is also widely perceived as having acted irresponsibly when he abruptly gave up his premiership in 2007, after only one year in office, due to health problems. 
His comeback has given the country a rather odd feeling of déjà vu. 
So, the Japanese public is now searching for a party that can take on the tasks of reforming the country, reviving the economy, and enhancing national security. 
Neither the DPJ nor the LDP appears dependable in any of these areas. 
As a result, the public is paying increasing attention to the newly created Japan Restoration Party (JRP) and its populist leader, Osaka City Mayor Toru Hashimoto, a former governor of Osaka prefecture and the son of a minor Yakuza (mafioso). 
The JRP aspires to be a ruling party, or at least a kingmaker in Japanese politics, but it has an almost exclusively domestic agenda and suffers from a dearth of talent below Hashimoto. 
Without a comprehensive agenda and expertise in foreign and security policy, the party will most likely stumble badly should it come to power. 
It is almost certain that the next general election will not produce a parliamentary majority for a single party. 
Given the parties’ ideological, organizational, and policy disarray, Japan will enter a period of profound uncertainty, ultimately leading to an unprecedented political shakeup. 
This prospect may seem surprising, given that Japan has already lost two decades since its economy’s bubble burst in the early 1990’s. 
But, after a short-lived non-LDP government, successive coalition governments until 2009 had the LDP at their core. 
Japan’s hidebound postwar regime has been insulated, externally and internally, by relatively unchanging geostrategic and economic conditions. 
The country remains the world’s largest creditor, and has slowly but steadily eliminated enormous non-performing loans in its banking sector. 
Moreover, the Cold War never ended in East Asia, requiring the preservation of a US-led security system centered on the US-Japan alliance – an alliance that appears to presuppose a pliant Japanese political system. 
In fact, the system’s resilience in absorbing huge disruptions – the 2008 financial crisis and the 2011 earthquake – is one key reason for its survival. 
Thus, Japan remains broadly credible, at least relative to the US and the European Union. 
The yen’s appreciation reflects markets’ assessment that Japan’s economic position is stronger than that of the US and the EU, which are burdened with serious structural problems of their own. 
Indeed, with a huge capital surplus and very low interest rates in a time of creeping deflation, Japan now has a golden opportunity to invest in public infrastructure, education, defense, and overseas projects – a burst comparable to the British Empire in the late nineteenth century. 
But Japan is unable to seize these opportunities, because its political system is incapable of producing competent leadership. 
Given rising tensions in Asia, the question is how long this can last. 
China’s rise and America’s relative decline present not only a danger for Japan, but also an opportunity – and perhaps the needed momentum boost – for real reform. 

Mastering Our Urban Future 
NEW YORK – By the end of this century, ten billion people will inhabit our planet, with 8.5 billion living in cities. 
This could be the stuff of nightmares. 
But, with sufficient political will, vision, and creativity – along with some simple, practical policy changes – we may be able to create cities of dreams. 
Cities are hubs of economic and social power. 
They drive national and global development by concentrating skills, ideas, and resources in a single location. 
But rapid urban development comes at a heavy cost. 
As cities expand, they swallow up land that would otherwise be used for food production. 
They drain water supplies, account for almost 70% of global energy use, and generate more than 70% of greenhouse-gas emissions. 
If global growth is to be sustainable and equitable, we will need to alter the balance between rapid urbanization and the unrelenting consumption of resources that it fuels. 
This is a main goal of the UN Conference on Sustainable Development, which has warned of the unprecedented pressures that economic growth will impose in coming decades on infrastructure (especially transportation), housing, waste disposal (especially of hazardous substances), and energy supplies. 
The battle to keep the world's cities – and thus the global economy – both dynamic and sustainable can be won by developing innovative ways to consume our limited resources, without diminishing them or degrading the delicate ecological systems on which they depend. 
To achieve this, the world must meet six broad challenges. 
First, we must change the way we design cities. 
Sustainability must be central to all urban planning, particularly in coastal cities that will soon face the ravaging effects of climate change. 
Denser cities use land more efficiently, reduce the need for private cars, and increase the quality of life by making space for parks and nature. 
Likewise, tightly integrated mass-transit systems reduce greenhouse-gas emissions dramatically. 
Second, we must rethink how we design and operate buildings so that they use less energy – or, better still, generate energy. 
Buildings are responsible for substantial CO 2 emissions, owing to the materials used in their construction, their cooling and heating requirements, and auxiliary functions such as water supply, wastewater, and solid-waste disposal. 
Our building codes need to promote energy-efficient engineering and construction technologies, which can be supported by tax incentives and stricter regulations. 
With almost 30% of city dwellers in the Asia-Pacific region living in slums, one of our greatest tests will be to improve their living conditions without wreaking havoc on the environment. 
The third challenge is to alter citizens' transport habits. 
This means shifting from private cars to public transportation, and from road to rail. 
Indeed, wherever possible, we should try to reduce the need to travel at all. 
Transport systems that favor cars and trucks cause accidents, pollution, and chronic congestion. 
Moreover, the transport sector accounted for 23% of all energy-related CO2 emissions in 2004, and it is the fastest growing source of emissions in developing countries. 
Instead, we need to integrate transportation, housing, and land use, encourage reliance on public transportation, and make our streets pleasant and safe for walking (especially for women and the disabled). 
The fourth challenge is to change how we produce, transport, and consume energy . 
This includes creating more efficient energy systems and increasing our investment in renewable sources (which will, one hopes, create jobs in the process). 
We can also encourage households to consume less energy, and companies to reduce the amount of energy that they waste. 
Fifth, we must reform how we manage water resources and water infrastructure, so that this precious resource can be re-used several times, and on a city-wide scale . 
This requires us to integrate the various aspects of water management, such as household supply, rainwater harvesting, wastewater treatment and recycling, and flood-control measures. 
Finally, we must change the way we manage solid waste so that it becomes a resource, not a cost. 
In many developing countries, 60-80% of solid waste is organic, with open dumping causing excessive amounts of methane to enter the atmosphere. 
Cash-strapped local governments spend 30-40% of their budgets on waste management but derive little in return. 
Yet, with some simple technological and design improvements – aimed, for example, at achieving higher rates of composting and recycling – 90% of this waste could be converted into something useful, such as biogas and resource-derived fuel. 
These six steps require a comprehensive and coordinated change in behavior, and will require government at all levels to cooperate, invest at scale, share ideas, replicate best practices, and plan for the long term. 
It is a monumental and daunting challenge, but not an impossible one. 
If it can be achieved, the world may yet get the urban future that it deserves. 

Who Killed the Nokia Phone? 
HELSINKI – It seems to be a law in the technology industry that leading companies eventually lose their positions – often quickly and brutally. 
Mobile-phone champion Nokia, one of Europe’s biggest technology success stories, was no exception, losing its market share in the space of just a few years. 
Can the industry’s new champions, Apple and Google – not to mention titans in other tech sectors – avoid Nokia’s fate? 
In 2007, Nokia accounted for more than 40% of mobile-phone sales worldwide. 
But consumers’ preferences were already shifting toward touch-screen smartphones. 
With the introduction of Apple’s iPhone in the middle of that year, Nokia’s market share shrunk rapidly and revenue plummeted. 
By the end of 2013, Nokia had sold its phone business to Microsoft. 
What sealed Nokia’s fate was a series of decisions made by Stephen Elop in his position as CEO, which he assumed in October 2010. 
Each day that Elop spent at Nokia’s helm, the company’s market value declined by €18 million ($23 million) – making him, by the numbers, one of the worst CEOs in history. 
Elop’s biggest mistake was choosing Microsoft’s Windows Phone as the only platform for Nokia’s smartphones. 
In his “burning platform” memo, Elop compared Nokia to a man on a burning offshore oilrig, facing a fiery death or an uncertain leap into the frigid sea. 
He was right that business as usual meant certain death for Nokia; he was wrong to choose Microsoft as the company’s life raft. 
But Elop was not the only person at fault. 
Nokia’s board resisted change, making it impossible for the company to adapt to rapid shifts in the industry. 
Most notably, Jorma Ollila, who had led Nokia’s transition from an industrial conglomerate to a technology giant, was too enamored with the company’s previous success to recognize the change that was needed to sustain its competitiveness. 
The company also embarked on a desperate cost-cutting program, which included the elimination of thousands of jobs. 
This contributed to the deterioration of the company’s once-spirited culture, which had motivated employees to take risks and make miracles. 
Good leaders left the company, taking Nokia’s sense of vision and direction with them. 
Not surprising, much of Nokia’s most valuable design and programming talent left as well. 
But the largest impediment to Nokia’s ability to create the kind of intuitive, user-friendly smartphone experiences that iPhones and Android devices offered was its refusal to move beyond the solutions that had driven its past success. 
For example, Nokia initially claimed that it could not use the Android operating system without including Google applications on its phones. 
But, just before its takeover by Microsoft, Nokia actually built a line of Android-based phones called Nokia X, which did not include Google apps, but instead used Nokia maps and Microsoft search. 
Why didn’t Nokia choose Android earlier? 
The short answer is money. 
Microsoft promised to pay billions of dollars for Nokia to use Windows Phone exclusively. 
Given that Google gives away its Android software, it could not match this offer. 
But Microsoft’s money could not save Nokia; it is not possible to build an industrial ecosystem with money alone. 
Elop’s previous experience at Microsoft was undoubtedly also a factor. 
After all, in difficult situations, people often turn to what is familiar. 
In Elop’s case, the familiar just happened to be another sinking company. 
After hearing that Nokia had chosen Windows, Google director Vic Gundotra tweeted: “Two turkeys do not make an eagle.” 
Apple and Google should not rest easy. 
Like Nokia in the mobile-phone industry – not to mention Microsoft and IBM in the computing industry – one day they will lose their leading position. 
But there are steps they can take to prolong their success. 
First, companies must continue to innovate, in order to improve the chances that disruptive technologies emerge from within. 
If market leaders implement a system for discovering and nurturing new ideas – and create a culture in which employees are not afraid to make mistakes – they can remain on their industry’s cutting edge. 
Second, major firms should keep track of emerging innovators. 
Instead of forming partnerships with smaller companies that suit their current business model, major firms should work with inventive startups with disruptive potential. 
Finally, though successful companies must constantly innovate, they should not be afraid to imitate. 
If Nokia had immediately begun to develop products modeled after the iPhone, while addressing related patent issues effectively, the mobile-device business would look very different today. 
Nokia’s experience also carries an important lesson for regulators, particularly in the European Union. 
Attempting to quell disruptive technologies and protect existing companies through, for example, antitrust crusades, is not an option. 
Indeed, that approach would ultimately hurt the consumer, both by impeding technological progress and eliminating price competition – like that from Samsung’s Android devices, which forced Apple to lower iPhone prices. 
Herein lies the most important lesson in Nokia’s fall. 
Technology companies cannot achieve success simply by pleasing their board of directors or even striking multi-million-dollar deals with partners. 
Whichever company makes the consumer happy – whether a well-established multinational or a dynamic startup – will win. 
Companies that lose sight of that are doomed. 

Confronting the Next Global Health Challenge 
ZURICH – Thanks to unprecedented international cooperation, the world is making impressive progress in the fight against malaria. 
According to the World Health Organization’s just-released 2016 World Malaria Report, malaria mortality rates among children under age five have fallen by 69% since 2000. 
And this progress is not limited to malaria. 
Many countries have reduced new HIV infections by 50% or more over a similar period, and the infection rates for other debilitating tropical diseases, such as leprosy and Guinea worm, have fallen significantly in recent years. 
But while mortality rates from infectious diseases are declining, developed countries’ sedentary lifestyles, tobacco use, and poor diets are catching on in the developing world, and noncommunicable diseases such as diabetes, cardiovascular disease, and cancer are increasing at an alarming rate. 
NCDs now kill 38 million people annually, with almost 75% of those deaths occurring in low- and middle-income countries. 
And the outlook for developing countries is dire; for example, by 2030, NCDs are expected to cause more deaths in Africa than communicable, maternal, and nutritional illnesses combined. 
Beyond threatening lives, NCDs can destabilize economies, especially in countries with limited health-care infrastructure. 
The challenge for governments and global health agencies is to continue making progress against infectious diseases, while also addressing the rising NCD threat. 
Fortunately, we can apply lessons from the successful fight against infectious diseases to the emerging fight against NCDs. 
Working with nonprofit agencies, intergovernmental organizations, and private companies, world leaders can have a profound impact on public health – even if foreign-aid budgets are strained. 
For starters, we need innovation. 
Without the great leap forward in antiretroviral therapy in the mid-1990s, we would not have the tools we have today to control HIV. 
And without the artemisinin-based combination treatments that also emerged in that decade, malaria death rates would still be stubbornly high. 
Policies that improve access to health care should also support innovation – and they must never undermine it. 
Beyond innovation, we need strong partnerships to manage NCDs and ensure that patients have access to the treatment they need. 
Effective HIV management has transformed that disease from a death sentence into a chronic condition in most places; but, of course, we now need sustainable solutions to provide continuous, long-term care. 
The private sector is increasingly committed to this approach. 
Novo Nordisk’s Changing Diabetes Care and Eli Lilly’s NCD Partnership are just two examples of how companies are collaborating with governments and health organizations in resource-limited countries to develop scalable, sustainable, and locally driven programs to combat diabetes. 
And Novartis Access, which our company launched in 2015, is a socially oriented business that works with governments, NGOs, and other public-sector customers in lower-income countries. 
We have two goals for the program: to expand access to affordable medicines to treat NCDs such as heart disease, type-2 diabetes, respiratory illnesses, and breast cancer; and to cooperate with local and international organizations to strengthen health-care systems. 
So far, we have observed that developing countries need to shift their paradigm for medicine procurement, and update their national essential-medicines lists. 
A third lesson to take from the fight against infectious diseases is that political commitment is crucial. 
As Chatham House and other independent observers have warned, too few governments – particularly in developing countries – spend the recommended 5% of annual GDP on promoting health. 
Even when national budgets are tight, health investments are worth it; after all, an ounce of prevention is worth a pound of cure. 
Lower-income countries that are heavily affected by NCDs have everything to gain from investments that will make their people healthier and more productive. 
As we have learned from managing HIV, investments in public health create a virtuous cycle: as people and communities begin to experience better health, they invest further in making health a priority. 
Managing the rise of NCDs will require long-term thinking, and government leaders will have to make investments that might pay off only after they are no longer in office. 
This is a serious challenge, especially in electoral democracies; but policymakers from around the world can come together to leverage their investments and those undertaken by the private sector. 
And even if most countries reach the recommended spending of 5% of GDP, the world will still need innovative financing mechanisms and policies to enable public-private collaboration. 
Leaders from around the world must prioritize the global fight against NCDs. 
To this end, governments and global health agencies should apply lessons learned from the successful fight against infectious diseases. 
Through innovation, dynamic partnerships to strengthen health systems, and political will, the world can sustain the gains made against infectious disease, while also effectively combating NCDs. 

Germany’s Rash Rush for Russian Gas 
BRATISLAVA – In the right circumstances, we can all be gullible fools – which will be the case if the European Union welcomes the Nord Stream 2 project to double the delivery of natural gas from Russia via the Baltic Sea to Germany. 
According to the five European companies involved in the project (each with a 10% stake), their partnership with Russia’s Gazprom (which owns the remaining 50%) is simply a commercial business initiative. 
In fact, it is much more – dangerously more – than that. 
A decade ago, when the first Nord Stream pipeline deal was announced, Poland’s then-foreign minister, Radek Sikorski, compared the venture to the 1939 Molotov-Ribbentrop Pact (the non-aggression treaty between Hitler’s Germany and Stalin’s Soviet Union). 
As the EU signed off on the deal, Sikorski was accused of grotesque hyperbole. 
Today, in the wake of Russia’s annexation of Crimea, and ongoing subversion of Ukraine’s sovereignty, Sikorski’s words don’t seem so outlandish. 
Indeed, Gazprom today is even more of a tool of Kremlin policy (and source of revenue), with its gas deliveries repeatedly used for political extortion, particularly to keep ex-Soviet republics like Ukraine in line. 
The argument for Nord Stream 2 is that it will meet the EU’s growing demand for gas. 
Yet the capacity of existing pipelines between the EU and Russia is already more than double Europe’s current demand. 
According to Gazprom’s own data, Russia in 2015 exported slightly more than 100 billion cubic meters (bcm) of natural gas to Western Europe – far below half of existing capacity. 
The EU’s consumption of natural gas does not justify building a 55 bcm pipeline. In 2014, consumption fell 23%, to 387 bcm, from its 2010 peak of 502 bcm, reaching its lowest level since 1995. 
Indeed, Nord Stream’s capacity-utilization rate was just 43% in 2013, 65% in 2014 and 71% in 2015. 
Some will argue that Europe’s consumption of gas will grow. 
Really? 
Just seven West European countries (Germany being the biggest) account for some 80% of total EU gas consumption, and all have strong energy-efficiency and renewable-energy programs. 
Unless Europe decides to waste cheap natural gas, the decline in its consumption will continue. 
On the other hand, doubling Nord Stream’s capacity to 110 bcm would in theory enable Europe to import all of Russia’s gas, via Nord Stream alone. 
That, of course, is the danger if Nord Stream 2 is built. 
Within a very short time, both the Brotherhood and Yamal pipelines – which link Russia with, respectively, Ukraine and Poland – will almost certainly begin to collapse as businesses. 
Without the transit fees that are the heart of their business, lack of maintenance will quickly lead to serious decay. 
Poland, Slovakia, Belarus, and Ukraine – with their 100 million people – will be stripped of an important source of revenue, which will weaken them economically and make them more vulnerable to Kremlin pressure. 
The only real winner is Russia, which will secure more European money for a longer period of time. 
New Western investment in new pipelines would commit Europe’s energy system to sticking with Russian natural gas, and perhaps discourage the transition to efficient energy use. 
Corporate and Russian propaganda would have the German public believe that Nord Stream 2 is to be a kind of energy cordon sanitaire, insulating Germany from the troubles of its eastern neighbors, even though they may be fellow EU members. 
But Nord Stream 2 would make those troubles inevitable. 
A poorer Ukraine would be an even easier victim of Russian aggression than it is today. 
And the Kremlin’s hold on Belarus would be even tighter should Yamal close down. 
Moreover, Germans and other Europeans would not be spared the consequences. 
By committing to buy more Russian gas than necessary, and for a longer time, the EU would be helping to finance Russia’s military build-up, which represents a direct threat to peace in Europe. 
According to the Global Militarization Index of the Bonn International Center for Conversion, Russia is among the most militarized countries in the world. 
Some 37% of Russia’s federal budget in the first quarter of 2016 was spent on the country’s military and security forces – and the vast majority of that spending was financed by selling oil and gas to Europeans. 
So it is we Europeans who finance Russia’s wars in Ukraine and Syria, its military occupation of Crimea, South Ossetia, Abkhazia, and Transnistria, and the provocative flights of Russian military aircraft in the Baltic and elsewhere. 
The more Russian gas we burn, the more money Vladimir Putin has for military modernization and “hybrid warfare,” when Russia augments conventional forces with irregular troops and cyber weapons. 
The question that Germany and its leaders must ask themselves is whether they are serious about peace. 
If they are, it is essential that they stop financing Russia’s armies – in or out of uniform. 
But are Germans serious about the EU, which has ensured seven decades of peace in what previously was by far the most violent part of the world? 
Are they serious about fighting climate change and defending the future of the planet? 
If so, they must surely burn much less, not more, natural gas. 
Nord Stream 2 stands against everything that the German government says it values most: the survival of the EU, peace in Europe, and the environment. 
German politicians would do well to recall the words of another Kremlin ruler: “These capitalists,” Lenin reputedly said, “will sell us the rope with which we will hang them.” 

North Korea and Asia’s Widening Arms Race 
North Korea’ test of a long range missile may have failed, but that will not relieve regional jitters. 
Indeed, it will only confirm what is already underway – an arms race across the region. 
Southeast Asia’s return to prosperity since the financial crisis of 1997 has brought a region-wide splurge on new weapons. 
Most Southeast Asian countries are busily modernizing their armed forces. 
So far, most have done so without compromising their autonomy in security matters. 
But, with China’s military build-up causing nervousness everywhere, and with North Korea a perpetual source of insecurity, many governments in the region are starting to work with outside powers. 
Indonesia’s President Susilo Bambang Yudhoyono has perhaps been the most assertive. 
In addition to becoming more active in world diplomacy, Yudhoyono will meet Russian President Vladimir Putin in Moscow this month to discuss buying Russia’s newest fighter jets. 
Indonesia is seeking to form an air-defense squadron of 12 jets, with eight Russian fighters to complement the two Russian Su-27SK’s and Su-30MKM’s that it has already bought. 
Elsewhere in the region, Singapore has apparently opted to purchase 12 new F-15SG fighter aircraft from the United States. 
Thailand’s Prime Minister, Thaksin Shinawatra, met Putin late last year and tentatively agreed to purchase 12 Su-30MKM’s. 
Malaysia has agreed to buy 18 Su-30MKM’s over the next two years, while Vietnam has purchased 36 SU-27SK’s, 12 of which are already in service. 
With the exception of Singapore, it seems that Russian fighter-attack aircraft are the region’s weapon of choice at the moment. 
Russia’s growing slice of the local arms market worries the US, the world’s biggest weapons supplier and still Asia’s greatest military power. 
Thus, for example, last November, the US lifted its six-year embargo on military sales to Indonesia, imposed in 1999 in response to human rights abuses in East Timor. 
Indonesia immediately expressed its intention to purchase C-130 transport aircraft, as well as fast patrol boats to conduct “anti-terrorism and anti-piracy measures.” 
Yet Indonesia is also trying to align itself with Asia’s rising power, China, by seeking greater defense and security cooperation. 
As a result of these improved relations, Indonesia has received Chinese short-range missile technology. 
The possibility that Southeast Asia’s governments might begin to play America and China off against each other is one of the concerns that most animates the latest US quadrennial defense review, which is intended to “focus on the Pacific Ocean” in awareness of China’s growing naval power. 
Undoubtedly, the US will try to build closer ties with Indonesia through greater military cooperation, because Indonesia borders the region’s key sea lines of communications. 
In particular, Indonesia will inevitably become involved in the tug of war between the US and China for influence over the vitally important Malacca Strait. 
Because China must import vast quantities of oil through the Malacca Strait, that sea lane has become a central element in the country’s security strategy. 
For this reason, China is attempting to use economic and military aid as leverage to improve relations even with countries with which it has had military confrontations with in the past, most prominently Vietnam and the Philippines. 
India, too, is now joining the military build-up. 
It has actively led regional multilateral joint exercises, such as the naval joint exercise that India’s navy hosted in the Andaman Sea, in the eastern Indian Ocean, earlier this year. 
Nine Asian-Pacific countries took part, including Indonesia, Malaysia, Singapore, and Thailand. 
Both India and China are each seeking greater influence over the strategically important country of Myanmar. 
For example, after Myanmar signed an agreement with China in 2005 to supply natural gas, India responded by cutting its own gas deal with Myanmar. 
South Korea has also, of course, joined the scramble. 
President Roh Moo-hyun visited Malaysia and agreed to expand mutual economic cooperation mainly in information technology, bio-technology, and resources and energy. 
Roh reportedly also discussed exporting defense materials worth $2.3 billion, including training aircraft, destroyers, and armed vehicles. 
Moreover, in January 2006, Korean Defense Minister Yoon agreed with the Philippines to deliver two used patrol boats. 
In this crowded power play, only Japan is left out, choosing for the most part to remain aloof and cultivate its relations with the US, which is now to supply anti-missile technology to counter the North Korean threat. 
But, despite deep historical animosity over World War II, there are increasing calls in the region for Japan to expand its influence to counterbalance China. 
In reality, Japan is not ready for this, because it still strongly adheres to “self-imposed restraints” against “influence over other countries in security and defense,” including weapons exports. 
In the 1960’s, as its economic takeoff was proceeding, Japan initiated a serious dialogue with regional players, aiming to build stronger relations with countries that it had once conquered and occupied. 
It is no overstatement to say that those efforts, which boosted trade and investment in the region, formed the foundation of Japan’s national power today. 
But now Japan’s political and economic influence in South East Asia is gradually declining, owing in part to its failure to exert influence over security and defense matters. 
At a time of regional uncertainty about North Korea and China – including the looming prospect of China’s first aircraft carrier – Japan’s participation in the evolving Asian security framework is fundamental to stability. 
The time when Japan could remain on the sidelines is over. 


Storm Clouds Over Korea 
BERLIN – Decades after the end of the Korean War and the partition of Korea, the conflict on the Korean Peninsula remains one of the most dangerous and intractable problems of our time. 
And today it is more dangerous – and seemingly intractable – than ever. 
The North Korean regime is a remnant of the Cold War – a Stalinist dinosaur that has survived to the present day, whereas South Korea has rapidly become an economic and technological power in the region. 
And China, North Korea’s most important ally and only financial backer, has pursued an increasingly successful modernization policy. 
These developments have left the North Korean regime isolated and justifiably fearful for its future. 
So, to ensure that its brutal dictatorship survives, the ruling Workers’ Party of Korea, led by the Kim clan, hit upon the idea of developing nuclear weapons and the systems needed to deliver them. 
To date, all diplomatic and technological efforts to prevent North Korea’s nuclear armament have failed. 
It is only a matter of time until North Korea has nuclear-armed missiles that can reach South Korea and its capital of Seoul, Japan, and even large cities on the West Coast of North America. 
The United States, for its part, has installed a missile-defense system in South Korea. 
And the Trump administration, like administrations before it, views North Korea’s pursuit of intercontinental missiles capable of reaching San Francisco or Los Angeles as a justification for war. 
If the color scale used today for terror threat levels were applied to the crisis on the Korean Peninsula, it would show a shift from orange to red. 
With time for a diplomatic solution – or even containment of the crisis – quickly running out, the situation is coming to a head. 
That is because the current drama is playing out in an extremely sensitive strategic location. 
South Korea and Japan – both important players in the global economy and close US partners – are under immediate threat, whereas China and Russia, North Korea’s two northern neighbors, are global nuclear powers with their own interests in the dispute. 
China, in particular, views the Korean Peninsula in terms of strategic security. 
Chinese leaders have not forgotten that Imperial Japan attacked Northern China (Manchuria) from the Korean Peninsula in the 1930’s, or that it was US troops’ approach toward the Yalu River on China’s border that prompted Chinese intervention in the Korean War, in the early 1950’s. 
Since then, China has been North Korea’s quasi-protector, and the US has protected South Korea, not least by keeping a large military deployment in the region even after the Cold War ended. 
Without that American military presence, war most likely would have returned to the region; or, at a minimum, Japan and South Korea would have developed their own nuclear deterrent. 
A military confrontation on the Korean Peninsula could lead to a nightmare scenario in which nuclear weapons are used, or even to a larger clash between nuclear-armed global powers. 
Either scenario would have serious consequences beyond the immediate geographic vicinity. 
And yet North Korea’s concerted push to develop nuclear-armed intercontinental ballistic missiles means that a continued wait-and-see policy is no longer a serious option. 
So, what will US President Donald Trump do? 
A series of recent visits to the region by senior American officials suggests that the new administration is treating the situation on the Korean Peninsula as a serious threat. 
While German Chancellor Angela Merkel was visiting Trump in Washington earlier this month, US Secretary of State Rex Tillerson made his first official trip to East Asia, following Secretary of Defense James Mattis’s trip to the region in February. 
When he was in South Korea, Tillerson was anything but reassuring. 
He spoke of an “immediate threat,” declared an end to former US President Barack Obama’s “policy of strategic patience,” and said that “all options are on the table” – including military action. 
Tillerson’s harsh language could be justified if it leads to a negotiated solution among the US, China, and North Korea. 
But what if that doesn’t happen? 
Nuclear or conventional war on the Korean Peninsula would carry incalculable regional and global risks. 
In fact, if one considers those risks carefully, one realizes that all options are not on the table: diplomacy, despite all of its difficulties, is the only solution. 
A diplomatic solution, however, can be achieved only if the US and China cooperate closely and do not repeat past mistakes. 
For example, the Trump administration would do well not to pursue an overly aggressive policy toward China in the South China Sea, in light of the burgeoning crisis on the Korean Peninsula. 
At the same time, China’s leaders need to ask themselves how much longer they intend to provide unconditional support to the North Korean regime – which is completely dependent on Chinese supplies – rather than putting pressure on it to cease its provocations. 
To avoid a military conflict, China and the US will need to agree on a joint approach and move toward reviving the Six-Party Talks with North Korea. 
It is becoming increasingly clear that, even under a Trump presidency, the US cannot simply shirk its role as a stabilizing power on the world stage. 
And for China to prove that it, too, can be a stabilizing power in the twenty-first century, it will have to do its part to resolve the conflict on the Korean Peninsula. 

The Coming Confrontation with North Korea 
KYIV – Imagine it is 2020. 
The director of the CIA requests an urgent meeting with the US president. 
The reason: North Korea has succeeded in making a nuclear bomb small enough to fit inside the tip of an intercontinental ballistic missile capable of reaching the continental United States. 
The news soon leaks to the public. 
High-level meetings to devise a response are held not just in Washington, but in Seoul, Tokyo, Beijing, and Moscow as well. 
This scenario may seem unreal today, but it is more political science than science fiction. 
North Korea just carried out its fifth (and apparently successful) test of a nuclear explosive device, doing so just days after testing several ballistic missiles. 
Absent a major intervention, it is only a matter of time before North Korea increases its nuclear arsenal (now estimated at 8-12 devices) and figures out how to miniaturize its weapons for delivery by missiles of increasing range and accuracy. 
It is difficult to overstate the risks were North Korea, the world’s most militarized and closed society, to cross this threshold. 
A North Korea with the ability to threaten the US homeland might conclude it had little to fear from the US military, a judgment that could lead it to launch a conventional, non-nuclear attack on South Korea. 
Even if such a war ended in North Korea’s defeat, it would be extraordinarily costly by any measure. 
That said, North Korea would not have to start a war for its nuclear and missile advances to have real impact. 
If South Korea or Japan ever concluded that North Korea was in a position to deter American involvement in a war on the Peninsula, they would lose confidence in US security assurances, raising the possibility that they would develop nuclear weapons of their own. 
Such decisions would alarm China and set the stage for a regional crisis or even conflict in a part of the world with the greatest concentration of people, wealth, and military might. 
There is another risk as well. 
A cash-strapped North Korea might be tempted to sell nuclear arms to the highest bidder, be it a terrorist group or some country that decided that it, too, needed the ultimate weapon. 
By definition, nuclear proliferation increases the chances of further nuclear proliferation – and with it the actual use of nuclear weapons. 
The US has options, but none is particularly attractive. 
As for negotiations, there is little if any reason to be confident that North Korea would give up what it considers to be its best guarantee of survival. 
In fact, it has often used negotiations to buy time for further advances in its nuclear and missile capabilities. 
Another option is to continue with a version of the current policy of extensive sanctions. 
The problem is that sanctions will not be potent enough to force North Korea to give up its nuclear and missile programs. 
This is partly because China, fearing large refugee inflows and a unified Korea in America’s strategic orbit should North Korea collapse, will most likely continue to ensure that it gets the fuel and food it needs. 
As a result, it makes more sense to focus on diplomacy with China. 
The US, after consulting closely with South Korea and Japan, should meet with Chinese officials to discuss what a unified Korea would look like, so that some Chinese concerns could be met. 
For example, a unified country could be non-nuclear, and any US military forces that remained on the Peninsula could be fewer and farther south than they are now. 
It is of course possible or even probable that such assurances would not lead to any meaningful diminution in Chinese support for North Korea. 
In that case, the US would have three more options. 
One would be to live with a North Korea in possession of missiles that could bring nuclear bombs to US soil. 
The policy would become one of defense (deploying additional anti-missile systems) and deterrence, with North Korea understanding that any use or spread of nuclear weapons would lead to the end of the regime and possibly nuclear retaliation. 
Cyber weapons might also be employed to obstruct and impede the progress of North Korea’s program. 
The second option would be a conventional military attack, targeting North Korean nuclear and missile capabilities. 
The danger is that such a strike might not achieve all of its objectives and trigger either a conventional military attack on South Korea (where nearly 30,000 US troops are based) or even a nuclear attack from the North. 
Needless to say, Japan and South Korea would have to be prepared to support any US military response before it could be undertaken. 
The third option would be to launch such a conventional military attack only if intelligence showed North Korea was putting its missiles on alert and readying them for imminent use. 
This would be a classic pre-emptive strike. 
The danger here is that the intelligence might not be sufficiently clear – or come early enough. 
All of which brings us back to that possible day in 2020. 
If much is unknown, what seems all but certain is that whoever wins November’s US presidential election will confront a fateful decision regarding North Korea sometime during her or his term. 

A Korean Helsinki Process? 
SEOUL – Last month, North and South Korea narrowly avoided a catastrophic military confrontation. 
After 40 hours of strenuous negotiations, the South agreed to stop loudspeaker broadcasts into the demilitarized zone between the two countries, in exchange for the North expressing “regret” for the South Korean soldiers killed by a landmine blast in the DMZ three weeks earlier. 
While the crisis featured North Korea’s familiar belligerence and aggressive rhetoric, there were also some interesting new twists. 
Understanding these developments could help to generate enough momentum to initiate, after more than seven years of confrontation, genuine inter-Korean cooperation and help guide the peninsula toward a more peaceful and secure future. 
The first new development is the South Korean leadership’s much firmer response to provocations from the North. 
In 2010, the South Korean public was sharply critical of the military’s failure to retaliate immediately following the North’s sinking of the Cheonan, a South Korean warship carrying more than 100 personnel, and its shelling of Yeonpyeong Island later that year. 
After the recent landmine blasts, by contrast, President Park Geun-hye would not back down from her demands that the North, which denied planting the mines, apologize. Her approval ratings soared to 50%, from around 34% the previous month. 
This shift, while popular in South Korea, carries serious risks for the peninsula. 
If an unyielding South becomes engaged in another military game of chicken with the often-audacious and always-erratic North, the results could be catastrophic. 
In this sense, an institutional framework for permanent inter-Korean peace is more urgent than ever. 
The second development relates to China, which remained silent throughout the latest crisis – a significant departure from its stance in 2010, when it actively sided with North Korea on the international diplomatic stage. 
Of course, it is impossible to know whether China’s response this time marks a genuine strategic withdrawal from its role as the North’s only ally and key economic benefactor. 
China’s leaders may simply have decided that a tactical disciplining of the North’s leadership was in order. 
But, at a time when China’s relationship with South Korea is deepening, the silence has been deafening. 
If China really is distancing itself from North Korea, Kim Jong-un’s regime will be almost entirely isolated internationally. 
Will Kim respond to that isolation recklessly, by continuing to antagonize the South, or pragmatically, by becoming more flexible? 
That is not an easy question to answer. 
It should be clear to Kim by now that his parade of provocations is not benefiting his country. 
His bellicose behavior in 2013, for example, worsened his relationships with China, South Korea, and the United States simultaneously; and in the recent crisis, all he earned was a halt to mocking loudspeaker broadcasts. 
But Kim is not exactly known for his pragmatism or diplomacy. 
Kim’s intentions may become clearer next month, when the North is expected to commemorate the 70th anniversary of the founding of the ruling Korean Workers’ Party by conducting a nuclear test and launching a new intercontinental missile. 
But China, South Korea, and the US – whose policies toward North Korea are now more closely aligned than ever – should not simply wait to see what happens. 
They should initiate a dialogue with the North and take steps to dissuade Kim from continuing on his path of antagonism. 
The third new development on the peninsula is a growing awareness among North Koreans of their country’s dire situation. 
At this point, the shift is most apparent among North Korean soldiers in the DMZ, for whom the South’s recent broadcasts were highly demoralizing. 
Today’s young soldiers represent the so-called Jangmadang (“black market”) generation that came of age under the marketization process that followed the massive famine in the mid-1990s. 
Exposed to South Korean movies, music, and other products, they recognize the yawning gap between their government’s propaganda and the country’s grim reality. 
The South’s loudspeaker broadcasts drove the point home. 
As the marketization process continues, soon it won’t be just the soldiers who see through the regime’s propaganda. 
The time for bottom-up change in the North may not be far off. 
This opens up a new policy option for the West: impelling North Korea to dial back its foreign and security policy by deepening its economic and social engagement with the rest of the world. 
The benefits for the North would drastically change the regime’s strategic calculus, particularly concerning nuclear weapons. 
International linkages – or, rather, sanctions that blocked the benefits of such linkages – were vital to Libya’s decision to denuclearize and Iran’s willingness to reach an agreement with world powers regarding its nuclear program. 
Sanctions have been less effective in North Korea, largely because the population did not know what it was missing. 
Similarly, growing connections between groups within the Soviet bloc and the West played a major role in bringing about the 1975 Helsinki Accords. 
The accords represented an effort to improve East-West relations during the Cold War, and included an emphasis on human rights. 
Most important, they achieved the kind of sustained engagement that is badly needed on the Korean Peninsula today. 
The aftermath of the August crisis may be the moment to think seriously about how to balance continued sanctions on North Korea with deeper economic and social ties. 
Without such an approach, North and South Korea could, before long, be locked in another military standoff. 
The next one may not end so well as the last. 

From PyeongChang to Peace? 
SEOUL – After some two years of rising tensions on the Korean Peninsula, the reprieve, however brief, that the upcoming Winter Olympics in the South Korean city of PyeongChang promises to bring is more than welcome. 
But, with some military experts estimating that the probability of war now surpasses 50%, complacency is not an option. 
After years of accelerated missile development, which culminated in successful tests of intercontinental ballistic missiles and, allegedly, a hydrogen bomb last year, North Korea’s nuclear program has become an imminent threat not only to its neighbors, but also to the United States. 
The response of US President Donald Trump’s administration – which has included unprecedented saber-rattling on Twitter – has escalated tensions further. 
Yet, on January 1, North Korean leader Kim Jong-un called for better relations with the South, before agreeing to participate in the Olympics. 
What accounts for Kim’s sudden extension of an olive branch to South Korea? 
Since coming to power in 2011, Kim has been committed to a policy called the “Byungjin line,” which emphasizes parallel goals: economic development and a robust nuclear weapons program. 
With one of those goals now ostensibly achieved, Kim has shifted his focus to securing new economic opportunities for North Korea’s sanction-battered economy. 
For example, the sanctions imposed in September 2017 on textiles, coal, and other exports are said to have reduced North Korean exports by 90%. 
According to South Korea’s central bank, North Korea’s economy grew by 3.9% in 2016, but may have contracted in 2017. 
Kim now seems to have decided that his best hope for boosting North Korea’s economy, without reversing progress on its nuclear program, is to weaken the international coalition enforcing the sanctions. 
His campaign begins with South Korea, where he is attempting to use ethnic nationalism to drive a wedge between that country and its US ally and potentially even to convince it to abandon the alliance altogether. 
In the longer term, Kim appears to hope that he can convince the international community that it can co-exist with a nuclear North Korea, much as Pakistan did. 
But South Korea is unlikely to be fooled so easily. 
Since his inauguration last May, President Moon Jae-in has known that he needed to find a way to mitigate the existential threat of nuclear war. 
So he decided to treat the Winter Olympics as an opportunity not only to defuse tensions on the Korean Peninsula, but also to spur momentum for dialogue on denuclearization. 
While the possibility that South Koreans may be drawn into North Korea’s honey trap cannot be ruled out, most Koreans, including young people, have had their fill of the North’s provocations, and are highly unlikely to be seduced by Kim’s charm offensive. 
Moon himself made it clear last month that no improvement in the South’s relationship with North Korea will be possible without denuclearization. 
Indeed, his efforts to open a dialogue with the North seem to be driven by cool diplomatic realism, not naïve idealism. 
As for the US, its take on the intra-Korea dialogue reflects a mixture of skepticism and expectation. 
Trump has expressed support for the effort, but Americans remain concerned about any potential strain on their country’s alliance with South Korea. 
More dangerous, some US policymakers continue to entertain the possibility of delivering a “bloody nose” strike to the North – a decision that could cost hundreds of thousands of lives. 
After all, there is no guarantee that North Korea would be able to discern whether it really is a one-time strike, or a declaration of war. 
And even if the North could read the Trump administration’s intentions, there is no telling how it would respond. 
To help prevent this outcome, and with Kim refusing to discuss denuclearization with his “brethren” in the South (at whom he claims his missiles are not aimed), Moon now must figure out how to build up the intra-Korea dialogue to enable talks between North Korea and the US. 
To this end, a quiet meeting between the second-highest officials of the two countries – US Vice President Mike Pence and President of the Presidium of the Supreme People’s Assembly of North Korea Kim Yong-nam, both of whom are expected to come to Pyeongchang – might be possible. 
But, ultimately, it is Trump who needs to seize the opportunity to initiate talks. 
The fact is that, despite their importance, sanctions alone cannot bring about the outcome desired by the US or its allies. 
Talks are needed, if only to try to find out the North’s true intentions: is its nuclear program a defensive or offensive project? 
For that, the Trump administration will need to move beyond the “maximum pressure” promised by its stated North Korea policy, and get started on the “engagement” that it also acknowledges will be indispensable to forging a solution. 

Making Economic Sanctions on North Korea Work 
CAMBRIDGE – Last week, in a brazen rebuff to tough new United Nations sanctions, North Korean leader Kim Jong-un’s regime fired a ballistic missile over the northern Japanese island of Hokkaido – its second launch over Japan in less than three weeks. 
But, far from indicating that sanctions don’t work, Kim’s move shows that they still aren’t tough enough. 
The latest sanctions cap oil imports, ban textile exports, and penalize designated North Korean government entities. 
Following Kim’s response, sanctions should be tightened even further, to stop all trade with North Korea, including halting all fuel imports. 
North Korea is one of the most insular countries in the world. 
That insularity is a curse for the long-suffering North Korean people, but an advantage for a sanction-based strategy, because only one country is needed to make it work: China. 
From an economic perspective, China is the only country that really matters to North Korea, as it controls about 90% of the North’s foreign trade and supplies almost all of its fuel. 
Yet China’s economy would barely register the effect of new sanctions: North Korea’s annual GDP, at a meager $28 billion, constitutes little more than a rounding error for its giant neighbor. 
The lack of viable commercial alternatives and the massive asymmetry of power between North Korea and those imposing sanctions mean that a stricter sanctions regime would push the country into a corner. 
The question is whether economic hardship would induce North Korea to change its nuclear policy. 
Though it is impossible to say for sure, a look at the economics of North Korea’s nuclear program suggests that it might. 
Contrary to popular perception, nuclear arms are weapons of the poor – extraordinarily cheap compared with conventional armaments. 
In fact, it was this rationale that drove the Soviet Union’s massive nuclear buildup: Soviet leaders, recognizing that they could not compete with the much wealthier United States’ conventional weapons, focused their country’s limited resources on creating a potentially devastating nuclear arsenal. 
Likewise, North Korea’s focus on nuclear, rather than conventional, weapons may be enabling it to minimize the tradeoff between guns and butter. 
Indeed, there are reports of some vitality in the North Korean economy, with markets full of goods and new buildings under construction. 
Tighter sanctions are therefore needed to increase the economic price that the regime must pay for its nuclear program. 
Even if North Korea does not change its policy, total economic isolation may bring about an end to its nuclear program, by sowing internal discord and, ultimately, triggering the regime’s collapse. 
Yet China hopes to avoid precisely this outcome – which is a key reason why it has so far refused to escalate sanctions further. 
China worries that the collapse of the Kim regime would fuel a major refugee crisis, with millions of Koreans pouring across its border in search of food, shelter, and security – and imposing heavy economic and social costs on China in the process. 
Moreover, Chinese leaders fear the loss of the North Korean buffer separating China from US troops stationed in South Korea. 
Given the widespread belief in Chinese policy circles that the US secretly hopes to re-fight the Korean war and establish a single US-allied Korea on China’s border, the potency of this concern should not be underestimated. 
US President Donald Trump’s administration understands the central importance of China to any strategy to rein in North Korea’s nuclear ambitions. 
But, so far, the US has relied on threats, such as halting $650 billion in bilateral trade, to persuade China to cooperate. 
This is not a stick, but a boomerang – one that will hit China and immediately return to smack the US. 
What is needed instead are carrots. 
Persuading China to isolate the North economically will require the international community to establish some agreement regarding how regime collapse would be handled, with an eye to allaying China’s key concerns. 
For starters, the entire international community, but especially the US, must explicitly pledge not to attempt to change the nature of the North Korean regime. 
That means that if the Kim regime collapses, the US will not pursue reunification. 
Instead, China should exercise primary political custodianship of North Korea in the event that a political vacuum emerges. 
Come what may, US and South Korean troops would not cross the 38th parallel. 
Persuading China to impose potentially regime-destroying sanctions will also require economic pledges, with the entire international community – especially the US, Japan, and South Korea – committing to share the mammoth costs of sheltering refugees and rebuilding North Korea’s economy. 
While China would inevitably cover a substantial share of these costs, owing to its geographic proximity and historic ties to the North, it needs reassurance that it would not be left to shoulder the burden alone. 
Admittedly, this approach is somewhat reminiscent of the one taken at the 1945 Yalta Conference, where leaders of the Soviet Union, the United Kingdom, and the US carved out geopolitical spheres of influence in post-World War II Europe. 
Moral and ideological objections, therefore, are to be expected. 
But it’s time to get real. 
The nuclear threat posed by North Korea is serious, immediate, and requires a bold response. 
This is not the time to be constrained by conventions and ideology; it is the time to do whatever is needed to defuse nuclear tensions and protect the lives of those in the Kim regime’s crosshairs. 
China is the only country with the power to force North Korea to change its nuclear policy. 
Convincing the Chinese to wield that power must be world leaders’ top priority. 


Managing North Korea’s Collapse 
LOS ANGELES – In the last few months, North Korea has again displayed remarkable temerity. 
First, the regime threatened to conduct more nuclear tests if the United Nations does not withdraw its recommendation to prosecute the country’s leaders for crimes against humanity at the International Criminal Court. 
Moreover, US officials claim that the regime mounted a clandestine cyber attack on Sony Pictures, allegedly over objections to “The Interview,” a slapstick movie premised on an assassination attempt against North Korea’s leader, Kim Jong-un. 
Then, in yet another melodramatic twist, Kim offered in his New Year’s address to resume talks with South Korea. 
The Kim regime’s actions obviously merit consideration. 
But they should not divert attention from the real risks on the Korean Peninsula: Kim’s uncertain grip on power and the dangers that could be unleashed should his regime fall apart. 
Indeed, none of the region’s key strategic players – China, the United States, and South Korea – seem to be adequately prepared for such a scenario. 
That needs to change. 
Crucially, the long-standing presumption that the US should take the lead in responding to what happens in North Korea also needs to be reconsidered. 
The North’s behavior almost certainly reflects mounting turmoil among the elite. 
For more than a year, the regime has been carrying out a purge of high-level officials, beginning with the execution of Kim’s uncle, Jang Song Taek, in 2013. 
Subsequent executions of Jang’s entourage and advisers, the recall of Jang’s associates from posts abroad, and the attempted kidnapping in France of the son of one of his assistants attest to the level of alarm in Kim’s inner circle. 
The elevation of Kim’s inexperienced 27-year-old sister, Kim Yo-jong, to a senior post, is another indication of growing anxiety. 
The potential for instability has not gone unnoticed in China. 
An article published late last year in the official media by a prominent retired People’s Liberation Army general describes the North Korean regime as terminal. 
The article’s appearance is a clear sign that China’s leaders are debating how deeply they can afford to be drawn in if the regime collapses. 
A similar discussion needs to take place in the US. 
There is no question about what America’s responsibility would be if the Kim regime’s downfall led to all-out war. 
The security agreement between the US and South Korea mandates a military response. 
What is less clear is the role that the US should play in the event of a peaceful collapse. 
America’s contingency planning is classified. 
But publicly available evidence suggests that US forces and resources are expected to play the primary role. 
In 2013, a former principal deputy director of national intelligence wrote that America’s interests could require major use of US armed forces. 
Last year, the Rand Corporation estimated that as many as 270,000 troops would be needed just to secure the North’s nuclear weapons. 
In light of the costly interventions in Iraq and Afghanistan, the US should give careful thought to its plans – and consider limiting its involvement as much as possible. 
Sixty years after the end of the Korean War, South Korea is well equipped to take the lead in the event of a North Korean collapse. 
With a trillion-dollar economy, world-class technology, a 500,000-strong military, and a vibrant, well-educated society, the country is capable of planning, manning, and paying for the aftermath of a peaceful end to the Kim regime. 
In order to do so, however, South Korea will need to invest in its capabilities to stabilize North Korea and manage its transition. 
Recent plans for major cuts in the South Korean military, along with a lack of public discussion about the country’s role in the wake of Kim’s fall, suggest that much work remains to be done. 
If South Korea takes the lead, the US will be able to concentrate on its top priority: North Korea’s nuclear arsenal. 
Whether the Kim regime collapses with a bang or a whimper, the country’s nuclear weapons will present both an immediate danger and a future proliferation threat. 
Ensuring that these weapons are not used, moved, or exported is a task that will require the capabilities of the US armed forces. 
Communication with China will be essential. 
If North Korea collapses, the Chinese may well send troops. 
As US and South Korean forces would most likely be operating on the same territory, they will need to avoid misperceptions or mistakes that could cause unintended clashes. 
China’s military relations with its North Korean counterparts also could play a stabilizing role, particularly if the Kim dynasty’s demise unleashes internal strife. 
Given the instability in North Korea, each country should define its role now. 
Careful consideration, not events in Pyongyang, should drive their discussions, and the understandings and policies they produce. 

North Korea Makes History 
Historical turning points are normally easier to identify in retrospect. 
But it will not require years to determine whether North Korea’s test of a nuclear explosive device qualifies as one. 
It does. 
The question is whether it proves to be a turn for the better or for the worse. 
Some argue that little has changed as a result of the test. 
The world assumed for years that North Korea possesses enough nuclear material to make a half-dozen or more basic nuclear bombs. 
The test made explicit what was implicit. 
But what was assumed is now known. 
So much has changed. 
North Korea has challenged the world; the question is how the world responds. 
The stakes could hardly be higher. 
North Korea’s leaders have a history of aggressiveness, a demonstrated contempt for their people, and a record of selling just about anything (from drugs and counterfeit dollars to missile parts) to earn hard currency. 
The danger is that they might be tempted to use a nuclear weapon, act irresponsibly in the belief that such weapons shield them, or sell one to terrorists. 
A second danger concerns the regional consequences of North Korea’s test. 
Northeast Asia is a dynamic arena, home to many of the world’s powers, including China, Russia, Japan, the two Koreas, and in many ways the United States. 
This dynamism could lead to instability, owing to multiple sources of mistrust and the lack of strong regional institutions to help manage rivalries. 
Global consequences exist as well. 
North Korea is now the ninth state with nuclear weapons, joining the five permanent members of the UN Security Council, Israel, India, and Pakistan. 
The danger is that we may fast be approaching a tipping point. 
How the world responds to North Korea is likely to affect the calculations of other would-be nuclear powers, including Iran. 
Maintaining peace in a world in which literally dozens of fingers are on nuclear triggers will be far more difficult—and the consequences of failure far more destructive. 
Initial reactions to North Korea’s nuclear test were uniformly critical, culminating (thus far) in UN Security Council Resolution 1718, which condemns the test, demands that North Korea resume full cooperation with the International Atomic Energy Agency, and imposes a range of military, political, and economic sanctions. 
Nevertheless, North Korea’s leaders are clearly betting that they can get away with what they have done, and that the world will get used to their nuclear weapons program, much as it did with Israel, India, and Pakistan. 
They may be right. 
Both South Korea and China are reluctant to support robust sanctions. 
South Korea’s “Sunshine Policy” is best understood as “unconditional engagement.” 
Not surprisingly, this “all carrot, no stick” approach has failed to affect North Korean behavior. 
China, for its part, has made clear that it does not intend to inspect cargo moving in and out of North Korea across their long common border to ensure it does not contain items prohibited by Resolution 1718. 
While China opposes North Korea’s pursuit of nuclear weapons, it is even more opposed to policies that could threaten the North’s stability and lead to massive refugee crossings into China or to a unified Korea with its capital in Seoul. 
So the challenge remains to devise a response that will gain widespread international backing and influence North Korean behavior and capabilities. 
One option is a “preventive” military strike. 
The problem is that it would almost surely trigger a massive, costly war, and it would not necessarily succeed in destroying all of North Korea’s hidden capabilities. 
Moreover, both China and South Korea strongly oppose such a scenario, while the United States is poorly positioned to implement it, given its involvement in Iraq. 
A second option is living with a nuclear North Korea. 
The danger is less that North Korea might use nuclear weapons (although it might) than that it might sell them. 
President Bush’s warning that “the transfer of nuclear weapons or material by North Korea to states or non-state entities would be considered a grave threat to the United States, and we would hold North Korea fully accountable of the consequences of such action,” is meant to deter this outcome. 
The problem, of course, is that deterrence sometimes fails. 
The third option is diplomacy. 
North Korea would be expected to give up its nuclear weapons and place its nuclear material under international safeguards in exchange for formal security assurances, energy resources, and a range of political and economic benefits. 
Such efforts should be renewed as soon as possible; the US should agree to bilateral as well as six-party talks with the North, possibly in exchange for a moratorium on nuclear tests. 
It will take a blend of the three options – the threat of military force, the reality of economic sanctions, and the resumption of diplomacy —to deal with North Korea’s challenge. 
This will not be easy, but it is worth pursuing, because the alternative—a desperate, hostile, nuclear-armed, and isolated North Korea—should alarm everyone. 

China’s Road to Peace on the Korean Peninsula 
BEIJING – A new crisis is brewing on the Korean Peninsula. 
In mid-February, North Korea conducted an intermediate-range ballistic missile test. 
On March 1, the United States and South Korea began a joint military exercise that is unprecedented in scale and intensity. 
These military drills will run until the end of April, and will include a significant number of ground, air, and naval forces from both countries, including strategic assets such as B-52 bombers and the aircraft carrier USS Carl Vinson. 
And, despite objections from Russia and China, the US is accelerating its deployment of a Terminal High Altitude Area Defense (THAAD) anti-missile system in South Korea. 
On the same day that the US and South Korea began their military drills, North Korean leader Kim Jong-un inspected the headquarters of Large Combined Unit 966 of the Korean People’s Army. 
Five days later, the North launched four ballistic missiles, one of which reportedly landed within 200 miles of Japan’s coastline. 
The tests have led most experts to believe that North Korea has significantly expanded its nuclear and ballistic-missile capabilities, and that by 2020 it may be able to affix miniaturized nuclear warheads onto long-range missiles capable of reaching the continental US. 
Talks in New York between a North Korean delegation and former senior US officials had originally been planned for early March. 
But the meeting was canceled in late February, when the US State Department refused to issue visas for North Korean diplomats, perpetuating a lack of communication that has only compounded the risks of the current standoff. 
US President Donald Trump has apparently decided to increase the pressure on North Korea, rather than make good on his campaign rhetoric and speak directly with Kim. 
Trump’s National Security Council is reportedly conducting an in-depth review of US policy toward North Korea, and considering a number of policy options, ranging from preemptive strikes on North Korean nuclear facilities to “soft” regime change through the imposition of harsher sanctions. 
Even if Trump were willing to hold one-on-one talks with North Korea, his administration clearly is not ready to do so, because it lacks both a coherent policy and a credible policymaking operation. 
The Trump White House remains mired in dysfunction, as evidenced not only by Michael Flynn’s sudden ouster as national security adviser, but also by the scarcity of senior appointments to oversee Asia-Pacific affairs at the Departments of State and Defense. 
Despite this executive-branch policy vacuum, the US government views North Korea’s recent missile tests as a major threat. 
Many congressmen and senior military officials are now calling for a tougher response, which could include restoring the Kim regime to a list of state sponsors of terrorism, and using US Special Forces to launch surgical strikes. 
But such actions would only exacerbate the regime’s sense of insecurity. 
The US and South Korean intelligence communities believe that North Korea has 10-16 nuclear weapons and more than 1,000 ballistic missiles, making it practically impossible to disable the North Korean threat militarily without inflicting serious damage on the US and its allies. 
And now that South Korean President Park Geun-hye has been impeached and formally removed from office, South Korea’s government, with a campaign for a new president in the offing, will be in no position to pursue new policy options – hardline or otherwise – for a number of months. 
Meanwhile, China’s role on the Korean Peninsula is becoming more complicated. 
On the one hand, China has voiced opposition to North Korea’s missile tests, and suspended coal imports from the North under a United Nations Security Council resolution. 
In response, North Korean state media went so far as to criticize China implicitly for “dancing to the tune of the US.” 
But China also regards the new THAAD system in South Korea as a serious strategic threat. 
Chinese leaders worry that THAAD’s X-band radar will negate China’s second-strike nuclear capacity, and that the system could be integrated with US and Japanese facilities to create a web covering all of Northeast Asia. 
Indeed, Japanese Prime Minister Shinzo Abe is already pushing ahead with THAAD deployment in Japan. 
In November 2016, South Korea and Japan signed a pact to share military intelligence. 
But as the two US allies, who were once bitter enemies, improve their bilateral security relationship, China and Russia both fear that a close US-Japan-South Korea alliance could emerge as the equivalent of a mini-NATO to their east. 
The reemergence of Cold War-like security blocs in Northeast Asia would only exacerbate regional hostilities. 
To avoid that outcome, China is calling on all parties to stop and think. 
As Chinese Foreign Minister Wang Yi recently put it, the US and North Korea are like “two accelerating trains coming toward each other, with neither side willing to give way.” 
Wang has met with North Korean Vice Foreign Minister Ri Kil-song in Beijing, and he will meet with US Secretary of State Rex Tillerson on March 18, in an effort to coordinate a first meeting between Chinese President Xi Jinping and Trump. 
Needless to say, resolving the North Korean nuclear issue will be a priority at that summit. 
China, for its part, has proposed a two-prong approach. 
First, North Korea stops its nuclear and missile tests, while the US and South Korea halt their joint large-scale military exercises. 
Second, all parties involved return to the negotiating table, with the parallel goals of denuclearizing the Korean Peninsula and concluding a peace accord to replace the 60-year-old Korean War Armistice Agreement. 
Parties should, in the meantime, take note of former South Korean Foreign Minister Yoon Young-kwan’s proposal that the THAAD system be removed after North Korea abandons its nuclear program. 
Strategic mistrust across Northeast Asia will only worsen the US and China’s already testy relationship. 
The nightmare scenario of a violent conflict on the Korean Peninsula demands that cooler heads prevail. 

Defining Diplomacy Down 
NEW YORK – Some 25 years ago, Daniel Patrick Moynihan, a Harvard professor who in the course of his career served as United States ambassador to the United Nations and a US senator from New York, coined the phrase “Defining Deviancy Down.” 
The phrase was meant to describe a social trend in which behavioral standards declined over time to the point that what was once intolerable became broadly acceptable. 
I am reminded of Moynihan’s phrase when I consider the state of diplomacy aimed at bringing about North Korea’s denuclearization. 
Increasingly, the parties involved, including the United States and South Korea, appear to be relaxing their requirements for what is expected of North Korea. 
Call it “Defining Diplomacy Down.” 
All this has taken on more than a little urgency, because it is now more than four months since the Singapore summit and there is talk that President Donald Trump and North Korea’s Kim Jong-un will meet again soon. 
As is always the case with diplomacy, the question arises as to how to define success. 
Peace is one possible answer. 
And to be sure, peace is well worth preserving on the Korean Peninsula, given the enormous human and economic costs that any war would entail. 
But if avoiding war takes precedence over all else, there is the danger that other important interests could well be compromised. 
There is the danger, too, of arrangements that would lessen tensions over the short-term but threaten peace over the long-term by requiring real compromises and constraints in exchange for promises and possibilities. 
Already there is evidence that neither South Korea nor the US is anxious to demand from North Korea a full accounting of all its nuclear materials and weapons, without which real denuclearization cannot be carried out and verified. 
The concern appears to be that North Korea would balk at such a request, causing a crisis. 
Instead, South Korea has suggested that it ought to be enough for the time being if North Korea simply destroys one or another nuclear facility. 
The US, for its part, is counseling patience and advising skeptics not to demand too much of North Korea too soon. 
In both cases, what we are seeing is a reluctance to give North Korea a test that it might fail. 
At the same time, the “maximum pressure” campaign has effectively ended, with calls to relax sanctions and a reluctance to enforce fully those on the books. 
The US and South Korea have also canceled military exercises and relaxed their force posture, respectively, easing the pressure on the Kim regime. 
This is what defining diplomacy down is all about. 
This reluctance to press North Korea, however, points to the danger that Kim’s regime will be allowed not just to keep but to increase its nuclear arsenal. 
Indeed, North Korea could close or destroy facilities yet never denuclearize if it continues to build capacity at the same time. 
North Korea will perhaps understandably resist a negotiation in which it is asked to do everything before it receives anything. 
It will demand compensation, most likely in the form of relaxing economic sanctions, if it were to eliminate any nuclear capacity. 
China and Russia would surely support such a request. 
But rewarding North Korea generously for partial measures reduces its incentive to take additional steps, much less complete the process of denuclearization. 
The Kim regime is also certain to want to avoid being forced to choose between giving up its nuclear and missile programs, which it sees as essential for its security, and improving its economy, which is essential for social and political stability. 
It wants to have its cake and eat it: both continued security and greater prosperity. 
North Korea has been pressing for a declaration of the end of war, an aspirational statement that would signal a common desire to replace the armistice that has existed since the Korean War ended 65 years ago with a formal peace treaty. 
Again, the question arises as to what North Korea would require in return. 
Already, its suspension of nuclear and missile testing has brought about an end to large US-South Korea military exercises. 
At some point, North Korea is likely to ask for a reduction in US troop levels in South Korea. 
This risk is related to the focus on denuclearization. 
Achieving it is an understandable priority for the US, but South Korea must worry as much, if not more, about North Korea’s non-nuclear or conventional military forces that threaten Seoul, home to roughly 20% of South Koreans. 
The danger is that differing priorities drive a wedge between the two allies, benefiting North Korea. 
Despite Trump’s tweets and statements, denuclearization is neither a fact nor a certainty. 
On the contrary, it remains a distant and unlikely goal. 
The challenge for the US and South Korea is to bring the goal closer without growing apart. 
The best way to achieve this is through close consultation, a commitment to avoid surprising each another or entering into separate deals, and the forging of a comprehensive agreement on what diplomacy must achieve and what it would require in return. 
Existing military exercises and economic sanctions should be sustained, until there are significant changes that reduce the North Korean threat. 
Think of it as defining diplomacy up. 

No Appeasement for North Korea 
WASHINGTON, DC – Earlier this month, North Korea carried out its fifth nuclear test – its second this year. 
Judging by the tremor detected, it was the North’s most powerful nuclear device ever. 
The question now is how the international community should respond. 
That question has become all the more acute because, though North Korean reports are not exactly reliable, the propaganda that accompanied the latest test hinted that the North was testing a weapon design, not just an explosive device. 
And, as South Korean officials have suggested, it may not be the last test of this year. 
In other words, North Korea may begin to stockpile weapons of mass destruction. 
Not only have the North’s recent nuclear tests been more powerful than those of previous years; they have also been conducted alongside an equally robust series of tests of ballistic missiles, including submarine launches and multi-stage rocket launches, with much more powerful engines. 
This means that North Korea may be close to perfecting a delivery system for whatever weapons it is developing. 
No one can say for sure whether a deliverable weapon will come from North Korea in the next two years, four years, or later. 
But there is little doubt that the North Koreans are not just seeking attention; they are seeking a powerful bomb and the means to use it. 
As expected, the international community has unvaryingly condemned the tests. 
But not everyone agrees on what else to do. 
Some observers, including New York Times contributor Joel S. Wit and former intelligence officer Scott Ritter, declare that now would be an appropriate time to initiate talks with the North Koreans. 
The logic behind such suggestions seems to come down to, “What have we got to lose?” 
The answer is simple: plenty. 
Such talks – “dialogue” as the Chinese often call it – would most likely bring with it a general acceptance of North Korea as a nuclear-weapons state. 
Moreover, the North would be unlikely to engage in any such talks, much less impose a moratorium on weapons tests, unless some of their longstanding demands – such as the suspension of joint military exercises by the United States and South Korea – were met. 
This Realpolitik approach, some seem to believe, will somehow diminish whatever power the North Koreans wield, essentially disarming them. 
But the truth is that the North has done nothing to earn such appeasement. 
And, in fact, if the international community were to make any such conciliatory gestures, the result would be a bolder North Korea. 
But there is a good reason why the international community – and the United States, in particular – has refused to agree to North Korea’s terms, particularly the suspension of US-South Korea military exercises. 
Joint military exercises are an essential part of any alliance. 
If two countries agree to mutual defense, they need to ensure that their cooperation is practiced and perfected. 
That is precisely why North Korea, which knows a thing or two about the need for tests and exercises, has made the issue a top propaganda priority. 
Instead of giving into such demands, the US has long held that it will engage in talks with North Korea only if they are based on previous agreements, including the September 2005 joint statement, which obliged the North to abandon all nuclear programs. 
This is a sensible position. 
After all, launching new talks that ignored past obligations would cast doubt on the viability of any new accord. 
To be sure, pursuant to a February 2007 agreement, North Korea did take concrete steps to disable its nuclear facilities, including demolition of the cooling tower at its main atomic reactor in the Yongbyon Nuclear Scientific Research Center in June 2008. 
Such measures were supposed to brake the country’s nuclear momentum, by ensuring that restarting the program would be costly – perhaps even prohibitively so. 
But, by restarting its nuclear program without rebuilding the cooling tower, North Korea has avoided many of those costs. 
Kim Jong-un’s regime – which has as little regard for the environment as it does for international rules and norms – simply called for the steaming water used to cool the reactor to be dumped into a nearby river. 
Against this background, the argument for talks is weak. 
After all, negotiations are simply a means to an end, and if that end is unclear or unlikely, it makes little sense to engage in them. 
Instead, the international community should reject North Korea’s demands outright, ending the regime’s fantasy that the world will simply accept it as a nuclear-weapons state. 
Fortunately, the international community’s response to North Korea’s nuclear ambitions generally aligns with this imperative. 
What is needed is more cooperation with China on sanctions enforcement, as well as deep and quiet talks with the Chinese that aim to address any strategic mistrust over the eventual political arrangements on the Korean Peninsula. 
The US should also continue to strengthen its security relations with Japan and South Korea, including by developing and deploying antiballistic missile systems. 
Direct measures like those that were allegedly used to hamper Iran’s nuclear program should be explored and accelerated. 
None of this is to say that engaging North Korea is not an option. 
On the contrary, previous agreements should remain on the table. 
The September 2005 deal addressed North Korea’s key national interests: it gained assurances of peace and diplomatic recognition, in exchange for the dismantling of its nuclear program. 
If the Kim regime really wants an opportunity to join the international community, it has everything it needs, written, agreed, and ready to be implemented. 
If, however, it wants to continue its march toward nuclearization, it should know, beyond a shadow of a doubt, that it will remain a pariah. 
Its status as a nuclear-weapons state will never be accepted. 

China’s “Double-Freeze” Con 
CLAREMONT, CALIFORNIA – North Korean dictator Kim Jong-un says the United States will pay a “thousand-fold for all the heinous crimes” it has committed against his country. 
US President Donald Trump warns that North Korea will experience “fire and fury like the world has never seen.” 
Kim threatens to fire four missiles at the US territory of Guam. 
Trump promises that Kim “will truly regret it” and “regret it fast” if he follows through on that threat, or issues another. 
As the unprecedented exchange of white-hot rhetoric and overt military threats between the leaders of two nuclear-armed countries continues to escalate, reasonable people around the world are asking whether there is a peaceful way out of this unfolding crisis. 
The answer, according to some, is to pursue a “double freeze,” in which North Korea freezes its nuclear and missile activities in exchange for the US and South Korea freezing their joint military exercises. 
At first glance, this option – which was originally proposed by China, and has since been endorsed by Russia – appears to be a sensible compromise. 
Without the ability to test nuclear and missile technologies, North Korea would be stuck with what it already has. 
Rather than a potent arsenal with credible long-range capabilities, it would have an unreliable arsenal with potentially no miniaturized nuclear warheads. 
For the US, suspending joint military exercises with South Korea seems like a small price to pay for such an outcome, as it would do little to undercut America’s overwhelming military superiority. 
But the US has flatly rejected China’s proposal, ostensibly because it seems to morally conflate North Korea’s quest for weapons of mass destruction (which it appears fully prepared to use) with America’s right to defend itself and its allies. 
In accepting a double freeze, the US would essentially be rewarding North Korea for ceasing activities that are already in violation of United Nations Security Council resolutions. 
In addition to the dangerous precedent that it would set, the double-freeze solution has two fundamental weaknesses. 
First, the costs of non-compliance for such a deal would not be symmetrical. 
The Kim regime would incur only modest costs by restarting its nuclear program, but it may be able to impose severe and irreversible costs on the US and South Korea, should that decision lead to a full-fledged nuclear arsenal. 
This is partly because of a second key weakness: the difficulties of verification. 
It is easy to tell whether the US is conducting military exercises with South Korea; it is much harder to ensure that North Korea is not engaging in underground research and development activities. 
Indeed, most of North Korea’s R&D, not least its enrichment of fissile materials, occurs in secret facilities inaccessible to outside inspectors. 
Under a double-freeze arrangement, North Korea might halt only its observable activities, such as its missile and nuclear tests. 
Worse still, this could even work in Kim’s favor, by buying time for his scientists to master technologies – particularly nuclear-warhead miniaturization – that could then be quickly deployed once the deal is publicly broken. 
Such an approach would be nothing new from North Korea. 
In 1994, when the US and North Korea last agreed to a freeze on North Korea’s plutonium production, Kim’s father, Kim Jong-il, quickly broke the deal, embarking on a secret uranium program. 
The Americans have no reason to buy the same horse twice. 
Of course, the weaknesses of the double-freeze approach are probably not lost on China, either. 
Indeed, offering this solution was, in all likelihood, largely a tactical decision. 
As the Kim regime’s principal patron, China is viewed as the key to containing Kim’s nuclear ambitions. 
But China is reluctant to squeeze North Korea, because it fears that doing so could lead to the collapse of the Kim regime, and the loss of its strategic buffer against the US. 
Against this backdrop, the double-freeze proposal was not intended to actually resolve the crisis; after all, China probably expected the US to reject it. 
Rather, China wanted to shift the international community’s attention away from its own potential leverage over the Kim regime, and toward the Trump administration’s erratic and worrying policy approach. 
By raising the double-freeze solution, China put the ball in America’s court, and placed the onus for resolving the crisis squarely on Trump’s shoulders. 
If China truly does want a peaceful resolution to the escalating nuclear crisis, it should address the two key weaknesses of the double-freeze solution, proposing a detailed, intrusive, and stringent verification regime and committing itself to serve as the principal enforcer of the agreement. 
China should make it clear that, were North Korea to violate the deal, it would immediately lose all of the protection and support it receives. 
Now that would be a deterrent. 

Will Nuclear History Repeat Itself in Korea? 
WASHINGTON, DC – As Chinese President Xi Jinping’s first summit with US President Donald Trump takes place at Trump’s luxurious Florida estate Mar-a-Lago, at least part of the discussion will invariably focus on one of the world’s most impoverished places: North Korea. 
Despite more than two decades of on-again, off-again negotiations, North Korea’s nuclear weapons program is pushing the world toward a strategic watershed much like the one that the West faced 60 years ago, when the United States and the Soviet Union faced off against each other in Europe. 
The US and its allies successfully navigated the challenge of Europe in the twentieth century without war. 
But to achieve comparable success in East Asia today, Trump must persuade Xi to adopt a different policy toward North Korea. 
When the US and the Soviet Union became rivals after World War II, each had a way of deterring the other from attacking. 
The Soviet Union had – or was widely believed to have – a large advantage in non-nuclear forces, which the Kremlin could use to conquer Western Europe. 
The US, with its monopoly on nuclear weapons, could launch a nuclear strike from Europe on the Soviet homeland. 
Then, in 1957, the launch of Sputnik made it clear that the Soviet Union would soon be able to deliver a nuclear strike on the US mainland, calling into question the effectiveness of American deterrence. 
Was it credible that, in response to an attack on Western Europe, the US would make war on the Soviet Union, thus inviting a nuclear attack on its own territory? 
America and its allies had four possible solutions to this novel and dangerous problem: preemption, defense, proliferation, and deterrence. 
Preemption – an attack on the Soviet Union’s nuclear weapons – would have started WWIII, a distinctly unappealing prospect. 
And, as the Soviet nuclear arsenal grew, the US government ruled out defense against a missile attack: because it could not deflect every incoming nuclear explosive, it would be safer if neither side tried to build ballistic missile defenses. 
President Richard Nixon’s administration therefore negotiated and signed the 1972 Soviet-American Anti-Ballistic Missile (ABM) Treaty, effectively banning such systems. 
The third option, acquisition of nuclear armaments by potentially threatened countries, was based on the assumption that a government would be willing to use such weapons to defend its own country, if not another one. 
French President Charles de Gaulle invoked this logic to justify his country’s nuclear weapons program, although he also had other reasons for wanting France to join the nuclear “club.” 
By this logic, however, West Germany, too, needed a nuclear arsenal; and, given Germany’s twentieth-century history, no one, least of all the Germans, desired such an outcome. 
So the West opted to reinforce the status quo, with the US seeking to enhance the credibility of its policy of deterrence in Europe by stating, publicly and frequently, that it would indeed defend its allies, despite the risk that this would lead to an attack on its own territory. 
The US backed up its stance by deploying nuclear weapons on the European continent, and by stationing troops on the front lines in Germany as a “trip-wire”: an attack there would trigger US participation in any war the communist side might begin. 
This strategy worked: for whatever combination of reasons, the Soviet Union never launched a westward attack of any kind. 
Six decades later, a similar challenge looms on the Korean Peninsula. 
Since the end of the Korean War in 1953, a US military presence has helped deter a North Korean attack on the South, while the communist North has deterred the US as well: its massive artillery deployments along the demilitarized zone dividing the peninsula could devastate South Korea’s capital, Seoul, with its ten million people, in retaliation for any US attack. 
North Korea’s nuclear weapons program threatens to upset that balance, by giving its regime the capacity, through the long-range ballistic missiles it is testing, to strike the West Coast of the US, thereby raising a new version of an old question: would the US risk Los Angeles to protect Seoul? 
The US and its Asian allies have the same four options as the Atlantic Alliance had 60 years ago. 
They can attempt to live with North Korean long-range nuclear missiles, relying on deterrence. 
Peace, and the safety of millions of Americans, would then depend on the prudence and rationality of North Korea’s 33-year-old dictator, Kim Jong-un, a young man with a taste for grotesque executions of family members and close associates. 
In the past, such an outcome has seemed unacceptable to US national security experts. 
In June 2006, William Perry, a former defense secretary, and Ashton Carter, a future one, argued in The Washington Post that if North Korea deployed on its territory a nuclear-armed missile capable of hitting the US, the US should attack and destroy it. 
But, like the status quo, attacking the North’s nuclear arsenal would carry enormous risks. 
Such an attack would likely trigger a second Korean War. 
The North would surely lose, and the regime would collapse, but probably not until it inflicted terrible damage on South Korea, and perhaps also on Japan. 
Having withdrawn from the ABM Treaty, the US has already begun to deploy missile-defense systems, with the hope of defeating a small-scale nuclear assault (though not a massive attack of the kind Russia could launch). 
This option, too, carries grave risks. 
As the North Korean nuclear arsenal grows, the effectiveness of missile defense will diminish. 
Even one nuclear explosion in the US, South Korea, or Japan would be a catastrophe. 
If East Asian countries come to doubt the credibility of the US commitment to their defense – and Trump has made clear his reservations about US alliances – they can build their own nuclear weapons, as France did. 
Japan, South Korea, and Taiwan are certainly capable of doing so rapidly. 
But an East Asia in which several countries possessed nuclear weapons would not necessarily be stable. 
Unlike Europe during the Cold War, it would have several nuclear powers, not just two; and some of them would lack the capacity for “assured destruction” – that is, the ability to absorb a nuclear strike and still inflict devastating damage on the attacker. 
Without such a capacity, a nuclear-armed country has a much greater incentive than the US and the Soviet Union did to launch a first strike if it suspects that it will be attacked. 
Deterrence, preemption, defense, and proliferation: none of the four possible responses to the progress of the North Korean nuclear program inspires confidence. 
But an important difference between twenty-first-century East Asia and twentieth-century Europe creates a chance to avoid all four: China is in a position to exert powerful pressure on the source of the nuclear threat. 
Almost all of North Korea’s food and fuel comes from neighboring China. 
But, despite its opposition to North Korea’s nuclear weapons program and its lack of enthusiasm for the Kim dynasty, the Chinese government has thus far refrained from applying pressure by threatening to sever the North’s lifeline. 
China’s bigger fear is the collapse of the Kim regime, which would send a wave of unwanted refugees across its border and could create a new and unwanted neighbor: a reunified Korean state allied with the US. 
While the Chinese may have good reasons to prefer the status quo on the Korean Peninsula, continuing to indulge the North Korean leadership’s nuclear ambitions is a risky option. 
China could find itself surrounded by unfriendly nuclear-armed states, or with a nasty war on its border, or perhaps both. 
Trump should emphasize that point to Xi. 
At the very least, North Korea’s nuclear progress, unless China acts to stop it, will make East Asia a far more dangerous place for everyone, including the Chinese themselves. 
Mark Twain observed that everybody talks about the weather, but nobody does anything about it. 
That has been true of North Korea’s nuclear weapons program for almost a quarter-century. 
It may not be true for much longer. 

A Winter Thaw on the Korean Peninsula 
MADRID – Pierre de Coubertin, the founder of the modern Olympic Games, famously said, “The most important thing is not to win, but to take part.” 
Now that North Korea has agreed to participate in the upcoming Winter Olympics in the South Korean city of Pyeongchang, that phrase has taken on new meaning. 
Throughout the history of the modern Olympic Games, separating politics from sports has been impossible. 
Perhaps it is not even desirable. 
After all, one of the Games’ primary objectives is to put sports at the service of peace and human dignity. 
More broadly, sports have long played a politically constructive role on the world stage. 
At the 1971 World Table Tennis Championships in Japan, an American player hitched a ride on the Chinese team’s bus, inaugurating what became known as “ping-pong diplomacy.” 
Soon after, at the height of the Cultural Revolution no less, Mao Zedong invited the US table tennis team to China, paving the way for US President Richard Nixon’s historic visit there in 1972. 
At the 1991 World Table Tennis Championships, again hosted by Japan, North and South Korea formed a joint team, and beat the odds to win a gold medal in the women’s competition. 
The camaraderie developed by the players helped them defeat the Chinese team in the final. 
For a brief moment, jubilant Koreans forgot their divisions. 
In fact, South Korea may even owe its modern democracy, at least in part, to the Olympic Games. 
In 1987, with the 1988 Seoul Summer Olympics quickly approaching, South Koreans succeeded in pushing then-President Chun Doo-hwan’s military regime to hold a democratic election. 
This was a striking turn of events, given that Chun had conceived the Olympic bid as an opportunity to improve his dictatorship’s domestic and foreign image. 
Without the approaching Games, and the international pressure that they brought, South Korea’s democratic transition might not have taken place, at least not as peacefully or rapidly as it did. 
But the 1988 Seoul Games also had a dark side. 
North Korea, unable to reach an agreement with the South about how to share the event, ended up boycotting it altogether. 
And in 1987, the same year the Chun dictatorship collapsed, a Korean Air flight was downed, most likely by the North Korean regime, in an effort to disrupt the approaching election and discourage other countries from participating in the Games. 
In the end, the 1988 Games deepened the divide between the two Koreas, and the brief moment of shared triumph in 1991 would not be enough to reverse the trend. 
The South went on to open itself to the world, and the North hardened its isolationism – a process that intensified after the dissolution of the Soviet Union – and pursued the path of nuclear proliferation. 
Of course, North Korea’s decision to stage a boycott in 1988 was hardly unprecedented. 
Historically, many countries have boycotted the Games, or even used them as a platform to promote values contrary to the Olympic spirit. 
That was certainly the case when Adolf Hitler’s regime hosted the 1936 Summer Olympics in Berlin. 
In 1945, George Orwell looked back at the 1936 Games and observed that, “serious sport … is war minus the shooting.” 
The Games, he noted, are “bound up with the rise of nationalism – that is, with the lunatic modern habit of identifying oneself with large power units and seeing everything in terms of competitive prestige.” 
Orwell wasn’t far off. 
At the 2008 Summer Olympics in Beijing, for example, the connection between sports and nationalism was on display. 
The Games were an organizational success, complete with brilliant new architecture. 
The fact that China ended up winning more gold medals than any other country undoubtedly heightened national pride. 
And the protests against China’s treatment of Tibet during Olympic torch relays around the world fueled Chinese nationalism. 
Today, national pride is still a key focus for the political leader who supervised the Beijing Games: then-vice president and now-president of China, Xi Jinping. 
Similarly, the 2014 Winter Olympics in Sochi helped to breathe life into Russian President Vladimir Putin’s then-ailing regime. 
Three days before the closing ceremony, Putin launched his military intervention into Crimea. 
Now the Games are returning to the turbulent Korean Peninsula, where the two Koreas remain formally at war 65 years after agreeing to an armistice. 
Before the North’s recent decision to participate in the PyeongChang Games, many were understandably worried about a repeat of 1988, or that North Korean leader Kim Jong-un would use the occasion to put on one of his military shows of force. 
That is, after all, what happened at the 2002 World Cup, co-hosted by South Korea and Japan. 
Toward the end of the tournament, which was marked by an extraordinary performance by the South Korean national team, North Korea started a naval battle with the South. 
Fortunately, South Korean President Moon Jae-in’s thoughtful, conciliatory attitude, which Kim seemed to reciprocate in his New Year’s address, has created a slight thaw. 
The South’s efforts to ease tensions by postponing joint military exercises with the United States, like the North’s decision to participate in the Games, should be welcomed. 
And, indeed, since then, there has been a steady stream of good news: the two countries will march together at the opening ceremony, and will even form a combined women’s hockey team. 
To be sure, one must always question the Kim regime’s motives. 
In the past, the North’s friendly gestures have not led to meaningful concessions or progress toward peace. 
Given that the two Koreas marched together in three Olympic Games since 2000, prudence is advisable. 
But we should resist the urge to succumb to fatalism, and instead remain supportive of North Korea’s overtures. 
The North Korean nuclear threat cannot be managed without negotiations. 
To that end, the PyeongChang Games, coming just 30 years after the Seoul Games, may represent the best chance in years to get the process started. 
Let us hope that the North Korean athletes’ journey from Pyongyang to PyeongChang bears diplomatic fruit, and that “the Peace Games,” as Moon calls them, will be remembered more for the North’s presence than for the final medal count. 

North Korea’s Choice 
NEW YORK – When the Republic of Korea was established in 1948, Korea was one of the poorest countries in the world. 
GDP per capita was US$67 in 1953, immediately following the Korean War, and rose to only US$79 in 1960. 
At that time, North Korea’s economy was much stronger than that of the South. 
Natural resources were abundant in the North, and even electricity was supplied from North to South. 
Most industry was located in the North, whereas the South was mainly agricultural. 
Today, the South’s GDP is 40 times larger than that of the North. 
Comparing the two Korean economies is virtually meaningless. 
Such disparities do not arise from different historical experiences, because Koreans have shared a history for thousands of years as one nation. 
The gap, instead, reflects recent historical choices. 
By persistently adhering to a planned economy and obsolete ideology, North Korea is trapped in a vicious cycle, suffering from unstable food supplies and low, or sometimes negative, economic growth. 
Nonetheless, North Korea has shown little interest in reform. Instead, it has developed a nuclear weapons program that threatens stability in the region and places a heavy burden on its economy. 
South Korea, which is enjoying unprecedented prosperity, is becoming increasingly uncomfortable with North Koreans’ economic despair. 
Probably no two neighboring countries have such a huge economic gap, let alone countries that share the same ethnic and historical background. 
The danger is that such a discrepancy can become a source of instability and conflict. 
To overcome its economic deficiencies and attain social stability, the North has no choice but to abandon its nuclear weapons program and move toward reform and greater openness. 
South Korea is trying to persuade the North to make this strategic decision. 
We are more than willing to help the North achieve economic growth, which is almost always the source of peace and security. 
As such, North Korea’s economic recovery is vital for an enduring peace on the Korean Peninsula. 
So, in accordance with the Six-Party Talks (North and South Korea, the United States, Russia, China, and Japan) my government wants to create a Korean Economic Community in collaboration with the North. 
In cooperation with the international community, we will help North Korea raise its annual per capita income to US$3,000. 
To this end, we will carry out joint projects in five key areas: education, finance, industrial infrastructure, quality of life, and economic development. 
But an institutional mechanism is needed to implement this initiative, such as an inter-Korean consultative body. 
Of course, mere economic assistance or investment is not sufficient for a country to bail itself out of the vicious circle of underdevelopment and poverty. 
A national economy can take off only when the necessary infrastructure, an adequate level of competition, and reasonable government policies are in place. 
We know how difficult it is to achieve such conditions, because we had to do it ourselves. 
Our vision for an inter-Korean economic community is based on sharing our experiences with the North. 
True, inter-Korean relations have already expanded. But this expansion has not brought fundamental change to the two Koreas’ relationship. 
An incident at Mt. Geumgang last July demonstrated the relationship’s vulnerable nature. 
A middle-aged South Korean female tourist was shot to death while walking on the beach, having inadvertently crossed over the boundary of the tourist zone. 
No North-South dialogue has emerged to investigate the incident, or to prevent a recurrence. 
Under these circumstances, there are greater calls in South Korea for a new approach towards the North. 
We now believe that inter-Korean relations should conform to principles and standards that any member of the international community should respect. 
Another key consideration is to consolidate a sustainable peace structure on the Korean Peninsula. This cannot merely be a state of affairs like the current one, in which hostilities are absent. 
It refers to an enduring peace, which is not easily affected by incidents or accidents and is able to prevent politico-military crises such as that caused by the North’s nuclear program. 
The only way to realize such a peace is by completing North Korea’s denuclearization and establishing a peace regime on the Korean Peninsula. 
As of today, the Six-Party Talks is the principal framework to open up the future of the North. 
If the North abandons its nuclear weapons program, many benefits can be gained. Relations between the North and its neighbors can improve, along with a greater probability of forming a Northeast Asia peace and security mechanism. 
Fortunately, America’s removal of North Korea from its list of state sponsors of terrorism has re-started the denuclearization process. 
But the North’s prior threat to resume work at the facilities suggests that this process may be fitful. 
Moreover, since South Korea’s new government took office earlier this year little progress has been made in relations between the two Koreas. 
But our vision will eventually open up ways to solve North Korea’s problems, not only bringing a better future for the North, but also making the Korean Peninsula a gateway for peace and prosperity in Northeast Asia. 
Leaders in the North may mistakenly believe that they can circumvent or outmaneuver the South – the so-called strategy of driving a wedge between the Republic of Korea and the US. 
But in the end, South Korea is the neighbor whom the North can truly trust and rely on the most. 
The North should realize this and make a wise choice. 

North Korea’s Powerful Weakness 
CAMBRIDGE – When US President Barack Obama and Chinese President Xi Jinping met for their “shirt-sleeves summit” in California last month, North Korea was a major topic of conversation. 
The subject was not new, but the tone was. 
More than two decades ago, the International Atomic Energy Agency caught North Korea violating its safeguards agreement and reprocessing plutonium. 
After the North renounced the subsequent Agreed Framework, negotiated by President Bill Clinton’s administration, in 2003, it expelled IAEA inspectors, withdrew from the Nuclear Non-Proliferation Treaty, and has since detonated three nuclear devices and conducted a variety of missile tests. 
During those two decades, American and Chinese officials frequently discussed North Korea’s behavior, both privately and in public meetings. 
The Chinese consistently said that they did not want North Korea to develop nuclear weapons, but claimed that they had limited influence over the regime, despite being its major supplier of food and fuel. 
The result was a somewhat scripted exchange in which China and the US would accomplish little more than professing denuclearization as a shared goal. 
China was sincere in expressing its desire for a non-nuclear Korean Peninsula, but the nuclear issue was not its primary concern. 
It also sought to prevent the collapse of the North Korean regime and the resulting potential for chaos on its border – not only flows of refugees, but also the possibility that South Korean or US troops could move into the North. 
Torn between its two objectives, China placed a higher priority on preserving the Kim family dynasty. 
That choice gave rise to a seeming paradox: North Korea gained surprisingly powerful influence over China. 
North Korea has what I call “the power of weakness.” 
In certain bargaining situations, weakness and the threat of collapse can be a source of power. 
To take a well-known example, if you owe a bank $1,000, the bank has power over you; but if you owe the bank $1 billion, you may have considerable bargaining power over the bank. 
China is, in this sense, North Korea’s over-exposed banker. 
As a result, China has tried to persuade North Korea to follow its market-oriented example. 
But, with the Kim regime terrified that economic liberalization would eventually provoke demands for greater political freedom, China’s influence over the regime is limited. 
As a Chinese official once told me in an unguarded moment, “North Korea has hijacked our foreign policy.” 
North Korea has amplified its power by playing its weak hand audaciously. 
The North’s leaders know that superior South Korean and US military forces would win a full-scale military conflict. 
And yet, with 15,000 artillery tubes in the Demilitarized Zone, just 30 miles (48 kilometers) north of Seoul, the South Korean capital, they also know that they could wreak havoc on South Korea’s economy, whereas the North has relatively less to lose. 
North Korea has long been adept at flaunting its willingness to take risks, provoking a crisis in 2010 by sinking a South Korean naval vessel and shelling a South Korean island. 
This spring, it conducted a nuclear test and a series of missile tests, accompanied by a stream of bellicose rhetoric. 
Now it appears that China is beginning to lose patience. 
It has less confidence in the North’s inexperienced new ruler, Kim Jong-un, than it had in his father, Kim Jong-il. 
Chinese leaders are also beginning to recognize the risks that North Korea is imposing on China. 
With more nuclear tests, a demand for nuclear weapons could grow in South Korea and Japan. 
Moreover, if this spring’s sharp rhetoric from the Kim regime is followed by provocations against South Korea like those that occurred in 2010, South Korea could respond forcefully, and China might be drawn in. 
The signs of a change are intriguing. 
Following the “frank” discussion of North Korea by Xi and Obama, Xi hosted a summit with South Korean President Park Geun-hye, without first meeting with its official North Korean ally. 
Instead, two senior North Korean officials subsequently visited Beijing and were scolded for the North’s behavior. 
By contrast, Xi and Park issued a joint statement proclaiming the importance of faithfully implementing United Nations Security Council resolutions that call for sanctions against North Korea, as well as a multilateral agreement in 2005 that obliges the North to exchange its nuclear-weapons programs for economic and diplomatic benefits. 
Both leaders urged a resumption of the six-party talks on denuclearization, which have been suspended since 2009. 
What comes next is uncertain. 
North Korea has tempered its rhetoric and behavior, but the Kim regime has given no indication that it is willing to give up the nuclear-weapons program that it regards as vital to its security and prestige. 
In the long run, economic and social change may help to resolve the situation. 
China’s dilemma remains that if it pushes too fast for reform, the Kim regime may collapse. 
Faced with that prospect, the US and South Korea could take steps to reassure China that they would not exploit such a situation by moving their troops to China’s border. 
In the past, when the US has suggested quiet talks to discuss contingency planning in the case of regime collapse, China has been wary of offending and weakening North Korea. 
But finding a formula to talk about such contingencies may be the next step for China as it seeks to overcome its quandary. 

North Korea’s Missile Tantrum 
SEOUL – Once again, tension is rising across Asia over North Korea’s missile program. 
Unlike its previous “surprise” missile launches, North Korea’s government this time notified international agencies in advance that it will launch a “satellite” sometime between April 4 and 8. 
The question for the world now is not whether the North Korean regime will launch its missile, but what happens afterward. 
The United States, Japan, and South Korea have already publicly condemned the launch as a “provocative act” and a violation of United Nations Security Council Resolution 1718, adopted in October 2006, five days after North Korea conducted a nuclear weapons test. 
But, instead of hot rhetoric, what is needed now is a cool-headed assessment of the military implications of the missile launch. 
If Japan, the US, and others attempt to intercept or counter the missile, military tension – even possible combat – is likely to ensue. 
How to prevent unnecessary military measures and countermeasures is the most immediate concern for the region’s governments. 
Above all, the ongoing six-party talks (China, the US, Japan, Russia, South Korea, and North Korea) that have sought to bring North Korea’s nuclear program to an end must not become a casualty of the missile launch. 
In dealing with North Korea, two fundamental issues must be addressed. 
First, although governments are justified in criticizing North Korea for its foolhardy, counterproductive, and self-destructive behavior over many years, including numerous inhuman acts perpetrated against its own people and others, North Korea is not solely to blame for its “missile tantrum.” 
Indeed, the Bush administration’s unilateral behavior, including the dismantling of the 1994 Geneva Agreed Framework with North Korea, the hyping of an enriched uranium deal, and the infamous “axis of evil” speech, have all increased the paranoia of an already paranoid regime. 
So former President Bush’s foreign policy toward North Korea, especially during his first term in office, must take a fair share of responsibility for the present mess. 
More fundamentally, no one should think that North Korea’s totalitarian communist system can be changed overnight. 
No one inside or outside can remove its anachronistic dynastic-communist regime, and no outsider can hope to modify quickly the policy behavior of its fossilized military, party, and administrative bureaucrats. 
These are the cold realities of North Korea today. 
But cold realities do not necessarily have to turn into hot combat. 
Indeed, the idea of warfare on the Korean peninsula should be unthinkable, given the grotesque levels of deaths that it would likely cause. 
Even to contemplate such a possibility is proof of diplomatic failure, not a triumph of real leadership. 
A leadership mismatch has, moreover, been a central obstacle in resolving the problem of North Korea’s weapons of mass destruction and the ultimate question of achieving a unified Korea. 
Since the emergence of two separate regimes and systems on the Korean Peninsula in 1948, South Korea and the US (its only defense ally) have dealt with only two “supreme leaders,” Kim Il-sung and Kim Jong-il. 
During the same period, there have been 10 South Korean presidents and 11 US presidents. 
For the past 10 years, three South Korean presidents and three US presidents have been attempting to deal with the same “perpetual” leader – Kim Jong-il. 
From Kim’s perspective, encountering such leadership changes and subsequent policy clashes are both bewildering and difficult to assimilate. 
Just on the South Korean side, he has had to cope with Kim Dae-jung’s “sunshine policy” of engagement, Roh Moo-hyun’s on again, off again diplomacy, and current President Lee Myung-bak’s confrontational stance. 
From the US, he has confronted engagement on the part of Bill Clinton, unilateral confrontation from George W. Bush, and the nascent “principled engagement” of Barack Obama. 
This form of leadership mismatch has also disturbed relations between South Korea and the US. 
The discrepancy between the two-term, four-year US presidency and one-term, five-year South Korean presidency has sometimes been problematic, and the respective policies toward North Korea of US and South Korean administrations have often collided. 
When they do, both sides must spend an enormous amount of time and effort in reaching a consensus on North Korea, which leaves the isolated North breeding all sorts of conspiracy theories. 
The Korean question is even more intractable and perplexing if the leadership changes of other concerned parties in the region such as China, Japan, and Russia are factored into the political equation. 
The long-term result of all this is oscillation between dialogue and deadlock, which has led to periods of uncertain engagement or heated confrontation. 
To break this sterile cycle, what is needed now is not more hot rhetoric about North Korea’s missiles, but a commitment to steady, patient diplomacy that transcends changes in the political cycle. 
There is no quick fix in disentangling the Korean knot. 
Only persistence and commitment will do. 

Out of Time in North Korea 
NEW YORK – There is a growing consensus that the first genuine crisis of Donald Trump’s presidency could involve North Korea and, more specifically, its ability to place a nuclear warhead on one or more ballistic missiles possessing sufficient range and accuracy to reach the continental United States. 
A crisis could stem from other factors as well: a large increase in the number of nuclear warheads that North Korea produces, evidence that it is selling nuclear materials to terrorist groups, or some use of its conventional military forces against South Korea or US forces stationed there. 
There is no time to lose: any of these developments could occur in a matter of months or at most years. 
Strategic patience, the approach toward North Korea that has characterized successive US administrations since the early 1990s, has run its course. 
One option would be simply to accept as inevitable continued increases in the quantity and quality of North Korea’s nuclear and missile inventories. 
The US, South Korea, and Japan would fall back on a combination of missile defense and deterrence. 
The problem is that missile defense is imperfect, and deterrence is uncertain. 
The only certainty is that the failure of either would result in unimaginable costs. 
In these circumstances, Japan and South Korea might reconsider whether they, too, require nuclear weapons, raising the risk of a new and potentially destabilizing arms race in the region. 
A second set of options would employ military force, either against a gathering North Korean threat or one judged to be imminent. 
One problem with this approach is uncertainty as to whether military strikes could destroy all of the North’s missiles and warheads. 
But even if they could, North Korea would probably retaliate with conventional military forces against South Korea. 
Given that Seoul and US troops stationed in South Korea are well within range of thousands of artillery pieces, the toll in lives and physical damage would be immense. 
The new South Korean government (which will take office in two months) is sure to resist any action that could trigger such a scenario. 
Some therefore opt for regime change, hoping that a different North Korean leadership might prove to be more reasonable. 
It probably would; but, given how closed North Korea is, bringing about such an outcome remains more wish than serious policy. 
This brings us to diplomacy. 
The US could offer (following close consultations with the governments in South Korea and Japan, and ideally against the backdrop of additional United Nations resolutions and economic sanctions) direct negotiations with North Korea. 
Once talks commenced, the US side could advance a deal: North Korea would have to agree to freeze its nuclear and missile capabilities, which would require cessation of all testing of both warheads and missiles, along with access to international inspectors to verify compliance. 
The North would also have to commit not to sell any nuclear materials to any other country or organization. 
In exchange, the US and its partners would offer, besides direct talks, the easing of sanctions. 
The US and others could also agree to sign – more than 60 years after the end of the Korean War – a peace agreement with the North. 
North Korea (in some ways like Iran) could keep its nuclear option but be barred from translating it into a reality. 
Concerns over North Korea’s many human-rights violations would not be pressed at this time, although the country’s leaders would understand that there could be no normalization of relations (or end of sanctions) so long as repression remained the norm. 
Full normalization of ties would also require North Korea giving up its nuclear weapons program. 
At the same time, the US should limit how far it is willing to go. 
There can be no end to regular US-South Korean military exercises, which are a necessary component of deterrence and potential defense, given the military threat posed by the North. 
For the same reason, any limits on US forces in the country or region would be unacceptable. 
And any negotiation must take place within a fixed time period, lest North Korea use that time to create new military facts. 
Could such an approach succeed? 
The short answer is “maybe.” 
China’s stance would likely prove critical. 
Chinese leaders have no love for Kim Jong-un’s regime or its nuclear weapons, but it dislikes even more the prospect of North Korea’s collapse and the unification of the Korean Peninsula with Seoul as the capital. 
The question is whether China (the conduit by which goods enter and leave North Korea) could be persuaded to use its considerable influence with its neighbor. 
The US should offer some reassurances that it would not exploit Korea’s reunification for strategic advantage, while warning China of the dangers North Korea’s current path poses to its own interests. 
Continued conversations with China about how best to respond to possible scenarios on the peninsula clearly make sense. 
Again, there is no guarantee that diplomacy would succeed. 
But it might. 
And even if it failed, demonstrating that a good-faith effort had been made would make it less difficult to contemplate, carry out, and subsequently explain to domestic and international audiences why an alternative policy, one that included the use of military force, was embraced. 

How to Negotiate with North Korea 
SEOUL – North Korean leader Kim Jong-un seems to be setting the stage for an historic deal with US President Donald Trump that would allow his country, like Myanmar and Vietnam, to reduce its dependence on China and move closer to the West. 
But, despite declaring a moratorium on nuclear and long-range missile tests and dropping the demand that American troops withdraw from South Korea, Kim is unlikely to abandon North Korea’s hard-won nuclear-weapons program until a credible and comprehensive agreement is reached. 
North Korea has conducted a total of six nuclear tests – the same number as India, whose formidable nuclear-weapons capability is beyond dispute. 
Kim’s emulation of India’s 1998 declaration of a test moratorium – which enabled talks with the United States and led eventually to a US law recognizing India’s nuclear arsenal – implies that he seeks international acceptance of his country’s nuclear status. 
Of course, the US-Indian nuclear deal was made possible by post-Cold War strategic pressures, which are lacking in the context of the Korean Peninsula. 
Nonetheless, if Trump’s summit with Kim is to have a lasting impact, it is essential to move beyond simply trying to force North Korea to denuclearize and pursue a broader strategic deal aimed at opening the North to the world. 
Historically, ending longstanding conflicts – for example, taming the Khmer Rouge, which had been responsible for the Cambodian genocide in the 1970s – has depended on comprehensive strategies that have not put disarmament first. 
There is no reason to believe that the situation will be any different with North Korea. 
After all, that country’s only leverage is its nuclear arsenal – and Kim knows it. 
The mere fact that he finally agreed to hold summits with South Korea and the US stems from his confidence in his country’s nuclear deterrent, however limited it may be. 
Kim has already enshrined North Korea’s nuclear-weapons status in the country’s constitution and erected monuments to the long-range missiles launched last year. 
His moratorium on testing fits this narrative, as Kim presents himself as the leader of a nuclear-armed state embarking on potentially epoch-making diplomatic initiatives. 
In this context, it is important to note that, while Kim’s peace overtures are motivated by a desire to rebuild North Korea’s sanctions-battered economy, sanctions alone did not change the behavior of a country long used to enduring extreme hardship. 
On the contrary, escalating sanctions helped to fuel North Korea’s nuclear and missile advances. 
Securing any kind of denuclearization, therefore, will demand a more effective economic opening. 
America’s handling of the 2015 Iran nuclear agreement makes it even less likely that North Korea will agree to a narrow denuclearization accord. 
Even after signing the deal, President Barack Obama kept in place some strict economic sanctions, affecting, in particular, Iran’s financial sector. 
Making matters worse, Trump seems keen to follow through on his threat to withdraw from the Iran deal – or at least to add new sanctions – despite a lack of evidence that Iran has not fulfilled its obligations. 
And yet, when it comes to North Korea, the Trump administration remains focused solely on denuclearization. 
To be sure, where nuclear proliferation issues are concerned, the US has a history of staking out a maximalist position publicly, but being more pragmatic in closed-door negotiations. 
For example, it tolerates the world’s fastest-growing nuclear arsenal in Pakistan, even though that country, in Trump’s words, has “given us nothing but lies and deceit,” including providing a “safe haven to the terrorists we hunt in Afghanistan.” 
But Kim’s latest declaration that he has accomplished the nuclear-deterrent objective of his “byungjin policy” – the other objective being economic modernization – is not an empty boast. 
The North Korea challenge is no longer one of nuclear nonproliferation. 
Past agreements with the country, like that reached in 2005, are no longer relevant. 
Of course, the risks posed by North Korea’s arsenal must be addressed. 
But rather than emphasize “denuclearization” – which implies a one-sided compromise – negotiators should seek to secure a nuclear-weapons-free zone (NWFZ) on the Korean Peninsula. 
This is also essential for realizing South Korean President Moon Jae-in’s vision of closer economic cooperation that harnesses the North’s natural resources and the South’s advanced technologies. 
The NWFZ approach would entail concessions by all parties. 
Yes, North Korea would have to denuclearize. 
But all nuclear powers would have to forswear so much as threatening to use nuclear weapons on the Korean Peninsula. 
In addition, foreign warships carrying nuclear arms could no longer make port calls there. 
For an NWFZ to be possible, however, South Korea would have to agree to be outside the US nuclear umbrella – not a particularly popular notion in the country. 
According to one opinion poll, most South Koreans want to go in the opposite direction, with the US redeploying the tactical nuclear weapons it withdrew more than a quarter-century ago. 
The problem with this approach is clear: If the South will not give up its effective nuclear deterrent, Kim will ask why the North should abandon its own. 
As Kim has pointed out, both Iraq’s Saddam Hussein and Libya’s Muammar el-Qaddafi met with gruesome ends after renouncing nuclear weapons. 
Only a US-supported NWFZ can meet the denuclearization conditions to which Kim’s regime has alluded, including the removal of nuclear threats and a “commitment not to introduce the means to carry out a nuclear strike.” 
Elements of a NWFZ can realistically be negotiated alongside the provisions of a credible and comprehensive peace deal, though the negotiations will undoubtedly be difficult. 
If the US needs added motivation to pursue this approach, it should consider this: it is China that faces the biggest challenge from North Korea’s nuclear weapons, as it works to supplant the US as Asia’s dominant power. 
The only way to mitigate the North Korean nuclear threat, without giving China the upper hand, is to show true diplomatic leadership in securing a comprehensive peace accord on the Korean Peninsula. 

The Art of the North Korean Deal 
SEOUL – US President Donald Trump’s surprisingly restrained reaction to North Korea’s latest ballistic missile test has left many observers wondering what his next move will be. 
Trump has publicly declared that North Korea’s goal of developing a nuclear-capable missile that can reach the United States “won’t happen.” 
But what, specifically, will he do to prevent it? 
Some might advise the Trump administration to launch pre-emptive strikes on North Korea’s nuclear facilities. 
But this is a dangerous and ineffective option, because North Korea would then likely retaliate against South Korea. 
South Koreans do not want to risk a war, so an attack by North Korea, if somehow incited by the US, would be catastrophic for the US-South Korean alliance. 
Moreover, North Korea recently developed missiles with solid-fuel engines, which can be stowed away until just before they are launched, making it technically difficult to identify the right targets – and the right times to strike them. 
Another possible response to the North Korean threat is tougher international sanctions, including secondary boycotts. 
But sanctions that are strong enough to make North Korea’s “Young General,” Kim Jong-un, think twice about his latest provocations will require China’s cooperation, and securing it will not be easy. 
Chinese leaders might interpret overly aggressive secondary boycotts as being aimed not only at North Korea, but at China, too. 
And with the Communist Party of China’s 19th National Congress looming later this year, President Xi Jinping will not want to be perceived as giving in to US pressure. 
We know from more than two decades of nuclear diplomacy with North Korea that, to achieve a positive outcome, the Trump administration will have to resolve two fundamental dilemmas. 
And while past political leaders have preferred to sweep them under the carpet, Trump’s unique, untraditional leadership and negotiating style could enable him to make progress where his predecessors did not. 
The first dilemma concerns China. 
Any diplomatic effort to denuclearize North Korea must also alleviate China’s geostrategic concerns about the future of the Korean Peninsula. 
For centuries, China has feared that the peninsula could become part of a chain of encirclement, or serve as an invasion route. 
In 1592, the Japanese general Toyotomi Hideyoshi invaded the Korean Kingdom to establish a beachhead for invading China. 
In response, China, under the Ming Dynasty, fought alongside Korea against the Japanese army. 
Three centuries later, China’s Qing Dynasty fought the Sino-Japanese War of 1894 to prevent Japan from dominating Korea. 
And again, in the winter of 1950-1951, Chinese Communist Party Chairman Mao Zedong intervened in the Korean War when the US army crossed the 38th parallel and advanced toward China’s border. 
China’s current leaders share their forbears’ strategic concern about the Korean Peninsula, which explains their unwillingness to meet fully US demands for action against North Korea. 
China simply does not want to run the risk of its North Korean buffer state imploding as a result of sanctions. 
And, because they understand China’s strategic imperative, North Korea’s leaders have felt free to develop their country’s nuclear program. 
Trump and Xi have had their first phone conversation, and may soon meet in person. 
My hope is that Trump will live up to his reputation for boldness, and propose a grand bargain with China that alleviates its geostrategic worries about the Korean Peninsula. 
Unless the North Korea problem is separated from the strategic competition between the US and China, diplomatic efforts will continue to fail. 
So, Trump could promise China that his administration will not seek regime change in North Korea, and instead offer security guarantees if North Korea denuclearizes. 
Alternatively, he could offer to withdraw the US’s new THAAD (Terminal High Altitude Area Defense) anti-missile system – to which China has objected – from South Korea as soon as North Korea scraps its nuclear program. 
Trump could then demand that, in exchange, China cooperate wholeheartedly on sanctions and other efforts to persuade North Korea to abandon its nuclear ambitions. 
With such a deal in place, China’s existing proposal – denuclearization alongside a peace treaty to bring a formal end to the Korean War – would become achievable. 
But assuaging China’s strategic concerns brings us to the second dilemma at the heart of the current impasse: North Korea’s own security. 
In the brutal world of international relations, a small, weak, and isolated country like North Korea can feel threatened by its neighbors even when they mean it no harm. 
To compensate for its perceived vulnerability, it strengthens its military and acquires powerful deterrents such as nuclear weapons. 
But this becomes a vicious cycle, because its neighbors interpret its actions as a provocation, and start to feel threatened themselves. 
Former US President Bill Clinton acknowledged this problem and tried to address it. 
Under the 1994 Geneva Agreed Framework, the Clinton administration succeeded in freezing North Korea’s nuclear activities for several years, by promising to improve US-North Korea relations. 
And although George W. Bush’s administration consigned North Korea to its “Axis of Evil,” it also recognized the North’s security dilemma, and tried to address it through the Six-Party Agreement on September 19, 2005. 
Critics of this approach think that the US has bought the same horse twice, and should focus on sanctions, while waiting for North Korea to make the next move. 
But sanctions are not effective without robust Chinese support. 
And North Korea has taken advantage of the diplomatic pause in recent years to develop its nuclear and missile technologies. 
As a result, we are in a worse place now than when we started. 
During his presidential campaign, Trump said he would “have no problem” speaking to Kim. 
He now has a chance to do just that, by exploring the possibility of a comprehensive deal with North Korea, based on a US security guarantee and economic incentives. 
But Trump should go down this road only if he is also willing to address China’s strategic concerns. 
If Trump can strike simultaneous deals with China and North Korea, even his harshest critics will recognize his masterstroke. 

The New Nuclear Danger 
BERLIN – As someone who was born in 1948, the risk of a nuclear World War III was a very real part of my childhood. 
That threat – or at least the threat of East and West Germany both being completely destroyed – persisted until the end of Cold War and the collapse of the Soviet Union. 
Since then, the risk of nuclear-armed superpowers triggering Armageddon has been substantially reduced, even if it has not disappeared entirely. 
Today, the bigger danger is that an increasing number of smaller countries ruled by unstable or dictatorial regimes will try to acquire nuclear weapons. 
By becoming a nuclear power, such regimes can ensure their own survival, promote their local or regional geopolitical interests, and even pursue an expansionist agenda. 
In this new environment, the “rationality of deterrence” maintained by the United States and the Soviet Union during the Cold War has eroded. 
Now, if nuclear proliferation increases, the threshold for using nuclear weapons will likely fall. 
As the current situation in North Korea shows, the nuclearization of East Asia or the Persian Gulf could pose a direct threat to world peace. 
Consider the recent rhetorical confrontation between North Korean dictator Kim Jong-un and US President Donald Trump, in which Trump promised to respond with “fire and fury” to any further North Korean provocations. 
Clearly, Trump is not relying on the rationality of deterrence, as one would have expected from the leader of the last remaining superpower. 
Instead, he has given his emotions free rein. 
Of course, Trump didn’t start the escalating crisis on the Korean Peninsula. 
It has been festering for some time, owing to the North Korean regime’s willingness to pay any price to become a nuclear power, which it sees as a way to ensure its own safety. 
In addition, the regime is developing intercontinental ballistic missiles capable of carrying a nuclear warhead and reaching the West Coast of the US, or farther. 
This would be a major security challenge for any US administration. 
Ultimately, there are no good options for responding to the North Korean threat. 
A US-led pre-emptive war on the Korean Peninsula, for example, could lead to a direct confrontation with China and the destruction of South Korea, and would have unforeseeable implications for Japan. 
And, because the China-South Korea-Japan triangle has become the new power center of the twenty-first-century global economy, no country would be spared from the economic fallout. 
Even if the US continues to allude to the possibility of war, American military leaders know that the use of military force is not really a viable option, given its prohibitively high costs and risks. 
When North Korea achieves nuclear-power status, the American security guarantee will no longer be airtight. 
A North Korea with nuclear weapons and the means to use them would add pressure on South Korea and Japan to develop their own nuclear capacity, which they could easily do. 
But that is the last thing that China wants. 
The situation in Asia today has the nuclear attributes of the twentieth century and the national-power dynamics of the nineteenth century. 
That could prove to be a highly inflammatory cocktail. 
And at the same time, the international system is becoming increasingly unstable, with political structures, institutions, and alliances around the world being upended or called into question. 
Much will depend on what happens in the US under Trump’s wayward presidency. 
The investigation into the Trump campaign’s possible collusion with Russia ahead of the 2016 presidential election, and the failure to repeal the Affordable Care Act (Obamacare) have shown the US administration to be unstable and ineffective. 
And agenda items such as tax cuts, the Mexican border wall, and the renegotiation of the North American Free Trade Agreement – to say nothing of Trump’s own emotional outbursts – are fueling America’s radical right. 
Instability within the US is cause for global concern. 
If the US can no longer be counted on to ensure world peace and stability, then no country can. 
We will be left with a leadership vacuum, and nowhere is this more dangerous than with respect to nuclear proliferation. 
Another nuclear danger looms this fall. 
If the US Congress imposes new sanctions on Iran, the nuclear agreement between that country and the P5+1 (the five permanent members of the United Nations Security Council, plus Germany) could fail. 
Iranian President Hassan Rouhani publicly announced just last week that Iran could abandon the deal “within hours” in response to new sanctions. 
In light of the North Korea crisis, it would be the height of irresponsibility to trigger a gratuitous nuclear crisis – and possibly a war – in the Middle East. 
And a return by the US to a strategy of regime change in Iran would likely be self-defeating, because it would strengthen the country’s hardliners. 
All of this would be taking place in a region that is already riven by crises and wars. 
And, because Russia, China, and the Europeans would stick to the nuclear deal, the US would find itself alone and at odds with even its closest allies. 
Today’s nuclear threats demand exactly the opposite of “fire and fury.” 
What is needed is level-headedness, rationality, and patient diplomacy that is not based on dangerous and fanciful threats of force. 
If the last superpower abandons these virtues, the world – all of us – will have to confront the consequences. 

Planning for Korean Reunification 
SEOUL – The long-simmering North Korean nuclear crisis has reached a near boiling point. 
Last month, the Hermit Kingdom launched two intercontinental ballistic missiles capable of hitting major US cities. 
The United Nations Security Council responded with a unanimous vote to impose new economic sanctions on the country – the most stringent yet – which would cut at least one third of its annual export revenue. 
Since then, North Korean leader Kim Jong-un and US President Donald Trump have been hurling escalating threats at each other. 
At this point, it is impossible to say what will happen on the Korean Peninsula. 
For now, all the international community can really do is continue to leverage a combination of economic sanctions, military pressures, and diplomacy to try to get the Kim regime to the negotiating table. 
But, at the same time, we should consider and prepare for all eventualities, from a military conflict to the peaceful reunification of North and South Korea. 
The most catastrophic scenario would undoubtedly be a military conflict. 
And yet the likelihood of that outcome has now actually increased, owing to the Trump administration’s recent announcement that it is reviewing its military options, including “preventive war.” 
The truth is that a preemptive strike is far from a practical solution. 
It is not at all clear that such an approach would lead to North Korean denuclearization or topple the Kim regime. 
What it could do is escalate into an armed confrontation between the US and China, with nuclear war being the worst possible outcome. 
South Koreans, well within the range of the North’s weapons, would suffer dearly from the Kim regime’s retaliation against a US strike. 
To put it into perspective, the Korean War of 1950-1953 killed more than two million Koreans, as well as 36,000 Americans and 600,000 Chinese soldiers – and it didn’t even involve nuclear weapons. 
A safer and more practical approach would focus on tightening the economic and political screws on North Korea. 
To be sure, some argue that economic sanctions, however harsh, would be inadequate to compel North Korea’s leaders to give up their nuclear weapons. 
After all, both Iraq’s Saddam Hussein and Libya’s Colonel Muammar Qaddafi halted their programs to acquire weapons of mass destruction, only to be driven out of power and then executed. 
Given the risk implied by a military solution, more robust economic and political pressure remains the international community’s best bet for defusing the North Korean nuclear threat, whether by compelling the Kim regime to abandon its program or by triggering that regime’s collapse. 
The UN Security Council sanctions are a step in the right direction, but they are not enough, as they do not ban supplies of oil to the North, apparently due to Chinese and Russian opposition. 
In fact, though China agreed to the sanctions, it remains reluctant to aggravate its already tense relationship with its North Korean client. 
This must change. 
Stronger and more focused US-China cooperation is essential if sanctions are to have a chance of working. 
Avoiding such cooperation will only make a devastating outcome – be it a military conflict or an unruly collapse of the Kim regime – more likely. 
China could still be persuaded to take a more active role in constraining the Kim regime. 
Indeed, its uncooperativeness could damage its relationships with the US, Europe, Japan, and South Korea – all of which are ultimately more valuable partners than the unruly, impoverished North Korea. 
But for China to do more, it needs assurances that it will not immediately lose its strategic buffer on the Korean Peninsula. 
Hence the need for an agreement now on how to handle the potential collapse of the Kim regime and the reunification of the Korean Peninsula. 
Like the fall of the Berlin Wall, the Kim regime’s collapse could come about quite suddenly. 
So China needs to know now that a reunified Korea would not be its enemy, and that the US would withdraw its troops that are currently stationed in South Korea. 
Of course, the implications of a collapsed regime in North Korea extend far beyond China’s strategic interests. 
Indeed, it would have a major economic and political impact throughout the region. 
That is all the more reason to put a comprehensive plan in place to ensure a peaceful transition. 
I recently conducted a quantitative assessment of the economic impacts of unification on North and South Korea under several hypothetical scenarios, assuming North Korea’s sudden collapse. 
As it turns out, a peacefully managed unification process, characterized by comprehensive economic reform and opening up, could enable North Korea to achieve sustained double-digit GDP growth, despite a sharp slowdown immediately following the collapse. 
The key to success would be to allow North Korea to take advantage of its relatively abundant human and natural resources, including rich mineral reserves, to achieve export-led industrialization. 
As for South Korea, with sufficient preparation, effective policies, and more financial resources, it can manage a peaceful reunification and mitigate the adverse effects of the shock. 
By contrast, in a scenario where South Korea is unprepared for reunification and the North quickly dissolves in a state of disorder, the risk premium on the Korean Peninsula would jump sharply, and reforms would be delayed. 
This would lead to persistently weakened investment and GDP growth across the Korean Peninsula, causing South Korea’s GDP to decline by more than 3% in the initial years of the crisis. 
Inflows of migrants from the North would compound the risks, potentially disrupting South Korean labor markets and causing social unrest. 
For now, the international community, including China, should continue to push for North Korea to abandon its nuclear weapons and pursue economic reforms, using ever-stronger economic sanctions. 
Meanwhile, South Korea must continue its efforts to resume a dialogue with the North on humanitarian, health, and environmental issues. 
Civilian exchanges and information flows could nurture forces that would bring about fundamental change from the inside. 
Even after 70 years of division, South Koreans must not give up hope for peaceful reunification with our northern brethren. 
On the contrary, we must plan for it. 

The North Korean Cult 
NEW YORK – The absurdity of the North Korean dictatorship is easy to caricature. 
Kim Jong-un, with his 1930s-style pudding-bowl haircut (cultivated, it is claimed, to make him resemble his grandfather, Kim Il-sung, the regime’s founder), his antiquated Mao suit, and his short, plump body, is almost like a cartoon character himself. 
Officially regarded as an omnipotent genius, he is worshipped like a god and shown constantly surrounded by people, including his highest military officers festooned in medals, laughing or clapping, or shouting hysterically. 
As we know, of course, life in North Korea is anything but amusing. 
Periodic famines devastate the population. 
Up to 200,000 political prisoners are kept as slaves in brutal labor camps, where they are lucky if they are not tortured to death. 
And free speech does not exist. 
It is not only forbidden to express reservations about Kim’s divine status; staying alive requires regularly proclaiming one’s devotion. 
It is possible, even likely, that many North Koreans behave like worshippers only because they must. 
Others fall into line because they don’t know any better. 
Like people everywhere, they reflexively conform to the norms of the world around them, without thinking through their merits. 
But some North Koreans, perhaps many, might genuinely believe in the cult of the Kim Dynasty, which, like all cults (or indeed religious faiths), is made up of bits and pieces taken from other cultures, beliefs, and traditions. 
The Kim cult owes something to Stalinism, something to messianic Christianity, something to Confucian ancestor worship, something to indigenous shamanism, and something to the emperor worship of the Japanese, who ruled Korea in the first half of the twentieth century. 
Kim’s father, Kim Jong-il, was supposed to have been born on Mount Paektu, believed to be a sacred spot where the divine founder of the first Korean kingdom, a bear-man named Tangun, was born more than 4,000 years ago. 
The birth of Kim Jong-il, also known as the Dear Leader (his father, Kim Il-sung, was the Great Leader), turned winter into spring and was illuminated by a bright star in heaven. 
All of this might sound zany, but the stories of miracles in any faith invariably do. 
What matters is that people believe them. 
In this respect, North Koreans are no weirder than believers anywhere else. 
There are often good reasons why certain beliefs have a strong appeal. 
Islam and Christianity found ready converts among outcasts and the oppressed because they offered equality in the eyes of God. 
The North Korean faith is altogether less inclusive. 
Indeed, at its core is a sense of ethnic purity, a feeling of sacred nationalism that must be defended at any cost against hostile forces. 
Like Poland, which has a strong Christian self-image of national martyrdom, Korea has a history of being dominated by greater powers, mainly China, but also Russia, and, most notably since the brutal invasions of the sixteenth century, Japan. 
The Americans are latecomers, but official hatred of American imperialism in North Korea stems not only from the savage Korean War, but also from the long memory of foreign oppression. 
Domination by outside powers created poles of collaboration and resistance in Korean history. 
Some of the ruling classes in various Korean kingdoms cooperated with the foreign powers, and some struggled against them. 
This resulted in deep hatreds among Koreans themselves. 
Kim Il-sung began his career as a collaborator. 
He was handpicked by Stalin to be a puppet Communist leader in the North. 
This made the legend of Kim as a resistance hero against the Japanese during World War II, and later against the Americans and their South Korean “collaborators,” all the more important. 
North Korean nationalism, with its cult of self-reliance known as Juche, is as religious as it is political. 
Defending the Kim dynasty, built up as a symbol of Korean resistance to foreign powers, is a sacred task. 
And when the sacred takes over politics, compromise becomes almost impossible. 
People can negotiate over conflicting interests, but not over matters that are considered holy. 
Donald Trump, a real estate developer, believes that everything is negotiable. 
Nothing is sacred in business. 
His idea of making a deal is to overwhelm the other party with bluff and intimidation, hence his promise to “totally destroy North Korea” (a promise, by the way, that would mean more than 20 million dead). 
It is hard to imagine how Kim Jong-un, as the divine defender of his people, could be persuaded by such bluster to negotiate. 
It is possible that Kim, and perhaps even some subjects of his despotic rule, would rather be obliterated than give in. 
It would not be the first time that a cult turned suicidal. 
But there is another, more likely, risk. 
Because Trump’s hostile tweets and swaggering public utterances are usually followed by more cautious statements from senior members of his cabinet, Kim might not take them seriously. 
He may well think that Trump is all bluff and will never carry out his threats. 
This might prod Kim into taking some reckless action – aiming a missile at Guam, for example – to which the US would feel it must respond in kind. 
The result would be a catastrophe, not only for the Koreans who believe in Kim’s sacred mission, but above all for millions of Koreans, just 35 miles from the North Korean border, who have no part in the Kim cult at all. 

The Battle for Santa Claus’s Home 
STOCKHOLM – A couple of years ago, a Canadian minister proudly declared that Santa Claus was a citizen of Canada. 
After all, his home and toy factory are at the North Pole, which, according to the minister’s interpretation, belongs to Canada. 
Though Santa Claus has not commented on the matter, it is now clear that he could choose several passports when he travels the world on December 24th. 
In 2007, a privately funded mini-submarine planted a Russian flag directly beneath his alleged home. 
And two weeks ago, Denmark, which has sovereignty over Greenland, staked its own territorial claim, also covering the North Pole. 
By filing its claim with the United Nations Commission on the Limits of the Continental Shelf, Denmark has joined our era’s “great game”: the contest for economic control over a large part of the Arctic. 
And Denmark’s claim is massive. 
Not only does it seek sovereignty over everything between Greenland and the North Pole; it is also extending its claim to nearly 900,000 square kilometers, all the way to the existing limits of the Russian economic zone on the other side of the Pole – an area 20 times Denmark’s size. 
How to assess countries’ claims to Arctic territory hinges on the status of the Lomonosov Ridge, a vast formation that rises from the sea floor and stretches 1,800 kilometers from Greenland to the East Siberian continental shelf. 
Everyone agrees that it is a ridge. 
The key question is whether it is an extension of the Greenland shelf or an extension of the East Siberia shelf. 
Denmark, together with the government of Greenland, now claims that it is the former, giving it the right to extend its economic zone across a huge area at the top of the world. 
Though nothing is yet known about the claim that Russia says it will present in the spring, there is no doubt that it will argue the opposite. 
And what about the Canadians and their claim? 
That remains to be seen, but there have been reports that Prime Minister Stephen Harper is dissatisfied that Canadian scientists are not being sufficiently aggressive in pressing the country’s case. 
Nonetheless, for all the hype about a “race for the Arctic,” and despite the rather icy atmosphere among the claimants, there is little reason to fear conflict. 
Under the terms of the 2008 Ilulissat Declaration, all of the countries bordering the Arctic Ocean agree to resolve their claims peacefully and based on the UN Convention on the Law of the Sea. 
According to settled procedure, a UN commission will first judge whether the claims have merit. 
If they are overlapping, which is highly probable, bilateral negotiations will be held. 
Such talks, to put it mildly, could take time. 
Norway and Russia negotiated over a far smaller territorial delimitation for four decades. 
Both Denmark and Russia have been devoting significant resources to exploring the Lomonosov Ridge. 
Denmark has hired Swedish icebreakers for repeated expeditions, and Russia has been deploying special submarines to obtain samples from the ridge and the ocean floor. 
The Arctic region has always been strategically vital for Russia, accounting for roughly 85% of Russia’s natural-gas production, which is based primarily in Western Siberia. 
The Kremlin has activated a new military command for the Arctic, and is busy reopening air bases and radar stations along its Arctic shoreline. 
But it is a very long way from these new Russian bases to virtually everywhere. 
And, in addition to the vast distances, there is the harsh climate. 
A Canadian military commander, asked what he would do if foreign soldiers attacked his country’s Far North, calmly replied that he would dispatch an expedition to rescue them. 
Though Russia had hoped for a rapid increase in shipping along the Northern Sea Route, commercial traffic this year fell by 77%. 
Of course, the stakes are too high for Canada, Denmark, and Russia to allow the region’s remoteness and its hostile environment to influence how resolutely they press their claims. 
Boundaries like these are fixed once and forever, and no one knows what discoveries, technologies, and opportunities the future might bring. 
But for the time being, neither Santa Claus, nor anyone else, has reason to be worried. 
The nature of the Lomonosov Ridge will be debated for years to come, while his thoughts – and ours – are likely to be focused on more immediate issues. 

Northern Ireland: Between Optimism and Hope 
BELFAST: The French say that optimists are those who don’t understand a question. 
This week’s events in Northern Ireland contradict such cynicism. 
One of Europe's most intractable conflicts could be nearing resolution as key elements of the Belfast Agreement signed in April 1998 and endorsed by referendums in both parts of Ireland were implemented. 
Substantial constitutional changes have transformed British-Irish relations with many lessons for other conflicts in Europe and elsewhere. 
The Irish Nobel laureate poet Seamus Heaney distinguishes between optimism – the wish for a better future – and hope, the more rationally grounded expectation that it can indeed come to pass. 
In that case hope and history would rhyme, as he put it in a celebrated phrase. 
Following these momentous events Northern Ireland is suspended somewhere between optimism and hope. 
A 10-person cross-party, cross-community, power-sharing executive was formed in Belfast on Thursday December 2 to govern functions devolved from the British government in London. 
Ireland’s government dropped its territorial claim to Northern Ireland. 
The principle of consent is accepted, meaning Northern Ireland 's constitutional status as a part of the United Kingdom stands unless a majority of its citizens vote to unite with Ireland. 
Cross-border governmental bodies have been established to deal with policies affecting Northern Ireland and Ireland itself. 
A new British-Irish treaty and British-Irish Council provide a forum for the sovereign governments and devolved executives. 
The Irish Republican Army, Sinn Fein's paramilitary wing, has appointed a representative to liaise with an independent body charged with overseeing the decommissioning of arms by Northern Ireland’s paramilitary groups. 
This week's events followed a vote by the Ulster Unionist Party to accept a package worked out with former US Senator George Mitchell during a 10 week review of the Belfast Agreement. 
But the vote was carried by 57% to 43% only after UUP leader David Trimble inserted a condition that the IRA actually begin arms decommissioning by February next. 
In the delicate symbolic choreography of this peace process that new condition is seen by Sinn Fein as breaching the voluntary nature of the IRA's commitment to disarm, which it views as necessary to avoid the psychological/political stigma of being seen as having surrendered. 
In fact the peace process was predicated on a military stalemate between the IRA and the British forces which led to the 1994 cease-fire and an agreement to include Sinn Fein and Protestant/unionist paramilitaries in negotiations. 
The IRA commitment to decommission weapons by May 2000 is contingent on the overall implementation of the Belfast Agreement, including demilitarisation by the British army; radical reform of the Royal Ulster Constabulary (the province’s armed police force); effectively functioning devolved administration and cross-border bodies; prisoner releases, equality and cultural reforms. 
So there is only a limited time to demonstrate that the process will work. 
Many dissident unionists still see the surrender of IRA arms as necessary – a condition that would subvert the process. 
They are appalled that a party sustained by a private army should be in government controlling Northern Ireland’s education and health ministries. 
Sinn Fein leaders are fearful that imposing arms decommissioning as a precondition will split the IRA, creating a paramilitary force determined to destroy the agreement. 
The next few months will show whether political will exists to overcome these obstacles. 
Public opinion in both parts of Ireland and the overwhelming balance of international influences on the peace process support it and will apply pressure to see it survive. 
The actual functioning of the new institutions may create momentum for peace to succeed. 
America’s role in the process has been crucial. 
President Clinton saw that the end of the Cold War changed the special relationship with Britain which had inhibited the US government from involving itself decisively in Northern Ireland – despite the political influence of Irish-Americans. 
His decision in 1994 to allow the Sinn Fein leader Gerry Adams to visit Washington was made despite outright opposition by the British and the State Department. 
It gave him an important purchase on the negotiations ever since, which Mr Mitchell's skilful diplomacy built upon. 
A speech by Britain’s then Secretary of State for Northern Ireland, Mr Peter Brooke, on November 9th, 1990 recognised the significance of the end of the Cold War for Ireland by saying "the British government has no selfish or strategic interests in Northern Ireland". 
That they had such interests until then was for centuries the essence of the relationship. 
Mrs Thatcher refused to allow that speech to be made before 1989 because nuclear submarines passed close to Northern Ireland to patrol the Atlantic approaches. 
Recognition of changed geopolitical circumstances allowed the Northern Irish nationalist leader John Hume to convince Sinn Fein that a peaceful settlement was possible. 
1989 liberated central and eastern European countries from totalitarian rule, enabling them to transform their political and economic systems. 
It also revealed deep historical similarities between Ireland's national question and many of those that re-erupted after 1989. 
All were products of the WWI’s post-imperial settlements. 
The extent and role of national minorities in Ireland and central and eastern Europe are similar, as are those of external homeland nationalisms and cross-boundary agreements. 
The Belfast agreement would not have been possible without the umbrella of a wider European identity and Europe’s political and legal order. 
These created confidence amongst Irish nationalists north and south, allowing them to compromise over sovereignty, including the acceptance of multiple identities and diverse allegiances. 
It helped that European integration had transformed Irish relations with Great Britain economically and politically into a more normal interdependent relationship between smaller and larger neighbours. 
This process has many resonances elsewhere on the continent, which should be recognized as pan-European integration is addressed at the upcoming Helsinki European Council meeting. 

Good People, Bad Judgments 
NEW YORK – Vidkun Quisling, Norway’s wartime fascist leader whose name has become synonymous with collaboration with evil, lived with his wife in a rather grandiose villa outside of Oslo. 
That villa is now the Norwegian Center for Studies of the Holocaust and Religious Minorities, a fine transformation of a tainted place. 
Earlier this year, I visited the center for a fascinating exhibition on the first independent Norwegian constitution promulgated in 1814. 
It was a remarkably enlightened and progressive document, composed by learned scholars, steeped in history, law, and philosophy. 
Some were experts on the Greek classics, others on ancient Hebrew; all were keen readers of Kant and Voltaire. 
There is, however, one extraordinary clause: Article II proclaims freedom of religion in the Lutheran state, with the caveat that “Jews shall still be banned from entering the Realm.” This was peculiar, even at the time. 
Napoleon, defeated in that same year, had secured civil rights for Jews in the countries he had conquered. 
And just before the clause entered Norwegian law, the King of Denmark had granted citizenship to Jews in his realm. 
What is most interesting about Norway’s 1814 constitution is not that it contains this clause, but why. 
The stated motives of the intellectuals who created it were not racist; they did not assume Jews to be biologically inferior. 
Rather, the question was argued in terms of culture and faith, with Jewish beliefs and customs deemed incompatible with modern, enlightened Western values. 
One of the writers of the constitution, Frederik Motzfeldt, argued that Jews would never assimilate themselves with the people of any country. 
Another asserted that Judaism encourages its followers to deceive Christians and other Gentiles. 
Jews, it was believed, would always form a “state within a state.” 
The constitution’s writers were undoubtedly aware that Jews had long been persecuted in other countries, but they concluded that it was not Norway’s problem. 
For Norway, it was best not to let them become citizens at all. 
Experts in Hebrew culture explained that Judaism and Norway’s constitution were irreconcilable. 
Mosaic law was, so the experts said, the only constitution recognized by Jews, and so it should be feared, in the way modern critics of Islam fear Sharia law. 
So the main issue was religion, not race – though the two could easily be confused. 
As Håkon Harket, the greatest Norwegian scholar on the subject of the anti-Jewish clause, explains: “Even those who fought for civil rights for the Jews held often an ambition to liberate Jews from Judaism.” 
The parallels with current notions about Muslims and Islam hardly need to be pointed out. 
Now, too, the Enlightenment is often invoked as shorthand for the Western values that are supposedly in danger of “Islamization.” 
Now, too, people warn of Muslim tricksters, states within states, the impossibility of assimilation, and the necessity for staunch secularists to free the benighted Muslims from their faith. 
To be sure, in 1814, there was no Jewish equivalent of the violent Jihadism that poisons relations with Muslims in the West today. 
Nonetheless, there are lessons to be learned from the Norwegian constitution’s misguided anti-Jewish clause, which, it should be noted, was repealed just a few decades later. 
Bad judgment can arise even from decent motives, and knowledge (of Islam or of Judaism) is no prophylactic against stupid ideas. 
The most important lesson, however, is that it is always foolish – and, indeed, dangerous – to judge people by what we think they believe. 
To assume that all Muslims think alike because of their religious background, that they have “a mind” rather than individual thoughts, is as big a mistake as to assume to know the minds of Jews, Christians, or anyone else. 
And to claim that something as diverse, and sometimes vague, as a religious faith can be pinned to a fixed ideological position, because of certain ancient texts, is utterly misleading. 
There are populist demagogues in the West who would ban the Koran and prohibit Muslims from immigrating to their countries. 
They have a following, which might be growing, fueled by the widespread anxiety about terrorism spilling over from the Middle East. 
But they are not yet in the majority, and the belief that the West is in imminent danger of being “Arabized” or “Islamized” is not quite yet mainstream. 
Yet even mainstream politicians, sometimes for the best of reasons, are in danger of making the same kinds of mistakes as the members of the 1814 Norwegian Constituent Assembly. 
British Prime Minister David Cameron, for example, is aiming to crack down on Islamist extremism by banning the expression of ideas that the government deems to be promoting or glorifying it. 
People who “reject our values” will be prosecuted, he has declared, “whether they are violent in their means or not.” 
Cameron is not a known racist, or a bigot. 
He is attempting to tackle a real problem: the promotion of violent extremist ideologies. 
But, while people should certainly be punished for acts of violence, going after people purely for what they think – or, worse, what we think they think – has the air of a witch-hunt. 
Cameron is right: “key values” like “democracy and tolerance” are fine things, and they ought to be defended. 
But it is hard to see how banning ideas, or penalizing those who do nothing more than express them, is the best way to do so. 

Not Only The Dutch Were Disgraced at Srebrenica 
Atrocities cast long shadows. 
The Dutch government has resigned over the Srebrenica massacre of 1995, which occurred when the supposedly "safe" enclave of Srebrenica, supposedly defended by a battalion of Dutch UN troops, surrendered to heavily armed Serb militias. The massacre of at least 7,000 Bosnian boys and men followed. 
The Dutch government of Premier Wim Kok resigned after a report that it had commissioned accused the government of 1995 (also headed by Mr. Kok) of acting irresponsibly in underestimating the threats faced by Dutch peacekeepers. 
It is, of course, an honorable act for a government to take responsibility for so grave a failing and resign. 
Too few governments or politicians ever accept this debt to honor. 
But the resignation of the Kok government does not deal with the disgrace of Srebrenica. 
It only underlines the fact that the international community still has scores to settle with the largest massacre on European soil in the last half century. 
What we should have seen in The Hague was not only the resignation of a Dutch government - but more importantly the appearance of General Ratko Mladic and his accomplices to face the International Criminal Tribunal for the Former Yugoslavia. 
So long as these men remain at large, the shame over Srebrenica will stick to the international community. 
Most people remember the televised images of General Mladic humiliating the Dutch commander of the "safe" Srebrenica enclave, Colonel Ton Karremans, offering him drinks and gifts for his family. 
Then the Dutch peacekeepers were sent on their way, as were women and children. 
Only the men and the boys remained, to be slaughtered. 
I retain not only these images forever in my head, but also the sights and smells of thousands of decayed corpses stacked in two mine tunnels near Tuzla. 
They were picked up from the mass graves that appeared around Srebrenica. 
They were in Tuzla awaiting the long and laborious process of identifying the remains. 
Many of Srebrenica's survivors were clinging to the desperate hope that a missing husband or son might still be alive in a remote camp. 
They needed to know what had happened before they could try to get on with their lives. 
After the Dayton Agreement of Bosnia an International Commission on Missing Persons (ICMP) was established to clarify what had happened to the more than 20,000 persons missing from the civil war in Bosnia. 
Another 10,000 missing were later added to this remit from Kosovo. 
That task seemed overwhelming. 
But in recent months there has been a breakthrough. 
New DNA technology, combined with computer programs that match the findings with DNA from bereaved relatives, has led to increasing numbers of identifications. 
Every day names can be put on the anonymous body bags, and a decent burial can take place. 
Now survivors at least know that the dead are dead. 
So this sad chapter of Srebrenica is finally being told. 
But we still need to bring those who committed the crime to account. 
It is totally unacceptable that people like Ratko Mladic remain at large. 
The government of the Federal Republic of Yugoslavia (FRY) could seize and extradite them - if it wished to. 
Until now it has not. 
The FRY wants to integrate with the Euro-Atlantic community. 
It pursues three goals: accession to the Council of Europe, membership in NATO's Partnership for Peace, and a Stabilisation and Association Agreement with the European Union. 
But the international community must hold the FRY to the same high standards for inclusion in intergovernmental structures that have been rightly required of Croatia and Bosnia since 1996. 
So long as General Mladic and his henchmen do not join Mr. Milosevic in The Hague, we cannot believe that the FRY really belongs in the company of democratic European states in respect to the rule of law. 
If the FRY is not confronted with the same demands others had to meet, this will only strengthen obstructionist forces within Serbia and undermine the security of Serbia's neighbours. 
Membership in the international community cannot be given away at a discount. 


Markets’ Rational Complacency 
NEW YORK – An increasingly obvious paradox has emerged in global financial markets this year. 
Though geopolitical risks – the Russia-Ukraine conflict, the rise of the Islamic State and growing turmoil across the Middle East, China’s territorial disputes with its neighbors, and now mass protests in Hong Kong and the risk of a crackdown – have multiplied, markets have remained buoyant, if not downright bubbly. 
Indeed, oil prices have been falling, not rising. 
Global stock markets have, overall, reached new highs. 
And credit markets show low spreads, while long-term bond yields have fallen in most advanced economies. 
Yes, financial markets in troubled countries – for example, Russia’s currency, equity, and bond markets – have been negatively affected. 
But the more generalized contagion to global financial markets that geopolitical tensions typically engender has failed to materialize. 
Why the indifference? 
Are investors too complacent, or is their apparent lack of concern rational, given that the actual economic and financial impact of current geopolitical risks – at least so far – has been modest? 
Global markets have not reacted for several reasons. 
For starters, central banks in advanced economies (the United States, the eurozone, the United Kingdom, and Japan) are holding policy rates near zero, and long-term interest rates have been kept low. 
This is boosting the prices of other risky assets such as equities and credit. 
Second, markets have taken the view that the Russia-Ukraine conflict will remain contained, rather than escalating into a full-scale war. 
So, though sanctions and counter-sanctions between the West and Russia have increased, they are not causing significant economic and financial damage to the European Union or the US. 
More important, Russia has not cut off natural-gas supplies to Western Europe, which would be a major shock for gas-dependent EU economies. 
Third, the turmoil in the Middle East has not triggered a massive shock to oil supplies and prices like those that occurred in 1973, 1979, or 1990. On the contrary, there is excess capacity in global oil markets. 
Iraq may be in trouble, but about 90% of its oil is produced in the south, near Basra, which is fully under Shia control, or in the north, under the control of the Kurds. 
Only about 10% is produced near Mosul, now under the control of the Islamic State. 
Finally, the one Middle East conflict that could cause oil prices to spike – a war between Israel and Iran – is a risk that, for now, is contained by ongoing international negotiations with Iran to contain its nuclear program. 
So there appear to be good reasons why global markets so far have reacted benignly to today’s geopolitical risks. 
What could change that? 
Several scenarios come to mind. 
First, the Middle East turmoil could affect global markets if one or more terrorist attack were to occur in Europe or the US – a plausible development, given that several hundred Islamic State jihadists are reported to have European or US passports. 
Markets tend to disregard the risks of events whose probability is hard to assess but that have a major impact on confidence when they do occur. 
Thus, a surprise terrorist attack could unnerve global markets. 
Second, markets could be incorrect in their assessment that conflicts like that between Russia and Ukraine, or Syria’s civil war, will not escalate or spread. 
Russian President Vladimir Putin’s foreign policy may become more aggressive in response to challenges to his power at home, while Jordan, Lebanon, and Turkey are all being destabilized by Syria’s ongoing meltdown. 
Third, geopolitical and political tensions are more likely to trigger global contagion when a systemic factor shaping the global economy comes into play. 
For example, the mini-perfect storm that roiled emerging markets earlier this year – even spilling over for a while to advanced economies – occurred when political turbulence in a few countries (Turkey, Thailand, and Argentina) met bad news about Chinese growth. 
China, with its systemic importance, was the match that ignited a tinderbox of regional and local uncertainty. 
Today (or soon), the situation in Hong Kong, together with the news of further weakening in the Chinese economy, could trigger global financial havoc. 
Or the US Federal Reserve could spark financial contagion by exiting zero rates sooner and faster than markets expect. 
Or the eurozone could relapse into recession and crisis, reviving the risk of redenomination in the event that the monetary union breaks up. 
The interaction of any of these global factors with a variety of regional and local sources of geopolitical tension could be dangerously combustible. 
So, while global markets arguably have been rationally complacent, financial contagion cannot be ruled out. 
A century ago, financial markets priced in a very low probability that a major conflict would occur, blissfully ignoring the risks that led to World War I until late in the summer of 1914. 
Back then, markets were poor at correctly pricing low-probability, high-impact tail risks. 

Gouging the Gauchos 
NEW YORK – Like individuals, corporations, and other private firms that rely on bankruptcy procedures to reduce an excessive debt burden, countries sometimes need orderly debt restructuring or reduction. 
But the ongoing legal saga of Argentina’s fight with holdout creditors shows that the international system for orderly sovereign-debt restructuring may be broken. 
Individuals, firms, or governments may end up with too much debt because of bad luck, bad decisions, or a combination of the two. 
If you get a mortgage but then lose your job, you have bad luck. 
If your debt becomes unsustainable because you borrowed too much to take long vacations or buy expensive appliances, your bad behavior is to blame. 
The same applies to corporate firms: some have bad luck and their business plans fail, while others borrow too much to pay their mediocre managers excessively. 
Bad luck and bad behavior (policies) can also lead to unsustainable debt burdens for governments. 
If a country’s terms of trade (the price of its exports) deteriorate and a large recession persists for a long time, its government’s revenue base may shrink and its debt burden may become excessive. 
But an unsustainable debt burden may also result from borrowing to spend too much, failure to collect sufficient taxes, and other policies that undermine the economy’s growth potential. 
When the debt burden of an individual, firm, or government is too high, legal systems need to provide orderly ways to reduce it to a more sustainable level (closer to the debtor’s potential income). 
If it is too easy to default and reduce one’s debt burden, the result is moral hazard, because debtors gain an incentive to indulge in bad behavior. 
But if it is too difficult to restructure and reduce debts when bad luck leads to unsustainable debts, the result is bad for both the debtor and its creditors, who are better off when a reduced debt ratio is serviced than when a debtor defaults. 
Finding the right balance is not easy. 
Formal legal bankruptcy regimes for individuals and firms have evolved over time to accomplish this. 
Because a formal bankruptcy regime for governments does not exist (though Anne Krueger, the International Monetary Fund’s then-deputy managing director, proposed one more than a decade ago), countries have had to rely on a market-based approach to resolve excessive debt problems. 
Following this approach, the country offers to exchange old bonds for new bonds with a lower face value and/or lower interest payments and longer maturities. 
If most investors accept this offer, the restructuring occurs successfully. 
But this implies a key problem: Whereas a bankruptcy court can force holdout creditors to accept the exchange offer as long as a significant majority of creditors have already done so (a so-called “cram down”), the market-based approach allows some creditors to continue to hold out and sue to be paid in full. 
That is why, over the last decade, governments have augmented the market-based approach with a contractual approach that resolves the holdout problem by introducing collective-action clauses (CACs) that can also cram down on holdouts the terms accepted by a majority of creditors. 
These clauses became standard in sovereign bonds but were missing in those issued by Argentina before 2001, when the crisis hit. 
Though 93% of Argentina’s creditors accepted new terms for their bonds in 2005 and 2010 in two exchange offers, a small group of holdouts sued Argentina in the United States, and, with the US Supreme Court recently ruling on the issue, have now won the right to be paid in full. 
The US court decision is dangerous for two reasons. 
First, the court ruled for the first time that a country cannot continue to pay those creditors who accepted a big reduction (or “haircut”) on their claims until the holdouts are paid in full. 
So, why would any future creditor who benefits from an orderly restructuring vote for it if its new claims can be blocked by even a single holdout creditor? 
Second, if the holdouts are paid in full, the majority of creditors who accepted a haircut can request to be paid in full, too. 
If that happens, the country’s debt burden will surge again, become unsustainable, and force the government – in this case Argentina, which is servicing most of its debt – to default again on all creditors. 
The inclusion of CACs in new bond contracts may help other countries avoid the holdout problem in the future. 
But even CACs may not fully help, because they are designed in a way that still allows a small minority of creditors to hold out and thus prevent an orderly restructuring. 
Either super-CACs need to be designed and introduced (though it will take years to include them in all new bond contracts) or the international community may want to reconsider whether the 2002 IMF proposal for a formal bankruptcy court for sovereign borrowers should be resurrected. 
Holdouts must not be permitted to block orderly restructurings that benefit debtors and creditors. 

The Trouble with Emerging Markets 
LAGOS – The financial turmoil that hit emerging-market economies last spring, following the US Federal Reserve’s “taper tantrum” over its quantitative-easing (QE) policy, has returned with a vengeance. 
This time, the trigger was a confluence of several events: a currency crisis in Argentina, where the authorities stopped intervening in the forex markets to prevent the loss of foreign reserves; weaker economic data from China; and persistent political uncertainty and unrest in Turkey, Ukraine, and Thailand. 
This mini perfect storm in emerging markets was soon transmitted, via international investors’ risk aversion, to advanced economies’ stock markets. 
But the immediate trigger for these pressures should not be confused with their deeper causes: Many emerging markets are in real trouble. 
The list includes India, Indonesia, Brazil, Turkey, and South Africa – dubbed the “Fragile Five,” because all have twin fiscal and current-account deficits, falling growth rates, above-target inflation, and political uncertainty from upcoming legislative and/or presidential elections this year. 
But five other significant countries – Argentina, Venezuela, Ukraine, Hungary, and Thailand – are also vulnerable. 
Political and/or electoral risk can be found in all of them, loose fiscal policy in many of them, and rising external imbalances and sovereign risk in some of them. 
Then, there are the over-hyped BRICS countries, now falling back to reality. 
Three of them (Brazil, Russia, and South Africa) will grow more slowly than the United States this year, with real (inflation-adjusted) GDP rising at less than 2.5%, while the economies of the other two (China and India) are slowing sharply. 
Indeed, Brazil, India, and South Africa are members of the Fragile Five, and demographic decline in China and Russia will undermine both countries’ potential growth. 
The largest of the BRICS, China, faces additional risk stemming from a credit-fueled investment boom, with excessive borrowing by local governments, state-owned enterprises, and real-estate firms severely weakening the asset portfolios of banks and shadow banks. 
Most credit bubbles this large have ended up causing a hard economic landing, and China’s economy is unlikely to escape unscathed, particularly as reforms to rebalance growth from high savings and fixed investment to private consumption are likely to be implemented too slowly, given the powerful interests aligned against them. 
Moreover, the deep causes of last year’s turmoil in emerging markets have not disappeared. 
For starters, the risk of a hard landing in China poses a serious threat to emerging Asia, commodity exporters around the world, and even advanced economies. 
At the same time, the Fed’s tapering of its long-term asset purchases has begun in earnest, with interest rates set to rise. 
As a result, the capital that flowed to emerging markets in the years of high liquidity and low yields in advanced economies is now fleeing many countries where easy money caused fiscal, monetary, and credit policies to become too lax. 
Another deep cause of current volatility is that the commodity super-cycle is over. 
This is not just because China is slowing; years of high prices have led to investment in new capacity and an increase in the supply of many commodities. 
Meanwhile, emerging-market commodity exporters failed to take advantage of the windfall and implement market-oriented structural reforms in the last decade; on the contrary, many of them embraced state capitalism, giving too large a role to state-owned enterprises and banks. 
These risks will not wane anytime soon. 
Chinese growth is unlikely to accelerate and lift commodity prices; the Fed has increased the pace of its QE tapering; structural reforms are not likely until after elections; and incumbent governments have been similarly wary of the growth-depressing effects of tightening fiscal, monetary, and credit policies. 
Indeed, the failure of many emerging-market governments to tighten macroeconomic policy sufficiently has led to another round of currency depreciation, which risks feeding into higher inflation and jeopardizing these countries ability to finance twin fiscal and external deficits. 
Nonetheless, the threat of a full-fledged currency, sovereign-debt, and banking crisis remains low, even in the Fragile Five, for several reasons. 
All have flexible exchange rates, a large war chest of reserves to shield against a run on their currencies and banks, and fewer currency mismatches (for example, heavy foreign-currency borrowing to finance investment in local-currency assets). 
Many also have sounder banking systems, while their public and private debt ratios, though rising, are still low, with little risk of insolvency. 
Over time, optimism about emerging markets is probably correct. 
Many have sound macroeconomic, financial, and policy fundamentals. 
Moreover, some of the medium-term fundamentals for most emerging markets, including the fragile ones, remain strong: urbanization, industrialization, catch-up growth from low per capita income, a demographic dividend, the emergence of a more stable middle class, the rise of a consumer society, and the opportunities for faster output gains once structural reforms are implemented. 
So it is not fair to lump all emerging markets into one basket; differentiation is needed. 
But the short-run policy tradeoffs that many of these countries face – damned if they tighten monetary and fiscal policy fast enough, and damned if they do not – remain ugly. 
The external risks and internal macroeconomic and structural vulnerabilities that they face will continue to cloud their immediate outlook. 
The next year or two will be a bumpy ride for many emerging markets, before more stable and market-oriented governments implement sounder policies. 

The Great Backlash 
NEW YORK – In the immediate aftermath of the 2008 global financial crisis, policymakers’ success in preventing the Great Recession from turning into Great Depression II held in check demands for protectionist and inward-looking measures. 
But now the backlash against globalization – and the freer movement of goods, services, capital, labor, and technology that came with it – has arrived. 
This new nationalism takes different economic forms: trade barriers, asset protection, reaction against foreign direct investment, policies favoring domestic workers and firms, anti-immigration measures, state capitalism, and resource nationalism. 
In the political realm, populist, anti-globalization, anti-immigration, and in some cases outright racist and anti-Semitic parties are on the rise. 
These forces loathe the alphabet soup of supra-national governance institutions – the EU, the UN, the WTO, and the IMF, among others – that globalization requires. 
Even the Internet, the epitome of globalization for the past two decades, is at risk of being balkanized as more authoritarian countries – including China, Iran, Turkey, and Russia – seek to restrict access to social media and crack down on free expression. 
The main causes of these trends are clear. 
Anemic economic recovery has provided an opening for populist parties, promoting protectionist policies, to blame foreign trade and foreign workers for the prolonged malaise. 
Add to this the rise in income and wealth inequality in most countries, and it is no wonder that the perception of a winner-take-all economy that benefits only elites and distorts the political system has become widespread. 
Nowadays, both advanced economies (like the United States, where unlimited financing of elected officials by financially powerful business interests is simply legalized corruption) and emerging markets (where oligarchs often dominate the economy and the political system) seem to be run for the few. 
For the many, by contrast, there has been only secular stagnation, with depressed employment and stagnating wages. 
The resulting economic insecurity for the working and middle classes is most acute in Europe and the eurozone, where in many countries populist parties – mainly on the far right – outperformed mainstream forces in last weekend’s European Parliament election. 
As in the 1930’s, when the Great Depression gave rise to authoritarian governments in Italy, Germany, and Spain, a similar trend now may be underway. 
If income and job growth do not pick up soon, populist parties may come closer to power at the national level in Europe, with anti-EU sentiments stalling the process of European economic and political integration. 
Worse, the eurozone may again be at risk: some countries (the United Kingdom) may exit the EU; others (the UK, Spain, and Belgium) eventually may break up. 
Even in the US, the economic insecurity of a vast white underclass that feels threatened by immigration and global trade can be seen in the rising influence of the extreme right and Tea Party factions of the Republican Party. 
These groups are characterized by economic nativism, anti-immigration and protectionist leanings, religious fanaticism, and geopolitical isolationism. 
A variant of this dynamic can be seen in Russia and many parts of Eastern Europe and Central Asia, where the fall of the Berlin Wall did not usher in democracy, economic liberalization, and rapid output growth. 
Instead, nationalist and authoritarian regimes have been in power for most of the past quarter-century, pursuing state-capitalist growth models that ensure only mediocre economic performance. 
In this context, Russian President Vladimir Putin’s destabilization of Ukraine cannot be separated from his dream of leading a “Eurasian Union” – a thinly disguised effort to recreate the former Soviet Union. 
In Asia, too, nationalism is resurgent. 
New leaders in China, Japan, South Korea, and now India are political nationalists in regions where territorial disputes remain serious and long-held historical grievances fester. 
These leaders – as well as those in Thailand, Malaysia, and Indonesia, who are moving in a similar nationalist direction – must address major structural-reform challenges if they are to revive falling economic growth and, in the case of emerging markets, avoid a middle-income trap. 
Economic failure could fuel further nationalist, xenophobic tendencies – and even trigger military conflict. 
Meanwhile, the Middle East remains a region mired in backwardness. 
The Arab Spring – triggered by slow growth, high youth unemployment, and widespread economic desperation – has given way to a long winter in Egypt and Libya, where the alternatives are a return to authoritarian strongmen and political chaos. 
In Syria and Yemen, there is civil war; 
Lebanon and Iraq could face a similar fate; 
Iran is both unstable and dangerous to others; and Afghanistan and Pakistan look increasingly like failed states. 
In all of these cases, economic failure and a lack of opportunities and hope for the poor and young are fueling political and religious extremism, resentment of the West and, in some cases, outright terrorism. 
In the 1930’s, the failure to prevent the Great Depression empowered authoritarian regimes in Europe and Asia, eventually leading to World War II. 
This time, the damage caused by the Great Recession is subjecting most advanced economies to secular stagnation and creating major structural growth challenges for emerging markets. 
This is ideal terrain for economic and political nationalism to take root and flourish. 
Today’s backlash against trade and globalization should be viewed in the context of what, as we know from experience, could come next. 

Emerging-Market Risk and Reward 
NEW YORK – One definition of an emerging-market economy is that its political risks are higher, and its policy credibility lower, than in advanced economies. 
After the financial crisis, when emerging-market economies continued to grow robustly, that definition seemed obsolete; now, with the recent turbulence in emerging economies driven in part by weaker economic-policy credibility and growing political uncertainty, it seems as relevant as ever. 
Consider the so-called Fragile Five: India, Indonesia, Turkey, Brazil, and South Africa. 
All have in common not only economic and policy weaknesses (twin fiscal and current-account deficits, slowing growth and rising inflation, sluggish structural reforms), but also presidential or parliamentary elections this year. 
Many other emerging economies – Ukraine, Argentina, Venezuela, Russia, Hungary, Thailand, and Nigeria – also face significant political and/or social uncertainties and civil unrest. 
And that list does not include the perilously unstable Middle East, where the Arab Spring in Libya and Egypt has become a winter of seething discontent; civil war rages in Syria and smolders in Yemen; and Iraq, Iran, Afghanistan, and Pakistan form a contiguous arc of volatility. 
Nor does it include Asia’s geopolitical risks arising from the territorial disputes between China and many of its neighbors, including Japan, the Philippines, South Korea, and Vietnam. 
According to the positive narrative about emerging markets, industrialization, urbanization, per capita income growth, and the rise of a middle-class consumer society were supposed to boost long-term economic and sociopolitical stability. 
But in many countries recently wracked by political unrest – Brazil, Chile, Turkey, India, Venezuela, Argentina, Russia, Ukraine, and Thailand – it is the urban middle classes that have been manning the barricades. 
Likewise, urban students and the middle classes spearheaded the Arab Spring, before losing authority to Islamist forces. 
This is not a complete surprise: in many countries, working classes and rural farmers have benefited from per capita income increases and a broadening social safety net, while the middle classes feel the pinch from rising inflation, poor public services, corruption, and intrusive government. 
And now the middle classes tend to be more vocal and better politically organized than in the past, in large part because social media allow them to mobilize faster. 
Not all of the recent political unrest is unwelcome; a lot of it may lead to better governance and greater commitment to growth-oriented economic policies. 
Among the Fragile Five, a change in government is likely in India and Indonesia. 
But uncertainty abounds. 
In Indonesia, economic nationalism is on the rise, implying a risk that economic policy will follow an inward-looking course. 
In India, the opposition Bharatiya Janata Party’s prime ministerial candidate, Narendra Modi, if elected, may or may not be able to implement at the national level the growth-oriented policies that he successfully implemented at the state level in Gujarat. 
Much will depend on whether he can shed his sectarian attitudes and become a truly inclusive leader. 
By contrast, a change in government is unlikely in South Africa, Turkey, and Brazil. 
But the current rulers, if reelected, may shift policies. 
South African President Jacob Zuma has chosen a pro-business tycoon as his vice-presidential candidate and may move toward market-oriented reforms. 
Turkish Prime Minister Recep Tayyip Erdoğan cannot realize his dream of a presidential republic and will have to follow his opponents – including a large protest movement – to the secular center. 
And Brazilian President Dilma Rousseff may embrace more stable macroeconomic policies and accelerate structural reforms, including privatization. 
Even in extremely fragile and risky cases, such as Argentina, Venezuela, and Ukraine, political and economic conditions have become so bad that – short of becoming failed states – the situation can only get better. 
Argentine President Cristina Fernández is a lame duck; and any of her potential successors will be more moderate. 
In Venezuela, President Nicolás Maduro is a weak leader who may eventually be unseated by a more centrist opposition. 
And Ukraine, having gotten rid of a kleptocratic thug, may stabilize under a Western-led economic revival program – that is, if the country can avoid civil war. 
As for the Middle East, risks remain abundant, with a bumpy economic and political transition likely to take more than a decade. 
Even there, however, gradual stabilization will eventually lead to greater economic opportunities. 
So, in most cases, there is reason to hope that electoral change and political upheaval will give rise to moderate governments whose commitment to market-oriented policies will steadily move their economies in the right direction. 
Of course, the risks should not be discounted. 
Emerging economies today are more fragile and volatile than in the recent past. 
Structural reforms imply the need to pay short-term costs for longer-term benefits. 
State capitalism of the sort exemplified by China has strong support among policymakers in Russia, Venezuela, and Argentina, and even in Brazil, India, and South Africa. 
Resource nationalism is on the rise, as is a backlash against free trade and inward FDI. 
Indeed, rising income and wealth inequality in many emerging markets may eventually lead to a social and political backlash against liberalization and globalization. 
That is why economic growth in emerging markets must be cohesive and reduce inequality. 
While market-oriented reforms are necessary, government has a key role to play in providing a social safety net for the poor; maintaining high-quality public services; investing in education, training, health care, infrastructure, and innovation; enforcing competition policies that constrain the power of economic and financial oligopolies; and ensuring genuine equality of opportunity for all. 

Russia’s Eurasian Vision 
NEW YORK – The escalating conflict in Ukraine between the Western-backed government and Russian-backed separatists has focused attention on a fundamental question: What are the Kremlin’s long-term objectives? 
Though Russian President Vladimir Putin’s immediate goal may have been limited to regaining control of Crimea and retaining some influence in Ukrainian affairs, his longer-term ambition is much bolder. 
That ambition is not difficult to discern. 
Putin once famously observed that the Soviet Union’s collapse was the greatest catastrophe of the twentieth century. 
Thus, his long-term objective has been to rebuild it in some form, perhaps as a supra-national union of member states like the European Union. 
This goal is not surprising: declining or not, Russia has always seen itself as a great power that should be surrounded by buffer states. 
Under the Czars, Imperial Russia extended its reach over time. 
Under the Bolsheviks, Russia built the Soviet Union and a sphere of influence that encompassed most of Central and Eastern Europe. 
And now, under Putin’s similarly autocratic regime, Russia plans to create, over time, a vast Eurasian Union. 
While the EAU is still only a customs union, the European Union’s experience suggests that a successful free-trade area leads over time to broader economic, monetary, and eventually political integration. 
Russia’s goal is not to create another North American Free Trade Agreement; it is to create another EU, with the Kremlin holding all of the real levers of power. 
The plan has been clear: Start with a customs union – initially Russia, Belarus, and Kazakhstan – and add most of the other former Soviet republics. 
Indeed, now Armenia and Kyrgyzstan are in play. 
Once a broad customs union is established, trade, financial, and investment links within it grow to the point that its members stabilize their exchange rates vis-à-vis one another. 
Then, perhaps a couple of decades after the customs union is formed, its members consider creating a true monetary union with a common currency (the Eurasian ruble?) that can be used as a unit of account, means of payment, and store of value. 
As the eurozone experience proves, sustaining a monetary union requires banking, fiscal, and full economic union. 
And, once members give up their sovereignty over fiscal, banking, and economic affairs, they may eventually need a partial political union to ensure democratic legitimacy. 
Realizing such a plan may require overcoming serious challenges and the commitment of large financial resources over a period of many decades. 
But the first step is a customs union, and, in the case of the Eurasian Union, it had to include Ukraine, Russia’s largest neighbor to the west. 
That is why Putin put so much pressure on former President Viktor Yanukovych to abandon an association agreement with the EU. 
It is also why Putin reacted to the ouster of Yanukovych’s government by taking over Crimea and destabilizing eastern Ukraine. 
Recent events have further weakened market-oriented, Western-leaning factions in Russia and strengthened the state-capitalist, nationalist factions, who are now pushing for faster establishment of the EAU. 
In particular, the tension with Europe and the United States over Ukraine will shift Russia’s energy and raw-material exports – and the related pipelines – toward Asia and China. 
Likewise, Russia and its BRICS partners (Brazil, India, China, and South Africa) are creating a development bank that is to serve as an alternative to the Western-controlled International Monetary Fund and the World Bank. 
Revelations of electronic surveillance by the US may lead Russia – and other illiberal states – to restrict Internet access and create their own nationally controlled data networks. 
There is even talk of Russia and China creating an alternative international payment system to replace the SWIFT system, which the US and Europe can use to impose financial sanctions against Russia. 
Creating a full EAU – one that is gradually less tied to the West by trade, financial, economic, payments, communications, and political links – may be a pipe dream. 
Russia’s lack of reform and adverse demographic trends imply low potential growth and insufficient financial resources to create the fiscal and transfer union that is needed to bring other countries in. 
But Putin is ambitious, and – like other autocrats in Central Asian nations – he may remain in power for decades to come. 
And, like it or not, even a Russia that lacks the dynamism needed to succeed in manufacturing and the industries of the future will remain a commodity-producing superpower. 
Revisionist powers like Russia, China, and Iran appear ready to confront the global economic and political order that the US and the West built after the collapse of the Soviet Union. 
But now one of these revisionists powers – Russia – is pushing ahead aggressively to recreate a near-empire and a sphere of influence. 
Unfortunately, the sanctions that the US and Europe are imposing on Russia, though necessary, may merely reinforce the conviction among Putin and his nationalist Slavophile advisers that Russia’s future lies not in the West, but in a separate integration project in the East. 
US President Barack Obama says that this is not the beginning of a new Cold War; current trends may soon suggest otherwise. 

Bubbles in the Broth 
NEW YORK – As below-trend GDP growth and high unemployment continue to afflict most advanced economies, their central banks have resorted to increasingly unconventional monetary policy. 
An alphabet soup of measures has been served up: ZIRP (zero-interest-rate policy); 
QE (quantitative easing, or purchases of government bonds to reduce long-term rates when short-term policy rates are zero); 
CE (credit easing, or purchases of private assets aimed at lowering the private sector’s cost of capital); and FG (forward guidance, or the commitment to maintain QE or ZIRP until, say, the unemployment rate reaches a certain target). 
Some have gone as far as proposing NIPR (negative-interest-rate policy). 
And yet, through it all, growth rates have remained stubbornly low and unemployment rates unacceptably high, partly because the increase in money supply following QE has not led to credit creation to finance private consumption or investment. 
Instead, banks have hoarded the increase in the monetary base in the form of idle excess reserves. 
There is a credit crunch, as banks with insufficient capital do not want to lend to risky borrowers, while slow growth and high levels of household debt have also depressed credit demand. 
As a result, all of this excess liquidity is flowing to the financial sector rather than the real economy. 
Near-zero policy rates encourage “carry trades” – debt-financed investment in higher-yielding risky assets such as longer-term government and private bonds, equities, commodities and currencies of countries with high interest rates. 
The result has been frothy financial markets that could eventually turn bubbly. 
Indeed, the US stock market and many others have rebounded more than 100% since the lows of 2009; issuance of high-yield “junk bonds” is back to its 2007 level; and interest rates on such bonds are falling. 
Moreover, low interest rates are leading to high and rising home prices – possibly real-estate bubbles – in advanced economies and emerging markets alike, including Switzerland, Sweden, Norway, Germany, France, Hong Kong, Singapore, Brazil, China, Australia, New Zealand, and Canada. 
The collapse from 2007 to 2009 of equity, credit, and housing bubbles in the United States, the United Kingdom, Spain, Ireland, Iceland, and Dubai led to severe financial crises and economic damage. 
So, are we at risk of another cycle of financial boom and bust? 
Some policymakers – like Janet Yellen, who is likely to be confirmed as the next Chair of the US Federal Reserve – argue that we should not worry too much. 
Central banks, they argue, now have two goals: restoring robust growth and low unemployment with low inflation, and maintaining financial stability without bubbles. 
Moreover, they have two instruments to achieve these goals: the policy interest rate, which will be kept low for long and raised only gradually to boost growth; and macro-prudential regulation and supervision of the financial system (macro-pru for short), which will be used to control credit and prevent bubbles. 
But some critics, like Fed Governor Jeremy Stein, argue that macro-pru policies to control credit and leverage – such as limits on loan-to-value ratios for mortgages, bigger capital buffers for banks that extend risky loans, and tighter underwriting standards – may not work. 
Not only are they untested, but restricting leverage in some parts of the banking system would merely cause the liquidity from zero rates to flow to other parts of it, while trying to restrict leverage entirely would simply drive the liquidity into the less-regulated shadow banking system. 
According to Stein, only monetary policy (higher policy interest rates) “gets in all of the cracks” of the financial system and prevents asset bubbles. 
The trouble is that if macro-pru does not work, the interest rate would have to serve two opposing goals: economic recovery and financial stability. 
If policymakers go slow on raising rates to encourage faster economic recovery, they risk causing the mother of all asset bubbles, eventually leading to a bust, another massive financial crisis, and a rapid slide into recession. 
But if they try to prick bubbles early on with higher interest rates, they will crash bond markets and kill the recovery, causing much economic and financial damage. 
So, unless macro-pru works as planned, policymakers are damned if they do and damned if they don’t. 
For now, policymakers in countries with frothy credit, equity, and housing markets have avoided raising policy rates, given slow economic growth. 
But it is still too early to tell whether the macro-pru policies on which they are relying will ensure financial stability. 
If not, policymakers will eventually face an ugly tradeoff: kill the recovery to avoid risky bubbles, or go for growth at the risk of fueling the next financial crisis. 
For now, with asset prices continuing to rise, many economies may have had as much soup as they can stand. 

Slow Growth and Short Tails 
NEW YORK – The global economy had another difficult year in 2013. 
The advanced economies’ below-trend growth continued, with output rising at an average annual rate of about 1%, while many emerging markets experienced a slowdown to below-trend 4.8% growth. 
After a year of subpar 2.9% global growth, what does 2014 hold in store for the world economy? 
The good news is that economic performance will pick up modestly in both advanced economies and emerging markets. 
The advanced economies, benefiting from a half-decade of painful private-sector deleveraging (households, banks, and non-financial firms), a smaller fiscal drag (with the exception of Japan), and maintenance of accommodative monetary policies, will grow at an annual pace closer to 1.9%. 
Moreover, so-called tail risks (low-probability, high-impact shocks) will be less salient in 2014. 
The threat, for example, of a eurozone implosion, another government shutdown or debt-ceiling fight in the United States, a hard landing in China, or a war between Israel and Iran over nuclear proliferation, will be far more subdued. 
Still, most advanced economies (the US, the eurozone, Japan, the United Kingdom, Australia, and Canada) will barely reach potential growth, or will remain below it. 
Households, banks, and some non-financial firms in most advanced economies remain saddled with high debt ratios, implying continued deleveraging. 
High budget deficits and public-debt burdens will force governments to continue painful fiscal adjustment. 
And an abundance of policy and regulatory uncertainties will keep private investment spending in check. 
The outlook for 2014 is dampened by longer-term constraints as well. 
Indeed, there is a looming risk of secular stagnation in many advanced economies, owing to the adverse effect on productivity growth of years of underinvestment in human and physical capital. 
And the structural reforms that these economies need to boost their potential growth will be implemented too slowly. 
While the eurozone’s tail risks are lower, its fundamental problems remain unresolved: low potential growth; high unemployment; still-high and rising levels of public debt; loss of competitiveness and slow reduction of unit labor costs (which a strong euro does not help); and extremely tight credit rationing, owing to banks’ ongoing deleveraging. 
Meanwhile, progress toward a banking union will be slow, while no steps will be taken toward establishing a fiscal union, even as austerity fatigue and political risks in the eurozone’s periphery grow. 
In Japan, Prime Minister Shinzo Abe’s government has made significant headway in overcoming almost two decades of deflation, thanks to monetary easing and fiscal expansion. 
The main uncertainties stem from the coming increase in the consumption tax and slow implementation of the third “arrow” of “Abenomics,” namely structural reforms and trade liberalization. 
In the US, economic performance in 2014 will benefit from the shale-energy revolution, improvement in the labor and housing markets, and the “reshoring” of manufacturing. 
The downside risks result from political gridlock in Congress (particularly given the upcoming midterm election in November), which will continue to limit progress on long-term fiscal consolidation; a lack of clarity about the Federal Reserve’s planned exit from quantitative easing (QE) and zero policy rates; and regulatory uncertainties. 
Emerging markets’ difficult year in 2013 reflected several factors, including China’s economic slowdown, the end of the commodity super-cycle, and a fall in potential growth, owing to delays in launching structural reforms. 
Moreover, several major emerging economies were hit hard in the spring and summer, after the Fed’s signal of a forthcoming exit from QE triggered a capital-flow reversal, exposing vulnerabilities stemming from loose monetary, fiscal, and credit policies in the boom years of cheap money and abundant inflows. 
Emerging economies will grow faster in 2014 – closer to 5% year on year – for several reasons. 
Brisker recovery in advanced economies will boost imports from emerging markets. 
The Fed’s exit from QE will be slow, keeping interest rates low. 
Policy reforms in China will attenuate the risk of a hard landing. 
And, with many emerging markets still urbanizing and industrializing, their rising middle classes will consume more goods and services. 
Still, some emerging markets – namely, India, Indonesia, Brazil, Turkey, South Africa, Hungary, Ukraine, Argentina, and Venezuela – will remain fragile in 2014, owing to large external and fiscal deficits, slowing growth, below-target inflation, and election-related political tensions. 
Some of these countries – for example, Indonesia – have recently undertaken more policy adjustment and will be subject to lower risks, though their growth and asset markets remain vulnerable to policy and political uncertainties and potential external shocks. 
The better-performing emerging markets are those with fewer macroeconomic, policy, and financial weaknesses: South Korea, the Philippines, Malaysia, and other Asian industrial exporters; 
Poland and the Czech Republic in Europe; 
Chile, Colombia, Peru, and Mexico in Latin America; 
Kenya, Rwanda, and a few other economies in Sub-Saharan Africa; and the Gulf oil-exporting countries. 
Finally, China will maintain an annual growth rate above 7% in 2014. 
But, despite the reforms set out by the Third Plenum of the Communist Party’s Central Committee, the shift in China’s growth model from fixed investment toward private consumption will occur too slowly. 
Many vested interests, including local governments and state-owned enterprises, are resisting change; a huge volume of private and public debt will go sour; and the country’s leadership is divided on how quickly reforms should be implemented. 
So, while China will avoid a hard landing in 2014, its medium-term prospects remain worrisome. 
In sum, the global economy will grow faster in 2014, while tail risks will be lower. 
But, with the possible exception of the US, growth will remain anemic in most advanced economies, and emerging-market fragility – including China’s uncertain efforts at economic rebalancing – could become a drag on global growth in subsequent years. 


Abenomics, European-Style 
NEW YORK – Two years ago, Shinzo Abe’s election as Japan’s prime minister led to the advent of “Abenomics,” a three-part plan to rescue the economy from a treadmill of stagnation and deflation. 
Abenomics’ three components – or “arrows” – comprise massive monetary stimulus in the form of quantitative and qualitative easing (QQE), including more credit for the private sector; a short-term fiscal stimulus, followed by consolidation to reduce deficits and make public debt sustainable; and structural reforms to strengthen the supply side and potential growth. 
It now appears – based on European Central Bank President Mario Draghi’s recent Jackson Hole speech – that the ECB has a similar plan in store for the eurozone. 
The first element of “Draghinomics” is an acceleration of the structural reforms needed to boost the eurozone’s potential output growth. 
Progress on such vital reforms has been disappointing, with more effort made in some countries (Spain and Ireland, for example) and less in others (Italy and France, to cite just two). 
But Draghi now recognizes that the eurozone’s slow, uneven, and anemic recovery reflects not only structural problems, but also cyclical factors that depend more on aggregate demand than on aggregate supply constraints. 
Thus, measures to increase demand are also necessary. 
Here, then, is Draghinomics’ second arrow: to reduce the drag on growth from fiscal consolidation while maintaining lower deficits and greater debt sustainability. 
There is some flexibility in how fast the fiscal target can be achieved, especially now that a lot of front-loaded austerity has occurred and markets are less nervous about the sustainability of public debt. 
Moreover, while the eurozone periphery may need more consolidation, parts of the core – say, Germany – could pursue a temporary fiscal expansion (lower taxes and more public investment) to stimulate domestic demand and growth. 
And a eurozone-wide infrastructure-investment program could boost demand while reducing supply-side bottlenecks. 
The third element of Draghinomics – similar to the QQE of Abenomics – will be quantitative and credit easing in the form of purchases of public bonds and measures to boost private-sector credit growth. 
Credit easing will start soon with targeted long-term refinancing operations (which provide subsidized liquidity to eurozone banks in exchange for faster growth in lending to the private sector). 
When regulatory constraints are overcome, the ECB will also begin purchasing private assets (essentially securitized bundles of banks’ new loans). 
Now Draghi has signaled that, with the eurozone one or two shocks away from deflation, the inflation outlook may soon justify quantitative easing (QE) like that conducted by the US Federal Reserve, the Bank of Japan, and the Bank of England: outright large-scale purchases of eurozone members’ sovereign bonds. 
Indeed, it is likely that QE will begin by early 2015. 
Quantitative and credit easing could affect the outlook for eurozone inflation and growth through several transmission channels. 
Shorter- and longer-term bond yields in core and periphery countries – and spreads in the periphery – may decline further, lowering the cost of capital for the public and private sectors. 
The value of the euro may fall, boosting competitiveness and net exports. 
Eurozone stock markets could rise, leading to positive wealth effects. 
Indeed, as the likelihood of QE has increased over this year, asset prices have already moved upward, as predicted. 
These changes in asset prices – together with measures that increase private-sector credit growth – can boost aggregate demand and increase inflation expectations. 
One should also not discount the effect on “animal spirits” – consumer, business, and investor confidence – that a credible commitment by the ECB to deal with slow growth and low inflation may trigger. 
Some more hawkish ECB officials worry that QE will lead to moral hazard by weakening governments’ commitment to austerity and structural reforms. 
But in a situation of near-deflation and near-recession, the ECB should do whatever is necessary, regardless of these risks. 
Moreover, QE may actually reduce moral hazard. 
If QE and looser short-term fiscal policies boost demand, growth, and employment, governments may be more likely to implement politically painful structural reforms and long-term fiscal consolidation. 
Indeed, the social and political backlash against austerity and reform is stronger when there is no income or job growth. 
Draghi correctly points out that QE would be ineffective unless governments implement faster supply side structural reforms and the right balance of short-term fiscal flexibility and medium-term austerity. 
In Japan, though QQE and short-term fiscal stimulus boosted growth and inflation in the short run, slow progress on the third arrow of structural reforms, along with the effects of the current fiscal consolidation, are now taking a toll on growth. 
As in Japan, all three arrows of Draghinomics must be launched to ensure that the eurozone gradually returns to competitiveness, growth, job creation, and medium-term debt sustainability in the private and public sectors. 
By the end of this year, it is to be hoped, the ECB will start to do its part by implementing quantitative and credit easing. 

The Changing Face of Global Risk 
NEW YORK – The world’s economic, financial, and geopolitical risks are shifting. 
Some risks now have a lower probability – even if they are not fully extinguished. 
Others are becoming more likely and important. 
A year or two ago, six main risks stood at center stage: 
· A eurozone breakup (including a Greek exit and loss of access to capital markets for Italy and/or Spain). 
· A fiscal crisis in the United States (owing to further political fights over the debt ceiling and another government shutdown). 
· A public-debt crisis in Japan (as the combination of recession, deflation, and high deficits drove up the debt/GDP ratio). 
· Deflation in many advanced economies. 
· War between Israel and Iran over alleged Iranian nuclear proliferation. 
· A wider breakdown of regional order in the Middle East. 
These risks have now been reduced. 
Thanks to European Central Bank President Mario Draghi’s “whatever it takes” speech, new financial facilities to stabilize distressed sovereign debtors, and the beginning of a banking union, the eurozone is no longer on the verge of collapse. 
In the US, President Barack Obama and Congressional Republicans have for now agreed on a truce to avoid the threat of another government shutdown over the need to raise the debt ceiling. 
In Japan, the first two “arrows” of Prime Minister Shinzo Abe’s economic strategy – monetary easing and fiscal expansion – have boosted growth and stopped deflation. 
Now the third arrow of “Abenomics” – structural reforms – together with the start of long-term fiscal consolidation, could lead to debt stabilization (though the economic impact of the coming consumption-tax hike is uncertain). 
Similarly, the risk of deflation worldwide has been contained via exotic and unconventional monetary policies: near-zero interest rates, quantitative easing, credit easing, and forward guidance. 
And the risk of a war between Israel and Iran has been reduced by the interim agreement on Iran’s nuclear program concluded last November. 
The falling fear premium has led to a drop in oil prices, even if many doubt Iran’s sincerity and worry that it is merely trying to buy time while still enriching uranium. 
Though many Middle East countries remain highly unstable, none of them is systemically important in financial terms, and no conflict so far has seriously shocked global oil and gas supplies. 
But, of course, exacerbation of some of these crises and conflicts could lead to renewed concerns about energy security. 
More important, as the risks of recent years have receded, six other risks have been growing. 
For starters, there is the risk of a hard landing in China. 
The rebalancing of growth away from fixed investment and toward private consumption is occurring too slowly, because every time annual GDP growth slows toward 7%, the authorities panic and double down on another round of credit-fueled capital investment. 
This then leads to more bad assets and non-performing loans, more excessive investment in real estate, infrastructure, and industrial capacity, and more public and private debt. 
By next year, there may be no road left down which to kick the can. 
There is also the risk of policy mistakes by the US Federal Reserve as it exits monetary easing. 
Last year, the Fed’s mere announcement that it would gradually wind down its monthly purchases of long-term financial assets triggered a “taper” tantrum in global financial markets and emerging markets. 
This year, tapering is priced in, but uncertainty about the timing and speed of the Fed’s efforts to normalize policy interest rates is creating volatility. 
Some investors and governments now worry that the Fed may raise rates too soon and too fast, causing economic and financial shockwaves. 
Third, the Fed may actually exit zero rates too late and too slowly (its current plan would normalize rates to 4% only by 2018), thus causing another asset-price boom – and an eventual bust. 
Indeed, unconventional monetary policies in the US and other advanced economies have already led to massive asset-price reflation, which in due course could cause bubbles in real estate, credit, and equity markets. 
Fourth, the crises in some fragile emerging markets may worsen. 
Emerging markets are facing headwinds (owing to a fall in commodity prices and the risks associated with China’s structural transformation and the Fed’s monetary-policy shift) at a time when their own macroeconomic policies are still too loose and the lack of structural reforms has undermined potential growth. 
Moreover many of these emerging markets face political and electoral risks. 
Fifth, there is a serious risk that the current conflict in Ukraine will lead to Cold War II – and possibly even a hot war if Russia invades the east of the country. 
The economic consequences of such an outcome – owing to its impact on energy supplies and investment flows, in addition to the destruction of lives and physical capital – would be immense. 
Finally, there is a similar risk that Asia’s terrestrial and maritime territorial disagreements (starting with the disputes between China and Japan) could escalate into outright military conflict. 
Such geopolitical risks – were they to materialize – would have a systemic economic and financial impact. 
So far, financial markets have been sanguine about these new rising risks. 
Volatility has increased only modestly, while asset prices have held up. 
Noise about these risks has occasionally (but only briefly) shaken investors’ confidence, and modest market corrections have tended to reverse themselves. 
Investors may be right that these risks will not materialize in their more severe form, or that loose monetary policies in advanced economies and continued recovery will contain such risks. 
But investors may be deluding themselves that the probability of these risks is low – and thus may be unpleasantly surprised when one or more of them materializes. 
Indeed, as was the case with the global financial crisis, investors seem unable to estimate, price, and hedge such tail risks properly. 
Only time will tell whether their current nonchalance constitutes another failure to assess and prepare for extreme events. 

Back to Housing Bubbles 
NEW YORK – It is widely agreed that a series of collapsing housing-market bubbles triggered the global financial crisis of 2008-2009, along with the severe recession that followed. 
While the United States is the best-known case, a combination of lax regulation and supervision of banks and low policy interest rates fueled similar bubbles in the United Kingdom, Spain, Ireland, Iceland, and Dubai. 
Now, five years later, signs of frothiness, if not outright bubbles, are reappearing in housing markets in Switzerland, Sweden, Norway, Finland, France, Germany, Canada, Australia, New Zealand, and, back for an encore, the UK (well, London). 
In emerging markets, bubbles are appearing in Hong Kong, Singapore, China, and Israel, and in major urban centers in Turkey, India, Indonesia, and Brazil. 
Signs that home prices are entering bubble territory in these economies include fast-rising home prices, high and rising price-to-income ratios, and high levels of mortgage debt as a share of household debt. 
In most advanced economies, bubbles are being inflated by very low short- and long-term interest rates. 
Given anemic GDP growth, high unemployment, and low inflation, the wall of liquidity generated by conventional and unconventional monetary easing is driving up asset prices, starting with home prices. 
The situation is more varied in emerging-market economies. 
Some that have high per capita income – for example, Israel, Hong Kong, and Singapore – have low inflation and want to maintain low policy interest rates to prevent exchange-rate appreciation against major currencies. 
Others are characterized by high inflation (even above the central-bank target, as in Turkey, India, Indonesia, and Brazil). 
In China and India, savings are going into home purchases, because financial repression leaves households with few other assets that provide a good hedge against inflation. 
Rapid urbanization in many emerging markets has also driven up home prices, as demand outstrips supply. 
With central banks – especially in advanced economies and the high-income emerging economies – wary of using policy rates to fight bubbles, most countries are relying on macro-prudential regulation and supervision of the financial system to address frothy housing markets. 
That means lower loan-to-value ratios, stricter mortgage-underwriting standards, limits on second-home financing, higher counter-cyclical capital buffers for mortgage lending, higher permanent capital charges for mortgages, and restrictions on the use of pension funds for down payments on home purchases. 
In most economies, these macro-prudential policies are modest, owing to policymakers’ political constraints: households, real-estate developers, and elected officials protest loudly when the central bank or the regulatory authority in charge of financial stability tries to take away the punch bowl of liquidity. 
They complain bitterly about regulators’ “interference” with the free market, property rights, and the sacrosanct ideal of home ownership. 
Thus, the political economy of housing finance limits regulators’ ability to do the right thing. 
To be clear, macro-prudential restrictions are certainly called for; but they have been inadequate to control housing bubbles. 
With short- and long-term interest rates so low, mortgage-credit restrictions seem to have a limited effect on the incentives to borrow to purchase a home. 
Moreover, the higher the gap between official interest rates and the higher rates on mortgage lending as a result of macro-prudential restrictions, the more room there is for regulatory arbitrage. 
For example, if loan-to-value ratios are reduced and down payments on home purchases are higher, households may have an incentive to borrow from friends and family – or from banks in the form of personal unsecured loans – to finance a down payment. 
After all, though home-price inflation has slowed modestly in some countries, home prices in general are still rising in economies where macro-prudential restrictions on mortgage lending are being used. 
So long as official policy rates – and thus long-term mortgage rates – remain low, such restrictions are not as binding as they otherwise would be. 
But the global economy’s new housing bubbles may not be about to burst just yet, because the forces feeding them – especially easy money and the need to hedge against inflation – are still fully operative. 
Moreover, many banking systems have bigger capital buffers than in the past, enabling them to absorb losses from a correction in home prices; and, in most countries, households’ equity in their homes is greater than it was in the US subprime mortgage bubble. 
But the higher home prices rise, the further they will fall – and the greater the collateral economic and financial damage will be – when the bubble deflates. 
In countries where non-recourse loans allow borrowers to walk away from a mortgage when its value exceeds that of their home, the housing bust may lead to massive defaults and banking crises. 
In countries (for example, Sweden) where recourse loans allow seizure of household income to enforce payment of mortgage obligations, private consumption may plummet as debt payments (and eventually rising interest rates) crowd out discretionary spending. 
Either way, the result would be the same: recession and stagnation. 
What we are witnessing in many countries looks like a slow-motion replay of the last housing-market train wreck. 
And, like last time, the bigger the bubbles become, the nastier the collision with reality will be. 

 

Now For An Arab Economic Revolution 
BEIRUT – Revolution across the Arab world has forced the region’s peoples and governments to grapple with the need for change. 
Years of sclerosis have given way to a frantic push for reforms to match the aspirations and discontent of millions. 
But reform momentum is tugging in two, quite opposite, directions. 
One push is for governments to provide for their people; the other calls for governments to stop restricting their people’s freedom, particularly their economic liberty. 
The first type of reform will likely only exacerbate the Arab world’s grave problems; the second offers hope for positive and sustainable change. 
In several Arab countries, most notably Saudi Arabia, rulers have sought to quell popular discontent by providing a combination of cash, subsidies, guaranteed jobs, and free goods and services. 
Such largesse betrays a fundamental misunderstanding of the causes of today’s discontent, because it assumes that these causes are purely material. 
But any examination of the protesters’ slogans and demands clearly indicates otherwise. 
The protests are much more about political and economic freedom than about material needs, reflecting a keen awareness that such needs are merely a symptom and consequence of the absence of political and economic freedom. 
The dominant “handout approach” is not sustainable, and, if continued, would likely exacerbate the Arab world’s current economic malaise. 
Economic wealth cannot be created by government decree; it comes from productive jobs that create goods and services that people value. 
Governments that hand out benefits are not making their citizens richer by generating new wealth; they are simply redistributing existing wealth. 
This also applies to government-created and guaranteed jobs: if a job is indeed productive, its output would be rewarded by other members of society who benefit from it, without the need for government subsidies and guarantees. 
The fact that government guarantees a job implies that its output is not wanted. 
Such jobs are a liability for society, not an asset. 
As citizens start relying on redistribution, productive work is discouraged, and real wealth creation suffers. 
Economic rot sets in as the ranks of dependent citizens grow, productive citizens dwindle in number, and society eventually runs out of other people’s money. 
But the popularity of the handout option raises an important and instructive question: just how did the ruling classes in these countries amass fortunes so large that people are clamoring for them to be redistributed? 
Government officials and their cronies did not necessarily engage in straightforward theft or pillaging. 
Through innocuous-sounding government “supervision” and “regulation” – and under the guidance of the major international financial institutions – ruling elites managed to run entire sectors of the economy as personal fiefdoms. 
While this pattern of official behavior is reprehensible, the real disaster is that it destroyed Arabs’ economic productivity and initiative. 
This economic totalitarianism has been legitimated by government charity. 
Arab elites have been engaged in a false embrace of economic reforms for decades, with countless ministerial shuffles, five-year plans, and elaborate World Bank and International Monetary Fund programs. 
But all these reforms involve government handouts or government-created jobs and opportunities; rarely do they involve removing the government’s grip over people’s lives. 
By framing the debate on reform as being about the type of handouts, governments evade tackling the real problem: their control of economic activity. 
State handouts can be reliably financed only by controlling the economy’s productive sectors. 
But in the Arab world, as everywhere else, this leads to theft, corruption, uncompetitive monopolies, a stifling of enterprise, and, eventually and inevitably, to decline and decay. 
The toppled Tunisian and Egyptian regimes spent decades providing handouts while denying citizens economic freedom. 
As Arabs confront far-reaching change, they must not be distracted into fruitless debates about the right types of government support for citizens. 
What is needed is a root and branch transformation of the way that economic activity is carried out in all Arab nations. 

Now is Our Time 
New York – Every September, the world’s leaders gather at the United Nations to reaffirm our founding Charter – our faith in fundamental principles of peace, justice, human rights, and equal opportunity for all. 
We assess the state of the world, engage key issues of the day, and lay out our vision for the way ahead. 
But this year is different. The 64th opening of the General Assembly asks us to rise to an exceptional moment. 
We are facing many crises – food, energy, recession, and pandemic flu – occurring all at once. 
If ever there were a time to act in a spirit of renewed multilateralism, a time to put the “united” back into the United Nations, it is now. 
And that is what we are doing, as action on three issues of historic consequence demonstrates. 
First, world leaders are uniting to address the greatest challenge we face as a human family – the threat of catastrophic climate change. 
Last week, 101 leaders from 163 countries met to chart the next steps toward December’s all-important UN climate change conference in Copenhagen. 
They recognized the need for an agreement that all nations can embrace – in line with their capabilities, consistent with what science requires, and grounded in “green jobs” and “green growth,” the lifeline of a twenty-first century global economy. 
We at the UN have prepared carefully for this moment. 
For two and a half years, ever since I became Secretary-General, we have worked to put climate change at the top of the global agenda. 
Today, we have entered a new phase. 
Last week’s summit sharply defined the issue and focused attention in capitals the world over. 
To be sure, the issues are complex and difficult, especially those of financing adaptation and mitigation efforts in poorer countries. 
Yet leaders left New York committed to clear and firm instructions for their negotiators: seal a deal in Copenhagen. 
Japan issued a challenge, agreeing to cut CO2 emissions by 25% by 2020 if other nations follow. 
China’s President Hu Jintao spoke about all that his country is already doing to reduce energy intensity and invest in “green” alternatives. 
He emphasized that China is prepared to do more under an international agreement, as did US President Barack Obama. 
Negotiators will gather for another round of UN talks on September 28 in Bangkok, and we are considering a smaller meeting of major emitting and most vulnerable nations in November. 
We need a breakthrough in this make-or-break year. 
We saw another turning point on a second issue of existential importance: nuclear disarmament. 
Finally, the assumption that such weapons are needed to keep the peace is crumbling. 
At a special summit called by the President Obama, the Security Council unanimously adopted a resolution that opens a new chapter in the UN’s efforts to address nuclear proliferation and disarmament. 
That resolution improves prospects for expanding the Nuclear Non-Proliferation Treaty next May, and offers hope for bringing the Comprehensive Nuclear Test Ban Treaty into force. 
It also sets establishes the contours of a legal framework for action against misuse of civilian nuclear technology for military purposes and reflects an emerging consensus, seen in meeting after meeting, that the time has come to increase pressure on countries that fail to respect these principles. 
The world is united on a third front, as well. 
Though some may speak of “turning the corner to recovery,” we see a new crisis emerging. 
According to our recent report, “Voices of the Vulnerable,” the near-poor are becoming the new poor. 
An estimated 100 million people could fall below the poverty line this year. 
Markets may be bouncing back, but jobs and incomes are not. 
That is why, earlier this year, the UN put forward a Global Jobs Pact for balanced and sustainable growth. 
It is also why we are creating a new Global Impact Vulnerability Alert System, giving us real-time data and analysis on socio-economic conditions around the world. 
We need to know precisely who is being hurt by the financial crisis, and where, so that we can best respond. 
That is also why, next year at this time, we will convene a special summit on the Millennium Development Goals. 
We have only five years to meet the targets for health, education, and human security that we set for 2015. At the various G-20 summits over the past year, including the latest in Pittsburg, the UN has stood firm to speak and act for all those being left behind. 
Rhetoric has always been abundant at the General Assembly, action sometimes less so. 
Yet listening to the world’s leaders speak, last week, I was struck by their passion, commitment, and collective determination to turn a page from a past of countries divided by narrow interests to nations united in the cause of a global common good. 
From confronting climate change to creating a world without nuclear weapons to building a more equitable and sustainable global economy, I saw a sprit of renewed multilateralism, with the UN at the fore. 
No country can deal with any of these challenges by itself. 
But as nations united, the United Nations can. 

Now or Never in Cyprus 
ANKARA – Cyprus is back on the international agenda, with leaders of the island’s rival Greek and Turkish communities engaged in intense negotiations to resolve the divided country’s status. 
But, although new talks are underway, the international community is, not surprisingly, tired of dealing with the issue. 
After all, the Cyprus conflict has dragged on since 1974, wearing out United Nations Secretary-Generals and special representatives of all sorts, as well as bringing down governments in both Greece and Cyprus. 
In 2004, the European Union, the United States, and a good part of the international community invested considerable energy in trying to resolve the conflict once and for all. 
Then UN Secretary-General Kofi Annan and his team drafted a plan, which Turkey’s government took very significant political risks in supporting. 
The government convinced the Turkish Cypriots to make a leap of faith and vote in favor of the Annan plan in order to reunite the island. 
Regrettably, the Greek Cypriot leadership at that time actively campaigned against the UN plan. 
Consequently, whereas 65% of Turkish Cypriots voted in favor of the plan when it was put to a vote on the island, 76% of Greek Cypriots rejected it. 
Worse yet, Greek Cyprus joined the EU literally days after it spurned the will of the international community, while the EU reneged on its promises to end the Turkish community’s isolation if it supported Annan’s plan. 
Today, many people might think that all of this is water under the bridge. 
But the fate of the Annan plan remains very much a part of Turkish thinking on the Cyprus issue. 
In 2008, the UN started a new negotiation process for Cyprus. Turkish Prime Minister Recep Tayyip Erdogan has given his full blessing to a negotiated settlement, and, similar to 2004, Turkey supports the Turkish Cypriots’ willingness to find a viable solution to the division of Cyprus under the UN umbrella. 
But it should be clear that the current talks are the last chance for a negotiated settlement on the island. 
So it is imperative that the transatlantic community recognize that the current talks constitute a historic opportunity. 
No one – not the US, the EU, Turkey, Greece, or the two Cypriot communities – can afford to waste it. 
Either the island will reunite under a UN plan accepted by both sides or the status quo will need to change by some other means. 
The isolation of the Turkish Cypriots, who opted in favor of an internationally acceptable solution, cannot be sustained any longer. 
The talks between Turkish Cypriot President Mehmet Ali Talat and Greek Cypriot President Dimitris Christofias are now entering a critical phase. 
Both leaders need the full support of the transatlantic community. 
The US is particularly well situated to contribute to the process in a positive manner, and its engagement at the appropriate level will be needed in the coming months. 
The US-Turkish partnership, badly strained by the war in Iraq, was reinvigorated by President Barack Obama’s visit to Turkey in June. 
American participation in resolving the Cyprus conflict would ensure that the relationship remains on a sound footing. 
Contrary to many previous rounds of Cyprus negotiations, the issue this time is not confined to the island alone but embraces the wider region. 
The outcome of the ongoing talks, for example, will have a big impact on how Turkey assesses its relations with the EU. 
Should the talks fail, the side that behaves in an uncompromising manner will bear full responsibility for dividing the island forever. 
Moreover, failure to resolve the Cyprus issue would deadlock already strained security cooperation between NATO and the EU. 
The recent visit to Ankara by the new NATO Secretary-General, Anders Fogh Rasmussen, only highlighted again how urgent a Cyprus settlement really is. 
Failure might also have security implications in the Balkans, the Black Sea, and the Eastern Mediterranean – all areas where the US and the EU have vital interests. 
It is for these reasons that the transatlantic community should invest its time and energy in the ongoing UN-sponsored talks. 
Neither the US nor the EU can afford another failure in Cyprus. 
There is simply too much at stake. 

Now the EU is Balkanizing the Balkans 
SOFIA: Residents of the sleepy town of Schengen, near Luxembourg’s border with France and Germany, would marvel at the hatred in which their hometown is held across Eastern Europe. 
For the freedom of movement without passport controls that the Schengen agreements brought within much of the EU was paid for at the price of ridiculously complicated procedures for entry by other Europeans. 
The worst aspect of all is the so-called “Schengen black list”. 
Citizens from European countries outside the Schengen zone face Alice in Wonderland justice; they must prove that they are not criminals or job-poachers if they are to secure a Schengen visa. 
But everyone knows that it is almost impossible to disprove a negative. 
“Schengen” Europeans shrug nonchalantly; they seem to think that everyone beyond the Schengen zone is part of some low post-Soviet breed, always up to no good. 
In recent weeks angry Bulgarians protested against the Schengen visa process. 
These demonstrations were more passionate even than those that took place during NATO's bombing of Yugoslavia. 
Most Bulgarian rage is targeted at Europe. 
Some of it, however, is directed against neighboring Romania because the forthcoming meeting of the EU Council of Justice & Interior to decide when and whether to lift the Schengen restrictions on both countries, is pitting Bulgaria against Romania in a classic case of divide and misrule. 
Romania and Bulgaria were blacklisted at Schengen’s inception. 
When invited to begin negotiations to join the EU, both were told what must be done to get off the list: tighten border and custom controls, stiffen penalties against drug traffikers and illegal immigrants, and make identification papers impossible to forge. 
By everyone’s reckoning, Bulgaria complied and now expects the EU to keep its part of the bargain. 
In the last year alone, indeed, Bulgaria’s border police confiscated over 1000 kilograms of illegal narcotics, almost as much as confiscated in all Europe combined. 
This fact inspired the US ambassador to Sofia - no slouch in condemning narcotics smugglers - to call Bulgaria “one of America's most reliable partners” in the drug war. 
As to Romania, EU-members are divided. 
Germany appears unconvinced that Romania is ready for Schengen membership and suggests that Romania and Bulgaria be looked at separately, on their own merits. 
Everyone knows, of course, that this means that the Germans want to keep the Romanians waiting at the EU gate as long as possible. 
France, among others, is concerned about antagonizing Romanians, perhaps the only people in Eastern Europe who take their diplomatic cues from Paris. 
French diplomats (with assenting nods, it appears, from the Greeks and Dutch) suggest that where Schengen is concerned Romania and Bulgaria are Siamese twins. 
So now Bulgarians are beginning to blame Romanians for keeping them out in the cold. 
Assen Agov, head of our parliament’s foreign policy committee, responded to fears that Bulgaria must wait until Romania catches up by saying that, if EU visa restrictions do not fall in a timely way, Bulgaria should withdraw from the Stability Pact for the Balkans, perhaps capsizing it. 
The argument here is that the Stability Pact has grouped Bulgaria with fragile Balkan democracies like Macedonia and Croatia, which may never see the Euro-light, at least not soon. 
Bulgarians, it seems, are guilty by mere geographical association with the Balkan Wars. 
Bulgaria’s national co-ordinator for the Stability Pact resigned to protest Agov’s rant, and the government has tried to distance itself even more. 
But because the opposition is attacking our reforming government for its supposed cravenness before the EU, several ministers have nonetheless echoed Agov. 
So, too, many members of the governing majority during a special debate in parliament. 
Deputy Prime Minister Petr Zhotev was caught by news cameras saying that “obviously, we are physically unacceptable for Europe. 
They don't want us there.” 
More than national pride and economics are wounded by the Schengen restrictions. 
For the EU’s handling - so far - of this relatively minor issue shows that the road to EU membership appears to be paved with hypocritical intentions. 
Are friendship and prejudice to rule in the EU’s membership determinations, or will objective facts determine things? 
For example: Latvia and Lithuania saw their visas vanish without a fuss because their neighbors lobby hard for them. 
In the words of the Danish foreign minister, “bringing the Balts into the EU is Denmark’s foreign policy priority.” 
Bulgaria’s nearest EU members, however, seem to yearn for the Iron Curtain. 
The EU’s Justice & Interior Council is to meet on 30 November to determine the fates of Romania and Bulgaria in regard to Schengen. 
They must not conceive of their decision so narrowly because, in Bulgaria at least, their words and actions are beginning to twist the very meaning of what it is to be “in” Europe. 
If objective facts and fulfilled commitments can be deliberately ignored, Bulgarians may become convinced that the EU is only interested in promoting a Europe of the “balkanizing” kind. 

Relearning to Love the Bomb 
WASHINGTON, DC – The shocking thing about nuclear weapons is that they seem to have lost their power to shock. 
While the nuclear deal that was just reached with Iran in Lausanne might suggest otherwise and is very good news, that effort should not obscure the bad news elsewhere. 
The momentum toward a nuclear-weapon-free world driven by US President Barack Obama’s landmark 2009 speech in Prague, having faltered for the last few years, has now gone into sharp reverse. 
When Russia annexed Crimea last year, President Vladimir Putin announced his readiness to put Russian nuclear forces on alert, and even signaled plans to “surprise the West with our new developments in offensive nuclear weapons.” 
The world barely stirred. 
Meanwhile, China and India are steadily increasing the size of their nuclear arsenals, and Pakistan is doing so even faster, even spelling out plans to combine battlefield nukes with conventional weapons. 
Again, the world shrugs. 
For its part, the United States plans to spend $355 billion upgrading and modernizing its vast nuclear arsenal over the next ten years. 
Far from moving toward disarmament, the intention seems to be to maintain and enhance every component of America’s current land, sea, and airborne nuclear capability. 
There was more amusement than alarm at a conference of 800 nuclear specialists in Washington, DC, in March, when a senior Air Force general, eerily channeling George C. Scott in “Dr. Strangelove,” offered a nostrils-bared defense of “an ability to allow no adversary to have sanctuary anywhere in the world.” 
Spooked by Russia’s incursions into Ukraine, North Korea’s erratic intransigence, and China’s new foreign-policy assertiveness, US allies and partners in East Asia and Europe have rushed back to unthinking embrace of Cold War assumptions about the deterrent utility of nuclear weapons and their central importance in security policy. 
As my colleagues and I put it in our book-length report Nuclear Weapons: The State of Play 2015, launched in Geneva, Vienna, and Washington in March: “On the evidence of the size of their weapons arsenals, fissile material stocks, force modernization plans, stated doctrine and known deployment practices, all nine nuclear-armed states foresee indefinite retention of nuclear weapons and a continuing role for them in their security policies.” 
All of this has serious implications for the five-year review conference of the Nuclear Non-Proliferation Treaty (NPT), scheduled to begin in New York in late April. 
The NPT has been the single most crucial factor in limiting the world’s nuclear-armed states to the current nine, rather than the 20-30 widely feared a generation ago. 
But its credibility now hangs by a thread. 
The NPT, after all, is based on a bargain: states that do not possess nuclear weapons promise not to acquire them, in exchange for a pledge by those that do to move seriously toward eliminating their arsenals. 
And recent developments have once again jeopardized that bargain, with many states again asking why, if the US, Russia, and others need nuclear weapons, they do not. 
Given such sentiments, it will prove almost impossible at the review conference to build a consensus in favor of further necessary strengthening of the non-proliferation regime, with improved safeguards, export controls, security disciplines, and sanctions against withdrawal from the treaty. 
The irrationality of such resistance is not likely to weaken it. 
Not all the news is bleak. 
Aside from the Iran negotiations, other arms control cooperation is continuing, including between the US and Russia over the New START treaty to reduce strategic deployments, and over chemical weapons in Syria. 
Despite lack of any visible progress toward ridding the Middle East of weapons of mass destruction, the signs are encouraging that Egypt and others in the region want to keep trying, and will not use the issue of a WMD-free zone to blow up the review conference, as had been feared. 
Most encouraging of all, a major new international movement is gathering pace to focus policy attention on the horrific humanitarian consequences of any use of nuclear weapons, and to create the conditions for a treaty to ban them once and for all. 
Since 2012, major conferences have been hosted by Norway, Mexico, and Austria, and more than 155 states have pledged support for appropriate action, with only the nuclear-armed states and their allies and partners dragging their feet. 
The nuclear-armed states will not sign on any time soon to any treaty that bans the use of their weapons under all circumstances. 
They will resist even more strongly the outright elimination of their weapons, given that the world is probably still decades away from devising sufficient verification and enforcement measures. 
But if the NPT review conference is not to end in tears, with all the accompanying risks for world order that failure would entail, the five nuclear-armed states that are NPT signatories can and must be prepared to bring more to the table than they have so far. 
Baby steps – improving their transparency in reporting, or agreeing on the meaning of technical terms like “strategic,” “deployed,” and “reserve” – will not begin to satisfy the many NPT countries that have been appalled by the recent re-emergence of Cold War mindsets and behavior. 
The nuclear-armed states can and should make serious commitments to dramatic further reductions in the size of their arsenals; hold the number of weapons physically deployed and ready for immediate launch to an absolute minimum; and change their strategic doctrines to limit the role and salience of nuclear weapons, ideally by committing to “no first use.” 
Most important, they should agree on indicative target dates – from five to 15 years – for achieving all of these initial objectives. 
Deadlines have been indispensable for achieving sustainable-development and carbon-reduction goals: saving the world from the threat of nuclear annihilation is hardly a less urgent and important objective. 

Nuclear Disarmament and Neighborhood Bullies 
MADRID – Twenty-five years ago, at a summit in Rejkjavik, Iceland, US President Ronald Reagan stunned the world and his Soviet counterpart, Mikhail Gorbachev, by proposing global and comprehensive elimination of all nuclear weapons. 
Unfortunately, the skepticism of the United States’ defense establishment, together with Reagan’s adamant refusal to abandon his Strategic Defense Initiative nipped this bold move in the bud. 
That was a tragic missed opportunity, for a US-Soviet agreement, reached in what was still an essentially binary international system, might have had truly global meaning. 
Although US and Russian stockpiles still account for more than 90% of the world’s nuclear warheads, US President Barack Obama’s disarmament goal, Global Zero, is proving far harder to accomplish now, given how much the world has changed since the Cold War’s end. 
Not only has the number of nuclear states increased, but the so-called “nuclear renaissance” – the revival of nuclear power, owing to rising oil prices and environmental concerns – has put nuclear technologies into growing use. 
This revival holds important implications for nuclear proliferation. 
More importantly, China, India, Pakistan, Iran, and Israel might not be particularly impressed by Russian and American assumptions that they can meet their defense needs with far smaller nuclear arsenals. 
Nuclear disarmament must therefore focus not only on a truly total elimination of stockpiles by the major powers, but also on regional powers’ concerns. 
Global Zero must go hand in hand with a robust strategy of conflict resolution and confidence-building in trouble spots such as Southeast Asia and the Middle East. 
All the nuclear-weapon-free zones that were created in the last decades – for example, by the Tlatelolco Treaty for Latin America or the Treaty of Rarotonga for the South Pacific – were made possible by understandings that were reached freely by regional powers in an atmosphere of multilateral confidence. 
Conspicuously, the 1992 Declaration on the Denuclearization of the Korean Peninsula remains to this day a dead letter simply because of the latent state of war between the two Koreas. 
Another case in point is the Middle East. 
Unless conditions in the region change dramatically for the better, the creation of a WMD-free zone (WMDFZ) in the Middle East – an idea launched at the Nuclear Non-Proliferation Treaty Review Conference in 2010 – might prove a stillborn initiative. 
How can a meeting be convened in 2012, as stipulated by the 2010 NPT conference’s final document, “on the basis of arrangements freely arrived at by the states of the region,” when many of those states are in turmoil, inter-state relations are strained, and the threat of conflict is mounting? 
The Middle East has already had its own missed opportunity, the 1992-1995 Arms Control and Regional Security multilateral working group, which was launched within the Madrid peace process. 
Conceived as a confidence-building endeavor and accompanied by a robust peacemaking track, ACRS was interrupted by the difficulties in the peace process, by Arab states’ insistence that Israel’s nuclear capabilities be addressed before anything else, and by the underlying struggle for mastery in the region. 
If the 2012 conference is conceived as yet one more opportunity to pressure Israel to join the NPT – possibly in exchange for the Arabs joining the Chemical Weapons Convention and the Biological Weapons Convention – the conference might soon reach an impasse. 
But the same outcome is assured if the US and Israel conceive the conference solely as a way to isolate and force NPT compliance on Iran and Syria. 
The nuclear deadlock in the Middle East can be resolved only if all of the regional players are ready to change old patterns of behavior. 
The Arab position has traditionally been that Israel cannot be offered the fruits of peace, such as recognition and normal relations, before it has paid its full territorial price – that is, a complete withdrawal from occupied Arab lands and the creation of a Palestinian state. 
But the Arab states nonetheless insist that, even before the end of conflict, Israel unilaterally must give up its (undeclared) nuclear capabilities. 
This is a futile exercise, not only because Israel would never disarm unilaterally, but also because without normal inter-state relations in the region it is impossible to engage seriously in an effective dialogue on such vital issues. 
Indeed, Israel’s concept of “peace first and denuclearization last” was vindicated in the 1994 Israeli-Jordanian peace treaty, which speaks of a WMDFZ as a goal “to be achieved in the context of a comprehensive, lasting and stable peace.” 
Nor can Israel expect to have the best of all worlds – making nuclear disarmament conditional on a comprehensive peace, while simultaneously conducting a policy aimed at stalling the peace process. 
There might be no better formula for progress towards a WMDFZ in the Middle East than a return to the ACRS concept, whereby two parallel tracks move toward a comprehensive Israeli-Arab peace along the lines of the Arab Peace Initiative, and to the establishment of a WMDFZ in the region. 
To work, the Arabs must accord to Israel key benefits of peace before peace has been formally achieved. 
Israel, for its part, must recommit itself to the late Yitzak Rabin’s doctrine that only a comprehensive regional peace agreement can prevent the Middle East from declining into nuclear chaos. 

Nuclear Disarmament Disarmed 
SINGAPORE – US President Barack Obama’s foreign-policy landscape is littered with deflated balloons. 
Soaring speeches, high hopes, and great expectations have yielded minimal returns. 
Across the Islamic world – from North Africa to Iraq, Afghanistan, and Pakistan – we see fragile relationships, unhappy transitions, unresolved conflicts, and outright attacks on the United States, despite Obama’s case for a new beginning, movingly articulated in his June 2009 speech in Cairo. 
Israel, deaf to Obama’s urging, is further from reconciliation with Palestine, and closer to war with Iran, than it has ever been. 
Likewise, for all the effort put into improving America’s most important bilateral relationships – those with China and Russia – ties with both countries have become increasingly tense, owing most recently to the Kremlin’s intransigence over Syria and official Chinese behavior in the South China Sea. 
But the balloon that has deflated the most may be the one that Obama sent aloft in Prague in April 2009, when he made the case for rapid and serious movement toward a world free of nuclear weapons. 
A good start was made with the US-Russia New START treaty to limit significantly strategic-weapon deployments, the largely successful Nuclear Non-Proliferation Treaty (NPT) Review Conference, and the productive, US-hosted Nuclear Security Summit. 
But, over the last year, the spirit of optimism that energized these developments has, sadly, gone missing. 
This month, a group of former prime ministers, foreign and defense ministers, and military, diplomatic, and scientific leaders from 14 countries met in Singapore as the Asia Pacific Leadership Network for Nuclear Non-Proliferation and Disarmament (APLN). 
They expressed their profound disappointment at what they described as the “evaporation of political will” evident in global and regional efforts toward nuclear disarmament. 
Apart from another reasonably productive Nuclear Security Summit in Seoul in March 2012, the news on the disarmament front over the last year has certainly been bleak. 
Further US-Russia arms-reduction negotiations ground to a halt long before the American presidential election season began. 
Meanwhile, no other nuclear-armed state has expressed the slightest interest in bilateral or multilateral reduction negotiations until the two major powers, which currently hold 95% of the world’s stockpile, make further major cuts. 
Cautious initial moves by the US to modify its nuclear doctrine – toward accepting that nuclear weapons’ “sole purpose” is to respond to nuclear threats, and not any other kind – have gone nowhere. 
Negotiations to “de-alert” the 2,000 nuclear weapons that remain at absurdly dangerous, Cold War-era launch readiness have never really started. 
There are also no signs of movement on bringing into force the Comprehensive Nuclear-Test-Ban Treaty (CTBT). 
And there has been zero progress on breaking the negotiating stalemate on a new treaty to ban production of fissile material for nuclear weapons; negligible progress on a conference to create a nuclear-weapons-free zone in the Middle East (a key outcome of the 2010 NPT Review Conference); and actual acceleration of nuclear-weapons programs in India, Pakistan, and China. 
So who is to blame? 
Some charge the Obama administration itself with sending mixed signals or worse: The US, they note, has modernized its own nuclear arsenal, developed new ballistic-missile defense and conventional weapons systems, and been too willing to accommodate its European and Northeast Asian allies’ nervousness about limiting the nuclear dimension of the extended deterrence umbrella under which they shelter. 
But it is hard to ignore the huge constraint that an intensely partisan and negative political environment in the US has imposed. 
Republican intransigence has precluded US ratification of the CTBT, which would be a big international circuit-breaker; almost killed the New START treaty at birth; and has caused the bar for further negotiations with Russia and China to be set almost impossibly high. 
Nor is there any sign that any of these positions would be modified should Mitt Romney, the Republican challenger, become president. 
International concerns have been compounded – certainly for the APLN leaders – by the shrillness of Romney’s statements on China and Taiwan, as well as his extraordinary identification of Russia as America’s “number one geopolitical foe.” 
There are those who will say that it is naïve to want a world free of nuclear weapons, much less to think that it can be achieved. 
But it is not naïve to be concerned about the most indiscriminately inhumane weapons of destruction ever invented – 23,000 of which still exist – with a combined destructive capability of 150,000 Hiroshima bombs. 
And it is not naïve to believe that non-proliferation and disarmament are inextricably connected: that so long as any state retains nuclear weapons, others will want them. 
The genuinely naïve – or ignorant – position is to believe that statesmanship and foolproof controls, rather than sheer dumb luck, have enabled the world to go almost seven decades without a nuclear-weapons catastrophe. 
It is not naïve to believe that nuclear deterrence is both fragile operationally, and of thoroughly dubious utility in sustaining the peace. 
Nor is it naïve to believe that even if nuclear weapons cannot be un-invented, they can ultimately be outlawed. 
Obama cannot be faulted for trying. 
Even deflated balloons are better than a devastated planet. 

Nuclear Disarmament’s Midnight Hour 
CANBERRA – Last month, the Doomsday Clock’s hands were moved a minute closer to midnight by the Bulletin of the Atomic Scientists, the respected global organization that for decades has tracked the risk of a nuclear-weapons catastrophe, whether caused by accident or design, state or terrorist, fission bomb or dirty radiological bomb. 
Few around the world seemed to be listening. 
The story – as others like it since the end of the Cold War ­– came and went within a half-day’s news cycle. 
But the Scientists’ argument was sobering, and demands attention. 
Progress since 2007 – when the Clock’s hands were last set at five minutes to midnight – has stalled, and political leadership has gone missing on all of the critical issues: disarmament, non-proliferation, and key building blocks needed for both. 
On disarmament, the balloon has well and truly deflated. 
The New START treaty, signed by the United States and Russia in 2010, reduced the number of deployed strategic weapons, but left both sides’ actual stockpiles intact, their high-alert status undisturbed, weapons-modernization programs in place, disagreements about missile defense and conventional-arms imbalances unresolved – and talks on further draw-downs going nowhere. 
With no further movement by the US and Russia, which together hold 95% of the world’s total of more than 20,000 nuclear weapons, no other nuclear-armed state has felt pressure to reduce its own stocks significantly, and some – China, India, and Pakistan – have been increasing them. 
The 2010 Non-Proliferation Treaty (NPT) Review Conference was a modest success, mainly because it did not collapse in disarray, as had the previous one in 2005. But it could not agree on measures to strengthen the regime; its push for talks on a nuclear-weapons-free zone in the Middle East has so far gathered no momentum; 
North Korea is no closer to being put back in its NPT box; and Iran is closer than ever to jumping out of it, with consequences that would ricochet around the region – and the global economy – if it makes that decision. 
Despite President Barack Obama’s good intentions, the US Senate is no closer to ratifying the Comprehensive Nuclear-Test-Ban Treaty, while China, India, and Pakistan, among others, take shelter behind that inaction, with a fragile voluntary moratorium the only obstacle to resumed testing. 
And negotiations on another crucial building block for both disarmament and non-proliferation – a treaty to ban further production of weapons-grade fissile material – remain at an impasse. 
The only half-way good news is that progress continues on a third building block: ensuring that weapons-usable materials, and weapons themselves, currently stored in multiple locations in 32 countries, do not fall into the hands of rogue states or terrorists. 
At the end of March, South Korean President Lee Myung-bak will host a follow-up meeting to Obama’s successful Nuclear Security Summit in 2010, which brought together 47 government leaders to agree on a comprehensive program aimed at securing all such materials within four years. 
High on the agenda will be the security implications of nuclear safety: the Fukushima catastrophe showed that nuclear-power plants may be vulnerable not only to natural disaster, but also to terrorist sabotage. 
But nuclear security is only one small part of what must be done to eliminate nuclear threats once and for all, and summit fatigue will make it difficult to sustain key world leaders’ commitment to meeting for so narrow a purpose. 
New thinking is urgently needed on how to recover the momentum of just two years ago. 
To achieve that requires meeting three conditions. 
First, political leaders and civil-society leaders must restate, ad nauseam if necessary, the case for “global zero” – a world without nuclear weapons – and map a credible step-by-step path for getting there. 
Second, new mechanisms are needed to energize policymakers and publics. 
One is to develop and promote a draft Nuclear Weapons Convention as a framework for action. 
Another is a “State of Play” report card that pulls no punches in assessing which states are meeting their disarmament and non-proliferation commitments, and which are not (the Nuclear Materials Security Index, just published by Senator Sam Nunn’s Nuclear Threat Initiative, is one example). 
Advocacy-focused leadership networks, such as those now operating in Europe and the Asia-Pacific region, comprising well-known former leaders and other senior figures, could also help. 
Third, sustaining high-level policy attention to the entire nuclear agenda requires an institutional setting. 
The Nuclear Security Summit’s focus is too narrow for this role; the International Atomic Energy Agency’s formal mandate is too restricted; the NPT Review Conference meets too irregularly; and the United Nations Security Council’s membership is too limited. 
The best forum for norm-building may prove to be the G-20, whose members embrace both North and South, account for most of the world’s population, GDP, and all but a handful of its nuclear weapons, and whose heads of government meet regularly. 
With its foreign ministers meeting in Mexico this month to discuss broader global governance issues, the G-20 is beginning to move beyond a narrow economic focus. 
That is to be welcomed. 
Economic destruction causes immense and intolerable human misery. 
But there are only two global threats that, if mishandled, can destroy life on this planet as we know it. 
And nuclear weapons can kill us a lot faster than CO2 can. 

How Iran Is Winning 
TEL AVIV – In 2003, the United States – which, along with its NATO allies, had already occupied Afghanistan – toppled Saddam Hussein’s government in Iraq and overran his army. 
Iran’s leaders, alarmed that they were being encircled, lost no time in offering the West a grand bargain covering all contentious issues, from nuclear-weapons development – they halted their military nuclear program – to regional security, including the Israeli-Palestinian peace process and their backing of Hezbollah and Hamas. 
The recent framework agreement on Iran’s nuclear program has had the opposite effect. 
Though the deal does slow Iran’s development of nuclear weapons, it does not restrain – or even address – the regime’s hegemonic ambitions in the region, for which it has already spent billions of dollars and suffered crippling sanctions. 
As a result, the framework agreement is creating strategic chaos in an already dysfunctional region. 
A future in which regional powers like Turkey, Egypt, and Saudi Arabia (which has worked closely with Pakistan on the nuclear front) possess threshold nuclear capabilities is becoming more likely that ever. 
These are glorious days for Iran. 
After more than a decade of diplomatic isolation and economic sanctions, its status as a threshold nuclear state has been internationally legitimized. 
Moreover, it has managed to compel the US to abandon its dream of regime change, and to coexist – and even engage – with an Islamic theocracy that it finds repugnant. 
The regional balance of power is already tilting in Iran’s favor. 
In Lebanon, Palestine, and Syria, Iranian proxies have prevailed over Saudi-backed groups. 
And the Iran-backed Houthis remain in control of Yemen, despite Saudi airstrikes. 
Iran’s leaders can thank George W. Bush. 
Far from producing the outcome that they feared in 2003, Bush’s wars in the Middle East left Iran as the most influential actor in Iraq. 
As Saudi officials have observed, Iranian militias fighting the Islamic State in predominantly Sunni regions north and west of Baghdad hope to reinforce their country’s control over Iraq. 
The perceived threat posed by the Islamic State has also caused the US to drop ousting Syria’s Bashar al-Assad, Iran’s main regional ally, from its agenda. 
Indeed, the US has ended up indirectly allied with Hezbollah, a key Iranian proxy, which is fighting alongside Assad’s troops against foreign jihadi forces. 
Meanwhile, America’s relationship with its traditional Arab allies – the region’s conservative Sunni regimes – is faltering, owing largely to US President Barack Obama’s failure to respond effectively in the aftermath of the Arab Spring uprisings. 
Obama’s offers of security guarantees and “nuclear umbrellas” have not been able to restore their trust. 
(Such security guarantees are, after all, implicit.) 
For Iran’s enemies, the message of the framework agreement is clear: protect your own vital interests, rather than waiting for the US. 
And that is precisely what countries like Egypt and Saudi Arabia are doing, having established a joint Arab military force to fight Iranian influence in the region, as well as discreet security links with Israel, another self-declared victim of the framework agreement. 
Turkey is also engaging in strategic recalculations. 
President Recep Tayyip Erdoğan, who called Iran his “second home” during a visit to Tehran last year, recently accused the Islamic Republic of “seeking to dominate the region.” 
As a result, Turkey now finds itself collaborating with Saudi Arabia in backing the Al Nusra Front, the Syrian arm of Al Qaeda, which captured Idlib in the first major military setback for Assad in recent months. 
Still, Turkey’s recent behavior – from Erdoğan’s shocking call for an end to the Sykes-Picot system to its de facto collusion with the Islamic State’s siege of the Kurdish town of Kobani, just over the border in Syria – has discouraged the region’s major Sunni powers from pursuing closer ties. 
But no regional leader is as frantic – or as dangerous – as Israeli Prime Minister Binyamin Netanyahu. 
In his vulgar use of Holocaust metaphors to portray the Iranian threat, he sounds more like the principal of a Jewish ghetto about to be annihilated by an agitated mob than the prime minister of the most powerful country in the Middle East. 
Netanyahu’s lack of self-awareness is perhaps best exemplified in his interactions with Obama. 
He expects the US to offer Israel security assistance to face the challenge that Iran poses, even as he barges clumsily into Obama’s political backyard and forges alliances with his domestic opponents. 
In fact, Netanyahu has fundamentally misunderstood the Iran challenge: It is not an existential threat, but part of a broader struggle for regional mastery. 
Rather than engaging in an unrealistic campaign to kill the nuclear agreement, Netanyahu should have been focusing on the strategic implications of Iran’s rise. 
It is Iran’s geopolitical behavior, not its threshold nuclear status, that matters. 
Of course, Netanyahu is intentionally exaggerating the Iranian threat to deflect attention from Israel’s real problems – especially its enduring conflict with Palestine. 
But he can hope to obscure the sins of occupation only temporarily. 
If the Palestine issue is not resolved soon, there can be no lasting alliances with “moderate” Sunni powers to counter Iran. 
In order to bring some semblance of stability to the Middle East, the US must think beyond the framework nuclear agreement with Iran and develop, with all stakeholders, a collective security regime – an initiative that will require the US to regain the trust of its allies in the region. 
In reality, the key question has never been when Iran will develop a nuclear weapon, but how to integrate it into a stable regional system before it does. 

Bottling the Sun 
LONDON – This December, world leaders will gather in Paris for the United Nations Climate Change Conference, where they will attempt – yet again – to hammer out a global agreement to reduce greenhouse-gas emissions. 
Despite the inevitable sense of déjà vu that will arise as negotiators struggle to reach a compromise, they must not give up. 
Whatever the political or economic considerations, the fact remains: if global temperatures rise more than 2˚C from pre-industrial levels, the consequences for the planet will be catastrophic. 
But the challenge does not end with reducing emissions. 
Indeed, even if we make the transition to a cleaner world by 2050, we will need to determine how to meet a booming global population’s insatiable appetite for energy in the longer term – an imperative that renewables alone cannot meet. 
That is why we need to invest now in other technologies that can complement renewables, and provide reliable electricity for many centuries to come. 
And one of the most promising options is nuclear fusion – the process that powers the sun and all stars. 
Brought down to earth, nuclear fusion – a process fueled primarily by lithium and deuterium (an isotope of hydrogen), both of which are plentiful in seawater and in the earth’s crust – could provide a major source of low-carbon energy. 
A fusion power station would use only around 450 kilograms of fuel annually, cause no atmospheric pollution, and carry no risk of accidents that could lead to radioactive contamination of the environment. 
But, while the fusion process has produced some power (16 million watts of it, to be specific), scientists have yet to create a self-sustaining fusion “burn.” 
Indeed, unlike nuclear fission, which went from the laboratory to the power grid within two decades, fusion has proved a tough nut to crack. 
The problem is that fusion involves joining two positively charged nuclei – and, as basic science shows, same-sign charges repel each other. 
Only at extremely high temperatures – over 100 million degrees Celsius, or almost ten times hotter than the sun – do the nuclei move so rapidly that they overcome their repulsion and fuse. 
Scientists have spent the last 60 years trying to figure out the best way to create these conditions. 
Today, the frontrunner is a device known as a “tokamak,” a magnetic bottle in which the fuel, held at 100-200 million degrees Celsius, fuses, unlocking huge amounts of energy. 
Of course, holding the sun in a bottle is no small challenge, especially when one considers that the systems must be engineered so that they can create electricity for a price consumers are willing to pay. 
But in a sunny corner of southern France, a global megaproject is coming together that will, for the first time, test the technology on an industrial scale, creating the first controlled fusion burn. 
Everything about the so-called “ITER reactor” is big. 
It will be heavier than three Eiffel Towers; the material for its superconducting magnets would stretch around the equator twice; and it has a price tag of more than €15 billion ($16.8 billion), making it one of the largest international science endeavors in history. 
The ITER partners – China, the European Union, India, Japan, Russia, South Korea, and the United States – represent half the world’s population. 
And, if it is successful, the reactor will produce half a gigawatt of fusion power and open the way for commercial reactors. 
But the tokamak is not the only game in town. 
Other designs are emerging to join the race for fusion power. 
Lawrence Livermore National Laboratory’s National Ignition Facility in California is getting impressive results by firing high-powered lasers at capsules of fuel, crushing the particles together to trigger fusion reactions. 
Elsewhere, particularly in the US, privately funded fusion ventures are springing up like mushrooms, each with its own concept for what some call the Holy Grail of energy. 
As the most advanced design, the tokamak still looks like the safest bet, but the competition from its rivals can only spur further innovation and progress. 
Some discourage investment in nuclear fusion, claiming that, given how far from being market-ready the technology is, our financial resources are better allocated to tried and tested energy options. 
The critics have a point: given that fusion can be carried out only on a large scale, its investment requirements are considerable. 
In the 1970s, American researchers estimated that getting fusion power on the grid would demand investment of $2-3 billion annually in research and development until anywhere from 1990 to 2005 (depending on the amount of effort applied). 
They also estimated a minimum level of investment, below which funding would never be sufficient to build a fusion power plant. 
Nuclear fusion research budgets have remained below that line for 30 years. 
But fusion’s potential is simply too great to give up. 
And, in fact, the progress that has been made in recent years – despite the lack of adequate investment – belies the naysayers. 
Machines all over the world are reaching fusion temperatures and extending our technological capabilities. 
The ITER experiment, when it starts up in the early 2020s, will embody those advances, achieving the long-awaited fusion burn – and place us just one step away from the ultimate goal of getting fusion power on the grid in an affordable manner. 
Without nuclear fusion, future generations’ energy options will be severely limited – creating a serious problem for developed and developing countries alike. 
Lev Artsimovich, the tokamak’s inventor, said that “fusion will be ready when society needs it.” 
One hopes that he is right. 
But, rather than depending on fusion researchers to defy the odds, the world should step up investment in the technology. 
Our future may depend on it. 

Rediscovering the Promise of Nuclear Power 
OXFORD – At the 2015 United Nations Climate Change Conference in Paris, world leaders at last seemed to recognize the reality of climate change. 
But the response they are pursuing is fundamentally flawed, given its dependence on “renewable energy sources” – such as solar, hydro, and wind power, as well as biofuels – that actually damage nature. 
Ironically, the world’s best bet to achieve the Paris agreement’s goals is to rely on an energy source that is often demonized: nuclear power. 
Water, wind, and solar power cannot reliably provide energy on the scale required for a modern economy. 
One kilogram (2.2 pounds) of water behind a dam that is 100 meters (328 feet) high can provide just 1/3,600 kilowatt hours of energy. 
One kilogram of coal, by contrast, provides about 7 kWh of energy – 20,000 times more. 
A hydroelectric scheme would thus have to be enormous to generate the same amount of energy as a coal-fired equivalent, implying high environmental and human costs. 
To build the largest existing hydroelectric project – the Three Gorges reservoir on the Yangtze River, which stretches for 600 kilometers (373 miles) – 1.3 million people were relocated, as 13 cities, 140 towns, and 1,350 villages were inundated. 
Wind has a similar energy density. 
Even with their large and noisy turbines, offshore wind farms produce, at their peak, as little as nine megawatts per square kilometer. 
To match a one-gigawatt coal-fired plant requires several hundred turbines. 
The same goes for solar farms: to be competitive, they must be huge, covering vast areas of hillside and meadow. 
Yet, even if these massive and environmentally damaging structures were installed, they would be unable to produce enough energy reliably. 
Articles touting the peak power generation of wind and solar often fail to mention that, for periods that sometimes last many days, they offer little to none. 
If excess energy could be stored efficiently, the lean periods might be covered; but improvements in battery technology are limited by the laws of chemistry. 
A recent claim that renewable sources alone could supply all of the United States’ electricity needs has been discredited. 
To avoid blackouts, fully reliable back-up energy sources must be built and kept on stand-by at a cost attributable to the fluctuating renewables. 
Some argue that the answer is biofuels such as ethanol and biodiesel, which benefit from subsidies in some places. 
But, among renewable-energy options, biofuels have the greatest environmental impact of all, because they require large areas of agricultural land and forest, yet fail to retain the carbon dioxide that nature captures so effectively. 
Nuclear energy is the one carbon-free energy source without these environmental downsides. 
In fact, nuclear fuel has 100,000 times the energy density of coal, so that a one-gigawatt nuclear plant would require only 15 hectares of land. 
Smaller modular plants could blend unobtrusively into the landscape. 
Moreover, nuclear ores are widespread geographically, and the fuel is easily transported and stockpiled. 
And a nuclear plant – which can operate for 60 years – is more resilient to extreme weather than wind or solar plants. 
Despite these advantages, countries around the world are refusing to invest in new nuclear plants and are even shutting down those that already exist. 
The reason lies in a lack of understanding of how we are exposed to radiation from nuclear processes – an integral part of nature – every day. 
For three billion years, life has evolved not to be adversely affected by natural radiation from rocks and space. 
A century ago, Marie Curie received two Nobel Prizes for explaining the physics and chemistry of nuclear physics and radiation, before pioneering the use of high doses of radiation for cancer treatment. 
Yet, while virtually everyone has a relative or friend who has benefited from radiotherapy, public attitudes toward nuclear energy and radiation never recovered from the shock of the nuclear bombs dropped on Hiroshima and Nagasaki in 1945. 
But the long-term effects of the radiation released by those bombs have been greatly exaggerated. 
True, up to 200,000 people may have died in the bombings and their immediate aftermath, but that was mainly from the blast and resulting firestorm. 
Few died of cancer. 
Indeed, the medical records of survivors indicate an extra 550-850 cancer deaths over 50 years. 
It did not help that, during the Cold War, politicians and media exploited fear of radiation. 
Draconian safety regulations were enacted in the 1950s, not because evidence demanded it, but to appease an anxious public whose concerns were exacerbated by the nuclear-arms race between the US and the Soviet Union. 
In 1986, the nuclear accident at Chernobyl seemed to confirm these fears, though the radiation death toll of that event was just 43. 
Likewise, although no one died from radiation released by the 2011 accident at Japan’s Fukushima Daiichi plant, that episode was widely regarded as proof that countries should abandon nuclear power. 
The negative impact of Fukushima – including 1,600 deaths and severe economic and environmental damage – were the result of inept regulation and evacuation procedures. 
And what caused the accident in the first place was geology, not the pursuit of nuclear power. 
The world must move beyond radiation phobia and accept more relaxed, evidence-based nuclear regulations. 
(It is compliance with excessive regulations that makes nuclear power apparently expensive.) 
What is required, above all, is the political will to challenge the status quo, in the name of smart and forward-thinking policy choices, and better education of the public (beginning with schoolchildren and higher investment in education). 
Nuclear power may not be popular today, but it should be tomorrow. 
It is the best choice for our collective future. 
We should embrace it. 

From Nuclear Safety to Nuclear Security 
WASHINGTON, DC/MOSCOW – Four years ago, a devastating tsunami crashed into the coast of Japan. 
Fifty-foot waves breached the seawall of the Fukushima Daiichi nuclear power plant, cutting off its emergency power supply and disabling its cooling systems. 
The nuclear accident was the worst since the meltdown of the Chernobyl power plant in 1986. 
Investigators concluded that one of the underlying causes was complacency: those in charge of the facility believed that their safety systems were robust, and there was no effective independent oversight. 
The disaster in Japan has spurred reforms in the field of nuclear safety. 
But when it comes to nuclear security, complacency remains a major problem. 
We must not wait until tragedy strikes to do something about it. 
Today, well over 1.5 million kilograms of highly enriched uranium and plutonium – key ingredients for nuclear weapons – are dispersed across hundreds of facilities in 25 countries. 
Some are poorly secured. 
Yet enough nuclear material to fill a small bag of sugar is all it takes to construct a device with the potential to kill hundreds of thousands of people and inflict billions of dollars in damage. 
Much has been done to improve security at nuclear facilities in recent years, but governments must do more to protect their citizens from the risks of catastrophic nuclear terrorism. 
The lessons from the Fukushima crisis can serve as a useful guide for reform. 
For starters, governments and industry must treat nuclear security as a process of continuous improvement and work to keep pace with evolving threats and challenges. 
A facility considered secure 20 years ago might now be vulnerable to a cyber attack that bypasses its security systems or confounds efforts to keep track of its nuclear material. 
Well-organized and well-financed non-state groups, like the Islamic State, may employ new tactics, technologies, and capabilities to steal nuclear materials. 
Governments must therefore consistently evaluate evolving technologies and threats so that security systems designed to protect nuclear materials stay ahead of the capabilities of those who would seek to steal them. 
Second, governments and industry should make sure that security culture, like safety culture, becomes an integral part of every nuclear facility’s operations. 
As General Eugene Habiger, a former commander-in-chief of the United States Strategic Command who was the US Department of Energy’s “security czar,” once put it: “Good security is 20% equipment and 80% people.” 
Governments and industry should work together to nurture a strong culture of security. 
Each and every employee at a nuclear facility – from guards to scientists to senior staff – must view the security of nuclear materials as an essential part of their jobs. 
Third, governments must regularly review security systems at nuclear facilities. 
It is not sufficient for nuclear operators to say that the state of security in their facilities is “good enough.” 
Effective oversight can root out complacency. 
Fukushima exposed the need for regulators to perform regular stress tests, evaluating the ability of nuclear facilities to stand up to various contingencies affecting their safety. 
Regulators should conduct similar evaluations aimed specifically at assessing facilities’ ability to withstand security threats, including theft by knowledgeable insiders. 
Finally, world leaders should seek to establish closer forms of international cooperation on nuclear security. 
As Chernobyl and Fukushima demonstrated, nuclear safety vulnerabilities in one country can have profound consequences for the rest of the world. 
The same can be said of nuclear security risks. 
We share a political – and moral – responsibility to ensure that terrorists never get their hands on the world’s most dangerous materials. 
Countries should draw on the example of the Nunn-Lugar Cooperative Threat Reduction program, a successful program of collaboration on nuclear security among the United States, Russia, and ex-Soviet states. 
Countries with nuclear materials should exchange information on how best to bolster security, increase intelligence-sharing on common nuclear-security challenges, and explore the possibility of conducting peer reviews. 
Our friend and colleague Sam Nunn, co-chairman of the Nuclear Threat Initiative, often warns that we are in a race between cooperation and catastrophe. 
It is important that we learn the lessons of Fukushima and incorporate them into our strategy to combat nuclear terrorism. 
This is one race in which we cannot afford to fall behind. 

Nuclear Steps Undermine Peace 
By abandoning many of the nuclear arms agreements negotiated in the last 50 years, the United States has been sending mixed signals to North Korea, Iran, and other nations with the technical knowledge to create nuclear weapons. 
Currently proposed agreements with India compound this quagmire and further undermine the global pact for peace represented by the nuclear nonproliferation regime. 
At the same time, no significant steps are being taken to reduce the worldwide arsenal of almost 30,000 nuclear weapons now possessed by the US, Russia, China, France, Israel, Britain, India, Pakistan, and perhaps North Korea. 
A global holocaust is just as possible now, through mistakes or misjudgments, as it was during the depths of the Cold War. 
The key restraining commitment among the five original nuclear powers and more than 180 other nations is the 1970 Non-Proliferation Treaty (NPT). 
Its key objective is “to prevent the spread of nuclear weapons and weapons technology...and to further the goal of achieving nuclear disarmament.” 
In the last five-year review conference at the United Nations in 2005, only Israel, India, Pakistan, and North Korea were not participating – the first three have nuclear arsenals that are advanced, and the fourth’s is embryonic. 
The American government has not set a good example, having already abandoned the Anti-Ballistic Missile treaty, binding limitations on testing nuclear weapons and developing new ones, and a long-standing policy of foregoing threats of “first use” of nuclear weapons against non-nuclear states. 
These recent decisions have encouraged China, Russia, and other NPT signatories to respond with similar actions. 
Knowing since 1974 of India’s nuclear ambitions, I and other American presidents imposed a consistent policy: no sales of nuclear technology or uncontrolled fuel to India or any other country that refused to sign the NPT. 
Today, these restraints are in the process of being abandoned. 
I have no doubt that India’s political leaders are just as responsible in handling their country’s arsenal as leaders of the five original nuclear powers. 
But there is a significant difference: the original five have signed the NPT, and have stopped producing fissile material for weapons. 
India’s leaders should make the same pledges, and should also join other nuclear powers in signing the Comprehensive Nuclear Test Ban Treaty. 
Instead, they have rejected these steps and insist on unrestricted access to international assistance in producing enough fissile material for as many as 50 weapons a year, far exceeding what is believed to be India’s current capacity. 
If India��s demand is acceptable, why should other technologically advanced NPT signatories, such as Brazil, Egypt, Saudi Arabia, and Japan – to say nothing of less responsible nations – continue to restrain themselves? 
Having received at least tentative approval from the US for its policy, India still faces two further obstacles: an acceptable agreement with the International Atomic Energy Agency (IAEA) and an exemption from the Nuclear Suppliers Group (NSG), a 45-nation body that – until now – has barred nuclear trade with any nation that refuses to accept international nuclear standards. 
The non-nuclear NSG members are Argentina, Australia, Austria, Belarus, Belgium, Brazil, Bulgaria, Canada, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, Germany, Greece, Hungary, Ireland, Italy, Japan, Kazakhstan, Latvia, Lithuania, Luxembourg, Malta, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, South Africa, South Korea, Spain, Sweden, Switzerland, Turkey, and Ukraine. 
The role of these nations and the IAEA is not to prevent India’s development of nuclear power or even nuclear weapons, but rather to assure that it proceeds as almost all other responsible nations on earth do, by signing the Non-Proliferation Treaty and accepting other reasonable restraints. 
Nuclear powers must show leadership, by restraining themselves and by curtailing further departures from the NPT's international restraints. 
One-by-one, the choices they make today will create a legacy -- deadly or peaceful -- for the future. 

Nuclear Targets 
LOS ANGELES -- Nuclear facilities as military targets? 
The drumbeat appears to be growing louder. 
Western leaders repeatedly declare that no option is off the table to stem Iran’s nuclear ambitions. 
And, in mid-November, London’s Sunday Times reported that Israel put defenses around its Dimona nuclear reactor on “red alert” 30 times, as worries grew that Syria would avenge Israel’s September attack on a suspected nuclear site in Syria. 
Israel’s fear reflects the region’s unique history. 
Since World War II, strikes to halt nuclear activities have taken place exclusively in the Middle East: Iraq was struck by Iran (1980), Israel (1981), and the United States (1991, 2003), while Iraq bombed Iran (1984-87) and Israel (1991). 
But raids never generated significant radiological consequences, because plants were under construction, contained inconsequential amounts of nuclear material, had radioactive elements removed prior to the attack, or because the attacker missed the mark. 
A successful strike on Dimona, however, would be another matter. 
So, given the threat of radioactive releases, does the plant’s continued operation outweigh the risks? 
Dimona is unique. 
It is the region’s largest nuclear plant and sole producer of atomic weapons materials. 
Since it went into operation in the mid-1960’s, it has generated elements for an estimated 200 nuclear weapons. 
Israel’s first prime minister, David Ben Gurion, inaugurated the enterprise to compensate for Israel’s strategic vulnerability, a fledgling army, and the West’s unwillingness to enter into a formal alliance to defend the Jewish state. 
Dimona is no Chernobyl. 
It generates only about 5% of that failed Soviet reactor’s power. 
Still, the plant – along with its spent nuclear fuel, extracted plutonium, and nuclear reprocessing waste – poses significant radiological hazards that a military strike could disperse into the environment. 
Israeli officials tacitly acknowledge the risk. 
Authorities have distributed potassium iodide tablets to the nearby towns of Yerham, Dimona, and Aruar. 
Potassium iodide blocks thyroid absorption of radioactive iodine, an early risk in a nuclear release. 
But it would not obstruct serious health consequences from other radioactive elements. 
And, depending on weather and the nuclear discharge, the radioactive consequences may not remain localized. 
Light contamination and hot spots could impact Israeli, Palestinian, and Jordanian urban centers some distance away. 
Beyond health effects, contamination could terrorize affected populations, prompting temporary flight and permanent relocation. 
Serious, long-term economic consequences would follow. 
For decades, Israel dealt with this risk through effective air defenses and disdain for its adversaries’ ability to strike Dimona. 
In May 1984, after I authored a book about the consequences of military attacks on nuclear facilities, an Israeli intelligence officer came to California to question me about the vulnerability of the reactor and a proposed nuclear power plant. 
The officer belittled the risk, arguing that no Arab air force had ever overcome Israeli air defenses, and none ever would. 
At that time, history provided odd support. 
Although Egyptian reconnaissance aircraft had flown near Dimona in 1965 and 1967 without incident, during the 1967 war, Israel shot down one of its own Mirage jet fighters when it strayed over the facility. 
In 1973, Dimona’s defenders downed a wayward Libyan civilian airliner heading for the reactor, killing 108 people. 
But the 1991 Persian Gulf War upset whatever solace Israel could take from the past. 
Iraqi Scud missiles bombarded Tel Aviv, and one came close to hitting Dimona. 
Hezbollah’s bombardment of northern Israel in 2006, further demonstrated the country’s vulnerability to missile attack. 
And, while Israel’s Arrow ballistic missile defenses, which now surround Dimona, may be superior to the Patriot system that failed in 1991, Syria’s more advanced Scuds and Iran’s Shahab 3 rocket present a more capable challenge than Saddam’s projectiles. 
Dimona has produced all the plutonium that Israel reasonably needs, and the reactor – one of the world’s oldest – has suffered minor mishaps and evident deterioration, raising the specter of more serious accidents. 
So, if Israel cannot guarantee the plant’s defense against attack, it should close it. 
By doing so, Israel could also derive political benefits. 
It could claim that closure demonstrates its commitment to reducing regional nuclear tensions, while sending a message about the wisdom of building reactors in the world’s most volatile region. 
Indeed, about a dozen Middle East and North African countries propose to build nuclear power plants. 
Given the historic targeting of atomic installations, planners should consider whether providing adversaries with radiological targets far larger than Dimona makes sense. 
Until the Middle East resolves its political differences, it may not. 

Nuclear Vigilantes 
LOS ANGELES – Forty years ago this month, more than 50 nations gathered in the East Room of the White House to sign the Treaty on the Nonproliferation of Nuclear Weapons. 
In his memoirs, US President Lyndon B. Johnson called it “the most significant step we had yet taken to reduce the possibility of nuclear war.” 
Today, with the benefit of time, we can evaluate whether the accord truly marks the “historic turning point” President Johnson hoped for. 
The evidence suggests that while the pact’s dikes have largely held, serious leaks have developed, prompting nuclear vigilantes to apply force when they have concluded that diplomacy would fail to halt the Bomb’s spread. 
Whether this behavior is a harbinger for the future remains unclear, but it raises a continuing specter given the failure of the NPT to include an effective enforcement mechanism. 
One fact is not in doubt: the NPT is the legal linchpin for the nuclear nonproliferation regime now signed and ratified by all but three nations – India, Pakistan, and Israel – and one drop-out, North Korea. 
The Treaty’s principles remain bold: the pact’s five acknowledged nuclear weapons states – the US, Britain, France, Russia, and China – promise to eliminate their nuclear arsenals, and the remaining parties commit not to acquire nuclear weapons in exchange for the right to develop civil nuclear power, with international assistance, subject to binding safeguards. 
While the NPT is not entirely responsible for the absence of dozens of nuclear-armed states that many people once feared would emerge, it generated a standard of behavior that continues to guide most countries. 
Still, the accord never fulfilled its disarmament objective. 
The five nuclear powers continue to hang on to their weapons, giving mere lip service to their elimination. 
More disturbing for international calm, a handful of non-nuclear signatories have secretly flouted the agreement. 
Eventually exposed, their perfidy demonstrated the NPT’s imperfect ability to deter, catch, and reverse nuclear cheats. 
Six cases mark the most egregious cheating. 
Twice, Iraq bucked safeguards – first when it built the Osirak reactor and failed to provide inspectors full transparency and convincing assurance it would not use the plant to produce plutonium for weapons, and, second, when it nearly completed its secret enrichment program prior to the 1991 Persian Gulf War. 
North Korea proved more successful, becoming the eighth country to detonate a nuclear weapon. 
At least two other NPT parties – Libya and Syria – engaged in significant nuclear subterfuge but failed. 
And then there is Iran. 
Equally disturbing has been the failure of International Atomic Energy Agency safeguards to catch such violations. 
In only one case, North Korea, did the IAEA succeed. 
In Iran, a dissident group, not the IAEA, blew the whistle. 
Lack of confidence in Treaty enforcement inspired three instances of military vigilantism: Israel’s strike on Osirak in 1981, its attack on Syria’s suspect site in 2007, and Washington’s 2003 invasion of Iraq. 
Mixed results followed. 
Osirak’s destruction inspired Saddam to try again. 
The US became mired in Iraq. 
And, for the moment, Israel’s Syrian strike appears to have eliminated a potential threat. For the Jewish state, military strikes have suggested another lesson. 
A nuclear vigilante could apply force with impunity. 
No retaliation followed. 
In other instances when countries contemplated the same thing, they were not as sanguine. 
Hence, the Soviet Union, the US, Egypt, and India decided that it is better to live with a nuclear-armed China, North Korea, Israel, and Pakistan, respectively, than risk war. 
The United Nations Security Council, which remains the NPT’s enforcer, could better address proliferation breakouts and the compulsion of some to take matters into their own hands were it to grant itself predetermined authority to promptly stop cheaters by any and all means. 
The result would make the prospective treaty violator think twice. 
But political divisions among the Council’s permanent members make achieving this goal unlikely. 
This leaves only two options to buttress the NPT’s objectives. 
First, there is ad hoc diplomacy, which succeeded in eliminating Libya’s nuclear program and closing North Korea’s nuclear weapons production reactor. 
But diplomacy takes time – a lot of time – and there is no guarantee that it will succeed. 

Rebooting Nuclear Security 
VIENNA – In these days of economic woe, potential pandemic disease, and widespread civil unrest, it may come as a surprise that so many people around the world still view nuclear conflict as the greatest threat facing humanity. 
They do so with good reason. 
Consider the potential effects of a 50-megaton nuclear explosion, similar to the Tsar Bomba, detonated in October 1961, which shattered windows 900 kilometers (560 miles) away and sent a mushroom cloud rising above the stratosphere. 
Global agreements such as the Nuclear Non-Proliferation Treaty (NPT), along with the general sense of goodwill immediately following the Cold War, may have led to the perception that such a weapon would never be used in combat. 
But there is an increasing realization that we cannot breathe easy just yet. 
In considering the risks, the emphasis has shifted over the last decade from preventing additional states from acquiring nuclear weapons to preventing terrorist groups and other non-state actors from acquiring them (or critical components). 
The stakes are high and the threat is real. 
The danger of nuclear terrorism constitutes one of the gravest threats to our collective security. 
Even a small amount of nuclear material could kill and injure hundreds of thousands of innocent people. 
Terrorist networks could acquire the materials to assemble a nuclear weapon, wreaking havoc on global peace and stability, with the possibility of extraordinary loss of life and economic damage. 
This has been the main focus of the biennial Nuclear Security Summit, which began in 2010 with 47 countries and three international organizations. 
But the NSS has so far restricted its scope to protecting nuclear infrastructure and material from active misuse. 
We should be wary about defining nuclear security so narrowly. 
We do not have the luxury of approaching the linked issues of arms control, disarmament, and non-proliferation separately. 
In today’s highly complex, interconnected world, we must consider all nuclear threats in a holistic way. 
A good starting point is to consider how the Comprehensive Nuclear-Test-Ban Treaty is contributing to nuclear security. 
By banning all nuclear explosions, the CTBT hampers both first-time development of nuclear weapons and substantial improvements to them. 
In the last 15 years, only one country – North Korea – has tested a nuclear weapon. 
And, by doing so, it has cemented its status as a rogue state. 
It is clear that the NPT and the CTBT have reinforced nuclear security. 
Only a handful of countries have developed nuclear weapons outside of the NPT, and the CTBT has reduced the number of nuclear tests from an average of 500 per decade to a mere trickle. 
Yet the failure of eight countries to ratify the CTBT has prevented it from entering into force, and its contribution to global security has so far not been included on the NSS agenda. 
Given the existence of a technologically advanced verification regime that can detect even small underground nuclear tests – what US Secretary of State John Kerry recently called “one of the great accomplishments of the modern world” – this is especially disappointing. 
The international community’s failure to bring the CTBT into force is one of the reasons why the Bulletin of Atomic Scientists’ iconic Doomsday Clock remains poised at five minutes to midnight – the closest it has been to midnight since the height of the Cold War. 
But, while there clearly is cause for concern, there is no reason to lose hope. 
With the next Nuclear Security Summit to take place in the United States in 2016, a window of opportunity will be opened by next year’s NPT Review Conference, which will allow the world to address the issue of nuclear security in a long-term, inclusive manner. 
What is most needed in the run-up to the 2016 NSS is a process that advances global action to address the nuclear threat comprehensively, including by ensuring that the CTBT enters into force. 
We owe it to ourselves and to future generations to use all opportunities to create the conditions for increased trust and mutual understanding that are needed to free the world of the nuclear threat. 
Broadening our understanding of that threat, and devising a comprehensive approach to nuclear security does not mean diluting efforts or losing focus. 
On the contrary, it means taking care not to exclude any significant advocate or useful tool in reducing the risk of the unthinkable becoming reality. 

Nuclear Weapons in Civil War Zones 
LOS ANGELES – The recent failed military coup in Turkey has produced instability, paranoia, and a crackdown on the regime’s perceived opponents, including many journalists. 
Luckily, it did not end with rebel forces seizing some of the dozens of US nuclear weapons stored at Turkey’s Incirlik Air Base, from which rebel aircraft departed. 
But what about next time? 
The world’s nine nuclear powers claim that there is little to worry about. 
They argue that the combination of physical protection and, in most cases, electronic safeguards (permissive action links, or PALs) means that their arsenals would remain secure, even if countries where they are stored or deployed were engulfed by violence. 
Robert Peurifoy, a former senior weapons engineer at Sandia National Laboratories, disagrees. 
He recently told the Los Angeles Times that such safeguards – earlier versions of which he helped to design – may only delay terrorists in using seized nuclear weapons. 
“Either you keep custody or you should expect a mushroom cloud.” 
Peurifoy’s statements have rightly raised concerns about the security of nuclear weapons stockpiled in insecure regions. 
Consider Pakistan, which has the world’s fastest-growing nuclear arsenal and suffers relentless jihadi terrorism and separatist violence. 
Attacks have already been carried out on Pakistani military installations reportedly housing nuclear components. 
The country’s new mobile “battlefield nuclear weapons” – easier to purloin – augment current fears. 
North Korea, with its volatile and mercurial regime, is another source of concern. 
Suspicious of the military, Kim Jong-un’s government has repeatedly purged senior officers, which has surely stoked opposition that someday could spark serious civil strife. 
Adding nuclear weapons to that mix would be highly dangerous. 
While other nuclear powers appear stable, countries like China and Russia, which rely increasingly on authoritarianism, could face their own risks, should political cohesion fray. 
Of course, there are plenty of examples of security enduring strife. 
The 1961 revolt of the generals in French Algeria, which placed a nuclear test device in the Sahara at risk, produced no dangerous incidents. 
In China, the government effectively protected nuclear weapons sites threatened by Revolutionary Guards during the Cultural Revolution. 
And neither the attempted coup against Mikhail Gorbachev nor the Soviet collapse resulted in a loss of control over the country’s nuclear arsenal. 
But it is a leap to presume that these precedents mean that nuclear weapons will remain safe, especially in unstable countries like Pakistan and North Korea. 
Nuclear bombs or materials risk being controlled by rebels, terrorist groups, or even failing and desperate governments. 
And, in those cases, the international community has few options for mitigating the threat. 
External powers can, for example, launch a targeted attack, like the one that Israel carried out on suspected reactors under construction in Iraq and Syria. 
Those strikes would not have succeeded had Israel not been able to identify the targets accurately. 
Indeed, though the existence of Iraq’s Osirak plant was public knowledge, uncovering Syria’s Al Kibar plant was an intelligence coup. 
Carrying out such a strike on North Korean or Pakistani nuclear sites in a time of crisis would require a similar breakthrough – one that may be even more difficult to achieve, given extensive concealment efforts. 
Stealthy movement of bombs or materials amid the unrest would further complicate targeting. 
Another option – invasion and occupation – avoids the challenge of identifying nuclear sites. 
The defeat of Nazi Germany permitted the Allies to find and destroy the country’s nascent nuclear program. 
The 2003 invasion of Iraq granted the US unfettered access to all possible sites where weapons of mass destruction could be stored. 
But the costs were huge. 
Likewise, invasion and occupation of either North Korea or Pakistan would require massive armies risking a bitter conventional war and possible use of the weapons against the invaders. 
A third option is nuclear containment, which relies on several measures. 
First, in order to prevent nuclear migration, all land, sea, and air routes out of the country in question would have to be controlled, and homeland security near and far would have to be strengthened. 
While the Proliferation Security Initiative (PSI) is already in place to stop the smuggling of nuclear contraband worldwide, the International Atomic Energy Agency reports continued trafficking of small amounts of nuclear material. 
An increase in monitoring may reduce, but still not eliminate the problem. 
Containment also requires nuclear custodians be persuaded to risk their lives to defend nuclear sites against terrorists or rebels. 
And it demands that states neighboring the country in question put ballistic missile defenses on alert. 
While India, South Korea, and Japan continue to modernize such systems, no missile defense is perfect. 
In a time of crisis, when the facts on the ground change fast and fear clouds thinking, mitigating the nuclear threat is no easy feat. 
While concerned governments do have confidential contingency planning in place, such planning has a mixed record when it comes to responding to recent international upsets in the Middle East. 
And simply hoping that things will go according to plan, and nuclear command and control will stick, remains a gamble. 
The time has come to discuss new ideas, with the United States – still the global leader in combating proliferation – taking the lead. 
A public discussion with input from the executive branch, Congress, think tanks, investigative journalists, and scholars should lay a foundation for policy. 
We cannot allow ourselves to stand on the precipice of catastrophe without a well-considered and broadly supported plan in place. 
The lesson from Turkey is not that the bombs of Incirlik – not to mention other nuclear weapons in unstable regions – are safe. 
Rather, it is that our most deadly weapons could be compromised in an instant. 
It ought to be a wake-up call for all of us. 

Nuremberg Judgments in Baghdad 
When American troops were captured in Iraq, President Bush said that he expects them to be treated humanely. 
"If not," the President warned, "the people who mistreat the prisoners will be treated as war criminals." 
President Bush's remarks drove home the importance of strict adherence to the Geneva Conventions and the question of how war crimes trials may be convened in post-war Iraq and who will conduct them. 
The US plan for war crimes trials covers violations committed before the current conflict began. 
American officials recently released a list of Iraqis who would face trial for past crimes. 
The American military takes the Geneva Conventions seriously. 
The main provisions of the Conventions are repeated in the rules of combat of the US armed services. 
Similar rules to govern the conduct of the United States Army during the Civil War have guided the American military since 1863, when a code of 159 articles was drafted by Francis Lieber, a German immigrant who became a professor of law at Columbia University. 
Among the reasons the American military is committed to respect for the Geneva Conventions is a concern about reciprocity. 
By treating others properly, American forces strengthen their argument that they themselves should be dealt with in accordance with the Geneva Conventions. 
But the treatment accorded the prisoners of various nationalities (Arab, Uzbek, Ughuir, Chinese) at the US military base at Guantanamo Bay, Cuba, shows that President Bush and his top advisors apply the Conventions when it suits them. 
Not one detainee has been accorded prisoner-of-war status; none has been granted a hearing as required by the Geneva Conventions in cases of doubt. 
Prisoners, it seems, are denied legal protection so that coercive interrogations can proceed without interference. 
This is no way to set an example for the humane treatment of captured combatants. 
Having said that, whatever America does at Guantanamo does not justify Iraqi mistreatment of American or British prisoners. 
Every government has an independent duty to comply with the Geneva Conventions. 
Unfortunately, judging by the past record of Saddam Hussein's forces, it is likely that they will commit many war crimes. 
As a long-time advocate of bringing Saddam and his cohorts to justice for their crimes against the Kurds, the Marsh Arabs and many others, I endorse the Bush Administration's view that proceedings should not be limited to offenses committed in the current war. 
But those charged with responsibility for such crimes should be brought before an international--not American--tribunal. 
Following World War Two, the victorious allies tried Germans and Japanese for war crimes at Nuremberg and Tokyo. 
Although those proceedings were admirable in many ways, including in the care taken to protect the procedural rights of the defendants, they have always been tainted by the charge of "victor's justice." 
Nearly a half-century later, the world embarked on a better course with the establishment of the International Criminal Tribunal for ex-Yugoslavia (ICTY) in 1993. It is not susceptible to the charge of victor's justice, because the entire world is represented by its judgments. 
The ICTY has convicted Serbs, Croats, and Bosnians, and recently indicted several leaders of the Kosovo Liberation Army. 
Although the most high-profile defendants, Slobodan Milosevic and Vojislav Seselj, are doing their best to discredit the tribunal, they will fail. 
The charge of bias is simply not sustainable. 
If the US tries Iraqi officials before a US military commission, as leading American defense officials have suggested, it would reverse the progress made in the decade since the establishment of the tribunal for ex-Yugoslavia. 
Ironically, the American proposal coincided with the inauguration of the International Criminal Court. 
An even blacker irony is that America and Iraq were two of the seven governments that voted against its establishment in Rome in 1998 when the treaty for the court was adopted. 
If the US continues to do all that it can to minimize civilian casualties, it has nothing to fear from an international tribunal. 
The fact that errant bombs or missiles kill some civilians does not make their deaths war crimes. 
The US, having flouted international justice by disregarding the Geneva Conventions at Guantanamo, would make matters worse by reverting to a system in which military victors doff their uniforms and attire themselves in judicial robes. 
"Military justice is to justice what military music is to music," George Bernard Shaw once quipped. 
The bite in his comment is justified. 
"Victor's justice" is no longer acceptable. 

African Women on Top 
TORONTO – Africa has a long history of female leadership. 
Yet leadership can be a challenging aspiration for the continent’s young women, owing to enduring barriers to success. 
If African countries – and Africa’s women – are to meet their potential, this must change. 
Women were leaders on the frontlines of Africa’s decolonization struggle. 
Queen Anna Nzinga, the monarch of the Ndongo and Matamba Kingdoms in what is now Angola, spent decades fighting to protect her people from the Portuguese and their expanding slave trade. 
In 1900, Yaa Asantewaa, queen mother of the Ashanti Empire (part of modern-day Ghana), led a rebellion against British colonialism. 
Nearly three decades later, women in southeastern Nigeria organized a revolt, known as the Aba Women’s Riots, against British colonial policies. 
More recently, President Ellen Johnson Sirleaf – a Nobel Peace Prize laureate – led her country to reconciliation and recovery following a decade-long civil war, managing a devastating Ebola epidemic along the way. 
Former Rwandan Minister of Health Agnes Binagwaho has dedicated her career to achieving equitable access to health care in her country and beyond. 
As a young teenager, Kakenya Ntaiya agreed to undergo female circumcision (a traditional Maasai rite of passage) in exchange for the opportunity to get an education. 
After earning a PhD in education, she founded Kakenya’s Dream, which focuses on educating girls, ending harmful traditional practices, and uplifting rural communities in Kenya. 
Yet barriers to women’s leadership in Africa today remain systemic, widespread, and they begin early. 
They start at home, where girls are expected to take on more responsibility, including chores like childcare, cooking, and laundry. 
This, and other factors, undermines African girls’ educational attainment: 47% either do not complete school or never attend at all. 
Girls’ paths are no easier when they grow up. 
From limited land rights to the enduring expectation that they perform the majority of unpaid household labor, women in Africa face major economic, legal, and cultural barriers to advancement. 
According to the World Economic Forum’s Gender Gap Report, Sub-Saharan Africa has closed the disparity in economic empowerment by only 68%, with women still far more likely to be unemployed, underemployed, or hold precarious employment in the informal sector. 
But while the barriers to women’s leadership are formidable, they are not insurmountable. 
Whether in politics or health, law, or engineering, African women are showing the world how to unleash their fellow women’s leadership potential. 
In Uganda, Favourite Regina is keeping refugee girls out of early marriage and pregnancy, as part of an initiative led by CIYOTA, a youth-led, volunteer-based organization established in the Kyangwali refugee settlement. 
In Nigeria, Blooming Soyinka employs a half-dozen economically disadvantaged and disabled artisans at Africa Blooms, creating conditions for those employees and their families to thrive and educate their children. 
In Kenya, Fanice Nyatigo is developing MammaTips, an app that will provide timely information on pregnancy, breastfeeding, immunization, and other important health matters to new mothers. 
These are young people – all Mastercard Foundation Scholars – to watch, as they are only just beginning to demonstrate the breadth of their potential as leaders. 
Africa needs more such remarkable woman leaders. 
And, though research on how to champion female African leadership is sparse, early findings from the scholars program suggest that there are several pathways that young African women can take – and that we can support – to assume their rightful place among the continent’s leaders. 
For starters, while education plays an important role, experience shows that it is not enough. 
Deliberate investment in leadership programs for young women are also essential. 
Young women need opportunities to practice leadership, whether in school, the workplace, or the community. 
And they need supportive spaces where they can hone these skills, build networks, and obtain support. 
Moreover, recognition of young women’s talent and potential is needed to nurture their confidence and self-esteem, and to raise their profile beyond their immediate community. 
Mentors and role models – especially female ones – are also extremely valuable. 
This is a job not only for African governments or local NGOs. 
All global policy discussions concerning education, the environment, science, and health must explicitly address how to develop woman leaders. 
Africa’s aspiring young women are often motivated by the desire to give back to their communities. 
We should empower them to do just that. 
If we provide young women with the right support, they will transform their communities, their continent, and the world. 
They will provide ethical leadership inspired by shared values, passion for community, and a commitment to a brighter future. 
For those of us who believe in their potential, it is a privilege to accompany them on this journey. 

Nurturing the Creative Roots of Growth 
Governments all over the world try to encourage economic growth. 
But growth--with the high employment and rising living standards that politicians crave--results from creativity. 
As people pursue new directions in business, science, and the arts, they develop innovations and improvements that drive the economy forward. 
So how, beyond mere rhetoric, can governments promote creativity? 
Intellectual property law--patents and copyrights--is the clearest example of a government policy designed to stimulate creativity. 
The idea dates back to renaissance Italy, but modern patent law originated in England, where, in 1624, the Statute of Monopolies was enacted to grant a 14-year exclusive right to the "true and first inventor" of any manufacturing method. 
The law benefited inventors in a way that tied an invention's reward to its economic dividends. 
This approach can result in large rewards for important inventions--precisely what is needed if maximum incentive is to be given to people to develop bold new concepts--and has served us well over the centuries since 1624. 
But until recently, patent law was based on a rather narrow definition of creativity, usually the kind embodied in the invention of devices or industrial processes. 
In recent years, however, patent law widened enormously with the acceptance, in the United States, Australia, Japan, and Korea, of business-method patents --that is, patents not on a technological process but on a way of doing business. 
The turning point in the US came in 1998, when a federal court decision upheld a patent on an accounting system, which launched a flood of business-method patents--over a thousand a year in 1999 and 2000. 
The expanding scope of patents increases their value as a tool to promote creativity. 
While previously most patentable inventions were produced in laboratories, with business-method patents the rewards for creativity can now motivate all kinds of people throughout a business organization. 
Indeed, countries that do not allow business-method patents--even though some of their citizens apply for patents in the US--run the risk that their businesses will lose some of their creative edge. 
One area where business-method patents promise to spur innovation is financial markets. 
Despite dramatic theoretical advances, financial institutions were, until recently, slow to develop and expand new instruments allowing people to exploit many risk-sharing opportunities. 
Yet, as I argued in a recent book, financial instruments that increase our ability to manage risks that are now regarded as "non-diversifiable" would be of great economic importance. 
Introducing such instruments, however, is likely to be costly. 
People will probably not buy and sell them unless the markets for them are liquid, which means that a lot of traders must be there at the same time. 
But generating enough liquidity implies huge expenses: the public must be educated to understand the concept of risk management and overcome serious psychological barriers before it can be persuaded of the usefulness of the new instruments. 
Financial innovators might not incur these costs if they expect that others will copy their ideas at little or no cost to themselves as soon as they are shown to work. 
The harm of inadequate patent protection in the financial world before 1998 was clear. 
In 1993, the American Stock Exchange (AMEX) expended considerable resources to develop and promote its new concept of an exchange-traded fund (ETF), with its first embodiment as Standard & Poor's Depository Receipts (SPDR's). 
The ETF was a key innovation that made it possible for investors to hold an instrument that effectively tracked the value of a specified portfolio, such as the S&P index, with low trading costs. 
But once the idea was proven successful, it was widely imitated by other organizations, depriving the AMEX of a big share of the returns on its innovation. 
The recent expansion of patent protection is designed to prevent these problems and to bring a faster pace of innovation. 
Of course, there are downsides to patent law expansion, prime among them the increased incidence and cost of litigation. 
Firms are discovering that their competitors with business-method patents may seek to block them from improving their business strategies. 
For example, Amazon.com sued Barnes & Noble.com for offering to its customers Amazon's patented "one-click shopping" method. 
The matter was made worse by the fact that one-click shopping seemed to be an "obvious" idea that shouldn't have been granted a patent in the first place. 
(The case was settled out of court last year, with royalties paid to Amazon.com.) 
The lesson is that whenever patents are extended to a new domain, we must be attentive to whether their positive incentive effects are outweighed by the main disadvantage of granting what is in essence a monopoly to the inventor: slower adoption by others. 
Patents work well to promote creativity when innovation involves high costs for the innovator and low adoption costs for everyone else. 
In such cases, the innovation would never be implemented without patent protection, because no inventor could ever recoup costs. 
But patents work poorly when an invention depends on many small sequential innovations. 
In these cases, too many patents can drive up licensing and legal costs prohibitively, lowering the payoffs to inventors and discouraging them from innovating. 
It should be a top priority for policymakers to ensure that patent offices have the financial and human resources needed to grant business-method patents judiciously, and that they do not award patents to obvious or merely incremental ideas. 
If correct patent policies are followed, business-method patents have the potential to boost dramatically business creativity--and the economic growth that goes with it. 

Putting Nutrition Back on the Menu 
BRASILIA – Human nutrition is of increasing importance to science. 
Of course, centuries of scientific research have been devoted to ensuring that enough food is produced for growing populations. 
But with obesity and diet-related diseases on the rise, and hunger and malnutrition affecting more people than ever before, scientists are focusing not only on how to feed the planet, but on what to feed it. 
As a biologist, I look at foods and diets from an evolutionary perspective. 
Put simply, foods evolve in concert with the organisms that consume them. 
Consider the humble apple. 
By itself, the fruit’s fructose isn’t particularly healthy, and when eaten in large quantities, it increases the risk of diabetes, heart disease, and other non-communicable diseases. 
But when the fruit’s sugars are digested along with its fibers, absorption of fructose in the body slows, and the fruit is metabolically healthier. 
Through this mechanism, the apple – like most fruits and vegetables – becomes a more perfect food. 
The same logic applies to our diets. 
Throughout history, foods have been created and altered by combining flavors, colors, and nutritional values, while diets have matured differently within families, cultures, and communities. 
But, for the most part, our ancestors chose foods for their health outcomes. 
Unhealthy diets were generally short-lived because of the poor results. 
Today, however, bad diets seem to have more staying power. 
Natural and raw foods are being replaced by ready-to-eat meals and processed foods. 
This trend toward microwaveable pre-packaged convenience has led to the erosion of regionally specific diets and created a more homogeneous – and unhealthy – globalized menu, one associated with obesity, diabetes, hypertension, and shortened lives. 
Part of this shift is unavoidable; the way foods are produced, purchased, and consumed has much to do with how and where we live. 
In many countries, the combination of larger, denser urban areas and rapidly-aging populations has forced changes to food manufacturing and distribution systems. 
Unfortunately, many of these adjustments have had a negative impact on food quality. 
Fortunately, global efforts are underway to help humanity eat better. 
The United Nations has declared 2016-2025 the “Decade of Action on Nutrition,” and the UN’s Sustainable Development Goals encourage comprehensive strategies for improving health, eliminating hunger, and promoting sustainable agriculture. 
These international campaigns have come amid growing recognition within the private sector that addressing nutritional shortfalls can be good for business. 
For example, through local farmers’ collectives and regional food networks, smallholder innovators are attempting to restore variation to how we eat. 
But global summits and regional commitments are only part of the solution. 
If the world’s dietary devolution is to be corrected, at least three additional measures are urgently needed. 
First, people and policymakers must properly define what “nutrition” means. 
Too often, people conflate the study of “nutrition” with research on “nutrients.” 
But that misunderstanding can push consumers toward undesirable food trends, such as diets that replace natural foods with supplements, powders, or other food-like products. 
Improving nutrition means something else entirely: balancing the intake of quality food with the human body’s needs. 
Second, bias in research on food and nutrition needs to be addressed. 
Economic interests that favor mass-produced over locally produced food are skewing the research agenda. 
Restoring independence to nutrition science is critical to helping consumers and policymakers make better food choices. 
Finally, improving nutrition requires changing behaviors, policies, and attitudes toward food. 
This may sound obvious, but people have largely forgotten the connection between their health and what they eat. 
Modern food security is not a question of producing food in abundance; the world knows how to do that. 
Rather, today’s challenge is to balance what’s healthy with what’s fashionable. 
Diets of the future, like consumption in the past, must be realigned with natural sources. 
That means strengthening, or even reinventing, food systems so that producers and suppliers can serve consumers in healthier ways. 
During this era of industrialized nutrition, people have strayed far from their ancestors’ dinner table. 
My vision for a tastier, healthier world means restoring food as a social glue; taking the time to produce higher-quality foods; wisely selecting ingredients for the meals we cook; and enjoying food in the company of others. 
Most important, it means thinking about food all the time – even when we aren’t hungry. 
Dedicating ourselves to better nutrition – and consuming natural and minimally processed foods in larger quantities – is the least that our bodies deserve. 

 

Obama Across the Pacific 
MANILA – Unlike his predecessor, US President Barack Obama is popular from the Atlantic to the Pacific. 
He has reached out to the Muslim world and pledged to address the Israeli-Palestinian conflict without delay. 
The nations of Asia have a particular affection for him, owing to the years he spent as a child in Indonesia. 
If Obama improves America’s global standing with support from political heavyweights such as Vice President Joe Biden, Secretary of State Hillary Clinton, Defense Secretary Bob Gates, National Security Adviser James Jones (a former NATO Supreme Commander), and Secretary of Veterans Affairs Eric Shinseki (a former United States Army Chief), he should be able to ask more from America’s allies, particularly for NATO to send more troops to Afghanistan. 
He will also be able to push Israel to reinvigorate the derailed Middle East peace process. 
Although his national security team consists of people who largely supported the war in Iraq, Obama has made it clear that his agenda includes withdrawing troops from that country. 
International goodwill will probably be the key to his success, if not in re-establishing American hegemony, then at least in making America the “indispensable nation” once more. 
Although Obama is likely to give priority in his diplomacy to the wars in Iraq and Afghanistan, he cannot take the Asia-Pacific region’s stability for granted. 
The sources of uncertainty are many: tension between South and North Korea; anxiety over nuclear proliferation posed by cooperation between North Korea and Iran; managing the rise of China and India; and continued Islamist extremism on the Indian sub-continent, particularly Pakistan, as well as in Southeast Asia, where Al-Qaeda has established a second front through Indonesia’s Jemaah Islamiyah . 
Vast changes in America’s presence across the Asia-Pacific region are underway and are likely to continue. 
So far, none of these changes have unsettled the region. 
Substantial redeployments of US military forces and assets, triggered by the need for additional troops in Afghanistan and ongoing problems over the US-Japan status-of-forces agreement, are already taking place. 
Media reports indicate, for example, that nearly 25,000 US marines, soldiers, family members, and civilian employees are to descend on the tiny island of Guam in the next five years to ease the overconcentration of US forces on the Japanese island of Okinawa without pulling back too far from the flashpoints of Taiwan and North Korea. 
But the future of security in the Pacific should not be left to US decision-makers alone. 
Regional leaders must now develop their own strategy to transform Asia’s many challenges into opportunities, with Obama playing the role of “good neighbor” who expects other peoples to help themselves and put their own houses in order before turning to the US for assistance. 
The Philippines is in an advantageous position to take advantage of the many diplomatic opportunities that will be generated by Obama’s potential activism in the Pacific. 
To be sure, the country’s “America” card – the result of the two countries’ longstanding strategic relationship (I myself was educated at West Point and fought alongside US troops in the Korean War) – must be played carefully and not be taken for granted. 
But it offers the potential for a relationship of the sort that arises only between countries with deep and many-layered ties. 
By strategizing “out of the box” and finding ways to link Obama’s Asian agenda with that of their own nations, Philippines President Gloria Macapagal-Arroyo and other Asian leaders will be able to truly make the Pacific the central focus of the Obama administration’s diplomacy. 

Obama and Asia’s Two Futures 
TOKYO – Despite the relentless shift of global economic might to Asia, and China’s rise as a great power – the central historical events of our time, which will drive world affairs for the foreseeable future – America’s focus has been elsewhere. 
The terrorist attacks of 2001, followed by the Afghanistan and Iraq wars, the Great Contraction of 2008, the Arab Spring, and Europe’s sovereign debt crisis, all diverted the United States from helping to create a lasting structure of peace to accommodate today’s resurgent Asia. 
In November, US President Barack Obama can begin to redress this imbalance when he hosts the Asia Pacific Economic Cooperation summit in his native state of Hawaii. 
The meeting’s timing is fortunate, because a number of critical Asian issues are coming to a boil. 
The South China Sea, for example, is now churning with competing claims to its islands, atolls, and sea bed, including China’s bold assertion that all of it is Chinese sovereign territory. 
At this year’s ASEAN summit in Bali, it was agreed that these territorial disputes be settled through bilateral negotiations. 
But the scope of Chinese claims doomed that agreement from the start; indeed, China now insists that the sea constitutes a core national interest, on a level with Taiwan and Tibet, for which it is prepared to fight. 
China’s willingness to throw its weight around amplifies the grave imbalance in size, and leverage, between it and the other countries bordering the South China Sea. 
This has made bilateral negotiations to settle these disputes unviable. 
Vietnam and the Philippines have been bullied in this way recently, with both pushing back rather than submit to Chinese imposed terms. 
The presidential elections scheduled for next year in two of Asia’s strongest democracies – South Korea and Taiwan – are also likely to cause diplomatic temperatures to rise in the months ahead. 
The risk stems not from the conduct of the South Koreans or the Taiwanese, but from the democratic choices that they make, which may offend two of Asia’s last dictatorships. 
In South Korea, the remarkable Park Guen-hye’s bid to become her country’s first woman president may provide an excuse – as if any were needed – for North Korean mischief-making. 
The regime in Pyongyang is seeking to ensure that power passes to a third generation of Kims, represented by the pudgy and well-fed “Dear Young General,” Kim Jong-un, and appears to believe that provocations such as its bombardment of a South Korean island earlier this year are the way to secure the succession. 
Taiwan, too, may elect a woman president, Tsai Ing-wen, the leader of the opposition Democratic Peoples’ Party, next year. 
That outcome would stoke Chinese ire, not because of Tsai’s gender, but owing to her politics. 
The DPP has long been the Taiwanese party keenest on securing independence for the country. 
A third Asian issue with combustible potential is Burma, where another unique woman, the Nobel Peace Prize winner Aung San Suu Kyi, is at the heart of events. 
The elections earlier this year, which many at first assumed were a sham, now appear to have produced changes to which Asia’s countries will need to collectively and individually respond. 
The government not only freed Suu Kyi after two decades of house arrest, but has even begun a dialogue with her – talks for which the meticulous opposition leader has expressed real hope. 
Indeed, President Thein Sein’s government has begun to release thousands of political prisoners, including the monk who led the massive street protests of 2007. 
Sein’s government has also listened to Burmese public disquiet at China’s massive influence in the country, and has canceled a huge $3.6 billion dam that Chinese firms were building. 
China, it is plain to see, is at the root of most of the disputes troubling Asia. 
Two main issues must be managed – one philosophical, the other structural – in seeking to ameliorate the problems caused by China’s unconstrained rise. 
Only by resolving the structural issue will Asia succeed in overcoming the philosophical problem. 
The philosophical problem concerns China’s renewed conception of itself as the “Middle Kingdom,” a state with no sovereign equal. 
Throughout its history, China has sought to treat its neighbors as vassals – a mindset currently reflected in the way that it has approached negotiations with Vietnam and the Philippines over the South China Sea. 
China’s free-floating rise, unanchored in any regional structure or settlement, makes this mindset particularly worrying. 
At the Hawaii summit, Obama must orchestrate the first steps toward constructing an effective multilateral framework within which the complications posed by China’s rise can be addressed. 
The absence of such a structure of peace has been obscured, to some extent, by America’s dominant role in Asia since the Pacific War. 
But China’s rise and America’s other global and domestic concerns have left many Asians wondering just how enduring those commitments will be in the future. 
Nevertheless, China’s recent strategic assertiveness has led many Asian democracies to seek to deepen their ties with the US, as South Korea has done with a bilateral free-trade agreement. 
The US is reciprocating by pledging not to cut Asia-related defense spending, despite the big reduction in overall US defense spending that lies ahead. 
What Asia most needs today is a well-conceived regional system, embedded in binding multilateral institutions. 
A “Trans-Pacific Partnership” between Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, the US, and Vietnam to govern supply-chain management, intellectual-property protection, investment, rules on state-owned firms, and other trade issues – likely to be announced in Hawaii – is a good start in the economic sphere. 
But much more is needed. 
Ultimately, the best way for peace to prevail in the region is for the US and China to share responsibility for a regional order with Asia’s other powers, particularly India, Indonesia, Japan, and South Korea. 
Asia’s choice is clear: either the region embraces a multilateral structure of peace, or it will find itself constrained by a system of strategic military alliances. 
In Hawaii, Obama and the other assembled Asian leaders – particularly the Chinese – must begin to choose between these two Asian futures. 

Obama and Global Warming 
COPENHAGEN – In one of his first public policy statements as America’s president-elect, Barack Obama focused on climate change, and clearly stated both his priorities and the facts on which these priorities rest. 
Unfortunately, both are weak, or even wrong. 
Obama’s policy outline was presented via video to California Governor Arnold Schwarzenegger’s Governors’ Global Warming Summit, and has again been shown in Poznan, Poland, to leaders assembled to flesh out a global warming roadmap. 
According to Obama, “few challenges facing America and the world are more urgent than combating climate change.” 
Such a statement is now commonplace for most political leaders around the world, even though it neglects to address the question of how much we can do to help America and the world through climate policies versus other policies. 
Consider, for example, hurricanes in America. 
Clearly, a policy of reducing CO2 emissions would have had zero consequence on Katrina’s devastating impact on New Orleans, where such a disaster was long expected. 
Over the next half-century, even large reductions in CO2 emissions would have only a negligible impact. 
Instead, direct policies to address New Orleans’ vulnerabilities could have avoided the huge and unnecessary cost in human misery and economic loss. 
These should have included stricter building codes, smarter evacuation policies, and better preservation of wetlands (which could have reduced the ferociousness of the hurricane). 
Most importantly, a greater focus on upkeep and restoration of the levees could have spared the city entirely. 
Perhaps these types of preventive actions should be Obama’s priority. 
Likewise, consider world hunger. 
Pleas for action on climate change reflect fears that global warming might undermine agricultural production, especially in the developing world. 
But global agricultural/economic models indicate that even under the most pessimistic assumptions, global warming would reduce agricultural production by just 1.4% by the end of the century. 
Because agricultural output will more than double over this period, climate change would at worst cause global food production to double not in 2080 but in 2081. 
Moreover, by implementing the Kyoto Protocol at a cost of $180 billion annually would keep two million people from going hungry only by the end of the century. 
Yet by spending just $10 billion annually, the United Nations estimates that we could help 229 million hungry people today . 
Every time spending on climate policies saves one person from hunger in a hundred years, the same amount could have saved 5,000 people now. 
Arguably, this should be among Obama’s top priorities. 
Obama went on to say why he wants to prioritize global warming policies: “The science is beyond dispute and the facts are clear. 
Sea levels are rising. 
Coastlines are shrinking. 
We’ve seen record drought, spreading famine, and storms that are growing stronger with each passing hurricane season.” 
Yes, global warming is happening, and mankind is partly responsible, but these statements are – however eloquent – seriously wrong or misleading. 
Sea levels are rising, but they have been rising at least since the early 1800’s. 
In the era of satellite measurements, the rise has not accelerated (actually we’ve seen a sea-level fall over the past two years). 
The UN expects about a 30-centimeter sea-level rise over this century – about what we saw over the past 150 years. 
In that period, many coastlines increased , most obviously in Holland, because rich countries can easily protect and even expand their territory. 
But even for oft-cited Bangladesh, scientists just this year showed that the country grows by 20 square kilometers each year, because river sedimentation win out over rising sea levels. 
Obama’s claim about record droughts similarly fails even on a cursory level – the United States has in all academic estimates been getting wetter over the century (with the 1930’s “dust bowl” setting the drought high point). 
This is even true globally over the past half-century, as one of the most recent scientific studies of actual soil moisture shows: “there is an overall small wetting trend in global soil moisture.” 
Furthermore, famine has rapidly declined over the past half century. 
The main deviation has been the past two years of record-high food prices, caused not by climate change but by the policies designed to combat it: the dash for ethanol, which put food into cars and thus upward pressure on food prices. 
The World Bank estimates that this policy has driven at least 30 million more people into hunger. 
To cite policy-driven famine as an argument for more of the same policy seems unreasonable, to say the least. 
Finally, it is simply wrong to say that storms are growing stronger every hurricane season. 
Even for the Atlantic hurricane basin, which we tend to hear about the most, the total hurricane energy (ACE) as measured by the US National Oceanic and Atmospheric Administration has declined by two-thirds since the record was set in 2005. 
For the world, this trend has been more decisive: maximum ACE was reached in 1994, and has plummeted for the past three years, while hurricanes around the world have for the past year been about as inactive as at any time since records began being kept. 
Global warming should be tackled, but smartly through research and development of low-carbon alternatives. 
If we are to get our policies right, it is crucial that we get our facts right. 

Obama and India 
NEW DELHI – India has stood out around the world for being one of the few countries indifferent to America’s presidential election. 
Indeed, an astounding 87% of Indians polled said that they did not think the election mattered to them. 
President-elect Barack Obama will have to deal with disasters on many fronts as his administration takes over the reins of government. 
India, presumably, will not be one of them. 
If there is one bilateral relationship that the Bush administration is seen to have handled successfully, it is that with India. 
This impression is no accident. 
A powerful lobbying effort included millions of dollars spent to support passage of one of the crowning achievements of Bush’s foreign policy: the United States-India Civil Nuclear Cooperation Agreement. 
Senator Obama voted for the deal, as did Senator Joe Biden, one of its champions as chairman of the Senate Foreign Relations Committee. 
In the heady first months after it came to power, the Bush administration laid out a bold new vision that gave India – a rising Asian democracy on China’s border, proximate to the shipping lanes of the Indian Ocean and to the epicenter of Islamist terrorism – a starring role in US foreign policy. 
The argument to India was essentially this: You need us to realize your ambition to become a major world power, and we share a concern over China’s rise and Islamist terrorism, so let’s work together. 
But the Bush administration’s vision was, and remains, flawed, for it regards the US-India relationship solely as a strategic one that enhances both countries’ military reach. 
Indeed, India’s $5 billion of US weapons purchases accounts for an astonishing 20% of the $24.8 billion in US arms sales in 2007. 
The flaw consists partly in viewing China, India’s largest trading partner, as a threat. 
Moreover, while it is true that the US and India face terrorist threats, both have erred in their approach to dealing with them. 
America’s mistakes include the Patriot Act, the invasion of Iraq, the mishandling of Afghanistan, the torture committed at Abu Ghraib, and the prison at Guantánamo Bay. 
India’s list of misguided responses to terrorism is almost as long. 
Its Prevention of Terrorism Act (POTA), enacted after the September 11, 2001, attacks on America by the then ruling Bharatiya Janata Party (BJP)-led government, contains many of the features enshrined in the Patriot Act: an overly vague definition of what constitutes terrorism or unlawful acts, immunity from prosecution for law-enforcement or government agents, and expansion of wire-tapping. 
This law remained in effect until the current Congress Party-led government repealed it in 2004. 
But the BJP may well win India’s national elections next spring, and has pledged to bring back POTA, or something even more draconian. 
At the same time, in the face of an alarming increase in the number of terrorist attacks, Manmohan Singh’s government has also indulged in a heavy-handed response to suspected Islamist terrorists, who are hauled off on flimsy evidence and killed before they can be convicted of any crime. 
Meanwhile, a commission that the government charged with investigating the state-condoned massacres of Muslim citizens in Gujarat in 2002 produced only a whitewash, absolving the perpetrators of any wrongdoing – and fueling a further rise in homegrown terrorism by deeply disaffected Indian Muslims. 
This sort of behavior has had terrible consequences for the moral credibility of democracy, for security in India, and for regional security in South Asia. 
The Obama administration should make as bold a break with the Bush administration’s policy toward India as the Bush administration did with its predecessor by refocusing the relationship on tackling the real sources of insecurity. 
President Obama must shift the fundamental basis of the US-India relationship away from a strategic partnership based on a militarized notion of security toward a holistic vision of human security in which military force plays an appropriate but not a defining role. 
A new vision of the US-India relationship would focus on global warming, the collapse of industrial agriculture, the widening gap between rich and poor, the conventional and nuclear arms race in Asia, and the intensification of ethnic and religious conflict. 
The elements of a new Obama vision for the US-India relationship would be: an emergency joint task force to fast-track the development of sustainable solutions to meet India’s and the world’s burgeoning energy, water and food needs. 
It also should build a partnership for the elimination of nuclear weapons within a set time frame in which the US must take a leadership role. 
A vigorous new commitment to protecting the rights and freedoms of all citizens and residents and a zero-tolerance policy toward any state collusion with or tolerance of ethnic cleansing, torture, summary detention, citizen surveillance or other insults to democracy, is also necessary. 
A McCain presidency would have offered no hope for a radical break with the military swagger and crony capitalism of the Bush years, on which the bilateral relationship with India was built. 
For the sake of the future of the people of the world’s oldest and largest democracies, let’s hope that an Obama presidency fulfills this hope. 

Obama and Iran 
NEW YORK – While talking to an Iranian official in Tehran earlier this year, he reminded me of Ayatollah Khomeini’s fondness for comparing the relationship between the United States and Iran to that between a wolf and a lamb. 
But the official went on to add his own twist, “Nearly 30 years have passed, and we are not that lamb anymore, and maybe the US is not the same wolf it once was.” 
His point was that Iran no longer feels the deep inequality with the US that it did in the past, and that it may be time to try engagement. 
Over the past three decades, five American presidents have struggled to figure out what to do about Iran. All five failed. 
As US President-elect Barack Obama and his advisers assess their foreign-policy priorities, they will encounter the immediate challenge of addressing Iran’s nuclear program and the country’s growing strategic importance in the Middle East and South Asia. 
They will need quickly to face up to the reality that in order to pursue US interests in the region, including stabilizing Iraq and Afghanistan, the current standoff with Iran cannot continue, and that a greater degree of cooperation is unavoidable. 
If they do not want to repeat the failures of past administrations, they will be well advised to do what none of Obama’s predecessors have tried. 
They should make a strategic decision to engage Iran – without any pre-conditions – in discussions on a broad range of issues of significance to both sides. 
During his candidacy, Obama said of Iran that, “For us not to be in a conversation with them doesn’t make sense.” 
Now, he has the opportunity to follow through. Such an approach does not mean having Obama sit down with Iranian Supreme Leader Ali Khamenei or President Mahmoud Ahmadinejad anytime soon. 
A great deal of preparatory work will be required first. 
This can be carried out by a small team, which would hammer out the details of a mutually acceptable framework for a wide-ranging and unconditional dialogue that enables both governments to produce some modest initial successes, and gradually build the confidence and trust required to imagine solutions to larger problems. 
The process could include appointing a US envoy to Iran. 
Ultimately, direct dialogue at the highest levels should be a key objective. 
This will not be easy. 
At the heart of the American-Iranian conflict is a deep mistrust about each nation’s readiness to tolerate the presence of the other on the world stage. 
Each nation feels that it has been humiliated and demonized by the other. 
What is needed is a process that rebuilds trust and communication so that the give-and-take of negotiation is perceived as serving mutual interests rather than serving up insults to national dignity or identity. 
Although it is far from an exact precedent, the historic 1972 Shanghai Communiqué signed by China and the US, which allowed both governments to “agree to disagree” on many issues while committing themselves to dialogue at the highest levels, offers a promising model. 
This far-sighted framework’s effectiveness has been well proven over time. 
Dialogue with Iran will inevitably be frustrating and difficult, but it offers the only way to lay out possible grounds for constructive engagement and to devise a strategy for heading off a potentially disastrous confrontation. 
Dialogue focused on Iran’s nuclear program or on Iraq alone will not work. 
Instead, the full range of issues that are significant to US-Iran relationship must be on the table. 
Such an approach will require that each side exercise broad restraint and live with the ambiguity of working with a strong adversary to manage profound differences. 
Distrust will continue, signals will be confused, setbacks will be frequent, but the results could well lead over time to greater mutual understanding and a learned capacity to work on some of the most pressing problems, just as the US learned to do with the Soviet Union and China. 
Direct diplomatic and strategic engagement between the US and Iran at the highest levels is a proposition yet to be tested. 

Obama and the Middle East 
BERLIN – With the successful enactment of his health reform, Barack Obama has achieved his biggest domestic success so far – which, surprisingly, had greater consequences abroad than at home. 
The US President, whose hands had been tied in recent months by domestic concerns, and whose political power had been progressively eroded, has suddenly returned to the world stage. 
Against this backdrop, the signing of a new treaty with Russia on nuclear-arms reduction, the global nuclear-disarmament initiative at the Washington conference, and an emerging new unity with Russia and China concerning further sanctions on Iran demonstrate the recovery of Obama’s freedom of action and operational competence. 
In the process, America’s new foreign-policy priorities and objectives are becoming increasingly clear. 
At their core lie Iran and its nuclear program. 
To be sure, worldwide nuclear disarmament is in itself a central issue for the Obama administration and, likewise, US relations with China and Russia influence many of America’s other key interests. 
But when you look at the big picture, it becomes apparent that US foreign policy is seeking to isolate Iran internationally by means of diplomacy. 
The various initiatives for nuclear disarmament are intended to build a new consensus on renunciation of nuclear weapons, which in turn would isolate and pressure Iran on its nuclear program. 
Cooperation with China and Russia serves, among other things, that same purpose. 
And Obama considers progress in the Middle East peace process essential to separating Iran from the “Arab street,” thereby changing the region’s balance of power for the better. 
So, Obama’s policy towards Iran will prove to be a test of whether the US, as a world power, can defend its interests more successfully by returning to diplomacy and multilateralism, thereby dissociating itself from the belligerent unilateralism of the previous Bush administration. 
As such, the success or failure of America’s policy towards Iran will become a test of multilateralism itself. 
The difficulties are immense. 
Judging the prospects of deterring Iran from becoming a nuclear power through sanctions and diplomatic isolation requires a closer analysis of the situation in the region between the Indus Valley and the Mediterranean. 
America is fighting three wars in this region: in Iraq and Afghanistan, and – not to be forgotten! – the “war on terror” against Al Qaeda and its offshoots, a war that is closely linked to the interests and conflicts within this large region. 
Obama must finish the first two wars within his first term – or at least massively reduce US military operations – for domestic-policy and budgetary reasons, if he does not want to ruin his prospects for a second term. 
Both wars are not only civil wars, but also proxy wars about regional power. 
The war in Afghanistan will not be decided by military force, but by the strategic interests of Pakistan and other regional powers. 
Every negotiated solution with the Taliban means re-establishing Pakistan’s dominance in Afghanistan, at least partially. 
This, however, conflicts with the goals of America’s “war on terror.” 
Besides, neither India nor Iran will simply accept such a compromise. 
In Iraq, the question of power-sharing between Sunnis and Shia has neither been resolved or secured institutionally in such a way that would definitively prevent a slide back into civil war after the majority of US troops withdraw in 2011. 
Another significant factor is regional rivalry between Saudi Arabia and Iran over hegemony in the Persian Gulf. 
The US under George W. Bush successfully destabilized Iraq and increased Iran’s influence there, and the question of whether and how Iraq can maintain its stability without US military presence remains open. 
As for the Middle East conflict, the conflicting interests of Binyamin Netanyahu’s administration and the American government are becoming clear. 
Netanyahu has the choice of either losing his majority in the government and the chairmanship of his Likud party by taking up Obama’s peace initiative, or blocking that initiative. 
Everything favors his taking the second option, which will tend to lead to a standstill, and even a step back, in efforts to resolve the Israeli-Palestinian conflict. 
Looking at this picture, we should not forget the global dimension, either. 
Today, after the world financial and economic crisis (and in contrast to 2001), the US appears to be crucially weakened. 
Moreover, new superpowers with their own interests – namely, China and India – have come onto the international stage. 
Without the support of China and India, America’s Middle East policy can no longer succeed, but this support is only granted half-heartedly – if at all. 
A success for American policy in this region holds very limited interest in Beijing and New Delhi, and Europe is neither willing nor able to contribute substantial support. 
In this tangled knot of regional wars, crises, and conflicts, Iran’s nuclear ambitions look like a ticking time bomb – and plenty of new dynamite is being accumulated throughout the region. 
If the Obama administration does not succeed in stopping Iran by peaceful means from crossing the threshold to becoming a nuclear power, a hot confrontation is lurking. 
It is hard to believe that Netanyahu, of all Israeli prime ministers, would be the one to accept idly Iran’s entry into the nuclear club. 
It does not look good for Obama and his Middle East policy. 
But if he succeeds in defusing the situation there, he would more than deserve his Nobel Peace Prize. 
In any case, he deserves every conceivable support. 

Obama and the Rise of the Rest 
NEW YORK – American elections usually produce a brief euphoria; the public sense of renewal, of future possibilities, acts as a shot of adrenaline. 
This year, however, the palpable relief and celebration will be tempered by the widely shared sense that all is not well in America. 
The economic data are almost uniformly bleak and will not improve soon, and, while national security issues appear less pressing because of the financial crisis, they have hardly disappeared, given the tenuous situation in Afghanistan and Pakistan and the unresolved problems in Iraq, Iran, and North Korea. 
Moreover, the power of America’s presidency, and of the United States, has undergone dramatic shifts in recent years, making our era unlike earlier periods when the world was in flux and a new American president faced deep challenges. 
Until recently, it was possible to speak of “the rise of the rest” without forecasting a decrease in American power. 
Now, with the US military at its limit in Iraq and Afghanistan and the US fiscal position weakening, America is confronted with stark choices. 
That is an unfamiliar position for a new US president. 
Even in the dark years after Vietnam in the late 1970’s and early 1980’s, there was a sense that America could still make its economic choices without much reference to the wider world. 
That was the privilege of having the largest, most dynamic economy – and one that acted as a world creditor. 
No more. 
There is no small irony in the fact that on November 15, America’s lame duck president, the unilateralist George W. Bush, is hosting a multilateral conference to discuss reshaping the global economic system. 
It also speaks to America’s relative position that even the less-than-organized ministers of the European Union acted more quickly to create a floor for the financial crisis than did the US president and congress. 
And it speaks volumes to the changing world that, as panic recedes and the wreckage is revealed, Asia in general and China in particular are emerging as clear winners. 
The credit crisis exposed the flimsy foundations of the sustained growth that the US and Europe enjoyed during the past four to five years. While many had noted the extraordinary wealth transfer to oil-producing states and China, the implications of this were not fully appreciated. 
It is not just that the US has become a debtor nation; it is that large pools of capital and liquidity now reside in places like the Gulf region and China, with no sign of that trend reversing. 
In fact, the current crisis has even put Japan, which has spent nearly two decades in the doldrums, in a position of relative strength, given its large currency reserves and the clean-up of its major banks’ balance sheets. 
There was a brief period in the 1970’s when a similar transfer took place. 
But, unlike then, the countries that are accumulating the capital today are not spending it on consumption – remember the endless pictures of Saudi princes buying up real estate on the French Riviera – but on investment, infrastructure, and education. 
Yes, there are bubbles here and there, whether it is real estate in Shanghai and Dubai or stocks in Mumbai, but there has also been serious long-range planning that is likely to give these countries a strong position for years to come. 
Even China, which is trying to shift its economy more toward consumption in order to reduce its dependence on capital spending, has put in place an infrastructure of roads, power grids, ports, and railways that will serve its domestic economy for decades. 
Meanwhile, it can use its $2 trillion of reserves as a cushion when the US and global economy sag. 
China’s economic growth may slow as its exports to the US and Europe weaken, but it is less dependent on these markets than most people assume. 
The talk now is of a global recession that will be steep and prolonged. 
Perhaps, but the more likely scenario is continued stagnation in the US and Europe and a more accelerated shift in economic power toward Asia. 
Few parts of Asia are structurally exposed to the credit implosion, and the balance sheets of Asian banks and companies are on the whole cleaner than their counterparts elsewhere. 
Yes, many companies took on too much debt, and some countries, such as Korea, are more compromised than others. 
But China, which is Asia’s anchor, is not, and in a world where everyone else is falling down, the one left standing is that much taller. 
The US will remain a powerful part of the global system, but the task of the new president is to recognize lasting strengths and accept new limits. 
President-elect Obama has shown pragmatism and realism, and seems to understand that accepting limitations is not weakness; refusal to acknowledge reality is. 

Obama at Halftime 
NEW YORK – In September 2008, the global economy and financial system was hit by an earthquake, whose epicenter was in the United States. 
It was the end of the Bush administration. 
The presidential election was two months away. 
The timing, from the point of view of crisis management, could not have been worse. 
The level of uncertainty about asset values, solvency, and the connectedness of balance sheets that prevailed at the time was extraordinarily high. 
Uncertainty bred fear, causing banks, businesses, and households to hoard cash. 
Consumption plummeted, taking down retail sales with it, and, after a short lag, employment and investment as well. 
Individually rational choices were giving rise to collectively irrational results. 
These conditions had all the makings of a depression scenario, with credit rationing destroying businesses indiscriminately, and thus required fast, aggressive, and unconventional action by the US government and the Federal Reserve. 
The response, mounted by the Bush administration and taken over by the Obama administration, was all of the above. 
A combination of financial-sector recapitalization and rapid expansion of the Fed’s balance sheet prevented a complete credit lockup. 
Policies sometimes missed their target and had to be modified. 
For example, the Troubled Asset Relief Program (TARP) originally targeted the purchase of complex securitized assets that had lost value and stopped trading, but had to be partly altered to direct infusions of capital into banks. 
Financial support for Wall Street villains infuriated many, but no one proposed a better alternative at the time – or has since. 
The Bush and Obama administrations both understood that wise policymaking in crisis circumstances requires selecting the least bad option, accepting the inevitable anger and criticism, and implementing the decision quickly. 
The first priority, after all, was to stabilize a highly dangerous situation. 
The Obama administration then assumed responsibility for organizing the government’s efforts to boost recovery, the centerpiece being a large stimulus package to shore up the real economy. 
Following the capital injections and Fed programs aimed at supporting the financial system, the stimulus package was an important step, notwithstanding disagreements about its size, effectiveness, and targeting. 
After its enactment in late February 2009, the markets’ downward plunge began to decelerate, and prices stabilized the following month. 
The Obama administration was not responsible for poor US economic performance in the immediate post-crisis period; that was inevitable. 
But it was responsible for allowing flawed expectations of a sharp recovery to pre-crisis levels of output and consumption to persist. 
And that left the administration open to the charge that bad policy was the cause of poor economic performance. 
The administration needed to see – and to say – that the debt-fueled pre-crisis economy was on a dangerously unsustainable path, and that the challenge now, having averted a depression, was to make a difficult transition to a new path. 
Instead, it treated the Great Recession as similar to others in the recent past, albeit deeper. 
Perhaps that outcome was foreordained. 
Shortly after taking office, the administration faced a crucial strategic decision about the scope and breadth of its agenda. 
One option was to defer important policy initiatives (in health care, energy, and the environment, including climate change) and focus political capital and fiscal resources on restoring growth and employment. 
The alternative was to pursue a full policy agenda aligned with the priorities and commitments enunciated in Obama’s election campaign. 
The narrower agenda – financial reform, stabilizing the housing market, restoring balance sheets, addressing structural deficiencies, and restoring growth and employment – would not have captured the public’s imagination, and almost certainly would have disappointed Obama’s enthusiastic supporters. 
But, if adopted, it would have had the advantage of clarity and focus, in an area of central importance to everyone. 
And, if successful over time, it might have made the rest of Obama’s agenda seem less overwhelming and more affordable. 
Obama chose the second, more expansive, option, which generated more or less the opposite dynamic: benefits became risks. 
The full agenda would have been much easier to implement successfully if the assumptions about the nature of the recession and the likely path of recovery had been accurate. 
But they weren’t. 
And now, as the administration shifts to a more central focus on restoring growth and employment, it risks getting bogged down as declining economic performance relative to expectations translates into waning political support. 
The administration is not entirely to blame, of course. 
It has had to deal with a widespread and understandable loss of confidence in elites – academics, policy analysts, Wall Street, business leaders, regulators, and politicians – which makes implementing pragmatic, centrist policies more difficult. 
This phenomenon precedes the crisis, but the crisis has certainly made it worse. 
Elites, after all, failed to see the crisis coming and to take steps to prevent it, and some of them appear to be the only ones who are recovering: profits are up, but employment is not. 
Moreover, many Americans’ anxiety is rooted in deepening income inequality. 
The economic and political implications of this long-term trend have been widely discussed but left largely unattended, betraying the general lack of concern for distributional issues that shadows elites’ excessive faith in markets to provide beneficial outcomes. 
Indeed, a lack of clarity about means and ends spans American politics. 
Markets, regulatory frameworks, and public-sector investments are means to attain shared goals. 
The administration, political and policy elites, and private-sector leaders need to state clearly that the main goal of domestic economic policy and strategy is to reestablish a pattern of inclusive growth and employment. 
The choices to be made are not simple, obvious, or clear-cut. 
Persistence, pragmatism, and some willingness to experiment will help. 
But Obama needs to take the lead in redirecting a highly polarized political environment engaged in a debate about the appropriate role and size of government toward a more pragmatic, results-oriented agenda. 

Obama Joins the Greek Chorus 
PRINCETON – US President Barack Obama’s recent call to ease the austerity imposed on Greece is remarkable – and not only for his endorsement of the newly elected Greek government’s negotiating position in the face of its official creditors. 
Obama’s comments represent a break with the long-standing tradition of official American silence on European monetary affairs. 
While scholars in the United States have frequently denounced the policies of Europe’s monetary union, their government has looked the other way. 
Those who criticize the euro or how it is managed have long run the risk of being dismissed as Anglo-Saxons or, worse, anti-Europeans. 
British Prime Minister Margaret Thatcher accurately foresaw the folly of a European monetary union. 
Gordon Brown, as British Chancellor of the Exchequer, followed in Thatcher’s footsteps. 
When his staff presented carefully researched reasons for not joining the euro, many Europeans sneered. 
And that is why Obama’s statement was such a breath of fresh air. 
It came a day after German Chancellor Angela Merkel said that Greece should not expect more debt relief and must maintain austerity. 
Meanwhile, after days of not-so-veiled threats, the European Central Bank is on the verge of cutting funding to Greek banks. 
The guardians of financial stability are amplifying a destabilizing bank run. 
Obama’s breach of Europe’s intellectual insularity is all the more remarkable because even the International Monetary Fund has acquiesced in German-imposed orthodoxy. 
As IMF Managing Director Christine Lagarde told the Irish Times: “A debt is a debt, and it is a contract. 
Defaulting, restructuring, changing the terms has consequences.” 
The Fund stood by in the 1990s, when the eurozone misadventure was concocted. 
In 2002, the director of the IMF’s European Department described the fiscal rules that institutionalized the culture of persistent austerity as a “sound framework.” 
And, in May 2010, the IMF endorsed the European authorities’ decision not to impose losses on Greece’s private creditors – a move that was reversed only after unprecedented fiscal belt-tightening sent the Greek economy into a tailspin. 
The delays and errors in managing the Greek crisis started early. 
In July 2010, Lagarde, who was France’s finance minister at the time, recognized the damage incurred by those initial delays, “If we had been able to address [Greece’s debt] right from the start, say in February, I think we would have been able to prevent it from snowballing the way that it did.” 
Even the IMF acknowledged that it had been a mistake not to impose losses on private creditors preemptively; it finally did so only in June 2013, when the damage had already been done. 
There is plenty of blame to go around. 
Former US Treasury Secretary Timothy Geithner championed a hardline stance against debt restructuring during a crisis. 
As a result, despite warnings by several IMF Directors in May 2010 that restructuring was inevitable, the US supported the European position that private creditors needed to be paid in full. 
Lee Buchheit, a leading sovereign-debt attorney and the man who managed the eventual Greek debt restructuring in 2012, was harshly critical of the authorities’ failure to face up to reality. 
As he put it, “I find it hard to imagine they will now man up to the proposition that they delayed – at appalling cost to Greece, its creditors, and its official-sector sponsors – an essential debt restructuring.” 
Obama may have arrived late to the right conclusion, but he expressed what should be an obvious truth: “You cannot keep on squeezing countries that are in the midst of depression.” 
If Obama’s words are to count, he must continue to push for the kind of deal Greece needs – one that errs on the side of too much debt forgiveness, rather than too little. 
Recent analysis shows that forgiveness of Greece’s official debt is unambiguously desirable, as another bogus deal will keep the Greek economy depressed, ensuring that the problem soon recurs. 
If European sensitivities must be assuaged, Greece’s debt repayment could be drawn out over 100 years. 
At the end of the day, debt forgiveness benefits creditors as much as it helps debtors. 
Creditors have known this since at least the sixteenth century, when Spain’s King Philip II became the world’s first known serial sovereign defaulter. 
As Jesus put it, “It is more blessed to give than to receive.” 
European authorities must come to understand that the next act of the Greek tragedy will not be confined to Greece. 
If relief fails to materialize, political discontent will spread, extremist forces will gain strength, and the survival of the European Union itself could be endangered. 

Rapprochements with Rogue States 
SEOUL – In his State of the Union address to the US Congress in 2002, President George W. Bush famously described Iraq, Iran, and North Korea as an “axis of evil.” 
In the years since, however, America has not treated each in the same way. 
The differences are highly instructive. 
Bush and his hardline advisers believed that only force or “regime change” would stop these “rogue” states’ terrorism or their programs to acquire “weapons of mass destruction.” 
So, in March 2003, the United States invaded Iraq, resulting in a state of near-constant civil war for over a decade; an ineffectual central government in Baghdad; and now the rise of the Islamic State. 
In Iran, then-President Mohammad Khatami, a political moderate, offered what might have been a reasonable deal to curb the country’s nuclear program. 
But Bush and his team preferred to pressure Iran with sanctions and military threats, and any hope for a negotiated solution vanished when Mahmoud Ahmadinejad succeeded Khatami in 2005. 
It was only when another moderate president, Hassan Rouhani, took office in 2013 that hope for a negotiated solution could be revived. 
Fortunately, US President Barack Obama has not missed the opportunities that were presented to him. 
Indeed, the recent agreement with Iran, coming after diplomatic breakthroughs with Myanmar and Cuba, should make those who speak of an America in decline think again. 
But what of North Korea, the last member of that notorious axis? 
For the Bush administration, the Geneva Agreed Framework, signed in 1994 by North Korea and the US with the aim of freezing the North’s nuclear activity and gradually decommissioning its graphite-moderated reactors, was an act of appeasement by the “naive” administration of President Bill Clinton. 
Bush’s administration preferred a harder line, using the so-called six-party talks, begun in 2003 and involving the US, China, Russia, Japan, and North and South Korea, to act almost as a pressure-cooker. 
Though not publicly declared, it was widely believed that key American policymakers wanted regime change. 
But, though Bush maintained America’s hard line toward Iran, in 2006 he changed tack in dealing with North Korea and began seeking a deal – doubtless influenced by the North’s first nuclear test, carried out in October of that year. 
An eventual agreement, reached in the fifth round of the six-party talks in February 2007, could not be implemented because of North Korea’s refusal to agree on a verification protocol. 
When Obama entered office in January 2009 and offered to “extend a hand” to Bush’s rogue states, optimists hoped for the negotiated denuclearization of North Korea. 
Sadly, North Korea has betrayed the US at least three times since then: it conducted a second nuclear test in May 2009; launched a satellite in April 2012 in defiance of UN Security Council Resolutions 1718 and 1874; and carried out a third nuclear test in February 2013. 
Given the North Korean regime’s frequent threats to turn American targets, from Hawaii to Washington, into “a sea of fire,” optimism is hard to sustain. 
What should experience with the “axis of evil” trio since 2002 tell US policymakers? 
First, aiming for “policy change” makes more sense than striving for regime change. 
The Bush administration changed the regime in Iraq, but at a monumental cost that is still being paid. 
In contrast, Obama’s goal concerning Iran was modest and focused on denuclearization. 
It has borne fruit. 
What, then, does this imply with respect to North Korea? 
Given the Kim regime’s past negotiating tactics, Obama is understandably reluctant to launch any new diplomatic initiative and may well believe that negotiating with North Korea would provide his domestic political opponents with ammunition to ruin his Iran deal. 
So the wait-and-see approach is likely to continue. 
Yet just waiting for North Korea to collapse is a regime-change strategy by default – and the cost of a chaotic or violent collapse could be frighteningly high. 
Indeed, the fear of this cost is what keeps China so passive where its North Korean client is concerned. 
But time is not on America’s side. 
North Korea continues to enlarge its nuclear stockpile and develop long-range missile technologies (it can already launch a ballistic missile capable of hitting America’s west coast). 
In short, the country is becoming a direct security threat to the US. 
Accordingly, US policymakers should have only limited aims in dealing with North Korea, and they should recognize that they will be achieved only by linking them to economic benefits for the Kim regime. 
Libya’s decision to abandon its nuclear option in December 2003 and the Iran deal this year were both possible for precisely this reason. 
North Korea, of course, is neither Libya nor Iran. 
But it is also not the hermit state of the 1950s, having moved significantly toward a market economy in recent years. 
Indeed, by the early 2000s, more than four-fifths of an average North Korean’s household income comprised unofficial earnings from market activities. 
At the same time, the regime depends on taxes on international trade to support itself. 
North Korea’s leader, Kim Jong-un, is no reformist like China’s Deng Xiaoping; but his regime is becoming more like China’s every day, owing to the irreversible expansion of market forces. 
This will certainly change the context in which Kim calculates the cost and benefits of his nuclear program. 
The West should facilitate this change in his calculus. 
Moreover, the fact that the US, China, and Russia could cooperate on the Iran deal might prove helpful. 
In particular, Chinese President Xi Jinping’s position on North Korea’s nuclear program is closer to America’s than that of any of his predecessors. 
Given North Korea’s economic dependence on China – which accounts for some 90% of its trade nowadays – it is critical to take advantage of this policy convergence. 
The best way to do that would be to forgo “strategic patience” and begin informal contact with the North to probe Kim’s intentions. 
After all, with a regime as volatile as North Korea’s, patience is never a virtue. 

Obama Gets It Right 
NEW YORK – US President Barack Obama has been much criticized for the way he has handled revolutionary changes in North Africa and the Middle East. 
Actually, he has not handled them very much, at least not in public. 
That is precisely the problem for armchair warriors watching events unfold on their computer and television screens in Washington and New York. 
They want Obama to handle things more. 
Instead of taking a cautious approach, and letting the demonstrators in Iran, Tunisia, Egypt, Libya, Bahrain, Yemen, and other places do the shouting, they want him to talk tough, or, better yet, to send in the US Air Force and blast Qaddafi’s jet fighters and helicopter gunships out of the sky. 
They want Obama to tell those dictators to quit right now, or else… 
Or else what, exactly? 
To be sure, the US government has coddled too many brutal dictators over the last half-century. 
During the Cold War, dictators benefitted from American largesse as long as they were anti-Communist (“our bastards”). 
Middle Eastern dictators were showered with money and arms if they refrained from attacking Israel and kept the Islamists down. 
In both cases, these cozy relationships were maintained for far too long. 
In Arab countries, they only helped to inflame Islamic extremism. 
And yet, in order to begin a transition to more democratic forms of government, it helps to be a client state of the US. 
During the 1980’s, South Korea, the Philippines, and Taiwan managed to ditch their dictators, partly because they were utterly dependent on US arms and money. 
When the Cold War was drawing to a close, anti-Communism no longer guaranteed US protection. 
So, when Koreans, Filipinos, and Taiwanese rose up against their rulers, the US, albeit belatedly, was in a position to tell their military clients to back off. 
In a discreet way, something like this probably happened in Egypt as well. 
Unfortunately, this type of pressure could not work in China when its people demanded what other Asians had won. 
Both the Chinese Communist Party and the People’s Liberation Army could survive without US patronage. 
The same is true of the semi-theocratic regime in Iran. 
If Qaddafi finally goes, it will not be because his army is dependent on the US. 
But there is another problem with the US taking a leading role in political revolts in the Middle East. 
Some of the same people who accuse Obama today of being “soft” were keen promoters of the war in Iraq. 
Back then, they expected that the “shock and awe” of US force would not only topple the dictator (which turned out to be true), but also that the US-led invasion would be greeted with enthusiasm by the liberated Iraqis, who would then herald a new democratic era in the Middle East. 
One casualty of that brutal enterprise, apart from the roughly 100,000 Iraqis who have died and the millions more who have become refugees, is trust in the US as a force for good. 
Operation Iraqi Freedom, not to mention Operation Enduring Freedom in Afghanistan, gave American efforts to promote democracy a terrible name. 
People want freedom, but not when it comes from the barrel of a US gun. 
So far, anti-American rhetoric has been remarkably muted in the uprisings sweeping the Middle East. 
The cynical way in which despots try to discredit all opposition as the work of foreign agents no doubt plays a part in this silence. 
But so does Obama’s public discretion. 
His conciliatory speech in Cairo on June 4, 2009, much derided by hawks in the US, together with his general lack of bluster, created enough space for the opponents of Middle Eastern dictators to rebel without being tainted in any way by foreign intervention. 
It is their show, and so it should be. 
But that is not to say that the US must always be passive. 
In fact, it has not been. 
Where America’s influence counts, as in the case of the Egyptian military, it has been used. 
And Obama has made his support of democratic aspirations clear, to the dismay of allies like Israel and Saudi Arabia. 
However, as recent history has shown, toppling strongmen is only the beginning of the democratization process. 
Building institutions that guarantee not only political liberties, but also the protection of minorities, as well as other liberal conditions, is difficult enough in countries where such institutions had once existed, as in post-communist Central Europe. 
It will be harder in countries where they did not, or where the economy remains largely in the hands of the armed forces. 
Armed Anglo-American intervention, especially if it is not sanctioned by the United Nations, would do much to undermine liberals and democrats, who need all the credibility they can get. 
There are no doubt some among the demonstrators who would like Obama to be more strident in his support of their aims. 
Some even call for more active US assistance. 
There may be things that Western powers can do to alleviate the suffering, by offering aid to refugees, for example, or use the latest technology to keep lines of information open. 
But American hawks want what most opposition leaders in Libya have expressly rejected. 
They want the US to show leadership, which is the last thing aspiring democrats need right now. 
People in the Middle East and North Africa have been led by the West, or by Western-backed dictators, for long enough. 
They must find their own way to freedom. 
Obama seems to understand this. 
Which is why he has done all right. 

Obama Goes South 
MEXICO CITY – US President Barack Obama’s current swing through Latin America will probably be short on substance, long on rhetorical flourishes and symbolism, and may include a few announcements affecting American business in the region. 
More importantly, he will see real success stories, and how Latin America as a whole has changed. 
The main change is that Latin America is splitting in two. 
Indeed, this might be the last trip that a US president ever makes to “Latin America.” 
Later visits will be either to South America, or to Mexico and the Caribbean Basin. 
Chile’s success is old, if still inspiring, news. 
More than two decades of democratic rule and economic growth practically ensure that, simply by staying the course, the country will achieve lower-tier developed status by 2020. 
And there is every reason to believe that it will stay the course, even if President Sebastián Piñera, who will preside over Chile’s best economic performance in 15 years, is succeeded by former president and rival Michele Bachelet in 2014. 
Even the country’s proverbial inequality is beginning to shrink, albeit slowly, and lower-middle-class living standards are finally rising to where they should have been a decade ago. 
Brazil’s success is also well known. 
Millions of families have been lifted out of poverty. 
Inequality has diminished, though from astronomically high levels. 
The economy is growing at a sustainable pace. 
As long as China and India maintain their insatiable appetite for commodities, Brazil’s exports will finance today’s consumer boom. 
In the international arena, the new president, Dilma Roussef, has pulled back from Luiz Inácio Lula Da Silva’s many excesses (indifference to human rights abuses, support for Iran and its nuclear program, and rhetorical anti-Americanism) during his last year in office, and may even have a present for Obama. 
Brazil has been mulling whom to pick to renew its Air Force’s fighter fleet, and, whereas Lula favored France, Roussel canceled that option and may be leaning toward the US. 
El Salvador is Latin America’s most interesting success story. 
It is far from a picture of health and stability, with high levels of violence and crime, mass emigration, a slow-growth economy, and perpetual tensions within its center-left coalition government. 
But next year the country will celebrate the 20th anniversary of the Chapultepec Peace Accords, which ended its decade-long civil war. 
Ever since, a country that had never truly experienced democratic rule has enjoyed all the charms and vicissitudes of competitive elections, legislative battles, and rotation in power. 
After a succession of conservative governments, in 2009 Salvadorans elected a president running on the ticket of the FMLN, the old guerrilla group that fought the Salvadorean army and its US ally to a draw in the late 1980’s. 
The right accepted its defeat, and the left has governed reasonably (maintaining the dollar as the national currency). 
The right has started to regroup, and Obama will surely point to this virtuous cycle as one in which the US has played a positive role, and can continue to do so. 
This would be even more true if the US were to move toward immigration reform. 
El Salvador, together with Ecuador, leads the world in terms of the proportion of its population living abroad. 
It also has an economy that is not growing sufficiently to stem the ongoing tide passing through Mexico to the US. 
Stagnant growth and emigration are two of the main factors causing division in the Americas. 
South America is booming, as India and China swallow up its exports of iron, copper, soybeans, coffee, coal, oil, wheat, poultry, beef, and sugar. 
Its foreign trade and investment patterns are diversified and dynamic. 
With a few minor exceptions, migration is internal to the region, and a modus vivendi has been reached with the drug trade, mainly coca leaf and cocaine in Bolivia, Peru, and Colombia. 
Moreover, relations with the US, while important, are no longer paramount. 
South American governments can afford to disagree with the US, and often do. 
They have just elected a new president of the Union of South American Nations (Unasur), whose headquarters are being built in Quito, Equador. 
As its name suggests, Unasur’s main raison d’être is to exclude Canada, the US, and Mexico (in contrast to the Organization of American States). 
None of this holds true for Mexico, Central America, and the Caribbean islands – mainly the Dominican Republic, but eventually Cuba, too, and, in its own way, Haiti. 
These are not mineral-rich or bountiful agricultural nations: some coffee and bananas here, a little sugar and beef there, but nothing with which to sustain a boom. 
While Mexico is America’s second-largest supplier of oil, this represents only 9% of its total exports. 
Instead, these countries export low-value-added manufactured goods (Mexico does more, of course), and live off remittances, tourism, and drug-transhipment profits. 
All of this is overwhelmingly concentrated on the US: that is where the migrants are, where the towels and pajamas are shipped, where the tourists come from, and where the drugs are bought. 
For these countries, including Mexico, stable, close, and productive relations with America are essential. 
Obama will say all the right things during his visit, and will be cheered everywhere. 
But he should ponder the shifts taking place in the hemisphere. 
One area is freeing itself from US hegemony and is thriving, but may founder if Chinese and Indian growth slows. 
Another is increasingly integrated with the US and Canada. 
Despite its current travails, it will discover a path to prosperity when the US does. 
Latin America as a single entity is no more. 
Long live Latin America. 

Obama in Africa 
BERKELEY – On July 10, one very important descendant of black Africa will make a triumphant return to the motherland. 
Scholars speak of “the empire striking back,” referring to former colonized peoples, such as immigrants from Africa and India, settling in Europe and North America and then challenging norms of race and identity. 
In his first official trip to Africa, US President Barack Obama is striking back in a novel way. 
His visit to Ghana highlights the desirability of prominent people from the diaspora making a positive contribution to African affairs. 
But Obama’s visit, while heavy on symbolism, reveals the limits of his power. 
Burdened by economic problems in America and wars in Iraq and Afghanistan, he can’t act boldly in Africa or make big promises. 
Indeed, six months into his presidency, he has already undercut expectations. 
He has approached with great caution the task of settling the region’s violent conflicts – in Darfur, eastern Congo, and Somalia. 
He has also kept a safe distance from Africa’s political failures, notably in Zimbabwe, where he has resisted calls to assist in the removal of Robert Mugabe. 
Obama’s caution is reasonable. 
He doesn’t want to be pigeon-holed, after all, as “the president of Africa.” 
But, in choosing restraint over intervention, he has disappointed ordinary Africans and international activists alike. 
Like his predecessors, George W. Bush and Bill Clinton, Obama wants to avoid messy entanglements in Africa’s internal politics. 
Bush did nothing to stop the killings in Darfur or hasten Mugabe’s exit from power. 
Clinton, meanwhile, shamefully abandoned Somalia after the deaths of American soldiers in Mogadishu – and did nothing in the face of Rwanda’s genocide. 
For Obama, Africa so far chiefly remains a backdrop against which he defines his American identity. 
As he explained in his memoir Dreams from My Father , visiting his father’s native Kenya for the first time made him feel more American – and less African – than ever. 
In deciding to visit Ghana, a former British colony and a leading node in the global slave trade of the eighteenth and nineteenth centuries, Obama bypassed the Kenya of his father. 
Kenya is embroiled in bitter tribal disputes, and saddled with a brazenly corrupt government. 
By contrast, Ghana represents the sunny side Africa. 
The country recently completed a well-run election in which the opposition took power. 
Its economy is growing. 
Ethnic relations in this highly diverse nation are as good as they are anywhere in the world. 
Obama will be on African soil for a mere two days, during which time he is expected to emphasize America’s role in promoting good governance and non-violence in Africa – goals long high on America’s public agenda. 
Obama’s one new priority – to expand US support for African farmers – reflects a shrewd appreciation of how the expansion of agriculture can quickly lift many rural Africans out of poverty. 
“The administration plans over a number of years to put a substantial amount of money into agricultural development,” Obama’s choice for Secretary of State for African Affairs, Johnnie Carson, said in advance of the president’s trip. 
Don’t expect Obama to confront the most controversial aspect of US relations with Africa: the American military’s new African command. 
Bush, who created the command, gave the US Department of Defense new powers to work on civilian issues in Africa and to expand its military partnerships with governments in the region. 
Obama isn’t likely to say whether he’ll scale back the US military role in the region, or whether America’s growing reliance on African oil is the real reason – not Obama’s heritage – for wooing Africans. 
Obama’s lack of candor won’t hurt him in the US, where domestic political calculations take precedence. 
In truth, his visit to Africa is a reward to his stalwart African-American supporters, who voted overwhelmingly for him in the November election and who remain one pillar of his base. 
For African-Americans, Ghana has special meaning. 
The country played an important role in the push for civil rights in America, for instance. 
In 1957, when legal segregation seemed entrenched in the US, Ghana’s first president, Kwame Nkrumah, used the occasion of his country’s independence from Britain to highlight the injustices experienced daily by black Americans. 
He invited Martin Luther King, Jr. to his inauguration, giving the Atlanta-based civil rights leader a global platform for the first time. 
Malcolm X, the black nationalist leader, visited Ghana two years later, and again in 1964. 
Nkrumah invited W.E.B. Du Bois, the most important black intellectual of the twentieth century, to Ghana in 1961. 
Du Bois became a citizen and lived in Ghana until his death. 
Hundreds of African-Americans live year round in Ghana today, some within a short walk of Cape Coast Castle, the slaving fort that shipped human cargo until Britain halted the trade in 1807. 
Learned and deeply reflective, Obama knows that black Americans will view his visit to Ghana very differently than white Americans will. 
His tendency to view Africa through an American lens is thus both understandable and inevitable. 
Yet his African roots give him a unique capacity to transform American relations with Africa, elevating the importance of African self-reliance and achievement, while striving to make American aid more intelligent and effective. 

Obama in Chains 
NEW YORK – It is hard for international observers of the United States to grasp the political paralysis that grips the country, and that seriously threatens America’s ability to solve its domestic problems and contribute to international problem solving. 
America’s governance crisis is the worst in modern history. 
Moreover, it is likely to worsen in the years ahead. 
The difficulties that President Barack Obama is having in passing his basic program, whether in health care, climate change, or financial reform, are hard to understand at first glance. 
After all, he is personally popular, and his Democratic Party holds commanding majorities in both houses of Congress. 
Yet his agenda is stalled and the country’s ideological divisions grow deeper. 
Among Democrats, Obama’s approval rating in early November was 84%, compared with just 18% among Republicans. 
Fifty-eight percent of Democrats thought the country was headed in the right direction, compared with 9% of Republicans. 
Only 18 % of Democrats supported sending 40,000 more troops to Afghanistan, while 57% of Republicans supported a troop buildup. 
In fact, a significant majority of Democrats, 60%, favored a reduction of troops in Afghanistan, compared with just 26% of Republicans. 
On all of these questions, a middle ground of independents (neither Democrats nor Republicans) was more evenly divided. 
Part of the cause for these huge divergences in views is that America is an increasingly polarized society. 
Political divisions have widened between the rich and poor, among ethnic groups (non-Hispanic whites versus African Americans and Hispanics), across religious affiliations, between native-born and immigrants, and along other social fault lines. 
American politics has become venomous as the belief has grown, especially on the vocal far right, that government policy is a “zero-sum” struggle between different social groups and politics. 
Moreover, the political process itself is broken. 
The Senate now operates on an informal rule that opponents will try to kill a legislative proposal through a “filibuster” – a procedural attempt to prevent the proposal from coming to a vote. 
To overcome a filibuster, the proposal’s supporters must muster 60 of 100 votes, rather than a simple majority. 
This has proven impossible on controversial policies – such as binding reductions on carbon emissions – even when a simple majority supports the legislation. 
An equally deep crisis stems from the role of big money in politics. 
Backroom lobbying by powerful corporations now dominates policymaking negotiations, from which the public is excluded. 
The biggest players, including Wall Street, the automobile companies, the health-care industry, the armaments industry, and the real-estate sector, have done great damage to the US and world economy over the past decade. 
Many observers regard the lobbying process as a kind of legalized corruption, in which huge amounts of money change hands, often in the form of campaign financing, in return for specific policies and votes. 
Finally, policy paralysis around the US federal budget may be playing the biggest role of all in America’s incipient governance crisis. 
The US public is rabidly opposed to paying higher taxes, yet the trend level of taxation (at around 18% of national income) is not sufficient to pay for the core functions of government. 
As a result, the US government now fails to provide adequately for basic public services such as modern infrastructure (fast rail, improved waste treatment, broadband), renewable energy to fight climate change, decent schools, and health-care financing for those who cannot afford it. 
Powerful resistance to higher taxes, coupled with a growing list of urgent unmet needs, has led to chronic under-performance by the US government and an increasingly dangerous level of budget deficits and government debt. 
This year, the budget deficit stands at a peacetime record of around 10% of GNP, much higher than in other high-income countries. 
Obama so far seems unable to break this fiscal logjam. 
To win the 2008 election, he promised that he would not raise taxes on any household with income of less than $250,000 per year. 
That no-tax pledge, and the public attitudes that led Obama to make it, block reasonable policies. 
There is little “waste” to cut from domestic spending, and many areas where increases in public spending are needed. 
Higher taxes on the rich, while justified, don’t come close to solving the deficit crisis. 
America, in fact, needs a value-added tax, which is widely used in Europe, but Obama himself staunchly ruled out that kind of tax increase during his election campaign. 
These paralyzing factors could intensify in the years ahead. 
The budget deficits could continue to prevent any meaningful action in areas of critical need. 
The divisions over the wars in Iraq and Afghanistan could continue to block a decisive change in policy, such as a withdrawal of forces. 
The desire of Republicans to defeat the Democrats could lead them to use every maneuver to block votes and slow legislative reforms. 
A breakthrough will require a major change in direction. 
The US must leave Iraq and Afghanistan, thereby saving $150 billion per year for other purposes and reducing the tensions caused by military occupation. 
The US will have to raise taxes in order to pay for new spending initiatives, especially in the areas of sustainable energy, climate change, education, and relief for the poor. 
To avoid further polarization and paralysis of American politics, Obama must do more to ensure that Americans understand better the urgency of the changes that he promised. 
Only such changes – including lobbying reforms – can restore effective governance. 

Obama in Cuba 
MEXICO CITY – Barack Obama’s upcoming visit to Cuba is undoubtedly an historic moment, as it will mark the first time in 88 years that a sitting American president has set foot on the island. 
But superlatives are far less useful than a pragmatic look at the practical implications – for both the United States and Cuba – of Obama’s legacy-enhancing move. 
In fact, pragmatism is among the main shapers of Obama’s approach to Cuba. 
He recognizes the failure of the trade embargo, in place since 1960, to push the country to strengthen human-rights protections, much less to move toward democracy. 
Thus, Obama has pragmatically – perhaps even somewhat cynically – decided to abandon trying to compel Cuba’s leaders to change their political system. 
After all, if the US had set a political opening in Cuba, or even a modicum of respect for human rights by the government, as a precondition for normalization of diplomatic relations, the two countries would still be at an impasse. 
But while Obama may be burnishing his legacy by pursuing unconditional normalization – so-called “engagement” – what he is not doing is securing any actual change in Cuba. 
“Engagement” is, ultimately, just rhetoric. 
Indeed, if engagement is supposed to result in political change, US engagement with Cuba is most likely doomed to fail; after all, trade and investment have done nothing to bring about a democratic opening in Vietnam over the last 20 years. 
Nor have 30 years of massive trade with, and investment in, China brought that country’s leaders any closer to democracy. 
If engagement entails setting aside matters relating to democracy and human rights, at least partly, it is still a sensible policy, if not a very altruistic one. 
In any case, attending a baseball game in Havana in the company of Cuban President Raúl Castro, as Obama is set to do, is not a necessary element of this policy. 
On the contrary, as the columnist Andrés Oppenheimer has argued, it is a serious mistake, as it amounts to a slap in the face for the victims of the Castro regime’s human-right abuses. 
Jettisoning the trade embargo, a failed policy, makes sense, but it does not require “playing nice” with a dictator. 
One never knows whether other dictators will invoke a regrettable precedent set by an American head of state, particularly one who is highly admired nearly everywhere in the world. 
This is not to say that Obama has forsaken Cuba’s small and beleaguered opposition. 
Indeed, he is scheduled to meet with Cuban dissidents, much to the displeasure of the Castro regime. 
Moreover, Obama will address questions of democracy and respect for human rights in his live televised address to the Cuban public. 
The media representatives who will flank Obama during his visit – including, unfortunately, at that ill-advised baseball game – will take up these crucial issues in their reports, even if they are peppered with platitudes about Cuban music and published alongside silly shots of vintage automobiles on Havana’s streets. 
While the US cannot – and, it seems, will not – ignore the principles of democracy and human rights in its dealings with Cuba, there is a distinction between democratic norms and economic policies. 
In fact, the biggest challenge facing the US as it attempts to normalize ties with Cuba is on the economic front. 
In the 15 months since ties were reestablished and prospectors headed to the island in search of investment opportunities, little has actually happened, in terms of trade, tourism, and new projects. 
Indeed, as the New York Times reports, American and Cuban players have signed only a handful of business deals – a reality that “threatens to sap momentum from the process of building relations.” 
Part of the problem is the lingering embargo. 
While support for lifting it has grown within the Cuban-American community and the US Congress, it is unlikely to happen before Obama leaves office. 
Though a number of restrictions on travel and financial transactions have been rescinded, the obstacles in the path of a real change in the island’s economic situation remain formidable. 
Even without the embargo, Cuba would still be held back by its dilapidated infrastructure; strict labor laws; restrictions on foreign-investment; an educated but unskilled workforce, unaccustomed to Western workplace practices; and a lack of contracts and legal instruments to enforce those practices. 
All of this makes it highly unlikely that US engagement will have much of an impact on ordinary Cubans. 
For Cuba’s leaders, the absence of concrete economic benefits is a massive disappointment. 
With Venezuela facing economic devastation, owing partly to collapsing oil prices, its people are no longer interested in subsidizing Cuban socialism to the tune of several billion dollars per year; indeed, they have already rejected their own left-wing leadership. 
Castro saw this shift coming even before the Venezuelans did, and began looking to the US to take up the slack. 
But the US hasn’t, and probably won’t, at least not for some time. 
Without a strong economic impact, America’s opening to Cuba will not make even a small contribution to political liberalization on the island. 
This will not matter much for Obama’s legacy. 
But it does raise questions about how important an individual leader’s legacy should be in shaping policy toward an endearing but impoverished and still-repressive country. 


Obama’s Letters and Trump’s Delusions 
TOKYO – When was the last time you sat down and wrote a letter? 
I don’t mean an email or a text message; nor would I count a dictated message to a machine or a personal assistant. 
No, I mean an old-fashioned “Dear Donald” or “Dear Hillary” letter. 
The reason I ask is that 65,000 people actually did write such letters to Barack Obama every week when he was serving as president of the United States. 
According to a recent feature in The Guardian, a team of White House staffers would select ten letters each day to pass along to the president, who would then respond to them personally that evening. 
Was this nightly ritual a waste of time for the most powerful leader in the world? 
One might think that Obama would have been better served reading policy briefs on Syria or on the implementation of health-care reform. 
No doubt, he read those, too. 
But I suspect that he realized the value of a daily encounter with voters. 
His ritual was a partial solution to a fundamental problem that all political leaders face: keeping in touch with the real world. 
Now consider Donald Trump. 
With a few honorable exceptions such as Secretary of Defense James Mattis, Trump is surrounded by people who will tell him that the world is as he believes it to be, rather than as it actually is. 
For the lickspittles of Trump’s court, dutifully confirming the president’s delusions is de rigueur. 
And the same goes for those on Fox News, who routinely tell their audience exactly what Trump wants to hear. 
Of course, even leaders who are more like Obama than Trump struggle to apprise themselves of everything that is going on. 
Ideally, heads of state will have teams of dedicated public servants to ensure that political decisions are made with a full understanding of their context and consequences. 
In a democracy, leaders can and often must pursue courses of action that entail some risk. 
But they should do so only after having considered all of the facts. 
Another problem is that the longer leaders are in power, the less they like being told that they are wrong. 
Political longevity breeds sycophancy. 
I personally witnessed this with former British Prime Minister Margaret Thatcher, who read her policy briefs and knew most of the issues inside out. 
Thatcher was most successful when she allowed her instincts to be challenged. 
But the longer she stayed in office, the more she assumed that she knew best. 
Eventually, Thatcher’s epistemic isolation would bury her. 
She usually had a strong grasp of issues relating to the standard of living; and yet she failed to comprehend the impact that a new poll tax would have on household budgets. 
Ultimately, this – not some lofty debate about Britain’s place in Europe, as is often suggested – was what brought her down. 
Moreover, navigating the demands of parliamentary accountability is not the same thing as engaging with voters. 
One can master all the political tricks of the trade to survive parliamentary debates or interrogations by committees. 
And if you are a minister, you should already know more about your subject area than any potential interlocutor. 
The real challenge comes when you meet your constituents. 
To its credit, the British electoral system at least establishes a more or less direct relationship between MPs and the people who vote for them. 
Each MP represents a particular town, suburb, or stretch of countryside, and most go back each week to listen to voters and hold sessions known as constituency surgeries. 
On these occasions, people usually come to discuss housing problems, social-security benefits, or schooling; or they just want to grouse about some national controversy. 
As a former MP, I can remember times when I had easily convinced Parliament that I was right about some policy decision, only to learn through face-to-face encounters with my constituents that I was not nearly as smart as I thought I was. 
When someone breaks down crying while trying to explain the impact that your decision has had on their life, you usually think twice about the issue. 
Obama didn’t need focus groups to tell him that ordinary Americans were struggling to pay their medical bills and being denied treatment for preexisting conditions. 
He already knew that from reading their letters, some of which he had framed and placed on his wall. 
No wonder health care is such a big issue in the US midterm elections this year. 
Perhaps the results will send a message to Trump. 
Rather than a letter, he might be handed a string of Republican congressional defeats. 
If it’s any consolation, he can find out about them on Fox News, where nothing is ever his fault. 

Obama Meets the World 
CAMBRIDGE – Many people will try to set President Barack Obama’s priorities, but one person is sure to have a major effect. 
George W. Bush has bequeathed an unenviable legacy: an economic crisis, two wars, a struggle against terrorism, and problems across the Middle East and elsewhere. 
If Obama fails to fight these fires successfully, they will consume his political capital, but if all he does is fight them, he will inherit Bush’s priorities. 
The new president must deal with the past and chart a new future at the same time. 
Foremost on Obama’s agenda will be the economic crisis, where his domestic and international priorities intersect. 
He will need to stimulate the economy and avoid protectionist pressures at home, while also taking the lead in restructuring the global financial system. 
Cooperation with others will be essential. 
That Bush convened a G-20 meeting in November sets a useful precedent of going beyond the G-7 to include emerging economies such as China, India, and Brazil. 
In second place must be America’s two current wars. 
Obama campaigned on a promise to withdraw American combat brigades (but not troops engaged in training and counterterrorism) from Iraq by mid-2010. 
Now the Bush administration and the Iraq government have signed an agreement for troop withdrawal by late 2011. 
These timetables’ effectiveness will depend on events on the ground, including political compromises inside Iraq and dialogue with Iraq’s neighbors, but a clear sense of direction has been established. 
Afghanistan looks more difficult, given the Taliban’s reinvigoration with help from groups in Pakistan. 
Obama has called for additional United States and NATO troops to stabilize the situation, but too many foreign troops will only increase Afghan nationalist reactions. 
We cannot simply shoot our way out of the problem. 
Increased training of the Afghan army and police, and a political dialogue inside the country and with neighbors will be important components of any solution. 
The third priority will be what Bush misleadingly called a “global war on terrorism.” 
The Obama administration will have to pursue the struggle against Al Qaeda, but should drop the war rhetoric. 
It makes little sense to declare war on a tactic, and experience has proven that the terminology merely reinforces the narrative that bin Laden seeks to promote, which is why Britain now avoids the phrase. 
A successful strategy against Al Qaeda will require close intelligence cooperation with other countries and policies that attract the support of mainstream Muslim opinion. 
The Middle East represents a fourth set of urgent priorities. 
Iran has now enriched enough uranium to produce (in principle) one nuclear bomb. 
Nonetheless, there remains time for a diplomatic initiative that includes Europe, Russia, and China. 
Given the unattractiveness of choosing between a pre-emptive attack on Iran or allowing Iranian nuclear weapons to destabilize the Gulf region, Obama has pledged to conduct a broad diplomatic dialogue with Iran without the preconditions that hampered Bush. 
But successful diplomacy will require repairing relations with Russia. 
Also high on the priority list in the Middle East will be to sustain and enhance Bush’s efforts to bring about a two-state solution between Israel and Palestine, and to encourage the incipient dialogue between Israel and Syria. 
Major issues will also arise in Africa, Latin America, and Asia, and relations with these areas will grow in importance. 
Fortunately, none of them became political footballs in the recent election campaign. 
In Asian policy, with the exception of North Korea, the Bush legacy is better, bequeathing good relations with the key states of Japan, China, and India. 
The “Bush Doctrine” of preemptive war and coercive democratization, coupled with a unilateralist style, was based on a flawed analysis of power in today’s world. 
The paradox of American power is that the strongest country since the days of Rome cannot achieve its objectives acting alone. 
Obama’s election has done much to restore American “soft” power, but he will need to follow up with policies that combine hard and soft power into a smart strategy of the sort that won the Cold War. 
Democracy promotion is better accomplished by soft attraction than hard coercion, and it takes time and patience. 
Here Obama should lead by example and remember the historical wisdom of being Reagan’s “shining city on a hill.” 
Closing the prison camp at Guantánamo Bay, Cuba, would send such a signal. 
Right now, Bush’s calls for democracy are heard as an imperial imposition of American institutions. 
We need less Wilsonian rhetoric about making the world safe for democracy, unless combined with John F. Kennedy’s calls to “make the world safe for diversity.”ampnbsp; 
A “liberal realist” policy should look to the long-term evolution of world order and realize the responsibility of the international system’s strongest country to produce global public goods – things people and governments around the world want but cannot otherwise attain – as Britain did in the nineteenth century. 
America should similarly promote an open international economy and commons (seas, space, Internet), mediate international disputes before they escalate, and develop international rules and institutions. 
Early signals that the US will take the lead in dealing with global climate change will be an important start. 
The US can become a smart power by once again investing in global public goods. 
That means support for international institutions, aligning America with the cause of international development, promoting public health, increasing cultural exchanges, maintaining an open economy, and dealing seriously with climate change. 
Indeed, Obama’s most important priority must be to show that America is back in the business of exporting hope rather than fear. 

Obama’s Passage to India 
CAMBRIDGE – Indian Prime Minister Narendra Modi’s vigorous foreign policy in the seven months since he took office has surprised observers. 
After inviting the leaders of Pakistan and other neighboring countries to his inauguration, he embarked on trips to China, Australia, and the United States. 
More recently, he welcomed Russian President Vladimir Putin to New Delhi and signed a large number of trade deals and orders to import Russian nuclear reactors. 
India, Modi is telling his fellow citizens, is strong and well regarded around the world. 
Next month, US President Barack Obama will travel to New Delhi as Modi’s special guest at events commemorating Republic Day, India’s national holiday – just three months after the two leaders held substantive talks in Washington, DC. 
The visit should thus be regarded as a clear signal of Obama’s desire, no less than Modi’s, to strengthen US-India relations. 
So what is likely to be on Obama’s mind when he meets his Indian counterpart again, and what does he think can be done to cement bilateral ties? 
Three issues stand out – beginning with trade, which is as important politically as it is economically. 
Obama hopes that the Trans-Pacific Partnership will be concluded in 2015 and ratified by the US Senate. 
The TPP will not be as powerful a free-trade agreement as originally intended, owing to exclusions and a very long phase-in period. 
But it will tie the US and 11 other Pacific Rim countries (including Japan but excluding China) together in a new economic bloc. 
Obama should be eager to stress that India’s exclusion from the TPP is a matter solely of geography – India does not abut the Pacific – and that the US wants to increase bilateral trade and direct investment by American firms. 
The second issue is terrorism. 
The US authorities are worried that American citizens who have been fighting with the Islamic State and Al Qaeda in the Middle East will return home to commit terrorist acts. 
India has experienced horrific acts of terrorism on its own territory. 
Continued cooperation between the US and Indian intelligence agencies can help both countries prevent future incidents. 
Terrorism includes not just physical violence, but also assaults in cyberspace. 
China, Russia, and Iran have been the source of frequent cyber attacks on banks, companies, and government agencies; 
North Korea, the US alleges, was behind the recent breach of Sony Pictures’ computers. 
Though Obama presented evidence to Chinese President Xi Jinping of technology theft by hackers based in China, the Chinese authorities continue to deny it. 
More recently, Russia and others have been planting malware in the control systems of the US power grid and other sensitive networks. 
Looking ahead, the US worries about cyber attacks by non-state actors like the Islamic State and Al Qaeda. 
Although these groups’ members may lack the sophistication to commit such acts, they may try to hire individuals with the necessary skills. 
India has a large number of talented computer engineers, including some who might be sympathetic to the Islamist cause. 
The US and India could both benefit from cooperating to prevent and disrupt such recruitment efforts. 
The third issue on Obama’s mind is bound to be China’s asserted goal of dominating Asia and excluding the US from the region. 
Chinese hegemonic ambition runs counter to India’s strategic interests as well – reason enough for Modi’s eagerness to strengthen his country’s relations with its neighbors as well as with the US. 
Obama has already made it clear that the US understands that Modi’s willingness to cooperate with Russia, despite Western sanctions imposed on the country, stems from India’s desire to discourage a Sino-Russian alliance against it. 
Modi won a landslide victory in an election that reflected the Indian public’s disappointment with the policies and performance of the previous government, led by the Indian National Congress. 
Though India had experienced annual real GDP growth of more than 8% for several years, growth has slowed since 2010, to less than 5% in 2013, owing to a populist shift in policies dictated by Congress party leader Sonia Gandhi. 
By contrast, the Modi government plans to pursue a pro-growth agenda that includes reducing bureaucratic delays, increasing infrastructure investment, stimulating manufacturing activity, and shifting to a simpler unified tax system. 
Modi’s agenda also evidently includes an active foreign policy – as it should. 
Cultivating India as a reliable partner in the global economy and in international affairs is a high priority for the US as well. 
Obama’s visit to India can help to realize that relationship’s potential. 


Obama of Arabia? 
DENVER – Not since 1989 has the world seen such an all-consuming, all-engulfing wildfire of freedom and democracy, whose burning passions are sweeping across a region vast and old and desperately in need of reform. 
From the Maghreb to the Levant to the Arabian Peninsula, Arab history is on the move. 
A new generation of leadership seems poised to take over. 
Moments like these are especially challenging for foreign policymakers, who must keep one eye on the world as it is and the other on the world as it might be in the future. 
In trying to do just that, US President Barack Obama has been harangued about the need to “get on the right side of history,” or, to quote Bob Dylan, “to get out of the new [road] if you can’t lend your hand.” 
These are, indeed, delicate and changing times for the United States, especially at a time when Americans expect their president to be the “emoter” in chief. 
How Obama manages calls from both the left and the right for more action could well shape the environment in which the process – owned and managed by Arabs – eventually unfolds. 
As it picks its way through crisis after crisis in the Arab world, the Obama administration would do well to follow a few guidelines that do not change with every news cycle. 
First, staying on the right side of history is one thing, but suggesting that the US is inspiring, if not directing, the Arab revolts is quite another. 
Avoiding this perception is sometimes difficult: in much of the region, US media are perceived as an arm of a supposedly omnipotent America. 
So, when the reporting of US correspondents borders on cheerleading (a relatively common occurrence), the perception that America is masterminding events is given fresh impetus. 
It is thus wise for Obama not to be out directing traffic in the crise du jour. 
There are times when it is best for a US president to lay low, even if it makes him seem absent and disengaged. 
This is one of those times. 
Second, Americans often pride themselves on taking a transactional approach to the world. 
But what is happening in the Arab world is not a series of transactions; it is a tectonic cultural shift in terms of generational attitudes, gender relations, and urban-rural tensions. 
Democracy versus dictatorship is, of course, one fault line, but so, too, as we know from Bahrain and Saudi Arabia, is the 1,300-year-old Shia-Sunni divide. 
Policies designed for one fault line are not necessarily appropriate for the latter. 
Accurate analysis of what is taking place on the ground is essential, but this can prove difficult in an echo chamber of globalized cultural icons. 
While many Americans would like to think that the battle lines have been drawn between Tweeters and non-Tweeters, between those on Facebook and those without profiles, it is more likely that some other identities account for what is happening. 
Of course, nobody likes to refer to “tribalism” or “clan” conflict, but these elements of identity often play a key role in determining people’s willingness to take to the streets. 
In fact, the aura of political incorrectness that surrounds such terms reflects the absence of any similar organizing principle in contemporary globalized societies. 
But that is no reason to rule out such categories of analysis where they do apply. 
Third, there is at least one motivation behind the Arab revolts that permeates Western politics as well: the urge to forget the facts, the risks, and the future, and just throw the rascals out. 
We see this sentiment reflected in the slogan that has become ubiquitous in the region: “The people want to bring down the regime.” 
Some of these rascals are indeed, to put it gently, past their shelf life. 
In some cases, they and their cronies have stolen much of the national wealth. 
Who is to say that this motivation should be held in any lower regard than that of those manning the ramparts of democracy? 
There is much to respect in the “throw the rascals out” approach. 
Unfortunately, it does not always lead to more democracy. 
Finally, the Obama administration should bear in mind that in some countries, the old order will be replaced quickly. 
In time, however, the changes might amount to less than was first hoped, and could actually bring about a situation that arguably is worse than the status quo ante (the French Revolution, the Bolshevik Revolution, and the Iranian Revolution come to mind). 
In other countries, of course, the outcome might be much more promising (The American Revolution, Eastern Europe in 1989). 
Some historical processes, however quickly launched, will eventually falter. 
A dictator who has shown no concern for his people might actually prove quite talented at clinging to power. 
In these circumstances, there will be inevitable calls for the West – namely the US – to overthrow the tyrant militarily. 
When such prescriptions present themselves, policymakers should take a deep breath and ask how the tyrant got there in the first place. 
When US-led forces overthrew Saddam Hussein in 2003, far too little effort was made to understand how a peasant tyrant like Saddam was able to seize power and hold it for so long. 
How did he manipulate Sunni-Shia relations, or manage the complexities of Iraq’s tribal system, so well? 
Of course, terror was at the root of Saddam’s approach, but so, too, was a grasp of internal political and social processes. 
The US – now in the ninth year of an engagement that has cost it more than $1 trillion, with thousands of American and Iraqi lives lost –would have done well to understand those processes with equal thoroughness. 
Surely, that lesson should be applied as the US responds to the emergence of a new – but not necessarily newly democratic – Arab world. 

Obama’s Chance for Middle East Peace 
STOCKHOLM – Next year marks the centennial of the Balfour Declaration, the British statement that paved the way for Israel’s founding in 1948, and for the conflict between Israel and the Palestinians, as well as the larger Arab world, that continues today. 
World leaders gathering in New York for the United Nations General Assembly probably won’t have time to discuss this perennial political challenge. 
But, despite all of the Middle East’s other – and seemingly bigger – problems, the Israeli-Palestinian conflict is the lynchpin issue that will determine whether the region’s future will be one of peace and prosperity. 
The conflict – whether it is resolved or not – will also help define US President Barack Obama’s foreign-policy legacy. 
As Obama’s second term nears its end, it is worth recalling that when he came to office in 2009, he sought rapprochement with the wider Muslim world. 
In his historic Cairo speech in June of that year, he described the Palestinians’ situation as “intolerable” and promised to pursue – “with all the patience and dedication that the task requires” – a policy of “two states, where Israelis and Palestinians each live in peace and security.” 
Obama has made very little progress on this issue since then, though not for lack of trying. 
During Obama’s first term, Israeli Prime Minister Binyamin Netanyahu and Republicans in the US Congress united against him to derail any meaningful peace efforts. 
And during his second term, his secretary of state, John Kerry, led a heroic nine-month effort – involving almost a hundred bilateral meetings with Israeli and Palestinian leaders – that simply petered out. 
Netanyahu and Palestinian President Mahmoud Abbas have now both expressed a willingness to meet, in Moscow or in some other location yet to be determined. 
But no one seriously expects the parties to make real progress toward a two-state solution at this point. 
One reason is that Netanyahu is waiting for Obama to leave office. 
His current priorities are to secure a massive military-aid deal with the US in the coming months, and to orchestrate a new public-relations blitz justifying his government’s current policy regarding settlements in the occupied territories, which the international community has condemned as illegal. 
Moreover, Abbas’s authority is slipping, and there is no mandate for a Palestinian leader to pursue serious peace efforts in today’s political climate. 
Leaving office without having made progress on an issue he specifically promised to resolve would be a colossal failure for Obama. 
Fortunately, he still has time, and many previous US presidents have set a precedent for bold diplomacy during their final months in the White House. 
In late 1988, Ronald Reagan recognized the Palestine Liberation Organization and authorized the State Department to begin “substantive dialogue” with PLO leaders. 
In late 2000, Bill Clinton published his parameters for a future peace framework. 
And, starting with the Annapolis Conference in late 2007, George W. Bush mediated a series of negotiations between Abbas and Israeli Prime Minister Ehud Olmert. 
Now it is Obama’s turn, and he should push for a UN Security Council resolution that establishes new parameters for a future peace accord, and replaces UN Security Council Resolution 242, which dates back to the 1967 Six-Day War between Israel and Egypt, Jordan, and Syria. 
The international community agrees that ending the conflict is in everyone’s interest – France has long argued for a new resolution, and Russia has no incentive to oppose one. 
Obama should start by approaching Russia, the European Union, and the UN to discuss how the resolution should be phrased. 
He will need international support, because Netanyahu will certainly object to any new parameters that undermine his own increasingly apparent vision of a Greater Israel from the Mediterranean to the Jordan River. 
Netanyahu will have American allies to run interference for him. 
Republican presidential candidate Donald Trump doesn’t even mention a two-state solution in his platform; and Democratic candidate Hillary Clinton has assured American pro-Israel advocacy organizations that she opposes any new Security Council resolution to lay the foundation for a future accord. 
Still, a new resolution would ideally come this November, just after the US election, sparing the next president the political costs. 
A Clinton administration would benefit from already having something to work with, and a Trump administration would benefit from low expectations, while being restrained from doing more damage than it otherwise could have done. 
The resolution itself will have to be far more comprehensive than previous efforts by the Security Council. 
Indeed, Resolution 242 doesn’t even mention the Palestinians or a future Palestinian state. 
A far better model would be the Arab League’s 2002 Arab Peace Initiative, which embodies a much wider regional perspective, and which Obama has previously said would give Israel “peace with the Muslim world from Indonesia to Morocco.” 
Moreover, a new resolution should establish that the international community will recognize no changes to the pre-1967 borders, including with regard to Jerusalem. 
Admittedly, a resolution now would not lead to immediate peace, or even to peace talks. 
In fact, it might divide Israelis and Palestinians further in the near term. 
But if the world wants to avoid a future cataclysmic confrontation between a coming Greater Israel and a Palestine backed by a larger alliance of Arab countries, the conditions for talks leading to a stable two-state solution must be established now. 
Obama is in a position to establish a framework for an eventual settlement. 
If he does, it would demonstrate that his Cairo speech was not in vain, and it might even justify the Nobel Peace Prize he received at the start of his presidency, when he vowed that peace between Israel and Palestine would be a defining part of his legacy. 

Obama’s Asian Vision 
NEW YORK – Now that Barack Obama has made history by being elected President of the United States, people throughout the Asia-Pacific region fervently hope he will focus on Asia in a way that he did not during the election season. 
In the past few months, every time I visited an Asian country – whether South Korea or India, China or Japan – I was asked repeatedly about candidate Obama’s positions on three issues: trade, foreign policy, and the new geo-economic order. 
We all now hope that President-elect Obama will provide the answers, not only in words, but also in actions. 
Policy wonks and interested Asians alike often say that when Republicans are in power in America, Asians breathe a confident sigh of relief. 
Their assumption is that Republicans will back free trade and oppose protectionism. 
This time around, they have not heard much from the President-elect, who is a Democrat, on trade with Asia, and what they have heard about his position on the North American Free Trade Agreement – an alleged desire to rewrite that trade pact unilaterally – does not inspire confidence. 
At the same time, countries like India feel that the US, along with Europe, have been on both sides of “free” and “fair” trade – but always from a narrow nationalistic perspective. 
If the US is serious about “fair” trade, they say, the new administration will need, for example, to deal with the unfairness of agricultural subsidies, which led to the collapse of the Doha round of World Trade Organization talks. 
Most importantly, a trade policy must be articulated that is both free and fair (not only for US workers, but also for Asian workers), and that reassures Asians that Obama will be aware of their needs. 
While the US economy falls into a deep recession, the economies of large Asian countries like China and India will continue to grow at an annual rate of 7% to 9%. 
They will remain an important source of import demand, especially for high technology and industrial goods. 
This could be a great boon to the US economy. 
Asian leaders have often complained that at a time when Asia became increasingly interconnected and China began to enlarge its sphere of influence, America was largely absent in the region. 
Indeed, for the past seven years America’s foreign policy seems to have been conducted entirely through the prism of the “war on terror” and the Iraq war. 
While there were some singular bilateral accomplishments, such as the adoption of the US-India civil nuclear energy deal, the US has been perceived to be less effective in dealing with the region’s burgeoning multilateral frameworks. 
Now, fully aware of Obama’s claims for a presidency that will be about the future, Asians are eager to hear about his vision of the Asia-Pacific region and how the US will deal with Asia’s giants – China and India – while maintaining strong connections to Japan. 
The need for Obama to address the region’s new realities early in his tenure has been underlined by the current financial crisis, which has made abundantly clear that the center of global economic power has shifted toward the East. 
It is also clear that the West’s future role will depend on how America manages this new distribution of power. 
British Prime Minister Gordon Brown has begun to talk about a Bretton Woods II that would give a bigger voice to Asia in the world’s great multilateral financial and economic institutions, and French President Nicolas Sarkozy has asked that China help the West during these difficult times. 
And, while scholars have begun to talk about building an Asia-Pacific community that can match the Atlantic community’s extensive network of relationships, there has been no clear signal from the US government about America’s role in this transformation. 
So Asians are keen to hear Obama’s thoughts about a new or renewed international system, and hope that his vision of a new global order will incorporate the rising countries of Asia as America’s partners. 
I was in Korea last week, and several of my friends and colleagues, some in prominent public positions, were thrilled at the prospect of the new US president. 
They marveled at the fact that America’s democracy can actually make it possible for a youngish African-American to become the leader of the free world. 
Now, this rising region is desperate to hear Obama’s thoughts about America’s role in Asia, thoughts that are commensurate with Asia’s importance – and with the scope of his vision. 

Obama’s China Card? 
MELBOURNE – According to the United States Federal Reserve, Americans’ net worth has fallen 40% since 2007, returning to its 1992 level. 
Progress towards recovery will be slow and difficult, and the US economy will be weak throughout the run-up to November’s presidential and congressional elections. 
Can any incumbent – and especially President Barack Obama – win re-election in such conditions? 
To be sure, the blame for America’s malaise lies squarely with Obama’s predecessors: Bill Clinton, for encouraging the Fed to take its eye off financial-market supervision and regulation, and George W. Bush, for his costly wars, which added massively to US government debt. 
But, come Election Day, many (if not most) Americans are likely to ignore recent history and vote against the incumbent. 
Given this, it would not be surprising if Obama and others in his administration were seeking non-economic issues to energize his campaign. 
National-security problems in general, and the challenge posed by China in particular, may be shaping up as just such issues. 
Obama’s foreign and defense policies have been assertive, to say the least, especially in the Middle East and the Pacific. 
He has sanctioned far more unmanned drone strikes than Bush did; extended the security services’ intrusion into Americans’ privacy; allowed the CIA to continue its rendition program; approved trials of accused terrorists by flawed military tribunals; and has not shut Guantánamo Bay. 
Moreover, the US is increasing its troop presence in the Pacific at a time when it already has more military force in the region than all other countries combined. 
Six aircraft carriers, with their accompanying support vessels – indeed, 60% of America’s entire navy – are now stationed in the Pacific. 
In addition, Obama’s administration has been conducting talks with the Philippines to increase and enhance naval cooperation. 
And Singapore has been persuaded to host four advanced naval ships. 
Australia has established a base for marines in Darwin and another for unmanned spy planes on the Cocos Islands. 
That is not all. 
In a move that has received little or no publicity, congressional Republicans added a clause to the Defense Appropriation Bill for next year requiring the Obama administration to consult with countries in the Western Pacific about stationing even more forces – including tactical nuclear weapons – in the region. 
Senator Richard Lugar has advised me that since there has been little or no objection to the amendment from the White House, he sees no reason why it will not pass the Senate. 
At a recent security conference in Singapore, US Secretary of Defense Leon Panetta emphasized the American military build-up in the region. 
Afterwards, he went to Vietnam, allegedly for discussions about the US Navy’s use of Cam Ranh Bay, a major American base during the Vietnam War. 
The US, like Australia, denies that all of this adds up to a policy of containment aimed at China. 
But few in the Western Pacific see it that way. 
Panetta’s visit to Vietnam followed hard on US Secretary of State Hillary Clinton’s visit to Beijing for strategic and economic talks. 
Those talks seemed to go well, but it is becoming increasingly clear that the US is pursuing a two-track policy: talks, yes, but a build-up and repositioning of US military power in the Pacific just in case. 
All of this is happening at a time when China is preparing for a change of leadership. 
I happen to believe that the political transition will occur smoothly. 
Others suggest that it will be – and already is – a difficult period of turmoil and uncertainty. 
The Obama administration may believe that toughness directed at China will generate electoral support in the US. 
During major international incidents or crises, America has seldom voted against an incumbent president. 
But has he properly reckoned with how provocative his policies are to China? 
None of this is meant to suggest that the Pacific region does not need America. 
But, while America obviously has a significant role to play in the region, the US should have learned by now that its political objectives are unlikely to be achieved by military means. 
The Chinese themselves do not want the Americans to leave the Western Pacific, as that would make smaller countries on China’s periphery even more nervous about Chinese power. 
China is mature enough to understand this; nonetheless, a major US military build-up throughout the region is another matter. 
These are dangerous days, not only economically, but also strategically. 
We really do need to ask whether Obama is trying to play a China card to shift the electoral scales in his favor. 
If that is his intention, it is a move fraught with great danger. 
Australia should be saying to the US that it will have none of this. 
I would sooner abrogate the ANZUS Treaty with New Zealand and the US – that is, I would sooner end defense cooperation with the US – than allow nuclear missiles to be sited on Australian territory. 
The current Australian government would not take such a step, and the opposition would be unlikely to do so as well. 
But more and more Australians are beginning to question the closeness and wisdom of our strategic ties to the US. 
Perhaps our best hope for stability and peace lies in China’s refusal to be provoked. 
The Chinese understand the game being played. 
I suspect that they will remain on the sidelines during the US election campaign. 

Obama’s Flawed Peace Process 
MADRID – Since its inception in Oslo almost two decades ago, the Israeli-Palestinian peace process has been stymied by the dysfunctional political systems of both sides. 
Hostage of an impossible coalition and of a settlement movement of free-lance fanatics, Israeli Prime Minister Binyamin Netanyahu’s leadership is seriously compromised. 
His Palestinian counterparts are hardly in a better position. 
Today, the clique that surrounds Palestinian President Mahmoud Abbas embodies the bitter deception which the peace process that began with the Oslo agreement has meant for the Palestinians. 
Moreover, the Palestinian Authority has come neither to represent the majority of Palestinians nor to rule by democratic means. 
Abbas’ presidential term has expired, and elections are constantly being postponed. 
The PA prime minister, Salam Fayyad, like his Hamas counterparts in Gaza, rules by decree, keeps parliament inactive, and silences the opposition. 
With no institutionalized democratic legitimacy, the PA is bound to rely on its security forces and on those of the occupier, Israel, to enforce its will. 
Of course, throughout history, national liberation movements have had to marginalize their own radicals and fanatics in order to reach the Promised Land. 
This was true of Zionism, of the Italian Risorgimento, and most recently of the Catholics in Northern Ireland. 
But never did the outcast faction actually represent the democratically elected majority. 
A peace process conceived as a means to weaken and isolate the winners of an election – Hamas – is unlikely to gain much traction. 
Like George W. Bush, President Barack Obama confines his diplomatic engagement largely to friends rather than adversaries. 
This, more than anything else, explains the growing disconnect between Arab public opinion and the Obama administration. 
The assumption – dear to the architects of the current process – that peace can be achieved by driving a wedge between “moderates’ and “extremists” is a fatal misconception. 
The paradox here is double. 
Not only does one negotiate with the illegitimate “moderates,” but it is precisely because of their legitimacy deficit that the moderates are forced to be unyielding on core issues, lest the radicals label them treasonous. 
The Palestinian negotiators’ dangerous deficit of legitimacy – and, indeed, the disorientation of the entire Palestinian national movement – is reflected in the return of the PLO to its pre-Arafat days, when it was the tool of Arab regimes instead of an autonomous movement. 
The green light was given to the current negotiators by the Arab League, not by the elected representatives of the Palestinian people. 
Obama’s endorsement of Israeli Prime Minister Binyamin Netanyahu’s claim that if Israel is recognized as a Jewish state and its security needs accepted, “I will surprise, and the sky is the limit,” has made the current process possible. 
But maximal security – for example, an insufferably long timetable for withdrawal, unreasonable territorial demands wrapped up as security needs, an Israeli presence in the Jordan valley, and full control of Palestinian airspace and the electromagnetic spectrum – would inevitably clash with Palestinians’ view of what sovereignty entails. 
For Netanyahu, creation of a Palestinian state means the end of conflict and the finality of claims. 
By reopening Israel’s demand to be recognized as the state of the Jewish people, he is forcing the Palestinians to insist even more on the constituent issues of the conflict, first and foremost on the so-called “right of return” of Palestinians who fled or were driven out after Israeli independence in 1948. 
Abbas is too weak and compromised to accept any final settlement with which Netanyahu can live. 
Arafat set the standard as to what is acceptable and what is not, and Abbas cannot allow himself the luxury of deviating from it. 
As he admitted in a recent interview with the Palestinian newspaper Al Quds, if pressured to concede on sacred Palestinian principles such as refugees, Jerusalem, and borders, he “would pack his suitcase and go away.” 
It is not impossible that with Hamas in the picture, an agreement could end the occupation, if not the conflict. 
In other words, such a process would deal with the issues of 1967 – defining a border (including Jerusalem), withdrawing and dismantling settlements, putting in place security arrangements, and the Palestinians’ assumption of full governance responsibility – while shelving for the future those of 1948. 
Hamas is a far more convenient partner for such a settlement than the PLO. 
Oddly, Hamas and Israel might have more common ground than Israel and the PLO. 
Israel wants an end to the conflict but is incapable of paying the price, whereas Hamas can better reconcile its ideology with a peace agreement with Israel if it is not defined as final. 
The end of the conflict, like the requirement that Israel be recognized as a Jewish state, is a concept that has unnecessarily acquired mythical meaning. 
Instead of insisting on what the Palestinians cannot give, Israel should focus on what is essential: the international legitimacy of its borders. 
United Nations Resolution 181 in 1947 has already recognized Israel as a Jewish state. 
And, even if Palestinian negotiators agreed to end the conflict once and for all, the chances that all Palestinian factions would abide by such a settlement are nil. 
Whatever route is taken, the great question today concerns the enigma that is Bibi Netanyahu, a would-be Churchill who believes that his mission is to thwart the designs of Iran’s evil new Shia empire, something which requires the goodwill of the international community, particularly of the Obama administration. 
It is not entirely far-fetched to assume that Netanyahu finally calculated that if he wants more room to maneuver to deal with Iran, he must participate in the peace process with the Palestinians. 
But, in that case, Iranian quiescence, not peaceful relations with an independent Palestine, might be Bibi’s true objective. 

Obama’s Global Ethical Challenges 
PRINCETON – The astonishing story of Barack Obama’s election as president has already done much to restore America’s global image. 
In place of a president whose only qualification for the office was his father’s name, we now have one whose intelligence and vision overcame the formidable obstacle of being the exotically named son of an African Muslim. 
Who would have believed, after the last two elections, that the American public was capable of electing such a candidate? 
Obama’s achievement raises the stakes for his first term in office. 
He campaigned on the theme that he is different from other politicians and will deliver real change. 
That appeal drew large and enthusiastic crowds, which, together with astute use of the Internet, gained him an unprecedented four million donors, and induced a huge number of African-Americans and young people to register to vote. 
This is the chance of a lifetime to break through the cynicism that has pervaded American politics for decades. 
But if Obama fails to make good on his promise of change, it will be decades before the electorate again places its trust in a candidate who claims to be different from the usual run of politicians. 
Many Americans will judge the new administration by what it does at home. 
That includes raising taxes on those earning more than $250,000 a year, and using the money to extend health insurance to the tens of millions of Americans who – uniquely for an industrialized nation – do not have it. 
He has also pledged tax cuts for medium and lower-paid workers, and improvements to America’s education system. 
Keeping those promises despite America’s gloomy economic prospects will not be easy. 
The biggest impact that Obama can make, however, is beyond America’s borders. 
Last year, when speaking to the Chicago Council on Global Affairs, he called for a president who can speak directly to everyone in the world who longs for dignity and security, and say: “You matter to us. 
Your future is our future. 
And our moment is now.” 
Indeed, it is now. 
If Obama is to be that president, he should begin by keeping his promises to close the prison camp at Cuba’s Guantánamo Bay and to end the Bush administration’s practice of locking people away without ever telling them why or what they are charged with. 
He must also begin the process of withdrawing combat troops from Iraq, a task that he said would be completed in 16 months. 
Keeping these promises will be significant steps towards restoring America’s image around the world. 
Playing a constructive role in bringing about reform at the United Nations is also vital. 
The structure of the Security Council is 60 years old. 
It still gives the victors of the Second World War permanent membership of the Council, and a veto over its decisions. 
To change that will inevitably dilute the privileges of those nations, including the United States. 
But if any US president can overcome that historical shadow hanging over the UN, Obama can. 
Given that Obama has a Kenyan father and has spent time in the African villages where his kin still live, it is no surprise that he understands the need for rich nations to assist developing nations. 
Last year, he pledged to double US foreign aid by 2012, raising it to $50 billion a year. 
(That still leaves the US lagging behind many European nations in the percentage of its national income that it gives in aid.) 
US aid also must be better targeted toward helping those living in extreme poverty. 
Regrettably, when then-Senator, now Vice-President Joe Biden was asked what spending an Obama administration might have to curtail because of the financial crisis, he mentioned the pledge to increase foreign aid. 
But doubling US foreign aid involves a modest amount of money, compared to what will be saved by pulling out of Iraq. 
Perhaps the most difficult aspect of turning the US into a good global citizen is cutting back on its grossly excessive greenhouse gas emissions – roughly five times the global per capita average. 
On this issue, the Bush administration wasted eight precious years during which we have gotten perilously close to the point at which an irreversible chain of events could occur that leads to catastrophe. 
Ugandan President Yoweri Museveni last year accused the industrialized countries of committing aggression against Africa by causing global warming. 
That may sound like hyperbole, but raising the temperature and reducing the rainfall of a predominantly agricultural nation can be as devastating to its people as dropping bombs on it. 
Obama needs to make the US a leader in reducing emissions. 
Then, having demonstrated his good faith, he and European leaders should be able to work out a deal that will bring China and India into whatever agreement replaces the Kyoto protocol when it expires in 2012. 

Obama’s Hardest Choices Lie Ahead 
TEL AVIV – It was only natural that Barack Obama, a president whose election was one of the most revolutionary events in American history, should fill his first 100 days in office with a breathtaking, all-embracing agenda. 
These are times of trial and upheaval that call for such daring. 
Strikingly energetic and self-confident, Obama has set out on a titanic journey to remake America’s economy and redress a broken and dysfunctional international system. 
It is perhaps especially in Obama’s domestic policy – the shift to a more social-democratic tax system and universal health care – that one can best see the new president’s ideological drive. 
But emphasizing the reduction of social inequalities does not sit easily with America’s profoundly individualistic ethos, and the attempt to “Europeanize” the nature of the social contract between the state and its citizens might yet crash against the constitutive principles of the American system. 
When it comes to salvaging America’s collapsing financial system, Obama has been far more interventionist than any European government. 
For once, the faltering Czech presidency of the EU reflected a European consensus when it defined Obama’s astronomic financial stimulus as a “road to hell.” 
The unprecedented explosion of America’s fiscal deficit raises the risk of high inflation in the future – exactly the kind of scenario that Europeans want to prevent at all cost. 
Obama’s foreign policy agenda has been no less audacious than his domestic undertakings. 
After eight years of American unilateralism that left behind a broken transatlantic alliance, resuscitated the specter of a cold war with Russia, and saw the Middle East decline into a doomsday politics, Obama’s injection of new thinking to endemic problems is extremely welcome. 
The organizing principle in the new president’s foreign policy is one of not having principled, ideological guidelines. 
Essentially, his approach to international issues is pragmatic, and, in departing from his predecessor’s penchant for machtpolitik , Obama has pledged always to exhaust diplomacy first. 
But Obama might soon realize that most of his predecessors started as believers in international cooperation, until events forced them to fall back on a strategy of confrontation. 
Not even George W. Bush seemed to be committed to any particular doctrine in foreign affairs before the terrorist attacks of September 11, 2001, drove him to unleash his ill-conceived “global war on terror.” 
The real test of Obama’s strategy of dialogue and cooperation will come only when it fails, and tough choices will have to be made. 
Repairing old alliances is vital not only for the exercise of American power, but also for Europe’s empowerment as a global player. 
Yet America’s European allies administered Obama’s first setback. 
They applauded him everywhere on his recent trip to Europe, but sent him home almost empty-handed, resisting the idea of a coordinated fiscal stimulus and, after years of preaching multilateralism, turning down his call for more European troops for Afghanistan. 
For many in Europe, it was easier to live against Bush than to make sacrifices with Obama. 
Obama also pushed the “reset button” with Russia, and suggested that he might freeze Bush’s plan to deploy a missile defense system in the Czech Republic and Poland. 
The expectation was that Russia would join the United States in putting pressure on Iran to abandon its nuclear ambitions. 
But this has not yet happened. 
Nor was North Korea impressed by Obama’s warnings that America might shoot down its rocket if they went ahead with their launch in defiance of the United Nations. 
Shielded behind a protective China, Kim Jong-il launched his rocket anyway, and the US refrained from action. 
Iran is another front where Obama might be forced to recognize the limits of his conciliatory approach. 
He has waived America’s long-standing demand that Iran stop uranium enrichment as a precondition for negotiations, and he has sworn off any idea of regime change. 
But the Iranians are the subtlest negotiators to be found anywhere, and will make certain that their nuclear program outpaces the negotiations. 
If that happens, then what? 
Nor is it clear what Obama really means by saying that he recognizes Iran’s “rightful place in the community of nations.” 
If this means a special status at the expense of other Middle East powers such as Egypt or the Gulf states, Obama might run into strong opposition from America’s traditional allies in the region. 
It is right and refreshing that Obama has made clear that America’s aspiration is to lead, not dominate. 
But even an exercise in modesty and realism requires strong alliances, with partners ready for sacrifices. 
Nor would old enemies and competitors like Russia and China readily abandon the benefits of spoiling American plans. 
It is when this becomes crystal clear, and also when some worn-out foreign-policy paradigms, such as the fetish of a two-state solution for the Israeli-Palestinian conflict fail once again, that real choices will have to be made. 

Obama’s Israel Problem 
NEW YORK – On a rare foray outside his native Texas, Governor Rick Perry accused US President Barack Obama of “appeasement” towards the Palestinians. 
Former New York City Mayor Edward Koch supported a Catholic Republican congressional candidate against a Jewish Democrat in New York, because the Republican supports Israel through thick and thin – and because Obama had voiced reservations about Israel’s expansion of settlements on the West Bank. 
In Koch’s words, Obama “threw Israel under the bus.” 
The Republican won. 
Meanwhile, Israeli Prime Minister Binyamin Netanyahu, who is rather sensitive about foreigners meddling in domestic Israeli politics, has been openly and consistently courting congressional Republicans by attacking Obama. 
And Obama’s response? 
A speech at the United Nations, reiterating his support for Israel, his understanding of Israel’s fears and vulnerability, with barely a mention of Palestinian fears and vulnerability. 
What is it about Israel that reduces America’s president to Jell-O? 
Why, for that matter, are all American politicians so afraid to be critical of Israeli policies? 
Is it fear of being called an anti-Semite? 
Or is it the “Jewish vote”? 
On the face of it, Democrats don’t have that much to fear. 
Polls suggest that a majority of Jewish Americans (a mere 1.7% of the US population) still vote for the Democratic Party. 
When it comes to the so-called Israel lobby in Washington, which is well organized and very well funded, evangelical Christians play an important part as well. 
But they vote overwhelmingly for Republicans, so Obama would not seem to have much to lose there. 
True, certain pro-Israeli organizations, notably the American Israel Public Affairs Committee (AIPAC), can generate a great deal of money to make or break political candidates, who are judged solely on their attitudes towards Israel. 
And money, given or withdrawn, as well as Jews refusing to vote for Obama out of pique, could make all the difference in crucial “swing states” such as Florida. 
Cash, voters, and lobbies aside, something fundamental has changed in recent years, and this scares the Democrats: Israel’s conflict with Palestine is now being used by the American right as a cudgel to beat up liberals. 
This was not true before. 
In the first few decades of its modern existence, when it was largely run by socialists, Israel was mainly supported by the world’s liberal left. 
In fact, the last US administration to be somewhat tough on the Israeli government was that of the Republican George H.W. Bush. 
Jews, in both Europe and the US, traditionally tended to lean towards the left. 
Right-wing politics, especially when based on ethnic nationalism, are rarely good for minorities, who fare better in a more open, cosmopolitan environment. 
Jews were among the most ardent supporters of black Americans’ struggle for civil rights in the 1950’s and 1960’s. 
As long as Israel was a liberal state, it was easy, even natural, for most American Jews to support it. 
There was no conflict between the head and the heart, between an emotional attachment to Israel and a political commitment to liberal causes. 
But things began to change when the Israeli Labor Party lost ground to the harder-line Likud. 
More and more, Israel began to be infected by precisely the type of politics most Jews have traditionally feared, especially ethnic nationalism. 
Provoked, in part, by Arab neighbors’ hostility and Palestinian leaders’ intransigence, Israel began to turn sharply to the right. 
This was also the result of demographic changes: Middle Eastern Jews were more viscerally anti-Arab than their European brethren, and Jewish immigrants from Russia were viscerally anti-left. 
Moreover, the number of Orthodox Jews continued to grow apace. 
As a result, the European liberal left lost its sympathy for Israel, and the country acquired a new set of friends among the right – even the far right. 
European right-wing populists, including some who represent parties with a strong anti-Semitic past, now proudly proclaim their support for Israeli settlers on Palestinian land. 
And, in the US, a peculiar alliance of Jewish hardliners and evangelical Christians, who believe that all Jews must eventually return to the Holy Land and convert to Christianity, has become the main base of support for Israel. 
This has created a very odd situation. 
Right-wing politicians from the American South, together with Austrian, German, French, and Dutch populists, are accusing liberals of appeasing “Islamofascism.” 
These political heirs of deeply racist traditions are the new champions of a Jewish state, whose policies now owe more to nineteenth-century ethnic chauvinism than to Zionism’s socialist roots. 
Pandering to Israel’s uncompromising policies may be the easiest way for America’s Democratic president to avoid trouble in an election year. 
Obama certainly needs all the friends he can get. 
But the price will be high. 
Forced to back Israel, right or wrong, the US is quickly losing credibility and influence in a turbulent Middle East. 
Putting pressure on Israel to stop building settlements and come to terms with a viable Palestinian state will be very difficult. 
But it is the only way to break the constant cycle of violence. 
Standing up to Israel, and its new fanatical friends, is not anti-Jewish. 
On the contrary, it is to uphold the liberal tradition in which many Jews continue to believe. 

Obama’s Middle East Malady 
PARIS – No sooner did US President Barack Obama welcome home American troops from Iraq and laud that country’s stability and democracy than an unprecedented wave of violence – across Baghdad and elsewhere – revealed the severity of Iraq’s political crisis. 
Is that crisis an unfortunate exception, or, rather, a symptom of the failure of Obama’s Middle East diplomacy, from Egypt to Afghanistan? 
Upon taking office, Obama set four objectives in the Middle East: stabilize Iraq before leaving it; withdraw from Afghanistan from a position of strength and on the basis of minimal political convergence with Pakistan; achieve a major breakthrough in the Middle East peace process by pushing Israeli Prime Minister Binyamin Netanyahu to freeze settlements; and open a dialogue with Iran on the future of its nuclear program. 
On these four major issues, Obama has clearly achieved little. 
With regard to Iraq, since George W. Bush’s presidency, the United States has strived to exert a moderating influence on Shia power, so that the country can create a more inclusive political system – specifically, by passing a new law on sharing oil-export revenues among the Shia, Sunni, and Kurdish communities. 
Unfortunately, the precise opposite happened. 
Kurdistan has embarked on a path toward increased autonomy, while the Sunnis are increasingly marginalized by a sectarian and authoritarian Shia-dominated central government. 
This has implications for the regional balance of power, because Iraq is growing closer to Iran in order to offset Turkey, which is seen as protecting the Sunnis. 
Iraqi Prime Minister Nouri al-Maliki’s remark during a recent trip to Washington that he was more concerned about Turkey than Iran exposed the huge gulf between Iraq and the US, which now appears to have lost all significant political influence on Iraqi affairs. 
Indeed, in a disturbing development, the US decided not to play its last remaining card in dealing with al-Maliki: arms sales. 
There can no longer be any doubt that the occupation of Iraq was a huge strategic defeat for the US, because it ultimately served only to strengthen Iran. 
Yet Obama lacks a medium-term vision to deal with the seriousness of the situation – an oversight that, sooner or later, will cost the US dearly. 
One of two things will happen: either tighter containment of Iran through sanctions on oil exports will produce positive results and weaken Iran, or containment will fail, leading the US inexorably toward a new war in the Middle East. 
It is not unlikely that some in US foreign-policy circles regard the deepening Iraqi crisis as a building block in constructing the case for military intervention in Iran. 
But Obama is nobody’s fool. 
He has registered the US Congress’s hostility toward Iran and the desire to confront the Islamic Republic militarily. 
He believes, however, that he can avoid extreme solutions; in diplomacy, anything can happen, and the worst-case scenario is never guaranteed. 
The problem is that Obama has a strong tendency to overestimate America’s ability to influence weaker actors. 
What is true for Iraq is also true for Afghanistan: Obama can pride himself on having eliminated Osama bin Laden, which was undoubtedly a success, but one that failed to address the root of the problem. 
Despite a 10-year military presence, involving the deployment of more than 100,000 troops at a cost of $550 billion, the US still has not succeeded in creating a credible alternative to the Taliban. 
Worse, its political alliance with Pakistan has frayed. 
Indeed, US-Pakistan relations have regressed to their level before September 11, 2001, a time marked by deep mutual distrust. 
Pakistani leaders obviously bear a heavy responsibility for this state of affairs. 
But if the US has been unable to involve Pakistan in resolving the Afghanistan conflict, that failure simply reflects America’s refusal to give the Pakistanis what they wanted: a shift in the regional balance of power at the expense of India. 
Pakistan, accordingly, froze cooperation with the US, because its leaders no longer saw much to gain in fighting the Taliban. 
The risk is that when the American withdrawal from Afghanistan begins – a process that has just been brought forward to next year, from 2014 – the US will again seek to impose sanctions on Pakistan, an unreliable nuclear state that will react by strengthening ties with China and deploying Islamist terrorism. 
Obama also sought to use America’s influence to resolve the Israeli-Palestinian conflict as part of his strategy for the broader Middle East. 
He initially thought that by pressuring Netanyahu to freeze settlements, he would succeed in reviving the peace process. 
But he was quickly and skillfully outmaneuvered by his ally, who knows how important the Israeli issue is to US domestic politics. 
By putting Obama at odds with the rest of the US establishment, Netanyahu forced him to retreat. 
In 2009, Obama envisioned a settlement of the conflict through the strong commitment of the international community. 
In 2011, he asserted that only both sides’ willingness could ensure a successful outcome. 
Clearly, the US cannot do much to resolve the conflict. 
There is no overarching explanation for Obama’s successive Middle East failures, but there are a few factors worth considering: the increase in the number of asymmetrical conflicts, in which the traditional use of force is largely ineffective; increasingly blurred lines between difficult allies and intransigent adversaries; and major political differences between a centrist US president and a Congress that is dominated more than ever by extreme ideas. 
But Obama himself bears a large part of the blame. 
Contrary to what one might think, he does not have a real strategic vision of the world – a shortcoming reflected in his quick capitulation in the face of opposition to his proposals. 
Obama often has a plan A, but never a plan B. When it comes to conducting a successful foreign policy, plan A is never enough. 

Obama’s Middle East Malady 
PARIS – No sooner did US President Barack Obama welcome home American troops from Iraq and laud that country’s stability and democracy than an unprecedented wave of violence – across Baghdad and elsewhere – revealed the severity of Iraq’s political crisis. 
Is that crisis an unfortunate exception, or, rather, a symptom of the failure of Obama’s Middle East diplomacy, from Egypt to Afghanistan? 
Upon taking office, Obama set four objectives in the Middle East: stabilize Iraq before leaving it; withdraw from Afghanistan from a position of strength and on the basis of minimal political convergence with Pakistan; achieve a major breakthrough in the Middle East peace process by pushing Israeli Prime Minister Binyamin Netanyahu to freeze settlements; and open a dialogue with Iran on the future of its nuclear program. 
On these four major issues, Obama has clearly achieved little. 
With regard to Iraq, since George W. Bush’s presidency, the United States has strived to exert a moderating influence on Shia power, so that the country can create a more inclusive political system – specifically, by passing a new law on sharing oil-export revenues among the Shia, Sunni, and Kurdish communities. 
Unfortunately, the precise opposite happened. 
Kurdistan has embarked on a path toward increased autonomy, while the Sunnis are increasingly marginalized by a sectarian and authoritarian Shia-dominated central government. 
This has implications for the regional balance of power, because Iraq is growing closer to Iran in order to offset Turkey, which is seen as protecting the Sunnis. 
Iraqi Prime Minister Nouri al-Maliki’s remark during a recent trip to Washington that he was more concerned about Turkey than Iran exposed the huge gulf between Iraq and the US, which now appears to have lost all significant political influence on Iraqi affairs. 
Indeed, in a disturbing development, the US decided not to play its last remaining card in dealing with al-Maliki: arms sales. 
There can no longer be any doubt that the occupation of Iraq was a huge strategic defeat for the US, because it ultimately served only to strengthen Iran. 
Yet Obama lacks a medium-term vision to deal with the seriousness of the situation – an oversight that, sooner or later, will cost the US dearly. 
One of two things will happen: either tighter containment of Iran through sanctions on oil exports will produce positive results and weaken Iran, or containment will fail, leading the US inexorably toward a new war in the Middle East. 
It is not unlikely that some in US foreign-policy circles regard the deepening Iraqi crisis as a building block in constructing the case for military intervention in Iran. 
But Obama is nobody’s fool. 
He has registered the US Congress’s hostility toward Iran and the desire to confront the Islamic Republic militarily. 
He believes, however, that he can avoid extreme solutions; in diplomacy, anything can happen, and the worst-case scenario is never guaranteed. 
The problem is that Obama has a strong tendency to overestimate America’s ability to influence weaker actors. 
What is true for Iraq is also true for Afghanistan: Obama can pride himself on having eliminated Osama bin Laden, which was undoubtedly a success, but one that failed to address the root of the problem. 
Despite a 10-year military presence, involving the deployment of more than 100,000 troops at a cost of $550 billion, the US still has not succeeded in creating a credible alternative to the Taliban. 
Worse, its political alliance with Pakistan has frayed. 
Indeed, US-Pakistan relations have regressed to their level before September 11, 2001, a time marked by deep mutual distrust. 
Pakistani leaders obviously bear a heavy responsibility for this state of affairs. 
But if the US has been unable to involve Pakistan in resolving the Afghanistan conflict, that failure simply reflects America’s refusal to give the Pakistanis what they wanted: a shift in the regional balance of power at the expense of India. 
Pakistan, accordingly, froze cooperation with the US, because its leaders no longer saw much to gain in fighting the Taliban. 
The risk is that when the American withdrawal from Afghanistan begins – a process that has just been brought forward to next year, from 2014 – the US will again seek to impose sanctions on Pakistan, an unreliable nuclear state that will react by strengthening ties with China and deploying Islamist terrorism. 
Obama also sought to use America’s influence to resolve the Israeli-Palestinian conflict as part of his strategy for the broader Middle East. 
He initially thought that by pressuring Netanyahu to freeze settlements, he would succeed in reviving the peace process. 
But he was quickly and skillfully outmaneuvered by his ally, who knows how important the Israeli issue is to US domestic politics. 
By putting Obama at odds with the rest of the US establishment, Netanyahu forced him to retreat. 
In 2009, Obama envisioned a settlement of the conflict through the strong commitment of the international community. 
In 2011, he asserted that only both sides’ willingness could ensure a successful outcome. 
Clearly, the US cannot do much to resolve the conflict. 
There is no overarching explanation for Obama’s successive Middle East failures, but there are a few factors worth considering: the increase in the number of asymmetrical conflicts, in which the traditional use of force is largely ineffective; increasingly blurred lines between difficult allies and intransigent adversaries; and major political differences between a centrist US president and a Congress that is dominated more than ever by extreme ideas. 
But Obama himself bears a large part of the blame. 
Contrary to what one might think, he does not have a real strategic vision of the world – a shortcoming reflected in his quick capitulation in the face of opposition to his proposals. 
Obama often has a plan A, but never a plan B. When it comes to conducting a successful foreign policy, plan A is never enough. 

Obama’s Middle East 
JERUSALEM – President-elect Barack Obama’s plans for the Middle East, the region where his predecessor’s policies shattered America’s standing around the world as a benign superpower, represent a welcome departure from President Bush’s grand design to redress the region’s ills through “constructive chaos.” 
Unfortunately, Obama’s all-encompassing promises might prove to be just as unrealistic. 
Obama’s agenda is breathtaking. 
It includes extrication from the Iraqi morass and lifting its burden from America’s foreign policy, resolving the festering Israeli-Palestinian conflict while confronting the “hawkish” Israel lobby, using dialogue to curb Iran’s nuclear ambitions and wean Syria from its radical agenda – thereby dissolving the region’s “axis of evil” (Iran-Syria-Hezbollah-Hamas) – freeing Lebanon from Syria’s grip, and pushing for an Israel-Syria peace. 
And you can add to this a reorientation of America’s military effort to the war in Afghanistan. 
The magnitude of this agenda must be seen against the region’s depressing legacy. 
The entire region is going through a dangerous process of “Somaliazation,” with an expanding chain of non-state agents, mostly radical Islamist groups, challenging the idea of the state almost everywhere. 
This is the case in Lebanon with Hezbollah, in Palestine with Hamas, in Iraq with Moqtada al-Sadr’s Mahdi Army and scores of other groups, with the Taliban and tribal warlords in Afghanistan, and with breakaway movements in Pakistan that have been emboldened by Pervez Musharaf’s resignation. 
The looming end of President Hosni Mubarak’s long rule in Egypt might lead to the emergence of a formidable bid by the Muslim Brotherhood for power in Cairo, possibly forcing Mubarak’s successor either to reach a modus vivendi or to wage a fight to the death. 
Obama may soon learn that his timetable for withdrawal from Iraq is unrealistic. 
A rapid American disengagement might ultimately cause the country’s disintegration into fragmented political entities, one of which would likely be an Iran-controlled Islamic republic. 
The resurgence of the Taliban in Afghanistan requires a more robust military response, but with the American army bogged down in Iraq and the Western allies reluctant to send additional troops, the country’s dismemberment by local warlords is not a far-fetched scenario. 
And, with the allies’ military operations eroding President Hamid Karzai’s domestic legitimacy, Obama might consider the advice of French Foreign Minister Bernard Kouchner, who warns that the answer in Afghanistan will have to be more political than military. 
As for Iran, Obama might have to fall back on a strategy of military pressure sooner than he would like. 
As the protracted dialogue conducted by the European Union’s special representative, Javier Solana, on behalf of the Security Council’s permanent members and Germany has proved, Iran has no intention of deviating from its drive to nuclear status. 
Unless Obama reaches an uneasy understanding with Russia – which would require revising post-Cold War strategic agreements – the chances of imposing a tight sanctions regime on Iran are slim. 
The specter of a Middle East nuclear arms race, with Iran’s Sunni rivals in the region – Saudi Arabia, Egypt and others – redoubling their efforts to attain nuclear status, cannot be ruled out. 
In the Middle East, Obama faces an almost impossible task of redressing historical and political ills. 
Meanwhile, he inherits an America that is no longer an undisputed hegemony, and that, together with its allies, is immersed in the most severe economic crisis since 1929. 
Struggling with a crisis that is shaking the foundations of capitalism and the American way of life, and laden with a $10 trillion national debt and a $1 trillion budget deficit, the United States is bound to opt for a realistic foreign policy, one that departs from the haughty disregard for history, tradition, and religion that characterized the Bush administration. 
Obama’s ascension to the US presidency represents a revolutionary landmark in America’s history that should not be allowed to fall victim to inflated expectations. 
His idealism needs to be tempered by the limits of American power. 
The challenge of his foreign policy is not to change the Middle East – this is the long-term task of the region’s peoples – but to redress America’s damaged reputation in the Muslim world. 
To achieve this objective requires resolution of the Arab-Israeli conflict, particularly the Palestinian question. 
This is the real wound that infects America’s entire foreign policy, particularly its standing in the Arab and Muslim world. 
During his visit to the region last July, Obama vowed to address the Israeli-Palestinian conflict “starting from the minute I’m sworn into office.” 
He cannot lose any time in fulfilling that pledge. 
Unlike the insoluble mess that he inherits in the broader Middle East, the road to a comprehensive solution of the Arab-Israeli dispute has already been paved, and no wheels would have to be reinvented. 
Leadership and commitment are what is required, and Obama’s “Yes, we can” campaign has already shown that he has both. 

Obama’s New World Order 
As the world digests President Barack Obama’s recent historic speech in Cairo, one conclusion is readily apparent: it will take more than a single speech to effect reconciliation between the United States and the Islamic world, after years of hostility and mistrust. 
But this was a significant start. 
There is a second conclusion to be drawn, less evident but even more important: Obama’s ambition is not confined to cutting the root of Islamic terrorism, or even to bringing peace to the Middle East. 
It extends to nothing less than a complete reshaping of the global order. 
Obama’s dramatic overture to the Islamic world was only the latest in a series of such openings by this remarkable US president. 
The economic crisis arguably forced the new American rapprochement with China (the “emerging” power that has now emerged as the big winner from the world’s financial turmoil). 
But no such circumstance prompted the move to “re-set” relations with Russia, the journeys to mend fences with Latin America and Turkey, or efforts to reach out to Iran. 
These are all products of a deliberate policy. 
The unilateral moment has passed. 
The US had its few short years as a hyper-power, and it did neither America nor the world much good. 
Now, before our eyes, Obama is repositioning the US at the centre of a web of global bilateral relationships – the “G-2” economic relationship with China, the nuclear relationship with Russia, and now the search for a relationship of mutual respect and cooperation with the Muslim world. 
As in a Venn diagram, Obama is placing the US at that central point where all the different ellipses overlap. 
First among equals, and the indispensable nation. 
Where, one might wonder, does this leave Europe? 
Europeans have grown used to the idea that the transatlantic relationship is the foundation of the international order. 
Following the difficult years of the Bush presidency, Obama has duly sought to restore transatlantic harmony as well, visiting Europe in April and extending the hand of partnership there, too. 
To be sure, Europe gave Obama very little back for his pains, whether in terms of help in Afghanistan or support in stimulating the global economy. 
But if Obama lost sleep over this tepid European response, he showed no signs of it. 
In the new Obama world order, transatlantic relations are not the foundation, but just one of the Venn diagram’s ellipses – as significant or insignificant as Europeans choose to make it. 
While Europeans chew on that, they should also reflect on what the Cairo speech could mean for their own position in the Middle East. 
Europeans have long cherished the belief that centuries of history and the facts of geography, not to mention more recent patterns of immigration, have given them some sort of special relationship with the Islamic world – an often strained and sometimes bloody relationship, but nonetheless one based on deep mutual familiarity. 
In European eyes, Americans lack such sophisticated understanding, and often have no interest in acquiring it, seeing the land around and beyond Israel as populated largely by greedy oil sheikhs and dangerous religious fanatics. 
Like all caricatures, this European view has had some truth to it. 
And, though Europeans have lamented that fate has allocated the real power in the Middle East to their crass cousins, they have nonetheless done pretty well there, not least commercially, simply by not being American. 
Now, after listening to Obama in Cairo, they will have to ask themselves whether this is not another aspect of how the world works, and of Europe’s position in it, that is about to change. 
It was a fine speech, and Europeans will duly applaud it; but listen for the growing undertone of anxiety that this bold young US president has just helped himself to some more of Europe’s clothes. 

Obama’s Nuclear Agenda 
CAMBRIDGE – The announcement of a secret uranium enrichment facility located on a military base in Iran has sharpened President Barack Obama’s efforts to place nuclear proliferation issues at the top of the world agenda. 
2010 will be a critical year. 
In September, both at the United Nations and at the G-20 Summit in Pittsburgh, many countries agreed to work on Obama’s nuclear agenda. 
But, in the midst of those meetings, it was revealed that Iran has been secretly building a second enrichment facility with the potential to produce weapons-grade uranium. 
In early October, Iranian officials met in Geneva with representatives of the permanent members of the UN Security Council (plus Germany) and agreed to allow the International Atomic Energy Agency to inspect the hitherto secret plant. 
In addition, the Iranians said that they would export their existing low-enriched uranium to be fabricated into nuclear fuel outside of Iran. 
If these measures are implemented, they will represent important steps. 
There has been widespread fear that Iran would abrogate the Nuclear Non-Proliferation Treaty (NPT) and use its enrichment facilities to develop a nuclear weapon. 
It is not yet clear whether words will be matched with deeds. 
Meanwhile, the United States and Russia, whose stockpiles contain more than 90% of the world’s nuclear weapons, are negotiating in Geneva to produce a strategic arms reduction treaty to replace their START I arms-control agreement, which expires in December. 
If those talks are successful, they may yield cuts of up to one-third of all strategic nuclear warheads. 
The US Senate would then consider the new treaty for ratification next year. 
The Obama administration is also consulting with Congress on when to re-submit the Comprehensive Nuclear Test Ban Treaty (CTBT), which was rejected by the Senate 10 years ago. 
International agreements regulating the size and composition of national defenses have often been controversial in the Senate. 
The new strategic arms-reduction treaty, which is still a work in progress, and the CTBT have already aroused skepticism from opposition legislators and opinion-makers. 
If Obama submits both treaties to the Senate in 2010, he will need to convince the public that they serve an integrated strategy for enhancing national and international security. 
If he fails and the Senate rejects one or both of the treaties, it could have a strong negative effect on the non-proliferation regime. 
In May, 189 member states of the NPT will meet in Vienna to review its status. 
When the NPT entered into force in 1970, it was intended to limit the number of nuclear-weapons states to five (the US, the Soviet Union, Britain, France, and China). 
Overall, the treaty has been a success. 
Many people, including President John F. Kennedy, believed in the 1960’s that there would be dozens of countries with nuclear weapons by now, and that their use would be highly probable. 
Fortunately, this has not been the case. 
Since 1970, three states that never signed the treaty have acquired nuclear weapons (India, Israel, and Pakistan). 
In addition, North Korea violated its treaty obligations and exploded two crude devices. 
Iran’s suspected nuclear-weapons program has now raised new fears that the global nonproliferation regime may unravel. 
Averting that danger will require multiple, coordinated, and sustained efforts for many years to come, but ratification of post-START and the CTBT would help. 
For example, a new arms-reduction agreement would improve the US-Russian relationship, and that, in turn, could translate into a more constructive Russian position on Iran in the Security Council. 
Senate approval of the CTBT would also restore America’s credibility in its efforts to get other countries to forgo nuclear testing. 
Next March, Obama will host a Global Nuclear Security Summit with the aim of developing new means to combat nuclear smuggling and terrorism. 
In addition, his proposed long-term goal of abolishing nuclear weapons will require a great deal of preparatory work before it becomes an operational rather than an aspirational objective. 
Obama will need to begin discussions with the Russians, for example, on how to handle the question of short-range nuclear weapons, and how to regulate anti-ballistic missile defenses to maintain stability in a world of fewer offensive weapons. 
At some point, he must open discussions with countries like China, France, and Britain to understand better the conditions for transparency and verification that would be necessary for a clearer path toward eventual elimination of nuclear weapons in accordance with Article VI of the NPT. 
At the same time, Obama cannot allow these long-term issues to divert his attention from crucial short-term issues. 
So long as the world remains a dangerous place with several nuclear weapons states, Obama must reassure its allies about the credibility of American guarantees of extended deterrence. 
Otherwise, reductions that create anxieties in other countries could lead them to develop their own weapons and thus increase the number of nuclear weapons states. 
Obama will also need to pursue negotiations to persuade North Korea to return to the Six-Party talks with the objective of eventually giving up its nuclear weapons (as South Africa once did). 
And, of course, he will need to pursue the negotiations with Iran to persuade them to keep their word and remain in the NPT as a non-nuclear weapon state. 
How successful Obama is in managing the domestic politics and international diplomacy of his nuclear agenda will be an important factor in his effectiveness as a world leader. 
Even more important, his progress in 2010 will say a lot about the world’s ability to maintain the existing 60-year taboo against the use of nuclear weapons. 

Obama’s Pacific Pivot 
CAMBRIDGE – Asia’s return to the center of world affairs is the great power shift of the twenty-first century. 
In 1750, Asia had roughly three-fifths of the world’s population and accounted for three-fifths of global output. 
By 1900, after the Industrial Revolution in Europe and America, Asia’s share of global output had shrunk to one-fifth. 
By 2050, Asia will be well on its way back to where it was 300 years earlier. 
But, rather than keeping an eye on that ball, the United States wasted the first decade of this century mired in wars in Iraq and Afghanistan. 
Now, as US Secretary of State Hillary Clinton put it in a recent speech, American foreign policy will “pivot” toward East Asia. 
President Barack Obama’s decision to rotate 2,500 US Marines through a base in northern Australia is an early sign of that pivot. 
In addition, the November Asia-Pacific Economic Cooperation meeting, held in Obama’s home state of Hawaii, promoted a new set of trade talks called the Trans-Pacific Partnership. 
Both events reinforce Obama’s message to the Asia-Pacific region that the US intends to remain an engaged power. 
The pivot toward Asia does not mean that other parts of the world are no longer important; on the contrary, Europe, for example, has a much larger and richer economy than China’s. 
But, as Obama’s national security adviser, Tom Donilon, recently explained, US foreign policy over the past few years has been buffeted by the wars in Iraq and Afghanistan, concerns about terrorism, nuclear-proliferation threats in Iran and North Korea, and the recent Arab uprisings. 
Obama’s November trip to Asia was an effort to align US foreign-policy priorities with the region’s long-term importance. 
In Donilon’s words, “by elevating this dynamic region to one of our top strategic priorities, Obama is showing his determination not to let our ship of state be pushed off course by prevailing crises.” 
The Obama administration also announced that, whatever the outcome of the defense-budget debates, “we are going to make sure that we protect the capabilities that we need to maintain our presence in the Asia-Pacific” region. 
Obama’s November trip was also a message to China. 
After the 2008 financial crisis, many Chinese expressed the mistaken belief that the US was in terminal decline, and that China should be more assertive – particularly in pursuing its maritime claims in the South China Sea – at the expense of America’s allies and friends. 
During Obama’s first year in office, his administration placed a high priority on cooperation with China, but Chinese leaders seemed to misread US policy as a sign of weakness. 
The administration took a tougher line when Clinton addressed the South China Sea question at the Association of Southeast Asian Nations meeting in Hanoi in July 2010. 
Chinese President Hu Jintao’s subsequent official visit to Washington in January 2011 was successful, but many Chinese editorialists complained that the US was trying to “contain” China and prevent its peaceful rise. 
China’s anxiety about a supposed US containment policy is on the rise again, now that Clinton is insisting that the country’s maritime disputes with its neighbors be placed on the agenda at next year’s East Asia Summit in Manila, which will be attended by Obama, Hu Jintao, and other regional leaders. 
But American policy toward China is different from Cold War containment of the Soviet bloc. 
Whereas the US and the Soviet Union had limited trade and social contact, the US is China’s largest overseas market, welcomed and facilitated China’s entry into the World Trade Organization, and opens its universities’ gates to 125,000 Chinese students each year. 
If current US policy towards China is supposed to be Cold War-style containment, it seems unusually warm. 
The Pentagon’s East Asia Strategy Review, which has guided American policy since 1995, offered China integration into the international system through trade and exchange programs. 
Although the US hedged its bet by simultaneously strengthening its alliance with Japan, this does not constitute containment. 
After all, China’s leaders cannot predict their successors’ intentions. 
The US is betting that they will be peaceful, but no one knows. 
A hedge expresses caution, not aggression. 
American military forces do not aspire to “contain” China in Cold War fashion, but they can help to shape the environment in which future Chinese leaders make their choices. 
I stand by my testimony before the US Congress of 1995 in response to those who, even then, wanted a policy of containment rather than engagement: “Only China can contain China.” 
If China becomes a bully in the Asia-Pacific region, other countries will join the US to confront it. 
Indeed, that is why many of China’s neighbors have strengthened their ties with the US since 2008, when China’s foreign policy became more assertive. 
But the last thing the US wants is a Cold War II in Asia. 
Whatever the two sides’ competitive positions, Sino-American cooperation on issues like trade, financial stability, energy security, climate change, and pandemics will benefit both countries. 
The rest of the region stands to gain, too. 
The Obama administration’s pivot towards Asia signals recognition of the region’s great potential, not a clarion call for containment. 

Obama’s Policy of Nuclear Balance 
WASHINGTON, DC – Perhaps never in history have nuclear security, non-proliferation, and arms control received the prominence that they will during this month’s strategic trifecta: the April 6 release of the latest United States Nuclear Posture Review (NPR), the April 8 signing in Prague of the New START Treaty, and the April 12-13 Nuclear Security Summit. 
These events will flow into May’s Nuclear Non-Proliferation Treaty (NPT) Review Conference. 
US President Barack Obama has become one of the most prominent global advocates of abolishing nuclear weapons, a position for which he unexpectedly received a Noble Peace Prize last year. 
But Obama’s actions have been considerably more restrained than is often assumed. 
In general, Obama has pursued a policy of nuclear balance in which steps towards disarmament are accompanied by measures to retain America’s nuclear primacy. 
The former underscore his administration’s commitment to meeting its obligations under the NPT, while the latter reassure the US Congress and allies skeptical of bold new approaches. 
The administration’s policies strive to address the aspirations of global disarmament advocates in several ways. 
The NPR, for example, further reduces America’s reliance on nuclear weapons by adopting an almost no-first-use doctrine. Only in “extreme circumstances” would the US consider using nuclear weapons. 
For the first time, the US pledges not to retaliate with a nuclear strike even if attacked by chemical or biological weapons. 
The NPR also commits the US not to develop new nuclear weapons, missions, or capabilities. 
Obama’s administration will instead continue to enhance the roles and capabilities of US conventional forces to perform missions previously assigned to nuclear weapons. 
In addition, his administration pledges not to resume testing nuclear weapons by detonating them, and to seek to bring the Comprehensive Test Ban Treaty (CTBT) into force by securing its ratification by the US Senate and all other countries. 
Symbolic of the administration’s commitment to transparency and openness, the Obama NPR is the first such document to be entirely unclassified. 
In describing the New START Treaty, Obama administration officials stress the magnitude of the reductions. 
The number of permissible deployed warheads, 1,550, is 74% lower than the limit of the 1991 START Treaty and 30% below the cap set by the 2002 Moscow Treaty. 
The limit for strategic nuclear-delivery vehicles is less than half that of the original START Treaty. 
The administration describes these lower ceilings, and its pursuit of other arms control measures, as meeting America’s non-proliferation and disarmament obligations under the NPT. 
Nevertheless, the administration has sought to meet the concerns of those Americans and US allies worried that Obama might pursue a naïve and reckless path toward nuclear disarmament. 
Although Obama has endorsed the goal of abolishing nuclear weapons, he has described this as a long-term effort, and offered no concrete time-line for achieving it. 
No date has been set when Obama will ask the Senate to reconsider the CTBT. 
Whereas advocates of abolishing nuclear weapons wanted his administration to employ a zero-based approach to nuclear planning, with the burden of proof on those seeking to retain nuclear weapons to fulfill essential military functions, the NPR presumes the continuation of current nuclear roles and missions unless convincing arguments exist to end them. 
It presumes that “the United States will sustain a safe, secure, and effective nuclear deterrent…as long as nuclear weapons exist.” 
The NPR affirms the policy of extended nuclear deterrence, under which the US retains the option to employ nuclear weapons to defend its allies. 
Skeptics doubt the credibility of this policy, which in principle obliges the US to sacrifice New York in response to an attack on Warsaw, or endanger Los Angeles to defend Taipei. 
But proponents of such US guarantees believe that they discourage aggression and contribute to nuclear non-proliferation by reducing the incentive of US allies to seek their own nuclear deterrents. 
In this context, the administration has rejected calls to withdraw US tactical nuclear weapons from Europe unilaterally, insisting that it will only do so with the consent of all NATO members. 
Moreover, the no-first-use pledge in the NPR contains an important hedge. 
It commits the US not to employ or threaten to employ nuclear weapons against states that do not possess them, provided that these countries remain in compliance with the NPT and their other nuclear non-proliferation obligations. 
The Obama administration considers both Iran and North Korea to be outside this category. 
American START negotiators argued with their Russian colleagues for months to exclude legally binding language that might constrain missile defenses or the use of non-nuclear warheads on long-range ballistic missiles. 
Although some US officials remain skeptical about these capabilities, they appreciate that Congress might not ratify a START Treaty that included formal limitations on these options. 
Even with the lower ceilings found in the New START Treaty, the US will maintain thousands of nuclear weapons, as well as the long-standing US “strategic triad” of intercontinental land-based and submarine-launched ballistic missiles and nuclear-capable bombers. 
Having this mixture helps ensure that if technological developments render one leg vulnerable, the others can still threaten sufficient retaliation. 
The US will seek to guarantee the reliability of its nuclear weapons by spending billions of dollars to improve its nuclear weapons infrastructure and conduct tests not involving nuclear detonations. 
The Nuclear Security Summit plays an essential role in linking both strands of Obama’s nuclear policies. 
American liberals and conservatives, as well as US friends and allies, all favor the principle of enhancing the security of dangerous nuclear materials and reducing the risk of nuclear terrorism, which could plausibly threaten anyone. 
Obama has introduced important innovations in US nuclear policy, but much important continuity with previous policies exist. 
Given the stakes, continuing to rely on proven approaches, even while trying to promote a world with fewer and safer nuclear weapons, is a judicious strategy. 

A Man Without a Plan 
NEW HAVEN – During the United States’ recent presidential election campaign, public-opinion polls consistently showed that the economy – and especially unemployment – was voters’ number one concern. 
The Republican challenger, Mitt Romney, sought to capitalize on the issue, asserting: “The president’s plans haven’t worked – he doesn’t have a plan to get the economy going.” 
Nonetheless, Barack Obama was reelected. 
The outcome may reflect the economy’s slight improvement at election time (as happened when Franklin Roosevelt defeated the Republican Alf Landon in 1936, despite the continuing Great Depression). 
But Obama’s victory might also be a testament to most US voters’ basic sense of economic reality. 
Economic theory does not provide an unambiguous prescription for policymakers. 
Professional opinion in macroeconomics is, as always, in disarray. 
Because controlled experiments to test policy prescriptions are impossible, we will never have a definitive test of macroeconomic measures. 
Romney had no miracle cure, either, but he attempted to tap into voters’ wishful-thinking bias, by promising to reduce the size of the government and cut marginal tax rates. 
That would work if it were true that the best way to ensure economic recovery were to leave more money on the table for individuals. But the electorate did not succumb to wishful thinking. 
The idea that Obama lacks a plan is right in a sense: nothing he has proposed has been big enough to boost the US economy’s painfully slow recovery from the 2007-9 recession, nor to insulate it from shocks coming from Europe and from weakening growth in the rest of the world. 
What Obama does have is a history of bringing in capable economic advisers. 
Is there anything more, really, that one can ask of a president? 
And yet US presidential campaigns generally neglect discussion of advisers or intellectual influences. 
Although a president’s advisers may change, one would think that candidates would acknowledge them, if only to suggest where their own ideas come from; after all, realistically what they are selling is their ability to judge and manage expertise, not their own ability as economists. 
This time, too, however, there was no mention by name of any deep economic thinker, or of any specific economic model. 
Obama originally had a wonder team of economic advisers, including Lawrence Summers, Christina Romer, Austan Goolsbee, and Cass Sunstein. 
But they are gone now. 
Today, the most powerful economic adviser remaining in the White House is Gene Sperling, head of the National Economic Council (NEC), the agency created by President Bill Clinton in 1993 to serve as his main source of economic policy (somewhat shunting aside the Council of Economic Advisers). 
Because this position does not require Congressional approval, the president may appoint whomever he wants, without having his choice raked over the coals in the US Senate. 
That is why Obama could appoint the highly talented but politically unpopular Summers, the former president of Harvard University. 
Sperling is not nearly so well known as Summers. 
But his record of influence in government is striking; indeed, he has been at the pinnacle of economic-policymaking power in the US for almost a decade. 
He was the NEC’s deputy director from its beginning in 1993 until 1996, and its director from 1996 to 2000. 
Obama reappointed him as head of the NEC in January 2011. 
His 2005 book The Pro-Growth Progressive contains many ideas about how to make the economy perform better. 
None is grandiose, but together they might help substantially. 
Some of these ideas found their way into the American Jobs Act, which might have had some real impact had Congress passed it in 2011. 
The AJA embodied some of what Sperling describes in his book: subsidies for hiring, wage insurance, and job training, as well as support for education and early learning. 
Moreover, the AJA would have offered some balanced-budget stimulus – the kind of stimulus that would boost the level of economic activity without increasing the volume of government debt. 
But the public, despite its concern about unemployment, is not very interested in the details of concrete plans to create more jobs. 
Sperling is just not very visible to the public. 
His book was not a best seller: in commercial terms, it might be better described as a dud. 
Sperling is fundamentally different from the typical academic economist, who tends to concentrate on advancing economic theory and statistics. 
He concentrates on legislation – that is, practical things that might be accomplished to lift the economy. 
He listens to academic economists, but is focused differently. 
At one point in his book, Sperling jokes that maybe the US needs a third political party, called the “Humility Party.” 
Its members would admit that there are no miraculous solutions to America’s economic problems, and they would focus on the “practical options” that are actually available to make things a little better. 
In fact, Americans do not need a new political party: with Obama’s reelection, voters have endorsed precisely that credo of pragmatic idealism. 

Obama’s Recovery? 
CAMBRIDGE – With November’s election in the United States fast approaching, the Republican candidates seeking to challenge President Barack Obama claim that his policies have done nothing to support recovery from the recession that he inherited in January 2009. 
If anything, they claim, his fiscal stimulus, the bank bailouts, and US Federal Reserve Chairman Ben Bernanke’s aggressive monetary policy made matters worse. 
Obama’s Democratic defenders counter that his policies staved off a second Great Depression, and that the US economy has been steadily working its way out of a deep hole ever since. 
Middle-ground observers, meanwhile, typically conclude that one cannot settle the debate, because one cannot know what would have happened otherwise. 
There is a good case to be made that government policies – while not strong enough to return the economy rapidly to health – did halt an accelerating economic decline. 
But the middle-ground observers are right that one cannot prove what would have happened otherwise. 
It is also true that it is rare for a government’s policies to have a major impact on the economy immediately. 
But here is the remarkable thing: whether one listens to the Republicans, the Democrats, or the middle-ground observers, one gets the impression that economic statistics show no discernible improvement around the time that Obama took office. 
In fact, the reality could hardly be more different. 
This is especially true if one looks at revised data, which show the US economy to have been in far worse shape in January 2009 than was reported at the time. 
In January 2009, the annualized growth rate in the second half of 2008 was officially estimated to have been -2.2%; but current figures reveal the contraction to have been much sharper – a horrendous -6.3%. 
This is the main reason why economic activity in 2009 and 2010 was so much lower than had been forecast – and why unemployment was so much higher. 
The maximum rate of economic contraction – a veritable freefall – came in the last quarter of 2008. 
More specifically, according to the monthly GDP estimates from the highly respected forecaster Macroeconomic Advisers, it came in December – the month before Obama was inaugurated. 
As the graphs below plainly show, the growth trajectory miraculously reversed as soon as Obama’s term began, yielding a clear “V” pattern in 2008-09. 
The full force of the fiscal stimulus package began to go into effect in the second quarter of 2009, with the US National Bureau of Economic Research officially designating the end of the recession as having come in June of that year. 
Real GDP growth turned positive in the third quarter, but slowed again in late 2010 and early 2011, which coincides with the beginning of the withdrawal of the Obama administration’s fiscal stimulus. 
Other economic indicators, such as interest-rate spreads and the rate of job loss, also turned around in early 2009. 
Labor-market recovery normally lags behind that of GDP – hence the “jobless recoveries” of recent decades. 
But official data on monthly job losses and gains reveal an obvious V-shape here, too: as the graph below shows, the end of the free-fall for private-sector employment came precisely when Obama was inaugurated. 
Again, such data do not demonstrate that Obama’s policies yielded an immediate payoff. 
In addition to the lags in policies’ effects, many other factors influence the economy every month, making it difficult to disentangle the true causes underlying particular outcomes. 
Given that difficulty, the right way to assess whether the fiscal stimulus enacted in January 2009 had a positive impact is to start with common sense. 
When the government spends $800 billion on such things as highway construction, salaries for teachers and policemen who were about to be laid off, and so on, it has an effect. 
Workers who otherwise would not have a job now have one, and may spend some of their income on goods and services produced by other people, creating a multiplier effect. 
Those who claim that this spending does not boost income and employment (or that it causes harm) apparently believe that as soon as a teacher is laid off, a new job is created somewhere else in the economy, or even that the same teacher finds a new job right away. 
Neither can be true, not with unemployment so high and the average spell of unemployment much longer than usual. 
They also believe that the government deficit drives up inflation and interest rates, thereby crowding out other spending by consumers and firms. 
But interest rates are at rock-bottom levels – even lower than in January 2009 – while core inflation has slowed to a pace unseen since the early 1960’s. 
The conditions of the last four years – high unemployment, depressed output, low inflation, and low interest rates – are precisely those for which traditional “Keynesian” remedies were designed. 
Economists’ more sophisticated forecasting models also show that the fiscal stimulus had an important positive effect, for much the same reasons as the common-sense approach. 
The non-partisan US Congressional Budget Office reports that the 2009 spending increase and tax cuts gave a positive boost to the economy, and indeed had the extra multiplier effects predicted by traditional Keynesian models. 
Allowing for a wide range of uncertainty, the CBO estimates that the stimulus added 1.5-3.5% to GDP by the fourth quarter, relative to where it otherwise would have been. 
The boost to 2010 GDP, when the peak effect of the stimulus kicked in, was roughly twice as great. 
Of course, econometric models do not much interest most of the public. 
A turnaround needs to be visible to the naked eye to impress voters. 
Given this, one can only wonder why basic charts, such as the 2008-2009 “V” shape in growth and employment, have not been used – and reused – to make the case. 

Obama’s Tightrope 
CAMBRIDGE – According to a United States State Department official, the concept of “smart power” – the intelligent integration and networking of diplomacy, defense, development, and other tools of so-called “hard” and “soft” power – is at the heart of the Obama administration’s foreign-policy vision. 
Currently, however, Obama’s smart-power strategy is facing a stiff challenge from events in the Middle East. 
If Obama fails to support the governments in Egypt, Bahrain, Saudi Arabia, or Yemen, he may jeopardize important foreign-policy goals such as Middle East peace, a naval base in the Persian gulf, stability in oil markets, or cooperation against Al Qaeda terrorists. 
On the other hand, if he merely supports such governments, he will antagonize those countries’ new information-empowered civil society, thus jeopardizing longer-term stability. 
Balancing hard-power relations with governments with soft-power support for democracy is like walking a tightrope. 
The Obama administration has wobbled in this balancing act, but thus far it has not fallen off. 
Because the Obama administration has used the term “smart power,” some people think that it refers only to the US, and critics complain that it is merely a slogan, like “tough love,” used to sugar-coat American foreign policy. 
But smart power is by no means limited to the US. 
Combining hard and soft power is a difficult task for many states – but no less necessary for that. 
In fact, some small states have proven highly adept at smart-power strategies. 
Singapore has invested enough in its military defense to make itself seem as indigestible as “a poisoned shrimp” to neighbors that it wishes to deter. 
At the same time, it has combined this hard-power approach with attractive soft-power activities in the Association of Southeast Asian Nations (ASEAN), as well as efforts to use its universities as hubs of regional non-governmental activities. 
Likewise, Switzerland long used mandatory military service and mountainous geography as hard-power resources for deterrence, while making itself attractive to others through banking, commercial, and cultural networks. 
Qatar, a small peninsula off the coast of Saudi Arabia, allowed its territory to be used as the US military headquarters in the invasion of Iraq, while at the same time sponsoring Al Jazeera, the most popular television station in the region, which was highly critical of American actions. 
Norway joined NATO for defense, but developed forward-looking policies on overseas development assistance and peace mediation to increase its soft power. 
Historically, rising states used smart-power strategies to good avail. 
In the nineteenth century, Bismarck’s Prussia employed an aggressive military strategy to defeat Denmark, Austria, and France in three wars that led to the unification of Germany. 
But once Bismarck had accomplished that goal, he focused German diplomacy on creating alliances with neighbors and made Berlin the hub of European diplomacy and conflict resolution. 
One of Kaiser Wilhelm II’s great mistakes two decades later was to fire Bismarck, fail to renew his “reinsurance treaty” with Russia, and challenge Britain for naval supremacy on the high seas. 
After the Meiji Restoration of 1867-1868, a rising Japan built the military strength that enabled it to defeat Russia in 1905. 
But it also followed a conciliatory diplomatic policy toward Britain and the US, and spent considerable resources to make itself attractive overseas. 
After the failure of its imperialist Greater East Asia Co-Prosperity scheme of the 1930’s (which had a soft-power component of anti-European propaganda) and its defeat in World War II, Japan turned to a strategy that minimized military power and relied on strategic alliance with the US. 
Japan’s single-minded focus on economic growth achieved its goal, but the country developed only modest military and soft power. 
In its first decades, communist China built its military strength and simultaneously used the soft power of Maoist revolutionary doctrine and Third World solidarity to cultivate allies abroad. 
But, after the exhaustion of the Maoist strategy in the 1970’s, Chinese leaders turned to market mechanisms to foster economic development. 
Deng Xiaoping warned his compatriots to eschew external adventures that might jeopardize internal development. 
In 2007, President Hu Jintao proclaimed the importance of investing in China’s soft power. 
Given China’s rising economic and military power, this was a smart decision. 
By accompanying its growing hard power with efforts to make itself more attractive, China aimed to stem its neighbors’ fears and tendency to balance Chinese power. 
In 2009, China was justly proud of its success in emerging from the global recession with a high rate of economic growth. 
Many Chinese mistakenly concluded that this represented a shift in the balance of global power, and that the US was in decline. 
But such narratives can lead to conflict. 
Indeed, overconfidence in assessing its power led to more assertive Chinese foreign-policy behavior in the latter part of 2009 and 2010. 
China miscalculated by deviating from the smart strategy of a rising power and violating Deng’s dictum that China should proceed cautiously and “skillfully keep a low profile.” 
After Chinese leaders faced international criticism and deteriorating relations with the US, Japan, India, and other countries, they decided to return to Deng’s smart-power strategy. 
So, as the Obama administration struggles to implement its smart-power strategy in the current revolutionary conditions of the Middle East, it is worth noting that the US is not alone in confronting the difficulties of combining hard and soft power successfully. 
Smart power is an important strategy for success in world politics, but no one said that it would be easy. 

Obama’s Vietnam Syndrome 
NEW HAVEN – There can be no military resolution to the war in Afghanistan, only a political one. 
Writing that sentence almost makes me faint with boredom. 
As US President Barack Obama ponders what to do about the war, who wants to repeat a point that’s been made thousands of times? 
Is there anyone on earth who does not know that a guerilla war cannot be won without winning the “hearts and minds” of the people? 
The American public has known this since its defeat in Vietnam. 
Americans are accustomed to thinking that their country’s bitter experience in Vietnam taught certain lessons that became cautionary principles. 
But historical documents recently made available reveal something much stranger. 
Most of those lessons were in fact known – though not publicly admitted – before the US escalated the war in Vietnam. 
That difference is important. 
If the Vietnam disaster was launched in full awareness of the “lessons,” why should those lessons be any more effective this time? 
It would seem that some other lessons are needed. 
Why did President Lyndon Johnson’s administration steer the US into a war that looked like a lost cause even to its own officials? 
One possible explanation is that Johnson was thoroughly frightened by America’s right wing. 
Urged by Senator Mike Mansfield to withdraw from Vietnam, he replied that he did not want another “China in Vietnam.” 
His national security adviser, McGeorge Bundy, fueled Johnson’s fears. 
In a memo of 1964, he wrote that “the political damage to Truman and Acheson from the fall of China arose because most Americans came to believe that we could and should have done more than we did to prevent it. 
This is exactly what would happen now if we should be seen to be the first to quit in Saigon.” 
In another memo, Bundy argued that neutrality would be viewed by “all anti-communist Vietnamese” as a “betrayal,” thus angering a US domestic constituency powerful enough “to lose us an election.” 
Did Johnson’s advisers push the country into a disastrous war in order to win an election – or, to be more exact, to avoid losing one? 
Johnson, Bundy, and the others of course believed the “domino” theory, which says that one country “falling” to communism would cause others to fall. 
But that theory meshed with suspicious ease with the perceived domestic political need for the president to appear “tough” – to avoid appearing “less of a hawk than your more respectable opponents,” as Bundy later put it. 
What is uncanny about the current debate about Afghanistan is the degree to which it displays continuity with the Vietnam debates, and the Obama administration knows it. 
To most Americans, Vietnam taught one big lesson: “Don’t do it again!” 
But, to the US military, Vietnam taught a host of little lessons, adding up to “Do it better!” 
Indeed, the military has in effect militarized the arguments of the peace movement of the 1960’s. 
If hearts and minds are the key, be nice to local people. 
If civilian casualties are a problem, cut them to a minimum. 
If corruption is losing the client government support, “pressure” it to be honest, as Obama did in recent comments following President Hamid Karzai’s fraud-ridden re-election. 
The domestic political lessons of Vietnam have also been transmitted down to the present. 
George McGovern, the Democratic presidential candidate in 1972, proposed to end the war, which by then was unpopular, yet lost the election in a landslide. 
That electoral loss seemed to confirm Johnson’s earlier fears: those who pull out of wars lose elections. 
That lesson instilled in the Democratic Party a bone-deep fear of “McGovernism” that continues to this day. 
There is unmistakable continuity between Joseph McCarthy’s attacks on President Harry Truman’s administration for “losing” China, and for supposed “appeasement” and even “treason” and Dick Cheney’s and Karl Rove’s refrains assailing Obama for opposing the Iraq war, not to mention Sarah Palin’s charge during the election campaign that Obama had been “palling around with terrorists.” 
It is no secret that Obama’s support for the war in Afghanistan, which he has called “necessary for the defense of our people,” served as protection against charges of weakness over his policy of withdrawing from Iraq. 
So the politics of the Vietnam dilemma has been handed down to Obama virtually intact. 
Now as then, the issue is whether the US is able to fail in a war without becoming unhinged. 
Does the American body politic have a reverse gear? 
Does it know how to cut losses? 
Is it capable of learning from experience? 
Or must it plunge over every cliff that it approaches? 
At the heart of these questions is another: must liberals and moderates always bow down before the crazy right over national security? 
What is the source of this right-wing veto over presidents, congressmen, and public opinion? 
Whoever can answer these questions will have discovered one of the keys to a half-century of American history – and the forces that, even now, bear down on Obama over Afghanistan. 
Recently, Obama paid a nighttime visit to Dover Air Force base to view the return of the remains of 16 soldiers killed in Afghanistan. 
The event was minutely choreographed. 
Obama saluted in slow motion, in unison with four uniformed soldiers, then walked in step with them past the van that had just received the remains from the cargo plane that had brought them home. 
No one spoke. 
Had Obama become caught in the military’s somber spell? 
Or was his presence a silent public vow, as he makes his decisions, to keep his mind fixed on matters of life and death, rather than on the next election? 
Obama’s actions in Afghanistan will provide the answer. 

Obama’s Vision Thing 
MADRID – Humbled by the Republicans’ landslide mid-term election victory, US President Barack Obama will now need to negotiate every minor detail of his domestic agenda with a confrontational Congress – at least until the next elections in 2012. 
Congress can obstruct Obama’s foreign policy as well, but this remains a domain where any US president “enjoys almost royal prerogatives,” to use Alexis de Tocqueville’s somewhat inflated description. 
These prerogatives, however, have so far allowed Obama only to describe the world that he wants, not to bring it about. 
George W. Bush committed the cardinal sin of all fallen empires – that of overreach. 
The Obama alternative was supposed to be collective global security sustained by multilateral structures. 
Rather than containing rising powers such as China and India, they would be drawn into a civilized world order, one based on global governance and “smart diplomacy.” 
Yet, instead of building such an order, Obama’s presidency has so far been a mighty struggle to stem the decline in American power. 
He has fallen desperately short in making real progress towards the Promised Land, in which America lives in peace with the Muslim world, thanks to an Israeli-Palestinian settlement; brings about a nuclear-free planet (a noble, yet entirely delusional pledge); gets Russia’s support in addressing other global problems; contains China’s quest to translate its growing economic power into major strategic gains; ends its two diversionary wars in Muslim countries; and leads a solid international alliance to cut short Iran’s nuclear ambitions. 
Foreign policy has almost invariably been the refuge of US presidents hit by mid-term defeats. 
But foreign policy cannot be detached from its domestic foundations altogether. 
Can a president shown to be hesitant in the Middle East and Afghanistan even before his mid-term setback muster the authority needed to advance his global vision after such a domestic debacle? 
One should hope so, if only because no better alternative to Obama’s vision is in view. 
And now, with a Republican-controlled House of Representatives, Obama might not be able to fulfill major foreign-policy promises, including ratification of the Comprehensive Test Ban Treaty, a key item in the president’s vision for reinvigorating the Non-Proliferation Treaty. 
Should Congress not ratify the new Strategic Arms Reduction Treaty with Russia, Obama’s most tangible foreign-policy achievement so far, the entire inspection system for nuclear arms might collapse. 
But, with respect to most other foreign-policy issues, the question is one of presidential leadership. 
Obama’s problem lies not in his vision for America and the world, but in his deficient efforts to move from theory to practice. 
Nevertheless, despite the new Congress’s overwhelmingly pro-Israel cast, Israeli Prime Minister Binyamin Netanyahu should not assume that the Republicans will stymie Obama if he pushes resolutely for an Israeli-Palestinian peace deal. 
After all, it was a Republican who produced the Reagan Plan, calling on Israel to withdraw to the 1967 borders. 
Thus, however much they despised Bill Clinton, the Republicans were prepared to allow him the glory of being a Middle East peacemaker, believing that any agreement reached with the Palestinians at the 2000 Camp David Summit was in America’s interest. 
Obama was recently advised by David Broder, a long-time Washington Post columnist, to launch an attack on Iran. 
Convinced that history will judge the president by his success in containing the Iranian threat, Broder also assumes that a war with Iran would reignite the American economy. 
That is a strange idea, given that today’s two ongoing wars have only compounded the US economy’s weaknesses. 
An American war against Iran is plausible only as a response to a blatant and immediate Iranian challenge to vital US interests, such as a major terrorist attack, an invasion of an ally in the Gulf, or disruption of the free flow of Middle East oil to the West. 
The Iranian regime is far too astute to cross any of these red lines. 
Iran, like North Korea, will continue to test Obama’s capacity to build international alliances aimed at putting pressure on defiant states. 
Those, like Netanyahu, who stick to the lunacy of a military operation against Iran, will not find a ready ally in Obama. 
Such an operation would make America appear to be doing Israel’s bidding – even George W. Bush refused when former Israeli Prime Minister Ehud Olmert asked the US to attack a Syrian nuclear reactor – and destroy Obama’s strategy of reconciliation with the Muslim world. 
Glory in foreign policy is no guarantee of future electoral gains. 
Conversely, Obama did not lose the mid-term elections because of his foreign policy’s inconsistencies. 
He lost because US unemployment remains near 10%, with no prospect of rapid improvement. 
And only one major foreign-policy test for Obama has clear implications for the US economy and job creation: the need to recalibrate relations with China in a way that restores balance to bilateral trade. 
At the end of the day, Bill Clinton was right: now, as then, “It’s the economy, stupid.” 
It certainly wasn’t – and isn’t – foreign policy, as George H. W. Bush, one of America’s most proficient presidents in international affairs – can attest. 

Obama versus Romney on Jobs 
BERKELEY – The United States has just completed its third year of economic recovery, but the unemployment rate remains above 8%, and there are worrisome signs of a slowdown. 
So it is no surprise that jobs have become a major focus in the presidential campaign – or that the candidates have very different ideas about how to boost employment. 
Last autumn, President Barack Obama proposed the American Jobs Act, a $450 billion package of fiscal measures aimed at job creation. 
The AJA amounted to about 3% of GDP and was designed to take effect in 2012, providing a timely employment boost and insurance for the US recovery against global headwinds. 
Most of its measures had enjoyed bipartisan support in the past; tax cuts comprised about 56% of the total cost; and the package was paid for in Obama’s long-term deficit reduction plan. 
Several independent economists concluded that Obama’s plan would provide a significant lift to the job market in 2012-2013. 
Indeed, two of the nation’s most respected forecasters predicted that the AJA would add 1.3-1.9 million jobs in 2012 and more than two million jobs by the end of 2013. 
The non-partisan Congressional Budget Office (CBO) also found that most of the AJA’s policies ranked high in budgetary effectiveness, measured by the number of jobs created in 2012-2013 per dollar of budgetary cost. 
The AJA was filibustered by Senate Republicans, and the Republican-controlled House of Representatives likewise prevented the bill from coming to a vote. 
Mitt Romney, now the Republican presidential candidate, attacked the plan as “mere stimulus” that would “throw a cup of gasoline on the embers” of the recovery. 
Ultimately, Obama, bolstered by polls endorsing his plan, won partial passage of two AJA policies: a one-third cut in employees’ payroll taxes (he had proposed one-half), and an extension of unemployment benefits by about 60% of what he had recommended. 
But Congress failed to approve a 50% cut in employers’ payroll taxes – a business tax cut that many Republicans favored in the past and that ranks high on budgetary effectiveness. 
Nor did Congress approve $30 billion in federal grants to states to enable them to employ about 135,000 teachers, police, and firemen, despite strong voter support. 
Such grants between 2009 and 2011, totaling $130 billion, helped states to maintain vital services and retain the public employees providing them. 
Romney opposes more federal money for the states, arguing that “it is time to cut back on government and help the American people.” 
But teachers, firemen, and police are American people who help other American people. 
Government employment is falling at the fastest rate since the 1940’s, and is now at its 2006 level. 
If public employment had grown during the last three years at about the same rate as the population, as it did during George W. Bush’s presidency, the unemployment rate would be around 7% rather than 8.2%, owing to about 800,000 additional jobs. 
Likewise, Congress failed to approve Obama’s call for $90 billion in additional infrastructure spending, which would have supported about 400,000 jobs, despite the fact that the US has at least $1.1 trillion in unfunded infrastructure needs. 
Moreover, infrastructure investment not only creates jobs in the near term, but also promotes long-term competitiveness. 
Altogether, Congress left at least one million jobs on the negotiating table, holding unemployed workers hostage to the outcome of November’s election. 
Meanwhile, in response to persistent media pressure, Romney has unveiled his policies to boost short-term job creation. 
They are not convincing. 
Romney says that he would ensure that the US puts more people to work in the energy sector. 
But, while the oil and gas industry has grown significantly since 2007, it employs fewer than 200,000 people, implying a negligible effect even if employment in this sector doubled in the short run. 
And, while Romney says that he would open new foreign markets, Obama has been doing just that, winning passage of three major trade agreements and increasing federal support for US exports, which have been growing nearly twice as fast as they did during the recovery from the 2001 recession. 
Moreover, Romney’s promise to charge China, America’s third-largest export market, with currency manipulation, and to impose large tariffs on Chinese imports, would almost certainly invite retaliation, causing a decline in US exports and jobs. 
Romney would also repeal “Obamacare” – the 2010 health-care reform legislation – because it “is scaring small business from hiring.” 
But the evidence for this claim is meager and anecdotal. 
A recent survey found that most small businesses support the reform. 
Most businesses, large and small, cite insufficient demand as the primary reason they are not hiring. 
Nor is Romney’s promise to enact immediate cuts in federal discretionary spending by an additional 5% likely to boost job growth, as he asserts. 
When an economy is suffering from high unemployment and weak aggregate demand, spending cuts are contractionary. 
Romney conceded this point recently, acknowledging that the “fiscal cliff” – the expiration of Bush-era tax cuts at the end of this year, combined with large spending cuts already scheduled to take effect – would push the economy back into recession. 
Finally, in addition to extending Bush’s tax cuts, Romney promises an across-the-board 20% reduction in marginal personal-income-tax rates and a significant cut in the corporate rate to encourage businesses to hire more workers. 
Despite large cuts in marginal income-tax rates at the start of the Bush administration, however, job growth between 2000 and 2007 was half the rate of the previous three decades. 
Even if Romney’s new tax cuts strengthened investment and growth in the long run (a debatable proposition that depends on how they are financed), their short-term effect on job creation would be minimal, and they would entail a significant loss of revenue. 
Indeed, these cuts perform poorly on the CBO’s measure of budgetary effectiveness. 
Obama’s proposals to boost job creation are convincing, whereas Romney’s proposals would have little or no effect – and some could even make matters worse. 

Obama and the $400,000 Question 
NEW YORK – Fox Business has gleefully reported that former US President Barack Obama will accept $400,000 from the Wall Street investment firm Cantor Fitzgerald to speak at a health-care conference this September. 
Those most disappointed by this news include people whom I hold in high regard. 
For example, Senator Elizabeth Warren says that she is “troubled” by Obama’s decision, and Senator Bernie Sanders finds it “distasteful.” 
But Obama’s decision, I believe, does have some redeeming features. 
I have met Obama twice, and was struck on both occasions by his natural warmth and grace. 
The first time was on November 7, 2010, when then-Indian Prime Minister Manmohan Singh hosted a dinner for Obama at his New Delhi residence. 
At that time, the Indian economy stood out for having recovered quickly after the 2008 financial crisis. 
When Singh introduced me as the Chief Economic Adviser of the Government of India, Obama showed his facility for repartee. 
He pointed to his treasury secretary, Timothy Geithner, and told me, “You should give this guy some tips.” 
Our second meeting came in January 2015, a few weeks before Obama would make another official visit to India. 
Obama’s advisers invited me to the White House to brief the president on the state of the Indian economy, as part of a three- or four-person discussion on Indo-US relations. 
That meeting is now one of my most memorable ever, because I think Obama took the advice that I offered. 
That alone encourages me to offer him another bit of advice, now that he has accepted the controversial speaking fee. 
Obama’s arrangement with Cantor Fitzgerald is a clear demonstration of how business economics has changed in the last few decades. 
In this age of globalization and information overload, everyone is scrambling for everyone else’s attention. 
That special hamburger on your restaurant’s menu is of no value if people do not know about it. 
With so many producers vying for customers’ attention, marketing and endorsements have become all the more important – and expensive. 
What is true for burgers is also true for consultancy and financial-services firms. 
Brands and communication now occupy a more elevated place than in any previous era. 
If you can signal to people that something about your company is special in today’s digital, globalized world, you can rake in large profits. 
For Cantor Fitzgerald, hosting a fresh former president serves as such a signal. 
The firm cut a deal with Obama, by offering him a share of its soon-to-be expanded pie. 
If Obama had asked for a much lower fee – say, $50,000 – he would have avoided criticism, but by handing a Wall Street investment firm an extra $350,000. 
Of course, some observers will simply treat Obama’s appearance at the September conference as an endorsement of Wall Street – a downside that should concern him. 
To be sure, if Obama had accepted an invitation from the National Rifle Association, no one could view his decision as anything but a betrayal. 
But Wall Street is different, because it is an integral part of the new world economy, and cannot simply be excised. 
It needs to be repaired, with carefully crafted solutions. 
Companies started using former presidents to boost their brands in the 1970s, and the practice became starkly visible after Ronald Reagan accepted $2 million from a Japanese company to deliver two lectures. 
At the same time, the value of producing the good or service to be sold has diminished in relative terms, as marketing, advertising, and deal making have become top priorities. 
This is obvious in the fact that CEOs today make 200 times more than their company’s typical worker, whereas in the 1950s, they made only 20 times more. 
It is heartening that some people whom the system has enriched agree that it needs to change, and even advocate for that outcome. 
They are confronted with essentially the same question that the philosopher Bertrand Russell asked in his controversial 1932 essay for the New York American: “Should Socialists Smoke Good Cigars?” 
(For the record, Russell’s answer was yes.) 
Still, more people need to recognize that the changed world economy has given rise to extreme inequalities that, like excessive CO2 emissions, constitute a “public bad.” 
And they need to acknowledge that the task of reducing inequality, like fighting climate change, cannot be left to the market. 
We need smarter regulations, higher taxes on the rich – which is the opposite of what US President Donald Trump wants to do – and targeted limits on corporate honchos’ incomes relative to their workers. 
For the most part, our current predicament is not the fault of any single person or group. 
But developing and promoting a progressive agenda is now a collective responsibility. 
My answer to Russell’s question is that, in a poor country, idealists fighting for greater equality should try not to smoke expensive cigars; but if they are hopelessly addicted, they must not give up their idealism just because they cannot give up cigars. 
The same goes for Obama. 
So here is my other piece of advice for Obama: he must continue to criticize Wall Street and the systemic trap that we are in. 
Now that he has accepted the $400,000, he should use it to fight inequality and to promote a more progressive agenda, so that his successors do not even receive such offers. 

Obama Versus Obamacare 
NEW YORK – The US Patient Protection and Affordable Care Act, President Barack Obama’s signature 2010 health-care reform, has succeeded in extending insurance coverage to millions of Americans who would not otherwise have it. 
And, contrary to critics’ warnings, it has not pushed up health-care costs; in fact, there is some hope that the cost curve may finally be bending downward. 
But whether “Obamacare” succeeds in curbing excessively high health-care costs is not assured. 
That will depend on the Obama administration’s other policies, particularly in an area that might seem unrelated: the United States’ ongoing discussions with India over intellectual property. 
And here, Obama appears determined to undermine his own signature reform, owing to pressure from the powerful US pharmaceutical lobby. 
Pharmaceutical costs account for an increasingly large component of US health-care spending. 
Indeed, outlays for prescription drugs, as a share of GDP, have nearly tripled in just 20 years. 
Lowering health-care costs thus requires greater competition in the pharmaceutical industry – and that means allowing the manufacture and distribution of generic drugs. 
Instead, the Obama administration is seeking a trade deal with India that would weaken competition from generics, thereby making lifesaving drugs unaffordable for billions of people – in India and elsewhere. 
This is not an unintended consequence of an otherwise well-intentioned policy; it is the explicit goal of US trade policy. 
Major multinational pharmaceutical companies have long been working to block competition from generics. 
But the multilateral approach, using the World Trade Organization, has proved less effective than they hoped, so now they are attempting to achieve this goal through bilateral and regional agreements. 
The latest negotiations with India – the leading source of generic drugs for developing countries – are a key part of this strategy. 
In the 1970s, India abolished pharmaceutical patents, creating an advanced and efficient generics industry capable of providing affordable medicines to people throughout the developing world. 
That changed in 2005, when the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) forced India to allow drug patents. 
But, in the view of America’s pharmaceutical industry, TRIPS did not go far enough. 
The Indian government’s desire to enhance its trade relations with the US thus provides the industry an ideal opportunity to pick up where TRIPS left off, by compelling India to make patents easier to obtain and to reduce the availability of low-cost generics. 
So far, the plan seems to be working. 
Last fall, during his visit to the US, Indian Prime Minister Narendra Modi agreed to establish a working group to reevaluate the country’s patent policy. 
The US participants in the group will be led by the Office of the US Trade Representative, which serves the pharmaceutical companies’ interests, rather than, say, the National Academy of Sciences, the National Science Foundation, or the National Institutes of Health. 
How might India tighten its patent system? 
For starters, it could lower its standards for what is considered a “novel” product, and thus one that merits intellectual-property protection. 
As it stands, India sets the bar quite high, resulting in its refusal to grant patents for new combinations of existing drugs. 
India could also stop issuing compulsory licenses to allow other companies to produce a patent holder’s drug, in exchange for a fee – an arrangement permitted under TRIPS, but anathema to the drug industry. 
India’s current policies allow drugs to be sold at a small fraction of the monopoly prices commanded by patent holders. 
For example, the Hepatitis-C drug Sovaldi is sold for $84,000 per treatment in the US; 
Indian manufacturers are able to sell the generic version profitably for less than $1,000 per treatment. 
The generic price is still a huge expense for people living on a few dollars a day; but, unlike the US price, it is manageable for many governments and aid organizations. 
This is hardly an isolated example. 
Low-cost generics have made it possible to treat tens of millions of HIV/AIDS patients in the developing world. 
In fact, the threat of competition from Indian generics is partly responsible for major pharmaceutical companies’ decision to make some of their drugs available to the world’s poor at low prices. 
If the US compels India to tighten its patent rules substantially, so that they resemble US rules more closely, this outcome could be jeopardized. 
Of course, if America’s strong patent regime were, as its proponents claim, the best way to foster innovation in the pharmaceutical industry, the Obama administration’s policy toward India could perhaps be justified. 
But that is not the case. 
Because patents are essentially government-granted monopolies, they lead to the same inefficiencies and rent-seeking behavior as any other such market distortion. 
A patent that raises the price of a drug a hundred-fold has the same effect on the market as a 10,000% tariff. 
In such cases, drug companies gain a powerful incentive to mislead doctors and the public about their products’ safety and effectiveness, and even to promote their drugs for inappropriate uses, often using innovative side-payments to persuade doctors to prescribe them. 
Furthermore, patent-supported research encourages secrecy, as companies disclose only the information needed to acquire patents. 
Yet openness is crucial for efficient scientific progress. 
Many economists, including the authors, have suggested a variety of alternatives to patent-supported R&D and testing that avoid these problems. 
If the Obama administration succeeds in forcing India to strengthen its patent laws, the change would harm not only India and other developing countries; it would also enshrine a grossly corrupt and inefficient patent system in the US, in which companies increase their profits by driving out the competition – both at home and abroad. 
After all, generic drugs from India often provide the lowest-cost option in the US market once patent terms have expired. 
Obama was right to push for a health-care reform that would increase the sector’s efficiency and accessibility. 
In its dealings with India, the Obama administration is pursuing a policy that flouts these goals, with consequences not just for India and the US, but for the entire world. 

Obamamania 
NEW YORK – Why do Europeans adore America’s president-elect, Barack Obama? 
Stupid question, you might say. 
He is young, handsome, smart, inspiring, educated, cosmopolitan, and above all, he promises a radical change from the most unpopular American administration in history. 
Compare that to his rival John McCain, who talked about change, but to most Europeans represented the opposite. 
And yet, there is something odd about the European mania for a black American politician, even as we all know that a black president or prime minister (let alone one whose middle name is Hussein) is still unthinkable in Europe. 
Or perhaps that is precisely the point. 
Europeans have long been hospitable to black American stars. 
Think of Josephine Baker, who wowed Parisians and Berliners at a time when blacks could not vote – or even use the same bathrooms as whites – in many parts of the United States. 
Cities like Paris, Copenhagen, and Amsterdam offered refuge to black American jazz musicians, who needed a break from institutionalized racism. 
The same was true for other artists. 
James Baldwin, for example, found a home in France. 
Since there were only very few black people in Europe, the adoration of black American stars came easily. 
It made Europeans feel superior to Americans. 
They could pat themselves on the back for their lack of racial prejudice. 
When large numbers of people from non-Western countries started to come to Europe after the 1960’s, this proved to be something of an illusion. 
Still, the illusion was nice while it lasted, and Obamamania may contain an element of nostalgia, as well as hope. 
The other reason for the European love affair with Obama is that he is seen as something more than an American. 
Unlike McCain, the all-American war hero, Obama looks like a citizen of the world. 
With his Kenyan father, he carries the glamour once associated with Third World liberation movements. 
Nelson Mandela inherited that glamour; indeed, he personified it. 
Some of that has rubbed off on Obama, too. 
This did not help him much at home. Indeed, it could easily have hurt him. 
Republican populists have long tried to depict their Democratic opponents, often with great success, as “un-American” elitists, intellectuals, and the kind of guys who speak French – in short, “Europeans.” 
When Obama made his rousing speech at the Berlin Tiergarten in July, in front of 200,000 cheering Germans, his popularity ratings at home actually fell, especially in the old industrial “rustbelt” of Ohio and Pennsylvania. 
He came dangerously close to looking too “European.” 
But the real Europeans loved him for it. 
But the main reason for Obamamania may be more complex. 
It has become popular of late for European pundits and commentators to write the US off as a great power, let alone an inspirational one. 
In this, they have more or less followed public opinion. 
Many liberal-minded people expressed, often sorrowfully, their deep disillusion with America during the dark Bush years. 
The nation they had grown up looking up to, as a beacon of hope – a place that, while flawed, still inspired dreams of a better future and produced great movies, soaring buildings, rock ‘n’ roll, John F. Kennedy, and Martin Luther King – had been hopelessly tainted by reckless wars, officially sanctioned torture, coarse chauvinism, and extraordinary political arrogance. 
Others expressed the same disillusion with a gloating air of schadenfreude . 
At last, that big, arrogant, fatally seductive nation, which left the Old World in its shade for so long, had been brought to its knees. 
Watching the economic rise of China, Russia, and India, and the American debacles in the Middle East, it was tempting to believe that US power really did not count for very much anymore. 
A multi-polar world, many thought, would be vastly preferable to more Pax Americana. 
Yet such projections could never entirely disguise a nagging anxiety. 
How many Europeans (or Asians, for that matter) would really be happier being subjected to the superior power of China or Russia? 
Under all the confident-sounding dismissals of US power, there is still some yearning to return to a more reassuring time, when the democratic world could lay its collective head on Uncle Sam’s broad shoulders. 
This, too, is probably an illusion. 
Too much has changed since the Marshall Plan, the Berlin Airlift, and the Cuban Missile Crisis. 
But I do not believe that the American dream has died in Europe quite yet. 
Obamamania seems to have revived it. 
Obama’s election has demonstrated that things are still achievable in the US that remain unthinkable elsewhere. 
As long as this is so, the US, as primus inter pares , can still be looked up to as the defender of our freedoms. 
Europeans – and others – may regard China’s rise with awe, and hope to find a modus vivendi with Russia, but without the hopes inspired by that extraordinary republic, which represents the worst and the best of our battered Western world, we would all be much worse off. 
In their hearts, most Europeans know this. 
That is why they are going crazy over Barack Obama’s election. 

Obasanjo’s Troubling End-Game 
In Nigeria today, the key question nowadays is not whether President Olusegun Obasanjo will quit after his second (and final) term expires next year, but who will succeed him. 
Given Nigeria’s history of sit-tight military dictatorships, that is real progress. 
Unfortunately, it is not necessarily the president’s doing. 
Attempts by Obasanjo’s supporters to persuade the National Assembly to amend the Constitution to enable Obasanjo to continue in office beyond two terms met a solid wall of opposition. 
Government and commercial activities virtually ground to halt this spring as democracy activists, in alliance with politicians and lawmakers opposed to a third term, battled Obasanjo’s allies to thwart the proposed bill. 
The failure of Obasanjo’s supporters triggered three big political developments. 
The president’s authority is draining away precipitately, and his vice-like grip on his People’s Democratic Party (PDP) has loosened. 
Opposition parties, human rights groups, and other government critics, hitherto cowed by a seemingly omnipotent Obasanjo and PDP machine, have found a new lease on life. 
Obasanjo, besieged and angry that friends at home and abroad (particularly in the United States and Europe) betrayed him by aiding his political opponents in killing the amendment, is determined to settle scores. 
The storm had hardly settled when Obasanjo sacked General Aliyu Gusau, his powerful National Security Adviser. 
Several senior military officers whose loyalty was questionable were also replaced. 
Ngozi Okonjo-Iweala, the Finance Minister and the brain behind the government’s economic reforms, was redeployed to head the Foreign Ministry, in a move widely seen as punishment, as Obasanjo has dominated foreign policy-making throughout his tenure. 
The official spin is that Okonjo-Iweala, a former World Bank economist, was reassigned to prepare her for higher office in 2007, and that the move signals the end of the President’s love affair with IMF-guided neo-liberal reforms. 
But it is no coincidence that Obasanjo removed Okonjo-Iweala from a job for which she has proven competence and, more importantly, in which she ruled the roost: she had led the opposition from within the government to the constitutional amendment. 
Obasanjo is also shaking up the oil industry in a double maneuver interpreted as a rap on the knuckles for his Western allies and a last ditch effort to secure a legacy as the one Nigerian leader who tamed corruption in that sector. 
American, British, and French oil companies enjoyed a virtual monopoly of Nigeria’s oil industry. 
Royal Dutch Shell’s joint venture with the government produces half of the country’s daily output of 2.5 million barrels. 
Two US companies, Chevron Texaco and Mobil, are also key players. 
Obasanjo’s new oil policy threatens this dominance. 
China made a dramatic entry into the picture last April, when Nigerian officials announced that China National Offshore Oil Corporation (CNOOC) had bought a 45% stake in a Nigerian oil field for more than $2 billion. 
That field will pump 225,000 barrels per day when it begins production in 2008. 
Obasanjo also negotiated a loan of $1 billion from the Chinese government to finance repair of Nigeria’s railways and buy new rolling stock. 
These deals were brokered at the height of the constitutional drama, when America said it would not support an attempt by the government to extend its stay in office unconstitutionally. 
In addition to rolling out the welcome mat for energy-hungry China, oil ministry officials say they will tighten financial regulations and impose sanctions on companies seen as defaulting on tax and royalty payments – moves apparently aimed at local subsidiaries of Western oil companies in the Niger Delta. 
The announcement was welcomed by ordinary Nigerians, but incited jitters in the industry, prompting anxious questions about how deep Obasanjo’s angry sword will cut, and how smooth the political succession is likely to be. 
Obasanjo has made it clear that Atiku Abubakar, the Vice President and the arrowhead of the anti-third term coalition, will not succeed him. 
But this has not stopped Abubakar, a formidable political operator, from launching his presidential bid, despite uncertainty over whether he will fight it out with his boss for control of the PDP machinery or decamp to another political party. 
In fact, the PDP has splintered into three warring factions, drastically reducing Obasanjo’s chances to control the succession. 
Muhammadu Buhari, a retired general who challenged Obasanjo for the presidency in 2003 and lost, has said that he will try again in 2007 on the platform of the All Nigeria People’s Party (ANPP), the second largest party. 
But the ANPP is also in disarray. 
Obasanjo’s spokesmen regularly brief journalists anonymously that he favors a successor from the Niger delta area. 
The President has appointed the late Ken Saro-Wiwa’s son as one of his special assistants, in an attempt to mend fences with political elites in the restive delta. 
Obasanjo is anxious to thwart the region’s growing armed insurgency, which is driven by widespread poverty and oil industry-related ecological damage. 
Dangling the PDP’s presidential ticket before the delta region’s leading politicians is seen as Obasanjo’s strategy to maintain stability and, more importantly, prevent Atiku Abubakar or General Buhari from coming to power. 
As it has since the discovery of oil and the Biafran War in the 1960’s, the Niger Delta will be at the center of Nigerian politics. 
This time, however, the politics will be democratic. 

 

One Earth, One Ocean 
NEW YORK – The ocean and the atmosphere are linked in ways that are only just beginning to be fully understood. 
Like siblings, the sky above us and the waters around us share many characteristics – most notably these days a need to be protected. 
We are siblings working on a shared agenda to defend both – an agenda that will define the future for many millions of brothers, sisters, fathers, mothers, friends, and neighbors, as well as life-forms on the land and in the seas, now and for generations to come. 
Fortunately, governments around the world are beginning to understand the challenge, and are expected to deliver – or at least make progress toward – two important agreements this year: a new global treaty to protect marine life in international waters, and a climate-change accord to safeguard the atmosphere. 
Together with a suite of Sustainable Development Goals, these agreements will serve as crucial road signs indicating the path to be followed by the world’s national economies over the next 15 years and beyond. 
The planned accords come amid extraordinary efforts by countries, cities, companies, and citizens to protect the climate and the ocean. 
Investments in renewable energy are running at well over $250 billion a year, and many countries are spending as much on green forms of energy production as they do on fossil fuels. 
Our native Costa Rica, for example, now gets 80% of its energy from renewable sources. 
In China, renewables are expanding rapidly, and coal consumption fell by 2.9% year on year in 2014. 
Meanwhile, offshore, the need for more marine reserves and sustainable fishing is being recognized and, in some cases, met, with technological breakthroughs strengthening officials’ ability to monitor and track illegal catches. 
Scientists studying climate change have shown how the problem can be tackled by adopting a clear path with progressive milestones. 
We must bring global emissions to a peak in the next decade, drive them down rapidly thereafter, and establish a balance between emissions and the planet’s natural absorptive capacity by the second half of the century. 
The ocean has historically played an important role in achieving that balance. 
As a natural carbon sink, it absorbs approximately 25% of all the carbon dioxide emitted by human activity annually. 
But we are overtaxing its absorptive capacity. 
The carbon dissolved in the ocean has altered its chemistry, driving up acidity by 30% since the beginning of the Industrial Revolution. 
The rate of change is, to the best of our knowledge, many times faster than at any time in the last 65 million years, and possibly the last 300 million years. 
If CO2 emissions are not brought under control, the rate of acidification will continue to accelerate – with deadly effects on the ocean’s inhabitants. 
As CO2 from the atmosphere is churned into the world’s waters, it reduces the availability of carbonate ions needed by many marine animals and plants to build their shells and skeletons. 
If CO2 levels continue to rise at their current rates, scientists estimate that around 10% of the Arctic Ocean will be corrosive enough to dissolve the shells of sea creatures by 2018. 
Many other oceanic bodies face a similar future. 
International agreements succeed best when the political, economic, and social trends of the time align, as they have now, to give rise to a new vision of the future and a new relationship between humanity and the planet we share. 
Realizing this vision will involve multiple generations. 
Both the ocean and the climate are in need of global, credible, measurable, actionable plans to provide for their protection. 
Our scattered, fully protected marine reserves must be expanded from the 1% of the ocean they currently protect to form a truly global network. 
Last month, 13 Caribbean heads of state and government called for an effective global agreement, citing current and emerging impacts. 
It is an alarming list: “more frequent extreme events, more intense and changing rainfall patterns, more ocean acidification and ocean warming, coral bleaching, rising sea levels, coastal erosion, salinization of aquifers, the greatly accelerated emergence of new communicable diseases, reduced agricultural productivity, and a disruption of fishing traditions.” 
Such threats are proof of the urgent need to expand the international rules providing for the conservation and sustainable management of the climate and marine life. 
The climate-change agreement expected to be reached in Paris in December will not solve the problem at the stroke of a pen, just as no agreement to protect marine life will, on its own, lead to a healthier ocean. 
But it is essential that we establish the policy pathways needed to ensure that all countries play their part in protecting the planet, while assisting the vulnerable to adapt to the effects of environmental degradation already underway. 

The October Revolution in Post-Truth Russia 
MOSCOW –Russia is locked in a battle between official history (the story of the state) and counter-history (the story of civil society and the memories of the people). 
With the centenary of the October Revolution this year, the clash will move to the center of public life. 
President Vladimir Putin is the embodiment of nostalgia not so much for Soviet times as for that period’s sacralization of the state, which enabled the government to use, in modern parlance, “fake news” to advance its own ends. 
In fact, the October Revolution is remembered with no small amount of ambivalence and trepidation. 
Just the word “revolution” is abhorrent to modern Russian elites, tending as it does to be preceded by the epithets “orange” or “color” – the bête noire for Putin’s regime. 
At the same time, the revolution was an important moment in Russia’s history, and thus a source of national identity. 
For the Communist Party, the anniversary is a clear opportunity to present itself as the successor of a great and enduring anti-capitalist tradition, albeit one that now brings together Marxist-Leninist teachings and the teachings of the Russian Orthodox Church. 
But the Communist Party is no longer in power, and for those who are, it’s much harder to articulate a coherent approach to the centenary. 
Given the revolution’s historical importance, the Kremlin cannot avoid commemorating it. 
But rather than pursue the needed reconciliation of adversaries – the reds and the whites – the regime will probably take a side, in order to spin the story to its own benefit. 
That spin is likely to be imperial. 
According to the empire narrative, Vladimir Lenin was an evil genius who disrupted the Russian empire at a moment when it was flourishing and brimming with spirituality. 
Joseph Stalin then rebuilt the empire ostensibly on the foundation of Marxism-Leninism, but really on the foundation of traditional Russian conservative values. 
Nikita Khrushchev’s post-Stalin “thaw,” when repression and censorship were relaxed, undermined the empire’s fundamental values, carelessly handing Crimea to Ukraine. 
But, from the end of 1964, when Khrushchev was deposed, things got better, with Russians living quietly and happily. 
The fall of the Soviet Union, which amounted to another disruption of the empire, was a great geopolitical catastrophe in Russia’s history. 
In this interpretation, ice ages in Russia’s history – periods when cold-blooded leaders ruled with an iron fist – were good for the country. 
Thaws – periods of democratization and modernization – were bad, characterized by disruption and violence. 
All allusions by the Putin regime to the Stalinist era must reinforce Putin’s own image as a modern benevolent dictator, capable of restoring Russia’s global influence and bringing it prosperity. 
This discourse has driven some local authorities to build monuments to Stalin and Ivan the Terrible, while the federal authorities have ceremoniously erected a monument to Vladimir the Great, who brought Orthodoxy to Kievan Rus. 
How fortuitous that he even shares a name with today’s president. 
In a sense, history is more powerful than policy. 
Propaganda focuses on the military victories of Russia’s “1,000-year history” (copyright: Vladimir Putin), in order to reinforce the image of Russia as a fortress besieged by the hostile West. 
World War II, from which 70 years of liberal democracy emerged in Western Europe, is used in Russia to legitimize the current autocratic regime. 
Glorifying the past can even offset the political ramifications of poor economic performance. 
Consider how Putin’s standing benefited from the annexation of Crimea – a move that he defended in historical terms – despite the devastating impact of that move on Russia’s economy. 
Because that impact was delivered largely via Western sanctions, it fit the guiding hand of Putin’s imperial narrative like a glove. 
But, beyond the biography of a state – the stories of wars, cannonades, military commanders, statesmen, administrative hierarchy, and empire building that comprise Russia’s official history – there is another history. 
It is the history of freedom, encompassing the stories and memories of ordinary people, dissidents, and independent thinkers. 
In its struggle with this counter-history, the regime is trying to nationalize personal stories and biographies. 
When Putin joined the ranks of the informal “Bessmertnyi Polk” (Immortal Regiment) march, in which citizens commemorate loved ones who died in WWII, he turned it into a Kremlin initiative. 
But such efforts cannot obscure the clash between these two histories, reflected perhaps most clearly in the divide between conservatives and liberals on condemning Stalinist repression. 
It is also apparent in discussions about WWII – or the “Great Patriotic War,” as Russians call it – and the turbulent 1990s. 
In that sense, the anniversary of the October Revolution may be viewed as a second-tier event, despite its symbolism. 
Nonetheless, the centenary will offer Putin an opportunity to strengthen his preferred narrative: that Russia, which has always been greatest under powerful national leaders, is now returning to greatness, thanks to the power Putin himself has consolidated. 
This is history, Russian-style: a past made serviceable for present purposes. 

 

Of Banks and Bailouts 
PALO ALTO – Early signs of a manufacturing rebound, already strong in Asia, lend hope for some modest recovery from today’s deep global recession. 
But a strong and durable economic expansion is unlikely until progress is made in dealing with the toxic assets poisoning the balance sheets of financial institutions and bedeviling policymakers almost everywhere. 
The financial system is a complex interaction of lenders and borrowers, buyers and sellers, and savers and investors. 
When it functions well, it balances risk and reward, and innovation and safety. 
Banks and other financial firms borrow short – increasingly in recent years from the commercial securities market, not deposits – and lend long at higher interest rates, taking on both credit risk (of default) and interest-rate risk. 
Increasing leverage boosts returns on the upside but is very risky on the downside. 
No surprise, then, that the large financial firms that failed – Bear Stearns, Fannie Mae and Freddie Mac, AIG, and Lehman Brothers – had the highest leverage, in the range of 30 or 40 times their capital. 
From 2002-2007, trillions of dollars were loaned for sub-prime and prime mortgages, autos, credit cards, commercial real estate, private equity, and more, on the assumption by (most) borrowers and lenders that strong global growth, rising home prices and cheap, readily available short-term credit would continue for the foreseeable future. 
Once the music stopped, the assets plunged in value. 
The complexity of securitized pools of loans that were sold worldwide – bilaterally over the counter – as pieces of various tranches, meant that nobody was certain about who owned what or what it was worth. 
This difficulty in valuing the now so-called toxic assets remains at the core of today’s credit difficulties. 
The immense response by central banks and finance ministries has eased the strain. 
The United States Federal Reserve’s commercial paper facility was helpful in reopening the commercial paper market (although other of its facilities have been less successful). 
The barometer of stress watched most closely by experts, the LIBOR-OIS (Overnight Indexed Swap) spread is down substantially from its stratospheric crisis levels. 
Some government programs are shrinking from lack of demand. 
But there remain little new securitization and bank debt offerings without government backup. 
The original idea for the US government to buy up (some of the) toxic assets with the $700 billion Troubled Asset Relief Program (TARP) gave way to capital infusions (and auto bailouts). 
Treasury Secretary Timothy Geithner’s new public-private investment program to buy toxic assets has few takers, despite subsidized non-recourse financing. 
So the toxic assets remain on bank (and other) balance sheets. 
Can banks generate enough profits for long enough to buy time to write down smaller losses and raise private capital later in a stronger economy? 
Or are the losses so large –and in danger of mounting further as others (such as commercial real estate) are added – that a gradual workout is unlikely, if not impossible? 
Estimates of the losses on US loans and securities range from under $1 trillion to almost $4 trillion. 
The IMF puts them at $2.7 trillion, but the range of uncertainty is enormous. 
More than half is held by banks and broker-dealers. And analogous problems exist in Western Europe (e.g., for loans to Eastern Europe) and Asia. 
Gradualism and profitability, and eventually US Brady bonds, worked in the Latin American debt crisis in the 1980’s. 
But a difficult economy will drive down the value of toxic assets and make more assets toxic. 
For example, falling home prices put more families in negative equity – mortgages worth more than the home. 
This creates an incentive to default, which increases foreclosures and lowers the value of the mortgage-backed securities on financial firms’ books. 
Policymakers need a Plan B in the event that one proves necessary, modeled on America’s rapid resolution of insolvent savings and loans in the early 1990s, together with sales of toxic assets in large blocks (to prevent so-called adverse selection from unraveling any bidding process). 
History is instructive. 
Of the $500 billion that America required for the Resolution Trust Corporation (equivalent to $1¼ trillion today), $400 billion was returned from asset sales, for a net cost of $100 billion, one-tenth the worst-case private forecasts of $1 trillion. 
The final tab on the toxic mortgage bailout and other assets is likely to be a larger percentage of a larger amount, but still far less than the face value of the loans, because the underlying assets will in many cases retain considerable value. 
In addition to bailouts and toxic asset plans, governments worldwide want central banks to monitor macroeconomic and overall financial-sector risk (as opposed to focusing on individual firms). 
Barack Obama’s administration would anoint the Fed, whose history has been to recognize crises late. 
The Bank of England seeks similar powers. 
The European Union wants to establish a European Systemic Risk Board composed of the national central bank governors, chaired by the European Central Bank. 
What will these central bankers do to advise on macro-prudential risk? 
Demand adjustments in large current-account imbalances? 
Call for reductions in taxes, spending, and government debt, which are the primary systemic risks? 
To do that could jeopardize monetary policy independence and heighten the threat of future inflation. 
Dealing with financial institutions deemed too big to fail won’t be easy. 
The current system, which allows privatized gains from highly leveraged risk-taking but socializes losses in the event of failure, must be changed to avoid episodic financial meltdowns. 
To balance the benefits of scale and scope with the socialized losses to taxpayers, firms deemed too big to fail should be required to have more capital, and the amount should rise disproportionately with size. 



Fossil-Fuel Doublespeak 
BERLIN – Since the Paris climate agreement was signed in 2015, too many policymakers have fallen for the oil and gas industry’s rhetoric about how it can help to reduce greenhouse-gas emissions. 
Tall tales about “clean coal,” “oil pipelines to fund clean energy,” and “gas as a bridge fuel” have coaxed governments into rubber-stamping new fossil-fuel projects, even though current fossil-fuel production already threatens to push temperatures well beyond the Paris agreement’s limit of well below 2° Celsius above pre-industrial levels. 
The International Energy Agency (IEA) estimates that in 2016, investment in the oil and gas sector totaled $649 billion, and that fossil-fuel subsidies within the G20 countries amounted to $72 billion. And by 2030, investments in new gas projects across G20 countries are expected to surpass $1.6 trillion. 
Clearly, the industry has pulled out all the stops to expand production and profits before the world moves to a decarbonized economy. 
And so far, it is succeeding, because it has convinced governments of multiple falsehoods. 
For starters, there is the claim that natural gas can be a “bridge fuel” to a stable climate even though its climate impact often equals that of coal – or worse. 
In reality, a “dash for gas” would consume almost two-thirds of G20 countries’ combined carbon budget by 2050. 
Worse, new gas production often displaces not coal, but wind- and solar-energy projects, both of which are now cheaper than coal and gas in many regions. 
The fact that most new investments in gas production assume at least a 30-year operational timeline should be evidence enough that they are not geared toward reducing emissions anytime soon. 
One would expect the European Union to lead the way toward a decarbonized future. 
But, if anything, it seems to be doing the opposite. 
Since 2014, the EU has allocated €1 billion ($1.16 billion) to the natural-gas sector. 
And though the European Commission’s proposed 2020-2027 budget would reduce such funding, it would allow member states to continue spending taxpayers’ money on fossil-fuel production. 
Yet, according to a study by British climate scientists Kevin Anderson and John Broderick, in order to meet its climate commitments, the EU must phase out all fossil fuels by 2035. 
Another industry canard is that income from oil and gas expansion is needed to fund the transition to a clean economy. 
This incoherent claim has underpinned policy in Canada, where the authorities continue to push for major new tar-sands pipelines. 
Most recently, the government stepped in and paid the Texas-based energy firm Kinder Morgan $3.4 billion for a 65-year-old pipeline in order to ensure its planned expansion, which the company had deemed too risky. 
This use of public funds is particularly objectionable because it threatens to lock in the very energy sources that are driving dangerous climate change. 
Implicit in any major new investment in energy infrastructure is that operations will continue for decades, as even if demand and prices fall dramatically, an owner or investor will prefer some income return on that capital rather than nothing. 
As a result, politically and legally, it is much harder to shut down a project than to stop it before it starts. 
A third ingredient of fossil-fuel flimflam is so-called clean coal, often relying on carbon capture and storage (CCS) technologies. 
Governments and the energy industry have long framed CCS as a silver bullet for climate change, and thus as a perfect excuse for postponing meaningful reductions in fossil-fuel use. 
And now, CCS is even being promoted as an enabling technology for magical schemes that can “suck” carbon out of the atmosphere. 
CCS was originally developed for enhanced oil recovery (EOR), whereby pressurized CO2 is pumped into older oil reservoirs to extract otherwise inaccessible crude oil, significantly boosting production, and thus greenhouse-gas emissions. 
The technique has been used for more than 40 years, particularly in the United States. 
But it is costly in terms of both money and energy: a coal-fired power station that adopts CCS must burn even more coal in order to produce the same amount of energy. 
The main reason that oil companies have become such strong proponents of CCS is that it offers them a source of subsidized CO2 for use in EOR. 
Companies such as Shell and Statoil have spent decades and billions of dollars on CCS research and development, and all they have to show for it is a few commercial-scale CCS operations. 
It is already clear that CCS is commercially viable only when used for EOR, which means that coal itself will never be a clean fuel, even if modern filters can be used to reduce particulate air pollution. 
A final claim often made by oil and gas companies is that they can execute any given project more “cleanly” than anyone else. 
Energy companies have been racing to announce new technologies and measures that supposedly improve the efficiency of their current operations, as if that should give them the right to increase production unabated. 
But, as with the rest of the industry’s doublespeak, this logic more often than not leads to further lock-in, as firms sink ever more funding into unproven negative-emissions technologies and other measures that will perpetuate dependence on fossil fuels. 
For example, the Canadian province of Alberta, home of the tar sands, is investing $304 million explicitly to “help [oil sands] companies increase production and reduce emissions.” 
At a time when science and expertise are increasingly being dismissed as elitist conceits, governments that know better should not be helping fossil-fuel companies profit from the mounting climate crisis. 
The industry’s spin machine threatens to trap us all in a dangerous status quo. 
The global climate movement is redefining leadership on this issue, but nongovernmental organizations and activists alone cannot usher in a decarbonized future. 
Governments that claim to be committed to the Paris accord must offer a robust plan for phasing out fossil fuels, rather than supporting that sector’s continued expansion. 

Oil Currency Hypocrisy 
CAMBRIDGE – Does it make sense for United States Treasury Secretary Hank Paulson to be touring the Middle East supporting the region’s hard dollar exchange-rate pegs, while the Bush administration simultaneously blasts Asian countries for not letting their currencies appreciate faster against the dollar? 
Unfortunately, this blatant inconsistency stems from the US’s continuing economic and financial vulnerability rather than reflecting any compelling economic logic. 
Instead of promoting dollar pegs, as Paulson is, the US should be supporting the International Monetary Fund’s behind-the-scenes efforts to promote de-linking of oil currencies and the dollar. 
Perhaps the Bush administration worries that if oil countries abandoned the dollar standard, today’s dollar weakness would turn into a rout. 
But the US should be far more worried about promoting faster adjustment of its still-gaping trade deficit, which in many ways lies at the root of the recent sub-prime mortgage crisis. 
The administration’s multi-pronged effort to postpone pain to US consumers, including super easy monetary and fiscal policy, only risks a greater crisis in the not-too-distant future. 
It is not at all hard to imagine the whole strategy boomeranging in early 2009, soon after the next US president takes office. 
Of course, a strengthening of the oil currencies (including not only the Gulf States, but also other Middle East countries and Russia) would not turn around the US trade balance overnight. 
But oil countries do account for a large share of the world’s trade surpluses, and a weaker dollar would help promote US exports to some degree, even in the short run. 
More importantly, it is imperative for US policies to be consistent across regions. 
How can the US Treasury, on the one hand, periodically flirt with labeling China a “currency manipulator” and, on the other hand, condone a similar strategy in oil-exporting countries? 
Of course, one can imagine other reasons for US supplication to the oil states. 
Perhaps the administration worries that it cannot simultaneously beg for lower dollar oil prices and help promote a weaker dollar. 
But, contrary to popular opinion, the two actually have little to do with each other. 
Oil prices are set in a world market, and depend mainly on the quantities demanded and supplied by different regions, not the currency of payment. 
It is not at all clear that the dollar price of oil would evolve any differently if the euro, rather than the dollar, were the reference currency. 
Secretary Paulson has emphasized that the US is “open for business” from sovereign wealth funds. 
One can hope that his confidence is justified. 
There is no cause for the US to place any significant new restrictions on sovereign investments in the US beyond those that it already has on trade. 
Besides, the US needs these investments to help re-capitalize its badly weakened financial system. 
However, even if we can agree on keeping the US open to sovereign wealth fund investments, that is no reason for promoting exchange-rate policies that exacerbate the very trade imbalances that are driving the whole sovereign wealth fund phenomenon in the first place. 
Then again, perhaps the Bush administration is worried that if the oil currencies strengthen too much against the dollar, it will start becoming too expensive for the US to scale up its military operations in the Middle East. 
This, too, is wrong-headed. 
If a cheaper dollar leads to an invasion of US exports to the Middle East and rising living standards in the region, all parties will be far better served. 
What about the interests of the oil countries themselves? 
Are they right to fear potentially catastrophic results from abandoning the dollar? 
As with China, these concerns are overblown. 
Even with the prevalence of dollar indexation across the region, exchange-rate appreciation would still help promote cheaper imports and higher living standards. 
Moreover, as public confidence in the de-linked oil currencies increases over time, dollar indexation of private contracts will diminish, and currency movements will have a greater impact on overall prices. 
More immediately, inflation across the oil states is soaring today, with CPI inflation in the Middle East averaging more than 6% after years of relative stability. 
If this inflation is allowed to continue and deepen, it is likely to have effects easily as pernicious as the exchange-rate appreciation the region’s leaders are striving so hard to avoid. 
Perhaps the most important positive effect of exchange-rate appreciation would be to help promote the development of domestically-oriented industries such as health care, education, and banking, thereby alleviating some of the region’s mass underemployment. 
To be sure, there are important differences between the oil exporters and the Asian economies. 
With world energy prices at record highs, it makes sense for oil economies to run surpluses, thereby saving for when oil supplies eventually peter out. 
But flexible exchange rates are still the right way for the region to develop a more balanced economic and financial base. 
As for the US, it makes little sense to support dollar currency pegs in any large emerging market, at least until its trade balance normalizes. 

Oil in the Gulf, Then and Now 
VIENNA – On April 20, an explosion on Deepwater Horizon, a British Petroleum (BP)- operated oil rig in the Gulf of Mexico, led to the most publicized oil spill in decades. 
Another blowout in the same waters 31 years ago, farther south on the Mexican side of the Gulf, turned into the largest peacetime oil spill ever. 
The platform where that accident happened, called Ixtoc 1, was operated by Pemex, the state-owned Mexican oil company. 
The two accidents and the spills they caused have a number of similar features, although marine oil spills in general have profoundly changed in character in the three decades between the two events. 
Oil tankers used to be responsible for the bulk of oil that was spilled. 
Tank-washing gave rise to a huge number of small spills, and tanker accidents such as those involving the Torrey Canyon, Exxon Valdez, Metula, and St. Peter resulted in huge, concentrated spills. 
Blowouts were not infrequent, but most occurred on land or in shallow water, and most could be stopped relatively easily. 
The ban on tank-washing, technical features such as double hulls and sectioning of tanks, introduction of one-way sea lanes and, most important, the use of Global Positioning Systems, have greatly reduced the amount of oil entering the sea from tankers. 
Meanwhile, the technology used at drilling and production platforms has developed tremendously, but the challenges regarding depth, weather, and sediment structure have grown even more, as easy-to-exploit oil fields have been exhausted. 
Blowouts have become the most troublesome type of oil spills, and in deep water they tend to continue for a considerable time because of the difficulties faced in containing them. 
After the explosions at Deepwater Horizon and Ixtoc, oil and gas under high pressure entered the water at the seabed. 
This resulted in a three-phase emulsion of oil, gas, and water that also contained sand and dirt particles. 
The properties of this oil emulsion differ from normal crude oil. 
Some part of it will float on the surface, but parts may also form plumes at different depths in the water mass. 
Standard aerial or satellite imaging techniques to measure the quantity of oil spilled do not work well. 
In the Ixtoc case, using such methods, Pemex (wanting to keep the loss figure low) estimated the spill to amount to a little under a half-million tons. 
A United Nations expert group that I led put the figure significantly higher. 
Similarly, whereas BP has been using a release figure of 800 tons per day From Deepwater Horizon, estimates by independent experts are many times higher. 
Pemex tried to put a device called a “sombrero” over the Ixtoc leak to collect the oil at the ocean floor, but the plan failed because the structure could not be kept in place. 
Formation of methane hydrate was noted, but was not decisive. 
In the case of Deepwater Horizon, a huge dome could be put in place, despite the greater depth, thanks to deployment of modern unmanned underwater vehicles, robots, and positioning tools, but the formation of methane hydrates clogged the device and rendered it useless. 
In both cases, efforts were made to burn off the oil from the ocean’s surface. 
But, as the 1967 Torrey Canyon experience showed – the stranded tanker was bombed with napalm – oil on water doesn’t burn well, and the emulsified oil called “chocolate mousse” hardly burned at all. 
Whether or not to “disperse” oil has been a key strategic question since combating spills began in earnest in the 1960’s. 
The answer depends on whether the priority for protection is birds and beaches, or other forms of marine life such as fish, shrimps, and mollusks. 
If it’s birds and beaches, disperse; if it’s fisheries, don’t. 
The decision has an obvious public-relations dimension. 
Oil-contaminated birds and beaches make appalling pictures, whereas dead fish and shrimp larvae go unnoticed by cameras. 
The damage caused by the Ixtoc spill was huge. 
Beaches, mostly in Mexico but to some extent also in the United States, were hit, and birds succumbed in large numbers, despite the dispersion efforts. 
Because of the dispersion, shrimp, squid, and some fish populations suffered, with fisheries hit even harder. 
Where the concentrations of un-weathered oil components are highest, water-breathing organisms die. 
In a much larger area, they become tainted and rendered useless as food products. 
In an even larger area – and for a much longer time – consumers reject the products. 
After Ixtoc, the blow to the Mexican fisheries became a blessing in disguise. 
The dramatic reduction in fishing pressure allowed the devastated populations to recover, and five years later one had to look carefully to spot either remaining oil or damaged populations. 
The high temperatures of the Gulf of Mexico helped, as recovery proceeds much faster in warm waters than in cold. 
It took nine months to cap the Ixtoc well. 
Drilling a release well finally did the job of stopping the flow of oil. 
Deepwater Horizon is still spewing oil into the Gulf of Mexico, even though BP has succeeded in inserting a smaller pipe into the main leakage to suck off part of the flow. 
It is far too early to assess the ecological damage and economic losses to fisheries and tourism from the Deepwater Horizon spill. 
It is a safe bet that shrimp and squid populations will suffer, as they did in the Ixtoc case, but so is a close-to-complete recovery within a limited number of years. 

Oil is America's Motive for War 
All around the world people ask: what is the real motive for the Bush Administration's threatened war with Iraq? 
Is it to curb weapons of mass destruction? 
Is it more personal, an act of vengeance by a son against the man who attempted to assassinate his father? 
Is it to defend Israel? 
Is it to reinvent the Middle East as a more democratic region, as many of the Bush Administration's leading voices insist? 
Or is it, as some suspect, so that America can get its hands on Iraqi oil? 
The Bush administration has offered a range of justifications for its plans, although with a fairly consistent emphasis on weapons of mass destruction. 
Deputy Secretary of Defense Paul Wolfowitz talks about making Iraq the "first Arab democracy." 
Many in the Bush Administration argue that aggressive policies toward Iraq can ultimately bring down autocratic governments in the Middle East the same way that the Reagan Administration supposedly brought down the "evil" Soviet empire. 
Outside of America, almost nobody buys these arguments. 
Most believe that oil ranks at the top of America's list of motives. 
Short of the US national security archives suddenly falling open, we are unlikely to find a definitive account of the President's innermost thoughts. 
Moreover, different US officials certainly have different priorities. 
President Bush may focus on weapons of mass destruction; Mr. Wolfowitz may target democracy. 
Others may have their eyes firmly on the prize of Iraqi oil. 
A more fruitful question than an inquiry into America's motives is how the US will act once war comes. 
Here we don't have to rely on second-guessing individuals. 
We can examine America's behavior in recent history. 
Looking at the historical record, it is difficult to believe that the US will give the Middle East a democratic makeover. 
Today's Middle East is a construction of the US and Europe. 
Its despots and monarchs owe their positions to the machinations and connivance of the West. 
Even if America goes off to war waving the banner of democracy, the results are likely to be less glorious. 
In the end, this will likely be a war for Iraqi oil. 
Throughout the 20 th century, Arab self-determination, democracy, and economic reform took a back seat to oil. 
When the British inveigled Arab chieftains to fight on behalf of the British empire in World War I, the Arabs were not rewarded with sovereignty at the Great War's end, but with ongoing British and French suzerainty. 
Whenever real democracy in the Middle East threatened American control over oil reserves, democracy was jettisoned. 
Consider the CIA-backed coup against Iranian Prime Minister Mussadegh. 
In 1951, Mussadegh nationalized Iran's oil industry, prompting a British boycott the next year and then US-backed intervention (which toppled and jailed the popular Prime Minister) in 1953. 
A similarly instructive case is the West's support for a military crackdown in Algeria after democratic elections in early 1992 threatened to bring the Islamic Salvation Front (FIS) to power. 
When the FIS seemed headed to victory, Algeria's army stepped in to prevent continuation of the vote. 
Western governments, led by France but with US backing, gave moral and financial support to Algeria's generals. 
American behavior in former Soviet Central Asia is equally vivid. 
Many in the Bush Administration point to its work in this region as a showcase for how they will reshape the Middle East. 
Yet democracy has absolutely nothing to do with American policy in Central Asia, where US oil companies and diplomats trip over each other promoting deals in despotic Kazakhstan, Turkmenistan, and Uzbekistan. 
A good window on postwar US policy in Iraq can be found in key documents written by and for the Bush Administration before September 11, when the analysis of the Middle East was much less infected by today's fears. 
Probably the most interesting document is a study entitled "Strategic Energy Policy Challenges of the 21 st Century," produced by the James Baker III Institute for Public Policy at Rice University in Texas and the Council on Foreign Relations. 
The study makes clear two points. 
First, Iraq is vital to oil flows from the Middle East, as it sits on the second largest reserves in the world. 
The report agonizes over the fact that for economic security reasons America needs Iraqi oil, but that for military security reasons the US can't allow Saddam to develop the oil. 
The implication seems clear: the US needs a new Iraqi regime for its energy security. 
Democracy is not mentioned anywhere in the study. 
This document also provides an interesting glimpse into the preoccupations of officials like Vice President Dick Cheney and Defense Secretary Donald Rumsfeld. 
Both men entered national leadership under President Gerald Ford in 1974, during the Arab oil embargo, which unleashed huge economic shocks that doomed Ford's presidency. 
The "Strategic Energy Policy Challenges" study puts enormous weight on the threats of a similar disruption today. 
The 1970s embargo was evidently a defining moment in the strategic thinking of Messrs. Cheney and Rumsfeld. 
The Bush Administration may believe that it is going to war to fight for democracy in the Middle East, but US support for real democracy stands to be an early victim. 
Sadly, a war fought for oil will be one that further destabilizes international politics and society, and undermines the true security of the US and the world. 

Cheap Oil’s Silver Lining for the Gulf 
BEIRUT – In June 2014, a barrel of Brent crude – the main benchmark of the international oil market – sold for $115. 
Today, less than two years later, the price is $45 – or even less. 
Not surprisingly, that collapse has been a massive shock to Saudi Arabia and the Gulf oil sheikhdoms, which rely on oil for some 85% of their revenues. 
And what they need to realize is that, unlike past price declines, this one will not be transitory. 
This “new normal” for oil reflects new realities: China’s economic growth – and so its demand for oil – is bound to be lower; the world’s energy efficiency will increase, not least because of commitments made in December at the Paris conference on climate change; and disruptive innovation is making shale oil and gas, along with renewable energy sources, far more competitive. 
With the return of Iran, Libya, and Iraq as major oil exporters, low oil prices must surely be both inevitable and enduring. 
Saudi Arabia and the other Gulf states should not let this crisis go to waste. 
They now have a perfect opportunity finally to undertake comprehensive economic reforms. 
Their aim should be a new development model that frees them from dependence on hydrocarbons. 
The fiscal buffers from past oil revenues can provide the six countries of the Gulf Cooperation Council (GCC) with short-term relief. 
But they must use that window to launch the structural reforms needed to achieve sustainable economic growth, macroeconomic stability, and the sound and equitable exploitation of their oil and gas reserves. 
That means economic diversification, which can be achieved only by reducing the size of government and removing the obstacles that stymie the private sector. 
A radical reform of the Kafala system, which monitors and regulates migrant labor, would remove a major barrier to labor mobility. 
But governments must also introduce the legal and regulatory frameworks needed for privatization and public-private partnerships (PPPs). 
Sadly, only Kuwait and Dubai have so far moved to allow PPPs, while only Saudi Arabia intends to privatize airports (Jeddah and Dammam). 
Privatization and PPPs in infrastructure, energy, health, education, transport, and logistics could attract massive domestic and foreign investment. 
So, too, would legislation to allow full ownership of enterprises by foreigners and the proper protection of their property rights – which would have the added benefit of encouraging expatriates to save and invest locally. 
Dubai’s free-trade zones are a testament to the success that comes with liberalization and the removal of barriers to foreign ownership and management. 
Fiscal reform must also be a high priority. 
Wasteful government expenditures and subsidies account for some 8% of non-oil GDP (5% of total GDP) in the GCC states. 
Energy subsidies – so ingrained in the GCC economies – distort consumption and production patterns; defeat government attempts at economic diversification; and increase vulnerability to volatile international energy prices. 
Eliminating the subsidies would not only stimulate investment in energy efficiency and solar power, but would also generate substantial environmental and public-health benefits. 
Similarly, if the region’s governments were to introduce efficient, equitable pricing of public services and utilities – including water, electricity, and transport – they would create fiscal room to promote job creation with schemes linking education and employment. 
Instead of government spending crowding out the private sector, there could be development spending to “crowd in” the private sector. 
The other imperative is to diversify government revenue. 
The prevailing tax regime across the Gulf is not fit for purpose, has limited ability to influence private-sector behavior, and rules out counter-cyclical fiscal policy. 
From 2012 to 2014, the GCC’s non-oil tax revenues averaged only about 1.6% of GDP. 
As a first step, the GCC states are moving toward new tax regimes in early 2018, including a value-added tax, a corporation tax, property taxes, and taxes on fuel, tobacco, and alcohol. 
At 5%, the VAT could raise a modest 1.5-2% of GDP in revenue. 
But why not go further? 
A $0.52 carbon tax per liter could raise over $50 billion annually for Saudi Arabia, substantially reducing this year’s projected budget deficit of $90 billion. 
As a third step, the GCC countries should issue debt and sukuk (Sharia-compliant bonds) to finance budget deficits as well as development projects and infrastructure investment. 
The GCC countries have low levels of government debt and can run moderate budget deficits without jeopardizing fiscal sustainability. 
But developing their financial markets would allow the private sector to tap the GCC’s plentiful financial resources invested outside the Gulf. 
Finally, the GCC needs to favor greater exchange-rate flexibility and monetary independence. 
Traditionally, its governments have pursued expansionary policies during economic booms and tightened their belts in downturns. 
Pegging their currencies to the US dollar has aggravated this pro-cyclical pattern. 
While the peg gives GCC currencies credibility, it has prevented real depreciation and fails to reflect the deep structural changes in GCC members’ economic and financial links over the past three decades – particularly the shift away from the United States and Europe and toward China and Asia. 
Instead, the GCC countries should peg their currencies to a basket comprising the dollar, the euro, the yen, and the renminbi. 
If the basket also included oil, GCC currencies could depreciate in line with a falling price – and rise if and when it recovers. 
The bottom line is that economic diversification – so long preached rather than implemented – is now a necessity for the Gulf’s oil states. 
As the cliché has it, necessity is the mother of invention. 
The GCC should embrace it. 

Cheap Oil for Change 
WASHINGTON, DC – The recent decline in oil prices is likely to have a major, largely positive impact on the global economy – even greater than most observers seem to recognize. 
Indeed, if governments take advantage of lower oil prices today to implement critical energy-policy reforms, the benefits may improve structural features of their economies tomorrow. 
A key reason why the price decline’s impact has so far been underestimated is that nobody knows how long it will last. 
And, indeed, past price movements provide little guidance in this regard. 
When prices plunged in 2008, they shot back up almost faster than experts could say “new normal”; after the 1986-1987 drop, prices remained low for a decade and a half. 
This time, the price trajectory is likely to be determined by a new player in the energy game: shale oil. 
The marginal cost of shale-oil production (the expense of continuing to pump an existing well) varies from $55 to $70 per barrel. 
Add a $5 profit margin, and the oil-supply curve now has a long, near-horizontal segment in the range of about $60-75 per barrel. 
Regardless of demand, this will be the natural nesting range for the price of oil – call it the “shale shelf” – and will likely remain in place for a protracted period. 
This provides some insight into OPEC’s decision last November not to curtail supply. 
Saudi Arabia correctly reasoned that cutting output would not boost prices, but simply concede space for new players to step in and grab market share. 
Of course, this pattern could be disrupted, if, say, a war or major conflict in an oil-exporting region constrained supply enough to cause prices to spike beyond the shale shelf. 
But, in the absence of a major unexpected shock, oil companies will remain under pressure to continue selling oil, even at low prices, as they struggle to service the large debts they incurred on investments when oil prices were high. 
This pressure is precisely what drove oil prices so low in December and January. 
Given this, it is reasonable to expect the oil supply to remain plentiful, and prices to remain moderate, through 2016 – a trend that will boost global growth by an estimated 0.5 percentage points over this period. 
The impact will be especially large for countries like India and Indonesia, where the bill for oil imports amounts to as much as 7.5% of GDP. 
In fact, India’s current account, which has been in deficit for years, is likely to record a surplus this year. 
This creates a unique opportunity for energy-policy reform. 
In far too many countries, fuel is heavily subsidized, straining government budgets and encouraging wasteful consumption. 
Low oil prices offer an ideal opening to reduce subsidies, thereby releasing funds that governments can spend on basic services and social-welfare programs that advance poverty reduction. 
But advising countries simply to lower subsidies is often meaningless. 
In countries where the government dictates gas prices – like India and Indonesia did until recently (and, to some extent, continue to do) – lower market prices would reduce the subsidy automatically. 
That is why holding down subsidies is inadequate for such countries. 
The goal should be to shift from a fixed-price system, with occasional government-decreed adjustments, to a market-based price regime, in which the government makes a credible pledge not to limit prices, with the exception of pre-defined extreme circumstances. 
While such a move would have a negligible effect on prices now, it would provide countries with a huge advantage during future oil-price fluctuations, because consumers and retail suppliers would no longer be cut off from price signals. 
Amid all of this good news, two serious concerns stand out. 
In the short run, declining oil prices create grave challenges for those who, having invested in expanding production when prices were high, now face large costs and failing businesses. 
More problematic, lower oil prices encourage excessive consumption – the long-term environmental impact of which will be compounded by the weakening incentive to invest in alternative energy sources. 
Policymakers must recognize these risks, and implement policies to mitigate them. 
Specifically, governments should divert the money they save on oil and subsidies to targeted programs aimed at helping people escape poverty, and they should incorporate into their tax regimes incentives for innovation and investment in clean energy. 
With the correct approach, today’s oil-price volatility could turn out to be a critical turning point on the path toward a more sustainable future, characterized by shared prosperity and genuine progress on poverty reduction. 
The direction to take is clear. 

Oil Dictator Dominos 
LONDON – Price movements as large and rapid as those that have upended oil markets since June 2014 are sure to cause pain to some and benefit others. 
Though the pain tends to capture the most attention, the benefit is just as important – if not more so. 
The 70% drop in the price of a barrel of crude represents a colossal transfer of $3 trillion in annual income from oil producers to oil consumers. 
As a result, while sliding equity markets and a further decline in oil (and other commodity) prices have sparked much talk of another global recession, dire predictions are likely to prove overly gloomy and misdirected. 
To be sure, the dramatic drop in the price of oil will produce winners and losers. 
But the biggest dangers will be political, not economic. 
The shift in fortunes can perhaps best be seen on the boarding passes of International Monetary Fund officials. 
Rather than going to Athens, they are now heading for Baku. 
Indeed, Central Asia’s oil-producing dictatorships, including Azerbaijan, have been among the countries hardest hit by the drop in prices – especially because, as ex-Soviet states, they remain heavily dependent on trade with Russia, another oil producer. 
The biggest beneficiaries of the price slump will be the highly indebted, oil-importing countries of the eurozone: Greece, Italy, and Spain (Germany, too, is likely to benefit). 
Their export markets in emerging economies will suffer, damping hopes of a trade-led recovery, but that negative effect stands to be more than offset by the windfall from a big drop in energy costs. 
Growth in the eurozone will be based on the resulting increase in domestic demand, rather than exports. 
The United States and the United Kingdom are simultaneously energy producers and importers, so the impact on their economics is likely to be more complicated. 
In 2013 and 2014, energy firms dominated business investment, and cutbacks in the sector will translate into lost jobs and dropping demand for the manufacturers and service companies supplying the industry. 
On the other hand, consumer spending in both countries stands to rise. 
While US consumers have so far saved a large proportion of the windfall they have received through cheaper gasoline prices, the gains for households are starting to translate into higher levels of spending. 
Economists are likely to spend months puzzling over why the effect of low oil prices has proved slow to emerge in the consumption statistics. 
But, ultimately, emerge they will, as they have every time such a large fall has occurred. 
The more important question is one for political scientists: Which governments will collapse this year, and with what consequences? 
It is no coincidence that the last emerging-markets crisis, in 1997-1998, was also associated with a dramatic fall in oil prices. 
In that case, the two biggest victims were a dictator in Indonesia and a fragile democrat in Russia. 
In May 1998, nine months after the beginning of East Asia’s financial crisis, Indonesian President Suharto resigned after 31 years in office. 
A few months later, Russia defaulted on its sovereign debt as its currency collapsed. 
On December 31, 1999, President Boris Yeltsin resigned, leaving the country in the hands of his recently appointed prime minister, Vladimir Putin. 
In attempting to predict which governments might face a similar fate this time, the basic criteria – in addition to the oil slump’s financial impact – are resilience and flexibility. 
Does a regime have the financial reserves with which to cushion the shock and buy time to adjust? 
Does a country have a robust banking system? 
Can its political system contain growing popular frustration or channel it through existing institutions? 
Oil-dependent regimes that fail to meet these criteria are in trouble. 
This analytical framework yields surprising insights. 
As much as pundits like to predict the collapse of the Saudi Arabian monarchy, they are likely to be disappointed once again. 
The country is the world’s lowest-cost oil producer; and, though its political rigidity is beyond question, it is showing economic flexibility by cutting its budget and introducing wide-ranging reforms. 
Russia, however, for all its bluster, may prove less fortunate. 
Its political robustness is not matched by financial and economic resilience. 
Putin will try to mask the pain, but at some point it is likely to become debilitating. 
The potential victims are many, with worrying implications for geopolitical stability worldwide. 
Venezuela has been in financial crisis since long before the oil crunch, and Nigeria is looking a lot like Russia in 1998 – a fragile democracy facing a currency crisis. 
As to who might become the next Suharto in the coming months, my best guess is one or more of the Central Asian oil autocrats in Azerbaijan, Kazakhstan, and Turkmenistan. 
In any case, this year promises to be interesting – and harrowing, if you happen to be a dictator clinging to power in an oil-exporting country. 


The Geopolitical Impact of Cheap Oil 
CAMBRIDGE – The price of oil has fallen more than 25% in the past five months, to less than $80 a barrel. 
If the price remains at this level, it will have important implications – some good, some bad – for many countries around the world. 
If it falls further, as seems likely, the geopolitical consequences on some oil-producing countries could be dramatic. 
The price of oil at any time depends on market participants’ expectations about future supply and demand. 
The role of expectations makes the oil market very different from most others. 
In the market for fresh vegetables, for example, prices must balance the supply and demand for the current harvest. 
By contrast, oil producers and others in the industry can keep supply off the market if they think that its price will rise later, or they can put extra supply on the market if they think the price will fall. 
Oil companies around the world keep supply off the market by reducing the amount of oil that they take out of the ground. 
Oil producers can also restrict supply by holding oil inventory in tankers at sea or in other storage facilities. 
Conversely, producers can put more oil on the market by increasing production or by running down their inventories. 
The market expectations reflected in today’s price reflect lower future demand and increased future supply. 
Lower demand reflects both the current weakness of economic activity, particularly in Europe and China, and, more important, the longer-term changes in technology, which will increase cars’ fuel efficiency and induce the use of solar power and other non-oil energy sources. 
The increase in the future potential supply of oil reflects new output produced by fracking, the development of Canada’s tar sands, and Mexico’s recent decision to allow foreign oil companies to develop the country’s energy sources. 
These changes in demand and supply suggest that the future price of oil will be lower than industry participants expected until just a few months ago. 
Some of the recent changes in expected future demand and supply could have been anticipated earlier. 
But there is no way to know when attitudes and expectations will change. 
The historic volatility of oil prices reflects these psychological shifts as well as changes in objective reality. 
Today’s oil price is also linked to anticipated future interest rates. 
More specifically, oil producers have an investment choice: They can increase production now, selling the additional oil at today’s price and investing the proceeds at the existing long-term interest rate, or they can leave the oil in the ground as an investment. 
A low rate of interest encourages producers to leave oil in the ground. 
When the current abnormally low interest rates on long-term bonds rise over the next few years, it will become more attractive for producers to increase the supply of oil and invest the resulting income at the higher rate. 
Unless expectations about the fundamentals of future supply and demand change, the rise in the interest rate will cause oil prices to fall further. 
The low price of oil is good news for the United States economy, because it implies higher real incomes for American consumers. 
Within the US, the lower price is transferring real income from oil producers to households, which raises short-term demand because households spend a higher proportion of their incomes than oil firms do. 
For the same reason, the lower price also gives a boost to aggregate demand in Europe, Asia, and other oil-importing regions. 
The big losers from falling oil prices include several countries that are not friends of the US and its allies, such as Venezuela, Iran, and Russia. 
These countries are heavily dependent on their oil revenue to support their governments’ spending – especially massive transfer programs. 
Even at $75 or $80 a barrel, these governments will have a difficult time financing the populist programs that they need to maintain public support. 
Although Saudi Arabia and several of the Gulf states are also major oil exporters, they differ from other producers in two important ways. 
First, their cost of extracting oil is extremely low, which means that they will be able to produce profitably at the current price – or even at a much lower price. 
Second, their enormous financial reserves allow them to finance their domestic and international activities for an extended period of time, as they seek to transform their economies to reduce their dependence on oil revenue. 
A further decline in the price of oil could have major geopolitical repercussions. 
A price of $60 a barrel would create severe problems for Russia in particular. 
President Vladimir Putin would no longer be able to maintain the transfer programs that currently sustain his popular support. 
There would be similar consequences in Iran and Venezuela. 
It is not clear whether these countries’ current regimes could survive a substantial and sustained future decline in oil prices. 
By contrast, it is obvious that oil-importing countries would benefit greatly – as they already are. 

Oil Prices and Global Growth 
CAMBRIDGE – One of the biggest economic surprises of 2015 is that the stunning drop in global oil prices did not deliver a bigger boost to global growth. 
Despite the collapse in prices, from over $115 per barrel in June 2014 to $45 at the end of November 2015, most macroeconomic models suggest that the impact on global growth has been less than expected – perhaps 0.5% of global GDP. 
The good news is that this welcome but modest effect on growth probably will not die out in 2016. 
The bad news is that low prices will place even greater strains on the main oil-exporting countries. 
The recent decline in oil prices is on par with the supply-driven drop in 1985-1986, when OPEC members (read: Saudi Arabia) decided to reverse supply cuts to regain market share. 
It is also comparable to the demand-driven collapse in 2008-2009, following the global financial crisis. 
To the extent that demand factors drive an oil-price drop, one would not expect a major positive impact; the oil price is more of an automatic stabilizer than an exogenous force driving the global economy. 
Supply shocks, on the other hand, ought to have a significant positive impact. 
Although parsing the 2014-2015 oil-price shock is not as straightforward as in the two previous episodes, the driving forces seem to be roughly evenly split between demand and supply factors. 
Certainly, a slowing China that is rebalancing toward domestic consumption has put a damper on all global commodity prices, with metal indices also falling sharply in 2015. 
(Gold prices, for example, at $1,050 per ounce at the end of November, are far off their peak of nearly $1,890 in September 2011, and copper prices have fallen almost as much since 2011.) 
New sources of oil supply, however, have been at least as important. 
Thanks to the shale-energy revolution, American oil production has risen from five million barrels per day in 2008 to 9.3 million barrels in 2015, a supply boom that has so far persisted, despite the price collapse. 
Anticipation of post-sanctions Iranian oil production has also affected markets. 
A decline in oil prices is to some extent a zero-sum game, with producers losing and consumers gaining. 
The usual thinking is that lower prices stimulate global demand, because consumers are likely to spend most of the windfall, whereas producers typically adjust by cutting back savings. 
In 2015, though, this behavioral difference has been less pronounced than usual. 
One reason is that emerging-market energy importers have a much larger global economic footprint than they did in the 1980s, and their approach to oil markets is much more interventionist than in the advanced countries. 
Countries such as India and China stabilize retail energy markets through government-financed subsidies to keep price down for consumers. 
The costs of these subsidies had become quite massive as oil prices peaked, and many countries were already looking hard for ways to cut back. 
Thus, as oil prices have fallen, emerging-market governments have taken advantage of the opportunity to reduce the fiscal subsidies. 
At the same time, many oil exporters are being forced to scale back expenditure plans in the face of sharply falling revenues. 
Even Saudi Arabia, despite its vast oil and financial reserves, has come under strain, owing to a rapidly rising population and higher military spending associated with conflicts in the Middle East. 
The muted effect of oil prices on global growth should not have come as a complete surprise. 
Academic research has been pointing in this direction for a long time. 
Oil is now thought to be less of an independent driver of business cycles than was previously believed. 
Also restraining growth is a sharp decline in energy-related investment. 
After years of rapid growth, global investment in oil production and exploration has fallen by $150 billion dollars in 2015. 
Eventually, this will feed back into prices, but only slowly and gradually: Futures markets have oil prices rising to $60 per barrel only by 2020. 
The good news for 2016 is that most macroeconomic models suggest that the impact of lower oil prices on growth tends to stretch out for a couple years. 
Thus, low prices should continue to support growth, even if emerging-market importers continue to use the savings to cut subsidies. 
For oil producers, though, the risks are rising. 
Only a couple – notably governance-challenged Venezuela – are in outright collapse; but many are teetering on the brink of recession. 
Countries with floating exchange rates, including Colombia, Mexico, and Russia, have managed to adjust so far, despite facing significantly tighter fiscal constraints (though Russia’s situation remains especially vulnerable if low oil prices endure). 
By contrast, countries with rigid exchange-rate regimes are being tested more severely. 
Saudi Arabia’s long-standing peg to the dollar, once apparently invulnerable, has come under enormous pressure in recent weeks. 
In short, oil prices were not quite as consequential for global growth in 2015 as seemed likely at the beginning of the year. 
And strong reserve positions and relatively conservative macroeconomic policies have enabled most major producers to weather enormous fiscal stress so far, without falling into crisis. 
But next year could be different, and not in a good way – especially for producers. 

The Abnormality of Oil 
LONDON – Writing about oil prices is always risky. 
In a January 2015, I suggested that oil prices would not continue to fall, and even predicted that they would “finish the year higher than they were when it began.” 
I was wrong then; but I might not be wrong for much longer. 
I recently spoke at the massive Abu Dhabi Petroleum Exhibition and Conference (ADIPEC), which is a kind of Davos for oil-market participants. 
While there, I caught the tail end of a discussion among senior oil executives who all agreed that at this time next year, crude oil will still be around $60 per barrel, as it is today. 
I was about to be interviewed by the CNBC reporter Steve Sedgwick, to whom I said, “That would be a first. Oil prices hardly moving in a year?” 
Needless to say, Sedgwick began the interview by telling the audience what I had said, and quizzed me on why I disagreed with the others. 
Before I get to my explanation, let me state the usual caveats. 
Forecasting oil prices is inevitably a fraught endeavor; in fact, it makes forecasting currency markets look easy. 
When I completed a doctorate on oil markets in the late 1970s and early 1980s, I had already concluded that trying to guess oil prices is a waste of time and energy. 
Later, when I was at Goldman Sachs, I was often amused to see commodity analysts in my research group struggling to cope with the usual chaos of oil-price developments. 
While interviewing me, Sedgwick raised an interesting point: Given that the volatility of many other asset prices has declined sharply in recent years, it might just be a matter of time before oil and other commodity prices do the same. 
To be sure, that could very well happen. 
In principle, he is right. 
But I would argue that the decline in volatility in currency, bond, and equity markets largely reflects low inflation in many parts of the world, and the lack of significant monetary-policy adjustments by major central banks in recent years. 
I’m not sure that these factors apply to oil in the same way, especially at a time when energy markets are on the cusp of big changes in supply and demand. 
On the demand side, market commentators are finally waking up to something that has been pretty clear for most of 2017: the world economy has gained momentum, and is now probably growing at a rate of 4% or higher. 
With the exception of India and the United Kingdom, eight of the ten largest economies are expanding at the same time. 
And even as many countries try to wean themselves off oil, that transition will not happen overnight. 
Accordingly, oil markets are adjusting to stronger demand. 
On the supply side, the world’s most important marginal supplier of oil, Saudi Arabia, has suddenly drawn a lot of wary eyes. 
The Saudi government has been implementing radical changes, both domestically and in its foreign policy, and its reasons for doing so are not entirely clear. 
Not surprisingly, market participants suddenly want to add a premium to the price of oil. 
In my two speeches at ADIPEC, I shared a slide with trend lines for the Brent crude oil spot price and the five-year forward price. 
I have long defaulted to watching the five-year forward price for lack of a more fundamentals-based approach to thinking about the equilibrium price of oil. 
As I explained in January 2015, the Brent crude oil spot price is less subject to speculative fluctuations, and is thus a purer approximation of underlying commercial supply and demand factors. 
The chart I prepared – which was made before the latest oil-price acceleration in early November – shows the five-year forward oil price picking up after a period of some stability. 
With the spot price having now moved above the five-year forward price, one could conclude that a trend change is underway. 
For my part, I’m unsure; but I wouldn’t be surprised if it happened. 
Let us return to Sedgwick’s question. 
While oil prices could be around $60 per barrel in November 2018, my guess is that they will have risen to around $80 per barrel in the meantime. 
Sedgwick also asked me how oil companies might be able to make their investment and operational decision-making less beholden to cyclical factors. 
Is it possible for oil companies to temper their excitement during periods of rising prices, and not to fall into a malaise when prices are low for lengthy periods? 
It’s a tough question. 
My answer is that oil companies need to complete the commodity-analysis quest that I started but never finished. 
They must come up with a credible method for estimating the underlying equilibrium price of oil. 
Then, as soon as the oil price exceeds two standard deviations of that equilibrium, they should start to ignore the fashionable advice of colleagues, analysts, and industry insiders. 

Oil’s Upward March 
IRVING, TEXAS – When OPEC members met in Vienna recently, the Saudis failed to control the meeting, OPEC’s production ceiling remained unchanged, and member countries are setting their own output levels. 
But talk of an OPEC breakup is premature. 
After all, it has survived major wars, numerous diplomatic disputes, and two major market collapses. 
In fact, the secret to OPEC’s survival is its weakness, not its strength. 
Friction or no friction, OPEC has been, and will always be, irrelevant to market forces on the ground. 
OPEC has never had market power, but Saudi Arabia has, and Saudi market power has always been assigned, mistakenly, to OPEC. 
The Saudis did not like the recent meeting. 
They decided to go it alone. 
Can they deliver? 
The answer is no. 
The recent move by the 28-member International Energy Agency to release oil from strategic reserves proves this point. 
The global oil market has become a large sea that generates its own storms, which guarantee that the sea will continue to grow. 
Looking at recent history, one can identify four factors that will continue to drive oil prices higher unless a major earthquake brings the market to its knees. 
The first factor is the relationship between oil prices and economic growth in the oil-producing countries. 
Higher prices fuel higher growth in these countries, which, accompanied by a population boom, leads to higher domestic energy consumption. 
That, in turn, reduces oil exports, driving up prices further. 
Only a major recession could break this cycle; otherwise, we are headed for an energy crisis. 
Of course, prices cannot continue to rise indefinitely – the price increase will ration demand. 
The increase in energy demand has already led to power shortages in the oil-producing countries, which are expected to reduce exports this summer. 
More crude oil will be burned in power plants, more diesel will be burned in private generators, and more gasoline will be burned in SUVs from Riyadh to Kuwait City during blackouts in which the only place to keep cool will be in a moving car. 
Second, there is the relationship between oil prices and the need for income diversification in the oil-producing countries. 
As oil prices rise, these countries’ dependence on the oil sector increases, despite all efforts to diversify their economies. 
To combat the impact of such dependence, they spend oil revenues on other sectors, leaving the oil sector with little investment. 
As global oil demand increases, there is not enough capacity to meet it – a cycle that will continue until demand collapses. 
The rhetoric of energy independence in the oil-consuming countries makes the situation even worse: the oil-producing countries are building energy-intensive industries to guarantee a market for their oil once consuming nations wean themselves of imported oil. 
They intend to export oil embedded in other products, such as petrochemicals, plastic, aluminum, etc. 
And they can build such plants in faster than the oil-consuming countries can establish alternatives to oil imports, exacerbating future shortages. 
Again, higher prices will ration global oil demand, but only after a period of economic pain in some regions around the world. 
The third factor is the vicious circle of oil prices and the value of the US dollar. 
Higher oil prices increase America’s trade deficits, which in turn lower the value of the dollar. 
Owing to the inverse relationship between oil prices and the dollar, the weaker dollar increases oil prices, which increases the trade deficit further, putting more downward pressure on the dollar. 
Oil prices will continue to rise until demand collapses. 
Statistical evidence suggests that this relationship will weaken once the real-estate market recovers, but this remains a long-run prospect. 
Finally, there is the relationship between oil prices and fiscal and monetary policies in the oil-consuming countries. 
To combat the effect of high oil prices, consuming countries adopt expansionary economic policies, lowering interest rates and increasing government spending. 
This enables continued economic growth with high oil prices. 
But continued growth increases demand for oil, sending prices even higher. 
The alternative to monetary and fiscal expansion is recession, at which point oil prices would stop rising. 
Given the current turmoil in the Middle East, the loss of Libyan and Yemeni oil, and increasing energy demand in the oil-producing countries, any increase in Saudi oil exports, if any, would have a limited impact on the market. 
Oil production does not matter; exports do, which means that announcements of increases in oil output are irrelevant for prices. 

Oiling Russia's Finances 
The global oil situation is particularly interesting at the moment. 
At around $30 a barrel, oil prices are remaining high even though a soft global economy means that world demand is low. 
The previously fashionable view that the American seizure of Iraqi oil resources would break OPEC and send the price of oil plummeting has turned out to be nonsense. 
Even with improved security, it will take five years to get Iraq oil fully on stream. 
With the American economy now recovering strongly, the price of oil should stay high, or even rise further, in the foreseeable future. 
So the announcement by Russian Finance Minister Alexei Kudrin that Russia will start an oil stabilization fund comes at a good moment. 
It means that the fund can look forward to several years of surpluses. 
This is both an opportunity and a danger. 
An oil fund should be seen as an instrument of macroeconomic stabilization, segregated from normal revenue streams. 
Today most of the world's finance ministers are committed to balancing the budget over the business cycle. 
Government revenues are set to equal government spending when the economy is growing normally. 
If output grows above trend, the budget is in surplus; if it grows below trend, the budget is in deficit. 
Surpluses are applied to repaying debt, and borrowing finances deficits. 
If the finance minister gets his sums right, the national debt remains the same over the cycle, with no tendency to grow or contract. 
A constant debt-GDP ratio is thus a key indicator of fiscal sustainability. 
In a country like Russia, half of whose budget revenues are derived from taxes on oil, setting up an oil fund is the equivalent of a commitment to balance the budget over the cycle. 
Only in this case, it is an oil price cycle. 
This strategy is dictated by the fact that oil prices are more volatile--and therefore more destabilizing for the budget--than fluctuations in GDP. 
Government taxes and spending are set to balance at the average oil price over a period of years. 
(Over the last five years, the average would have been $22 a barrel.) 
The oil fund accumulates surpluses and incurs deficits when the price of oil is above or below the average. 
Surpluses are used to pay off debt, and the deficits are financed by acquiring debt, leaving the debt-GDP ratio constant over the cycle. 
A fund that works like this sends a strong signal that the government is committed to sound long-term finance. 
The key to success is to realize that an oil fund is a limited instrument for a specific purpose. 
The danger is that officials will be tempted to use it to solve other problems, which will destroy its usefulness as a stabilising mechanism. 
The first danger is that politicians will spend the surpluses on vote-winning social programmes. 
This happened in Venezuela. 
The best way to guard against this is to open a special account with an independent central bank, where the fund can be kept safely out of the reach of politicians. 
This is what Norway does. 
A more subtle danger is that the fund will be seen as a direct means to combat the so-called "Dutch disease." This is a situation where earnings from oil exports drive up the value of the currency, reducing the competitiveness of other domestically produced products. 
Investing fund surpluses in foreign securities would counteract the tendency for the exchange rate to rise. 
This is true, but the same result can be achieved by paying off foreign debt, which is a better policy, especially at the outset, when the fund is trying to build up credibility. 
Of course, it is important that Russia becomes less dependent on energy exports. 
Properly used, an oil fund can contribute to this aim, but it should do so indirectly, by promoting domestic financial stability. 
This will enable low real interest rates, which (together with bank reform) is the main condition for the growth of small and medium-sized enterprises needed to diversify the economic structure and ensure a more stable pattern of growth. 

Sugar-Free Health Care 
LAGOS – While at dinner recently at a restaurant in Nigeria’s capital, Abuja, I observed a mismatched couple. 
The man appeared to be at least 60, but was dressed in skinny jeans and a skin-tight sleeveless top, with a large gold chain and dark sunglasses, though it was after eight in the evening. 
His companion, who looked no older than 22, skipped in behind him with three friends. 
She tried to include him in their conversation, even leaning in to kiss him occasionally, but a weak smile could not obscure her sugar daddy’s growing discomfort. 
Of course, such relationships are neither new nor limited to Nigeria. 
Few people are shocked to see a wealthy older man take up with a younger, poorer women, promising to finance her education, travel, or shopping in exchange for her company. 
What is surprising is when one of these relationships develops into something deep and lasting. 
The relationship between Africa and the West, especially when it comes to health care, strongly resembles this sugar-daddy dynamic. 
For decades, health-care innovations have been copied from developed countries, perhaps with slight variations, on the assumption that father knows best. 
But the results have been cumbersome, expensive, and almost never sustainable. 
The reality is that African countries’ needs, interests, and resources differ substantially from those of their Western counterparts. 
For example, in most European countries, there are roughly 30 doctors for every 1,000 patients; in Nigeria, that ratio is closer to 4:100,000. 
Given such divergences, it is not surprising that Western medical protocols do not work in developing countries. 
The problem is that it has been difficult to shake the conviction that innovation flows only one way: from North to South. 
But developing countries can help to improve Western countries’ health-care systems, which are far from perfect (even at home). 
Indeed, as advanced-country populations age, health-care costs are spiraling out of control. 
Total health-care spending in the United States is expected to reach $4.8 trillion – nearly one-fifth of GDP – in 2021, up from $2.6 trillion in 2010 and $75 billion in 1970. 
Likewise, in Europe, public expenditure on health care could rise from 8% of GDP in 2000 to 14% in 2030. 
Advances in medical technology also contribute considerably – 38-65%, according to the Robert Wood Johnson Foundation – to the increase in health-care spending. 
Such technologies expand the range of treatments available to patients, but often by replacing lower-cost options with higher-cost services. 
More cost-effective solutions are critical to ensure that more people can access life-saving medical technologies. 
That is where developing-country innovations come in. 
Ever-increasing global connectivity has reshaped the innovation landscape, enabling anyone with a mobile phone or an Internet connection to access the ideas and resources they need to deliver game-changing systems. 
Add to that a level of need that developed countries do not share, and developing countries can not only revolutionize their own health-care systems; they can also help to find solutions to the developed world’s health-care predicament. 
The good news is that developing countries’ innovative potential is becoming increasingly apparent. 
In order to leapfrog the constraints imposed by their countries’ lack of modern infrastructure, Africans are increasingly taking advantage of mobile technologies and renewable-energy sources like solar. 
In terms of health care, there is Ghana’s mPedigree Network – the first company to implement mobile short-code systems for detecting fake medicines, which cause an average of 2,000 deaths worldwide every day. 
Using a basic mobile phone, people can instantly – and at no cost – verify if a particular medicine is authentic. 
Similarly, the Embrace infant warmer, developed in India, costs roughly $200 – compared to $2,000 for a conventional incubator in the US – giving millions of low-birth-weight and premature infants access to this life-saving resource. 
Hundreds of innovations like these are delivering high-quality health care to those who need it most, for as little as 1% of the cost in America, Europe, or Japan. 
This kind of innovation can improve the lives of millions of people in developing countries, while helping to reduce the crippling costs of health care in the West. 
Relationships between sugar daddies and their companions rarely last. 
But a partnership of equals has a fighting chance. 
It is time for world leaders and multilateral organizations to recognize and support Africa’s potential to innovate – for everyone’s sake. 


Old Europe, Young World 
As the EU reaches its 50th birthday, many Europeans are entering middle age with it. 
They are also becoming aware of the potential of demographic change to make Europe’s next half-century very different from the previous one. 
The EU’s first 50 years were characterized by a growing population and a high proportion of working-age people relative to children and the elderly. 
The post-war “baby boom” generation drove a period of sustained economic growth that strengthened Europe’s standing in the world and led to dramatic improvements in its citizens’ quality of life. 
The EU’s next five decades, on the other hand, will see the baby boomers moving into retirement, leaving a shrunken labor force with the heavy burden of supporting their elders’ health care and pension needs. 
Thirty-six per cent of Europeans will be aged 60 or over by 2050, and, despite increasing life expectancy, continued low fertility will mean the continent’s population will begin to dwindle by 2020. 
Although Europe is unlikely to become poorer as a consequence of this demographic shift, it may experience a prolonged period of slower growth. 
All else being equal, per capita incomes and productivity in countries with high proportions of elderly people tend to grow more slowly than in younger countries. 
Europe’s economic strength relative to the rest of the world may therefore diminish, perhaps sharply. 
Just as Europe’s population is aging and will be shrinking, that of much of the developing world is young and growing. 
By 2050 the population of the 50 least developed countries is projected to double, and while the ratio of working-age to non-working-age people in Europe will fall to around 1.4, in the developing world it will be considerably higher. 
Countries in most developing regions, such as Latin America, North Africa, the Middle East, and much of Asia, may be able to absorb their armies of potential workers into productive employment and benefit appreciably from the ensuing economic boost. 
(Indeed, this “miracle” has already occurred in East Asia.) 
As a result, these regions’ share of the global economy would increase. 
Other regions, however, are likely to be unable to provide productive employment. 
Swollen cohorts of young, underemployed people may cause an increase in crime and civil unrest. 
Political instability, war, and terrorism could result, with dire effects both at home and abroad, including in Europe. 
Sub-Saharan Africa’s demographic prospects look particularly bleak, as mushrooming populations of young people move into labor markets that cannot accommodate them. 
Migration from Africa and other developing regions to Europe is already increasing; as populations in poor countries grow, the number of would-be migrants will multiply. 
These migration pressures present a potential solution to Europe’s labor-market problem. 
Europe needs working-age people to reduce the burden of a burgeoning elderly population, so relaxing immigration restrictions could help. 
But this might bring with it social problems, as Europeans resist an influx of foreigners, owing to fears about jobs, security, or cultural differences. 
Opening the door to migrants would have to be a gradual and controlled process, with determined efforts made to convince Europeans of its benefits. 
Moreover, given the massive increase in migration that would be needed to offset the impact of population aging in Europe, this would be only a partial solution at best. 
But Europe can take other steps to redress or adapt to the looming demographic imbalance. 
Many countries in the region already have policies aimed at increasing the birth rate. 
Tax benefits and monthly allowances for couples with children and reduced support for contraception are among the most common means of encouraging increased fertility. 
In many EU countries, a much higher percentage of men than women are in the labor force. 
Measures aimed at enabling mothers to work, such as state-funded childcare and more flexible working hours, create incentives for childrearing while expanding the labor force. 
However, the effects of such measures are unlikely to be felt soon, so policies will also need to be directed at those already in the labor force, to encourage them to save more for retirement, and at those on the point of leaving it. 
Existing pension systems often penalize people who wish to work beyond the official retirement age, and age discrimination impedes many who are capable of working into their sixties and seventies. 
More flexible pension arrangements, legal reforms, and media and education campaigns aimed at shifting employers’ perceptions of older workers will allow individuals to keep working for longer. 
Encouraging lifelong learning will help people adapt their skills and knowledge to the demands of a changing economy. 
And with higher life expectancy, raising the retirement age is a further sensible way to address the negative effects of an aging population. 
A combination of these and other measures would help Europe to sustain its high living standards in the coming decades. 
Recognition of the growing power of regions with more favorable demographic structures, for example, will encourage political and economic alliances that help the EU preserve its own global status. 
Likewise, efforts to help developing countries create jobs and improve quality of life will reduce irregular migration and help avert its social costs. 
Population change happens slowly, but its effects can be forecast early. 
If EU countries are to overcome the demographic challenges of the next half-century, they should not delay in preparing for them. 

Old Left Versus New Left in Latin America 
There are two ways to interpret Latin America’s recent election results. 
First, and most obviously, the supposed turn to the left is running out of steam, fast. 
In recent weeks, the hyper-nationalist Ollanta Humala, a clone of Venezuelan President Hugo Chávez, was defeated in Peru, the conservative Alvaro Uribe won a landslide victory in Colombia, with 62% of the vote, and Andrés Manuel López Obrador has fallen behind in Mexico’s July 2 presidential election. 
All of these isolated developments seemingly contradict the leftward trend in Latin America. 
But there is another way of looking at these events. 
Yes, President Uribe won re-election, but the big surprise in Colombia was the end of the two-party system that had dominated the country for decades, and the emergence of the left-wing Polo Democrático as the second largest political force in the nation. 
Similarly, while Alan García won in Peru, he does not come from a hard-left party that has finally seen the light (like Lula da Silva in Brazil, Michelle Bachelet in Chile, and Tabaré Vázquez in Uruguay). 
His APRA party, founded by Victor Raúl Haya de la Torre in the 1920’s, is one of the region’s oldest and most anachronistic populist organizations. 
Like Chávez in Venezuela, Kirchner in Argentina, Evo Morales in Bolivia, and López Obrador in Mexico, President García belongs to the unreconstructed left that springs from the great Latin American populist tradition. 
He may have learned many lessons from his disastrous presidency in the 1980’s, but he is much closer to the wrong left than to the right one. 
In Mexico, López Obrador has both begun picking up in the polls in recent days, and showing his true colors, promising the stars and the moon to the Mexican electorate. 
In fact, the more important recent developments within the Latin American left may lie not so much in the horserace results of elections, but in the growing differences between modernists and revanchists, between national interests and ideology. 
As Morales cozies up to Chávez and Fidel Castro more quickly than most people expected – nationalizing Bolivia’s natural gas, inviting large numbers of Cuban doctors and advisers to his country, and signing myriad cooperation agreements with Venezuela – he is also fueling increasing tensions with Brazil and Chile. 
Both countries are his neighbors, and in theory at least, their leaders are his ideological soul mates. 
But the differences between the modern and archaic left, and the three countries’ contradictory national interests, seem to be trumping more superficial political affinities. 
For example, Saõ Paulo, Brazil’s industrial powerhouse, now depends for most of its energy on Bolivian natural gas. 
As a result, Petrobras, the Brazilian energy company, has invested huge sums in Bolivia in everything from exploration to pipelines. 
Now, with the election of Evo Morales, the main source of Petrobras’s natural gas has suddenly been nationalized. 
Indeed, domestic royalties on Bolivian gas production are being increased by more than 50%, and the price charged to Bolivia’s foreign clients may well be doubled. 
Contracts are being respected only in the breach, and technicians and lawyers from PDVESA, the Venezuelan oil giant, are auditing Petrobras installations in Bolivia. 
Lula wants to be nice to Morales, but he can’t be nice to his expropriating neighbor and at the same time keep the industrialists and consumers of Saõ Paulo happy. 
Similar frictions are arising with Chile. 
President Bachelet would like to solve the century-old problem of landlocked Bolivia’s access to the Pacific, but she is finding this task to be trickier than expected, as Morales increases gas prices and reduces gas exports to Argentina, Chile’s largest foreign supplier of energy. 
Nor does Morales’s rhetoric help: accusing the United States of attempting to assassinate him, as he did last week, does not endear him to the elites of a country that has signed a free-trade agreement with the US and whose president will be visiting Washington soon. 
At the end of the day, Bolivia’s immediate national interests may be served by Morales’s strategic alliance with Cuba and Venezuela. 
On the other hand, Chávez’s unabashed meddling in the Peruvian elections may have so alienated Alan García that he actually becomes a European-style social democrat, and López Obrador may deliver on his promises to respect NAFTA, adhere to macro-economic orthodoxy, and pursue good relations with the US. 
But the cleavage between the two lefts in Latin America is steadily deepening. 
This is inevitable, because that rupture is being fueled by the simple acknowledgement that responsible governments must place national interests ahead of nostalgia, grandstanding rhetoric, and strident ideology. 

The Right to Eat 
NEW YORK – Food systems have gone global. 
The average North American meal now travels 2,400 kilometers (1,491 miles) from field to plate. 
As the food-supply chain has been transformed, efforts to ensure that it is accessible to all have intensified, with the “right to food” serving as an important driver of bottom-up change. 
In September, India adopted a landmark law on food security, guaranteeing five kilograms of subsidized wheat, rice, and other foodstuffs monthly for two-thirds of the population, and enhancing support for pregnant women, schoolchildren, and the elderly. 
Though there are undoubtedly numerous holes in the system, treating access to food as a legal entitlement is an important step in the right direction. 
Such progress, which extends far beyond India, follows a decade of global activism that has challenged the logic of existing food systems like never before. 
Since the Universal Declaration of Human Rights was adopted in 1948, political rights like freedom of speech have been widely claimed, while the right to food has been largely neglected. 
To be sure, since the declaration was signed, a plethora of tools has been introduced in the effort to combat hunger. 
Some countries have opened their markets to imports; others have closed them. 
Many became dependent on food aid, while some acted on the conviction that eradicating hunger is merely a matter of fostering GDP growth. But such efforts have had limited success. 
Meanwhile, the most powerful institutional tool has been neglected. 
Unlike the top-down, technical solutions that policymakers have usually favored, a solution based on the concept of food as an entitlement, not a privilege, would involve – and empower – multiple actors. 
Such an approach would be centered on upholding the right of all people to produce or gain access to food. 
This approach has clearly found an audience in India, where millions of people live in hunger and poverty, even as the country’s net wealth grows. 
Over the last decade, a right-to-food movement has taken root in the country, putting pressure on policymakers and approaching the problem from legal and political angles. 
In 2001, a lawsuit brought by public-interest NGOs resulted in the Indian Supreme Court recognizing the right to food as an aspect of the constitutionally protected “right to life.” 
The court ruled that a series of social programs should be expanded, in order to provide a basic nutritional floor for all. 
This activated a virtuous circle; by strengthening the social movements rallying around the right to food, the Supreme Court’s decision enabled them to ratchet up pressure on state governments to build an effective food-security apparatus. 
The recent law is a milestone in this process, but by no means the end point. 
In a country characterized by massive regional wealth disparities and deep-rooted poverty, the road to eradicating hunger is sure to be long and difficult. 
The key to ensuring continued progress is to establish accountability. 
In this sense, the social audits used by India’s Right to Food Campaign to assess compliance with court-mandated policies, such as the delivery of school meals, will be essential in the coming years. 
Peasant farmers, parliamentarians, civil-society groups, and institutional actors have come together in similar ways elsewhere – including in Brazil, South Africa, and Mexico – to demand legal protections against hunger. 
Right-to-food framework legislation has been adopted in Argentina, Guatemala, Ecuador, Brazil, Venezuela, Colombia, Nicaragua, and Honduras. 
This has often led to the kind of participatory approach to policymaking that empowers the poor and enables lasting inroads against hunger to be made. 
In Brazil, for example, civil-society representatives comprise two-thirds of the National Council on Food and Nutrition Security, and thus have the opportunity to influence policymaking at the highest level. 
In Mexico – where the right to food was constitutionally recognized in 2011 – an inter-ministerial commission includes 19 government departments and institutions. 
It is no coincidence that these countries now boast bold social programs that are dramatically reducing hunger among the poorest groups. 
Clearly, courts have made a signal contribution to the fight against hunger, by upholding and making fully operational the right to food. 
In 2012, South Africa’s High Court ordered a revision of fisheries legislation to protect the livelihoods of small-scale fishers. 
In Nigeria, Argentina, and Nepal, the right to food has recently been invoked on behalf of regions and population groups – including indigenous peoples – whose access to food was threatened. 
Breakthrough crops, fertilizer subsidies, and aid campaigns may grab the headlines, but it is the right-to-food movement that holds the greatest promise for ending hunger. 
The good news is that its power is only just being realized. 
With a truly global right-to-food movement now emerging, the best is yet to come. 

Ollanta Humala’s Limited Options 
BUENOS AIRES – The big question in Latin America today is this: Will Peru’s newly elected president, Ollanta Humala, orient his country toward Venezuela’s Hugo Chávez and his radical allies? 
Or will he choose the path taken by Brazil’s former president Luiz Inácio Lula da Silva and the region’s other moderate politicians? 
Humala’s own ambiguous words offer little guidance. 
So the direction in which he intends to lead must be read from his actions, and these are unlikely to be definitive in the short term. 
Peru’s domestic and international situation, however, will frame his main decisions. 
Humala is no novice politician rising to victory on charm and luck. 
In the presidential election of June 2006, he received 45.5 % of the vote – not enough to defeat Alan García, but sufficient to show how deeply he had tapped into the hopes and trust of many Peruvians. 
At that time, populism seemed an unstoppable force in Latin America. 
Fueled by an oil boom and vast social spending, Chávez was flying high, blessed and supported by the aging but still active Fidel Castro. 
Across the región, Chávez’s influence was strong. 
His backing was a decisive influence in the election of Bolivia’s President Evo Morales in 2006, and the following year he supported Daniel Ortega in Nicaragua and Rafael Correa in Ecuador, though his impact on their victories is hotly debated. 
In 2006, Humala praised Chavez’s policies as a sign of a new era in Latin America. 
But, in the recent presidential campaign, he suggested that his policies would resemble those of Lula, not Chávez. 
In particular, he would seek to emulate Lula’s efforts to include vast sectors of the population in the benefits of a strong economy. 
Today, with Venezuela’s economy mired in high inflation and overly dependent on oil, Chávez is fading as a regional model and guide. 
He has also been startled by the rise of domestic opposition. 
So Brazil’s mix of diversified economic growth and redistribution is a far more appealing example. 
Indeed, a major reason for Humala’s victory was García’s inability to secure the benefits of growth for Peru’s poorest people. 
Humala’s main campaign argument was that he would not risk the “success” of Peru’s economy, but would, on the contrary, strengthen it. His fight against poverty and social exclusion would be undertaken as part of that effort. 
Humala comes to power in a regional environment of moderation and growing economic integration, which he would disturb at his peril. 
García recently signed an economic agreement with Chile, Colombia, and Mexico, called Pacto del Pacífico, which is destined to reorient Latin America’s economies. 
These countries will jointly seek to develop a bigger presence in Asian markets, and to offer developed countries a safe option for capital investments in emerging markets. 
Moreover, each of the countries has bilateral free-trade agreements with the others and with the United States (though the US Congress has yet to approve the United States-Colombia Trade Promotion Agreement, as it is officially known). 
Breaking with these strategic policies would harm Peru’s economy. 
It would also harm Humala’s domestic political base and isolate him in the region. 
He would not be able to lean on Brazil, the moderating regional power, but would inevitably fall under the sway of Chávez and Morales, deterring foreign investors and harming the country’s foreign relations. 
Cuba is out of the question as a patron, due to its preoccupation with Raúl Castro’s efforts to reshape its depleted economy in an improbable bid for Chinese-style capitalism in a one-party state. 
So Humala’s Latin American options are limited: Venezuela, Brazil, or the countries of the Pacto del Pacífico. 
Although the last two options might be difficult to merge –Mexico might not want the competition of such a large player as Brazil – they are not mutually exclusive. 
In fact, Brazil’s leaders have good reason to be flexible: their country needs the access to the Pacific that Peru and Chile offer. 
The local stock market’s fall immediately after Humala’s victory is a clear sign that the most influential forces in the Peruvian economy will continue to press for deeds, not promises – deeds that benefit their interests, of course. 
Humala most likely will not follow market dictates robotically. But he will not be able wholly to avoid them. 
Finally, there is the question of political effectiveness. 
Humala’s coalition, Gana Perú, will have a plurality of representatives in Peru’s congress, but will need the votes of ex-president Alejandro Toledo’s party to have a controlling majority. 
Toledo, a Stanford graduate and a moderate politician, supported Humala during the campaign and provided him with economic advisers, which proved to be decisive in establishing the credibility of Humala’s retreat from radical policies. 
Both the internal and external environments in which Humala finds himself – and the fact that he won by a margin of only three percentage points – seem to call for moderation and consensus. 
Half of Peru’s citizens did not side with him. 
Polarization may have proved functional to winning an election, but Humala will have to broaden his support in order to forge the consensus he needs in order to govern. 

An Economic Myth of Olympic Proportions 
NORTHAMPTON – According to Olympic legend, hosting the Games is an economic boon for the chosen city and country. 
In reality, the Games are more often a boondoggle, as Rio de Janeiro is finding out. 
First, consider how the games are awarded to a host city. 
The International Olympic Committee (IOC), an unregulated global monopoly, conducts a biannual auction whereby the world’s cities compete against one another to prove their suitability. 
Business executives – often from the construction industry – who stand to gain from the Games’ preparation usually lead a prospective city’s bidding process. 
Among other things, cities will offer lavish sporting venues, ostentatious ceremonial spaces, newly built transportation networks, luxurious accommodations for athletes, and media and broadcasting centers. 
The outcome of this process is predictable: winning cities usually overbid. 
The cost of hosting the Summer Olympics these days runs from $15 billion to $20 billion, including venue construction and renovation, operations and security, and additional infrastructure. 
The total revenue for the host city from its share of international television contracts (roughly 25%, with the other 75% going to the IOC), international and domestic sponsorships, ticket sales, and memorabilia is $3.5-4.5 billion. In other words, costs comfortably exceed revenues by $10 billion or more. 
Those vying for their city to host the Games often argue that any short-term deficit will turn into long-term gain, because tourism, foreign investment, and trade will grow, to say nothing of improved national morale. 
Again, the empirical evidence does not support this extravagant claim. 
Consider tourism. 
During July and August 2012, the number of tourists visiting London, the host city for the Summer Games that year, actually fell by 5%. 
The shops, restaurants, theaters, and museums around the event space in Piccadilly Circus all reported next to no business during the 17 days of the Games. 
As it happens, everyday tourists avoid Olympic host cities during the Games, owing to crowds, transportation delays, inflated prices, and possible security threats. 
As a result, hosting the Games does more harm than good for tourism, which thrives on word of mouth. 
If tourists are avoiding a city – or having a negative experience because of the Games – they will have nothing good to report back to their family and friends. 
Beyond tourism, no smart business makes investment or trade decisions simply because a city has hosted the Olympics. 
If anything, the expense to the city creates fiscal distress, implying a less favorable business environment in the future. 
Another drawback to hosting the games is the public scrutiny a city receives. 
Rio de Janeiro’s preparations to host this year’s Summer Games did its international image no favors. 
A city once known for its natural beauty and fun-loving lifestyle is now known for corruption, violence, bad traffic, pollution, political instability, and the Zika virus. 
One area where some host cities – but not all – can actually realize long-term gains is in infrastructure spending. 
In Rio’s case, one could argue that the city will benefit from improvements to its international airport and downtown port. 
But this is not a valid reason to become a host city; it is merely a consolation prize. 
A billion dollars of productive infrastructure development does little to make up for the other $19 billion spent on the Games, which will not improve the city for most of its residents or regular visitors. 
Consider the $2.9 billion subway line (originally budgeted at $1.6 billion) connecting the Games’ beachside event space to Barra da Tijuca, a wealthy suburb ten miles away. 
This new infrastructure will boost property values in Barra da Tijuca, while doing nothing to improve Rio’s horrendous street traffic. 
The bulk of Rio’s workers living north and west of downtown will have just as difficult a commute as ever. 
Examples like this abound. 
The city built a new golf course on the protected wetlands of the Marapendi Natural Reserve, which will degrade the ecosystem and consume vast amounts of water – a preciously scarce resource in Rio. 
It also built bus lanes that run between Olympic venues, which will ease travel for IOC executives but only further congest the city’s now-narrower roadways for everyone else. 
Along with pointless and disruptive infrastructure, the Rio Games have exacted a human cost. 
To make room for the 32 sport venues, the athletes’ Olympic Village, the broadcasting and media center, the ceremonial green space, and to beautify the surrounding landscape, the Rio government has evicted more than 77,000 residents from shantytowns or favelas since 2009, the year the city was awarded the Games. 
Ultimately, hosting the Olympic Games is a big economic gamble for any city. 
Less developed cities with inadequate infrastructure must spend more to meet the IOC’s transportation, communications, and hospitality requirements; more developed cities have the infrastructure, but not necessarily the land, and risk disrupting thriving industries to bring the Games to fruition. 

Olympic Gamesmanship 
NEW YORK – China lobbied long and hard to host this summer’s Olympics, and thousands of Chinese literally danced in the streets when the decision was made to award Beijing the games. 
This was to be a chance for the Chinese to show the world just how far they and their country had come. 
I do not know if there is a Mandarin equivalent for “Be careful what you wish for,” but if there is, it surely applies. 
China is getting a great deal of international attention, but not the sort it bargained for. 
On the contrary, China is finding itself under intense international scrutiny for everything from its policy toward Tibet, human rights, and product safety to the level of its currency, its policy in Sudan, and global climate change. 
What was meant to be a moment of celebration has turned into one of criticism. 
Indeed, it is likely that several prominent world leaders, including British Prime Minster Gordon Brown, German Chancellor Angela Merkel, and United Nations Secretary General Ban Ki-moon, will not attend the opening ceremonies. 
Several prominent American politicians have voiced support for a boycott. 
Still other heads of state, including French President Sarkozy, are weighing staying away. 
Of course, China merits criticism in many areas of its domestic and foreign policy. 
But snubbing China is misguided. 
It ignores what the country has accomplished, and it risks consequences that are inconsistent with what the critics themselves want to see. 
Some perspective is called for. 
Modern China is only some six decades old. 
Its economic growth has been and is truly astounding. 
Hundreds of millions of Chinese have been lifted out of poverty. 
Indeed, Chinese economic growth must be acknowledged as one of history’s great achievements in poverty reduction. 
China is not simply wealthier; it is also a far more open place politically than it was during the Mao era. 
Civil society is growing; there are now more than 300,000 NGOs. 
Official statistics show that more than 85,000 public protests occurred in 2005 (and probably more each year since) over issues such as corruption, public health, the environment, and land use. 
Even the recent earthquake in Sichuan revealed how Chinese politics are changing. 
Cameras were allowed in; senior officials were seen and heard. 
There are also indications that China’s foreign policy is evolving. 
China has played a helpful role of late in encouraging North Korean cooperation with demands to limit its nuclear capabilities. 
In Sudan, China supported a UN Security Council resolution establishing an international operation and committed 315 engineers to the UN-African Union force. 
None of this excuses or justifies the shortcomings in Chinese behavior at home or abroad, which are many and real. 
But reality is not one-dimensional. 
China is changing, in many ways for the better, and further change in the right direction is not likely to result from a policy of isolating or sanctioning China. 
If we want China to become a full participant, a stakeholder, in the international system, we are more likely to achieve this outcome by integrating China into the world’s institutions. 
The Chinese need to see how they benefit from inclusion – and how they would suffer from not being one of the countries shaping and buttressing today’s international institutions. 
We should seek China’s integration as a matter of self-interest. 
In a globalized world, global challenges largely require global responses, which are impossible if a country of China’s size and population and wealth does not participate. 
Stopping the spread of nuclear weapons, promoting more efficient energy use, taking action on climate change, and maintaining an open global economy – these and other tasks require Chinese participation, even cooperation, if globalization is not to overwhelm us all. 
One useful step on our part would be to end the anachronism of bringing together many of the world’s principal leaders in the annual G-8 meeting of industrialized countries and not including China (or India or Brazil, for that matter) as a matter of course. 
But integration will succeed only if China and its leaders are open to it. 
Communism and socialism do not command public support as they once did. 
Materialism and consumerism cannot be a substitute for political and religious freedoms, which remain severely constrained. 
Nationalism can all too easily fill a void. 
This is dangerous, as history demonstrates that leaders who allow or stimulate excessive nationalism can all too easily become trapped by it. 
This argues not simply for keeping nationalism in check, but for allowing greater political and religious freedom so that there are alternative sources of legitimacy and allegiance in Chinese society beyond that of economic advancement. 
This is something that the Chinese will largely have to do by and for themselves. 
Outsiders can and should make their views known, but mostly in private and without saying and doing things likely to stimulate the very nationalism we want to discourage. 
All of which brings us back to this summer’s events in Beijing. 
China needs to show respect for human rights and allow journalists to report. 

Olympolitik 
PARIS – Is there a link between economic power and Olympic medals? 
Is a form of multipolarity in sports emerging as political multipolarity sets in? 
In 1992, immediately after the Cold War’s end, the United States and the former Soviet Union’s “Unified Team” won a quarter of the medals in Barcelona. 
Global bipolarity had not yet vanished. 
By the 2008 Beijing games, the world had changed significantly. 
The Soviet-American duopoly had given way to a Sino-American duopoly, which won a combined 20% of the medals. 
The London games confirmed this trend. 
The Sino-American duopoly has loomed large in the medal count (22% of the total), but not outrageously so. 
Europe remains strong, while Asia and the Caribbean have made significant headway. 
There are, in fact, four factors behind Olympic power: population size, sports traditions, sports policy, and level of development. 
Taken separately, none of these factors can explain a country’s Olympic record. 
Collectively, however, their explanatory power is relatively large. 
For starters, population size is a source of power simply because large countries can take advantage of their greater human potential to shine in a broad array of disciplines. 
Countries with great demographic potential therefore inherently have great Olympic potential. 
Conversely, Australia appears to be the only country with less than 50 million inhabitants gaining more than 3% of the medals at a Summer Olympic Games. 
But, of course, a large population is not always a recipe for success. 
The most striking example is India, one of the least sports-oriented countries in the world, given its demographics: six medals for more than 1.2 billion inhabitants – the same number as Croatia, which has a population of just 4.3 million! 
Clearly, Indian society has a complex relationship with sports. 
But the disparity between its demographic size and its Olympic success also shows that political multipolarity and sports multipolarity are not cast from the same mold. 
India is probably the most spectacular counter-example, but it is not the only one. 
Countries like Brazil, Argentina, Turkey, and Mexico are dwarfed by countries like South Korea. 
Overall, it is fair to say that South America and the Middle East remain fringe players at the Olympics. 
The Caribbean, for example, far outranks Brazil. 
National traditions are the second important factor in Olympic success. 
First, there are physical and natural realities. 
Ethiopians begin running in childhood as a means to reach, say, a distant school in the highlands. 
And the Caribbean does not necessarily offer many sports activities besides track and field, for which relatively few material resources are needed to create champions. 
This is one of the reasons why East Africa, the Caribbean, and to a lesser extent the Maghreb are prominently represented in Olympic running disciplines. 
But traditions can also be created. 
The French are not culturally or physically predisposed to dominate sports such as judo, canoeing, and swimming, in which they have achieved distinction for more than 50 years. 
A national sports policy can be conducive to good results. 
Such policies embody a country’s choice in developing one or several sports. 
They can grant a great deal of autonomy to various federations (as in the US and Great Britain); devote significant public resources to sports for political purposes (as in Russia and other dictatorships); or insulate publicly financed sports institutions from partisan politics in order to ensure continuity (as in Italy and France). 
On the other hand, the absence of a real sports policy (or its unraveling) can become a decisive handicap. 
Indeed, how else to explain the poor performance of a country as well-endowed as Switzerland, or as highly populated as Nigeria? 
And what accounts for South Korea’s exceptional performance if not a coherent sports policy? 
Finally, a country’s level of development, as we have seen, is far from being decisive to Olympic success, especially in the running disciplines. 
Runners can travel and train individually on the best tracks. 
Obviously, however, development does play a significant role. 
While sports like running are relatively inexpensive, others – including gymnastics, swimming, and even more so team games and equestrian events – require significant resources. 
It is no coincidence that the Caribbean and Africa do not have a presence in these disciplines at the highest levels of competition. 
Indeed, of the ten countries that received the most medals at the London games, all except China and Russia are OECD members. 
There are no less-developed countries, with the possible exception of Ukraine, in the top 15. 
Thus, while economic power is not a prerequisite to Olympic power, multipolarity in sports remains positively correlated with it. 
Africa received only 3% of all medals in London. 

Omar and Osama's Kampf 
History possesses many stories like this: a political party emerges, and most people think it a bad or sick joke. 
Everyone tries to ignore it; that is, when they are not laughing at it. 
Suddenly, the economy becomes bad or an external threat looms and that party marches toward power. 
When it seizes the government - think of Hitler, Lenin, Mussolini, even of Mullah Omar in Afghanistan - all laughter stops. 
In Poland, a ``joke'' party of malignant intentions is emerging. 
Called ``Self-defense,'' it voices (it says) the discontents of poor farmers and those displaced and radically dissatisfied with politics here. 
The leader of ``Self-defense'' is a shrill primitive named Andrzej Lepper. 
A thuggish guttersnipe more akin to Aleksander Lukashenka, the dictator of Belarus, than to the great dictators, Lepper nonetheless represents a hideous post-modern form of irrational politics. 
For this reason, I cannot laugh at him. 
Hitler, Lenin, and Mussolini sought power in order to use the state to impose their will and their programs. 
Today's anti-democrats, however, view the state as an obstacle. 
They want to gut state power so that jackals like themselves can feed on the corpse. 
``Self-defense'' has participated in several parliamentary elections but never received more than 2% of the vote before this year. 
Three weeks before last September's elections, opinion polls gave it 7-8 % of the vote. 
Everyone thought this an exaggeration, but when the balloting ended, ``Self-defense'' had secured nearly 11% of the vote and was parliament's third largest party. 
Everyone was shocked. 
But most Poles are committed to democratic norms and believe in civilizing the uncivilized. 
So Lepper became parliament's deputy speaker (one of four). 
Because he is provocative, political commentators and TV and newspaper interviewers were drawn to him. 
Not for long. 
Within a month the media elite was bored. 
Lepper sought to reclaim their attention by calling the foreign minister a traitor, and threatening violence if his program was not enacted. 
Ideas about civilizing ``Self-defense'' ended. 
Parliament evicted Lepper from his deputy speakers's position. 
In Lepper's last speech as deputy speaker he accused many famous politicians of taking bribes, naming the amounts, times, and places where the bribery took place. 
Now Lepper seems unable to prove his accusations or offer any substantiation of them. 
No matter: he kept his profile high by asking to meet America's Ambassador, saying that he knew of a Polish role in the events of September 11 th . 
I wish that I could say that by discrediting himself, Lepper self-destructed. 
This is what should happen in a democracy. 
After all, the American demagogue Joe McCarthy imploded when he failed to prove his charge that there were hundreds of Soviet spies infesting the US State Department. 
But Lepper is no empty windbag like McCarthy. 
He is not a nationalist like France's Le Pen; he is neither rightist nor leftist. 
Instead, he loathes the political system and wants to overturn and replace it with a nothingness in which feral politicians run amuck. 
Lepper's supporters are not the poor and excluded, but are remnants of the lower Communist nomenclatura (the apparatchiks too stupid to steal as Communism collapsed) and those who made money during the grey period of 1989-1991, when state controls were practically nonexistent and when all that you needed to make money was a truck and enough petrol to drive to Berlin. 
You smuggled and you became relatively rich. 
Lepper's people are nostalgic for the profitable anarchy of a crippled state. 
So who is their enemy? 
Not the Jews, masons or gypsies who were the traditional targets of lumpen anti-democrats. ``Self-defense'' loathes, instead, democratic government. 
They repudiate not only parliament and its necessary compromises, but the rule of law itself. 
Parliamentary democracy was born centuries ago by Europeans sickened by domestic (mainly religious) wars. 
Indeed, parliamentary democracy's greatest enemy remains domestic war. 
I do not want to exaggerate the threat that Lepper poses, but I believe he represents a poisonous model of irrational politics. 
From Indonesia to Afghanistan, from Georgia to Ukraine, Lepper's movement is part of a new nihilism that seeks to make countries ungovernable. 
As a political philosopher, I find democracy's internal enemies a true intellectual problem. 
Law, I believe, cannot be democracy's only defense, because even if Lepper's countless lies are proven false and he is jailed, his followers (and their rage) will remain. 
Like Hitler, he will likely emerge from prison even more beloved by them. 
You cannot win domestic wars (even non-violent ones) through legal processes alone. 
America could not defeat Osama bin Laden's terrorists through arrests, indictments, and trials. 
Political means are not the only tools that can be employed against political dangers. 
All the ordinary - and the extraordinary - weapons that democracy possesses must be employed. 
We must - to repeat the idea of the German political philosopher Carl Schmitt (no friend of democracy himself) - treat enemies as enemies. 
When democracy is at stake you must defend it, to borrow a line from Malcolm X, ``by any means necessary.'' This may be difficult for liberals to understand; more difficult for democratic-minded peoples to accept. 
But hard choices are inevitable if democracy is to prevail. 

The Draghi Put on Trial 
CAMBRIDGE – In the summer of 2012, European Central Bank President Mario Draghi pledged to do “whatever it takes” to save the euro, including purchasing “unlimited” amounts of struggling governments’ bonds. 
The move, which has come to be known as the “Draghi put,” almost immediately reduced borrowing costs for Spain and Italy, and is widely touted as having pulled the eurozone back from the brink of disaster – without ever using the so-called “outright monetary transactions.” 
That may sound like a resounding success: the mere announcement of the OMT scheme was enough to end the monetary union’s existential crisis. 
But, according to the German Constitutional Court, the policy violates European Union treaties – a ruling that the European Court of Justice is now reviewing. 
The ECJ’s decision will have important implications for the eurozone’s future, for it will define what authority, if any, the ECB has to intervene in a debt crisis. 
And yet, in a fundamental way, the current debate about OMT misses the point. 
Rather than asking whether the ECB’s mandate allows it to intervene in a debt crisis, EU leaders should be asking whether it should. 
The Bundesbank’s position on this question is well known; a leaked submission to the Constitutional Court last year declared unequivocally that, “It is not the duty of the ECB to rescue states in crisis.” 
But there is a strong case for allowing the ECB to act as lender of last resort. 
One key argument for forcing central banks to adhere to strict inflation targets is that it eliminates the temptation to use “monetary financing” (purchases of government bonds) unexpectedly, either to stimulate the economy or to inflate away its debt. 
After all, such action rarely works: markets anticipate it and raise interest rates to compensate lenders for expected inflation. 
The result is typically both high inflation and high borrowing costs. 
What is worse, the argument goes, the expectation of monetary financing would drive governments to borrow excessively. 
This could trigger a vicious circle of mounting debt and uncontrollable inflation, with devastating consequences. 
These are convincing arguments. 
But they fail to account for one critical factor: historical context. 
If a debt crisis results from government profligacy and mismanagement, rather than from a market failure, it is true that the central bank should not intervene. 
If, however, the crisis results from a coordination failure among investors – when each investor refuses to roll over the government’s debt for fear that others will do the same, leading to a default – monetary policy can play an important role. 
Indeed, by putting a floor on the price of sovereign debt and any accompanying inflation, central-bank intervention would reduce the real value of the debt and facilitate repayment. 
Moreover, as the OMT announcement demonstrated, a credible promise to use monetary financing in the event of such a crisis can prevent it from arising in the first place – with no inflationary action required. 
Without central-bank involvement, investors’ panicky prophecy would be self-fulfilling, with the resulting spike in borrowing costs making it impossible for the government to repay its creditors. 
In other words, prohibiting the central bank from acting as lender of last resort can push solvent economies into a needless debt crisis, undermining output and employment. 
By most accounts, this is precisely what happened to Spain and Italy in 2012. 
In this context, the Draghi put was a highly defensible action. 
Refusing to consider any amount of monetary financing, and continuing to adhere to a strict inflation target, would have been much more difficult to justify. 
To be sure, central-bank intervention is not the only way to quell self-fulfilling crises in the eurozone. 
Fiscal transfers, whereby eurozone countries commit to provide funds to their distressed counterparts, could also work. 
But this approach is far less practicable, and thus less credible. 
Opponents of central-bank intervention are right about one thing: monetary financing carries serious risks. 
In order to ensure that it is as safe and effective as possible, it must be used primarily in the event of self-fulfilling debt crises. 
In terms of institutional design, it is thus optimal for the central bank to maintain a strong commitment to keeping inflation low in normal times and to be willing to intervene in a crisis. 
The ECB’s use of OMT satisfies both criteria. 

On Censorship in Hong Kong 
No jackboots are to be seen marching through Hong Kong's sleek shopping malls, but a distinct whiff of totalitarianism is in the air. 
The tell-tale phrases are on everyone's lips: talk of the need for anti-subversion laws, press controls, strong leadership, of adjusting to Hong Kong's new reality. 
Everyone looks to the great Northern neighbor for direction and mutters about expediency. 
Most of the world lost interest in Hong Kong after 1997 when the "Anschluss" with China did not instantly deliver vast changes. 
Over the last year or two, however, the pace of integration into the People's Republic of China has quickened decisively. 
Life at the South China Morning Post , Hong Kong's leading English language newspaper, and so a visible political gauge, offers a window into what is going on all across Hong Kong's institutions. 
The atmosphere at the paper began to darken noticeably as one after another of its leading editorial lights was pushed out. 
It would be an exaggeration to compare the situation to the way the Nazis took over institutions in Germany in the 1930s, and to how people back then fell in line, because no one is disappearing into concentration camps. 
Hong Kong remains a rich and prosperous place. 
Yet the dictatorship in Beijing has made its presence felt, if only through proxies and collaborators. 
Before I chose to protest to the editor who sacked me a week ago, I was guilty of complicity too. 
I stayed silent when the paper's popular cartoonist (Larry Feign) was unjustly dismissed, and remained silent even after its best satirical writer (Nury Vittachi) was sacked. 
I only became uneasy when the British editor (Jonathan Fenby) was fired and replaced. 
"I am still OK," I reasoned. "They still let me write what I want..." 
My job as bureau chief in Beijing isolated me from the struggles in the head office in distant Hong Kong. 
Besides, working in Beijing is itself a constant struggle of conscience and compromise. 
Foreign reporters are under constant surveillance and risk compromising their contacts. 
That means one begins to avoid tough subjects, like the repression of Falun Gong and its followers. 
Gradually, you also noticed a change in the behavior of your HK colleagues. 
As the government proposed to introduce an anti-subversion law and strengthened its control over the civil service, they became guarded in what they said and tightlipped about mentioning the pressures from above. 
Whispered rumors of daily interference from management were only confirmed in private. 
Some people responded opportunistically, seeing the way to promotion open as talented colleagues disappeared. 
So the internationally recognized editor, Willy Lam, was replaced by a mainlander, Wang Xiangwei. 
Those who organized this coup hoped that it would lead to greater things for themselves; those who signed a petition of protest were fired not long after. 
Management then began to quietly spread word that the paper needed people able to "negotiate" with the sensibilities of the Communist Party. 
Curiously, some officials in Beijing complained about the crude tactics of those sent to run Hong Kong. 
It seemed the urge to collaborate actually ran ahead of the party's demands. 
The paper's tone began to change, becoming increasingly deferential toward China's rulers. 
Reporting became blander and blander. 
Management talked of the virtues of writing to allow readers to read between the lines. 
These changes speeded up over recent months. 
Even the office photographer began to notice different photographic choices. 
The Hong Kong and Macao Affairs Office took charge of the paper's correspondents based on the mainland, demanding that they be replaced by ethnic Chinese. 
Then they began to offer guidance on reporting in exchange for favors like access to officials. 
Despite the obviousness as to where all this was leading, individuals responded differently. 
Some continued to deny what was happening, and became indignant if the issue was raised. 
Others reasoned that if they kept their head down and compromised, the crisis would pass. 
A sort of listlessness now grips Hong Kong, particularly the civil service. 
The business sector remains unaffected and continues to talk optimistically of the prospects opened up by closer integration with the mainland. 
But Hong Kong is surrendering the uniqueness and exceptional position it once held over the Chinese world. 
As other Chinese cities become more free and more confident, Hong Kong is submissively abandoning the freedoms it once held with pride. 
In 1997, China promised to preserve these freedoms for 50 years under the one county, two systems mantra. 
Now Hong Kong itself is undoing the system. 
Many of its tycoons (one of whom, Robert Kuok, controls the South Morning China Post ) are jettisoning their autonomy for the sake of business - even when such action is not requested. 
They seem blind to the value of what they are sacrificing. 
The intangibles of freedom will determine the vitality and future of Hong Kong. 
Tragically, such losses never appear on the profit sheets measured by accountants. 

On the 10th Anniversary of the Velvet Revolution 
PRAGUE - Ten years ago today the Czechoslovak Communist power brutally intervened against a peaceful demonstration of students who had decided to pay tribute to the memory Jan Opletal, a student who was one of the first victims of Nazism. 
That intervention became the proverbial snowball that set off an avalanche. 
Shortly thereafter our squares filled with hundreds of thousands of people who made it clear that they had had enough of life without freedom. 
The regime that possessed every fathomable tool of power and controlled both the media and the entire economy began to crumble like a house of cards in the face of a peacefully, yet resolutely expressed will of the people. 
Those excited days of nation-wide solidarity, courage to make sacrifices, enthusiasm and boundless joy accompanying the fall of the totalitarian regime are long gone; the ensuing years have found us grappling – sometimes more successfully, at times less so – with all the grievous consequences of the decades of Communism in our country. 
Myriad difficulties emerged as we reconstituted and developed political pluralism; engaged in the pursuit of a genuine rule of law; built up democratic institutions; and proceeded to transform a wholly nationalized economy into a free-market economy. 
Moreover – and this has proved to be the hardest part of all – we have had to deal with the pernicious legacy that the Communist period left behind in our souls and to confront all the bad things which had lain dormant in us, and which our newly acquired freedom brought to the surface of our lives. 
All these day-to-day troubles, which often make us feel hopelessly vexed, are but a negligible trifle in comparison with the historic significance of the fall of Communism across the world, which was the background of the Czechoslovak November 1989. 
Our revolution, if I may call it that, did not fall from heaven. 
It was an organic component of a major process associated with the unstoppable disintegration of a system based on lies, hatred and coercion; a system that deprived people of their most fundamental rights, contravened the very essence of life and attempted to forcibly halt the progress of history under the banner of an appealing but false utopia. 
It is only today, ten years later, that we are becoming fully aware of the magnitude and multiplicity of the challenges that originated in those epochal developments. 
The bipolar division of the world collapsed, and there came a time for the building of an entirely new, more equitable order for the world's security, politics and economy, one better befitting the new era of human liberation that followed Communism's fall. 
The present calls for a new perception of the contemporary world as a multipolar, multicultural and globally interconnected entity; and, for a consistent reform of all international organizations and institutions in order that they might reflect this new understanding and are able to meet the formidable tasks of the coming period with this new spirit. 
Bold endeavors are needed to combat all the many evils that have resurfaced, in all their width and depth, as an aftermath of the collapse of the old structures. 
I am speaking of callous nationalism and hatred amongst different communities living on this planet; organized crime possessing hitherto unseen technological means; international terrorism; the spreading drug trade; the dehumanizing effects of the fast growth of urban agglomerations; the danger that our civilization will lose control over the nuclear weapons or information systems that it has invented and over the environmental consequences of its own development; widening social differences combined with a rapid population growth and with our inability to regulate the various sophisticated forms of the globalized market economy in order that its products help to genuinely cultivate human life instead of confine it. 
In short, I am convinced that the fall of Communism meant not only the liberation of millions of oppressed and humiliated human beings but, as a result of many different reasons, also a major challenge prompting our contemporary civilization to undertake a renewed and profound self-examination; to reconsider its direction and the threats it is facing; and, to look for ways of generating, or resurrecting, a sense of responsibility for itself. 
It is not true that there is no base to start from: Somewhere deep in the very heart of all the major religious systems of the contemporary world lies, hidden or enthralled, the same primary inspiration that gave us the courage to seek our freedom in the face of so overwhelming a monolith as the Communist system. 
All we need is to comprehend and embrace it. 
Today, ten years after we regained our freedom, it is simply insufficient to commemorate and recapitulate those dramatic times when the old world was falling apart and a new burst of freedom appeared. 
Instead, we must focus on the broader implications and effects of that liberation. 
The first concern in our thinking must be the future. 
If, however, such thinking is to have a solid foundation we must not forget the past either. 
Nor can we forget those to whom we owe all the good things which the past bequeaths to our future. 

Ending the Syrian Horror 
RIYADH – No issue in the world today is of greater immediate importance than the need to end the civil war in Syria. 
The past two and a half years have been a disaster for peace, stability, and our sense of common humanity. 
Gut-wrenching images of unspeakable, indiscriminate violence against civilians have shocked the world. 
According to the latest United Nations estimates, more than 100,000 Syrians, including many children, have lost their lives as a result of the criminal behavior of Bashar al-Assad’s regime. 
There are now more than two million Syrian refugees in bordering countries and more than four million displaced persons inside Syria. With the murder of peaceful protesters, the shelling of residential quarters, the execution of soldiers who refuse to fire on their countrymen, and the use of chemical weapons, a picture has emerged of a regime that is systematically defying the most basic international moral and legal standards. 
Unless the world is content to watch the carnage continue, the Syrian regime and its instruments of oppression must be removed. 
The international community’s shameful acceptance of impunity for Assad and his henchmen is a blot on the conscience of the world. 
Western leaders’ dithering, and the callous, cynical, and cavalier support of Russia and China for Assad, is a stigma that they will bear forever. 
Iran’s support for the regime is nothing less than a war crime. 
The current charade of international control over Assad’s chemical arsenal would be amusing if it were not so blatantly perfidious. 
While it has allowed US President Barack Obama to back down from his threat of military intervention in response to the regime’s use of chemical weapons, it has also allowed Assad to continue to butcher his people. 
It is ludicrous to believe that US Secretary of State John Kerry’s “offhand” comment about destroying Syria’s chemical-weapons stockpile was anything but a well-choreographed opening for Russia to make its diplomatic play, thereby letting the US off the hook. 
If the world, and especially the American people, believe that removing Assad’s chemical weapons will end his government’s slaughter of innocent men, women, and children, then all semblance of rational thought, humanitarian care, and regard for national interest has been thrown to the wind. 
Preventing Assad from using his killing machine by any means, including targeted strikes on his air force and command-and-control centers, is the only way to end the bloodshed in Syria. 
Yet, despite public promises by Kerry to supply the Syrian opposition with weapons – and even after Obama declared that Assad must go – Martin Dempsey, Chairman of the US Joint Chiefs of Staff, announced that the Pentagon had no such plans. 
Why make such a statement, when it can bring only chagrin and despair to the victims, and comfort and solace to a criminal regime? 
How one can reconcile such contradictions is beyond me. 
If we continue to delay military action, we will have to intervene with greater force when the carnage spreads to Lebanon, Israel, Jordan, Turkey, and Iraq. 
Indeed, Lebanon, following the collapse of Najib Mikati’s government, is already on the brink of civil war, as direct intervention in Syria by Hezbollah, Iran’s Lebanese proxy, to prevent Assad’s overthrow has exacerbated the country’s own longstanding sectarian tensions. 
Witness the recent car-bomb attacks in a Hezbollah-controlled neighborhood of Beirut and in the northern city of Tripoli. 
If law and order are to prevail, Hezbollah must be neutralized, and the Syrian-dispatched assassins of former Lebanese Prime Minister Rafik Hariri must be brought to justice. 
Saudi Arabia is doing what it can to help. 
The Kingdom is providing financial aid to Lebanon in an effort to rebuild a stronger, more stable country, and to roll back the influence of Iran. 
We have long pushed for the disarming of Hezbollah, and we have assisted the government with nearly $1 billion in financial support and credit to purchase weapons for the Lebanese Army, and we will continue to do so in the coming decade. 
But, unless the international community –particularly the permanent members of the United Nations Security Council – begins to fulfill its obligations in Syria, money will not be enough to prevent further chaos and destruction. 

China’s Imperial Overreach 
HONG KONG – Chinese President Xi Jinping’s tenure has been marked by high ambition. 
His vision – the “Chinese dream” – is to make China the world’s leading power by 2049, the centenary of communist rule. 
But Xi may be biting off more than he can chew. 
A critical element of Xi’s strategy to realize the Chinese dream is the “one belt, one road” (OBOR) initiative, whereby China will invest in infrastructure projects abroad, with the goal of bringing countries from Central Asia to Europe firmly into China’s orbit. 
When Xi calls it “the project of the century,” he may not be exaggerating. 
In terms of scale or scope, OBOR has no parallel in modern history. 
It is more than 12 times the size of the Marshall Plan, America’s post-World War II initiative to aid the reconstruction of Western Europe’s devastated economies. 
Even if China cannot implement its entire plan, OBOR will have a significant and lasting impact. 
Of course, OBOR is not the only challenge Xi has mounted against an aging Western-dominated international order. 
He has also spearheaded the creation of the Asian Infrastructure Investment Bank, and turned to China’s advantage the two institutions associated with the BRICS grouping of emerging economies (the Shanghai-based New Development Bank and the $100 billion Contingent Reserve Arrangement). 
At the same time, he has asserted Chinese territorial claims in the South China Sea more aggressively, while seeking to project Chinese power in the western Pacific. 
But OBOR takes China’s ambitions a large step further. 
With it, Xi is attempting to remake globalization on China’s terms, by creating new markets for Chinese firms, which face a growth slowdown and overcapacity at home. 
With the recently concluded OBOR summit in Beijing having drawn 29 of the more than 100 invited heads of state or government, Xi is now in a strong position to pursue his vision. 
But before he does, he will seek to emerge from the National Congress of the Chinese Communist Party later this year as the country’s most powerful leader since Mao Zedong. 
Since taking power in 2012, Xi has increasingly centralized power, while tightening censorship and using anti-corruption probes to take down political enemies. 
Last October, the CCP bestowed on him the title of “core” leader. 
Yet Xi has set his sights much higher: he aspires to become modern China’s most transformative leader. 
Just as Mao helped to create a reunified and independent China, and Deng Xiaoping launched China’s “reform and opening up,” Xi wants to make China the central player in the global economy and the international order. 
So, repeating a mantra of connectivity, China dangles low-interest loans in front of countries in urgent need of infrastructure, thereby pulling those countries into its economic and security sphere. 
China stunned the world by buying the Greek port of Piraeus for $420 million. 
From there to the Seychelles, Djibouti, and Pakistan, port projects that China insisted were purely commercial have acquired military dimensions. 
But Xi’s ambition may be blinding him to the dangers of his approach. 
Given China’s insistence on government-to-government deals on projects and loans, the risks to lenders and borrowers have continued to grow. 
Concessionary financing may help China’s state-owned companies bag huge overseas contracts; but, by spawning new asset-quality risks, it also exacerbates the challenges faced by the Chinese banking system. 
The risk of non-performing loans at state-owned banks is already clouding China’s future economic prospects. 
Since reaching a peak of $4 trillion in 2014, the country’s foreign-exchange reserves have fallen by about a quarter. 
The ratings agency Fitch has warned that many OBOR projects – most of which are being pursued in vulnerable countries with speculative-grade credit ratings – face high execution risks, and could prove unprofitable. 
Xi’s approach is not helping China’s international reputation, either. 
OBOR projects lack transparency and entail no commitment to social or environmental sustainability. 
They are increasingly viewed as advancing China’s interests – including access to key commodities or strategic maritime and overland passages – at the expense of others. 
In a sense, OBOR seems to represent the dawn of a new colonial era – the twenty-first-century equivalent of the East India Company, which paved the way for British imperialism in the East. 
But, if China is building an empire, it seems already to have succumbed to what the historian Paul Kennedy famously called “imperial overstretch.” 
And, indeed, countries are already pushing back. 
Sri Lanka, despite having slipped into debt servitude to China, recently turned away a Chinese submarine attempting to dock at the Chinese-owned Colombo container terminal. 
And popular opposition to a 15,000-acre industrial zone in the country has held up China’s move to purchase an 80% stake in the loss-making Hambantota port that it built nearby. 
Shi Yinhong, an academic who serves as a counselor to China’s government, the State Council, has warned of the growing risk of Chinese strategic overreach. 
And he is already being proved right. 
Xi has gotten so caught up in his aggressive foreign policy that he has undermined his own diplomatic aspirations, failing to recognize that brute force is no substitute for leadership. 
In the process, he has stretched China’s resources at a time when the economy is already struggling and a shrinking working-age population presages long-term stagnation. 
According to a Chinese proverb, “To feed the ambition in your heart is like carrying a tiger under your arm.” 
The further Xi carries OBOR, the more likely it is to bite him. 

One Big Union 
PARIS – In the last few weeks, the idea of establishing a European banking union has become the latest remedy advanced as a solution to the long-running euro crisis. 
But, whatever the merits of a banking union – and there are many – proposals to establish one raise more questions than can currently be answered. 
The motivations of those who advocate a banking union differ markedly. 
For some, particularly in southern Europe, it is seen as a means of shifting the burden of supporting their indigent banks to those with deeper pockets. 
For others, especially in the European Union’s Brussels Eurocracy, it is seen as another leap forward in the construction of a European super-state. 
Taking their cue from the sacred Rome Treaty’s reference to “ever closer union,” the European Commission’s theologians view every crisis as an opportunity to advance their federalist agenda. 
The European Central Bank has been more thoughtful, though no less enthusiastic, arguing that a banking union should have three objectives. 
First, stronger eurozone-wide supervision should reinforce financial integration, “mitigate macroeconomic imbalances,” and improve the conduct of monetary policy. 
How a single EU supervisor would address the problem of imbalances is not explained, but it is surely a worthy aim. 
The second objective should be to “break the link between banks and sovereigns,” which has been a particularly dangerous feature of the last year, while the third is to “minimize the risks for taxpayers through adequate contributions by the financial industry.” 
The third aim could be achieved country by country, but it is certainly arguable that an across-the-board banking levy, or a Europe-wide financial-transaction tax, would eliminate competitive distortions. 
How might these laudable objectives be achieved? 
The European Commission has argued that a fully-fledged banking union would need to rest on four pillars: a single deposit protection scheme covering all EU (or eurozone) banks; a common resolution authority and common resolution fund, at least for systemically important and cross-border banks; a single European supervisor for the same banks; and a uniform rule book for prudential supervision of all banks in Europe. 
Anyone who has been involved in banking supervision can see at once that these four pillars will require careful construction. 
Many individual countries have taken a generation to develop their own domestic schemes. 
And, in this case, three big political issues have yet to be resolved. 
First, the identity of the single European banking supervisor remains undecided, and the ECB has seen an opportunity for a power grab. 
Central bankers in Europe have always resented the narrow monetary-policy mandate given to the ECB under the Maastricht Treaty. 
Banking supervision was not included among the ECB’s objectives, though one article of the treaty gives the system of European central banks as a whole the task of contributing to effective supervision. 
They now argue that the simplest solution would be to expand that remit and make the ECB the de facto pan-European supervisor. 
That is not the outcome favored by the European Commission, which has only just set up the European Banking Authority. 
The EBA is closely linked to the Commission itself, and is seen as the natural candidate for a broader role. 
The Commission has a case, but it also has a problem. 
During the political horse-trading that preceded the creation of the EBA (together with two equivalent bodies for securities and insurance), it was agreed that the new authority would be based in London. 
That seemed logical at the time, but not if the EBA’s role is to be broadened. 
How could a eurozone supervisor be based outside the eurozone? 
The second unresolved question is how to achieve a banking union in legal terms. 
Constitutional change on this scale would normally require a new European treaty. 
But that would take time, and Europe’s leaders have run out of it. 
Furthermore, there is no guarantee that voters in countries that require a referendum on treaty changes would support a further transfer of sovereignty. 
So the likely outcome is that, in the EU’s time-honored fashion, the banking union will be constructed using existing powers, finessing the sovereignty question, and avoiding any reference to public opinion. 
That points towards reliance on the ECB. 
The final question is what such a eurozone banking union would mean for the single financial market, and especially for EU countries that are outside the single currency. 
Many of them would sign up willingly, as they intend to join as soon as possible, in spite of the euro’s difficulties. 
But that is not the case for the United Kingdom, and London remains the continent’s biggest financial center, by far. 
I fear that the French and Germans have now lost patience with the troublesome British, and are reluctant to cut a deal. 
And Euroskeptic British politicians see this as an opportunity to recast the UK’s relationship with the EU; indeed, for some, it means a chance to negotiate an exit. 
Opinion in the City of London tends to favor a middle way, which would allow the UK to cling to the benefits of the single market, without conceding unified regulation. 
That will be hard to pull off. 
I suspect that a banking union of some kind will be implemented, and soon. 
Otherwise, the eurozone banking system will collapse. 
But the consequences of such a step for Europe’s great free-trade experiment could be serious, and, if not managed carefully, could lead to Britain’s withdrawal. 
The political stakes are high, and the outcome is likely to reflect that. 

One Europe 
"One Europe" will be the rallying-call of the Danish Presidency of the EU, which begins this week. 
One Europe to seal the definitive unwinding of the 20th century: its wars, divisions and tragedy. 
One Europe in pursuit of freedom, security and justice. 
One Europe with a competitive and resource-efficient economy. 
One Europe with food policies for the long-term. 
One Europe that shoulders its global responsibility for managing international crises, for avoiding new iron curtains in Europe, and for spreading the benefits of globalization. 
The bloodiest century in European history started in August 1914. 
We can end it in December 2002. 
1945 brought peace and freedom - but only to some of us. 
While Western Europe was free to construct common institutions for peace and prosperity, the Soviet Union subjugated our Central and Eastern heartland. 
The dream of One Europe was put off for almost two generations. 
The fall of the Berlin Wall revived that dream. 
The time has come to realize it. 
Preparations have been under way for almost a decade since conditions for membership were first defined in Copenhagen in 1993. 
Candidate countries deployed immense efforts to comply with those conditions. 
Today the goal is moving from the dream world to the real world. 
We have a historic chance of closing enlargement negotiations with up to ten countries in Copenhagen in 2002. 
The EU is determined to make it happen. 
Enlargement is the geo-strategic choice of a generation. 
It is about uniting a continent. 
It is about lasting peace and shared prosperity. 
We know we can do it. 
The evidence is the track record of the institutions and policies that enlargement will extend to new members. 
For decades they have created a zone where war has become unthinkable, where might is not right, where the poorer catch up with the richer. 
Not only is the EU one of history's greatest peace projects, it also delivers the goods in terms of higher incomes, more jobs, and greater opportunities for its citizens. 
One look at the economic transformation of, say, Ireland or Spain since they joined the Union suffices to drive home this point. 
By enlarging the EU, we will stimulate economies to grow and catch up, adding tens of millions of new consumers to the internal market. 
The resulting trade and investment will make everyone better off. 
When some object to the budgetary costs of enlargement and others to transitional periods, the prospect of stimulating growth across Europe is the perspective to keep in mind. 
One Europe. 
Lasting stability. 
Shared prosperity. 
This year provides a historic window of opportunity. 
We must seize it. 
Room for manoeuvre in the enlargement negotiations is limited. 
To make minds meet in Copenhagen, both sides must be flexible and willing to make necessary compromises. 
Not only do we owe it to the victims of the century that we lay behind, we owe it to the children to come. 
If we don't grasp the moment it will vanish. 
But some candidates will not be able to conclude negotiations this year. 
A special effort should be made in order to strengthen their prospects. 
We will also continue the efforts to bring Turkey closer to the EU. 
The door remains open to the countries of the Balkans too. 
They chose the path towards Europe as they entered the EU Stabilisation and Association Process. 
Enlargement will make Russia an even more important partner for the EU. 
The ultimate goal is far-reaching integration in a Common Economic Space. 
Together we can prevent a new silver curtain from replacing Europe's old iron curtain. 
In parallel with enlargement, we will set the stage for reinforced relations with Russia and the EU's new neighbours to the East. 
Our guiding principle always remaining: One Europe. 
While enlargement remains the EU's most important geo-strategic goal, we must shoulder our global responsibility in other ways as well. 
To this end, we must strengthen the Common Foreign and Security Policy. 
Not only will we strive to ensure a concerted, clear and speedy reaction to international events and crises, we will also continue the dynamic development of the EU's crisis management capabilities. 
As is well known, this will happen in close cooperation with Greece. 
The EU has a special responsibility for peace and stability in a world characterised by increasing interdependence. 
The transatlantic relationship embedded in our shared values remains the bedrock of our global efforts. 
This applies in particular to the fight against terrorism and to efforts to reduce poverty. 
We neither could nor should seek to put an end to globalization. 
But we can and should contribute to spreading the benefits of globalization more evenly. 
The World Summit on Sustainable Development in Johannesburg and the new WTO round are both important means to this end. 
Today's new challenges require common solutions in the form of enhanced co-operation at European and global levels. 
To ensure the safety and security of our citizens, we must fight terrorism, trafficking in human beings and international crime. 
At the same time, we must promote fair and equal treatment of refugees and legal aliens. 
One Europe in the service of freedom, justice and security. 
We must also continually improve the capacity of the EU to deliver the goods expected by its citizens. 
A competitive, innovative and resource-efficient economy. 
One Europe with more jobs, freer competition and simpler and better rules for the benefit of companies, consumers and workers. 
One Europe able to stand its ground in the coming global competition. 
Last but not least, we need food policies for the long term. 
One Europe with the highest standards of food safety. 
One Europe that starts pondering how to steer its agricultural policy in a more market oriented and green direction. 
One Europe with a new fisheries policy that safeguards marine natural resources for the future while taking due account of the importance of the fishing industry to local communities. 
The Danish Presidency will consistently put the common interest at the forefront. 
We intend to achieve results through clear priorities and strong cooperation with all of our partners. 

One Forest, Two Tigers 
When Japan’s government recently decided to ignore Chinese protests and allow Taiwan’s former president, Lee Teng-hui, to visit Japan, China lashed out at its Asian neighbor, even threatening retaliation. 
But this latest dispute is characteristic of a remarkable flurry of anti-Japanese activity in China since 2003. 
That August, construction workers in Qiqihar mistakenly ruptured mustard gas canisters left from the wartime Japanese occupation, injuring dozens and killing at least one. 
The reaction by China’s public to the gory photos of the injured was furious. 
One million signatures were rapidly gathered on an Internet petition demanding that the Japanese government thoroughly resolve the chemical weapons issue, while Internet chat rooms filled with anti-Japanese invective. 
Two weeks later, 400 Japanese businessmen hired as many as 500 local Chinese prostitutes for a weekend sex party in a Zhu Hai hotel. 
Racy reports in China’s press sparked another round of righteous fury, drawing on the trope of China as a raped woman, an image long suppressed under Mao. 
Occurring on the 72nd anniversary of the 1931 Mukden Incident that led to the Japanese occupation of Manchuria, 90% of Chinese respondents to an Internet poll said they believed that the Japanese businessmen intended to humiliate China. 
The following month, at a party thrown by Northwestern University in Xian, three Japanese students and one of their Japanese teachers performed a skit, during which they pranced around the stage with red bras over their t-shirts. 
In Japan, such skits are apparently regarded as humorous; in China, the skit was seen as lewd and insulting. 
The Japanese students received death threats. 
Thousands of Chinese demonstrated on campus and through the city, shouting “Boycott Japanese goods!” and “Japanese dogs, get out!” 
A Japanese flag was burned outside the foreign students’ dorm. 
Even though the Japanese students apologized, they were expelled. 
Then, last August, during the Asian Cup soccer tournament, Chinese fans in Chongqing, Jinan, and Beijing hurled insults at the Japanese team – and bottles at their team bus. 
During the Cup final between China and Japan in Beijing, which Japan won, Chinese fans reportedly chanted “Kill! 
Kill! 
Kill!” and “May a big sword decapitate the Japanese!” 
Sino-Japanese amity was hardly enhanced in mid-November, when a Chinese nuclear sub encroached into Japanese waters. 
Nor did it help when Chinese Premier Wen Jiabao snubbed Japanese Prime Minister Junichiro Koizumi’s invitation to visit his country. 
Why has this popular nationalism emerged? 
And why is it directed at Japan? 
The short answer is that after a quarter-century of economic reform, Chinese today are much freer to express themselves. 
Under Mao, when the Chinese Communist Party sought accommodation, diplomatic recognition, and overseas development aid from Japan, Chinese were not allowed to confront their past victimization at the hands of Western and Japanese imperialism. 
Today, however, Chinese are facing past atrocities from the “Century of Humiliation” that ended with the Communist takeover in 1948, and a long suppressed anger has resurfaced. 
To most Chinese, the Japanese are paradigmatic “devils,” not only because of the brutality of Japanese imperialism and the sheer number of Chinese killed by Japanese troops. 
Anti-Japanese anger has an ethical justification rooted in the perceived injustice of “little brother” Japan’s impertinent behavior towards “big brother” China, from China’s loss in the Sino-Japanese Jiawu War and the humiliating Treaty of Shimonoseki of 1895 to the insulting “21 Demands” of 1915 and on to WWII atrocities like the Rape of Nanking. 
The complexity and depth of these anti-Japanese sentiments helps sustain them and sets them apart from other, more fleeting and contradictory anti-foreign sentiments, such as those Chinese sometimes harbor towards Americans. 
The emergence of a deep-rooted and popular anti-Japanese enmity in China does not bode well. 
As the Party uses nationalist sentiment to keep China unified, these sentiments have become fiercer, and the political leadership is increasingly held hostage to nationalist opinion in formulating China’s foreign policy towards Japan. 
As a result, Japanese increasingly fear China’s rise and possible future retribution for their country’s wartime aggressions. 
Indeed, Japanese public-opinion surveys also reveal a marked decline in favorable views of China. 
Meanwhile, an emergent Japanese nationalism argues that Japan should revise its pacifist constitution and develop its military capability – possibly including nuclear weapons to balance threats like that from North Korea. 
The possibility of a Sino-Japanese arms race is becoming increasingly real. 
Indeed, the Japan Defense Agency recently outlined three scenarios for a Chinese attack against Japan, and announced that it is planning to redeploy its troops from the north (where they were originally stationed to defend Japan against the former Soviet Union) to the south, facing China. 
Pessimists now fret that Asia is not big enough for both China and Japan: you “can’t have two tigers in one forest.” 
Optimists counter that China and Japan can cooperate, acting as the “dual engines” of Asian development. 
Japan expert Feng Zhaokui takes the middle ground, arguing that Sino-Japanese relations will be marked by the coexistence of both cooperation and conflict. 
Recent developments suggest that a purely cooperative bilateral relationship is unlikely, to say the least. 
If we are lucky, Feng may be right. But if we are not, we could witness the emergence of a new and dangerous political fault line in East Asia. 

One Hand Clapping for Ben Bernanke 
WASHINGTON, DC – President Barack Obama’s nomination of Ben Bernanke to a second term as Chairman of the United States Federal Reserve represents a sensible and pragmatic decision, but it is nothing to celebrate. 
Instead, it should be an occasion for reflection on the role of ideological groupthink among economists, including Bernanke, in contributing to the global economic and financial crisis. 
The decision to nominate Bernanke is sensible on two counts. 
First, the US and global economies remain mired in recession. 
Though the crisis may be over in the sense that outright collapse has been avoided, the economy remains vulnerable. 
As such, it makes sense not to risk a shock to confidence that could trigger a renewed downturn. 
Second, Bernanke is the best among his peers. 
He did eventually come to understand the nature and severity of the crisis, and then took decisive steps that contributed to halting the economic freefall. 
That record, combined with doubts that any of his peers would have done better, means replacing him with another mainstream candidate makes little sense. 
These two factors justify Bernanke’s reappointment, but the faintness of praise is indicative of the deeper problems that his leadership has exposed. 
Those problems concern the state of economics and economic policy advice. 
One such problem is Wall Street’s implicit veto over the Fed. 
After all, a major reason for reappointing Bernanke is to avoid rocking financial markets. 
This also explains why Bernanke’s only rivals are from his peer group – the only people whom financial markets would be willing to accept. 
In the 1990’s, placating financial markets was also invoked to justify the reappointment of Bernanke’s predecessor, Alan Greenspan, and it is now perennially invoked to block change at the Fed and other central banks. 
In effect, financial markets have established an implicit veto over much of economic policy and the people who can hold top policymaking positions, and it is time to think how we can escape that hold. 
A second problem concerns the state of economics. 
Though Bernanke may be the best in his peer group, the fact is that the economic crisis decisively proved him and his peers to have been wrong. 
As a group, they joined in the adulation of Greenspan, whom one leading economist proclaimed “the greatest central banker who ever lived.” 
Almost without exception, mainstream economists failed to foresee the crisis, and even the few who did get the logic and unfolding of events wrong. 
For his part, Bernanke led the intellectual charge toward inflation targeting by central banks, arguing that setting a target for annual inflation was a full and sufficient framework for monetary policy. 
Such thinking contributed to neglect of asset and credit markets, promoted intellectual disregard for regulation, and fostered laissez-faire excess, because macroeconomic belief in the sufficiency of inflation targeting paired logically with microeconomic belief that credit markets would take care of themselves. 
In Greenspan’s words, the “self-interest of lending institutions” would protect shareholders and the economy from lending excess. 
This thinking explains why the Fed under Bernanke’s leadership was so slow to respond to the crisis, which began in August 2007 yet did not elicit a coherent and comprehensive response until November 2008. 
The Fed certainly would have reacted sooner had it not been attached to a model of banking more appropriate to the 1950’s. 
Oblivious to the role of the shadow banking system, the Fed did not understand how its implosion would undermine the traditional banking system. 
The Fed simply failed to comprehend the significance of traditional banks’ large holdings of mark-to-market assets and their own engagement in shadow banking via off-balance-sheet “structured investment vehicles.” 
Any dispassionate assessment of the Fed’s thinking before and well into the crisis shows that it failed to understand the economics of its own bailiwick, banking and financial markets. 
Moreover, the Fed promoted broader economic views about deregulation and the self-stabilizing nature of markets that the crisis has discredited. 
Though circumstances dictate that Bernanke is the best candidate and should be reappointed, the real challenge is to ensure a thorough intellectual housecleaning at the Fed in order to open space for alternative economic views. 
The great danger is that reappointing Bernanke will be interpreted as a green flag for a flawed status quo . 
That is where public debate and Bernanke’s Senate confirmation hearings enter the picture. 
Those hearings should be an occasion for critical examination of what went wrong, and why. 
If that happens, Bernanke’s reappointment can serve as a trigger for constructive change rather than an endorsement of a discredited paradigm. 

One World, One Europe 
PARIS – G-8, G-5, G-20, G-2, G-3, and now the G-14 (the G-8 plus the G-5 plus Egypt): never have the “mathematics” of world order seemed more complex and confusing. 
Kofi Annan, on the occasion of the 60th anniversary of the United Nations in 2005, attempted to adjust the multilateral institutions of our world to fit its new realities. 
It was a brave effort that came too soon. 
The Northern industrial world was not yet ready to recognize the new weight of the emerging powers and the need to strike a new balance between North and South, East and West. 
Has the current financial and economic crisis, given its traumatic depth and the obvious responsibility of the United States as its source, created the necessary conditions and a more favourable climate for a major re-foundation of the multilateral institutions? 
It is too early to be confident that true change will come. 
What is certain is that a rebalancing between North and South must start with an honest and hard-headed look at Europe’s current status in our multilateral system. 
Nowadays, there is both too much and too little Europe, or, to put it differently, too many European countries are represented in the world’s premier forums, with too many voices. 
But, in terms of weight and influence, there is not enough united Europe. 
In the early 1980’s, a former French foreign minister, Jean François-Poncet suggested that France and the United Kingdom give up their seats on the UN Security Council in favour of a single European Union seat. 
Germany would no longer seek a seat, Italy would not feel left out, and Europe’s international identity would be strengthened in a spectacular way. 
Of course, this was not to be. 
France and the UK were not willing to give up the symbol of their nuclear and international status. 
They are probably are even less willing to do so today in the name of a Union that is less popular than ever, at least in the British Isles. 
But let’s be reasonable: the absurdity of Italy’s presence in the G-8, together with the lack of official membership for countries such as China, India, and Brazil, is no longer acceptable or tenable. 
Yet, because of that anomaly, Europe suffers from a grave deficit of legitimacy and presence internationally. 
Of course, the US cannot be compared with a Union that is nowhere near becoming a United States of Europe. 
But if the contrast between the two sides of the Atlantic, between the continent of “Yes, we can” and the continent of “Yes, we should,” is so immense, it is for reasons that Europeans are refusing to face or even to discuss. 
The first one is the EU’s lack of anything that incarnates it. 
It would be absurd to set US President Barack Obama and EU Commission President José Manuel Barroso against each other as equals. 
Whereas Obama owes his election in large part to his charisma, Barroso is likely to succeed himself precisely because of his lack of charisma, because he says very little in so many languages. 
But, for national leaders in the EU whose last ambition is to have to deal with a new Jacques Delors, i.e., a man with ideas of his own, a cipher like Barroso is just the man for the job. 
On the other hand, the EU is paying a steep price for the bureaucratic anonymity of its leaders. 
A process of escalating alienation and indifference between the Union and its citizens is at work, illustrated by low turnout in the last European Parliament elections. 
As a result, there is less Union in Europe and less Europe in the world. 
A strong European voice, such as Nicolas Sarkozy’s during the French presidency of the EU, may make a difference, but only for six months, and at the cost of reinforcing other European countries’ nationalist feelings in reaction to the expression of “Gallic pride.” 
If Europeans want to regain self-confidence, pride and, collective hope, they must seize the opportunity that the necessary and inevitable adjustment of the multilateral system represents for them. 
They should make of necessity an opportunity. 
Of course, a single European voice in the major multilateral institutions appears more unrealistic than ever: who wants it, except maybe the EU’s smaller members? 
But Europe’s last chance to be a credible actor in a multi-polar world rests precisely on its ability to present a single, united, responsible voice. 
Europe currently exists as an economic actor, not as an international political actor. 
If Europeans were to set for themselves the goal of speaking with one voice, of having one representative in the spectrum of multilateral institutions – starting with the UN Security Council – they would be taken more seriously. 
In this case, one can really say that “less is more.” 
Such a move would be deemed premature by numerous critics. 
Twenty years ago, right after the fall of the Berlin Wall, one could say “I want Europe so much that I am willing to accept one Germany” – a revolutionary move if one had in mind the French writer François Mauriac’s famous joke, “I like Germany so much, I want two of them.” 
In today’s global age, with the rise of emerging powers and the relative decline of the West, the only Europe that will be taken seriously is a Europe that can speak and be seen as one. 

Job-Saving Technologies 
SAN FRANCISCO – This is an age of anxiety about the job-killing effects of automation, with dire headlines warning that the rise of robots will render entire occupational categories obsolete. 
But this fatalism assumes that we are powerless to harness what we create to improve our lives – and, indeed, our jobs. 
Evidence of technology’s potential to help resolve our job concerns can be found in online talent platforms. 
Digital platforms already have transformed many parts of the economy. 
The online marketplaces built by Amazon and Alibaba, for example, have reshaped the retail landscape, partly by changing the local nature of retail markets. 
Online talent platforms apply a similar approach to the world of work – with a similar impact. 
By creating regional, national, and even global job markets, they allow employers to tap into broader talent pools and connect job seekers with a wider universe of opportunities. 
In this way, they have transformed the typical job search, and are now approaching the critical mass needed to move employment numbers. 
Such platforms take various forms. 
Websites like LinkedIn, Monster.com, and Indeed.com – which match individuals with employers seeking to fill traditional jobs – have already engaged hundreds of millions of individual users and many of the world’s leading companies, and are generating the bulk of the economic impact. 
But there are also the digital marketplaces of the “gig economy,” which connect freelancers with work assignments, from web development to chauffeuring passengers, thereby reducing underused labor and capital. 
Digital platforms make markets more transparent and efficient, which is exactly the kind of disruption that today’s labor markets need. 
In many countries, 30-45% of the working-age population is unemployed, inactive, or working only part-time. 
Meanwhile, companies are complaining that they cannot fill open positions in sectors ranging from technology to health care. 
And those who are employed are often stuck in roles that do not take full advantage of their skills. 
These issues represent a staggering waste of human and economic potential. 
The problems stem from the fact that today’s labor markets provide crude, incomplete, and geographically restricted signals about the skills that actually are in demand. 
As a result, mapping out an education, training, and career path entails quite a lot of guesswork. 
That does not only hurt workers; it also means that companies’ needs can be left unmet. 
Online talent platforms can boost labor-market efficiency by aggregating data on candidates and job openings in a broader geographic area, thereby illuminating for workers which positions are open today, as well as the actions they can take to gain more fulfilling work. 
This dynamic could be especially important in Europe, where employment prospects differ radically across countries (and across regions within countries), and many feel trapped in stagnant local economies. 
It is not likely that someone will move from Spain to Swaziland, even for a dream job; but that person might accept a better position a few hundred miles away. 
Moreover, by facilitating faster matches, online talent platforms shorten the duration of unemployment, while the creation of flexible part-time opportunities can draw more inactive workers into the labor force and help part-time workers add hours. 
At the same time, by connecting the right person with the right role, such platforms can boost productivity. 
In short, while online talent platforms cannot boost weak demand in advanced economies, solve complex development issues in the emerging world, or create better jobs across the board, they can have a major impact on seemingly intractable issues like unemployment, underemployment, and low job satisfaction. 
According to a recent McKinsey Global Institute research study, they could increase global GDP by $2.7 trillion annually by 2025; that is equivalent to adding another United Kingdom to the world economy. 
Much of the impact of online talent platforms stems from the use of technology to bridge information asymmetries that impair labor-market performance. 
In the past, these gaps were only partly bridged by signals carrying useful information. 
But online talent platforms aggregate much larger amounts of information efficiently, increasing the “signal density.” 
With expanded data, companies can use predictive analytics to identify the best candidate for a given role. 
Job seekers can augment their educational credentials and employment histories with samples of their work and endorsements from co-workers and customers, thereby conveying their potential value to employers more effectively. 
Furthermore, platforms that aggregate anonymous reviews from current and former employees give individuals a better idea of what it is like to work for a given company, as well as the salary they can and should expect. 
As employee satisfaction becomes more widely reported, companies are facing pressure to ensure good working conditions in order to recruit the talent they need. 
So far, the biggest winners from this shift have been educated and skilled professionals in the advanced economies. 
In fact, the most sought-after engineers and software developers may not need to apply for jobs at all; companies are now increasingly recruiting “passive” candidates, sometimes forcing employers to increase the salaries of workers they want to retain. 
But it is not all good news. 
Now that employers have new tools for recruitment and assessment, they may find low-skilled workers easier to replace, potentially worsening income inequality in the short run. 
In the longer term, however, a better overall system for skills upgrading could be designed – one that could be integral to facilitating upward mobility. 
And there is another benefit in this regard. 
As the career outcomes associated with specific institutions and degree programs become more transparent, education and training providers will become more accountable for preparing their students for prosperous and productive lives. 
With global smartphone subscriptions set to reach eight billion by 2025, online talent platforms have enormous room to expand into new regions and sectors. 
As these technologies continue to evolve, they may change the world of work in ways we cannot even imagine today. 
It seems that there is room in the labor market for a little optimism, after all. 

Only the Weak Survive 
TOKYO – The risk of global currency and trade wars is rising, with most economies now engaged in competitive devaluations. 
All are playing a game that some must lose. 
Today’s tensions are rooted in paralysis on global rebalancing. 
Over-spending countries – such as the United States and other “Anglo-Saxon” economies – that were over-leveraged and running current-account deficits now must save more and spend less on domestic demand. 
To maintain growth, they need a nominal and real depreciation of their currency to reduce their trade deficits. 
But over-saving countries – such as China, Japan, and Germany – that were running current-account surpluses are resisting their currencies’ nominal appreciation. 
A higher exchange rate would reduce their current-account surpluses, because they are unable or unwilling to reduce their savings and sustain growth through higher spending on domestic consumption. 
Within the eurozone, this problem is exacerbated by the fact that Germany, with its large surpluses, can live with a stronger euro, whereas the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) cannot. 
On the contrary, with their large external deficits, the PIIGS need a sharp depreciation to restore growth as they implement painful fiscal and other structural reforms. 
A world where over-spending countries need to reduce domestic demand and boost net exports, while over-saving countries are unwilling to reduce their reliance on export-led growth, is a world where currency tensions must inevitably come to a boil. 
Aside from the eurozone, the US, Japan, and the United Kingdom all need a weaker currency. 
Even Switzerland is intervening to weaken the franc. 
Meanwhile, China is intervening massively to resist appreciation of the renminbi and thus maintain its export performance. 
As a result, most emerging-market economies are now similarly worried about currency appreciation, lest they lose competitiveness relative to China, and are intervening aggressively and/or imposing capital controls to stem upward exchange-rate pressure. 
The trouble, of course, is that not all currencies can be weak at the same time: if one is weaker, another must, by definition, be stronger. 
Likewise, not all economies can improve net exports at the same time: the global total is, by definition, equal to zero. 
So the competitive devaluation war in which we find ourselves is a zero-sum game: one country’s gain is some other country’s loss. 
The first salvos in this war came in the form foreign-exchange intervention. 
To diversify away from US dollar assets while maintaining its effective dollar peg, China started to buy Japanese yen and South Korean won, hurting their competitiveness. 
So the Japanese started to intervene to weaken the yen. 
This intervention upset the EU, as it has put upward pressure on the euro at a time when the European Central Bank has placed interest rates on hold while the Bank of Japan (BoJ) and the US Federal Reserve are easing monetary policy further. 
The euro’s rise will soon cause massive pain to the PIIGS, whose recessions will deepen, causing their sovereign risk to rise. 
The Europeans have thus already started verbal currency intervention and may soon be forced to make it formal. 
In the US, influential voices are proposing that the authorities respond to China’s massive accumulation of dollar reserves by selling an equivalent amount of dollars and buying an equivalent amount of renminbi. 
Meanwhile, China and most emerging markets are accelerating their currency interventions to prevent more appreciation. 
The next stage of these wars is more quantitative easing, or QE2. 
The BoJ has already announced it, the Bank of England (BoE) is likely to do so soon, and the Fed will certainly announce it at its November meeting. 
In principle, there is little difference between monetary easing – lower policy rates or more QE – that leads to currency weakening and direct intervention in currency markets to achieve the same goal. 
In fact, quantitative easing is a more effective tool to weaken a currency, as foreign exchange intervention is usually sterilized. 
Expectations of aggressive QE by the Fed have already weakened the dollar and raised serious concerns in Europe, emerging markets, and Japan. 
Indeed, though the US pretends not to intervene to weaken the dollar, it is actively doing precisely that via more QE. 
The BoJ and the BoE are following suit, putting even more pressure on the eurozone, where a stubborn ECB would rather kill any chance of recovery for the PIIGS than do more QE, ostensibly owing to fears of a rise in inflation. 
But that is a phantom risk, because it is the risk of deflation, not inflation, that haunts the PIIGS. 
Currency wars eventually lead to trade wars, as the recent US congressional threat against China shows. 
With US unemployment and Chinese growth both at almost 10%, the only mystery is that the drums of trade war are not louder than they are. 
If China, emerging markets, and other surplus countries prevent nominal currency appreciation via intervention – and prevent real appreciation via sterilization of such intervention – the only way deficit countries can achieve real depreciation is via deflation. 
That will lead to double-dip recession, even larger fiscal deficits, and runaway debt. 
If nominal and real depreciation (appreciation) of the deficit (surplus) countries fails to occur, the deficit countries’ falling domestic demand and the surplus countries’ failure to reduce savings and increase consumption will lead to a global shortfall in aggregate demand in the face of a capacity glut. 
This will fuel more global deflation and private and public debt defaults in debtor countries, which will ultimately undermine creditor countries’ growth and wealth. 

Measuring the Internet for Freedom 
ROME – Last year, during a wave of deadly political protests in Ethiopia, the government blocked more than 15 media websites and the smartphone chat application WhatsApp. 
Sites promoting freedom of expression and LGBTQ+ rights, as well as those offering censorship-circumvention tools, such as Tor and Psiphon, were also suppressed. 
All of this was uncovered through the use of software called ooniprobe, which is designed to measure networks and detect Internet censorship. 
Ooniprobe was developed more than five years ago by the Tor-supported Open Observatory of Network Interference (OONI), with which I work, in order to boost transparency, accountability, and oversight of Internet censorship. 
The software is free and open source, meaning that anyone can use it. 
And, indeed, tens of thousands of ooniprobe users from more than 190 countries have already done just that. 
Those users have contributed to the collection of millions of network measurements, all of which are published on OONI Explorer, arguably the largest publicly available resource on Internet censorship. 
Thanks to their use of ooniprobe, we uncovered the extent of last year’s wave of censorship in Ethiopia, as well as details of many other cases of censorship elsewhere in the world. 
In Uganda, local groups used ooniprobe during last year’s general election, when the government blocked social media. 
Ooniprobe’s network-measurement data not only confirmed the government’s action; it also uncovered which sites were blocked and the different methods used by Internet Service Providers (ISPs) to implement censorship. 
Ooniprobe also came in handy in Malaysia in 2015. 
Facing accusations that he had transferred nearly $700 million from the state investment fund 1MDB to his personal bank accounts, Prime Minister Najib Razak attempted to block news outlets and blogs that reported on the scandal. 
It was ooniprobe’s network-measurement software that enabled Malaysian civil-society groups to collect data that serve as evidence of the blocking. 
Of course, censorship is not always carried out to protect the politically powerful; it can also be used to reinforce social and cultural norms. 
In Indonesia, for example, low social tolerance for homosexuality may have played a role in the blocking of numerous LGBTQ+ websites, even though the country does not officially restrict LGBTQ+ rights. 
Similar factors may have influenced efforts to block sites perceived as overly critical of Islam. 
In Thailand, ISPs have, in the last three years, blocked access to a number of sites that are perceived to be offensive toward the country’s royal family. 
But, here, there is a legal justification: Thailand’s strict prohibition against lèse-majesté protects the royal family’s most senior members from insult or threat. 
Other cases of legally justified Internet censorship include the blocking of sexually explicit websites in countries where pornography is prohibited. 
Then there are cases where the motivation for censorship is unclear. 
Why, for example, has an online dating site been blocked in Malaysia? 
In some countries, ISPs appear to be censoring sites at their own discretion. 
According to ooniprobe data, multiple Thai ISPs simultaneously blocked access to different types of websites – from news outlets to Wikileaks to pornography – indicating that they likely received vague orders from authorities. 
Before ooniprobe, such censorship was difficult to detect, leading to a lack of accountability, with governments and ISPs often denying any and all involvement. 
Even in cases where governments announce official lists of blocked sites, they may leave some targets off. 
Likewise, ISPs may not always comply with official orders to lift blocks. 
Vimeo and Reddit, for example, were recently found to be blocked in some networks in Indonesia, even though the official ban on those sites was lifted more than two years ago. 
With ooniprobe, users are not only able to expose Internet censorship; they can also acquire substantial detail about how, when, where, and by whom the censorship is being implemented. 
OONI’s Web-Connectivity Test, for example, is designed to examine whether access to websites is blocked through DNS tampering, TCP/IP blocking, or a transparent HTTP proxy. 
Other ooniprobe tests are designed to examine the accessibility of chat apps – namely, WhatsApp, Telegram, and Facebook Messenger – within networks, as well as that of censorship-circumvention tools, such as Tor, Psiphon, and Lantern. 
OONI also provides software tests that uncover the presence of systems (“middle boxes”) that could potentially be responsible for censorship or surveillance. 
The depth of OONI data supports much-needed accountability and oversight. 
Lawyers can use OONI data to assess the legality of Internet censorship in their countries, and potentially introduce it as evidence in court cases. 
Journalists, researchers, and human-rights defenders can use the data to inform their work as well. 
And censorship-circumvention projects like Tor can use OONI findings on emergent censorship events to shape their tools and strategies. 
OONI data can help enrich public discourse about the legality, necessity, and proportionality of Internet censorship. 
That makes it a critical tool for safeguarding human rights on the Internet and beyond. 

The Death of OPEC 
IRVING, TEXAS – The Organization of the Petroleum Exporting Countries is dead. 
Saudi Arabia killed it. 
Now, OPEC is just a toothless zombie, attracting attention, but without having any impact on the living. 
Few have noticed OPEC’s demise for a simple reason: it never really had the impact that it was widely perceived to have. 
It was never actually a cartel, possessing monopolistic market power. 
Anyone who thought otherwise was mistakenly attributing to it Saudi Arabia’s market power. 
And Saudi Arabia’s power is expansive. 
It remains the dominant producer in world oil markets, and its political and economic decisions shape global energy economics. 
This impact will be intensified if the Kingdom resurrects Arab Light as the global benchmark crude. 
Of course, new players in the energy-production game could conceivably deal a blow to Saudi Arabia. 
But, so far, the Kingdom has managed to avoid serious injury. 
The shale-energy revolution in the United States, for example, has had a far-reaching international impact – far greater than expected. 
The Atlantic Basin ran an oil surplus – producing more than it consumed – for the first time in a half-century, while the Pacific Basin became the only dumping ground for crude. 
The surge in domestically produced shale oil caused OPEC members Algeria, Angola, and Nigeria to lose significant market share in the US. 
Yet that revolution has had little impact on Saudi Arabia, Iraq, or Kuwait, owing to crude quality. 
Algeria, Angola, and Nigeria were exporting to the US a kind of light sweet crude that is comparable to shale oil. 
Yet many US refineries are still geared toward the heavier and more sour types of crude that the country imports from the Middle East. 
As a result, Saudi Arabia’s market share in the US seems relatively secure. 
This is not to suggest that Saudi Arabia is invincible. 
On the contrary, it has lost market share among the largest oil importers in Asia, which have increased their purchases of West African crude (diverted from the US). 
Perhaps most painful, the Kingdom has lost substantial market share in China to Russia. 
Russian penetration of the Chinese market was spurred by the imposition of Western sanctions after Russia invaded Ukraine and annexed Crimea in 2014. 
China took full advantage of the Kremlin’s desperation, securing rock-bottom rates for Russian energy resources. 
Once the door to Asia was open, however, Russian companies seized the opportunity to enter the downstream markets of India and Indonesia – two countries that are critical to the Saudis’ own strategy. 
Over the last two years or so, Saudi Arabia has made starkly clear that it will not easily give up its market share – to anyone. 
It has pursued a campaign to recover its former position not just in crude, but also in petroleum products, natural gas liquids, and petrochemicals. 
To this end, it has sustained a price war, supported by a boost in production, aimed at pushing out weaker competitors. 
At first, Saudi Arabia took aim at the shale industry. 
But its strategy for asserting its dominance over global energy markets evolved over time, adapting to new economic information and political circumstances. 
Ultimately, Saudi Arabia dragged all of OPEC into the price war. 
Countries increased their production for as long as they could, causing prices naturally to drop. 
When production peaked, the bottom fell out of the market, because OPEC members were forced to enter into direct price competition with one another. 
The permanent internal rifts that all of this has produced were painfully apparent at this April’s OPEC meeting in Doha, where a deal to freeze output fell apart. 
Saudi Arabia refused to cut production unless Iran would do likewise. 
But Iran – which, like Russia, had lost considerable market share as a result of Western sanctions – refused to cut production outright. 
Producers that lost market share in the US will not cut production, either. 
By now, Saudi Arabia recognizes that low oil prices will not fully restore its market share in Asia and Europe. 
But it also sees that it has no more use for OPEC, an organization that it foisted on the world with the first Arab oil embargo in 1973 and has since used as a shield for its oil policies. 
With the US shale revolution having rendered OPEC useless, Saudi Arabia has decided that its creature is not worth keeping alive. 
But this does not mean that there is no hope for energy cooperation. 
Saudi Arabia is now pursuing a major shift in its foreign, economic, and energy policies, exemplified by the impending privatization of a portion of Aramco, its national petroleum company, which is set to expand its refining capacity. 
All of this suggests that competition in energy markets may shift from crude oil to refined products. 
That would create new opportunities for cooperation: producers with large refining and storage capacity could purchase surplus oil from producers lacking such capacities. 
A shift from competition in crude to competition in petroleum products would have a profound effect on global oil markets and related industries, like shipping. 
Ultimately, it would most likely boost the overall efficiency of the oil market and strengthen producers’ capacity to weather market volatility. 
The producers and refiners with the most sophisticated technologies would dominate – beginning with Saudi Arabia. 

Making Open Data a Reality 
NEW YORK – The idea of open data has gone mainstream. 
Yet despite the far-reaching benefits of freely sharing data, there is still a long way to go before it becomes common practice. 
In the last five years, major private and public research funders – including the Bill & Melinda Gates Foundation, the Wellcome Trust, the National Institutes of Health (NIH), and NASA – have instituted data-sharing policies, and municipal, state, and country governments in the United States have been promoting open data portals. 
Academic publishers, too, have embraced open data, and individual scholarly journals have established policies that encourage, expect, or even require sharing data. 
But the actual practice of sharing data has stagnated. 
In Figshare’s 2017 open data report, 60% of 2,300 surveyed researchers declared that they shared their data “either frequently or sometimes,” but only 20-30% shared “frequently.” 
Another recent study of 1,200 researchers found that “less than 15% of researchers share data in a data repository.” 
Data openness is certainly not the default in my field, the social sciences. 
Clearly, the prevailing policy approach to promoting open data – if you mandate it, they will share, to paraphrase Field of Dreams – is not working. 
To bring about change, researchers themselves must embrace data sharing. 
And to do that, we need the right information and incentives. 
In short, we need more carrots, rather than just sticks. 
Make no mistake: a data-sharing requirement is essentially a stick. 
So is replication, the other most commonly cited argument in favor of data sharing. 
Of course, replicating studies is crucial, and science is now plagued by a reproducibility crisis. 
But, in a 2016 survey of 4,600 researchers, only 31% of researchers who shared data said they were motivated by “transparency and re-use.” 
Major reasons why researchers hesitate to share their data, according to the same survey, include intellectual property or confidentiality issues, fears about misinterpretation or misuse of their work, or concerns that their research would be scooped. 
Given the “publish or perish” model that defines academic careers, and the competitive funding environment for all scientists, individuals benefit more from “owning” the data underlying their publications than from sharing their work. 
It is time to shift the cultural conversation about data sharing from what researchers might “lose” to what they stand to gain – beginning with credit. 
The good news is that data journals where researchers can publish their datasets are already gaining traction. 
The number of citations in three of the largest open-access journals (Data in Brief, Biodiversity Data Journal, and Scientific Data) jumped from three in 2012 to 1,028 in 2016. 
Another “carrot” is that data sharing maximizes return on investment for both researcher and donor. 
Currently, disparate study registries and data portals make it difficult for an individual researcher, collecting data with the goal of getting published in a high-impact journal, to find similar projects. 
That raises the risk that both research time and donor dollars will be wasted on work that directly overlaps with someone else’s. 
Data sharing would solve this problem. 
Similarly, for a randomized evaluation in Zambia on which I worked, my colleagues and I collected data on approximately 2,500 adolescents and young adults. 
To meet our donor’s requirements, we are publishing findings on about 10% of that data in peer-reviewed journals, but we lack the funding to analyze the data set further (a common problem for researchers). 
If our unused data were openly available, however, we could attract new collaborators to return to it – and potentially generate stronger analyses. 
Using existing, openly shared data makes it easier for researchers to reach across disciplines and formulate the kinds of innovative questions and research agendas that are far more likely to lead to groundbreaking discoveries. 
Beyond accelerating progress, the collaboration supported by data sharing boosts researchers’ ability to secure the funding they need, because donors are attracted to interdisciplinary, innovative work. 
Yet, to make the most of data sharing, donors should also shift their mindset and invest more in quality data collection and management during project implementation, and sustain funding for curation and continued analysis of datasets. 
Researchers need to be given adequate time and resources to make the most of the data they collect, discerning the deeper stories that the evidence reveals. 
Another positive impact of data sharing is that it supports future researchers, who can use the data we collected for, say, a dissertation. 
Early in my career as an NIH fellow, I was fortunate to have access to multiple internal datasets from researchers at the NIH and Johns Hopkins University, where I spent two years conducting secondary analyses across various settings. 
Building on previous work, I was able to publish a number of papers that advanced my research career. 
Beyond better incentives for researchers and donors, a fundamental shift in the culture of science is needed to accelerate scientific progress, and several promising initiatives are underway. 
For example, the Center for Open Science is promoting openness, integrity, and reproducibility of scholarly research. 
The Berkeley Initiative for Transparency in the Social Sciences is providing open data and training in research transparency, in order to strengthen the integrity of research and evidence used for policymaking. 
The Cochrane-REWARD prize is working to maximize the use of research funding, an estimated $170 billion of which is wasted each year. 
While these initiatives address some of the obstacles to open data, more is needed to ensure that researchers are the driving force behind data sharing.The Girl Innovation, Research, and Learning Center, a global center for adolescent research at the Population Council that I direct, is building the world’s largest Adolescent Data Hub, a unique global portal where researchers, organizations, and others can share and access high-quality quantitative data on more than a million individuals. 
We believe that open data can accelerate research transparency and innovative solutions that have a meaningful impact on the lives of the largest-ever generation of adolescents – 1.2 billion people. 
And we believe that as open-data practices become more widespread, the benefits of sharing and collaboration that they enable will extend much further. 

The Data-Driven City 
SAN JOSÉ – When you look at your phone or tablet, what do you see? 
Pixels? 
Pictures? 
Digital distraction? 
I see data. 
Every day, we generate enormous amounts of information, a binary trail of breadcrumbs that forms a map of our interests, habits, and interactions. 
For those of us in the business of urban planning, these disparate datasets represent a goldmine of opportunity. 
If harnessed properly, user-generated data can help planners build cities that are more in tune with people’s actual needs. 
There is just one problem: the world is literally drowning in data. 
To make use of all the information that people involuntarily produce, planners must improve how data is captured, analyzed, and shared between the public and private sectors. 
If we succeed, some of the biggest obstacles that the world faces – from poverty to climate change – could become a bit more manageable. 
One of the most significant innovations being embraced by the world’s planning agencies is the concept of “open data,” information that can be used by anyone to improve any aspect of public life. 
In an open-data environment, datasets from transportation, education, health care, and countless other municipal sectors are made available to optimize current services, or to create new ones. 
For example, France’s La Base Adresse Nationale pulls together location information to improve spatial analysis and emergency response times, while the European Union’s Urban Data Platform facilitates data sharing across the EU. 
When governments, universities, research centers, and innovation hubs work together to share information, they become true partners in the urban-planning process. 
Open data usage can also promote transparency and build trust in government decision-making and official policies. 
To be sure, many challenges must be overcome before governments can open the data floodgates. 
Legal frameworks must protect personal anonymity; data protocols should be adopted to ensure that decisions don’t exclude populations that are cut off from technology; and trustworthy platforms are needed to enable data sharing between agencies and municipalities without risk of sabotage. 
But, once the hurdles are overcome, the opportunities for better planning will be virtually endless. 
Nuggets of digital detail illuminate how people move in and interact with the built environment. 
When combined with data from government sources – such as information on air quality, traffic patterns, crime, or health statistics – user-generated information can lead to more sustainable cities. 
For example, by mapping how and when people travel, planners can know where to invest more in cleaner modes of transportation – such as bike-sharing systems or electric car-charging stations. 
The interaction between transportation and climate-related challenges is one of the most promising areas for testing open-data solutions. 
Today, roughly half of the world’s population lives in cities, but cities account for approximately 75% of global carbon dioxide emissions, which are largely attributable to transportation. 
In many parts of the world, twentieth-century urban development strategies created sprawling, car-centered cities; but accelerating rates of urbanization have made this approach unsustainable. 
Faced with such challenges, open data has become a key tool in redefining the urban-planning process. 
That is why my government is using it to understand how sectors like transportation – as well as agriculture, energy, and others – are affecting strategies to mitigate climate change. 
Costa Rica’s National Climate Change Metrics System, which is currently being developed, is planned as an open-source data tool that will integrate information from across national agencies into a single public portal. 
The goal is to help improve decision-making and enhance the country’s ability to monitor and meet its climate-change goals. 
Eventually, the system will be used to engage Costa Ricans in sustainability programs, while the source code will be shared with other developing countries. 
A world of truly open data will take time to build; people will need to become comfortable with the idea of user-generated information circulating freely. 
But governments have already recognized the importance of open data in solving key planning challenges. 
Costa Rica’s climate change portal is just one example of how improved access to information can streamline urban planning. 
So, the next time you pick up your smartphone, pause for a moment to consider the full potential of what you’re holding. 
A more sustainable future for everyone is in the palm of your hand. 

How to Be an Open Economy 
MILAN – The word “openness” has two related but distinct connotations. 
It can mean that something is unrestricted, accessible, and possibly vulnerable; or it can mean that something, such as a person or institution, is transparent, as opposed to secretive. 
The first meaning is often applied to trade, investment, and technology (though most definitions do not match opportunity with vulnerability), which have always driven structural economic changes, especially with respect to employment. 
Structural change can be simultaneously beneficial and disruptive. 
And policymakers have long had to strike a balance between the abstract principle of openness and concrete measures to limit the worst effects of change. 
Fortunately, academic research and historical perspective can help policymakers respond to this challenge intelligently. 
Consider the experience of Northern Europe’s small developed countries, which tend to be open, and for good reason: if they were not, they would have to over-diversify the tradable parts of their economies to meet domestic demand. 
That would impose high costs, because the small size of the domestic market would prevent them from achieving economies of scale in technology, product development, and manufacturing. 
But these countries’ openness has increased the economic and political salience of investments in human capital and a strong social safety net. 
Social-security policies are doubly important for small, specialized economies, because an external shock to one tradable sector can affect the entire economy. 
It wasn’t always so. 
Small- and medium-size economies such as Canada, Australia, and New Zealand used to have protectionist policies that over-diversified their tradable sectors. 
But with increased international trade and specialization, the cost of domestically produced goods – such as cars – relative to imports became too high for consumers to bear. 
In the 1980s and 1990s, these three countries began to open up, and experienced difficult structural transitions that nonetheless boosted productivity and provided broad-based benefits to citizens and consumers. 
Still, striking the right balance is never easy. 
Canada, Australia, and New Zealand are all resource-rich countries that are susceptible to the “Dutch disease” – when one strong, capital-intensive sector hurts other sectors by pushing up the value of the currency. 
This has given rise to continuing concerns about under-diversification, which would make them vulnerable to volatility in global commodity markets and pose challenges for employment. 
We tend to associate structural adjustments with international trade and investment. 
But industrial activity changes within countries all the time, and creates local- and regional-level challenges. 
For example, US textile production, once heavily concentrated in New England, shifted mainly to the South (before relocating to Asia and other lower-cost locales). 
In 1954, then-Senator John F. Kennedy wrote a long, fascinating article in The Atlantic in which he attributed this undesirable dislocation in New England to tax subsidies in southern states. 
Such practices, he argued, would lead to inefficiently high levels of industrial mobility, because corporations would pursue profits wherever they could, regardless of the impact on individual communities. 
To prevent this race to the bottom, Kennedy called not for free trade, but for regulations to make trade more fair and efficient. 
Indeed, structural changes are necessary to improve dynamic efficiency. 
But so, too, are policies to ensure that investments and economic activities are based on real comparative advantages, and not on transitory “beggar thy neighbor” incentive structures. 
This is particularly important during periods of rapid structural change. 
Because supply-side adjustments are slow, painful, and costly, they should not be made unnecessarily. 
But, like closed economies that miss out on the benefits of trade altogether, open economies with significant institutional or political obstacles to structural change will underperform. 
This explains why many open economies today are failing to adapt to new technologies and trade patterns. 
Too often, policymakers want to prevent change from occurring at all. 
But while blocking change can protect existing industries and jobs for a while, doing so dramatically deters investment, and eventually hurts growth and employment. 
A country’s economic and social-security structure can also stand in the way of change. 
As former Greek Finance Minister Yanis Varoufakis observes, the promise of a long-term growth dividend from structural reform is not enough to allay people’s concerns about the immediate or near-term future, especially in a semi-stagnant economy. 
If you replace something with nothing, you have to expect significant political and social resistance. 
If structural reforms are not accompanied by social-security reforms, they are likely to fail. 
The “Agenda 2010” reform program initiated by former German Chancellor Gerhard Schröder in 2003 is a good example of this multi-prong approach; but it proved to be politically perilous for Schröder, who was not re-elected in 2005. 
How reforms are sequenced also matters. 
For example, incumbent workers will be much more concerned with social-security reforms in a poorly performing economy than in a booming economy. 
Political resistance to structural reforms – especially from older incumbent workers – will be stronger in a low-output, high-unemployment economy, because it is worse to be laid off in such conditions. 
As a rule, a government should not introduce structural reforms until it has first gotten its economy moving with fiscal and investment-oriented policies. 
Proceeding in this order will reduce the political resistance to change. 
As it happens, Europe is currently experiencing a modest but significant surge in growth. 
But whether policymakers will take advantage of this opportunity to pursue needed reforms is anyone’s guess. 
One final lesson to bear in mind is that structural change is not just an unfortunate side effect of growth and the creation of new jobs and sectors; rather, it is an integral part of these processes. 
One can see this clearly in successful developing countries, where the recipes for growth include openness, modern sectors, trade, high levels of investment, and an expanding human-capital base. 
These countries are not spared from structural shifts and distributional challenges. 
But their transitions are faster and less painful, because investments run broadly across their public and private sectors, and across tangible and intangible assets. 
Developed economies are not so different in this respect. 
A significant across-the-board increase in investment might not fix all of their distributional and adjustment problems. 
But it certainly would help to spur growth and reduce economic and political frictions in their structural adaptations. 

Safeguarding the Open Internet 
THE HAGUE – Proposals regarding Internet governance are bound to generate serious friction. 
The online world, after all, has provided enormous opportunities to billions of denizens, largely because it has never been governed. 
And yet, as the Internet grows in importance, so do the risks inherent in the lack of regulation. 
There is a growing danger that the open platform we all cherish will increasingly be colonized by corporate greed, criminal activity, and conflict between states – with ordinary citizens the ultimate victims. 
It is essential that safeguards be put in place, and that countries and companies alike are bound by principles that encourage them to act in the common interest. 
The utopian view that governments and other institutions should stay out of the way ignores the role that countries are already playing on the Internet, often secretly. 
Nor does it account for the fact that giant companies are exploiting this largely unregulated environment to set themselves up as the new sovereigns. 
When a country censors online content on a massive scale or uses digital backdoors to monitor its citizens, the entire Internet feels the impact. 
Similarly, when companies with billions of users scattered around the world suffer data breaches or choose to pursue profits at the expense of universal human rights, it is not currently clear who can hold them to account. 
Human rights cannot be “balanced” with the interests of states or commercial companies. 
Upholding core principles requires a system of checks and balances – mechanisms that can ensure that human rights, including privacy, are safeguarded, even as legitimate security concerns are taken into account. 
Doing this will require the key players responsible for the Internet’s openness to enter into a mix of voluntary and binding agreements that establish something akin to the rule of law. 
Until now, discussions about Internet governance have aimed at establishing voluntary norms. 
These are important first steps, but if the process does not eventually lead to binding agreements, it is unlikely to succeed in keeping the Internet functioning and safe. 
Revelations of pervasive online surveillance have already eroded trust in the Internet and its suitability for communicating, accessing information, and doing business. 
It is crucial that the Internet’s central protocols be declared a neutral zone, free from interference by any party, as per a recommendation by the scientific council that is advising the Dutch government. 
This measure, which will work only if it is binding, is in the interest of all countries and companies, because the trust that users have in the services built on top of these protocols depends on it. 
Among the protected elements would be TCP/IP protocol suites, various standards, the domain name system (DNS), and routing protocols. 
The Global Commission on Internet Governance (of which I am a member) has put forward a proposal for “a new social compact” among citizens, their elected representatives, law-enforcement and intelligence agencies, businesses, civil-society groups, and programmers and developers. 
Among the provisions would be the recognition of privacy and personal data protection as a fundamental human right, and a call for clear, precise, and transparently created regulations that set limits on government surveillance and companies’ use of consumer data. 
Under this framework, governance would strengthen the technology upon which the Internet depends. 
Governments would not seek to create backdoors to access data if doing so would make the Internet less secure. 
Companies that store or transmit consumer data would assume greater responsibility for illegal intrusion, damage, or destruction. 
And efforts by the Internet’s technical custodians to incorporate human-rights-enhancing solutions in standards and protocols, including end-to-end data encryption, would be encouraged. 
Such a social compact and multi-stakeholder process would not replace judicial oversight and international human-rights law. 
Existing governance institutions should be brought to bear on Internet regulation wherever possible. 
But, given the enormous challenges that this entails, it is also necessary to encourage all actors to behave in the best interest of the Internet ecosystem as a whole. 
The dangers of doing otherwise are simply too great. 

Opening China, Then and Now 
WASHINGTON, DC – America’s opening to China by Richard Nixon and Henry Kissinger in 1971-1972 was a historic breakthrough. 
Less famous, but of equal importance, was the next major step, taken by Jimmy Carter exactly 30 years ago, establishing full diplomatic relations between China and the United States. 
Without this action, announced on December 15, 1978, US-China relations could not have moved beyond a small, high-level connection with a limited agenda. 
As they left office in 1977, President Gerald Ford and Kissinger left behind an incomplete and therefore unstable relationship with China. 
The US still recognized Taiwan, under the name of The Republic of China, as the legitimate and sole government of China. 
Since 1972, America and China maintained small “liaison offices” in each other’s capitals, without recognition. 
Official communications were very limited, and annual bilateral trade was under $1 billion. 
(Today, it is a staggering $387 billion.) 
Carter took office hoping to normalize relations with China. 
This would require switching American recognition from Taiwan to the mainland. 
Some saw this as a simple acknowledgement of reality, but in fact it was a momentous step that required diplomatic skill and political courage. 
A way would have to be found for the US, while recognizing China, to continue dealing with the government on Taiwan without recognizing their claim to represent China; most important, the US had to retain the right to sell arms to Taiwan. 
From a political point of view, there was the famed Taiwan lobby, one of the most powerful in the US, still dominated by the conservative wing of American politics.& 
Led by America’s “Mr. Conservative,” Senator Barry Goldwater, and the leading contender for the 1980 Republican nomination, Ronald Reagan, the Taiwan lobby would fight normalization all the way. 
(Goldwater took the US government to the Supreme Court to challenge, unsuccessfully, Carter’s action; 
Reagan, in the 1980 presidential campaign, pledged partially to undo normalization, only to abandon that position after he was elected.) 
The saga unfolded over the first two years of the Carter administration, entirely out of public view, except for two important trips to China, one by Secretary of State Cyrus Vance, the other by National Security Advisor Zbigniew Brzezinski. 
Incredibly, those of us involved in the process (I was then Assistant Secretary of State for East Asian and Pacific Affairs) managed to keep our intense negotiations completely secret. & 
The Chinese demanded a complete severing of all official ties between Taiwan and the US, including arms sales. 
Knowing that such a move would provoke an enormous backlash domestically, we looked for a formula for continuing official contacts and arms sales with Taiwan even after we had de-recognized them and terminated the mutual security treaty ratified during the Eisenhower years. 
There was no precedent for this in American or international law. 
With advice from Eisenhower’s former Attorney General, Herbert Brownell, State Department lawyers drafted the Taiwan Relations Act, a law like no other in American history, which allowed the US government to conduct business with Taiwan, including arms sales, without recognition. 
But when we explained to China why this was necessary in order to recognize them, they balked. 
They wanted trade and other benefits of recognition, which would benefit both nations in those Cold War days, when China was fiercely hostile to the Soviet Union, with which it had almost gone to war only a few years earlier. 
But Taiwan remained a huge, seemingly impossible obstacle. 
The breakthrough came in late 1978, and was carefully timed by Carter to follow the mid-term congressional elections. 
The most important factor in the breakthrough was probably the emergence of Deng Xiaoping as China’s new paramount leader. 
(Mao had died in 1976). 
Deng, who had been forced to wear a dunce cap and denounce himself during the insanity of the Cultural Revolution, had achieved the greatest comeback imaginable, and in the fall of 1978, he finally got enough power to cut a deal with the US: China would not “agree” to American arms sales or other activities with Taiwan, but they would proceed with normalization anyway. 
It was a classic example of Chinese negotiating style: firm on principle, flexible on specifics. 
I am leaving a lot out here – this was a very complicated negotiation – but that was the essence of it. 
In January 1979, Deng made his historic trip to the US, which began with a private dinner at Brzezinski’s house and climaxed with the most sought-after State dinner of the Carter years (also remarkable for Richard Nixon’s first visit to Washington since he had resigned; I sat at Nixon’s table, and retain a menu that everyone signed that night).& 
At Brzezinski’s house, Deng talked of his dreams for a China that he knew he would not live to see. 
He believed China could leapfrog the lost years in which the world had passed it by, but only with American support. 
He was ready to cooperate on containing the Soviet Union, even agreeing to the installation of secret American intelligence listening posts along China’s border to track Soviet missiles. 
Deng accurately foresaw a vast exchange of students, modern technology, and trade. 
More than any American official, he anticipated what the American opening to China would accomplish. 
But even Deng could not fully imagine what would be unleashed by that announcement of December 15, 1978 – nothing less than the development of the most important bilateral relationship in the world today. 


Opening Up Japan 
After a dozen years of stagnation, Japan's economy seems to be looking up. 
But appearances can deceive. 
Despite improvements and reforms, many of Japan's fundamentals remain woeful. 
Japan's decline has been palpable. 
In the late 1980's, it was fashionable in some Japanese policy circles to argue that the Pax Americana was over, to be replaced in Asia by Pax Japonica. 
America's economy seemed to be tanking, Japan's was soaring, and projections favored 2005 as the date when it would overtake the United States. 
That things have turned out far differently reflects Japan's inertia. 
The problems underlying Japan's decline are legion. 
Japanese policymakers and business leaders do not understand the concept of "creative destruction." 
Too many industrial dinosaurs are kept on life support. 
So, although some firms do extremely well - say, Toyota and Canon - there is little space for new ventures and entrepreneurs. 
If Japan's economy were a computer, it would have a hard disk full of obsolescent programs and a "delete" button that doesn't work. 
No matter what criterion one uses, Japan's economy remains the most closed among OECD countries and one of the most closed in the world. 
Not only is foreign capital conspicuously absent, but so are foreign managers, workers, intellectuals, and ideas. 
Universities, think tanks, and the media are for the most part insular institutions. 
Similarly, while non-government organizations (NGO's) are a dynamic component in most societies nowadays, Japan has few, and major international NGO's are nonexistent or have only a weak presence. 
Oxfam, one of the world's leading NGOs, with offices and branches all over the world, is absent altogether. 
The closed nature of Japanese society and the dearth of ideas are partly attributable to the linguistic barrier. 
Where Japan really falls short is in English - the global language, and thus the main purveyor of global ideas. 
In Asia, Japan ranks above only North Korea in scores on the Test of English as a Foreign Language (TOEFL) examination. 
Moreover, Japan's demographics are among the worst in the world. 
In this respect, Europe is not much better, although its current restrictive immigration policies will likely be eased over the next decade or so. No such assumption can be made about Japan, where an aging population will intensify the closed and intellectually arid nature of its society. 
As one of the world's major trading powers, Japan should be a leading player in the World Trade Organization and in trade policy forums. 
Yet despite being one of the main beneficiaries of the post-World War II open and multilateral trading system, Japan stands out as a retrograde mercantilist state. 
Isolation has brought confusion about Japan's place in the world. 
While Japan's government lobbies hard to get a permanent seat on the UN Security Council, its Prime Minister regularly flouts Asian opinion by paying his respects to war criminals at the Yasukuni Shrine. 
Apart from the immorality of such public behavior (imagine a German chancellor paying his respects at Goebbels' grave!), the fact that both China and the US have veto power at the UN suggests that it is stupid even from the standpoint of Realpolitik . 
Indeed, relations with China are Japan's most profound problem. 
Japan's emergence as East Asia's leading power in the nineteenth and early twentieth centuries involved three brutal wars in China, in which the Japanese army committed dreadful atrocities. 
The 1949 communist takeover in China, the Cold War, America's adoption of Japan as its pampered protégé, and the failure to prosecute Emperor Hirohito for war crimes, allowed Japan to avoid a moral reckoning. 
Now, as China rises and Japan declines, the old, deep-seated suspicions, tensions, and distrust are resurfacing. 
Japan's grim outlook is bad news for the world because it is the globe's second leading economic power. Prospects for Japan acting as a global economic locomotive and of playing a role in poverty reduction and economic development are, for now, almost nil. 
Indeed, Japan's current growth is being driven overwhelmingly by trade with China - a country with only one-thirtieth of Japan per capita GDP! 
From a broader geopolitical perspective, the situation becomes alarming. 
Despite its frequent economic booms, Asia is also a strategic and security minefield. 
A sclerotic, atavistic, nationalist, and inward-looking Japan can only aggravate the situation. 
What should Japan do? 
The only solution for Japan is to open up - not only its economy, but its society, its universities, its media, its think tanks, and, indeed, its bars and bathhouses. 
Many young Japanese - often the brightest and most entrepreneurial - demand to live in an open society, but the option they are choosing now is emigration. 
An open Japan would, by definition, be more outward-looking, would speak better English so that it could communicate across Asia and the world, would be more influenced by foreign ideas - including ideas concerning war guilt. 
It has been 150 years since the "black ships" of America's Navy forcibly opened up Japan. 
Today, the Japanese must open up their country themselves. 

Opening up Malaria Research 
LONDON – In recent years, tremendous progress has been made in the battle against malaria. 
According to the World Health Organization, the number of deaths from the disease has fallen by a staggering 60% since 2000 – the result of improved access to diagnostic testing and treatment. 
To be sure, there is still considerable work to be done, but the downward trend in new infections and deaths underscores the power of collaboration among governments (in malaria endemic and non-endemic countries alike), between commercial and non-profit organizations, and between academic science and medicine. 
Without such partnerships, advances in fighting this deadly disease would not have been possible. 
Alongside coordinated action on the ground, increasing openness and collaboration among scientists researching and developing a new generation of medicines and vaccines is paving the way for further progress. 
There is a growing recognition within the scientific community that no single organization or group has the know-how or resources to tackle malaria alone. 
As with many other diseases afflicting the developing world, the science is hugely complex, and the commercial opportunity is limited. 
Reversing the tide on malaria requires us to pool resources and combine the diverse experience and expertise of scientists from different backgrounds and specialties. 
Fortunately, scientists are already taking note, and the result is the emergence and spread of a disruptive new approach to research and development. 
Called “open innovation,” it turns the traditional R&D model on its head and removes barriers to collaboration. 
Based on the recognition that the whole can be greater than the sum of its parts, open innovation is a collegial way of working, in which sharing is everything. 
This openness is well illustrated by unprecedented levels of data sharing. 
In 2010, GSK, the Genomics Institute of the Novartis Research Foundation, and the St. Jude Children’s Research Hospital in Memphis, Tennessee, released into the public domain the details of more than 20,000 compounds that are active against the malaria parasite – 13,500 of which came from GSK’s proprietary compound library. 
This was a landmark move, one intended to galvanize the international research community. 
Medicines for Malaria Venture (MMV), a non-profit organization, took things a step further. 
Through the “open access malaria box,” MMV provides physical access to a diverse selection of 400 commercially available compounds. 
Access is free for scientists around the world, as long as they agree to make the results of their research public. 
To date, the malaria box has been shared with more than 250 research groups in 30 countries around the world, and has led to the initiation of several new drug- discovery programs across a range of neglected diseases. 
In addition to facilitating the sharing of tools and insights, open research creates frameworks for scientists from different institutions and backgrounds to work together (both physically and remotely), draw on each other’s strengths, and exchange know-how. 
One example of this type of collaboration is the world’s first “open lab” for research into diseases of the developing world, established in 2010 at GSK’s research site in Tres Cantos, Spain. 
The lab operates with the support and advice of a broad range of actors, including GSK, the Wellcome Trust, the European Union, and MMV, as well as various other product-development partnerships and academic centers. 
It enables researchers from leading institutions worldwide to work alongside industry scientists in a dynamic and collaborative environment, with the aim of transforming early research ideas into drug-discovery programs. 
With 60 projects completed since its establishment, this initiative has gained wide recognition as an incubator for new ideas and a valuable model for R&D into treatments for other major health challenges. 
Other intensely collaborative R&D initiatives are also bearing fruit. 
Three potential new treatments for malaria being developed by GSK (two in partnership with MMV) are progressing to clinical trials. 
Another potential new drug being developed through a collaboration between GSK and MMV, for vivax malaria, is further along in the development process, having entered the final stages of clinical trials. 
If successful, it will be the first treatment for relapsing malaria approved in more than 60 years. 
Moreover, last year, regulators gave the green light to GSK’s malaria vaccine. 
A world first, it is the culmination of three decades of research and unprecedented levels of collaboration between GSK, the PATH Malaria Vaccine Initiative, and prominent African research centers. 
But while we have good reason to be encouraged by recent progress, we must not become complacent in our efforts to defeat malaria. 
Each positive statistic is balanced by the stark reality that there are still around 200 million cases of malaria each year, killing nearly 500,000 people, the vast majority of whom are children under the age of five. 
With the establishment of a strong, collaborative research community and the increasingly free flow of knowledge, we are now better placed than ever to step up our efforts, and to encourage others to follow suit. 
In an area where commercial gains are limited, but the potential for vastly improving the health and economies of entire countries is enormous, scientists must continue to break down silos and collaborate for the global good. 

Why Corruption Matters 
WASHINGTON, DC – Pope Francis has called corruption “the gangrene of a people.” 
US Secretary of State John Kerry has labeled it a “radicalizer,” because it “destroys faith in legitimate authority.” 
And British Prime Minister David Cameron has described it as “one of the greatest enemies of progress in our time.” 
Corruption, put simply, is the abuse of public office for personal gain. 
As leaders increasingly recognize, it is a menace to development, human dignity, and global security. 
At the anti-corruption summit in London on May 12, world leaders – together with representatives from business and civil society – will have a critical opportunity to act on this recognition. 
Corruption is decried across cultures and throughout history. 
It has existed as long as government has; but, like other crimes, it has grown increasingly sophisticated over the last several decades, with devastating effects on the wellbeing and dignity of countless innocent citizens. 
For starters, corruption cripples prospects for development. 
When, say, public-procurement fraud is rampant, or royalties for natural resources are stolen at the source, or the private sector is monopolized by a narrow network of cronies, populations are unable to realize their potential. 
But corruption also has another, less-recognized impact. 
As citizens watch their leaders enrich themselves at the expense of the population, they become increasingly frustrated and angry – sentiments that can lead to civil unrest and violent conflict. 
Many current international security crises are rooted in this dynamic. 
Indignation at the highhanded behavior of a corrupt police officer helped to drive a Tunisian fruit seller to set himself on fire in 2010, touching off revolutions across the Arab world. 
Protesters demanded that specific ministers be arrested and put on trial, and they called for the return of pilfered assets – demands that were rarely met. 
In places where government officials enjoy (and often flaunt) their enrichment and impunity, extremist movements – including the Taliban, Boko Haram, and the Islamic State – exploit citizens’ outrage. 
The only way to restore public integrity, these groups assert, is by means of a rigidly applied code of personal conduct. 
With no viable recourse – and no avenue for peaceful appeal – such language has grown increasingly persuasive. 
It is clear that corruption must be combated. 
What is less clear is how to do it. 
In a world of competing demands, corrupt governments may seem to serve vital purposes. 
One deploys soldiers to the fight against terrorism; another provides critical energy supplies or access to raw materials. 
Leaders must inevitably contend with difficult tradeoffs. 
To determine the best approach in each specific case, governments must analyze the problem more effectively, which means improving the collection of intelligence and data. 
As security expert Sarah Chayes argues in Against Corruption, the volume of essays that the British government will publish to accompany the summit, corruption today is structured practice. 
It is the work of sophisticated networks, not unlike organized crime (with which corrupt agents are often integrated). 
Governments must study these activities and their consequences the same way they study transnational criminal or terrorist organizations. 
Armed with such assessments, donor countries must structure assistance in a way that mitigates corruption risks. 
Military or development assistance is not apolitical. 
Programs must be tailored to ensure that funds are not captured by kleptocratic elites. 
This means that anti-corruption efforts can no longer be shunted off to under-resourced specialists; they must be central to the planning of major development initiatives or the sale of costly weapons systems. 
Recipient governments must understand that funding will dry up if they continue to squander or steal it. 
In fact, corruption and its implications must inform the way Western officials interact with their counterparts in the developing world. 
The departments that we spent our careers serving – the US State Department and the US Department of Defense – set great store by building relationships. 
Diplomats depend on these relationships to advance their national interests, and professional ties between military officers are sometimes the only channels that weather political storms. 
But diplomats and military brass alike should be willing to take a step back when appropriate, condition their interactions, and make use of available leverage – even at the risk of a counterpart’s wrath. 
But, as recent revelations about purveyors of shell companies or bribery by intermediaries demonstrate, much of the real leverage is to be found at home – in the domestic financial and property industries, in public relations and law firms that burnish kleptocrats’ images, and in universities that educate corrupt officials’ children and solicit their donations. 
The application of the US Racketeer Influenced and Corrupt Organizations (RICO) Act to indict officers of FIFA, soccer’s international governing body, shows how focusing on Western service providers can curb corruption among foreign officials. 
Another important tool in the fight against corruption will be technological innovation, which can reduce opportunities for wrongdoing, empower citizens to highlight illegal practices, and enhance government transparency and accountability. 
Strides have already been made in a number of areas, from electronic voter registration to electronic payments for civil servants. 
While technology is no panacea, when paired with wise policy reforms, it can make a meaningful contribution to the fight for good governance. 
None of these suggestions will be easy to implement. 
But, to address many of the crises currently besetting the world, a strong focus on combating corruption is vital. 
Our hope is that the upcoming conference in London demonstrates the unity of purpose and commitment to action that is so badly needed. 

Congratulations, President Macron – Now We Oppose You 
ATHENS – Prior to the second round of the French Presidential election, DiEM25 (the pan-European movement of democrats, mostly of the left, that I helped to found) promised Emmanuel Macron that we would “mobilize fully to help” him defeat Marine Le Pen. 
This we did – incurring the wrath of many on the left – because maintaining “an equal distance between Macron and Le Pen,” we believed, was “inexcusable.” 
But there was a second part to our promise to Macron: if he “becomes merely another functionary of Europe’s deep establishment,” pursuing dead-end, already-failed neoliberalism, we “will oppose him no less energetically than we are – or should be – opposing Le Pen now.” 
Relieved that Macron won, and proud of our clear support for him, we must now fulfill the second part of the promise. 
No “honeymoon” period: we must oppose Macron immediately. 
Here’s why. 
Macron’s electoral program made clear his intent to continue with the labor-market policies that he began to introduce as former President François Hollande’s economy minister. 
Having spoken to him about these policies, I have no doubt that he believes in them strongly. 
He follows a long tradition of blaming the legal constraints on firing workers for the fall in permanent employment and the emergence of a new division between protected and precarious employees – between insiders, with well-paid, quasi-tenured positions, and outsiders, who work as service providers without benefits and often under zero-hour contracts. 
Trade unions and the left, according to this view, are actually a conservative force, because they defend insiders’ interests while ignoring the plight of the burgeoning army of outsiders. 
For Macron, a true progressive must not only support reforms that strengthen employers’ right to dismiss and manage workers; equally important are increases in social security for those losing their jobs, training in new skills, and incentives to take up new jobs. 
The idea is simple: If employers have more control over how long and how much they pay their employees, they will hire more workers under normal contracts. 
And the improved social safety net will ensure that workers with the right skills will be available. 
There is, of course, nothing new to this idea. 
Known by the unfortunate neologism “flexicurity,” it was implemented with some success in Denmark and other Scandinavian countries in the 1990s. 
But flexicurity is bound to fail badly in France, thus strengthening Le Pen’s xenophobic nationalists, because it can work only in a macroeconomic environment of investment-led growth. 
Alas, this is not the environment that the new French President has inherited. 
In today’s France, investment in fixed capital, relative to national income, is at its lowest level in decades – and falling. 
This reinforces deflationary expectations, which, when dismissals become easier, imply a rapid reduction of permanent, full-time positions. 
In short, rather than ameliorating the division between insiders and outsiders, Macron’s labor-market legislation would deepen it. 
Macron’s greatest difficulty will be the same as Hollande’s: dealing with Germany. 
The German government – and consequently the Eurogroup of eurozone finance ministers, which Germany dominates – never misses a chance to castigate the French for their failure to bring the government’s budget deficit below the agreed 3%-of-GDP limit. 
Macron has pledged to achieve this by dismissing civil servants, cutting local government spending, and increasing indirect taxes, which ultimately hit the poorest. 
In any economy afflicted by low and falling investment, cutting government spending and raising indirect taxes is bound to weaken aggregate demand, thus confirming the pessimistic expectations that prevent investors from investing and giving the deflationary wheel another spin. 
As if this were not enough, Macron has promised to redress an injustice he feels burdens the low-income, asset-rich French: he pledged to reduce taxes on wealth or assets that do not generate incomes above a certain threshold. 
As with flexicurity, there is a logic to this: Taxing assets that do not generate incomes makes little sense from an ethical, political, or economic viewpoint. 
Even so, to reduce wealth taxes before closing the loopholes that allow the income-rich (who are often also asset-rich) to pay their share of income tax makes little sense. 
To do so while practicing austerity on the poor is to commit an act of vandalism on an already divided society. 
Macron understands the folly in the foundations of the eurozone. 
And he has promised to work tirelessly to convince Germany that Europe must speedily create a proper banking union, common unemployment insurance, a debt-restructuring mechanism for countries like Greece and Portugal, a proper federal treasury, Eurobonds (operating like US Treasuries), and a federal parliament that legitimizes the federal treasury’s authority. 
So, what will Macron do when Germany says nein? 
In fact, the Germans have said so already. 
According to Wolfgang Schäuble, Germany’s finance minister, all Europe now needs is to convert the European Stability Mechanism into a European Monetary Fund. 
In other words, if France wants joint funding, it must submit itself to the same conditionality that wrecked Greece. 
Martin Schulz, the leader of Germany’s opposition Social Democrats, agrees that no new fiscal institution is necessary, proposing only that France and Germany jointly finance some common investment projects. 
In other words, nein means nein. 
Hollande, lest we forget, also won the French Presidency by promising to challenge Germany on eurozone macroeconomic policy – and then quickly abandoned the fight. 
If Macron is to succeed, he will need a credible fallback position and a European strategy that he can pursue without German agreement. 
Such a plan is not in evidence. 
All we see is a readiness to do whatever Germany demands in advance, including “flexicurity,” austerity, and so forth, in the hope that Germany will then agree to some of his eurozone reforms before it is too late. 
Reasonable people understood that Macron ought to be supported against Le Pen. 
Now they understand that Macron’s policies will worsen the deflationary, regressive cycle that is Le Pen’s greatest ally. 
With the election over, opposing Le Pen now means opposing Macron. 

Turkey’s Emboldened Opposition 
ISTANBUL – In Turkey, where President Recep Tayyip Erdoğan’s government has been working to centralize political power, opposition parties have lately had few reasons to be optimistic. 
This month’s massive rally in Istanbul was a rare exception. 
On July 9, after walking for 25 days from the capital, Ankara, Turkey’s main opposition leader, Kemal Kiliçdaroğlu, urged supporters to resist the decline in democratic freedoms. 
“We will be breaking down the walls of fear,” Kiliçdaroğlu told a crowd of hundreds of thousands. “The last day of our justice march is a new beginning, a new step.” 
The question now is whether Turkey’s divided political opposition can move beyond rhetoric, and mount a meaningful, unified challenge to Erdoğan’s political hegemony. 
The party that Kiliçdaroğlu leads, the Republican People’s Party (CHP), commands a high level of support from Turks frustrated by Erdoğan’s majority rule. 
But in Turkey’s constrained political environment, and with a popular if polarizing president still at the helm, opposition leaders will face a difficult struggle to maintain the momentum they have established. 
When I spoke with Kiliçdaroğlu a few days before his arrival in Istanbul, as he approached the city limits, he sounded as surprised as anyone by the protest’s size, and was keenly aware of the difficulties that loomed. 
The march was an unplanned reaction to the arrest of Enis Berberoğlu, a former editor-in-chief of the mainstream Hürriyet newspaper, and a CHP member of parliament. 
But the march’s more concrete objectives, like its route, became known only after the 450-kilometer (280-mile) protest got underway. 
By the time Kiliçdaroğlu arrived in Istanbul, marchers were calling for economic equity, educational opportunity, gender equality, and a guarantee of non-discrimination on the basis of ethnicity, religion, or cultural identity. 
Kiliçdaroğlu, meanwhile, said his goal was the complete remodeling of the Turkish state, with clear limits on executive authority by a re-empowered parliament, an impartial judiciary, and a free media. 
Forging a coherent political platform from such a diverse array of objectives will test the CHP leadership. 
In recent years, spontaneous demonstrations like the one just completed have not delivered the reforms participants have sought. 
In May 2013, for example, huge crowds gathered to challenge the government’s plans to develop Istanbul’s Gezi Park; the demonstrations ended with no real political impact. 
A similar outcome is possible this time. 
Nonetheless, polling numbers seem to suggest that the public is increasingly behind Kiliçdaroğlu. 
According to a survey published by Research Istanbul on the day of the rally, support for the march was 43%, which is about 17 percentage points higher than the CHP’s approval ratings. 
In other words, CHP marchers drew support from outside their base, a sign of Turkey’s deepening disillusionment with the status quo. 
Supporters included members of the pro-Kurdish People’s Democratic Party (HDP), 83% of whom approved of the protest. 
It even resonated with members of Erdoğan’s own Justice and Development Party (AKP); 10% of AKP members surveyed said they supported the march’s objectives. 
With his unexpected, unplanned civil disobedience, Kiliçdaroğlu seems to have consolidated his role as the leader of a larger, somewhat fragmented, opposition. 
In the year since last July’s failed coup, the government’s inevitable but overly heavy-handed response has alienated many Turks. 
With emergency rule still in effect, a growing segment of the public, it seems, is receptive to the opposition’s calls to strengthen the rule of law. 
Erdoğan’s narrow victory in April’s constitutional referendum, which granted the president sweeping new powers to dissolve Parliament, issue decrees, and unilaterally appoint judges, deepened the opposition’s resolve. 
But it also helped push more Turks into the opposition’s embrace. 
According to a Research Istanbul survey, among those who voted “no” to the referendum, 85% stood with Kiliçdaroğlu marchers. 
Tellingly, 7% of those who voted “yes” did as well. 
It is too early to speculate whether Kiliçdaroğlu’s march will have a lasting impact on Turkey’s political direction. 
But, at the very least, it has reframed expectations for the country’s next presidential election, now scheduled for November 2019. 
But even with the modest gains made earlier this month, Erdoğan remains a formidable opponent, and there is still a long road to walk if Kiliçdaroğlu’s “new beginning” for Turkey is to be realized. 

Standing Up to Illiberalism 
LONDON – It is a rare political speech that stops me in my tracks. 
But that is exactly what happened this summer when I read a remarkable address by Viktor Orbán, Hungary’s increasingly authoritarian prime minister. 
Orbán rarely commands attention outside of his country. 
The last time he gave a speech as noteworthy as this summer’s was 25 years ago, when, as a young man, he helped break the back of communism in Europe. 
Speaking in June 1989 at the reburial of Imre Nagy – who led Hungary during its 1956 anti-Soviet uprising – Orbán angrily demanded the withdrawal of Russian troops from Hungarian territory. 
This summer, however, Orbán struck an entirely different note. 
He delivered a speech in favor of what he called the “illiberal state,” offering five examples of successful “systems that are not Western, not liberal, not liberal democracies, and perhaps not even democracies.” 
Russia and China were among them. 
It was as though the Iron Curtain and the tanks that crushed Nagy’s government – let alone Orbán’s younger self – had never existed. 
Russia and China may no longer be communist, but they certainly are illiberal and definitely not democratic. 
Russia is poised somewhere between authoritarianism and totalitarianism; and, for all of China’s recent economic progress, the rising Asian power remains squarely in the same camp. 
Orbán’s remarks, and his subsequent announcement of plans to implement his vision of “an illiberal state,” were greeted with shock. 
How could he profess such views as the leader of a European Union member state, even as he stuffed his government’s coffers with EU subsidies? 
The truth is that Orbán was merely echoing an increasingly widespread argument (though one that usually is expressed more delicately). 
Six years after the start of the global financial crisis, many are beginning to ask uncomfortable questions. 
How can liberal democracies remain globally competitive? 
Have Western democracies lost their self-confidence and their ability to deliver a better life for their citizens? 
Are America and Europe in decline, haggard and living on past glories? 
What Orbán would describe as the “liberal democracies” in the United States and Europe are indeed weighed down by internal problems. 
In the US, polarized politics, gerrymandered Congressional districts, and a constitution that seems to check more than it balances, have obstructed reforms and left the country seemingly adrift in choppy waters. 
The middle class is being hollowed out, and failed overseas adventures have discouraged the once “indispensable nation” from bearing the burden of global leadership. 
America remains indispensable; alas, it has allowed the notion that it is unavailable for duty to take root. 
At the same time, Europe seems incapable of upholding the social contract that underpinned its post-war economic boom. 
The continent’s most successful economy, Germany, insists that its partners follow its brand of fiscal conservatism, choking off the growth that would make painful reforms easier to implement. 
With the world’s most successful democracies obsessed with recent failures, international politics has drifted toward more dangerous potential outcomes. 
Sensible deterrence, bold efforts to reform international institutions, and a readiness to fulfill responsibilities have all fallen victim to the West’s exaggerated sense of failure and political stalemate. 
And yet, even as Western democracies seem least able to act, more will be required of them. 
None of the countries that Orbán cited in his speech has offered an alternative vision of world order. 
On the contrary, their domestic problems threaten to turn uncertainty into peril. 
Russia will have to confront the impact of a collapse in oil prices on its petro-economy. 
Major firms are begging for government handouts to tide them over. 
The ruble is falling like a stone. 
It will be a tough winter in Moscow and St. Petersburg. 
Even China’s supersonic growth is beginning to slow; some economists, including Larry Summers, are predicting that it could grind suddenly to a halt. 
Either way, the road ahead is likely to be bumpy, with increasing friction where politics rubs against economics. 
At home (most notably in Hong Kong) and abroad, China gives the impression that the word “compromise” does not exist in Mandarin. 
Orbán’s putative political role models are likely to become even more shrill and nationalist in foreign policy as they attempt to retain domestic support. 
In order to secure peace on the home front, leaders will point to the enemies – real or imaginary – at the gate. 
The world’s liberal democracies must start believing in themselves again. 
They must prove that Orbán’s remarks were nothing more than bombastic nonsense. 
If we want the “peace on earth and mercy mild” promised in our Christmas carols, we will need to work much harder and more confidently to secure them. 

How Will New Cybersecurity Norms Develop? 
CAMBRIDGE – Last month, United Nations Secretary-General António Guterres called for global action to minimize the risk posed by electronic warfare to civilians. 
Guterres lamented that “there is no regulatory scheme for that type of warfare,” noting that “it is not clear how the Geneva Convention or international humanitarian law applies to it.” 
A decade ago, cyber security received little attention as an international issue. 
But, since 2013, it has been described as the biggest threat facing the United States. 
Although the exact numbers can be debated, the Council on Foreign Relations’ “Cyber Operations Tracker” contains almost 200 state-sponsored attacks by 18 countries since 2005, including 20 in 2016. 
The term cybersecurity refers to a wide range of problems that were not a major concern among the small community of researchers and programmers who developed the Internet in the 1970s and 1980s. 
In 1996, only 36 million people, or about 1% of the world’s population, used the Internet. 
By the beginning of 2017, 3.7 billion people, or nearly half the world’s population, were online. 
As the number of users soared after the late 1990s, the Internet became a vital substrate for economic, social, and political interactions. 
Along with rising interdependence and economic opportunity, however, came vulnerability and insecurity. 
With big data, machine learning, and the “Internet of Things,” some experts anticipate that the number of Internet connections may grow to nearly a trillion by 2035. 
The number of potential targets for attack, by both private and state actors, will expand dramatically, and include everything from industrial control systems to heart pacemakers and self-driving cars. 
Many observers have called for laws and norms to secure this new environment. 
But developing such standards in the cyber domain faces a number of difficult hurdles. 
Although Moore’s law about the doubling of computing power every two years means that cyber time moves quickly, human habits, norms, and state practices change more slowly. 
For starters, given that the Internet is a transnational network of networks, most of which are privately owned, non-state actors play a major role. 
Cyber tools are dual use, fast, cheap, and often deniable, verification and attribution are difficult, and entry barriers are low. 
Moreover, while the Internet is transnational, the infrastructure (and people) on which it relies fall within the differing jurisdictions of sovereign states. 
And major states differ in their objectives, with Russia and China stressing the importance of sovereign control, while many democracies press for a more open Internet. 
Nonetheless, the description of “www” as the “wild west web” is a caricature. 
Some norms do exist in cyberspace. 
It took states about two decades to reach the first cooperative agreements to limit conflict in the nuclear era. 
If one dates the international cybersecurity problem not from the origins of the Internet in the early 1970s but from the takeoff period since the late 1990s, intergovernmental cooperation in limiting cyber conflict is now at about the two-decade mark. 
In 1998, Russia first proposed a UN treaty to ban electronic and information weapons (including for propaganda purposes). 
With China and other members of the Shanghai Cooperation Organization, it has continued to push for a broad UN-based treaty. 
The US continues to view such a treaty as unverifiable. 
Instead, the Secretary-General appointed a Group of Governmental Experts (UNGGE) which first met in 2004, and in July 2015 proposed a set of norms that was later endorsed by the G20. 
Groups of experts are not uncommon in the UN process, but only rarely does their work rise from the organization’s basement to recognition at a summit of the 20 most powerful states. 
The UNGGE’s success was extraordinary, but it failed to agree on its next report in 2017. 
Where does the world go now? 
Norms can be suggested and developed by a variety of policy entrepreneurs. 
For example, the new non-governmental Global Commission on Stability in Cyberspace, chaired by former Estonian Foreign Minister Marina Kaljurand, has issued a call to protect the public core of the Internet (defined to include routing, the domain name system, certificates of trust, and critical infrastructure). 
Meanwhile, the Chinese government, using its Wuzhen World Internet Conference series, has issued principles endorsed by the Shanghai Cooperation Organization calling for recognition of the right of sovereign states to control online content on their territory. 
But this need not contradict the call to protect the public core, which refers to connectivity rather than content. 
Other norm entrepreneurs include Microsoft, which has issued a call for a new Geneva Convention on the Internet. 
Equally important is the development of norms regarding privacy and security regarding encryption, back doors, and the removal of child pornography, hate speech, disinformation, and terrorist threats. 
As member states contemplate the next steps in the development of cyber norms, the answer may be to avoid putting too much of a burden on any one institution like the UNGGE. 
Progress may require the simultaneous use of multiple arenas. 
In some cases, development of principles and practices among like-minded states can lead to norms to which others may accede at a later point. 
For example, China and the US reached a bilateral agreement restricting cyber espionage for commercial purposes. 
In other cases, such as security norms for the Internet of Things, the private sector, insurance companies, and non-profit stakeholders might take the lead in developing codes of conduct. 
What is certain is that the development of cybersecurity norms will be a long process. 
Progress in some areas need not wait for progress in others. 

Osama bin Laden, Bard of Terror 
PRINCETON – In Riyadh last March, King Abdullah of Saudi Arabia decorated American Vice President Dick Cheney with the Kingdom’s Order of Merit. 
This gesture elicited hundreds of Internet postings from Arabs condemning the award as treachery and lamenting the pitiful state of leadership in the Arab world. 
To cite only one comment, addressed to the King: “Shame on you for claiming to be Custodian of the Two Holy Sanctuaries” in Mecca and Medina. 
At the same time, Osama bin Laden released two audio statements condemning Western and Israeli attacks on Muslims and reiterating the need for violent warfare to liberate occupied Muslim territories from the infidels. 
In terms of media strategy, the contrast between the leaders of the Arab countries and bin Laden could not be starker. 
On the one hand, Arab kings and presidents lack charisma, seem politically impotent and are rarely, if ever, on message with respect to the “big issue” concerns of the peoples of the Middle East. 
Bin Laden, however, is mesmerizing, framing the perceived frustrations of many Arabs in his use of classical Arabic, including the recitation of medieval-style poetry. 
He deliberately projects an image of himself as a leader who speaks truthfully, conveying a muscular ideology that articulates the sense of humiliation that Muslims feel today and offers a plan of action to remedy the situation. 
Arab culture places a high value on poetic expression, so it is no coincidence that it appears repeatedly in Al Qaeda’s propaganda. 
Bin Laden often recites poetry to underscore a point and to associate himself with chivalrous and learned warriors who were willing to become martyrs for Islam’s honor and glory. 
Here are a few lines of the kind of poetry that Al Qaeda uses: 
I do not sell our honor like a pimp 
that I should lower my eyes, or surrender. 
I see the army of the Cross in our land, 
invading Iraq and rubbing our face in the dirt. 
You who ask me to give up our jihad, 
and to live a life of comfort and happiness, 
Don’t waste your breath. 
I will not give up the jihad while our community 
is gored with a poisoned knife; 
No indeed, I will not give up the jihad 
while their Crosses attack in the dark of night, 
Pollute Sacred Arabia, and proclaim 
the establishment of “security” while chaining my wrists. 
It is difficult to know what to make of this literary material, and at times to understand it because of its archaic style, allusions and metaphors. 
But Al Qaeda’s poetry deserves closer attention, because it is a medium of communication between members of the movement. 
Indeed, through poetry, Al Qaeda defines what it means to be a member of the movement and commemorates the big episodes in the group’s history by glorifying the exploits of “martyrs.” 
Although much of this poetry is not necessarily of high quality, it nonetheless underscores the image that Al Qaeda’s leadership wishes to project, namely that Al Qaeda’s message is authentic and reflects “real Islam.” 
Moreover, Al Qaeda uses poetry to address the challenges that it faces. 
Contrasting its fighters’ bravery and commitment with the “comfort” of Muslim bystanders, Al Qaeda tries to rally more fighters to its cause in Iraq. 
Its dilemma is stark. 
The Shia of the Mahdi Army defeated Iraq’s Sunnis in the last bout of fighting, and thousands of Iraqi Sunnis, under the so-called Awakening Movement, have rallied to the side of the United States forces and have fought against Al Qaeda. 
In addition, many Sunni scholars have argued that Al Qaeda’s ideology and tactics are illegitimate, and that Muslims should refrain from jihad and remain obedient to their rulers. 
The term for those who have not joined Al Qaeda’s jihad is the “sitters” or the “immobile ones” ( qaaidun ). 
Bin Laden wants these people to feel like sinners. 
Poetically, he attacks Muslim men’s masculinity and sense of honor for not defending Islam. 
This is the core of bin Laden’s appeal: the ability to articulate the profound sense of injustice and humiliation that many Arabs and Muslims feel today. 
For all the violence perpetrated by Al Qaeda, bin Laden also relies on “soft” power, using arguments about injustice that resonate with his audience. 
A path between the extremes of jihad and blind obedience to the Middle East’s authoritarian rulers must be found before Al Qaeda’s message begins to lose some of its luster. 

Osama bin Laden’s Pakistan 
NEW DELHI – The killing of Osama bin Laden by United States special forces in a helicopter assault on a sprawling luxury mansion near Islamabad recalls the capture of other Al Qaeda leaders in Pakistani cities. 
Once again, we see that the real terrorist sanctuaries are located not along Pakistan’s borders with Afghanistan and India, but in the Pakistani heartland. 
This, in turn, underlines another fundamental reality – that the fight against international terrorism cannot be won without demilitarizing and de-radicalizing Pakistan, including by rebalancing civil-military relations there and reining in the country’s rogue Inter-Services Intelligence agency. 
Other terrorist leaders captured in Pakistan since 9/11 – including Khalid Sheikh Mohammed, Al Qaeda’s third in command; 
Abu Zubeida, the network’s operations chief; 
Yasser Jazeeri; 
Abu Faraj Farj; and Ramzi Binalshibh, one of the coordinators of 9/11 – were also found living in cities across Pakistan. 
If there is any surprise about bin Laden’s hideout, it is its location in a military town, Abbottabad, in the shadow of an army academy. 
This only underscores the major protection that bin Laden must have received from elements of the Pakistani security establishment to help him elude the US dragnet for nearly a decade. 
The breakthrough in hunting him down came only after the US, even at the risk of rupturing its longstanding ties with the Pakistani army and ISI, deployed a number of CIA operatives, Special Operations forces, and contractors deep inside Pakistan without the knowledge of the Pakistani military. 
In recent years, with its senior operations men captured or killed and bin Laden holed up in Pakistan, the badly splintered Al Qaeda had already lost the ability to mount a major international attack or openly challenge US interests. 
With bin Laden’s death, Al Qaeda is likely to wither away as an organization. 
Yet its dangerous ideology is expected to live on and motivate state-sponsored non-state actors. 
It will be mainly such elements that will have the capacity to launch major transnational terrorist attacks, like the 2008 Mumbai strikes. 
Even in Afghanistan, the US military’s main foe is not Al Qaeda but a resurgent Taliban, which enjoys safe haven in Pakistan. 
That is why the spotlight is likely to turn on the terrorist nexus within Pakistan and the role of, and relationship between, state and non-state actors there. 
Significantly, as the CIA closed in on bin Laden, the chairman of the US Joint Chiefs of Staff, Admiral Mike Mullen, for the first time publicly linked the Pakistani military with some of the militants attacking US forces in Afghanistan. 
Pakistan’s homegrown Islamist militias continue to operate openly, and the Pakistani army and intelligence remain loath to sever their cozy ties with extremist and terrorist elements. 
For the US, Pakistan poses a particularly difficult challenge. 
Despite providing $20 billion to Pakistan in counterterrorism aid since 9/11, the US has received grudging assistance, at best, and duplicitous cooperation, at worst. 
Today, amid a rising tide of anti-Americanism, US policy on Pakistan is rapidly unraveling. 
Yet Pakistan, with one of the world’s lowest tax-to-GDP ratios, has become more dependent than ever on US aid. 
Even as Americans exult over bin Laden’s killing, the US government must recognize that its failed policy on Pakistan has inadvertently made that country the world’s main terrorist sanctuary. 
Rather than helping to build robust civilian institutions there, the US has pampered the jihadist-penetrated Pakistani military establishment, best illustrated by the fresh $3 billion military aid package earmarked for the next fiscal year. 
After dictator Pervez Musharraf was driven out of office, the new Pakistani civilian government ordered the ISI to report to the interior ministry, but received no support from the US for this effort to assert civilian control, allowing the army to quickly frustrate the effort. 
After coming to office, US President Barack Obama implemented a military surge in Afghanistan. 
In Pakistan, however, he implemented an aid surge, turning it into the largest recipient of US aid, even though the Afghan Taliban leadership and Al Qaeda remnants remained ensconced in the country. 
This only deepened US involvement in the wrong war and emboldened Pakistan to fatten the Afghan Taliban, even as sustained US attacks continued to severely weaken Al Qaeda. 
Make no mistake: the scourge of Pakistani terrorism emanates more from the country’s Scotch whisky-sipping generals than from the bead-rubbing mullahs. 
It is the self-styled secular generals who have reared the forces of jihad and fathered the Taliban, Lashkar-e-Taiba, Jalaluddin Haqqani militia, and other groups. 
Yet, by passing the blame for their ongoing terrorist-proxy policy to their mullah puppets, the generals have made the US believe that the key is to contain the religious fringe, not the puppeteers. 
In fact, Pakistan’s descent into a jihadist dungeon occurred not under civilian rule, but under two military dictators – one who nurtured and let loose jihadist forces, and another who took his country to the very edge of the precipice. 
Without reform of the Pakistani army and ISI, there can be no end to transnational terrorism – and no genuine nation-building in Pakistan. 
How can Pakistan be a “normal” state if its army and intelligence agency remain outside civilian oversight and decisive power remains with military generals? 
With bin Laden dead, the only way that Al Qaeda can reconstitute itself is if the Pakistani military succeeds in reinstalling a proxy regime in Afghanistan. 
Until the Pakistani military’s vise-like grip on power is broken and the ISI cut down to size, Pakistan is likely to remain Ground Zero for the terrorist threat that the world confronts. 

Knowledge for Progress 
LONDON – Some 236 years ago, a young governor from the American state of Virginia broke the mold on education reform. 
In his Bill for the More General Diffusion of Knowledge, Thomas Jefferson called for “a system of general instruction” that would reach all citizens, “from the richest to poorest.” 
It was the first step in the creation of the American system of public education – an institution that helped to propel the country’s rise to global prominence. 
By the early twentieth century, the United States was a global leader in public schooling. 
Investments in education provided a catalyst for economic growth, job creation, and increased social mobility. 
As Claudia Goldin and Lawrence Katz have shown, it was American “exceptionalism” in education that enabled the country to steal a march on European countries that were under-investing in human capital. 
As world leaders gather this week for the Oslo Summit on Education for Development, the lessons from this experience could not be more relevant. 
In fact, with the global economy becoming increasingly knowledge-based, the education and skills of a country’s people are more important than ever in securing its future. 
Countries that fail to build inclusive education systems face the prospect of sluggish growth, rising inequality, and lost opportunities in world trade. 
In this context, some of today’s discussions on education sound curiously anachronistic. 
Harvard economist Ricardo Hausmann recently berated what he describes as the “education, education, education crowd” for advocating an “education-only” strategy for growth. 
It was an impressive attack on a view that, to the best of my knowledge, nobody holds. 
Of course education is not an automatic route to growth. 
Expanding education in countries where institutional failure, poor governance, and macro-economic mismanagement stymie investment is a prescription for low productivity and high unemployment. 
In North Africa, the disharmony between the education system and the job market left young, educated people without decent opportunities – a situation that contributed to the revolutions of the Arab Spring. 
None of this detracts from the vital role of education – not just years of schooling, but genuine learning – as an essential component of growth. 
Extensive research – from the work of Adam Smith to Robert Solow and Gary Becker and, most recently, Eric Hanushek – confirms the importance of learning in building productive human capital. 
One step up the standard deviation score on the OECD’s Program for International Student Assessment is associated with a 2% increase in a country’s long-run per capita growth rate. 
Education may not be a quick fix for slow growth. 
But try naming a country that has sustained an economic transformation without advances in education. 
Economists at the World Bank have contributed a few straw men of their own to the education debate. 
In one contribution, Shanta Devarajan criticizes the view that education is an essential public good that governments should finance and deliver, arguing that it should instead be considered a private good, delivered through markets to customers – that is, parents and children – seeking private returns. 
The problem is that education is self-evidently not a public good – in the real world, few things are. 
It is, however, a “merit” good, something that governments should offer for free, because of the wide-ranging private and social returns that might be lost if parents underinvest, or if the poor are excluded. 
For example, progress in education – especially girls’ education – is closely associated with improvements in child survival and nutrition, and maternal health, as well as higher wages. 
It is time to move beyond futile discussions based on flawed logic to focus on the real challenges in education – challenges that must be addressed, if we are to meet the Sustainable Development Goal of delivering high-quality primary and secondary education to all by 2030. 
The Oslo summit presents an important opportunity to lay the groundwork for success. 
With 59 million primary school-age children and 65 million adolescents out of school, that opportunity should be seized with both hands. 
A successful summit would advance four key imperatives. 
First, governments must commit more domestic funds to education. 
One background paper for the summit highlights the failure of successive governments in Pakistan, which now has the world’s second-largest out-of-school population, to invest in education. 
At the heart of the problem are politicians who are more interested in facilitating tax evasion by the wealthy than improving learning opportunities for the poor. 
Second, international donors must reverse the downward trend in aid for education. 
Even with an enhanced resource-mobilization effort, roughly $22 billion annually in aid will be needed to achieve universal lower-secondary education. 
That is around five times current levels. 
Beyond closing the aid gap, United Nations Special Envoy on Education Gordon Brown has rightly called for financing mechanisms to deliver education to children affected by conflict and humanitarian emergencies. 
Third, world leaders must get serious about inequality. 
Every government should be setting targets aimed explicitly at narrowing education disparities – linked to gender, wealth, and the rural-urban divide – and aligning their budgets with those targets. 
As it stands, the disparities are huge. 
In Nigeria, for example, urban boys from the wealthiest 20% of households average ten years of schooling, while poor rural girls in northern areas can expect less than two years. 
Yet, as another Oslo summit background paper shows, education finance is skewed toward the wealthy in most countries. 
Finally, governments and aid agencies must abandon market-based experiments, and commit to genuine system-wide reform. 
One key priority area is teachers, who need strong incentives, effective training, and dependable support systems to deliver real learning. 
After all, an education system is only as good as its educators. 
As world leaders gather in Oslo, millions of parents will be struggling to ensure that their children receive the education they deserve – one that will enable them to build better lives for themselves and their families. 
For these parents, schooling is a source of hope. 
We owe them and their children our best efforts. 

The German Leadership Question 
FRANKFURT – Many in the eurozone’s crisis countries complain that the source of their suffering is a rigid economic-austerity regime – including reductions in wages and pensions, tax increases, and soaring unemployment – imposed on them by Germany. 
Hostility against Germany has reached a level unseen in Europe since the end of World War II. 
And yet, despite this antagonism, loud calls for Germany to assume “leadership” in Europe can also be heard. 
Germany is undoubtedly Europe’s most important economy; and, with low unemployment and relatively sound public finances, it is also the best-performing one – at least for the time being. 
So Germany is asked to take the lead in saving the eurozone, an outcome that is in the interest not only of the entire European community, but also of Germany, which is widely seen as having gained the greatest advantage from the single currency. 
Complaints about the imposition of a “teutonic regime” and appeals for German leadership seem to contradict each other – a kind of continent-wide cognitive dissonance. 
In fact, the complaints and calls for leadership are mutually reinforcing. 
The implementation of austerity policies in the periphery has caused these countries to ask for help and request that Germany take the lead by putting more money on the European table. 
Nobody would deny that Germany has an interest in preserving the euro. 
So why shouldn’t it support its partners with financial help to overcome the crisis? 
Such support can already be found via the various rescue mechanisms – above all, the European Stability Mechanism and the implicit guarantees of TARGET 2 – that have been erected since the crisis began. 
But these mechanisms must be distinguished from a regime of more or less automatic, permanent transfers. 
As long as a fully-fledged political union remains a vision for the future, fiscal transfers must be legitimized by national parliaments. 
For now – and probably for a long time to come – the eurozone will continue to be a union of sovereign states, with each country responsible for its own policies and for their outcome. 
The no-bailout clause that was included in the monetary union’s founding treaty is an indispensable corollary. 
Eurobonds, for example, would not only create moral hazard; “taxation without representation” would also violate a fundamental tenet of democracy and undermine support for the European idea. 
The creation of a European banking union is another area in which misguided calls for solidarity prevail. 
Establishing a single supervisory authority and a resolution mechanism are valid proposals. 
But asking others to pay for the legacy of banks’ past irresponsible practices is hard to justify. 
What would be the reaction if, say, Italian or Spanish taxpayers were asked to pay for the reckless behavior of the German IKB or HRE banks? 
Who would not find such a request inappropriate, to say the least? 
And yet when the bailout is presented the other way around, with German taxpayers asked to backstop reckless Italian or Spanish banks, somehow it is supposed to be an act of solidarity. 
Legacy problems in national banking systems should be solved at the national level before the banking union moves forward. 
Bailing out governments and banks is not the direction in which Germany should lead. 
If Germany should lead at all, it should do so by providing a model of good economic policies for others to emulate. 
It should lead by respecting the commitments enshrined in the European treaties. 
Indeed, Germany set a disgraceful and damaging example when, back in 2003-2004, it undermined the European Union’s Stability and Growth Pact by not adhering to it. 
Walter Hallstein, the first president of the European Commission, repeatedly stressed that the union is based on the principle of a community of nations under the rule of law (Rechtsgemeinschaft). 
Today, credibility can only be restored if treaties and rules are respected again. 
Think of the eurozone as a selective club. 
Unless its members respect the rules by which it is defined, it will wither. 
Those who violate the rules must be warned and finally sanctioned – preferably in an automatic fashion. 
Those who violate the rules consistently, and even announce that they will continue in their misbehavior, should not be allowed to blackmail the community and should ultimately consider leaving the club. 
Those who are concerned about permanent German dominance of the European “club” can rest easy. 
Having emerged from the position of the sick man of Europe only a decade ago, Germany is now willfully, if thoughtlessly, undoing the reforms that had so strengthened its economy. 
By reinforcing already-strict labor-market regulation, pursuing a misguided energy policy, and reversing pension reform, Germany is undermining its current economic position and will move in the direction of problem countries. 
This regression will take time, but it will happen. 
Accordingly, calls for German leadership will disappear and its strained public finances will suppress requests for financial transfers. 
One wonders how the discussion about “leadership” for Europe will look then? 

Our Deep Debt Future 
TILBURG, NETHERLANDS – The 1980’s was the decade in which high inflation was supposedly consigned to the dustbin of history, while the 1990’s were all about the so-called new economy. 
Governor Mervyn King of the Bank of England once called it the NICE decade (No Inflation, Continuing Expansion) – a time when the economy reached the promised land of high growth and price stability. 
The following decade turned out to be one of, first, the war on terror and, later, the worst financial and economic crisis in almost a century – a time when virtually every developed economy experienced a long and deep recession. 
The war against terror is still raging. 
But, owing to the financial and economic crisis, the current decade will be remembered as the decade of public debt, and in some countries or regions, maybe even the decade of permanent fiscal derailment if nothing is done. 
In the European Union, for example, public debt in the most important eurozone and EU countries would rise to 100% of GDP or more in the next ten years alone. 
Of course, something will be done, but it will most likely not be enough. 
Doing enough would require reducing annual budget deficits by 0.5% of GDP every year during the coming decade just to improve the sustainability of government debt on average. 
That effect, however, has to come on top of withdrawing the current fiscal stimulus that all countries have implemented. 
Fiscal consolidation equivalent to 1% of GDP per year might bring government debt down toward 60% of GDP – the ceiling imposed by the EU’s Stability and Growth Pact ­– during the next decade. 
But, for some countries, such as Greece, Ireland, and Spain, this would not be enough to reach sustainable debt levels in 2020. 
Moreover, low long-term interest rates are a thing of the past. 
As government deficits and public debt increase in many developed and emerging economies, financial markets will most likely demand higher risk premia, owing to heightened fears of default and inflation down the road. 
So, not only is public debt set to increase much faster than nominal GDP growth, but governments will have to devote an increasing share of their revenues to interest payments. 
Of course, governments can slash their expenditure and increase taxes to balance their budgets, or at least to embark on a path leading in that direction, as the hotly debated example of Greece has shown. 
But chances are that it will not really help, because it trying to reduce deficits in that manner will severely undermine economic performance. 
Greece must slash its deficit by some 4% of GDP. 
And that is just a start. 
In the coming years, total consolidation is set to increase to around 9% of GDP. 
The same goes for the United States, the United Kingdom, and the eurozone’s five largest economies (Germany, France, Italy, Spain, and the Netherlands). 
Even if all those deficit reductions are implemented, all the forecasts of economic growth in subsequent years, on which fiscal consolidation depends, are not realistic. 
Already, the European Commission has stated that various European governments’ forecasts for GDP growth, put forward in their plans for budget austerity in the coming years, are overly optimistic. 
In other words, economic growth will turn out to be structurally much lower than is the figures used now for estimating deficits and debt. 
Little wonder, then, that the Commission has issued a warning that crisis-related fiscal expansion and the aging population raise questions about the sustainability of public finances in the EU. 
Many government behave as if the economic setback is temporary and happy pre-crisis days will return fairly soon. 
Among economists there is a strong feeling that the world economy is bouncing back from deep recession, and that the current crisis, although severe, is an aberration. 
But even if the world economy is on course to a firm recovery, the long-term trend has been severely and permanently disrupted. 
After this crisis, nothing in economics will be the same. 
Indeed, it would be naïve to believe that the crisis is the only reason that public finances are in bad shape. 
Change in the global economy, from a decade of high structural growth to a long period of low growth, is playing a major role as well. 
During the last 20 years, economic growth has been based on rising asset prices and declining borrowing costs for consumers and companies. 
That mechanism is broken beyond repair. 
In the absence of some miraculous improvement in productivity growth of the same order as the Internet or globalization, the world can expect a lengthy period of low growth and exceedingly difficult fiscal consolidation. 
The NICE era is well and truly over. 
Welcome to the BAD (Big Annual Deficits) decade of public debt. 

Our Energy Future 
Where energy is concerned, everything seemed simple before the Iraq War. 
The US would topple Saddam, Iraq's vast oil reserves would be unleashed after a short period of reconstruction, and world petroleum prices would drop to under $20 per barrel. 
Instead, world oil prices have soared to $35 per barrel. 
No surprise, then, that new attention is being focused on energy supplies. 
But the basic message is clear: current energy patterns are risky and must change. 
Two interconnected energy issues will shape our economic and geopolitical future for decades to come. 
The first is that dependence on Middle East oil is increasingly risky. 
Nobody knows how much oil is left and how much it will cost to extract, but the peak of global oil production will probably be reached sometime in the next quarter century, perhaps even in the next few years. 
Remaining oil supplies will be concentrated in the volatile Middle East. 
Meanwhile, global demand for energy will soar as the economies of China, India, Brazil, and other countries grow. 
If the Middle East is already at a breaking point, imagine what could happen if competition for Middle East oil intensifies among America, Europe, China, India, Japan, and others. 
The second great challenge is that our modern energy system is destabilizing the global climate. 
Petroleum and other fossil fuels (coal and natural gas) are causing long-term changes in the global climate, but few people appreciate the risks. 
There are three largely unrecognized problems: 
· climate change will shift every aspect, such as temperature, rainfall, and storm patterns, as well as bringing fundamental changes in the physical environment, such as rising sea levels and changes in ocean chemistry. 
The effects are unpredictable but likely to be huge, in terms of crop production, diseases, costs and availability of irrigation and drinking water, coastal erosion, and so forth; 
· climate change may not be gradual. 
The long history of climate change shows the risks of dramatic and abrupt changes over the course of but a few decades; 
· humans might react badly to such changes, because changes in monsoon patterns or sea levels and the ensuing economic distress could provoke massive political unrest, refugee movements, and violent conflict. 
These challenges - petroleum scarcity, growing instability in the Middle East, and climate change - require clear thinking. 
Some alarmists declare that we need to drastically reduce energy use on a global scale, undermining the global economy. 
Efficiencies in energy use are possible, but they cannot solve either the problem of long-run oil supplies or climate change. 
Others declare that we must kick the fossil fuel habit and make a mad dash for renewable energy sources such as solar or wind power. 
Yet these alternatives are expensive, and cannot realistically replace fossil fuels. 
Fortunately, if we plan for the long term on a global scale, we can find our way through these challenges. 
Our goals should be reliable supplies of energy that are environmentally safe at affordable prices. 
There are two key ideas here. 
First, we should recognize that even as oil becomes scarce, other fossil fuels such as coal, gas, and unconventional sources such as shale and tar sands, will remain plentiful for centuries. 
We should aim to develop technologies and infrastructure so that these other fossil fuels can be used efficiently and safely. 
Chemical processes already exist, for example, to convert coal into gasoline. 
Coal can also be converted into hydrogen if we choose to go down the road of a hydrogen-based economy, in which hydrogen-powered fuel cells replace the internal combustion engine in automobiles. 
The jury is still out on whether the hydrogen economy will be cost effective. 
Second, as these other fossil fuels take up the slack when oil production reaches a plateau or starts to decline, the effects of fossil fuels on the climate must be brought under control. 
The environmentally sound manner for using fossil fuels in the future will involve capturing the carbon dioxide at the power plant before it is emitted into the atmosphere, and then disposing of it by somehow burying it in the ground. 
This process, called "carbon capture and disposal," is being pursued by some of the world's leading engineers. 
Our energy future will depend not on one solution, but on a variety of steps: exploration and development of new petroleum sources, especially outside the Middle East; increased energy efficiency; long-term development and adoption of affordable renewable sources; and the environmentally safe use of alternative fossil fuels such as coal. 
Today's course of action - in which we neglect the coming squeeze in global oil supplies, rely too heavily on Middle East oil, and ignore the environmental consequences of fossil fuels - is reaching a dead end. 
Reality will catch up with us. 
How then to think ahead? 
The world's largest energy users, starting with the US, Europe, China, Japan, and India, need to agree on collective actions to develop new technologies for carbon capture and storage, and for the affordable development and use of alternative energy supplies. 
We need to make certain that market prices for energy use reflect the true social costs of using energy, so that energy users and energy suppliers make better choices regarding energy efficiency, the development of alternative energy sources, and the adoption of environmentally safe technologies. 

Our G-Zero World 
NEW YORK – We live in a world where, in theory, global economic and political governance is in the hands of the G-20. 
In practice, however, there is no global leadership and severe disarray and disagreement among G-20 members about monetary and fiscal policy, exchange rates and global imbalances, climate change, trade, financial stability, the international monetary system, and energy, food and global security. 
Indeed, the major powers now see these issues as zero-sum games rather than positive-sum games. 
So ours is, in essence, a G-Zero world. 
In the nineteenth century, the stable hegemon was the United Kingdom, with the British Empire imposing the global public goods of free trade, free capital mobility, the gold standard, and the British pound as the major global reserve currency. 
In the twentieth century, the United States took over that role, imposing its Pax Americana to provide security to most of Western Europe, Asia, the Middle East, and Latin America. 
The US also dominated the Bretton Woods institutions – the International Monetary Fund, the World Bank, and, later, the World Trade Organization – to determine the global trade and financial rules, with the dollar as the main reserve currency. 
Today, however, the US “empire” is in relative decline and fiscally over-stretched. 
Moreover, the rising power, China, which is not a liberal democracy, is pursuing a model of state capitalism, and is free-riding on the current global system – on trade, exchange rates, climate change – rather than sharing in the provision of global public goods. 
And, while there is general unhappiness with the US dollar, the Chinese renminbi is still far from becoming a major global reserve currency, let alone the dominant one. 
This power vacuum has reinforced the absence of leadership on global economic and political governance within the G-20 since it succeeded the G-7 at the onset of the recent economic and financial crisis. 
Indeed, with the exception of the London summit in April 2009, when a consensus was reached on joint monetary and fiscal stimulus, the G-20 has become just another bureaucratic forum where much is discussed, but little is agreed upon. 
As a result, the global economic powers have been left bickering about whether we need more monetary and fiscal stimulus or less of it. 
There are also major disagreements about whether to reduce global current-account imbalances – and about the role that currency movements should play in this adjustment. 
Exchange-rate tensions are leading to currency wars, which may eventually lead to trade wars and protectionism. 
Indeed, not only is the Doha round of multilateral free-trade negotiations effectively dead, but there is also a rising risk of financial protectionism as countries re-impose capital controls on volatile global financial flows and on foreign direct investment. 
Likewise, there is very little consensus on how to reform the regulation and supervision of financial institutions – and even less on how to reform an international monetary system based on flexible exchange rates and the dollar’s central role as the leading reserve currency. 
Global climate-change negotiations have similarly ended in failure, and disagreement reigns concerning how to address food and energy security amid a new scramble for global resources. 
And, on global geopolitical issues – the tensions on the Korean peninsula, Iran’s nuclear ambitions, the Arab-Israeli conflict, the disorder in Afghanistan and Pakistan, and the political transition in autocratic Middle East regimes – the great powers disagree and are impotent to impose stable solutions. 
There are several reasons why the G-20 world has become a G-Zero world. 
First, when discussion moves beyond generic principles into detailed policy proposals, it’s much more difficult to reach clear agreements among 20 negotiators than among seven. 
Second, G-7 leaders share a belief in the power of free markets to generate long-term prosperity and in the importance of democracy for political stability and social justice. 
The G-20, on the other hand, includes autocratic governments with different views about the role of the state in the economy, and on the rule of law, property rights, transparency, and freedom of speech. 
Third, the Western powers now lack the domestic political consensus and financial resources to advance an international agenda. 
The US is politically polarized, and must at some point begin to reduce its budget deficit. 
Europe is preoccupied with its attempt to save the eurozone, and has no common foreign or defense policy. 
And Japan’s political stalemate on structural reforms has left it helpless to stem long-term economic decline. 
Finally, rising powers like China, India, and Brazil are far too focused on managing the next stage of their domestic development to bear the financial and political costs that come with new international responsibilities. 
In short, for the first time since the end of World War II, no country or strong alliance of countries has the political will and economic leverage to secure its goals on the global stage. 
This vacuum may encourage, as in previous historical periods, the ambitious and the aggressive to seek their own advantage. 
In such a world, the absence of a high-level agreement on creating a new collective-security system – focused on economics rather than military power – is not merely irresponsible, but dangerous. 
A G-Zero world without leadership and multilateral cooperation is an unstable equilibrium for global economic prosperity and security. 

Our Low-Carbon Future 
LONDON – The United Nations climate change conference, to be held in Copenhagen this December, should provide the climax to two years of international negotiations over a new global treaty aimed at addressing the causes and consequences of greenhouse-gas emissions. 
A global deal on climate change is urgently needed. 
Concentrations of carbon dioxide and other greenhouse gases in the atmosphere have reached 435 parts per million (ppm) of CO2-equivalent, compared with about 280 ppm before industrialization in the nineteenth century. 
If we continue with business-as-usual emissions from activities such as burning fossil fuels and cutting down forests, concentrations could reach 750 ppm by the end of the century. 
Should that happen, the probable rise in global average temperature relative to pre-industrial times will be 5˚C or more. 
It has been more than 30 million years since the earth’s temperature was that high. 
The human species, which has been around for no more than 200,000 years, would have to deal with a more hostile physical environment than it has ever experienced. 
Floods and droughts would become more intense and global sea levels would be several meters higher, severely disrupting lives and livelihoods, and causing massive population movements and inevitable conflict around the world. 
Some parts of the world would be under water; other would become deserts. 
Developing countries recognize and are angered by the inequity of the current situation. 
Current greenhouse-gas levels are largely due to industrialization in the developed world since the nineteenth century. 
Yet developing countries are the most vulnerable to the consequences of climate change, which threaten the economic growth that is necessary to overcome poverty. 
At the same time, emissions cannot be reduced at the extent required without the central contribution of the developing world. 
Climate change and poverty, the two defining challenges of this century, must be tackled together. 
If we fail on one, we will fail on the other. 
The task facing the world is to meet the environment’s “carbon constraints” while creating the growth necessary to raise living standards for the poor. 
To avoid the severe risks that would result from a rise in global average temperature of more than 2˚C, we must get atmospheric concentrations below 450 ppm. 
This will require a cut in annual global emissions from about 50 gigatonnes of CO2-equivalent today to below 35 gigatonnes in 2030, and less than 20 gigatonnes by 2050. 
Today, per-capita annual emissions in the European Union are 12 tonnes, and 23.6 tonnes in the United States, compared to six tons for China and 1.7 tons for India. 
As the projections for 2050 suggest that the world’s population will be about nine billion, annual per-capita emissions must be reduced to approximately two tons of CO2-equivalent, on average, if the global annual total is to be less than 20 gigatonnes. 
Most developed countries are targeting reductions in annual emissions of at least 80% – relative to levels in 1990 – by 2050. 
If they are to convince developing countries that the 2050 goal is credible, they must be both ambitious and realistic about the domestic political challenges they face in adopting and implementing demanding targets for 2020, 2030, and 2040. 
Developing countries need substantial help and support from rich nations in order to implement their plans for low-carbon economic growth, and to adapt to the effects of climate change that are now inevitable over the next few decades. 
Developed countries should also provide strong support for measures to halt deforestation in developing countries, and for reducing emissions substantially, quickly, and at reasonable cost. 
Based on recent estimates of the developing world’s extra requests as a result of climate change, rich countries should be providing annual financial support – in addition to existing foreign-aid commitments– of about $100 billion for adaptation and $100 billion for mitigation by the early 2020’s. 
Some of the latter can come through carbon market. 
Rich countries must also demonstrate that low-carbon growth is possible by investing in new technologies, which should be shared with developing countries to boost their mitigation efforts. 
We are already seeing extraordinary innovation by the private sector, which will drive the transition towards a low-carbon global economy. 
Investments in energy efficiency and low-carbon technologies could also pull the global economy out of its economic slowdown over the next couple of years. 
More importantly, in driving the transition to low-carbon growth, these technologies could create the most dynamic and innovative period in economic history, surpassing that of the introduction of railways, electricity grids, or the internet. 
There is no real alternative. 
High-carbon growth is doomed, crippled by high prices for fossil fuels and killed off by the hostile physical environment that climate change will create. 
Low-carbon growth will be more energy-secure, cleaner, quieter, safer and more bio-diverse. 
We should learn from the financial crisis that if risks are ignored, the eventual consequences are inevitably worse. 
If we do not start to combat the flow of greenhouse-gas emissions now, the stock in the atmosphere will continue to grow, making future action more difficult and costly. 
Other public expenditure can be postponed, but delaying climate-change measures is a high-risk, high-cost option. 
Climate change poses a profound threat to our economic future, while low-carbon growth promises decades of increased prosperity. 
The choice in Copenhagen will be stark, and the stakes could not be higher. 
We know what we must do, and we can do it. 

Our Other Drug Problem 
MILAN – With all the official and media attention given to the worldwide trade in illicit drugs, the public has at most a dim awareness of the serious problems affecting the production, testing, and sale of the legal kind: the medicines that we take to treat or cure everything from AIDS to Yellow Fever. 
The development of new drugs is a complex and lengthy process. 
It starts with an idea and requires a wide range of skills to bring that idea to fruition: synthesis or extraction of more or less complicated molecules, proof of their therapeutic effect in cell cultures and animals, testing for toxicity, and clinical studies. 
Along this path, many potential drugs are withdrawn, and even successfully tested drugs face the additional hurdle of regulatory approval. 
Finally, the drug reaches the market, where it must be followed closely, because many adverse reactions are detected only with a large number of patients and after years of use. 
There are several thousand drugs currently on the market, with a worldwide value of about $3 trillion. 
But conditions in the drug market are far from optimal. 
Ideally, drugs should have a favorable risk-benefit ratio. 
Compared with other drugs with the same indications, new drugs should be selected on the basis of their safety, effectiveness, and cost. 
But the financial interests involved tend to distort the process by creating incentives to overestimate the benefits of new drugs, underestimate the risks, and, above all, boost prescriptions. 
What can be done? 
First, new drugs should always offer added value – better efficacy, lower toxicity, or greater ease of treatment. 
Unfortunately, this is not required by current legislation in Europe, where only quality, efficacy, and safety must be demonstrated, without any need for comparative studies. 
There is therefore the risk that new drugs may in fact be worse than products already on the market. 
New drugs are often tested against placebos or drugs that are not the best treatment available, the point being to demonstrate that the new drug is not inferior to any already on the market. 
But it is ethically questionable to test a drug for “non-inferiority,” because patients are exposed to potential risks while contributing, in the best case, to the development of a drug that is no better than those already available. 
Patients’ informed consent usually does not provide a clear description of a non-inferiority trial, and the lack of added value indicates that in many cases the development of a new drug is driven by commercial aims rather than patients’ needs. 
Second, improvement of drug development requires more transparency from the regulatory bodies. 
At present, a new drug’s producer prepares the entire dossier presented to the regulatory authority for approval; in the interests of the public, at least one of the clinical trials should be carried out by an independent non-profit organization. 
Moreover, only the regulators can examine the dossiers, which are highly confidential. 
It is unacceptable that patients participating voluntarily in clinical trials, and their representatives, have no right to see data that would not exist without them. 
Third, better conditions for the approval of new drugs should be matched by better use of drugs, which requires better information for prescribers. 
Today, information provided by drug makers largely predominates over independent information. 
As a result, certain drugs are used much more frequently than would be expected from their approved indications. 
This so-called “off-label” use is sustained by continuous propaganda aimed not only at doctors, but also directly at the public. 
Direct but shadowy information tends to lead to “disease mongering” – the creation of diseases in order to boost prescriptions. 
For example, the concept of “pre-hypertension” could extend the use of anti-hypertensive drugs dramatically, because everybody’s blood pressure rises with age. 
Likewise, the notion that blood cholesterol should be as low as possible clears a path to treating healthy people with anti-cholesteremic agents. 
Clearly, health authorities must take closer control of information by becoming more responsible for physicians’ continuous education. 
If the conditions for drug approval and marketing become more severe, pharmaceutical companies will be forced to produce fewer me-too drugs and more products of clinical importance. 
Requiring longer testing periods, and possibly extra resources, could be compensated by new drugs’ greater longevity on the market, and patent coverage could be extended. 
Finally, incentives must be found to encourage pharmaceutical companies to develop drugs that fulfill the needs of patients still awaiting therapy. 
There are more than 6,000 rare and neglected diseases – many in developing countries – that lack remedies. 
The challenge is how to produce new drugs that – because patients are too few or too poor – promise very limited returns. 
A partnership between governments, non-profit research institutions, charities and pharmaceutical companies might be one way to clean up the approval process for new drugs. 
If public awareness of the current problems stimulates politicians to find a solution that works, better drugs and better drug use will be achievable. 


Our Summer of Extremes 
BERLIN – This summer has been one of weather-related extremes in Russia, Pakistan, China, Europe, the Arctic – you name it. 
But does this have anything to do with global warming, and are human emissions to blame? 
While it cannot be scientifically proven (or disproven, for that matter) that global warming caused any particular extreme event, we can say that global warming very likely makes many kinds of extreme weather both more frequent and more severe. 
For weeks, central Russia has been in the grips of its worst-ever heat wave, which has caused probably thousands of fatalities. 
As a result of drought and heat, more than 500 wildfires have raged out of control, smothering Moscow in smoke and threatening several nuclear facilities. 
Russia’s government has banned wheat exports, sending world grain prices soaring. 
Meanwhile, Pakistan is struggling with unprecedented flooding that has killed more than a thousand people and affected millions more. 
In China, flash floods have so far killed more than a thousand people and destroyed more than a million homes. 
On a smaller scale, European countries like Germany, Poland, and the Czech Republic have also suffered serious flooding. 
Meanwhile, global temperatures in recent months have been at their highest levels in records that go back 130 years. 
Arctic sea-ice cover reached its lowest recorded average level for the month of June ever. 
In Greenland two huge chunks of ice broke off in July and August. 
Are these events connected? 
Looking only at individual extreme events will not reveal their cause, just like watching a few scenes from a movie does not reveal the plot. 
But, viewed in a broader context, and using the logic of physics, important parts of the plot can be understood. 
This decade has been marked by a number of stunning extremes. 
In 2003, the most severe heat wave in living memory broke previous temperature records by a large margin and caused 70,000 deaths in Europe. 
In 2005, the most severe hurricane season ever witnessed in the Atlantic devastated New Orleans and broke records in terms of the number and intensity of storms. 
In 2007, unprecedented wildfires raged across Greece, nearly destroying the ancient site of Olympia. 
And the Northwest Passage in the Arctic became ice-free for the first time in living memory. 
Last year, more than a hundred people were killed in bush fires in Australia, following drought and record-breaking heat. 
This cluster of record-breaking events could be merely an astonishing streak of bad luck. 
But that is extremely unlikely. 
This is far more likely to be the result of a warming climate – a consequence of this decade being, worldwide, the hottest for a thousand years. 
All weather is driven by energy, and the sun ultimately provides this energy. 
But the biggest change in Earth’s energy budget by far over the past hundred years is due to the accumulation in our atmosphere of greenhouse gases, which limit the exit of heat into space. 
Owing to fossil-fuel emissions, there is now one-third more carbon dioxide in the atmosphere than at any time in at least a million years, as the latest ice drilling in Antarctica has revealed. 
The changes in the planet’s energy budget caused by solar variations are at least ten times smaller in comparison. 
And they go in the wrong direction: in recent years, the sun has been at its dimmest since satellite measurements began in the 1970’s. 
So, when unprecedented extreme weather events occur, the prime suspect is naturally the biggest atmospheric change that has happened over the past hundred years – one that has been caused by human emissions. 
The fact that heat waves like the one in Russia become more frequent and extreme in a warmer world is easy to understand. 
Extreme rainfall events will also become more frequent and intense in a warmer climate, owing to another simple fact of physics: warm air can hold more moisture. 
For each degree Celsius of warming, 7% more water is available to rain down from saturated air masses. 
Drought risk also increases with warming: even where rainfall does not decline, increased evaporation dries out the soils. 
The carbon-dioxide effect can also change the preferred patterns of atmospheric circulation, which can exacerbate extremes of heat, drought, or rainfall in some regions, while reducing them in others. 
The problem is that a reduction in those extremes to which we are already well-adapted provides only modest benefits, whereas the new extremes to which we are not adapted can be devastating, as recent events in Pakistan show. 
The events of this summer show how vulnerable our societies are to weather-related extremes. 
But what we see now is happening after only 0.8º Celsius of global warming. 
With swift and decisive action, we can still limit global warming to a total of 2º Celsius or a bit less. 
Even that much warming would require a massive effort to adapt to weather extremes and rising sea levels, which needs to start now. 
With weak action, like that promised by governments in Copenhagen last December, we will be on course for 3-4º Celsius of global warming. 
This is bound to outstrip the ability of many societies and ecosystems to adapt. 
And, with no action at all, the planet could even heat up by 5-7º Celsius by the end of this century – and more thereafter. 
Knowingly marching down that road would be insane. 
We must face the facts: our emissions of greenhouse gases probably are at least partly to blame for this summer of extremes. 
Clinging to the hope that it is all chance, and all natural, seems naive. 
Let us hope that this summer of extremes is a last-minute wake-up call to policy makers, the corporate world, and citizens alike. 

Our Unbalanced World 
The search for a new Managing Director of the IMF provides a keen reminder of how unjust today's international institutions are. 
Created in the postwar world of 1945, they reflect realities that have long ceased to exist. 
The organization and allocation of power in the UN, the IMF, the World Bank, and the G7 meetings reflects a global equilibrium that disappeared long ago. 
After WWII Germany and Japan were the defeated aggressors, the Soviet Union posed a major threat, and China was engulfed in a civil war that would bring Mao's Communists to power. 
Much of the so-called Third World was either recently independent, or remained colonies; all of it was very poor. 
There were 74 independent countries in the world in 1945; today there are 193. 
Outside of China, Cuba, and North Korea communism is popular only in West European cafés and a few American college campuses. 
Germany is reunited and much of the Third World is growing faster than the First World, with computer software built in Bangalore and American graduate programs, including business schools, receiving thousands of application from smart Chinese students. 
The whole world has turned upside down, and yet France and Britain, for example, retain permanent seats on the UN Security Council. 
This made sense in 1945; it does not today. 
Why France and Britain and not Germany or Japan, two much larger economies? 
Or India and Brazil, two huge countries? 
Does it really make sense that two European Union member countries hold a veto power on the Security Council while the Third World (outside of China) is completely unrepresented? 
The EU does not have a common foreign policy and it will not have one in the foreseeable future, but this is no reason to continue to provide a preference to France and Britain. 
If Europe is really serious about a common foreign policy, does the current arrangement make any sense? 
True, France and Britain do have the best foreign services in Europe, but this is reversing cause and effect. 
France and Britain maintain this capability because they continue to have foreign-policy relevance. 
Europe's over-representation extends beyond the Security Council. 
While a European foreign policy does not exist, Europe has some sort of common economic policy: 12 of the 15 current members have adopted the euro as their currency and share a central bank. 
Nevertheless Germany, France, Italy, and Britain hold four of the seven seats at the G7 meetings. 
Indeed, the situation is even more absurd when G7 finance ministers meet: the central bank governors of France, Germany, and Italy still attend these meetings, even though their banks have been reduced to local branches of the European Central Bank, while the president of the ECB - these countries' real monetary authority - is a mere "invited guest." 
Shouldn't there be only one seat for Europe? 
Of course, European leaders strongly oppose any such reform: they fear losing not only important opportunities to have their photographs taken, but real power as well. 
But how much power they really wield in the G7 is debatable: America's President, Secretaries of State and Treasury, and the Chairman of the US Federal Reserve almost certainly get their way more easily in a large, unwieldy group than they would in a smaller meeting where Europe spoke with a single voice. 
The current search for a new IMF head continues this pattern. 
The IMF Managing Director is a post reserved for a West European; the Americans have the World Bank. 
This division of jobs leaves out the developing countries, many of which are "developing" at a speed that will make them richer than Europe in per capita terms quite soon. 
What about the one billion Indians or the 1.2 billion Chinese? 
Shouldn't one of them at least be considered for such a post? 
What about the hard working and fast-growing South Koreans? 
Why should they not be represented at the same level as Italy or France? 
What about Latin American success stories like Chile and perhaps Mexico or Brazil? 
The Europeans don't even seem to care very much about the job. 
After all, Horst Köhler, the IMF managing director, resigned from a job that commands the world's attention to accept the nomination to become President of Germany, a ceremonial post with no power whatsoever, not even inside Germany. 
The OECD is located in Paris, the UN's Food and Agriculture Organization in Rome, and the list goes on. 
Simply put, Western Europe is overrepresented in international organizations, given its size in terms of GDP and even more so in terms of population. 
It is thus not surprising that some Europeans - particularly the French - are so reluctant to reform the international organizations, even in terms of cutting waste and inefficiency at the UN. 
After all, might not someone then suggest that the first step in such a reform is to reduce Europe to a single seat on the Security Council? 
Europe is being myopic. 
A single seat - at the UN, the IMF, or the World Bank - would elevate Europe to the same level as the US and would augment, rather than diminish, its global influence. 
The over-representation of Western Europe and the under-representation of growing developing countries cannot last. 
Indeed, it is already creating tensions. 
Obsolete dreams of grandeur should not be allowed to interfere with a realistic and fair distribution of power in the international arena. 

Our Virtual Middle Ages 
Wikipedia , the online encyclopedia, is the most impressive collective intellectual project ever attempted – and perhaps achieved. 
It demands both the attention and the contribution of anyone concerned with the future of knowledge. 
Because of the speed with which it has become a fixture in cyberspace, Wikipedia ’s true significance has gone largely unremarked. 
Since its sixth anniversary in 2007, Wikipedia has consistently ranked in the top ten most frequently viewed Web sites worldwide. 
Everyday it is consulted by 7% of all 1.2 billion Internet users, and its rate of usage is growing faster than that of Internet usage as a whole. 
Wikipedia is an encyclopedia to which anyone with a modicum of time, articulateness, and computer skills can contribute. 
Anyone can change any entry or add a new entry, and the results will immediately appear for all to see – and potentially contest. 
“Wiki” is a Hawaiian root that was officially added to English in 2007 to signify something done quickly – in this case, changes in the collective body of knowledge. 
Some 4.7 million “Wikipedians” have now contributed to 5.3 million entries, one-third of which are in English, with the rest in more than 250 other languages. 
Moreover, there is a relatively large group of hardcore contributors: roughly 75,000 Wikipedians have made at least five contributions in any given 30-day period. 
The quality of articles is uneven, as might be expected of a self-organizing process, but it is not uniformly bad. 
True, topics favored by sex-starved male geeks have been elaborated in disturbingly exquisite detail, while less alluring matters often lie fallow. 
Nevertheless, according to University of Chicago Law professor Cass Sunstein, Wikipedia is now cited four times more often than the Encyclopedia Britannica in US judicial decisions. 
Moreover, Nature ’s 2005 evaluation of the two encyclopedias in terms of comparably developed scientific articles found that Wikipedia averaged four errors to the Britannica ’s three. 
That difference probably has been narrowed since then. 
Wikipedia’s boosters trumpet it as heralding the arrival of “Web 2.0.” 
Whereas “Web 1.0” facilitated the storage and transmission of vast amounts of different kinds of information in cyberspace, “Web 2.0” supposedly renders the whole process interactive, removing the final frontier separating the transmitter and receiver of information. 
But we have been here before – in fact, for most of human history. 
The sharp divide between producers and consumers of knowledge began only about 300 years ago, when book printers secured royal protection for their trade in the face of piracy in a rapidly expanding literary market. 
The legacy of their success, copyright law, continues to impede attempts to render cyberspace a free marketplace of ideas. 
Before, there were fewer readers and writers, but they were the same people, and had relatively direct access to each other’s work. 
Indeed, a much smaller, slower, and more fragmented version of the Wikipedia community came into existence with the rise of universities in twelfth- and thirteenth-century Europe. 
The large ornamental codices of the early Middle Ages gave way to portable “handbooks” designed for the lighter touch of a quill pen. 
However, the pages of these books continued to be made of animal hide, which could easily be written over. 
This often made it difficult to attribute authorship, because a text might consist of a copied lecture in which the copyist’s comments were inserted and then perhaps altered as the book passed to other hands. 
Wikipedia has remedied many of those technical problems. 
Any change to an entry automatically generates a historical trace, so entries can be read as what medieval scholars call a “palimpsest,” a text that has been successively overwritten. 
Moreover, “talk pages” provide ample opportunity to discuss actual and possible changes. 
While Wikipedians do not need to pass around copies of their text – everyone owns a virtual copy – Wikipedia ’s content policy remains deeply medieval in spirit. 
That policy consists of three rules: 1) no original research; 2) a neutral point of view; and 3) verifiability. 
These rules are designed for people with reference material at their disposal but no authority to evaluate it. 
Such was the epistemic position of the Middle Ages, which presumed all humans to be mutually equal but subordinate to an inscrutable God. 
The most one could hope for, then, was a perfectly balanced dialectic. 
In the Middle Ages, this attitude spawned scholastic disputation. 
In cyberspace, the same practice, often dismissed as “trolling,” remains the backbone of Wikipedia ’s quality control. 
Wikipedia embodies a democratic medievalism that does not respect claims to personal expertise in the absence of verifiable sources. 
To fully realize this ideal, participation in Wikipedia might be made compulsory for advanced undergraduates and Master’s degree candidates worldwide. 
The expected norms of conduct of these students correspond exactly to Wikipedia ’s content policy: one is not expected to do original research, but to know where the research material is and how to argue about it. 
Compulsory student participation would not only improve Wikipedia ’s already impressive collective knowledge base, but also might help curb the elitist pretensions of researchers in the global knowledge system. 

Out in Eighteen Months or One Hundred Years? 
BLOOMINGTON, INDIANA – Winston Churchill once said that, in wartime, truth was so precious that it needed to be surrounded by a “bodyguard of lies.” 
In America’s presidential campaign – and, sadly, within Iraq itself nowadays – the Iraq War may not be surrounded by a bodyguard of lies, but it has certainly picked up a vast entourage of partisan half-truths, cynical indifference, and uninformed stubbornness. 
America’s Democrats continue to argue for complete withdrawal of United States forces from Iraq within 18 months, despite the fact that no rational observer believes that Iraqi forces will by then be able to secure Iraq’s borders and face down the country’s numerous militias, which remain armed to the teeth. 
Indeed, the Democratic plan (if it can be called one) ignores Iran’s ongoing subversion of Iraq’s state institutions, which will continue unless and until they become strong enough to resist such machinations. 
Moreover, Barack Obama’s insistence that Iraq has never constituted a central front in the war on terror insults the memory of tens of thousands – perhaps hundreds of thousands – of Iraqi civilians and US troops murdered by al-Qaeda’s suicide bombers since 2003. 
Indeed, by 2004, the terrorists themselves regarded Iraq as the central front of their campaign. 
Nor can one be buoyed by Joseph Biden’s repeated calls for a “soft partition” of Iraq, even though the entire Iraqi political class has rejected the notion. 
As for the Republicans, setting aside Sarah Palin’s talk of America’s divine mission in the war on terror, it is inconceivable that John McCain truly believes that a US presence is sustainable in Iraq into the indefinite future. 
To be fair, McCain never suggested that US troops will wage 100 years of war, as some of his critics claim. 
What McCain was referring to was a peaceable presence of US forces in the country for a long period, rather like their continued presence in Japan since 1945. 
Still, even assuming that the American public would tolerate such a presence, the Iraqi public would not. 
America has made too many policy mistakes, US forces are too closely associated with an unpopular and incompetent occupation, and, until recently, their tactics have been too thuggish to permit talk of a permanent presence. 
While most Iraqis understand the need for US forces to be in their country for the short term, they will not abide a permanent deployment. 
McCain’s advisors would do well to consider a historical precedent: the failed British attempt at World War I’s close to maintain a long-term military presence in Iraq. 
Iraqi politicians have not been exempt from posturing for political gain. 
The government committed a number of blunders in its negotiations on the continued presence of US troops. 
Indeed, this summer it injected itself into the US elections by seeming to endorse Obama’s plan for early withdrawal. 
Then again, for three consecutive years, Iraq’s national security advisor – a physician with no credentials for the job when appointed by the US occupation authority, except that he spoke tolerable English – insisted that the next year would be the last in which American troops were needed. 
Iraq’s government is demanding a withdrawal timetable from the US, not because it believes that Iraqi forces will be ready to take over soon, but to burnish its nationalist credentials ahead of next year’s parliamentary elections. 
Thus, it hopes to divert public attention from still non-existent basic services, continuing sectarianism, weak oil production, scant infrastructure investment, and rampant corruption and cronyism. 
Whether this strategy will succeed in obscuring the government’s record of failure in the minds of voters remains to be seen. 
The problem now for Iraqi and US politicians is that, to act rationally, they will need to face down elements within their own constituencies. 
They must recognize that a long-term presence by US troops is out of the question, but that US combat forces will be needed in Iraq – albeit with a diminishing role – for the next five years. 
Only such a presence can consolidate the palpable, but still reversible, gains made over the past year. 
Such a force is needed to continue pursuing al-Qaeda, and to counteract pro-Iranian activities. 
Ending US involvement before the Iraqis can achieve these goals on their own would be disastrous for both US and Iraqi interests. 
In the meantime, US forces must support Iraqi efforts to strengthen the country’s own military and security forces, while simultaneously disbanding all militias. 
Iraq’s militias will not go quietly, yet their dissolution is essential for long-term stability, itself a sine qua non for stability in the region. 
When these missions are accomplished – but not sooner – US forces should withdraw from Iraq. 

Out of Step at the ECB 
The European Central Bank remains seriously out of step with other key central banks in the industrial world despite recently announced coordinated efforts to increase short-term liquidity in the banking system. 
The United States, Canada, and the United Kingdom all have cut interest rates recently. 
But the ECB holds firm against cutting; indeed, after the Governing Council’s December meeting, ECB President Jean-Claude Trichet said that some members were in favor of raising rates. 
Who are they kidding? 
Everyone knows that the ECB cannot raise interest rates now, and for some time to come. 
In the midst of the most serious financial crisis in recent memory, the ECB has resorted to an unconvincing bluff, because it has an inflationary expectations problem. 
Past policy missteps are responsible for the ECB’s present predicament. 
The first misstep was the ECB’s delay in tightening monetary policy, long after it had become obvious that interest rates had been held too low (at 2%) for too long (from June 2003 to December 2005). 
The ECB’s hawks, understanding the dangers of abnormally low interest rates for a central bank whose primary objective is price stability, had been eager to start raising rates earlier. 
But the leadership was too timid. 
A faster pace for rates hikes could have offset the slow start, but the ECB again erred on the side of caution. 
For reasons that are unclear, Trichet, in contrast to the ECB’s first president, Wim Duisenberg, has wanted to raise rates by only 25 basis points at a time. 
Many in the Governing Council wanted to go faster, because they knew they had a long journey in front of them, but Trichet refused. 
The hawks were right to be in a hurry. 
Because of the late start and slow pace, the Governing Council had reached only the 4% mark when the current financial crisis effectively put a lid on further rate hikes. 
Trichet even had to rescind the rate hike he had signaled for September, though he still claims the increase has been merely postponed, not abandoned. 
Not a chance. 
The truth is that ECB would not be in its current predicament if the central bank had reached the 4.75% or even 5% level by now. 
Higher rates would have meant lower inflation, so that inflationary expectations would not be the issue they have become. 
Moreover, from a higher rate level, the ECB would be in a better position to cut rates now that the economy is slowing. 
Several frustrated hawks on the Governing Council are dead set against cutting interest rates precisely because they believe that, at 4%, rates already have been “cut” from the 5% or so levels they had expected to achieve. 
They don’t want to go further, and one can understand their chagrin, if not agree with their policy stance. 
The ECB will have to cut interest rates in 2008 if it wants to avoid a hard landing for the euro-zone economy. 
Being out of step has consequences. 
The euro has sharply appreciated, for example, causing Trichet to condemn “brutal” currency moves. 
When the Canadian dollar sharply appreciated, the Bank of Canada did more than talk – it cut interest rates. 
The ECB has the same option, but refuses to use it. 
Along with its empty threats of interest rate hikes, there is a real danger the ECB will be labeled the central bank that barks but doesn’t bite (animal behaviorists know that barking and biting are substitutes, not complements). 
The ECB’s credibility is on the line. 
How seriously, one wonders, did the Chinese take Trichet when he came to China to protest the euro’s “brutal” appreciation against the renminbi? 
Cut your own interest rates, they must have thought to themselves, and you will have less to complain about. 
Being out of step also focuses attention on the fact that the ECB is in danger of losing control over inflationary expectations. 
The US Federal Reserve can cut 100 basis points from the federal funds rate and not lose control over US inflationary expectations. 
Yet, the ECB cannot cut interest rates 1 basis point because it fears euro-zone inflationary expectations are becoming unglued. 
This is clear and convincing evidence of the ECB’s previous policy missteps in the normalization of interest rate process. 
If Europe’s central bank had not been too late and too slow in the past, it would have been truer to its own price stability mandate, and not now out of step with central banks in other industrial countries. 

Out of the Asylum 
Serbia -- long castigated as the land whose late president, Slobodan Milošević, launched a genocide in Yugoslavia -- is not accustomed to finding itself lauded for safeguarding human rights. 
But in one area of human rights protection, much-maligned Serbia has taken an unprecedented step that puts ahead of all the rest of Central and Eastern Europe, including states that are already members of the European Union. 
In September 2006, Serbia’s Ministry of Labor, Education, and Social Affairs made it official policy to integrate into society thousands of people who had been locked away in Dickensian state institutions because they have a mental disability. 
With this historic move, Serbia adopted a practice that took hold in the rich, Western countries after World War II but was never applied in the Communist bloc. 
It is anathema to the concept of a free society to segregate people solely on the basis of mental disability, to ignore their most-basic human rights, to bar them from access to education and employment, to deny them the freedom to choose where and how they live and with whom they can associate. 
The policy change aimed at rectifying this grim reality in Serbia came when the Ministry agreed to apply country wide a pilot project that has, since 2003, established a range of community-based support services to enable persons with intellectual disabilities to leave the institutions where they were confined and begin living lives in the wider world. 
That pilot project demonstrated that people with mental disabilities are capable of living as equal citizens when they receive appropriate assistance. 
Based upon the project’s success, the Ministry has committed to purchase more than 130 apartments and homes to house people brought out of institutions and to establish day services to help them cope with the complexities of life beyond the walls that once confined them. 
Funding for these reforms comes from the privatization of state assets -- not from aid from abroad. 
To Serbia’s credit, the Ministry made its policy decision knowing that the change would require belt-tightening elsewhere in its budget, but it took the action because it concluded that protecting human rights was more important than saving a few dinars. 
Hopefully, Serbia’s decision will inspire the other states of Central and Eastern Europe, including states that have won membership in the European Union, to follow its lead. 
It is shocking that the EU has done so little to press its members, and candidate-members, to promote community living for people with mental disabilities. 
None of the new EU member-states have concrete plans or financing mechanisms to develop networks of community-based alternatives on a national scale. 
While there are pockets of high quality community-based services in most of the region’s countries, tens of thousands of people with mental disabilities are still living in institutions, and most of them have no prospect of ever leaving. 
* Hungary continues to segregate its most disabled citizens and spent millions of dollars on the construction of a new institutional behemoth which sits empty because it does not meet EU fire and safety standards. 
* Croatia is demonstrating that deinstitutionalization is not a question of money. 
The Open Society Institute committed over $2 million to assist the government in closing a large institution for people with intellectual disabilities. 
But, almost a year into the negotiations, the government is still not ready to commit to concrete action. 
* In Romania last year, children were dying of starvation in one institution. 
The government placed the blame on local authorities; the local authorities blamed the government for allocating inadequate resources; and inmates of the institutions still look out at the world through windows that are locked and barred. 
There is an urgent need to change government policies so that providing services for people with mental disabilities in the community is the norm rather than the exception. 
Such services must be accessible to everyone who needs them. 
And governments must reallocate resources from institutions -- and the bureaucracies that have a vested interest in preserving their positions -- to organizations that support community-based living. 
It is time for the rest of Central and Eastern Europe to catch up to Serbia. 

Outsourced and Out of Work 
The latest buzzword in the globalization debate is outsourcing. 
Suddenly Americans - long champions of globalization - seem concerned about its adverse effects on their economy. 
Its ardent defenders are, of course, untroubled by the loss of jobs. 
They stress that outsourcing cuts costs - just like a technological change that improves productivity, thus increasing profits - and what is good for profits must be good for the American economy. 
The laws of economics, they assert, ensure that in the long run there will be jobs for everyone who wants them, so long as government does not interfere in market processes by setting minimum wages or ensuring job security, or so long as unions don't drive up wages excessively. 
In competitive markets, the law of demand and supply ensures that eventually , in the long run, the demand for labor will equal the supply - there will be no unemployment. 
But as Keynes put it so poignantly, in the long run, we are all dead. 
Those who summarily dismiss the loss of jobs miss a key points: America's economy has not been performing well. 
In addition to the trade and budget deficits, there is a jobs deficit. 
Over the past three and a half years, the economy should have created some 4 to 6 million jobs to provide employment for new entrants into the labor force. 
In fact, more than 2 million jobs have been destroyed - the first time since Herbert Hoover's presidency at the beginning of the Great Depression that there has been a net job loss in the US economy over the term of an entire presidential administration. 
At the very least, this shows that markets by themselves do not quickly work to ensure that there is a job for everyone who wishes to work. 
There is an important role for government in ensuring full employment - a role that the Bush administration has badly mismanaged. 
Were unemployment lower, the worries about outsourcing would be less. 
But there is, I think, an even deeper reason for concerns about outsourcing of, say, hi-tech jobs to India: it destroys the myth - which has been a central tenet of the globalization debate in the US and other advanced industrial countries - that workers should not be afraid of globalization. 
Yes, apologists of outsourcing say, rich countries will lose low-skilled jobs in areas like textiles to low wage labor in China and elsewhere. 
But this is supposedly a good thing, not a bad thing, because America should be specializing in its areas of comparative advantage, involving skilled labor and advanced technology. 
What is required is "upskilling," improving the quality of education, especially in science and technology. 
But this argument no longer seems convincing. 
America is producing fewer engineers than China and India, and, even if engineers from those developing countries are at some disadvantage, either because of training or location, that disadvantage is more than offset by wage differentials. 
American and rich country engineers and computer specialists will either have to accept a wage cut and/or they will be forced into unemployment and/or to seek other employment - almost surely at lower wages. 
If America's highly trained engineers and computer specialists are unable to withstand the onslaught of outsourcing, what about those who are even less trained? 
Yes, America may be able to maintain a competitive advantage at the very top , the breakthrough research, the invention of the next laser. 
But a majority of even highly training engineers and scientists are involved in what is called "ordinary science," the important, day-to-day improvements in technology that are the basis of long-term increases in productivity - and it is not clear that America has a long-term competitive advantage here. 
Two lessons emerge from the outsourcing debate. 
First, as America grapples with the challenges of adjusting to globalization, it should be more sensitive to the plight of developing countries, which have far fewer resources to cope. 
After all, if America, with its relatively low level of unemployment and social safety net, finds it must take action to protect its workers and firms against competition from abroad - whether in software or steel - such action by developing countries is all the more justified. 
Second, the time for America to worry is now. 
Many of globalization's advocates continue to claim that the number of jobs outsourced is relatively small. 
There is controversy, of course, about the eventual size, with some claiming that as many as one job in two might eventually be outsourced, others contending that the potential is much more limited. 
Haircuts, like a host of other activities requiring detailed local knowledge, cannot be outsourced. 
But even if the eventual numbers are limited, there can be dramatic effects on workers and the distribution of income. 
Growth will be enhanced, but workers may be worse off - and not just those who lose their jobs. 
This has, indeed, already happened in some developed countries: in the ten years that have passed since the signing of the North American Free Trade Agreement, average real wages in the US have actually declined. 
Putting one's head in the sand and pretending that everyone will benefit from globalization is foolish. 
The problem with globalization today is precisely that a few may benefit and a majority may be worse off, unless government takes an active role in managing and shaping it . 
This is the most important lesson of the ongoing debate over outsourcing. 

Outsourcing in Africa 
In the past 40 years, advanced computers and communications have transformed one part of the world after another - first, the US and Europe, then Japan, Korea, and Taiwan, and most recently, India, China, and Eastern Europe. 
Is Africa next? 
Despite civil wars, malnutrition, and the anguish of the AIDS epidemic, something remarkable is happening in black Africa: the stealthy rise of a high-technology sector. 
If not quite representing an African "Silicon Valley," these shoots of high-tech industry nonetheless can and must be nurtured if Africa is to thrive. 
Consider what is happening on several floors of a single high-rise office building in Accra, Ghana's capital. 
There some 1,500 Africans process American health-insurance claims - working around the clock, in three shifts. 
The Africans speak English, type at least 50 words a minute on a computer, take data from paper claim forms supplied by US health insurers via satellite in electronic form, put it into new digital forms, and ship them back to the US. 
So connected are these Africans that their forms can be reviewed - as they fill them in - by an American supervisor 8,000 miles away. 
Ghana is best known for producing cocoa and gold, but today Affiliated Computer Services (ACS), a Texas company that runs the outsourcing operation, is the country's largest private employer. 
African "key punchers" earn $4 to $5 a day - four times the legal minimum wage - and receive health insurance, meals, and subsidized transport. 
A small number of African engineers and professionals earn much more, and receive periodic training in advanced technologies. 
ACS's employees are but the first Africans to benefit from the hottest trend in the global economy: outsourcing, or the shift of service jobs from high-wage to low-wage countries. 
To be sure, the number of jobs moving to Africa is tiny compared to those going to Asia, Latin America, and Eastern Europe. 
But the big news is that Africa is finally competing in the economic contest that is reshaping the world economy. 
Still, Africa remains burdened by severe disadvantages, not the least of which is a terrible image. 
"Big corporations don't even have Africa on the map when they consider outsourcing locations," says Sambou Makalou, a native of Mali who tries to persuade US employers to shift service jobs to Africa. 
"There are real opportunities for outsourcing to Africa," he says, "but there are barriers, too." 
African governments also must be willing to start small: expend a lot of effort to attract pilot projects in the hope of larger employment in the future. 
With sensible reforms, many barriers can be removed or at least eased. 
Start with the following: 
· Better Governance : African governments often boast when they simply stop the corrosive effects of corruption and irrational business regulation. 
But little attention is given to the high cost of telecommunications, unreliable electrical-power systems, and the poor transport infrastructure. 
• Greater Competitiveness : African leaders have been slow to realize that they must woo foreign corporations with special services, training programs for workers, and even subsidized offices. 
Asian countries attract many jobs by creating "industrial parks," with more reliable services, including ultra-reliable communications networks, offered at competitive prices. 
By restructuring their secondary schools and universities to train graduates with skills demanded by multinational corporations, Asian countries also create more competitive workforces. 
To be sure, Africa is a far better place to do business than five years ago. 
The spread of mobile telephony has revolutionized ordinary life in a continent with the world's lowest penetration of fixed-line telephones. 
Satellite links have vastly improved Internet access, and a new undersea cable that runs along the coast of Africa (SAT-3) promises to improve and reduce the cost of all types of communications. 
The problem is that, although Africa's economic appeal is increasing, India and China are improving more quickly, widening the gap. 
African cities are increasingly finding their way onto the short lists of corporate location experts, only to lose out to Asian cities. 
Africans can start winning only if they move faster. 
Surprisingly, wage competitiveness is a problem. 
Although Africa is the world's poorest region on average, wages in the formal economy generally exceed those paid in China and India, where government keeps basic food, housing, and transport costs relatively low through subsidies and controls. In urban Africa, costs - for food and transport in particular - are relatively high, which forces wages up. 
The supply of African professionals and skilled workers, meanwhile, is tight; shortages also drive up wages. 
Indeed, an Indian software programmer typically earns less than a comparable African programmer. 
Even wages for routine data-entry tasks in Africa are usually no less than those paid in south Asia. 
The odds that Africa one day will receive a fair share of outsourcing jobs are improving. 
But there is a risk that the region will fall further behind. 
When ACS decided to expand recently, it opened a new operation in India rather than in Ghana or another African country. 
The message was sobering. 
Even as hundreds of similar outsourcing centers spring up in Asia, Eastern Europe, and Latin America, the Accra center remains a rarity in Africa. 
That is a shame, but it need not be Africa's fate. 

The Not-So-High Costs of Brexit 
BRUSSELS – The United Kingdom’s vote to “Brexit” the European Union is on course to become the year’s biggest non-event. 
Beyond a weaker pound and lower UK interest rates, the referendum has not had much of a lasting impact. 
Financial markets wobbled for a few weeks after the referendum, but have since recovered. 
Consumer spending remains unmoved. 
More surprising, investment has remained consistent, despite uncertainty about Britain’s future trade relations with the EU. 
Have the costs of Brexit been overblown? 
Not exactly. 
In fact, the UK may well end up losing the predicted 2-3% of GDP from Brexit. 
But it is the exit from the single market, not the initial vote to leave, that will bring those losses, and that may happen over a long period. 
If the exit turns out to be a ten-year process, the losses would be borne gradually over that period, costing the UK about 0.2-0.3% of GDP per year, on average. 
This could be very good news for the UK. 
With a weaker currency, the country will benefit from an increase in export competitiveness that could offset those incremental losses and the transient investment weakness that is likely to arise. 
Other factors will also cushion the blow of Brexit. 
Over the last two decades, the UK has transformed its economy to foster unprecedented specialization in services. 
In the mid-1990s, goods exports were three times as important as services exports, and the majority of British exports went to the EU. Nowadays, the UK exports mostly services – and mostly to non-EU markets. 
As a result, the internal market for goods is far less important for the UK today than it is for other EU countries. 
The value-added contained in British goods exports to the EU accounts for only about 5% of GDP – several times less than for, say, Germany. 
Meanwhile, Britain’s non-EU exports account for about 7% of GDP. 
The shift in UK goods exports away from the EU reflects a change in the sources of economic growth, with Asia, in particular, gaining primacy. 
To some extent, other EU member states have also shifted their goods exports away from Europe, but the effect has been most pronounced in the UK. 
The fact that the UK now relies more heavily on access to world markets than on access to the EU’s internal market surely contributed to the Brexit vote, as it minimized the sacrifice that the UK would have to make to regain control over hot-button issues like immigration. 
The belief that the UK could secure superior access to world markets on its own than as part of the EU also helped. 
This is where the Brexit bet becomes riskier. 
To be sure, approving trade deals will be much easier for the UK than it is for the EU, which requires agreement from 30 parliaments (including some regional ones). 
The political challenges that have impeded the approval of a relatively low-profile free-trade agreement with Canada exemplify this challenge. 
But the UK will also have less leverage in negotiations than the EU does, especially in dealing with large emerging economies. 
Similarly, the UK does not have to fear huge changes in its ability to export services to the EU, which currently accounts for about 40% of the UK total, because the EU’s internal services market already is far from open. 
But there is one exception: financial services. 
And it is a big one. 
As it stands, financial services account for about one-third of Britain’s total services exports and two-thirds of the overall services surplus that the UK needs to pay for its deficit on goods. 
The industry’s success is the result, at least partly, of the UK’s EU membership. 
The specialization of the UK economy and its external accounts toward financial services (and services in general) began when capital movements were liberalized under the internal market program of the 1990s. 
It was accelerated with the introduction of the common currency, which, combined with the elimination of obstacles to cross-border capital flows and a global credit boom, fostered the concentration of many types of wholesale financial services in the City of London. 
The financial sector has a natural tendency to form clusters, and London – where English is spoken, the legal system is efficient, labor markets are flexible, and the regulatory regime is relatively streamlined – offered substantial advantages. 
Add to that the EU’s “passporting” system, which enables London-based banks to sell their services directly throughout the EU, and the growth of the city’s financial-services sector makes perfect sense – as does the fact that citizens of London voted overwhelmingly against Brexit. 
Yet the reality is that most of the advantages that have made London into a financial-services hub will remain even after Brexit. 
And the loss of passporting might be offset by the creation of subsidiaries or “bridgeheads” within the EU, such as Dublin, Frankfurt, or Paris. 
London’s financial-services industry could therefore survive Brexit, though it is unlikely that it will maintain its previous vigor. 
Indeed, no matter what terms the UK negotiates with the EU, it will probably have to change its growth model, probably through a modest revival of manufacturing, among other things. 
Given decades of decline in British manufacturing, this would be easier said than done. 
But, if the country doesn’t manage such a rebalancing, the long-term cost of Brexit might turn out to be substantially higher than current estimates. 
The expansion of the financial-services industry – which creates few, but very highly paid, jobs – has contributed to rising income inequality, which has been more pronounced in the UK than elsewhere in the EU. 
And inequality helped fuel the widespread frustration with globalization and the so-called “establishment elites” that carried the Brexit campaign to victory. 
In this sense, one of the major economic benefits of the UK’s EU membership led the British to reject the project. 
The question is whether the economic changes that Brexit will necessitate will produce the benefits for British workers that the “Leave” campaign promised. 
The answer remains far from clear. 

Overcoming Africa’s North-South Divide 
The late President Mobutu Sese Seko of former Zaire once declared that the North African countries, which pride themselves on their Arabic descent, should be excluded from the then Organization of African Unity. 
Mobutu’s rule was, of course, deeply flawed, but he was not alone within the pan-African movement in such thinking. 
The antagonism between the blacks of sub-Saharan Africa and the inhabitants of the continent’s north remains a reality that impedes the prospect of any union between them. 
Northern hostility, separatism, and racism toward the southerners are at the center of this split. 
However, in our current era of political correctness, outright separation between the north and the south remains unmentionable. 
In declaring that Egypt was an Arab republic, President Gamel Abdel Nasser was falsifying history, erasing 3000 years of a culture neatly intertwined with black Africa. 
Indeed, for nearly three centuries, from 950 to 663 BC, black pharaohs and queens such as Tii from the “land of Kush” – today’s black Sudan – ruled Egypt. 
More grotesquely, when the Americans decided to finance a film on the life of Anwar Sadat, the Egyptians objected because the actor chosen to play Sadat was black. 
Similarly, when Morocco quit the OAU in 1984, it dreamed of European Union membership. 
Sudan’s ruling class – descendants of Arab slaves – have no qualms about bombing, killing, and displacing millions of their black citizens in the south and now in the Darfur region, with the backing of the Arab League. 
And when Libyan leader Colonel Muammar Khadafi, disappointed by the pan-Arabism he advocated, turned to championing pan-Africanism, his people continued to riot to chase out black immigrants. 
Mauritania’s leaders quit ECOWAS, the West African regional grouping, to join the union formed by the North African countries. 
These countries’ attitude reflects that of the Arabs themselves. 
When al-Qaeda decided to take on the United States, it targeted the US embassies in Kenya and Tanzania, killing more than 260 people. 
With the exception of 12 US citizens, all were black civilians, while more than 4,000 Kenyans and Tanzanians were injured. 
Justifying the killings of black Africans, a leading Arab commentator invoked Stalin: “One can’t make an omelet without breaking eggs.” 
In Saudi Arabia, the racism against black Muslims is so acute that one wonders if it is worth it for them to perform the pilgrimage to Mecca, one of the five pillars of the Muslim faith. 
As a Muslim and a world traveler, I have never experienced as much ostracism as I did in Saudi Arabia as a pilgrim. 
Why then, should sub-Saharan black Africans keep alive the mirage of a union with the North African countries? 
The Egyptians, with a historical civilization second to none in terms of achievements in all walks of life, want desperately to associate with the Arabs, with whom they have no kinship other than colonization. 
Likewise, the other people of North African countries are Berbers who, less than half a century ago, were given cash incentives to learn Arabic. 
The African Union needs thorough rethinking. 
Diversity must be a source of richness, not antagonism, and countries that favor the latter must be excluded. 
This would entail the dismantling of the African Union in its current form, which in any case is built on shaky grounds, since its designers seemed to favor plagiarizing the European Union – hardly a bureaucratic model worth emulating. 
But African leaders have no interest in a real African Union. 
They derive their powers from the fragmentation of the continent, and one cannot expect them to renounce that stance for the sake of the well-being of the masses. 
Consequently, a United States of Africa would have to stem from the grassroots, through existing institutions of civil society like professional associations, trade unions, and other non-governmental organizations. 
It is worth remembering that the people who were instrumental in establishing the best and most enduring union of states in history, the United States of America, were political activists, not heads of states. 
In Latin America, the only breakthrough that dented post-independence domination by the descendants of European colonizers came from a black freedom fighter and unifier, Simon Bolivar, who united the region before being forced into exile in Jamaica. 
Now, Bolivar has an heir in Hugo Chávez, and the Latin American political landscape is changing at breakneck speed under his inspiration and leadership. 
Inspired leadership is crucial to any process of nation building, and Africans should look to figures such as Bolivar, Martin Luther King, Jr., Georges Padmore, W.E.B. Dubois, Kwame Nkrumah, and Cheikh Anta Diop to mount a resistance movement against their mostly corrupt and incompetent leaders (a Herculean task, indeed). 
Only then could they fulfill the dream of a common African identity and the establishment of a United States of Africa. 

The Greening of African Technology 
JOHANNESBURG – Technological innovation offers Africa huge possibilities. 
That is why I joined Africa’s movers and shakers last week at a meeting of the World Economic Forum in Kigali, the capital of Rwanda. 
We were there to discuss how the digital economy can propel the kind of radical change the continent needs. 
At the same time, though, we had to think about some old tools that our ancestors passed down to us – namely, how to think for the long term and how to work together. 
These tools are a form of technology that we need to use now, so that future generations have a chance. 
Climate change is the ultimate test of whether we can use the old and new technologies to safeguard our children’s future. 
Africans must take decisive action to combat the threat of global warming, by reducing greenhouse-gas emissions and by helping one another to adapt to climate change. 
If we fail to make progress in these areas now, future generations will judge our inaction as expensive, unjust, and immoral. 
Africa is one of the regions most vulnerable to climate change. 
Yet it accounts for only 2.3% of global CO2 emissions. 
That is partly because two-thirds of Africans – 621 million people – do not have access to electricity. 
To meet the double challenge of climate change and this energy deficit, African countries need to help themselves and one another. 
Developed countries – the major contributors to global warming – must live up to the promises they made at the COP21 climate talks in Paris last December. 
Alongside reacquainting ourselves with old-tech methods of thinking about the long run and working together, new technology is essential if Africa is to cope with climate change. 
Innovations in biotechnology and farming methods are needed to deal with disease, pests, and drought. 
New technology can also help Africa to leapfrog over dependence on fossil fuels and into a low-carbon future. 
The continent has a great opportunity to develop new low-carbon energy strategies that build resilience and support growth that benefits everyone, reducing poverty faster. 
We show how this can be done in the 2015 Africa Progress Report, “Power People Planet: Seizing Africa’s Energy and Climate Opportunities.” 
Renewable sources will replace fossil fuels gradually. 
It cannot happen overnight. Africa needs a judicious and dynamic energy mix. 
Most of all, it needs much more energy, now: Sub-Saharan Africa as a whole, excluding South Africa, currently generates less electricity than Spain. 
The state of education in Africa is one telling consequence of the continent’s energy crisis. 
I have worked in education most of my life, as a teacher and minister of education in Mozambique. 
Experience has taught me that a country’s schools are the key to its success and prosperity. 
Yet in many African countries, 80% of primary schools do not have electricity, severely compromising the quality of instruction. 
Shortages of electricity also cost lives. 
Almost four in five Africans rely for cooking on solid biomass, mainly wood and charcoal. 
As a result, more than 600,000 people die each year from household air pollution. 
Efficient cooking stoves would save them, liberate millions of girls and women from the chore of gathering firewood, and generate wide-ranging environmental benefits. 
The steps that Africa’s leaders need to take are clear. 
Long-term national interest must take precedence over short-term political goals, vested interests, and political patronage. 
African leaders need to root out graft, make the governance of energy utilities – some of which have been centers of corruption and inefficiency – more transparent, strengthen regulations, and increase public spending on energy infrastructure. 
They also need to redirect the $21 billion spent in Africa on subsidies for loss-making utilities and electricity consumption – which mainly benefit the rich – toward connection subsidies and renewable-energy investments that deliver energy to the poor. 
There is also a clear course of action for the leaders of major CO2-emitting countries. 
They need to put a proper price on their emissions by taxing them, instead of continuing to subsidize them by spending billions on fossil-fuel exploration. 
G-20 countries must set a timetable for phasing out such subsidies. 
And rich countries need to mobilize international development finance, which can play a key role in helping African countries meet their energy needs. 
The fragmented, under-resourced and ineffective system for financing climate policy has failed Africa. 
It needs wholesale reform. 
Unfortunately, the world’s largest emitters have shown little commitment to the United Nations’ Green Climate Fund. 
Corporate leaders have a responsibility to act as well. 
They should demand a price on carbon, drive innovation, and seek opportunities to fund low-carbon development across Africa. 
Natural gas and renewable energy sources, such as sun, water and wind, are an opportunity, not a risk, in Africa. 
Millions of energy-poor, disconnected Africans earning less than $2.50 a day constitute an energy market worth $10 billion a year. 
Some hope for rapid change may be glimpsed in the fact that Africa now leads the world in adopting many new technologies. 
It is bypassing earlier ones and jumping straight into the digital age. 
East Africa’s M-Pesa system for transferring money via mobile phones is spurring new microfinance services, such as peer-to-peer lending. 
Commodity exchanges are enabling farmers to access real-time prices. 
Let us put those timeless, old-tech skills of far-sightedness and collaboration together with new technology. 
If we do, the current generation of African leaders has a unique opportunity to protect future generations from a climate disaster, deliver on the promise of energy for all, and build shared prosperity. 

Can the Democrats and Republicans Heal Themselves? 
WASHINGTON, DC – The contests to decide the nominees of America’s two main political parties, the Democrats and the Republicans, for the presidential election are all but over. 
That leaves both parties facing the challenge of reuniting for the fall campaign – a feat that will be much harder to pull off this year than it was in most other presidential election years. 
Though it is mathematically impossible for Bernie Sanders to win enough pledged delegates to capture the Democratic nomination, he is staying in the race, which means that Hillary Clinton cannot yet begin her healing effort. 
But winning the support of the millions of voters who fervently back Sanders poses a serious challenge. 
Sanders is not simply an adversary; he leads a movement that opposes what Clinton and the “establishment” stand for. 
The contest between Clinton and Barack Obama in 2008 seemed to end amicably enough. 
Though Clinton stayed in the race to the end, she toned down her rhetoric against Obama as the contest wound down. 
That summer, she took the unusual step of going onto the convention floor to urge the party to nominate him by acclamation. 
Yet the efforts in 2008 to unite the Democratic Party weren’t as successful as the conventional wisdom suggests. 
It is one thing for candidates to decide that they must be gracious in defeat. 
Their followers can be harder to reconcile. 
After 2008, tensions between some of Clinton’s and Obama’s strongest supporters lingered for years. 
One way to unite party factions is for the nominee to select his rival as his running mate. 
John F. Kennedy chose his formerly bitter opponent, Lyndon B. Johnson. (That merger didn’t go well.) 
But Clinton isn’t about to make Sanders her running mate. 
Sanders is temperamentally unsuited for the role of subordinate, and their policy disagreements reflect deeply held views about the role of the federal government. 
Obama probably chose Clinton to be his first Secretary of State for reasons that went beyond her considerable intelligence: It was better to have her in the tent than outside it. 
Even so, Clinton’s loyalty was not absolute. 
In her book Hard Choices, she took some shots at his handling of Syria’s civil war, and in her campaign she has sometimes distanced herself from his policies. 
Yet Obama, once Sanders is out of the race, will surely campaign hard for Clinton. 
It is clear that Sanders intends to challenge Clinton on some issues to be included in the party’s 2016 policy platform. 
During the nomination campaign, he managed to pull her somewhat to the left on trade, the minimum wage, and mass incarceration. 
But there’s only so far she can go in the general election without losing the votes of independents. 
While Sanders’s proposals are popular, particularly among young people, much of his agenda – such as transforming Obamacare into a single-payer health system – isn’t politically feasible. 
Likewise, Wall Street’s banking behemoths are unlikely to be broken up. 
Moreover, at this point, Clinton and Sanders are exasperated by each other. 
She and her husband, Bill, are annoyed with Sanders for continuing to campaign (even though she did the same in 2008) and for not toning down his critique of her record. 
Candidates rarely forget such things. 
Thirty years later, Jimmy Carter still spoke bitterly about an incident at the Democrats’ convention in 1980. 
Carter, the incumbent president, was reduced to chasing his defeated challenger, Edward M. Kennedy, around the stage in pursuit of the traditional photo of former rivals with arms raised and hands clasped. 
Instead of a beaming show of unity, Carter got only a grudging handshake. 
The main reason why it could be hard for Clinton to win over Sanders’s supporters is that a great many of them don’t like her. 
A third of them have said that they won’t vote for her. 
In April, only 40% of Democrats gave her high marks for being honest and trustworthy, and only 50% of Democrats rated her favorably overall. 
(Obama’s favorability rating in 2008 was 60%.) 
Though Republicans relish the possibility that Clinton will be indicted for routing official business through a private email server when she was Secretary of State, prosecutors would have to prove that she intended to break the law, which is unlikely. 
But the email row has highlighted some of the reasons people don’t like Clinton: To put it charitably, she’s been evasive in her responses to questions about what was undeniably a reckless act. 
As a result, her standing has gone down during the campaign. 
Clinton has a great many fervent supporters, of course, but her presidential campaigns have both suffered from a dearth of passion. 
The greatest danger she faces in the election in November is that too many Democrats simply won’t bother to vote. 
Her campaign is counting on Donald Trump to unite the party, and that might well happen; but she will have her work cut out, particularly among young and first-time voters, who have overwhelmingly backed Sanders. 
The Republicans will also have a problem uniting around Trump, who is now the party’s presumptive nominee. 
Most elected Republicans view him as too ill-informed and bombastic to be President. 
In late April, 40% of Republicans polled said that they wouldn’t support Trump in the general election. 
Republicans also worry that Trump could be defeated badly enough to cost them control of the Senate and cut their majority in the House of Representatives. 
For this reason, many are agonizing over what to do about Trump. 
Some are stretching to say that they support Trump, but don’t endorse him. 
Presidents George H.W. Bush and George W. Bush have both said that they’ll stay out of this race. 
For the first time in American history, both parties’ nominees are far more disliked than liked by the country at large, though Trump does lead Clinton in this department. 
This is not a very good basis for starting the next presidency. 

Getting Past Slow Growth 
WASHINGTON, DC – Most economists nowadays are pessimistic about the world economy’s growth prospects. 
The World Bank has, yet again, downgraded its medium-term projections, and economists the world over are warning that we are facing a “new normal” of slower growth. 
Where there is less consensus – or so it seems – is in accounting for this weakness. 
Almost three years ago, former US Treasury Secretary Larry Summers revived Alvin Hansen’s “secular stagnation” hypothesis, emphasizing demand-side constraints. 
By contrast, in Robert Gordon’s engaging and erudite book The Rise and Fall of American Growth, the focus is on long-term supply-side factors – in particular, the nature of innovation. 
Thomas Piketty, in his best-selling tome Capital in the Twenty-First Century, describes the rise of inequality that is resulting from low GDP growth. 
Joseph E. Stiglitz’s book Re-Writing the Rules of the American Economy: An Agenda for Growth and Shared Prosperity blames political choices for both slowing growth and rising inequality. 
These accounts differ in emphasis, but they are not contradictory. 
On the contrary, while Summers, Gordon, Piketty, and Stiglitz each examines the issue from a different perspective, their ideas are complementary – and even mutually reinforcing. 
Summers’s Keynesian argument is that the problem is a chronic aggregate-demand shortfall: Desired investment lags behind desired savings, even at near-zero nominal interest rates, resulting in a chronic liquidity trap. 
Today’s near-zero – even slightly negative – short-term policy interest rates do not mean that longer-term rates, which are more relevant to investment financing, have also hit zero. 
But the yield curve in the major advanced economies is very flat, with both real and nominal longer-term rates at historic lows. 
There may be many reasons for this, but Gordon describes one possibility: The underlying pace of innovation has slowed, leading to lower expected returns on investment and thus forcing down interest rates. 
And it is the investment needed to translate new knowledge into actual innovation that links the supply and demand sides and generates growth. 
Both of these theories can be connected with Piketty’s arguments about the dynamics of capital accumulation. 
Implicit in Piketty’s thesis is that capital can be substituted for labor relatively easily. 
When capital grows faster than labor and GDP, the rate of return will fall over time, but proportionately less than growth in the amount of capital. 
The result is a redistribution of income from labor to those who own capital. 
Summers actually proposed a new form of the production function, whereby the progress of intelligent machines makes capital a perfect substitute for segments of the labor force. 
An increasing concentration of income at the top, combined with top earners’ high propensity to save, then leads to the chronic shortfall of aggregate demand that characterizes secular stagnation. 
Stiglitz makes the case that policy bias also contributes to income concentration. 
Gordon’s thesis is more about a kind of “satiation” in rapid technological progress, which depresses expected returns and thus helps to explain the chronic lack of sufficient investment. 
But, at the end of his book, he makes median income the real indicator of economic performance. 
In Gordon’s 2015-2040 projection, annual growth in median income in the United States is only 0.4%, compared to average income growth of 0.8%, reflecting continuously rising inequality. 
(Compare this to 1.82% annual growth in median income from 1920 to 2014.) 
The intertwined forces of chronic Keynesian imbalance, a slowdown in productivity growth, and a concentration of income at the top lead to a very subdued outlook for growth in median income. 
With expectations about the future being undermined by such deep-rooted and multifaceted forces, perhaps it should not be surprising that voters in the United States, Europe, and elsewhere are expressing anger toward the establishment. 
Fortunately, there are reasons for hope. 
First, I do not share Gordon’s assessment of prospects for longer-term technological progress. 
I believe that, as the digital revolution and artificial intelligence restructure larger segments of economic activity, overall productivity growth may accelerate again, leading to higher expected returns and, therefore, more investment and faster growth. 
That in itself will not lead to a more balanced distribution of wealth or income, and it may not generate enough employment. 
But it could help create the political and fiscal space for inclusiveness-oriented policy reforms. 
Second, developing and emerging economies still offer immediate opportunities for large high-return investments, which should be financed by what appears as excess global savings. 
With significant room to move toward the technology frontier, including in services, there are still plenty of opportunities for “catch-up” growth. 
Such investments would help close the global savings gap and generate positive feedback for advanced economies as well. 
To take advantage of these opportunities, however, regulatory and political uncertainty must be reduced and public-private partnerships in development finance must be scaled up within a framework that leads to inclusive benefits. 
It is likely that continued rapid increases in prosperity are possible. 
Ultimately, however, political choices will determine whether the diffusion of artificial intelligence leads to widespread increases in median incomes or exacerbates polarization and inequality. 
Political will and powerful messaging will be needed to spur the ambitious social and economic reforms, together with the kind of international cooperation, that will be needed to take advantage of opportunities for inclusive growth. 

Overcoming the Copenhagen Failure 
NEW YORK – Pretty speeches can take you only so far. 
A month after the Copenhagen climate conference, it is clear that the world’s leaders were unable to translate rhetoric about global warming into action. 
It was, of course, nice that world leaders could agree that it would be bad to risk the devastation that could be wrought by an increase in global temperatures of more than two degrees Celsius. 
At least they paid some attention to the mounting scientific evidence. 
And certain principles set out in the 1992 Rio Framework Convention, including “common but differentiated responsibilities and respective capabilities,” were affirmed. 
So, too, was the developed countries’ agreement to “provide adequate, predictable and sustainable financial resources, technology, and capacity-building….” to developing countries. 
The failure of Copenhagen was not the absence of a legally binding agreement. 
The real failure was that there was no agreement about how to achieve the lofty goal of saving the planet, no agreement about reductions in carbon emissions, no agreement on how to share the burden, and no agreement on help for developing countries. 
Even the commitment of the accord to provide amounts approaching $30 billion for the period 2010-2012 for adaptation and mitigation appears paltry next to the hundreds of billions of dollars that have been doled out to the banks in the bailouts of 2008-2009. 
If we can afford that much to save banks, we can afford something more to save the planet. 
The consequences of the failure are already apparent: the price of emission rights in the European Union Emission Trading System has fallen, which means that firms will have less incentive to reduce emissions now and less incentive to invest in innovations that will reduce emissions in the future. 
Firms that wanted to do the right thing, to spend the money to reduce their emissions, now worry that doing so would put them at a competitive disadvantage as others continue to emit without restraint. 
European firms will continue to be at a competitive disadvantage relative to American firms, which bear no cost for their emissions. 
Underlying the failure in Copenhagen are some deep problems. 
The Kyoto approach allocated emission rights, which are a valuable asset. 
If emissions were appropriately restricted, the value of emission rights would be a couple trillion dollars a year – no wonder that there is a squabble over who should get them. 
Clearly, the idea that those who emitted more in the past should get more emission rights for the future is unacceptable. 
The “minimally” fair allocation to the developing countries requires equal emission rights per capita. 
Most ethical principles would suggest that, if one is distributing what amounts to “money” around the world, one should give more (per capita) to the poor. 
So, too, most ethical principles would suggest that those that have polluted more in the past – especially after the problem was recognized in 1992 – should have less right to pollute in the future. 
But such an allocation would implicitly transfer hundreds of billions of dollars from rich to poor. 
Given the difficulty of coming up with even $10 billion a year – let alone the $200 billion a year that is needed for mitigation and adaptation – it is wishful thinking to expect an agreement along these lines. 
Perhaps it is time to try another approach: a commitment by each country to raise the price of emissions (whether through a carbon tax or emissions caps) to an agreed level, say, $80 per ton. 
Countries could use the revenues as an alternative to other taxes – it makes much more sense to tax bad things than good things. 
Developed countries could use some of the revenues generated to fulfill their obligations to help the developing countries in terms of adaptation and to compensate them for maintaining forests, which provide a global public good through carbon sequestration. 
We have seen that goodwill alone can get us only so far. 
We must now conjoin self-interest with good intentions, especially because leaders in some countries (particularly the United States) seem afraid of competition from emerging markets even without any advantage they might receive from not having to pay for carbon emissions . 
A system of border taxes – imposed on imports from countries where firms do not have to pay appropriately for carbon emissions – would level the playing field and provide economic and political incentives for countries to adopt a carbon tax or emission caps. 
That, in turn, would provide economic incentives for firms to reduce their emissions. 
Time is of the essence. 
While the world dawdles, greenhouse gases are building up in the atmosphere, and the likelihood that the world will meet even the agreed-upon target of limiting global warming to two degrees Celsius is diminishing. 
We have given the Kyoto approach, based on emission rights, more than a fair chance. 
Given the fundamental problems underlying it, Copenhagen’s failure should not be a surprise. 

Test-Driving Driverless Cars 
ANN ARBOR – It is June 15, 2030, and for Sam and Sue of Ann Arbor, Michigan, it is going to be a busy day. 
Their daughter Sophia has a 9 a.m. karate match. 
At noon, her older sister Sally’s high school graduation will begin. 
And, by 3 p.m., the house must be ready for Sally’s graduation party. 
At 8:40, Sam uses a smartphone app to order a ride from Maghicle, Ann Arbor’s mobility service, which uses self-driving robotic vehicles. 
Within minutes, Sam, Sue, and Sophia are headed for the karate club. 
En route, Sophia studies videos of her opponent’s past matches, while Sue catches up on emails and Sam orders appetizers and flowers for the party. 
They arrive at the club on time, and the robot proceeds to pick up someone else nearby. 
Sally, who must arrive at school by 10:30, has already ordered a Maghicle ride. 
When she boards at 10:15, she receives a text message from her best friend Amanda, who wants to ride with her. 
Sally enters Amanda’s address in the Maghicle app, and the robot chooses the best route. 
At 11:30, as a victorious Sophia trades her karate uniform for something better suited for her sister’s graduation, Sam receives a text message confirming that a small temperature-controlled pod has delivered the appetizers for Sally’s party in the secure, refrigerated drop-box at the house. 
When Sophia is ready, the family orders another Maghicle ride, this time to Sally’s school. 
They take their seats and, as Sam waves to Sally sitting with her classmates, he is struck by how quickly 17 years have passed. 
In 2013, Sam’s day would have been far more difficult, stressful, and expensive. 
He would have wasted far too much time in his gas-guzzling SUV, stuck in traffic jams or searching for parking spaces. 
Now, because he does not need to own a car, he spends far less money on transportation and has more time to do as he pleases. 
With services like Maghicle enabling people to get around safely, affordably, conveniently, and sustainably, Sam does not have to worry about his wife or daughters getting into automobile accidents, as his parents worried about him. 
By contrast, today’s road transportation system is inconvenient, unsustainable, and dangerous. 
Of the nearly one billion motor vehicles worldwide – enough to circle the planet 100 times if parked end to end – some 95% depend on oil for energy, making car travel subject to resource geopolitics and price volatility. 
Furthermore, combustion engines account for more than one-fifth of the world’s carbon emissions, contributing significantly to climate change. 
And, with more than 1.2 million people dying on the road each year, car travel remains a proven killer. 
Sam’s world of 2030 is not mere fantasy. 
But achieving it will require a thorough overhaul of the existing road transportation system – and that means overcoming the complex combination of public and private elements, vested interests, ingrained business models, and massive inertia that has so far impeded its development. 
Indeed, with certain institutions and industries benefiting when all of the system’s components – vehicles, roads, fuel stations, traffic laws, regulations, vehicle standards, and licensed drivers – work together, no transformational development has occurred in road transportation since Karl Benz invented the car and Henry Ford popularized it. 
A narrow focus on, say, developing better batteries, improving fuel efficiency, or making automobile production more sustainable is inadequate to catalyze the needed transformation. 
A genuinely transformational solution is needed – one that meets the needs of consumers, businesses, and governments. 
An integrated network of driverless, electric vehicles that are connected, coordinated, and shared should form the core of that solution. 
Such vehicles would be programmed to avoid crashes, leading to fewer deaths and injuries and less property damage. 
In order to minimize the excessive resource consumption associated with driving, the vehicles would be tailored to trip characteristics, such as the number of passengers. 
For example, lightweight, two-passenger vehicles can be up to ten times more energy efficient than a typical car. 
In the United States, where 90% of automobiles carry one or two people, reliance on such vehicles would result in a dramatic decline in carbon emissions, which would fall even further as a result of less road congestion and smoother traffic flows. 
Moreover, the land and infrastructure needed for parking would be significantly reduced. 
Under such a system, personal mobility could cost up to 80% less than owning and operating a car, with time efficiencies augmenting those savings further. 
For Americans earning minimum wage ($7.25 per hour), time spent driving at a rate of 30 miles (48 kilometers) per hour costs $0.24 per mile. 
At the US median hourly wage of $25, each mile costs $0.83. 
Given that Americans drive roughly three trillion miles annually, saving just one cent per mile implies $30 billion in annual savings. 
The technology needed to advance such a scheme exists. 
The task now is to introduce prototype systems in representative communities, in order to prove what is possible, discover consumers’ preferences, determine the most attractive business models, and identify and avert unexpected consequences. 
Once the prototypes have proved effective and practical, they should scale quickly without public incentives. 
As with other innovations – such as mobile phones, e-books, digital photography and music, and flat-screen televisions – large-scale deployment will occur when the new technologies reach the market tipping point, when their value to consumers exceeds the costs to businesses of supplying them. 
Policymakers would be responsible only for guaranteeing the expanding system’s safety. 
A cleaner, safer, more convenient road transportation system is possible – and closer to being realized than many believe. 
It needs only the opportunity to prove itself. 

Owning Up to Israel’s Bomb 
TEL AVIV – President Barack Obama’s vision of a world without nuclear weapons, and the recent agreement he signed with Russia aimed at cutting back the nuclear stockpiles of both countries, enhances his moral and political leadership. 
But how will his campaign against nuclear proliferation affect Israel, widely seen as the world’s sixth nuclear weapon state, and so far the only one in the Middle East? 
US Assistant Secretary of State Rose Gottemoeller’s recent call for Israel to join the nuclear Non-Proliferation Treaty (NPT), which would require it to declare and relinquish its nuclear arsenal, has incited fears that America’s diplomatic umbrella for Israel’s nuclear status is ending. 
From now on, it appeared to Israelis, the US will treat all states the same when it comes to nuclear weapons. 
Israel is especially concerned that Obama might be willing to address Iran’s nuclear ambition by equating it with Israel’s nuclear status. 
The intellectual foundations of the new American attitude were laid down in a famous article by Henry Kissinger, Sam Nunn, George Schultz, and William Perry entitled “Toward a Nuclear-Free World.” 
In calling upon the world’s nuclear powers to preach by example and dramatically reduce their nuclear arsenals, the article was also a call for equality among nations in the nuclear domain. 
Bruce Riedel, who until recently headed the Obama administration’s strategy review for Afghanistan and Pakistan, and who is by no means hostile to America’s unique relations with Israel, has been explicit about this. “If you are really serious about a deal with Iran, Israel has to come out of the closet. 
A policy based on fiction and double standards is bound to fail sooner or later. 
What is remarkable is that it has lasted so long.” 
But it was a recent statement to Congress by Secretary of Defense Robert Gates that was especially shocking to Israelis. 
He expressed understanding for Iran’s desire to acquire nuclear weapons because, as he said, the Iranians are surrounded by nuclear powers such as Pakistan, India, Russia, and Israel. 
Israel is bound to fight against this emerging new American doctrine that equates it with Iran, or even with India and Pakistan for that matter. 
Political contexts matter, the Israelis will argue. 
Not only has Iran developed its nuclear capabilities while a party to the NPT, the Israelis will say, but it also has put Israel’s destruction high on its agenda. 
Israel’s nuclear deterrence is its ultimate defense against an existential threat. 
Across-the-board nuclear equality can, in the end, only boost to Iran’s nuclear claims. 
India and Pakistan, unlike Israel, which has been committed to a strategy of nuclear opacity, both see themselves as nuclear states and want the world to accept that status. 
Moreover, Israel never tested a nuclear weapon, and has unequivocally accepted the Nuclear Suppliers Group (NSG) guidelines, which seek to stem proliferation through the control of nuclear exports. 
Israel expects the Obama administration not only to appreciate the unique context of its ambiguous nuclear status, but also to recognize that it cannot be forthcoming in assuring its neighbors or the rest of the world regarding its nuclear program unless the Middle East political environment changes in a radically positive way. 
Here, a change in Iran’s pattern of behavior toward Israel is an absolute prerequisite. 
The potential for export of nuclear material and know-how by countries such as Pakistan – and perhaps one day Iran – is also a matter of concern for Israel. 
Indeed, Israel insists that it is, after all, Iran, not Israel’s supposed nuclear capabilities, that triggered the current Middle East nuclear arms race. 
But, as with the issue of the West Bank settlements, the Obama administration seems to be moving definitively away from an automatic endorsement of Israel’s understandings with previous US administrations. 
A revision of US policy towards Israel’s nuclear status can by no means be ruled out. 
Gottemoeller’s declaration, as well as Gates’ explicit recognition of Israel’s nuclear status should be interpreted within the context of the Obama administration’s broader disarmament agenda. 
Israel’s policy of nuclear ambiguity has remained practically unchallenged for almost 50 years, not least within Israel itself, where the issue has been a sacred taboo. 
But the changing international environment, the threat of uncontrolled nuclear proliferation in the Middle East, and the new policies being worked out in the US might all be good reasons for Israel to consider revising its nuclear doctrine. 
After all, the current strategy has not really worked either as a deterrent against conventional attacks (which persisted throughout the years that Israel supposedly developed its nuclear arsenal) or as a warning to rivals (such as Iran) against developing a nuclear weapon. 
Israel’s official policy is that of a Middle East Free of Weapons of Mass Destruction. 

Transparency for Tuna 
PALIKIR/SAN FRANCISCO – A cluster of small Pacific islands is poised to make history in the management of global fish stocks. 
This week, when conservationists from around the world gathered at the fifth annual Our Ocean Conference in Bali, the Federated States of Micronesia (FSM) unveiled a bold promise and issued an even bolder challenge: full transparency in tuna fishing by 2023. 
If FSM’s commitment is replicated, citizens of the Pacific could reclaim control over a natural resource that forms the backbone of the region’s economies. 
And it would promote future prosperity by helping to ensure that tuna stocks are fished sustainably, and that foreign vessels fishing in these waters do not take more than is permitted by law. 
The mechanism that FSM and The Nature Conservancy will present this week is called the Technology for Tuna Transparency Challenge, a combination of monitoring and regional pacts aimed at improving fishing oversight. 
The initiative represents the first time a developing country has committed to 100% transparency in its fishery operations; if it succeeds, it could trigger a transformation of how seafood is managed worldwide. 
FSM and the seven other island states that make up the Parties to the Nauru Agreement (PNA) may look like dots on the map, but they command an expanse of ocean greater than the size of Europe and are global powerhouses when it comes to fish. 
With control over half of the world’s supply of skipjack tuna and about a third of tuna stocks globally, the PNA is a veritable OPEC of the sea. 
In FSM, efforts are already underway to use this market position as a force for good. 
Fish like tuna are important global commodities, but the industry is in steep decline worldwide. 
By committing to full transparency and pushing private partners to do the same, FSM will send a powerful signal that sustainable fishing practices are urgently needed to protect these crucial species. 
But the real motivation behind FSM’s pledge lies closer to home. 
Tuna is more than a commodity here; it is what builds schools, pays teachers’ salaries, paves roads, and keeps hospitals open. 
It is the socioeconomic foundation of communities on the frontlines of climate change and rising sea levels. 
In other words, this is an existential fight – for the wellbeing of people today and the survival of island societies in the future. 
FSM’s rich tuna fishery already provides half of the country’s income, but it could deliver even more. 
That is because too much of the value of tuna caught in local waters is being captured by foreign fishing fleets. 
Transparency is the key to bringing more of this wealth home. 
With electronic and human monitoring, we can stop illegal, unreported, and unregulated fishing, which robs the region of more than $600 million a year. 
Contrary to popular belief, most poaching is not the work of pirate operators; the major culprits are licensed foreign vessels that underreport or deliberately misreport their catch. 
State-of-the-art electronic monitoring will also help ensure the sustainability of fish stocks and the communities they support. 
Currently, a lack of reliable monitoring data makes it difficult to establish protective fishing limits, and even harder to enforce them. 
To remedy this, FSM plans to deploy remote sensors, GPS systems, cameras, and tracking devices on every longline vessel in its waters within five years. 
This will enable the collection of information such as catch composition, discards, and bycatch, which in turn will help minimize the accidental capture of sharks, turtles, and marine mammals. 
Crucially, these tools will also give authorities the data to manage ocean resources in real time. 
By joining FSM in these efforts, the PNA could raise the bar for transparency and set a new standard for fisheries management. 
We already know that cooperation and conservation can reap big rewards. 
For example, since PNA-member states launched the Vessel Day Scheme in 2007 – which sets limits on fishing by foreign fleets – their annual tuna earnings have increased from about $60 million to more than $500 million. Pacific fisheries ministers are hoping to raise revenue even more by working with The Nature Conservancy to co-implement a system similar to one used in western Alaska, where the Community Development Quota Program (CDQ) has helped poor communities generate income by investing in fisheries-related businesses. 
The commitment to full transparency and the launch of a CDQ-type initiative for PNA states are intended to keep more tuna wealth in the Pacific. 
By promoting better fishing practices, we can increase regional revenue flows to rebuild and restore fisheries, boost food and job security, and strengthen resilience to climate change. 
We believe that fish, marine ecosystems, and people can coexist and thrive, and that the road to sustainability runs through community empowerment. 
We hope this vision will be shared by FSM’s Pacific neighbors, consumer advocates, and fishing partners gathered in Bali this week. 
Protecting a third of the world’s tuna stocks could be just the start of the global transparency revolution needed to protect our oceans – and our future. 


Pakistan after Bhutto 
The assassination of former Prime Minister Benazir Bhutto has brought Pakistan’s state of turmoil to new heights. 
As head of the nation’s most popular political party, Bhutto largely transcended Pakistan’s ethnic and sectarian divides. 
Her return from exile in October was seen as a step toward curbing the country’s dangerous fragmentation; her murder shatters those hopes. 
President Pervez Musharraf must take immediate steps – most importantly, the formation of a national unity government – to prevent Pakistan from tearing apart at the seams. 
In deciding that her People’s Party would participate in the January parliamentary election, Bhutto threw a lifeline to Musharraf, who has been beset by multiple insurgencies, a nationwide terrorist threat, and rock-bottom legitimacy. 
Both Musharraf and his supporters in Washington hoped that mainstream parties’ participation in the election would end Pakistan’s governance crisis and provide popular support for a decisive confrontation with the Taliban and al-Qaeda. 
Now, however, the election will likely be postponed. 
Indeed, Musharraf might be compelled to impose emergency rule again, as he did in November, should Pakistan’s stability further deteriorate. 
There are reports of violence in cities across Pakistan. 
Karachi, a multi-ethnic metropolis, could erupt into full-scale chaos. 
During the 1990’s, violence there between Bhutto’s party and a local ethnic party – now allied with Musharraf – took thousands of lives. 
In these circumstances, a state of emergency could be warranted. 
But, given Musharraf’s lack of legitimacy, such a move would further infuriate Bhutto’s supporters, whose street power Bhutto had contained since October. 
This could set the stage for a violent confrontation between the Pakistani masses and Musharraf’s regime. 
The nightmare scenario envisioned by many in Pakistan ­­– a nuclear-armed country actively targeted by al-Qaeda and the Taliban – could become a reality. 
But this need not be a foregone conclusion. 
Musharraf, who regularly claims to act on the basis of a “Pakistan first” policy, must now let go of partisan objectives and form a national unity government led by a prime minister from the opposition. 
Any subsequent measures, including temporary imposition of emergency rule and full-scale war against the terrorists, require the complete support of the opposition parties. 
Musharraf and his political allies cannot be seen as benefiting from Bhutto’s assassination; nor can they afford the perception of a cover-up. 
His opponents must be incorporated into the decision-making process. 
A national unity government must assume three major responsibilities. 
First, it must establish an independent commission to determine who was responsible for Bhutto’s murder. 
While political assassination is not unfamiliar – Pakistan’s first prime minister was killed in the same park where Bhutto was murdered – it is imperative that the culprits be apprehended and tried. 
Anything short of this would permanently taint Pakistan’s leadership and impede all attempts at political reconciliation. 
Second, it must take necessary measures to ensure public safety and political stability, while paving the way for free and fair elections. 
It must offer Pakistan a consensual path toward winning back its tribal areas from the insurgents, end the wave of terror in its cities, and ensure the election of a new, legitimate government. 
Finally, it must begin a dialogue with Musharraf and the military on a permanent, constitutional separation of powers. 
If Bhutto had not been assassinated and, instead, successfully became prime minister, she would likely have clashed with Musharraf over his arbitrary empowerment of the presidency at the expense of the premiership. 
The issue will not go away with Bhutto’s death. 
Pakistan’s civil and military elite must create a broad consensus – perhaps with foreign assistance, but never with foreign meddling – on the constitutional roles of the prime minister, president, and the military. 
Ravaged by endemic elite discord since its founding, Pakistan desperately needs an elite reconciliation that includes all of the country’s major stakeholders. 
Otherwise, Pakistan’s terrorists, who feed off of political instability, will continue to gain, while the country’s poor and illiterate majority will continue to lose ground. 
The murder of Benazir Bhutto need not result in the country’s demise. 
Pakistan’s elite have an opportunity to overcome their differences, unite in opposition to militants, and transform their failing state into a stable and prosperous democracy. 
If they succeed in bringing about a national renewal, Bhutto, a monumental political figure in Pakistani history, will not have died in vain. 

Pakistan’s Democracy Will Survive 
LAHORE – The decision by Pakistan’s Supreme Court to remove from office Prime Minister Nawaz Sharif, who had a comfortable majority in the National Assembly, is viewed by many in the West as an ominous sign of renewed political instability, if not heralding a return to authoritarianism. 
But Pakistan’s political history suggests otherwise. 
Today’s Pakistan emerged not in August 1947, when it gained independence, but rather in December 1971, when, after a bloody civil war, the country’s eastern region became Bangladesh. 
Afterwards, Pakistan was governed as a parliamentary democracy, led by the charismatic Prime Minister Zulfikar Ali Bhutto. 
But charges of large-scale vote-rigging in the 1977 elections triggered widespread unrest, which not only brought down Bhutto (who was ultimately executed), but also led to a military coup. 
General Muhammad Zia-ul-Haq took over the presidency in 1978, and remained in the position until his death ten years later. 
Zia’s death brought to power another democratically elected civilian prime minister: Benazir Bhutto, the daughter of Zulfikar Ali and the first woman to lead a Muslim-majority country. 
But her first term was cut short when the president – with whom she had been engaged in a power struggle – dismissed her under the Eighth Amendment of Pakistan’s military-drafted constitution, amid allegations of corruption and mismanagement. 
Soon after, Sharif took over as prime minister. 
His first term ended in 1993, when he resigned under military pressure. 
That cleared the way for the return of Bhutto, who remained prime minister until 1996, when she was dismissed yet again – this time, by her own Pakistan Peoples Party. 
In 1997, it was Sharif’s turn again. 
But his confrontation with the military had intensified over the years, resulting in another coup in 1999, leading to eight years of military rule under General Pervez Musharraf. 
In 2008, Musharraf resigned under popular pressure, and a new election brought Asif Zardari, the widower of Benazir Bhutto, who had been assassinated the previous December, to the presidency. 
Ignoring constitutional requirements, Zardari did not transfer executive authority to his prime minister, and instead expected the two prime ministers who served under him to follow his orders. 
Zardari’s five-year tenure reinforced the presidential system in Pakistan. 
That changed, however, with Sharif’s reelection as prime minister in 2013, when parliamentary democracy was fully restored. 
Of the 45 years since the civil war, Pakistan has spent 24 under presidential rule, and just 21 as a parliamentary democracy. 
But the current situation – characterized by an independent judiciary, free press, active civil society, and chastened military – favors the continuation of parliamentarism, regardless of Sharif’s dismissal. 
And, indeed, the trajectory of Pakistan’s government so far appears promising. 
Shahid Khaqan Abbasi – a well-educated former petroleum minister, who is regarded as a skillful manager – is now serving as interim Prime Minister. 
That could mean that he will serve for 45 days – long enough to elect Shahbaz Sharif, Nawaz Sharif’s younger brother, as Pakistan’s next leader. 
Alternatively, Abbasi could remain in office until the next general election, to be held in May 2018. 
The latter approach offers distinct political advantages. 
Shahbaz Sharif has served for almost a decade as Chief Minister of Punjab, the heartland of the governing party, the Pakistan Muslim League, which is still led by Nawaz. 
And he has some promises to fulfill before leaving that post – beginning with the reduction of electricity brownouts, which undermine economic and personal wellbeing, particularly during what has been the province’s hottest year on record. 
Punjab also needs better urban infrastructure. 
The population of Pakistan’s cities is growing by 6% per year, raising demand for improved transport, water management, sanitation, and solid-waste collection, as well as for education and health services. 
This is particularly true in Punjab, where the urban population increased by nearly 26% between 2001 and 2011. 
Sharif’s provincial administration is already addressing these issues, and tangible improvements are expected by the spring. 
Keeping Sharif in Punjab may well be the best way to ensure that things go according to plan, and thus that the Pakistan Muslim League can count on strong voter support there in the next election. 
That outcome would reinforce the continuation of Pakistan’s parliamentary system, which matters for the rest of the Muslim world as well. 
Social stability, which so few Muslim countries enjoy, demands political systems that are open, inclusive, and representative. 
This is all the more true today, when the median age across Muslim-majority countries stands at around 25 years. 
The world’s 1.6 billion young Muslims are, thanks to technology, exposed to the world outside their borders, and tend to favor greater openness and opportunity. 
This holds lessons for outside powers, too. 
The United States has long supported “friendly” authoritarian regimes, such as that of Egyptian President Abdel Fattah el-Sisi. 
But while this may seem to serve US interests today, it will eventually stoke instability and social violence that could spill over in an already-troubled region. 
Pakistan’s political system has undoubtedly faced serious challenges in the past. 
But the dismissal of Sharif need not portend a return to instability or, worse, military rule. 
Following in the footsteps of India, where a reasonably inclusive political system has underpinned relative peace and stability for almost 70 years, Pakistan seems still to be moving along the path toward democratic consolidation. 


Pakistan’s Persistent Energy Crisis 
ISLAMABAD – For almost a decade, Pakistan has lacked the energy it needs, with producers and consumers across the country facing power outages for up to 12 hours per day. 
At the root of this crisis lies poor governance. 
Yet the authorities and aid donors alike stubbornly fail to recognize the obvious, and instead continue to pursue costly and ultimately ineffective interventions. 
Pakistan’s experience is a case study in how poor countries can often struggle to formulate and implement reforms, including reforms needed to escape poverty. 
And, indeed, Pakistan’s ongoing energy crisis is undermining its economic development: the Ministry of Finance estimates that energy shortages have reduced annual economic growth by two percentage points, on average, over the last nine years. 
And it gets worse. 
Over the same period, the government has spent more than 10% of GDP to cover the energy sector’s financial losses. 
This means that, had Pakistan’s energy sector been reformed properly, the country’s economy could have grown significantly faster – by about 4% per year – potentially creating a sufficient number of jobs for a young and growing population. 
Over the last nine years, Pakistan has received assistance through two International Monetary Fund programs and numerous World Bank initiatives, as well as from the Asian Development Bank and various donor agencies. 
In exchange for funding, the IMF demanded huge increases in tax rates on petroleum products, as well as hikes in energy prices. 
The World Bank, for its part, forced the government to use loan guarantees to spur private investment in energy. 
Now, these guarantees are coming back to bite the government. 
In a recent ad campaign, private power producers once again threatened to invoke them to secure payment of unpaid bills. 
After some back and forth, including production slowdowns, the government, as usual, has opted to cover the losses. 
Despite these huge costs, three successive governments have produced no white paper or policy analysis that sheds light on the issue, much less devised a strategy for preventing further financial losses. 
No independent commission or task force has been created to examine the problem, either. 
We are told that the crisis is too urgent to investigate what caused it. 
Donors and the government claim that a solution is imminent: several billion dollars of supply are now coming on stream. 
But simply spending more to supply more energy has been tried before – at huge cost to the country. 
Meanwhile, energy-sector losses have often been passed on to the consumer through price increases, surcharges, and other taxes. 
This is not a sustainable approach. 
It is time for Pakistan to undertake a more thorough audit of its energy crisis. 
When I was involved with the energy sector as a senior policymaker, I found it useful to use a systems approach to understand the structure of supply, the quality of regulation, the forces driving prices, and the impact of conservation policies on demand. 
As it stands, energy supply and distribution in Pakistan is managed through a centralized government bureaucracy. 
Private electricity producers and one privatized distribution company function as government contractors with a guaranteed margin. 
The rest of the production and distribution companies operate as part of the government, with their parent ministry controlling their management, resources, and finances. 
In this context, it should be no surprise that the system continues to incur major losses. 
Despite talk of energy markets, the system is based on administered prices: While consumers pay the same price throughout the country, the regulatory authorities set different prices for production and distribution companies. 
But whether those prices are determined by a careful balancing of supply and demand is far from guaranteed. 
In fact, there is every reason to suspect that the regulatory authority has been captured. 
While prices and tariffs are determined on a cost-plus basis, it is unclear whether costs are properly scrutinized. 
Tariffs are set without regard for continuing losses or energy-sector inefficiencies, and the government routinely overrides the price-setting system to force consumers to cover the sector’s losses. 
On the demand side, no serious conservation policy has been put in place. 
On the contrary, systems and regulations seem practically designed for waste. 
City land and building codes lend themselves to energy-intensive sprawl, as they favor single-family homes over flats. 
Wide avenues, flyovers, and expressways promote cars, while virtually precluding pedestrians and bicycles. 
Moreover, buildings and houses constructed of concrete with thin glass windows are inefficient to heat and cool. 
And they are equipped with appliances that are not forced to meet energy standards, and therefore can be very energy-intensive, especially when it comes to the use of gas. 
Yet insulation materials and energy-efficient appliances remain expensive, owing to tariff protections for incumbent producers using outmoded technologies. 
There is a clear need for systemic reform of all aspects of Pakistan’s energy system. 
The country must develop a sensible pricing mechanism, establish fact-based and independent regulation, create an efficient and decentralized supply system, and implement incentives for conservation. 
To aid in this effort, the World Bank and the ADB must respond to as-yet-unanswered requests to provide Pakistan with competent technical assistance to develop a modern pricing mechanism and conduct a regulatory audit. 
After nine years of quick-fix and temporary solutions, Pakistan and its donors need to recognize that its energy crisis can be resolved only through institutional reform. 
Otherwise, losses will only grow – and not just in the energy sector. 
If allowed to continue, that accumulation of losses could even destabilize the state, with devastating consequences. 

Pakistan’s IMF Problem 
ISLAMABAD – After Pakistan’s recent election, Imran Khan and his Pakistan Tehreek-e-Insaf (PTI) party are now forming a new government. 
As usual, it will be greeted by an economic crisis. 
A trip, cap in hand, to the International Monetary Fund seems inevitable. 
Pakistan, after all, is an IMF addict. 
The country has already spent 22 of the past 30 years in a dozen different IMFbailout programs. 
As the former IMF advisers Ehtisham Ahmad and Azizali Mohammed explained in a 2012 working paper for the Asia Research Center, no American, IMF, or Pakistani official has any incentive to reform Pakistan’s structural economic problems, and so the cycle of bailouts continues. 
Unfortunately, few in Pakistan have ever read Ahmad and Mohammed’s paper or debated its significance. 
If they had, they would know that the IMF’s approach to the country has been a failure. 
For decades, IMF programs have been undercutting Pakistan’s productivity and growth potential, by eroding governance and state capacity, and creating conditions for ever more rent-seeking and corruption. 
Successive IMF programs have required that Pakistan adopt more withholding taxes (never to be refunded), surcharges, and levies on essential goods such as oil and electricity, even though these measures hurt employment and investment growth. 
And when the government misses its fiscal targets, the Fund and Pakistan’s finance ministry agree on quarterly mini-budgets, which often include new taxes on school fees, bank transactions, Internet access, and so forth. 
It should go without saying that if businesses do not even know what tax measures will be included in the next quarterly mini-budget, they will be unable to plan and invest. 
This is Economics 101. 
Moreover, alongside distortionary tax policies, the IMF has forced the finance ministry into unplanned spending cuts without any real reforms, despite the obvious negative effect this has on growth. 
When such reductions were made under an IMF program in the 1990s, Pakistan’s national bus service ended up on the chopping block, and vehicles were allowed to deteriorate. 
Since then, funding for public services – including railways, police, health, and education – has been cut to the bone. 
In other words, Pakistan has been the subject of a long-running experiment in austerity. 
Hastily designed spending cuts have undermined growth, and thus the government’s fiscal position, forcing it to kill off public services and infrastructure projects. 
The result has been a severe erosion of state capacity. 
To be sure, Khan’s new government and the IMF will talk of reform; but such talk is never followed up with action. 
Reforms to overcome Pakistan’s constant power shortages have been discussed for the last decade, and yet the losses continue to mount. 
With the costs of mismanagement passed on in the form of price increases, the debt held by private power producers and the government stands at over one trillion rupees ($8.2 billion). 
New IMF funding will no doubt lead Khan’s government to repeat past mistakes. 
It will cling to artificial exchange rates, while avoiding reforms that could actually plug leakages in state-owned enterprises. 
When the Fund was preparing its 2013-2016 program for Pakistan, I warned the deputy director overseeing the plan that it would be used to overvalue the exchange rate. 
She insisted that it would not. 
It was. 
The pattern is always the same. 
With the Fund’s blessing, the government goes on a shopping spree, taking out costly loans for expensive projects, thus building up even more debt and adding new inefficiencies. 
After a few years, another crisis ensues, and it is met by another IMF program. 
The short-term focus of these programs ensures that reforms will be postponed, and that obsolete industries will not be allowed to die. 
Meanwhile, education goes underfunded, energy and water shortages grow more frequent and severe, economic imbalances worsen, and the government’s policymaking capacity continues to erode. 
Rapidly achieving stable macroeconomic indicators is all that matters, even if doing so accelerates social and political decay. 
It is precisely the rush to meet IMF-dictated fiscal numbers that leads to bad policies. 
In the absence of due process – such as parliamentary or cabinet scrutiny, ministerial and expert review, and domestic consultation – the finance ministry accrues more power, and governance declines. 
That is what happened under the previous government – which used an IMF program to push through vanity projects – and Pakistanis are now paying the price. 
Sound macroeconomic policymaking cannot be conducted through arbitrary mini-budgets. 
The way to address economic imbalances is to spur growth in the real economy, which will allow for the accommodation of deficits and debts. 
As I show in my book Looking Back: How Pakistan Became an Asian Tiger in 2050, economic growth and development require sound governance and ample state capacity. 
Those criteria can be met only through extensive, well-considered reforms over the long term. 

The Pakistani Nuclear Deal That Wasn’t 
LAHORE – Recently, it came to light that the United States was attempting to negotiate with Pakistan a deal to constrain the Pakistanis’ fast-growing nuclear weapons program. 
That sounds like good news: Any move toward non-proliferation seems like a positive step. 
Unfortunately, in this case the effort has had some dangerous unintended consequences. 
It all started last month, when US media reported that an agreement was already near completion. 
First, David Ignatius of The Washington Post reported, on the basis of conversations with senior US officials, that agreement had already been reached on a number of steps Pakistan would take to reduce its dependence on nuclear weapons for deterrence. 
A few days later, David Sanger of The New York Times confirmed. 
Both accounts suggested that the agreement would be announced in a joint statement following the October 23 meeting in Washington, DC, between US President Barack Obama and Pakistani Prime Minister Nawaz Sharif. 
But the reality is that those media reports were the beginning, not the end, of the process. 
According to senior Pakistani officials – including Sartaj Aziz, a key adviser on foreign affairs and national security – there was no agreement in the works when the stories appeared. 
Rather, it seemed that the US was using the media to put pressure on Pakistan’s government to respond more readily to America’s pleas to cap production of tactical weapons and the short-range missiles that could deliver them. 
The reports put Pakistan’s political leaders in an awkward position. 
They could not possibly succeed in convincing the country’s powerful military establishment to place constraints on the development of the country’s nuclear arsenal. 
Indeed, the US effort merely widened the divide on security issues within Pakistani– a situation that serves no one’s interests. 
Pakistan’s leaders were determined to turn attention back toward their country’s rapidly deteriorating relations with India, a challenge with which the US could help. 
So when they received America’s draft of the statement to be issued after the Obama-Sharif meeting, and saw that it focused almost entirely on nuclear issues, it was decided that Aziz would head to Washington a day early to agree on revisions. 
From Pakistan’s perspective, the draft statement seemed to be driven by the White House. 
It seemed that “the office of the National Security Adviser wanted to add another ‘nuclear feather’ to Obama’s cap, following the successful negotiations with Iran,” Aziz speculated to me in a private conversation. 
Believing that the US State Department was not “kept in the loop,” Aziz requested that, if he could not agree on the statement’s wording with the designated official, he could meet with Secretary of State John Kerry. 
To be sure, the US government’s agenda would have some benefits for Pakistan. 
The US would press the Nuclear Supplier Group to issue a waiver to Pakistan, as it has already done for India, so that Pakistan could import the technology, parts, and components needed to build nuclear power plants. 
And, in fact, Pakistan needs to build about a half-dozen such plants – in addition to the two already being built by the Chinese near Karachi – to address its energy shortfall, which amounts to an estimated 5,000 megawatts annually. 
With voters heading to the polls in early 2018, genuine progress toward resolving the energy crisis would presumably be good for Pakistan’s political leaders. 
In exchange for this, however, Pakistan would have to limit the number of tactical nuclear weapons in its arsenal and cease development work on them. 
Moreover, Pakistan would have to mothball the short-range “Nasr” missile, which has already been shown to be capable of delivering small nuclear weapons over a distance of 50-75 kilometers. 
The US believed that shifting Pakistani leaders’ attention from nuclear-weapons development to power-plant construction would, in addition to bolstering efforts to close the energy gap, limit Pakistan’s dependence on China for nuclear technology and reduce the risk of an immensely destructive war in South Asia. 
But these calculations failed to take into account Pakistani security considerations – in particular, the military’s renewed fears about India’s intentions. 
For some time, senior military officials have been concentrating on rooting out terrorism at home, and they have scored some impressive successes. 
But recent base-building activity by India near its border with Pakistan has been raising red flags in Islamabad. 
According to a senior Pakistani military official, India, in pursuit of its “Cold Start” military doctrine, is constructing eight bases at which heavy armor would be stationed. 
Developed after the 2001 attack on the Indian Parliament, the doctrine calls for Indian troops to move rapidly to occupy 300-500 square kilometers of Pakistani territory in the event of another terrorist attack. 
The occupation would end only when Pakistan formally relinquished its claim to Kashmir and dismantled all terrorist training camps operating within its borders. 
“Tactical nuclear weapons,” the Pakistani military official explained, “will deter India from following through on this strategy.” 
Against this background, the US should have known that trying to compel Pakistan to limit its nuclear-weapons capability would fail. 
But it pushed anyway. 
As a result, Pakistan’s reliance on China has been strengthened, not weakened. 
And, instead of reducing the chances of a nuclear standoff in South Asia, the White House plan served only to distract attention from efforts to address tensions between India and Pakistan. 
Ultimately, the Obama-Sharif statement did emphasize India-Pakistan relations, and made no reference to the nuclear issue. 
Obama mentioned Kashmir as an unresolved issue, while pleading for stability in South Asian affairs. 
According to Aziz, Pakistan was satisfied with the final statement. 
The US, however, may not have felt the same. 

Pakistan on the Precipice 
ISLAMABAD – Pakistani President Asif Ali Zardari abruptly returned to Karachi on the morning of December 19, following a 13-day absence for medical treatment in Dubai, where he lived while in exile. 
The government issued no a formal statement about Zadari’s health, but his supporters disclosed that he had suffered a mild stroke, which left him unconscious for several minutes. 
Zardari’s sudden return fueled speculation about his future, but, more importantly, about the future of civilian rule in Pakistan. 
His decision followed a three-hour meeting between Prime Minister Yusuf Raza Gilani and General Ashfaq Pervez Kayani, the Pakistani army’s chief of the army. 
His choice of destination – Karachi, Pakistan’s largest city and his political base, rather than Islamabad, the county’s capital – suggests the depth of the crisis now bubbling below the surface. 
Zardari has held power since 2008, having been elected eight months after the assassination of his wife, Benazir Bhutto. 
Even after a constitutional amendment in 2010 made the prime minister the country’s chief executive, Zardari has continued to be the main decision-maker. 
His political rise is thus in keeping with South Asia’s tradition of quasi-democratic dynastic politics: he assumed leadership of Bhutto’s Pakistan People’s Party (PPP) – founded in 1967 by her father, Zulfikar Ali Bhutto – and appointed his son Bilawal as the party’s co-chairperson, basing his decision on a handwritten will left by his wife. 
To underscore the link, the son was renamed Bilawal Bhutto Zardari. 
But, having deftly out-maneuvered his opponents for three years, Zardari seems to have misread the current political environment, for Pakistan is not the same country in which his wife and father-in-law wielded power. 
By trying to play by the old rules, he committed several mistakes that may ultimately cost him his job and the Bhutto family its hold on power. 
As many other Pakistani leaders have done before before him, Zardari has relied on American support to stay where he is. 
This worked for some time, but an alleged attempt to involve the United States more openly in Pakistani politics weakened, rather than strengthened, his hold on power. 
Indeed, while the Arab Spring ended the old corrupt bargain that kept so many autocratic rulers in power across the Muslim world, Zardari and his associates appear not to have received the message. 
It was widely believed that Husain Haqqani, Pakistan’s ambassador to the US, had attempted to enlist America’s help in preventing yet another military coup. 
An unsigned memorandum, believed to have been written at Haqqani’s suggestion, was sent to Admiral Mike Mullen, then Chairman of the US Joint Chiefs of Staff, seeking American help in exchange for fighting extremists in Pakistan’s tribal areas who were complicating America’s efforts to extract itself from Afghanistan. 
What the lively Pakistani media dubbed “memogate” forced Haqqani to resign and enabled the Supreme Court to assert its authority by deciding to investigate the matter. 
The court was already casting an eye at Zadari by examining the deal between former President Pervez Musharraf and Benazir Bhutto. 
In exchange for the withdrawal of corruption cases against her, Zardari, and several of their friends and associates, Bhutto agreed to support Musharraf after the elections scheduled for December 2007. 
The Bush administration, eager to have a democratically elected government in Pakistan to continue the fight against terrorism, was believed to have brokered the agreement. 
That arrangement has now been struck down by the Supreme Court, which ordered the government to reopen corruption cases, including one in Switzerland, where Zardari is alleged to have parked tens of millions of dollars. 
The government balked, and now the Court is working to ensure that the executive branch carries out its orders. 
But Zardari’s decision to begin grooming his 23-year old son for power may have been his gravest mistake. 
Zulfikar Ali Bhutto anointed his wife and daughter to be the PPP’s co-chairpersons in case he was executed by the military regime that had overthrown him. 
Benazir Bhutto, in turn, placed control of the party in the hands of her husband and son. 
But, this time, an awakened citizenry was not inclined to readily accept that political leadership could be passed on so easily from father to daughter, from wife to husband, from father to son. 
Political change in Pakistan is assured, but it will come about in a way that cannot be foreseen. 
The Arab Spring, America’s declining influence in the Muslim world, and citizens’ determination to be heard have combined to create an environment in which the unprecedented and the unpredictable are the only certainties. 

Pakistan’s Black Revolution 
SHANGHAI -- Immediately after taking office last month, Pakistani Prime Minister Yousuf Raza Gilani ordered the release of the 60 judges who had been detained by President Pervez Musharraf since November. 
This is a triumph for the rule of law in Pakistan, and above all a triumph for the brave Pakistani lawyers who took to the streets to protest Musharraf’s imposition of a state of emergency last autumn. 
The lawyers marched, sang, danced, and exchanged their briefcases for signs and, occasionally, eggs and stones. 
As one Pakistani blogger wrote, “They danced in black coats and they danced in black ties. 
Their black coats their Kalashnikovs and their black ties their bullets.” 
In a world of color revolutions, Pakistan’s was clothed in the sober hues of the law. 
Last November, Musharraf effectively declared war on both the bar and the judiciary, dismissing all judges who refused to recognize his declaration of a state of emergency, purportedly aimed at protecting the nation from terrorists. 
The seven-member Supreme Court, headed by Chief Justice Iftikar Mohammad Chaudhry, countered by issuing an order barring the government from proclaiming emergency rule. 
Musharraf dissolved the Supreme Court and the four High Courts, put Chaudhry and his entire family under house arrest, sealed the Supreme Court premises under army guard, and proceeded to arrest and detain all judges who refused to swear allegiance to the Provisional Constitutional Order upholding the state of emergency. 
The result was the detention of most of the senior judiciary, as well as bar association presidents across the country and all leading lawyers and human rights activists seeking to defend judicial independence. 
In the ensuing protests, lawyers were routinely beaten, gassed, brutalized, and humiliated. 
They stood with and for their judges, making it virtually impossible for judges willing to take Musharraf’s oath of allegiance to operate. 
The lawyer’s movement, it seems, drove a historic wedge between the judiciary and the executive. 
Yet in Pakistan, the United States, and other countries where lawyers have helped to lead fights for human rights and the rule of law, lofty ideals cloak an equally important set of interests. 
The Pakistani lawyers were safeguarding their livelihoods as much as their principles. 
Lawyers cannot practice without judges to hear their cases. 
And clients will not bring those cases unless they believe that the judges are independent enough to decide cases on the merits, rather than on the basis of bribes or political considerations. 
These interests also help explain why Kenya’s lawyers were at the forefront of protests against the corruption of President Daniel Arap Moi’s regime in the early 1990’s, but much less visible in the eruption of tribal violence this past year. 
Corruption corrodes the possibility of making a living through the law, which becomes a preserve of the rich. 
By contrast, in crises fueled by ethnic conflict, lawyers’ interests are not so clear. 
Noting the convergence between ideals and interests does not in any way demean the Pakistani lawyers’ courage and the importance of their protests. 
America’s founders, for instance, fully understood that the two must go hand in hand. 
Their design for constitutional democracy ensured, in James Madison’s words, that ambition would counter ambition and “the interests of the man” would be “connected to the constitutional rights of the place.” 
The best foundation for the rule of law is to build an island of legality wherever it is most needed to advance legitimate government goals – to stop corruption, to protect the environment, to clean up the financial system, or to enforce contracts with foreign investors. 
Within these limited areas, independent judges and the lawyers who can argue before them have a home. 
As these islands begin to form an archipelago, a legal class emerges, supported by the clients who need them. 
And on the day that a judge finally crosses a political line, speaking constitutional truth to usurped power, the government’s refusal to comply threatens the interests and ideals of an articulate and motivated segment of society. 
The coming weeks will reveal whether Pakistan’s new government has the courage and integrity not only to release the fired judges, but to restore them to the bench and perhaps to face their scrutiny down the road. 
If it does, Pakistan’s lawyers will be able to return to the courtrooms, and Pakistani citizens will have another chance to make democracy work. 
If they succeed, perhaps they should add a black border around the proud Islamic green of their flag – the black not of mourning, but of justice. 

Pakistan’s Cruel Summer 
LAHORE – July was one of the roughest months in Pakistan’s history. 
The country’s establishment was blamed for duplicity in the American war effort in Afghanistan, backing both sides – the United States and the Taliban – at the same time. 
There was considerable public anger in Pakistan at the way British Prime Minister David Cameron handled such suspicions, some of which was directed at President Asif Ali Zardari, who decided to proceed with a planned official visit to London despite Cameron’s harsh language. 
Public anger at the charges coming from America and Britain about Pakistan’s Inter-Services Intelligence (ISI) increased as round-the-clock television coverage showed the devastation and suffering caused by floods in the country’s northwest, the worst in more than 80 years. 
The military launched a major effort to help those affected. 
Its commander, General Ashfaq Pervez Kayani, whose tenure in office was recently, and unusually, extended for an additional three years, was alone among Pakistan’s senior leaders in visiting the flood-affected areas and showing concern about the suffering. 
And this was not the only crisis in which the military leadership seemed to be doing what the public thought was right. 
The Wikileaks publication of raw US intelligence reports from Afghanistan confirmed what had long been suspected. 
A number of field reports described contacts between the ISI and the Taliban, even as the ISI was engaged in fighting some the Taliban in Pakistan. 
The records contained firsthand accounts of the anger felt by Americans at the ISI’s unwillingness to confront the insurgents, in particular those who were attacking US and NATO troops near the Pakistani border. 
The ISI seemed to be keeping its lines of communications open to some Taliban in the hope that they could be used as a reserve force in case of another military confrontation with India or a precipitous American withdrawal from Afghanistan. 
This theme of apparent Pakistani duplicity was picked up by Cameron. 
In a speech delivered before an audience of Indian business leaders in Bangalore, he accused Pakistan of being on both sides of the Afghan equation. 
Cameron’s remarks were deeply resented in Pakistan. 
They left the impression that Britain was prepared to humiliate Pakistan publicly in order to curry favor with the Indians. 
The strategy may work over the short term in winning export orders for British firms from India. 
Indeed, the prime minister’s team won at least one major contract – for the sale of military aircraft worth more than a billion dollars. 
But, over the long run, British behavior is likely to contribute to the worsening of Indian-Pakistani relations. 
The Pakistani public demanded a quick, decisive rebuke of Britain from the country’s leadership. 
It came from the military. 
Lt. Gen. Ahmad Shuja Pasha, the head of the ISI, canceled his planned visit to London, where he was to discuss intelligence matters, while the civilian leadership seemed to dither. 
After hesitating, Zardari arrived in London three days later. 
Pakistan’s civilian government also seemed to be dropping the ball in the economic field, as poor management by the authorities was driving the country towards another crisis. 
Partly because of the floods, which will shave off at least 1% from GDP, partly because of the administration’s inability and unwillingness to curb non-essential expenditures, and partly because of slowing export growth, Pakistan is once again facing serious fiscal and balance-of-payments problems. 
This time, however, foreign help might not be as readily available as it was in, say, 2008. 
The government anticipated 4.1% GDP growth in 2010-2011. It will be lucky if it manages to achieve 2.8%, one half of that expected in Bangladesh and one-third of that projected for India. 
Pakistan is now the sick man of South Asia, with three consecutive years of growth below 3% causing the number of people living in absolute poverty to increase by 10 million. 
Much of this increase is occurring in large cities where discontent was already mounting in response to the government’s palpable failure to provide basic goods and services. 
These deepening crises on several fronts – some attributed to poor governance – raise the question once again as to whether Pakistan can sustain its democracy. 
The military’s high and positive profile seems to suggest that it is the only institution left in a tottering state that seems able to stabilize a delicate situation. 
But will Pakistan’s military once more inject itself directly into the political arena, as it has done four times in the six decades since independence? 
Or will the country’s civilian leaders mend their ways? 
The difference between today and the periods that preceded other Pakistani coups is that an active civil society, an unconstrained electronic and print media, and an assertive judiciary may be able to keep the military in the barracks and force the politicians onto the right track. 
Nevertheless, July was a cruel month for Pakistan, and more seem certain to follow. 


Pakistan’s Moral-Hazard Economy 
LAHORE – Hillary Clinton’s just-concluded visit to Islamabad – for the second session of the strategic dialogue that she and her Pakistani counterpart, Shah Mehmood Qureshi, launched in Washington earlier this year – brought some comfort to her hosts. 
The United States promised to provide $500 million of funding for several “highly visible” projects in Pakistan. 
This was to be part of the $1.5 billion allocated to Pakistan in legislation signed by President Barack Obama last year. 
The day before Clinton arrived in Islamabad, the Friends of Democratic Pakistan met there. 
An earlier meeting of the group was chaired by Obama on the sidelines of the United Nations General Assembly session in New York last year. 
It was attended by then-Prime Minister Gordon Brown of Britain, the heads of the World Bank and the International Monetary Fund, and government ministers from several countries. 
At the Islamabad meeting, the FDP agreed to provide finance for Pakistan’s energy-development program, and requested proposals from the Pakistanis for the development of other sectors considered vital for the economy. 
A few days before that, President Asif Ali Zardari paid his fifth visit to Beijing since taking office in August 2008 – this one a state visit – and received pledges of support for developing nuclear power and constructing a railway line over the Karakoram mountain range, linking the two countries. 
This would facilitate western China’s access to the sea, via the Pakistani port of Gwadar. 
These promises and pledges underscore Islamabad’s growing dependence on foreign assistance, which is not surprising, given that Pakistan’s tax-to-GDP ratio has declined to less than 9%, the lowest among the 22 largest emerging economies. 
They also suggest the continuance of a sort of moral-hazard approach to economic management that ensures foreign help whenever the country drives itself to the edge of an abyss. 
Today, Pakistan is Asia’s worst-performing economy. 
Its GDP growth rate of 3% is half that of Bangladesh and one-third that of India. 
And, while there is a good chance that this latest infusion of foreign money will help the country to pull out of a deep economic crisis, it will simply be history repeating itself. 
Pakistan does well when it receives large flows of foreign assistance, as in the 1960’s, during President Ayub Khan’s term in power, the 1980’s, when General Zia-ul-Haq ran the country, or the early 2000’s, when General Pervez Musharraf was in charge. 
During these three periods of military rule, the country was able to align itself quickly with the US. 
In the 1960’s, America wanted Pakistan to be on its side as it sought to contain the spread of communism in Asia. 
In the 1980’s, the US wanted Pakistan to help it force the Soviet Union out of Afghanistan. 
After the terrorist attacks of September 11, 2001, the US wanted Pakistan to help end Taliban rule in Afghanistan. 
Now, for the first time, the US is providing large amounts of assistance to a democratic government. 
Will this relationship help Pakistan get off the economic rollercoaster it has been riding for the last half-century? 
To ensure that its economy’s performance is no longer dictated by the availability of foreign aid, Pakistan must undertake some fundamental restructuring. 
If carried out by a representative government, such economic reforms have a better chance of being sustained. 
On the other hand, there is no assurance that the right policies would be maintained if power once again passed to a military ruler. 
The foreign governments that are currently engaging Pakistan should encourage its leaders to move forward on at least two related fronts: trade and better relations with India are crucial. 
At independence more than 60 years ago, Pakistan had a larger trade-to-GDP ratio, owing in part to trade with India. 
That came to a sudden stop in 1949, as a result of the first of many trade wars that the two countries have fought. 
Before 1949, India absorbed roughly 60% of Pakistan’s exports and accounted for 70% of its imports. 
Nowadays, India accounts for less than 5% of Pakistan’s total trade turnover. 
This is contrary to what would be predicted by the so-called gravity model of trade, which is based on both the size of the trading partner and its distance. 
According to this model, China and India, not the US, should be Pakistan’s largest trading partners. 
Thus, Pakistan should not devote so much of its energy to improving its access to the US textile market, as it now does. 
Indeed, given competition from low-wage economies such as Bangladesh and Cambodia, Pakistan should abandon its focus on textiles altogether and expend much greater effort to develop its knowledge-based industries. 
Another area of emphasis for donor dialogue with Pakistan is governance – not just reducing and controlling corruption, but also bringing policymaking closer to the people. 
Long stretches of military rule, with its emphasis on command and control, has left policymaking in Pakistan highly centralized. 
More power needs to be devolved to the provinces. 
Today’s democratic government has taken a step in this direction by amending Pakistan’s constitution. 
The country’s “friends” should encourage this effort, perhaps by requiring that the country’s provinces be given a voice in their dialogue with Zardari’s government. 
Foreign donors must insist that Pakistan reform its economy in order to escape the moral hazard implied by continued dependence on aid flows. 
But that outcome is much more likely if democracy flourishes throughout the country. 


Pakistan’s Next Fight 
NEW YORK – The terrorist sanctuary in the South Waziristan region of Pakistan’s tribal frontier with Afghanistan is coming apart. 
It took a while for the Pakistani Army to move against the region’s rising violence and chaos, but its campaign in South Waziristan is making progress. 
The campaign’s immediate impact consists in Pakistan’s determination to establish its authority in the area. 
But the window for the military to fill the power vacuum will be open only briefly. 
The terrorists have shown before that they can take a punch, strike back, and even rebuild their networks. 
Indeed, even as the Pakistani Army launched operation Rah-e-Nijat (Path to Salvation) in October, a dozen devastating terrorist attacks in Pakistan’s major cities demonstrated the reach of the South Waziristan militants. 
In a few instances, senior army and intelligence officers were targeted outside their homes in Islamabad, despite extensive security measures in and around the capital. 
The October 11 attack on Army Headquarters in Rawalpindi was the most daring of all – and sent shudders across the military command, because the terrorists knew the layout of the military and security buildings. 
But this inside knowledge also worked against the militants, because it demonstrated what was at stake for the country at large. 
No large street protests against the military operation in South Waziristan have been reported from anywhere in Pakistan. 
But success in South Waziristan is only the starting point for dealing with the problem. 
Militant hubs are scattered throughout the sparsely-populated tribal areas, including the North Waziristan, Orakzai, and Mohmand regions. 
Moreover, violent militancy has now spread into Pakistan proper. 
Southern Punjab is seeing a rapid growth in the number of religious fanatics, and rooting out the problem there is much more challenging than acting in the Pashtun tribal areas. 
Many militants in Punjab worked closely with the Pakistani intelligence services for years, and their infrastructure is dispersed and hidden in various towns and villages. 
The Army, which recruits heavily in the Punjab, will not use force there in the way it is doing in the tribal areas. 
Only a concerted law-enforcement effort, with the full support of the intelligence services, can succeed in the Pakistani heartland. 
The deep security crisis in Pakistan is mirrored across the border in Afghanistan, which offers a model of what not to do. 
The Afghan Taliban, removed from power and routed from the country by the end of 2001, needed only a few years to revive itself, owing to the failure of the Afghan government and its international backers to rebuild and stabilize the country. 
A critical factor in the Taliban’s revival was the haven that it found in the distant reaches of the Pakistan-Afghanistan border, and the support that it continued to receive from elements within Pakistan. 
This time, as the Afghan Taliban are expelled from Pakistan, NATO and Afghan forces must be ready to take them on. 
Observing the fighting in Pakistan, the United States, Afghanistan, and India expect the Pakistani army to take on both the Afghan Taliban and the Pakistani militants. 
But thousands of fighters are thought to be dispersed in the Pashtun tribal areas of Pakistan, with many of them focused on operations in Afghanistan. 
The cross-border movement of radicals suggests the importance of international cooperation. 
Moreover, alliances among radical groups are constantly shifting, a reflection of tribal traditions and opportunism. 
Outsiders watching these shifts, and the Pakistani government’s handling of them, have been unable to discern a consistent pattern that would explain Pakistani policy. 
But here, regional politics must be taken into account, especially the continuing rivalry between India and Pakistan. 
At every stage of the lengthy conflict that has brought the US into the region, Pakistan has sought to limit Indian influence in Afghanistan. 
Indeed, India’s growing influence and investment in Afghanistan is disturbing to Pakistan’s national security apparatus. 
Ultimately, the dynamics of Afghan politics will determine Afghanistan’s fate. 
But a collaborative India-Pakistan effort to stabilize the country could work wonders. 
For both Pakistan and India, Afghanistan risks turning into a new disputed territory, like Kashmir, where conflict has damaged both countries for more than 60 years. 
In Afghanistan today, they have an opportunity to reject that precedent and act on their mutual interest in stability. 
Pakistan must be able to focus internally on its future. 
Financially insolvent and politically paralyzed, Pakistan needs international help to bring development to its liberated tribal areas and hope to the young people – 65% of the population – who live there. 
For India, stability in Pakistan and Afghanistan would ease its rise to global economic power. 
Both countries should take advantage of the opportunity for cooperation provided by the Pakistani Army’s campaign against Waziristan’s militants. 

Pakistan’s Road to China 
ISLAMABAD – Large events sometimes have unintended strategic consequences. 
This is turning out to be the case following the killing of Osama bin Laden in a compound in Abbottabad, a military-dominated town near Islamabad, Pakistan’s capital. 
The fact that the world’s most wanted man lived for a half-dozen years in a large house within spitting distance of Pakistan Military Academy, where the country trains its officers, has provoked a reaction that Pakistanis should have expected, but did not. 
The country’s civilian and military establishment has been surprised and troubled by the level of suspicion aroused by the events leading to Bin Laden’s death – many Pakistanis call it “martyrdom” – and there is growing popular demand for a major reorientation of Pakistan’s relations with the world. 
Unless the West acts quickly, Bin Laden’s death is likely to result in a major realignment of world politics, driven in part by Pakistan’s shift from America’s strategic orbit to that of China. 
I have personal experience of how quickly China can move when it sees its “all-weather friend” (Pakistani Prime Minister Yousaf Gilani’s phrase) in extreme distress. 
In 1996, when Pakistan was near bankruptcy and contemplating default, I went to Beijing as the country’s finance minister to ask for help. 
My years of service overseeing the World Bank’s operations in China had put me in close contact with some of the country’s senior leaders, including then-Prime Minister Zhu Rongji. 
At a meeting in Beijing, after telling me that China would not allow Pakistan to go bankrupt under my watch, Zhu ordered $500 million to be placed immediately in Pakistan’s account with the Federal Reserve Bank in New York. 
That infusion of money enabled Pakistan to pay its bills while I was in charge of its economy. 
China seems to have adopted the same approach to Pakistan today, as the United States Congress threatens to cut off all aid. 
Gilani recently took a quick trip over the mountains to Beijing, and returned with an offer of immediate delivery of 50 fighter planes to Pakistan. 
Much more has been promised. 
Given China’s record as a provider of aid to Pakistan, these promises will quickly be realized. 
In the meantime, Pakistan continues to pay the price for Bin Laden’s death, with his supporters striking a town not far from Islamabad just days later, killing more than 80 people. 
That was followed by a brazen attack on a naval base in Karachi, in which some very expensive equipment, including aircraft, was destroyed. 
The terrorists struck for a third time two days later, killing a dozen people in a town near Abbottabad. 
The human toll continues to rise, as does the cost to the economy. 
On May 23, the government issued an estimate of the economic cost of the “war on terror” that put the total at $60 billion, compared to the $20 billon the Americans have supposedly paid in compensation. 
In fact, a substantial share of the promised US aid has yet to arrive, particularly the part that is meant to rescue the economy from a deep downturn. 
While Gilani was in Beijing, Finance Minister Abdul Hafeez Shaikh returned from Washington with empty hands. 
He had gone there to persuade the International Monetary Fund to release the roughly $4 billion that it was withholding from the $11 billion that Pakistan had been promised in late 2008 to save the country from defaulting on its foreign debt. 
The IMF’s decision was in response to the Pakistani government’s failure to take promised steps to increase its abysmal tax-to-GDP ratio, which stands at less that 10%, one of the lowest levels in the emerging world. 
The Fund was right to insist that Pakistan stand on its own feet economically, but, in early June, Shaikh will present his 2011-2012 budget, in which he wants to ease the burden on ordinary Pakistanis. 
This has put Gilani’s two-year-old government in a real bind. 
Whether Shaikh can balance the IMF’s demands with ordinary people’s needs will not only determine the Pakistani economy’s direction, but will also have an enormous impact on how Pakistan and its citizens view the world. 
The only comfort that Pakistan has received from the West came in the form of assurances given by US President Barack Obama and British Prime Minister David Cameron following Obama’s state visit to London. 
In a joint press conference, both promised that their countries would stand with Pakistan’s government and people. 
Pakistan, they said, was as deeply engaged as their countries in the war against terrorism. 
Pakistan will continue to receive American and British help. 
But the US and Britain find it difficult to move quickly, and strong voices in their capitals want Pakistan to be punished, not helped, for its wayward ways. 
In the meantime, China waits with open arms. 

Pakistan's War of All Against All 
The alliance in the fight against terrorism between Pakistani President General Pervez Musharraf and the United States is imperative not only for America, but for Pakistan-a Muslim-majority nation whose social fabric is being torn apart by militancy and lawlessness. 
But will an exclusive focus on military power ultimately prove to be counter-productive? 
The Human Rights Commission of Pakistan, perhaps the country's most credible human rights body, argues that while "the violence now deeply embedded in society is to be rooted out over the coming years," that task "presents bigger challenges than merely picking up, detaining, and torturing those who authorities claim are militants." 
In opposing how the war against Al-Qaeda and the Taliban is fought, many in Pakistan's minuscule middle class find themselves aligned with people they abhor: extremists whose distorted religiosity violates the tolerant version of Islam prevalent in this region. 
Many upwardly mobile urbanites thus find themselves caught on the horns of a dilemma: how to reconcile aspirations for a better lifestyle, as symbolized by America, with increasing abhorrence of US policies. 
Those on the religious right have no dilemma: they just hate America and its policies outright, and oppose all things "un-Islamic," including television, films, radio, and even indigenous forms of dance and music. 
Interestingly, computer technology is exempted, as it can be used to further the extremist cause. 
However, while Pakistan's progressives oppose militarism and violence in principle, religious fundamentalists have no compunction in resorting to violence to reinforce their point of view - thus posing a threat not just to General Musharraf, who has survived at least two assassination attempts, but also to human rights workers. 
Indeed, the prominent feminist lawyer Asma Jahangir has 24-hour armed guards. 
Militants have also attacked non-governmental organizations, particularly those located in the undeveloped tribal Northern Areas that lie beyond the writ of Pakistani law. 
Sharing a mountainous - and porous - border with Afghanistan, this region includes many Taliban sympathizers among their fellow Pashtuns. 
Human rights groups have long urged the necessity of extending the writ of Pakistan's Constitution to the tribal belt, where religion-based parties have wide support. 
These religious parties, a coalition of which now heads the provincial government in the North West Frontier Province, were politically marginalized until given a central role by Pakistan's military dictator of the 1980's, General Zia ul Haq, who led Pakistan's covert intervention in the war against the Soviet occupation of Afghanistan. 
Throughout his rule, religion-based politics grew along with the number of madrassahs and fighters trained and equipped by Pakistani and US intelligence agencies. 
The terrorist attacks of September 11, 2001, and subsequent pressure from Washington, led to a U-turn by Pakistan away from pro-jihadi policies. 
Today, many former officials associated with those policies, such as Mushahid Hussain, a former information minister, concede that Pakistan should have contained militancy long ago. 
Cautious steps are being taken, like the review of religion-based laws and curricula that have contributed to a creeping talibanization of Pakistani society. 
For human rights activists, it is ironic that an elected (but basically military-led) government that they oppose in principle should be undertaking reforms they have long advocated, but that elected civilian governments ignored. 
Despite fierce opposition from religious parties, there have been minor victories, like a couple of madrassahs agreeing to include secular subjects like math, English, and computer studies in their curricula. 
There has also been administrative action against a few religious institutions for encroaching on public space - practically unheard of since official patronage of religious parties began in the 1970's, when their cadres were needed in the war against the Soviets. 
But the "war on terror" has also provided this government with an excuse to arrest and detain suspects without charge. 
More heinous human rights violations have also come to light. 
Qari Noor Mohammad, a religious activist in Faisalabad in Punjab province, was arrested recently and held without charge for several days before his corpse was dumped in front of his house. 
The lack of transparency that surrounds Pakistan's fight against "terrorism" is contributing to a growing public sentiment against the anti-militancy drive, which is largely perceived to be taking place under US pressure. 
Particularly contentious is the ongoing military operation in Wana district in the Northern Areas, which the Pakistani army has entered for the first time ever. 
The army action in Wana, aimed against Al Qaeda and Taliban operatives who are believed to be hiding there, has led to several civilian casualties, including women and children, and rendered over 30,000 people homeless. 
But human rights groups question how the five to six hundred Al-Qaeda operatives that the government claims were holed up in the area came to be based there in the first place. 
Locals interviewed independently say that some of those captured are in fact innocent local people from Wana, not foreign militants. 
Compared to his military predecessor, Musharraf, who touts the catch-phrase of "enlightened moderation," is conveniently progressive. 
Whereas the devoutly religious Zia was useful for boosting religious Islamic sentiments against the Soviets, Musharraf is needed nowadays to contain those very forces, which threaten not just global security but Pakistan itself. 
It remains to be seen, however, whether he will be progressive enough. 


Schooling and Social Change in Pakistan 
ISLAMABAD – The importance of education – and especially schooling – cannot be overestimated. 
Not only has the expansion of primary and secondary education been linked to accelerated economic growth, poverty eradication, and improved income equality, but education also appears to be closely associated with social enrichment and inclusion, the upgrading of human capital, increased opportunities, and enhanced freedom and welfare. 
That is why, as Pakistan’s prime minister, I have placed universal access to education very high on the national agenda. 
Education influences the way people perceive the world around them, understand issues, and find solutions to their problems. 
It makes them more aware of their rights and duties and affects how they interact within their communities and with the state and its institutions. 
Above all, it enables them to think critically and question established wisdom, thereby enabling them to rise above prejudice, myth, and restrictive historical legacies. 
In this sense, education is a major driver of social progress. 
And it is the key to fulfilling my promise, made when I took office two years ago, to create a new framework for social change in Pakistan, one that ensures equal opportunities and social justice for everyone and stops the exploitation of the poor and harnesses their potential. 
As the Oslo Summit on Education for Development approaches, I remain firm in my commitment to securing the right to a high-quality education for every child in Pakistan – especially for girls, who have long faced high barriers to education. 
But there remain considerable obstacles to fulfilling that commitment. 
Indeed, nearly six million Pakistani children are currently out of school, and many more are not learning even basic mathematics or reading skills. 
Dropout rates are high. 
And, perhaps worst of all, terrorists and extremists have been targeting schools, blowing up their buildings and threatening their teachers, particularly in the northern part of the country. 
In a particularly tragic incident last December, terrorists attacked young students and teachers at a school in Peshawar. 
I now reiterate the promise that I made after that attack. 
My government will not allow Pakistan’s schools – so vital to our country’s future – to become targets of terrorism. 
Education is the most important investment we can make in our most precious assets – our children – and we will not tolerate even the slightest threat to it. 
Protecting schools from extremists today will help to stem the rise of extremism tomorrow. 
Indeed, given the contribution of ignorance, lack of choice, and socioeconomic deprivation to the rise of extremism in parts of Pakistan and Afghanistan, ensuring that future generations have better education, improved capabilities, and more opportunities will ensure that the next generation will not become easy prey for terrorist organizations. 
In addition to the risk that a few would be tempted by extremism is the certainty that, if we fail to meet our commitment to universal education, millions of children would be relegated to a life of poverty and struggle, with their hopes, dreams, and potential squandered, undermining the country’s development potential. 
More than half of Pakistan’s population is under the age of 25; theirs is the generation with the potential to drive progress and prosperity in the country – if, of course, they receive the education they deserve. 
Given how unlikely it is that a free-market approach would lead to the equitable provision of education, my government has committed to increase the public resources allocated for education, which averaged only 2.4% of GDP from 2004 to 2013, to 4% percent of GDP over the next three years. 
Such funding will support the steps needed to fulfill the promise, contained in our country’s constitution, that the state will “provide free and compulsory secondary education within minimum possible period.” 
Those steps include cooperation with provincial governments – which bear the primary responsibility for primary and secondary education in Pakistan – to devise a roadmap for universal enrollment. 
In order to improve the quality of teaching and learning, we are working not only to expand facilities for teacher training, but also to draw more talented people to the profession by recognizing and honoring the service of teachers. 
And we are investing in computers and other advanced learning tools to ensure that our children can compete internationally. 
We have also launched several new initiatives to make education more widely accessible. 
One such initiative is the National Endowment Scholarships for Talent, which finances the education of poor students. 
Finally, we are strengthening the institutional scaffolding of Pakistan’s education system. 
For example, we have created the National Curriculum Council, which will standardize school curricula throughout the country, while ensuring that they are consistent with national requirements and international benchmarks. 
Reforms to the examination system are being introduced to complement this effort. 
My pledge is being turned into action. 
But my government cannot do it alone. 
To overcome the challenges we face and fulfill our promise to our children, we need active support from the international community. 
The Millennium Development Goal (MDG) of achieving universal primary education was expected to reach its target this year; it has not. 
And so now is the ideal moment for the world to renew its commitment to education. 
We must approach the Sustainable Development Goals, which aim to carry on the work of the MDGs, with a clear direction, a sense of purpose, and strong resolve. 
For our part, we have created a SDG unit in our Ministry of Planning, Development, and Reform to coordinate their timely achievement. 
We hope that other countries will show the same commitment. 
For Pakistan, education is not merely a priority – it is a policy imperative. 

The Pakistani Mecca of Terror 
BERLIN – Almost seven decades after it was created as the first Islamic republic of the postcolonial era, Pakistan is teetering on the edge of an abyss. 
The economy is stagnant, unemployment is high, and resources are scarce. 
The government is unstable, ineffective, and plagued by debt. 
The military – along with its rogue Inter-Services Intelligence (ISI) agency, comprising the country’s spies and secret policemen – is exempt from civilian oversight, enabling it to maintain and deepen its terrorist ties. 
Nuclear-armed Pakistan is now at risk of becoming a failed state. 
But even if it does not fail, the nexus between terrorist groups and Pakistan’s powerful military raises the specter of nuclear terrorism – a menace so large that the United States has prepared a contingency plan to take out the country’s fast-growing nuclear arsenal should the need arise. 
Make no mistake: Pakistan is “ground zero” for the terrorist threat the world faces. 
The footprints of many terrorist attacks in the West have been traced to Pakistan, including the 2005 London bombings and the 2015 San Bernardino killings. 
Two key actors behind the September 11, 2001, terrorist attacks in the United States – Osama bin Laden and Khalid Sheik Mohammed – were found ensconced in Pakistan. 
In the recent Manhattan and New Jersey bombings, the arrested suspect, Ahmad Khan Rahami, was radicalized in a Pakistan seminary located near the Pakistani military’s hideout for the Afghan Taliban leadership. 
But it is Pakistan’s neighbors that are bearing the brunt of its state-sponsored terrorism. 
Major terrorist attacks in South Asia, like the 2008 Mumbai strikes and the 2008 and 2011 assaults on the Indian and US embassies in Afghanistan, respectively, were apparently orchestrated by the ISI, which has reared terrorist organizations like Lashkar-e-Taiba, Jaish-e-Mohammad, and the Haqqani network to do its bidding. 
This is no hearsay; former Pakistani military dictator Pervez Musharraf has largely acknowledged it. 
In India, in particular, the Pakistani military – which, despite being the world’s sixth largest, would have little chance of winning a conventional war against its giant neighbor – uses its terrorist proxies to wage a clandestine war. 
This year alone, Pakistani military-backed terrorists have crossed the border twice to carry out attacks on Indian military bases. 
In January, Jaish-e-Mohammad struck India’s Pathankot air base, initiating days of fighting that left seven Indian soldiers dead. 
Last month, members of the same group crossed the border again to strike the Indian army base at Uri, killing 19 soldiers and prompting India to carry out a retaliatory surgical strike against militant staging areas across the line of control in disputed and divided Kashmir. 
Afghanistan and Bangladesh also accuse ISI of undermining their security through terrorist surrogates. 
They blame Pakistan for the recent grisly attacks in their respective capitals, Kabul and Dhaka, in which a university and a café were among the targets. 
Such activities have left Pakistan isolated. 
Just recently, its regional neighbors – Afghanistan, Bangladesh, Bhutan, India, Nepal, and Sri Lanka – pulled the plug on a South Asian Association for Regional Cooperation summit that was scheduled for early next month in Pakistan’s capital, Islamabad. 
Sri Lanka’s prime minister, Ranil Wickremesinghe, has warned that “cross-border terrorism” imperils the very future of SAARC. 
But diminished international standing and growing regional isolation have been insufficient to induce Pakistan’s dominant military to rethink its stance on terrorism. 
One reason is that Pakistan retains some powerful patrons. 
Beyond receiving financial support from Saudi Arabia, Pakistan has, in some ways, become a client of China, which provides political protection – even for Pakistan-based terrorists – at the United Nations Security Council. 
This month, China torpedoed, for the fifth time in two years, proposed UN sanctions on Masood Azhar, the Pakistan-based head of Jaish-e-Mohammed, which the UN designated as a terrorist outfit years ago. 
The sanctions were backed by all other members of the Security Council’s anti-terror committee, not least because India had presented evidence linking Azhar to the terrorist killings at its two military bases. 
In terms of financial aid, however, it is the US that serves as Pakistan’s biggest benefactor. 
Yes, even after finding the likes of Bin Laden on Pakistani soil, the US – the country that has spearheaded the so-called War on Terror – not only continues to deliver billions of dollars in aid to Pakistan, but also supplies it with large amounts of lethal weapons. 
US President Barack Obama’s administration also opposes a move in Congress that would officially brand Pakistan a state sponsor of terrorism. 
This approach reflects Obama’s commitment to using inducements to coax the Pakistani military to persuade the Taliban to agree to a peace deal in Afghanistan. 
But that policy has failed. 
The US remains stuck in the longest war in its history, as a resurgent Taliban carries out increasingly daring attacks in Afghanistan with the aid of their command-and-control structure in – you guessed it – Pakistan. 
No counterterrorism campaign has ever succeeded when militants have enjoyed such cross-border havens. 
Achieving peace in Afghanistan, like stemming the spread of international terrorism, will be impossible without making the Pakistani military accountable to the country’s civilian government. 
The US has a lot of leverage: Pakistan has one of the world’s lowest tax-to-GDP ratios, and is highly dependent on American and other foreign aid. 
It should use that leverage to ensure that the Pakistani military is brought to heel – and held to account. 

Palestine after Abbas? 
RAMALLAH – A political leader’s decision not to seek re-election usually triggers fervent discussion about potential heirs. 
Yet, President Mahmoud Abbas’s withdrawal from the presidential election scheduled for January 24, 2010, has produced nothing of the kind in Palestine – not because of a dearth of leadership or a reluctance to mention possible successors, but because the presidency of the Palestinian Authority has become irrelevant. 
Abbas’s withdrawal comes at a time when Palestinian frustration with the political process has rendered suspect the entire rationale behind the PA, established in the mid-1990’s, following the Oslo Accords. 
The main component of the PLO’s agreement with Israel was a five-year interim period during which negotiations were expected to lead to an independent Palestinian state alongside Israel. 
Sixteen years later, it has become clear that the Israelis have made no effort to come to terms with Palestinian national aspirations – and that no effective effort has been made to convince them. 
The number of illegal Jewish settlers in Palestinian areas has doubled, leaving Palestinians increasingly convinced that negotiations are a waste of time. 
Many recall the preferred strategy of former Israeli Prime Minister Yitzhak Shamir: “I would have conducted negotiations on autonomy for ten years, and in the meantime we would have reached a half-million people in the West Bank.” 
Initially, the five-year interim agreement called for the election of a Palestinian Legislative Council and an executive leader whom the Israelis wanted to call a “chairman,” spurning the word “president.” 
Because Arabic makes no distinction between chairman and president, the Israelis accepted use of the Arabic word rayyes in the official English text. 
Palestinian refugees in exile and other Palestinians living in the diaspora were not allowed to vote. 
East Jerusalem Palestinians were allowed to vote only at the post office or at booths outside the city limits. 
Abbas’s withdrawal merely confirms the obvious. 
Another such election in the near future, including the one set for January, is unlikely to occur, mainly owing to the continuing rift between the PLO and Hamas, which controls Gaza. 
Hamas participated in the 2006 legislative elections, which followed Israel’s military withdrawal from Gaza. 
But for years Hamas and other radical Palestinian groups have rejected the Oslo process, on the grounds that free elections under Israeli occupation would be absurd. 
Hamas has the power to stymie the vote and has indicated that it would do so. 
Moreover, Abbas has not given up his positions as head of the PLO and leader of its biggest faction, Fatah, which remains in control in the West Bank. 
Abbas cannot resign from his post for the foreseeable future, lest the Hamas-backed speaker of the Palestinian Legislative Council take over. 
At the same time, no PLO official is likely to seek the presidency without Abbas’s approval, which he will withhold until a new mechanism for ending the occupation is found. 
The PLO will likely gain much from Abbas’s decision, because it de-emphasizes the status of the PA president and raises the profile of his post as chairman of the PLO’s executive committee. 
That shift, in turn, clears the way for a generational change in leadership – and, more importantly, a transition to post-Oslo politics. 
The PLO’s old guard – men like Yasser Arafat and Abbas, who led the liberation organization from exile and returned home with the Oslo Accords – dominated the Palestinian political landscape up to now. 
After they depart the scene, Palestinian leaders who were born under occupation and spent time in Israeli prisons will most likely fill the vacuum. 
The most prominent such figure is Marwan Barghouti, the leader of the student movement at Birzeit University in the 1980’s and one of the main organizers of the First Intifada, resulting in his deportation by Israel in the late 1980’s. 
In 2002, he was arrested and sentenced to a long prison term on charges that he led the Second Intifada, which had begun two years earlier, and ordered some of its military attacks. 
Despite being imprisoned, Barghouti was recently elected to Fatah’s central council, and a number of others who spent time in Israeli prisons will join him. 
One is Jibril Rajoub, imprisoned for 19 years and deported in the First Intifada, only to return to lead one of the security services after the PA was established. 
Another is Mahmoud Dahlan, also an ex-prisoner and former security official, although the loss of Gaza to Hamas, for which many Palestinians hold him partly responsible, has dimmed his leadership prospects. 
Finally, there is Nasser al-Qudwa, the former PLO representative at the United Nations. 
Qudwa is a dark-horse candidate to succeed Abbas – a possible compromise figure who has never been directly involved in security or military activities. 
For many Palestinians, Qudwa, a soft-spoken, multi-lingual nationalist (and Arafat’s nephew), presents an acceptable face for Palestine locally and internationally. 
The coming months will reveal whether we are, indeed, witnessing the dawn of the post-Oslo era in Palestinian politics, and whether a new leader, with new supporters, will be required to revive the Palestinian cause. 
Whoever emerges on top will have to present an effective strategy to end four decades of military occupation and bring about a truly independent state that a majority of Palestinians can embrace. 

Palestine as a Failed State 
Every week, it seems, brings another backward step for Palestine. 
President Mahmoud Abbas’s failure to convene the Palestinian Legislative Assembly, due to a Hamas boycott, may lead inexorably to the final breakdown of the political structures created under the Oslo Accords. 
Sadly, this is only the latest chapter in the Palestinians’ tragic history of failed attempts to create a nation-state. 
Palestinians see their history as one of struggle against Zionism and Israel. 
But the reality is more complicated, and marked by repeated failures to create a coherent body politic, even when historical opportunities beckoned. 
Perhaps the first failure occurred in the 1920’s, when the British Mandatory government in Palestine encouraged the two national communities – Jewish and Arab – to establish communal institutions of self-government to look after education, welfare, housing, and local administration. 
The Jews – then less than 20% of British Palestine’s population – set up what became known as the National Committee (Va’ad Leumi), based on an elected body, the Representative Assembly of Palestinian Jews. 
Regular elections to this Assembly took place, sometimes with more than a dozen parties competing. 
This autonomous institution became the forerunner of the political structure of the nascent Jewish state, and its leaders – David Ben-Gurion among them – emerged as Israel’s future political elite. 
Israel succeeded as a nation, with a vibrant and sometimes obstreperous parliamentary life, precisely because its leaders used this opportunity. 
The Palestinians, however, never created similar embryonic state structures: an Arab Higher Committee was established, made up of regional and tribal notables, but no elections ever took place. 
The Mufti of Jerusalem, Haj Amin al-Husseini (later an ally of Nazi Germany), became its chairman, but it never succeeded in creating a generally accepted national leadership or in providing the Arab community the panoply of educational and welfare services offered to the Jewish community by its elected institutions. 
The second failure occurred during the Arab Revolt against British rule in Palestine in 1936-1939, which was accompanied by massive terror attacks against Jewish civilians. 
The revolt itself was brutally suppressed by the British army, but not before a split within the Palestinian community resulted in two armed militias – one based on the Husseini clan, the other on the more moderate Nashashibis – that turned viciously on each other. 
More Palestinians were killed by contending militias than by the British army or the Jewish self-defense forces. 
The third failure – even more tragic – occurred in 1947-48, when Palestinian Arabs rejected the United Nations partition plan, which envisaged separate Arab and Jewish states after the departure of the British. 
While Jews accepted this compromise, the Palestinian Arabs, supported by the Arab League countries, rejected it and went to war against the emerging State of Israel. 
The Palestinian Arab defeat in this endeavor, and the resulting refugee problem, is a defining moment for Palestinians. 
But what sometimes gets lost in this narrative is that, while practically all sectors of Palestinian Arab society rejected the UN plan, Palestinians were unable to devise coherent political institutions and a unified military command with which to confront the much smaller Jewish community. 
By contrast, the besieged Jewish community, under David Ben-Gurion and the Jewish self-defense force (the Hagannah) was able to mobilize, through its democratic institutions and with only marginal dissent, the resources needed for a successful military campaign. 
Indeed, many Palestinian political leaders absconded to Beirut or Cairo once violence broke out. 
The Husseini clan set up its militia in the Jerusalem area. 
Near Tel Aviv, in adjoining Jaffa, a competing militia under Hassan Salameh, took control. 
In the north of the country, a Syrian-based militia, under Fawzi al-Kaukji, attacked Jewish villages. 
The more moderate Haifa Arabs tried, not very successfully, to stay out of the fray. 
Disunity made the Arab defeat almost inevitable. 
Moreover, the scars of the 1930’s virtual civil war have still not healed: mutual suspicion and memories of internecine massacres vitiated cooperation and trust. 
The last failure occurred when the 1993 Oslo Accords between Israel and the PLO set up the autonomous Palestinian Authority under Yasser Arafat. 
Instead of creating the infrastructure of the future Palestinian state, with various functions slowly transferred from the Israeli army to the Palestinian Authority, Arafat created a mukhabarat (security services) state, as in Egypt, Syria, and (until Saddam Hussein’s fall) in Iraq. 
Arafat and his Fatah-based supporters established almost a dozen competing security services – sometimes indistinguishable from clan-based militias – which consumed more than 60% the Palestinian Authority’s budget, at the expense of education, housing, welfare, and refugee rehabilitation. 
Into this vacuum burst Hamas, with its network of schools, welfare services, community centers, and support organizations. 
The Hamas takeover of Gaza was but the latest step in this development. 
It is easy to blame the current Palestinian crisis on individuals – be it Arafat or Abbas. 
It is even easier to blame the Israeli occupation or American policies. 
To be sure, there is a lot of blame to go around. 
But all national movements – the Greek as well as the Polish, the Jewish as well as the Kurdish – begin in adversity. 
The Palestinians have a difficult history – one of internal disunity and murderous internecine conflict – to overcome. 
They now stand again at a crossroads, and whether they will be able to transcend their tragic heritage depends on them. 
No one can help them if they cannot come up with a coherent, consensual, and reasonably united leadership – what Abbas himself calls “one law, one authority, one gun.” 


Internet or Intifada? 
TEL AVIV – According to Israeli Prime Minister Binyamin Netanyahu, the ongoing wave of knife attacks on Jews by young Palestinian “lone wolves” can be blamed entirely on incitement by Palestinian Authority and Islamist websites. 
Netanyahu evidently expects Israelis, and the world, to believe that if these sites were posting cat videos, the Palestinians would cease their agitation and submit quietly to occupation. 
Palestinians are indeed being provoked, but by Israeli actions – beginning with the perpetual encroachment on their rights that occupation entails. 
Beyond facing daily humiliation at checkpoints, Palestinians have seen Israeli settlers destroy their crops and olive groves, and even torch a West Bank home, burning three family members and killing a toddler. 
Add the Israeli military’s frequent late-night house raids in search of “terror suspects” and the relentless expansion of Israeli settlements, and it becomes pretty clear that Palestinians don’t need to scour the Internet for reasons to be angry. 
It is ironic that Netanyahu, of all people, is accusing anyone of incitement. 
Was it not incitement when, just days before Prime Minister Yitzhak Rabin was assassinated in 1995 for his efforts to achieve peace with the Palestinians, Netanyahu addressed a rally where posters depicted Rabin in a Nazi SS uniform? 
Was it not incitement when he attempted to mobilize Jewish voters earlier this year by warning of “Arabs voting in droves, bussed in by the left.” 
Just this month, one of Netanyahu’s shamelessly incendiary statements – the claim that Haj Amin al-Husseini, the Grand Mufti of Jerusalem, gave Adolf Hitler the idea of annihilating Europe’s Jews during World War II – sparked a media firestorm. 
When it comes to anti-Jewish zeal, Husseini’s record hardly needs false footnotes – unless, apparently, one has an interest in presenting the Palestinians as co-perpetrators of the Holocaust. 
In this case, it seems that Netanyahu may have gone too far; after more than a week of condemnation, including from Israeli historians, he was forced to retract the statement. 
But he is unlikely to be chastened. 
For Netanyahu, incitement is a powerful political tool. 
He fuels Israeli fears and disillusionment, in order to preserve a status quo that, at least in the case of Palestine, benefits Israel. 
As Netanyahu put it last month in a closed meeting of the Knesset’s Foreign Affairs and Defense Committee, Israel must continue “controlling all the territory,” adding that the country “will forever live by the sword.” 
Of course, this approach is not always successful; for example, Netanyahu was unable to block the international nuclear deal with Iran, despite his best efforts. 
But, rather than rethink his approach, he has simply redirected it, in order to restore the Palestinians to their position as the principal existential threat to Israel. 
Today’s emerging intifada demonstrates the profound danger implied by this approach. 
Fueling Israelis’ fear and resentment of Palestinians does not only undermine the chances of a political solution; it also exacerbates Palestinians’ frustration and anger with Israelis. 
And that anger is already intense, especially among young Palestinians living under Israeli occupation. 
Consider what life is like in East Jerusalem, the epicenter of the decentralized rebellion, where some 77% of Palestinians live below the poverty line. 
Not only are municipal services poor or non-existent; 
Palestinians also face persistent pressure from Jewish religious groups bent on asserting Israeli control. 
Young Palestinians – the third generation to live under occupation – have run out of patience. 
Despite being a largely secular generation, they are using the narrative of jihad (the knife is a conspicuous Islamic State symbol) to defy their parents’ docility, challenge an incompetent Palestinian leadership, and, most of all, to resist the Israeli occupiers. 
That is why they have made Islam’s holy shrines on Jerusalem’s Temple Mount (Haram al-Sharif to Muslims) into icons of their rebellion. 
If iron-fisted authoritarian governments in countries like Egypt and Tunisia could not stop their populations from overthrowing them in the Arab Spring, how can one expect the crippled Palestinian Authority to stop this rebellion? 
Indeed, at this point, Palestinian Authority President Mahmoud Abbas is more worried about avoiding the fate of Egypt’s Hosni Mubarak or Tunisia’s Zine el-Abidine Ben Ali than he is about stopping the violence. 
To preempt young Palestinians’ wrath, he has refused to condemn their terror campaign and indirectly fueled anger over Israel’s supposed violation of the status quo on the Temple Mount. 
This approach will have far-reaching consequences, for a similarly dangerous vehemence regarding the Temple Mount, the holiest site in Judaism, has lately been gaining traction among Israelis. 
Though Jewish law explicitly forbids Jews from ascending the Temple Mount, lest they profane this most sanctified of Jewish shrines before the coming of the Messiah, a growing number of Israelis – from religious fanatics to members of Israel’s ruling coalition – now support defying that prohibition. 
They claim that Jews must frequent the holy site, and even build a temple, to strengthen Israel’s sovereignty there. 
The focus on the Temple Mount has given the current confrontation an apocalyptic quality. 
It is time for both sides – and especially the Israelis – to recognize just how dangerous the situation is. 
By blurring the borders between Israel and the Palestinian territories, Israel has created the conditions for permanent civil war. 
The two-state solution might not be particularly attractive to either party anymore; but a binational solution, at least as it is unfolding these days, would be a living nightmare. 

Palestine’s House Divided 
President George W. Bush’s call for a new peace conference for Israel, Palestine, and neighboring states that back a two-state solution is a welcome, if very tardy, development. 
But efforts to re-start the peace process now confront a stark new reality: two mutually hostile Palestinian entities in Hamas-ruled Gaza and the Fatah-led West Bank must now be factored into the process. 
The Hamas/Fatah face-off marks a dramatic shift in Palestinian politics, whose top priorities until now has been an end to the Israeli occupation and the establishment of an independent state. 
It also tremendously complicates peace negotiations, which both the Palestinians and the “Quartet” (the United States, the European Union, the United Nations, and Russia) had premised on maintaining the Gaza Strip and the West Bank as a single territorial unit. 
Ironically, these territories were reunited by Israel’s victory in the 1967 war, after 19 years of separation. 
Previously, Egypt had ruled in Gaza, while Jordan annexed the West Bank. 
Under Israel’s occupation, and then with the establishment of the Palestinian Authority (PA) in 1994, the territories remained separated geographically, but not politically. 
The Hamas takeover in Gaza has – at least for now – ended that political unification. 
Palestinian President Mahmoud Abbas has now set his conditions for dialogue. 
Hamas must withdraw its armed men from all security headquarters they occupied, return power to the legitimate authority, and apologize to the Palestinian people. 
Although internal division harms Palestinians’ national interest, it is unlikely amid mutual accusations and incitements that dialogue between Fatah and Hamas will be conducted soon. 
But the fear that is most consuming Abbas and Fatah is that the conflict with Hamas might spread to the West Bank. 
To avoid such a scenario, Abbas has banned all militias and military groups in the West Bank, including his Fatah Party’s al-Aqsa Martyrs Brigades. 
Abbas has succeeded in convincing Israel to grant amnesty to many Fatah fugitives in the West Bank who will join his security apparatuses. 
Abbas has also asked Israel to allow the PLO’s Badr Brigade, currently stationed in Jordan, to enter the West Bank. 
That would give Abbas an additional 3,000 well-equipped and trained troops. 
Following King Abdullah II of Jordan’s intervention, Israel appears to have agreed to allow the Badr Brigade’s entry with full arms and ammunition. 
If Fatah is to become a viable partner for peace and regain its grassroots support, it must reform itself and end the widespread corruption that has undermined its reputation. 
Abbas must also share power with more disciplined, younger leaders. 
Israel can help Abbas by releasing senior Fatah leader Marwan Barghouti, who is currently serving five life sentences in an Israeli prison. 
Owing to his influence with the Fatah militias, Barghouti’s release could help Abbas and the discredited Fatah leadership, and boost the younger generation of Fatah leaders. 
Israel is divided on how to deal with Hamas, which will also complicate the start of peace talks. 
Some Israelis argue that Hamas should be encouraged to establish order in Gaza and provide assurances to its neighbors. 
If Hamas can establish order inside Gaza, prevent violence against Israel, and stop missile attacks against Israeli towns and villages, it might avoid Israeli military intervention. 
But the dominant view in Israel is that Hamas is a direct threat, unwilling to stop attacks on Israel. 
For Israel, last summer’s fight with Hezbollah in Lebanon demonstrated the risks of allowing radical Islamists to consolidate their power on Israel’s border. 
Sooner or later, Israel is likely to deal with Hamas militarily, perhaps even by re-occupying Gaza. 
One reason neighboring countries may take part in peace talks is that Egypt and Jordan fear that Hamas could begin actively to support these countries’ own Islamic opposition groups. 
Moreover, Egypt, Jordan, and Saudi Arabia – the three main Sunni Muslim regimes – are concerned that Gaza could provide a base for their regional non-Arab foe, Shiite Iran. 
Their fear is based on Iranian support for Islamist groups – Sunni and Shiite – in Iraq, Lebanon, and Palestine, as well as its ongoing relationship with Syria. 
If the Hamas-Fatah split brings about another territorial partition, Palestinians’ national aspirations will suffer their gravest setback in the last half-century. 
Although the overwhelming majority of Palestinians reject the use of force to settle this power struggle, many welcome the change in Gaza, where Hamas has cleared the streets of armed militias and restored some law and order. 
The Palestinians confront a harsh reality. 
Whatever actions are taken to confront Hamas will undermine the Palestinian national project. 
A house divided against itself cannot stand, said Abraham Lincoln. 
And a Palestine divided against itself will never secure its independence. 

Palestine’s Moment of Decision 
NOT TO BE PUBLISHED BEFORE JANUARY 10 
The victory of Mahmoud Abbas in the Palestinian presidential election poses a huge challenge to the Palestinian leadership. 
By being voted chairman of the PLO’s executive committee hours after the death of Yasser Arafat, Abbas clinched the support of the organization that represents all Palestinians, including those in the diaspora. 
Popular election as President of the Palestinian National Authority gives Abbas the grassroots legitimacy to carry out his political program. 
That program, while similar to Arafat’s, differs in key ways. 
Abbas (also known as Abu Mazen) has been publicly and consistently critical of what he calls the “militarization of the intifada.” 
Even before Arafat’s death, Abbas argued that the use of force by militants weakens the Palestinian negotiating position. 
He stuck to this position throughout his electoral campaign, refusing the demands of hard-line Palestinian factions that he apologize for his previous statements. 
Abbas conducts himself in a business-like manner, and he strongly believes in the rule of law and in the need for real civilian governance to assume preeminence in Palestinian politics. 
In this he also differs from Arafat, who believed that the revolutionary mindset must continue so as long as Palestinians lived under an illegal foreign occupation. 
Until liberation, there could be no business as usual. 
By winning election on a clear anti-violence and pro-rule of law platform, Abbas has the mandate and the responsibility to carry out this policy. 
He needs to make it clear to every armed Palestinian that there will be no tolerance for any unofficial group carrying arms or conducting military attacks from Palestinian territory. 
In order to preserve national unity, Abbas will obviously need to use all his persuasive skills to convince radical groups (some in his own Fatah movement) to respect that approach. 
As chairman of the PLO, he will be under extreme pressure not to delegitimize the internationally sanctioned acts of resistance against Israeli military targets. 
In order to counter that pressure, he will have to show that a cessation of violence is in the higher interest of Palestinians. 
Abbas will find it equally challenging to apply rule-of-law principles to a traumatized community that is reeling after nearly five years of violence, oppression, and draconian travel restrictions imposed by the Israelis. 
As in the issue of the militarization of the intifada, this is not a simple matter, as it concerns forces outside the control of Abbas and his government. 
Nevertheless, internal policies will be of grave importance. 
The day-to-day lives – and livelihoods – of Palestinians need immediate improvement. 
The Israeli-built wall to the west of the West Bank means that Palestinian unemployment will continue to rise and living standards will continue to drop. 
To counter this, Abbas will have to seek external Arab and international support. 
The real need is to encourage investment, primarily from Palestinians and Arabs. 
But this is unlikely without major legal and administrative reforms, and, more generally, good governance and ironclad application of the rule of law. 
The key to establishing civil order is peace. 
No matter how persuasive Abbas is in convincing radical groups to put down their arms, a unilateral ceasefire will not last long if it is not mutual. 
The role of the Israeli occupation forces will thus be crucial in determining the success of Abbas’s daunting mission. 
Indeed, the task that Abbas faces will become impossible if the Israeli policy of “targeted killings” is allowed to continue while Palestinian leaders are working seriously to put an end to acts of violence against Israelis. 
Ultimately, the main agenda for the new Palestinian president in negotiations with Israel will be to push the Israelis to make good on their repeated international assurances that a viable contiguous Palestinian state is a realistic goal in the near future. 
But if left to Israelis and Palestinians alone, the goal of Palestinian independence within the 1967 borders of Palestine will most likely remain out of reach. 
The international community, lead by the United States, must invest effort and political capital to realize this goal. 
The new Palestinian president faces a challenging agenda and high popular expectations. 
Much will depend on how Abbas handles himself and how he governs. 
But the ultimate question is what Israel and the international community will do if Abbas fulfills his pledge to end anti-Israeli violence and apply the rule of law in a functioning democracy. 
Palestinians have chosen; now the world must do so as well. 

Palestine’s Necessary Civil War 
Regardless of the latest hastily negotiated truce, the battle between nationalist Fatah and Islamist Hamas seems to be gaining intensity. 
Palestinian politics, always self-destructive, has reached new heights of internal conflict, pulling the population deeper into disorder and pushing them further away from statehood. 
The movement’s remarkable ability to sabotage itself is not new. 
In the late 1960’s, the PLO, led by Fatah, antagonized its Jordanian hosts until they expelled it by force. 
During the 1970’s, the PLO entered Lebanon’s civil war, wearing out its welcome there. 
The sole issue on which Israel, Syria, and Lebanese political leaders agreed in the 1980’s was that the PLO should be thrown out of Lebanon. 
During the 1990's, the PLO botched its opportunity to govern the West Bank and the Gaza Strip, create a stable and development-oriented regime there, and make peace with Israel. 
Rejecting a deal with Israel in 2000, Fatah instead launched a violent revolt that has lasted ever since then, destroying the infrastructure built up in the Palestinian territories during the previous decade. 
Massive foreign aid was stolen, squandered, or wrecked by unnecessary violence. 
When Yassir Arafat, the perennial PLO, Fatah, and Palestinian Authority leader, died, Palestinians in theory had a chance to end this history of disasters. 
Yet Arafat’s replacement, Mahmoud Abbas, was a colorless, not particularly strong figure with no real political or military base of his own. 
During the 1990’s, as the challenge from Hamas steadily grew, Arafat thought he could use the Islamists – after all, he was basically one himself – and refused to curb them. 
He was notorious for refusing to build strong institutions. 
So once Arafat died, the roof caved in on Fatah. 
Three main factors brought Hamas into leadership in the January 2006 parliamentary elections. 
First, Arafat’s legacy left Fatah and the PLO completely undisciplined. 
Its deep divisions meant that Fatah candidates split the vote and ensured a Hamas landslide. 
Second, Fatah never gave Palestinians any alternative vision. 
Apart from a few scattered speeches – some by Abbas himself – it never accepted peace and compromise. 
In this respect, Fatah was not much different from Hamas, and the two competed to prove who waged terrorism better and was more militant. 
Finally, Fatah did a terrible job at governing, bringing Palestinians neither material benefits nor a state. 
Instead, it brought massive corruption and administrative incompetence, together with breathtaking arrogance. 
When I predicted Hamas’s victory before the election, Fatah’s campaign manager replied, “Everyone will vote for Abbas and everything will be all right.” 
But while Abbas remains chief executive, Hamas controls the parliament and the government. 
Yet Fatah was hardly going to give up. 
One of Fatah’s few remaining assets is that the West, horrified by Hamas’s more open hate-mongering and extremism, has largely boycotted the new Palestinian regime and cut off aid. 
With Hamas allied to Iran and Syria, Fatah has seemed more attractive in geopolitical terms. 
On this issue, however, there are unfortunate realities that few will admit. 
Instead, the West continues to believe that there is still a chance of Arab-Israeli peace, that this problem is the region’s centerpiece, that Hamas might become more moderate, and that Fatah and Hamas can somehow create a government of national unity. 
People of good will who want a real negotiated solution, with Israel and Palestine living peacefully as neighbors, simply don’t want to face the fact that any such deal is now decades away. 
In Palestinian politics, total victory and Israel’s destruction is still preferable to an honest assessment that this goal is unattainable, terrorism must be abandoned, and law and order must be imposed. 
But Fatah is almost as extreme as Hamas. 
Anarchy rules, and there is no one with the vision and strength to end it. 
Dozens of international plans and proposals collapse one after the other. 
The current “ceasefire” with Israel is violated by the daily of salvos of missiles fired from Gaza, while ceasefires among Palestinians have typically been broken by gunfire and assassination attempts within a few hours. 
Now Abbas has called for new elections, which Hamas rejects, and it seems unlikely that he has the capacity to impose his will. 
Many people advocate the simple expedient of “strengthening Abbas” as a moderate, but one cannot strengthen a wet noodle. 
The irony is that real change could come about only from a civil war won by moderates. 
But the Palestinians are not engaged in a civil war pitting moderates versus extremists. 
The reciprocal low-level violence between Hamas and Fatah is simply a struggle fueled by greed and patronage. 
There are limits to how far that struggle will go, but the Palestinians are not going to stop fighting among themselves or against Israel. 
This is an unfortunate truth. 
But recognizing it is crucial to understanding why no political solution works, and why every clever plan to resolve the Israeli-Palestinian or inter-Palestinian conflicts fails. 

Palestine’s State of Mind 
RAMALLAH – The idea of Palestine becoming a permanent member of the United Nations originated, say Palestinians, with none other than US President Barack Obama. 
Speaking at the UN General Assembly on September 23, 2010, Obama said that he hoped that “when we come back here next year, we can have an agreement that will lead to a new member of the United Nations – an independent, sovereign state of Palestine, living in peace with Israel.” 
Palestinians decided to take Obama at his word. 
Obama’s efforts to rekindle the Middle East peace process began with Israel’s refusal to carry out a temporary settlement freeze. 
The United States was even willing to offer a $3 billion arms deal to Israel in return for the suspension of building Jewish-only settlements in areas earmarked for the Palestinian state. 
But Israel’s prime minister, Binyamin Netanyahu, rejected the US offer. 
Nine months later, Obama made another effort to kick-start the talks. 
“The borders of Israel and Palestine should be based on the 1967 lines with mutually agreed swaps, so that secure and recognized borders are established for both states,” he said in May. 
Once again, Palestinians accepted Obama’s formula, while Netanyahu publicly rejected it, leaving Palestinians with no other nonviolent alternative but to go to the UN to seek a state based on the 1967 borders. 
In 1967, it should be recalled, Israel occupied the remainder of historic Palestine and other Arab territories following the June War. 
Shortly after the war, the UN Security Council declared in the preamble to Resolution 242 that “it is inadmissible to occupy land by force.” 
This is not the first time that the UN has been called upon to arbitrate the intractable Middle East conflict; nor have only Palestinians approached. 
Back in 1947, when the UN General Assembly voted to partition the British Mandate of Palestine into a Jewish state and an Arab state, Jews of the British Mandatory state of Palestine danced in the streets of Tel Aviv. 
Today’s Israelis are rejecting recognition of Palestinian statehood on a much smaller territory than that assigned to Arabs by the original partition. 
In more recent history, since 1991’s Madrid Conference, direct talks between Israelis and Palestinians have taken place in various formats. 
Palestinians made one compromise after another, hoping that partial agreements would lead to statehood. 
The 1993 Oslo accords set in motion a peace process that was supposed to last five years, with the end goal being an independent Palestinian state and a safe, secure, and recognized Israel. 
But the peace process exposed a permanent inability to agree on anything of real substance. 
Worse, direct talks have not only failed to produce the desired results; their continuation has also helped to mask widespread construction of Israeli colonies on Palestinian territory. 
Palestinian lands continue to be confiscated, Jewish-only settlements continue to be built, and Israel’s so-called “security wall” has strangled the Palestinians socially and economically. 
The International Court of Justice at The Hague has ruled that the wall built inside Palestinian territory is illegal under international law, yet nothing has been done to enforce that ruling. 
Mahmoud Abbas, the chairman of the PLO and President of the Palestinian Authority, who has vowed not to run for re-election, has chosen to take the path of UN recognition rather than continue with the charade of useless – indeed, harmful – direct talks. 
And, clearly, that change in tactics has hit a raw nerve with Israelis and frustrated the US. 
Few Palestinians see anything wrong with the move, although many are not certain that it will produce much in the way of immediate and tangible results. 
Nonetheless, the Palestinian public is pleased for now with a leadership that has found the backbone to stand up to pressure from Israel and the US. 
This will certainly help Abbas in the short term. 
But if the UN move does not bear fruit within a reasonable timeframe, the public might turn against its political leaders – as well as against the Israeli occupiers. 
So what, exactly, is Abbas hoping to achieve? 
The UN General Assembly, unlike the Security Council, cannot declare a state, and the US has vowed to veto any Security Council resolution that recognizes Palestine’s independence. 
But, if two-thirds of its members agree, the General Assembly can recognize Palestine as a state with observer status, similar to the Vatican. 
At that point, the international community would be obliged to begin acting against any party that was denying Palestine the right to behave as a fully functional and sovereign state. 
Moreover, as a state (even with observer status), Palestine could seek legal relief from the International Court of Justice. 
It might also try, within the General Assembly, to invoke the rarely used Uniting for Peace resolution (the last time was against South Africa’s apartheid regime). 
Palestinians’ desire to obtain a UN vote on statehood (in whatever form) does not mean that they cannot have direct negotiations with Israel. 
Palestinian spokesmen, including Abbas, have said that they see no reason why representatives of the newly recognized state cannot negotiate with representatives of Israel. 

Palestine’s Time 
PARIS – This September, Mahmoud Abbas, president of the Palestinian Authority, took the bold step of directly asking the United Nations to grant official recognition to the state of Palestine. 
The UN’s 193 member states look geared to vote on that request within the next few months. The world’s focus is now on Palestine. 
It is almost two decades since the “quartet” – the UN, the United States, the European Union, and Russia – agreed that the Palestinian Authority and the Israeli government should establish peace by coexisting as two separate states. 
And yet, while US President Barack Obama has referred to the quartet’s decision as his guiding principle for diplomatic action on the Israeli-Palestinian conflict, the situation remains as dire as ever, because the devil remains in the details. 
The Palestinians want an independent state, but on the condition that they secure Jerusalem as its capital, and that Israel ceases to expand settlements on territory that it has occupied since the 1967 Six-Day War. 
Israel, however, has never considered ceding Jerusalem to Palestine. 
Many hope that, under pressure to reform municipal boundaries, Israel will consider this solution. 
But the question of the settlements is even more difficult to resolve. 
Even under pressure from the international community and, most powerfully, from the US, Israel has consistently refused to slow expansion of its settlements in the West Bank. 
Tragically, strong resistance from Israel and the Jewish diaspora has led Obama to acknowledge openly his powerlessness in the conflict, and thus to abandon US political pressure on Israel. 
As a result, a small group of pro-Israeli congressmen has been free to threaten and pressure those countries likely to vote for the recognition of the Palestinian state. 
In any event, Israel’s leaders are not actually interested in a realistic peace. 
Instead, they seem to want a solution reminiscent of nineteenth-century Ireland – which led to a century of casualties on both sides. 
Israel is effectively demanding the disappearance of Palestinian identity. 
The rest of the world should not tolerate that effort, even if the US does. 
Every country knows that it is difficult and costly to engage in an explicit conflict with the US. 
But when the US fails to act as a global leader because of its fragile internal politics, other countries do not have to follow its example. 
Abbas well understands the riskiness of his strategy: there will be brutal retaliation from Israel. 
But his persistence in pursuing this last chance at peace has clearly gained him increased popularity at home and greater respect abroad. 
Hamas, the Palestinian Authority’s rival in Gaza, will undoubtedly try to thwart Abbas’s effort. 
An organization like Hamas, which supports permanent war – and with which Israel negotiated for five years for the release of one abducted Israeli soldier, Gilad Shalit, in exchange for more than 1,000 Palestinian prisoners – is exactly the enemy that Israel needs to justify its hardline stance. 
For a long time, Israeli leaders have lobbied supporters like me, who, since the Holocaust, have defended the Jewish people’s right to security and statehood. 
But Israel’s tactics regarding Palestine have been unconscionable. 
They have strengthened Hamas, a hostile opponent of peace, pushed the US to vote against the Palestinian state whose birth it defends, and refused outright to accept any conditions that might resolve the conflict. 
No civilized country can permit this behavior. 
Palestine must be granted legal status so that, at the very least, its people will have access to the international legal court, with the understanding that international support is required to aid and defend this young state. 
The Americans have lost their moral right to leadership in resolving the Israel-Palestine conflict. 
It is time for Europe to step into the fray. 

Palestine’s War of Generations 
Yasir Arafat may be dead, but his Machiavellian strategies linger. 
Ever protective of his position as sole leader of the Palestinian people, Arafat sought to block any means by which a potential rival could challenge him. 
But in protecting his position, Arafat also blocked the appointment of a successor in his lifetime. 
In the first weeks after Arafat’s death, that seemed not to matter. 
Mahmoud Abbas, Arafat’s longtime deputy and the architect of the Oslo accords, quickly secured the backing of Fatah, the PLO’s core body. 
A seamless transition appeared possible. 
But now Marwan Barghouti, Fatah’s leader in the West Bank during the current Intifada, has decided to contest Abbas for the presidency of the Palestinian Authority (PA) from his Israeli jail cell. 
Facing economic stagnation and what Palestinian Authority Prime Minister Ahmed Qurei calls “the anarchy of weapons,” a succession struggle is the last thing Palestinians need. 
Any new leader must spur the economy, enforce the rule of law, fight corruption, unify the PA’s security agencies, and preserve public safety – and he must do so quickly or lose authority. 
Abbas (also known as Abu Mazen) represents the Old Guard of Palestinian politics. 
But the Young Guard – those who led the first Intifada (1987-1993), as well as those making their names in the current Intifada – want a share of power. 
Abbas will thus need to find support within this rising generation of nationalist leaders if he is to succeed. 
Resolving this generational struggle peacefully will require democratic elections within Fatah for membership of both the Revolutionary Council and the Central Committee. 
The Sixth Fatah Congress, the first in sixteen years, will take place in August 2005 and will seek to reconcile the conflict between the Old and Young Guard. 
Unlike Arafat and his fellow exiles, Barghouti, the most prominent leader among the Young Guard, grew up under Israeli occupation, and was arrested and detained several times. 
Barghouti’s popularity also stems from his refusal from the beginning to take any office in Arafat’s corrupt PA and its institutions. 
Although he was elected to the Palestinian Legislative Council in 1996, Barghouti’s reputation soared when the current Intifada began in September 2000. 
His support for attacks against Israeli soldiers and settlers in the occupied territories, which he argues is legitimate under international law, has earned him immense popularity among Palestinians, but also a sentence of five life terms plus 40 years in an Israeli prison. 
Whether he can be released from prison is now a source of intense speculation. 
But Barghouti has begun speaking out from his jail cell on the political situation, and his presence is growing. 
His decision to challenge Abbas means that the “secular” forces within the Palestinian movement may be divided at a time when rivals with a robust Islamic agenda – principally Hamas and Islamic Jihad – are challenging them. 
Both Hamas and Islamic Jihad are highly disciplined organizations, exercising tight control over their political and military wings. 
Although Hamas has been weakened by Israel’s targeted assassinations of Sheik Ahmad Yassin and Abdel-Aziz Rantisi, it retains strong military capabilities and popular support ranging between 25-30%, making it the second leading faction in the West Bank and Gaza. 
Hamas has declared that it will not nominate its own candidate for the PA presidency. 
Hassan Yusuf, a Hamas leader who was recently released from an Israeli jail after 28 months of administrative internment, explained to Al-Jazeera that “if Hamas assumed the leadership at this time, it would be vilified and isolated by the international community, and then the people would suffer.” 
Although Hamas is boycotting the election, many Hamas sympathizers will vote for the candidate most committed to defending the Palestinians’ core demands. 
Here Hamas members are simply reiterating Arafat’s views, which will continue to limit the concessions any new leader can make. 
Arafat set forth a blueprint including an independent Palestinian state in the West Bank and Gaza, with East Jerusalem as its capital, and a fair and just solution to the refugee problem. 
Changing leaders will in no way alter these conditions for making peace. 
So the question is this: who will Palestinians, in particular the Hamas constituency, think is better able to secure these goals, Abbas or Barghouti? 
That answer will most likely determine who will be the PA’s next leader. 
But in the end, Israel will also have to make a choice, because peace will require Israeli concessions, not just compromises from the Palestinians. 
Israel must freeze its settlement activity in the West Bank and stop constructing its barrier wall on Palestinian territories. 
Israel must also free Palestinian prisoners, remove all checkpoints between Palestinian villages and town, and redeploy its forces to positions held prior to September 28, 2000, in accordance with phase I of the Road Map. 
Either Abbas or Barghouti would certainly meet such a demonstration of good faith with good faith of his own. 

Palestine Stands Up 
JERUSALEM – Although the crisis over Israel’s naval interventions to defend its blockade of Gaza is gaining all the headlines around the world, something of far more historic importance is taking place in the Middle East. 
The Palestine National Authority is preparing to issue a unilateral declaration of independence, and it is taking concrete steps on the ground to make any such declaration viable. 
When US President Barack Obama appointed former Senator George Mitchell as his special envoy for Middle East peace negotiations, Mitchell’s mandate was to achieve within two years not only an agreement between Israel and the Palestinians, but also overall peace between the Jewish state and the whole Arab world. 
But, after 15 months on the job, and innumerable visits to the region, all Mitchell has to show for his efforts is an agreement between Israel and the Palestinian Authority to start indirect “proximity talks” – which it is hoped will lead to direct talks in due course. 
When one bears in mind that both sides have been negotiating directly for 15 years, Mitchell’s achievement appears even more minuscule. 
Under such circumstances, calling Mitchell’s work up to now a failure is the only polite – and realistic – thing to do. 
It is as easy to blame Israeli Prime Minister Binyamin Netanyahu’s intransigence – his enforcement of the Gaza blockade, for example – as it is to point out that the Palestinian Authority does not control Hamas-ruled Gaza, with its 1.2 million inhabitants, leaving it in no position to speak authoritatively for Palestinians. 
As a result, one thing that both Israelis and Palestinians agree on is that the proximity talks will most likely lead nowhere, so both sides are currently busy ensuring that the other side will be blamed for the failure. 
On too many issues – borders, settlements, refugees, Jerusalem – the gaps between the two sides are too deep to be easily bridged. 
In these circumstances, an idea recently raised – tentatively but courageously – by Palestinian Prime Minister Salam Fayyad should be eagerly welcomed. 
It may or may not fly, but it is arrestingly novel: if negotiations fail – so Fayyad says – sometime in 2011 the Palestinians should declare independence unilaterally. 
This may be a real game changer. 
Obviously, it would not resolve the conflict; it might not even immediately change the situation on the ground. 
Indeed, it could even precipitate some unforeseen Israeli countermeasures. 
But it would certainly mean a paradigm shift for a conflict in which everyone has been treading water for almost two decades. 
If the Palestinians declared independence unilaterally, and if, as is expected, some sort of recognition by at least some states followed, the contours of the Israeli-Palestinian conflict would change dramatically. 
Indeed, the conflict would become, if one can use the expression, more “normal” – no longer between an occupying power and an occupied people, but between two countries, two states, that disagree about a lot of issues, including borders, mutual relations, and control over populations. 
In a way, a unilateral declaration of independence would make the Israeli-Palestinian conflict a bit more like the Israeli-Syrian conflict – an inter-state conflict. 
It might even force Israel to make decisions that until now it found easier to avoid. 
Such a declaration would also be an enormous act of self-empowerment for the Palestinians. 
Until now, they have failed abysmally in institutional nation-building, a necessary requirement for any successful national movement. 
Palestinian nationalism is deeply ingrained in the consciousness of most Palestinians – yet, since 1948, when the United Nations proposed partitioning British Palestine into two states, a Jewish and an Arab one, it has failed to move from ideology towards reality. 
Neither violence nor terrorism nor relying on outside powers (the UN, the Arab League, the Soviet Union, the US, the European Union) succeeded in delivering statehood, which a people can achieve only by its own agency – what Zionist ideology calls “auto-emancipation.” 
Fayyad is the first Palestinian leader who did not emerge from the Fatah movement, and he may thus understand what other Palestinian leaders failed to comprehend, mired as they were in a toxic combination of self-righteous ideology and violence. 
It may just be that the Palestinians are on the verge of a new chapter in their history – and in the history of Israel and the whole region as well. 

Palestinian Hopes for Barack Obama 
RAMALLAH – President-elect Barack Obama’s defiantly positive campaign for change has inspired hope not only in the millions of Americans who voted for him, but also in the billions of others worldwide who could not. 
Across the Middle East, as elsewhere, expectations are building that his presidency will herald a new era for America’s role in the world. 
Palestinians identify strongly with the civil rights movement in the United States. 
Many recall the dark days when American society enforced racial segregation. 
That the same society elected an African-American president only a few decades later renews Palestinian hopes that, in our ongoing struggle for justice and freedom, we, too, shall overcome. 
Obama’s electoral triumph arrives at a symbolic moment in Palestinian history. 
This month marks the twentieth anniversary of the Palestinian Declaration of Independence. 
Drafted by the poetic hand of my late friend, Mahmoud Darwish, the text is nothing short of visionary. 
Whereas previously the Palestine Liberation Organization (PLO) had campaigned for a single, secular, and democratic state across the entirety of mandatory Palestine, our Declaration of Independence endorsed a two-state solution. 
The depth of this compromise can be fully appreciated only in its historical context. 
In the war and violence that surrounded Israel’s establishment in 1948, our losses were immense. 
Over 726,000 Palestinian Christians and Muslims – the majority of the Arab population of mandatory Palestine – fled or were forced to leave their homes by Zionist militias. 
Over 400 Palestinian villages in what became Israel were destroyed or depopulated. 
Endorsing a two-state solution meant recognizing Israeli sovereignty over 78% of our homeland and exercising our right to self-determination on only the remaining 22% that Israel has occupied militarily since 1967: the West Bank, including East Jerusalem, and the Gaza Strip. 
Yet we made this historic compromise because we believed that doing so would bring us to the threshold of liberty. 
Of course, that is not how things have turned out: Palestinians have been living under Israeli occupation for 41 years. 
As Obama prepares to enter the White House, we are confident that he will consider the constructive role America can play in the search for peace and security. 
In the year since Palestinians and Israelis renewed their commitment to their obligations under the “road map,” we may have failed to reach a conclusive settlement to our conflict, but that does not mean that the efforts made were in vain. 
With the determination of both sides, I am confident that we can reach a final agreement in relatively short order. 
The US can take four practical steps to help negotiations move forward immediately. 
The first step is early engagement. 
The Bush administration’s efforts to assist our peace-making project faltered in part because our conflict was neglected during the early part of its tenure. 
Allowing this conflict to fester will only aggravate our peoples’ insecurity and our region’s instability. 
Second, the US should establish a credible enforcement mechanism to ensure that the parties comply with their respective obligations, particularly an immediate freeze on Israeli settlement activity throughout the occupied Palestinian territory. 
Not only has Israel failed to halt its settlement activity since Annapolis – in violation of international law and its renewed road map commitments – but it has actually accelerated such activity. 
Construction of settlement housing units is over 45% higher now than in the nine months prior to Annapolis. 
Israeli demolitions of Palestinian homes have also increased, particularly in occupied East Jerusalem. 
Nothing undermines Palestinian faith in the peace process like watching the homes of our families flattened, while the architecture of our oppression is strengthened. 
Third, the new administration should encourage the re-engagement of its Quartet partners – the United Nations, the European Union, and Russia – in the mediation process. 
International cooperation is key to securing the legitimacy of negotiations, and it will be critical when the time comes for the enforcement and implementation of any agreement. 
The US cannot be expected to shoulder the post-conflict burdens of peacekeeping alone. 
Fourth, the US should renew its respect for international law by recognizing three principles: that the 1967 pre-occupation boundaries must be respected in any negotiations; that Palestinian sovereignty over East Jerusalem must be safeguarded, with guaranteed access for Muslims, Christians, and Jews to their holy sites; and that the plight of Palestinian refugees, whose 60-year ordeal remains emblematic of the Palestinian predicament, must be acknowledged and fairly addressed. 
Fortunately, a framework already exists that supports these concerns. 
The 2002 Arab Peace Initiative offers Israel a unique opportunity: full normalization of relations with 57 Arab and Muslim states in return for a comprehensive peace agreement, including an end to Israel’s occupation of Arab lands and a just and agreed upon solution for refugees. 
Our Declaration of Independence is now twenty years old. 
The Arab Peace Initiative has been collecting dust for over six years. 
Palestinian patience is not infinite. 
Some have already resigned themselves to believing a viable Palestinian state will never emerge. 
Others, like me, argue that we must not lose faith. 
But if we are to realize our dream of freedom and statehood -and prove the cynics wrong- we will need President Obama’s help. 

Is Trump Palestine’s New Hope? 
RAMALLAH – On his recent visit to Washington, DC, Palestinian leader Mahmoud Abbas surprised many by heaping praise on US President Donald Trump. 
Speaking through a translator, Abbas called Trump, who had promised to “get done” a peace agreement between Israel and Palestine, “courageous” and wise, and lauded Trump’s “great negotiating ability.” 
“Now, Mr. President,” Abbas concluded in English, “with you we have hope.” 
The question, of course, is whether that hope is warranted. 
After all, in his own public statement, Trump made no reference to the two-state solution, and his vague declarations about peace (mentioned 11 times) included not so much as a hint about the need for Israel (also mentioned 11 times) to end its illegal settlement construction. 
And, in fact, Trump fell back in his statements on that asymmetrical phrasing he has so often used in the past: Israel and the Palestinians. 
The reality is that Trump has long been giving Palestinians reason to worry. 
During his election campaign, Trump spoke about moving the United States embassy to Jerusalem and condemned the outgoing Obama administration’s decision to abstain from voting on a United Nations Security Council resolution denouncing Israeli settlements (rather than vetoing it). 
Once elected, Trump appointed as US ambassador to Israel his bankruptcy lawyer, David Friedman, who has a long history of supporting right-wing Israeli causes (even donating to a West Bank settlement). 
Yet Abbas was silent about these issues. 
The mere fact that Trump had invited him to the White House so early in the administration seemed to provide reason for optimism. 
And Trump had already directed some attention to resolving the Israeli-Palestinian conflict, tasking his son-in-law and trusted (though wholly inexperienced) adviser Jared Kushner with brokering a peace agreement. 
Of course, promises to broker peace are nothing new for a US president. 
But Trump is no ordinary US president. 
Many Palestinians are encouraged by the fact that he does not seem bound by the usual lobby-influenced ideologies and commitments of US political parties. 
In their view, a US president who puts “America first” surely will see the absurdity of spending so much political and financial capital on Israel, which provides little strategic benefit to the US, at the cost of greater instability in the Middle East. 
Trump’s image as a deal maker reinforces this hopeful narrative. 
While his promises to strike “the ultimate deal” are not backed by much detail, they remain appealing to Palestinians, who have grown frustrated with a peace process that has had little impact beyond allowing Israel to expand and consolidate its occupation of Palestinian land. 
This is not to say that Palestinians blindly trust the Trump administration to determine their fate. 
On the contrary, Abbas has worked diligently to strengthen his own position, meeting with Egyptian President Abdel Fattah el-Sisi and Jordanian King Abdullah II five times between Trump’s inauguration and the visit to the White House. 
When Sisi and Abdullah visited Trump, each reiterated the position included in the 2002 Arab Peace Initiative: Israel should withdraw fully from the occupied territories, in exchange for normalization of relations with Arab League countries. 
At the March 29 Arab League summit in Jordan, they and other Arab leaders underscored the need for an independent Palestinian state on the 1967 borders, with East Jerusalem as its capital. 
With such efforts, Abbas hoped to underscore the real goals that must be pursued, countering Israeli attempts at diversion. 
For example, Israeli Prime Minister Binyamin Netanyahu has been calling on the Palestinian Authority to halt social benefits to the families of prisoners who killed Israelis, attempting to portray those allocations as some kind of payoff. 
Abbas’s praise of Trump at the White House may be another tactic for keeping Trump on track. 
It is too early to tell if Abbas’s approach to the Trump administration will succeed. 
Some might argue that Trump’s decision to make Saudi Arabia, rather than Israel, the destination of his first trip abroad as US president reflects a new view of the region (though he will head to Israel immediately after). 
When interviewed by Reuters on his first 100 days in office, Trump said that the US presidency had turned out to be a much harder job than he had anticipated. 
But the negotiations between Israelis and Palestinians need not be. 
After all, we know what a deal must entail: an independent Palestinian state, secured through land swaps, and a creative solution to the Palestinian refugee issue. 
The main obstacle to an agreement has been insufficient political will on the part of the US to push for the needed compromise. 
Palestinian leaders hope that Trump, a businessman obsessed with his legacy, will finally display the needed resolve, using the full clout of the US presidency to secure the “ultimate deal.” 

Palestinian Refugees and German Expellees 
The atmosphere could not have been more tranquil: a former royal castle in the rolling hills of the Taunus region near Frankfurt, where statesmen and politicians held an annual meeting dealing with the Middle East. 
Europeans and Americans, Israelis and Iranians, Egyptians and Turks, Palestinians and Tunisians rubbed shoulders. 
The novelty this year was the presence of representatives from post-Saddam Iraq, among them an official from the Kurdish Regional Government, as well as a high ranking Shi'a representative. 
The new situation in Iraq, along with the Middle East road map, were at the center of attention. 
On the opening night, a senior German government minister, himself deeply involved in Middle Eastern affairs, addressed both subjects, displaying great sensitivity both to Israeli and Palestinian concerns. 
The evening proceeded along the expected anodyne trajectory until a Lebanese academic raised the issue of the right of Palestinian refugees to return to Israel. 
The senior German minister listened attentively, and then said: ``This is an issue with which we in Germany are familiar; may I ask my German colleagues in the audience to raise their hand if they, or their families, have been refugees from Eastern Europe?'' 
There was a moment of silence. 
The issue is embarrassing in Germany, fraught with political and moral landmines. 
Slowly, hands were raised: by my count, more than half of the Germans present (government officials, journalists, businessmen) raised a hand: they, or their families, had been Vertriebene --expelled from their ancestral homes in Poland, Czechoslovakia, Hungary, and Yugoslavia after World War II. 
It is estimated that up to 10 million were expelled, and with their descendants they make up today almost double that number--almost one in four Germans. 
In the hushed room, the senior German minister continued: he himself was born in Eastern Europe, and his family was expelled in the post-1945 anti-German atmosphere. ``But,'' he added, ``neither I nor any of my colleagues claim the right to go back. 
It is precisely because of this that I can now visit my ancestral hometown and talk to the people who now live in the house in which I was born--because they do not feel threatened, because they know I don't want to displace them or take their house.'' 
The minister went on to explain that peace in Europe is today embedded in this realization: if East European countries had thought that millions of ethnic Germans would like to return, ``the Iron Curtain would have never come down.'' 
It was a highly emotional response to the Lebanese academic's question--one that Arab representatives chose later on to ignore. 
But it was just one more expression of the context in which the issue of the 1948 Palestinian refugees has to be addressed. 
As the German senior minister reminded the audience, there are numerous parallels in recent history to the Palestinian refugee problem. 
Anyone who now claims that the 1948 Palestinian refugees have a claim, in principle, to return to Israel, must confront the question: should the millions of Germans expelled from Eastern Europe after 1945 also have the same right of return to their lost homes? 
The German minister supplied the answer. 
Similarly, if Helmut Kohl's government had insisted in 1990 that all Germans expelled from Poland and Czechoslovakia have a right to return to those countries, German reunification would not have gained the broad international agreement that it did. 
It would be clear that what West Germany had in mind was not reunification, but reversing the consequences of Nazi Germany's defeat in 1945. 
The Palestinians' demand for the right of return has an analogous meaning. 
Insistence on it in 2000 at Camp David and Taba made clear to most Israelis that what the Palestinians have in mind is not undoing the consequences of the Six Day War in 1967. Rather, the demand for a right of return amounts to an effort to reverse the consequences of their defeat in 1948, when the Arab world went to war to prevent the state of Israel from being born. 
It is worth keeping in mind what advocates of a Palestinian right of return now prefer to forget: Palestinian Arabs and four Arab members of the UN went to war in 1948 not only against Israel, but against international legitimacy and the UN plan for a two-state solution. 
There is no other example of UN member countries going to war to prevent implementation of UN decisions. 
This is what the Arab countries and the Palestinians did. 
Clearly there is a serious humanitarian issue involved. 
The fact that the refugees' plight was compounded by their use as political pawns for half a century is a measure of the cynicism and immorality of Arab political leadership. 
Nonetheless, the humanitarian issue remains. 
The senior German minister referred to it explicitly, both with regard to the Palestinians and the post-1945 German refugees. But the political consequences for him were clear: the revanchist call for a return of refugees--in both the German and the Palestinian case--is a formula for instability, if not war. 


The Last Gentlemen’s Club 
LONDON – Is one of the last bastions of gender inequality in the rich democracies finally starting to crumble? 
In the past few weeks, Janet Yellen was nominated as the first female chair of the US Federal Reserve Board, and Karnit Flug became the first woman to be appointed Governor of Israel’s central bank. 
If money is power, then women must no longer be excluded from controlling the supply of it. 
Although women do head central banks in 17 emerging markets – including Malaysia, Russia, Argentina, South Africa, Lesotho, and Botswana – they are the exceptions that prove a general rule: women are excluded from the world of monetary policymaking. 
Yellen’s appointment is particularly important, because she breaks the glass ceiling in the advanced economies. 
Until her promotion, no member of the G-7 had a woman heading its central bank. 
Moreover, men occupy all 23 seats on the European Central Bank’s (ECB) Governing Council. 
Since the Bank of England’s Monetary Policy Committee was established in 1997, only three women have been appointed as external members – and no woman has even been nominated since 2002. 
The Bank of Japan has only one woman on its Policy Board. 
Women, nowadays, are more likely to occupy top political jobs. 
Angela Merkel was recently reelected for a third term as German Chancellor; Britain’s voters elected Margaret Thatcher three times as Prime Minister; and France has had a female prime minister. 
But no woman has come close to leading these countries’ central banks. 
Equality seems to have eluded central banks even in gender-conscious Scandinavia. 
For example, Norway, which has been promoting positive gender discrimination for years and recently elected Erna Solberg as its first female prime minister, has yet to allow a woman to control the purse strings – at either the central bank or the finance ministry, with its powerful sovereign wealth fund. 
Recent attempts to compel change have been counter-productive. 
In an effort to promote diversity and gender equality in the ECB, the European Parliament in 2012 blocked the appointment of Luxembourg’s Yves Mersch to the bank’s executive board. 
But MEPs then failed to propose a plausible female alternative, leaving the ECB understaffed for weeks during the eurozone sovereign-debt crisis. 
Unsurprisingly, the European Parliament’s handling of Mersch’s appointment was widely ridiculed, and his nomination was eventually confirmed. 
But many people drew the wrong conclusion from the episode, which they viewed as affirming the idea that competence and experience must always trump ill-conceived ideas about positive discrimination. 
If there are no suitable female candidates, it was argued, then the best candidate should prevail, regardless of gender. 
But this view misses the point. 
Why were there no suitable female candidates in the first place? 
Women hold around 30% of economics doctorates in developed countries, including Europe, and not one of them could be brought forward for the ECB post? 
The more reasonable conclusion to be drawn from Mersch’s appointment is that no serious effort was made to identify qualified women early on. 
On the contrary, female candidates tend simply to be overlooked. 
This was the case for both Yellen and Flug – until the preferred, male applicants dropped out. 
Flug was finally offered the top job only in the absence of a male rival, though she was already occupying the position temporarily while the board searched for Stanley Fischer’s successor. 
Neither Yellen nor Flug was held back by a lack of academic credentials – both are accomplished scholars – or by the catch-all charge of having “limited experience.” 
Flug has been the Bank of Israel’s deputy governor since 2011; 
Yellen has been involved in the Fed system for almost two decades, first in San Francisco and subsequently as Vice Chair of the Fed’s Board of Governors. 
If a lack of skills or experience is not preventing women from reaching the summit of monetary policymaking, what is? 
The most plausible explanation is that, as organizations with non-elected leaders and limited transparency, central banks tend to function as clubs whose largely male membership hire and promote familiar types; governments usually reinforce this by simply rubber-stamping the banks’ preferred candidate for the top job. 
If gender is a proxy for diversity, then central banks fail a basic test of it. 
Promoting diversity – not only in terms of gender, but also with respect to age and, in many countries, ethnic background – is a matter of effectiveness as much as a question of social justice. 
A broader, more transparent recruitment process would reduce groupthink, challenge the status quo, and, one hopes, leave central banks better equipped to handle a financial crisis. 
The promotion of Yellen and Flug is a good start; now the doors of these fusty male-dominated clubs must be flung wide open. 

The Business of Korean Reconciliation 
SEOUL – Can trade and commerce foster peace and mutual understanding between hostile governments? 
When it comes to the Koreas, this question may seem to be beside the point, given the ruthless purge now underway in the North. 
But it remains an essential consideration for the longer-term future of North Korea and other outcast regimes. 
The Kaesong Industrial Complex, a joint venture of the North and South Korean governments, is both a tribute to the concept of diplomatic reconciliation through business and a difficult test of its feasibility. 
Roughly 50,000 North Korean workers are employed in 123 factories that produce about $450 million worth of goods (mainly textiles, shoes, and household goods). 
Kaesong is an expensive investment for South Korea, which provides capital and infrastructure, including a power station, a water purification plant, and a hospital. 
But, more than a decade after its inauguration, the complex runs at 40% capacity and has attracted only medium-size companies. 
Despite generous tax incentives, South Korea’s huge conglomerates, the chaebol, have spurned the experiment, at least partly because of enduring transportation and communications problems. 
The complex can be accessed only through the demilitarized zone separating the two Koreas, which requires entry and exit passes. 
The lack of mobile-phone networks and broadband Internet means that South Korean managers must communicate with their headquarters by landline phones and fax. 
Of course, commercial gain is not the only motivation behind the Kaesong complex. 
The South Korean authorities are rightly proud of the initiative, which they view as an investment in future reunification with the North. 
Seen from this perspective, North Korea’s recent announcement that it will open another 14 special economic zones is a positive development – one that is underpinned by significant financial incentives. 
Aside from enabling the North to acquire technology and learn market-oriented business practices, the Kaesong complex generates about $80 million annually in workers’ compensation (the monthly wage of $160 is far higher than in North Korea). 
But political and historical tensions continue to shape daily life in Kaesong, where companies operate under the constant threat that North Korea, for whatever reason, will react rashly, even abandoning the joint project altogether. 
Already last year, rising inter-Korean tensions led to a temporary shutdown of the complex. 
As a result, firms must dedicate considerable time and effort to dealing with North Korea’s often volatile and opaque politics, exemplified in the recent execution of North Korean leader Kim Jong-un’s powerful uncle, Jang Song-thaek. 
This challenging climate undermines the project’s viability, even though the business model – based on lower-cost workers from the North producing labor-intensive goods – makes sense. 
Kaesong is a bit of George Orwell’s 1984, with added elements of nineteenth-century paternalism. 
The atmosphere is stilted and muffled, with workers moving around in silence and guards everywhere. 
During a recent visit – the first by a foreign delegation since 2006 – the cold and snowy weather intensified this feeling, creating the sense of being suspended in time and space. 
The visit began with military jeeps escorting our convoy into North Korean territory. 
The vehicles’ number plates were covered with white cardboard, and red flags had been affixed to the doors next to the side-view mirrors – for which none of our South Korean hosts was able to offer an explanation. 
Even the preparation for our visit, which was confirmed less than 24 hours before it began, was somewhat Orwellian. 
Detailed packing instructions were issued, informing us that we could not bring radios, mobile phones, wireless devices, printed materials, photos, cassette tapes, or DVDs. 
Despite being limited to cameras with lenses under 160mm, we were not permitted to take photos of the demilitarized zone between the industrial complex and the border, or of North Korean soldiers or workers. 
Our cameras were checked when we left the country to verify compliance. 
The border between the two Koreas is virtually impenetrable, with gates that open for a half-hour at a time a few times per day. 
As a result, all personal contact occurs through official channels. 
Even as diplomatic visitors, we were prohibited from speaking with or giving anything to the workers, whom we watched with a mixture of curiosity and sympathy. 
The North Koreans seemed to share our desire to connect, as they sought to engage with us to whatever extent they could. 
The diminutive border guard looked into my eyes, smiled warmly, and asked where I was from. 
Likewise, lined-up workers at one of the factories responded to my gesticulations with waves and smiles as we passed them. 
Given the prevailing paranoia, fueled by propaganda and genuine ignorance, on both sides of the border, it is possible that our hosts were being excessively cautious. 
Nonetheless, our pre-trip “indoctrination” stifled our reactions, regrettably preventing us from trying harder to reach out to the workers we encountered – an experience that seemed to exemplify the difficulty of bringing North Korea into the international community. 
Despite their flaws, initiatives like the Kaesong complex help to build an environment of collaboration and trust. 
As Asia’s recent history shows, authoritarian regimes tend to open up in response to a combination of grassroots movements and gradual top-down reforms. 
North Koreans may well be prepared to provide the former, but whether the government is prepared to do its part remains highly uncertain, to say the least. 
The expansion of special economic zones – supported by increased private investment, especially from firms that are not South Korean or Chinese – would significantly improve the odds that North Korea’s regime eases its repressive rule and embraces a program of economic reform, as China did more than three decades ago. 
The task of defusing the threat to regional peace and stability that North Korea poses should be one that is shared across Asia. 

Parents or Gods? 
The birth of Louise Brown in 1978, and with her that of human in vitro fertilization (IVF), was a landmark in medical science. 
Surgically harvesting eggs from a woman's ovaries, fertilizing them outside her body, and transferring the resulting embryos into her uterus enabled effective treatment of female infertility caused by irreparably damaged fallopian tubes. 
Since then, rapid innovation has led to new applications for IVF and other assisted reproductive technologies. 
Many infertile couples now turn to such advanced technologies when other "low tech" options fail, and they are the treatment of choice not only for tubal damage, but also for significant forms of male infertility. 
For example, intracytoplasmic sperm injection is a technique in which a single viable sperm is injected into an egg, allowing fertilization to occur even in cases where few healthy sperm are available. 
Freezing unimplanted embryos is now standard procedure; freezing unfertilized eggs is under development. 
Perhaps inevitably, our access to human eggs and embryos now enables us to extend prenatal genetic diagnosis to the pre-implantation embryo. 
Conventional prenatal diagnosis entails removing fetal cells, either from the amniotic fluid (amniocentesis) or from the placenta (chorionic villus sampling, CVS). 
Both procedures are routinely offered to pregnant women 35 years and over to diagnose chromosomal abnormalities such as Down's syndrome, or to screen for cystic fibrosis, sickle cell disease, or Tay Sachs disease. 
However, amniocentesis and CVS both entail a 0.5-1% risk of pregnancy loss, and if an abnormality is diagnosed the only clinical option is to terminate the pregnancy. 
Preimplantation genetic diagnosis (PGD) is fundamentally different from its prenatal counterpart. 
Because the diagnosis is made prior to placement of the embryo in the woman's uterus, the exclusion of specific abnormalities is possible without terminating an established, ongoing pregnancy. 
Clearly, couples carrying a transmissible genetic defect and otherwise requiring IVF should be offered the option of PGD, and if necessary, referral to a center that can perform this specialized procedure. 
But genetically affected couples who do not suffer from infertility may also be candidates for IVF with PGD. 
They could well prefer this option to natural conception and the prospect of therapeutic abortion following a conventional prenatal genetic diagnosis. 
But now consider a more morally complicated scenario: a couple has a naturally conceived child affected with a life-threatening genetic disease for which the only possible cure is a bone marrow transplant from a matched donor. 
Understandably, they may want PGD to prevent similar defects in their future children. 
But they also want those embryos to be tissue typed in search of a sibling who could serve as a bone marrow donor to their first child. 
In this case, an embryo is being selected not only to avoid congenital disease and thus directly benefit the resulting child, but also to produce a child whose very existence could provide a cure for an older sibling, and with virtually no risk to the donor child. 
Ethicists have grappled with such scenarios, and many would find this clinical option to be ethically sound. 
But what if the older sibling requires a donated kidney? 
The more the donor child is placed in physical jeopardy the thornier the issue becomes. 
Gender selection is another hotly debated potential application of PGD. 
Gender selection may be clinically justified in order to prevent transmission of a sex-linked disease, such as hemophilia. 
Under such circumstances, it should be no more controversial than using PGD to screen for sickle cell disease. 
But is PGD ethically sound if an infertile couple merely prefers a boy or a girl? 
If so, then would it not be acceptable for "family balancing," when a fertile couple with three boys strongly desires a girl, or if a couple wants to choose the sex of their first-born child? 
Obviously, analogous questions can be extended to the selection of many other traits that are not essential to the health of the resulting offspring. 
To all of these questions, there are no simple answers. 
The essential goal of medicine is diagnosis and alleviation of disease, and infertility is a disease. 
The extension of prenatal diagnosis to an embryo in a laboratory dish will, in turn, reduce the incidence of certain types of genetically transmitted diseases. 
But new medical technologies also offer applications that fall outside of these conventional precepts. 
As always, the rapid advancement of science and technology should be accompanied and tempered by careful and thoughtful consideration of the appropriate uses of newly realized capabilities. 


Toward a Viable Climate Target 
BERLIN – Last December in Paris, 195 governments reached a consensus on how to curb climate change over the coming decades. 
But, as usual when it comes to the United Nations, the deal that was struck was big on stated ambition, but far more modest when it comes to commitments to concrete action. 
The Paris climate agreement includes a pledge to keep warming “well below two degrees Celsius above pre-industrial levels.” 
Furthermore, at the request of the world’s most vulnerable countries, language was added promising “to pursue efforts to limit the temperature increase to 1.5º.” 
The trouble is that these aspirations are not matched by the commitments called for by the treaty. 
Instead, the agreement’s system of voluntary mitigation pledges will allow global emissions to rise until 2030, likely leading to a warming of 3-3.5º by 2100. 
This looks like a prime example of inconsistency in policymaking. 
The problem lies, first and foremost, with the goals spelled out in the agreement. 
Targets like limiting warming to 1.5º or 2º cannot effectively guide policymakers and the public. 
They address the whole Earth system, not individual actors or governments. 
By failing to state explicitly what individual countries are required to deliver, it allows leaders to support targets that seem ambitious, while pursuing mitigation efforts that are in reality insignificant. 
No scientific formula can describe how to share the burden of global mitigation equitably among countries, leaving every government able to declare confidently that its policies are in line with any given temperature target. 
An evaluation of whether the goals are being attained can be carried out only on a global level, and thus no country can be held responsible if the target is missed. 
As a result, every UN climate summit concludes with expressions of grave concern that the overall efforts are inadequate. 
This has to change. 
The conventional approach is to call for more consistency between talk, decisions, and actions. 
But inconsistency is inherent to policymaking. 
Diplomats and politicians treat talk, decisions, and actions independently, in order to satisfy the demands of a diverse set of stakeholders and to maximize external support for their organizations. 
In climate policy, most governments choose a progressive stance while talking and deciding, but a more cautious one when it comes time to act. 
Ambitious UN climate targets have not served as a prerequisite, but as a substitute for action. 
This is no reason to give up on climate targets altogether. 
Complex long-term policymaking works only if ambitious goals are in place. 
But targets cannot be vague aspirational goals; they must be precise, evaluable, attainable, and motivating. 
The Paris agreement itself offers one possible approach. 
Hidden behind a vaguely defined formula, a third mitigation target has been introduced: reaching zero emissions in the second half of the century. 
A target of zero emissions tells policymakers and the public precisely what must be done, and it directly addresses human activity. 
Every country’s emissions must peak, decline, and eventually reach zero. 
This provides a transparent system to evaluate the actions not only of national governments, but also of cities, economic sectors, companies, and even individuals. 
Defection would be discouraged because it is easy to see – and more important, to explain to the public – whether emissions are going up or down. 
Such a target would put all new fossil-fuel-based infrastructure under intense scrutiny; if we need to drive emissions down, why build another coal plant or badly insulated building? 
A shared vision of zero emissions could even spark a race to cross the finish line first. 
Sweden wants to be there by 2045. 
The United Kingdom has announced that it plans to come up with a zero-emissions target soon. 
Germany might follow, after its next elections. 
Scientists prefer exact thresholds for climate stabilization, and policymakers like powerful symbols. 
That is why temperature targets dominate the global climate discourse. 
But history proves that this does not automatically lead to action. 
Replacing temperature thresholds with an effort to reduce emissions to zero would ensure accountability and minimize political inconsistency. 
There is precedent for such an approach. 
The Montreal Protocol for protecting the ozone layer primarily addresses harmful substances, trying to accelerate their phase-out, rather than defining a stabilization target for the ozone layer. 
The gap between real-world emissions and what will be needed to keep warming below the agreed-upon limits is rapidly widening. 
The UN has tasked the Intergovernmental Panel on Climate Change to conduct a detailed investigation of how to meet the – already unrealistic – ceiling of 1.5°C. This implies a risk that the world will waste valuable time on yet another debate about lofty goals. 
Whatever our temperature target, global emissions have to peak soon and decrease afterwards – all the way to zero. 
The Paris climate agreement will be remembered as a success only if we manage to shift our focus from talk to effective action. 

We Are At War 
PARIS – Ever since the terrorist attacks in January on the satirical magazine Charlie Hebdo and a kosher supermarket, Parisians knew that barbarism lurked around the corner, and that it would strike again. 
But it is one thing to know something, to anticipate it, and another to be confronted with the grim reality. 
On Friday night, reality struck us with a vengeance. 
We are at war. 
It would be wrong – even dangerous – not to admit it. 
And to win will require clarity, unity, and firmness. 
Clarity of analysis is what we now need the most. 
We barely know our enemy, except for the intensity of his hatred and the depth of his cruelty. 
To understand his strategy, we must recognize him for what he is: an intelligent – and, in his own way, rational – adversary. 
For too long, we have despised and underestimated him. 
It is urgent that we now change course. 
In the last few weeks, the Islamic State’s strategy of terror has brought death to the streets of Ankara, Beirut, and Paris, and to the skies over Sinai. 
The identity of the victims leaves no doubt about the message. 
“Kurds, Russians, Lebanese Shia, French: You attack us, so we will kill you.” 
The timing of the attacks is as revealing as the targets’ nationality. 
The more the Islamic State is defeated on the ground and loses control of territory in Syria and Iraq, the more it is tempted to externalize the war to deter further intervention. 
The synchronized attacks in Paris, for example, coincided with the Islamic State’s loss of the Iraqi city of Sinjar. 
Of course, the terrorist cell that struck Paris was not created in the wake of the Islamic State’s recent battlefield losses. 
It was already in place, waiting to be activated (as others may be). 
That demonstrates the Islamic State’s tactical flexibility, not to mention the availability of people willing to commit suicide. 
If the Islamic State chose this time, in Paris, to target people who are not satirists, policemen, or Jews, it is precisely because their “ordinariness” left them unprotected. 
This time, the attackers chose “quantity” over “quality” (if one may be pardoned for such a crude formulation). 
The goal was to kill as many people as possible. 
This strategy is possible because the territory controlled by the Islamic State provides a sanctuary and training ground. 
The self-proclaimed caliphate’s territories represent for the group what Taliban-controlled Afghanistan meant for Al Qaeda in the 1990s. 
It is imperative to regain control of this territory. 
And destroying the Islamic State’s “provinces” in Libya, Sinai, and elsewhere must become the number one priority of the international community. 
Beyond analytical clarity, there is a need for unity, beginning in France, where citizens would reject their political class were its members to continue to behave divisively at such an obvious historical turning point. 
Unity must also be achieved within Europe. 
We are repeatedly told that Europe is in the midst of an identity crisis, in need of some new project. 
Well, now Europe has found one. 
To be European means to confront together the scourge of barbarism, to defend our values, our way of life, and our way of living together, despite our differences. 
Unity is also required of the Western world as a whole. 
President Barack Obama’s statement after the Paris attacks demonstrates that what unites Europe and the United States is much more significant than what divides us. 
We are in the same boat, faced with the same enemy. 
And this sense of unity must go beyond the European and Western world, because the Islamic State threatens countries such as Iran and Russia, not to mention Turkey, as much – if not more – than it does the West. 
Of course, we must be realists. 
Our alliance of circumstance with these countries will not overcome all problems between them and us. 
So, beyond clarity and unity, we need firmness, both in confronting the threat of ISIS and in defending our values, especially adherence to the rule of law. 
The Islamic State expects from us a combination of cowardice and overreaction. 
Its ultimate ambition is to provoke a clash of civilizations between the West and the Muslim world. 
We must not fall prey to that strategy. 
But clarity comes first. 
When Paris is attacked as it was last Friday, one must speak of war. 
No one wants to repeat the errors of the US under President George W. Bush; but to use those errors as an alibi to avoid confronting the world as it is would merely be an error of a different sort. 
Europe’s response must be tough, but it must not deviate from the rule of law. 
We are, after all, engaged in a political battle with the Islamic State, one in which our love of life must prevail over their love of death. 

Radical Realism About Climate Change 
BERLIN – Mainstream politics, by definition, is ill equipped to imagine fundamental change. 
But last December in Paris, 196 governments agreed on the need to limit global warming to 1.5°C above pre-industrial levels – an objective that holds the promise of delivering precisely such a transformation. 
Achieving it will require overcoming serious political challenges, reflected in the fact that some are advocating solutions that will end up doing more harm than good. 
One strategy that has gained a lot of momentum focuses on the need to develop large-scale technological interventions to control the global thermostat. 
Proponents of geo-engineering technologies argue that conventional adaptation and mitigation measures are simply not reducing emissions fast enough to prevent dangerous warming. 
Technologies such as “carbon capture and storage” (CCS), they argue, are necessary to limit damage and human suffering. 
The Intergovernmental Panel on Climate Change seems to agree. 
In its fifth assessment report, it builds its scenarios for meeting the Paris climate goals around the concept of “negative emissions” – that is, the ability to suck excess carbon dioxide out of the atmosphere. 
But this approach ignores serious problems with the development and deployment of geo-engineering technologies. 
Consider CCS, which is the process of capturing waste CO2 from large sources like fossil-fuel power plants and depositing it in, say, an underground geological formation, thereby preventing it from entering the atmosphere. 
It sounds good. 
But what makes it economical is that it enables enhanced oil recovery. 
In other words, the only way to make CCS cost-effective is to use it to exacerbate the problem it is supposed to address. 
The supposed savior technology – bioenergy with carbon capture and storage (BECCS) – is not much better. 
BECCS begins by producing large amounts of biomass from, say, fast-growing trees which naturally capture CO2; those plants are then converted into fuel via burning or refining, with the resulting carbon emissions being captured and sequestered. 
But bioenergy is not carbon neutral, and the surge in European demand for biomass has led to rising food commodity prices and land grabs in developing countries. 
These realities helped persuade the scientists Kevin Anderson and Glen Peters recently to call carbon removal an “unjust and high-stakes gamble.” 
What about other geo-engineering proposals? 
Solar Radiation Management (SRM) aims to control the amount of sunlight that reaches the Earth, essentially mimicking the effect of a volcano eruption. 
This may be achieved by pumping sulphates into the stratosphere or through “marine cloud brightening,” which would cause clouds to reflect more sunlight back into space. 
But blasting sulphates into the stratosphere does not reduce CO2 concentrations; it merely delays the impact for as long as the spraying continues. 
Moreover, sulphate injections in the northern hemisphere could cause serious drought in the Africa’s Sahel region, owing to dramatic reductions in precipitation, while some African countries would experience more precipitation. 
The effect on the Asian monsoon system could be even more pronounced. 
In short, SRM could severely damage the livelihoods of millions of people. 
If geo-engineering can’t save us, what can? 
In fact, there are a number of steps that can be taken right now. 
They would be messier and more politically challenging than geo-engineering. 
But they would work. 
The first step would be a moratorium on new coal mines. 
If all currently planned coal-fired power plants are built and operated over their normal service life of 40 years, they alone would emit 240 billion tons of CO2 – more than the remaining carbon budget. 
If that investment were re-allocated to decentralized renewable-energy production, the benefits would be enormous. 
Moreover, with only 10% of the global population responsible for almost 50% of global CO2 emissions, there is a strong case to be made for implementing strategies that target the biggest emitters. 
For example, it makes little sense that airlines – which actually serve just 7% of the global population – are exempt from paying fuel taxes, especially at a time when ticket prices are at an historic low. 
Changes to land use are also needed. 
The 2009 International Assessment of Agricultural Knowledge, Science and Technology for Development charts the way to a transformed agricultural system – with benefits that extend far beyond climate policy. 
We must apply this knowledge around the world. 
In Europe, the waste sector could make a significant contribution to a low-carbon economy. 
Recent research, commissioned by Zero Waste Europe, found that optimal implementation of the European Commission’s “circular economy package” waste targets could save the European Union 190 million tons of CO2 per year. 
That is the equivalent of the annual emissions of the Netherlands! 
Available measures in the transport sector include strengthening public transportation, encouraging the use of railways for freight traffic, building bike paths, and subsidizing delivery bicycles. 
In Germany, intelligent action on transport could reduce the sector’s emissions by up to 95% by 2050. 
Another powerful measure would be to protect and restore natural ecosystems, which could result in the storage of 220-330 gigatons of CO2 worldwide . 
None of these solutions is a silver bullet; but, together, they could change the world for the better. 
Geo-engineering solutions are not the only alternatives. 
They are a response to the inability of mainstream economics and politics to address the climate challenge. 
Instead of trying to devise ways to maintain business as usual – an impossible and destructive goal – we must prove our ability to imagine and achieve radical change. 
If we fail, we should not be surprised if, just a few years from now, the planetary thermostat is under the control of a handful of states or military and scientific interests. 
As world leaders convene for the 22nd United Nations Framework Convention on Climate Change to bring the Paris agreement into force, they should repudiate geo-engineering quick fixes – and demonstrate a commitment to real solutions. 

Why Renewables Are Not Enough 
NEW DELHI – At the United Nations in New York on April 22, world leaders ratified the global climate agreement reached in Paris last December. 
One hundred ninety-five countries, ranging from richest to poorest, have now agreed to limit global warming to well below 2°C above pre-industrial levels, with the goal of not exceeding 1.5°C. They have also committed to “intended nationally determined contributions” (INDCs) to limit or reduce greenhouse-gas emissions by 2030. 
This is a major achievement, but it is far from sufficient. 
In fact, even if all INDC targets were achieved, the world would still be heading toward eventual warming of some 2.7-3.4°C above pre-industrial levels. 
To keep warming well below 2°C, emissions in 2030 must be more than 30% below those envisaged in the INDCs. 
This will be an enormous challenge, given the need for major strides in economic development over the same period. 
Before this century is over, we should seek to enable all the world’s people – probably more than ten billion by then – to achieve the standards of living currently enjoyed only by the wealthiest 10%. 
That will require a huge increase in energy consumption. 
The average African, for example, today uses about one-tenth of the energy used by the average European. 
But by 2050, we must reduce energy-related emissions by 70% from 2010 levels, with further cuts needed to achieve net zero emissions by 2060. 
Meeting those objectives will require both an improvement in energy productivity (the amount of income produced per unit of energy consumed) of at least 3% per year and the rapid decarbonization of energy supply, with the share of zero-carbon energy increasing by at least one percentage point each year. 
This implies a massive acceleration of national efforts. 
Over the last decade, energy productivity has grown by only 0.7% annually, and the share of zero-carbon energy rose by only 0.1 percentage point per year. 
Moreover, even if the INDCs were fully implemented, these annual growth rates would reach only 1.8% and 0.4 percentage points, respectively. 
Impressive progress is already being made in one crucial area: electricity generation. 
Solar power costs have fallen 80% since 2008. 
In some places, new supply contracts have set prices as low as $0.06 per kilowatt hour, making solar power fully competitive with coal and natural gas. 
Between now and 2030, the INDCs indicate that renewable-power capacity will grow four times faster than fossil-fuel capacity, with 70% of this new renewables investment in emerging and developing economies. 
That investment needs to be matched by accelerated progress in battery technology, or by other tools to match electricity demand to intermittent supply. 
But there is no doubt that, by mid-century, the world can build a cost-effective zero-carbon electricity system. 
And yet zero-carbon power, though hugely important, is insufficient, because electricity currently accounts for only 20% of global energy consumption. 
Broader changes to the global energy system are needed. 
Road transport and aviation, which currently rely almost entirely on liquid fossil fuels, account for 30% of total energy consumption. 
Decarbonization of these activities will require either electrification or the use of hydrogen or biofuels. 
This is certainly feasible, but it will take time. 
Heating buildings is another area where major changes are needed. 
Here, the more widespread use of zero-carbon electricity, instead of fossil-fuel-based energy, could have a major impact. 
But there are also important opportunities to design and construct buildings and cities that are substantially more energy-efficient. 
With the world’s urban population expected to increase by 2.5 billion by 2050, it is vital that we grasp them. 
Energy use by heavy industry energy, however, presents challenges that are often ignored. 
Metals, chemicals, cement, and plastics are vital building blocks of the modern economy, and involve processes that cannot be easily electrified. 
Decarbonization may instead require the application of carbon capture and storage technologies, while newly designed building materials could reduce demand for carbon-intensive inputs. 
Given these challenges, fossil fuels will undoubtedly play a role in transport and heavy industry for some time to come, even as their role in electricity generation declines. 
And, even in electricity generation, emerging economies’ INDCs imply significant new investments in coal or gas capacity. 
Taken together, the INDCs suggest that coal could still account for 35% of global electricity generation in 2030. 
But that level of coal generation is likely to be incompatible with the below-2°C target. And, because coal- and gas-fired power stations last 50 years or more, such investments raise the risk of either locking in emission levels incompatible with the climate target, or forcing major asset write-offs. 
The challenge now is to find an economically sensible path that enables emerging economies to fulfill their growing energy needs, while ensuring that the world meets its climate objectives. 
It is technologically possible. 
But it will require action by many very different actors. 
Governments have a vital role to play, but so, too, do incumbent fossil-fuel-based energy companies and new-entrant companies deploying or developing new technologies. 
NGOs can help to identify required policies and hold governments and companies to account. 
Individual consumers are also important, because their behavior shapes energy demand. 
Despite their varied backgrounds, economic interests, and points of view, all of these actors must engage in an informed debate that recognizes all of the complexities of the challenge ahead. 
The shared objective is clear: to build a low-carbon economy that can keep global temperatures well within 2°C of pre-industrial levels, while delivering prosperity for a world of ten billion people or more. 

The Climate-Change Fight Returns to Paris 
PARIS – Nearly two years have passed since France’s then-foreign minister, Laurent Fabius, struck his gavel and declared: “The Paris agreement for the climate is accepted.” 
Next week, President Emmanuel Macron and the French government will host world leaders and non-state actors for the One Planet Summit. 
The purpose of this gathering is to celebrate climate gains made since 2015, and to boost political and economic support for meeting the goals and targets of the Paris agreement. 
The Paris climate agreement, a historic feat of diplomacy that ushered in a new era of international climate collaboration, was facilitated by a number of political and social forces. 
One of the most influential of these was a group of more than 100 countries known as the “high ambition coalition,” which helped finalize the deal in the waning days of the 2015 United Nations Climate Change Conference (COP21). 
This diverse coalition of leaders – from the richest countries to the most vulnerable Pacific island states – broke a political deadlock that had impeded climate progress for years, if not decades. 
As we reflect on that success, one thing is abundantly clear: the need for ambitious coalitions has returned. 
Strong global leadership on climate change scored a diplomatic victory two years ago, and today, new economic and political alliances are needed to turn those commitments into action. 
The diplomatic success of the Paris accord is worthy of praise in its own right; it was a remarkable leap forward in the fight against climate change. 
But we must not rest on our laurels. 
With the United States, the world’s largest historical emitter of greenhouse gases, dismissive of the accord, the rest of the global community must reaffirm its commitment to reducing carbon dioxide emissions. 
Dramatic, meaningful, and immediate steps must be taken. 
The best available science estimates that the world has only three years to begin a permanent reduction in greenhouse-gas emissions if there is to be any hope of achieving the Paris accord’s goal of keeping warming to “well below 2°C” relative to pre-industrial levels. 
And, whatever urgency science cannot convey is being communicated by the planet itself – through a ferocious display of hurricanes, floods, wildfires, and deadly droughts. 
Given the immediacy of the challenge, what can and should be done to avert crisis? 
Solutions start with money, and a main objective of the One Planet Summit is to mobilize public and private financing to fund projects that can reduce climate-changing pollution today. 
During the summit’s “Climate Finance Day,” companies, banks, investors, and countries will announce new initiatives to help fund the costly transition to a carbon-free future. 
Hollow promises will have no place at this gathering; only real commitments of real money for tangible projects will be discussed. 
As a result, we hope to see hundreds of millions of dollars committed by governments to fund solutions across all fronts of the climate-change battle. 
Plenty will go to renewable-energy projects, but money will also be committed to clean transportation, agriculture, infrastructure, and urban systems. 
Funding will also be earmarked for projects that help protect communities that are most vulnerable to the impact of global warming. 
The One Planet Summit will be an occasion for countries, companies, and private institutions to forge concrete strategies to shift away from fossil fuels. 
At the UN climate talks in Bonn, Germany, last month, 20 countries, led by Canada and the United Kingdom, announced plans to phase out coal from electricity generation. 
The gathering in Paris will provide an opportunity for other countries to join the Powering Past Coal Alliance, which aims to formalize a deliberate transition from coal, and to help companies achieve net-zero emissions. 
Ultimately, next week’s summit should be a place where governments, businesses, investors, and other key stakeholders collaborate and share ideas, showcase successful projects, and coordinate goals. 
This event should not stand alone, but rather serve as a springboard for international meetings that will take place over the next few years. 
After all, it is during this short timeframe that the fate of the Paris accord’s temperature targets will be determined. 
Two years after the adoption of a groundbreaking climate agreement, global leaders are set to reconvene in the City of Light. 
When they arrive, their collective ambition will be needed once more. 
This time, however, the goal must be to ensure that past agreements amount to more than just words on a page. 

Beyond the Paris Climate Agreement 
COPENHAGEN – Now that it has been ratified by India and the European Union, the Paris climate agreement is set to enter into force. 
But the hard part is yet to come: turning the agreement’s vague political commitments into concrete action to mitigate global warming. 
The Paris agreement, concluded last December, was a major accomplishment and an unprecedented display of political unity in the effort to tackle one of the most dangerous and complicated threats to our future welfare and prosperity. 
By including the entire international community in its partly binding framework, the deal establishes a new paradigm in global governance. 
But, in practical terms, the agreement is hardly a guarantee of success. 
It provides no tools to ensure implementation of the policies and measures needed to keep global warming “well below” two degrees Celsius above pre-industrial levels, the threshold that forms the centerpiece of the deal. 
The agreement provides merely a framework for reporting and reviewing on the implementation of disparate national agendas, as well as provisions aimed at nudging countries to achieve deeper cuts. 
Rather than establishing an enforcement mechanism to keep countries on track to meeting their targets, the agreement relies on a “facilitative dialogue” on collective progress to sustain momentum. 
But even this provision will not be tested until 2018. 
Given the difficulty of such large-scale intergovernmental cooperation, a more ambitious and binding global agreement could not reasonably be expected, at least not anytime soon. 
But climate change is not going to wait. 
Its effects are already being felt worldwide, with extreme weather conditions becoming increasingly frequent. 
In fact, evidence suggests that the effects of current concentrations of greenhouse-gas emissions are already at the upper end of the modeled scenarios. 
Climate scientists now warn that the two-degree window is closing very rapidly, if it is not already shut. 
If we are to have any chance of meeting our climate targets, we need to take strong action now to reduce emissions drastically – action that goes beyond the Paris agreement. 
We must fundamentally transform the way we do business, with investors and companies abandoning their cautious approach to the low-carbon transition. 
There are signs that such a shift in mindset is underway. 
Efforts and initiatives to catalyze a more rapid move toward greener practices by companies, investors, and capital markets are multiplying, spearheaded partly by business leaders eager to profit from the transformation. 
But the momentum remains far from strong enough, and, in general, capital markets still do not incorporate climate and carbon factors when pricing assets and evaluating risk. 
With the right approach, businesses could not only help to achieve the emissions targets set out in the Paris agreement; they could also contribute to reigniting growth and delivering on the Sustainable Development Goals, approved by the United Nations last year. 
As a recent report released by the Global Commission on the Economy and Climate emphasizes, that approach should center on investment in sustainable infrastructure. 
There is no question that the investments made today in infrastructure, as well as in extraction and utilities – will have important implications for long-term emissions. 
The wrong approach could easily lock the world into a carbon-based economy for another decade or more, pushing us far beyond the two-degree threshold. 
Green infrastructure, however, can form the foundation for a sustainable economy. 
The Global Commission report sets out to identify the main obstacles to financing such infrastructure and to create an agenda to overcome them. 
In doing so, it represents a new approach to bringing about systemic change, different in two fundamental ways. 
First, the proposed agenda adopts a more holistic perspective on the green transformation. 
The report includes specific recommendations on matters such as how to shift to low-carbon systems; but it presents them against the backdrop of broader priorities, such as the SDGs. 
In other words, it seeks not just to put the transition to a green economy at the top of the political agenda; it makes it a key component of the response to a broad range of political, social, and economic challenges. 
Second, the recommendations emphasize the business opportunity presented by the ongoing disruption of the world economy. 
If investors recognize the benefits of getting in on the ground floor of the new economy, they will be more likely to embrace the necessary changes, thereby helping to drive forward a critical climate transition. 
The new approach may make all the difference – and not only to business. 
What is at stake is nothing less than the world’s ability to take back control of our future. 

Pragmatism in Climate Policy 
BERLIN – The diplomatic effort to forge an international agreement to mitigate climate change is undergoing a fundamental shift. 
The top-down approach that has guided the effort since 1992 is slowly being replaced by a bottom-up model. 
Rather than attempting to craft an accord based on legally binding restrictions on greenhouse-gas emissions, the new approach relies on voluntary commitments by individual countries to rein in their contributions to climate change. 
This is, in one sense, an admission of failure; such an approach is unlikely to limit the rise in global temperatures to less than 2° Celsius, the target set by the United Nations in 2010. 
But given the slow pace of progress so far, small pragmatic steps by individual countries may be far more productive than attempts to strike a grand bargain that remains forever out of reach. 
International negotiators have made significant progress over the last five years, but they are still far away from an agreement that would meet the 2°C target. 
As a result, diplomats, fearing that another failed attempt to reach a global accord could discredit the entire negotiating process, have rescaled their ambitions. 
In particular, efforts to set strict limits on emissions are quietly being dropped. 
The focus is no longer on what is environmentally desirable or on the measures needed to keep climate change in check; rather, it is on what is politically feasible – the possibilities and constraints of the negotiating process, especially with a view to securing broad participation. 
Given the slow pace of progress since the first UN climate-change summit in 1995, any agreement that involves all members of the Framework Convention on Climate Change will be hailed as a historic success. 
That is why, as world leaders and environment ministers prepare to attend the climate-change conference in Paris in November and December, persuading all major emitters to commit to ambitious and legally binding emissions reductions is no longer considered realistic. 
The world’s largest polluters – especially China, India, and the United States – have made it clear that they alone will decide what measures they will take. 
Having declared their unilateral targets, they are unlikely to engage in further multilateral negotiations. 
To be sure, few diplomats would state this so bluntly. 
Doing so would acknowledge the failure of the last 20 years of UN climate policy. 
Instead, they tend to frame the bottom-up approach not as a break with the top-down paradigm, but as a pragmatic supplement that accommodates major emitters and creates a framework for the climate initiatives of sub-national actors, such as large cities and companies. 
But the truth is that the top-down approach is already being discarded. 
Its defining characteristic, after all, is not the political arena in which an agreement will be struck (the UN system); it is the overarching policy goal (avoiding dangerous climate change). 
And it is already clear that the negotiations in Paris will fail to deliver on the 2°C target established in 2010 – or on any other strictly binding threshold. 
When the contributions of the more than 160 countries that have submitted their voluntary mitigation commitments – the so-called “intended nationally determined contributions” – are added up, the scale of the failure becomes evident. 
Even if all countries rigorously adhere to their pledges, the world is on track for a temperature increase of at least 3°C. 
Indeed, the stated goal of the Paris agreement will be to try to “keep the 2°C target within reach.” 
Diplomats plan to include “ratcheting-up mechanisms” that allow for a gradual increase in aspiration. 
But if history is any guide, such mechanisms are unlikely to be used in the next ten years; their main function is to put a positive spin on a disappointing outcome and keep hopes of more ambitious policies alive. 
Nonetheless, there is reason for optimism: pragmatism is proving more powerful than idealism. 
After more than a decade of attempts to establish strict limits on emissions, the top-down approach has clearly failed to deliver. 
The quiet adoption of a bottom-up approach is a tacit admission that countries cannot be forced to abide by a strict, centralized regime, even if it is based on scientific evidence. 
The adoption of voluntary measures has already sparked progress, most notably the coordinated commitments by the US and China. 
Because the bottom-up approach respects the established ways sovereign countries act on the international stage, it has the potential to create positive momentum. 
Most governments prioritize political survival and short-term economic success; they will contribute to global climate action only if they know that their main competitors are doing so as well. 
On balance, then, the emergence of a bottom-up approach in the fight against climate change is an important step forward. 
A world that is 3°C warmer may be far from ideal. 
But it is better than a world in which climate change has spiraled out of control. 

From Good Intentions to Deep Decarbonization 
NEW YORK – In the run-up to the United Nations Climate Change Conference (COP21) in Paris, more than 150 governments submitted plans to reduce carbon emissions by 2030. 
Many observers are asking whether these reductions are deep enough. 
But there is an even more important question: Will the chosen path to 2030 provide the basis for ending greenhouse-gas emissions later in the century? 
According to the scientific consensus, climate stabilization requires full decarbonization of our energy systems and zero net greenhouse-gas emissions by around 2070. 
The G-7 has recognized that decarbonization – the only safe haven from disastrous climate change – is the ultimate goal this century. 
And many heads of state from the G-20 and other countries have publicly declared their intention to pursue this path. 
Yet the countries at COP21 are not yet negotiating decarbonization. 
They are negotiating much more modest steps, to 2025 or 2030, called Intended Nationally Determined Contributions (INDCs). 
The United States’ INDC, for example, commits the US to reduce CO2 emissions by 26-28%, relative to a 2005 baseline, by 2025. 
Though the fact that more than 150 INDCs have been submitted represents an important achievement of the international climate negotiations, most pundits are asking whether the sum of these commitments is enough to keep global warming below the agreed limit of 2º Celsius (3.6º Fahrenheit). 
They are debating, for example, whether the INDCs add up to a 25% or 30% reduction by 2030, and whether we need a 25%, 30%, or 40% reduction by then to be on track. 
But the most important issue is whether countries will achieve their 2030 targets in a way that helps them to get to zero emissions by 2070 (full decarbonization). 
If they merely pursue measures aimed at reducing emissions in the short term, they risk locking their economies into high levels of emissions after 2030. 
The critical issue, in short, is not 2030, but what happens afterward. 
There are reasons to worry. 
There are two paths to 2030. 
We might call the first path “deep decarbonization,” meaning steps to 2030 that prepare the way for much deeper steps after that. 
The second path could be called the way of “low-hanging fruit” – easy ways to reduce emissions modestly, quickly, and at relatively low cost. 
The first path might offer little low-hanging fruit; indeed, the low-hanging fruit can become a distraction or worse. 
Here is the reason for worry. 
The simplest way to reduce emissions to 2030 is by converting coal-fired power plants to gas-fired power plants. 
The former emit about 1,000 grams of CO2 per kilowatt-hour; the latter emit around half of that. 
During the coming 15 years, it would not be hard to build new gas-fired plants to replace today’s coal plants. 
Another low-hanging fruit is great gains in the fuel efficiency of internal combustion engines, taking automobile mileage from, say, 35 miles per gallon in the US to 55 miles per gallon by 2025. 
The problem is that gas-fired power plants and more efficient internal-combustion vehicles are not nearly enough to get to zero net emissions by 2070. 
We need to get to around 50 grams per kilowatt-hour by 2050, not 500 grams per kilowatt-hour. 
We need to get to zero-emission vehicles, not more efficient gas-burning vehicles, especially given that the number of vehicles worldwide could easily double by mid-century. 
Deep decarbonization requires not natural gas and fuel-efficient vehicles, but zero-carbon electricity and electric vehicles charged on the zero-carbon electricity grid. 
This more profound transformation, unlike the low-hanging fruit eyed today by many politicians, offers the only path to climate safety (that is, staying below the 2ºC limit). 
By pursuing coal to gas, or more efficient gas-burning vehicles, we risk putting ourselves into a high-carbon trap. 
The figure above illustrates the conundrum. 
The low-hanging-fruit pathway (red) achieves a steep reduction by 2030. 
It probably does so at lower cost than the deep-decarbonization pathway (green), because the conversion to zero-carbon electricity (for example, wind and solar power) and to electric vehicles might be more costly than a simple patch-up of our current technologies. 
The problem is that the low-hanging-fruit pathway will achieve fewer reductions after 2030. 
It will lead into a dead end. 
Only the deep-decarbonization pathway gets the economy to the necessary stage of decarbonization by 2050 and to zero net emissions by 2070. 
The allure of the short-term fix is very powerful, especially to politicians watching the election cycle. 
Yet it is a mirage. 
In order for policymakers to understand what’s really at stake in decarbonization, and therefore what they should do today to avoid dead-end gimmicks and facile solutions, all governments should prepare commitments and plans not only to 2030 but also at least to 2050. 
This is the main message of the Deep Decarbonization Pathways Project (DDPP), which has mobilized research teams in 16 of the largest greenhouse-gas emitters to prepare national Deep Decarbonization Pathways to mid-century. 
The DDPP shows that deep decarbonization is technically feasible and affordable, and it has identified pathways to 2050 that avoid the traps and temptations of low-hanging fruit and put the major economies on track to full decarbonization by around 2070. 
The pathways all rely on three pillars: major advances in energy efficiency, using smart materials and smart (information-based) systems; zero-carbon electricity, drawing upon each country’s best options, such as wind, solar, geothermal, hydro, nuclear, and carbon capture and storage; and fuel-switching from internal combustion engines to electric vehicles and other shifts to electrification or advanced biofuels. 
A key question for Paris, therefore, is not whether governments achieve 25% or 30% reductions by 2030, but how they intend to do it. 
For that, the Paris agreement should stipulate that every government will submit not only an INDC for 2030 but also a non-binding Deep Decarbonization Pathway to 2050. 
The US and China have already signaled their interest in this approach. 
In this way, the world can set a course toward decarbonization – and head off the climate catastrophe that awaits us if we don’t. 

Taming the Chaebols 
SEOUL – The indictment of Lee Jae-yong, the heir apparent at Samsung, is but the latest explosive development in the political scandal that has been rocking South Korea. 
Already, the National Assembly voted to impeach President Park Geun-hye, the daughter of former president Park Chung-hee, on December 9. 
The Constitutional Court now has six months to justify her permanent removal from office. 
Depending on its decision, a presidential election may be held in the next few months. 
But, as Lee’s indictment demonstrates, more than the presidency is at stake in this crisis. 
At the heart of the scandal is the reciprocal relationship between politicians and the chaebols, South Korea’s giant family-owned conglomerates. 
If the government takes this opportunity to transform the economy’s chaebol-dominated structure, it would reshape the country’s economic future as well – for the better. 
Park is accused of using her political influence to benefit her longtime confidante, Choi Soon-sil, who is charged with forcing the chaebols to funnel about 80 billion Korean won ($70 million) into two nonprofit cultural foundations that she effectively controlled. 
She is also suspected of interfering in various state affairs, including ministerial appointments and state visits, despite having no official position. 
Park is being ridiculed as Choi’s puppet. 
To some extent, this is nothing new in South Korea. 
Most administrations have extracted money from the chaebols, often with the help of prosecutors and the tax authorities. 
In exchange for that money, which is used to finance costly state projects or even political campaigns, the chaebols gain favors, such as cheap bank loans or preferential regulations. 
This reciprocal relationship has existed since the start of South Korea’s economic transformation in the 1960s. 
The country’s rapid progress is attributed to strong manufacturing exports, carried out by firms that were able to compete in global markets only with the help of government incentives. 
Park’s father, who led South Korea from 1961 until his assassination in 1979, worked closely with the chaebols, helping them first to build comparative advantages in labor-intensive manufacturing and then to progress to more capital-intensive industries, including automobiles, shipbuilding, and chemicals. 
Today, the chaebols produce almost two-thirds of South Korea’s exports – no small feat, in the world’s sixth-largest exporting country. 
Samsung Electronics is the largest chaebol, and accounts for 20% of total exports. 
Ranking 13th on the Fortune 2016 Global 500, Samsung’s market capitalization comprises one-fifth of the South Korean stock market. 
Beyond government support, the chaebols’ ownership and governance structure has contributed to their success. 
With the founding families in charge, chaebols’ top management can focus on a long-term vision, instead of short-term profits, and can mobilize resources swiftly. 
The efficiency of this model is apparent in the chaebols’ success as “fast followers” of top US and Japanese firms. 
Yet the chaebols’ hierarchical management structure is often too rigid to correct bad decisions. 
Many conglomerates went bankrupt during the 1997 Asian financial crisis, having made excessive and unprofitable investments. 
Moreover, the chaebols’ ownership is often opaque, with webs of cross-shareholdings allowing founding families to exercise controlling power, despite holding only a small portion of equity. 
The Lee family has less than 5% direct ownership of Samsung Electronics, but holds a 31.1% stake in Samsung C&T, the group’s de facto holding company, which owns a 4.3% stake in Samsung Electronics and a 19.3% stake in Samsung Life Insurance. 
Samsung Life Insurance, in turn, has a 7.3% stake in Samsung Electronics, which indirectly invests in Samsung C&T and Samsung Life Insurance. 
This type of ownership structure can be particularly problematic during transfers of ownership to new generations. 
As with any dynasty, no one is ever sure that the heir apparent is capable of doing the job. 
Lee recently took over as Samsung Electronics’ vice chairman. 
At a time of strong and growing market competition, he must provide the kind of visionary leadership that characterized his father and grandfather, the company’s pioneering founder, who transformed a small local trading company into a global semiconductor and smartphone powerhouse. 
Like the rest of the chaebols, Samsung risks losing ground in global markets, owing to the narrowing technology gap with China. 
Though South Korea is still ahead of China in high-tech branches like memory chips and automobiles, its lead is diminishing in many major industries, such as steel, ships, petrochemicals, and electronics. 
In emerging markets, Samsung Electronics has already lost market share to Chinese smartphone makers such as Huawei and OPPO. 
It is in this high-pressure context that, last year, Moon Hyung-pyo, South Korea’s then-health and welfare minister, allegedly pressured the National Pension Service to back a controversial merger of two Samsung group affiliates that was essential to ensure a smooth transfer of managerial control to Lee. 
Moon, who then became chair of the NPS, has now been arrested for that move. 
Lee’s indictment, too, is linked to this effort. 
He is charged with donating to Choi’s two foundations, and of bankrolling Choi’s daughter, in exchange for the support he received. 
He is also accused of embezzlement and perjury. 
(The judge ruled that there was insufficient reason to issue the requested arrest warrant.) 
While the government makes deals with the chaebols, start-ups and small and medium-size enterprises (SMEs) are struggling to make their way into the market. 
SMEs’ labor productivity is just 35% that of large firms. 
And labor productivity in the services sector is 45% that of the manufacturing sector – just half the OECD average. 
To create a healthier business climate for innovative small firms and venture startups, the chaebols’ dominance must end. 
South Korea’s leaders must implement stronger regulations to prevent illegal transactions and unfair practices, including collusion between chaebols and government officials. 
They should also strengthen the rights of minority shareholders and outside directors to prevent expropriation by founding families. 
There was a time when what was good for the chaebols was good for South Korea. 
But times have changed, and the chaebol system is now doing more harm than good. 
With Park’s impeachment, South Korea has gained an ideal opportunity to leave behind her father’s legacy as well. 

Parties and Populists 
This is not a good time for political parties, especially those with traditional orientations. 
Gone are the times in the older democracies when one could count on two major parties – one social democratic, the other more to the right of center – dominating the political scene. 
In the new democracies of the postcommunist world, such two-party systems never came into being. 
Nowadays the two largest parties can rarely hope to muster two-thirds of the popular vote. 
Not infrequently they have to form a “grand coalition.” 
The rest of the vote is split many ways – unless a political force emerges to cut right through the old party structures by arousing popular nationalist or socialist sentiments, or a combination of the two. 
The decline of parties reflects the decline of class. 
The old proletariat and the old bourgeoisie are gone. 
Instead we see what has sometimes been called a “levelled-in middle-class society,” albeit one with an important elite of the super-rich at one end and an underclass at the other. 
The very structure of society has come to be shaky. 
There are no social groups on which lasting organizations can be built. 
People are, in a sense, socially homeless. 
This means that their interests vary as situations change. 
It also means that they no longer find a political home in parties, but react to situations, to vague moods, and above all to appeals to sentiments, if not resentments. 
This is the condition in which populists thrive. 
In some cases, they are individuals like President Hugo Chávez of Venezuela (and other Latin American leaders) or Italy’s ex-Prime Minister Silvio Berlusconi. 
Mostly they enter the political scene from the fringes but manage to form a highly personalized grouping, like Jörg Haider and his Austrian Freedom Party, Jean-Marie LePen and his French Nationalists, Andrzej Lepper and his Polish Peasant Party, or Prime Minister Robert Fico and his Direction in Slovakia. 
Many other names could be added to the list. 
The list tells us two things. 
One is that a surprising number of populist leaders have managed to get themselves into power in recent years. 
Their success reflects the electorate’s uncertainties and, increasingly, the perceived injustices of globalization, as well as the fear of many about minorities, immigrants, and foreigners in general. 
These populists promise solutions that dispense with the habits and norms of moderation, notably with centrist democratic policies and an internationalism that seeks to promote peace and prosperity. 
One sometimes wonders whether we are experiencing not so much the end of history as the end of enlightened history, perhaps of the enlightenment itself. 
But another look at the list of populists tells us something else as well: most of them do not last. 
As long as they accept elections and election results, they may be gone almost as quickly as they arrived. 
It does not take long for voters to discover that the promises of populists were empty. 
Once in power, they simply make for bad government. 
Taking two recent European examples, Poles and Slovaks will likely soon realize that their new populist governments do more harm than good to the people and their country. 
To be sure, this is not much of a consolation. 
For one thing, some populist leaders may not accept the result of the next elections. 
It took Silvio Berlusconi quite a while to admit that he had lost. 
Beyond that, populist episodes are signs of an underlying instability that neither serves national progress nor contributes to international order. 
Austria paid a price for its Haider interlude, and France did not exactly benefit from the runoff between President Jacques Chirac and Le Pen in the last Presidential election. 
Is there a remedy? 
Political parties have had a bad press in recent years, and there are good reasons for this. 
Still, they do fulfill a useful function by bundling interests and issues, thereby providing an element of stability in the political system. 
Existing parties urgently need to recapture the support of citizens. 
To succeed requires programmatic clarity, organizational honesty, and an understanding of the concerns of societies that have lost their traditional structures. 
Those structures are gone forever, but a liberal-democratic order cannot succeed through situational politics built on popular resentments. 
It requires a sense of the medium term and a commitment to rational debate of issues, for one tradition that can be revived – that of enlightened thinking – is the most important of all. 

Partnerless in Pakistan 
New York -- President George W. Bush rightly called Pakistan’s recent national and provincial elections “a victory for [its] people.” 
But, even as he uttered those words, his administration was working behind the scenes to subvert the will of Pakistan’s people by trying to dictate the composition of their next coalition government and prop up the election’s biggest loser, President Pervez Musharraf. 
Bush is playing a dangerous game, risking the collapse of Pakistan’s political process for the sake of his own legacy. 
Millions of Pakistanis delivered a clear message at the polls. 
Collectively, they voted against Musharraf and religious extremists, and in favor of democracy, the rule of law, and good governance. 
Nationally, no single party received a majority, but the centrist, democratic opposition won more than 70% of the National Assembly seats. 
The Musharraf-allied faction of the Muslim League party (PML-Q) came in third, polling only 15%, despite the assistance of surgical vote-rigging. 
Most of its senior leaders were defeated in their constituencies – including one who hadn’t lost an election in 26 years. 
The PML-Q, created in 1999 by Pakistan’s intelligence agencies, is now political deadwood. 
An alliance between the two largest parties, the late Benazir Bhutto’s Pakistan People’s Party (PPP) and Nawaz Sharif’s Muslim League faction (PML-N) is what the country needs and what most Pakistanis want. 
The PPP and PML-N have the numbers to form a unity government. 
They also realize that this is perhaps their last chance to “save” Pakistan. 
Together with the pro-democracy army chief, Gen. Ashfaq Kayani, this coalition can address Pakistan’s most pressing challenges, including terrorism. 
With the addition of smaller parties and independents to the coalition, they can also impeach Musharraf and restore the judiciary, which he had deposed. 
This is unpalatable to the Bush administration, which has helped keep Musharraf in power, despite the fact that 75% of Pakistanis want him to resign. 
The Bush administration finds the PML-N’s nationalism and antagonism to Musharraf particularly troublesome. 
Sharif has called for Pakistan’s foreign policy to be debated in parliament, but supports continued cooperation with the United States. 
His party also wants the sacked Supreme Court justices to be restored. 
The US government, however, endorsed the justice’s illegal removal, seeing the court’s insistence on constitutional accountability for Musharraf as complicating its regional objectives. 
The court, for example, required Musharraf to present alleged terror suspects – some of whome were likely “rendered” to Pakistan by the CIA – detained for years without government acknowledgment. 
Of course, a popular, democratically elected government and an independent judiciary in Islamabad complicate relations with the US. 
Democracy is intrinsically messy, but it won’t jeopardize Pakistan’s partnership in the war on terror. 
The Bush administration, however, has become used to dealing with one man and is increasingly impatient. 
In its final year, it would like to increase the odds of a Republican victory in November’s US presidential election. 
Toward this end, progress in Pakistan and Afghanistan would be highly valuable. 
As a result, the Bush administration is aggressively interfering in coalition talks between Pakistan’s political parties. 
It wants to pair the PPP with the discredited PML-Q and isolate the PML-N. 
US Ambassador to Pakistan Anne Patterson, for example, has held a joint meeting with senior Musharraf advisor Tariq Aziz and PPP Co-Chairman Asif Ali Zardari, Bhutto’s widower. 
Vice President Dick Cheney’s office also is reportedly playing an active role. 
Zardari, in a joint press conference with Sharif, refused to answer a question about whether there is pressure from the US to ally with Musharraf. 
But he and Sharif did agree “in principle” to form a government. 
The Bush administration’s forceful manipulation of Pakistan’s political leadership is dangerous for both Pakistan and the US. 
Its favored arrangement could divide the opposition, keep Musharraf ascendant, and provide continuity in the Pakistan army’s campaign against militants. 
But it would also likely de-legitimize the next government before it comes into power, rupture Pakistan’s largest political party, and create a nationalist backlash against the US. 
The US needs to take a step back and let Pakistan's political process proceed naturally. 
The end result might not be optimal, but if the Bush administration overplays its hand, it could find itself partnerless in Pakistan. 

Partnership? 
What Partnership? 
London – European Union policy toward its neighbors to the east is in trouble, despite the launch of its new Eastern Partnership. 
European public opinion is increasingly introspective and sporadically protectionist. 
So what is to be done about the “grey zone” to Europe’s east – the six countries that now lie between the EU and Russia? 
Inaction is unacceptable. 
The region has been badly hit by the economic crisis, made all the worse by internal political turmoil and serious security dangers. 
The idea for the “Eastern Partnership” (EaP) came from a Polish-Swedish initiative early last summer. 
So, by EU standards, it has been rushed through on a very fast track. 
The new initiative is exclusively for the region to the Union’s east – Ukraine, Moldova, Belarus, Georgia, Armenia, and Azerbaijan – and is designed to complement the European Neighborhood Policy. 
It has few new resources and a limited budget for technical projects (€600 million over four years for the six countries). 
The idea is that the EaP will provide a positive signal to these countries, change the climate in which the region is discussed in the EU, and slowly help pull it into the EU’s orbit. 
The offer has annoyed Russia. 
But the EU has its own problems with the initiative. 
For example, it had a lot of trouble persuading leaders to turn up in Prague on Thursday. 
And those who agreed to come are not a good advertisement for the region. 
Ukraine’s President Viktor Yushchenko’s popularity ratings are below 5% after steering his country from crisis to crisis since the “Orange Revolution” in 2004. 
Georgia’s Mikheil Saakashvili is dealing with domestic protests after his disastrous military misadventure in August 2008. 
Armenia also faces protests, following the controversial election of Serzh Sarksyan in February 2008, which led to the killing of ten people. 
In March 2009 Azerbaijani President Ilham Aliyev staged a constitutional referendum that opened the way for his lifetime presidency. 
Most controversial of all has been “Europe’s last dictator,” Belarusan President Alyaksandr Lukashenka. 
Previously, Belarus was not even in the European Neighborhood Policy. 
Five years after the EU’s “big bang” expansion took in eight former communist countries to its east, the Union is in danger of losing the hearts and minds of its eastern neighbors because of its complacency and long-winded approach to crises. 
The eastern neighbors are not like the central European states that negotiated EU accession in the 1990’s. 
Their statehood is weak, their leadership often weaker, and they lack the consensus about their European destiny that enabled difficult reforms in Poland, Slovakia, and the Baltic States to be pursued. 
By an accident of bureaucratic timing, the EaP is seen by many in the east as merely the EU’s response to the global economic crisis, not as a strategy tailored for the region. 
Indeed, Moldova’s President Vladimir Voronin dismisses it as “candies.” 
To be sure, the EU’s technocratic focus on structural reforms is having some effect in the region. 
All six states, except Belarus, now trade more with the EU than with Russia. 
But the political relevance of these changing economic realities is close to nil. 
If anything, the region has been moving in the wrong direction, with security tensions and even war (in Georgia last summer) increasingly frequent. 
Fake elections are rapidly become the norm. 
The six states do not have the time or the inclination to swallow the EU’s bureaucracy in one gulp. 
Russia has managed to revamp the way it operates in the region since it got its fingers burned by interfering so crudely in Ukraine in 2004. 
It now uses a broad range of hard and soft power, some incommensurate to that of the EU – for instance, the military bases that it has managed to secure in each of the six states. 
Moreover, it does things that the EU does and does them better, a notable example (until recently) being its more open labor market. 
Russia is also using less coercion and more carrots, offering economic assistance, security guarantees and an ideology of “sovereign democracy” that appeals to many post-soviet elites. 
The Eastern Partnership is a typical long-term EU technocratic instrument. 
The EU pledges to help set up “Western-type public institutions” and to transform the Eastern economies through comprehensive free-trade agreements. 
That’s all good, but the EU needs to be quicker. 
It needs to show that its mission is to build up weak states, help them overcome short-term crises, and nurture democracy, rather than treat them as empty vessels for the export of EU policy. 
As a follow-up to the Eastern Partnership summit, the EU must initiate lower-level meetings of interior ministers to discuss migration, visas, and counter-terrorism, and should seek to integrate Ukraine and Moldova into the European energy market. 
The alternative is a wall of instability in what is, after all, Europe’s neighborhood. 
As with the United States and Mexico, the consequences of growing gaps in living standards, good governance, and the rule of law will inevitably flow across borders. 
The EU’s eastern policy should not be seen as philanthropy, but as a strategy promoting clear-cut pan-European interests. 

 

Patenting Prosperity 
CAMBRIDGE: Most people are aware of the huge inequalities of income that now separate the developed and developing world. 
Fewer people recognize that the gaps between rich and poor in terms of science and technology are even larger than the gaps in income. 
While rich countries account for around 16% of the world's population, and around 60% of the world's purchasing power, they account for around 99% of the patents for new inventions granted by the United States and Europe in recent years. 
If we are serious about narrowing the income gaps between the rich and poor, we had better think seriously about how to raise the outputs of science and technology directed at the problems of poor countries. 
In today's world, economic prosperity comes not from natural resources or production of industrial goods such as coal and steel, but from the production of new ideas and new products. 
The dynamic U.S. economy owes its great advantage to a tremendous capacity to innovate – whether in information technologies such as computer hardware and software, or biotechnology such as new medicines and crop varieties, or new telecommunications technologies such as advanced fiber optics and earth satellites. 
The world's poorest countries, by contrast, hardly innovate at all. 
As a result, many of them rely on exports of primary commodities with little change in the composition of exports or their methods of production year after year, or even decade after decade. 
Thus, many tropical countries continue to live off of the same mix of coffee, tea, cacao, bananas, or mining products that they did a generation ago. 
In the case of many of these commodities, world prices have declined sharply during the period (at least relative to the cost of imports), but the poorest countries lack the flexibility and innovative capacity to shift to new types of production, much less to produce entirely new products not previously seen in world markets. 
Recent data for the U.S. Patent and Trademark Office tells an amazing story. 
Of the 163,000 patents issued by the United States in 1998, 90,000 were issued to U.S. inventors and 72,000 to foreign inventors. 
Of the foreign inventors, Japanese inventors received 32,000 patents, German inventors 9,500 patents, and another 28,000 among the next 15 countries, all of which are developed economies. 
Three of these – Korea, Taiwan, and Israel – were considered developing countries a decade ago, but each has achieved rapid and sustained growth for many years, in no small part due to their scientific prowess. 
The combined patents coming from developing countries and transition (post-communist) economies in 1998 amount to less than 1 percent of the U.S. total patents last year. 
Tropical countries, almost all of which are poor, had virtually zero share of the total patents (Singapore being the only notable exception). 
It might be considered normal that developed countries would be the inventors, and developing countries the users, or new technologies. 
But the status quo is very risky for poorer countries. 
With the developing world relying almost totally on innovation from the rich countries, many of the most pressing problems that are unique to poorer countries remain neglected by the world's scientists and leading high-technology industries. 
For example, many of the poorest countries are in the tropics, and problems of tropical health (such as malaria) and tropical agriculture, are generally ignored by rich-country scientists. 
A very few countries, particularly Israel, Korea, and Taiwan, have made the transformation to being producers of high technology products. 
They have gotten rich in the process. 
It's time for the developing world to put science and technology much higher among their policy priorities. 
The list of needed policy changes includes the following measures: 
· strengthening the university system (including the encouragement of private universities to compete with state universities); 
· increasing public-sector spending on scientific institutes; 
· attracting high-technology firms from the developed countries to invest in the developing countries; 
· fostering increased scientific and technological partnerships between rich-country universities and companies with those in the developing countries; 
· strengthening the protection of intellectual property rights to foster innovative activities; 
· shifting international aid money away from IMF-World Bank structural adjustment lending and towards research and development in priority areas (such as health and agriculture). 
Such steps would help to increase the vitality of science and technology in the developing countries, and thereby to give new energy to their overall economic development. 

Patents and the Poor 
CAMBRIDGE: Debates over drug pricing and intellectual property rights are raging. 
Many life-saving drugs, notably those used to fight AIDS, are produced under patents mainly by US and European pharmaceutical companies. 
The patent-protected prices of these drugs often puts them out of reach of poor people in the poorest countries. 
Thus, while many AIDS patients in rich countries are kept alive by these drugs, millions of people in poor countries are dying before they should, leaving behind misery, millions of orphans, and economic devastation. 
A typical AIDS drug regimen is priced at about $10,000 per patient, per year in rich countries. 
The costs of producing these drugs, however, are much less than the market price, perhaps as low as $350-$500 per year for some of the three-drug combinations used to treat AIDS. 
Some quality producers of generic drugs, such as Cipla of India, have offered to provide these drugs at prices near to the cost of production. 
In response to this offer (and to bad publicity), Merck, Abbott Laboratories, and Bristol Myers Squibb, three large patent-holding companies, announced that their willingness to supply the African market at "zero profit" – ie, at around $500 per patient per year for the AIDS drugs they produce. 
The tragedy of millions of impoverished people dying of AIDS even when drugs exist to treat them raises deep questions about global intellectual property rights, because patent protection is creating a barrier to essential medicines reaching the world's poor. 
But how can the benefits of a global patent system that provides incentives for innovation and new discoveries be combined with an assurance that poor people gain access to the medical care that they desperately need? 
One way is to set drug prices at different levels in rich and poor countries. 
In rich countries, patent protection should continue so that the pharmaceutical industry keeps innovating. 
This is particularly important in the case of AIDS, because the spread of drug resistant viruses and the unwanted side-effects of existing medicines, means that new anti-retroviral drugs will be needed to keep treatments effective. 
Thus drug companies must keep plowing their earnings back into research and development. 
To assure that, profits – protected by patents – are needed. 
Yet poor countries – or donors acting on behalf of the poor – cannot pay the same prices paid by rich countries. 
America’s average annual income is over $35,000 per person; in much of Africa, annual income is less than $350 per person. 
Poor countries are, indeed, so poor that they cannot afford the drugs even at the production cost of around $350 per patient, per year, because even these reduced prices amount to a year's average income. 
Thus, few Africans can afford AIDS treatment even when supplied by generic drug producers. 
Any viable solution requires that the following conditions be satisfied: 
- drug companies – whether patent holders or generic drug producers – must provide drugs to poor countries at prices near to production costs; 
- drug prices in rich countries must remain higher through patent protection to preserve incentives for innovation; 
- rich and poor markets must be separated, so that cheap drugs from poor countries are not smuggled into rich countries (or are not allowed in legally through parallel-market imports); 
- governments in rich countries must provide substantial assistance to poor countries, so that the poor – who are too poor to afford these drugs even at reduced prices – can make use of them. 
Indeed, rich countries should create a “Global Health Fund” to help less fortunate countries buy drugs and medical services to fight killer diseases like AIDS, tuberculosis, and malaria. 
This fund would be aimed not only at poor countries, but at some middle income countries like South Africa where diseases like AIDS are so rampant that the volume of drugs needed to combat disease cannot be purchased even at reduced prices. 
But rich-country voters may demand that drug prices for them should also fall. 
If politicians cave in here – say, by eliminating patent protection, imposing price controls, or allowing re-import of drugs from poor countries – innovation for new drugs will stall. 
Still, rich country drug purchasers, however, should not fear the worst: there is no reason to believe that the drug prices they pay would rise just because drug companies agree to lower prices in poor countries. 
During the recent court fights over AIDS drugs in South Africa, patents received a black eye. 
But without them, the stream of new antiretroviral products used to fight AIDS would not have flowed, because the incentives for developing new drugs would be lacking. 
Some opponents of patents argue that government-sponsored research is enough to develop new drugs, but history shows that, although government-sponsored research is good at basic science, the profit-based private sector is best at developing and introducing new products. 
So, reform the international patent system to guarantee the poor access to essential medicines, but don’t kill the goose that lays the golden egg by undermining the patent system. 

The Other Nigeria 
LAGOS – Nigeria has been getting a lot of bad press lately, owing largely to the militant Islamist group Boko Haram’s abduction of more than 200 schoolgirls in April, part of a brutal campaign of kidnappings, bombings, and murder. 
But, while these developments certainly merit international concern, they should not be allowed to obscure Nigeria’s recent achievements – or spur the outside world to turn its back on the country. 
What is lost in most discussions about Nigeria today is the strong economic record that it has established over the last decade. 
In fact, a recent year-long study of the country by the McKinsey Global Institute (MGI) showed that, over the next 15 years, Nigeria has the potential to become a major global economy. 
With roughly 170 million inhabitants, Nigeria has Africa’s largest population. 
But it has only recently been acknowledged as having the continent’s largest economy – 26th in the world – following the release of “rebased” data putting GDP at $510 billion last year. 
MGI estimates that, in 2013-2030, Nigeria could expand its economy by more than 6% annually, with its GDP exceeding $1.6 trillion – moving it into the global top 20. 
Moreover, if Nigeria’s leaders work to ensure that growth is inclusive, an estimated 30 million people could escape poverty. 
The problem is that Nigeria remains subject to outdated assumptions, which are limiting its prospects, especially among foreign companies and investors. 
For example, many believe that Nigeria is a petro-economy, wholly at the mercy of the world oil market. 
But the resources sector accounts for only 14% of GDP – meaning that, while oil production remains a critical source of revenue and exports, the Nigerian economy is far more diverse than many assume. 
A related myth is that Nigeria’s economic growth is unstable, with large and unpredictable shifts in performance from year to year. 
In fact, as Nigeria has diversified its economy and detached public-spending plans from current oil prices (part of a 2004 budget reform), it has become increasingly stable, both economically and fiscally. 
Indeed, in recent years (2010-13, in “re-based” terms), GDP has grown by a steady 6-7%, owing more to rising productivity than to favorable demographics. 
Finally, there is a general misunderstanding about the Nigerian economy’s evolution. 
Despite widespread poverty and low (though improving) productivity in almost all industries outside of the resources sector, Nigeria has a rapidly growing consumer class that will play an increasingly important role in driving growth. 
By 2030, more than 34 million households, with about 160 million people, are likely to be earning more than $7,500 annually, making them aspiring consumers. 
This implies a potential rise in consumption from $388 billion annually to $1.4 trillion – a prospect that is already attracting investments by multinational consumer-goods producers and retailers. 
Nigeria’s prospects are enhanced further by its strategic location, which will enable it to take advantage of booming demand across Africa and other parts of the developing world. 
Add to that a large and growing population and an entrepreneurial spirit, and the future looks bright. 
In order to unleash this potential and ensure that the next decade of growth brings sharp reductions in poverty, Nigeria’s leaders must pursue reforms aimed at increasing productivity, raising incomes, and delivering essential services like health care and education more efficiently. 
For example, to increase productivity and incomes in the agricultural sector, the government could pursue land-title reform aimed at opening more farmland without deforestation; expand the use of fertilizer and mechanized equipment; and support a shift to more profitable crops. 
Moreover, improvements in distribution and marketing would allow farmers to keep more of the proceeds from the sale of their crops. 
In urban areas, productivity suffers from a high degree of informal employment, sometimes even by major corporations. 
This keeps too many Nigerians in low-skill, low-paying jobs and deprives the economy of the dynamism that competitive small and medium-size enterprises create. 
The spate of Internet startups that have emerged in Nigeria demonstrates that the skills are there, and tapping Nigeria’s diaspora can augment that talent pool. 
To make it easier to do business in Nigeria, the government also will need to streamline processes for registering and running a legal business and, together with aid agencies and the private sector, increase investment in infrastructure. 
It will also need to intensify its fight against endemic corruption, which represents a tax on all businesses. 
Finally, to promote inclusive growth – essential to relieving human suffering and mitigating social and political tensions – Nigeria must improve public-service delivery dramatically. 
The fact that Nigeria lags behind countries that spend comparable amounts on public services proves that it has scope to improve. 
All that is needed to ensure that assistance – from seed subsidies to immunization – reaches those who need it most, regardless of where they live in the country, is a strong commitment from Nigeria’s leaders to build more effective and transparent government agencies. 
Nigerians do not need sympathy or even outrage from the global community. 
What they need is support and encouragement. 
Only with stable and inclusive growth can Nigeria escape the clutches of brutal forces like Boko Haram and give its citizens the security and prosperity that they deserve. 

The African Dream 
KIGALI – The dream that the twenty-first century will be the “African Century” is powerful and intoxicating. 
It is also becoming reality. 
As African officials gather in Washington, DC, on August 4-6 for the first US-Africa Leaders Summit, it is worth considering the basis – and the limits – of the continent’s progress. 
While conflict and poverty remain serious problems in many African regions, our continent is not only more stable than ever before; it is also experiencing some of the highest economic growth rates anywhere on the planet. 
Over the past decade, tens of millions of people across Africa have joined the middle class; our cities are expanding rapidly; and our population is the most youthful in the world. 
But Africans must not take it for granted that their time has come. 
Words are cheap, and, despite the continent’s positive momentum, we know that history is littered with squandered dreams – nowhere more so than in Africa. 
So there is much that we in Africa must do to seize our opportunity. 
Building bigger, more integrated sub-regional markets that are deeply embedded in the global economy is one of the most urgent tasks that we are facing. 
After all, from the European Union to the Association of Southeast Asian Nations to the North American Free Trade Agreement, we see how geographic regions can create conditions for shared growth and prosperity by removing barriers to commerce, harmonizing regulatory norms, opening labor markets, and developing common infrastructure. 
That is precisely the vision that we are working to realize in our own part of Africa, under the banner of the Northern Corridor Integration Projects. 
In the past 18 months, Kenya, Rwanda, and Uganda, joined by South Sudan and more recently Ethiopia, have launched 14 joint projects that will integrate East Africa more closely and make our region a better, easier place to do business. 
There are already concrete results. 
We have put in place a single tourist visa valid in all three countries. 
We have established a single customs territory, slashing red tape and removing non-tariff trade barriers. 
A standard-gauge railway from Mombasa to Kigali and Juba via Kampala is being designed, and financing for the first segment has been secured from Chinese partners. 
Taking these steps has required going against decades of entrenched practice. 
Unfortunately, across Africa, national borders have tended to be chokepoints rather than enablers of intra-continental cooperation on trade, security, labor, and environmental issues. 
Too often, Africa’s economies exchange goods and coordinate policy among themselves less than they do with countries outside of the continent. 
We are determined to change this. 
Under the Northern Corridor initiative, for example, each of our governments has accepted responsibility for shepherding key projects. 
Uganda is securing investors for a new oil refinery and is spearheading the development of regional infrastructure for information and communications technology, which will lead to the elimination of cellular roaming charges among our countries. 
Kenya is tasked with developing a regional commodity exchange, improving human resources through education and consultancy services, and building both crude and refined oil pipelines. 
Kenya is also exploring ways to expand regionally focused power generation and transmission. 
Rwanda is charged with aligning immigration laws and promoting freedom of movement for both citizens and visitors. 
Other coordination duties include regional security (through the East African Standby Force), coordinated airspace management, as well as joint tourism marketing. 
We know what success will look like for our region’s citizens. 
And we know what needs to be done. 
Progress will be achieved not by building monuments for politicians or holding summits, but by lowering the costs of doing business and raising the incomes of our people. 
Bureaucracies move slowly, sometimes because they are institutionally programmed to subvert change. 
The framework of the Northern Corridor Integration Projects is designed to generate and sustain the political will necessary to get the project done. 
The United States has always been an important partner for our countries, but the path to solving our problems is not through handouts from American taxpayers. 
Only we, together with our business sector, can do the job. 
As we do so, we look forward to a deeper and more “normal” relationship with the US, focused on what we can do together rather than on what Americans can do for us. 
Africa has always had what it takes to rise. 
Together, we can make it happen. 

Microeconomics for All 
TOULOUSE – For the last half-century, the world’s leading universities have taught microeconomics through the lens of the Arrow-Debreu model of general competitive equilibrium. 
The model, formalizing a central insight of Adam Smith’s The Wealth of Nations, embodies the beauty, simplicity, and lack of realism of the two fundamental theorems of competitive equilibrium, in contrast to the messiness and complexity of modifications made by economists in an effort to capture better the way the world actually functions. 
In other words, while researchers attempt to grasp complex, real-world situations, students are pondering unrealistic hypotheticals. 
This educational approach stems largely from the sensible idea that a framework for thinking about economic problems is more useful to students than a ragbag of models. 
But it has become burdened with another, more pernicious notion: as departures from the Arrow-Debreu model become more realistic, and thus more complex, they become less suitable for the classroom. 
In other words, “real” microeconomic thinking should be left to the experts. 
To be sure, basic models – for example, theories of monopoly and simple oligopoly, the theory of public goods, or simple asymmetric-information theory – have some educational value. 
But few researchers actually work with them. 
The bread-and-butter theories for microeconomics research – incomplete contracts, two-sided markets, risk analysis, inter-temporal choice, market signaling, financial-market microstructure, optimal taxation, and mechanism design – are far more complicated, and require exceptional finesse to avoid inelegance. 
Given this, they are largely excluded from textbooks. 
In fact, microeconomics textbooks have remained practically unchanged for at least two decades. 
As a result, undergraduate students struggle to understand even the abstracts of papers on the complex representations of microeconomic reality that fill research journals. 
And, in many areas – such as antitrust analysis, auction design, taxation, environmental policy, and industrial and financial regulation – policy applications have come to be considered the domain of specialists. 
This does not have to be the case. 
While it is true that realistic microeconomic models are more complex than their idealized textbook counterparts, grasping them does not necessarily require years of research experience. 
A case in point is the economics of two-sided markets, which involve competition between platforms whose principal “product” consists in connecting two categories of users, who then offer each other network benefits. 
When markets are two-sided, many of the standard assumptions of antitrust analysis no longer hold: market entry can be bad for consumers, exclusive contracts can increase the number of firms in a market, and pricing below cost may not be predatory. 
A survey by David Evans and Richard Schmalensee describes numerous situations in which applying old assumptions could lead to mistakes by, say, an anti-trust regulator with only an undergraduate degree. 
The unmistakable message is, “Don’t try this at home.” 
But every behavioral divergence between two-sided and traditional markets can be understood using simple tools of elementary microeconomics, such as the distinction between substitute and complementary products. 
When producers of substitutes collude, they usually raise prices; producers of complements, by contrast, collaborate to lower them. 
So, if two platforms that appear to be performing similar services are complementary – for example, because one platform connects consumers with a set of users that helps them to value another set of users more highly – market entry can be bad for consumers. 
In fact, two platforms can even be complementary for one set of users and substitutes for another. 
The different stages of a televised soccer (football) tournament, for example, are complementary for viewers and substitutes for advertisers. 
Moreover, exclusive dealing can increase competition by allowing two platforms to occupy distinct market niches, with the alternative being that one drives out the other. 
In short, with a solid understanding of the difference between complements and substitutes, one can do almost everything the fancy models do – without hiring a single expensive expert. 
Undergraduate-level microeconomics should empower students, not alienate them. 
While the Arrow-Debreu model has its value – namely, it explains why an unplanned economy can produce order – it is discouraging for students to find that what they are deemed capable of comprehending offers little insight into real-life situations. 
Restructuring the microeconomics syllabus would send a far more inspiring – and accurate – message: even complex ideas developed by experts can be understood and applied by educated laypeople. 


Paving the Road to Growth 
The extreme poor in Latin America’s rural communities live five kilometers or more on average from the nearest paved road – almost twice as far as non-poor rural households, resulting in difficult and very costly access to markets and needed services. 
Moreover, poor transport undermines Latin America’s international competitiveness. 
More than half of Latin American firms consider poor infrastructure to be a major obstacle to the operation and growth of their business. 
One option is obvious: spend more (and more wisely) on infrastructure. 
On average, countries in Latin America and the Caribbean spend less than 2% of their GDP on infrastructure, while 3% to 6% is needed to sustain rapid growth and keep pace with countries like China or Korea. 
Given scarce public funds and fiscal constraints, to increase spending, users must cover a higher share of the costs. 
This requires developing a payment culture, as well as providing a safety net for those citizens who cannot afford to pay. 
The temptation to build “white elephants” should be avoided; projects should be chosen for their potential to increase productivity and competitiveness. 
For many nations, that will require developing institutions capable of conducting adequate planning, monitoring, and evaluation. 
Bolivia recently rehabilitated two stretches of road, improving the Calamarca-San Pedro and Boyuibe-Yacuiba routes at a cost of around $25 million. 
But the project generated benefits worth roughly twice that amount because it lowered the costs of vehicle operation, accidents, and travel time, removed physical constraints to the flow of goods and people within Bolivia and from Bolivia to its neighbors, and ensured more reliable and safer transport services. 
A similar project targeting the maintenance of Mexico’s federal highways yielded even greater benefits. 
The project increased the percentage of highways classified as being in “good” or “fair” condition from 57% to 75%, at a total cost of $77 million, while the benefits of the project were estimated to be worth $612 million. 
Laying kilometer upon kilometer of bitumen is the favored solution for many politicians. 
But other options are more cost-effective. 
One approach is to create policies that raise the standards of unreliable transport and logistics companies. 
Exporters pay a high cost for low-quality trucking industries, as in Colombia, or when trucking services for perishables are inadequate. 
As a result, less than 65% of agricultural products in Latin America reach markets. 
Firms stockpile much more of their products, because they can’t rely on their carriers, adversely impacting their competitiveness. 
The energy and resources businesspeople devote to making sure their goods get from factory to market could be put to much better use. 
The goal should be to foster private-sector investment to provide efficient logistics services. 
Deregulation can be a big help. 
In Peru, logistics costs represent 34% of the value of the country’s products. 
Reducing this to 20% would spark an impressive increase in demand and employment across many industries. 
Even if this led to just one percentage point of additional growth, Peru’s GDP would increase by $800 million a year. 
The third solution we recommend is very cheap, and has the most benefits related to costs: Latin American countries need to make it cheaper and easier to move goods across national borders. 
This means change both at borders and within countries. 
The congestion and urban chaos that is typical in a port area, for example, must be eliminated through better planning. 
Customs procedures, which currently obstruct the flow of international trade, must be modernized and simplified in order to facilitate it. 
Simple changes like special fast lines for reliable clients are part of the answer. 
Each country could create a council that represents public bodies (transportation, public works, customs) and major users (exporters and logistics companies) that must work together to identify ways to reduce logistics costs. 
Communication between users and government services is vital to achieve any real improvement. 
It is just as vital, though, for committees to be developed along similar lines in the provincial areas of each country. 
Merchandise needn’t pass through the capital, as it does in most Latin American and Caribbean countries, with the associated cost increases. 
Regions then can be turned into engines of growth. 
Above all, local companies need to be supported when they make moves to become more efficient, innovative, and competitive. 
Firms that go global are more likely to stick around, adding to the economy and employing locals. 
These sorts of reforms bring massive returns relative to the investment required to finance them. 
However, spending on infrastructure wins more public support and creates fewer protests. 
The real challenge is to establish how Latin America can generate the political consensus needed to adopt the best policies to remove its infrastructure logjams. 

Pay-or-Play Capitalism 
LONDON – When I led the British government’s Review on Antimicrobial Resistance (AMR) from 2014 to 2016, we suggested various ways to fund a market-entry reward for drug makers that develop new antibiotics and vaccines. 
To that end, one of our most controversial proposals was what we called “pay or play”: a $12 billion pot would be financed by a surcharge levied on the overall sales of pharmaceutical companies that were not developing new drugs. 
I came to embrace this idea when I learned that many leading pharmaceutical companies often manage their price-to-earnings performance by buying back their own shares, thereby reducing the number of outstanding shares in the market. 
And while many in the industry would say that there is little difference between this and issuing a dividend payment, I beg to differ. 
A dividend payment benefits all shareholders directly, whereas share buybacks directly benefit only the firm’s senior executives. 
Yes, in theory, if buybacks help to boost the price-to-earnings ratio, that might help shareholders generally, all else being equal. 
But if pharmaceutical companies are using buybacks to boost executive compensation while avoiding investments that could lead to far-reaching societal benefits, then something is wrong. 
Since proposing a pay-or-play scheme for the pharmaceutical industry, I have come to think that the same principle could be applied more broadly in business. 
Larry Fink, the CEO of the asset-management firm BlackRock, might agree. 
At a time when many people have come to doubt that the modern global economy serves their interests, Fink has called on all companies to do more to make a “positive contribution to society.” 
In my view, all companies, particularly those that are publicly listed, need to embrace the principle of enlightened self-interest, and recognize that a healthy society is better for their own business in the long run. 
But until they do, policymakers should start thinking about how pay-or-play schemes could be used to address growing popular disenchantment with a corporate sector where only insiders seem to benefit from rising profits. 
Here in the United Kingdom, there are a few areas where pay-or-play schemes could prove useful. 
For example, many companies now organize their affairs in such a way as to avoid paying UK corporate taxes, despite having conducted their business here. 
So, why not replace the tax on reported profits with a pay-or-play tax on a percentage of their overall sales? 
A second problem in the UK is a shortage of skilled workers. 
When I was serving as Commercial Secretary to the UK Treasury in 2015-2016, business leaders often griped about this shortcoming as if they expected the government to be the sole provider of worker training. 
But don’t corporations also have a duty to train the labor force from which they recruit? 
Former Prime Minister David Cameron started to address this issue by imposing a “skills levy” on firms hiring foreign workers, with the proceeds earmarked to fund worker-training programs. 
This version of a pay-or-play program now needs to be expanded so that it can have a lasting impact. 
Germany, where some 20% of the federal education budget is funded by German companies and set aside for vocational training, has established a good model to follow. 
It should not be too much to ask British companies to do something similar, especially given that it is in their own interests. 
A third challenge in the UK is pension shortfalls resulting from firms going bust. 
For example, when the major government contractor Carillion recently filed for bankruptcy, it revealed that it has a £590 million ($826 million) pension deficit, despite having paid out generous dividends in recent years. 
Surely, companies must be held more accountable. 
Those failing to keep their pension balances in the black should have to pay into a bailout fund before they can pursue share buybacks or similar programs. 
A final concern in the UK is, of course, Brexit. 
It is clear that the European Union will not allow the UK to participate in the European single market unless it provides for the free movement of goods, capital, services, and people. 
Still, the EU might be more willing to grant access to the single market in exchange for a sizeable entry fee. 
And who better to provide the funds for that than large British companies that will benefit the most from retaining access to the continent? 
To be sure, many corporate leaders would hate such an idea. 
But at a time when the public is increasingly skeptical of corporations, CEOs are hardly in a position to complain about the effects Brexit will have on their bottom line. 
They need to open their minds, take out their wallets, and have faith in the promise of enlightened self-interest. 

How to Pay for Africa’s Education Gains 
JOHANNESBURG – Africa is in the midst of an education crisis. 
Despite pledges to improve access to education for all children by 2030, many African governments are failing to fund this ambitious component of the UN Sustainable Development Goals (SDGs). 
There is still time to address the financing shortfall, but only if new investment strategies are embraced with vigor. 
Today, roughly half of the world’s young people, including some 400 million girls, are not being educated to succeed in the workplace of the future. 
This challenge is most acute in Africa; although 75% of girls in Sub-Saharan Africa start school, only 8% complete secondary education. 
Sub-Saharan Africa is the only region where women still do not enroll in or graduate from tertiary education at the same rates as men. 
These problems are well known, if not always addressed. 
Less understood is the contradictory impact that Africa’s future growth will have on the availability of education funding. 
By 2030, nearly 30 countries in Africa are expected to have reached lower middle-income status, defined by the World Bank as a per capita gross national income (GNI) between $1,026 and $4,035. 
As countries approach this level of development, new investments will be needed to pay for health and education upgrades, and mobilizing domestic tax revenue will become a critical component of budgeting strategies. 
At the moment, however, estimated tax revenues in most countries will be insufficient to cover the costs associated with improving educational outcomes. 
As a result, an education-funding crisis threatens to dash hopes of sustained rapid growth and lasting prosperity. 
Traditional forms of international aid will continue to play a role in the development of Africa’s education sector. 
And yet, owing to the projected increases in GNI, most lower-middle-income countries will no longer qualify for the grants and low- or zero-interest loans that are currently available. 
As a result, millions of young Africans will suffer the effects of a paradox in international development: countries will be too prosperous to qualify for the best funding options, but too poor to meet the educational needs of their citizens on their own. 
Fortunately, the International Commission on Financing Global Education Opportunity, where I serve as a commissioner, has helped to develop a solution. 
Called the International Finance Facility for Education, this innovative approach aims to help lower-middle-income countries invest in education – especially programs for women and girls – in more sustainable ways. 
By leveraging $2 billion in donor guarantees, we aim to deliver about $10 billion in grant and concessional education funding to countries that need it most. 
But there is a catch: governments seeking to access these funds must first demonstrate an interest in and capacity for long-term educational reform. 
This approach is designed to improve grants’ effectiveness and give countries the ability to strengthen their economic resilience with a better-educated workforce. 
Research shows that in lower-middle-income countries, every $1 spent on education increases the earning power of graduates by $4. 
In other words, our long-term goal is broader than building schools or teaching math; it is to create conditions for lasting social and economic change. 
Similar funding strategies have already proved to be successful in the health-care sector. 
For example, the International Finance Facility for Immunization was created to provide financing for GAVI, the Vaccine Alliance. 
Eventually, billions of dollars in new funding was mobilized to help vaccinate more than 640 million children and save over nine million lives. 
The economic returns were also dramatic; one study that surveyed outcomes in 73 countries found that every $1 spent on immunizations translated into $18 in health-care-related savings. 
The education finance facility has the potential to produce a similar impact. 
Millions of young people around the world, and particularly young girls in Africa, are failing to excel because they continue to be denied access to quality education. 
With just 12 years to go before the expiration of the SDGs, Africa’s education crisis must be moved to the top of the development agenda. 
Government leaders routinely claim that children are our future. 
If they truly believe it, programs like the International Finance Facility for Education must be given the priority they deserve. 


Paying the Price of Reform 
Angela Merkel’s poor showing in Germany’s recent election has now put into cold storage any hope of a serious overhaul of the country’s famously rigid economy. 
Tony Blair was waiting for her to help launch a drive to make the current British Presidency of the European Union a historical turning point for the Union’s economy. 
Now Blair has no project, and all would-be reformers are most likely downsizing their ambitions. 
Europe appears to be more stuck than ever. 
But is it? 
To start with, the private sector is doing well. 
Technology travels fast and is swiftly adopted. 
Firms have responded to inhospitable conditions by cutting workforces and boosting productivity through more capital-intensive production processes and, when needed, by offshoring their capacities. 
The laggards are to be found only in the service industry, which is largely insulated from international production chains and even from internal European competition. 
More fundamentally, there is no such thing as a “European economy.” 
The Union’s 25 member countries are very diverse. 
The Nordic countries are high-tech leaders; Spain has slashed its unemployment rate by half (it stood at 25% not so long ago); and the new members from Central and Eastern Europe are cruising briskly along a steady catch-up path. 
The really sick countries are three of the EU’s four biggest: France, Germany, and Italy. 
But even they have carried out some reforms – not enough and too recently to make a difference yet; nonetheless, they have started to move. 
More importantly, no one ignores that the old ways have to go if prosperity is to be maintained. 
Except for a fringe of die-hard Marxists – which can still collect up to 10% of the votes – there is a keen sense that deep reforms are needed to come to grip with the high unemployment and poor growth of the last decade. 
Continuing budget deficits have visibly failed to deliver what die-hard Keynesians had promised. 
These days, no politician dares to suggest that continuing to pile up debt is the way to go, even though few are prepared to articulate a credible plan for fiscal consolidation. 
The problem, of course is that the most urgently needed reforms will hurt a lot of people. 
Most economists agree that high levels of employment protection merely hold down the creation of new jobs rather than reduce joblessness. 
But reducing employment protection scares every worker in the private sector. 
This is understandable, given an unemployment rate of around 10% in France, Germany, and Italy; with so few new jobs, becoming unemployed is a major disaster. 
To be sure, comfortable unemployment benefits soften the blow. 
The problem, though, is that some people have even become addicted; they now aim at living on welfare benefits alone. 
This is why economists want to change the unemployment and welfare systems to raise the incentives to go back to work. 
Successful experience notwithstanding, most people interpret “incentives” as painful kicks in the butt, and they want none of it. 
Then consider these countries’ bloated public services, where jobs are guaranteed for life, promotion is by seniority rather than merit, and customers are seen as a nuisance. 
The result is red tape all over and a huge drag on productivity. 
Shaping up the public sector is an obvious goal, but civil servants are adamantly opposed to what would in effect mean new and much less attractive work contracts. 
Economists know that important parts of the population are bound to lose from reform. Their answer is that more people stand to benefit, and that the benefits far outweigh the costs. 
This is true, but it provides little solace for the potential losers. 
Reforms are relatively easier in smaller countries, probably because winners and losers are likely to be personally connected to each other as relatives, neighbors, or friends. 
In large countries, the fear of being on the losing side is not outweighed by people’s appreciation that the country as a whole will do better. 
One solution is just to go ahead and reform anyway, regardless of the resistance. 
This is the Thatcher solution, which took almost everyone by surprise. 
Angela Merkel was sometimes called the German Iron Lady, and that seems to have scared enough people to rob her of an expected victory. Even if she becomes Chancellor, she has no mandate for deep reform. 
Meanwhile, the French presidential hopeful, Nicolas Sarkozy, who was associating himself with Merkel and articulating a bold reform program, suddenly seems weak. 
Clearly, if reforms are to be carried out in Europe, something else must be tried. 
Here is one idea. 
Why shouldn’t winners compensate the losers? 
Surely, for example, there is a price tag that can be attached to breaking civil servants’ existing work contracts. 
If a fair one-time payment is offered, it is likely to be taken up by a majority of civil servants, and public opinion will frown upon the greedy or lazy ones who turn it down. 
It might be expensive to compensate all potential losers, but we must put our money where our mouth is; if a reform is certain to pay off handsomely, it will pay for the buy-offs, and more. 
Governments can borrow what they need to pay out now, and service this debt as reforms yield benefits. 
Not only is paying up-front against future benefits efficient and fair, but it also can provide strong incentives for policy makers to weed out bad reforms. 
If a reform is as good as we think it is, then so is public debt to finance its political acceptability. 

Peace, Not a Peace Offensive 
TOKYO – When a North Korean dove clutching an olive branch suddenly appears, the world should challenge it to reveal its hidden talons. 
This is the only prudent stance for South Korea to adopt when face-to-face negotiations with the North begin on February 8. 
For what Kim is now offering is not peace, but a “peace offensive” – a tactic used by the North repeatedly since the armistice of 1953 in order to sow division whenever the regime’s adversaries have demonstrated unity and resolve. 
Kim’s less-than-innocent intentions are demonstrated by his regime’s secret construction of a massive uranium-enrichment facility, containing more than 2,000 centrifuges, revealed to Stanford University’s Siegfried Hecker, a former director of America’s Los Alamos National Laboratory. 
The existence of the facility seems as clear a declaration as possible that the regime is committed to achieving the capacity to intimidate its neighbors with its nuclear arsenal. 
Some believe that North Korea has begun displaying its growing nuclear threat in order to secure the succession to power of Kim Jong-un, Kim Jong-il’s rotund, twenty-something youngest son. 
But, given how long this facility must have been under construction, this cannot possibly be the sole, or even the main, motivation. 
The “Dear Leader’s” key objective is most likely to secure his own position, given the North’s dire economic condition. 
For it now seems that the only way for Kim Jong-il to defend his family dynasty against any domestic challenge is to make a show of force as a nuclear power. 
The challenges facing Kim are piling up. 
Deification of the leader, once the foundation of the regime, is disintegrating. 
Economic failure, chronic food shortages, mounting public distrust of and animosity toward Kim’s government, and an apparent reluctance within elements of the North Korean military to go to war all point to the regime’s increasing fragility. 
There are also signs of growing adoration of liberal countries such as the US and South Korea throughout North Korean society – a sentiment that the regime has sought to appease by broadcasting one or two Western films on state television. 
More ominously, crime is on the rise and a breakdown in state-controlled health care is fueling the spread of various types of infectious disease. 
Kim’s hope must be that, by showing off his nuclear arsenal, he can bully the US, Japan, and South Korea into helping him to resolve some of his regime’s domestic crises. 
Most immediately, Kim’s aim is to pressure Barack Obama’s administration into weakening the US-led sanctions against North Korea, having evidently decided that his dynasty has no future so long as the sanctions remain in place. 
To drive the point home, his regime has been refusing to attend multilateral talks. 
Here Kim has shown just how fundamentally flawed his understanding of the workings of Western democracy is. 
He apparently believed that, following the defeat that Obama absorbed in the mid-term elections, the US would lack the will to stand up to a fresh nuclear threat and would move to conclude a peace accord with his regime, thus perpetuating his dynasty. 
“We are ready for both dialogue and war,” Kim has declared. 
But, of course, just the opposite is true: the victory of conservative Republicans in Congress has left Obama with even less room to offer carrots to the North. 
Moreover, nuclear brinkmanship is a particularly poor tactic, since Kim’s behavior is now becoming fused in American minds with arguably the most serious strategic threat on the US agenda: Iran’s push to secure nuclear weapons of its own. 
Indeed, there is considerable talk among Western security services that the recently disclosed centrifuges were not actually assembled in the Nyeongbyeon facility, implying that Kim’s regime is hiding another facility. 
The question then becomes, who helped Kim build these facilities? 
Who transferred the technology that the North needed? 
Although there is mounting circumstantial evidence of cooperative exchanges between North Korea and Iran, no conclusive proof has been found. 
It has been reported that more than 200 North Koreans are currently working surreptitiously in Iran. 
If these include personnel from Room 99, Kim’s secret nuclear directorate, and Room 39, the bureau that controls his slush fund of hard currencies, more attention is needed. 
Of course, the inner workings of Kim’s regime are shrouded in mystery, not only to the outside world, but also to most of North Korea’s government. 
The only way to increase transparency from outside is to shine a light on North Korea’s external activities, which means exposing as many connections and links between North Korea and Iran as can be found. 
Nuclear cooperation between North Korea and Iran is no doubt assisting both countries to flaunt international norms – and now it appears that Burma has joined this axis of illicit nuclear proliferation. 
One country could help the world gain the transparency – and the leverage – that it needs: China, over whose territory Iran and North Korea must be conducting their nuclear relations. 
Assuming that China does not approve of this unholy alliance, it has a responsibility to call a halt to these exchanges. 
Vague expressions of concern, such as those offered by President Hu Jintao during his Washington summit, will not do the job. 


Peace Now for Palestine 
MADRID/WASHINGTON, DC – As revolutionary change sweeps across the Arab world, it is easy to think that now is not the time to push for peace between Israel and Palestine. 
Until the dust settles on the new Middle East, the old roadmaps seem dated, and conventional wisdom holds that progress toward a peace agreement in the face of regional upheaval is wishful thinking. 
But the opposite is true. 
Even with so many failed efforts in the past, there is a clear window of opportunity for the United States and Israel to urgently push for a lasting settlement. 
Everyone needs to start thinking differently about the Middle East. 
The international community’s old approach was to prioritize stability over democracy and pursue Israeli-Arab peace on a completely separate diplomatic track. 
This policy proved to be a failure – placing stability ahead of democracy brought neither, and isolated peace efforts went nowhere. 
If the US and other world powers want to make headway on their three key objectives – stability, political reform, and peace – they need to understand how they are linked and pursue all three simultaneously and holistically. 
Picking and choosing which challenges to care about only increases the risk that they will become intractable problems instead. 
The US has been behind the curve from the moment the turmoil sparked, trying to play catch up as two authoritarian governments were toppled by popular protest and more regimes try to cling to power as long as they can. 
The US needs to get out in front. 
And, as the US and the broader international community attempt to address the unfolding events, it would be a mistake to leave the peace process off the agenda. 
Whereas the demands of Arab demonstrators concern governance at home, the current turmoil can be used to help end a conflict that has confounded the world for decades. 
Delaying the Israeli-Palestinian peace process would be a costly blunder. 
As we know from bitter experience, waiting only makes a peace settlement harder to achieve. 
For the US, sympathy for Arab publics yearning for freedom cannot exclude compassion for Palestinians dreaming of lives of dignity, which for them includes ending the occupation. 
The US should not be selective in its support for freedom and democracy. 
This has never been more true than today, and if America is not seen as an avid supporter of a two-state solution, it will stay well behind the curve and damage its own interests in the Middle East. 
Israel also needs to revisit its policies. 
As political reform achieves results, Israel will no longer be able to claim that it is the only democracy in the Middle East; with conditions changing on the ground, it will be increasingly difficult to ignore Palestinians’ demand for independence. 
Israel’s concern that the region will grow more hostile will become a self-fulfilling prophecy if new democracies see the Israeli government impeding steps toward a viable and just solution. 
At the same time, a peace process backed by elected and more legitimate Arab governments will actually help solidify long-term peace and stability. 
With time for a two-state solution quickly running out, a speedy settlement is in everyone's best interest. 
Waiting and hoping for more favorable conditions could easily backfire. 
If there is no movement toward peace as new Arab democracies take shape, negative views of Israel and the US will be hardened. 
And, as we have all witnessed in recent months, Arab public opinion clearly matters. 
Bad perceptions only complicate future peace efforts, making a breakthrough even less likely. 
And the US could have less of a role in a new Middle East with new governments less forgiving than their predecessors about the continuation of the occupation. 
To argue that peacemaking can’t be successful when governments and regimes are in flux ignores the fact that it is precisely in such circumstances that outsiders can help shape the process. 
Instead of operating in an environment with little influence or room for maneuver, pushing the peace process now could help endear the Arab public to the West and give the US more sway in the new Middle East. 
We don’t need never-ending bilateral negotiations between Israel and Palestine; there needs to be a regional solution. 
Tomorrow’s Middle East will not be the same as it was a mere two months ago, but the shape the region will ultimately take is unknown. 
The US has a chance to get on the right side of history and help shape its direction by supporting real reform and advancing a deadlocked peace process. 
In the end, an uprising against poor governance presents an opening to achieve not only democracy, but also stability and peace. 

Peace Now 
Despite the fragile ceasefire in Lebanon, the risks of a widening war in the Middle East remain. 
Too many political leaders, including President George W. Bush, Prime Minister Tony Blair, and the leaders of radical groups in the Middle East, prefer military solutions to peaceful compromise. 
When Bush paints the Middle East as a struggle of good versus evil, or terror versus freedom, he abandons politics. 
When Israel attempts vainly to defeat Hezbollah, it tries to avoid painful but necessary political compromises over disputed territory. 
The problems of the Middle East are much more about politics and culture than about terror versus freedom. 
Part of the problem is Israel’s continuing occupation of the West Bank as well as a piece of southern Lebanon. 
Until Israel agrees to return to the 1967 borders with minor modifications, and to end its political control over millions of West Bank Arabs, unrest will continue. 
Another part of the problem is the brazen manipulation of the Persian Gulf region by the UK and US to ensure their oil security. 
There can be little doubt that the current war in Iraq is fundamentally about oil. 
For nearly 100 years, first the British empire and then the US manipulated Middle Eastern governments, launched coups, bought puppet regimes, and supported wars, with the main purpose of controlling the region’s oil flows. 
This approach continues despite its persistent failure. 
The key to oil security is peace, not military occupation and puppet regimes. 
The US embraced the Shah of Iran, and got the Iranian Revolution. 
The US embraced, and later toppled, Saddam Hussein, inciting chaos, with an unintended boost for Iran. 
The US stationed troops in Saudi Arabia and thus helped to create al-Qaeda’s political agenda. 
The US pushed for elections in Palestine, but then championed the financial strangulation of the newly elected Hamas government. 
These factors, together with the obvious failings of many Middle Eastern governments, have fueled the surge of fundamentalism among Muslims, American Christians, and some Israeli Jews that has now boiled over to rampant extremism, terror, and messianic visions of good versus evil. 
True, fundamentalists are a minority everywhere, but they are stoking widespread fear, loathing, and dreams of salvation, provoking violence and war while weakening moderates forces. 
Many warmongers in Washington, including apparently some in the White House, are seeking to expand their endless military campaign to Iran and Syria. 
Indeed, the daily demonizing of Iran, Syria, and Hezbollah is the same as the morbid demonization of Saddam before the Iraq War. 
The war party appears to be trying to whip up American public opinion in support of a wider conflict. 
Political operatives may also judge that an increased sense of danger and insecurity will tilt votes to the Republicans in the US congressional elections in November. 
We need to reject “us-versus-them” logic, in which Israel is pure and the Arabs are evil (or vice versa). 
Every state in the region must embrace compromise and mutual respect as the basis of a lasting settlement. 
Israel will not be able to avoid territorial withdrawals to the 1967 borders by exercising its military might; the US will not be able to ensure oil security through continued military occupation in the Middle East; and terrorists will not be able to destroy Israel or foist their fundamentalist ideas by force on moderate societies. 
This is no pipe dream. 
In my work throughout the world, as an economist and development practitioner, I find that the vast majority of individuals and political leaders of all religions, races, and creeds are ready to work together to achieve the shared goals of prosperity and wellbeing for their children. 
The claim by many Israelis that there are “no partners for peace” is absurd. 
Israel’s neighbors will make peace on the basis of fair borders and fair play. 
Similarly, the claim that we are headed toward an inevitable clash of civilizations is sheer madness, propounded by people who think the worst of other groups but don’t really know them through personal contact or shared experience. 
What unites us is vastly greater than what divides us. 
We can’t depend on our political leaders to do what is needed, because many of them are captives or promoters of extremist views. 
Our independent media need to seek out voices not only of the warmongers who make so much noise, but also of civil society leaders whose voices we do not regularly hear. 
American newspapers need to publish op-ed pieces not only by Americans “interpreting” the Middle East, but also by representative thinkers from the Middle East itself. 
Scientists in Europe, the US, Asia, and the Middle East need to deepen their contacts and work together. 
The same is true with artists, musicians, sports teams, and community leaders. 
Crass tribalism now threatens to overwhelm all that unites us in our common care for our children, our planet, and our future. 
This is a challenge far too important to be left to Bush, Blair, Mahmoud Ahmedinejad, and Ehud Olmert. 
Peace will be won by the moderate voices around the world that demand an end to senseless violence and to the tragic illusions of those who believe in a “final victory” over their foes. 

Peace On All Fronts? 
JERUSALEM – Not since the collapse of the Israeli-Palestinian peace talks during President Bill Clinton’s last days in the White House has the Middle East seen such a frenetic pace of peace diplomacy as it is seeing today. 
A cease-fire has been brokered between Israel and Hamas in the Gaza Strip, Israel and Syria have started peace negotiations, and Israel has offered Lebanon a chance to resolve the issues that block a bilateral settlement. 
Less dramatic perhaps, yet persistent nonetheless, are the peace talks between Israel and President Mahmoud Abbas’s Palestinian Authority. 
So is the Middle East at the gates of a lasting, comprehensive peace? 
Not quite. 
Aside from the Annapolis talks, which seem to be going nowhere because of the parties’ irreconcilable differences over the core issues, all the other peace efforts are more tactical than strategic. 
In none of them do the conditions yet exist for an immediate leap from war to peace, nor do the parties themselves expect that to happen. 
It would require bold statesmanship to turn the cease-fire with Hamas into a prelude to political talks. 
Indeed, both Israel and the United States are adamant about excluding Hamas from the Annapolis process unless and until it recognizes Israel’s right to exist, while Hamas will not abandon its identity as a resistance movement merely to join negotiations that seem unlikely to satisfy the Palestinian people’s minimal requirements. 
For Israel, the cease-fire with Hamas reflects its reluctance to become mired in another asymmetric war like the one it fought in Lebanon two summers ago, this time in the alleys of Gaza’s refugee camps. 
Ehud Olmert, an especially unpopular prime minister whose days leading the government are probably numbered, lacks the legitimacy to throw the country into another bloody war, which given conditions in Gaza would be both costly and inconclusive. 
Israel’s leaders believe that the day of reckoning with Hamas will come only when the conditions for a major military showdown are riper. 
The Syrian track – requiring Israel’s withdrawal from the strategically vital Golan Heights and the evacuation of tens of thousand of settlers – is hampered not only by the Israeli leadership’s legitimacy deficit, but also by US opposition to the talks. 
For the Syrians, the major objective in concluding peace with Israel is rapprochement with the US, but they will balk at the Americans’ demand that they stop flirting with terrorism as a precondition for talks. 
In fact, it is doubtful that they will ever agree to this. 
As Buthaina Shaaban, a Syrian minister, put it, “To demand that Syria forsake Hamas and Hezbollah is like demanding that the United States forsake Israel.” 
The US has been absent from Middle East peacemaking for too long. 
Indeed, for the first time in the history of its special relationship with Israel, America is not speaking to Israel’s enemies, be they Syria, Iran, Hamas, or Hezbollah. 
As a result, Israel, embattled and facing a gathering storm of regional threats, had to find its own way to talk, without the diplomatic assistance of its big brother. 
The demarche with Lebanon, to which US Secretary of State Condoleezza Rice devoted most of her recent surprise visit to Beirut, has much to do with America’s desperate attempt to revive its role as the main regional peace broker. 
After all, it was tiny Qatar that brokered Lebanon’s domestic settlement, Egypt that mediated the Gaza cease-fire, and Turkey that is facilitating the Israeli-Syrian talks. 
Israel’s shift in policy towards Syria, and that of French President Nicolas Sarkozy, was a powerful message to the Americans that they should not miss the Lebanese train as well. 
But America’s dwindling leverage cannot match the influence of the region’s “axis of evil.” 
Lebanon is too vulnerable to pressure from Syria and Iran, neither of which wants to see their local clients relieve the Israelis of the burden of a “Lebanese front” before their own grievances are addressed. 
Nor is Hezbollah keen to see the end of Israel’s occupation of the Sheba Farms on the Lebanon border undermine its claim to the formidable independent military force that it has built with Iranian and Syrian help. 
Tactical moves, however, can always develop into strategic shifts. 
The Gaza cease-fire should be allowed to facilitate reconciliation between Fatah and Hamas, which would make the Annapolis process more legitimate and inclusive. 
It was none other than the Hamas spokesman in Gaza, Salah al-Bardawil, who defined the cease-fire as “a historic opportunity for all the sides involved to live in peace, and to build a future for the next generations.” 
Nor are the other peace tracks – Lebanon, Syria, and maybe also Iran – doomed to permanent failure. 
But their success, so urgently needed to save the region from the politics of Doomsday, will have to wait for a new US administration to inject into them the necessary balance of realism and idealism, military power tempered by a genuine commitment to diplomacy. 

Peace or Poison 
HAIFA – Contrary to the hopes of many, the end of the Second World War and the shock of the Nazi atrocities did not mean the end of war and genocide. 
Indeed, the decades following it have been rife with bloody conflicts in which entire population groups have been murdered. 
Remember Angola’s civil war, the Khmer Rouge’s massacre of millions of Cambodians, Rwanda’s tribal wars, the bloody disintegration of Yugoslavia, and the extermination of Christians in Southern Sudan. 
Nor should we forget the Stalinist crimes against the peoples of the former Soviet Empire. 
And yet there is something unique about the Holocaust that made the United Nations single it out and devote a special day to its commemoration. 
The difference lies not only in the mind-boggling number of victims and the ferocity with which it was perpetuated, but also in the absence of the usual motives found in other massacres and genocides. 
The Nazis did not kill the Jews because they wanted their territory – the Jews had none; or because the Jews were followers of a rival religious faith – the Nazis and their henchmen were atheists and enemies of all religion. 
Even less did the Nazis kill Jews because of their ideological differences – Jews had no peculiarly “Jewish” ideology. 
Nor did the Nazis exterminate the Jews in order to take their property – most Jews were poor, and those who owned anything probably would have given it up gladly in order to save themselves. 
The Nazis looked at Jews as a strain of “microbes,” and it was for this reason that they wanted to destroy them so brutally and meticulously. 
The Holocaust was born of an absurd and hallucinatory mechanism that associated the Jews with an invented congenital threat, and that gave rise to a deranged, burning, irrational hatred. 
It is a hatred that did not disappear with Nazism, and that one can still, 65 years after the liberation of Auschwitz, glimpse in terrifying manifestations. 
The world must therefore be alert, so that this hatred does not reawaken and direct itself against Jews or other peoples. 
Israel’s leaders, in particular, have sought to reinforce the defenses against the anti-Semitism that still persists in the world. 
That is why they have tried to obtain political support against the nuclear ambitions of Iran, which periodically threatens Israel, at times proclaiming its desire to wipe it off the face of the earth. 
Iran is not Nazi Germany. 
Its political regime, its ideology, and its military and economic potential are very different from that of Hitler’s state. 
Modern Israel is also not like the weak Jewish communities dispersed throughout Europe in the past. 
Still, Iran’s rulers have adopted a bizarre and total opposition to Israel’s very existence, a position that can revive the same nefarious mechanism that led to the genocidal hatred of the Holocaust. 
If Iran gains nuclear weapons, it may, like Nazi Germany before it, be engulfed by murderous folly, threatening disaster for Israel. 
What can be done to prevent this? 
The sanctions directed by the international community against Iran are not guaranteed to convince its leaders to desist from developing nuclear weapons. 
And any attempt to destroy militarily Iran’s nuclear potential could entangle Israel in a prolonged and exhausting struggle that might unite all the enemies of the Jewish state. 
The bleakness of these alternatives has led many to believe that the best and most moral way of neutralizing the Iranian threat would be for Israel to sign a peace treaty with the Palestinians. 
Last month, during a public prayer in Ramallah, the Palestinian Minister of Religion, Mahmoud Habash, delivered a speech that gives hope to proponents of this solution. 
Before TV cameras and in the presence of the Palestinian Authority’s senior leaders, he lambasted Iran’s interference in the Israeli-Palestinian conflict. 
Essentially, what he said to the Iranians was this: “Why are you entering this conflict? 
We don’t need your patronage or your support. 
Instead of helping us and the Israelis reach a solution acceptable to all – two states for two peoples – you do everything to exacerbate the conflict. 
For your own reasons that have nothing to do with our struggle, you encourage the extremism of Hamas, thus provoking Israel’s violent reaction, aggravating our suffering, and pushing back the solution that we all want. 
Not one Iranian soldier has ever shed his blood for our people the way the soldiers of Egypt and Jordan did, yet their governments later signed peace agreements with Israel.” 
The Palestinian leadership knows that if Iran ever launches a nuclear attack against Israel, their people would suffer terribly as well. 
On the other hand, peace between Israel and the Palestinians might neutralize the poison of Iranian hatred and break the hallucinatory political mechanism that identifies Israel with absolute evil – the “small Satan” that should be annihilated at all cost. 
The conclusion of the Israeli-Palestinian conflict would be far more effective than any military undertaking. 
A united front of Israelis and Palestinians could push the Iranian people, who until recently maintained good relations with the Jewish state, to rebel against the folly that seems to have taken hold of their leaders. 
By contrast, Israeli or American military action against Iran would risk worsening the situation, prolonging and intensifying the suffering in this very sensitive region of the world. 

Peace Process or Real Peace? 
RAMALLAH – Direct talks between Palestinian and Israeli leaders are the most obvious way to achieve peace in the Middle East conflict. 
But history has shown time and again that a high-profile peace process alone is no recipe for success. 
The Arab League is set to meet later this month to advise the Palestinian leadership whether or not to engage in direct talks with Israel. 
Palestinian officials say that there is no use in holding direct talks that are nothing more than a photo opportunity intended to create the impression of a peace process while avoiding any substantive commitments. 
For Palestinians, the first step in real peace talks must include some accord on the basic issues of borders and security. 
The Palestinians have presented to their Israeli counterparts (through the Americans) a written offer that includes giving up lands occupied by Israel in 1967 and now populated by Israeli settlers. 
These lands would be swapped for other lands equal in size and importance. 
Israel has yet to produce a single written document outlining its position on the territory that will become a Palestinian state alongside Israel. 
Israel insists that any serious progress will happen only if both sides can sit at the negotiating table face to face. 
According to this view, Netanyahu's right-wing coalition might be persuaded to accept the continuation of the partial settlement freeze, but only if the Israeli public sees President Mahmoud Abbas and Netanyahu publicly engaged in negotiations. 
But the history of such negotiations tells a much different story. 
All successful efforts in the Middle East conflict have not occurred in front of cameras and through publicly declared direct talks. 
The visit to Jerusalem of Egypt's then-President Anwar el-Sadat, and the ensuing Egypt-Israel breakthrough at Camp David, took place only after successful behind-the-scenes understandings. 
The public Madrid talks failed to bring about any breakthroughs, whereas the much more secretive Oslo channel brought about the PLO-Israel agreement. 
Even some of the most explosive situations on the ground between Israel and its northern neighbors have been defused as a result of understandings that often included neutral third parties. 
Former United States senator George Mitchell represents a relatively neutral third party supervising the current talks. 
These “proximity talks” allow Mitchell to ensure that each side is making serious offers. 
If the proximity talks are replaced with direct talks in which the US is not physically inside the negotiating room, there is no guarantee that the stronger partner will not try to bully the weaker one. 
Direct talks also have some well-known liabilities. 
Failed direct talks have often led to a spike in violence. 
Neither side, nor the rest of the world, wants that. 
When former US president Bill Clinton tried to set up the second Camp David summit, Palestinian leader Yasser Arafat hesitated. 
He felt that the situation was not right for direct talks. 
What worried Arafat was the possibility of failure and the potential of a blame game if the talks didn't produce the desired goal. 
Clinton, who was embroiled in domestic problems, badly needed an international success, and assured Arafat that fingers would not be pointed at either party if the talks failed. 
But no sooner had the parties left Washington after the talks broke down than Clinton joined Israel's then-Prime Minister Ehud Barak in blaming the Palestinians. 
That failure, and the emotional responses from both sides as to what was or was not offered in the talks, helped spark the violence which led to the second intifada in the winter of 2000. 
To his credit, Clinton and his staff decided, despite the violence, to make one last attempt in Taba, Egypt late in his presidency. 
That effort is said to have been the closest the two parties have ever been to a breakthrough. 
It would be helpful if the Taba understanding or the more recent efforts by Abbas and former Israeli Prime Minister Ehud Olmert could become the basis for direct talks. 
The Netanyahu government has refused to agree to any such clear reference point before talks begin. 
The Israelis want talks without conditions, even though Netanyahu has imposed his own condition on the Palestinians: recognition of Israel as a Jewish state, and acceptance of a demilitarized Palestinian state that does not include Jerusalem and the Jordan valley. 
Every expert on the Middle East agrees that the best avenue to a serious breakthrough in Palestinian-Israeli negotiations is quiet, behind-the-scenes negotiations. 
The biggest stumbling block for any successful conclusion is the public on both sides, so the more the public is kept out of the day-to-day talks, the better. 
Of course, the public can and should be included through a national referendum in assessing the results once the talks have reached fruition and a comprehensive settlement is reached that both leaders say they can live with. 
But, until that happy day arrives, or at least until the two sides have reached the contours of an agreement, direct talks and photo opportunities should be considered counter-productive. 
After all, Palestinians and Israelis are no longer interested in the peace process. 
They just want peace. 

Peace this Time? 
JERUSALEM – The imminent resumption in Washington of direct Israeli-Palestinian peace talks is good news. 
But whether these talks will lead to an agreement, let alone within one year as US President Barack Obama hopes, is another matter. 
When Obama, two days into his presidency, appointed former Senator George Mitchell as his special envoy to the Middle East, many hoped that within two years his efforts would lead to an agreement between Israel and the Palestinians – and to a comprehensive peace between Israel and all its Arab neighbors. 
Whether these exaggerated hopes should be traced to Obama’s inexperience or to hubris – or both – is a moot point: what is clear is that, after 18 months and numerous visits to the region, Mitchell was able to achieve only an agreement in principle by Israel and the Palestinians to start talking to each other. 
The problem is that they have been talking to each other now for 17 years, under different Israeli and Palestinian leaders, and under two US Presidents. 
To bring them to the negotiating table again is not a breakthrough, but rather an attempt at damage control. 
And, while Mitchell’s successful track record in achieving reconciliation in Northern Ireland seemed like an excellent credential for his current job, it may have hindered him in the Middle East. 
The conflict in Northern Ireland was always territorial: not even the most radical Irish Republican group ever denied the legitimacy of Great Britain – only its rule over the six northern provinces of what they consider United Ireland. 
The crux of the Palestinian-Israeli conflict, by contrast, only partly concerns Israel’s borders. 
The Palestinians contest not just the post-1967 occupation of the West Bank; since the United Nations partition plan of 1947 – which called for the establishment of two states, one Jewish and one Arab – Palestinians have refused to recognize Israel’s right to exist, and most Israelis are not convinced that they have totally abandoned that stance. 
Being tone-deaf to these fundamental issues, Mitchell started on the wrong foot by initially acceding, with Obama’s encouragement, to the Palestinians’ demand for a freeze on further construction in Israeli settlements on the West Bank prior to the start of negotiations. 
A stop to settlement activities in Palestinian territories is a reasonable demand, and the Palestinians could naturally insist on it in the negotiations. 
But making a settlement freeze a precondition for negotiations was obviously unacceptable to the Israeli government, which maintained that no preconditions for negotiations should be set. 
More than a year was wasted on this, causing, among other things, tensions between Prime Minister Benjamin Netanyahu’s government and the Obama administration. 
With a lack of grace, Netanyahu finally agreed to a temporary freeze – due to expire at the end of September – and eventually the Palestinians, this time under US pressure, relented to open negotiations without an explicit Israeli assurance that the freeze would be continued. 
Not only was precious time wasted, but further damage was done. 
Even Israelis who do not agree with Netanyahu’s hard-line positions didn’t like to see their prime minister treated by the US as if he were the leader of Upper Volta. 
Indeed, he did, after all, announce last year that contrary to his Likud Party’s previous position, he was now willing to accept a two-state solution – a position that is still anathema to many Likud members, as well to at least three of the smaller parties in his government coalition. 
Now that the talks are to begin, will they achieve anything substantial, or will the summit in Washington merely be another photo opportunity, like President George W. Bush’s Annapolis summit in 2007? 
Only an unreconstructed optimist would give the talks more than a 50% chance of succeeding. 
The reasons are more immediate than the intractable character of Middle East peace-making. 
Even if Netanyahu is willing to bow to realism, some of his coalition partners might leave his government. 
On the Palestinian side, Mahmoud Abbas’s Palestinian Authority lost control in 2006 of the Gaza Strip – now ruled by an illegitimate Hamas-led government – and thus cannot speak anymore for all Palestinians. 
With more than 600 Palestinians killed in Gaza since Hamas’s violent putsch, making peace among the Palestinians may be as difficult as making peace between them and Israel. 
Moreover, before Israeli-Palestinian talks broke down two years ago, the previous Israeli government, under Prime Minister Ehud Olmert and Foreign Minister Tzipi Livni, negotiated for two years with the Palestinian Authority. 
This was the most moderate Israeli government conceivable, and the same can be said about the Fatah movement controlling the Palestinian Authority. 
Yet, after dozens of meetings, public and private, the two sides failed to reach an agreement. 
Even the most moderate leaders on both sides could not agree on the core issues of the conflict: borders, settlements, Jerusalem, and the fate of 1947-1948 Palestinian refugees and their descendants. 
Both sides had an immediate stake in reaching an agreement: for Olmert, an agreement might have rescued his position as prime minister, and it would have been a trump card for Abbas in Fatah’s de facto civil war with Hamas. 
The failure to reach agreement under such apparently auspicious conditions does not bode well for the coming talks. 
But Netanyahu has said that once negotiations start, “we will surprise everyone,” and the Palestinians have gone further than ever before in building the institutions needed for national independence. 

Peace Through Development 
New York – American foreign policy has failed in recent years mainly because the United States relied on military force to address problems that demand development assistance and diplomacy. 
Young men become fighters in places like Sudan, Somalia, Pakistan, and Afghanistan because they lack gainful employment. 
Extreme ideologies influence people when they can’t feed their families, and when lack of access to family planning leads to an unwanted population explosion. 
President Barack Obama has raised hopes for a new strategy, but so far the forces of continuity in US policy are dominating the forces of change. 
The first rule in assessing a government’s real strategy is to follow the money. 
America vastly overspends on the military compared with other areas of government. 
Obama’s projected budgets do not change that. 
For the coming 2010 fiscal year, Obama’s budget calls for $755 billion in military spending, an amount that exceeds US budget spending in all other areas except so-called “mandatory” spending on social security, health care, interest payments on the national debt, and a few other items. 
Indeed, US military spending exceeds the sum of federal budgetary outlays for education, agriculture, climate change, environmental protection, ocean protection, energy systems, homeland security, low-income housing, national parks and national land management, the judicial system, international development, diplomatic operations, highways, public transport, veterans affairs, space exploration and science, civilian research and development, civil engineering for waterways, dams, bridges, sewerage and waste treatment, community development, and many other areas. 
This preponderance of military spending applies to all ten years of Obama’s medium-term scenario. 
By 2019, total military spending is projected to be $8.2 trillion, exceeding by $2 trillion the budgeted outlays for all non-mandatory budget spending. 
US military spending is equally remarkable when viewed from an international perspective. 
According to the Swedish International Peace Research Institute, total military spending in constant 2005 dollars reached roughly $1.4 trillion in 2007. 
In other words, the US spends roughly the same amount spent by the rest of the world combined – a pattern that the Obama administration shows no signs of ending. 
The policy decisions of recent months offer little more hope for a fundamental change in US foreign policy direction. 
While the US has signed an agreement with Iraq to leave by the end of 2011, there is talk in the Pentagon that US “non-combat” troops will remain in the country for years or decades to come. 
It is easy to see how the persistence of instability in Iraq, Iranian influence, and al-Qaeda’s presence will lead American policymakers to take the “safe” route of continued military involvement. 
Some opponents of the Iraq War, including me, believe that a fundamental – and deeply misguided – objective of the war from the outset has been to create a long-term military base (or bases) in Iraq, ostensibly to protect oil routes and oil concessions. 
As the examples of Iran and Saudi Arabia show, however, such a long-term presence sooner or later creates an explosive backlash. 
The worries are even worse in Afghanistan and Pakistan. 
NATO’s war with the Taliban in Afghanistan is going badly, so much so that the commanding US general was sacked this month. 
The Taliban are also extending their reach into neighboring Pakistan. 
Both Afghanistan and the neighboring provinces of Pakistan are impoverished regions, with vast unemployment, bulging youth populations, prolonged droughts, widespread hunger, and pervasive economic deprivation. 
It is easy for the Taliban and al-Qaeda to mobilize fighters under such conditions. 
The problem is that a US military response is essentially useless under these conditions, and can easily inflame the situation rather than resolve it. 
Among other problems, the US relies heavily on drones and bombers, leading to a high civilian death toll, which is inflaming public attitudes against the US. 
After one recent disaster, in which more than 100 civilians died, the Pentagon immediately insisted that such bombing operations would continue. 
A recent survey showed overwhelming Pakistani opposition to US military incursions into their country. 
Obama is doubling down in Afghanistan, by raising the number of US troops from 38,000 to 68,000, and perhaps more later. 
There are also risks that the US will get involved much more heavily in the fighting in Pakistan. 
The new US commanding general in Afghanistan is reportedly a specialist in “counter-insurgency,” which could well involve surreptitious engagement by US operatives in Pakistan. 
If so, the results could prove catastrophic, leading to a spreading war in an unstable country of 180 million people. 
What is disconcerting, however, is not only the relentless financing and spread of war, but also the lack of an alternative US strategy. 
Obama and his top advisers have spoken regularly about the need to address the underlying sources of conflict, including poverty and unemployment. 
A few billion dollars has been recommended to fund economic aid for Afghanistan and Pakistan. 
But this remains a small amount compared to military outlays, and an overarching framework to support economic development is missing. 
Before investing hundreds of billions of dollars more in failing military operations, the Obama administration should re-think its policy and lay out a viable strategy to US citizens and the world. 
It’s high time for a strategy of peace through sustainable development – including investments in health, education, livelihoods, water and sanitation, and irrigation – in today’s hotspots, starting with Afghanistan and Pakistan. 
Such a strategy cannot simply emerge as a byproduct of US military campaigns. 
Rather, it will have to be developed proactively, with a sense of urgency and in close partnership with the affected countries and the communities within them. 
A shift in focus to economic development will save a vast number of lives and convert the unthinkably large economic costs of war into economic benefits through development. 
Obama must act before today’s crisis explodes into an even larger disaster. 

Peace Through Reconciliation in Afghanistan 
NEW YORK – It may or may not be coincidental, but as US President Barack Obama’s military offensive in Afghanistan gets underway, Afghan President Hamid Karzai has at long last embarked on a serious effort at national reconciliation. 
The prime focus of this process is to find some means to reintegrate at least parts of the Taliban into society and into productive activities. 
In order to qualify for reintegration, members of the Taliban will need to lay down their weapons, renounce their connection with Al Qaeda, and agree to respect Afghan laws. 
This policy change is a necessary parallel to the military action now taking place. 
It is also a belated recognition that the “development as usual” policies followed in Afghanistan up to now have failed. 
Indeed, as has been painfully demonstrated, the old policies were never going to be enough to galvanize Afghan public support, particularly for a new military “surge.” 
Eight years ago, Afghanistan embarked on four distinct transitions: a security transition away from violence and insecurity; a political transition toward a society based on participatory government and the rule of law; a social transition from tribal and ethnic confrontations toward national reconciliation; and an economic transition to transform a war-torn and unstable economy into a viable one in which people can make a decent and legal living. 
Because economic reconstruction takes place amid this multi-pronged transition, what has been happening in Afghanistan is fundamentally different from normal development processes. 
The current Afghan situation reflects the failure until now to make national reconciliation – rather than optimal development policies – the bedrock priority of the government and the international community. 
War-torn countries that have embarked on transitions of this type since the end of the Cold War have a dismal record: roughly half revert to conflict within a few years. 
Of the other half, most end up highly aid-dependent – indeed an unsustainable position in the present financial context. 
Afghanistan has an infamous record on both grounds: it has reverted to conflict, and it is not being weaned off its high aid-dependence. 
El Salvador, following the end of its civil war, managed to avoid reverting to conflict or becoming aid-dependent, owing mainly to its emphasis on efforts to reintegrate former combatants from both sides and other war-affected people into the national security forces, the political process, or economically productive activities. 
The “arms-for-land” program that the Salvadoran government pursued was the main venue for productive reintegration, providing beneficiaries with a viable livelihood and a stake, however tiny, in the country’s wealth. 
Because the main short-term challenge in any transition to peace is national reconciliation, the political objective of peace should prevail at all times over the economic or financial objective of development if the two ever clash, as they often do. 
Peace-related activities – particularly reintegration and other reconciliation programs – need to be given priority in budget allocations. 
Failure to do so has proved a major factor in countries’ relapse into war, because, in the absence of peace, there can be no sustainable development. 
So success in Afghanistan demands reintegration of the Taliban. 
This requires careful planning, bold and innovative solutions for inducing the Taliban to give up their arms, and a commitment to “stay the course” with the right policies, possibly for many years. 
But reintegration will require a carrot-and-stick approach. 
Incentives probably can be found to induce a large number of the rank and file to abandon the insurgency and join the Afghan armed forces or police, play a role in local politics, join the national civil service, or find agricultural or other private-sector employment. 
Cash payments should be minimized to immediate short-term needs, but an active policy of job creation urgently needs to be implemented. 
The situation regarding Taliban commanders is, however, more problematic. 
The rewards will have to be larger, as they were in the case of the Salvadoran programs for FMLN commanders. 
In the case of Afghanistan, it may also require a sharp reduction in Taliban financing from drug-related activities, as well as targeted military operations to destroy insurgency hideouts in both Afghanistan and Pakistan. 
Two serious problems make reconciliation in Afghanistan particularly challenging. 
First, the Karzai government must overcome credibility issues related to the broken promises it made in the past to former Taliban who laid down their weapons. 
Second, the $140 million pledged by donors at the London Conference for the Peace and Reintegration Trust Fund is blatantly insufficient for effective reintegration. 
To paraphrase John Maynard Keynes, the economic price of establishing peace is large, but it is indeed a good investment. 
That investment would save thousands of lives, and it would be a pittance compared to the hundreds of billions of dollars spent by the international community in military and peacekeeping expenditures since the so-called “war on terror” began in 2001. 

Peace through Superior Football 
When it comes to wishing for peace in the Middle East – virtually a New Year’s tradition ­– one needs to be careful. 
So many hopes have vanished in the bitter failure of so many negotiations. 
But we have a wish for the Middle East – one that, while perhaps not bringing peace, can create one of peace’s preconditions: goodwill. 
Israel and Palestine should jointly bid for, and be awarded, the Football World Cup in 2018. 
The Israel-Palestine conflict has lasted far too long. 
The Annapolis peace conference ended a seven-year freeze on negotiations, with President George W. Bush asking the conflict’s main protagonists to reach an agreement by the end of 2008. 
Nothing prevents us from hoping that a fair and just peace can be achieved by then. 
There is no curse that keeps Israelis and Palestinians from living side by side peacefully. 
Where there is a will, there is a way. 
But nurturing the will to achieve long-lasting peace depends on more than political negotiations. 
Israelis and Palestinians need an underlying source of solidarity if they are ever to settle their large disagreements and prevent their small ones from erupting into violence. 
Although football cannot solve the region’s major strategic problems, it has much to contribute in this regard. 
Football mobilizes energies and unites enthusiasms. 
After the 2010 World Cup in South Africa – a country where peace has taken root – and before the 2014 tournament in Brazil, it will be time to select the host for 2018. 
If a peace agreement is concluded before that choice is made, a 2018 World Cup jointly staged in Israel and Palestine would be a fantastic opportunity to consolidate the gains for both sides. 
Infrastructure investment would then follow. 
The joint organization of the 2018 World Cup in a place where two peoples were once at war would serve as a powerful symbol of the way that sports can serve the cause of peace. 
Indeed, the prospect of hosting the football World Cup might constitute yet another incentive for Israelis and Palestinians to reach a settlement. 
Let us imagine that they could then work hand in hand to host the biggest sporting event in the world. 

The Epidemic We Must Stop Ignoring 
PARIS – A primary-school student is diagnosed with tuberculosis in a leafy neighborhood outside Washington, DC. 
An infant with TB meningitis is transported by helicopter to a hospital in Eastern Canada. 
A preschool student in Smarves, France, is showing symptoms of TB a year after a classmate from the same school died from the disease. 
These are just three victims of a TB epidemic that will afflict one million children this year. 
Among those who are fortunate enough to get the standard antibiotic treatment and have no complicating factors such as HIV, 99% will survive. 
And yet 90% of the children who die from TB have been deprived of treatment, and a quarter-million children will die from the disease this year alone. 
There are no nuances to this story: health-care authorities around the world are leaving kids with TB to fate. 
If this sounds outrageous, consider the opening lines of a 2016 research paper by experts from Imperial College London, the Medical Research Council, and UNICEF. 
“Until recently, pediatric tuberculosis has been relatively neglected by the broader TB and the maternal and child health communities,” the authors write. 
“Human rights-based approaches to children affected by TB could be powerful; however, awareness and application of such strategies is not widespread.” 
In other words, children with TB have been failed by the very communities meant to serve them, but few people are even aware of the problem. 
Worldwide, TB kills more people than any other communicable disease. 
It is a serious public-health concern because the bacteria that cause it are easily spread through the air. 
But tackling TB in children is not the same as confronting it in adults. 
Because TB tests were designed for adults, they are not reliable for diagnosing children, who often present different symptoms. 
This is one reason why children go untreated. 
But an even simpler explanation is that children are not as contagious as adults. 
When children cough, their weaker bodies expel fewer TB germs than adults do. 
And when TB afflicts children, the bacteria often attack body parts besides their lungs – such as the abdomen and the tissues surrounding the brain. 
To be sure, individual health workers are not knowingly leaving children with TB to suffer and die. 
But health systems are. 
Globally, efforts to combat TB are under-resourced. 
And with more than ten million people contracting the disease every year, funds tend to be directed toward stopping its spread. 
So, even though children are one of the most vulnerable patient populations, their needs are ignored, because they are less contagious. 
Owing to these system-level priorities, one million children are dying from a preventable, treatable condition every four years. 
That is a human-rights catastrophe. 
Fortunately, practical life-saving measures to address the TB epidemic in children already exist. 
For example, we know that about half of all children living with a TB-infected adult will also contract the disease. 
Accordingly, one would expect children in households with an infected adult to be screened and given proper care. 
A 2017 study in The Lancet, however, finds that “household contact investigation remains severely underutilized” in countries where TB is common. 
Moreover, health workers and public-health officials could catch far more cases of TB in children simply by paying closer attention to their symptoms. 
After the International Union Against Tuberculosis and Lung Disease started advocating this approach in Uganda, the number of diagnosed cases of pediatric TB more than doubled in areas where it was implemented. 
But, beyond this example, children have generally been left out of TB research, and we urgently need to develop new tools designed specifically for them. 
TB in children is both a moral and a political problem. 
As such, governments should put human rights at the center of their TB strategies, policies, and public-health services. 
The Convention on the Rights of the Child – the most widely ratified treaty in the world – can serve as a guiding framework. 
They should start this work immediately. 
In May, top health officials at the World Health Assembly in Geneva began making preparations for the High-Level Meeting on Tuberculosis at the United Nations General Assembly in September. 
For the first time in history, the world’s heads of state will gather to explore ways to end TB. 
The outcome will shape the international response to TB for years to come. 
One hopes that world leaders will come to understand that the pediatric TB epidemic reflects widespread neglect of children’s fundamental rights, and could be dramatically curtailed with existing policy interventions. 
There is no longer any excuse for ignoring this scourge. 

The Rise of the Frugal Economy 
PALO ALTO – In a famous 1937 essay, the economist Ronald Coase argued that the reason Western economies are organized like a pyramid, with a few large producers at the top and millions of passive consumers below, is the existence of transaction costs – the intangible costs associated with search, bargaining, decision-making, and enforcement. 
But with the Internet, mobile technologies, and social media all but eliminating such costs in many sectors, this economic structure is bound to change. 
Indeed, in the United States and across Europe, vertically integrated value chains controlled by large companies are already being challenged by new consumer-orchestrated value ecosystems, which allow consumers to design, build, market, distribute, and trade goods and services among themselves, eliminating the need for intermediaries. 
This bottom-up approach to value creation is enabled by the horizontal (or peer-to-peer) networks and do-it-yourself (DIY) platforms that form the foundation of the “frugal” economy. 
Two key factors are fueling the frugal economy’s growth: a protracted financial crisis, which has weakened the purchasing power of middle-class consumers in the West, and these consumers’ increasing sense of environmental responsibility. 
Eager to save money and minimize their ecological impact, Western consumers are increasingly eschewing individual ownership in favor of shared access to products and services. 
As it stands, nearly 50% of Europeans believe that, within a decade, cars will be consumed as a “shared” good, instead of privately owned, and 73% predict the rapid growth of car-sharing services. 
BlaBlaCar, Europe’s leading car-sharing service, now transports more passengers monthly than Eurostar, the high-speed rail service connecting London with Paris and Brussels. 
And the better-known service Uber is causing panic among taxi companies worldwide. 
Despite recent controversy, the company, founded in 2009, is valued at more than $40 billion. 
This shift in consumer attitudes extends far beyond transport. 
The peer-to-peer home-sharing service Airbnb now rents more room-nights annually than the entire Hilton hotel chain. 
And the peer-to-peer lending market, which bypasses banks and their hefty hidden fees, surpassed the $1 billion mark in early 2012. 
The global market for shared products and services is expected to grow dramatically, from $15 billion today to $335 billion by 2025, without requiring any major investment. 
The European Commission predicts that peer-to-peer sharing, now an income booster in a stagnant labor market, will evolve into a disruptive economic force. 
The nature of horizontal networks supports this prediction. 
Such networks begin working long before they reduce transaction costs. 
By enabling ordinary people to do at home what, a decade ago, only scientists in large labs could do, the Internet economy is lowering the costs of research and development, design, and production of new goods and services in many sectors. 
Thanks to low-cost DIY hardware kits like the $25 Arduino or the $35 Raspberry Pi, people are increasingly building their own consumer devices. 
Moreover, customers can now design and manufacture industrial-caliber products by using shared high-tech workshops – so-called “fab labs” – equipped with CNC routers, laser cutters, and 3D printers. 
Such changes are propelling the so-called “maker movement”: a legion of tinkerers who collectively can create products faster, better, and more cheaply than big companies can. 
Together, the maker movement and peer-to-peer sharing platforms are empowering once-passive customers to become active “prosumers,” thereby spawning a frugal economy that can create value in a more efficient, cost-effective, socially inclusive, and environmentally sustainable way. 
Recognizing these benefits, some communities are actively supporting the maker movement and accelerating the development of frugal economies. 
For example, mayors of major cities – including New York, Tokyo, Rome, Santiago, and Oslo – are seeking to host Maker Faires, where ordinary citizens showcase their ingenuity and engage with other makers. 
Last June, US President Barack Obama hosted the first White House Maker Faire – declaring that “Today’s DIY is tomorrow’s ‘Made in America’” – and appointed a senior adviser to determine how to turn the maker movement into an engine of US economic growth. 
And New York City Mayor Bill de Blasio, who proclaimed September 15-21, 2014, “Maker Week,” and Barcelona Mayor Xavier Trias, who wants to build a “Fab City,” are trying to put their cities at the forefront of the global maker movement. 
Meanwhile, in Vauban – a neighborhood in the German city of Freiburg – 65% of electricity is produced by solar panels and a co-generation plant established and operated by local citizens. 
And Helsinki is building a “mobility on demand” system that seamlessly combines multiple shared- and public-transport services in a single payment network, with the goal of eliminating private car ownership by 2025. 
A self-organizing frugal economy could generate billions of dollars in value and create millions of jobs in the medium term. 
But, of course, there will be losers: the large Western companies whose “more for more” business models, backed by huge R&D budgets and closed organizational structures, are not designed to serve the needs of cost-conscious and eco-aware consumers seeking more – and better – for less. 
In order to survive, these established companies will need to reinvent themselves as frugal enterprises that integrate digitally empowered “prosumers” into their value chains and strive to address market needs in a more eco-efficient and cost-effective way. 
The transition to a frugal economy is happening. 
Traditional companies must get on board – or risk becoming obsolete. 

People Power in the Caucasus 
For the past month, women in Georgia who were displaced from Abkhazia during the 1993 conflict have witnessed history moving backwards; everything they lived through 15 years ago is repeating itself. 
These women are now hosting a new flood of displaced civilians from Abkhazia and South Ossetia after Russia’s aggression in those regions, as well as within the Georgian territories that Russian forces have occupied since the invasion. 
In Tbilisi alone, there are more than 500 camps for internally displaced people, many of them women and children living with shortages of food and medical supplies. 
Georgians today hardly feel supportive of their president, Mikheil Saakashvili, who, in a foolish attempt to regain control over South Ossetia, provoked Russia to drop its peacekeeping mission in the region and turn its full military might to pushing Georgian troops out of South Ossetia and Abkhazia, and then to occupying much of Georgia. 
The Russians bombed numerous strategic and civilian targets in Georgia, destroying infrastructure and producing growing shortages of food, fuel, and medicine. 
People are in despair; they are angry at Russia for its aggression and at their own government for provoking this uneven conflict. 
People of different nationalities and ethnicities have been living in this region side by side for centuries, sharing customs, traditions, bread and wine, and mutual respect for each another’s cultures and languages. 
But, going back to the Russian, British, and Ottoman Empires that once battled here, they have been continually exploited by politicians and generals. 
Women and children suffer the most in times of conflict. 
Add to this centuries-old patriarchal traditions, 15-year-old post-war traumas, a 20-year economic crisis, and current Russian aggression, and you may begin to grasp what women in South Ossetia, Abkhazia, and Georgia are enduring these days. 
Besides the general devastation that modern warfare brings, impoverished and angry Russian soldiers were wreaking havoc on civilians by stealing belongings left behind and raping women. 
In addition, lawlessness was enticing bandits to cross the border and vandalize and rob properties left by fleeing refugees. 
News reports and “analysis” by state-controlled channels in both Russia and Georgia that promote negative images of “the enemy” serve only to widen the gap between ethnic groups. 
Over the past month, concerned citizens in both Russia and Georgia have started to make attempts to build alliances and reach out to each other outside of the government-controlled media and structures. 
There have been action calls and statements circulated on the Web calling on the people of the region to unite and not allow governments to build bigger walls between them. 
Despite government propaganda, the region’s people must remember that Russians are not superior to Georgians, Georgians to Ossetians or Abkhazians, and so on. 
We need to stop these territorial battles based on national pride and desire to control and rule. 
Saakashvili must be pressured to abandon his effort to wield full control over Abkhazia and South Ossetia. 
At the same time, the Russian government must be pressured to pull out of the Caucasus and let people there decide their future for themselves. 
Now is the time for Georgian, Russian, Abkazian, and Ossetian civilians who are bearing the brunt of the conflict to come together to stop imperial chess games that kill thousands of people and leave thousands more displaced and emotionally wounded. 
It is time to help civil society in this area build a world where peace, not warfare, is the rule. 
Women’s rights activists in the region should not fall into a brainwashing trap of nationalism and territorial disputes, becoming another tool in the hands of politicians. 
They should demonstrate to their governments that they will not succumb to divisive ideology. 

Perfect Losers 
LONDON – Economics, it seems, has very little to tell us about the current economic crisis. 
Indeed, no less a figure than former United States Federal Reserve Chairman Alan Greenspan recently confessed that his entire “intellectual edifice” had been “demolished” by recent events. 
Scratch around the rubble, however, and one can come up with useful fragments. 
One of them is called “asymmetric information.” 
This means that some people know more about some things than other people. 
Not a very startling insight, perhaps. 
But apply it to buyers and sellers. 
Suppose the seller of a product knows more about its quality than the buyer does, or vice versa. 
Interesting things happen – so interesting that the inventors of this idea received Nobel Prizes in economics. 
In 1970, George Akerlof published a famous paper called “The Market for Lemons.” 
His main example was a used-car market. 
The buyer doesn’t know whether what is being offered is a good car or a “lemon.” 
His best guess is that it is a car of average quality, for which he will pay only the average price. 
Because the owner won’t be able to get a good price for a good car, he won’t place good cars on the market. 
So the average quality of used cars offered for sale will go down. 
The lemons squeeze out the oranges. 
Another well-known example concerns insurance. 
This time it is the buyer who knows more than the seller, since the buyer knows his risk behavior, physical health, and so on. 
The insurer faces “adverse selection,” because he cannot distinguish between good and bad risks. 
He therefore sets an average premium too high for healthy contributors and too low for unhealthy ones. 
This will drive out the healthy contributors, saddling the insurer with a portfolio of bad risks – the quick road to bankruptcy. 
There are various ways to “equalize” the information available – for example, warranties for used cars and medical certificates for insurance. 
But, since these devices cost money, asymmetric information always leads to worse results than would otherwise occur. 
All of this is relevant to financial markets because the “efficient market hypothesis” – the dominant paradigm in finance – assumes that everyone has perfect information, and therefore that all prices express the real value of goods for sale. 
But any finance professional will tell you that some know more than others, and they earn more, too. 
Information is king. 
But just as in used-car and insurance markets, asymmetric information in finance leads to trouble. 
A typical “adverse selection” problem arises when banks can’t tell the difference between a good and bad investment – a situation analogous to the insurance market. 
The borrower knows the risk is high, but tells the lender it is low. 
The lender who can’t judge the risk goes for investments that promise higher yields. 
This particular model predicts that banks will over-invest in high-risk, high-yield projects, i.e., asymmetric information lets toxic loans onto the credit market. 
Other models use principal/agent behavior to explain “momentum” (herd behavior) in financial markets. 
Although designed before the current crisis, these models seem to fit current observations rather well: banks lending to entrepreneurs who could never repay, and asset prices changing even if there were no changes in conditions. 
But a moment’s thought will show why these models cannot explain today’s general crisis. 
They rely on someone getting the better of someone else: the better informed gain – at least in the short-term – at the expense of the worse informed. 
In fact, they are in the nature of swindles. 
So these models cannot explain a situation in which everyone, or almost everyone, is losing – or, for that matter, winning – at the same time. 
The theorists of asymmetric information occupy a deviant branch of mainstream economics. 
They agree with the mainstream that there is perfect information available somewhere out there, including perfect knowledge about how the different parts of the economy fit together. 
They differ only in believing that not everyone possesses it. 
In Akerlof’s example, the problem with selling a used car at an efficient price is not that no one knows how likely it is to break down, but rather that the seller knows perfectly well how likely it is to break down, and the buyer does not. 
And yet the true problem is that, in the real world, no one is perfectly informed. 
Those who have better information try to deceive those who have worse; but they are deceiving themselves that they know more than they do. 
If only one person were perfectly informed, there could never be a crisis – someone would always make the right calls at the right time. 
But only God is perfectly informed, and He does not play the stock market. 
“The outstanding fact,” John Maynard Keynes wrote in his General Theory of Employment, Interest, and Money , “is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made.” 
There is no perfect knowledge “out there” about the correct value of assets, because there is no way we can tell what the future will be like. 
Rather than dealing with asymmetric information, we are dealing with different degrees of no information. 
Herd behavior arises, Keynes thought, not from attempts to deceive, but from the fact that, in the face of the unknown, we seek safety in numbers. 
Economics, in other words, must start from the premise of imperfect rather than perfect knowledge. 

Peril or Promise in North Korea? 
MADRID – Two days after Kim Jong-il, North Korea’s leader, died in a train in his country, South Korean authorities still knew nothing about it. 
Meanwhile, American officials seemed at a loss, with the State Department at first merely acknowledging that press reports had mentioned his death. 
The South Korean and US intelligence services’ inability to pick up any sign of what had happened attests to the North Korean regime’s opaque character, but also to their own deficiencies. 
American planes and satellites watch North Korea day and night, and the most sensitive intelligence-gathering equipment covers the frontier between the two Koreas. 
Nonetheless, we know very little of that country, because all vital information is restricted to a small group of leaders obsessed with secrecy. 
The leadership change is occurring at the worst possible time. 
It is known that Chinese leaders had hoped that Kim Jong-il would survive long enough to consolidate support among the country’s various factions for the succession of his son, Kim Jong-un. 
All of the symbolic attributes of power have been transferred to Kim Jong-un – reflected in his official position in the funeral ceremonies, his presidency of the Military Commission, and his assumption of the ruling party’s highest rank – with remarkable speed. 
But such trappings will not make the transition process any easier for a young man of less than 30 in a society where veteran military chiefs retain so much power. 
The economic situation, which is still very precarious, with many people living close to starvation, constitutes another key challenge. 
Two examples suffice to illustrate the impact: the price of rice has tripled while consumption of electricity is down by two-thirds from two decades ago. 
My personal memories of North Korea, now almost ten years old, are of a poor and depressed country. 
Pyongyang, the capital, was dark and deserted, illuminated by the cavalcade taking us from the official housing to the opera house, only to return to darkness behind us. 
Kim Jong-il was greeted with the same fervor when he entered the opera house that today marks public mourning of his death. 
My trip took place in April 2002, a somewhat optimistic time. 
The European Union had joined an agreement initiated by the two Koreas and the US within the Korean Energy Development Organization program, the objective being to persuade North Korea to freeze and later dismantle its nuclear program. 
In exchange, two light-water nuclear reactors would be built to generate electric energy, and 500,000 metric tons of oil would be supplied annually until the first reactor began operating. 
In turn, the EU initiated an extensive humanitarian aid project. 
The talks with Kim Jong-il and his collaborators seemed promising. 
Unfortunately, the agreement did not last long. 
In 2003, North Korea abandoned the Nuclear Non-Proliferation Treaty. 
From that moment, all optimism was lost, until contacts were subsequently reinitiated in a complex six-party format (China, Russia, the US, Japan, and the two Koreas) that continued, with ups and downs, until the end of 2007. 
Since the maritime incidents of 2009 and 2010, in which North Korean forces attacked South Korean assets, there has been virtually no contact at all between the two sides. 
Given North Korea’s behavior over the last decade, the sudden change of leadership increases the threat of unexpected incidents. 
In order to limit the risk, it is essential to keep relations with China as transparent as possible. 
It is China that has the most direct contact with North Korea, and that could best catalyze resumption of the six-party talks. 
China recognizes that North Korea cannot continue in its present form, and would like to see its leaders transform the economy without undertaking substantial political change. 
Is that possible? 
Could it be done quickly enough to boost other regional players’ confidence that the country’s evolution will be predictable? 
For China, problems are judged according to the country’s own history and from the standpoint of domestic policy – all the more so the closer the problem is to its borders. 
For the West, especially the US, every problem should have a solution within a finite period of time. 
While the US breaks down problems and tries to find solutions for each part, China considers political problems unhurriedly, as an extended process that might have no resolution. 
Beyond the six-party talks, it is necessary to create a framework from which a cooperative dialogue between the US and China might emerge. 
In the case of Korea – as Christopher Hill, one of the most effective US negotiators on these matters, remembers – the US should make it clear that no possible solution for the divided peninsula would mean a strategic loss for China. 
After the armistice that ended the Korean War in 1953, the 38th parallel was established as the limit for US forces’ presence; the importance of that war for China should not be forgotten. 
This approach could be one way to stabilize the region during this period of heightened uncertainty. 
There might be others. 
The ongoing opening in Myanmar (Burma) shows that potentially significant political change does not need to be accompanied by regional instability. 
In the case of North Korea, where nuclear arms are in play, it cannot afford to be. 

Education Cannot Wait 
LONDON – “Recall the face of the poorest and weakest man you have seen, and ask yourself if this step you contemplate is going to be any use to him.” 
These words, spoken by Mahatma Gandhi in 1948, should be taken as a test of our sincerity, and as a challenge to our complacency, when considering the fate of the 30 million children displaced from their homes by civil wars and natural disasters. 
More boys and girls have been uprooted by crisis than at any time since 1945. 
They are likely to spend their school-age years without entering a classroom, their talents undeveloped and their potential unlocked. 
There are now 75 million young people whose education has been interrupted by conflict and crisis. 
Yet urgency – and international law, which mandates the education of all displaced children – fails to inspire action. 
Displaced children are more likely to become the youngest laborers in the factory, the youngest brides at the altar, and the youngest soldiers in the trench. 
Without opportunity, children are vulnerable to extremists and radicalization. 
Every year, close to a half-million girls are trafficked and vanish. 
The fate of these dispossessed is tethered to the thinnest of lifelines. 
When disaster strikes, what can only be described as a begging bowl is handed around the world’s donor community. 
Voluntary contributions are then administered by refugee agencies, charities, and NGOs, which heroically help refugees scrape by with the bare essentials – food, water, shelter, and protection. 
In such circumstances, the right to education becomes an unaffordable “luxury.” 
While UN Peacekeepers are funded by assessed contributions levied on member countries, the millions of children displaced by crises have no guarantee that anyone will fund their schooling. 
Indeed, less than 2% of humanitarian aid reaches education. 
Syria’s civil war, now entering its sixth year, and the first anniversary of Nepal’s devastating earthquake – two disasters that have forced millions more children into the streets – serve as painful reminders that we lack the means to return children to the classroom in the wake of such tragedies. 
A permanent fund securing education for children in emergency situations is long overdue. 
Instead of wasting months begging for aid, such a reserve fund would be capable of delivering it immediately. 
At the onset of an emergency, the fund would swiftly assess where dispossessed children are, develop a strategy, and put in place a plan to provide education for them. 
Now, for the first time, we are in a position to deliver on this promise. 
Under the leadership of UNICEF Executive Director Anthony Lake, UNESCO Director-General Irina Bokova, UN High Commissioner for Refugees Filippo Grandi, Chair of the Global Partnership for Education Julia Gillard, and World Bank President, Jim Yong Kim – and with the support of the UN Secretary-General, Ban Ki-moon – an unprecedented humanitarian fund for education in emergencies is about to be established. 
The new “Education Cannot Wait” fund will respond to new realities and requirements. 
Most child refugees are likely to spend more than a decade out of their own countries, so their plight cannot be considered temporary. 
The breakthrough fund will support the education of refugees for up to five years, instead of the mere months of patchwork provisions that are presently on offer. 
No longer will humanitarian, security, and development needs be split into silos with their own addresses and agendas. 
A single fund will now meet these needs at once. 
After all, when refugee children find a place in school, they are more secure, their parents are more hopeful, and their states are more stable. 
The fund will not be bound by old World Bank rules that, until recently, excluded the education of refugee children in middle-income countries from concessional loans. 
The initiative will be the first official humanitarian fund for education. 
And a parallel UN-led fund will have distinct windows through which businesses, foundations, and individuals can contribute. 
To be sure, delivering an education to displaced children demands a departure from pure voluntarism: a shift toward assessed contributions collected by levies from wealthy countries. 
But, until this shift occurs, we will ask individual philanthropists, corporations and charities – as well as new and old aid donors – to come together to catalyze the venture. 
Our sense of urgency, coupled with the requisite funds, promises to have a significant impact. 
When it comes to securing schooling, no price tag is too steep. 
The fund will harness today’s passions and key innovations. 
We want technology firms to play a central role in providing new ideas and disruptive thinking. 
We want firms that already offer refugees an online education, internet access and IT hardware to drive the provision of education to displaced and isolated girls and boys. 
In establishing this fund, we are ending the era of the formulaic crisis response. 
It was Gandhi’s belief that reflection could motivate action by recalibrating our moral compass. 
What makes this fund unique is not the series of new benchmarks it sets. 
Rather, it signals a change in how we meet the challenges of an emergency. 
Going beyond present demands, the fund is based on the needs of the future. 
In providing resources to deliver education, the fund is a bold affirmation of a better tomorrow – an unwavering promise to unlock talent, develop potential, and secure futures for all children, wherever they are. 
By establishing “Education Cannot Wait”, we are sending a message to the downcast and dispossessed everywhere. 
Education, at its best, offers something that food, shelter, and healthcare can never themselves provide: hope, the chance to plan, and to prepare for the future. 

Your Data or Your Life 
LONDON – Apple’s new watch keeps track of your health. 
Google Now gathers the information needed to compute the ideal time for you to leave for the airport. 
Amazon tells you the books you want, the groceries you need, the films you will like – and sells you the tablet that enables you to order them and more. 
Your lights turn on when you get close to home, and your house adjusts to your choice of ambient temperature. 
This amalgamation and synthesis of digital services and hardware is designed to make our lives easier, and there is no doubt that it has. 
But have we stopped asking fundamental questions, both of ourselves and of the companies we entrust to do all of these things? 
Have we given sufficient consideration to the potential cost of all of this comfort and ease, and asked ourselves if the price is worth it? 
Every time we add a new device, we give away a little piece of ourselves. 
We often do this with very little knowledge about who is getting it, much less whether we share their ethics and values. 
We may have a superficial check-box understanding of what the companies behind this convenience do with our data; but, beyond the marketing, the actual people running these organizations are faceless and nameless. 
We know little about them, but they sure know a lot about us. 
The idea that companies can know where we are, what we have watched, or the content of our medical records was anathema a generation ago. 
The vast array of details that defined a person was widely distributed. 
The bank knew a bit, the doctor knew a bit, the tax authority knew a bit, but they did not all talk to one another. 
Now Apple and Google know it all and store it in one handy place. 
That is great for convenience, but not so great if they decide to use that information in ways with which we do not proactively agree. 
And we have reason to call into question companies’ judgment in using that data. 
The backlash to the news that Facebook used people’s news feeds to test whether what they viewed could alter their moods was proof of that. 
I do not recall checking a box to say that that was okay. 
Recently, hackers misappropriated photos sent via Snapchat, a service used primarily by young people that promises auto-deletion of all files upon viewing. 
Likewise, health-care data were always considered private, so that patients would be open and honest with health-care professionals. 
As the lines between health care and technology businesses become hazy, some manufacturers of “wearables” and the software that runs on them are lobbying to have their products exempted from being considered medical devices – and thus from regulatory requirements for reliability and data protection. 
Privacy is only one part of a larger discussion around data ownership and data monopoly, security, and competition. 
It is also about control and destiny. 
It is about choice and proactively deciding how people’s data are used and how people use their own data. 
More mature firms have phased in formal protocols, with ethics officers, risk committees, and other structures that oversee how data are collected and used, though not always successfully (indeed, they often depend on trial and error). 
Small new companies may have neither such protocols nor the people – for example, independent board members – to impose them. 
If serious ethical lapses occur, many consumers will no longer use the service, regardless of how promising the business model is. 
We like new applications and try them out, handing over access to our Facebook or Twitter accounts without much thought about the migration of our personal data from big companies with some modicum of oversight to small companies without rigorous structures and limits. 
Consumers believe or expect that someone somewhere is keeping an eye on this, but who exactly would that be? 
In Europe, legislation to protect personal data is not comprehensive, and much of the rest of the world lacks even rudimentary safeguards. 
After exploring this issue with legislators in several countries over the past couple of months, it has become abundantly clear that many do not have a full grasp of the myriad issues that need to be considered. 
It is a difficult subject to address, and doing so is impeded by lobbying efforts and incomplete information. 
In the short term, young companies should view ethics not as a marketing gimmick, but as a core concern. 
All organizations should invest in ethics officers or some sort of review process involving people who can assess all of the implications of a great-sounding idea. 
Legislators need to educate themselves – and the public – and exercise more oversight. 
For example, just as many countries did with car seatbelts a generation ago, a public-safety campaign could be paired with legislation to explain and promote two-step verification. 
In the longer term, as we rightly move toward universal Internet access, we need to ask: How much of ourselves are we willing to give away? 
What happens when sharing becomes mandatory – when giving access to a personal Facebook account is a job requirement, and health services are withheld unless a patient submits their historical Fitbit data? 
If that is the future we want, we should stride toward it with full awareness and a sense of purpose, not meander carelessly until we fall into a hole, look up, and wonder how we got there. 

Pervez Musharraf’s Long Goodbye 
ISLAMABAD – Pervez Musharraf of Pakistan stands virtually alone today while facing the most serious challenge to his presidency: possible impeachment by the new democratically-elected government. 
The potential charges are serious: conspiring to destabilize the government that was elected last February, unlawfully removing the country’s top judges in November 2007, and failing to provide adequate security to Benazir Bhutto before her assassination last December. 
Allying himself with the Bush administration has increased his unpopularity, especially following missile attacks by the United States in Pakistan’s tribal areas. 
Despite earlier differences on how to deal with Musharraf, Pakistan’s leading political parties are now united against him. 
Feuding between the Pakistan People’s Party, led by Benazir’s widower, Asif Ali Zardari, and the Pakistan Muslim League (N), led by former Prime Minister Nawaz Sharif, had given Musharraf a chance to regain some standing after his allies were defeated in the February elections. 
American reluctance to abandon Musharraf – together with prolonged electricity shortages, which made the new government appear incompetent – also raised his hopes. 
Musharraf may be counting on the army, his primary constituency, to bail him out of this crisis. 
Though such support remains a possibility, it is unlikely that the army leadership will extend itself on his behalf. 
Though a protégé of Musharraf, the army’s chief of staff, General Ashfaq Kayani, is a professional soldier for whom the army’s institutional interests are more important than the political interests of his former army boss. 
Kayani has repeatedly declared that the army will not interfere in political affairs, and that the parliament and constitution are supreme. 
Even if the army is tempted to step in on Musharraf’s behalf, it has been chastened by political developments during the past year. 
The entire legal community arose to demand restoration of the country’s judges and reinforcement of the rule of law. 
The public’s demand for free elections and the resulting creation of a democratic government have forced the military to accept the public will. 
The army has also paid a heavy price for Musharraf’s approach to the war on terror. 
Suicide bombers have struck repeatedly at military installations and personnel around the army’s headquarters in Rawalpindi. 
An increase in deadly attacks on army convoys in the Pakistan-Afghanistan tribal areas has also pushed the army away from Musharraf. 
Though the army has reaped a financial windfall from US military aid, and has targeted many foreign militants allied with al-Qaeda in the region, its performance against Pakistani militants has been mixed at best. 
Consequently, the prestige of the Taliban and other militant groups operating in the area has grown. 
In this context, the army, seeking to avoid sole responsibility for reverses, wants a popular government to take charge of policy. 
No such government can emerge if the elected parties are unseated. 
Nevertheless, there are signs of disagreement on important matters between the government and the army. 
The military recently blocked a government move to place Pakistan’s infamous intelligence service, the ISI, under the control of the interior minister rather than the prime minister. 
Musharraf backed the military’s opposition to this reform, gaining some gratitude from military commanders. 
During Prime Minister Yousaf Raza Gilani’s recent visit to the US, President Bush repeatedly said that his administration supports Pakistan’s democracy, a policy since reiterated by Secretary of State Condoleezza Rice. 
This indicates that the US will not back Musharraf in any confrontation between him and Pakistan’s democratic forces. 
Most Pakistanis hope so. 
Musharraf must assess what will be his legacy. 
Rather than trying to face down impeachment and prolonging the crisis, he should recognize that Pakistan cannot afford more instability, and that giving up honorably will bring him some respect. 
For the sake of argument, even if Musharraf faces impeachment and by some stroke of luck is saved from being thrown out of office, his future will be bleak. 
In March 2009, the current ruling coalition will gain more seats in the Senate, and the government would almost certainly try to impeach him again. 
Moreover, any attempt by Musharraf to dislodge the government by using his constitutional authority would trigger another election, the results of which would not be much different from the vote in February. 
It is time for Musharraf’s friends in the West to press him to serve his country one last time, by avoiding confrontation with his country’s democratic forces and calling it quits. 

Pervez Musharraf’s Minions of Terror 
After his ill-advised dismissal of the chief justice of Pakistan’s Supreme Court ignited a firestorm of violent protests, President General Pervez Musharraf may be banking on Islamic fanatics to create chaos in the nation’s capital, Islamabad. 
Many suspect that an engineered bloodbath that leads to army intervention, and the declaration of a national emergency, could serve as a pretext to postpone the October 2007 elections. 
This could make way for Musharraf’s dictatorial rule to continue into its eighth year – and perhaps well beyond. 
This perverse strategy sounds almost unbelievable. 
Musharraf, who President George W. Bush describes as his “buddy” and supports an “enlightened moderate” version of Islam, wears religious extremists’ two close attempts on his life as a badge of honor. 
But his secret reliance upon the Taliban card – one that he has been accused of playing for years – increases as his authority weakens. 
Signs of government-engineered chaos abound. 
In the heart of Islamabad, vigilante groups from a government-funded mosque, the Lal Masjid, roam the streets and bazaars imposing Islamic morality and terrorizing citizens in full view of the police. 
Openly sympathetic to the Taliban and tribal militants fighting the Pakistan army, the two cleric brothers who head Lal Masjid, Maulana Abdul Aziz and Maulana Abdur Rashid Ghazi, have attracted a core of banned militant organizations around them. 
These include the Jaish-e-Muhammad, considered to be the pioneer of suicide bombings in the region. 
The clerics openly defy the state. 
Since January 21, baton-wielding, burqa-clad students of the Jamia Hafsa, the woman’s Islamic university located next to Lal Masjid, have forcibly occupied a government building, the Children’s Library. 
In one of their many forays outside the seminary, this burqa brigade swooped upon a house, which they claimed was a brothel, and kidnapped three women and a baby. 
Jamia Hafsa students in Islamabad demonstrating for enforcement of Islamic law, March 2007. 
Male students from Islamabad’s many madrasas are even more active in terrorizing video shop owners, whom they accuse of spreading pornography. 
Newspapers have carried pictures of grand bonfires made with seized cassettes and CD’s. 
Most video stores in Islamabad have now closed. 
Their owners duly repented after a fresh campaign on May 4 by militants blew up a dozen music and video stores, barbershops and a girl’s school in the Northwest Frontier Province. 
Astonishing patience has been shown by the Pakistani state, which on other occasions freely used air and artillery power to combat such challengers. 
The Lal Masjid clerics operate with impunity – no attempt has been made to cut off its electricity, gas, phone, or Web site – or even to shut down its illegal FM radio station. 
The chief negotiator appointed by Musharraf, Chaudhry Shujaat Husain, described the burqa brigade kidnappers as “our daughters,” with whom negotiations would continue and against whom “no operation could be contemplated.” 
Clerics realize that the government wants to play ball. 
Their initial demand – the rebuilding of eight illegally constructed mosques that had been knocked down by Islamabad’s civic administration – became a call for enforcement of Sharia law across Pakistan. 
In a radio broadcast on April 12, the clerics issued a threat: “ There will be suicide blasts in the nook and cranny of the country. 
We have weapons, grenades, and we are expert in manufacturing bombs. 
We are not afraid of death…. ” 
The Lal Masjid head cleric, a former student of my university in Islamabad, added the following chilling message for our women students: 
The government should abolish coeducation. 
Quaid-e-Azam University has become a brothel. 
Its female professors and students roam in objectionable dresses. 
I think I will have to send my daughters of Jamia Hafsa to these immoral women. 
They will have to hide themselves in hijab, otherwise they will be punished according to Islam…. 
Our female students have not issued the threat of throwing acid on the uncovered faces of women. 
However, such a threat could be used for creating the fear of Islam among sinful women. 
There is no harm in it. 
There are far more horrible punishments in the hereafter for such women. 
Indeed, on May 7, a female teacher in the QAU history department was physically assaulted in her office by a bearded, Taliban-looking man who screamed that he had instructions from Allah. 
What’s next? 
As Islamabad heads the way of Pakistan’s tribal towns, the next targets will be girls’ schools, Internet cafes, bookshops, and stores selling Western clothing, followed by purveyors of toilet paper, tampons, underwear, mannequins, and other un-Islamic goods. 
In a sense, the inevitable is coming to pass. 
Until a few years ago, Islamabad was a quiet, orderly, modern city no different from any other in Pakistan. 
Still earlier, it was largely the abode of Pakistan’s hyper-elite and foreign diplomats. 
But the rapid transformation of its demography brought with it hundreds of mosques with multi-barreled audio cannons mounted on minarets, as well as scores of madrasas illegally constructed in what used to be public parks and green areas. 
Now, tens of thousands of their students with little prayer caps dutifully chant the Koran all day. 
In the evenings, they roam in packs through the city’s streets and bazaars, gaping at store windows and lustfully ogling bare-faced women. 
The stage is being set for transforming Islamabad into a Taliban stronghold. 
When Musharraf exits – which may be sooner rather than later – he will leave a bitter legacy that will last for generations, all for a little more taste of power. 

The Case for Better Government 
LONDON – A recent survey by the World Economic Forum’s Network of Global Agenda Councils rated government lower than either business or media in its ability to respond to global challenges. 
On one level, this is understandable, given the plethora of challenges that governments face and the lack of long-term solutions to many problems that demand one. 
But, on another level, the attempt to rate government alongside business and the media is fundamentally misguided: no sector operates at the scale of responsibility, accountability, and expectation that governments do. 
Business decides for itself where to invest and grow. 
Media indulge themselves in a fast-moving news cycle. 
Government enjoys neither luxury. 
It cannot simply pack up and move on when it faces a loss or is bored with a story. 
Government must stay put – and must often clean up the messes left behind by those who do not. 
On a good day, it may even get to make improvements. 
The problem for governments, more often than not, is that in attempting to respond to and reconcile often conflicting individual, family, and national needs, their ability to deliver results efficiently and effectively has declined. 
As a result, trust in government has plummeted. 
Just before the WEF’s Summit on the Global Agenda in Abu Dhabi last month, I spent a week in India. 
Most of the people with whom I spoke complained endlessly about government shortcomings. 
Government at both the federal and state levels was invariably regarded as slow, indecisive, corrupt, unimaginative, and shortsighted – in general, worthless. 
It is easy for business to want government just to get out of the way, and for the media to point fingers and sensationalize events without much depth of analysis – or even, sometimes, grasp of reality. 
True, India may not be the best advertisement for democracy in some respects, given how hard it often seems there to make long-term decisions and implement them without being buffeted – and frequently derailed – by volatile public opinion and hard-nosed vested interests. 
But the alternative – rule not by law but by dictatorship – is a far nastier prospect. 
And there are not many problems in India’s governance that state funding of politics could not solve. 
After all, when serving a vast democracy requires non-stop electioneering, and politicians are thus dependent on financial donations, governance is bound to go awry. 
Governments’ ability to respond to global challenges is a more general problem. 
Globalization – the breaking down of national boundaries and the integration of economies across continents – has resulted in burgeoning demands on governments at the same time that their ability to provide answers has been reduced. 
In other words, demand for government is exceeding supply. 
Globalization has made many people feel more insecure and in need of government support to cope with the pressures on their livelihoods and quality of life. 
But most of the policy responses needed to meet people’s demand for greater security are beyond the scope and reach of national governments, especially when these governments are trying to cope on their own. 
That is why, long ago, European countries saw the sense in pooling their weight and reach through the European Union. 
Imperfect as the EU is, it still represents the best response to globalization yet seen among any extended group of countries. 
Governments working together are better than governments working separately – or, worse, against one another. 
We live in an increasingly multipolar world, in which major emerging economies and their populous societies are transforming the international landscape. 
But, at the same time, multilateral frameworks are in decline, undermining the ability to bring sense and coherence to this world. 
Consider the international trading system and its centerpiece, the World Trade Organization. 
Since the demise of the Doha Round, the WTO’s standing as a multilateral negotiating forum has declined sharply, salvaged in part by the recent agreement in Bali. 
It will be essential, after Bali, to reflect seriously on the next phase for the WTO and its role in the international trading system. 
The major international financial institutions – the International Monetary Fund, the World Bank, the European Bank for Reconstruction and Development, and the regional development banks – are having to work hard to make themselves fit for the twenty-first century. 
The authority of the United Nations has frayed. 
Until we reverse the trend of declining multilateralism, governments’ ability to respond to global challenges will not improve. 
Business can moan and the media can carp, but the answer to many of the world’s great problems is more – or at least better – government, not less. 
A better supply of government meeting the flow of demands. 
Ronald Reagan famously insisted that, “government is not the solution to our problem; government is the problem.” 
Today we know better: If government is not part of the solution, our problems will only get bigger. 

Migration on the Move 
LONDON – In 2000, the United Nations established the Millennium Development Goals (MDGs) to drive progress on important development objectives, such as reducing poverty, promoting gender equality, and curbing disease. 
But the architects of the MDGs neglected one critical issue: migration. 
Fortunately, it looks like world leaders will not make the same mistake with the post-2015 development agenda. 
The scale of remittances alone should be enough to convince the world that migration deserves a prominent spot in the post-2015 agenda. 
Last year, migrants from developing countries sent an estimated $414 billion to their families – triple the total of official development assistance. 
More than a billion people rely on such funds to help pay for education, health care, water, and sanitation. 
As if that were not enough, remittances have important macroeconomic benefits, enabling countries to pay for essential imports, access private capital markets, and qualify for lower interest rates on sovereign debt. 
But many of migration’s benefits are squandered. 
Financial intermediaries extract 9% of remittances, on average, for an estimated total of $49 billion in migrant earnings last year. 
Rapacious recruiters, who often keep one-third of a migrant’s pay, skim billions more. 
Meanwhile, smuggling, trafficking, exploitation, and discrimination take an incalculable human toll. 
This is where the post-2015 development agenda comes in. 
With the right incentives, governments and companies can be encouraged to pursue policies aimed at ensuring that more funds reach poor families, while working to protect migrants’ rights and prevent discrimination. 
At the same time, the agenda can help to transform perceptions of migrants. 
As it stands, migration is often viewed as a sign of a home country’s failure to offer adequate opportunities, while locals in destination countries believe that migrants are stealing their jobs, depressing their wages, or exploiting their welfare systems. 
But the fact that 9% of British citizens live abroad demonstrates that people move regardless of their home country’s wealth. 
Moreover, evidence shows that migrants contribute more than they appropriate, as they foster knowledge transfers, trade, tourism, investment, and even job creation through entrepreneurship, while doing important jobs – from caring for children and the elderly to staffing hotels and restaurants to picking crops – that are undesirable to locals. 
Given the undeniable benefits of migration, it might be surprising that it was not included in the MDGs. 
The problem is that, in 2000, there was neither enough evidence about migration’s effects on development nor sufficient political support to secure its addition to the agenda. 
That is no longer the case. 
A group of countries, international agencies, and NGOs has made a strong case to the UN Open Working Group on Sustainable Development Goals (the body responsible for facilitating deliberations on the post-2015 agenda) that migration can help reduce poverty and generate economic growth. 
The group’s proposal – which includes lower remittance costs, increased pension portability, and strong action against human trafficking – calls for a specific set of targets and indicators, which would substantially enrich the next development agenda. 
It even calls for migrants to be considered when measuring progress toward other goals, such as ensuring decent work and equitable access to health-care services. 
There is a groundswell of political support behind this effort. 
Last October, when the UN General Assembly met to discuss migration for only the second time, member states unanimously approved a declaration that called for migration’s inclusion in the post-2015 agenda. 
The International Organization for Migration Council issued a similar resolution in November, and the campaign has attracted additional support from civil-society groups and international organizations. 
The international community has pledged to place people at the center of the post-2015 development agenda. 
There is no better expression of this commitment than recognizing the indispensable role that migrants play – and protecting their rights. 
To this end, the agenda must create the basis for sustained and meaningful global partnerships on migration and human mobility, similar to efforts under the MDGs, to make trade and technology transfer work for development. 
But not everyone stands behind these goals. 
A handful of national leaders could veto the inclusion of migration, owing to misplaced fears of its domestic political consequences. 
To avoid such an outcome, it is important to note that opinion polls usually reveal public anxiety about unregulated migration, not legal migration or legitimate asylum-seekers. 
Even in Europe, where populism is on the rise, citizens are more enlightened than their leaders: 69% of Europeans say that they are not worried about legal migration, and 62% do not believe that migrants take jobs from locals. 
Governments like those in Germany and Sweden that manage migration well and invest in integration have the strongest public support. 
The number of migrants that a country welcomes is a matter that only it can decide. 
But how migrants are treated, whether they are allowed to keep what they earn, and what they contribute to social and economic development are issues that matter to everyone. 
International law requires that the human rights of all migrants, whatever their status, are respected, which is also a fundamental precondition for individual and collective development. 
Migration – when it is safe, legal, and voluntary – is the oldest poverty-reduction and human-development strategy. 
It seems that this long-ignored reality is finally sinking in, pushing discussion of the post-2015 development agenda in the right direction. 

A Step Closer to Brexit? 
LONDON – The referendum on Scottish independence, due on September 18, comes at a time of growing opposition in the United Kingdom to remaining in the European Union. 
This is significant, because Scotland is the strongest base of pro-European sentiment in the UK. 
For example, a poll conducted earlier this year determined that if a referendum on continued EU membership had been held in June in the UK as a whole, 47.1% would have voted to leave, with 39.4% voting to remain. 
But a poll in February 2014 showed that in Scotland, 48.7% would vote for the UK to remain in the EU, with 35.4% voting to leave. 
Other polls have also shown a consistent and markedly more positive attitude toward the EU in Scotland than in England. 
Of course, it is premature to draw any firm conclusions from these figures. 
The referendum on exiting the EU that Prime Minister David Cameron has proposed may not take place, regardless of the success (whatever that may mean) of his promised “renegotiation” of the terms of British membership. 
But, as a result of various ostensibly minor issues, the likelihood of a British exit seems to be increasing – which fundamentally alters the importance of the vote in Scotland. 
For example, the proposal of the relatively unknown Jonathan Hill, the leader of the UK House of Lords, as the British member of the new European Commission headed by Jean-Claude Juncker was just the latest in a long series of British EU errors. 
Cameron’s spokesmen said in July that, at his first meeting with the new Commission president, Cameron would seek a prestigious portfolio, such as the internal market, for Hill. 
Juncker’s office coldly replied that important portfolios in the new Commission would go to major political figures, and that Juncker “does not owe [Cameron] anything.” 
Given Cameron’s opposition to Juncker’s candidacy for the Commission presidency, the abuse to which Juncker has been subjected by the British press, and Hill’s lack of centrality within British politics, Cameron may be justifiably nervous when Juncker announces his appointments to the new Commission. 
Juncker, after all, has many senior politicians to accommodate, and their approval by the European Parliament is no minor matter. 
And, though it was perhaps unsurprising that Cameron should be unenthusiastic about Juncker’s candidacy, the vehemence of his opposition was extraordinary. 
Cameron no doubt wished to reassure those in his Conservative Party who doubt his euroskeptic zeal. 
Even so, Cameron’s supposed remark that the UK was more likely to leave the EU if Juncker’s candidacy succeeded was strange and disquieting, not least because any renegotiation of the terms of British membership will be carried out primarily with other member states, not with the Commission. 
Cameron’s bid to thwart Juncker’s candidacy mirrored his unsuccessful attempt to prevent the adoption of the EU’s fiscal compact in 2012. 
He overestimated German Chancellor Angela Merkel’s willingness and ability to support the British position. 
Many influential Germans are reluctant to help Cameron in what they regard as his self-created European problem. 
They will not allow Merkel much latitude here, even if she seeks it. 
If Cameron’s advisers overestimated the support that they might have received from Merkel and others, they clearly underestimated the power and effectiveness of the European Parliament. 
For many months, the European Parliament had made it clear that it had specific ideas about how it would exercise its new powers, granted by the Treaty of Lisbon, over the Commission presidency. 
But the rapid post-election agreement among the Parliament’s major political groups to support Juncker caught Cameron off guard. 
Far from enhancing British influence, threats of withdrawal have undermined the Cameron government’s credibility and influence within the EU, as colleagues have become disinclined to engage in significant compromises with a UK that may not be a member in two years. 
Traditionally, EU heads of state and governments try to help one another with their domestic political problems. 
But there is a growing sense in the European Council that Cameron is abusing this goodwill. 
Thus, Cameron’s claim that Juncker’s election would make it more difficult to ensure the UK’s continued EU membership risks becoming a self-fulfilling prophecy. 
To present Juncker’s candidacy as a matter of high political principle, with Cameron heroically but unsuccessfully standing alone against the dark forces of federalism and centralization, could have only reinforced English feelings of alienation from Europe. 
That is less likely to be the case in Scotland. 
If Cameron returns as prime minister after the general election in 2015, he will face an uphill battle in renegotiating the terms of British EU membership, owing to resistance not only from his European partners, but also from his own Conservative Party, which is close to advocating British withdrawal. 
Indeed, it is difficult to see how a re-elected Cameron could maintain the Conservative Party’s unity without endorsing a “no” vote in the referendum on the outcome of his own renegotiation. 
Britain’s EU membership will be one of the major issues at stake in next year’s election. 
It would be a tragedy if British voters cast their ballots without fully understanding the European implications of their choice. 
One thing, however, seems certain: If Scotland votes for independence in September, a referendum within the rump UK on continued EU membership would be even less likely to produce a victory for those who wish to remain. 

Migration’s Hall of Mirrors 
LONDON – On both sides of the Atlantic, anti-immigrant politics are undermining democracies and damaging lives. 
Far-right nationalist parties are gaining traction in Europe, while millions of undocumented migrants suffer in the shadows. 
In the United States, President Barack Obama, concerned about his party’s ability to retain control of the Senate, has decided to put off immigration reform until after the election in November. 
Yet that may be the wrong approach. 
A new public-opinion survey by the German Marshall Fund (GMF) reveals that anti-immigrant sentiment stems largely from misinformation, not entrenched animus. 
The most important finding of the GMF’s Transatlantic Trends survey is that concern about immigrants falls sharply when people are given even the most basic facts. 
For example, when asked if there are too many immigrants in their country, 38% of the Americans surveyed agreed. 
But when respondents were told how many foreigners actually reside in the US before being asked that question, their views changed significantly: just 21% replied that there were too many. 
The same was true in country after country. 
In the United Kingdom, 54% of respondents said that there were too many immigrants; that number fell to 31% among those who were given the facts about foreigners. 
In Greece, 58% became 27%; 
Italy went from 44% to 22%; and so on. 
The only countries without such a gap were those with either very little immigration, like Poland, or those with a more open, informed, and progressive political debate about immigration, like Sweden and Germany. 
Other surveys have exposed extraordinary inaccuracies in perceptions of migrants. 
In many developed countries, for example, the public believes that there are three times as many immigrants residing in their country as there really are. 
The average Briton believes that 34% of UK residents are foreigners; the true number is just 11%. 
Such distortions disappear in countries where migration challenges are confronted openly, discussed reasonably, and addressed with conviction. 
The average Swede, for example, believes that 18% of the country’s population is composed of migrants; the actual number is close to 13%. 
As a result, populism in these societies is not on the rise, and mainstream politicians do not vilify minorities and migrants. 
This constitutes strong evidence that reality-based debate and policymaking can fundamentally transform the negative political dynamics generated by migration. 
It also suggests that, by failing to engage voters on the reality of migration, mainstream politicians in Europe are manufacturing support for extremist parties. 
This self-inflicted political wound is extremely dangerous. 
The Transatlantic Trends survey also shows that the American public is not worried about legal migration, while around two-thirds believe that the children of immigrants are being well integrated into their communities. 
These findings should embolden policymakers to be more proactive in designing pathways for legal migration and policies to integrate migrants. 
Even when it comes to illegal immigrants, though US citizens express concern, they are more reasonable than their political leaders about how to solve the problem. 
A plurality of Americans surveyed by the GMF, for example, said that illegal immigrants should be allowed to obtain legal status. 
A deliberative approach to engaging the public on other aspects of migration also could help quell anti-migrant sentiment. 
For example, recent research in several countries shows that immigrants as a whole contribute more economically to their communities than they take from them. 
In Germany, a study by the Bertelsmann Foundation, to be released next month, shows that the net fiscal contribution per migrant amounted to €3,300 ($4,260) in 2012. 
Such data upend the conventional wisdom that migrants are a drain on public services. 
Of course, migration creates real challenges for communities and can lead to job losses and lower wages for native workers. 
But here, too, it is the absence of attention to these issues, not necessarily the presence of migrants, that is the problem. 
Implementing vigorous retraining policies, for example, would be a better way to counter these adverse effects than calling for mass deportations. 
This is one reason why labor unions, which once opposed immigration across the board, are now far more supportive of measures that would legalize undocumented workers and create more pathways for migration. 
Informed public debate is the sine qua non of a democratic polity. 
In its absence, bias and populism prevail. 
The immigration debate will never be an easy one, but it can become less tendentious and more deliberative if its participants consider the facts. 

Buy Back or Pay Forward? 
LONDON – When British Prime Minister David Cameron asked me to lead a review into the problem of antimicrobial resistance, the last thing I expected was that accepting the position would lead me to question one of the most popular tools for corporate financial management: share buybacks. 
The problem of antimicrobial resistance is a serious one. 
Left unaddressed, it could be responsible by 2050 for the deaths of some ten million people a year, more than currently die of cancer, along with an astonishing $100 trillion in economic damage. 
Fortunately, however, there is much we can do to mitigate the threat – provided that adequate resources are made available. 
One important avenue to pursue is the development of new drugs. 
In a forthcoming paper, the Review on Antimicrobial Resistance estimates that bringing new antimicrobials to market and improving their administration will cost about $25 billion – a significant sum, but one that pales in comparison to the costs to society if the problem is not checked. 
It is also roughly what two of the world’s largest pharmaceutical companies will spend this year buying back their own shares. 
While the review has yet to come up with recommendations for financing the development of new drugs, it seems clear to me that it is well within the capacity of the pharmaceutical industry to contribute. 
A common argument made by drug companies is that they need to be guaranteed a reward if they are to invest in developing medicines that are unlikely to deliver the kind of returns that other investments may provide. 
The only sure way to guarantee drug development, the argument goes, is to allow prices to rise until demand matches supply. 
And yet there is a good reason why the pharmaceutical industry can and should play a major role in financing something like a common “Innovation Fund” to provide financing for early-stage research into solving the problem of antimicrobial resistance. 
And that reason is one that I became familiar with during my years at Goldman Sachs: enlightened self-interest. 
Six years after the eruption of the global financial crisis, the banking industry is still widely blamed for the catastrophe. 
And, as a result, banks are being hit with regulatory constraints that limit some aspects of their business. 
I suspect that if the industry had shown greater leadership on issues – for example, excessive executive pay – they would have found themselves in a much more favorable environment today. 
The same is true of the pharmaceutical industry. 
Share buybacks can sometimes be legitimate, but on other occasions they do not seem justified – especially when considered from the standpoint of enlightened self-interest. 
In December, the pharmaceutical giant Merck spent $8.4 billion to acquire Cubist Pharmaceuticals, a Massachusetts-based drug-maker that specializes in combating Methicillin-resistant Staphylococcus aureus (MRSA), a bacteria that has become resistant to many types of antibiotics. 
In early March – less than three months after the acquisition – Merck announced it would close down Cubist’s early-stage research unit, laying off some 120 staff and perhaps crippling its efforts to introduce new drugs into the pipeline. 
Three weeks later, Merck announced that it would spend an additional $10 billion to buy back some of its shares. 
It is difficult for an outside observer not to draw a connection between the two decisions. 
Of course, dubious buybacks are not confined to the pharmaceutical industry. 
Apple is another good example. 
The company’s latest quarterly sales results show how the company has become something more than a technology firm; it is now a major middle-class Chinese consumer brand. 
Within a year, China will likely be a bigger market for its products than the United States. 
And yet, even more striking than this confirmation of the still-rising importance of the BRIC (Brazil, Russia, India, and China) economies is the sheer size of Apple’s ongoing buyback program. 
In April, the company announced it had authorized an additional $50 billion to be used for repurchasing shares, bringing the total to $140 billion. 
Coming at a time when the technology industry is under increasing scrutiny in the developed world as governments struggle with budget shortfalls and rising debt, this seems to me to be a questionable decision. 
Companies’ ability to minimize their global tax burden, while boosting their earnings per share through buybacks – in some cases financed with debt – does not strike me as a stable trend. 
When companies are genuinely unable to identify areas of research and investment that would help their business (and employees and clients), they are better off returning the savings to shareholders in the form of higher dividends than authorizing buybacks. 
Or, better yet, in a world confronted with a host of problems – from climate change to antimicrobial resistance – industry leaders should begin asking themselves how they can contribute to averting the crises of the future. 

Teaching Drugs New Tricks 
CHARLOTTESVILLE – Producing effective medicines requires huge investments of time and money. 
The average drug on the market today spent a decade in the lab and in clinical trials, and cost more than $2 billion to develop. 
Unfortunately, most prescription drugs are marketed for a single disease, rather than a group of diseases for which they could be safe and effective. 
This increases development costs, and complicates the discovery of new drug applications. 
Fortunately for patients everywhere – not to mention the pharmaceutical industry and health-care systems worldwide – there is a better approach. 
Similar to recycling of household goods, “systematic drug repositioning” seeks to make drugs developed for one illness capable of treating another. 
That is the story of thalidomide, which was used in the 1950s and 1960s by pregnant women to allay morning sickness, but was banned after it was found to cause severe birth defects. 
After significant study, however, scientists modified the drug’s molecular structure to alter how it works. 
Now, the thalidomide family of drugs is prescribed for multiple myeloma, mantle cell lymphoma, certain skin diseases, and some forms of anemia. 
What is significant about thalidomide is that a new treatment emerged from the ashes of failure. 
Many patients are benefiting today because a few scientists and their financial backers took a chance on reconsidering a failed drug. 
Equally remarkable is the history of a new multiple sclerosis (MS) treatment, called dimethyl fumarate. 
Under the brand name Tecfidera, this compound generates some $3 billion in annual revenue, and has helped many patients manage a crippling disease. 
Yet it was first created almost 200 years ago by a French chemist as a mold inhibitor for sofas and leather apparel. 
It was later used to treat psoriasis; but, because psoriasis is related to autoimmune deficiencies, it was eventually tested on other autoimmune disorders, including MS. 
Most drug-repositioning successes have happened by chance, as was the case with thalidomide and dimethyl fumarate. 
But what would happen if researchers and drug companies collaborated to search systematically for new uses of existing drugs? 
Medically, the payoffs could be massive – bringing equally massive benefits to society. 
Drugs work by targeting specific molecules in the body. 
In some cases, different diseases have the same “target” molecule. 
For example, Arzerra, which was developed to treat chronic lymphocytic leukemia, targets a protein called CD20. 
But this protein is also associated with MS, and researchers found during testing that ofatumumab, which is the active ingredient in the medicine, could be of benefit to MS and possibly other autoimmune patients. 
Given the drug’s potential for treating cancer, GlaxoSmithKline, which markets Arzerra, first licensed the rights to its use as a cancer drug to another pharmaceutical giant, Novartis. 
Then, in a subsequent and separate deal, the company licensed additional rights to Novartis for the repositioned use in treating MS. 
For the pharmaceutical industry, this was a revolutionary approach. 
The typical business model is to license all of a drug’s current and future uses, even if the drug’s potential is unknown at the time. 
In the case of Arzerra, however, a new business opportunity was created by splitting the drug into two revenue-generating assets. 
Repositioning does not usually happen smoothly. 
Clinical trials are slow, cumbersome, and costly; many drugs don’t overcome the financial hurdles. 
Moreover, “off-label prescribing” presents marketing challenges. 
After encountering patients who don’t respond to standard courses of treatment, doctors may want to dispense a repositioned drug, but often don’t have enough data to make an informed decision. 
Pharmaceutical and biotech companies like ours are working to make this process easier. 
We focus on finding new uses for existing drugs in a systematic manner, combining augmented and artificial intelligence (AI) to do so. 
Our goal is a future where every drug is mapped against every known disease, no matter how that drug came into existence. 
Not only is this critical for improved patient health; it is also financially prudent, given that repositioning can cut the time and expense of drug development in half. 
Other stakeholders are also getting involved. 
For example, the MEPs Against Cancer group, as well as a handful of non-profit foundations and certain policymakers, are reviewing the current regulatory pathway in Europe, and are calling for new drug-development routes that complement existing ones. 
In the near future, drugs may even be repositioned in real time, mapped to the unique needs of each patient. 
New technologies like AI and augmented reality could help doctors find alternative treatments for patients with difficult-to-treat illnesses or complex comorbidities. 
To realize this future, however, systematic repositioning must be integrated into every pharmaceutical firm’s business model. 
Fortunately, there are strong economic incentives for companies proactively to do just that. 
If they do, we may find ourselves on the cusp of another discovery: that leveraging biological interconnectedness to reposition systematically old and new drugs is the best way to improve health and reduce health-care costs worldwide. 

Pharmaceutical Myths 
Drug companies want us to believe that soaring prices for prescription drugs are necessary to cover their research and development (R&D) costs – a claim that implies that they spend most of their money on R&D, and that after they pay for it, they have only modest profits left over. 
Curtailing prices, they say, would choke off R&D and stifle innovation. 
But the real story is very different. 
Big drug companies actually spend relatively little on R&D – far less than they spend on marketing and administration and even less than what they have left over in profits. 
In 2002, for example, the top ten American drug companies had sales of $217 billion. 
According to their own figures, they spent 14% of sales revenues on R&D. But they spent over twice as much, a whopping 31%, on marketing and administration. 
And they had 17% left over as profits. 
Most drug companies lump marketing and administration together in their annual reports, but one reported that 85% of the total went to marketing. 
Assuming that the figure is roughly the same for the other big companies – and there’s reason to think that it is – then they spent nearly twice as much on marketing alone as they did on R&D. 
In its public pronouncements, the industry denies this by counting just four specific activities as marketing – sales visits to doctors, the value of free samples, direct-to-consumer advertisements, and advertisements in medical journals. 
But, in fact, marketing budgets cover a lot more than this, most importantly the “education” of doctors (which teaches them to prescribe more drugs). 
And what about profits? 
For many years, drug companies in the United States have had higher profits than any other industry – after they’ve paid for R&D and all their other expenses. 
Compare the 17% profit margin for the top ten American drug companies in 2002 with the median of only 3.1% for all of America’s “Fortune 500” industries that year. 
In 2003, for the first time, the industry fell slightly from first place to third in terms of profitability, but its profits were still well above the median. 
The recent claim that drug companies spend on average $802 million to bring each new drug to market is based on secret, proprietary data and is wildly inflated. 
But, whatever they spend on R&D, if drug companies spend more on marketing and have more left over as profits, they can hardly claim that high prices are necessary to cover their R&D. Instead, high prices are necessary to cover their stupendous marketing expenditures and maintain their enormous profits. 
There is now some pushback on prices, but drug companies are compensating by convincing more people to take more drugs for dubious or exaggerated ailments, thereby increasing volume. 
The important issue is not how much drug companies spend on R&D, but whether we consumers get our money’s worth. 
Remarkable as it seems, only a small fraction of drugs are innovative in any meaningful sense of the word. 
In the six years from 1998 to 2003, of the 487 drugs that entered the market, fully 78% were classified by the US Food and Drug Administration as likely to be no better than drugs already on the market. 
Moreover, 68% were not even new chemical compounds, but just old drugs in new forms or combinations. 
In other words, the major output of the industry is not important new drugs, but minor variations of drugs that are already on the market – called copycat or “me-too” drugs. 
For example, the top-selling drug in the world, Pfizer’s Lipitor, is the fourth of six cholesterol-lowering drugs of the same type. 
There are now whole families of me-too drugs, and little reason to think one is better than another at comparable doses. 
Far from being a model of free enterprise, the pharmaceutical industry is utterly dependent on government-funded research and government-granted monopolies in the form of patents and exclusive marketing rights. 
The few innovative drugs usually stem from publicly funded research done at government or university labs. 
Even among related me-too drugs, the original is usually based on government-sponsored work. 
For example, the first of the Lipitor-type drugs, Mevacor, came on the market in 1987 and was based largely on university research. 
Most of today’s top-selling drugs have progenitors that date back to the 1980’s or even earlier. 
The bottom line is that, despite industry rhetoric, drug companies are growing less and less innovative. 
They’re just re-jiggering the same old drugs, getting new patents and exclusivity, and relying on their marketing muscle to convince doctors and patients that they’re producing medical miracles. 
Every advanced country regulates prescription drug prices in some way. 
Even in the US, Medicare regulates doctors’ fees and hospital payments. 
So we need not worry about stifling innovative R&D. Drug companies do much less of it than they claim, and what they do they can easily afford. 

Megafunding Drug Research 
SEATTLE – As price-gouging practices by a handful of drug companies attract headlines, one troubling aspect of the story remains underplayed. 
Exorbitant increases in the prices of existing drugs, including generics, are motivated not just by crass profiteering but by a deep skepticism about the economic feasibility of developing new drugs. 
That skepticism is justified. 
Traditional models for funding drug development are faltering. 
In the US and many other developed countries, the average cost of bringing a new drug to market has skyrocketed, even as patents on some of the industry’s most profitable drugs have expired. 
Venture capital has pulled back from early-stage life-sciences companies, and big pharmaceutical companies have seen fewer drugs reach the market per dollar spent on research and development. 
Indeed, on average, only one of every 10,000 compounds identified as potentially useful in early-stage research will ultimately win approval from regulators. 
The approval process can take as long as 15 years and errs on the side of caution. 
Even among drugs that make it to human clinical trials, only one in five will clear that final hurdle. 
The price tag for these “slow fails” can be enormous. 
Pfizer, for example, spent a reported $800 million on its cholesterol-lowering drug, torcetrapib, before pulling it from phase III clinical trials in 2006. 
That’s an unappealing prospect for most investors. 
Because the risk of backing any one compound, or even a particular company, is so high, vast pools of investment capital lie out of reach for drug developers. 
Spurred by these pressures, finance experts have proposed several funding alternatives that reduce the risk of biopharma investments while improving the efficiency and productivity of the R&D pipeline. 
Although industry incumbents may be slow to shift gears, developing countries creating next-generation biopharma hubs have a unique opportunity to adopt and benefit from alternative models. 
Many of those models build upon a common strategy for de-risking investments: assembling a diversified portfolio. 
Two decades ago, a company called Royalty Pharma launched a diversified model, building a fund of ownership interests in multiple drug royalty streams. 
Royalty Pharma focused on approved drugs with blockbuster potential, creating stable revenue streams and impressive equity returns – even during periods of extreme stock-market volatility. 
But Royalty Pharma’s model will not bridge the funding gap between the basic research supported by government grants and the late-stage development of drugs that are in clinical trials. 
Because the candidate drugs in this R&D “valley of death” are riskier than anything in which Royalty Pharma invests, an even larger portfolio of compounds would be needed to yield levels of risk and rates of return that are acceptable to typical investors. 
How large would that portfolio have to be? 
One of us (Lo) has carried out simulations of diversified funds for early- and mid-stage cancer drugs, which show that a so-called megafund of $5-30 billion, comprising 100-200 compounds, could sufficiently de-risk the investment while generating returns of between 9-11%. 
That’s not exciting territory for venture capitalists and private-equity investors, but it is in keeping with the expectations of institutional investors, such as pension funds, endowments, and sovereign wealth funds. 
Moreover, the risk reduction from diversification would allow the megafund to issue large amounts of debt as well as equity, further broadening the pool of potential investors. 
To put these numbers in context, consider that the US National Institutes of Health funds just over $30 billion annually in basic medical research, and members of the Pharmaceutical Research and Manufacturers of America spent about $51 billion last year on R&D. A megafund approach would help to make both investments more productive by filling the funding gap between them. 
Moreover, this model may work on a smaller scale. 
Further simulations suggest that funds specializing in some drug classes, such as therapies for orphan diseases, could achieve double-digit rates of return with just $250-500 million dollars and fewer compounds in the portfolio. 
Of course, this approach faces challenges. 
It won’t be easy to manage a large pool of candidate compounds and dozens of simultaneous drug trials. 
Simulations show that megafunds will not work for all classes of drugs in all therapeutic areas. 
Development of Alzheimers’ therapies, for example, is unlikely to benefit from the megafund model. 
But where they do work, megafunds could make drug development vastly more efficient, and therefore less costly. 
No single company possesses the scale or finances to deploy all the advances in science and technology since the genomics revolution, but a megafund-backed effort could. 
Researchers employed by the fund could share knowledge, facilities, and state-of-the-art equipment, data, and computing resources, spread over a wide array of projects. 
Failures would be faster – and much cheaper – because stakeholders would be less dependent on any one project. 
Emerging-market countries should take note. 
Most are chasing the pharmaceutical and biotechnology industries. 
China has established hundreds of life-sciences research parks and committed billions of dollars in national funds for drug development; comparable programs are under way in India, Singapore, and South Korea. 
For these countries, forming a megafund to test a few hundred compounds could be a much better bet than seeding biotech startups or offering incentives to big pharmaceutical firms. 
A biopharma megafund would offer a competitive edge in the industry, with lower development costs, a higher success rate, and faster time to market. 
Regional economies would benefit from the same networks of high-paying research jobs, entrepreneurs, investors, and service providers that traditional life-sciences innovation hubs create. 
London’s mayor recently embraced this approach, proposing a $15 billion megafund to help the United Kingdom maintain a leadership role in drug development. 
In addition to direct investment, governments can also create incentives for the formation of these kinds of funds – for example, by guaranteeing bonds issued for biopharma research. 
Ushering a drug from lab bench to bedside requires investing vast sums of money over long horizons. 
That funding must pay off for both society and investors. 
Emerging countries can lead the world to better health and greater wealth by pioneering new ways to finance drug development. 

The Disenchantment of Europe 
LONDON – The recent European Parliament elections were dominated by disillusion and despair. 
Only 43% of Europeans bothered to vote – and many of them deserted establishment parties, often for anti-EU extremists. 
Indeed, the official results understate the extent of popular dissatisfaction; many who stuck with traditional parties did so reluctantly, faute de mieux. 
There are many reasons for this political earthquake, but the biggest are the enduring misery of depressed living standards, double-digit unemployment rates, and diminished hopes for the future. 
Europe’s rolling crisis has shredded trust in the competence and motives of policymakers, who failed to prevent it, have so far failed to resolve it, and bailed out banks and their creditors while inflicting pain on voters (but not on themselves). 
The crisis has lasted so long that most governing parties (and technocrats) have been found wanting. 
In the eurozone, successive governments of all stripes have been bullied into implementing flawed and unjust policies demanded by Germany’s government and imposed by the European Commission. 
Though German Chancellor Angela Merkel calls the surge in support for extremists “regrettable,” her administration – and EU institutions more generally – is substantially responsible for it. 
Start with Greece. 
Merkel, together with the European Commission and the European Central Bank, threatened to deprive Greeks of the use of their own currency, the euro, unless their government accepted punitive conditions. 
Greeks have been forced to accept brutal austerity measures in order to continue to service an unbearable debt burden, thereby limiting losses for French and German banks and for eurozone taxpayers whose loans to Greece bailed out those banks. 
As a result, Greece has suffered a slump worse than Germany’s in the 1930’s. 
Is it really any wonder that popular support for the governing parties that complied with this diktat plunged from 69% in the 2009 European Parliament election to 31% in 2014, that a far-left coalition demanding debt justice topped the poll, or that the neo-Nazi Golden Dawn party finished third? 
In Ireland, Portugal, and Spain, the bad lending of German and French banks in the bubble years was primarily to local banks rather than to the government. 
But here, too, the Berlin-Brussels-Frankfurt axis blackmailed local taxpayers into paying for foreign banks’ mistakes – presenting the Irish with a €64 billion ($87 billion) bill, roughly €14,000 per person, for banks’ bad debt – while imposing massive austerity. 
Support for compliant establishment parties duly collapsed – from 81% in 2009 to 49% in 2014 in Spain. 
Fortunately, memories of fascist dictatorship may have inoculated Spain and Portugal against the far-right virus, with left-wing anti-austerity parties and regionalists benefiting instead. 
In Ireland, independents topped the poll. 
The misconception that northern European taxpayers are bailing out southern ones also prompted a backlash in Finland, where the far-right Finns won 13% of the vote, and in Germany, where the new anti-euro Alternative für Deutschland won 7%. 
At Merkel’s behest and with the complicity of the ECB, which waited until July 2012 to quell a bond-market panic sparked by eurozone policymakers’ mistakes, the Commission also imposed eurozone-wide austerity, causing a cumulative loss of nearly 10% of GDP in 2011-13, according to the Commission’s own economic model. 
By plunging Italy into a deep recession (from which it has yet to recover), austerity sank interim Prime Minister Mario Monti’s broad-based coalition and boosted Beppe Grillo’s anti-establishment, anti-euro Five Star Movement, which finished second in the European Parliament election. 
Merkel also demanded a stifling and undemocratic EU fiscal straightjacket, which the Commission duly enforces. 
So when voters throw out a government, EU fiscal enforcer Olli Rehn immediately insists that the new administration stick to its predecessor’s failed policies, alienating voters from the EU and pushing them toward the extremes. 
Consider France. 
After François Hollande became President in 2012 on a pledge to end austerity, his Socialist Party won a large majority in parliamentary elections. 
But Berlin browbeat him into further austerity. 
Now, with both the center right and the center left discredited – together, they received only 35% of the popular vote – Marine Le Pen’s racist Front National topped the poll by promising radical change. 
Along with a chronic economic crisis, Europe now has an acute political crisis. 
Yet the EU establishment seems bent on pursuing business as usual. 
In the parliament, a vocal but fragmented minority of critics, cranks, and bigots is likely to push the center-right and center-left groups, which still have a combined majority, to club together even more closely. 
The low turnout and weakening of mainstream parties gives the European Council – national leaders of the EU’s member states – a pretext to continue cutting deals in smoke-free rooms. 
First up will be the choice of the European Commission’s next president. 
The outgoing president, José Manuel Barroso, claims that “the political forces that led and supported…the Union’s joint crisis response…have overall won once again.” 
Merkel wants to stick to current policies that have failed to deliver growth and jobs. 
Perhaps the man to shake things up is Matteo Renzi, Italy’s dynamic 39-year-old prime minister. 
In office since February, he won a resounding 41% of the vote, twice that of his nearest rival. 
Already committed to reforming his country’s crony capitalism, he now has a mandate to challenge Merkel’s crisis response. 
The timing is perfect: Italy takes over the EU’s rotating presidency in July. 
Renzi has already called for a €150 billion EU investment boost and greater fiscal flexibility. 
Instead of a eurozone caged in by Germany’s narrow interests as a creditor, Europe needs a monetary union that works for all of its citizens. 
Zombie banks should be restructured, excessive debts (both private and public) written down, and increased investment combined with reforms to boost productivity (and thus wages). 
The fiscal straightjacket should be scrapped, with governments that borrow too much allowed to default. 
Ultimately, the fairer, freer, and richer eurozone that would emerge is in Germany’s interest, too. 
Europeans also need a greater say over the EU’s direction – and the right to change course. 
They need a European Spring of economic and political renewal. 

Duterte’s Reign of Terror 
NEW YORK – Since Philippine President Rodrigo Duterte took office in late June and declared a “war on drugs,” more than 1,900 people have been killed – 756 by police officers and another 1,160 by “vigilantes,” according to police reports as of August 24. 
Duterte is celebrating the killings and has vowed to continue his anti-drug program so long as he remains president. 
The Philippine law-enforcement agencies prosecuting the drug war have thrown out the rulebook and ignored fundamental requirements such as collecting evidence, adhering to due process, or even holding trials. 
Philippine Police Chief Ronald dela Rosa has even blamed the victims for their own deaths, claiming that, “If they did not fight it out with the police, they would be alive.” 
This explanation for the high body count defies belief. 
In scenarios where individuals are shot while resisting arrest, the number of people who are wounded should – as in military conflicts – far exceed the number of people who are killed. 
If almost everyone who is shot by police or soldiers dies, this suggests that the shooters are executing people they already have in custody. 
Moreover, if culprits were fighting the police, one would expect to see a sharp rise in the number of police officers who are wounded or killed. 
Yet the police have not reported any increase in officer casualties. 
It is not surprising that Duterte is encouraging these killings. 
Previously, as the long-time mayor of Davao City, on the southern Philippine island of Mindanao, he carried out a similar campaign of vigilante incitement and made clear that he would continue it nationally if elected president. 
That promise seems to have contributed to his electoral success, pointing to an unfortunate historical trend in Southeast Asian politics. 
In 1983, Suharto, who ruled Indonesia with an iron fist from 1967 to 1998, presided over a series of mysterious deaths, known as the Petrus Killings (for their Indonesian acronym). 
Over the course of two years, an estimated 3,000-10,000 alleged petty criminals – many of them supposedly drug users – were executed without trial. 
(The reason for such a wide estimate is that Indonesia’s censors made reporting on human rights all but impossible at the time.) 
More recently, in 2003, then-Prime Minister Thaksin Shinawatra of Thailand conducted his own war on drugs. 
About 2,800 people were arbitrarily killed, and a subsequent official investigation found that more than half of them had no involvement with drugs. 
Both Suharto and Thaksin were eventually overthrown, but not because they orchestrated the killings of suspected petty criminals and drug users. 
In fact, as with Duterte, inciting mass murder appears to have contributed to their popularity, at least for a while. 
One explanation for this commonality is that launching a public campaign against a powerless, unpopular group like drug users is an easy way for a leader to mask other shortcomings. 
Duterte is riding high right now, but there are instruments available to hold him accountable, such as the International Criminal Court, to which the Philippines became a party in 2011. 
Under the 2002 Rome Statute, which established the ICC, the court has jurisdiction to prosecute all crimes that Philippine law-enforcement agencies are “unable” or “unwilling” to pursue themselves. 
Unless Philippine law-enforcement officials preempt the ICC by bringing a good-faith prosecution against Duterte in Philippine courts, the ICC can take action. 
The Rome Statute defines murder or persecution that is knowingly “committed as part of a widespread or systematic attack against any civilian population” as a crime against humanity. 
The wide-scale extrajudicial killings carried out under Duterte’s drug-war banner already meet that definition. 
The Rome Statute also stipulates that “official capacity as a Head of State or Government ... shall in no case exempt a person from criminal responsibility under this Statute...” 
So, there is nothing stopping the Prosecutor of the ICC from launching an investigation against Duterte – and against police officials and vigilante leaders who have collaborated with him in conducting the killings. 
Doing so would send a message that the world is watching and demanding justice. 
If Duterte and his coterie sense they can act with impunity, the killings will only escalate. 
One prominent Philippine political figure, Leila de Lima, a senator and former justice minister, is already calling on the ICC to take action. 
Everyone around the world who is committed to due process and human rights should take up her plea. 
The fact that a popular head of state is trampling the rule of law in the Philippines makes a fast, decisive response all the more necessary. 

Disaster and Development 
NEW YORK – When Typhoon Hagupit made landfall in the Philippines on December 6, memories of Typhoon Haiyan, which killed more than 6,300 people, were fresh in people’s minds. 
Some 227,000 families – more than a million people – were evacuated ahead of Hagupit’s arrival, according to the United Nations. 
The typhoon, one of the strongest of the season, killed some 30 people. 
All deaths from disasters are a tragedy, but the fact that this number was not much higher attests to the efforts that the Philippines has made to prepare for natural disasters. 
As Administrator of the United Nations Development Programme, I have seen firsthand the devastation and heartbreak caused by disasters around the world. 
Since the beginning of the century, more than a million people have died in storms like Hagupit and other major disasters, such as the 2010 Haitian earthquake, with economic damage totaling nearly $2 trillion. 
These losses are tragic, but they are also avoidable. 
They serve as a reminder that disaster preparedness is not an optional luxury; it is a constant, intensive process that is necessary to save lives, protect infrastructure, and safeguard development. 
The argument for investing in disaster preparedness is simple. 
If countries expect to experience natural hazards, such as violent storm seasons or major earthquakes, then investing time and resources in preparing for shocks will save lives and protect communities from other losses. 
Unfortunately, governments often put different priorities ahead of disaster preparation. 
Other investments often take precedence, and donors have historically funded emergency relief much more readily than pre-disaster preparedness. 
The measures that are implemented tend to be stand-alone and piecemeal, rather than part of a larger, systematic risk-reduction plan. 
That needs to change. 
Countries like the Philippines continue to demonstrate the benefits of investing in preparedness, especially when done as part of a larger risk-mitigation effort. 
Typhoon Hagupit is just the latest event to showcase this. 
The Philippine government’s quick, effective response saved many lives. 
But it is important to note that its efforts were not simply an overnight reaction to the oncoming storm. 
They were part of a national, comprehensive effort that was long in the making. 
Officials were wise to acknowledge their country’s vulnerabilities and to commit the resources and capital needed to build resilience. 
The Philippines includes preparedness as a core component in its overall strategy for reducing disaster risk. 
Over the last decade, the country’s authorities have raised awareness, established and strengthened disaster-management institutions, and worked on recovering from past disasters, including Typhoon Haiyan. 
National and local disaster plans have been improved, standard operating procedures have been developed, and early warning systems have been put in place. 
The end result has been nothing short of a transformation of how the Philippines reacts to disasters. 
The UNDP, and the wider UN system, is supporting governments as they place greater emphasis on disaster-risk reduction, including preparedness, by strengthening their institutional capacity to plan and act when needed. 
In addition to assisting with emergency relief, it is crucial that the international community help to introduce basic procedures for responding long before disaster strikes. 
First responders, for example, need training and tools. 
Emergency shelters and evacuation routes must be planned and established using risk assessments and actual simulations. 
If communities are to be expected to make use of available resources, they need to be involved in the design and development of emergency plans. 
Risk reduction, including preparedness, is also, first and foremost, rooted in responsive governance. 
In March 2015 a new global framework for disaster reduction will be agreed in Sendai, Japan. 
It is crucial that delegates push for transformational change that enables preparedness and saves lives. 
Furthermore, risk reduction needs to be integral to sustainable-development strategies. 
The Philippines can serve as an example. 
The archipelago will always be in the path of tropical storms. 
There is little officials can do about that. 
But what they can do – and have done – is emphasize risk reduction and strengthen preparedness, thereby saving lives and building greater resilience. 
That is a lesson that all of us must learn. 

Piñata Politics 
George Bush's immigration policy is a big piñata hanging across the border between Mexico and the United States. 
Some immigrants believe it's shaped like a star to guide them across the Rio Grande to work in the promised land, others think it resembles a devil, offering the tantalizing prospect of legal jobs in the US, only to discover that this is a mirage. 
Many are thankful that the piñata is available to liven up bilateral relations and can't wait to give it a good whack. 
But if Mexico's President Vicente Fox is to benefit from his turn hitting the piñata, he will need to take off the blindfold he wears in public where President Bush is concerned. 
Fox has every right to celebrate the recent initiative announced by President Bush to assist some currently illegal immigrants to the US come out of the shadow economy, and he should congratulate himself for pressing Bush to make this effort. 
It was his constant prodding that helped design and fill the piñata. 
But Fox needs to move quickly from self-congratulation to action, because Mexico needs a more fulfilling relationship with America than the scanty prizes that are now dropping from Bush's piñata. 
He will have time to do so, because no new proposal is likely to be launched in a US presidential election year. 
To start, Fox must listen more carefully than he has to the people he governs. 
For some immigrants, the Bush proposal offers the possibility of stepping out of the shadows into legal jobs, for others it represents the possibility of legalization today but deportation from the US tomorrow. 
On one side, there is the carrot of living and earning like a US resident. 
On the other, there's the stick of probably never becoming a citizen. 
While many immigrants would welcome the idea of returning to Mexico after temporary employment in the US, many others would prefer to immigrate permanently to the US. 
In fact, a majority of Mexican immigrants already in the US don't know exactly how to respond to Bush's proposal, and Vicente Fox will have to listen to them, too, if he wants to speak in their name. 
There are those who welcome what Bush has brought to the bilateral party because it will allow them to live without fear. 
For them, Bush's proposal is a big step forward. 
Others, however, have reacted skeptically, and for good reason. 
They think that the piñata is a distraction from the goal of earned legalization. 
They don't want a job that will solve their problems for three years, but rather a precise path to residency in the US that will solve their problems forever. 
For those who have worked in the US for 10 or 15 years, the Bush piñata is a mere decoration. 
They don't want a legal status that will vanish in three years. 
Vicente Fox will have to acknowledge these differences and work with them. 
Immigrants themselves are divided and Vicente Fox will have to understand why. 
Therefore, he should not embrace the Bush proposal as is. 
Three years ago, Fox wanted the "whole enchilada": a temporary workers accord, more Green Cards to allow Mexicans to work in the US, legalization of immigrants already in the US, development funds for Mexican communities that send immigrants to the US, and a bilateral approach to managing the problem. 
Without these five components, any immigration proposal will not cut back on the number of deaths among those seeking to cross the border, or the existence of an abused underclass, or the persistence of temporary and legal employment that becomes permanent and illegal employment. 
Vicente Fox probably feels tempted to hit the piñata as it hangs there and go back home with whatever he can get. 
But he has long-term responsibilities - both to Mexicans in Mexico and to Mexicans in the US - that go beyond obtaining a short-term political victory. 
Bush's proposal is full of holes, and Fox should figure out how to fill them. 
Since Bush's proposal doesn't incorporate Mexico's interests, Fox should spell them out. 
If Bush's piñata can't spell out all the details, Fox should define them in Mexican and bilateral terms. 
The Italian word "pignatta" means "fragile pot." 
Bush's immigration piñata is indeed a fragile one. 
It is swaying in fierce electoral winds, it was made exclusively in the USA without Mexican help, and it doesn't contain enough candy. 
Vicente Fox has said that he wants more, and he should keep his word. 
He needs to remember that in Mexico, piñatas are symbols of hope. 

Pigs, Calves, and American Democracy 
Amidst all the headlines about the Democrats gaining control of the United States Congress in the November elections, one big election result was largely ignored. 
Although it illuminated the flaws of America’s political system, it also restored my belief in the compassion of ordinary Americans. 
In Arizona, citizens can, by gathering a sufficient number of signatures, put a proposed law to a direct popular vote. 
This year, one of the issues on the ballot was an act to prohibit tethering or confining a pregnant pig, or a calf raised for veal, in a manner that prevents the animal from turning around freely, lying down, and fully extending his or her limbs. 
Those who know little about modern factory farming may wonder why such legislation would be necessary. 
Under farming methods that were universal 50 years ago, and that are still common in some countries today, all animals have the space to turn around and stretch their limbs. 
Today, however, about 90% of US breeding sows – the mothers of the pigs that are raised and killed for pork, bacon, and ham – spend most of their lives locked in cages that measure about two feet by seven feet (0.6 meters by 2.2 meters). 
They are unable to turn around, lie down with their legs fully extended, or move more than a step forward or backward. 
Other sows are kept on short tethers that also prevent them turning around. 
Veal calves are similarly confined for all their lives in individual stalls that do not permit them to turn around, lie down, or stretch their limbs. 
These methods are, essentially, labor-saving devices – they make management of the animals easier and enable units with thousands or tens of thousands of animals to employ fewer and less skilled workers. 
They also prevent the animals from wasting energy by moving around or fighting with each other. 
Several years ago, following protests from animal welfare organizations, the European Union commissioned a report from its Scientific Veterinary Committee on these methods. 
The committee found that animals suffer from being unable to move freely and from the total lack of anything to do all day. 
Common sense would, of course, have reached the same conclusion. 
Following the report, the EU set dates by which close confinement of these animals would be prohibited. 
For veal calves, that date, January 1, 2007, is almost here. 
Individual stalls for sows, already outlawed in the United Kingdom and Sweden, will be banned across the entire EU from 2013. 
Measures to improve the welfare of laying hens, which are typically kept crammed into bare wire cages with no room to stretch their wings, are also being phased in. 
In the US, no such national measures are anywhere in sight. 
In the past, when my European friends have asked me why the US lags so far behind Europe in matters of animal welfare, I have had no answer. 
When they pressed me, I had to admit that the explanation could be that Americans care less about animals than Europeans. 
Then, in 2002, animal welfare advocates put a proposal to ban sow stalls on the ballot in Florida. 
To the surprise of many, it gained the approval of 55% of those voting. 
Last month in Arizona, despite well-funded opposition from agribusiness, the ban on small cages for sows and veal calves also passed, with 62% support. 
Neither Florida nor Arizona are particularly progressive states – both voted for George W. Bush over John Kerry in 2004. 
So the results strongly suggest that if all Americans were given a chance to vote on keeping pregnant pigs and calves in such tight confinement, the majority would vote no. 
Americans seem to care just as much about animal welfare as Europeans do. 
So, to explain the gap between Europe and the US on farm animal welfare, we should look to the political system. 
In Europe, the concerns of voters about animal welfare have been effective in influencing members of national parliaments, as well as members of the European Parliament, resulting in national legislation and EU directives that respond to those concerns. 
In the US, by contrast, similar concerns have had no discernible effect on members of Congress. 
There is no federal legislation at all on the welfare of farm animals – and very little state legislation, either. 
That, I believe, is because agribusiness is able to put tens of millions of dollars into the pockets of congressional representatives seeking re-election. 
The animal welfare movement, despite its broad public support, has been unable to compete in the arena of political lobbying and campaign donations. 
In US electoral politics, money counts for more than the opinions of voters. 
Party discipline is weak, and Congressmen must themselves raise most of the money that they need for re-election – and that happens every two years for members of the House of Representatives. 
In Europe, where party discipline is strong and the parties, not the individual candidates, finance election campaigns, money plays a smaller role. 
In the US, a nation that prides itself on its democratic traditions, pigs and calves are hardly the only losers. 

The Invention of Inequality 
LONDON – Everyone seems to be talking about – and condemning – today’s rising level of economic inequality. 
Fueled by jarring statistics like Oxfam’s recent revelation that the world’s richest 62 people own as much wealth as the poorest 3.6 billion, popular support for left-wing figures like America’s Bernie Sanders and Britain’s Jeremy Corbyn is rising. 
But today’s ideology-driven debates oversimplify an issue that is exceedingly complex – and affected by processes that we do not fully understand. 
Many of those engaged in the debate on inequality nowadays cite the French economist Thomas Piketty’s 2014 book Capital in the Twenty-First Century, which makes three key points. 
First, over the last 30 years, the ratio of wealth to income has steadily increased. 
Second, if the total return on wealth is higher than the growth in incomes, wealth is necessarily becoming increasingly concentrated. 
Third, this rising inequality must be reversed through confiscatory taxation before it destroys society. 
The points might seem convincing at first glance. 
But the first statement is little more than a truism, and the second is falsified by Piketty’s own data, making the third irrelevant. 
Piketty observes a rising wealth-to-income ratio from 1970 to 2010 – a period divided by a significant change in the monetary environment. 
From 1970 to 1980, the Western economies experienced rising inflation, accompanied by interest-rate hikes. 
During that period, the wealth-to-income ratio increased only modestly, if at all, in these countries. 
From 1980 on, nominal interest rates fell dramatically. 
Not surprisingly, the value of wealth rose much faster than that of income during this period, because the value of the assets that comprise wealth amounts essentially to the net present value of their expected future cash flows, discounted at the current interest rate. 
The most straightforward example is a government bond. 
But the value of a house is determined in a similar manner: according to the rent it is expected to generate, capitalized at the current nominal interest rate. 
Equities, too, are valued at a higher multiple of earnings when interest rates fall. 
In determining the value of total wealth, Piketty included both the income generated by assets and their appreciation. 
Meanwhile, incomes were capitalized at declining interest rates for more than a generation. 
By this approach, his finding that wealth grew faster than incomes makes perfect sense – it is a direct consequence of falling interest rates. 
What impact do lower interest rates have on measured inequality? 
If I own one house and my neighbor owns two, and falling interest rates cause the value of those houses to double, the monetary inequality between us also doubles, affecting a variety of statistical indicators and triggering much well-intended concern. 
But the reality is that I still own one house and my neighbor still owns two. 
Even the relative affordability of houses doesn’t change much, because lower interest rates make larger mortgages possible. 
For further evidence of this phenomenon, consider Piketty’s own data. 
In Europe, Piketty singles out Italy as the country where the wealth-to-income ratio rose the most, to about 680% in 2010, compared to 230% in 1970. 
Germany appears to be a more “virtuous” country, with a wealth-to-income ratio of 400%, up from 210% in 1970. What Piketty fails to highlight is that, over this period, interest rates fell much more in Italy (from 20% to 4%) than in Germany (from 10% to 2%). 
The real-world impact of this dynamic on inequality is precisely the opposite of what Piketty would expect. 
Indeed, not only are Italians, on average, much richer than Germans; 
Italy’s overall wealth distribution is much more balanced. 
A 2013 study of household finances in the eurozone, conducted by the European Central Bank, showed that in 2010 – the last year in Piketty’s research – the average Italian household was 41% richer than the average German household. 
Moreover, whereas the difference between mean and median household wealth is 59% in Italy, it is a whopping 282% in Germany. 
This difference can be explained largely by the fact that 59% of households in Italy own homes, compared to only 26% in Germany. 
A larger share of Italians has thus benefited more from a larger drop in interest rates. 
This example highlights how household investment decisions shape wealth outcomes. 
Complicating wealth measurements further is the fact that, as Martin Feldstein recently pointed out, for the vast majority of households, a large proportion of wealth is in the form of unaccounted future social benefits. 
Then there are the numerous factors affecting incomes, such as demand for particular skills. 
For those whose skills are not in demand, the availability of skills upgrading or training opportunities will have a significant impact on income prospects. 
At the same time, above certain income levels, a person might require a substantial monetary incentive to take the quality-of-life hit associated with increased work responsibilities. 
Clearly, economic inequality is a highly complex phenomenon, affected by a wide variety of factors – many of which we do not fully understand, much less control. 
Given this, we should be wary of the kinds of radical policies that some politicians are promoting today. 
Their impact is unpredictable, and that may end up doing more harm than good. 
Perhaps a new approach is not necessary at all. 
After all, globally, standards of living are continuously improving and converging. 
That is something that everyone, from the emerging populists to the hardened capitalists, should be able to agree on. 

Pinochet’s Trial, Chile’s Dignity 
The court battle on whether or not to punish former Chilean dictator Augusto Pinochet is now over. 
After prolonged reflection on medical reports regarding Pinochet’s health, Judge Juan Guzmán found him mentally fit to stand trial on nine counts of kidnapping and one count of homicide. 
Chile’s Supreme Court has now upheld that indictment. 
All of those crimes were committed during "Operation Condor," a Latin America-wide program among the continent’s dictators to physically eliminate their opponents on the left. 
Judge Guzmán also determined that the former dictator is not insane and knows right from wrong. 
This is critical, as Pinochet has sought to deny his competency. 
A recent "vascular incident" that sent him to a military hospital – where he regained consciousness and motor skills – will furnish excuses to request new medical examinations and delays as criminal proceedings move forward. 
But Guzmán’s efforts to bring the dictator to justice should not remain isolated. 
Other judges and official bodies need to keep the pressure on Pinochet. 
Much, for example, is still to be learned in cases such as the assassination of General Carlos Prats and his wife in Buenos Aires in 1974. Moreover, investigations by the US Congress into the Riggs Bank have uncovered the suspicious means by which Pinochet and his family obtained their wealth. 
These investigations need to be followed up with judicial action. 
The investigation into the death in 1980 of ex-president Frei Montalva, the principal opponent of the dictatorship, has advanced but needs to be pursued vigorously in the courts. 
Frei’s death implicates the repressive apparatus that Pinochet and Manuel Contreras, his “right hand,” managed in lockstep. 
Operation Condor, the Riggs, Frei, and Prats affairs, and many other crimes are documented in the recent report on torture and political imprisonment written by the special commission established by President Ricardo Lagos. 
Arriving 30 years after the military coup that brought Pinochet to power, the report has both unsettled and empowered Chileans. 
Seemingly invincible for many years, the former dictator’s final collapse began in London in October 1998, when Spanish lawyers, Judge Baltasar Garzón of Spain, and Scotland Yard brought charges against him. 
Pinochet responded with arrogance, provoking a huge sense of shame for Chile’s young democracy. 
Pinochet’s ability to evade the courts cast a dark shadow over the country’s military institutions and made many Chileans wonder how far the country had really gone in its transition to democracy. 
Without Judge Garzón’s insistence on pursuing the matter, prosecuting Pinochet would have been nearly impossible, owing to powerful opposition from wealthy and media-savvy Chileans. 
The Chilean government’s excessive caution – rooted in fear of instability that could affect the basic rights regained after the dictatorship – also helped Pinochet evade justice. 
Indeed, Chile’s courts could not have garnered the necessary public support to free them from their inertia without the push Garzón provided. 
It would also have been impossible to consider bringing Pinochet to justice without the extraordinarily important human rights struggles waged by victims’ organizations, victims’ families, and jurists who, against all the odds, remained true to their cause for decades. 
Few organizations in Chile have been as capable or as successful as those dedicated to human rights. 
Because of the tenacity and passion of ordinary Chileans demanding that the state fulfill its mandate to protect their human rights, Pinochet finds himself before the bar of justice, and others who used their power to kill, torture, or exile their fellow citizens are being pursued. 
Yet many still wonder, “Will Pinochet ever pay for his deeds?” 
International public opinion and history have already condemned him. 
Chile’s dignity now hinges on whether or not its legal system reaches the same conclusion. 
Doubts that Pinochet will be punished exist because “pinochetismo” remains alive in Chile. 
Powerful supporters defend him, using any underhanded means they can muster. 
They are aided by the fact that some within the government would prefer to close a sorrowful chapter of human rights violations rather than bringing it to a conclusion. 
Depending on the course the nation takes, Chileans may in time reconcile themselves to their past. 
For now, their different views coexist and they live together peacefully. 
But citizens and the state must also face the truth and bring human rights abusers to justice if people are to live honestly in their society and in history. 
To the extent that Chileans do so, they will create the conditions for a more dignified and honorable society. 
A judicial judgment against Pinochet is an important step forward. 

Piracy in China 
BEIJING: China now appears to be the country with the most notorious reputation for corporate piracy. 
Indeed, if multinationals and developed countries had an “Interpol” to track down and arrest countries charged with being havens for business piracy, China would likely top the “Most Wanted” list because of its lack of protection of intellectual property rights (IPR). 
Sadly, much of the case against China is true; no one here should ignore this, or pretend the facts are otherwise. 
Is this reputation for piracy somehow an intrinsic business “characteristic of the Chinese” or of “Asians” as a whole as some allege? 
Maybe, maybe not. 
Taiwanese and Koreans were the culprits in the 1960s, and 1970s. 
Today, Thai businesses are accused of piracy as often as Chinese companies. 
But intellectual/corporate piracy is not confined to Asia. 
Israel was once nicknamed a “one-disc-country” – a reference to the idea that a single software CD-Rom would be bought and then illicitly copied throughout the country. 
Piracy, however, should not be used to tar an entire country’s economy or business structures as criminal. 
It should, instead, be regarded as a problem found almost universally in countries undergoing the earliest stages of development. 
A fully functioning legal system and – perhaps more importantly – the mentality associated with the rule of law are often absent, or primitive, in most developing countries. 
Signing IPR conventions, and incorporating them into domestic law, means little or nothing when a country’s law enforcement is weak. 
Moreover, law enforcement and legal sanctions don’t mean much if people do not own property themselves, that would be at risk through fines or other sanctions. 
No surprise, then, that a backward, developing country in the early stages of “catching up” through learning from the developed world, sees copying the intellectual advances of others as something like a human right. 
This may explain why the issues of intellectual property rights are, for most developing countries, usually treated as an “international matter,” not a problem for domestic politics. 
Given this situation, is it actually realistic to expect politicians and government officials to work hard to protect foreigners’ rights in face of the needs of their fellow citizens? 
The answer is an emphatic NO. 
Politicians and bureaucrats, indeed, will only take action when “domestic piracy” starts to occur. 
When people in a country begin to illicitly copy the intellectual achievements of a fellow citizen, IPR becomes a real domestic political issue dividing special interest groups. 
Containing piracy then becomes a matter debated in political assemblies, in the media and - most importantly - in the courts. 
When this happens, real efforts to enforce laws that previously existed only on paper to please foreigners, starts to take place. 
This is now happening in China. 
It offers real hope that China will improve its record of protecting intellectual property. 
In recent years, Chinese companies have been suffering piracy related problems just as their foreign counterparts have. 
As a result they now lobby the government vociferously and are gaining serious attention from lawmakers and law enforcement alike. 
Foreign companies will no doubt also benefit from this new commitment to stamp out piracy. 
China’s accession to the World Trade Organization (WTO) may help some more, but it will not solve the problem overnight. 
In any case, no one should exaggerate the problem of piracy. 
Quite a few foreign companies shout “piracy” when what is really happening is competition - ie, a company in a developing country makes a similar product but at a lower price. 
Copying the idea and basic design of a product is not piracy. 
As developing countries seek to create their own “knowledge economy,” copyright and intellectual property rights will become more and more important. 
Real profits will be coming from innovations made within developing country themselves. 
Here, indeed, China is particularly hopeful about its future. 
Although this may mean that China is crossing the “divide” between the haves and have-nots of the world’s knowledge economy, it will not bridge that divide. 
Other peoples and countries find themselves on an unequal footing in this digital age, so the problem of piracy is not likely to disappear. 
The costs of acquiring and using new technologies protected by copyrights pose huge obstacles for developing countries. 
Reducing those costs should be a priority in international discussions about the “digital divide” and “poverty relief.” 
Poverty is no excuse for “stealing” or gaining a free lunch, of course, but using the protection of intellectual property to keep the poor poor is unjust, and may cause instability that harms rich countries, too. 
Reducing the costs for developing countries to use new technologies may, indeed, reduce the incentives for violating copyright and other intellectual property protections. 

Pity the Policymakers 
NEWPORT BEACH – I don’t know about you, but whenever I am in an airplane experiencing turbulence, I draw comfort from the belief that the pilots sitting behind the cockpit’s closed door know what to do. 
I would feel very differently if, through an open door, I observed pilots who were frustrated at the poor responsiveness of the plane’s controls, arguing about their next step, and getting no help whatsoever from the operator’s manuals. 
So it is unsettling that policymakers in many Western economies today resemble the second group of pilots. 
This perception reflects not only the contradictory pronouncements and behavior of policymakers, but also the extent to which economic outcomes have consistently fallen short of their expectations. 
This perception is evident in Europe, the United States, and Japan, where indicators of economic sentiment are deteriorating again, already-weak recoveries are stalling, and over-stretched balance sheets are becoming even more precarious. 
Understandably, companies and households are becoming even more cautious – inevitably making a difficult job for policymakers that much harder. 
In Europe, policymakers have failed to counter an expanding sovereign-debt crisis in the eurozone’s periphery, despite many summits and programs, multiple expensive bailouts, and the imposition of painful economic sacrifices on societies. 
Like an airplane piloted in confusion, the European economy has not behaved according to the instructions. 
As Greek Prime Minister George Papandreou put it last week in his powerful letter to the head of the Eurogroup, Luxembourg’s Prime Minister Jean-Claude Juncker, “The markets and rating agencies have not responded as we had all expected.” 
With outcomes that fall far short of policymakers’ projections, it is not surprising that there is little harmony in official circles. 
Narratives increasingly conflict – and in an astonishingly open and unsettling way. 
Disagreement in Europe is not limited to that between “solution providers” (the troika of the European Central Bank, the European Union, and the International Monetary Fund) and countries now implementing painful austerity measures (Greece, Ireland, and Portugal). 
Damaging discord has emerged within the troika itself, with a particularly disruptive impasse between Frankfurt, where the ECB resides, and Berlin, the seat of the German government. 
The situation in the US is not as acute as it is in Europe, but policy impotency prevails here, too. 
Despite unprecedented fiscal and monetary stimulus, economic growth remains sluggish, and unemployment is stuck at a worrisomely high level. 
The medium-term fiscal outlook continues to deteriorate while, in the short term, politicians play with the country’s valuable AAA credit rating by arguing like schoolchildren over how to extend the debt ceiling. 
Then there are the complex technical difficulties facing policymakers, to which US Federal Reserve Chairman Ben Bernanke referred in his refreshingly candid manner, acknowledging that “We don’t have a precise read.” 
The Fed’s economic manuals, including technical models and historical analyses, shed insufficient light on today’s economic situation. 
Little wonder, then, that the latest release of the closely followed minutes of the Federal Open Market Committee meeting points to a divided body, whose members anticipate divergent paths for monetary policy, with some expecting further accommodation and others expecting a round of tightening. 
Meanwhile, Japan continues to languish. 
Four months after a major earthquake, a devastating tsunami, and the start of persistent nuclear uncertainties, a comprehensive reconstruction program has yet to be launched. 
The resulting economic uncertainties are compounding years of inadequate growth and deteriorating public-debt dynamics. 
Six important issues speak to the problem for policymakers in Europe, the US, and Japan. 
First, all three economic areas are struggling with unsettling de-leveraging dynamics. 
Like oxygen being sucked out of our metaphorical airplane in midflight, deleveraging destabilizes societies and undermines the traditional effectiveness of official policies. 
Indeed, left completely to their own dynamics, these economies would probably shed excessive debt and alter long-standing social contracts in a manner that is both highly disorderly and that leads to economic contraction and a higher risk of another financial crisis. 
Second, domestic de-leveraging dynamics are aggravating other structural impediments. 
While the specifics vary by economic region and sector (housing, labor markets, credit intermediation, etc.), it is a combination with a common and unfortunate outcome: it inhibits economies’ ability to grow, and thus to overcome debt overhangs in an orderly way. 
Third, policymakers are operating in a global economy that is in the midst of major re-alignments, as several systemically important emerging economies, led by China, continue to plow through their developmental breakout phase. 
Fourth, in choosing cyclical measures to deal with structural problems, policymakers have complicated matters even more – a reflection, again, of their inability to understand the unusual challenges that they face. 
Fifth, politics is complicating matters significantly. 
The reason is simple: in most cases, the required structural measures involve immediate pain for longer-term gain – a tradeoff that politicians abhor, especially when they are subject to short election cycles. 
Finally, communication has been dreadful. 
Rarely have I witnessed such failure by policymakers to provide a clear vision of their medium-term economic vision – a failure that has added to the general and unsettling sense of uncertainty. 
All of this speaks to why we should pity today’s policymakers, who must confront unusually difficult challenges with abnormally ineffective tools. 
But pity is not a free pass: we should also urge policymakers to shift from their traditional cyclical mindset to one that can better comprehend, and effectively address, the more complicated, yet critically important, structural issues that underlie today’s malaise. 
Unfortunately, this will not happen overnight; and, in some cases, conditions might have to become a lot worse in order to focus policymakers’ minds. 
In the meantime, companies and households lucky enough to be in a position to build precautionary cushions will inevitably continue to do so. 
Others, unfortunately, will be vulnerable to even greater stomach-churning turbulence – without the perceived benefit of a closed cockpit door. 

The Eternal Return of the Plague 
NORMAN, OKLAHOMA – “Fearsome Plague Epidemic Strikes Madagascar.” 
That recent New York Times headline might sound like the synopsis of a horror movie. 
The epidemic gripping Madagascar is not just any plague, and it certainly isn’t some Hollywood apocalypse. 
It’s the plague, caused by the bacterium Yersinia pestis, agent of the notorious bubonic plague. 
For most people, “the plague” conjures up images of the medieval Black Death, and perhaps a vaguely reassuring sense that, in the developed world, such ancient dangers are long past. 
But in recent years, thanks to the work of geneticists, archaeologists, and historians, we now know that human civilization and the plague have a much deeper and more intimate association than previously assumed. 
Lessons learned from studying this historic interaction could reshape how we think about global public health today. 
All infectious diseases are caused by pathogens – bacteria, viruses, protozoa, and parasites – that are capable of subverting our immune systems long enough to make us sick. 
These organisms are the product of their own biological evolution, and the history of the plague’s development is perhaps (along with maybe HIV) the most detailed biography of any pathogen known to science. 
The plague bacterium, in its most destructive form, is about 3,000 years old. 
It evolved in Central Asia as a rodent disease; humans were accidental victims. 
From the germ’s point of view, people make poor hosts, because we die quickly and are usually a terminus, not a transmitter. 
The plague is spread principally by the bite of fleas, and a few thousand years ago, the bacterium acquired a genetic mutation that made it ferociously effective at spreading. 
This adaptation improved the plague’s biological fitness, which, for rodents – and the humans who live near them – has proven to be a nightmare. 
Thanks to new genomic evidence, we can say with greater confidence how long this nightmare has been recurring. 
One of the most surprising and solidly confirmed findings in recent years has been the prevalence of plague in samples from Stone Age and Bronze Age societies in Europe and Central Asia. 
While it remains unclear what role plague played in the failure of those societies, it is reasonable to assume that the disease has long influenced human history. 
What is now beyond question is that Yersinia pestis was indeed the pathogen responsible for two of the most destructive pandemics ever. 
The Black Death, which lives on in popular imagination to this day, arrived from Central Asia in the 1340s, and in the space of a few years, wiped out roughly half of the population in the regions it struck. 
The disease then lingered for a few more centuries, killing many more. 
But this entire episode is properly known as the “second pandemic.” 
The first pandemic began in AD 541, during the reign of the Roman Emperor Justinian. 
The outbreak is known as the Justinianic plague, and, like the Black Death, it cut a swath of destruction from inner Asia to the shores of the Atlantic in the space of a few years. 
Total mortality was in the tens of millions, and stupefied contemporaries were certain they were living on the verge of the last judgment. 
As with the Black Death, later historians questioned whether a rodent disease could cause destruction on such a scale. 
But in recent years, the pathogen’s genetic traces have been found in sixth-century graves, and the DNA evidence convicts Yersinia pestis of this ancient mass murder as definitively as it would in a modern courtroom. 
The plague triggered a demographic crisis that helped to topple the Romans’ “eternal empire.” 
Plague pandemics were events of mind-boggling ecological intricacy. 
They involved a minimum of five species, in perilous alignment: the bacterium itself, the reservoir host such as marmots or gerbils, the flea vector, the rodent species in close quarters with humans, and the human victims. 
The germ first had to leave its native Central Asia. 
In the case of the Justinianic plague, it seems to have done so by exploiting the shipping networks in the Indian Ocean. 
Once within the Roman Empire, it found an environment transformed by human civilization, along with massive colonies of rodents fattened on the ancient world’s ubiquitous granaries. 
Human expansion helped rodents prosper, and rat infestations, in turn, intensified and prolonged the plague’s outbreak. 
There is tantalizing evidence that climate change also played a role in triggering the first pandemic. 
Just a few years before the appearance of the plague on Roman shores, the planet experienced one of the most abrupt incidents of climate change in the last few thousand years. 
A spasm of volcanic explosions – in AD 536, when historians reported a year without summer, and again in AD 539-540 – upset the global climate system. 
The precise mechanisms by which climate events fueled plague remain contested, but the link is unmistakable, and the lesson is worth underscoring: the complex relationship between climate and ecosystems impacts human health in unexpected ways. 
The plague in Madagascar today is an offshoot of what is known as the “third plague pandemic,” a global dispersion of Yersinia pestisthat radiated from China in the late nineteenth century. 
There still is no vaccine; while antibiotics are effective if administered early, the threat of antimicrobial resistance is real. 
That may be the deepest lesson from the long history of this scourge. 
Biological evolution is cunning and dangerous. 
Small mutations can alter a pathogen’s virulence or its efficiency of transmission, and evolution is relentless. 
We may have the upper hand over plague today, despite the headlines in East Africa. 
But our long history with the disease demonstrates that our control over it is tenuous, and likely to be transient – and that threats to public health anywhere are threats to public health everywhere. 

Water Management Is Health Management 
LONDON – With climate change accelerating and its effects exacerbating other geopolitical and development crises, the role of environmental protection in preserving and improving human wellbeing has become starkly apparent. 
This recognition lies at the heart of the concept of “planetary health,” which focuses on the health of human civilization and the condition of the natural systems on which it depends. 
The concept’s logic is simple: if we try to deliver better health to a growing population, without regard for the health and security of our natural resources, we will not just struggle to make new strides; we will reverse the progress already made. 
Where things get complicated is in applying the concept, particularly when addressing the nexus of water services, health, and ecosystem integrity. 
Since at least 1854, when John Snow discovered that cholera was spread through contaminated water supplies in central London, humans have understood that polluted water is bad for our health. 
The degradation of freshwater ecosystems often brings disease, just as the protection or strengthening of such ecosystems improves health outcomes. 
But, while it is now well understood that progress in one area improves outcomes in another, such co-beneficial dynamics often are insufficient to spur investment in both areas. 
For example, investing to protect a watershed can also protect biodiversity and improve water quality in associated rivers, thereby benefiting human health. 
But if the goal is explicitly to improve human health, it might be more cost-effective simply to invest in a water-treatment plant. 
A more compelling dynamic is complementarity: when investment in one area increases the returns on investment in other areas. 
In this scenario, investments in protecting a watershed would aim not just to produce returns directly, but also to boost the returns of simultaneous investments in human health. 
Complementarity produces mutually reinforcing dynamics that improve outcomes across the board. 
A well-functioning water sector already attempts to balance complementary interventions. 
Indeed, such a system amounts to a multidisciplinary triumph of human ingenuity and cooperation – involving engineering, hydrology, governance, and urban planning – with far-reaching complementary impacts on both human health and economic development. 
In 1933, through the Tennessee Valley Authority Act, the United States established an agency whose purpose was to build hydroelectric dams on the Tennessee River. 
That effort benefited industry, agriculture, flood control, and conservation throughout the Tennessee Valley watershed, until then one of the country’s most disadvantaged regions. 
Since then, governments worldwide have recognized the potential of water infrastructure to complement other economic and social policies, including those intended to improve health outcomes. 
It is no coincidence that one of the World Bank’s largest lending portfolios – $35 billion worth of investments – comprises water projects. 
But understanding the potential of complementarity is just the first step. 
To maximize results, we must design a coherent strategy that takes full advantage of the dynamic, at the lowest possible cost. 
The question is whether there is an optimal mix of environmental protection and direct health interventions on which policymakers can rely to maximize investment returns for both. 
A recent analysis suggests that, in rural areas, a 30% increase in upstream tree cover produces a 4% reduction in the probability of diarrheal disease in children – a result comparable to investing in an improved sanitation facility. 
But, if that is true, we have yet to determine at what point reforestation becomes a better investment than improving sanitation, let alone increases the returns of other health interventions by the highest possible amount. 
Another study found that an estimated 42% of the global malaria burden, including a half-million deaths annually, could be eliminated through policies focused on issues like land use, deforestation, water resource management, and settlement siting. 
But the study didn’t cover the potential benefits of employing insecticide-treated nets as a tool for fighting malaria, ruling out a comparison of the two investments’ returns. 
Worldwide, around 40% of cities’ source watersheds show high to moderate levels of degradation. 
Sediment from agricultural and other sources increases the cost of water treatment, while loss of natural vegetation and land degradation can change water-flow patterns. 
All of this can adversely affect supply, thereby increasing the need to store water in containers – such as drums, tanks, and concrete jars – that serve as mosquito larval habitats. 
Can we show that ecological restoration of the watershed could do more than just insecticides or mosquito nets to support efforts to reduce malaria (and dengue) in cities? 
In all of these cases, finding the best option requires knowing not just the relative contribution of different interventions, but understanding their complementarity. 
In a world of limited resources, policymakers must prioritize their investments, including by differentiating the necessary from the desirable. 
To that end, finding ways to identify and maximize complementarity is vital. 
Some 2.1 billion people worldwide lack access to safe, readily available water at home, and more than twice as many – a whopping 4.5 billion – lack safely managed sanitation, severely undermining health outcomes and fueling river pollution. 
With a growing share of the world’s population – including many of the same people – feeling the effects of environmental degradation and climate change firsthand, finding solutions that simultaneously advance environmental protection, water provision, and health could not be more important. 
Global health and conservation professionals must cooperate more closely to find those solutions – and convince policymakers to pursue them. 

Nourishing Cities with Nature 
BOSTON – Ever since the ancient Greek poet Theocritus wrote his pastoral idylls romanticizing rural life, people have been pondering how to build cities that are in concert with their natural surroundings. 
But with rates of urbanization growing exponentially around the world , the need for greener cities has never been more urgent. 
Fortunately, innovation and technology can help strike this long-elusive balance. 
Bridging the urban-rural divide has long been a focus of city planners. 
In the nineteenth and early twentieth centuries, European cities experienced unprecedented growth as huge numbers of people moved from the countryside to newly booming metropolises. 
As these cities grew, they become overcrowded and polluted, which inspired a new generation of thinkers to search for solutions. 
One of these visionaries was Britain’s Ebenezer Howard, who in 1898 coined the term “garden city” – which he defined as residential communities built around a mix of open spaces, parks, factories, and farms. 
Soon, London was surrounded by leafy suburbs designed to keep high-quality housing and abundant green space in equilibrium. 
Howard’s mantra was to bring the city to nature. 
A few decades later, on the other side of the Atlantic, Frank Lloyd Wright conjured up Broadacre City, an imagined suburban development balancing the built environment with the wild. 
And back in Europe, Charles-Édouard Jeanneret, an architect and designer known as Le Corbusier, was sketching visions of utopian cities that seamlessly enveloped the natural world. 
And yet, while each one of these ideas was revolutionary for its time, they failed because they relied heavily on the automobile and promoted urban sprawl. 
In fact, most early urbanization in the West was characterized by development patterns that crashed against nature, connected not by green spaces and parks, but rather by endless ribbons of impervious pavement. 
As planners recognized the shortcomings of twentieth-century remedies, they sought to reverse the equation: how can nature be returned to the city? 
New York City’s High Line, an aerial greenway built from a converted rail bed that opened in June 2009, was one of the first projects to capture this new ambition in urban planning. 
From London’s (now defunct) Garden Bridge to Seoul’s Skygarden, projects are being designed to better incorporate nature into the urban fabric. 
Singapore’s Gardens by the Bay is among the more ambitious efforts. 
At the park’s Supertree Grove, photovoltaic cells harvest energy from the sun, and rainwater is stored in the steel trees’ “canopy” to feed vertical towers of foliage. 
Dehumidified air is even collected to help cool adjacent buildings. 
Meanwhile, in Germany, a startup called Green City Solutions is building mobile moss-covered walls to clean polluted air and help lower urban temperatures. 
The company’s CityTree concept – essentially a natural filtration system – is being tested from Mexico City to Milan. 
We are even witnessing a boom in urban agriculture, as advances in hydroponic and aeroponic farming techniques make it easier to grow vegetables in confined spaces. 
While cities will never replace rural areas as the world’s main source of nutrition, a higher percentage of food can be cultivated in urban areas. 
New ventures like Freight Farms in Boston and InFarm in Berlin are already harnessing these technologies to bring urban farming to more people. 
As innovative solutions like these take root, urban planners are turning their attention to even bolder endeavors. 
One concept that my colleagues and I have explored is custom-designed urban ecosystems and climates. 
In Milan, we recently unveiled our Living Nature exhibit, a 500-square-meter (5,381-square-foot) pavilion that can recreate four seasons simultaneously under the same roof. 
The goal of the project was to spark conversation about sustainable design, and to illustrate the surprising ways that nature will be integrated into the cities and homes of the future. 
More than a century ago, the French geographer Élisée Reclus astutely predicted that people would always need “the dual possibility of gaining access to the delights of the city …and, at the same time, the freedom that is nourished by nature.” 
Reclus’s ideal was visionary, if premature. 
But today, thanks to new technologies and bold thinking, the urban-rural divide in city planning is slowly closing. 

Toward a Global Treaty on Plastic Waste 
BERLIN – If there are any geologists in millions of years, they will easily be able to pinpoint the start of the so-called Anthropocene – the geological age during which humans became the dominant influence on our planet’s environment. 
Wherever they look, they will find clear evidence of its onset, in the form of plastic waste. 
Plastic is a key material in the world economy, found in cars, mobile phones, toys, clothes, packaging, medical devices, and much more. 
Worldwide, 322 million metric tons of plastic were produced in 2015. 
And the figure keeps growing; by 2050, it could be four times higher. 
But plastic already is creating massive global environmental, economic, and social problems. 
Despite requiring resources to produce, plastic is so cheap that it often is used for disposable – often single-use – products. 
As a result, a huge amount of it ends up polluting the earth. 
Plastic clogs cities’ sewer systems and increases the risk of flooding. 
Larger pieces can fill with rainwater, providing a breeding ground for disease-spreading mosquitos. 
Up to 13 million tons of plastic waste end up in the ocean each year; by 2050, there could be more plastic in there than fish. 
The plastic that washes up on shores costs the tourism industry hundreds of millions of dollars every year. 
Moreover, all that plastic poses a serious threat to wildlife. 
Beyond the dead or dying seals, penguins, and turtles that had the bad fortune of becoming entangled in plastic rings or nets, biologists are finding dead whales and birds with stomachs stuffed with plastic debris. 
Plastic products may not be all that good for humans, either. 
While the plastics used, say, to package our foods are usually nontoxic, most plastics are laden with chemicals, from softeners (which can act as endocrine disruptors) to flame retardants (which can be carcinogenic or toxic in higher concentrations). 
These chemicals can make it through the ocean and its food chain – and onto our plates. 
Addressing the problem will not be easy; no single country or company, however determined, can do so on its own. 
Many actors – including the biggest plastic producers and polluters, zero-waste initiatives, research labs, and waste-picker cooperatives – will have to tackle the problem head-on. 
The first step is to create a high-level forum to facilitate discussion among such stakeholders, with the goal of developing a cooperative strategy for reducing plastic pollution. 
Such a strategy should go beyond voluntary action plans and partnerships to focus on developing a legally binding international agreement, underpinned by a commitment from all governments to eliminate plastic pollution. 
Negotiations on such a treaty could be launched this year, at the United Nations Environment Assembly in Nairobi in December. 
Scientists have already advanced concrete proposals for a plastic-pollution treaty. 
One of the authors of this article proposed a convention modeled after the Paris climate agreement: a binding overarching goal combined with voluntary national action plans and flexible measures to achieve them. 
A research team from the University of Wollongong in Australia, taking inspiration from the Montreal Protocol, the treaty that safeguards the ozone layer, has suggested caps and bans on new plastic production. 
Some might ask whether we should embark on yet another journey down the long, winding, and tiresome road of global treaty negotiations. 
Can’t we engineer our way out of our plastic problem? 
The short answer is, probably not. 
Biodegradable plastics, for example, make sense only if they decompose quickly enough to avoid harming wildlife. 
Even promising discoveries like bacteria or moths that can dissolve or digest plastics can provide only auxiliary support. 
The only way truly to address the problem is to slash our plastic waste. 
Technology might be able to help, offering more options for substitution and recycling; but, as the many zero-waste communities and cities around the world have shown, it is not necessary. 
For example, Capannori, a town of 46,700 inhabitants near Lucca in Tuscany, signed a zero-waste strategy in 2007. 
A decade later, it has reduced its waste by 40%. 
With 82% of municipal waste now separated at source, just 18% of residual waste ends up in landfills. 
Such experiences should inform and guide the national action plans that would form part of the treaty on plastics. 
The European Commission’s “circular economy package” may provide another example worth emulating. 
Though it has not yet been implemented, its waste targets have the potential to save the European Union 190 million tons of CO2 emissions per year. 
That is the equivalent of annual emissions in the Netherlands. 
Of course, the transition to zero waste will require some investment. 
Any international treaty on plastic must therefore include a funding mechanism, and the “polluter pays” principle is the right place to start. 
The global plastic industry, with annual revenues of about $750 billion, surely could find a few hundred million dollars to help clean up the mess it created. 
A comprehensive, binding, and forward-looking global plastics treaty will not be easy to achieve. 
It will take time and cost money, and it will inevitably include loopholes and have shortcomings. 
It certainly will not solve the plastic pollution problem on its own. 
But it is a prerequisite for success. 
Plastic pollution is a defining problem of the Anthropocene. 
It is, after all, a global scourge that is entirely of our making – and entirely within our power to solve as well. 

Better Plastics for Healthier Oceans 
LONDON – Plastics are among the most popular materials in use today. 
Given the material’s versatility, it is little wonder that some 320 million tons of it are used around the world each year. 
Indeed, the recent holidays left many with a mountain of plastic products and packaging. 
But plastics also pose a serious environmental threat. 
If not disposed of properly, plastics can lie or float around for decades. 
In addition to being harmful to terrestrial and aquatic life, free-floating plastics in oceans can adsorb toxins and break up into micro-plastics, which then enter the food chain. 
It is this seeming immortality that has led governments to tax certain environmentally damaging plastic products or ban them altogether. 
Many governments are also encouraging better waste management, and the reuse, redesign, and recycling of plastic products. 
This is prudent policymaking. 
But while taxes, bans, and waste-management policies will reduce the problem of plastic pollution, they will not solve it. 
And, because plastics are made from a byproduct of oil refining, a ban would have little or no impact on hydrocarbon extraction, either. 
What taxes and bans will do is deprive the poorest people of a useful and inexpensive material. 
The fact is that, despite the best efforts of well-intentioned lawmakers and nongovernmental organizations, thousands of tons of plastic waste are still entering the environment, particularly the oceans, every day. 
Clearly, a better approach is needed. 
Some governments and companies have been persuaded that “bio-plastics” – which are derived partly from biomass like cornstarch – are the solution. 
But this argument is flawed: bio-plastics are very expensive and energy-intensive to produce, and still contain large amounts of material derived from oil. 
Moreover, recycling bio-plastics requires that they be separated from ordinary plastic. 
Such polymers are tested to biodegrade, but only in the particular conditions found in industrial composting. 
In other words, while this technology might sound appealing, it will not solve the problem of plastic litter seeping into the environment. 
The focus of the plastics industry has long been on a product’s functionality during its lifespan. 
This approach is no longer tenable. 
The world needs a new type of plastic – one that will perform well, but will also biodegrade much faster than the plastics we use today. 
Enter oxo-biodegradable plastic. 
Unlike other plastics, including bio-plastics, OBP biodegrades anywhere in the environment, and can be recycled if collected during its useful life. 
Ordinary plastic products can be upgraded to OBP with existing machinery at the time of manufacture and at little to no extra cost, using technology that the Oxo-biodegradable Plastics Association is working to explain. 
OBP is produced when a special additive is mixed with a normal polymer. 
The additive (produced by a company where I am a director) dismantles the molecular structure of the polymer at the end of its useful life and enables natural decomposition in an open environment. 
And, when it comes to OBP, decomposition doesn’t mean breakdown into plastic fragments. 
As Ignacy Jakubowicz, a professor at the Research Institutes of Sweden and one of the world’s leading experts on polymers, explains, when OBPs break down, the material changes entirely, with hydrocarbon molecules becoming oxygen-containing molecules that can be assimilated back into the environment. 
According to international standards (such as ASTM D6954), the use of OBP would demand proof of degradation and biodegradation, and confirmation that there are no heavy metals or eco-toxicity. 
As plastics change, the ways countries integrate them into their economies must change, too. 
The good news is that, though the United States and Europe have been slow to embrace innovative solutions, others have been more open to them. 
For example, Saudi Arabia and the United Arab Emirates have banned the import or manufacture of conventional plastics for a wide range of products, and both now require that plastic products be upgraded with OBP technology. 
They have not opted for “bio-based” plastics. 
The world does not need new bans or taxes. 
Rather, it needs people who work with plastic, and their governments, to become as adaptable as the material itself, taking advantage of technological advances to ensure that we can make the most of a cheap and versatile material, without subjecting the environment to its damaging impact. 

New Frontiers for Waste Management 
WASHINGTON, DC – The world is mired in a serious, if underreported, crisis. 
Every year, humans generate about two billion tons of household waste, and much more industrial, hazardous, electronic, medical, and construction waste, much of which is disposed of inadequately. 
And, as usual, the consequences – environmental destruction, damage to health, and impeded development – are disproportionately affecting the world’s poor. 
As it stands, at least one-third of all global waste is openly dumped or burned. 
In low-income countries, which may already spend as much of 20% of their municipal budgets on waste management, that figure can rise as high as 93%. 
The damage to human health and the environment is already profound. 
For example, each year, the world generates 242 million tons of plastic, which comprises as much as 90% of ocean debris, damaging the marine ecosystem and ending up in our own bodies. 
According to Ocean Conservancy, plastic has been found in every species of sea turtle and more than 25% of fish sampled from seafood markets around the world. 
And the problem is set to worsen. 
The recent What a Waste 2.0 report projects that annual global waste generation will increase by as much as 70% by 2050, even as the world’s population grows by less than half that. 
Half of the increase will come from Sub-Saharan Africa, where waste generation will more than triple, and South Asia, where it will more than double. 
Confronting the escalating waste crisis will be crucial to achieving the United Nations Sustainable Development Goals. 
The 2030 Agenda for Sustainable Development commits countries to achieving sustainable production and consumption patterns (SDG12). 
It also calls for universal access to clean water and sanitation (SDG6) and the creation of healthy and sustainable cities (SDG11). 
And SDG14 – “conserve and sustainably use the oceans, seas and marine resources for sustainable development” – obviously cannot be achieved without major progress in fighting marine pollution. 
Fortunately, the world finally seems to be recognizing the scale of the waste crisis. 
October’s Our Ocean Conference in Bali, Indonesia, focused on generating commitments and formulating measures to maintain ocean sustainability, including by cutting marine pollution. 
In particular, there has been a surge in bans or taxes imposed on certain plastics or plastic products. 
But addressing the issue of plastic consumption still requires far-reaching behavioral change. 
At the same time, the plastic waste that is produced needs to be managed better, in order to prevent it from ending up in waterways. 
Given that larger countries make the biggest contributions to plastic pollution, improving waste management there will have a major impact. 
Where regulations to prevent dumping are insufficient, they should be strengthened and enforced. 
There are already numerous successful models of waste management and disposal that may provide a useful starting point for such changes. 
Forward-thinking action will also be critical in countries anticipating rapid economic and/or population growth, such as the Democratic Republic of Congo, India, Nigeria, and Pakistan. 
Of course, such changes cost money, which is often in short supply. 
On average, local governments pay 50% of countries’ costs for solid waste management. 
Though lower-income countries spend less on waste management in absolute terms (around $35 per ton), they have a harder time recovering costs. 
Given this, international institutions should help countries – especially lower-income countries – plan and develop state-of-the-art waste-management systems, including by providing needed financing. 
In Morocco, the government, with the help of international loans, implemented a program that transformed solid waste management, including by boosting private-sector participation considerably. 
International institutions should also support the introduction of policies that create incentives for reducing household waste. 
Here, again, there are successful models to emulate. 
In Ningbo, China, citizens receive a financial incentive to separate organic waste and recyclables, reducing the city’s overall cost of collection. 
Effective waste mitigation requires action at all levels of government and society. 
This means securing broad-based behavioral change, aligning incentives, reducing barriers to financing, and promoting private-sector participation. 
It also means providing support to the countries that need it most, such as those in Sub-Saharan Africa and Asia. 
A cleaner, healthier future is within reach. 
We must not let it go to waste. 

The Platform Economy 
WASHINGTON, DC – Hardly a day goes by without another article, conference, or research initiative devoted to the future of work. 
The robots are coming, or they’re not coming as fast as we think; when they do come, they’ll put everyone out of work, or they’ll create as many jobs as they destroy. 
Thus the conversation goes. 
But what if, instead of trying to predict the future, we look at realities that exist today for billions of people? 
Some 80% of the global population lives in emerging economies – defined by informal markets and fluid employment structures. 
The SHIFT: Commission on Work, Workers, and Technology invited groups in five cities across the United States to imagine four scenarios along two axes of change – more or less work, and more jobs or more tasks. 
Participants were divided as to the amount of future work, but almost all foresaw the continuing disaggregation of jobs into tasks in both low- and high-end work, from driving to lawyering. 
That is the reality in emerging economies today. 
Examining work patterns in these diverse countries yields three key lessons. 
First, people layer multiple work streams and derive income from more than one source. 
Second, platform economies are emerging rapidly and build on traditional networks. 
Finally, these work patterns often go hand in hand with dramatic income inequality. 
Flexibility and uncertainty define informal markets in developing countries. 
Those lucky men and women who have formal jobs (less than 40%) often have “side hustles” through which they sell their time, expertise, network, or ideas to others in an effort to hedge against an uncertain labor market. 
A Nigerian saying – “you have a 9 to 5, a 5 to 9 and a weekend job” – aptly describes the environment of layered work. 
The same pattern is starting to emerge in developed countries. 
A report by the JPMorgan-Chase Institute concludes that platform jobs are largely a secondary source of income, used to offset dips in regular income. 
A key difference, however, is that in emerging economies flexible networks of individuals or small businesses take the place of formal employers. 
Kenya’s informal sector – called in Kiswahili the Jua Kali (“hot sun”) – is the country’s main job creator. 
The 2017 Economic Survey in Kenya showed that the Jua Kali generated 747,300 jobs the previous year, whereas the formal sector added only 85,600. 
The Jua Kali comprises sector-based associations among workers and artisans that harken back to medieval guilds. 
The associations – of carpenters, mechanics, plumbers, and so on – enable pooled savings, provide opportunities to upgrade skills, and create a form of market regulation. 
As technology has been added, many of the associations are going online to match supply and demand in the informal labor market more effectively. 
Go-Jek in Indonesia (named as a pun on ojek, a motorcycle taxi) is a $2.5 billion company that delivers everything from food to hairdressers by motorbike through an app. 
The company, with more than 200,000 drivers on the platform, boosts Indonesians’ productivity in the face of snarling traffic. 
The market for low-cost legal services in Accra, Ghana, provides another interesting example. 
Journalist Joseph Warungu describes a “narrow alleyway at the back of the court buildings” teeming with notaries, commissioners for oaths, letter writers, and lawyers offering services from witness statements to contracts, all “processed efficiently and at a pocket-friendly rate.” 
That alleyway is a platform, bringing together multiple sellers of separate legal services together with buyers, in contrast to a traditional law firm, which requires clients to purchase multiple services from the same source. 
It simply needs to migrate online. 
Developed economies are only beginning to catch up. 
Bliss Lawyers has “a bench” of more than 15,000 lawyers across the US who are paid over $200 an hour for “work on an engagement basis for in-house legal department and law firm clients.” 
More broadly, the Business Talent Group provides “in-demand business talent on-demand,” across a wide range of professional services. 
Emerging markets also offer a cautionary tale concerning the downside of the on-demand economy. 
They have some of the highest levels of inequality in the world. 
The world’s 50 most unequal economies are in Sub-Saharan Africa and Latin America, with South Africa taking the prize for the highest income inequality. 
Informal markets, lack of access to finance, and poor educational opportunities in these countries continue to trap most people in relative poverty. 
Gig economy platforms that provide small jobs without benefits or career progression can supplement income and buffer other employment, but they do not add up to the security and advancement opportunities of a formal job. 
Indeed, most emerging-market workers turn to the gig economy not out of a desire for flexibility or to follow their passions, but simply to make ends meet. 
Nonetheless, informal markets in developing countries provide a vast field for experimentation to transform a patchwork of jobs into a steady upward path for workers. 
Tailoring education to allow workers to get the on-demand skills they need when they need them, and creating verifiable work histories through blockchain, are two ways to help gig economy workers find suitable opportunities more efficiently and capture more value from selling their labor. 
While developed countries in Europe, North America, and Asia are rapidly aging, emerging economies are predominantly youthful. 
By 2040, one in four workers worldwide will be African. 
They are products of dynamic informal markets, and that should ease their absorption into a tech-enabled gig economy. 
Nigerian, Indonesian, and Vietnamese young people will shape global work trends at an increasingly rapid pace. 
We can learn from them today to prepare for tomorrow. 

Playboy and the Mullah 
Indonesia recently witnessed a pair of dramatic releases: one a radical Muslim cleric from prison, the other a saucy men’s magazine from its editors. 
Both Abu Bakar Ba’asyir and Playboy are now out on the streets and in the public eye, but neither is as significant as its opponents claim. 
Their releases and the public debate to which they have contributed, however, cut straight to the heart of the ongoing struggle for Indonesia’s self-identity – a struggle which has taken a dramatic turn of late. 
Abu Bakar Ba’asyir is a radical Muslim cleric who was convicted of blessing the original 2002 Bali bombing, and suspected by some of providing much more. 
His name is on a UN list of terrorists, and undoubtedly Indonesia and the rest of the world would be safer if he were still in prison. 
But his release in itself is not, as some charge, evidence that Indonesia is becoming more radicalized. 
Ba’asyir was released for the simple reason that the law required it: he had completed his 30-month sentence. 
Indonesia’s government would undoubtedly prefer to see Ba’asyir languish in jail, but without any legal measure to justify continued detention, it had little option but to release him. 
Having done so, the government has been quick to impose a travel ban, freeze his bank accounts, and make clear that it will monitor his activities closely. 
Ba’asyir’s release is undeniably unfortunate and possibly dangerous – but it is the consequence of legal proceedings, not any sudden radicalization of Indonesia. 
The case of Playboy is a much more accurate barometer of the state of religious radicalism in Indonesia. 
When Playboy unveiled plans for a nudity-free Indonesian edition early this year, it was denounced by politicians and conservative religious leaders as a threat to traditional values. 
The national parliament introduced an “Anti-Pornography Bill,” which turned out to be a vaguely-worded document with the potential to outlaw not only pornography, but also certain traditional dances, sunbathing, and public kissing. 
The proposed bill attracted support from moderate Muslim leaders, but its most vocal advocates were a collection of radical religious groups with a predilection for violence, led by the Islamic Defenders Front (known by its Indonesian acronym, FPI). 
This year alone, these self-appointed moral vigilantes have ransacked bars and nightclubs, attacked the American and Danish embassies, and stoned the offices of Playboy after its first edition – all with only occasional protests from the police. 
The FPI and its brethren took up the anti-pornography bill with vigor, organizing demonstrations in support and denouncing anyone who dared oppose it. 
In the months following Playboy’s announcement, the public backlash against the magazine appeared to have pushed the Indonesian mainstream firmly to the right, an impression only furthered by the high visibility and loud belligerence of radical groups. 
Moderate Muslim activists and intellectuals tried valiantly to counter the radicals, but seemed unable to gain traction. 
Late this spring, something changed, and within a few weeks moderates made dramatic public advances. 
The most striking demonstration of this political shift came after an incident in central Java, in which a speech by former President Gus Dur was interrupted by FPI members who denounced him for supporting pluralism and opposing the anti-pornography bill. 
It was a public attack on a respected national and religious leader, and it was answered quickly by the leaders of the two most important Muslim organizations in the country. 
Representing a combined membership of more than sixty million Indonesians, they called directly upon the government to act against groups who engage in violence in the name of Islam, and denounced the behavior of such groups as un-Islamic, criminal, and a threat to national unity. 
Newly emboldened, the government pledged to crackdown on groups that engage in violence, and announced plans to empower authorities to disband organizations that threaten ‘security and order.’ 
The Jakarta police have begun acting with new vigor: they charged one prominent radical leader with defamation for publicly calling women opposed to the anti-pornography bill “evil, wretched, and immoral,” and then arrested the chairman and twenty members of FPI for attacking a group of cafes. 
A national dialogue about fostering pluralism is now in progress, and has inspired renewed public interest in Pancasila, the national philosophy discredited during the Suharto years but now seen by some as a symbol of Indonesia’s historic pluralism. 
Meanwhile, legislators have said they will work to transform the controversial anti-pornography bill into a more targeted anti-smut ordinance. 
As for the Playboy , it has been met with the expected criticism – but no attacks and indeed, not even any demonstrations. 
In sum, a remarkable shift in the national debate -- from how to make Indonesia more conservatively Islamic, to how to sustain Indonesia’s tradition of religious pluralism into the future – has taken place. 
The releases of Ba’asyir and publication of Playboy , however controversial, will not themselves alter this new discourse, but they offer an insightful glimpse into just how dramatically things are changing in Indonesia. 
The moderate agenda has gained important ground this month – but the struggle to establish Indonesia’s political and religious identity is far from over. 

Playing at Democracy 
In Calcutta, when some younger kid came along and insisted on joining the game my friends were playing, we would let the new kid in, but only after whispering into each other's ears the words, elé belé . 
An elé belé is a player who thinks he is participating but, in truth, is merely going through the motions. 
Everybody knew that a goal scored by him was not a real goal. 
As a child, mastering the cruel art of elé belé was important. 
When a new kid arrived, accompanied by a doting mother, we could convey to one another with a mere glance that the kid would be an elé belé. 
The technique of elé belé also thrives in the adult world. 
All of us can recall collective decision-making situations--a selection committee, a team for drafting rules--where some members were elé belés. 
All of us have been elé belés at one time or another, though we may not be aware of it. 
What's true of children and adults is also true of international institutions. 
Indeed, organizations that are officially committed to involving all nations in their decision making are often controlled by small groups of powerful nations, while others merely go through the motions of participation. 
The World Trade Organization (WTO), supposedly run on the principle of one country one vote, actually has its agenda selected behind the stage by a small group of nations. 
It is now standard practice for international organizations publishing a report to involve all the "stakeholders" and to reflect their opinions. 
So the evolving report is usually put up on a Web site and suggestions are invited from one and all--NGOs, trade unions, and other organizations of civil society. 
This promotes a sense of participation, but as a friend, seasoned in such matters, informed me, the key in the end is to ignore all the comments received and to write up the report as if there were no Web site and no participation. 
Increasingly, free expression of opinion does not influence or restrain how government behaves. 
Consider the United States. 
People expressed their opinion freely--in newspapers, on television, in Internet chat rooms--concerning George Bush's planned war on Iraq. 
Never before was there so much opposition to a war before it occurred. 
Yet the invasion went ahead. 
The same holds true for Britain and Australia, where public opposition to war counted for naught. 
Part of what happened--or, rather what didn't happen--is admirable: almost no effort was made to muzzle criticism of the government, as happens in China and scores of dictatorial countries. 
But the world's great democracies--the US, India, the UK, and others--are increasingly adept at not allowing freely expressed opinions to constrain what the government does. 
The current war in Iraq is perhaps the strongest proof of this. 
Leaving aside the immorality of this war--and immoral it is--I wish to draw attention to this increasing ability and inclination of democracies to "deal" with (meaning neutralize) public opinion. 
They have embraced the elé belé strategy: let people believe that their opinion counts, that they are participating in their nation's decision making, while keeping them out of the real game. 
As democracies mature they become ever more practiced at managing opinion, and in many cases, at shaping opinion. 
Every time Hans Blix commented on the UN inspections of Iraq that he was conducting, members of the Bush administration would paraphrase what Blix said. 
The paraphrasing would subtly change Blix's comments to suit America's case for war. 
By repeating the altered comments, it was hoped, mass opinion would shift in favor of the war. 
Overthrowing a totalitarian regime and organizing elections may be hard, but the harder task is to go from voting to establishing a true democracy. 
For people accustomed to living in a totalitarian state, learn what participation means is not easy. 
Hence the popular belief that democracies, like wine, improve with age. 
While this may be true, there is a downside to maturity. 
Just as citizens in a democracy continuously learn to participate, democratic governments continuously learn how to get their way despite the participation. 
It is no use denying that civic participation too often serves only to legitimize a sham. 
We must recognize and confront this problem to prevent established democracies from atrophying and to help new democracies become more effective. 
For it is not only morally wrong to leave nations and communities feeling marginalized and without voice; it is a recipe for frustration, rage, and terrorism. 

Playing Defense in Europe 
LONDON – The most frightening periods in history have often been interregnums – moments between the death of one king and the rise of the next. 
Disorder, war, and even disease can flood into the vacuum when, as Antonio Gramsci put it in his Prison Notebooks, “the old is dying and the new cannot be born.” 
The dislocation and confusion of 2016 do not rival the turmoil of the interwar period, when Gramsci wrote, but they are certainly symptoms of a new interregnum. 
After the end of the Cold War, the world was held together by an American-policed security order and a European-inspired legal order. 
Now, however, both are fraying, and no candidates to replace them have yet emerged. 
Indeed, unlike in 1989, this is not a crisis of a single type of system. 
Countries as different as Brazil, China, Russia, and Turkey are coming under heightened political and economic pressure. 
Even if the nightmare of a President Donald Trump is avoided, as appears increasingly likely, the United States can no longer be the world’s policeman. 
Powers such as Russia, Iran, and China are probing US reactions in Ukraine, Syria, and the South China Sea. 
And US allies like Turkey, Saudi Arabia, Poland, and Japan are forging independent and assertive foreign policies to make up for a US that cannot and will not carry its previous burdens. 
Meanwhile, the European Union’s declining cohesion is undermining its moral authority on the world stage. 
Many of the global institutions that reflect European values and norms – from the World Trade Organization and the International Criminal Court to the United Nations Framework Convention on Climate Change – are gridlocked. 
Regionally, the three strands of the European order are unraveling: the US is seeking to reduce its investment in NATO, the EU is de-emphasizing enlargement, and the chaos in the Middle East and Ukraine is making a mockery of the European Neighborhood Policy. 
The rise – and rapprochement – of illiberal forces in Russia and Turkey mean that the EU is no longer the only pole of attraction in the region. 
Worse, EU integration has gone into reverse, with member states seeking to insulate themselves from the outside world, rather than trying to export their shared values. 
As a result, the biggest threats to free trade and the open society stem from domestic sources, not external enemies. 
Even in Germany, which had long seemed immune to such pressures, the interior minister talks of banning burkas (a policy that would affect 300 people), while the vice-chancellor has declared the death of the Transatlantic Trade and Investment Partnership (TTIP) between the EU and the US even before the body is cold. 
The EU proved over the last few decades that it could be a force for globalization – tearing down barriers between peoples and nations. 
But today its survival depends on showing that it can protect citizens from the very forces it has promoted. 
Maintaining the four freedoms at the heart of the European project – the free movement of people, goods, capital, and services within Europe – will be possible only if EU governments have credible policies to protect the most vulnerable in their societies. 
That will mean improving protection of the EU’s external borders, compensating domestic losers from migration and free trade, and soothing public fears about terrorism. 
The danger is that much of what the EU rightly pushed for during the good times could hasten its unraveling now, during the current interregnum. 
For example, given so much uncertainty about the future state of Europe and the world, debating enlargement or the TTIP seems pointless – or worse, because even opening such discussions is certain to play into the hands of Euroskeptics. 
The EU needs to distinguish between core and peripheral priorities. 
For issues such as EU relations with Russia and Turkey (and these two countries’ relations with each other), member states need to agree on a policy that recognizes the interests of all. 
But much greater flexibility is advisable in other areas, including commitments to refugee re-allocation and eurozone rules, where excessive rigidity could cause European unity to buckle and snap. 
In addition to preventing an alliance between Russia and Ankara, the EU should rethink its goals in its neighborhood. 
Although the Balkan countries that are outside the EU will remain there for many years, they are in the European security space already, and Europeans should be prepared to intervene militarily if outbreaks of violence recur. 
Moreover, EU leaders should pursue a broader definition of peace than the absence of war, including political and social stability and preventing radicalization in Bosnia and Kosovo. 
For Georgia, Ukraine, and Moldova, the goal should be to promote stable and predictable governments. 
For the next few years, the EU should view them as independent buffer states rather than as member-states-in-waiting. 
It will be particularly important not to set red lines that the EU is not willing to defend. 
In the troubled Middle East, the EU cannot hope to be the central actor. 
But EU countries cannot protect their populations from instability if they are only spectators. 
Particularly in Syria and Libya, the EU needs to playing a more concerted role with regional powers – as well as with the US and Russia – to advance political processes that could help reduce violence, provide humanitarian aid, and stem the flow of refugees. 
One of the EU’s main challenges is to define success in a defensive era. 
During the heyday of enlargement, the goal was to deepen integration and broaden its reach across Europe. 
Now, however, success means preventing countries from leaving the EU or hollowing out its institutions. 
History moves in cycles. 
The interregnum will eventually end and a new order will be born. 
What is certain is that the survivors and inheritors of the old order will write the rules of the new one. 
The EU’s goal, achievable only with flexibility and courage, must be to remain a viable project – and thus be one of the authors. 

Playing for Human Rights 
PRAGUE -- The selection of Beijing to organize and host the 2008 Olympic Games was accompanied by the Chinese government’s pledges of visible progress on respect for human rights. 
We understood these as a condition whose fulfillment the International Olympic Committee would demand. 
That is how this year’s Olympics could contribute to a greater openness and respect for international standards of human rights and liberties in the host country. 
If the words of the Olympic Charter, stating that it is a goal of Olympism to “place sport at the service of the harmonious development of man, with a view to promoting a peaceful society concerned with the preservation of human dignity,” are to be fulfilled, it is necessary for all Olympians to be able to learn about the real situation in China and to point out human rights violations freely whenever and wherever in line with their conscience. 
We call on the International Olympic Committee to make that possible. 
An interpretation of the Olympic Charter according to which human rights would be a political topic not to be discussed in the Olympic venues is alien to us. 
Human rights are a universal and inalienable topic, enshrined in international human rights documents that China has also signed onto, transcending international as well as domestic politics, and all cultures, religions and civilizations. 
To speak of the conditions of human rights therefore cannot be in violation of the Olympic Charter. 
To speak of human rights is not politics; only authoritarian and totalitarian regimes try to make it so. 
To speak of human rights is a duty. 
We are concerned that the Beijing Olympics might simply become a giant spectacle to distract the attention of the international public from the violations of human and civil rights in China and in other countries with the Chinese government’s significant influence. 
Therefore, we see a dignified celebration of the Olympic ideals not only in sporting performances, but also in the opportunity to express one’s civic attitudes. 
We call on all participants of the summer Olympic Games in Beijing to use this liberty to support those whose freedoms, even at the time of the Olympics, are denied by the Chinese government. 

Playing Russian Roulette with Climate Change 
GENEVA – Mounting skepticism and deadlocked negotiations have culminated in an announcement that the Copenhagen Climate Conference will not result in a comprehensive global climate deal. 
Disappointing? 
Certainly. 
But the Copenhagen climate summit was always meant to be a transitional step. 
The most important thing to consider is where we will go from here. 
The phrase “the day after” is most commonly associated with the word “hangover.” 
The absence of a binding agreement could mean a global hangover, and not just for a day. 
Fed up with apocalyptic predictions, people wanted a miracle in Copenhagen. 
So a perceived failure may cause a massive, perhaps irreversible, loss of confidence in our politicians. 
No surprise, then, that governments have sought to manage our expectations carefully. 
Decision-makers have not faced up to just how close the world may be to the climate “tipping point.” 
But, while a runaway climate remains a risk, runaway politics are already a fact. Official negotiations are removed from reality. 
According to the latest science, the current proposals under negotiation will result in warming of more than 4°C during this century – double the 2°C maximum endorsed by the G-8 and other leaders. 
That leaves a higher than 50% probability of the world’s climate moving past its tipping point. 
An agreement based on the parameters that are now on the negotiating table would thus put us in a position more dangerous than a game of Russian roulette. 
To avoid both the global hangover of no deal and the self-deception of a weak deal, a breakthrough is needed – and can still be achieved in Copenhagen. 
A two-step process is now our best bet. 
States should make a political commitment to a framework that includes overall objectives, an institutional framework, and specific pledges of early action and financing. 
The declaration must stipulate that a legally binding agreement must be finalized by COP15-bis in 2010. 
That would allow the United States and other countries to enact the necessary legislation, and provide United Nations negotiators time to translate the COP15 Declaration into an appropriate, workable legal structure. 
If this means a total reworking of the current document, so be it. 
In addition, it might be necessary to have a review conference in 2015 to adjust our targets and plans to the new realities. 
Therefore, it is more important than ever that heads of state attend the Copenhagen conference, as this two-step solution will only work with strong, direct intervention by leaders. 
In 1985 during the height of the Cold War, when negotiations were bogged down at the US – Soviet Union Geneva Summit, the negotiators were instructed by their leaders annoyed by lack of progress, “we do not want your explanations why this can’t be done. 
Just do it!" 
And it was done by the morning. 
Today’s leaders must come to Copenhagen and say, "We want this done!" 
To move forward, the Copenhagen meeting must break the political deadlock between industrialized and developing states. 
Climate injustice must be redressed, as developing countries bear the brunt of the impact and face massive adaptation costs. 
Rich countries need to put serious money on the table. 
Claims that they lack the needed resources ring hollow, as trillions of dollars were found to bail out banks in the financial crisis. 
Poor countries are aware of their power to block progress. 
Veto power is effectively shifting from the UN Security Council to G-77 plus China. 
Who would have imagined in the West ten years ago that the future and their children’s well-being would depend upon decisions taken in Beijing or Delhi or Addis Ababa? 
So the industrialized countries need to put a real financing offer on the table as soon as possible to allow time for a positive reaction and announcements of commitments from developing countries. 
In particular, commitment to an early-start fund – at least $20 billion to immediately assist the least developed countries – is critical. 
This would help establish the trust that is now sorely lacking, and create conditions to restart productive negotiations. 
Leaders must be honest about the scale of the challenge and recognize that a systemic and transformational change, not incremental gestures, is required. 
The official response to climate change must be recalibrated to the level and urgency of the threat. 
A new global agreement must be science-based, not a lowest-common-denominator compromise watered down by vested interests. 
Sensible risk management today dictates that atmospheric carbon should be stabilized at 350 parts per million of CO2 equivalent, not the current pathway of 450-500ppm CO2e. 
This requires emission reductions of 45-50% in industrialized countries by 2020, and almost complete de-carbonization by 2050, not the levels of 15-25% by 2020 and 60-80% by 2050 that are now on the table. 
Major developing countries must also commit to nationally appropriate mitigation actions. 
But the rich must move first. 
Their inaction over the last 20 years does not give them the right to point fingers. 
Governments should not withhold the truth from their citizens. 
Everyone will have to make sacrifices. 
But do you want your home to be cheap, dirty, and dangerous or clean, decent, and safe? 

Plugging the Leaks 
MUNICH – With pain and misgiving, the United States Congress bailed out Wall Street in order to prevent a meltdown of America’s financial system. 
But the $700 billion to be used may flow into a leaky bucket, and so may the billions provided by governments throughout the world. 
The US financial institutions that went bankrupt in 2008 – or that would have gone bankrupt without government help – were in trouble because they lacked equity capital. 
They did not lack that capital because they never had it, but because they paid out too much of their abundant earnings in previous years to shareholders, leveraging their operations excessively with debt capital. 
If no measures are taken to increase the minimum equity requirements for banks and other financial institutions, financial crises like the current one could recur. 
Anglo-Saxon financial institutions are known for their high dividend-payout ratios. 
From a European perspective, the hunger for dividends and the emphasis on short-term performance goals that characterize these institutions is both amazing and frightening. 
Investment banks, in particular, are known for their minimalist equity approach. 
While normal banks need an equity-asset ratio of at least 7%, investment banks typically operated on a ratio of only 4%. 
The lack of equity resulted largely from the concept of “limited liability,” which provided an incentive for excessive leveraging. 
Earnings left inside a financial institution can easily be lost in turbulent times. 
Only earnings taken out in time can be secured. 
Lack of equity capital, in turn, made risk-averse shareholders hire gamblers to manage their limited-liability investment companies. 
The managers chose overly risky operations, because they knew that the shareholders would not participate symmetrically in the risks. 
While upside risks would be turned into dividends, downside risks would be limited to the stock of equity invested. 
Claims against the personal wealth of shareholders would be blocked by the limited liability constraint. 
The banks’ creditors or governments ultimately would bear any losses. 
The mutual interaction between the incentive to minimize equity capital and the incentive to gamble in order to exploit the upside risks caused America’s crisis. 
In theory, bank lenders and the government could anticipate the additional risks they encounter when a company chooses a high-leverage strategy. 
Lenders may charge higher interest rates, and the government may charge higher taxes or fees. 
But this theory fails to match reality. 
Governments do not tax the return on equity less than debt interest, and lenders do not sufficiently honor the benefits of high equity with lower interest rates, owing to a lack of information about the true repayment probability. 
This is why equity capital held by financial institutions typically is more than twice as expensive as debt capital and why these institutions try to minimize its use. 
The provision of limited liability not only turned Wall Street into a casino, but so-called “Main Street” also was induced to gamble, because homeowners enjoyed a limited liability similar to that of the companies. 
When low-income borrowers took out a loan to buy their homes – often 100% of the purchase price – they typically could use the home as collateral without warranting the repayment with additional wealth or even their income. 
Thus, they were protected against the downside risk of falling house prices and profited by speculating on the upside risk of appreciation. 
Such homeowners knew that with rising prices they would be able to realize a gain by either selling their homes or increasing their debt, while in the case of falling prices they could simply hand over the keys to their banks. 
Given the uncertainty about future house prices, they could reasonably expect gains, which induced them to pay even more in the first place. 
Gambling by Main Street caused the sub-prime crisis. 
The crisis spread because the banking system was not sufficiently risk-averse – and in some cases even seemed to relish risk. 
Mortgage banks kept some claims on their books, but sold most of them to investment banks as “mortgage-backed securities.” 
The investment banks blended these securities into “asset-backed securities” and “collateralized debt obligations” (CDOs) and sold them on to financial institutions throughout the world. 
These institutions, attracted by the high rates of return that were promised, invariably neglected the downside risks. 
The buyers of the CDOs were often misguided by rating agencies that performed badly and did not provide reliable information. 
As private rating agencies live on the fees they collect from rated companies, they cannot easily downgrade important clients or the assets they sell. 
The big American investment banks received excellent ratings up to the last moment, and so did the CDOs with which they betrayed the world. 
All of this explains why the US had such a formidable period of growth in recent years, despite the fact that household savings were close to zero, and why foreigners were willing to finance a record US current-account deficit of more than 5% of GDP – higher than it has been since 1929. That period is now over. 
The US must carry out fundamental reforms of its financial system to plug the equity leaks and recover investors’ confidence. 
But even then it will have a hard time continuing to sell financial assets to the rest of the world. 
American households will need to learn to accumulate wealth by cutting consumption rather than speculating on real estate. 
A painful decade of stagnation for America lies ahead. 



Poland’s Successful Losers 
WARSAW – How can a government with the best economic record in Europe (indeed in the entire OECD) be humiliated at the polls by a Euroskeptic, nationalistic, and economically illiterate opposition – one deemed unelectable only a year ago? 
That is the question many Poles, and friends of Poland, are now asking, following the defeat on October 25 of the Civic Platform government. 
If creating jobs and boosting incomes can’t get you re-elected, what can? 
One reason for the opposition’s victory is, of course, universal: after a time, people everywhere want change, and Civic Platform had been in power since 2007. 
And impatience with the status quo is arguably stronger in the post-communist countries of Central and Eastern Europe, where much of the social, political, and economic order is yet to be generally accepted. 
Indeed, Civic Platform’s Donald Tusk was Poland’s first post-communist prime minister to win successive terms. 
Moreover, as parties govern longer, their strongest personalities tend to be replaced by weaker ones. 
Civic Platform contested this election after replacing Tusk with Ewa Kopacz, and has had the same problem with a number of other “substitutions.” 
What is specific to Poland is that the past eight years have apparently created a pronounced case of cognitive dissonance. 
Annual GDP growth averaged 3.2% over this period; and, unlike in the rich West, both inequality and unemployment have actually fallen, with growth mainly benefiting the middle three quintiles of the income distribution. 
This segment of the population – usually politically crucial – enjoyed a 28% rise in per capita real income from 2007 to 2014. 
At one level, Poles are aware of this, with large majorities describing financial conditions in their own families, workplaces, and social environments as either “good” or “very good.” 
The dissonance is that equally large majorities also describe Poland’s economic situation and the “direction in which the country is moving” as either “bad” or “very bad.” 
Poland’s transformation is visible not only in the form of new motorways, local roads, airports, hospitals and stadiums, but also in the appearance of vast numbers of new and refurbished housing units, supermarkets, and modern factories. 
And this has not been achieved by mortgaging the future. 
Poland has recorded the fourth lowest increase in public debt (as a percentage of GDP) in the European Union. 
And yet the disconnect between this reality and the Poland “in ruins” or “on the verge of catastrophe” perceived by many voters was too strong to ignore. 
Even Kopacz admitted the contrast between the “public affluence” that everyone sees and the “private penury” that many feel persists (at least relative to Germany, the preferred benchmark for Poles). 
In today’s Poland, it is harder to accept wages – nominally about a third of those in Germany – that had seemed perfectly adequate in 2007, when they were only a quarter of the German level. 
But, unsurprisingly, Kopacz’s campaign slogan, “A strong economy – higher wages,” and her implicit promise to address the issue in one parliamentary term, did not appear credible. 
Although the problem faced by Kopacz and Civic Platform was specifically Polish, it contains a universal truth: to win, politicians must define the context in which they operate. 
During Tusk’s premiership, the government was perversely reluctant to claim credit for Poland’s economic success. 
Tusk praised Poles themselves for their hard work, but neglected to emphasize that without the government’s effective macroeconomic policies, that work would have been wasted. 
He never even reminded voters that the government’s choices in managing the fallout from the 2008 global financial crisis – which were neither obvious nor easy, because they required rejecting the EU’s austerity consensus – was the right one. 
Given that most voters do not consider themselves able to judge competence in government, they base their choice of party on the general direction in which it intends to take the country and the overarching principles by which it intends to govern. 
Civic Platform came to power in 2007 with a strongly pro-business and free-market ethos. 
During the financial crisis, it had to moderate these views considerably, taking steps that ran counter to its ideology: increasing deficits in the trough of the crisis (2009-2010) and raising taxes once growth resumed (2011). 
And then, when the government reduced the size of the absurdly expensive, but popular, funded pension system (2011-2014), Tusk attempted to compensate voters by pumping all additional free resources into family benefits. 
Although this was justified, given Poland’s very low birth rate, it was also intended to appeal to his urban electorate. 
But, to many voters, it seemed that Civic Platform, which had identified itself in 2007 as socially conservative and economically liberal, was drifting to the economic (as well as the cultural) left. 
By 2014, the government was perceived as being so pragmatic as to be almost value-free. 
That perception naturally raised the suspicion that self-interest had become Civic Platform’s main motivation. 
As the party’s narrative became an endless litany of the good social things it had done (or was about to do), Poles came to view the campaign as a cynical attempt to buy their votes – and to do so with their own money. 
Even the fact that these promises, though plentiful, were mostly inexpensive (certainly compared to those of the opposition) was not used to convey a commitment to fiscal responsibility. 
Elections are a choice, not an auction between competing lists of promises, with victory simply going to the highest bidder. 
Civic Platform lost because it failed to explain to Poles its own view of that choice. 
It hardly mattered that the opposition’s program lacked credibility: Civic Platform had already become the architect of its own defeat. 

Memory Laws and Nationalist Lies 
ATLANTA – A controversial law recently enacted by Poland’s ruling Law and Justice (PiS) party has attracted a tremendous amount of attention around the world for its criminalization of expressions like “Polish death camps.” 
But the law is intended to be much more than a means to get people to mind their language. 
The law states that one could face a fine or up to three years imprisonment for “publicly and contrary to the facts” ascribing to the Polish people or government “responsibility or co-responsibility for Nazi crimes” or “other offenses” that constitute crimes against peace, crimes against humanity, or war crimes. 
True, “Nazi crimes” were committed by the Nazis, and Poles should not be blamed for them. 
Likewise, while Nazi extermination camps were located in Poland, they were by no means Polish. 
But it is the mention of “other offenses” that should concern us. 
The truth is that, in many places in Eastern Europe, the arrival of German troops during World War II prompted an immediate outbreak of homicidal anti-Semitism. 
Many Jews were murdered by their neighbors or the local police force, only sometimes pursuant to German orders. 
While Nazism was the catalyst for such murders – which include pogroms all across German-controlled Europe, particularly in the east – should Nazis alone be blamed for them? 
Poland’s PiS government is far from the first to introduce “memory laws” aimed at reshaping historical narratives by criminalizing certain statements about the past. 
Such laws exist in some 30 European countries, as well as in Israel, Russia, Rwanda, and Turkey. 
Laws criminalizing the denial of the Holocaust or other crimes against humanity – the most common type of memory law – were first introduced in the 1980s and 1990s in West European democracies that had been implicated in those crimes, including Austria, France, and Germany. 
Whether or not it is advisable to use criminal law in such a way, there is no doubt about the intentions of the people behind such efforts: to protect the memory of the victims, while acknowledging shared responsibility and regret for the misdeeds of the past. 
Some Eastern European countries have likewise prohibited Holocaust denial. 
But they have also introduced memory laws with essentially the opposite aim: to whitewash national narratives by shifting the responsibility for historical atrocities entirely onto others, whether Hitler’s Germany or Stalin’s Soviet Union. 
Poland introduced such a law in 1998. 
Similar norms exist in the Czech Republic, Hungary, Latvia, and Lithuania. 
By obscuring the role that local populations played in both Nazi and communist crimes, such laws help to advance nationalist narratives, which can prove very handy for politicians looking to win popular support. 
The PiS, for one, has accrued substantial electoral support, thanks in part to its exploitation of past tragedies for political ends. 
There are more extreme cases than that of Poland. 
In Russia, a 2014 law prohibits any criticism of Stalin’s policy during WWII. In Turkey, a 2005 law forbids calling the extermination of Armenians under the Ottoman Empire genocide. 
These laws differ fundamentally from memory laws in Western Europe, because they actively protect the memory of the perpetrators, rather than the victims, of state-sponsored crimes. 
Of course, Turkey, and especially Russia, can hardly be called a democracy, and neither is a member of the European Union. 
But Poland is – and its government, too, is now actively protecting the memory of the perpetrators of crimes against humanity, though they were individual citizens, not state officials acting in their government’s name. 
This is not even the first time the PiS has attempted to introduce such a law. 
In 2008, it proposed a law that penalized “slander against the Polish nation,” including accusations concerning Poles’ involvement in Nazi and communist crimes. 
The country’s Constitutional Tribunal invalidated that law on procedural grounds. 
Memory laws emerged in Western Europe’s old democracies as a means of promoting truth, peace, and reconciliation. But, in attempting to avoid future tragedies, these countries may have set a dangerous precedent. 
Now, memory laws have become one of the preferred instruments of nationalist populists attempting to consolidate their own power – and to incite the very xenophobic nationalism that once provided fertile soil for the Holocaust. 

The Polish Threat to Europe 
WARSAW – Poland has now emerged as the latest European battleground in a contest between two models of democracy – liberal and illiberal. 
The overwhelming election victory in October of Jarosław Kaczyński’s far-right Law and Justice party (PiS) has led to something more akin to regime change than to a routine turnover of democratically elected governments. 
Prime Minister Beata Szydło’s new administration has purged the civil service (including public radio and television), packed the Constitutional Court with sympathizers, and weakened the Court’s capacity to strike down legislation. 
In response, the European Commission has launched an official inquiry into potential violations of the EU’s rule-of-law standards. 
Moreover, Standard & Poor’s has, for the first time, downgraded Poland’s foreign currency rating – from A- to BBB+ – and warned of perhaps more cuts to come as it accuses the government of weakening “the independence and effectiveness of key institutions.” 
Growing doubts about the commitment of Poland’s new rulers to democracy has deepened the slump in Poland’s stock market and contributed to a depreciation of the Polish złoty. 
Poland is the largest European Union country to embrace illiberalism; but it is not the first. 
Hungarian Prime Minister Viktor Orbán’s government has been at odds with the EU for several years over his open politicization of Hungarian institutions, while Robert Fico’s government in neighboring Slovakia has pursued a similar brand of raw majoritarianism. 
What accounts for this contempt for democratic norms in some of Europe’s newest democracies? 
Throughout the 1990s, the promise of EU membership framed a process of root-and-branch political and economic reform in Central and Eastern Europe’s previously closed societies. 
And, following these countries’ accession to the Union in 2004, the gap between them and the old EU members seemed to be closing. 
Indeed, during the eight years of center-right rule that preceded the PiS’s victory, Poland emerged as a model European student, recording the strongest economic growth in the OECD. 
Yet the EU’s post-communist members were bound to experience a crisis of liberal democracy sooner or later, owing to a fundamental legacy from their communist past: the absence of the concept of a loyal opposition – legitimate adversaries to be debated, rather than traitorous enemies to be eliminated. 
Unlike in the West, where, broadly, a left-right socioeconomic cleavage shapes politics, the main split in the post-communist democracies is between proponents of an open versus a closed society. 
In a political order defined by the traditional left-right divide, people on both sides, however vociferously they may disagree, rarely question their opponents’ political legitimacy. 
Thanks to liberal constitutional frameworks – including judicial independence, the separation of powers, and freedom of speech – replacing, say, a left-leaning government with a right-leaning one is unlikely to transform the country or its political system. 
But in a political system defined by the open-closed divide, the two sides disagree about which is which: It is always the other who seeks a closed society. 
The same dynamic that helped Vladimír Mečiar, Slovakia’s nationalist former prime minister, win elections in the 1990s helped former Czech President Václav Klaus, an economic arch-liberal, secure victories in the 2000s. 
In practice, however, the open-closed cleavage enables those who actually do espouse illiberalism – including Orbán (who has explicitly called for an “illiberal state” based on the Chinese and Russian models) and Kaczyński (who, tellingly, rules from behind the scenes) – to dismantle the constitutional framework that permits a peaceful rotation of power. 
A single election can thus transform the entire political system, as appears to be the case in Hungary and now Poland. 
The question is what drives voters to support the closed camp. 
In countries with a weak or long-interrupted tradition of liberal constitutionalism, an explosion of nationalism usually follows the establishment of democracy. 
The politics of identity prevails, and, unlike that of social welfare, it is not amenable to compromise. 
The result is a kind of permanent Kulturkampf, in which rigidly binary thinking gives rise to trumped-up claims and conspiracy theories. 
Of course, post-communist countries are not alone in their vulnerability to illiberalism. 
Other factors – such as globalization, economic uncertainty, an influx of refugees, and security risks like terrorist attacks – can cause voters to turn against liberal democracy. 
All of these factors – not to mention confrontation over Ukraine with Russia, which is financing many of Europe’s far-right parties – are at play today in Europe. 
Even before the refugee crisis worsened sharply last year, avatars of the closed society – France’s National Front and the United Kingdom Independence Party – won elections to the European Parliament in two of the West’s ostensibly best-developed democracies. 
The question now is how to stop this destructive trend from engulfing Europe? 
The answer is straightforward: cooperation and integration. 
When countries fear a loss of sovereignty, whether because of globalization or an influx of refugees, their first instinct often is to turn inward, even if it means renouncing liberal principles and institutions. 
But no liberal democracy can survive for long without liberals. 
And no illiberal democracy can succeed to the extent that it closes itself off to cooperation. 
The primary purpose of European integration at its inception was to safeguard the continent from war. 
Today, its main purpose is to protect democratic politics in the face of economic globalization. 
A more integrated EU can play a central role in resolving existing crises, safeguarding against future ones, and reinforcing liberal norms. 
In fact, despite rising nationalism, a move toward increased integration appears to be in the cards. 
If Poland opposes that tendency, it will find itself on the outside, overwhelmed by economic forces it cannot control and Russia’s corrosive influence. 
A new iron curtain in Europe, this time between liberal and illiberal democracies – is a grim prospect. 
Although Poland is not a regional leader, it does wield influence, owing to its large and healthy economy and its strategic role as a buffer between Russia and Western Europe. 
This is particularly important with respect to Ukraine, whose independence is viewed by Polish leaders as a precondition of Poland’s own. 
But, given the developments in Hungary and elsewhere, European leaders must now draw a line in the sand in defense of Europe’s open society. 
Today, the EU is testing Poland, and Poland is testing the EU. 
Poland – and Europe – can win only if the EU does. 

Poland's Christian Mission in Europe 
Last week, Poland's (ex-communist) president called for an explicit reference to Europe's Christian heritage to be inserted into the forthcoming EU constitution. 
Others have only whispered their longing for such a statement. 
José Casanova explains why Poland publicly took the lead. 
The link between Christianity and European civilization is breaking. 
Western Europe is less and less the core of Christian civilization, and the most dynamic forms of Christianity today are less and less European. 
Yet it is at this moment that Catholic Poland is ``rejoining Europe.'' 
During the years when West European societies were undergoing their process of secularization--indeed, of ``de-Christianization''--Polish Catholicism underwent an extraordinary revival. 
All attempts by the communist regime to sever the links between the Catholic Church and the Polish nation failed. 
Forced secularization from above--relatively successful in the Soviet Union--failed abjectly. 
The hope that economic development would have the same secularizing effect as in the West also proved false. 
Not unlike 19 th Century Poland's doomed, romantic uprisings against Tsarist Russia, most European observers viewed the country's religious vitality under communism as anachronistic, if not reactionary. 
Yet the Poles confounded the Zeitgeist . 
The surprising--some say miraculous--elevation of Cardinal Karol Wojtyla to the Papacy as John Paul II, his triumphal visit to Poland in 1979, the rise of Solidarity a year later, and the collapse of the Soviet system in 1989 changed the march of history. 
Given this background, it is no surprise that Poland has forged a type of Catholic ``Europhobe'' who objects to the EU not because of the Euro or some supposed threat to national sovereignty, but because of what Europe represents morally and spiritually. 
These anti-Europe Catholics reject European integration because they think Europe's secular, materialist, and hedonist values threaten Poland's Catholic identity. 
They fear the threat of secularization implied by European integration. 
That fear is not unjustified. 
After all, it is a fundamental premise of the theory of secularization that the more modern a society, the more secular it becomes. 
Because modernization, in the sense of catching up with European levels of political, economic, social, and cultural development, is one reason Poland sought integration with the EU, one can anticipate that the general historical pattern of modernization will lead to secularization across Central Europe, including Poland. 
Belief in a progressive religious decline is part of Europe's definition of what constitutes the modern situation, and this has real consequences for religiosity. 
The assumed normality of belief in the inevitability of secularization tends to reproduce itself, as well as to appear increasingly irreversible. 
Yet it is on this point that Polish Catholicism sees for itself a special, historic role. 
Despite initial ambivalence toward Europe, the Polish Catholic Church has maintained -at least officially--an unambiguous position in support of European integration ever since 1996, when a delegation of Polish Bishops visited the European Commission in Brussels. 
That position is fully in line with the vision of European unity stressed by the Polish Pope. 
During John Paul II's 1999 visit to Poland, he stated explicitly his support for EU integration. 
One reason for this positive attitude may be connected with the apostolic assignment the Pope has reserved for the Polish Church. 
As the first Slavic pope in history, John Paul II felt a special mission to liberate the Slavic peoples from communism and to deepen ecumenical dialogue with the predominantly Orthodox churches of Eastern Europe. 
The fall of the Berlin Wall confirmed the Pope in his mission to reunify and spiritually regenerate Christian Europe. 
But the Pope's vision confronts a Western Europe that he perceives as increasingly pagan, hedonist, and unresponsive to his revivalist message. 
Frustrated, he turned to an Eastern Europe--particularly Catholic Poland--that was seemingly less corrupted by capitalist materialism, urging the region's peoples to serve as the ``spiritual reservoir'' of Christian Europe. 
What he discovered, however, was that Western material goods and values were flooding the East and polluting that reservoir. 
Poland's Catholic bishops, however, accepted the assignment given to them by the Pope and have repeatedly stressed that one of the Church's goals in a united Europe is to foster a revival of Christianity. 
But given the loss of demand for religion, the supply of surplus Polish priests for a pan-European evangelizing effort is unlikely to change things much. 
Europe's lukewarm--if not outright hostile--response to John Paul II's revivalist preaching testifies to the difficulty of this assignment. 
A less ambitious apostolic assignment, however, could work. 
Let Poland prove that the link between modernization and secularization is wrong. 
Let Poland be Poland. 
Let Polonia semper fidelis keep faith with its Catholic identity and tradition while succeeding in its integration within Europe, becoming in the process a ``normal'' European country. 
In so doing, it could prove that the decline of religion in Europe is not an inevitable process tightly linked to modernization, but a historical choice Europeans have made. 
A modern, religious Poland could force secular Europeans to rethink their assumptions and realize that it is not so much Poland that is out of sync with Europe, but secular Europe that is out of sync with the rest of the world. 
Polish Catholicism has confounded skeptics and critics before. 
It may do so again. 

Poland’s Double Trouble 
Much of the world seems fascinated by the fact that Poland is now governed by a set of identical twins who first became famous as child movie actors: President Lech Kaczynski and Prime Minister Jaroslaw Kaczynski. 
They are indeed intriguing, but the political forces they represent are even more interesting – and worrying. 
Since the fall of 2005, the Kaczynskis have led a conservative-populist coalition, with a dose of nationalism – represented by the small League of Polish Families (LPR) – thrown in. 
The Polish right was last in power in 1997, having previously governed in the years 1990-1993. 
The post-communist Party of the Democratic Left (SLD) was voted out in 1997, despite a five-year streak of economic prosperity and rapidly falling unemployment. 
Although the SLD’s popularity remained high, the previously fragmented right prevailed due to temporary unity. 
In 1998, however, prosperity vanished. 
So the right’s turn in government was followed by years of stagnation and exploding unemployment. 
Unable to cope with the downturn, the right was replaced by another SLD-led government in 2001. 
During this period, the right disintegrated. 
Among the splinter groups that arose were the conservative Law and Justice (PiS) and the nationalist LPR. 
As they emerged on the political stage, the left was failing: the economy did not improve, unemployment remained high, and the SLD, which attracted all kinds of riffraff, became mired in corruption scandals. 
The scandals provided the right with an opportunity to deliver a coup de grace to the SLD in the form of parliamentary investigative commissions. 
The hearings, reminiscent of Joe McCarthy’s witch hunts in 1950’s America, humiliated the SLD and, in large part, compromised the entire post-1989 period. 
But the large swings in Polish politics are not merely the result of political shenanigans. 
They reflect the instincts of Polish voters. 
People vote for all kinds of parties, from the far right all the way to the left, so long as they are convinced that the parties will deal with their social concerns and grievances. 
The fusion of an irresponsible right-wing campaign and economic stagnation made Poland’s “wandering” electorate shift in the direction of the PiS, whose success was mostly due to its leader, Jaroslaw Kaczynski, currently the right’s most prominent politician. 
Kaczynski presented this fluid electorate with a credible vision of a state concerned with social solidarity (with no one’s refrigerator standing empty) and opposed to heartless liberalism (which brings empty refrigerators for the poor and full ones for the rich). 
This contrast, and a strong attack on the liberal Civic Platform, made it impossible to create a moderate right-wing coalition. 
Having rejected Civic Platform as a partner, Kaczynski decided to ally his minority PiS with the populist Self-Defense party and the nationalist LPR. 
The stated goal of the new alliance was to establish what Kaczynski calls the “Fourth Republic” (implying a constitutional break with the supposedly compromised post-1989 Third Republic). 
The Kaczynskis want to destroy the “corrupt system composed of careerist politicians, post-communists, former secret service functionaries, and criminal organizations,” who, according to the twins, have ruled Poland since 1989. 
The Fourth Republic is supposed to be republican, rather than liberal, with greater state involvement in the economy. 
It is to be a democracy steered from above, with only a limited division of power and a streak of authoritarianism, guided by a mixture conservatism, populism, and nationalism. 
It is to be assertive in its dealings with the EU – perhaps not so much Euro-skeptical as “Euro-difficult” – aping Margaret Thatcher’s Britain of the 1980’s, despite Poland’s being much poorer and less politically influential than Thatcher’s Britain was. 
The notion of a Fourth Republic incites heated opposition. 
President Lech Kaczynski’s approval ratings, are dramatically lower than those of his predecessor, the SLD’s Aleksander Kwasniewski. 
His brother, Jaroslaw, has always evoked popular mistrust. 
Most Poles did not vote for the Kaczynskis and still do not want to follow them. 
But they did not see the risk in letting them gain so much power, and so did not mobilize to block them. 
New elections are not due until 2009. 
To be sure, a political crisis can bring the coalition down, but this can happen only if Poland’s “wandering” electorate decides that the PiS has let it down. 
That looks unlikely. 
The coalition took power at the start of what seems to be a new period of prosperity, underpinned by large EU subsidies. 
As a result, there will be room for myriad favors for special interests and for boosting social benefits, which may buy time for the PiS and its vision of a Fourth Republic. 
How far will the twins push their idea? 
Jaroslaw Kaczynski is an intelligent politician who understands the link between currency stability and political success. 
So he will not allow government largesse to become excessive and thus risk a negative reaction in the financial markets. 
Yet the strong link between the fate of the coalition (and that of the Fourth Republic) and a fickle electorate addicted to social benefits will block the serious reforms that are needed to put the economy on a sound footing in the long term. 
This will likely result in a gradual loss of economic competitiveness ­– all the more dangerous for being obscured by the temporary boost from EU funds, which will help maintain the government’s popular support. 
In that case, life with the twins could become more interesting than Poland needs. 

Poland's House Divided 
WARSAW: Voters can be merciless judges. 
Ten years after leading Poland to freedom, Lech Walesa received less than 1% of the vote in Sunday’s presidential elections, in which President Aleksander Kwasniewski romped to a second term in office. 
Like Mikhail Gorbachev in Russia, Walesa is now a prophet without honor - indeed, invisible - in his own country. 
In the years to come, both Walesa and Gorbachev may yet be recognized for the gifts of liberty they delivered. 
For now, the verdict of voters is for complacency. 
Of course, Poland’s presidential elections provoked heated discussions about the state of the country. 
But our chattering classes now find life so pleasant that we forgot to discuss - or omited on purpose - the problem of those who were left behind by the train called freedom, democracy and the free market. 
According to various estimates, between 35% and 50% of Poles are excluded from the economic benefits of Poland’s new society. 
Some of these people are old and uneducated and don’t realize that they are excluded. 
But my neighbor in the country, who is twenty-years-old, also has no chance: no chance to go to university; no chance of getting a decent job; no chance of even buying a slice of pizza in the local village. 
He, however, belongs to that half of the excluded who understand what is happening to them and who have no illusions. 
For him, all the days and years ahead look black; for him, there is only resentment and controlled rage. 
In that balance between “fear of falling” and “hope of rising” which Alexis de Tocqueville saw as the driving force of free societies, fear of having fallen into an abyss beyond hope is carrying the day and paralyzing millions. 
Even those who claim to represent the Left avoid mentioning inequality and do not offer the excluded, like my neighbor, any reason to hope. 
Why is this happening? 
First, (and here I speak about all postcommunist democracies) we accepted - almost unanimously and with little debate, for even the postcommunists accept the basic rules of the market - the neo-liberal package. 
In Poland, this is called the politics of Balcerowicz, after the architect of our reforms of the early 1990s, Leszek Balcerowicz. 
We uncritically accepted the idea that maximizing economic growth is the best medicine for society’s problems. 
Supposedly, the more money we the people have, the less poverty and exclusion there will be. 
After ten years of implementing these policies, we know this is false. 
Morally neutral, free markets are heedless of the fact that those who have the most - and grabbed what they have first - keep getting more. 
Those that cannot pass the market’s starting line, either because they are too poor or too uneducated, and who lack modern skills, are politically free but consigned to a kind of permanent second class citizenship. 
The shame in this is obvious. 
Those of us who have prospered are now so pleased with our new money and new toys that we explain away poverty and exclusion by saying that the excluded lack an entrepreneurial spirit. 
Poverty is a personal flaw. 
Somewhere in the recesses of our consciences we know that we should think about those left behind, but we are so happy rushing forward that we fail to look back at what is happening in our new democratic ghettoes. 
Luckily for us, the excluded and the poor tend not to revolt, precisely because they are so excluded. 
To revolt requires you to be active. 
Being able to revolt means being able to work together and fight together. 
But when you are excluded, you are permanently alone. 
We must not delude ourselves that this situation is stable. 
We must understand that exclusion is bad for our economy and national well-being because about 40% of society cannot participate in the market economy we are building. 
This fact is known in the boardrooms of foreign companies that invest in Poland; these foreign bosses recognize that there are nowhere near 40 million Poles able to buy their cars, TV sets and mobile phones. 
Mass exclusion also has its political side. 
Today, we do not fear primitive populism or peasant protests; we should, however, begin to fear for the future of Polish democracy, indeed for all the postcommunist democracies. 
For in every democracy the excluded retain certain inalienable rights, including the right to vote. 
The excluded - as most sociological research shows - vote at about the same rate as other adults. 
Whom do they vote for? 
They never vote “for” anyone; they only vote against. 
Against Balcerowicz; against the free market; against democracy. 
As their votes today are dispersed, they pose no immediate danger. 
Eventually, their exclusion will rot our democratic culture from within. 
Ten years ago “Solidarity” represented an ideal “political community”. 
Now the idea of a political community in any form, of a demos offering all its citizens equality of opportunity, is patently ridiculous. 
We - the new democracies of Eastern Europe – are becoming more and more like those countries that provide opportunity only for the rich, leaving everyone else to fend for themselves. 
Perhaps we are slightly more civilized than those countries. 
But, strange irony, this civility is due to the remnants of the social protections left behind by the distinctly uncivilized communists. 
Like the rich in Jakarta and Rio de Janeiro, isolated behind steel doors at night and with armed guards on the watch, perhaps we too should begin to fear the everyday squalor from which we avert our eyes. 
On the eve of America’s civil war, Abraham Lincoln said that his country could not long endure if it remained a society half-free and half-slave. “A House divided against itself,” said Lincoln, “cannot stand.” 
Can our postcommunist democracies continue to stand if they remain divided against themselves, half-rich and half without hope? 

Poland's Jacquerie 
"Bless... the peasant who is born, eats, and dies without anyone bothering about his affairs." 
So wrote that some-time Italian journalist best known for his musical compositions, Giuseppe Verdi. 
What Verdi believed was possible in the 19 th century and the thousand years that preceded it, but is no longer. 
Indeed, the opposite is more likely. 
In Poland, for example, peasants not only want to shout news of their affairs to the world, but they want to shape Poland in their own image. 
In his The Age of Extremes, Eric Hobsbawm argued that the greatest change in the West in the 20 th century was the vast reduction in the number of people employed as farmers. 
Everywhere you look peasants have almost disappeared. 
Not here in Eastern Europe. 
Soviet-style economies may have posed as avatars of industrial modernization, but in most of the USSR's former satellite states Marxist-Leninist economics locked vast numbers of people onto farms. 
Today, this reserve army of peasants is creating the most serious political conflicts seen in Poland since communism's fall as the country seeks membership in the European Union. 
Most people in most societies feel something mystical about rural land and the people who work it. 
But in the Western world too much land is agricultural, so there is surplus food production. 
People recognize this, but still find the gradual disappearance of peasants troubling. 
Poland's peasants, who gained a glimpse of the wider world since 1989, see what is going on and fear it. 
As 38% of Poland's people live in villages or work on farms, this poses a serious political problem. 
No imaginable solution to their plight seems available. 
Like everyone else, our peasants vote their fears and choose as their representatives the peasant parties who think that political stalemate is the only way to preserve Poland's rural way of life. 
No EU membership; no more privatization; no pension reform. 
Standstill. 
Mysticism about the land plays into their hands. 
Many Poles believe that they should not sell their land to foreigners, because Poland's identity is somehow buried within its poor soil. 
Given the history, it is no surprise that Poles do not want to sell to Germans, and luckily few Germans are interested. 
But there is interest in the Netherlands, and some Poles bizarrely suspect the Dutch of wanting to take over the country. 
Fear of speculators, of people who want to sell Poland piece-by-piece, are rampant. 
Pure nonsense, of course. 
There are few buyers because Polish land is too poor. 
Yet everyone thinks that the country's independence will be lost in an instant when farms can be sold to other Europeans, a condition of EU membership. 
With communism discredited and Catholicism waning, the connection - mental, psychological, even spiritual - of the land with defense of the fatherland, appears to be Poland's last political certainty. 
After 1989 Poles (as happened in other postcommunist countries) gained freedom but lost their national identity, which had been constructed on the revulsion they felt towards their oppressors. 
You can deplore such social feelings, as I do, but the myth of the Polish peasant hero standing against communist collectivization on his small private plot seems ineradicable, even if it is undeserved. 
In reality, the peasants were not much help in the Solidarity era and they now constitute the main obstacle to modernization. 
Besides, heroes are no longer needed here. 
The sad thing about the power that Poland's peasants now exert is that theirs is a wholly negative one. 
Poles, who lost nearly all their patriotic ideas over the past decade, now seem poised to rediscover their national identity solely on a negative basis forged by our peasants. 
The European Union wants to steal (or buy for nothing) our land, they say. 
We Poles must fight them. 
If national pride demands eternal Polish ownership of Polish land, and thus scuttles membership in the EU, Poland will be condemned to a future as a kind of a gigantic museum of the peasantry. 
One horse carriages. 
A lone cow standing in a meadow. 
Pigs eating greedily from the family table. 
Cottages with TV satellite antennas may be seen, but they will be surrounded by straw, mud, chopped wood and the aromatic stench of livestock. 
Then, instead of buying Polish farms and modernizing them, Dutch and Germans and Danes and others will visit the farms as a type of rural Disneyland, a place where you see what the long-ago past was like. 
They will come, give some money to quaint and slightly lunatic looking farmers ploughing behind their mules, and they will leave. 
It may annoy the Polish to recognize this, but if they make such a choice they will be condemned to a perpetual third rate status, scarcely above the most wretched places on earth and without any illusion of progress. 
Verdi at least offered his peasants that illusion. 

Poland's Witch-hunters Burn Their Own 
WARSAW: Control the past and you control the future. 
That Orwellian maxim animated communism for decades. 
It has now taken root in postcommunist Poland. 
But the anti-communists in the government who seek to use it have only succeeded in burning their own supporters at the stake. 
Recently, a Polish vice-premier, Janusz Tomaszewski, was sacked because a special judge sent his case to the "lustration" court. 
Tomaszewski was and remains a brave man from the former opposition and the probability that he collaborated with the communist secret services seem small. 
He denies ever being a collaborator. 
Nevertheless he had to resign, because his colleagues from the rightist, post-Solidarity party now in power decided that anyone merely accused by the special judge (even before conviction) must leave his (or her) job in government, parliament or the judiciary. 
Lustration is new in Poland. 
Parliament passed this strange law a year ago. 
Now people must declare if they collaborated with the secret services before 1990. 
A special judge then checks the truthfulness of their declarations. 
If someone has lied, or there are ambiguities, the case goes to a special court. 
But the only sentence it can inflict is a forced absence from public life for a given time. 
The people subject to this law are members of parliament, of government, judges and other lawyers who volunteer to be checked. 
From the moment of its passage, the law was criticized heavily. 
It was introduced ten years after the transition to democracy, and the archives of the secret police are obviously neither complete nor necessarily honest. 
Moreover, the law failed to define adequately what constitutes collaboration. 
I would like to add two more objections. 
Let me start with collaboration. 
Poland was not East Germany, where the Stasi was ubiquitous. 
Here, cases of collaboration were rather rare and ambiguous. 
Communist party members could not – by definition – be collaborators, and the small fish from the opposition who collaborated did not know enough to be dangerous. 
But the new law says that anyone who was in contact with the secret police is a collaborator. 
So I must declare that I, too, had secret police contacts, and not merely during the time I spent in prison in 1968. 
In 1966 the secret police made me an offer they thought I couldn't refuse: if I collaborated, they would drop me by parachute over England and arrange for me to study at Oxford. 
Later they would contact me and tell me what to do as a secret agent. 
I simply laughed in their faces and that was it. 
But I was in communication with them, so therefore I should not try to become a minister or member of parliament. 
This now seems funny from my point of view, but it is not funny for the politicians who do not know if they have collaborated or not according to the law. 
In concocting this monstrosity the people from the former Solidarity opposition who produced this law confused two ideas: decommunization and lustration. 
Poland saw no real decommunization after 1989 and this rankles many people in AWS, the Solidarity Electoral Alliance, which is the biggest group in Poland's ruling coalition. 
But now it is simply too late to turn back the clock and start outing communists. 
If opinion polls are right, the most popular party in the country right now is the party of former communists. 
Poland's president, who defeated Lech Walesa at the polls, is a former communist. 
Mere vengeance, however, is not the catalyst for this attempt at lustration. 
It is politics, and the irony here is that the law they created is one now boomeranging against its creators. 
Young politicians, simply because of their age, could not possibly have collaborated; postcommunists can't be charged with collaboration because you cannot attack someone for collaborating with his or her own party. 
So the only political victims of this law will come, as they have, from the relatively small group of "Solidarity" activists. 
From South Africa to Chile to Eastern Europe, a more general problem arises whenever governments begin to peer into the past of defeated dictatorships. 
In all democratic countries people quarrel, they then negotiate and compromise. 
In all democratic countries some issues are avoided or at least treated as private problems, precisely because they cannot be solved by compromise. 
Such issues are history and memory. 
Germany and France both witnessed debates like this after WWII, but politicians (for the most part) tried to keep them out of politics (and sometimes even out of the courts). 
South Africa's elegant solution, its Truth and Reconciliation Commission, also tried, quite heroically, to depoliticize exploration of past political crimes. 
As an historian, I know that the past is never certain; most uncertain of all are judgments concerning human behavior. 
In a society where the enormous majority of people collaborated passively, active collaboration is hard to discern from passive. 
Democracy is supposed to defend us against civil strife, politicization of memory incites such strife. 
With this lustration law young rightists have been handed a stick with which to beat their older colleagues for their behavior during our Stalinist period – and perhaps advance their own careers by ousting older rivals from their jobs. 
Memory, indeed, is running rampant. 
Serious newspapers harp on the atrocities of the gulags. 
Television uses a meeting between the German and Polish presidents, a meeting of reconciliation, to uncritically recycle images of the Germans as murderous brutes. 
Politicians, intellectuals, journalists focus on the past while society thinks about making money and the future. 
In Poland, this split is growing and becoming dangerously undemocratic. 

Building Stability for Indian Growth 
MUMBAI – In their efforts to stimulate demand by pursuing increasingly aggressive monetary policies, advanced economies have been imposing risks on emerging-market countries such as India. 
Indeed, one day we face surging capital inflows, as investors go into “risk-on” mode, and outflows the next as they switch risk off. 
India has responded to this external volatility by trying to create a domestic platform of macroeconomic stability on which to build growth. 
India’s latest central budget emphasizes fiscal prudence, adheres to past commitments, and aims at structural reforms, especially in agriculture. 
Fiscal consolidation has also helped to keep the current-account deficit under 1% of GDP. 
Moreover, inflation has been brought within the official target range. 
And parliament has created a monetary-policy committee for the Reserve Bank of India (RBI), which should ensure that multiple views are embedded in policy and improve continuity. 
We must also address banks’ non-performing loans so that their balance sheets have room for new lending. 
Unlike more developed countries, India does not have an effective bankruptcy system (though a bill to create one has just cleared the lower house of Parliament). 
But, using some “out-of-court resolution” mechanisms devised by the RBI, and with capital support from the government, banks should have well-provisioned balance sheets by March 2017. 
Perhaps the hardest challenge has been to persuade the public, impatient for rapid growth, of the need to ensure stability first. 
Growth, it is argued, is always more important, regardless of the looming economic risks. 
Yet, despite the focus on stability, inhospitable global growth conditions, and two successive droughts (any of which would have thrown the economy into a tailspin in the past), growth is above 7%. 
The task is to build on this base. 
For the first time in decades, global trade has grown more slowly than global output. 
As countries become richer, non-traded services constitute a greater share of output, causing GDP to grow faster than trade, while global overcapacity has restrained trade growth further. 
And, as advanced economies become more competitive, and as China moves up the value chain, more inputs are being sourced within countries. 
For all these reasons, the heady days of double-digit growth in Indian trade in goods and services will not return soon. 
Many emerging markets have been hit by lower prices for their commodity exports, but India’s exports of goods seem to be doing worse recently than those of other emerging markets. 
At the same time, India’s exports of services are doing somewhat better, perhaps because of demand from the United States. 
Of course, these differences are over very short periods, so it is probably unwise to draw too many conclusions – except that India is not alone in suffering a fall-off in trade. 
That does not stop industry bodies from demanding that the authorities “do something” – especially by lowering the value of the rupee. 
The rupee seems to have weakened by about 6% against the dollar since the beginning of 2015. 
This depreciation should have helped our merchandise exports, and yet it coincides with their relative underperformance, because other currencies have depreciated against the dollar, too. 
For this reason, economists focus on the “nominal effective exchange rate,” which compares the rupee’s value to that of other currencies by weighing their share in trade. 
In trade-weighted terms, the rupee has remained relatively flat since early 2015. 
That said, inflation in India is higher than in most other countries. 
If a widget cost a dollar to make a year ago in the US, and cost 63 rupees to make in India, the Indian producer would have been competitive with the US because the dollar was worth 63 rupees. 
But if inflation in India is 5% and zero in the US, it will cost the Indian manufacturer 66.2 rupees to make it today – and still just a dollar for American competitors. 
Hence the need to look at the “real effective exchange rate,” or the nominal effective exchange rate adjusted for inflation. 
The higher the index is, the less the exchange rate has depreciated to offset inflation – and the more uncompetitive India is. 
Interpretation is in the eye of the beholder. 
Someone who wants to blame the exchange rate for India’s export slowdown can look at the index from the low point of September 2013 and argue that it has appreciated 20% (based on the IMF measure). 
But, over the past year, as goods exports have slowed, the real effective exchange rate has been rather flat. 
So someone who wants to absolve the exchange rate of blame will point to the recent period. 
But exchange rates are only one measure of competitiveness. 
Productivity also matters. 
In a rich country, firms typically can improve productivity only through innovation. In India, productivity can be improved simply by building a better road from a factory to the railhead. 
Much of the appreciation in the real exchange rate is offset by increased productivity. 
India’s trade has certainly been slowing – but not necessarily because of the rupee’s value. 
Non-economists typically advocate a strong rupee: Not only does it convey national strength, but it also allows one to buy more stuff when one travels abroad, and imports are cheaper. 
Of course, it is precisely because domestic tourism and production are disadvantaged relative to tourism and production abroad that many economists prefer a weak rupee. 
Yet these modern-day mercantilists do not acknowledge that undervaluation is a subsidy to India’s producers, financed by India’s consumers and savers. 
The ideal exchange rate for India is neither strong nor weak; it is the “Goldilocks rate” produced by market forces, with the RBI focusing on attracting long-term capital inflows and intervening only to maintain orderly movement of the rupee versus other currencies. 
To ensure such an orderly market, in good times we must resist the temptation to open up too much to short-term foreign-currency debt. 
Our rules now encourage investors in infrastructure and other projects with limited foreign earnings to issue Masala bonds (whereby Indian companies can borrow abroad in rupees), or to borrow long term, thereby limiting their risk when the exchange rate moves against them. 
So if the exchange rate is unlikely to be helpful, how should India export more? 
The answer is to improve productivity with better infrastructure; improve human capital with better schools, colleges, and vocational and on-the-job training; simplify business regulation and taxation; and improve access to finance. 
I am often asked, “Which industries should we encourage?” 
I would say that “encouraging” any industry may be the surest way of killing it. 
Our job as policymakers is to enable business activity, not to dictate its course. 

Why Haven’t We Ended Polio? 
BERN, LONDON, GENEVA – October 24, 2016, should be a unique day in the history of polio. 
If all goes according to plan, it will be the last annual World Polio Day before the disease is eradicated. 
But now is not the time for celebration or complacency; while we know how to eliminate polio, we have not yet finished the job. 
Consider this: in August 2014, the World Health Organization declared the Ebola crisis in West Africa a Public Health Emergency of International Concern (PHEIC); it lifted that status in March 2016. 
In May 2014, the WHO declared the international spread of wild poliovirus a PHEIC as well; yet that status is still active today, leaving one to wonder if world leaders are paying sufficient attention. 
They should be. 
The continuing polio PHEIC is endangering the success of the Global Polio Eradication Initiative (GPEI), into which the world has invested $15 billion since it was launched in 1988; and it threatens global health generally. 
For starters, the GPEI effort to interrupt poliovirus transmission could miss its latest target date; unfortunately, it would not be the first time. 
By the original 2000 target date, the incidence of polio had been reduced by more than 99%, from an estimated 350,000 cases in 1988. 
Since then, however, a long, stubborn “tail” of infection has persisted, mainly in remote, poor regions and conflict zones. 
The effort to tackle these lingering cases is laborious, and it remains incomplete, despite PHEIC status. 
To be sure, there have been some successes, such as in India, which was certified polio-free in 2014, and in Nigeria, which interrupted transmission the same year. 
But there have also been setbacks: in 2016, Nigeria suddenly had two new cases among children from an area that had just been liberated from the militant group Boko Haram. 
The two other polio-endemic countries, Afghanistan and Pakistan, missed their 2015 eradication target and have had to extend it by another year, at a cost of $1.5 billion. The root causes of both countries’ missed deadlines will require delicate, skilled political handling to resolve. 
They include internal conflicts that make children inaccessible to public-health professionals, opposition by some religious leaders, and public mistrust of national governments and international initiatives. 
Eradicating polio is expensive, but it would cost tens of billions of dollars more to fight the disease in perpetuity. 
Politicians and policymakers should be reminded that a polio-free world would be a global public good, that eradication is by far the best bargain, and that sustained financing and political support is necessary to ensure the GPEI’s success. 
But it is also important to ensure that valuable assets and practices built up by the GPEI over time are not squandered once polio is gone. 
These include cold chains to preserve vaccines during transport from factories to patients; established “immunization days” and negotiated “days of tranquility” in conflict zones, when vaccinations can be administered; trained health-care workers; and systems for surveillance, laboratory analysis, and rapid response. 
These assets have proved their worth in combating other diseases: Nigeria was able to stop Ebola’s spread during the West Africa outbreak owing to its efficient polio-tracking system. 
The reality, however, is that countries will be able to absorb GPEI assets into their health systems only if they are supported financially, logistically, and politically. 
A major effort will be required to transfer materials to where they are needed, and to coordinate surveillance and laboratory operations. 
Doing so would not only boost global-health security and resilience for the next outbreak; it would also help us reach the United Nation Sustainable Development Goal for universal health-care coverage. 
More broadly, lessons from the GPEI and other eradication efforts must not go unlearned. 
In 1980, smallpox became the first disease in people to be successfully eradicated, and there were prior unsuccessful campaigns against hookworm, yaws, yellow fever, and malaria. 
But many lessons that were already known by the 1980s went unheeded for too long – such as the importance of tackling remote infection reservoirs and maintaining high immunization levels everywhere so that health systems aren’t overwhelmed. 
A complex array of political pressures, motives, and aspirations determines which lessons we take from history, and which new global-health targets we set for ourselves. 
World Polio Day is thus an occasion to urge politicians to renew their commitments to polio eradication, and to apply lessons from the GPEI to improve health everywhere. 
In the fight against polio, the world is largely relying on the generosity of the United States, Rotary International, the Bill & Melinda Gates Foundation, and European countries such as Germany, Norway, and the United Kingdom (with additional political support from others such as Monaco). 
Other European countries and the European Commission itself should do more to contribute to the eradication effort. 
While G7 member states renewed their commitment to eliminating polio at a summit in Japan earlier this year, a subsequent G20 summit in Hangzhou, China, where two-thirds of the world’s population was represented, made no reference to it; nor did the G77 group of 134 developing countries at its last meeting. 
That is not good enough. 
After years of effort, it is now clear that only a strong, consistent, worldwide commitment to full eradication can end the polio emergency. 


Polio's Defeat and Its Global Meaning 
A recent ceremony in Copenhagen marked a singular achievement in global public health, an achievement, which confirms that development aid works, and that it works best in partnership. 
An independent commission certified the 51 countries of the World Health Organization European Region free of polio. 
Adding the Europe Region to the Americas, China and the Pacific Rim, means more than half the world's countries - comprising over three billion people - are now officially free of this crippling disease. 
The will to free the world of polio was underscored at the G8 summit in Canada, where G8 leaders pledged to help finish the job and rid Africa of the disease. 
The success to date of the polio eradication program - clearing a huge swathe of the earth of an ancient scourge - demonstrates what can be achieved when simple technology is used effectively. 
A closely coordinated effort amongst private and public sector partners to deliver oral polio vaccine to every child under five was the key to success. 
Globally, international donors and UN agencies worked closely with national governments, tallying the exact needs for massive polio immunization campaigns aimed at reaching hundreds of millions of children. 
Last year alone, the Global Polio Eradication Initiative delivered almost two billion doses of polio vaccine to 575 million children in 94 countries. 
In each country, partner institutions including the minister of health, the World Health Organization, UNICEF, other UN agencies, service groups like Rotary International, representatives from donor governments, the private sector and non-governmental organizations, jointly and carefully planned each immunization campaign. 
Every detail, from the number of bicycles and boats needed to deliver the vaccine to otherwise inaccessible areas, to the refrigerators and cold boxes needed to keep the vaccine potent, even the batteries necessary to power them, were counted and budgeted. 
This close collaboration delivered the polio vaccine to the poorest of the poor, from the child living on a windswept island in the Congo River to the infant living in a tiny alleyway in Delhi. 
The Global Polio Eradication Initiative is also fostering unprecedented public health action among nations in order to beat remaining pockets of polio in south Asia and parts of Africa. 
In the midst of uncertainty following the terrorist attacks of September 11 th , the people of Afghanistan and Pakistan, determined not to let the conflict sidetrack progress in polio eradication, immunized 35 million of their children in coordinated efforts in September and November 2001. African heads of state have personally launched polio campaigns synchronized across several countries, vaccinating tens of millions of children over a few days. 
The investment of funds, political commitment and sound technical strategies delivers results, fast. 
When this ambitious eradication program was launched in 1988, polio was paralyzing more than 1,000 children every day in 125 countries on five continents. 
Last year, 480 children were paralyzed, in parts of 10 countries. 
That's a 99.8% reduction, but it is still 480 children too many. 
Saving children from the agony of polio is a great achievement, but the rewards for global public health are even greater. 
A global polio laboratory network gives countries access to the most sophisticated disease surveillance system in the world. 
Through collective support for polio eradication, health ministries now have the knowledge, the maps, the staff and the will of millions of volunteers to do even more. 
Globally, investing in polio eradication helps everyone. 
As the worldwide polio burden plummets, we become safer from importations of the virus. 
This is a real concern, as children in Bulgaria were paralyzed only last year due to polio imported from India. 
To protect every child, polio must be eradicated globally. 
Once it is, we may eventually be able to stop immunization against the disease, and save up to US$1.5 billion every year in averted immunization and treatment costs. 
So, as polio nears eradication, the world is on the verge of delivering the first global public good of the new millennium. 
But the risk not finishing the job boils down to a common problem: the need for more funding. 
The Global Polio Eradication Initiative, spearheaded by the WHO, Rotary International, the US Centers for Disease Control and Prevention and UNICEF, urgently requires US$275 million to fill a funding gap for immunization activities. 
This is a small price to pay to ensure that six billion doses of polio vaccine reach 600 million children over the next three years. 
It is a small price to prevent a disability that drives countless families into desperation and poverty. 
The G8 leaders' commitment to increase support for polio eradication in Africa is promising. 
But there are immediate needs - the programme is short US$60 million this year alone. 
Without these funds, polio immunization activities will have to be postponed, cancelled or seriously cut back in several countries. 
We have invested much in this fight. 
Failure to eradicate polio for lack of funds would be a squandered opportunity for the world. 
With a little more investment, we can deliver a polio-free world to our children, indeed, to all children for all time. 

Populism at the Barrel of a Gun? 
WARSAW – So far, Hungarian Prime Minister Viktor Orbán and Polish Law and Justice (PiS) party Chairman Jarosław Kaczyński’s “illiberal” counterrevolution has meant cracking down on the independent judiciary, public media, and – in the case of Orbán’s government – even private universities, such as Budapest’s Central European University. 
But now it is apparent that even the military may be brought under the control of a single political party. 
In Poland, the PiS is carrying out a revolutionary reorganization of the army, the likes of which have not been seen since the imposition of communist rule. 
A recent Ministry of Defense communiqué reveals the sheer scale of the changes the PiS is demanding, as well as their political underpinnings. 
“Minister of Defense Antoni Macierewicz has implemented wide-scale staffing changes at the highest levels in operational units, replacing officers selected by Civic Platform,” the communiqué reads. 
“In the General Staff, these changes encompass 90% of command positions, and 82% in the General Command.” 
Kaczyński’s claim that the now-dismissed officers were connected to Civic Platform (the former ruling party) is completely groundless. 
After his own shocking dismissal, Mirosław Różański, General Commander of the Polish Armed Forces, pointed out the absurdity: “I received my first star from President Aleksander Kwaśniewski, the second from Lech Kaczyński, and the third from Bronisław Komorowski.” 
Only Komorowski was with Civic Platform. 
Meanwhile, Macierewicz has also barred military officers from corresponding directly with Polish President Andrzej Duda, even though the president is the supreme commander of the armed forces under the Polish constitution, and Duda has faithfully carried out all of Kaczyński’s commands. 
Even before these recent changes, civil-military relations had become increasingly strained since the PiS government took office in 2015. 
Prior to assuming power, the party had indicated that Jarosław Gowin, a moderate former justice minister from the PiS-allied Poland Together Party, would be appointed defense minister. 
But when the new government announced its cabinet, Macierewicz, one of Poland’s most extreme politicians, was named instead. 
While in office, Macierewicz has fostered the “Smoleńsk cult,” which promotes the paranoid fantasy that European Council President Donald Tusk and Russian President Vladimir Putin are responsible for the 2010 plane crash that killed Kaczyński’s brother, then-Polish President Lech Kaczyński, and 95 others. At this year’s Munich Security Conference, Macierewicz mentioned the crash, along with Russia’s incursions into Ukraine and Georgia, as “examples of Russian aggression” that make NATO necessary. 
He then appealed to NATO to help investigate the crash, even though it has long since been ruled an accident. 
Not surprisingly, NATO did not take Macierewicz’s request seriously. 
Shortly after assuming office, Macierewicz earned the nickname “Minister of National Disarmament,” when he canceled a carefully negotiated contract for the purchase of 50 Caracal helicopters from the manufacturer Airbus Helicopters. 
As a result, French President François Hollande called off a planned trip to Poland. 
Macierewicz then responded by declaring that Poland would purchase new helicopters from the United States, only to suggest soon after that Poland would produce its own helicopters jointly with Ukraine, or perhaps restart negotiations with Airbus. 
He caused further diplomatic embarrassment, when he falsely accused France of selling two Mistral-class assault ships to Egypt, in order to deliver them to Russia, in contravention of international sanctions. 
Macierewicz has also systematically humiliated Poland’s military personnel. 
His spokesman and chief of staff, Bartłomiej Misiewicz, is a 26-year-old former pharmacy assistant who does not have a college degree. 
In December 2015, Macierewicz had Misiewicz direct a late-night raid by Polish military police on a NATO counterintelligence center in Warsaw – an episode that culminated in an investigation by the Polish Prosecutor General’s office (which is, however, subordinate to the government). 
But the most shocking episode came when Misiewicz visited military units and demanded that servicemen and officers salute him and address him as “Minister,” an honor not usually accorded to people in his position. 
When General Waldemar Skrzypczak – the former commander of Poland’s Land Forces and of Multinational Division Central-South in Iraq – refused to comply, he was immediately fired from the Military Institute of Armament Technology. 
There is only one plausible reason why an extremist like Macierewicz would be entrusted with such an important position, and why a loyal president would be cut off from the army: Kaczyński needs someone who will not hesitate to use the army to suppress public protests if needed. 
As Radek Sikorski, a defense minister under the previous Civic Platform government, recently pointed out: “This kind of behavior is characteristic of people who believe that the army can be used to maintain power.” 
Likewise, Adam Michnik, the editor-in-chief of the national daily newspaper Gazeta Wyborcza, has accused the current PiS government of carrying out a “creeping coup” according to its own variant of “Putinism.” 
Indeed, to understand why a political party would seek direct control over the military, one need look no further than Russia and Turkey. 
Still, by elevating Macierewicz to this level, Kaczyński has created new problems for himself. 
As the high priest of the Smoleńsk cult, Macierewicz enjoys strong support from Radio Maryja, a Church-owned broadcaster influential among Catholic extremists. 
Owing to this base of support, Macierewicz is now the only cabinet official who can get away with not listening to Kaczynski. 
This was evident when Macierewicz, springing his latest surprise, moved to limit Poland’s role in Eurocorps – an integrated military unit built around a core Franco-German brigade. 
Kaczynski has long called for a common European defense strategy, so Macierewicz’s decision suggests that something strange is afoot within the PiS. 
Given Poland’s national-security concerns, why would Macierewicz need to risk his country’s relations with its allies by recalling the 120 Polish Eurocorps officers currently based in Strasburg? 
One likely explanation is that Macierewicz’s decimation of the officer corps has left Poland with an officer shortage. 
What remains to be seen is whether the PiS leadership is trying to stack the army with loyalists or is maneuvering to seize control back from Macierewicz. 

Squashing the Superbugs 
LONDON – Current antibiotics are becoming increasingly ineffective, not only at fighting common illnesses like pneumonia and urinary tract infections, but also at treating a range of infections, such as tuberculosis and malaria, which now risk again becoming incurable. 
With the G-7 leaders having committed, in a recent joint declaration, to tackle “antimicrobial resistance” (AMR), it is time for the more inclusive G-20 – and China, as it chairs the group for the first time – to take the fight to the next level. 
Failure to address AMR will affect everyone, regardless of their nationality or their country’s level of development. 
Indeed, by 2050, ten million people could be dying as a result of AMR, up from around 700,000 today, with China and India each housing about one million sufferers. 
At that point, an estimated $100 trillion in global GDP will already have been lost. 
No G-7 strategy, however well crafted, can succeed without the involvement of the rest of the international community. 
After all, if infections travel with the people who carry them, so does resistance, meaning that the only solution to AMR is a shared one. 
That is why members of the World Health Organization have agreed to implement a “global action plan on AMR,” and have called upon the United Nations to convene a high-level meeting of political leaders in 2016. 
In this effort, the emerging economies – with their large populations, rising wealth, and growing international clout – have a particularly important role to play, with China leading the way. 
We at the Review on Antimicrobial Resistance (which I chair) have already recommended such a role for China, including in discussions with some Chinese policymakers. 
Between now and 2016, the stage must be set for China to act. 
The G-7 countries should drive this effort forward by taking concrete steps to fulfill the commitments they made in their joint declaration. 
One such commitment is to reduce the use of antibiotics in animal husbandry. 
Some European governments have already made significant progress in regulating this practice. 
The United States has been slower to act, but has lately made some important policy moves. 
But perhaps the best way to change the way livestock are raised is by putting pressure on major food companies – a feat that consumers could achieve most effectively. 
Indeed, rising demand for healthier foods, including antibiotic-free meat, has already compelled major food-industry players like McDonald’s, Costco, and KFC to declare their intention to phase out antibiotic-laden meat. 
Governments should capitalize on this trend by implementing a major social-media campaign highlighting the smarter, healthier habits that all people should adopt – habits that would indirectly reduce demand for antimicrobials. 
The low cost and potentially high payoff of such a campaign makes it all the more appealing. 
A second commitment included in the joint declaration – to help ensure that medicines are used only when they are needed – may seem obvious, but in fact represents a major problem driving AMR. 
The key to addressing this problem is, as the declaration recognizes, to develop and improve access to rapid point-of-care diagnostic tools. 
Improved diagnostic technologies are undoubtedly within the reach of the world’s top technology firms. 
But they will invest only if they are confident that health systems will use their innovations. 
If governments, say, mandated that particular diagnostic tests must be conducted before antibiotics could be prescribed, companies would have the necessary incentive. 
Such a requirement would face criticism, with some claiming that testing takes too long, and thus is not always possible before starting treatment. 
While this may be true in rare cases, there are many areas where fast and effective tests exist, but are not yet used widely – either in developing or developed countries. 
Consider one of the most common infections: sore throats. 
Though they are often viral, rather than bacterial, they are frequently treated with antibiotics – an approach that not only is ineffective, but also fuels AMR. 
A quick and easy swab test could solve this problem – and, indeed, one already exists. 
In a trial by a British pharmacy chain (which, admittedly, used a small sample), the test reduced the number of antibiotics consumed by nearly 60%. 
Investment in the development and deployment of this technology could lead to a substantial decline in unnecessary antibiotic treatments for sore throats, not to mention ease pressure on health systems and save doctors’ time. 
A third imperative, recommended by the Review and recognized by the G-7, is improved surveillance of the spread of drug-resistant infections, particularly in developing countries, where such data is most sparse. 
On this front, our own government is leading the way, with Chancellor George Osborne pledging in March to allocate £195 million ($307 million) to help emerging countries finance the fight against AMR. 
Foundations are likely to pledge their own funds to this initiative. 
Meanwhile, the US government is focusing on supporting the development of new drugs via the Biomedical Advanced Research and Development Authority. 
The world faces many challenges and crises, virtually all of which will demand strong political commitment and significant investment to resolve. 
But the fact is that, when it comes to AMR, governments have a rare opportunity to preempt a major crisis, at a fraction of the cost of responding to the crisis once it has escalated. 
In the scramble to address the recent Ebola outbreak in West Africa, for example, the US alone had to contribute $5.4 billion in public funds. 
Add to that the savings to health systems and even employers, and concerted action to combat AMR becomes even more cost-effective. 
That is why the G-7 governments should intensify their efforts to address AMR. And it is why China and the other emerging economies should join the fight. 
Together, we can safeguard the curative powers of our medicines. 

Explaining Global Recovery Amid Political Recession 
MILAN – In the summer, as life slows down, there is space to reflect on fundamental issues. 
One of the key puzzles occupying my mind of late is the disconnect between widespread political dysfunction and relatively strong economic and financial-market performance. 
Today, the world’s major economies are experiencing a steady recovery, despite the occasional setback. 
To be sure, economic performance is far from reaching its full potential: depending on where one looks, one can find output gaps, excess leverage, fragile balance sheets, under-investment, and unfunded longer-term non-debt liabilities. 
Still, financial markets show no signs of convulsion, even as monetary stimulus is gradually withdrawn. 
Yet, at the same time, political conditions seem to be deteriorating. 
Polarization has intensified, owing partly to growing resistance to globalization and the unbalanced growth patterns that have resulted from it. 
In the United States, for example, the Pew Research Center reports that people not only disagree vehemently with their compatriots on the other side of the aisle; they also don’t like or respect them. 
The political gridlock long fueled by America’s right-left divide has now become entrenched within the Republican Party, which controls both houses of Congress and the White House. 
So far, President Donald Trump’s administration has only exacerbated this internal turmoil, while offering none of the hoped-for economic-policy shifts that might elevate investment and growth and boost quality employment. 
While it is hard to detect the Trump administration’s priorities at this point, it would be hard to argue that they include a concerted and narrow focus on policies designed to make growth patterns more equitable and sustainable. 
In the United Kingdom, last summer’s vote to leave the European Union surprised many, and concerns across the EU were heightened when Prime Minister Theresa May took over and committed to securing a “hard” Brexit. 
Now that British voters have stripped May of her parliamentary majority in June’s snap general election, the outcome of the coming withdrawal negotiations – and the fate of the post-Brexit UK – has become even more uncertain. 
Leaders in Europe, as well as in a number of emerging economies, have now concluded that both the UK and the US are unpredictable and unreliable allies and trading partners. 
Asia, with China in the lead, has decided to go its own way. 
International cooperation on economic and security matters – never easy – seems to be unraveling. 
In this context, the global economy’s resilience – at least so far – is all the more remarkable (though it is of course impossible to know how the economy would be performing in a more stable political environment). 
There are several possible (and non-mutually exclusive) explanations for this counterintuitive state of affairs. 
For starters, institutions built over time now limit the capacity of political leaders and legislators to affect the economy. 
While these institutions can impede the implementation of positive policies, they also serve to minimize economic and investment risk. 
Particularly on the international front, politicians cannot easily bring about a dramatic and immediate reversal of the patterns of globalization that have been established in recent decades. 
Any attempt to do so – undoubtedly fueled by intensifying populist and nationalist pressures – would cause serious economic damage, ultimately depleting the political capital of those who spearheaded it. 
Another, more worrying possibility is that risks are rising faster than perception of them. 
If this seems implausible, consider the 2008 global financial crisis, in which lax regulation and informational asymmetries led to a pattern of rapidly rising risk and deepening imbalances that were, for the most part, obscured from view. 
In the current context, the cumulative effect of rising geopolitical tensions, loss of trust, and disrespect for key institutions could produce either a large shock or just deteriorating conditions for investment. 
But it is harder to construct concrete scenarios than it is to ignore the potential risks we face. 
Having said that, there is a more hopeful explanation, to which I subscribe, at the risk of being labeled an irrational optimist. 
The inequality of opportunity and outcomes that have fueled popular discontent and political polarization are very real, and, after years of neglect, they are finally getting the attention they deserve. 
More concerted attention to social cohesion will not bring quick results. 
But, over time, it can help to reduce partisan intensity, refocus citizens’ attention on their common values, and restore their leaders’ capacity to deliberate responsibly and implement policy. 
As always, there will be disagreements – sometimes sharp disagreements – about how to achieve shared goals. 
The key is to address them in a context of relative mutual respect. 
This scenario is far from guaranteed, but it is by no means impossible. 
After all, Emmanuel Macron’s election as France’s president, May’s setback on hard Brexit, and a near-universal rejection of the Trump administration’s stance on climate change and a rules-based global economic order, both within and outside the US, suggest that the center may be holding. 
In the meantime, national and international institutional frameworks must continue to guard against destructive actions by political leaders. 
In the final analysis, confidence in these institutions’ resilience – and in an eventual end to the current political dysfunction – is what markets seem to be banking on. 

Political Evolution 
People everywhere want a new relationship with power – more autonomy and more respect. 
This reflects our current era, in which new knowledge, ideas, and possibilities have made our identities richer, more fluid, and less subject to fate. 
At the same time, the information society and globalization have made ours a more insecure world, where we experience risks that politics-as-usual has been unable to address. 
As the leader of a political party, the central idea for me nowadays is to empower individuals. 
A traditional party leader says to his followers, “You can trust me. ” 
I think the future for progressive politics lies in leaders trusting citizens . 
It’s a new kind of relationship. 
We in PASOK, the party that I lead, have started to think through what we want out of politics in a practical sense and how this can be delivered in a way that respects people’s lives. 
We’re making changes at the top in order to open up our party to greater participation. 
We need to highlight, not hide , different views, and see our parties less as “war headquarters” and more as bio-diverse think tanks or workshops. 
People can easily become lost in today’s ocean of information. 
They will always be looking for a lighthouse, faros , as we say in Greek. 
But what are these lighthouses? 
In an information society they will be those who are trusted to be able to help interpret or analyse what is happening. 
So I believe that the future for political parties is to develop a culture of debate, dialogue, and critical understanding of issues, where people can help set a nation’s priorities and are not simply told by experts or their leaders what is right and wrong for them. 
Big issues, such as migration, narcotics, or the environment, no longer fall within a traditional left-right framework. 
For example, people may see an inevitable tradeoff between tough environmental standards and jobs. 
But these same people often want both. 
It is no longer just one side against the other. 
The nature of capitalist growth requires us to take a more holistic view and work out how we can achieve sustainable development. 
Of course, bringing more democracy into our daily lives cannot mean perpetual debate, without actually making decisions. 
Rather, it should mean that certain principles of respect, consultation, and deliberation become part of everyday life. 
There is, by contrast, a traditional style of leadership that almost encourages fear and insecurity, so that a savior can come along and say, “I am the one who will solve this.” 
President George W. Bush projects this style very openly. 
I opposed the Bush administration’s policy on Iraq because this type of foreign policy is associated with a form of power – resurgent, I believe, in conservative parties around the world – that projects leadership as command. 
I know this mindset well. 
When I was first elected as a member of parliament in 1981, people said, “Now George, you’ve got to bang the table.” 
People would say you look weak if you’re not cursing the opposition and driving around in a big black car wearing a tie. 
Above all, to be “strong,” you’re supposed to be giving orders. 
I said to myself, “I’m going to have to go about things in a more democratic way.” 
I realized that I would have to fight to communicate what I wanted to achieve. 
There was a whole political culture that had to change. 
Part of my thinking concerns personal style, but also something deeper: the relationship between professional politicians and voters. 
Obviously, there is a point where a leader must commit to a decision. 
But one can do this in ways that are not violent and aggressive, by defending the principles of that new relationship. 
Power by itself has no principles. 
Our societies and citizens need more freedom if we are to build a more peaceful, prosperous, and secure world. 
Consider the example of Greek-Turkish relations, which had hardened under the compressed weight of “establishment” views that were long entrenched in both countries. 
Only a new approach could break the mold of conventional wisdom. 
Quite often in confrontational situations, people and politicians create a zero-sum game culture, which results in authoritarian and militaristic leadership. 
We in the former PASOK government instead helped create a more positive framework by declaring our commitment to work for consensus, thereby creating the basis for trust and mutual understanding. 
Political parties everywhere must now become an agent for similar change. 
Nowadays, the framework of power itself – the old-fashioned party hierarchy that takes command of the state or municipality – is a kind of abuse. 
It takes power away from people in their own names, but gives them fear rather than confidence. 
Not surprisingly, my party is now seeking to return to power in the next election. 
But we’re also looking deeper and further ahead. 
We will not be returned to government unless we offer a better kind of democracy in the long term. 
In this enedeavor, we hope to set an example to the world. 

Africa’s Women Belong at the Top 
ZOMBA, MALAWI – When I was eight years old, a family friend told my father that he thought I was destined for leadership. 
My dad never let me forget that heady observation, and as a result of his constant encouragement, I took every opportunity I had to pursue our friend’s prophecy. 
Today, I owe much of my success to my late father, whose belief in me was unwavering. 
Unfortunately, most African girls are not as lucky as I was. 
While many girls possess leadership qualities, social, political, and economic barriers stymie their potential. 
This is especially true for girls in rural parts of Africa, where poverty, abuse, and tradition conspire to limit opportunity. 
The heartbreaking story of my childhood friend, Chrissie, is illustrative. 
Chrissie was the star student in the village in Malawi where I grew up. 
But she dropped out of secondary school because her family could not afford the $6 in monthly fees. 
Before Chrissie was 18, she was married with a child; she has never left the village where we were born. 
Chrissie’s experience is repeated millions of times over in my country, across Africa, and around the world. 
Today, more than 130 million girls worldwide are out of school through no fault of their own. 
By the time many African girls turn ten, their fate is already determined. 
Some are victims of harmful cultural practices, like female genital mutilation and child marriage, while others are unable to escape the poverty that grips their families and communities. 
Economic bias is especially damaging to girls. 
When resources are limited, poor families must choose which children to send to school, and in many regions, boys are viewed as “safer” investments. 
Girls, meanwhile, are married off, or sent to work in the fields or as domestic helpers. 
These decisions about the allocation of educational opportunity severely stunt female leadership potential. 
One of the objectives of the Joyce Banda Foundation is to strengthen the financial independence of Malawian women, and thereby create the conditions for the development and emergence of young girls as future leaders. 
Evidence shows that when women work, they invest 90% of their income back into their families, compared with 35% for men. 
Furthermore, once women have their own sources of income, they are better able to participate in the political process. 
Changing endemic cultural norms about gender and identity – and developing more female leaders – begins in the classroom. 
School-age girls must be taught to value themselves and one another, and that it is their right to be educated, healthy, and empowered. 
At the Joyce Banda Foundation School in Blantyre, Malawi, educators have adopted a curriculum based on four building blocks: universal values, global understanding, service to humanity, and excellence. 
Parts of Africa are moving in the right direction. 
Today, nearly a quarter of Sub-Saharan Africa’s lawmakers are women, up from just 10% in 1997. 
Rwanda, meanwhile, has the highest percentage of female legislators in the world. 
And throughout Africa, women have been elected to leadership roles at all levels of government. 
Still, much work remains. 
As the Bill & Melinda Gates Foundation will make clear in its annual Goalkeepers report later this month, governments must recommit to supporting female leaders’ development by investing in the health and education of women and girls. 
Delivering services to girls under ten years of age, especially in rural areas, is essential if Africa is ever to achieve lasting gender equality. 
Over the course of my career in Malawi – first in civil society, then as a Member of Parliament, and finally, as president – I became convinced that the only way to change Africa’s misogynistic narrative is by helping more women reach the highest levels of power. 
Research from India shows that when governments increase the percentage of women in their ranks, social issues like health care, education, and food security receive higher priority. 
Having more women in leadership is thus good for everyone. 
Leaders are born as well as made, but when they are born in Africa, they are not always recognized. 
To give more young women the opportunity to develop their talents and put their skills to work, today’s leaders must clear a path for the female leaders of tomorrow. 

Surviving in a Post-Truth World 
LOS ANGELES – Despite the falsehoods that some politicians peddle, facts still matter, and getting those facts right is essential for survival. 
I know, because I regularly see the deadly consequences of getting facts wrong. 
I am a behavioral ecologist, and I study how animals assess and manage predation risk. 
But, rather than study the flashy predators – with their sharp teeth, stealthy approaches, and impressive sprinting abilities – I focus on their food. 
Some wallabies make bad use of facts. 
Too often, these four-legged snacks ignore information right in front of them – like rustling in the underbrush or the scent of a passing carnivore. 
And they pay for this ignorance dearly, with the sudden slash of talons, or the constricting squeeze of a powerful jaw. 
But my research has shown that many would-be meals – marmots, birds, lizards, fish, and sessile marine invertebrates among them – are better at assessing risk. 
In 1979, the ecologists Richard Dawkins and John Krebs proposed the “life-dinner principle,” which holds that prey, with more to lose than predators, are more creative survivalists. 
The risk of being eaten – and thus removed from the gene pool – provides a strong incentive to up one’s game. 
For the predator, the only consequence of failure is going hungry until the next meal. 
We see the life-dinner principle at work all around us. 
When shorebirds or ducks flock together as a dog runs down the beach or along a pond, it is because the birds understand that there is safety in numbers. 
People do the same thing. 
We feel more anxious, for example, when we surf alone, because we know that, in the extremely unlikely event that a shark decides it wants a fiberglass-and-neoprene meal, our odds of survival increase when the shark has more than one target from which to choose. 
People, just like animals, need reliable, truthful data to make good decisions. 
Once, while studying marmots in the Karakoram mountain range between China and Pakistan, a lack of facts almost got me killed. 
A cataclysmic rainstorm and resulting landslides had cut off all access into and out of my study site, disorienting me as I sought to leave. 
As conditions worsened, it was impossible to craft an exit strategy. 
Because I was battling typhoid and had a lot of research gear with me, I simply didn’t have the energy to walk across miles of slumping rock and mud. 
Only days later, when the threat passed and I was finally able to leave the area, did I realize how unhelpful the available information about the roads and alternative routes out that I had been using really was. 
While any self-respecting scientist must question everything, and be critical of accepted wisdom, it is possible to make predictions, design experiments to collect data, and, after analyzing those data, draw conclusions that support or disprove an original prediction. 
We learn – and science advances – by constantly challenging assumptions with fresh, factual information. 
In this way, we test and hone our ideas until we are left with a conclusion that cannot easily be refuted. 
We call this our “revealed truth.” 
But revealed scientific truth is always subject to new analysis, new scrutiny, and new interpretation. 
It is always regarded as provisional – that is, subject to later falsification – rather than becoming a fully accepted dogma. 
When scientists, and the public at large, dismiss well-supported hypotheses by citing so-called alternative facts, supported by nothing more than emotion or personal belief (post-truth in political-speak), we miss an important opportunity to strengthen our analysis. 
When we glibly dismiss fact-checked articles in reputable news sources as “fake news,” we fail to use evidence to support our conclusions. 
In politics as in science, when we dismiss revealed truth, we increase the likelihood of catastrophically bad outcomes. 
People have survived because their ancestors got their facts right, like the shorebird that flocks at the hint of danger. 
In all aspects of life, we should insist on a scientific process that bases decisions on accumulated observations. 
If, and when, there is enough evidence to support a particular conclusion, we should accept it. 
Ongoing, self-critical analysis is essential, but only if new ideas, new evidence, or new experimental methods are introduced. 
For humanity, emulating the predator-naïve wallaby, and simply ignoring the rustle in the bushes, is no way to avoid being killed. 
Rather, it is a certain recipe for extinction. 

Political Machismo 
NEW YORK – Parts of the world are experiencing eruptions of hyper-masculinity. 
The president of the United States presents himself as a kind of caveman, beating his chest, grabbing women “by the pussy,” and roaring like a great ape. 
A Canadian psychology professor, Jordan Peterson, has attracted countless young male followers by telling them to stand up straight, fight the liberal softies, reassert their male authority, and restore the old social hierarchies that he believes are forces of nature. 
Peterson is a slightly more couth version of another male self-help guru, Julien Blanc, who caused a scandal a few years ago by stating that women enjoy being taken by force. 
Such eruptions have occurred before in a more politically toxic manner. 
In Italy between the two world wars, Mussolini made himself the focus of a masculine cult: the Great Leader in riding boots, hands planted firmly on his leather belt, scowling and strutting and jutting his massive jaw, dominating the Italian public, as though it were his submissive mistress. 
Other fascist leaders in Europe followed Mussolini’s example. 
Obsessed by a sense of national decadence, of cultures growing soft, they sought to invigorate their people with shows of theatrical manliness. 
Hitler’s description of the Hitler Youth put the manly ideal succinctly: “Fast as greyhounds, tough as leather, and hard as Krupp steel.” 
Fascists commonly portrayed Jews as a pernicious force that threatened, through wicked manipulation, to undermine the health of nations and dominate the world. 
This image, barely disguised in the rhetoric of aspiring strongmen, is still potent in some parts of Europe. 
And yet official haters also exploited a stereotype of Jews as weak, eager to please, and bookish – the opposite of the masculine ideal. 
Extending the hierarchy of the school playground to society, they were the natural victims of bullies. 
The elevation of violence and hyper-virility was not confined to the Western world. 
The grotesque forms of Japanese militarism in the 1930s are well enough known. 
But what happened in India at roughly the same time is not. 
Radical Hindu nationalists founded the Rashtriya Swayamsevak Sangh (RSS), a voluntary Hindu nationalist paramilitary organization that remains a strong influence on the ruling Bharatiya Janata Party today. 
Inspired by late-nineteenth-century slogans such as “Beef, Biceps, and the Bhagavad Gita,” the RSS emulated European fascists by instilling their own ideals of military discipline in young Hindus in khaki uniforms. 
Although eruptions of hyper-masculinity may occur at more or less the same time in different parts of the world, they come about for a variety of reasons. 
They usually stem from humiliation, or the fear of humiliation. 
The Hindu nationalists in India were reacting, understandably enough, to the shame of colonial subjugation. 
They had to become as strong as their British masters, even if this involved the alien habit of eating beef. 
Many Germans, especially men who had served in the armed forces, felt humiliated by defeat in World War I, and the harsh terms imposed on their country by the allied governments. 
They wanted revenge, not only on the victorious allies, but also on the liberals and Jews who had supposedly betrayed them. 
The French who started radical right-wing movements like Action Française at the end of the nineteenth century were still smarting from defeat in the Franco-Prussian War of 1871. 
Reactionary French intellectuals dreamed of reinvigorating the nation. 
Some were so tormented by the idea of French decadence that they welcomed the German invasion in 1940 as a necessary shock that would restore manly virtues. 
So why today’s outbreak of political machismo? 
Why in the US? 
Why in Europe? 
Fear of humiliation can have many causes. 
Some young men might feel intimidated by feminist demands for equality. 
Even though men still occupy most leading positions in society, this is no longer a given. 
Indeed, one explanation for the loathing of Hillary Clinton as a presidential candidate was that she reminded too many men of the kind of female boss they hated. 
Many young men seem to crave the reassurance from self-help gurus who tell them that it is natural for men to lead. 
Others might feel sexually intimidated by the #MeToo movement and other assertions of women’s rights. 
Another target of the macho right is multiculturalism, and the presence of Muslims in particular. 
The rise of women to positions of authority in Western societies is matched by an increase in the number of successful people from non-European backgrounds. 
Again, as with Jews in the past, Muslims today are depicted as a danger to Western civilization: zealots and terrorists. 
But the truth is that most Muslims in the West are in a position of weakness, making them easy targets for popular aggression. 
And while this is happening at home, non-Western powers like China loom as existential threats abroad. 
If Clinton was seen as a despicable figure of female power, Barack Hussein Obama, though hardly a softie himself, represented everything that many people resent: he was highly educated, liberal, had a Muslim middle name, and his father was African. 
Obama’s presidency, along with the rise of China, the visibility of non-Western immigrants, and the challenges of feminism, showed how much the world has changed. 
And so people chose a tall, blond, swaggering, pussy-grabbing president who promised that he would change it all back again. 
And yet, somehow, Trump’s hyper-masculinity is distinctly unconvincing. 
Despite his rants and bluster, one still has the impression that behind that façade of pumped-up machismo lurks a frightened little white man who knows that he is no longer in control. 

What’s Wrong with Normal? 
LONDON – In Britain these days, one can’t avoid hearing and seeing more and more about the wretched campaign to spit in the face of the world (and of reality) and quit the European Union. 
Visiting the United States, as I recently did, provides some relief. 
But it comes at a price: wall-to-wall coverage of the presidential primaries. 
The Republican contest is almost egregiously distasteful, with the exception of the performance of Governor John Kasich of Ohio. 
Unfortunately, he is not going to win. 
His problem is simple: He is recognizably a normal human being. 
Watching the incendiary, invective-filled campaigns of his opponents – Donald Trump and Senator Ted Cruz – makes one mourn for the Grand Old Party. 
The first election campaign that I got involved in was some 50 years ago, in New York, where all of today’s candidates – Republican and Democrat – recently traded blows, with Trump and Democratic frontrunner Hillary Clinton emerging triumphant. 
In the mid-1960s, the leaders of the state and city, Governor Nelson Rockefeller and Mayor John Lindsay, were Republicans, as were New York’s two senators, Kenneth Keating and Jacob Javits. 
These political moderates, and many other Republicans in the 1960s, still reflected the party of Abraham Lincoln in readily defined ways. 
For one thing, they were internationalists. 
For another, they believed in a partnership between government and the private sector (think of President Dwight D. Eisenhower’s record, say, in building the US interstate highway system). 
Above all, they understood and identified with the integrationist project that remains the country’s continuing civilizing mission (reflected in the words – E Pluribus Unum – on America’s seal). 
One cannot imagine those Republicans from the 1960s campaigning alongside the two leading GOP candidates today. 
Cruz is an ideological bruiser; Trump is just a bruiser, with no discernible ideology at all. 
On the other hand, I don’t imagine those former Republicans would have had any difficulty endorsing Kasich, a successful conservative governor whose primary motivation is plainly not hating people, whether in his own party or in the Democratic Party. 
And that appears to be the source of his weakness as a candidate. 
He doesn’t froth at the mouth. 
He seems – what a crime – blessedly sane. 
Apparently, normal isn’t good enough in today’s Republican Party. 
The party is paying the price for surrendering in panic over the years to Tea Party zealots backed by disgracefully large treasure chests of billionaires’ loot. 
Acquiescence in heavily bankrolled, fearsome prejudice has left the rational and electable parts of the Republican Party in moral and political ruin. 
So now there is a late-in-the-day scramble by the party’s establishment to convince themselves that Cruz, an arrogant, bullying extremist, is not as ghastly as they have always told people he is. 
They fear him less as the party’s presidential candidate than they fear Trump. 
On the Democrats’ side, the battle between Senator Bernie Sanders and former Secretary of State (and US Senator) Hillary Clinton is nowhere near as grubby. 
It exposes some real issues of social equity and hostility to globalization that need to be addressed. 
But the rest of the world will hope that the result is not to give way to protectionism and to turn America’s back on the leadership that only it can give in tackling global problems. 
Watching all this close up could encourage despair. 
But we should not forget that, especially in the US, all politics is local. 
And, at the state and city level, there are still plenty of sane, decent, and intelligent elected officials trying to provide sensible leadership. 
And some will move on to the national stage. 
For example, in Los Angeles, where I spent a few days, a clever, well-educated young mayor, Eric Garcetti, combines energy, good looks, and common sense in a way that will almost certainly take him further. 
There must be a lot more like him, genuinely committed to public service, not to the self-aggrandizing antics of some of today’s dangerous clowns. 
But what is required in America, as in Britain these days, is for the normal and the moderate to stand up, make more noise, and be counted. 
Almost a century ago, in his anguished and all too prescient poem “The Second Coming,” W.B. Yeats wrote: “Things fall apart; the center cannot hold.” 
The reason the center could not hold is as relevant today as it was then: “The best,” Yeats argued, “lack all conviction, while the worst/ are full of passionate intensity.” 
It is time in Western democracies for the best to show more of that “passionate intensity.” 
Without it, there is always the danger of the birth of what Yeats called the “rough beast” slouching toward Bethlehem. 
There are at the moment rather too many “rough beasts” around, in US and British politics alike – indeed, almost everywhere in the democratic world. 

Can Movement Politics Renew European Democracy? 
PRINCETON – Many people expected the big political story of 2017 to be about the triumph of populism in Europe. 
But things didn’t turn out that way. 
Instead, the biggest story was about self-styled “movements” upending or replacing traditional political parties. 
Consider French President Emmanuel Macron’s La République En Marche!, which swept the French presidential and parliamentary elections this past spring. 
Or consider how, at the end of the year, 31-year-old Sebastian Kurz became Chancellor of Austria after refashioning the conservative Austrian People’s Party (ÖVP) into a movement called “The Sebastian Kurz list – The New People’s Party.” 
Across the European continent, more voters have come to see traditional political parties as self-interested and power-hungry. 
In the developing world, too, parties with well-established pedigrees, such as the African National Congress (ANC) in South Africa, are now widely regarded as corrupt. 
In many cases, traditional parties have become what political scientists call “cartels”: they use state resources to remain in power, and, regardless of their policy differences, they often work together to keep out challengers. 
Young voters, in particular, seem to have less interest in working for traditional parties, which they view as overly bureaucratic, and thus boring. 
One is reminded of Oscar Wilde’s famous quip about the problem with socialism: it takes up too many evenings. 
Not surprisingly, then, the most innovative political experiments in Europe in recent years have emerged from street protests and mass assemblies that eschewed hierarchical forms of organization. 
For example, Spain’s left-wing Podemos was formed after mass demonstrations by the indignados in 2011. 
Italy’s populist Five Star Movement (M5S), which came out on top in Italy’s 2013 parliamentary elections and is predicted to do well again in 2018, emerged from large rallies organized by comedian Beppe Grillo against “la casta” – his derogatory term for what he sees as the country’s ruling casteof professional politicians and journalists. 
Yet something funny happened between these movements’ origins as spontaneous, inclusive street protests and their later success at the ballot box. 
Ironically, even as they have continued to tout horizontal forms of organization and participatory democracy, their charismatic leaders have concentrated ever more power in their own hands. 
Podemos Secretary-General Pablo Iglesias, for instance, has drawn criticism from idealistic activists in the movement for his “hyper-leadership” and “online Leninism.” 
In response, Iglesias has declared that, “one cannot storm heaven by consensus.” 
Grillo holds no official position in M5S, which bills itself as a “non-association,” and yet he owns the blog that has been key to the movement’s success, as well as the copyright to its official symbol. 
He has revoked M5S members’ right to use that symbol for supposedly breaking the “rules” – or what is officially called the “non-statute” – of his “anti-party.” 
And those running for public office under the M5S banner must sign a contract promising to pay fines if they violate party principles. 
Of course, political movements are not necessarily populist in nature. 
As the Green and feminist movements have shown, a movement can contest traditional forms of politics without claiming to represent “the real people” or the “silent majority.” 
But today’s political movements also tend to be less pluralistic than the large parties that have dominated post-war European politics. 
This makes sense, given that “movement” implies not just dynamism, but also a presumption that all members are in complete agreement about the path forward. 
The problem is that when everyone supposedly already agrees on where they are going, there seems to be no need for extensive democratic deliberation. 
Thus, the movements that have emerged in Europe in recent years – on both the left and the right – have focused on strengthening their respective individual leaders, rather than empowering their rank-and-file members, even when they emphasize participatory democracy. 
In the case of Macron and Kurz, each leader has tapped into the sense of dynamism and purpose that is usually a key feature of single-issue movement politics. 
Kurz, for his part, has bent the entire ÖVP to his will. 
In addition to giving it a new name, he has reorganized its internal structures and changed its official color from black to turquoise. 
Still, the party’s conservative platform has hardly changed at all, suggesting that Kurz’s moves are about marketing and asserting his personal authority more than anything else. 
In the end, Podemos, La République En Marche!, and Momentum, the youth movement that helped Jeremy Corbyn reshape the British Labour Party’s platform, are not important because they are movements per se. 
Rather, they are important because they provide more political choices for citizens, especially those frustrated with prevailing duopolies – political systems dominated by two long-established parties offering nearly identical policy prescriptions. 
In Corbyn’s case, movement politics could reestablish Labour’s progressive credentials, and reverse what many saw as an embrace of neoliberal policies under former Prime Minister Tony Blair. 
But it would be naive to think that movements alone will make European politics more democratic. 
If anything, they could operate even less democratically than traditional parties, owing to their strong plebiscitary forms of leadership. 



Democracy Beyond the Nation-State 
WASHINGTON, DC – According to the Harvard economist Dani Rodrik, it is impossible to have full national sovereignty, democracy, and globalization simultaneously. 
The concept of a “political trilemma of the world economy,” which Javier Solana also recently explored, is useful, but incomplete. 
Rodrik’s argument, elaborated in his new book, is that too much globalization erodes the sovereignty of democratic nation-states, by increasingly subjecting them to economic and financial forces that may not correspond with the wishes of the domestic majority. 
By this logic, an authoritarian state may function better in a globalized world, because it is unconstrained by, say, electoral concerns. 
With less globalization, democratic decision-making within the nation-state would be less constrained by external forces – particularly financial markets – meaning that its scope would be wider. 
Globalization and democracy, without the nation-state, is also possible, though Rodrik is skeptical about whether democratic institutions could function on a global scale. 
Of course, Rodrik does not portray this trilemma as a hard-and-fast rule. 
Rather, his goal is to highlight the challenges associated with fostering or maintaining these three institutional arrangements, partly or fully. 
But, to get the most out of Rodrik’s concept, it is necessary to account for another dimension: the many levels of governance that exist in today’s world. 
The nation-state, managed by national government, remains the fundamental building block of the international order. 
But below the nation-state are states (or provinces), cities, and regions, which may have their own governance structures. 
Above, there are supranational blocs like the European Union and global institutions like the United Nations. 
Any discussion of the trilemma must take into account these various levels of governance. 
It is true that today’s widespread disillusionment with government is partly a backlash against globalization, which has seemed to impose itself on nation-states. 
But another reason for the disillusionment may be that citizens feel disconnected from their national governments. 
Yet subnational governments are not so far away, and citizens often feel that they can still exert significant influence over them. 
As a result, the tension between democracy and globalization seems to be less acute at, say, the municipal level. 
It helps that subnational governments tend to be focused on more local-level concerns – such as infrastructure, education, and housing – that are not perceived as being strongly influenced by globalization. 
On the opposite end of the spectrum are supranational governance structures, such as the EU. 
Not only does the EU often deal with globalization-related issues like trade; Europe’s citizens feel that the distant and disconnected “Brussels,” over which they have little influence, is infringing on the sovereignty of nation-states. 
This sentiment, exemplified in the Brexit vote, can be observed across Europe. 
The ways in which these dynamics can complicate Rodrik’s political trilemma have been on stark display in Catalonia, where the tension between local democracy and the nation-state is even more acute than that with globalization. 
Indeed, many Catalans are more frustrated with Spain’s national government than they are with either globalization or the EU. 
The same can be said of Scotland vis-à-vis the United Kingdom. 
In this context, a retreat to the nation-state that rejects globalization, as is occurring in the United States under President Donald Trump, becomes even more problematic, because it threatens to resurrect all of the economic and political pathologies that nationalism incited in the past, and then some. 
But what if we adopted a new approach, in which local-level democracy and sovereignty were strengthened instead? 
In many countries, if not most, cities are the centers of innovation and progress, as the promise of agglomeration, economies of scale, and positive spillovers attract high-performing firms. 
Citizens feel close to their municipal governments and proud of their cities, but their pride in their identity does not have the damaging qualities of nationalism. 
As the nation-state cedes some of its power to regional, state, or municipal governments, the trilemma weakens. 
Both democracy, with its concomitant sense of belonging, and globalization, driven by cosmopolitan cities open to the world, can thrive, without causing any country to lose sovereignty. 
The benefits of such an approach could be profound. 
But there are serious risks. 
As successful metropolitan areas attract a growing share of a country’s capital, skilled labor, and innovative capacity, rural areas, in particular, are likely to face economic decline: fewer job opportunities, closure of hospitals and schools, and deteriorating infrastructure. 
That trend, as we have seen, creates fertile ground for populist politicians to offer simplistic solutions, rooted in extreme ideologies that sow division and undermine progress. 
That is why it is vital to find ways to help, from the start, those who may be left behind by such a system. 
Here, the nation-state would retain a major role, though an appropriate balance must be struck, in order to prevent the trilemma from reasserting itself. 

No Hiding From Sustainable Development 
NEW YORK – One year ago, I was in Brazil to launch the Brazilian chapter of the United Nations Sustainable Development Solutions Network (SDSN), an initiative of UN Secretary-General Ban Ki-moon. 
The main message I heard that day was that São Paulo was suffering from a mega-drought, but that state and local politicians were keeping it quiet. 
This is a reality around the world: too many political leaders are ignoring a growing environmental crisis, imperiling their own countries and others. 
In the case of Brazil, state and local officials had other things on their mind in 2014: hosting the World Cup soccer tournament in June and July and winning elections later in the year. 
So they relied on a time-tested political tactic: hide the bad news behind a “feel-good" message. 
Some places have been even more foolish than simply ignoring the risks. 
North Carolina's coastlands, like coastal areas around the world, are threatened by rising sea levels caused by human-induced climate change. 
Yet in 2012, land developers convinced the state legislature to bar the use of scientific evidence on rising sea levels in the state's coastal management policies, at least until 2016. 
The issue is equally flagrant at the federal level: US Congress members, on the take from Big Oil, simply deny the reality of climate change. 
But growing environmental threats are forcing their way into the headlines whether politicians and land developers like it or not. 
The bad news about mega-droughts and freshwater scarcity stretches from Brazil to California to conflict-ridden countries in the Middle East. 
São Paulo's metropolitan region of 20 million people is now on the verge of water rationing, an unprecedented threat for one of the world's leading cities. 
In California, this winter has been another dry season in a bitter four-year drought, one of the most severe in the region's history. 
In Pakistan, the minister of water and energy recently declared that, “Under the present situation, in the next six to seven years Pakistan can be a water-starved country." 
In Iran, the Hamoun wetlands bordering Afghanistan are disappearing, posing a grave threat to the local population. 
Looking back, it is also clear that a decade-long drought in neighboring Syria helped to trigger the unrest that escalated into a catastrophic civil war, with at least 200,000 Syrians dead and no end to the violence in sight. 
The drought had displaced an estimated 1.5 million people and caused food prices to soar, leading to a spiral of protest, crackdown, and eventually war. 
Though drought does not explain all of the ensuing violence, it certainly played a role. 
Each of these droughts reflects a complex mix of factors: long-term climate change, short-term or decade-long weather patterns, growing populations' rising demand for freshwater, mismanagement of local resources, and, of course, a lack of political attention and will. 
Every drought must therefore be confronted locally, addressing local realities. 
Yet the global message is also clear: the world's growing population (now at 7.3 billion, but likely to reach eight billion by 2024 and nine billion by around 2040), human-induced climate change, and the overuse of freshwater for irrigation and urban needs (especially when cities are built up in dry regions) are all fueling the potential for catastrophe. 
Recent research indicates that these trends are likely to intensify. 
Almost all studies of human-induced climate change show that the Mediterranean region, including security hotspots like Libya, Egypt, Israel, Palestine, and Syria, is likely to experience a further significant decline in rainfall, compounding the drying trend that has occurred during the past quarter-century. 
Likewise, a recent study by my colleagues at Columbia University's Earth Institute has shown that human-induced climate change is likely to cause increasingly frequent mega-droughts in the American southwest and Great Plains states in the second half of this century. 
In September of this year, world leaders will gather at the United Nations to adopt a set of Sustainable Development Goals to address these rising threats. 
The SDGs will not ensure global action, but, as US President John F. Kennedy once said about UN agreements, they can serve as a lever to help move the world toward action. 
That is why it is so important to start planning for the SDGs now. 
Ban launched the SDSN to help countries achieve the new goals. 
Its key members include universities and think tanks around the world, with leading businesses and NGOs serving as important partners. 
National and regional SDSN chapters are being formed worldwide, in the Americas, Europe, the Middle East, South Asia, East Asia, Africa, and Oceania. 
The goal is to ensure strong participation in the SDSN in every country by the time the SDGs are adopted in September. 
This spring and summer, in countries around the world, SDSN-affiliated institutions will invite governments to begin brainstorming about how to achieve sustainable development in their cities, countries, and regions. 
Many politicians, no doubt, will be grateful for the support of their universities, NGOs, and leading businesses. 
And those who want to hide from reality will find that they no longer can. 
That is because our new reality is one of droughts, heat waves, extreme storms, rising sea levels, and unstable climate patterns. 
Unless we act with foresight and base our actions on scientific evidence, water stress, food insecurity, and social crises will not be far behind. 
In other words, today's mounting threats cannot be covered up. 

Politicizing EU Competition Policy 
The new European Commission has been named. 
What should be its primary goals? 
The Commission was originally created as a technocratic body relatively independent of either national or supranational control - correctly so, given its mandate. 
The Commission works best when it sticks to this role. 
Think of the excellent work it has done in the area of competition policy: breaking up cartels and stopping state aid, even when it comes in disguised forms, such as government guarantees on company debt. 
The lesson is that Commissioners should focus on their specific tasks, bearing in mind the interests of the EU rather than those of their country of origin. 
Mario Monti, the successful Commissioner for Competition, happened to be Italian, but nobody ever accused him of pursuing an "Italian agenda." 
In fact, his fight against state aid clashed with normal Italian practice. 
An innovation by current President Romano Prodi's Commission helped. 
Prodi's Commission decided to send Commissioners "into the field": their offices were no longer next to the President's office, but located in the department for which each was responsible. 
This forced Commissioners to concentrate on their jobs and keep an eye on the all-powerful director-generals and their bureaucracies; there was little time left for "big picture" politics. 
But the new commission that Durao Barroso, Portugal's former Prime Minister, has appointed risks becoming imprisoned by the bureaucracy again. 
For one thing, Barroso has decided to bring his Commissioners back into the President's office. 
This means less control and direct oversight of the bureaucracy, and an increased incentive to spend the day thinking up big plans rather than concentrating on targeted improvements. 
The problem is aggravated by the composition of the new Commission. 
There will be 25 Commissioners, one for each EU member country, whereas previously big countries had two and small countries one. 
Moreover, the new Commissioners will include three former prime ministers, five former foreign ministers, and three former finance ministers - all heavyweight people with big political agendas at home. 
Consider Italy, where Prime Minister Silvio Berlusconi replaced Mario Monti, the Commission's most successful and effective member, with a politician enmeshed in the arcane games of Italian party politics. 
Berlusconi's interest is clear: he wants someone he can call and ask to look after Italy's interests - be it a forbidden government loan to Alitalia or some other favor. 
There is also a Machiavellian explanation for the replacement of Monti. 
It is no secret that he irritated France and Germany. 
His latest decision was to force France Telecom to pay back with interest a loan granted years ago by the French government, in violation of EU rules on state aid. 
Germany never really accepted Monti's decision to bar government guarantees on the balance sheets of its Landesbanken, the powerful regional banks. 
The German government is also worried by the Commission's resolution to question the "Volkswagen law." 
That law prevents any shareholder who controls more than 20% of voting shares in Volkswagenwerk GmbH (VW) from casting more than 20% of the votes in a shareholders' meeting. 
It also decrees that a majority of more than 80% of shareholder votes is required for important decisions in the company. 
The Volkswagen law also deters private investors from acquiring shares in the company, despite the principle of free capital mobility within the EU. 
We do not know whether Chancellor Gerhard Schröder and/or President Jacques Chirac called Berlusconi to suggest that he find a new Italian Commissioner. 
Maybe they did, and maybe they didn't: one cannot know, especially at a time when Italy may need the full support of Chirac and Shröder as it tries to bail out Alitalia. 
The bottom line is that with the new Commission members focused on their domestic political agendas, Durao Barroso's team will do less effectively what the Commission used to do well. 
At the same time, to the extent that the Commission becomes less a body of technocrats and more a political body, the so-called "democratic deficit" will increasingly become a problem. 
The root cause of the problem is the new European constitution. 
By failing to limit the size of the Commission and accepting the one-country/one-commissioner rule, the Constitution has turned the Commission into a body of national representatives. 
This, together with the rule that all decisions, even in the area of state aid, must be approved by a majority of Commissioners, suggests that the Commission is set to become much more lenient on state aid and competition policy. 

Politics and Corporate Money 
CAMBRIDGE – A recent decision issued by the United States Supreme Court expanded the freedom of corporations to spend money on political campaigns and candidates – a freedom enjoyed by corporations in other countries around the world. 
This raises well-known questions about democracy and private power, but another important question is often overlooked: who should decide for a publicly traded corporation whether to spend funds on politics, how much, and to what ends? 
Under traditional corporate-law rules, the political-speech decisions of public companies are subject to the same rules as ordinary business decisions. 
Consequently, such decisions can be made without input from ordinary shareholders or independent directors, and without detailed disclosure – all safeguards that corporate law establishes for other managerial decisions, such as those concerning executive compensation or related-party transactions. 
In a recent article, however, Robert Jackson and I argue that political-speech decisions are fundamentally different from ordinary business decisions. 
The interests of directors, executives, and dominant shareholders with respect to such decisions may often diverge significantly from those of public investors. 
Consider a public corporation whose CEO or controlling shareholder supports a political movement to the country’s right or left and wishes to support it with corporate funds. 
There is little reason to expect the political preferences of corporate insiders to mirror those of the public investors funding the company. 
Furthermore, when such divergence of interest exists, using the corporation’s funds to support political causes that the corporation’s public investors do not favor – or even oppose – may well impose on them costs that exceed the monetary amounts spent. 
To prevent this, lawmakers should adopt safeguards for political spending decisions that would limit the divergence of such decisions from shareholder interests. 
For starters, it is important to require traded companies to provide detailed disclosure to public investors about the amounts and beneficiaries of any funds that the company spends, either directly or indirectly. 
In expanding corporations’ rights to spend money on politics, the US Supreme Court relied on “the processes of corporate democracy” to ensure that such spending does not deviate from shareholder interests. 
Clearly, however, such processes can have little effect if political spending is not transparent to public investors. 
For such disclosure to be effective, it must include robust rules with respect to political spending via intermediaries. 
In the US, for example, organizations that seek to speak for the business sector, or for specific industries, raise funds from corporations and spend more than $1 billion annually on efforts to influence politics and policymaking. 
While the targets of these organizations’ spending are disclosed, there is no public disclosure that enables investors in any public corporation to know whether their corporation contributes to such organizations and how much. 
Investors deserve to know. 
Moreover, a public company’s political spending decisions should not be solely the province of management, as they often are. 
Independent directors should have an important oversight role, as they do on other sensitive issues that may involve a divergence of interest between insiders and public investors. 
And these directors should provide an annual report explaining their choices during the preceding year. 
Lawmakers also should consider providing public investors with a say over political spending decisions. 
In the United Kingdom, for example, public companies have been subject to such a requirement for more than a decade. 
Shareholders of British companies must approve, by majority vote on a shareholder resolution, any political spending that exceeds £5,000. 
Following the adoption of this legislation, political spending remained significant but fell somewhat below previous levels. 
Shareholders may have different views from those of corporate insiders not only with respect to the amount of political spending, but also with respect to how that spending is targeted. 
This problem can be addressed by permitting shareholders to adopt at the annual meeting binding resolutions concerning corporate political spending. 
For example, shareholders could direct that the corporation may not spend funds for certain types of political purposes, or that it must follow certain principles in allocating whatever budget is authorized. 
The mere existence of shareholder power to adopt such resolutions could well increase insiders’ incentives to target the corporation’s political spending in ways that are consistent with shareholder interests. 
Legal rules allowing corporations to spend on politics are premised on the view that expression of corporations’ positions has a legitimate role in the political marketplace. 
But a corporation’s wishes should not be automatically and necessarily equated with those of its management. 
That is why we need new legislation to ensure that the use of corporate funds in politics does not stray from the interests of shareholders. 

The Politics of Financial Volatility 
LONDON – Twenty-four years ago, in the midst of an ugly US presidential campaign, Bill Clinton’s campaign manager neatly summed up his candidate’s message: “It’s the economy, stupid.” 
Today, as investors struggle to understand what is driving extreme volatility in the financial markets, there is an equally pithy explanation: It’s the stupid politics. 
Central bank policies have moved from supporting the markets to potentially destabilizing them. 
Now markets are turning to structural reform and fiscal policy for assistance. 
In this light, current price movements should be viewed through the spectrum of geopolitics. 
And it is not a nice view. 
Nowhere is this more evident than in the oil markets, where prices have collapsed, with both Brent and Crude now hovering around the $30-per-barrel level. 
The extent of oil’s fall, and consequent deflationary fears, is cited as a major factor behind overall market turmoil. 
In January, the correlation between crude oil prices and the S&P 500 reached the highest level since 1990. 
It has become increasingly clear that supply dynamics, rather than falling demand, explain the drop from $110/barrel since the summer of 2014. 
The shift to competitive pricing implied by the breakdown of Saudi Arabia’s monopoly power, together with OPEC’s desire to counter the threat from US shale energy, drove the first downward move. 
Likewise, the recent lifting of sanctions on Iran, and the resulting increase in global oil supply, prompted a further 9% price drop over a matter of days. 
These supply dynamics are shaped by politics. 
Daily headlines about potential coordinated measures by the key oil-producing countries fuel oil-price volatility and define risk appetite across financial markets. 
Yet the politics is so confused that coordination appears unlikely, at best; the Iranian oil minister recently described a potential OPEC production freeze as a “joke.” 
Iran’s parliamentary elections augment the uncertainty. 
Aside from oil, the other popular explanation for today’s market tumult is the economic slowdown in China, which many investors have cited as the reason for slumping equity prices this year. 
But the slowdown, reflecting China’s transition from investment-led to consumption-driven growth, was widely expected, and the 2015 growth figure of 6.8% was within forecasts. 
The real problem has been self-inflicted policy errors by China’s political leaders. 
An ill-advised intervention in the equity markets in July 2015, followed by a poorly communicated exchange-rate adjustment in August, led investors to question the competence of policymakers. 
These concerns have grown since the beginning of the year. 
Currency policy remains confused, while newly introduced (and soon withdrawn) stock-market circuit breakers have accelerated market falls, as investors try to sell shares before liquidity disappears. 
Moreover, purchases by state-owned financial institutions, together with bans on sales by large institutional shareholders, cannot remain permanent features if the market is to be truly free. 
Expected leadership changes – six of the seven members of the Politburo Standing Committee will be replaced over the next 18 months – will only exacerbate uncertainty. 
Labile politics are increasingly driving outcomes in other emerging markets as well. 
In Brazil, the government struggles to balance its populist agenda with lower commodity prices, dwindling growth, and persistent inflation. 
Moreover, a corruption scandal has paralyzed reform. 
Small wonder that Brazil’s stock market has fallen 28% since last May. 
In Russia, too, politics has aggravated the negative oil-price shock. 
Western sanctions have contributed to an already slowing growth trajectory, and are threatening Russia’s ability to raise debt capital in global markets. 
The ruble has plummeted 130% since 2014 began, and GDP in 2015 contracted by 3.7%. 
Yet Russia is a star performer compared to Venezuela, where President Nicolás Maduro’s government has overseen the economy’s total disintegration. 
Indeed, analysts are declaring the country is past the “point of no return.” 
Even the relatively dynamic India is struggling, as its exciting reform agenda is challenged by social protests. 
In Europe, the efficacy of the European Central Bank’s monetary policies is waning as the political scene becomes increasingly fragile. 
In the United Kingdom, polls show the June 23 referendum on continued European Union membership will be extremely tight – an obvious threat to market stability, reflected in the immediate sell-off of pounds. 
Meanwhile, the migration crisis threatens Germany’s government; splits are now deepening within Chancellor Angela Merkel’s party, which is losing popular support. 
The unilateral decision by Austria and nine Balkan states to block the flow of migrants across their borders has fueled political turbulence. 
The migrant crisis will have far-reaching ramifications, including the potential destruction of the Schengen zone. 
In Southern Europe, Spain’s recent elections were inconclusive, and the absence of a stable government could derail an economic recovery that gained traction in 2015. 
Meanwhile, the Italian government’s bank bail-ins have fueled volatility, with leading banks experiencing extraordinary one-day stock declines. 
The damage to Prime Minister Matteo Renzi’s reputation for reliability has prompted fears of renewed political turmoil. 
Turning to Japan, the strength in equities since Prime Minister Shinzo Abe took office has been founded on his “Abenomics” strategy’s “three arrows”: monetary stimulus, fiscal stimulus, and structural reforms. 
The Bank of Japan has launched one arrow, expanding the monetary base to ¥80 trillion ($710 billion) and more recently adopting negative interest rates. 
But momentum has faded considerably, as investors wait for the structural reforms needed for sustained improvement in economic, and market, fundamentals. 
In the US, deep voter frustration has fueled Bernie Sanders’s leftist bid for the Democratic Party’s presidential nomination and the astonishingly vitriolic campaign waged by Donald Trump. 
With Trump’s lead for the Republican Party’s nomination widening following the “Super Tuesday” primaries in ten states, financial markets, which seek stability and predictability, are struggling to find it in the politics of the world’s largest economy. 
History may not repeat itself, but let’s hope it finds its rhyme. 
Back in the 1990s, the US economy stabilized and then surged forward, driven by accelerating productivity and abetted by sound monetary and fiscal policy. 
But economies may prove to be easier to mend than today’s dysfunctional politics, which may be part and parcel of the “new normal.” 

When Politics Trumps Economics 
NEW HAVEN – With each passing day, it becomes increasingly evident that US President Donald Trump’s administration cares less about economics and more about the aggressive exercise of political power. 
This is obviously a source of enormous frustration for those of us who practice the art and science of economics. 
But by now, the verdict is self-evident: Trump and his team continue to flaunt virtually every principle of conventional economics. 
Trade policy is an obvious and essential case in point. 
Showing no appreciation of the time-honored linkage between trade deficits and macroeconomic saving-investment imbalances, the president continues to fixate on bilateral solutions to a multilateral problem – in effect, blaming China for America’s merchandise trade deficits with 102 countries. 
Similarly, his refusal to sign the recent G7 communiqué was couched in the claim that the US is like a “piggy bank that everybody is robbing” through unfair trading practices. 
But piggy banks are for saving, and in the first quarter of this year, America’s net domestic saving rate was just 1.5% of national income. 
Not much to rob there! 
The same can be said of fiscal policy. 
Trump’s deficit-busting tax cuts and increases in government spending make no sense for an economy nearing a business-cycle peak and with an unemployment rate of 3.8%. 
Moreover, the feedback loop through the saving channel only exacerbates the very trade problems that Trump claims to be solving. 
With the Congressional Budget Office projecting that federal budget deficits will average 4.2% of GDP from now until 2023, domestic saving will come under further pressure, fueling increased demand for surplus saving from abroad and even bigger trade deficits in order to fill the void. 
Yet Trump now ups the ante on tariffs – in effect, biting the very hand that feeds the US economy. 
So what Trump is doing is not about economics – or at least not about economics as most academics, political leaders, and citizens know it. 
Sure, Trump has been quick to draw on some fringe mutations of economics – say, Arthur Laffer’s infamous back-of-a-napkin supply-side musings – but none that have withstood the test of time and rigorous empirical validation. 
But why single out economics? 
The same complaint could be made about Trump’s views on climate change, immigration, foreign policy, or even gun control. 
It’s power politics over fact-based policymaking. 
This should not be all that surprising. 
Trump’s battle with China merely underscores his eagerness – transparent from the start – to use economics as a foil in his pitch to “Make America Great Again.” 
Contrary to his bluster over unfair trade deficits, China’s real challenge to the United States is less about economics and more about the race for technological and military supremacy. 
Indeed, the pendulum of geopolitical leadership is now in motion. 
China’s massive pan-Asian infrastructure plan, the Belt and Road Initiative, together with its muscular behavior in the South China Sea, pose far greater threats to American hegemony than does one bilateral piece of a much larger multilateral trade deficit. 
At the same time, China’s recent efforts to build the institutions of an alternative financial architecture – spearheaded by the Asian Infrastructure Investment Bank and the New (BRICS) Development Bank – stand in sharp contrast to an increasingly inward-looking US. 
Much has been written about the historical trajectory of great powers and the military conflicts that often arise during their rise and fall. 
This is where economics eventually comes back into play. 
Geostrategic power and economic power are joined at the hip. 
As Yale historian Paul Kennedy has long stressed, a condition of “imperial overreach” arises when the projection of military power outstrips a country’s shaky economic foundations. 
It has been 30 years since Kennedy warned that the US, with its excessive defense spending, was increasingly vulnerable to such overreach. 
But then the would-be heirs to the US faded: The Soviet Union collapsed, Japan’s economic miracle imploded, and Germany became entangled in reunification and European integration. 
An unthreatened America plodded on. 
China, of course, was barely on the radar screen back then. 
Moreover, in 1988 the US had a net domestic saving rate of 5.6% of national income – only slightly below the 6.3% average of the final three decades of the twentieth century, but nearly four times the current rate. 
Back then, the US was spending $270 billion on defense – less than half the $700 billion authorized in the current budget, which now outstrips the combined military outlays of China, Russia, the United Kingdom, India, France, Japan, Saudi Arabia, and Germany. 
Meanwhile China has ascended. 
Back in 1988, its per capita GDP was just 4% of the US level (in purchasing-power-parity terms). 
This year, that ratio is close to 30% – nearly an eightfold increase in just three decades. 
Can power politics offset the increasingly tenuous fundamentals of a saving-short US economy that continues to account for a disproportionate share of global military spending? 
Can power politics contain the rise of China and neutralize its commitment to pan-regional integration and globalization? 
The Trump administration seems to believe that America has reached a propitious moment in the economic cycle to play the power game. 
Yet its strategy will succeed only if China capitulates on the core principles of the growth strategy that frames President Xi Jinping’s great power aspirations: indigenous innovation, technological and military supremacy, and pan-regional leadership. 
Like Trump, Xi does not do capitulation. 
Unlike Trump, Xi understands the linkage between economic and geostrategic power. 
Trump claims that trade wars are easy to win. 
Not only is he at risk of underestimating his adversary, but he may be even more at risk of over-estimating America’s strength. 
The trade war may well be an early skirmish in a much tougher battle, during which economics will ultimately trump Trump. 

The Problem with Poor Countries’ GDP 
SEATTLE – Even in good financial times, development aid budgets are hardly overflowing. 
Government leaders and donors must make hard decisions about where to focus their limited resources. 
How do you decide which countries should get low-cost loans or cheaper vaccines, and which can afford to fund their own development programs? 
The answer depends, in part, on how we measure growth and improvements in people’s lives. 
Traditionally, one of the guiding factors has been per capita GDP – the value of goods and services produced by a country in a year divided by the country’s population. 
Yet GDP may be an inaccurate indicator in the poorest countries, which is a concern not only for policymakers or people like me who read lots of World Bank reports, but also for anyone who wants to use statistics to make the case for helping the world’s poorest people. 
I have long believed that GDP understates growth even in rich countries, where its measurement is quite sophisticated, because it is very difficult to compare the value of baskets of goods across different time periods. 
In the United States, for example, a set of encyclopedias in 1960 was expensive but held great value for families with studious kids. 
(I can speak from experience, having spent many hours poring over the multi-volume World Book Encyclopedia that my parents bought for my sisters and me.) 
Now, thanks to the Internet, kids have access to far more information for free. 
How do you factor that into GDP? 
The challenges of calculating GDP are particularly acute in Sub-Saharan Africa, owing to weak national statistics offices and historical biases that muddy crucial measurements. 
Bothered by what he regarded as problems in Zambia’s national statistics, Morten Jerven, an assistant professor at Simon Fraser University, spent four years examining how African countries obtain their data and the challenges they face in turning them into GDP estimates. 
His new book, Poor Numbers: How We Are Misled by African Development Statistics and What to Do about It, makes a strong case that a lot of GDP measurements that we thought were accurate are far from it. 
Jerven notes that many African countries have trouble measuring the size of their relatively large subsistence economies and unrecorded economic activity. 
How do you account for the production of a farmer who grows and eats his own food? 
If subsistence farming is systematically underestimated, some of what looks like growth as an economy moves out of subsistence may merely reflect a shift to something that is easier to capture statistically. 
There are other problems with poor countries’ GDP data. 
For example, many countries in Sub-Saharan Africa do not update their reporting often enough, so their GDP numbers may miss large and fast-growing economic sectors, like cell phones. 
When Ghana updated its reporting a few years ago, its GDP jumped by 60%. 
But many people didn’t understand that this was just a statistical anomaly, not an actual change in Ghanaians’ standard of living. 
In addition, there are several ways to calculate GDP, and they can produce wildly different results. 
Jerven mentions three: the World Development Indicators, published by the World Bank (by far the most commonly used dataset); the Penn World Table, released by the University of Pennsylvania; and the Maddison Project at the University of Groningen, which is based on work by the late economist Angus Maddison. 
These sources rely on the same basic data, but they modify it in different ways to account for inflation and other factors. 
As a result, their rankings of different countries’ economies can vary widely. 
Liberia is Sub-Saharan Africa’s second-poorest, seventh-poorest, or 22nd-poorest country in terms of GDP, depending on which authority you consult. 
It is not only the relative rankings that differ. 
Sometimes, one source will show a country growing by several percentage points, and another source will show it shrinking over the same time period. 
Jerven cites these discrepancies to argue that we cannot be certain whether one poor country’s GDP is higher than another’s, and that we should not use GDP alone to make judgments about which economic policies lead to growth. 
Does that mean that we really don’t know anything about what works (and what doesn’t) in development? 
Not at all. 
Researchers have long used techniques like periodic household surveys to collect data. 
For example, the Demographic and Health Survey is conducted regularly to determine things like childhood and maternal death rates. 
Moreover, economists are using new techniques like satellite mapping of light sources to inform their estimates of economic growth. 
Although such methods are not perfect, they also are not susceptible to the same problems as GDP. 
Other ways to measure overall living standards in a country are similarly imperfect; but they nonetheless provide additional ways to understand poverty. 
One, called the Human Development Index, uses health and education statistics in addition to GDP. 
Another, the Multidimensional Poverty Index, uses ten indicators, including nutrition, sanitation, and access to cooking fuel and water. 
And, by using purchasing power parity, which measures the cost of the same basket of goods and services in different countries, economists can adjust GDP to gain better insight into living standards. 
Yet it is clear to me that we need to devote greater resources to getting basic GDP numbers right. 
As Jerven argues, national statistics offices across Africa need more support so that they can obtain and report timelier and more accurate data. 
Donor governments and international organizations such as the World Bank need to do more to help African authorities produce a clearer picture of their economies. 
And African policymakers need to be more consistent about demanding better statistics and using them to inform decisions. 
I’m a big advocate for investing in health and development around the world. 

How Poor Countries Foot the Refugee Bill 
PARIS – The Syrian refugee crisis has focused attention on the need to improve management of refugee flows during times of crisis. 
One issue is particularly worrying: poor countries may be paying a large indirect price for rich countries’ efforts. 
Data show that a substantial portion of the costs associated with the influx of refugees and asylum-seekers in some European countries is being reported as official development assistance (ODA) – the measure the OECD Development Assistance Committee (DAC) uses to track international aid spending. 
This leaves less ODA available to launch, sustain, or expand economic development projects in poor countries. 
In 2015, the European Union’s DAC member states spent $9.7 billion of their ODA budgets on approximately 1.2 million asylum-seekers in their own countries. 
By comparison, they spent $3.2 billion of ODA in Syria, Afghanistan, Somalia, South Sudan, and Sudan – the top five countries from which those asylum-seekers had fled. 
The rule enabling donors to report so-called “in-donor” refugee costs as ODA was introduced in the OECD-DAC Statistical Reporting Directives back in 1988. 
At first, few DAC donors took advantage of it. 
From 2010 to 2015, however, the share of total ODA reported as in-donor spending more than tripled, from 2.7% to 9.1%. 
The DAC is working to establish clearer rules for using ODA to cover in-donor refugee costs. 
It has established a Temporary Working Group on Refugees and Migration to help determine whether donors are targeting their assistance in the right way, in the right place, and at the right time. 
We expect to be able to communicate the results of this work around July. 
The global attention that the Syrian crisis has focused on refugee flows and associated humanitarian needs is a positive development. 
Yet Syrians constitute only a small portion of the more than 21 million people worldwide listed as “refugees” by the United Nations Refugee Agency (the UNHCR categorizes more than 65 million people as “forcibly displaced”). 
And while the spotlight today is on asylum-seekers in Europe, most refugees – over 86% – remain in developing countries, close to the countries they have fled. 
Uganda, for example, took in more refugees from South Sudan in 2016 than the total number of migrants crossing the Mediterranean into Europe over the same period. 
Every day, 40,000 people are forced to flee from conflict and persecution. 
Many more leave their homes in search of a safe and dignified future. 
An increasing number of these people are displaced for 20 years or more. 
And many are left behind, displaced within their own countries, living in extreme insecurity and poverty. 
Standing by idly while others live in fear is not humane. 
Yet countries like Uganda, which for decades have generously hosted hundreds of thousands of refugees, increasingly see the principles of tolerance and protection they uphold undermined in the global north. 
Wealthy countries understandably seek to manage their own refugee populations and reassure their own citizens. 
Yet the right to asylum is universal and development cooperation must not, under any circumstances, be used for the purpose of containment. 
Refugee situations are not new. 
Together, the top five countries of origin have generated approximately 10.2 million refugees over the past 25 years. 
The numbers are staggering, but the challenge they represent is by no means insurmountable. 
Development aid can help to address the longer-term, socioeconomic dimensions of displacement, lending support to ensure that refugees are included in national and local development plans. 
It can help address the root causes of forced displacement by focusing efforts on reducing poverty and inequality, strengthening peace building, and improving access to justice. 
The OECD’s temporary working group will seek to identify and deliver better solutions for refugees. 
The conditions facing forced migrants today stand in stark contrast to international commitments such as the Sustainable Development Goals, which strive to “leave no one behind.” 
Failure to address these issues also threatens the international solidarity that underpins the global development agenda. 
Developed and developing countries need to work together. 
They must leave no ambiguity about the right to seek asylum and the responsibility to protect those who exercise it. 
We need to ensure that “new” funding means extra money, rather than the redirection of funds. 
And above all, programs for refugees – including responses within our own borders – must have human rights at their core. 

Growth Without Industrialization? 
CAMBRIDGE – Despite low world prices for the commodities on which they tend to depend, many of the world’s poorest economies have been doing well. 
Sub-Saharan Africa’s economic growth has slowed precipitously since 2015, but this reflects specific problems in three of its largest economies (Nigeria, Angola, and South Africa). 
Ethiopia, Côte d’Ivoire, Tanzania, Senegal, Burkina Faso, and Rwanda are all projected to achieve growth of 6% or higher this year. 
In Asia, the same is true of India, Myanmar, Bangladesh, Lao PDR, Cambodia, and Vietnam. 
This is all good news, but it is also puzzling. 
Developing economies that manage to grow rapidly on a sustained basis without relying on natural-resource booms – as most of these countries have for a decade or more – typically do so through export-oriented industrialization. 
But few of these countries are experiencing much industrialization. 
The share of manufacturing in low-income Sub-Saharan countries is broadly stagnant – and in some cases declining. 
And despite much talk about “Make in India,” one of Prime Minister Narendra Modi’s catchphrases, the country shows little indication of rapid industrialization. 
Manufacturing became a powerful escalator of economic development for low-income countries for three reasons. 
First, it was relatively easy to absorb technology from abroad and generate high-productivity jobs. 
Second, manufacturing jobs did not require much skill: farmers could be turned into production workers in factories with little investment in additional training. 
And, third, manufacturing demand was not constrained by low domestic incomes: production could expand virtually without limit, through exports. 
But things have been changing. 
It is now well documented that manufacturing has become increasingly skill-intensive in recent decades. 
Along with globalization, this has made it very difficult for newcomers to break into world markets for manufacturing in a big way and replicate the experience of Asia’s manufacturing superstars. 
Except for a handful of exporters, developing economies have been experiencing premature deindustrialization. 
It seems as if the escalator has been taken away from the lagging countries. 
What, then, are we to make of the recent boom in some of the world’s poorest countries? 
Have these countries a discovered a new growth model? 
In recent research, Xinshen Diao of the International Food Policy Research Institute, Margaret McMillan of Tufts University, and I have looked at the growth patterns among this new crop of high-performing countries. 
Our focus is on the patterns of structural change these countries have experienced. 
We document a couple of paradoxical findings. 
First, growth-promoting structural change has been significant in the recent experience of low-income countries such as Ethiopia, Malawi, Senegal, and Tanzania, despite the absence of industrialization. 
Labor has been moving from low-productivity agricultural activities to higher-productivity activities, but the latter are mostly services rather than manufacturing. 
Second, rapid structural change in these countries has come at the expense of mostly negative labor productivity growth within non-agricultural sectors. 
In other words, even though the services that absorbed new employment exhibited relatively high productivity early on, their edge diminished as they expanded. 
This pattern contrasts sharply with the classic East Asian growth experience (such as in South Korea and China), in which structural change and gains in non-agricultural labor productivity both contributed strongly to overall growth. 
The difference seems to be explained by the fact that the expansion of urban, modern sectors in recent high-growth episodes is driven by domestic demand rather than export-oriented industrialization. 
In particular, the African model appears to be underpinned by positive aggregate demand shocks generated either by transfers from abroad or by productivity growth in agriculture. 
In Ethiopia, for example, public investments in irrigation, transport, and power have produced a significant increase in agricultural productivity and incomes. 
This results in growth-promoting structural change, as increased demand spills over to non-agricultural sectors. 
But non-agricultural labor productivity is driven down as a by-product, as returns to capital diminish and less productive firms are drawn in. 
This is not to downplay the significance of rapid productivity growth in agriculture, the archetypal traditional sector. 
Our research suggests that agriculture has played a key role in Africa not only on its own account, but also as a driver of growth-increasing structural change. 
Diversification into non-traditional products and adoption of new production techniques can transform agriculture into a quasi-modern activity. 
But there are limits to how far this process can carry the economy. 
In part because of low income elasticity of demand for agricultural products, outflows of labor from agriculture are an inevitable outcome during the process of development. 
The labor that is released must be absorbed in modern activities. 
And if productivity is not growing in these modern sectors, economy-wide growth ultimately will stall. 
The contribution that the structural-change component can make is necessarily self-limiting if the modern sector does not experience rapid productivity growth on its own. 
Low-income African countries can sustain moderate rates of productivity growth into the future, on the back of steady improvements in human capital and governance. 
Continued convergence with rich-country income levels seems achievable. 
But the evidence suggests that the growth rates brought about recently by rapid structural change are exceptional and may not last. 

Poor Little Rich Country 
Feeling sympathy for Norway is hard. 
Thanks to its massive North Sea oil reserves, the country has achieved a level of wealth unimaginable only a generation ago - and which has allowed it to cold-shoulder the European Union since 1994. 
But Norway's problems, while hardly on a par with Sub-Saharan Africa or Afghanistan, are nonetheless serious enough to elicit concern, if not pity. 
When a country's newly discovered natural resource abundance leads to windfall wealth, investment in the rest of its economy shifts away from the tradeables sector (mainly manufactured exports) and into the nontradeables sector (mainly consumer goods and services). 
The diagnosis is a familiar one known as "the Dutch disease." 
If and when the natural resource generating the windfall wealth (in this case, oil and gas) disappears, the economy is left with too few competitive industries and too many empty bookstore-cafes. 
Painful restructuring is sure to follow. 
So far, Norway has avoided the worst pitfalls of the Dutch disease by using its massive oil revenues to establish a national savings scheme, the Petroleum Fund, which is permitted to invest only in foreign assets. 
This rule serves to curb inflationary demand pressure while preventing elected officials from squandering the country's riches on politically rewarding but economically wasteful projects. 
On both counts, however, Norway has recently lowered its guard and is heading for trouble. 
Wages throughout the economy have soared, with the average increase likely to hit a whopping 6% this year. 
To compensate, firms have been raising prices, fueling inflation. 
But with the central bank committed to holding annual inflation to an average of 2.5%, Norway's interest rates are currently among the highest in Europe. 
This has helped cause the exchange rate to strengthen by nearly 10% over the last year against the currencies of Norway's main trading partners, making the tradeables sector even less competitive. 
Domestic industries that face foreign competition are beginning to close down or relocate abroad. 
As a result, in one of the world's richest countries, unemployment is rising. 
But the real problem is the public sector. 
Government spending is now increasing by 4% annually because of a new "action rule," enacted in 2001, that allows revenue from the Petroleum Fund to be phased into the domestic economy. 
But the additional budget revenue has merely offset lower taxes, while high wages and interest rates are jacking up public expenses. 
So more government spending is needed to maintain public services at the same level - and to keep unemployment down. 
The cycle thus takes another vicious turn: higher interest rates, continuing currency appreciation, further decimation of the tradeables sector, and the risk of more unemployment. 
If Norway is to avoid succumbing to the Dutch disease, there can be only one solution. 
With the importance of the tradeables sector dwindling away, the nontradeables sector must increase its productivity and output. 
There is only one main way that the necessary productivity and outcome gains can be achieved: excess demand in the public sector must be shifted elsewhere. 
After all, the demand will not disappear on its own. 
Waiting lists for medical and nursing services in Norway already seem endless, and school buildings are deteriorating - some have even been closed down by the public health authorities. 
A range of public services will therefore have to be privatized. 
As always, this will be a politically contentious and challenging process. 
But it will also provide a golden opportunity to realize the country's potential through a strategy of sensible investment - the original purpose of the Petroleum Fund. 
This strategy should include significant investments in human capital: education, training, and basic scientific research. 
But brilliant ideas cannot be made to order. 
Any government effort to sustain dying industries or to allocate investment by picking all sorts of "innovative" projects will be a recipe for economic disaster. 
As so often in the rest of the world, windfall wealth such as came to Norway because of its oil and gas, can be a curse as much as it is a blessing. 
With just 10-15 years of estimated oil reserves remaining, the United Arab Emirates last year dropped visa requirements for most Westerners in an effort to accelerate the development of a viable tourist trade. 
With the recent discovery of its huge Caspian Sea reserves, Kazakhstan stands at the start of this process. 
These countries, like Norway, were winners in the natural resource lottery. 
But that is no guarantee that they will remain rich after the payments stop. 

Popes, Saints, and Religious Competition 
CAMBRIDGE – The election of the first non-European pope is long overdue. 
After all, Pope Francis’s native region, Latin America, is currently home to nearly half (44%) of the world’s Catholics. 
But the Catholic Church is increasingly losing out to Protestant competition there and elsewhere. 
Just look at the statistics. 
Evangelicalism is the fastest-growing world religion by conversion – a trend that underlies the strong expansion of Protestantism in traditionally Roman Catholic Latin America. 
Protestants in Latin America accounted for only 2.2% of the population in 1900, but 16.4% in 2010, with growth coming mainly at the expense of Catholics, whose population share fell from 90.4% to 82.3%. 
The Catholic Church understands this competition, but it confronts a chronic shortage of priests. 
As a result, the creation of saints is becoming an important way of retaining the faithful. 
Indeed, the choice of a Latin American pope echoes a prior shift in the geographical distribution of new saints. 
Since the early part of the twentieth century – and, most clearly, since John Paul II’s papacy (1978-2005) – the traditional dominance of Italy and other European countries in the locations of blessed persons has waned. 
This is reflected in the two stages of saint-making: beatification (the first stage of the process and currently the status of John Paul II) and canonization. 
The rationale for this shift is to use national saints to inspire Catholics – and thereby counter the competition from Protestants, especially Evangelicals. 
This phenomenon is most clear in Latin America, but it applies to North America, Asia, and Africa as well. 
And we think that the naming of a Latin American pope has the same underlying motivation – to compete with the growing threat of Protestantism in this region. 
The idea of using saints to compete with evangelicals in Latin America goes back a long way – the friars accompanying conquering Spanish troops introduced patron saints in every nucleated community. 
Coupled with persistent shortages of priests, the worship of saints in Latin America became more embedded in the region’s culture than in that of Europe. 
In 1992, John Paul II referred to evangelical groups in Latin America as “rapacious wolves” who were “luring Latin American Catholics away from the Church of Rome,” and he decried the “[h]uge sums of money…spent on evangelical proselytizing campaigns aimed specifically at Catholics.” 
His concerns with Protestant competition in Latin America were – and remain – understandable, particularly in Brazil, Chile, and Guatemala, which have seen sharp increases in Evangelical adherence. 
John Paul II changed the process of saint-making dramatically. 
He personally beatified 319 people (non-martyrs), compared to a total of only 259 by the 37 previous popes since 1585. 
He also made 80 saints, compared to a prior total of 165. 
Pope Benedict XVI’s (2005-2013) large number of saints (44) reflects mainly the large stock of beatified people left behind by John Paul II. 
As part of this process, Benedict XVI dramatically shortened the number of years that blessed persons had to wait to graduate from beatification to sainthood. 
For example, John Paul II became a blessed person a mere six years after his death. 
With respect to competition with Protestants, the key feature of the last two popes is the shift in the geographical distribution of blessed persons away from the traditional dominance of Europe. 
Under John Paul II and Benedict XVI, the share of (non-martyr) beatifications from Latin America was 10.5%, along with 4.6% for North America, 3.9% for Asia, and 1.9% for Africa. 
Similarly, Latin America accounted for 9.8% of (non-martyr) canonizations, along with 6.6% for North America, 4.1% for Asia, and 0.8% for Africa. 
These shares compare with the mere handfuls of blessed persons from these regions who were named by previous popes. 
Francis will visit Brazil in July to attend World Youth Day. 
There have been suggestions that he will visit other Latin American countries this year, including his homeland, Argentina. 
According to the Pew Forum on Religion and Public Life, Brazil has the largest Catholic population in the world. 
Combined, Brazil, Mexico, and Argentina account for 26% of the world’s Catholics. 
Yet Latin America’s Catholic population appears to be leveling off, due to falling birth rates and conversions out of Catholicism. 
The combination of the highest share of Catholics in the world with a decline in the share of religious adherents leaves Francis facing a strategic dilemma. 
Either he can focus on regaining Latin America for the Catholic Church, or he can place longer-term bets on Sub-Saharan Africa, where both the population and Catholicism are now growing faster than anywhere else in the world. 
Where will the next saints come from? 

A Mexican Impasse for the Pope 
LIMA – On February 17, Pope Francis is scheduled to celebrate Mass in Ciudad Juárez, Mexico, just south of the border with the United States. 
He will surely take that opportunity to urge support for the poor in Mexico and for those who have migrated north. 
After all, that is what he did in September during his moving homily in New York’s Madison Square Garden. 
Referring to the 11 million undocumented immigrants in the US, he asked his listeners to reach out to “all those people who don’t appear to belong, or are second-class citizens…because they have no right to be there.” 
But the absence of rights is a problem that is neither unique to the US nor confined to immigrants who lack legal authorization to remain in the country in which they reside. 
Far larger and far more damaging is the difficulty that afflicts the five billion people who lack documented property rights. 
In Mexico alone, there are ten million urban homes, 137 million hectares of land, and six million businesses whose owners’ rights are poorly protected. 
If Francis focuses only on undocumented immigration in his Juárez address, his message is likely to become bogged down in a debate about US security concerns and countries’ sovereign right to protect their borders. 
If, instead, he expands the discussion to include the importance of clearly documented property rights within countries, he will be on much firmer ground. 
Property rights are a universal right enshrined in the US Constitution and the United Nations Charter. 
Indeed, it is in search of just such rights that many of the world’s poor are motivated to cross borders into countries like the US. 
For those living in the richest parts of the world, it is easy to take clear property rights for granted. 
But the reality is that only 2.3 billion people have the documents to protect and leverage their rights – including approximately one billion people living in Japan, Singapore, and the democratic West, and another billion in certain developing countries and former Soviet states. 
Documentation is not just a bureaucratic stamp on a piece of paper. 
It is crucial to economic progress and inclusion. 
The reason the undocumented have an interest in being properly documented – whether they know it or not – is that clear property rights provide their owners and the things they own with a lot of additional value. 
In the US or Europe, for example, a house not only serves as a shelter; it is also an address that can identify people for commercial, judicial, or civic purposes, and a reliable terminal for services, such as energy, water, sewage, or telephone lines. 
Documentation also allows assets to be used as financial instruments, providing their owners with access to credit and capital. 
If you want to take out a loan – whether you are a mining company in Colorado or a Greek shoemaker in New York – you must first pledge documented property in one form or another as a guarantee. 
As I have shown elsewhere, the poor of the world are in possession of some $18 trillion of undocumented assets in real estate alone. 
But those assets will never attain their full value if they are not documented. 
As it stands, they cannot be used to raise capital. 
Nor can they be joined with other assets to create more complex and valuable holdings. 
The lack of property rights also plays an important role in two areas of concern for both the pope and many US leaders: the turmoil in the Middle East and North Africa and the protection of the environment. 
The Arab Spring, it should be recalled, began after a Tunisian street vendor set himself on fire as a protest against the arbitrary expropriation of his undocumented assets. 
And much of the anger that drove people to the streets, led countries to the point of collapse, and drove millions from their homes was motivated by a desire for clear rights, including those protecting property. 
Similarly, property rights are critical to environmental protection. 
Without clear documentation, it is impossible for authorities to determine who is accountable for damaging natural resources or responsible for restoring local ecosystems. 
Updated records are also needed to adjust conservation strategies to the opportunities and threats that arise as industry expands into virgin territories. 
In the headwaters of the Amazon River, for example, most of the 1,496 local communities cannot fix precise boundaries – using universal coordinates and enforceable property law – to the land in their possession. 
As a result, individual residents struggle to protect their assets, adapt to environmental threats, or respond to the challenges and opportunities of expanding globalization. 
The fact that Francis is addressing the issue of documentation is important. 
It means the Vatican is not only asking why so few have so much, but also why so many have so little. 
By extending his compassion to those who lack documentation, the pope has an opportunity to do very much for very many. 

Francis of the Forest 
WASHINGTON, DC – When Pope Francis visited Latin America in July, he made an impassioned plea for the protection of the Amazon rainforest and the people who live there. 
“Our common home is being pillaged, laid waste and harmed with impunity,” he told activists gathered in Bolivia for the World Meeting of Popular Movements. “Cowardice in defending it is a grave sin.” 
Heeding Francis’s call for action is not only a moral issue; it is a practical one. 
When world leaders meet at the United Nations Climate Change Conference in Paris later this year to craft a response to the challenges of global warming, they should put in place policies to protect tropical forests and the people who make them their home. 
Francis is hardly the first missionary to have visited the Amazon. 
Franciscan, Jesuit, and Dominican priests have been spreading the gospel in the region for centuries. 
What makes Francis’s appeal different is that his words were directed not so much at the local population, but at the residents of North America and Europe, where demand for timber, biofuels, and agricultural products drives the destruction of the rainforests and imperils the lives of indigenous populations. 
Communities in the Amazon have suffered grievously from the economic incentives to cut down the rainforests. 
Around the world, indigenous people are being threatened, murdered, and driven from their homelands. 
Of the 116 environmental activists killed in 2014, 40% were indigenous leaders. 
In September 2014, for example, Edwin Chota and three other leaders of the Asháninka communities in Peru, were brutally murdered, most likely by illegal loggers. 
Two months later, José Isidro Tendetza Antún, a leader of the Shuar people in Ecuador, was tortured and killed while headed to a protest against a mining project that threatened his people’s homeland. 
In addition to being an affront to human rights, deforestation and the accompanying assault on indigenous cultures is a serious threat to the fight against climate change. 
The links between the loss of forest cover and global warming has been well documented. 
Carbon-dioxide emissions from forest clearing and burning account for nearly 10% of global emissions. 
Meanwhile, forest people have demonstrated that they are often the best guardians of the trees on which their livelihoods depend. 
The forests where indigenous people live often hold more carbon than those managed by any other owners, public or private. 
Indeed, indigenous reserves in the Brazilian Amazon have played a critical role in lowering deforestation rates – at a considerable cost. 
In the past 12 years, more activists and indigenous leaders have been killed in Brazil than in any other country. 
During the proceedings in Paris later this year, countries will be expected to present national plans – known as Intended Nationally Determined Contributions (INDCs) – outlining the specific steps they will take to reduce CO2 emissions. 
If Francis’s appeal is to be respected, these steps must include commitments to help indigenous people secure the right to their land and empower them to protect their forests against destruction. 
So far, only a little more than one-quarter of the world’s countries have submitted preliminary INDCs for review. 
Unfortunately, few countries with tropical forests have submitted their plans, and not one of the Amazon countries has done so. 
Mexico, by contrast, is setting a good example. 
The government has used its INDC to set several ambitious goals, including commitments to zero deforestation by the year 2030 and to restoring forest ecosystems in the country’s watersheds. 
And yet, while Mexico has relatively strong formal land and property rights for indigenous peoples and local communities, those rights have yet to be integrated with other regulations – hindering any kind of economic development. 
Industrialized countries, such as the United States and the members of the European Union, bear a special responsibility for providing solutions to the problem of deforestation. 
Forest communities must be provided with assistance in managing their resources and maintaining their livelihoods. 
The Green Climate Fund, established by the United Nations to help developing countries mitigate CO2 emissions and adapt to climate change, should include provisions specifically for indigenous people, along the lines of the Climate Investment Fund’s Dedicated Grant Mechanism. 
Francis’s upcoming trips will include visits to Washington, DC and Paris, where he is expected to continue his advocacy on behalf of the environment. 
It is up to our leaders to answer his call and turn prayers into policy. 

Pope Francis in America 
LONDON – It’s a dollar to a cent that Pope Francis’s visit to the United States in September will be one of the biggest news stories of 2015. 
Take the sheer number of American Catholics, add the diplomatic skill of the Vatican’s purple-and-scarlet-clad officials, then throw in Francis’s powerful statements on a variety of subjects – often antagonizing America’s right wing in the process – and you have all the ingredients of an epic event. 
Start with the diplomats. 
Vatican officials catch their share of criticism, not least from Francis himself. 
But their ranks include intelligent top-rank officials – led by the Pope’s chief adviser, Cardinal Pietro Parolin – who are experienced at working quietly for peace and social justice in some of the most perilous parts of the world. 
When such smart diplomacy is put at the service of an appealing and influential Pope, not to mention the 1.2 billion Catholics worldwide, the result is an engine for doing good that is more formidable than anything the world has seen for some time. 
Anecdotes about Francis – from his propensity for making personal phone calls to those in distress to his decision to wash the feet of criminals, Muslims, and women (to the horror of some churchmen) – ring true. 
Such acts of graceful nobility have contributed to his reputation as a kind, approachable, charismatic, and decisive leader – one who has proved to be highly appealing worldwide. 
My personal experience with Francis suggests that his reputation is well deserved. 
Though, at age 71, I may be a little old to indulge in hero worship, I cannot remember a public figure to whom I have warmed more. 
He embodies the message, delivered in the Gospel of St. Matthew’s account of the Sermon on the Mount: “Blessed are those who hunger and thirst for righteousness” (Matthew 5:6). 
The moral authority that Francis exudes makes his interventions in controversial contemporary issues – such as his condemnation of the Armenian genocide, Islamic jihadi violence, Mafia criminality and corruption in Italy, and the deaths of African and Middle Eastern migrants in the Mediterranean – extremely powerful. 
Before and during his visit to the US, his views on three issues – none of which is without controversy in the US – will have a particularly strong impact. 
First, Francis is helping to end the decades-long standoff between the US and Cuba. 
Not only did Cardinal Parolin, formerly the Vatican’s man in Venezuela, play a key role in the restoration of diplomatic relations between the US and Cuba; 
Francis plans to visit the island on his way to the US. 
But the thaw in US-Cuba relations has not been welcomed by all US politicians. 
Indeed, despite President Barack Obama’s apparent desire to end the pointless diplomatic freeze, some right-wing US politicians would, it seems, prefer a pariah to a potential partner off Florida’s coast. 
The second key issue that Francis will address relates to the Israel-Palestine conflict – a fraught subject for the US, Israel’s most important ally. 
The Vatican has announced its intention to sign a treaty that includes recognition of a Palestinian state. 
Given Francis’s long record of friendship with Jews, and his understanding of their religion and culture, no Israeli politician can possibly condemn him as an anti-Semite. 
Nonetheless, in parts of the American political establishment, Israel – specifically, Prime Minister Binyamin Netanyahu and his Likud Party – can do no wrong. 
A US senator once told me, “We are all members of Likud here.” 
The third issue – the most challenging for some American politicians, especially the most conservative among them – is Francis’s recent encyclical on environmental stewardship, climate change, and sustainable and fair economic development. 
He clearly intends to put the full moral weight of his papacy behind the efforts to conclude a deal on climate change at the United Nations conference in Paris in December. 
Obama’s recent statement on carbon-dioxide emissions is clearly very much in line with the encyclical. 
Francis will undoubtedly discuss the subject in his address to Congress, 30% of whose members – including House Speaker John Boehner, a Republican – are Catholic. 
Given that several of the leading candidates for the Republican presidential nomination – including Jeb Bush, Marco Rubio, and Bobby Jindal – also are Catholic, Francis’s strong stance on climate change may create a serious political dilemma for some. 
Already, some of the most conservative elements in American politics – backed by those, like the billionaire brothers David and Charles Koch, who benefit from inaction on climate change – are attempting to denounce Francis’s views. 
Whereas the Catholic Church once tried to suppress science and reason, most notably in its condemnation of Galileo, it is now defending them, while conservative US politicians deny the facts. 
The pope is on the side of reason, as well as that of the angels. 
In 1891, Pope Leo XIII produced Rerum Novarum, an encyclical on workers’ rights that fundamentally challenged the contemporary political discourse and approach to policymaking. 
Francis hopes to have a similar impact today, helping to catalyze action on climate change. 
In this manner, he hopes, the world can achieve sustainable growth that improves the lot of the poor, while safeguarding the planet on which we depend. 
The 78-year-old Francis often talks of the limited time he has ahead of him. 
Most Catholics pray that this is not the case. 
Given the positive impact that such a charismatic and forward-thinking pope can have on the world, we should all share that hope. 

The Real Mission for Pope Francis 
GLENDALE, CALIFORNIA – Catholicism, among the most tradition-bound religions, contains at its core a paradox that has become increasingly sharp. 
As Pope Francis begins his first overseas trip – to Brazil, the world’s most populous Catholic country – it is difficult, despite the inertia of the past, to tell where the church is headed. 
The accession of Jorge Mario Bergoglio to the papacy adds to the puzzle. 
The chief Jesuit confessor at the papal court used to be called “the black pope,” owing to his simple black cassock (if not his sinister intent). 
Now, for the first time, a Jesuit has become pope – and has compounded the novelty by assuming the very un-Jesuit name of Francis. 
As curious as such gestures are in an institution that thrives on imagery, they are symbolic frills. 
We already have plenty of pictures of Francis kissing babies; what he faces now – in Brazil and around the world – are strategic matters of genuine substance. 
One such challenge, the Vatican Bank, is equivalent to cleaning up the Augean stables. 
It is enough to mention the words “Vatican” and “bank” in the same sentence to start a cascade of jokes about comic-opera ineptness and skullduggery. 
In order to find a remedy, Francis has appointed a special papal financial commission. 
But the bank known as the Institute for Works of Religion, founded in 1942, does not have deep roots in Catholicism. 
Though notoriously secretive, the operation is far removed from the Church’s more sensitive, doctrinal core. 
Besides, the commission’s members have impeccable loyalist credentials, which is also true of the cardinals appointed by Francis to look into broader issues of reform. 
At the same time, Francis has launched a series of initiatives aimed at pleasing just about everyone. 
He has expedited the canonization process for John XXIII, who inaugurated Vatican II almost a half-century ago, and John Paul II, the autocratic Pole who reined in many of Vatican II’s liberating impulses. 
He has also announced plenary indulgences – time off from “the pains of purgatory” – for those who follow his visit to the Catholic youth festival in Rio de Janeiro on the Internet. 
Such measures are difficult to get worked up about – both for Catholics who do not take them seriously and for “the simple faithful.” 
They have feel-good value, but little else. 
The heart of the matter is that Francis’s actions have been in line with the “revolution from above” style of reform associated with Vatican II. 
In particular, none of the changes promoted by Francis envision a reduction in papal power. 
The “primacy of the papacy” – a term Catholic theologians use when talking with their Protestant counterparts – remains sacrosanct. 
The larger lesson is that this monarchical model of Catholicism, together with the hierarchy that attends it, has remained pretty much the same since the Counter-Reformation. 
For example, when priests leave “holy orders,” they are “reduced to the lay state” – a bit of condescending terminology that says a lot about the Church’s archaic mindset. 
This is not a new situation. 
What is new are the circumstances under which it is unfolding. 
Catholicism in its heyday combined a fairly decentralized administration, under the sway of stand-alone bishops, with a uniform set of beliefs. 
One reason why it used to take roughly 13 years for a Jesuit to reach ordination was the long indoctrination in orthodoxy required for priests who, unlike “regular clergy” (whose training lasted half that time), would be mobile and beyond the direct control of bishops. 
This situation is now close to being reversed. 
Church administration has become increasingly subject to uniform civil codes. 
At the same time, since Vatican II – and in tandem with the decline of close-knit ethnic enclaves – churchgoers no longer feel obliged to hew to the letter of canon law. 
“Relativism,” “cafeteria Catholicism,” and the like are ubiquitous. 
Papal authority stands on shaky ground, especially in the comparatively secular West. 
Francis can attract attention by opining about social justice outside the church, but it is difficult for any pope to influence the habits and theological views of Catholics themselves, who think and act as they please. 
He can scold – a tack that Francis has so far tried to avoid – but he cannot convince. 
If the Church’s first dilemma concerns the basis and effectiveness of papal authority, the second concerns sexuality. 
The two are linked. 
Francis shies away from the retrograde rhetoric that his predecessors used in raising alarms about the role of women, and he has not gone out of his way to follow up on the Vatican’s “visitation” (read “Inquisition”) of uppity American nuns. 
But he has kept that last episode on the books, and he continues to wax traditional about homosexuality. 
Catholicism – or, more accurately, the celibate male mythos at the heart of the institutional church – rests on centuries of sexism. 
An antifeminist culture pervades the organization. 
Thoughtful theologians can distinguish among psycho-sexual issues; in practice, however, fear of a slippery slope to calamity prevails. 
Pull one thread – the celibacy requirement for priests, for example – and the whole edifice comes crashing down. 
Consider what has happened to liberalizing Protestant denominations, which, for all their good intentions, have lost adherents. 
One could argue that concessions on this front would simply acknowledge attitudinal and behavioral reality and allow the church to move on. 
One could also argue that the consequences of reform would not be as organizationally disastrous as feared – in the same way that cleaning up backwaters like the Vatican Bank would restore credibility to the Church’s spiritual message. 
But this is a conversation that Francis has yet to initiate, and that the people around him show little sign of understanding. 

Poppy Power 
This month, the European Parliament adopted a resolution on Afghanistan that could pave the way for a new and more open-minded approach to counter-narcotics strategies worldwide. 
In fact, the resolution calls on the participants at a conference of donors, to take place in London at the end of January, “to take into consideration the proposal of licensed production of opium for medical purposes, as already granted to a number of countries.” 
This proposal was originally made by the Senlis Council, an independent organization based in Paris, during a workshop in Kabul last September. 
The text introduced by the European Liberal Democrats, with the support of virtually all political groups in the European Parliament, is revolutionary, not only because it goes against conventional thinking, but also because it raises the issue above the stagnant reality of the “war on drugs.” 
In Afghanistan, that so-called war has essentially been based on eradication campaigns and alternative livelihood projects, which have achieved only scant results. 
The European Parliament’s new stance may, I hope, mark the beginning of a radical policy shift by all actors involved in rebuilding Afghanistan. 
According to the United Nations Office on Drugs and Crime, despite concerted efforts at eradication and crop substitution, Afghanistan produced 87% of the world’s opium in 2005 – roughly 4.1 tons – generating $2.7 billion of illegal revenue, which amounts to roughly 52% of the country’s GDP. 
The 2005 Afghanistan Opium Survey, released last November, estimates that the total value of this opium, once turned into heroin and distributed around the world, could reach more than $40 billion. 
Moreover, in recent years, factories and laboratories for processing opium into heroin have been sprouting in Afghanistan, producing 420 tons of heroin last year alone. 
The increase in domestic heroin production has provided a massive boost to the local retail market, giving rise to concerns about HIV/AIDS spreading in a country with poor infrastructure and nonexistent health services. 
In addition, the itineraries used by the export convoys are no longer limited to the infamous “golden route” through Pakistan and Iran, but have multiplied, employing exit points in former Soviet Republics such as Tajikistan, Uzbekistan, and Turkmenistan. 
This is helping to promote further instability in already volatile political contexts. 
International counter-narcotics policy is currently driven by pressure for rapid and visible results. 
But eradication and alternative livelihood projects mainly affect the lowest end of the value-added chain, the farmers, with no real impact on those higher up, such as large landowners and local traffickers, not to mention the extremely powerful drug lords and the international cartels and mafias. 
Most landless farmers find it difficult to switch to different crops, being caught up as they are in the illegal opium-denominated market, which forces them to live at the mercy of the drug traffickers, who provide them with access to credit and market outlets. 
The result of this was laid out in a report by the European Union’s Election Observation Mission that I presented in Kabul last December: Afghanistan risks becoming a “rentier” state with easy access to resources that lubricate corruption throughout its entire political system, finance illegal armed groups, and fuel regional destabilization. 
Illicit Afghan networks, replicating well-known methods that organized crime has applied successfully for decades in other parts of the world, are mobile and resourceful, and can plug into a range of legal economic activities to sustain themselves. 
This might lead Afghanistan into a situation of no return: becoming a narco-state that drifts away from any form of rule of law and disengages itself from the fragile social contract with its own citizens that it has started to establish. 
As New York University’s Barnett Rubin, an expert on Afghan society, has put it: “Afghanistan cannot be stabilized while the most dynamic sector of its economy is illegal, nor if more than half of its economy is destroyed.” 
So what should be done? 
Because of the serious threat that the illegal drug economy poses to stability and democracy in Afghanistan, we must start thinking in terms of regulated poppy growing for medical purposes, in particular for painkillers, with the active participation of donor countries and the UN itself. 
Indeed, the UN estimates that just six countries prescribe 78% of the total legal production of opiates, implying shortages of opium-based painkillers in many of the UN’s 185 other member states. 
Hence the potential legal demand is huge. 
Moreover, the UN also estimates that there are 45 million people living with HIV/AIDS in countries where health systems are either absent or very poor, and that over the next 20 years there will be some 10 million new cases of cancer in the developing world. 
These estimates, together with poor countries’ additional needs when natural catastrophes strike, imply that the potential legal demand for medicinal opiates is even higher. 
An increase in production of “medical” opium would address its lack of availability worldwide. 
It would also provide Afghan peasants, who have been growing poppy despite forced eradication of the plant and incentives to change crops, with an option that is regulated by law and that, in time, could have an impact on the heroin trade. 
Governments, international organizations and individuals that participate in the London conference must not dismiss the call made by the European Parliament, for it offers a far more workable strategy to promote Afghanistan’s future than the current counter-narcotics policies permit. 

Population Change and Challenge 
Like everything else in our world, change in population is swifter than ever. 
The most profound changes in population, however, are not demographic but social, and they go deep into personal and family life. 
Women are tasting new freedoms—new expressions of their fundamental human rights—and these have profound implications for both men and the social structures they traditionally dominate. 
Demographic change has certainly been swift. 
In 1970, world population was less than 4 billion: today, it is over 6 billion and will stand at 8 billion by 2025, with nearly all of that growth concentrated in what are still called “developing countries”-- most of Asia and nearly all of Latin America and Africa. 
Hidden within those astounding numbers, however, are some more hopeful figures. 
Over the last 30 years, family size in developing countries has fallen by half, from 6 children to 3; there are many more women today, but compared with their mothers--or any previous generation--they have fewer children. 
On a scale unknown to history, women are making choices for themselves, and their choice is for smaller families. 
Back in 1970, the issue of population growth was controversial. 
It divided north and south, developed and developing countries, in a way that few other issues did—with blame and counter-suspicions cast widely – and with the result that population concerns tended to sink toward the bottom of the agenda of most countries and international organizations. 
Few developing countries had family planning programs. 
The people who carried most of the responsibility for bearing and raising children—women--were not heard from at all. 
Nothing could be further from the way population issues are viewed today. 
There is a global consensus that population issues are part of daily life. 
Reproductive health and gender equality have become an integral part of the human rights agenda. 
The amazing though little-known fact is that this epochal change marks a real and visible success for the United Nations and its ponderous but painstaking way of reaching consensus. 
Slowly, over years of long discussion and hard-won practice, divisions between the various population camps have been closing. 
Or not so much closing as shown to grow from false premises. 
A generation of practice has shown that if women have choices--real choices--they will have smaller families than their parents’ generation. 
The reasons are complex and not completely understood, but the facts are clear. 
Family size and population growth rates thus become not so much a matter for high-level decision, but the results of many private decisions further down the power structure. 
Many things flow from this. 
In the past, policy and politics were a matter for men: now women increasingly play an equal part. 
In countries like India and Uganda, for example, women sit on local and regional legislatures by right. 
That women need access to health care for themselves and their children, in particular family planning, is more widely accepted every day. 
Nearly all countries now officially support family planning. 
Even this is not enough. 
If women are going to use contraception successfully, they must be able to make their own decisions about it. 
The implications of this are revolutionary for societies where women traditionally have not been allowed to make decisions for themselves. 
After all, if women can decide about family planning, why not about other things? 
The whole power structure of the family, and the community in which the family lives, begins to change. 
In Bangladesh, for example, where women have traditionally been kept from public view, they now use cell-phones to contact one another, raise loans and do business. 
In some families, women are now the main earners. 
In many developing countries, there has been an explosion of women’s groups in the last decade, and these assert themselves as never before. 
In Chile, for example, mothers went on the street in favor of a move by the education ministry, but opposed by the Church, to include sex education in school. 
Government, of course, is still needed: governments provide health care and education, the two most critical elements of the mix. 
And leadership is needed, though in new and unfamiliar ways. 
Political leaders must pay attention to social needs: economic growth by itself won’t solve social problems; in fact the realization is spreading that sustained economic growth depends on dealing with social issues. 
The “Asian tigers,” for example, made heavy investments in education and health, including family planning, early in their development. 
This investment paid off a thousandfold in terms of social stability, a healthy and educated workforce and faster economic growth 
Governments today must pay attention to women, though, granted, for many, this is proving hard to do. 
International agreements have been reached: human rights structures are in place. 
Agreement, however, is one thing: implementation another. 
Women are willing to make partnerships to make progress. 
The problem lies with men. 
Somehow men must learn that equal power for women does not threaten their own power: that being a man does not depend on controlling a woman; that sharing power makes everyone more powerful. 
Men in all countries, from poorest to richest, at all levels of society, are learning that they must change. 
That is the lesson of the last 30 years, and the great success for all of us who have spent our lives in population and development. 
We have changed population concerns from a divisive political issue to a social force, behind which women and men can unite. 
In the process, the structures of both politics and society are changing. 
This is a quiet revolution: and it has only just begun. 

Populism Versus Prosperity 
LONDON – Marine Le Pen, the leader of France’s far-right National Front, claims that the twenty-first century’s defining battle will be between patriotism and globalism. 
US President Donald Trump appears to believe that it will be between “the very fake news media” and himself, backed by “the people” he claims to represent. 
They are both wrong. 
The battle that will actually define this century will pit long-term thinking against short-term thinking. 
The politicians and governments that plan for the long term will defeat those that fail – or simply refuse – to look beyond the current election cycle. 
China is famed for its supposed long-term thinking, but we do not have to resort to dictatorships to test the point. 
Some Western democracies have also done the work needed to manage the powerful forces of globalization, technology, and demography – and they have been rewarded with stable economies and political systems largely unchallenged by populists. 
Others have remained fixated on the short term, and suffered considerably as a result. 
To map this distinction, I have developed a new composite statistical indicator for my educational charity, the Wake Up Foundation, called the Wake Up 2050 Index. 
Unlike, say, the World Economic Forum’s Global Competitiveness Index, the Wake Up 2050 Index looks beyond statistics covering past and current performance to detect clues about countries’ future burdens and the likely productiveness of their main assets, especially their own citizens. 
Based on 25 measures, the Wake Up 2050 Index ranks the 35 mainly advanced-country members of the OECD according to their preparedness in five areas: demography, the knowledge society, technological innovation, globalization, and resilience in the face of unexpected shocks. 
The results are striking. 
Switzerland tops the index as the Western country best prepared for the known trends and forces shaping the twenty-first century. 
The country’s populists are a single-issue brigade – with that issue being immigration – and have far too little support to enter government. 
What backing the far-right Swiss People’s Party has attracted emerged only after the number of foreign-born migrants reached one-quarter of the Swiss population, almost double the level in the United States or the United Kingdom. 
Switzerland’s four neighbors languish far lower on the list – Germany in 15th place; Austria in 17th; 
France in 20th; and Italy in 32nd – despite their close cultural, historical, and commercial ties to Switzerland. 
In Austria and France, Euroskeptic, anti-immigrant populist parties have gained enough support to have a real chance of winning power, as has Italy’s more left-wing Five Star Movement. 
Even in Germany, the populist influence is rising. 
Given Switzerland’s reputation for being wealthy, well educated, innovative, and resilient, its success in the index may not seem surprising. 
But with wage levels among the world’s highest and 19% of its GDP coming from manufacturing (compared with 12% in the US and 10% in the UK), it should, in theory, be highly vulnerable to Chinese competition and job-destroying automation. 
Yet it has largely shrugged off these challenges. 
The same cannot be said of Italy. 
Though its manufacturing sector accounts for a smaller share of GDP than Switzerland’s – 15%, to be precise – it has suffered far more from Chinese competition. 
The reason is simple: Italy is producing less sophisticated and innovative goods. 
This reflects a serious mistake that Italy, along with France, is making. 
By over-spending on public pensions to buy off voters in the short term, both countries’ governments have severely limited their ability to invest in education and scientific research. 
No country can compete effectively in an increasingly knowledge-based, technology-driven global economy, if its government doesn’t devote sufficient resources to fostering the right skills and capabilities among its labor force. 
Success also requires a regulatory environment and corporate culture that enable citizens to make productive use of the knowledge they have acquired. 
In this sense, countries with low female labor-force participation (like Italy) or where the most experienced workers, those over age 65, no longer work (like Italy and France) are at a distinct disadvantage. 
The value of long-term planning is perhaps most apparent in Japan. 
Despite being the advanced economy experiencing the fastest population aging, Japan scores rather well on demography in the Wake Up 2050 Index. 
One major reason is that, anticipating the demographic shift it would undergo, the country has kept more than 20% of over-65s in the workforce, compared to just 2.9% in France. 
The US scores worse than expected on both innovation and knowledge. 
Poor performance among secondary schools and a low overall labor-force participation rate mean that the advanced technologies the US develops are not used to their full potential. 
That is a major reason why Trump was elected president – and a bad sign for America’s future prosperity. 
To “Make America Great Again,” as Trump has pledged to do, policymakers must think beyond the current election cycle. 
The same goes for all of the Western democracies. 
Yet many critics have begun to doubt whether Western policymakers are even capable of such long-term thinking anymore. 
But the critics could be proved wrong. 
Immigration, one of the most contentious questions in today’s political debates, is fundamentally a long-term issue. 
And while voters in the US have come out against openness, the UK promises to remain open after Brexit, except to immigration from the EU. 
Elsewhere, openness is still being staunchly defended. 
In France, the question of openness is the main battleground of the upcoming election. 
Le Pen, like Trump and the Brexiteers, claims that openness has been a disaster. 
But Le Pen’s two main rivals – the independent centrist Emmanuel Macron and the center-right Republican François Fillon – both argue for more openness and freer markets. 
Who comes out on top will determine the trajectory not just of France, but of Europe as a whole. 
Switzerland, for one, is more than a little nervous. 

When Populism Can Kill 
LONDON – Unfounded skepticism about vaccines in some communities, in developing and developed countries alike, has emerged in recent years as one of the most serious impediments to global progress in public health. 
Indeed, it is one of the primary reasons why eradicable infectious diseases persist today. 
For example, the effort to eradicate polio worldwide has been disrupted in Afghanistan, Pakistan, and Nigeria, where rule by Islamist militants has led to increased resistance against vaccination campaigns. 
And many high-income countries have experienced measles outbreaks in recent years, owing to fears about vaccinations that began with the publication of a fraudulent paper in the British medical journal The Lancet in 1998. 
More recently, skepticism about vaccine safety and efficacy has been on the rise in Southern Europe. 
According to a 2016 study, Greece is now among the top ten countries worldwide with the lowest confidence in vaccine safety. 
And, as Greek Minister of Health Andreas Xanthos has noted, health-care professionals are increasingly encountering parents who have fears about vaccinating their children. 
Similarly, in Italy, Minister of Health Beatrice Lorenzin recently warned of a “fake news” campaign, backed by the opposition Five Star Movement, to dissuade parents from vaccinating their children. 
Already, the share of Italian two-year-olds who have been inoculated against measles is under 80%, well below the World Health Organization’s recommended threshold of 95%. 
So it should come as no surprise that Italy had five times more measles cases in April of this year than it did in April 2016. 
In May, Greece and Italy each enacted very different policies to respond to vaccine skepticism. 
In Greece, despite the fact that child vaccination has been mandatory since 1999 (unless a child has a certified medical condition), Xanthos has advocated an opt-out option for parents who do not want to vaccinate their children. 
By contrast, Italy’s center-left Democratic Party government has made vaccinations against 12 preventable diseases compulsory for all children. 
Under a new law, unvaccinated children are not permitted to attend school, and parents of unvaccinated children can be fined for their children’s non-attendance. 
According to Lorenzin, the law is meant to send “a very strong message to the public” about the importance of inoculation. 
In other words, two left-wing governments have responded to the same public health problem in very different ways. 
Whereas Greece moved from paternalism to laissez faire, Italy moved in the opposite direction. 
The decision by Greece’s Syriza-led government is surely the stranger of the two, given that Syriza tends to favor robust state intervention in most other policy areas. 
In Italy, the government is responding to the populist Five Star Movement’s anti-vaccination agenda, which has become a part of its broader campaign against the state, established political parties, and the “experts” responsible for the 2008 financial crisis and the eurozone’s prolonged economic malaise. 
But, putting politics aside, there are compelling reasons for why governments should mandate vaccinations for all children, rather than leaving it up to parents to decide. 
Ultimately, the state has a responsibility to protect vulnerable individuals – in this case young children – from foreseeable harm. 
In 1990, Greece signed the United Nations Convention on the Rights of the Child, in which it recognized all children’s right to “the highest attainable standard of health and to facilities for the treatment of illness and rehabilitation of health.” 
But by allowing misinformed parents to forego vaccinations, Greece is exposing children to preventable infectious diseases and openly violating its pledge to ensure “that no child is deprived of his or her right of access to such health-care services.” 
Moreover, governments have a responsibility to establish public goods through legislation, and “herd immunity” is one such good. 
Herd immunity describes a level of vaccination coverage that is high enough to prevent a disease from spreading through the population. 
Achieving herd immunity is one of the only ways to protect vulnerable members of a community who cannot be vaccinated because they are immunocompromised, or simply too old. 
In addition, vaccination is a crucial instrument in the fight against one of the twenty-first century’s biggest health challenges: antimicrobial resistance. 
By preventing infections, vaccines also prevent overuse of antibiotics, thereby slowing down the development of drug resistance. 
More generally, it is widely known that high vaccination coverage results in a healthier population, and that healthier people can contribute more, both economically and socially, to their communities. 
No medical or technical obstacles are blocking us from eradicating preventable infectious diseases such as measles and polio. 
Rather, the biggest hurdle has been popular resistance to vaccination. 
By allowing parents to make uninformed decisions about the health of not just their own children, but their entire community, the Syriza government is only adding to the problem. 
Governments should be educating the public to improve overall coverage, not validating unfounded fears about vaccine safety. 
No country can achieve herd immunity – and eventually eradicate preventable infectious diseases – if it allows parents to opt out of vaccinating their children, as in Greece. 
But it also will not do simply to sanction noncompliant parents, as in Italy. 
Ultimately, to defeat infectious diseases, we will have to restore faith in expertise, and rebuild trust with communities that have grown increasingly suspicious of authority in recent years. 

The Geopolitics of Populism 
SINGAPORE – The big question in Asian countries right now is what lesson to take from Donald Trump’s victory in the United States’ presidential election, and from the United Kingdom’s Brexit referendum, in which British voters opted to leave the European Union. 
Unfortunately, the focus is not where it should be: geopolitical change. 
Instead, for the most part, economic narratives have prevailed: globalization, while improving overall wellbeing, also dislocates workers and industries, and generates greater income disparity, creating the anxious electorates that backed Brexit and Trump. 
An alternative narrative asserts that technological advances, more than globalization, have exacerbated economic inequalities, setting the stage for political disruptions in developed countries. 
In either case, policymakers in emerging countries have identified inequality as a major problem, and rallied around efforts to improve social mobility, lest globalization and new technologies displace their middle and working classes, and clear a path for their own versions of Trump and Brexit. 
For Asian countries, the policy prescription is clear: take care of disadvantaged populations and provide retraining and new employment opportunities for displaced workers. 
Of course, all societies should look out for their poorest members and maximize social mobility, while also rewarding entrepreneurship and challenging people to improve their lot. 
But focusing on such policies would not address the public disaffection underlying the populist uprising, because inequality is not its root cause. 
Feelings of lost control are. 
Even if countries closed their domestic income and wealth gaps and ensured social mobility for all their citizens, the forces fueling public dissatisfaction around the world today would remain. 
Consider the US, where the inequality narrative’s poster child has become the displaced, older, less-educated, white working-class male. 
Many people credit these voters for Trump’s victory, but the poster-child cohort did not actually have the biggest impact on the election outcome. 
According to exit polls, Trump won 53% of white male college graduates, and 52% of white women (only 43% of the latter group supported Clinton); he won 47% of white Americans between the ages of 18 and 29, compared to 43% for Clinton; and he beat Clinton by 48% to 45% among white college graduates overall. 
These Trump supporters do not fit the stereotype at the center of the economic narrative. 
Meanwhile, more than half of the 36% of Americans who earn less than $50,000 annually voted for Clinton, and of the remaining 64% of voters, 49% and 47% chose Trump and Clinton, respectively. 
Thus, the poor were more favorable toward Clinton, and the rich toward Trump. 
Contrary to the popular narrative, Trump does not owe his victory to people who are most anxious about falling off the economic ladder. 
A similar story unfolded in the UK’s Brexit vote, where the “Leave” campaign asserted that the EU’s supposedly burdensome regulations and exorbitant membership fees are holding back the British economy. 
This hardly amounts to an agenda to fight economic inequality and exclusion, and it is revealing that rich businessmen wrote the largest checks to support Leave. 
Moreover, the street-level emotions that contributed to Leave’s victory were not rooted in income inequality or “the 1%”: alienated poor voters directed their anger at other alienated poor people – particularly immigrants – not at the rich. 
The Mayor of London’s office reported a 64% increase in hate crimes in the six weeks after the referendum, compared to the six weeks before it. 
So, while income equality may have been a part of the Brexit campaign’s background noise, it was not the first issue on Leave voters’ minds. 
What unites Trump and Leave supporters is not anger at being excluded from the benefits of globalization, but rather a shared sense of unease that they no longer control their own destinies. 
Widening income inequality can add to this distress, but so can other factors, which explains why people at all levels of the income distribution are experiencing anxiety. 
Indeed, many people in Eastern Europe felt a sense of lost control during the harsh socialist experiments of the post-war era, as did many Chinese during the Cultural Revolution, and these societies had minimal visible income inequality. 
Paradoxically, Brexit and Trump supporters might be feeling the effects of globalization because overall inequality has actually declined. 
Globalization’s largest effect has been to lift hundreds of millions of people in emerging economies out of poverty. 
Throughout the 1990s, emerging countries’ combined GDP (at market exchange rates) amounted to barely one-third of the G7 countries’ combined GDP. 
By 2016, that gap had essentially vanished. 
Low international income inequality, rather than growing income inequality in individual countries, is putting unprecedented stress on the global order. 
There is a growing mismatch between what Western countries can provide, and what emerging economies are demanding. 
The power of the transatlantic axis that used to run the world is slipping away, and the sense of losing control is being felt by these countries’ political elites and ordinary citizens alike. 
Trump and the Leave campaign appealed to voters by raising the possibility that transatlantic powers can reassert control in a quickly changing world order. 
But with the geopolitical rise of emerging economies, especially in Asia, that order will have to achieve a new equilibrium, or global instability will persist. 
Closing the income gap can help the poor; but, in the developed countries, it will not alleviate their anxiety. 

Populism, Past and Present 
MADRID – It seems that practically no Western democracy nowadays is immune to right-wing populism. 
While populist rhetoric seems to be reaching fever pitch, with far-reaching consequences – most notably the United Kingdom’s vote to “Brexit” the European Union – the reality is that the strain of nativism that it represents has long bedeviled democratic politics. 
Populist movements tend to focus on blame. 
Father Charles Coughlin, the 1930s-era Roman Catholic priest from Detroit who promoted a fascist agenda for America, consistently sought to root out the culprits for society’s problems. 
Likewise, today’s right-wing populists have eagerly turned on the “establishment” and the “elites.” 
In Europe, this has meant blaming the EU for everything that goes wrong. 
Addressing the complex roots of current economic and social challenges – the UK and France, for example, suffer substantially from hereditary privilege and frozen class systems – is a lot harder than decrying the EU as a villainous behemoth. 
Beyond blame, populist ideology relies heavily on nostalgia. 
Much of the current upheaval in Europe evokes Edmund Burke’s repudiation in 1790 of the French Revolution as the product of a misguided faith in ideas that defied people’s attachment to history and tradition. 
For the UK’s Brexiteers, the borderless world that the EU, with its commitment to globalization, represents is destroying the nation-state, which better protected their interests. 
In their referendum campaign, they recalled a past when jobs were secure, neighbors were familiar, and security was assured. 
Whether that past ever really existed was irrelevant. 
The last time European democracies were overtaken by radical political movements, in the 1930s, demagogues based their support largely on the old lower middle class, whose members feared being dispossessed and pushed into poverty by uncontrolled economic forces. 
In the wake of the protracted euro crisis, and the painful austerity that followed, today’s populists have been able to play on similar fears, again primarily among older workers and other vulnerable groups. 
Of course, Europe is not alone in being swept up by populism. 
The United States, where Donald Trump has secured the Republican nomination to be president, is also in serious danger. 
Trump paints a bleak picture of life in the US today, blaming globalization (specifically, immigration) and the “establishment” leaders who have advanced it for the struggles of ordinary American workers. 
His slogan, “Make America Great Again,” is the ultimate display of false populist nostalgia. 
Moreover, just as Brexiteers want to withdraw from Europe, Trump wants to withdraw the US from international arrangements of which it is a part, if not the linchpin. 
He has suggested dispensing with NATO, declaring that US allies should have to pay for America’s protection. 
He has also launched tirades against free trade and even the United Nations. 
As elsewhere, Trump’s protectionism and national narcissism are sustained by the anxiety of those hit by the impersonal dark forces of the “market.” 
The turn toward populism constitutes a revolt against intellectual orthodoxy, embodied by cosmopolitan professional elites. 
In the Brexit campaign, “expert” became a slur. 
This is not to say that challenging the establishment is entirely without merit. 
The establishment is not always in touch with the people. 
Populism can sometimes be a legitimate channel for aggrieved voters to make their frustrations known, and to call for a change of course. 
And in Europe, there are plenty of legitimate grievances: austerity, widespread youth unemployment, a democratic deficit in the EU, and an overloaded bureaucracy in Brussels. 
But, rather than focus on real solutions, today’s populists are often appealing to people’s basest instincts. 
In many cases, they are emphasizing feelings over facts, stoking fear and hate, and relying on nativist appeals. 
And, in fact, they are less interested in tackling economic grievances than they are in using those grievances to win support for an agenda that would roll back social and cultural openness. 
This is most apparent in the immigration debate. 
In the US, Trump has won support with proposals to block Muslims from entering the US and to build a wall to keep out those crossing the border from Mexico. 
Likewise, in Europe, populist leaders have capitalized on the influx of refugees fleeing conflicts in the Middle East to convince people that EU-imposed policies threaten not just Europeans’ security, but also their culture. 
The fact that nearly all of the regions in Britain that voted for Brexit received massive EU subsidies supports this interpretation. 
So do circumstances in Germany. 
Though the arrival of a million largely Muslim immigrants last year has not hurt the economy – which remains at full employment – many people are rejecting Chancellor Angela Merkel’s vision of a new, more multicultural Germany. 
Simply put, for many Europeans, immigrants represent less a threat to their livelihoods than a challenge to their national and tribal identities. 
Populist leaders like the UK Independence Party’s Nigel Farage have not hesitated to capitalize on this cultural anxiety, leading British voters ultimately to vote against their own interests. 
And yet the grievances which populists like Farage and Trump manipulate are real. 
To preserve the principles of openness and democracy on which continued social and economic progress depends, those grievances must be understood and addressed. 
Otherwise, populists will continue to win support, with potentially severe consequences, as the Brexit debacle shows. 
Fortunately, there is also precedent for escaping populist takeovers. 
In the 1930s, as Europe drifted into the hands of either tyrants or banal democratic leaders, America’s Coughlins and others were overshadowed by President Franklin Roosevelt’s New Deal. 
And a new deal – one that corrects the EU’s yawning democratic deficit and puts an end to self-defeating austerity policies – is precisely what will save Europe today. 

Pulling Europe Back from the Brink 
DAVOS – In 2007, the United States caught a serious – and highly contagious – economic cold. 
Eight years later, it is finally making a convincing recovery – so convincing that last month the US Federal Reserve raised the country’s base interest rate for the first time in almost a decade. 
Europe, however, remains in bad shape. 
Not only has it not recovered from its post-2008 cold; beset by multiplying crises, it is now on the verge of developing pneumonia. 
The best defense against pathogens is a strong immune system. 
And that is what Europe lacks today, in the form of political leaders who provide an inspiring and forward-looking vision to their people. 
With political disenchantment reaching levels not seen since the continent’s darkest times in the 1930s, the risk that Europe will succumb to the destructive forces of populism looms ever larger. 
But it is too soon to give up hope; on the contrary, Europe is well positioned to succeed in the long term. 
To secure that future, Europe’s political class, rather than struggling to cope with crises as they arise, must begin to look at the big picture, anticipate and address challenges, and inspire people once again. 
Is this too much to ask? 
History tells us that the answer is an emphatic no. 
Sixty years ago, with Europe’s economy reeling from the destruction caused by World War II, Europe’s leaders lifted their eyes above daily hardships to shape a more hopeful future, underpinned by European integration. 
That same vision and foresight is needed today, and the European Union, with its unmatched ability to facilitate regional cooperation, will remain essential. 
Of course, there are some key differences between the circumstances that drove the EU’s creation and those that Europe’s leaders face today. 
Most notably, thanks to the EU, Europeans today have largely not endured war and absolute economic deprivation. 
With the dangers of demagoguery not embedded in their living memories, they are far more vulnerable to fear-mongering and false promises – illustrated in the growing influence of nationalist narratives and populist movements. 
Even worse, faced with an erosion of their voter base, many mainstream parties are playing catch-up with these destructive forces, engaging in EU-bashing of their own. 
Clearly, the EU needs a new impetus that reflects twenty-first-century challenges and opportunities. 
But this will be virtually impossible to establish – and use to inspire people – until the EU and its member governments get a handle on the crises that are threatening to overwhelm them. 
That is why it is so urgent that Europe puts its economic house in order once and for all. 
Such a reckoning will not be quick or easy, not least because it will require us to address the many issues that have been swept under the carpet over the years, as half-baked projects were foisted on the EU to implement. 
The foremost example of this is the partial economic and monetary union that has been around for nearly two decades, and that must now become a full union if it is to be successful and deliver results. 
It is time for Europe’s leaders to break the decades-old habit of pursuing half-baked projects that blunt the symptoms of crises, and to implement real reforms that address the root causes. 
Only with a new approach – and tangible progress – can solidarity within Europe be regained. 
My call for a renewed commitment to the EU does not stem from some federalist mantra. 
I would be the first to emphasize that political actors at all levels have a role to play in Europe, to the extent that they are able to implement policy effectively. 
And I would also recognize that EU institutions need reform, so that they manage the big picture, instead of the details. 
Nonetheless, the EU and its institutions remain integral to efforts to respond to challenges that require a united front – challenges like those that Europe faces today. 
If Europe’s leaders are to inspire their people to build a shared future, they must demonstrate an understanding of what that future has in store – and how to make the most of it. 
They should start by changing their attitudes and committing to working together to face present and future crises head-on. 
While we cannot know for certain what the next 10-20 years will bring, we have a few important clues. 
For one thing, there is the Fourth Industrial Revolution, which promises to transform our economies and societies in fundamental ways. 
Plenty of other transnational challenges – from addressing the root causes of the Middle East refugee crisis to implementing last month’s Paris agreement to mitigate climate change – are also in the cards. 
It would be ironic if Europeans, enthralled by illusory promises of blissful national self-containment, threw away 60 years of deep cooperation at a moment when such cooperation is needed more than ever. 
Of course, self-destructive national behavior is not new. 
But, more often than not, leaders have managed to pull back from the brink. 
The key for Europe will be to deliver a coherent and compelling vision that justifies our need for cooperation in the decades ahead. 

Populism’s Short March in Central Europe 
A specter is haunting the European Union’s new members in Central Europe ­– the specter of populist nationalism. 
The Law and Justice Party (PiS) has just won Poland’s parliamentary and presidential elections, while populist and nationalist political forces could gain the upper hand in elections in Hungary, the Czech Republic, and Slovakia next year. 
These are momentous developments. 
For 15 years, Central Europe has been a model student of democratization. 
Now, according to former Czech President Václav Havel, the region could become trapped in a “suffocating atmosphere.” 
Even Havel’s own successor, Václav Klaus, rails against multiculturalism and the decline of the traditional European nation-state. 
What happened? 
Paradoxically, the EU – seen as a guarantee of stability and progress – is itself part of the problem. 
Attracted by the promise of membership, the countries that joined the EU last year underwent 15 years of social, economic, legal, and political changes whose scope was unprecedented in modern European history. 
Public institutions were rapidly modernized, political democracy adopted, and a standard market economy created. 
But ordinary people were put under tremendous pressure to adjust quickly, and sometimes painfully. 
As long as EU membership remained only a goal, it had a disciplining effect on the region’s political elites. 
In fact, the promise of EU membership now seems to have been a more effective means of promoting reform than membership itself: aspiration, unlike membership, gave the EU far greater political leverage. 
To be sure, Poland, the Czech Republic, Hungary, and Slovakia have rightly viewed EU accession as an act of political emancipation, and have begun asserting themselves as political equals. 
At the same time, the political parties that led their countries into the EU all came under pressure, because they were associated with painful reforms. 
This cleared the way for politicians with a simple message: our countries have had enough of Western tutelage and belt-tightening; the time has come to return to our national values and interests. 
Some warned even before EU accession that their nations could lose their identity. 
As President Klaus put it, the Czech Republic could “dissolve in the EU like a sugar cube in a cup of coffee.” 
Tomas G. Masaryk, Czechoslovakia’s first president after its establishment in 1918, used to say that his country was a democracy, but “so far, without democrats.” 
Havel reasons along similar lines when he warns of the emerging dangers of nationalism and populism in the region. 
In his opinion, the underlying “old” patterns of political behavior (some a legacy of the pre-communist era) were temporarily pushed to the background by the wave of pro-Western civic liberalism that followed the collapse of communism in the region. 
Now the old patterns of political behavior are returning to the fore. 
But there is also evidence that Havel is right to argue that the re-emergence of these patterns represents a mere “hangover” from 15 years of sustained – and often traumatic – reform. 
Unlike before World War II, when democratization efforts were undermined by the rise of authoritarianism in Germany, the region’s countries are now fully integrated into a network of highly stable Western democracies. 
Attempts by political parties to thrive on nationalism, xenophobia and populism will soon be confronted with the limits set by the EU and other international organizations. 
For example, the PiS’s promises to reintroduce the death penalty and return Poland to its conservative Christian roots violate EU and Council of Europe standards. 
One can predict with a high degree of confidence that the Polish “Fourth Republic” that the PiS would like to build will have to come to terms with the limited space in Europe for messianic visions and “Christian fundamentalism.” 
The same is true of Klaus’s nationalism; it may appeal to a popular streak of Czech provincialism, but even if the conservative Civic Democratic Party, which Klaus founded, wins the parliamentary election next year, EU membership will temper nationalist ambitions. 
Leftist populists in Slovakia, represented by Robert Fico’s Smer (Direction) party, which is leading in opinion polls ahead of the next year’s elections, will most likely reach a similar conclusion. 
Viktor Orban’s Fidesz party, which could win Hungary’s elections next spring, provides a particularly instructive example. 
In the mid-1990’s, before becoming the governing party, it pandered openly to nationalist and populist sentiment in order to win votes. 
But by the time its government was replaced in 2002, by the current Socialist-led administration, Fidesz’s record was rather pro-European. 
In other words, while populist-nationalist forces could well make further gains next year – even allying themselves, like the PiS, with far-right parties to win support for their policies – Central Europe is unlikely to revert to the virulent nationalism for which it was once infamous. 
Havel is right that the region will sober up after its political hangover. 
But, as with real hangovers, it won’t be pretty to watch. 

Containing the Populist Contagion 
PRINCETON – With populism seemingly going viral in the advanced economies, the political establishment is in retreat. 
Outsiders are achieving significant political victories by making dramatic promises to shake up or overthrow the system. 
The populists’ enemies are members of the “global elite,” who have betrayed national values; and yet their revolt against what US President-elect Donald Trump calls “globalism” also aspires to be a global phenomenon, and actually depends on its own brand of internationalism. 
Contagion is a well-understood process in finance. 
A shock in one place produces tremors elsewhere, even when there are no direct financial links, because pattern-seeking market participants perceive fundamental forces at work. 
Today’s populist revolt is exhibiting a similar dynamic. 
Trump promised in advance that his victory would be Brexit in spades; and, indeed, when he won, Dutch and French far-right political forces immediately saw his election as a portent of what is to come. 
So, too, did the “No” campaign in Italy’s upcoming constitutional referendum – upon which Italian Prime Minister Matteo Renzi has bet his political future. 
An obvious historical parallel for today is the interwar period of the twentieth century, when Vladimir Lenin presented Soviet communism as a global brand, and founded the Communist International. 
Benito Mussolini’s Italian fascism – a response to Lenin’s movement – also adopted an internationalist stance: colored-shirt movements, imitating Mussolini’s Black Shirts, emerged in Europe, Latin America, and Asia, to elevate authoritarianism as an alternative model to liberalism. 
While intensely nationalist movements such as Mussolini’s fascists and Adolf Hitler’s Nazis did compete with one another over who was more genuinely fascist, they ultimately united to oppose the liberal order. 
Similarly, today’s political revolt may be following an unstoppable logic, whereby every country must close itself off to trade, migration, and capital flows, or risk losing out in a zero-sum game. 
This raises a fundamental question: can a firewall be built to prevent such political contagion? 
Two measures are generally used to stop financial crises and stem financial contagion: international rescue packages and financial reforms. 
Similarly, we can envisage a political counterpart to such interventions, perhaps with reforms to global governance institutions and existing democratic frameworks. 
After all, many problems that now affect individual countries are, in fact, transnational, and cannot be addressed by one country alone. 
The most obvious example is climate change, which produces droughts and repeated crop failures, and thus mass-migration flows. 
But today’s populists have made a point of refusing to think collectively, or engage internationally. 
Anything that looks like a transnational issue is immediately deemed irrelevant to national concerns, and any coordinated international action is ridiculed and held up as a failure. 
Perhaps today’s contagious populism will create the conditions for its own destruction. 
The substantial uncertainty that it implies could deter investment and choke off growth in already-fragile economies. 
But autocratic, populist thinking can also thrive off that fear, which is why self-styled “illiberal democrats” promise certainty and continuity, and often make a pact with some part of the business class to guarantee it. 
At the moment, the United Kingdom provides a striking example of post-populist economics at work. 
The outcome of June’s Brexit referendum did not cause the economic catastrophe that much of the “Remain” camp had predicted it would. 
But Brexit’s aftermath has nevertheless been marked by considerable uncertainty and fundamentally incompatible proposals for the country’s future, which has provoked political infighting in Parliament and within UK Prime Minister Theresa May’s government. 
With its attendant economic angst and political tension, Brexit is hardly an attractive model for other European countries to emulate. 
And, indeed, opinion polls have shown increased support for the European Union in most, but not all, member countries since the referendum was held. 
Trump’s upcoming presidency will likely create similar problems, and the president-elect’s promise to remain “unpredictable” could tarnish the populist model further, especially if fears of a trade war, or a dramatic spike in the dollar, owing to looser fiscal policy and tighter monetary policy, cause additional economic uncertainty. 
But the US may be uniquely resilient: because it has historically been the global safe haven in times of economic uncertainty, it may be less affected than other countries by political unpredictability. 
After the 2008 financial crisis – a crisis that unambiguously originated in the US – the safe-haven effect caused the dollar to strengthen as capital inflows rose. 
This has also been the case in the weeks since Trump’s victory. 
Thus, the economics of US populism will not necessarily fail, at least not immediately, and this could increase its appeal in the eyes of autocratic and nationalist leaders who come to see Trump as a colleague and role model. 
Japanese Prime Minister Shinzo Abe has wasted no time in signing on to Trump’s agenda. 
A big country like the US can generally impose the costs of its unpredictability on other countries, and especially on emerging markets. 
But smaller countries, such as the UK, tend to face more immediate costs, in addition to being more vulnerable to big countries’ populist policies. 
As countries reflect on these lessons, they could begin to form defensive regional blocs to protect themselves from the populist contagion. 
For example, China could start to speak for all of Asia; and the EU might finally find ways to unite against those who would tear it apart. 
At worst, this new regionalism could fuel geopolitical animosities and reprise the tensions of the 1930s; at best, regional integration could set the stage for sorely needed governance reforms, and thus clear a way out of the populist trap. 

Populism for the Rich 
BUCHAREST – I recently joined a tour in Bucharest of the Palace of Parliament, the gigantic folly built in the 1980s on the orders of the late Romanian dictator Nicolae Ceauşescu, who was executed before he could see it finished. 
The statistics rehearsed by our guide were staggering: the third biggest edifice in the world, 220,000 square feet of carpet, one million cubic meters of marble, 3,500 tons of crystal. 
The enormous marble stairways had to be rebuilt several times to match exactly the steps of the dictator, who was a small man. 
To construct this neoclassical monstrosity, an entire swath of the city, a beautiful area of eighteenth-century houses, churches, and synagogues, was razed, displacing 40,000 people. 
More than a million people worked on the project non-stop day and night. 
It pretty much bankrupted the state, even as Ceauşescu’s subjects had to do without heat and electricity for much of the time. 
It still costs more than $6 million a year to maintain the palace, which now houses the Romanian parliament and an art museum, leaving 70% of the building unused. 
Ceauşescu’s folly is a monument to megalomania. 
But it is by no means unique, except in its size (though Turkish President Recep Tayyip Erdoğan has tried to rival it in scale with his new palace in Ankara). 
It is indeed remarkable how megalomaniacs of a certain kind think alike, or at least share a similar taste in architecture. 
Hitler’s plans for the reconstruction of Berlin reflected the same neoclassical gigantism. 
And the interior of the palace in Bucharest, a kind of Louis XIV style on steroids, is just a more extravagant version of Donald Trump’s living quarters in Florida and New York. 
These places are what you get when socially insecure outsiders dream of being the Sun King. 
To mention Trump in the same breath as Hitler and Ceauşescu is perhaps unfair. 
Trump is not a murderous tyrant. 
And his social background is more complicated. 
Hitler was the son of a minor customs official, and Ceauşescu was of poor peasant stock. 
Both men felt small and provincial in their capital cities. 
Their way of dominating the more sophisticated urban elites was to oppress them violently and rebuild the cities according to their own grandiose dreams. 
Trump, too, wants everything bearing his name to be bigger and shinier than everything else. 
But he was born in New York and inherited a considerable amount of money from his father, Fred Trump, a real-estate developer with a somewhat shady reputation. 
And yet he, too, appears to seethe with resentment against the elites who might look down on him as an uncouth arriviste, with his absurd golden skyscrapers and rococo mansions full of gilded chairs and massive chandeliers. 
Modern populism is often described as a new class war between the beneficiaries of a globalized world and those who feel left behind. 
Supporters of Trump in the United States and of Brexit in the United Kingdom are, on the whole, less educated than the “establishment��� they oppose. 
But they could never have gotten as far as they have on their own. 
The Tea Party in the US would have been relatively marginal without powerful backers and demagogues. 
And these are often newly rich men who share their followers’ bitterness. 
This was clearly the case in Italy, where former Prime Minister Silvio Berlusconi, whose background is almost identical to Trump’s, managed to tap into the dreams and resentments of millions of people. 
Populist movements in other countries show a similar pattern. 
In Thailand, the Sino-Thai business tycoon Thaksin Shinawatra, the son of a nouveau-riche father like Berlusconi and Trump, ran against Bangkok’s social and political elites, becoming Prime Minister with the backing of provincial and rural voters, before being ousted in a military coup. 
In the Netherlands, a newly rich class of real-estate moguls backed the right-wing populist Pim Fortuyn and his cruder successor, Geert Wilders. 
The newly rich are as important a force in the rise of populism as the poorer and less educated people who feel neglected by the elites. 
Despite huge inequalities of wealth, they share a deep anger at those whom they suspect of looking down on them. 
And they are not entirely wrong. 
No matter how many palaces or yachts new money can acquire, old money will continue to despise the acquirer. 
Likewise, the educated urban class tends to dismiss the voters who supported Brexit or back Trump as stupid and ill-bred. 
It is the fusion of resentments, felt by the newly rich as much as by the left behind, that drives right-wing populism. 
In extreme circumstances, this can result in dictatorship, with the tyrant free to indulge bizarre fantasies at the expense of millions under their control. 
So far, in Europe and the US, the demagogues can only serve up dreams: taking back our country, making it great again, and so on. 
To stop such dreams from becoming political nightmares, something more is needed than technocratic expertise, or calls for civility and moderation. 
Angry people cannot easily be persuaded by luminous reason. 
They must be offered an alternative vision. 
The problem today, all over the world, is that such an alternative is not readily at hand. 
The French Revolution happened more than two centuries ago. 
“Liberty, Equality, and Fraternity” is only a historic slogan today. 
But this might be a good time to update it. 

Managing the Economic Consequences of Nationalism 
LAGUNA BEACH – The aftermath of the United Kingdom’s unexpected vote in June to leave the European Union is being monitored closely. 
People all over the world – and particularly in Europe – want to know how Brexit will unfold, not just to manage its specific effects, but also to gain insight into what is likely to happen if other upcoming votes tip in favor of nationalist agendas. 
Those agendas are certainly making a political comeback. 
In Germany, which will hold a general election in 2017, support for the far-right Alternative for Germany (AfD) is on the rise, exemplified in the party’s strong showing in recent state elections. 
In France, the National Front’s leader, Marine Le Pen, hopes to ride nationalism to power in next year’s presidential election. 
The trend is not exclusive to Europe. 
In the United States, Republican presidential candidate Donald Trump has promised to impose trade tariffs on China, build a wall on the border with Mexico, and bar Muslims from entering the country. 
So what economic consequences would a vote for nationalism have? 
Judging by the Brexit referendum, the immediate effects could include financial-market turmoil and a shock to consumer and investor confidence. 
But this could give way rather quickly to an economic and financial calm. 
The real question is what comes next. 
To be sure, the calm that has set in in Britain is tenuous. 
Pre-referendum predictions that a vote for Brexit would lead to substantial economic pain and financial volatility remain likely to materialize. 
The severity of the effects will depend on how the UK and its European partners negotiate their tricky separation, particularly the extent to which free trade and financial passporting are upheld. 
But, for now, volatility remains contained. 
That can be attributed partly to Prime Minister Theresa May’s new government, which has purposely adopted a gradual approach to the Brexit process. 
May has also made it clear that she and her Cabinet members are not in the business of providing regular progress reports. 
The Bank of England has also helped, by injecting liquidity into the economy almost immediately. 
Moreover, the BoE has convincingly reassured market participants that it is committed to maintaining financial stability and avoiding the disorder that malfunctioning markets can cause. 
The BoE’s vigilance, together with the fact that economic and financial arrangements with Europe have yet to be altered, has convinced companies and households to postpone plans to change their behavior. 
They are now waiting to see whether the UK negotiates a “soft” or “hard” Brexit before they make any significant moves. 
Britain’s ability to restore a sense of calm amid far-reaching uncertainty about its economic and financial future shows how, with the right approach, political actors can manage shocks and surprises. 
Had Britain’s leaders rushed to dismantle long-standing trading systems and other economic and financial arrangements with the EU, before developing a credible and comprehensive alternative, the situation could be much more volatile. 
Others aspiring to advance similarly inward-looking agendas – be they nationalistic European parties seeking to roll back international connectivity or US presidential candidates proposing tariffs that could well trigger retaliation from trading partners – should take note. 
Of course, under the current circumstances, there are limits to the beneficial effects of sound UK leadership. 
When the details of Britain’s divorce from the EU are eventually announced, companies and households will respond, particularly if the country’s trading, economic, and financial linkages with the EU change considerably. 
That response, it seems almost inevitable, will hurt economic growth and spur financial volatility. 
But here, too, a measured and cautious approach can help. 
The UK government should do its utmost to conduct the most sensitive parts of the negotiations with its European partners in secret. 
When it is time to announce changes, it should do so in the context of a larger program of credible domestic reforms that target strong, inclusive growth and improved financial stability. 
It is not easy to keep an airplane flying smoothly while changing the engines. 
And that is precisely the challenge the May government faces. 
It is now preparing for this ultra-delicate maneuver by identifying and arranging the components of the new engine, and planning for their quick assembly; only then will it be able to dismantle the engine of European trade without risking heavy turbulence, or even a painful crash. 
But even with a carefully sequenced plan in place, May’s government will need to show a level of resilience and agility far beyond what has been required of its predecessors, in order to manage the transition without veering off the path of growth and stability. 
The same would be true for any other nationalist political figure or party that came to power. 
The question is whether any of them would be equal to such a complex challenge. 

Putting the Populist Revolt in Its Place 
CAMBRIDGE – In many Western democracies, this is a year of revolt against elites. 
The success of the Brexit campaign in Britain, Donald Trump’s unexpected capture of the Republican Party in the United States, and populist parties’ success in Germany and elsewhere strike many as heralding the end of an era. 
As Financial Times columnist Philip Stephens put it, “the present global order – the liberal rules-based system established in 1945 and expanded after the end of the Cold War – is under unprecedented strain. 
Globalization is in retreat.” 
In fact, it may be premature to draw such broad conclusions. 
Some economists attribute the current surge of populism to the “hyper-globalization” of the 1990s, with liberalization of international financial flows and the creation of the World Trade Organization – and particularly China’s WTO accession in 2001 – receiving the most attention. 
According to one study, Chinese imports eliminated nearly one million US manufacturing jobs from 1999 to 2011; including suppliers and related industries brings the losses to 2.4 million. 
As the Nobel laureate economist Angus Deaton argues, “what is crazy is that some of the opponents of globalization forget that a billion people have come out of poverty largely because of globalization.” 
Even so, he adds that economists have a moral responsibility to stop ignoring those left behind. 
Slow growth and increased inequality add fuel to the political fire. 
But we should be wary of attributing populism solely to economic distress. 
Polish voters elected a populist government despite benefiting from one of Europe’s highest rates of economic growth, while Canada seems to have been immune in 2016 to the anti-establishment mood roiling its large neighbor. 
In a careful study of rising support for populist parties in Europe, the political scientists Ronald Inglehart of the University of Michigan and Pippa Norris of Harvard found that economic insecurity in the face of workforce changes in post-industrial societies explained less than cultural backlash. 
In other words, support for populism is a reaction by once predominant sectors of the population to changes in values that threaten their status. 
“The silent revolution of the 1970s appears to have spawned an angry and resentful counter-revolutionary backlash today,” Inglehart and Norris conclude. 
In the US, polls show that Trump’s supporters are skewed toward older, less-educated white males. 
Young people, women, and minorities are under-represented in his coalition. 
More than 40% of the electorate backs Trump, but with low unemployment nationally, only a small part of that can be explained primarily by his support in economically depressed areas. 
On the contrary, in America, too, there is more to the resurgence of populism than just economics. 
A YouGov poll commissioned by The Economist found strong racial resentment among supporters of Trump, whose use of the “birther” issue (questioning the validity of the birth certificate of Barack Obama, America’s first black president) helped put him on the path to his current campaign. 
And opposition to immigration, including the idea of building a wall and making Mexico pay for it, was an early plank in his nativist platform. 
And yet a recent Pew survey shows growing pro-immigrant sentiment in the US, with 51% of adults saying that newcomers strengthen the country, while 41% believe they are a burden, down from 50% in mid-2010, when the effects of the Great Recession were still acutely felt. 
In Europe, by contrast, sudden large influxes of political and economic refugees from the Middle East and Africa have had stronger political effects, with many experts speculating that Brexit was more about migration to Britain than about bureaucracy in Brussels. 
Antipathy toward elites can be caused by both economic and cultural resentments. 
The New York Times identified a major indicator of Trump-leaning districts: a white-majority working-class population whose livelihoods had been negatively affected throughout the decades in which the US economy shed manufacturing capacity. 
But even if there had been no economic globalization, cultural and demographic change would have created some degree of populism. 
But it is an overstatement to say that the 2016 election highlights an isolationist trend that will end the era of globalization. 
Instead, policy elites who support globalization and an open economy will have to be seen to be addressing economic inequality and adjustment assistance for those disrupted by change. 
Policies that stimulate growth, such as infrastructure investment, will also be important. 
Europe may differ because of heightened resistance to immigration, but it would be a mistake to read too much about long-term trends in American public opinion from the heated rhetoric of this year’s election campaign. 
While the prospects for elaborate new trade agreements have suffered, the information revolution has strengthened global supply chains and, unlike in the 1930s (or even the 1980s), there has not been a reversion to protectionism. 
In fact, the US economy has increased its dependence on international trade. 
According to World Bank data, from 1995 to 2015, merchandise trade as a percentage of total GDP has increased by 4.8 percentage points. 
Moreover, in the age of the Internet, the transnational digital economy’s contribution to GDP is rapidly increasing. 
In 2014, the US exported $400 billion in information and communication technologies (ICT)-enabled services – almost half of all US services exports. 
And a poll released last month by the Chicago Council on Foreign Relations found 65% of Americans agreeing that globalization is mostly good for the US, while 59% say that international trade is good for the country, with even stronger support among the young. 
So, while 2016 may be the year of populism in politics, it does not follow that “isolationism” is an accurate description of current American attitudes toward the world. 
Indeed, in crucial respects – namely, on the issues of immigration and trade – Trump’s rhetoric appears to be out of step with most voters’ sentiments. 

The Crisis of Market Fundamentalism 
LONDON – The biggest political surprise of 2016 was that everyone was so surprised. 
I certainly had no excuse to be caught unawares: soon after the 2008 crisis, I wrote a book suggesting that a collapse of confidence in political institutions would follow the economic collapse, with a lag of five years or so. 
We’ve seen this sequence before. 
The first breakdown of globalization, described by Karl Marx and Friedrich Engels in their 1848 The Communist Manifesto, was followed by reform laws creating unprecedented rights for the working class. 
The breakdown of British imperialism after World War I was followed by the New Deal and the welfare state. 
And the breakdown of Keynesian economics after 1968 was followed by the Thatcher-Reagan revolution. 
In my book Capitalism 4.0, I argued that comparable political upheavals would follow the fourth systemic breakdown of global capitalism heralded by the 2008 crisis. 
When a particular model of capitalism is working successfully, material progress relieves political pressures. 
But when the economy fails – and the failure is not just a transient phase but a symptom of deep contradictions – capitalism’s disruptive social side effects can turn politically toxic. 
That is what happened after 2008. 
Once the failure of free trade, deregulation, and monetarism came to be seen as leading to a “new normal” of permanent austerity and diminished expectations, rather than just to a temporary banking crisis, the inequalities, job losses, and cultural dislocations of the pre-crisis period could no longer be legitimized – just as the extortionate taxes of the 1950s and 1960s lost their legitimacy in the stagflation of the 1970s. 
If we are witnessing this kind of transformation, then piecemeal reformers who try to address specific grievances about immigration, trade, or income inequality will lose out to radical politicians who challenge the entire system. 
And, in some ways, the radicals will be right. 
The disappearance of “good” manufacturing jobs cannot be blamed on immigration, trade, or technology. 
But whereas these vectors of economic competition increase total national income, they do not necessarily distribute income gains in a socially acceptable way. 
To do that requires deliberate political intervention on at least two fronts. 
First, macroeconomic management must ensure that demand always grows as strongly as the supply potential created by technology and globalization. 
This is the fundamental Keynesian insight that was temporarily rejected in the heyday of monetarism during the early 1980s, successfully reinstated in the 1990s (at least in the US and Britain), but then forgotten again in the deficit panic after 2009. 
A return to Keynesian demand management could be the main economic benefit of Donald Trump’s incoming US administration, as expansionary fiscal policies replace much less efficient efforts at monetary stimulus. 
The US may now be ready to abandon the monetarist dogmas of central-bank independence and inflation targeting, and to restore full employment as the top priority of demand management. 
For Europe, however, this revolution in macroeconomic thinking is still years away. 
At the same time, a second, more momentous, intellectual revolution will be needed regarding government intervention in social outcomes and economic structures. 
Market fundamentalism conceals a profound contradiction. 
Free trade, technological progress, and other forces that promote economic “efficiency” are presented as beneficial to society, even if they harm individual workers or businesses, because growing national incomes allow winners to compensate losers, ensuring that nobody is left worse off. 
This principle of so-called Pareto optimality underlies all moral claims for free-market economics. 
Liberalizing policies are justified in theory only by the assumption that political decisions will redistribute some of the gains from winners to losers in socially acceptable ways. 
But what happens if politicians do the opposite in practice? 
By deregulating finance and trade, intensifying competition, and weakening unions, governments created the theoretical conditions that demanded redistribution from winners to losers. 
But advocates of market fundamentalism did not just forget redistribution; they forbade it. 
The pretext was that taxes, welfare payments, and other government interventions impair incentives and distort competition, reducing economic growth for society as a whole. 
But, as Margaret Thatcher famously said, “[…] there’s no such thing as society. 
There are individual men and women and there are families.” 
By focusing on the social benefits of competition while ignoring the costs to specific people, the market fundamentalists disregarded the principle of individualism at the heart of their own ideology. 
After this year’s political upheavals, the fatal contradiction between social benefits and individual losses can no longer be ignored. 
If trade, competition, and technological progress are to power the next phase of capitalism, they will have to be paired with government interventions to redistribute the gains from growth in ways that Thatcher and Reagan declared taboo. 
Breaking these taboos need not mean returning to the high tax rates, inflation, and dependency culture of the 1970s. 
Just as fiscal and monetary policy can be calibrated to minimize both unemployment and inflation, redistribution can be designed not merely to recycle taxes into welfare, but to help more directly when workers and communities suffer from globalization and technological change. 
Instead of providing cash handouts that push people from work into long-term unemployment or retirement, governments can redistribute the benefits of growth by supporting employment and incomes with regional and industrial subsidies and minimum-wage laws. 
Among the most effective interventions of this type, demonstrated in Germany and Scandinavia, is to spend money on high-quality vocational education and re-training for workers and students outside universities, creating non-academic routes to a middle-class standard of living. 
These may all sound like obvious nostrums, but governments have mostly done the opposite. 
They have made tax systems less progressive and slashed spending on education, industrial policies and regional subsidies, pouring money instead into health care, pensions, and cash hand-outs that encourage early retirement and disability. 
The redistribution has been away from low-paid young workers, whose jobs and wages are genuinely threatened by trade and immigration, and toward the managerial and financial elites, who have gained the most from globalization, and elderly retirees, whose guaranteed pensions protect them from economic disruptions. 
Yet this year’s political upheavals have been driven by elderly voters, while young voters mostly supported the status quo. 
This paradox shows the post-crisis confusion and disillusionment is not yet over. 
But the search for new economic models that I called “Capitalism 4.1” has clearly started – for better or worse. 

War Against the West 
NEW YORK – In 1938, Aurel Kolnai, a Hungarian philosopher of Jewish origin living in exile, published his most famous book, The War Against the West, an investigation of the ideas underpinning National Socialism. 
Kolnai seems to have read every turgid treatise – most written by third-rate thinkers – extolling the martial, self-sacrificing, blood-and-soil virtues of the Land of Heroes, and damning the materialistic, liberal democratic, bourgeois societies in the Lands of Merchants (that is to say, the West). 
The Land of Heroes was of course Nazi Germany, and the West, corrupted by Jewish money and noxious cosmopolitanism, was represented by the US and Britain. 
You had to share the same blood to belong to the heroic German Volk, whereas citizenship in the Anglo-Saxon world was open to immigrants who agreed to abide by the law. 
This idea of two distinct models of citizenship goes back at least as far as the late nineteenth century, when Germany’s Kaiser Wilhelm II viewed Britain, America, and France with contempt for being mongrel societies, or indeed, in his phrase, “Jewified.” 
The “West” won the war, at least in the western half of Europe; the Soviet Union won in the east. 
And, instead of being punished, the former enemies were educated – through cultural and political programs, richly subsidized by US money – to be more like Americans. 
At the same time, the United States, with the help of Britain, set up a new international order after 1945, based on free trade, supranational institutions, and, in theory at least, the promotion of liberal democracy. 
And yet the war of ideas never really ended. 
Once again, liberal ideas, internationalism, and openness to immigrants, are under fire. 
Only marginal groups openly espouse National Socialism (though they, too, are becoming more conspicuous). 
But official hostility against cultural or religious minorities is back, as is the loathing of cosmopolitan elites. 
There is at least one good test of where people stand: their view of the international investor and philanthropist George Soros. 
Like Kolnai, Soros is a Hungarian-born Jew, and has lived his adult life in Britain and the US. 
After the collapse of the Soviet empire in the late 1980s, Soros has done more or less what US government agencies did after World War II. 
He has spent large chunks of his personal fortune on the promotion of liberal democratic values in former Communist countries. 
One of the many beneficiaries of his largesse is the current prime minister of Hungary, Viktor Orbán, who studied at Oxford on a Soros scholarship. 
Now, biting the hand that fed him, Orbán recently called Soros’s “trans-border empire” a vicious threat to Hungary’s national identity. 
Soros, in his view, is a “predator” backed by “tons of money.” 
Orbán is a fiery advocate of “illiberal democracy,” as are other elected autocrats in former Soviet satellites. 
“In every country, they will want to displace Soros,” he declared in December. 
Orbán is right about a few countries at least. 
The leader of Poland’s governing party, Jarosław Kaczyński, believes that groups backed by Soros want “societies without identity.” 
Liviu Dragnea, who leads the ruling party in Romania, goes further, saying that Soros has “financed evil.” 
What Soros is in fact financing in Romania are education programs, international scholarships, and NGOs helping to clean up the environment. 
Indeed, Soros might be described as the personification of “the West” as defined by Kolnai. 
He is everything that nativists and anti-Semites hate: rich, cosmopolitan, Jewish, and a liberal dedicated to what Karl Popper, yet another child of Jewish origin from the Austro-Hungarian Empire, called “the open society.” 
When the enemies of the open society were threatening Europe during the 1930s, there was at least a powerful counter model in Britain, and especially the US, bolstered by Franklin D. Roosevelt’s New Deal. 
Victims of continental European totalitarianism could still find refuge in that “West,” and even those who couldn’t still knew that fascists and Nazis had formidable enemies in London and Washington. 
We now live in a very different world. 
Britain has turned its back on Europe, rejecting the internationalism of the EU, and imbibing the poison from politicians who think that immigration is an existential threat to national identity. 
And then there is Donald Trump’s election as US president, which Orbán has called a new opportunity – “a gift” – for Hungary. 
Indeed, Soros emerged as a villainous cosmopolitan conspirator in the propaganda of Trump’s own campaign. 
Trump’s views on immigration – those incoming “rapists,” “terrorists,” and so on – have provided a huge moral boost to the enemies of the West. 
His “America first” approach, Islamophobia, support for torture, and attacks on the mainstream media are being used by anti-liberals and autocrats worldwide to justify closing their borders and crushing “enemies of the people” – with violence if need be. 
In this political climate, the counter-model to the closed society is withering. 
The West, as defined by Kolnai, does indeed face an existential threat, but not from immigrants, Islam, or NGOs financed by Soros. 
The most dangerous enemies of the West are people who often claim to be saving it, such as Orbán, France’s Marine Le Pen, the Netherlands’ Geert Wilders, Kaczyński, and Trump. 
There is, however, one hope in Europe that would have astonished Kolnai, who published his book the same year that Hitler’s soldiers marched into Austria and Czechoslovakia. 
Germany’s chancellor, Angela Merkel, may have made serious mistakes, notably in the way Greece was treated by the EU, but she has also been the staunchest European champion of liberal democratic ideas. 
We can only hope that Germany, the former Land of Heroes, holds firm in the latest war against the West. 

The Female Resistance 
WARSAW – Antagonism is mounting between today’s right-wing populists and a somewhat unexpected but formidable opponent: women. 
In the United States, much like in Poland, women’s rights have been among the first targets of attack by populist leaders. 
Women are not taking it lying down. 
Traditional conservatism in the West has largely come to terms with the need to grant women broad reproductive freedom. 
Today’s right-wing populist administrations, by contrast, are downright pre-modern in this regard, attempting to reverse reforms championed not just by the left – and long accepted by the conventional right. 
It is no secret that the mainstream consensus is a source of contempt – and success – for the modern populist, and not just on women’s rights. 
Donald Trump’s first acts as US President show an eagerness to reject longstanding norms in many other areas as well, including foreign affairs and economic policy. 
But it is the attack on women’s rights that is receiving the most powerful pushback. 
Poland’s de facto leader, Jarosław Kaczyński, has retreated politically only once since his party’s return to power in 2015. 
Last October, when thousands of women of all ages took to the streets in the “black protest,” his government was forced to withdraw from its plan to introduce a total ban on abortion. 
(Under the current law, abortion is allowed in the event of rape, severe fetal defects, or a threat to the health of the mother.) 
Similarly, of all the sources of opposition to Trump, only women have been able to organize quickly and efficiently. 
Last month’s Women’s March on Washington boasted a turnout some three times larger than Trump’s own inauguration the previous day. 
In other words, Trump began his term with a symbolic defeat at the hands of American women. 
Trump’s subsequent reinstatement of the “global gag rule,” which undermines women’s health in developing countries by defunding organizations that provide abortion counseling, could not obscure that loss, nor could his pledges to defund Planned Parenthood, which offers reproductive-health services in the US. 
Instead, women continued to resist – for example, by creating the #DressLikeAWoman hashtag on Twitter, to shine a spotlight on Trump’s sexist demand of female staffers. 
As women have stood in the path of the populists, mainstream political leaders and parties have practically cowered; unsurprisingly, they continue to lose ground. 
But women have not been entirely alone. 
NGOs and other kinds of social movements have also stepped up. 
Even the media have helped the cause; though they are not accustomed to such a blatantly political role, circumstances – such as Trump’s “war” on them – have forced their hand. 
The composition of the resistance actually makes considerable sense. 
Right-wing populism is, at its core, an attack on liberalism, not necessarily on democracy. 
Separation of powers, a free press, an independent judiciary, and free trade are liberal ideals; they are not democratic. 
Women have stood above the rest in the opposition, because they are, in many ways, the antithesis of right-wing populism, support for which comes primarily from poorly educated white men – the demographic cohort with the least comprehension of feminism. 
The question now is whether women can win the battle against the populists. 
While the answer is not yet clear, they do have a few powerful weapons in their arsenal. 
For starters, women are more numerous than any other single social group, including blacks, Latinos, the left, the right, liberals, conservatives, Catholics, and Protestants. 
There are more women than there are white men in the US – or in Poland, for that matter. 
And, most important, women far outnumber populists. 
(Women must fight for their rights as if they were a minority, though they are a majority, and as if they lacked human capital, though, in the West, they tend to be better educated than men.) 
Moreover, women are everywhere, and discrimination, to varying degrees, is part of all women’s experiences. 
This makes women something of a revolutionary class, in the Marxist sense.It also makes it relatively easy for women to build solidarity. 
During Poland’s black protest, thousands more people protested in solidarity, from Berlin (where several thousand took to the streets) to Kenya (where about 100 people demonstrated). 
During the Women’s March on Washington, up to two million people marched in solidarity around the world. 
Clearly, women are a global force. 
Who better, then, to resist the likes of Trump, Kaczyński, and other right-wing populists, as they launch an assault on globalism? 
Perhaps the most important weapon in women’s arsenal is that they are unashamed. 
While the twentieth century was characterized by discipline through fear, the twenty-first century has been characterized by repression through shame. 
Unlike fear, shame can be hidden – and that’s the point. 
Whereas one can feel fear without losing one’s dignity, shame arises from feelings of inferiority. 
That is what women are rejecting in their anti-populist protests. 
Defending the rights of women to choose whether to have an abortion – particularly in places where abortion is still relatively accessible – amounts to defending women’s dignity and autonomy. 
Mainstream political parties, however, still experience shame, as do other traditional organizations like trade unions. 
They have scruples, and are concerned about how they are perceived. 
That makes them poorly equipped to stand up to the most shameless group of all: the populists. 
The likes of Kaczyński and Trump have benefited massively from their lack of shame, saying and doing whatever wins them the support of their political base. 
But women aren’t having it. 
They are throwing off the shackles of the shame that has long been used to repress them, and fighting fire with fire. 
Can the populists take the heat? 

Populists Are Sometimes Right 
Developing countries are often advised (or instructed) to undertake reforms recommended by "experts" who are called "technocrats" and are often backed by the IMF. 
Opposition to the reforms they propose is usually dismissed as "populist." 
Countries that fail to undertake these reforms are dismissed as craven or lacking political will, and soon suffer the consequences: higher interest rates when borrowing abroad. 
But look closely at some of these "technocratic" proposals: many are more often based on ideology than economic science. 
Technocrats can of course reliably make an electricity plant work better. 
The goal is simple: to produce electricity at as low a price as possible. 
This is mostly a matter of engineering, not politics. 
Economic policies are usually not technocratic in this sense. They involve tradeoffs: some may lead to higher inflation but lower unemployment; some help investors, others workers. 
Economists call policies where no one can be made better off without making someone else worse off Pareto efficient. 
If a single policy is better than all others for everyone , i.e., has no Pareto-efficient alternatives, it is said to be Pareto dominant . 
If choices among policies were purely Paretian, i.e., if no one was made worse off by choosing one policy, as against another, the choices involved would indeed be purely "technical." 
But in reality, few policy choices are Paretian. 
Instead, some policies are better for some groups, but worse for others. 
Different policies benefit and hurt different groups. 
In East Asia, for example, IMF bailouts helped international lenders, but hit workers and domestic firms hard. 
Different policies might have imposed more risk on international lenders, and less on workers and domestic firms. 
Deciding which policy to choose involves choices among values, not just technical questions about which policy is in some morally uncontroversial sense "better." 
These value choices are political choices , which cannot be left to technocrats. 
Of course, there is scope for technical analysis even when political choices are at the crux of the decision. 
Technocrats can sometimes help avoid Pareto inferior policies, that is, policies that make everyone worse off. 
Sometimes there are policies that can promote both growth and equality, and the job of good economists is to search for them. 
The problem is that many policies advanced by technocrats as if they were Pareto efficient are in fact flawed and make many people--sometimes entire countries--worse off. 
Look at the litany of technocratically inspired examples of privatization and deregulation in the 1990's. 
Banking "reform," for example, frequently soon required government bail-outs, leaving a few people much richer, but the country much poorer. 
These failures suggest that we should have less confidence in the supposed professional skills of technocrats--or at least less confidence than they have in themselves. 
But there is also a more fundamental point here. 
Democratic processes are likely to be more sensitive to the real consequences of policies, to the real tradeoffs involved. 
Of course, some criticisms of technocratic remedies may be populist posturing, but sometimes they contain insights that ivory-towered (and usually US-trained) technocrats miss. 
Consider the case of Mexico, where a proposal to raise revenue by taxing food and medicines consumed by the poor was, unsurprisingly, rejected by a democratically accountable legislature. 
Rejecting this proposal was not a matter of unbridled populism. 
The problem was with the proposal. 
Its advocates argued that efficiency required adopting a comprehensive Value Added Tax. 
Advanced industrial countries in Europe use such a tax. 
Developing countries, the technocrats said, should do likewise. 
But there is a fundamental difference between developed European countries and emerging markets: the size of the informal sector, from which VAT is not collected. 
This vast "black economy" makes VAT inefficient in most developing countries. 
Indeed, because VAT is a tax on the formal sector--the new factories, banks, and so forth that pay regular salaries and whose incomes and expenditures can easily be traced (as distinct from those of the cash-based street vendors, village enterprises, and poor farmers)--VAT impedes development. 
The logic is simple. 
Developing countries that impose a VAT perversely encourage production to remain in the informal sector, which often produces the goods that are consumed domestically or used as inputs in the developed world. 
But it is the formal sector that produces higher value-added manufactured goods that compete with developed countries. 
There are other sources of tax revenue in many developing countries that are both more equitable and distort economic incentives far less than VAT. 
Many developing countries lack a corporate income tax: the huge profits of the telecom, cement, and other monopoly sectors escape taxation. 
(If one worried about double taxation, one could allow a credit for corporate taxes on individual tax returns.) 
It may also be possible to impose taxes on luxury goods (many of which are imported), thereby promoting equity without stifling growth. 
Economic theory supports a VAT only if one does not care about distribution and if one can impose a tax on all commodities. 
You don't need an economics doctorate to recognize that, in developing countries, you can't impose a tax on all commodities. 
Moreover, you should care about equity. 
So the next time you hear rumblings in the legislature of an emerging democratic country against this or that "technocratic" proposal, think twice before dismissing the deputies' doubts as populist rants. 
Perhaps the populists are popular because they know something that the technocrats don't. 

Populists Can be Right 
Does the rise of left-leaning governments in Latin America, particularly the election of Evo Morales as President of Bolivia, presage a shift to the hard left across the continent? 
Does it mark a repudiation of United States foreign policy in the region? 
Will it, for example, lead to a re-nationalization of Bolivia’s vast natural gas deposits? 
These are vital questions, but they miss the larger significance of the rise of someone like Morales, for he is Bolivia’s first indigenous elected head of state. 
His victory marks a step forward in Latin America’s overall democratization, with positive long-term significance for economic and social development in the region. 
To understand why, it is helpful to take a broad view of Latin America’s history and economic development. 
The societies of the Americas were forged by European conquests of indigenous populations, and by the racial and ethnic divisions that followed. 
Both the US and Latin America are still coming to terms with those historic divisions. 
The Europeans who conquered and colonized the Americas after 1492 did not find vast empty lands, as they sometimes proclaimed, but rather lands populated by communities dating back thousands of years. 
A large portion of the indigenous populations quickly succumbed to diseases and hardships brought by the European colonizers, but many survived, often in dominant numbers, as in Bolivia and much of the highlands of the Andes mountain region. 
Almost everywhere, these surviving indigenous populations became subservient members of European-led societies. 
The Europeans then brought millions of African slaves to the Americas. 
After emancipation in the nineteenth century, the African-American communities remained impoverished and largely bereft of political rights. 
Thus, vast inequalities of power, social standing, and economic well-being were part and parcel of the forging of the Americas. 
Indigenous, African-American, and mestizo (mixed) communities have been fighting for their social, political, and economic rights ever since. 
Democracy in Latin America has been a hard-won struggle. 
Even in the US, a country that fancies itself as a model of democracy, African-Americans were not truly enfranchised until the mid-1960’s. 
In Latin America, democracy has similarly been incomplete, unstable, and often inaccessible to indigenous, African-American, and mixed populations. 
Moreover, given the vast inequalities of power and wealth in Latin America, and with a large part of the population bereft of land and education, the region has long been vulnerable to populist politics and rebellions, with leaders promising quick gains for the dispossessed by seizing property from the elites. 
The elites have fought back, often brutally, to protect their property. 
Politics has therefore often been more a violent than an electoral struggle, and property rights have often been tenuous. 
A dominant pattern in both the US and Latin America has been the resistance of the dominant white communities to sharing in the financing of public investments in the “human capital” (health and education) of the black and indigenous communities. 
While European societies have developed social welfare states with universal access to public health and education services, elites throughout the Americas have tended to favor private-sector provision of health and education, in part reflecting white populations’ unwillingness to pay for social services for other ethnic and racial groups. 
Morales’ election in Bolivia – where indigenous groups are estimated to comprise around 55% of the population and mixed-race people account for another 30% – should be viewed against this historical backdrop. 
Moreover, Bolivia is not alone: the shift from military rule to democratic politics in Latin America during the past 20 years is gradually, fitfully, but consistently, broadening political empowerment beyond the traditional elites and dominant ethnic groups. 
In Peru, for example, Alejandro Toledo is that country’s first indigenous president. 
In the longer term, the spread of democracy in Latin America promises not only fairer societies, but also economically more dynamic societies, through increased public investments in health, education, and job skills. 
The region’s chronic under-investment in education, particularly in science and technology, is partly responsible for its economic stagnation during the past quarter-century. 
Unlike East Asia and India, most of Latin America did not make a breakthrough to high-technology industries, instead suffering a period of low GDP growth, debt crises, and macroeconomic instability. 
This can now change, at least gradually. 
Bolivia would do well to follow the example of its eastern neighbor, Brazil, which has experienced a surge in educational and scientific investments since its democratization in the 1980’s. 
Rising educational attainment is helping to promote more technologically sophisticated exports as well. 
Of course, Morales’ election also raises many important short-term doubts and questions. 
Will the new government follow responsible economic policies, or will Bolivia flirt yet again with destabilizing populist measures, as it has done so often in the past? 
Will Morales renegotiate the laws and contracts governing Bolivia’s vast natural gas reserves, as his government is rightly committed to do, in a way that does not scare away urgently needed foreign investment? 
Bolivia has entered a new era of mass mobilization of its long-suffering but now victorious indigenous communities. 
The short-term outlook is uncertain. 
In the longer run, however, it’s right to bet on the economic benefits of democratization. 


The Inclusion Imperative 
WASHINGTON, DC – Great advances have been made toward meeting the Millennium Development Goals (MDGs) since they were initiated in 2000. 
But, unfortunately, many countries still remain far from achieving them, and, even in countries that have made substantial progress, some groups – including indigenous peoples, residents of slums or remote areas, religious or other minorities, and people with disabilities – are consistently left out. 
As a recent World Bank report emphasizes, understanding the causes of exclusion is critical to ensuring that future development efforts are more effective and inclusive. 
Social and economic exclusion is not only a moral problem; it is also extremely costly. 
A 2010 World Bank report on the exclusion of the Roma from educational and economic systems in Europe estimated annual productivity losses of at least $172 million in Serbia, $273 million in the Czech Republic, and $660 million in Romania (using April 2010 exchange rates). 
These losses reflect the far-reaching consequences of exclusion. The World Health Organization and the World Bank found that children with disabilities are less likely to enter school than their non-disabled peers – and that they also stay in school at lower rates. 
In Indonesia, there is a 60% discrepancy between the share of disabled and non-disabled children attending primary school and a 58% discrepancy for secondary school. 
The resulting feelings of exclusion and alienation can undermine social cohesion and even lead to unrest and conflict. 
The emerging development agenda that will succeed the MDGs reflects a more acute awareness of the critical importance of inclusivity. 
In its report on the post-2015 agenda, the High-Level Panel of Eminent Persons emphasized inclusion, stating that “no person – regardless of ethnicity, gender, geography, disability, race, or other status – is denied universal human rights and basic economic opportunities.” 
The next development agenda, it asserts, must “end discrimination” and “tackle the causes of poverty, exclusion, and inequality.” 
Given this, it is not surprising that inclusion is a cornerstone of the ambitious new proposal for the MDGs successor, the Sustainable Development Goals (SDGs) – beginning with the goal-selection process, in which developing countries are playing a leading role. 
Achieving goals for social and economic inclusion will not be easy. 
Targets must be clearly defined, measurable, and actionable, and they must be supported by effective monitoring, evaluation, and shared frameworks of accountability. 
Moreover, a system must be created to help countries transform the global goals agreed at the United Nations into concrete measures that suit their particular economic circumstances and social norms. 
To this end, Mexico’s government has hosted a series of workshops this year that have engaged representatives from governments, UN agencies, multilateral development banks, and academia to share visions, best practices, and methodologies to implement, measure, and monitor inclusive and sustainable goals. 
These discussions were informed by the international community’s commitment to tackling the structural causes of poverty, inequality, and environmental degradation. 
Social and economic inclusion lie at the heart of the World Bank Group’s goals of eliminating extreme poverty and boosting shared prosperity. 
After all, these objectives cannot be achieved unless investment in development benefits everyone; ensuring this requires a focus on groups that have consistently been marginalized. 
That is why the World Bank Group established equality as a key theme of this year’s Annual Meetings of the World Bank and the International Monetary Fund. 
Policies and programs that seek to address social inclusion do not necessarily do more; rather, they do things differently. 
With such an approach, South Africa has made considerable progress from institutionalized segregation toward an ideal of a “rainbow nation” in just two decades. 
Similarly, Bangladesh has advanced inclusion by expanding participation in its once-exclusionary system of informal local justice, the shalish. 
Vietnam’s Northern Mountains Poverty Reduction Project, created to provide improved social services and sustainable infrastructure to the region’s poor villagers, demonstrated the vital role that ethnic minority community members can play in development initiatives. 
Finally, Mexico’s Inclusive Early Childhood Development Compensatory Education Project, focused on expanding access to early-childhood-development services and improving learning outcomes in the most marginalized municipalities, has engaged with excluded groups to identify their specific needs. 
For example, it provides bilingual education, as requested by indigenous parents. 
Of course, designing an inclusive post-2015 development agenda is only the first step. 
Its successful implementation will require bold policies and strengthened global cooperation that address both the impact of inclusion and its underlying causes. 
Moreover, world leaders must apply the key lessons of the MDGs: clear targets, adequate financing, and better data are essential to evidence-based policy and monitoring its effectiveness. 
With such an approach, the next development agenda can finally ensure that all groups gain in terms of economic opportunity and social progress. 

Post-American Israel 
PARIS – Israel is one of the only places in the world where Georges W. Bush can be greeted with real enthusiasm and even affection. 
The most unpopular American president in recent history thus relished his recent triumphal welcome in Jerusalem, where he was the guest of honor of the International Conference planned and devised by Israeli President Shimon Peres on the occasion of the 60th anniversary of the creation of the Jewish state. 
Historical revisionism was near the top of the agenda, with the United States portrayed as Israel’s most faithful supporter and ally since 1948. 
But in fact, George C. Marshall, the US secretary of state in 1948, sought to prevent President Harry Truman from recognizing Israel. 
Likewise, the Suez crisis of 1956, when the US thwarted a joint French, British, and Israeli plan to seize the Suez Canal, was presented in a politically correct light, as were Henry Kissinger’s complex diplomacy during the Yom Kippur War of 1973. 
The hugging and kissing between Bush, Peres, and Israeli Prime Minister Olmert were undeniably moving, but they were also troubling – and not only because serious references to the Palestinians were, for the most part, not on the agenda. 
One had the feeling that this was something akin to dancing on the Titanic – the culmination of a privileged partnership at its tipping point, a grand gala for something that was about to disappear. 
This is not only a matter of leaders – Bush and Olmert – on their way out. 
Beyond the celebration of eight exceptional years of “unique friendship” under Bush, it also seemed clear that the 41-year-old special relationship inaugurated by the Six Day War in 1967, when the US became Israel’s main backer, might be coming to an end. 
The next US president, whether he is Barack Obama or John McCain, will certainly maintain the close bilateral alliance. 
But it will not be the same: even if America remains an indispensable nation, it will no longer be the only one. 
While Bush was in Jerusalem, so was India’s Lakmar Mittal, the king of the world’s steel industry. 
If Bush was the departing present, Mittal represents the incipient future, in which America will have to share influence with emerging powers such as China, India, Russia, Brazil, and eventually, if its members get their act together, the European Union. 
In fact, Israelis are already debating the meaning of the emerging post-American “multi-polar world” for their country’s security. 
Will it really be such a bad thing, or might it hold some redeeming value? 
The close bond between Israel and Bush’s America can in retrospect be seen as a mixed blessing – a special relationship that contributed to the declining attractiveness of both countries. 
Israel, rightly, may not be ready to exchange US support for that of any other power, but Israeli leaders, having kept all their eggs in one basket for so long, will now have to factor not only American concerns and interests into their decision-making, but those of the other powers as well. 
Thus, the problem for Israel is not to replace the backing provided by “300 million Americans,” as Bush put it in Jerusalem, but to add to it the sympathetic interest of more than three billion Chinese, Indians, Russians and others in Israel’s future in a pacified Middle East. 
The question is not so much one of substituting alliances, but of creating a complementary system of security. 
In their effort to achieve international respect and legitimacy as responsible stakeholders in today’s evolving international system, countries such as China, India, and even Russia have a greater interest in stability than in global confusion. 
For them, a nuclear Iran led by President Mahmoud Ahmadinejad is seen more as a threat than as a card they can play, even if their actions thus far in regard to Iran do not always match their long-term strategic interests. 
In fact, when it comes to deterring Iran from developing nuclear weapons – or, for that matter, exerting pressure on Israel and the Palestinians (including Hamas) to reach a compromise – a group of powers such as the US, China, India, and Russia might produce better results than a sole superpower imprisoned by its own contradictions and limitations. 
Israel’s nimble society and economy seem perfectly designed for the post-American era of political and economic globalization. 
Equally important, Israel will be forced to confront the reality of Palestinian despair, which the unique relationship with America has allowed it to obfuscate and evade for too long. 

The Case for Muddling Through Brexit 
SANTA BARBARA – Panic is gripping markets – stocks and bonds are falling, the pound is plumbing new depths, fears of recession are rampant – all because a slim majority of voters in the United Kingdom decided that the country should leave the European Union. 
The British public has spoken and the die is cast. 
The UK’s new prime minister, Theresa May, will have to invoke Article 50 of the Treaty of Lisbon. 
Within two years, Britain will be officially out, like it or not. 
But is all the market angst warranted? 
One could argue that the outlook is much less dire than most people realize. 
My advice is to take a deep breath and adopt the long view, because this story is far from over. 
After all is said and done, the ending could in fact turn out to be surprisingly benign and, ironically, similar to what exists now. 
The challenges ahead are obvious. 
The narrow majority for “Leave” implies that there are still many in Britain who deeply resent the idea of “Brexit.” 
Start with “the City,” London’s Wall Street, which, despite the UK’s use of the pound rather than the euro, has long served as the EU’s pulsing financial center and its gateway to the rest of the world’s markets. 
With Britain out altogether, large sectors of the City’s business can be expected to migrate to new homes on the continent. 
The only question is which city will win the race to replace London. 
The most logical choice would seem to be Frankfurt, the home of the European Central Bank, but Paris and Amsterdam are also in the running. 
Britain’s exporters are also unhappy because half of their sales are to fellow EU members. 
Nor should we forget the Scots and the Northern Irish, who voted overwhelmingly against Brexit and are now prepared to go to great lengths to preserve their membership in the European club. 
Indeed, even some of the most enthusiastic Leave campaigners have shown signs of buyer’s remorse, now that the price of Brexit is becoming increasingly clear. 
Most notorious among them is Boris Johnson, the former London mayor who, just four days after the referendum, wrote a commentary in the Daily Telegraph titled: “I Cannot Stress Too Much That Britain Is Part of Europe – And Always Will Be.” 
So, how can Britain uphold the democratic will of its voters and yet remain “part of Europe,” as the City and others would like? 
The answer is simple: It should muddle through. 
This shouldn’t be too hard in the end. 
This, after all, is the country that had, as the historian John Robert Seeley once wrote, “conquered and peopled half the world in a fit of absence of mind.” 
Fortunately, the EU itself also has a proud tradition of muddling through the challenges it faces, long relying on messy arrangements to accommodate its various members’ needs and demands. 
The EU most likely would have collapsed early on had it not been for what The Economist has described as its “spirit of grubby compromise.” 
Where divergent interests cannot be easily reconciled, the EU has mastered the techniques of obfuscation and ambiguity to keep the beast lumbering forward. 
Can such an arrangement now keep Britain in Europe? 
If I were a betting man, I would say yes. 
Policymakers know that despite the definitive wording of the Brexit referendum, the choice was never a simple “in” or “out.” 
Between those two poles is a host of possible compromises that would leave Britain an informal partner of the EU, even if no longer a formal member. 
The most likely possibility that comes to mind is known as the “Norway option.” 
Norway is a member of the European Economic Area, but it has access to the EU’s single market. 
In return for that privilege, Norway contributes annually to the EU budget, agrees to play by all the bloc’s rules – even if it has no part in their formulation – and allows for the free movement of EU citizens. 
There is little reason to doubt that Britain could negotiate something along similar lines. 
The easiest part to negotiate would be the annual contribution, which need not be very different from what the UK transfers to the EU now. 
Nor should it be difficult to find some way to give Britain an opt-out on any new EU rules, similar to what it already enjoys outside the eurozone under the banner of “vital national interests.” 
The biggest stumbling block is immigration, which motivated so many Leave voters. 
But even here it isn’t impossible to imagine that diplomats might be able to fudge things enough to reach an agreement that even the Leave camp can stomach. 
In short, there is a good chance that in two or three years, after the smoke has cleared, little will have changed between the UK and the EU in practical terms. 
As a strictly legal matter, Britain will no longer be an EU member. 
But, otherwise, life will go on much as it did before. 
The EU’s spirit of “grubby compromise” will have won out again. 

Only More Europe Can Beat Europe’s Nationalists 
BRUSSELS – British voters’ choice to leave the European Union is unfortunate, but unsurprising. 
For decades, British politicians have avoided making the case for EU membership, or even explaining to the British people how the Union works and why it is necessary. 
Throughout his premiership, David Cameron failed to show any leadership or willingness to engage in a meaningful way with the EU. 
One foot was always out the door as he repeatedly railed against faceless bureaucrats in Brussels. 
Sadly, his last-minute attempt to defend EU membership during the Brexit campaign was not enough to undo the effects on British public opinion of decades of lies. 
Britain has chosen isolation in Europe, against the advice of its friends and allies. 
Now that its post-imperial decline is complete, the most important lesson to take away from the “Brexit” referendum that sealed its fate is that one cannot defeat nationalism by pandering to nationalists. 
If the EU wants to tackle the strains of nationalism that are undermining its very raison d'être, it will have to listen to people’s concerns and offer a radical new vision for effective governance. 
Otherwise, the nationalist cancer will spread. 
To begin with, the remaining EU countries must now uphold European law and push for a quick and clean divorce. 
The United Kingdom’s citizens voted to leave, and its political leaders insist that they will respect the referendum’s outcome, so it is not “punishment” to insist that they do so as soon as possible. 
If British inaction causes Europe to continue to suffer economically from political uncertainty, a full separation should be carried out unilaterally. 
Politically, the UK is already on its way to becoming an adversary, rather than a trusted partner, of the EU. 
Before reversing herself under fire, Theresa May – the home secretary, who is now the leading candidate to succeed Cameron as Prime Minister – implicitly threatened the future status of EU nationals living in the UK by promising only that they would be “part of the negotiation” for Britain’s exit. 
May actually opposed Brexit. 
Yet her anti-European hostility differs only in degree, not in kind, from that of pro-Brexit politicians, such as Daniel Hannan, a Conservative MEP, and Nigel Farage, the leader of the UK Independence Party, who rejoice at the possibility of additional exit referenda across the EU. 
Fortunately, post-Brexit contagion has so far failed to materialize, most likely thanks to the embarrassing public spectacle that the UK has become since June 23, with its economic prospects dimming, its financial sector – a global powerhouse – scouting new locations, and its leaders stabbing one another in the back. 
In fact, the referendum may have even prompted EU countries – including those with noisy Euroskeptic parties, such as Denmark and Sweden – to close ranks in support of EU membership. 
A post-referendum poll in Sweden found 66% of respondents still in favor of EU membership. 
In Denmark, similar polling after the Brexit referendum showed a 9% jump in support of EU membership. 
EU leaders must not sit on their hands. 
The Brexit crisis should be treated as an opportunity for the Union, given that concerns about globalization, terrorism, immigration, and inequality are now mainstream. 
A divided Europe has failed to respond to these challenges; and, while the British will be missed, the EU will now be less divided. 
Still, today’s EU is not capable of decisive, large-scale action. 
To provide an alternative to the emotional appeal of populist nationalism, the Union must become more responsive to its citizens’ demands. 
This will require radical structural reforms to the eurozone and to the EU’s central political institutions. 
Economists generally agree that a single currency without a fiscal union or a common treasury is unsustainable. 
If Europeans do not finish the job they started when they established the euro, they will continue to experience the economic pain of structural disunity. 
Complete integration would deliver prosperity and better governance. 
Europe’s security arrangements suffer similar shortfalls. 
It is absurd that Europe has the globally respected European Space Agency, but no credible organization to collect and share intelligence in the fight against terrorism. 
The attacks in Paris last November should have made it obvious that borderless terrorism demands borderless intelligence, yet EU member states continue to put individual sovereignty ahead of collective security. 
More inter-governmental cooperation simply won’t do. 
Europe needs a central intelligence authority with teeth. 
Only by starting on such far-reaching reforms can Europe begin to stem the rise of populism that led to the success of the UK’s “Leave” campaign. 
Some would say that more sovereign powers should be returned to EU member states. 
I could not disagree more. 
This would only further weaken the project of integration that has safeguarded peace and prosperity in Europe for decades. 
Populism and Euroskepticism are the enemies of that project. 
The only way to beat them is to build a Europe that works for its citizens. 
Anything less works only for the demagogues who would follow the UK into the wilderness. 

The UK’s Multilateral Trade Future 
CAMBRIDGE – As the United Kingdom negotiates the terms of its divorce from the European Union, it would be wise for the country’s leaders to begin looking further into the future to determine what approach to international trade relations would serve it best. 
Does the UK really want to hang its future on bilateral agreements with a long list of individual trade partners? 
Or would it be better off joining existing mega-regional free-trade agreements, while working to strengthen the global multilateral system under the World Trade Organization? 
The bilateral approach would demand a huge amount of time and resources, with UK negotiators engaging in a series of discussions with each and every country with which they wanted to do business. 
The end result would be a tangled network of deals that would only exacerbate the balkanization of the international trading system. 
This approach limits gains from trade. 
For example, the Inter-American Development Bank reports that the trade gains from Latin America’s 33 small regional trade agreements have been meager. 
The key to boosting those gains, according to the IADB, is to adopt a new strategy that expands access across and within markets. 
This suggests that, for the UK, mega-regional trade agreements – which provide access to multiple markets, but entail lower levels of fiscal and regulatory integration than the EU – are the best way forward. 
After all, it is this approach that would enable UK firms to position themselves in well-developed and integrated supply chains, serving much larger markets than those to which a bilateral agreement would grant them access. 
The argument can be made that a multilateral approach is not just the better option; it is the only one. 
Consider the recent challenges faced by Bombardier, a Canadian multinational that produces 100-150-seat passenger jets using globally sourced parts, including wings made by Bombardier UK, the largest manufacturing employer in Northern Ireland. 
Bombardier negotiated the sale of up to 125 of its jets to Delta Air Lines. 
But the American aviation giant Boeing challenged the sale, alleging that, enabled by subsidies at home, Bombardier was selling the jets at below-market rates, giving the company an unfair advantage. 
Despite loud protests from Canada and the UK, the US Department of Commerce now seems set to impose an extremely high import tariff of about 300%. 
The effects of that duty will radiate throughout the supply chain, hitting the 4,200 employees of Bombardier UK. 
This experience demonstrates the limitations of bilateral agreements, especially in a world where supply chains and markets extend far beyond the countries involved. 
The UK may negotiate a bilateral free-trade agreement with, say, Canada, but UK firms will secure few benefits, unless Canadian firms can sell products with UK components to their other trading partners. 
The Bombardier episode also highlights the importance of engagement in – and reform of – the WTO, under whose rules the US-initiated proceedings against Bombardier are taking place. 
The impact of WTO rules and resolution mechanisms is far-reaching, as 164 countries worldwide subscribe to them. 
Yet WTO rules have their flaws. 
For example, they allow exporting countries to provide financial support and subsidies to specific industries; but they also give importing countries the right to use tariffs to offset these subsidies. 
The WTO has heard countless disputes over its subsidies and dumping rules, and it is now sure to hear one more, over the Bombardier case, because the US and Canada have different ideas about how to interpret these rules. 
Though no one is happy with the current WTO rules, efforts to reform them have so far ended in deadlock. 
But recent high-value cases involving high-tech products like airplanes, semiconductors, and green technologies, including solar panels and biodiesel, make clear that the problem cannot be ignored. 
And the fact is that concerns over state aid and competition policy can be addressed only in a multilateral forum like the WTO. 
Because the UK has historically shown far less appetite for industrial subsidies than its trading partners have, it stands to gain from clear international rules on industrial support and anti-subsidy tariffs. 
Given this, the UK has a strong incentive to engage with – and help to upgrade – the WTO. 
Another multilateral forum that could prove invaluable to the UK is the Trans-Pacific Partnership, a mega-regional trade agreement that provides for duty-free trade and includes modest commitments in areas like state aid and competition policy, without requiring EU-level integration. 
Though the TPP suffered a setback last year, when Donald Trump withdrew the United States, last month the 11 Pacific Rim countries remaining in the deal committed to keeping it alive. 
The TPP does not have to limit its membership to the Pacific; the UK could engage with it. 
Given its free-trade credentials and international stature, the UK could help to breathe new life into these and other trade negotiations that have been thrown into disarray by the Trump administration’s protectionist impulses. 
With Brexit looming, the UK has no choice but to redesign its future trading relationships. 
As a major producer of sophisticated components, its long-term trade strategy should focus on gaining deep and unfettered access to integrated cross-border supply chains. 
That means pivoting away from bilateral deals, toward a multilateral approach that enables the country to rebalance and expand its trading arrangements around the world. 

What Is the Pound Telling Us? 
LONDON – I know from my 32 years in finance that the weird world of foreign-exchange markets can sometimes defy comprehension, and that trying to estimate sterling’s baseline, equilibrium value can be an exercise in futility. 
Indeed, in the heady hour after the Brexit referendum polls closed on June 23, the British pound initially traded above a rate of £1.5/$1. 
This exchange rate turned out to reflect the now-ridiculous assumption that the “Remain” side had won. 
The pound has since declined 20% from that initial peak, and it has declined similarly relative to the euro. 
Despite these discrepancies, we do have ways to gauge the pound’s post-Brexit performance reasonably well. 
For starters, we can compare its value today to its average value during the referendum’s campaign period, from February to June. 
Viewed from this perspective, the pound has declined by a still significant 13% since voters decided that the United Kingdom should leave the European Union. 
Beyond looking at purchasing power parity, we also have models for estimating real-exchange-rate (RER) equilibrium, such as by identifying the exchange rate at which a country can achieve a sustainable current-account balance, or the rate that would allow an economy to reach full employment. 
These models include Goldman Sachs’s Dynamic Equilibrium Exchange Rate and the Peterson Institute for International Economics’ Fundamental Equilibrium Exchange Rate. 
The GSDEER’s current estimated equilibrium rate is £1.44/$1.63, and the FEER’s is £0.88/€0.74, which implies that the pound is now undervalued – by anywhere from 14% to 24% against the dollar, and by as much as 20% against the euro – relative to its notional fair value. 
These misalignments could be partly attributable to overvaluation of the other currencies. 
But let us assume that these estimates are at least roughly accurate, and that the pound is now broadly undervalued relative to the currencies of its major trading partners. 
An optimistic interpretation is that, all things being equal, the pound’s decline implies an improved balance-of-payments position in the future, and that the UK economy will undergo a much needed rebalancing. 
To be sure, economic data released since the referendum suggest bullishness in the manufacturing sector, and the National Institute of Economic and Social Research recently forecast that the UK’s balance of payments could achieve a small surplus by 2019. 
Of course, all things are not equal, so another interpretation is that the current equilibrium exchange rates will decline further, reflecting the market’s pessimism about the UK economy’s supply-side outlook and future productivity growth. 
Much will depend on whether the UK actually does leave the EU, and, if it does, on the government’s post-Brexit trade arrangements and economic policies. 
Another, complementary interpretation is that the pound’s weakness, notwithstanding its potential cyclical benefits, reflects a risk premium on the UK, owing to its tricky EU exit path and other policy uncertainties. 
We can estimate such risk premia by adjusting the RER equilibrium models to account for “normal” cyclical economic developments. 
Higher interest rates and low, stable inflation can give a country’s currency an edge over other currencies, so if we factor in the real-interest-rate differential, we can determine a notional price at which a currency should trade. 
When we do this for the pound against the dollar and the euro, the pound’s notional exchange rate is still substantially weaker than its actual spot rate, which suggests that the market has indeed factored in a considerable risk premium. 
These estimates have public-policy implications. 
For starters, British policymakers should acknowledge that a declining pound is helpful, but not sufficient, for improving the UK’s external position and rebalancing its economy. 
Second, the pound’s daily and weekly gyrations reflect a market assumption that a “hard” Brexit – whereby the UK forfeits its EU single-market access in order to restrict immigration – will negatively affect productivity growth. 
If the market is correct, then the UK’s future growth will depend even more on policymakers’ ability to boost post-Brexit trade. 
Moreover, policymakers will have to develop a sophisticated immigration strategy to attract high-skill workers, even as they restrict the movement of people overall. 
Finally, if there is even a chance that foreign-exchange markets have built in risk premia for the UK (and it appears that there is), policymakers will have to be very careful not to suggest any other changes to the UK’s economic-policy framework. 
Any new threats to the Bank of England’s independence, in particular, could provoke a reckoning from the market. 

Extraordinary Measures for Ordinary Times 
MUNICH – It has been ten years since the financial crisis went international. 
Until July 2007, the subprime mortgage crisis seemed like it was strictly a problem for the United States. 
But then Landesbank Sachsen and IKB Deutsche Industriebank, two publicly-owned regional German banks, had to be bailed out, and it suddenly became clear to policymakers just how interconnected the global financial system had become. 
The legacy of 2007 is still with us. 
Its most devastating and destructive effect was to put a premium on unconventional monetary measures. 
Unfortunately, when policymakers scrambled in search of “big bazookas” ten years ago, they set the stage for the return of an old character: a strongman willing to pull the trigger. 
To be sure, at the height of the financial crisis, politicians were right to conclude that they could not rely on business as usual. 
Central banks needed to provide liquidity on a massive scale, and governments needed to complement those monetary-policy efforts with fiscal expansion. 
Accordingly, China and the US, in particular, launched large-scale stimulus programs in 2008 and 2009, respectively. 
Some of the extraordinary measures implemented in response to the financial crisis proved to be ill-conceived, and were abandoned or revised. 
In the US, the Troubled Asset Relief Program (TARP), which former President George W. Bush signed into law in October 2008, started out as a program whereby the Department of the Treasury purchased problematic, largely mortgage-based assets directly from financial institutions. 
But that turned out to be more complicated than originally thought, and, within weeks, the government simply recapitalized US banks instead. 
Other bad decisions were not so easily reversed. 
Hoping to prevent a bank run, the Irish government offered a blanket guarantee for all banking deposits. 
With that one unilateral decision, Ireland destabilized the rest of Europe. 
Suddenly, other governments had to fear that their own banks’ depositors would flee en masse to the backstopped Irish banks (never mind that the cost of the guarantee was too much for the Irish government to bear). 
Still, overall, the response to the financial crisis was strikingly successful, and those who led it were right to pat themselves on the back for having prevented a repeat of the Great Depression. 
But, because unconventional policies were so effective, they are now considered appropriate and necessary responses to any problem, while constitutional safeguards are increasingly dismissed as petty bureaucratic concerns. 
Already in 2008, former Federal Reserve Chairman Paul Volcker warned that the Fed was at “the very edge of its lawful and implied powers.” 
Of course, some might ask why a policymaker should not ignore that edge for the sake of the country’s welfare. 
But invoking salus populi suprema lex – the maxim that laws should reflect the public interest – is an old way of justifying autocracy. 
Indeed, who is to say what is in the public’s best interest, let alone determine the supreme law of the land? 
John Adams, America’s second president, noted the dangerous ambiguity of this concept: “The public good, the salus populi,” he wrote, “is the professed end of all government, the most despotic, as well as the most free.” 
The post-crisis view holds that a powerful leader can and should fix things by himself (strongmen are rarely women). 
This approach was readily apparent in the Russian government’s response to collapsing aluminum prices in 2009, when job losses and unpaid wages gave rise to large-scale protests at a plant in Pikalevo, 150 miles (250 kilometers) southeast of St. Petersburg. 
When then-Prime Minister Vladimir Putin toured Pikalevo, he made a show of humiliating the plant’s owner, the oligarch Oleg Deripaska, by calling him a “cockroach.” 
Putin didn’t announce any new policies to help Russian workers; nonetheless, his performance in Pikalevo was hailed as a bold assertion of state power in the face of capitalist excess. 
Strongmen tend to present themselves as being uniquely able to tackle a specific problem. 
For Philippine President Rodrigo Duterte, that means a “war on drugs” that has led to thousands of extrajudicial killings. 
Putin and Turkish President Recep Tayyip Erdoğan justify their policies in the context of fighting terrorism. 
And Hungarian Prime Minister Viktor Orbán has framed his autocratic behavior as a necessary response to a domestic financial crisis. 
By focusing on one narrow “crisis,” these leaders create a mindset in which all other problems become crises that demand immediate, effective, and unconstrained action. 
This post-crisis mentality is in keeping with the German political theorist Carl Schmitt’s doctrine of “decisionism.” 
Schmitt, who joined the Nazi Party in 1933, held that sovereign decision-making is the central feature of the political process. 
When leaders make political decisions, they are reasserting control over the concept of sovereignty itself, which has been gradually eroded and transformed through various phases of globalization. 
According to Schmitt, how leaders arrive at their decisions is secondary to the fact that a decision has been made. 
A sovereign “needs” to act forcefully to protect particular threatened interests. 
Often, this entails symbolic gestures. 
In 1930, for example, America’s Smoot-Hawley Tariff Act singled out Swiss watches, Japanese silk products, and other nationally iconic imports. 
Protectionism today is no different. 
Consider US President Donald Trump’s threat to impose tariffs against BMW and Mercedes-Benz: two high-visibility brands that one immediately associates with Germany. 
In response to Trump’s threats, Europe has also tapped into the politics of symbolism. 
If Trump follows through, the European Union may retaliate by targeting bourbon whiskey, a distinctly American spirit that is heavily produced in Kentucky, US Senate Majority Leader Mitch McConnell’s home state. 
Unfortunately, this approach has created a political environment in which established norms have been eroded, and no new norms have taken their place. 
The Soviet-born British journalist Peter Pomerantsev said it best in the title of his brilliant book about post-Soviet life: Nothing Is True and Everything Is Possible. 
Now that crisis has been normalized as a permanent condition, we are all post-Soviet. 

Post-EU Depression 
The government of Poland collapsed first, followed by the Czech government. 
Then the Hungarian prime minister resigned. 
The government of Slovakia lost its majority and is unstable. 
Within months, if not weeks, of realizing the long-sought goal of European Union membership, a wave of political instability surged through Central Europe. 
Why should this historic event cause such political upheaval? 
Some argue that these countries are inherently unstable. 
Their political cultures are underdeveloped. 
They were admitted to the EU only fifteen years after the fall of communism, and not all of them had previous experience with democracy. 
Unlike EU members admitted during earlier rounds of enlargement, the Central Europeans suffer from widespread corruption, political nepotism, fragile political parties with unclear identities, and weak civil societies. 
All of these problems were to some extent hidden due to the external pressure of EU accession, and have now erupted into full view. 
But there are more obvious causes for Central Europe's current problems. 
Above all, every government that successfully led its country into the EU had to adopt-often under pressure and hastily-a range of unpopular steps. 
Although most citizens in these countries supported EU membership, many thought that their governments paid too high a price. 
This was partly because the EU was not as generous toward its newest members as it had been toward new members in the past. 
Moreover, only fifteen years ago, eight of the ten new members had state-controlled economies, which meant that a period of painful transition toward a market economy was followed by, or overlapped with, sometimes painful reforms necessary for EU membership. 
Even before attaining EU membership, all candidate countries' governments had to start adopting measures aimed at meeting the Maastricht criteria within several years, because the new members had committed themselves in their accession treaties to adopting the euro. 
The most important measures required cutting budget deficits, often at the cost of lowering public expenditures. 
In the Czech Republic, Hungary, and Poland, the task of completing such difficult reforms just before crossing the "finish line" fell to socialist parties, forcing them to betray their socialist identity in the eyes of leftist voters. 
As a result, their historic mission doomed them. 
In Poland, the Democratic Left Alliance fell apart shortly before accession, while the Czech Social Democrats came close to a similar split. 
Ruling coalitions were at the same time in disadvantageous positions vis-à-vis opposition parties, which attacked the incumbents for failing to negotiate good membership terms, without themselves having to pass the test of negotiating better conditions. 
Government parties were also hurt by the nationalistic rhetoric of center-right parties, which repeatedly warned against a betrayal of national interests. 
The overlap between the end of the accession process and heated discussions about the new European Constitution played into the hands of the opposition. 
The political right in Hungary, Poland, and the Czech Republic warned against a possible loss of sovereignty should the Constitution be adopted. 
Such rhetoric resonates powerfully in former Soviet satellites that have only recently regained their sovereignty. 
Despite all this pressure, the ruling coalitions in the Poland, the Czech Republic, and Hungary held together, as the historical mission of attaining EU membership worked like a lid on a pressure cooker. 
Addressing conflicts among government coalition parties, as well as within individual government parties, was postponed until after official EU entry. 
Not surprisingly, accession untied politicians' hands, and conflicts came to the fore. 
Polish Prime Minister Lezsek Miller resigned one day after his country's official admission to the EU. 
Czech Prime Minister Vladimir Spidla was forced to resign by his own party several weeks later. 
Hungarian Prime Minister Peter Medgyessy was pushed out in late August. 
Even the center-right Slovak government was not spared. 
It took it upon itself not only to meet EU membership criteria, but also push forward with other painful reforms. 
The comfortable role of criticizing the government fell into the hands of leftist populists, for a change. 
The Slovak government is still in power, but it has lost its majority and could fall soon. 
In Poland, Hungary, and the Czech Republic, we will now witness a period of unabashed populism. 
The ruling coalitions were reconstructed, with new faces at the helm. 
The main objective of the new prime ministers and cabinet members is to regain popularity for their parties. 
The ruling coalitions can finally afford, at least temporarily, "the luxury" of populism that opposition parties used as their main weapon in the last few years. 
Those who hope for further progress on economic reforms in Central Europe will have to wait. 


Poverty, Social Spending, and IMF Programs: Myth vs. Reality 
WASHINGTON, D.C.: An oft-repeated claim is that the IMF is responsible for increasing human misery in developing countries - in particular, by forcing countries to cut spending on programs like health and education. 
But riots and repetition do not make such claims true. 
At best, such accusations are out of date; at worst, they are ideological grandstanding. 
The record, indeed, is clear: in 66 countries with IMF programs, between 1985 and 1998, per capita spending on health and education rose by more than 2% per year after inflation. 
These numbers reflect the fact that IMF advice to countries facing budgetary pressures emphasizes the importance of sustaining expenditures on health and education. 
The Fund urges that savings be found in unproductive spending - meaning excessive military spending, subsidies for the well-to-do, and inefficient administrative practices. 
Indeed, military spending (in the 41 countries where the IMF has data) fell by almost 1% of GDP between 1993 and 1997. 
Low-income countries have posted larger gains in health and education spending than other countries under IMF programs. 
This difference will become even more pronounced as increasing amounts of debt relief are delivered under the Initiative for Heavily-Indebted Poor Countries (HIPCs), because a principal condition for this assistance is that money saved is channeled into poverty reduction. 
In the past year, 10 of the 41 eligible countries have been granted debt relief under this initiative; we expect another 10 to start receiving debt relief by the end of this year. 
Early participants like Bolivia and Uganda are seeing their debt service payments fall by as much as 1% of GDP, providing scope for a substantial increase in health and education spending. 
In Tanzania, next year’s budget provides for a 44% increase in poverty-related spending. 
Twenty years ago, it may have been true that IMF fiscal policy advice focused on the bottom line of a government’s accounts. 
Over time, as it became increasingly clear that the burden of fiscal adjustment fell on those with the weakest voice - usually the poor - the IMF recognized that a focus on short-run fiscal outcomes was inadequate. 
Since the late 1980’s, the Fund has regarded investment in human development as a way to promote sustained economic growth. 
Today, the IMF emphasizes protecting (or increasing) social expenditures for the poor, while making sure spending is well-targeted, and on improving governance mechanisms so that the voice of the poor is heard. 
Of course, poverty reduction involves more than throwing money at a problem. 
The quality and composition of social spending is just as important as the amount that is spent. 
Social spending should be targeted at the needy. 
In health and education, the poor often do not have good access to services. 
In many of the HIPCs, we find heavy spending on urban hospitals and higher education relative to basic health care and primary education. 
In these countries, only 14% of health and education spending benefits the poorest 20% of the population, while 30% of the spending goes to the richest 20%. 
The need to target spending applies equally to social benefits. 
Indonesia had large subsidies for cooking oil and other widely-consumed products, largely benefiting the middle class. 
The IMF-supported program, despite heavy criticism, eliminated most of them. 
Instead, the money saved was ploughed back into better-targeted subsidies, such as a grade of rice mostly eaten by the poor. 
To improve targeting to yield the largest possible reduction in poverty with the resources available, the IMF now expects all poor countries borrowing from the Fund to prepare comprehensive poverty reduction strategies. 
Second, funds must be efficiently channeled to social expenditures. 
Losses through corruption or excessive spending on program administration need to be minimized. 
Here, improved transparency of government operations is vital. 
Nigeria’s IMF-supported program, for example, embraces the Poverty Reduction Initiative, which aims to use funds productively and to ensure that the public funds for poverty reduction are accounted for in every quarter. 
Finally, it must be recognized that - for whatever reason - even the best-intentioned policies do not necessarily translate into results. 
In countries with IMF programs, we know there have been positive outcomes. 
School enrollment rates rose by 1% per year, and more quickly for girls than for boys, narrowing the gender gap. 
Infant mortality fell by 22% per year, and even faster for children under 5. 
Immunization rates rose by almost 5% per year. 
Nevertheless, the IMF is not complacent, and seeks to ensure that policies deliver results. 
It is a truism that a country’s future is its people, and promoting better health and education outcomes may be one of the soundest economic decisions a country can make. 
Still, giving priority to education and health care should not be at the expense of other public programs - such as sanitation and rural road-building - that may be just as important for reducing poverty. 
We must not lose sight of the wood for the trees. 
Much remains to be done to improve the lot of the poorest of the poor. 
Indeed, there is much that we still don’t know about how to reduce poverty. 
In many countries, even reliable data about the current state of affairs is hard to come by. 
But the IMF is making every effort to help countries achieve the global objective of halving poverty by 2015, and as the numbers show, this is not just talk. 

A World of Vulnerability 
ROME – In 2010, global leaders achieved the Millennium Development Goal (MDG) of reducing the share of the world’s poor to half of its 1990 level – five years ahead of schedule. 
But rising unemployment and falling incomes underscore the enduring threat of poverty worldwide. 
After all, poverty is not an unchanging attribute of a fixed group; it is a condition that threatens billions of vulnerable people. 
Despite their shortcomings, income measures are useful in gaining a better understanding of the extent of poverty and vulnerability worldwide. 
But the World Bank’s poverty line of $1.25 per day (in purchasing-power-parity terms), which is used in measuring progress toward the MDGs’ poverty-reduction target, is not the only relevant threshold. 
When the poverty line is raised to per capita daily spending of $2, the global poverty rate rises from 18% to roughly 40%, suggesting that many people are living just above the established poverty line, vulnerable to external shocks or changes in personal circumstances, such as price increases or income losses. 
Three-quarters of the world’s poor live in rural areas, where agricultural workers suffer the highest incidence of poverty, largely owing to low productivity, seasonal unemployment, and the low wages paid by most rural employers. 
In recent decades, vulnerability and economic insecurity have increased with the rise of transient, casual, and precarious employment, including self-employment, and part-time, fixed-term, temporary, and on-call jobs. 
At-home positions, frequently filled by women, are also on the rise. 
Labor-market liberalization, globalization, and unions’ declining influence have exacerbated these employment trends. 
At the same time, macroeconomic policies have focused on achieving and maintaining low-single-digit inflation, rather than full employment, while limited social protection has heightened economic insecurity and vulnerability. 
During the East Asian crisis of 1997-1998, poverty rose sharply. 
For example, Indonesia’s poverty rate soared from roughly 11% to 37% during the crisis, mainly owing to the massive depreciation of the rupiah. 
Likewise, following the 2008 global economic crisis, food-price spikes and recession caused the United Nations Food and Agriculture Organization to revise its hunger estimates upward, to more than one billion people. 
Considering the FAO’s conservative definition of chronic severe hunger, this is a serious indictment of global poverty-reduction efforts. 
Most poor adults in developing countries have to work, if only to survive. 
Aside from the working poor, an additional 215 million workers worldwide slipped below the poverty line in 2008-2009, owing to the Great Recession. 
Another 5.9%, or 185 million workers, were living on less than $2 per day. 
The estimated 330 million working women who lived below the poverty line in 2008-2009 accounted for roughly 60% of the 550 million working poor worldwide. 
New estimates by the International Labor Organization (ILO), based on a different methodology from that used by the World Bank, demonstrate that, while the number of those classified as working poor worldwide declined by 158 million from 2000 to 2011 (from 25.4% of workers to 14.8%), progress has slowed markedly since 2008. 
Indeed, only 15% of workers, or 24 million people, managed to rise above the poverty line in 2007-2011. 
The other 134 million workers who escaped poverty did so earlier, in 2000-2007. 
As a result, there were 50 million more working poor in 2011 than projected by pre-crisis trends for 2002-2007. 
The lack of basic social protection in most countries exacerbates vulnerability. 
The ILO World Social Security Report found high or very high vulnerability, in terms of poverty and labor-market informality, in 58 countries, mainly in Africa and Asia. 
Most such countries do not provide unemployment insurance, while more than 80% of their populations lack social-security coverage and access to basic health services. 
Indeed, few countries currently provide comprehensive social protection, as defined by ILO Convention 102 (the instrument establishing internationally-agreed minimum social-security standards). 
According to the ILO, only one-third of countries worldwide – accounting for roughly 28% of the global population – provide all nine types of protection, meaning that only about 20% of the world’s working-age population (and their families) enjoys comprehensive coverage. 
Although all countries offer some kind of social protection or security, in most countries, coverage is severely limited and targeted at specific groups. 
As a result, only a small minority of the global population has full, legally guaranteed access to existing social-protection schemes – leaving roughly 5.6 billion people worldwide vulnerable to various degrees. 
Vulnerability exists at levels far above the World Bank’s $1.25/day poverty threshold, especially given rising job insecurity and inadequate social protection worldwide. 
To address global poverty effectively, global leaders must take a more comprehensive approach that focuses on reducing citizens’ vulnerability. 

Poverty and Terror 
Glib assertions that poverty breeds terrorism have been tossed around of late. 
Of course, no simple equation between the two can be drawn. 
Yet, such statements do contain grains of truth. 
Poverty may not cause Islamic terrorism, but Islamic terrorists manipulate poverty to their advantage. 
Thus, any viable strategy to prevent terrorism must address core issues of economic development. 
The first issue to be recognized is that development took a wrong turn about 30 years ago, when OPEC imposed two severe oil-shocks on the global economy. 
Developed countries shifted from promoting growth to fighting inflation. 
World growth slowed dramatically (except in East Asia) and the growth of world trade was halved. 
OPEC countries grew rich, while the rest of the developing world struggled with unsustainable trade deficits and indebtedness. 
Most experienced negative growth. 
During the 1980s and 1990s, half of the IMF's member developing countries endured severe financial crises and were forced to scale back social expenditures so that poverty, inequality and the potential for civil strife increased substantially. 
In the wake of this, development policies changed. 
America, the IMF, and the World Bank began to emphasize globalization by stressing trade liberalization, restrictive macro-economic policies and the institutional strengthening of markets - the policy package known as ``The Washington Consensus.'' 
International assistance was recast: development loans became ``structural adjustment loans,'' intended to help heavily indebted developing countries avoid default and made conditional upon countries undertaking reforms favored by the Washington Consensus. 
Aid fatigue set in and, as the Cold War diminished, official aid flows declined as it was no longer necessary to bribe countries to keep them out of the Soviet camp. 
For the average developing country the results were stagnation, widened economic inequalities, climbing unemployment, and increased numbers of poor people. 
Economic modernization and poverty reduction suffered. 
In Africa, per capita GNP dropped at an average rate of .7% annually between 1970 and 1995. 
The median rate of growth in developing-country per capita GNP between 1980 and 1998 was 0.0% - no ringing endorsement of Washington Consensus policies. 
The 1980s became a lost decade for development. 
Of course, some bright spots emerged: ``high-development-level'' developing countries - Taiwan, Korea and most of Latin America - became democracies. 
Between 1970 and 1990, the share of trade in GNP increased and the share of developing country manufactured exports rose, except in oil-countries. 
Chile, China, India and Vietnam increased their growth rates substantially through labor-intensive export-led growth and market-oriented reforms, albeit at the cost of burgeoning inequality. 
But poverty was not the only wound inflicted in these years. 
Escalating oil-prices created a super-rich feudal aristocracy in the Gulf States. 
The gaps between the cosmopolitan oil-sheiks and the disaffected, disenfranchised, and nearly hopeless remainder of the population widened. 
Economic modernization was practically non-existent. 
Significant increases in education coupled with little modern-job creation and rapid rural-urban migration added to social and political unrest. 
The oil-regimes were oppressive, quelled dissent through torture, and were venal and corrupt. 
Nonetheless, because of oil, they retained US support. 
Small wonder some Arab youths became radicalized. 
A small band of fiery Imams seized upon this youthful discontent. 
Recalling the achievements of Islamic culture during the Middle Ages, they offered a (self-serving) nostrum for lifting Moslems out of dependence, degradation and misery: the reestablishment of theocratic Islamic States that would be more pure and just than secular ones. 
Largely unnoticed by the West, they created a fanatical, totalitarian, movement that would stop at nothing, including self-immolation, to achieve its goals. 
Who were their enemies? 
Modernizing secular leaders (Nasser and Sadat in Egypt; the Shah in Iran); intellectuals who preached of a just secular order and exposed the excesses of the fundamentalist movement (Salman Rushdie); the small moderate Moslem middle class; the feudal, secular elites; infidels (moderate Moslems, Christians and Jews); and foreign powers that supported their enemies. 
For several decades, their activities were largely limited to their own countries. 
When Arab governments clamped down, they exported violence westward. 
For now, the terrorist war is the policy response to the spread of Islamic terrorism. 
In the long run, something beyond a military response is needed. 
I believe that the West can learn a great deal about what to do by studying the policies pursued in the world's only two mid-development Moslem states, Tunisia and Indonesia, because each successfully avoided becoming prey to Islamic fundamentalism. 
Tunisia's achievement is noteworthy given its proximity to violence-prone Algeria. 
Both countries combined substantial increases in secular education with rapid job creation in manufacturing jobs; stressed rural development and labor-intensive exports; and pursued rapid, egalitarian development. 
Egalitarian development of this sort is the only viable answer to the problems of the Moslem world's mal-development. 
However, it provides no short-term answer to terrorism for several reasons: it does not supply an ideology compelling enough to compete with fundamentalism, which has captured at least two generations in the Moslem world. 
Once radicalized, the genie of violence can rarely be put back into his bottle by civilized means. 
Violence arises when there is hope rather than when things are hopeless. 
Note that the terrorist leaders are not the poor and uneducated, and that the usual suspects among countries that sponsor terrorism are not the poorest Arab states. 
Indeed, 1999, the year before the current Palestinian Intifada erupted, was a good year economically for the West Bank and Gaza. 
Sadly, the politics of crackdown appears to be the only immediate answer to terrorist violence. 
But if peace, once achieved, is to be maintained, genuine development that is more balanced among different aspects of development, which delivers more benefits to the poor and promotes economic convergence among countries, must become the West's goal. 
While such policies might take decades to lessen Islamic terrorism, they may prevent radicalization in other developing countries. 

Poverty Is Also a Psychosocial Problem 
BRIGHTON – Being poor is a highly shameful experience, degrading one’s dignity and sense of self-worth. 
While the manifestations and causes of poverty differ, the humiliation that accompanies it is universal. 
Recent research conducted at the University of Oxford found that from China to the United Kingdom, people facing economic hardship – even children – experience a nearly identical assault on their pride and self-esteem. 
Yet, despite the clear evidence linking poverty to psychological distress, policies tacking poverty do not typically take shame into account. 
Rather, poverty reduction efforts tend to focus on tangible manifestations of deprivation such as lack of income or education. 
As a result, solutions to poverty often implicitly assume that more material wealth or improved living conditions will automatically translate into non-tangible benefits, including improved mental wellbeing. 
This lack of focus on the “psychosocial” side of poverty – the interaction between social forces and individual attitude or behavior – is misguided. 
If we are to alleviate human suffering and achieve the UN’s premier Sustainable Development Goal of ending poverty “in all its forms” by 2030, addressing the intrinsic and instrumental roles that shame plays in poverty must be front and center in our efforts. 
The crippling sense of dishonor that accompanies poverty, and impedes people from taking positive action to improve their situation, has been seen around the world. 
In India, the shame associated with crop losses and financial stress has pushed farmers to substance abuse and, in extreme cases, suicide. 
In Tanzania, researchers studying bilingual education have found that a fear of being mocked can prevent students with weaker English skills from participating in class. 
And in Uganda, poor high school students say the inability to pay fees, purchase uniforms, or obtain school supplies is a constant source of humiliation. 
To address poverty-related shame, and adequately account for the role shame plays in perpetuating poverty, a number of steps must be taken. 
For starters, policymakers should recognize the problem. 
Rather than seeing shame as an unfortunate byproduct of living in poverty, human development planners should consider how poverty undermines human dignity. 
The Nobel economics laureate Amartya Sen, one of the most influential voices on poverty reduction, has long argued that shame is a driver of “absolute” poverty. 
Taking shame seriously must be part of any poverty-reduction strategy. 
Moreover, shame, a lack of self-confidence, and low self-esteem can negatively impact how people view their ability to affect change, sustaining a perception of inadequacy that can be debilitating and trap them in poverty. 
To help people escape, human development strategies must consider how to bolster personal agency, aspiration, and self-efficacy – the belief in one’s ability to influence events that affect one’s life. 
Finally, policymakers must be aware that programs aimed at reducing poverty, if not properly implemented, can actually increase feelings of shame. 
For example, researchers working in India in 2005 found that Indian women stopped going to health clinics in order to avoid debasing treatment by health workers – to the detriment of their own wellbeing and that of their children. 
Women in South Africa applying for child support grants have reported similar experiences, as have food bank users in the UK. 
In fact, many respondents in Britain said the stigma of receiving free food was so severe that “fear” and “embarrassment” were common emotions. 
The issue of shame, and the need to take it more seriously in poverty-reduction policies, is slowly gaining traction. 
Academics who research human suffering have recognized that “recipient dignity” is a crucial component of successful poverty alleviation. 
For example, a 2016 review of cash transfer programs in Africa found that the absence of stress and shame enhanced confidence in recipients, leading to improved decision-making and productivity. 
Building on such evidence, the University of Oxford is extending its research on the “shame-poverty nexus,” to study how the international development sector can “shame-proof” anti-poverty policies. 
Programs aimed at reducing poverty are moving in the right direction, but much work remains to be done to integrate the psychosocial component of poverty into policy and planning. 
Only when policymakers truly grasp that dignity and self-respect are unavoidable prerequisites in the struggle against deprivation – rather than outcomes of its alleviation – will the world have a fighting chance of eradicating poverty in all its forms. 

Poverty versus Growth 
The debate among governments, economists, and NGOs about how much the world’s poor benefit from economic growth seems unending. 
Last year The Economist claimed that “Growth really does help the poor: in fact it raises their incomes by about as much as it raises the incomes of everybody else.” 
Yet, in a letter published soon after by the same magazine, Justin Forsyth of Oxfam claimed that “..current patterns of growth and globalization are widening income disparities and hence acting as a brake on poverty reduction.” 
Irreconcilable positions? 
Not necessarily: for both sides in this debate are, in many respects, talking about different things. 
One side may be talking about absolute poverty, the other about relative poverty. 
Moreover, average findings conceal large differences: in some countries the poor can benefit from economic growth, in others they may be too deprived to take advantage of it. 
In short, some truth resides on both sides. 
The full picture, however, is more complicated than either point of view. 
New data from the 1990s confirms earlier studies that there is little or no evidence that economic growth is associated with increases in income inequality as measured by national household surveys. 
For if the share of national income going to the poor does not fall with economic growth then of course the poor will gain in absolute terms; growth will be poverty reducing, and contraction will be poverty increasing. 
Moreover, the available data confirms that the higher the rate of growth, the higher the average rate of poverty reduction. 
That is the type of evidence that The Economist was promoting. 
Yet it is deceptive to conclude from this that growth raises the incomes of the poor “.. by about as much as it raises the incomes of everybody else.” 
Given existing inequality, the absolute income gain to the rich will be greater - much greater - than the gains to the poor. 
For the richest 10% of people in India the income gain from aggregate economic growth tends to be about four times higher than the gain to the poorest 20%; in Brazil it tends to be almost 20 times higher. 
This is consistent with growth having no overall effect on inequality as conventionally measured. 
Focusing on average outcomes also misses the fact that the experiences of poor people during times of economic growth are diverse. 
The same growth rate can bring anything from a modest drop in poverty to a dramatic decline. 
One finds plenty of cases of rising inequality during spells of growth. 
Indeed, the best data available suggests that inequality increases about half the time, and falls the other half. 
Even when inequality does not change with growth, one finds both gainers and losers at all levels of living. 
In cases where household survey data has tracked the same families over time it is common to find considerable churning under the surface. 
Many people escape poverty while others fall into poverty, even when the overall poverty rate moves rather little. 
An important factor in the heterogenous experiences of developing countries in the 1990s is that starting conditions varied immensely between countries undergoing economic reform. 
The most important differences appear to be in the physical and human assets of the poor. 
In economies where poor people tend to be illiterate, sick, hard to reach and/or marginalized socially, they have less chance of sharing in the gains from growth than in an economy in which such debilities are less severe. 
In other words, in countries where the level of income inequality is high, inequality is reduced less by growth than in countries where inequality is relatively low. 
These differences are, in turn, associated with long-standing differences in policy regimes. 
Suppose you could divide reforming countries into two categories: those whose previous policies benefited the rich, keeping inequality artificially high; and those whose previous policies had the opposite effect, keeping inequality low. 
Opening the economy and freeing internal markets may well entail sizable redistribution between rich and poor, but in opposite directions in the two groups of countries. 
In fact, the average impact of policy reform on inequality is zero. 
Yet there is abundant distributional change going on under the surface. 
Policy reforms shift the distribution of income in different directions in different developing countries, as expected, given the diverse starting conditions. 
As a result, behind the averages, people are often hurting. 
So, both sides in this debate have valid points. 
One side smoothes over the diversity in country experiences; the other often ignores the averages, and focuses instead on cases in which high or rising inequality dulls the gains to the poor from growth. 
Yet the evidence is compelling that, on average, the gains to the poor from growth outweigh the losses. 
It is equally important, however, to understand the variety in outcomes for the poor, so as to understand better what else must be done to assure more growth that directly benefits them. 
That is where the debate should now turn. 

The Power of Monuments 
NEW YORK – The ghastly spectacle last month of neo-Nazis marching through Charlottesville, Virginia, carrying torches and barking slogans about the supremacy of the white race, was sparked by the city’s plans to remove a statue of Robert E. Lee, the leader of the Confederate army, which fought to retain slavery in the secessionist South during the American Civil War. 
The statue of General Lee on his horse has been there since 1924, a time when the lynching of black citizens was not a rarity. 
Inspired by the events taking place in Charlottesville, advocates have emerged in Britain seeking to pull Admiral Nelson off his famous column on Trafalgar Square in London, because the British naval hero supported the slave trade. 
And two years ago, protesters at the University of Oxford demanded the removal of a sculpture of Cecil Rhodes from Oriel College, where the old imperialist had once been a student, because his views on race and empire are now considered to be obnoxious. 
There always was something magical about this kind of iconoclasm, which rests on the belief that smashing an image will somehow solve the problems associated with it. 
When English Protestants challenged the power of the Roman Catholic Church in the sixteenth century, mobs laid waste to stone-carved saints and other holy representations with pick-hammers and axes. 
Eighteenth-century revolutionaries did the same to churches in France. 
The most radical example occurred in China only a little more than 50 years ago, when Red Guards destroyed Buddhist temples and burned Confucian books – or indeed anything old and traditional – to herald the Cultural Revolution. 
It is easy to deplore this type of destruction. 
Great buildings and works of art are lost. 
One is tempted to assume that only people who believe in the magical power of images would wish to erase them. 
The sensible way to deal with monuments of the past would be to see them simply as artifacts of history. 
And yet it is not so simple. 
Who would argue that after 1945 streets and squares in German cities should continue to be named after Adolf Hitler? 
It was surely not just a childish mistake to remove sculptures of the Führer – or of Soviet leaders in Central and Eastern Europe after 1989. 
One could argue that images of these leaders and their henchmen lacked the artistic value of great churches of medieval England, or Tang Dynasty Buddhist sculptures in China. 
But then statues of General Lee are hardly worth preserving for artistic reasons either. 
The question is where we should draw the line. 
Should a historical figure be judged by the amount of blood on his hands? 
Or should we establish a proper time frame? 
It might be argued that monuments celebrating villains who lived within living memory and would still cause grief to surviving victims must be removed, and that anything older should be left alone. 
But that doesn’t quite work, either. 
The argument for preserving a sculpture of Hitler in a public place, assuming that such a thing still exists, does not get stronger as time goes on. 
Many people in the US South argue that Confederate monuments should be protected as mere reminders of the past, as part of a common “heritage.” 
The problem is that history is not always neutral. 
It can still be toxic. 
The way we tell stories of our past, and keep memories alive in cultural artifacts, is a large part of how we view ourselves collectively. 
This demands a certain degree of consensus, which often does not exist, especially when there has been a civil war. 
The case of postwar Germany is quite straightforward. 
Both East and West Germany set out to build their collective futures in direct contrast to the Nazi past. 
Only a resentful fringe still wishes to cling to fond memories of the Third Reich. 
Nonetheless, to this day, German authorities ban the display of Nazi imagery, fearing that it might still tempt people to repeat the darkest episodes of their country’s history. 
This fear is understandable, and not wholly irrational. 
Such temptations could even become stronger as Nazism fades from living memory. 
Britain has a less traumatic recent history. 
The views of Cecil Rhodes, or Admiral Nelson, though fairly conventional in their time, are certainly no longer fashionable today. 
It is highly unlikely that many British people gazing up at Nelson on his column or passing Oriel College, Oxford, will be inspired to advocate slavery or build an empire in Africa. 
The American South, however, is still a problem. 
The losers in the Civil War were never quite reconciled to their defeat. 
For many southerners, though by no means all, the Confederate cause and its monuments are still felt to be part of their collective identity. 
Although hardly anyone in his right mind would advocate the revival of slavery, nostalgia for the Old South is still tinged with racism. 
That is why statues of General Lee in front of court buildings and other public places are noxious, and why many people, including southern liberals, wish to see them removed. 
There is no perfect solution to this problem, precisely because it is not just about images carved from stone. 
Resentment in the South is political. 
The wounds of the Civil War remain unhealed. 
Much of the rural south is poorer and less educated than other parts of the US. 
People feel ignored and looked down upon by urban coastal elites. 
That is why so many of them voted for Donald Trump. 
Knocking down a few statues will not solve this problem. 
It might even make matters worse. 

The Powerlessness of the Most Powerful 
MADRID – The annual General Debate of the United Nations General Assembly is one of the most notable events on the international diplomatic calendar. 
As usual, this year’s meeting, during the last week of September, brought together a long list of world leaders, although perhaps the term “world leader” should no longer be used so lightly. 
The president of the leading global power has made it clear that he has no interest in getting involved in resolving any of the world’s shared problems. 
Unfortunately, he is not alone. 
For those of us who put our faith in international cooperation as a necessary complement to economic globalization, the General Assembly debate revealed a bleak panorama. 
Certain leaders’ short-term interests, often presented as “national interests,” are one of the factors roiling international relations more than any time since the end of the Cold War. 
But the rise of nationalist populism is less the cause than the result of rifts that have been forming for some time. 
As with any economic process, globalization has a distributive dimension, which means that it is bound to generate frustration for some groups of people. 
The center of the Western political spectrum has tended to underestimate the impact of rising inequality within countries, focusing instead on the benefits of market opening and integration, such as the unprecedentedly rapid reduction in global poverty. 
Understandably, however, not everyone is consoled by such outcomes. 
It is not only goods, services, and capital that circulate through the global economy. 
Ideas circulate, too. 
So globalization, like democracy, is vulnerable to itself, because it puts at its opponents’ disposal a set of tools that they can use to sabotage it. 
Aware of this, the “nationalist international” driven by US President Donald Trump and his ideological fellow travelers has mobilized anxiety and alienation to launch a (somewhat paradoxical) crusade to globalize their particular anti-globalization discourse. 
Addressing the UN General Assembly, Trump stated openly that, “We reject the ideology of globalism, and we embrace the doctrine of patriotism.” 
He lavished praise on other states, such as Poland, that follow his example. 
Should Brazilians elect the far-right presidential candidate Jair Bolsonaro, they will join the wave of national populism threatening to raze the world’s multilateral institutions. 
Yet globalism and patriotism are not incompatible concepts. 
Trump’s invocation of patriotism has no aim other than to whitewash his nationalist and nativist tendencies. 
Rhetorical traps of this type can catch us with our guard down, above all when the person who resorts to them is a leader who is known for serving his ideas raw. 
But it is evident that the Trump administration, too, worries about keeping up appearances. 
There are many other examples. 
At the UN, Trump sought to give his foreign policy a patina of coherence by calling it “principled realism.” 
In international relations, realism is a theory that regards states as the central actors and units of analysis, relegating international institutions and law to an ancillary status. 
Principles such as human rights are usually set aside, though countries may deploy them selectively to advance their interests. 
This is precisely what Trump does when he criticizes the repression of the Iranian regime, while failing to denounce similar practices in other countries. 
But no self-respecting realist would exaggerate the threat posed by Iran, or allow a flurry of compliments from Kim Jong-un to cloud their vision regarding North Korea. 
“America will always choose independence and cooperation over global governance, control, and domination,” Trump told the UN. 
In theory, cooperation is not incompatible with the realist paradigm. 
For example, realists could conceive of the US trying to offset China’s geopolitical rise by bolstering its alliances in the Asia-Pacific region, especially with Japan and South Korea. 
But the Trump administration has called into question the security umbrella that it provides for these countries, not even exempting them from its protectionist trade measures (although the recent update of the bilateral agreement with South Korea seems to have calmed the waters). 
This disconcerting behavior has extended to other traditional US allies, such as the European Union, revealing that Trump is extraordinarily reluctant to cooperate. 
When he does, he seldom favors the alliances that most fit his country’s strategic interests. 
Regarding China, US diplomacy openly uses the term “competition,” despite the friendly relations that Trump claims to maintain with Xi Jinping. 
The ongoing trade (and technology) war between the two countries, along with the bouts of friction in the South China Sea, seem to presage an uncontrollable spiral of confrontation. 
Nonetheless, this scenario (which the realist school might foresee) can be avoided, especially if we shore up the existing structures of multilateral governance, which can help us to manage shifts in the balance of power. 
It is clear that China does not always adhere to international norms, but the right response is to uphold these norms, not to bulldoze them. 
Unfortunately, the US is opting for the latter course in many areas, such as commercial relations. 
In his General Assembly speech, China’s foreign minister, Wang Yi, did not stress the realpolitik that his country often promotes; instead, he mentioned the concept of “win-win” no less than five times. 
If Trump – together with the rest of the nationalist international – continues to reject this notion of mutual benefits, he will likely manage to slow down not only China’s growth, but also that of the US. 
Even more alarming, spurning multilateral cooperation means dooming the world to resignation in the face of existential issues such as climate change, a negligent stance that the Trump administration has adopted with relish. 
America’s abdication of leadership under Trump raises an obvious question: What good is it to be the world’s dominant power if, in the face of the greatest global challenges, its government chooses to condemn itself to powerlessness? 

Powers of the Future 
Looking back over the turbulent year that is now coming to an end, one is tempted to focus on what American leaders have come to call the Greater Middle East. 
Such a survey would obviously take us to Iraq, to Israel, and Palestine – and to terrorism. 
Lasting peace in the Middle East could lead to greater prosperity and cooperation in the world. 
But if we take a wider view, the problems of the Middle East appear to be but one aspect of deeper shifts among the powers of the world. 
Indeed, tectonic changes became visible in 2004. 
We have begun to see the “powers of the future,” to borrow the title of former German Chancellor Helmut Schmidt’s recent bestselling book. 
Chancellor Schmidt is certain of two developments. 
The United States remains the key player, and China’s power will continue to grow. 
He is less certain about the future of Europe, Russia, and the Middle East. 
To be sure, 2004 has seen the confirmation of America’s hard power – and its voters’ choice of a politics of values rather than of interests. 
Americans may not want their soldiers and military hardware in dozens, if not hundreds, of places around the world, but they accept a president who offers simple – often martial – certainties. 
One may also wonder whether this president could lead them in another direction, to traditional Republican isolationism. 
After all, it is the Democrats who have traditionally taken America to war. 
In any case, security guaranteed by military power will continue to be an American concern. 
But while America’s hard power dominates the world scene, its soft power declined this year. 
The US lost some of its attractiveness for many, and Americans are unpopular in many parts of the world. 
The decline in overseas visitors, and notably in the number of foreign students in the US, is the immediate result of stricter visa laws, but it is an important factor in the weakening of America’s global hegemony. 
Soft power begins with economic power. 
America’s twin fiscal and trade deficits may prove to be solvable problems, but new ways will have to be tried to resolve them. 
At a recent conference, US government representatives were unimpressed by European pleas to do something about the deficits – and the falling dollar that has resulted from them. 
“That is not a European problem,” the Americans responded. 
“It is an issue between us and China.” 
All at once, China is rapidly emerging as a growing economic force. 
It not only has considerable dollar reserves, but has also become the manufacturing capital of the world. 
American and European jobs increasingly migrate to China. 
Early hints at the reaction could be heard in the American presidential election campaign, with the frequent protests against outsourcing and China’s pegged exchange rate. 
But the trend will not be stopped. 
It is surely only a matter of time – a short time – before China makes its political and military weight felt. 
This leaves the uncertain future of Russia and those still in the Russian orbit, like Ukraine. 
This year witnessed a decline in democracy and the rule of law across what Mr Putin calls the “former Soviet space.” 
The problem is a challenge especially for Europe. 
At first sight, 2004 was a good year for the European Union, with enlargement to 25 members completed in May a notable success. 
Enlargement was not only a triumph for democracy and the rule of law in the postcommunist countries to the west of Russia, but it is also an indication of the magnetism of the EU, and thus of its soft power. 
Eastward expansion of the EU enables the New Europe to emulate the economic dynamism of other recent members, like Spain and Ireland. 
Enlargement has produced a Union confident enough to engage more explicitly – and even with elements of hard power – in the Balkans, Afghanistan, and elsewhere. 
It has also provided the courage to open accession negotiations with Turkey. 
Yet one cannot help agreeing with Chancellor Schmidt when he sees Europe’s future shrouded in uncertainty. 
There is no clear recognition of the fact that Europe’s soft power means little unless it is allied with the hard power of the US. 
But there was no progress in 2004 in recreating a transatlantic partnership that recognizes the massive changes occurring in world affairs. 
Pathetic attempts to go it alone have not made Europe stronger, and anti-Americanism harms Europe more than the US. 
Thus, at the end of 2004, the most important global task remains unresolved: creation of a confident nucleus for the Free World. 
An alliance of those who espouse and practice liberal democracy might provide a pole of certainty in a highly uncertain world. 
Let us hope that 2005 will bring us a few steps closer to that objective. 

Health in a Time of Ebola 
NEW YORK – In Sub-Saharan Africa, any child with a fever should receive immediate medical care to prevent death from malaria or pneumonia. 
But, as panic about the spread of Ebola grips Liberia – as well as Sierra Leone, Guinea, and Nigeria – people there are increasingly associating clinicians and health-care facilities with exposure to the disease. 
Ensuring that they continue to seek care when they need it requires improvements to frontline clinics and investment in locally hired community health workers (CHWs) to reach the vulnerable in their homes. 
To be sure, the shortcomings of Liberia’s health-care system long preceded the Ebola outbreak, with roughly 28% of the country’s four million citizens lacking access to adequate facilities. 
The 2003 Accra Comprehensive Peace Agreement may have ended years of civil war, but it left the country with only 51 doctors and decimated infrastructure. 
With very few qualified health-care professionals, repairing the health-care system demands more than building new hospitals and clinics across Liberia’s densely rain-forested countryside. 
Fortunately, the government, like others in Sub-Saharan Africa, recognizes the need to invest in training CHWs in rural counties to treat diarrhea, pneumonia, and malaria – the three major causes of death in children under five years old. 
By definition, CHWs have deep relationships with their communities, including traditional healers, which enables them to help the formal health-care system calibrate its approach. 
At the same time, mobile technologies facilitate quality control and supervision, while providing CHWs with expert clinical support. 
In March, Liberia’s health ministry, in collaboration with United Nations agencies, USAID, local and international NGOs, and private companies, created a comprehensive scale-up plan for the country’s community-health program. 
But Ebola struck soon after, shifting attention to clinics, quarantines, and reports of cures. 
The World Health Organization (WHO) has played a central role in coordinating the international response along with national governments, aid groups like Doctors Without Borders, and the US Centers for Disease Control and Prevention (CDC). 
With the epidemic still growing, the public-health community is attempting to mount an effective response, using a $100 million funding boost to deploy clinicians, epidemiologists, and other experts. 
To put this in context, the Liberian plan unveiled in March estimated that a national CHW network would cost some $20 million annually. 
To be sure, investments in CHWs should not come at the expense of critical public-health measures to slow the spread of Ebola or support for frontline clinics. 
But without continued investment in CHWs, whose costs are modest compared to those of traditional health-care systems, it will be difficult for the international community and national governments to stop the spread – and prevent the recurrence – of Ebola and other devastating epidemics. 
There are two basic approaches to building a health-care system. 
One has hospitals at the center and clinics radiating outward; the other is founded on social networks and mobilized by CHWs. 
If the first is too rigid, diseases and their social context evolve beyond its means. 
If the second is too flexible, the ability to carry out technically complex work is compromised. 
Striking the right balance is particularly challenging in areas where access is limited or trust is lacking. 
Doing so in the midst of an epidemic is even more complicated, owing to the social dimension of epidemics. 
In other words, how people respond when a child or family member falls ill is shaped by their friends’ and neighbors’ experiences, the availability of health-care services, and the community’s perception of those services; this response, in turn, determines how and to what degree the disease will spread. 
As a CDC expert explained, CHWs are the key to stopping Ebola, because anybody who shows symptoms of the disease becomes a “suspected patient,” all of whose contacts must be followed for another three weeks. 
“Every day, except Sunday, the workers report their findings to a supervisor.” 
One organization, Last Mile Health, has built a network of 300 CHWs that serves 30,000 patients, providing access to basic clinics even in places like hard-to-reach Konobo, Liberia. 
The organization’s hybrid structure is capable of addressing regular challenges, while retaining the flexibility to respond to extraordinary developments. 
As the rainy season approaches, threatening to facilitate the emergence of multiple epidemics that will overwhelm the health-care system’s capabilities, the need to mobilize, train, and equip citizens to respond has become even more urgent. 
This demands a combination of targeted development aid, domestic investment, expert support, and on-the-ground perspectives from Sub-Saharan countries that have successfully scaled up CHW networks. 
The same is true for all of the countries with active Ebola cases. 
Indeed, buttressed by the organizations behind the One Million CHWs campaign, these countries are already working to scale up CHWs. 
But they need more support, and international agencies and development banks remain too focused on containing the Ebola epidemic to offer the needed backing. 
International organizations must recognize that they do not have to choose between supporting traditional health-care investments and emergency-response efforts. 
Long-term investment in credible health-care systems is the only way to head off future epidemics. 
Otherwise, Sub-Saharan Africa’s people will forever struggle to overcome avoidable health crises. 

A New World of Health Care 
NEW YORK – Traditional health-care systems are in trouble. 
In the OECD, costly hospitals and clinics dominate health services, and account for 97% of the United States’ health-care spending. 
These systems are struggling in the face of cost constraints, public demand for higher quality, and exaggerated expectations. 
But there is a different system, widely practiced in poorer countries that cannot afford Western-style hospitals, and centered on community-based healthcare. 
We need both approaches; and we need them to work together. 
Indeed, the growing gap between the promise and the reality of health care has created room – in developed and developing countries alike – for new players who are concerned more with social behavior than with biology. 
In his seminal 1996 article in the Harvard Business Review, W. Brian Arthur identified the important distinctions between a health-care system defined by planning, hierarchy, and control and one characterized by observation, positioning, and flattened organizations. 
The first type of system, he argued, is concerned with materials, processing, and optimization. 
It is principally focused on access to medical care, and typically faces diminishing returns. 
By contrast, the second type of system is a networked world of psychology, cognition, and adaption. 
It can increase returns through its agile structure and ability to meet varied, locally determined, needs. 
It is not driven by the interests of any specific industry, and it complements, rather than competes with, high-cost health-care systems. 
It prioritizes wellbeing, healthy behavior, and how health choices are made. 
The latter approach is particularly relevant to conditions such as heart disease, hypertension, and diabetes, which most closely reflect individual behavior, physical context, and socioeconomic factors. 
Consider diabetes. 
A few major pharmaceutical companies compete for a finite group of diabetics by offering new formulations, marginal improvements in blood-sugar control, competitive pricing, and strategic partnerships with insurers and health-care providers. 
These incumbents are primarily concerned with defending their market position. 
Their activities do not extend to helping the hundreds of millions of obese people at risk of diabetes, or to those who respond poorly to existing treatment. 
But the key to living well with diabetes is a nutritious diet, an active lifestyle, social support, and coaching that is tailored to each individual’s circumstances. 
This basic formula also forms the foundation of efforts to prevent diabetes, as well as most chronic diseases. 
And it benefits healthy people, too. 
Indeed, traditional medical care accounts for only a small share (perhaps 20%) of our quality of life and life expectancy, while the rest is determined by healthy behavior, social and economic factors, and the physical environment. 
Dealing with the global epidemic of chronic diseases requires us to address this 80%, and doing so cannot be left to traditional health-care organizations alone. 
Instead, many successful initiatives, built upon existing social infrastructure, solve known health problems and even uncover new issues. 
Examples of this new approach include technology companies such as Omada Health, which delivers customized online health coaching at home for people at risk of diabetes; social enterprises, such as the Grameen Bank, which is building low-cost primary care systems on the back of its microlending networks; and the One Million Community Health Worker Campaign, which teaches ordinary citizens how to provide care in their own communities, based on lessons learned from similar models in Ethiopia, Rwanda, and elsewhere in Sub-Saharan Africa. 
Such health-care initiatives can be accelerated in practical ways. 
For starters, national health-care spending across the OECD must shift from its almost exclusive focus on medical care and embrace new entrants that can deliver health improvements. 
Moreover, these new entrants should have access to the costly data and financial infrastructure of traditional health-care systems. 
Physicians and nurses should be encouraged to work with new health practitioners to engage external stakeholders, such as schools, food companies, financial firms, and social services. 
Finally, greater support is needed for community groups and family caregivers who help people striving for better health. 
Western health-care authorities are taking note. 
Britain’s National Health Service in Wales, for example, is experimenting with community practices similar to those used in Brazil. 
New York City, inspired by African health networks, is expanding its community health networks to connect the city’s disjointed services. 
To be sure, the promise of traditional health care will always be compelling as long as technological progress continues to enhance health infrastructure and service delivery. 
Even so, there is much to learn from a new generation of health experts who understand how individuals make decisions, how collective action creates a healthier environment, and how good health is a means to a better life. 
Ultimately, the new world of health care has unlimited potential, because its frontier is where we live, work, and play, making all of us health-care experts and innovators. 
Ultimately, the battle against chronic disease will be won or lost at home. 

Microfinance’s Macro Potential 
LONDON – Microfinance is, at its heart, an effort to provide financial services to people who are not served – or are under-served – by the formal banking system. 
With appropriate, accessible, and fairly priced financial services, people can build their savings, cover the costs of unexpected emergencies, and invest in their families’ health, housing, and education. 
The International Finance Corporation estimates that microfinance has reached some 130 million people worldwide in the last 15 years. 
Over this period, microfinance has been lauded for its potential to advance financial inclusion and enable people to escape poverty. 
But it has also faced harsh criticism, with some lenders being accused of profiteering. 
Despite the industry’s widely publicized pitfalls, its potential to improve the lives of the poor cannot be ignored. 
The question now is how to ensure that microfinance becomes the industry that the world needs. 
To this end, three important steps must be taken. 
The first step is better regulation. 
Microfinance institutions (MFIs) come in many forms – mainstream banks, specially licensed banks, non-financial companies, finance and leasing companies, non-governmental organizations, cooperatives, and trusts – and follow a variety of business models. 
All of these intermediaries must be recognized and regulated according to the needs of the economies in which they operate. 
Inadequate regulation is most damaging to those who need microfinance services the most. 
Nowhere was this more apparent than in the 2010 microfinance crisis in the Indian state of Andhra Pradesh – a hub of MFI activity – when a decade of explosive growth, fueled by aggressive and reckless lending practices, came to a head. 
Over-indebtedness, together with coercive recovery practices, led to a series of widely publicized suicides, spurring local officials to implement new restrictions on MFIs and discourage borrowers from repaying their debts. 
As repayment rates plummeted, micro-lending ground to a halt. 
In order to prevent such outcomes, governments must design regulations that foster a sustainable financial-inclusion model, one that enables MFIs to offer long-term support to borrowers. 
At the same time, regulation must deter MFIs from behaving recklessly with a vulnerable client segment. 
And regulation should be based not on past experience, as it is now, but on future possibilities; in other words, the regulatory framework must be flexible enough to accommodate new innovations. 
The second step, to be taken by the microfinance industry itself, is to create effective mechanisms for assessing the industry’s impact. 
As it stands, some governments and academics are uncomfortable with the fact that MFIs, which are supposed to be providing a public good by advancing financial inclusiveness, are pursuing profits. 
But the failure of some MFIs to differentiate between profit-seeking and profiteering does not mean that sustainable microfinance should not yield returns above costs. 
The business of providing financial services to the poor requires commitment. 
Without profits, MFIs are unable to invest in the talent and product development needed to serve people for the long term. 
Many governments have now implemented interest-rate ceilings and margin caps to curtail excessive profits for MFIs, while ignoring the margins of the market’s non-organized alternatives, like pawnbrokers. 
In order to provide a more balanced perspective on the microfinance industry compared to other kinds of financial-services providers, MFIs need to do more to measure and explain their social and economic value. 
The good news is that industry bodies, investors, and governments have already introduced metrics for factors ranging from pricing to conduct. 
While this has resulted in a rather disparate set of indicators, which must be standardized, such efforts are an encouraging sign of the microfinance industry’s commitment to securing its role in the financial-services ecosystem. 
The third step concerns technology. 
Mobile connectivity is transforming the global financial system by enabling remote, rural populations to access financial services for the first time. 
Mobile-payment systems like M-Pesa are changing how people transfer, receive, and save money in many developing countries, including Kenya, Pakistan, and the Philippines. 
For the microfinance industry, such systems represent an important opportunity, as they enable borrowers to apply for, receive, and repay loans on their mobile phones, using a network of local agents to deposit and withdraw cash. 
But, without robust regulation, MFIs cannot make the most of these developments. 
Moreover, the mobile-payments revolution has so far been led largely by telecom providers. 
If it is to deliver real benefits to the financially excluded, the financial-services industry will need to play a much more active role. 
Of course, microfinance alone will not eliminate poverty, or even financial exclusion, regardless of how well it functions. 
To have a truly transformative impact, MFIs’ operations must be supported by government-led efforts to improve access to education, training, and employment. 
Although microfinance has already helped countless people worldwide, the World Bank estimates that some 2.5 billion adults still lack access to financial services. 
It is the responsibility of all stakeholders – including governments, regulators, banks, and civil society – to ensure that microfinance continues to be part of the solution. 

A Precautionary Approach to Artificial Intelligence 
FLORENCE – For policymakers anywhere, the best way to make decisions is to base them on evidence, however imperfect the available data may be. 
But what should leaders do when facts are scarce or non-existent? 
That is the quandary facing those who must grapple with the fallout of “advanced predictive algorithms” – the binary building blocks of machine learning and artificial intelligence (AI). 
In academic circles, AI-minded scholars are either “singularitarians” or “presentists.” 
Singularitarians generally argue that while AI technologies pose an existential threat to humanity, the benefits outweigh the costs. 
But although this group includes many tech luminaries and attracts significant funding, its academic output has so far failed to prove their calculus convincingly. 
On the other side, presentists tend to focus on the fairness, accountability, and transparency of new technologies. 
They are concerned, for example, with how automation will affect the labor market. 
But here, too, the research has been unpersuasive. 
For example, MIT Technology Review recently compared the findings of 19 major studies examining predicted job losses, and found that forecasts for the number of globally “destroyed” jobs vary from 1.8 million to two billion. 
Simply put, there is no “serviceable truth” to either side of this debate. 
When predictions of AI’s impact range from minor job-market disruptions to human extinction, clearly the world needs a new framework to analyze and manage the coming technological disruption. 
To be sure, incomplete data are a common problem for technology researchers. 
Even under “normal” conditions, the study of emerging technologies is like solving a puzzle in the dark with a dim flashlight. 
The assumptions of established theories are not questioned, and securing beneficial outcomes is a matter of quantifying probabilities of adverse events and consequently managing the associated risks. 
But every so often, a “post-normal” scientific puzzle emerges, something philosophers Silvio Funtowicz and Jerome Ravetz first defined in 1993 as a problem “where facts are uncertain, values in dispute, stakes high, and decisions urgent.” 
For these challenges – of which AI is one – policy cannot afford to wait for science to catch up. 
At the moment, most AI policymaking occurs in the Global North, which deemphasizes the concerns of less developed countries and makes it harder to govern dual-use technologies. 
Worse, policymakers often fail adequately to consider the potential environmental impact, and focus almost exclusively on the anthropogenic effects of automation, robotics, and machines. 
Even without reliable data, decision-makers must move forward with AI governance. 
And, as the world waits for scientific certainty (which may never arrive), there is an existing solution that can guide us into the unknown: the “precautionary principle.” 
Adopted globally in 1992 as part of the United Nations Rio Convention on sustainable development, and later incorporated into one of the European Union’s founding treaties, the precautionary principle states that a lack of certainty cannot be a basis for failing to protect human health or the environment. 
That seems like a suitable way to address the uncertainty of a tech-driven future. 
The precautionary principle is not without its detractors. 
But while its merits have been debated for years, we need to accept that the lack of evidence of harm is not the same thing as evidence of lack of harm. 
This simple idea has been applied to myriad human development issues – from public health to infant mortality. 
There are three good reasons why AI should be next. 
For starters, applying the precautionary principle to the context of AI would help rebalance the global policy discussion, giving weaker voices more influence in debates that are currently monopolized by corporate interests. 
Decision-making would also be more inclusive and deliberative, and produce solutions that more closely reflected societal needs. 
The Institute of Electrical and Electronics Engineers, and The Future Society at Harvard’s Kennedy School of Government are already spearheading work in this participatory spirit. 
Additional professional organizations and research centers should follow suit. 
Moreover, by applying the precautionary principle, governance bodies could shift the burden of responsibility to the creators of algorithms. 
A requirement of explainability of algorithmic decision-making can change incentives, prevent blackboxing, help make business decisions more transparent, and allow the public sector to catch up with the private sector in technology development. 
And, by forcing tech companies and governments to identify and consider multiple options, the precautionary principle would bring to the fore neglected issues, like environmental impact. 
Rarely is science in a position to help manage an innovation long before the consequences of that innovation are available for study. 
But, in the context of algorithms, machine learning, and AI, humanity cannot afford to wait. 
The beauty of the precautionary principle lies not only in its grounding in international public law, but also in its track record as a framework for managing innovation in myriad scientific contexts. 
We should embrace it before the benefits of progress are unevenly distributed, or, worse, irreversible harm has been done. 

Predatory Competition Policy 
The recent decision by the European Court of First Instance to uphold the fine and sanctions the European Commission imposed upon Microsoft in 2004 appears to have justified the Commission’s interventionist approach to competition policy. 
A five-year investigation of Intel may also end with severe penalties. 
But the EU should not rejoice at this seeming triumph over American “big business.” 
Instead, it should ponder if its policies actually make Europe hospitable for innovating enterprises. 
Italy’s Minister for Trade and Europe, Emma Bonino, commenting upon the Microsoft ruling, observed that the very name Microsoft evokes “what the US is capable of doing.” 
To Bonino, if a company of comparable significance isn’t being born in Europe, it is because “we haven’t been able to set up a favorable climate for it to flourish.” 
The European Commission’s approach to competition policy won’t move Europe toward that better climate. 
Indeed, high-tech companies like Microsoft and Intel are particularly unsuitable targets for antitrust policing, because regulators cannot possibly move at the speed of ‘Internet time.’ 
Consider computer operating systems, business accounting software, databases, Internet search engines, silicone chips, broadband services, cable, and cellular telephony. 
All are examples of fast-moving industries in which competition is fierce and great wealth is created. 
Industries and firms, like people, have their own life cycles, and the pace of change in high-tech industries is unprecedented. 
Remember IBM? 
Only a few years ago, antitrust authorities in the US were convinced that IBM was locking up the computer industry for generations to come. 
Since then firms like Microsoft and Intel exploited software and hardware revolutions that IBM and others had missed, and left IBM in the dust. 
And just as competition authorities on both sides of the Atlantic have been losing sleep over the Windows monopoly, Microsoft’s desktop model is threatened today by handheld devices and Google’s dispersed online computing model. 
Intel is subject to parallel threats from a myriad of chip and hardware makers. 
Regulators contribute no value to this high speed evolutionary process. 
Rather than preventing monopolization and restraint of trade, as the theory goes, antitrust regulation in the “new economy” is a new face of the old “industrial policy,” allowing bureaucrats to manipulate economic outcomes and favor companies dearer to them than the consumers’ choice. 
The only beneficiaries of government officials’ telling Microsoft how to make computer software are Microsoft’s competitors -- and not competition. 
Yet regulators persist in trying to inject themselves into these fields, with antitrust authorities claiming that they are ripe with anti-competitive practices and exercises of “undue market power" by the most successful market participants. 
European competition law in particular allows policymakers to intervene at will, increasing uncertainty, damaging wealth creation and consumer well-being. 
Efficient companies are punished for their success by being held to a special standard that expects them to cuddle their competitors, instead of continuing to out-price and outsell them, to the benefit of consumers. 
What is presented as a defense of competition results in advancing politically connected special interests and imposing unnecessary costs on innovation. 
Even if Microsoft on occasion may have engaged in some sharp competitive practices, the EU’s competition authorities have not been content with slapping its wrists, but got involved in deeply intrusive remedies, including the unbundling of a media player from Microsoft’s operating system and mandating disclosure of industrial secrets embodied in Microsoft’s server software. 
Not surprisingly, Microsoft’s competitors cheered the Commission throughout the entire investigation and appeal. 
The Commission is thus establishing itself as a friendly venue for businesses that cannot overcome competitors in the market, and seek a second chance in court. 
The new European Commission’s action against the chipmaker Intel is a good example. 
Intel is charged with “abusing” its dominant market position by so called “predatory pricing” (selling below cost) and offering substantial rebates to retain market share and undermine its arch-rival Advanced Micro Devices. 
“Predatory pricing” is an old scarecrow of antitrust enforcement. 
The idea that it is rational for a company to incur enormous losses by selling below cost in order to achieve or maintain a monopoly position has been roundly criticized by economists who argue that situations in which such losses can be recouped by subsequent monopoly profits are extremely rare. 
Indeed, empirical research has shown that, throughout history, as far back as the Standard Oil case in the early 20th century, most instances of alleged “predatory pricing” have in fact been cases of superior efficiency. 
In the last couple of decades, US courts have made proving price predation next to impossible. 
Yet the EU’s competition authorities persist in accusing Intel of exactly this form of irrational behavior. 
The problem with “predatory pricing” is that the courts are very unlikely to be able to distinguish “unfair” prices from effective competition that is a boon to consumers. 
It is the less efficient competitors, and not consumers, that are the most likely to benefit from punishing Intel for lowering its prices. 
Reforms are needed if Europe really wants to become a competitive, knowledge-based economy, and not merely the most regulated one. 
Imposing billions of dollars of fines on the most conspicuous wealth creators is not the way to go. 
Europe needs to make the likes of Microsoft and Intel feel at home in Brussels, Paris, or Berlin, not to become a political market leader in supplying sympathetic verdicts to market losers. 

Sizing Up the US Election’s Opening Round 
WASHINGTON, DC – If you find America’s presidential election campaign puzzling, you probably have a better grasp of it than those who are willing to predict an outcome. 
At this point, with both major parties set to choose their nominees in state-level primary elections or caucuses, there can be no predictions, only informed (or uninformed) guesses. 
The first major contest, in Iowa on February 1, is usually tricky to forecast, because the outcome relies more on organizational prowess than on popularity. 
The main question, in both the Republican and Democratic races, is whether the candidates can get enough of their supporters to the caucuses – relatively small gatherings held in the evening in wintry conditions. 
On the Republican side, Ted Cruz and Donald Trump are within the margin of polling error of each other in both Iowa and New Hampshire, which votes eight days later. 
Although Trump leads by an enormous margin in national polls, the strength of his Iowa organization is unknown, and what matters are the state-level results as the nominating process moves ahead. 
His challenge is that many of his supporters have never actually participated in an election. 
Trump’s success so far reflects his shrewdness at reading the times and pleasing a crowd. 
(His reality television show, The Apprentice, gave him plenty of practice.) 
The electorate is angrier and more fearful than in recent presidential contests, and both he and Cruz are capitalizing on it. 
That sentiment – a product of slow economic recovery, ever-widening wealth and income inequality, and a racially infused sense of insecurity (particularly among white men) – makes for volatile politics. 
Trump, in particular, is channeling the same populist anger on the right that fueled the rise in 2010 of the Tea Party, which opposed both the government’s bailout of the banks that had caused the 2008 financial crisis and President Barack Obama’s health-care program. 
But the Tea Party candidates who swept into Congress in 2010 failed to deliver on their promises to repeal “Obamacare” and substantially cut federal spending, further inflaming much of the Republican base. 
So the preference of the possible Republican voters has been for someone who hasn’t been “tainted” by “Washington.” 
Trump – roughly half of whose supporters have only a high school education or less – is especially deft at pandering to racial prejudices and hostility toward immigration. 
And his supposed success in business (his record is actually mixed) convinces his followers that he knows how to get things done, while his enormous personal wealth is seen as making him incorruptible. 
An important consideration to bear in mind, though, is that Trump has been benefiting from the fact that the field is so large. 
When other candidates drop out, the picture could be quite different. 
Whether an “establishment” figure – one backed by the party leadership, such as former Florida Governor Jeb Bush or New Jersey Governor Chris Christie – can catch on with voters will become clearer only after Iowa and New Hampshire have voted. 
Conservative fundamentalist Christians – traditionally a powerful force in the Iowa Republican caucus – had been largely backing another anti-establishment candidate, the noted neurosurgeon Ben Carson. 
But, as Carson’s campaign has collapsed under the weight of his obliviousness to policy, Cruz has emerged as the greatest threat to Trump in the early contests. 
A first-term senator from Texas, Cruz is smart, serious, and nasty. 
In the current political climate, he wears the scorn of his Senate colleagues – he’s detested by almost all of them – as a badge of honor. 
That approach, along with his record as Obamacare’s greatest congressional foe and his displays of religiosity, is clearly working for him. 
Those who assumed – as many did – that Bush would walk away with the Republican nomination were misreading the political barometer. 
The Bush name is no longer magic, and Jeb had been out of politics for eight years when he entered the race. 
Moreover, the pressures facing a national candidate are quite different – both more magnified and more diffuse – from those facing a governor. 
Yet some believe that it’s too soon to write Bush off. 
Senator Marco Rubio of Florida – a supposedly “establishment” candidate who has been moving up in the polls – is arguably the exception to the pattern so far. 
But, based on his record in the Senate, the “establishment” label is debatable. 
Rubio, the epitome of a young man in a hurry, has taken positions – for example, on the Iran nuclear deal – that have incensed the Senate Republican leadership. 
Rubio’s slick speaking style and Hispanic heritage make Democrats nervous. 
But he is now being tested as never before, and he’s made some mistakes (including something as silly as turning up in boots with “Cuban” heels that made him look faintly ridiculous). 
On the Democratic side, the huge crowds turning up for the self-described Democratic Socialist Bernie Sanders are also motivated largely by perceived economic injustice (creating a possible overlap – which Sanders has noted – with Trump supporters). 
It should be no surprise that Sanders – substantive, authentic, and uninhibited by the need to placate the party’s various interest groups – is posing such a strong challenge to Hillary Clinton, the long-presumed Democratic nominee. 
He leads most polls in New Hampshire, which neighbors his home state of Vermont, but also some in Iowa. 
Nonetheless, given Clinton’s organizational advantages (particularly the overwhelming support of other Democratic officeholders), only some dramatic and unforeseeable development could block her path to the party’s nomination. 
Her greatest challenge, in the primaries if not in the general election, is likely to be an enthusiasm gap: Support for her candidacy, while broad, is not deep. 
Indeed, because she lacks the intense connection with voters needed to encourage them to turn out in a close race, her frontrunner status could, paradoxically, become her greatest weakness. 

Greece’s Bogus Debt Deal 
PRINCETON – The process of official forgiveness of Greek debt has begun. 
Referred to as “official sector involvement” (OSI), it includes several initiatives aimed at reducing Greece’s debt/GDP ratio to 124% in 2020, from roughly 200% today. 
Even as the deal was announced, however, newspaper reports suggested that officials recognized that the measures would be insufficient to meet the target; further negotiations on additional steps would be needed at a politically more convenient moment. 
The economist Larry Summers has invoked the analogy of the Vietnam War to describe European decision-making. 
“At every juncture they made the minimum commitments necessary to avoid imminent disaster – offering optimistic rhetoric, but never taking the steps that even they believed could offer the prospect of decisive victory.” 
This strategy needs to be inverted – and Greece offers a real opportunity to get ahead of the curve. 
Instead of driblets of relief, a sizeable package, composed of two elements, is the way forward. 
First, as Lee Buchheit, the attorney who oversaw the Greek private restructuring, has proposed, maturities on official Greek debt could be greatly extended. 
A simple structure would be to make all debt payable over 40 years, carrying an interest rate of 2%. 
This would move Greece and its official creditors beyond the continuous angst that now prevails. 
The second element of the debt-relief package would be more innovative: If Greece’s economy performs well, the generous extension of maturities can be clawed back or the interest rate raised. 
A formula for this could be linked to the debt/GDP ratio – a scheme with advantages that transcend the Greek case. 
The idea of linking debt relief to a country’s debt/GDP ratio has been around for a while, but has never gained significant acceptance. 
Applying it in Greece would be a highly visible test; if successful, it would set a valuable precedent. 
Why bother? 
Because the very premise of the current deal and the expectations it sets out are wrong. 
First, the notion that there is a smooth transition path for the debt/GDP ratio from 200% to 124% is fanciful. 
Second, even if, by some miracle, Greece did reach the 124% mark by 2020, the claim that its debt will then be “sustainable” is absurd. 
Thus, continuing down this path will further erode policymakers’ credibility – not that they seem to care – while imposing on the rest of the world a persistent sense of crisis and uncertainty, with real financial and economic costs. 
Make no mistake: policymakers’ track record on forecasting Greek economic performance during the crisis has been an embarrassment. 
In May 2010, the International Monetary Fund projected – presumably in concurrence with its European partners – that Greece’s annual GDP growth would exceed 1% in 2012. 
Instead, the Greek economy will shrink by 6%. 
The unemployment rate, expected to peak this year at 15%, is now above 25% – and is still rising. 
The debt/GDP ratio was expected to top out at 150%; absent the substantial write-down of privately held debt, which was deemed unnecessary, the ratio would have been close to 250%. 
In September 2010, four months after the official Greek bailout was put in place, the IMF issued a pamphlet asserting that “default in today’s advanced economies is unnecessary, undesirable, and unlikely.” 
The conclusion was that official financing would carry Greece past its short-term liquidity problems. 
Calls for immediate debt restructuring went unheeded. 
Six months later, after substantial official funds had been used to pay private creditors, the outstanding private debt was substantially restructured. 
Such were the errors committed over short time horizons. 
Relatively speaking, 2020 is an eternity away. 
Even assuming better forecasts, the projection of 124% could be a gross underestimate. 
The precision of the numbers underpinning the deal is a façade, if not a reflection of an alternate reality. 
And, again, even if Greece somehow did achieve the 124% milestone, its debt would still not be sustainable. 
At that point, Greece would merely be where it started in May 2010. 
The most reasonable comparison is with Latin American countries during their debt crises in the 1980’s and 1990’s. 
Despite significantly lower debt/GDP ratios and continuous debt restructuring, they eventually needed the large debt reduction that came with the issuance of Brady bonds to achieve some breathing room. 
Getting ahead of the curve will give Greece a realistic chance of controlling its own destiny. 
It will also be a reminder of the dangers of rushing in with official money where private debts have become unsustainable. 
Staying the course, as Summers warns, will lead only to “needless suffering” before that course inevitably collapses, bringing Greece – and much else –­ crashing down. 


Prepare Now for the Return of SARS 
Every winter, millions of people around the world suffering from flu-like illnesses visit their doctor. 
Some patients actually are infected with flu; others have colds or other respiratory infections, many of which also peak in the winter. 
This coming flu season there will be a new twist: physicians will have to be aware that hidden among these patients could be a small number with SARS, a respiratory disease that is also likely to be seasonal and whose early symptoms are almost indistinguishable from those of the flu. 
If even a few SARS cases are present among the millions of flu-like cases that will appear this autumn, it will be critical to identify and isolate them to prevent a repeat of the epidemic that scourged China earlier this year. 
But among the vast number of flu and other cases, finding these cases will be difficult. 
Paradoxically, the best way for health authorities to prepare for a possible return of SARS this winter is to make special efforts to reduce the spread of flu and speed its diagnosis. 
This may be a tough sell politically. 
Unfortunately, if predictably, the remarkable success of efforts around the world to control the transmission of SARS--particularly in Taiwan and mainland China--has led some to question whether the threat of SARS was ``overblown.'' 
But the very reason we have the luxury to ask such questions is that the spread of the infection was contained by exceedingly stringent measures. 
Rapid and effective isolation of infected cases, together with efficient tracing and monitoring of the contacts made by those infected with SARS, allowed public health officials in Hong Kong, Toronto, Singapore, and Vietnam to contain the epidemic. 
Screening travelers from affected regions may have prevented significant epidemics elsewhere. 
Health officials around the world should maintain their vigilance and prepare for the possibility that renewed control efforts will be required if SARS resurges. 
Indeed, the experience with SARS in Toronto, where cases escaped detection and led to a second outbreak, stands as a warning against excessive optimism about the apparent control of the larger and more geographically dispersed outbreaks in Taiwan and mainland China. 
These epidemics may, in fact, be eliminated entirely in coming months. 
But it is at least as likely that some transmission will persist, or that the virus will be reintroduced into human populations from animals. 
Like other respiratory infections, SARS may be easier to contract, more severe, or both, during winter. 
Continued surveillance and infection control measures will be required to ensure that the accomplishments of the last few months are not undone by a few undetected cases that touch off new SARS hot spots. 
Surveillance will not be easy. 
SARS is difficult to diagnose definitively, and during flu season, it will be much easier to miss a case of SARS. 
With current tests, it is impossible to verify that a patient has been infected with SARS until several weeks after symptoms begin. 
Experience around the world shows that SARS cases must be isolated within a few days of the onset of symptoms in order to control the spread of the virus. 
The dilemma is that playing it safe--by treating every flu-like illness with the precautions appropriate for SARS--would present an enormous logistical, operational and financial burden to health care systems. 
But to ignore the possibility that some such patients are SARS cases risks the start of new outbreaks. 
We don't have vaccines or rapid tests for SARS, but we do have them for flu. 
We need to use them. 
Influenza vaccine supplies should be increased so that more individuals are inoculated. 
Extra efforts should be made to encourage more people to get a flu shot, including those outside the traditional ``target'' groups, such as elderly people and health care workers. 
By preventing influenza, these vaccines reduce the number of individuals to be evaluated for SARS. 
Kits for rapid diagnosis of influenza infection already exist. 
If more physicians had routine access to these kits, they could tell on the spot whether a patient had influenza and eliminate the need to treat him or her as a possible SARS patient. 
Even assuming the best-case scenario--that SARS is eliminated by the end of this year--increased flu vaccination and better availability of diagnostics will benefit millions of people worldwide. 
According to the World Health Organization, as many as half a million people die each year from influenza. 
Many more are hospitalized with severe illness. 
Wider vaccination will protect people from infection and block the spread of the virus. 
Broader use of rapid diagnostics will permit more effective treatment for flu cases at risk of developing serious complications. 
If SARS is brought under control worldwide in the next few months, public health authorities will have achieved a great triumph. 
Successful containment of SARS might mark the first time in history that person-to-person, respiratory transmission of a major pathogen has been halted globally without the use of antibiotics or a vaccine. 
But we would be foolish to think we have seen the last of SARS, and it will take time for scientists to develop diagnostics, treatments, and vaccines. 
In the meantime, we should intensify the fight against an older nemesis, influenza, both for its own sake and as a way to prepare for the return of SARS. 

Preparing for President Trump 
LONDON – As America’s friends and allies look on in astonishment at the all-but-certain prospect of a contest between Hillary Clinton and Donald Trump in November’s US presidential election, they need to do more than just wring their hands. 
They must hope for the best but prepare for the worst. 
The crucial point about the 2016 election is not just that a reality-TV star and property magnate who has never held elected office has emerged as the presumptive Republican candidate. 
It is the enormous difference that a victory by Trump would make for the rest of the world compared with a victory by Clinton. 
In every US presidential election in modern times, America’s friends and allies have had their private preferences. 
But never before have the Democratic and Republican candidates been as different as chalk and cheese. 
There was no unbridgeable gulf between Reagan and Carter, or Clinton and Bush, or Bush and Gore, or Obama and McCain. 
There is between Trump and Clinton. 
To the rest of the world, Clinton represents continuity, and Trump means dramatic change. 
Just how dramatic cannot be known, but the normal assumption that candidates play to their party’s core supporters during the primary season but then tack to the center for the general election cannot be relied on in Trump’s case. 
His is an abnormal candidacy. 
That is why preparation makes sense. 
Trump confirmed in his speech on foreign policy to the Center for the National Interest in Washington, DC, on April 27 that “America First” would be the overriding theme of his administration. 
He would reject multilateral trade deals and institutions, take a much tougher line on illegal immigration, and forge a new approach to defense and security alliances. 
Trump declared in that speech that he wants the United States to be “predictably unpredictable,” but he also made it clear that he won’t abandon his basic position. 
Allies will have to pay more for their defense. 
And they can expect tough measures by his administration if they have an enduringly large bilateral trade surplus with the US. 
Regional deals, such as the 1994 North American Free Trade Agreement (NAFTA) between the US, Mexico, and Canada, are a “total disaster” that have tied America’s hands. 
So the best assumption is that they would be scrapped. 
So how can friends and allies prepare for a President Trump? 
Discreetly, of course. 
But the author of the 1987 bestseller The Art of the Deal would surely agree that sound preparation is the essence of striking a good bargain. 
If Trump finds evidence of it after having won the White House, he would likely admire his counterparts for it, even if secretly. 
There are two sorts of things that friends and allies can and should do to prepare for the worst. 
One is to make themselves stronger and thus better able to stand up to a bully. 
The other is to shore up their alliances and friendships with one another, in anticipation of an “America First” rupture with old partnerships and the liberal international order that has prevailed since the 1940s. 
A weak Japan and a fractious collection of 28 countries in the European Union would be a tempting target for President Trump. 
A Japan that had, over the next 12 months, truly embraced the growth-enhancing strategy of liberalization that has often been promised by Prime Minister Shinzo Abe would be in a stronger position. 
So would European countries that dropped their obsession with fiscal austerity and used public-investment programs to kick-start growth and reduce unemployment. 
Such moves, which are needed in any event, would make it easier to start on the task of building stronger alliances – which may well become essential. 
If a Trump administration seeks to scrap NAFTA, Canada and Mexico will need to make common cause. 
If it chooses to discard the Trans-Pacific Partnership (TPP) trade agreement negotiated by the Obama administration with 12 Asia-Pacific economies, those countries, perhaps led by Japan or Australia, must be ready to carry on the deal, or something like it, among themselves. 
(Clinton has also turned against the TPP, but this can be assumed to be merely tactical; in Trump’s case, no such assumption is warranted.) 
A similar story applies in Europe. 
To avoid being pushed around by Trump over trade or security, members of the EU and NATO must be prepared to stick together. 
That may mean being ready to spend more on their own defense – a demand by Trump that is not unreasonable. 
It will also mean being sufficiently united to avoid being picked off singly by an American bully. 
And yet European solidarity is fraying, to say the least, thanks to the migrant crisis and the economic aftermath of the 2008 financial crash. 
On June 23, British voters could make the situation far worse if they vote in their referendum to leave the EU. 
To strengthen Britain, and the EU itself, in anticipation of Trump, they would be well advised to vote to stay in. 
Asia has not been known for its solidarity. 
It has depended, perhaps excessively, on American influence to balance its rivalries. 
Japan, for example, has close ties with Southeast Asian countries but no formal security relationships with them. 
Both Japan and its nearest neighbor, South Korea, have longstanding security treaties with the US, but are hostile to each other. 
Given the possibility of trade wars, currency wars, and a renunciation of long-held security alliances within the next 9-12 months, it is time to put regional solidarity ahead of old enmities and the forces of fragmentation. 
America’s friends and allies need to start preparing for a less friendly America. 

Prescription Financial Products 
NEW DELHI – One positive fallout of the financial crisis of 2007-201? is our realization that financial products can be as complex and dangerous as drugs. 
This realization has led to innovative ideas and experimentation with new laws, regulations, and institutions around the world. 
In India, the government has announced the establishment of the Financial Stability and Development Council (FSDC) to address inter-regulatory coordination issues and provide macro-prudential supervision. 
In the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and new initiatives to monitor the safety of financial products, could alter the architecture of finance. 
Several proponents of these new ideas have openly used the analogy with drugs. 
It has been argued that if, in 2007, the US had a Financial Products Safety Commission akin to its Food and Drugs Administration, the market would not have been flooded with “teaser” mortgages that entangled millions of households in chains of predatory credit. 
What is especially sophisticated about the new ideas cropping up in the US, Europe, India, China and elsewhere is the recognition that, as with drugs and toys, it is impossible to say in advance which financial products we should allow and which we should not, because we cannot conceive of all the products that can and will come to market. 
Hence, the need for a judgmental body that can look at a new product and form an opinion about its desirability. 
Indeed, there is a worrying aspect to the new plans: they must tread a narrow path between reckless freedom for financial institutions, which contributed to the recent global financial crisis, and over-caution, which can suffocate innovation and create inefficiencies. 
Consider a teaser loan, which initially charges low or even no interest, with much higher rates kicking in at a later date. 
To be sure, this is a dangerous product, and it did cause many families to fall into an unsustainable debt trap. 
But such loans can be of great value to sophisticated firms and households that may have good reason to believe that their future earnings will be higher than their current earnings. 
Such entities would be able to make investments that would not be possible otherwise. 
This is just one example. 
It is impossible to anticipate the numerous financial products that human ingenuity can create, and that can be dangerous to use but of great value to some. 
The risk created by many of the regulatory measures under consideration in today’s crisis-scarred world is that they may end up over-regulating our markets to the point of blocking the emergence of valuable new products. 
But there is a way out of this conundrum. 
In creating new financial regulations, we need to take the medical analogy one step further – by creating the equivalent of the prescription. 
Instead of banning or freely allowing all dangerous products, we need to identify products that are valuable to some customers but not all – call them “prescription financial products” – and create a body of registered finance professionals (RFPs) who are empowered to certify the purchase of these products by individuals. 
For example, you are planning to buy a house. 
Your local bank offers you what is certified to be a teaser loan – a prescription product. 
You can take such a loan provided that an RFP approves such a contract. 
In brief, just as we do not ban steroids because they are dangerous, but require that buyers have a valid prescription, we should institutionalize caution in how financial products can be used – and by whom. 
This option could vastly shorten the list of products that will need to be banned outright. 
We should, however, avoid the medical convention whereby each product is either over-the-counter or prescription, regardless of who is buying the product. 
In order to keep the system lean, there should be a provision for exempting some individuals and firms – those sophisticated enough to handle their own affairs, or well off enough to deal with financial failure – from the requirement of an RFP’s approval before buying a prescription financial product. 
The reason I argue for this provision is my positive experience in India, having recently moved here from the US. 
A few months ago, I went to meet the owner of our local drugstore. 
Without encumbering him with any prescription, I told him somewhat sheepishly that I was going on an extended foreign trip and wanted to keep a precautionary strip of antibiotic tablets with me. 
He looked me up and down, sized me up, and then said, “Since you are going for so long, I would suggest you keep two strips.” 

President Bush Goes Soft 
The first term of George W. Bush’s presidency was marked by unilateralism and military power. 
The United States was the world’s only superpower, so others had to follow. 
The result was a dramatic decline in America’s “soft” or attractive power. 
Secretary of Defense Donald Rumsfeld said he did not know what soft power was. 
Now it is back in fashion in Washington. 
Bush’s second inaugural address was devoted to the power of liberty and democracy. 
Such rhetoric is not new to American presidents. 
Harry Truman spoke of defending free people everywhere, and Woodrow Wilson spoke of promoting democracy. 
The neo-conservatives in Bush’s first administration were in that tradition, but ignored the fact that both Wilson and Truman were also institution-builders who consulted other countries. 
In dropping that half of Wilson’s approach, they stepped on their own message, reducing its effectiveness. 
The tone at the beginning of the second Bush administration is different. 
As Secretary of State Condoleezza Rice said recently in Paris: “I use the word ‘power’ broadly, because even more important than military and indeed economic power is the power of ideas, the power of compassion, and the power of hope.” 
Bush not only chose to visit Brussels, the capital of the European Union, on his February trip to Europe, but stated that what “we seek to achieve in the world requires that America and Europe remain close partners.” 
Even Rumsfeld is trying to be conciliatory! 
Will Bush’s new approach succeed? 
On a recent trip to Europe, I encountered both encouragement and skepticism. 
Many people welcomed the new tone, but wondered if it was simply sugarcoated cynicism. 
Words must be matched by deeds before people are convinced. 
One place to look to see if deeds are forthcoming is in Bush’s latest budget. 
The budget cuts discretionary spending (other than defense and homeland security) by nearly 1%, and slashes as many as 150 domestic programs. 
Yet, in this climate of fiscal stringency, he calls for increased contributions to international organizations, the Millennium Challenge Account to provide assistance to countries with a commitment to making progress in poverty reduction, and the Global HIV/AIDS Initiative. 
Bush’s new budget also includes an increase in funding for public diplomacy. 
The allocation for the State Department’s educational and cultural exchange programs, including overseas research centers, libraries, and visitor programs, is boosted by nearly 25%. 
As Bush’s budget request to Congress puts it, “Rarely has the need for a sustained effort to ensure foreign understanding for our country and society been so clearly evident.” 
This comes after a first term in which public diplomacy was a neglected stepchild, and a Pentagon advisory panel summed up the situation as a “crisis.” 
Even with these increases, there is a long way to go to improve America’s standing. 
A recent non-partisan report by the Public Diplomacy Council called for a new Agency for Public Diplomacy within the State Department, 24-hour English-language broadcasts by the Voice of America, and a fourfold budget increase over the next five years. 
The Bush administration still has much to do in promoting ideas, but early indications suggest a change from the neglect of the first term. 
But it will not be enough for Bush to start his second term with grand rhetoric about values and increased investment in public diplomacy. 
A country’s attractiveness or soft power stems partly from its culture and values (where they are attractive to others), but it also grows out of a country’s policies when they are seen as legitimate, consultative, and inclusive of the interests of others. 
Unless the policies fit the values, the discrepancy will give rise to charges of hypocrisy. 
At a minimum, Bush will need to pursue policies – in a more consultative manner – that seek a political solution in Iraq and progress in the Israel-Palestine peace process. 
Here too, the early signs are encouraging. 
The 60% turnout in the January elections and the scenes of Iraqis risking their lives to vote has led to hopes that a political settlement in Iraq may be possible. 
The elections are but a first step; the insurgency continues; civil war remains possible. 
Nonetheless, the elections may have softened some of the sense of illegitimacy that has clouded Bush’s Iraq policy. 
Similarly, with regard to the Middle East peace process, the replacement of Yasir Arafat by Mahmoud Abbas, the Palestinian elections, and the meetings between Abbas and Ariel Sharon suggest progress. 
On difficult nuclear issues, such as North Korea and Iran, Bush has pursued multilateral consultation and coordination with other powers. 
Of course, this still leaves unresolved other multilateral issues, like the International Criminal Court and global climate change. 
There is little prospect that Bush will reverse his rejection of the Kyoto Treaty, but it will be interesting to see how far he accommodates Prime Minister Tony Blair’s efforts to make climate change a priority during Britain’s period as chair of the Group of Eight major economies. 
It is much too early for a verdict on Bush’s second term policies. 
As he looks ahead to the verdict of history, he seems to realize that hard power alone will not consolidate his reputation, but he remains hostage to incidents and accidents that could drive even his best-laid plans off course. 
Nonetheless, the most striking thing at this point in Bush’s second term is his belated discovery of the importance of diplomacy and soft power. 

President Lyndon Ronald Bush 
President Bush has fired and replaced his Treasury Secretary and chief economic advisor. 
Will those changes make any difference? 
Economic historian Harold James sets the Bush economic strategy in its historical context and hears dangerous echoes of past American failures. 
In the 1990s, the international economic and financial system was more stable than in previous decades, despite the turbulence of 1997-98. 
But that stability is now disappearing fast--along with the fundamental consensus on which it rested. 
One of the most important elements of the 1990s consensus--exported globally as the "Washington Consensus"--was the idea of fiscal responsibility. 
In the US, the commitment to fiscal rectitude followed President Clinton's early realization that balanced budgets would stabilize financial markets, reduce borrowing costs, and thus generate higher growth. 
He carried this policy through a skeptical Congress, even at the price of abandoning many of the social welfare promises he made during his 1992 presidential campaign. 
In Europe, meanwhile, the consensus was embodied in the European Union's Growth and Stability Pact and made operational in the rigid Maastricht criteria that capped government budget deficits at 3% of GDP. 
Now the fiscal consensus of the 1990s is under sustained attack worldwide. 
Portugal, Germany, and France proudly declare their intention to deviate from the Maastricht criteria. 
But it is America that is leading the attack on fiscal discipline. 
The US federal budget deficit for 2001-2 was $159 billion, quite respectable (in percentage terms) by European standards. 
But more red ink is likely, owing to the current administration's irresponsible commitment to tax reduction, and, unlike Clinton, or, indeed, the first President Bush, George W. Bush does not intend to break his campaign promises. 
President Bush's view on taxation is strikingly different from his predecessor's. 
Bush's election program promised big tax cuts, which he followed through on. 
When asked about the ballooning deficit, he explained that "we have a deficit because tax revenues are down;" and that the tax relief package "has helped the economy, and that the deficit would have been bigger without the tax-relief package." 
So, in Bush's eyes, tax cuts reduce the federal deficit. 
But this is precisely the so-called "supply side" argument that the President's father once famously mocked as "voodoo" economics when Ronald Reagan expounded it. 
Two scare stories underlie this theory. 
The Japanese scare story of the 1990s, in which monetary and fiscal policy prove powerless in the face of a sustained deflation, is the economic trauma now used to rationalize Bush's vast 10-year program of tax cutting. 
September 11 th is the second scare story. 
At the beginning of 2002, the President proposed a $48 billion boost in military spending--a sum larger than the total defense budget of every country except Russia. 
Overall, the new US military budget is $396 billion, just under 4% of GDP. 
A war with Iraq would add around another $100 billion, or 1% of GDP, to the defense budget (the war in Afghanistan cost a humble $10 billion.) 
Precedents abound in American history for using scare stories to justify fiscal expansion. 
Indeed, today's bout of fiscal stimulation seems historically better founded than the brief episode of stability in the 1990s. 
In the 1980s, President Reagan believed that America was losing its entrepreneurial edge, and that Japan and Europe were overtaking it, so he let the deficit rip. 
In the 1960s, President Johnson feared the risk of a new 1930s-style Great Depression, and responded with an increase in domestic social spending ("the Great Society") at the same time as the escalation of the war in Vietnam boosted military expenditure. 
In both periods, fiscal laxity stoked volatility in the foreign exchange markets, where the surge in inflation in the 1960s destroyed the fixed exchange rate system of Bretton Woods. 
This generated a wave of mutual recrimination across the Atlantic, with Europeans (especially the French and the Germans) accusing the US of irresponsible inflationism, while Americans blamed Europe for refusing to grow fast enough. 
The episode greatly strengthened anti-Americanism in Europe. 
In the 1980s, the dollar first soared against the Yen and European currencies, then it collapsed. 
Again, both sides of the Atlantic played a mutual blame game. 
Such instability would matter little if it produced only dizzying movements on currency traders' computer screens. 
But those movements produce big changes in real exchange rates, i.e., in manufacturing competitiveness, and thus fuel demands for trade protection. 
When the dollar strengthened at the end of the 1960s and in the mid-1980s, American industry felt threatened by foreign imports and pressed for changes in the trading regime. 
A new wave of deficits and exchange-rate instability would thus call into question the most fundamental and beneficial legacy of the 1990s: the major push for trade opening and liberalization. 
Sometimes people are so confident about the robustness of globalization that they assume that it can't be reversed: but this is exactly what each round of financial and economic turbulence threatens. 
The world is now more integrated now than in the 1960s or in the 1980s. 
Recent events suggest that we are more vulnerable that ever to a sudden and sharp backlash. 

A Presidential Truthfulness Oath 
CAMBRIDGE – On January 20, 2017, Donald Trump will be sworn in as the 45th president of the United States. 
I say “sworn in,” rather than “assume the presidency,” because, under Section I of Article II of the US Constitution, Trump cannot actually become president unless he takes an oath of office, publicly committing himself to uphold the Constitution and perform to the best of his ability while in office. That is, of course, the case for all presidents. 
But, given how Trump comported himself during the campaign, it is particularly meaningful in his case. 
Until now, Trump has made no effort to behave in an honest or reliable way. 
Technically, he didn’t have to. 
The US does not require any sworn statements from the men and women who run for president, nor does it have any enforceable code of behavior or constraints on the kind of rhetoric that can be used. 
Candidates may conduct themselves however they see fit. 
This approach is based on the assumption that we can trust the candidates’ judgment. 
People seeking the country’s highest office should know how to balance the political imperative of winning votes with a sense of responsibility for the feasibility of – and reasoning behind – their policy promises. 
By and large, experience has vindicated this view. 
The US has had the good fortune of choosing largely from among presidential aspirants who adhere to generally accepted norms. 
With Trump, it seems that fortune has turned into bankruptcy. 
During his primary and general election campaigns, Trump lied incessantly about himself, his businesses, his opponents, other countries’ behavior and motivations, America’s electoral system, the size of trade deficits, the actions of the Federal Reserve, and data on everything from labor to crime (to name a few examples). 
Moreover, many of Trump’s campaign promises – building a Mexico-funded wall on America’s southern border, bringing back lost manufacturing jobs, deporting millions of illegal immigrants – are patently impossible to implement. 
Mitt Romney, the Republican Party’s presidential nominee in 2012, was right when he called Trump “a phony, a fraud,” a candidate whose promises are “worthless.” 
But while these traits are clearly problematic, they obviously have not hurt Trump’s political career. 
Trump convinced a sizable portion of the electorate to ignore – if not condone – his flagrant policy reversals and lack of knowledge. 
Even Romney himself bowed to Trump in the end, meeting with the president-elect a couple of weeks after the election, reportedly in search of a cabinet position. 
This has to be one of the most sobering lessons from this past year: outrageous lies and hollow promises can win even the most consequential elections. 
And adhering to basic norms of decency – facts can be massaged, but not manufactured, and promises must be plausible, if vague – can lose them. 
Trump’s opponent in the campaign, former Secretary of State Hillary Clinton, learned that the hard way. 
During the campaign, Clinton often quoted First Lady Michelle Obama: “When they go low,” she would declare, “we go high.” 
But when your opponent goes as low as Trump, “going high” is like choosing, in a classic prisoner’s dilemma, to remain loyal to your partner in crime, who, sitting in the next room, is cutting a deal to testify against you. 
When you “go high” in such circumstances, you get what game theorists call a “sucker’s payoff.” 
Candidates should never be put in such a position. 
Instead, we must make sure that all candidates adhere to a basic code of conduct. 
One simple way to do that would be to demand that all presidential candidates, beginning in 2020, take an oath to be truthful, responsible, and transparent in their campaign rhetoric and conduct. 
In American society and political culture, the oath has a rare status. 
Testifying in a court of law or before a committee of the US Congress, witnesses “solemnly swear to tell the truth, the whole truth, and nothing but the truth.” 
Doctors take the “Hippocratic Oath,” pledging first to do no harm. 
Students at many universities swear to uphold an honor code. 
And Trump will not be alone in taking his oath next month: at around the same time, new members of the US Congress and Trump’s cabinet will make a similar pledge. 
Given this reverence for oaths, it is reasonable to assume that taking a truthfulness oath before initiating a campaign for public office would have some impact on candidates’ approach. 
There is nothing partisan about this proposal; many Republicans were victims of Trump’s unbridled campaign style before Clinton was in his crosshairs. 
The public and the media could use the oath as a tool for assessing – and holding accountable – would-be leaders. 
And candidates would stand to gain a competitive advantage against opponents who refuse to take the oath. 
Implementation would not be difficult. 
While the presidential oath is required by the US Constitution, a candidates’ oath wouldn’t have to be. 
Political and market pressure would be enough, if print, television, and social media simply refused to carry campaign advertisements from candidates who refused to take the oath. 
The political advantage should not go to the most mendacious candidate. 
For the sake of democracy, we must take action to solidify basic norms of decency and transparency in vital election campaigns. 
We can start with the modest step of demanding a truthfulness oath from all future presidential candidates. 

Publicizing the Plight of Journalists 
AMSTERDAM – Every five days, on average, somewhere in the world, a journalist is murdered for being a journalist. 
Nine out of ten times, no one is prosecuted, creating an atmosphere of impunity that extends beyond death threats or violence. 
Imprisonment of journalists is at an all-time high, and members of the press routinely suffer harassment and intimidation while on assignment. 
Today, journalism is one of the most dangerous professions anywhere. 
One way to address this state of affairs is by talking about it. 
Three recent examples highlight the risks journalists take to report the news, and underscore why publicizing their plight is the only way to bring about change. 
Consider Maria Ressa, CEO of Rappler.com, an online news network based in the Philippines. 
Since founding Rappler in 2012, Ressa’s website has become an invaluable source of information about the extrajudicial killings linked to President Rodrigo Duterte’s “war on drugs.” 
For her enterprising reporting, Ressa has received more than 80 death threats in the last month alone. 
Many of these warnings have come from anonymous bloggers, with IP addresses traceable to the president’s associates. 
Then there is the case of William Ntege, a journalist who reported on recent protests against Ugandan President Yoweri Museveni’s decision to run in the next presidential election, despite constitutional prohibitions preventing him from doing so. 
Ntege was severely beaten by police for his coverage, and held in jail for more than ten days. 
Finally, there is the erosion of press freedoms in Myanmar. 
A new clause written into the country’s media law allows citizens to file a lawsuit if they have a complaint with an article or news item, even if the reporting does not directly mention them. 
This legal provision – in sharp contrast to international norms – has led to 61 cases filed against journalists since February 2016, when Aung San Suu Kyi’s National League for Democracy came to power. 
Infringements of press freedom like these have become common tactics for autocratic regimes, from Turkey to Russia and beyond. 
But it is not only despots and strongmen who have declared war on the press. 
In Colombia and Mexico, hundreds of journalists have been placed under armed guard to protect them from criminal syndicates. 
Yet this hasn’t stopped journalists across Latin America from leaving the profession in droves. 
A favorite strategy of Mexican drug gangs seeking to stay out of the headlines is to threaten investigative journalists’ children. 
No wonder the media’s ranks are shrinking. 
Part of the reason most consumers of news do not know these stories is that organizations like mine have long worked to ensure that journalists never become the story. 
Press freedom groups have typically operated under the assumption that the best way to protect fact-based, investigative journalism is to shield the storyteller from violence. 
And, like most journalists, we have opted to do our jobs quietly, rather than burdening readers and viewers with how dangerous the profession has become. 
But it is time to change our approach, and make a point of highlighting the hazards. 
For example, Ntege was released only after considerable effort by a team of lawyers retained by Reporters Respond, the Free Press Unlimited emergency fund for journalist safety. 
Since the fund’s inception in 2011, it has helped dozens of journalists around the world, including, most recently, a group of reporters fleeing mob violence in Burundi. 
And a huge number of organizations aid journalists in distress in the Middle East, in Eastern Europe, and elsewhere. 
These stories behind the news must be told. 
Of course, telling these tales is just the beginning. 
Press freedom advocates must also deliver journalists a stronger, more coordinated framework for their protection and safety. 
To that end, my organization is engaging with other global entities to strengthen the UN Plan of Action on the Safety of Journalists and the Issue of Impunity. 
We have also begun holding regular meetings with other media freedom groups to devise a path forward. 
And, we have started working to ensure that media protections are backed up by legislation and enforcement. 
Journalists will need brave prosecutors and judges to hold attackers accountable if impunity is to end. 
But the most important changes must come from within the media industry itself. 
Because journalists’ safety directly affects news organizations’ employees, freelancers, and audiences, these organizations should report on the topic. 
With attacks on the press increasing, the old approach – prideful silence – no longer makes sense. 
If the journalists use their platforms to inform the world of the dangers they and their colleagues face, the world will have to listen. 
Violence against journalists has historically been an issue that has remained behind the headlines. 
On November 2, as the world recognizes the International Day to End Impunity for Crimes Against Journalists, let’s commit to making these stories front-page news. 

Taking Monetary Policy to the People 
LONDON – The United Kingdom was late to adopt central-bank independence, because then-Prime Minister Margaret Thatcher firmly opposed allowing unelected bankers to control interest rates. 
She famously asserted that she would never hand that control away, and the Bank of England was not set free until 1997, when Tony Blair’s first Labour government was elected. 
The Old Lady of Threadneedle Street, as the BoE is known, was 303 years old before she was allowed to make her own decisions – and her own mistakes. 
While both the US Federal Reserve and the German Bundesbank had long been independent, most other European countries followed suit only in the run-up to establishing a monetary union. 
For its part, the Bank of France had, since Napoleon, been left “in the hands of the government, but not too obviously so.” 
For the last 20 years, central-bank independence has marked a kind of “end of history” for monetary policy, after many other regimes were tried and failed. 
In the years before the 2008 global financial crisis, independent central banks were seen as successful in controlling inflation; and countries with sizable fiscal deficits were especially enthusiastic about central-bank independence because they benefited from lower long-term interest rates. 
Central banks that also regulate the banking industry were asked tough questions about their insouciance in the face of rapid credit expansion, but they were widely praised for their prompt and decisive response when trouble hit. 
But the period of monetary-policy consensus may be coming to an end. 
In the United States, Republican presidential candidate Donald Trump has challenged Fed governors’ independence, and made it clear that he would quickly replace the Fed’s leadership were he elected. 
In Europe, the European Central Bank’s quantitative-easing policies have been widely criticized, and ECB President Mario Draghi recently had to defend his approach before a highly critical German Parliament. 
British politicians have also begun to protest, even though criticizing the BoE was long considered tantamount to blaspheming in church. 
British Prime Minister Theresa May, in a recent speech before the Conservative Party Conference, noted that “monetary policy has had some bad side effects. 
People with assets have got richer. 
People without them have suffered … a change has got to come. 
And we are going to deliver it.” 
William Hague, an influential former Conservative leader, was even more blunt when he recently issued a not-so-veiled threat: if central banks do not “change course soon, they will find their independence increasingly under attack.” 
In that case, he added, “the era of their much-vaunted independence will come, possibly quite dramatically, to its end.” 
While May has denied any split between her government and BoE Governor Mark Carney, it is clear that monetary policy has become a subject of political debate for the first time in 20 years. 
In response to these heretical outbursts, Carney has sounded emollient and understanding; and Draghi has laudably engaged with his critics’ arguments. 
But German Bundesbank Executive Board member Andreas Dombret tried a different tack. 
At a British Bankers Association Conference in London this month, he said: “It may be time for a gentle reminder that central-bank independence is not debatable,” Dombret suggested. 
“Politicians are well-advised to not exert influence in the wrong places.” 
One can see Dombret’s point. Careless talk about monetary policy can unsettle markets, and politicians need to be careful what they wish for. 
But they are unlikely to agree that central-bank independence is “not debatable.” 
They will likely ask for more humility from the technocrats, because what politicians give, they may take away. 
Just because they are debating the social implications of monetary policy does not necessarily mean that they are questioning the legitimacy of those who set the dials. 
To be sure, this is delicate territory. 
There is a powerful argument to be made that central banks, insulated from short-term political pressures, have been careful stewards of price stability, and have served the global economy well. 
It is not obvious that returning to politically administered interest rates would have any benefits beyond the immediate term. 
Still, we must accept that central banks’ large-scale quantitative easing takes them into uncharted territory, where the boundary between monetary and fiscal policy is blurred. 
In the UK, for example, the Treasury decides on the level of economic intervention, while the BoE determines the timing and method of implementation. 
So, the central bank’s independence is not absolute. 
Central bankers must demonstrate that they understand the political pressures and unusual circumstances that zero, or even negative, interest rates create. 
Savers are bitterly complaining that they are being penalized for their prudence; refusing to debate this and other implications of current monetary policies is not an acceptable response. 
Independence demands higher degrees of accountability and transparency, whereby policies are explained to the public. 
To its credit, the BoE has been showing the way forward with a series of open forums around the UK. 
Taking monetary policy to the people is time-consuming, but it is essential if the necessary political consensus to sustain independence is to be maintained. 

Preventing an AI Apocalypse 
NEW YORK – Recent advances in artificial intelligence have been nothing short of dramatic. 
AI is transforming nearly every sector of society, from transportation to medicine to defense. 
So it is worth considering what will happen when it becomes even more advanced than it already is. 
The apocalyptic view is that AI-driven machines will outsmart humanity, take over the world, and kill us all. 
This scenario crops up often in science fiction, and it is easy enough to dismiss, given that humans remain firmly in control. 
But many AI experts take the apocalyptic perspective seriously, and they are right to do so. 
The rest of society should as well. 
To understand what is at stake, consider the distinction between “narrow AI” and “artificial general intelligence” (AGI). 
Narrow AI can operate only in one or a few domains at a time, so while it may outperform humans in select tasks, it remains under human control. 
AGI, by contrast, can reason across a wide range of domains, and thus could replicate many human intellectual skills, while retaining all of the advantages of computers, such as perfect memory recall. 
Run on sophisticated computer hardware, AGI could outpace human cognition. 
In fact, it is hard to conceive an upper limit for how advanced AGI could become. 
As it stands, most AI is narrow. 
Indeed, even the most advanced current systems have only limited amounts of generality. 
For example, while Google DeepMind’s AlphaZero system was able to master Go, chess, and shogi – making it more general than most other AI systems, which can be applied only to a single specific activity – it has still demonstrated capability only within the limited confines of certain highly structured board games. 
Many knowledgeable people dismiss the prospect of advanced AGI. 
Some, such as Selmer Bringsjord of Rensselaer Polytechnic Institute and Drew McDermott of Yale University, argue that it is impossible for AI to outsmart humanity. 
Others, such as Margaret A. Boden of the University of Sussex and Oren Etzioni of the Allen Institute for Artificial Intelligence, argue that human-level AI may be possible in the distant future, but that it is far too early to start worrying about it now. 
These skeptics are not marginal figures, like the cranks who try to cast doubt on climate-change science. 
They are distinguished scholars in computer science and related fields, and their opinions must be taken seriously. 
Yet other distinguished scholars – including David J. Chalmers of New York University, Yale University’s Allan Dafoe and Stuart Russell of the University of California, Berkeley, Nick Bostrom of Oxford University, and Roman Yampolskiy of the University of Louisville – do worry that AGI could pose a serious or even existential threat to humanity. 
With experts lining up on both sides of the debate, the rest of us should keep an open mind. 
Moreover, AGI is the focus of significant research and development. 
I recently completed a survey of AGI R&D projects, identifying 45 in 30 countries on six continents. 
Many active initiatives are based in major corporations such as Baidu, Facebook, Google, Microsoft, and Tencent, and in top universities such as Carnegie Mellon, Harvard, and Stanford, as well as the Chinese Academy of Sciences. 
It would be unwise simply to assume that none of these projects will succeed. 
Another way of thinking about the potential threat of AGI is to compare it to other catastrophic risks. 
In the 1990s, the US Congress saw fit to have NASA track large asteroids that could collide with the earth, even though the odds of that happening are around one in 5,000 per century. 
With AGI, the odds of a catastrophe over the upcoming century could be as high as one in a hundred, or even one in ten, judging by the pace of R&D and the strength of expert concern. 
The question, then, is what to do about it. 
For starters, we need to ensure that R&D is conducted responsibly, safely, and ethically. 
This will require a deeper dialogue between those working in the AI field and policymakers, social scientists, and concerned citizens. 
Those in the field know the technology and will be the ones to design it according to agreed standards; but they must not decide alone what those standards will be. 
Many of the people developing AI applications are not accustomed to thinking about the social implications of their work. 
For that to change, they must be exposed to outside perspectives. 
Policymakers also will have to grapple with AGI’s international dimensions. 
Currently, the bulk of AGI R&D is carried out in the United States, Europe, and China, but much of the code is open source, meaning that the work potentially can be done from anywhere. 
So, establishing standards and ethical ground rules is ultimately a job for the entire international community, though the R&D hubs should take the lead. 
Looking ahead, some efforts to address the risks posed by AGI can piggyback on policy initiatives already put in place for narrow AI, such as the new bipartisan AI Caucus launched by John Delaney, a Democratic congressman from Maryland. 
There are many opportunities for synergy between those working on near-term AI risks and those thinking about the long term. 
But regardless of whether narrow AI and AGI are considered together or separately, what matters most is that we take constructive action now to minimize the risk of a catastrophe down the road. 
This is not a task that we can hope to complete at the last minute. 

Preventing Europe’s Next Banking Crisis 
As shockwaves from America’s subprime disaster continue to reverberate, there is growing doubt about Europe’s ability to handle a financial crisis on a major scale. 
Severe lapses in bank regulation – in Germany, Britain, and perhaps France – have damaged the credibility of national systems of supervision. 
But this is only part of the problem. 
The European Union remains hopelessly ill-equipped to handle the crises that haven’t yet happened: cross-border crises sparked by EU banks’ increasing interdependence. 
EU financial integration began in earnest in the 1980’s, and the European Commission and European Council made great strides in financial-sector reform. 
Among the milestones were the decisions in 1986-1988 to remove all restrictions on cross-border capital flows, and the launch in 1999 of a legislative action plan on financial services. 
The euro was introduced and quickly became the world’s second currency, behind the dollar. 
Perhaps less conspicuous, the EU’s decision to adopt International Financial Reporting Standards in 2000-2002 triggered an extraordinary move toward the global harmonization of accounting rules. 
Meanwhile, the Commission’s steadfast defense of competition in the banking sector – particularly in Portugal, Germany, Italy, and Poland – ended an era of protectionism in the guise of prudential control; this helped to spur cross-border financial integration to an extent unprecedented in developed economies. 
These achievements came during a period of remarkable stability in Europe’s financial markets. 
Even during the 1992-1993 dark days of the European Monetary System, Europe looked like a safe haven in an unsettled financial world. 
Many countries outside the European Community suffered banking crises, including neighboring Norway, Sweden, Finland, and Turkey, as well as many East European nations during their transitions from communism. 
By contrast, the most serious bank failures inside the EC in the 1990’s – including BCCI, Crédit Lyonnais, and Barings – had only a limited fiscal cost and a negligible impact on growth. 
Later, corporate governance scandals in Asia and then in the US, notably after the dot-com bubble and the accounting debacles at Enron, WorldCom, and others, encouraged Europeans to think that the “old continent” had somehow preserved higher standards. 
The subprime-induced storm ended that fair-weather complacency. 
From the point of view of public policy, three points can already be made in its wake. 
First, the good news: the European Central Bank proved itself an efficient lender of last resort to Europe’s financial system. 
When the crisis started in earnest in August 2007, the ECB reacted quickly and intervened as long as the inter-bank market needed support. 
Banks in the euro zone and beyond all benefited. 
By contrast, the Bank of England’s reluctance to provide liquidity – because of concerns about “moral hazard” – was a poor choice. 
Second, however, national banking supervision in Europe fell far short of requirements and its overall credibility is now in question. 
German authorities have been deplorably tolerant of commercial bank involvement in complex asset-backed securities investments, which were kept off their balance sheets via so-called “conduit” operations in Ireland. 
Even if the three German banks most stricken by the credit crunch – Sachsen LB, IKB, and West LB – had technically complied with capital adequacy requirements, their “conduits” represented high risk factors at around 30%, 20%, and 13% of their total assets, respectively. 
Much stronger supervision was needed. 
In Britain, the Northern Rock meltdown highlighted problems with the three bodies responsible for financial stability: the Treasury, the Financial Services Authority, and the Bank of England. 
In France, doubts were cast on the risk controls at major investment banks – first Calyon, then Natixis, and then most dramatically in January 2008, Société Générale. 
Finally, the current financial turmoil highlights a long-standing but urgent problem for Europe: the lack of credible arrangements for the management of cross-border banking crises. 
Until recently, most banks focused on their country of origin, so risks largely arose under national systems of supervision. 
But Europeans banks have now dramatically expanded their operations across the EU. 
Ten years ago, non-domestic assets were barely one-sixth of the total European assets of the EU’s largest banks; the proportion today has grown to one-third. 
By contrast, the proportion of assets held outside the EU is almost unchanged. 
Cross-border mergers and acquisitions are likely to continue apace once the current market turbulence is over, further increasing the likelihood of a major cross-border banking crisis. 
Both economic theory and past experience show that scattered national regulators who face conflicting pressures cannot efficiently manage such crises. 
Without a framework for more centralized supervision of a limited number of major international banks, the cost of a future cross-border crisis involving one of them is likely to be larger than Europe’s economy can afford. 
There are therefore very good reasons to put discussion about new EU-level prudential institutions high on the policy agenda. 
The exact arrangements will have to be decided, but they must allow quicker and better-informed decision-making while respecting national fiscal prerogatives. 
A system built on a strictly limited mandate could be both more efficient and less controversial than some single, all-encompassing financial regulator. 
No doubt there will be difficult political and technical issues to resolve, but the current credit chaos has generated a fresh feeling of urgency. 
Even Britain, an enduring opponent of EU institutions for financial regulation, may decide that its own interests as Europe’s financial hub would be better served by reform. 
As Walter Bagehot once famously said, “Money will not manage itself.” 
The private sector cannot act alone to sort out the financial mess; it needs support from well-adapted public institutions. 
An up-to-date system of EU supervision is more crucial than ever if Europe’s financial system is to serve its proper purpose. 

Preventing the Euro’s Next Crisis 
LUXEMBOURG – Much dedication and energy are currently being devoted to institutionalizing a crisis-management mechanism for the euro area. 
This is a good and important goal. 
But a far more significant challenge – largely covered in the accompanying debate – is the need for crisis prevention. 
At the European Union’s pre-Christmas summit, European heads of state and government agreed in principle to replace the Luxembourg-based European Financial Stability Facility (EFSF), which was thrown together practically overnight in May 2010, with a new, permanent European stability mechanism in 2013. 
That decision – and the speed with which it was reached – reflects the insight that the euro area’s institutional framework will remain incomplete until there are clear rules for handling financial crises. 
But, while it is clear that the euro area will have solid and well-equipped quarantine wards should it once again be afflicted by financial contagion, a vaccine to prevent the infection would be far more effective. 
Unfortunately, developing one is receiving too little attention in the political arena. 
The starting point should be the weaknesses of the euro area’s rules and regulations. 
The monetary union’s distinctive feature is the absence of a common state, despite the single currency. 
The euro’s architects were well aware that the participating states’ maintenance of sound public finances was a vital precondition for the new currency’s stability. 
A compromise was found with the Stability and Growth Pact (SGP) and its provisions for adhering to the Maastricht criteria, which sought to quantify the fiscal soundness of sovereign states without actually interfering with their budget and tax policies. 
Today, we know that this was a poor compromise. 
There has been a lack of political will to make a clear commitment to a stability-oriented fiscal policy, illustrated by the weakening of the SGP at the instigation of Germany and France in 2005. 
And individual euro-area members have since neglected to observe even the discipline required under the weakened version of the pact. 
Indeed, there have been nearly a hundred violations of the SGP’s deficit ceiling (3% of GDP) since the euro was introduced – and all have gone unpunished. 
Given these repeated breaches of the SGP’s deficit requirements, together with a similar lack of commitment to the pact’s debt limit (60% of GDP), it is hardly surprising that punishment for some states has come from the markets. 
The debt crisis in the euro area has highlighted the unwillingness or inability of politicians to maintain a fiscal policy consistent with the stability requirements. 
Instead, both long-term objectives and sustainable public finances have been sacrificed for the short-term promise of electoral success. 
This implies the need to separate national debt management in the euro area from short-term electoral constraints. 
What is required is a stronger emphasis on automatic sanctions for fiscal profligacy and excessive debt than is contained in the EU Commission’s current proposal for reform. 
It is all well and good to counter undesirable economic developments at an early stage, as the Commission’s plan promises, but the time to begin is not when fiscal distortions actually threaten. 
Such distortions are generally preceded by a buildup of macroeconomic imbalances. 
For a while, booming or overheating real-estate markets and a thriving, but oversized banking sector can disguise a gradual loss of competitiveness and risks to fiscal sustainability, as occurred in the euro area. 
Only when it was too late did seemingly solid national budgets come under substantial pressure. 
Effective prevention must start when undesirable economic trends arise. 
An independent body of experts that publicly calls for member states to correct their macroeconomic course – based on objective and comprehensible indicators, such as unit labour costs – could make an important contribution in this regard. 
Of course, Europe’s political class doesn’t like suggestions like this, because they entail surrendering some degree of national sovereignty. 
After all, public finances are a major competency of politics. 
But wouldn’t that loss be offset by greater solidarity in case of a crisis? 
It is worth noting that sovereignty’s defenders never complained when the euro brought their countries the low inflation and interest rates of the euro’s most stable predecessor currencies in exchange for handing over their monetary-policy competencies to the European Central Bank. 
A stable currency and sound public finances are two sides of the same coin – that’s just how it is. 
Recent experience offers us an opportunity to extend EU institutions in a way that markedly reduces the likelihood of a new crisis. 
That means improved rules and regulations that place greater emphasis on crisis prevention than on crisis management. 
Those unwilling to pay the price of handing over national sovereignty in some areas tacitly accept that the eruption of a new crisis is only a matter of time. 
When it does, better-equipped quarantine wards will be poor consolation. 


Preventing Toxic Stress in Children 
Cambridge – What if political leaders around the world could improve school achievement and job readiness, reduce crime, and extend healthy life expectancy – but the results would not be seen until after they left public office? 
Would they have the political courage to act now in the best long-term interest of their people? 
Or would they become mired in ineffective, poorly-funded attempts to obtain quick results, and then say it couldn’t be done? 
Thanks to a remarkable convergence of new scientific knowledge about the developing brain, the human genome, and the effects of early experiences on later learning, behavior, and health, these are not hypothetical questions. 
We have the knowledge to secure our future by improving the life prospects of all our young children. 
What is needed now is political vision and leadership. 
Scientists can now credibly say that the early childhood years – from birth to age 5 – lay the foundation for later economic productivity, responsible citizenship, and a lifetime of sound physical and mental health. 
Conversely, deep poverty, abuse, neglect, and exposure to violence in early childhood can all lead to toxic stress. 
In contrast to normal or tolerable stress, which can build resilience and properly calibrate a child’s stress-response system, toxic stress is caused by extreme, prolonged adversity in the absence of a supportive network of adults to help the child adapt. 
When it occurs, toxic stress can actually damage the architecture of the developing brain, leading to disrupted circuits and a weakened foundation for future learning and health. 
The lasting, neurobiological effect on young children who experience toxic stress leads to a far greater likelihood of anti-social behavior, lower achievement in school and at work, and poor physical and mental health – all of which society addresses at great cost. 
Deep poverty is but one risk factor for toxic stress and its long-term consequences. 
The greatest harm comes from the cumulative burden of multiple risk factors, including neglect, abuse, parental substance abuse or mental illness, and exposure to violence. 
With each additional risk factor, the odds of long-term damage to brain architecture increase. 
Neuroscience and the biology of stress help us to begin to understand how poverty and other adversities are literally built into our bodies. 
Prolonged activation of the body’s stress system during early development can damage the formation of the neural connections that comprise our brain architecture and set our stress-response system at a hair-trigger level. 
We can thus comprehend why children born into such circumstances have more problems in school, are more likely to commit crimes, and are more prone to heart disease, diabetes, and a host of other physical and mental illnesses later in life. 
By addressing the circumstances that can produce toxic stress – always asking, “How can we best protect our children?” – local, national, and global leaders would improve not only the life prospects of their youngest citizens, but also outcomes for their societies. 
A wide range of policies and practices that support positive relationships and quality learning experiences – at home, in early care and education programs, and through targeted interventions – can have a positive impact if based on solid evidence and matched to the specific needs they are expected to address. 
Beyond their short-term benefits to individuals, extensive economic analysis also has demonstrated significant financial benefits to society for years to come. 
Science points to three things that we can do to level the playing field: 
· Make basic medical services and early care and education available to all young children; 
· Provide greater financial support and rich learning experiences for young children living in poverty; and 
· Offer specialized services for young children experiencing toxic stress from difficult life circumstances. 
The scientific principles of early childhood development do not vary by family income, program type, or funding source. 
In advanced countries, programs that screen for adversity and respond to the specific health and developmental needs of individual children and families can yield benefits that far exceed their costs. 
In developing countries, shifting the focus of international investments from an exclusive focus on child survival to an integrated approach to early childhood health and development offers greater promise than addressing either domain alone. 
Children burdened by significant economic insecurity, discrimination, or maltreatment benefit most from effective interventions. 
Neuroscience, child development, and the economics of human capital formation all point to the same conclusion: creating the right conditions for early childhood development is far more effective than trying to fix problems later. 
Finally, leadership is about more than smart economic decisions. 
It is also about moral responsibility, wisdom, judgment and courage – and about leveraging knowledge to promote positive social change. 
The negative consequences of poverty and other forms of adversity are not inevitable. 
The gap between what we know and what we do is growing and increasingly unconscionable. 
The time for leadership on behalf of vulnerable children is now. 

Preventive Diplomacy, Not Pre-Emptive Strikes 
Finally, the United Nations Security Council has unanimously agreed a resolution to end the crisis in Lebanon. 
Now, the first priority must be a full and immediate ceasefire to end the suffering of unarmed civilians and make way for peace. 
The international community must be guided in their actions by a common conviction that violence is never a viable solution. 
We, the authors of this article, as well as the organization we represent, the Socialist International, have always defended Israel’s right to exist and defend itself. 
We wish to see Israeli citizens living in peace and security alongside all their neighbors. 
We have consistently condemned attacks that target innocent Israelis. 
Israel claims its actions in Gaza and Lebanon are designed to safeguard its own security. 
However, indiscriminate use of force and continued occupation will never give Israel lasting security. 
The response to Hezbollah’s initial aggression, as well as Israel’s military response in Gaza, is disproportionate. 
The devastation in Lebanon will take generations to repair, not only materially, but also psychologically. 
Hezbollah, which claims it is fighting for Lebanese independence and sovereignty, also bears responsibility for unacceptable aggression, placing the lives of innocent Israelis and Lebanese at stake. 
We are convinced that the way these policies are carried out will only deepen mistrust, heighten polarization, and embed hatred between neighbors who have to learn to live with each other. 
A military solution is not viable. 
War is strengthening the hand of those who regard terror as the only effective weapon, thus creating a breeding ground for more violence, insecurity, and extremism across the Middle East. 
With moderates being marginalized, the long-term effect will be to undermine democratization efforts in the region. 
Innovative and bold diplomatic initiatives for peace must be launched as an alternative to the logic of military force. 
This has happened before. 
The Gulf War led to the Madrid Peace Conference in 1991 and the subsequent Oslo accords between the PLO and Israel in 1993. 
This crisis, too, can be a stepping-stone for a long-term political solution involving all parties in the Middle East. 
Today’s incoherent, piecemeal strategies will not break the cycle of violence. 
As well as taking collective action to stop the war in Lebanon and Gaza, key players like the “quartet” – the UN, the United States, the European Union, and Russia – must develop a comprehensive security framework for the Middle East. 
The international community should demand the immediate start of negotiations towards the creation of a Palestinian state and push for direct negotiations on a peace agreement between Israel and Syria. 
If the international community is to remain credible, a regional initiative for collective security – a Madrid II – needs to be taken. 
This presupposes the engagement of all parties, including Syria and Iran, as well as all political and religious groups. 
A strategy of isolation has resulted in a dangerous alliance of convenience among extremist forces excluded from political processes and power structures. 
Unless leading actors have ownership of local solutions, peace will never be sustainable. 
If we hope to halt violent extremism, we must engage religious and militant groups in dialogue and address the root causes of violence. 
Both the PLO and Israeli militant groups active at the time of Israel’s creation moved away from violence once the international community engaged them. 
Likewise, influential groups such as Hamas, the legitimate winner of the Palestinian elections, cannot be eliminated by military force, however powerful, nor exorcised by decree. 
For their part, radicalized groups must renounce violence and accept international principles and laws. 
Causing loss of lives does not contribute to the present or future welfare of the people of the region. 
There is currently no guarantee that a political truce with Hamas or Hezbollah would result in a renunciation of their absolutist vision. 
Nonetheless, there can be a diplomatic process with rights and obligations. 
To secure lasting peace, the key is to develop political mechanisms that allow space for moderation and democracy. 
We therefore must support political alternatives to violent extremism. 
Palestinian President Mahmoud Abbas’ initiative to unite the Palestinian leadership may lead to greater moderation on the part of Hamas and create real prospects for the negotiation of a two-state solution. 
If this effort is successful, the international community must cooperate fully and swiftly with the Palestinian Authority. 
Our appeal is for preventive diplomacy rather than pre-emptive strikes. 
This policy of inclusion rather than exclusion is based on political pragmatism and the belief that this carnage can and must stop. 
To save innocent people from paying with their lives, the world’s leaders must act quickly and boldly. 
The Socialist International is committed to working hard with its partners in the region to make peace in the Middle East a reality. 

Preying on Pensions? 
As Argentina's economy lost access to credit in late 2001, the government resorted to desperate measures in a vain attempt to avert disaster. 
Privatized pension funds--created in 1994 as a result of a Social Security reform based on individual accounts vested in bonds and equities--were one casualty. 
The government forcibly rescheduled the public debt holdings of these funds, known locally as AFJP. 
It also "pesofied" these holdings, which in mid-2001 amounted to more than 60% of the pension funds' portfolios, in effect converting dollar-denominated assets into local pesos overnight. 
This "confiscation" occurred after several years in which high-risk government securities obtained very large returns. 
Between September 1994 (the year of their inception) and January 2001, the AFJP yielded an average annual rate of return of 10.9% in US dollars--nearly 600 basis points above the return obtainable from US Treasury Bills. 
There is an obvious lesson to be learned from Argentina's experience: if pension funds invest heavily in risky public-sector obligations--a common strategy in Latin America throughout the transition from state-funded pay-as-you-go systems to schemes based on individual capitalized accounts--repayment will be at risk from the outset. 
Pension funds might be subjected to arbitrary treatment. 
But this is precisely the situation that Social Security reform was supposed to eliminate. 
How badly were the AFJP's actually treated? 
As the dust settles, it is becoming apparent that they have fared rather well. 
The rate of return on their portfolio holdings from September 1994 to December 2002 is around 9.5% per year in real terms, which appears more than reasonable by any account. 
Even accounting for the very large peso devaluation, the US dollar rate of return varies between -2.5% and 4% per year, depending on the real exchange rate used to value the peso assets of AFJP's after the devaluation in January 2002. 
This outcome stands in stark contrast to that of external private creditors, who have not seen a cent of what they are owed for more than one year and so far do not have even a hint about terms of repayment. 
Based on market valuation, their US dollar rate of return over the same period is around -11% per year. 
Put differently, even after default, `pesofication' and devaluation, Argentina's pension funds yielded a very decent return in real terms. 
Furthermore, they fared well relative to other classes of creditors, especially foreign bondholders. 
Thus, pension funds were de facto treated as senior creditors, but by means of a highly disruptive mechanism: huge excess returns followed by default and pesofication. 
This brings us to the second, less obvious lesson from Argentina's experience, namely that privatizing Social Security at a time when the government's fiscal credibility is suspect may give rise to favoritism toward pension funds and, as a result, impose burdensome (and unjustified) fiscal costs. 
Suppose pension funds are de facto treated as senior creditors (as suggested by the case of Argentina). 
Under these conditions, the premium paid on pension funds' holdings of government bonds involves a rent on those holdings, because pension funds would be willing to hold government bonds even if they yielded a lower-than-market interest rate. 
There is no justification for this rent if the retirees' income is never at stake. 
Moreover, the interest premium paid on government bonds held in pension funds imposes burdensome and unjustified fiscal costs, since it adds to budget deficits and the public debt. 
In fact, experience indicates that the interest-rate gap increases dramatically when fiscal crisis looms. 
Thus, until crisis erupts, and the government defaults on its bonds, the (excess) financial costs of government bonds held by pension funds could represent a large portion of the total fiscal deficit and actually help provoke the crisis. 
In sum, privatizing Social Security under conditions of weak government credibility may lead to actions that betray the fundamental principles on which such a pension reform are based and unduly increase the fiscal burden. 
There are at least two ways in which these pension reform transition problems might be diminished. 
First, the status of senior claimants of pension funds could be made explicit and, to the extent that there is no solvency risk, the above problems could be addressed by creating a pension fund bond that yields a rate of return that is not subject to repudiation risk . 
Second, and more radically, pension funds could be barred from investing in domestic government bonds that are not rated, say, A- or higher. 
Moreover, pension funds could be allowed to invest in low-risk foreign assets such as US government securities, and the government could finance transitional fiscal gaps by placing bonds at market rates and among market participants who are in the business of taking risks. 
In practice, these proposals are likely to remove pension funds from the list of large investors in high-risk domestic securities (including public debt), which may partially impair the development of the local capital market. 
Even if that is the case, the costs of letting pension funds bet on high-risk securities may ultimately be far greater. 


The Market Dogs That Didn’t Bark 
LONDON – Three months ago, I argued that rising stock markets around the world were a consequence of improving economic conditions, not a sign of “irrational exuberance.” 
Since that commentary was published, share prices accelerated upward, and some “irrational exuberance” did start to appear, leading to a sharp fall in early February. 
Although most stock markets are still well above their levels of last November, the question lingers: Did February’s reversal mark the end of the bull market, or was it just a temporary correction? 
The strongest evidence, as Sherlock Holmes might have remarked, comes from the dog that didn’t bark. 
More precisely, it comes from three vehement guard dogs – oil prices, long-term US interest rates, and currencies – that slept peacefully through the commotion on Wall Street. 
Why this evidence is so significant becomes clear when we recognize that the main risks to the global economy are now completely different from the “New Normal” of secular stagnation, “low-flation,” recession, and European instability that markets have spent the past decade worrying about. 
The real threats to global expansion and asset prices now come from accelerating inflation, unsustainably rapid growth, and political mismanagement in the United States. 
I noted some reasons for this reversal in my earlier column: the world economy is now firing on all cylinders. 
Every region is now following the US post-2008 roadmap of aggressive monetary stimulus and bank recapitalization, but with long delays that have ranged from three years in Japan and China to six years in Europe and even longer in large emerging economies such as India, Russia, and Brazil. 
The danger of recession or a major slowdown has therefore disappeared in most of the world economy, at least for the next year or two. 
But economic growth does not eliminate financial risks. 
On the contrary, some of the biggest stock-market crashes have occurred during periods of rapid growth, usually triggered by accelerating inflation and rising interest rates. 
The question now is whether these inflation risks are looming over the horizon. 
Or is it still too early to worry about overheating, given that inflation in most economies is still at or below 2%, interest rates are still negative in Japan and Europe, and plenty of labor and capital remains underemployed? 
It is in addressing this question that we should note the dogs that didn’t bark. 
The biggest inflation threat this year comes from rising oil prices. 
The collapse of oil prices from above $100 a barrel in 2014 into what looked like a stable range with a ceiling around $50 has been a major boon to the world economy. 
But US oil prices broke through the $50 ceiling last autumn, and by January they seemed to be heading for $70, with many traders forecasting a return to $100. 
Sharply higher oil prices, at a time when inflation is already creeping up, would be a disaster for the world economy, forcing central bankers to raise interest rates aggressively and possibly provoking a panicked sell-off of long-term bonds. 
But, luckily, oil prices did not continue rising as share prices declined. 
Instead, they fell sharply. 
If oil prices stabilize near their current level, the most immediate risk to the world economy and the bull market in equities will have been removed. 
The US bond market was the second dog that did not bark this month, although it did stir a bit uneasily. 
Much has been written about the rise of ten-year Treasury yields from around 2.5% in early January to almost 3% today. 
What is really significant, however, is that the 3% level, which has acted as a ceiling since 2011, has not been breached. 
If US bond yields rose substantially above 3%, this would certainly raise a question mark about US asset valuations. 
But this has not happened yet – and, more important, the bond market seems to believe that a sustained breakout above 3% in the foreseeable future is very unlikely. 
The bond market’s complacency about US interest rates and inflation may be surprising – and in my view it will turn out to be an expensive mistake at some point – but it is a fact. 
The proof is that the 30-year US bond yield is still only 3.2% – exactly where it was a year ago and in most of 2015 and 2016. It is almost a full percentage point lower than in 2013 and two full points below the level in 2007. 
In other words, the bond market believes that the long-term outlook for growth and inflation is more or less the same as it was in the period from 2015 until early last year – and much weaker than it was a decade ago. 
This confidence may vanish in the future, if bond investors wake up to the long-term risks of US inflation and fiscal profligacy. 
When that happens, long-term yields will rise steeply and investors really would have something to worry about. 
For the moment, however, the behavior of long-term US interest rates implies an almost unshakeable confidence among investors that inflation will never again become a serious threat, despite President Donald Trump’s decision to slash taxes, boost government spending, and abandon deficit limits in a US economy already nearing full employment. 
This points our investigation toward the third dog that didn’t bark. 
Currencies were almost completely unmoved by the stock-market commotion. 
This quiescence makes sense: If investors are unperturbed by inflationary pressures in the US economy, they can surely be much more confident about the rest of the world. 
In Europe, Japan, and many emerging markets, cyclical upswings are more recent, inflation is lower, and economic management is sounder than in the US. 
The implication is obvious: The global expansion and bull market will continue, but leadership will move from America to the more promising economies of Europe, Japan, and the emerging world. 

Pricing Corporate Governance 
CAMBRIDGE – Do markets appreciate and correctly price the corporate-governance provisions of companies? 
In new empirical research, Alma Cohen, Charles C.Y. Wang, and I show how stock markets have learned to price anti-takeover provisions. 
This learning by markets has important implications for both managements of publicly traded companies and their investors. 
In 2001, three financial economists – Paul Gompers, Joy Ishii, and Andrew Metrick – identified a governance-based investment strategy that would have yielded superior stock-market returns during the 1990’s. 
The strategy was based on the presence of “entrenching” governance provisions, such as a classified board or a poison pill, which insulate managements from the discipline of the market for corporate control. 
During the 1990’s, holding shares of firms with no or few entrenching provisions, and shorting shares of firms with many such provisions, would have outperformed the market. 
These findings have intrigued firms, investors, and corporate-governance experts ever since they were made public, and have led shareholder advisers to develop governance-based investment products. 
Even if anti-takeover provisions hurt firms’ performance, however, investors may be unable to make trading profits if prices come to reflect the effects of these publicly-known provisions. 
Indeed, in our study, Cohen, Wang, and I show that the association between governance and returns documented for the 1990’s subsequently disappeared. 
No such association existed during the 2000’s or any sub-period within this decade. 
After out-performing the market during the 1990’s, the governance-based strategy subsequently performed on par with it. 
How can one make sense of the association between governance and returns during the 1990’s and its subsequent disappearance? 
We find that this pattern is due to markets’ learning over time to appreciate the difference in expected future profitability between firms that have good and bad governance (in terms of their levels of anti-takeover protection). 
Consistent with such learning, the attention to governance by the media, institutional investors, and researchers jumped sharply at the beginning of the 2000’s, and has remained at historically high levels. 
For example, the number of governance-related articles in US newspapers tripled from 2000 to 2002, and the number of governance-related resolutions brought to a vote by institutional investors (many focusing on anti-takeover provisions) more than doubled, with both figures remaining at elevated levels ever since. 
Market prices seem to have been affected by the increase in attention to governance. 
We found evidence that, by 2001, markets learned to appreciate the difference between good-governance and bad-governance firms in terms of their expected future profitability. 
We examined the extent to which firms’ earning announcements surprised markets (as reflected in stock-price reactions to these announcements) and stock analysts (as measured by the gap between announced and forecast earnings). 
We found that, during the 1990-2001 period, but not afterwards, the earning announcements of good-governance firms were more likely to surprise both markets and analysts than the earning announcements of bad-governance firms. 
It should be emphasized that, while trading on anti-takeover provisions could no longer be used to out-perform the market during the 2000’s, such provisions remain quite consequential for firms’ valuation. 
Throughout the 2000’s, firms with higher entrenchment levels have had lower market capitalization (relative to their book value). 
Indeed, the incorporation of entrenchment levels into market prices is what made it impossible to trade profitably using information on such levels. 
Overall, our findings support the view that markets might be unable to price new governance provisions and practices accurately right away, but that they can be expected to learn over time to do so. 
Such learning can take considerable time, but it does happen. 
Both managements and investors should take market learning into account, paying close attention to the potential increase in market capitalization that eliminating anti-takeover provisions could produce. 
Many firms have already eliminated anti-takeover provisions in recent years, removing staggered boards and supermajority requirements for mergers. 
Lowering entrenchment levels, rather than trading on them, continues to offer opportunities for substantial returns to firms’ shareholders. 
Furthermore, while markets now price anti-takeover provisions, our findings raise the possibility that markets do not (yet) price other governance features whose emergence is relatively more recent. 
The introduction of new governance arrangements and their subsequent incorporation into prices is a gradual process, a work constantly in progress. 
Thus, while investors can no longer profit by basing their trading decisions on standard anti-takeover provisions, our findings leave open the possibility that an investment strategy based on other features of corporate governance might be worthwhile. 
Thus, managements should not dismiss governance reforms that are potentially valuable, but that investors are not yet focused on, and that markets do not yet price. 
Investors eventually do learn. 
And, when they do, they appropriately reward or penalize firms for their governance choices. 

Spurring Private Investment for Development 
STRASBOURG – Successful economic development has hewed to a well-known pattern. 
Lifting a country out of poverty and placing it on a path of sustainable growth requires hard work, the creation of a robust system of property rights, and – crucially – private investment. 
This method is not specific to a particular region or people. 
As Asia’s spectacular growth has demonstrated, it is transferable across cultures. 
So it is a shame that development economists and the world’s multilateral institutions are failing to apply it systematically in the developing world. 
Billions of dollars of aid has been poured into developing countries, but it has not been enough, and the results have been disappointing. 
The World Bank estimates that one billion people still live on less than $1.25 a day, while more than 800 million do not have enough to eat. 
The Millennium Development Goals attempted to apply a comprehensive approach to reducing poverty, but the MDGs failed to address its underlying causes. 
On paper, at least, the United Nation’s new Sustainable Development Goals, put in place last year, are an improvement. 
The trouble is that lofty ambitions come with a high price tag, and there remains a funding gap of around $2.5 trillion if all 17 goals are to be met. 
A chasm this big cannot be bridged by cash-strapped governments and taxpayers alone. 
That is why a recent decision by the European Parliament to back my report calling for the mobilization of private capital in the fight against global poverty is so important. 
For the first time in the parliament’s history, its members acknowledged the private sector as a key partner in wealth creation in the developing world. 
Given that the European Union is one of the biggest providers of development aid, the decision could be highly significant. 
To be sure, winning a vote, while never straightforward, is the easy part. 
The challenge will be translating words into action. 
The early signs are heartening. 
Marianne Thyssen, the EU’s employment and labor commissioner, wants work on implementing the report to begin immediately. 
She has promised that the European Commission will invest more than €2 billion ($2.27 billion) to support the private sector in the developing world by 2020. 
She expects that €4.8 billion in EU grants would leverage at least €66 billion in investment in Sub-Saharan Africa, Asia, and Latin America by financial institutions and private firms. 
If the EU’s entire development budget was similarly maximized, we could mobilize about €300 billion of capital, which, if spent on acquiring equipment, plant, and technology from Europe, could give an enormous boost to the current sluggish growth of the European economies. 
An important early task in achieving the desired impact will be to create an environment in which private initiatives can flourish. 
Currently, micro, small, and medium-size enterprises account for some 60% of the developing world’s employment. 
And yet 70% of these businesses receive no help from financial institutions, even though investment would enable them to grow and create jobs. 
We must begin to change this by providing the financial and technical assistance countries need to establish reliable banking systems and tax administrations. 
Adherence to international accounting standards should be encouraged. 
Transparency must be improved, and corruption must be rooted out. 
And in many countries, the system of land registration and property rights needs to be formalized, so that individuals and companies gain equity against which they can borrow to invest in their businesses. 
The effect will be to increase the number of bankable projects in which both local businesses and international firms can invest. 
Potential for public-private partnerships exist in energy and telecommunications projects, in wells and irrigation, in the construction sector, in infrastructure such as roads, airports, and harbors, and in processing plants for agro industries, meat, fruit, and vegetables. 
Of course, stringent safeguards must be put in place. Private investors will need to agree to binding rules protecting social, environmental, human, and gender rights. 
To build trust, EU-level forums should be created, in which the private sector, NGOs, think tanks, and governments can discuss development opportunities. 
Helping developing countries grow will stimulate investment opportunities for EU companies and open new markets for their goods. 
The result will be a virtuous cycle of development that benefits everyone – and that moves the world significantly closer to achieving the ambitious goals that it has adopted. 

New Frontiers in Development Finance 
WASHINGTON, DC – When the Millennium Development Goals (MDGs) expire at the end of this year, the world will have made significant progress on poverty reduction, the provision of safe drinking water and sanitation, and other important objectives. 
In order to ensure that the next development agenda, underpinned by the Sustainable Development Goals (SDGs), produces even greater progress, world leaders must refine and optimize the MDG framework – particularly when it comes to financing. 
The MDGs brought together governments, multilateral organizations, and NGOs to support the implementation of key programs and policies, with global partnerships advocating for resources. 
In order to maximize efficiency, the MDGs were pursued and funded individually, rather than as a unit, with new initiatives being implemented when targets were not being met. 
But this approach created some imbalances, with global health and education initiatives attracting far more financing than other efforts. 
This sectoral model must be reevaluated ahead of the next development agenda's launch to ensure that such imbalances do not persist. 
Doing so is particularly important, given that the proposed SDGs attempt to incorporate the social, economic, and environmental dimensions of sustainable development, making them more comprehensive and interdependent than the MDGs. 
World leaders will have three critical opportunities to develop an integrated approach. 
In July, the United Nations will hold a conference on financing for development in Addis Ababa, Ethiopia. 
In September, the UN General Assembly will convene to launch the SDGs. 
And in December, world leaders will attend the 21st Conference of the Parties (COP21) of the UN Framework Convention on Climate Change, where they are expected to adopt a binding global agreement on the long-term reduction of greenhouse-gas emissions. 
Given the vital importance of finance in supporting development initiatives, it should be among the first issues to be addressed. 
World leaders must avoid making the same mistake they made with the MDGs – the implementation of which was delayed for two years, until financing was agreed at the 2002 Monterrey Consensus – by developing an effective and traceable financing program at their earliest opportunity: the conference in Addis Ababa. 
The urgency consists partly in the scope of financing that the SDGs will require – an amount that will far exceed the resources needed to implement the MDGs. 
Beyond funding for initiatives aimed at eradicating poverty and hunger, improving health and education, strengthening governance, and promoting gender equality, investments must be made in infrastructure, energy, and agriculture. 
The SDGs will also call for financing global public goods, including environmental protection and efforts to combat climate change and mitigate its impact. 
With governments and international donors unable to foot the bill alone, they must develop programs and policies that can channel a larger share of global savings, which now amount to roughly $22 trillion annually, toward the SDGs. 
Specifically, national and local governments and international financial institutions should leverage their resources by deploying tailored financing measures, including public-private partnerships, performance-based instruments, and a variety of credit and political risk guarantees. 
This range of financing measures, adjusted to each country's needs and strengths, can help mitigate risks and improve collaboration. 
This will be especially pertinent for emerging middle-income economies. 
As these countries strengthen their creditworthiness and improve their capacity to manage debt and equity instruments, they will have at their disposal a larger toolkit of financing instruments with which to attract private-sector resources. 
By tapping private resources, emerging economies can free up much-needed official development assistance (ODA), which can then be channeled toward poverty-reduction efforts and to countries that international private financial flows largely bypass (and that thus have a lower capacity to raise resources domestically). 
Viable financing solutions should be considered on a case-by-case basis across countries and sectors. 
To ensure that the Addis Ababa conference produces the needed action, the World Bank, the International Monetary Fund, and several regional multilateral development banks (MDBs) are working on a joint approach that will leverage billions of dollars in grant and ODA funds into the trillions needed to finance the post-2015 agenda. 
MDBs already help, individually and collectively, to leverage scarce official assistance to attract enough capital to finance development projects. 
In fact, their financial leverage is built into their structure: they are fundamentally financial institutions, funded efficiently by small amounts of paid-in capital, which is backed by callable capital from shareholders. 
The MDBs also have significant operational leverage, stemming from their capacity to establish – through innovation, intermediation, and market creation – conditions that are attractive to the private sector, thereby producing sustainable solutions and investment opportunities. 
And they provide integrated, cross-sectoral inputs, by investing in the systems, institutions, and capacities that are needed to achieve development goals. 
To support this joint approach, the World Bank is providing an analysis, based on 11 case studies, of how countries in diverse circumstances can use a combination of public, private, domestic, and international sources of financing most effectively to fund the implementation of the SDGs. 
The analysis will also recommend a pragmatic approach to assessing the SDGs' financing needs at the country level. 
The MDBs will discuss their common approach at April's IMF-World Bank Group Spring Meetings. 
Their ability to identify tangible financing solutions will be crucial to set the stage for the Addis Ababa conference in July – and, indeed, for the successful implementation of the SDGs and the post-2015 development agenda. 

A Private-Sector Solution to the Refugee Crisis 
BRUSSELS – International development is not just about alleviating poverty; it is also about delivering security, stability, and economic opportunities to poor and fragile communities, thereby preventing citizens from having to flee their home country in search of a better life. 
For a West eager to stem the flows of refugees and migrants from Africa and the Middle East, supporting development is a much more effective approach than building walls and razor wire fences. 
But too often development is forced to take a back seat in policymaking. 
The so-called War on Terror that began in 2001 has evolved into multiple brutal conflicts that are destabilizing the entire Middle East, eroding people’s freedoms, undermining their safety, and transforming the very nature of their societies. 
This is driving people from their homes, and often from their countries. 
The ongoing conflict in Syria, in particular, has already displaced some five million people. 
It is, of course, sensible to say that refugees should stay in the first safe country they can reach. 
But many, nonetheless, clamor to escape the instability of their region altogether. 
They dream of a life of security and opportunity in Europe, and are willing to go to great lengths to obtain it – even embarking on a life-threatening journey across the Mediterranean Sea. 
For Europe, turning our backs on these refugees is not an option – desperate people will continue to march toward safety and hope – though many continue to believe that it is. 
When German Chancellor Angela Merkel agreed to accept a million refugees into Germany, she was praised by many – and opposed by many others. 
But simply absorbing the refugee flows is not really an option either, at least not a complete one. 
What if Egypt were to explode in the way that Syria has? 
Developed countries – some of which have resisted accepting any refugees at all – would not simply accept 20 million newly displaced people. 
The only real option for tackling the refugee crisis is to address the causes of people’s displacement, including terrorism, hunger, disease, oppression, inadequate infrastructure, scarce vital resources, a lack of jobs and economic prospects, and falling standards of living. 
Seen in this light, supporting international development is not some discretionary act of generosity; it is a matter of mutual survival. 
To succeed, however, requires adapting development policies to economic reality. 
Rather than simply handing money from one state to another, as the world has done for the last 60 years, development funds must be used to mobilize the private sector – the real engine of economic growth and development. 
Indeed, in developing economies, the private sector accounts for 90% of jobs. 
With the right approach, the €20 billion ($21.9 billion) in annual development funding provided by the European Union could be leveraged to mobilize €300 billion of capital for the developing world, changing millions of people’s lives for the better. The model is straightforward: first, blend public, private, and charitable contributions; second, invest the funds under rigorous private-sector standards, rather than entrusting them to profligate public-sector actors who often treat donor money with contempt. 
Such blended finance vehicles, though in their infancy, have already been shown to work well elsewhere in the world. 
A World Economic Forum survey found that every $1 of public money invested in such initiatives attracted as much as $20 of private investment. 
And this does not even account for the benefits implied by improved accounting, tendering, and reporting procedures – all by-products of greater private-sector involvement. 
This approach is especially appropriate at a time when many European countries are struggling with sluggish growth and face tight fiscal constraints. 
Only four EU members now spend the globally agreed 0.7% of gross national income on development aid. 
The good news is that European governments increasingly seem to recognize the need to tap the potential of the private sector to support development. 
Last month, at a European Parliament plenary session in Strasbourg, the European Commission threw its support behind my plan to put the private sector front and center in development projects. 
But establishing private-sector investment as a key component of Europe’s development strategy is just the first step. 
The Commission must now put words into action, which means engaging directly with the private sector and business communities. 
By stabilizing Middle Eastern societies and advancing their economic development, Europe can help to stem the influx of migrants and asylum-seekers today, while securing new markets, business opportunities, and partnerships tomorrow. 

Privatizing Africa’s Development 
Lagos – There has been considerable progress on achieving the Millennium Development Goals since their inception in 2000. 
But, despite the best efforts of governments, reaching those goals by the 2015 target date still remains a distant prospect for many countries, not the least of in Africa. 
Many of us in Africa’s private sector are keen to make a difference in meeting these goals. 
At the Africa Finance Corporation (AFC), reducing poverty on the African continent through private-sector initiative is our mission. 
For, in the end, the private sector is and will be the engine of growth in Africa, and its increasingly active involvement in the development process bodes well for the continent. 
Africa’s development challenges are well known. 
More than 40% of its population lives on less than a dollar a day. 
Over half a billion people live without modern forms of energy, and the continent’s share of global trade remains a paltry 3%. 
Lack of basic infrastructure and industrial capacity remains one of Africa’s biggest problems, for it sustains poverty and undermines the continent’s ability to compete with the rest of the world. 
Transport costs for sub-regional trade are double that of other developing regions, and high energy costs contribute significantly to the prohibitive cost of doing business. 
Africa needs substantial investments to correct these shortfalls: $75 billion to close its 135-gigawatt power deficit by 2015, and $37 billion to improve transport infrastructure. 
And, despite Africa’s huge natural-resource deposits, heavy manufacturing remains elusive. 
As a result, most of the value chain for the fossil fuel and mining sectors continues to be outside the continent. 
But these challenges have not dampened optimism about Africa’s growth prospects. 
The continent’s economy, after all, has been experiencing its strongest growth in three decades, with annual GDP up by 6% in the past three years. 
The rebirth of Africa’s private sector – a critical missing ingredient in past development efforts – has played a significant role in driving this performance, and it can fill the investment gap while generating returns in the process. 
The AFC is promoting such investment, based on a new development-oriented banking style in Africa that involves the proactive creation and management of infrastructure, industrial, and financial assets, including the six leading industrial sectors: power, transport infrastructure, telecoms, oil and gas, mining, and heavy industries. 
These areas offer the greatest development impact and the most attractive returns to investors. 
An AFC-led consortium is financing a project that will develop Sub-Saharan Africa’s first deep-sea container port on the Atlantic coastline area of Olokola, Nigeria. 
The completion of this $1 billion landmark project is expected to transform Africa’s shipping and port capacity dramatically. 
Guinea-Bissau is also taking advantage of this new private sector-led development approach. 
As a member country of the AFC, it will benefit from a private sector-driven initiative to accelerate economic development and reduce poverty. 
The AFC, with its project development subsidiary, Africa Infrastructure, and Chinese equity and technical partners, WEMPCO, is launching a power generation initiative in Bissau. 
The investment will lead to a rapid deployment of emergency power using heavy fuel power generation, and will involve the rehabilitation and management of transmission and distribution. 
There is a huge window of opportunity for private sector-led development in Africa. 
But taking advantage of this opportunity requires a new approach to private financing of Africa’s development, in which Africa is the lead investor in its own economic renaissance. 

Privatizing Nigeria's Government 
Nigeria can be bold at diplomacy, as its offer of asylum to President Charles Taylor of Liberia demonstrates. 
It will require similar audacity if it is to turn its moribund economy around. 
Nigeria is a paradigm of failed development. 
Average incomes are amongst the lowest in the world. 
Poverty is endemic, with more than three-quarters of Nigerians living on less than US$2 per day and distribution of income more skewed in favor of the rich than anywhere else in the world. 
The top 2% of Nigerians earn the same as the bottom 55%. 
With Nigeria on the verge of burying the ghosts of its past dictatorships the time is ripe for daring reforms. 
Its leaders should focus on one key issue: managing Nigeria's oil revenues. 
Paradoxically, the boldest course would be for the government to stop managing these revenues and turn over a large fraction of these funds directly to the people, as is done in the US state of Alaska and the Canadian province of Alberta. 
At the earliest opportunity, Nigeria's government should convene a conference of all national and regional leaders and secure agreement on a constitutional provision whereby each household would be guaranteed a share of oil revenues, with the amount determined by prevailing prices and quotas. 
What is the rationale of this proposal and how might it be implemented? 
Recent research I conducted with the IMF's Arvind Subramanian demonstrates that Nigeria's poor economic performance is primarily a story of the mismanagement of oil revenues. 
Based on evidence from a cross-section of countries, natural resources such as oil and minerals do seem to be a ``curse'' rather than a blessing, as they impose a heavy drag on long-run economic growth. 
But the real curse of possessing oil is not so much that it incites the infamous ``Dutch disease''--the misallocation of resources away from tradable sectors--or that it generates uncertainty due to oil's price volatility. 
Rather, the main problem with oil booms is that they give rise to a series of pathologies--rent seeking, patronage, corruption, plunder--that corrode vital domestic public institutions and undermine governance. 
Indeed, asked at a conference in London what would be the worst news his staff could bring him, Senegal's President Wade quipped: ``that oil has been discovered just off our coast.'' 
The surest way to avoid these debilities is to remove the conditions in which they thrive. 
Oil revenues should be taken out of public hands to the greatest degree possible and handed over to the private sector. 
This solution is rendered more urgent in Nigeria by the prospect of exploiting the country's vast reserves of natural gas, which may aggravate and prolong the resource ``curse.'' 
Our proposal has a number of advantages, most importantly creating the right incentives for effective and responsive governance. 
Currently, oil accounts for a substantial share of Nigeria's total government revenues. 
With no need to tax the public, Nigeria's government has little incentive to provide services efficiently: oil revenues are manna from heaven and keep flowing regardless of what the public sector delivers. 
Moreover, while Nigeria is formally a democracy, the balance of power between citizens and public officials, including those at state and local government levels, is skewed in favor of the latter by virtue of their easy access to oil revenues. 
This perpetuates politics, even democratic politics, as patronage. 
Empowering citizens by giving them money could rectify this imbalance and so improve accountability and the functioning of democracy. 
Finally, our proposal offers a way out of the ongoing and sterile debate between international donors and Nigeria on the issue of debt relief. 
Nigerian officials and the public wish to see the external debt burden lifted, especially because a big part of it is ``odious''-- contracted by dictators, with a large degree of creditor complicity. 
But donors are wary. 
They justifiably fear that any savings from relief may well be misused, just as other public resources have been. 
Under our proposal, the savings from debt relief would be distributed directly to the private sector, alleviating donors' legitimate concerns while also responding to Nigerian grievances. 
The details for implementing our proposal need to be worked out by Nigerian politicians. 
For example, a decision needs to be made as to whether the transfers go to each citizen or each household (a yearly check for each person in the family may have undesirable consequences on fertility as parents have children to collect checks). 
Also, Nigerians need to decide whether all beneficiaries receive equal shares, or whether those who face the environmental consequences of oil exploration and production -- for example, in the Nigerian delta -- should receive more. 
Another question is how much of the revenues should be transferred, and how transfers can be effected in a country as large, complex, and financially backward as Nigeria. 
But even with all the difficulties of corruption and inefficiency that will no doubt plague its actual implementation, our proposal is superior to the status quo. 
After all, today's terrible conditions are the result of staggering corruption and waste over the last 40 years. 
At best, our proposal could fundamentally improve the quality of public institutions and thus transform economics and politics in Nigeria for decades to come. 
The time to act is now. 

Prizes, Not Patents 
Part of modern medicine’s success is built on new drugs, in which pharmaceutical companies invest billions of dollars on research. 
The companies can recover their expenses thanks to patents, which give them a temporary monopoly and thus allow them to charge prices well above the cost of producing the drugs. 
We cannot expect innovation without paying for it. 
But are the incentives provided by the patent system appropriate, so that all this money is well spent and contributes to treatments for diseases of the greatest concern? 
Sadly, the answer is a resounding “no.” 
The fundamental problem with the patent system is simple: it is based on restricting the use of knowledge. 
Because there is no extra cost associated with an additional individual enjoying the benefits of any piece of knowledge, restricting knowledge is inefficient. 
But the patent system not only restricts the use of knowledge; by granting (temporary) monopoly power, it often makes medications unaffordable for people who don’t have insurance. 
In the Third World, this can be a matter of life and death for people who cannot afford new brand-name drugs but might be able to afford generics. 
For example, generic drugs for first-line AIDS defenses have brought down the cost of treatment by almost 99% since 2000 alone, from $10,000 to $130. 
But, despite the high price they pay, developing countries get little in return. 
Drug companies spend far more money on advertising and marketing than they do on research, far more on research for lifestyle drugs (for conditions like impotence and hair loss) than for lifesaving drugs, and almost no money on diseases that afflict hundreds of millions of poor people, such as malaria. 
It is a matter of simple economics: companies direct their research where the money is, regardless of the relative value to society. 
The poor can’t pay for drugs, so there is little research on their diseases, no matter what the overall costs. 
A “me-too” drug, for example, which nets its manufacturer some portion of the income that otherwise accrues only to the company that dominates a niche, may be highly profitable, even if its value to society is quite limited. 
Similarly, companies raced to beat the human genome project in order to patent genes such as that associated with breast cancer. 
The value of these efforts was minimal: the knowledge was produced just a little sooner than it would have been otherwise. 
But the cost to society was enormous: the high price that Myriad, the patent holder, places on genetic tests (between $3,000 and $4,000) may well mean that thousands of women who would otherwise have been tested, discovered that they were at risk, and taken appropriate remediation, will die instead. 
There is an alternative way of financing and incentivizing research that, at least in some instances, could do a far better job than patents, both in directing innovation and ensuring that the benefits of that knowledge are enjoyed as widely as possible: a medical prize fund that would reward those who discover cures and vaccines. 
Since governments already pay the cost of much drug research directly or indirectly, through prescription benefits, they could finance the prize fund, which would award the biggest prizes for developers of treatments or preventions for costly diseases affecting hundreds of millions of people. 
Especially when it comes to diseases in developing countries, it would make sense for some of the prize money to come from foreign assistance budgets, as few contributions could do more to improve the quality of life, and even productivity, than attacking the debilitating diseases that are so prevalent in many developing countries. 
A scientific panel could establish a set of priorities by assessing the number of people affected and the impact on mortality, morbidity, and productivity. 
Once the discovery is made, it would be licensed. 
Of course, the patent system is itself a prize system, albeit a peculiar one: the prize is temporary monopoly power, implying high prices and restricted access to the benefits that can be derived from the new knowledge. 
By contrast, the type of prize system I have in mind would rely on competitive markets to lower prices and make the fruits of the knowledge available as widely as possible. 
With better-directed incentives (more research dollars spent on more important diseases, less money spent on wasteful and distorted marketing), we could have better health at lower cost. 
That said, the prize fund would not replace patents. 
It would be part of the portfolio of methods for encouraging and supporting research. 
A prize fund would work well in areas in which needs are well known – the case for many diseases afflicting the poor – allowing clear goals to be set in advance. 
For innovations that solve problems or meet needs that have not previously been widely recognized, the patent system would still play a role. 
The market economy and the profit motive have led to extremely high living standards in many places. 
But the health care market is not an ordinary market. 
Most people do not pay for what they consume; they rely on others to judge what they should consume, and prices do not influence these judgments as they do with conventional commodities. 
The market is thus rife with distortions. 
It is accordingly not surprising that in the area of health, the patent system, with all of its distortions, has failed in so many ways. 
A medical prize fund would not provide a panacea, but it would be a step in the right direction, redirecting our scarce research resources toward more efficient uses and ensuring that the benefits of that research reach the many people who are currently denied them. 


Should We Be Worried About Productivity Trends? 
MILAN – Economists concern themselves not only with addressing difficult questions thoughtfully, but also with formulating the questions themselves. 
Sometimes, rethinking those questions can hold the key to finding the answers we need. 
Consider the productivity debate. 
Economists trying to explain the apparent structural slowdown in productivity growth have been asking the following question: Where is the missing increase? 
Their response covers concerns about measurement, structural shifts in the labor market, a potential paucity of investment opportunities, productivity-diluting technological innovations, and technology-driven skills mismatches. 
But it may also be useful to consider a more fundamental question: How much productivity growth do we really want, and at what cost? 
There is no doubt that productivity growth is desirable. 
It is a primary driver of GDP growth (especially in countries where labor-force growth is slowing) and income gains. 
Strong GDP growth and rising incomes can then support the fulfillment of fundamental human needs and desires. 
This link is particularly obvious in developing countries, where economic expansion and rising incomes are preconditions for poverty reduction and improvements in health and education. 
But the link between aggregate growth and individual welfare is no less visible in advanced countries – particularly those now struggling with slow growth, high unemployment, output gaps, debt overhangs, misaligned exchange rates, and structural rigidities. 
But this does not mean that policymakers’ primary goal should be more productivity growth. 
Societies – including governments and individuals – care about a range of things, from health care and security to fairness and freedom. 
Inasmuch as productivity growth – and, in turn, GDP and income growth – advances these societal objectives, it is highly desirable. 
There is, however, a tendency among economists and policymakers to overemphasize such market-related measures of performance, while overlooking the reason why that performance matters: human wellbeing. 
Efforts to implement a more comprehensive framework for assessing economic performance, one that reflects social needs and desires, have been largely unsuccessful. 
In order to determine how much productivity growth we want, we need to take a broader view, one that enables us to decide how best to allocate society’s limited resources, especially its most valuable human resources. 
Such a perspective should recognize the possibility that market-related measures, particularly real (inflation-adjusted) income growth, may no longer be as important as they were in the past. 
And it must account for a society’s priorities, revealed in the ways in which its members use their resources. 
Health-related discoveries and advances, for example, have brought massive societal benefits since World War II: increased longevity and reduced child mortality and morbidity, not just higher productivity and GDP. 
That is why the government of, say, the United States invests so much in medical research: the National Institutes of Health alone has an annual budget of $32 billion with which to fund infrastructure and research projects that employ a subset of the country’s greatest scientific talent. 
Similarly, the National Science Foundation and the scientific research arm of the US Department of Energy receive a combined total of about $12 billion per year, which they use to advance a wide variety of goals in engineering, energy efficiency, and green energy, and the natural and social sciences. 
The economic return on public investment is even more difficult to calculate for security-related spending, where the total resources allocated to enhancing it and the effectiveness of those resources may be unknowable. 
But there is little doubt that security has a powerful claim on people’s wellbeing and thus on resource allocation. 
In some cases, people’s desires may actually clash with the goal of improving productivity. 
Social media, for example, has often been derided as a feeble or even negative contributor to productivity. 
But productivity is not the point of social media. 
What people value about it is the connectivity, interaction, communication, and diversion that it enables. 
In fact, for many individuals, particularly in wealthier countries, the top priority is not simply becoming richer, but rather living a richer life, and it is toward the latter goal that they will channel their time, income, and creativity. 
As societies become richer, the relative value placed on different dimensions of life may shift. 
Societies’ allocation of resources will imprecisely but persistently follow these shifts. 
This is especially true when it comes to human resources, but public-sector resources also tend to respond to the same preferences and values over the longer term, regardless of the imperfections in our mechanisms of social choice. 
This kind of evolution is not unique to high-income countries. 
China has reached – or perhaps passed – the stage during which a laser-like focus on productivity and GDP growth corresponds with ordinary citizens’ sense of wellbeing. 
As a result, China’s resources are increasingly being redeployed toward a more balanced portfolio that still includes growth, but adds environmental protection, social welfare, security, and innovation in a wide range of fields that overlap only partly with productivity and income growth. 
All of this suggests that a substantial share of the decline in productivity growth may not be the result of some deep problem with resource allocation or some consequence of exogenous technological innovation cycles over which we have little control. 
Rather, it could reflect a natural shift in priorities to other dimensions of wellbeing. 
This shift is not without its risks. 
Without productivity growth, the incomes of those at the lower end of the distribution will likely remain flat, exacerbating inequality and, as we have been seeing lately, jeopardizing social and political stability. 
Given this, governments should devote resources to reducing inequality, regardless of the shifting preferences of the average citizen. 
Societies could, we have little doubt, elevate productivity and income growth substantially, if they managed to redeploy their resources entirely in that direction. 
But whether bucking revealed preferences embedded in private and public investment choices would make us individually and collectively “better off” is dubious, at best. 
More likely, it is simply not true. 

Probing the Productivity Paradox 
WASHINGTON, DC – Over the last decade or so, productivity growth has slowed considerably in most major developed economies, even as impressive advances have been made in areas like computing, mobile telephony, and robotics. 
All of these advances ostensibly should have boosted productivity; and yet, in the United States, a world leader in technological innovation, business-sector labor productivity growth in 2004-2014 averaged less than half the rate of the previous decade. 
What is going on? 
One theory that has gained a lot of traction lately is that the so-called productivity paradox does not actually exist. 
Productivity growth only seems to be dropping, the logic goes, because the statistics we use to measure it fail to capture fully recent gains, especially those from new and higher-quality information and communication technology (ICT). 
If prices do not reflect quality improvements in the new products, price deflators are overestimated, and real output is underestimated. 
Moreover, the skeptics point out, standard measures of productivity are based on GDP, which, by definition, includes only output produced. 
Consumer surplus – which is growing fast, as Internet-based services like Google search and Facebook generate substantial utility to consumers, at a market price of close to zero – is ignored. 
There is some logic to this argument. 
Indeed, a recent review of research on productivity by the Brookings Institution and the Chumir Foundation confirmed that gains from new technologies are underestimated, owing to measurement issues relating to both product quality and consumer surplus. 
But these two types of mismeasurement, the report continues, explain only a relatively small share of the slowdown in economic gains. 
Furthermore, these lapses have existed for a long time, and they do not seem to have increased substantially in recent years. 
The conclusion is clear: the productivity-growth slowdown is real. 
Perhaps, then, we must look at the other component of the paradox: technological innovation. 
Many have argued that the real issue is that recent technological innovations have been less consequential than their predecessors. 
New ICT technologies, the “techno-pessimists” claim, simply do not bring the kind of economy-wide benefits that were brought by, say, the internal combustion engine and electrification. 
“Techno-optimists,” for their part, believe that ICT advances do have the potential to drive rapid productivity growth; their benefits are merely subject to lags and come in waves. 
What do the numbers say? 
Firm-level data show that productivity growth has held up relatively well for firms that are at the technological frontier. 
It is the less technologically advanced firms, which are often smaller, that have experienced the major growth slowdowns. 
This suggests that the problem may not be the technology itself, but rather its slow diffusion. 
There is also a macroeconomic element to the decline in productivity growth, rooted in deficient aggregate demand. 
According to former US Treasury Secretary Larry Summers, when the desired level of investment is below the desired level of savings despite a nominal interest rate of zero, chronically deficient demand constrains GDP and productivity growth, producing so-called “secular stagnation.” 
But, of course, demand- and supply-side arguments are inextricably linked. 
And, indeed, techno-pessimist expectations, which can lower expected profits, may be discouraging investment. 
Meanwhile, excessive income concentration at the top – a situation that inadequate technological diffusion may exacerbate – contributes to excess savings. 
Any strategy to address the problems underpinning low productivity growth – from inadequate technological diffusion to income inequality – must address skill constraints and mismatches affecting the labor market’s ability to adjust. 
As it stands, workers, particularly from lower income groups, are slow to respond to demand for new higher-level skills, owing to lags in education and training, labor-market rigidities, and perhaps also geographical factors. 
These factors, together with rent capture and winner-take-all markets, can entrench inequality and blunt markets’ competitiveness. 
Spurring investment is also important. 
In most advanced economies and many emerging economies, investment rates fell sharply in the wake of the 2008 global financial crisis, and have still not returned to pre-crisis levels. 
But innovation is often embedded in capital and needs new investment to spread across economies. 
Fortunately, world leaders seem to recognize some of the imperatives they face. 
At the recent G20 summit in Hangzhou, China, world leaders emphasized the need to boost investment and accelerate structural reforms to enhance productivity and lift potential growth. 
One hopes that this is the first step toward an integrated approach that addresses the forces impeding technology diffusion, undermining competitiveness, and exacerbating inequality. 
We cannot know how new technologies will affect the world economy in the long term. 
But we know one thing: the productivity paradox is real, and it is contributing to rising inequality in many societies. 
It is time to address it. 



The Profitability of Trust 
GENEVA – The effects of the most devastating financial crisis in decades have begun to fade. 
But debate about the fundamentals of the global economy is far from over. 
Indeed, there has been a new wave of heated discussion about whether companies should put profits or the common good first. 
Milton Friedman, a leading proponent of the profit-oriented approach to corporate management, famously declared that “the business of business is business.” 
Indeed, from this standpoint, there is no contradiction between profit maximization and the common good. 
The pursuit of profit itself is a socially beneficial goal. 
A conceptual basis for the opposing perspective, to which I adhere, lies in the Harvard economist Michael Porter’s theory of shared value creation. 
In fact, my own publications promote the stakeholder concept as the framework for a modern understanding of socially responsible corporate management. 
The theoretical debate could continue indefinitely. 
But, in terms of practical company management, such ideological polarization is not particularly useful. 
If managers had to choose between fulfilling the expectations of shareholders and meeting their social and ethical responsibilities, their companies would probably collapse. 
Instead, successful managers recognize that any company is both an economic and social entity, and thus that no stakeholder can be neglected. 
As I wrote more than four decades ago, a company, “like an organism…depends on several arteries,” all of which it must nurture if it hopes to survive and grow. 
That sounds straightforward. 
But it can be very difficult when the demands of, say, the company’s shareholders conflict with the interests of its employees, customers, or local communities. 
The good news is that, in any such conflict, there is one clear, unifying goal: ensuring the company’s long-term success. 
This requires, first and foremost, that the company is profitable. 
But profitability should not be an end in itself; it is a tool to help managers determine the most effective use of their resources and gauge the company’s competitiveness and vitality. 
So instead of just paying out dividends, companies should use their profits to bolster their long-term viability. 
Profitability, growth, and safeguards against existential risks are crucial to strengthening a company’s long-term prospects. 
But if these three factors constitute a company’s “hard power,” firms also need “soft power”: public trust and acceptance, won by fulfilling a company’s social responsibility. 
Only when a company has gained the public’s confidence – its “license to operate” – can its management create long-term value for all stakeholders, including shareholders. 
In short, the real conflict is not between profit maximization and social responsibility, but rather between short- and long-term thinking. 
This, in a sense, is an easier conflict to resolve. 
After all, a short-sighted approach not only undermines companies’ prospects; it also threatens the entire economy. 
Indeed, managers’ irresponsible focus on advancing shareholders’ immediate interests, thereby maximizing their own bonuses, contributed significantly to bringing the global financial system to the brink of collapse in 2008. 
In order to enable a company’s management to accommodate the long-term interests of all stakeholders, corporate decision-making must account for the four prerequisites of a company’s survival: profitability, growth, risk protection, and public trust. 
Given that satisfying one of these prerequisites often comes at the cost of the others, such a system would entail continuous adjustment and compromise. 
We are emerging from a period when companies, under pressure to meet shareholder expectations, favored profitability and growth, even if it meant taking undue risks and losing public confidence. 
Companies now need to work on minimizing risk and building trust by meeting the legitimate expectations of all their stakeholders, including reducing their activities’ adverse impact on the environment and creating high-quality employment opportunities. 
But corporate social responsibility is not limited to how a company does business. 
Firms should use their core competencies to help find solutions to today’s most pressing social problems. 
In other words, beyond serving its own stakeholders, a company should accept its own role as a stakeholder in our collective future – a sort of quid pro quo for its license to operate. 
Fortunately, companies are increasingly acting with a sense of social responsibility. 
By working with governments, international organizations, and civil society, companies are addressing major challenges like social integration, and creating the necessary systems to provide education and health care to those who need it most. 
These companies are implementing the stakeholder concept on a micro and macro level, answering to the demands of their employees, customers, and communities, and thus strengthening their brands. 
In doing so, such companies offer a powerful response to the question of what their role in society should be. 
More important, they are showing the rest of the corporate sector that the business of advancing the common good is a worthy one. 

Putting Profits in Perspective 
BERKELEY – High profits are usually viewed as a sign of a company’s economic prowess, the result of innovation and efficiency forged by healthy competition. 
But, as a recent report by the US Council of Economic Advisers shows, high profits can have another cause: market concentration. 
The report lists several indicators of decreasing competition in the US economy, including a long-term decline in new business formation and the accrual of enormous profits to a small number of firms. 
Acting on its recommendations, President Barack Obama recently issued an executive order calling on all US government agencies to use their authority to promote competition. 
It is an important moment to assess the state of competition in various sectors. 
Many US industries, including some of the most innovative, are dominated by a handful of large companies, some of which enjoy very large market shares and generate returns that greatly exceed historical averages. 
And some companies are stockpiling cash or acquiring competitors rather than using their returns to build productive capacity. 
Nonetheless, it would be a mistake to conclude that weakening competition is driving these unusual economic trends. 
They are taking place in a context of swiftly changing sectoral dynamics and rapid digitization. 
Corporate profits may be near all-time highs, but their variance among firms and industries has also increased significantly. 
The most profitable firms in the US are no longer in heavy industry; they are in sectors that capitalize on research and development, brands, software, and algorithms. 
Companies in sectors like pharmaceuticals, media, finance, information technology, and business services have the highest profit margins. 
Even excluding finance, these sectors’ share of US corporate profits has increased significantly, from 25% in 1999 to 35% in 2013. 
Corporate profitability is increasingly driven by digital capabilities. 
In the most digitally advanced sectors of the economy, margins have grown 2-3 times faster than average. 
And even within these sectors, there are enormous spreads between the top-performing companies and the rest of the pack. 
The “winner-take-most” dynamic of the digital economy is not only producing record profits for leading firms; it may be accelerating the pace of innovation and broadening the areas in which companies can enter and quickly establish market power. 
There are also many reasons why some firms appear to have decided to stockpile their returns. 
For starters, while gross business investment as a share of GDP has yet to recover from the 2008 financial crisis, growth in investment has been in line with its historical relationship to output growth. 
At the macroeconomic level, investment growth has been weak, because economic growth has been anemic. 
At the same time, investment growth has been strong in sectors like technology and – until recently – energy, where demand has been expected to rise. 
And while awaiting stronger demand at home, some US companies have been investing in foreign markets, attracted by their size and projected growth. 
Second, measurement issues may be clouding investment figures. 
The price of capital equipment, particularly ICT equipment and software, has declined sharply since the 1980s, even as quality has improved. 
Thus, real price- and quality-adjusted investment may be considerably stronger than official statistics imply. 
Third, asset-light, heavily digitized firms have a much larger presence in the US than they did even a decade ago. 
By their nature, these firms do not need much in the way of factories, equipment, and fleets of vehicles. 
Focusing on their investment in physical capital ignores their ability to generate returns from intellectual property and other intangible assets. 
And it overlooks their investment in R&D and intellectual property assets. 
In fact, R&D investment has hit a record high, driven by ideas-intensive companies that compete through innovation. 
Meanwhile, many leading firms in ideas-intensive sectors are using their substantial cash holdings to grow through mergers and acquisitions. 
The bigger and more profitable these firms become, the more they tend to use M&A as one of the few available avenues for continued growth. 
To be sure, this could accelerate market concentration. 
But it is important to note that the effects of market concentration are changing. 
Indeed, in a growing number of digital markets where a few giant firms hold commanding shares, there is little evidence that market power is leading to higher prices. 
On the contrary, consumers have gained an array of free services and conveniences. 
More relevant concerns about market concentration may turn out to be privacy and data ownership, not pricing power. 
Indeed, some have begun to ask whether the collection and control of large amounts of data by a few huge firms with commanding market shares can be an anticompetitive force, creating insurmountable entry barriers for would-be innovators. 
At the same time, however, some of the largest digital platforms, by their very nature, may promote competition, as they improve transparency in markets and enable millions of small enterprises to reach customers and suppliers around the world. 
A recent study found that digital platforms can help small businesses increase their export rates dramatically. 
It is possible that the era of “peak profits” that has sparked concerns about market power is coming to a close. 
US corporations have had a remarkable three-decade run, but profits have already slipped from 11.5% of national income in 2012 to 9.5% last year. 
Today, wages are rising, borrowing costs have nowhere to go but up, and corporate tax policies are under scrutiny. 
On top of those shifts, the digitization of American business is still in its early stages. 
Recent research has estimated that the US economy has realized only about 18% of its digital potential. 
As the economic transformation continues to play out, the corporate world may become even more Darwinian. 
Indeed, many digital behemoths did not exist a decade ago, and it is possible that they will no longer exist a decade from now. 
Today’s market leaders may look invincible. 
But they can always be toppled by the next new thing. 


The Tuberculosis Front 
BERLIN – This has been a good decade in the fight against tuberculosis. 
We are likely to achieve the United Nations Millennium Development Goal of cutting TB prevalence and mortality in half by 2015, from 1990 levels. 
At least a dozen new vaccines and drug candidates are in clinical trials, and the World Health Organization has endorsed a new diagnostic test called the GeneXpert. 
This progress is all the more important given the complacency that led to a complete standstill in research and development for new TB interventions toward the end of the twentieth century. 
The TB drugs currently in use were developed between 1950 and 1970. Indeed, the Bacille Calmette–Guérin (BCG) vaccine is almost 100 years old, while the most widely used diagnostic test, microscopic detection of bacilli in sputum, was developed 130 years ago. 
No wonder that the efficacy of these tools has weakened. 
The current vaccine prevents severe TB in infants, but not the most prevalent pulmonary TB in all age groups. 
The microscopic test gives false results in nearly half of all cases. 
We like to think of TB as a malady of the past. 
In fact, nine million people develop the active disease every year, and one in five will die. 
This places the tubercle bacillus second only to human immunodeficiency virus (HIV) on the list of top microbial killers. 
One-third of the world’s population is infected with the causative agent, though only one in ten develops the active disease. 
The bad news is that infected individuals carry the agent with them for their entire lives. 
When one’s immune system weakens, the disease may erupt. 
With the emergence in the 1980’s of HIV, which compromises the immune system, TB reemerged, and is the number-one killer of HIV-infected individuals. 
Roughly 15 million people suffer from co-infection of HIV and Mycobacterium tuberculosis, the primary causative agent in most TB cases. 
Moreover, the tubercle bacillus engages in trench warfare, gaining resistance to conventional antibiotics and canonical vaccination approaches, as well as delaying diagnosis and determination of drug sensitivity. 
Whereas pandemics appear suddenly, spread rapidly, and raise enormous fears of an impending threat, TB has been spreading slowly but consistently for tens of thousands of years, patiently waiting for new opportunities. 
Treatment of TB requires a minimum of three drugs administered over at least six months. 
Compare this with antibiotic treatment of, say, a urogenital infection, which lasts a few weeks at most. 
As a result, compliance with TB drug treatment is particularly weak, paving the way for the emergence of multidrug-resistant (MDR) TB, which can no longer be treated by conventional therapeutic regimes. 
Some 50 million people are infected with tubercle bacilli that are MDR. 
While treating MDR-TB remains possible, doing so is arduous, with a treatment time of roughly two years, using drugs that are neither as efficient nor as benign as canonical drugs – and at a cost that rises by a factor of 10-100. 
While this additional cost can be borne by health-care systems in the rich world, it is excessive for poor countries, implying no, or insufficient, treatment. 
Moreover, in 85 countries, extensively drug-resistant (XDR) TB, which is virtually untreatable, has been diagnosed. 
Indeed, surgical resection of affected lungs has become the treatment of choice in many XDR-TB hotspots. 
Welcome back to the pre-antibiotic era! 
So, the question is not whether we need novel drugs, vaccines, and diagnostics, but when they will become available. 
The new GeneXpert test diagnoses not only TB, but also, in the same step, MDR-TB, which means that it can rapidly direct adequate treatment and prevent infection of contacts – a true breakthrough. 
Unfortunately, the test is expensive and sophisticated, putting it out of reach for many poor countries. 
A number of other drugs – some new and some repurposed – are currently in the last stage of clinical trials, and one new drug has been approved by US regulators for treatment of MDR-TB even before such trials have been completed. 
But the first potential vaccine to be tested for efficacy recently failed miserably. 
So, the good news of the last decade is just a glimmer of hope. 
We still have a long way to go, and accelerated R&D to develop new drugs and vaccines can be achieved only with increased funding. 
Unfortunately, private-sector incentives for developing new TB interventions are too weak. 
New approaches, such as partnerships between public research institutions and private industry, are needed. 
While clinical trials of the most promising drugs and vaccines need to be pursued, we also need to go back to the drawing board and develop entirely new tactics. 
Current annual funding for R&D devoted to TB is estimated to be $500 million. 
But more than $2 billion is needed annually. 
That amount may seem unrealistically high, but it is a negligible proportion of the estimated $160 billion spent on health-related R&D worldwide. 
More important, the economic burden of TB has been put as high as $20 billion annually – and even higher if the losses in human capital are included. 
If we choose to continue suffering these losses, we might save some money in the short term. 
The wiser course, however, is to make the necessary investments today, thereby averting a much larger bill tomorrow. 

Sustainable Development Economics 
PARIS – Two schools of thought tend to dominate today’s economic debates. 
According to free-market economists, governments should cut taxes, reduce regulations, reform labor laws, and then get out of the way to let consumers consume and producers create jobs. 
According to Keynesian economics, governments should boost total demand through quantitative easing and fiscal stimulus. 
Yet neither approach is delivering good results. 
We need a new Sustainable Development Economics, with governments promoting new types of investments. 
Free-market economics leads to great outcomes for the rich, but pretty miserable outcomes for everyone else. 
Governments in the United States and parts of Europe are cutting back on social spending, job creation, infrastructure investment, and job training because the rich bosses who pay for politicians’ election campaigns are doing very well for themselves, even as the societies around them are crumbling. 
Yet Keynesian solutions – easy money and large budget deficits – have also fallen far short of their promised results. 
Many governments tried stimulus spending after the 2008 financial crisis. 
After all, most politicians love to spend money they don’t have. 
Yet the short-term boost failed in two big ways. 
First, governments’ debt soared and their credit ratings plummeted. 
Even the US lost its AAA standing. 
Second, the private sector did not respond by increasing business investment and hiring enough new workers. 
Instead, companies hoarded vast cash reserves, mainly in tax-free offshore accounts. 
The problem with both free-market and Keynesian economics is that they misunderstand the nature of modern investment. 
Both schools believe that investment is led by the private sector, either because taxes and regulations are low (in the free-market model) or because aggregate demand is high (in the Keynesian model). 
Yet private-sector investment today depends on investment by the public sector. 
Our age is defined by this complementarity. 
Unless the public sector invests, and invests wisely, the private sector will continue to hoard its funds or return them to shareholders in the forms of dividends or buybacks. 
The key is to reflect on six kinds of capital goods: business capital, infrastructure, human capital, intellectual capital, natural capital, and social capital. 
All of these are productive, but each has a distinctive role. 
Business capital includes private companies’ factories, machines, transport equipment, and information systems. 
Infrastructure includes roads, railways, power and water systems, fiber optics, pipelines, and airports and seaports. 
Human capital is the education, skills, and health of the workforce. 
Intellectual capital includes society’s core scientific and technological know-how. 
Natural capital is the ecosystems and primary resources that support agriculture, health, and cities. 
And social capital is the communal trust that makes efficient trade, finance, and governance possible. 
These six forms of capital work in a complementary way. 
Business investment without infrastructure and human capital cannot be profitable. 
Nor can financial markets work if social capital (trust) is depleted. 
Without natural capital (including a safe climate, productive soils, available water, and protection against flooding), the other kinds of capital are easily lost. 
And without universal access to public investments in human capital, societies will succumb to extreme inequalities of income and wealth. 
Investment used to be a far simpler matter. 
The key to development was basic education, a network of roads and power, a functioning port, and access to world markets. 
Today, however, basic public education is no longer enough; workers need highly specialized skills that come through vocational training, advanced degrees, and apprenticeship programs that combine public and private funding. 
Transport must be smarter than mere government road building; power grids must reflect the urgent need for low-carbon electricity; and governments everywhere must invest in new kinds of intellectual capital to solve unprecedented problems of public health, climate change, environmental degradation, information systems management, and more. 
Yet in most countries, governments are not leading, guiding, or even sharing in the investment process. 
They are cutting back. 
Free-market ideologues claim that governments are incapable of productive investment. 
Nor do Keynesians think through the kinds of public investments that are needed; for them, spending is spending. 
The result is a public-sector vacuum and a dearth of public investments, which in turn holds back necessary private-sector investment. 
Governments, in short, need long-term investment strategies and ways to pay for them. 
They need to understand much better how to prioritize road, rail, power, and port investments; how to make investments environmentally sustainable by moving to a low-carbon energy system; how to train young workers for decent jobs, not only low-wage service-sector employment; and how to build social capital, in an age when there is little trust and considerable corruption. 
In short, governments need to learn to think ahead. 
This, too, runs counter to the economic mainstream. 
Free-market ideologues don’t want governments to think at all; and Keynesians want governments to think only about the short run, because they take to an extreme John Maynard Keynes’ famous quip, “In the long run we are all dead.” 
Here’s a thought that is anathema in Washington, DC, but worthy of reflection. 
The world’s fastest growing economy, China, relies on five-year plans for public investment, which is managed by the National Development and Reform Commission. 
The US has no such institution, or indeed any agency that looks systematically at public-investment strategies. 
But all countries now need more than five-year plans; they need 20-year, generation-long strategies to build the skills, infrastructure, and low-carbon economy of the twenty-first century. 
The G-20 recently took a small step in the right direction, by placing new emphasis on increased infrastructure investment as a shared responsibility of both the public and private sectors. 
We need much more of this kind of thinking in the year ahead, as governments negotiate new global agreements on financing for sustainable development (in Addis Ababa in July 2015); Sustainable Development Goals (at the United Nations in September 2015), and climate change (in Paris in December 2015). 
These agreements promise to shape humanity’s future for the better. 
If they are to succeed, the new Age of Sustainable Development should give rise to a new Economics of Sustainable Development as well. 

Promoting Democracy in the Greater Middle East 
American and European leaders are talking about the need to promote reform in the "Greater Middle East." 
Americans see this as the key battleground in the war on terror, and Europeans want stable, responsive governments that stem the flow of illegal migration and organized crime. 
Both sides accept that working with local partners for peaceful democratic change today is the best way to avoid violent revolution or military action tomorrow. 
This enthusiasm for reform marks a paradigm shift. 
In the past, other interests, such as securing a steady flow of oil or obtaining cooperation on counter-terrorism, assumed priority. 
But, despite flourishing rhetoric about promoting democracy, promoting it is still not backed with concrete plans of action. 
A serious strategy must do three things: increase support for the region's democrats; create a regional context that facilitates democratic development; and, finally, reorganize ourselves at home to pursue and sustain pro-democracy policies abroad. 
First, while the West must play a critical supporting role, change must come from within the region. 
Our task is to strengthen indigenous political forces pushing for democratic change. 
In many countries, democratic activists sit in jail because of their commitment to human rights - and little is done to help them. 
No senior American or European leader should visit the region without raising human rights and defending individuals fighting for democracy. 
In practical terms, the West must increase its direct support for local NGOs and campaigners (although in countries like Egypt it will first need to get the Government to change the law so that they can receive foreign funding). 
Whereas the US now spends nearly $400 billion on defense, the National Endowment for Democracy lives on a budget of some $40 million, a fraction of which is spent in the Greater Middle East. 
Support should be raised tenfold or even more to make a real impact. 
The EU should increase its democracy promotion efforts to at least €500 million a year. 
This money should be administered at arms-length from government to ensure that it is not constrained by diplomatic pressures. 
A new Trans-Atlantic Forum for Democracy Promotion could be created to co-ordinate all activities in the region, including bilateral programs pursued by European countries. 
This could be supplemented by an independent Trust for Democracy in the Middle East, to which Europe and the US contribute funds and expertise. 
As well as working at a grass roots level, policies on trade and aid should be used to encourage governments to reform and enlarge the space for legitimate political action. 
Countries that make progress on democracy and good governance should be rewarded; privileges should be withdrawn from those that do not. 
Second, the US and its European allies need to help create the external security environment and regional context in which democratic change can occur. 
Providing security is crucial in fostering democratic development. 
As well as working to further peace between Israel and Palestine, we must help Turkey succeed in turning itself into a full-fledged democracy that qualifies for EU membership, renew pressure on the Iranian regime for democracy and arms control, and avoid premature disengagement from Iraq. 
Working with moderate Arab states, we can create a new regional security regime for the Greater Middle East, modeled on the Organization for Security and Cooperation in Europe. 
The contribution of the Helsinki process in Europe was its recognition that true peace required a new relationship between rulers and ruled as well as between states. 
It empowered societies to demand from their governments that they behave properly. 
In the Middle East, such a regime would mean giving Arab countries incentives to sign up. 
Meanwhile, NATO can provide the peacekeeping capabilities needed to help rebuild Afghanistan and Iraq. 
It can also promote more democratic practices in peacetime by extending cooperation under a Middle East version of NATO's Partnership-for-Peace program. 
Finally, we must reorganize ourselves to sustain such a course. 
This means creating a new generation of diplomats and democracy builders who know the region and its languages, as well as ensuring that governments maintain their commitments over the long term. 
Winning the war on terrorism will require a combination of offense and defense. 
For defense, the US created the Department of Homeland Security and is transforming its military. 
In Europe, the Commissioner for Justice and Home Affairs and the High Representative on External Affairs are boosting Europe's ability to tackle new threats. 
But when it comes to offense, or most important missions - building democracy, promoting a political transformation agenda, and winning the hearts and minds of millions of ordinary people in the region - remain buried deep in bureaucracy, deprived of the necessary leadership, attention, and resources. 
America needs to create a Department of Democracy Promotion headed by a Cabinet-level official. 
The Europeans should appoint a Commissioner for Democracy and Human Rights Promotion. 
The point of such a post would be to give leadership to efforts to promote democratic change - and to create an effective interlocutor for his/her American counterpart so that a joint transatlantic strategy will take shape. 
As the debate over the "Greater Middle East" grows heated, there is a danger that Europeans and Americans will pursue competing strategies. 
Both sides have much to offer, so we should pool the best proposals available and begin implementing them together. 

Harnessing the Power of Teenage Girls 
LAGOS – When you think of teenage girls, you might imagine common stereotypes, from the “mean girl” to the sullen high school student locked in her bedroom. 
The reality is that teenage girls are not only some of the world’s most marginalized people; they also have virtually unmatched potential to help build a better future for all. 
As it stands, adolescent girls are routinely denied control over their destinies. 
More than 32 million of the poorest are currently out of school. 
Every day, 39,000 girls under the age of 18 become someone’s wife. 
For huge numbers of girls worldwide, reproductive rights seem like an impossible dream. 
This situation is morally reprehensible, socially self-defeating, and economically foolish. 
By addressing it, we could not only protect millions of children; we could also tackle some of the greatest challenges facing the world today. 
Consider the challenge posed by rapid population growth. 
Though population size seems to be leveling off in most parts of the world, it continues to rise fast in some regions, particularly those where girls face the highest barriers to success. 
In Africa, the population is expected to double by 2050 and quadruple by 2100. 
If teenage girls were given the knowledge, skills, and tools to avoid unwanted pregnancy and take control of their own futures, fertility rates would drop substantially. 
These newly empowered and educated girls could then become agents for broader positive change within their communities. 
Protecting the world’s young girls is a tall order. 
But countries worldwide have pledged, through the ambitious Sustainable Development Goals (SDGs), to fulfill it by 2030, including by ending child marriage and ensuring that all girls are in school. 
But if countries are to succeed in protecting and empowering girls, they must also embrace the promise of a key initiative: to expand access to the vaccine for human papillomavirus, which causes the vast majority of cervical cancer cases. 
A relatively new development, the HPV vaccine is most effective on nine- to 13-year-old girls who have not yet been exposed to the virus, meaning that they have never been sexually active. 
This age requirement differentiates the HPV vaccine from most other childhood vaccines, which are mainly administered to infants. 
At first glance, this might seem like a serious disadvantage, because the HPV vaccine cannot simply be incorporated into other vaccine initiatives. 
In fact, the age requirement provides an important opportunity to reach adolescent girls with other vital health services, such as reproductive education, menstrual hygiene, deworming, nutrition checks, vitamin shots, and general check-ups. 
Encouragingly, developing-country governments have increasingly been demanding the HPV vaccine. 
This makes sense: of the 266,000 women who die from cervical cancer every year – an average of one every two minutes – 85% are in developing countries. 
If left unchecked, that figure is expected to rise to 416,000 by 2035, overtaking maternal deaths. 
For many of these countries, the HPV vaccine is not just an effective solution, one that prevents 1,500 deaths per 100,000 vaccinated; it is often the only solution, because the poorest countries lack the capacity to offer screening or treatment for cervical cancer. 
This is one reason why cancer experts, government officials, private-sector leaders, and civil society representatives met a few weeks ago in Addis Ababa for the tenth Stop Cervical, Breast and Prostate Cancer in Africa conference. 
There is more good news: the foundations of an HPV-vaccine initiative have already been laid. 
In 2013, well before the SDGs were agreed, Gavi, the Vaccine Alliance, for which I serve as Board Chair, took steps to make the HPV vaccine available and affordable in poor countries. 
Since then, we have seen 23 countries introduce the vaccine through demonstration pilot projects, with five more set to follow. 
But there are significant challenges ahead. 
While the focus on holding vaccination sessions in schools has proved successful, it is inadequate for reaching girls in countries with low school-attendance rates, especially in urban areas. 
Unless we find a way to reach the most vulnerable groups, no amount of political will or financing will be enough to achieve the SDGs to protect women and girls. 
Given that only two Gavi-supported countries, both of which have relatively high enrollment rates, have so far introduced the vaccine nationally, it is not entirely clear how difficult it will be to overcome this challenge. 
As we move away from demonstration projects toward a more efficient and cost-effective system of phased national scale-ups, we should gain a better sense of what to expect. 
We do have some ideas for reaching girls who are not in school – beginning with community health centers. 
As it stands, women are most likely to go to a community health center when they are pregnant, or to have their infants vaccinated. 
But by engaging with community leaders and parents to raise awareness of cervical-cancer prevention and address other local health concerns, we are finding that it is possible to generate demand and achieve good turnout at these centers. 
Ensuring that all girls have access to the HPV vaccine would improve countless lives, not only by reducing rates of cervical cancer, but also by enabling the provision of numerous other critical services. 
It is an opportunity that should be on the minds of cancer experts, government officials, and representatives from the private sector and civil society. 
And it is an imperative for all of the 193 governments that have signed up to the SDGs. 
We must not let our girls down. 

Death and Hope on the High Seas 
HALIFAX, CANADA – Sharks and their cousins, the rays, predate the dinosaurs. 
They survived the catastrophic mass extinction that finished off Tyrannosaurus Rex and all the rest, as well as the Permian-Triassic extinction that wiped out around 96% of marine species. 
Even the more recently evolved shark lineages, such as the hammerheads, have been around for more than 30 million years. 
Yet in just a few decades, a quarter of all sharks and rays have become threatened with extinction. 
This is our fault – and it is our responsibility to fix it. 
Shark and ray populations are not alone. 
Many other components of marine biodiversity – especially corals, marine mammals, seabirds, and turtles – are also struggling to withstand human pressures. 
As a result, marine ecosystems are at risk of unraveling and becoming less stable and less productive. 
Given the broad range of threats facing marine life – including overfishing, climate change, pollution, and coastal development – it is easy, perhaps even rational, to be pessimistic. 
Yet this year could mark the beginning of a more robust approach to safeguarding ocean ecosystems, particularly with regard to overfishing, which is responsible for precipitous declines in many species. 
The challenge ahead should not be underestimated. 
Meeting it will require overcoming one of the most intractable obstacles to marine conservation: ensuring the sustainability of biodiversity in the roughly 60% of the world’s oceans that lie beyond the jurisdiction of individual states. 
Within the 200-nautical-mile limit that comprises their exclusive economic zones (EEZs), a few countries have used a combination of strong legislation, good management, and effective enforcement to preserve fish stocks and ecosystems. 
(There have also been far too many counter-examples.) 
Beyond the EEZs, however, a pernicious problem arises: most living resources are de facto open-access, leaving them vulnerable to overexploitation. 
While there have been numerous well-intentioned attempts to improve management of these resources, all rely on individual actors’ willingness to concede the short-term economic benefits of intensive resource use for the sake of the long-term common good. 
Whenever a cost arises from engagement with an international process, there will always be an incentive not to play by the rules, to enforce them weakly, or not to participate at all. 
This is especially true for environmental issues, where the political capital required is high; the need for near-unanimous support is crucial; the issues can be contentious; and the benefits are disproportionately distributed and are realized over a long time horizon. 
A passing familiarity with the Realpolitik of climate change suggests that this is an intimidating – if not intractable – challenge, displaying elements of the most difficult political and social quandaries: the prisoner’s dilemma, the free-rider problem, and the tragedy of the commons. 
At present, a web of legislation – including the United Nations Convention on the Law of the Sea, Food and Agriculture Organization guidelines, and the Fish Stocks Agreement, as well as the Convention on Migratory Species of Wild Animals – governs activities that may affect biodiversity on the high seas. 
Yet the protection afforded to living resources remains limited – and riddled with loopholes. 
For example, because not all countries are signatories to these agreements, vessels can choose which flag to fly to avoid being bound by regulations (a “flag of convenience”). 
Some fisheries remain outside the jurisdiction of any of the regional bodies that play a role in resource management. 
As a result, illegal, unreported, and unregulated fishing is worth billions of dollars per year. 
One promising step, recommended by a UN working group in January, is the development of a new, legally binding agreement on high-seas biodiversity, to be ready for the UN General Assembly to review by September. 
Such a coordinated and harmonized framework may help to close regional gaps in governance; compel existing fisheries bodies to work to improve outcomes; and ultimately enable the development of new bodies that are focused on management and protection of ecosystems, not only fish stocks. 
That, in turn, may catalyze the cooperation needed to create high seas marine protected areas, which would enable damaged or depleted ecosystems to recover. 
Of course, to be effective, such areas must be monitored. 
A promising development has been the use of satellite technology to detect and address fisheries violations by individual vessels. 
This could bring about a profound change for the better in ocean management, particularly for countries with large EEZs and limited marine enforcement capacity. 
A coordinated system for responding to violations is also vital. 
Closing ports to vessels that break the rules could be achieved through the Port State Measures Agreement, currently awaiting ratification. 
Ocean governance and conservation is at a critical juncture. 
Marine resources cannot be overexploited indefinitely. 
The forthcoming “biodiversity beyond national jurisdiction” agreement, underpinned by novel ways of monitoring compliance, could improve ocean management dramatically. 
The difficulty is that, in any scenario, better management assumes that we choose long-term sustainability over short-term profits. 
Whether we will overcome our inclination to choose otherwise remains to be seen. 

The Public Sphere’s New Enemies 
NEW YORK – Before November’s terrorist attacks in Paris, it was legal to stage a demonstration in a public square in that city. 
Now it isn’t. 
In Uganda, although citizens campaigning against corruption or in favor of gay rights often faced a hostile public, they didn’t face jail time for demonstrating. 
But under a frighteningly vague new statute, now they do. 
In Egypt, government authorities recently raided and shut down prominent cultural institutions – an art gallery, a theater, and a publishing house – where artists and activists once gathered. 
All around the world, it seems, the walls are closing in on the space that people need to assemble, associate, express themselves freely, and register dissent. 
Even as the Internet and communications technology have made speaking up publicly technically easier than ever, ubiquitous state and commercial surveillance has ensured that expression, association, and protest remain constrained. 
In short, speaking up has never required more courage. 
For me, this shift could not hit closer to home. 
In November, the Open Society Foundations (the global philanthropies of George Soros, which I lead) became the second organization blacklisted under a Russian law, enacted in May, that allows the country’s prosecutor general to ban foreign organizations and suspend their financial support of local activists. 
Because anyone who engages with us is subject to possible prosecution and imprisonment, we have had no choice but to cut off relations with the dozens of Russian citizens we supported in their efforts to preserve some fragment of democracy in their country. 
Of course, there is nothing wrong with regulating public space and the organizations that use it. 
In the early 1990s, some new governments in Eastern Europe, Africa, and Latin America, underestimating the power of an active citizenry and civil society, failed to regulate adequately advocacy organizations and the space in which they work. 
But over the last two decades, as active citizens have toppled regimes in dozens of countries, governments have moved too far in the opposite direction, imposing excessive regulations on those organizations and that space. 
In the process, they are criminalizing the most basic forms of democratic practice. 
In some cases, governments do not even bother to create a legal precedent for their actions. 
Last spring in Burundi, President Pierre Nkurunziza assumed a third term in office, despite the two-term limit enshrined in the constitution. 
When citizens took to the streets to protest, they were violently suppressed. 
Even countries with some of the world’s most robust democratic traditions have been cracking down. 
After the Paris attacks, France and Belgium (where the plot was planned and organized) suspended civil liberties indefinitely, transforming themselves overnight into what are, at least by statute, police states. 
In both countries, demonstrations have been banned; places of worship have been closed; and hundreds of people have been detained and interrogated for having voiced an unconventional opinion. 
This approach is exacting a heavy toll. 
Thousands of people who had planned to protest at the United Nations climate talks last month had to settle for leaving their shoes. 
It was a startling image, illustrating how fear can overrun the commitments needed to maintain open societies and political freedoms even in Europe, the birthplace of modern citizenship. 
There is no simple formula for regulating public space or safeguarding peaceful political dissent in an age of terrorism and globalization. 
But two basic principles are clear. 
First, the world needs stronger international governance of the movement of people and money, and fewer restrictions on speech, association, and dissent. 
Lately, governments have been moving in the wrong direction. 
But 2016 offers plenty of opportunities for correction, in areas ranging from trade to migration. 
Second, non-profit organizations working to improve public policy need the same rights to secure international funding as for-profit entrepreneurs seeking to provide goods and services. 
Foreign direct investment should be encouraged, not hindered, regardless of whether it will support goods production and job creation or stronger public policies and more active citizenship. 
The responsibility for changing course does not fall exclusively on governments. 
All of us who value open public space must stand shoulder to shoulder in support of the policy frameworks and institutions that safeguard it. 
Now is a time for solidarity across movements, causes, and countries. 
When simply taking up the activism of a concerned citizen can land you in jail and fear of surveillance encourages mass passivity, single-issue politics is not a winning strategy. 
The best way to defend public space is to occupy it, even if you are championing a cause different from that of the person standing next to you. 
In 2016, we must fill – and thus protect – that space together. 

Gene Editing and Seed Stealing 
AUSTIN, TEXAS – Four hundred years ago, John Rolfe used tobacco seeds pilfered from the West Indies to develop Virginia’s first profitable export, undermining the tobacco trade of Spain’s Caribbean colonies. 
More than 200 years later, another Briton, Henry Wickham, took seeds for a rubber-bearing tree from Brazil to Asia – via that great colonialist institution, London’s Royal Botanic Gardens – thereby setting the stage for the eventual demise of the Amazonian rubber boom. 
At a time of unregulated plant exports, all it took was a suitcase full of seeds to damage livelihoods and even entire economies. 
Thanks to advances in genetics, it may soon take even less. 
To be sure, over the last few decades, great strides have been made in regulating the deliberate movement of the genetic material of animals, plants, and other living things across borders. 
The 1992 United Nations Convention on Biological Diversity, in particular, has helped to safeguard the rights of providers of genetic resources – such as (ideally) the farmers and indigenous people who have protected and nurtured valuable genes – by enshrining national sovereignty over biodiversity. 
While some people surely manage to evade regulations, laboriously developed legal systems ensure that it is far from easy. 
The majority of international exchanges of seeds, plants, animals, microbes, and other biological goods are accompanied by the requisite permits, including a material transfer agreement. 
But what if one did not have to send any material at all? 
What if all it took to usurp the desired seeds was a simple email? 
What if, with only gene sequences, scientists could “animate” the appropriate genetic material? 
Such Internet-facilitated exchanges of biodiversity would clearly be much harder to regulate. 
And, with gene sequencing becoming faster and cheaper than ever, and gene-editing technology advancing rapidly, such exchanges may be possible sooner than you think. 
In fact, genes, even entire organisms, can already move virtually – squishy and biological at each end, but nothing more than a series of ones and zeros while en route. 
The tiny virus that causes influenza is a leading-edge example of technical developments. 
Today, when a new strain of influenza appears in Asia, scientists collect a throat swab, isolate the virus, and run the strain’s genetic sequence. 
If they then post that strain’s sequence on the Internet, American and European laboratories may be able to synthesize the new virus from the downloaded data faster and more easily than if they wait for a courier to deliver a physical sample. 
The virus can spread faster electronically than it does in nature. 
More complicated viruses and some bacteria are in the range of such techniques today, though wholly synthesizing a higher organism with a more complex genome, such as maize, is many years away. 
But that may not matter, as new gene-editing technologies, like CRISPR-Cas9, enable scientists to stitch together complicated new organisms, using gene sequence information from organisms to which they do not have physical access. 
For example, the key traits of a drought-resistant maize from a Zapotec community in Oaxaca, Mexico, might be reproduced by editing the genes of another maize variety. 
No major new advance in the technology is needed to unlock this possibility. 
What is needed is the genetic sequences of thousands of types of maize. 
Those data act as a sort of roadmap and resource pool, enabling scientists to compare sequences on a computer screen and identify pertinent variations. 
The selected adjustments might then be made to, say, the parents of a new Monsanto or DuPont Pioneer maize hybrid. 
Managing access to large genomic databases thus becomes critically important to prevent a virtual version of the theft carried out by Rolfe and Wickham. 
And, indeed, in an unguarded e-mail released under the US Freedom of Information Act, one of the US Department of Agriculture’s top maize scientists, Edward Buckler, called such management “the big issue of our time” for plant breeding. 
If agricultural biotechnology corporations like Monsanto and DuPont Pioneer – not to mention other firms that work with genetic resources, including pharmaceutical companies and synthetic biology startups – have free access to such databases, the providers of the desired genes are very likely to lose out. 
These are, after all, wholly capitalist enterprises, with little financial incentive to look out for the little guy. 
In this case, that “little guy” could be African sorghum growers, traditional medicinal practitioners, forest peoples, or other traditional communities – people who have created and nurtured biodiversity, but never had the hubris or greed to claim the genes as proprietary, patented inventions. 
All it would take is for someone to sequence their creations, and share the data in open databases. 
Yet open access is the mode du jour in sharing research data. 
The US government’s GenBank, for example, doesn’t even have an agreement banning misappropriation. 
This must change. 
After all, such no-strings-attached databases do not just facilitate sharing; they enable stealing. 
The question of how to regulate access to genetic sequence data is now cropping up in international discussions, including at the World Health Organization and the Food and Agriculture Organization. 
Perhaps the most important forum for such discussions is the Conference of the Parties to the Convention on Biological Diversity, the main treaty regulating access to biodiversity. 
The next meeting (COP 13) will take place in Cancún, Mexico, in early December. 
Participants at COP 13 must focus on the need to protect the rights of resource providers. 
To this end, they should pursue a careful assessment of existing policies and craft the necessary changes – before synthetic biology outpaces legal systems and renders them impotent. 
Arrangements must be made to supervise access to genetic sequences in a way that ensures fair and equitable sharing of benefits from their use. 
Otherwise, decades of work to promote conservation and prevent piracy will be undermined, endangering the biodiversity convention – and those it protects. 

 

Protecting Education in Conflict Zones 
DOHA, LONDON – In conflict zones, it is children who often bear the brunt of the violence. 
Last month, repeated air strikes on a school compound in Idlib, Syria, killed at least 22 children; and children in the besieged Syrian city of Aleppo have, for months, had no way to escape near-constant bombardments. 
As the New York Times reported in September, “They cannot play, sleep or attend school. 
Increasingly, they cannot eat.” 
Just a few weeks before that report, a bomb was detonated outside a school in Southern Thailand, just as parents were dropping off their children. 
The blast instantly killed a father and his four-year-old daughter, and injured ten others. 
Brad Adams of Human Rights Watch described the bombing as an act of “incomprehensible brutality”: “Calling this a war crime does not fully convey the harm done to the victims, or the far-reaching impact such attacks have on children in the region.” 
And just weeks before the Thailand bombing, on August 13, air strikes on a school in Yemen’s northwestern Saada region killed ten children and injured about 30 more. 
Given these recent examples, there is clearly a need to prevent attacks – by state and armed non-state actors alike – on educational institutions and facilities. 
That is why Education Above All (EAA) has established its advocacy program, Protect Education in Insecurity and Conflict (PEIC). 
The rationale underpinning PEIC is straightforward: education provides critical opportunities for children and young people, and this is especially true for those living in conflict zones. 
Schools and universities give students a vital link to normality, while encouraging them to maintain hope and pursue their aspirations. 
They not only train the next generation of doctors, journalists, lawyers, and community leaders; they also furnish children with mentors, food, water, and knowledge about basic health and sanitation. 
And yet, as the attacks on schools in countries such as Syria, Yemen, and Sudan show, what are supposed to be safe havens often are under direct threat. 
If children can still attend school during conflicts, they will be the green shoots that emerge to re-rebuild their war-torn societies when the fighting is over. 
To protect students’ basic human right to education, universities and schools in conflict zones should be shielded in the same way that health-care facilities are. 
Indeed, like hospitals, schools concentrate one of the most vulnerable populations in any society. 
Attacks on children and schools often draw international condemnation, but words alone are clearly not an effective deterrent. 
Thus, PEIC’s mission is to use the enforcement mechanisms available under international law to strengthen our collective political will to prevent attacks on educational facilities. 
EAA wants to ensure that education is recognized as being fundamental to human development – and thus is accorded the fullest protection. 
We should be creating a world where everyone who wishes to learn, teach, or conduct academic research can do so in peace and with dignity. 
But this shared ambition requires shared action, because it will take collaboration, cooperation, and mutual trust to develop the new international arrangements needed to protect educational institutions in conflicts. 
Toward that end, and in partnership with the Global Coalition to Protect Education from Attack, PEIC has taken a leading role in promoting the Safe Schools Declaration, which includes a promise to protect “schools and universities from military use during armed conflict.” 
This clause is essential for safeguarding schoolchildren, teachers, and facilities during times of war. 
We hope that, in time, the Declaration in its entirety will become a universally recognized international standard. 
In September, Albania became the 56th country to sign the Declaration, and the Albanian government has now publicly committed to protecting education during periods of armed conflict. 
In making this pledge, Albania has joined countries such as Iraq, where there is a pressing need to safeguard children’s futures, as well as Argentina, Brazil, Chile, Italy, Kenya, Nigeria, New Zealand, Norway, Qatar, and South Sudan. 
EAA is committed to preventing schools from becoming battlegrounds, and it is calling on all countries that have not yet signed the Declaration to do so. 
Signing the Declaration amounts to a political commitment to protect education, even during the most savage conflicts – which is to say that it is a commitment to protect the world’s children. 
It is in every country’s interest to guarantee that today’s students will have the opportunity to serve as tomorrow’s leaders. 
As the world watches schools being destroyed in Syria, Yemen, and other conflict zones the Safe Schools Declaration is more important than ever. 

Protecting Zimbabwe 
JOHANNESBURG – Although the Chinese ship that was carrying arms to Zimbabwe, the An Yue Jiang, has reportedly turned back, we don’t know where else President Robert Mugabe’s military and paramilitary forces may be acquiring weapons. 
In light of the escalating violent repression of the opposition Movement for Democratic Change – and of those whose support apparently helped the MDC to prevail in the presidential election, the results of which have still not been announced after four weeks – an international arms embargo on Zimbabwe is urgently needed. 
In addition, we call on the African Union, with the support of the United Nations, to send an investigative mission to Zimbabwe to determine what additional measures may be required to carry out the internationally accepted “responsibility to protect.” 
The concept of the “responsibility to protect” was adopted unanimously by the UN World Summit in 2005. 
Yet, it remains controversial because it is often assumed that it implies the use of military force for purposes of humanitarian intervention. 
We believe, as was recognized at the UN World Summit, that military force should only be a last resort when needed to prevent or halt large-scale loss of life. 
The first step is to gather reliable information so that it is possible to know what international measures are required to prevent a disaster. 
In the case of Zimbabwe, it is extremely difficult to obtain such information. 
Mugabe’s regime has systematically shut down independent media, attacked independent civil society organizations, denied visas to foreign journalists, and has arrested and beaten journalists who nevertheless enter the country. 
Foreign observers were present when the voting took place in Zimbabwe on March 29, and their presence helped to ensure that the election itself was peaceful. 
The observers have long since left the country, however, and the reports that have filtered out suggest that in some parts of the country, Mugabe’s opponents are now experiencing a reign of terror. 
The Constitutive Act of the African Union provides in Article 4 the “right of the Union to intervene in a Member State pursuant to a decision of the Assembly in respect of grave circumstances, namely: war crimes, genocide, and crimes against humanity [as well as a serious threat to legitimate order].” 
Here too, however, actual military intervention should only be a last resort. 
In the case of Zimbabwe, for example, it is possible that sending in unarmed observers from other African countries would be sufficient. 
Their presence and ability to provide objective information might prevent continuation or further escalation of the violence of the last few weeks to the point where it would require military intervention. 
Unarmed observers could also help to ensure that emergency international food assistance, on which much of Zimbabwe’s population now depends for survival, is distributed equitably, without regard to the political leanings of those requiring it. 
Earlier this year, the African Union, through the good work of former UN Secretary General Kofi Annan, averted a calamity in Kenya after a disputed election led to widespread violence. 
The danger in Zimbabwe appears to be comparable. 
Once again, the African Union, with the support of the UN, should provide the leadership that would demonstrate that Africa has the capacity and the will to resolve a great crisis in a manner that mitigates the suffering of African people. 

No Time for Trade Fundamentalism 
CAMBRIDGE – “One of the crucial challenges” of our era “is to maintain an open and expanding international trade system.” 
Unfortunately, “the liberal principles” of the world trade system “are under increasing attack.” 
“Protectionism has become increasingly prevalent.” 
“There is great danger that the system will break down … or that it will collapse in a grim replay of the 1930s.” 
You would be excused for thinking that these lines are culled from one of the recent outpourings of concern in the business and financial media about the current backlash against globalization. 
In fact, they were written 35 years ago, in 1981. 
The problem then was stagflation in the advanced countries. 
And it was Japan, rather than China, that was the trade bogeyman, stalking – and taking over – global markets. The United States and Europe had responded by erecting trade barriers and imposing “voluntary export restrictions” (VERs) on Japanese cars and steel. 
Talk about the creeping “new protectionism” was rife. 
What took place subsequently would belie such pessimism about the trade regime. 
Instead of heading south, global trade exploded in the 1990s and 2000s, driven by the creation of the World Trade Organization, the proliferation of bilateral and regional trade and investment agreements, and the rise of China. 
A new age of globalization – in fact something more like hyper-globalization – was launched. 
In hindsight, the “new protectionism” of the 1980s was not a radical break with the past. 
It was more a case of regime maintenance than regime disruption, as the political scientist John Ruggie has written. 
The import “safeguards” and VERs of the time were ad hoc, but they were necessary responses to the distributional and adjustment challenges posed by the emergence of new trade relationships. 
The economists and trade specialists who cried wolf at the time were wrong. 
Had governments listened to their advice and not responded to their constituents, they would have possibly made things worse. 
What looked to contemporaries like damaging protectionism was in fact a way of letting off steam to prevent an excessive buildup of political pressure. 
Are observers being similarly alarmist about today’s globalization backlash? 
The International Monetary Fund, among others, has recently warned that slow growth and populism might lead to an outbreak of protectionism. 
“It is vitally important to defend the prospects for increasing trade integration,’’ according to the IMF’s chief economist, Maurice Obstfeld. 
So far, however, there are few signs that governments are moving decidedly away from an open economy. 
The website globaltradealert.org maintains a database of protectionist measures and is a frequent source for claims of creeping protectionism. 
Click on its interactive map of protectionist measures, and you will see an explosion of fireworks – red circles all over the globe. 
It looks alarming until you click on liberalizing measures and discover a comparable number of green circles. 
The difference this time is that populist political forces seem much more powerful and closer to winning elections – partly a response to the advanced stage of globalization achieved since the 1980s. 
Not so long ago, it would have been unimaginable to contemplate a British exit from the European Union, or a Republican presidential candidate in the United States promising to renege on trade agreements, build a wall against Mexican immigrants, and punish companies that move offshore. 
The nation-state seems intent on reasserting itself. 
But the lesson from the 1980s is that some reversal from hyper-globalization need not be a bad thing, as long as it serves to maintain a reasonably open world economy. 
As I have frequently argued, we need a better balance between national autonomy and globalization. 
In particular, we need to place the requirements of liberal democracy ahead of those of international trade and investment. 
Such a rebalancing would leave plenty of room for an open global economy; in fact, it would enable and sustain it. 
What makes a populist like Donald Trump dangerous is not his specific proposals on trade. 
It is that they don’t add up to a coherent vision of how the US and an open world economy can prosper side by side (it is also of course the nativist, illiberal platform on which he is campaigning and would likely govern). 
The key challenge facing mainstream political parties in the advanced economies today is to devise such a vision, along with a narrative that steals the populists’ thunder. 
These center-right and center-left parties should not be asked to save hyper-globalization at all costs. Trade advocates should be understanding if they adopt unorthodox policies to buy political support. 
We should look instead at whether their policies are driven by a desire for equity and social inclusion, or by nativist and racist impulses; whether they want to enhance or weaken the rule of law and democratic deliberation; and whether they are trying to save the open world economy – albeit with different ground rules – rather than undermine it. 

Protectionism Made in the USA 
America's imposition of tariffs on imported steel has been greeted with a howl of protest around the world. 
But harsh words have not been followed by a strong counter-attack. 
Now is the time to confront America's hypocrisy, not to bluster. 
The global financial crisis of 1997/1998 - mismanaged by the IMF, largely at the direction of the US Treasury - led to an increased flow of steel imports. But that is part of the market adjustment process the US trumpets so loudly at other times. 
The argument put forward by the US, that it was entitled to safeguard against a surge of imports - utilizing safeguard measures that are part of the WTO - is unlikely to past muster with a WTO panel when one is eventually convened, but the argument itself is disingenuous. 
Europe pushed to restructure its steel industry in the 1980s and early 1990s, and succeeded mostly. 
In America, many efficient new firms (mini-mills) were indeed created, but yesterday's lumbering giants stood still. 
They cannot compete with efficient steel mills elsewhere - including (perish the thought) Korea's state-owned steel company. 
Many of America's problems are made in the USA. 
America's deteriorating fiscal position is leading to a strong dollar, just as the deteriorating fiscal position of the US after Reagan's irresponsible tax cut of two decades ago did. 
While countries may pride themselves on a strong currency, a strong dollar is bad for exports and good for imports. 
In a dynamic economy, if jobs are lost in one sector, new jobs are being created in another. 
Government's role is to facilitate the movement of labor from one to the other. It is a primary responsibility of government to maintain full employment. 
Both in assisting shifts in employment and in maintaining full employment, the Bush Administration has failed. 
President Bush recognized that a fiscal stimulus was needed when he arrived in office, but rather than pushing for genuine stimulus, it pushed for regressive tax changes under the name of a fiscal stimulus. 
Aid to old economy firms that spent more on avoiding taxes than in restructuring took the form of a repeal of the alternative minimum tax, a tax provision designed to limit the extent to which firms could make use of loopholes in the tax code. 
Lowering taxes for the rich: under the Bush administration's original proposal, a family of four earning $50,000 would have received zero - yes zero - benefits over four years, while a $5 million dollar a year family of four "struggling to make ends meet" would have received a whopping $500,000! 
The Democrats rightly resisted; the number of jobs that would have been created was miniscule. 
But the weaknesses in the economy as a result of this economic mismanagement mean that those who lose their jobs will face a tougher time. 
While America loses, Europe loses, many in the developing world lose, and much more is at stake. 
Globalization, well and equitably managed, can benefit all countries. 
But under globalization, as currently managed, many have not gained; and some of the poorest have lost out. 
Instead, globalization is an unfair game, with the rules written by rich advanced industrial countries for rich industrial countries. 
But the US believes that even this is not enough: it will interpret these rules in ways which suit its political interests, bending and breaking them at will, challenging those who do not like it to do something about it. 
The motto of the Bush Administration seems to be, "Trade is good, but imports are bad! " 
Think of the lessons that poor developing countries learn. 
Lowering import duties lead to a surge of imports. 
So, under the "new" US rules, that country is entitled to reinstate tariffs as "safeguards." 
If the US needs to worry about unemployment with an unemployment rate of less than 6%, what is a poor country with unemployment at 10% or 20% to say? 
The US pleads for understanding; elections are coming in November, and voters in West Virginia and other states must be "bribed" to accept a new round of trade negotiations. 
But democracies exist across the developing world, and their voters have even more legitimate concerns about the jobs that result from liberalization. 
The IMF - in which the US is the only country with veto power - shows little sympathy with such political concerns in the developing world. 
Why the double standard? 
If the increase in steel tariffs were an isolated incident it would be bad enough. 
But, while preaching free market doctrines abroad, the US bails out its airlines and increases agricultural subsidies at home. 
Even before these increases, subsidies to agriculture by the advanced industrial countries were enormous - exceeding the total incomes of sub-Saharan Africa. 
The rich effectively close their markets to many goods that represent the comparative advantage of the poor. 
Argentina's economic position today, indeed, would be vastly different if America and Europe opened their markets to its agricultural goods. 
The same can be said for country after country in the developing world. 
Globalization entails increasing interdependence. 
Given the volatility in the global economy, this entails bearing some risks. 
Rich countries - like the US - are in the best position to bear those risks. 
Much discussion has taken place of late of the advantages to be gained by the world adopting global standards, e.g. in banking. 
Inevitably globalization will entail adopting such standards. 
America's actions over steel seem to suggest that the US embraces a double standard. 
This cannot be allowed. 
Countries, particularly in Europe, that are capable of standing up to the US must oppose it here. 
Taking strong measures will be in their interests, will be in America's interest (even if it is not in the interests of particular special interests, or President Bush's political interests), and will be in the broader interests of the world. 

Protectionism Rides Again 
Round up the usual suspects. 
In any US presidential election campaign, you can be sure that protectionism will break in, as it has. 
But America's swing back toward protectionism started long before, with President George W. Bush's steel tariff of 2001. 
It was hard to understand what the underlying calculus was when the Bush administration imposed that tariff on steel imports. 
The tariff was bad economics: it made America poorer. 
The tariff was bad mercantilism: it robbed more in profits and unionized jobs from steel-consuming industries than it gave to steel-making industries, and the former were at least as well-organized and vocal in Washington as the latter. 
Finally, the tariff was also bad diplomacy: why should anyone enter into an agreement with a US government that appears eager to demonstrate that it will break its commitments for the tiniest of imagined domestic political benefits? 
Unfortunately, America's swing back toward protectionism did not stop there. 
It continued last year when the Bush administration, recognizing that it had no policies to boost employment, explored whether China's undervalued exchange rate might be blamed for closed factories in Ohio. 
No surprise, then, that the Democratic Party has now picked up the protectionist baton. 
Its leading candidate for the presidential nomination, John Kerry, talks about how "Benedict Arnold CEO's" betray America by outsourcing jobs. 
Kerry's remaining competitor, John Edwards, talks about how the gap on trade between him and Kerry is wide and deep - with Kerry on the free-trade side. 
The past three years have seen much less progress on freeing up world trade than almost any free-trade advocate would have hoped. 
Unless the swing of the pendulum in the US can be stopped, the rest of this decade will be as bad. 
Neither the European Union nor Japan can be counted upon to do anything more than allow themselves to be dragged kicking and screaming into trade liberalization agreements. 
Without aggressive US leadership - which means a US executive and congress that believe in free trade - trade liberalization simply will not happen, and there will be more "emergency" tariffs, "extraordinary" quotas and "voluntary" export restraints. 
All of these steps will have minimal impact on the US. 
But they have the potential to cause countless disasters for emerging market countries that export to America. 
Can anything halt this swing of the pendulum? 
Absent a sudden, immediate, and strong boost in US domestic demand that turns into a durable boom with rapid employment growth, probably not. 
The fall over the past three years in the proportion of the working-age population with jobs in America has been the biggest in percentage terms since the Great Depression. 
American workers and voters are more anxious about job security and more willing to blame anything for job insecurity because they have seen the most profound deterioration in labor market conditions in the memory of anyone younger than eighty-five. 
That slack labor market is powering this swing of the protectionist pendulum. 
So we probably must accept that protectionist sentiment will remain strong. 
But we should seek ways to diminish the time spent and the damage done at the protectionist end of this political cycle. 
There are two arguments and one economic shift that could accelerate a return to trade liberalization. 
The two arguments in favor of free trade are powerful, but by and large they have not been deployed. 
The first argument needs to be made by countries that export to the US: they should tell journalists, politicians, voters, and workers in the US about all the American jobs that would not exist without their exports to America. 
Fear that expanded trade will destroy jobs and disrupt the American economy needs to be balanced by fear that reduced trade will destroy jobs and disrupt the American economy. 
The second argument needs to be made by those who care about America's national security. 
The 21st century will see the world constantly at war against terrorism. 
An important part of that war will consist of shaping the foes of terrorism into a durable alliance. 
Increased world trade can be an important part of that alliance-building process. 
An economic shift also needs to be carried out by Europe and Japan: a shift from deflation to reflation. 
Strong demand growth in Japan and Europe that produces a higher level of American exports would be the most powerful pro-trade liberalization force imaginable. 
For too long, Europe and Japan have subordinated the quest for full employment to other goals, whether extremely low inflation (Europe) or avoiding the costs of a bubble economy (Japan). 
Convincing ordinary American voters that trade liberalization is a positive force will be easier when the US is not the only locomotive pulling world demand forward, and not the world's importer of last resort. 

Protectionism Will Not Protect Jobs Anywhere 
CAMBRIDGE – As US and European political leaders fret about the future of quality jobs, they would do well to look at the far bigger problems faced by developing Asia – problems that threaten to place massive downward pressure on global wages. 
In India, where per capita income is roughly a tenth that of the United States, more than ten million people per year are leaving the countryside and pouring into urban areas, and they often cannot find work even as chaiwalas, much less as computer programmers. 
The same angst that Americans and Europeans have about the future of jobs is an order of magnitude higher in Asia. 
Should India aim to follow the traditional manufacturing export model that Japan pioneered and that so many others, including China, have followed? 
Where would that lead if, over the next couple of decades, automation is going to make most such jobs obsolete? 
There is, of course, the service sector, where 80% of the population in advanced economies works, and where India’s outsourcing sector still tops the world. 
Unfortunately, there, too, the path ahead is anything but smooth. 
Automated calling systems already have supplanted a substantial part of the global phone center business, and many routine programming jobs are also losing ground to computers. 
China’s economic progress may have been the big story of the last 30 years, but it struggles with similar challenges. 
While China is far more urbanized than India, it, too, is still trying to bring ten million people a year into its cities. 
Between jobs lost to automation and to lower-wage competitors such as Vietnam and Sri Lanka, integrating new workers is becoming increasingly difficult. 
Recently, the rise in global protectionism has made this difficult situation worse, as epitomized by the decision of Foxconn (a major supplier to Apple) to invest $10 billion in a new factory in Wisconsin. 
Admittedly, the 13,000 new jobs in the United States is a drop in the bucket compared to the 20 million (or more) that India and China must create each year, or even compared to the two million that the US needs. 
At the margin, the US and Europe might have some scope to make trade fairer, as Trump says he will do. 
For example, many Chinese steel plants have state-of-the-art pollution controls, but these can be switched off to save costs. 
When the result is that excess output is dumped at cheap prices into world markets, Western countries are fully justified in taking countermeasures. 
Unfortunately, the long history of trade protectionism is that it rarely takes the form of a surgical strike. 
Far more often, the main beneficiaries are the rich and politically connected, while the losers are consumers who pay higher prices. 
Countries that go too far in closing themselves off to foreign competition eventually lose their edge, with innovation, jobs, and growth suffering. 
Brazil and India, for example, have historically suffered from inward-looking trade policies, though both have become more open in recent years. 
Another problem is that most Western economies have long since become deeply intertwined in global supply chains. 
Even the Trump administration had to reconsider its plan to pull out of the North American Free Trade Agreement when it finally realized that a lot of US imports from Mexico have substantial US content. 
Erecting high tariff barriers might cost as many US jobs as Mexican jobs. 
And, of course, if the US were to raise its import tariffs sharply, a large part of the costs would be passed on to consumers in the form of higher prices. 
Trade will surely increasingly permeate the service sector, too. 
Amazon’s Mechanical Turk (named after the eighteenth-century chess-playing machine which actually had a person cleverly hidden inside) is an example of a new platform that allows buyers to contract very small specific tasks (for example, programming or data transcription) at third-world wage rates. 
Amazon’s clever slogan is “artificial artificial intelligence.” 
Even if protectionists could shut down outsourcing of tasks, what would the cost be? 
To be sure, online service platforms do need to be regulated, as early experience with Uber has demonstrated. 
But, given the massive number of new jobs that India and China need to create every year, and with the Internet remaining highly permeable, it is folly to think advanced economies can clamp down tightly on service exports. 
So how should countries deal with the relentless advance of technology and trade? 
For the foreseeable future, improving infrastructure and education can achieve a great deal. 
While the rest of the world floundered in the aftermath of the 2008 financial crisis, China continued to extend its vast logistical and supply chains. 
In a world where people are likely to have to change jobs frequently and sometimes radically, wholesale changes in adult education are needed, mainly effected through online learning. 
Last but not least, countries need to institute stronger redistribution though taxes and transfers. 
Traditional populist trade policies, like those that Trump has espoused, have not worked well in the past, and are likely to perform even worse now. 

Protectionist Myths 
NEW YORK – At a debate in New York last year entitled “Buy American/Hire American Policies Will Backfire,” with hundreds of people in attendance, my team of three free-trade proponents took on a trio of protectionists who are often in the public eye. 
We expected that we would lose the final audience vote by 55% to 45%. 
As it happened, we wiped the floor with them, winning by an unprecedented margin of 80% to 20%. 
The feedback from several voters was that we had won handily because we had the “arguments and the evidence,” whereas our opponents had “assertions and invective.” 
Evidently, the pessimism and despair that often overwhelms free traders today is unwarranted. 
The arguments of protectionists, new and old, are just so many myths that can be successfully challenged. 
Consider some of the most egregious examples. 
Myth 1: “The cost of protection and its flipside, gains from trade, are negligible.” 
This means, of course, that if protectionism is politically convenient, you need not shed tears over harming the country by surrendering to it, an attitude that many Democrats in the United States find convenient to adopt. 
Ironically, this myth was a product of inappropriate methodology and resulted from the research of my eminent Cambridge teacher Harry Johnson; and it has inexplicably been a favorite thesis since 1990 of my celebrated MIT student Paul Krugman. 
But, while this theme continues to play well in Washington, no serious scholar buys into it, owing to the compelling refutations published in 1992 by Robert Feenstra, the most accomplished trade policy empiricist today, and in 1994 by Stanford’s Paul Romer. 
Myth 2: “Free trade may increase economic prosperity, but it is bad for the working class.” 
This claim has great credibility with labor unions that believe that trade with poor countries produces paupers in rich countries. 
They therefore argue for leveling the playing field – i.e., that the costs for their rivals in poor countries must be raised by imposing the same labor standards that exist in rich countries. 
Orwellian use of terms like “fair trade” masks the fact that this is nothing but an insidious form of protectionism that seeks to reduce import competition. 
Many economists have concluded, however, that continual and deep labor-saving technological change, not trade with poor countries, is a principal culprit in the stagnation seen in rich-country wages nowadays. 
Moreover, workers profit from lower prices for imported goods like clothing and electronics. 
Myth 3: “Free trade requires that other countries also open their markets.” 
This is a refrain that recurs each time a new US administration takes office. 
But the facts are often fiction, and the logic is not compelling. 
US automakers were convinced during the years of Japan-bashing in the 1980’s that Japan was closed and the US was open. 
But it was the US that had a quota of 2.2 million units for Japanese cars, while the Japanese market was open but difficult to penetrate. 
The refrain is recurring with China today. 
Even if other economies are closed, open economies still profit from their own free trade. 
There was skepticism about this long-standing wisdom when it was argued that, if Japan was closed and the US was open, Japanese firms would have two markets and American firms would have one. 
The former, it was claimed, would have lower unit costs than the latter. 
But the problem here, as always, is with the assumption that Japanese firms would continue to be as efficient as American firms, despite protectionism. 
Myth 4: “Paul Samuelson abandoned free trade, and he was the greatest economist of his time.” 
The latter is indeed true; but the former, asserted by many protectionists, is not. 
Even Hillary Clinton, in her campaign for the US presidency, mistakenly embraced this fallacy. 
All that Samuelson showed was that any exogenous change could harm a trading economy; he did not argue that an appropriate response to that unfortunate situation was to abandon free trade. 
Consider an analogy. 
If Florida is devastated by a hurricane, its governor would only make matters worse if he responded by abandoning trade with other states. 
Myth 5: “Offshoring of jobs will devastate rich countries.” 
This scare arose during Senator John Kerry’s failed presidential campaign in 2004, when digitized x-rays were sent from Massachusetts General Hospital in Boston to be read in India. 
But no radiologists have lost jobs in the US since then, nor have their earnings fallen. 
Indeed, it is clear that the increased tradability of services has not unleashed an economic tsunami on rich countries. 
Often, jobs that would have disappeared anyway, owing to high costs in the US and other rich countries, have resurfaced where costs are lower, thus providing services that would have been lost otherwise. 
So noted offshoring worriers like the economist Alan Blinder have now shifted to arguing merely that increased tradability of services means that we should extend long-standing Adjustment Assistance Programs for trade-distressed activities to include services. 
To which the free trader responds: no problem there! 

Down with the Czar Putin 
SAN FRANCISCO – The protests that rippled across Russia ahead of Vladimir Putin’s fourth inauguration as president followed a familiar script. 
Police declared the gatherings illegal, and the media downplayed their size. 
Alexey Navalny, the main organizer and Russia’s de facto opposition leader, was arrested in dramatic fashion, dragged out of a rally in Moscow by police. 
On May 15, he was sentenced to 30 days in prison. 
More than 1,600 protesters across the country were beaten and detained. 
But one element of the recent protests came from a much older show. 
The rallying cry “Down with the Czar!” was brought out of obscurity and onto the streets of Moscow almost 100 years after Russia’s last czar, Nicholas II, was riddled with Bolshevik bullets in a Yekaterinburg cellar. 
A century before that, in a bid to lift the spirits of his friend Pyotr Chaadayev, a philosopher who was declared mad for his criticism of Czar Nicholas I, the poet Alexander Pushkin predicted the advent of better times, when “Russia will start from her sleep.” 
On “the ruins of autocracy,” he wrote, “our names will be inscribed!” 
Nearly 200 years and three revolutions later, from the pedestal installed in the center of the square that bears his name, Pushkin’s bronze effigy gazed over throngs of his modern compatriots in mock paper crowns still working to raise Russia from its “age-old slumber” – and at their whip-brandishing detractors in Cossack uniforms. 
Pushkin’s name may have been inscribed on many a monument, but his prophecy has yet to be fulfilled. 
Though Putin is a product of the Soviet Union, where “czar” really was a derogatory word, he shows considerable fondness for the autocrats of old. 
With the ardent support of the Russian Orthodox Church, he has relentlessly promoted the concept of state power as sacred, and resistance to it as sacrilegious. 
He has ascended the throne of the Byzantine emperors on the Holy Mount Athos in Greece, and portrayed his perpetual presidency as a burden he must carry, in service to his country and his people. 
Whereas the Bolshevik leaders tore down monuments to the czars, Putin has built massive monuments to Vladimir the Great in Moscow and Alexander III in Crimea. 
Four years before famously shunning the centenary of the Russian Revolution in 2017, he sponsored lavish celebrations of the 400th anniversary of the House of Romanov. 
With the recent protests’ rallying cry, Navalny – Putin’s unbending opponent, who continues to demand truth from his government, even as its agents drag him toward yet another jail cell – called Putin’s imperial bluff. 
The demonstrations thus served as both an acknowledgement of and a challenge to Putin’s autocratic ambitions. 
The odds are stacked in Putin’s favor. 
Navalny has a YouTube channel; Putin controls the entire state apparatus, a mechanism of suppression vaster than any of the Russian czars ever had – and one that decades of totalitarianism have made virtually bulletproof. 
Beyond the amped-up military and the powerful security services, there is now the National Guard of the Russian Federation, or Rosgvardiya, a contingent of some 340,000 personnel created by Putin in 2016 that answers directly to him. 
Putin also manages a highly effective propaganda machine, which churns out a post-modernist pastiche of old Soviet slogans, pre-revolutionary religious rituals, and state-of-the-art marketing ploys inspired by the “consumerist” West. 
“Nothing is true and everything is possible,” the narrative goes. 
Ostensibly, Putin’s system is working. 
Official surveys insist that 86% of Russians – and it is usually 86% – support him on everything from the annexation of Crimea to his latest term as president. 
But Putin’s ambitions as a post-modern autocrat may be his Achilles’ heel. 
After all, autocrats often mistake their people’s proclamations of love and admiration for the real thing. 
The truth about what people genuinely feel remains impossible to know. 
With the Russian economy stagnating, owing largely to international sanctions and Kremlin counter-sanctions, discontent will continue to simmer. 
Any shock – even a seemingly minor one – could cause it to boil over. 
At that point, targeting rivals and dissenters may no longer be enough; 
Putin would have to resort to Stalin-style mass repression instead. 
Just how viable such a dictatorship is in the Internet age remains an open question. 
Consider the failure of the Kremlin’s attempt to block Telegram, Russia’s leading instant messaging service: far from quashing dissent, that effort has fueled support for the recent protests. 
The allegiances of Russians are notoriously hard to pin down. 
The very people who stood for hours in the cold to glimpse Nicholas II aboard the royal ship were revolting against him a decade later. 
The people may be silent for a time, as they devastatingly were at the end of another Pushkin masterpiece, the tragic play “Boris Godunov,” when a false new czar ascended to the throne. 
But silence does not always mean consent. 
The recent protests may seem insignificant compared to the scale of Putin’s repressive resources and the spectacle of his inauguration. 
But it is hard to ignore the history to which the protesters are appealing. 
Pining for a crown, Putin forgets that Russian monarchy, for all its splendor, was always a minefield, because an autocrat’s contempt for law leaves him vulnerable to mob justice. 
As he reaches for Monomakh’s Cap, the ruby-studded relic of Russia’s czars, Putin risks paving the way for yet another round of violence. 
Whether or not that upheaval finally fulfills Pushkin’s prophecy, it would tear Russia apart – and most likely drive today’s would-be czar into the dustbin of history. 



Unlocking Public Wealth 
NEW YORK – After World War I ended, Havana emerged as one of the world’s most vibrant cities. 
During the first half of 1920, rising sugar prices and a favorable global environment meant that credit and finance were flowing into Cuba, fueling the so-called Dance of the Millions. 
But, as David Lubin recalls in his book Dance of the Trillions, the party ended abruptly before the year was over, owing largely to US interest-rate hikes, which drew liquidity back into the United States. 
The Cuban sugar industry never recovered. 
With US credit to non-bank borrowers in developing countries having more than doubled since the 2008 global financial crisis – reaching $3.7 trillion at the end of 2017 – Cuba’s experience should serve as a warning. 
But, for developing countries today, there is an additional complication: global finance is increasingly governed not by the Washington Consensus, which encourages transparency and adherence to rules that apply to all, but rather by an opaque and biased “Beijing Consensus.” 
China is now the world’s second-largest national economy and the leading supplier of credit to emerging markets globally, having filled the gap left by retreating Western creditors. 
The terms of this lending are so murky that only China has information about the volume, maturity, and cost of outstanding loans, which are issued on a bilateral basis, often for political or strategic reasons. 
As a result, assessing debt sustainability is more difficult than ever. 
But there is good reason to believe that many countries face serious risks. 
According to the International Monetary Fund, more than 45% of low-income countries are either in or near debt distress. 
And the credit-ratings agency Moody’s notes that many of the countries China has chosen to participate in its infrastructure-focused Belt and Road Initiative are among the world’s financially insecure. 
Countries do not need to be at the mercy of major lenders like China. 
According to the IMF, the world’s public assets are worth at least twice global GDP. 
Instead of neglecting those assets, as most governments do today, countries should be using them to generate value. 
Most governments own airports, harbors, metro systems, and utilities, not to mention far more real estate than people generally realize. 
For example, Boston’s financial statements indicate that the city has a negative net worth. 
But Boston’s total real-estate assets are actually worth almost 40 times their book value, because they are reported at their historic cost. 
In other words, the city has massive amounts of hidden wealth. 
And Boston is hardly unique. 
Public real estate is often worth around 100% of the GDP of a given jurisdiction, the equivalent of a quarter of the total value of the real-estate market. 
Governments simply don’t realize this, implying massive opportunity costs. 
With professional and politically independent management, a city could, it can reasonably be assumed, earn a 3% yield on its commercial assets. 
This would amount to an income many times more than Boston’s current capital plan. 
In fact, for many economies, professional management of public assets could generate more revenues annually than corporate taxes, drastically increasing the amount of funding available for infrastructure investment. 
This approach is proven not least by Asian cities like Singapore and Hong Kong, which at one point were just as poor as many of the cities in developing Asia today, and certainly much less affluent than Havana in the past. 
It is worth remembering that when Singapore achieved independence in the late 1960s, it was hardly a very promising place. 
In fact, it was more dangerous and riskier than most cities today. 
At the time, few expected Singapore to survive, let alone prosper. 
Singapore’s first prime minister, Lee Kuan Yew, is often quoted as having said (as early as 1957) that the idea of a potentially independent Singapore was a “political, economic, and geographical absurdity.” 
Yet it has managed to thrive, thanks partly to its unorthodox decision to unlock its public wealth by incorporating portfolios of assets into public-wealth funds, making professional managers responsible for public commercial assets. 
Temasek and GIC, the holding companies set up by the government, have used appropriate governance tools borrowed from the private sector to fund Singapore’s economic development. 
HDB, Singapore’s housing fund, has provided almost 80% of the city-state’s citizens with public housing. 
Likewise, in the 1990s, economic malaise and high unemployment impelled Copenhagen’s leaders to get creative, consolidating the city’s old harbor area, as well as a former military garrison on the city outskirts, in a professionally managed public wealth fund. 
Beyond transforming the city’s harbor district into a highly desirable area, the fund enabled the government to build a transit system, all without dipping into tax revenues. 
Similarly, Hong Kong, acutely aware of its own fiscal limitations, found a way to build a subway and railway system the size of New York City’s without using a single tax dollar: it developed the real estate adjacent to its stations. 
There is no question that depending on outside capital carries serious risks, especially when that capital can quickly flee, as Cuba learned the hard way. 
Leveraging existing public assets, however, can strengthen government finances, boost debt sustainability, and enhance credit worthiness, bolstering economic development in the longer term. 
It shouldn’t take a crisis to spur governments to pursue this course. 

The Perils of Public Media Funding 
BUDAPEST – Hungary’s state media corporation, MTVA, operated last year with a budget of roughly $309 million, most of it coming from the government’s coffers. 
That means that MTVA – which runs television stations, a radio network, and a news agency – had a daily budget of $846,000. 
For a country of just ten million people, that is the definition of a spendthrift quango. 
One might assume that MTVA’s financial strength is an exception in an industry plagued by dwindling revenue and broken business models. 
But among the world’s state-supported media companies, MTVA’s bloated budget is the norm. 
In newsrooms from Serbia to South Africa, taxpayer-generated funding is growing. 
Unfortunately, while this windfall might be putting more programming on the air, it is only deepening the industry’s woes. 
Governments have played a major role in domestic media for decades, using regulation of broadcast frequencies and licensing requirements to shape the market. 
Yet, in recent years, governments have also stepped up their budgetary influence. 
Today, government budget allocations are among the leading sources of media revenue. 
Public support is typically delivered in one of three ways. 
One method is to levy licensing fees on households, a de facto tax on content. 
While public media budgets have not grown everywhere – between 2011 and 2015, for example, funding for public media dropped in 40% of the European Broadcasting Union’s 56 member countries – government cash remains influential. 
In January 2017, the Romanian government approved a $360 million budget for state broadcaster SRTV, a massive amount in a country of just 20 million people. 
Similar infusions of public money are common elsewhere. 
Purchases of advertising are a second method of providing government support. 
State spending in this category can be significant. 
During the first half of 2013, for example, Malaysia’s government spent $118.5 million more on ads than the next four advertisers combined. 
Finally, states often provide cash contributions to struggling media outlets, especially those offering favorable coverage. 
In 2014, the government of Montenegro, a country with just 622,000 people, spent $33.6 million on state aid for media outlets. 
According to the Center for International Media Assistance, the donations included “generous” support to the “reliably pro-government” newspaper Pobjeda. 
Financial contributions will always be welcomed by the media, and especially by cash-strapped independent outlets. 
But when funding comes with strings, as government money often does, journalistic integrity can suffer. 
In many cases, public media organizations are often little more than government mouthpieces, and authorities regularly meddle in editorial affairs. 
Hungary is a case in point. 
In 2010, not long after the right-wing populist Fidesz party came to power, government officials fired a number of MTVA journalists who had been critical of Fidesz during the election campaign. 
Since then, the authorities have dramatically reshaped media legislation, a move that some fear will “restrict media pluralism in the long term.” 
Similar overreach has been reported in Macedonia, where, in 2014, the European Commission criticized the government for using advertising money to cement state control over news content. 
There are countless other examples of similar interference in media markets around the world. 
Generally, governments tend to finance friendly media outlets, or news organizations that are ready to toe the line. 
According to a 2014 report on the future of digital journalism, which I co-edited for the Open Society Foundations, governments used financial pressure to manipulate news organizations in more than half of the markets we examined. 
No doubt that proportion has only increased in the years since. 
More broadly, by favoring docile journalism, or by cutting subsidies to critical media voices, governments are distorting media markets to their advantage. 
In 2012, a cash injection from Serbian authorities into the state-controlled news agency, Tanjug, gave it a massive competitive edge over the independent news service Beta. 
In Hungary, too, independent journalism is struggling to keep pace with state-funded behemoths. 
One example is Atlatszo, an intrepid investigative startup. 
Funded almost entirely by donations, Atlatszo’s annual budget is less than half of MTVA’s daily allocation. 
While public money is reshaping the media business, taxpayers are not the biggest beneficiaries in many countries. 
If even a fraction of the budgetary windfall received by state media was redirected to independent news organizations, journalism would thrive and the public would be better informed. 
At the moment, however, the biggest winners in the public media marketplace are the governments manipulating a struggling industry. 

Muzzling the Dogs of War 
WASHINGTON, DC – Sitting in Paris as the United States’s first ambassador to France, Thomas Jefferson reflected on how the new US government could avoid the errors of European “despots” who kept their people subjugated through war and debt. 
Writing to James Madison, he observed that the US Constitution had at least checked “the Dog of war,” by transferring “the power of letting him loose from the Executive to the Legislative body, from those who are to spend to those who are to pay.” 
At the same time, however, the Constitution designates the executive as the “Commander in Chief,” a power that American presidents have invoked to use military force without Congressional authorization on more than 200 occasions. 
President Barack Obama relied on that power when he told both Congress and the American people that he had the authority to order limited strikes on Syria without going to Congress. 
By simultaneously claiming that authority and seeking Congressional authorization to use it, Obama enters a small class of leaders who actively seek to constrain their own power. 
That is because he sees his historical legacy as that of a president who ended wars and made them harder to start, instead reinvesting America’s resources in its own people. 
He opposed the Iraq war in 2003 and promised in 2008 that he would end the unlimited “war on terror,” which had become a potential blank check for US presidents to use force anywhere in the world. 
But, beyond the system of political “checks and balances” created by the US Constitution, does it make sense for leaders to take decisions regarding the use of force to the people? 
It certainly makes the leaders’ lives harder. 
British Prime Minister David Cameron came up short when he turned to Parliament to authorize British participation in US strikes against Syria. 
French President François Hollande faced intense criticism from right-wing parties in the National Assembly for his agreement to participate in the strikes. 
And Turkish Prime Minister Recep Tayyip Erdoğan, who volunteered to participate in a military coalition, is facing strong domestic opposition to his Syria policy. 
There are several arguments for not allowing the people’s representatives to intervene in the complicated foreign-policy dance between force and diplomacy. 
For starters, there is the traditional idea that politics end at the water’s edge, where messy domestic disagreements are supposed to give way to the abstraction of one state with a unified national interest. 
A related argument is that domestic political processes can hamstring a government in the great game of poker or chess that international politics is supposed to be. 
As Obama has just discovered, having a legislature that clearly does not want to go to war weakens the executive’s hand in international negotiations. 
Timing is another problem. 
Legislative processes are slow and often tortuous, while international diplomacy can change overnight, owing to shifting coalitions, unexpected opportunities, and well-hidden traps. 
Moreover, diplomacy thrives on back-room deals of the kind that US Secretary of State John Kerry and Russian Foreign Minister Sergei Lavrov have just struck over Syria’s chemical weapons. 
In high-stakes negotiations, the last thing the players need is public debate about the cards that each of them holds. 
A threat to turn from talks to tanks must be credible, which it will not be if an opposing player can simply count votes to see if the necessary legislative majority exists. 
Still, Jefferson had it right. 
Though turning to the legislature may prove to be inconvenient, frustrating, and even counter-productive, it is the right thing to do, for three reasons. 
First, the use of force is costly in terms of lives, money, and leaders’ energy and attention. 
The people pay these costs, so their representatives should decide whether to incur them. 
Second, it is never more important for a democracy to follow its procedures and uphold its principles than in an armed conflict involving non-democracies. 
The Syrian people, oppressed and brutalized by their own government, should see that the American people have a different relationship with their leaders. 
Finally, a core component of democracy is a set of rules and procedures designed to require public officials to justify their policies with reasons that can be accepted or countered in public debate. 
When contemplating foreign military intervention, leaders must explain their actions in ways that make clear how their country’s strategic and moral interests are at stake – for example, how unbridled aggression and hideous suffering can fester and spread. 
Leaders would prefer to speak in the language of readily calculable interests. 
Talk of care and moral scruples is uncomfortable and unstable terrain. 
As the Turkish political analyst Mustafa Akyol has put it, for most of the Turkish population, “care for Syria does not translate into, ‘Let’s go liberate it.’” 
Yet leaders who need their people’s support to address complex, interdependent problems beyond their borders must socialize them into a twenty-first-century world in which caring without acting imperils us all. 
These arguments do not mean that leaders will not use force from time to time without turning to their people first. 
Obama does have constitutional authority to conduct limited military strikes to deter and degrade Syrian President Bashar al-Assad’s ability to use chemical weapons. 
All leaders can order their forces into battle in cases of national emergency or self-defense. 
They must preserve their legal and operational ability to act swiftly and decisively when necessary. 
But, two centuries after Jefferson, states are no longer merely colored shapes on a map; increasingly, they are transparent and open territories that we view as home to millions of fellow human beings. 
It is thus ever more important that the people of one country participate in the decision to attack the people of another. 

Investing in Happy Endings 
LONDON – Public and private investment in the real economy has been under attack since the 2008 financial crisis. 
In difficult economic times, it may seem logical to cut investments that yield results only in the long term, and thereby conserve money and resources to address short-term problems. 
In fact, cutting investment in our future – be it in people, the planet, political institutions, or business – is deeply irrational. 
It is only through investment in visionary ideas, blue-skies thinking, research and development, and innovation that we can ensure that the future will be better – freer, more peaceful, and more prosperous – than the past. 
Early-childhood education, preventive medicine, libraries, physical infrastructure, and basic scientific research, for example, all cost money – and studies show that they are worthwhile. 
But when policymakers need to cut spending, investment in these public goods is often the first thing to go, because voters do not feel the effects in the short term. 
Most of the pain is deferred, which is precisely why such cuts are politically attractive. 
But this is low-hanging fruit that societies cannot afford to pick. 
We must start investing in people at the earliest possible moment – right from birth. 
Universal access to high-quality nutrition and preventive health care, as well as early-childhood learning programs, are necessary to provide strong foundations upon which countries around the world can ensure their future social advancement and economic growth. 
Likewise, for children and adults alike, there is real value in, say, public libraries – secular and free gathering spaces that offer universal access to learning and, increasingly, provide a gateway to digital services. 
The same is true of cultural programs and institutions that stimulate growth in the arts and sciences; they, too, are necessary to ensure that citizens can contribute productively to their societies and economies. 
The temptation to cut long-term investment in economic hard times stalks the private sphere as well. 
And companies around the world, big and small, have been succumbing to it since the beginning of the global economic downturn. 
As companies are forced to look to their bottom line and become leaner, they cut investment in research and development, employee development and training, infrastructure, and more. 
Making matters worse, these budget lines are the last to be restored when economic prospects brighten. 
For example, in the face of investor pressure, pharmaceutical companies have cut their research activities dramatically, relying instead on acquisition strategies. 
The aim is to “de-risk” by buying up firms that have already carried out all of the costly blue skies research and have developed proven drugs. 
Obviously, such strategies will not work in the long term if no one is willing to invest in the earliest stages of research in critical areas like biotechnology, digital technology, renewable energy sources, and the like. 
With early-stage investors scarce, governments turning away from blue-sky science, and funders of university-based research increasingly demanding that grantees’ show the “impact” of their work, who will fund risk-taking? 
If no one does, the well will run dry, and there will be nothing to acquire. 
Likewise, instead of investing in new infrastructure, companies patch up the old. 
But patching broken things can work for only so long. 
By not committing resources to invest in new, cost-efficient, environmentally-friendly operations, or in developing the skills and knowledge of employees, or in innovation, companies will find that their short-term savings come at the expense of their long-term success. 
The choices that companies are making not only affect their own operations, but also have profound consequences for their customers, suppliers, and the societies in which they are embedded. 
Failure to invest in the future will affect that future for everyone. 
Not everything that is worthwhile has an immediate positive effect on financial bottom lines, or can be put neatly in a box. 
If public and private investment decisions are driven only by the easily measured and easily defined, we will miss out on the breakthrough moments that characterize so much of human achievement and advancement. 
In both the public and private sectors, we need to commit ourselves to long-term investment, whether in children and education, science and technology, and health and medicine, or in building strong institutions that can serve as the sustainable foundations of peaceful, democratic, and prosperous societies. 
An investment in our future is never wasted. 
Investing in beginnings is the only way we will live to see happy endings. 

Donald Trump and a World of Distrust 
WASHINGTON, DC – A crisis of public confidence in civic institutions – including governments, legislatures, courts, and the media – is a central factor in the rise of Donald Trump and figures like him around the world. 
And so long as the crisis persists, such leaders will continue to resonate with voters, regardless of electoral outcomes. 
The crisis is not new. 
A 2007 study, commissioned for a United Nations forum, showed a “pervasive” pattern: over the last four decades, nearly all of the so-called developed, industrialized democracies have been experiencing a decrease in the public trust in government. 
In the 1990s, even countries long known for strong civic trust, such as Sweden and Norway, recorded a decline. 
In the United States, Gallup’s latest survey of “confidence in institutions” shows double-digit percentage declines in trust since the 1970s (or the earliest available measurement) for 12 of 17 institutions, including banks, Congress, the presidency, schools, the press, and churches; of the remaining institutions, confidence increased modestly for four, and significantly for just one: the military. 
As a social anthropologist who trained in Eastern Europe in the waning years of communism, I observed firsthand what happens to a society devoid of civic trust. 
People viewed formal institutions with profound skepticism and retreated into social silos: informal, close-knit (and closed) circles of friends, family, and allies on which they relied for news, information, and much else. 
Young people saw little reason to invest in their future, and their elders succumbed to suicide and substance abuse at alarming rates. 
There are similarities to some alarming trends in the US, Europe, and elsewhere today. 
According to a major study by the economists Anne Case and Angus Deaton last year, the mortality rate for middle-aged, less-educated white men in the US has been surging, in what some observers have called a wave of “despair deaths.” 
At the same time, American millennials (those born between 1982 and 2004) are postponing marriage and home or car purchases, with many telling pollsters that the postponement will be permanent. 
They are residing with their parents at rates not seen since 1940, and many are eking out a living through a patchwork of “gigs” that provide neither benefits nor job security. 
As a result, a growing cohort of people are identifying as outsiders. 
Doors that were once open to them have been shut, and their faith in public institutions to represent their interests has significantly eroded. 
Many look to anti-establishment movements and figures, such as Trump, for salvation. 
This same tendency is apparent in the anti-elite, anti-system rage that has erupted across Europe, reflected in the United Kingdom’s Brexit referendum; the right-wing Alternative for Germany Party’s continued rise; far-right National Front leader Marine Le Pen’s strong showing in the French presidential campaign; and the Austrian elections this year, where for the first time since World War II no “establishment” candidates made it to the final ballot. 
In the US, as the 2016 presidential campaign got underway, many voters clearly believed – not without reason – that the system was “rigged.” 
But democracy and distrust can be a dangerous compound, because people confronting complex political and economic issues do not always direct their anger at the proper target. 
Profound economic and technological changes in recent decades – together with privatization, deregulation, digitization, and financialization – have further empowered elites and enabled them to hone their use of political influencing via think tanks and philanthropies; shadow lobbying, workarounds that subvert standard processes; the media; campaign finance; and stints in “public service” to advance their interests. 
This “new corruption,” though usually technically legal, is virtually nontransparent – and thus highly corrosive of public trust. 
This, along with widening income inequality, helps explain how voters can be swayed by a candidate like Trump, especially when they live, as many increasingly do, in their own information universes. 
Facebook and Twitter algorithms confirm a group’s biases and screen out contrary viewpoints – and even facts. 
The digital age has created an insularity that, ironically, is not unlike that fostered under communism. 
The result is frighteningly familiar to anyone who has studied Eastern European history. 
Like Russian President Vladimir Putin, Trump harnesses futility and anger, exploits nostalgic yearning and nationalism, and finds convenient scapegoats in vulnerable people such as immigrants. 
As in Russia, where gays and other minorities have been officially targeted, America’s disenchanted are being encouraged to harass and demonize already marginalized groups. 
Trust is the lifeblood of a thriving society, and much of the West needs an emergency transfusion. 
But its political systems will remain on life support until their entrenched elites feel sufficiently vulnerable to stop ignoring the needs of those who have been left behind. 

Public Versus Private France 
President Jacques Chirac's re-election incited a sigh of relief across France that is echoing around the world. 
But the scare Jean-Marie Le Pen threw into French politics will be for nought if the political class in Britain slips back into its old hauteur and complacency. 
France has always been a nation of sharp divisions. 
Once its divide marked the chasm between Left and Right. 
Today it marks the economy's division between its public and private sectors. 
Premier Lionel Jospin, who was humiliated by Le Pen in being denied a place in the final presidential run-off, had presided over a strong economy, with many new jobs created, more leisure due to the 35-hour week, and some liberal reforms such as privatization on a scale hitherto unseen in France. 
But despite all that, unemployment remained stubbornly high and a pervasive insecurity had set in. 
Jospin's program failed to diminish these twin ills primarily because French society is divided between a large public sector and a dynamic private sector, much of which is increasingly being driven outside the country because of high taxation and endless bureaucracy. 
Businesses that remain must bear the costs France's leviathan public sector. 
The fact that France has experienced high unemployment for over two decades, no matter who holds the reigns of power, is a clear sign that French economic policy is amiss. 
French unemployed are well off compared to their international counterparts, but the system is costly and inefficient and has shortcomings. 
Social benefits, for example, are paid only for a limited amount of time; they are then replaced by a minimum living allowance, which represents an exclusion from society. 
In August 1945, Jean Monnet told Charles de Gaulle that: "you speak of grandeur but the French are small today. 
There will only be grandeur when the French assume a status that justifies grandeur...There must be more production, more productivity; [we] must transform the country from a material point of view." 
The General did not need convincing. 
He believed that the state had an "ardent obligation" to engage in economic planning. 
One of Monnet's first actions was to declare that modernization could not be attained while the French worked such short hours; a 45-hour working week was the minimum that was necessary. 
French workers put in an average of 46 hours per week through the early 1960s. 
Since then, work-time has steadily declined. A 32-hour work week is now deemed something worth going on strike for. 
Monnet's effort to rebuild France by mobilizing business, unions and government authorities at all levels mutated into France's "Great Organizational Myth"- the idea that technocrats can allocate resources better than the market. 
French central planning attempted to blaze a new path between Communist centralisation and Vichy corporatism. 
Five decades on, the wheels of state are still mostly spinning in that muddy middle ground. 
The French state employs around five million people - nearly one-fourth of the working population, including at the local level. 
The salaries and pensions of these fonctionnaires represent about 40% of the national budget. 
This trend is completely opposite that prevailing in other sectors. 
For example: the number of French farmers fell steadily over the last three decades, yet the number of Ministry of Agriculture bureaucrats doubled. 
Compare that bloat with the French private sector. 
EU single market provisions have forced French companies to compete without the crutch of traditional protectionist measures and state subsidies. 
The best French companies have cut costs ferociously, improving productivity and expanding production abroad. 
Cosmetic giant L'Oreal, Danone, Michelin and Club Mediterranee are but a few of the highly competitive companies that are more global than French. 
Their achievement demonstrates the strength of the external side of the French economy, which is the main engine of French growth. 
But "Private France" - despite its dynamism - cannot continue to compete and innovate while carrying the dead weight of "Public France" on its shoulders. 
Many ill-managed public or semi-public enterprises only survive because they are saturated by state subsidies. 
The private sector's burden is not limited to state enterprises, but stems more generally from the vast share of national income (51%) that the state taxes and spends, with a large part of taxation falling on employment. 
Additional obstacles include a lack of labour flexibility, especially legal barriers to shedding labour. 
The more immediate explanation for the lack of reforms derives from the paradox of the strength of the French economy. 
The situation is not bad enough to incite demands for serious reform. 
Indeed, high living standards and high social expectations make it political suicide for any party or leader to propose even the short-term sacrifices serious reform will entail. 
So the strength of the French private sector has created the material basis for a welfare state that is truly parasitical: it weakens its host (the private sector) without killing it. 
Europe was thought by the French political class to be the solution. 
But Europe and the euro could are increasingly catalysts for public resentment. 
Jospin and Chirac have done nothing to implement the large liberalization program (including energy, financial services and transport) agreed among EU members in Lisbon two years ago, which means that the benefits of liberalization are denied France at a time when the public perceives the EU as imposing all sorts of restrictions on the French way of doing business. 
It is time for France to abandon the indulgence of French exceptionalism ('L'Exception Francaise) and start serious reforms that engage the French electorate. 
The shame of Le Pen's newfound prominence may yet prove beneficial if it forces the mainstream political establishment to heed popular concerns and address the country's problems. 

Publicly Funded Inequality 
WASHINGTON, DC – One of the factors driving the massive rise in global inequality and the concentration of wealth at the very top of the income distribution is the interplay between innovation and global markets. 
In the hands of a capable entrepreneur, a technological breakthrough can be worth billions of dollars, owing to regulatory protections and the winner-take-all nature of global markets. 
What is often overlooked, however, is the role that public money plays in creating this modern concentration of private wealth. 
As the development economist Dani Rodrik recently pointed out, much of the basic investment in new technologies in the United States has been financed with public funds. 
The funding can be direct, through institutions like the Defense Department or the National Institutes of Health (NIH), or indirect, via tax breaks, procurement practices, and subsidies to academic labs or research centers. 
When a research avenue hits a dead end – as many inevitably do – the public sector bears the cost. 
For those that yield fruit, however, the situation is often very different. 
Once a new technology is established, private entrepreneurs, with the help of venture capital, adapt it to global market demand, build temporary or long-term monopoly positions, and thereby capture large profits. 
The government, which bore the burden of a large part of its development, sees little or no return. 
One example, flagged by the economist Jeffrey Sachs, is Sovaldi, a drug used to cure hepatitis C. As Sachs explains, the company that sells it, Gilead Sciences, holds a patent for the treatment that will not expire until 2028. 
As a result, Gilead can charge monopoly prices: $84,000 for a 12-week course of treatment, far more than the few hundred dollars it costs to produce the drug. 
Last year, sales of Sovaldi and Harvoni – another drug the company sells for $94,000 – amounted to $12.4 billion. 
Sachs estimates that the private sector spent less than $500 million on research and development to develop Sovaldi – an amount that Gilead was able to recoup in a few weeks of sales. 
The NIH and the US Department of Veterans Affairs, however, had heavily funded the start-up that developed the drug and was later acquired by Gilead. 
There can be no doubting that the imagination, marketing savvy, and management skills of private entrepreneurs are critical to the successful application of a new technology. 
And the lower prices, better products, and consumer surplus provided by the commercialization of many innovations clearly provide large societal gains. 
But one should not overlook the role of government in these successes. 
Joint OECD-Eurostat data show that direct government expenditures accounted for 31% of R&D spending in the US in 2012. 
Adding indirect expenditures, like tax breaks, would bring this figure to at least 35%. 
Thanks to such public outlays, a few private players are often making huge returns, which are a major cause of excessive income concentration. 
There are several ways to change such a system. 
Rodrik proposes the creation of public venture capital firms – sovereign wealth funds – that take equity positions in exchange for the intellectual advances created through public financing. 
Another solution would be to reform the tax code to reduce returns when an individual or firm is cashing in on publicly funded research. 
Both solutions face difficulties. 
Sovereign wealth funds would have to be shielded from partisan politics, perhaps by giving them only non-voting shares. 
Raising taxes on the beneficiaries of publicly funded research would be a challenge, given that the link between an original breakthrough and the wealth it created might be hard to quantify. 
There is also the complication of global capital mobility and tax avoidance, which the G-20 is only beginning to address. 
Other approaches are also possible: tightening up patent laws or imposing price controls for monopolistic industries, such as pharmaceuticals, as many market economies have done. 
What would not be a solution, however, would be to channel fewer public resources into research and innovation – key drivers of economic growth. 
It does not take huge rates of returns to mobilize a lot of talent; something like a 50% profit margin for a few years would be an acceptable reward for particularly good entrepreneurship. 
Multiples of that amount, however, simply end up as gifts by the public to a few individuals. 
A combination of measures and international agreements must be found that would allow taxpayers to obtain decent returns on their investments, without removing the incentives for savvy entrepreneurs to commercialize innovative products. 
The seriousness of this problem should not be understated. 
The amounts involved contribute to the creation of a new aristocracy that can pass on its wealth through inheritance. 
If huge sums can be spent to protect privilege by financing election campaigns (as is now the case in the US), the implications of this problem, for both democracy and long-term economic efficiency, could become systemic. 
The possible solutions are far from simple, but they are well worth seeking. 

Disaster Capitalism Comes to Puerto Rico 
NEW YORK – It has been more than a year since Hurricane Maria ravaged Puerto Rico, compounding the agony of a commonwealth that was already caught in an economic downward spiral. 
In addition to experiencing an out-migration crisis, the island sought what amounted to bankruptcy protection in May 2017. 
And under the US Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), a federal oversight board now oversees its finances. 
Though Maria was a tragedy, it also created an opportunity to rewrite a flawed fiscal plan that had been certified by the oversight board in March 2017. 
That plan was supposed to restore the island’s economic health while also providing money to creditors who were clamoring for repayment. 
But the plan was projected to depress economic activity even further, and failed to establish an appropriate basis for calculating how much debt restructuring Puerto Rico would need. 
Sadly, the opportunity to right Puerto Rico’s fiscal ship has not been seized. 
On the contrary, the oversight board recently certified a new fiscal plan and a deal with holders of bonds issued by the Puerto Rico Urgent Interest Fund Corporation (COFINA) that could put the island in a debt straitjacket indefinitely. 
At $17.8 billion, the stock of COFINA bonds (which are backed by future sales-tax revenues) accounts for more than one-third of the total debt in the new fiscal plan. 
And the COFINA deal is itself part of a larger debt-restructuring effort that is based on an unrealistic assessment of the commonwealth’s economic conditions. 
Simply put, the terms of the restructuring do not provide enough relief for Puerto Rico to be able to achieve future growth. 
Under the new deal, Puerto Rico’s annual debt payments would increase from $420 million in fiscal year 2019 to almost $1 billion in fiscal year 2041, implying an aggregate recovery rate of 75.5% of the amount owed. 
That is a very generous deal for COFINA bondholders. 
But if Puerto Rico’s other bondholders are hoping to receive similar treatment, they should think again. 
As our computations show, if such a deal were to be implemented, there would be virtually nothing left for the other categories of bonds (assuming that the point of the debt restructuring is to restore the sustainability of the island’s debt). 
Thanks to the oversight board, COFINA bondholders will now be getting far more than what they could have expected last December, when Puerto Rican bonds bottomed out. 
Prices of both COFINA and general obligation bonds have steadily recovered, owing to a political game over disaster relief funds that has been playing out among the oversight board, the US Congress, and bondholders – a game that Puerto Rico’s House of Representatives joined a few days ago when it passed a bill to allow for the COFINA deal. 
As the old saying goes, funds are fungible. 
Even if all the money earmarked for disaster relief actually went where it was supposed to go, the injection of funds nevertheless frees up money elsewhere. 
Hence, the recent evolution of Puerto Rican bond prices reflects an expectation that the additional funds will go not to Puerto Ricans still suffering from the devastating effects of Maria, but rather to the commonwealth’s creditors. 
The oversight board’s new fiscal plan is equally flawed. 
Based on new growth projections that are even more optimistic than those in the pre-Maria plan, the board assumes that the hurricane somehow provided a net positive shock to Puerto Rico. 
The new plan includes a relatively bright forecast for fiscal year 2019, and foresees economic growth and higher government revenue from then on, despite larger doses of fiscal austerity and declining federal aid. 
It is hard to make sense of such assumptions, and harder still to accept that they could provide a good basis for computing Puerto Rico’s actual repayment capacity. 
As Brad Setser of the Council on Foreign Relations explains, the oversight board justifies its optimism by assuming – implausibly, in our view – that the plan’s proposed structural reforms for the 2021-2023 period will deliver extraordinarily large gains. 
More realistically, the plan projects a steep decline in Puerto Rico’s population, from 3.3 million today to 2.1 million by 2058. 
Yet while the oversight board tacitly recognizes that many citizens will have to leave for the US mainland to find work, it expects output per worker to rise miraculously to compensate for the contraction of the labor force. 
Despite a strong consensus among economists that Puerto Rico needs a radically different economic and debt-restructuring plan, the relevant policymakers do not seem to be listening. 
If the island’s liabilities are not properly restructured, it will remain in a debt trap. 
As long as the money needed for investments is going to pay bondholders, sustained growth is impossible. 
Given the state of Puerto Rico’s economy after Maria, a much deeper restructuring is inevitable. 
But by pursuing its new fiscal plan and the COFINA deal, the oversight board has squandered valuable time, ensuring that Puerto Rico’s decade-long struggle will both continue and grow worse. 

PROMESA’s Dangerous Premises 
NEW YORK – Puerto Rico’s economy is in deep trouble. 
More than a decade of recession has made the public debt unsustainable and is fueling migration outflows to the United States mainland, affecting the lives of thousands of families and imposing a higher burden on those who stay. 
Reversing this destabilizing dynamic will require a debt restructuring that provides the relief needed to implement pro-growth policies. 
Unfortunately, what is being offered isn’t nearly enough. 
Puerto Rico’s debt is to be restructured under a framework established by the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). 
That federal law, enacted in June 2016, also established an Oversight Board with fiscal decision-making authority for the US commonwealth. 
The restructuring process started on May 3, when the Board filed a petition in federal court. 
But many crucial decisions have yet to be taken, such as how much overall debt relief will be provided, and how the “haircut” will be distributed among holders of different types of bonds. 
These decisions will determine which policies are feasible to boost Puerto Rico’s economic prospects – and thus how much it can pay its creditors. 
At the center of any effort to resolve the debt crisis must be the understanding that just as today’s debt restructuring affects Puerto Rico’s future growth, Puerto Rico’s future growth affects how much debt restructuring is needed. 
Yet the ten-year fiscal plan approved by the Board for the 2017-2026 period – which inevitably will form the basis of debt-restructuring discussions – seems to ignore this circularity. 
The plan itself recognizes that its adoption implies another “lost decade” of economic activity and will weaken the island’s debt sustainability, thus perpetuating a crisis that all parties would like to end . 
Unfortunately, the Board’s already-deep projected fall in real GNP is highly optimistic, because it relies on a number of implausible and/or controversial assumptions. 
Five flaws in the Board’s fiscal plan stand out. 
First, the projected fiscal multipliers – the amount by which GNP will fall as a result of each dollar of fiscal contraction – used for the GNP forecast assume that a contraction of one dollar in the primary fiscal deficit will be associated with a $1.34 contraction of GNP. 
That value lies on the lower end of the range of estimated fiscal multipliers for countries or regions experiencing recessions. 
The value of fiscal multipliers depends on how the economy is performing. 
Point estimates of multipliers associated with non-defense spending for regions or countries in recessions range from 1.09 to 3.5. 
And, because Puerto Rico is not in any ordinary recession, it is not enough (or even appropriate) to analyze what to expect in the best-case scenario. 
A proper assessment of the consequences of the fiscal policies demanded by the plan should focus not on a single value, but on a range of values based on plausible scenarios from an optimistic to a pessimistic bound. 
For example, simply using a multiplier of 2.0 and maintaining all of the plan’s other (unrealistic) assumptions causes a 9.4% projected cumulative fall in real GNP during fiscal years 2018 and 2019, compared to the fiscal plan’s estimate of 7.2%. 
A second flaw is that the plan’s GNP projections ignore the endogenous feedback effects that declining economic activity will have on fiscal revenues. 
A reduction in public spending that depresses economic activity also reduces the tax base. 
Thus, the government would need to do more than what the plan foresees to achieve the revenue targets. 
Third, whereas the plan’s contractionary policies push the economy below the Board’s baseline GNP estimates, a number of structural reforms, mostly meant to affect aggregate supply, allegedly push it above. 
Indeed, these reforms seem to be the only force driving the (nominal) recovery that the plan projects after 2022. 
But this simply is not credible. 
Puerto Rico’s economy is in a demand-constrained regime, and there is no reason to expect this to change in the foreseeable future. 
Thus, economic recovery in the short term requires aggressive government stimulus, particularly given that any structural reform that reduces spending (such as a decrease in pensions) will be more likely to have a contractionary effect in an economy that is demand-constrained. 
Other measures, such as cutting funding for public education, are likely to reduce demand now and lower aggregate supply over the long run. 
Fourth, the plan’s assumption about outward migration is controversial at best. 
Puerto Rico’s population has declined from approximately 3.8 million in 2000 to a little more than 3.4 million in 2016. 
Between 2010 and 2016, the annual rate of population contraction exceeded 1%, and reached 1.8% in 2016. 
A deeper recession – as anticipated by the Board’s plan – will further decrease opportunities in the island, fueling more migration to the mainland. 
And yet the plan assumes that the migration flows will taper off, with the population declining by only 0.2% per year over the 2017-2026 period. 
Given the destabilizing dynamics that the fiscal plan will trigger, out-migration will be higher than the plan assumes, the size of the economy will shrink, and the per capita debt burden on those remaining will increase. 
Finally, instead of specifying a comprehensive debt-restructuring proposal, the plan simply specifies the amount that will be repaid to creditors during the next decade. 
But future macroeconomic dynamics cannot be assessed without an estimate of the debt relief that will be provided. 
Indeed, the lack of a restructuring plan heightens uncertainty and thus impedes the investment needed to restore economic growth. 
Filing for what is essentially bankruptcy was a sensible move. 
Otherwise, Puerto Rico would have been exposed to massive litigation that would have undermined restructuring efforts and lengthened the road to economic recovery. 
But what the plan should have done is to define the policies Puerto Rico needs to recover, and simultaneously present a restructuring proposal that grants enough relief to make those policies feasible. 
Instead, by approving the 2017-2026 fiscal plan, the PROMESA Oversight Board put itself in a difficult position. 
Using that plan as the basis for calculating Puerto Rico’s relief needs risks leading to the flawed conclusion that Puerto Rico can manage a recovery with a much smaller haircut than it needs. 
Unless the plan is urgently redefined on the basis of credible assumptions, Puerto Rico will not recover, debt sustainability will not be restored, and the Board will have failed in its mission. 


Putin: Tsar or Doge? 
Two practical questions can be asked of any political system: First, what distinguishes the political parties? 
Second, who is in charge? 
For a while in postcommunist Russia, the answers were blindingly clear: parties were divided between those nostalgic for Soviet times and those who wanted reform. 
Who was in charge? 
The president. 
After twelve years of transition, the answer to the first question has blurred. 
With the Communist Party in terminal decline, ideologies are vanishing. 
Indeed, anybody hoping for an obvious clash of left and right during the recent presidential election campaign was bound to be disappointed, because the answer to the second question is even more emphatic today: President Putin's re-election was never in doubt. 
This president is very much in charge. 
Putin's all-encompassing popularity, which is genuine, and his blurring of all political dividing lines has given him an unassailable position. Many bemoan this state of affairs, but his ascendancy might be less malign than it seems. 
Russia's size, the poverty of its infrastructure, and the disarray of its bureaucracy limit Putin's power. 
Within those limits, he uses his power relentlessly. 
Sufficient unto themselves behind the Kremlin's walls, Putin and his officials rule in ways more arbitrary and opaque than would be tolerated in a true democracy. 
The impression Putin's presidency creates is of autocracy punctuated by elections. 
Autocracy, not dictatorship. 
After four years of a presidency supposedly devoted to forging a "dictatorship of law," the rule of law in Russia remains weak and property rights ill defined. 
A solid middle class has yet to emerge, nor a resilient civil society. 
Privatisation of state assets has done much for the economy, but has also been used for patronage and empire building. 
The army does not appear to be reliably under civilian control, and the brutal war in Chechnya festers. 
So Putin's authoritarianism creeps along, but by Russian standards it is far from being hideously creepy. 
In some things, indeed, he deserves the thanks of all Russians. 
He has consigned the Communists to Trotsky's dustbin of history. 
Now splintering, some seem willing to stop pandering to Bolshevik ghosts. 
That is good for Russia. 
Welcome to the republic. 
Putin has also not turned the clock back on economic reform. 
Indeed, the economy has mostly boomed under his stewardship - another reason ordinary Russians like him. 
Where Putin has failed is in fostering democratic governance. 
The question is not just whether he and his ex-KGB cronies muzzle the media and jail their opponents. 
No, the real flaw in Putin's rule is that his power is personal, not based on the support of a political party. 
The central issue in Russian politics is not the battle for votes. 
More significant by far is the competition for power that takes place in the bowels of the presidency. 
Barely discernible most of the time, only brief flashes illuminate the battle, as when Mikhail Khodorkovsky was arrested. 
But whether Putin is master of this system or its prisoner - a tsar or a doge - is something even he may not know. 
The emergence of viable political parties requires a strong parliament. 
But, because Russia's presidency is so powerful, the Duma is largely a squabbling-shop and a fixer's paradise. 
At best, it is a safety valve for democracy rather than an engine of it. 
Of course, there is a big pro-presidential majority party in the Duma. 
But that is its flaw: it stands only for the president. 
What he wants, it votes for. 
But what Russia needs is political parties that stand for something other than their boss's will. 
Because Putin cannot stomach opposition, he stifles the growth of parties. 
Here he gets a helping hand from party politicians, because the reformist parties inspire little confidence. 
A pessimist surveying last December's Duma election, with its futile party politics, bitterness, and invective, might compare Russia to Weimar Germany. 
The reformist "Union of Right Forces," led by Boris Nemtsov and Anatoly Chubais, destroyed itself last December, failing to gain a seat in the Duma. 
The URF leaders ran an electoral campaign that seemed to revel in their distance from ordinary Russians. 
Instead of visiting Russians struggling to manage their difficult lives, Nemtsov and Chubais touted themselves as modern men flying about in private jets and fiddling with laptops. 
Tin political ears deserve defeat. 
Compounding the problem of party formation is personal rivalry. 
Grigory Yavlinsky seems to think he is Charles de Gaulle, waiting at his dacha version of de Gaulle's home in Colombey for a summons to power. 
His ego alone kept his Yabloko Party from cooperating with the Union of Right Forces. 
Putin understands instinctively that Russia needs elements of democracy, if only to distinguish the new Russia from the old, and to let the odd gust of healthy fresh air in. Unchallenged in his second and last term, will he retain even that slight democratic instinct? 
The talk today in Russia is of "Putinism," which professes democracy without as yet obliging the state to accept the disciplines of a truly democratic system. 
But the French have an older word for Putinism: étatisme , which holds that the state commands society rather than serves it. 
This does not imply that a government must rule by fear, as past Russian governments did: in this respect, Putin's government is as good as any Russia has ever had. 
But a "Putinist" government won't have much time for openness, debate, or accountability. 


Putin and Medvedev: Teammates or Rivals? 
Vladimir Putin’s decision to serve as prime minister should Dmitri Medvedev become Russia’s next president has made their electoral success in March a virtual certainty. 
Although the Communist Party’s leader, Gennadi Zyuganov, and the Liberal Democrats’ Vladimir Zhirinovsky are running – in contrast to 2004, when they fielded stand-ins – neither will get more than 15% of the vote. 
Even assuming that Mikhail Kasyanov, Boris Nemtsov, and Democratic Party leader Andrei Bogdanov somehow collect two million signatures each to get on the ballot, the outcome will be the same. 
Indeed, so far, none of them has more than 2% popular support. 
But, while Medvedev’s victory in the first round of voting appears assured, the important questions will arise after the ballots are counted. 
How will power be distributed between Medvedev and Putin? 
Who will be in charge? 
Will Russia have to rewrite its laws and Constitution to give the prime minister more official power? 
Is Putin risking his political future by accepting a formally secondary role and making himself accountable for all socio-economic policy? 
Russia’s Constitution does not allow for a “technical presidency.” 
The head of state has extensive powers, which alone indicates that Medvedev will be a strong president. 
Moreover, Medvedev is a strong-willed politician and very experienced administrator. 
But Putin will be a strong prime minister, if only because he’s Putin. 
He is set to remain the most popular person in Russia for a long time to come. 
That implies a system of governance with at least two decision-making centers – perhaps in addition to United Russia, the party of Putin and Medvedev, which won 64% of the vote in the recent parliamentary election up from 37% in 2003. 
All this represents obvious progress from the standpoint of the separation of powers. 
In consenting to become prime minister, Putin is well aware of what to expect. 
After all, he served as prime minister for several months in 1999. 
Many commentators underestimate the prime minister’s powers. 
According to the Constitution, the prime minister is head of the executive branch, and the government is empowered to determine the main direction of domestic and foreign policy. 
Much depends on who is prime minister; heavyweight politicians holding the office can potentially eclipse the president. 
Recall Yevgeny Primakov – or Putin at the end of Boris Yeltsin’s last presidential term, when it was obvious to everyone that the prime minister was running the country. 
The 2008 version of Prime Minister Putin will undoubtedly be stronger than the 1999 version. 
So no changes are required to the laws or the Constitution for him to remain a key political player. 
But Medvedev – youthful and energetic, with a fresh mandate – will be far stronger than Yeltsin was in 1999. 
A powerful prime minister seems preferable. 
One of the chief weaknesses in Russia's constitutional design is that power is separated from accountability: the president has the most power, but the government is held accountable for policy results. 
From this standpoint, the American model, for example, is more successful: the head of state also leads the government. 
While not entirely addressing the flaws in the design, the new situation – with the strongest political figure heading the executive branch – will permit more effective performance by the government, which is still battling to recover from Putin’s administrative reforms of 2004. 
Many commentators have reproached Putin for agreeing to take a job that they say is beneath him – assuming responsibility for road-building, social services, inflation, and many other problems that could undermine his popularity. 
However, he should be thanked rather than reproached. 
But how stable will this new polycentric system of governance be? 
How long will Medvedev remain president and Putin prime minister? 
What if they quarrel? 
Of course, stability requires agreement between the two key actors; and there are sure to be plenty of opponents and allies trying to stir up trouble between them. 
But Putin and Medvedev have worked together for more than 17 years with no serious conflicts. 
Moreover, Putin has never made a mistake about the loyalty of the people he promotes. 
In the Yeltsin era, sacked officials often took revenge by publishing their memoirs and “telling all” about their ex-boss. 
In the Putin era, no one has done so. 
Mikhail Kasyanov, a former prime minister and now an opposition critic, was inherited from Yeltsin. 
When Putin made the most important appointment of his life – the choice of his successor – one can be sure that his calculations were thorough. 
So Medvedev will become the next president, and will hold that office for at least one full term. 
And Putin will remain prime minister throughout that time, with a good chance of becoming president again in 2012 or 2016 – or after any other presidential election over the next two decades. 

Does Putin Really Want a Trump Presidency? 
MOSCOW – Email scandals have plagued Hillary Clinton, the Democratic Party nominee for US president, throughout her campaign. 
First, there was the revelation that Clinton, as Secretary of State, had used a private server for official business, resulting in an FBI investigation that chastised her for being “extremely careless.” 
Now hackers, believed by the US to be working for or on behalf of the Russian state, are thought to be the source for Wikileaks’ publication of a slew of Democratic National Committee emails revealing DNC leaders’ support for Clinton during the primaries. 
Russian hackers are also suspected of intruding upon the Clinton campaign’s servers. 
Clinton’s opponent in the Democratic primary, Senator Bernie Sanders, dismissed the brouhaha about her private server early in the campaign. 
But Clinton’s opponent in November’s election, Republican nominee Donald Trump, has embraced the hackers’ effort to discredit Clinton – just as he has, it seems, embraced the country responsible for the hacks. 
The question is whether Russian President Vladimir Putin is, as suspected, actually working to derail Clinton’s campaign and get Trump elected. 
The two men’s international bromance is well known. 
Trump has complimented Putin’s leadership frequently, and has been complimented in return. 
He has also expressed an interest in building deeper ties with the Kremlin, and said that he would consider accepting Russia’s annexation of Crimea and lifting the sanctions that were imposed in response – all without asking Putin for anything in return. 
Perhaps most unsettling, Trump has called into question America’s automatic defense of NATO allies such as the ex-Soviet Baltic states, whose independence Putin has questioned. 
When Newt Gingrich, one of Trump’s foreign-policy gurus, called Estonia “the suburbs of Saint Petersburg,” he implied that Putin could have free rein with Russia’s neighbors. 
Then there is Trump’s unabashedly pro-Russia team of advisers. His campaign manager, Paul Manafort, was a key figure in the repackaging of Viktor Yanukovych, Putin’s proxy in Ukraine, into a faux democrat for the 2010 presidential election. 
Since Yanukovych’s ouster in 2014, Manafort has helped revive the fortunes of his client’s corrupt Party of Regions, positioning it as the main opposition to Ukraine’s current government. 
Likewise, Trump’s main foreign-policy adviser, Carter Page, an investment banker, has worked closely with Gazprom, the natural-resources behemoth that is a virtual arm of Russia’s government. 
Both Page and Manafort have made fortunes in Russia – Manafort ran an investment fund that specialized in investing Russian oligarch money in Ukraine – and no doubt dreams of even bigger possibilities if Trump is elected. 
There is even speculation (though no solid evidence) that Trump himself has business dealings with Russia, beyond his well-documented courting of Moscow politicians to let him erect a Trump Tower near Red Square. 
Given these connections, it would be surprising if Putin did not see a Trump victory as advantageous for Russia. 
And perhaps the biggest benefit would be the defeat of Clinton, whom Putin has plenty of reason to dislike. 
As Secretary of State, Clinton repeatedly took Putin to task for his clampdown on Russian protesters and independent Russian media, and rebuked him especially harshly for Russia’s meddling in Ukraine. 
Add to that Putin’s “traditional” attitude toward women (another source of affinity with Trump), and it seems reasonable that he would prefer to deal with just about anyone other than Clinton. 
The fact that the alternative is a man who seems genuinely to admire him is icing on the cake. 
Or so it seems. 
The truth may be completely different. 
Russia is widely viewed in the US as an unscrupulous, even malevolent power. 
Russia’s links to the DNC and Clinton campaign hacks, regardless of one’s feelings about the information revealed, have reinforced this perception, which is not entirely off base. 
After all, Putin, a former KGB officer, has proved more than willing to use digital (not to mention physical) means to harass, intimidate, and coerce his enemies and opponents. 
Of course, Russia is not alone. 
The US has engaged in its fair share of spying, exemplified by the National Security Agency’s surveillance programs that came to light in 2013. 
And it has not hesitated to meddle in other countries’ affairs. 
Consider the leaked 2014 phone call between Clinton’s assistant secretary of state, Victoria Nuland, and the US ambassador to Ukraine, Geoffrey Pyatt, about how to ensure a pro-Western outcome to the popular protests that led to Yanukovych’s fall from power. 
Nonetheless, given Russia’s poor reputation in the US, the latest email scandals may well hurt Clinton less than they hurt Trump – whose subsequent appeal to Russia to find 30,000 emails missing from Clinton’s tenure at the State Department has not done him any favors. 
Putin probably recognizes this. 
This is not to say that the Kremlin was displeased by the hack, which, at least in the case of the DNC, may have been carried out by Putin supporters, not official contractors. 
But it is likely to have been more of a petty prank than a genuine effort to undermine Clinton’s campaign. 
It could have been payback for the recent NATO meeting in Warsaw, where Russia’s aggression was at the top of the agenda, or even for the handling of the doping scandal that nearly kept Russia out of the Rio Olympic Games. 
It could even have been retaliation against Clinton for a direct insult; she did, after all, once liken Putin’s moves in Ukraine to Hitler’s actions prior to World War II – an affront not just to Putin, but also to a Russia that prides itself on its role in defeating Nazism. 
But, bad blood aside, Putin may still consider Clinton the better choice. 
She might be against him, but she is a known quantity, with a foreign policy that Russia – an old hand at adversarial relations – could manage. 
With Trump, no one – possibly not even Trump – would know what to expect. 
Putin may not be a grand strategist, and he certainly wouldn’t mind a buffoon in the White House; but he knows an overly risky bet when he sees one. 

The Danger of an Unpopular Putin 
MOSCOW – Just seven months ago, Russian President Vladimir Putin won re-election, for the fourth time, with 77% of the vote. 
But according to a poll conducted by the Russian Public Opinion Research Center, if a presidential election were held now, Putin would probably receive only 47% of the vote, forcing him into a second-round run-off. 
This is a dangerous state of affairs for Russia and the world. 
Of course, poll data in Russia do not necessarily reflect the real balance of power. 
Yet such a steep decline is a remarkable development, not least because Russians, who remember well the harsh punishments dissidents faced during Soviet times, often prefer to speak positively of their leaders when asked. 
Putin first secured the presidency in 2000 on the promise to raise living standards and restore Russia’s status as a leading global power. 
Fortunately for him, oil prices began to skyrocket. 
Meanwhile, he set to work reviving the Soviet Union, under a different name but similarly based on opposition to American global leadership and Western-style democratization. 
From the start, Putin used media censorship to secure his authority, ensuring that any success – including rising oil prices – was hailed as his personal achievement. 
As the speaker of Russia’s Duma (parliament), Vyacheslav Volodin, declared in 2014, “There is Putin – there is Russia; there is no Putin – there is no Russia.” 
Failures, of course, were never Putin’s fault. 
So in 2007, when economic growth was slowing and social inequality rising, Putin delivered a speech at the Munich Security Conference condemning the United States for its domination of global affairs, and implying that the expansion of NATO into the Baltics was directed against Russia. 
Suddenly, all of Russia’s struggles could be blamed on a new cold war, supposedly declared by the West. 
In 2008, Kosovo’s declaration of independence and Russia’s war with Georgia further reinforced Putin’s “besieged fortress” narrative. 
Nonetheless, by 2013, Putin’s approval ratings dropped to record lows – even lower than today’s levels. 
So Putin pulled out the big guns, first metaphorically and then literally. 
In 2014, after Russian athletes performed impressively at the Winter Olympic Games in Sochi (with the help of a vast state-sponsored doping system), Russia invaded Ukraine and annexed Crimea. 
Putin, state media proclaimed, was fulfilling his promise of restoring Russia’s former greatness. 
Putin’s approval rating soared to 85%. 
Russian stores were filled with t-shirts emblazoned with his face alongside phrases like “Thanks for the Crimea” and “The Politest of People.” 
For the overwhelming majority of Russians, Putin’s authority was indisputable. 
If their president supported a policy or decision, Russians willingly accepted it, however unpopular it had been initially. 
Putin had followed the advice attributed to Vyacheslav Konstantinovich von Plehve, who served as the director of police, and later Minister of the Interior, under Czar Nicholas II, “To avert a revolution, we need a small victorious war.” 
But while Putin’s small victorious war boosted his standing and silenced dissent, the long-term consequences have been severe, owing to the stringent Western sanctions imposed in response to the annexation of Crimea. 
As a result of those sanctions, the ruble’s value has fallen by half against the dollar, inflation is up, and Russian households purchasing power and living standards have fallen. 
At the end of last summer, the cash-strapped Russian government was forced to raise the retirement age – a move opposed by 90% of the population. 
Not even an emergency television appeal by Putin himself could secure broader public support. 
Moreover, despite Putin’s backing, the ruling United Russia party has suffered rare electoral setbacks in Russia’s Far East. 
Representatives of the nationalist, anti-Western Liberal Democratic Party trounced the United Russia candidates in second-round run-offs in the gubernatorial elections in the Khabarovsk and Vladimir regions. 
In a gubernatorial election in Primorsky Krai, a Communist Party candidate appeared to win – thanks partly to protest votes against United Russia – before the election was ruled invalid, and the United Russia candidate was declared the winner. 
The uproar was so potent that, for the first time in Russia’s post-Soviet history, the election results were annulled. 
Some experts claim that United Russia’s electoral defeats reflect a kind of “power fatigue.” 
But the fact remains that as average Russians’ wellbeing has declined – and Putin cronies’ wealth has continued to swell – proclamations of Russia’s greatness have begun to ring hollow. 
Citizens now wonder how strong Russia’s position really is. 
Buckling under sanctions and isolated by the West, the country has begun to look less like a great power than a geopolitical has-been. 
Official propaganda still blames the West for the country’s plight, but Russians aren’t convinced. 
And they aren’t nearly as impressed by Russia’s engagement in faraway Syria, whatever boost it might provide to the country’s role in world affairs, as they were by the annexation of neighboring Crimea. 
But if Putin’s 18 years in power has taught us anything, it is that his declining approval ratings are not good news for anyone. 
Russians may be tired, but Putin is not. 
And if he feels that his authority is waning, he may soon decide that it’s time for another victory at others’ expense. 

The Future of Putin’s Illusion 
WASHINGTON, DC – The outcome of Russia’s presidential election on March 18 is a foregone conclusion: the incumbent, Vladimir Putin, will win after garnering 5-6 times more votes than the second-place candidate. 
Elections in Russia today are no more fair, free, or competitive than in Soviet times. 
The only difference is that only one candidate was on the ballot back then, whereas nowadays there are several, to make the exercise seem more credible. 
Another certainty about the upcoming election is that Putin will once again reincarnate himself, as he has done four times already. 
His earlier rebirths came in late October 2003, after the arrest of the now-exiled oligarch Mikhail Khodorkovsky, then in 2004, when another new-model Putin emerged for that year’s election. 
After the 2008 election, Putin had to find ways to manage Russia’s newly elected president, Dmitry Medvedev. 
And then in 2012, a belligerent Putin – the one who would later invade Ukraine – rallied his supporters on Moscow’s Poklonnaya Gora plaza, overcame mass protests, and returned to the presidency. 
Despite his knack for transformation, Putin is unlikely to introduce any substantive policy reversals after his coming victory. 
Bold, comprehensive reforms of the type proposed by the liberal former finance minister Alexei Kudrin are not in the cards. 
Putin is an old dog; he will not learn new tricks. 
To predict what Putin might do in his next term in office, consider five trends that have defined Russia during his 18-year rule. 
The first is escalation of political and military confrontation with the West, which has turned Russia into a rogue state that threatens its neighbors. 
The second is a gradual consolidation of power in the hands of a small circle of elites, who have replaced the bureaucracy, parliament, and judiciary as Russia’s ultimate decision-makers. 
A third trend is growing reliance on the use of force, particularly on the part of the secret police, in political life. 
With little or even no evidence, the Federal Security Service (FSB), the successor to the KGB, may now jail federal ministers, regional governors, opposition leaders, theater directors, environmental activists, or ordinary Russian citizens who express political views on Twitter or Facebook. 
A fourth, and related, trend is the restriction of constitutionally guaranteed freedoms, including voting rights and rights of expression and assembly. 
And a final trend is the gradual erosion of property rights, which has left Russian businessmen unwilling to invest in the country. 
All of these negative trends will persist, even if the pace of decline is debatable. 
Putin’s reelection almost certainly means another six years of economic stagnation and international isolation. 
He may speak about the need for reform; but after nearly a generation in power, his words can no longer be trusted. 
To divine his intentions and future policies requires focusing on his actions – what he does, not what he says. 
In my view, there are four plausible scenarios. 
First, Putin would seek to position himself as president for life, by holding a referendum to eliminate the constitutional limit of two consecutive presidential terms. 
Or he could be elected as the president of the Union State of Russia and Belarus, with Belarus’s current president, Alexander Lukashenko, serving as prime minister. 
The Union State has been dormant since 1997, but it could be revived to serve Putin’s purposes. 
In the second scenario, Putin would become a Russian Deng Xiaoping. 
He would acknowledge that Russia’s current political model is unsustainable, and convene a “roundtable” of representatives from around the country to come up with a framework for a new system. 
The delegates could establish rules for a transitional period comprising the last two years of Putin’s presidency, after which Russia would enter a new political era. 
Or, like Boris Yeltsin before him, Putin might declare himself exhausted and nominate a successor. 
In the third scenario, that successor might be a liberal like Medvedev, whereas in the fourth scenario, it would be a conservative like Deputy Prime Minister Dmitry Rogozin, who currently oversees the defense industry. 
In these last two scenarios, it doesn’t really matter whether the successor is a liberal or conservative. 
What matters is whether either type of leader could retain power once in office. 
Neither a Medvedev nor a Rogozin would be able to keep the current system as it is. 
But any reforms they might attempt would necessarily threaten powerful entrenched interests, and thus destabilize the existing balance of power. 
Moreover, it is unclear what kind of relationship Medvedev or Rogozin would have with the FSB, or whether either man could ensure the secret police’s noninterference in the country’s post-Putin political life. 
I won’t speculate about which of these four scenarios is most likely. 
At any rate, they all raise the same question: In 2024, will the leader of Russia be Putin 5.0, or someone else? 
Whatever happens, we can be sure that with every passing day, Putin will become increasingly preoccupied with his existential quandary: What next? 

Europe Versus Gazprom 
NEW YORK – For years, Russian President Vladimir Putin has wielded Europe’s dependence on his country’s natural gas as a foreign-policy weapon, without fear of the European Union calling his bluff – until now. 
With the EU launching an antitrust case against the state-controlled gas conglomerate Gazprom, Europe has sent a clear signal that Putin’s brutishness is no longer as intimidating as it once was. 
The message from the European Commissioner on Competition – that market rules apply to everyone – is one that Putin has dismissed for years. 
Reliance on economic and legal means to achieve his political goals has long been a hallmark of his rule. 
More than a decade ago, the Kremlin expropriated Yukos Oil, which at the time produced 20% of Russia’s output, and jailed its founder, Mikhail Khodorkovsky, for ten years on trumped-up tax evasion charges after he dared to oppose Putin. 
All major players in Russia’s energy-centric economy quickly fell into line politically, enabling Putin to use the country’s oil and gas exports as a geopolitical cudgel. 
EU countries that he could not intimidate militarily, owing to NATO, were wooed with discounts – or punished with price hikes. 
Hungarian Prime Minister Victor Orbán is Putin’s staunchest friend in Europe (though Greek Prime Minister Alexis Tsipras seems to want to change that), while Poland’s leaders have consistently warned that Russia could become a menace to the continent again. 
As a result, whereas Hungary pays Gazprom $260 per thousand cubic meters of gas, Poland pays $526 – the highest price in the EU. 
The Poles have paid a steep price, but they were right. 
The downing of Malaysian Airlines Flight 17 over eastern Ukraine last July seemed to mark the beginning of the end of Russia’s reputation, such as it is, as a civilized country. 
And now there is the hearing, currently underway in London, into the murder of Alexander Litvenenko, a dissident ex-KGB officer. 
Early in that hearing, the barrister acting for Litvenenko’s family claimed that the evidence in the case led to Putin’s door. 
Russia’s economy has already been reeling under Western sanctions imposed in response to the Kremlin’s annexation of Crimea and continued aggression in eastern Ukraine. 
Output is expected to shrink by almost 4% this year, and the country’s credit ratings have been reduced to “junk” or “near junk” status. 
And now the European Commission is taking a page from Putin’s playbook. 
By seeking to punish Gazprom for its manipulation of energy prices, it is aiming a dagger at the heart of Putin’s regime. 
Moreover, the EU’s antitrust action seems to be part of a coordinated legal assault. 
Last summer, the Permanent Court of Arbitration in The Hague ruled that Russia must pay $50 billion to Yukos’s shareholders – a judgment expected to be upheld on appeal. 
In essence, the decision sent the same message as the EU’s anti-trust action against Gazprom: rules apply to everyone, and stolen property must be returned. 
Of course, Europe could not easily withstand a 30% cut in natural-gas deliveries if Putin ordered Gazprom to stop doing business there. 
But that is unlikely: Natural resources comprise 70% of Russia’s exports, and transfers from Gazprom’s revenues alone account for at least 5% of the national budget. 
Over the past decade, rising oil and gas prices fueled rapid GDP growth, securing Putin’s popularity and giving him the resources to reconstruct Russia’s military might, now on display in Ukraine. 
In other words, Gazprom (and the Russian government) are less capable of withstanding the loss of the European market than vice versa. 
Indeed, given the hard bargains that China has been driving during Putin’s desperate search for alternative buyers, threatening to cut exports to Europe has proven to be an exceedingly unwise tactic. 
A moment of truth is slowly approaching. 
Much of the world is working to reduce its dependence on volatile or unsavory energy suppliers by adopting new technologies such as hydraulic fracturing and increasing purchases from places like Australia, Norway, Qatar, and the United States, which has eased restrictions on the export of natural resources. 
Whether Putin likes it or not, this trend will force him to become accountable for his actions. 
The EU may be unable to return Crimea to Ukraine, but its legal actions should put Putin on notice that his strong-arm tactics will not work for much longer. 

Putin Is An Island 
No man is an island, the poet John Donne said. 
If he is well briefed for his summit in Moscow and Saint Petersburg, President Bush should discount Donne's wisdom. 
For within Russia, President Putin does appear to be an isolated island, at least among the Russian elite who have singularly failed to embrace his decision to anchor Russia firmly to the West. 
The elite's gripes about Putin's foreign policy are many, but they center mostly on the notion that America is running roughshod over Russian interests. 
American troops, they complain, are on the ground in the former Soviet republics of Georgia, Kyrgizstan, Tadjikistan, and Uzbelistan. 
The next wave of NATO expansion promises to lap onto Russia's border and indeed surpass the old Soviet borders by taking in the Baltic states. 
Foreign investment has scarcely increased. 
Putin, they allege, has surrendered Russia' traditional notions of security and received nothing from the West in return. 
The crimes they attribute to Putin sound like the indictment for a treason trial. 
After making his bold moves towards the West after September 11 th, Putin undoubtedly expected to receive praise and favors in return. 
Of course, the West's ingratitude has been marked: America withdrew from the 1972 ABM Treaty and has now rammed a vague disarmament agreement - to be signed during the summit and which will allow the US not to destroy surplus missiles and warheads but rather to put them in cold storage - down Putin's throat. 
Even Putin's Defense Minister Sergei Ivanov, a former KGB colleague and a man often considered to be Putin's closest advisor within his government, does not fully agree with him on the terms of collaboration with America. 
If the Russian-Western alliance fails to bring tangible benefits to Russia soon, there is a growing fear that the loss of confidence in Putin may weaken him fatally. 
There is an eerie sense of déja vu in all this. 
Khrushchev, Gorbachev and Yeltsin all saw their hold on power undermined when they sought to please or placate the West only to receive nothing in return. 
Weakened by the perception of allowing the West to mistreat Russia, their influence among Russia's ruling elite disintegrated. 
But there is a critical difference between the Russia of today and even Yeltsin's early postcommunist Russia. 
Under Khrushchev and Gorbachev (and also Yeltsin), Russia was an autocratic society in which control of the elite was the key to power. 
Civil society didn't exist. 
Only the power bureaucracy mattered. 
The faceless mass was just that: faceless and powerless. 
Public opinion didn't matter; it didn't even exist. 
That elite, the old politburo nomenclature, was united by homogenized opinions. 
You kept power by sticking together in thought and word and deed. 
Change was anathema, risk to be avoided at all costs. 
Better to stick to a tried and failed policy than to upset the apple cart, even if the apples were rotten. 
Today's Russia is no longer a two-tier society. 
It is a society with a diversity of opinions, options, opportunities and interest groups. 
Democracy, every Westerner will tell you, is not founded on what the élite think; it's what the people think that matters - or at least what a contending rabble of rival interests think. 
But the most important thing is that people are free to think, which Russia's people undoubtedly are now free to do. 
What they think is that Vladimir Putin is looking after Russian interests, which now include being an unconditional part of the West. 
Public opinion matters, and Russia's elite knows it. 
Yes, Putin cares that the elite are keeping their distance from his foreign policy. 
But he knows something that they don't seem to recognize: Russia's people endorse his policies and do not want them overturned. 
Of course, the elite works behind the scenes to retard Putin's efforts, which is one reason why his ideas for military reform have gone almost nowhere under Sergei Ivanov's direction. 
But obstructing is far from overthrowing. 
Putin may well be as isolated as my grandfather Nikita Khrushchev was in 1964, when Leonid Brezhnev organized his palace coup against him. 
Yet he is nowhere near as vulnerable, thanks to his widespread grassroots support among ordinary Russians. 
Indeed, in the old days, Russia relied on its strength, mostly military, to determine its self-image. 
Russia's elite still embraces this vision. 
But after the disasters of the last two decades, including the military debacle in Afghanistan and the ruinous barbarity of the Chechen war which has blown back its violence into Russia's cities, ordinary Russians are less enamored of military might. 
They still revere their country, of course, and want the world to respect it. 
But it is respect for Russia's culture that matters most to them, and such does not come at the barrel of a gun. 
The obsession with power and prestige that galvanizes Russia's elite hardly matters at all. 
Russian society today is diversified and democratic, and its support for Putin is stronger than the grudges Russia's élite hold against him. 
So perhaps John Donne was partly right: if Putin is an island, he is one in a sea of millions of islands. 
The bell of a coup will not toll for him. 


Vladimir Putin’s Soviet Dream 
MADRID – The recent nuclear deal concluded by six major world powers and Iran represented a triumph of multilateralism. 
If those same powers – the five permanent UN Security Council members and Germany – showed the same will to work together to resolve other disputes, the world might enter a new era of cooperation and stability. 
Unfortunately, such a scenario seems farfetched. 
From China’s activities in the South China Sea to the Islamic State’s continued advance in the Middle East, competition and conflict are threatening long-standing regional orders. 
But perhaps the most critical conflict – the one whose resolution has implications for all the rest – is in Ukraine, a country that has become central to Russian President Vladimir Putin’s expansionist ambitions. 
Russia’s unilateral annexation of Crimea and support for separatists in eastern Ukraine have ruptured its relations with the West, and Putin has intentionally recreated a Cold War atmosphere by touting Russia’s “conservative values” as an ideological counterweight to the American-led liberal world order. 
Nonetheless, key issues – the carnage in Syria, the fight against the Islamic State, nuclear non-proliferation, and conflicting interests and competing claims in the Arctic – cannot be resolved without Russia’s involvement. 
That is why, as hard as it may be for Western powers, some efforts to appease Russia are unavoidable. 
The United States should be less dismissive of Russia’s sensibilities as an important power and a major civilization, and Russia’s legitimate security interests concerning its borders with NATO countries must be addressed, not least to keep Ukraine out of a rival military alliance. 
The Ukrainian parliament’s endorsement, despite strong international opposition, of autonomy for the pro-Russia separatist regions – a solution initially proposed by Putin – is exactly the kind of concession that is needed to restore peace. 
Ultimately, however, it is up to Russia to change its ways. 
Propaganda-driven nostalgia for the Soviet Union’s Cold War-era “great power” status is obscuring the lessons of that time. 
The Soviet Union was an unsustainable empire; if it could not survive at a time when isolation and bipolarity were the order of the day, it certainly could not be recreated within today’s interconnected multipolar global system. 
Russia already is in no position to confront the West: Its economy is withering, and it lacks solid alliances capable of countering US power. 
Putin is hoping that Russia and its BRICS partners (Brazil, India, China, and South Africa) will become “the future leaders of the world and the global economy,” as he put it in July, at the conclusion of the BRICS and Shanghai Cooperation Organization summits 
But the plain truth is that neither the BRICS nor the SCO is remotely close to being a cohesive bloc capable of insulating Russia from the consequences of its behavior in Ukraine. 
The differences in values and strategic interests within the groupings are no less acute than the disagreements that their various members have with the West. 
Russia’s bilateral relationship with China is no different. 
It is a relationship founded largely on Chinese dependence on Russian energy supplies, mutual support for “spheres of influence” as the conceptual foundation of an alternative world order, and joint naval exercises in the Black Sea. 
But the two countries have conflicting interests in Central Asia, where China is pursuing major investments to expand its influence in countries that Russia views as its “near abroad.” 
When Putin questioned Kazakhstan’s independence last year, China was quick to support the country’s sovereignty. 
China’s potential encroachment on Russia’s unpopulated Far East borders – which, in China’s view, were stolen, much like Hong Kong and Taiwan, during its “century of humiliation” – is another source of anxiety in the Kremlin. 
More important, China’s economy depends on continued access to Western – and especially US – markets. 
At a time when a slowing economy is creating greater uncertainty for China, it cannot afford to provoke tensions with the US over anything that is not in its direct interests, such as its territorial claims in the South China Sea. 
Despite Russia’s weak alliances, Putin seems undeterred. 
Beyond his boastful talk about Russia’s nuclear arsenal, his government has recently announced a new naval doctrine – one that amounts to an alarming echo of Germany’s naval challenge to Britain prior to World War I. If no diplomatic détente is brokered, Putin may well continue on this path, bringing his country ever closer to a full-blown conflict with NATO. 
Even if no such conflict erupts, Putin’s attempts to restore Russian influence across Eurasia (by whatever means necessary, if his actions in Ukraine are any indication) will be highly damaging. 
It should be no surprise that Kazakhstan and Belarus are as wary of Russian expansionism as Ukraine. 
Putin has discarded former President Dmitri Medvedev’s concept of a “partnership for modernization” with the West. 
But a Eurasian customs union among post-Soviet and other countries is not the road to modernization for Russia; nor is an effort to make the defense industry the engine of industrialization. 
That, in a nutshell, was the Soviet model, which failed once and would fail again. 
If Putin is serious about diversifying and strengthening Russia’s commodities-based economy, thereby improving the lives of his country’s people, he must attract advanced technologies and foreign investment, especially from the West. 
For that, he must pursue democratic reforms, institutional regeneration, and renewed diplomatic ties with the West. 
Russia is in no position to create an alternative international system; but, if Putin continues to pursue an outdated and antagonistic foreign policy, it can undermine the existing one. 
At a time when the world is facing so many destabilizing challenges, this would not be good for anyone. 
The West should seek to mollify Russia on core strategic questions like NATO expansion. 
But that will not help Putin to overcome the source of Russia’s weakness, which lies in his inability or unwillingness to see the Soviet Union for the failure that it was. 

Leadership Icons of a Globalized World 
PRINCETON – In today’s global culture, where simple models help make sense of so much complexity, German Chancellor Angela Merkel and Russian President Vladimir Putin embody opposing archetypes of national leadership. 
Like others before them, such icons often have a foil – a yang for a yin – that establishes a stark choice between two alternate worldviews. 
That was certainly true in previous periods of political and economic strain. 
For example, in the aftermath of World War I, with democratic political systems disintegrating, much of the world looked to either Benito Mussolini in Italy or Vladimir Lenin in Russia to determine the future. 
In the 1920s, Mussolini convinced many foreign observers that he had devised the optimal way to organize society, one that overcame the anarchy and self-destructiveness inherent in traditional liberalism. 
Under Mussolini, Italy was still integrated into the world economy, and official corporatism, with its emphasis on the supposed harmony of interests between capital and labor, seemed to many to herald a future without class conflict and pitched political struggle. 
In Germany, members of the orthodox nationalist right, as well as many others, admired Mussolini, not least the young Adolf Hitler, who asked for an autographed picture after Il Duce (as Mussolini became known) seized power in 1922. 
In fact, Hitler used Mussolini’s so-called March on Rome as his model for the Beer Hall Putsch in Bavaria in 1923, which he hoped would be a stepping-stone to power throughout Germany. 
Mussolini’s fascist internationalism inspired imitators around the world, from Oswald Mosley’s British Union of Fascists to Corneliu Zelea Codreanu’s Iron Guard in Romania. 
Even in China, cadets at the Whampoa Military Academy tried to launch a Chinese “Blue Shirts” movement akin to Mussolini’s Blackshirts or Hitler’s paramilitary Brownshirts, the Sturmabteilung. 
During this period, Mussolini’s foil was Lenin, the fulcrum for the international left. 
Throughout the world, leftists defined themselves by the degree to which they admired or disapproved of the Soviet leader’s ruthlessness. 
Like Mussolini, Lenin claimed to be building – by any means necessary – a classless society, where political conflict was a thing of the past. 
Today’s leaders are grappling with the politics of globalization, and in that debate Merkel and Putin – who are less similar in their tactics than Mussolini and Lenin were – represent two paths forward: openness and defensiveness, respectively. 
In Europe, political leaders define themselves by their relationship to one or the other. 
Hungary and Turkey are both vulnerable to Russian geopolitical machinations; but their leaders, Hungarian Prime Minister Viktor Orbán and Turkish President Recep Tayyip Erdoğan seem to have joined the international Putin admiration society. 
Meanwhile, Marine Le Pen, the leader of France’s far-right National Front, who will likely be a candidate in the second-round runoff of next year’s presidential election, has established herself as a foil to Merkel. 
For Le Pen, Merkel is an empress using the European Union to impose her will on the rest of Europe, and especially on hapless French President François Hollande. 
Likewise, Germany’s generous refugee policy under Merkel is a pretext to import “slaves.” 
In the United Kingdom, Nigel Farage, the former leader of the UK Independence Party, takes a similar position. 
Merkel, he believes, is a greater threat to European peace than Putin. 
On the other hand, UK Prime Minister Theresa May seems to be channeling Merkel, at least in her negotiating style. 
Her first major policy speech largely ignored June’s Brexit referendum, which brought her to power, and promised to push for so-called codetermination – workers’ representation on company boards – which is a crucial part of Germany’s social contract. 
Putin and Merkel are fixed compass points not only in Europe. 
In the United States, Republican presidential candidate Donald Trump – who has praised Putin for “getting an ‘A’ [in leadership]” – recently lambasted his opponent, Hillary Clinton, as “America’s Merkel,” and then started a Twitter hashtag equating Merkel and Clinton. 
Like Le Pen and UKIP, Trump has tried to put Merkel’s immigration policy at the center of political debate. 
One obvious interpretation of the Merkel-Putin dichotomy is that it embodies gender archetypes: Merkel favors “feminine” diplomacy and inclusion, whereas Putin favors “masculine” competition and confrontation. 
Another interpretation is that Putin represents nostalgia – a longing for an idealized past – whereas Merkel stands for hope: a belief that the world can be improved through effective political management. 
Putin’s position is apparent in his effort to unify Eurasia around social conservatism, political authoritarianism, and orthodox religion as a nominal arm of the state. 
His is a barely updated version of nineteenth-century theoretician and czarist adviser Konstantin Pobedonostsev’s three-pronged political prescription: orthodoxy, autocracy, and nationality. 
Merkel emerged as Putin’s foil and a global icon, incidentally, during the eurozone debt crisis, when she was seen as a rather nationalistic defender of German economic interests, and again in the summer of 2015 when she countered objections to her migration policies by arguing that Germany is “a strong country” that “will manage.” 
Of course, this “new” Merkel had always been there. 
In 2009, she openly rebuked former Pope Benedict for not providing “sufficient clarification” about his decision to rescind a Holocaust-denying bishop’s excommunication; and, in 2007, she insisted on receiving the Dalai Lama, despite official Chinese objections. 
Merkel and Putin have emerged as political icons just as globalization has reached a crossroads. 
While Trump, channeling Putin, wants an alternative to globalization, Merkel wants to salvage it with strong leadership, competent management, and a commitment to universal values and human rights. 
The 1920s’ global icons inspired calls for violent political change. 
Today, that kind of language is kept at arm’s length. 
But the choice between inclusive integration and exclusive disintegration remains with us. 

Putin is No Ally Against ISIS 
MUNICH – The leaders of the United States and the European Union are making a grievous error in thinking that President Vladimir Putin’s Russia is a potential ally in the fight against the Islamic State. 
The evidence contradicts them. 
Putin’s current aim is to foster the EU’s disintegration, and the best way to do so is to flood the EU with Syrian refugees. 
Russian planes have been bombing the civilian population in southern Syria forcing them to flee to Jordan and Lebanon. 
There are now 20,000 Syrian refugees camped out in the desert awaiting admission to Jordan. 
A smaller number are waiting to enter Lebanon. 
Both groups are growing. 
Russia has also launched a large-scale air attack against civilians in northern Syria. 
This was followed by a ground assault by Syrian President Bashar al-Assad’s army against Aleppo, a city that used to have 2 million inhabitants. 
The barrel bombs caused 70,000 civilians to flee to Turkey; the ground offensive could uproot many more. 
The families on the move may not stop in Turkey. 
German Chancellor Angela Merkel flew to Ankara on February 9 to make last-minute arrangements with the Turkish government to induce the refugees already in Turkey to prolong their stay there. 
She offered to airlift 200,000-300,000 Syrian refugees annually directly to Europe on the condition that Turkey prevent them from going to Greece and will accept them back if they do so. 
Putin is a gifted tactician, but not a strategic thinker. 
There is no reason to believe that he intervened in Syria in order to aggravate the European refugee crisis. 
Indeed, his intervention was a strategic blunder, because it embroiled him in a conflict with Turkish President Recep Tayyip Erdoğan that has hurt the interests of both. 
But once Putin saw the opportunity to hasten the EU’s disintegration, he seized it. 
He has obfuscated his actions by talking of cooperating against a common enemy, ISIS. 
He has followed a similar approach in Ukraine, signing the Minsk Agreement but failing to carry out its provisions. 
It is hard to understand why the leaders of both the US and the EU take Putin at his word rather than judging him by his behavior. 
The only explanation I can find is that democratic politicians seek to reassure their publics by painting a more favorable picture than reality justifies. 
The fact is that Putin’s Russia and the EU are engaged in a race against time: The question is which one will collapse first. 
The Putin regime faces bankruptcy in 2017, when a large part of its foreign debt matures, and political turmoil may erupt sooner than that. 
Putin’s popularity, which remains high, rests on a social compact requiring the government to deliver financial stability and a slowly but steadily rising standard of living. 
Western sanctions, coupled with the sharp decline in the price of oil, will force the regime to fail on both counts. 
Russia’s budget deficit is running at 7% of GDP, and the government will have to cut it to 3% in order to prevent inflation from spiraling out of control. 
Russia’s social security fund is running out of money and has to be merged with the government’s infrastructure fund in order to be replenished. 
These and other developments will have a negative effect on living standards and opinions of the electorate before the parliamentary election in the fall. 
The most effective way that Putin’s regime can avoid collapse is by causing the EU to collapse sooner. 
An EU that is coming apart at the seams will not be able to maintain the sanctions it imposed on Russia following its incursion into Ukraine. 
On the contrary, Putin will be able to gain considerable economic benefits from dividing Europe and exploiting the connections with commercial interests and anti-European parties that he has carefully cultivated. 
As matters stand, the EU is set to disintegrate. 
Ever since the financial crisis of 2008 and the subsequent rescue packages for Greece, the EU has learned how to muddle through one crisis after another. 
But today it is confronted by five or six crises at the same time, which may prove to be too much. 
As Merkel correctly foresaw, the migration crisis has the potential to destroy the EU. 
When a state or association of states is in mortal danger, it is better for its leaders to confront harsh reality than to ignore it. 
The race for survival pits the EU against Putin’s Russia. 
ISIS poses a threat to both, but it should not be over-estimated. 
Attacks mounted by jihadi terrorists, however terrifying, do not compare with the threat emanating from Russia. 
ISIS (and Al Qaeda before it) has recognized the Achilles’ heel of Western civilization – the fear of death – and learned how to exploit it. 
By arousing latent Islamophobia in the West and inducing both publics and governments to treat Muslims with suspicion, they hope to convince young Muslims that there is no alternative to terrorism. 
Once this strategy is understood, there is a simple antidote: Refuse to behave the way your enemies want you to. 
The threat emanating from Putin’s Russia will be difficult to counter. 
Failure to recognize it will make the task even more difficult. 

Putin of all the Russias 
VIENNA -- For those who still wondered who Vladimir Putin is, the mystery is over. 
His actions this week show that he is Russia’s new autocrat. 
He is a Czar pure and simple. 
The seven years since Putin assumed power in the Kremlin have been a time of conflicting signals. 
On one hand, he appears to be an educated and dynamic leader committed to modernizing Russia. 
On the other hand, with the help of the military-industrial KGB complex – the “ siloviki ” – he has systematically weakened or destroyed every check on his personal power, while strengthening the state’s ability to violate citizens’ constitutional rights. 
This week, Putin told the United Russia party that he will place his name at the top of its ballot for the parliamentary election scheduled for December 2, which could enable him to become Russia’s new prime minister after the presidential election due in March 2008. 
Of course, as he put it, Russia will have to elect as president a “decent, competent, effective, modern person with whom it would be possible to work in tandem.” 
But what that really means is that Russia will have to choose a man Putin has hand-picked to do his bidding. 
If this scenario comes true, it will be a sad day for Russia, but not because Putin will be retaining power – something everyone in Russia knew that he would. 
True, Putin has concentrated in his own hands more decision-making authority than at any time in Russia’s post-Soviet history. 
But most Russians think he is a great leader, crediting him with taking the country from the bankruptcy and despair of the Yeltsin era to wealth and prosperity in just seven years. 
Poll after poll puts his approval ratings at more than 70%. 
Putin, quite genuinely, holds contradictory views. 
He simultaneously advocates multiparty democracy and centralized power. 
He favors a free economy, but wants the state to control how wealth is allocated and who benefits from it. 
Like their president, most Russians see no contradiction between improving their personal lives and the country’s international status since the 1990’s and the erosion of democratic institutions. 
Of course, Russia’s formal institutions of democracy remain in place; but, in the absence of a free press, an independent judiciary and free elections in the regions – where Kremlin cronies, like Ramzan Kadyrov in Chechnya, now hold sway – they have been hollowed out. 
Russians would rather have a “father of the nation,” no matter the title – czar, general secretary, president, or prime minister – than follow laws and rules. 
Putin’s political genius is to have recognized this. 
Even if Putin has found a way to retain power without amending the constitution – a possibility that was endlessly speculated about by Russia’s dwindling band of democrats – the undemocratic nature of his strategy is glaringly obvious. 
Moving from one high office in the Kremlin to another in the White House (the seat of the Russian Parliament) is merely a technicality. 
Putin will be czar no matter what office is formally his own. 
What will make this work is that, like any good KGB man, Putin is a master of facades. 
It has been said that presidential democracy only strengthens Russian political culture’s tendency to favor rulers with a “strong hand,” whereas a parliamentary system would allow for a more “horizontal” distribution of power. 
So any future Prime Minister Putin will be able to say— hey , I rule under the ultra-democratic Italian parliamentary model. 
What could be more democratic? 
But if Putin, who has spent seven years “verticalizing” power in order to restore the stability and pride lost during Yeltsin’s “democratization” of Russia, really wanted to secure the good of his country, he would follow in Yeltsin’s footsteps and exit the scene. 
For the lesson of the years of communist misrule is this: no one man or party can know enough to manage a modern economy. 
Only democratic systems and free markets provide the essential signals that a government needs in order to act efficiently. 
After all, the good of democratic structures is their predictability. 
Only the Russians, with their devotion to the rule of a strongman, still insist on the importance of the role of personality in history. 
By contrast, successful democracies believe that nobody is irreplaceable. 
After September 11, 2001, many New Yorkers wanted the city’s then Mayor Rudy Giuliani to remain in office. 
But democracy required an election, and many now argue that the current mayor, Michael Bloomberg, has performed even better than Giuliani might have done in reviving the city. 
So, if Putin is concerned about Russia, he should abandon his czarist notions of power and leave high office, if not politics altogether. 
Like other democratic leaders, he might consider working in the private-sector, like Gerhard Schröder, or, better yet, write books and help Tsunami victims, like Bill Clinton or become an environmentalist, like Mikhail Gorbachev. 
But this seems to be too much to ask of ex-KGB man Putin, for whom there can be no distinction between losing power and leaving it gracefully. 


Russia’s Oligarchs-in-Waiting 
STOCKHOLM – Under President Vladimir Putin, cronyism has replaced Russia’s once-burgeoning capitalism. 
If Putin lives by any motto, it is this: “To my friends, anything; for my enemies, the law.” 
In his 2000 “autobiography,” First Person, Putin reveals what “counts most” to him. “I have a lot of friends,” he tells an interviewer, “but only a few people are really close to me. 
They have never gone away. 
They have never betrayed me, and I haven’t betrayed them either.” 
Indeed, Putin has helped his friends a great deal. 
According to Forbes, many of them are billionaires, even without counting what they probably have stashed away in offshore havens. 
For example, the leaked “Panama Papers” last year revealed that Putin’s childhood friend Sergey Roldugin – a cellist who does not even pretend to be a businessman – has received some $2 billion in state funds. 
Putin has essentially nationalized Russia’s elites. 
His close friends from St. Petersburg and the Soviet-era KGB have educated their sons in Russia, rather than sending them abroad. 
And as the better-known offspring of Russia’s previous generation of oligarchs have steadily left the country, the children of Putin’s cronies have taken their place. 
As the Russia observer Brian Whitmore put it in 2015, the “children of Vladimir Putin’s cronies” are already billionaires, “and most of them are under 40.” 
Unlike their fathers, most of these oligarchs-in-waiting have no graduate training. 
After college, they tend to go straight into career jobs at state-owned banks or companies such as Gazprom, where, after one or two quick promotions, they usually become a vice president. 
Their sisters, meanwhile, are supposed to marry suitable young men. 
Among Putin’s golden youth, the sons of his St. Petersburg cronies have done particularly well, usually by working in privatized companies. 
Consider the case of the lesser-known Putin crony Nikolai Shamalov and his two sons. 
Shamalov managed medical-equipment sales in Russia for Siemens AG until 2008, when the United States Department of Justice and the US Securities and Exchange Commission fined Siemens $1.34 billion for violating the Foreign Corrupt Practices Act. 
According to the SEC, Siemens had engaged “in a systematic practice of paying bribes to foreign government officials to obtain business” in six countries, including Russia. 
Shamalov was sacked from Siemens after 16 years of loyal service. 
But he landed softly, and his two sons have already had splendid careers. 
In 2005, his older son, Yuri, became the chief executive of Gazfond, Gazprom’s large pension fund. 
And, his younger son, Kirill, became – at the age of 25 – a vice president at Sibur, a large petrochemical company that had been spun off from Gazprom. 
From 2011 to 2013, Kirill acquired 4.3% of Sibur through an executive stock-option program. 
Then, in 2013, he reportedly married Putin’s daughter, Katerina Tikhonova, in a secret ceremony, after which Putin’s wealthiest crony, Gennady Timchenko, sold him 17% of Sibur at a favorable price. 
All told, Putin’s son-in-law was worth an estimated $1.3 billion by the time he was 34. 
Or consider the case of Arkady Rotenberg, an oligarch who has thrived on state contracts for gas pipelines and roads. 
Rotenberg’s oldest son, Igor, is the majority shareholder in Gazprom Drilling; his second son, Roman, is a vice president at Gazprombank. 
Similarly, the son of Yuri Kovalchuk – the spider in Putin’s financial web who runs Bank Rossiya, which is under international sanctions – is the CEO of Inter RAO, a state-owned energy holding company. 
The sons of Putin’s KGB friends have also ascended quickly in the corporate world. 
Sergei Ivanov, the namesake of Putin’s former chief of staff, first became a vice president of Gazprombank at age 25, and then the president of Alrosa, Russia’s state-owned diamond company, at 36. 
Russian National Security Adviser Nikolay Patrushev’s son, Dmitry, became CEO of Rosselkhozbank, the state-owned Russian Agricultural Bank, at 33. 
And Rosneft CEO Igor Sechin’s son, Ivan, became deputy director of a Rosneft department at 25. 
In this context, FSB Chairman Aleksandr Bortnikov’s son, Denis, was a wise old man of 37 when he joined the VTB Bank management board. 
Russian Prime Minister and SVR Director Mikhail Fradkov’s son, Petr, was more in the generational mold, just 29 when he became a deputy chairman of Vnesheconombank – the bank now associated with the Trump administration’s ongoing scandals. 
Putin’s loyalty to his cronies and their families seems to know no bounds. 
In November 2015, his government introduced a new road tax called “Platon,” and faced large-scale protests among independent long-haul truckers, just so that it could create a monopoly for an operating company that is half-owned by Igor Rotenberg. 
Putin even defended Platon at his annual press conference in December 2015. 
When a questioner brought up “Rotenberg, Jr., who has received the country’s long-haul truckers as a present,” Putin brushed off her concerns as being “of secondary importance.” 
According to Putin, revenues from the tax “do not go into somebody’s pocket but into the Road Fund of the Russian Federation, down to the last cent.” 
And from there, he claimed, it “is spent on road construction in Russian regions.” 
But, despite Putin’s reassurances, massive protests have continued, and so has the flow of money into Igor Rotenberg’s pocket. 
While nepotism is rampant in Russia, the concentration of such a tiny group of wealthy individuals in top positions is striking. 
Putin’s intergenerational cronyism has made the oligarchs and their families ever wealthier. 
But with fewer and fewer career paths to top positions, resentment among a generation of young, able, and ambitious Russians will only continue to fester. 

Putin’s Crooked Road to Damascus 
MOSCOW – When Russian President Vladimir Putin addressed the United Nations General Assembly on September 28, he knew he would grab the world’s attention and upstage US President Barack Obama with his call for a united front in the battle against the Islamic State. 
But Putin was addressing Russians, too, knowing full well the need to distract them from their country’s increasingly obvious economic woes. 
Last year, the distraction was the annexation of Crimea, followed by the encouragement of pro-Russia separatists in eastern Ukraine. 
The recent dispatch of Russian aircraft, missiles, and a few thousand troops to Syria is a flag-waving substitute for that failed “Novorossiya” project. 
Putin’s critics rightly see his Syrian adventure as yet another appeal to Russian nostalgia for the Soviet past: the USSR was mighty – and Putin claims that Russia can and does have the same power. 
But to what end? 
Wrong-footing the United States and the West may be good tactics in the short term, but there seems to be no long-term vision of the purposes that Russian power is supposed to serve, other than to preserve the power of Russia’s elites. 
As a result, the regime mimics the forms of democracy while using its propaganda to foment an aggressive form of nationalism. 
In the early years of this century the combination of high oil prices and economic growth dulled the elites’ appetite for strategic thinking and allowed them to ignore the subsequent rollback of health-care, education, and social-welfare reforms. 
The regime and the public now see the current situation as more or less normal – a “non-crisis crisis.” 
Because perception shapes reality, everything is normal, nothing has to be done, and Putin – having supposedly restored Russia’s dignity – can enjoy his approval ratings of more than 80%. 
To Putin, restoring Russia’s dignity is the same as resurrecting its “great-power status” following the collapse of the Soviet Union and its humiliating “defeat” by the West in the Cold War. 
Exercising power externally apparently compensates for the fact that dignity within the country is far from restored: Today’s Russian citizen remains defenseless before his bosses, the utility companies, the courts, and the police – and yet, whatever his hardships, he remains proud of his nation and its leader. 
There is, of course, another explanation of why Putin’s popularity is still growing in the face of a worsening economy: those unable to fend for themselves naturally look to the state for help – and are hardly likely to bite the hand feeds them. 
What Westerners decry as human-rights abuses ordinary Russians are likely to praise as policies to rid the country of “alien” practices and protect the majority from the “subversive” minority. 
The regime’s hostility toward gays and lesbians may offend the West, but it strikes a sympathetic chord with most Russians. 
Because those same Russians regard the war in Ukraine as defensive and just, war becomes justified; history’s dark pages are rewritten; and hostile language becomes the norm. 
Not long ago, ordinary Russians spoke openly about the number of deaths and casualties suffered in their country’s military operations; now, following Putin’s presidential decree on “secret losses,” they keep quiet. 
Even though the decree may well conflict with the Russian Constitution and the Law on State Secrets, the list of classified information now includes Russian military losses during peacetime operations. 
The consequence is a country divided between loyal and disloyal, patriotic and unpatriotic – that is, between those who toe the party line and those who refuse. 
If the polls are accurate, the loyal and obedient are a clear majority – at least so far. 
This explains support for the separatists in eastern Ukraine’s Donbas region and for Putin’s intervention in Syria. 
If the US cannot accept this, it merely proves that America insists on hegemony, whether in Europe, through NATO, or in the Middle East. 
Such logic is bolstered by Putin’s self-interested reinterpretation of history, which justifies the 1939 Winter War against Finland, the Molotov-Ribbentrop Pact of 1939, and the 1979 Soviet invasion in Afghanistan. 
The Attorney General’s Office has even been occupying itself with a ludicrous retrospective analysis of the decision in 1954 to transfer Crimea from the jurisdiction of the Russian Soviet Federative Socialist Republic to that of the Ukrainian Soviet Socialist Republic. 
Worryingly, the same analysis is being carried out on the legality of the independence of the Baltic states after the collapse of the Soviet Union. 
Where will all this lead? 
Just as in the Soviet era, today’s rulers equate themselves with the state. 
The state is then reduced to the leader’s inner circle and the top echelon of the financial and political elites, secure in their power because ordinary citizens have been duped into an uncritical and extreme form of nationalism. 
Putin’s embattled opponents can safely predict a long period of political, economic, and intellectual stagnation – certainly until the parliamentary election next year and the presidential election two years later. 
The stagnation will probably last into the following political cycle, too. 
But it cannot last forever: at some point, the regime’s survival will require offering the public something other than nationalism and nostalgia. 
The question is whether Putin, now deepening Russia’s involvement in yet another foreign military adventure, understands this. 

All the President’s Eunuchs 
MOSCOW – Russian President Vladimir Putin has been methodically purging his closest and longest-serving advisers. 
The latest – but surely not the last – victim is Sergei Ivanov, a former KGB operative (like Putin himself) and defense minister who has just been forced out as Kremlin chief of staff. 
Ivanov, a relatively substantive policymaker, is being replaced by a toothless factotum: the former head of the Protocol Schedule Directorate, Anton Vaino. 
Likewise, the reform-minded education and science minister, Dmitry Livanov, has been fired and replaced with the faceless apparatchik Olga Vasilyeva, a rare woman appointee known only for her Stalinist views (imagine the French president handing an important cabinet position to a mid-level official from the far-right National Front). 
As usual, Putin is offering no real explanation for these changes, leaving Kremlinologists – who have gained a new lease on life under Putin – little to work with other than a clear pattern: those who could speak to the president as equals are being replaced by those whom he has created, and who owe their careers to him. 
Why now? 
According to a member of Putin’s inner circle during the early years of his regime, the latest purge simply reflects the president’s idea of effective management. 
Years ago, during a meeting between Putin and his regional plenipotentiaries – whose job was essentially to keep an eye on regional governors – someone in attendance asked the president how he would describe the envoys’ role. 
He replied that, “Well, they are supposed to be sort of…liaison officers.” 
In other words, Putin expects members of his team to be loyal, follow orders like soldiers, and efficiently relay the will of the sovereign down the chain of command. 
This explains the composition of the new guard – technocrats and officers from the military and security establishment, known as siloviki – that Putin is grooming to serve as the new Russian elite after the 2018 presidential election. 
And make no mistake: the relative youth of Putin’s new elite does not mean they will be more liberal. 
Not one of his new appointees espouses anything like a liberal viewpoint; in fact, they show no ideological commitments or aspirations whatsoever. 
They are merely what the Chechen warlord and Kremlin loyalist Ramzan Kadyrov calls “Putin’s soldiers.” 
The old associates are being removed under different pretexts and by different means. 
For example, Ivanov – whom many viewed ten years ago as a potential successor to Putin – was given a new job: “Special Presidential Representative for Environmental Protection, Ecology, and Transport.” 
The head of the Federal Customs Service, Andrey Belyaninov, left office in disgrace after police raided his opulent private residence and emerged with shoeboxes full of cash. 
Putin knows that his old cronies are tired, ineffective, often excessively wealthy, and comfortably corrupt, which is not what he needs for a new presidential term. 
What he does need are his slightly younger “liaison officers,” who will carry out his orders without asking questions. 
Members of Putin’s new guard already see themselves as loyal subordinates, and, unlike the old guard, they don’t expect the president to be their friend. 
It’s hard to say what will become of the old guard’s remaining members. 
Some – such as Sergey Chemezov, the CEO of the hi-tech and defense state corporation Rostec, and the Kremlin’s “grey cardinal,” Igor Sechin, the executive chairman of the state-owned oil company Rosneft – still hold powerful positions and show little inclination to resign on their own. 
But Putin has a lot of time to work his will – the 18 months until the presidential election, and then another six-year term. 
In the meantime, by appointing an archconservative as his education minister, he is supplementing his military-laden new guard with mid-level officials who hold rabidly isolationist and imperialist views. 
This will not only jeopardize whatever liberalizing achievements remain from his predecessor Boris Yeltsin’s era, but also the limited social improvements made during his own rule. 
Putin’s canny instinct for self-preservation seems to be the only thing preventing him from eliminating the few loyal liberals who still hold key economic positions in his government. 
These include the Economic Development Minister Alexey Ulyukayev, Finance Minister Anton Siluanov, and the head of the Central Bank of Russia, Elvira Nabiullina. 
Even if these officials remain in place for Putin’s next presidential term, we can safely assume that he will not appoint a prominent liberal, such as former finance minister Alexey Kudrin, to replace Dmitry Medvedev as prime minister. 
His current personnel strategy suggests he’ll choose a bloodless satrap – someone like Vaino. 
One thing we know for sure is that Russian foreign and domestic policy is not about to change, and that it will continue to be determined solely by Putin. 
The presidency is the only institution in Russia today that has not been hollowed out, so it is the president who will make all major political decisions. 
Everyone else is just a liaison officer. 

Putin’s Pyrrhic Victory 
STOCKHOLM – Vladimir Putin’s reelection to a fourth term as Russia’s president was a foregone conclusion. 
The Kremlin undoubtedly orchestrated ballot-box stuffing and other measures to ensure that Putin received at least 70% of the vote across all regions. 
Yet, even without such shenanigans, Putin probably still would have cruised to victory on the nationalist wave created by his 2014 annexation of Crimea. 
Less predictable than the election outcome is Putin’s policy agenda for the next six years. 
The Russian economy is showing some signs of improvement, but growth remains far weaker than in the boom years of Putin’s first years in power. 
At the same time, the diplomatic divide between Russia and the West continues to widen. 
Putin has assembled competing teams of economists to draft policy proposals for the coming years, but few observers expect genuine reforms to follow. 
The economy’s long-term prospects will remain dim as long as the security state maintains its hold on Russian businesses and society. 
Moreover, it is hard to see how Russia can improve its economy without first improving its relations with the West. 
The investments needed to boost growth are being held back by Russia’s limited access to key technologies and global financial markets, and by sanctions on Russian companies and oligarchs close to Putin. 
Putin apparently believed that the West’s reaction to his aggression in Ukraine would be short-lived, as it was after Russia’s military intervention in Georgia in 2008. 
When that turned out not to be the case, and Western sanctions became increasingly painful, the Kremlin began seeking investment and trade opportunities with China. 
But the Kremlin’s hope of a deeper partnership with China was dashed when Chinese President Xi Jinping invited US President Donald Trump to a state dinner in Beijing’s Forbidden City – an honor never extended to a Soviet or Russian leader. 
Likewise, the prospect of warmer ties with the US has gone up in smoke, owing to revelations of Russian meddling in the US 2016 election. 
The Kremlin also failed to predict events in Ukraine. 
Despite Russian incursions into Eastern Ukraine, the Ukrainian government did not collapse. 
Rather, it pursued reforms and concluded an association agreement with the European Union. 
Finally, in Syria, Putin has proclaimed “Mission accomplished” time and again, yet Russian mercenaries on the ground there keep dying. 
To be sure, Russia has been able to test new military hardware while shoring up Syrian President Bashar al-Assad’s regime. 
But peace and stability are still nowhere in sight. 
Trying to exude confidence in his annual address to the Federal Assembly this month, Putin nonetheless revealed his fears about the future. 
For example, his promise of economic growth was familiar, but he was far more explicit than usual in warning that Russia could fall behind other countries. 
“The speed of technological progress is accelerating sharply,” he observed. “Those who manage to ride this technological wave will surge far ahead. 
Those who fail to do this will be submerged and drown in this wave.” 
There can be little doubt that Russia currently risks drowning. 
Similarly, Putin devoted the bulk of his speech to a multimedia show of sophisticated new strategic weapons: super-heavy intercontinental ballistic missiles, hypersonic strategic attack weapons, gigantic futuristic underwater torpedoes, and nuclear-powered cruise missiles with unlimited range. 
But in his attempt to prove that Russia can overcome any new strategic defense measures the US might put in place, Putin betrayed his fear that Russia’s strategic nuclear arsenal could be rendered irrelevant. 
Aside from Russia’s nuclear arsenal and the veto power that it enjoys as a permanent member of the United Nations Security Council, its foundation of strategic influence is weak. 
Even after adjusting for differences in purchasing power, Russia’s economy is closer in size to Italy’s. 
If Putin is serious about sustaining a strategic arms race with the US, he will have to force significant sacrifices on other key economic sectors – and a lower standard of living on ordinary Russians. 
On the other hand, Putin recently expressed openness to deploying a UN peacekeeping mission in Ukraine’s Donbas region. 
And it is possible that his gadget show was meant to underscore the need for more strategic arms control and open dialogue. 
If so, he chose an odd way to convey that message. 
Even if Putin did want to open a dialogue with the West, one cannot ignore the nerve-agent attack on former Russian double agent Sergei Skripal and his daughter in Salisbury, England, this month. 
As with the 2006 polonium attack that killed Russian defector and former spy Alexander Litvinenko, the British government has concluded that the Kremlin ordered the operation against the Skripals. 
Russian security agencies may have a “license to kill” defectors with whatever sophisticated methods they can muster. 
But, like the polonium attack a decade ago, the first-time use of a sophisticated nerve agent, Novichok, did not go undetected, and the Kremlin is now resorting to a crude arsenal of lies and disinformation to try to hide its tracks. 
Needless to say, a regime that murders and lies is not an inviting partner for cooperation. 
But this doesn’t make serious talks between US and Russia any less necessary. 
Both countries are modernizing their nuclear arsenals, and there is a real risk that new technologies could erode longstanding arms-control measures or render them obsolete. 
The future of Putin’s extended reign is highly uncertain. 
Domestic reforms are not likely to be forthcoming, and the Kremlin’s unleashing of its security forces abroad has undermined the prospect of rapprochement with the West. 
While a new arms race would pose significant dangers for Russia – and for everyone else – it would also almost certainly bring the country to ruin, as the Soviet Union’s last leaders could no doubt attest. 

The Last Silovik? 
MOSCOW – President Vladimir Putin’s regime is as sphinxlike as any that has ever ruled Russia, and now there is a new mystery afoot. 
Is Igor Sechin – perhaps the most powerful of the St. Petersburg siloviki who helped establish Putin’s regime 18 years ago – about to fall? 
The siloviki, the grey men who emerged from the security and military apparatus, have ruled the roost in Russia for the last generation. 
Sechin had a more substantial KGB career than Putin himself, and has held many of the key posts in his patron’s administration. 
Since 2012, he has been CEO of the state-owned oil giant Rosneft, Russia’s third-largest company (after Gazprom and Lukoil), whose board chairman since September is former German Chancellor Gerhard Schröder. 
Under Sechin’s leadership, Rosneft has become a state within a state, with a quarter-million employees, $65 billion in revenue, and 50 subsidiaries at home and abroad – as many as Gazprom. 
And Rosneft, even more than Gazprom, has pioneered the modus operandi of the Putin system since 2004, when it took over the assets of Yukos, following the imprisonment of the company’s head, Mikhail Khodorkovsky, a Putin opponent, on fraud and embezzlement charges. 
Sechin has always had a direct line to Putin. 
Many Russians have long assumed that he is also the eyes and ears of the KGB’s successor, the Federal Security Service (FSB), in the natural-resource sector, which forms the core of Russia’s economy and is the hub of the country’s corrupt power networks. 
Yet, today, Sechin is involved in a very public – and symbolically significant – courtroom fight. 
He has been summoned three times by a Moscow criminal court to testify in a case against Alexei Ulyukaev, a former minister of economic development. 
But Sechin has consistently failed to appear, with his office recently telling the court that he wouldn’t be available until next year. 
Sechin’s excuses for not showing up have been pretty standard: the summons was lost, and his schedule – which included big government trips to Vietnam and Turkey – did not allow it. 
But there is nothing standard about a Russian court ordering a figure of Sechin’s stature to testify publicly. 
On the contrary, in the world of Kremlin politics, the move is as bizarre as it gets. 
It all began a year ago, when Ulyukaev was detained at Rosneft’s Moscow headquarters, where he was allegedly attempting to secure a $2 million bribe from Sechin, in exchange for his support for Rosneft’s planned acquisition of a majority of state shares in Bashneft, a regional oil company. 
Sechin had, after a previous conversation on the topic, reported Ulyukaev to the FSB, who were waiting to take the minister into custody. 
Yet bribery is how Russia operates, so the decision to pursue a bribery case against a powerful player is never just about the rule of law. 
In this case, the real motivation behind Sechin’s decision to go after Ulyukaev is uncertain. 
Perhaps he felt that the minister needed reminding of his place in the rigid Kremlin hierarchy. 
Or perhaps, as has been rumored, Ulyukaev was working with other officials to rein in Sechin by stopping Rosneft from acquiring the Bashneft shares. 
In any case, Sechin’s plan – about which Putin may well have known nothing – soon backfired, as the legal proceedings became public. 
Particularly damning, transcripts of Sechin’s secret recordings of his conversation with Ulyukaev – part of a sting operation in which Sechin played a leading role – were disclosed in September. 
Sechin called the court’s decision to open the case to the public “professional cretinism.” 
He claims that “cases like this should be closed from all sides,” because “they contain state secrets.” 
But the truth is that Sechin was both arrogant and a fool to assume that he would not get dragged into the case. 
Of course, given Sechin’s role in entrapping Ulyukaev, logic dictates that he should have been the first witness called. 
But, in Russia, powerful or famous figures – such as, for example, Khodorkovsky – do not become embroiled in legal cases without the Kremlin’s explicit approval. 
No low-level Moscow court judge or prosecutor could possibly have summoned Sechin unilaterally. 
So when Sechin was called as the last witness – unlucky number 13 – there was only one logical conclusion: Putin, who has already ousted a number of the leading siloviki who brought him to power, had decided to take Sechin down a peg or two. 
The gray cardinal of Rosneft had stepped too far out of line. 
As in the Khodorkovsky case, the Kremlin seems to be using the courtroom as a platform for clarifying the positions of the Russian elite. 
This is particularly important in the run-up to the 2018 presidential election, not least because it is rumored that Putin is seeking a trusted flunky to take over his post, at least temporarily. 
Even if Putin does run again – the more likely outcome, given his penchant for total control – he will be seeking a subservient prime minister. 
The current one, Dmitri Medvedev, has been discredited as inefficient and – to a public that views him as a political pygmy – unworthy of the level of personal corruption that has been exposed. 
By going after one of Putin’s ministers, Sechin appeared to be flexing his muscles, perhaps believing that this would prove his readiness as a prime-time political player. 
Instead, the episode has merely shown, yet again, that there is no real “number two” in Russia; there is only Putin, controlling the FSB, the courts, and the commanding heights of the economy. 
Whether Putin decides to remain president or temporarily to fill the post with a puppet, as he did in 2008 with Medvedev, his message could not be clearer: I, and only I, am in charge. 

Is Vladimir Putin Losing His Grip? 
MOSCOW – In 1984, just before Mikhail Gorbachev’s ascent to power, there was a sense in Moscow that the Soviet Union was petrified, and nothing could change. 
Then everything did change, exposing the extent of the transformation that had occurred beneath the surface. 
Today, a similar mood pervades Moscow, with President Vladimir Putin’s regime appearing stable, even unbreachable. 
But, as was the case back then, a closer look reveals a number of chinks in the armor. 
In many ways, Russia has been moving backward in recent decades. 
In the 1990s, Russia was a freewheeling place, where virtually everything was allowed. 
Moscow had 20 daily newspapers, with views ranging from liberal to Stalinist. 
Today, Russian civil society is severely stifled, and to watch television in Moscow is to find 20 channels controlled by the Kremlin. 
In 1991, Boris Yeltsin, in one of his first actions as President, broke up the old KGB into several agencies, cut its staff by half, and slashed its budget. 
Today, the KGB’s successor, the Federal Security Service (FSB), has seized complete control over Russia’s security apparatus, including by arresting high-level generals in other law-enforcement agencies. 
The result is a single security service that is more powerful than at any time since Stalin – and viewed as independent from the Kremlin. 
On the economic front, too, Russia has backtracked. 
In 2003, Russia’s private sector produced 70% of the country’s GDP. 
Today, the state sector generates most of the country’s output, squeezing out small and medium-size enterprises, and five big state banks dominate the financial market. 
Moreover, Putin’s policy of “de-offshoring” has imposed such cumbersome controls on the business leaders of the 1990s that most have sold off their assets in Russia and decamped to London or Monaco. 
This trend has been accelerated by Russia’s lack of any real property rights, which has enabled the Kremlin to cut Russia’s wealthy down to size at will, often targeting the most law-abiding among them. 
Small wonder that forecasts for annual GDP growth are stuck at 1.5-2%. 
The regime wants to change this pattern. 
In May 2016, Putin asked three expert groups to recommend economic-reform programs: a liberal group led by former Finance Minister Alexei Kudrin; a technocratic group led by Economy Minister Maxim Oreshkin; and the more statist Stolypin Club led by Putin’s business ombudsman Boris Titov. 
Each group has delivered thousands of pages of expert reports. 
But any shift toward respecting the rule of law would be incompatible with the kleptocratic character of Putin’s regime, implying that genuine reform is out of the question. 
The mandate given to the three groups thus appears to have been little more than therapy for social scientists, a way to keep them busy – and out of the opposition. 
Far from embracing change, Putin will seek a fourth term in next year’s presidential election – a race he will surely win, given the Kremlin’s control over the media and the courts. 
But, to render his victory credible, Putin needs Russia’s dispirited population to show up to vote. 
It is rumored that Sergei Kiriyenko, the Kremlin’s first deputy chief of staff, is targeting 70% turnout, with 70% of those votes going to Putin. 
That won’t be easy to achieve. 
In the State Duma elections in September 2016, only 47.8% of registered voters turned out. 
In local elections last month, even fewer bothered to participate, with Vladivostok reporting just 13% turnout. 
If voters are going to show up for next year’s presidential election, they will need to believe that real change is possible. 
Putin needs a credible rival, not the same old Kremlin-linked candidates – the communist Gennady Zyuganov, the nationalist buffoon Vladimir Zhirinovsky, and the purported liberal Grigory Yavlinsky – to join the race. 
The socialite Ksenia Sobchak, who announced her candidacy after meeting with Putin, may seem able to inject some life into the campaign. 
But there is only one real option to secure a large voter turnout: the anti-corruption campaigner and vocal Kremlin critic Alexei Navalny. 
In September 2013, when Navalny ran for mayor of Moscow, he received 27% of the vote. 
But the independent pollster Levada Center reckons that, despite strong support for Navalny in Moscow, he would not obtain more votes today. 
Given this, some Kremlin advisers want to let Navalny run, while keeping him off national television. 
And it seems that the Kremlin may be considering just that, as it has allowed Navalny to hold large campaign meetings with up to 10,000 people in 100 cities. 
But others in Putin’s inner circle would prefer to lock up Navalny for the fourth time this year – no surprise, given his proven capacity to disrupt the Kremlin’s authority. 
Last March, for example, Navalny produced a 50-minute documentary on corruption, revealing that Prime Minister Dmitri Medvedev had used $1.3 billion in bribes to purchase six palaces and two vineyards. 
The film, watched on YouTube by some 25 million people, effectively killed Medvedev’s political career. 
Now, Putin will need to consider who should succeed Medvedev. 
In the past, he has usually installed a loyal non-entity in that position, and he has many possible candidates, such as the remarkably ineffective Gazprom Chairman Alexei Miller. 
The question is whether the next prime minister will be more closely allied with Putin or the FSB. 
The United States may play an unexpected role in this drama. 
The recently enacted Countering America’s Adversaries Through Sanctions Act, which calls for a report on Russian “oligarchs and parastatal entities” within 180 days, offers the US a unique opportunity to influence the Kremlin before the presidential election. 
Many of Russia’s wealthy have already fled Russia in fear of the FSB. 
Now, Russia may see another wave of departures, with those close to the Kremlin fearing that Putin can no longer protect them. 
Putin may be guaranteed another presidential term, but a regime that cannot satisfy even its rulers is hardly sustainable. 


How Russia Stays Afloat 
WASHINGTON, DC – The long-term sustainability of Russia’s economy is an open question. 
Cronyism is rife, and Russia’s heavy dependence on oil revenues means that it will suffer whenever oil prices are low. 
But if the Soviet Union taught us anything, it is that unsustainable systems can survive for many years. 
The Russian system today reminds me of the Soviet system I experienced in 1983, when I lived in Moscow, and KGB disciplinarian Yuri Andropov (the “Butcher of Budapest”) was still in power (albeit in poor health). 
The common economic features, then and now, include low oil prices, a nonviable economic ideology, state ownership of crucial industries, and authoritarian rule. 
But one notable difference is that Russia’s macroeconomic management is much more competent today than it was then. 
Russia is not at risk of running out of financing, despite continued Western sanctions. 
But its tight resources do limit the Kremlin’s foreign-policy options and aggravate tensions among Russian elites. 
Since oil prices started falling in June 2014, Russia has slipped from sixth place to 14th in the International Monetary Fund’s global economic rankings; its GDP (measured in current United States dollars) has dropped from $2.1 trillion to $1.1 trillion – just 6% of US GDP. 
(And it spends only 8% of what the US does on defense.) 
But, though Russia is not economically competitive with the US, its government has maintained admirable macroeconomic balances, even as growth prospects have faded. 
It took some time for the Russian government to get things right, and its international reserves did slump dangerously in 2014; but that December, the Central Bank of Russia (CBR) finally floated the ruble’s exchange rate, and macroeconomic conditions have since stabilized. 
In his public statements, Russian President Vladimir Putin emphasizes five indicators of stability: international reserves, the foreign-payments balance, the budget balance, inflation, and the unemployment rate. 
Among these, he places the biggest premium on international reserves. 
At the annual “Russia Calling!” investment forum in October, Putin reported that “international reserves are growing” and “currently stand at around $400 billion” – which is apparently his target amount. 
Russia’s international reserves include the Ministry of Finance’s Reserve Fund, which will run out in 2017. 
But for Putin, all that matters is the total size of Russia’s international reserves. 
By letting the exchange rate float with the oil price, the CBR has managed to maintain a significant current-account surplus, even though lower commodity prices cut exports and imports by half since 2013. 
Similarly, the Ministry of Finance keeps the budget deficit at around 3% of GDP, and the falling exchange rate has kept revenues relatively stable in ruble terms, even as absolute revenues have fallen. 
The government has made up for budget shortfalls by ruthlessly slashing education, health care, and now pensions. 
When the ruble depreciated early last year, inflation surged above 16%; but the CBR’s tight monetary policy has since reduced inflation to 6%, with a further decline, to 4%, likely to be achieved next year. 
Remarkably, the unemployment rate is currently 5.4%, and Russia has managed to keep it below 6% since the oil-price shock; what’s more, public debt is a minuscule 13% of GDP. 
Despite these positive indicators, overall investment, GDP, and living standards are falling. 
Real disposable incomes fell 10% last year, and will likely shrink by another 5-6% this year; investment fell more than 8% last year, and will likely fall by 4% this year; and GDP declined by 3.7% in 2015, and will probably contract this year as well (though by less than 1%). 
A Westerner would consider these numbers unacceptable. 
But ordinary Russians appreciate that their real (inflation-adjusted) incomes doubled between 1999 and 2008. 
And, at any rate, it is not as though they can protest under the current regime. 
Still, Putin once based his legitimacy on economic growth. 
Now that he can no longer deliver improved living standards, he follows the recommendation made in 1904 by Russian imperial minister Vyacheslav von Plehve: “We need a small victorious war.” 
Putin has benefited from three so far: the 2008 war in Georgia, the 2014 annexation of Crimea, and the ongoing intervention in Syria since September 2015. 
But a previously risk-averse Putin has had to take ever greater risks, not least in Eastern Ukraine, where the conflict that he precipitated has been neither small nor victorious. 
Eastern Ukraine represents a foreign-policy failure, and it demonstrates that, while Russia enjoys military superiority over its neighbors, it cannot afford protracted wars. 
The West has been exploiting this weakness with its financial sanctions, which shave about 1% from Russia’s GDP each year they are in place. 
Russia’s domestic elites pose another threat to Putin, which is why, since August 2014, he has sacked one KGB general after another, and has sought to eliminate potential rivals. 
But his purge has stalled, with Russia’s generals still constituting a majority in the country’s “real” Politburo, the Security Council of Russia. 
On November 15, Putin took his purge in a new direction with the arrest of Minister of Economic Development Alexei Ulyukaev, one of the remaining liberal technocrats. 
The next day, when Putin addressed the Ministry of Defense with a prepared, televised speech, the generals in attendance regarded him with evident disgust, and the powerful defense minister, Sergey Shoigu, seemed to ignore him altogether. 
Putin is politically savvy and often hides his real intentions. 
He has frequently taken the world by surprise with improvised wars and diplomatic initiatives, as in Ukraine and Syria. 
He is financially constrained, but his situation is not hopeless, and we should always expect the unexpected from him. 
Now that US President-elect Donald Trump’s victory has created a power vacuum in Washington, Putin has a great opportunity to boost his own domestic standing. 
We can be certain that he will seek to exploit it fully. 

Putin’s Ark 
Recently I visited Moscow after five years away. 
The city, which looked different and strange, impressed me by its ability to change. 
My days back in Russia were divided between official meetings, hours wasted in traffic jams, and nights spent with old friends who tried to show me the best of Moscow nightlife. 
On my first free evening, I was invited to a place called “Shinok.” 
The restaurant had many of the traits found in ethnic restaurants everywhere. 
Different bits of kitsch, this time Ukrainian, were richly represented. 
But the interior decoration had one unique element – an artificial wall with windows separating a part of the restaurant hall. 
Behind the wall was a stage set of a village yard. 
A real cow, as well as chickens and geese populated that ersatz farmyard. 
At times an old woman in traditional dress appeared to feed the animals. 
Visitors enjoying borscht and pirogi observed her efforts with satisfaction. 
“She works for the restaurant,” my acquaintance explained. “She feeds animals and sits in the yard to create the rustic ambiance.” 
Shinok was just an introduction to today’s new wave of Moscow restaurant culture. 
A few days later, I visited “The White Sun of the Desert,” another ethnic hangout. 
The White Sun existed in Soviet times. 
Back then, it was called “Uzbekistan” and was nothing more than an obligatory culinary demonstration of the supposedly unbreakable union of the USSR’s fifteen fraternal republics. 
Although the restaurant interior had completely changed since then, its decorative themes remained the same. 
Nowadays, however, the establishment is named after a popular Soviet borscht-western (or “eastern”) filmed in 1969 and set in Central Asia during the 1919 Civil War. 
The restaurant is decorated not only with oriental carpets, but with life-size figures of the movie’s heroes firing machine guns or sitting on crates of dynamite. 
This Soviet “orientalism” is reinforced by pretty waitresses dressed in sexy outfits more inspired by the Arabian Nights than by any Central Asian reality – then or now. 
But the Soviet past, not ethnic motifs, are the biggest element in contemporary Muscovite restaurant design. 
The club-restaurant “Major Pronin:” is conveniently located in the vicinity of the KGB-FSB headquarters. 
It is named after the hero of bad Soviet-era spy novels, a figure who was also the butt of many underground jokes. 
The restaurant’s interior is decorated with various pieces of espionage equipment. 
But the main attraction is a shooting gallery where patrons can test their skills between courses. 
Targets depicting serial killers and drug dealers have mottos like “Save a woman” or “Save a boy” on them. 
In the middle of the wall is a target representing New York’s World Trade Center being approached by an aircraft, with the inscription “Save America.” 
A new club called “Zone” – Russian slang for a concentration camp – is designed to reproduce the feeling of gulag life. 
Barking Alsatian dogs, stern guards, and waiters dressed in inmate uniforms work hard to recreate the gulag’s sinister atmosphere. 
Russian literature is not forgotten. 
If the restaurant “Pushkin” on Tverskoy Boulevard not far from the monument to the great Russian poet is designed to recreate the “aristocratic atmosphere” of the early nineteenth century, the combined bar and diner called “Gogol” on Stoleshnikov Lane is an attempt to recreate a vanished Soviet institution called “rumochnaia.” 
A “rumka” is a vodka glass from which exhausted proletarians could revive themselves. 
Of course “rumochnaia” had nothing in common with Nikolai Gogol, but the establishment named after the famous writer does have a skating rink that is used once a day by a man dressed up as Gogol. 
After my return to Washington, I had a dinner with an American politician who had just visited Saint Petersburg. 
As a special honor, his Russian hosts organized an excursion to Strelna, the “Russian Versailles,” which was recently restored from ruin to become the Petersburg residence of President Vladimir Putin. 
The palace didn’t impress the American. 
The amount of marble used for renovation seemed excessive, and the understanding of what constitutes luxury appeared to correspond to the standards of a Holiday Inn. 
The American’s excited Russian hosts asked him constantly for his opinion of the palace. 
Throughout the tour, the American answered with polite exclamations like “exquisite” or “striking.” 
Finally, they reached the attic. 
At last, the American was excited. 
The attic of the presidential residence was designed as a belly of the seventeenth-century ship. 
“The last time I saw something like this was in a Hamburg beer hall in the 1960’s,” the politician told me. 
How perfect, I thought, as I imagined Russia’s president climbing the stairs to the attic of his palace to play the role of Peter the Great. 
Like the customers in that Ukrainian-style village restaurant, perhaps Putin found his attic ark reassuring in some unconscious way. 
A historical wave beyond his control had lifted the former KGB lieutenant colonel from out of the shadows to the pinnacle of power. 
But fate might also just as suddenly wash him away. 
What could be better than to have an ark at hand if one day the political tides turn? 
Please visit this link for full size photos: 
http://www.project-syndicate.org/akinsha/photos.html 

Putin’s Balkan Mischief 
Russia is again on a tear. This time, the Kremlin has stuck its finger in the West’s eye over the long and painful effort to bring Kosovo to formal independence. 
Unlike the fracas over an American missile shield in Europe, this conflict shows no signs of blowing over, and threatens to damage further the rocky relationship between Russia and the West. 
At every turn, Russia has challenged Western efforts to facilitate Kosovo’s independence. 
After a year of negotiations between Serbia and Kosovo, President Vladimir Putin’s Kremlin rejected the UN mediator’s report recommending supervised independence, prevented the Security Council from accepting that report, and insisted on three additional months of negotiations between Serbia and Kosovo – even after compromise became impossible. 
Three weeks ago in the UN Security Council, Russia again insisted that any agreement required the approval of both Serbia and Kosovo, and that further negotiations were necessary. 
Russia knows that such negotiations will be fruitless, but believes that another seemingly innocent appeal for more talks would strain EU unity, which appears to be a vital goal for Putin. 
Further delay might also generate violence in Kosovo and undermine international support for independence. 
Putin’s hatred of the Yeltsin era’s “subservient” relations with the West fuels his opposition. 
But the West’s delay in resolving Kosovo’s status permitted that opposition to gain traction. 
Indeed, the West has consistently misread Russia’s intentions on Kosovo. 
Many claimed that the Kremlin was delaying the inevitable but ultimately would not block independence. 
Now, at the eleventh hour, Russia is sticking to its obstructionist position, and its presidential election in March will likely reinforce anti-Western postures. 
So what will Putin do when the United States and most European Union members recognize an independent Kosovo in the coming months without a UN blessing, as they now plan? 
It is unlikely that the Kremlin would attempt another military intervention in Kosovo (their effort in 1999 to land troops at Pristina airport was a fiasco), but it has a range of options that must give the West pause. 
Kremlin support has made Serbia’s nationalist intransigence over Kosovo effective. 
Russia has said that it will not give Serbia a blank check, but it will likely support the Serbian government’s efforts to isolate and destabilize an independent Kosovo. 
While Serbia has resisted partition of Kosovo, Russia would also support a Serbian proposal to partition the Serb-populated north, an effort that would open up a Pandora’s box of possible partition of Serbia, Bosnia, and Macedonia. 
Such a proposal could get some support in Europe and elsewhere as a seemingly appropriate compromise, even if it would destabilize the Balkans once more. 
Russia will certainly continue its diplomatic efforts to persuade the world that negotiations are the only way to solve the problem, and that it cannot be solved outside the UN. 
That will attract support among many UN members, including those that have major dissatisfied ethnic minorities. 
Russia could also react beyond the Balkans, most obviously in the Caucasus, with its breakaway regions, particularly in Georgia. 
A declaration of independence by Kosovo will likely bring a similar declaration from Georgia’s breakaway Abkhazia region, which Russia could well recognize. 
If Georgia takes military steps to prevent that, Russia’s military would likely react with force, creating a situation that could get out of control. 
While the US and the EU do not want to worsen relations with Russia, they cannot retreat in the face of Russian obduracy; security in Europe is at stake. 
But they must also continue to try to preempt confrontation with Russia on all fronts. 
The West should make clear to Serbia that it will react vigorously against any efforts to promote violence or partition Kosovo. 
Dispatching additional NATO troops, in addition to the planned EU mission, to supervise Kosovo independence would be helpful. 
Putin’s Russia, which pays little attention to the rule of law, cloaks its diplomatic effort in the guise of adherence to international law, in particular UN Security Council resolution 1244, which ended the 1999 Kosovo war. 
A long overdue diplomatic offensive needs to be launched to undercut Russian arguments as well as remind the world of what happened in Kosovo. 
Resolution 1244 does not state that Kosovo must remain under Serb sovereignty, as Russia and Serbia insist, nor does it preclude independence. 
Indeed, any reasonable reading of the resolution – especially in the context of the conflict-ridden Balkans over the past two decades – would acknowledge that independence would satisfy the resolution’s intent and the purpose of sustaining UN supervision of the province for the past eight years. 
In the case of Abkhazia, the West should reiterate the sui generis nature of Kosovo and highlight the tremendous efforts it has undertaken there since 1999. 
The world must make clear that Russian military involvement in Abkhazia is unacceptable, while also restraining Georgia’s government from reacting militarily to any provocation. 
How Russia reacts to Western support of Kosovo’s coming declaration of independence will test how far we have progressed since the Cold War. 
Through careful management of Kosovo’s independence process, and attentiveness to opportunities to improve relations with Russia, the West might mitigate the worst consequences of this confrontation. 

Putin’s Brezhnev Syndrome 
PARIS – The winner of Sunday’s legislative election in Russia was a foregone conclusion: United Russia, organized by Vladimir Putin. 
Likewise, there is no doubt that Putin himself will win the presidential election due in March 2012. 
But the public enthusiasm that ratified Putin’s rule for a decade has vanished, something demonstrated by the poor performance of his party, United Russia, in the just concluded elections to the Duma. 
Unlike Europe, beset by a sovereign-debt crisis, and the United States, whose leaders are wrangling over how to stem the deficit, Russia may look like an oasis of stability and continuity. 
But that continuity is more reminiscent of the zastoi, or stagnation, of the Brezhnev era. 
Eight years of 7% average annual GDP growth during Putin’s previous presidency (2000-2008) allowed Russia to repay its debts, accumulate almost $600 billion in foreign-currency reserves, and join the leading emerging economies. 
A decade after the 1998 crisis brought Russia to its knees, its leaders boasted that the country could weather the 2008 financial crisis. 
Given Russia’s economic fundamentals, Putin’s diminished popularity might appear surprising. 
The International Monetary Fund’s forecast of 4% growth in 2011 and subsequent years puts Russia well behind China and India, but far ahead of average growth rates in the rich G-7 countries. 
Moreover, Russia’s budget will be balanced as long as oil prices remain above $110 per barrel. 
Longer-term trends have also improved. 
Rapid demographic decline has been brought to a halt since the turn of the century (a time when coffins outnumbered cribs by seven to four), as generous government subsidies for a third child have boosted the fertility rate from its 1999 low of 1.16 children per woman to 1.58 in 2010. 
That is still far below the replacement rate of 2.1, but higher fertility, together with successful measures to reduce male mortality, has slowed the pace of population shrinkage. 
But Russia remains essentially a “rentier state” – that is, a state whose primary source of revenue is rent – in this case, oil and gas – rather than taxation, which thus keeps demands for political representation at bay. 
Instead, the state is the target of political entrepreneurs who strive to capture it in order to capture the rents that it controls. 
Russia has most of the usual features of rentier states: autocracy, weak political and judicial institutions, arbitrary governance, lack of the rule of law, little transparency, restraints on freedom of expression, widespread corruption, cronyism, and nepotism. 
Also common to rentier states are short investment horizons, vulnerability to commodity-price volatility – euphoria when they surge, crisis when they collapse – and an underdeveloped and uncompetitive manufacturing sector. 
Today’s Russia is a gigantic reservoir of raw materials, and its economy relies heavily on commodities – mining and drilling. 
Russia is the world’s largest oil and gas exporter, sitting on more than 25% of total proven gas reserves. 
Those commodities account for over two thirds of the country’s export earnings, and are the primary source of state revenue. 
The impact on governance is all too predictable. 
In 2011, Transparency International’s “corruption perception” index ranked Russia 143rd out 182 countries, on a par with Nigeria, and 182nd out of 210 for “control of corruption,” one of the World Bank’s worldwide governance indicators. 
Regarding the rule of law, there has been only minimal improvement, with Russia ranked 156th. 
In the meantime, infrastructure is crumbling even within the vital extractive industry, while manufacturing is internationally uncompetitive. 
The Russian armaments industry has lost its strong position with India and China, once its two main customers. 
Despite the hype about nanotechnology and a “Russian Silicon Valley” at Skolkovo, spending on Rampamp;D is a mere one-fifteenth of the US level, and one-quarter of China’s. 
As a proportion of GDP, it has been halved since the early 1990’s, and is now just 1% of GDP. 
Scientists and researchers, once the pride of the Soviet Union, have vanished, often lured by more rewarding opportunities, at home or abroad. 
Indeed, Russian universities are almost absent from global rankings: only two appear in the Shanghai University Top-500 list and, at the very bottom, among the 400 rated by The Times Higher Education Supplement. 
Russia also fares poorly – 63rd – in the Global Competitiveness Index released by the World Economic Forum, well behind all developed countries and even many developing countries. 
The same holds for innovation capacity and technology. 
Yet there are hints of hope. 
Russia no longer lags behind the developed world in Internet use, which has provided space for unregulated speech, allowing users to circumvent the official – and overwhelmingly pro-Putin – news media. 
Moreover, after lengthy negotiations, Russia recently reached an agreement with the World Trade Organization to join, implying the need to comply with all relevant obligations regarding transparency and trading rules. 
But comprehensive transformation of Russia’s economy remains doubtful. 
One of Russia’s leading independent economists, Sergei Guriev, the rector of the New Economic School in Moscow, soberly noted in 2010 that 
“meaningful reforms look highly unlikely – for the simple reason that they would harm the interests of Russia’s ruling elites. 
In any resource-rich and undemocratic country, the political class and the business interests that surround it have little or no incentive to support stronger property rights, the rule of law, and competition. 
Indeed, such structural changes would weaken the elite’s grip on political and economic power. 
The status quo – opaque rules, arbitrary decision-making, and lack of accountability – allows insiders to enrich themselves, especially by obtaining a share of commodity-export revenues.” 
When Russia marks the twentieth anniversary of the collapse of the Soviet Union this Christmas, it will have much to celebrate. 

Putin’s Deadly “Great Game” 
President Vladimir Putin will visit Ukraine, the scene of his biggest foreign policy blunder, this weekend. 
Given his myopic actions at home, where he seems increasingly incapable of dealing with any institution that has any degree of autonomy, this seems unlikely. 
For example, Putin recently abolished elections in Russia’s provinces. 
From now on, presidential appointees will rule a country that is as complex and multi-national as the EU or the US. 
That’s not a recipe for sophisticated thinking. 
Indeed, elected officials in Russia have become an endangered species. 
The Kremlin black art of manipulating elections by deception and other means – called “political technology” by locals – will now be used only in other countries’ elections in, as these are the only real elections the Kremlin has to worry about, so neutered have Russia’s own votes become. 
The justification for canceling elections in Russia is the need to fight terrorism – the end that now justifies all means. 
How did it happen that every contemporary problem, particularly in Russia, seems to have been reduced to terrorist attacks and counter-terrorist operations? 
Poverty, racism, and ideological legacies are just as visible now as they were three or thirteen years ago. 
Terrorism has not exacerbated them. Security forces have not helped resolved them. 
On the contrary, the “double terror” induced by terrorism and counter-terrorism distracts public attention from those problems that, as some of us still remember, produced terrorism. 
Palestine and Chechnya, two sites of pain and terrorist infection, have not healed. 
Their national independence is now more elusive than it was before the terrorist era began. 
The past was, of course, far from perfect, but governments and peoples everywhere appeared more capable of tolerating failure. 
When battles were lost, talks began. 
These talks eventually resulted in the formation of respected countries, from Italy in the nineteenth century, to India in the middle of the twentieth century, to Eritrea near that century’s end. 
Try to imagine Putin as Russia’s leader in 1920, when Poland gained its independence from Russia, or in 1991, when Georgia did. 
Would he ever have engaged in peace talks? 
Nowadays, Rudyard Kipling’s imperialist Great Game is decomposing into a vicious circle. 
Security forces respond to the growth of terrorism. 
The growth of terrorism responds to the strengthening of security forces. 
The heavier the hand, it seems, the stronger the resistance; the stronger the resistance, the heavier the hand. 
Real issues are buried beneath the crimes of the terrorists and the mistakes of the security forces. 
With every turn of the circle, both parties, terrorists and security forces, grow closer to each other. 
Their common interest is continuation of the game. 
Opposing parties use the same weapons, develop comparable tactics, and preach increasingly similar ideals. 
So it goes, until the rules of the game change. 
But why would they? 
In Russian history, there is an analogous situation. 
At the beginning of the twentieth century, socialist revolutionaries led by Evno Asef embarked on a series of terrorist attacks against state officials. 
Somewhere along the line, Asef became a double agent. Sometimes he killed an official who was not on good terms with the police. 
At other times, the police simply did not want to betray their precious agent. 
Manipulating each other, the terrorists and the security guys became indistinguishable. 
Call this the “Asef” effect. 
Once such an alliance was shaped, nothing but revolution could stop it – in this case, the Bolshevik revolution. 
So the game must be stopped, if only for the survival of innocent bystanders – the rest of us. 
If you do not see humanity in your counterpart, you will not talk to him. 
You will either use him or kill him. 
So the “other” is elevated to the very center of high politics. 
This is the Asef effect in action. 
The Bolsheviks did it to the bourgeoisie. 
The Nazis did it to the Jews. 
But classical empires learned not to do it to colonized people. 
Over time, they invented fascinating ways to control their subjects, combining education, bribery, and force. 
Learning the great art of Orientalism, the classical empires knew how to keep talking while keeping their distance. 
Abolishing democracy in Russia’s provinces, including Muslim-populated regions such as Tatarstan and Dagestan, is a deadly act. 
Civil peace in these areas was one of the few accomplishments of which contemporary Russia could be proud. 
So is Putin suicidal? 
Unfortunately not. 
He owes his career to Chechnya, as Bush may owe his presidency to Iraq. 
But Chechnya, obliging as it is, is small, poor, and idiosyncratic. 
Converting vast areas of Russia into new Chechnyas, Putin and his clique calculate that – sooner rather than later – they will play out their games of terror and security with millions of Muslims in the oil-rich plains of Eurasia. 

Putin's Dictatorship of Law Begins Lawlessly 
BOSTON: Wide agreement exists among Russian intellectuals as well as foreign observers that one of the most important – if not the most important task – facing post-Soviet Russia is establishment of the rule of law, the foundation of democracy and a free market economy. 
Yet doubts persist whether President Putin and his associates realize this fact. 
Some of their actions and pronouncements suggest that in their pursuit of a "strong state," they may be willing to sacrifice law to political expediency. 
During nearly all her history, Russia was a stranger to law as a principle binding ruler and ruled. 
Until the beginning of the twentieth century, tsars knew no legal constraints, such as impeded the absolutism of West European sovereigns. 
They did not have to respect private property in land because until 1785 they owned all the land. 
Nor did they have to honor the rights of the nobility, inasmuch as until the middle of the eighteenth century all nobles were their servants. 
The peasants, who made up nine-tenths of the population, consisted overwhelmingly of serfs of the Crown or the gentry and as such enjoyed no legal rights whatsoever. 
The first Russian legal codes were compiled in the 1830's and the first effective courts appeared in the 1860's. 
Law, of course, did exist but it did not serve to protect people from the arbitrary authority of government: instead, it was an instrument of administration. 
Suffice it to say that tsarist officials could not be sued without the permission of their superiors. 
And as for private persons standing up to the government in court, the idea was utterly inconceivable. 
The traditions of law were, therefore, very shallow in Russia when the Bolsheviks seized power. 
The seven decades of their dictatorship blighted the little bits of a law-based society that had taken root root. 
Lenin defined his "dictatorship of the proletariat" as "power that is limited by nothing, by no laws, that is restrained by absolutely no rules, that rests directly on coercion." 
Such, indeed, it was. 
President Putin has asserted that in contemporary Russia law will be a "dictator". 
But some evidence suggests that he conceives law in the traditional Russian sense, that is, not as a principle binding equally the state and its citizens, but as device by means of which the state promotes its own interests. 
One illustration of this attitude is the recent raid on the headquarters of the Media-Most conglomerate whose television and radio stations, as well as newspapers, have been critical of the Chechnya campaign. 
The raid – by heavily armed and masked men! – was allegedly carried out to investigate unlawful actions by the company's personnel. 
But it was a highly unlawful procedure in itself, for which no apologies have been offered as of yet. 
Another instance has to do with Putin's effort to rein in the governors in charge of Russia's 89 provinces. 
During the past decade these elected officials have acquired the powers of feudal barons and in some cases act in clear violation of the constitution. 
To bring them to heel, Putin has appointed seven officials (mostly ex-generals and KGB men) resembling tsarist Governors-General who will serve as his agents. 
In announcing this move, Putin added, ominously, that he would "dismiss" governors who were found to act have acted unlawfully. 
This statement itself was unlawful because, according to Russia's constitution, dismissals of duly elected officials should occur only by virtue of court orders. 
Perhaps this was a slip of the presidential tongue. 
But a faux pas of this kind, if that is what it was, reflects a mentality that places power over law. 
A third illustration concerns Moscow's recent defiance of the United Nations war crimes tribunal by hosting a visit of Yugoslav Defence Minister, Dragoljub Ojdanic. 
Mr Ojdanic was indicted a year ago by the Hague-based tribunal, a court established with Moscow's assent, for crimes against humanity in Kosovo. 
As a member of the UN Security Council, Russia was duty-bound to arrest him. 
Yet it treated him as an official guest, granting him meetings with the Defense Minister and chief of staff of the armed forces. 
The trouble is that Vladimir Putin, although a graduate of Saint Petersburg University Law School, served many years in the KGB and surrounds himself with veterans of the KGB, an institution whose main domestic function was repressing dissent. 
The mind-set of these people is geared to achieving their objectives without regard to legal niceties. 
Such a background is difficult to overcome, especially if the new mission is the establishment of a "strong state." 
It bodes ill for Russia which has yet to learn that political strength derives not from riding roughshod over the civil rights of the citizenry but from creating, through strict observance of the law, a sense of shared interest between government and people. 

Putin's Gold-Medal War 
LONDON – What does the “Olympics War,” otherwise known as Russia’s invasion of Georgia, really mean? 
The war itself was, of course, predicable and predicted. 
Its results are equally clear. 
First, Prime Minister Vladimir Putin remains in unambiguous charge in Moscow. 
He may play a “good cop-bad cop” routine with President Dmitri Medvedev. 
But the bad cop, Putin, is the real boss. 
Second, Putin cannot stand Georgian President Mikheil Saakashvili, who admittedly is not an easy man to like. 
The Russian thought the Georgian had become too big for his boots. 
He waited for Saakashvili to go a step too far, and then came down on him and his poor country like a ton of bricks. 
Third, Russia has been stirring up trouble in South Ossetia and Abkhazia for years. 
Moscow wants to keep Georgia weak. 
It plays the same game in Transdniestria to undermine Moldova. 
If an outsider had tried similar tactics in Chechnya, the Russians would rightly have howled with rage. 
Fourth, today’s Russian leaders, like nineteenth-century Czars, want a sphere of influence around their borders. 
So far as they are concerned, the countries that were once part of the Russian empire in the Soviet Union should enjoy only limited sovereignty. 
The message being transmitted from Georgia to Ukraine and the Central Asian Republics is heard very loudly. 
Russia has in particular opposed its neighbors joining NATO. 
What is NATO against, the Russians ask? 
Where is NATO’s front line? 
Are we Russians really the enemy? 
If so how should we react? 
Russia’s actions have had the reverse effect to what was presumably intended; the invasion of Georgia has made a powerful case for further NATO enlargement. 
Fifth, Georgia itself provides an important link to Caspian energy for all those Europeans who do not want to be totally dependent on pipelines controlled by Russia. 
Indeed, Georgia is Russia’s choke point in its policy of using oil and gas as strategic foreign policy weapons, which it has done repeatedly. 
The Swedish Defense Research Agency has reported that out of 55 deliberate gas supply interruptions, explicit threats, or coercive price actions by Russia since 1991, only 11 had nothing to do with politics. 
America has reacted strongly – at least verbally – to Russia’s attack on its neighbor, in which the Russian army moved in first and made things safe for the Russian-backed unofficial South Ossetian militias to burn and pillage Georgian property. 
But America is not in a strong position to go any further. 
Its moral authority has been compromised in the Bush years, it cannot put more troops on the ground to defend Georgian sovereignty, and, even if it could, doing so would escalate the crisis. 
America’s position is further weakened in the absence of a strong and united European response. 
But you can forget about seeing that. 
Russia knows that when it comes to conducting a serious foreign and security policy, Europe is all mouth. 
Russia has pushed Europe around for years on energy issues, cutting bilateral deals with the bigger countries and opposing efforts to create a common European energy policy. 
Europe certainly needs Russian gas. 
But Russia needs European consumers, and sooner rather than later it will seek more European investment in energy exploration and extraction. 
No sensible person in Europe wants to revive the Cold War. 
But it is not the European Union that is being provocative. 
It is not Germany, France, and Italy that are invading their neighbors. 
We Europeans seem to have forgotten our history. 
There were other times when we have stood by while a militaristic European power insisted that it had the right to intervene wherever it wanted to advance the interests of those who claimed shared ethnicity from the Baltics to the Caucasus. 
French President Nicolas Sarkozy claims to have brought peace to Georgia. 
Yet it looks suspiciously as though the deal that ended the fighting will leave Russian troops in that truncated country for years. 
So what, exactly, will Europe do? 
Perhaps initially Europeans should be cautious. 
But I doubt whether anything tougher than strongly worded communiqués will ever be employed. 
Will we stop talking about our allegedly shared values with Russia? 
Will we press the pause button on further discussion of how to integrate Russia fully into the international community? 
Will we cut off some of our contacts with Russia, reconsider its membership of the G8, or delay its entry to the WTO and OECD? 
Will we put to the side for the time being negotiations on a partnership and cooperation agreement between the EU and Russia? 
I suspect that the answer to each of these questions is a resounding “no.” 
It will be business pretty much as usual as Europeans prepare cheerfully in the years ahead for the Winter Olympics in Sochi, just up the road from the Russian missiles and tanks on Georgian soil. 
Meanwhile, Europeans will continue to talk about their crucial role in world affairs. 
It is enough to make even the cynical shake their heads in disbelief. 
You could not make it up. 
Europe's approach is weak and will cause bigger problems in the future. 
So Putin wins the gold medal in his favorite event - bullying his smaller neighbors. 

Putin’s History Lessons 
CAMBRIDGE – Soviet ideology was always about the future. 
By contrast, today’s official Russian ideology seems to be focused squarely on the past. 
Prime Minister Vladimir Putin’s recent article for the Polish newspaper Gazeta Wyborcza – written to commemorate the 60th anniversary of the Nazi invasion of Poland – expresses his determination to make twentieth-century European history a major part of the Russian government’s business. 
That article reflects the deep, unresolved problems of Putin’s era: the inability to distinguish between the Soviet past and the Russian present; an unscrupulous mix of political conservatism and historical revisionism; and indifference, bordering on incomprehension, with regard to the key values of democracy. 
In his article, Putin did not mourn the collapse of the USSR, though he previously called it “the greatest catastrophe of the twentieth century.” 
Indeed, he even praised the democratic movements that buried the Soviet Union and its sphere of influence, and he expressed no sympathy for the twentieth century’s revolutions, which he called “deep wounds” that humanity inflicted on itself. 
What really worries Putin and his historical advisers is the memory of World War II. 
They regard the Soviet victory over Nazi Germany as the highest achievement of the state and nation that they inherited from the USSR. 
They also see this victory as the main counter-weight to the memory of the USSR as a reign of brutal, unjustified violence. 
Not that Putin’s version of history denies this memory altogether. 
This summer, he publicly instructed his education minister to include passages from Aleksandr Solzhenitsyn’s The Gulag Archipelago in the high school curriculum. 
Rather, what concerns Putin is the balancing of WWII and Stalinism in Soviet history. 
Calling for a “contextual” and “causal” view of history, he acknowledges the Stalinist terror but interprets it as a response to the extraordinary need to defeat Nazism. 
Putin summarizes his understanding of the scale of the war by recalling the loss of “27 million lives of my compatriots.” 
That number has grown over the years, as Soviet officials broadened the definition of wartime deaths to mean total “population loss,” rather than direct military casualties. 
Official estimates of Soviet deaths in WWII thus rose from seven million (the figure put forth under Stalin) to 20 million (Khrushchev) to 26.6 million (Gorbachev), with civilian deaths accounting for at least two-thirds of Putin’s estimate. 
Unfortunately, Putin does not explain whom he counts as his compatriots. 
If he meant those who lived within Russia’s contemporary borders, the number would have been much lower. 
Instead, he includes all citizens of the USSR who died during the war, including millions of Ukrainians, Belarusians, and others. 
And, when the USSR annexed the Baltic countries, Königsberg, parts of Poland, Finland, Moldova, and Japan, their citizens, too, became Soviet compatriots. 
Moreover, because Putin’s “contextual” history subordinates Soviet-era suffering to the purpose of fighting the Great Patriotic War, his number mixes those who died in battle fighting for the USSR with those whom the Soviets killed through mass murder, deportation, and forced labor. 
By this logic, one could also reclassify the victims of the terror, collectivization, and famine of the 1930’s in order to boost the number of Hitler’s casualties in the USSR. 
Putin connects two events that triggered WWII, the Munich Agreement of 1938 and the Molotov–Ribbentrop Pact of 1939, in one causal construction. 
Both acts of collusion with Nazi Germany were immoral mistakes, writes Putin, but the latter was merely a response to the former. 
To be sure, Britain’s Neville Chamberlain and France’s Edouard Daladier signed a shameful treaty with Hitler and Mussolini in Munich. 
But when Hitler breached the treaty, both Chamberlain and Daladier lost popular support, and, by the start of WWII, neither was still in office. 
The dictators remained, however, Molotov and Stalin among them. 
Moreover, while the Munich Agreement cynically blessed Hitler’s dismemberment of Czechoslovakia, it was a public document that meant what it said. 
But the truly important part of the Molotov-Ribbentrop Pact was its Secret Protocols, which divided Europe into two imperial domains, Stalin’s and Hitler’s, without the consent – or even the knowledge – of the nations consigned to them. 
Molotov, who remained in power throughout the war and until 1956, denied the existence of the Secret Protocols until his death 30 years later. 
Democracies make shameful mistakes, but they eventually correct them, or at least apologize for them. 
And they dethrone those who got them into trouble. 
It is wrong, and even immoral, to equate democratic and dictatorial practices. 
But this is the new Russian equation. 

Putin’s Imperial Dreams 
To divide a people in order to conquer them is an immoral strategy that has endured throughout recorded history. 
From Alexander the Great to Stalin the Cruel, variants of that strategy have been used to keep nations in thrall to the will of an emperor. 
We are now seeing this strategy at work again as President Vladimir Putin stealthily seeks to restore Kremlin supremacy over the lands treated as “lost” when the USSR imploded in 1991. 
In so overplaying his hand in Ukraine’s recent election, however, Putin clearly revealed to the world his neo-imperialist designs. 
In the wake of the euphoric mass protests in Kyiv, Russia’s president has since said that he can work with whatever government Ukraine’s people choose. 
These are mere words, for in mind and action Putin does not want anyone to rule Ukraine that he has not put in place. 
No price is too high to achieve that end, so traditional threats about dividing Ukraine have been used. 
I speak as someone who has been on the receiving end of Russian imperialist designs. 
When Lithuania and then the other Baltic States – Estonia and Latvia – which were occupied by Stalin early in WWII, seized their opportunity for freedom in 1990-91, the Kremlin did not sit on its hands. It knew that the rest of Russia’s colonies – the so-called “Soviet republics” – would want to follow the ungrateful Baltic countries into freedom. 
They began to foster and incite splits and confrontations. They stoked supposed resentments among different national or ethnic communities based on Lenin’s idea that even small groups of villages could demand territorial autonomy. 
Note the word “territory.” 
The demands were never about normal cultural autonomy as a means of continued identity and supposed self-protection. 
Only territorial autonomy, it seems, would do. 
This way, minorities become easily manipulated majorities. 
Divide enough, stoke enough resentment, and a nation becomes nothing more than a ruined society within a national territory. 
Arm some of these manufactured minority structures so that they can demand autonomy at the barrel of a gun, and you get the kind of chaos the Kremlin can use to reassert its control. 
Fortunately, Lithuanians – as well as Estonians and Latvians – understood this game. 
It failed also in Crimea when Russia sought to deploy its old strategy of divide and rule there in 1991. 
But these defeats did not inspire the Kremlin to abandon the basic strategy. 
On the contrary, Russia’s imperial ambitions persisted, and persistence has paid off. 
Around the Black Sea, Russia has called into being a series of artificial statelets. 
Georgia and Moldova have both been partitioned through the creation of criminal mini-states nurtured by the Kremlin and which remain under its military umbrella. 
Indeed, in the very week that Putin was meddling in Ukraine’s presidential election, he was threatening to blockade one of those statelets, Georgia’s Abkhazia region, after it had the temerity to vote for a president the Kremlin did not like. 
Moldova has been particularly helpless in the face of the Kremlin’s imperial designs. 
A huge Russian garrison remains deployed in Transdneister, where it rules in collaboration with local gangs. 
Proximity to this lawless territory has helped make Moldova the poorest land in Europe. 
To the east, Armenia and Azerbaijan were pushed into such bloody confrontation at the Kremlin’s instigation that the only way for them to end their ethnic wars was to call in the Russians – as in Transdneister – for a kind of “Pax Ruthena.” 
Now Ukraine’s people may face a similar test after supporters of Viktor Yanukovych threatened to seek autonomy should the rightful winner of the country’s presidential vote, Viktor Yushchenko, actually become president. 
Who can doubt that the hand of Russia is behind this? 
Would Moscow’s mayor Yuri Luzkhov, a loyal creature of Putin, have dared to attend the rally where autonomy was demanded without the sanction of the Kremlin’s elected monarch? 
Indeed, Putin openly claims this part of Ukraine as a Russian “internal matter.” 
It is to be hoped that Ukraine’s Russian-speaking citizens, having witnessed the economic despair – and sometimes the bloodshed – caused by the Kremlin’s manufactured pro-autonomy movements, will realize that they are being turned into Putin’s pawns. 
The test for Viktor Yushchenko and his Orange revolutionaries, as it was for Lithuania’s democrats in 1990-91, is to show that democracy does not mean that the majority suppresses any minority. Lithuania passed that test; 
I am confident that Viktor Yushchenko and his team will do so as well. 
But Europe and the world are also being tested. 
Russia is passing from being the Russian Federation of Boris Yeltsin to a unitary authoritarian regime under Vladimir Putin and his former KGB colleagues. 
Europe, America, and the wider world must see Putin’s so-called “managed democracy” in its true light, and must stand united against his neo-imperialist dreams. 
The first step is to make Russia honor its binding commitment to the Organization for Security and Cooperation in Europe, as well as to the Council of Europe, to remove its troops from Moldova and Georgia. Any plans to “defend” Yanukovych and the eastern part of Ukraine by military force must be confronted. 

Putin’s Last Stand 
WASHINGTON – On April 2-4, NATO will hold its biggest summit ever in Bucharest, the capital of its new member, Romania. 
Incredibly, NATO has invited its fiercest critic, Russian President Vladimir Putin, to attend. 
For the first time since 2002, he will. 
His presence is an embarrassment to NATO, but an even greater disgrace for Russia. 
The two biggest issues in Bucharest will be whether to invite Albania, Croatia, and Macedonia to join NATO, and whether to offer applications to Ukraine and Georgia to start so-called “membership action plans.” 
These questions should be decided by NATO’s members, not outsiders. 
In February 2007, Putin, in an anti-Western tirade delivered in Munich, declared: “I think it is obvious that NATO expansion does not have any relation with the modernization of the Alliance itself or with ensuring security in Europe. 
On the contrary, it represents a serious provocation that reduces the level of mutual trust.” 
So Putin’s views about NATO are clear. 
He will scandalize the summit by seeking to intimidate the former Soviet clients in the room. 
Such an aggressive attitude benefits a country’s foreign policy only up to a point – one that Putin passed long ago. 
Initially, he acted as an able diplomat and accommodator, but since his Munich speech, Putin has begun uniting the West against Russia. 
In his speech on May 9, 2007, commemorating Russia’s victory in World War II, Putin compared the United States with Nazi Germany: “We have a duty to remember that the causes of any war lie above all in the mistakes and miscalculations of peacetime, and that these causes have their roots in an ideology of confrontation and extremism. 
It is all the more important that we remember this today, because these threats are not becoming fewer, but are only transforming and changing their appearance. 
These new threats, just as under the Third Reich, show the same contempt for human life and the same aspiration to establish an exclusive dictate over the world.” 
Serious politicians do not speak like that. 
These are the rants of Putin’s few remaining friends – Venezuela’s Hugo Chavez, Iran’s Mahmoud Ahmadinejad, and Belarus’s Alyaksandr Lukashenka. 
At home, awareness is rising that Putin is damaging Russia’s interests by insulting and intimidating everybody. 
He is isolating his country among the world’s pariahs; worse yet, he has achieved little. 
When Putin became president in 2000, he named accession to the World Trade Organization as his foreign policy priority. 
He failed, because he gave in to petty protectionist interests, imposing a timber embargo against Finland and Sweden, a fish embargo against Norway, and various agricultural embargos against Lithuania, Ukraine, Moldova, Georgia, and others. 
Russia’s foreign policy is focused on the interests of its state-dominated corporations, notably Gazprom, which has concluded agreements with many foreign countries and companies for monopolistic deliveries. 
But a Gazprom pipeline typically costs three times as much per kilometer as a similar Western pipeline, because of “leakage” (kickbacks and waste). 
The primary purpose of Russia’s foreign policy seems to be to tap Russia’s state companies for the benefit of Kremlin officials. 
But customers do not trust suppliers who cut deliveries, raise prices unpredictably, expropriate competitors, and let production decrease in the way Gazprom and Russia’s other state companies have done. 
As a result, Russia’s gas exports to Europe have started declining. 
Putin��s foreign policy also is evidently intended to whip up populist chauvinism. 
Beating up on foreigners may boost his authoritarian rule, but this, too, has a price. 
Not only the US and Europe, but all former Soviet republics feel alienated by Putin’s aggressive tactics. 
Many are seeking to shield themselves from Russia’s capricious embargos – for example, by seeking alternative energy supplies. 
Arguably, Russia has improved its relations with China under Putin, but at the cost of acceding to China’s demands for two big disputed islands over which the two countries fought in 1969. 
Putin’s apparent aim was to secure financing for Rosneft’s purchase of the Yugansk oil field, which was part of the Yukos confiscation. 
Yet China, too, is wary of Putin, and has been sending warm signals to leaders of former Soviet republics, such as Ukraine’s Yuliya Tymoshenko. 
Russia’s nationalists are also outraged by Putin’s foreign policy, because it has alienated former Soviet republics and weakened Russia’s military. 
The nationalist Council for National Strategy published a devastating report on the decay of Russia’s military under Putin. 
Russian military procurement, it claims, has plummeted. 
For example, only three new military aircraft have been purchased since 2000. 
True, armaments costs have risen sharply, but only because Putin’s KGB friends, who monopolize weapons production, have stolen inordinate amounts. 
Yet, despite this spending shortfall, Putin seems obsessed with making pointless and provocative gestures, such as resuming long-range nuclear bomber flights off the American coast. 
In the early 1990’s, many westerners and Russians wanted Russia to become a full-fledged member of both the European Union and NATO, on the condition that Russia became a full-fledged democracy. 
Unfortunately, the West never made that offer, and Russian democracy went astray. 
Russia should be given a new chance, but only after Putin has departed. 
Russia is no enemy of the West; 
Vladimir Putin is. 


Putin's Neo-Imperial Ambitions 
As Vladimir Putin's re-election approaches on March 14, it is time to take stock of his presidency. 
The biggest thing to happen on his watch is that Russia stabilized itself. 
With stability, the face of 21st century Russia was revealed. 
What much of the world sees in Putin's Russia is a neo-authoritarian regime based on a state-directed capitalism interlinked with the ruling bureaucracy and flanked by an immature civil society. 
In terms of raw power, Russia is clearly inferior to the former Soviet Union. 
This Russia is neither capable, nor desirous of, full integration with the West. 
But weakened, as it no doubt is, Putin's Russia still regards itself as a great power. 
The ruling elite rejects transforming Russia into a junior partner of the US or an unimportant member of the West. 
As far as Russia's elite is concerned, Realpolitik in the 21st century is a fusion of geopolitics and geo-economics, with military might thrown in. 
Ideology and values play little role. 
Thus, Putin does not view closer relations with the West as an ideological imperative, but as a resource for Russia's economic modernization. 
In relations with the US and EU, Putin wants to boost Russia's status. 
This is what his modernization policy aims to achieve. 
Russian leaders no longer expect real assistance from the West. 
Self-help has replaced the discredited notion that foreign countries will come to Russia's rescue. 
Foreign investment is still viewed as desirable, but no one attaches primary importance to attracting it anymore. 
Russia, it is widely believed, can rely on domestic capital. 
The same sort of thinking holds true in military/strategic affairs. 
Because America only respects strong partners, Russia will modernize the components of its national power that make it comparable to the US, in particular its nuclear arsenal. 
Overly close contacts with NATO (let alone membership) would deprive Russia of strategic independence. 
Of course, confrontation with America must be avoided. 
But, because an alliance of equals is impossible, a flexible combination of limited partnership and local rivalry seems the most likely course. 
Russia's leaders clearly recognize the country's true current condition, so they accept the need to concentrate on vital interests. 
They remain convinced that Russia is a great power, but one that for now must act primarily as a regional one. 
The major objective of this strategy in the near future will come down to restoring Russian influence in the states of the former Soviet Union. 
Call this strategy "Operation CIS." 
The objective is not to revive the Soviet Union. 
All CIS countries - with the possible exception of Belarus - will retain their sovereignty. 
When President Alexander Lukashenko departs, Belarus may fold into Russia as East Germany was absorbed by West Germany in the early 1990's. 
Russia's transformation into an economic magnet for the CIS will be the major force of renewed Russian strategic influence. 
In exchange for economic support, the Kremlin will demand political loyalty. 
The criteria for that loyalty will be fairly simple - participating in the security framework headed by Russia and eliminating the "excessive" influence of third parties (the US, EU, China, or Turkey) within CIS nations. 
Agreements with the CIS ruling elites will become the main instrument for implementing "Operation CIS." 
This will require painstaking efforts to promote pro-Russian groups and gradually weaken and neutralize pro-Western circles. 
This task will be lengthy, but the similarities between the CIS political and economic systems with what exists in Russia will make it easier. 
Besides, in most cases, Western integration is impossible for these CIS states. 
Many elites in these countries, because they seized power and became rich rapidly, feel insecure. 
Russia's support on promising terms may attract them, particularly because the matter of forfeiting sovereignty will not be raised. 
But Russia will encounter problems in pursuing this strategy. 
Putin's attempt in 2003 to have President Bush recognize Russia's "special interests" in the former Soviet Union failed, just as Yeltsin's bid to gain that recognition failed a decade earlier. 
Unlike Yeltsin, however, Putin won't give up and expects that he can take advantage of the fact that America will be too busy fighting terrorism and WMD proliferation, rearranging the Middle East, and containing China to object too strongly. 
Russian activism in the CIS will also bring it into direct rivalry with the EU. 
If the Kremlin uses force to establish its regional hegemony, Europe may again see Russia as a security threat, which would bring about a renewal of the Cold War/NATO policy of containment. 
Likewise, China might oppose "Operation CIS." 
Until recently, China feared that Russia's withdrawal from the region would create a vacuum that the US would fill. 
Viewing the region as its strategic backyard and a source of energy, China is now expanding its influence. 
Consolidation of Russian strategic power would limit the scope of China's sway. 
But if Russia acts as a reliable rear guard and provider of energy and military hardware, China is unlikely to seriously object to expanding Russian influence. 
In pursuing these goals, Russia must remember that imperialism is expensive and will incite confrontation with the West. 
It must also remember that for the CIS countries, sovereignty primarily means independence from Russia. 
So the Kremlin should strive for voluntary recognition of its leadership based on economic and social achievements. 
True leaders, after all, lead by example. 

Putin's Puppies and Russian Democracy 
When overseeing military exercises from aboard a nuclear submarine near Scandinavia, Vladimir Putin announced that Russia had developed a new missile system, the finest in the world. 
It was not his most convincing moment. 
Three older missiles, launched in his presence, failed to reach their targets on Kamchatka. 
The submarine that Putin was on resembled the Kursk, which exploded during a similar military exercise in 2000, killing 118 sailors. 
After the Kursk catastrophe, Putin was asked what really happened. 
"It sank," he replied, with a somewhat macabre smile. 
In a recent joke, an interviewer asks Putin what happened to his favorite dog's puppies, whose birth he proudly announced during last December's parliamentary elections. 
"They sank," he answers. 
Russian democracy is almost as young and blind as Putin's puppies - but much poorer. 
Low-income countries can develop democracy, but they have a tough time maintaining it. 
India, which is both poor and democratic, is a happy exception to this rule. 
Will Russia, whose political legacy is not British but Soviet, be another? 
Countries with per capita incomes close to the current Russian level sustain democracy for 15-20 years on average. 
Russian democracy, born in 1991, may be nearing its expiration date. 
Putin's first term in office proved to be an economic success and a political failure. 
High oil prices kept Russia's economy - and common people's income ­- growing rapidly. 
(Europeans need not be envious: growth is quicker when it begins low; think again about puppies.) 
Russia is a rich country with a poor population, and redistribution schemes work well in such conditions. 
But they will not work for long. 
Putin promises to double Russia's GDP by 2010 - an ambitious aim, and success would improve democracy's prospects. 
But few of Putin's promises have been fulfilled. 
The Chechen war drags on, bringing new victims every month. 
Foreign students are killed because of growing racism. 
The population is declining, but immigration is blocked for ideological reasons. 
Military reform has yet to begin. 
Independent media are practically extinct. 
Russia's international position is worse than ever. 
Turkey and Ukraine aspire to join the European Union; 
Russia does not. 
Putin counts on economic growth as the basis for his personal popularity. 
But this is a bad bet. 
Private companies, not the state, generate Russian growth. 
Practically everything that a Russian citizen can find in a supermarket, including the supermarket itself, is produced or imported by private firms. 
Oil, the main engine of growth, is privately controlled. 
In the late 1980's, Mikhail Gorbachev announced that Russian oil was practically exhausted. 
Now Putin claims credit for making Russia the world's leading producer, ahead of Saudi Arabia. 
This is indeed a success. 
The hydrocarbons sector secures Russian growth, undermines the power of Arab producers and OPEC, and thus promises a decrease in oil prices. 
The problem for Putin is that this success was achieved not by the Russian state, but by private enterprises. 
By creating independent courts, securing property rights, and collecting fair taxes, the state is crucial for making the environment favorable for business. 
But to attribute the performance of Russian business to the efforts of the state is the same as attributing a writer's work to his editor, or even to his censor. 
Many Russian industrialists, such as the founders of Yukos Oil, oversaw their businesses' stunning growth. 
Now some of them are in jail, in exile, or frightened out of the industry. 
In the meantime, economic growth, which is vital for an impoverished but ambitious population, was the central issue of the presidential campaign. 
You cannot deceive people about growth; they feel the weight of their pockets better than anyone else. 
But you can manipulate their understanding of it: who are the authors of growth, the Khodorkovskys or the Putins? 
Growth, it seems, is attributed here not to those who produce it, but to those who punish it. 
The business of Putin and his coterie is politics. 
Trained as lawyers or even as philologists, but with their formative experience in the security services, these people introduced a concept they call "political technology." 
These "technologies" range from producing decoy political parties and legally persecuting opponents to publishing fake polls and falsifying elections. 
Of course, electorates have been cheated, bribed, and blackmailed for as long as there have been elections. 
What is fairly new, at least for Russians, is that these "technologies" are efficiently coordinated from the top of the presidential administration. 
The most successful recent example was the invention of the political party "Motherland," which took protest votes away from the liberal parties as well as from the Communists. 
Created by the presidential administration two months before the December parliamentary elections, "Motherland" split and practically collapsed two months after its amazing victory. 
Russian political experts, pollsters, and consultants ascribe every success or failure in Russian politics to "political technologies." 
Their profession has become so important in recent years that there is now a special "Day of the Political Consultant" in Russia every February 25. 
This year's day saw Putin sack the then Prime Minister, Mikhail Kasyanov - an architect of Russia's pro-business reforms - as if to celebrate the overriding power of "political technology." 
This manner of governance bodes well neither for economic growth nor democracy in the long term. For when you drown puppies, they sink. 

Putin's Soft Authoritarianism 
A joke making rounds in Moscow nowadays goes like this: Americans didn't know who their President was two months after their last presidential election, but we Russians knew who was going to occupy the Kremlin two years before our recent election. 
Russia's political class has ample grounds to be slyly and cynically proud of the system they invented - it guarantees the result it wants. 
Despite its lack of drama, intrigue, and competitiveness, the election was important not because Russia's political class renounced all the key elements of authentic democratic electoral procedures, but because it closed the chapter on Russia's liberal democratic experiment, legitimizing Putin's new Russian political system. 
What is the nature of the new system? 
Is it democracy with adjectives, such as "managed" democracy, "illiberal" democracy, or "electoral" democracy? 
Only a few pundits stubbornly adhere to this approach. 
Or is the system simply that of a conniving authoritarian? 
This view is already conventional wisdom, not only in America, but in Europe as well. 
In reality, however, Putin's regime is a strange and complicated mix, which relies upon two important elements: the personal power of Vladimir Putin himself and the growing role of Russia's consolidating democratic institutions. 
The tension between these two forces will drive Russia's political dynamics for the next four years. 
Complicating the picture further is the fact that Putin represents the most pro-Western force in Russia, while the state apparatus remains conservative, traditional, and archaic. 
So Russia's liberals and democrats face a harsh choice: do they support Putin's personal authoritarianism or seek to weaken and delegitimize him and thus restore the role of an ascendant bureaucracy? 
How do the siloviki , the now notorious representatives of Russia's security and power structures, fit in this picture? 
Everybody likes this myth of the siloviki , because it's so easy to explain Russian developments by ascribing events to a "KGBization" of power. 
But this is unpersuasive: the siloviki have not coalesced into a coherent group and consolidated their authority - at least so far. 
They lack a leader, have no agenda, and failed to seize power during Putin's first term. 
I think they will fail again during Putin's second term. 
Indeed, in coming years, other forces have much greater potential to consolidate power, with the siloviki used only as their praetorian guards. 
So who is responsible for the fact that liberal democracy has ended in Russia? 
Well, Putin, of course, and Yeltsin before him. 
Moreover, ordinary Russians are becoming allergic to liberal democracy, because liberal technocrats have consistently served as window dressing for an illiberal Kremlin regime. 
Having tied themselves to Russia's existing power structures, liberals are now in no position to become convincing critics. 
Indeed, Putin's soft authoritarianism is now probably the greatest threat to greater democratization in Russia. 
Paradoxically, because Putin's "strong" leadership incorporates liberals and even democrats so as to preserve a pro-Western façade, a truly liberal opposition cannot emerge. 
By contrast, a genuinely repressive iron hand would be far likelier to spur a more potent democratic resistance. 
Of course, Putin has concentrated so much authority and control over the levers of power in his own hands that he appears capable of anything. 
But appearances can deceive, for the legacy of Putin's first term is that he is losing his fight with the state apparatus that he inherited. 
He's not yet a hostage of the bureaucracy, but he regularly loses major battles. 
So what will happen when Russia's political class and the President himself discover that "bureaucratic authoritarianism" is not the recipe for modernization à la South Korea that they hoped for? 
What will they do when they realize that it has failed to secure sustainable economic growth and political stability? 
Under the current soft authoritarian regime, I can see only one rather negative scenario for the future: authentic, full-fledged dictatorship. 
The question is whether it will be a Pinochet-style dictatorship bent on economic modernization, or a dictatorship with a revived totalitarian ideology? 
By winning so decisively, Putin has legitimately made himself responsible for everything. 
There is no government below him to take the blame for failure, and failure is the easiest way to lose legitimacy. 
Failure, moreover, will likely bring with it a split in the political class, making it very difficult to find a single candidate to become Putin's successor. 
Not one political force in Russia knows how to answer the challenges that "soft authoritarianism" has brought. 
Russia has never made a successful transformation of any kind in a time of peace. 
Change comes through war and domestic conflict. 
For those who seek a democratic and liberal Russia, the quandary is awful, because to delegitimize Putin only risks bringing darker and more archaic powers to the surface. 


Putin’s Unwilling Executioner? 
MOSCOW – The question that has dominated Russian politics, and world discussion of Russian politics – “Will he (Vladimir Putin) or won’t he stay in power?” – has now been settled. 
He will and he won’t. 
The election of Putin’s longtime acolyte and handpicked successor, Dmitri Medvedev, as Russia’s president means that Putin is formally surrendering all the pomp and circumstance of Kremlin power. 
But now it looks like 21-gun salutes and first place in protocol lines are the only things that Putin is giving up – if that. 
In opting to become President Medvedev’s prime minister, Putin sees himself as coming closer to the machine of power, because he will obtain minute-by-minute control of the government. 
This bizarre transfer of office but not power – perhaps a slight improvement on state governors in the American south who used to hand their offices to their wives when their term-limits expired – is Putin’s scenario. 
But what if it is not Medvedev’s? 
What if Medvedev, after a few years, becomes as independent of his patron as Putin became of Boris Yeltsin, the man who put him on the Kremlin throne? 
Should that turn out to be the case, it will be useful to know what, if anything, Medvedev stands for. 
One thing immediately stands out about Medvedev: he has only indirect ties to the siloviki , the ex-KGB and military men who have dominated the Putin era. 
As a trained lawyer, he should in principle understand the importance of the rule of law. 
And, as deputy prime minister since 2005, he oversaw the Russian National Priority Projects (a set of policies to develop social welfare), which has given him a clearer insight into Russia’s deep flaws than any of the siloviks , with their focus on getting and maintaining personal power, could ever have. 
Medvedev’s promises to modernize the feudal conditions of Russia’s army also set him apart, given the absolute failure of military reform during the Putin era. 
Moreover, he appears to believe that confrontations between the state and civil society are counterproductive. 
Indeed, he insists that the government’s job is to strengthen civil society based on the rule of law. 
All of this sounds good. 
The problem is that we have heard it all before from Putin – another trained lawyer – at the start of his presidency, when he promised a “dictatorship of law,” military reform, land reform, and, consequently, a return of Russia’s agriculture dream, ruined by the post-1917 planned economy. 
Instead, he and his ex-KGB comrades-in-arms placed themselves above the law, abandoned meaningful social and economic reform, and coasted on high world oil prices. 
There is hope, however slight, that, unlike Putin, Medvedev may mean what he says. 
His non-KGB, non-military background suggests that his conception of the rule of law may not be entirely shaped by a cynical love of power. 
But Medvedev’s track record is not encouraging. 
As Russia’s deputy prime minister since 2005, he has not gone beyond consoling rhetoric. 
For eight years, he carried out silovik orders, combining the role of Kremlin gray cardinal with treasurer of the main source of silovik power, the chairmanship of state-owned energy giant Gazprom. 
Medvedev also coordinated Russia’s interference in the 2004 Ukrainian election, which led to that country’s “Orange Revolution.” 
More broadly, as the head of Putin’s presidential administration, Medvedev directly oversaw the construction of today’s authoritarian system of Russian governance. 
So it was only appropriate that he should become deputy prime minister for social affairs in 2005, because he had already succeeded in largely bringing these affairs to a halt. 
Russia is supposed to be a mystery, but it rarely surprises the world in living down to expectations: most analysts were certain that Putin would find a way to stay in power even without amending the constitution. 
And so he did. 
Indeed, Russia’s liberal promises have been shattered time after time. 
Nikita Khrushchev’s de-Stalinization reforms ended with Leonid Brezhnev’s stagnation; Boris Yeltsin’s democratization resulted in Putin’s authoritarianism. 
In the sadly immortal words of Victor Chernomyrdin, Russia’s prime minister during the Yeltsin era, “We wanted for the better, but it turned out to be like always.” 
But, as predictable as Russia’s undemocratic system of governance usually is, the country does defy expectations once in a while. 
Khrushchev denounced his mentor, Stalin. 
Mikhail Gorbachev was originally installed in power to press on with Yuri Andropov’s KGB-inspired vision of communism, but instead diverted the Soviet Union’s course into glasnost and perestroika , and accidentally into freedom. 
What if Putin is wrong in his choice of successor, and Medvedev refuses to be his clone, but instead follows in the footsteps of Khrushchev, Gorbachev, and Yeltsin? 
What if the supposed puppet starts to pull the strings? 

Putin’s Year of Living Dangerously 
MOSCOW – In the spring of 2008, Russian President Vladimir Putin was on top of the world. 
Oil and gas prices were sky high, with export revenues flooding the Kremlin’s coffers. 
The country’s once powerful military, which collapsed with the demise of communism in 1991, was being rebuilt. 
And Putin’s handpicked successor, Dmitri Medvedev, had been eased into power, while Putin downshifted into the premiership. 
The United States, moreover, remained a perfect foil for a leader with pretensions to global leadership. 
The Bush administration’s incoherent foreign policy included a plan to build a missile defense shield in Poland and the Czech Republic, which allowed Putin to revive the Old Europe/New Europe divisions that began with the Iraq war, with this split appearing to enhance Russian influence on the continent. 
Russia’s seeming military revival also played a part in boosting the domestic economy. 
Arms sales, worth close to $8 billion, were again competing globally with Great Britain and the US, going to nearly 80 countries, including Venezuela, China, India, Algeria, Iran, Malaysia, and Serbia. 
And those arms sales were often closely tied to Putin’s foreign assertiveness, with the Russian army training and holding exercises in many places for the first time, including Venezuela, as if in preparation for another Cuban Missile Crisis, with Hugo Chávez assuming the role of Fidel Castro. 
So good did things seem that Russia suddenly discovered that, perhaps for the first time since the early days of the Soviet era, the country actually had some “soft power.” 
This first became apparent when the International Olympic Committee awarded the 2014 Winter Games to the Black Sea resort of Sochi. 
In 2007, Putin addressed the Olympic Committee (in English), and persuasively argued that the Games will “play a major role in Russia’s future. 
They will help Russia’s transition as a young democracy.” 
In May 2008, Russia won the world hockey championship, beating Canada. 
In June, it almost won the Euro 2008 football championship, losing in the semi-finals to Spain. 
Next came the Eurovision Song Contest, an annual competition of pop (rarely first class) European singers, at which Russia’s Dima Bilan gained first prize for his musical clip “Believe.” 
That, too, helped rekindle a sense of national pride, extending from the Kremlin to the streets. 
Russians habitually respond with black humor to events both good and bad, and the events of 2008 were no exception. 
One joke nicely encapsulates the hubris that Putin and his Kremlin allies felt: Putin and Medvedev discuss their newly found invincibility. 
“Eurovision, hockey, soccer, smooth presidential transition – what a lucky streak,” muses Medvedev. 
“Indeed, time to initiate World War III,” enthuses Putin. 
But, as usual, pride precedes a fall. 
The fall began with an event that Putin perceived as a mighty triumph – his blitzkrieg in August against Georgia. 
Yes, the Kremlin was able to smack down the uppity Mikheil Saakashvili’s hope of reuniting his country by force. 
But the world saw in Russia’s onslaught against so puny an antagonist a thuggish state determined to recapture its lost empire. 
All the post-Cold War certainties in Europe melted away, and with them went Putin’s reputation as a reliable manager of Russia’s economy. 
Capital began to flee the country, which may not have mattered had the world economy not tanked in September. 
But tank it did, taking Russia’s economy with it. 
The reserves that Russia accumulated during the oil boom years are steadily being drained away. 
With oil prices collapsing, this pool of resources won’t be refilled quickly. 
That could prove to be devastating, because all of Russia’s fiscal assumptions were based upon high oil prices continuing for years to come. 
Nevertheless, Putin is trying to spend his way out of the crisis. 
But such efforts are unlikely to be enough, because the heavy-handed state-dominated economy – with ex-KGB agents now embedded at the top of most state companies – lacks both the nimbleness and the diversification to recover speedily. 
Moreover, with animosity between East and West at their highest since the Cold War’s end, Russia’s trading partners are anxiously looking for other options, which may mean that Putin has damaged Russia’s long-term prospects for an export-led recovery as well. 
Indeed, the Georgian war antagonized not only the west, but also China, which has a vital strategic interest in maintaining the post-Cold War geo-strategic settlement. 
China, after all, has no desire to see a “Soviet Reunion” on its border. 
Besides antagonizing China, the Georgian war also exposed the hollowness of Russia’s military re-armament. 
Yes, the Russian army could smash Georgia and most of its ex-Soviet neighbors, but its performance in Georgia shows that it remains the same lumbering, badly motivated outfit that it was in the 1990’s. 
Now that America is no longer saddled with a president loathed around the world, Putin has lost one of the key tools that had helped him boost Russia’s international standing. 
Poking Bush in the eye was a fine thing to do in the eyes of many people, particularly in Europe. 
But to greet the elegant and popular President-elect Barack Obama with threats to station missiles on Europe’s borders, as Medvedev did the day after America’s presidential election, exposed before the world the Kremlin’s ham-handed ways once again. 


Putin’s Rules of Attraction 
CAMBRIDGE – Russian President Vladimir Putin’s covert aggression in Ukraine continues – and so do Western sanctions against his country. 
But the economy is not all that is under threat; Russia’s soft power is dwindling, with potentially devastating results. 
A country can compel others to advance its interests in three main ways: through coercion, payment, or attraction. 
Putin has tried coercion – and been met with increasingly tough sanctions. 
German Chancellor Angela Merkel, Putin’s main European interlocutor, has been expressing her frustration with Russian policy toward Ukraine in increasingly harsh terms. 
Whatever short-term gains Putin’s actions in Ukraine provide will be more than offset in the long term, as Russia loses access to the Western technology it needs to modernize its industry and extend energy exploration into frontier Arctic regions. 
With Russia’s economy faltering, Putin is finding it increasingly difficult to employ the second tool of power: payment. 
Not even oil and gas, Russia’s most valuable resources, can save the economy, as Putin’s recent agreement to supply gas to China for 30 years at knockdown prices demonstrates. 
This leaves attraction – a more potent source of power than one might expect. 
China, for example, has been attempting to use soft power to cultivate a less threatening image – one that it hopes will undermine, and even discourage, the coalitions that have been emerging to counterbalance its rising economic and military might. 
A country’s soft power rests on three main resources: an appealing culture, political values that it reliably upholds, and foreign policy that is imbued with moral authority. 
The challenge lies in combining these resources with hard-power assets like economic and military power so that they reinforce one another. 
The United States failed to strike this balance with respect to its 2003 invasion of Iraq. 
While America’s military power was sufficient to defeat Saddam Hussein’s forces quickly, it did so at the expense of its attractiveness in many countries. 
Likewise, though establishing a Confucius Institute in Manila to teach Filipino people about Chinese culture may help to cultivate China’s soft power, its impact will be severely constrained if China is simultaneously using its hard power to bully the Philippines in the territorial dispute over the Scarborough Shoal. 
The problem for Russia is that it already has very little soft power with which to work. 
Indeed, as the political analyst Sergei Karaganov noted in 2009, Russia’s lack of soft power is precisely what is driving it to behave aggressively – such as in its war with Georgia the previous year. 
To be sure, Russia has historically enjoyed considerable soft power, with its culture having made major contributions to art, music, and literature. 
Moreover, in the immediate aftermath of World War II, the Soviet Union was attractive to many Western Europeans, owing largely to its leadership in the fight against fascism. 
But the Soviets squandered these soft-power gains by invading Hungary in 1956 and Czechoslovakia in 1968. 
By 1989, they had little soft power left. 
The Berlin Wall did not collapse under a barrage of NATO artillery, but under the impact of hammers and bulldozers wielded by people who had changed their minds about Soviet ideology. 
Putin is now making the same mistake as his Soviet forebears. 
Despite his 2013 declaration that Russia should be focusing on the “literate use” of soft power, he failed to capitalize on the soft-power boost afforded to Russia by hosting the 2014 Winter Olympic Games in Sochi. 
Instead, even as the Games were proceeding, Putin launched a semi-covert military intervention in Ukraine, which, together with his talk of Russian nationalism, has induced severe anxiety, particularly among ex-Soviet countries. 
This has undermined Putin’s own stated objective of establishing a Russia-led Eurasian Union to compete with the European Union. 
With few foreigners watching Russian films, and only one Russian university ranked in the global top 100, Russia has few options for regaining its appeal. 
So Putin has turned to propaganda. 
Last year, Putin reorganized the RIA Novosti news agency, firing 40% of its staff, including its relatively independent management. 
The agency’s new leader, Dmitry Kiselyov, announced in November the creation of “Sputnik,” a government-funded network of news hubs in 34 countries, with 1,000 staff members producing radio, social media, and news-wire content in local languages. 
But one of the paradoxes of soft power is that propaganda is often counterproductive, owing to its lack of credibility. 
During the Cold War, open cultural exchanges – such as the Salzburg Seminar, which enabled young people to engage with one another – demonstrated that contact among populations is far more meaningful. 
Today, much of America’s soft power is produced not by the government, but by civil society – including universities, foundations, and pop culture. 
Indeed, America’s uncensored civil society, and its willingness to criticize its political leaders, enables the country to preserve soft power even when other countries disagree with its government’s actions. 
Similarly, in the United Kingdom, the BBC retains its credibility because it can bite the government hand that feeds it. 
Yet Putin remains bent on curtailing the role of non-governmental organizations and civil society. 
Putin may understand that hard and soft power reinforce each other, but he remains seemingly incapable of applying that understanding to policy. 
As a result, Russia’s capacity to attract others, if not to coerce and pay them, will continue to decline. 

Putin’s European Fifth Column 
BERKELEY – If the world should have learned one thing from the recent months of tensions between Russia and the West, it is that Russian President Vladimir Putin’s strategic ambition and skill should never be underestimated. 
It is in this light that the West should view Putin’s recent overtures to some within the European Union. 
Putin may or may not truly believe that last year’s anti-Russian uprising in Ukraine was the direct result of interference by the United States and the European Union. 
But there can be no doubting his awareness of the role that European ideals – and the possibility of EU membership – has played in motivating the struggle in Ukraine and constraining his actions. 
The popular desire to join Europe’s community of democratic states was a key force behind the collapse of right-wing dictatorships in Greece, Spain, and Portugal in the 1970s. 
It also played a critical role in the collapse of communist regimes in Central and Eastern Europe after the fall of the Berlin Wall. 
And it certainly contributed to the ouster of Ukrainian President Viktor Yanukovych – a key Putin ally – in 2014. Indeed, the existence of a European model continues to guide and encourage those pursuing transparent, democratic governance in many post-communist countries. 
There is no question that Putin would benefit from the EU’s demise. 
Europe’s attractiveness as a model of democratic governance would be greatly weakened. 
Aspiring EU member states would turn elsewhere. 
Indeed, some current EU members, such as Hungary, where Euroskepticism and illiberal sentiment are already widespread, might be tempted to follow Putin down the path toward authoritarian rule. 
And countries in the region would be more exposed to Russian pressure and the temptations of Russian patronage. 
Putin knows this, which is why the Kremlin has been reaching out to Euroskeptic parties and groups from both extremes of the political spectrum. 
In some cases, Russia may have actually provided financial assistance to these groups. 
In November, for example, Marine Le Pen, the leader of France’s far-right National Front, acknowledged that her party received a €9 million ($11 million) loan from a Russian state-owned bank. 
Meanwhile, Russian oligarchs have been purchasing European newspapers, including The Independent, The Evening Standard, and France-Soir. 
The French newspaper Libération recently highlighted the extent of pro-Putin connections in French academia, think tanks (on both the left and the right), media, and business networks. 
And the state-owned energy giant Gazprom has been suspected of bankrolling anti-fracking activism in Lithuania and Romania. 
Putin’s efforts appear to be bearing fruit. 
Despite the ongoing tensions between Russia and the West – or perhaps because of them – Putin enjoys remarkable support among some European intellectuals and politicians. 
The Kremlin’s portrayals of the uprising in Ukraine as a fascist coup, and of Russia’s annexation of Crimea and support for Ukrainian separatists as defensive, have been reproduced through a dense network of Putin supporters – including the Princeton University professor Stephen F. Cohen, Czech President Miloš Zeman, Hungarian Prime Minister Viktor Orbán, the German leftist Matthias Platzeck, and the Dutch rightist Geert Wilders – and media outlets. 
Putin’s narrative may be reminiscent of Soviet propaganda. 
But that has not prevented it from being embraced by many at a time when the European project is already under great stress from the continent’s economic crisis. 
A battle of values is looming. 
In one corner is the EU, standing for democracy, freedom, the rule of law, and institutionalized international cooperation; in the other stands Putin, representing authoritarianism, intolerance, and the use of force and intimidation as instruments of foreign policy. 
Unfortunately, the European establishment is not doing enough to counter Moscow’s anti-European, divide-and-rule offensive. 
That is particularly true in Berlin, where the German government continues to promote austerity in the eurozone in the face of anemic economic growth and widespread unemployment. 
If Putin has indeed set out to destroy the EU, such an approach is the best way to help him. 
Europe is in desperate need of growth, and achieving it will require bold leadership from the EU’s most important member state, Germany, and its most important leader, Chancellor Angela Merkel. 
The German public must be made to understand what is at stake – and why continuing on the current path could end up delivering the EU into Putin’s hands. 

Putin the Poker Player 
Perhaps it takes an ex-KGB spy for a Kremlin ruler to play diplomatic poker with skill. 
Indeed, President Vladimir Putin shows as much mastery at international diplomacy as he does in handling Russian domestic affairs. 
Not since Gustav Stresemann, Weimar Germany's foreign minister, played the Soviet Union and the West off against each other, has a leader with so weak a hand played his cards so effectively. 
Putin's latest moves in North Korea, and his careful tap-dance over Iraq, are just the latest examples. 
Diplomacy, in its traditional form, was never Russia's strong suit. 
Under the Tsars, Russia was often isolated. 
Even when part of alliances--the Triple Alliance with Bismarck's Germany and the Habsburg Empire, or the Entente with France before the First World War--Russia was kept at a distance. 
Russian leaders typically dealt with their fear of isolation--and encirclement--by going out of their way to appear threatening. 
In the Soviet era, the distances between Russia and its neighbors became unbridgeable chasms, with the USSR ringed either by hostile states or weak, servile ones. 
Stalin wasted no time in antagonizing Communist China after Mao's revolution of 1949. 
Not until Boris Yeltsin did Russia make its first steps to bridge these divides. 
But Yeltsin could never get over Russia's lost superpower status; his periodic growls to assert Russia's wounded pride ultimately made him seem unreliable. 
True, his democratic Russia was permitted some role in global diplomacy. 
In Yugoslavia, former Premier Victor Chernomyrdin joined Finnish President Matti Ahtissari in resolving the Kosovo crisis of 1999. 
But this hardly amounted to recognition of Russia's indispensability; after all, NATO troops entered Kosovo without Russian consent. 
A realist in his bones, Putin recognizes Russia's changed status. 
But this recognition is not a confession of weakness; instead, it reflects his clear-sighted analysis of Russia's current predicament, and of the country's need to create, recreate, and sustain friendly relations among all of its neighbors if lost influence is to be regained. 
Since Putin took the reigns of power in 2000 he has become almost everybody's best friend--Belarus's lunatic strongman Aleksander Lukashenko, US President George W. Bush, Germany's Gerhard Schroeder, Japan's Junichiro Koizumi, and China's Jiang Zemin. 
Even North Korea's erratic leader, the hermit Kim Jong Il, who never travels outside his country, has visited Putin twice in recent years. 
In fact, North Korea provides a textbook example of Putin's diplomatic method. 
Putin cultivated Kim when other leaders neglected him. 
In the summer of 2002, the North Korean leader visited Russia to learn about "non-intrusive"--that is, not entirely Western--capitalism, while riding in an armored train on the Trans-Siberian railway. 
Kim seemed to reason that, while Russia was no longer Soviet, it retained enough socialist overtones to work with his country. 
The benefit of this "educational experiment" was that Putin became one of the few people to whom Kim Jong Il listens. 
But Putin's method is to maintain warm relations with everyone. 
Even as he hosted Kim in Moscow, Russian diplomats in Pyongyang were helping to protect an American spy in North Korea. 
Previously spurned by America in its attempts to use its longstanding contacts in Asia, this assistance appears to have convinced America that Russia can be of real help in its diplomacy with North Korea. 
Final negotiations over North Korea's nuclear ambitions will undoubtedly need to take place between the US and Kim Jong Il. 
What Putin may be able to provide is the diplomatic cover the US president needs to maintain his pose of not negotiating directly with the North Koreans. 
This will allow President Bush to avoid seeming to surrender to the threat of nuclear blackmail. 
As a diplomatic practitioner, Putin has learned history's lessons and is determined not to see his country ringed by enmity. 
Instead of Russia's borders draining his country's economy, he envisions Russia as a transit point between east and west, and also as an engine of growth for countries in search of the heavy industrial equipment Russia makes. 
A rail link between South Korea and Siberia, to carry Korean and Japanese goods west and Russian resource exports east, may be but one positive result of any successful deal he may broker on the Korean peninsula. 
Of course, some of the old suspicions about Russian motives linger in the West, most particularly over Iraq (where Lukoil, Russia's biggest oil company, recently signed a new deal to develop Iraqi oil fields). 
But Putin's interventions in the UN Security Council over Iraq have been far more moderate than, say, those of France and Germany, two of America's historic allies. 
This is so even though Russia has vital national interests to protect in Iraq, including real fears about regional instability spreading into Russia's south, with its millions of Muslim citizens. 
For too long Russia practiced either the diplomacy of the thug or that of the Byzantine. 
The first made potential partners recoil in fear, the second made them shrink in confusion. 
But a spy's stock-in-trade is recruiting and nurturing collaborators. 
Those skills are now being put on display by Russia's spymaster president. 
No one is complaining. 


America’s Russian Hypocrisy 
NEW YORK – I hate agreeing with Vladimir Putin, even a little. 
Russia’s president is dragging his country – the country of my birth – backwards, and falsely argues that violating international law is somehow good for Russians. 
But the hysterical response of Americans to the Kremlin’s alleged efforts to influence the US presidential election has forced me to look at things from Putin’s perspective. 
To be sure, the US intelligence agencies’ allegations that Russia purveyed fake news and released hacked emails, in order to hurt Hillary Clinton’s chances against Donald Trump, are not baseless. 
It is certainly in Putin’s character to purloin secrets and create disinformation; he was a KGB operative, after all. 
Likewise, the accusations that Putin is holding a dossier of compromising material on Trump, though uncorroborated, also ring true. 
It would make little sense for Russia to spare Trump, of all people, from its schemes. 
And, beyond Trump, Republican Party leaders must know that if Russia hacked the Democrats, their own servers must have been hacked, too. 
Even if the alleged dossier’s sensational details are not accurate, chances are that Russia is holding at least some compromising business records, or even Trump’s tax returns – information that Trump has worked very hard to keep hidden from the American public. 
If Trump doesn’t play nice, taking Russia’s side on issues ranging from NATO to Ukraine, he will likely see his secrets laid bare, just as Clinton’s were. 
The US response to this prospect has been extreme. 
Those firmly in Trump’s camp are willing to indulge the fragile bromance between Trump and Putin, despite its obvious vulnerability to exploitation by both sides. 
Others, including some senior Republicans, cite the recently released US intelligence report on Russia’s suspected interference in the election and demand stern measures against Putin’s government, even though a new Cold War is clearly in no one’s interest. 
In my view, the intelligence report itself was fundamentally problematic. 
Full of conjecture and bias, the report is based on the argument that Putin must be an enemy, because he doesn’t share Western values. 
But how could he? 
Russia was never fully welcome in the Western world order, much less able to participate in it on equal terms. 
That is why Putin has sought to create his own international order. 
In fact, in the early days of his presidency, Putin wanted Russia to be part of Europe. 
But he was immediately confronted with NATO’s expansion into the Baltic states. 
In 2006, then-President George W. Bush’s administration announced plans to build a missile-defense shield in Eastern Europe, in order to protect the Western allies against intercontinental missiles from Iran. 
Russia viewed the plan – which President Barack Obama went through with last year – as a direct threat, and a sign that calls for closer ties should be regarded with caution. 
The US has supported anti-Putin forces since 2008, but ramped up that support in 2011, when Putin, then the prime minister, prepared to return to the presidency. 
In 2013, the US cheered the protests in Ukraine that ultimately ousted the pro-Russian president, Viktor Yanukovych. 
But while Yanukovych was undoubtedly a crook, the US supports plenty of crooks. 
Its effort to deny Russia, or any other power, the right to possess similarly odious factotums is pure hypocrisy. 
Such duplicity has pervaded US foreign policy. 
Bush’s war in Iraq was launched on the basis of tendentious intelligence. 
For his part, Obama supported the Arab Spring uprisings, but offered no pro-democratic strategy – an approach that has led Libya to become a failed state, Egypt to become even more dictatorial, and Syria to collapse into nightmarish and protracted conflict. 
Meanwhile, the US National Security Agency was spying on everyone, whether friend or foe. 
The US intelligence report asserts that Putin is seeking to undermine liberal democracy. 
It seems clear, however, that his more immediate goal is to expose the West’s double standards, thereby breaking down Western barriers to his pursuit of Russian interests. 
If the US can behave so badly without apology, Putin’s thinking goes, why should Russia be denied its sphere of influence in, say, Ukraine? 
For that matter, why shouldn’t Putin have attempted to help out Trump? 
Ukrainians campaigned for Clinton, believing that she would advance their interests. 
It is perfectly reasonable that Putin would back Trump, who had repeatedly expressed admiration for his leadership, over Clinton, who had compared him to Adolf Hitler. 
The notion that he shouldn’t take steps to protect his interests is ideological partiality disguised as objectivity, and it lends credence to Putin’s claims that the West is out to get him. 
Don’t get me wrong: despite its imperfections, the US remains a positive force in the world. 
Indeed, it may well be the only strongly positive force, along with the European Union, which should stop squabbling and start curtailing megalomaniacal and illiberal leaders like Hungary’s Putin-infatuated prime minister, Viktor Orbán. 
Moreover, the prospect that their new president is in Putin’s pocket should certainly be worrying to Americans. 
And the West’s policies toward Russia – economic sanctions or military exercises in border countries like Poland – are not necessarily wrong. 
What is wrong is that those concerns and policies are driven largely by anger over Putin’s own nationalism, rather than by a careful consideration of the diplomatic and strategic milieu. 
If the US allows itself to become caught up in suspicion and conjecture about Russian involvement in its recent election, it will most likely find itself locked in an even more destructive confrontation with Putin. 
Instead, the US should devise a sound, thoughtful, and measured approach toward Russia – one that appeals to values not as propaganda, but as the basis of a more straightforward and credible foreign policy. 


Putinomics 
WASHINGTON, D.C. -- President Vladimir Putin turned Russia’ parliamentary election into a referendum on himself – and won by a landslide. 
But, while he refuses to spell out his plans for remaining in power once his second term expires next spring, his economic policy is clear. 
The strangest thing about the Duma election was that Putin lost his nerve. 
He over-exposed himself in public appearances that were as aggressive as they were vague in substance. 
He ran against the West and the “chaos” of the 1990’s, just as he raged against Chechen terrorists in 1999 and against oligarchs in 2003. 
The Kremlin abandoned democratic procedures, controlling which parties were allowed to run and their candidates, while Putin’s United Russia monopolized media coverage. 
Opposition activists were blocked from most campaigning, and often arrested, while Kremlin-controlled courts denied their complaints. 
People were intimidated into voting for United Russia on a mass scale. 
Independent election monitors were barred. 
As a consequence, the new State Duma has not been elected so much as appointed. 
It lacks legitimacy and its members are unknown. 
But Putin’s legitimacy has also been tainted by the pervasive fraud. 
His only “mass” meeting in Moscow drew no more than 5,000 people. 
The main questions are how authoritarian he will become, or whether this pathetic campaign will weaken him. 
Putin’s policy is easy to understand if one realizes that he usually does the opposite of what he says. 
In his first term, Putin appeared to be an authoritarian reformer, undertaking substantial market reforms, such as introducing a 13% flat income tax. 
But in his second term, Putin was simply authoritarian, undertaking no economic or social reforms worth mentioning. 
The expropriation of the oil company Yukos, valued at $100 billion, was the signal event, and was followed by rising corruption. 
Putin has established a purely personal dictatorship. 
He rules through the presidential administration and competing secret police forces without ideology or party. 
United Russia is little more than a bunch of state officials. 
He has sapped most power from other state institutions. 
Personal authoritarianism rarely survives its founder. 
Since Putin has created an over-centralized regime that cannot survive without him, he has to stay as president. 
Law is of minimal relevance, as he can always order the Constitutional Court to approve his third term. 
Putin’s regime may be described as a group of clans, consisting of state-dominated corporations, such as Gazprom, Rosneft, Vneshtorgbank, Rosoboronexport, and the Russian Railways, together with the security agencies. 
Putin’s KGB cronies, usually from St. Petersburg, control these institutions, and tap them for huge kickbacks. 
At the same time, Putin has made sure that they all hate one another, so that they need him as arbitrator or godfather. 
In a sensational interview before the election in the Russian newspaper Kommersant , one of these previously unknown KGB managers explained how they use state extortion against private enterprises to accomplish their “velvet re-privatization” through state corporate raiding. 
According to the European Bank for Reconstruction and Development, the share of GDP originating in the private sector has declined from 70% to 65% under Putin. 
Re-nationalization through extortion is likely to accelerate. 
This re-nationalization has not been justified ideologically, but rather cynically: the purpose is simply to generate corrupt revenues for top Kremlin officials. 
Although corruption has been declining in most of the former Soviet Union, it has surged in Russia since 2004, becoming more rationalized and concentrated. 
None of Putin’s KGB kingpins has been arrested or even demoted. 
As re-nationalization gained momentum, the public economic rhetoric changed and become statist. 
Putin now favors protectionism, state intervention, and subsidies. 
In this climate, no progressive structural reforms are likely. 
Until recently, Russia has pursued an admirably conservative macroeconomic policy, running up huge budget and current account surpluses. 
It has paid off its foreign debt and built up foreign currency reserves of $450 billion. 
Before the Duma election, however, Putin jeopardized this last vestige of responsible economic policy. 
Currently, Russia’s greatest economic concern is growing inflationary pressure, driven especially by food prices. 
Rising food prices are an international phenomenon, and Russia’s inflation is driven by the large current account surpluses and capital inflows. 
But Russia’s government is no longer trying to mitigate these factors, instead pursuing an inflationary policy. 
Monetary policy has been loose for the last year, and before the Duma election the government started pouring huge sums into pensions and other social welfare transfers. 
Not surprisingly, inflation has shot up from 7% last spring to 11% currently, and may reach 15% in the spring. 
Naturally, monetary and fiscal policy should be tightened, but that is difficult when Putin is trying to placate the population. 
He could liberalize the exchange rate and let it float upwards, but he is not even doing that. 
Instead, using an old Soviet tactic, Putin has imposed informal price controls, which cannot hold for long in a privatized economy. 
Russia’s economic growth is still driven by the sound market reforms undertaken in the 1990’s and Putin’s first term, together with high oil and gas prices. 
But, while growth is not likely to stop any time soon, Russia’s economic success increasingly hinges not only on high but rising oil and gas prices. 
The main question about economic policy in Putin’s third term, then, is how fast it will deteriorate. 



Putting Public Health at the Center of the Struggle against Poverty 
CAMBRIDGE: One great challenge facing humanity is reducing the huge gaps in income and wealth between the world’s haves and have nots. 
Globalization by itself is not doing the job. 
Now, Dr. Gro Bruntland, the head of the World Health Organization, has taken up the challenge. 
She points to the desperate health conditions of the world’s poor as one of the greatest barriers to economic development, and is mobilizing the world community to do something about it. 
In mid-January, Dr. Bruntland appointed a new global Commission on Macroeconomics and Health (CMH), and honored me by appointing me as its Chairman. 
The Commission’s task is enormous, but easily described: to help put global public health at the center of a new strategy of global economic development. 
The Commission will meet in various parts of the world – Asia, Africa, Latin America, Europe – in the coming two years, and will issue its report and recommendations at the end of 2001. 
Market reforms by themselves cannot lift a population from poverty if people are simultaneously struggling with epidemics of AIDS, or malaria, or tuberculosis, or chronic malnutrition, or other crippling health problems. 
Populations battling with disease lack the energy, productivity, or means to invest in their own future. 
Studies show that when life expectancy is low, so too are many kinds of investments in the future, such as school attendance, personal saving by households, and foreign investments. 
Throughout modern history, improvements in public health have speeded economic development. 
It was Britain’s rising agricultural productivity in the 18th century, for example, which helped to raise nutrition levels and reduce the burden of infectious diseases, that helped to initiate the Industrial Revolution. 
It was U.S. investment in eradicating hookworms from its Southern states in the early 20th century that improved health conditions in the American South, and which helped to bring about a boom in investments in that previously impoverished region. 
Similarly, eradication of malaria in Spain, Italy, and Greece in the late 1940s (using household spraying of pesticides among other factors) helped bring a boom in tourism and foreign investment to these countries in the 1950s and 1960s. 
That boom enabled Southern Europe to begin to narrow the large gap in income with the richer countries of Northern Europe. 
Health conditions in many of the poorest countries in the world are shockingly bad, and in some cases getting worse. 
Approximately one-third of children in the poorest countries are malnourished, and thereby at risk of much greater incidence of infectious disease, learning disorders, and other maladies. 
Life expectancy is little more than 50 years (compared with around 77 years in the rich countries). 
Millions of poor people every year die of infectious diseases, such as malaria, tuberculosis, pneumonia, and measles. 
Ironically, many deaths would be preventable by existing vaccines (such as for measles), but the populations are often too poor to have access to even basic public health. 
Even in many middle-income and higher-income countries, there have been surges of new and re-emerging infectious diseases, as a result of increased global travel, the opening of new regions to settlement, and the overuse of antibiotics with a resulting spread of disease-resistant parasites. 
The Commission will address these desperate conditions by: 
 mobilizing evidence showing how poor health contributes directly to failed economic development; 
 working with professionals at the World Health Organization, UNICEF, the World Bank, the Gates Foundation, and other organizations, to identify public health interventions, such as greater vaccine coverage, that have a very high economic rate of return as well as a high health benefit; 
 working with the pharmaceutical sector and non-governmental organizations to find creative new ways to get essential medicines to the poorest peoples; 
 helping to devise new ways to re-direct global research and development efforts to unsolved problems, such as an effective vaccine for AIDS, malaria, tuberculosis, and dysentery; 
 exploring ways to increase overall public spending on vital health needs, by mobilizing more international aid, by expanding the depth of debt relief for highly indebted poor countries, and by finding ways that poor countries can increase their own financial efforts. 
The Commission will look for inputs from concerned citizens, public health experts, governments, and non-governmental groups from all parts of the world. 
One of the crucial purposes of the Commission is to help give voice to the health needs of the poorest of the poor. 
Therefore, the Commission will be seeking inputs in advice and research from all parts of the world, and will provide a record of its evidence gathering and deliberations on the internet. 
At a time when global science is more dynamic than ever; when the richest countries are experiencing a boom in wealth unrivaled in history (including around $8 trillion in stock market gains in the United States in the past four years!), the world yearns for more effective approaches to the struggle against poverty. 
The World Health Organization is taking its place at the center of that effort. 

Putting Youth First 
All of the world's current crises - conflict, HIV/AIDS, unemployment - have one thing in common: they all involve young people who are burdened by the despair of these problems, but who are also a largely untapped source of change. 
To many of us, the world may seem like an old place. 
Yet there are 2.8 billion people under the age of 25 out of a world population of six billion. 
Nine out of 10 of these young people live in developing countries. 
They are not just the future, but also the present. 
That is why 170 youth leaders from 82 countries are gathering this week in Sarajevo, at the invitation of the World Bank, the European Youth Forum, and the Scout Movement. 
This is not just another meeting, it is a gathering of a group that is most at risk, and one that is key to meeting the world's development challenges. 
Consider HIV/AIDS: of the 40 million people living with HIV/AIDS, more than a quarter are in their youth. 
There are 121 million children of primary school age who are not in school, and more than half of these are girls - most of whom will never learn to read or write. 
Similarly, youth are becoming involved in conflict around the world with alarming frequency, either as victims or, just as tragically, as soldiers. 
More than half of those who are of working age are jobless, according to a new International Labor Organization report. 
Lack of jobs can lead to increased frustration and hopelessness on such a scale that ensuing social and political ferment could make tomorrow's world far less stable and secure than that of today. 
One thing is certain: old solutions to old problems won't work. 
Greater effort, in the form of research and resources, must be invested in better understanding the hopes and aspirations of young people. 
After all, they are living in deeply confusing times. 
Young people today are more exposed to the rest of the world as a result of globalization. 
But most do not have access to it. 
They are part of a strange paradox, one that is ubiquitous in the developing world: in villages in Africa, young people can buy Coca-Cola, but they have no clean water. 
In small towns in Asia, youth enjoy Internet access and the world is at their fingertips. 
Yet visa regimes will not allow them to travel very far. 
While we must address these imbalances of globalization, we must also take advantage of the opportunities it presents. 
There is a universal sensibility that more and more young people share, thanks to the Internet, music, and culture. 
We need to find ways to harness this in order to let young people be conduits for peace and harmony. 
The Sarajevo conference is a step in the right direction. 
The conference deals with education, conflict prevention and resolution, risky behavior, and youth employment. 
The young representatives understand that these issues are manifestly interlinked. Greater awareness of their shared problems should bring greater activism toward developing programs that meet the needs of youth. 
The concerns of today's young people are heartfelt and urgent. 
In the next 25 years, two billion more people entering our planet will live in the developing world. 
We must set our priorities around their need for more opportunities, jobs, and social justice. 

Qatar’s Wait-And-See Strategy 
DOHA – When Gulf Arab powers announced on June 5 that they were severing diplomatic ties with Qatar over its ties to terrorists, the message was clear: get in line with regional policies, or pay the price. 
Nearly a week later, Qatar appears in no hurry to comply. 
And it is the incoherence of US President Donald Trump’s foreign policy that is perpetuating the rift. 
Tainting Qatar as a regional pariah is unlikely to change its calculus, for two reasons. 
For starters, the country is simply too wealthy to be pushed around easily. 
Qatar’s abundant supply of natural gas translates into the highest per capita income in the world. 
Even with trade and travel bans imposed by Saudi Arabia, the United Arab Emirates (UAE), Bahrain, and Egypt, Qatar’s economy will not suffer significantly. 
The second reason why Qatar can afford to wait out its neighbors is its strategic importance to the United States. 
By hosting the al-Udeid Air Base, which serves as America’s forward operating base in its fight against the Islamic State (ISIS), Qatar has shrewdly balanced its ties to Islamist extremists with a strong relationship to the US. 
Qatar’s links with jihadist groups have drawn American ire, but the US has also benefited from them. 
For example, Qatar persuaded the Taliban to release the American soldier Bowe Bergdahl in May 2014; three months later, it helped secure the freedom of Peter Theo Curtis, an American journalist held by al-Qaeda’s Syrian affiliate, the al-Nusra Front. 
Qatar believes its links with groups like Hamas, the Taliban, and al-Qaeda have softened these group’s positions, making them more amenable to negotiations. 
Of course, Qatar’s biggest Gulf neighbors see things differently; but, during past disagreements, US diplomacy managed to keep the peace. 
No longer. 
The Trump administration has shown no such capacity for defusing regional tensions. 
After the diplomatic breakdown, Trump lambasted Qatar on Twitter, appearing to take credit for the Saudi-UAE decision. 
That has complicated the US narrative, pushing the Pentagon and the State Department to assume a more neutral tone. 
A Pentagon spokesman praised the Qataris’ “enduring commitment to regional security,” while a State Department spokesman characterized the US relationship with Qatar as “strong” and commended Qatar’s efforts to curb terrorist financing. 
Qatar carved out a niche as a regional arbiter of conflicts years ago. 
But, following the Arab Spring revolts of 2011, it embraced an interventionist foreign policy that has favored Islamists, a move that has irked Egypt, Saudi Arabia, and the UAE. 
Bahraini-Qatari relations, meanwhile, have never been good. 
The two countries clashed over disputed islands in 1986. 
Today, Bahrain’s Sunni rulers despise Qatar’s friendly ties with Iran, accusing the Islamic Republic of fomenting unrest among Bahrain’s majority-Shia population. 
These four states have spearheaded the anti-Qatar campaign by sealing their borders and closing their airspace to Qatar’s planes. 
They have also cut off trade ties. 
Most of the Arab states in the Gulf have demanded that their citizens leave Qatar. 
The UAE has even made it illegal to post expressions of sympathy toward Qatar on social media. 
Though the list of countries severing ties is impressive for its unity, equally noteworthy are the omissions. 
Kuwait and Oman have not followed suit, despite both being members of the Gulf Cooperation Council (which, in addition to Qatar, includes Bahrain, Saudi Arabia, and the UAE). 
The anti-Qatar bloc could not even persuade its closest allies to follow its lead. 
Similarly, while Jordan announced that it would downgrade diplomatic relations, it has offered few details. 
As long as Qatar can maintain relations with Jordan and Kuwait, the effects of the current campaign are likely to be limited. 
Indeed, previous attempts to isolate more vulnerable Arab states have all eventually fizzled. 
After Iran captured Iraqi territory in 1986, the same alliance denouncing Qatar today pressured Syria to downgrade ties with Iran. 
Saudi Arabia used a package of carrots and sticks, including offering to replace Iran as Syria’s chief supplier of oil. 
But even though Syria was suffering a severe balance-of-payments deficit, several years of drought, and reduced foreign aid, it rebuffed the Saudi coalition. 
Qatar must also tread lightly with Iran, given their shared ownership of the world’s largest natural gas field, South Pars in the Persian Gulf. 
Iran has offered to provide the 40% of Qatar’s food supply that it no longer receives from Saudi Arabia as a result of the blockade. 
Though there is little risk that Qatar will drift too far into Iran’s orbit, any further warming of ties should trouble the US administration, given that Trump’s chief Middle East policy is to isolate Iran. 
The US leadership vacuum has, however, opened the door for regional diplomacy, with Kuwait attempting to mediate the current crisis. 
It is possible that all parties will agree to pull back from the brink in exchange for cosmetic concessions. 
But it is far more likely that the rift will persist for months, if not years, further unraveling a fragmented Middle East – and underscoring the ineffectiveness of America’s tweeter-in-chief. 

Qatar’s Source of Arab Springs 
CAMBRIDGE – There’s a joke making the rounds in the Middle East these days: three of Egypt’s former presidents, Gamal Abdel Nasser, Anwar el-Sadat, and Hosni Mubarak, meet in hell and ask each other how they fell. 
Nasser replies “poison”; Sadat says “assassination”; and Mubarak answers “Al Jazeera.” 
During the 15 years that it has broadcast from Qatar, Al Jazeera has served as far more than a traditional television station. 
With its fearless involvement in Arab politics, it has created a new venue for political freedom, which has culminated in its unreserved support for Arab revolutions. 
Al Jazeera has pushed the boundaries of information by providing live coverage of major developments in the Arab world and elsewhere. 
It is a platform for political and religious opposition groups in the Arab countries. 
It hosts Israeli spokespersons and embraces state-of-the-art broadcasting techniques. 
In short, it has become a global brand and a role model for other Arab media. 
Success breeds confidence, but it also attracts envy. 
Al Jazeera has no shortage of enemies, from the most radical Islamic fundamentalists to American and Israeli intelligence gatherers. 
And, between these two extremes, there is fierce debate over whether Al Jazeera is friend or foe. 
Liberals who welcome it as a beacon of freedom and progress in the Arab world confront those who accuse it of Islamism and religious radicalization. 
Islamists who praise it as a platform for their own views must deal with the fact that it also offers a voice to Israelis. 
Al Jazeera journalists are household names; they also suffer more harassment, imprisonment, and fatalities than their colleagues at other major news organizations. 
Al Jazeera is not a tool of the CIA, Israel, or Al Qaeda. 
Rather, it is the sophisticated mouthpiece of the state of Qatar and its ambitious Emir, Hamad Al Thani. 
Simply put, the Al Jazeera success story would not have been possible without Qatar’s backing. 
For Al Thani, Al Jazeera is integral to the national “branding” of Qatar and its foreign-policy aspirations. 
The motivation for these aspirations is unclear, but a number of ideas are worth pondering. 
After deposing his father in a palace coup in 1995, Al Thani was suddenly confronted with a hostile Saudi Arabia and Egypt, whose elites despised the ambitious young ruler and preferred his more timid father. 
Qatar was perceived as increasingly rebellious, routinely defecting from the collective and mundane line of Gulf countries’ politics – inviting further pressures from the “big brothers.” 
In response, under the young Emir’s firm hand, Al Jazeera delivered a more assertive line of criticism against governments, such as those of Egypt and Saudi Arabia, that other Arab mainstream media would do their best to avoid alienating. 
Having received carte blanche from Qatar’s political leadership to support the Arab revolutions, Al Jazeera became fully engaged in live coverage of events in Tunisia, and then in Egypt, by relying on social-media networks away from the eyes of local security officials. 
Its coverage was filled with Arab masses declaring their demands to the world. 
Banned from local media and mostly on the run, revolutionaries used Al Jazeera to reach – and mobilize – their own people. 
The channel canceled its regular programs, and was transformed into a round-the-clock workshop of live news and interviews, switching from one revolution to another. 
So, while the Arab Spring has been a genuine popular uprising against decades of corrupt and oppressive authoritarian regimes, its rapid spread, which caught almost everyone by surprise, was due in part to the influence of Al Jazeera, which became the voice of the voiceless throughout the Middle East. 
As for Qatar itself, Al Thani provided various forms of support to all of the Arab revolutions, except in Bahrain, where the Saudis and, more pointedly, the Americans, drew a very sharp red line. 
Al Thani’s political audacity stems partly from Qatar’s enormous gas resources, which have allowed him to develop vigorous policies in all areas, especially in foreign affairs. 
Protecting himself and Qatar by hosting the largest American military base outside the United States, his strategy has been to wrest control from regional third parties who might otherwise dominate the smaller Gulf states. 
At the same time, Qatar has created strong links with both Israel and many Islamist movements, including Hamas and Hezbollah. 
It has been an aggressive and risky foreign policy, but Al Thani clearly believes that he can fill a regional leadership vacuum. 
His support, via Al Jazeera, of the Arab Spring’s revolutions – and of the new generation of leaders that they have spawned – has only strengthened Qatar’s position. 
The falling regimes consistently maintained that Al Jazeera wasn’t neutral. 
They were right. 

The QE Placebo 
BRUSSELS – It has now been nearly half a year since the European Central Bank declared its intention to buy some €1.1 trillion ($1.3 trillion) worth of eurozone bonds. 
When it first announced the so-called “extended asset-purchase program” in January, the ECB emphasized that it was only expanding an existing program, under which it had been buying modest quantities of private-sector bonds, to cover government paper. 
But this pretense of continuity was just that: a pretense. 
In reality, by purchasing large volumes of government bonds, the ECB was crossing the Rubicon; after all, it is explicitly prohibited from financing governments. 
The ECB’s defense was that that the program was the only way to move inflation closer to its target of approximately 2%. 
Moreover, it pointed out, it was merely following the example of other major central banks, including the Bank of England, the Bank of Japan, and especially the US Federal Reserve, whose program of quantitative easing (QE) entailed the purchase of more than $2 trillion worth of long-term securities from 2008 to 2012. 
Legal uncertainty aside, whether the ECB’s decision to pursue QE can be justified ultimately depends on its impact. 
But, after six months, that impact remains difficult to assess. 
One reason for this is that long-term interest rates are affected not just by the actual bond purchases, but also by financial markets’ expectations about future monetary policy. 
Indeed, just one day after the ECB made its announcement – and weeks before the purchases began – interest rates fell by a fraction of a percentage point throughout the eurozone. 
When the purchases began, rates did continue to fall for a few weeks, so much so that many were concerned that there would not be enough German bonds to meet the ECB’s country-debt quota (determined according to eurozone member states’ GDP and population). 
But rates have since risen again, and have now returned, in real terms, to pre-QE levels. 
In this sense, the ECB’s bond-buying program has been a failure. 
Other indicators, however, paint a different picture. 
Notably, price growth turned positive last month, suggesting that the threat of deflation has been eliminated. 
This has prompted a modest uptick in expected inflation – the ECB’s favorite measure of price stability – not for the immediate future, but in five years, and then for five years. 
In concrete terms, the ECB is measuring its policy’s success today according to the expected inflation rate in 2020-2025. This figure, calculated from the prices of different types of indexed and non-indexed five- and ten-year bonds, is based on the somewhat heroic assumption that all of the markets for these bonds work efficiently. 
This presents a fundamental contradiction. 
QE is supposed to work via “portfolio balance effects,” which implies that markets are not fully efficient: purchases of longer-term bonds affect financial conditions by changing the types and quantity of financial assets the public holds. 
How can one use market prices as an indicator of inflation far into the future and simultaneously justify QE by claiming that most investors stick to certain asset classes and thus do not follow market signals efficiently? 
Another problem with using the five-year, five-year-forward rate of expected inflation to gauge QE’s effectiveness is that the rate is correlated with oil prices. 
Indeed, when oil prices fell last year, so did inflation expectations (measured however imperfectly). 
And the ECB’s QE announcement coincided with the beginning of the oil-price recovery, which could be expected to increase inflation expectations somewhat. 
With such coincidences and contradictions arising in nearly every aspect of the QE debate, it seems that evaluating the policy’s effectiveness is more of an art than a science. 
Unfortunately, this leaves plenty of room for distortion and bias. 
Most glaring is QE supporters’ tendency to ascribe any decline in interest rates before the policy was announced to market participants’ expectations that QE would be coming. 
Yet they do not apply the same reasoning to the decline in inflation expectations that occurred during the same period. 
They have followed the same logic since the purchases began, ignoring recent increases in interest rates, while lauding the small rise in inflation expectations as proof of QE’s effectiveness. 
In reality, of course, QE – whether the expectation or execution of it – would affect both interest rates, and the inflation expectations that are derived from them. 
So, if ECB President Mario Draghi wants to highlight the fact that nominal interest rates are lower today than last August, he must also acknowledge that, given low inflation expectations, real interest rates have moved little. 
But such pragmatic thinking has been sorely missing from discussions about QE. 
Instead, each side has caricatured the other: supporters emphasize that QE has nowhere led to runaway inflation, while opponents point out that nowhere has QE alone reignited robust growth. 
In fact, there has been neither inflation nor growth: central banks can seemingly pour hundreds of billions of dollars, euros, or yen into the market with little discernible effect. 
So QE basically consists of an exchange of two low-yielding assets – long-terms bonds and central-bank deposits. 
In broad and efficient markets, that exchange does not mean much. 

China’s Internet Revolution 
BEIJING – It is a story that has played out worldwide. 
Internet adoption reaches critical mass, changing how business is conducted and creating billion-dollar markets for digital goods and services – and causing massive “creative destruction.” 
It is now China’s turn to experience this phenomenon – only, in China’s case, it is occurring amid broad economic transformation and rapid social change. 
The collision of these forces could fundamentally transform the world’s second-largest economy. 
With 632 million users, China’s Internet has already produced a dynamic technology sector, thriving social networks, and the world’s largest e-tail (consumer-facing e-commerce) market. 
Global investors’ excitement about the IPO of China’s largest online retailer, Alibaba, reflects the scale of the economic value that has already been created. 
But most of the action so far has been on the consumer side. 
Key sectors, from manufacturing to health care, have not progressed beyond the early stages of the shift online. 
Indeed, as of 2012, only about one-quarter of China’s small and medium-size enterprises had started to use the Internet in areas like procurement, sales, and marketing – meaning that the most sweeping changes lie ahead. 
As traditional industries increase their usage of the Internet, they streamline their operations, find new methods of collaboration, and expand their reach via e-commerce – all of which accelerate productivity growth. 
The McKinsey Global Institute projects that new Web applications could enable as much as 22% of China’s total GDP growth through 2025. 
Beyond its effects on GDP and productivity, the Internet can also boost transparency and trust. 
E-tailing, for example, began with a cash-on-delivery business model. 
But, over time, online-payment platforms gained Chinese consumers’ trust, paving the way for explosive growth in e-tailing. 
Other industries are beginning to follow suit. 
Online real-estate databases match buyers and sellers faster, while reducing price premiums stemming from information asymmetries. 
Such platforms have been created for land auctions and foreclosures, as well as private transactions. 
Similarly, China’s nascent used-car market stands to benefit significantly from the Internet revolution, as e-commerce boosts the transparency of vehicle listings and transactions, and new online tools help lenders acquire and analyze credit histories in a more detailed and sophisticated way. 
Of course, though the Internet can facilitate competition, forcing companies of all sizes to raise their game, building such a trust-based system is no easy feat. 
Much of the Internet’s commercial potential stems from data collection, sharing, and analysis, all of which are fraught with privacy concerns. 
Though China’s government established preliminary rules governing online privacy in 2012, many gray areas remain, including basic issues like the types of information companies can share, how that information can be used, and what constitutes consumer consent. 
In addition to clarifying the legal framework for data sharing, the government can set an example by using the Internet to render its own data collection and transaction records more uniform and systematic. 
Moreover, by making some of its own data sets publicly available, it can kick-start an open-data movement and pave the way for the emergence of related industries. 
For Chinese firms, such a movement will have to be accompanied by a fundamental change in mentality. 
Instead of focusing on large-scale, one-size-fits-all production, firms must use the data they receive to glean more detailed insights about consumers’ preferences and expectations – and expand their portfolios to include the niche products that consumers crave. 
Given that the Internet empowers consumers to compare offerings directly and choose the most economical and attractive option, firms that attempt to adhere to business as usual will quickly be overtaken by their competitors. 
Of course, such intense competition will erode firms’ profit margins – a trend that they can offset by integrating Internet technologies into back-office functions and logistics. 
Another fundamental shift to be expected from the rise of China’s Internet economy is that the most innovative and flexible – not necessarily the largest or most established – enterprises will be the most successful. 
The Internet enables startups to scale up rapidly and at a low cost, unburdened by legacy systems and traditional methods of doing business, while blurring the lines between sectors. 
As a result, new players can emerge suddenly to challenge long-established institutions. 
Nowhere is this more apparent than in banks’ current scramble to defend their territory from online financial-services providers. 
The Internet revolution will also disrupt the labor market, with some jobs being automated away and companies facing a shortage of technologically proficient workers. 
A company’s success will depend on its employees’ willingness to acquire new skills, undertake new roles, and adapt to the faster pace and unfamiliar demands of the digital marketplace. 
But the onus of adaptation does not rest entirely on workers. 
Policymakers and business leaders must ensure that displaced workers have options for retraining, and that the education system is producing enough technology-savvy workers. 
The Internet will not only create economic momentum for China in the years ahead; it will help to transform an unsustainable growth model based on fixed investment and cheap labor. 
By unleashing the economy’s productivity-growth potential, the Internet can help China attain its goal of developing a growth model that can lift the country to high-income status. 

Monetary Mystification 
NEW YORK – Central banks on both sides of the Atlantic took extraordinary monetary-policy measures in September: the long awaited “QE3” (the third dose of quantitative easing by the United States Federal Reserve), and the European Central Bank’s announcement that it will purchase unlimited volumes of troubled eurozone members’ government bonds. 
Markets responded euphorically, with stock prices in the US, for example, reaching post-recession highs. 
Others, especially on the political right, worried that the latest monetary measures would fuel future inflation and encourage unbridled government spending. 
In fact, both the critics’ fears and the optimists’ euphoria are unwarranted. 
With so much underutilized productive capacity today, and with immediate economic prospects so dismal, the risk of serious inflation is minimal. 
Nonetheless, the Fed and ECB actions sent three messages that should have given the markets pause. 
First, they were saying that previous actions have not worked; indeed, the major central banks deserve much of the blame for the crisis. 
But their ability to undo their mistakes is limited. 
Second, the Fed’s announcement that it will keep interest rates at extraordinarily low levels through mid-2015 implied that it does not expect recovery anytime soon. 
That should be a warning for Europe, whose economy is now far weaker than America’s. 
Finally, the Fed and the ECB were saying that markets will not quickly restore full employment on their own. 
A stimulus is needed. 
That should serve as a rejoinder to those in Europe and America who are calling for just the opposite – further austerity. 
But the stimulus that is needed – on both sides of the Atlantic – is a fiscal stimulus. 
Monetary policy has proven ineffective, and more of it is unlikely to return the economy to sustainable growth. 
In traditional economic models, increased liquidity results in more lending, mostly to investors and sometimes to consumers, thereby increasing demand and employment. 
But consider a case like Spain, where so much money has fled the banking system – and continues to flee as Europe fiddles over the implementation of a common banking system. 
Just adding liquidity, while continuing current austerity policies, will not reignite the Spanish economy. 
So, too, in the US, the smaller banks that largely finance small and medium-size enterprises have been all but neglected. 
The federal government – under both President George W. Bush and Barack Obama – allocated hundreds of billions of dollars to prop up the mega-banks, while allowing hundreds of these crucially important smaller lenders to fail. 
But lending would be inhibited even if the banks were healthier. 
After all, small enterprises rely on collateral-based lending, and the value of real estate – the main form of collateral – is still down one-third from its pre-crisis level. 
Moreover, given the magnitude of excess capacity in real estate, lower interest rates will do little to revive real-estate prices, much less inflate another consumption bubble. 
Of course, marginal effects cannot be ruled out: small changes in long-term interest rates from QE3 may lead to a little more investment; some of the rich will take advantage of temporarily higher stock prices to consume more; and a few homeowners will be able to refinance their mortgages, with lower payments allowing them to boost consumption as well. 
But most of the wealthy know that temporary measures result only in a fleeting blip in stock prices – hardly enough to support a consumption splurge. 
Moreover, reports suggest that few of the benefits of lower long-term interest rates are filtering through to homeowners; the major beneficiaries, it seems, are the banks. 
Many who want to refinance their mortgages still cannot, because they are “underwater” (owing more on their mortgages than the underlying property is worth). 
In other circumstances, the US would benefit from the exchange-rate weakening that follows from lower interest rates – a kind of beggar-thy-neighbor competitive devaluation that would come at the expense of America’s trading partners. 
But, given lower interest rates in Europe and the global slowdown, the gains are likely to be small even here. 
Some worry that the fresh liquidity will lead to worse outcomes – for example, a commodity boom, which would act much like a tax on American and European consumers. 
Older people, who were prudent and held their money in government bonds, will see lower returns – further curtailing their consumption. 
And low interest rates will encourage firms that do invest to spend on fixed capital like highly automated machines, thereby ensuring that, when recovery comes, it will be relatively jobless. 
In short, the benefits are at best small. 
In Europe, monetary intervention has greater potential to help – but with a similar risk of making matters worse. 
To allay anxiety about government profligacy, the ECB built conditionality into its bond-purchase program. 
But if the conditions operate like austerity measures – imposed without significant accompanying growth measures – they will be more akin to bloodletting: the patient must risk death before receiving genuine medicine. 
Fear of losing economic sovereignty will make governments reluctant to ask for ECB help, and only if they ask will there be any real effect. 
There is a further risk for Europe: If the ECB focuses too much on inflation, while the Fed tries to stimulate the US economy, interest-rate differentials will lead to a stronger euro (at least relative to what it otherwise would be), undermining Europe’s competitiveness and growth prospects. 
For both Europe and America, the danger now is that politicians and markets believe that monetary policy can revive the economy. 
Unfortunately, its main impact at this point is to distract attention from measures that would truly stimulate growth, including an expansionary fiscal policy and financial-sector reforms that boost lending. 
The current downturn, already a half-decade long, will not end any time soon. 
That, in a nutshell, is what the Fed and the ECB are saying. 
The sooner our leaders acknowledge it, the better. 

The Shortcomings of Quantitative Easing in Europe 
CAMBRIDGE – Why has the US Federal Reserve’s policy of quantitative easing been so much more successful than the version of QE implemented by the European Central Bank? 
That intellectual question leads directly to a practical one: Will the ECB ever be able to translate quantitative easing into stronger economic growth and higher inflation? 
The Fed introduced quantitative easing – buying large quantities of long-term bonds and promising to keep short-term interest rates low for a prolonged period – after it concluded that the US economy was not responding adequately to traditional monetary policy and to the fiscal stimulus package enacted in 2009. 
The Fed’s chairman at the time, Ben Bernanke, reasoned that unconventional monetary policy would drive down long-term rates, inducing investors to shift from high-quality bonds to equities and other risky securities. 
This would drive up the value of those assets, increasing household wealth and therefore consumer spending. 
The strategy worked well. 
Share prices rose 30% in 2013 alone, and house prices increased 13% in the same twelve months. 
As a result, the net worth of households increased by $10 trillion that year. 
The rise in wealth induced consumers to increase spending, which restarted the usual expansionary multiplier process, with GDP up by 2.5% in 2013 and the unemployment rate falling from 8% to 6.7%. 
The expansion continued in subsequent years, bringing the current unemployment rate down to 5% – and the unemployment rate among college graduates to just 2.5%. 
The ECB has been following a similar strategy of large-scale asset purchases and extremely low (indeed negative) short-term interest rates. 
But, although the policy is the same as the Fed’s, its purpose is very different. 
Because Europe lacks the widespread share ownership that exists in the United States, quantitative easing cannot be used to stimulate consumer spending by raising household wealth. 
Instead, a major if unspoken purpose of the ECB’s low-interest-rate policy has been to stimulate net exports by depressing the value of the euro. 
The ECB succeeded in this, with the euro’s value falling by some 25% – from $1.40 in the summer of 2014 to $1.06 by the fall of 2015. 
I have been an advocate of reducing the value of the euro for several years, so I think this strategy was a good one. 
But, although the fall in the value of the euro has stimulated the eurozone’s net exports, the impact on its members’ exports and GDP has been quite limited. 
One reason for this is that much of the eurozone countries’ trade is with other eurozone countries that use the same currency. 
Moreover, exports to the US don’t benefit much from the decline of the euro-dollar exchange rate. 
European exporters generally invoice their exports in dollars and adjust their dollar prices very slowly, a point made clear in an important paper that Gita Gopinath of Harvard presented at the Federal Reserve’s Jackson Hole conference in August 2015. 
As a result, total net exports from the eurozone rose less than €3 billion ($3.2 billion) between September 2014 and September 2015 – a negligible amount in an €11 trillion economy. 
A further motive of the ECB’s bond purchases has been to increase the cash that eurozone banks have available to lend to businesses and households. 
But, as of now, there has been very little increase in such lending. 
Finally, the ECB is eager to raise the eurozone inflation rate to its target of just under 2%. 
In the US, the QE strategy has increased the “core” inflation rate – which excludes the direct effect of declining prices of energy and food – to 2.1% over the past 12 months. 
This has been a by-product of the increase in real demand, achieved by reducing unemployment to a level at which rising wages contribute to faster price growth. 
This strategy is unlikely to work in the eurozone, because the unemployment rate is still nearly 12%, about five percentage points higher than it was before the recession began. 
The ECB’s quantitative easing policy can probably achieve higher inflation only through the increase in import prices resulting from a decline in the value of the euro. 
This very limited process still leaves core inflation in the eurozone below 1%. 
ECB President Mario Draghi recently responded to the new evidence of eurozone weakness and super-low inflation by indicating that the Bank is likely to ease monetary conditions further at its next policy-setting meeting in March. 
This could mean further reducing already-negative short-term interest rates and expanding and/or extending its bond-purchase program. 
Eurozone financial markets reacted in the expected way. 
Long-term interest rates fell, equity prices rose, and the euro declined relative to the dollar. 
But past experience and the reasons spelled out here suggest that these policies will do very little to increase real activity and price inflation in the eurozone. 
To make real progress toward reviving their economies, the individual countries need to depend less on quantitative easing by the ECB and focus squarely on structural reforms and fiscal stimulus. 

Quenching America’s Thirst for Oil 
The United States consumes a quarter of the world’s oil, compared to 8% for China. 
Even with high Chinese growth expected in coming years, the world will not run out of oil anytime soon. 
Over a trillion barrels of proven reserves exist, and more is likely to be found. 
But two-thirds of those proven reserves are in the Persian Gulf, and are thus vulnerable to disruption. 
In the past, rising prices had a strong effect on US oil consumption. 
Since the price spikes of the 1970’s, US oil consumption per dollar of GDP has fallen by half, which also reflects the general economic shift away from industrial manufacturing to less energy-intensive production. 
After all, it requires a lot less energy to create a software program than it does to produce a ton of steel. 
In the early 1980’s, energy costs accounted for 14% of America’s economy. 
Today, they account for 7%. 
Adjusted for inflation, oil prices would have to reach $80 per barrel (or $3.12 per gallon of gasoline) to reach the real level recorded in March 1981. 
According to the US government, if there are no supply disruptions, and the American economy grows at an annual rate of 3%, the price of a barrel of oil will decline to $25 (in 2003 dollars) in 2010 and then rise to $30 in 2025. 
The energy intensiveness of the economy will continue to decline at an average annual rate of 1.6%, as efficiency gains and structural shifts offset part of the overall growth in demand. 
Nonetheless, dependency on oil will grow at an annual rate of 1.5%, from 20 million barrels per day in 2003 to 27.9 million in 2025. 
The American political system has difficulty in agreeing on a coherent energy policy. 
But over the next decade, the politics of energy in the US may gradually change. 
Some observers detect a new “Geo-Green” coalition of conservative foreign-policy hawks, who worry about America’s dependence on Persian Gulf oil, and liberal environmentalists. 
In the hawks’ view, the real energy problem is not the absence of petroleum reserves, but the fact that they are concentrated in a vulnerable area. 
The answer is to curb America’s thirst for oil rather than increasing imports. 
Greens argue that even if energy supplies are abundant, the ability of the environment to support current rates of consumption is limited. 
The middle of the range of scenarios considered by the Intergovernmental Panel on Climate Change projects that atmospheric CO2 concentrations will reach nearly three times their pre-industrial level in 2100. 
While the Bush Administration remains skeptical about the science behind such projections, some state and local governments are enacting measures to cut CO2 emissions. 
More importantly, companies such as General Electric are committing to green goals that go well beyond government regulations. 
A recent report by the bipartisan National Commission on Energy Policy exemplifies the new coalition. 
While President Bush argues that technological advances in hydrogen fuels and fuel cells will curb oil imports in the long run, such measures require major changes in transportation infrastructure that will require decades to complete. 
The commission suggests policies that could be implemented sooner. 
For example, in recent testimony before Congress, James Woolsey, a commission member and former CIA director, urged the use of hybrid gasoline/electric vehicles that could charge their batteries overnight with cheap off-peak electricity; energy efficient ethanol made from cellulose; and a ten-mile-per-gallon increase in fuel-efficiency requirements. 
He argued that this agenda could cut gasoline consumption significantly in a matter of years rather than decades. 
It would also avoid the need for dramatic increases in gasoline or carbon taxes, which are broadly accepted in Europe and Japan, but remain the kiss of death for American politicians. 
But US government policies are unlikely to change Americans’ energy consumption significantly in the next few years. 
Even if a new administration were to enact new policies after Bush leaves office in 2008, there would still be a lag prior to any effect on actual consumption. 
In the next few years, market forces are likely to be more important than government policies in influencing consumption patterns. 
But over the next decade, the combination of markets and policies could make a big difference. 
For example, between 1978 and 1987, government regulations produced an improvement of 40% in the fuel efficiency of new American-made cars. 
In a surprise-free world, the Bush administration is probably right that America’s thirst for oil will grow by 1.5% annually over the next two decades. 
But political disruption in the Persian Gulf or a new terrorist attack in the US would drive up oil prices rapidly, and the political climate in America might also change quickly. 
The probability of such events is not negligible. 
Energy independence may be impossible for a country that consumes a quarter of the world’s oil but has only 3% of its reserves. 
Even so, a major decline in America’s thirst for oil is not out of the question in the longer term. 

China’s Inscrutable Contraction 
CAMBRIDGE – While virtually every country in the world is trying to boost growth, China’s government is trying to slow it down to a sustainable level. 
As China shifts to a more domestic-demand driven, services-oriented economy, a transition to slower trend growth is both inevitable and desirable. 
But the challenges are immense, and no one should take a soft landing for granted. 
As China’s economy grows relative to the economies of its trading partners, the efficacy of its export-led growth model must inevitably fade. 
As a corollary, the returns on massive infrastructure investment, much of which is directed toward supporting export growth, must also fade. 
Consumption and quality of life need to rise, even as China’s air pollution and water shortages become more acute in many areas. 
But, in an economy where debt has exploded to more than 200% of GDP, it is not easy to rein in growth gradually without triggering widespread failure of ambitious investment projects. 
Even in China, where the government has deep pockets to cushion the fall, one Lehman Brothers-size bankruptcy could lead to a major panic. 
Think of how hard it is to engineer a soft landing in market-based economies. 
Many a recession has been catalyzed or amplified by monetary-tightening cycles; former US Federal Reserve Chairman Alan Greenspan was christened the “maestro” in the 1990s, because he managed to slow inflation and maintain strong growth simultaneously. 
The idea that controlled tightening is easier in a more centrally planned economy, where policymakers must rely on far noisier market signals, is highly questionable. 
If one were to judge by official and market growth forecasts, one would think that the risks were modest. 
China’s official target growth rate is 7.5%. 
Anyone forecasting 7% is considered a “China bear,” and predicting a downshift to 6.5% makes one a downright fanatic. 
For most countries, such small differences would be splitting hairs. 
In the United States, quarterly GDP growth has fluctuated between -2.1% and 4.6% in the first half of 2014. 
Of course, Chinese growth almost surely fluctuates far more than the official numbers reveal, in part because local officials have incentives to smooth the data that they report to the central authorities. 
So where is China’s economy now? 
Most evidence suggests that the economy has slowed significantly. 
One striking fact is that annual growth in electricity demand has fallen sharply, to below 4% for the first eight months of 2014, a level recorded previously only in the depths of the global financial crisis that erupted in 2008. 
For most of China’s modernization drive, electricity consumption has grown faster than output, not slower. 
Weakening electricity demand has tipped China’s coal industry into severe distress, with many mines effectively bankrupt. 
Falling house prices are another classic indicator of a vulnerable economy, though the exact pace of decline is difficult to assess. 
The main house-price indices measure only asking prices and not actual sales prices. (Data in many other countries – for example, Spain – suffer from the same deficiency.) 
Of course, exports have also slowed, given sluggish growth in the rest of the world. 
Commodity exporters such as Australia, Indonesia, and Brazil have already felt the effects of slowing Chinese growth, as have countries, such as Germany and Switzerland, that depend on satisfying China’s voracious demand for capital-intensive goods. 
Unfortunately, China’s data are not nearly as reliable as those measuring a developed economy, which makes it difficult for anyone to be sure of what is happening. 
Electricity usage is typically one of the most reliable measures of growth; but, with the economy shifting toward services, and with many energy-intensive industries such as cement and steel production slowing down, it is perfectly possible that slow electricity growth is simply a symptom of rebalancing. 
Likewise, the softening of housing prices follows a short period in which prices more than doubled, which makes it difficult to tell whether China is facing a modest and healthy correction or outright collapse. 
And if continental Europe eventually recovers, as the US and the United Kingdom are, export growth could pick up again. 
What seems clear is that China’s leadership is intent on pursuing many of the market-oriented reforms approved by the Third Plenary in 2013. 
President Xi Jinping’s aggressive anti-corruption campaign might be seen as preparation for political resistance to further economic liberalization. 
On the other hand, one can argue that, until now, Chinese corruption was more of a tax than a paralyzing force, and that dramatically changing the rules of the game could by itself catalyze a sharp drop in output. 
Can China’s government engineer a soft landing while weeding out corruption, reducing pollution, and liberalizing markets to ensure long-term growth? 
The stakes are high. 
If Chinese growth collapses, the global fallout could be far worse than that caused by a normal US recession. 
China’s growth rate remains perched at a very high level, so there is a great deal of room to fall. 
The potential vulnerability of Western exports and equity prices is massive. 
Of the two major instances of policy tightening occurring in the world today, the US Fed’s may be the easier one to understand, but it is not necessarily more consequential for the world than what is happening in China. 

Questions for Robert Zoellick 
Paul Wolfowitz’s resignation from the World Bank solved one problem, but brought another to light. 
When Wolfowitz’s name was first mentioned as a candidate to lead the world’s premier development bank, the idea that the architect of America’s failure in Iraq would be so rewarded was met by incredulity. 
But President George W. Bush had, from the beginning of his administration, sought to undermine multilateral institutions and agreements. 
Wolfowitz’s nomination seemed to be part of that effort. 
Should Bush, a lame duck president with little support at home and less abroad, now be allowed to appoint the next World Bank president? 
Bush has already demonstrated his lack of judgment. 
Why give him another chance? 
The arguments against the “old boy” system – by which the United States appoints the head of the World Bank and Europe the head of the IMF – are especially compelling today How effective can the Bank be in promoting good governance and fighting corruption if its president is chosen in a process that demonstrates flaws in its own governance? 
How credible will an anti-corruption message be when delivered by an appointee of what is considered one of the most corrupt and incompetent administrations in US history? 
Interestingly, as several heads of US Congressional committees have pointed out, it is in America’s interest for the Bank to be led by the most qualified person, selected in an open and transparent process, regardless of nationality, gender, or race. 
This requires a change in how its president is chosen, and, at Congressional hearings on the World Bank – the first in 13 years – I, like everyone who testified, called for this key reform. 
Presidential appointments to senior posts in America’s government are subject to open hearings. 
Regardless of whether the old boy system is preserved – but especially if it is – the Bank’s Board should likewise conduct open hearings on Bush’s nominee to succeed Wolfowitz. 
Here are some of the questions – with some hints at right and wrong answers – that it should ask any proposed candidate for the Bank’s presidency, including Bush’s nominee, Robert Zoellick: 
Do you believe that the president of the World Bank should put the interests of developing countries first? 
Will you press for Europe and America to eliminate their agricultural subsidies? 
Will you advocate a development round that emphasizes liberalization of labor markets more than capital markets, elimination of non-tariff barriers that keep developing countries’ goods out of advanced industrial countries, and abolition of so-called “escalating tariffs,” which impede development? 
Will you be open to research even when that research shows that policies of the advanced industrial countries may, at least in some circumstances, not be in the interests of developing countries? 
During James Wolfensohn’s presidency of the Bank, there was a change in philosophy. 
We encouraged research-based policies, even when that research was critical of policies being pushed by certain advanced industrial countries and by some in the Bank. 
When our research showed that certain policies (like agricultural subsidies) were hurting developing countries, we publicized the findings, helping to redefine the debate. 
Will you support the initiative of developing countries to have a development-oriented intellectual property regime? 
What separates developing countries from developed countries is not only the gap in resources, but also a gap in knowledge. 
The Bank should be viewed, in part, as a Knowledge Bank, and it should advocate reforms that enhance developing countries’ access to knowledge. 
Access to generic medicines is essential if developing countries, with their limited budgets, are to improve the health of the poor. 
TRIPs, the intellectual property provisions of the Uruguay round, were designed to reduce access to generic medicines – and they succeeded. 
But as bad as TRIPs are, the bilateral trade agreements that Bush has been pushing are worse. 
Any candidate claiming to represent the interests of developing countries must distance himself from these policies. 
Will you work to redefine the criteria by which countries get access to funds? 
Today, money goes to countries that are neither most in need nor can most effectively use it. 
Complying with current orthodoxies – for example, on privatization and liberalization – can earn you points on “good governance,” and thus increase aid allocations—even when they reduce true aid effectiveness. 
Do you think countries that are corrupt should be cut off from funding? 
If so, will do you so in a consistent way? 
If not, how should the Bank respond? 
Will you support a comprehensive anti-corruption agenda, including closing down secret bank accounts? 
One of the flaws of Wolfowitz’s anti-corruption agenda that expansion or continuation of aid for countries favored by the Bush administration, like Iraq or Pakistan, was pushed, regardless of how corrupt they were, while there was little tolerance elsewhere. 
Problems with Uzbekistan were overlooked – until it fell out of favor with the US. 
Likewise, the Bush administration opposed the OECD initiative to restrict bank secrecy – until it realized that secret bank accounts help finance terrorists. 
Since then, it has shown that it can close secret bank accounts, but has chosen to do so only for terrorists. 
Do you think the World Bank should do more to encourage countries to adopt core labor standards? 
Not only has the Bank not been active in promoting these globally agreed standards, there is a concern that the Bank discourages collective bargaining and protections for workers when it talks about “flexible labor markets” and conditions that are conducive to private investment. 
The old boy system of choosing the head of the World Bank must go. 
It has done enough damage. 
But if the advanced industrial countries that control the Bank refuse to stand by their principles, at least they should give a nod to greater transparency. 
The world should know what it is getting. 
Open hearings would be a step in the right direction. 

Quo Vadis, Iran? 
BERLIN – Iran is in the process of wasting the biggest historical opportunity the country has had since the revolution of 1979, and perhaps even in the last hundred years. 
This opportunity is called Barack Obama. 
It is Obama’s policy of reaching out to Iran that offers the country this unique opportunity – if, and it’s a big “if,” the Iranian leadership takes it up. 
At the moment, however, little if anything suggests that this will happen, because, for Iran’s leaders, Obama’s offer also represents a grave danger. 
There is nothing they fear as much as opening up and reducing tension with America. 
Indeed, the regime welcomed George W. Bush and his neo-con administration, because it allowed Iran’s leaders to close ranks, and at the same time delivered free access to influence in Iraq and Afghanistan. 
Like all partial modernizers in authoritarian regimes, Iran’s rulers want an advanced economy, technology, and infrastructure, but not freedom, democracy or the rule of law. 
This explains their great fear of, indeed an obsession with, “color revolutions,” although they are de factoworking hard to bring one about. 
The ongoing drama of mass demonstrations, violence, torture and repression that followed June’s fraudulent election has exposed a fundamental conflict within the Iranian power elite about the basic course of the Islamic Republic. 
Does the country seek increased openness or isolation? 
Integration or destabilization? 
The decisions are anything but final, even though the isolationists now prevail. 
Although Ayatollah Khomeini’s revolution of 1979 defined itself as Islamic, at its core it was and remains a national revolution, its most important aim being the nation’s independence from the influence of foreign powers. 
Thirty years later, Obama’s offer would enable Iran not just to consolidate its independence through reconciliation with the United States, but also to live up to its increased significance within the region and in world politics. 
The dream of Iran’s resurgence as a great power and civilization could be realized in unison with the major regional and global powers, rather than ending in the nightmare of confrontation. 
Iran’s current leadership, however, has obviously bet on the nightmare option. 
What is visible in the current crisis is that the Iranian revolution against the Shah was not the first Islamic revolution, but one of the last Third World anti-colonial revolts – the end rather than the beginning of an historical era. 
One of the first successful revolutions of this kind, and certainly the most important, took place in China in 1949. Numerous successful national liberation movements in Asia, Africa, and Latin America followed. 
They were usually anti-Western in orientation, and for good reason. 
Many of these revolutions opted for the Soviet economic model, which combined a state-controlled economy with a minimal degree of integration into the world market. 
For this, many countries involved paid a high price. 
Iran’s leadership would do well to study these cases carefully. 
Indeed, the Soviet Union itself eventually collapsed because of its shortage economy, not a lack of missiles and nuclear warheads. 
Its demise could not be averted by the country’s abundance of oil and natural gas. 
But Iran’s rulers apparently don’t want to learn from history. 
Instead, they are valiantly pinning their hopes on the old decolonization/nationalist strategy, nowadays even resorting to such Stalinist tools as staged show trials. 
In the long run, though, rule by bayonet rarely works. 
Of course, all the partial modernizers in China, Russia, Vietnam, and other countries share a fear of “colored revolutions,” the non-violent upheavals that brought democracy to Georgia, Ukraine, and Lebanon in recent years. 
But to avoid this type of political modernization, these countries have all opted for economic and social liberalization and integration into the world market. 
There are still a few unreformed “Socialist” states left: North Korea and Cuba, for example, even a couple new acolytes: Venezuela and Bolivia. 
But these countries are unable to develop independently and lack a global power alternative. 
All they will leave behind for their people is another wasted chance, with shattered hopes and unpaid bills. 
And it is more to the pitiful remains of the anti-colonial revolutions in Latin America than to the community of Islamic states that Iranian President Mahmoud Ahmadinejad is drawn. 
The outcome of this stance looks even gloomier if Iranians compare themselves with India, Brazil, and Turkey. 
The impressive success of these countries has showcased the economic, social, and technological preconditions for becoming a regional or even global power in the twenty-first century. 
In the medium term, Iran’s main competitor in the region will be neither Israel nor its Arab neighbors, but Turkey. 
While Iran suppresses internal freedom, relies on a foreign policy of regional destabilization, and concentrates on developing nuclear weapons, which will reduce rather than enhance its security, Turkey is undergoing a process of successful and comprehensive modernization. 
As a result, Turkey, not Iran, is on track to become this century’s key Middle Eastern power. 
This autumn, important decisions must be made, because the uranium enrichment process continues unabated in Iran. 
Indeed, Iran is getting very close to the red line of being able to produce nuclear weapons. 
Its leadership must therefore decide whether to take the hand offered by Obama or lead the region into a new phase of confrontation. 
A look at history books could help them make the decision. 

Raúl Castro Reaches Out 
BRASILIA – Raúl Castro has begun a gradual process of changing Cuba’s economy and international relations. 
Within Cuba, he hopes to legitimize his government by improving standards of living. 
Outside of Cuba, he does not want to be held captive by Cuba’s one international supporter: Venezuelan President Hugo Chávez. 
Castro believes in giving farm workers greater incentives. 
He has authorized the sale of farm machinery and tools – centralized until now – directly to farmers, as well as handing over idle land to private cooperatives and other organizations that request them. 
He also cancelled the debts of some small producers and raised the prices paid by the state for milk and meat. 
In another measure intended to improve the lives of ordinary Cubans, he has removed restrictions on acquiring computers, microwave ovens, and other appliances. 
Cuban officials stress that the purpose of these changes is to increase efficiency, “not to alter the socialist model.” 
But, like China and Vietnam, the government will have to embrace the market more openly if it is really to improve living conditions. 
Only with foreign investment and economic liberalization – a process that has already begun in some measure – can Cuba hope to offer its 11.2 million people more consumer goods and comfort, improve the social welfare system, and rehabilitate the country’s infrastructure. 
This is essential not only in order to build a “better socialism,” as Castro has promised, but, especially, to legitimize the continuity of the regime established by his brother Fidel’s revolution. 
For now, Cuba is politically stable. 
The evolution of its internal situation leaves no doubt about the consolidation of Raúl Castro’s authority. 
There is somewhat greater freedom of expression, with debates and criticism of several aspects of Cuba’s socialist model, such as low salaries and the dual monetary system, which has caused income inequality by favoring those who work in tourism and for foreign companies. 
But greater political liberalization is unlikely in the short or medium term. 
Cuba’s government argues that America’s financial and political support for the opposition impedes that. 
Nevertheless, with Felipe Pérez Roque as Minister of Foreign Affairs, Cuba continues to conduct a pragmatic foreign policy. 
Venezuela and China have become Cuba’s main economic and commercial partners, and may continue to be so. 
But Raúl Castro wants to avoid dependence on one or two countries alone. 
His objective is to diversify Cuba’s foreign relations and prevent problems that any change in these countries could cause his regime – a constant imperative since the collapse of the Soviet Union. 
As a result, relations with Latin America’s giants, Brazil and Mexico, are being put on a more normal footing, relations with Spain are being improved. 
Moreover, negotiations with the European Union have been resumed, greater understanding with the Vatican is being fostered, and Castro himself has publicly suggested the possibility of dialogue with the United States. 
Although Venezuela provides between $1.5 and $2 billion annually to Cuba, Castro regards Chávez as something of a headache, owing to his rhetoric and his confrontational attitude with several countries. 
Chávez is simply not the right person to help Cuba normalize its international relations. 
Moreover, Venezuela has its own economic problems, despite its enormous dollar reserves. 
Shortages of medicines and basic foodstuffs such as milk, sugar, eggs, beef, and chicken abound as a consequence of price controls and mounting inflation. 
This reminds Castro of the economic dislocations that led the Soviet Union to slash its aid to Cuba in the years before it collapsed. 
Venezuela’s problems make collaboration and support from Brazil – the southern hemisphere’s largest industrial power – even more important. 
During President Luís Ignacio da Silva Lula’s visit to Havana in January 2008, Brazil and Cuba signed several economic and commercial agreements. 
Indeed, Brazil doubled its loan to Cuba for the purchase of foodstuffs and medicines, to $200 million, and has arranged projects to rehabilitate Cuba’s infrastructure with the participation of Brazilian companies. 
Other agreements include a project in which Brazil’s state energy company, Petrobrás, and Cuba’s Cupet will extract oil in the Gulf of Mexico, and another that involves technological aid from the Brazilian Company Pessquisa Agropecuária for the development of soya production in Cuba. 
Indeed, as these initiatives suggest, rapprochement with Brazil and Mercosur appears to be Cuba’s best international alternative as Raúl Castro seeks to avoid falling into America’s economic orbit. 

Raúl Castro’s China Strategy 
MEXICO CITY -- Fidel Castro’s resignation from two of his three leadership posts, together with the appointment of his younger brother, Raúl, as his successor, marks the end of an era…sort of. 
Raúl replaced Fidel as President of the Councils of Ministers and of State, but not as First Secretary of the Cuban Communist Party. 
And, in a scene worthy of the glory years of Stalinism, Raúl received the unanimous permission of Cuba’s “parliament” to consult with Fidel on all major issues. 
As long as Fidel is around – writing, meeting foreign dignitaries, and weighing in on everything from ethanol to the American presidential campaign – two things will remain clear. 
First, Raúl will barely be able to budge even on the modest, strictly economic and regulatory reforms that he hopes, somewhat naïvely, will put food back on Cubans’ table. 
Second, while the succession arrangement that the Castros designed years ago has the advantage of stability and predictability, Raúl will be unable to replace the old guard with younger leaders (his successor in the Armed Forces is 72 and his vice-president is 77). 
Doing so would give whomever he chooses an edge when Raúl, who is 76, passes on, and he and Fidel do not necessarily agree on who should come next. 
Raúl’s strategy is to pursue a Vietnamese or Chinese solution: pro-market economic reforms under continued Communist rule, with no progress on democracy or human rights. 
For those in the United States who have rightly concluded that the half-century trade embargo has proved counter-productive, this is an appealing halfway response that provides an alibi for moderation: one day, economic reforms will bring political change. 
For Latin American pragmatists, always fearful of Cuban fifth columnists, it offers a way to square the circle: encouraging change in Cuba without going too far. 
And, for some European governments, it is a typical hands-off remedy that places the problem squarely in America’s lap. 
But the Vietnamese or Chinese roads are unacceptable in Latin America, which has made huge progress in transforming advances in democracy and respect for human rights into a regional legal order that goes beyond national sovereignty or the sacrosanct principle of non-intervention. 
After decades of coups, dictatorships, torture, and disappearances, Latin America today, while not devoid of these plagues, has built a number of firewalls to forestall them. 
Accepting a Cuban exception would represent an enormous setback. 
What will deter the next Central American dictator and murderer if the Cubans are given a free pass? 
Invoking pragmatism to justify continued human rights violations in Cuba merely because economic reforms might dissuade a mass exodus to Mexico and Florida is a bad idea. 
Mexico has seemed especially tempted to return to its Cuban complicity of the past. 
It appears that during an upcoming visit to Havana, the Mexican foreign minister will not meet with local dissidents, breaking with precedents established since 1993. 
There are sound reasons to set a timetable for Cuba’s return to the Latin American democratic fold, without imposing elections as a first step or precondition. 
Indeed, free and fair elections and full respect for human rights can come at the end of the road – if that end is clearly established. 
What would be unacceptable are the two extremes: making an immediate transition to democratic rule a precondition for normalization of relations with the US and re-entering the Latin American community, or exempting Cuba from the obligation to adhere to democratic principles and practices on the grounds that it is somehow different. 
In 1953, Fidel Castro, in what is probably the best-known speech in Latin American political history, proclaimed in court that history would absolve him. 
In fact, history will judge him, and his nearly 50 years in power, only when the results are in: when the initial achievements in health and education and combating inequality are evaluated according to international standards and with the transparency to which the rest of the region’s countries are subject. 
Only then we will know if the trade-off at least made sense, even if for many it was unacceptable: authentic social justice and progress in exchange for authoritarian rule, international ostracism, and a cultural desert. 

Race and Republicanism 
Race has always been a provocative subject when the needs of science and statistics intersect with politics. 
Now that debate is once again heating up in France, as the planned introduction of “ethnic statistics” has caused a fierce dispute that touches the very heart of French republicanism. 
According to a law that dates back to the French Revolution, and reconfirmed in 1978, French government officials are forbidden to collect information about a citizen’s ethnic or racial origins, whether real or alleged, when conducting a census or other efforts to gathering statistical information on the population. 
There are two main reasons for this. 
The first is the republican principle, enshrined in the Constitution, that recognizes only citizens and does not accept any distinction among them due to origin, race, or religion. 
The second reason is historic: the painful and still vivid memories of the Vichy regime of WWII, when citizens’ “racial” and religious origin was stamped on national identification documents and was used as a key tool in rounding up French Jews for delivery to the death camps. 
Today, the issue has returned to the forefront because of a new fight against racial discrimination, which appears to require more accurate measures of social inequality. 
Existing public statistics, it is believed, do not provide enough relevant information to analyze the possibility of discrimination in employment or housing. 
After all, without appropriate statistics, it is difficult to prove discrimination. 
Indeed, many argue that by refusing to take into account distinctions linked to ethnic and religious origin, these distinctions are legitimized. 
One British social critic, quoted by the sociologist Dominique Schnapper, compares the behavior of the French, unwilling to mention ethnic discrimination, with English people of the Victorian era, who refused to talk about sex. 
Supporters of gathering statistics on race and religion also look to the experiences of the United States, Britain, or the Netherlands, where census takers are free to inquire about ethnic origins and a citizen’s sense of belonging. 
Since 1990, the US has collected data on ethnic origins. 
Although the First Amendment of the US Constitution bans any religious test for citizenship or political office, ruling out questions on religious beliefs, it is possible to gather information on ethnicity, even in certain cases of multiple ethnic origins, such as “White,” “Black,” “Asian,” and “native American.” 
In Britain, the concern about social promotion of minorities led to the introduction in 1991 of statistics that indicate ethnic status. 
As for the Netherlands, companies were obliged to report the ethnic composition of their workforces until the law was repealed in 2003. 
But today’s French legislation is less rigorous than it seems. 
It distinguishes between anonymous files from random samples and established for scientific purposes, which may contain data about a person’s origins, and files that are not anonymous, which have direct consequences for the people concerned – and for which it is strictly forbidden to register any information about ethnic origins. 
The 1978 law allows government statisticians to ask “delicate” questions only if these questions are relevant for the survey and with the consent of the person polled. 
But government statisticians have long been studying the national origins of immigrants, and are permitted to indicate the previous nationality of people who have acquired French citizenship. 
Thus, there is a distinction between mentioning the original nationality, which is allowed, and mentioning ethnic and racial origins, which is not. 
Is it necessary to go further just because the indicators linked to national origin are not enough to identify discrimination – especially indirect discrimination – based on ethnic grounds? 
Some surveys show that the groups involved are doubtful about this. 
Statistics are not only a reflection of reality: they help to shape it. 
Statistical categories often tend to become social categories. 
Not only are racial indications (White, Black, Arabic, Asian) very inaccurate in a world where racial mixing is now common, but, as François Héran, the head of France’s National Institute of Demographic Studies, argues, it is also necessary to prove that difference means inequality and that inequality necessarily means discrimination. 
Indeed, ethnic counting could merely reinforce the logic of community separation. 
Given the desire to penalize ethnic discrimination, the push for government to gain this knowledge is understandable. 
But the state has other means to encourage equality on the basis of national, social, or economic criteria. 
In view of the risk of inciting fresh antagonism, gathering racial, religious, and ethnic statistics may not be worth it. 
The ban against ethnic and racial data is a taboo that should not be overthrown easily, and not without carefully weighing the risk to social peace. 

Race and the US Presidential Race 
BUENOS AIRES – Three-quarters of Americans now disapprove of President George W. Bush’s performance. 
Given this, and the fact that the policies and values of John McCain and his vice-presidential nominee, Sarah Palin, are almost identical to those of Bush, you would expect Obama to be leading in the polls by a wider margin than he is. 
The reason that he is not, I suspect, is racism. 
When polled, most older white voters overwhelming reject Obama, even if many of them are unhappy with Bush. 
Indeed, one-third of Democrats have at various times told pollsters that they will not vote for a black candidate. 
And a recent Associated Press/Yahoo News poll suggested that his race is costing Obama six percentage points in the polls. 
Most of the time, this racism is covert, only hinted at through code words. 
The media, particularly the increasingly popular conservative media and talk radio, are particularly important here. 
Obama is consistently criticized for his “otherness” and his “arrogance,” terms that call to mind the image of the “uppity nigger” from the days of segregation, which are actually not so far in America’s past. 
In a recent interview, Bill O’Reilly, the most popular TV talk show host at Fox News, America’s most watched news station, talked down to Obama in so condescending a manner that some viewers were reminded of the image of a slave owner in an old Hollywood movie putting a young black upstart in his place. 
Sean Hannity, another star host at the Rupert Murdoch-owned Fox News, demanded repeatedly on air from one interviewee, Fareed Zakaria, a well-known columnist at Newsweek with a CNN talk show of his own, whether he thought America to be the greatest nation on earth. 
The dark-skinned Zakaria, a naturalized American from India with a Ph.D. from Harvard, felt compelled to affirm his loyalty for America twice. 
It is hard to imagine Hannity demanding such a public affirmation of loyalty from anyone with white skin. 
So how much is race costing Obama? 
The problem is that pollsters cannot effectively measure the problem. 
They call it the “Bradley effect,” first noted during the 1982 governor’s race in California, when Tom Bradley, the then African-American mayor of Los Angeles, lost the race to his white opponent despite leading in pre-election polls throughout the campaign. 
The idea behind the “Bradley effect” is that white voters won’t reveal their prejudices to pollsters. 
Instead, they lie and say that they will vote for the black candidate when, in fact, they have no intention of doing so. 
Of course, many people now say that Obama has proven that the “Bradley effect” is a thing of the past. 
But his continuing difficulties with white working-class voters, who in the primaries went with Hillary Clinton, suggest that, perhaps, the “Bradley effect” is still alive and well. 
Younger Americans accept inter-racial relationships as part of the normal social and sexual landscape. 
Yet, the very speed with which American society has progressed has threatened half of the country, older and mostly white, unable and unwilling to live in the present. 
The moderate Republican Party of Dwight D. Eisenhower and the Rockefellers has been taken over by a radical crowd, with even Eisenhower’s granddaughter now openly backing Obama. 
So it boggles many non-Americans’ minds that so many in that great nation still do not wake up to the reality that four more years of Republican rule will further degrade and bankrupt the country. 
In any civilized society, ignorance is not illegal and being moralistic is anybody’s inherent privilege. 
But what is alarming is how private religious beliefs and morals have increasingly shaped the secular agenda of America, whose Founding Fathers had specifically designed the Constitution to separate state and church. 
Today’s radical Republican Party represents a large segment of the population that believes that abortions and same-sex marriage are immoral, God sent America to Iraq, and that bailing out Wall Street is “socialism.” 
At the Republican Convention in August, the ear-splitting chants of “USA! 
USA!” and “Drill, baby, drill” sounded like cries of desperation, as well as of defiance against an enemy who threatens American’s divine right to remain supreme. 
Palin has since identified the enemy, proclaiming of Obama: “This is not a man who sees America like you and I see America.” 
Whether or not her judgment carries a racist undertone, as many observers believe, the polls indicate that many Americans agree. 

Racial Medicine's Revival 
It wasn't supposed to be this way. 
In the spring of 2000, Francis Collins and Craig Venter announced at a White House news conference the completion of "the first draft" of the mapping and sequencing of the human DNA. 
With President Bill Clinton and Prime Minister Tony Blair nodding their approval, Collins and Venter agreed that racial classifications make no sense at the molecular level; we humans are 99.9% alike in our DNA. 
News media around the world picked up the story, intrigued by science's definitive refutation of racial thinking. 
Not so fast. 
While we may all be 99.9% alike, there are three billion base pairs of human DNA, which leaves at least three million points of difference (single nucleotide polymorphisms, or SNP's) between any two people. 
Armed with the promise of powerful new computer-driven technology, scientific attention is becoming riveted to that remaining 0.1% of genetic difference. 
Why has science turned - after only a few years - from repudiating the existence of racial differences between human beings to generating a near obsession with them? 
Around the same time that the first draft of the human genome was being completed, IBM announced the development of a new Super Computer capable of performing 7.3 trillion calculations per second on human DNA. 
The original idea was that greater computing capacity would enable particularized therapies, because we could now turn our attention to individual differences in everything from gene therapy to the delivery of pharmaceuticals. 
But gene therapy has run up against a brick wall. 
An experiment at the University of Pennsylvania resulted in the death of the patient, Jesse Gelsinger, in late 1999. 
Then another gene therapy experiment in France generated leukemia in several patients - and the protocols were stopped immediately. 
So the blind alley of gene therapy has sent biotechnology heading full throttle down the road of drug development, based on the new genomics. 
Here, researchers are keen to exploit national, ethnic, and racial bio-databanks. 
A breakthrough came in December 1998, when Iceland's parliament approved a bill giving a private biotechnology company legal access to a comprehensive genetic database - the first of its kind - for the country's entire population of 270,000. 
Iceland has kept medical data on its population for more than a century, including records of the deceased. 
By combining both stored and newly collected blood and tissue samples, and supplementing these with detailed genealogical charts and records, the biotechnology company believes that it has gained a head start in searching for genes that are implicated in human disease. 
What is worrisome, however, is the putative "ethnic purity" of the database. 
According to the magazine Science , Iceland's "isolated position" and catastrophes that "wiped out large parts of [its] population" have left it with "a remarkably homogenic gene pool." 
This makes it "relatively easy to track down disease-causing mutations that might form the basis for new tests and therapies." 
Here was the foot in the door, the first step toward conceptualizing strategies of research and then delivery of drugs to populations that are defined by ethnicity and race. 
The next step was not long in coming. 
In March 2001, the United States Food and Drug Administration (FDA) allowed the biotech firm NitroMed to proceed with a full-scale clinical trial of what has been touted as "the first ethnic drug." 
The trial itself was the first ever "conducted exclusively in black men and women suffering from heart failure." 
The drug, BiDil, is designed to treat or prevent congestive heart failure by raising low or depleted levels of nitric oxide in the blood. 
It was originally designed for a wide population base, and race was irrelevant. 
But early clinical studies revealed no compelling results, and an FDA advisory panel voted 9 to 3 against the drug's approval. 
However, BiDil was suddenly born again as a racialized remedy. 
This is all the more remarkable because, by concentrating only on blacks, the clinical trials now under way can have little or nothing compelling to say about comparative results according to supposed racial differences between humans. 
Moreover, the underlying epidemiological mistake of such "racial medicine" is obvious. 
As Michael Klag and his colleagues showed a decade ago, in general, the darker one's skin color, the higher the rate of hypertension for American blacks, even within the African American community. 
The differences were not biological or genetic in origin , but biological in effect due to stress-related outcomes of darker skin color: reduced access to valued social goods such as employment, promotion, housing, etc. 
Unfortunately, while the new mantra of biotechnology is to claim that someday soon pharmaceuticals will be marketed to individuals based on their DNA, the fundamental truth is that selling drugs is still a mass-market business. Target markets consist of groups and population aggregates, not individuals. 
So, for the pharmaceutical industry, racial categorizations make economic sense. 
It has always been difficult to use the market to battle racial discrimination, and many governments nowadays behave as though they would prefer to give up the fight. 
But racialized drugs? 
They may be coming soon, accompanied by the retrograde racial thinking - with its full range of dangerous assumptions and historical associations - that molecular biology was supposed to have dispelled. 

Radical Islam's Challenge to Indonesia 
With the Taliban on the run, sighs of relief can be heard as far away as Indonesia. 
Protests against the US-led coalition's bombing campaign had roiled Indonesia for weeks, increasing the country's already perilous instability. 
Now that the war in Afghanistan may wind down soon, there is a fear that President Megawati Sukarnoputri will do little to change her do-nothing ways. 
These protests came as Mrs Megawati's first 100 days in office ended. 
They were but another sign of the scant political honeymoon she enjoyed. 
Grumbling about her ``slow motion'' style of government can be heard everywhere; applause for her few accomplishments - such as weathering the Islamic storm - is slight. 
Public expectations about Mrs Megawati were modest from the start. 
In her report to the annual session of the People's Consultative Assembly, delivered on November 1, Megawati admitted that her government had achieved little. 
The Assembly sought to fill this policy vacuum by outlining steps that her government must take to jump-start the economy. 
Although the Assembly remains dubious about her, Mrs Megawati was heartened when Assembly Chairman Amien Rais foreswore any challenge to her presidency for the remainder of her term, which expires in 2004. 
So Megawati need not worry about being ejected from office as her predecessor Abdurrahman Wahid was, just a few months ago. 
But Amien Rais' statement is as much self-serving as it is in the interest of political stability. 
He is the only viable rival candidate for President Megawati's job, and would be the man to step into the presidential palace should she be removed. 
No politician with any common sense (which Mr Rais has in abundance) would seek to unseat Megawati at this moment, for the challenges she faces are daunting and the chances of success small. 
Many people suspect that Megawati's inactivity results from her recognition of the almost intransigent nature of the challenges facing Indonesia. 
Hers is a kind of ``self-healing'' administration in which events are left to run their course in the hope that they won't get out of hand. 
So Amien Rais' assurance that Megawati will remain president until 2004 will not have injected a greater urgency into her presidency. 
Her sense of security (and hence her indolence) is also increased because her political opponents are in complete disarray. 
But government by sleepwalking is risky in a country's whose territorial integrity seems to be coming apart at the seams. 
The unified Indonesia of the past 40 years or so is finished. 
A new regional autonomy law will provide greater freedoms for regions and local communities to express themselves. 
Right now, this decentralization process is manageable. 
It may not remain so without a firm policy hand at the center. 
If the central government refrains from re-imposing its power in the regions, either administratively or militarily, they are more likely to remain within the Republic. 
Granting special autonomy to the two most strife-ridden provinces - Aceh and Papua (Irian Jaya) - may also reduce tension between national and local military commanders. 
However, the deep wounds of the past few years of violence will not heal unless serious efforts are made by the government in Jakarta to bring human rights abusers to justice. 
Megawati promised to pursue human rights violators, but few actions have been taken to enforce this promise. 
Such inaction cannot last if national unity is to be maintained. 
A credible system to manage Indonesia's new decentralized system is needed. 
Regions must be prevented from promulgating regulations that violate national laws or impose negative effects on other regions, as has happened with the creation by some regions of internal trade barriers. 
Because of the government's inactivity, such barriers are rising across the Indonesian archipelago. 
Regional autonomy, moreover, has not pacified ethnic tensions. 
Violent conflicts among Indonesia's myriad ethnic and religious groups continue. 
Radical Muslim groups have declared holy war, ``jihad,'' which has complicated and aggravated conflicts in the Moluccan islands. 
Fundamentalist Islamic groups, indeed, raised the most consistent challenge to Megawati's ``secular'' government even before the attacks on America. 
They are not yet a serious threat to Megawati, only because they are not backed by Indonesia's powerful Islamic political parties. 
Mrs Megawati's challenge is to keep these Islamic parties firmly within Indonesia's conventional political framework. 
In the first month of the war on terrorism, some Islamic political parties were drawn into anti-American protests and even Vice President Hamzah Haz (chairman of one of Indonesia's strongest Islamic parties) was tempted to ride this tiger for a time. 
During Megawati's trip to America to support President Bush's policy, indeed, the government in Jakarta was almost incapacitated by these small, noisy and radical Islamic groups. 
On her return, Megawati restored her credibility by ordering the security services to act against these groups. 
This restored order. 
Credit for the absence of a truly serious Islamic challenge, however, should perhaps be given to Indonesia's moderate and mainstream Muslim leaders and groups, such as Nahdatul Ulama and Muhammadyah, who avoided incendiary words and deeds. 
Their responsible behavior demonstrates the growing importance of Indonesia's civil society. 
Because Indonesia's government will likely be weak for years to come, Mrs Megawati should forge alliances with the many civil society groups that are emerging in Indonesia and which support a democratic regime. 
Such activity by the President will do more to root Indonesia's democracy than any other action Megawati might take. 

The War with Radical Islam 
NEW YORK – French Prime Minister Manuel Valls was not speaking metaphorically when he said that France is at war with radical Islam. 
There is, indeed, a full-fledged war underway, and the heinous terrorist attacks in Paris were part of it. 
Yet, like most wars, this one is about more than religion, fanaticism, and ideology. 
It is also about geopolitics, and its ultimate solution lies in geopolitics as well. 
Crimes like those in Paris, New York, London, and Madrid – attacks on countless cafes, malls, buses, trains, and nightclubs – affront our most basic human values, because they involve the deliberate murder of innocents and seek to spread fear throughout society. 
We are wont to declare them the work of lunatics and sociopaths, and we feel repulsed by the very idea that they may have an explanation beyond the insanity of their perpetrators. 
Yet, in most cases, terrorism is not rooted in insanity. 
It is more often an act of war, albeit war by the weak rather than by organized states and their armies. 
Islamist terrorism is a reflection, indeed an extension, of today’s wars in the Middle East. 
And with the meddling of outside powers, those wars are becoming a single regional war – one that is continually morphing, expanding, and becoming increasingly violent. 
From the jihadist perspective – the one that American or French Muslims, for example, may pick up in training camps in Afghanistan, Syria, and Yemen – daily life is ultra-violent. 
Death is pervasive, coming as often as not from the bombs, drones, and troops of the United States, France, and other Western powers. 
And the victims are often the innocent “collateral damage” of Western strikes that hit homes, weddings, funerals, and community meetings. 
We in the West hate to acknowledge – and most refuse to believe – that our leaders have been flagrantly wasteful of Muslim lives for a century now, in countless wars and military encounters instigated by overwhelming Western power. 
What is the message to Muslims of the US-led invasion of Iraq in 2003? 
More than 100,000 Iraqi civilians – a very conservative estimate – died in a war that was based on utterly false pretenses. 
The US has never apologized, much less even recognized the civilian slaughter. 
Or consider Syria, where an estimated 200,000 Syrians have recently died, 3.7 million have fled the country, and 7.6 million have been internally displaced in a civil war that was stoked in no small part by the US, Saudi Arabia, and other allied powers. 
Since 2011, the CIA and US allies have poured in weapons, finance, and training in an attempt to topple President Bashar al-Assad. 
For the US and its allies, the war is little more than a proxy battle to weaken Assad’s patrons, Iran and Russia. 
Yet Syrian civilians are the cannon fodder. 
Long before there was Islamist terrorism in the West, the United Kingdom, France, and the US relied on diplomatic chicanery and launched coups, wars, and covert operations in the Middle East to assert and maintain Western political control over the region. 
Historians know this sordid story, but most Westerners do not (in no small part because many of the interventions have been covert). 
Since the fall of the Ottoman Empire a century ago, Western powers have sought to control the Middle East for a variety of reasons, including claims on oil, access to international sea routes, Israel’s security, and geopolitical competition with Russia in Egypt, Syria, Iraq, and Iran. 
The US now has more than 20 military bases in six countries in the region (Afghanistan, Bahrain, Djibouti, the United Arab Emirates, Oman, and Turkey) and large-scale military deployments in many others, including Egypt, Kuwait, Qatar, and Saudi Arabia. 
It has funded violence for decades, arming and training the mujahedeen (in effect building the precursor of Al Qaeda) in Afghanistan to fight the Soviets; stoking the Iraq-Iran War in the 1980s; invading Iraq in 2003; trying to topple Assad since 2011; and waging relentless drone attacks in recent years. 
The fact that jihadist terrorist attacks in the West are relatively new, occurring only in the last generation or so, indicates that they are a blowback – or at least an extension – of the Middle East wars. 
With very few exceptions, the countries that have been attacked are those that have been engaged in the post-1990 Western-led military operations in Afghanistan, Iraq, Libya, and Syria. 
The terrorists themselves cast their actions in political terms, even though we rarely listen; indeed, the terrorists’ words are typically reported only briefly, if at all. 
But the fact is that almost every terrorist attack in the West or against Western embassies and personnel has been accompanied by the message that it is in retaliation for Western meddling in the Middle East. 
The Paris terrorists pointed to France’s operations in Syria. 
To be clear, Western actions do not provide Islamist terrorism with a scintilla of justification. 
The reason to point out these actions is to make clear what Islamist terrorism in the West represents to the terrorists: Middle East violence on an expanded front. 
The West has done much to create that front, arming favored actors, launching proxy wars, and taking the lives of civilians in unconscionable numbers. 
Ending the terror of radical Islam will require ending the West’s wars for control in the Middle East. 
Fortunately, the Age of Oil is gradually coming to an end. 
We should make that end come faster: climate safety will require that we leave most fossil-fuel resources in the ground. 
Nor do the other ancient motives for Western interference apply any longer. 
The UK no longer needs to protect its trade routes to colonial India, and the US no longer needs a ring of military bases to contain the Soviet Union. 
It is time for the West to allow the Arab world to govern itself and to choose its path without Western military interference. 
And there are heartening reasons to believe that a self-governing Arab Middle East would wisely choose to become a peaceful global crossroads and a partner in science, culture, and development. 
The Arab world has played that beneficent role in the past, and it can do so again. 
The region is filled with talented people, and the overwhelming majority in the region want to get on with their lives in peace, educate and raise their children in health and safety, and participate in global society. 
Their objectives – prosperity and human security – are our own. 

Extremism’s Strange Bedfellows 
FLORENCE – Nowadays, we associate far-right politics with fervent Islamophobia. 
But this was not always the case. 
In fact, the relationship between the extreme right, particularly in Europe, and Islamist radicalism runs deep, with adherents of both groups sharing some important traits. 
These links have often been obvious. 
Amin al-Husseini, the grand mufti of Jerusalem from 1921 to 1937, maintained close ties with the fascist regimes in Italy and Germany. 
Many Nazis found refuge in the Middle East after World War II, and some even converted to Islam. 
And Julius Evola, the reactionary Italian thinker whose work has inspired Europe’s post-war far right, expressly admired the concept of jihad and the self-sacrifice it demands. 
After the September 11, 2001, terror attacks in the United States, neo-Nazis in both the US and Europe fêted the attackers. 
An official of the National Alliance, America’s premier neo-Nazi group, said that he wished his own members had “half as much testicular fortitude.” 
In France, celebrations of the attacks were held at the National Front’s headquarters, and German neo-Nazis burned US flags. 
The Islamist group Hizb ut-Tahrir was banned in Germany in 2003, partly because of its contacts with the far right. 
Common enemies – Jews, the US government, the alleged “New World Order” – have sustained this unholy alliance politically. 
But closer examination of its ideological and psychological components reveals deeper connections. 
Unlike liberals and the left, right-wing and Islamist ideologues promote an authoritarian, hierarchical, and often ritualized vision of social order and daily life. 
They promise to purge society of the corruption that has separated it from its glorious past. 
And they believe that their racial or religious “supremacy” justifies the subjugation, and even enslavement, of others. 
According to political psychologists, conservative and right-wing views tend to be accompanied by a tendency to be easily disgusted, a “need for closure” (a preference for order, structure, and certainty), and sharp delineation of one’s “in-group” and “out-groups.” 
While such research focuses on peaceful individuals, there is evidence that right-wing and Islamist extremists also possess these personality traits. 
Start with the Islamists. 
Several jihadi operatives are known for their obsession with cleanliness. 
Faisal Shahzad, who planted bombs in New York City’s Times Square, took meticulous care of his apartment in Bridgeport, Connecticut, before leaving for his failed bombing mission. 
Mohamed Atta, the chief hijacker on 9/11, left instructions for his burial, demanding that no woman approach his body and that the men washing him touch his genitals only with gloves. 
Salafi jihadis structure their lives according to a literal reading of Islamic scripture – a simple way of satisfying their “need for closure.” 
As for the obsession with identifying the “in-group,” there is al-wala’ wal-bara, a core doctrine of Salafism that commands believers to dissociate themselves from non-believers, including impure Muslims. 
The need for certainty extends beyond religion. 
As we explore in our book Engineers of Jihad, since the 1970s, a disproportionate share of Islamist radicals have pursued hard technical fields rather than softer subjects that offer fewer clear answers. 
Both Shahzad and Umar Farouk Abdulmutallab, the Nigerian “Underwear Bomber” who attempted to detonate explosives on a flight in 2009, studied engineering. 
Of the 25 individuals directly involved in the 9/11 attacks, eight were engineers, including the two leaders, Atta and Khalid Sheik Mohammed. 
To establish whether something systematic was going on, we examined the education of more than 4,000 extremists of all stripes around the world. 
We found that, among Islamist radicals born and educated in Muslim countries, engineers are found 17 times more often than they are among the general population; the proportion of university graduates among radicals is four times greater. 
Within the Muslim world, more engineers tend to join radical groups in countries where economic crisis is undermining employment opportunities for elite graduates. 
They are especially likely to join at the outset of such crises. 
Among all university graduates, engineers (and, to a lesser extent, doctors) seem the most frustrated by the lack of opportunities, perhaps reflecting the ambition and sacrifice required to earn such a high-level degree. 
But this is not the whole story. 
Engineers also comprise a disproportionate share of Islamist radicals who have grown up in the West, where employment opportunities are greater. 
They are also less likely than other graduates to defect and leave violent Islamism behind. 
And, critically, radical Islamists are not the only group with a disproportionate share of engineers. 
Among radical right-wingers with a university education, engineers are similarly overrepresented. 
Meanwhile, there are almost no engineers among radical left-wing groups, which are more likely to attract graduates in humanities and social sciences. 
Analyzing poll data on 11,000 male graduates from 17 European countries, we found that, beyond being on the political right, engineers score, on average, more strongly than other graduates on almost all measures relating to the tendency toward disgust, the need for closure, and a strong in-group preference. 
These traits are much weaker among humanities and social sciences graduates. 
The traits are also weaker among women, who have a strong presence on the radical left, while being nearly absent among both radical Islamists and right-wing extremists. 
The correlation among psychological traits, academic disciplines, and presence in different radical groups is nearly perfect. 
Of course, most people who study engineering or have a strong preference for order will not become radicalized, meaning that these factors cannot be used effectively in profiling. 
But such insight into the psychology of radicalization remains important. 
Western and many Arab governments employ hundreds of people to dissuade would-be radicals, without a clear understanding of the psychological needs these ideologies serve. 
Much research remains to be done, but gaining such an understanding could help reveal better ways to meet those needs, before or after radicalization occurs. 

Radical Goals for Sustainable Development 
BERLIN – Let us imagine for a moment that we could change the world according to our wishes. 
Dramatic economic inequality gives way to social and political inclusion. 
Universal human rights become a reality. 
We end deforestation and the destruction of arable land. 
Fish stocks recover. 
Two billion people look forward to a life without poverty, hunger, and violence. 
Rather than paying lip service to climate change and resource scarcity, we start to respect and uphold the limits of our planet and its atmosphere. 
That was the aim in 2001, when the United Nations adopted the Millennium Development Goals. 
And it will be the aim next year, when the MDGs expire and the UN adopts a successor framework for environmental and development policy. 
The coming set of Sustainable Development Goals (SDGs) will seek to protect ecosystems, conserve resources, and, as with the MDGs, lift millions of people out of poverty. 
Combining environmental and developmental frameworks is a good idea – one that builds on the success of a host of legally binding international conventions and agreements crafted under the UN’s auspices to protect the climate, conserve biodiversity, uphold human rights, and reduce poverty. 
Though they may not be perfect – and, unfortunately, the countries that ratify them do not always achieve the targets – they have led to the creation of institutional processes that encourage countries to meet their promises and embolden citizens to hold governments accountable. 
But, though the SDGs will thus stand on solid legal ground, that ground must be developed further. 
For starters, global agreements and targets have not yet been put in place for major environmental challenges, including the destruction of fertile topsoil and global plastic production. 
Such agreements will be necessary to enable the SDGs to consider human rights, the environment, and development holistically. 
Researchers and civil-society organizations have been calling for a reversal of soil degradation by 2020, and are pressing for at least one international panel of experts to meet at the UN to address this central aspect of global food security. 
Every year, 12 million hectares of land – an area the size of Austria and Switzerland – are lost to overuse and excessive application of fertilizers. 
The environmental impact is magnified by large-scale farming. 
The social consequences can also be severe: eviction, the loss of livelihoods, and violent conflict. 
The use of plastic must also be reined in. 
Since the 1950s, worldwide production has increased by a factor of one hundred. 
Every year, more than 280 million tons of plastic is produced, with vast quantities making their way into groundwater, rivers, and oceans – and onward up the food chain. 
Though plastic is not biodegradable, not a single country has pledged to prevent it from entering our environment. 
Another largely unexplored possibility would be to set targets for phasing out environmentally damaging and socially detrimental subsidies. 
Globally, such subsidies, like those offered by the European Union’s Common Agricultural Policy, run into the hundreds of billions of dollars, draining budgets and often doing nothing for the poor. 
Cutting them would not only remove perverse incentives; it would also free up money for education, universal health care, and infrastructure in rural areas, where it is needed to create income opportunities. 
Unfortunately, we are unlikely to get the world of our wishes. 
The SDG negotiations reflect what is currently possible in a multilateral framework: relatively little. 
No government is truly willing to tackle the causes of inequality and hunger, which would require making fair taxation and comprehensive welfare a top priority. 
Such reforms would be more effective than any development aid, but for now they are off limits. 
The rules of the global economy also remain untouchable, making it nearly impossible to restructure financial and trade policies to ensure that they do not result in more poverty, unchecked climate change, and irreversible resource destruction. 
The language agreed upon so far is not reassuring. 
A timeworn commitment to economic growth at all cost is no answer to the question of how development can be balanced against the limits of our planet and the fact that billions of people live in poverty. 
In a finite world, infinite growth is impossible, and rising output will not put food on everyone’s table if the benefits of growth are not fairly distributed. 
It is not only the advanced countries that are impeding the creation of a bolder development agenda. 
Elites in emerging and developing countries are using the SDG negotiations primarily as a platform to call for international aid transfers. 
The UN is only as good as its members. 
We will know how good they are by the extent to which they view the SDGs as an opportunity to establish truly new priorities and truly universal goals for environmental and development policy in the twenty-first century. 

Raising The Left From The Dead 
LONDON: Victory by the Labour Party in the British election is an historic event, whose implications will spread far beyond Europe. 
It reminds us that in a democracy no ideology or party can ever take success for granted. 
Under Margaret Thatcher, Britain's Conservatives secured a seemingly unbreakable grip on power, dominating political and economic debate. 
In fact, Conservatives have ruled Britain for 70 out of the last 100 years, almost the same proportion of this century that the Communists ruled Russia. 
Such was the confidence in the Conservatives' political monopoly that, after the last elections, many commentators doubted whether a Labour government would ever be returned to office. 
Five years later, the same question is being asked about the tattered, demoralised Conservatives, who seem on the verge of a party split which could condemn them to opposition for decades. 
Shattering political monopolies is what democracy is all about. 
A second lesson from Britain is that politics is not always driven by economics. 
This election has proved that a booming economy is not enough to assure a government of re-election or even protect it from electoral catastrophe. 
As the Conservatives' unpopularity plumbed depths never before recorded in the public opinion polls, cynics in Britain said that people might talk from their hearts, but vote from their wallets. 
They might tell pollsters they were prepared to pay higher taxes for better public services and a more compassionate attitude to the poor. 
But in the end they would do exactly what they had done in each of the previous four elections - vote for a Party which proclaimed "every man for himself". 
Today this pseudo-Marxist theory for economic determinism has been refuted once and for all. 
In 1992, John Major ran for re-election in the midst of an economic slump, a vicious monetary squeeze and the aftermath of a rapid inflation. 
Economic determinists predicted that he did not stand a chance. 
He won. 
Five years later, Britain has the strongest economy in Europe, with unemployment halved and inflation a non-issue. 
Voters showed their gratitude by crushing John Major. 
Rarely, has history provided a more precise controlled experiment to test a political proposition - and prove it false. 
We can now say with confidence that Marx was wrong: politics does not follow economics. 
What account for this dramatic change? 
Half the explanation lies in the weakness and incompetence of John Major. 
In trying to explain the astonishing repudiation of Major's government, British commentators have quoted a comment made by Harold Macmillan in the 1960s, when he was asked what was the greatest problem a Prime Minister faced: "Events, dear boy, events". 
It was Major's complete inability to deal with the unexpected, his capacity to turn small political setbacks into major crises, which incited public contempt for his government. 
While many of his policies achieved satisfactory results, especially in economics, Major always looked like a victim of events, rather than their master. 
The other half of the explanation is to be found in the Labour opposition and its leader Tony Blair. 
Blair completed the purge of the party's marxist left-wingers which began almost 10 years ago. 
He repudiated its traditional socialist ideology, rewriting the party's constitution to remove all references to state ownership. 
He abandoned even the social democratic commitment to redistribution of income through taxes and public spending. 
Blair has proposed a new version of left-wing politics, completely detached from the economic preoccupations of the Marxist tradition. 
For him, the difference between left and right is moral, not economic. 
The great divide in politics is not about how the economy should be run, but instead over the social relationship between the government and the people. 
During the right-wing ascendancy of the past 20 years, the pendulum of politics swung too far towards individualism and ignored the capacity of collective action, regulated or organised by governments, to achieve what individuals could not do. 
This may sound abstract, but British voters seemed to understand what Blair meant. 
According to the polls, voters were not moved by questions about personal prosperity and taxes. 
They were more interested in social issues such as improving hospitals and schools and preventing crime. 
Voters were also surprisingly indifferent to the issue of Europe, which obsessed the Conservatives and dominated domestic and international politics in the Major years. 
In every western country - first in America, now in Britain and soon perhaps in France and Germany too - there seems to be a growing sense that the domestic problems which really matter to voters have been neglected by politicians who prefer to strut the international or European stage. 
(Even in Russia, the issue of Nato enlargement has failed to excite widespread public outcry, despite the focus on it by the new Kremlin elite.) 
Blair's election could mark a renationalisation of politics in Europe. 
Blair is the first leader of a major European country with no memories of WWII or the hardships of post-war reconstruction. 
Europe, for him, is a simply a practical and geographic reality -- neither a shining vision nor a mortal threat. 
Here is an attractive, intelligent young leader of the Left with a belief in social solidarity and a strong social conscience -- but with none of the paranoia so evident in Europe about global competition and American domination and very little interest in the massive bureaucratic structures of trans-national integration which in Europe have become identified with left-wing ideals. 
In opposition Blair showed there was life after Thatcherism for the Left. 
Now that he is in government, he will inspire new hope for the Left across Europe. 
He may even offer an alternative vision to the bureaucratic bankers' Europe promoted by Helmut Kohl and the Franco-German centre-right. 

Trump-style Politics Comes to India 
PHILADELPHIA – The decision by the widely respected economist Raghuram Rajan not to seek a second term as Governor of the Reserve Bank of India (RBI, the central bank) is likely to roil India’s financial markets, which regarded him as a critical anchor for the country’s economy. 
Investors will now dissect the implications of his departure for the ability of the monetary authorities to ensure price stability and encourage growth, or rebuild a banking system beset with non-performing loans. 
Ever since Alan Greenspan’s chairmanship of the US Federal Reserve Board, both markets and the media have tended to lionize and personalize institutions like central banks. 
But the “Greenspan effect” can impede dispassionate analysis. 
There were genuine policy differences between the RBI and Prime Minister Narendra Modi’s government, and tensions flared when officials perceived public comments by Rajan as being outside his domain. 
But the ad hominem attacks on Rajan in recent months raise large questions with serious implications for India. 
The most important question is this: Will Modi continue to maintain his strategic ambiguity about addressing his own party’s extremist elements, or will he demonstrate true leadership by curbing party members’ tirades about core state institutions and exercising greater care in selecting the heads of public institutions? 
The principal source of the attacks on Rajan was Subramanian Swamy, a bloviating Donald Trump-like figure with a penchant for bigotry and wild allegations, who was nominated to the Rajya Sabha (the upper house of parliament) by Modi’s Bharatiya Janata Party (BJP) in late April. 
Having selected Swamy for Parliament despite his unsavory reputation, the government’s failure to curb his indiscriminate attacks led to speculation that it had chosen him precisely to attack those– like Rajan – whom it wanted to undermine. 
A singular weakness of Modi’s government has been its tendency, when it comes to BJP extremists, to run with the foxes and hunt with the hounds. 
One of the grounds for attacking Rajan was that he has permanent residency in the United States and, despite being a citizen, was “mentally not Indian.” 
This was rank hypocrisy, given that Modi has been traveling the world lauding the achievements and contributions of the Indian diaspora. 
India’s best and brightest are apparently free to contribute their talents to other countries, but are suspect when it comes to helping their homeland. 
And if they do, it must be in the private sector and not in the talent-starved public sector. 
Earlier this month, in an address to the US Congress, Modi emphasized that “for my government, the Constitution is its real holy book.” 
But BJP cadres have been stoking communal tensions, most recently in Uttar Pradesh, a critical state that is due to hold elections next year. 
Encouraging ethnic and religious polarization for electoral gain is of course not unique to the BJP or India. 
But Modi’s interventions to calm troubled waters have lacked the leadership and passion he demonstrates elsewhere. 
His government’s judgment in selecting heads of public institutions is similarly questionable, especially in the case of cultural and educational institutions. 
Even if motivated by a conscious strategy to undermine the domains of the left’s cultural power, it has needlessly courted controversy by appointing people with weak credentials. 
Given the importance of human capital for India’s future, choosing people of questionable merit to lead institutions of higher education will inevitably have negative economic consequences. 
Here, too, it should be noted that all political parties in India share blame for politicizing and undermining India’s human-capital foundations. 
But a government that defends its record by claiming to be no worse than its predecessors is not one that can claim the mantle of change, as Modi’s so often does. 
To be sure, the boundaries of acceptable public discourse have been changing globally: Trump has shown that in the world’s oldest democracy, and people like Swamy exemplify it in the world’s largest. 
But rhetoric has consequences, and a politician as gifted as Modi must be aware that those in his party who are deploying public speech to undermine reputations can also weaken the very institutions that are crucial to his own laudable economic ambitions for India. 
Public servants have few defenses when attacked so openly by prominent politicians. 
An elected government may have genuine policy differences with the person heading its central bank, and it is well within its rights not to extend the incumbent’s tenure when it expires. 
But if it abandons institutional roles and norms of civil behavior, and embraces known provocateurs, it will drive away the people of talent and integrity that sound, effective institutions need. 
Just ask Raghuram Rajan. 

Africa’s Hidden Hunger 
DAR ES SALAAM – Just over 20 years ago, South African photographer Kevin Carter shocked the world with a controversial photograph of a famished young Sudanese child being watched by a vulture during a famine. 
Critics slammed the shot as “disaster porn,” calling it yet another example of how the international media sensationalize African problems. 
But what disturbs me is not the photograph. 
Rather, it is that two decades later, the conditions that the photograph depicts remain basically the same. 
Every year, 3.1 million children around the world still die of hunger. 
As an African doctor, I know that the ravages of serious malnutrition and hunger are not always visible. 
They are not always as manifest as they are in the protruding ribs of ghostly children hooked up to feeding tubes, like those I used to see in hospital wards in Tanzania. 
Chronic malnutrition, or “hidden hunger,” shows itself in other ways – but it can be just as devastating and deadly. 
And while deaths from many other diseases, including acute malnutrition, have declined, hidden hunger remains pervasive. 
In the last two decades, astounding success has been achieved in the fight against HIV, tuberculosis, and malaria. 
New HIV infections have dropped by as much as 50% in some countries in Africa, with AIDS-related deaths down by 30-48%; 
TB cases have declined by 40%, and malaria cases by 30%. 
But the stunting of early childhood growth as a result of malnutrition remains high, dropping by only about 1% over the same period. 
In Africa, hunger remains the leading cause of death in children, accounting for half of all deaths of children under the age of five and killing more than AIDS, TB, and malaria combined. 
In fact, many scientific studies have shown that a malnourished child is much more likely to contract an infection, to suffer from other illnesses, and to suffer from them longer. 
Diarrhea, for example, is a deadly disease for severely underweight children, who are 12 times more likely to die from an ailment that should be easily treated. 
And severely underweight children are 9.5 times more likely to die from malaria as well. 
Indeed, childhood malnutrition is now confirmed to be the leading cause of the global disease burden, with the World Health Organization attributing to it 45% of all deaths under the age of five in 2011. 
Recent reports from the war-ravaged Central African Republic indicate that more children there are dying from hunger than from bullets. 
These numbers make the problem of malnutrition look insurmountable. 
But what works is no secret: vitamin A, iodized salt, and fortified foods. 
The lack of vitamin A alone results in blindness in a half-million children every year, with half of them dying within 12 months of losing their sight. 
Similarly, half of all women of childbearing age in developing countries suffer from weakened immune systems, owing to anemia caused by iron deficiency. 
The long-term damage caused by malnutrition has a domino effect, impeding educational achievement, and ultimately, hobbling national economies. 
Addressing this ongoing crisis requires money – an estimated $10 billion per year – and new and better strategies to bring life-saving solutions to the mothers and children who most need them. 
But the cost looks far less daunting when one considers the cost of hunger. 
UNICEF estimates that the cost of Africa’s child malnutrition is $25 billion a year. 
And this is not the whole story. 
Malnutrition costs an estimated $3.5 trillion every year to the global economy, owing to loss of productivity and higher health-care costs. 
To meet this challenge, save lives, and improve economies, Africa needs a comprehensive strategy and increased investment in agriculture. 
The Africa Union has declared 2014 the year of agriculture and food security in Africa, and the continent’s agriculture sector is expected to grow significantly. 
In theory, that should improve overall nutrition; but increased investment in agriculture is not a panacea. 
We need to concentrate on building nutrition-sensitive agriculture programs that include small-scale farmers, households, women, and children. 
A big step would be to increase women’s control over land ownership and farming decisions, along with access to agricultural credits and subsidies designed to encourage domestic food production through home gardening and cattle and poultry husbandry. 
Studies show that women are much more likely than men to spend additional income on food and health. 
Increasing their farming income and decision-making power ultimately has a greater impact on children’s health and nutrition. 
Moreover, agricultural policies, subsidies, and investments have traditionally benefited cereal farmers. 
But policymakers need to concentrate on increasing access to more nutritious foods, such as meat, fruit, and vegetables, which are too expensive for the poor. 
Malnutrition causes the greatest damage during the first thousand days of life, leading to grievous and irreversible changes in infant health. 
To make real inroads against hidden hunger, African governments, supported by global development partners, must act quickly. 
Childhood hunger in Africa does not have to be as dramatic as that depicted in Carter’s 1993 photograph to be just as deadly. 

Ransoming Israel’s Chance for Peace 
MADRID – The exchange of prisoners between enemies is often a prelude to political reconciliation. 
Unfortunately, the recent exchange between Israel and Hamas, in which the Islamist organization gained the lion’s share of more than 1,000 prisoners in exchange for the Israeli soldier Gilad Shalit, does not augur well for the chances of an Israeli-Palestinian peace. 
Contrary to appearances, the deal is not a reflection of both sides’ interest in beginning a political rapprochement that might lead to the end of the Gaza siege and other confidence-building measures. 
This exchange reveals quite the opposite – that both parties are committed to their core values of resistance and confrontation. 
For Israel, recovering Shalit was its way to uphold an ethos of unity in times of war, and to fulfill the army’s promise to its conscripts (and their families) that no soldier, dead or alive, would ever be left behind. 
The message was that Israel must remain mobilized and alert in a hostile environment, and that its survival depends on the cohesion of its citizens’ army, as well as on solidarity with those sent into battle. 
Controversial and divisive, the Shalit deal triggered a profoundly moral debate in one of the world’s most vibrant civil societies. 
The deal is also, in the eyes of Israelis, a badge of honor for their res publica – their Periclean democracy’s claim to the moral high ground in an autocratic neighborhood. 
For Hamas, on the other hand, the prisoner exchange embodied the core value of steadfastness. 
It was about standing up to the Zionist enemy, the high-tech crusader whose military superiority can be defeated only by stubborn resistance. 
Hamas believes that the deal vindicated the teachings of Hezbollah’s leader, Hassan Nassrallah, who has defined Israel as nothing but a “spider’s web” that can be destroyed with the whisper of a sword. 
Both Hamas and Hezbollah are bound to conclude from Israel’s emotional collapse at the fate of one young soldier that its helplessness in dealing with psychological and sentimental dilemmas opens the way to its eventual strategic defeat. 
Meanwhile, the deal severely compromised the leadership of Mahmoud Abbas, the president of the Palestinian Authority, who has been clamoring for years for the release of prisoners in order to boost his popular standing and enhance his position as Israel’s interlocutor for peace. 
Hamas’ resounding success in bringing home the heroes of the Palestinian cause was a major defeat for Abbas – and a significant blow to the peace process. 
The Shalit deal clearly gave a boost to the war camp in Palestine and weakened its champions of peace. 
The sad irony is that Abbas is still cooperating with Israel in curtailing Hamas in the West Bank, and is still detaining hundreds of Hamas militants, among them some who were arrested for planning abductions of Israeli soldiers and civilians. 
The Arab Spring has pushed Israel into a strategic trap from which it can extricate itself only through accommodation with the Palestinians. 
In the current political climate, Arab leaders, whether conservative or revolutionary, can no longer afford to be seen as complicit with Israel and the United States in the region. 
The Palestinian cause will now resonate louder than ever in the central squares of Cairo, Amman, and Ankara. 
By freeing Gilad Shalit, Israeli Prime Minister Benjamin Netanyahu may have finally become a leader who can take difficult decisions. 
He will need this quality to make bold moves on the peace process as well. 
Admittedly, Hamas is no easy enemy, but neither is it immune to rational political calculations.True, its leader, Khaled Mashaal only recently declared in Tehran that “our aim is liberating all of Palestine from the River to the Sea.”More than once, however, he has also made conciliatory declarations. 
But Israel is not required to sign a peace deal with the erratic Mashaal. 
Its task is to boost Abbas, instead of weakening him, as it did in the Shalit deal. 
It is in Israel’s best interest to reach a settlement with the man who has constantly repudiated his predecessors’ tactics of armed conflict. 

Rating the Raters 
CAMBRIDGE – In the new financial order being put in place by regulators around the world, reform of credit rating agencies should be a key element. 
Credit rating agencies, which play an important role in modern capital markets, completely failed in the years preceding the financial crisis. What is needed is an effective mechanism for rating the raters. 
There is widespread recognition that rating agencies have let down investors. 
Many financial products related to real estate lending that Standard & Poor, Moody’s, and Fitch rated as safe in the boom years turned out to be lethally dangerous. 
And the problem isn’t limited to such financial products: with issuers of other debt securities choosing and compensating the firms that rate them, the agencies still have strong incentives to reciprocate with good ratings. 
What should be done? 
One proposed approach would reduce the significance of the raters’ opinions. 
In many cases, the importance of ratings comes partly from legal requirements that oblige or encourage institutional investors and investment vehicles to maintain portfolios of assets that have received sufficiently high grades from the recognized agencies. 
Disappointment about the raters’ performance, and skepticism about the effectiveness of regulation, has led to calls to eliminate any regulatory reliance on ratings. 
If ratings are not backed by the force of law, so the argument goes, regulators need not worry about rating quality and can leave the monitoring of raters to the market. 
Even if ratings were no longer required or encouraged by law, however, demand for ratings – and the need to improve their reliability – would remain. 
Many investors are unable to examine the extent to which a bond fund’s high yield is due to risk-taking, and would thus benefit from a rating of the fund’s holdings. 
Given past experience, we cannot rely on market reputation to ensure that such ratings will be reliable. 
Another approach would be to unleash the liability system. 
On this view, if investors were able to take raters to court, raters’ incentives would improve. 
But, while such judicial scrutiny may be effective in eliminating some egregious cases, it cannot ensure that raters do the right thing when courts are not expected to be able to tell after the fact what the right thing was. 
There is thus no substitute for providing raters with incentives to provide as accurate a rating as they can. 
This can be done by making raters’ profits depend not on satisfying the issuers that select them, but on performing well for investors. 
If raters’ profits depend on such performance – on the accuracy of their ratings – the profit motive would turn from a source of perverse incentives to a provider of beneficial incentives. 
The US Senate voted this month to incorporate such a mechanism into the financial reform bill that will now have to be reconciled by the bill passed by the US House of Representatives. 
Under the Senate’s approach, regulators would create rules under which an independent regulatory board would choose raters. 
The board would be allowed to base its choices on raters’ past performance. 
For such a mechanism to work well, it must link the number of assignments won by raters, and thus their compensation, to appropriate measures of their performance. 
Such measures should focus on what makes ratings valuable for the investors who use them – their accuracy in forecasting financial health. 
Once developed, such a mechanism should not be limited (as, unfortunately, it is in the Senate’s bill) to ratings of structured financial products. 
It should apply to all products that rating agencies evaluate. 
All ratings of financial products raise the same incentive problems and could benefit from reform. 
Predictably, the Senate’s bill encountered stiff resistance from the dominant rating agencies. 
Standard & Poor argued that such a mechanism would provide credit rating agencies with “less incentive to compete with one another, pursue innovation, and improve their models, criteria, and methodologies.” 
Well, such a mechanism would indeed reduce raters’ negative incentives to compete with one another to please issuers of securities, and to pursue innovations and improvements that enable raters to serve issuers better. 
But it would strengthen raters’ positive incentives to compete with one another to produce accurate ratings, and to pursue innovations and improvements that enable raters to achieve that far more socially beneficial goal. 
Rating agencies have been and should remain an important aspect of modern capital markets. 
But to make ratings work, the raters need to be rated. 

Taking Back Immigration 
LONDON – Within hours of US President Barack Obama’s re-election last month, a powerful belief took hold: overwhelming support from Latino voters had helped to secure his victory. 
Suddenly, the Republican Party, long identified with a hard line on immigration, started talking about the need for comprehensive reform. 
Pundits argued that if the Republicans resisted reform, they would lose the Latino vote for the next generation, relegating their party to near-permanent opposition status. 
That might or might not be true. 
But the American election’s implications for immigration run deeper than electoral expediency – with lessons for governments around the world. 
The remarkable speed with which anti-immigration positions buckled indicates that what most Americans want, above all, is a rational approach; they want their political leaders to take responsibility for the issue, rather than running away from it. 
When it comes to immigration, politicians usually are driven by fear – a tendency that has become even more acute since the onset of the global financial crisis. 
The rise of extreme nationalists in places like Greece and Finland has reinforced the belief that talking about immigration, except to argue against it, is politically fraught. 
So politicians either address immigration in the context of border security and cultural identity, or they ignore it. 
But they might well be misreading their citizens’ concerns. 
Voter reaction is often less about disliking immigrants than it is about a profound sense of frustration that governments have failed to create an immigration system that works. 
They want a system that allows for the legal entry of needed workers, while preventing illegal entry; clamps down on exploitative employers; and provides resources to integrate immigrants into communities. 
Voters might not like that some migrants enter their country illegally. 
But many find it equally or even more unconscionable that migrants are forced to live for decades in the shadows – or that children raised by immigrant parents could be deported to countries that they have never seen. 
When migration is undertaken in a legal, orderly way, the public supports it. 
A recent transatlantic survey by the German Marshall Fund found that, while majorities in all countries were worried about illegal immigration, anxiety about legal immigration was low – with only 26% of European respondents expressing concern, and just 18% doing so in the United States. 
Ceding the immigration debate to extremists has abetted another extraordinary distortion: people generally believe that the number of immigrants in their countries is far higher than it actually is. 
In the same German Marshall Fund survey, British respondents estimated that 31.8% of the United Kingdom’s population was foreign born; the true figure is 11.3%. 
Americans estimated that the US foreign-born population stood at 37.8% – triple the actual proportion, 12.5%. 
Such false perceptions make it even more difficult to have a reasonable debate about the issues. 
Tackling migration-related challenges is necessary regardless of whether one favors more or less immigration. 
Today, according to the United Nations, there are 214 million people living outside their country of birth, up from approximately 82 million in 1970. 
So, even if not a single new person were to cross a border, the challenges would still be with us. 
The reality, of course, is that many countries, especially OECD members, will decide that they need more immigrants as their own populations age and shrink. 
This implies that they should figure out how to manage immigration well, rather than outsourcing much of the process to smugglers and extremists. 
And, in a world in which nearly half of migrants are now moving from one developing country to another, the problems are no longer confined to the West. 
The good news is that there have been important advances during the last decade in managing migration. 
For example, policymakers can draw on successful programs to integrate migrant children into educational systems. 
They can learn how some countries are successfully matching their businesses’ labor needs with immigrants’ skills. 
Developing countries, meanwhile, are getting smarter about how to leverage the $406 billion in remittances that their expatriate citizens will send home this year – by issuing diaspora bonds, for example, or by creating targeted investment opportunities for them. 
Many pivotal stakeholders also are advocating for a more rational immigration system. 
Labor unions, once known for their skepticism toward immigration, are increasingly in favor of pro-immigration reforms. 
In fact, unions were a driving force behind last year’s Domestic Workers Convention, which seeks to protect the rights of the world’s estimated 50-100 million domestic workers. 
By supporting smart, progressive reforms, politicians should at least be able to neutralize the issue of immigration on Election Day, if not turn it to their advantage. 
More important, electoral politics aside, they would be helping to craft better societies whose politics are shaped by reasonable debate among citizens, not distorted by the community-destroying behavior of smugglers and extremists. 
This, after all, is what democratic politics is all about. 

Rationality versus Intelligence 
TORONTO – In 2002, the cognitive scientist Daniel Kahneman of Princeton University won the Nobel Prize in Economics for work done with his longtime collaborator Amos Tversky (who died in 1996). 
Their work had to do with judgment and decision-making – what makes our thoughts and actions rational or irrational. 
They explored how people make choices and assess probabilities, and uncovered basic errors that are typical in decision-making. 
The thinking errors they uncovered are not trivial mistakes in a parlor game. 
To be rational means to adopt appropriate goals, take the appropriate action given one’s goals and beliefs, and hold beliefs that are commensurate with available evidence. 
It means achieving one’s life goals using the best means possible. 
To violate the thinking rules examined by Kahneman and Tversky thus has the practical consequence that we are less satisfied with our lives than we might be. 
Research conducted in my own laboratory has indicated that there are systematic individual differences in the judgment and decision-making skills that Kahneman and Tversky studied. 
Ironically, the Nobel Prize was awarded for studies of cognitive characteristics that are entirely missing from the most well-known mental assessment device in the behavioral sciences: intelligence tests. 
Scientists and laypeople alike tend to agree that “good thinking” encompasses sound judgment and decision-making – the type of thinking that helps us achieve our goals. 
Yet assessments of such good (rational) thinking are nowhere to be found on IQ tests. 
Intelligence tests measure important things, but they do not assess the extent of rational thought. 
This might not be such a grave omission if intelligence were a strong predictor of rational thinking. 
But my research group found just the opposite: it is a mild predictor at best, and some rational thinking skills are totally dissociated from intelligence. 
To an important degree, intelligence tests determine the academic and professional careers of millions of people in many countries. 
Children are given intelligence tests to determine eligibility for admission to school programs for the gifted. 
Corporations and the military depend on assessment and sorting devices that are little more than disguised intelligence tests. 
Perhaps some of this attention to intelligence is necessary, but what is not warranted is the tendency to ignore cognitive capacities that are at least equally important: the capacities that sustain rational thought and action. 
Critics of intelligence tests have long pointed out that the tests ignore important parts of mental life, mainly non-cognitive domains such as socio-emotional abilities, empathy, and interpersonal skills. 
But intelligence tests are also radically incomplete as measures of cognitive functioning, which is evident from the simple fact that many people display a systematic inability to think or behave rationally despite having a more than adequate IQ. 
For a variety of reasons, we have come to overvalue the kinds of thinking skills that intelligence tests measure and undervalue other important cognitive skills, such as the ability to think rationally. 
Psychologists have studied the major classes of thinking errors that make people less than rational. 
They have studied people’s tendencies to show incoherent probability assessments; to be overconfident in knowledge judgments; to ignore the alternative hypothesis; to evaluate evidence with a “my side” bias; to show inconsistent preferences because of framing effects; to over-weigh short-term rewards at the expense of long-term well-being; to allow decisions to be affected by irrelevant context; and many others. 
All of these categories of failure of rational judgment and decision-making are very imperfectly correlated with intelligence – meaning that IQ tests tend not to capture individual differences in rational thought. 
Intelligence tests measure mental skills that have been studied for a long time, whereas psychologists have only recently had the tools to measure the tendencies toward rational and irrational thinking. 
Nevertheless, recent progress in the cognitive science of rational thought suggests that nothing – save for money – would stop us from constructing an “RQ” test. 
Such a test might prove highly useful. 
Suboptimal investment decisions have, for example, been linked to overconfidence in knowledge judgments, the tendency to over-explain chance events, and the tendency to substitute affective valence for thought. 
Errors in medical and legal decision-making have also been linked to specific irrational thinking tendencies that psychologists have studied. 
There are strategies and environmental fixes for the thinking errors that occur in all of these domains. 
But it is important to realize that these thinking errors are more related to rationality than intelligence. 
They would be reduced if schools, businesses, and government focused on the parts of cognition that intelligence tests miss. 
Instead, these institutions still devote far more attention and resources to intelligence than to teaching people how to think in order to reach their goals. 
It is as if intelligence has become totemic in our culture. 

Today’s Rational Exuberance 
LONDON – With share prices around the world setting new records almost daily, it is tempting to ask whether markets have entered a period of “irrational exuberance” and are heading for a fall. 
The answer is probably no. 
What many analysts still see as a temporary bubble, pumped up by artificial and unsustainable monetary stimulus, is maturing into a structural expansion of economic activity, profits, and employment that probably has many more years to run. 
There are at least four reasons for such optimism. 
First and foremost, the world economy is firing on all cylinders, with the United States, Europe, and China simultaneously experiencing robust economic growth for the first time since 2008. 
Eventually, these simultaneous expansions will face the challenge of inflation and higher interest rates. 
But, given high unemployment in Europe and spare capacity in China, plus the persistent deflationary pressures from technology and global competition, the dangers of overheating are years away. 
Without hard evidence of rapid inflation, central bankers will prefer to risk over-stimulating their economies rather than prematurely tightening money. 
There is thus almost no chance of a quick return to what used to be considered “normal” monetary conditions – for example, of US short-term interest rates rising to their pre-crisis average of inflation plus roughly 2%. 
Instead, very low interest rates will likely persist at least until the end of the decade. 
And that means that current stock-market valuations, which imply prospective returns of 4% or 5% above inflation, are still attractive. 
A second reason for confidence is that the financial impact of zero interest rates and the vast expansion of central bank money known as “quantitative easing” (QE) are now much better understood than they were when introduced following the 2008 crisis. 
In the first few years of these unprecedented monetary-policy experiments, investors reasonably feared that they would fail or cause even greater financial instability. 
Monetary stimulus was often compared to an illegal performance drug, which would produce a brief rebound in economic activity and asset prices, inevitably followed by a slump once the artificial stimulus was withdrawn or even just reduced. 
Many investors still believe the post-crisis recovery is doomed, because it was triggered by unsustainable monetary policies. 
But this is no longer a reasonable view. 
The fact is that experimental monetary policy has produced positive results. 
The US Federal Reserve, which pioneered the post-crisis experiments with zero interest rates and QE, began to reduce its purchases of long-term securities at the beginning of 2014, stopped QE completely later that year, and started raising interest rates in 2015 – all without producing the “cold turkey” effects predicted by skeptics. 
Instead of falling back into recession or secular stagnation, the US economy continued growing and creating jobs as the stimulus was reduced and then stopped. 
And asset prices, far from collapsing, hit new highs and accelerated upward from early 2013 onwards – exactly when the Fed started talking about “tapering” QE. 
The Fed’s policy experimentation points to a third reason for optimism. 
By demonstrating the success of monetary stimulus, the US has provided a roadmap that other countries have followed, but with long and variable lags. 
Japan started full-scale monetary stimulus in 2013, five years after the Fed. 
Europe lagged by seven years, starting QE in March 2015. 
And in many emerging economies, monetary stimulus and economic recovery only began this year. 
As a result, business cycles and monetary policy are less synchronized than in any previous global expansion. 
That is good news for investors. 
While the Fed is raising interest rates, Europe and Japan are planning to keep theirs near zero at least until the end of the decade, which will moderate the negative effects of US monetary tightening on asset markets around the world, while European unemployment and Asian overcapacity will delay the upward pressure on prices normally created by a coordinated global expansion. 
This suggests the fourth reason why the global bull market will continue. 
While US corporate profits, which have been rising for seven years, have probably hit a ceiling, the cyclical upswing in profits outside the US has only recently started and will create new investment opportunities. 
So, even if US investment conditions become less favorable, Europe, Japan, and many emerging markets are now entering the sweet spot of their investment cycles: profits are rising strongly, but interest rates remain very low. 
All of these cyclical reasons for optimism are, of course, challenged by long-term structural anxieties. 
Can low interest rates really compensate for rising debt burdens? 
Is productivity really falling, as implied by most economic statics, or accelerating, as technological breakthroughs suggest? 
Are nationalism and protectionism poised to overwhelm globalization and competition? 
Will inequality be narrowed by job creation or widen further, causing political upheaval? 
The list could go on and on. 
But these structural questions all have something in common: We will not know the true answers for many years. 
One thing we can say with confidence, however, is that market expectations about what may happen in the long term are strongly influenced by short-term cyclical conditions that are visible today. 
During recessions, investor opinion is dominated by long-term anxieties about debt burdens, aging, and weak productivity growth, as has been true in the period since 2008. 
In economic upswings, psychology shifts toward the benefits of low interest rates, leverage, and technological progress. 
When this optimistic shift goes too far, asset valuations rise exponentially and the bull market reaches a dangerous climax. 
Some speculative assets, such as cyber currencies, have already reached this point, and shares in even the best public companies are bound to experience temporary setbacks if they run up too fast. 
But for stock markets generally, valuations are not yet excessive, and investors are far from euphoric. 
So long as such cautiousness continues, asset prices are more likely to rise than fall. 

Re-Booting DDT 
PALO ALTO – Microsoft co-founder Bill Gates is fascinating. 
So is the 19-page annual letter that describes the work of the Bill and Melinda Gates Foundation, the world’s largest philanthropy. 
But for someone as smart as Gates, who can afford to hire experts on any subject under the sun, some of his foundation’s strategies are baffling. 
Consider his foundation’s approach to malaria, which focuses on bed nets, a low-tech, only modestly effective intervention, and on the development of a vaccine, a high-tech solution that has eluded intensive efforts for decades. 
This approach dismisses an old, cheap, and safe way to control the vector – the Anopheles mosquito – that spreads the disease: the chemical DDT. 
Malaria is a scourge, particularly for inhabitants of poor tropical countries. 
Forty-one percent of the world's population live in areas where malaria is transmitted, with 350-500 million cases each year. 
The disease imposes substantial costs on individuals, families, and governments. 
Costs to individuals and their families include drugs, travel to and treatment at clinics, lost time at work and school, and expenses for preventive measures. 
Costs to governments include maintenance of health facilities, purchases of drugs and supplies, public-health interventions such as spraying insecticide or distributing insecticide-treated bed nets, and lost revenue from taxes and tourism. 
Such costs are a huge economic burden on malaria-prone countries and impede their development. 
It has been estimated that annual economic growth in countries with a high incidence of malaria is 1.3 percentage points lower than that of other countries. 
Drugs called artemisinins are safe and exhibit potent, rapid anti-malarial activity. 
In combination with other anti-malarials, they have been used effectively for several years to treat multiple-drug-resistant malaria. 
But resistance has arisen and will surely increase, so that in the absence of a vaccine, elimination of the mosquitoes that spread the disease is the key to preventing epidemics. 
Unfortunately, flawed public policy limits the available options. 
In 1972, on the basis of data on toxicity to fish and migrating birds (but not to humans), the United States Environmental Protection Agency banned virtually all uses of DDT, an inexpensive and effective pesticide once widely deployed to kill disease-carrying insects. 
DDT was subsequently banned for agricultural use worldwide under the 2001 Stockholm Convention on Persistent Organic Pollutants, which stigmatized the chemical and effectively constituted a prohibition. 
A basic principle of toxicology is that the dose makes the poison. 
Although DDT is a (modestly) toxic substance, there is a world of difference between applying large amounts of it in the environment – as farmers did before it was banned – and using it carefully and sparingly to fight mosquitoes and other disease-carrying insects. 
(When it is used at all now, it is now sprayed indoors in small amounts to prevent mosquitoes from nesting.) 
The regulators who banned DDT also failed to take into consideration the inadequacy of alternatives. 
Because it persists after spraying, DDT works far better than many pesticides now in use, some of which are toxic to fish and other aquatic organisms. 
With DDT unavailable, many mosquito-control authorities are depleting their budgets by repeated spraying with short-acting, marginally effective insecticides. 
Moreover, even if mosquitoes become resistant to the killing effects of DDT, they are still repelled by it. 
An occasional dusting of window frames and doorframes is extremely effective. 
Bill Gates’s experts seem not to know that; the foundation’s annual letter contains the following single mention of DDT: “The world hoped in the 1950s and 1960s that [malaria] could be eliminated by killing mosquitoes with DDT, but that tactic failed when the mosquitoes evolved to be resistant to the chemical.” 
Since DDT was banned, insect-borne diseases such as malaria and dengue have been on the rise. 
In fact, the huge toll of diseases spread by mosquitoes has led some public-health officials to rethink DDT’s use. 
In 2006, after roughly 50 million preventable deaths, the United Nations’ World Health Organization reversed course and endorsed the use of DDT to kill and repel Anopheles mosquitoes. 
Arata Kochi, the WHO official in charge of malaria said, “We must take a position based on the science and the data. 
One of the best tools we have against malaria is indoor residual spraying. 
Of the dozen or so insecticides WHO has approved as safe for house spraying, the most effective is DDT.” 
But policies based on science and data have a short half-life at the UN. 
With a notable absence of fanfare, in May 2009 the WHO, together with the UN Environment Program, reverted to endorsing less effective methods for preventing malaria, announcing that their goal is “to achieve a 30% cut in the application of DDT worldwide by 2014 and its total phase-out by the early 2020s, if not sooner.” 
In the absence of effective vaccines or new anti-malarial drugs – and the funding and infrastructure to deliver them – this decision is tantamount to mass murder, a triumph of radical environmental politics over public health. 
How can we drain the public-policy swamp? 
First, governments should re-evaluate the voluminous data on DDT that have been compiled since the 1970’s, and they should make DDT available immediately for mosquito control indoors. 
Second, governments should oppose international restrictions on DDT and withhold all funding from UN agencies that oppose the use of the “best available technology” (including DDT) to control mosquito-borne diseases. 
Third, public-health officials should embark on a campaign to educate local authorities and citizens about the DDT. 
People now hear only the reflexively anti-pesticide drumbeat of the environmental movement, the lamentable legacy of the benighted Rachel Carson and her acolytes. 
And oh, yes, it would be helpful if the world’s greatest philanthropist were to throw his weight behind removing the stigma on DDT. 

Re-Booting Emerging Europe 
LONDON – After the 1997-1998 financial crisis, policymakers in Asia’s major emerging markets – South Korea, Thailand, Malaysia, and even Indonesia – vowed “never again” to be humiliated by international capital markets. 
They set out to address the structural weaknesses that had brought their systems down. 
Many countries in emerging Europe had similar near-death experiences in the recent global crisis. 
Thanks to international and national policy interventions, their currencies and banking systems were saved from collapse, but many of them saw massive output drops and soaring unemployment. 
Unfortunately, they have not to the same extent embraced their Asian counterparts’ determination to address the vulnerabilities. 
Following the Asian crisis, the region’s economies underwent intense internal and external scrutiny. 
It was clear that they had become more vulnerable due to loss of competitiveness, weak governance, and lack of transparency. 
Badly regulated banking sectors, feeble market structures, and weak competition, as well as trade and current-account restrictions, were also among the shortcomings identified. 
Not all Asian countries walked the line to the same extent, and some opportunities for reform were undoubtedly lost, but important lessons were learned and institutions improved. 
Similarly, emerging economies in Latin America changed their economic-policy course after devastating crises – in some cases a series of them – and moved toward strengthening monetary frameworks to reduce dollarization and build local capital markets, liberalize markets, and improve governance. 
These measures contributed to the improved economic fundamentals that helped limit the impact of the global financial crisis. 
The countries of emerging Europe must go through a similar bout of introspection, but the fact that they were saved from worst-case scenarios seems to make it more difficult to launch this process. 
The region needs to find its way back not only to rapid growth, but also to safer, more sustainable growth. 
In the decade leading up to the crisis, the emerging European economies were remarkably successful. 
Many of them grew at rates that compared favorably to other emerging markets, if not to China. 
In terms of exports, they did almost as well as, and in some respects even surpassed, the Chinese. 
But it was clear even before the crisis that emerging Europe was losing many of the strengths that explained its success. 
Labor costs grew much faster than for most competitors. 
In Latvia, for example, unit labor costs grew ten times faster than in the United States from 2001-2008. 
Similarly, the potential gains from improved trade arrangements were being exhausted as they joined the European Union. 
Looking ahead, the region’s main export markets, primarily in advanced Europe, are not expected to grow as fast as in the past. 
Moreover, the region had relied excessively on foreign savings to support growth, with many countries running large long-term current-account deficits. 
A significant part was financed by non-debt-creating inflows of foreign direct investment, but external borrowing, particularly by the private sector, also grew very rapidly. 
Foreign financing fueled foreign-currency credit growth, even for borrowers without foreign-currency income. 
As a result, the exchange-rate risk was passed on to those least able to manage it: households. 
And banks were saddled with large exposures. 
As wages grew faster than productivity in the run-up to the crisis, competitiveness also suffered, and domestic demand became the main engine of growth. 
Easy access to cheap funding and high commodity prices alleviated the need to press ahead with difficult reforms of infrastructure, utilities, education, and health care, to name a few areas. 
Diversification of production took a back seat in policy decisions as commodity prices continued to fuel rapid growth. 
Emerging Europe needs new sources of competitiveness. 
There are still important gains to be had from further improvements in the broader business environment. 
A large-scale survey of business managers, reported in this year’s EBRD Transition Report, reveals grave concerns with the availability of skilled labor, the predictability and transparency of taxation, and corruption. 
There are no shortcuts to progress on addressing these problems, but lessons from the region should inspire emulation. 
Some countries, like Hungary, have managed to sustain the quality of education, critical for long-term competitiveness. 
Estonia has shown the way towards a simplified tax administration, modeled on the Scandinavian experience. 
Georgia has managed to reduce low-level corruption radically, through deep staff cuts, improved compensation to remaining government employees, and stiffer penalties for bribery. 
Emerging Europe’s fundamental growth model is sound. 
If these economies introduce the necessary reforms, they will improve their potential growth. 
Equally important, they will create the buffers needed to offset external shocks and, as in emerging Asia and Latin America, to implement countercyclical policies that contain the extent and costs of future systemic crises. 

Re-envisioning Europe 
Many citizens of France’s 24 partners in the European Union, or of states that aspire to enter the EU soon, are angry – indeed, indignant – at France’s rejection of the European Union’s constitutional treaty. 
After the Dutch “no,” there is fear that distrust of the European project will spread. 
The French vote mainly expressed a rejection of our ruling class and deep anxiety about our economic prospects. 
It was a vote of misery and desertion, an impulse moved by panic as well as anger. 
But the size of the “no” vote also reflected the persistent lack of a clear explanation by our politicians of what the EU brings to Europeans in terms of wealth, competitiveness, social welfare and, of course, peace. 
Too often, our politicians disparage Europe and impute to it evils (like unemployment) that are really the result of domestic insufficiencies. 
Like many in France, I do not believe that this thunderbolt means the end of Europe. 
We can and must react positively, and we can do so by returning to basics and offering to Europe’s nations, including the French and the Dutch, new challenges and a new spirit. 
First, let us express the undeniable facts about Europe’s Union. 
Above all, Europe means peace. 
Peace was at the heart of the ambition of Europe’s founding fathers. 
It returned as an animating and unifying force with the collapse of communism and the Balkan wars of a decade ago. 
Peace is also a living issue today, given global terrorism and Europe’s unbreakable alliance with the United States. 
It is wrong to pretend that the risk of war is behind us. 
If Europe’s vigilance breaks down, violent conflict will become a possibility once again. 
A united Europe can respond to these dangers in ways that no single state can. 
Moreover, no single state can weigh in on international negotiations and offer solutions to economic rivalries or trade issues that threaten to degenerate into political clashes. 
Europe also incarnates democratic values. 
The Union helped countries in southern Europe overthrow authoritarian regimes in the 1980’s, and helped countries in Europe's East become democracies in the 1990’s. 
Enlargement of the EU is not only an economic duty to be borne by the richest nations; it is also the recognition of a common history and a shared culture. 
We in the wealthy West do not have the right to abandon this task, and we must welcome in the same community of destiny all democratic countries east to Russia if they fulfill the EU’s criteria. 
Europe also means prosperity and, for the countries that joined the EU recently or will join shortly, the promise of prosperity. 
All countries face, to different degrees, economic problems. 
But there is a model, simultaneously economic and social, that only Europe embodies. 
The European framework is exacting but necessary. 
It is as far from being a controlled economy as it is from resembling the libertarian anarchism that many French opponents of the constitutional treaty fear. 
It is a framework that is based on a discipline and solidarity within and between member states from which no one can be exempt. 
To be sure, behind the Union’s great schemes lurks another EU, one that is excessively bureaucratic. 
But it also must be recognized that the EU built its success on its meticulous processes and ability to regulate economic life for the benefit of all. 
It was in this way that it radically transformed economies and societies for the better. 
Nor can we overlook the banal bargaining of European leaders, the quarrels over budgets, and the rise of national egoisms whenever elections loom. 
True, such political infighting makes the EU appear as if it is no longer motivated by great and noble ambitions. 
Even the constitutional treaty, which should have been a clarion call for all Europeans, was allowed to become bogged down in minutia. 
Indeed, today no European political figure of global stature offers an ambition that resonates. 
So our task is to offer Europe a new foundation and a new impulse. 
We need founding fathers – or mothers – and nations moved by a clear understanding of their interests and a popular enthusiasm for European integration. 
The road will be long. 
But we are compelled to be confident that we can move domestic politics to higher considerations. 
Europe’s academics, senior civil servants, business executives, and trade unionists must work together to build a project that expresses a new frontier for Europe. 
If we are unable to build a new idea of and for Europe, all that Europe has achieved in the last 50 years will be put at risk. 


Re-Orienting America 
NEW YORK – Some 40 years ago, when I entered Oxford University as a graduate student, I declared my interest in the Middle East. 
I was told that this part of the world came under the rubric of “Oriental Studies,” and that I would be assigned an appropriate professor. 
But when I arrived for my first meeting at the professor’s office, his bookshelves were lined with volumes bearing Chinese characters. 
He was a specialist in what was, at least for me at the time, the wrong Orient. 
Something akin to this mistake has befallen American foreign policy. 
The United States has become preoccupied with the Middle East – in certain ways, the wrong Orient – and has not paid adequate attention to East Asia and the Pacific, where much of the twenty-first century’s history will be written. 
The good news is that this focus is shifting. 
Indeed, a quiet transformation is taking place in American foreign policy, one that is as significant as it is overdue. 
The US has rediscovered Asia. 
“Rediscovered” is the operative word here. 
Asia was one of the two principal theaters of World War II, and again shared centrality with Europe during the Cold War. 
Indeed, the period’s two greatest conflicts – the wars in Korea and Vietnam – were fought on the Asian mainland. 
But, with the end of the Cold War and the demise of the Soviet Union, Asia receded from American interest. 
In the first decade of the post-Cold War era, the US trained much of its attention on Europe. 
American policymakers focused primarily on enlarging NATO to encompass many of the former Warsaw Pact countries, and on contending with the post-Yugoslav wars. 
The second phase of the post-Cold War era began with the 9/11 terror attacks. 
What followed was a decade of US focus on terrorism and the large-scale commitment of American military forces to Iraq and Afghanistan. 
The two conflicts have claimed more than 6,000 American lives, cost more than $1 trillion, and consumed countless hours for two presidents and their senior staff. 
But now this phase of American foreign policy is ending. 
President Barack Obama has announced that US armed forces will be out of Iraq by the end of 2011. 
In Afghanistan, US force levels have peaked and are declining; the only questions concern the pace of withdrawal and the size and role of any residual US military presence after 2014. 
This is not to argue that the Middle East is irrelevant or that the US should ignore it. 
On the contrary, it is still home to massive oil and gas reserves. 
It is a part of the world where terrorists are active and conflicts have been common. 
Iran is moving ever closer to developing nuclear weapons; if it does, others may well follow suit. 
And it is a region now experiencing what could prove to be historic domestic political upheavals. 
There is also the unique American tie to Israel. 
Nevertheless, there are grounds for the US doing less in the greater Middle East than it has in recent years: the weakening of al-Qaeda; the poor prospects for peacemaking efforts; and, above all, the mounting evidence that, by any measure, massive nation-building initiatives are not yielding returns commensurate with the investments. 
At the same time, there are strong arguments for greater US involvement in the Asia-Pacific region. 
With its large populations and fast-growing economies, it is difficult to exaggerate the region’s economic importance. 
American companies export more than $300 billion in goods and services to countries in the region each year. 
Meanwhile, Asian countries are a critical source of investment for the US economy. 
Maintaining regional stability is thus critical for US (and global) economic success. 
The US has multiple alliance obligations – with Japan, South Korea, Australia, the Philippines, and Thailand – which are needed, in part, to deter North Korean aggression. 
Moreover, US policy must create an environment in which a rising China is never tempted to use its growing power coercively – within or outside the region. 
For this reason, recent US efforts to strengthen ties with India and several Southeast Asian countries make good sense. 
The US is right to shift its focus from the Middle East to the Far East. 
The good news is that this conclusion seems to be shared across the US political spectrum. 
Mitt Romney, the likely Republican nominee for president, pledges to increase the rate of shipbuilding – a commitment linked to an increased US presence in the Pacific. 
And US Secretary of State Hillary Clinton speaks of America pivoting away from the greater Middle East: “The world’s strategic and economic center of gravity is shifting east, and we are focusing more on the Asia-Pacific region.” 
Regardless of whether the twenty-first century will be another “American century,” it is certain that it will be an Asian and Pacific century. 
It is both natural and sensible that the US be central to whatever evolves from that fact. 


Re-thinking Foreign Aid 
CAMBRIDGE: Rich countries of the world give a considerable amount of foreign assistance to poorer countries every year, around $60 billion in net assistance. 
While this is not a particularly generous proportion of rich-country income (roughly one-fourth of one percent of their combined gross national products), it is a lot of money just the same. 
We might expect to get more results for this money, but in fact, most aid recipients are doing poorly in economic performance, and several studies have shown only weak links between foreign aid and improvements in living standards in the recipient countries. 
The World Bank has recently offered one reason for this weak linkage: many aid recipients have poor economic policies, such as excessive state intervention in the economy, high levels of corruption, macroeconomic instability, and the like. The Bank rightly stresses that aid cannot work in an otherwise inappropriate economic environment. 
The Bank's solution is therefore clear: aid should be better targeted to those countries undertaking economic reforms and aid should be cut off when governments are mis-using aid or are otherwise highly corrupt. 
This advice is fine, and to be supported, but it does not really go very far. 
There are at least two additional reasons why the assistance process is failing. 
The first is that most aid recipients are drowning in foreign indebtedness, with the money often owed to the very same governments and international agencies providing the "aid." 
Much aid, in fact, is simply the delivery of dollars for recycling to repay debts owed to the IMF and World Bank and rich-country governments. 
The "donors" do not cut off aid flows because they know that their past loans would fall into default if new money is not delivered to the countries to repay the old debts! 
The second reason is that the aid delivery is itself highly flawed and poorly designed. 
For example, a considerable amount of aid is simply payments to domestic firms in the rich countries to sell unneeded products to the poorer countries. 
Thus "aid" is often a marketing device for low-priority goods from the rich-countries. 
And since a lot of the aid is in the form of loans rather than grants, the poor countries get even deeper into debt as they are encouraged to purchase supplies, products, and technical assistance from the rich countries. 
At the same time, some of the forms of aid that are desperately needed by the poor countries are almost not forthcoming at all. 
Recent studies at the Harvard Institute for International Development (which can be found on http://www.hiid.harvard.edu) have shown that much of the problem of global poverty can be traced to severe geographical problems of the poorer countries, such as endemic diseases that are prevalent in the tropics, such as malaria, schistosomiasis, and hookworm. 
These diseases often lack effective preventative or curative vaccines or medicines, or the treatments that are available are too costly for the impoverished populations. 
And yet foreign assistance is barely available to meet such challenges. 
These medical challenges are scientific and technological, and thus cannot be solved by IMF-World Bank "structural adjustment loans," which focus on policy reforms rather than scientific and technological innovations. 
In the case of malaria, for example, a recent study by the Wellcome Trust in the United Kingdom estimated that total malaria research worldwide runs at about $80 million per year. 
Since malaria kills between 1 and 2 million people per year, this amounts to around $40 - $80 of research spending per malaria death per year. 
This level of spending (per death) is a tiny fraction of the research spending on "rich-country" diseases, such as asthma. 
We could make the same point concerning agricultural productivity. 
Poor countries often have extremely low agricultural productivity, not mainly because of poor policies, but because of poor soils and difficult climatic conditions. 
Again, the amount of scientific research to study tropical agricultural is a tiny fraction of the research expenditures to study "rich-country" agriculture in the temperate climate. 
One estimate has shown that the combined agriculture research spending by state governments in California, New York, and Florida exceeds the total of the worldwide system of international agricultural research centers for tropical countries. 
We need a complete re-thinking of the global assistance strategy. $60 billion of foreign aid per year could stimulate a lot of new medicines, vaccines, hybrid seeds, and the like. 
Without such aid, these scientific advances will not be forthcoming, since the needed scientific resources are almost all concentrated in the advanced economies, and normal market forces will not lead to their mobilization. 
In summary, a future aid strategy will need at least three components. 
For aid delivered to particular countries, better targeting along the lines suggested by the World Bank. 
For the poorest countries in the world, a bold cancellation of debts, so that new aid is not simply recycled for debt repayments. 
And for all of the developing world, a re-orientation of the aid effort to mobilize the scientific and technological knowledge needed to conquer unsolved problems of tropical health, agriculture, environment, energy use, and other areas that will not be overcome by economic reforms alone. 

Re-Thinking Homegrown Terrorism 
BERLIN – Homegrown terrorism stands high on the security agenda almost everywhere in Europe. 
Its links to international extremist Islamic groups require that governments review and re-think how they respond to it. 
International security cooperation, border controls, and transport sector monitoring are all important, but they don’t go far enough. 
Governments must also identify radical tendencies within Europe’s Muslim communities and devise strategies to counteract them. 
The narrow aim should be to nip terrorism in the bud, and the broader aim should be to open a dialogue with the Muslim community. 
This agenda emphasizes intercultural communication as the best way to break down prejudices and negative clichés on both sides. 
From the point of view of security policy, intercultural communication is intended to immunize those sections of the Muslim community that are deemed to be potentially receptive to extremist propaganda, with the clear aim being to prevent their radicalization and recruitment to jihad . 
For immunization of this sort to be successful, it is important to first clarify what can turn someone into a jihadi . 
There appears to be no single answer. 
But one common pattern that does emerge is that the jihadi message, because it promises meaning and identity, seems to appeal particularly to people who are unsure about who they are and where they are heading. 
Last year, a study of German Muslims analyzed social integration (including obstacles), religion, attitudes to democracy, the rule of law, and politically-inspired violence. 
The vast majority of respondents were from a migrant background, and a quarter were Muslims whose families had been in Germany for a generation or more. 
In terms of ethnic origin and religious practice, they were a representative sample of Germany’s Muslim community. 
The study provided valuable insights into homegrown terrorism, for it revealed a consistently close link between radicalization and “vicarious” experiences of marginalization and discrimination. 
A critical factor was the powerful emotions generated by United States-led military interventions in Muslim countries, and by the situation of the Palestinians. 
The blanket suspicion that was widely seen as falling on all Muslims after every terrorist attack was also strongly resented. 
But the study revealed no automatic correlation between Islamist sympathies and condoning the use of violence. 
And, while individuals who had Islamist sympathies and condoned violence were more likely than others to become involved in homegrown terrorism, a mere 1.1% of Germany’s Muslims fell into this category. 
The authors also noted that the mechanisms that turn Muslims into potential terrorists are the same as those that make German teenagers susceptible to xenophobic propaganda and right-wing extremism. 
The study’s conclusions applied only to Germany, but its main findings were largely corroborated by a Gallup global survey. 
According to Gallup, only 7% of Muslims are politically radical and condone the use of violence, and their motives are not so much religious as inspired by the demeaning political and social treatment that Muslims are perceived to suffer. 
This is in marked contrast to the conventional view in the West that the prime motive for Islamist terrorism is religious. 
Many Muslims see that erroneous assumption as evidence of the West’s contempt for Islam, reinforcing their view that Muslims as a whole are victims of discrimination and creating a vicious cycle that may generate further radicalization on both sides. 
Indeed, certain aspects of the host-country environment may contribute to radicalization. 
While external factors also play a major role, Muslim attitudes toward their host country are strongly influenced by the perception that Muslims are subjected to humiliation and oppression. 
This is liable to be reinforced by any negative experiences that Muslims may suffer themselves. 
Finally, there is the quantitative question. 
The number of potential terrorist recruits can only be estimated, but it corresponds more or less to the percentage of the population in any Western society that is likely to be involved in violent crime. 
In no sense do these people amount to a mass movement. 
But, as protagonists in the complex web of interaction between the Muslim and the Western worlds, they view militant terrorism as their preferred option. 
There are, of course, other forms of interaction, and this brings us back to the question of how to respond to homegrown terrorism. 
A distinction is often made between “hard” tools for combating terrorism – i.e. executive, including military measures – and “soft” tools such as programs promoting the integration of Muslim immigrants, efforts to stabilize and develop problem countries, and strategies for intercultural dialogue. 
The slogan “war for Muslim hearts and minds” is a grotesque yet revealing attempt to link both sets of tools. 
Even when such interaction is to communicate a political message, an image of war is used. 
If we adopt the parlance employed by al-Qaeda while at the same time proclaiming our intention to communicate with the whole Muslim world, we run the risk of reinforcing al-Qaeda’s message. 
The “competition of ideas” appears to be confined to al-Qaeda’s jihadi agenda. 
Such a response is hardly likely to alter the mindset of potential recruits. 
Today’s tendency to view Muslim grievances in one-dimensional terms reduces political discourse to a very simplistic level. 
Our interactions with Muslims may be unconsciously influenced by this defensive reflex, and that may encourage equally defensive attitudes on their part. 

Re-Thinking the Iranian Nuclear Threat 
Would it be a great disaster if Iran had nuclear weapons? 
As a habitual contrarian, I pose the question because almost everyone seems to believe that it would, and that it must be prevented at all costs. 
But is that true? 
John Bolton, the former United States Ambassador to the United Nations, said in April that “if the choice is [Iran] continuing [towards a nuclear bomb] or the use of force, I think you’re at a Hitler marching into the Rhineland point.” 
Bush, too, has compared Iranian President Mahmoud Ahmadinejad to Hitler. 
But these so-called statesmen never consider what might have happened had Germany and Britain both had nuclear weapons in 1939. 
Would Hitler, wicked as he was, have gone to war had he faced an assured threat of total destruction? 
Have we forgotten all about the theory of deterrence? 
Of course, the world would be safer if Iran did not have nuclear weapons, not because it is a “rogue” state, but because any spread of nuclear weapons is likely to make the world more dangerous. 
That is why it is worth continuing to make every effort to dissuade Iran from “going nuclear.” 
Suppose, though, that it becomes clear that Iran is playing the West along, simply buying time to build a bomb and develop a delivery system to hit Israel. 
Would that justify a pre-emptive military strike, as certain circles in Israel and the US advocate? 
Military intervention in Iran could go either way. 
Iran might lie down peacefully like Libya did when America bombed it, or turn into another Iraq. 
My own instinct is that it would unleash a train of uncontrollable events. 
It would ignite an already incendiary part of the world, with the added risk of global economic collapse if the Strait of Hormuz, through which one-fifth to one-third of the world’s oil passes, is blocked. 
On this view, if America is determined to use force to prevent Iran from becoming a nuclear weapons state, it would have to establish a quasi-permanent empire in the Middle East. 
It is to avoid this imperialist logic that sensible Americans like Henry Kissinger and George Shultz have revived the dream of a nuclear-free world. 
First proposed in the Baruch Plan of 1945, versions of it have surfaced ever since as the number of nuclear weapons states increased. 
The main idea of the Kissinger initiative is large reductions in US and Russian nuclear stockpiles, backed by improved security arrangements for fissile materials, a more intrusive inspection regime for the nuclear powers, and assistance for civilian nuclear programs. 
A better arms control system would undoubtedly make it more difficult for non-nuclear weapons states to acquire nuclear capability; but it is hard to see why reductions alone, however dramatic, in the huge number of American and Russian warheads should induce aspiring nuclear powers to give up their nuclear ambitions. 
Even if America and Russia agreed to reduce their stockpiles of nuclear warheads from 5,000-6,000 each to 1,000 each, why should that stop Iran from wanting to build 50-100 nuclear warheads and short-range delivery systems if it perceives this to be in its national interest? 
The risk is that if Iran is allowed its bomb, uncontrollable nuclear proliferation would follow. 
However, since the Non-Nuclear Proliferation Treaty (NPT) came into force in 1970, only three new nuclear states have emerged – India, Pakistan, and Israel. 
There are two reasons for this. 
First, the control system established by the NPT made it very hard for non-nuclear states to acquire nuclear weapons capability. 
Second, most non-nuclear states were happy enough to live under the security umbrella provided by the superpower nuclear duopoly. 
Given the huge obstacles – technological, economic, and political – to acquiring nuclear weapons, states must have quite specific reasons for wanting to go nuclear, such as the need for security against a regional threat or a perception that a superpower itself threatens the state’s political independence. 
Large barriers to nuclear proliferation thus exist independent of the NPT. 
There is no reason to believe that they would fall if Iran built its own weapon. 
It seems that fear of the US rather than Israel has been the main reason for Iran’s nuclear ambition. 
That is why the attractive idea of a nuclear-free Middle East, in which Iran would renounce nuclear weapons in exchange for a similar move by Israel, appears unrealistic. 
It is the US, not Israel, that Iranian hardliners want to deter, using Israel as a hostage. 
They see going nuclear as a way of limiting US military and geopolitical involvement in the Middle East. 
They bank on eventual American acquiescence, as happened with India. 
Where do we go from here? 
While voluntary Iranian renunciation of nuclear weapons would be the best outcome for the West, there is no reason to believe that a nuclear-armed Iran would be a danger to the world. 
The floodgates to nuclear proliferation would not open; a more likely outcome would be a “balance of terror” between Israel and Iran, as exists between India and Pakistan. 
However, if Iran were allowed to become a nuclear weapons state, it should be done by agreement with the five “legal” nuclear powers (the US, Russia, Britain, France, and China) – that is, by an officially sanctioned enlargement of the nuclear club, which would include India, Pakistan, and Israel. 
This would be the best way to bind Iran to acceptable rules of behavior. 
At the very least, we should be clear that military intervention is the third-best (that is, worst) option. 

Re-Thinking Trade Sanctions 
The US Congress has voted almost unanimously (418 to 2 in the House of Representatives and 94 to 1 in the Senate) to tighten trade and financial sanctions against Myanmar, whose despotic regime harasses and repeatedly imprisons the country's rightful leader, Aung San Suu Kyi. 
She won the presidential election in 1990 but the military prevented her from taking power. 
But sanctions are the wrong approach, for international marginalization hurts ordinary citizens far more than it hurts dictatorial regimes. 
It's time to curtail the use of economic sanctions and to make them better targeted at despots. 
The most famous sanctions in recent history were those imposed on South Africa during the apartheid era. 
Much of the world community stopped trading with South Africa, and stopped making investments in South African-based enterprises. 
Those sanctions did, it seems, help speed the demise of that barbaric system. 
But one great success does not negate the many failures. 
Moreover, it is quite possible that the world community could have supported the overthrow of apartheid in other ways. 
Of course, sanctions can be effective in hurting the economy of the target country. 
Economic development in today's global economy depends on each country being integrated into the worldwide network of production, trade, and investment. 
A national economy that is excluded by sanctions is likely to stagnate or even collapse. 
Thus, the South African economy experienced an absolute decline in per capita output during the years of widespread sanctions. 
But sanctions were not the only reason for decline. 
Political unrest also devastated the economy, as did a fall in world gold prices that coincided with the anti-apartheid movement in the final years. 
Still, South Africa was hurt badly by sanctions, and the same has been true for many other countries. 
Cuba bears a heavy economic burden today not only as a result of its own internal economic mistakes but also because of the barriers to trade and investment imposed by the US since the 1960's. 
Haiti went into an economic tailspin when America imposed sanctions in the 1990's, ostensibly to re-establish democracy. 
Even today, the US blocks aid for Haiti because some right-wing US Congressmen are intent on toppling President Aristide, whom they abhor. 
Iraq and North Korea have likewise been battered by sanctions. 
In Iraq during the 1990's, millions of children suffered repeated illnesses and vast numbers died because international sanctions contributed to ruining the country's economy. 
North Korea's economy utterly collapsed in the 1990's, leading to widespread famine. 
Once again, this results from a combination of North Korea's political despotism, atrocious economic policy, and international sanctions. 
Myanmar has already paid an extremely high price for its isolation. 
International organizations have cut back or eliminated their work in the country, and much bilateral foreign aid has been eliminated, too. 
One result is that HIV/AIDS has run rampant, and the country has received almost no help in getting the epidemic under control. 
Myanmar's HIV/AIDS crisis is now by far Southeast Asia's worst. 
Although sanctions clearly create suffering in many places, how often have they achieved the desired goal? 
In Myanmar, Iraq, North Korea, and Cuba, despotic regimes not only survived the imposition of sanctions, but became more despotic. 
These regimes were able to blame foreigners for domestic hardships, even when it was their own policy mistakes and human rights abuses that caused the crises. 
Indeed, sanctions weaken an economy and public health, but do not necessarily make it more likely that a despotic regime will collapse. 
Sanctions purportedly undermine the regime by causing widespread unrest and by reducing the government's power base and tax collections. 
But sanctions also weaken the ability of the private sector to finance an opposition, tend to cut off the domestic opposition from international sources of support, and reduce, rather than increase, international awareness of the abuses taking place. 
Some additional effects are even more pernicious. 
When legal means of business are outlawed, illegal means become more attractive. 
Many countries under sanction, such as Myanmar, become sources of global illegal trafficking in drugs, arms, money laundering, and forced labor. 
Drug trafficking or other illegal activities can overtake the whole government, turning it from despotism to international organized crime. 
Does this mean that the world should do nothing about despotic regimes? 
There is no easy answer, but to the extent that it is possible to weaken a government without weakening an economy, such steps should be taken. 
For example, so-called ``smart sanctions'' focus more narrowly on the political leadership. 
Smart sanctions include denial of international travel privileges to despots and their families, and subjecting those despots to the risk of international prosecution. 
Leaders can thus be made prisoners in their own countries. Smart sanctions can also specifically target the trade in military goods, cutting off despotic regimes' armed forces. 
Moreover, foreign aid can be shifted away from government towards non-governmental organizations, strengthening the civil societies in such countries. 
It is easy to vote against Mynamar's government, but it is harder to foster political change. 
Starving Myanmar's economy is unlikely to help, but it is certain to deepen the suffering of its people. 
Of course, countries that embrace the use of sanctions do not intend this, but that does not lessen their responsibility for the outcome. 

Read China’s Lips 
NEW HAVEN – The Chinese have long admired America’s economic dynamism. 
But they have lost confidence in America’s government and its dysfunctional economic stewardship. 
That message came through loud and clear in my recent travels to Beijing, Shanghai, Chongqing, and Hong Kong. 
Coming so shortly on the heels of the subprime crisis, the debate over the debt ceiling and the budget deficit is the last straw. 
Senior Chinese officials are appalled at how the United States allows politics to trump financial stability. 
One high-ranking policymaker noted in mid-July, “This is truly shocking… We understand politics, but your government’s continued recklessness is astonishing.” 
China is no innocent bystander in America’s race to the abyss. 
In the aftermath of the Asian financial crisis of the late 1990’s, China amassed some $3.2 trillion in foreign-exchange reserves in order to insulate its system from external shocks. 
Fully two-thirds of that total – around $2 trillion – is invested in dollar-based assets, largely US Treasuries and agency securities (i.e., Fannie Mae and Freddie Mac). 
As a result, China surpassed Japan in late 2008 as the largest foreign holder of US financial assets. 
Not only did China feel secure in placing such a large bet on the once relatively riskless components of the world’s reserve currency, but its exchange-rate policy left it little choice. 
In order to maintain a tight relationship between the renminbi and the dollar, China had to recycle a disproportionate share of its foreign-exchange reserves into dollar-based assets. 
Those days are over. 
China recognizes that it no longer makes sense to stay with its current growth strategy – one that relies heavily on a combination of exports and a massive buffer of dollar-denominated foreign-exchange reserves. 
Three key developments led the Chinese leadership to this conclusion: 
First, the crisis and Great Recession of 2008-2009 were a wake-up call. 
While Chinese export industries remain highly competitive, there are understandable doubts about the post-crisis state of foreign demand for Chinese products. 
From the US to Europe to Japan – crisis-battered developed economies that collectively account for more than 40% of Chinese exports – end-market demand is likely to grow at a slower pace in the years ahead than it did during China’s export boom of the past 30 years. 
Long the most powerful driver of Chinese growth, there is now considerable downside to an export-led impetus. 
Second, the costs of the insurance premium – the outsize, largely dollar-denominated reservoir of China’s foreign-exchange reserves – have been magnified by political risk. 
With US government debt repayment now in play, the very concept of dollar-based riskless assets is in doubt. 
In recent years, Chinese Premier Wen Jiabao and President Hu Jintao have repeatedly expressed concerns about US fiscal policy and the safe-haven status of Treasuries. 
Like most Americans, China’s leaders believe that the US will ultimately dodge the bullet of an outright default. 
But that’s not the point. 
There is now great skepticism as to the substance of any “fix” – especially one that relies on smoke and mirrors to postpone meaningful fiscal adjustment. 
All of this spells lasting damage to the credibility of Washington’s commitment to the “full faith and credit” of the US government. 
And that raises serious questions about the wisdom of China’s massive investments in dollar-denominated assets. 
Finally, China’s leadership is mindful of the risks implied by its own macroeconomic imbalances – and of the role that its export-led growth and dollar-based foreign-exchange accumulation plays in perpetuating those imbalances. 
Moreover, the Chinese understand the political pressure that a growth-starved developed world is putting on its tight management of the renminbi’s exchange rate relative to the dollar – pressure that is strikingly reminiscent of a similar campaign directed at Japan in the mid-1980’s. 
However, unlike Japan, China will not accede to calls for a sharp one-off revaluation of the renminbi. 
At the same time, it recognizes the need to address these geopolitical tensions. 
But China will do so by providing stimulus to internal demand, thereby weaning itself from relying on dollar-based assets. 
With these considerations in mind, China has adopted a very transparent response. 
Its new 12th Five-Year Plan says it all – a pro-consumption shift in China’s economic structure that addresses head-on China’s unsustainable imbalances. 
By focusing on job creation in services, massive urbanization, and the broadening of its social safety net, there will be a big boost to labor income and consumer purchasing power. 
As a result, the consumption share of the Chinese economy could increase by at least five percentage points of GDP by 2015. 
A consumer-led rebalancing addresses many of the tensions noted above. 
It moves economic growth away from a dangerous over reliance on external demand, while shifting support to untapped internal demand. 
In addition, it takes the heat off an undervalued currency as a prop to export growth, giving China considerable leeway to step up the pace of currency reforms. 
But, by raising the consumption share of its GDP, China will also absorb much of its surplus saving. 
That could bring its current account into balance – or even into slight deficit – by 2015. 
That will sharply reduce the pace of foreign-exchange accumulation and cut into China’s open-ended demand for dollar-denominated assets. 
So China, the largest foreign buyer of US government paper, will soon say, “enough.” 
Yet another vacuous budget deal, in conjunction with weaker-than-expected growth for the US economy for years to come, spells a protracted period of outsize government deficits. 
That raises the biggest question of all: lacking in Chinese demand for Treasuries, how will a savings-strapped US economy fund itself without suffering a sharp decline in the dollar and/or a major increase in real long-term interest rates? 
The cavalier response heard from Washington insiders is that the Chinese wouldn’t dare spark such an endgame. 
After all, where else would they place their asset bets? 
Why would they risk losses in their massive portfolio of dollar-based assets? 
China’s answers to those questions are clear: it is no longer willing to risk financial and economic stability on the basis of Washington’s hollow promises and tarnished economic stewardship. 
The Chinese are finally saying no. 
Read their lips. 


The Digital Divide Is Impeding Development 
GENEVA – It is easy to assume that access to the digital economy is ubiquitous, and that online shopping is the natural evolution of commerce. 
For example, in July, Amazon sold more than 100 million products to consumers worldwide during its annual Prime Day event, a $4.2 billion bonanza that included sales of table salt in India, Coke Zero in Singapore, and toothbrushes in China. 
But figures like these mask the fact that for many people in developing countries, the road to e-commerce is riddled with potholes. 
Simply put, the growth of e-commerce is not automatic, and the spread of its benefits is not guaranteed. 
Some of the obstacles are logistical. 
On the tiny South Pacific island of Tuvalu, for example, fewer than ten streets in the capital, Funafuti, are named, and only about 100 homes have a postal address. 
Even if everyone in Tuvalu had access to the Internet (which they don’t; only 13% of the country’s population had broadband in 2016, according to the World Bank), delivery of goods purchased online would be difficult. 
Elsewhere, billions of people lack bank accounts and credit cards, and in many developing countries, consumer-protection laws do not extend to goods purchased online. 
These challenges are particularly acute for people in Sub-Saharan Africa, in remote island states, and in several landlocked countries. 
By contrast, in most developed economies, well-functioning postal systems and strong legal frameworks mean that products can be purchased online and delivered without a second thought. 
But e-commerce is only one facet of the evolving digital economy. 
Innovation, production, and sales are all being transformed by technology platforms, data analytics, 3D printing, and the so-called Internet of Things (IoT). 
By 2030, the number of IoT-connected devices is expected to reach 125 billion, compared to 27 billion in 2017. 
Moreover, this rapid pace of digital tethering is occurring even as half the world’s population remains unconnected from the Internet. 
If left unaddressed, the yawning gap between under-connected and hyper-digitalized countries will widen, exacerbating existing inequalities. 
Levels of digitalization may even influence whether countries are able to achieve the Sustainable Development Goals set by the international community for tackling challenges like hunger, disease, and climate change. 
That is why I believe more must be done to support poor countries as they strive to integrate into the digital economy. 
How that economy will develop is difficult to predict. 
But we already know that actions taken by governments, donors, and development partners will determine the way forward. 
One effort – the Going Digital project, launched by the OECD in 2017 – is helping countries seize opportunities and prepare for technological disruption. 
Areas of focus include competition, consumer protection, innovation and entrepreneurship, insurance and pensions, education, governance, and trade. 
It is a holistic approach that specialists in development cooperation should emulate. 
Moreover, by the end of the next decade, information and communication technology (ICT) will drive economic growth and power productivity gains. 
To thrive, people will need new skills and knowledge, and countries will require updated policies to protect online users. 
Small companies, including those owned and operated by women, will be especially vulnerable to the changing business environment. 
Unfortunately, only 1% of all funding provided by Aid for Trade – an initiative by World Trade Organization members to help developing countries improve their trading infrastructure – is currently being allocated to ICT solutions. 
Similarly, multilateral development banks are investing just 1% of their total spending on ICT projects, and only about 4% of this limited investment is being spent on policy development, work that is critical if digital economies are to be well regulated. 
At my organization, the United Nations Conference on Trade and Development, we are creating strategies to help developing countries leverage their assets and improve digital capabilities. 
One initiative, “eTrade for all,” is aimed at making it easier for developing countries to source financial and technical assistance. 
Since the program’s inception two years ago, nearly 30 global partners have been recruited, and an online platform has linked governments with organizations and donors to share resources, expertise, and knowledge. 
The G20 is also planting its flag on this issue; in August, I joined G20 ministers in Argentina to discuss what can be done to spread the benefits of the digital transformation. 
Needless to say, the meeting could not have come at a better time. 
Still, while programs and summits can offer the world’s developing and least-developed countries a place to start in their push for greater connectivity, more support is needed if we are ever to close the digital divide. 
With billions of people still below the first rung of the digital ladder, the climb to prosperity is becoming more challenging than ever. 

Reaffirming Europe 
ROME/STOCKHOLM – The ongoing global economic crisis is shaking beliefs and approaches that have long been enshrined in European policies. 
Indeed, the crisis is calling into question the very foundations of the European Union. 
There is thus an urgent need to reassert the core character and identity of Europe. 
The very nature of our European model – a model that is open internally, externally, and globally – must be reaffirmed. 
Internally, Europe should remain both an open society and an open economy. 
We should fight against the protectionist temptations that would unravel the very foundation of the European project, a project based on the “four freedoms”: free movement of goods, people, services, and capital. 
But the European economic recovery plan that was recently reaffirmed by the European Council of Ministers is mainly focused on national measures to support domestic demand. 
In implementing this plan, governments must refrain from the temptation to turn national measures into narrow protectionist schemes. 
Such a development would threaten growing unemployment in Europe and elsewhere, and make fighting the crisis much more difficult. 
So a return of economic, social, or political nationalism is simply not an option. 
Indeed, intra-EU trade today accounts for nearly two-thirds of EU member states’ total trade. 
And the EU itself is the leader in world trade, accounting for 18%, followed by the US and China. 
Even the free circulation of workers and people in Europe is a well-established and positive reality: 2% of EU citizens – more than 10 million people – reside in a Union member country other than their native one. 
Moreover, in 2006, 57% of European citizens declared themselves ready to move abroad for professional reasons. 
Among these, young Europeans are the most motivated (a half-million EU young people are already studying in another country). 
The crisis must also not become an excuse to create new institutional formats that jeopardize the delicate balance between the different EU institutions, a balance that – through appropriate adjustments – has been proven by the test of time. 
Of course, the crisis does highlight the need to strengthen the EU’s institutions and instruments for common action and coordination. 
We need final and complete ratification of the Lisbon Treaty in order to have the institutionally and internationally stronger European Union we need. 
Nor should today’s uncertainties become an excuse to call into question the need to continue and complete the process of EU enlargement. 
Extending the EU’s area of freedom and democracy, peace, stability, and prosperity, especially throughout south-eastern Europe, is in the interest of every European citizen. 
Indeed, we need to send a strong signal to our neighbors in the Western Balkans that their European perspective is still alive, as reaffirmed by the European Heads of State in 2008. And we remain convinced of the strategic and economic benefits of bringing Turkey into the Union. 
Of course, the process of accession depends on the readiness of the adhering countries, but it should not be halted or slowed down. 
Globally, Europe needs to promote an open, inclusive, and effective system of international governance. 
Through its wide-ranging experience of convergence of national interests and values, the EU has emerged as a model of multilateralism and as the most powerful normative actor in all areas of governance. 
The EU is ready to play a major role in building a new system of global governance. 
This requires further development and deepening of strategic relations with emerging powers, such as China, India, and Brazil, as well as with regional organizations. 
This is precisely what Italy has been promoting during its current presidency of the G-8. 
We need to integrate today’s emerging powers into a new system of global governance. 
The latter, however, should be ready to share the burden with us. 
This is also the moment to inject new energy into the Doha round of global trade talks. 
A successful conclusion of the round would be the strongest possible action to counter protectionist tendencies and resume growth in world trade. 
Finally, in times of economic crisis we should be guided more than ever by our common democratic values – the inner dimension of our European identity and a crucial unifying factor for our societies. 
They are also a powerful tool for European leadership in global affairs. 
Europe has a special role to play in securing a better world where human rights and individual freedoms are widely and fully respected. 
We must not shy away from our responsibilities. 

The Real Risk to the Global Economy 
WASHINGTON, DC – One of the great mysteries of today’s global markets is their irrepressible enthusiasm, even as the world around them appears on the verge of chaos or collapse. 
And yet, investors may be more rational than they appear when it comes to pricing in political risks. 
If investing is foremost about discounting future cash flows, it’s important to focus precisely on what will and will not affect those calculations. 
The potential crises that may be most dramatic or violent are, ironically, the ones that the market has the easiest time looking through. 
Far more dangerous are gradual shifts in international global institutions that upend expectations about how key players will behave. 
Such shifts may emerge only slowly, but they can fundamentally change the calculus for pricing in risks and potential returns. 
Today’s market is easy to explain in terms of fundamental factors: earnings are growing, inflation has been kept at bay, and the global economy appears to be experiencing a broad, synchronized expansion. 
In October, the International Monetary Fund updated its global outlook to predict that only a handful of small countries will suffer a recession next year. 
And while the major central banks are planning, or have already begun, to tighten monetary policy, interest rates will remain low for now. 
Political crises, however sensational they may be, are not likely to change investors’ economic calculus. 
Even after the greatest calamities of the twentieth century, markets bounced back fairly quickly. 
After Japan’s attack on Pearl Harbor, US stock markets fell by 10%, but recovered within six weeks. 
Similarly, after the terrorist attacks of September 11, 2001, US stocks dropped nearly 12%, but bounced back in a month. 
After the assassination of President John F. Kennedy, stock prices fell less than 3%, and recovered the next day. 
Yes, each political crisis is different. 
But through most of them, veteran emerging-markets investor Jens Nystedt notes, market participants can count on a response from policymakers. 
Central banks and finance ministries will almost always rush to offset rising risk premia by adjusting interest rates or fiscal policies, and investors bid assets back to their pre-crisis values. 
Today, a conflict with North Korea over its nuclear and missile programs tops most lists of potential crises. 
Open warfare or a nuclear incident on the Korean Peninsula would trigger a humanitarian disaster, interrupt trade with South Korea – the world’s 13th largest economy – and send political shockwaves around the world. 
And yet such a disaster would most likely be brief, and its outcome would be clear almost immediately. 
The world’s major powers would remain more or less aligned, and future cash flows on most investments would continue undisturbed. 
The same can be said of Saudi Arabia, where Crown Prince Mohammed bin Salman just purged the government and security apparatus to consolidate his power. 
Even if a sudden upheaval in the Kingdom were to transform the balance of power in the Middle East, the country would still want to maintain its exports. 
And if there were an interruption in global oil flows, it would be cushioned by competing producers and new technologies. 
Similarly, a full-scale political or economic collapse in Venezuela would have serious regional implications, and might result in an even deeper humanitarian crisis there. 
But it would most likely not have any broader, much less systemic, impact on energy and financial markets. 
Such scenarios are often in the headlines, so their occurrence is less likely to come as a surprise. 
But even when a crisis, like a cyber attack or an epidemic, erupts unexpectedly, the ensuing market disruption usually lasts only as long as it takes for investors to reassess discount rates and future profit streams. 
By contrast, changes in broadly shared economic assumptions are far more likely to trigger a sell-off, by prompting investors to reassess the likelihood of actually realizing projected cash flows. 
There might be a dawning awareness among investors that growth rates are slowing, or that central banks have missed the emergence of inflation once again. 
Or the change might come more suddenly, with, say, the discovery of large pockets of toxic loans that are unlikely to be repaid. 
As emerging-market investors well know, political changes can affect economic assumptions. 
But, again, the risk stems less from unpredictable shocks than from the slow erosion of institutions that investors trust to make an uncertain world more predictable. 
For example, investors in Turkey know that the country’s turn away from democracy has distanced it from Europe and introduced new risks for future returns. 
On the other hand, in Brazil, despite an ongoing corruption scandal that has toppled one president and could topple another, investors recognize that the country’s institutions are working – albeit in their own cumbersome way – and they have priced risks accordingly. 
The greatest political risk to global markets today, then, is that the key players shaping investor expectations undergo a fundamental realignment. 
Most concerning of all is the United States, which is now seeking to carve out a new global role for itself under President Donald Trump. 
By withdrawing from international agreements and trying to renegotiate existing trade deals, the US has already become less predictable. 
Looking ahead, if Trump and future US leaders continue to engage with other countries through zero-sum transactions rather than cooperative institution-building, the world will be unable to muster a joint response to the next period of global market turmoil. 
Ultimately, a less reliable US will require a higher discount rate almost everywhere. 
Unless other economic cycles intervene before investors’ expectations shift, that will be the end of the current market boom. 

Realism about Russia 
BERLIN – Russia’s strategy to revise the post-Soviet order in what it calls its “near abroad” will be pursued with even more perseverance following its victory over Georgia. 
Europe should have no illusions about this and should begin to prepare itself. 
But, as the European Union ponders what to do, cold realism, not hysterical overreaction, is in order. 
Unfortunately, equating the current situation in the Caucasus with the Soviet Union’s invasion of Czechoslovakia in 1968 does not attest to this kind of realism. 
Neither the West nor NATO constitutes the decisive strategic threat facing Russia, which comes from the Islamic South and from the Far East, in particular the emerging superpower, China. 
Moreover, Russia’s strength is in no way comparable to that of the former Soviet Union. 
Indeed, demographically, Russia is undergoing a dramatic decline. 
Apart from commodity exports, it has little to offer to the global economy. 
Notwithstanding booming oil and gas revenues, its infrastructure remains underdeveloped, and successful economic modernization is a long way off. 
Likewise, its political and legal system is authoritarian, and its numerous minority problems remain unsolved. 
As a result, Russia’s current challenging of the territorial integrity of Georgia might prove to be a grave error in the not-so-distant future. 
Given this structural weakness, the idea of a new Cold War is misleading. 
The Cold War was an endurance race between two similarly strong rivals, the weaker of which eventually had to give up. 
Russia does not have the capacity to wage another struggle of that type. 
Nevertheless, as a restored great power, the new Russia will for the time being attempt to ride in the slipstream of other great powers for as long as doing so coincides with its possibilities and interests; it will concentrate on its own sphere of influence and on its role as a global energy power; and it will otherwise make use of its opportunities on a global scale to limit America’s power. 
But it will not be able to seriously challenge the United States – or looking towards the future, China – in ways that the Soviet Union once did. 
It is now clear that in the future, Russia will once again pursue its vital interests with military force – particularly in its “near abroad.” 
But Europe must never accept a renewal of Russian great power politics, which operates according to the idea that might makes right. 
Indeed, it is here that Russia’s renewed confrontation with the West begins, because the new Europe is based on the principle of the inviolability of boundaries, peaceful conflict resolution, and the rule of law, so to forgo this principle for the benefit of imperial zones of influence would amount to self-abandonment. 
Further eastward expansion of NATO, however, will be possible only against fierce Russian resistance. 
Nor will this kind of policy in any way create more security, because it entails making promises that won’t be kept in an emergency – as we now see in Georgia. 
For too long, the West has ignored Russia’s recovery of strength and was not prepared to accept the consequences. 
But not only Russia has changed; so has the entire world. 
America’s neo-conservatives have wasted a large part of their country’s power and moral authority in an unnecessary war in Iraq, willfully weakening the only global Western power. 
China, India, Brazil, Russia, and the Persian Gulf today are the world economy’s new growth centers and will soon be centers of power to be reckoned with. 
In view of these realities, the threat of exclusion from the G8 doesn’t really feel earth shattering to Russia. 
Europe’s disunity and impotence underline this image of a West that has partially lost touch with geo-political realities. 
The response to the return of Russia’s imperial great power politics has nothing to do with punishing Russia, and a lot to do with establishing innately Western – especially European – positions of power. 
This requires several measures: 
· a new political dynamism vis-à-vis Turkey to link this country, one crucial for European security, permanently to Europe; 
· putting a stop to Moscow’s divide-and-conquer politics by adopting a common EU energy policy; 
· a serious initiative for strengthening Europe’s defense capabilities; 
· a greater EU commitment to Ukraine to safeguard its independence; 
· a greater freedom of travel for all the EU’s Eastern neighbors. 
All of this, and much more, is needed to send a clear signal to Russia that Europe is unwilling to stand idly by as it returns to great power politics. 
Presumably, none of this will happen, and it is precisely such inaction that is, in large part, the cause of Russia’s strength and Europe’s weakness. 
At the same time, however, one shouldn’t lose sight of the joint interests linking Russia and the West. 
Cooperative relations should be maintained as far as possible. 
It is blatantly obvious that for Russia’s elites, weakness and cooperation are mutually exclusive. 
Therefore, whoever wants cooperation with Russia – which is in Europe’s interest – must be strong. 
That is the lesson from the violence in the Caucasus that Europe must urgently take to heart. 

Realism for Europe and Turkey 
BERLIN – Relations between Europe and Turkey have long been characterized by a deep contradiction. 
Whereas security cooperation (especially during the Cold War) and economic ties have been strong, the vital foundations of democracy – human rights, press freedom, minority rights, and an independent judiciary to enforce the rule of law – have remained weak in Turkey. 
History, too, has divided the two sides, as the dispute over recognition of the Armenian genocide during World War I attests. 
After the ruling Justice and Development Party (AKP) assumed power under Abdullah Gül in 2002 and later under Recep Tayyip Erdoğan, these conflicts seemed to have been resolved. 
During its first years in government, the AKP wanted Turkey to join the European Union and to modernize the economy. 
And it delivered real reforms – particularly in areas, such as the judiciary, essential to progress toward EU membership. 
But Erdoğan always kept open a “neo-Ottoman” option, which would orient Turkey toward the Middle East and the Muslim world. 
That became evident in 2007, when German Chancellor Angela Merkel and then-French President Nicolas Sarkozy together de facto closed the door to EU membership for Turkey, and in a manner that humiliated Erdoğan. 
In recent days, however, the fraught relations between Europe and Turkey have taken a bizarre turn. 
The Turkish government has twice summoned Germany’s ambassador to protest against a short satirical clip about Erdoğan shown on regional German television, even demanding that the clip be banned. 
There can be no doubt that Turkey’s skilled and experienced diplomats understand Germans’ relationship with press freedom and freedom of opinion – fundamental values of the EU which Turkey wants to join. 
The question is how much of this understanding still filters through to President Erdoğan. 
Relations could deteriorate further this spring, when Germany’s Bundestag votes on a resolution calling for the mass murder of Armenians in 1915 to be categorized as genocide. 
The motion will most likely be adopted by a large cross-party majority, aggravating tensions with Erdoğan’s government. 
But, despite these recent conflicts, the EU and its member states must not lose sight of the fact that the decades-old partnership with Turkey is of paramount interest to both sides. 
Now and in the future, Europe needs Turkey, and Turkey needs Europe. 
The price for this partnership, however, can never be the abandonment of democratic principles; on the contrary, Turkey urgently needs to institutionalize these principles for the sake of its own modernization. 
What is required is to focus on sustaining the relationship and reducing tensions as much as possible. 
Partnership or not, Europe cannot free itself from its geopolitical neighborhood. 
Ever since the nineteenth century, Europe has had to deal with the so-called “Eastern question,” which at the outset concerned how to address the consequences of the Ottoman Empire’s decline. 
The Ottoman legacy led to several Balkan wars, which ultimately triggered World War I. 
Now, a century later, the Eastern question has returned to Europe, and it is just as dangerous, even if it does not currently entail any risk of war on the continent. 
The Balkans – an undoubtedly European region – will remain at peace as long as a belief in a future within the EU remains alive. 
But the Middle East and North Africa are trapped in a power vacuum, giving rise to political crises, civil disorder, war, terror, and untold losses to the economy and human welfare. 
America’s intervention in Iraq, followed by the weakening (whether real or perceived) of its security guarantee for the region, has led to open strategic rivalry between the leading Sunni power, Saudi Arabia, and the leading Shia power, Iran. 
Turkey, too, is involved in that game. 
Meanwhile, most Arab states are unable to provide adequate jobs and opportunities to increasingly young populations, fueling support for religious extremism. 
The conflict between Israel and the Palestinians is escalating once again, as is Kurdish militancy. 
And the fighting in Syria (and to a certain extent Iraq), by calling into question the century-old borders established under the WWI-era Sykes-Picot agreement, is destabilizing the region and fueling the seemingly endless flows of refugees making their way to Europe. 
Russia’s military intervention in Syria, moreover, raised the specter of a direct military clash with a NATO member state, when Turkey shot down a Russian military plane. 
Should the Kremlin, which has withdrawn its forces, decide to return, the risk of such a conflict, with all its uncertain consequences, would return as well. 
Today’s version of the Eastern question, like the century-old variant, poses enormous risks for Europe’s security. 
And it could easily culminate in a forsaken and alienated Turkey, isolated on the margins of both Europe and the Middle East, with its democratic potential exhausted by the irresolvable Kurdish question. 
Against this backdrop, a clash of values will almost certainly continue to define relations between Europe and Turkey. 
But, as has been true for a century, much more – both sides’ fundamental security interests – will be in the balance as well. 

Realism in Iraq 
The Washington mountain has labored and brought forth less than a mouse. 
General David Petreaus and President George W. Bush have spoken, but United States policy in Iraq remains as it was. 
This policy has led the US into a trap, so that now the largest and most important power in the world is facing only bad options. 
If the US followed its national interests, it would withdraw from Iraq as soon as possible, because the war can no longer be won. 
It is weakening the West’s leading power and strengthening the West’s enemies. 
But the US cannot withdraw without sending the entire region into chaos. 
The US wanted to establish a democratic Iraq. 
Instead, after a US withdrawal, the country might fall apart, possibly leading to “balkanization” of the Middle East, with extremely dangerous consequences for the whole region. 
With the war in Iraq, the US also wanted to initiate a democratic transformation of the entire Middle East. 
Instead, it has helped Iran to gain a regional ascendancy that the country could never have achieved on its own. 
Instead of a democratic transformation, were the US to withdraw now, the Middle East would face a war of all against all for regional hegemony. 
There is no indication that Bush will begin to grasp this bitter reality during the remaining months of his term. 
If he were to admit defeat, his presidency would be destroyed. 
He will thus pass the war on to his successor. 
This might be advantageous for Bush’s domestic purposes, but as a foreign policy, it will only escalate the risk of a Middle East explosion. 
The current US turn toward collaboration with Sunni militias holds within it the risk of a final break-up of Iraq into three parts. 
The key question is whether the consequences of Iraq’s disintegration could be contained within its national borders, or whether large parts of the region would be affected. 
A disintegrating Iraq would draw all its neighbors and other powers in the region into an undeclared war of succession. 
Moreover, in the Middle East, there is no safety net like the European Union, which has helped lure the Balkans out of the abyss. 
The only way out of this dilemma is to set a reachable and realistic goal. 
Instead of victory, the goal must be a minimum of stability – and this still seems achievable. 
Indeed, US military withdrawal from Iraq can be accomplished without causing a major regional catastrophe only if America manages to establish such a minimum of regional stability. 
What this requires is a sustainable consensus that includes all the parties involved. 
Iraq’s future, if it still has any, will depend first and foremost on Iraqi Shiites, Sunnis, and Kurds, and, secondly, on Iraq’s neighbors and their interests and risk calculations. 
But even if Iraq does fall apart after US withdrawal, it will be of vital importance to contain the consequences of its disintegration within Iraq’s own borders. 
This will require a regional consensus that only the US can bring about. 
It is hard to understand why the US does so little to advance the goal of regional stabilization, especially since it still retains considerable leverage in this respect. 
As no regional power is strong enough to win a war of succession outright, all of these powers could only lose if a conflict ensues. 
Indeed, all will be threatened by internal destabilization as a consequence of such a confrontation. 
Certainly, talks and conferences make little sense without a coherent policy. 
But with appropriate preparation, a regional solution is possible, and, of all the parties involved, Syria is uniquely positioned to help bring it about. 
Syria is the only Arab country allied with Iran, and, as Iraq’s direct neighbor, it is crucial for Iraq’s stabilization. 
Moreover, Lebanon’s security and independence hinges on Syria, and Syria is one of the main actors in the conflict between Israel and its Arab neighbors. 
Finally, economically and politically, Syria is in a weak position, and its interests are by no means congruent with those of Iran. 
It’s incomprehensible, then, why the US, having succeeded in striking a deal with Libya, vehemently rejects any initiative toward Syria. 
If Syria changed sides, the situation in the region would be fundamentally transformed. 
This would be true for Lebanon, the Israeli-Palestinian conflict, Iraq and, above all, Iran. 
For Iran, this development would be tantamount to a strategic worst-case scenario, bringing about its definitive isolation. 
Should it become a realistic prospect, a decisive approach to Iran would make sense. 
The ensuing “grand bargain” should concern the stabilization of Iraq, Iran’s nuclear program, and its role in the Israeli-Palestinian conflict. 
If successful, the bargain should also aim at a total normalization of relations between Iran and the US. 
To be sure, even a decisive regional strategy by the US and its Western partners will not stop terrorism and violence in Iraq or, indeed, in the Middle East overnight. 
But it would be a decisive first step toward changing the regional balance of power that would enable the stabilization of Iraq and the region as a whole. 
Only this can make a withdrawal of US troops from Iraq realistic in the foreseeable future. 

Realism's Gift to Palestinian Radicals 
In support of Ariel Sharon's plan to evacuate unilaterally all Gaza settlements and a few in the West Bank, the Bush administration backed Israel's stance on borders and refugees, two of the most important issues of Palestinian-Israeli final status negotiations. 
This position is in clear violation of the text of the "roadmap" to achieve a Palestinian/Israeli peace, which the Bush administration claims it continues to believe in. 
That claim does not withstand scrutiny. 
President Bush assured the Israelis that, given the "new realities on the ground, including already existing major Israeli population centers," Israel does not have to return all the territories it occupied in 1967. Moreover, in Bush's view, Israel need not worry about allowing Palestinian refugees to return to their homes inside Israel. 
Instead, the vast majority of refugees are expected to settle in a Palestinian state. 
Given Palestinian public opinion, the most likely outcome of Sharon's disengagement plan is the empowerment of Hamas and other Palestinian militants. 
By presenting the settlements' evacuation as a unilateral step, Sharon allows Palestinian militants to present it as Israel bowing to the "reality" of defeat inflicted by their armed struggle. 
Indeed, a survey that I conducted in April 2004 found that two-thirds of Palestinians saw the Israeli plan in just this light. 
The same survey showed Hamas with more public support than the nationalist Fatah in the Gaza Strip. 
Israel's disengagement plan presents the evacuation of Gaza settlements as an end to 37 years of occupation. 
But at the same time, Israel insists that Gaza will not have any attributes of sovereignty and will continue to be governed by existing arrangements covering most aspects of security and civil administration. 
This means that the Israeli military will continue to enter Gaza at will and maintain control over border crossings, airspace, and territorial waters. 
Nor will the Israeli military be withdrawn from the strip of land along the Palestinian-Egyptian border. 
These conditions rule out any possibility of forging a security plan that would receive the support of all factions, including Hamas. 
Under such conditions, the option of Hamas agreeing to a cease-fire and some form of power sharing with the Fatah-led Palestinian Authority would no longer be viable. 
Sharon's disengagement plan may ultimately render the Gaza Strip little more than a suffocating ghetto isolated from Israel and the rest of the world. 
While the new American positions do not represent a revolutionary change in US policy, they do represent a clear procedural and indeed substantive departure from previous American positions, particularly those of the Clinton administration. 
The so-called "Clinton Parameters," which were presented just before the end of Clinton's second term, sought to preclude Israeli annexation of parts of the occupied territories by conditioning any border changes on "territorial swaps and other arrangements." 
Similarly, while clearly advocating the absorption of refugees in the Palestinian state, the Parameters did not exclude Israel from the list of countries in which refugees could choose to live. 
Indeed, the Palestinians themselves have always agreed to absorb refugees in their future state, but this was conditional on granting refugees the right to choose. 
In almost all previous final status negotiations, Israel has agreed to accept a certain number of refugees as part of its contribution to help close this historical file. 
With his letter, President Bush managed to punish the Palestinians twice: by making significant concessions on their behalf and by excluding them from negotiations. 
On the other hand, Israel was rewarded twice: by receiving US assurances of significant Palestinian concessions, and by being relieved from paying a price in return for these concessions. 
Aside from forcing Palestinian concessions on borders and refugees, the US also relieved Israel of the need to negotiate with the Palestinians until they change their leadership. 
Most discouragingly, the American assurances will likely discredit Palestinian moderates and the positions they have advocated regarding the need for mutual concessions with Israel. 
From now on, the Bush statement will strongly affect the framing of the solution to the issues of territory and refugees. 
Under normal conditions of give and take, the idea of mutual concessions finds acceptance among the majority of Palestinians. 
Now, however, the one-sidedness of the US approach is likely to discredit possible compromises in the eyes of the public. 
Radicals will remind Palestinians that these two concessions represent a US-Israeli imposition and an attempt to force the Palestinians to bow to the realities of occupation and dispossession. 
So concessions that were deemed legitimate and acceptable may now become illegitimate and unacceptable. 
Moderate leaders who advocate these concessions in the context of give-and-take negotiations may become weaker and hardliners stronger. 
For the Palestinians, the bottom line in the Sharon plan and the Bush letter is that diplomacy and negotiations no longer have a role: Israeli unilateralism, combined with American prejudgment, makes that clear. 
The message is that any peace agreement can only come at the expense of Palestinian rights. 
Facts on the ground will be understood as the ultimate arbiters, no matter how illegal and unjust they may be. 
For Israel and its US supporters, this strategy has the seeming appeal of hardheaded realism. 
But attempting to formalize a fait accompli will most likely lead nowhere in the direction of lasting peace, for under such conditions, Palestinians would have no reason to abandon violence. 

Rethinking the Internet of Things 
SHENZHEN – At a telecommunications conference hosted by Huawei late last year, I told a group of senior executives looking for growth opportunities in a saturated market that one billion new mobile subscribers were just waiting for their services. 
Then, I showed them a photo of a cow. 
People took pictures of my presentation with their smartphones. 
Some chuckled; maybe they thought I was joking. 
But I was dead serious. 
Chinese dairy farmers are already connecting their herds to the Internet. 
Cows wear collars with wireless sensors that collect biometric data such as body temperature and heart rate. 
Insights from this information are then used to improve milk production, helping farmers earn an extra $420 per cow each year, and increase overall profits by 50% annually. 
For China’s farmers, more data means more money in the bank. 
But, whether the business is bovines or brain surgery, information always enhances decision-making. 
That’s why those of us in the telecoms industry believe the world would benefit by reimagining digital connectivity. 
Connecting more “things” to the Internet has the potential to increase efficiency, lift productivity, reduce waste, and fuel economic growth. 
According to a McKinsey Global Institute study, a fully networked Internet of Things (IoT) could add up to $11 trillion to the global economy every year by 2025. 
Realizing these benefits, however, will require changes in how data are delivered and managed. 
Today’s broadband networks were built to serve people; they are used to make phone calls, chat by video, surf the web, and play online games. 
While these applications are important, they are fairly limited in scope. 
Scenarios for connecting things are much more diverse. 
For example, a networked shipping container crossing the ocean must have extended wireless range, but it doesn’t need super-fast response speeds. 
The opposite is true for virtual reality headsets, which require ultra-low delay, or latency, to give viewers an immersive experience. 
By 2025, the world will have some 100 billion connected devices, and to derive maximum value from these linkages, we will need to optimize our networks for things as well as people. 
The first step in doing that is ensuring that future networks have enough bandwidth to handle applications like high-definition video, which will soon account for the majority of user traffic. 
A particular challenge will be upgrading systems to handle industrial video, which is fast becoming integral to modern manufacturing. 
For example, chip foundries use machine vision to check integrated circuits for microscopic defects, a process that requires extraordinarily high resolution. 
To transmit this information, cameras need bandwidths of up to ten gigabits per second, and a single factory may have 1,000 cameras running simultaneously. 
Second, when it comes to data latency, today’s networks are designed for human perception, which tolerates a fairly high degree of delay. 
On a phone call, for example, a 50-millisecond wait is imperceptible to the human brain. 
Power grids, on the other hand, need a consistent latency of 20 milliseconds or less. 
To support connected grids, “smart” robots, and other machines, next-generation networks will need to be faster and have even greater capacity. 
Third, the networks of tomorrow will need to be automated, self-optimizing, and self-repairing. 
Artificial intelligence will allow basic network functions to be placed on autopilot, and simple economics will make this a necessity. 
Once the IoT is supporting billions of connections among cars, trains, factories, and hospitals, operating costs will skyrocket unless networks can be maintained with little human intervention. 
And finally, to bring the IoT to life, policymakers will need to support the development of advanced networks that can transmit larger volumes of data faster. 
In particular, the wireless spectrum – airwaves across which data travel invisibly to and from connected devices – will form the basis of many digital services. 
But spectrum, just like water and oil, is a limited resource. 
Most countries will need to release more spectrum space for wireless communications, increasing usable airwaves by anywhere from 50% to 100%. 
Every business in every industry can benefit from these advances. 
New connections will deliver value to entrepreneurs, societies, and economies, allowing people to manage assets better and make more fully informed decisions. 
But to realize this future, we must begin thinking differently about how networks and business models interact. 
After all, in a world of deepening connections, everything is a potential new subscriber. 

Reason in the Age of Trump 
MADRID – In the classical Greek tragedy The Bacchae, the god Dionysus, powered by a thirst for vengeance, battles the inflexible and closed-minded King Pentheus for the soul of Thebes. 
Ultimately, Pentheus’s rigidity – his attempt to suppress, rather than understand or adapt to, the emotions inflamed by the passionate and unconventional Dionysus – proves to be his undoing. 
Dionysus emerges victorious, and Pentheus is ripped to shreds. 
Today, the emotional and mercurial Donald Trump is challenging the US political establishment for America’s soul. 
But Trump is no god. 
And if he wins this battle, his country will be far worse off than Thebes, and the repercussions will be felt by the entire world. 
While the likelihood of a Trump presidency seems to be declining by the day, it would be premature – and, indeed, highly risky – to dismiss it altogether. 
As the British vote in June to exit the European Union starkly demonstrated, citizens of democratic countries are more than capable of making choices that contradict their own rational self-interest – a trend that has lately been picking up steam. 
Paradoxically, this is not altogether illogical. 
Amid economic struggle, national identity crises, and populist fearmongering – all amplified by social media – there is some sense in gravitating toward voices and ideas that provide comfort and an outlet for frustration. 
But, while the fantasy of deus ex machina may feel good, it will not solve any problems. 
Leaders like Trump make things much worse, because they undermine the rules-based system that has delivered untold prosperity and security over the last seven decades. 
A century ago, the sociologist Max Weber classified the three types of legitimacy that can ground governmental authority: traditional (an inherited system); charismatic (a particular leader’s force of personality); or legal (a set of rational rules, applied fairly). 
For Weber, the modern state was rooted in a self-evident legal legitimacy. 
But, contrary to Weber’s assumptions, a growing number of Westerners today regard neither the logic nor the fairness of the rules as obvious. 
This leaves space for new leaders to step in, using personal charisma and appeals to tradition to win support. 
For everyone from right-wing populists in the West to ISIS recruiters, the combination has proved to be a powerful one. 
To be sure, there are real problems with the current system. 
Western democracies offer endless examples of regulation run amok, as well as instances of rules being applied unevenly. 
Add to that enduring income, racial, and gender inequality, and frustration with the current system is not surprising. 
But this is reason to pursue reform, not to advocate the wholesale exit that people are increasingly supporting. 
And, indeed, the key to saving a rules-based order is not just to demonstrate its unquestionable superiority, but also to acknowledge and address its flaws. 
That is the only way to change the perception of rules as a source of oppression, rather than protection. 
Reform will not be easy. 
Politically, it is much simpler – and electorally more rewarding – to criticize a system than it is to defend it, especially when that system is far from perfect. 
But defend it we must, with leaders explaining effectively why rules are necessary, including by educating the public on why the system operates the way it does. 
At the same time, policymakers must take a deeper look at the system, and make vital changes. 
Specifically, they must adjust how rules are made, to ensure that what results is fit for the modern world. 
At a time when change happens at lightning speed, there is a perception that formal rule-making is too slow to keep up. 
But the predictable rules that formal processes produce remain critical to reinforce the stability required for sustained prosperity. 
What is needed is an updated approach that supports the evolution of law in a constantly evolving environment, thereby ensuring that law is more responsive to the needs of citizens. 
The final item on the agenda for reviving the rules-based order, and defeating the world’s destructive Dionysuses, is the most challenging: we must reinforce rules-based communities. 
Dislocated by modernity, the West has seen a turn towards identities of the past – nationalism, tribalism, sectarianism – whose allure rests in their familiarity and certainty. 
But identity politics, it is well known, can be very destructive. 
That is why it is critical that rules-based communities, such as the modern state, become a hook that people overwhelmed by change can grasp. 
This means moving beyond pure reason to establish an emotional connection with and among citizens. 
This may seem counterintuitive. 
Law is supposed to be impartial and rational; that is its core strength. 
But if the rules-based order is to survive, it must resonate in people’s hearts, as well as their heads. 
It is not yet clear precisely how to approach this process. 
What is clear is that it will require a foundation of common values, and leaders who work actively and consistently to build credibility and earn a skeptical public’s trust. 
Otherwise, we will see the shift toward an unruly world, one shaped by passion and power grabs, gain momentum. 
The growing appeal of irrationality should be a wake-up call to rational leaders everywhere. 
If we want to prevent our societies from being lured onto the rocks by the siren song of charisma and nostalgia, we must make a strong case for the rule of law, while rejecting rigidity. 
Failure to do so is, after all, what got Pentheus killed. 

Reasoning with Iran 
PARIS – Negotiations over Iran’s nuclear program have been stalled for more than three years. 
For six years, the voices of reason have largely been drowned out, with passions and delusions claiming primacy. 
Countries sitting on their own nuclear arsenals seem to think that they can give Iran orders; it’s a case of “do as I say, not as I do.” 
Another favorite delusion in the West is to believe that Iran will surrender if pressure is steadily increased. 
Anyone familiar with Iran knows that this provokes only a defiant response. 
But Iran, too, harbors illusions, including the notion that it can count on support from non-Western countries, or at least from some sort of Islamic caucus. 
Yet, at each stage in the crisis, Iran’s supposed “friends” have let it down. 
Iran has also believed that it could split France, and perhaps Germany, away from the United States – as if either country would risk infuriating the Americans for the sake of a leader like Mahmoud Ahmadinejad. 
Above all, Iran deludes itself that it can develop an advanced nuclear program by itself. 
In fact, continued isolationism would force Iran to reinvent nuclear technologies already invented by others, no doubt with poor results. 
Passions abound. 
The West feels repugnance over the Iranian regime’s cynical human rights transgressions and hypocritical mixing of religion and politics. 
Western public opinion abhors the constant insults directed at Israel, Jews, and the West in general. 
There is a profound conviction in the West that an Iranian regime such as this must want nuclear weapons, and that it is acting accordingly. 
But Iran has been forecast to develop the bomb for 20 years. People remain convinced that next year, or maybe the year after, the prediction will come true. 
Thus, insidiously, the burden of proof is shifted. 
As Angela Merkel said at the United Nations in 2007: “The world does not need to prove to Iran that Iran is building an atomic bomb. 
Iran must persuade the world that it does not want the Bomb.” 
Emotions run high in Iran too, which is happy to return to its familiar role as eternal victim in plots by the Great Powers. 
From time to time, Mohammed El Baradei, Director General of the International Atomic Energy Agency (IAEA), has attempted to reintroduce reason and remind everyone that the focus must remain on capabilities, not intentions. 
This raises the practical question of what Iran’s current bomb-making capability is. 
Would it be possible to detect in advance clandestine activity aimed at producing one, and, if so, what would Iran have to pledge in the matter of inspections and checks, and how might such pledges be obtained? 
We know that Iran has made progress with the centrifuge technology essential for producing the enriched uranium needed for nuclear weapons. 
It is likely that Iranian teams have been working on the mechanics of a nuclear explosive device, at least at the blueprint stage, and the country is also developing ballistic missiles that would bring many regional capitals within range of a nuclear attack – Israeli cities, of course, being the obvious targets. 
That said, Iran must still bring all of these programs together, and that cannot happen undetected. 
Iran may be capable of producing sufficient nuclear material to make one or two bombs within the next couple of years, but such activities would inevitably come into the open, because Iran would either have to enrich the uranium under the eyes of IAEA inspectors or expel them, giving the game away. 
At this stage, Iran still needs at least a year or longer to assemble one or two crude Hiroshima-type bombs. 
The hardest part still lies ahead: the miniaturization needed to fit a nuclear device into a warhead. 
Here, too, Iranian testing would also be easily detected. 
So, to build a credible nuclear arsenal, Iran would need a decade or longer. 
No one can say for sure that Iran’s regime has formally adopted a nuclear weapons program. 
Although many Iranian leaders no doubt toy with the idea, others are carefully weighing the costs of such a venture – the risks of preventive strikes from outside, increased isolation, and a regional nuclear arms race. 
The West’s options will continue to narrow if it maintains its present course. 
It is a great pity that formal negotiations with Iran have been stalled since 2005 amid Western demands that Iran suspend all of its enrichment-related activities. 
Three years have been wasted, and we have seen no signs of suspension or willingness to negotiate. 
Do negotiations stand any chance of success with Ahmadinejad as president? 
The answer is “no” if our objective remains forcing Iran to renounce all activity on centrifugation. 
But this objective was also unattainable under President Mohammad Khatami, Ahmadinejad’s reform-minded predecessor. 
Acquisition of this technology was, even then, a national priority. 
If we alter course, progress may still be possible. 
For example, if Iran’s nuclear activities were to be surrounded with enough voluntarily accepted checks and controls, we could be confident of detecting at an early stage any diversion toward military purposes. 
Iran could develop its civil nuclear program while remaining a signatory to the Nuclear Non-Proliferation Treaty; the IAEA would be able to fulfill its role as watchdog; and perhaps confidence in Iranian intentions would slowly be restored. 
We cannot know whether this course of action is realistic unless we try it. 
But we do know that the alternatives – increasing sanctions, military strikes, and perhaps war – would have unforeseeable consequences. 
Only rational behavior by the West has any chance of eliciting a rational response from Iran. 

 

Rebalancing the Eurozone 
WASHINGTON, DC – The eurozone crisis unfolded primarily as a sovereign-debt crisis mostly on its southern periphery, with interest rates on sovereign bonds at times reaching 6-7% for Italy and Spain, and even higher for other countries. 
And, because eurozone banks hold a substantial part of their assets in the form of eurozone sovereign bonds, the sovereign-debt crisis became a potential banking crisis, worsened by banks’ other losses, owing, for example, to the collapse of housing prices in Spain. 
So a key challenge in resolving the eurozone crisis is to reduce the southern countries’ debt burdens. 
The change in a country’s debt burden reflects the size of its primary budget balance (the balance minus interest payments) as a share of GDP, as well as the difference between its borrowing costs and its GDP growth rate. 
When the difference between borrowing costs and growth becomes too large, the primary budget surpluses required to stop debt from increasing become impossible to achieve. 
Indeed, growth in southern Europe is expected to be close to zero or negative for the next two years, and is not expected to exceed 2-3% even in the longer term. 
While not always evident from the headlines, an underlying cause of the eurozone crisis – and now an obstacle for growth in the south – has been the divergence in production costs that developed between the peripheral countries, notably the “south” (specifically, Greece, Spain, Italy, and Portugal) and the “north” (for simplicity, Germany) during the first decade after the introduction of the euro. 
Unit labor costs in the four southern countries increased by 36%, 28%, 30%, and 25%, respectively, from 2000 to 2010, compared to less than 5% in Germany, resulting in an end-2010 cumulative divergence above 30% in Greece and more than 20% in Portugal, Italy, and Spain. 
Unit labor costs reflect compensation levels and productivity: gains in productivity can offset the effect of wage growth. 
Productivity performance did not vary dramatically between northern and southern European countries from 2000 to 2010 – in fact, average annual productivity growth was faster in Greece than in Germany (1% versus 0.7%). 
But labor costs increased much faster in the south, resulting in differential cost increases that cannot be addressed by devaluation as long as the monetary union endures. 
As long as this internal divergence persists, the euro crisis cannot be fully resolved, because current-account deficits and/or slow growth will continue to stalk the southern European countries, perpetuating worries about sovereign debt and commercial banks. 
In this context, productivity growth �� whether through technical progress, better allocation of resources, or productive investment – is as important a variable for the southern economies as wage restraint is. 
Indeed, excessive wage deflation is likely to have negative effects on productivity. 
Skilled labor is likely to emigrate faster, and extreme austerity, falling prices, and high unemployment – and the resulting likelihood of social tension – are not exactly conducive to investment, innovation, or labor mobility. 
Likewise, while reducing employment is one way to boost productivity, it implies high macroeconomic costs in terms of lost revenues and higher social spending. 
Perhaps even more importantly, economic policy should not break a society’s confidence in itself; what economists call “animal spirits” must be able to reflect hope for the future. 
For all of these reasons, excessive austerity and deflation could defeat its own purpose and make the “reforms” to improve the southern European countries’ competitiveness impossible to implement. 
The right approach must combine reasonable wage restraint and low (but not negative) inflation with microeconomic policy measures aimed at encouraging productivity increases. 
Moreover, it is clear that northern European countries could help to close the competitiveness gap more rapidly by encouraging faster wage growth. 
Indeed, Western policy-makers’ strong focus on persuading the Chinese authorities to permit greater appreciation of their currency is puzzling when one considers that Germany’s current-account surplus, as a share of GDP, is now much larger than China’s. 
Reversing the large differential in unit labor costs that has emerged in the euro’s first decade thus requires not only wage restraint and productivity-enhancing reforms in the south, but also higher wage gains in the north. 
A simulation shows that if German wages grew at 4% annually instead of the 1.5% of the last decade, and if annual productivity growth in Spain accelerated to 2% (it was close to 0.7% in both countries), Spain could reverse the unit-labor-cost differential that emerged with Germany since 2000 in five years, with Spanish wages growing at about 1.7% per annum. 
This should not be an impossible scenario. 
It would require restraint in Spain, where wages grew at an average annual rate of 3.4% in 2000-2010, as well as a serious effort to accelerate productivity growth. 
But it would not require falling wages or significant price deflation: annual wage growth of 1.7% and productivity growth of 2% would be compatible with inflation close to zero. 
Productivity growth at the historical rate of 0.7% in Germany, with wage growth of 4%, would be compatible with an inflation rate a little above 3%. 
In short, internal adjustment in the eurozone is achievable without serious deflation in the south, provided that productivity growth there accelerates, and that the north does its part by encouraging modestly faster wage gains. 
The smaller current-account surplus in northern Europe that might result from this should itself be welcome. 
If the north insists on maintaining the low wage growth of the 2000-2010 period, internal adjustment would require significant unemployment and deflation in the south, making it more difficult and perhaps politically impossible to achieve. 

Rebalancing the US-China Economic Relationship 
CAMBRIDGE – As the global economy stabilizes, there is a growing danger that the United States and China will slip back into their pre-crisis economic patterns, placing themselves and the rest of the world at risk. 
Despite Chinese official rhetoric about the need for a new global currency to replace the dollar, and US lawmakers’ flirtation with “Buy American” clauses (which scares everyone, not just the Chinese), no one will want to rock a boat that has almost capsized. 
So China continues to run a giant trade surplus, and the US continues to spend and borrow. 
Short-run stability certainly seems attractive right now. 
But if the US-China trade and debt relationship merely picks up where it left off, what will prevent recurrence of the same unsustainable dynamic that we just witnessed? 
After all, huge US foreign borrowing was clearly a key factor in creating the recent financial mess, while China’s excessive reliance on export-driven growth has made it extraordinarily vulnerable to a sudden drop in global demand. 
A giant fiscal stimulus in both countries has helped prevent further damage temporarily, but where is the needed change? 
Wouldn’t it be better to accept more adjustment now in the form of slower post-crisis growth than to set ourselves up for an even bigger crash? 
True, both the US administration and China’s leadership have made some sensible proposals for change. 
But is their heart in it? 
US Treasury Secretary Timothy Geithner has floated a far-reaching overhaul of the financial system, and China’s leaders are starting to take steps towards improving the country’s social safety net. 
Both of these measures should help a lot in bringing the US and Chinese trade balances toward more sustainable levels. 
Greater financial regulation in the US means consumers will not be able to borrow so easily to rack up huge mortgage and credit card debt. 
Chinese consumers, on the other hand, might actually start spending more of their income if they can worry a bit less about saving for health care, their children’s education, and their old-age retirement. 
Nevertheless, there is cause for concern. 
As the world seems to emerge from its horrific financial crisis, it is human nature for complacency to set it, and the domestic politics of the US-China trade and financial relationship is deeply rooted. 
One shudders to think what lessons the US financial sector will draw if, after the multi-trillion dollar bailout, there are only superficial, toothless reforms. 
And will China’s coastal export interests again prevail in exchange rate policy decisions, at the expense of poor inland consumers? 
Another reason to worry is that the global recovery is still fragile. 
US and Chinese leaders have fought the crisis with not only massive fiscal stimulus, but also deep intervention into credit markets. 
Such extraordinary fiscal largesse, all at taxpayers’ expense, cannot continue indefinitely. 
World Bank President Robert Zoellick has rightly warned that all this massive temporary fiscal stimulus is a “sugar high” that will ultimately pass without deeper reforms. 
As I have argued before, the endgame to the financial bailouts and fiscal expansion will almost certainly mean higher interest rates, higher taxes, and, quite possibly, inflation. 
For better or for worse, it may not be possible to turn back the clock. 
The US consumer, whose gluttony helped fuel growth throughout the world for more than a decade, seems finally set to go on a diet. In addition to tighter credit, falling home prices and high unemployment will continue to put a crimp on US consumer spending. 
Frankly, higher US personal saving rates would not be a bad thing. 
It would almost certainly help reduce the risk of an early repeat of the financial crisis. 
The obvious candidates to replace them are Chinese and other Asian consumers, whose combined economies are more than equal to that of the US. 
But are Asian governments prepared to abandon their mercantilist paradigm? 
Outside Japan, Asia policymakers certainly don’t seem amenable to exchange-rate appreciation 
Since the beginning of this decade, at least a few economists (including me) have warned that the global trade and current-account imbalances needed to be reined in to reduce the chance of a severe financial crisis. 
The US and China are not solely responsible for these imbalances, but their relationship is certainly at the center of it. 
Prior to the crisis, there was plenty of talk, including high-level meetings brokered by the International Monetary Fund, but only minimal action. 
Now, the risks have spilled out to the entire world. 
Let’s hope that this time there is more than talk. 

Rebuilding Haiti From Davos 
ROME – When the captains of business and industry meet in Davos for the World Economic Forum this month, the devastation caused by the recent earthquake in Haiti will be near the top of their agenda. 
It should be, for there is much they can do to help. 
Haiti was in dire straits even before the earthquake struck. 
Rapid population growth, coupled with political and social turmoil , helped make Haiti the poorest nation in the Western hemisphere. 
Right now, the international relief efforts in Haiti are rightly focused on the country’s urban areas, which suffered most in the earthquake. 
But when rebuilding starts, rural areas must not be overlooked. 
In fact, many of those who have lost their homes and jobs in Port-au-Prince and other Haitian cities will likely return to rural communities where they have family. 
This will put pressure on the rural economy and place more strain on areas already grappling with meagre resources. 
Agriculture plays a vital role in Haiti’s economy, yet the country does not produce enough food to feed its people. 
Some 60% of the food Haitians need, and as much as 80% of the rice they eat, is imported. 
Sustainable agricultural development is essential to improving the country’s prospects for long-term economic and food security. 
The International Fund for Agricultural Development (IFAD) has seen first-hand how investing in agriculture can help people recover from natural disasters. 
Our experience in developing countries tells us that investments in agriculture can be twice as effective in reducing poverty as similar investments in other sectors. 
Less than two years ago, Haiti was devastated by a hurricane that caused about $220 million in damage to food crops – at a time when the population was also struggling to feed itself because of high world food prices. 
IFAD funded a program to kick-start food production. 
The 2008 winter planting yielded $5 million in bean crops, helping to improve food security and the incomes of poor farmers. 
While the crisis in Haiti is a major setback in achieving increased food production, it should not be a stop sign on the path to long-term development. 
The challenge is to ensure that earlier efforts are not lost, and that recovery includes a push toward sustainable agricultural production systems for Haiti. 
One group now rising from the rubble is Fonkoze, a microfinance organization operating predominantly in rural Haiti. 
With assistance from IFAD’s multi-donor Financing Facility for Remittances, Fonkoze purchased satellite phones and diesel generators in 2007, and began delivering remittance services in rural areas where basic infrastructure is often weak or lacking. 
Only today is the true value of that investment coming to light. 
Fonkoze was back in operation only days after the earthquake. 
Remittances transferred through Fonkoze are free, giving recipient families in Haiti vital resources to meet short-term needs while also encouraging long-term development. 
More than $1.9 billion was sent to Haiti in 2008 through remittances, more than official development assistance and foreign direct investment combined, with more than half of these funds going directly into the hands of families in rural areas. 
When I am in Davos, I will highlight for the CEOs and business leaders the mutual benefits of forming partnerships with small producers. 
Much-needed capital investment can enable smallholder farmers to provide the private sector with a sustainable supply of high-quality agricultural produce. 
Indeed, smallholder farmers are often extremely efficient producers per hectare, and can contribute to a country’s economic growth and food security. 
For example, Vietnam transformed itself from a food-deficit country to the second-largest rice exporter in the world by developing its smallholder farming sector. 
As a result, poverty fell from 58% in 1979 to below 15% today. 
In Haiti, and in developing countries around the world, smallholder farmers can contribute to food security and economic growth just as they did in Vietnam. 
But they cannot do so without secure access to land and water – as well as to rural financial services to pay for seed, tools, and fertilizer. 
They also need roads and transportation to get their products to market, and technology to receive and share the latest market information on prices. 
Above all, they need a long-term commitment to agriculture from their own governments, the international community, and the private sector, backed up by greater investment. 
The productive capacity of Haiti’s small farmers will be crucial in helping the country to overcome this crisis and avert severe food shortages. 
That is why Haiti needs the private sector now more than ever – to help rebuild both the country and the livelihoods of poor rural people. 
Indeed, the private sector has a pivotal role to play in rural development, not just in Haiti but throughout the developing world. 
But public- private partnerships must be backed up with the right policies and support for rural communities, so that poor rural people can increase food production, improve their lives, and contribute to greater food security for all. 
Organizations like IFAD can help link the private sector and smallholder farmers. 
We can support investments that expand the productive potential of the smallholder sector in the developing world by helping investors reduce their risks, and by assisting smallholder farmers in accessing new financing and markets through private-sector partnerships. 
Klaus Schwab, the founder and chairman of the World Economic Forum, has said that this year’s Davos meeting should be used to “solicit commitments in practical help for relief of the continued pain of Haiti’s people, and particularly for the reconstruction of Haiti.” 
In Davos, I will work to ensure that the interests of the world’s smallholder farmers – in Haiti and in developing countries around the world – are represented. 


Rebuilding Palestine's Economy 
The economy of the West Bank and Gaza, like Yassir Arafat's headquarters at Ramallah, is in ruins. 
Rebuilding it will provide as challenging - and urgent - a task as the reconstruction of Palestinian political institutions now supposedly underway. 
Due, primarily, to their bleak history since 1948, Palestinians in the West Bank and Gaza pursued a development strategy of exporting labor rather than goods. 
In June 2000, three months before the current intifada began, 21% of all Palestinians with jobs worked in Israel, mainly in low-skilled positions in construction. 
Net incomes from abroad amounted to more than 22% of Palestinian GDP, making it one of the world economies most dependent on remittances. 
The blood-soaked politics that have prevailed since September 2000 exposed the extreme vulnerability of this development strategy, making urgent the need to rethink the economic foundations of the Palestinian territories. 
Israel's labor market is now sealed off to Palestinians, and the prospect of it reopening soon is unlikely, to say the least. 
Do viable alternative development strategies for the Palestinian economy exist? 
Do any of these offer a chance at growth at least as strong as what has been attained by exporting labor? 
Of course, the Palestinian economy's dismal performance is not solely the result of the sharp reduction in the number of Palestinians working in Israel. 
Even more damaging are the restrictions imposed on the movement of goods and people within the West Bank and Gaza. 
The comprehensive curfews imposed on almost all large Palestinian towns in recent months effectively confine people to their homes, thus bringing the economy to a virtual standstill. 
Moreover, trucks carrying goods between Palestinian towns and villages now must unload and reload their cargo before entering each town so as to allow the Israeli military to inspect the shipment. 
This hugely increases the cost of doing business, and contributes to a gradual, stealthy "cantonization" of the West Bank. 
Although the current inability of Palestinians to work in Israel has had devastating economic consequences, there may be a silver lining: over the longer term resources might be reallocated towards export-oriented activities, as lower employment in Israel and lower levels of remittances pull down wages and thereby improve export competitiveness. 
Emphasizing exports may in itself enhance the Palestinian economy's growth potential by increasing incentives to innovate, invest, and reduce inefficiencies. 
We recently evaluated a Palestinian development strategy based on exports of goods against a continued reliance on exporting labor. 
We also attempted to identify policies that could ease the (possibly forced) transition towards this new model of economic development. 
In one scenario, we assumed that the Israeli labor market will be progressively re-opened. 
In another we assumed that it will remain closed until 2010. 
Comparing the outcomes of these two simulations suggests that large export flows of Palestinian labor to Israel reduce the capacity of the Palestinian economy to export goods by putting upward pressure on wages, undermining competitiveness. 
These simulations also suggested that continued reliance on the export of labor results in a lower growth potential for the Palestinian economy than does a development strategy based on exporting goods. 
But the level of average incomes in the West Bank and Gaza will remain much lower under the latter strategy than in the situation where the Israeli labor market is gradually reopened for Palestinian labor. 
This confirms the huge short term welfare cost to Palestinian society of restricting Palestinian workers' access to the Israeli labor market. 
What trade policies might boost exports of goods rather than labor? 
Palestinian officials argue that acceptance of the Paris Protocol, which formalized the de facto customs union with Israel that has existed since 1967, was conditioned on free access of Palestinian workers to Israel. 
That access was intended to offset the cost to the Palestinian economy of granting preferential access to Israeli goods. 
But the Palestinian/Israeli customs union is extremely costly because it impedes expanding Palestinian trade links with the rest of the world. 
If Israel's labor market remains closed to Palestinian workers, maintaining this regime will become increasingly counter-productive. 
Adopting a more neutral trade regime, in which Israel is treated the same as any other trading partner, would then become more attractive. 
Our simulations indicate that a non-discriminatory trade regime would magnify the potential positive impact of depreciation in the real exchange rate (as a result of the reduction in wages) on Palestinian GDP. 
Gains from trade would undoubtedly take time to materialize, and restoring access to the Israeli labor market would more quickly boost incomes for a large number of ordinary Palestinians than any effort to promote the export of goods. 
But a return of Palestinian workers to jobs in Israel is by no means certain. 
This makes adopting trade policies that facilitate Palestinian trade with Israel and the rest of the world even more crucial. 
Without such a global trade option, the West Bank and Gaza could be prevented from exporting both goods and labor, producing even more dire and tragic consequences for the Palestinian people. 

Rebuilding the Asylum System 
NEW YORK – The European Union needs to accept responsibility for the lack of a common asylum policy, which has transformed this year’s growing influx of refugees from a manageable problem into yet another political crisis. 
Each member state has selfishly focused on its own interests, often acting against the interests of others. 
This precipitated panic among asylum seekers, the general public, and the authorities responsible for law and order. 
Asylum seekers have been the main victims. 
The EU needs a comprehensive plan to respond to the crisis, one that reasserts effective governance over the flows of asylum-seekers so that they take place in a safe, orderly way, and at a pace that reflects Europe’s capacity to absorb them. 
To be comprehensive, the plan has to extend beyond the borders of Europe. 
It is less disruptive and much less expensive to maintain potential asylum-seekers in or close to their present location. 
As the origin of the current crisis is Syria, the fate of the Syrian population has to be the first priority. 
But other asylum seekers and migrants must not be forgotten. 
Similarly, a European plan must be accompanied by a global response, under the authority of the United Nations and involving its member states. 
This would distribute the burden of the Syrian crisis over a larger number of states, while also establishing global standards for dealing with the problems of forced migration more generally. 
Here are the six components of a comprehensive plan. 
First, the EU has to accept at least a million asylum-seekers annually for the foreseeable future. 
And, to do that, it must share the burden fairly – a principle that a qualified majority finally established at last Wednesday’s summit. 
Adequate financing is critical. 
The EU should provide €15,000 ($16,800) per asylum-seeker for each of the first two years to help cover housing, health care, and education costs – and to make accepting refugees more appealing to member states. 
It can raise these funds by issuing long-term bonds using its largely untapped AAA borrowing capacity, which will have the added benefit of providing a justified fiscal stimulus to the European economy. 
It is equally important to allow both states and asylum-seekers to express their preferences, using the least possible coercion. 
Placing refugees where they want to go – and where they are wanted – is a sine qua non of success. 
Second, the EU must lead the global effort to provide adequate funding to Lebanon, Jordan, and Turkey to support the four million refugees currently living in those countries. 
Thus far, only a fraction of the funding needed for even basic care has been raised. If education, training, and other essential needs are included, the annual costs are at least €5,000 per refugee, or €20 billion. 
EU aid today to Turkey, though doubled last week, still amounts to just €1 billion. In addition, the EU also should help create special economic zones with preferred trade status in the region, including in Tunisia and Morocco, to attract investment and generate jobs for both locals and refugees. 
The EU would need to make an annual commitment to frontline countries of at least €8-10 billion, with the balance coming from the United States and the rest of the world. 
This could be added to the amount of long-term bonds issued to support asylum-seekers in Europe. 
Third, the EU must immediately start building a single EU Asylum and Migration Agency and eventually a single EU Border Guard. 
The current patchwork of 28 separate asylum systems does not work: it is expensive, inefficient, and produces wildly inconsistent results in determining who qualifies for asylum. 
The new agency would gradually streamline procedures; establish common rules for employment and entrepreneurship, as well as consistent benefits; and develop an effective, rights-respecting return policy for migrants who do not qualify for asylum. 
Fourth, safe channels must be established for asylum-seekers, starting with getting them from Greece and Italy to their destination countries. 
This is very urgent in order to calm the panic. 
The next logical step is to extend safe avenues to the frontline region, thereby reducing the number of migrants who make the dangerous Mediterranean crossing. 
If asylum-seekers have a reasonable chance of ultimately reaching Europe, they are far more likely to stay where they are. 
This will require negotiating with frontline countries, in cooperation with the UN Refugee Agency, to establish processing centers there – with Turkey as the priority. 
The operational and financial arrangements developed by the EU should be used to establish global standards for the treatment of asylum-seekers and migrants. 
This is the fifth piece of the comprehensive plan. 
Finally, to absorb and integrate more than a million asylum seekers and migrants a year, the EU needs to mobilize the private sector – NGOs, church groups, and businesses – to act as sponsors. 
This will require not only sufficient funding, but also the human and IT capacity to match migrants and sponsors. 
The exodus from war-torn Syria should never have become a crisis. 
It was long in the making, easy to foresee, and eminently manageable by Europe and the international community. 
Hungarian Prime Minister Viktor Orbán has now also produced a six-point plan to address the crisis. 
But his plan, which subordinates the human rights of asylum-seekers and migrants to the security of borders, threatens to divide and destroy the EU by renouncing the values on which it was built and violating the laws that are supposed to govern it. 
The EU must respond with a genuinely European asylum policy that will put an end to the panic and the unnecessary human suffering. 

Rebuilding the Brain 
For many years, it was thought that all of our brain cells (neurons) are produced before birth, or exceptionally, up to one or two years after birth, but then the process supposedly stopped. 
From then on, most brain scientists believed, brain circuits could only be modified by altering the synapses, or contacts between existing cells. 
In this view, the total complement of cells, anatomically organized by function and forming major pathways, constituted the brain’s “hardware.” 
The detailed nature of the relation between cells, the modifiable synapses, was the software. 
Starting in the 1960s, evidence suggested that new neurons might be added beyond this early period and even in adulthood. 
This evidence became compelling in the 1980s, based on observations made while studying parts of the songbird brain involved in the acquisition and production of learned song. 
The original observations were met with skepticism, but the birdsong data proved compelling. 
How does one prove that a neuron was born at a particular time? 
Each cell in the body contains DNA, which is responsible for producing the proteins that are necessary for a cell’s functioning. 
Though all cells in the body have the same DNA, only a subset of the genes encoded by the DNA is expressed in each cell type, thus accounting for the difference between, say, a skin cell, a liver cell, and a brain cell. 
When a cell is about to divide, as happens when tissue grows, the DNA in the mother cell has to be doubled, that is, new DNA is synthesized. 
It is possible to supply the cell with one of the building blocks of the new DNA, and to put a little radioactive tag on that building block. 
Later, scanning through the brain, every time we find a tagged cell we know that it was born at the time we furnished the DNA. 
When we gave adult canaries the tagged DNA building block and then looked for tagged neurons that would have been born one or two days earlier, we found none. 
But if we waited longer – for example, 1-3 weeks, depending on part of brain – we found quite a few tagged neurons. 
This told us that the new neurons were not born by division of existing neurons, but were born elsewhere in the brain and went through a migratory stage during which they were not recognized as neurons. 
It took at least a week for the first new neurons to reach their destination and acquire the looks of an adult neuron. 
We then learned how to identify the future neurons during their migratory journey. 
They were, at that stage, much smaller and had an elongated shape that allowed them to slip between other cells. 
It came as a great surprise when we discovered that the cells giving birth to the new neurons were a type called radial glia, which were thought not to occur in adulthood and were not known to give birth to neurons. 
One of the paradoxes of this process is that in adult birds and mammals the total number of brain cells remains remarkably constant. 
The new neurons replace older ones of the same kind that die – a process of natural rejuvenation. 
There are no hospitals in nature. 
The sudden loss of many brain cells as a result of strokes or injuries must have serious effects on an animal’s survival. 
It seems likely that the replacement of neurons in the adult brain did not evolve to make up losses due to illness or lesion, but as a process of constant renewal, a few cells being replaced every day. 
This idea is so novel that it needs further elaboration. 
In the adult songbird brain, we can find at any moment many little migrating neurons ready to replace cells that have died. 
Only one of every three job seekers finds a job, but the overproduction is probably worthwhile, for it ensures that as a replaceable neuron dies, there will already be, in its vicinity, a younger one ready to take its place. 
As far as known, only a small fraction of all brain cells fall into the replaceable class; when other kinds of neurons die, they are not replaced. 
We now know that the brain has the potential to grow new brain cells to replace others that have died. 
This potential could be used to repair damaged circuits. 
Laboratories around the world are trying to develop ways to bring this knowledge to clinical situations. 
The trick will be to induce the brain to produce and deliver to the correct destination any kind of neuron that might be needed, so that regardless of cell class, new cells of the required kind can replace others of the same type that have died. 
This goal is not near. 

Rebuilding the Ruins of Qaddafi 
TRIPOLI – With the creation of a new government, Libya’s leaders should finally be able to focus on organizing the transition from the authoritarian state that they inherited to the more pluralistic one they envisage. 
But are they really able and willing to achieve that goal? 
In the United States, the debate on Libya has focused on what steps its government should take next. 
Senator Robert Menendez argues it “must move quickly to embrace democratic reform,” while international development specialists, such as Manal Omar of the US Institute for Peace, believe that success lies in the cultivation of a vibrant civil society. 
These views, however, overlook Libya’s unique history, and treat Libya as though it were just another Third World country in need of generic solutions. 
In fact, remedying the country’s ills requires building strong state institutions. 
Since Libya achieved independence in 1951, it has been a fractured state. 
Rulers relied on loyal tribes and narrow cliques to prop up their regimes. 
Under a monarchy that led the country from 1951-1969, King Idris’s relatives and inner circle ran roughshod over fledgling state institutions. 
More interested in reigning than in governing, state institutions withered under Idris’s neglect. 
These trends were exacerbated after Muammar el-Qaddafi overthrew the king in 1969. 
Frustrated with a bureaucracy reluctant to implement his political vision, Qaddafi bypassed traditional institutions and claimed a direct dialogue with the country’s population. 
The new Libyan leader created an intricate hierarchy of political organizations that were advertised as empowering citizens, but which in reality only reinforced their subservience to his autocratic regime. 
As Libyans tired of Qaddafi’s revolutionary rhetoric, he decided that a new organization was needed to stir popular support. 
In 1977, he established committees that he dubbed the “watchdogs of the revolution.” 
The committees formed their own courts, assumed sweeping arrest powers, took over the media, and purged officials who resisted Qaddafi’s will. 
This led to a split between the state’s official institutions and Qaddafi’s shadow revolutionary apparatus. 
Qaddafi clearly preferred the latter. 
In 1979, he resigned from his official posts to assume the vague role of “Commander of the Revolution,” explaining that “the revolution must be separated from the authority of the state.” 
This led to what the scholar Moncef Djaziri described as a division of formal and informal authority. 
Qaddafi’s strategy stunted the growth of state institutions, because, like Mao Zedong’s Cultural Revolution in China, it implied subordinating their development to the needs of an all-embracing vision of transformation. 
Economic planning reflected his populist policies and foreign adventures, rather than any focus on stability and sustainable growth. 
Instead of relying on state structures to govern, he leaned on a small coterie of minions and members of his tribe. 
As a result, state institutions decayed. 
Beginning in 1986, the Libyan Central Bank ceased publishing the annual statistical reports that economists and specialists need to formulate coherent policies. 
Frustrated by his population’s political apathy, Qaddafi frequently announced his intention to dissolve all government ministries and transfer their responsibilities to municipalities. 
Today, Libya’s state institutions exist merely to extract the country’s vast oil wealth and distribute it via subsidies. 
In a state that embodied the whim of its leader for 42 years, the rule of law does not exist. 
Explaining why he helped spearhead a 1993 military coup attempt, Air Force officer Muhammad Bashir Salah said, “We have neither a state, nor laws, nor a constitution.” 
Indeed, even the military, which in many Third World countries is the strongest state institution, was marginalized under Qaddafi. 
The revolutionary committees’ attacked it for being “a traditional fascist institution.” 
Qaddafi declared his desire to disband the army on several occasions, and its role was so insignificant that it played almost no part in defending the regime during the eight months of fighting that overthrew him. 
American diplomatic cables released by WikiLeaks noted that Libya has “few formal decision-making structures,” and called it an “opaque regime in which lines of authority are deliberately blurred to obscure power structures and mitigate accountability.” 
Today, Qaddafi’s successors on the National Transitional Council (NTC) are perpetuating the dualistic authority that he created. 
Politically inexperienced and lacking strong leadership, they have proved unable to impose discipline on the myriad militias that sprang up during the revolution. 
These rogue units have exacted vengeance on Qaddafi supporters and alienated significant segments of society. 
If the NTC cannot assert its authority, the council risks the emergence of a movement nostalgic for Qaddafi and the security that his regime provided. 
Unlike their neighbors in Egypt, Libyans are not clamoring for the elections deemed by many Westerners to be of paramount importance. 
Instead, they have drawn on a patience rooted in their traditional political apathy. 
Few political parties have emerged, and there is little popular demand for them. 
Activists have instead focused on drafting a new constitution that would empower state institutions. 
Libyans understand that the NTC needs time to build a new country on the ruins of the one that Qaddafi destroyed. 
That daunting task begins by developing the state institutions required to respond to Libyans’ needs. 

Recasting Governance in Asia 
Governance--the way in which decisions that affect the public interest are made--has emerged as a key factor in determining a country's pace of development. 
Successful governance brings purposeful change. 
Failure is punished by unrest, disaffection, and stagnation. 
On April 18th, a conference in Bangkok will dissect the prospects for improved governance in Asia. 
Today's Asian policymakers confront a very different environment from that faced by their predecessors fifty years ago. 
Asia's population has more than doubled since 1950, with most of that growth coming in its poorest countries. 
The political systems of these countries were tailored to small, static, rural populations. 
Now these societies must cope not only with vast urban centers, but also with the very different talents and demands of urbanized people. 
The global economy has changed dramatically, too. 
Increased flows of goods, money, and knowledge around the world mean that foreign organizations and individuals become more influential, making it increasingly difficult for national governments manage their countries by themselves. 
For example, international bodies such as the WTO have changed the framework within which economic decisions are taken. 
Local economic change has been equally dramatic. 
In parts of Asia, living standards have skyrocketed. 
Foreign investment from within and outside the region has altered the structure of domestic economies. 
Old models of economic growth, however, such as export orientation and selective use of import restrictions that worked well for East Asia in the last century, are less feasible under today's global trade rules. 
So new rules of the game are needed. 
In most Asian countries, formal rules need to be simplified and applied more fairly. 
A "back to basics" approach is vital in three inter-linked areas, in which national governments must take the lead: minimizing corruption, enforcing property rights, and consistent application of the rule of law. 
Few countries score strongly here. 
Close links between business and governments were blamed by many for the financial crisis that struck Southeast Asia in 1997. 
In parts of South Asia, violent conflict and the power of vested interests threaten the rule of law. 
The result of such failures is that small elites benefit while the majority suffers. 
A clear structure of formal rules is the best antidote to these flaws, for they bolster the informal customs on which so much in society depends. 
Most business is not conducted in courts but in meetings where trust and reputation are essential. 
As the social theorist Robert Putnam has explained, "social capital"--the networks, norms, and social trust that facilitate cooperation and coordination for mutual benefit--is as much a determinant as it is a result of economic growth. 
Empowering as many members citizens as possible is likely to instill a widespread sense of purpose into efforts to move countries forward. 
Government, the private sector, and civil society all have a role to play in strengthening social capital. 
But successful interactions between these sectors cannot be wished into existence, and it is essential that the role of each is clearly defined. 
Many Asian governments recognize the need to define their roles more clearly. 
Following the 1997 crisis, the state withdrew further from markets, acknowledging the limits to what it can achieve and the importance of allowing private enterprise to flourish. 
But governments retain a role in fostering an enabling environment within which markets operate. 
Monitoring rules and enforcement are important, but different ways of working--say, through public-private partnerships--are also increasingly being considered in many innovative Asian economies. 
The valuable role of civil society in giving voice to communities that governments cannot reach is also recognized, but its relationship with government and business is often characterized more by conflict than cooperation. 
The private sector's role in decision-making, too, often needs to be clarified--where businesses have too much influence over government, their need to operate profitable may lead to policies that favor the few over the many. 
The metaphor of a game--with rules and participants--leads many to think in terms of a competition between nations. 
This is not entirely healthy, as our interdependent world is not a zero-sum game, where one country's gain is another's loss. 
Indeed, countries do not compete against each other in the way that firms do. 
Trade is potentially a positive-sum game, with all countries benefiting by exploiting their areas of comparative advantage. 
Good governance can enhance this positive-sum game, and ensure that companies and individuals within countries partake of the benefits. 
In another sense, however, it is valuable to think of governments as being in competition--providing a more effective service to their people than other governments. 
International comparison of systems therefore plays an important role. 
In this spirit, this month's UNCTAD-UNDP conference--"Governance in Asia: Underpinning Competitiveness in a Global Economy"--will bring together policy-makers from across Asia to discuss the governance challenges that Asia faces. 
The role of government--the only actor possessing the legitimacy of a popular mandate--is fundamentally important in steering a society forward. 
The private sector and civil society are, of course, increasingly important partners for governments. 
How relationships among these stakeholders function will powerfully influence Asia's future development. 

Reconciliation’s New Frontier 
In France, May 10 is a day to commemorate the abolition of slavery. 
January 27 is the day we remember the Holocaust, through the commemoration of the liberation of Auschwitz. 
In a few days, there will be ceremonies to celebrate the 100th anniversary of the revision of Captain Alfred Dreyfus’s conviction on charges of espionage in a trial that tore the country apart. 
France in particular, but also Europe in general, seems to be in a mood for remembering and repenting. 
It all looks as if the need to integrate communities within nations, to reconcile them with their past in order to unite them around a common identity and therefore a common project for the future, has replaced Europe’s now-completed mission of reconciling old enemies like Germany and France. 
For decades, “reconciliation” and its most remarkable achievement – the Franco-German rapprochement – was the trademark of the project to create an ever closer union in Europe. 
Reconciliation may seem far off for, say, the peoples of Japan, China, and South Korea, but it is taken for granted by today’s Europeans. 
Except for the Balkans, most European nations are at peace with each other. 
The genes of war now express themselves on the soccer field; competition for land has been replaced by competition for medals and titles. 
The first Franco-German history book was released recently, and, according to its team of writers, it was not the past and the Nazi years that constitute a source of contention between French and German historians, but the present and in particular relations with the United States. 
So, if the mission of reconciliation has any life left, its focus has shifted. 
If European nation-states are reconciled with each other, they are not yet fully reconciled with themselves, with their dark or grey spots, and in particular their treatment of minorities. 
Historians of Europe will probably one day conclude that it is the Holocaust and Europe’s relations with its Jews that paved the way for the opening of this process of repentance. 
In the words of the Polish historian and statesman Bronislaw Geremek, the liberation of Auschwitz on January 27, 1945, has to be seen as one of the founding moments of today’s Europe. 
The silence that surrounded Holocaust survivors during the immediate postwar reconstruction of Europe has been replaced by gestures of contrition and reparation. 
Responsibility for passivity as well as active crimes has been recognized. 
Pious lies have been uncovered. 
In France half a century ago, as the Cold War loomed, Charles de Gaulle easily convinced the French that they were heroic during World War II because he was heroic. 
Francois Mitterrand, by contrast, managed to assure the French only that they were not so bad, because he, Mitterrand, had served in the collaborationist Vichy regime of Marshal Pétain before joining the resistance. 
In the eyes of historians, President Jacques Chirac’s redeeming value will most probably remain his courageous attempt to reconcile France’s wounded minorities with their past and the French nation through a national process of repentance. 
It started with the Jews and acknowledgement that the Vichy regime did indeed incarnate the French state. 
Thus “France” itself was an accomplice to the crimes of the Nazi regime. 
Today, France’s black minority is trying to organize itself along the lines of the Jewish minority. 
It has created a central authority serving as an umbrella for diverse organizations. 
And it has concluded that centuries of slavery amount to the equivalent of the Holocaust. 
European recognition of crimes against the Jews, they argue, must be followed by an admission of guilt towards the Continent’s black minorities. 
It is likely that the violence that erupted in the fall of 2005 in many French cities and suburbs, in which young and unemployed black people played a large part, has accelerated the willingness of French officials to come to terms with this historical legacy. 
To face the challenge of integration, France must face its past. 
But it must also behave in a modern, rather than a neo-colonial, way in many places in its former African empire. 
If reconciliation with the past is vital to building a harmonious future, France has much to do concerning another minority for whom history seems to remain largely frozen. 
It is with the French of Algerian descent, not to mention Algeria itself, that reconciliation seems most difficult to achieve. 
It will take more than a few role models, such as Zinedine Zidane, France’s greatest soccer star, to appease the frustrations and to curb the resentments. 
But is acknowledging past guilt only a way to facilitate the integration of minorities? 
Or is it also part of a process of closing the doors of our European “paradise” to all those who still want to join us? 
Reconciliation between nations is probably easier than reconciliation within nations. 
This is the challenge facing much of the democratic world today, not only in France and Europe at large, but also in the US. 

Reconciling Hamas and Fatah 
GAZA/JERUSALEM – As representatives of Hamas and Fatah meet for the fourth round of national unity talks in Cairo, not only Palestinians but also Americans and Europeans will be watching closely. 
The top-level talks, hosted by Egyptian intelligence chief Omar Suleiman, will be crucial to ending nearly two years of bloody confrontation between Hamas-ruled Gaza and the Fatah-ruled West Bank, governed by Western-backed Mahmoud Abbas. 
Given previous failures, this round of talks might prove to be the final chance to re-establish Palestinian unity. 
The continuing internal schism between the more moderate and secular Fatah and the Islamist Hamas has not only left the Palestinian leadership in disarray, but has also made meaningful peace negotiations with Israel next to impossible. 
Moreover, continued internal disunity continues to thwart reconstruction efforts in Gaza, which are urgently needed in the aftermath of Israel’s military offensive earlier this year. 
Thus, the outcome of the negotiations in Cairo will have repercussions for Palestinians and Israelis – and, indeed, for anyone with a stake in the Middle East peace process. 
In previous rounds, the different factions agreed in principle on forming a united government for the West Bank and Gaza, and on holding legislative and presidential elections in the Palestinian Territories by January 2010. 
But Fatah and Hamas still differ fundamentally on how to form a government tasked to prepare elections. 
Discussions also center on the control of the security services – a field in which neither Fatah nor Hamas have much room to maneuver. 
Moreover, disagreement prevails on the type of electoral system to be used. 
Whereas Fatah favors a clear majority voting system, Hamas calls for a more personalized approach. 
Furthermore, the question of including Hamas in the Palestine Liberation Organization is crucial. 
Contrary to common perception, the PLO has always been the only official negotiating partner with Israel and does not include Hamas. 
In a rather obscure linguistic debate, Hamas has in previous negotiation rounds refused to “commit’ itself to past PLO agreements with Israel, but has instead offered to “respect” them. 
Negotiators in Cairo will thus have to discuss if such an indirect recognition of Israel’s right to exist will be acceptable. 
Underneath this clear-cut quid pro quo of political bargaining, the representatives from Fatah and Hamas are charged with finding the means to reconcile Hamas’s tremendously popular political ideology with Fatah’s traditional secular aspirations. 
This is not merely an internal Palestinian affair, for it reflects a conflict raging across the entire Middle East. 
Until now, no Arab society has managed to harmonize these opposing trends. 
Instead, most governments have opted for a more or less confrontational approach of suppression and exclusion, banning Islamists from participating in elections or bullying them into semi-legality. 
The case of the Palestinian Territories, however, is different. 
In the absence of a strong central authority, the predominant divide between secular nationalism and politicized religion has led to the actual geographic disintegration of the Palestinian Territories into two distinct parts. 
Given the difficulties that even major players in the region face when dealing with the challenge of political Islam, it becomes clear that for the Abbas-led Palestinian Authority, only compromise and dialogue is a feasible way to heal the rift. 
Unsurprisingly, the fate of the Cairo talks is anything but certain. 
Failure to come up with a unified Palestinian position would undoubtedly play into the hands of the newly elected Israeli government of Benjamin Netanyahu. 
After all, the Israeli Prime Minister has made it clear that he favors continued conflict management in terms of “economic peace” over far-reaching political processes based on mutual respect and cooperation. 
Faced with continued internal division, pressing for a meaningful peace process is very difficult for the Palestinians. 
As a consequence, Israel’s willy-nilly expansion of West Bank settlements might finally bury comprehensive peace efforts for good. 
But success in Cairo might prove even more challenging. 
If the negotiations lead to the establishment of a Palestinian government supported by both Fatah and Hamas, there will be a tough choice to make – not primarily for Palestinians, but first and foremost for Western decision makers. Will the West continue its policy of boycotting Hamas politically and financially, or will it adopt an alternative approach? 
Given Hamas’s belligerent ideology, any change in the West’s approach towards Hamas in the aftermath of successful Palestinian dialogue in Cairo would be difficult. 
But a modified and more pragmatic stance that focuses on Hamas’s behavior on the ground, rather than on abstract conditions, would not only be demanding for Western decision makers; it would pose a major political challenge for Hamas as well. 

Reconciling Minority Rights and State Sovereignty 
When the East/West conflict ended ten years ago, many hoped that the democratic changes in Eastern Europe would inspire peaceful resolution between the claims of human rights and those of state sovereignty throughout the world. 
Instead, ethnic conflicts have multiplied, shaking many East European and Asian countries. 
Minority and ethnic rights, it appears, are only demanded at the barrel of a gun, as in Chechnya and East Timor. 
Why is this so? 
The call for ``human rights,'' which have been made repeatedly since 1989, accents the rights of individuals in their struggles against overweening state institutions. 
Freedom of thought, freedom of the press, freedom of assembly: these were the rights that have been stressed most often, probably because they reflected the long struggle to restore the individual liberties smothered under communism. 
But human rights confined to the context of freedom for individuals are insufficient to resolving ethnic conflicts, because ethnic communities and groups cannot use the mechanisms of human rights laws and agreements to secure an effective hearing for their claims. 
States, after all, are usually the forces suppressing their demands. 
Minority and ethnic violence arises out of the sense of frustration that results. 
In order for the international community to use the concept of human rights to resolve and settle ethnic conflicts, a concept of community must be incorporated within the framework of our understanding of human rights. 
Only if groups are offered corresponding instruments to assert their own collective human rights will there arise a chance that ethnic minorities will not resort to violence in order to achieve their ends, but will seek satisfaction in a civic forum. 
A court, a place that furnishes binding jurisdiction for both oppressed minorities and for the countries riven by ethnic disputes is now required. 
We need an International Court for Minorities that would act in similar ways to the International Court of Justice to make decisions concerning the legitimacy of claims in this area. 
Today, the most virulent examples of such minority and ethnic assertions of their group rights are to be found in Afghanistan. 
Ever since the former Soviet Union withdrew its invading army from that country, a political vacuum has existed. 
Civil war, motivated by ethnic and religious divisions, followed. 
The disintegration of what little remained of the central Afghan administration contributed decisively to the establishment of what can only be called sub-state terrorist structures. 
Terrorists rule where the Afghan state once did. 
Why did this happen, and why has this experience been repeated time and again? 
Why does it appear to be impossible to resolve national and ethnic conflicts by civil, political, and non-violent means? 
One reason for this failure, I believe, is that the notion of human rights, despite everything that has been done in its name over the past half-century, remains undefined in a critical way. 
After 1989, human rights were understood as a universal code to tame state despotism. 
It is my belief, however, that human rights cannot be used as a universal idea for resolving ethnic conflicts unless the concept obtains a clear-cut and expanded definition, which includes ethnic and minority rights. 
An International Court for Minorities would provide a forum to define these collective rights. 
What would be its work? 
First, it would be a place for minorities who consider their legitimate rights within a state as being violated to seek redress. 
Charges could be filed and justice sought. 
The Court would not only allow minority groups to stake their claims, but the accused national state would also have a chance to be heard in order to protect itself, perhaps, against undeserved propaganda. 
Should the Court conclude that the rights of the minority in question were gravely violated it could issue a binding decision demanding that the national state concerned change its laws and practices. 
Should that state fail to do so the International Court for Minorities could demand that the UN Security Council provide protection to the endangered minority. 
This court would be a place for civic and civilized settlement between ethnic minorities and state sovereignty. 
It would thus re-balance the UN charter, which now stipulates that discrimination against individuals is prohibited but says nothing about discrimination of ethnic groups. 
The Court would be a mediator issuing binding decisions and setting standards that would regulate the legitimate rights of minorities, and would so become an global authority against not only state despotism but the license of ethnic groups. 
For in order to appeal to the Court, minority groups must refrain from using violence. 
Of course, no conflict can be resolved in a one-sided manner, benefiting either the state or an ethnic group but not the other. 
Just as states would no longer be able to stress their sovereignty as a trump card over minority claims, ethnic groups could no longer insist that their right to self-determination justified any action. 
No state may exercise its sovereignty without restriction; not every ethnic group has a right to its own national state. 
The Court's objective must be discuss the claims made by both parties and seek a just and peaceful resolution. 
The International Court for Minorities that I propose would be both therapeutic and preventative. 
It may moderate and, optimally, settle existing conflicts - say, the Middle East conflict, for example - but it might also identify potential conflicts and hinder them from becoming violent. 
Here, I am particularly concerned about multinational countries such as China, Brazil, Indonesia and India. 
Ethnic conflicts, and in extreme cases ethnic terrorism now pose a clear and present danger to world peace. 
They will continue to pose that threat unless the world acts. 
Creating an International Court of Justice for Minorities offers a means to head-off such violence and secure global peace. 

The Price of Peace 
MADRID – The relationship between peace and justice has long been the subject of polarizing debates. 
Some argue that the pursuit of justice impedes conflict-resolution efforts, while others – including International Criminal Court (ICC) Chief Prosecutor Fatou Bensouda – contend that justice is a prerequisite for peace. 
As President Juan Manuel Santos leads Colombia through the most promising peace talks in five decades of brutal conflict with the Revolutionary Armed Forces of Colombia (FARC), he will have to consider this question carefully. 
The Nuremberg trials, which followed Nazi Germany’s unconditional surrender in World War II, provide an ideal model for post-conflict justice. 
But, in conflicts in which no side has been defeated, the peacemaker’s job becomes more challenging. 
Given what is at stake, a trade-off between reconciliation and accountability may well be inescapable. 
Since 1945, more than 500 cases of amnesty in post-conflict transitions have been recorded; since the 1970’s, at least 14 states – including Spain, Mozambique, and Brazil – have given amnesty to regimes guilty of serious human-rights violations. 
In South Africa, amnesty was a key feature of the “truth and reconciliation” process that facilitated the peaceful transition from more than four decades of white-minority rule to democracy. 
Similarly, in 2003, Nigeria’s president offered asylum to his Liberian counterpart, Charles Taylor, on the condition that Taylor retire from politics, thereby helping to end the rebellion against him. 
(In this case, justice was later served; in 2012, the Special Court for Sierra Leone convicted Taylor of 11 counts of aiding and abetting war crimes in Sierra Leone, making him the first former head of state to be convicted for such crimes by an international tribunal since Nuremberg.) 
Although it may be painful to offer a safe exit to war criminals and human-rights abusers, the prospect of ending the suffering of civilians can take priority over a principled stand for justice. 
Who today would oppose amnesty for Syrian President Bashar al-Assad if it ended the brutal civil war that has led to more than 100,000 deaths and created nearly two million refugees (including more than a million children) in just two years? 
This is precisely the dilemma that Santos now faces. 
Given the innumerable atrocities that the FARC have committed, the prospect of suspending punishment is difficult to accept. 
But prolonging a conflict that has already led to more than 200,000 deaths and displaced roughly five million people is in no one’s interest. 
With Colombia’s recent accord on agrarian reform having resolved the conflict’s root cause, the question of transitional justice has become the determining factor in whether the peace process will succeed. 
If impunity for perpetrators of crimes against humanity, however morally repugnant, could protect potential future victims by ending the conflict, accepting such an outcome may well be worth sacrificing a full measure of justice for past victims. 
Rather than launching an uncompromising campaign to defeat the insurgents, Santos has pursued the more politically challenging course: a negotiated settlement. 
This suggests a willingness to do whatever it takes to protect long-suffering rural communities from continued violence. 
Santos would certainly not be the first head of state to go silent on accountability. 
In 2003, the United States and the European Union acquiesced to an accord that formally ended the Democratic Republic of the Congo’s civil war, which had claimed nearly four million lives, though the agreement lacked provisions to hold war criminals accountable. 
The same is true for Sudan’s 2005 Comprehensive Peace Agreement, which ended a 22-year civil war in which more than two million died. 
In these cases – as in Colombia today – a fundamentalist approach to transitional justice was not feasible. 
Rather, justice had to be applied according to the specific political conditions that brought about the transition. 
After all, transitional justice is essentially a political solution, a historic contract of national reconciliation – not a strictly judicial matter. 
For Santos, reconciling peace and justice in a complicated domestic political context may require alternative formulas, such as reduced sentences, community penalties, conditional verdicts, or asylum in third countries. 
But none of these options, let alone amnesty, should be allowed unless the demobilized insurgents cooperate fully with the courts, including by disclosing all of their crimes. 
Following this logic, FARC leader Pablo Catatumbo has acknowledged the “pain and acts of cruelty” that the guerillas have committed and has requested a collective pardon that would cover human-rights violations committed by both the FARC and state security forces. 
He has also insisted on the identification and compensation of victims as a prerequisite for peace and national reconciliation. 
When conflict-resolution efforts are on the line, a single-minded quest for retribution often is the wrong option. 
Archbishop Desmond Tutu, a leader of South Africa’s democratic transition, has described an alternative – restorative justice – that focuses on “the healing of breaches, the redressing of imbalances, [and] the restoration of broken relationships.” 
With this constructive, forward-looking understanding of justice in mind, Santos, too, can succeed, thereby securing the peaceful, secure future that Colombians deserve. 

Reconciling with Sykes-Picot 
NEW YORK – This month marks the centenary of the Sykes-Picot Agreement, the secret British-French accord that launched a decade-long series of adjustments to the borders of the post-Ottoman Middle East. 
Most commentary on the anniversary has been negative, suggesting that the agreement bears considerable blame for the frequency and durability of the region’s conflicts. 
That interpretation, however, borders on caricature. 
Mark Sykes and François Georges-Picot aimed to devise a plan that would enable Great Britain and France to avoid a ruinous rivalry in the Middle East. 
They largely succeeded: Their design kept the region from coming between the two European powers, and it managed to survive for a century. 
To be sure, many of the Sykes-Picot borders reflected deals cut in Europe rather than local demographic or historical realities. 
But that hardly makes the Middle East unique: Most borders around the world owe their legacy less to thoughtful design or popular choice than to some mixture of violence, ambition, geography, and chance. 
The unpleasant reality is that today’s Middle East is what it is because its people and leaders have done such a bad job in shaping it. 
Sykes and Picot cannot be blamed for the region’s pervasive lack of tolerance and political freedom, poor schools, or the unfair ways in which girls and women are treated. 
Other parts of the world (including those without enormous reserves of oil and gas) have emerged from colonialism in much better shape. 
The factors accounting for the record of failure in the Middle East – history, culture, religion, and personalities – are worthy of serious examination. 
But the more pressing question that this anniversary raises has less to do with historical analysis than it does with current policy. 
In much of the Middle East, a violent struggle for mastery is the new normal. 
In four – arguably five – countries in the region, the government does not control significant portions of the state’s territory. 
Lebanon has been in this condition for decades, Iraq for more than a decade, and Syria, Libya, and Yemen for some five years now. 
Militias, terrorist organizations, foreign fighters, and other armed groups have asserted varying degrees of local authority. 
There are also the unfulfilled national aspirations of the Kurds (large numbers of whom live in Turkey, Iraq, Syria, and Iran) and the unresolved matter of how to reconcile the reality of Israel with the Palestinians’ political goals. 
The border between Syria and Iraq is for all intents and purposes gone. 
Millions of men, women, and children find themselves living in a country that is not their own. 
What, then, should be done? 
One option would be to try to preserve – or, more accurately, restore – the Sykes-Picot Middle East. 
But attempting to reunify the countries that appear on the map – and to make the borders between them matter – would be folly. 
These countries will not go back to what they were; ties to region, religion, tribe, ethnicity, and/or ideology have in many cases superseded national identities. 
A second option would be to try to negotiate the terms of a new Middle East, a successor to Sykes-Picot. 
This, too, would prove to be an expensive failure. 
Redrawing the map might be possible one day, but that day is decades away, at best. 
There is simply no consensus on what the map should look like, and no party or alliance that could impose or uphold it. 
As a rule of thumb, diplomacy can be expected only to work with facts on the ground, not to create them, and the facts on the ground stand in the way of a regional settlement. 
All of this leads to a third option: Acceptance of the fact that for the foreseeable future the Middle East will not resemble what appears on maps and globes. 
This is not an argument for remaining aloof; as bad as things are, they can always get worse. 
To see that they do not, governments and organizations that meet certain standards can and should be strengthened; those that do not can and should be weakened. 
But no level of effort will alter the region’s basic reality: borders that count for little and governments that count for only a little more. 
Syria, Iraq, and Libya are likely to be countries in name only; important parts of each will essentially be autonomous and on their own, for better or worse. 
The fact that Turkey, Iran, Saudi Arabia, Israel, Russia, and the United States are working at cross-purposes more often than not further suggests a messy future without legal foundation. 
In some ways, the pre-Sykes-Picot Middle East is coming back – but without the order imposed by the Ottoman Empire. 
As a result, the Middle East stands to suffer far worse in the next century than it did in the last – a reality that could well leave us nostalgic for the times of Sykes and Picot. 

Reconstructing Haiti 
NEW YORK – The horrors of Haiti’s earthquake continue to unfold. 
The quake itself killed perhaps 100,000 people. 
The inability to organize rapid relief is killing tens of thousands more. 
More than one million people are exposed to hunger and disease and, with the rain and hurricane seasons approaching, are vulnerable to further hazards. 
Even an economy as impoverished as Haiti’s is a complex system dependent on trade between rural and urban areas, transport, electricity, port services, and government functions. 
Haiti’s economy worked badly in the past, and was still reeling from four hurricanes in 2008 when the earthquake struck. 
The fact that the quake hit the capital, and demolished every center of social activity, destroyed the systems upon which daily urban life depends. 
Millions of people are now without livelihoods and the means for survival. 
The first stage in an effective response, the first three or four weeks, must focus on rescuing survivors and stabilizing supplies of food, water, medical services, and shelter for the population. 
Neither Haiti nor the world was properly equipped for this, and tens of thousands will die needlessly. 
The world’s emergency-response systems – especially for impoverished countries in zones that are vulnerable to earthquakes, volcanoes, droughts, hurricanes, and floods – needs upgrading. 
After just a month or so, the emergency phase will give way to a decades-long struggle for recovery and long-term development. 
Haiti must avoid a prolonged period of tent cities in which people are mere refugees. 
But where should displaced people – numbering hundreds of thousands, and perhaps more than a million – live? 
How should they be provided with food, water, health care, and shelter? 
And how can they begin to contribute to the revival of basic economic life? 
The economy will have a simple structure in the coming years, with most economic activities focused in five sectors: smallholder, or peasant, agriculture; reconstruction; port services and light manufacturing; local small-scale trade; and public services, including health care and education. 
The key challenge is to support these five sectors in order to combine short-term relief with long-term reconstruction and development. 
First, special efforts should be made to boost peasant agriculture and rural communities. 
This will enable hundreds of thousands of displaced people to return to their village communities and live from farming. 
With fertilizer, improved seeds, small-scale irrigation, rapid training and extension services, and low-cost storage silos, Haiti’s food production could double or triple in the next few years, sustaining the country and building a new rural economy. 
Reconstruction – of roads, buildings, and water and sanitation systems – will employ tens of thousands, perhaps hundreds of thousands, of Haitian construction workers, and boost the regeneration of towns. 
The World Food Program can help peasant farmers to produce more food in the countryside and then purchase the food to use in food-for-work programs oriented to construction projects. 
Haiti ’s infrastructure was meager before the earthquake (hence the shocking mortality rate), and most of that is now rubble. 
Large-scale capital investment will also be needed to re-equip the ports and to re-establish a power grid. 
Recovery will also require re-establishing at least a small-scale manufacturing sector. 
Haiti, like its next-door neighbor, the Dominican Republic, once created jobs in port facilities, including production of clothing, baseballs, and other light-manufacturing items. 
Those jobs disappeared in the 1990’s, when the US imposed a trade embargo on Haiti as part of an effort to re-establish democracy. 
Democracy returned, but the economy was destroyed. 
Other countries have risen from the rubble of natural disaster and war, and Haiti can do the same over the next five to ten years. 
For the next decade, however, and especially for the next five years, there will be no escape from the need to rely on international financing, and mainly grant assistance, to finance the rebuilding effort. 
The world has spent heavily in Haiti before, but very ineffectively. 
This time, it must be done right. 
A clear strategy is needed to bolster the key sectors discussed above. 
Each sector requires a five-year recovery strategy with a clear budget and clear lines of partnership and responsibility linking the Haitian government, non-governmental organizations, and institutional donors, especially governments and international agencies. 
The second key to successful reconstruction is to harmonize the international response. 
There are probably 40 or more official organizations from abroad, if not more, already engaged in the recovery effort. 
In addition, there are hundreds, if not thousands, of native Haitian NGOs. 
The Haitian government itself has been reduced to paralysis by death and destruction. 
There should be one overarching framework. 
There should be one major multi-donor bank account to finance the heavy outlays required for Haiti’s recovery. 
There should be a highly professional executive team coordinating the international support efforts. 
And all of this should be put in place very soon, while there is international interest. 
The world will move on to the next crisis very soon, well before Haiti has even started to recover. 
I have watched the problems of international cooperation for a quarter-century. 
Each agency has its role, but they also tend to squabble over turf rather than cooperate. 
International financial promises are made for headlines and photo opportunities, but end up undelivered. 
We therefore need money in the bank, and clear leadership. 
My nominee to guide the process is the Inter-American Development Bank. 
The IDB’s deep, long-term commitments in Haiti and professional expertise in agriculture, health, education, and infrastructure qualify it to coordinate the multitude of agencies that will be involved. 
It should work closely with a professional executive team made up of native and diaspora Haitian professionals with relevant expertise. 
Rebuilding Haiti will cost perhaps $10-$20 billion, and will take much of the coming decade. 

Recount Kenyans’ Votes 
Kenya is aflame after a presidential election on December 27 widely believed to have been rigged to secure the re-election of Mwai Kibaki. 
Kibaki’s opponents took to the streets, the government issued shoot-to-kill orders, and hundreds have died at the hands of the police as well as from gang rampages and inter-ethnic violence. 
The United States has led the international diplomatic response, but its approach has been deeply flawed. 
Kenyans voted in vast numbers, waiting in the hot sun for several hours at crowded polling booths around the country. 
The first results to be counted were for Kenya’s parliament, with Kibaki’s government ministers roundly defeated in their local constituencies. 
The main opposition alliance, led by Raila Odinga, won about 100 seats, compared to roughly 30 for Kibaki. 
It appeared overwhelmingly likely that the presidential vote count would similarly show Odinga beating Kibaki by a wide margin. 
That, indeed, is how the early count transpired. 
As the tallies from polling stations from around the country came into Nairobi, Odinga built up a lead of several hundred thousand votes. 
Then the trouble began. 
Vote tallies from Kibaki’s homeland in central Kenya were delayed. 
Independent observers from the European Union and elsewhere began to report serious irregularities in the Kibaki strongholds, where opposition party representatives were denied access to polling sites. 
Matters became even more dubious as the vote tallies were collected and recorded at the Electoral Commission of Kenya (ECK). 
According to detailed evidence submitted by the opposition, the tallies from the countryside, allegedly already padded for Kibaki, were again manipulated, with additional votes awarded to him. 
As a result, many more votes were recorded by the ECK for the presidential race than for the parliamentary race, even though voters were clearly instructed – indeed required – to cast a vote in both races. 
When the opposition tried to challenge these inconsistencies, the ECK abruptly declared Kibaki the winner. 
Days later, the ECK’s head publicly acknowledged that Kibaki supporters had pressured him to announce the “results” immediately, despite the clear evidence of vote rigging. 
Shockingly, he declared that he did not know who really won. 
The EU observers also announced that the election tally had not met basic international standards. 
The election is a disaster for Kenya, but the response of the international community, led by the US, is no less distressing. 
American foreign policy in Africa is in the hands of Assistant Secretary of State Jendayi Frazer, a former student of Secretary of State Condeleezza Rice. 
From the start of the post-election crisis, Frazer took three flawed positions. 
First, she declared that the vote could not be re-assessed by an independent tally. 
In fact, most observers on the scene believed that there was a long paper trail, from the polling sites all the way to Nairobi, which could be re-assessed in detail. 
Second, she claimed that there had been vote rigging “on both sides,” and suggested that the true election results were very close and that perhaps Kibaki had won. 
Given the vast amount of direct and circumstantial evidence that the rigging was on behalf of Kibaki, Frazer’s assignment of equal blame to each side was met with astonishment and dismay by the opposition. 
She also failed to acknowledge an exit poll carried out by a US foundation, which showed a clear Odinga victory. 
Finally, Frazer argued that the two sides needed to compromise and share power. 
Instead, Kibaki disdainfully appointed 18 key cabinet members even as “mediation” from abroad was about to begin. 
The opposition, of course, was perplexed by the US call for compromise without any serious call to review the vote itself. 
In the end, only Kenya will decide its own fate. 
The US or other outside powers will not save Kenyan democracy. 
Threats, sanctions, or aid cutoffs would only cause further damage to an economy already in free fall, tragically punishing Kenya’s poor while fomenting further violence. 
Still, the international community can play a more constructive role than it has until now by pressing both sides to accept an independent recount. 
By standing up for democratic principles, the world would truly stand on the side of the Kenyan people. 
In dismissing such a recount, Frazer told Kenyans that they shouldn’t expect their vote to be tallied accurately, and that power can be seized or perhaps even negotiated in a backroom. 
She also sent an unmistakable signal to those who would steal votes: at worst, they might have to share a few cabinet positions with the opposition. 
Perhaps a recount would show that the election was too close to call. 
Perhaps, as the opposition insists, it would demonstrate a clear victory for Odinga. 
Either way, Kenyans and their votes would be taken seriously, and tempers could well subside. 
Only if both sides accept that there was no clear winner is it reasonable to call for power-sharing (or a new election). 
There is still time to get this right. 
The international community should stop pushing for a backroom “compromise” that ignores the popular will. 
Let the world stand with neither Kibaki nor the opposition, nor for an arbitrary compromise, but with Kenya’s voters. 
If Kibaki rejects an independent recount, his refusal will reverberate around Kenya and the world. 
Those who ignore voters should quickly learn that they have no place to hide. 

Recovering America’s “Smart Power” 
The United States needs to rediscover how to be a “smart power.” 
That was the conclusion of a bipartisan commission that I recently co-chaired with Richard Armitage, the former deputy secretary of state in the Bush administration. 
The Smart Power Commission, convened by the Center for Strategic and International Studies in Washington, comprised Republican and Democratic members of Congress, former ambassadors, retired military officers, and heads of non-profit organizations. 
We concluded that America’s image and influence had declined in recent years, and that the US must move from exporting fear to inspiring optimism and hope. 
We are not alone. 
Recently, Defense Secretary Robert Gates called for the US government to commit more money and effort to “soft power,” including diplomacy, economic assistance, and communications, because the military alone cannot defend America’s interests around the world. 
Gates pointed out that military spending totals nearly a half-trillion dollars annually, compared to the State Department’s budget of $36 billion. 
He acknowledged that for the head of the Pentagon to plead for more resources for the State Department was odd, but these are not normal times. 
Smart power is the ability to combine the hard power of coercion or payment with the soft power of attraction into a successful strategy. 
By and large, the US managed such a combination during the Cold War; more recently, however, US foreign policy has tended to over-rely on hard power, because it is the most direct and visible source of American strength. 
But, while the Pentagon is the best-trained and best-resourced arm of the government, there are limits to what hard power can achieve on its own. 
Democracy, human rights, and the development of civil society do not come from the barrel of a gun. 
True, the American military has impressive operational capacity, but turning to the Pentagon because it can get things done creates an image of an over-militarized foreign policy. 
Diplomacy and foreign assistance are often under-funded and neglected, in part because it is difficult to demonstrate their short-term impact on critical challenges. 
In addition, wielding soft power is difficult because many of America’s soft power resources lie outside of government in the private sector and civil society, in its bilateral alliances, multilateral institutions, and transnational contacts. 
Moreover, American foreign policy institutions and personnel are fractured and compartmentalized, and there is no adequate inter-agency process for developing and funding a smart power strategy. 
The effects of the September 11, 2001, terrorist attacks have also thrown us off course. 
Since the shock of those attacks, the US has been exporting fear and anger rather than the country’s more traditional values of hope and optimism. 
Guantánamo Bay has become a more powerful global icon than the Statue of Liberty. 
The CSIS Smart Power Commission acknowledged that terrorism is a real threat and likely to be with us for decades, but pointed out that over-responding to extremists’ provocations does more damage to the US than terrorists ever could. 
Success in the struggle against terrorism means finding a new central premise for American foreign policy to replace the current theme of a “war on terror.” 
That premise should be a commitment to invest in the provision of public goods that people and governments worldwide want but cannot attain without American leadership. 
By doing so, the US could rebuild the framework that it needs to address tough global challenges. 
Specifically, the Smart Power Commission recommended that American foreign policy focus on five critical areas: 
Implementing such a smart power strategy will require a strategic reassessment of how the US government is organized, coordinated, and budgeted. 
The next president should consider a number of creative solutions to maximize the administration’s ability to organize for success, including the appointment of senior personnel who could reach across agencies to better align resources. 
This will require innovation, but the US has been a smart power in the past, and it can become so again. 

Recovering from Kosovo 
LONDON – Kosovo’s recent unilateral declaration of independence brought back memories. 
I publicly opposed NATO’s attack on Serbia – carried out in the name of protecting the Kosovars from Serb atrocities – in March 1999. 
At that time, I was a member of the Opposition Front Bench – or Shadow Government – in Britain’s House of Lords. 
The then Conservative leader, William Hague, immediately expelled me to the “back benches.” 
Thus ended my (minor) political career. 
Ever since, I have wondered whether I was right or wrong. 
I opposed military intervention for two reasons. 
First, I argued that while it might do local good, it would damage the rules of international relations as they were then understood. 
The UN charter was designed to prevent the use of force across national lines except for self-defense and enforcement measures ordered by the Security Council. 
Human rights, democracy, and self-determination are not acceptable legal grounds for waging war. 
Secondly, I argued that while there might be occasions when, regardless of international law, human rights abuses are so severe that one is morally obliged to act, Kosovo was not such a case. 
I considered the “imminent humanitarian disaster” that the intervention was ostensibly aimed at preventing, to be largely an invention. 
I further argued that non-military means to resolve the humanitarian issue in Kosovo were far from being exhausted, and that the failed Rambouillet negotiation with Serbia in February-March 1999 was, in Henry Kissinger’s words, “merely an excuse to start the bombing.” 
This view was vindicated by the Organization for Security and Cooperation in Europe’s Report on Human Rights Violations in Kosovo , published in December 1999. 
The report showed that the level of violence fell markedly when OSCE monitors were placed in Kosovo following the Holbrooke-Milosevic agreement of September 23, 1998; and that it was only after the monitors were withdrawn on March 20, 1999, in preparation for the bombing that general and systematic violation of human rights began. 
Between March and June 1999 – the period of NATO bombing – the number of deaths and expulsions in Kosovo shot up. 
The “humanitarian disaster” was in fact precipitated by the war itself. 
Despite this, the term “genocide,” freely bandied about by Western interventionists, was grotesquely inappropriate at any time. 
Without doubt, NATO air strikes and the subsequent administration of Kosovo as a protectorate improved the political situation for Albanian Kosovars. 
Without NATO intervention, they probably would have remained second-class citizens within Serbia. 
Against this must be set large-scale deterioration in the economic situation of all Kosovars, Albanian and Serbian (44% unemployment), widespread criminalization, and the fact that under NATO rule, Kosovo was ethnically cleansed of half its Serb minority. 
Kosovo remains in political limbo to this day. 
Two thousand European Union officials run the country, and 16,000 NATO troops guard its security. 
Its “independence” is rejected by Serbia, unrecognized by the Security Council, and opposed by Russia, China, and most multi-national states in Europe and Asia, which fear setting a precedent for their own dismemberment. 
Indeed, Russian Foreign Minister Sergei Lavrov was quick to blame the disturbances in Tibet on Kosovo’s declaration of independence. 
A Serbian insurgency and de facto partition of Kosovo remain possible, and we have yet to face the destabilizing effects of Kosovo’s claim to independence on other divided Balkan states such as Bosnia and Macedonia But the balance sheet is even worse in terms of international relations. 
Kosovo was a stalking horse for Iraq, as the doctrine of humanitarian intervention morphed into President George W. Bush’s doctrine of “pre-emptive war,” by which the US claimed the right to attack any state that it deemed a threat to its national security. 
As then-UN Secretary General Kofi Annan rightly argued, this opened the door to the proliferation of unilateral, lawless use of force. 
Not the least damaging consequence of the Bush doctrine is that it dispenses with the need for public proof of aggressive intent. 
The Iraq invasion was justified by the same use of fraudulent evidence as was displayed in Kosovo. 
On balance, I believe that I was right to oppose the Kosovo war. 
It was a regressive answer to a genuine international problem: how to hold together multi-ethnic/religious states in a reasonably civilized way. 
Since 1999, Kosovars have rejected Serbian offers of autonomy, because they were confident of American support for independence. 
Western countries must consider more seriously how far they should press their human rights agenda on states with both the power and the will to defend their territorial integrity. 
Under American leadership, it is the West that has emerged as the restless, disturbing force in international affairs. 
China should certainly grant Tibet more autonomy; but is pumping up the Dalai Lama into a world leader or threatening to boycott the Beijing Olympics the best way to secure a better deal for Tibetans, or to obtain Chinese cooperation on matters that are far more important than Tibet’s status? 
Activists, impassioned by the justice of their cause, will not consider these questions. 
But world leaders should take them seriously. 

Recovery, Interrupted 
NEW YORK – Since the 2008-2009 slump lifted in mid-2009 – and especially following the exposure of the massive public-debt problems in Greece, Ireland, and elsewhere in Europe – most G-7 governments have reversed their earlier counter-recessionary positions. 
With the important exception of the United States, G-7 leaders have been pushing since mid-2010 for urgent fiscal consolidation, effectively overturning their earlier recovery efforts, and urging austerity measures to balance their budgets, despite the weakness, unevenness, and uncertainty of the economic upturn. 
Austerity-based fiscal consolidation is likely to fail, because sustainable public budgets are best achieved on the basis of strong economic growth. 
Indeed, the logic of fiscal consolidation requires those economies that have recovered strongly to phase out their recovery efforts, while those that have not continue such efforts. 
The virtual abandonment of recovery efforts in most developed economies presumes that stronger Asian economic growth outside Japan can lift the world economy from its current trajectory. 
However, even continued strong performance by Asia’s emerging markets is unlikely to be enough to secure a strong global recovery. 
In fact, the likely renewed slowdowns in the G-7 economies will jeopardize growth in emerging markets as well. 
This prospect has been ignored, despite warnings by the International Monetary Fund, the United Nations, and others. 
Moreover, the shift from recovery efforts to fiscal consolidation and, more recently, to current-account rebalancing, has undermined the initial G-20-led coordinated recovery efforts. 
Instead, finger-pointing grew more widespread in 2010, impeding policy coordination and cooperation – the very sources of the G-20’s earlier success. 
The outcome of early November’s US mid-term elections has effectively denied the Obama administration the option of fiscal expansion. 
Instead, the US Federal Reserve has turned to a second round of “quantitative easing.” 
QE2 does not really create new money; that will happen only if the banks lend, which they have not been doing so far. 
Rather, it will increase banks’ excess-reserve balances. 
Critics suggest that QE2 is really intended only to create inflationary expectations and thus encourage acquisition of more risky assets by reducing rates on Treasury bills with longer-term maturities (5-7 years and 7-10 years). 
Many observers consider QE2 a blunt instrument that is unlikely to achieve its objectives, although it may weaken the dollar, which many think will redress recurrent US trade deficits. 
But critics argue that QE2 may instead merely encourage more private investors to hold emerging-market debt, which would have an impact on the currency, due to the price change, rather than on the quantity of money. 
Indeed, after an initial dip, the dollar started to strengthen again, later reinforced by the return of euro risk. 
After making limited progress on encouraging faster renminbi appreciation, the US has tried to limit current-account surpluses, with China the main target. 
Understandably, China has resisted, probably mindful of the post-1985 yen appreciation’s association with the end of Japan’s four-decade-long post-war boom. 
The UN and others have long drawn attention to global imbalances. 
However, these imbalances did not trigger the crisis alone, and reducing them certainly is not the most urgent priority, given the prospect of protracted stagnation in most of the G-7 and its likely adverse consequences for the world economy. 
The US enjoys a privileged role in the international monetary system as issuer of the world’s de facto reserve currency. 
Hence, the US current-account deficit cannot be addressed without dealing with related problems: first, the lack of a proper international reserve-currency arrangement, and, second, the perceived need of emerging-market economies with liberalized capital accounts to accumulate reserves for protection against volatile capital flows. 
These issues can be addressed only through systemic reform over the medium term, while the recovery effort should remain the global priority in the near term. 
Meanwhile, agreeing on Basel 3 banking standards in just two years is commendable, especially as Basel 2 took a decade to negotiate. 
However, Basel 3 only indirectly addresses the “shadow banking system,” despite its role in triggering the crisis and the future threats it poses for financial stability. 
More worryingly, Basel 3 retains, if not deepens, biases in the Basel 2 rules against bank lending to developing countries, such as for trade finance. 
With the G-7 struggling and emerging-market countries expected to support, if not lead, global recovery, that is an astonishingly short-sighted decision. 


Resuscitating Africa’s Health Care 
FREETOWN, SIERRA LEONE – In late October, the International Federation of Red Cross and Red Crescent Societies (IFRC) confirmed what many had long suspected: millions of dollars donated to fight the Ebola outbreaks in Guinea and Sierra Leone had been mismanaged and stolen. 
The world’s oldest humanitarian organization was “outraged” by the findings, it said. 
Needless to say, they were not alone. 
I was national coordinator of Ebola burials for Sierra Leone at the height of the epidemic. 
For much of the crisis, beginning in 2014, we lacked the equipment and materials needed to contain the deadly virus. 
We lost many health workers amid the dearth of resources, and the thought of losing my own life – leaving behind a family and two young children – terrified me daily. 
These were anxious times for my country. 
That anxiety has not vanished. 
My thoughts frequently return to colleagues who died during the heroic fight. 
And now, with confirmation that huge sums of aid were stolen, the grief is compounded by anger and disappointment – at the fraud itself, but also for what it says about Africa’s struggles to improve health-care access and outcomes. 
The rampant fraud illustrates how problematic it can be when donors channel resources through big NGOs like the Red Cross. 
And the IFRC’s revelation is likely just the tip of the iceberg. 
Sierra Leone’s minister of health and sanitation first warned of the possibility of widespread fraud in May 2015; he even called for a full accounting of money received and spent. 
Unfortunately, his request was largely ignored. 
The silence was lamentable, but not surprising; tracking donor funds is extremely difficult. 
When governments and private donors pledge monetary aid, the funds typically pass through a chain of large groups that determine how it will be allocated. 
But a full accounting often is never provided. 
For example, the United Nations Office for the Coordination of Humanitarian Affairs estimates that $3.3 billion was donated to the countries that were hardest hit by Ebola. 
And yet, the office’s data do not show how the money was spent. 
There is widespread agreement among governments, development partners, and relief agencies that in a crisis like that caused by Ebola – or any other health emergency, for that matter – strong financial management is critical. 
Only with disciplined budgeting can staff be properly equipped and paid, hospitals stocked, and triage centers opened. 
When well-intentioned pledges fail to reach those in need, the result is measured in a lack of resources – from a shortage of doctors to a lack of vehicles to transport the sick and bury the dead. 
Anger was my first emotion upon learning of the IFRC funding fraud. 
But it is the second sentiment – disappointment – that must drive Africa forward. 
If the continent is to make gains in achieving universal health coverage (UHC) and improving the quality of health care for everyone, it must start by ensuring that resources are used efficiently and fairly. 
Some progress has been made in strengthening national planning processes and principles. 
And, according to the UHC 2030 Alliance, which works to improve the quality of and access to health-care systems around the world, recipient countries have done far more than their international counterparts to establish more effective budgetary frameworks. 
But Africa still has a long way to go before financial management and procurement systems meet adequate standards. 
To improve the quality of Africa’s health-care systems, and avoid a repeat of the IFRC’s Ebola funding fiasco, countries that receive aid need better financial management protocols. 
In health emergencies, immediate aid is essential. 
But if that aid is to be allocated properly, recipient countries must already have the ability to manage large sums transparently. 
The goal must be to ensure that recipient countries have oversight over how donor funds are spent. 
At the moment, the opposite is happening, and most African countries are like the parched sailor adrift at sea – we see money everywhere, but we have no ability to use it. 
To drink from the ocean of aid, African countries must first take control of their health-care funding destinies. 
To do that, resources much be used efficiently. 
A regional and sector-wide approach is critical to improving coordination and preventing duplication. 
After the war and genocide in Rwanda, for example, the country’s government required that all development partners work according to the government’s agenda. 
Today, Rwanda is among the world leaders in health-care access and outcomes. 
Rwanda’s experience should serve as a model for other countries. 
As the world observed Universal Health Coverage Day in December, I was left to reflect on the horrors of the last few years, and consider what steps we must take to improve health care in the future. 
In Sierra Leone, as elsewhere, the focus must be on strong leadership, governance, and partnerships. 
But most of all, we must use our collective dissatisfaction with past failures to fuel efforts to make quality health care a reality for everyone. 

Connecting the Red Sea 
KING ABDULLAH ECONOMIC CITY – The Red Sea has played a pivotal role in global trade for millennia. 
In the time of the pharaohs, it was at the heart of the global spice trade. 
Today, it is an essential global artery, feeding Western demand for hydrocarbons and facilitating the flow of goods between Europe and booming Asian markets. 
More than 10% of world trade moves through the Red Sea basin every year, a figure that is set to increase as Egypt doubles the capacity of the Suez Canal. 
And yet, with a few exceptions, most of the modern wealth generated by that trade sails rapidly onward, leaving little to show for its passage. 
There is no reason that should continue to be the case. 
A regional effort to facilitate trade and build infrastructure has the potential to reposition the countries surrounding the Red Sea as destinations for global investment and international trade. 
The Red Sea region, comprising the 20 countries that use the route as their primary trading corridor, is the largest, fastest-growing, and least exploited emerging market in the world. 
Over the next 35 years, the United Nations expects the region’s population to rise more than twofold, from 620 million today to 1.3 billion. 
This population growth will be accompanied by one of the world’s highest urbanization rates, creating a burgeoning middle class, which the Brookings Institution estimates will grow from 136 million today to 343 million by 2050. 
Over the same period, according to current projections, the region’s GDP will triple, from $1.8 trillion to $6.1 trillion, while trade will increase fivefold, from $881 billion to $4.7 trillion. 
And yet, as encouraging as these numbers may be, the region has the potential to do much better. 
Long-term forecasts for the Red Sea region’s share of global trade are comparatively flat. 
According to HSBC, for example, trade within the Middle East and Africa will account for 10% of the global total in 2050, up only slightly from 9% today. 
There are good reasons for this conservative outlook. 
Many of the countries in the Middle East and Africa have comparatively limited infrastructure; there are few world-class deep-water ports in the Red Sea or nearby. 
Levels of economic development vary widely, from the wealthy countries of the Gulf Cooperation Council to the emerging economies of sub-Saharan and East Africa. 
And, unfortunately, political and cultural differences do not always encourage cross-border cooperation. 
A coordinated initiative to facilitate trade within the Red Sea region would have a significant impact on future development, boosting GDP by about 10% to $6.6 trillion and increasing trade by nearly 35% to $6.3 trillion, according to research commissioned by King Abdullah Economic City. By providing greater access to international trade for small and medium-size enterprises, the core drivers of growth and job creation, such an initiative would diversify exports and significantly enhance the local share of the global value chain. 
Achieving this would require significant improvement of logistics capabilities in the region. 
The World Bank’s Logistics Performance Index (LPI) scores most of the countries in the Red Sea economic region below 2.6 on its five-point scale. 
The most logistics-friendly market in the region, the United Arab Emirates, has a score of 3.54, placing it just within the top 20% of countries in the LPI. 
The private sector should be at the forefront of the effort to build the infrastructure and logistics links that form the backbone of global trade, install the technologies and systems that maximize efficiency, and provide the training and skills to boost performance. 
This process alone will create jobs, open career paths, and improve access to education across the region. 
National governments will also need to participate, streamlining customs controls, border management policies, and regional trade regulations. 
A good place to start would be the formation of a Red Sea Trade Agreement, similar to the Trans-Pacific Partnership, outlining specific measures to reduce the costs of cross-border trade and mechanisms to settle disputes between investors and governments. 
Another potential initiative would be the formation of a regional infrastructure bank, modeled on China’s Asian Infrastructure Investment Bank. 
Such an institution would facilitate the efficient distribution of capital to infrastructure development around the region, enhancing national trade capabilities and promoting sustainable economic growth. 
The Red Sea region has a unique opportunity to develop into a global center of excellence in trade facilitation, strengthening economic ties throughout the region and building a new growth engine for the global economy. 
All that is needed is the will to seize it. 

The Real Side of Fake News 
NEW YORK – Today’s digital devices and social networks deliver so much information that even the savviest consumer cannot evaluate all of it. 
We seem to be living in a version of Aldous Huxley’s Brave New World, where truth is drowned in a sea of irrelevance. 
But the future need not be the dystopia that the present seems to suggest. 
The share of Americans who get their news from social media has grown rapidly in recent years, to 62% as of 2016. 
And yet, according to a recent study by the Pew Research Center, media, academic, technology, and publishing professionals have increasingly come to view the Internet as a cesspool of hate speech, anger, and trolls. 
Much of what arrives on our digital doorstep these days is best described as “fake news”: hoax stories, propaganda, and other forms of misinformation. 
But while “fake news” is a useful label for a very real problem, it does not tell us if we are in fact living in a “post-truth” world; and, if so, whom we should hold responsible. 
To answer those questions, we need to examine the fake-news infrastructure. 
Many of the anonymous political hobbyists and social hackers who are creating and disseminating fake news do so on Reddit. 
With around 300 million monthly users globally, Reddit is the fourth most visited website in the US, and eighth in the world, as of this month. 
A casual observer who visits Reddit will find what looks like a Web 1.0 message board that is ridden with near-indecipherable jargon and acronyms, such as “HH,” “cucks,” “centipedes,” and “God Emperor of the Internet.” 
These are insider code words that did not emerge accidentally. 
They respectively refer to “Heil Hitler,” critics of the so-called alt-right, Trump supporters, and, of course, Trump himself. 
Despite being wildly popular, Reddit is mentioned in mainstream media coverage only when its most controversial conversations boil over, as occurred in 2008, when a Reddit subpage (or subreddit) called “Jailbait” provided a platform for users to exchange child pornography. 
Following a public outcry, Reddit banned the subreddit in 2011, as it did again when the public took notice of a subreddit about stalking women called “CreepShots.” 
Still, misogyny and hate speech have continued to flow freely on the site. 
In an ugly masquerade of free speech, Reddit has hosted subreddits called “BeatingWomen,” “FatPeopleHate,” and “The Chimpire” (promoting racism). 
Most recently, a “Pizzagate” subreddit hosted conspiracy theorists claiming that Hillary Clinton ran a child pornography ring out of a pizza restaurant in Washington, DC. 
When Edgar Maddison Welch, armed with an AR-15, arrived at the establishment and started firing off rounds, the media finally, but only temporarily, took notice of Reddit’s role in the fake-news phenomenon. 
Reddit co-founder Alexis Ohanian, for his part, doesn’t seem to spend much time worrying about the potential dangers posed by his website. 
When Ohanian delivered a keynote address at the popular SXSW Interactive Festival in Austin, Texas, this year, he didn’t talk about the line between free speech and hate speech. 
Nor did he mention the infamous subreddit “The_Donald,” which has more than 300,000 registered users, and may have played a critical role in electing Donald Trump. 
Instead, he spoke about a Reddit user called “Shitty Watercolour,” and he declared “pseudonymity” to be the hallmark of freedom and uncensored speech. 
During an “Ask Me Anything” session after his speech, Ohanian took no questions about Pizzagate, “The_Donald,” or hate speech. 
To be sure, Reddit isn’t the only supporter of the kind of online anonymity that allows users to distribute hate speech and fake news without consequences. 
And there are those who worry that cleaning up Reddit will only drive the trolls underground to less public sites like Voat. 
But while other large online platforms such as Facebook are taking steps to address the problem, Reddit remains defiant. 
Reddit’s relative immunity from criticism may help to explain its indifference. 
As a top-ten site for US web traffic, it acts as a major conduit for media outlets, which use it to increase their page views, and thus their advertising revenues. 
Reddit itself is owned by some familiar names. 
Its single largest shareholder is Advance Publications, the parent company of Condé Nast; and its other investors include Marc Andreessen, Peter Thiel, Sam Altman, Ron Conway, Snoop Dogg, Jared Leto, and Josh Kushner, the brother of White House Senior Adviser Jared Kushner. 
Sadly, none of these high-profile investors seems to have objected to Reddit’s hosting of subreddits called “WhiteNationalism,” “rapeisfun,” “BurningKids,” “cutefemalecorpses,” and so on. 
Fake news is a symptom of a larger problem. 
With advertising revenues declining, media organizations are increasingly desperate for clicks. 
Most readers do not hesitate to share or re-tweet headlines that support their own biases and beliefs. 
And technology companies shrug and claim that they are “just a platform,” while they reap profits from the traffic that fake news brings in. 
So, what can news consumers do to push back against fake news? 
For starters, we should be demanding that trusted media outlets avoid hosting their content on anonymous sites like Reddit. 
And we should apply more pressure on companies like Advance Publications to take responsibility for the sites they own and what happens there. 
Above all, that means rolling back the culture of digital anonymity that facilitates hate speech and misinformation. 
Digital platforms should require those who espouse ideas and share information to sign their names to their output. 
Pseudonyms are for fiction writers. 


Redefining Sustainable Development 
MELBOURNE – Albert Einstein once said that if he had just one hour to find a solution on which his life depended, he would spend the first 55 minutes defining the problem. 
Once he knew the right question to ask, he could solve the problem in less than five minutes. 
Today, humanity faces such a life-threatening problem: How are we to provide adequate nutrition and a decent quality of life to a global population that is set to surpass nine billion by 2050, without irreparably damaging our planetary life-support system? 
To find a solution, we must start by clarifying the problem. 
Humans have fundamentally altered Earth’s ecosystems. 
By interfering with the carbon, nitrogen, water, and phosphorus cycles, human activity changes the atmosphere, oceans, waterways, forests, and ice sheets, and diminishes biodiversity. 
Indeed, the effects of human behavior on the planet’s ecosystems have become so significant in the last few centuries that many scientists now believe that the planet has entered a new geological epoch, dubbed the Anthropocene. 
As the environmental consequences of human activity become increasingly apparent, so does humanity’s responsibility to mitigate them. 
Last year, at the United Nations Earth Summit in Rio de Janeiro, world leaders agreed to create a set of universal Sustainable Development Goals, which would change the playing field for future economic policy to safeguard our life-support system. 
That’s easy to say. 
But where does one start? 
For almost three decades, sustainable development has been defined as development that meets the needs of the present, without compromising future generations’ ability to meet their needs. 
Related policies have reflected the view that sustainable development rests on three equal pillars: the economy, society, and the environment. 
But this view is no longer tenable. 
As the United States Global Change Research Program’s recently released draft report on climate change points out, some kinds of weather events have become more common, and more intense, in recent years. 
In 2012 alone, Arctic sea-ice dipped to a new low, as an area larger than the US melted; unprecedented heat waves struck Australia, and other areas; record floods hit China and Japan; and the United Kingdom had its wettest year on record. 
But global responses remain inadequate. 
A new approach is needed. 
Rather than separate pillars of sustainable development, the economy must be seen as servicing society, which in turn thrives within a secure natural environment. 
Viewed this way, sustainable development should be redefined as “development that meets the needs of the present while safeguarding the Earth’s life-support system, on which the welfare of current and future generations depends.” 
After all, a healthy, thriving planet is a prerequisite for healthy, prosperous lives. 
The process of identifying the Sustainable Development Goals, which are intended to enter into force in 2015, has begun in earnest. 
Last week, representatives from 69 countries met at the UN in New York, and an expert group meets this week. 
The goals must have measurable, achievable objectives that extend beyond national policy; they must inspire regional and local administrations, businesses, civil society, and individuals everywhere to change their behavior. 
They should create goals for humanity that are grounded in shared values – and in relevant science. 
This week, my colleagues and I published a report called Sustainable Development Goals for People and Planet, which outlines what is required. 
We identified six universal goals for sustainable development: lives and livelihoods, food security, water sustainability, clean energy, healthy ecosystems, and good governance. 
The next step is to define measurable targets, such as better lives for slum dwellers or reduced deforestation. 
Genuine progress in any of the six target areas will require a comprehensive approach, with policies that span the economic, social, and environmental domains. 
For example, eradicating poverty entails the provision of food, water, energy, and access to gainful employment. 
But providing energy to all will require governments to discontinue subsidies for fossil fuels and unsustainable agriculture. 
And achieving food security is impossible without agricultural systems and practices that not only support farmers and produce enough food to meet people’s nutritional needs, but that also preserve natural resources by, for example, preventing soil erosion and relying on more efficient nitrogen and phosphorus fertilizers. 
The Millennium Development Goals, due to expire in 2015, succeeded because they marshaled international resources and funding to address a focused set of poverty-related issues. 
The Sustainable Development Goals must go a step further. 
Like Einstein’s thought experiment, many lives depend on it. 

The Next Social Contract 
PARIS – Around the world nowadays, persistent unemployment, skill mismatches, and retirement frameworks have become central to fiscal policy – and to the often-fierce political debates that surround it. 
The advanced countries are facing an immediate “aging” problem, but most of the emerging economies are also in the midst of a demographic transition that will result in an age structure similar to that of the advanced economies – that is, an inverted pyramid – in just two or three decades. 
Indeed, China will get there much sooner. 
Multiple problems affect employment. 
Weak demand in the aftermath of the global financial crisis that began in 2008 remains a key factor in Europe, the United States, and Japan. 
But longer-term structural issues are weighing down labor markets as well. 
Most important, globalization results in a continuous shift of comparative advantage, creating serious adjustment problems as employment created in new activities does not necessarily compensate for the loss of jobs in old ones. 
In any case, most new jobs require different skills, implying that workers losing their jobs in dying industries have little hope of finding another one. 
Moreover, technological progress is becoming ever more “labor-saving,” with computers and robots replacing human workers in settings ranging from supermarkets to automobile assembly lines. 
Given the volatile macroeconomic outlook, many firms are reluctant to hire new workers, leading to high youth unemployment throughout the world. 
At the same time, aging – and the associated cost of health care for the elderly – constitutes the main fiscal challenge in maturing societies. 
By the middle of this century, life expectancy at age 60 will have risen by about ten years relative to the post-World War II period, when current retirement ages were fixed. 
Marginal changes to existing arrangements are unlikely to be sufficient to respond to technological forces, reduce social tensions and young people’s fears, or address growing fiscal burdens. 
A radical reassessment of work, skill formation, retirement, and leisure is needed, with several principles forming the core of any comprehensive reform. 
For starters, skill formation and development must become a life-long process, starting with formal schooling, but continuing through on-the-job training and intervals of full-time education at different points in life. 
Special youth insertion programs should become a normal part of public support for employment and career formation, with exemption from social-security contributions for the first one or two years of employment. 
A second principle is that retirement should be a gradual process. 
People could work an average of 1,800-2,000 hours per year until they reach their 50’s, taper off to 1,300-1,500 hours in their early 60’s, and move toward the 500-1,000 range as they approach 70. 
A hospital nurse, an airplane crew member, or a secondary-school teacher, for example, could work five days a week until her late fifties, four days a week until age 62, three days until age 65, and perhaps two days until age 70. 
Employers and workers should negotiate such flexibility, but they should do so with incentives and financial support from government – for example, variable social-security and income taxes. 
Paid holidays can be 3-4 weeks until age 45, gradually increasing to 7-8 weeks in one’s late 60’s. 
Maternity and paternity leave should be increased where it is low, such as in the United States. 
Public policies should also encourage greater scope for individual choice. 
For example, every ten years, a worker should be able to engage in a year of formal learning, with one-third of the cost paid by the employer, one-third by public funds, and one-third by personal savings (these proportions could vary by income bracket). 
The overall objective should be a society in which, health permitting, citizens work and pay taxes until close to the age of 70, but less intensively with advancing age and in a flexible manner that reflects individual circumstances. 
In fact, gradual and flexible retirement would in many cases benefit not only employers and governments, but also workers themselves, because continued occupational engagement is often a source of personal satisfaction and emotionally enriching social interaction. 
Using the Gallup World Poll, my colleagues at the Brookings Institution in Washington, DC, Carol Graham and Milena Nikolova, have found that the happiest cohorts are those who work part-time voluntarily. 
In exchange for longer work lives, citizens would have more time for both leisure and skill formation throughout their lives, with positive effects on productivity and life satisfaction. 
The new social contract for the first half of the twenty-first century must be one that combines fiscal realism, significant room for individual preferences, and strong social solidarity and protection against shocks stemming from personal circumstances or a volatile economy. 
Many countries are taking steps in this direction. 
They are too timid. 
We need a comprehensive and revolutionary reframing of education, work, retirement, and leisure time. 


Redesigning Capitalism 
PARIS – When the heads of state of the world’s 20 largest economies come together on short notice, as they just did in Washington, D.C., it is clear how serious the current global crisis is. 
They did not decide much, except to call for improved monitoring and regulation of financial flows. 
More importantly, they committed themselves to launching a lasting process to reform the world’s financial system. 
Of course, those who dreamed of a Bretton Woods II were disappointed. 
But the original Bretton Woods framework was not built in a day; indeed, the 1944 conference was preceded by two and a half years of preparatory negotiations, which is probably the minimum needed to decide such weighty issues. 
The recent G-20 summit occurred with virtually no real preliminary work. 
Three tasks must now be addressed. 
First, a floor must be put under the international financial system in order to stop its collapse. 
Second, new regulations are needed once the system revives, because if it remains the same way, it will only produce new crises. 
Finding the right mix will not be easy. 
For 25 years, the world has experienced a huge financial crisis every five years, each seemingly with its own cause. 
The third task is to focus on real economic activity, end the recession, sustain growth, and, above all, reform the capitalist system to make it be less dependent on finance. 
Long-term investments, not short-term profits, and productive work, rather than paper gains, need to be supported. 
The first task is already being tackled. 
But, although the United States and some European countries have gone a long way toward restoring the lending capacity of banks, that may not be enough. 
After all, if the economy is to grow again, banks need borrowers, but the recession has led entrepreneurs to cut their investments. 
The second task remains open. 
Disagreements about how to re-regulate the financial markets are deep, owing to countless taboos and the huge interests at stake. 
Moreover, there can be no comprehensive agreement that does not take into account the relationship between finance and the real economy. 
The essential problem in addressing the third task is to find out precisely what is going on in the real economy. 
Some states (Iceland and Hungary) are clearly bankrupt. 
Some merely face a hazardous financial situation (Denmark, Spain, and others). 
Their financial crisis is the main reason for their weakness. 
All of these problems are so difficult to resolve because they have been festering for so long. 
It is now increasingly evident that today’s crisis has its roots in February 1971, when US President Richard Nixon decided to break the link between the dollar and gold. 
Until that point, America’s pledge to maintain the gold standard was the basis for the global fixed-exchange-rate system, which was the heart of the Bretton Woods framework. 
During the 27 years that it lasted, huge growth in international trade, supported by non-volatile pricing, was the norm, and large financial crises were absent. 
Since then, the international financial system has been highly volatile. 
The era of floating exchange rates that followed the end of the gold standard required the development of products that could protect international trade from price volatility. 
This opened the way to options, selling and buying on credit, and derivatives of all kinds. 
These innovations were considered technical successes. 
Prices were (mostly) stabilized, but with a slow, if continuous, rising trend. 
The market for these financial products grew over 30 years to the point that they delivered huge opportunities for immediate gain, which provided a strong incentive for market participants to play with them more and more. 
During this time, capitalism – smooth and successful between 1945-1975 (sustained high growth, low unemployment, and no financial crises) – weakened. 
Through pension funds, investment funds, and arbitrage (or hedge) funds, shareholders became well organized and seized power in developed countries’ firms. 
Under their pressure, more and more processes were “outsourced.” 
In real terms, wages no longer rose (indeed, the average real wage has been stagnant for 25 years in the US), and a growing share of manpower (currently around 15%) was without steady employment. 
Everywhere, the share of wages and incomes began to fall as a proportion of GDP. 
As a result, consumption weakened, unsteady employment grew, and unemployment stopped declining. 
Under such circumstances, the upper middle classes in developed countries increasingly came to look for capital gains instead of improving their living standards through productive work. 
This promoted inequality, and led to the under-regulated financial system’s seizure of power over the entire economy, destabilizing the real economy by fatally weakening its capacity to react to external shocks. 
Today’s crisis marks the end of economic growth fueled only by credit. 
But untying the knot that an overweening financial sector has drawn around the economy will take time. 
Indeed, there is still no consensus that this needs to be done. 
Yet the G-20 has opened the way to discussion of these fundamental issues. 

Rediscovering the West 
Transatlantic disputes are multiplying at the very moment that Europe's Constitutional Convention begins to debate a joint EU foreign policy. 
Ralf Dahrendorf thinks that both sides of the Atlantic need to look beyond the trivial and rediscover the common interests and values of the West. 
Hardly a week goes by without some addition to the already long list of European-American gripes and irritants. 
One week it is the UN Security Council vote about a continued US presence in the Bosnia peacekeeping mission. 
Before that the setting up of the International Criminal Court without American participation set both sides on edge, and the question of whether the Palestinians should be told whom not to elect as their leader. 
Israel and the Palestinians remain a subject of profound Europe-US disagreements, as are issues surrounding the environment and the idea of sustainable development. 
Add to these US trade sanctions, America's latest Farm Bill, and of course the whole question of alleged or real US unilateralism. 
Fortunately, such spats are not the whole truth. 
American unilateralism is in fact a form of "multilateralism à la carte". 
Where it suits American interests, international institutions are happily used, and they usually serve European interests. 
Also one must never forget that we are talking about democracies. 
In the US, as in Europe, there are many different views about Bosnia, about Arafat, even about protecting farmers. 
After all, not every American voted for President Bush, nor is every European a Eurofederalist. 
Still, when representatives of the US and the EU meet for formal consultations, they arrive at the table with different perceptions. 
US participants represent a country at war in which energies are concentrated on defeating the enemy, "terrorism," whether of the Al Queda or Iraqi variety. 
EU participants on the other hand represent ... well, what exactly? 
If the issue is trade, then the answer is clear. 
In so far as the European Union is a "single market," it is represented by the Trade Commissioner, Pascal Lamy. 
If the issue is competition, Commissioner Mario Monti represents Europe, stridently so, as Americans have learned to their surprise. 
But as soon as we move to wider issues of foreign and defense policy, Xavier Solana, the High Representative of the EU Council of Ministers, may be at the telephone number that Henry Kissinger famously could never find in Brussels when he wanted to "speak to Europe" in his day, but Solana is hardly in a position to speak for "Europe" in important matters today. 
European attitudes demonstrate the consequences. 
Americans are right to point out that Europeans spend an undue amount of time consulting among themselves, and then come up with very little. 
Most of the time, they agree only to try to put the brakes on firm action. 
They are reluctant. 
"Don't go too fast in welcoming Russia to NATO!" 
"Don't go too far in supporting Israel and neglecting the Palestinians!" 
"Don't extend the fight against terrorism to the producers of weapons of mass destruction!" 
What should be done instead? 
"Political solutions" should be found, which really means that the European method of consensus building without firm action should be applied to the world at large. 
Sometimes the two methods - consultation without action in Europe, actions without consultation in the US - can be turned to mutual advantage. 
If Europeans do not want to go to war, and Americans do not want to get involved in protracted processes of institution building in distant places, an obvious potential for an international division of labor emerges. 
To some extent it is practiced already both in Afghanistan and in the Balkans. 
At other times, a dangerous potential for division arises between Europeans and the US. 
Quite a few in Europe define the EU as an instrument for holding their own against the United States. 
They see even the Euro as a weapon against the dollar and rejoice when the Euro is "strong" and the dollar is "weak". 
The US has found a new "empire of evil" in "terrorist" states and organizations; Europe has found a new adversary who helps it integrate in the United States. 
This is a dangerous state of affairs for those on either side of the Atlantic who believe in the values of the enlightenment and in the constitution of liberty. 
In terms of basic values, there is such a thing as the West. 
After September 11 th , it has become more important than ever. 
Defending the values of the West against anti-enlightenment forces both within and without may well be the most important task ahead for all who believe in liberty. 
It is unfortunate that some in America, and many in Europe, seem to have forgotten, at least temporarily, that this is what our efforts are all about. 
Europeans do not want to fight, not even for their basic values, and Americans think they are fighting only as patriots of their great country. 
Neither vision is good enough. 
Rediscovering the West and the institutions that go with it, and defending them with whatever it takes, is the primary issue on the agenda of liberty today. 

Reducing Inequality and Poverty in America 
CAMBRIDGE – With a new American president and Congress taking office just six months from now, the time has come to rethink the government’s programs aimed at helping the poor. 
The current election season has reflected widespread concern about the issue of inequality. 
Reducing poverty, rather than penalizing earned success, is the right focus for dealing with it. 
The United States government now spends more than $600 billion a year on programs to help the poor. 
That’s about 4% of America’s total GDP. 
Half of those outlays are for health programs, including Medicaid and the health-insurance subsidies under the 2010 Affordable Care Act (so-called Obamacare). 
The other half are for a complex range of programs including food stamps, housing subsidies, the Earned Income Tax Credit, and cash relief. 
To put that 4% of GDP in perspective, the federal government’s total revenue from the personal income tax is less than 9% of GDP, implying that nearly half is spent on these means-tested programs. 
Spending on these programs also exceeds that for defense (3.3% of GDP) and the 3.3% of GDP spent on all other nondefense discretionary programs. 
But, despite this large expenditure, the proportion of the population living in poverty is officially estimated at 15%, about the same as it was 50 years ago. 
Experts agree, however, that the government’s poverty measure doesn’t correctly reflect the progress that has occurred, because official statistics focus only on cash income and ignore almost all of the government’s transfer payments. 
Many of those who are poor, or would otherwise be poor, are also aided by Social Security benefits for retirees and survivors, and by Medicare for the disabled and those over age 65. 
Because eligibility for benefits under these programs does not depend on income or wealth, the amounts spent for these programs are not included in outlays targeted at the poor. 
The existing approach to helping the poor needs reform. 
Myriad overlapping programs with different eligibility rules are difficult for the poor to navigate, create bad work incentives, and are unnecessarily costly to taxpayers. 
The largest of the ten major means-tested programs is the food subsidy program, now called SNAP (Supplemental Nutrition Assistance Program). 
Some 46 million people, about one-seventh of the US population, receive monthly benefits totaling $75 billion per year. 
Despite its widespread use, the government estimates that only about 70% of those who are eligible receive benefits. 
Eligibility to receive SNAP benefits is limited to households with incomes below 130% of the poverty level, about $1,700 a month for a family of three. 
Because a decision by a second adult to work could eliminate eligibility, the program discourages employment and reduces earned incomes. 
Although SNAP is described as a nutrition program, the average benefit of $130 per month is far less than these low-income households spend on food. 
The program is thus really equivalent to a cash transfer. 
As such, it dominates the program launched by President Bill Clinton to provide cash assistance with significant restrictions. 
When Clinton declared in 1996 that he would “end welfare as we know it,” he worked with Congress to create the Temporary Assistance for Needy Families (TANF) program, which requires recipients to work and limits their lifetime eligibility to 60 months. 
As a result of these conditions, the $17 billion program has declined in scale and has a participation rate of less than 50% percent of eligible households. 
How should programs for the poor be changed to increase participation and avoid adverse effects on work incentives? 
One bad idea that is getting a surprising amount of favorable attention is the so-called Universal Income Benefit: providing enough money to all households (below the age of 65) to keep them above the poverty line, even if they had no other income. 
The amount given to each household would depend on the number of adults and children, but not on the household’s income or wealth. 
This unconditional transfer would solve the problem of lifting all Americans out of poverty. 
But it would be impossibly expensive. 
Even if it replaced all of the means-tested programs for the poor other than the health programs, its net cost would exceed $1.5 trillion a year, or more than 9% of GDP. 
To pay for that without raising the deficit would require doubling the personal income tax. 
So the Universal Income Benefit is definitely a non-starter. 
The best way to help the poor is the negative income tax plan originally proposed by both Milton Friedman (the conservative economist at the University of Chicago) and James Tobin (the liberal economist at Yale University). 
All households below the age of 65 would receive an amount of money that would keep them out of poverty if they had no other income; but the amount of the transfer would decline gradually as their household income rose. 
Above a certain threshold, the household would pay an income tax as they do today; below that level, the “tax” would be negative. 
The rate at which the transfer declines would be set to limit adverse incentives while protecting the household’s living standard. 
The health-care programs for the poor would continue. 
While there is no perfect solution to the difficult problem of dealing with poverty, some solutions are better – often much better – than others. 
The negative income tax may be the best way possible to achieve simplicity, inclusiveness, and moderate taxpayer cost. 

Can Smart Cities Be Equitable? 
WASHINGTON, DC/SAN FRANCISCO – Around the world, governments are making cities “smarter” by using data and digital technology to build more efficient and livable urban environments. 
This makes sense: with urban populations growing and infrastructure under strain, smart cities will be better positioned to manage rapid change. 
But as digital systems become more pervasive, there is a danger that inequality will deepen unless local governments recognize that tech-driven solutions are as important to the poor as they are to the affluent. 
While offline populations can benefit from applications running in the background of daily life – such as intelligent signals that help with traffic flows – they will not have access to the full range of smart-city programs. 
With smartphones serving as the primary interface in the modern city, closing the digital divide, and extending access to networks and devices, is a critical first step. 
City planners can also deploy technology in ways that make cities more inclusive for the poor, the disabled, the elderly, and other vulnerable people. 
Examples are already abundant. 
In New York City, the Mayor’s Public Engagement Unit uses interagency data platforms to coordinate door-to-door outreach to residents in need of assistance. 
In California’s Santa Clara County, predictive analytics help prioritize shelter space for the homeless. 
On the London Underground, an app called Wayfindr uses Bluetooth to help visually impaired travelers navigate the Tube’s twisting pathways and escalators. 
And in Kolkata, India, a Dublin-based startup called Addressing the Unaddressedhas used GPS to provide postal addresses for more than 120,000 slum dwellers in 14 informal communities. 
The goal is to give residents a legal means of obtaining biometric identification cards, essential documentation needed to access government services and register to vote. 
But while these innovations are certainly significant, they are only a fraction of what is possible. 
Public health is one area where small investments in technology can bring big benefits to marginalized groups. 
In the developing world, preventable illnesses comprise a disproportionate share of the disease burden. 
When data are used to identify demographic groups with elevated risk profiles, low-cost mobile-messaging campaigns can transmit vital prevention information. 
So-called “m-health” interventions on issues like vaccinations, safe sex, and pre- and post-natal care have been shown to improve health outcomes and lower health-care costs. 
Another area ripe for innovation is the development of technologies that directly aid the elderly. 
Here, the creation of local social-media networks could help seniors stay connected, perhaps by drawing them into mentoring and tutoring programs that build cross-generational bonds. 
E-career platforms could also be coded to match retirees with opportunities outside of the home. 
And more cities could deliver telemedicine and video consultations to elderly residents who are unable to easily travel to see doctors. 
In fact, lower-income cities that embrace smart planning are often better positioned to benefit because they are building infrastructure from scratch. 
According to forthcoming research by the McKinsey Global Institute, smart-governance solutions can improve health, safety, environmental, and other quality-of-life metrics by 10-30%. 
And, as the research discovered, cities at the upper end of that range are often the poorest. 
To realize this potential, however, poor cities must first overcome a more basic problem: gaps in digital infrastructure. 
City planners have sometimes been accused of promoting digital conveniences that favor the rich and exclude the poor. 
But as cities around the world are already demonstrating, it is possible to deploy technologies that serve everyone – even those on the margins of connectivity. 
As the urban world becomes “smarter,” cities will have an opportunity to become more inclusive. 
The alternative – the persistence and deepening of digital divides between communities – will not be easily undone. 

How to Save Women and Newborns During Childbirth 
BOSTON – Tennis star Serena Williams’ harrowing story of life-threatening complications after the birth of her daughter reminds us that childbirth is potentially deadly for any woman or newborn. 
Williams suffered a pulmonary embolism – a blood clot in her lung. 
After advocating for herself, she received the lifesaving care she needed. 
Millions of women around the world do not. 
Every year, more than 5.6 million women and newborns die during pregnancy, childbirth, or in the first month of life. 
Low-quality care during the 48 hours around childbirth, in particular, is one of the greatest contributors to birth-related suffering and death. 
These deaths shatter families and communities. 
And, compounding the tragedy, they are almost entirely avoidable. 
Ninety-nine percent of the maternal deaths and 80% of the newborn deaths can be prevented with the right care. 
We know what kills women and newborns around the time of childbirth. 
The biggest killers of women are hemorrhage, sepsis, obstructed labor, and eclampsia. 
For newborns, the main risks are asphyxia (difficulty breathing), prematurity, and infection. 
How to assess, treat, and prevent these causes of death has been known for decades. 
In many cases, simple steps like washing hands, warming the baby with skin-to-skin care, or treating high blood pressure would make all the difference. 
Globally, childbirth has shifted from the home to health facilities where a skilled clinician could provide safer care. 
This should mean better care and better outcomes. 
In many places, however, encouraging women to deliver in health facilities, rather than at home, has not resulted in reduced mortality. 
In too many places, facilities are unable to provide even the most basic care – like monitoring a laboring woman’s blood pressure – and women face lack of privacy, unhygienic conditions, or even abuse by staff. 
Progress on reducing maternal and newborn mortality and morbidity, it has become clear, requires improving and strengthening the capabilities and quality of care in primary care facilities that provide labor and delivery services. 
But how? 
For the last three years, we ran one of the world’s largest maternal-newborn health trials in the Indian state of Uttar Pradesh to see if we could reduce deaths by improving the quality of care in frontline facilities. 
These facilities, where most local women give birth, each averaged 3-4 deliveries a day, most of which were conducted by nurses. 
In the average frontline facility, we found that proper hand washing was completed in less than 1% of deliveries, and only 25% of women received the right medication to prevent postpartum bleeding. 
Overall, 11 of 18 essential birth practices were missing. 
To improve performance and outcomes, we didn’t punish or fire staff. 
The problems typically stemmed from lack of organization and coordination to make certain that staff had the supplies, training, and supervision they needed. 
No method had been proved to make a large-scale difference. 
But we had a theory that coaching teams to implement key practices would help. 
We trained a group of nurses and doctors to coach birth attendants and managers to deliver the vital basics found in the World Health Organization’s Safe Childbirth Checklist: proper supplies and steps to prevent infection, identification and treatment of high blood pressure to prevent eclampsia, and appropriate medication to prevent hemorrhage. 
The result was significant progress, but still not quite enough. 
We confirmed marked improvement in care. 
Birth attendants who had been performing just seven of 18 known life-saving steps during childbirth now performed 13. 
We showed that it is possible to improve significantly the quality of care in low-resource settings. 
Yet the evidence showed that we needed to do more to achieve a large-scale reduction in mortality rates. 
The effort can be difficult and discouraging. 
Effective health systems must be able to close nearly all gaps in care, including gaps in supplies and equipment, basic skills and capabilities, and communication and connections to higher-level health facilities for sick mothers and babies. 
The relationships between clinical leaders and frontline providers, and between providers and the families they serve, must be respectful and supportive. 
There are no shortcuts. 
This is true everywhere in the world, whether in Florida, where Williams delivered, or in Uttar Pradesh, where we ran the BetterBirth intervention. 
How do we get to this standard? 
We think the answer is not likely to be fundamentally different from what we attempted. 
We need to put in place mechanisms to identify the gaps at each facility and coach leaders and staff in closing them. 
But, as we observed, while our basic checklist provided the targets for improvement and a tool for organizing and reminding people of key steps, more was needed to accelerate change, including financial resources, political will, and the dedication of leaders, providers, and the community to demand progress. 
We are closer than we have ever been to closing the gaps that account for most maternal and newborn mortality. 
We know that complications arise in childbirth for women everywhere. 
The good news is that we know what is needed to make childbirth safer. 
To improve the health and wellbeing of mothers and their newborns, we must translate that knowledge into reality in every facility around the world. 

Saving Asia’s Mothers 
BANGKOK – With all the talk about the impending “Asian century,” one might imagine that the region had moved beyond what are often viewed as poor-country health challenges, like high rates of maternal mortality. 
The reality is very different. 
In 2015, an estimated 85,000 women died of complications related to pregnancy and childbirth across the Asia-Pacific region – 28% of the global total. 
Up to 90% of those deaths, which were concentrated in just 12 countries, could have been prevented through quality antenatal, obstetric, and perinatal care. 
In the absence of such care, the average maternal mortality rate (MMR) in the Asia-Pacific region is extremely high: 127 per 100,000 live births, compared to the developed-country average of 12 per 100,000. 
The 12 countries with the highest MMRs, exceeding 100 deaths per 100,000 live births, are Afghanistan, Bangladesh, Cambodia, India, Indonesia, Laos, Myanmar, Nepal, Pakistan, Papua New Guinea, the Philippines, and Timor-Leste. 
These countries, together, accounted for about 78,000 known maternal deaths in 2015. 
The actual figure is probably higher. 
In fact, MMRs are notoriously difficult to estimate, with conflict, poverty, poor infrastructure, weak health systems, and inadequate resources causing many deaths to go unreported. 
MMR data do, however, provide an indication of general trends, which are not promising. 
Indeed, if they persist, hundreds of thousands of mothers in those 12 high-MMR Asia-Pacific countries alone could lose their lives by 2030. 
To be sure, substantial progress has been made in the last 15 years, and efforts are being made to sustain it. 
The United Nations development agenda, underpinned by the Sustainable Development Goals (SDGs), aims to reduce the MMR to 70 deaths per 100,000 live births by 2030. 
If that target is met, up to 100,000 lives could be saved across the Asia-Pacific region. 
Achieving the goal presupposed faster progress, with annual rates of MMR reduction particularly low (2%) in Papua New Guinea and the Philippines. 
On current trends, only four of the Asia-Pacific region’s 12 high-MMR countries will be able to meet the SDG target for maternal mortality. 
The remaining eight will require an average of 26 years. 
At a time when family-planning policies are becoming increasingly restrictive, accelerating the pace of progress could prove difficult. 
Indeed, for some countries, progress is at risk of slowing. 
The UN Population Fund (UNFPA) is working hard to counter this trend. 
We are committed to ensuring that all pregnancies are safe and wanted, and that all women and girls are empowered not just to make their own choices about their own families and bodies, but also to contribute more to poverty reduction and economic development. 
In the 12 high-MMR Asia-Pacific countries, the UNFPA advocates the development of responsive and inclusive health systems with sufficient numbers of trained personnel, from midwives to community-health workers. 
And we are already working to advance that objective. 
In Afghanistan, the UNFPA and its partners have supported the expansion of community health services, including the creation of 80 family health houses and nine mobile support teams. 
Those initiatives had reached more than 420,000 people by 2015. 
In Lao PDR, the UNFPA has helped the Ministry of Health train midwives and village health volunteers to provide basic sexual and reproductive care, providing the information that women need to avoid unwanted pregnancies. 
This contributed in a steep drop in the MMR, from 450 to 220 per 100,000 live births, between 2005 and 2015. 
In Fiji, the UNFPA, with the support of the Australian government, pre-positioned thousands of dignity and reproductive-health kits. 
Following the devastation caused by Cyclone Winston in February 2016, these strategically placed supplies help to address women and girls’ immediate reproductive-health needs, saving the lives of mothers and children. 
But, while such initiatives are already having a powerful impact, more investment must be channeled toward ensuring that comprehensive health services are available and accessible to all, especially the most vulnerable groups. 
In particular, additional resources must be allocated to sexual- and reproductive-health services – and to ensuring access to them. 
Strengthening the provision of antenatal care, ensuring safe delivery through skilled birth attendance, and expanding emergency obstetric care are all key interventions that can reduce MMRs across the region. 
Of course, women also need access to family-planning services, to help them avoid unwanted pregnancies and reduce the number of unsafe abortions. 
The rights of all women and their partners to choose the family-planning method that is appropriate for them must be respected, and a full range of quality contraceptives must be readily available to all. 
When women have full control over their sexual and reproductive health, society as a whole reaps enormous benefits. 
In fact, every $1 invested in modern contraceptive services can yield as much as $120 in social, economic, and environmental returns. 
Such investment should come partly from international development assistance, which must place a higher priority on sexual- and reproductive-health services, and partly from national governments. 
But money is not all governments can offer. 
They can and must develop inclusive policies that address the needs of vulnerable and marginalized groups, including in ways that go beyond the health sector. 
This includes fighting harmful practices such as child marriage and gender-based violence; removing legal barriers to contraception; and working with communities to address misconceptions around sexual and reproductive health. 
Safe pregnancy and childbirth should be a top priority for all societies, as it is for the UNFPA. 
If we are to meet the SDG target for maternal mortality, we must work together to advance targeted, tailored interventions that respect the rights of women and girls to make decisions about their sexual and reproductive health. 

Preventing Nuclear Conflict in Europe 
MUNICH – When leaders from across the Euro-Atlantic region meet at the Munich Security Conference this week, the “win-lose” framework defining relations between Western countries and Russia will be entering its fifth year. 
The longer this continues, the tighter the resulting knot of distrust will become – and the greater the risk of the ultimate “lose-lose” scenario: a military conflict. 
We must work together to cut this knot, and now. 
The four of us, and together with a group of former and current senior officials and experts from across the Euro-Atlantic region – the Euro-Atlantic Security Leadership Group (EASLG) – believe that, despite significant differences, the United States, Russia, and Europe can and must cooperate on areas of vital common interest. 
Together in Munich, we will be presenting and discussing our ideas to improve the security of all people living in the region, beginning with reducing nuclear and other military risks. 
Reducing and eliminating nuclear risks is an existential interest that all countries share. 
We have entered a new era, in which a fateful error – triggered by an accident, miscalculation, or blunder – could trigger a nuclear catastrophe. 
In the Euro-Atlantic region today, the risks of such an error are compounded by heightened tensions between NATO and Russia – and little communication between military and political leaders. 
In the absence of some positive initiative, we will continue to drift toward danger. 
In Munich, the EASLG will call on governments to work together to mitigate the risks of nuclear conflict. 
First, leaders of the region’s nuclear weapons states should reaffirm the principle that a nuclear war cannot be won and must never be fought. 
Agreement on this principle would send an important message – that leaders recognize their responsibility to work together to prevent nuclear catastrophe – and could be a foundation for other practical steps to reduce the risks that such weapons pose. 
Second, countries should work to preserve and extend existing agreements and treaties that are crucial to sustaining transparency and predictability. 
The demise of the arms control architecture will dramatically increase nuclear risks for all Europeans and indeed the world. 
This year may be crucial. 
All countries in the Euro-Atlantic region have a shared interest in preserving the 1987 Intermediate-Range Nuclear Forces (INF) Treaty between the United States and Russia, and should insist on full compliance by the parties to that agreement. 
Similarly, all countries in the Euro-Atlantic region have a stake in the full implementation of the 2010 US-Russia New START Treaty and its mutual extension through 2026. 
Third, all countries should support full implementation of and strict compliance with the Joint Comprehensive Plan of Action with Iran. 
The JCPOA is a crucial bulwark against the spread of nuclear weapons in the Middle East. 
We should be building on its success, not contemplating its termination. 
Actions by any country that precipitate the JCPOA’s demise or violate its terms will increase nuclear dangers in the region and weaken the international community’s ability to address nuclear dangers around the world. 
Finally, we must recognize the hard truth that cyber capabilities transform nuclear risks by increasing the probability of accidents, miscalculations, or blunders. 
These risks are compounded by the potential for cyberattacks by state or non-state actors that lead to the theft of nuclear materials, sabotage to a nuclear facility, false warning of a missile attack, or intrusion into nuclear command-and-control systems. 
In Munich, the EASLG will call on governments to work together to reach at least informal understandings about cyber dangers relating to nuclear facilities, strategic warning systems, and nuclear command and control. 
We must start by developing clear “rules of the road” to prevent the catastrophic consequences of a cyber attack on a nuclear facility or of a war launched by mistake. 
The Euro-Atlantic region is confronting a range of significant issues today. 
But none should distract its governments from the urgent pursuit of practical steps to reduce real dangers. 
The steps we have identified here are the right place to begin; and we must begin now, before we can no longer prevent the final failure. 

Weapons of Male Destruction 
GENEVA – As an advocate for the abolition of nuclear weapons, I don’t have the luxury of mincing words. 
There are an estimated 15,000 nuclear warheads scattered around the world, and eliminating them means speaking truth – and often hard truths – to power. 
In that spirit, let me be unequivocal: today’s leaders are too emotionally unstable to be trusted with the world’s nuclear stockpile. 
As I told the Nobel committee last year when accepting the Nobel Peace Prize on behalf of my organization, the International Campaign to Abolish Nuclear Weapons, nuclear arms are a “madman’s gun held permanently to our temple.” 
And it is mad men with their fingers on the trigger. 
For reasons that I cannot fathom, nuclear weapons have been coopted as symbols of male power. 
In recent months, North Korean dictator Kim Jong-un and US President Donald Trump have publicly bragged about the “size” of their buttons and the robustness of their arsenals. 
Not to be outdone, Russia’s Vladimir Putin used his annual address to his country’s parliament to assert that Russia actually has the most potent nuclear weapons of all. 
He supported his braggadocio with fanciful animations imagining just how “invincible” his missiles might be. 
It would be less concerning if the rhetorical warfare were contained to social media. 
But, all three leaders are prone to making hasty decisions that affect real people. 
For example, Trump reportedly launched a devastating trade war because he was “unglued,” and convinced during a meeting with steel executives that tariffs were a good idea. 
What if Trump had just attended a meeting with hawks eager to launch a preemptive nuclear attack on North Korea, or goad Iran into conflict? 
Now that John Bolton is Trump’s national security adviser, neither scenario is as fanciful as it was just a few weeks ago. 
I am not trying to wage a gender war; nuclear weapons are dangerous regardless of who controls them. 
Nor am I suggesting that all men with power are unstable. 
History does include some prudent and visionary male heads of state. 
But the fact remains that eight of the world’s nine nuclear-armed countries are currently led by men (Britain is the sole exception). 
And, judging by the conduct of three of these leaders, the planet’s nuclear weapons are in terrifyingly impulsive hands. 
I am tempted to absolve these leaders of their reckless rhetoric by blaming it on biology. 
Maybe it is simply in their genes to behave as brutes, lashing out recklessly when wounded or threatened. 
It’s hard to go against one’s nature, I might say. 
But to forgive Kim, Trump, and Putin on these grounds would be sexist, and this is not a gender issue. 
Rather, the issue is the existence of the weapons themselves. 
Throughout history, far more thoughtful leaders have brought the world to the brink of nuclear war, and many were fortunate to pull it back. 
I am not so certain that such caution would or could be exercised today. 
Nuclear weapons cannot be left to the whims and fancies of dictators, authoritarians, and democratically elected presidents – gender notwithstanding. 
Conflict between nuclear states would unleash destruction so incomprehensible that, according to the International Federation of Red Cross and Red Crescent Societies, a humanitarian response would be impossible. 
Given the risks, then, how do we proceed? 
There is only one answer: doing away with the weapons altogether. 
For more than seven decades, leaders of nuclear-armed states have relied on an unstable compound of fear and luck to keep their populations safe from total destruction. 
But that luck is running out; at some point, an accidental or intentional launch will trigger global contagion. 
And with particularly fragile egos currently leading the world’s biggest (US and Russia) and most unpredictable (North Korea) nuclear-armed states, the doomsday scenario is simply too plausible for comfort. 
The world as we know it could vanish with just one tweet across the Pacific from a “dotard” to “rocket man.” 
Nobody should have that kind of power in his (or her) hands. 
It’s time that we took these weapons away from everyone – before the most reckless leaders get us all killed. 

Referendum Farce in Burma 
PRAGUE – The enormous suffering of the Burmese people caused by the recent cyclone, which has caused tens of thousands of deaths, deserves the sympathy of the entire world. 
But more than sympathy is needed, because the Burmese military junta’s incompetence and brutal oppression are further aggravating the tragic consequences of this natural disaster. 
In the midst of the cyclone’s devastation, Burma’s ruling generals went ahead and held a referendum on a new constitution. 
But, according to Burma’s Constitutional Referendum Act, members of religious organizations, those subject to criminal prosecution, and members of ethnic groups that have not agreed to a ceasefire with the government were barred from voting. 
Thus, all current and former political prisoners, about 500,000 Buddhist monks, and more than twice as many members of ethnic minority groups living close to the borders were banned from the vote. 
Moreover, according to the new constitution that was supposedly “approved” by the “referendum,” Daw Aung San Suu Kyi, who has never been prosecuted and still remains under house arrest, is barred from standing in the 2010 general elections under the pretext that her deceased husband was British. 
Is the world really willing to accept such an absurdity? 
We strongly support the Burmese opposition’s campaign calling on the country’s citizens to reject the constitution, which does not promote human rights, but only confirms the military’s political role. 
Many democracy activists have been arrested throughout the country. 
The regime’s draconian “law” (5/96) prohibits participants from criticizing the draft constitution; those who dare to challenge the regime face a 20-year prison sentence. 
Given the violent suppression of last September’s mass demonstrations (the “Saffron Revolution”) led by Burma’s Buddhist monks, and the constant repression in the country, it is not surprising that the military junta tries to shroud its despotic tendencies in pseudo-democratic measures such as the sham electoral process of the referendum. 
Sadly, the international community did not respond to last autumn’s mass arrests of human rights defenders. 
The 88 Generation leaders, including Min Ko Naing, Ko Ko Gyi, women activists like Su Su Nway, and others bravely expressed their grievances time and again in letters, statements, and public demonstrations prior to the Saffron Revolution. 
Their courageous calls fell on deaf ears; they now remain imprisoned. 
It is time to strongly condemn the exclusion of a considerable number of people from voting and to insist on the release of Burma’s political prisoners. 
The United Nations and the European Union should be ready to reject conclusively the result of the referendum and strengthen sanctions against the regime. 
Burma’s neighbors in ASEAN should stop looking the other way as Burma’s rulers trample on Burma’s citizens. 
The UN Security Council should consider introducing a universal arms embargo, and the EU should adopt banking sanctions that target the regime and its cronies. 
Moreover, the UN should not only condemn, but without further delay put a stop to today’s greatest atrocity: the regime’s obstruction of foreign assistance to victims of the cyclone. 
Their deaths are the sole responsibility of the military junta, which deliberately and with knowledge of the likely consequences has closed the door to humanitarian aid and workers from all over the world. 
Their actions represent an appalling crime against humanity. 
The military-run referendum will not bring democracy to Burma, nor will it help the Burmese people, who now are suffering not only from the authoritarian regime and poverty, but also from a grave natural disaster and its totally inept handling by the cynical generals. 
Burma’s rulers have failed in their duty to protect the Burmese people, but active and decisive political action by the international community towards the regime may yet do so. 

The Referendum Charade 
NEW YORK – Referendums are all the rage in Europe. 
In June, British voters will decide whether the United Kingdom should remain in the European Union. 
The Hungarian government has called for a referendum on accepting its quota of refugees set by the EU. 
Hungary’s prime minister, Viktor Orbán, has already said that Hungary would resist letting them in. 
“All the terrorists are basically migrants,” he said. 
The referendum is likely to go his way. 
Perhaps the oddest referendum will take place in April in the Netherlands, following a successful petition campaign. 
The question put to Dutch citizens will be whether the Netherlands should sign up to an association agreement between the EU and Ukraine. 
All other EU member countries have already agreed, but without the Dutch it cannot be ratified. 
One might think that the details of trade agreements and tariff barriers with Ukraine would baffle most Dutch voters, and one might also wonder why they should care enough to hold a referendum. 
But referendums fit the populist mood that is sweeping many countries, from Donald Trump’s America to Orbán’s Hungary. 
Referendums are an example of what is known as “direct democracy.” 
The voice of the people (or rather, the People) is not heard through their elected representatives in government, but directly through plebiscites. 
When Winston Churchill suggested in 1945 that the British people should vote in a referendum on whether to continue the wartime coalition government, the Labour leader Clement Attlee opposed it. 
He called referendums un-British and a “device of dictators and demagogues.” 
Attlee was right. 
Even though referendums are sometimes used in representative democracies, as when British voters elected to stay in the European Economic Community in 1975, dictators are much keener on them. 
After invading Austria in 1938, Hitler asked the Austrians in a plebiscite whether they wanted to be annexed by Germany. 
It was a choice they could not really refuse. 
Despots like to be backed by plebiscites, because they do not only pretend to represent the People; they are the People. 
The vogue for referendums today reflects distrust of political representatives. 
Normally, in a liberal democracy, we vote for men and women expecting them to study and decide on issues that most ordinary citizens have neither the time nor the knowledge to deal with themselves. 
Trade agreements are typically something that voters would not be asked to concern themselves with directly. 
A referendum is not usually an accurate sounding of people’s rational faculties or a test of their expertise. 
Referendums are about gut feelings, which can be easily manipulated by demagogues. 
That is why demagogues like them. 
So far, the Brexit debate in Britain has been almost entirely emotional, focusing on the historical greatness of Britain, the horrors of foreign tyrannies, or, conversely, fears of what might happen if the status quo were to be upset. 
Very few British voters have a clue about how the European Commission actually works, or the role of the European Council, but most have some feeling about Britain standing alone against Hitler, or the prospect of being “swamped” by immigrants. 
Usually, in a referendum, people decide on where they stand for reasons that have little to do with the question put to them. 
Some people in Britain might choose to leave the EU just because they don’t like Prime Minister David Cameron, who is in favor of staying in. 
Voters in the Netherlands and France voted against the proposed EU Constitution in 2005. 
Very few had probably ever read the Constitution; it is in fact an unreadable document. 
The “no” vote stemmed from general discontent with political elites associated with “Brussels.” 
To some extent, this was understandable – and not without justification. 
EU negotiations are complex and opaque to most people, and EU institutions are remote. 
No wonder many citizens feel that they have lost control over their political affairs. 
Democratic national governments look more and more impotent, and the EU is not a democracy. 
The desire for referendums is not only a sign of internal national divisions; it is yet another symptom of a global populist demand to “take back our country.” 
This may be mostly delusional (outside the EU, Britain may actually have less power over its fate than if it stays in), but the crisis of confidence needs to be taken seriously. 
After all, even if referendums are often frivolous, their consequences are not. 
What happens in Ukraine is important. 
Britain’s exit from the EU could have devastating results not only for the UK, but for the rest of Europe, too. 
Hungary’s successful example of refusing to cooperate in solving the refugee crisis could provoke other countries to follow suit. 
The fundamental problem is that a large number of people feel unrepresented. 
Old party politics, governed by old elites working traditional networks of influence, no longer give many citizens a sense of participating in a democracy. 
The extraordinary influence of a handful of billionaires in the US, and the lack of transparency in EU politics, aggravate this problem. 
Direct democracy will not reestablish people's confidence in their political representatives. 
But if a greater degree of trust is not restored, power will go to leaders who claim to speak in the People’s voice. 
And nothing good ever came from that. 

Reflections on the Revolution in Egypt 
NEW YORK – Revolutions happen for a reason. 
In the case of Egypt, there are several reasons: more than 30 years of one-man rule; Hosni Mubarak’s plans to pass the presidency on to his son; widespread corruption, patronage, and nepotism; and economic reform that did not benefit most Egyptians, but that nonetheless contrasted sharply with the almost complete absence of political change. 
The net result was that many Egyptians felt not just alienated, but also humiliated. 
Humiliation is a powerful motivator. 
Egypt was ripe for revolution; dramatic change would have come at some point in the next few years, even absent the spark of Tunisia or the existence of social media. 
Indeed, social media are a significant factor, but their role has been exaggerated. 
It is hardly the first disruptive technology to come along: the printing press, telegraph, telephone, radio, television, and cassettes all posed challenges to the existing order of their day. 
And like these earlier technologies, social media are not decisive: they can be repressed by governments as well as employed by governments to motivate their supporters. 
Timing counts for a lot in politics. 
Mubarak’s announcement that he would not seek re-election would likely have averted a crisis had he issued it in December. 
But, by the time he did say it, the mood of the street had evolved to the point that he could no longer placate it. 
The initial success of revolutions is determined less by the strength of the protesters than by the will and cohesion of the regime. 
Tunisia’s collapse came quickly, because its president lost his nerve and the army was weak and unwilling to stand by him. 
Egypt’s establishment and its military are demonstrating far greater resolve. 
Mubarak’s departure is a significant but not decisive development. 
To be sure, it closes a prolonged era of Egyptian politics. 
It also marks the end of the first phase of Egypt’s revolution. 
But it is only the end of the beginning. 
What begins now is the struggle for Egypt’s future. 
The objective must be to slow the political clock. 
Egyptians need time to build a civil society and open a political spectrum that has been mostly closed for decades. 
A hybrid, caretaker government, including military and civilian elements, may be the best way forward. 
To slow the clock is not to stop it, however. 
A genuine political transition needs to move ahead, albeit at a measured pace. 
Early elections should be avoided, lest those (such as the Muslim Brotherhood) who have been able to organize over the years enjoy an unfair advantage. 
The Muslim Brotherhood should be allowed to participate in the political process so long as it accepts the legitimacy of that process, the rule of law, and the constitution. 
The history and political culture of Egypt suggest a natural limit to the Brotherhood’s appeal if Egyptians can bridge their most important differences, maintain order, and restore economic growth. 
Constitutional reform is critical. 
Egypt needs a constitution that enjoys broad support – and that includes checks and balances that make it difficult for minorities (even those who command the support of a plurality of voters) to rule majorities. 
Revolutionary movements invariably split into factions. 
Their sole common objective is the ouster of the existing regime. 
As soon as this goal comes close to being achieved, elements of the opposition begin to position themselves for the second phase of the struggle and the coming competition for power. 
We are already beginning to see signs of this in Egypt and will see more in the days and weeks to come. 
Some in Egypt will be satisfied only with full democracy; others (probably a majority) will care most about public order, greater official accountability, a degree of political participation, and economic improvement. 
It is never possible to satisfy the demands of all protesters, and regimes should not try. 
Egypt will face enormous economic difficulties, exacerbated by recent events, which have frightened off tourists, deterred investment, and kept many from working. 
The challenges of a fast-growing population, inadequate education, insufficient jobs, corruption, bureaucracy, and rising global competition constitute the greatest threat to the country’s future. 
Outsiders have had and will have only limited influence over the course of events. 
Over the past 30 years, intermittent calls by the United States for limited political reform were largely rebuffed. 
Once the crisis began, the people in the streets, Mubarak himself, and above all the army have been the principal protagonists. 
Moving forward, it will again be Egyptians who will largely determine their own path. 
In this vein, outsiders should be careful of intervening too much, especially in public. 
It is up to Egyptians to define for themselves how much and what kind of democracy is established. 
Outsiders can assist – for example, with ideas for constitutional reform or voting procedures – but this should be done privately and as suggestions, not demands. Developments in Egypt will have uneven consequences in the region. 
Not every country will be affected equally. 
True monarchies, like Jordan, have a legitimacy and stability that the leaders of faux monarchies (Syria, Libya, and Yemen), as well as the Iranian regime, do not. 
Much will depend on what transpires and how. 
Change in Iraq was imposed from the outside by force, whereas change in Egypt has come from within and has largely been accomplished by consent rather than coercion. 

Putting a Price on Rainforests 
NEW YORK – In early October, shortly after Hurricane Maria made landfall in Puerto Rico, Tesla CEO Elon Musk said on Twitter that his company could, given the opportunity, rebuild the island’s electrical grid using solar power. 
Coming in the midst of so much human suffering, it was a bold claim. 
But from a technological perspective, the timing was perfect. 
By late October, solar panels and high-capacity batteries had been installed at San Juan’s Hospital del Niño, and additional projects are in the works. 
This type of response to a natural disaster – replacing a fossil-fuel-reliant power grid with renewable energy – should be applauded. 
But no matter how clean and efficient renewable energy sources may be, they will never fully mitigate the climatic effects that are bringing more hurricanes like Maria ashore. 
There is another way to do that, and it is far cheaper than what Musk has proposed. 
Puerto Rico is home to one of the most efficient and inexpensive tools available in the fight against climate change: rainforests. 
On the island’s eastern tip, the nearly 29,000-acre El Yunque National Forest is one of the Caribbean’s most important systems for capturing and storing carbon. 
Maria destroyed the forest, too. 
But tech CEOs have not tweeted about restoring that resource, because, at the moment, they see no viable business model for saving trees. 
But what if such a model did exist? 
What if there were ways to make tropical forests worth more alive than dead? 
Global leaders have been pondering this question for years. 
And, at UN climate talks, they have come up with a novel solution: an initiative called Reducing Emissions from Deforestation and Forest Degradation (REDD+). 
The idea is simple: with the right incentives, people, governments, and industries will preserve and restore tropical forests, rather than plow them under. 
In return, the world gets more carbon sinks to soak up greenhouse gasses. 
REDD+, which has been around in various forms for nearly a decade, provides a payment structure for preservation and restoration efforts. 
By putting an economic value on forests for the role they play in large-scale carbon capture and storage, REDD+ allows standing trees to compete with lucrative land uses – such as logging or agriculture – that result in deforestation. 
The first large-scale REDD+ program, an agreement between Norway and Brazil, was initiated in 2008. 
Norway agreed to provide $1 billion in “performance-based payments” to Brazil for successfully protecting its rainforests. 
The money from Norway was released in installments, as Brazil conserved its forests. 
The results were impressive: Brazil reduced the average rate of Amazon deforestation by over 60% over the last decade, absorbing about 3.6 billion tons of carbon dioxide, more than any other country. 
And Norway was able to help mitigate global carbon dioxide emissions. 
But, despite the success of the pilot partnership, the REDD+ program today is in dire need of capital. 
In many ways, the solution is similar to Musk’s solar proposal in Puerto Rico. 
Only this time, the innovation is not technical, but financial. 
Creating a market for REDD+ credits would create investment opportunities in tropical forest preservation for heavily polluting companies and industries. 
With an adequate policy framework, REDD+ credits could be offered through existing compliance markets – such as the carbon credit markets in California or South Korea – unlocking billions in additional capital for reforestation efforts. 
Developing such a framework would also enable REDD+ to become part of future compliance systems, like the one being developed by the global airline industry to cap emissions, or the carbon-permit market that China plans to launch later this year. 
Integration into these markets could also tap new funding streams for forest conservation and reforestation, as it would allow financial intermediaries, like the REDD+ Acceleration Fund, to connect REDD+ projects directly with the private sector. 
At the moment, most of this is aspirational. 
REDD+ is merely a set of guidelines, and a forest credit market will require rules and standards to govern how protection and reforestation allowances are allocated to buyers and integrated into current markets. 
Global leaders gathering this week for the UN climate change conference in Bonn, Germany, can aid these efforts by continuing to support the development of effective and transparent accounting mechanisms for REDD+ projects. 
There is danger in delay. 
In the two years since the Paris climate agreement was adopted, deforestation increased sharply in Indonesia and parts of the Amazon, where much of the world’s largest and most vital tropical forests stand. 
According to the Union of Concerned Scientists, tropical deforestation is responsible for three billion tons of additional atmospheric CO2 annually – more than the world’s entire transportation sector. 
No technology is as effective at storing carbon as tropical forests, and saving and restoring them offers one of the cheapest large-scale forms of emissions abatement or capture, while providing a host of other environmental and social benefits. 
To take advantage of this crucial hedge against a warming planet, more trees must remain standing. 
For those of us who believe that a forest credit market could provide critical means of protecting our planet our Musk moment is here. 
We must be similarly bold. 

Reform and Renewal at the IMF 
CAMBRIDGE – Every time the International Monetary Fund awaits a new managing director, critics complain that it is past time for the appointee to come from an emerging-market country. 
But whining won’t change the unjust 60-year-old tradition by which a European heads the IMF and an American leads the World Bank. 
Only if emerging-market countries unite behind a single candidate will they have a shot at securing the post. 
Unfortunately, that is unlikely this time around, too, so the job will probably go to a European yet again. 
After all, the oft-repeated principle that the IMF’s managing director should be chosen on the basis of merit rather than nationality need not mean a departure from past practice. 
French Finance Minister Christine Lagarde (Europe’s choice) is impressive and capable. 
But the proposition that the ongoing sovereign-debt crisis on Europe’s periphery is a reason to appoint a European is wrong. 
(Lagarde herself seems to acknowledge this.) 
Europe has lost its implicit claim to be the best source of serious people with the experience needed to run the international monetary system. 
At one time, there may have been a kernel of truth to this. 
In the 1980’s, for example, the IMF was run by highly capable managing directors from France, during a period when huge budget deficits and even hyperinflation ran wild in the developing world. 
But that time is past. 
There are three respects in which Europe can no longer claim to be a special seat of wisdom and responsibility. 
First, many large emerging-market countries have done a better job than Europe at managing their economies over the last decade. 
These countries do not have the excessive budget deficits that many European countries ran up during the last expansion – and that are culminating in today’s mismanaged sovereign-debt crisis. 
Second, the Europeans have now chosen three managing directors in a row who resigned before the end of their term. 
True, neither of Dominique Strauss-Kahn’s two predecessors left amidst scandal as he did. 
Then again, both of those resignations suggested that the men in question had not taken the job seriously enough. 
Finally, many of the best candidates this time around are from emerging economies. 
So the merit criterion happens to coincide well with the much-recognized but never-honored need to give emerging-market countries more weight in the IMF’s governance, in line with their new weight in the global economy. 
Indeed, the number of excellent emerging-market candidates is remarkable. 
Of course, not everyone being put forward by his or her government is a good candidate. 
When Turkey’s leaders say they have at least ten good candidates, they show that politicians often don’t know what the job requires. 
(No country has ten good candidates.) 
I count nine emerging-market candidates who are unusually well qualified to lead the IMF. 
Six seem to be live candidates, and they come from all parts of the world: 
·Agustín Carstens, the governor of Mexico’s central bank, has been described as the leading prospect among the group. 
But even Latin America is not unifying behind him (Brazil has not been supportive), let alone other developing countries; 
·Arminio Fraga, the former governor of Brazil’s central bank, is another good candidate with extensive experience. 
But it is not clear that Latin America’s other governments are prepared to unify behind someone from the region’s largest country. 
Indeed, it seems that any candidate linked to a large regional power is more likely to provoke jealousy than solidarity from others; 
·Tharman Shanmugaratnam, who has excelled as Singapore’s finance minister and was just promoted to Deputy Prime Minister, is my favorite. 
(Full disclosure: he was my student at Harvard in 1988-1989.) 
In March, he was chosen to head the International Monetary and Financial Committee, the panel of ministers that advises the IMF on strategy twice a year. 
He has strong political skills, and, coming from a non-threatening country, might be the sort of candidate behind whom emerging markets could unite; 
·Sri Mulyani Indrawati is another highly qualified candidate from Southeast Asia. 
She became one of the World Bank’s three managing directors last year, after apparently being forced out as Indonesia’s finance minister for doing too good a job. 
Incidentally, she is young and could be an excellent candidate next time around too (as could the first three); 
·Leszek Balcerowicz, Poland’s former finance minister and central bank governor, is also a credible candidate. 
Poland would be a compromise with respect to nationality, because it is both a European Union member and an emerging-market country; 
·Trevor Manuel was a great success as South Africa’s finance minister. 
It would be good to make better use of him than the current government is doing. 
I can think of at least three other candidates who would perform well, but are apparently not actively in contention: 
·Kemal Dervis, Turkey’s former minister of economic affairs, would have been excellent, but he took himself out of the running early. 
·Stanley Fischer, whom I thought should have been picked in 2000 (he was Deputy Managing Director at the time). 
Doing so would have been a first step toward accommodating developing countries’ legitimate desire to break the monopoly of European and US officials on the top jobs in the IMF and World Bank (Fischer was born in Zambia). 
·Montek Ahluwalia is Deputy Chairman of India’s Planning Commission, a position far more important than it sounds. 
But there is a presumption that the candidate cannot be over 65, which would exclude him (and Fischer). 
June 10 is the deadline for nominations. 
Any of the nine would do a good job. 
Personally, I would urge emerging-market countries to support Shanmugaratnam. 
But it is far more likely that they will remain divided. 
In that case, it will go to Lagarde. 

The New Frontiers of Loyalty 
LONDON – This is a tricky time to be a state, and an even trickier time to be a citizen. 
The nation-state, the classic provider of security and basic wellbeing in exchange for citizens’ loyalty, is under threat – both at home and as the fundamental unit of international affairs. 
New types of loyalty and association are challenging the state’s traditional role. 
Some are geographic. 
In Europe alone, there at least 40 would-be Scotlands seeking separation of some kind from the countries in which they now find themselves. 
Other loyalties are based on other kindred identities – not just religious or ethnic, but based on shared commercial, political, or other interests. 
Today, many more of us are supporters of NGOs than are members of political parties. 
In short, our allegiances, particularly in the West, have rarely seemed more divided than they do now. 
Amartya Sen, the Nobel laureate economist, has argued that we can learn to live with these multiple identities and even thrive with the diversity of citizenship and loyalties that they allow us. 
But this diversity is not entirely benign. 
Many of us work for or hold stock in commercial organizations that seem to pay scant regard to national tax or regulatory authorities. 
And, in much of the West, states adhere to models of welfare provision that increasingly disappoint their citizens and are often unaffordable. 
A global reordering of economic growth is punishing the developed countries’ high-cost, high-tax, high-benefits governance model. 
The Western state’s shortcomings are strikingly apparent when compared with robust survivors and adapters in other parts of the world. 
China represents what might be called the Economic Security State: seeking to channel domestic savings into household consumption to sustain GDP growth and popular support, while using its investment power abroad to secure the commodities and energy that underpin its industrialization. 
Under Prime Minister Narendra Modi’s leadership, India may prove to be a semi-admiring imitator of China. 
Russia, by contrast, is a more classic National Security State, now playing Western anxieties like a fiddle to consolidate its tightening grip on Ukraine and suppress domestic opposition with a tide of official nationalism. 
So we live in a world of evolutionary state disorder. 
While some in the West may yearn for the return of the strong, unifying state, most of us recognize that it is not coming back. 
Indeed, some argue that the inventiveness and internationalism of a world networked by interests and shared causes is likely to be more resilient than one crammed into the artificial – and increasingly constraining – box of the national state. 
In that sense, economic success in China or India may be those states’ undoing, as middle-class political aspirations render current arrangements dysfunctional. 
Conversely, we may find ourselves in a world whose eastern half is organized into strong authoritarian state structures, with the West embracing post-state models of association. 
The question for international governance is how to provide a framework of institutions and rules in a world of competing organizational structures. 
The politicians’ answer is depressingly predictable: in the face of a resurgent Russia and China, this is no time to abandon our own states and diplomacy to their fate. 
Yet the old systems no longer offer useful answers, as Russia has demonstrated by brushing aside the United Nations Security Council – the high altar of the state-based international system – over Ukraine and stalemating it over Syria. 
And, away from the din of their ranting politicians, what Russians, as much as Americans or Chinese, probably want most is a peaceful, predictable international order that allows them to provide for their families and enjoy the benefits of a golden age of global commerce and technology. 
A world, in which states’ hard power is contending with the soft power of transnational ideas, invention, and finance, needs rules. 
We will all pay dearly – in defense budgets and, more important, in lost global opportunities – if we do not summon the courage to design a global order in which non-state actors have a formal role. 
Otherwise, we would be inviting states to continue pursuing a might-makes-right approach and to shirk the coordinated action on, say, financial regulation and the environment that the world now requires. 
Of course, states do not have a monopoly on bad behavior. 
Transnational economic activity has been an opportunity not only for business, but also for organized crime and others to liberate themselves from effective regulation. 
At the moment, the United States has stepped into the breach, relying on often-Draconian extraterritorial use of its justice system and control of the international banking system to impose a crude frontier justice. 
That is not good enough. 
What is needed is a legitimate system of rules, norms, and institutions, devised by private as well as government stakeholders, that reflects the emerging global nature of economic, political, and social activity as the old state loses its dominance and must coexist with a patchwork of non-state structures of association. 

Reform is Feasible for Russia 
PARIS: Who lost Russia? 
Who is responsible for Russia's economic meltdown since 1990? 
Are bumbling politicians guilty, or grasping oligarches, corrupt apparatchiks, the mafia, or the IMF? 
Accusations and finger pointing abounds, but the facts remain obscure. 
Ordinary Russians throw up their hands thinking everyone with power is tainted. 
A new study by the consultants McKinsey, however, sheds some light on this question and moves the debate forward. 
The goal of the study (which is available at www.mckinsey.com) was simple: to study, in detail, how ten key economic sectors are faring. 
The conclusions are equally simple: in all sectors, average productivity is only at 19% of levels prevailing in the United States. 
The cause of this very weak productivity is the same for all sectors: Russia's complex system of disguised subsidies, heavy regulations and price distortions protects state owned firms, whose productivity is abysmal, and hinders the development of new firms, whose productivity is a lot higher. 
The study of each of these sectors allows for a better understanding of the nature of the system of subsidies. 
At times, the rules of the game are transparent and still the established and incompetent triumph. 
In the construction sector, for example, when bids are solicited publically and therefore should be open to all, contracts simply go to the old, established firms. 
Others have to fight endlessly in order to obtain their construction permit from a myriad of government authorities, or clarify their property rights to the land they wish to build on. 
Subsidies are often hidden. 
Many firms would have to close shop if they purchased the oil and electricity and gas they use at prevailing market prices. 
As a result, they rely on barter, using goods of little value (such as empty residential buildings) in order to pay their suppliers. 
And the distortions don't stop there. 
To keep oil suppliers from selling their products at market prices, the government discourages petroleum exports and the development of new pipelines to the East. 
These measures lead to unproductive businesses, to a lack of transparency that fosters the worst cases of abuse and corruption, and the loss of potential export revenues, which, at this stage, are invaluable for Russia's development. 
What explains this systematic, almost suicidal discrimination against new businesses? 
Is it the political influence of former directors of state-owned enterprises? 
Is it local governments trying to avoid an increase in unemployment associated with the closing-down of large enterprises? 
Is it the result of widespread corruption, where each potential entrepreneur knows that whatever profits could be made will go toward both taxes and bribes? 
All these possible explanations contain grains of truth. 
Yet they also imply the possibility of, if not magical, some certainly reform-oriented partial solutions to Russia's crisis. 
For now, because of the relation between the different levels of government, local governments have very little to gain from an economic upswing within the areas that they administer. 
Allowing local governments to have a greater say in regional economic growth, and thus benefit directly from it, would provide an incentive to promote new businesses, at least as far as they do not pose a threat to jobs in existing local firms. 
Competition would thus spread outward. 
Such developments would encourage putting a lid on corruption at the local level. 
The McKinsey study shows how this was done in the Novgorod region. 
The results are impressive and constitute a reason for hope. 
Indeed, there are reforms in today's Russia that are both politically viable and economically promising. 

Reform or Divorce in Europe 
NEW YORK – To say that the eurozone has not been performing well since the 2008 crisis is an understatement. 
Its member countries have done more poorly than the European Union countries outside the eurozone, and much more poorly than the United States, which was the epicenter of the crisis. 
The worst-performing eurozone countries are mired in depression or deep recession; their condition – think of Greece – is worse in many ways than what economies suffered during the Great Depression of the 1930s. 
The best-performing eurozone members, such as Germany, look good, but only in comparison; and their growth model is partly based on beggar-thy-neighbor policies, whereby success comes at the expense of erstwhile “partners.” 
Four types of explanation have been advanced to explain this state of affairs. 
Germany likes to blame the victim, pointing to Greece’s profligacy and the debt and deficits elsewhere. 
But this puts the cart before the horse: Spain and Ireland had surpluses and low debt-to-GDP ratios before the euro crisis. 
So the crisis caused the deficits and debts, not the other way around. 
Deficit fetishism is, no doubt, part of Europe’s problems. 
Finland, too, has been having trouble adjusting to the multiple shocks it has confronted, with GDP in 2015 some 5.5% below its 2008 peak. 
Other “blame the victim��� critics cite the welfare state and excessive labor-market protections as the cause of the eurozone’s malaise. 
Yet some of Europe’s best-performing countries, such as Sweden and Norway, have the strongest welfare states and labor-market protections. 
Many of the countries now performing poorly were doing very well – above the European average – before the euro was introduced. 
Their decline did not result from some sudden change in their labor laws, or from an epidemic of laziness in the crisis countries. 
What changed was the currency arrangement. 
The second type of explanation amounts to a wish that Europe had better leaders, men and women who understood economics better and implemented better policies. 
Flawed policies – not just austerity, but also misguided so-called structural reforms, which widened inequality and thus further weakened overall demand and potential growth – have undoubtedly made matters worse. 
But the eurozone was a political arrangement, in which it was inevitable that Germany’s voice would be loud. 
Anyone who has dealt with German policymakers over the past third of a century should have known in advance the likely result. 
Most important, given the available tools, not even the most brilliant economic czar could have made the eurozone prosper. 
The third set of reasons for the eurozone’s poor performance is a broader right-wing critique of the EU, centered on eurocrats’ penchant for stifling, innovation-inhibiting regulations. 
This critique, too, misses the mark. 
The eurocrats, like labor laws or the welfare state, didn’t suddenly change in 1999, with the creation of the fixed exchange-rate system, or in 2008, with the beginning of the crisis. 
More fundamentally, what matters is the standard of living, the quality of life. 
Anyone who denies how much better off we in the West are with our stiflingly clean air and water should visit Beijing. 
That leaves the fourth explanation: the euro is more to blame than the policies and structures of individual countries. 
The euro was flawed at birth. 
Even the best policymakers the world has ever seen could not have made it work. 
The eurozone’s structure imposed the kind of rigidity associated with the gold standard. 
The single currency took away its members’ most important mechanism for adjustment – the exchange rate – and the eurozone circumscribed monetary and fiscal policy. 
In response to asymmetric shocks and divergences in productivity, there would have to be adjustments in the real (inflation-adjusted) exchange rate, meaning that prices in the eurozone periphery would have to fall relative to Germany and northern Europe. 
But, with Germany adamant about inflation – its prices have been stagnant – the adjustment could be accomplished only through wrenching deflation elsewhere. 
Typically, this meant painful unemployment and weakening unions; the eurozone’s poorest countries, and especially the workers within them, bore the brunt of the adjustment burden. 
So the plan to spur convergence among eurozone countries failed miserably, with disparities between and within countries growing. 
This system cannot and will not work in the long run: democratic politics ensures its failure. 
Only by changing the eurozone’s rules and institutions can the euro be made to work. 
This will require seven changes: 
· abandoning the convergence criteria, which require deficits to be less than 3% of GDP; 
· replacing austerity with a growth strategy, supported by a solidarity fund for stabilization; 
· dismantling a crisis-prone system whereby countries must borrow in a currency not under their control, and relying instead on Eurobonds or some similar mechanism; 
· better burden-sharing during adjustment, with countries running current -account surpluses committing to raise wages and increase fiscal spending, thereby ensuring that their prices increase faster than those in the countries with current-account deficits; 
· changing the mandate of the European Central Bank, which focuses only on inflation, unlike the US Federal Reserve, which takes into account employment, growth, and stability as well; 
· establishing common deposit insurance, which would prevent money from fleeing poorly performing countries, and other elements of a “banking union”; 
· and encouraging, rather than forbidding, industrial policies designed to ensure that the eurozone’s laggards can catch up with its leaders. 
From an economic perspective, these changes are small; but today’s eurozone leadership may lack the political will to carry them out. 
That doesn’t change the basic fact that the current halfway house is untenable. 
A system intended to promote prosperity and further integration has been having just the opposite effect. 
An amicable divorce would be better than the current stalemate. 
Of course, every divorce is costly; but muddling through would be even more costly. 
As we’ve already seen this summer in the United Kingdom, if European leaders can’t or won’t make the hard decisions, European voters will make the decisions for them – and the leaders may not be happy with the results. 

 

Reform the UN Security Council 
Human progress can be measured by the fact that we are living in a century where unilateral military operations based on power alone are intolerable. 
But the spread of the ideology of peace does not mean that threats to security have disappeared. 
At times, preventive action may be necessary. 
Many lives would have been saved in Africa, for example, if the international community could have acted decisively and quickly. 
The events in Iraq also have demonstrated that the key issue for world security is really the relationship of the big powers to the UN Security Council. 
The need for an effective UN Security Council reflects the central strategic certainty of the post-Cold War period: security threats are no longer likely to take the form of war between states, but will instead consist in acts of terror, civil wars, and massacres of civilian populations. 
These threats are often related to economic chaos and basic failures in national governance, and international military action will often be needed to meet them head on. 
But the legitimacy of any international military action that goes beyond immediate self-defense requires broad international approval - and action without legitimacy is bound to fail. 
The international community must therefore accept the need for a fundamental link between such military action and the UN. 
Peacekeeping and crisis prevention are accepted functions of the UN. 
But broad international support will not be forthcoming if military operations are perceived as some form of Western neo-imperialism. 
This last point has been at the heart of the problems in Iraq. 
Augmenting US and British troops with other "Western" forces would not, particularly at this late stage, change the fundamental perception of that intervention, both in the Arab world and beyond it. 
Only the explicit, up-front approval of a reformed UN Security Council can provide the legitimacy and international support that military action - with the exception of clear self-defense - requires. 
This is true for actions contemplated by individual nations, temporary alliances, or more permanent alliances such as NATO. 
For the Security Council to be effective in providing global governance in the domain of security, it must be reformed to reflect the realities of the twenty-first century. 
A system of weighted voting with global representation should replace the current system, according to which veto authority based on the post-World War II balance of power determines what is feasible, regardless of world opinion. 
The new system must, of course, reflect not only the size of populations but also the differing economic and military capabilities of nations. 
The degree of "internal legitimacy" of governments in terms of human rights and democracy could become another factor determining voting weights or voting rights. 
Countries such as India and Japan must gain a strong voice. 
Latin America, Africa, and the Arab world also must see an increase in their influence. 
There should be permanent global participation in the Security Council through regional constituencies, although the number of seats at any one time should remain in the neighborhood of 15 in order to permit constructive debate and a degree of cohesion. 
It is only within this kind of renewed UN that NATO or other military alliances can obtain legitimized effectiveness. 
Ideally, NATO should provide troops to UN-sponsored operations together with forces from other regional security organizations that could be established in Latin America, Asia, or Africa. 
These organizations would cooperate with explicit UN guidance and endorsement. 
The High Level Panel on Security Reform appointed by Secretary General Kofi Annan is looking at the various options. 
A far-reaching reform will be difficult, and some may regard it as beyond our reach. 
But it is time to think big, to escape from the constraints of the past, and to try to tackle the problems of our age if we truly want to prevent catastrophic events and achieve genuine and long-lasting global peace and security. 

Reform the UN Security Council 
Human progress can be measured by the fact that we are living in a century where unilateral military operations based on power alone are intolerable. 
But the spread of the ideology of peace does not mean that threats to security have disappeared. 
At times, preventive action may be necessary. 
Many lives would have been saved in Africa, for example, if the international community could have acted decisively and quickly. 
The events in Iraq also have demonstrated that the key issue for world security is really the relationship of the big powers to the UN Security Council. 
The need for an effective UN Security Council reflects the central strategic certainty of the post-Cold War period: security threats are no longer likely to take the form of war between states, but will instead consist in acts of terror, civil wars, and massacres of civilian populations. 
These threats are often related to economic chaos and basic failures in national governance, and international military action will often be needed to meet them head on. 
But the legitimacy of any international military action that goes beyond immediate self-defense requires broad international approval - and action without legitimacy is bound to fail. 
The international community must therefore accept the need for a fundamental link between such military action and the UN. 
Peacekeeping and crisis prevention are accepted functions of the UN. 
But broad international support will not be forthcoming if military operations are perceived as some form of Western neo-imperialism. 
This last point has been at the heart of the problems in Iraq. 
Augmenting US and British troops with other "Western" forces would not, particularly at this late stage, change the fundamental perception of that intervention, both in the Arab world and beyond it. 
Only the explicit, up-front approval of a reformed UN Security Council can provide the legitimacy and international support that military action - with the exception of clear self-defense - requires. 
This is true for actions contemplated by individual nations, temporary alliances, or more permanent alliances such as NATO. 
For the Security Council to be effective in providing global governance in the domain of security, it must be reformed to reflect the realities of the twenty-first century. 
A system of weighted voting with global representation should replace the current system, according to which veto authority based on the post-World War II balance of power determines what is feasible, regardless of world opinion. 
The new system must, of course, reflect not only the size of populations but also the differing economic and military capabilities of nations. 
The degree of "internal legitimacy" of governments in terms of human rights and democracy could become another factor determining voting weights or voting rights. 
Countries such as India and Japan must gain a strong voice. 
Latin America, Africa, and the Arab world also must see an increase in their influence. 
There should be permanent global participation in the Security Council through regional constituencies, although the number of seats at any one time should remain in the neighborhood of 15 in order to permit constructive debate and a degree of cohesion. 
It is only within this kind of renewed UN that NATO or other military alliances can obtain legitimized effectiveness. 
Ideally, NATO should provide troops to UN-sponsored operations together with forces from other regional security organizations that could be established in Latin America, Asia, or Africa. 
These organizations would cooperate with explicit UN guidance and endorsement. 
The High Level Panel on Security Reform appointed by Secretary General Kofi Annan is looking at the various options. 
A far-reaching reform will be difficult, and some may regard it as beyond our reach. 
But it is time to think big, to escape from the constraints of the past, and to try to tackle the problems of our age if we truly want to prevent catastrophic events and achieve genuine and long-lasting global peace and security. 

Reforming Bank Reform 
LONDON – Over the last three years, oceans of ink (or bytes) have been expended on articulating schemes to solve the conundrum of “too big to fail” banks. 
Many academics and pundits have castigated regulators and central bankers for their inability to understand the obvious attractions of so-called “narrow banking,” a restoration of Glass-Steagall-era separation of commercial and investment/merchant banking, or dramatically higher capital requirements. 
If only one of these remedies were adopted, the world would be a safer and happier place, and taxpayers would no longer be at risk of bailing out feckless financiers. 
In response, bankers have tended to argue that any interference in their business would be an unconscionable assault on their inalienable human right to lose shareholders’ and depositors’ money in whatever way they please. 
Moreover, they argue that the cost of any increase in required equity capital would simply be passed on to borrowers in the form of higher interest rates, bringing economic growth to a grinding halt. 
One might characterize this as a dialogue of the deaf, except that most deaf people manage to communicate with each other quite well, through sign language and other means. 
Onto this fiercely contested terrain marches the United Kingdom’s Independent banking Commission, set up last year by Chancellor of the Exchequer George Osborne, with a brief to examine possible structural reforms to the banking system aimed at safeguarding financial stability and competition. 
The Commission is chaired by Sir John Vickers, the Warden of All Souls College, Oxford, which in British academia is about as good as it gets. 
At his side sits Martin Wolf of The Financial Times, so a good reception in the pink pages can be expected. 
The Commission’s interim report, published on April 11, is both lucid and penetrating. 
It also persuasively demonstrates that all the proposed remedies come with significant costs. 
The reader is obliged to conclude that regulators might not have been so dim after all. 
One obvious point is that it is hard to identify a clear relationship between the financial industry’s structure and success or failure in the crisis. 
Some universal banks did well, others badly. 
Some investment banks prospered (in Goldman Sachs’ case, perhaps too much), others collapsed. 
Some retail banks went belly-up, like Northern Rock, while others stayed afloat (Santander’s UK subsidiary, for example). 
Vickers gives short shrift to some of the more beguiling options. 
Narrow banking, which entails retail deposits being kept in distinct entities, backed only by safe and liquid assets like government bonds, does not fare well under the All Souls microscope. 
“The social costs would be significant,” he warns, as the synergies between deposit-taking and lending would be lost. 
And governments would almost certainly have to back some lending banks, too, so the claimed benefits in terms of insulating the public purse would not be realized. 
Vickers is no more enamored of so-called “limited purpose banking,” in which all debt is effectively securitized. 
“There would be a decrease in economic value added from intermediation,” and loans to small and medium-size enterprises would be badly affected. 
Straightforward size limits on banks also find no favor. 
The Volcker rule? 
“It is unlikely that the impact would be significant in the UK,” or, by implication, elsewhere outside the US. 
Glass-Steagall detains the Commission for rather longer, but also comes up short: “the costs of full separation could be higher than is necessary to address the problems,” owing in part to potential “economies of scope between retail and wholesale/investment banking services.” 
Moreover, “full separation would remove all intra-bank diversification benefits and so eliminate the possibility that one part of the group could save another part.” 
By this point in the report, readers in the boardrooms of British banks were looking forward to a three-set walkover. 
The knighted Professor was heading for the Freedom of the City of London (an obscure but valued honor that entitles the holder to drive a flock of sheep across London Bridge). 
But there is a sting in the tail. 
One reform that does find favor is what the Commission describes as a “retail ring-fence.” 
The impact would be to require a bank carrying out retail activities in the UK to put them in a separately capitalized subsidiary. 
The capital requirements attached to that subsidiary would be more burdensome, with minimum Tier One capital set at 10%, compared to the new Basel 3 standard of 7%. 
Such a requirement would impose costs on universal banks by constraining their ability to transfer capital within the group. 
The scale of these costs is unknown, but the share prices of the banks that could be affected (Barclays and Royal Bank of Scotland in particular) rose when the report was published, suggesting that they are not as high as had been feared. 
The major advantage of the scheme is that it dovetails with other reforms under development in Basel. 
A retail ring-fence makes most sense if coupled with new a new resolution regime, which would allow a retail subsidiary to be wound up without contagion across the group. 
If efforts to produce a parallel bail-in arrangement, which allows bondholders to share the pain, are also successful, we might be within sight of a sensible and not-too-costly reform with which the market can make peace – and which regulators would have a realistic chance of managing. 
Those who want the banks “cut down to size,” even if it is a case of cutting off one’s nose to spite one’s face, are not happy with Vickers. 

Reforming Economic Reform 
Economists have been more influential over the last 15 years than at probably any other time in history. 
The policies of central planning, dirigisme , and import substitution, which many newly independent countries adopted in the 1950's and 1960's, could be labeled as the ideas of communists, Fabian socialists, and nationalists, not trained economists. 
The policies of deregulation, privatization, and trade liberalization (the so-called Washington Consensus) that countries adopted in the 1980's, supposedly marked the victory of professional economists over populist politicians. 
The paradox is that this was no victory for economics. 
Indeed, the last two decades have proved dismal for the practice of the "dismal science." 
With few exceptions, countries in which the US-educated economic technocracy gained the upper hand performed worse than they did prior to the 1980's. 
Latin America's stalled and stagnant economies, which embraced the Washington Consensus more than most, stand out as exhibit "A." 
The biggest development successes in recent years have been in places like China and Vietnam, where Western economic ideas, to the extent that they were considered at all, lost out to more practically oriented policymakers. 
The puzzle is not "why did economics fail us?" but "why were economists so overconfident?" 
After all, much of the Washington Consensus cannot be deduced from proper economic analysis. 
Any graduate student in economics knows that deregulation, privatization, and trade liberalization cannot be expected to produce economic benefits without a long list of unlikely conditions being satisfied. 
Moreover, there is nothing in economic theory that should have made economic technocrats think that Anglo-American institutions of corporate governance or "flexible labor markets," to pick just two examples, produce unambiguously superior economic performance when compared to German-style insider control or institutionalized labor markets. 
On closer scrutiny, what passed as state-of-the-art thinking on economic policy turns out to have been based on some crude rules of thumb. 
More often than not, the advocacy of simple panaceas was based on one or more of the following pathologies: 
· Flimsy empiricism . 
South Korea has done better than North Korea, and Burma's path is hardly one that leads to prosperity. 
Therefore we know that markets do better than central planning, and that foreign trade is better than autarky. 
But it takes a huge leap of faith to conclude from this that one can't go wrong by deregulating, privatizing, and opening domestic markets as much as possible. 
Even in areas where the empirical record appears clear, closer analysis reveals major flaws. 
Analysts who focused only on those elements of China's or South Korea's experience that fit their beliefs missed the larger story that these countries were undergoing massively heterodox experiments. 
· Implicit political theorizing . 
Economists who become policy advisors are great fans of simplicity, uniformity, and arm's-length relations between government and the private sector, not because of economic theory or empirical evidence, but because of unexamined and untested assumptions. 
Governments, they believe, are run by crooks, so tie their hands; bureaucrats are beholden to rent-seeking private agents, so ensure non-discretion and apply uniform taxes and incentives; domestic political systems cannot be trusted, so import laws and institutions from abroad; external influences are always more benign than domestic ones, so ensure maximum openness to international trade and investment; reformers have a limited "honeymoon period," so implement reforms fast. 
Economists ended up practicing public administration without license. 
· Lack of institutional imagination . 
No Western-trained economist could have envisioned China's household responsibility system or township and village enterprises--institutional innovations that lie at the core of the Chinese miracle. 
Any economist from Washington (or Harvard) would have pushed a recipe of privatization and across-the-board liberalization if asked in 1978 to advise the Chinese government. 
Only with hindsight can we see that China's innovations were truly demanding reforms. 
Of course, economic principles do not work differently in different places. 
Property rights and the rule of law are always important so that investors--both current and prospective--can expect to retain the money they make. 
Private incentives always need to be aligned with social costs and benefits if productive efficiency is to be achieved. 
Macroeconomic and financial stability require debt sustainability, prudential regulation, and sound money. 
Any economist can mouth these platitudes to his/her hosts immediately upon arrival in a foreign land, without fear of going astray. 
The trouble is that these universal principles are not self-executing: they do not automatically translate into clear-cut institutional arrangements or policy prescriptions. 
For example, the principle that property rights should be protected implies very little about the best way to achieve this under a society's existing institutional preconditions. 
It certainly does not imply that a system of private property rights and Anglo-American corporate governance is the right approach for all countries at all times. 
Consider the vast investment and entrepreneurial activity that China has elicited through a hybrid system of property rights and a legal regime that is as far as imaginable from the Anglo-American system. 
Similarly, the principle that private incentives should be aligned with social costs and benefits hardly results in unconditional support for policies of trade liberalization, deregulation, and privatization. 
Neither does it preclude the use of activist trade and industrial policies in pursuit of economic restructuring. 
Finally, debt sustainability, fiscal prudence, and sound money are also obviously compatible with diverse institutional arrangements. 
For economists, the challenge is to work out the operational implications of these universal principles in specific economies. 
We must take full account of predicates, conditionals, and contingencies in order to specify more completely which countries should adopt what policies. 
Failing that, it is time for economists to stop pretending that we have all the answers. 

Reforming Employment Protection 
There may be no labor market institution more controversial than employment protection regulation--the complex set of laws and procedures that govern how firms hire and fire workers. 
Firms complain not only about the direct cost, but also about the complexity and the uncertainty introduced by such regulation. 
They argue that regulatory constraints make it difficult for them to adjust to changes in technology and product demand, and that this in turn lowers their efficiency, raises their costs and, as a result, deters job creation. 
Workers, on the other hand, focus on the pain of unemployment, and argue that such pain should be taken into account by firms when they consider closing a plant or laying off a worker. 
Under pressure from firms to decrease protection, and from workers to maintain it, European governments have navigated carefully, looking for politically acceptable reforms. 
In most countries, reforms have included extending the scope for temporary contracts. 
This would seem like a smart solution, both politically and economically. 
Politically, it maintains high protection for those workers who are already protected. 
Economically, easier recourse to temporary contracts gives firms more flexibility in adjusting to changing market conditions. 
But the evidence on the effects of these reforms is mixed. 
The existence of two classes of workers--those on permanent versus temporary contracts--has led to an increasingly dual and unequal labor market. 
Firms are typically reluctant to keep workers on when their temporary contracts end, as this would imply giving them high employment protection. 
So new entrants to the labor market go through a long period of dead-end jobs and stretches of unemployment before they eventually get a stable job--not the best way to start their working life. 
From a political point of view, the fact that the majority of workers remains highly protected, and that firms have more flexibility than before, decreases the pressure for coherent, across-the-board reform. 
Ignore political feasibility for the moment, and ask what "good employment protection" should look like. 
The answer is actually simple. 
When deciding whether to lay off a worker, a firm should take into account the social costs of doing so. 
This means taking into account the benefits that the unemployment insurance fund will have to pay the worker. 
At least for workers with seniority in a firm, it also means taking into account the psychological costs associated with losing a long-held job. 
How can such "social accounting" be done? 
Again, simplicity rules. 
If a firm lays off a worker, it should pay a layoff tax that is equal, at least on average, to the unemployment benefits that will be paid to the laid-off worker; to compensate for psychological costs, it should pay severance payments that increase in line with workers' seniority. 
If, under these conditions, a firm decides to layoff a worker, it should be free to do so. 
Simply put, if firms find it more profitable to close a job or a plant even after paying the social costs of their decision, then it does not make sense to keep that job or plant open. 
How does this answer compare to the way employment protection is currently designed? 
The answer varies from country to country, but the case of France is representative. 
In France, unemployment contributions are collected through a payroll tax, not a layoff tax. 
This means that firms that lay off more workers do not pay more. 
But firms that lay off more workers should pay more. 
At the same time, the judicial process is such that judges have a substantial say in deciding whether a layoff decision is justified. 
This is also wrong: not only does it lead to a long, uncertain process, but there is no reason for judges to be involved in the first place. 
So employment protection reform should involve a shift from a payroll tax to a layoff tax, accompanied by a reduction in the role of judges. 
Judges should make sure that rules are followed, but if a firm is willing to satisfy administrative requirements, pay the layoff tax, and make severance payments, they should not be able to second guess the firm's decision. 
How complicated would it be to shift from a payroll tax to a layoff tax? 
Ironically, the answer comes from America, where the financing of unemployment insurance is indeed done through layoff taxes. 
The generosity of the US system--and hence the burden of layoff taxes--is limited. 
Benefits and taxes would be higher in Europe, but America's system indicates that it can be done. 
This forces us to return to the question of whether such a reform is politically feasible. 
I believe it is. 
Higher layoff taxes, which force firms to think twice before laying off, would be welcomed by workers, while lighter and more predictable regulation of employment relations would surely be welcomed by firms. 
The political road is narrow, but it may exist, and the economic and social rewards of finding it would be very high. 

Reforming Europe from Below 
Look at European history for the past 25 years, and you see that from the late 1970's to the early 1990's the continent was plagued by macroeconomic instability, high unemployment, over-regulated markets--including, importantly, financial markets--unregulated monopolies, and inefficient state-run industries. 
Over the past decade Europe has made important progress in restoring macroeconomic stability, but it has been less successful in enacting the micro-level reforms that are necessary to deregulate markets and improve their efficiency. 
Why is this? 
Is there a lesson in this for the countries of Central and Eastern Europe as they prepare to join the EU? 
High inflation and mounting public debt generated a feeling of ``crisis'' in the early 1990's in some EU countries: when one's house is on fire, the costs of doing nothing are too large to continue sitting back and doing nothing. 
It took the exchange rate crisis of 1992, for instance, to make Italy's leaders realize that something had to be done about the country's public finance mess. 
The fear of being left out of the euro did the rest, by creating a political consensus in favor of taking the right and necessary steps. 
Today, Europe's economic house is no longer on fire. 
So it has become much harder to break the back of special interests in order to liberalize markets and improve economic efficiency. 
Just this past June, for example, France went through a 1968-style month of strikes and street protests only to implement minor pension reforms: the elimination of a few special privileges enjoyed by public sector employees. 
In a sense such pusillanimous reforms are the outcome of Europe having become a more ``normal'' place. 
Europe simply could not afford the failure of the euro project, so it's leaders did what was necessary. 
But no one, it seems, will stop this rich continent from living with slow growth, high unemployment, and inefficient markets. 
There is no ``crisis'' associated with that choice--just slow decline. 
The Maastricht convergence criteria that led to the euro's creation worked because they were imposed by a multinational agreement and were monitored multinationally. 
More importantly, the ``punishment'' for not complying was clear, strong, and certain: exclusion from the monetary union. 
None of that threatens Europe today. 
So member states have precious little incentive to continue the reform process? 
But could something like the Maastricht process be used to implement structural reform? 
In a sense, such a process is already at work. 
One mechanism that has often been effective at reining in powerful special interests in individual EU states, and thus at implementing structural reforms, is action by the European Commission. 
France decided to permit a very mild opening of its domestic electricity market the day before the start of formal proceedings against France at the European Court of Justice for infringement of an EU directive. 
Italy ended 70 years of active involvement by the state in industry thanks to the determination of the EU competition commissioners, Karel van Miert and his successor, Mario Monti. 
Obviously the European Commission can play a positive role only if it embraces a stance in favor of liberalizing markets and does not fall into the trap of focusing on coordinating national regulation throughout the Union. 
Regulation of markets does need to be coordinated; but it also needs to be eliminated in many cases. 
Consider Europe's financial markets, which provide an alternative way to break the reform deadlock. 
In the old Europe, with fragmented financial markets, Chancellor Gerhard Schroeder's request that Mannesmann remain a German company in the face of a (successful) takeover bid by Vodaphone was tantamount to his following an order by the company's mostly German shareholders. 
As it turned out, such action no longer works in a world in which European companies are exposed to the scrutiny of international investors. 
European financial markets were, and to some extent still are, dominated by a few large banks. 
When the euro was launched banks in Europe accounted for some 80% of total firm financing, as compared to 30% in the US. 
Banks are often less prepared to finance a risky, but possibly bright idea. 
As lenders, they are also less efficient at monitoring firms than shareholders are. 
Before the advent of the euro, local markets were small and illiquid. 
The development of modern, highly liquid financial markets has been one of the main benefits of the euro: in a few years, for instance, bank lending in Germany fell from 74% to 32% of the total funds raised by large German companies. 
In Italy the share of bank lending as a percent of the total funds raised by big Italian companies fell from 75% to 50%--the difference being made up mostly by emissions of corporate bonds. 
The lesson for new member countries from the East is clear: once you are in the Union, the outside pressure to reform decreases: the impetus to reform must be found at home. 
Reforms aimed at deregulating financial markets should be the priority. 

Reforming Japan’s Constitution 
“Reform with no sacred cows” was Junichiro Koizumi’s slogan when he became prime minister five years ago, and no cow here is more sacred than our “peace” constitution. 
So it should be no surprise that, as Koizumi moves toward the end of his second and final term in office, his efforts to reform the constitution to allow Japan more effectively to defend world peace are gathering pace. 
In mid-April, the Constitution Review committee of Japan’s House of Representatives issued a final report on the fundamental problems facing Japan’s Constitution and submitted it to the Chair of House of the Diet. 
Soon the House of Councillors will submit its final report. 
Moreover, concrete discussions on constitutional reform are underway within both the ruling Liberal Democratic Party (with Koizumi himself in charge) and the opposition Democratic Party. 
The private sector and media outlets like the influential Yomiuri Shimbun newspaper have also joined in. 
The Liberal Democrats aim to have their draft constitutional amendments ready for the 50th anniversary of the party’s founding this November. 
Although almost everyone concedes that some amendments to the constitution are necessary, agreement on what needs to be done has been difficult to reach. 
Indeed, the Liberal Democrats are as divided as everyone else. 
In addition to these divisions, there are problems concerning how to amend the constitution. 
New legislation will be needed to enable amendments to the constitution, and this will take time and even more debate. 
Yet the pressure for fundamental change – particularly of Article 9, which putatively pledges that Japan will never maintain armed forces – is such that there is a real chance that these obstacles can and will be overcome. Fundamental change, indeed, is needed as soon as possible, because current interpretations of the constitution have consistently distorted Japan’s security and defense policies. 
Across Japan, there is a growing view that some of these policies cannot wait for constitutional amendment. 
Up to now, issues related to national defense have been regulated by the administrative judgments of the time or by Diet resolutions based on the prevailing interpretation of Article 9. 
But this ad-hoc approach has been, and remains, a recipe for paralysis. 
The myriad rulings that have resulted from this process have left the exercise of national defense without any clear position under the Constitution and impede Japan from exercising its “collective self-defense” rights and treaty obligations with its allies (principally the United States). Tortured reasoning about phrases like “use of force” or “exclusively defense-oriented policy” amounts to an open invitation to confusion, both in the military and to countries in the region. 
And the so-called “three principles on arms exports” have placed absurd limits on what may be sold or supplied abroad, as even flying boats used for sea rescue have been viewed as banned from export. 
Given the current regional security environment– international terrorism tied to local, Asian-based terrorists, various challenges to the security of vital sea lanes, North Korea’s search for nuclear weapons and ballistic missiles, and China’s rapid enhancement of its naval power–, Asia today is far less stable and more complex than it was when Japan's constitution was written. 
By revising the country’s National Defense Program Guideline (conventionally called an Outline) last December, Koizumi’s government began the process of clarifying some of these debilitating ambiguities. 
The Guideline lifted some of the more foolish limits on arms exports by ending the “all-out prohibition policy” maintained since the Miki Administration of 1976. 
For example, it clearly determined that the ongoing Japanese-US joint technical research to develop and produce the SM-3 sea-based ballistic missile defense system is an exception. 
More generally, the government may now review requests for weaponry from friendly governments on a case-by-case basis, according to whether the sale risks instigating or fueling international conflicts. 
As a result, the sale or supply of used or new surface combat vessels by the Japan Coast Guard or even Japan Maritime Self-Defense Force (JMSDF) to ASEAN countries, say, Malaysia, Indonesia or Singapore, to help them fight maritime terrorism and piracy more effectively will now likely be permitted. 
Supplying European countries as well ASEAN countries with JMSDF flying boats for sea rescue, patrol, and fire fighting will also now likely be approved. 
These favorable and appropriate actions will allow Japan, for the first time in its postwar history, to meet the international community’s requests in a timely way. 
Yet, without fundamental constitutional reform, Japan’s position in Asia and the world will remain anomalous. 
It should be remembered that, after the US, Japan is the largest contributor to the United Nations, and to its peacekeeping budget. Yet its constitution severely constrains its ability to send combat units for the Security Council’s peacekeeping operations. 
Japan needs to be able to back up the Security Council with men, and hence share the political risk, as well as the cost, of the UN’s efforts to maintain world peace. 

Reforming Macho Politics 
Latin America’s democracies range from those that are models for the world – Chile, Costa Rica, and Uruguay – to those like Guatemala, Haiti, and Venezuela that are so weak that calling them democracies is dubious. 
The democracies in this region face a myriad of hazards, but one crucial challenge could be solved relatively easily: the gross under-representation of women in their legislative bodies. 
Despite some prominent women at the top of Latin American politics, the general absence of women from the region’s political life causes a serious democratic deficit. 
The low representation of women in legislatures is not only a symbol of flaws in the functioning of Latin American democracies; it also means that women legislators are unable to bring their intrinsically different approaches to policy into play. 
Only the Argentine Senate has a composition that is more than 40% female, while the Costa Rican Legislative Assembly and Argentine Chamber of Deputies are the only legislatures above the 30% bar. 
In nine legislative bodies in the region, women account for 10% or less of the members. 
Between 1991 and 2000, twelve Latin American countries adopted legislation requiring minimum percentages of women on the party lists used for the election of national legislators. 
But, despite this legislation, the percentage of women legislators in many of these countries remains very low. 
To address the dismal under-representation of women in Latin America’s legislatures, a series of reforms must be adopted, reforms that depend in part on a country’s existing electoral legislation. 
All countries, for example, should adopt quotas requiring that no more than half of parties’ legislative candidates in each district be of the same sex. 
Research demonstrates that gender quota legislation is more effective in ensuring the election of women when a closed party list voting system is used. 
Under this system, voters can only vote for political parties as a whole, and thus have no influence on the order in which candidates are elected. 
When combined with adequate enforcement of the quota legislation, closed lists guarantee a minimum level of women’s representation across all parties and districts. 
For example, in Argentina, Costa Rica, and Mexico (where a closed list, placement mandates, and strict compliance are in force), there is an assurance that if a party wins three seats in a district, a women will occupy at least one of the seats. 
Open-list systems, where voters have influence on the order in which a party’s candidates are elected, provide no such guarantee. 
In closed-list systems, the candidate lists should be zippered: male, female, male, female (or vice versa). 
In open-list systems, a 50% quota should be adopted. 
It is not possible to predict with any accuracy the impact of an increase in the quota percentages in the open-list systems that currently have effective quota legislation. 
But if these countries replace their open lists with closed lists, the percentage of women elected should, all else remaining equal, increase by around 10%. 
The impact would be greatest (resulting in an approximately 20% jump in the percentage of women elected) in systems that currently do not have effective quota legislation. 
Such legislation must also have rigid compliance standards that are reviewed and enforced by the state’s electoral authorities and courts. 
One way to enforce the rules may be to say that parties that do not comply with the legislation in a district should not be able to run candidates there. 
But lists alone won’t do the trick. 
Indeed, another necessary component of such reforms is the adoption of medium-sized to large-sized districts for the election of national legislators. 
Women have the most difficultly reaching office in single-seat districts. 
As nearly 40% of Latin American legislators are the only legislator from their party elected in a district, this poses a real barrier to women. 
The benefits from these reforms are two-fold. 
First, and most importantly, they will immediately increase the number of women in Latin America’s legislative bodies, which in turn will enhance the legitimacy of these countries’ democracies. 
Second, by increasing the presence of women in positions of power, the reforms will aid in the creation of an autonomous and powerful cadre of female political leaders. 
This will allow for a greater degree of substantive representation of issues and policies that are important to women, whose interests are often inadequately represented by overwhelmingly male legislatures. 

Reforming Russia’s Military Industrial Complex 
Under President Vladimir Putin, Russia has launched a comprehensive program to restructure its defense industry, which has shrunk dramatically since the Soviet era. 
This process has achieved some progress, but fundamental structural problems persist that lead Russia to export large quantities of advanced weapons to conflict-prone regions, placing the Kremlin at odds with Europe, the United States, and other countries. 
Over the last six years, the Putin administration has encouraged the nationalization and consolidation of private-sector defense firms into large, vertically integrated, state-controlled holdings. 
In November 2000, Putin approved the creation of a single government-supervised arms exporting agency, Rosoboronexport, to end the self-destructive competition that had developed between the country’s major weapons-exporting enterprises. 
Earlier this year, the agency gained the exclusive right to sell Russian weapons to foreign countries. 
At present, the government is promoting the creation of a similar institution in the aviation sector, the new United Aircraft Building Corporation (UABC), which includes major state and private manufacturers of fixed-wing aircraft. 
Proponents of the merger believe it will improve the efficiency of the Russian aircraft industry and, by lowering costs, make Russian planes more attractive to foreign buyers. 
Under Putin, Russian military spending has also rebounded. 
This year, the Russian government will provide the Ministry of Defense almost 5 trillion rubles ($189 billion) under the 2007-2015 State Armaments Program. 
The percentage of the defense budget allocated to purchasing military equipment will rise from 44% in 2006 to 50% by 2011. 
The primary purpose of this increased spending is to push new weapons systems from the research and development stage to actual procurement for Russia’s armed forces. 
Over the course of 2007-2015, Russia’s army and navy will replace almost half (45%) of their military equipment. 
In the past, poor government and industry practices frustrated similar plans to supply large numbers of advanced conventional weapons to Russia’s armed forces. 
The country’s military-industrial sector suffers from limited domestic orders and extensive overcapacity. 
Purchases for the Russian army and navy have been increasing, but still only sustain about one-fourth of Russia’s existing military production capacity. 
The Russian government now spends more on new Russian-made conventional weapons than do foreign purchasers. 
Yet, persistent inefficiencies in the Russian defense procurement system result in foreign buyers receiving more new systems than the Russian military. 
As a result, Russia’s leading defense firms remain heavily dependent on foreign sales. 
Although Russia’s arms exports have decreased considerably since the Soviet period, its revenue per transaction is now greater because Russian firms have yielded much of the lower-end market to less expensive suppliers like China, India, and other former Soviet bloc allies. 
Moreover, where the USSR transferred much weaponry under easy commercial terms or without charge (e.g., under long-term loans not expected to be repaid), Russia now discounts arms only for its closest allies. 
On March 27, 2007, the Defense Ministry announced that Russia’s annual arms exports increased by 50%, from $4 billion to $6.5 billion, from 2001 to 2006. 
In an effort to both maximize foreign revenue and strengthen Russia’s own military potential, former Russian Defense Minister Sergei Ivanov, who now oversees Russia’s military-industrial complex and is one of the two leading candidates to succeed Putin as president, stressed the need for “the national defense industry to find a balance between a commitment to arm the Russian military and an opportunity to export arms to countries not subject to UN sanctions.” 
Besides helping to sustain the health of Russia’s military industrial complex, many Russian officials think that arms sales will promote Russia’s diplomatic interests by strengthening ties with recipient states. 
These transactions, however, have complicated Moscow’s relations with foreign governments, particularly the United States. 
American officials complain that Russia’s self-imposed restrictions on arms sales are much weaker than those of Western countries, especially with regard to authoritarian governments accused of committing human rights violations or states seeking weapons of mass destruction. 
Washington has protested against Russian military sales to Belarus, China, Iran, Syria, Uzbekistan, and Venezuela. 
In early January 2007, the US government imposed economic sanctions on three Russian companies, including Rosoboronexport, for selling missiles and other prohibited military technologies to Iran and Syria. 
Russian officials insist that their military exports conform to all applicable international laws and involve primarily defensive weaponry that will not disrupt regional power balances. 
They add that the US and its allies also transfer large volumes of weapons to areas of conflict, including South Asia and the Middle East. 
Russian officials also contend that US and other foreign objections often reflect a desire to eliminate unwelcome Russian competition or curtail the Kremlin’s influence in important regions, such as Eastern Europe, Asia, and the Middle East. 
In 2005, the head of Rosoboronexport, Sergei Chemezov, said: “Let’s have no illusions: if we stop sending arms to export, then someone else will do it.” 
Russia seems prepared to negotiate on some security issues, including such sensitive questions as Iran and Kosovo. 
Achieving limitations on Russian arms sales, however, will prove much harder. 
Given the condition of Russia’s military-industrial complex, considerations of national pride, geopolitical influence, and entrepreneurial profits will likely sustain Russian interest in selling weapons to almost any client no matter how distasteful to Western governments. 

Reforming the Arab Security State 
WASHINGTON, DC – Experience across the Arab world demonstrates that when it comes to security-sector reform, technocratic approaches are inadequate. 
Simply put, a technocratic focus on upgrading skills and operational capability, in the absence of improved governance of the security services, can be easily subverted by anti-reform coalitions, resulting in the continuation of regressive patterns of behavior. 
This is especially true in polarized political and social environments – the most obvious cases today being Egypt, Iraq, Libya, and Yemen, not to mention Bahrain and Syria. 
But even in countries where there is some degree of political pluralism and an absence of civil strife or domestic armed conflict – such as Lebanon and Tunisia, and potentially the Palestinian Authority and Algeria – incremental approaches can achieve only partial success. 
Creating a fully modernized and accountable security service requires more than technocratic tinkering. 
Regardless of formal legal frameworks, barriers to effective audits prevent the monitoring of financial flows to and within the police and internal security agencies. 
Moreover, such institutions are often able to absorb formal anti-corruption training and yet continue with business as usual. 
For effective security-sector reform in the Arab world to occur, the shroud of secrecy surrounding the sector must be removed. 
But among the Arab states, only Yemen drafted a Freedom of Information law after 2011. 
Conversely, several state institutions blocked a proposal by Egypt’s Central Auditing Agency for legislation stipulating citizens’ right to access information regarding corruption in any governmental agency. 
The problem, as Egyptian researcher Dina El-Khawaga has argued, is that it may be impossible “to introduce reform on a structurally corrupt basis.” 
What is needed is broad and effective oversight of public procurement, fuller transparency regarding budgets and routines, and substantially upgraded, multi-agency monitoring of national borders to dismantle illicit networks involving the security sector. 
Arab states like Jordan have shown that reducing corruption in the security sector enables significant improvements, even in a challenging environment comprising long borders, extensive black market trade fed by wars in neighboring states, and large refugee populations. 
Effective governance of the security sector requires sustained political will at the top of the government, particularly a readiness to push reforms to sectors of the government and economy with which the security sector interacts. 
But change of this order of magnitude is highly contentious, and its path and outcome cannot be easily predicted or steered, no matter how determined the governmental leadership is. 
There is a grim paradox at work here. 
The move toward more pluralist politics in Arab states has unleashed deep social divides over the nature and purpose of policing – divides that invariably complicate the reform process. 
For example, some demand that the security services should enforce religious values. 
The specific dynamics of security-sector reform varies among states, depending on past modes of policing and the circumstances in which the authorities are challenged and forced to change existing structures. 
But, in most cases, people either look to the state and its officially mandated agencies to resolve problems and provide basic law enforcement, or would prefer to do so rather than resort – or just as often submit – to alternative, non-state providers. 
As a result, governments can claim a powerful legitimacy in embarking on reform efforts. 
Despite support for the state as the ultimate arbiter of law, increasing social polarization in many Arab states over the last two decades has impeded consensus on how to restructure and reform policing. 
Marginalization of up to 40% of the population, who live at or below the poverty line, has fueled political challenges, in turn subjecting entire social segments to targeting by official security bodies. 
Furthermore, the determination to crush dissent affects the urban middle classes, which might otherwise be the strongest proponents of security-sector reform in this area. 
Both Egypt and Syria are prime examples of this. 
The sectarian nature of Iraq’s security sector and partisan polarization in the Palestinian Authority imply similar risks. 
Severe political and constitutional breakdown, as well as extensive social and institutional fragmentation, also hampers – or, in cases like Libya or Yemen, blocks – reform. 
Even Egypt, with its highly centralized and bureaucratized state, has devolved certain policing and security functions in marginalized urban communities or rural areas to baltagiyyeh (thugs) and to former henchmen of the ruling party, village headmen, and clan elders. 
Clearly, formalizing policing and adjudication on the basis of clan, sectarian, or ethnic identity –as has happened with the revolutionary militias of Libya, the Shia Hashd militias in Iraq, or sectarian party militias in Lebanon – can be highly damaging. 
But the past emphasis on centrally managed security sectors has made them a crucial asset in political contests, enabling them to escape oversight and benefit from de facto legal impunity. 
So a better balance is needed to mitigate the concerns of diverse social and political actors whose participation is needed to renew constitutional frameworks, strengthen the rule of law, and revive national identity and state institutions in a context of democratic transition. 
The bottom line is that security-sector reform cannot be undertaken in isolation from the wider process of democratic transition and national reconciliation. 
Today’s Arab states in transition are discovering how difficult it is to replace deep-seated authoritarian practices and relationships with sustained democratization, a process that depends crucially on transforming their security sectors. 
The added focus on counter-terrorism is further impeding reform, though the failure of unreformed security sectors to fulfill this role effectively, such as in Egypt and Tunisia, should cause it to have the opposite effect. 
Those who advocate both democracy and security-sector reform must show consistent unity of purpose, build societal consensus and political coalitions for their programs, and formulate coherent, sustainable policies. 
Only then might the political, economic, and social roadblocks to creating modern, accountable security services be overcome. 

Reforming the UN 
The UN is in the midst of a serious, long-term crisis. 
That crisis will not go away unless its sources are understood and the organization reformed. 
But a new form of political correctness is making reform difficult. 
One major cause of the UN crisis is the change in the international situation after the demise of the Soviet Union and the proliferation of what I call ``incompetent states.'' 
Many countries that achieved independence as a result of the national liberation movements of the 1940's-1990's have proved themselves incapable of creating the conditions of normal life within their territories. 
In the age of globalization, they are also hopelessly and increasingly lagging behind developed states. 
Moreover, many of these regimes are simply ineffectual and will collapse or dramatically change in the foreseeable future. 
This will inevitably prove to be the source of long-term political and military instability in large parts of Africa, the Middle East, Central and South Asia, as well as a number of former Soviet republics. 
The rise of incompetent states brings about huge challenges: proliferation of weapons of mass destruction, terrorism, religious and ethnic strife, rivalry for natural resources, waves of migration, drug trafficking, and deterioration of the environment. 
Such states call into question our traditional attitude towards national sovereignty. 
Tolerating them, as was done until recently, is increasingly dangerous. 
The politically correct policy of affirming each nation's right to self-determination, including the establishment of an independent state, leads to the emergence of more incompetent regimes. 
Indeed, incompetent states now comprise almost a majority in the UN, which undermines that body's moral legitimacy in the eyes of many in the developed world. 
It also impairs the UN's ability to deal with the most important problems of today's international environment. 
The second cause at the root of the UN crisis is the fact that the US is no longer interested in observing the old rules of international relations. 
Indeed, America's superpower status makes it increasingly disadvantageous for its leaders to play by rules that, while repeatedly violated in the past, are now viewed as preventing the US from assuming a new role in international affairs. 
The new role the US envisages is closely tied to the profound destabilization brought about by the proliferation of incompetent states. 
In fact, America has been eager for some time to ``establish order'' in the world and modernize particularly troublesome regimes in highly strategic regions of the world. 
In the Middle East and Central Asia, this policy seems at times to have assumed predominance comparable to that of the former doctrine of deterrence deployed against the Soviet Union and its Communist allies. 
It was the desire to counter this destabilization and to consolidate its superpower status that was the primary reason for America's actions in Iraq. 
The world might not support the US in its unilateral attempts to become the world's policeman, especially because they may well bring more instability. 
Nevertheless, it is important to realize why the US is undertaking them and that they respond to a core problem of today's international order. 
If Russia and the other countries that opposed America's Iraq policy in the Security Council really wanted to convince the US not to attack Iraq and to defend international law, it was a naive policy doomed to failure. 
If we sought to preserve the UN Security Council and the position of the present permanent members, then those actions were more likely to produce the opposite effect. 
Similarly, rearguard efforts to prove that those who opposed war in Iraq were right and that the Americans and the Britons wrong, together with demands for ``proof'' that Iraq possessed weapons of mass destruction, are unconstructive and only cause mutual irritation. 
The UN cannot be preserved and reformed without cooperation from the US, however distressful this may be to some. 
By making the UN an instrument of struggle against America, the UN will only be weakened or written off altogether. 
What is needed is a reform that responds to today's international order and updates the increasingly obsolete and ignored body of international law to today's new economic and political realities. 
Restructuring must start with the UN Security Council, whose 1945 mandate is no longer viable. 
The most obvious solution is to increase the number of permanent members from five to eight or nine (including Germany, Japan, India and possibly Brazil) and to change the voting rules, so that two or three permanent members--rather than just one--are needed to block an action. 
But the UN is not likely to reform itself from within. 
Institutionalizing the G-8 and providing it with executive functions could best provide the external impetus that is needed. 
If, as is likely, increasing the number of permanent Security Council members lacks sufficient support, developed countries should revert to the idea, circulating in foreign policy circles for several years, of establishing a new G-8-based organization (but including China and India) to counter new threats to global security. 
Such proposals might spur further reform of the UN itself. 
In any case, one thing seems certain: in the absence of a sweeping overhaul, the UN may quickly follow in the footsteps of other institutional relics of the Cold War, such as the Organization for Security and Cooperation in Europe and NATO. 

India’s Growth Crossroads 
MANILA – As the slowdown in the world’s major industrial economies drags on, growth in developing Asia is being affected. 
A serious burden will likely be placed on the region’s major economies, particularly its two giants, India and China. 
Both countries’ external sectors have clearly been hit hard, while domestic consumption is stagnating. 
Fixed-asset investment in India rose by only 2.3% in the first half of 2012, compared to 9% in the year-earlier period. 
Unlike China, which has shown clear signs of stabilization since mid-2012, there is no clear evidence of recovery in India yet, as delay in implementing necessary reforms, among other factors, has weakened the economy’s competitiveness. 
While recent government measures are expected to boost economic revival, an additional challenge is that growth must be made sustainable and more inclusive, which requires addressing four key issues. 
The first is service-sector upgrades. 
India already has a large service sector, which has been a major source of growth. 
Considering the country’s young and growing population, the service sector needs to create more jobs for the millions who will join the workforce every year. 
But India’s service sector has been dominated by traditional, low-wage output in informal businesses, such as restaurants and personal services. 
To achieve inclusive growth, India must shift toward modern services, such as Internet connectivity technology, finance, law, accountancy, and other professional business services. 
The authorities must reduce burdensome regulations to allow the sector to be more competitive and dynamic (recent government service sector reform is most welcome). 
Second, improvements in the investment climate are vital, especially if India is to realize its potential in manufacturing. 
India needs to expand dramatically the sources and volume of available infrastructure financing. 
This will not be possible without private-sector participation, which requires, in turn, a business environment that ensures adequate return on investment, transparency in procurement, and high-quality governance and regulation. 
Third, while India possesses some of the world’s best managers, scientists, and engineers, a large portion of its workforce is unskilled or semi-skilled, which may constrain the country’s ability to deliver inclusive growth. 
The National Policy on Skill Development marks a welcome shift from the traditional, government-led model of skill development and vocational training to one that emphasizes private-sector-led initiatives. 
Finally, there is the challenge of urbanization. 
Migration to urban centers is causing new cities to emerge and existing ones to expand. 
India must seize the opportunity to adopt green urban planning early on: mass-transport systems should link satellite cities to ports and megacities, and new cities should be eco-friendly and energy-conserving. 
The Indian government’s recent promotion of dynamic economic corridors between major cities is a step in the right direction. 
The Asian Development Bank is working on innovative mechanisms to bring more finance to the infrastructure sector, such as the recent partial credit guarantee facility set up by India Infrastructure Finance Company Limited in collaboration with the ADB. 
By boosting the credit ratings of infrastructure projects via credit enhancements, this facility will allow pension funds and insurers to invest in infrastructure projects. 
A large share of our assistance is focused on India’s lagging states, making our work strongly inclusive. 
Moreover, the ADB’s support includes skills development, particularly to foster skills required by the infrastructure sectors, and strengthening skills design and delivery systems. 
The ADB is also exploring possibilities for focusing a subset of our operations around a few high-priority economic corridors, which leads naturally to the issue of regional cooperation and integration. 
With India playing a major role, the benefits of cooperation are immense, both within South Asia and across the continent more broadly. 
Greater regional cooperation can help South Asia to achieve shared prosperity that is both inclusive and sustainable. 
Indeed, only 5.4% of South Asia’s current trade flows are intra-regional, compared to 51% in East Asia. 
Major hurdles include poor transport connectivity and stifling non-tariff barriers, which impede growth and undermine welfare in Nepal, Bhutan, Bangladesh, and north-eastern India. 
With strong support from India, the South Asia Subregional Economic Cooperation Program, known as SASEC, has achieved much success in prioritizing trade facilitation; developing regional road and rail projects in Nepal, Bhutan, Bangladesh, and India; and agreeing on a time-bound investment program, including investment in the Siliguri corridor connecting India’s north-eastern states with the rest of the country. 
Improved connectivity and trade will not only boost growth, but also promises an economic lifeline for millions of poor people. 
India is expected to continue to benefit from its so-called demographic dividend and to lead global growth in the coming decades. 
Everybody sees the country’s enormous potential. 

Housing versus Habitat 
CAMBRIDGE – Peter Drucker, the influential management guru, famously said, “What does not get measured, does not get done.” 
He might have added that what gets measured poorly gets done poorly. 
Consider low-income housing. 
Most developing countries, and many rich ones, define their housing deficit according to the number of families living in units deemed socially unacceptable. 
But what is meant by unacceptable varies greatly from country to country. 
Piped water, sewerage, and electricity are seen as essential in the Americas, but not in India. 
The problem is that people do not demand houses; they demand habitats. 
A house is an object; a habitat is a node in a multiplicity of overlapping networks – physical (power, water and sanitation, roads), economic (urban transport, labor markets, distribution and retail, entertainment) and social (education, health, security, family, friends). 
The ability to connect to all of these networks makes a habitat valuable. 
Cities, for example, can be highly productive spaces, because they allow people to combine their different skills to make things that none of them could make individually. 
People can exchange their knowhow, learn from each other, and trade. 
Jane Jacobs’s insights on this, published more that 40 years ago, have been confirmed by more recent studies summarized in books by Edward Glaeser and Enrico Moretti. 
So, if the deficit being measured is one of houses rather than one of habitats, the solutions often do not solve the real problem. 
A housing minister who is told to build a certain number of houses will likely fail to build an equivalent number of well-connected habitat nodes. 
After all, much of what makes a house a habitat lies outside of his department’s purview. 
Moreover, if the housing deficit is diagnosed as a dearth of adequate housing, then the solution is to build more houses for those who lack it – that is, the poor. 
But this is like assuming that new cars should be built for those without them – that is, for people who could buy second-hand cars from those seeking to upgrade. 
It confuses the construction industry, which builds new homes, with the much larger housing market, which includes all homes. 
It gets worse. 
Because the poor cannot buy adequate housing on their own, public resources must be used. 
In order to target these subsidies to low-income households, governments typically treat families of different income levels differently: the rich must fend for themselves, middle-class families are provided with assistance to secure mortgage loans, and the poor are offered public housing. 
To maximize the number of units built, housing ministries make sure that projects meet minimum specifications below a certain per-unit cost threshold. 
As a result, developers look for the cheapest land, which is obviously the least connected to the networks that would make it more valuable. 
This approach has ended up exacerbating the segregation of the poor. 
It artificially creates – as in France – socially homogenous poor neighborhoods where the unskilled live among themselves, disconnected from others, making it harder for them to benefit from the agglomeration economies that would boost their productivity. 
Indeed, because many of these developments are so remote, residents often face a long, uncomfortable, and costly daily commute to reach good jobs. 
No wonder so many prefer to stay home and work on their own, which may explain why so many developing countries are becoming more urbanized but not more productive. 
Confusing the construction of new homes with the housing market is most absurd when dealing with displaced families. 
For example, the Venezuelan and Colombian governments were confronted with the need to relocate tens of thousands of families displaced by floods in 2010. 
Although the two governments are far apart politically, both promised the displaced families new houses in new urban developments. 
In the meantime, people were left for years waiting in shelters. 
And, once again, these new urban developments have few of the networks that would make them a habitat. 
The burden of creating integrated communities has been placed on a randomly assembled group comprising some of the least connected members of society. 
Instead, displaced families should quickly be given vouchers so that they can obtain an appropriate home without delay. 
They are bound to choose older homes in established neighborhoods that have already been connected to the many networks that make them a habitat. 
Large new housing developments should naturally attract those who already have ample social connections, making it easier to kick-start more integrated communities. 
In order to separate the problem of the overall housing deficit from the problem of families with inadequate housing, policymakers need to address both supply and demand. 
On the supply side, urban land – with all its physical and social infrastructure – must expand quickly enough. 
On the demand side, subsidies should focus on helping families choose from the entire housing market. 
This approach would promote socially diverse and productive neighborhoods, rather than segregation and pockets of economic stagnation. 
But this goal cannot be achieved unless the construction industry is prevented from dictating low-income-housing policy. 

The Night-Watchman State’s Last Shift 
HONG KONG – Too often, debate about the relationship between the state and the market casts them as opposing forces locked in a zero-sum struggle. 
But this simplistic approach quickly turns constructive discussion into a casualty of the ideological battle between advocates of state and market capitalism. 
A more useful framework would view the state and the market as two sides of the same coin, bound together by the property-rights infrastructure (PRI). 
The state interacts with the market – the realm of private, voluntary exchange of property rights – in three main ways. 
First, the state transacts with the private sector through taxation and expenditure. 
Second, it establishes and maintains the PRI, which includes all of the institutions needed to delineate, exchange, fine-tune, and protect (through enforcement of law and contracts) property rights. 
Among these institutions are the judiciary and arbitration panels, which function not only to adjudicate property-rights disputes, but also to address administrative abuses and disputes between the private and public sectors. 
Finally, the state competes with the private sector via state-owned enterprises and utilities. 
Given that an effective PRI safeguards market order and stability, the market needs a strong state to manage it. 
This means that whether a government is “big” or “small” is less important than how well it manages the PRI – that is, whether the state is able to ensure high-quality market order. 
Current policy debates have largely neglected this aspect of the state’s role, because Western thinkers take their countries’ PRI for granted, especially their regulatory and judicial systems, which have benefited from hundreds of years of development. 
But these countries’ experience is entirely different from that of developing economies, which are under intense pressure to build a sound PRI quickly. 
For a large economy like China – which has overlapping bureaucracies in different state agencies, and many layers of government extending from the central administration to local units – creating a transparent, fair, and effective PRI is particularly complex. 
As a state-led economy moves toward a market-based system, policymakers are faced with a difficult choice: pursue policies associated with immediate and rapid GDP growth, or seek the longer-term, less visible benefits of PRI development. 
When China began this transition, its central and local governments focused on building physical infrastructure, such as roads and electricity grids, which delivered tangible gains. 
But it was the state’s less visible investment in the country’s institutional infrastructure that had the biggest impact on China’s GDP growth. 
Over the last three decades, the government has created a transitory but effective PRI to remove barriers to market entry, define new property rights, and mimic international rules, thereby facilitating external trade and enabling foreign multinationals to operate effectively in China. 
China’s government-services supply chain plays an important role in orchestrating and supporting the market economy’s development. 
But it is not enough. 
With private and foreign-owned entities now accounting for more than two-thirds of China’s output, and with China becoming a leading actor in global markets, the need to upgrade its PRI is becoming increasingly urgent. 
In order to create value consistently within domestic and international markets, China must ensure that competition is fair, transparent, and subject to the rule of law. 
China’s leaders know that private small and medium-size enterprises with fair market access would be a far more reliable source of innovation and jobs than are large state-owned monopolies. 
Given this, China’s continued economic success depends on reducing state ownership of productive capital, facilitating market innovation and growth, and investing in human capital, such as through education, health care, and social welfare. 
Concretely, this means introducing land reform and privatization, regulating food and drugs, protecting human capital and intellectual property, safeguarding the value of household savings, ensuring market access, and executing fair and transparent taxation. 
Such reforms would not weaken the state; they would simply alter the distribution of power in order to create a more stable system. 
For example, the primary objective of privatization would not be to reduce the size of the state sector, but to eliminate state-owned enterprises’ unfair and hidden privileges, such as subsidized credit and monopolistic market positions. 
This would help to eliminate corruption, by making bureaucratic functions more transparent and preventing officials from rewarding themselves at the public’s expense. 
Strengthening the rule of law and creating a level playing field essentially involve building a stable, effective PRI, composed of institutions that can motivate public officials to deliver services as effectively as possible. 
Such a PRI would ensure that the state fulfills its responsibility to safeguard justice, enforce the law firmly and transparently, and enable the strongest competitors to reap their just rewards. 
The good news is that many of China’s local governments, which are responsible for overseeing the country’s courts, are beginning to compete with each other to deliver better PRI. 
They recognize that stable, equitable markets are better than physical infrastructure at creating jobs and driving long-term growth. 
The bad news is that those who benefit from the current system are resisting progress. 
In order to navigate the complex market-state relationship and achieve a beneficial outcome, Chinese policymakers must have a clear idea of where the state’s limited capacity and political capital are needed most. 
And that presupposes a discourse on the state-market relationship that is very different from the one to which Westerners are accustomed. 

The West’s Second Chance in Syria 
NEW YORK – The last-minute agreement between Russia and the United States to put Syria’s chemical weapons under international control gives the West, which had run out of good options, a second chance to reach what always should have been its strategic goal: peace in Syria and an end to its people’s suffering. 
Russian Foreign Minister Sergei Lavrov took advantage of Western leaders’ failure to formulate a clear central objective. 
Did they hope to end Syria’s civil war by forcing a military stalemate, or to bring about the demise of President Bashar al-Assad’s regime? 
Did they want to strengthen international law barring the use of chemical weapons, or to send Iran a signal about their determination to enforce “red lines”? 
The Russian proposal forced the West to choose prohibition of chemical weapons as its immediate goal. 
Given that this is one of the few areas of possible agreement in the United Nations Security Council, it is a good starting point to repair badly damaged relations among the Council’s five permanent members (China, France, Russia, the United Kingdom, and the US). 
Of course, the deal may prove to be little more than a diversion, breaking the momentum toward military action but failing to achieve its goal. 
Its implementation will be a test of Russia’s good faith. 
For their part, Western countries must avoid the traps of the difficult negotiation process that the deal demands, without losing sight of their strategic goal of ending the conflict. 
The complex process of securing and destroying Syria’s chemical arsenal promises to be next to impossible in the midst of a civil war. 
To succeed, Western leaders must reframe their approach to the Syrian endgame, rejecting the assumptions that have shaped their policies since the beginning of the crisis. 
The West’s fundamental mistake has been consistently to underestimate the Assad regime’s resilience. 
Despite its brutality, the Assad government retains a substantial base of supporters who are willing to fight to the death to prevent the regime’s collapse. 
Indeed, many Syrians believe that they have no future if Assad’s government collapses – a belief that has been reinforced as the civil war’s dividing lines have become increasingly sectarian. 
With regime supporters’ physical survival seemingly at stake, the expectation of a quick collapse was illusory. 
More problematic, the West’s loud calls for Assad’s exit from power, though now muted, have given false hope to the opposition, while Russia has been hiding behind the rhetoric of a “Syrian-led process” to avoid confronting its international responsibilities. 
But a diplomatic solution guided by the Security Council’s permanent members is the only credible path to peace. 
The alternative – an attempt at negotiation between Syria’s government and an increasingly fragmented opposition – would serve only to prolong the war and raise the death toll. 
Likewise, the West must recognize that reconciliation in Syria will be impossible without reconciliation between the Sunni and Shia regimes in the wider region. 
Several of the Sunni-ruled Gulf monarchies view Syria’s crisis and the prospect of Assad’s demise as an opportunity to compensate for Iraq’s rapprochement with Iran following the fall of Saddam Hussein’s Sunni regime and the emergence of a Shia-led government. 
A year ago, the US, the UK, and France appeared to side with Saudi Arabia when they rejected former UN Secretary-General Kofi Annan’s request that Iran be invited to the first attempt in Geneva to negotiate a settlement of Syria’s civil war. 
They probably feared that Iran’s participation in the talks would enable Iranian leaders to link efforts to end the Syrian crisis to negotiations over Iran’s nuclear program, enhancing their ability to resist international demands that the program be terminated. 
But, while Iran’s direct involvement in Syria – where its own Revolutionary Guards, along with its Lebanese proxy, Hezbollah, are fighting in support of Assad – is part of the problem, a long-term solution is virtually impossible without Iranian participation. 
Indeed, the Middle East cannot achieve long-term stability while Iran is excluded from negotiations and the Shia-Sunni schism is allowed to deepen. 
Although it is too soon to tell what, if anything, will come of the current diplomatic charm offensive by Iran’s more moderate new president, Hassan Rouhani, it might herald an important shift in Iranian policy that could ultimately enable regional reconciliation. 
With the entire Middle East undergoing a generational transformation, regional challenges cannot be addressed separately. 
Only a unified, comprehensive approach can manage the forces driving momentous change in the Middle East, prevent outside powers’ rivalries from complicating the situation further, and ensure a peaceful outcome. 
With emerging regional powers increasingly challenging the capacity of the Security Council’s permanent members to shape events in the Middle East, there is no time to waste. 
The West’s lofty and self-serving rhetoric has not helped to end Syria’s conflict; it may even have made the situation more dangerous. 
Although the Russian initiative is not without pitfalls, it could be a crucial launchpad for more serious and constructive engagement with Syria – and with the rest of the Middle East. 

Emergency Education Now 
DAVOS – In an ideal world, whenever children needed help, they would get it. 
When girls and boys were forced from their homes or classrooms because of war, natural disaster, or other crises, the international community would, within days, formulate a plan to ensure their immediate wellbeing. 
And such plans would include not only life-saving interventions, but also havens of psychological support and learning that protect opportunity and hope. 
Such places exist. 
They are called schools. 
Unfortunately, ours is far from an ideal world. 
When children need help, days turn into weeks and months. 
Hundreds of desperate children become thousands and eventually millions. 
Hope gives way to prolonged misery – not for a few months or even a year, but on average for more than a decade. 
They are shut out of schools, locked out of opportunity, and condemned to live in unbearable conditions – subject to child labor or forced begging, sold into marriage, trafficked, conscripted into gangs, or recruited by extremists. 
What has happened in recent years in South Sudan, northern Nigeria, and Iraq – and in Jordan, and Lebanon, where hundreds of thousands of Syrian refugee children are being denied the chance to return to school – makes an overwhelming case for a new humanitarian fund for education in emergencies. 
What has happened during the Ebola crisis in Liberia, Guinea, and Sierra Leone – where schools serving five million children remain closed or have not reopened quickly enough – makes this case, too. 
Yemen and Chad are likely to be next. 
In all of these countries and situations, children’s future depends on whether we, the international community, act. 
The Millennium Development Goals commit the international community to achieve the target of universal primary education by the end of 2015. 
But the official out-of-school figure currently stands at 58 million. 
And, once out of school for a year or more, children are unlikely to return. 
There is a huge gap in our array of solutions. 
In 2014, education received just 1% of humanitarian funds – leaving millions of children and young people on the streets or idle in camps. 
And there is no mechanism to pay for the education of refugee children or those affected by disaster. 
To be sure, there are organizations – the United Nations High Commission for Refugees (UNHCR), UNICEF, and many other groups – that, working together, perform heroically. 
And organizations like the Global Partnership for Education, Sheikha Mozah’s Educate a Child foundation, and the Global Business Coalition for Education also contribute in times of emergency. 
But that woefully small 1% figure means that the world simply does not have enough to ensure that more than a fraction of affected children get help. 
The solution must be based on a simple humane principle: No child should be denied opportunity simply because adults are unable to work together. 
That means establishing an emergency education system that enables adequate funding to be released to UN agencies and operational NGOs at the onset of a crisis – not years later. 
What has been happening in Lebanon over the past two years is a case in point. 
Today, there are 465,000 Syrian child refugees. 
The Lebanese government has volunteered to accept refugee children into the country’s schools by introducing a second afternoon session and enlisting teachers and school directors to take on the extra workload. 
Complicating the situation, officials have had to persuade a divided country, already worried about the influx of refugees (which has added 20% to the country’s population). 
But few refugee children have enrolled. 
UNICEF and the UNHCR have devised a plan with the Lebanese government to implement this program, but the international community has failed to help. 
Only $100 million has been pledged, but $163 million is still needed. 
Though the Global Partnership for Education and other organizations want to do more, their mandate does not permit them to provide assistance to middle-income countries like Lebanon. 
Something is very wrong with this picture. 
Lebanon’s government has a plan that requires no new schools or infrastructure, making it one of the most cost-effective solutions to a refugee crisis imaginable. 
But, still, the money is lacking. 
The same thing is happening in South Sudan. 
And in northern Nigeria, countless attacks by the terrorist group Boko Haram have underscored the need for a full safe-schools program; but the money to deliver it simply is not there. 
Similarly, in Pakistan, the Peshawar massacre last month has revealed how much more must be done to protect schools and children’s future. 
Given such crises, the world can no longer afford to do without a humanitarian fund for education during emergencies. 
In April, at the World Bank’s annual meeting, I will call for action by the assembled government ministers, and I hope to announce the establishment of such a fund at the Oslo Summit on Education for Development on July 6-7. 
Education, it is said, cannot wait. 
Passing the hat when a crisis erupts is not the solution. 
In 2015, we must do more. 

The Evolution of the Refugee Crisis 
LONDON – As they celebrate Christmas, Germans are also remembering the dead from last year’s attack on a Berlin Christmas market by a migrant who had been denied asylum. 
That incident fanned the flames of public sentiment against immigration, and probably played a role in Chancellor Angela Merkel’s stunning failure to form a new a coalition government after the federal election in September. 
Within the German electorate, there are widespread fears that another wave of migrants like the influx two years ago will deluge the country. 
But the facts on the ground have changed dramatically. 
On November 15, 2015, a migration command center in the German Foreign Ministry on Werderscher Markt in Berlin was tracking refugee flows at every potential border crossing on the route from Greece to Germany. 
Eventually, of 12 million displaced Syrians, one million arrived in Europe. 
And despite a massive response from the German government and members of the public, many asylum-seekers ended up sleeping on the streets and in railway stations. 
At the time, there were rumors of a migrant-fueled crime wave sweeping the country, though later research found little increase in crime along migration routes. 
Two year later, much has changed. 
The German bureaucratic engine has been firing on all cylinders to process asylum claims and facilitate integration. 
Of 700,000 asylum applications in 2016, almost 300,000 were denied, and those people are waiting to be returned to their countries of origin. 
Greece, the first stop in the European Union for refugees from the Middle East, has started to close some refugee camps, after granting asylum to around 50,000 people. 
And even Italy, the first EU port of call for African migrants, is now experiencing a decline in asylum applications. 
Turkey, meanwhile, has stuck to its deal with the EU, whereby it receives financial aid in exchange for taking in Syrian refugees. 
Before the deal entered into effect in March 2016, Turkey’s government had been actively encouraging migrants and refugees to continue to Europe; now, it is integrating refugees into Turkish society, and even trying to prevent high-skilled migrants from leaving. 
Accordingly, the European Commission announced this month that it would provide another €700 million ($830 million) in aid to Turkey. 
The situation has also improved in Northern Iraq (Iraqi Kurdistan). 
Previously, the Syrian civil war and the rise of the Islamic State (ISIS) had displaced three million Iraqis and hundreds of thousands of Syrian Kurds. 
But now that ISIS has been defeated militarily and its territory reclaimed, refugee Kurds have a choice of either staying in Iraq or returning to Syria. 
Internally displaced Iraqis, on the other hand, are expected to return to whatever remains of their cities and homes – a process that has been accelerated by the Iraqi Kurds’ renewed push for independence this year. 
Against this backdrop of relatively improved conditions, Lebanon stands out as an exception. 
Although Lebanon has a population of just four million people, it is now host to more than 1.5 million Syrian refugees. 
The result is a growing sense of refugee fatigue, which is threatening to destabilize the country’s fragile multi-confessional power-sharing arrangement. 
Already, the government’s rhetoric has started to focus on returning refugees to Syria, rather than on determining how best to provide for them. 
As for the refugees themselves, many are visible in the streets of Beirut, the capital, but most are stuck in camps or temporary host communities, and lack adequate access to health care and schooling. 
And even when refugees are accommodated by schools and universities, they have limited employment prospects after graduating. 
Another lost generation is coming of age in a country that has long been riven by bungled integration efforts. 
Making matters worse, following the resignation and return of Prime Minister Saad Hariri, Lebanon is now experiencing a political crisis that has raised the specter of a return to civil war. 
So, what can be done? 
Neighboring Jordan may offer one model to follow. 
Rather than integrating refugees, Jordan has until recently kept them largely confined along the Syrian border. 
At first, this left refugees with little access to education or labor markets. 
But, thanks to concerted efforts by the international community and funding from the EU, there are now several programs in place to stimulate investment, encourage companies to hire refugees, and create special economic zones on the border. 
The idea is that by spurring economic activity on the border, Syrian refugee communities and businesses can start to develop the capacity needed to rebuild post-war Syria when the time comes. 
It is too soon to evaluate the full impact of these measures, but they are promising nonetheless. 
But Europe, for its part, must do far more than provide funding. 
The failure of European governments to manage the sudden influx of refugees in 2015 has fueled populism and intolerance in previously open societies. 
True, this failure was partly due to genuine constraints, particularly in health-care and education systems. 
But it also reflected poor preparation, a lack of coordination, and insufficient investment. 
The refugee crisis is fundamentally a systemic challenge, because developments in one country can affect many other countries. 
As such, the crisis demands an EU-level and, indeed, a global response. 
Fortunately, for the first time since Syria’s civil war began, there is hope that the EU might muster an effective joint approach to the problem. 
In a wide-ranging speech at the Sorbonne in September, French President Emmanuel Macron injected new energy into EU policymaking in this area. 
And, inspired by the Jordanian model, EU policymakers can now begin to develop a more coherent, evidence-based migration policy. 
Of course, much will depend on Germany. 
One hopes that its leaders will not let whipped-up sentiments about migration torpedo a coalition agreement. 
They must recognize that German leadership in the EU and on the world stage is crucial for managing the migration challenge, not least in Germany itself. 

A Better Year for Migrants? 
DUBLIN – The Mediterranean migration crisis has delivered two critical lessons. 
First, Europe and the international community have grossly inadequate systems for protecting vulnerable migrants. 
Second, in the absence of such systems, populist leaders will prey on fear to gain political support, undermining the liberal, tolerant societies that have taken 70 years of hard work to build. 
That is why vigorous action at the European and global levels is essential this year. 
In September, United Nations Secretary-General Ban Ki-moon will convene an extraordinary summit dedicated to building a fair global system for protecting refugees and vulnerable migrants. 
One hopes that countries will come prepared to make tangible, enduring commitments. 
Such commitments were sorely lacking in 2015. 
Indeed, the international community could have blunted last year’s crisis by providing even modest support for the three frontline countries – Turkey, Lebanon, and Jordan – which together host some four million Syrian refugees. 
With only around €10 billion ($10.8 billion), these countries could have provided better housing, food, and education for refugees, thereby reducing the incentive to flee to Europe. 
That failure could end up costing Germany alone upwards of €21 billion annually for years to come. 
But the financial implications of the crisis pale in comparison to the human and political costs. 
More than a million people risked their lives crossing the Mediterranean last year, and then endured grueling journeys through the Balkans. 
Almost 4,000 people died on the way, and many European countries turned their backs on those who survived, refusing them safe haven. 
Cynical political leaders ruthlessly capitalized on popular anxiety by promoting an odious nationalist vision that either ignores or distorts real-life experiences with immigration. 
In the United States, for example, not one of the 780,000 refugees resettled since September 11, 2001, has executed a terrorist attack. 
Meanwhile, immigrants typically pay more in taxes than they receive in benefits. 
Nonetheless, extremist forces are dangerously close to taking political power in some European states, and are gaining traction even in formerly liberal bastions. 
Anti-migrant parties already are in power in Hungary and Poland. 
Their success is compelling mainstream parties to adopt anti-migrant policies as well. 
All of this has seriously undermined European cooperation. 
The EU’s program to process the million refugees who arrived on its shores has succeeded in “relocating” a mere 190 of them. 
Checks at the borders of six countries within the Schengen Area have been reinstituted, at least temporarily. 
To the rest of the world, the EU appears chauvinistic and inept. 
Of course, the crisis is not solely for Europe to solve; responsibility is not defined by proximity. 
But the EU might now face an existential threat, which it can overcome only with a strong show of solidarity and global leadership. 
That is why its member states must take the lead in proposing solutions. 
The most urgent priority is to create safe and legal paths for refugees to reach Europe. 
This does not imply that every vulnerable migrant must be accepted. 
But the EU should be more systematically generous in determining how many to admit, and it should implement organized ways to facilitate their entry. 
Such a system would protect migrants and safeguard Europe (by enabling it to vet applicants fully). 
Beyond reducing the incentive for asylum-seekers to risk their lives and life savings to cross the Mediterranean, such an approach would show solidarity with the frontline countries, which will continue to host most of the refugees. 
Equally important, it would put pressure on the rest of the international community to contribute. 
That brings us to the second priority for 2016: building a robust global system to protect refugees and other vulnerable migrants. 
This requires, first and foremost, agreement by more countries to accept refugees. 
In recent years, the UN Refugee Agency has been able to resettle fewer than 75,000 of more than 20 million refugees annually. 
Millions end up in protracted displacement, spending an estimated 25 years, on average, stuck in limbo, unsure when they might return home. 
In 2016, developed countries should agree to accept a combined total approaching a million refugees annually, either through resettlement or by issuing humanitarian, student, labor, and other visas. 
With Canada alone saying that it will resettle 50,000 Syrian refugees this year, it is clear that this target is achievable. 
At the same time, the international community must support the integration of refugees in major host countries like Turkey, Kenya, Lebanon, and Jordan. 
As it stands, such countries receive just a fraction of the $3,000-5,000 per refugee required annually to provide adequate housing, food, health care, schooling, and job training during the first few years of displacement. 
And that does not account for the costs of building or upgrading infrastructure. 
Lebanon’s water-supply system, for example, is faltering under the strain of the massive influx of refugees. 
In exchange for funding, host countries should agree to integrate refugees fully into their schools, labor markets, and civic institutions. 
But integrating migrants effectively will be impossible unless European and other countries change how they perceive migrants. 
If migrants are viewed as a burden or, worse, a security threat, reactionary political forces will continue to gain ground, cutting off opportunities for newcomers and turning such fears into a self-fulfilling prophesy. 
If, however, host countries enthusiastically integrate migrants, everyone will benefit – including home countries (for example, through remittances). 
Last month in Paris, the international community proved that it could subordinate national self-interest to a greater global goal: confronting climate change. 
In 2016, the same thing must happen to forge a better system for protecting migrants. 
It is a matter of life and death for 20 million refugees and millions of other vulnerable migrants – and a profound test of the civic health of democratic societies worldwide. 

The Case for Surge Funding 
MUNICH – Important progress was made at the donors’ conference for Syrian refugees convened in London on February 4. 
But much more remains to be done. 
The international community is still vastly underestimating what is needed to support refugees, both inside and outside the borders of the European Union. 
To deal with the refugee crisis, while putting the EU’s largely unused AAA borrowing capacity to better use, requires a paradigm shift. 
Rather than scraping together insufficient funds year after year, it is time to engage in “surge funding.” 
Spending a large amount of money up front would be far more effective than spending the same amount over several years. 
Frontloading the spending would allow us to address the most dangerous consequences of the crisis – including anti-immigrant sentiment in receiving countries and despondency and marginalization among refugees – more effectively. 
Making large initial investments would help tip the economic, political, and social dynamics away from xenophobia and disaffection, and toward constructive outcomes that benefit refugees and the recipient countries alike. 
Surge funding has been used often to finance immunization campaigns. 
The International Finance Facility for Immunization (IFFIm), which borrows against future government contributions to immunization programs, has raised billions of dollars over the past several years to ensure that vaccination campaigns are successful as soon as possible. 
In the long run, this is more effective than spending the same amount of money in yearly installments. 
IFFIm provides a convincing precedent for the current crisis. 
A sudden large influx of refugees can cause panic that affects the general population, the authorities, and, most destructively, the refugees themselves. 
The panic breeds a false sense that refugees are a burden and a danger, resulting in expensive and counter-productive measures, like erecting fences and walls and concentrating refugees into camps, which in turn breeds frustration and desperation among the refugees. 
If the global community could fund large-scale, concentrated programs to address the problem, the general public and the refugees would be reassured. 
A surge in spending is needed both in Europe and in frontline states like Jordan, Lebanon and Turkey. 
The necessary investments include an overhaul of the EU’s asylum policy and improvement of its border controls. 
In frontline states, money is needed to provide refugees with formal employment opportunities, health care, and education. 
If life for refugees is made tolerable in frontline countries, and they believe that an orderly process is in place for gaining entry to Europe, they are more likely to wait their turn, rather than rushing to Europe and overwhelming the system. 
Similarly, if the refugee crisis can be brought under control, the panic will subside and the European public will be less prone to support anti-migrant policies. 
Jordan could provide a test case. 
A country of 9.5 million people, it is providing refuge to 2.9 million non-citizens, including 1.265 million Syrians, and facing the influx of additional Syrians uprooted by Russian bombing. 
A combination of massive upfront direct financial assistance, enhanced trade preferences, and temporary debt relief is needed. 
A successful program for Jordan could demonstrate the international community’s ability to bring the refugee crisis under control, opening the way to similar programs for other frontline states, adjusted on a case-by-case basis, depending on local conditions. 
The approach suggested here would cost more than EU member states can afford out of current budgets. 
A minimum of €40 billion ($45 billion) needs to be spent annually in the next 3-5 years; but even larger amounts would be justified to bring the migration crisis under control. 
In fact, so far, lack of adequate financing is the main obstacle to implementation of successful programs in any of the frontline countries, particularly in Turkey. 
While Germany has an unallocated budget surplus of €6 billion ($6.8 billion), other EU countries are running deficits. 
German Finance Minister Wolfgang Schäuble has proposed a pan-European fuel tax, but that would demand either unanimous agreement or a coalition of the willing. 
This enhances the merits of having recourse to the EU’s largely unused AAA credit. 
The migration crisis poses an existential threat to the EU. 
Indeed, with the north pitted against the south, and the east confronting the west, the EU is coming apart at the seams. 
When should the EU’s AAA credit be mobilized if not at a moment when the EU is in mortal danger? 
It is not as if there is no precedent for this approach; throughout history, governments have issued bonds in response to national emergencies. 
Tapping the AAA credit of the EU, rather than taxing consumption, has the additional advantage of providing much-needed economic stimulus for Europe. 
The amounts involved are large enough to be of macroeconomic significance, especially as they would be spent almost immediately and produce a multiplier effect. 
A growing economy would make it much easier to absorb immigrants, whether refugees or economic migrants. 
In short, surge funding is a win-win initiative, and it must be undertaken urgently. 

Refugee Doctors for Refugee Health 
TORONTO – Syrian refugees are often portrayed as an unwelcome drain on the communities to which they relocate, especially with regard to health care. 
But, for those escaping Syria’s civil war, ignorance of their plight is overshadowed only by the reality of their needs – and the diversity of their expertise. 
Although refugees do bring with them extensive health-care issues, they also bring years of experience in the medical profession that, if put to proper use, could be a boon to the communities that receive them, not to mention for other refugees. 
One of the biggest challenges for refugees anywhere is finding a doctor. 
In many host countries, inadequate treatment is the result of xenophobia, language barriers, or insufficient supply of medical staff. 
This is especially true for Syrians, who are scattered across the Middle East, North Africa, Europe, and North America. 
But many Syrian refugees are also highly educated. 
As they settle in places far from the hospitals and clinics in which they once practiced, Syria’s doctors simply want to get back to work. 
Isn’t it time that they did? 
In the United Kingdom, efforts are underway to make that happen. 
The National Health Service and the British Medical Association have begun retraining refugee doctors, including many from Syria and Afghanistan, to fill the ranks of depleted clinics in UK. 
Through English-language training, postgraduate study, and professional registration, programs in London, Lincolnshire, and Scotland aim to reintegrate refugee doctors into the medical profession. 
These efforts should be lauded. 
Retraining refugee doctors is not only a moral exercise; it also makes practical sense. 
Displaced doctors are better able to treat refugee patients’ ailments. 
Refugee doctors can also help ensure that the flood of new patients does not overwhelm host countries’ health-care systems. 
And retraining a refugee doctor is cheaper and faster than educating a new medical student. 
With approximately 600 refugee doctors living in Britain, the well of untapped talent in the UK is deep. 
Moreover, refugee patients benefit when treated by doctors who understand their circumstances, including the enormous psychosocial stress that displacement causes. 
Translators can help, but they are not always available in crisis settings. 
Doctors who understand refugees emotionally and culturally are better equipped to put patients at ease. 
Britain is not alone in recognizing the potential of refugee doctors. 
In Turkey, Syrian doctors and nurses have received training to help them become familiar with the Turkish health-care system. 
The goal is to enable qualified Syrian professionals to treat refugee patients, thus mitigating the language and logistical barriers to effective, accessible, and dignified care. 
But other host countries have not been as forward thinking. 
In Lebanon and Jordan, for example, where more than 1.6 million registered Syrian refugees currently live, efforts to allow Syrian doctors to care for refugee patients have been criminalized. 
Doctors ignoring the law face arrest and possible deportation. 
Even Canada, a country that generally welcomes diversity and values human rights, is behind the curve on innovative approaches to refugee health. 
Syrian doctors face “many, many years” of retraining in Canada, and often struggle to fund the high cost of recertification. 
Amid this resistance, refugee health care should be viewed as more than a set of logistical and operational challenges, but also as an inherently political process. 
Two dimensions of the issue must be addressed if refugee patients are ever to be properly cared for, and refugee doctors properly deployed. 
For starters, refugee doctors may struggle to be accepted by their local colleagues, owing to political or personal bias. 
Recognizing the potential for local resistance to integration programs for refugee doctors is essential to develop proactive policies that ensure success. 
Moreover, refugee doctors must be trained to address the diversity of medical needs they will face in their adoptive homes. 
For example, in many countries where refugees originate, lesbian, gay, bisexual, transgender, and intersex (LGBTI) health concerns remain taboo, even among medical professionals. 
For refugee doctors relocating to countries where LGBTI health and rights are recognized, integration curricula should include training on LGBTI health, particularly the rights of exceptionally vulnerable LGBTI refugees. 
Improving health for LGBTI refugees can serve as a foundation for a more open society. 
The refugee crisis that has engulfed Syria is just one ripple in a tidal wave of global displacement. 
Around the world, some 22.5 million people are officially registered as refugees, and nearly 66 million have been forced from their homes. 
These numbers are unlikely to fall in the near term, as calamities caused by climate change, and by human and natural disasters, continue to push even more people from their communities. 
Every one of these future refugees will need access, at some point, to medical professionals trained in refugee health, diversity, and inclusion. 
Empowering refugee doctors to become part of the solution will help overcome entrenched dogmas toward refugee diversity and social identities. 
But, just as important, it will mark a crucial step forward in ensuring more inclusive refugee health. 

Turning Crisis into Success in Germany 
BERLIN – According to an early May opinion poll by ARD DeutschlandTREND, the far-right Alternative for Germany (AfD) party’s popular support now stands at 15%, up from around 5% a year ago. 
Can this dangerous trend be reversed? 
The AfD’s rise since last summer has been the direct result of the surge in the number of refugees – close to one million in 2015 – entering Germany. 
After all, the party has made opposition to admitting refugees the centerpiece of its platform, which also includes antagonism toward the European Union and a very conservative social program, to which an openly sectarian religious component was added at a May 3 party convention in Stuttgart. 
Yet Germany’s broad political center continues to hold. 
The center-right Christian Democrats and their allies still have the support of about 33% of the electorate; the center-left Social Democrats have 20% support; and the Green Party is backed by some 13%. 
Even the Free Democrats have clawed their way back from hard times, and now have about 6% support. 
In short, moderate political forces still enjoy the support of more than 70% of Germans – in contrast with, say, Austria, where the far right was able to gain 36% in the first round of presidential elections. 
Even Germany’s Left Party, which has 8% support and is not traditionally defined as moderate, has a more moderate “eastern” wing and a more radical “western” wing. 
The enduring strength of Germany’s political center probably reflects the country’s remarkable economic success, which it has sustained for more than a decade, even as most of the rest of Europe has faced serious challenges. 
It owes this outcome partly to the euro, which has benefited German exports and growth far more than most of its citizens realize. 
If Germany still had – or had reverted to – the Deutschmark, employment and growth would have been hampered by a much stronger currency, on a trade-weighted basis, in the wake of the global economic crisis. 
More fundamentally, Germany has benefited from the extraordinary culture of consensus that it developed in the post-World War II period, with social partners and political parties showing a remarkable ability to compromise. 
A fairly wide territorial distribution of economic activity, together with strong local governments and civil-society organizations, has contributed further to a general sense of contentment – a sense that is absent in much of the world nowadays. 
Now, however, as the refugee crisis fuels populism and political polarization, the foundations of Germany’s success appear to be under threat. 
Indeed, Germany’s future could play out in two ways. 
The world has a large stake in which scenario prevails. 
The first scenario is bleak: Germany fails to integrate the refugees socially and economically, political discontent surges, and the newcomers become increasingly frustrated with their plight. 
Any steps they take to vent that frustration embolden right-wing populists and could lead to violence from both sides. 
If, in the worst case, a terrorist attack were to occur – especially one that could, in some way, be linked to refugees – the nationalist-populist reaction would be powerful, potentially weakening the very fabric of German society. 
Anti-Muslim elements of that reaction would become fodder for religious extremists in the Middle East, by seeming to confirm their narrative of inevitable religious and civilizational conflict. 
The second scenario turns the refugee challenge into another success. 
Integration of the refugees proceeds reasonably quickly, and Germany resumes its path of moderate politics, social solidarity, and economic growth. 
In the long term, the refugees could actually make a strong contribution to German prosperity. 
Despite the AfD’s rise, there is plenty of reason to remain optimistic. 
Late last year, thousands of Germans gathered at train stations and on the streets to welcome the first groups of refugees as they arrived. 
Throughout much of the country, local communities have mobilized to provide housing, language training, and social guidance for refugees, who have never experienced anything like a wealthy democratic society. 
Tens of thousands of teenage students are acting as “facilitating partners” to their refugee classmates who don’t speak German, many of whom arrived in the country without their parents. 
Whether this approach will endure, and bring about successful integration, will depend on both the Germans and the refugees. 
The refugees will have to accept the rule of German law, even if in some cases it does not make sense to them. 
Both the new arrivals and German residents will need to balance respect for diversity in lifestyles with the understanding that, in a secular democracy, the same laws apply to everyone. 
Those laws must protect private religious and cultural space for all, without allowing that space to be used as an excuse for infringing on the basic human and democratic rights of every individual. 
The large existing community of former immigrants could be helpful in articulating and implementing that delicate balance, imperfect as it may have been at times. 
The successful integration of the refugees will also depend on economic growth. 
Indeed, this amounts to one more argument for Germany to use its fiscal space to increase investment and implement growth-enhancing policies. 
While the demographic inflow could become a large net benefit for Germany in the long run, it remains a burden in the short term. 
That is why there is also a need for some burden-sharing by European countries, as well as efforts to achieve a marked slowdown in the refugee flow, while upholding the human rights of those fleeing conflict and death. 
If Germany can integrate the refugees, it will send a powerful message to nihilists and extremists everywhere. 
It would show that, with a strong economy, active civil society, and the rule of secular law, religious differences, cultural tensions, and labor-market challenges can be overcome. 
This is a message that the world needs now more than ever. 

Connectivity and the Modern Refugee 
GENEVA – They were fresh off the boat, the group of refugees I met this time last year. 
They had fled their homes in Syria, traveled halfway across Turkey, and placed their lives in the hands of a gang of people smugglers promising to get them to Europe. 
Despite all that they had endured, one of them told me, upon landing on the Greek island of Lesbos, that they had panicked only once during that perilous voyage: when their mobile phone signal disappeared. 
That signal, however weak, had been the refugees’ only link to the outside world. 
When it vanished – when they truly had no way to contact family, friends, or anyone who could help them – they were gripped by a sense of isolation and fear more intense than they had ever experienced. 
It is a feeling no one should have to endure ever again. 
For most people in the industrialized world – and everyone at this year’s World Economic Forum Annual Meeting in Davos – connectivity is a fact of life. 
We have mobile phones, tablets, and computers, all linked to superfast – and accelerating – broadband networks. 
Add to that an ever-increasing number of social-media platforms, and we are always in contact with one another. 
Information flows so freely and relentlessly, in fact, that we tend to worry more about overload than scarcity. 
For refugees, life is very different. 
Globally, refugees are 50% less likely than the general population to have an Internet-enabled phone, and 29% of refugee households have no phone at all. 
Though 90% of refugees located in urban environments live in places with 2G or 3G coverage, about a fifth of those living in rural areas have no connectivity at all. 
This is a big deal. 
For refugees, connectivity is not a luxury, but a lifeline – one that has become all the more important at a time when sentiment in many host countries is turning against them (even as plenty of grassroots movements and communities remain eager to help). 
In some cases, technology can do what hostile politicians and reluctant governments will not: give refugees a chance to rebuild their lives. 
Connectivity means, at the most fundamental level, being able to remain in contact with family members left behind, some of whom may still be at risk of violence or persecution. 
Connectivity also provides access to important and up-to-date information about new threats, such as disease outbreaks or the spread of conflict, or the availability of necessities like food and water, clothing, shelter, and health care. 
In the longer term, connectivity can support online education and training that equips refugees for the workforce. 
It can help them find employment, and link them with legal or other crucial services. 
And it can enable them to communicate more easily with organizations like the United Nations Refugee Agency (UNHCR), telling us what they need most, what we’re getting right, and where we need to make changes. 
In a world of unlimited data, there is little stopping us from providing refugees with this lifesaving connectivity. 
If we are smart about how we design digital aid systems, we will have the opportunity to broaden our partnerships to hundreds, if not thousands, of organizations worldwide that are willing to help refugees. 
Realizing this potential requires overcoming two key challenges. 
First, we must figure out how to improve connectivity for refugees today. 
Second, we must position ourselves to use technology more effectively tomorrow. 
Overcoming these challenges will require, first and foremost, that governments improve access, including by investing in the necessary digital infrastructure. 
It will also require contributions from the private sector, particularly telecommunications providers, which can lend their technological expertise, global reach, and spending power to help ensure access to affordable phones and computers, inexpensive data plans, and training in digital literacy. 
Success on these fronts will require using microwave links, satellite dishes, unused television spectrum, drones, and balloons to improve wireless Internet access and capabilities in locations containing many refugees. 
Because the vast majority of today’s refugees are in developing countries, improved connectivity would carry far-reaching benefits for the host communities. 
In 2014, my colleagues encountered a young Syrian man called Hany, who had fled the city of Homs with his family and found refuge in a camp in Lebanon’s Beka’a Valley. 
A poet, rapper, and photographer, Hany was such a force of nature that it took my colleagues a while to realize he had a serious eye condition and could see only a few inches in front of his face. 
His mobile phone was utterly essential. 
It enabled him to learn English, take his first photographs, and call for help when he needed it. 
That same phone rang one day with the news that the city of Regina, Canada, was to be his new home. 
As he put it, “my phone is my little world.” 
For refugees like Hany, staying connected is not only a matter of survival; it also provides a route to self-reliance and independence, boosting their own wellbeing and enabling them to contribute to the communities that host them. 
Last year, the World Economic Forum launched a program called Internet For All. 
We must ensure that “All” includes refugees. 

A New Deal for Refugees 
NEW YORK – Today, there are 21.3 million refugees worldwide. 
That is 21.3 million people who have been driven from their countries by fear of violence or oppression based on race, religion, nationality, politics, or identity. 
Many live in overcrowded and unsafe camps, often lacking basic necessities, as they wait for some country to grant them asylum. 
But even asylum is inadequate to enable refugees to rebuild their lives. 
Their legal status as refugees helps to protect their human rights in the short term, but it does not entitle them to economic support to meet their longer-term needs. 
It is time to develop a system that recognizes refugees’ special economic status, in addition to their special legal status. 
The underpinnings of such a system are already in place. 
The World Bank was established in response to the last historic, world-shaking refugee crisis, during World War II. 
After the war, dozens of countries created the Bank not simply to rebuild Europe, but also to address the needs of those who had been displaced. 
In the decades since, the World Bank has helped to finance international development and poverty reduction. 
And it remains the best platform for quickly and effectively raising money to address pressing global needs. 
Indeed, it is already working to address the current refugee crisis. 
The Bank’s Concessional Financing Facility (CFF) aims to provide $3-4 billion in low-cost loans to the national governments of Jordan and Lebanon, which have experienced 10% and 25% population growth, respectively, owing to the influx of Syrian refugees. 
As part of the CFF program, the World Bank is working to raise $1 billion from donors to finance an interest-rate reduction from the level typical for middle-income countries (which would apply to Jordan and Lebanon) to a poor-country rate. 
But this approach – in which support is channeled through states and delivered in the form of loans – is fundamentally flawed. 
The countries on the front line of the refugee crisis face serious economic strain. 
(The combined GDP of the three main host countries – Jordan, Lebanon, and Turkey – is less than 6% of the United States’ GDP.) 
In many cases, they are already in debt, and struggling to fund their own investment priorities, such as education, infrastructure, and security. 
It makes little sense to force host countries further into debt, in order to support refugee populations. 
If nothing else, this can cause local populations to view refugees as a financial burden and a drain on national resources. 
That is not conducive to the integration, much less prosperity, of refugees. 
To avoid this perception – and to give refugees real opportunities to thrive – requires grants, not loans, and they need to be delivered not through governments, but directly to programs for refugee education, infrastructure, health care, and employment. 
And the grants need to be sustained – so-called “resilience funding.” 
Make no mistake: long-term solutions are absolutely critical. 
Many of today’s refugees have already been displaced for decades, with new generations – both kids and grandkids – born and raised in sprawling refugee camps like Kenya’s Dadaab. 
A dedicated entity delivering long-term economic support is vital to improve the lot of some of the world’s most disadvantaged people. 
Such an entity could function within the World Bank’s existing International Development Association (IDA) grant-making stream, which delivers funding aimed at promoting equality, economic growth, job creation, and better living conditions. 
All that is needed is to enable such funding to go not just to poor states, but also to poor stateless refugees. 
Once refugees are made eligible for IDA grants, the World Bank could quickly raise funds – as much as $5 billion annually – by issuing bonds, using its recently awarded triple-A credit rating. 
Over time, it would repay its investors with funds collected through special IDA replenishment calls. 
One critical question remains: Who is accountable for the funds delivered to refugees? 
When the Bank delivers funds to a government, it is clear who is accountable. 
In the case of refugees, however, other host-country organizations would have to fulfill this role. 
But here, again, the solution would not demand radical change. 
It would not be difficult for the World Bank to appoint a lean secretariat to formalize a network of the most effective public, private, and non-governmental organizations on the ground to receive and allocate the grants for refugees. 
Such a network could include agencies within states, such as ministries of education throughout the Middle East, where a billion-dollar funding gap means that one million refugee children risk being forced to miss yet another school year. 
It could also include United Nations agencies like the Food and Agriculture Organization, which has piloted refugee cash-for-work employment programs that are helping to rehabilitate much-needed agricultural infrastructure in host countries, while empowering refugees economically. 
Finally, the network could include innovative start-ups. 
BanQu is an organization using blockchain encryption to support an “economic identity platform” – a universal, borderless virtual identity card that could keep track of vital information for all 21.3 million refugees, including accounts of skills training, employment and education history, lists of past financial transactions, and health records. 
Incoming UN Secretary-General António Guterres, while serving as the UN High Commissioner for Refugees, referred to the system he administered as “financially broke.” 
He was right. 
Rather than creating opportunities for refugees to settle and succeed in new countries, the system meant to address the current crisis is hampering progress, generating discontent, and compounding the pressure on already-strained governments. 
Now is the time to build a new system on the foundations of the old – one that creates real opportunities for refugees to thrive. 

Regime Change in the Arab World 
Four years into a disastrous military adventure in Iraq and with the global war on terror against ill-defined forces of darkness still inconclusive, the collapse of America’s grand strategy has exposed how ill-conceived was its simplistic recipe for democratic change in the Arab world. 
The paradox is that America might be winning the war for Arab democracy, even if by default, but cannot reap the benefits, simply because the emerging pattern of Islamic pluralistic politics does not coincide with the West’s brand of secular liberal democracy. 
The shift of the Arab world’s mainstream fundamentalist movements to democratic politics is tantamount to a repudiation of the jihadist project and of al-Qaeda’s apocalyptic strategies. 
The failure of jihadism is paving the way for a potentially promising restructuring of Islamic politics, but the West either doesn’t recognize the changes or is hostile to them. 
The rise of Islamists throughout the region as the sole power capable of exploiting the opportunities of free elections – Hamas’ victory in Palestine and the Muslim Brotherhood’s spectacular gains in the 2005 Egyptian elections are but the most noteworthy – the ascendancy to regional hegemony of Shiite Iran, and the sense among Arab rulers that the embattled Bush administration is running out of steam have all combined to stall the promising drive to political reform in the region. 
The US retreated from its democratic designs once it realized that Arab democracy is not being identified with the liberal secular opposition, a political force that practically does not exist in the Arab world, but with Islamic radicals that are seek to repudiate America’s policies and the cause of reconciliation with Israel. 
That this should be so has of course much to do with America’s traditional policy of sustaining the Arab world’s pro-Western dictators. 
But the notion that the genii of democratization can now be squeezed back into the bottle is a self-serving fantasy. 
The move of mainstream Islamists, like the Muslim Brotherhood in Egypt, the Islamic Action Front in Jordan, Hamas in Palestine, the Renaissance Party in Tunisia, or the Party of Justice and Development in Morocco, away from jihadism to political participation started well before America’s democracy promotion campaign, and is not an attempt to please the West. 
It is a genuine response to the needs and demands of their supporters. 
Extinguishing Arab democracy, as President Mubarak of Egypt is now trying to do through his recent ban on political parties that are based on religion, will bring neither stability nor peace to the Middle East. 
It will only exacerbate the rage of the masses at the West’s hypocrisy, now expressed in a form of democratic charlatanry. 
The stability of those Arab regimes that are not sustained by a democratic consensus is bound to be fragile and misleading. 
Just as Islamic democracy is the natural reaction to Arab secular autocracy and to the West’s collaboration with it, so will the destruction of political Islam usher in even more extreme options with movements like Hamas going back to social work and terror, and with al-Qaeda making inroads into Islamic societies. 
Both the West and the Arab rulers need to realize that the tense equation between the incumbent regimes and political Islam is not necessarily a zero-sum game. 
This has been learned the hard way by Algerian President Bouteflika who, through his Charter for Peace and National Reconciliation of February 2006, brought an end to a long and bloody civil war, the origins of which lay in the violent cancellation by the military of the Islamist Front’s (FIS) electoral victory in 1991. 
It is in this context that the historic compromise between the religious (Hamas) and the secular (Fatah) to form a national unity government for Palestine might have established a new paradigm for the future of regime change in the Arab world. 
The concept of national unity governments might, indeed, be the formula that makes it possible to hold together the political families in the Arab world. 
King Muhammad VI of Morocco has already indicated that the Crown would consider a “historic compromise” with the Islamists should they, as predicted, win the elections in June 2007. 
Such compromises may be the only way to stem the slide to civil war, and possibly also co-opt the Islamists into a settlement with Israel and a rapprochement to the West. 
Engaging political Islam will need to be the central part of any successful strategy for the Middle East. 
Instead of sticking to doomsday prophecies or to categorical perspectives that prevent an understanding of the complex fabric of Islamic movements, the West needs to keep the pressure on the incumbent regimes to stop circumventing political reform. 
As Algeria in the 1990’s showed, exclusion of the Islamists is a recipe for disaster, while inclusion can breed moderation. 
The practical necessities of politics are bound to dilute ideological purity. 
The Mecca agreement that brought forth the unity government in Palestine will inevitably temper Hamas’ radicalism, just as the regime’s avoidance in Jordan of an “Egyptian solution” to the Islamist challenge allowed the Islamic Action Front to contain within the movement many who would have been otherwise drawn into the jihadist orbit. 
The challenge is not how to destroy Islamic movements, but how to turn them away from revolutionary to reformist politics by granting them legitimate political space. 

Global Zero at Ground Zero 
MADRID – Since its launch in December 2008, Global Zero, the vision of a world without nuclear weapons, has run up against some formidable challenges. 
One is related to the readiness of the two major nuclear powers, Russia and the United States, to move from the stockpile reductions to which they agreed in the New START treaty to complete elimination of their nuclear arsenals. 
Others concern smaller nuclear powers’ willingness to go along, and whether reliable inspection, verification, and enforcement systems can be put in place. 
But these issues are not the real problem. 
Although Russia and the US possess roughly 90% of the world’s nuclear warheads, their nuclear capabilities are less of a threat than is the danger of proliferation. 
It is this fear of a fast-growing number of nuclear-armed states, not the fine balancing of the US and Russian nuclear arsenals, that the case for Global Zero must address. 
Indeed, addressing the underlying security concerns that fuel nuclear competition in regional trouble spots is more important to the credibility of Global Zero’s goal of “a world without nuclear weapons” than is encouraging exemplary behavior by the two major nuclear powers. 
After all, North Korea, India, Pakistan, Iran, and Israel might not be particularly impressed by a reduction in the US and Russian nuclear-weapons stockpiles from gross overkill to merely mild overkill. 
There is a stark lack of synchrony between the (admittedly qualified) improvement in the two major nuclear powers’ bilateral relations and conditions in volatile regions around the world. 
This gap is bound to affect negatively the processes of nuclear disarmament that are now being envisaged, for these states’ flirtation with nuclear weapons is not just a quest for prestige or status; it is an attempt to counter the conventional superiority of hostile neighbors – or, as with Iran and North Korea, of the US itself. 
Consider Pakistan, for which repeated defeat at the hands of its sworn enemy, India, in conventional wars has been the catalyst for its readiness “to eat grass,” as Zulfikar Ali Bhutto famously put it, in order to counter India’s conventional superiority and nuclear capabilities. 
Today, Pakistan possesses more nuclear warheads than India does. 
To get to zero in this region, the conflict over Kashmir must be resolved, and India must cease being perceived by Pakistan as a threat. 
Ironically, the Russian case is no different from that of Pakistan, Iran, or North Korea. 
Notwithstanding the undeniable progress so far in Russia-US nuclear talks, the task of minimization, let alone elimination, of nuclear weapons by the Russians will depend on a willingness to address the Kremlin’s key security concern: its conventional military inferiority vis-à-vis the West. 
Meanwhile, Israel’s genuine, if arguably exaggerated, existential anxiety helps to explain its strategy of nuclear opacity. 
The prevailing perception in Israel is that of being surrounded by formidable non-nuclear threats, and dangerously weakened by the poor capacity of the state’s domestic front to sustain a long conventional war. 
A country that in the summer of 2006 had to send a million of its citizens to underground shelters to escape massive ballistic warfare conducted by a non-state agent, Hezbollah, now faces an “Islamic Awakening” that it cannot fully fathom, and, with it, an ominous worsening of its strategic environment. 
Nor can Israel ignore the Middle East’s infamy as the only region in the world where chemical and biological weapons have been used since World War II. 
Iraq used them against Iran in the 1980’s, Egypt in Yemen in the 1960’s, and Iraq against its own Kurds. 
But the cause of nuclear disarmament could advance in December, when the conference for the establishment of a “Middle East Free of Nuclear Weapons and all other Weapons of mass Destruction” will be held in Helsinki (with, one hopes, all states in the region, including Israel and Iran, in attendance). 
But the initiative must avoid unworkable shortcuts. 
For example, the Arab position, which addresses Israel’s nuclear status outside the region’s broader security context, is the best recipe for failure. 
Instead, the conference needs to begin a dialogue among all stakeholders about their underlying security concerns. 
The lesson for the Middle East in the mutual reduction of nuclear stockpiles by the US and Russia is that genuine disarmament is impossible unless preceded by an improvement in inter-state relations. 
This is also the lesson of the other five world regions – Latin America, the South Pacific, Southeast Asia, Central Asia, and Africa – that have adopted treaties establishing zones free of nuclear weapons. 
Israel needs to understand that its nuclear strategy cannot be sustained forever, and that Iran’s challenge to its supposed nuclear monopoly is not an obsession exclusive to the Iranian leadership. 
A Middle East free of nuclear weapons certainly is preferable to a region with two or more nuclear-weapons states. 
But the Arab countries should assume that, unless and until they normalize their relations with Israel, effective engagement with it on such vital issues will remain impossible. 
Peace and regional de-nuclearization must go hand in hand. 
Israel’s then-prime minister, Shimon Peres, was not exactly opaque when he declared in December 1995 that, if given peace, Israel “would give up the atom.” 
But the current incumbent, Binyamin Netanyahu, cannot have it both ways, conditioning nuclear disarmament on peace while doing everything he can to stall the peace process. 

Big Tech Is a Big Problem 
CAMBRIDGE – Have the tech giants – Amazon, Apple, Facebook, Google, and Microsoft – grown too big, rich, and powerful for regulators and politicians ever to take them on? 
The international investment community seems to think so, at least if sky-high tech valuations are any indication. 
But while that might be good news for the tech oligarchs, whether it is good for the economy is far from clear. 
To be fair, the tech sector has been the United States’ economic pride and joy in recent decades, a seemingly endless wellspring of innovation. 
The speed and power of Google’s search engine is breathtaking, putting extraordinary knowledge at our fingertips. 
Internet telephony allows friends, relatives, and co-workers to interact face to face from halfway around the world, at very modest cost. 
Yet, despite all this innovation, the pace of productivity growth in the broader economy remains lackluster. 
Many economists describe the current situation as a “second Solow moment,” referring to legendary MIT economist Robert Solow’s famous 1987 remark: “You can see the computer age everywhere but in the productivity statistics.” 
There are many reasons for slow productivity growth, not least a decade of low investment in the wake of the 2008 global financial crisis. 
Still, one has to worry that the big five tech firms have become so dominant, so profitable, and so encompassing that it has become very difficult for startups to challenge them, thereby stifling innovation. 
Sure, once upon a time, upstarts Facebook and Google crushed Myspace and Yahoo. 
But that was before tech valuations soared into the stratosphere, giving entrenched players a massive funding advantage. 
Thanks to their deep pockets, Big Tech can gobble up or squelch any new firm that threatens core profit lines, no matter how indirectly. 
Of course, an intrepid young entrepreneur can still spurn a buyout, but that is easier said than done. 
Not many people are brave enough (or foolish enough) to turn down a billion dollars today in hopes of much more later. 
And there is the risk that the tech giants will use their vast armies of programmers to develop a nearly identical product, and their vast legal resources to defend it. 
Big Tech firms might argue that all the capital they pour into new products and services is pushing innovation. 
One suspects, however, that in many circumstances the intent is to nip potential competition in the bud. 
It is notable that Big Tech still derives most of its revenues from its companies’ core products – for example, the Apple iPhone, Microsoft Office, and the Google search engine. 
Thus, in practice, potentially disruptive new technologies are as likely to be buried as nourished. 
True, there are successes. 
The remarkable British artificial intelligence firm DeepMind, which Google purchased for $400 million in 2014, seems to be plowing ahead. 
DeepMind is famous for developing the first world champion-beating Go program, a signal moment that reputedly sparked the Chinese military to start an all-out effort to lead in AI. 
But, by and large, DeepMind seems to be the exception. 
The problem for regulators is that standard anti-monopoly frameworks do not apply in a world where the costs to consumers (mainly in the form of data and privacy) are thoroughly non-transparent. 
But that is a poor excuse for not challenging relatively obvious anti-competitive moves, such as when Facebook purchased Instagram (with its rapidly growing social network) or when Google bought its map competitor, Waze. 
Perhaps the most urgent intervention is to weaken Big Tech’s grip on our personal data, a grip that allows Google and Facebook to develop targeted advertising tools that are taking over the marketing business. 
European regulators are showing one possible path forward, even as US regulators continue to sit on their hands. 
The European Union’s new General Data Protection Regulation now requires firms to allow consumers – albeit only those in the EU – to port their data. 
In their important recent book Radical Markets, the economists Glen Weyl and Eric Posner go one step further and argue that Big Tech should have to pay for your data, instead of claiming it for their own use. 
Whereas the practicality of this remains to be seen, surely individual consumers should have a right to know which data of theirs is being collected and how it is being used. 
Of course, the US Congress and regulators need to rein in Big Tech in many other key areas as well. 
For example, Congress currently gives Internet-based firms a veritable free pass in promulgating fake news. 
Unless Big Tech platforms are held to standards that parallel those applied to print, radio, and television, in-depth reporting and fact-checking will remain dying arts. 
This is bad for both democracy and the economy. 
Regulators and politicians in the homeland of Big Tech need to wake up. 
The prosperity of the US has always depended on its ability to harness economic growth to technology-driven innovation. 
But right now Big Tech is as much a part of the problem as it is a part of the solution. 

Regulation Revisited 
NEW YORK – We are in the midst of the worst financial crisis since the 1930’s.ampnbsp;ampnbsp; The salient feature of the crisis is that it was not caused by some external shock like OPEC raising the price of oil.ampnbsp; 
It was generated by the financial system itself. 
This fact – a defect inherent in the system – contradicts the generally accepted theory that financial markets tend towards equilibrium and deviations from the equilibrium occur either in a random manner or are caused by some sudden external event to which markets have difficulty in adjusting.ampnbsp; 
The current approach to market regulation has been based on this theory but the severity and amplitude of the crisis proves convincingly that there is something fundamentally wrong with it. 
I have developed an alternative theory which holds that financial markets do not reflect the underlying conditions accurately.ampnbsp; 
They provide a picture that is always biased or distorted in some way or another.ampnbsp; 
More importantly, the distorted views held by market participants and expressed in market prices can, under certain circumstances, affect the so-called fundamentals that market prices are supposed to reflect.ampnbsp; 
I call this two-way circular connection between market prices and the underlying reality ‘reflexivity’.ampnbsp; 
I contend that financial markets are always reflexive and on occasion they can veer quite far away from the so-called equilibrium.ampnbsp; 
In other words, financial markets are prone to produce bubbles.ampnbsp; 
The current crisis originated in the subprime mortgage market.ampnbsp; 
The bursting of the US housing bubble acted as a detonator that exploded a much larger super-bubble that started developing in the 1980’s when market fundamentalism became the dominant creed.ampnbsp; 
That creed led to deregulation, globalization, and financial innovations based on the false assumption that markets tend towards equilibrium.ampnbsp; 
The house of cards has now collapsed.ampnbsp; 
With the bankruptcy of Lehman Brothers in September, 2008 the inconceivable happened: the financial system went into cardiac arrest.ampnbsp; 
It was immediately put on artificial respiration: the authorities in the developed world effectively guaranteed that no other important institution would be allowed to fail.ampnbsp; 
But countries at the periphery of the global financial system could not provide equally credible guarantees.ampnbsp; 
This precipitated capital flight from countries in Eastern Europe, Asia, and Latin America. 
All currencies fell against the dollar and the yen. 
Commodity prices dropped like a stone, and interest rates in emerging markets soared. 
The race to save the international financial system is still in progress. 
Even if it is successful, consumers, investors, and businesses are undergoing a traumatic experience whose full impact is yet to be felt. 
A deep recession is inevitable and the possibility of a depression cannot be ruled out. 
So what is to be done? 
Because financial markets are prone to create asset bubbles, regulators must accept responsibility for preventing them from growing too big. 
Until now, financial authorities have explicitly rejected that responsibility. 
Of course, it is impossible to prevent bubbles from forming, but it should be possible to keep them within tolerable bounds. 
This cannot be done simply by controlling the money supply. 
Regulators must also take into account credit conditions, because money and credit do not move in lockstep.ampnbsp; 
Markets have moods and biases, which need to be counterbalanced.ampnbsp; 
To control credit as distinct from money, additional tools must be employed – or, more accurately, reactivated, since they were used in the 1950’s and 1960’s. I refer to varying margin requirements and the minimal capital requirements of banks. 
Today’s sophisticated financial engineering can render the calculation of margin and capital requirements extremely difficult, if not impossible. 
Therefore new financial products must be registered and approved by the appropriate authorities before being sold. 
Counterbalancing the mood of the market requires judgment, and because regulators are human, they are bound to get it wrong. 
They have the advantage, however, of getting feedback from the market, which should enable them to correct their mistakes.ampnbsp; 
If a tightening of margin and minimum capital requirements does not deflate a bubble, regulators can tighten some more. 
But the process is not foolproof, because markets can also be wrong. 
The search for the optimum equilibrium is a never-ending process of trial and error. 
This cat-and-mouse game between regulators and market participants is already ongoing, but its true nature has not yet been acknowledged. 
Alan Greenspan, the former US Federal Reserve chairman, was a master of manipulation with his Delphic utterances, but instead of acknowledging what he was doing, he pretended that he was merely a passive observer. 
That is why asset bubbles could grow so large during his tenure. 
Because financial markets are global, regulations must also be international in scope.ampnbsp; 
In the current situation, the International Monetary Fund (IMF) has a new mission in life: to protect the periphery countries against the effects of storms that originate at the center, namely the US.ampnbsp; 
The US consumer can no longer serve as the motor of the world economy.ampnbsp; 
To avoid a global depression other countries must also stimulate their domestic economies.ampnbsp; 
But periphery countries without large export surpluses are not in a position to employ countercyclical policies.ampnbsp; 
It is up to the IMF to find ways to finance countercyclical fiscal deficits.ampnbsp; 
This could be done partly by enlisting sovereign wealth funds and partly by issuing Special Drawing Rights so that rich countries that can finance their own fiscal deficits could cede to poorer countries that cannot. 
While international regulation must be strengthened for the global financial system to survive we must also beware of going too far. ampnbsp;Markets are imperfect but regulations are even more so.ampnbsp; 
Regulators are not only human; they are also bureaucratic and subject to political influences.ampnbsp; 
Regulations should be kept to the minimum necessary to maintain stability. 

Reincarnating Evita 
If myths could come true through sheer willpower, Cristina Kirchner, the wife of Argentine President Néstor Kircher, would already be a 21st-century Evita Perón. 
But myths are a collective and mysterious construction. 
Otherwise, they would be for sale. 
In Argentina’s recent legislative election, Cristina Kirchner became a political force in her own right, making the Kirchners a ruling couple from now on – the second in the country’s history after Juan Perón and Evita. 
Mrs. Kirchner was elected Senator for the province of Buenos Aires, where much of the country’s economic might is based. 
It is also where most of Argentina’s poor live. 
True, the Kirchner name helped, and perhaps tradition also played a part. 
After all, Isabelita – a very small woman in every sense and Perón’s third wife after Evita – became the country’s first female President only because she was Perón’s widow. 
Cristina Kirchner, however, is no small woman. 
As a lawyer and legislator since 1989, she enjoys a privileged role in developing the strategies of her husband’s government. 
Unlike any first lady in Argentine history, she is capable and well prepared when discussing complex issues such as money laundering or labor law. 
Yet myth-making was not absent on the night of her victory. 
Newspapers depicted her against the background of the Argentinean flag, with her head bathed in a halo of sunshine. 
The image seemed to evoke the Virgin of Luján (the religious figure who attracts the most worshipers in Argentina), as well as that of the Evita who was sanctified by the poor while still alive. 
It also seemed like an illustration of her authorized biography, entitled Reina Cristina (“Queen Cristina”). 
Argentina is a country of strong women – more than one has become a myth that transcends cultures. 
The most recent is a women’s collective, the Madres y Abuelas de Plaza de Mayo (Mothers of the Plaza de Mayo). 
These brave women constituted the only opposition that dared to confront the savage military junta in the late 1970’s, demanding to know the fate of their “disappeared” children. 
The other myth is, of course, Evita. 
But Cristina is no Evita. 
In the Argentina of the 1940’s and 1950’s, Evita gathered multitudes. 
In Cristina’s victory, and that of her husband, there were no mass celebrations. 
Perhaps this is just politics in the era of modern media. 
In her speeches, Cristina modulates her voice as Evita did. 
But, where Evita’s voice was full of the “pathos” of poverty and injustice, of passion and tenderness, Cristina evokes more anger and defiance. 
No compassion is heard. 
Instead, there is defiance and self-affirmation: “They will not do that to me...” 
Evita was the wife who would intercede before her husband to defend her “children,” the crowds of “descamisados,” or shirtless people. 
Her powerful myth made her a sort of primal woman. 
The Mothers of the Plaza de Mayo became the same: they would put their motherhood above their lives. 
Defenseless against the state’s power, they were invincible because they had nothing else to lose. 
Cristina is partly a “wife” like Evita, but she doesn’t portray herself as a mother figure. 
She is a woman with her own ideas, who will fight for them in the political project that she shares with her husband. 
It is a very modern model, perhaps in transition to something else. 
But to what? 
Perhaps the key difference between Evita and Cristina is the fact that Evita, the “standard-bearer of the poor,” was an actress hunting for her destiny when she met Perón. 
Cristina dreamed and built her project together with her husband from the start, acquiring more visibility every day. 
That makes her akin to Hillary Clinton. 
Like the Clintons, the Kirchners knew from early on in their marriage that they wanted to reach the top, and the best way to do it, they concluded, was together. 
They are political partners. 
Cristina loves being compared to Hillary. 
Bill Clinton’s wife could run for president in 2008, and Cristina could do the same in 2007, if her husband doesn’t pursue re-election, or in 2011, if he does, according to government officials. 
If Néstor and Cristina alternate as heads of state, they could do so indefinitely, because Argentina’s constitution allows for only one consecutive reelection but no limit on the total number of electoral terms. 
Marriage and political partnership can, in any case, keep the tandem intact. 
Few doubt that Bill Clinton will be a powerful force in America if his wife becomes president. 
Kirchner, too, is not going to retire and put his slippers on in 2007 or 2011 if Cristina heads the government. 
This new “monarchical” presidential model deserves study by political scientists and jurists. 
But, as the Kirchners dream their mythic dreams, they will also be confronted with reality. 
And reality is even harder to shape than a myth. 

Europe’s Irrelevant Austerity Debate 
BRUSSELS – The most visible symptom of the crisis in the eurozone has been the high and variable risk premiums that its peripheral countries now must pay on their public debt. 
Moreover, an influential paper by the American economists Carmen Reinhart and Kenneth Rogoff suggests that economic growth falls sharply when a country’s public debt rises above 90% of GDP. 
So the policy prescription for solving the crisis seems simple: austerity. 
Fiscal deficits must be cut to reduce debt levels. 
But the debate about austerity and the cost of high public-debt levels misses a key point: Public debt owed to foreigners is different from debt owed to residents. 
Foreigners cannot vote for the higher taxes or lower expenditure needed to service the debt. 
Moreover, in the case of domestic debt, a higher interest rate or risk premium merely leads to more redistribution within the country (from taxpayers to bondholders). 
By contrast, in the case of debt owed to foreigners, higher interest rates lead to a welfare loss for the country as a whole, because the government must transfer resources abroad, which usually requires a combination of exchange-rate depreciation and a reduction in domestic expenditure. 
This distinction between foreign and domestic debt is particularly important in the context of the euro crisis, because eurozone countries cannot devalue to increase exports if this is required to service foreign debt. 
And the evidence confirms that the euro crisis is not really about sovereign debt, but about foreign debt. 
Indeed, only those countries that were running large current-account deficits before the crisis were affected by it. 
The case of Belgium is particularly instructive, because the risk premium on Belgian sovereign debt has remained modest throughout most of the euro crisis, although the country’s debt/GDP ratio is above the eurozone average, at around 100%, and it went without a government for more than a year. 
An even starker example of the crucial difference between foreign and domestic debt is provided by Japan, which has by far the highest debt/GDP ratio among OECD countries. 
So far, the country has not experienced a debt crisis, and interest rates remain exceptionally low, at around 1%. 
The reason is obvious: Japan has run sizeable current-account surpluses for decades, giving it more than sufficient domestic savings to absorb all of its public debt at home. 
What does this imply for Europe’s austerity debate? 
If foreign debt matters more than public debt, the key variable requiring adjustment is the external deficit, not the fiscal deficit. 
A country that has a balanced current account does not need any additional foreign capital. 
That is why risk premiums are continuing to fall in the eurozone, despite high political uncertainty in Italy and continuing large fiscal deficits elsewhere. 
The peripheral countries’ external deficits are falling rapidly, thus diminishing the need for foreign financing. 
The debate about austerity and the high cost of public debt is thus misleading on two accounts. 
First, it has often been pointed out that austerity can be self-defeating, because a reduction in the fiscal deficit can lead in the short run to an increase in the debt/GDP ratio if both the debt level and the multiplier are large. 
But austerity can never be self-defeating for the external adjustment. 
On the contrary, the larger the fall in domestic demand in response to a cut in government expenditure, the more imports will fall and the stronger the improvement in the current account – and thus ultimately the reduction in the risk premium – will be. 
Italy’s experience is enlightening: the large tax increases implemented by former Prime Minister Mario Monti’s technocratic government in 2012 had a higher-than-expected impact on demand. 
The economy is contracting so much that the debt/GDP ratio is actually increasing, and the actual deficit is improving only marginally, because government revenues are falling along with GDP. 
But a side effect of the fall in GDP is a strong decline in imports – and thus a strong improvement in the current account, which is why the risk premium continues to fall, despite the political turmoil unleashed by the country’s inconclusive recent election. 
Second, if foreign debt is the real problem, the escalating debate about the Reinhart/Rogoff results is irrelevant for the euro crisis. 
Countries that have their own currency, like the United Kingdom – and especially the United States, which can borrow from foreigners in dollars – do not face a direct financing constraint. 
For these countries, it matters whether history suggests that there is a strong threshold effect once public debt exceeds 90% of GDP. 
But the eurozone’s peripheral countries simply did not have a choice: they had to reduce their deficits, because the foreign capital on which their economies were so dependent was no longer available. 
But the reverse is also true: as soon as the current account swings to surplus, the pressure from financial markets abates. 
This is likely to happen soon. 
At this point, peripheral countries will regain their fiscal sovereignty – and will be able to ignore Reinhart and Rogoff’s warning at their own risk. 

Reinventing Economics 
NEW HAVEN – The widespread failure of economists to forecast the financial crisis that erupted in 2008 has much to do with faulty models. 
This lack of sound models meant that economic policymakers and central bankers received no warning of what was to come. 
As George Akerlof and I argue in our recent book Animal Spirits , the current financial crisis was driven by speculative bubbles in the housing market, the stock market, and energy and other commodities markets. 
Bubbles are caused by feedback loops: rising speculative prices encourage optimism, which encourages more buying, and hence further speculative price increases – until the crash comes. 
But you won’t find the word “bubble” in most economics treatises or textbooks. 
Likewise, a search of working papers produced by central banks and economics departments in recent years yields few instances of “bubbles” even being mentioned. 
Indeed, the idea that bubbles exist has become so disreputable in much of the economics and finance profession that bringing them up in an economics seminar is like bringing up astrology to a group of astronomers. 
The fundamental problem is that a generation of mainstream macroeconomic theorists has come to accept a theory that has an error at its very core: the axiom that people are fully rational. 
And as the statistician Leonard “Jimmie” Savage showed in 1954, if people follow certain axioms of rationality, they must behave as if they knew all the probabilities and did all the appropriate calculations. 
So economists assume that people do indeed use all publicly available information and know, or behave as if they knew, the probabilities of all conceivable future events. 
They are not influenced by anything but the facts, and probabilities are taken as facts. 
They update these probabilities as soon as new information becomes available, and so any change in their behavior must be attributable to their rational response to genuinely new information. 
And if economic actors are always rational, then no bubbles – irrational market responses – are allowed. 
But abundant psychological evidence has now shown that people do not satisfy Savage’s axioms of rationality. 
This is the core element of the behavioral economics revolution that has begun to sweep economics over the last decade or so. 
In fact, people almost never know the probabilities of future economic events. 
They live in a world where economic decisions are fundamentally ambiguous, because the future doesn’t seem to be a mere repetition of a quantifiable past. 
For many people, it always seems that “this time is different.” 
The work of Duke neuroscientists Scott Huettel and Michael Platt has shown, through functional magnetic resonance imaging experiments, that “decision making under ambiguity does not represent a special, more complex case of risky decision making; instead, these two forms of uncertainty are supported by distinct mechanisms.” 
In other words, different parts of the brain and emotional pathways are involved when ambiguity is present. 
Mathematical economist Donald J. Brown and psychologist Laurie R. Santos, both of Yale, are running experiments with human subjects to try to understand how human tolerance for ambiguity in economic decision-making varies over time. 
They theorize that “bull markets are characterized by ambiguity-seeking behavior and bear markets by ambiguity-avoiding behavior.” 
These behaviors are aspects of changing confidence, which we are only just beginning to understand. 
To be sure, the purely rational theory remains useful for many things. 
It can be applied with care in areas where the consequences of violating Savage’s axiom are not too severe. 
Economists have also been right to apply his theory to a range of microeconomic issues, such as why monopolists set higher prices. 
But the theory has been overextended. 
For example, the “Dynamic Stochastic General Equilibrium Model of the Euro Area,” developed by Frank Smets of the European Central Bank and Raf Wouters of the National Bank of Belgium, is very good at giving a precise list of external shocks that are presumed to drive the economy. 
But nowhere are bubbles modeled: the economy is assumed to do nothing more than respond in a completely rational way to these external shocks. 
Milton Friedman (Savage’s mentor and co-author) and Anna J. Schwartz, in their 1963 book A Monetary History of the United States , showed that monetary-policy anomalies – a prime example of an external shock – were a significant factor in the Great Depression of the 1930’s. Economists such as Barry Eichengreen, Jeffrey Sachs, and Ben Bernanke have helped us to understand that these anomalies were the result of individual central banks’ effort to stay on the gold standard, causing them to keep interest rates relatively high despite economic weakness. 
To some, this revelation represented a culminating event for economic theory. 
The worst economic crisis of the twentieth century was explained – and a way to correct it suggested – with a theory that does not rely on bubbles. 
Yet events like the Great Depression, as well as the recent crisis, will never be fully understood without understanding bubbles. 
The fact that monetary-policy mistakes were an important cause of the Great Depression does not mean that we completely understand that crisis, or that other crises (including the current one) fit that mold. 
In fact, the failure of economists’ models to forecast the current crisis will mark the beginning of their overhaul. 
This will happen as economists’ redirect their research efforts by listening to scientists with different expertise. 
Only then will monetary authorities gain a better understanding of when and how bubbles can derail an economy, and what can be done to prevent that outcome. 

Reinventing Energy 
NEW YORK ­– The world economy is being battered by sharply higher energy prices. 
While a few energy-exporting countries in the Middle East and elsewhere reap huge profits, the rest of the world is suffering as the price of oil has topped $110 per barrel and that of coal has doubled. 
Without plentiful and low-cost energy, every aspect of the global economy is threatened. 
For example, food prices are increasing alongside soaring oil prices, partly because of increased production costs, but also because farmland in the United States and elsewhere is being converted from food production to bio-fuel production. 
No quick fix exists for oil prices. 
Higher prices reflect basic conditions of supply and demand. 
The world economy – especially China, India, and elsewhere in Asia – has been growing rapidly, leading to a steep increase in global demand for energy, notably for electricity and transport. 
Yet global supplies of oil, natural gas, and coal cannot easily keep up, even with new discoveries. 
And, in many places, oil supplies are declining as old oil fields are depleted. 
Coal is in somewhat larger supply, and can be turned into liquid fuels for transport. 
Yet coal is an inadequate substitute, partly because of limited supplies, and partly because coal emits large amounts of carbon dioxide per unit of energy, and therefore is a dangerous source of man-made climate change. For developing countries to continue to enjoy rapid economic growth, and for rich countries to avoid a slump caused, it will be necessary to develop new energy technologies. 
Three objectives should be targeted: low-cost alternatives to fossil fuels, greater energy efficiency, and reduction of carbon-dioxide emissions. 
The most promising technology in the long term is solar power. 
The total solar radiation hitting the planet is about 1,000 times the world’s commercial energy use. 
This means that even a small part of the earth’s land surface, notably in desert regions, which receive massive solar radiation, can supply large amounts of the electricity for much of the rest of the world. 
For example, solar power plants in America’s Mohave Desert could supply more than half of the country’s electricity needs. 
Solar power plants in Northern Africa could supply power to Western Europe. 
And solar power plants in the Sahel of Africa, just south of the vast Sahara, could supply power to much of West, East, and Central Africa. 
Perhaps the single most promising development in terms of energy efficiency is “plug-in hybrid technology” for automobiles, which may be able to triple the fuel efficiency of new automobiles within the next decade. 
The idea is that automobiles would run mainly on batteries recharged each night on the electricity grid, with a gasoline-hybrid engine as a backup to the battery. 
General Motors might have an early version by 2010. 
The most important technology for the safe environmental use of coal is the capture and geological storage of carbon dioxide from coal-fired power plants. 
Such “carbon capture and sequestration,” or CCS, is urgently needed in the major coal-consuming countries, especially China, India, Australia, and the US. 
The key CCS technologies have already been developed; it is time to move from engineering blueprints to real demonstration power plants. 
For all of these promising technologies, governments should be investing in the science and high costs of early-stage testing. 
Without at least partial public financing, the uptake of these new technologies will be slow and uneven. 
Indeed, most major technologies that we now take for granted – airplanes, computers, the Internet, and new medicines, to name but a few – received crucial public financing in the early stages of development and deployment. 
It is shocking, and worrisome, that public financing remains slight, because these technologies’ success could translate into literally trillions of dollars of economic output. 
For example, according to the most recent data from the International Energy Agency, in 2006 the US government invested a meager $3 billion per year in energy research and development. 
In inflation-adjusted dollars, this represented a decline of roughly 40% since the early 1980’s, and now equals what the US spends on its military in just 1.5 days. 
The situation is even more discouraging when we look at the particulars. 
US government funding for renewable energy technologies (solar, wind, geothermal, ocean, and bio-energy) totaled a meager $239 million, or just three hours of defense spending. 
Spending on carbon capture and sequestration was just $67 million, while spending for energy efficiency of all types (buildings, transport, and industry) was $352 million. 
Of course, developing new energy technologies is not America’s responsibility alone. 
Global cooperation on energy technologies is needed both to increase supplies and to ensure that energy use is environmentally safe, especially to head off man-made climate change from the use of fossil fuels. 

Reinventing Europe 
BERLIN – Since 2009, when the financial crisis that started in America in 2008 shook the eurozone to its core, crisis management has become Europe’s new normal. 
Indeed, crisis has followed crisis in Europe, and this is unlikely to change anytime soon. 
Europe has had a financial crisis, a Greek crisis, a Ukraine crisis, and, since the late summer of 2015, a refugee crisis. 
And now, with the UK, one of the European Union’s strongest member states economically and militarily, holding a referendum on June 23 on whether to leave the EU (so-called Brexit), Europe could soon be facing a secession crisis. 
Indeed, a massive crisis of trust vis-à-vis Europe and its institutions has developed in most EU member states, fueling a revival of nationalist political parties and ideas and a slackening of European solidarity. 
The re-nationalization of Europe is accelerating, making this crisis the most dangerous of all, as it threatens disintegration from within. 
The EU’s political leaders – the heads of state and government of the member states and the leaders of the European Council and the European Commission – made a fateful decision in the wake of the financial crisis. 
They placed their trust in crisis-mode management, rather than developing a vision for Europe and a strategy to achieve it. 
Strategic management of Europe would have required making the necessary compromises, which no doubt would have entailed political risks in all member states. 
Instead, EU leaders chose to let the reality of the various crises do the work for them, placing their faith in the force of circumstances. 
But this approach, born of cowardice and misplaced cunning, had its price, too: To its citizens, an EU that moves only in crisis mode is the very image of incompetence, unworthy of their confidence – no longer the solution to the old continent’s problems, but simply another problem. 
After almost six decades of successful integration, Europe has become a large feature of everyday life – a political, economic, institutional, and legal reality. 
But all of Europe’s manifestations depend on the vitality of its underlying idea, of its soul. 
If this idea dies among Europe’s citizens and peoples, the EU will come to an end, not with a bang but with a long, torturous whimper. 
Things cannot go on like this; too much – the future of our continent in a world of rapid change – is at stake. 
A policy of baby steps is no longer enough. 
Without a renewed vision of Europe and an effective approach to dealing with crises, the continent’s new (and old) nationalists will continue to gain in strength and jeopardize the entire project of peaceful integration on the basis of the rule of law. 
The Brexit referendum will point the way, both for the UK and for the EU as a whole. 
It will be followed either by sighs of relief (as I hope) or a cataclysm that rocks the EU to its core and brings disaster to the UK. 
But, however the British decide, Europe’s numerous crises need to be addressed. 
The financial crisis is anything but over; it has only taken on a new political guise. 
Portugal, Spain, and Ireland have shown that democratic majorities are no longer willing to endure the cure-or-kill treatment of austerity politics. 
And the Greek crisis is coming to a boil again. 
The euro might not survive. 
Despite signs of a moderate economic recovery in the eurozone, the gap between Germany and most other eurozone countries is widening and deepening. 
There is no longer any talk of convergence in the monetary union, and there hasn’t been for a long time. 
And yet it is clear that if the euro fails, the whole European project will fail with it. 
Europe’s leaders know that the euro is still anything but crisis-proof, despite technical improvements achieved during the previous crisis. 
Unless a renewed grand compromise is reached between Germany and other eurozone countries, it never will be. 
In practice, this would mean reforming the eurozone on the basis of deeper political integration – obviously no mean feat. 
The same applies to the EU’s joint security, protection of external borders, and a reformed European refugee policy. 
Here, too, effective political leadership requires a renewed vision for a united Europe in the twenty-first century – what it can and must provide, how it should be constituted, and what institutions and powers it requires. 
There is no reason for Europe to fear crises. 
They set things in motion and provide an opportunity for the EU to move forward and become stronger, provided one faces them without fear of the accompanying political risks. 
Once the UK has spoken this June, Europe must give its answer – courageously and with a vision and real solutions. 
Nationalism is not the answer. 
Only genuine Europeans can ensure a peaceful, prosperous future for Europe. 

Reinventing Europe’s Financial Markets 
FRANKFURT – Despite great progress in integrating the European Union’s financial markets, barriers remain in key areas: retail services, bank mergers and acquisitions, and tax harmonization, to name but a few. 
Completing a single financial market would boost economic growth and prosperity in every member state. 
It would also broaden consumer choice, open a host of new investment opportunities, strengthen the EU banking sector, and make Europe a center for financial innovation. 
What will the single European financial market of the future look like? 
First, there needs to be a level playing field within the EU. 
Second, consolidation of Europe’s banking sector must be extended, with all protectionist barriers or other obstacles to mergers and acquisitions eliminated. 
Third, the European market place should be fully integrated into the global network of financial centers, particularly those in the United States and Asia. 
The EU’s Financial Services Action Plan, launched in 1999 and implemented in stages, focused mainly on securities markets. 
It boosted competition and innovation for professional traders and encouraged institutional market players, in particular, to trade across EU borders. 
As a result, considerable progress was made in the “wholesale” securities sector. 
Retail customers, however, were largely ignored. 
But the aim of creating a “European home market” should not be reserved for wholesale market players. 
Retail customers deserve the chance to buy products and services from all member countries, and it would be in banks’ own interest for them to be able to do so. 
For example, according to surveys by the European Commission, more than 10% of European banking and insurance customers would like to use foreign products and services. 
But only 5% of customers currently have an account with a foreign bank. 
The figures for credit cards are even lower – only around 3% of Europeans have a card from a non-domestic provider. 
Just 3% make any private provision for retirement with a foreign bank, and only 1% of retail customers take out a mortgage in another EU country. 
The reasons for this are clear. 
There are undoubtedly “natural” barriers, such as language and national mentalities, which cannot be overcome swiftly. 
But there are also big “man-made” barriers, particularly those created by different national legislation in the fields of investor and consumer protection. 
These regulations differ widely. 
What information requirements must banks comply with? 
What formalities must customers complete if they want to open an account in another EU country? 
Nor will consumers find any uniform standards for loans or other financial guarantee agreements in the EU. 
This lack of uniformity is preventing both banks and consumers from doing more cross-border business, and it is where policymakers must act; only harmonized rules and EU-wide standards will eliminate costly and time-consuming compliance with different national regimes. 
Another missing piece in the EU financial market mosaic is the harmonization of tax law. 
The question is not one of aligning tax rates, which can and should be determined by competition. 
Rather, the aim of harmonization is to make cross-border trade easier for business. 
For example, if there is no standard way to determine taxable income, or offset losses, it is hard for firms – including banks – to sell their products in other member states or to optimize their cross-border corporate structures. 
Despite such headaches, significant progress toward a single financial market is being made. 
The technical conditions required for the Single Euro Payments Area (SEPA) have been met. 
Customers can, for the first time, make all their euro payments as safely, efficiently, and conveniently as they do at home. 
The payment products they use are based on uniform pan-European procedures. 
An efficient European financial market also needs centralization of supervisory competences. 
Convergence of national regulations should be accelerated, and closer cooperation between national authorities should become a priority. 
Otherwise, national authorities will be unable to respond properly to cross-border developments. 
Ultimately, the aim should be to create a single institution responsible for supervising large banks that operate across the EU, with national regulators responsible only for domestic banks. 
Here, the European System of Central Banks could serve as a model. 
Centralized financial supervision would avoid the need for banks to duplicate reports to different authorities, allow financial rules and supervisory practices to be harmonized, and eliminate distortions to competition. 
The remaining barriers to cross-border mergers and acquisitions also need to be removed so that EU banks can grow big enough to compete globally. 
Although direct legal obstacles have been eliminated in Europe, indirect obstacles such as taxation – which can make a merger unprofitable – persist. 
Some national governments have their part to play, too. 
Germany illustrates the problems that are created when a country’s banking sector is largely bypassed by the global trend toward consolidation. 
When measured against the size of its national economy, most German banks remain too small, trailing their international rivals in terms of both market capitalization and total assets. 
Germany needs three or four big banks to take their place among Europe’s market leaders and be at the forefront of the consolidation process. 
In other countries, policymakers set the course for banking modernization years ago and have reinforced competition since then – to the benefit of customers and banks alike. 
The “three pillar” structure of the German banking system is a drag on growth. 
While public banks can – and do – buy private banks, the reverse is blocked by law, which distorts competition. 
An integrated single market in financial services would be a platform for innovation and increased competitiveness. 
It would also boost Europe’s global role and allow EU banks to compete in the worldwide marketplace. 
While much has already been accomplished, it is time to finish the job. 

Reinventing Science Education 
VANCOUVER – Despite the growing importance of science in the modern world, science education remains a remote and minor issue for most people. 
This is both short-sighted and hazardous. 
After all, science and technology are not only the primary drivers of growth in the modern economy; they are also increasingly central to many major public policy issues, most notably those surrounding climate change and health care. 
To be sure, the need for more and better science education has not been entirely ignored. 
But little of this attention has been aimed at post-secondary science education, the only level for which there is data showing how to make substantial improvements without enormous costs. 
Moreover, it is doubtful that great progress can be made at the primary and secondary levels until a higher standard of science learning is set at the post-secondary level. 
The conventional view is that there is little problem with post-secondary science education. 
Scientists and engineers are being produced at rates comparable or higher than in the past, and, while few non-science students find their required science courses enjoyable or useful, that is considered to be inherent to the subject. 
However, the past 20 years or so have witnessed the emergence of research on science education at the university level carried out by scientists in their respective disciplines. 
The results of this research, and the dramatically improved gains in learning and interest achieved in associated teaching experiments, show that there are tremendous opportunities to improve university science education. 
Realizing these opportunities, however, will require a different pedagogical approach, one that treats science education as a science, with rigorous standards for teaching effectiveness. 
It also requires abandoning the longstanding and widespread assumption that understanding science means simply learning a requisite body of facts and problem-solving recipes, and that mastery of those facts is the sole qualification needed to be a science teacher. 
Science education research clearly shows that a true understanding of science, as demonstrated by how it is practiced, is not merely about learning information. 
Rather, it is about developing a way of thinking about a discipline that reflects a particular perception of how “knowledge” is established, its extent and limitations, how it describes nature, and how it can be usefully applied in a variety of contexts. 
Developing such a way of thinking is a profoundly different experience from learning a set of facts, and requires very different teaching skills. 
In many respects, science education today is similar to medicine during the mid-1800’s, when a new level of scientific rigor confronted long-held beliefs and well-respected traditional medical practices. 
For example, bloodletting had been in use for thousands of years, with detailed theories explaining its effectiveness. 
And there was convincing evidence that bloodletting worked: most people recovered from their illness after being treated, just as many students (though a smaller percentage) thrive in our traditional lecture-based university science courses and go on to become scientists. 
Over the course of several decades, however, an enormous intellectual shift occurred in how people came to think about the practice of medicine. 
Rigorous scientific standards were adopted, a better understanding of the complexities of the human body was developed, and a higher standard of evidence for the efficacy of treatments was established. 
The fact that some patients survived bloodletting was no longer good enough. 
While this shift led to far more effective medical treatments, it did not come quickly or naturally to people. 
Even today, a large number of people are willing to reject medical science in favor of home remedies supported only by an anecdote offered by a neighbor or relative. 
There is little reason to think that the adoption of a more scientific approach to science education will be much easier. 
Yet it has begun, and completing it offers the hope of moving from the educational equivalent of bloodletting to vaccines and antibiotics. 
With continued research and effective implementation of new findings about science education, it will be possible to achieve far more meaningful science learning for all university students. 
Giving students a deeper understanding of the world around them is inherently enriching. 
It will also enable them to make wiser decisions on critically important matters of public policy, and to be far more creative and effective members of the work force. 

Reinventing the European Dream 
PRINCETON – The euro crisis and Queen Elizabeth’s recent Jubilee seem to have nothing in common. 
In fact, together they impart an important lesson: the power of a positive narrative – and the impossibility of winning without one. 
Commenting on the Jubilee’s river pageant and horse parade, historian Simon Schama talked to the BBC about “little boats and big ideas.” 
The biggest idea was that Britain’s monarchy serves to connect the country’s past to its future in ways that transcend the pettiness and ugliness of quotidian politics. 
The heritage of kings and queens stretching back across more than a millennium – the enduring symbolism of crowns and coaches, and the literal embodiment of the English and now the British state – binds Britons together in a common journey. 
Cynics might call this the old bread-and-circuses routine. 
But the point is to fix eyes and hearts on a narrative of hope and purpose – to uplift, rather than distract, the public. 
Are Greeks, Spaniards, Portuguese, and other Europeans really supposed to embrace an austerity program imposed on them because prevailing wisdom in Germany and other northern countries considers them profligate and lazy? 
Those are fighting words, creating resentment and division just when unity and burden-sharing are most needed. 
Greece, in particular, now needs a way to connect its past with its future, but no monarch is forthcoming. 
And, as the cradle of the world’s first democracy, Greece needs other symbols of national renewal than scepters and robes. 
It is through Homer that virtually all Western readers first encounter the Mediterranean world: its islands and shores and peoples knit together by diplomacy, trade, marriage, oil, wine, and long ships. 
Greece could once again be a pillar of such a world, using its current crisis to craft a new future. 
That vision is more plausible than one might think. 
Natural-gas fields in the Eastern Mediterranean are estimated to hold up to 122 trillion cubic feet, enough to supply the entire world for a year. 
More gas and large oil fields lie off the Greek coast in the Aegean and Ionian Seas, enough to transform the finances of Greece and the entire region. 
Israel and Cyprus are planning joint exploration; 
Israel and Greece are discussing a pipeline; 
Turkey and Lebanon are prospecting; and Egypt is planning to license exploration. 
But politics, as always, intervenes. 
All countries involved have maritime disputes and political disagreements. 
The Turks are working with Northern Cyprus, whose independence only they recognize, and regularly make threatening noises about Israel’s drilling with the Greek Cypriot government of the Republic of Cyprus. 
The Greek Cypriots regularly hold the EU hostage over any dealings with Turkey, as has Greece. 
The Turks will not let Cypriot ships into their harbors and have not been on speaking terms with the Israelis since nine Turkish citizens were killed on a ship that sought to breach Israel’s blockade of Gaza. 
Lebanon and Israel do not have diplomatic relations. 
In short, the riches, jobs, and development that would flow to all countries in the region from responsible energy exploitation may well be blocked by the insistence of each on getting what it regards as its fair share and denying access to its enemies. 
The vision of a Mediterranean Energy Community thus seems destined to remain a pipedream. 
Yet July will bring the 60th anniversary of the ratification of the Treaty of Paris, which established the European Coal and Steel Community (ECSC) among France, Germany, Italy, Belgium, the Netherlands, and Luxembourg only six years after the end of World War II. 
During the previous 70 years, Germany and France had fought each other in three devastating wars, the last two of which ruined Europe’s economies and decimated its population. 
These countries’ mutual hatred and suspicion was no less bitter and deep-seated than that afflicting the Eastern Mediterranean. 
Yet French Foreign Minister Robert Schuman, with the assistance of his counselor Jean Monnet, announced a plan for the ECSC in 1950, only five years after German troops had left Paris, with the aim of making “war not only unthinkable but materially impossible.” 
Schuman proposed putting Franco-German coal and steel production under a common High Authority, thereby preventing the two sides from using the raw materials of war against each other, and powering a common industrial economy. 
The ECSC became the core of today’s European Union. 
The EU today is on the ropes, but only a few concrete steps by European leaders might open the door to similarly bold diplomacy that could restore EU and Mediterranean economies and transform the energy politics of Europe and Asia. 
If the European Parliament and the European Council were to take steps to make direct EU trade with northern Cyprus subject to qualified majority voting rather than consensus (and hence veto by Cyprus), the EU would be able to begin trading with northern Cyprus, and Turkey could begin trading with Cyprus as a whole. 
These steps could lead in turn to a Turkish, Cypriot, and Greek energy partnership that would provide positive incentives for Turkish-Israeli reconciliation. 
The Schuman Plan took two years to crystalize and a decade to implement. 
But it gave war-torn and desperately poor Europeans a positive vision of a new future, something that Greece and Cyprus, not to mention Middle Eastern and North African countries, desperately need. 
Europe’s leaders will not surmount this crisis by pounding their citizens with bleak demands for austerity. 
They must take concrete steps, with Greece as a full and equal partner, to create a vision of real rewards from a rejuvenated EU. 
The EU does not have a Queen Elizabeth. 
What it needs is another Schuman and Monnet. 


Преобразование МВФ 
Для всех финансовых кризисов, имевших место на протяжении последних 20 лет, будь то кризис внешнего долга 1982 года, мексиканский кризис 1994 года, кризис на финансовых рынках стран с развивающейся экономикой 1997-99 годов или же кризис, переживаемый сегодня Турцией и Аргентиной, характерна одна отличительная особенность, – все они охватывали страны, находящиеся на периферии мировой экономики. 
Это послужило причиной значительного несоответствия в экономических и финансовых показателях. 
В то время как на периферии один кризис сменялся другим, центральная часть поражала своей стабильностью и процветанием. 
Как объяснить такое явление и что можно сделать в подобной ситуации? 
Исторически сложилось так, что финансовые кризисы приводили к большему регулированию, включая усиление роли центральных банков и других контрольных органов. 
В странах, составляющих ядро мировой экономики, такие образования уже достигли уровня развития, позволяющего им отвращать финансовые неурядицы вроде проблем 1930-х годов. 
Однако процесс развития международных основ регулирования отстал от глобализации финансовых рынков. 
И действительно, кризис 1997-99 годов может быть хотя бы частично отнесен на счет преждевременного открытия доступа к рынкам капитала развивающихся стран, до того как их финансовые институты оказались способными справиться с этой задачей. 
Со времен кризиса 1997-99 годов особое значение придавалось необходимости усиления регулирующих механизмов в странах с развивающейся рыночной экономикой, тем временем, однако, ослабился международный регулирующий механизм. 
Существует широко распространенное мнение о том, что «спасательные пакеты» МВФ фактически способствовали возникновению кризисов, создавая то, что экономисты называют «моральным риском», т.е. уверенностью со стороны участников свободного рынка, что МВФ непременно придет на выручку находящимся в затруднении странам, тем самым помогая найти выход из положения инвесторам, предоставившим им кредиты. 
Спасательные пакеты МВФ, согласно этому мнению, ослабили рыночную дисциплину, стимулируя бум на неразумное, необоснованное предоставление займов. 
В этом аргументе есть доля истины. 
Однако рыночные фундаменталисты ошибаются, полагая, что устранение морального риска – это все, что требуется для создания прочной основы для международной финансовой системы. 
Система существенно накренена в сторону центра (главным образом Соединенных Штатов), занимаю��егося регулированием кредитно-денежной политики. 
Устранение морального риска просто позволит отразить уже само по себе невыгодное положение нахождения на периферии в стоимости и наличии капитала, что сейчас и происходит, хотя пока этого никто не признает. 
В ходе кризиса 1997-99 года и последовавших за ним событий МВФ резко изменил свою политику по отношению к частному сектору, начав отказывать в финансовой помощи вместо того, чтобы предоставлять ее. 
Стоимость распределения бремени расходов была включена в рыночные цены. 
В результате премия за риск при предоставлении финансирования странам с развивающейся экономикой значительно возросла, в то время как при подсчетах отношения риска к получаемой компенсации обнаружилось смещение в сторону невыгодности инвестирования в страны с развивающейся экономикой. 
Изменение политики МВФ принесет успех в предотвращении повторения бума на рынки стран с развивающейся экономикой, однако, оно уже создало проблему, работающую в противоположном направлении: высокая стоимость и отсутствие капитала само по себе является новой формой финансового заболевания. 
Оно проявляется не только в нехватке иностранных портфельных инвестиций, но и в утечке внутреннего капитала, а также ставит отечественные компании в периферийных странах в заведомо невыгодное положение относительно многонациональных корпораций. 
Собрав вместе ссуды на жилищное строительство, портфельные инвестиции и частные кредитные потоки, можно сделать вывод о существовании чистой утечки капитала из стран с развивающейся экономикой начиная с 1997 года, превратившейся из положительной размером в 81.7 миллиардов долларов в 1996 году в отрицательную размером в 104.7 миллиардов долларов в 2000 году, компенсируемой лишь слегка увеличившимися притоками прямых иностранных инвестиций и государственным финансированием. 
Ошеломляющий показатель - 64% всего мирового чистого экспорта капитала в 2000 году было направлено в Соединенные Штаты в поисках лучших инвестиционных возможностей; для сравнения можно привести средний показатель 1997-99 годов равный 35%. 
Ясно, что просто устранения морального риска в глобальной финансовой системе недостаточно, необходимы новые стимулы для создания более «ровного игрового поля» и поощрения направления потока капитала в страны, находящиеся на периферии. 
Такие стимулы должны принять форму кредитных поручительств и других усовершенствований в области кредитной политики, которые усилили бы могущество и влияние МВФ в деле предотвращения кризисов в будущем. 
Общие принципы очевидны: должен быть лучший баланс между предотвращением кризиса и вмешательством со стороны третьего лица, а также лучший баланс между предложением странам стимулов для ведения разумной политики и наказанием тех, кто этого не делает. 
Здесь пересекаются две основные цели: только посредством предложения определенных стимулов МВФ сможет оказывать более сильное влияние на экономическую политику отдельных стран до того, как эта страна обратится к МВФ за помощью в кризисной ситуации. 
Для воплощения этих принципов в жизнь я предлагаю следующие меры: • МВФ должен ввести рейтинг стран. 
Наивысшие оценки будут означать автоматический доступ страны к Чрезвычайным Кредитным Линиям, а держатели облигаций получат гарантии, что в случае развертывания программы МВФ их требования будут полностью удовлетворены. 
Это послужит серьезным повышением доверия к стране. 
И наоборот, странам, получившим низкие оценки, МВФ заранее даст понять, что не собирается вступать в программу без распределения бремени расходов между государственным и частным сектором. 
Caveat emptor: пусть покупатель будет бдителен . 
Могут также быть введены одна или две промежуточные оценки, когда МВФ сможет настаивать на различной степени распределения бремени расходов; • На основе Базельского Соглашения, которое устанавливает признанные во всем мире требования к уровню собственных средств для коммерческих банков, рейтинг МВФ мог бы быть преобразован в показатель изменения потребности в капитале. • Федеральный Резерв, Европейский Центральный Банк, «Бэнк оф Ингланд» (Bank of England) и "Бэнк оф Джапан" (Bank of Japan) могли бы принимать у своих дисконтных окон определенные казначейские векселя, выпущенные тщательно отобранными странами. 
Эта привилегия может сохраняться для конкретных стран или же использоваться в особо опасных ситуациях. 
Для того чтобы сделать эти изменения эффективными необходимо решить несколько правовых вопросов. 
Например, в настоящее время МВФ не имеет права настаивать на распределении бремени расходов, а также предлагать защиту, сходную с защитой во время банкротства, против судебных исков кредиторов в процессе реорганизации долга (министр финансов Соединенных Штатов О’Нил недавно выразил поддержку такому механизму). 
Такие реформы предоставят МВФ и всем его участникам более эффективные средства для предотвращения международных финансовых кризисов и уменьшения экономических несоответствий между странами, находящимися в центре глобальной экономической системы и на ее периферии. 
Для их осуществления нам, прежде всего, необходимо преодолеть возражения рыночных фундаменталистов, которые хотят ликвидировать или уменьшить роль МВФ. 

Reinventing the Maghreb 
At a time when the European Union and the United States are anxious to promote political and economic reform in the Arab world, they should not overlook the Maghreb. 
The EU cannot ignore the political, social, and security challenges that confront this huge swathe of northern Africa, and the US cannot afford to neglect this region in its global fight against terrorism. 
New and bold – yet pragmatic – initiatives are therefore needed that combine the efforts of local actors and external actors. 
The overall situation in the region is far from satisfactory. 
Algeria’s economy is massively dependent on oil and gas exports, Morocco’s is largely based on agricultural production (on which the weather has a huge impact) and remittances from expatriates, while Tunisia depends on European consumer demand and tourism. 
Education and labor policies in all Maghreb countries are under constant pressure from increasingly youthful populations. 
In addition, the controversy over who should rule Western Sahara remains an obstacle to full normalisation of Algerian-Moroccan relations. 
The EU is the region’s most important partner, accounting for over two-thirds of its external trade. 
Intense bilateral exchanges between states north and south of the Western Mediterranean have accompanied the “Barcelona process,” which created a comprehensive dialogue between the Union and its Mediterranean neighbors, including association agreements. 
Finally, a political forum for debate called the 5 + 5 Group periodically brings together representatives from Algeria, France, Italy, Libya, Malta, Mauritania, Morocco, Portugal, Spain, and Tunisia. 
For its part, the US has sponsored a number of specific actions to promote democracy and good governance in the region. 
Yet, despite these international initiatives and efforts by Maghreb governments, the situation is fragile; stability and security cannot be taken for granted. 
The UN Human Development Report, for instance, consistently puts the Maghreb countries below the global average. 
One key explanation for the Maghreb’s malaise is its lack of integration. 
In Europe and elsewhere, regional integration is gradually changing the political environment, increasing self-confidence in societies and bringing international trust. 
Indeed, some of the conditions necessary to launch a regional integration process are present in the Maghreb, but a new approach is needed. 
The only way to jump-start integration is by creating a new regional body. 
The Arab Maghreb Union could be revived. 
But its top-down design hampers its effectiveness. 
The European neighborhood policy recently reinforced the bilateral dimension of the Barcelona process. 
But while the EU is emphasizing its bilateral relations with Maghreb countries, not enough attention – or funding – is being given to the sub-regional dimension. 
To establish a new institutional dynamic in the Maghreb, three elements are needed: active engagement of the Maghreb states, who should be the initiative’s protagonists; determined EU support, which could be obtained only with the mediation of the Union’s Mediterranean members; and political backing from the US. 
Creation of a new institution, a “Maghreb Common Market,” would be in everyone’s interest. 
The Algerian, Moroccan, and Tunisian governments would show their engagement with their peoples’ future, and Europeans would demonstrate that they are ready to implement the principles they proclaim. 
It seems obvious that the US would be supportive of such an initiative, as it is in line with its global policy of promoting liberty, good governance, and free trade. 
Resolution of political disputes – both internal and international – in the Maghreb can be dealt with either directly, through thorny negotiations, or indirectly, starting with cooperation on issues, however modest, that could attract consensus. 
In Europe after World War II, the “small steps” policy, also called the “Monnet method,” enabled former enemies to put the past behind them and unite. 
Adapting this method to their needs, the Maghreb countries should open internal frontiers, facilitate exchanges, and embark on ambitious public works and infrastructure projects (such as highways, communications, and dams), all of which could ensure real progress via small steps. 
Finally, new regional arrangements, as well as specific projects, will require diversified funding sources. 
Neither the fiscal budgets in the Maghreb nor existing levels of debt currently allows the necessary public investments to be made. 
Although EU assistance from the Barcelona process is significant, it does not have a decisive impact on Maghreb economies. 
Therefore, an ad hoc funding mechanism must be defined, in the form, say, of a donor conference. 
In such a mechanism, Europeans should allocate funds not only from within the Barcelona process and the European Investment Bank, but also from the states most concerned – France, Italy, and Spain. 
In addition, international contributions from the World Bank could be supplemented with those from the US, which is keen to stabilize the region, and other donor countries, such as Canada, Japan, Norway, Switzerland, and some Arab countries. 
Boosting regional integration in the Maghreb promises much and would cost relatively little. 
But outside help is essential. 

Reinventing the World Bank, Again 
MADRID – With three nominees now in the running to become the World Bank’s next president – Nigerian Finance Minister Ngozi Okonjo-Iweala, former Colombian Finance Minister José Antonio Ocampo, and the United States’ nominee, Dartmouth College President Jim Yong Kim – this is the moment to step back and assess the Bank’s trajectory. 
Unless the Bank’s next president has a clear vision of the way ahead, and the gravitas to withstand the institution’s internal pressures, he or she will be swallowed up by its complex machinery and unwieldy processes. 
Global attention has been focused on weighing the three candidates’ strengths and qualifications, particularly their economic and financial credentials. 
But the real challenge lies in providing direction for the World Bank that reflects the world as it is, and re-calibrating the Bank’s tools accordingly. 
Inevitably, the new course hinges in part on recognizing that economics and finance, while integral elements of all areas of the Bank’s activities, are no longer the institution’s main drivers. 
The World Bank’s traditional instruments have been (and still are) low-interest loans, interest-free credits, and grants. 
But the Bank’s core philosophy has rested on lending, with interest, to middle-income countries and channeling the ensuing funds to the poorest countries eligible for assistance. 
Today, owing to the conditionality of its loans, the Bank is losing competitiveness vis-à-vis the plethora of actors, both public and private, that crowd the development scene. 
Meanwhile, the Bank is emerging as a vital – indeed, indispensable – source of expertise and technical assistance, as well as a provider of global public goods. 
Building on these strengths, the Bank must be willing to understand its client countries’ realities, rather than pontificate, and to balance its country-based work with its global roles. 
While lending is progressively thinned out and retained only for the poorest countries, the Bank must adopt the lean hub-and-spoke structure of a strategic consultancy or a “knowledge bank.” 
The organization must reformulate its mission, moving away from the idea of being the “West’s Bank,” the “BRICS’ Bank,” or, for that matter, a bank at all. 
What is unambiguous today is a growing intolerance for bad governance and corruption – a collective rejection evident in countries as diverse as Burma, Congo, Russia, and Bolivia, not to mention Arab countries from Syria to Morocco. 
At the same time, the biggest threat to the international order comes from failing, failed, post-conflict, and conflict-ridden states. 
For the past two decades, as part of the soul-searching triggered by the collapse of communism, the World Bank has been seeking to make governance and anti-corruption efforts integral to its work on economic growth and poverty reduction in the developing world. 
But, beyond eloquent rhetoric, these changes have been incremental, and have been superimposed on the Bank’s operations, rather than becoming part of its organizational DNA. 
The Bank has been too focused on itself and its reputation, and not enough on the countries that it advises and in which it operates, while institution-building has been considered to be embedded in the growth agenda. 
As a consequence, law, which constitutes the foundation of institution-building, has been regarded as no more than a toolbox. 
Property rights, contract enforcement, entrepreneurial conditions, and free and competitive product and labor markets were proclaimed to be part of the economic framework – a misconception recently restated by the former World Bank economist and current development pundit William Easterly. 
Moreover, the traditional interpretation of the Bank’s Articles of Agreement imposed a proclaimed “neutrality” that translated into a readiness to overlook the nature of its client countries’ regimes and their lack of popular accountability. 
Ironically, the same World Bank whose former president, Robert McNamara, transformed it almost five decades ago, at the height of decolonization, into a key instrument in the fight against communism, today views the so-called “Beijing Consensus,” by which the Chinese Communist Party maintains an iron grip on the country, as a viable development model. 
In this context, a “knowledge bank” needs to address three challenges. 
It must enhance support for the private sector and prioritize infrastructure, in a broad sense, in accordance with its importance for individual initiative. 
It also must strengthen its know-how in capacity-building, particularly administrative capacity-building, with an emphasis on its legal-institutional aspects. 
Finally, it must place anti-corruption and good-governance programs at the core of its mission. 
The international community cannot afford a World Bank that, anchored in the world of the past, loses its relevance. 
No other institution can fulfill the Bank’s formidable potential as a center of knowledge and a coordinator of development policies. 
The mandate of the Bank’s next president will be crucial in making or breaking an institution that the world desperately needs in the century ahead. 

New Life for the SDR? 
WASHINGTON, DC – The rise of anti-globalization political movements and the threat of trade protectionism have led some people to wonder whether a stronger multilateral core for the world economy would reduce the risk of damaging fragmentation. 
After all, lest we forget, the current arrangements – as pressured as they are – reflected our post-World War II forebears’ strong desire to minimize the risk of “beggar-thy-neighbor” national policies, which had crippled growth, prosperity, and global stability in the 1930s. 
Similar considerations fueled the launch, nearly 50 years ago, of the International Monetary Fund’s Special Drawing Right as the precursor to a global currency. 
And with renewed interest in the stability of the international monetary system, some are asking – including within the IMF – whether revamping the SDR could be part of an effective effort to re-energize multilateralism. 
The original impetus for the SDR included concerns about a national currency’s ability to reconcile the need for global liquidity provision with confidence in its role as the world’s reserve currency – what economists call the “Triffin dilemma.” 
By creating an international currency that would be managed by the IMF, member countries sought to underpin and enhance the international monetary system with a non-national official reserve asset. 
Legal and practical factors, as well as some countries’ political resistance to delegating economic governance to multilateral institutions, have prevented the SDR from meeting its creators’ modest expectations, let alone the grand role of a truly global reserve currency that anchors the cooperative functioning of a growth-oriented global economy. 
Information and other market failures have added to the challenges, as have weak institutional infrastructure and inadequate branding. 
The result is a substantial gap between the SDR’s potential and its performance. 
That gap has meant missed opportunities for the global economy – particularly in terms of asset-liability management, responsive liquidity, adjustment between deficit and surplus countries – and thus a gap between actual and potential growth. 
With the SDR providing a stronger glue at the international monetary system’s core, prudential currency diversification could have been made easier, the need for costly and inefficient self-insurance could have been reduced, and the provision of liquidity could have been made less pro-cyclical. 
So, do today’s anti-globalization winds – caused in part by poor global policy coordination in the context of too many years of low and insufficiently inclusive growth – create scope for enhancing the SDR’s role and potential contributions? 
Addressing this question, were it to gain traction, would involve a focus on an ecosystem of SDR use, with the composite currency – which last year added the Chinese renminbi to the British pound, euro, Japanese yen, and US dollar – potentially benefiting from a virtuous cycle. 
Specifically, the SDR’s three roles – an official reserve asset, a currency used more broadly in financial activity, and a numeraire – could ensure greater official liquidity, expand the range of new assets used around the world in public and private transactions, and boost its use as a unit of account. 
Of course, given the advanced economies’ embrace of more inward-looking, populist, and nationalist politics, a “big bang” approach to reinvigorating the SDR is highly unlikely. 
Even an incremental approach, starting with practical low-hanging fruit that does not require amendments to the IMF’s Articles of Agreement, would face political challenges. 
But it would be worth considering. 
Areas of focus would include using the SDR for some bond issuance and trade transactions, developing market infrastructure (including payments and settlement mechanisms), improving valuation methodologies, and gradually developing a yield curve for SDR-denominated loans and bonds. 
This would also help to leverage the inter-connectedness of the SDR’s roles, in order to reach critical mass quickly and have a foundation for further incremental gains. 
For the effort to succeed, the IMF’s approach would need to evolve – just like it did on country-specific issues. 
When I joined the IMF in the early 1980s, discussions with non-government counterparts, whether on country or policy work, were discouraged. 
The situation today is very different. 
Broader national engagement – with NGOs, local media, and a broad set of politicians – is now viewed as an integral part of effective country advice and program implementation, as well as being essential for the Fund’s “surveillance” function under its Article of Agreements. 
A similar pivot is needed if the IMF is to deliver better on the supra-national issues that are now migrating up its policy agenda. 
Specifically, the Fund would need to complement its traditional core constituency of governments and other multilateral institutions (particularly the World Bank) with systemically influential sub-national and private counterparts. 
The resulting public-private partnerships would enhance issuance, the development of market infrastructure, and liquidity provision for the SDR. 
While it is not easy to combine developmental and commercial activities, the implications for global growth and stability of not doing so suggest that it is an effort that should be explored. 
Moreover, the IMF could start small, focusing on interactions with other official multilateral and regional institutions, sovereign wealth funds, and multinational financial companies – all anchored by an active coalition of the willing among the G20. 
In an ideal world, the SDR would have evolved into more of a reserve currency during the era of accelerated trade and financial globalization. 
In the world as it is today, the international monetary system faces two options: fragmentation, with all the risks and opportunity costs that this implies, or an incremental approach to bolstering the global economy’s resilience and potential growth, based on bottom-up partnerships that facilitate systemic progress. 

Rejecting the Power to Waste 
SINGAPORE – Our ancestors preached it. 
Our parents taught it to us. 
The West is adopting it. 
So why are we Asians abandoning it? 
Calling the municipality to get a recycling bin in the building. Not flushing the toilet at night (that one always raises eyebrows). 
Growing up in India in the 1980’s, our lifestyle was very different from today’s. 
There was hardly any waste generated in a typical household. 
Everything was used and reused until it fell apart. 
We traveled in trains. 
We were reprimanded for wasting food. 
When my parents visited the United States for the first time, I didn’t hear the end of their shock at the excess they saw – from the wastage of paper napkins and plastic cutlery at fast-food restaurants to the average household’s usage of cars and electricity. 
At the time, as a young Indian recently relocated to the West, I didn’t want to be associated with stodgy parents who patiently folded used wrapping paper and stored it under their mattress. 
But now a renaissance of their mindset is taking place, as climate change becomes common knowledge. 
The wisdom of my parents’ generation speaks to me again. 
Losing touch with that wisdom was, perhaps, understandable. 
As India’s economic boom has transformed it from a global laggard into one of the world’s key emerging powers, the new generation of Indians finally arrived – in business, science, and politics. 
Indian diasporas in the United States, the United Kingdom, and Southeast Asia are among the richest communities in these countries. 
We don’t want to reuse paper bags anymore. 
We don’t even want to be seen conserving. 
We now have the power to waste, and we want to flaunt it. 
The same change in mindset can be seen in other emerging Asian economies. 
Conservation is regarded as a sign of weakness in this era of rising economic wealth. 
The desire to claim one’s rightful place under the sun – to share the planet equally – is a driving force throughout the region, from Southeast Asia to Korea and China. 
Why should we conserve? 
The West was responsible for all the pollution and waste in the first place. 
It is our turn now to ruin the planet, and no one should try to stop us. 
Unfortunately while we are queuing up for our BMWs, the rules of the game changed. 
The new lifestyle is no longer sustainable. 
It’s the end of the road for gas-guzzling cars, glass apartments that need constant air conditioning, water-thirsty washing machines, and wasteful packaging. 
By 2050, Earth’s population will be more than nine billion, and more than two-thirds will live in urban areas. 
We cannot survive the lifestyle that we desire. 
There is an opportunity here for leadership. 
Infosys is redesigning every aspect of how it provides lighting, cooling, water, and transportation to their more than 100,000 employees, and aiming to reduce costs ten-fold in the process. 
The Indian army is using solar steam cooking in Ladakh to cook for the 500 jawans (young army recruits) stationed there, and so is the Shirdi Sai Baba temple in Maharashtra. 
Elsewhere, prisons in Rwanda are using their 30,000 inmates’ sewage to provide biogas for cooking and compost for growing vegetables. 
Sunlabob, a private company in Laos, is renting solar lanterns to poor villagers, who find them more affordable than candles. 
The UAE is spending a chunk of its oil money to develop Masdar, the world’s first zero-carbon, zero-waste city. 
Singapore is using Newater, a treated form of wastewater that is potable. 
And British schools now include sustainability as a key part of the curriculum. 
But some are falling behind in this thinking, namely well-to-do Asian households – and some Asian governments. 
Just five years from now, developing countries are projected to emit more greenhouse gases than all developed countries. 
We can either shrug our shoulders, or we can use the opportunity to revive our old values, rethink how we live, and change that projection. 
Whether it is through low-energy housing, planting trees, teaching children to respect the environment, boycotting incandescent lightbulbs, or wrapping gifts in old newspapers, we have the opportunity to lead by example. 
Governments, too, should collaborate with their developing-country counterparts to provide much-needed leadership in the climate-change debate. 
Asia must leapfrog the unsustainable stage of development. 
We already have a deep-rooted tradition of conservation. 
Reclaiming it would make Asians trendsetters, and make the Asian way of life an example for others to follow. 

Religious Pluralism for a Pluralist Age 
The election of Pope Benedict XVI and the global war on terror have brought unprecedented attention to the role of religion in our world. 
There has been particular interest (most specifically in the case of Islam) as to whether specific religious traditions are compatible with the institutions and values of liberal democracy. 
But focusing exclusively on what is believed and practiced overlooks a potentially far more important question: how religious precepts are believed and practiced. 
Despite massive evidence to the contrary, many people – not least theologians – fear that we live in a secular age. 
But, far from being characterized by secularization, our age has witnessed vast eruptions of religious passion. 
The modern age is as religious as any previous historical period, and in some places more so. 
One exception is geographical: Western and Central Europe have indeed experienced a significant decline of religion, which has become an important ingredient of European cultural identity. 
The other exception is sociological, comprising a relatively thin but influential international intelligentsia, for whom secularization has become not only a fact, but, at least for some of its members, an ideological commitment. 
These are exceptions. 
What modernity more or less inevitably brings about is not secularization but pluralism – the peaceful co-existence of different racial, ethnic, or religious groups in the same society. 
Modernity undermines communities’ traditional homogeneity, because insiders and outsiders constantly rub up against each other, either physically (through urbanization and travel) or “virtually” (through mass literacy and mass communication). 
Pluralism – accelerated, expanded, and intensified by globalization – has become a pervasive fact of social life and individuals’ consciousness. 
On the institutional level, pluralism means that established religions can no longer take for granted that a particular population will supinely submit to its authority. 
If freedom of religion is guaranteed – the typical situation in liberal democracies – religious institutions cannot rely on the state to fill their pews. 
Instead, people must be persuaded to accept such authority, giving rise to something like a religious market. 
Even if one religious tradition still claims a majority of a population as its nominal adherents, individuals can still choose to disaffiliate from the institution representing that tradition (as in the Catholic majority countries of Europe). 
At the level of individual consciousness, this means that religious certainty is now harder to come by. 
A religious decision can be a matter of passionate commitment (as in Kierkegaard’s “leap of faith”), or, more commonly, an emotionally low-intensity consumer option (expressed in the telling American phrase “religious preference”). 
In either case, the individual is thrown back on himself to reflect upon and come to terms with his native religious tradition. 
Even if an individual decides to affirm a very conservative version of a tradition, this decision may, at least in principle, be revoked at some future time. 
As a result, pluralism pressures churches to become denominations. 
A denomination has the characteristics of a church, into which one is born, but individuals adhere to it voluntarily and it accepts other denominations’ right to exist. 
From the standpoint of their compatibility with modern liberal democracy, acceptance of pluralism, more than adherence to particular beliefs and practices, may be what most clearly distinguishes religions. 
Within Christianity, for well-known historical reasons, Protestantism has had a comparative advantage in adapting to pluralism. 
The Roman Catholic Church, after a long period of fierce resistance, also has adapted successfully to pluralist competition, legitimating it theologically in the declarations on religious liberty that began with the Second Vatican Council. 
Acceptance of the market economy has been slower, but that, too, has begun since the encyclical Centesimus Annus of John Paul II. 
Eastern Christian Orthodoxy is, however, a different matter. 
The relation of divine and secular fuels passionate debate throughout the Islamic world and in Israel, but the Orthodox idea of sinfonia – the harmonious unity between society, state, and church – constitutes a distinctive challenge to the acceptance of liberal democracy. 
And comparable Orthodox ideas about communal solidarity (Russian sobornost ) make it difficult to accept capitalism, because competition and individual entrepreneurship are seen as a morally repulsive expression of ruthlessness and greed. 
Responses to the challenge of global pluralism will take different forms in different parts of the Orthodox world. 
There may be efforts to re-establish something like the traditional sinfonia , as in Russia; embrace of “Eurosecularity,” as in Greece, Cyprus, and other countries entering the EU’s orbit (Romania and Bulgaria sooner, Armenia and Georgia later); or moves toward voluntary association, as in the US. 
But the challenge facing Orthodoxy underscores the three options that all contemporary religious communities now face: to resist pluralism, to withdraw from it, or to engage with it. 
None is without difficulties and risks, but only engagement is compatible with liberal democracy. 
Engagement means that the tradition is carried into the open discourse of the culture, and that those who represent the tradition make unapologetic truth claims. 
This will inevitably lead to charges of “proselytizing,” a term that has come to carry a pejorative meaning. 
But proselytizing means only that one tries to convince others of the truths to which one is committed. 
A self-confident community will usually do just that. To put it bluntly: instead of worrying that Roman Catholics will “steal” Orthodox souls, the Orthodox should try to steal Catholic souls. 
Barring that, in an age when religions must persuade , they must still “proselytize” within the community – pointing out the truth, the values, and the beauty of the tradition – even if they refrain from doing so outside it. 
Otherwise, they will lose their children. 

Remaking the Middle East 
President Bush, Palestinian Premier Mazen, and Israel's Prime Minister Sharon are poised to meet. 
Is America serious about bringing peace to Palestine and Israel? 
Where does this meeting fit in the overall US Middle East strategy? 
Richard Haass, Director of Policy Planning in the US State Department, offers his road map to the entire Middle East region. 
What was accomplished in Iraq--and, more importantly, what the Iraqi people will now accomplish with American help--will determine the future of one of the Middle East's key countries. 
An open, market_oriented, and peaceful Iraq could also advance reform and growth across the entire region. 
But far-reaching change both in Iraq and the Middle East is certain to take time. 
The post-Saddam challenge in Iraq has four components: humanitarian, security-related, economic, and political. 
The humanitarian challenge has been less burdensome than anticipated, thanks to advance planning by the US and the world community and to the rapid, focused, and discriminate way in which coalition forces fought the war. 
Some pockets of humanitarian need remain, but the massive crisis that was anticipated thankfully never materialized. 
Refugees and internally displaced persons are relatively few; supplies of food, water and medicine are mostly adequate or at least improving. 
The US government has provided some $600 million through UN agencies and non-governmental organizations to meet immediate humanitarian demands. 
We also need to restore basic order in Iraq. 
Security is the absolute precondition for sustainable recovery from conflict; without it, people cannot rebuild their country or return to school or work. 
Saddam's removal sparked a wave of looting, lawlessness, and score settling. 
The immediate priority is to put an end to this violence. 
Beyond this, international forces must secure and eliminate all weapons of mass destruction; prevent ethnic and religious tensions from erupting into violence; ensure that none of Iraq's neighbors exacerbates an already volatile situation. 
Over the longer term, we must help Iraqis rebuild their police and military forces so that they can provide their own safety and security without threatening anyone. 
Economic reconstruction is more accurately thought of as economic renewal . 
Physical capital is in a better state than expected, and modern Iraq benefits from a deep reservoir of human capital. 
Unlike many recent post_conflict situations, there is much raw material to work with. 
The US is making available more than $2 billion to support early reconstruction efforts. 
Oil output is coming back on line in meaningful quantities. 
Longer-run challenges include increasing oil production and tackling Iraq's huge outstanding debt. 
The UN Security Council's decision to remove all sanctions is a welcome step forward. 
Assisting Iraq's political regeneration may be the most difficult task, given the many religious, ethnic, geographic and political divisions that characterize Iraqi society. 
Still, the cynics and skeptics are wrong. 
America's goal--an Iraq that is intact, possesses a representative government, and respects the rule of law--is no pipe dream, particularly in view of the country's educated population and sizable middle class. 
The international community can realize this goal if it is prepared to stay the course and work with Iraqis until the fundamentals of a democratic society take hold. 
Responsible Iraqi leaders must be helped to channel today's tremendous political ferment in constructive directions. 
What happens in Iraq will obviously have an impact on the wider region. 
But it won't determine the Middle East's fate. 
It is difficult to think of a foreign policy issue that preoccupies and polarizes world opinion as much as the Palestinian question. 
Nearly one year ago, President George W. Bush declared his goal of bringing about a democratic Palestinian state, one prepared to live in peace beside Israel. 
Working with Russia, the EU, and the UN, the US developed a roadmap designed to take us in stages toward this goal. 
The emergence of a new Palestinian Prime Minister and government constitutes an important opening. 
The task now is to persuade Palestinians and Israelis to begin the process, to start taking steps to improve the situation on the ground so that they can tackle more far_reaching matters at the negotiating table. 
Terrorists cannot be allowed to forever frustrate the search for peace. 
But nor will resolving the Palestine question fix all the Middle East's problems. 
The challenges posed by Iran are clear_cut: it is developing weapons of mass destruction and has a history of supporting terror. 
Such behavior flouts the norms and rules of the international community and isolates Iran and its people. 
Continuation of these actions will have consequences. 
But if Iran turns away from terror and its pursuit of catastrophic weapons, it will find a US prepared to recast the relationship. 
The US is similarly prepared to respond if Syria demonstrates far_reaching changes in behavior. 
A more general issue is the relative lack of openness in the region's political systems and economies. 
For too long, America tolerated a "democratic exception" in the Muslim Middle East. 
As long as governments were friendly and backed regional stability, there was no need for outsiders to encourage representative government. 
We have learned the hard way that closed political systems breed resentment and extremism aimed against the interests of America, the West, and, indeed, the entire world. 
That is why we support democracy and political reform through the Middle East Partnership Initiative launched by Secretary of State Colin Powell in December 2002. 
Closed economic systems also pose a danger. 
As last year's "Arab Human Development Report" made clear, the Arab Middle East lags far behind other regions in key measures, including individual freedom, women's empowerment, and economic and social development. 
For too long, these countries watched economic prosperity pass them by. 
President Bush is determined to help Arabs share the benefits of economic liberty. 
Realizing his recent proposal to establish a US_Middle East free trade area within a decade would lay a strong foundation. 

Remembering and Forgetting Zhao Ziyang 
So, at last former Chinese Premier and Communist Party General Secretary Zhao Ziyang has died. 
But the political agenda that he espoused while in office passed away long ago, on May 19, 1989, when he appeared in Tiananmen Square just before dawn to beg tearfully for the forgiveness of protesters. 
“I am very sorry,” he said to startled onlookers. “I have come too late.” 
After that, he existed more as an historical chimera than as a real person. 
When his bizarre and unscheduled appearance in the square was broadcast on Central Chinese Television the next morning – during one of the last days of uncensored media coverage – people across China were stunned by this fleeting moment of all-too-human, official anguish. 
After all, Party leaders rarely evince their personal feelings in public, much less transgress the Party line as brazenly as Zhao did. 
Such individualism fit neither Leninist nor traditional Chinese proscriptions for behavior by a high official. 
As the crackdown following those heady weeks of free expression and assembly came to its apocalyptic end on the night of June 3-4, Zhao vanished, sucked down the Party’s memory hole into which so many other leaders have vanished since China’s “socialist liberation.” 
To the discredit of the democratic world, hardly any head of state remonstrated on Zhao’s behalf, minimally demanding that some accounting be made for his illegal and immoral incarceration. 
Instead, Zhao was allowed to remain in suspended animation, under house arrest, conveniently forgotten like some cryogenically frozen celebrity with no hope of resurrection. 
Zhao was not killed, but allowed to live in an old Beijing courtyard house with his family. 
He was let out from time to time, but under guard like a zoo animal, to go to some spa or to play solitary holes of golf, one of the many manifestations of “bourgeois liberalization” that his reform efforts allowed to leak through China’s once hermetic seal. 
Chinese have long since used the deaths of defrocked leaders as occasions to let out sentiments that can find no expression through the normal political process. 
During the winter of 1976, when Premier Zhou Enlai (viewed as a relative liberal in the Maoist hierarchy) died, tens of thousands of people spontaneously flooded Tiananmen Square, giving the Party a tremendous fright. 
It was, of course, the death of former Party chief Hu Yaobang, a liberal like Zhao, which set off the protests in 1989. 
Whether Zhao’s supporters will express themselves in a similar fashion is uncertain. 
The events of 1989 remain so sensitive, and Tiananmen Square so securely guarded, that it is hard to imagine a protest happening there soon. 
At the same time, China seems so drugged on business nowadays that it is hard to imagine many people marching for a cause that would do nothing for their bottom line. 
It’s almost as if the Communist Party had turned Marx on his head, replacing religion with profit as the new “opium of the masses.” 
Few outside of the lumpen classes of unemployed workers and dispossessed peasants seem to have any gusto for political protest. 
By contrast, Zhao embodied a chapter in Chinese history when to be a reformer meant to take on not only the economy, but every aspect of life. 
Before becoming Premier and Party chief, he experimented with everything from the de-collectivization of agriculture and separation of the Party from business to laws guaranteeing the rights of journalists and greater openness toward the outside world for ordinary people. 
He was even the first Chinese leader to wear a suit and tie rather than a Mao habit when traveling abroad, as well as the first to hold an open press conference. 
Although Zhao was no visionary, no Vaclav Havel or Lech Walesa, and not even anti-communist, his agenda in the mid-1980’s embraced the economy, politics, culture, media, and society, and it led to one of the most open and intellectually rich periods of Chinese history. 
It was a tragic paradox that the political movement that so peacefully swept China in 1989 ended up arresting the process of broad-based, evolutionary reform to which Zhao consecrated his life. 
So chastened by the trauma of June 4 was the Party leadership that, for several years afterwards, it was unclear if any reform would survive. 
Then, in 1992, Deng Xiaoping set in motion one of the most rapid and total marketizations of a society in history, catalyzing China’s spectacular rise as an economic superpower. 
Zhao Ziyang’s death reminds us not only of how unjustly he was treated, but of how lopsided China’s reforms have been. 
For China’s “miracle” to truly become miraculous, Party leaders could do worse than study the record of a man whose legacy they now seem eager to push into oblivion. 

Remembering Gaza 
LONDON – Government is all about statistics, but life is about people. 
That disjunction explains a lot about the cynicism and disaffection with politics that characterizes much of the world nowadays. 
And, while domestic problems may seem intractable, distance increases the confusion and fatigue induced by seemingly intractable international problems. 
As usual, the people who suffer are those who most need the world’s attention. 
This is notably true of the 1.5 million people crowded into the Gaza strip, locked between Israel, Egypt, and the Mediterranean Sea. 
The West has already isolated Gaza’s Hamas-controlled government. 
This week, the US Congress will discuss cutting off aid to the West Bank-based Palestinian Authority. 
But this is a time for more international engagement with the Palestinian people, not less. 
The statistics say that 80% of Gaza’s population is dependent on UN food aid. 
The youth unemployment rate is 65%. 
The Web site of the United Nations Office for the Coordination of Humanitarian Affairs has a comprehensive database that shows how many trucks, containing different kinds of supplies, have been allowed in by the Israeli authorities. 
The situation of the people – or rather the fight about their situation – is periodically in the news, most recently when violence broke the otherwise reasonably effective ceasefire in August. 
But Gaza has become the land that time – and the wider international community – forgot. 
It is for this reason that I took up the offer from Save the Children to visit the Gaza Strip last week. 
I had not been able to visit while serving in government for security reasons. 
Now I wanted to get a sense of life, not statistics. 
The purpose of the visit was not to meet politicians or decision makers, but to get a glimpse, albeit brief, of how people there live. 
And there is real life. 
Boys in Western football shirts – mainly Lionel Messi of Barcelona. 
Restaurants overlooking the Mediterranean. 
Schoolgirls in white headscarves wherever you look. 
Barbers, clothes shops, fruit stalls. 
And a good deal of traffic – with new cars smuggled in through tunnels beneath the “Philadelphi Route” that runs along the Egyptian border. 
But real life is also traumatic and limited. 
We saw buildings – not just the former Hamas headquarters – still in rubble. 
Houses are riddled with bullet holes. 
There is no electricity for up to eight hours a day. 
Shortages of schools and teachers have pushed class sizes to 50 or 60, and the school day is restricted to a few hours to allow for two or even three shifts. 
The consequences of war are encountered everywhere, nowhere more so than for those caught in the crossfire. 
We met the niece and son of a farmer caught in the “buffer zone” between the Israeli border and Gaza. 
She had lost an eye and he a hand to Israeli shells in the war of 2008-2009. 
Save the Children, obviously, is most concerned about the 53% of Gaza population that is under 18. 
The statistics say 10% of children are “stunted” – so undernourished before the age of two that they never grow to their full potential. 
We saw what Save the Children is trying to do about it, at a nutrition center serving mothers and children in Gaza City. 
The needs are basic: promoting breastfeeding, food supplies for young children, and medical attention for mothers. 
But not all those who need help are coming to get it, so Save the Children funds outreach workers to encourage families to use the services. 
There is remarkable work being done to create opportunities, as well as to prevent catastrophe. 
The Qattan Center for the Child is a privately funded library – and drama, computer, and youth center – that would grace any British community. 
The director told me it is dedicated to the credo of “building people not buildings.” 
The center is a true oasis. 
The situation surrounding such oases represents the ultimate failure of politics. 
After the war ended in January 2009, the international community was preoccupied with opening up Gaza. 
Nearly three years later, there is only stalemate – to match the wider stalemate in the search for a Palestinian state that can live alongside Israel. 
The responsibility lies, first and foremost, with Israel. 
The UN’s Gaza peace resolution (which Britain authored) calls on the Israeli government to open up the supply lines, but this has been heeded only in small part. 
That is why the tunnels do such a roaring trade, which Hamas taxes to fund its activities. 
The Israeli government would retort that the parallel call in the resolution for a halt to the flow of arms into Gaza also has not been heeded. 
That is true, too. 
Yet the international pressure is muted. 
The focus has shifted. 
But Gaza’s people and their needs remain in what British Prime Minister David Cameron last year called an “open prison.” 
Surely there is room across divides of party and nation to address these pressing humanitarian needs, which otherwise would only fuel future political trouble. 
What makes the situation in Gaza even more infuriating is that the status quo is actually irrational. 
It is not in anyone’s political interest. 
Israel doesn’t become safer, nor do Hamas or Fatah become more popular. 
One young mother at the nutrition center told me that she was just completing her accountancy degree – but there was no work. 
Yusuf, age nine, working on a computer at the Qattan Center, told me that he wanted to be a pilot. 
These people are not a threat to peace in the Middle East. 
They are actually its hope. 

Helmut Kohl’s Vision and Legacy 
HAMBURG – With Helmut Kohl’s death, “the largest figure on the continent of Europe for decades,” as Bill Clinton described the former German chancellor, has left us. 
Kohl possessed most of the talents of a successful politician: ambition, ruthlessness, tenacity, tactical skills, and a sense for the minds of ordinary people. 
In contrast to his two predecessors, Willy Brandt and Helmut Schmidt, he had no charisma (which Brandt had in abundance) or gift for words. 
What he did have, in contrast to his successors, was a clear vision for the future of his country. 
It was this that enabled Kohl to achieve the previously unimaginable: Germany’s reunification within a united Europe. 
Many, particularly in Germany, who recall those extraordinary months of late 1989 and early 1990, when Soviet control over Eastern Europe slipped away, still seem surprised that this supposedly provincial and boringly normal man could have grasped the chance to unite his divided country and deftly outmaneuvered opponents. 
Kohl, they seem to think, was lucky to be in the right place at the right time. 
But lucky outcomes in diplomacy are rarely a matter of chance; luck must be earned. 
In the summer of 1989, Kohl was just as surprised by the speed of events as everybody else. 
But he had used his time since becoming chancellor in 1982 to prepare should history beckon. 
Domestic policy issues inevitably demanded Kohl’s attention and skills; had it been otherwise, he scarcely would have been the dominant figure in his party and country for longer than any German chancellor since Otto von Bismarck. 
But what remained uppermost in his thoughts, and brought forth his greatest gifts, was the goal of ensuring Germany’s future within a peaceful Europe. 
As a journalist at the German weekly Die Zeit at the time, I had frequent personal exchanges with him in his Bonn office. 
“Foreign policy,” he used to tell me, “is more important than domestic policy, because mistakes can be very costly.” 
Kohl’s chief method to avoid mistakes was to build trust with all powers, big and small, that were relevant to Germany’s wellbeing. 
Moreover, Germany would need external support for any degree of national reintegration should the opportunity present itself. 
While for Schmidt the key strategic tool was the assurance of calculability, for Kohl it was the creation of trust. 
And he set out to strengthen and build it. 
With the country’s major and indispensable ally, the United States, Kohl sought the closest possible relationship from the start of his tenure. 
After Schmidt’s government fell in 1982 over massive popular opposition to the stationing of US medium-range nuclear missiles, Kohl stood firm, recognizing that bowing to public pressure and reneging on Germany’s commitment would be a blow both to the respect and trust of the US and his credibility in Moscow. 
Years later, when the walls in Europe began to crack, Kohl had established a unique relationship of trust in Washington. 
DC. And he found in President George H.W. Bush a firm and decisive supporter of reunification who would ensure that the Germany that emerged from the process remained firmly anchored in the West. 
In the meantime, although the Soviet Union’s aging and infirm Communist leadership offered little prospect for progress, Kohl stuck to the détente policies of Brandt and Schmidt, which his own party had bitterly opposed. 
When Mikhail Gorbachev took over, Kohl initially dismissed the new Soviet leader’s bold arms-reduction proposals as mere propaganda à la Joseph Goebbels. 
But as Kohl recognized Gorbachev’s seriousness, he hurriedly applied his trust-building strategy and established a close personal relationship with the man without whom no peaceful change of Europe’s Cold War map would have been possible. 
When that opportunity presented itself, the agreements that followed, remarkable given the political climate, were possible only because of Kohl had kept his eyes on the prize. 
For Kohl, a closely united Europe was a deeply emotional matter, as well as the key condition for Europe’s peace and Germany’s wellbeing. 
He succeeded in winning the trust of French President François Mitterrand and the friendship of Jacques Delors, then the president of the European Commission and the architect of Europe’s single market. 
Equally significant, Kohl wove a network of contacts in all the countries surrounding Germany. 
He was well-read on these countries’ history and had a knack for understanding how it shaped their attitudes toward Germany. 
He was convinced that, as Europe’s largest economy, Germany had to be the most constructive, if not the most generous, member of the European club. 
Kohl once asked me, to my surprise, if his big bulk – he was 6 feet 4 inches (193 centimeters) tall, and weighed more than 300 pounds (136 kilograms) during his leadership years – might not confirm fears of an overbearing Germany. 
I had no difficulty reassuring him. And when, in 1989, German reunification approached, the trust Kohl had built up over the years paid off, allaying concerns in enough European quarters that he was able to gain the necessary support. 
Today, Kohl’s strategy of building trust still echoes in official German rhetoric, though it has been more erratic in practice. 
It is futile to speculate how he would have reacted to Russia’s estrangement from the West at a time when it might still have been averted; or whether, unlike Chancellor Angela Merkel, he would have reacted with immediate solidarity, and more immediate effect, to the Greek debt crisis of 2010. 
Would Kohl have responded to President Donald Trump’s behavior by publicly distancing himself from the United States? 
Or would he have tried instead to strengthen the underpinnings of transatlantic ties? 
One thing seems clear: Kohl would not have sought only short-term or domestically popular solutions. 
Instead, he would have understood these challenges in terms of their impact on the European order of which Germany was (and remains) a major beneficiary. 
And he would have integrated any policy response into his long-term vision for the future of Germany and Europe. 
It is for this indispensable quality of statesmanship, not only for having helped bring about German reunification, that Kohl deserves to be remembered and mourned. 

Helmut Schmidt’s World 
BERLIN – Germany lost one of its giants this week when former Chancellor Helmut Schmidt died at the great age of 96. 
Schmidt was the country’s defense minister from 1969 to 1972, finance minister from 1972 to 1974, and federal chancellor from 1974 to 1982. 
Our own day and age may seem particularly tumultuous; but the years when Schmidt governed Germany were anything but quiet. 
His was the age of Ostpolitik and détente, of the first global oil crisis, of economic recession, stagflation, and the return to Europe of mass unemployment. 
His generation confronted the scourge of domestic terrorism and witnessed revolution in Iran, the Soviet invasion of Afghanistan, and the rise of Solidarity in Poland. 
Schmidt is remembered as a hands-on pragmatist, but above all as an accomplished crisis manager. 
He proved his judgment and his leadership abilities early on, when, as a city senator in Hamburg, he confronted the great flood of 1962, which devastated the city. 
Schmidt reinforced his image as a pragmatist by consistently voicing his deep skepticism of grand designs and long-term visions, albeit without ever renouncing his fundamental belief that there was a moral basis for his political objectives. 
So it should be no surprise that Karl Popper, with his pragmatic yet value-based approach, was his favorite philosopher. 
But there was always more to Schmidt’s outlook on the world: As a son of Germany’s largest port city, he was a committed internationalist, genuinely interested in what lay beyond our borders. 
As a student of Popper, and carrying the memories and scars of the catastrophe of the Nazi years, he was acutely aware throughout his life of both the strengths and the vulnerabilities of our open societies. 
Schmidt understood that a practical politician had to deal with events as they unfolded, managing them as astutely as possible. 
But he understood instinctively that daily events were shaped by powerful trends and forces: the strategic competition between East and West, the evolving international financial system in the age of global interdependence, and the consequences of decolonization. 
He was one of the first in Germany to notice the rise of China and reckon with the implications of Asia’s return to a leading role on the world stage. 
For Schmidt, thorough analysis was a necessary prerequisite for all political action. 
He particularly abhorred an emotional approach to foreign policy. 
He didn’t suffer fools gladly. 
And, invariably, he acted on his convictions. 
Together with French President Valéry Giscard d’Estaing, he pushed for the establishment of the Group of Seven to coordinate international economic policies, and played a leadership role at the G-7’s first summit, in Rambouillet in 1975. 
That same year he sat next to East Germany’s leader Erich Honecker in Helsinki while signing the “Final Act” of the Conference on Security and Cooperation in Europe – a major breakthrough for détente policy and in opening the closed societies of the USSR and Warsaw Pact. 
Schmidt’s relationship with US President Jimmy Carter was difficult, as many people have chronicled. 
Yet Schmidt was always a strong advocate of a close transatlantic partnership, which he saw as indispensable for Germany’s security and foreign policy. 
In fact, his initiative to counter the Soviet deployment of SS-20 intermediate-range nuclear missiles, a plan he set out in a major speech in 1977, was motivated above all by concerns about a potential decoupling of Europe and its US ally. 
Schmidt’s principled commitment to the so-called NATO Double-Track Decision in 1979, whereby intermediate-range nuclear missiles were eventually to be eliminated from Europe, came to the chagrin of many in his own party. 
But it was informed by his careful and sober reading of the evolving strategic landscape. 
Finally, Schmidt was a true European. 
He had lived through the cataclysm that extreme nationalism had wrought in Germany. 
He remained skeptical about notions of irreversible progress. 
Change for the better could emerge only from practical initiatives, not from Sunday speeches. 
Thus, European integration had to be created by real policies and institutions, not by decree. 
So he and Giscard created the European Council (composed of the heads of Europe’s governments), which is now a major player in the European Union’s institutional set-up. 
They pushed forward the idea of monetary integration, which came to fruition a generation later. 
They embodied the Franco-German commitment to a unified, peaceful Europe, able to pull its weight globally only if and when it acts in unity and with a sense of purpose. 
Schmidt remained a mentor to the German people for decades after leaving active politics. 
International crises, global order, and the future of Europe remained his fundamental preoccupations, and he saw a role and a responsibility for his own country in addressing and shaping all three of them. 
His thinking had a strong normative foundation, but his keen understanding of the world led him to approach foreign policy with a sense of humility and strategic patience. 
It is this rare combination of morality and perseverance that is his legacy as a foreign policy thinker and practitioner. 
We would do well to keep his priorities and his principles uppermost in our minds, now that he is no longer here to remind us of their necessity. 

Remembering Robert McNamara 
NEW YORK – I first met Robert McNamara, the US Secretary of Defense who presided over the American buildup in Vietnam, in the summer of 1967. 
I had just returned from a trip to South Vietnam, where, as a reporter for The New Yorker, I witnessed the destruction, by American air power, of two provinces, Quang Ngai and Quang Tinh. 
America’s policies were clear. 
Leaflets dropped on villages announced, “The Vietcong hide among innocent women and children in your villages….If the Vietcong in this area use you or your village for this purpose, you can expect death from the sky.” 
Death from the sky came. 
Afterward, more leaflets were dropped, informing villagers, “Your village was bombed because you harbored Vietcong….Your village will be bombed again if you harbor the Vietcong in any way.” 
In Quang Ngai province, some 70% of villages were destroyed. 
I was 23 years old at the time, and had no notion of what a war crime was; but later it became clear that that was what I was witnessing. 
(Five months later, in March of 1968, American troops committed the massacre at My Lai.) 
The familiar figure with the glinting, rimless glasses and the rigid hair forced back, as if it were spun glass, greeted me at the door of his seemingly tennis court-size office. 
I felt a prodigious, restless energy that I suspected he could not turn off if he wanted to. 
Soon after I began to recount my observations, he took me to a map of Vietnam and asked me to locate the areas of destruction. 
I felt that the request was a test – one that I was prepared to take, as I had carried maps with me in the forward air-control planes. 
He seemed deeply engaged, but made no comment, asking me only if I had anything in writing. 
I said that I did, but that it was in longhand. 
He suggested that I produce a typed copy, and provided me with the office of a general who was away. 
What he did not know was that the article was book-length. 
It took three days to dictate it into the general’s Dictaphone. 
I handed the finished project to McNamara, who thanked me, but said nothing further about the matter, either then or at any time thereafter. 
Fifteen years later, in 1982, when Neil Sheehan was researching his book about the war, A Bright and Shining Lie, he came across documents concerning my Pentagon-assisted manuscript. 
They showed that McNamara had sent the manuscript to the American Ambassador in South Vietnam, Ellsworth Bunker, who requested a certain Bob Kelly to write an overall report, with a view to discrediting my reporting, and arranged to get The Atlantic magazine (where Bunker mistakenly thought my article was scheduled to appear) to “withhold publication.” 
A memo recommending these steps was circulated to McNamara, Under Secretary of State Nicholas Katzenbach, and Assistant Secretary of State William Bundy. 
The “action” officer was Secretary of State Dean Rusk. 
The forward air-control pilots, were re-interviewed, and affidavits were taken. 
Two civilian pilots were dispatched to fly over the province and check my calculations of the damage. 
Plans were considered to publicly rebut my findings. 
But the resulting report inconveniently found that “Mr. Schell’s estimates are substantially correct.” 
Perhaps frustrated by his failure to find factual errors in my reporting, the author of the report offered some editorial comments that epitomized the flawed thinking on which the war rested. 
I had been unaware, he thought, of some extenuating factors for the destruction I witnessed. 
I had not known, he thought, that “The population is totally hostile…” Indeed, in the eyes of the Viet Cong, “the Viet Cong are the people.” 
Thus, the main reason for not fighting the war in the first place, namely the perfectly obvious hatred of the majority of the population for the American invasion and occupation, became a justification for the war. 
When I next spoke at length with McNamara, in 1998, it was not about Vietnam but about nuclear arms, on which we agreed as much as we had disagreed about Vietnam. 
We both believed that the only sensible thing to do with the bomb was to get rid of it. 
McNamara’s turnabout on this issue was dramatic. 
More than any other government official, he was responsible for institutionalizing the key strategic doctrine of the nuclear age, deterrence, otherwise known as mutual assured destruction. 
Now he wanted to dispense with it. 
But, in fact, by then we were closer on Vietnam as well, for he had, after two decades of silence regarding the war, published his book In Retrospect , in which he repudiated his former justifications for the war, famously writing of the Kennedy and Johnson administrations, “We were wrong, terribly wrong.” 
Many of McNamara’s critics assert – rightly, I think – that he stopped short of full understanding, that he sought to hold fast to claims of noble intentions that the record could not sustain. 
How noble are intentions when the facts showing their horrific results are readily at hand yet overlooked? 
Should McNamara have been more forthcoming in his regrets? 
He should. 
Should he have expressed them earlier? 
Certainly. 
Should he never have recommended the war, or presided over it in the first place, and should there never been an American war in Vietnam? 
Oh lord, yes. 
The twentieth century left heaps of corpses in its wake, and now they are piling up again. 
And yet, how many public figures of McNamara’s importance have ever expressed any regret for their mistakes and follies and crimes? 
I can name only one: Robert McNamara. 
In the unlikely event that a statue of him is ever unveiled, let it show him weeping. 

Homage to Simone Veil 
PARIS – I have an abiding image of Simone Veil, the French (and later European) politician who died last week. 
It is a black-and-white photo taken in September 1979, between Rosh Hashanah and Yom Kippur – a period known as the Days of Awe – in Paris, before the memorial to the unknown Jewish martyr. 
A young man, bareheaded behind a lectern, is speaking in honor of those who died in the Holocaust. 
Simone Veil is standing in the front row, a handsome woman lost in her thoughts yet still attentive. 
She is skeptical, stern, incredulous, wary. 
Afterwards, she will say to the young man, in a tone of gentle reproach, “too lyrical.” 
Several years earlier, in 1974, she stood before the French parliament to deliver a speech that would change the lives of French women and mark the term of President Valéry Giscard d’Estaing, just as the abolition of the death penalty marked the term of Giscard’s successor, François Mitterrand. 
Then, defending the legalization of abortion, she resembled Romy Schneider in Orson Welles’s The Trial, determined but ill at ease. 
There is thunder in her words, coexisting with a bottomless melancholy. 
She may not have wept after the speech, but I do not doubt that she lived through that moment in what the Christian theologian Duns Scotus called “the ultimate solitude.” 
She went on, paradoxically, to be honored, celebrated, adored all over Europe, while living as a sort of stowaway in an era that she would never fully embrace – an enigma to her contemporaries, always slightly withdrawn, yet as transparent in her own eyes as it is humanly possible to be. 
She knew her vocation, the direction of her destiny, and the force of her desire (from which she never wavered) to break with what she described, during a demonstration in Paris in support of the victims of the 1980 synagogue bombing on Rue Copernic, “Jewish disintegration.” 
Who are you when you are deported to Auschwitz just days after receiving your baccalauréat and survive the impossible, having looked death directly in the eye? 
How can you do anything but keep your distance when you have experienced, bodily, both disaster and miracle? 
Nothing made Veil angrier than the refrain about the Holocaust being unspeakable, which was supposed to explain why its survivors, upon returning home, retreated into silence. 
No! she would insist. 
To be able to speak was all they were really asking! 
But people did not want to hear it. 
And, in opposition to the cliché that first there was memory, before memory was gradually erased and replaced by oblivion, she believed that, for the generation that survived the camps, oblivion came first. 
Memory had to be built, take hold, and resist the quicksand of banalization and denial. 
The discomfort she felt when, as a cabinet minister, she tried to broach the subject was real and all too apparent. 
And what could she think when she was asked, at a reception, whether the tattoo on her arm was her coat-check number? 
We clashed once. 
It was in 1993, after I delivered to Mitterrand a message from Bosnian President Alija Izetbegović in which he compared Sarajevo to the Warsaw ghetto. 
Soon after, I arranged for Izetbegović to meet with the French president in Paris. 
Ahead of the meeting, Veil, Izetbegović, various friends of Bosnia, and I had dinner on the second floor of the Brasserie Lipp in Paris. 
She did not mince words: “Comparisons can be misleading; however awful the Bosnian situation may be, you do no one any favors by identifying it with the incomparable suffering of the Jews.” 
Izetbegović listened, nodded, and, oddly, seemed to agree. 
She was both imperious and gentle, irascible and giving. 
It must be acknowledged, in her defense, that no one pinpointed the Holocaust’s singularity as accurately as she. 
It was a crime, she said, without trace (no written orders; no official directive, ever, anywhere); without graves (her father, brother, and mother became smoke and ash, with no marker but her own memory and, later, her autobiography); without ruins (Auschwitz, when she returns to it years later, is becalmed, neutralized, cleansed); without exit (Sarajevans, Rwandans, and Cambodians could, at least in theory, flee, whereas the hallmark of the Holocaust is that the world itself was a trap); and, finally, without reason (given the choice of expediting a troop train headed for the front or a train carrying Jews to the ovens, the Nazis always chose the latter). 
And then, of course, there was the question of Europe. 
After the war, there were two responses. 
There was the response of the philosopher and musicologist Vladimir Jankélévitch: Germany’s ontological culpability, Hitler’s irremediable corruption of its language, and a vow never again to have anything to do with its culture or people. 
And there was the response of Simone Veil: no collective culpability, German as the language not only of Nazism but also of anti-Nazism, and a belief that Europe is possible, with France and Germany, both mourning their ghosts, as its pillars. 
The world, French philosopher Gaston Bachelard said a century ago, could be reduced to a series of copyrights. 
Einstein’s relativity. 
Descartes’s doubt. 
Bergson’s laughter. 
Dante’s hell. 
Today: Simone Veil’s Europe. 
Try as I may to associate other faces with the name of Princess Europa, she alone comes to mind. 
The last time I spoke with Simone was ten years ago, when I had the honor of bestowing upon her the Hebrew University of Jerusalem’s Scopus Award. 
She was accompanied by her husband, Antoine, and her sons, Jean and Pierre-François. 
She was tired but feisty. 
Unquiet but free of nostalgia. 
In a speech lauding peace, science, and law, she paraphrased the philosopher Martin Heidegger, proclaiming “only a word can save us.” 

Remembering the First "War on Terror" 
In June, NATO's leaders commemorated the 60th anniversary of D-Day, the allied invasion of Nazi-occupied France. 
This August, they passed up the opportunity to mark the 90th anniversary of the start of World War I, which led to calamities that echoed until the twentieth century's end. 
But the lessons of the Great War are no less important today, particularly for the United States. 
The causes of World War I have long baffled the public and historians. 
Europe was at the peak of its economic power relative to the rest of the world. 
Peace among the major European countries had reigned more or less continuously for decades. 
A technology boom was revolutionizing, indeed globalizing, the world economy. 
For increasingly rich Europeans, the summer of 1914 seemed a peaceful, lazy time. 
It turned out to be their last real peace for decades. 
That July, terrorists in Bosnia assassinated Archduke Franz Ferdinand of the Habsburg Empire. 
Austria responded by invading Serbia, Bosnia's neighbor and an "upstart" Slavic power. 
Russia mobilized to support Serbia, while Germany launched a "pre-emptive" war against France and Russia, invading France via Belgium. 
Great Britain came to the defense of Belgium and France. 
By September's end, a general conflagration was underway. 
But why did the pieces of the puzzle fall into place as they did? 
Was it bad luck, miscalculation, or bureaucratic error? 
It turns out that the German Army Chief of Staff Helmuth von Moltke was eager for war in the summer of 1914. 
As historian David Fromkin shows in his recent book Europe's Last Summer , von Moltke feared that Russia was gaining too much industrial strength, and that in a few years Russia could withstand a war with Germany. 
Moltke wanted to invade and defeat Russia before it was "too late" for Germany to triumph. 
The Archduke's assassination provided a perfect pretext. 
The Germans encouraged their ally Austria to respond by invading Serbia, under the clear expectation that this would trigger war, but in a way that Germany would not be blamed. 
Fromkin shows that the assassination of Ferdinand merely provided Germany an excuse to fight a European War while it still had, according to its calculations, a chance of winning. 
Every calculation proved to be disastrously wrong. 
Imperial Germany was not threatened by Russian industrial dominance in the way von Moltke feared, and its military calculations also failed. 
Germany did not knock out France and then conquer Russia. 
Instead, the war ground to a bloody stalemate. 
Eventually, Czarist Russia collapsed, opening the way to the Bolshevik Revolution. 
Germany's launch of WWI ninety years ago this month had a more devastating effect on the world economy than any single event in human history. 
The war bled Europe of a generation of youth, and set the stage for a second war a generation later. 
It opened the way for 75 years of Soviet communism, and set in motion the financial instability that led to the Great Depression as well as the collapse of the international trading system. 
All of this matters now because last year America launched a war in which a terrorist attack was also an excuse, not the real cause. 
The Bush administration wanted to fight Saddam Hussein well before the terrorist attacks on the US of September 11, 2001, but it could not have gained public support. 
Just as Fromkin shows with regard to Germany in 1914, the Bush administration manipulated US public opinion to support the Iraq War as a war on terror, even though Iraq had nothing to do with any terrorist attack against the US. 
The world was never fooled by the Bush administration's case, but most Americans were fooled, at least for a while. 
We know from a long trail of documents, memoirs, and interviews that the terrorist attacks of September 11, 2001 were a pretext. 
Richard Cheney, Donald Rumsfeld, and Paul Wolfowitz wanted war with Saddam all through the 1990's, and urged "regime change" as a policy for President Clinton, who wisely rejected such irresponsible advice. 
Their eagerness for war had several causes. 
They wanted to seize control of Iraq's oil. 
They wanted a new "home base" in the Middle East if Saudi Arabia soured. 
They wanted to protect Israel from Saddam. 
They also had exaggerated fears about American weaknesses, just as von Moltke had exaggerated fears about German weaknesses vis-à-vis Russia. 
As we know from WWI, wars founded on lies are likely to produce a series of disastrous unforeseen consequences. 
The ricochet effects of the Iraq War have combined to yield a mounting threat to stability and security. 
Perhaps the aggressive actions of the US and a resulting backlash in the Islamic world will contribute to nuclear proliferation in Iran, or to nuclear Pakistan someday falling into the hands of extremists. 
World leaders should still gather to commemorate WWI, in the hope that they might learn enough to avoid repeating its disaster in our time. 
The Iraq War is not WWI. 
We still have time to avoid further devastating mistakes, but only if we are honest about motives, means, and ends - and only if we are honest in the pursuit of peace. 

Remembering the Gulag 
"There is nothing more inconspicuous than a monument," said the Austrian writer Robert Musil a hundred years ago. 
From the ruins of another empire, Russia's, I would add: There is nothing more conspicuous than an absent monument. 
Monuments compose the body of a nation on display. 
By looking at monuments, we feel how a nation-state affirms its continuity. 
When revolutions disrupt this continuity, they wreak violence against monuments. 
As the example of Saddam Hussein teaches us anew, to overturn a monument is easier than to try a dictator. 
Post-revolutionary periods, however, allow for more variety. 
Sometimes, new monuments are erected. 
Sometimes, old monuments return to their original spots. 
Sometimes, monuments are in absentia, like professors on sabbatical. 
While Holocaust deniers have been purged from German universities, Russian universities employ a number of professors of Russian history who conspicuously maintain the Gulag's absence from their lectures. 
Though terror in Nazi Germany and Communist Russia created many millions of victims, the memories of these events are vastly different. 
The most arresting but unrecognized of all post-Soviet monuments to the Gulag is the 500 ruble banknote, issued in the late 1990's and widely used today. 
Seemingly a testament to the nation's proud history, this banknote carries a hidden message. 
It depicts the Solovki monastery, a historical complex on an island in the White Sea, which also served as the earliest and one of the most important camps in the Gulag. 
Local historians at Solovki believe that the atypical cupolas illustrated on the note date the picture to the end of the 1920's, the time of the camp's peak development. 
The design raises some challenging questions. 
Is this one of those monuments that has been erected not by artists but by critics, who produce meaning not through creation but through interpretation? 
Were officials of the Ministry of Finance being deliberately subversive? 
Or is the choice of picture on the banknote a symptom of psychological trauma, an unconscious but realistic manifestation of the work of mourning? 
The work of mourning, to use Freud's formula, is continuous. 
But symmetrical evil does not mean symmetrical memorialization. 
There are plenty of memorials on the sites of German concentration camps, and new ones are continually added. 
In Russia, only two Gulag sites, in Solovki and in Perm, have small museums that show conditions in the camps, the techniques of torture and murder, the documents, and the portraits. 
In some cases, monuments are erected not on the former murder sites, as in Germany, but near them. 
This pattern represents not the old regime's eradication, but its coexistence with the new one. 
Even such proximate memory is far from being the rule in Russia. 
There is not a single plaque commemorating the Leningrad KGB's victims near the site of their suffering. 
Such a monument is also notably absent from the vicinity of the Kremlin. 
The museum on Solovki Island fills just a few rooms inside the functioning monastery. 
Although about one million people were incarcerated there, there is only one heartbreaking plaque on a shed, which reads, "The children's barrack of the Solovki Camp." 
Some local museums display fascinating objects. 
In the Kargopol museum, for example, stands a clay pitcher, presented to the museum by the descendants of a guard who appropriated a prisoner's parcel - a pitcher full of honey. 
In such exhibits, however, it is impossible to find answers to the most obvious questions: How many prisoners passed through this camp? 
How many died here, and when? 
Who were the administrators, guards, and executioners? 
Close to the Belomorkanal, one of the Gulag's major construction sites, a large mass grave was uncovered at Sandarmokh. 
The site is a pine forest near an old highway, distinguished by the small, regular depressions in the earth that are characteristic of such graves. 
The Memorial Society meticulously compared their archeological findings with the "shooting protocols" kept in the KGB's archives. 
The protocols never mention names, but they give the number of those who were shot on a specific date, classified by gender, e.g. 20 men, seven women. 
By matching the number of skeletons and their gender, every "shooting protocol" was identified with a certain grave. 
About 9,000 people were shot at Sandarmokh between 1937-1938. 
Today, a wooden pole marks each mass grave. 
Designed as a local symbol of mourning, these poles, with their sharply angled roofs, remind viewers either of a peasant cross or a human figure with hands raised in prayer. 
Sandarmokh is the most important, and best developed, Russian site of memory. 
Unfortunately, it is unknown even to neighbors as close as the Scandinavians. 
Two better-known memorials in Moscow and St. Petersburg consist of granite stones taken from Solovki. 
In St. Petersburg, the stone is complemented with inscriptions, such as "To the victims of Communism." 
(This plaque has been vandalized many times, the last with a graffito in red oil paint, "Too few were shot.") 
Here we have memory converted to drama. 
But Russian memory is also subject to Western-style postmodernist mockery. 
A recent fashion in St. Petersburg are restaurants with names such as "Lenin's Mating Call," "USSR," and "Russian Kitsch," which has frescos showing collective farmers socializing with American Indians while Leonid Brezhnev, resembling Frank Sinatra, gives a speech to a stone-age tribe. 
Far more than Nazism, Communism belongs to our common European heritage. 
The memory of its victims is not only a national, but also a European responsibility. 
As generations pass, monuments evolve from a medium of mourning to instruments of education. 
The work of memory is hard, expensive, and fragile. 
Monuments move back and forth. 
Capitals may be renamed. 
Banknotes expire. 
Everything may be mocked and change meaning. 
Even mummies are mobile. 
In 1961, the mummy of Stalin was observed striding out of the Mausoleum in Red Square. 
Lenin's corpse remains there, but his departure is expected. 
This should be a European event. 

Remembering the Importance of Forgetting 
SINGAPORE – “Be careful what you post on Facebook,” US President Barack Obama warned American high school students this past September. 
“Whatever you do, it will be pulled up again later somewhere in your life.” 
In fact, we all are coming to learn that lesson the hard way: digital information almost never goes away, even if we wish that it would. 
The result is the permanency of the past in the present. 
This fact is one of the biggest challenges that society will face as computers and the Internet become more a part of everyday life. 
For millennia, remembering information was costly and time-consuming, and to forget was a natural part of being human. 
In the digital age, the opposite is true: cheap computer storage, powerful processors, and ubiquitous Internet access have made remembering the norm. 
Consider this: we tend to retain our rough drafts, years of e-mail traffic, and thousands of ghastly digital snapshots on our hard drives, not because we have decided that they are worth remembering, but because keeping them is now the default way of doing things. 
By contrast, deciding what to delete is costly. 
It actually requires much more time and effort to shed data than to keep it. 
So we click “save” just in case. 
But it is worth remembering that there is a lot of value in forgetting. 
Forgetting permits us to transcend details and generalize, to see the forest and not just the trees. 
As some information lapses over time, the world becomes more comprehensible because we become free to focus on what is important. 
Forgetting also enables us to forgive others. 
Fading memories of past experiences allow new memories to bloom, much as decaying leaves allow for new growth. 
Forgetting thus affords us a second chance, individually and as a society, to rise above our past mistakes and misdeeds, to accept that humans change over time. 
But, with digital memory, that natural process is halted. 
Instead, the past is always present, ready to be called up with a few clicks on a keyboard or mobile phone. 
Indeed, we are increasingly confronted with outdated information taken out of context, from anachronistic news stories to emotional e-mails and compromising pictures that we had long ago forgotten. 
For example, more and more employers are researching job applicants through Google and social-networking Web sites. 
There are already many cases of people being denied jobs or promotions because of what is unearthed. 
But these are reflections of a person’s past; they rarely provide accurate information about the present. 
Obama’s admonishment reminds us to be more discriminating about what information we share online. 
His advice is essentially to practice a form of digital abstinence. 
It is an understandable, pragmatic suggestion – but not necessarily a good one. 
We have much to gain individually and as a society from sharing information with each other. 
Too much self-censoring of what we do online would deny us the benefits of the Internet. 
A better approach would be to ensure that digital information, like its offline variants of yesteryear, can disappear over time. 
First, we could give digital files “expiration dates,” so that our digital systems would delete the file when the appropriate time comes. 
Second, we could opt to expose our information to a form of digital “rusting,” so that it slowly erodes (and we would need to take proactive steps should we ever wish to recover some of it). 
Third, we could separate past information, so that it takes a special effort or additional time to retrieve it, thereby reducing the chances that we accidentally stumble upon it. 
The more we steam headlong into the future, the more we amalgamate the data and detritus of the past and place it irrevocably into the present. 
Yet it is not just how information is stored and retrieved that needs to change, but how we think about information as well. 
The onus is on us as much as it is on the computer. 

Remembering Zhao Ziyang 
The conditions under which Zhao Ziyang lived at the time of his death, in utter isolation from Chinese society due to an illegally imposed 16-year house arrest, shames both Chinese justice and the Chinese Communist Party (CCP). 
Zhao’s persecution was the persecution of a leader who dedicated himself for over a decade to groundbreaking efforts that became the foundations of China’s economic reform. 
In the late 1970’s, Chinese peasants had long since lost their rights to own their land, owing to collectivization and the establishment of the People’s Commune. 
It is a right they have never regained. 
Zhao, however, was the first to advocate giving autonomy back to the peasants and so initiated the first pilot tests to abolish the People’s Commune. 
Chinese industry had been transformed into subsidiaries of government through nationalization and central planning. 
Zhao was the first to propose “expanded autonomy for Chinese enterprises” and “restoration of a healthy relationship between government and industry.” 
Expanded autonomy for enterprises and the peasantry were critical first steps whose success led eventually to full-blown economic reform. 
These were among the many incremental victories Zhao won to help China’s people break out of the suffocating stagnation of Maoist socialism. 
As China’s Premier, Zhao implemented ten years of economic reforms that brought steady progress in which the people, especially the peasantry, enjoyed tangible improvements. 
But Zhao was also the only CCP leader to propose a political reform package to tackle China’s system of one-party rule. 
The Party’s unchallenged monopoly on political power systematically ensured that every mistake it made – such as the dreadful decade of the Cultural Revolution – turned into a prolonged nationwide crisis. 
For genuine and long-term stability, Zhao proposed reforms that ultimately aimed at the legalization and systemization of democracy. 
He wished to establish the kind of democratic politics that could support and nurture a healthy market economy. 
Although the short-term practical objectives of Zhao’s political reforms were limited by the circumstances in which they were proposed, the measures all aimed at containing Communist Party power and represented a concrete step toward returning, peacefully, power to China’s people. 
Zhao’s package – a sharp break with Mao’s totalitarianism – was approved by the 13th Party Congress, officially the highest authority within the CCP. 
During his twenty months as CCP General Secretary, Zhao created a culture in which the Politburo refrained from interfering in the courts, and he stopped its attempts to control literature and the arts. 
Zhao abolished the policy of enterprises being run by Party organizations and the system by which fa ren (“legal representatives”) were the core of enterprises. 
Unfortunately, Zhao’s political reforms were terminated upon his fall from power. 
The dreadful result was the indiscriminate denial of civil rights and the principles of democracy, and the rise of what today’s leaders call “socialism with Chinese characteristics” – a bitter euphemism for unchecked Party and government power entwined with commercial interests. 
Zhao’s fate is also a chilling reminder of other injustices that are on the consciences of those now in power. 
The only reason for Zhao’s continued ill treatment was his opposition to the violent repression of the Tiananmen Square protest in 1989. 
It should have been his decision to make as General Secretary, but things were not as they should have been. 
It should be remembered that former General Secretary Hu Yaobang, who had been forced to step down two years earlier by Deng Xiaoping because of his liberal stance, died in April 1989, triggering spontaneous and peaceful student demonstrations in Beijing, which spread across the country. 
Half a million college students in Beijing alone were involved in this movement. 
It lasted 50 days and was heartily supported by Beijing residents and people all around the country, from all walks of life. 
Zhao pointed out to the Politburo that the sentiments expressed by the students and residents in their commemoration of Hu, in their protests against corruption, and their desire for democracy were really the same sentiments that they themselves held. 
He believed that it should be possible to resolve the student protests and respect the principles of democracy and the rule of law. 
Under Zhao’s direction, the Politburo and its Standing Committee called for dialogue with the students. 
This hopeful direction changed completely, however, when Deng Xiaoping revealed his desire for a violent crackdown. 
In the end, it came down to a fight among five members of the Politburo Standing Committee: Li Peng and Yao Yiling sought to deploy the military. 
Zhao opposed this. 
Qiao Shi and Hu Qili initially sided with Zhao, but then withdrew their support and, instead, asked Deng Xiaoping to make the final decision. 
With deep divisions evident, Deng chose to bypass all existing institutions, the Party’s Politburo, the Central Committee, and the National People’s Congress and its Standing Committee. 
Without further discussion, Deng mobilized 500,000 troops to enter Beijing to crack down on the unarmed students and civilians. 
The Tiananmen Square Massacre of 1989 was a tragedy for China, and another tragedy for the twentieth century. 
Sixteen years have passed, but the pain remains, buried in the hearts and minds of the people. 
In the years that have passed, China’s leaders were responsible not only for Zhao’s unlawful house arrest but also for a systematic effort to erase his name from history. 
But their attempts to conceal the truth about the past only reveal their weakness and their shamelessness. 
For one thing they cannot change: Zhao Ziyang remains with us, in the Chinese people’s ongoing struggle for rights and democracy. 

Harnessing the Remittance Boom 
ROME – For more than a decade, Asia’s economies have been on the move – and so have its people. 
The scale of migration from rural to urban areas and across international borders is historically unprecedented, and twenty-first-century Asia is its focal point. 
In Asia’s developing countries, the power and potential of remittances – the money that migrant workers send home to their families (many of whom live in poor and remote areas) – is immense. 
Currently, over 60 million migrant workers from the Asia/Pacific region account for more than half of all remittance flows to developing countries, sending home about $260 billion in 2012. 
China, India, and the Philippines are the three largest recipients of remittances, while Bangladesh, Indonesia, Pakistan, and Vietnam are also in the top ten. 
The money is often a lifeline: it is estimated that 10% of Asian families depend on payments from abroad to obtain their food, clothing, and shelter. 
But, while remittances to developing countries are five times higher than official development assistance, the enormous potential returns for society have not been realized – and can be secured only if the flow of money can be channeled into effective rural and agricultural development, particularly in fragile states and post-conflict countries. 
Doing so would contribute significantly to creating jobs, enhancing food security, and fostering stability in countries emerging from strife. 
In order to establish such channels, we must scale up key initiatives, identify new opportunities, and map out the road ahead. 
The fourth Global Forum on Remittances, which runs May 20-23 in Bangkok, will do just that. 
Convened by the International Fund for Agricultural Development (IFAD) and the World Bank, the forum will bring together policymakers, private-sector players, and civil-society leaders to chart a course for leveraging the development impact of remittances sent home each year in Asia and around the world. 
At IFAD, our starting point is always the three billion people who live in the rural areas of developing countries. 
We work to create conditions in which poor rural women and men can grow and sell more food, increase their incomes, and determine the direction of their own lives. 
We believe that diasporas and the global donor community can leverage the flow of migrant investment if they form partnerships with national governments for long-term development of the rural communities that are so often the beginning of the migration chain. 
More than 215 million people around the world live outside of the countries they call home. 
But most families that rely on remittances operate outside of the world’s financial system as well. 
Despite the global prevalence of electronic money transfers, most migrant workers are excluded from the convenience of modern banking services, dependent on costly cash transfers that often require rural recipients to travel significant distances. 
As a result, migrant workers are forced to initiate more than one billion separate transactions worldwide each year. 
That means more than one billion trips for rural women and men to collect their money. 
Adding up the cost of the transfer, travel, and time, remittances are far too expensive for people living in poverty. 
IFAD has been working in more than 40 countries to ensure that rural families can have easy access to remittances, and are better able to use them as savings or investments that go back into their communities. 
The amount of money at stake is staggering: It is estimated that over the next five years, more than $2.5 trillion will be sent in remittances to developing countries, with almost 40% – coming in the form of payments of $50, $100, or $500 at a time – destined for rural areas. 
While the majority of family remittances will always be used to meet immediate needs, IFAD’s experience shows that rural families would seize opportunities to save and invest, even small amounts, if they had better options. 
While remittances should and can be leveraged to bring about impressive results in poverty reduction, let us not forget that there is an underlying issue that needs to be addressed. 
Young people, the leaders and farmers of tomorrow, are leaving their rural communities behind in search of better opportunities. 
We need to turn rural areas into vibrant and economically stable communities that provide opportunities for young people to earn a living, build their capacities, and start a family. 
We should not ignore the enormous development potential of remittances to rural areas. 
Let us empower families to use their hard-earned money in ways that will help to make migration a matter of choice, not a necessity for the generations to come. 

The Clean-Energy Moonshot 
NEW YORK – In May 1961, President John F. Kennedy stirred America and the world with these words: “I believe that this nation should commit itself to achieving the goal, before this decade is out, of landing a man on the moon and returning him safely to the Earth.” 
Just eight years later, NASA did just that – with astounding benefits for science, technology, and the world economy. 
Now, a group of leading scientists, innovators, and economists has identified our era’s moonshot: to replace fossil fuels with clean-energy technologies within this generation. 
Since a group of policy leaders from the United Kingdom initiated the Global Apollo Programme to Combat Climate Change earlier this year, I and many others have enthusiastically signed on. 
The program, named after the NASA moon mission, is built on the idea of “directed technological change.” 
In other words, through a conscious effort, backed by public funds, we can steer the development of the advanced technologies needed to ensure humanity’s safety and wellbeing. 
At the top of the list is clean energy, which will enable us to head off the global warming caused by the combustion of massive amounts of coal, oil, and gas worldwide. 
The Deep Decarbonization Pathways Project (DDPP) has demonstrated that a low-carbon future is within reach, with huge benefits at a very modest cost. 
In the United States, for example, cutting emissions by 80% by 2050 is not only feasible; it would require added outlays of only around 1% of GDP per year. 
And the benefits – including a safer climate, smarter infrastructure, better vehicles, and cleaner air – would be massive. 
Pathways to a low-carbon future focus on three main actions: improving energy efficiency, producing electricity from low-carbon energy sources (such as solar and wind energy), and switching from petroleum to low-carbon energy for powering vehicles (such as electric or fuel-cell vehicles) and heating buildings. 
These are clear and achievable goals, and the public sector should play a major role in advancing them. 
Politicians need to end subsidies for coal, oil, and gas, and start taxing emissions from their use. 
Moreover, they must meet the need for new power lines to carry low-carbon solar, wind, geothermal, and hydroelectric power from remote areas (and offshore platforms) to population centers. 
But meeting these requirements presupposes advances in technologies that will enable low-carbon energy systems to compete with the alternatives. 
That is where the Apollo Programme comes in, with its bold goal of reducing the cost of renewable energy to below that of coal, oil, and gas. 
Of course, renewable energy is sometimes already cheaper than fossil fuels – when the sun is shining bright or the wind is blowing strong and consistently. 
The main challenge with renewables is energy storage, in two senses. 
First, we need to store renewable energy for use in vehicles in a low-cost and efficient way. 
While we already have high-quality electric vehicles, they require improvements in range and cost to be able to outcompete conventional vehicles. 
The highest technological priority is to develop batteries for transport that are cheaper, longer-lasting, faster-charging, and lighter. 
Second, we need to store intermittent energy for times when the wind is not blowing, the sun is not shining, and rivers are not flowing strongly enough to turn hydroelectric turbines. 
Many energy-storage technologies are already in use or in development. 
One example is pumped hydropower, in which excess wind and solar energy is used to pump water uphill into reservoirs that can later produce hydroelectric power. 
Another is the conversion of renewable energy into hydrogen (by splitting water molecules) or a synthetic liquid fuel made with carbon dioxide from the air. 
Others include compressed air and large-scale battery storage. 
Low-carbon technologies can be improved markedly in many other areas as well. 
Power grids running on renewables need more sophisticated systems for balancing energy supply and demand. 
Improvements in carbon capture and storage technologies would enable some fossil fuels to be used safely. 
And nuclear power plant designs can be made safer with passive (automatic) safety systems and fuel cycles that leave behind less radioactive waste and fissile material that could be turned into weapons. 
Given the trillions of dollars of potential losses from human-induced climate change, and the trillions of dollars invested annually in global energy systems, the world’s governments would be wise to invest tens of billions of dollars each year in the research and development needed to achieve a low-carbon energy future. 
With this in mind, more than one politician should have already followed in JFK’s footsteps, stepping forward to announce this generation’s critical moonshot, and to offer the public finances needed to make it happen. 
So far, none has. 
In the US, for example, the government allocates around $31 billion per year to biomedical research (with great returns to health), and roughly $65 billion per year for military R&D, but only about $7 billion per year for non-defense energy, and, of that, less than $2 billion per year for renewable-energy R&D. This is a shocking lapse on two counts: first, the US and the world are losing time on decarbonization; and, second, the US is squandering the chance to develop its own future high-tech industries. 
Together, the Apollo Programme and the DDPP point the world’s governments toward the agreement they should reach at the United Nations Climate Change Conference in Paris this December. 
First, governments should pledge to decarbonize their economies in order to keep global warming below the extreme danger zone of two degrees Celsius. 
Second, they should promise to unveil, in the next couple of years, national “pathways” to deep decarbonization by 2050. 
And, third, they should join together to fund the new global moonshot for clean energy. 
The pooled financing should start with a minimum of $15 billion per year, and rise sharply thereafter, as key, high-return technology breakthroughs come into view. 
As JFK showed, great progress begins with a great goal, one that is bold yet feasible. 
The goal today, backed by the Apollo Programme, is deep decarbonization. 
It is time for world leaders to commit to the planet-saving clean-energy moonshot. 

Renewed Hope for Renewable Energy 
VIENNA – A decade ago, renewable energy was viewed as an unwelcome offspring of fossil fuels, but the recent establishment of the International Renewable Energy Agency (IRENA) indicates that governments worldwide are taking “renewables” seriously. 
With mounting concerns about climate change and volatility in oil and other fossil-fuel prices, renewables are finally becoming a viable proposition. 
IRENA will be headquartered in the United Arab Emirates, in Masdar City, the world’s first carbon-neutral city, which will be constructed in the desert by 2011. 
The agency will also maintain two vital arms in Europe: an innovation and technology center in Bonn; and an office in Vienna for strategic alliances with other agencies, particularly the United Nations. 
Close to $155 billion was invested in 2008 in renewable energy companies and projects worldwide, not including large-scale hydroelectric projects, according to a recent UN Environment Program report. 
On a global scale, the renewable energy sector created 2.3 million jobs in the past few years. 
In Germany alone, the sector’s growth has generated 250,000 new green jobs in less than ten years. 
Big business is spending billions of dollars to explore the opportunities that renewables can bring. 
There are serious plans to turn the Sahara desert’s heat and sunlight into Europe’s major power source, supplying energy to half a billion people. 
Some estimates suggest it could cost up to $60 billion to start sending Sahara power to Europe a decade from now. 
With public support, progress could be much faster. 
The price tags are huge, but the current economic and financial crisis has taught us not to be afraid of ten-digit numbers. 
Renewable energy costs will eventually go down, in step with technological innovation and mass production. 
The European Parliament recently enacted a law to support investors who help the Continent reach its goal of sourcing 20% of its power from renewable energy by 2020. 
As a new global platform for renewables, IRENA will provide policy advice and assist in capacity building and technology transfer. 
This will contribute to giving the poorest nations affordable access to clean energy, a key step towards lifting millions out of poverty. 
Yet skeptics might say: must we really add yet another set of letters to the alphabet soup of global bureaucracy? 
My answer is yes. 
This new agency already has immense potential. 
First, IRENA will hit the ground running in developing policy and spreading technology, partly because the countries instrumental in its birth – Denmark, Germany, and Spain – have impeccable “green” policy credentials. 
Denmark is a pioneer in commercial wind power and produces half of the world’s wind turbines. 
It may soon set the stage for the post-Kyoto world. 
Germany leads in the clean technology sector, focusing on solar power. 
By 2020, it plans to get 47% of its electricity from renewables. 
Spain was among the first countries to introduce a national energy plan aimed at promoting renewable energy sources and reducing greenhouse-gas emissions. 
I would also add here Austria, a proven international energy hub and a leader in renewable energy production and technologies. 
Second, the new agency’s wide membership – 136 States – is keen to benefit from the opportunities that renewable energy will create for growth, jobs, and helping to meet the UN’s Millennium Development Goals. 
These countries recognize the potential for renewable energy, especially new off-grid solutions in rural areas. 
Third, IRENA will be based in a developing country, a vote of confidence in the quality, institutional expertise, and dynamism that exists in the developing world. 
Moreover, a headquarters in Abu Dhabi sends an unequivocal message that promoting renewable energy is not “anti-oil.” 
Fossil fuels will be with us for some time to come, and we should continuously seek out cleaner ways to use them. 
At the same time, we must face the facts: fossil fuels will not last forever, and some supplies may dwindle soon. 
So let’s plan for the inevitable, and develop the relevant policies, technologies, and institutional infrastructure as soon as possible. 
IRENA may not be a component of the UN system, but it should be regarded as part of the family from the outset. 
A lesson we have learned from both the climate change debate on the way to the December summit in Copenhagen and from the economic crisis is that only by working together can we achieve genuine change. 
In a sense, that change has now arrived. 
IRENA is solid proof that our world has the will to turn away from the carbon-clogged past and to fuel a clean, prosperous future that both developed and developing countries can enjoy. 

Renewing Europe’s Security Dialogue 
ATHENS – The year 2009 has been one of great change, taking place amidst even greater uncertainty. 
Twenty years after the fall of the Berlin Wall, the resilience of the post-Cold War security system in Europe is being tested. 
Longstanding conflicts remain unresolved and complex new challenges are emerging. 
Energy security, organized crime, terrorism, absolutism and fundamentalism, climate change, and cybercrime are acute concerns for every country. 
The economic crisis has left many people far less prosperous, and perhaps less inclined to be ambitious in our efforts to address Europe’s security challenges. 
But we must also keep in mind that crisis brings with it opportunities for change. 
This year has also seen a number of positive developments, including a “reset” in relations between two key players in the European security dialogue: Russia and the United States. 
The European Union has recently taken important steps towards greater cohesion and unity with the appointment of a President and High Representative for Foreign Affairs. 
We should celebrate these achievements even as we recognize that serious problems remain to be resolved. 
There are different perspectives on how Europe’s security architecture should be designed, but we all agree on the urgent need to tackle this critical challenge through constructive dialogue. 
It is in this spirit of cooperation and bridge-building that 56 foreign ministers – representing the US, Canada, and European countries, including the Russian Federation and the rest of the former Soviet Union – will meet in Athens on December 1-2 on my invitation to discuss the future of European security. 
The talks mark the continuation of the “Corfu Process,” anchored in the Organization for Security and Cooperation in Europe, which began with an informal ministerial meeting on Corfu in June. 
An attempt to address Europe’s unfinished business, the Corfu Process is an opportunity for us to come together to assess the gaps in our common security, to craft more effective responses to existing challenges, and – most importantly – to generate new political will for joint action. 
This includes action to preserve arms-control regimes, including the Treaty on Conventional Armed Forces in Europe; to accelerate the resolution of protracted conflicts; to promote human rights and fundamental freedoms; and to assess and address traditional and new threats. 
We cannot afford to leave the region’s protracted conflicts such as the ones in Nagorno-Karabakh and Transnistria on the back burner, as last year’s war in Georgia made abundantly clear. 
People living in these areas need peace and stability, not a fragile status quo that could suddenly shatter and turn violent. 
Security challenges in neighboring regions also require a joint response. 
Afghanistan is a case in point. 
And threats like terrorism, trafficking of arms, drugs, and people, and climate change are borderless and complex. 
Only a joint response can be effective. 
The fall of the Berlin Wall marked the end of an era of mistrust and division, and opened the way for cooperation aimed at a peaceful and stable Europe. 
Europe has come a long way from those years of division, but we have not yet fully reaped the benefits promised by the wave of change of 1989. 
The OSCE meeting in Athens comes at a critical time, when Europeans must move into the twenty-first century more united than ever before. 
We must take this opportunity to restore the full capacity of the OSCE and make a fresh commitment to an indivisible European security system. 

Renewing the News 
NEW YORK – Last week, rumors from the world of print media were rife: a hundred reporters from The New York Times news desk to be bought out – or to lose their jobs if they refuse; steep cutbacks at British newspapers; staffs slashed at Condé Nast – eight respected editors axed at Glamour magazine. 
In the United States and elsewhere, there is a sense that the long-foreseen implosion of news publishing is accelerating, having reached a kind of critical mass. 
The head of a famous journalism school, echoing sentiments common among her peers, told me recently, “We are preparing students to enter a profession that won’t exist as we know it by the time they graduate.” 
There is no way to disguise the reality: newspaper readers, in the West at least, are getting older; younger readers prefer to get their information online, where readers spend far less time actually reading news than print readers do; and, most agonizingly of all for the industry, people who were willing to pay for newspapers are unwilling to pay for the same content on a screen. 
But does this mean the death of news, or its evolution? 
I think we are witnessing something new being born. 
There is a great deal to mourn about the passing of the older news model. 
I had the honor of attending the premiere of The Most Dangerous Man in America , the new documentary about Daniel Ellsberg and his daring release of the Pentagon Papers – against the will of the US government – to The New York Times back in 1971. 
At that time, newspapers held the public’s focus and could be a powerful gadfly. 
If you were President Richard Nixon, there was no ignoring what appeared on the front page of The New York Times . 
The blessings of the Internet are many, but one casualty of our segmentation into online subcultures is the loss of a common focal point. 
It is easy for a president or prime minister to ignore a thousand Web sites; the multiplicity of outlets and voices online, paradoxically, has weakened the media’s power to force accountability from leaders. 
But the passing of the old news model has also had a salutary effect. 
People’s relationship to authority figures – doctors, politicians, religious leaders, or, indeed, journalists – is no longer slavishly deferential. 
But this means that newspapers, in order to survive, will have to abandon their top-down tone, their “we decide what's important” sense of hierarchy, and create more collaborative kinds of documentation and feedback with citizens. 
This does not mean merely permitting comments on an article that is published online; it means creating more opportunities for citizens to document, record, curate, and edit news from their own communities. 
A new form could evolve from this changed power relationship between editors and citizens, potentially becoming as powerful as traditional journalism, if not more so. 
First, online news outlets will have to link not just to sources, but to live footage, ideally shot by citizens. 
I have created op-eds in partnership with a citizens’ video news collective, The Glass Bead collective. 
There is a potent immediacy to documents that have hyperlinks to footage of veterans being trodden underfoot by mounted police at a demonstration at the US presidential debates, or students being gassed in their rooms during the recent G-20 summit. 
As more citizens become documentarians, online newspapers will have to curate their work to reflect reality on a level of visual urgency that new readers take for granted. 
Second, news outlets will have to be interactive: they should regularly teach citizens op-ed writing, for example, so that editors can receive a truly diverse set of submissions – well sourced, well written, and well argued – from people from all walks of life. 
Finally, citizens should be able to continue to curate a news story. 
On Facebook, of all places, I experienced the amazing potential of posting an item and then inviting my “community” to continue the research as well as the debate. 
To be sure, I have been exposed to flimsy sources, and newspapers of the future should help readers learn what a good source is, and what good citizen journalism requires. 
But I have also had many eye-opening experiences as people from around the world and from every background deepen my understanding and sourcing about issues as far-ranging as military law, religious practices, and swine flu. 
With every shift in medium, there is a period of mourning for the old one. 
I don’t pretend to possess journalism’s Holy Grail: a sustainable business plan for the newspaper of the future. 
But I do know that that goal is far more likely to be achieved if newspapers take their readers seriously and train them as documentarians of their own communities and of their own moments. 
If newspaper publishers continue merely to rearrange the deck chairs, their elegant, elitist – and currently sinking – ship will deserve its fate. 

Renminbi and Reality 
BEIJING – The exchange rate of the renminbi has once again become a target of the United States Congress. 
China-bashing, it seems, is back in fashion in America. 
But this round of China-bashing appears stranger than the last one. 
When Congress pressed China for a large currency revaluation in 2004-2005, China’s current-account surplus was rising at an accelerating pace. 
This time, China’s current-account surplus has been shrinking significantly, owing to the global recession caused by the collapse of the US financial bubble. 
China’s total annual surplus (excluding Hong Kong) now stands at $200 billion, down by roughly one-third from 2008. 
In GDP terms, it fell even more, because GDP grew by 8.7% in 2008. 
Back then, pegging the renminbi to the dollar pushed down China’s real effective exchange rate, because the dollar was losing value against other currencies, such as the euro, sterling, and yen. 
But this time, with the dollar appreciating against other major currencies in recent months, the relatively fixed rate between the dollar and the renminbi has caused China’s currency to strengthen in terms of its real effective rate. 
Of course, there are other sources of friction now that did not seem as pressing five years ago. 
America’s internal and external deficits remain large, and its unemployment rate is both high and rising. 
Someone needs to take responsibility, and, as US politicians don’t want to blame themselves, the best available scapegoat is China’s exchange rate, which has not appreciated against the US dollar in the past 18 months. 
But would a revaluation of the renminbi solve America’s problems? 
Recent evidence suggests that it would not. 
Between July 2005 and September 2008 (before Lehmann Brothers’ bankruptcy), the renminbi appreciated 22% against the dollar. 
Yet the quarterly US current-account deficit actually increased – from $195 billion to $205 billion. 
Most economists agree that the renminbi is probably undervalued. 
But the extent of misalignment remains an open question. 
The economist Menzie Chinn, using purchasing power parity (PPP) exchange rates, reckoned the renminbi’s undervaluation to be 40%. 
But, after the World Bank revised China’s GDP in PPP terms downward by 40%, that undervaluation disappeared. 
Nick Lardy and Morris Goldstein suggest that the renminbi was probably undervalued only by 12-16% at the end of 2008. 
And Yang Yao of Beijing University has put the misalignment at less than 10%. 
But assume that China does revalue its currency sharply, by, say, 40%. 
If the adjustment came abruptly, Chinese companies would suffer a sudden loss of competitiveness and no longer be able to export. 
The market vacuum caused by the exit of Chinese products would probably be filled quickly by other low-cost countries like Vietnam and India. 
American companies cannot compete with these countries either. 
So no new jobs would be added in the US, but the inflation rate would increase. 
Now assume that the renminbi appreciates only moderately, so that China continues to export to the US at higher prices but lower profits. 
This would push up inflation rates significantly, forcing the US Federal Reserve to tighten monetary policy, thereby quite possibly undermining America’s recovery, which remains unsteady. 
New difficulties in the US and China, the world’s two largest economies, would have a negative impact on global investor confidence, hurting US employment even more. 
In both scenarios, US employment would not increase and the trade deficit would not diminish. 
So then what? 
The historical evidence from the 1970’s and 1980’s, when the US consistently pressed Japan to revalue the yen, suggests that US politicians would most likely demand that the renminbi appreciate even more. 
The exchange rate measures the relationship between at least two currencies, whose values are based on the productivity and domestic balance of their respective national economies. 
Causes for misalignment may be found on both sides. 
If the US dollar needs to devalue because of fundamental disequilibrium in the US economy, the problems cannot be fixed by lowering the dollar’s value alone. 
Of course, there are problems with China’s external imbalance with the US, such as excessive national savings (which account for 51% of China’s GDP) and distortions in the prices of energy and other resources. 
All those problems contribute to the imbalance, and China should fix them. 
But we should realize that there are fundamental causes for the imbalance on the US side as well, such as over-consumption financed by excessive leverage and high budget deficits. 
Only when both sides make serious efforts to fix their domestic fundamentals will the imbalances be reduced in a serious and sustained way. 
Short-run exchange-rate adjustments simply cannot fix negative long-term trends. 
China may resume a “managed float” of its exchange rate, particularly if the uncertainty of the overall post-crisis economic situation diminishes. 
In choosing whether or not to do so, its policymakers may weigh factors ranging from China’s international responsibilities to the potential damage of foreign protectionism or even a “trade war.” 
What is certain, however, is that China’s politicians have a domestic agenda just like the Americans. 
The key element of that agenda is to maintain employment growth. 
One-third of China’s labor force remains in agriculture, earning only about half what migrant workers in China’s booming cities earn. 
(Per-capita earnings for China’s farmers may rise to $770 if the renminbi appreciates by 10%, but of course that is only a US dollar-term revision, with Chinese farmers feeling no increase at all). 
Getting more farmers into better-paid manufacturing and service-industry jobs will mean not only a reduction in poverty, but lower income disparity. 
By any moral standard, that goal is at least as important as anything on America’s agenda. 


An Economic Ultimatum for the Arab World 
WASHINGTON, DC – If Middle Eastern countries do not start making real progress on fundamental political and economic reforms, further regional turmoil is inevitable. 
With the rentier systems that governments have maintained for decades now at a breaking point, policymakers must begin the difficult, but not impossible, process of establishing new social contracts. 
That contract in Arab countries started to erode at the turn of the century, when governments with inflated budgets and bloated bureaucracies could no longer provide an adequate supply of basic services such as health care and education, create a sufficient number of jobs, or sustain food and fuel subsidies. 
But, despite diminished state benefits, most leaders have continued to insist that their countries’ people uphold their end of the contract by not participating meaningfully in public life. 
Arab governments were able to sustain inefficient economies for decades because they were propped up by oil revenues. 
In recent decades, most Arab countries have benefited in some way from the Middle East’s abundant oil and gas reserves. 
Hydrocarbon-producing countries used their profits to buy their citizens’ loyalty and establish what were effectively welfare states; and non-oil producers enjoyed the benefits of aid, capital inflows, and remittances sent back by their nationals working in resource-rich countries. 
Because the governments of oil-producing countries used revenues to provide for most of their people’s needs – including jobs, services, and favors – these governments fostered a culture of dependency, rather than encouraging self-reliance and entrepreneurship to expand the private sector. 
What’s more, because they did not need to tax their citizens to generate revenues, people had little recourse to challenge authoritarianism. 
The political culture reflected a simple principle: “no taxation, no representation.” 
Now that oil prices are declining and will likely continue to remain low for several years, if not permanently, the Middle East’s rentier systems face a significant challenge. 
Saudi Arabia, for example, is raising taxes, cutting domestic subsidies, and shifting its foreign-aid paradigm away from grants and toward investments. 
The kingdom has long provided financial support to Egypt, Jordan, and other countries in the region, so this shift will put pressure on those governments to pursue private-sector growth to improve their own countries’ economic performance. 
But, while the Arab world’s governments have reached the limits of their ability to employ more people, raise public debt, and attract outside grants, members of these countries’ political and economic elite, whom the current rentier system privileges, will likely resist efforts at substantive reform. 
And we should expect to see further opposition from state bureaucracies, which lack any vision for a transition to an inclusive and sustainable economic model. 
Still, Middle Eastern countries cannot hope to develop prosperous economies without such a transition. 
After relying on resource rents for decades, these governments must switch not only to new growth models, but also to more representative governance. 
When Arab societies are asked to accept reduced subsidies, fewer government jobs, and less from the state in general, they will demand a larger share in the decision-making process. 
As it stands, the Arab world is stuck between an unsustainable economic and political status quo and the inclusive, merit-based economic system that less myopic people in the region know must replace it. 
Too many Arab governments have put themselves in this untenable situation, having given little consideration to building the governance institutions their states need. 
The first wave of Arab uprisings, which began in December 2010 and led to the 2011 Arab Spring, was a response to the breakdown of the old social contracts. 
In today’s perfect storm of declining oil prices and closed political systems, a new wave of protest could well emerge, particularly where governments have not recognized that the end of rentierism marks the end of the old social contract. 
For these governments, economic reform is now a matter of survival. 
In a more open system, Arab governments will need to privatize many state-controlled companies, and make it far easier for entrepreneurs to register start-ups and launch new businesses. 
And, ultimately, Arab states’ economic reforms will succeed only if citizens gain a more powerful voice in governance. 
Tunisia is the one country where a new social contract has begun to replace rentierism. 
The rest of the Arab world faces two alternatives. 
Its leaders can begin fighting the cancer of an unsustainable status quo, with all the pain and uncertainty that such a struggle entails; or they can wait for the cancer to become a terminal condition, and be devoured by it. 

The World Without America 
NEW YORK – Let me posit a radical idea: The most critical threat facing the United States now and for the foreseeable future is not a rising China, a reckless North Korea, a nuclear Iran, modern terrorism, or climate change. 
Although all of these constitute potential or actual threats, the biggest challenges facing the US are its burgeoning debt, crumbling infrastructure, second-rate primary and secondary schools, outdated immigration system, and slow economic growth – in short, the domestic foundations of American power. 
Readers in other countries may be tempted to react to this judgment with a dose of schadenfreude, finding more than a little satisfaction in America’s difficulties. 
Such a response should not be surprising. 
The US and those representing it have been guilty of hubris (the US may often be the indispensable nation, but it would be better if others pointed this out), and examples of inconsistency between America’s practices and its principles understandably provoke charges of hypocrisy. 
When America does not adhere to the principles that it preaches to others, it breeds resentment. 
But, like most temptations, the urge to gloat at America’s imperfections and struggles ought to be resisted. 
People around the globe should be careful what they wish for. 
America’s failure to deal with its internal challenges would come at a steep price. 
Indeed, the rest of the world’s stake in American success is nearly as large as that of the US itself. 
Part of the reason is economic. 
The US economy still accounts for about one-quarter of global output. 
If US growth accelerates, America’s capacity to consume other countries’ goods and services will increase, thereby boosting growth around the world. 
At a time when Europe is drifting and Asia is slowing, only the US (or, more broadly, North America) has the potential to drive global economic recovery. 
The US remains a unique source of innovation. 
Most of the world’s citizens communicate with mobile devices based on technology developed in Silicon Valley; likewise, the Internet was made in America. 
More recently, new technologies developed in the US greatly increase the ability to extract oil and natural gas from underground formations. 
This technology is now making its way around the globe, allowing other societies to increase their energy production and decrease both their reliance on costly imports and their carbon emissions. 
The US is also an invaluable source of ideas. 
Its world-class universities educate a significant percentage of future world leaders. 
More fundamentally, the US has long been a leading example of what market economies and democratic politics can accomplish. 
People and governments around the world are far more likely to become more open if the American model is perceived to be succeeding. 
Finally, the world faces many serious challenges, ranging from the need to halt the spread of weapons of mass destruction, fight climate change, and maintain a functioning world economic order that promotes trade and investment to regulating practices in cyberspace, improving global health, and preventing armed conflicts. 
These problems will not simply go away or sort themselves out. 
While Adam Smith’s “invisible hand” may ensure the success of free markets, it is powerless in the world of geopolitics. 
Order requires the visible hand of leadership to formulate and realize global responses to global challenges. 
Don’t get me wrong: None of this is meant to suggest that the US can deal effectively with the world’s problems on its own. 
Unilateralism rarely works. 
It is not just that the US lacks the means; the very nature of contemporary global problems suggests that only collective responses stand a good chance of succeeding. 
But multilateralism is much easier to advocate than to design and implement. 
Right now there is only one candidate for this role: the US. 
No other country has the necessary combination of capability and outlook. 
This brings me back to the argument that the US must put its house in order – economically, physically, socially, and politically – if it is to have the resources needed to promote order in the world. 
Everyone should hope that it does: The alternative to a world led by the US is not a world led by China, Europe, Russia, Japan, India, or any other country, but rather a world that is not led at all. 
Such a world would almost certainly be characterized by chronic crisis and conflict. 
That would be bad not just for Americans, but for the vast majority of the planet’s inhabitants. 

A “Macroneconomic” Revolution? 
LONDON – Next month will mark the tenth anniversary of the global financial crisis, which began on August 9, 2007, when Banque Nationale de Paris announced that the value of several of its funds, containing what were supposedly the safest possible US mortgage bonds, had evaporated. 
From that fateful day, the advanced capitalist world has experienced its longest period of economic stagnation since the decade that began with the 1929 Wall Street crash and ended with the outbreak of World War II ten years later. 
A few weeks ago, at the Rencontres Économiques conference in Aix-en-Provence, I was asked if anything could have been done to avert the “lost decade” of economic underperformance since the crisis. 
At a session entitled “Have we run out of economic policies?” my co-panelists showed that we have not. 
They provided many examples of policies that could have improved output growth, employment, financial stability, and income distribution. 
That allowed me to address the question I find most interesting: Given the abundance of useful ideas, why have so few of the policies that might have ameliorated economic conditions and alleviated public resentment been implemented since the crisis? 
The first obstacle has been the ideology of market fundamentalism. 
Since the early 1980s, politics has been dominated by the dogma that markets are always right and government economic intervention is almost always wrong. 
This doctrine took hold with the monetarist counter-revolution against Keynesian economics that resulted from the inflationary crises of the 1970s. 
It inspired the Thatcher-Reagan political revolution, which in turn helped to propel a 25-year economic boom from 1982 onward. 
But market fundamentalism also inspired dangerous intellectual fallacies: that financial markets are always rational and efficient; that central banks must simply target inflation and not concern themselves with financial stability and unemployment; that the only legitimate role of fiscal policy is to balance budgets, not stabilize economic growth. 
Even as these fallacies blew up market-fundamentalist economics after 2007, market-fundamentalist politics survived, preventing an adequate policy response to the crisis. 
That should not be surprising. 
Market fundamentalism was not just an intellectual fashion. 
Powerful political interests motivated the revolution in economic thinking of the 1970s. 
The supposedly scientific evidence that government economic intervention is almost always counter-productive legitimized an enormous shift in the distribution of wealth, from industrial workers to the owners and managers of financial capital, and of power, from organized labor to business interests. 
The Polish economist Michal Kalecki, a co-inventor of Keynesian economics (and a distant relative of mine), predicted this politically motivated ideological reversal with uncanny accuracy back in 1943: 
“The assumption that a government will maintain full employment in a capitalist economy if it knows how to do it is fallacious. 
Under a regime of permanent full employment, ‘the sack’ would cease to play its role as a disciplinary measure, leading to government-induced pre-election booms. 
The workers would get out of hand and the captains of industry would be anxious ‘to teach them a lesson.’ 
A powerful bloc is likely to be formed between big business and rentier interests, and they would probably find more than one economist to declare that the situation was manifestly unsound.” 
The economist who declared that government policies to maintain full employment were “manifestly unsound” was Milton Friedman. 
And the market-fundamentalist revolution that he helped to lead against Keynesian economics lasted for 30 years. 
But, just as Keynesianism was discredited by the inflationary crises of the 1970s, market fundamentalism succumbed to its own internal contradictions in the deflationary crisis of 2007. 
A specific contradiction of market fundamentalism suggests another reason for income stagnation and the recent upsurge of populist sentiment. 
Economists believe that policies that increase national income, such as free trade and deregulation, are always socially beneficial, regardless of how these higher incomes are distributed. 
This belief is based on a principle called “Pareto optimality,” which assumes that the people who gain higher incomes can always compensate the losers. 
Therefore, any policy that increases aggregate income must be good for society, because it can make some people richer without leaving anyone worse off. 
But what if the compensation assumed by economists in theory does not happen in practice? 
What if market-fundamentalist politics specifically prohibits the income redistribution or regional, industrial, and education subsidies that could compensate those who suffer from free trade and labor-market “flexibility”? 
In that case, Pareto optimality is not socially optimal at all. 
Instead, policies that intensify competition, whether in trade, labor markets, or domestic production, may be socially destructive and politically explosive. 
This highlights yet another reason for the failure of economic policy since 2007. 
The dominant ideology of government non-intervention naturally intensifies resistance to change among the losers from globalization and technology, and creates overwhelming problems in sequencing economic reforms. 
To succeed, monetary, fiscal, and structural policies must be implemented together, in a logical and mutually reinforcing order. 
But if market fundamentalism blocks expansionary macroeconomic policies and prevents redistributive taxation or public spending, populist resistance to trade, labor-market deregulation, and pension reform is bound to intensify. 
Conversely, if populist opposition makes structural reforms impossible, this encourages conservative resistance to expansionary macroeconomics. 
Suppose, on the other hand, that the “progressive” economics of full employment and redistribution could be combined with the “conservative” economics of free trade and labor-market liberalization. 
Both macroeconomic and structural policies would then be easier to justify politically – and much more likely to succeed. 
Could this be about to happen in Europe? 
France’s new president, Emmanuel Macron, based his election campaign on a synthesis of “right-wing” labor reforms and a “left-wing” easing of fiscal and monetary conditions – and his ideas are gaining support in Germany and among European Union policymakers. 
If “Macroneconomics” – the attempt to combine conservative structural policies with progressive macroeconomics – succeeds in replacing the market fundamentalism that failed in 2007, the lost decade of economic stagnation could soon be over – at least for Europe. 

China’s New Growth Order 
HONG KONG – Between 1978 and 2012, China’s GDP grew at an average annual rate of about 10% – from $341 billion to $8.3 trillion (at 2012 prices) – lifting more than 500 million Chinese out of poverty in the process. 
Much of this was due to an export-led industrialization and urbanization strategy that opened up new opportunities in the rapidly expanding cities, where labor, capital, technology, and infrastructure came together to form supply capacities for global markets. 
According to the McKinsey Global Institute, by 2025, 29 of the world’s 75 most dynamic cities will be in China. 
But this urban-based, export-led growth model also created more challenges than it can now handle: property bubbles, traffic jams, pollution, unsustainable local government debt, land-related corruption, and social unrest related to unequal access to social welfare. 
As a result, a shift toward a new consumption-based growth model – one that emphasizes stability, inclusiveness, and sustainability – is at the top of China’s agenda. 
China is searching for a new “growth order” for its restlessly expanding cities. 
The current economic-growth model considers the configuration of key factors of production – land, labor, capital, and total factor productivity (a measure of efficiency). 
But this narrow focus on output neglects the economy’s human dimension – that is, how growth affects ordinary Chinese citizens’ lives. 
A growth order, by contrast, implies an emphasis on the configuration of sociopolitical and economic institutions – including norms, procedures, laws, and enforcement mechanisms – to achieve social objectives, such as improved living standards, a healthier natural environment, and a harmonious and innovative society. 
The growth order’s stability will depend on institutionalized and effective coordination between the state, the market, and society – a major challenge, given the divergent interests within and among these groups. 
But, more important, much of the growth order’s effectiveness will depend on the relationship between the central and local governments in the delivery of public services for the market. 
Indeed, contrary to popular belief outside China, the Chinese state is not monolithic; it is a highly complex bureaucracy with many layers of government and quasi-government institutions that do not always conform to central directives. 
The central government is in charge of national or systemic interests, deploying legal, regulatory, and broad monetary and fiscal policies to achieve its ends. 
But the state interacts with private enterprises, individuals, and civil society mainly through local governments and local offices of national regulatory agencies. 
A distinctive feature of the Chinese growth order is that local governments compete actively against each other for jobs, revenue, investment, and access to fiscal and human resources. 
This is because local governments’ leaders are appointed centrally, and, until recently, promotion has been based largely on the ability to generate GDP growth at the local level, leading to over-investment in the economy as a whole. 
Hence, the interplay between local and central governments is complex, particularly in terms of revenue sharing and responsibility for providing public services. 
Although the central government may be committed to reforms, implementation at the local level can be very uneven, owing to parochial and vested interests. 
For example, since 2008, when the central authorities tried to boost growth to combat the global crisis, local governments expanded their investment capacity through shadow-banking vehicles that sought to circumvent restraints on bank credit. 
Because local governments receive 50% of total national fiscal revenue, but account for 85% of total fiscal expenditure, they try to supplement their budgets through land sales. 
In 2012, Chinese local governments received ¥2.9 trillion ($475 billion) in revenue from land and property sales, compared with ¥6.1 trillion in other local revenue. 
Compared to the private sector, local governments and state-owned enterprises tend to have access to significantly cheaper funding, with the gap between official interest rates and shadow-banking borrowing costs reaching as much as ten percentage points. 
Cheap funding and land revenue have led to excess infrastructure and industrial capacity without adequate market discipline. 
From 2008 to 2012, fixed-asset investment in China amounted to ¥136 trillion, or 2.6 times more than the country’s 2012 GDP. 
Rebalancing the economy by shifting toward domestic consumption and avoiding over-investment will require major fiscal and monetary reforms, as well as structural reforms to delineate land-use rights more clearly. 
It will also require revising the framework for revenue sharing between central and local governments, as well as transparency in local-government finance. 
These reforms stand at the center of the state-market debate, because the private sector, caught in the complex interplay between central-local power sharing, can easily be crowded out. 
Thus, creating a new growth order requires the central government to align institutional structures and incentives so that local governments and the market can play to their strengths. 
The market must be allowed the space to innovate, while the state must implement the necessary institutional and procedural reforms. 
Striking the right balance between market-based product innovation and state-led institutional innovation will be the main challenge that China faces in the years ahead. 


A Conservative Plan to Combat Global Warming 
CAMBRIDGE – I recently joined several other former senior Republican officials in proposing a plan to limit carbon dioxide emissions. 
The group includes Jim Baker, Henry Paulson, and George Shultz – all of them Republican former treasury secretaries – as well as my Harvard colleague Greg Mankiw, who served as Chairman of the President’s Council of Economic Advisers under George W. Bush. 
I served in the same role under President Ronald Reagan. 
I cite these participants to emphasize the level of conservative support for this proposal, which comes at a time when Republicans have generally opposed government efforts to limit CO2 emissions, while Democrats have favored such plans. 
We hope that Republican support for our plan will provide the basis for bipartisan legislation. 
The plan calls for combining taxes on all sources of CO2 with a rebate of the collected revenues to all households on a per capita basis. 
Experts tell us that a tax of $40 per metric ton would achieve greater reduction in CO2 than all of the existing emissions regulations. 
Our plan therefore calls for legislation that eliminates all of this intrusive regulation in tandem with the tax-and-dividend plan. 
Our group recognizes that there is substantial controversy about the extent of global warming both now and in the future, as well as about the role of CO2 emissions from automobiles, home heating, and other human activity in contributing to that warming. 
But we believe the risk that CO2 emissions will lead to dangerous future increases in global temperature is high enough that a policy should be adopted to reduce it. 
A carbon tax is the simplest and economically most efficient way to limit CO2 emissions. 
It is better than the more cumbersome methods of regulation now in place. 
It is also simpler and more reliable than the “cap and trade” method that has been tried in Europe and proposed during President Barack Obama’s administration. 
The strategy of a carbon tax is very simple: require each household and business that causes CO2 emissions to pay a tax in proportion to the volume of emissions that they create – whether by using gasoline to drive their car or oil to heat their home or in operating a business. 
A carbon tax would be levied indirectly by taxing the raw material at the point at which it enters the economy. 
Thus, oil would be taxed at the refinery, coal when it leaves the mine, and so on. 
The tax would then be built into the prices of the products made from the raw material. 
Individuals and businesses would internalize the carbon tax without the inconvenience of paying a tax on each transaction. 
Because the carbon tax would be reflected in the prices of all goods and services that use carbon in their production, households and businesses would have an incentive to change their behavior in ways that reduce the volume of CO2 emissions. 
That might mean driving less, using more fuel-efficient technology, or investing in conservation. 
Solar power and wind power would become more competitive relative to carbon-based power without the need for government subsidies. 
Different types of carbon-based raw materials produce different amounts of CO2. 
For example, using coal to generate electricity produces more CO2 than using natural gas. 
The carbon tax at the point of entry to the economy would therefore vary by the type of raw material. 
Engineering experts can advise the US Congress how much to tax each type of carbon-based raw material to achieve a tax equal to $40 per ton of CO2 (or whatever level of overall tax is desired). 
The practical problem of enacting a carbon tax has been political. 
No one wants to pay more taxes. 
That’s why our plan calls for combining the carbon tax with a “cash dividend” to households. 
Each household would receive the same “carbon dividend” for each adult and half that amount for each child. 
The dividend would not depend on the amount of carbon tax that households pay. 
Thus, the carbon tax would provide the right incentive by being proportionate to the payer’s emissions, while the carbon dividend would cause about two-thirds of all households to receive more in cash than they pay in carbon taxes. 
A carbon tax of $40 per ton would produce enough revenue to give a four-person household a $2,000 annual dividend. 
We propose that the level of the tax be reviewed every five years in light of current scientific evidence on global warming and its link to CO2 emissions. 
Even if it were appropriate to raise the level of the tax, the same procedure for returning all of the revenue to households would apply. 
Because a carbon tax would raise the cost of US exports, the legislation that we propose calls for a rebate to exporters equal to the amount of carbon tax built into their product. 
Similarly, our carbon tax would be levied on imports from countries that do not impose an equivalent carbon tax, and the revenue would be added to the pool of funds distributed to all households. 
After this plan was publicly released earlier this month, I received a very large number of emails from individuals on the left and right saying how much they like the idea. 
Democrats applaud Republicans for proposing a plan to reduce CO2 emissions and combat global warming. 
Republicans like the idea of dealing effectively with global warming while eliminating the existing environmental regulations. 
Democrats are traditionally the main US advocates of legislation to reduce CO2 emissions. 
With Republicans now in control of both houses of Congress and the presidency, the time is right to enact a plan that will command bipartisan support. 

America’s Supply-Side Scam 
NEW HAVEN – Tax cuts masquerading as tax reform are the best way to describe the thrust of Washington’s latest policy gambit. 
The case is largely political – namely, the urgency of a Republican Congress to deliver a legislative victory for a Republican president. 
The consequences, however, are ultimately economic – and, unsurprisingly, likely to be far worse than the politicians are willing to admit. 
Taking the lead from President Donald Trump, the political case for tax cuts is that they are essential to “make America great again.” 
Over-taxed and cheated by bad trade deals, goes the argument, America needs tax relief to revive its competitive prowess. 
Notwithstanding the political pandering to hard-pressed middle-class families, corporate America is clearly the focus of these efforts, with proposed legislation aiming to reduce business tax rates from 35% to 20%. 
Never mind that US companies currently pay a surprisingly low effective corporate tax rate – just 22% – when judged against post-World War II experience. 
And pay no attention to the latest tally of international competitiveness by the World Economic Forum, which finds the US back in second place (out of 137 countries). 
And, of course, don’t draw comfort from the lofty stock-market valuations of the broad constellation of US companies. 
Forget all that, Republicans insist: cut business taxes, they say, and all that ails America will be cured. 
There are times when the politicization of economic arguments becomes dangerous. 
This is one of those times. 
The US simply can’t afford the current tax cuts making their way through Congress. 
According to the nonpartisan Congressional Budget Office, the cuts will result in a cumulative deficit of about $1.4 trillion over the next decade. 
The problem arises because America’s chronic saving shortfall has now moved into the danger zone, making it much more difficult to fund multi-year deficits today than was the case when cutting taxes in the past. 
The so-called Kennedy tax cuts of 1964 and the Reagan tax cuts of 1981 are important cases in point. 
The net national saving rate – the broadest measure of domestic saving, which includes depreciation-adjusted saving of households, businesses, and the government sector – averaged 10.1% during those two years (1964 and 1981). 
In other words, back then the US could afford to enact major tax cuts. 
That is not the case today, with the net domestic saving rate a mere 1.8% of national income. 
Even during the two tax cuts that followed – the second installment of Reagan’s fiscal program in 1986, and the initiatives of George W. Bush in 2001 – the net national saving rate averaged 4.2%, more than double the current level. 
Both experience and macroeconomic theory indicate what to expect. 
Saving-short economies simply cannot go on deficit-spending binges without borrowing surplus saving from abroad. 
That is what brings the balance-of-payments and trade deficits directly into the debate over fiscal policy. 
Significantly, the US current account was in slight surplus during the big tax cuts of 1964 and 1981 – in sharp contrast to today’s deficit of 2.6% of GDP. 
With fiscal deficits likely to push an already-low domestic saving rate even lower – possibly back into negative territory, as was the case from 2008-11 – there is a great risk of a sharply higher current-account deficit. 
And a bigger current-account deficit means that the already-large trade deficit will only widen further, violating one of the main tenets of Trumponomics – that making America great again requires closing the trade gap. 
It is at this point where the tale goes from fact to fiction. 
Trump and the congressional Republican majority insist that the proposed tax cuts will be self-financing, because they will spur economic growth, causing revenues to surge. 
This so-called supply-side argument, first advanced in support of the Reagan-era tax cuts, has been a lightning rod in US fiscal policy debates ever since. 
Reality has turned out quite differently than the supply-siders envisioned. 
Yes, the economy recovered spectacularly from a deep recession in 1981-1982. 
But that was due largely to an aggressive easing of monetary policy following the Federal Reserve’s successful assault on double-digit US inflation. 
By contrast, the fiscal nirvana long promised by supply siders never materialized. 
Far from vanishing into thin air, federal budget deficits ballooned to 3.8% of GDP during the 1980s, taking public debt from 25% of GDP in 1980 to 41% by 1990. 
Not only did the supply siders’ self-funding promises go unfulfilled; they also marked the beginning of the end for America’s balance-of-payments equilibrium. 
From 1960 to 1982, the current account was basically in balance, with a surplus averaging 0.2% of GDP. 
On the heels of the budget deficits of Reaganomics and the related plunge in national saving, the current account swung sharply into deficit, averaging -2.4% of GDP from 1983 to 1989. 
And it has remained in deficit ever since (with the exception of a temporary reprieve in the first two quarters of 1991 due to external funding of the Gulf War). 
Far from a recipe for greatness, the Trump fiscal gambit spells serious trouble. 
Lacking in saving, outsize US budget deficits point to sharp deterioration on the balance-of-payment and trade fronts. 
Nor will creative supply-side accounting alter that outcome. 
A “dynamic scoring” by the nonpartisan Tax Policy Center suggests growth windfalls might prune the multiyear deficit from $1.4 trillion to $1.3 trillion over the next decade – hardly enough to finesse America’s intractable funding problem. 
George H.W. Bush said it best when he was campaigning for the Republican presidential nomination in April 1980. 
He rightly criticized the “voodoo economic policy” of his opponent, Ronald Reagan. 
For today’s saving-short US economy, déjà vu is a painful understatement of what lies ahead. 

Déjà Voodoo 
NEW YORK – Having failed to “repeal and replace” the 2010 Affordable Care Act (“Obamacare”), US President Donald Trump’s administration and the Republican congressional majority have now moved on to tax reform. 
Eight months after assuming office, the administration has been able to offer only an outline of what it has in mind. 
But what we know is enough to feel a deep sense of alarm. 
Tax policy should reflect a country’s values and address its problems. 
And today, the United States – and much of the world – confronts four central problems: widening income inequality, growing job insecurity, climate change, and anemic productivity growth. 
America faces, in addition, the need to rebuild its decaying infrastructure and strengthen its underperforming primary and secondary education system. 
But what Trump and the Republicans are offering in response to these challenges is a tax plan that provides the overwhelming share of benefits not to the middle class – a large proportion of which may actually pay more taxes – but to America’s millionaires and billionaires. 
If inequality was a problem before, enacting the Republicans’ proposed tax reform will make it much worse. 
Corporations and businesses will be among the big beneficiaries, a bias justified on the grounds that this will stimulate the economy. 
But Republicans, of all people, should understand that incentives matter: it would be far better to reduce taxes for those companies that invest in America and create jobs, and increase taxes for those that don’t. 
After all, it is not as if America’s large corporations were starved for cash; they are sitting on a couple of trillion dollars. 
And the lack of investment is not because profits, either before or after tax, are too low; after-tax corporate profits as a share of GDP have almost tripled in the last 30 years. 
Indeed, with incremental investment largely financed by debt, and interest payments being tax-deductible, the corporate tax lowers the cost of capital and the returns to investment commensurately. 
Thus, neither theory nor evidence suggests that the Republicans’ proposed corporate tax giveaway will increase investment or employment. 
The Republicans also dream of a territorial tax system, whereby American corporations are taxed only on the income they generate in the US. 
But this would only reduce revenue and further encourage American companies to shift production to low-tax jurisdictions. 
A race to the bottom on corporate taxation can be prevented only by imposing a minimum rate on any corporation that engages in business in the US. 
America’s states and municipalities are responsible for education and large parts of the country’s health and welfare system. 
And state income taxes are the best way to introduce a modicum of progressivity at the subnational level: states without an income tax typically rely on regressive sales taxes, which impose a heavy burden on the poor and working people. 
It is thus perhaps no surprise that the Trump administration, staffed by plutocrats who are indifferent to inequality, should want to eliminate the deductibility of state income taxes from federal taxation, encouraging states to shift toward sales taxes. 
Addressing the panoply of other problems confronting the US will require more federal revenues, not less. 
Increases in standards of living, for example, are the result of technological innovation, which in turn depends on basic research. 
But federal government support of research as a percentage of GDP is now at a level comparable to what it was 60 years ago. 
While Trump the candidate criticized the growth of US national debt, he now proposes tax cuts that would add trillions to the debt in just the next ten years – not the “only” $1.5 trillion that Republicans claim would be added, thanks to some growth miracle that leads to more tax revenues. 
Yet the key lesson of Ronald Reagan’s “voodoo” supply-side economics has not changed: tax cuts like these do not lead to faster growth, but only to lower revenues. 
This is especially so now, when the unemployment rate is just over 4%. 
Any significant increase to aggregate demand would be met by a corresponding increase in interest rates. 
The “economic mix” of the economy would thus shift away from investment; and growth, already anemic, would slow. 
An alternative framework would increase revenues and boost growth. 
It would include real corporate-tax reform, eliminating the tricks that allow some of the world’s largest companies to pay miniscule taxes, in some cases far less than 5% of their profits, giving them an unfair advantage over small local businesses. 
It would establish a minimum tax and eliminate the special treatment of capital gains and dividends, compelling the very rich to pay at least the same percentage of their income in taxes as other citizens. 
And it would introduce a carbon tax, to help accelerate the transition to a green economy. 
Tax policy can also be used to shape the economy. 
In addition to offering benefits to those who invest, carry out research, and create jobs, higher taxes on land and real-estate speculation would redirect capital toward productivity-enhancing spending – the key to long-term improvement in living standards. 
An administration of plutocrats – most of whom gained their wealth from rent-seeking activities, rather than from productive entrepreneurship – could be expected to reward themselves. 
But the Republicans’ proposed tax reform is a bigger gift to corporations and the ultra-rich than most had anticipated. 
It avoids necessary reforms and would leave the country with a mountain of debt; the consequences – low investment, stalled productivity growth, and yawning inequality – would take decades to undo. 
Trump assumed office promising to “drain the swamp” in Washington, DC. 
Instead, the swamp has grown wider and deeper. 
With the Republicans’ proposed tax reform, it threatens to engulf the US economy. 

The Plot Against America’s 99% 
NEW YORK – After multiple failed attempts to “repeal and replace” the 2010 Affordable Care Act (Obamacare), US President Donald Trump’s administration now hopes to achieve its first legislative victory with a massive tax giveaway that it has wrapped in the language of “tax reform.” 
To that end, Republicans in the US Congress have just unveiled a bill that, if enacted, could vastly widen the deficit and increase the public debt by as much as $4 trillion over the next decade. 
Worse still, the Republican plan is designed to funnel most of the benefits to the rich. 
It would lower the corporate tax rate from 35% to 20%, reduce the tax on capital gains (investment profits), eliminate the estate tax, and introduce other changes that benefit the wealthy. 
Like the Republicans’ health-care proposals, their tax plan offers little to struggling middle- and working-class households. 
Trump continues to govern as a pluto-populist – a plutocrat pretending to be a populist – who has not hesitated to betray the people he conned into voting for him. 
Before releasing the current plan, congressional Republicans passed resolutions to reduce taxes by $1.5 trillion over the next decade. 
But the actual tax cut will likely be much larger. 
The proposal to lower the corporate tax rate to 20%, for example, implies a $2.5 trillion tax cut, once other tax cuts in the plan are considered. 
To keep the tax cuts below $1.5 trillion, one would have to keep the corporate rate at or above 28% and broaden the tax base. 
To make up for this difference, the bill proposes a cap on the mortgage-interest deduction for homeowners, and on the deductibility of property tax, as well as eliminating other tax benefits for the middle class. 
It would eliminate or cap the income-tax deduction for state and local taxes – again, squeezing the middle class to cover tax cuts for the rich. 
The problem is that eliminating the state and local tax deduction would provide just $1.3 trillion in revenue over the next decade. 
And because this change would hurt middle-income families, many Republicans in high-tax states such as New York, New Jersey, and California will oppose it. 
If congressional Republicans and the Trump administration end up keeping the state and local tax deduction, their tax cuts will add $3.8 trillion to the public debt over the next decade. 
Moreover, Republicans want their tax cuts to be permanent. 
Yet they are trying to enact their bill through the congressional budget reconciliation process, which requires any tax cuts that add to the deficit after ten years to be temporary. 
Even if the Republican plan really did keep the cuts at $1.5 trillion, it still would not comply with this rule. 
Trump and congressional Republicans argue that tax cuts will boost economic growth, and thus revenues. 
But standard dynamic scoring models show that increased growth would offset the cost by only one third, at most: the US would face $1 trillion, rather than $1.5 trillion, in lost revenues. 
So, how will the Republicans fudge these fiscal rules? 
For starters, like President George W. Bush’s administration, they will set the personal income tax cuts to expire after ten years. 
This will give them plenty of time to enjoy the political gains of tax cuts – starting with the midterm elections in 2018 – long before the bill comes due. 
But corporate tax cuts are another matter, because making them temporary would defeat the purpose. 
Companies operate with a much longer time horizon than households, and are unlikely to boost investment in response to cuts that last only ten years. 
To get around this problem, Trump and the Republicans might decide to bend or manipulate congressional rules. 
Or they might rely on unorthodox and untested economic models to claim that their cuts actually are revenue-neutral, and will have a much larger impact on growth than what standard models project. 
Most mainstream economists would estimate that a tax cut of the size being proposed would increase US potential growth by 20 basis points, at most, taking the growth rate from around 2% to 2.2% over time. 
Yet Trump and his advisers have clung to the false claim that growth will increase to 3% or even 4%. 
If this far-fetched projection sounds like voodoo economics all over again, that’s because it is. 
Voodoo economics came into parlance in the 1980 presidential election, when George H. W. Bush criticized Ronald Reagan for claiming that his planned tax cuts would pay for themselves. 
Bush was vindicated just a few years later, when the Reagan administration’s tax cuts blew a huge hole in US public finances. 
And yet Republican administrations have persisted in pursuing unsustainable and undesirable tax cuts benefiting primarily the rich, leading to ever-larger deficits and trillions of dollars of additional public debt. 
The Republicans’ eagerness to pass reckless tax cuts once in power gives the lie to their claims of fiscal rectitude. 
Making matters worse, America’s pluto-populist president is peddling a tax plan that will further increase economic inequality at a time when income and wealth gaps are already widening, owing to the effects of globalization, trade, migration, new labor-saving technologies, and market consolidation in many sectors. 
Given that the rich tend to save more than middle- and working-class people, who must spend a larger proportion of their incomes on basic necessities, the Trump tax plan will do little for economic growth; it may even decrease it. 
And it will add far more to the US’s excessively high public-debt burden. 
It is fake reform, brought to us by an alt-fact administration and a party that has lost its economic bearings. 

Republicans’ Responsibility for Gun Violence 
BOSTON – After the mass shooting at a concert in Las Vegas, Nevada, on Sunday night, Republican Senate Majority Leader Mitch McConnell told reporters that, “It’s particularly inappropriate to politicize an event like this. 
It just happened within the last day and a half.” 
With 59 dead and more than 500 injured, McConnell insisted that it was “[e]ntirely premature to be discussing about legislative solutions” to America’s gun-violence epidemic. 
His party’s legislative priority, he added, would continue to be tax cuts. 
McConnell’s response was fully in keeping with the Republican Party’s stance on gun violence. 
It is disheartening, however, that none of the reporters assembled in front of McConnell so much as tried to call him out on his position. 
It would not have been unreasonable to ask the Senate majority leader: “If you think it is premature now, then when do you think the right time will be? 
Could you provide a timetable?” 
Nor would it be unreasonable to question the premise that Democrats are “politicizing” a tragedy. 
After all, claiming politicization has been the go-to Republican talking point after every gun massacre for decades now. 
McConnell and his Republican colleagues should have to explain why they will not even discuss policy solutions to the scourge of gun violence in America, instead of being allowed to continue pursuing their transparent efforts simply to avoid the issue of gun control. 
And they must be held accountable for their positions, which reflect an instinct, both telling and chilling, to view any discussion about gun violence as a political issue, offering an opportunity to score partisan points, rather than as a policy and public-safety issue. 
One could argue that the repeated mass shootings in the United States over the past few decades have all had a Republican stamp on them. 
After every (predictable) tragedy, the party mobilizes to block any legislation that might strengthen gun controls. 
In 1996, the Republican-controlled Congress went so far as to threaten to defund the Centers for Disease Control and Prevention if it even tried to study gun violence. 
Until the Sandy Hook massacre in 2012, the CDC was forced to abstain from conducting any such research. 
The response to the Las Vegas shooting from Paul Ryan, the Republican Speaker of the House of Representatives, has been to dismiss the issue of guns, and to instead frame the tragedy as primarily a mental-health issue. 
Accordingly, Ryan has been breathily touting reforms to the mental-health system that Republicans supposedly worked on in the past. 
But Ryan chose not to mention the fact that, this past February, his Republican colleagues (and four Democrats) in the Senate voted to revoke a rule requiring the Social Security Administration to report the names of mentally-disabled Social Security recipients to the National Instant Criminal Background Check System. 
After that vote, US President Donald Trump repealed the rule, allowing mentally ill individuals to purchase deadly firearms without hindrance. 
Ryan also neglected to mention that his party’s repeated efforts to repeal the 2010 Affordable Care Act (“Obamacare”) included plans to defund mental-health programs, and to eliminate a rule requiring insurance companies and Medicaid to provide mental-health treatments. 
Journalists and pundits tend to be vague when assessing culpability in this distinctly American tale. 
They blame the failure to address America’s gun-violence problem on Congress, the “Washington establishment,” or the political system as a whole. 
Such manufactured even-handedness is tantamount to “fake news.” 
It is time to call a spade a spade: the Republican Party is overwhelmingly responsible. 
Consider the issue of “bump stocks,” the gun modification that the perpetrator of the Las Vegas massacre used to be able to fire faster. 
Some Republican senators have now drawn praise for indicating that they will support a ban on the device. 
But when Democratic Senator Diane Feinstein proposed a similar ban in 2013, Republicans overwhelmingly opposed her. 
After decades of such staunch opposition to any semblance of gun control, the small amount of flexibility Republicans are showing on banning bump stocks – which will just make killing with semi-automatic weapons slightly slower – should not be reason for high praise. 
To be sure, some congressional Democrats and independents have occasionally joined with Republicans in blocking gun-control legislation. 
But there is a fundamental difference: Democrats who oppose gun controls do so in defiance of their party’s official program, whereas Republicans do so in conformity with theirs. 
As a result, the degree of culpability between the parties is not even close. 
For evidence of this, one need only follow the money. 
According to the Los Angeles Times, in 2016, the National Rifle Association (NRA) donated $52.6 million to electoral campaigns, of which just $265 – yes, you read that right – went to Democratic candidates. 
McConnell received $1.3 million from the NRA in 2016 alone. 
After the 2012 massacre at Sandy Hook Elementary School in Newtown, Connecticut, where a lone gunman murdered 26 schoolchildren and their teachers, Senator Joe Manchin, a Democrat, proposed a bill to require universal background checks on all commercial gun purchases. 
The Manchin Amendment failed to gain the 60 votes needed to overcome a Republican filibuster. 
Just four of the 54 senators who voted in favor of the bill were Republicans; only five of the 46 senators who voted against it were Democrats. 
Mass murderers such as Adam Lanza at Sandy Hook, Omar Mateen at the Pulse nightclub in Orlando in 2016, Stephen Paddock in Las Vegas, and countless others pulled the trigger. 
But the Republican Party acted as a political accomplice to all of these murderous acts. 

Rescuing a Revolution 
Brussels – There is no more depressing sight in politics than a leader who, desperate to cling to power, ruins his country in the process. 
By his recent actions, President Viktor Yushchenko of Ukraine now looks like he has joined the long list of rulers who have sacrificed their country’s future simply to prolong their misrule. 
Yushchenko’s recent moves in both politics and economics suggest that his instinct for self-preservation knows no limits. 
Once a proud supporter of the free market and the man who banished hyper-inflation in Ukraine in the 1990’s, Yushchenko has in recent weeks vetoed – sometimes on flimsy grounds, and sometimes for no stated reason at all – a series of vital privatizations. 
He blocked the sale of regional energy companies, for example, because he claims that their privatization will threaten Ukraine’s “national security,” though it is corrupt and incompetent state management of these companies that is threatening Ukraine’s security by making it vulnerable to energy cut-offs. 
Yushchenko seems motivated only by a desire to damage his prime minister, Yuliya Tymoshenko, who he perceives as the biggest threat to his re-election in 2010. To undermine the Tymoshenko cabinet even more, Ukraine’s central bank, under the leadership of a presidential crony, is pursuing a policy that is importing high inflation. 
When confronted about this, Volodymyr Stelmakh, the bank’s governor, is said to have told Tymoshenko that his policies would destroy her government before they broke the back of the economy. 
In politics, too, Yushchenko is playing with fire, having lost the support of most of “Our Ukraine,” the party he created. 
Since his victory in 2004, Yushchenko’s popularity ratings have plummeted to around 8%. 
As a result, the party has been reduced to junior-partner status in Tymoshenko’s coalition government. 
Instead of trying to recover support by pursuing the reforms and privatizations that he promised during the Orange Revolution, Yushchenko is planning to take the few members of “Our Ukraine” that he still controls and forge a strategic alliance with the Party of the Regions, the very party that opposed Ukraine’s turn to democracy and an open society. 
To clinch this deal, the Regions would dump their unelectable leader, Viktor Yanukovych, as their presidential candidate and adopt Yushchenko as their standard bearer. 
Yushchenko has only himself to blame for his political predicament. 
His decision in 2006 to bring Yanukovych out of the wilderness and back into the premiership was an act from which he has never recovered. 
Only when Yanukovych sought to use parliament to strip the president of his powers did Yushchenko summon the will to fight back, dismissing Yanukovych’s government and calling for a special election last year. 
That election, however, was won by Tymoshenko, who has parlayed her return to power into a commanding lead in the polls for the coming presidential election. 
Throttling Ukraine’s economy and political system need not have been Yushchenko’s legacy. 
After he came to power in 2005 on a huge wave of popular support, he started off well. 
The economy was growing, and he and Tymoshenko began to tackle the country’s black hole of corruption. 
Moreover, he seemed genuinely committed to reconciliation between Ukraine’s Russian-speaking east and Ukrainian-speaking west. 
Throughout his presidency, he has overseen fair elections and a free and vibrant press. 
But Yushchenko’s chronic dithering and poor political judgement consistently undermine his fundamental democratic credentials. 
Sadly, he now appears poised to make another serious political miscalculation, because he is backing a radical constitutional reform aimed at creating a purely presidential system. 
That proposal has no chance of success in Ukraine’s parliament. 
Yushchenko sought to circumvent parliament by way of a national referendum, but Ukraine’s Constitutional court has ruled that only parliament may determine how constitutional reform is to occur. 
Although Yushchenko seems unable to save himself politically, Europe can help both him and Ukraine’s democracy. 
Tymoshenko is prepared to offer Yushchenko a compromise that Europe’s leaders should urge him to accept. 
Her proposals for constitutional reform would make Ukraine a pure parliamentary republic, while retaining a president as head of state and commander in chief of the armed forces. 
Yushchenko can yet secure an honorable place in history if, instead of undermining and obstructing Tymoshenko at every turn, he supports her anti-corruption initiatives and constitutional reform, the latter aimed at bringing Ukraine’s political system closer to Europe’s parliamentary democracies as well as to facilitate Ukraine’s European integration. 
Given that Yushchenko has almost no chance of winning the next presidential election, Tymoshenko has made him a generous offer. 
If accepted, it promises Ukraine, which aspires to EU membership and is currently negotiating a Free Trade Agreement with the Union, the stable, effective, and democratic government that it needs. 
Europe’s leaders, who helped broker a peaceful and democratic end to the Orange Revolution, should once again help Ukraine avoid political deadlock. 

Rescuing Annapolis 
TOLEDO, SPAIN – The Israeli-Palestinian peace talks that began three months ago at Annapolis do not suffer from a lack of ideas about how to address the conflict’s core issues. 
After years of frustrated attempts to reach a settlement, and with dozens of official and back-channel peace plans at the negotiators’ disposal, there remains little room for creativity in producing an agreement. 
But the deeper problem lies elsewhere, in the poverty of the leadership, and in the fragmentation of Palestinian politics. 
Indeed, the only man who could have made a peace agreement based on a two-state solution legitimate in Palestinians’ eyes, Yasser Arafat, took this legitimacy with him to the grave. 
President Mahmoud Abbas was never an inspiring figure for Palestinians. With the loss of Gaza to Hamas, his political clout has been diminished even further. 
In fact, Abbas does not even control the militias of his own party, Fatah, which have been even more active than Hamas in staging terrorist attacks against Israel. 
The Palestinian Authority’s rule over the West Bank would have collapsed long ago if it were not for the Israelis’ daily incursions against Hamas and Fatah in areas under Abbas’ control. 
Throughout history, nationalist movements, almost invariably consisting of radical and pragmatic wings, had to split in order to reach the Promised Land. 
Consensus is the negation of leadership and frequently a recipe for political paralysis. 
Zionism is a case in point. 
If Menachem Begin’s ultra-nationalist Irgun had joined a coalition with Ben-Gurion’s pragmatic Mapai in 1947, Zionists would have rejected the partition of Palestine, and Ben-Gurion would not have been allowed to declare the Jewish state in May 1948. 
Of course, this lesson should not be elevated to a dogma. 
In the Palestinian case, with the lack of the kind of leadership that Arafat provided, the radical wing, Hamas, cannot be discarded from the process leading to Palestinian statehood. 
Moreover, unlike in the case of Israel, the radical wing in Palestine represents the democratic majority, as it emerged victorious from the elections two years ago. 
As a result, the question that dominates Israeli discourse nowadays is whether or not to invade Hamas-controlled Gaza. 
Locked in a self-imposed conceptual paralysis that does not allow for a non-military solution, Israel refuses to see that Hamas’s rocket attacks on Israeli territory are not intended to draw Israel into an invasion. 
Instead, they are an attempt to establish a new deterrent against Israel that would force it to agree to a cease-fire ( Tahdiye) . 
It is self-deceiving to assume that those on the Palestinian side involved throughout the discredited Oslo process can still muster the necessary popular legitimacy to win support for a compromise with Israel that would require painful concessions on issues central to the Palestinian national ethos. 
Nor is it at all clear that a major invasion of Gaza could bring end the attacks on Israel. 
Hamas, with the help of Iran, has been undergoing a process of Hezbollahization. 
Its units are no longer simple terrorist cells; they are highly trained and well-equipped combat units, and its rockets, like those in southern Lebanon, are launched with timers from crude underground silos. 
The traumatic experience of the Lebanon war in 2006 has made Israel’s leadership wary of yet another asymmetric war where a clear-cut victory can never be claimed, and where the arithmetic of blood is always bound to turn the casualties of the superior force, Israel, into a domestic crisis. 
Israel must change its strategic objective in Gaza from toppling Hamas to rescuing the Annapolis process, and with it the last chance for a two-state solution. 
This requires not only a cease-fire with Hamas, but also a return to a Palestinian national unity government that alone can offer the peace process the vital legitimacy that it lacks today. 
Without the resurrection of the Mecca agreement, which put Hamas and the PLO in a coalition government, Hamas cannot expect to secure its control of Gaza and the PLO cannot deliver a peace settlement with Israel. 
The notion, dear to the architects of the Annapolis process, that peace can be achieved only when a wedge is driven between Palestinian “moderates” and “extremists” is a misconception. 
A Palestinian national unity government would not impede a settlement for the simple reason that the moderates now negotiating with Israel must in any case strive for an agreement that the extremists could not label as a treacherous sell-out. 
Hence, the difference between the Palestinian positions in the current negotiations and those they may hold when a unity government is restored would only be very minor. 

Rescuing Georgia 
Georgia will receive its Christmas and New Year's present late this year, but the wait will be worth it. 
For the presidential election to choose a successor to President Eduard Shevardnadze, scheduled for January 4, 2004, offers the country its first real hope since independence in 1991. 
A peaceful "Rose revolution" brought this about, but economics, not politics, will determine whether Georgia prospers or endures another lost decade. 
Eduard Shevardnadze's time had long since past. 
He lifted Georgia out of civil war in the early 1990's, but then held it together by playing one powerful clan off against another. 
During his 10 years in power, the economy tanked and hundreds of thousands of his ablest countrymen emigrated. 
Shevardnadze's initial term did bring a liberal foreign investment code and the foundation of a state based on the rule of law. 
Investment, particularly in energy, flowed in, as Westen companies hoped that oil and gas deposits in neighboring Azerbaijan meant that there must be some in Georgia, too. 
Shevardnadze also nurtured Georgia's dream to be a transport and energy bridge to the West. 
A consortium of international oil companies built the Baku-Supsa pipeline to export Azeri oil to the West through the Black Sea. 
Another consortium began to build multi-billion dollar oil and gas pipelines from Azerbaijan through Georgia to Turkey and the West. 
But these investments brought no economic trickle down. 
People here survive on a few dollars a day. 
The oil and gas pipelines are transport conduits, not real employers. 
Moreover, Georgia's reward for providing a strategic export route to the West for Azeri oil was not dollars, but a diplomatic insurance policy - i.e., Western, especially US, concern for the safety of the pipelines. 
Other foreign investors stayed away, because Shevardnadze turned a blind eye to corruption. 
Indeed, Transparency International, a watchdog group, calls Georgia one of the 10 most corrupt nations in the world. 
The rule of law that Shevardnadze promised existed merely on paper. 
Taking a stand against corruption is a crucial task for the reformist leadership of Mikheil Saakashvili, a Columbia University-educated lawyer, Nino Burjanadze, the acting head of state and speaker of parliament, and Zurab Zhvania, also a former parliamentary speaker. 
All are young, highly energetic, and lack Soviet habits. 
Better still, they don't owe anything to Georgia's old power brokers. 
Indeed, this group is reminiscent of the young twenty and thirty year olds who took power in Estonia in 1991 and successfully led that former Soviet country into EU membership. 
The primary task they face is to reinvent Georgia as a corruption-free nation. 
Otherwise, foreign investors will look elsewhere and domestic investors will continue to hide their money outside the country. 
Those who stole must be prosecuted in order to send a concrete signal that a new era has dawned. 
Finally, the monopolistic domestic energy sector must be regulated in fact, not just on paper. 
As important, a bureaucratic meltdown is needed. 
Georgia should adopt the Singaporean model and create a small, professional, and (relatively) well-paid administration. 
But paying decent salaries for honest government bureaucrats and judges requires tax revenue. 
Value-added tax and other indirect levies must be collected rigorously. 
A simple flat-rate income tax would also boost revenues, as it has in Russia. 
More problematic is assuring domestic stability. 
Peace must be made with Georgia's three de facto semi-independent regions. 
Meaning must be given to the provisions of the Georgian constitution granting these regions autonomous rights. 
If this problem is not resolved, foreign investors, let alone tourists, will continue to view Georgia as unstable and stay away. 
Russia remains the key. 
As a broker of Shevardnadze's removal, Russia at last appears to be interested in a stable Georgia. 
This new Russian concern is a window of opportunity that cannot be lost and should be tested. 
But only with American pressure will Russia truly be persuaded to honor its commitments to withdraw its troops from Georgia and disengage from its support of the separatists. 
If Georgia's new leaders fail to revive the country economically, and quickly, then the mythical allure of an authoritarian leader will be enhanced and democracy discredited. 
To prevent this will require sustained support from the US and the international community. 
America once again must participate in nation building, and it cannot do so on the cheap. 
Georgia simply does not, and cannot, collect sufficient taxes to do the job itself. 
It needs international budget support for operations, salaries, and basic services. 
This support should be conditioned on demonstrated progress. 
A Georgian Marshall Plan, with a strategic economic development plan and specified milestones, holds promise because the government would be able and willing to design and implement a viable program. 
To some donors, Georgia might not seem to be worth the cost. 
But a flourishing democracy there will have inevitable spillover effects on Georgia's neighbors, Azerbaijan and Armenia. 
What better--and more cost-effective--way to secure the trans-Caucasus pipelines than through democratic legitimacy? 
But if Georgians shiver through another energy-less winter in 2004, they could well lose their patience--and their trust in democracy. 
It's that simple. 
Georgia can be a democratic domino in the Caucasus, but only with committed international support. 
Nation building comes at a price--in time, money, and effort. 
There is no shortcut. 
The "Rose Revolution" must not be permitted to die on the vine. 

Rescuing Nuclear Non-Proliferation 
As a declared non-nuclear weapon state, Indonesia has always striven for nuclear non-proliferation - indeed, for a world free of nuclear weapons. 
But the cause of nuclear non-proliferation is now in deep trouble, as countries are once again tempted to acquire the means of oblivion. 
For over three decades, the nuclear Non-Proliferation Treaty (NPT) has been the cornerstone of the world's non-proliferation regime, a position that derives from growing acknowledgement of the legal and normative standards that it established. 
Adherence to the NPT has increased steadily, reaching a stage of near universal acceptance. 
But there is a general feeling that implementation has fallen short of expectations, particularly with regard to nuclear disarmament. 
Moreover, there is increasing concern over non-compliance and the associated risks of proliferation - to worrisome states, particularly in Asia, and, even more ominously, into the hands of private individuals and terrorist organizations. 
In the face of these threats, what can be done to strengthen the non-proliferation regime? 
The NPT regime stands on three pillars: non-proliferation, nuclear disarmament, and peaceful uses of nuclear energy. 
The Treaty envisages the construction of each pillar through a matching series of steps taken by both nuclear weapon states and non-nuclear weapon states. 
Strengthening the non-proliferation regime in order to confront today's challenges would require no more than following this strategy. 
Unfortunately, this has not been the case since 1995, when the NPT Review and Extension Conference made the duration of the NPT's validity indefinite. 
The Conference, which included the original five nuclear weapon states (the United States, Russia, China, France, and Great Britain) as well as a great number of other UN members, did not reach consensus on a "Final Declaration." 
But it did adopt three other decisions, entitled Strengthening the Review Process for the Treaty , Principles and Objectives for Nuclear Non-Proliferation and Disarmament , and Resolution on the Middle East . 
These constituted a unified package that was meant to be implemented in its entirety. 
Five years later, the 2000 Review Conference finally adopted a Final Document , which contained concrete measures, including "13 practical steps" for systematic and progressive efforts to achieve nuclear disarmament. 
The evolution of the NPT - its adaptation to new environments and problems that were not anticipated at the time of its adoption - appeared to ensure the Treaty's continuing effective implementation. 
But actions speak louder than words, and challenges to the NPT regime have continued to undermine its basic principles, causing considerable backsliding. 
Today, the challenges posed by proliferation are more complex than ever: 
· proliferation of nuclear weapons technologies by one de facto nuclear-capable state; 
· one stated withdrawal from the NPT; 
· one case of non-compliance; 
· increasing assertion of the role of nuclear weapons in military doctrines; 
· improvements in nuclear weapons by some nuclear weapon states. 
The possibility that non-state actors could acquire nuclear weapons and other weapons of mass destruction poses an especially grave new threat. 
Confronting it effectively will require the support of all NPT signatories. 
But a continuing imbalance and selectivity in the emphasis placed by different states on the Treaty's three pillars damages the unity that the NPT regime needs. 
In particular, imbalances in implementing the NPT obligations by the nuclear haves and have-nots are sharpening. 
For example, some countries want to develop smaller and "usable" nuclear weapons designed for pre-emptive or preventive military action. 
Many non-nuclear weapon states, particularly those from the developing world, remain frustrated with the fact that peaceful nuclear cooperation is yet to be fully realized. 
These challenges to the non-proliferation regime not only jeopardize the credibility, efficacy, and viability of the Treaty; they have also cast a long shadow of doubt on the future of nuclear disarmament itself. 
Deliberations and negotiations both within the NPT regime and in other areas of disarmament have reached a difficult stage, if not a stalemate. 
To jump-start progress, all NPT signatories should re-affirm that the Treaty's provisions are mutually reinforcing and must be pursued jointly and faithfully. 
The most dangerous force eroding the Treaty's credibility is the inclination of some nuclear-weapon states to reinterpret at will the package of agreements reached in the past. 
Despite the NPT's shortcomings, the overwhelming majority of non-nuclear states fully comply with their Treaty obligations. 
This constrains the number of nuclear weapon states, thus fulfilling one of the NPT's most important goals. 
One of the best ways to strengthen the non-proliferation regime now would be to implement fully the agreements that have already been reached. 
Selectivity and narrow reinterpretation can only weaken the Treaty. 
Developing a new set of non-proliferation mechanisms would be a waste time that we cannot afford, because any new protocol would have a dubious legal basis and encourage further imbalances in implementation. 
If we are serious about saving the non-proliferation regime, the time to act is now. 


Rescuing Yemen 
LONDON – Yemen has suddenly joined Afghanistan and Pakistan as a risk to global security. 
Indeed, it is increasingly seen as a nascent failed state and potential replacement host for Al Qaeda. 
The attempted bombing of a Detroit-bound airliner on Christmas Day by a young Nigerian man trained by Al Qaeda in Yemen appeared to open the West’s eyes to the country’s problems. 
Following that failed attack, US President Barack Obama and British Prime Minister Gordon Brown jointly pushed a conference in London to propose solutions for the previously overlooked crises in Yemen. 
But if the conference focuses too narrowly on Al Qaeda’s presence in Yemen, it will do more harm than good. 
Instead, the conference must aim to address broader issues of political and social stability within Yemen. 
Al Qaeda is not the primary danger to Yemen’s security and stability, but Yemen’s geography and political problems are well suited to its activities. 
A particularly attractive feature is the prevalence of the severe Wahhabi religious dogma, which was exported to Yemen by Saudi Arabia but now provides fertile ground for recruiting disaffected young Yemeni men for assaults on Saudi Arabia. 
Yemen ’s central problems are two: the ongoing civil war that the government is waging against the Houthi tribe in the country’s north, and the suppression of a secessionist movement in the south. 
It is the Yemeni government’s inability to find a political solution to these problems that has led Yemen to the brink of fragmentation. 
So far, Obama and Brown seem unable to fully grasp the fact that Yemen’s problems go well beyond Al Qaeda’s presence in the country. 
As a result, they appear to be playing into Yemeni President Ali Abdullah Saleh’s hands. 
Saleh wants to use the London conference as a means to leverage Western backing, particularly military aid, to pursue his wars against the Houthis and the southern secessionists. 
Saleh has regularly employed the danger of Al Qaeda to obtain additional financial and security support from both the West and Saudi Arabia. 
For him, the attempted Christmas Day bombing was a gift from heaven. 
Saleh’s dilemma is that Western aid may now come with increased interference in Yemen’s internal affairs at a time when he wants the world to turn a blind eye to his conduct of the country’s civil wars. 
The West and Saleh do not have the same enemy. 
Al Qaeda is the West’s enemy, while Saleh’s true enemies are the Houthis and the separatists of the south. 
But if the West is to curtail Al Qaeda’s activities in Yemen, it will need to push Saleh into reaching accommodations with both the Houthis and the southerners, and this will undoubtedly mean sharing power with them. 
Saleh will undoubtedly resist such an effort. 
Last December, Saleh called for national dialogue, but on his own terms: the Houthis and the southern leaders are to be excluded from the discussions unless they support the Yemeni constitution that has kept Saleh in power for decades. 
But Saleh’s hardline approach is failing. 
More than half of Yemen’s territory is falling out of government control. 
The US should not be surprised by any of these developments because American involvement in Yemen is not new. 
Al Qaeda in Yemen has been targeted since the USS Cole was bombed while in the port of Aden in 2000. 
Missile strikes by US drones last December in Abein and Shabwa killed a number of Al Qaeda members, as well as civilians. 
Fighting Al Qaeda in Yemen through such means may temporarily reduce terrorism, but it will not end it. 
The real question is whether the West will address Yemen’s failed political and military strategies, which are the root cause of Al Qaeda’s mushrooming presence in the country. 
Only if Western intervention aims to rescue the Yemeni state from itself will there be any possibility to contain Al Qaeda. 
And it is not just the Yemeni state that is at fault. 
Yemen’s neighbors have also played a role. 
Saudi Arabia exported both its Wahhabism and Al Qaeda to Yemen by funding thousands of madrassas where fanaticism is taught. 
Moreover, since the 1991 Gulf War, Saudi Arabia and Kuwait have been expelling Yemeni workers. 
Last month alone, 54,000 Yemeni workers were expelled from Saudi Arabia. 
Although Yemen is geographically part of the Arabian Peninsula, it was excluded from the Gulf Cooperation Council, primarily because its size – it is the most populous state on the peninsula – would have given it great influence. 
In fact, the Yemeni population exceeds the population of all six GCC members combined. 
Saleh received a strong endorsement from the GCC last December for his domestic wars, and Saudi Arabia has been in direct military confrontation with the Houthis, its army having crossed Yemen’s border. 
But the GCC members’ failure to open their economies – which are always in need of guest workers – to Yemen’s young men is short-sighted. 
The US and Britain, both patrons of the GCC, must encourage its members to include Yemen if they want to solve its problems. 
Yemenis are known as skilled labourers. 
So, instead of exporting religious radicalism to Yemen, importing its manpower could neutralize Yemen’s problems. 
The forthcoming London conference could prove to be either a trap for the West or the beginning of a true effort at the kind of domestic reform that can prevent Yemen from becoming another Afghanistan. 
If the West buys into Saleh’s depiction of a war against Al Qaeda, it will be trapped into supporting him and his failed policies. 
But if it looks beyond terrorism to the root causes of the problem, and presses Saleh to begin to share power, Yemen need not become another safe haven for terrorists. 

India’s Central Bank Under Attack 
ITHACA – Indian Prime Minister Narendra Modi’s government has launched an all-out political assault on the Reserve Bank of India, and the barrage of criticism is already taking a toll on the institution. 
This is an alarming development for India, because the RBI’s credibility and effectiveness have contributed substantially to macroeconomic and financial stability, thereby helping to sustain rapid GDP growth in recent years. 
One key criticism leveled against the RBI is not unique to India: the central bank, the government claims, is impeding growth by raising interest rates in the name of a misguided fear of excessive inflation and financial instability. 
US President Donald Trump has leveled similar complaints at the Federal Reserve, claiming that interest-rate hikes are dampening economic growth and the US stock market. 
But the threat such attacks pose to the RBI dwarf those faced by the Fed, not least because, unlike the Fed, the RBI has no statutory independence. 
Making matters worse, the Modi government has, for the first time ever, invoked Section 7 of the RBI Act, which allows it to issue directions directly to the central bank governor on matters of public interest. 
The Modi government’s willingness to go to such lengths suggests that more than interest rates are at stake. 
The government is particularly unhappy with RBI measures to clean up India’s banks, many of which are burdened by a large volume of non-performing assets, and prevent risks from building up in other parts of the financial system. 
These measures are squeezing state-owned banks’ ability to lend to politically connected clients. 
Of course, government ministers can’t come right out and say that. 
So, instead, the Modi administration – and, in particular, Arun Jaitley, the finance minister – has taken the RBI to task for not preventing the accumulation of non-performing assets in the banking system after the credit spigots were opened to help cope with the global financial crisis. 
The government has also accused the RBI of subverting due process by keeping it in the dark about monetary-policy moves. 
This criticism is disingenuous at best. 
At worst, it could bring to a grinding halt much-needed banking-sector reforms aimed at, among other things, ensuring productive, rather than politically motivated, lending. 
Such an outcome would heighten financial risk and jeopardize the economy’s growth potential. 
So far, RBI Governor Urjit Patel has refused to give in to the government’s demands. 
It helps the RBI’s stature and independence that Patel and his lieutenants, like their predecessors, are experienced at navigating the RBI through economic and political minefields. 
But if the government continues to attack the RBI on multiple fronts, effective monetary policymaking could become impossible. 
And if those attacks include forcing Patel out, the blow to the RBI – the only well-respected technocratic institution in India’s mostly dysfunctional bureaucracy – would be severe. 
Central-bank independence is often fetishized nowadays. 
But if a central bank pursues objectives that have no political support, its legitimacy should (and will) suffer. 
Nonetheless, the loss of operational independence – the ability to act without interference in pursuit of its stated objectives, developed in consultation with political authorities – can also be fatal to a central bank’s credibility. 
Consider recent events in Turkey. 
President Recep Tayyip Erdoğan’s public attacks on the central bank’s independence caused the Turkish lira to plummet. 
By the time the central bank prevailed over Erdoğan’s dictums and raised interest rates, it was too late; its credibility had been shattered. 
Modi’s government has a strong interest in ensuring that the RBI does not suffer a similar fate. 
After all, the central bank’s credibility has been essential to enable the implementation of policies that have provided the government with room to maneuver in a difficult domestic and external environment. 
For one thing, the RBI has prevented the rupee from falling further, thereby averting the risk of a vicious circle of capital outflows and currency depreciation. 
Moreover, the RBI’s commitment to price stability has translated into low interest rates, keeping the government’s debt-financing costs in check. 
More broadly, the RBI’s monetary policy and supervisory authority have made it one of the most potent tools for keeping the economy on a stable, high-growth path. 
With national elections approaching, India’s government cannot afford to sacrifice these benefits, especially at a time of rising skepticism about its ability to maintain fiscal discipline and implement difficult reforms. 
Modi and Jaitley need to recognize this and start speaking up for, not against, the RBI. 

Reserve Reform 
NEW YORK – Both China and the United Nations Commission on Reforms of the International Monetary and Financial System have called for a new global reserve system. 
That issue should be at the top of the agenda when the IMF’s International Monetary and Financial Committee next meet. 
The essential idea is quite simple: in the long run, an international monetary system cannot be built on a national currency – a point made a half-century ago by the Belgian-American economist Robert Triffin. 
Recognition of this fundamental problem was the reason why the IMF’s Special Drawing Rights (SDRs) were created in the 1960’s. 
The dollar standard with which the world has lived since the early 1970’s has three fundamental flaws. 
First, as with all systems that preceded it, it puts the burden of adjustment on deficit countries, not on surplus countries. 
The main exception is the United States, which, thanks to its reserve currency status, has so far been able to finance its deficit by issuing dollar liabilities that are held by the rest of the world. 
Second, the system is unstable, because it makes the major reserve currency’s value dependent on US macroeconomic policy and the vagaries of the US balance of payments and associated domestic deficits. 
Since the abandonment of gold-dollar parity in 1971, the world has experienced increasingly intense cycles in the value of the dollar and the US current account. 
The dollar has lost what any reserve asset should have: a stable value. 
The governor of China’s central bank recently emphasized this basic point. 
Third, the current system is inequitable, because it forces a transfer of resources from developing countries to the industrial nations that provide reserve currencies. 
This transfer has dramatically increased over the past two decades. 
Developing countries’ main defense against world financial instability has been to accumulate international reserves. 
At the end of 2007, developing countries, excluding China, held reserves equivalent to 20.6% of their GDP, compared to just 3.7% in 1990. 
This generated a huge asymmetry in the world economy, as industrial countries, excluding Japan, hold only 2.6% of GDP in reserves. 
One basic reason is that the only “collective insurance” available is limited and highly conditional IMF lending. 
It must be emphasized that a system based on competing reserve currencies would not solve the instability and inequities of the current system. 
In fact, it would add another one: the instability of the exchange rates among major reserve currencies. 
Indeed, this problem is already present in the current system. 
The deficiencies of current arrangements are why the world monetary system should be based on a truly global reserve currency: a fiduciary currency backed by the world’s central banks. 
This is what was hoped for when SDRs were created in the 1960’s, and this process must be completed by transforming the SDRs into such a global currency. 
A major advantage of an SDR-based system is that it would provide a mechanism for the IMF to provide finance with its own resources in an agile way during crises, thus operating in the same way as central banks have been doing on a massive scale in recent months. 
It would also be a much better mechanism with which to finance the IMF during crises than the credit lines to the IMF from a few countries (“arrangements to borrow”) that the G-20 is again advocating, as it is truly multilateral financing that does not depend on any individual country. 
For such a program to work, it is essential that developing countries recognize that IMF financing is good “collective insurance,” so that their demand for foreign-exchange reserves would decline. 
This means that the IMF would have to lend rapidly during balance-of-payments crises, and do so without the overburdening conditionality of the past, particularly when crises stem from rapid reversal of capital flows or a sharp deterioration in terms of trade. 
The IMF took steps in this direction in March, particularly by creating the Flexible Credit Line for crisis-prevention purposes, as well as expanding other credit lines and overhauling conditionality (relying more on ex-ante conditionality and eliminating structural performance criteria). 
The major problem with the new credit line is that it runs the risk of unduly dividing developing countries into two categories, with significant additional risks for the latter. 
A better alternative would be to go back to John Maynard Keynes’s proposal of an overdraft (or, in IMF terminology, drawing) facility for all member countries, with countries that continue to use it eventually having to apply to a formal lending program. 
The overdraft facility could again be financed with counter-cyclical issues of SDRs. 
The reform should also allow for a mechanism for countries to exchange their current dollar (and euro, yen, and pound) assets for SDRs, thus avoiding the disruptions that could be generated by the transition to the new system. 
As Fred Bergsten has reminded us, the mechanism is already available in the form of the “substitution account” that was negotiated in the IMF in 1980. 
It is time to broaden the agenda of global financial reform, which so far has focused on an essential but still limited set of issues, particularly financial regulation. 
Reform of the global reserve system must be part of that broader agenda. 

Reset Turkey/EU Relations 
MADRID – Just five months ago, Osama bin Laden was alive, Hosni Mubarak was firmly in control in Egypt, and Zine el-Abidine Ben Ali ruled Tunisia with an iron hand. 
Today, popular rebellion and political change have spread throughout the region. 
We have witnessed brutal repression of protests in Syria and Yemen, Saudi troops crossing into Bahrain, and an ongoing battle for Libya. 
For Europe, the “Arab Spring” should refocus attention on an issue largely ignored in recent months: the benefits of Turkey’s full membership in the European Union. 
Given the tremendous opportunities present in the current circumstances, the advantages for Europe of Turkey’s accession should be obvious. 
With Recep Tayyip Erdoğan now elected to another term as Turkey’s prime minister, and with Poland, a country well acquainted with the importance of Europe’s strategic position in the world, assuming the EU presidency at the end of the month, now is a time for the Union and Turkey to “reset” their negotiations over Turkish membership. 
The good that Turkey can bring to Europe was visible even before the “Arab Spring.” 
Europe is, by definition, culturally diverse, so diversity is the EU’s destiny. 
And, if Europe is to become an active global player, rather than a museum, it needs the fresh perspective and energy of the people of Turkey. 
Europe today is both larger and different compared to the Europe of 1999, when Turkey was invited to begin the accession process. 
It is also experiencing a profound economic crisis, which erupted around the same time that the Lisbon Treaty – aimed at accommodating EU enlargement – was finally approved. 
Had the treaty been approved in 2005 as intended, it would have been in place for six years, and the strain placed by the crisis on EU economic governance – so visible in the eurozone’s recent problems – would have been much more manageable. 
But the EU always faces problems, resolves them, and moves on. 
Today, we don’t have a treasury, but we are about to have something similar. 
Similarly, the European Central Bank has capacities today that no one imagined in, say, 1997. 
A major challenge that Europe must still face is migration, which will only become a bigger problem over time. 
Between now and 2050, Europe’s workforce will decrease by 70 million. 
Maintaining our economy requires migration and open EU borders – and facing down the populist movements in Europe that would shun “outsiders.” 
Today’s Turkey has also changed dramatically since 1999, both politically and economically, and this has much to do with the EU accession process. 
Indeed, without the attraction of the EU – its “soft” power – such changes would not have occurred. 
Economically, Turkey is now in the G-20 – and playing an effective role there. 
And, politically, Turkey has emerged as a regional leader, a role that it takes extremely seriously. 
With just-concluded parliamentary elections, and a new constitution to be approved, Turkey is approaching an epochal moment. 
I was a member of the Spanish Constitutional Commission that wrote the Spanish constitution in 1975 and 1976, following the death of Franco, so I know what it is to move from dictatorship to democracy – and how important it is that a constitution be framed by consensus. 
The EU-Turkey relationship began with an association agreement signed in 1963. 
Now the accession negotiations have started, and 35 “chapters” – covering everything from agriculture to energy, competition, environment, employment, social policy, and beyond – must be opened. 
We have already opened 19 chapters – fewer than we would like. 
But the real problem is that we have closed only one, and, worse, the pace of negotiations has slowed. 
In fact, in the second half of 2010, nothing happened. 
I hope that meaningful progress comes in 2011. 
Turkey and the EU need each other. 
The EU now accounts for 75% of foreign investment in Turkey and roughly half its exports and inward tourism. 
Likewise, Europe’s energy security depends on cooperation with Turkey on transit of oil and natural gas from Central Asia and the Middle East. 
We need each other politically as well. 
Turkey’s neighborhood is our neighborhood; its problems are our problems. 
The security benefits and strategic advantages for the EU with Turkey as a member would be many, starting with the relationship between the EU and NATO, of which Turkey has long been a member. 
Likewise, the EU’s involvement in today’s problems in the Mediterranean region would be much easier in concert with Turkey. 
In Bosnia-Herzegovina, EU-Turkey cooperation is fundamental to achieving a durable solution. 
In 1999, Turkey did not want to become an accession candidate, because its leaders thought that the conditions would be too tough. 
I was there; I talked to Prime Minister Bülent Ecevit at midnight, then to President Süleyman Demirel. 
And, two days later, Ecevit was in Helsinki to declare formally Turkey’s wish to become an EU member. 
And we said: Turkey will be an EU member. 
I supported the signature of that document; I would do the same today. 
In these times, difficult and unpredictable but full of hope, the world needs Turkey and the EU to work together. 
That does not mean meeting every now and then to decide how to handle a certain problem. 
It means something much deeper and well defined. 
It means Turkey’s admission to the EU. 

Reshaping China’s Government-Services Supply Chain 
HONG KONG – A supply chain links producers and consumers through a complex web of outsourcing contracts, with market leaders in any product category orchestrating activities to produce components profitably along its entire length. 
For example, an iPad is designed in California – with chips from Japan and parts from South Korea, Taiwan, and elsewhere – and finally assembled in China for global distribution. 
But the ecology of supply chains is not as straightforward as this depiction suggests. 
Most studies of supply chains examine their operations, but take for granted governments’ critical enabling role. 
Because the non-delivery of government services would inhibit the proper functioning of business supply chains, understanding how the government-services supply chain works is vital. 
For example, the Chinese economy’s transformation was enabled by the synchronized delivery of government services to support the logistics, finance, and manufacturing supply chains. 
This was a complex task that involved different levels of the Chinese government and many state agencies and ministries. 
A supply chain is not only a network for production, but also a live feedback mechanism, continually adjusting itself to ensure that production is coordinated and aligned efficiently to meet changes in global consumers’ demand, tastes, and preferences. 
Technology has enabled faster, more efficient “just-in-time” delivery, taking full advantage of specialization and knowledge-sharing on a global scale. 
As Apple has discovered, the winner in orchestrating a supply chain emerges with the lowest global costs and the largest market share. 
The iPad could not be produced at such high speed and low cost without the “made-in-the-world” supply chain based in China. 
In addition to the macro and micro aspects of economics, understanding supply chains in private and public goods and services in China requires mezo (institutional) and meta (system-wide) analysis. 
When China initiated its economic reforms in 1979, it inherited a centrally planned economy that lacked the institutional infrastructure for markets. 
Recognizing the need for systemic change, China allowed local governments in special economic zones and cities to experiment with modern legal, administrative, and logistical practices for export industries, including investments in utilities and transport. 
Intense competition among local governments for foreign investment led to dramatic improvements in the business environment, featuring economic incentives in areas like land, labor, and taxation, as well as speedy issuance of permits and approvals. 
City leaders were given responsibility for mobilizing local resources to generate GDP and employment, and they were (and continue to be) rewarded with promotion for good performance. 
The result was considerable innovation and institutionalization of local government services to support market activities, including outsourcing of expertise in infrastructure project design, administration, and operations to private and foreign consulting and design companies. 
To support China’s participation in global manufacturing supply chains, many local governments sold and dismantled their state-owned enterprises (SOEs), enabling many new private firms to provide the services needed for an export-oriented, market-based economy. 
At the national level, the consolidation of SOEs and banks, and the modernization of their corporate governance via public listing on stock exchanges, enabled improved efficiency in regulated utilities, hard infrastructure, and resource sectors, complementing liberalization and market growth. 
The Chinese government-services supply chain also benefited substantially from a meritocratic human-resources tradition. 
Officials with substantial and successful experience in local governments, ministries, or SOEs were deliberately promoted and cross-posted to less-developed regions to spread know-how, technology, and best practices and processes. 
Indeed, China’s economic success reflects the depth of administrative and market experience embedded in the Chinese bureaucracy. 
Chinese mayors are CEOs of their local economy, responsible not only for market development, but also for social stability. 
The critical mechanism for orchestrating and implementing the complex web of contracts embodied in China’s government-services supply chain is the Five-Year Plan, which foresees vertical and horizontal integration of almost all Party and administrative agencies. 
The FYP uses broad objectives and targets for social and economic development, formed after extensive internal and public consultations. 
These mandates are translated by sub-national officials into projects and work plans, such as targets for reducing energy use per unit of GDP in order to address resource constraints and concern about climate change. 
China’s success in developing from scratch a modern government-services delivery system explains why many foreign investors find it much easier to deal with Chinese governments than those in other developing countries. 
The 12th FYP aims to shift China from an export-driven growth model toward a balanced economy that relies on domestic demand, while simultaneously addressing industrial transformation, social inequities, and environmental degradation. 
This implies more complex contracts that go beyond promoting markets, GDP growth, and employment to ensure inclusive, equitable, and high-quality government-services delivery. 
Implementation of these evolving social goals through local government agencies by specific officials is a daunting task that requires profound changes in roles and performance metrics. 
No one doubts that Chinese local governments play a much more active and intrusive role than their counterparts in the West, which implies an additional complicating factor. 
Local governments now face not only growing demands from the emerging middle class for greater transparency, competition, fairness, and access to opportunities, but also deepening conflicts between local interests and global rules. 
Orchestrating a complex government-services supply chain in a substantially open continental economy with 1.3 billion people and five levels of government is difficult enough using a simple GDP growth objective. 
Adapting the governance metric in a country of China’s size to an economy that is green, inclusive, and equitable presents a novel challenge in human history. 
The only precedent for such an achievement is China itself. 


The Temptations of a Resilient China 
NEW HAVEN – Another growth scare has come and gone for the Chinese economy. 
This, of course, is very much at odds with Western conventional wisdom, which has long expected a hard landing in China. 
Once again, the Western perspective missed the Chinese context – a resilient system that places a high premium on stability. 
Premier Li Keqiang said it all in his final comments at the recent China Development Forum. 
I have attended this gathering for 17 consecutive years and have learned to read between the lines of premier-speak. 
Most of the time, senior Chinese leaders stay on message with rather boring statements about accomplishments, targets, and reforms, toeing the official line of the annual “Work Report” on the economy that is delivered to the National People’s Congress two weeks earlier. 
This year was different. 
Initially, Li seemed subdued in his ponderous responses to questions from an audience of global luminaries that focused on weighty issues such as trade frictions, globalization, digitization, and automation. 
But he came alive in his closing remarks – offering an unprompted declaration about the Chinese economy’s underlying strength: “There will be no hard landing,” he exclaimed. 
The all-clear sign from Li was in sync with official data in the first two months of 2017: solid strength in retail sales, industrial output, electricity consumption, steel production, fixed investment, and service sector activity (the latter signaled by a new monthly indicator developed by China’s National Bureau of Statistics). 
Meanwhile, foreign-exchange reserves rebounded in February for the first time in eight months, pointing to an easing of capital outflows. 
At the same time, the People’s Bank of China took its cue from the US Federal Reserve’s rate hike this month, boosting Chinese policy rates by about ten basis points. 
The PBOC would not have taken that step had it been overly concerned about the underlying state of the Chinese economy. 
But the icing on the cake came from the trade data – namely, annual export growth of 4% in January and February, following a 5.2% contraction in the fourth quarter of 2016. 
This underscores a key contrast between the latest and previous Chinese growth scares. 
Call it the Trump effect: the revival of the global economy’s “animal spirits” in recent months has provided important relief for a Chinese economy that is still heavily dependent on exports. 
Whereas earlier growth scares were exacerbated by chronic downward pressures from sputtering post-crisis global demand, this time external headwinds have given way to tailwinds. 
But while the near-term prognosis for the Chinese economy is far more encouraging than most had expected, an eerie sense of denial, bordering on hubris, appears to be creeping into China’s strategic groupthink. 
With the United States looking inward, Chinese decision-makers seem to be pondering the opportunity that might arise from a seismic shift in global leadership. 
I was repeatedly asked about the possibility of a China-centric globalization – reinforced by Chinese leadership in multilateral trade (the 16-nation Regional Comprehensive Economic Partnership, or RCEP), pan-regional investment (China’s One Belt, One Road initiative), and a new institutional architecture (the Chinese-dominated Asian Infrastructure Investment Bank and the New Development Bank). 
It’s as if China had been preparing to fill the void being left by Donald Trump’s “America first” US. 
The Chinese are keen students of history. 
They know that shifts in global leadership and economic power are glacial, not abrupt. 
Yet I get the sense that they view the current circumstances in a very different light: Trump, the great disruptor, has changed the rules of engagement for what had long been a US-centric globalization. 
Many in China are now wondering whether this may be an opportunity to seize the reins of global power. 
Anything is possible – especially in a world where uncertainty is the only certainty. 
But there is another lesson of history that the Chinese must bear in mind. 
As Yale historian Paul Kennedy has long maintained, the rise and fall of great powers invariably occurs under conditions of “geostrategic overreach” – when a state’s global power projection is undermined by weakness in its domestic economic fundamentals. 
Global leadership starts with strength at home, and China still faces a long road of rebalancing and restructuring before it reaches the Promised Land of what its leadership calls the “new normal.” 
But here there is another important disconnect between the view inside China and perceptions in the West. 
The view from outside is that Chinese reforms, the means to rebalancing, have stalled over the past five years under President Xi Jinping. 
The same view prevailed under the prior ten-year leadership of Hu Jintao. 
But is this really the correct way to assess what is happening in China? 
Results matter more than grand pronouncements. 
Since 2007, when former Chinese Premier Wen Jiabao laid down the rebalancing gauntlet for a Chinese economy that had become “unstable, unbalanced, uncoordinated, and unsustainable,” China’s economic structure has, in fact, undergone a dramatic transformation. 
The GDP share of the so-called secondary sector (manufacturing and construction) fell from 47% in 2007 to 40% in 2016, whereas the share of the tertiary sector (services) increased from 43% to nearly 52%. 
Structural shifts of this magnitude are a big deal. 
The key point missed by reform deniers is that China is actually making rapid progress on the road to rebalancing. 
All of which brings us back to the questions raised at this year’s China Development Forum. 
The combination of near-term resilience and an inward-looking US appears to offer a tantalizing opportunity for China. 
But China should resist the temptations of global power projection and stay focused on executing its domestic strategy. 
The challenge now is to realize the “tremendous opportunity” that Li touted in ruling out a hard landing. 

Resilient China 
BEIJING – Today’s financial crisis and looming global recession are challenging China’s export-driven economic model as never before in the 30 years since Deng Xiaoping opened the economy. 
Indeed, in recent weeks, “the factory of the world” has become plagued by the closure of thousands of manufacturing plants and the threat of widespread labor unrest. 
I believe that China’s innovative model for development is likely to help it weather both the gathering economic crisis and any resulting social and political unrest. 
Moreover, should China safely navigate this storm, its status as a rising economic and political power will be strengthened. 
The essence of the Chinese economic model is a careful sequencing of reforms, with priority given to economic reform over political reform, which means retaining the existing constitutional system and the ruling status of the Communist Party of China (CPC). 
This model has involved substantial liberalization in terms of official ideology, the economy, and society, while maintaining public ownership of the major banks and largest state-owned enterprises (SOEs) as “anchors of economic stability.” 
Similarly, whereas much autonomy has been extended to local governments in economic and social development, the central government has kept its grip on the direction of policy by maintaining the power to appoint local party and government officials. In short, the Chinese model reflects a combination of pragmatism, liberalism, and market competition, but with a strong dose of state intervention. 
What is astonishing about this “model” is that it has enabled China to maintain rapid growth within a relatively stable political environment for 30 years. 
Although China is not the only country to enjoy such long-term growth (post-WWII Japan and South Korea are other cases), it is something of a miracle that a once-poor country with one-fifth of the world’s population could achieve such sustained development. 
Of course, there are problems. 
Environmental deterioration is severe, the “Gini index” (the gap between rich and poor) is widening, and official corruption has not been curbed. 
Nor has domestic consumption been sufficiently expanded, leaving economic growth overly dependent on exports and foreign investment. 
Moreover, the global economic crisis has proven to be a far more serious threat than China’s leaders initially recognized. 
The worst difficulties stem from China’s dependence on international markets, especially the United States. 
A rapid decline in exports has caused the closure of thousands of factories in the Pearl River and Yangtze River deltas, and tens of millions of unemployed migrant workers are now returning to their hinterland provinces. 
These newly laid-off workers are joining more than six million new college graduates looking for work. 
If the economy cannot maintain high growth rates, mounting unemployment could combine with an accumulation of unresolved political and social issues to create a risk of major social unrest. 
But the “China model” has given the authorities the tools to avoid such an outcome. 
First, while the US had to wait for its new president to take office, China’s government was able to intervene swiftly with a rescue package. 
Judging from events in the last two months, its $560 billion stabilization plan has served its purpose, despite some public criticism that it was too hastily formulated. 
Second, China’s fiscal surplus, growing foreign-exchange reserves, and high savings rate have ensured the financial resources needed to maintain adequate investment and sufficiently rapid growth. 
Third, the new stimulus package is mainly aimed at infrastructure, equipment renovation, and industrial upgrading, which have suffered serious under-investment in the past, especially in China’s central and western regions. 
Fourth, increased investment in the country’s social safety net includes not only universal health and social insurance, but also expanded housing subsidies. 
This should help to solve the problem of insufficient demand for real estate, which could have led to the collapse of China’s economy. 
Fifth, increased investment in rural areas, provided for in the government’s rescue plan, will help narrow the gap between urban rich and rural poor. 
To promote the sale of household electrical appliances in rural areas, the government has begun providing a 13% price subsidy, not only benefiting rural consumption, but also boosting the growth of major industrial enterprises. 
Finally, the authorities have subtly used the media to maintain consumer confidence by managing public criticism and thereby helping maintain popular trust in the government and the economy. 
Most forecasts suggest that, with a huge effort, China can maintain 8% growth in 2009. But the history of economic crises shows that non-economic factors play an equally important role in any solution. 
Currently, ordinary Chinese still believe that their country’s economic growth remains high, and China’s leaders continue to enjoy high approval ratings because of widespread belief in their abilities and dedication. 
Such psychological factors will need continual nurturing. 
The coincidence of economic crisis with the 30th anniversary of China’s reforms has provided a timely reminder of the pain of the Cultural Revolution, memories of which make most Chinese opposed to returning in any way to the pre-reform years. 
Most Chinese now firmly believe that a more open and free China, one increasingly integrated into the world economy, is the only way forward. 

Resilient India 
NEW DELHI – With the world’s most developed economies reeling under the incubus of what is already being called the Great Recession, India at the beginning of the year took stock and issued a revised estimate for GDP growth in the 2008-2009 fiscal year. Its projection came out at a healthy 7.1%. 
It is striking that even amid all the doom and gloom assailing world markets, there is no fear of a recession in India. 
Even the pessimists are speaking only of lower positive growth. 
This is quite a turnabout for an economy that for years had crept along at what was derisively called the “Hindu rate of growth” – around 3% – while much of the rest of Asia shot ahead. 
For more than four decades after Independence in 1947, India suffered from the economics of nationalism, which equated political independence with economic self-sufficiency and so relegated the country to bureaucratic protectionism and stagnation. 
But, since 1991, India has liberalized its economy and profited from globalization. 
Its tech-savvy information-technology pioneers, software engineers, and call-center operators have made the country an economic success story. 
India has multiplied its per capita income levels many times over since 1950, and has done so far faster in recent years than Britain or the United States did during and after the industrial revolution. 
In the last 15 years, India has pulled more people out of poverty than in the previous 45 – 10 million people a year on average in the last decade. 
The country has visibly prospered, and, despite population growth, per capita income has grown faster than ever before. 
The current financial crisis is unlikely to change the basic success story. 
India’s financial system suffers from few of the creative and risky derivative instruments that caused such problems in the West. 
A tradition of conservative banking regulation and a tough-minded Governor of the Reserve Bank (India’s central bank) ensured that Indian banks did not acquire the toxic debts flowing from sub-prime loans, credit-default swaps, and over-inflated housing prices that assailed Western banks. 
The negative effect of the US financial setbacks on Indian stock markets, therefore, made little sense, since they bore no relation to the real value of Indian companies. 
Instead, the decline in Indian stocks reflected foreign investors’ liquidity problems: they withdrew from holdings in India because they needed their money back home, not because it wasn’t growing for them. 
Of course, economies that depend on foreign investment are bound to be hurt nowadays, because those investors have less capital to invest. 
But there are two reasons to be confident that India will weather the storm. 
First, India has considerable resources of its own to put towards growth, and has proven itself skilled at the art of channelling domestic savings into productive investments. 
Second, once things have begun to stabilize in the West, investors looking for a place to put their money will look anew at India, owing to the opportunities for growth and the sheer size of the market. 
That said, India has relied much less on foreign direct investment than China, and has even exported FDI to OECD countries. 
Despite being seen as a poster child for the benefits of globalization, India is not unduly dependent on global flows of trade and capital. 
India relies on external trade for less than 20% of its GDP; its large and robust internal market accounts for the rest. 
India’s private sector is efficient and entrepreneurial, and its capital and management skills have proven able to control and manage assets in the sophisticated financial markets of the developed West. 
India clearly has the basic systems it needs to operate a twenty-first-century economy in an open and globalizing world. 
Obviously, the terrorist attacks of late November complicate this story. 
The terrorists attacked India’s financial nerve-center and commercial capital, a city emblematic of the country’s energetic thrust into the twenty-first century. 
They struck at symbols of the prosperity that have made the Indian model so attractive to the globalizing world, a magnet for investors and tourists alike. 
Indeed, by striking hotels favored by foreign businessmen and visitors, they undermined the confidence of those whom India needs to sustain its success story. 
Terror may add to the time India will need to recover from the economic crisis. 
But India is already bouncing back. 
The hotels assaulted and burned in November reopened their doors a month later. 
Investors are returning, and FDI inflows this fiscal year are set to exceed the $25 billion received in 2007-08. 
At the end of February, Indian Prime Minister Manmohan Singh assured Parliament that “India would emerge the least affected among the countries of the world from the current economic crisis.” 
So, for those looking for signs of recovery from the global economic downturn, India remains the place to watch. 
According to the World Bank’s annual assessment of Global Economic Prospects, India’s economy could even triple in size in the next 15 to 20 years. 
A few more slumdogs may become millionaires by then. 

When Hindsight Is Not 20/20 
CAMBRIDGE – George Soros is a great man. 
His record speaks to his financial acumen. 
And no philanthropist or philanthropic institution did more than he to make the world a better place in the second half of the twentieth century. 
Unfortunately, his memory of events in 2008 and the couple of conversations we had back then is faulty. 
Moreover, his analysis of the policy options open to the US government in 2009 falls well short of his usual degree of sophistication. 
Surely the financial crisis of 2008 and its immediate aftermath could have been handled better; battlefield medicine is never perfect. 
But there is not even a prima facie case to be made for Johnson and Soros’s allegations of foolish ineptitude on the part of the administration in which I served. 
Readers of their argument may want to consider the following points. 
First, many commentators, experts, and political figures argued for capital infusions into banks rather than asset purchases to support the financial system. 
It seems exaggerated for Soros to take credit for the provisions in the legislation that made this possible. 
Second, the decision to infuse capital into all banks, rather than doing so selectively, was taken well before the presidential election of 2008, won by Barack Obama. 
It was a fait accompli from the point of view of the Obama administration when it took office in January 2009. 
I’m not sure what I would have advocated. 
But, certainly, at a moment of such high peril as the US and world economy faced at that moment, I can understand a decision not to allow any institutions to be stigmatized. 
Third, I did not dismiss George’s ideas with language about socialism, though I likely did refer to the political climate. 
Equally, it was not my objective to argue in detail with him. 
In early 2009, Soros was an active speculator in financial markets who was legendary for his ability to glean information about forthcoming government policies. 
The last thing any responsible official would want to do was to provide him a guide to current policy thinking or elaborate on policy considerations. 
Fourth, bank stock prices were down as much as 90% for institutions, such as Bank of America, that were holding large amounts of mortgage debt. 
There wasn’t much more to take from them. 
The idea that some version of the Soros plan would have accelerated growth is speculative at best. 
Most of the benefit of mortgage reduction flows to consumers only over time. 
As a result, careful calculations about the impact of mortgage reductions on aggregate demand (which we performed and which Johnson and Soros have not) do not bear out their claims: The extra spending per dollar of relief was likely to be less than a dime on the dollar of government resources expended. 
This leaves aside the further lesson, gained from experience, that institutions with large amounts of public capital tend to be very passive about increasing lending. 
Fifth, in the political environment that prevailed in 2009, it would have been difficult or impossible to get more money for the Troubled Asset Relief Program. 
By the time Obama came into office, a substantial majority of the TARP funds had been committed. 
Most observers expected (wrongly, as it turned out) that the remainder might well be insufficient to close all the gaps in the banking system. 
There were trillions of dollars of outstanding mortgages and hundreds of billions in second mortgages and home equity lines, most of which were held by banks. 
Any large-scale program of mortgage reduction would have required wiping out subordinated mortgages and would have created a capital hole much larger than we could be confident of filling. 
Sixth, the authors admiringly cite the British experience. 
It is not the case that Britain has avoided slow growth, right-wing electoral success, or toxic populism, so I’m not sure what this argument proves. 
Obama’s political advisers were emphatic that he should select the best policy, but with the awareness that mortgage relief that would disproportionately benefit those who borrowed most imprudently was highly unpopular. 
None of this is to say that, in hindsight, policy could not have been improved. 
More debt-service relief should have been provided more quickly. 
The focus shifted much too rapidly away from the task of recovery to long-run issues. 
More could have been done to establish accountability for those who had mismanaged financial institutions. 
But the scheme Johnson and Soros describe was not feasible at the time, would not have increased economic stimulus even if it had been possible, and most likely would have been politically toxic. 
I agree with the authors in that I hope we learn the right lessons from the failures – and successes – of the response to the Great Recession. 
But I’m afraid their view of what the right lessons are is wholly unpersuasive. 

Setting the Record Straight on Secular Stagnation 
CAMBRIDGE – Joseph Stiglitz recently dismissed the relevance of secular stagnation to the American economy, and in the process attacked (without naming me) my work in the administrations of Presidents Bill Clinton and Barack Obama. 
I am not a disinterested observer, but this is not the first time that I find Stiglitz’s policy commentary as weak as his academic theoretical work is strong. 
Stiglitz echoes conservatives like John Taylor in suggesting that secular stagnation was a fatalistic doctrine invented to provide an excuse for poor economic performance during the Obama years. 
This is simply not right. 
The theory of secular stagnation, as advanced by Alvin Hansen and echoed by me, holds that, left to its own devices, the private economy may not find its way back to full employment following a sharp contraction, which makes public policy essential. 
I think this is what Stiglitz believes, so I don’t understand his attacks. 
In all of my accounts of secular stagnation, I stressed that it was an argument not for any kind of fatalism, but rather for policies to promote demand, especially through fiscal expansion. 
In 2012, Brad DeLong and I argued that fiscal expansion would likely pay for itself. 
I also highlighted the role of rising inequality in increasing saving and the role of structural changes toward the demassification of the economy in reducing demand. 
What about the policy record? 
Stiglitz condemns the Obama administration’s failure to implement a larger fiscal stimulus policy and suggests that this reflects a failure of economic understanding. 
He was a signatory to a November 19, 2008 letter also signed by noted progressives James K. Galbraith, Dean Baker, and Larry Mishel calling for a stimulus of $300-$400 billion – less than half of what the Obama administration proposed. 
So matters were less clear in prospect than in retrospect. 
We on the Obama economic team believed that a stimulus of at least $800 billion – and likely more – was desirable, given the gravity of the economic situation. 
We were told by those on the new president’s political team to generate as much validation as possible for a large stimulus because big numbers approaching $1 trillion would generate “sticker shock” in the political system. 
So we worked to encourage a variety of economists, including Stiglitz, to offer larger estimates of what was appropriate, as reflected in the briefing memo I prepared for Obama. 
Despite the incoming president’s popularity and an all-out political effort, the Recovery Act passed by the thinnest of margins, with doubts about its ultimate passage lingering until the last moment. 
I cannot see the basis for the argument that a substantially larger fiscal stimulus was feasible. 
And the effort to seek a much larger one certainly would have meant more delay at a time when the economy was collapsing – and could have led to the defeat of fiscal expansion. 
While I wish the political climate had been different, I think Obama made the right choices in approaching fiscal stimulus. 
It is of course also highly regrettable that after the initial Recovery Act, Congress refused to support a variety of Obama’s proposals for infrastructure and targeted tax credits. 
Unrelated to the topic of secular stagnation, Stiglitz takes a swipe at me by saying that Obama turned to “the same individuals bearing culpability for the under-regulation of the economy in its pre-crisis days” and expected them “to fix what they had helped break.” 
I find this a bit rich. 
Under the auspices of the government-sponsored enterprise (GSE) Fannie Mae, Stiglitz published a paper in 2002 arguing that the chance that the mortgage lender’s capital would be depleted was less than one in 500,000, and in 2009 he called for nationalization of the US banking system. 
So I would expect Stiglitz to be well aware that hindsight is clearer than foresight. 
What about the Clinton administration record on financial regulation? 
With hindsight, it clearly would have been better if we had foreseen the need for legislation like the 2010 Dodd-Frank reforms and had a way to enact it with a Republican-controlled Congress. 
And certainly we did not foresee the financial crisis that came eight years after we left office. 
Nor did we anticipate the ways in which credit default swaps would mushroom after 2000. 
We did, however, advocate for GSE reform and for measures to rein in predatory lending, which, if enacted by Congress, would have done much to forestall the accumulation of risks before 2008. 
I have not seen a convincing causal argument linking the repeal of the Glass-Steagall Act and the financial crisis. 
The observation that most of the institutions involved – Bear Stearns, Lehman Brothers, Fannie Mae, the GSE Freddie Mac, AIG, WaMu, and Wachovia – were not covered by Glass-Steagall calls into question its centrality. 
Yes, Citi and Bank of America were centrally involved, but the activities that generated major losses were fully permissible under Glass-Steagall. 
And, in important respects, the repeal of Glass-Steagall actually enabled the resolution of the crisis, by permitting the merger of Bear and JPMorgan Chase and by allowing the US Federal Reserve to open its discount window for Morgan Stanley and Goldman when they otherwise could have been sources of systemic risk. 
The other principal attack on the Clinton administration’s record targets the deregulation of derivatives in 2000. 
With the benefit of hindsight, I wish we had not supported this legislation. 
But, given the extreme deregulatory approach of President George W. Bush’s administration, it defies belief to suggest that it would have created major new rules regarding derivatives but for the 2000 act; so I am not sure how consequential our decisions were. 
It is also important to recall that we pursued the 2000 legislation not because we wanted to deregulate for its own sake, but rather to remove what the career lawyers at the US Treasury, the Fed, and the Securities and Exchange Commission saw as systemic risk arising from legal uncertainty surrounding derivatives contracts. 
More important than litigating the past is thinking about the future. 
Even if we disagree about past political judgements and about the use of the term “secular stagnation,” I am glad that an eminent theorist like Stiglitz agrees with what I intended to emphasize in resurrecting that theory: We cannot rely on interest-rate policies to ensure full employment. 
We must think hard about fiscal policies and structural measures to support sustained and adequate aggregate demand. 

Responsibility While Protecting 
NEW YORK – Ten months ago, the United Nations Security Council, with no dissent, authorized the use of “all necessary measures” to protect civilians at imminent risk of massacre in Colonel Muammar el-Qaddafi’s Libya. 
Those lives were saved – and, if the Security Council had acted equally decisively and robustly in the 1990’s, so might those of 8,000 others in Srebrenica and 800,000 in Rwanda. 
I and many others hailed the agreement to intervene in Libya as the coming of age of the responsibility to protect (“R2P”) principle, unanimously embraced by the world’s governments in 2005. Its core idea – countering centuries of treating sovereignty almost as a license to kill – is that states must protect their own people from genocide and other mass atrocity crimes. 
If they manifestly fail to do so, the international community has the responsibility to act – by persuasion, if possible, and by coercion, if necessary. 
Now, ten months later, the Security Council is paralyzed over Syria, unable to agree not only on the extreme step of military force, but even on lesser coercive measures like targeted sanctions, an arms embargo, or referral to the International Criminal Court. 
That inaction comes despite a death toll of well over 5,000 and an outlook even worse than in Libya early last year. 
The hesitation partly reflects the very different geopolitics of the Syrian crisis: potentially explosive regional sectarian divisions, no Arab League unanimity in favor of tough action, a long Russian commitment to the Assad regime, and a strong Syrian army, which would make any conceivable military intervention difficult and bloody. 
But there is more to it than that. 
Security Council consensus about when and how to apply R2P, so evident in February and March 2011, has evaporated in a welter of recrimination about how the NATO-led implementation of the Council’s Libya mandate “to protect civilians and civilian populated areas under threat of attack” was carried out. 
Leading the critical charge have been the “BRICS” (Brazil, Russia, India, China, and South Africa). 
Their complaints are not about the initial military response – destroying the Libyan air force’s infrastructure, and air attacks on ground forces advancing on Benghazi. 
Rather, they object to what came after, when it rapidly became apparent that the three permanent Security Council’s members driving the intervention (the United States, the United Kingdom, and France) would settle for nothing less than regime change, and do whatever it took to achieve it. 
In particular, concerns have been raised that the interveners rejected ceasefire offers that may have been serious, struck fleeing personnel who posed no immediate risk to civilians, and attacked locations that had no obvious military significance (like the compound in which Qaddafi’s relatives were killed). 
More generally, the Western powers, along with Arab states like Qatar, comprehensively supported the rebel side in what rapidly became a civil war, ignoring an explicit arms embargo in the process. 
The US, the UK, and France are quick with some answers. 
Protecting civilians in areas like Tripoli that were under Qaddafi’s direct control, they argue, required overturning his regime. 
If one side was supported in a civil war, it was because a regime’s one-sided killing sometimes leads civilians (as in Syria) to take up arms to fight back (and to recruit army defectors). 
Moreover, military operations cannot be micromanaged with a “1,000-mile screwdriver.” 
And a more limited “monitor and swoop” concept of operations would have led to a longer and messier conflict in Libya, which would have been politically impossible to sustain in the US and Europe, and likely would have produced many more civilian casualties. 
These arguments all have force, but the US, the UK, and France resisted debating them in the Security Council, and other Council members were never given sufficient information to enable them to be evaluated. 
Maybe not all of the BRICS are to be believed when they say that more common ground could have been achieved had a better process been followed. 
But the Western powers’ dismissiveness during the Libyan campaign did bruise them – and those bruises will have to heal before any consensus can be expected on tough responses to such situations in the future. 
The better news is that a way forward has opened up. 
In November, Brazil circulated a paper arguing that the R2P concept, as it has evolved so far, needs to be supplemented by a new set of principles and procedures on the theme of “responsibility while protecting” (already being labeled “RWP”). 
Its two key proposals are a set of criteria (including last resort, proportionality, and balance of consequences) to be taken into account before the Security Council mandates any use of military force, and a monitoring-and-review mechanism to ensure that such mandates’ implementation is seriously debated. 
Initial reaction among the US, the UK, and France was almost contemptuous: one could almost hear their leaders sneering, “These countries would want all of those delaying and spoiling options, wouldn’t they.” 
But that attitude has begun to soften – as it must. 
Brazil, for its part, has indicated willingness to refine its proposals to make them more workable and broadly acceptable. 
Renewed consensus on how to implement R2P in hard cases may come too late to help in Syria. 
But everyone understands that the alternative to Security Council cooperation is a return to the bad old days of Rwanda, Srebrenica, and Kosovo: either total inaction in the face of mass atrocity crimes, or action outlawed by the UN Charter. 
After all that has been achieved in the last decade, such an outcome would be heartbreaking. 

Restart the Talks on Cyprus 
LONDON -- Ever since Greek Cypriots rejected the United Nations plan to reunite Cyprus in 2004, antagonism has grown between the Greek majority and the Turks in the north of the island. 
Turkish Cypriots have withdrawn into Turkey’s embrace and have attempted to gain greater international recognition. 
Greek Cypriots are using their European Union membership as a weapon to frustrate Turkey’s EU ambitions and to block attempts to increase trade between the EU and the island’s north. 
The EU cannot let Cyprus stew in its own juice, not least because as a member state the island is proving an uncomfortable bedfellow. 
The whole of Cyprus joined the EU in May 2004, but the acquis communautaire – the body of EU law – applies only to areas under direct government control, so it is suspended in those parts administered by Turkish Cypriots. 
The Turkish government, unwisely, became embroiled with the EU over its plan to extend the customs union to include all new member states, including Cyprus. 
Meanwhile, the EU has failed to deliver fully on aid and trade pledges to Turkish Cypriots. 
Perhaps most worrying of all, if the stalemate over Cyprus continues, it could end Turkey’s chances of joining the EU, as Greek Cypriot intransigence has given succor to other member states that want to keep Turkey out. 
It might also prevent rapprochement between Greece and Turkey, despite the hopes raised by Greek Prime Minister Kostas Karamanlis’s recent visit to Turkey – the first in almost a half-century. 
There are plenty of obstacles in the way of a negotiated solution to the Cyprus problem. 
Just over a year ago, the Finnish EU presidency failed to break the gridlock over the Cyprus trade issue, illustrating again the limited value of trying to agree partial solutions and “confidence-building” measures. 
The UN’s latest initiative to get low-key, exploratory talks moving is going nowhere. 
Cypriot presidential elections this month may give a second term to Tasos Papadopoulos, the Greek Cypriot leader who led the “No” campaign in the 2004 reunification referendum. 
On the other hand, Turkey’s recent elections returned the same pro-EU government that made a serious attempt to settle the Cyprus problem in 2004. 
So it’s not all gloom and doom. 
Some argue that it would be better to leave Cyprus alone and revisit the problem only in the closing stages of Turkey’s EU accession. 
These voices are likely to become louder if Papadopoulos is re-elected. 
In my view, such a delay would be a mistake. 
Turkey would then have to conduct dual negotiations – over Cyprus and over its own EU accession. 
This would risk overlaps and trade-offs between the two, or a cumulative burden of compromises that might become too great for Turks to accept, potentially wrecking both negotiations at one stroke. 
For Greek Cypriots, the failure of Turkey’s accession talks in this way would also end any chance of resolving the Cyprus problem. 
Both Greek and Turkish Cypriots must take proper responsibility for any solutions that are negotiated and stand behind their decisions during any subsequent referendum campaign. 
All too often, Cypriots present themselves as helpless pawns in a wider game played by Greece, Turkey, or the “great powers.” 
There may have been some truth to this in the past, although never to the extent that many Cypriots believe. 
This time around, only genuine negotiations by both parties − and a mutually accepted settlement − are likely to stand the test of time. 
Given the island’s complexity, and Cypriot sensitivity, it would be foolish for an outsider to try to sketch any future settlement. 
It would, however, seem safe to summarize certain elements at the outset. 
For example, it would be impractical to drop the basic framework of a bi-communal, bi-zonal federation, which was agreed by both sides as long ago as 1977. 
Moreover, there seems little doubt that the final, rejected version of the UN’s 2003-04 reunification plan will have to be changed, although earlier versions might contain ideas worth re-visiting. 
It may also be constructive to take advantage of transitional provisions linked to Turkey’s EU accession. 
One earlier UN suggestion was that Turkey complete the withdrawal of its troops from Cyprus when it joined the EU. 
At the same time, there are concerns raised by one side that could be settled without any difficulty for the other side. 
Greek Cypriots were worried, for instance, about the tax bill for the last proposed settlement; an agreement by the EU and other international players to subsidize the plan would cut the potential cost without affecting the Turkish community at all. 
The UN, the EU, Greece, Turkey, and UN Security Council members must be united in their support for any renewed effort to reach a settlement. 
Ever since UN peacekeepers were deployed in 1964, the UN has been the only party acceptable to all sides as a “midwife of compromise.” 
While the EU must be present, it cannot be a neutral mediator, since Greece and Cyprus are both members. 
The Security Council must also give support to the UN’s negotiators and guarantee the provisions of any settlement. 
This will help to avoid the kind of fears that surfaced in 2004 about implementation of the previous UN plan. 
Cyprus suffers from being a second-order problem, one that occasionally flares up, only to be damped down again with short-term palliatives. 
Many international diplomats are weary of the constant squabbles, endless setbacks, and stubbornness shown in previous negotiations. 
But neglect of Cyprus could have serious consequences, especially if its continued division keeps Turkey outside the EU. 
The future then would be fraught with tension in a part of the world where the EU needs to encourage peace and stability. 


Restoring Trust in Expertise 
LONDON – “Why did nobody notice it?” Britain’s Queen Elizabeth II famously asked the faculty at the London School of Economics in November 2008, just after the financial crisis erupted. 
Almost a decade later, the same question is being asked of “experts” following the extraordinary and unforeseen events of the past 12 months – from the United Kingdom’s Brexit referendum to Donald Trump’s election as President of the United States. 
Experts in general, not just pollsters and economists, have been the target of much criticism of late. 
The eurozone crisis that began in 2010 was perceived by some as an elite creation that had painful consequences for the public at large. 
This was compounded by a crisis of conduct, as scandals broke out over the misselling of financial products, global currency manipulation, and the rigging of the London Interbank Offered Rate (Libor, the benchmark interest rate that some banks charge one another for short-term loans). 
All of this strengthened the public’s suspicion that the system is fixed in favor of the rich and powerful, who are never held to account. 
Skepticism about the credibility of elites loomed large in the Brexit referendum and the US election. 
Amid such perceived failings, public confidence in experts is at a crossroads. 
With news becoming more narrowly targeted to individual interests and preferences, and with people increasingly choosing whom to trust and follow, the traditional channels for sharing expertise are being disrupted. 
Who needs experts when you have Facebook, Google, Mumsnet, and Twitter? 
Actually, we all do. 
Over the course of human history, the application of expertise has helped tackle disease, reduce poverty, and improve human welfare. 
If we are to build on this progress, we need reliable experts to whom the public can confidently turn. 
Restoring confidence requires, first, that those describing themselves as “experts” embrace uncertainty. 
Rather than pretending to be certain and risk frequently getting it wrong, commentators should be candid about uncertainty. 
Over the long term, such an approach will rebuild credibility. 
A good example of this is the use of “fan charts” in forecasts produced by the Bank of England’s Monetary Policy Committee (MPC), which show the wide range of possible outcomes for issues such as inflation, growth, and unemployment. 
Yet conveying uncertainty increases the complexity of a message. 
This is a major challenge. 
It is easy to tweet “BoE forecasts 2% growth.” 
The fan chart’s true meaning – “If economic circumstances identical to today were to prevail on 100 occasions, the MPC’s best collective judgment is that the mature estimate of GDP growth would lie above 2% on 50 occasions and below 2% on 50 occasions” – doesn’t even fit within Twitter’s 140-character limit. 
This underscores the need for sound principles and trustworthy practices to become more widespread as technology changes the way we consume information. 
Should journalists and bloggers be exposed for reporting or recirculating falsehoods or rumors? 
Perhaps principles and practices widely used in academia – such as peer review, competitive processes for funding research, transparency about conflicts of interests and financing sources, and requirements to publish underlying data – should be adapted and applied more widely to the world of think tanks, websites, and the media. 
At the same time, consumers need better tools to assess the quality of the information and opinions they receive. 
The digitization of knowledge has empowered people to get information that shapes their views. 
They can go to the doctor better informed about their illness and alternative treatments. 
But the democratization of information can make it difficult to discern fact from falsehood; algorithms create echo chambers of the like-minded; and extreme voices and views can rise to the top in the race for clicks and online revenue. 
Schools and universities will have to do more to educate students to be better consumers of information. 
Striking research by the Stanford History Education Group, based on tests of thousands of students across the US, described as “bleak” their findings about young people’s ability to evaluate information they encounter online. 
Fact-checking websites appraising the veracity of claims made by public figures are a step in the right direction, and have some similarities to peer review in academia. 
Listening to the other side is crucial. 
Social media exacerbates the human tendency of groupthink by filtering out opposing views. 
We must therefore make an effort to engage with opinions that are different from our own and resist algorithmic channeling to avoid difference. 
Perhaps technology “experts” could code algorithms that burst such bubbles. 
Finally, the boundary between technocracy and democracy needs to be managed more carefully. 
Not surprisingly, when unelected individuals steer decisions that have huge social consequences, public resentment may not be far behind. 
Problems often arise when experts try to be politicians or politicians try to be experts. 
Clarity about roles – and accountability when boundaries are breached – is essential. 
We need expertise more than ever to solve the world’s problems. 
The question is not how to manage without experts, but how to ensure that expertise is trustworthy. 
Getting this right is vital: if the future is not to be shaped by ignorance and narrow-mindedness, we need knowledge and informed debate more than ever before. 

The American Comeback Kid 
VIENNA – As is customary at the start of a new year, imposing statistics and trend forecasts are being trumpeted worldwide. 
For example, in 2016, China is expected to replace the United States as the world’s largest economy. 
And, by 2040, India’s population will have reached 1.6 billion, surpassing China’s, which will have stagnated a decade earlier. 
Perhaps the most startling projection is that the US will become an energy exporter by 2020, and will become energy self-sufficient 15 years later, owing to the plentiful supply of inexpensive shale gas and the discovery of massive oil reserves everywhere from North Dakota to the Gulf of Mexico. 
Despite opposition from environmental groups, these reserves will be easier to exploit than those in Europe, because they are largely located in sparsely populated areas. 
As a result, energy will be significantly cheaper in the US than in Europe or China for the foreseeable future. 
Indeed, shale-gas extraction is so economically favorable that even American gas exported to Europe would cost 30% less than what the Russian energy giant Gazprom currently charges. 
Cheap energy provides a powerful incentive for energy-intensive industries – from steel and glass to chemicals and pharmaceuticals – to locate in the US. 
In fact, the decreased cost of manufacturing in America, combined with the country’s business-friendly regulations, strong rule of law, and political stability, will eliminate the competitive advantage that has driven China’s rapid economic growth over the last several decades. 
Meanwhile, American universities still attract the world’s best and brightest in many fields, most notably in science and technology. 
And the country’s other longstanding advantages – flexibility, capacity for renewal, economic mobility, international regulatory strength, and the world’s main reserve currency – remain in place. 
Given these favorable conditions, the US has already begun “on-shoring” its industry – a process that will most likely continue for several decades. 
As other advanced economies become increasingly services-based, the US is reindustrializing. 
The resulting added value will bolster policymakers’ ability to find long-term solutions to persistent problems, including an inefficient health-care system, inadequate primary and secondary education, and blatant social injustice. 
Success in these areas would further enhance America’s appeal as an industrial center. 
As part of the Harvard Business School’s US Competiveness Project, Michael Porter and Jan Rivkin recently published an eight-point plan, which could be implemented within the next two to three years. 
Each proposed measure has generated broad, bipartisan agreement among policymakers (at least behind closed doors). 
The plan highlights the need to take advantage of the opportunities afforded by shale gas and newly discovered oil reserves. 
Low-cost domestic energy could help to lower the trade deficit, spur investment, and decrease America’s economic exposure to volatile oil-exporting countries. 
A strong federal regulatory framework could help to ensure this result, while minimizing the environmental and safety risks associated with extraction. 
Other proposals include easing the immigration of highly skilled individuals, particularly graduates from US universities; addressing distortions in international trade and investment; developing a more sustainable federal budget framework; streamlining taxes and regulations; and initiating an ambitious infrastructure program. 
By pursuing these strategies, President Barack Obama could restore America’s position as the engine of the global economy. 
But implementing the eight policy proposals would also widen further the wealth gap between the US and Europe, which has been growing for the last three decades. 
In 1980-2005, the US economy grew by a factor of 4.45 – a level that no major European economy even approached. 
In 2011, Norway and Luxemburg were the only European countries with higher per capita national income than the US in purchasing power parity terms. 
And, by 2040, European countries’ populations will have stagnated or shrunk (with the exception of the United Kingdom, which will have a population of roughly 75 million, comparable to Germany), while America’s will have grown to 430 million, from 314 million today. 
The political consequences of the US economy’s renewed strength will reverberate worldwide. 
But maintaining this economic revival will require greater reluctance to intervene in foreign conflicts or engage in new wars. 
This recognition has already dampened US policymakers’ support for the Arab Spring uprisings: witness Obama’s hesitation to intervene in Libya and his unwillingness, at least so far, to involve America directly in Syria’s bloody civil war. 
Although the Arab Spring’s historic significance was initially likened to that of the fall of the Berlin Wall, mounting concern about the Muslim Brotherhood’s increasing political influence is overshadowing the positive potential of change in the region. 
Likewise, while the US will not relinquish its bilateral relationship with Israel, relations between Israeli Prime Minister Binyamin Netanyahu and Obama have reached a new low. 
In this context, a major American peace initiative in the Middle East is unlikely in the foreseeable future. 
Meanwhile, America’s former rival, Russia, is struggling to restore its hegemony over many of the ex-Soviet countries. 
And conditions in Africa and Latin America are generally stabilizing. 
Given this, America’s foreign-policy priorities have shifted to the Asia-Pacific region, where the most pressing economic, political, and security challenges – including the threat of North Korean missiles and rising tensions between China and its neighbors over competing sovereignty claims in the South and East China Seas – are emerging. 
Other global challenges appear relatively minor in comparison. 
Although the weight of global politics, economics, and, in turn, influence is largely shifting from the Atlantic to the Pacific, it would be a mistake to underestimate America’s role in the new world order. 
America never really stepped out of the spotlight, and it will continue to play a leading role. 

 

Why Is Anti-Semitism Returning to Germany? 
BERLIN – Though the British Labour Party’s anti-Semitism scandal has dominated headlines of late, there is a more profound debate with the same theme taking place in Germany. 
Most worryingly, the fundamental tenets of vergangenheitsbewältigung – the collective project of coming to terms with the country’s World War II past – are shifting. 
This historical reckoning was hard won. 
During the early post-war era, Germany went through various stages of denial about the horrors committed during the Nazi regime. 
But in 1968, an intergenerational culture war exploded, as the children of Nazism faced up to the responsibilities of their parents – culminating in the violent excesses of the Red Army Faction. 
As historical scholarship documenting the crimes of the Nazi regime continued to pile up in the 1980s and 1990s, the German political establishment reached a consensus that the country’s historic guilt and responsibility must be a central part of its national story. 
But since 2015, when Chancellor Angela Merkel announced her policy of Willkommenskultur (“welcoming culture”) and opened Germany’s doors to refugees fleeing the conflict in Syria, unease about resurgent anti-Semitism has been growing in the German establishment, and particularly in the Jewish community. 
After all, just in the past year, a stone was hurled through a synagogue window in Gelsenkirchen, Israeli flags have been burned at demonstrations, and a Berliner wearing a yarmulke was assaulted in the street. 
Worse still, these attacks – sometimes by immigrants – have coincided with the rise of the far-right Alternative für Deutschland. 
The AfD is now using its position as the main opposition party in the Bundestag to question the culture of responsibility, even as it promises to protect German Jews from Islamist-inspired anti-Semitism. 
Attacks on Jews have sparked outrage from the many Germans who thought such scenes had vanished forever from their country’s streets. 
But, in addition to the more visible abuses, German Jews have also begun to talk about more subtle changes in their everyday lives as major German cities like Frankfurt, Hamburg, and Berlin grow more multicultural. 
Four parallel trends are now challenging Germany’s vergangenheitsbewältigung. 
First, the Holocaust is passing from memory into history. 
As the last survivors and perpetrators die, younger Germans feel less of a real connection to the past. 
Having a parent who may have been complicit in Nazi crimes is not the same thing as having a great-grandparent who was. 
It is not surprising that younger Germans feel less historically responsible. 
Second, immigrants from predominantly Muslim countries now constitute a growing share of the population. 
Members of this cohort have no personal links to past German crimes, and they have often been subjected to anti-Zionist indoctrination by regimes seeking legitimacy through solidarity with the Palestinians. 
Third, most Germans have never, and will never, meet a Jew, for the simple reason that Jews constitute a vanishingly small share of the population. 
Frankfurt, home to the country’s second-largest Jewish community (behind Berlin), has only 7,000 Jews, out of a metropolitan-area population of 5.7 million. 
Finally, the Israeli government’s increasingly radical and nationalistic embrace of Jewish identity above all else is changing the dynamics of anti-Semitism globally, as anti-Israeli sentiment becomes blurred with hostility toward Jews. 
Many who have been observing these trends from a distance – or even from within Germany – are listening for echoes of the 1930s. 
But, as someone of Jewish heritage who is currently reclaiming his German citizenship, I would argue that the re-emergence of anti-Semitism in Germany has more to do with the country’s global future than with its murderous past. 
Between the growing talk of Heimat (“homeland”) and the excommunication of Germany’s star soccer player over his photo with Turkish President Recep Tayyip Erdoğan, it is clear that Germany is trying to figure out how to adapt its national story to a global age. 
I recently met with the directors of a Jewish museum in one of Germany’s major cities, and I was struck by the thoughtfulness with which they are approaching the anti-Semitism problem. 
For starters, their aim is to “de-Israelify” the Jewish question, to show that Jewish history is German history, as evidenced by countless studies of Jews’ historical contributions to German culture. 
Germany’s Jewish community also understands the need to move from a focus on Germany’s special responsibility to talk about coexistence, multiculturalism, and interfaith dialogue. 
The goal is to get more young Germans to meet and engage with Jews. 
Most powerfully, the Jewish community is pursuing outreach specifically geared toward new (Muslim) immigrants, who must be made to understand that Jews have historically been the victim, not the oppressor. 
This effort entails drawing parallels between the discrimination met by immigrants today and that suffered by Jews historically. 
The hope is to build interfaith bridges within a common culture of the oppressed. 
As Germany confronts ever more complex debates about its identity, the country’s elites will need to adopt this philosophy, and do more to encourage dialogue within an increasingly diverse population. 
The problem that is emerging from today’s identity politics is not just anti-Semitism, but racism in general. 
And that is just as true in Germany as it is in the UK and other Western countries. 

Anti-Poverty 2.0 
ROME – Global leaders have touted the apparent success of achieving in 2010 – well ahead of the 2015 target – the Millennium Development Goal of halving the share of people who were living below the poverty line in 1990. 
But, amid enduring poverty, rising inequality, and lackluster growth in many developing countries, the success of past anti-poverty policies and programs appears dubious. 
In fact, outside of East Asia, progress has been modest, with the situation worsening in some countries and regions – despite several economic-growth spurts, sustained expansion in some large developing countries, and public commitments by the international community to the 2000 Millennium Declaration, which led to the MDGs. 
This mixed record calls into question the efficacy of conventional poverty-reduction policies, often identified with the Washington Consensus, which transformed the discourse on poverty in the 1980’s. 
Washington Consensus reforms – including macroeconomic stabilization (defined as low-single-digit inflation) and market liberalization – were supposed to reduce poverty by accelerating economic growth. 
But little attention was paid to poverty’s structural causes, such as inequality of assets and opportunities, or the unequal distributional consequences of growth. 
And, because unskilled workers tend to lose their jobs first in economic downturns, while employment generally lags behind output recovery, reduced public investment in health, education, and other social programs ultimately increased the vulnerability of the poor. 
Not surprisingly, therefore, the fallout from the global economic crisis that erupted in 2008 – the worst since the Great Depression of the 1930’s – has prompted experts, policymakers, and the international financial institutions to rethink poverty. 
Many are rejecting once-dominant perspectives on poverty and deprivation, warning that they lead to ineffective policy prescriptions. 
For example, the United Nations’ Report on the World Social Situation: Rethinking Poverty,and its companion book Poor Poverty: The Impoverishment of Analysis, Measurement, and Policies, havesought to advance the debate on poverty by examining the conventional policy framework and assessing popular poverty-reduction programs. 
They affirm the need for a shift away from the fundamentalist free-market thinking that has dominated poverty-reduction strategies in recent decades toward context-sensitive measures to promote sustainable development and equality. 
Indeed, these reports challenge the prevailing approach, which has left more than one billion people living below the poverty line (defined as the purchasing-power-parity equivalent of $1.25 per day in 2005), and has failed to prevent economic growth from stalling in most countries. 
Meanwhile, inequality has increased worldwide – even in countries that have experienced rapid economic expansion, notably China and India. 
While growth is usually needed for poverty reduction, it does not necessarily translate into job creation, as many countries’ recent record of jobless or job-poor growth demonstrates. 
The UN encourages governments to assume a more proactive development role, which would entail an integrated policymaking approach aimed at promoting structural change while reducing inequality, vulnerability, and economic insecurity. 
Growth must become more stable, with a consistently counter-cyclical macroeconomic policy stance, prudent capital-account management, and greater resilience to external shocks. 
Generally, economies that have succeeded in terms of both economic growth and poverty reduction over the last three decades have done so by adopting pragmatic, heterodox policies. 
Often invoking investor- and market-friendly language, they have generally encouraged private investment, especially in desired economic activities, such as those that create more job opportunities or offer increasing returns to scale. 
But aid conditionality and treaty commitments have significantly constrained policymaking in most developing countries, especially the poorest. 
In particular, slow growth and revenue losses, owing to economic liberalization programs, have reduced the scope for fiscal policy, with serious consequences for poverty and destitution. 
This trend must be reversed. 
Moreover, while the programs that most donors like – such as micro-credit, formalization of land titles, and governance reforms – have sometimes helped to ameliorate the conditions facing the poor, they have not reduced poverty significantly. 
Leaders must consider, design, and implement pragmatic and innovative alternatives, rather than continue to rely on ineffective policies and programs. 
In recent decades, social policies have increasingly involved some form of means testing of eligible beneficiaries, ostensibly to enhance cost effectiveness. 
But, in general, universal social policies have been much more effective and politically sustainable, while policies targeting the poor, or the “poorest of the poor,” have often been costly and neglectful of many of those in need. 
The right to social security enshrined in the Universal Declaration of Human Rights requires universal social protection to ensure the well-being of all, including people living in poverty and those at risk of poverty. 
Social policy, provisioning, and protection must therefore be integral to development and poverty-reduction strategies. 
In most countries, a basic social-protection floor – which can help countries to mitigate the negative effects of shocks and prevent people from falling deeper into poverty – is affordable. 
However, low-income and least-developed countries need assistance in raising the floor to more acceptable levels. 
In order to address global poverty effectively, world leaders must pursue poverty-reduction policies that support inclusive, sustainable economic growth and development – in turn increasing the fiscal resources that are available for social spending. 
Only when all citizens benefit from economic development can leaders devoted to poverty reduction claim genuine success. 

Reimagining Security and Rethinking Economics 
PRINCETON – Now that the world is facing a trade war and the growing possibility that the West could find itself in a real war, we would do well to reconsider the lessons of the interwar period. 
Many of today’s economic and security disorders are frequently attributed to the 2008 global financial crisis. 
In addition to exposing the flaws in conventional economic policies, the crisis and its aftermath accelerated the global rebalancing from the Atlantic to the Asia-Pacific region, while fueling political discontent and the rise of anti-establishment movements in the West. 
Likewise, the Great Depression of the 1930s is usually thought to have produced a seismic shift in economic thinking. 
According to the conventional narrative, policymakers at the time, having vowed never to repeat the errors that led to the crisis, devised new measures to overcome their economies’ prolonged malaise. 
The conceptual and institutional reordering of economics that followed is usually credited to one towering figure: the British economist John Maynard Keynes, who published The General Theory of Employment, Interest, and Money in 1936. 
Keynes also orchestrated the 1944 Bretton Woods conference, which led to the creation of the World Bank, the International Monetary Fund, and the post-war global monetary order. 
According to Keynes’s collaborator and biographer Roy Harrod, Keynes enjoyed a god-like presence at the Bretton Woods talks. 
But some of Keynes’s other contemporaries, notably the British economist Joan Robinson, always doubted that he deserved so much credit for ushering in the new order. 
After all, the real reason that Keynesian thinking took hold was that its method of calculating aggregate consumption, investment, and savings proved invaluable for American and British military planning during World War II. 
With consistent national accounting, governments could make better use of resources, divert production from civilian to military purposes, and curtail inflationary pressures, thereby maintaining consumption and staving off civil unrest. 
The same tools turned out to be just as useful in reorienting the post-war economy toward higher household consumption. 
But the point is that the revolution in economics, followed by the economic miracles of the post-war era, was a product of wartime calculation, not peacetime reflection. 
Pressing security concerns and the need to ensure domestic and international stability made policymakers more willing to challenge longstanding economic orthodoxy. 
This era holds important lessons for the present. 
Nowadays, many economists complain that the financial crisis did not prompt a serious rethinking of conventional economics. 
There are no modern-day equivalents to Keynes. 
Instead, economic and financial issues tend to be discussed in intellectual silos, by specialists who give little mind to security concerns or the interplay between national and international objectives. 
Still, as in the interwar period, there are security threats today that will make rethinking economic assumptions necessary, if not inevitable. 
Though the financial crisis did not lead to a holistic intellectual reckoning, three broader challenges to the liberal international order since 2016 almost certainly will. 
The first challenge is the existential threat of climate change, which will have far-reaching geopolitical consequences, particularly for areas already facing water shortages, and for tropical countries and coastal cities already experiencing the effects of rising sea levels. 
At the same time, some countries will enjoy temporary gains, owing to longer growing seasons and increased access to minerals, hydrocarbons, and other resources in polar regions. 
Ultimately, reducing the amount of greenhouse gases in the atmosphere will serve the common good. 
But, without an international mechanism to compensate those most at risk of a warming planet, individual countries will weigh the trade-offs of reducing greenhouse-gas emissions differently. 
The second global challenge is artificial intelligence and its foreseeable disruption of labor markets. 
AI threatens not just employment but also security, because it will render obsolete many technologies that states use to defend their populations and deter aggression. 
It is little wonder that larger powers like the United States and China are already racing to dominate AI and other big-data technologies. 
As they continue to do so, they will be playing an increasingly dangerous and unstable game, in which each technological turn could fundamentally transform politics by rendering old defenses useless. 
The third challenge is the monetary revolution being driven by distributed-ledger technologies such as blockchain, which holds out the promise of creating non-state money. 
Since Bretton Woods, monetary dominance has been a form of power, particularly for the US. 
But alternative modes of money will offer both governments and non-state actors new ways to assert power or bypass existing power structures. 
Cryptocurrencies such as Bitcoin are already disrupting markets, and could someday alter the financial relations on which modern industrial societies are based. 
In the new political geography, China, Russia, India, and others see each of these challenges as opportunities to shape the future of globalization on their own terms. 
What they envision would look very different from the model of the late twentieth century. 
China, for example, regards AI as a tool for recasting political organization through mass surveillance and state-directed thinking. 
By replacing individualism with collectivism, it could push global politics in a profoundly illiberal direction. 
Fortunately, there are alternative paths forward. 
In rethinking economics and security, we will need to develop an approach that advances innovation within a framework of coordinated deliberation about future social and political arrangements. 
We need to apply human imagination and inventiveness not only to the creation of new technologies, but also to the systems that will govern those technologies. 
The best future will be one in which governments and multinational corporations do not control all of the information. 
The challenge, then, is to devise generally acceptable solutions based on cooperation, rather than on the destruction of competing visions. 

Rethinking Hunger 
ROME – The world has a nutrition problem. 
Though great strides have been made toward the Millennium Development Goal of halving the proportion of undernourished people in developing countries, the problem remains persistent, pervasive, and complex. 
After all, the issue goes beyond merely providing more food; effective efforts to reduce undernourishment must ensure that people have access to enough of the right types of food – those that give them the nutrients they need to live healthy, productive lives. 
Since 1945, food production has tripled, and food availability has risen by 40%, on average, per person. 
Over the last decade alone, vegetable production in the Asia-Pacific region, where more than three-quarters of the world’s vegetables are grown, increased by one-quarter. 
But, despite these gains in expanding the food supply, at least 805 million people still go hungry every day, of whom some 791 million live in developing countries. 
Many more go hungry seasonally or intermittently. 
And more than two billion people suffer from “hidden hunger” – one or more micronutrient deficiencies. 
Hunger and undernourishment damage the health and productivity of adults, undermining their ability to learn and work. 
Moreover, they impede children’s physical and cognitive development, and leave them more susceptible to illness and premature death. 
Stunted growth due to malnutrition affects one in four children under the age of five. 
Adequate nutrition is most vital during the first 1,000 days of life (from conception to a child’s second birthday). 
But, even after that, hunger and undernourishment continue to diminish children’s chances of surviving to adulthood, much less reaching their full potential. 
Ironically, in many parts of the world, pervasive hunger coexists with rising levels of obesity. 
More than 1.5 billion people are overweight, with one-third of them considered obese. 
These people are particularly vulnerable to non-communicable diseases like heart disease, stroke, and diabetes. 
Contrary to popular belief, obesity is often related less to an overabundance of food than to inadequate access to affordable, diverse, and balanced diets. 
The challenge facing the international community is thus to ensure adequate consumption of the right kinds of food. 
This means developing food systems that are more responsive to people’s needs, particularly those of the socially excluded and economically marginalized. 
Mothers, young children, the elderly, and the disabled are among the most vulnerable to the pitfalls of undernourishment, and should be given special attention in efforts to end food insecurity and undernourishment. 
In order to ensure that today’s efforts benefit future generations, strategies to improve global food systems must emphasize environmental sustainability. 
Specifically, world leaders must reassess prevailing food-production processes, which often put considerable stress on natural resources by exhausting freshwater supplies, encroaching on forests, degrading soils, depleting wild fish stocks, and reducing biodiversity. 
Making matters worse, the lack of adequate infrastructure for storing and transporting food to consumers contributes to massive losses. 
Of course, it is essential to strike the right balance between producing enough nutrient-dense food and preserving the environment. 
Consider livestock production, which accounts for many foods – including milk, eggs, and meat – that have enriched diets in developing countries and provide livelihoods for millions. 
Unsustainable production systems, combined with wasteful and excessive consumption in some regions of the world, have had serious consequences in terms of climate change, disease transmission, and nutritional balance. 
But, with a strong political commitment, global food-production systems can be transformed. 
An obvious step would be to ensure that all food-related programs, policies, and interventions account for nutrition and sustainability. 
Likewise, food-related research and development should focus on facilitating the production of nutrient-rich foods and the diversification of farming systems. Finding ways to use water, land, fertilizer, and labor more efficiently, and with minimal adverse impact, is essential to ecological sustainability. 
Equally important will be interventions that empower local communities to improve their diets. 
This requires comprehensive public-health and education campaigns, social protection to enhance resilience, and initiatives to boost employment and income generation. 
Finally, producers and distributors need support and encouragement to transform their existing systems. 
After all, a shift toward sustainability cannot come at the expense of farmers’ livelihoods. 
Better nutrition makes economic sense. 
Malnutrition in all of its forms reduces global economic welfare by about 5% annually, through foregone output and additional costs incurred. 
The economic gains of reducing micronutrient deficiencies are estimated to have a cost/benefit ratio of almost 1:13. 
The upcoming Second International Conference on Nutrition in Rome will provide a historic opportunity to galvanize political commitment to enhance nutrition for all through better policies and international solidarity. 
Failure to make the needed investments in food access, nutrition, and sustainability is morally – and economically – unjustifiable. 

Rethinking Inflation Targeting 
ZURICH – Over the last two decades, inflation targeting has become the predominant monetary-policy framework. 
It has been essentially (though not explicitly) adopted by major central banks, including the US Federal Reserve, the European Central Bank, and the Swiss National Bank. 
But the 2008 global economic crisis, from which the world has yet to recover fully, has cast serious doubt on this approach. 
The Bank for International Settlements has long argued that pure inflation targeting is not compatible with financial stability. 
It does not take into account the financial cycle, and thus produces excessively expansionary and asymmetric monetary policy. 
Moreover, a major argument in favor of inflation targeting – that it has contributed to a decline in inflation since the early 1990s – is questionable, at best. 
Disinflation actually began in the early 1980s – well before inflation targeting was invented – thanks to the concerted efforts of then-US Federal Reserve Board Chair Paul Volcker. 
And, from the 1990s on, globalization – in particular, China’s integration into the world economy – has probably been the main reason for the decline in global inflationary pressure. 
A more recent indication that inflation targeting has not caused the disinflation seen since the 1990s is the unsuccessful effort by a growing number of central banks to reflate their economies. 
If central banks are unable to increase inflation, it stands to reason that they may not have been instrumental in reducing it. 
The fact is that the original objective of central banks was not consumer-price stability; consumer-price indices did not even exist when most of them were founded. 
Central banks were established to provide war financing to governments. 
Later, their mission was expanded to include the role of lender of last resort. 
It was not until the excessive inflation of the 1970s that central banks discovered – or, in a sense, rediscovered – the desirability of keeping the value of money stable. 
But how to measure the value of money? 
One approach centers on prices, with the consumer price index appearing to be the most obvious indicator. 
The problem is that the relationship between the money supply (which ultimately determines the value of money) and prices is an unstable one. 
For starters, the lag time between changes in the money supply and price movements is long, variable, and unpredictable. 
Given this, targeting consumer prices in the next 2-3 years will not guarantee that the value of money remains stable in the long term. 
Moreover, different methods of collecting consumer prices yield different results, depending on how housing costs are treated and the hedonic adjustment applied. 
In short, monetary policy has been shaped by an imprecise, small, and shrinking subset of prices that exhibits long and variable lags vis-à-vis changes in the money supply. 
Unfortunately, monetary policymakers’ effort to operationalize the objective of ensuring that the value of money remains stable has taken on a life of its own. 
Today’s economics textbooks assume that a primary objective of central banks is to stabilize consumer prices, rather than the value of money. 
Furthermore, economists now understand inflation as a rise in consumer prices, not as a decline in the value of money resulting from an excessive increase in the money supply. 
Making matters worse, central banks routinely deny responsibility for any prices other than consumer prices, ignoring that the value of money is reflected in all prices, including commodities, real estate, stocks, bonds, and, perhaps most important, exchange rates. 
In short, while price stabilization through inflation targeting is a commendable objective, central banks’ narrow focus on consumer prices – within a relatively short time frame, no less – is inadequate to achieve it. 
This was highlighted by the surge in many countries’ housing prices in the run-up to the 2008 financial crisis, the steep decline in asset and commodity prices immediately after Lehman Brothers collapsed, the return to asset-price inflation since then, and recent large currency fluctuations. 
All are inconsistent with a stable value of money. 
Central banks’ exclusive focus on consumer prices may even be counterproductive. 
By undermining the efficient allocation of capital and fostering mal-investment, CPI-focused monetary policy is distorting economic structures, blocking growth-enhancing creative destruction, creating moral hazard, and sowing the seeds for future instability in the value of money. 
Within a complex and constantly evolving economy, a simplistic inflation-targeting framework will not stabilize the value of money. 
Only an equally complex and highly adaptable monetary-policy approach – one that emphasizes risk management and reliance on policymakers’ judgment, rather than a clear-cut formula – can do that. 
Such an approach would be less predictable and eliminate forward guidance, thereby discouraging excessive risk-taking and reducing moral hazard. 
History hints at what a stability-oriented framework could look like. 
In the last quarter of the twentieth century, many central banks used intermediate targets, including monetary aggregates. 
Such targets could potentially be applied to credit, interest rates, exchange rates, asset and commodity prices, risk premiums, and/or intermediate-goods prices. 
Short-term consumer-price stability does not guarantee economic, financial, or monetary stability. 
It is time for central banks to accept this fact and adopt a comprehensive, long-term monetary-policy approach – even if it means that, in the short term, consumer-price inflation deviates from what is currently understood as “price stability.” 
Temporary fluctuations in a narrow and imprecisely measured CPI are a small price to pay to secure the long-term stability of money. 

 

Rethinking Poverty Reduction 
NEW YORK – Last year, the United Nations Food and Agriculture Organization announced that the number of hungry people in the world increased over the last decade. 
In 2008, the World Bank announced a significant decline in the number of poor people up to the year 2005. 
But if poverty is defined principally in terms of the money income needed to avoid hunger, how can announcements such as these be reconciled? 
According to the World Bank’s much cited “dollar-a-day” international poverty line, which was revised in 2008 to $1.25 a day in 2005 prices, there are still 1.4 billion people living in poverty, down from 1.9 billion in 1981. 
However, as China has accounted for most of this decline, there were at least 100 million more people living in poverty outside China in 2005 than in 1981. 
In Sub-Saharan Africa and parts of Asia, poverty and hunger remain stubbornly high. 
International agencies estimate that more than 100 million people fell into poverty as a result of higher food prices during 2007-2008, and that the global financial and economic crisis of 2008-2009 accounted for an increase of another 200 million. 
Delayed job recovery from the global downturn remains a major challenge for poverty reduction in the coming years. 
Meanwhile, measurement controversies continue to cast doubt on actual progress. 
With the 1995 Social Summit adopting a wider definition of poverty that includes deprivation, social exclusion, and lack of participation, the situation today may be even worse than suggested by a money-income poverty line. 
Inequality appears to have been on the rise in recent decades at the international level and in most countries. 
More than 80% of the world’s population live in countries where income differentials are widening. 
The poorest 40% of the world’s population account for only 5% of world income, while the richest 20% account for 75%. 
The mixed record of poverty reduction calls into question the efficacy of conventional approaches. 
Countries were advised to abandon their national development strategies in favor of globalization, market liberalization, and privatization. 
Instead of producing sustained rapid growth and economic stability, such policies made countries more vulnerable to the power of the rich and the vagaries of international finance and global instability, which has become more frequent and severe due to deregulation. 
The most important lesson is the need for sustained rapid growth and structural economic transformation. 
Governments need to play a developmental role, with implementation of integrated policies designed to support inclusive output and employment growth, as well as to reduce inequality and promote social justice. 
Such an approach needs to be complemented by appropriate industrial investment and technology policies, and by inclusive financial facilities designed to support them. 
In addition, new and potentially viable production capacities need to be fostered through complementary developmental policies. 
By contrast, the insistence on minimal government and reliance on the market led to precipitous declines in public infrastructure investment, particularly in agriculture. 
This not only impaired long-term growth, but also increased food insecurity. 
Advocates of economic liberalization policies cited the success of the rapidly industrializing East Asian economies. 
But none of these economies had pursued wholesale economic liberalization. 
Instead, governments played a developmental role by supporting industrialization, higher value-added agriculture and services, and improvement of technological and human capabilities. 
Structural transformations should promote full and productive employment as well as decent work, while governments should have enough policy and fiscal space to enable them to play a proactive role and to provide adequate universal social protection. 
The last three decades also saw the divorce of social policies from overall development strategies as a consequence of the drive for smaller government. 
National economic development strategies were replaced with donor-favored poverty-reduction programs, such as land-titling, micro-credit, and “bottom of the pyramid” marketing to the poor. 
Such fads have not succeeded in significantly reducing poverty. 
This is not to deny some positive consequences. 
For example, micro-credit has empowered millions of women, while important lessons have been learned from such schemes’ design and implementation. 
Meanwhile, universal social programs have improved human welfare much more than targeted and conditional programs. 
However, conditional cash-transfer programs have been quite successful in improving various human-development indicators. 
Unfortunately, poverty remains endemic, with more than a billion people going hungry every day. 
Urgent action is needed, as the recent financial and economic crisis, following hard on the heels of the food-price crisis, is believed to have set back progress on poverty reduction even further. 
There are also growing fears that climate change will more adversely threaten the lives of the poor. 
The United Nations’ biennial Report on the World Social Situation (RWSS 2010), entitled Rethinking Poverty , makes a compelling case for rethinking poverty-measurement and poverty-reduction efforts. 
For the world’s poor, “business as usual” has never been an acceptable option. 
Nor have the popular trends of recent decades proven to be much better. 

Rethinking Productivity Growth 
BERKELEY – Today, the world’s population is, on average, about 20 times richer than it was during the long Agrarian Age. 
Between 7000 BC and AD 1500, resources were scarce, technological progress was slow, and Malthusian pressures kept almost all human populations at a near-subsistence level, with per capita daily income of less than $1.50 in today’s terms. 
In 2017, only around 7% of the world’s population is that poor. 
Consider a scenario in which we took the total monetary value of what we currently produce, and used it to purchase the types of goods and services that people living on $1.50 per day consume. 
The average daily global-output value would be $30 per person (at current prices). 
That is our roughly $80 trillion of annual global income today. 
And while the fruits of global productivity are not equally distributed by any stretch, our society’s overall wealth today would leave our Agrarian Age predecessors dumbstruck. 
Moreover, we do not produce and consume the same things that our near-subsistence ancestors did. 
In 2017, 40 kilocalories a day in basic grains wouldn’t do anyone much good. 
Meanwhile, analogues to common goods and services that we now consume would have been absurdly expensive in the Agrarian Age. 
And in many cases, such analogues couldn’t even be considered. 
Tiberius Claudius Nero could not have dined on strawberries and cream during the first century BC, because nobody thought to put those two items together until the Tudor courtier Cardinal Thomas Wolsey’s cooks served it in the sixteenth century. 
In 1606, there was only one person who could sit at home and watch a bloody audiovisual drama about witches. 
His name was James Stuart, the king of England and Scotland. 
He had William Shakespeare and the King’s Men on retainer. 
Today, more than four billion people with smartphones, tablets, and televisions enjoy a form of on-demand entertainment that was once reserved for absolute monarchs. 
To take one more example, the richest man in the early nineteenth century, Nathan Mayer Rothschild, died in his fifties from an infected abscess. 
Had he been given the option to hand over all his wealth for one dose of modern antibiotics, he probably would have. 
So, it is actually misleading to say that a typical person today is 20 times richer than his or her Agrarian Age predecessor, because consumer choices now extend far beyond the goods and services that were broadly available back then. 
People today enjoy not just abundance, but an unprecedented variety of choices, which constitutes a significant boost to overall wealth. 
But just how significant is that boost? 
Statisticians at the US Department of Commerce’s Bureau of Economic Analysis, and at its sister agencies in other countries, have struggled to measure the role of increased “variety” in productivity. 
According to standard estimates, annual labor productivity growth in the North Atlantic region averaged 1% from 1800 to 1870, 2% between 1870 and 1970, and 1.5% since then – with a possible slowdown in the past decade. 
But this is largely an estimate of how we have improved at making bare necessities for the world’s poor; it does not measure how much our lives have been enriched by higher productivity. 
We owe much of this enrichment to innovations that have fundamentally transformed human civilization. 
These include flush toilets, automobiles, electric power, long-distance communications, modern information processing, and so forth. 
Again, it would have been ludicrously expensive – or simply impossible – to have achieved similar capabilities in earlier periods of history. 
In the late Roman Empire, only a wealthy aristocrat could have purchased a nomenclator – a slave tasked with memorizing names and faces, and reminding the aristocrat of them when social occasions demanded it. 
Today, having a basic smartphone is better than having an entourage of a dozen, or even thousands, of nomenclator-like assistants. 
In thinking about the future of growth, and the opportunities that continued growth will open up for all of humanity, we should reflect on how far we have come. 
I have been stymied in my own attempts to measure the sheer scale of economic growth in the North Atlantic over the past 200 years, but I am confident that output has increased 30-fold or more. 
How much more growth can we count on, and what will it mean for who we will become? 
If the past is any guide, we cannot possibly know. 
Tomorrow’s strawberries and cream hasn’t been invented yet. 

Rethinking Sovereignty 
For 350 years, sovereignty – the notion that states are the central actors on the world stage and that governments are essentially free to do what they want within their own territory but not within the territory of other states – has provided the organizing principle of international relations. 
The time has come to rethink this notion. 
The world’s 190-plus states now co-exist with a larger number of powerful non-sovereign and at least partly (and often largely) independent actors, ranging from corporations to non-government organizations (NGO’s), from terrorist groups to drug cartels, from regional and global institutions to banks and private equity funds. 
The sovereign state is influenced by them (for better and for worse) as much as it is able to influence them. 
The near monopoly of power once enjoyed by sovereign entities is being eroded. 
As a result, new mechanisms are needed for regional and global governance that include actors other than states. 
This is not to argue that Microsoft, Amnesty International, or Goldman Sachs be given seats in the United Nations General Assembly, but it does mean including representatives of such organizations in regional and global deliberations when they have the capacity to affect whether and how regional and global challenges are met. 
Moreover, states must be prepared to cede some sovereignty to world bodies if the international system is to function. 
This is already taking place in the trade realm. 
Governments agree to accept the rulings of the World Trade Organization because on balance they benefit from an international trading order even if a particular decision requires that they alter a practice that is their sovereign right to carry out. 
Some governments are prepared to give up elements of sovereignty to address the threat of global climate change. 
Under one such arrangement, the Kyoto Protocol, which runs through 2012, signatories agree to cap specific emissions. 
What is needed now is a successor arrangement in which a larger number of governments, including the United States, China, and India, accept emissions limits or adopt common standards because they recognize that they would be worse off if no country did. 
All of this suggests that sovereignty must be redefined if states are to cope with globalization. 
At its core, globalization entails the increasing volume, velocity, and importance of flows – within and across borders – of people, ideas, greenhouse gases, goods, dollars, drugs, viruses, emails, weapons, and a good deal else, challenging one of sovereignty’s fundamental principles: the ability to control what crosses borders in either direction. 
Sovereign states increasingly measure their vulnerability not to one another, but to forces beyond their control. 
Globalization thus implies that sovereignty is not only becoming weaker in reality, but that it needs to become weaker. 
States would be wise to weaken sovereignty in order to protect themselves, because they cannot insulate themselves from what goes on elsewhere. 
Sovereignty is no longer a sanctuary. 
This was demonstrated by the American and world reaction to terrorism. 
Afghanistan’s Taliban government, which provided access and support to al-Qaeda, was removed from power. 
Similarly, America’s preventive war against an Iraq that ignored the UN and was thought to possess weapons of mass destruction showed that sovereignty no longer provides absolute protection. 
Imagine how the world would react if some government were known to be planning to use or transfer a nuclear device or had already done so. 
Many would argue – correctly – that sovereignty provides no protection for that state. 
Necessity may also lead to reducing or even eliminating sovereignty when a government, whether from a lack of capacity or conscious policy, is unable to provide for the basic needs of its citizens. 
This reflects not simply scruples, but a view that state failure and genocide can lead to destabilizing refugee flows and create openings for terrorists to take root. 
The NATO intervention in Kosovo was an example where a number of governments chose to violate the sovereignty of another government (Serbia) to stop ethnic cleansing and genocide. 
By contrast, the mass killing in Rwanda a decade ago and now in Darfur, Sudan, demonstrate the high price of judging sovereignty to be supreme and thus doing little to prevent the slaughter of innocents. 
Our notion of sovereignty must therefore be conditional, even contractual, rather than absolute. 
If a state fails to live up to its side of the bargain by sponsoring terrorism, either transferring or using weapons of mass destruction, or conducting genocide, then it forfeits the normal benefits of sovereignty and opens itself up to attack, removal, or occupation. 
The diplomatic challenge for this era is to gain widespread support for principles of state conduct and a procedure for determining remedies when these principles are violated. 
The goal should be to redefine sovereignty for the era of globalization, to find a balance between a world of fully sovereign states and an international system of either world government or anarchy. 
The basic idea of sovereignty, which still provides a useful constraint on violence between states, needs to be preserved. 
But the concept needs to be adapted to a world in which the main challenges to order come from what global forces do to states and what governments do to their citizens rather than from what states do to one another. 

Rethinking the Growth Imperative 
CAMBRIDGE – Modern macroeconomics often seems to treat rapid and stable economic growth as the be-all and end-all of policy. 
That message is echoed in political debates, central-bank boardrooms, and front-page headlines. 
But does it really make sense to take growth as the main social objective in perpetuity, as economics textbooks implicitly assume? 
Certainly, many critiques of standard economic statistics have argued for broader measures of national welfare, such as life expectancy at birth, literacy, etc. 
Such appraisals include the United Nations Human Development Report, and, more recently, the French-sponsored Commission on the Measurement of Economic Performance and Social Progress, led by the economists Joseph Stiglitz, Amartya Sen, and Jean-Paul Fitoussi. 
But there might be a problem even deeper than statistical narrowness: the failure of modern growth theory to emphasize adequately that people are fundamentally social creatures. 
They evaluate their welfare based on what they see around them, not just on some absolute standard. 
The economist Richard Easterlin famously observed that surveys of “happiness” show surprisingly little evolution in the decades after World War II, despite significant trend income growth. 
Needless to say, Easterlin’s result seems less plausible for very poor countries, where rapidly rising incomes often allow societies to enjoy large life improvements, which presumably strongly correlate with any reasonable measure of overall well-being. 
In advanced economies, however, benchmarking behavior is almost surely an important factor in how people assess their own well-being. 
If so, generalized income growth might well raise such assessments at a much slower pace than one might expect from looking at how a rise in an individual’s income relative to others affects her welfare. 
And, on a related note, benchmarking behavior may well imply a different calculus of the tradeoffs between growth and other economic challenges, such as environmental degradation, than conventional growth models suggest. 
To be fair, a small but significant literature recognizes that individuals draw heavily on historical or social benchmarks in their economic choices and thinking. 
Unfortunately, these models tend to be difficult to manipulate, estimate, or interpret. 
As a result, they tend to be employed mainly in very specialized contexts, such as efforts to explain the so-called “equity premium puzzle” (the empirical observation that over long periods, equities yield a higher return than bonds). 
There is a certain absurdity to the obsession with maximizing long-term average income growth in perpetuity, to the neglect of other risks and considerations. 
Consider a simple thought experiment. 
Imagine that per capita national income (or some broader measure of welfare) is set to rise by 1% per year over the next couple of centuries. 
This is roughly the trend per capita growth rate in the advanced world in recent years. 
With annual income growth of 1%, a generation born 70 years from now will enjoy roughly double today’s average income. 
Over two centuries, income will grow eight-fold. 
Now suppose that we lived in a much faster-growing economy, with per capita income rising at 2% annually. 
In that case, per capita income would double after only 35 years, and an eight-fold increase would take only a century. 
Finally, ask yourself how much you really care if it takes 100, 200, or even 1,000 years for welfare to increase eight-fold. 
Wouldn’t it make more sense to worry about the long-term sustainability and durability of global growth? 
Wouldn’t it make more sense to worry whether conflict or global warming might produce a catastrophe that derails society for centuries or more? 
Even if one thinks narrowly about one’s own descendants, presumably one hopes that they will be thriving in, and making a positive contribution to, their future society. 
Assuming that they are significantly better off than one’s own generation, how important is their absolute level of income? 
Perhaps a deeper rationale underlying the growth imperative in many countries stems from concerns about national prestige and national security. 
In his influential 1989 book The Rise and Fall of the Great Powers, the historian Paul Kennedy concluded that, over the long run, a country’s wealth and productive power, relative to that of its contemporaries, is the essential determinant of its global status. 
Kennedy focused particularly on military power, but, in today’s world, successful economies enjoy status along many dimensions, and policymakers everywhere are legitimately concerned about national economic ranking. 
An economic race for global power is certainly an understandable rationale for focusing on long-term growth, but if such competition is really a central justification for this focus, then we need to re-examine standard macroeconomic models, which ignore this issue entirely. 
Of course, in the real world, countries rightly consider long-term growth to be integral to their national security and global status. 
Highly indebted countries, a group that nowadays includes most of the advanced economies, need growth to help them to dig themselves out. 
But, as a long-term proposition, the case for focusing on trend growth is not as encompassing as many policymakers and economic theorists would have one believe. 
In a period of great economic uncertainty, it may seem inappropriate to question the growth imperative. 
But, then again, perhaps a crisis is exactly the occasion to rethink the longer-term goals of global economic policy. 


The Creeping Public-Pension Debacle 
LONDON – If developed countries acted rationally, and in the interest of electorates that understood how their tax money is spent, they would set their public-pension retirement age at or above 70. 
But most developed countries have retirement ages below this mark, and, despite some progress, it will be decades before they catch up. 
In the meantime, Western welfare states will remain financially unviable, economically sickly, and politically strained. 
Demographic aging is the social and economic equivalent of climate change: it is a problem that we all know must be addressed, but which we would rather leave for future generations to solve. 
The impulse to put things off for a later day is understandable, given current economic and political troubles; but when it comes to public pensions, procrastination comes at a high cost – even more so than in the case of global warming. 
In 1970, the average effective retirement age for French male workers was 67, which was roughly the same as male life expectancy at that time. 
Now, the effective retirement age in France is just below 60 (the official retirement age is 65, but in practice public pensions can be drawn much sooner), even though male life expectancy is nearly 83. 
It is no wonder that France spends the equivalent of nearly 14% of its GDP annually on public pensions. 
Early retirement is even costlier for Italy, which tops OECD rankings of public-pension spending, with an annual outlay equivalent to nearly 16% of its GDP. 
In all, 13 OECD countries – including Japan, Germany, Poland, and Greece – devote the equivalent of 10% or more of their GDP to public pensions every year. 
These and other countries are taking money mainly from working taxpayers and giving it to retirees. 
When German Chancellor Otto von Bismarck invented the world’s first statutory pension scheme in 1889, he set the eligibility age at 70; few people were expected to live long enough to collect benefits, and certainly not for many years. 
Now, Italians who retire on average at 61-62 can expect to receive their pensions for several decades, and in some cases, for almost as many years as they worked. 
With around one-fifth of advanced economies’ populations over 65 (a proportion that is expected eventually to rise to one-third), public-pension expenditures will increasingly crowd out other public spending. 
Moreover, reducing public-debt levels will become more difficult unless there is a miraculous revival in economic growth, which current pension policies makes less likely every year. 
This is not just a question of how we treat older people. 
Tax revenues transferred to pensioners could have been invested in infrastructure, education, scientific research, defense, and all the other urgent causes that politicians claim to support. 
Pensioners do spend the money they receive, so this revenue isn’t wasted; but it could be better spent to propel stronger economic growth. 
Developed countries have been raising their retirement ages gradually, but trade unions and pensioner groups lobby hard against any increase. 
In fact, in 2014 Germany’s governing coalition yielded to union pressure and actually reduced the retirement age for some manual workers, despite frequently lecturing other eurozone countries to do the opposite. 
Beyond lobbying, the current system is upheld by mythology: the belief that keeping older people in the workforce worsens unemployment. 
It does not, and this is what economists call the “lump of labor fallacy” – the idea that handing out pensions frees up employment for younger people, as if there were a fixed number of jobs to go around. 
In reality, more people earning, consuming, and paying taxes leads to more economic growth. 
Delaying retirement does not steal jobs; it creates them. 
On August 29-31, I moderated the World Demographic & Aging Forum in St. Gallen, Switzerland, where attendees arrived at a clear conclusion: although we have increasingly rich data and sophisticated knowledge about future population trends, our concerted action to address those trends falls woefully short. 
Public policy is one part of the problem, but corporate behavior has been an even bigger obstacle to commonsense pension reforms. 
For starters, corporate pay and promotion structures are biased toward early retirement, because companies tend to push out older workers first when they need to cut costs. 
Even companies catering to the “silver market” (elderly consumers) have barely begun to develop more age-friendly employment practices. 
The slow recovery following the 2008 financial crisis has obscured the long-term reality that developed countries now face. 
Any country required by its public-pension policy to transfer billions of dollars to citizens for decades-long retirement periods risks bankruptcy or, at best, stagnation. 
One of the most urgent tasks for governments, companies, and individuals today is to rethink the length and pattern of our working lives. 

Retiring Mugabe 
At least for purposes of public consumption, southern Africa’s political leaders continue to stand by Zimbabwe’s President Robert Mugabe, despite his country’s ever-deepening economic crisis, which is directly attributable to his tyrannical rule. 
Indeed, years of economic mismanagement have produced an unemployment rate of 80%, with annual inflation nearing 5,000%. 
Though Zimbabwe was once known as “the breadbasket of Africa,” many of its citizens now go hungry and depend on international food donations for survival. 
About 3,000 people flee the country every day, often risking their lives when crossing the crocodile-infested Limpopo River – celebrated in Kipling’s tale of “How the Elephant Got Its Trunk” – and scaling a border fence to enter South Africa. 
By now, emigration is more than three million, about a quarter of the population. 
Yet when Mugabe was introduced at the most recent meeting of the Southern African Development Community (SADC) in Zambia’s capital, Lusaka, his fellow heads of state heartily applauded him. 
There are reports that, behind the scenes, things are different. 
South African President Thabo Mbeki is said to be trying to negotiate a way for Mugabe to leave the scene. 
Yet there have been similar rumors before, and it is difficult to know whether Mbeki and the other southern African leaders are finally willing to tell Mugabe that he must go. 
Up to now, paying their respects to him as a revolutionary leader, and catering to his megalomania, has been more important to them than alleviating the suffering of Zimbabwe’s people. 
The obvious way for Mugabe to leave at age 83 would be to announce that he has changed his mind about running again in the presidential election now scheduled for March 2008. 
Of course, should Mugabe stand down, a fair election next March probably would not be possible. 
The political opposition would have little capacity to organize an effective campaign in an environment in which Mugabe has shut down independent media, rewritten electoral rules, and used the police to pummel – literally – his adversaries. 
So a period of transition would be required for a proper election to be organized under the auspices of the SADC, with support from the African Union, Europe, and the United States, in order to get a fair result and launch a recovery process. 
Yet, given the brief period that remains until the scheduled election, an announcement is required soon if a fair result is to be achieved and a recovery process launched to halt the country’s slide into chaos. 
A big factor in any timetable for Zimbabwe’s rescue is Thabo Mbeki’s tenure. 
He has just over a year-and-a-half to go to complete his second and final five-year term as South Africa’s president. 
In certain respects, he has been a success. 
Under his leadership, South African’s multiracial democracy has been consolidated, and, in dramatic contrast to neighboring Zimbabwe, its economy is flourishing. 
Yet Mbeki’s achievement is severely marred by two failures. 
Domestically, his poor performance in addressing South Africa’s HIV/AIDS epidemic will ensure that he is judged harshly. 
Internationally, his record is stained by his lack of leadership up to now in dealing with Zimbabwe. 
Nevertheless, even at this late date, Mbeki has a chance to salvage a good part of his reputation by taking the lead in organizing a transition in Zimbabwe. 
But, given the amount of time a transition will take, he must act now. 
Even when a transition does take place in Zimbabwe, the crisis will not be over. 
The country has been so devastated by the Mugabe regime that substantial international engagement will be required to put it back on its feet. 
For now, however, the SADC should, at long last, tell Mugabe that he must step aside, and it should take responsibility for managing an electoral process whose result Zimbabweans will recognize as fair, thereby providing the legitimacy needed for recovery to begin. 

Retuning Europe’s Franco-German Engine 
BERLIN – Whether or not the French presidency of the EU, which begins next month, is successful will depend in large part on whether Franco-German cooperation can be revived. 
In that seemingly long-gone era, common initiatives for Europe were the rule, and a Franco-German proposal usually constituted an acceptable compromise for Europe as a whole. 
The Maastricht Treaty of 1992 was probably the last masterpiece of Franco-German creativity. 
But the two countries subsequently grew increasingly estranged from one another. 
France never engaged enthusiastically in the enlargement process, while the creation of the euro led to serious Franco-German tensions between1993 and 1999. 
France’s decision to abandon military conscription in 1996 while pressing ahead on nuclear testing did little to improve the relationship. 
The final years of Jacques Chirac’s presidency produced mostly deadlock, crowned in May 2005 by the French “No” vote to the EU’s draft constitutional treaty. 
Of course, the Franco-German engine cannot function as before. 
The two countries’ haughty behavior – for example, criticizing tax regimes in Eastern Europe while themselves failing to comply with the European Union’s Stability and Growth Pact – appalled other EU countries, especially the newest members. So did their arrogant claim that they alone understood “political Europe,” and would therefore sew up deals – like that on agriculture in October 2002 – bilaterally. 
Even so, the EU remains dependent on France and Germany as a driving force. 
They may have lost authority, but without them nothing much happens in the EU. 
So what can be done to generate a new sense of leadership around the Franco-German axis? 
The election a year ago of French President Nicolas Sarkozy might have promised a new era of cooperation. 
But Sarkozy’s view that the European Central Bank should be subject to political engineering upset Germany, his visit to Moscow, because Germany felt that it was being circumvented. 
Moreover, Sarkozy’s discussions with British Prime Minister Gordon Brown during his two-day state visit to London in March prominently featured a deal to use France’s considerable nuclear expertise to build a new generation of nuclear power stations in Britain – another source of discord with Germany. 
Whereas Sarkozy views nuclear power as a promising source of “renewable” energy, Germany remains adamantly opposed to it – a policy that Chancellor Angela Merkel placed at the top of her agenda during Germany’s EU presidency in 2007. 
Sarkozy’s visit to London also produced a Franco-British commitment to promote the European Security and Defense Policy (ESDP), and in France’s case to send more troops to Afghanistan. 
But Germany too, needs to be engaged over the ESDP and Afghanistan. 
If Sarkozy’s presidency has any relevance to Franco-German relations, it may be to reinforce the view that the EU needs new leadership, and that it must still be based on the founding partners. 
Indeed, closer Franco-British cooperation should be viewed as a positive development, for it pulls the United Kingdom once more towards Europe. 
And German-British relations are also improving. 
Further progress will become increasingly important as European responsibilities are placed on more shoulders: Iran, climate change, and the ESDP are all examples of shared decision-making. 
But the larger geo-strategic questions, such as the EU’s relations with Russia and its links to NATO, require the attention of a larger leadership team, including Eastern European countries. 
Poland has that leadership potential, even if Germany will remain the glue between East and West. 
Sarkozy has said that he wants to focus the French EU presidency on promoting measures to deal with climate change, reviewing European migration policy, and re-energizing the ESDP, in line with France’s decision to return to NATO. 
Moreover, the Lisbon Treaty will probably start being implemented during the French presidency, with nominations for the future EU leadership, including a permanent president, and steps to shape the future European External Action Service, essentially an EU foreign ministry. 
It is an ambitious program, and France will need Germany’s support if it is to succeed. 
Fortunately, Franco-German disputes, while often seemingly fierce, do not last long, and can even serve to refocus people’s attention on the importance of the relationship. 
For a time, tensions between the two countries rose to the point that France announced the postponement of the “Blaesheim talks,” a regular exchange of views by French and German leaders on European issues that began in 2001. 
In the end, though, the two countries’ institutional mechanisms of communication have held firm. 
France and Germany, along with the other EU states, must bear in mind that the Lisbon Treaty is, in effect, a European constitution, framed to lead the Union into the twenty-first century, and that its success requires broader leadership. 
France must show during its presidency that it truly cares for Europe and its role in the world, and that the EU is more than a French tool. 
Building a new leadership team for the EU will be Sarkozy’s main task. 

The Return of the Ugly German 
BERLIN – During the long night of negotiations over Greece on July 12-13, something fundamental to the European Union cracked. 
Since then, Europeans have been living in a different kind of EU. 
What changed that night was the Germany that Europeans have known since the end of World War II. 
On the surface, the negotiations were about averting a Greek exit from the eurozone (or “Grexit”) and the dire consequences that would follow for Greece and the monetary union. 
At a deeper level, however, what was at stake was the role in Europe of its most populous and economically most powerful country. 
Germany’s resurgence after World War II, and its re-establishment of the world’s trust (culminating in consent to German re-unification four and a half decades later), was built on sturdy domestic and foreign-policy pillars. 
At home, a stable democracy based on the rule of law quickly emerged. 
The economic success of Germany’s welfare state proved a model for Europe. 
And Germans’ willingness to face up to the Nazis’ crimes, without reservation, sustained a deep-rooted skepticism toward all things military. 
In terms of foreign policy, Germany rebuilt trust by embracing Western integration and Europeanization. 
The power at the center of Europe should never again become a threat to the continent or itself. 
Thus, the Western Allies’ aim after 1945 – unlike after World War I – was not to isolate Germany and weaken it economically, but to protect it militarily and firmly embed it politically in the West. 
Indeed, Germany’s reconciliation with its arch-enemy, France, remains the foundation of today’s European Union, helping to incorporate Germany into the common European market, with a view to the eventual political unification of Europe. 
But in today’s Germany, such ideas are considered hopelessly “Euro-romantic”; their time has passed. 
Where Europe is concerned, from now on Germany will primarily pursue its national interests, just like everybody else. 
But such thinking is based on a false premise. 
The path that Germany will pursue in the twenty-first century – toward a “European Germany” or a “German Europe” – has been the fundamental, historical question at the heart of German foreign policy for two centuries. 
And it was answered during that long night in Brussels, with German Europe prevailing over European Germany. 
This was a fateful decision for both Germany and Europe. 
One wonders whether Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble knew what they were doing. 
To dismiss the fierce criticism of Germany and its leading players that erupted after the diktat on Greece, as many Germans do, is to don rose-tinted glasses. 
Certainly, there was nonsensical propaganda about a Fourth Reich and asinine references to the Führer. 
But, at its core, the criticism articulates an astute awareness of Germany’s break with its entire post-WWII European policy. 
For the first time, Germany didn’t want more Europe; it wanted less. 
Germany’s stance on the night of July 12-13 announced its desire to transform the eurozone from a European project into a kind of sphere of influence. 
Merkel was forced to choose between Schäuble and France (and Italy). 
The issue was fundamental: Her finance minister wanted to compel a eurozone member to leave “voluntarily” by exerting massive pressure. 
Greece could either exit (in full knowledge of the disastrous consequences for the country and Europe) or accept a program that effectively makes it a European protectorate, without any hope of economic improvement. 
Greece is now subject to a cure – further austerity – that has not worked in the past and that was prescribed solely to address Germany’s domestic political needs. 
But the massive conflict with France and Italy, the eurozone’s second and third largest economies, is not over, because, for Schäuble, Grexit remains an option. 
By claiming that debt relief is “legally” possible only outside the eurozone, he wants to turn the issue into the lever for bringing about a “voluntary” Grexit. 
Schäuble’s position has thrown into sharp relief the fundamental question of the relationship between Europe’s south and north, his approach threatens to stretch the eurozone to the breaking point. 
The belief that the euro can be used to bring about the economic “re-education” of Europe’s south will prove a dangerous fallacy – and not just in Greece. 
As the French and Italians well know, such a view jeopardizes the entire European project, which has been built on diversity and solidarity. 
Germany has been the big winner of European unification, both economically and politically. 
Just compare Germany’s history in the first and second halves of the twentieth century. 
Bismarck’s unification of Germany in the nineteenth century occurred at the high-water mark of European nationalism. 
In German thinking, power became inextricably associated with nationalism and militarism. 
As a result, unlike France, Great Britain, or the United States, which legitimized their foreign policy in terms of a “civilizing mission,” Germany understood its power in terms of raw military force. 
The foundation of the second, unified German nation-state in 1989 was based on Germany’s irrevocable Western orientation and Europeanization. 
And the Europeanization of Germany’s politics filled – and still fills – the civilization gap embodied in German statehood. 
To allow this pillar to erode – or, worse, to tear it down – is a folly of the highest order. 
That is why, in the EU that emerged on the morning of July 13, Germany and Europe both stand to lose. 

Return to the Abyss 
NEW YORK – One interpretation of financial crises is that they are, in Nassim Taleb’s phrase, “black swan” events – unplanned and unpredictable occurrences that change the course of history. 
But, in my new book on financial crises, Crisis Economics – which covers not only the recent crisis, but also dozens of others throughout history and across both advanced economies and emerging markets – I show that financial crises are, instead, predictable “white swan” events. 
What is happening now – the second stage of the global financial crisis – was no less predictable. 
Crises are the inevitable result of a build-up of macroeconomic, financial, and policy risks and vulnerabilities: assets bubbles, excessive risk-taking and leverage, credit booms, loose money, lack of proper supervision and regulation of the financial system, greed, and risky investments by banks and other financial institutions. 
History also suggests that financial crises tend to morph over time. 
Crises like those we have recently endured were initially driven by excessive debt and leverage among private-sector agents – households, banks and financial institutions, corporate firms. 
This eventually led to a re-leveraging of the public sector as fiscal stimulus and socialization of private losses – bail-out programs – caused a dangerous rise in budget deficits and the stock of public debt. 
While such fiscal stimulus and bailouts may have been necessary to prevent the Great Recession from turning into Great Depression II, piling public debt on top of private debt carries a high cost. 
Eventually those large deficits and debts need to be reduced through higher taxes and lower spending, and such austerity – necessary to avoid a fiscal crisis – tends to slow economic recovery in the short run. 
If fiscal imbalances are not addressed through spending cuts and revenue increases, only two options remain: inflation for countries that borrow in their own currency and can monetize their deficits; or default for countries that borrow in a foreign currency or can’t print their own. 
Thus, the recent events in Greece, Portugal, Ireland, Italy, and Spain are but the second stage of the recent global financial crisis. 
The socialization of private losses and fiscal laxity aimed at stimulating economies in a slump have led to a dangerous build-up of public budget deficits and debt. 
So the recent global financial crisis is not over; it has, instead, reached a new and more dangerous stage. 
Indeed, a practical definition of a financial crisis is an event that forces policy officials to spend a long weekend trying desperately to announce a new bailout package in order to avoid national and global panic before the markets open on Monday. 
In the past years, such weekend all-nighters dealt with the needed bailouts of private firms – Bear Stearns, Fannie Mae and Freddie Mac, Lehman Brothers, AIG, bank rescues, etc. 
And, of course, such weekend dramas are still with us, as EU and eurozone policymakers recently spent a desperate weekend developing a rescue package not only for Greece, but also for other weak eurozone members. 
The progression is clear: first came rescue of private firms, and now comes the rescue of the rescuers – i.e., governments. 
The scale of these bailouts is mushrooming. 
During the Asian financial crisis of 1997-1998, South Korea – a relatively large emerging-market economy – received what was then considered a very large IMF rescue package – $10 billion. 
But, after the rescues of Bear Sterns ($40 billion), Fannie Mae and Freddie Mac ($200 billion), AIG (up to $250 billion), the Troubled Asset Relief Program for banks ($700 billion), we now have the mother of all bailouts: the $1 trillion European Union-International Monetary Fund rescue of troubled eurozone members. 
A billion dollars used to be a lot of money; now one trillion is the “new normal” or – to paraphrase the novel and film The Devil Wears Prada – a trillion is the new ten billion! 
Governments that bailed out private firms now are in need of bailouts themselves. 
But what happens when the political willingness of Germany and other disciplined creditors – many now in emerging markets – to fund such bailouts fizzles? 
Who will then bail out governments that bailed out private banks and financial institutions? 
Our global debt mechanics are looking increasingly like a Ponzi scheme. 
While the right medicine needed to avoid fiscal train wrecks is well known, the main constraint to fiscal consolidation and discipline is that weak governments around the world lack the political power and willingness to implement austerity. 
Political gridlock in Washington and in the United States Congress demonstrates the absence of the bipartisanship needed to address America’s fiscal issues. 
In the United Kingdom, a “hung” parliament has resulted in a coalition government that will have a hard time implementing fiscal discipline. 
In Germany, Chancellor Angela Merkel lost a key state election after the rescue of Greece, and Japan has a weak and ineffectual government that seems in denial of the scale of the problem that it faces. 
In Greece itself, there are riots in the streets and strikes in the factories; in the rest of the PIIGS (Portugal, Ireland, Italy, and Spain), fiscal discipline will be politically and socially painful. 
So political constraints may prevent fiscal austerity and structural reforms from being implemented. 
As a result, “crisis economics” is likely to be with us for a long time. 
Indeed, the recent financial crisis is not over, and, worse, the medicine used to treat may have been partly toxic. 
It seems to have made the patient weaker and more addicted to dangerous drugs, as well as more susceptible to new strains of the virus that may, in some cases, eventually prove fatal. 

Reversing Brexit 
LONDON – How should the European Union respond to the narrow decision by voters in the United Kingdom to leave? 
European leaders are now focusing, rightly, on how to prevent other countries from leaving the EU or the euro. 
The most important country to be kept in the club is Italy, which faces a referendum in October that could pave the way for the anti-euro Five Star Movement to take power. 
Europe’s fear of contagion is justified, because the Brexit referendum’s outcome has transformed the politics of EU fragmentation. 
Before, advocates of leaving the EU or euro could be ridiculed as fantasists or denounced as fascists (or ultra-leftists). This is no longer possible. 
Brexit has turned “Leave” (whether the EU or the euro) into a realistic option in every European country. 
Once Britain gives the Union formal notice (by invoking Article 50 of the Treaty of Lisbon), that option will enter the mainstream of political debate everywhere. 
Research by the European Council on Foreign Relations has found 34 anti-EU referendum demands in 18 other countries. 
Even if each of these challenges has only a 5% chance of success, the probability of at least one succeeding is 83%. 
Can the genie of disintegration be put back in its bottle? 
The EU’s breakup may well prove unstoppable once Britain leaves; but Britain has not yet invoked Article 50. 
The bottle could still be sealed before the genie escapes. 
Unfortunately, Europe is using the wrong threats and incentives to achieve this. 
France is demanding that Britain accelerate its exit. 
Germany is playing the “good cop” by offering access to the single market, but only in exchange for immigration rules that Britain will not accept. 
These are exactly the wrong sticks and carrots. 
Instead of rushing Brexit, Europe’s leaders should be trying to avert it, by persuading British voters to change their minds. 
The aim should not be to negotiate the terms of departure, but to negotiate the terms on which most British voters would want to remain. 
An EU strategy to avoid Brexit, far from ignoring British voters, would show genuine respect for democracy. 
The essence of democratic politics is responding to public dissatisfaction with policies and ideas – and then trying to change the judgment of voters. 
That is how numerous referendum outcomes – in France, Ireland, Denmark, the Netherlands, Italy, and Greece – have been reversed, even when deeply emotional issues, such as abortion and divorce, were involved. 
If European leaders tried the same approach with Britain, they might be surprised by the favorable response. 
Many Leave voters are already having second thoughts, and Prime Minister Theresa May’s uncompromising negotiating position will paradoxically accelerate this process, because voters now face a much more extreme version of Brexit than they were promised by the Leave campaign. 
May has stated unequivocally that immigration control is her over-riding priority and that Norway or Switzerland can no longer be models for Britain’s relationship with the EU. 
Her new “Brexit Ministry” has defined Britain’s main objective as tariff-free access to Europe and free-trade agreements with the rest of the world. 
That means abandoning the interests of Britain’s financial and business services, because services are unaffected by tariffs and are excluded from most free-trade deals. 
As a result, the new government will soon be politically vulnerable. 
In fact, most British voters already disagree with its negotiating priorities. 
Post-referendum polls show voters giving priority to single-market access over immigration restrictions by a two-to-one margin or more. 
Making matters worse for May, her slender parliamentary majority depends on disgruntled “Remain” rivals. 
As the British economy sinks into recession, trade deals prove illusory, and legal and constitutional obstacles proliferate, May will find it hard to maintain the parliamentary discipline needed to deliver Brexit. 
A strategy to avert Brexit therefore has a good chance of success. 
The EU could advance this strategy by calling May’s bluff on “Brexit means Brexit.” 
May should be told that only two outcomes are possible: either Britain loses all single-market access and interacts with Europe solely under World Trade Organization rules, or it remains an EU member, after negotiating reforms that could persuade voters to reconsider Brexit in a general election or a second referendum. 
This binary approach, provided EU leaders showed genuine flexibility in their reform negotiations, could transform public attitudes in Britain and across Europe. 
Imagine if the EU offered constructive immigration reforms – for example, restoring national control over welfare payments to non-citizens and allowing for an “emergency brake” on sudden population movements – to all members. 
Such reforms would demonstrate the EU’s respect for democracy in Britain – and could turn the tide of anti-EU populism across northern Europe. 
The EU has a long history of adapting in response to political pressures in important member states. 
So why is this strategy not being considered to counter the existential threat of Brexit? 
The answer has nothing to do with supposed respect for democracy. 
The Brexit vote is no more irreversible than any other election or referendum, provided the EU is willing to adopt some modest reforms. 
The real obstacle to a strategy of persuading Britain to remain in the EU is the EU bureaucracy. 
The European Commission, once the EU’s source of visionary creativity, has become a fanatical defender of existing rules and regulations, however irrational and destructive, on the grounds that any concessions will beget more demands. 
Concessions to British voters on immigration would inspire the southern countries to demand fiscal and banking reforms, eastern countries would seek budget changes, and non-euro countries would demand an end to their second-class status. 
The Commission is right to believe that demands for EU reform would extend well beyond Britain. 
But is this a reason to resist all change? 
That type of rigidity broke up the Soviet Union and nearly destroyed the Catholic Church. 
It will destroy the EU if the bureaucracy remains incapable of reform. 
It is time for Europe’s politicians to overrule the bureaucrats and re-create a flexible, democratic EU capable of responding to its citizens and adapting to a changing world. 
Most British voters would be happy to remain in that kind of Europe. 


Taking On Revisionist Russia 
MADRID – For some countries, military or political defeat is so intolerable, so humiliating, that they will do whatever it takes to overturn what they view as an unjust international order. 
One such revisionist power was Egypt, which resolved to undo its 1967 defeat by Israel and regain the Sinai Peninsula. 
This was ultimately achieved, but only after President Anwar Sadat embraced a strategy of peace by journeying to Jerusalem. 
The most ominous case, however, was Germany in the 1930s, which systematically shredded the European order that had emerged after World War I. 
History suggests that a revisionist power can be disciplined in two ways. 
It can be opposed with equal fervor, like that which enabled Europe's conservative powers to defeat Napoleon in 1815 and the Allies to defeat Germany in World War II. 
Or it can reach the limits of its military and economic strength, as in the case of the Soviet Union at the time of its disintegration. 
At that point, the country has a choice. 
It can, as Germany did, opt for reconciliation with the international order. 
Or it can take the route of President Vladimir Putin's Russia, and develop a new revanchist strategy – in this case, to overturn the order that emerged from the Soviet Union's Cold War defeat. 
Though Putin is undoubtedly the main actor driving this strategy, Ukraine's pursuit of closer ties with the European Union – a move that Europe and the United States generally welcomed – was bound to accelerate it. 
Putin knew that he could take advantage of Ukraine's ethno-religious division (the eastern regions are overwhelmingly Russian Orthodox and loyal to the Kremlin) to undermine these efforts. 
Europe, it seems, underestimated Russia's determination to uphold what it considers a core interest in Ukraine. 
The struggle for influence in Ukraine is a game that Putin cannot afford to lose. 
For the West, the principle of not redrawing borders by force is a vital political concern – indeed, it is a pillar of a civilized world order. 
But both the US and Europe have made it clear that Ukraine's sovereignty is not worth dying for, with the EU disinclined even to follow America's lead in imposing increasingly tough sanctions. 
Putin gained the upper hand early in the crisis with the annexation of Crimea. 
Now, in eastern Ukraine's Donbas region, he is shrewdly forcing a divided and risk-averse West to choose between war and accommodation. 
While neither option is particularly appealing, the dangers of a war with Russia cannot be overestimated. 
After all, in such a fight, both sides would possess large nuclear arsenals. 
That is why, as Sir Adrian Bradshaw, NATO's second in command, recently suggested, war can be contemplated only if Russia invades a NATO state – a step that Putin is unlikely to take, even as he ramps up his provocations, including cross-border kidnappings. 
And, even then, there would be reasons for hesitation. 
The Western powers' aversion to war raises risks of its own. 
Russia's blatant disregard for the 1994 Budapest Memorandum – in which it, the US, and the United Kingdom promised that Ukraine's territorial integrity would be respected if it surrendered its own nuclear weapons – is sending a dangerous message to nuclear states like Iran, North Korea, India, and Pakistan. 
They know that if Ukraine still had its nukes, it would almost certainly still have Crimea. 
Nonetheless, the West's views about a war over Ukraine are unlikely to change. 
And sanctions, despite having crippled Russia's economy, have proved inadequate, thus far, to breaking Putin's will. 
This leaves only accommodation – which means effectively granting legitimacy to the Kremlin's claim to authority over Ukraine and, presumably, the rest of its “near abroad." 
In this scenario, Russia would avoid attempting to govern Ukraine directly but would insist that Ukraine refrain from joining hostile blocs and alliances. 
As then President-elect Dmitri Medvedev said in 2008 “no country would be happy about a military bloc to which it did not belong approaching its borders." 
If the West acquiesces on this critical point, Putin will be eager to end the current war, which Russia's economy is losing badly. 
But the Kremlin-driven crisis would not be over. 
Indeed, Putin's revisionist agenda extends far beyond Ukraine to include the “Finlandization" of other nearby states, including EU members like Hungary and Romania. 
If Putin's dangerous brinkmanship is to be stopped, Western leaders will need to find a way to initiate strategic cooperation with Russia. 
Specifically, they must devise a grand bargain for peace that addresses the fundamental questions relating to global security norms and arms control that have so far impeded such cooperation. 
Of course, Russia is no longer a global superpower. 
But it retains the vocation and characteristics of a major power: a rich culture and history, vast size, formidable nuclear capabilities, strong influence across Eurasia, and the capacity to be a spoiler in many conflicts. 
Any realistic grand bargain would have to account for this. 
As for Ukraine, the way forward is difficult to discern – not least because of the conflicting experiences of buffer states in the past. 
Kaiser Wilhelm II invaded neutral Belgium to start WWI. 
Hitler swallowed Austria and Czechoslovakia when it suited him; but Austria's neutrality after 1955 was enough to satisfy the Cold War's two blocs, and now it is part of the EU. 
Likewise, since 1967, Jordan has served as an informal buffer state between Israel and the rest of the Arab world. 
Any future Palestinian state would have to assume a similar position, as Israel would never accept its accession to some hostile military alliance. 
The Franco-German plan for Ukraine calls for a demilitarized zone separating government and separatist forces, and granting what French President François Hollande defined as “rather strong" autonomy to the Russian-speaking eastern regions. 
In other words, it fulfills Russia's vision of a federated Ukraine, whereby the Russian-oriented east would have a say in foreign affairs and security matters. 
But such a plan cannot be counted on to curb Putin's broader revisionist ambitions. 
Only a united and determined West can do that. 

Reviving a Policy Marriage 
WASHINGTON, DC – Not long ago, the separation of financial supervision and monetary policy was in vogue in many countries. 
Some countries – like the United Kingdom and Australia – went so far as to unbundle these functions by assigning responsibility for financial stability to specialized agencies and extricating their central banks from financial supervisory issues altogether. 
In the aftermath of the global financial crisis, however, financial supervision and macroeconomic management have been forced to reunite. 
This rapprochement is a consequence of the growing recognition that asset-price cycles must be taken into account for both macroeconomic management and financial supervision. 
Prior to the crisis, asset-price cycles were seen by many as basically harmless or, at least, as a relatively insignificant monetary-policy channel. 
Even when the frequent appearance of asset-price bubbles was acknowledged, most believed that efforts to detect and prick them at an early stage would be impossible – and potentially harmful. 
Interest-rate cuts after bubbles burst would be a safer way to safeguard the economy. 
The dominant policy blueprint looked roughly as follows: the monetary authorities’ focus on inflation-targeting in setting interest rates should suffice to maintain price stability and economic growth near its potential rate. 
As for financial supervision, stability would be guaranteed by ensuring that individual financial institutions adopt sound prudential rules that preserve capital cushions commensurate with their risk exposure. 
While central banks should be in charge of maintaining adequate levels of liquidity in the system, so-called “microprudential” financial regulation should independently oversee financial institutions’ soundness and the protection of depositors. 
The crisis has shattered the belief that well designed microprudential rules alone are sufficient. 
It is now increasingly recognized that significant asset-price increases (for example, in real estate or existing equities) may well be reinforced by the pro-cyclical nature of risk assessment embodied in those rules. 
What this means is simpler than it sounds: the rising value of collateral tends to be seen as offering higher repayment probabilities. 
Moreover, if financial institutions follow their own risk assessments when estimating appropriate capital cushions, the costs associated with such provisions decline. 
Better repayment prospects and lower regulatory capital costs then fuel the asset-based financing of further acquisition of assets. 
If asset-price bubbles develop, balance sheets may look sound individually, but the entire network of interlinked asset-liability structures will become increasingly dependent on overvalued collateral, and thus vulnerable to financial contagion. 
The unraveling of such a network – through panic and runs against financial institutions, asset fire sales, credit crunches, and the like – then becomes a nightmare for financial supervisors and monetary authorities alike. 
Moreover, systemic risks potentially created during periods of booming asset prices escape the purview of macroprudential rules. 
In the advanced economies at the core of the recent financial crisis, the rules, implicit or explicit, of strict inflation-targeting regimes led monetary authorities to stay put while a massive pyramid of debt was built on a base of overvalued collateral. 
Now financial risks are deemed to be sufficiently important for macroeconomic management to warrant regulatory arrangements going beyond that of the microprudential supervisor. 
With respect to financial supervision, there has been increasing support since the crisis for countercyclical capital requirements, at least for banks. 
Capital buffers to absorb losses during the downturn of the cycle can be more easily built during the upswing. 
Furthermore, by raising regulatory capital costs in boom times, some counterweight to the pro-cyclical bias intrinsic to financial systems would be introduced. 
Such countercyclical capital requirements are likely to be added to the toolkit of macroprudential rules and policies, the use of which has risen as enthusiasm for light-touch financial supervision has faded. 
Those tools include caps, linked to borrowers’ characteristics, on loan-to-value ratios; direct limits on currency and maturity mismatches in financial institutions’ balance sheets; limits on their balance sheets’ interconnectedness; and minimum reserve requirements for specific financial instruments. 
Beyond capital rules, however, monetary policy and financial supervision must cooperate very closely on liquidity management, particularly through credit mechanisms. 
Given modern financial systems’ demonstrated ability to create (and destroy) liquidity endogenously – via financial innovation and global mobility – financial and macroeconomic stability may become more difficult to achieve if monetary instruments and macroprudential tools are not used in a consistent manner. 
Policy harmonization, rather than separation, seems to be the key to happy cyclical endings. 


Reviving Civil Disobedience 
PRINCETON – With populism and authoritarianism on the rise around the world, there has been considerable talk of “resistance,” especially in the United States. 
A rather broad term, resistance could refer to everything from supporting opposition candidates to the life-threatening work of those who went underground to sabotage Nazi occupations during World War II. 
Such vagueness is helpful, if one wants to appeal to as many citizens as possible; but it can also cloud one’s thinking when weighing how best to achieve concrete goals. 
As it happens, there is a more precise alternative to “resistance” that is rarely mentioned nowadays: civil disobedience. 
In theory, civil disobedience should be an effective weapon against populists. 
But, in practice, it faces two formidable challenges. 
First, there is a widespread misunderstanding of what civil disobedience actually entails. 
And, second, changes in the media landscape have made it harder to convey the message of civil disobedience to a broad and diverse audience. 
The American philosopher John Rawls offered the classic definition of civil disobedience in the early 1970s. 
Simply put, it means overt law-breaking, but in a conscientious, nonviolent manner aimed at persuading fellow citizens that a law ought to be changed because it is unjust. 
In Rawls’s formulation, those who commit acts of civil disobedience should be prepared to accept the penalties for doing so. 
Today, even protests that do not break any laws are often decried as “uncivil” or too “divisive” for an already polarized society. 
When citizens confronted politicians during US Supreme Court Justice Brett Kavanaugh’s confirmation hearings, they were derided as a “mob.” 
Even fellow liberals have admonished the Black Lives Matter movement for being too aggressive. 
And the noisy demonstrators who have gathered in Budapest to protest against Prime Minister Viktor Orbán’s increasingly authoritarian government have been dismissed as “liberal anarchists.” 
In each case, the “civil” in civil disobedience has been conflated with civility, as in politeness or general respectability. 
For his part, Rawls was adamant that any law-breaking be undertaken “within the limits of fidelity to the law.” 
He was echoing Martin Luther King, Jr., who argued that one who breaks the law in the name of civil disobedience “is in reality expressing the very highest respect for the law,” by highlighting its fundamental injustice in such a way as not to foreclose on future cooperation with one’s fellow citizens. 
Thus, King believed that, “one who breaks an unjust law must do so openly, lovingly, […] and with a willingness to accept the penalty.” 
That invocation of love should not be taken to mean that civil disobedience must be non-confrontational. 
A highly sanitized and sentimental historical accounting of the 1950s and 1960s might seem to suggest that the civil-rights movement succeeded merely by appealing to arch-American political principles of freedom and equality. 
In reality, part of the movement’s strategy was to seek out confrontations with police and defenders of white supremacy. 
These clashes generated images of white brutality that made at least some whites reconsider their unconditional defense of “law and order” under Jim Crow. 
In a recent study of protest movements spanning more than a century, social scientists Erica Chenoweth and Maria J. Stephan show that tough but nonviolent confrontation has been twice as likely as violent alternatives to bring about its stated goals. 
According to their data, sustained participation by a mere 3.5% of a population can be enough to achieve fundamental political change. 
Yet the history of the US civil-rights movement also points to a novel problem in our age. 
Rawls, King, and other defenders of civil disobedience took it for granted that the message – an appeal to principles of justice – would reach a majority of citizens undistorted. 
But today, the public spheres in many countries have become so fragmented and partisan that King’s idea of “national opinion” now seems nonsensical. 
As a recent groundbreaking study by three Harvard University scholars shows, the US has become home to a deeply insular “right-wing media ecosystem” in which all “news” is immediately reframed to confirm the identity of right-leaning citizens. 
And in semi-authoritarian contexts like Orbán’s Hungary, media are now completely dominated by government-friendly actors. 
Under such conditions, most appeals to what Rawls called a “public sense of justice” will be sidelined, severely distorted, or silenced altogether. 
Accordingly, potential practitioners of civil disobedience should not allow themselves to be caught in a trap of politeness and respectability. 
When opposition politicians recently disrupted the proceedings of the Hungarian parliament by blocking access to the speaker’s podium and heckling Orbán to his face, they were accused of attempting a putsch. 
In fact, they were merely shining a spotlight on the fact that the national assembly is no longer a normal representative body passing legitimate laws. 
Still, aspiring disobeyers will have to account for the increasingly fragmented and polluted nature of the public sphere. 
Sometimes, that will mean engaging fellow citizens directly on the street, in the marketplace, or even through door-to-door canvassing. 
In other situations, it will mean live-streaming acts of civil disobedience and hoping that authoritarians’ brutal methods will be exposed to a large enough audience through social media. 
And on still other occasions, it will mean pushing for structural changes, such as a return to the Fairness Doctrine by broadcasters in the US. 
Civil disobedience would certainly be more effective in a less distorted media landscape. 
But it still represents one of the most effective forms of democratic “resistance” available. 

Renewing the South Korean Miracle 
SEOUL – South Korea’s incoming president, Park Geun-hye, takes over a country that has been a global role model for economic development. 
But, with the economy slowing, it has become a model in need of renewal. 
The so-called “Miracle on the Han River” took root with the reforms initiated by Park’s late father Park Chung-hee, the country’s ruler for much of the 1960’s and 1970’s. 
A measure of South Korea’s success is that it was the first country to make the transition from being a recipient of OECD aid to becoming a donor, with per capita GDP today exceeding $30,000 (in purchasing power parity terms). 
But the growth formula that long underpinned South Korea’s success – a form of state-guided capitalism that focuses on export-led manufacturing – is no longer working for many South Koreans. 
GDP has nearly tripled over the past 20 years, but, with real wages rising at less than half this rate, growth has become decoupled from the fate of ordinary citizens. 
More than half of middle-income households spend more each month than they earn. 
The signs of social distress are multiplying. 
South Korea’s divorce rate has doubled, fertility rates have fallen to the fourth lowest among advanced economies, and the suicide rate is the highest in the OECD. 
South Korea is troubled for two key reasons. 
First, although some parts of the economy reached advanced industrialization in record time, other parts (and institutions) are struggling to catch up. 
Manufacturing conglomerates such as Hyundai, LG, and Samsung have morphed into highly productive global giants whose growth creates fewer high-quality jobs at home than before. 
Employment at the country’s largest companies is falling, and the share of South Korean jobs at such companies has dropped by one-third since 1995. 
But South Korea does not have a well-developed service sector to provide a new source of high-paying jobs. 
Worse, service industries are falling further behind large manufacturers in terms of productivity and wages. 
This leads to the second challenge: the dire financial straits of middle-income households. 
Many families now face stagnating wages, owing to the kinds of jobs now available, but are determined to cling to a lifestyle that they can no longer afford. 
Families with children are engaged in an escalating “educational arms race,” devoting large shares of their income to private education and tutoring to prepare children for entrance to elite universities and a shot at a secure job at a major corporation. 
Middle-income families also insist on buying homes, despite the highest multiple of home price to income among advanced economies and a housing-finance system that imposes high borrowing costs. 
South Korean women still drop out of the labor force when they marry or have children; only 38% of families have two wage earners (half the OECD average). 
One of the most pernicious effects of the squeeze on middle-income households and the cost of the educational arms race is a voluntary one-child policy that has reduced the country’s fertility rate to 1.2 births per woman, among the lowest in the industrialized world. 
The population is aging at an accelerating rate, and the net flow of working-age citizens into the labor force has turned negative. 
Without action, the economy faces the threat of declining consumption and even shrinking output. 
South Korea badly needs measures to relieve the stresses on middle-income finances and a new growth formula based on a globally competitive service sector and entrepreneurial small and medium-size (SME) businesses that create well-paying jobs. 
Major reforms are necessary to help middle-income families escape crushing monthly payments for housing and education. 
Housing payments are higher because mortgages are of short duration (an average of ten years) and tight loan-to-value restrictions force borrowers to seek additional higher-cost loans from second-tier deposit institutions and non-financial companies. 
These conditions need to change. 
Because banks would need to accept higher risk, a secondary market for mortgages is necessary. 
Policymakers should also consider measures to reduce demand for home ownership, including relaxing regulations on investment by insurance and other companies in residential housing, thereby creating better rental choices for middle-income households. 
South Korea also needs to improve its public schools, particularly at the secondary level, and significantly upgrade vocational training. 
Families invest in private education because they fear that the public education system will not get their children into elite universities and good jobs. 
“Meister” high schools, introduced in 2010 specifically to prepare young people for high-skilled jobs, are a positive step. 
Aggressive development of services – such as transport, retail, and restaurants, which today are dominated by low-productivity, low-paying local businesses, many run by sole proprietors – is another imperative. 
South Korea has excellent opportunities to build up health-care services and to compete in the global medical-tourism business. 
Other tourism, too, can expand to take fuller advantage of cultural and sports attractions. 
In financial services, the government should aim to produce 3-4 regional champions. 
Finally, Koreans must relearn the entrepreneurialism that built the chaebol, the family-owned industrial conglomerates that powered the economy’s development. 
Today, South Korea has many small, family-owned businesses, but few entrepreneurs. 
Fostering a more dynamic, innovative SME sector that will produce tomorrow’s globally competitive large companies requires removing disincentives to growth, such as the inheritance-tax exemption for family-owned businesses, which rewards owners for keeping their businesses small. 
A bankruptcy system that allows entrepreneurs to survive the inevitable failures that accompany innovation, as well as stronger protection of intellectual property and improved access to equity finance, are also needed. 
Park takes over at a pivotal point in South Korea’s history. 
The new government needs to take the pragmatic steps that can overcome the limitations of today’s economic model and save the country from declining growth, higher unemployment, and rising inequality. 
The task is no less than to achieve South Korea’s second miracle on the Han River. 

Reviving Europe’s Universities 
COPENHAGEN -- Writing at home sometime ago, with Wimbledon on TV in the background, it occurred to me that just as Britain hosts the world’s top tennis tournament but never wins it, so we Europeans are in a similar situation with education. 
The world’s first university was Plato’s Academy in Athens, venerable old universities are scattered across Europe from Coimbra to Cambridge to Copenhagen, and the modern university, uniting research and education, was pioneered by Wilhelm von Humboldt in Berlin. 
Yet today, universities in the United States easily outperform their European counterparts. 
Less than 2% of the European Union’s GDP is devoted to research, compared to 2.5% in the US and 3% in Japan. 
Spending per student on tertiary education is just over $9,000 in France, slightly under $11,000 in Germany, and almost $12,000 in the UK. 
Some EU countries, such as Denmark, do better, but still lag far behind the US, which spends more than $25,000. 
Measuring the quality of output is difficult, although The Times Higher Education Supplement attempts to do so every year. 
Only three European universities – Oxford, Cambridge, and Imperial College in London – made it into the top ten in the most recent list; all the rest were American. 
Only ten universities from the entire EU have ever made it into the top 50. 
Germany’s top university, Heidelberg, ranks 58th. 
As a result, roughly 400,000 European scholars currently reside in the US, and almost 60% of European citizens who received doctorates in US from 1998 to 2001 chose to remain there. 
There are twice as many Europeans studying in the US as there are Americans studying in Europe. 
Europe’s “education gap” doesn’t stop at the Atlantic. 
China and India represent more than mushrooming factories and low-cost semi-skilled labor. 
Just as in Europe, the industrial revolution in “Chindia” is also creating an ambitious new middle class that is willing and able to send its children to university. 
But in today’s world, students and researchers choose a university much as consumers shop in the international marketplace. 
Europe has made some modest efforts to regain university competitiveness. 
In March 2000, EU leaders meeting in Lisbon set the goal of making Europe the world’s most competitive and dynamic knowledge-based economy by 2010, and two years later they agreed that investment in R&D must reach 3% of GDP by 2010. 
Such ambitious goals, however unrealistic, can have a disciplining effect, leading some EU countries to increase their spending, while the EU itself has launched a number of promising schemes. 
The seventh Framework Program, worth some €50 billion – a 40% increase over the sixth program – is perhaps the most prominent funding source tool through which the EU supports R&D activities. 
But the EU and European governments must do more. 
Overall spending is still dwarfed by US federal research and development spending, which will total $137 billion in the 2007 fiscal year. 
European leaders must therefore substantially increase research funding when the EU budget is next due for revision in 2008 and 2009. 
Although the core financial burden will be on the member states, the EU level can make an important contribution. 
Moreover, although the European Commission clearly has a duty to prevent mismanagement and fraud, every application for EU funding requires extremely onerous procedures. 
Eliminating bureaucratic red tape, as the Commission has now pledged to do, would be a substantial boon to European researchers. 
Finally, Europe must place more emphasis on basic research. 
Of course, our scientists should respond to current problems in society. 
But if basic research is neglected, attempts to produce quick innovations through applied research will be futile. 
Basic research is the primary organism in the food chain of scientific endeavor. 
The European Research Council, which is to award research grants on the basis of peer-reviewed excellence, will therefore be an important step forward, and the EU should further increase its funding. 
But just throwing money at universities isn’t enough. 
As the former Financial Times editor Richard Lambert, together with Nick Butler, commented in a report published by London’s Centre for European Reform entitled The future of European universities: Renaissance or decay? , EU governments are stuck in a vicious circle: “The universities will get no more money unless they reform, and they cannot reform without more money”. 
The Danish government has sought to break free from this vicious circle by introducing reforms before pledging to increase budgets. 
In 2003, Denmark’s universities were turned into self-governing institutions run by governing boards dominated by external representatives. 
Last year, the government merged 12 universities into eight in order to achieve substantial economies of scale, and the Danish parliament approved a nearly 50% increase in government spending on research by 2010. 
The Danish case highlights the pivotal role of governance reform if Europe is ever to meet its Lisbon goals. 
The University of Copenhagen’s mergers with the Royal Veterinary and Agricultural University and the Danish University of Pharmaceutical Sciences have made it the largest university in Scandinavia. 
We now aspire to becoming the most significant health and life science research center in Europe, owing to a remarkable cluster of knowledge based 5,000 researchers, an excellent medical school, 11 university hospitals, and a thriving biotech business environment that already includes market leaders in diabetes and neuroscience. 
Until we embarked on governance reform, this would probably have been impossible. 
Our experience so far has taught us that university managers should not accommodate rising student populations by inflating their core business. 
However fierce the global competition, they should concentrate on safeguarding quality and achieving excellence in research and education. 

Reviving Georgia’s Western Dream 
Georgia’s recent instability has dealt a blow to its international reputation as a new democracy, and poses a challenge to the European Union as well. 
Faced with street protests in November, President Mikheil Saakashvili claimed that Russian-Georgian tycoon Badri Patarkatsishvili was conspiring to bring down the government. 
So he closed the opposition-leaning private Imedi TV station (owned by Patarkatsishvili) and introduced a state of emergency for nine days, before calling an early presidential election for January 5. 
Ever since Saakashvili’s inauguration in January 2004, following the 2003 “Rose Revolution,” Georgia’s government has displayed EU flags on official occasions. 
Georgians share that enthusiasm. 
A poll conducted by the International Republican Institute in September 2007 indicated that 81% of Georgians support joining the EU. 
But, regardless of the election’s outcome, the recent crisis exposes a lack of commitment by the EU to security and democracy in Georgia. 
Despite Georgia’s strategic location on the Black Sea, bordering Russia, Azerbaijan, and Turkey – and on a key trade route linking the EU, Iran, Russia, and Central Asia – Europe has dragged its feet on the country’s most enduring political problems. 
On the Georgian side, It is well understood – at least by the political elite – that EU membership is a distant prospect at best. 
This weakens the political importance of the European Neighborhood Policy (ENP), an initiative developed in 2004 to avoid the emergence of new dividing lines between the enlarged EU and its neighbors. 
An EU-Georgia ENP Action Plan was signed in November 2006, but it is unlikely to meet expectations. 
Indeed, the ENP comes second to co-operation with NATO as a priority for Georgia, in part because Georgians, feeling threatened by Russia, crave security above all. 
Moreover, while the recent state of emergency was a serious setback, NATO membership, unlike EU accession, is still within reach. 
This makes all the difference. 
The security interests of Georgia and the EU coincide least when it comes to the so-called “frozen conflicts” in the Kremlin-backed breakaway regions of Abkhazia and South Ossetia – it is no accident that “Promoting Peaceful Resolution of Internal Conflicts” ranks only sixth among the ENP Action Plan’s priorities. 
Georgia wants a reluctant EU to be more engaged, but each side understands engagement differently. 
The EU supports politically uncontroversial confidence-building measures that can reap results only in the long term, if ever. 
The Georgian government views the Abkhazian and Ossetian conflicts as the country’s principal security threat and impediment to development. 
It expects bolder moves from the EU, such as explicit endorsement of the Georgian-Ossetian working group, which includes the alternative, pro-autonomy South Ossetian government of Dmitri Sanakoyev, but is boycotted by the pro-Russian separatist government in Tskhinvali. 
The EU has avoided any such gesture, seeking to avoid further tension with Russia. 
On the other hand, there are better prospects for strengthening the EU’s role in democracy development. 
“Strengthening the Rule of Law, Building State Institutions, Protecting Human Rights and Fundamental Freedoms” occupies first place in the ENP Action Plan. 
Though judicial independence and protection of human rights remain conspicuously weak, Saakashvili’s government has increased the civil service’s efficiency, improved public infrastructure, fought corruption, reduced crime, and created an attractive investment environment. 
However, the opposition’s shortcomings pose a further obstacle to democratic development. 
The government’s opponents can mobilize public protests, as they did in November, but they are much less capable of formulating alternative policy agendas and attracting support for them. 
With no internal system of checks and balances in Georgia – the only way to sustain democratic institutions – the international community becomes a compensating actor, with the EU well placed to take the lead. 
In fact, while the Saakashvili government’s clampdown showed the structural weaknesses of Georgia’s democracy, the aftermath has also shown that Georgia’s Western ambition remains intact, because the government understands that it cannot afford any long-term deviation from democratic norms. 
The EU’s special representative in the South Caucasus, Swedish diplomat Peter Semneby, played a crucial role in bringing back Imedi TV in time to restore media balance ahead of the presidential election – possibly the first time that the EU took a leading role in seminal political events in Georgia. 
This was not part of any prefigured Action Plan, but it shows that, given the political will, the EU can play an active role in promoting democracy and stability. 

Reviving the Animal Spirits 
NEW HAVEN – The world’s fundamental economic problem today is a staggering loss of business confidence. 
Commercial banks, investment banks, and hedge funds all owe their ongoing trouble to its decline, which in turn is jeopardizing the plans of companies and entrepreneurs to launch enterprises and make investments, and of households to consume. 
Our “animal spirits,” to borrow a phrase made famous by John Maynard Keynes, are weakening. 
George Akerlof and I have just written a book by the same name, but by the time Animal Spirits appears later this winter, the world economy may be even worse than it is now. 
Nations everywhere are starting to implement aggressive stimulus and bailout packages. 
Yet the economic outlook still looks grim. 
The International Monetary Fund’s latest forecast predicts that the world’s advanced economies will contract 0.3% in 2009 – the first such shrinkage since the end of World War II. 
Part of the difficulty of contending with a crisis of confidence is that it is hard to quantify confidence in the first place. 
The Conference Board Consumer Confidence Index in the United States, begun in 1967, fell in October to its lowest value ever. 
The latest Nielsen Global Consumer Confidence Index, which covers 52 countries, fell to 84, from 137 when it was launched in 2005. 
But these surveys, which tabulate quick answers to simple questions, do not tell us how deeply held these opinions are, how new circumstances might change confidence, or what people will really do when they make important decisions in coming months or years. 
This decline in confidence is fundamentally related to the chaos in the financial markets that started in 2007 and accelerated this September. 
The specter of collapsing financial institutions around the world, and desperate government bailouts to try to save them, has created a general sense of alarm. 
Then there is the effect of memory on today’s animal spirits. 
People know enough about the Great Depression to understand that there are parallels with today. 
Many know that interest rates on three-month US Treasury bills became slightly negative in September 2008 – for the first time since 1941. 
People are also aware that the stock market has not been this volatile since the Great Depression (with the single exception of October 1987). 
Beyond that, national leaders are defending extraordinary bailout measures by not-so-veiled comparisons to the Great Depression. 
Animal spirits are not always shattered by extraordinary economic events. But then, not all economic convulsions are alike. 
For example, the October 19, 1987, stock market crash was the biggest one-day drop ever. 
The Standard & Poor’s Composite fell by 20.5%, the FTSE 100 by 12.2%, and the Nikkei 225 by 14.9% the next day. 
The crisis spread around the world, but there was no recession. 
Instead, world stock markets recovered, creating a colossal bubble that peaked 13 years later, in 2000. 
In a survey that I conducted immediately after the 1987 crash, I found that the biggest concern expressed by individual and institutional investors in the US was essentially that the stock market had been overpriced. 
After the crash corrected that problem, many people apparently did not feel there was much more to worry about. 
The only parallel to the Great Depression was the stock market drop itself. 
Moreover, many financial experts blamed the 1987 crash on a kind of programmed trading called “portfolio insurance,” which most thought would stop. 
But recent events do not carry such a rosy interpretation. 
The stunning magnitude of recent declines cannot be dismissed as a one-day anomaly caused by a technical trading glitch. 
The week of October 3-10 was the worst stock market week in the US since the Great Depression, while Japan’s stock market performed worse than it did in the worst week of the Asian financial crisis ten years ago. 
Similarly, Mexico’s stock market performed about as badly as it did during the worst week of the Mexican financial crisis in 1995, and Argentina’s stock market roughly matched the worst weekly drop during the country’s financial crisis of 1997-2002. 
Extraordinary stock market volatility, both up and down, has continued since. 
The current stimulus and bailout plans were hatched in reaction to that dreadful week. 
The G-7 countries announced a coordinated plan to fix the world economy on October 10, and that weekend the G-20 countries endorsed the plan. 
But stock markets were barely higher in early November. 
In China and India, they were lower. 
The erosion of animal spirits feeds on itself. 
Immense market volatility serves only to reinforce people’s sense that something is really wrong. 
A volatility feedback loop begins: the more volatility, the more people feel they must pay attention to the market, and hence the more erratic their trades. 
Perhaps the saving grace in this situation is that animal spirits can and sometimes do change direction. 
Confidence is a psychological phenomenon, and can make seemingly capricious jumps up as well as down. 
The most promising prospect for a return of business confidence now would be some kind of public inspiration. 
In the US, President-elect Barack Obama seems to have the charisma to create this, and his status as the first minority president marks a major historical transition that might have great positive psychological impact in the US and around the world. 
Whatever the near future holds the multitude of plans now being discussed to deal with this global crisis need to be judged with attention to the elusive and inexplicable effects they might have on confidence. 
The “animal spirits” that Keynes identified generations ago remain with us today. 

Reviving the Quartet 
Following the formation of a Palestinian unity government between Fatah and Hamas, and the Arab League summit which revived King Abdullah’s peace plan of 2002, it is time for the so-called Middle East Quartet, consisting of the European Union, Russia, the United Nations, and the United States, to get into action. 
The Quartet has been dormant since 2000, because any peace process requires negotiations between the parties in conflict. 
Instead, the region has witnessed a policy of unilateral steps. 
Some measures – Israel’s unilateral withdrawal from Lebanon in 2000 and from the Gaza Strip in 2005, or Hamas’ year-long ceasefire – might be seen as constructive. 
But, however positive their aims, these steps were taken without consulting the opposite side, thereby entrenching the perception that no partner existed. 
By the summer of 2006, with the Lebanon war and Israel’s reoccupation of the Gaza strip, the failure of unilateralism was clear. 
Today, we know that only a political process that takes each party’s legitimate national interests into account can reduce the risk of renewed violent conflict in the Middle East. 
Four steps are needed to restart such a process. 
The first step, revival of the Quartet, has already been taken. 
The Quartet remains the most appropriate format, as it combines European ideas and service with UN legitimacy and US leadership. 
It binds Russia and includes few enough participants to take quick decisions when necessary. 
But, aside from its revival, the Quartet should also widen its mandate to deal not only with the Israeli-Palestinian problem, but also with the Israeli-Syrian and Israeli-Lebanese conflicts. 
This does not preclude individual initiatives on the part of the US administration in the Israeli-Palestinian arena. 
Currently, the US refusal to negotiate directly with Syria, or to encourage Israel to talk with Syria, prevents such a widening of the Quartet’s mandate. 
Syria, however, cannot be ignored, since it is capable of undermining attempts at reaching an Israeli-Palestinian track or stabilizing Lebanon. 
Syria’s behavior is closely related to its prospects for recovering its own occupied territory – the Golan Heights – and is clearly interested in a new peace process with Israel to achieve this national goal. 
Second, a “goal map” should replace the Quartet’s largely outdated “road map,” and should state the basic legitimate interests of the parties to the conflict. 
These interests are not mutually exclusive and can be summarized as follows: Israel’s security, Palestinian statehood, Lebanon’s sovereignty and Syria’s territorial integrity. 
The Quartet should consult with the individual parties and to specify them further. 
What does Israel’s security mean and require? 
How can Palestinian statehood be preserved? 
Which guarantees are needed to safeguard Lebanon’s sovereignty? 
Third, dialogue must be re‑established. 
This may be the most difficult task, and it is mainly a responsibility for the Europeans. 
Again, the relationship between Syria and Israel is crucial here. 
The Israeli government needs to be convinced that resuming peace talks could lead to more constructive Syrian behavior vis-à-vis Lebanon and the Israeli-Palestinian conflict. 
The Syrian government itself has realized that it must demonstrate its willingness for dialogue by offering Israel unconditional negotiations, receiving the Iraqi and Palestinian presidents for talks in Damascus, and supporting intra-Palestinian talks. 
But it has yet to send convincing and reassuring signals towards Lebanon. 
In Lebanon itself, serious internal dialogue about the county’s future remains stalled. 
External actors like the EU or individual EU states could offer their support and facilitate talks on political and constitutional reforms. 
They should also make clear that no regional deal can be made at the expense of Lebanon’s sovereignty. 
With regard to the Palestinians, dialogue capacity of a different kind is needed. 
Since the Palestinian parliamentary election in January 2006, the international community has been communicating with President Mahmoud Abbas while boycotting the Hamas-led government. 
But isolating the Palestinian government significantly heightened the chaos in the West Bank and the Gaza Strip and has effectively contributed to a deconstruction of statehood. 
If the EU wants to continue its state-building efforts in Palestine and contribute to a peaceful settlement, it must find ways to talk to and work with the elected government. 
The formation of a Palestinian national unity government enables the EU and its partners to resume cooperation with the Palestinian authorities without losing face. 
Based on the Saudi-sponsored agreement between Fatah and Hamas, the unity government meets the EU Council’s demand that a legitimate Palestinian government “adopts a platform reflecting the Quartet principles.” 
According to its program, the government will respect all agreements signed by the PLO. 
Implicitly, this includes recognition of Israel and the obligation to refrain from and fight acts of terrorism. 
Avoiding contact with individual Palestinian ministers who violate these commitments may be necessary, but ostracizing the entire Palestinian administration must end. 
A fourth step, albeit for the future, is an international conference at which all relevant parties would adopt the “goal map” and commence parallel bilateral negotiations on this basis, which would enhance the actors’ interest in seeing the entire process through to a successful conclusion. 
Meticulous preparation of such a conference is more important than convening it quickly, as initiatives by individual states could undermine the EU’s and Quartet’s effort. 
Naturally, the US, as the most important Quartet member, must participate actively. 
The current EU presidency was able to convince the US administration that reviving the Quartet could be useful. 
However, the Bush administration’s priority in the region clearly remains Iraq, not the Israeli-Palestinian conflict. 
In these circumstances, the Europeans and the other Quartet partners could help Bush secure a more flattering legacy with regard to the Middle East. 
The EU must not, however, let US or Israeli lack of support thwart its efforts to devise a goal map that would be acceptable to all regional parties, or to push Syria onto a more constructive course by engaging it. 

A Europe of Solidarity, Not Only Discipline 
BERLIN – Originally, the European Union was what psychologists call a “fantastic object,” a desirable goal that inspires people’s imaginations. 
I saw it as the embodiment of an open society – an association of nation-states that gave up part of their sovereignty for the common good and formed a union dominated by no one nation or nationality. 
The euro crisis, however, has turned the EU into something radically different. 
Member countries are now divided into two classes – creditors and debtors – with the creditors in charge. 
As the largest and most creditworthy country, Germany occupies a dominant position. 
Debtor countries pay substantial risk premiums to finance their debt, which is reflected in their high economy-wide borrowing costs. 
This has pushed them into a deflationary tailspin and put them at a substantial – and potentially permanent – competitive disadvantage vis-à-vis creditor countries. 
This outcome does not reflect a deliberate plan, but rather a series of policy mistakes. 
Germany did not seek to occupy a dominant position in Europe, and it is reluctant to accept the obligations and liabilities that such a position entails. 
Call this the tragedy of the European Union. 
Recent developments seem to offer grounds for optimism. 
The authorities are taking steps to correct their mistakes, especially with the decision to form a banking union and the outright monetary transactions program, which would allow unlimited intervention by the European Central Bank in the sovereign-bond market. 
Financial markets have been reassured that the euro is here to stay. 
That could be a turning point, provided it is adequately reinforced with additional steps toward greater integration. 
Unfortunately, the EU’s unfolding tragedy characteristically feeds on such glimmers of hope. 
Germany remains willing to do the minimum – and nothing more – to hold the euro together, and the EU’s recent steps have merely reinforced German resistance to further concessions. 
This will perpetuate the division between creditor and debtor countries. 
A widening gap in economic performance and political dominance is such a dismal prospect for the EU that it must not be allowed to become permanent. 
There must be a way to prevent it – after all, history is not predetermined. 
The EU, originally conceived as an instrument of solidarity, is today held together by grim necessity. 
That is not conducive to a harmonious partnership. 
The only way to reverse the trend is to recapture the spirit of solidarity that animated the European project from the start. 
To that end, I recently established an Open Society Initiative for Europe (OSIFE). 
In doing so, I recognized that the best place to start would be where current policies have created the greatest human suffering: Greece. 
The people who are suffering are not those who abused the system and caused the crisis. 
The fate of the many migrant and asylum seekers caught in Greece is particularly heart-rending. 
But their plight cannot be separated from that of the Greeks themselves. 
An initiative confined to migrants would merely reinforce the growing xenophobia and extremism in Greece. 
I could not figure out how to approach this seemingly intractable problem until I recently visited Stockholm to commemorate the centenary of Raoul Wallenberg’s birth. 
This reawakened my memories of World War II – the calamity that eventually gave birth to the EU. 
Wallenberg was a hero who saved the lives of many Jews in my home city of Budapest by establishing Swedish safe houses. 
During the German occupation, my father was also a heroic figure. 
He helped to save his family and friends and many others. 
He taught me to confront harsh reality rather than to submit to it passively. 
That is what gave me the idea. 
We could set up solidarity houses in Greece, which would serve as community centers for the local population and also provide food and shelter to migrants. 
There are already many soup kitchens and civil-society efforts to help the migrants, but these initiatives cannot cope with the scale of the problem. 
What I have in mind is to reinforce these efforts. 
The EU’s asylum policy has broken down. 
Refugees must register in the member country where they enter, but the Greek government cannot process the cases. 
Some 60,000 refugees who sought to register have been put into detention facilities where conditions are inhumane. 
Migrants who do not register and live on the street are attacked by the hooligans of the neo-fascist Golden Dawn party. 
Sweden has made migration and asylum policy a high priority, while Norway is concerned about the fate of migrants in Greece. 
So both countries would be prime candidates to support solidarity houses. 
And other better-off countries could join them. 
OSIFE is ready to provide support for this initiative, and I hope other foundations will be eager to do the same. 
But this has to be a European project – one that eventually must find its way into the European budget. 
Currently, Golden Dawn is making political headway by providing social services to Greeks while attacking migrants. 
The initiative that I propose would offer a positive alternative, based on solidarity – the solidarity of Europeans with Greeks and of Greeks with migrants. 
It would provide a practical demonstration of the spirit that ought to infuse the entire EU. 
As soon as possible, I will dispatch an OSIFE needs-assessment team to Greece to contact the authorities – and the people and organizations already helping the needy – to work out a plan for which we can generate public support. 
My goal is to revive the idea of the EU as an instrument of solidarity, not only of discipline. 


Revolts of the Righteous 
It has become fashionable in certain smart circles to regard atheism as a sign of superior education, of a more highly evolved civilization, of enlightenment. 
Recent bestsellers suggest that religious faith is really a sign of backwardness, the mark of primitives stuck in the dark ages who are yet to catch up with scientific reason. 
Religion, we are told, is responsible for violence, oppression, poverty, and many other ills. 
It is not difficult to find examples to back up such assertions. 
But can religion also be a force for good? 
Indeed, are there cases where religious faith comes to the rescue even of those who don’t have it? 
Since I have never had either the benefits or misfortunes of adhering to any religion, it might smack of hypocrisy for me to defend those who have. 
But watching the Burmese monks on television defy the security forces of one of the world’s most oppressive regimes, it is hard not to see some merit in religious belief. 
Burma is a deeply religious country, where most men spend some time as Buddhist monks. 
Even the most thuggish Burmese dictator must hesitate before unleashing lethal force on men dressed in the maroon and saffron robes of their faith. 
The Burmese monks, together with nuns in pink robes, were soon joined by students, actors, and others who want to be rid of the military junta. 
But it was the monks and nuns who took the first step; they dared to protest when others had mostly given up. 
And they did so with the moral authority of their Buddhist faith. 
Romantics might say that Buddhism is unlike other religions – indeed, more a philosophy than a faith. 
But Buddhism has been a religion in different parts of Asia for many centuries, and, like any other belief, it can be used to justify violent acts. 
One need only look at Sri Lanka, where Buddhism is lashed to ethnic chauvinism in the slow-burning civil war between Buddhist Singhalese and Hindu Tamils. 
Just as the Buddhists risked their lives to stand up for democracy in Burma, Christians have done so in other countries. 
The Marcos regime in the Philippines was doomed in the mid-1980’s from the moment the Catholic Church turned against it. 
Thousands of ordinary citizens defied the tanks when Marcos threatened to crush “People Power” with force, but the presence of priests and nuns gave the rebellion its moral authority. 
Many political dissidents in South Korea were inspired by their Christian beliefs, and the same is true in China. 
And no one can deny the religious authority of Pope John Paul II as a spur to Poland’s rebellion against Communist dictatorship in the 1980’s. 
True believers would no doubt see the hand of God in these stirring events. 
Ferdinand Marcos’s main opponent, Cory Aquino, actually boasted of having a direct pipeline to the Lord. 
As a non-believer, I am bound to treat such claims with skepticism. 
But the moral power of religious faith does not need a supernatural explanation. 
Its strength is belief itself – belief in a moral order that defies secular, or, indeed, religious dictators. 
Active resisters to the Nazis during World War II were often devout Christians. 
Some sheltered Jews -- despite their own prejudices -- simply because they saw it as their religious duty to do so. 
Nor does faith have to be in a supernatural being. 
Men and women who found strength in their belief in Communism resisted the Nazis with equal tenacity. 
Despite the horrific violence of Islamist fanatics, it should not be forgotten that the mosque can also be a legitimate basis for resistance against the mostly secular dictatorships in the Middle East today. 
In a world of political oppression and moral corruption, religious values offer an alternative moral universe. 
This alternative is not necessarily more democratic, but it can be. 
Nevertheless, the danger of all dogmas, religious or secular, is that they lead to different forms of oppression. 
The revolt against Soviet domination in Afghanistan was led by holy warriors who then imposed their own form of misrule. 
Moreover, charismatic leadership can be problematic even when it takes a benign form. 
The Madonna-like status of Cory Aquino in the Philippines was inspiring in the heady days of People Power, but did little to bolster the institutions of a secular democracy. 
In Poland, once the battle against Communism was won, the Solidarity movement was soon sundered by conflicts between secular democrats and believers who looked to the Church for guidance. 
Faith has an especially important role to play in politics in circumstances where secular liberals are rendered impotent, as in the case of Nazi occupation, Communist rule, or military dictatorship. 
Liberals are most needed when compromises have to be made, but not nearly as useful when faced with brute force. 
That is when visionaries, romantics, and true believers are driven by their beliefs to take risks that most of us would regard as foolhardy. 
It is, on the whole, not beneficial to be ruled by such heroes, but it is good to have heroes around when they are needed. 

The Struggle for Middle East Mastery 
BERLIN – The last illusions about what was called, until recently, the “Arab Spring” may have vanished. 
Egypt’s military coup has made the simple, depressing alternatives for the country’s future crystal clear: The question is no longer one of democracy versus dictatorship, but rather one of (Islamist) revolution versus (military) counter-revolution – dictatorship or dictatorship. 
This applies not only to Egypt, but to almost all of the wider Middle East. 
And, because both sides have opted for armed struggle, the outcome will be civil war, regardless of what well-intentioned European Union foreign ministers decide in Brussels. 
The Islamists cannot win militarily, just as the generals cannot win politically, which all but ensures the return of dictatorship, significant violence, and a series of humanitarian disasters. 
For both sides, full mastery and control is the only option, though neither has even a rudimentary understanding of how to modernize the economy and society. 
So, whichever side gains the upper hand, authoritarianism and economic stagnation will prevail once again. 
In Egypt, the army will be the victor, at least in the medium term. 
With the support of old elites, the urban middle class, and religious minorities, Egypt’s military leaders have clearly adopted an all-or-nothing strategy. 
Moreover, financial support from Saudi Arabia and other Gulf states has made the army impervious to outside pressure. 
Thus, Egypt is reenacting the Algerian scenario. 
In 1992, with the Islamic Salvation Front poised to win Algeria’s general election, the country’s military staged a coup and immediately canceled the election’s second round. 
In the subsequent eight-year civil war, waged with appalling brutality by both sides, up to 200,000 people lost their lives. 
Military rule in Algeria continues de facto to this day. 
But, with the role of political Islam still unanswered, none of the country’s fundamental problems has been addressed seriously, and its leaders have been unable to take advantage of promising opportunities (for example, in contrast to Egypt, Algeria has large oil and gas reserves). 
In Egypt, the Muslim Brotherhood’s older generation is accustomed to prison and life underground, but there are many reasons to believe that its younger adherents will respond with terror and violence. 
Egypt, Syria, Yemen, Tunisia, and soon perhaps other countries in the region will serve as fertile grounds for a new, more militarily oriented Al Qaeda, which will become a more powerful factor in the Middle East’s cacophony of interests and ideologies. 
The West in general, and the United States in particular, has little influence or real leverage. 
So it will complain, threaten, and deplore the horrors to come, but ultimately will follow its interests, not its principles. 
For example, Egypt, with its control of the Suez Canal and its cold peace with Israel, is too important strategically to be simply abandoned. 
Taken in isolation, the Egyptian situation is bad enough; but it is by no means a unique case. 
Rather, it is part of a regional drama characterized primarily by a massive loss of order. 
The US-backed order in the Middle East is breaking down, yet no new order is emerging. 
Instead, there is only a spreading chaos that threatens to reach far beyond the region’s borders. 
Following the spectacular failure of President George W. Bush and Vice President Dick Cheney, with their neoconservative go-it-alone illusions, the US is no longer willing or able to shoulder the burden of being the last force for order in the Middle East. 
Having overstretched its forces in Afghanistan and Iraq, and facing economic retrenchment at home, the US is withdrawing, and there is no other power to take its place. 
Withdrawal is one of the riskiest military maneuvers, because it can easily degenerate into panicky retreat and chaos. 
With the upcoming withdrawal of the US and NATO from Afghanistan, the potential for turmoil in the region between North Africa and the Hindu Kush will increase significantly on its eastern edge. 
What we can learn today from the prolonged crisis in the Middle East is that regional powers are increasingly trying to replace the US as a force for order. 
This, too, will fuel chaos, because none of these powers is strong enough to shoulder the American burden. 
Moreover, the Sunni-Shia divide frequently leads to contradictory policies. 
In Egypt, for example, Saudi Arabia is supporting the military against the Muslim Brotherhood, whereas in Syria the Saudis are backing Salafists against the military, which receives support from Saudi Arabia’s main enemies, Shia Iran and its Lebanese proxy, Hezbollah. 
But the region’s struggle for power and its sectarian-ideological antagonisms also create an opportunity for cooperation once scarcely thought possible. 
Seen from this perspective, any US-Iranian talks over the nuclear issue in the wake of Hassan Rouhani’s victory in Iran’s presidential election could have much broader significance. 
In Egypt, the military counter-revolution will prevail, but the Islamist revolution eventually will return as long as its causes have not been eliminated. 
At the moment, there is virtually no indication of progress on this front. 
So, when the Islamist revolution does return, it is likely to be even more powerful and violent. 
A similar dynamic is evident in European history, particularly in the revolutions and counter-revolutions of the nineteenth and twentieth centuries. 
Indeed, the legacy of that dynamic was fully overcome in Europe only two decades ago. 
Now it seems to be recurring, largely unchanged, in the Middle East. 

Revolution in a Vacuum 
MADRID – The Cold War is long over, but superpower rivalry is back. 
As a result, the international community’s capacity to unite in the face of major global challenges remains as deficient as ever. 
Nowhere is this more clearly reflected than in the case of Syria. 
What was supposed to be a coordinated effort to protect civilians from ruthless repression and advance a peaceful transition – the plan developed by former United Nations Secretary-General Kofi Annan – has now degenerated into a proxy war between the United States and Russia. 
Russia’s leaders (and China’s) seek to uphold an international system that relies on the unconditional sovereignty of states and rejects the Western-inspired, humanitarian droit d’ingérence. 
Concerned that the Arab rebellions would radicalize their own repressed minorities, they refuse to allow the UN Security Council to be used to promote revolutionary changes in the Arab world. 
And Syria, the last Russian outpost of the Cold War, is an asset the Kremlin will do its utmost to maintain. 
But Russia and China are not the only problem. 
Major emerging democracies like Brazil, India, and South Africa have been especially disappointing in their response to the Arab Spring. 
All are outspoken paladins of human rights when it comes to condemning any Israeli defensive attack in Gaza as “genocide,” but are equally united in opposing Security Council action on Syria, even as the repression there grows ever more appalling. 
The Arab uprisings either clashed with their commitment to the inviolability of national sovereignty, or stoked their fear that “humanitarian intervention” would merely be another tool of Northern dominance. 
The West’s response has been far more supportive of Arabs’ aspirations, but it has also been contradictory and erratic. 
For years, both the US and Europe engaged in a monumental exercise in political hypocrisy, preaching the gospel of democratic change while supporting Arab tyrants. 
Not surprisingly, they found themselves with no tools to deal with the Arab revolutions. 
Indeed, at no time since the Arab Spring began has one been able to discern a coherent Western strategy to address its many challenges and uncertainties. 
Each case has elicited a different response, owing either to the constraints of international power politics, as is now the case with respect to Syria, or to economic and strategic considerations, as in Saudi Arabia and Bahrain. 
The US, for its part, did not abandon authoritarian allies such as Egypt’s Hosni Mubarak and Tunisia’s Zine el Abidine Ben Ali immediately. 
Had they been swifter and more effective in repressing the mass protests, they might still be in power today – with America’s blessing. 
The US turned against them not because they were autocrats, but because they were inefficient autocrats. 
Meanwhile, Europe finds itself paralyzed by a financial crisis that threatens the European Union’s very existence. 
The EU’s traditional foreign-policy tools – “promoting civil society” and “encouraging trade” – are no substitute for a strategy to confront the new power game in the Mediterranean. 
And yet Europe has proven utterly incapable of developing an appropriate response to conditions in which Islamist regimes are independently shaping their priorities and external actors – Qatar, Saudi Arabia, Turkey, Russia, China, and perhaps even Iran – are vying for influence with an extraordinary combination of financial firepower and political muscle. 
Europe cannot afford to remain on the sidelines. 
NATO’s “Operation Unified Protector” in Libya was a major success for the alliance, but America’s decision to let Europe assume the leading role also signaled its intention to “rebalance” its global priorities. 
With the US intent on shifting its attention from Europe’s sphere of vital interests, the Mediterranean and the Middle East, to Asia and the Pacific, it can no longer be expected to take the lead in resolving crises in Europe’s backyard. 
Indeed, grand designs for the Middle East are no longer on America’s agenda. 
Since its victory in the Cold War, America’s hegemony in the Middle East has been a story of frustration and unrewarded investment of blood, sweat, and treasure. 
A shift to foreign-policy realism is now expected, and Secretary of State Hillary Clinton’s recent meeting with Egypt’s Islamist president, Mohamed Morsi, is a clear indication of America’s new orientation. 
The implications of such a shift are far-reaching. 
Following the terrorist attacks of September 11, 2001, the US viewed the Islamic world almost exclusively through the prism of the “global war on terror.” 
Now, however, policymakers admit that it was precisely the persistence of secular Arab autocracies that encouraged Islamist terrorism. 
As a result, the major premise of current US policy is that a loss of trust by the Islamists in the democratic process would have adverse consequences, and that the restoration of the old regimes could threaten Western interests more than a Muslim Brotherhood government would. 
America is now wisely building working relations with the new Islamist leaders, in the hope that they will not endanger the region’s US-brokered peace agreements (Israel-Jordan and Israel-Egypt) or interfere with America’s drive to halt Iran’s nuclear ambitions. 
Realizing that hope is no easy task. 
Turmoil in Arab societies is bound to persist for years to come, and emerging regional and world powers can be expected to exploit the international order’s fragmentation to advance their interests in the region. 
With Europe in disarray, and Iran’s nuclear crisis still resistant to diplomatic resolution, America’s new foreign-policy realism could well imply that the US, however reluctantly, will ultimately be forced to revisit its “rebalancing strategy.” 

Revolutionary Shadows 
VIENNA – What happens after the euphoria of revolution fades? 
Today’s Eastern Europe, some two decades after the revolutions of 1989, may offer a salutary warning for today’s defiant and jubilant Arab youth that they must remain vigilant. 
Ever since I left Romania for exile in 1986, my returns have been rare and tense. 
Although the schedule for my most recent trip was overwhelming, and offered little real contact with ordinary people, I could still grasp – from daily newspapers, TV programs, and conversations with friends – the profound economic, political, and moral crisis engulfing the country. 
Mistrust and anger toward a corrupt and inefficient political class, coupled with skepticism about democracy – even nostalgia for communism – is to be found nowadays not only in Romania, but also in some other parts of Eastern Europe. 
Some 70% of Romanians reportedly now claim to regret the death of Comrade Nicolae Ceauşescu, whose summary execution in 1989 elicited general enthusiasm. 
Of course, the source of such an astonishing finding is difficult to trust, like everything else in Romanian politics, but the vulgar and radical coarsening of public discourse – now peppered with old-new xenophobic elements – is clear enough. 
I was offered a taste of this as a guest on a well-respected TV cultural program. 
I was amused that the debate focused not on my books, but on issues like the “Jewish cultural mafia” and the “exaggerated” anti-Semitism of past and present Romania. 
My interviewer was kinetic, taking over the dialogue with insinuations and personal interventions. 
I assumed that I was supposed to be provoked into unguarded comments, a method that fashionable TV journalists everywhere use nowadays. 
But I faced a new surprise the following week, when, on the same TV program, the hostess was rather passive towards her guest, a militant journalist turned mercenary journalist, as he confessed his admiration for Corneliu Zelea Codreanu, the “Captain” of the Iron Guard, the far-right Orthodox terrorist organization of the pre-war years. 
The journalist considered Codreanu a “Romantic hero.” 
A group of Romanian intellectuals, including me, protested in an Open Letter against this effort to rehabilitate a murderer and propagandist of hate and xenophobia. 
Romanian TV answered promptly that it understood that victims of anti-Semitic crimes might feel hurt by such a program, but that the program had not promoted this kind of propaganda, offering the bizarre interview with me the previous week as proof of the channel’s good faith. 
But the debate didn’t end there. 
Soon after, the national committee for the media condemned the program. 
And soon after that, some leading intellectuals condemned the national committee’s condemnation as an affront to freedom of speech.No one mentioned the danger of inciting an already radicalized audience. 
In fact, the responses from members of the public to these controversies were mostly of a vulgar nationalistic and anti-Semitic tone. 
Romania is not alone, of course, in reliving this dark comedy. 
Revitalization of the extreme right in Hungary and the rise of “National Bolshevism” in Russia, where Tolstoy is now re-condemned by the Orthodox Church as a proto-communist, suggest a deeper and more pervasive atavistic longing. 
I was reminded of my last class at Bard College before my trip to Romania. 
We were discussing Thomas Mann’s Death in Venice. 
Commenting on the moment when “Asiatic cholera” kills the great and troubled writer Gustav von Aschenbach, a brilliant Asian student pointed out that Mann related the disease to the “pestilence” of the Ganges delta, which traversed China and Afghanistan, Persia and Astrakhan, and “even Moscow,” before reaching Europe through the “city of the lagoon.” 
She noted with gravity today’s migrations from poor to prosperous countries, the globalization of evil, the contradictions and conflicts of modernity, the angry terrorist response to it, and the contrast between a rational, pragmatic West and a more idealistic and superstitious East, prone to religious fanaticism and political extremism. 
It was a relief to listen to my student’s well-articulated opinions and to see in her the hope of a new, cosmopolitan generation. 
But her example was also an unavoidable reminder of the great dangers of our time. 
I needed that hope, for what I saw in Eastern Europe had depressed me as much as what I was seeing in the United States, my adopted homeland. 
For someone who lived through two totalitarian systems, it is almost unbearable to contemplate America’s decline. 
Although we refugees, immigrants, exiles, and outcasts do not boast ad infinitum that “we are the best,” as many Americans do, we still believe that the US remains a powerful guarantor of freedom and democracy, and we consider its incoherence part of its liberty. 
For far different reasons, the US, and the entire world, seems condemned to simplification of thought, action, and feeling in the service of immediate, quotidian efficiency. 
Of course, art and culture can offer a respite from the oversimplifications of our age – a respite that we need more than ever if we are to reckon with the destiny behind and before us. 
But we also need modesty about ourselves and our societies. 
Some years ago, I proposed that every country should add to its monuments to heroism some monuments to its national shame. 
After all, guilt is as significant as courage in any human enterprise. 
To remember and reflect on how we have wronged other people and nations may benefit a country’s citizens as much as celebrating great deeds. 
Monuments to shame would not resolve the insoluble problems of humanity’s fate on Earth, but they might slow the advance of its dark side – in Eastern Europe, the Arab world, and everywhere else. 

Kofi Annan’s Unfinished Green Revolution 
GENEVA – Kofi Annan championed many global causes during his distinguished life and career, but as a native of Ghana, he always felt a special responsibility to Africa. 
And there, no issue was more important to him than tackling hunger and spurring growth through agriculture. 
During his tenure as Secretary-General of the United Nations, Annan, who died last month, often wondered why so much of Africa – with its abundance of fertile land and freshwater – had failed to turn farming into an asset. 
He even commissioned a study for the UN to analyze why “green revolutions” – agricultural reforms in Asia and Latin America that lifted millions out of poverty and accelerated economic transformations – had bypassed Africa. 
That study reached a straightforward conclusion: while Africa’s farmers have the potential to meet the continent’s nutritional needs, they cannot do it alone. 
The study’s findings led Annan to advocate for a “uniquely African green revolution” to increase farm productivity, and his plea later became the basis for the African Green Revolution Forum. 
This week, the AGRF – one of the world’s most important platforms for African agriculture – will gather for its annual meeting to discuss ways to help the continent feed itself. 
Africa’s agricultural sector has come a long way since 2010, when Annan chaired the first AGRF meeting, in Accra. 
Today, governments across the continent, including in Rwanda, this year’s host country, have placed agriculture at the center of their socioeconomic policies. 
This focus is creating jobs and improving food security and nutrition, while innovative partnerships are helping to build more viable, inclusive agribusinesses. 
And yet, despite progress, millions of Africans continue to suffer from hunger and extreme poverty. 
As leaders prepare for another round of AGRF discussions, Annan’s vision of a food-secure and prosperous Africa is more relevant than ever. 
Today, five key challenges are impeding Africa’s agricultural progress; each needs urgent attention. 
First, Africa’s governments must make good on pledges to allocate at least 10% of public spending to agriculture. 
At the moment, only 13 countries are hitting this mark. 
Simply put, Africa will continue to fall short of its economic potential if public and private investment in agriculture is not increased. 
Second, Africa needs an accountability system to measure policies and progress against key performance indicators. 
To that end, the African Union should endorse a new African Leaders for Nutrition initiative that is developing scorecards for agriculture and nutrition programs. 
Third, regional and international donors must direct more aid to the millions of smallholder farmers who rely on agriculture to make ends meet. 
Africa’s small farmers can be integrated into agricultural value chains, but not without first increasing farm productivity. 
To improve yields, smallholder farmers need access to high-quality seeds and fertilizers, innovative financing, and modern technology. 
Most important, support must be directed to the future of African agriculture – young people and women. 
Fourth, the volume of agricultural trade between countries must be increased, which can be accomplished by harmonizing trade regulations, lowering transportation costs, reducing tariffs, and improving warehouse and cold-storage facilities. 
A more robust intra-African food trade would promote economic growth, attract new investors, create jobs, and help prevent food insecurity. 
Finally, everyone involved in strengthening Africa’s agricultural sector – from donors to farmers – must never forget the transformative power of partnerships. 
Rather than working at odds, Africa’s governments, businesses, financial institutions, NGOs, and farmers’ organizations should pool their resources and expertise whenever possible. 
In 2006, when Annan stepped down as UN Secretary-General, he commented that in his next job, people might call him “Farmer Kofi.” 
Many of his colleagues assumed he was joking; he wasn’t. 
While his post-UN portfolio ranged from peacebuilding in Syria to political dialogue in Kenya, he never stopped advocating for Africa’s smallholder farmers. 
For Annan, the eradication of hunger was not an end but rather a means to creating a more just and peaceful world. 
As he put it in an interview in 2013, “a hungry man is not a free man,” because he can focus only on his next meal. 
Now that Annan is gone, it is up to the rest of us to ensure that his vision of freedom for Africa is realized. 

Revolutionizing Arab Economies 
ISTANBUL – The ongoing showdown in Egypt between the country’s Islamists and its military rulers is a clear reminder of how difficult democratic transitions in the Arab world are likely to be. 
Obviously, failure to reach a power-sharing agreement will prolong political instability. 
But the resulting economic inaction would be just as damaging to the consolidation of democratic rule. 
Emerging Arab leaders, from Islamists to re-invented former regime officials, are keenly aware of the need to improve their countries’ economic prospects. 
They know full well that their popularity can be sustained only if they are able to deliver growth, employment, and higher living standards. 
This would be a difficult challenge under any circumstances – and is all the more daunting against the backdrop of the Arab Spring’s destabilization of the economic systems across the Middle East and North Africa. 
Even in countries like Tunisia and Egypt, where the transition to democracy is more advanced, political uncertainty has tended to plague economic achievements. 
For the first time since 1986, Tunisia’s economy shrank in 2011, by 1.8%. 
Unemployment reached 18% last year, up from 13% in 2010. 
Meanwhile, the Egyptian economy contracted by 0.8%, and one million Egyptians lost their jobs. 
Egypt’s foreign-investment inflows have also dried up, falling from $6.4 billion in 2010 to a mere $500 million in 2011. 
The combination of these negative trends is affecting these countries’ fiscal as well as external balances. 
Egypt’s budget deficit reached 10% of GDP, while its foreign-exchange reserves have fallen to $15 billion – barely enough to cover the country’s import bill for the next three months. 
In Tunisia, too, the budget deficit has widened sharply in the wake of the revolution, rising from 2.6% of GDP in 2010 to 6% in 2011. 
This rapid economic deterioration, combined with the high expectations raised by the onset of political transition, is creating a sense of urgency. 
Emerging political actors feel compelled to develop more detailed economic programs and to address their populations’ growing material grievances. 
For example, whereas the Islamists had essentially focused on political themes, highlighting participation, inclusiveness, and democratic reforms, the recent election campaigns witnessed a rhetorical shift to economic aspirations. 
Overall, the emerging political players – particularly the Islamist parties – have adopted a rather conciliatory tone regarding engagement with international actors. 
These parties’ economic programs are by and large pro-market, emphasizing the private sector’s role in driving growth and the need to attract foreign capital. 
The state is seen as a vehicle for ensuring social justice, and there are scant references to sharia principles. 
Both in Tunisia and Egypt, for example, Islamist politicians have given assurances that the economically critical tourism sector will not be hindered by restrictions related to Islamic law. 
The Islamists’ economic programs also foresee a role for international institutions in helping their countries to overcome the challenges that they face. 
Indeed, whereas resistance to foreign intervention and assistance has been strong with respect to democratic reforms, new Arab leaders seem more receptive to a partnership with the West on economic objectives. 
Economic weakness thus provides an unprecedented opportunity for international engagement with the new Arab leadership, which should incorporate short-, medium-, and long-term goals. 
Short-term goals must have priority, because many Islamist parties are being pressed to produce positive results within a single electoral cycle. 
The new governments will face the immediate challenge of creating jobs, for which the only available recipe is investment in large-scale public-works projects. 
This type of government spending can create labor-intensive jobs that will help to stem rising unemployment. 
The international community can help the Arab governments to launch and sustain such initiatives in several ways. 
First, it can increase the amount of promised financial assistance. 
It can also provide technical expertise to Arab policymakers on debt management. 
Without first-rate expertise in debt management, an economy implementing large-scale public outlays risks crowding out private investment through overreliance on domestic savings. 
Finally, the international community can help Arab governments to establish a secure and predictable legal and regulatory framework for public-private partnerships for large-scale infrastructure projects. 
International actors, jointly with Arab governments, can then help to market these opportunities, allowing Arab economies to benefit from infrastructure-focused long-term international financing. 
Only a combination of these options would allow Arab economies to create jobs in the short term, while avoiding the risks of destabilizing fiscal imbalances or a lack of financing for private-sector investment. 
The West, for its part, stands to gain in myriad ways from a solid partnership with the Arab world to improve its societies’ economic future. 
Even in the midst of a protracted currency crisis, European governments can surely sign on to an agenda that prioritizes transfers of know-how over cash infusions. 


Rewriting Russia's Recent Economic History 
Ten years ago this month, Russia's parliament, the Duma, was seeking to impeach then President Boris Yeltsin, initiating a time of stalemate and struggle that ended seven months later when Yeltsin ordered tanks to fire on the Duma's headquarters. 
Yeltsin's victory settled who ruled Russia and who would determine economic policy. 
But were Yeltsin's economic policy choices the right ones for Russia? 
The move from communism to capitalism in Russia after 1991 was supposed to bring unprecedented prosperity. 
It did not. 
By the time of the ruble crisis of August 1998, output had fallen by almost half and poverty had increased from 2% of the population to over 40%. 
Russia's performance since then has been impressive, yet its GDP remains almost 30% below what it was in 1990. 
At 4% growth per annum, it will take Russia's economy another decade to get back to where it was when communism collapsed. 
A transition that lasts two decades, during which poverty and inequality increase enormously as a few become wealthy, cannot be called a victory for capitalism or democracy. 
Moreover, the longer-run prospects are far from rosy: with investment a mere 10% of what it was in 1990, even if that investment is better allocated, how can growth be sustained? 
IMF-style neo-liberals are now trotting out an interpretation that amounts to a belated declaration of victory. 
The pre-1998 period of economic decline, on their view, reflected a stalled transition process, whereas the ruble crisis finally jolted the authorities into action, with recovery following implementation of far-reaching reforms. 
But the real explanation lies elsewhere--and is much simpler. 
Until 1998, the ruble was overvalued, making it impossible for domestic producers to compete with imports. 
The IMF did not want Russia to devalue, and it provided billions of dollars to prop up the exchange rate. 
The IMF and the US Treasury worried that any change would restart inflation, because there was little or no excess productive capacity. 
This was a remarkable confession: these officials evidently believed that their policies had wrecked nearly half of Russia's economic capacity in the space of just a few years--a level of destruction not even Hitler's Nazi armies had achieved. 
They shunted aside micro-level data that showed that there was in fact excess capacity, just as they ignored a World Bank analysis showing that fresh IMF loans would not restore economic growth, but would only leave the country deeper in debt. 
The results were predictable: the 1998 bailout did not work, but devaluation did. 
It turned out that there was enormous excess capacity, and import substitution soon began, even in the midst of financial turmoil. 
Imports plummeted by nearly 50% in the year after devaluation, as consumers were forced to buy Russian-made food, clothes, and other goods. 
Later, higher world oil prices provided a further boost to the economy, generating funds for investment and expansion. 
Profits generated provided funds for expansion. 
Capital controls--another neo-liberal bugbear--were imposed, and domestic investors looked for opportunities at home instead of in New York or Cyprus or the Cote d'Azur. 
Yes, the market economy can provide incentives for wealth creation. 
Unfortunately, under the preceding years of IMF programs, the market economy with high interest rates, illegitimate privatization, poor corporate governance, and capital-market liberalization provided only incentives for asset stripping. 
Growth was caused by the change in the economic environment, a change that Russia made for itself. 
The reformist parliament elected in December 1999 in tandem with President Vladimir Putin's reformist administration lowered tax rates, overhauled the judicial system, legislated private ownership of land, and adopted new banking laws. 
These are positive reforms, but they do not explain the burst of post-crisis growth, which began before any of them were passed, let alone put in place. 
Indeed, even with the turmoil of default and devaluation, and despite the usual 12-18-month lag in the impact of devaluation, Russia was growing at 5.4% annually by the end of 1999. 
In the long run, we should be concerned not just with the pace of economic growth but with the type of society that is created. 
To Russia's so-called reformers, the enormous concentration of ownership in Russia that emerged in the 1990's is of no concern, so long as it generates growth. 
But there is another vision of a market economy, one based on greater equality, and which uses the power of markets to bring prosperity not just to the few but to all of society. 
That Russia's transition did not achieve this is no a surprise. 
That goal was not a part of the reformers' vision. 
The great paradox is that their view of economics was so stilted, so ideologically driven, that they failed even in their narrower objective of bringing about economic growth. 
What they achieved was undiluted decline. 
No rewriting of history will change this. 

The Real Raw Material of Wealth 
TIRANA – Poor countries export raw materials such as cocoa, iron ore, and raw diamonds. 
Rich countries export – often to those same poor countries – more complex products such as chocolate, cars, and jewels. 
If poor countries want to get rich, they should stop exporting their resources in raw form and concentrate on adding value to them. 
Otherwise, rich countries will get the lion’s share of the value and all of the good jobs. 
Poor countries could follow the example of South Africa and Botswana and use their natural wealth to force industrialization by restricting the export of minerals in raw form (a policy known locally as “beneficiation”). 
But should they? 
Some ideas are worse than wrong: they are castrating, because they interpret the world in a way that emphasizes secondary issues – say, the availability of raw materials – and blinds societies to the more promising opportunities that may lie elsewhere. 
Consider Finland, a Nordic country endowed with many trees for its small population. 
A classical economist would argue that, given this, the country should export wood, which Finland has done. 
By contrast, a traditional development economist would argue that it should not export wood; instead, it should add value by transforming the wood into paper or furniture – something that Finland also does. 
But all wood-related products represent barely 20% of Finland’s exports. 
The reason is that wood opened up a different and much richer path to development. 
As the Finns were chopping wood, their axes and saws would become dull and break down, and they would have to be repaired or replaced. 
This eventually led them to become good at producing machines that chop and cut wood. 
Finnish businessmen soon realized that they could make machines that cut other materials, because not everything that can be cut is made out of wood. 
Next, they automated the machines that cut, because cutting everything by hand can become boring. 
From here, they went into other automated machines, because there is more to life than cutting, after all. 
From automated machines, they eventually ended up in Nokia. 
Today, machines of different types account for more than 40% of Finland’s goods exports. 
The moral of the story is that adding value to raw materials is one path to diversification, but not necessarily a long or fruitful one. 
Countries are not limited by the raw materials they have. 
After all, Switzerland has no cocoa, and China does not make advanced memory chips. 
That has not prevented these countries from taking a dominant position in the market for chocolate and computers, respectively. 
Having the raw material nearby is only an advantage if it is very costly to move that input around, which is more true of wood than it is of diamonds or even iron ore. 
Australia, despite its remoteness, is a major exporter of iron ore, but not of steel, while South Korea is an exporter of steel, though it must import iron ore. 
What the Finnish story indicates is that the more promising paths to development do not involve adding value to your raw materials – but adding capabilities to your capabilities. 
That means mixing new capabilities (for example, automation) with ones that you already have (say, cutting machines) to enter completely different markets. 
To get raw materials, by contrast, you only need to travel as far as the nearest port. 
Thinking about the future on the basis of the differential transport-cost advantage of one input limits countries to products that intensively use only locally available raw materials. 
This turns out to be enormously restrictive. 
Proximity to which particular raw material makes a country competitive in producing cars, printers, antibiotics, or movies? 
Most products require many inputs, and, in most cases, one raw material will just not make a large enough difference. 
Beneficiation forces extractive industries to sell locally below their export price, thus operating as an implicit tax that serves to subsidize downstream activities. 
In principle, efficient taxation of extractive industries should enable societies to maximize the benefits of nature’s bounty. 
But there is no reason to use the capacity to tax to favor downstream industries. 
As my colleagues and I have shown, these activities are neither the nearest in terms of capabilities, nor the most valuable as stepping-stones to further development. 
Arguably, the biggest economic impact of Britain’s coal industry in the late seventeenth century was that it encouraged the development of the steam engine as a way to pump water out of mines. 
But the steam engine went on to revolutionize manufacturing and transportation, changing world history and Britain’s place in it – and increasing the usefulness to Britain of having coal in the first place. 
By contrast, developing petrochemical or steel plants, or moving low-wage diamond-cutting jobs from India or Vietnam to Botswana – a country that is more than four times richer – is as unimaginative as it is constricting. 
Much greater creativity can be found in the UAE, which has used its oil revenues to invest in infrastructure and amenities, thus transforming Dubai into a successful tourism and business hub. 
There is a lesson here for the United States, which has had a major beneficiation policy since the 1973 oil embargo, when it restricted the export of crude oil and natural gas. 
As the US increasingly became an energy importer, its leaders never found any reason to abandon this policy. 
But the recent shale-energy revolution has dramatically increased the output of oil and gas in the last five years. 
As a result, the domestic natural-gas price is well below the export price. 
This is an implicit subsidy to the industries that use oil and gas intensively and may attract some inward foreign investment. 
But is this the best use of the government’s capacity to tax or regulate trade? 
Would the US not be better off by using its capacity to tax natural gas to stimulate the development of the contemporary technological equivalent of the revolutionary engine? 

Turning Good Economic Luck into Bad 
CAMBRIDGE, MA – It is often difficult to understand how countries that are dealt a pretty good economic hand can end up making a major mess of things. 
It is as if they were trying to commit suicide by jumping from the basement. 
Two of the most extreme cases (but not the only ones) are Argentina and Venezuela, countries that have benefited from high prices for their exports but have managed to miss the highway to prosperity by turning onto a dead-end street. 
They will eventually have to make a U-turn and backtrack over the terrain of fictitious progress. 
The puzzling thing is that this is not the first time either country has veered into an economic cul-de-sac. 
It has been said that only barbers learn on other people’s heads, but some countries seem unable to learn even from their own experience. 
The ultimate reason for such self-destructiveness may be impossible to identify. 
But it is certainly possible to describe how the road to hell is paved, whatever the intentions. 
It all starts when some imbalance causes overall inflation or some key price – typically the exchange rate, but also power, water, and gasoline – to come under upward pressure. 
The government then uses its coercive power to keep a lid on price growth. 
For example, Brazil has wreaked havoc on the financial health of its national oil company, Petrobras, in order to keep gasoline prices low. 
Argentina destroyed its natural-gas sector with price controls. 
Many countries have kept power and water prices too low and have ended up with shortages. 
But things become really nasty when the government opts for foreign-exchange controls. 
The usual story, nicely summarized by the late Rüdiger Dornbusch and Sebastian Edwards, is that lax fiscal and monetary policies cause a flood of freshly printed currency to chase more dollars than the central bank can provide at the going exchange rate. 
Rather than let the currency depreciate, or tighten its policies, the government opts for foreign-exchange controls, limiting access to dollars to those who “really” need it and thus preventing “speculators” from hurting “the people.” 
Foreign-exchange controls, typically accompanied by price controls, give the government the sense that it can have its cake (lax policies) and eat low inflation. 
But controls lead to a parallel exchange rate, which can be either legal, as in Argentina, or illegal and even unpublishable, as in Venezuela. 
But having two prices for an identical dollar creates enormous arbitrage opportunities. 
A dollar purchased at the official rate can be sold for almost twice as much in the “blue” market in Argentina and a whopping ten times more in Venezuela. 
Repeat that game a few times and you will be able to afford a corporate jet. 
Nothing becomes more profitable than over-invoicing imports and under-invoicing exports. 
In Venezuela, importing spoiled food and letting it rot is more profitable than any investment anywhere else in the world (disregarding, of course, the bribes needed to make it happen). 
The dual-exchange-rate system ends up distorting production incentives and causing the effective supply of imported goods to decline, leading to a combination of inflation and shortages. 
But here things turn interesting. 
Public spending tends to rise with inflation more than government revenues do, because revenues depend on the tax on exports, which is calculated at the pegged official exchange rate. 
So, over time, fiscal accounts worsen automatically, creating a vicious circle: monetized fiscal deficits lead to inflation and a widening gap in the parallel exchange-rate market which worsens the fiscal deficit. 
Eventually, a major adjustment of the official rate becomes inevitable. 
For example, when Hugo Chávez was first elected President in 1998, the Venezuelan bolívar could be exchanged for 2,610 Colombian pesos. 
Today, despite a raft of foreign-exchange controls, a bolívar is worth barely 300 pesos at the official exchange rate (which is soon to be readjusted); one would be lucky to get 30 pesos at the black-market rate. 
Not surprisingly, prices in Venezuela rise in one month more than they do in two years in neighboring Colombia. 
Why do countries opt for such a strategy? 
Any system creates winners and losers. 
In Argentina and Venezuela, the winners are those who have preferential access to foreign exchange, those who benefit from the government’s profligacy, those who can borrow at the negative real interest rates that lax policies create, and those who do not mind waiting in long lines to buy rationed items. 
Such a system can generate a self-reinforcing set of popular beliefs, which may explain why countries like Argentina and Venezuela repeatedly drive down dead-end streets. 
Because so many businesses make money from the rents created by the rationing of foreign exchange, rather than by creating value, it is easy to believe that markets do not work, that entrepreneurs are speculators, and that governments need to control them and impose “fair” prices. 
All too often, this allows governments to blame the car, and even the passengers, for getting lost. 

In Search of Convergence 
CAMBRIDGE – One puzzle of the world economy is that for 200 years, the world’s rich countries grew faster than poorer countries, a process aptly described by Lant Pritchett as “Divergence, Big Time.” 
When Adam Smith wrote The Wealth of Nations in 1776, per capita income in the world’s richest country – probably the Netherlands – was about four times that of the poorest countries. 
Two centuries later, the Netherlands was 40 times richer than China, 24 times richer than India, and ten times richer than Thailand. 
But, over the past three decades, the trend reversed. 
Now, the Netherlands is only 11 times richer than India and barely four times richer than China and Thailand. 
Spotting this reversal, the Nobel laureate economist Michael Spence has argued that the world is poised for The Next Convergence. 
Yet some countries are still diverging. 
While the Netherlands was 5.8, 7.7, and 15 times richer than Nicaragua, Côte D’Ivoire, and Kenya, respectively, in 1980, by 2012 it was 10.5, 21.1, and 24.4 times richer. 
What could explain generalized divergence in one period and selective convergence in another? 
After all, shouldn’t laggards grow faster than leaders if all they have to do is imitate others, even leapfrogging now-obsolete technologies? 
Why didn’t they grow faster for so long, and why are they doing so now? 
Why are some countries now converging, while others continue to diverge? 
There are potentially many answers to these questions. 
But I would like to outline a possible explanation that, if true, has important implications for development strategies today. 
The economic expansion of the last two centuries has been based on an explosion of knowledge about what can be made, and how. 
An apt metaphor is a game of Scrabble: Goods and services are made by stringing together productive capabilities – inputs, technologies, and tasks – just as words are made by putting letters together. 
Countries that have a greater variety of capabilities can make more diverse and complex goods, just as a Scrabble player who has more letters can generate more and longer words. 
If a country lacks a letter, it cannot make the words that use it. 
Moreover, the more letters a country has, the greater the number of uses it could find for any additional letter it acquired. 
This leads to a “quiescence trap,” which lies at the heart of the Great Divergence. 
Countries with few “letters” lack incentives to accumulate more letters, because they cannot do much with any additional one: you would not want a TV remote control if you didn’t have a TV, and you would not want a TV broadcasting company if your potential customers lacked electricity. 
This trap becomes deeper the longer the alphabet and the longer the words. 
The last two centuries have seen an explosion in technologies – letters – and in the complexity of goods and services that can be made with them. 
So the techies get techier, and the laggards fall further behind. 
Why, then, are some poorer countries now converging? Is the technological alphabet getting shorter? 
Are products getting simpler? 
Obviously not. 
What is happening is that globalization has split up value chains, allowing trade to move from words to syllables. 
Now, countries can get into business with fewer letters and add letters more parsimoniously. 
It used to be that if you wanted to export a shirt, you had to be able to design it to the taste of people you didn’t really know, procure the appropriate materials, manufacture it, distribute it through an effective logistical network, brand it, market it, and sell it. 
Unless you performed all of these functions well, you would go out of business. 
Globalization allows these different functions to be carried out in different places, thereby allowing countries to participate earlier, when they still have few locally available capabilities, which can then be expanded over time. 
A recent example is Albania. 
Known as the North Korea of Europe until the early 1990s, when Albania abandoned its quixotic quest for autarky, it started cutting and sowing garments and shoes for Italian manufacturers, gradually evolving its own fully integrated companies. 
Other countries that started in garments – for example, South Korea, Mexico, and China – ended up reusing the accumulated letters (industrial and logistical capabilities) while adding others to move into the production of electronics, cars, and medical equipment. 
Consider this a stylized version of the sale of IBM’s Thinkpad to China’s Lenovo. 
Once upon a time, IBM asked a Chinese manufacturer to assemble its Thinkpad – using the components that it would supply and following a set of instructions – and send the final product back to IBM. 
A couple of years later, the Chinese company suggested that it take responsibility for procuring the parts. 
Later, it offered to handle international distribution of the final product. 
Then it offered to take on redesigning the computer itself. 
Soon enough, it was no longer clear what IBM was contributing to the arrangement. 
Learning to master new technologies and tasks lies at the heart of the growth process. 
If, while learning, you face competition from those with experience, you will never live long enough to acquire the experience yourself. 
This has been the basic argument behind import-substitution strategies, which use trade barriers as their main policy instrument. 
The problem with trade protection is that restricting foreign competition also means preventing access to inputs and knowhow. 
Participating in global value chains is an alternative way to learn by doing that is potentially more powerful than closing markets to foreign competition. 
It enables a parsimonious accumulation of productive capabilities by reducing the number of capabilities that need to be in place in order to get into business. 
This strategy requires a highly open trade policy, because it requires sending goods across borders many times. 
But this does not imply laissez-faire; on the contrary, it requires activist policies in many areas, such as education and training, infrastructure, R&D, business promotion, and the development of links to the global economy. 
Some dismiss this strategy, arguing that countries end up merely assembling other people’s stuff. 
But, as the famous astronomer Carl Sagan once said: “If you want to make an apple pie from scratch, you must first invent the universe.” 

Piketty’s Missing Knowhow 
CAMBRIDGE – Theoretical frameworks are great because they allow us to understand fundamental aspects of a complex world in much simpler terms, just as maps do. 
But, like maps, they are useful only up to a point. 
Road maps, for example, do not tell you current traffic conditions or provide updates on highway repairs. 
A useful way to understand the world’s economy is the elegant framework presented by Thomas Piketty in his celebrated book Capital in the Twenty-First Century. 
Piketty splits the world into two fundamental substances – capital and labor. 
Both are used in production and share in the proceeds. 
The main distinction between the two is that capital is something you can buy, own, sell, and, in principle, accumulate without limit, as the super-rich have done. 
Labor is the use of an individual capacity that can be remunerated but not owned by others, because slavery has ended. 
Capital has two interesting features. 
First, its price is determined by how much future income it will bring in. 
If one piece of land generates twice as much output in terms of bushels of wheat or commercial rent as another, it should naturally be worth double. 
Otherwise, the owner of one parcel would sell it to buy the other. 
This no-arbitrage condition implies that, in equilibrium, all capital yields the same risk-adjusted return, which Piketty estimates historically at 4-5% per year. 
The other interesting feature of capital is that it is accumulated through savings. 
A person or country that saves 100 units of income should be able to have a yearly income, in perpetuity, of some 4-5 units. 
From here, it is easy to see that if capital were fully reinvested and the economy grew at less than 4-5%, capital and its share of income would become larger relative to the economy. 
Piketty argues that, because the world’s rich countries are growing at less than 4-5%, they are becoming more unequal. 
This can be discerned in the data, though in the United States a large part of the increase in inequality is due not to this logic but to the rise of what Piketty calls “super-managers,” who earn extremely high salaries (though he does not tell us why). 
So let us apply this theory to the world to see how well it fits. 
In the 30 years from 1983 to 2013, the US borrowed from the rest of the world in net terms more than $13.3 trillion, or about 80% of one year’s GDP. 
Back in 1982, before this period started, it was earning some $36 billion from the rest of the world in net financial income, a product of the capital that it had previously invested abroad. 
If we assume that the return on this capital was 4%, this would be equivalent to owning $900 billion in foreign capital. 
So, if we do the accounting, the US today must owe the rest of the world roughly $12.4 trillion (13.3 minus 0.9). 
At 4%, this should represent an annual payment of $480 billion. 
Right? 
Wrong – and by a long shot. 
The US pays nothing in net terms to the rest of the world for its debt. 
Instead, it earned some $230 billion in 2013. 
Assuming a 4% yield, this would be equivalent to owning $5.7 trillion in foreign capital. 
In fact, the difference between what the US “should” be paying if the Piketty calculation was right is about $710 billion in annual income, or $17.7 trillion in capital – the equivalent of its yearly GDP. 
The US is not the only exception in this miscalculation, and the gaps are systematic and large, as Federico Sturzenegger and I have shown. 
At the opposite extreme are countries such as Chile and China. 
Chile has borrowed little in net terms for the past 30 years, but pays to the rest of the world as if it had borrowed 100% of its GDP. 
China has lent to the rest of the world, in net terms, over the last decade, about 30% of its annual GDP but gets pretty much nothing for it. 
From the point of view of wealth, it is as if those savings did not exist. 
What is going on? 
The simple answer is that things are not made just with capital and labor, as Piketty argues. 
They are also made with knowhow. 
To see the effect of this omission, consider that America’s net borrowing of $13 trillion dramatically understates the extent of gross borrowing, which was more like $25 trillion in gross terms. 
The US used $13 trillion to cover its deficit and the rest to invest abroad. 
This money is mixed with knowhow as foreign direct investment, and the return to both is more like 9%, compared to the 4% or less paid to lenders. 
In fact, 9% on $12 trillion is more than 4% on $25 trillion, thus explaining the apparent puzzle. 
Chile and China put their savings abroad without mixing them with knowhow – they buy stocks and bonds – and as a consequence get just the 4-5% or less that Piketty assumes. 
By contrast, foreign investors in Chile and China bring in valuable knowhow; hence the gross capital that flows in yields more than the gross savings abroad. 
This return differential cannot be arbitraged away, because one needs the knowhow to get the higher returns. 
The point is that creating and deploying knowhow is an important source of wealth creation. 
After all, Apple, Google, and Facebook are jointly worth more than $1 trillion, even though the capital originally invested in them is a minuscule fraction of that. 
Who gets to pocket the difference is up for grabs. 
Knowhow resides in coherent teams, not individuals. 
Everybody in the team is crucial, but outside the team each individual is worth much less. 
Shareholders may want to take the difference as profits, but they cannot do without the team. 
This is where the super-managers come in: they strive to pocket part of the value created by the team. 
Behind the growth of wealth and inequality lies not just capital, but also knowhow. 


The Tacit-Knowledge Economy 
CAMBRIDGE – Almost all rich countries are rich because they exploit technological progress. 
They have moved the bulk of their labor force out of agriculture and into cities, where knowhow can be shared more easily. 
Their families have fewer children and educate them more intensively, thereby facilitating further technological progress. 
Poor countries need to go through a similar change in order to become rich: reduce farm employment, become more urban, have fewer children, and keep those children that they have in school longer. 
If they do, the doors to prosperity will open. 
And isn’t that already happening? 
Let us compare, for example, Brazil in 2010 with the United Kingdom in 1960. 
Brazil in 2010 was 84.3% urban; its fertility rate was 1.8 births per woman; its labor force had an average of 7.2 years of schooling; and its university graduates accounted for 5.2% of potential workers. 
These are better social indicators than the United Kingdom had in 1960. 
At that time, the UK was 78.4% urban; its fertility rate was 2.7; its labor force had six years of schooling on average, and its university graduates accounted for less than 2% of potential workers. 
Brazil is not a unique case: Colombia, Tunisia, Turkey, and Indonesia in 2010 compare favorably to Japan, France, the Netherlands, and Italy, respectively, in 1960. 
Not only did these countries achieve better social indicators in these dimensions; they also could benefit from the technological innovations of the past half-century: computers, cellphones, the Internet, Teflon, and so on. 
This should allow higher productivity than was feasible in 1960. 
So today’s emerging-market economies should be richer than today’s advanced economies were back then, right? 
Wrong – and by a substantial margin. 
Per capita GDP at constant prices was 140% higher in Britain in 1960 than in Brazil in 2010. 
It was 80% higher in Japan back then than in Colombia today, 42% higher in old France than in current Tunisia, 250% higher in the old Netherlands than in current Turkey, and 470% higher in old Italy than in current Indonesia. 
Why is it that today’s smaller and more educated urbanized families in emerging-market economies are so much less productive than their counterparts were a half-century ago in today’s rich countries? 
Why can’t today’s emerging markets replicate levels of productivity that were achieved in countries with worse social indicators and much older technologies? 
The key to this puzzle is tacit knowledge. 
To make stuff, you need to know how to make it, and this knowledge is, to a large extent, latent – not available in books, but stored in the brains of those who need to use it. 
Getting it there is really tough. 
Tacit knowledge is acquired mostly through learning by doing. 
That is how we train musicians, barbers, doctors, and scientists. 
Consider how long it takes an adult to learn to speak a language or a musician to master the violin. 
Moreover, tacit knowledge is vast and growing, so that only a miniscule fraction of it fits in anybody’s head. 
But most products require much more knowledge than fits in anybody’s head, so that making them requires teams of people with different pieces of knowledge, not unlike a symphonic orchestra. 
Getting more tacit knowledge is easier said than done, because economies can offer experience only on the basis of current jobs. 
How do people learn to do jobs that do not yet exist? 
How do they create and mobilize coherent teams of people in new economic activities if the requisite tacit knowledge is missing? 
Recent research at Harvard University’s Center for International Development (CID) suggests that tacit knowledge flows through amazingly slow and narrow channels. 
The productivity of Nuevo León, Mexico, is higher than in South Korea, but that of Guerrero, another Mexican state, resembles levels in Honduras. 
Moving knowledge across Mexican states has been difficult and slow. 
It is easier to move brains than it is to move tacit knowledge into brains, and not only in Mexico. 
For example, as the CID’s Frank Neffke has shown, when new industries are launched in German and Swedish cities, it is mostly because entrepreneurs and firms from other cities move in, bringing with them skilled workers with relevant industry experience. 
They seldom hire locals. 
The recently deceased economist Steven Klepper argued that industries tend to cluster in particular cities simply because new firms are formed mainly by workers who leave other successful firms, taking the relevant tacit knowledge with them. 
Indeed, a large literature on knowledge spillovers points to their remarkably narrow geographic range. 
The exceptions often confirm the rule. 
The US would not have been able to build the first atomic bomb in just four years had Hitler not encouraged so many key scientists to leave Europe. 
The bottom line is that urbanization, schooling, and Internet access are woefully insufficient to transmit effectively the tacit knowledge required to be productive. 
That is why today’s emerging markets are so much less productive than rich countries were in 1960, even though the latter were less urban, had higher birth rates and less formal schooling, and used much older technologies. 
The policy implications are clear. 
Knowhow resides in brains, and emerging and developing countries should focus on attracting them, instead of erecting barriers to skilled immigration. 
They should tap into their diasporas, attract foreign direct investment in new areas, and acquire foreign firms if possible. 
Knowledge moves when people do. 

A Brain’s View of Economics 
CAMBRIDGE – In his pathbreaking 2005 book On Intelligence, Jeff Hawkins proposed an alternative paradigm of how the human brain works. 
In his view, the brain is not a Turing machine that manipulates symbols according to a table of rules, which is the model on which computers and artificial intelligence have been based. 
Instead, the brain is a giant hierarchical memory that is constantly recording what it perceives and predicting what will come next. 
The brain makes predictions by finding similarities between patterns in recent sensory inputs and previous experiences stored in its vast memory. 
It matches current fragmentary sounds in a sea of noise with a known song, or the face of a person in disguise with that of your child. 
The idea is similar to the auto-complete function in, say, the Google search box – constantly guessing what you will enter next based on what you have already typed in. 
To see the hierarchy in this mechanism, consider that by perceiving just a few letters, you can predict the word; by looking at a few words, you can predict what the sentence means, or even the paragraph. 
In fact, right now you must be guessing where it is that I am going with this entire commentary. 
The hierarchy allows you to understand meaning, whether the input got to your brain by reading or listening. 
The brain is thus an inductive machine that predicts the future based on finding similarities, at many different levels, between the present and the past. 
Hawkins’ alternative model of how the brain works has important implications for many fields, including the one that I spend most of my time thinking about: economic-development strategy. 
By definition, development is not just more of the same, just as an adult is not just a big baby. 
The process involves adding and combining new and existing capabilities to support more diverse and complex activities. 
But finding new things that can be done successfully is tricky, because it requires knowing what you will need and whether you will be able to procure it. 
This is why Jeffrey Sachs’s Millennium Villages project has faltered, as the journalist Nina Munk’s recent book shows. 
In trying to move farmers from subsistence to commercial agriculture, Munk argues, there are just too many missing pieces. 
Traditional thinking in economic development has followed a Turing-like approach, trying to specify a general model of the world – based on first principles – and then use that model to think about a country’s predicament or a policy’s potential impact. 
But the world is often too complex and nuanced for such an approach. 
Would it not be a great improvement if, when looking at a particular place, we could have in mind all of the world’s previous experiences and automatically identify the most relevant ones, in order to infer what to do next? 
Would it not be useful to see the development possibilities just as our brain, according to Hawkins, sees the world? 
An alternative, Hawkins-like approach to economic development would take massive amounts of data about the world and ask what is likely to succeed next in a country or a city at a given point in time, given what is already present and in light of the experience there and everywhere else. 
It would be like Amazon’s recommendation system, proposing books you may like based on your and everybody else’s experience. 
In a recent paper, my colleagues and I showed that such an approach to economic development actually works. 
In a particular city or country, you can predict, even a decade in advance, which industries will appear or disappear or grow or wane just by knowing the history of what has been there and everywhere else. 
Countries tend to move into industries that are related to the ones they already have or that are present in locations that are similar to them. 
We have made the approach user-friendly for countries in our recent Atlas of Economic Complexity. 
The idea of looking at previous experiences to inform future action is as old as civilization. 
Following this intuition, Justin Yifu Lin, the former chief economist of the World Bank, has suggested that when countries choose what to do next, they should look at a successful country that was similar to them two decades ago. 
But we should be able to do much better than that by looking at many more experiences in much more detail, using a much bigger memory that can find many more patterns across much more of the relevant human experience. 
Imagine that Sachs’s Millennium Villages project had known the sequence of all previous successful moves out of subsistence agriculture, rather than relying only on guesswork or deduction. 
Would it not be useful to understand the paths to industrial development – and the dead ends – that are most relevant to a particular country today? 
This alternative approach can empower many more people to seek successful routes to prosperity by lowering the perils and risks involved in the search – in the same way that maps empower people to get to where they want to go with much more information than they would otherwise have. 
Just as augmented-reality technologies make our experience of the world richer (imagine a sports match today without instant replay), putting the development experience of the world at the fingertips of those engaged in promoting development is now perfectly feasible. 
We should seize this opportunity. 

The Specialization Myth 
CAMBRIDGE – Some ideas are intuitive. 
Others sound so obvious after they are expressed that it is hard to deny their truth. 
They are powerful, because they have many nonobvious implications. 
They put one in a different frame of mind when looking at the world and deciding how to act on it. 
One such idea is the notion that cities, regions, and countries should specialize. 
Because they cannot be good at everything, they must concentrate on what they are best at – that is, on their comparative advantage. 
They should make a few things very well and exchange them for other goods that are made better elsewhere, thus exploiting the gains from trade. 
But, while some ideas are intuitive or obvious, they can also be wrong and dangerous. 
As is often the case, it is not what you don’t know, but what you mistakenly think you know, that hurts you. 
And the idea that cities and countries actually do specialize, and that therefore they should specialize, is one of those very wrong and dangerous ideas. 
When an idea is both intuitively true and actually false, it is often because it is true on one level but not on the level at which it is being applied. 
Yes, people do specialize, and they should specialize, too. 
Everyone benefits from each of us becoming good at different things and exchanging our knowhow with others. 
It is not efficient for a dentist and a lawyer, for example, to be the same person. 
But specialization at the individual level actually leads to diversification at a higher level. 
It is precisely because individuals and firms specialize that cities and countries diversify. 
Consider a rural medical facility and a major city hospital. 
The former probably has a single general practitioner who is able to provide a limited suite of services. 
In the latter, doctors specialize in different areas (oncology, cardiology, neurology, and so on), which enables the hospital to offer a more diverse set of interventions. 
Specialization of doctors leads to diversification of hospital services. 
The scale at which specialization of individuals leads to diversification is the city. 
Larger cities are more diversified than smaller cities. 
Among cities with similar populations – say, Salvador and Curitiba in Brazil, or Guadalajara and Monterrey in Mexico – more diversified cities are richer than less diversified cities. 
They tend to grow faster and become even more diversified, not only because they have a larger internal market, but also because they are more diversified in terms of what they can sell to other cities and countries. 
What is true at the level of cities is even more applicable at the level of states and countries. 
The Netherlands, Chile, and Cameroon have a similar population size, but the Netherlands is twice as rich as Chile, which is 10 times richer than Cameroon. 
Looking at their exports shows that the Netherlands is three times more diversified than Chile, which is three times more diversified than Cameroon. 
As my colleagues and I recently argued, one way to understand this is to think of industries as stitching together complementary bits of knowhow, just as words are made by putting together letters. 
With a greater diversity of letters, the variety of words that can be made increases, as does their length. 
Likewise, the more bits of knowhow that are available, the more industries can be supported and the greater their complexity can be. 
Cities are the places where people that have specialized in different areas congregate, allowing industries to combine their knowhow. 
Rich cities are characterized by a more diverse set of skills that support a more diverse and complex set of industries – and thus provide more job opportunities to the different specialists. 
In the process of development, cities, states, and countries do not specialize; they diversify. 
They evolve from supporting a few simple industries to sustaining an increasingly diverse set of more complex industries. 
Achieving this implies solving important coordination problems, because an industry that is new to a city will not find workers with industry experience or specialized suppliers. 
But policymakers can do a lot to solve these coordination problems. 
This is why the idea that cities, states, or countries should specialize in their current areas of comparative advantage is so dangerous. 
Focusing on the limited activities at which they currently excel would merely reduce the variety of capabilities – or “letters” – that they have. 
The challenge is not to pick a few winners among the existing industries, but rather to facilitate the emergence of more winners by broadening the business ecosystem and enabling it to nurture new activities. 
This is all the more important today, because the globalization of value chains is delocalizing supplier-customer relations. 
Cities and countries would be ill-advised to focus on a few “clusters” and consolidate the value chains in their location, as is so often recommended. 
Instead, they should worry about being a node in many different value chains, which requires finding other industries that can use their existing capabilities if they were somehow expanded and adjusted to new needs. 
Competition inevitably tends to winnow out the less efficient firms and industries. 
It is not the policymakers’ role to hasten their death. 
Their task is to identify productivity-enhancing interventions that can harness economies of agglomeration by adding new activities and productive capabilities, making the whole bigger than the sum of the parts. 

Rich Europe, Poor Europe 
From its earliest days, the European Union has aimed for balanced economic development across its many regions. 
The Maastricht Treaty contains the striking phrase “overall harmonious development.” 
But, however admirable this sentiment may be, there is no “scientific truth” about the “right” level of disparities and the correct speed of convergence. 
Nevertheless, it is useful to compare economic disparities in the EU with those in the United States to assess regional convergence in Europe – bearing in mind, of course, that the US has been a nation-state for more than two centuries, while the EU is best seen as a confederation of 27 states under a supra-national structure. 
Let us first take a historical look at the western part of the EU. 
In 1960, disparities in what later came to be known as the EU-15 were about twice as large as those between US states. 
Today, they are comparable with American income disparities. 
Income disparities have halved both in nominal terms when expressed in euros and in real terms when taking into account differences in purchasing power. 
Western Europe first saw a period in which real incomes converged, followed by a period of converging prices. 
In the 1960’s and early 1970’s, disparities in purchasing power declined by about 40%, then stalled, while nominal income disparities fell by a similar margin from the mid-1970’s to 1990. 
With the introduction of the euro, and with falling inflation, nominal convergence and real convergence have grown similar, both making gradual progress since the mid-1990’s. 
The average population of the EU-15 is about 25 million, many more than the six million in the average US state, which more closely resembles the average population of EU regions, such as Bavaria, Wallonia, Île-de-France and the Canary Islands. 
So perhaps it is more useful to compare the 50 US states with the EU’s 72 regions. 
The convergence trend in the EU at the country level is reflected in the regions. 
But income disparities in the regions are still substantial in western Europe when compared with American states. 
It is true that poorer EU countries tend to outgrow richer ones, but poor regions do not necessarily outgrow rich regions or even the country average. 
So regional disparities may persist or even grow, posing a challenge for policymakers concerned with stimulating economic growth and regional cohesion. 
And what about wealth disparities in today’s EU of 27 members? 
With the accession of 10 new states in 2004 and another two at the beginning of 2007, the Union’s membership now spans central and eastern Europe. 
In the 1990’s, these ex-communist countries had to face temporary income slumps as most of their industrial production became virtually made obsolete overnight. 
New production capacity has now been created and new markets conquered, but the catching-up process is still far from complete. 
Unsurprisingly, then, regional disparities in income are much greater across the enlarged EU’s countries than across the US states. 
In 2005, average income disparities were twice as high within the then-EU-25 as within the American states. 
But they have come down by nearly one-third over the past 12 years. 
As with the EU-15, income convergence for the regions again turns out to be slower than convergence between countries. 
Recent empirical evidence suggests that the central and eastern European regions benefiting most from EU membership are those around the country’s capital city or sharing a border with one of the 15 countries. 
But as long as poorer member states grow faster than their richer counterparts, one should not be overly concerned about temporary increases in intra-national disparities. 
In fact, a temporary increase in intra-national disparities may be a good thing. 
Globalization and technological change are reshaping production throughout Europe, leading to the decline of traditional industries and rapid growth of high-technology manufacturing, banking and finance, scientific research, and business services. 
The fact that companies in these sectors benefit from operating close to one another may boost economic development at the expense of peripheral regions. 
In the US, successful convergence in economic conditions across regions relies strongly on labor mobility. 
Internal migration is the main driver of income convergence, helped by a common language and all the other factors that foster mobility in America, such as comparatively easy access to housing and education. 
By contrast, labor in the EU is largely immobile. 
Despite populist speeches about the threat posed by “Polish plumbers,” net migration flows between regions are generally insensitive to differences in unemployment rates among regions. 
Of course, Europe’s labor immobility is partly caused by linguistic and cultural differences – barriers that cannot easily be removed. 
But other barriers can be overcome by reforming housing policies, reducing the cost of moving, and revising social-welfare policies in order to end fears of losing long-term benefits. 
Reducing the labor supply in economically depressed areas of Europe and increasing it in booming regions would do much to reduce differences in wages and unemployment rates. 
It’s time to start thinking seriously about how to make Europeans move. 

The Still-Emerging Markets 
SAN FRANCISCO – Today’s turbulence in emerging-market equity markets has triggered a wave of obituaries for their growth miracles of recent decades. 
But confusing short-term wobbles with terminal decline is a gross misreading of what is happening. 
The wave of industrialization and urbanization that is boosting the incomes of millions of people in emerging economies has not run its course. 
Indeed, emerging-market bears are missing an important new driver of continued growth in these countries: their increasingly powerful and dynamic companies. 
Emerging economies today are much more than a collection of new consumer markets and plentiful (and increasingly skilled) labor. 
They are also home to thousands of new companies, many of which are quickly becoming large, global leaders in their fields. 
Twenty years ago, who would have guessed that Mumbai’s Tata Group would be the largest private-sector industrial employer in the United Kingdom; or that Mexican companies Cemex and Bimbo would become the United States’ market leaders in cement production and bread-making, respectively; or that Beijing-based Lenovo would be on a par with Hewlett-Packard as the world’s largest seller of personal computers? 
Moreover, the transformation in the world’s business landscape is in its early stages and should bolster growth in emerging markets for years to come. 
The MGI CompanyScope, a new database of all companies with revenues of $1 billion or more, reveals that there are about 8,000 large companies worldwide. 
Three-quarters of them are still based in developed regions. 
By 2025, however, there are likely to be an additional 7,000 large companies, with seven out of ten based in emerging regions. 
The share of global consolidated revenue generated by these emerging-market corporate giants is set to increase from 24% today to 46% in 2025. 
The composition of the Fortune Global 500 is a case in point. 
From 1980 to 2000, the share of companies on the list that were based in the emerging world remained relatively flat, at 5%. 
By 2013, this share had soared to 26%, and, even on the most pessimistic assumptions for emerging-market growth, we expect it to rise to 39% by 2025 and to as high as 50% on more bullish assumptions. 
In fact, the shift in the business landscape thus far has lagged behind the shift in the weight of global GDP toward emerging markets. 
Between now and 2025, the GDP of emerging markets could increase by a factor of 2.5 – but the number of large companies based in these regions could more than triple. 
By 2025, some of the leading global names in many industries could be companies we have not yet heard of – and some will likely be based in cities that few today could point to on a map. 
We have mapped the MGI CompanyScope to Cityscope, our database of the world’s cities, giving us a detailed picture of where large companies locate their head offices and foreign subsidiaries. 
Headquarters are extraordinarily concentrated. 
The top 20 host cities are home to around one-third of all large companies’ headquarters and account for almost half of these companies’ combined revenue. 
Just five of these top 20 cities are in emerging regions today. 
But this, too, is changing fast. 
The number of large-company headquarters in São Paolo, for example, is expected to rise more than three-fold by 2025, while Beijing and Istanbul could have 2.5 times as many head offices as they do today. 
We estimate that about 280 cities – among the candidates are Campinas (Brazil), Daqing (China), and Izmir (Turkey) – could host large companies for the first time. 
More than 150 of these up-and-coming business cities are likely to be in China. 
If we look at telecoms companies, for example, Bandung (Indonesia) and Hanoi (Vietnam) already host large firms’ headquarters – despite the fact that their GDP is relatively small, at $6 billion and $12 billion, respectively. 
Fast-growing home markets have been the launchpad for globally competitive emerging-market companies partly because these firms have learned to compete at very different income levels. 
Moreover, they know how to work around inadequate infrastructure. 
McKinsey research suggests that these companies are growing more than twice as quickly as their counterparts in developed economies. 
Emerging-market large companies’ growing global clout is reflected in flows of foreign direct investment. 
As recently as 2001, only 5% of outward FDI came from non-OECD countries; by 2011, that share had soared to 21%. 
China’s outward FDI rose by almost 50% per year from 2004 to 2010; 
Brazil, Singapore, and Hong Kong have been major investors in Europe. 
Those who have been writing obituaries for the emerging-market boom should give serious consideration to these trends. 
The new breed of emerging-market multinational is diversifying its revenue around the world. 
If growth in these companies’ home markets slows, they will diversify even more aggressively. 
The global economy is now their platform. 

When Easy Money Ends 
LONDON – The departure of US Federal Reserve Board Chairman Ben Bernanke has fueled speculation about when and how the Fed and other central banks will wind down their mammoth purchases of long-term assets, also known as quantitative easing (QE). 
Observers seize upon every new piece of economic data to forecast QE’s continuation or an acceleration of its decline. 
But more attention needs to be paid to the impact of either outcome on different economic players. 
There is no doubting the scale of the QE programs. 
Since the start of the financial crisis, the Fed, the European Central Bank, the Bank of England, and the Bank of Japan have used QE to inject more than $4 trillion of additional liquidity into their economies. 
When these programs end, governments, some emerging markets, and some corporations could be vulnerable. 
They need to prepare. 
Research by the McKinsey Global Institute suggests that lower interest rates saved the US and European governments nearly $1.6 trillion from 2007 to 2012. 
This windfall allowed higher government spending and less austerity. 
If interest rates were to return to 2007 levels, interest payments on government debt could rise by 20%, other things being equal. 
Governments in the US and the eurozone are particularly vulnerable in the short term, because the average maturity of sovereign debt is only 5.4 years and roughly six years, respectively. 
The United Kingdom is in better shape, with an average maturity of 14.6 years. 
As interest rates rise, governments will need to determine whether higher tax revenue or stricter austerity measures will be required to offset the increase in debt-service costs. 
Likewise, US and European non-financial corporations saved $710 billion from lower debt-service payments, with ultra-low interest rates thus boosting profits by about 5% in the US and the UK, and by 3% in the eurozone. 
This source of profit growth will disappear as interest rates rise, and some firms will need to reconsider business models – for example, private equity – that rely on cheap capital. 
Emerging economies have also benefited from access to cheap capital. 
Foreign investors’ purchases of emerging-market sovereign and corporate bonds almost tripled from 2009 to 2012, reaching $264 billion. 
Some of this investment has been initially funded by borrowing in developed countries. 
As QE programs end, emerging-market countries could see an outflow of capital. 
By contrast, households in the US and Europe lost $630 billion in net interest income as a result of QE. 
This hurt older households that have significant interest-bearing assets, while benefiting younger households that are net borrowers. 
Although households in many advanced economies have reduced their debt burdens since the financial crisis began, total household debt in the US, the UK, and most eurozone countries is still higher as a percentage of GDP (and in absolute terms) than it was in 2000. 
Many households still need to reduce their debt further and will be hit with higher interest rates as they attempt to do so. 
Some companies, too, have been affected by QE and will need to take appropriate steps if such policies are maintained. 
Many life-insurance companies and banks are taking a considerable hit, because of low interest rates. 
The longer QE continues, the more vulnerable they will be. 
The situation is particularly difficult in some European countries. 
Insurers that offer customers guaranteed-rate products are finding that government-bond yields are below the rates being paid to customers. 
Several more years of ultra-low interest rates would make many of these companies vulnerable. 
Similarly, eurozone banks lost a total of $230 billion in net interest income from 2007 to 2012. 
If QE continues, many of them will have to find new ways to generate returns or face significant restructuring. 
We could also witness the return of asset-price bubbles in some sectors, especially real estate, if QE continues. 
The International Monetary Fund noted in 2013 that there were already “signs of overheating in real-estate markets” in Europe, Canada, and some emerging-market economies. 
In the UK, the Bank of England has announced that in February it will end its mortgage Funding for Lending Scheme, which allowed lenders to borrow at ultra-low rates in exchange for providing loans. 
Of course, QE and ultra-low interest rates served a purpose. 
If central banks had not acted decisively to inject liquidity into their economies, the world could have faced a much worse outcome. 
Economic activity and business profits would have been lower, and government deficits would have been higher. 
When monetary support is finally withdrawn, this will be an indicator of the economic recovery’s ability to withstand higher interest rates. 
Nevertheless, all players need to understand how the end of QE will affect them. 
After more than five years, QE has arguably entrenched expectations for continued low or even negative real interest rates – acting more like addictive painkillers than powerful antibiotics, as one commentator has put it. 
Governments, companies, investors, and individuals all need to shake off complacency and take a more disciplined approach to borrowing and lending to prepare for the end – or continuation – of QE. 

The Visual Politics of Terror 
NEW YORK – The British artist Damien Hirst once referred to the 2001 attack on New York’s World Trade Center as “kind of an artwork in its own right. 
It was wicked, but it was devised in this way for this kind of impact. 
It was devised visually.” 
Now, 13 years later, Western governments, while able to describe in strategic terms the threat of the Islamic State to the Middle East, are still struggling to come to terms with its visual assault in the global media. 
Like Osama bin Laden and Al Qaeda, the Islamic State appears to understand the impact that lurid images of violence can have on the public imagination. 
The irony, of course, is that the Islamic State’s exploitation of images of “pornographic” violence is at odds with the Islamists’ own condemnations of visual stimulation in other areas of life. 
Indeed, their videos take sensory titillation to its limit. 
Like an algorithm designed to access an adversary’s digital network, the Islamic State’s carefully staged videos, featuring the beheadings of American and British journalists and aid workers, have penetrated the Western psyche. 
That psyche has long been primed to receive shocking imagery. 
Now, the electronic media’s weakness for graphic violence has become the Islamic State’s strength. 
The visual politics of terror may seem primitive, but its practice can be as sophisticated as its effects are profound. 
Like ancient conquerors, who erected new temples on the sites where the vanquished had their own, the destroyers of New York’s Twin Towers used visual terror to strike at the heart of their enemy’s value system. 
That is what terror aims to do: destabilize the foe’s normative reality. 
Once the security of the familiar world is challenged, and its inner sanctums have been invaded and shaken, a space may be cleared for occupation. 
Consider, for example, how Indonesia’s Suharto regime, from 1966 to 1998, depicted alleged Communist insurgent savagery, and compelled citizens to watch it on television and in theaters. 
The horrifying images were intended to foment terror. 
In the face of a grotesquely violent enemy, an even more terrifying state apparatus of organized violence emerged. 
In effect, Suharto’s visual politics of atrocity and terror created a new reality from the violence and terror associated with the demise of the old. 
The same perverse logic is at work in the Islamic State’s viral spectacles. 
Though the need to confront evil remains as pressing as ever, Western societies’ motivation for doing so may lose clarity. 
After all, it is one thing to deliberate on the pros and cons of confronting external forces of irrational violence; it is something else to lash out against the producers of brutal, politically charged, and upsetting imagery. 
We must therefore ask ourselves what exactly is driving our response to the threats that the Islamic State presents. 
Distinguishing between information about real national-security concerns and images strategically designed to shock and titillate us will not be easy. 
But given the stakes, it is undoubtedly worthwhile. 
The visual politics of atrocity and terror is only as strong as we imagine it. 
That is why exorcising its demons will require more than military might. 
It also will require us to think deeply about the strategic use of violent images in the digital age. 

The New Thirty Years’ War 
NEW YORK – It is a region wracked by religious struggle between competing traditions of the faith. 
But the conflict is also between militants and moderates, fueled by neighboring rulers seeking to defend their interests and increase their influence. 
Conflicts take place within and between states; civil wars and proxy wars become impossible to distinguish. 
Governments often forfeit control to smaller groups – militias and the like – operating within and across borders. 
The loss of life is devastating, and millions are rendered homeless. 
That could be a description of today’s Middle East. 
In fact, it describes Europe in the first half of the seventeenth century. 
In the Middle East in 2011, change came after a humiliated Tunisian fruit vendor set himself alight in protest; in a matter of weeks, the region was aflame. 
In seventeenth-century Europe, a local religious uprising by Bohemian Protestants against the Catholic Habsburg Emperor Ferdinand II triggered that era’s conflagration. 
Protestants and Catholics alike turned for support to their co-religionists within the territories that would one day become Germany. 
Many of the era’s major powers, including Spain, France, Sweden, and Austria, were drawn in. 
The result was the Thirty Years’ War, the most violent and destructive episode in European history until the two world wars of the twentieth century. 
There are obvious differences between the events of 1618-1648 in Europe and those of 2011-2014 in the Middle East. 
But the similarities are many – and sobering. 
Three and a half years after the dawn of the “Arab Spring,” there is a real possibility that we are witnessing the early phase of a prolonged, costly, and deadly struggle; as bad as things are, they could well become worse. 
The region is ripe for unrest. 
Most of its people are politically impotent and poor in terms of both wealth and prospects. 
Islam never experienced something akin to the Reformation in Europe; the lines between the sacred and the secular are unclear and contested. 
Moreover, national identities often compete with – and are increasingly overwhelmed by – those stemming from religion, sect, and tribe. 
Civil society is weak. 
In some countries, the presence of oil and gas discourages the emergence of a diversified economy and, with it, a middle class. 
Education emphasizes rote learning over critical thinking. 
In many cases, authoritarian rulers lack legitimacy. 
Outside actors, by what they did and failed to do, added fuel to the fire. 
The 2003 Iraq war was highly consequential, for it exacerbated Sunni-Shia tensions in one of the region’s most important countries and, as a result, in many of the region’s other divided societies. 
Regime change in Libya has created a failing state; lukewarm support for regime change in Syria has set the stage for prolonged civil war. 
The region’s trajectory is worrisome: weak states unable to police their territory; the few relatively strong states competing for primacy; militias and terrorist groups gaining greater influence; and the erasure of borders. 
The local political culture confuses democracy with majoritarianism, with elections used as vehicles to consolidate power, not share it. 
Beyond the enormous human suffering and loss of life, the most immediate byproduct of the region’s turmoil is the potential for more severe and frequent terrorism – both in the Middle East and emanating from it. 
There is also the potential for disruption of energy production and shipping. 
There are limits to what outsiders can do. 
Sometimes, policymakers need to focus on preventing things from getting worse, rather than on ambitious agendas for improvement; this is one of those times. 
What this calls for, above all, is prevention of nuclear proliferation (beginning with Iran), whether through diplomacy and sanctions, or, if need be, through sabotage and military attacks. 
The alternative – a Middle East in which several governments and, through them, militias and terrorist groups have access to nuclear weapons and materials – is too horrific to contemplate. 
Steps that reduce global dependence on the region’s energy supplies (including improvements in fuel efficiency and development of alternative sources) also make great sense. 
Economic assistance should go simultaneously to Jordan and Lebanon to help them cope with the flood of refugees. 
Democracy promotion in Turkey and Egypt should focus on strengthening civil society and creating robust constitutions that diffuse power. 
Counter-terrorism against groups such as the Islamic State in Iraq and Syria (which now calls itself simply the “Islamic State”) – whether by drones, small raids, or the training and arming of local partners – must become a staple of policy. 
It is time to recognize the inevitability of Iraq’s break-up (the country is now more a vehicle for Iran’s influence than a bulwark against it) and bolster an independent Kurdistan within Iraq’s former borders. 
There is no room for illusions. 
Regime change is no panacea; it can be difficult to achieve and nearly impossible to consolidate. 
Negotiations cannot resolve all or even most conflicts. 
That is certainly true, for the time being, of the Israeli-Palestinian dispute. 
Even if this changes, a comprehensive settlement would help the locals but not affect the dynamics of neighboring countries or conflicts. 
That said, a narrow ceasefire between Israel and Hamas should be pursued. 
Likewise, diplomacy can work in Syria only if it accepts the reality on the ground (including the survival of the Assad regime for the foreseeable future), rather than seeking to transform it. 
The answer is not to be found in drawing new maps, though once populations have shifted and political stability has been restored, recognition of new borders might prove both desirable and viable. 
Policymakers must recognize their limits. 
For now and for the foreseeable future – until a new local order emerges or exhaustion sets in – the Middle East will be less a problem to be solved than a condition to be managed. 

The Decline of Upward Mobility 
NEW YORK – Concern about economic inequality is in the air almost everywhere. 
The issue is not inequality between countries, which is actually down in recent decades, thanks in large part to higher growth rates and longer lifespans in many emerging countries (especially China and India). 
Rather, the focus nowadays is on inequality – sometimes called income disparity – within countries. 
One reason is that the problem of inequality is real – and growing worse in many places. 
In recent decades, wealth and income have become more concentrated at the top – the so-called 1% – while real incomes and standards of living for the poor and middle class in many developed countries have stagnated or declined. 
This was true before the global financial crisis erupted in 2008, but the crisis and its aftermath (including prolonged high levels of unemployment) have made things worse. 
And, despite a few notable exceptions in northern Europe and parts of Latin America, the rise in inequality has affected the developed and developing worlds alike. 
Prominent people are calling attention to the problem as never before. 
Pope Francis exhorts the world to say “‘thou shalt not’ to an economy of exclusion and inequality,” because “such an economy kills.” 
US President Barack Obama speaks about an American economy that has become “profoundly unequal.” 
The recently elected mayor of New York City, Bill de Blasio, made the issue the centerpiece of his campaign, repeatedly referring to a “tale of two cities” and an “inequality crisis.” 
The emphasis is understandable, but there is a real danger in framing the problem as one of inequality. 
What should matter is not inequality per se – to paraphrase the gospel according to Matthew, the rich will always be with us – but rather whether citizens have a genuine opportunity to become rich, or at least become substantially better off. 
It is the lack of upward mobility, not inequality, that is the core problem. 
Seeing inequality as the problem can lead to all sorts of counter-productive “remedies” that in fact would make the situation worse. 
The most obvious temptation is to try to reduce inequality by taxing the rich. 
The flaw in the politics of redistribution is that it emphasizes shifting wealth rather than creating it. 
Making the rich poorer will not make the poor richer. 
There are of course exceptions to this principle. 
For example, in cases of extreme corruption and crony capitalism, the state’s resources are hijacked by the few. 
Many energy-rich countries fall into this category, which is why many observers speak of energy and mineral endowments as a “curse” rather than a benefit. 
But, fortunately, such cases are exceptions. 
As a rule, smart policy consists not in bringing down the rich but in raising up the poor and middle class. 
Reducing (or, better yet, eliminating) discrimination on the basis of race, religion, gender, and sexual orientation is one way to accomplish this, as is ensuring property rights, in part so that people can borrow money against their homes to start businesses. 
Education is also vital. 
But this does not imply the need to spend much more on education; here (and elsewhere), how money is used is more important than how much is spent. 
The most critical variable affecting students’ performance is the quality of teaching. 
The resources that are required for additional teacher training and for paying more to talented people to become and remain teachers can be offset by a willingness to shed those teachers who are not up to the task. 
Even if some costs were to rise, it would be worth it if the result were better-educated and more productive citizens. 
Reforming curricula is equally important. 
High schools and what are known in the United States as community colleges – post-secondary institutions that typically offer a two-year degree – need to provide courses tailored for jobs that exist or soon will. 
Close cooperation between employers and schools should be fostered, as is often done in countries like Germany. 
And education has to be made available inexpensively and efficiently to people throughout their lives, not just at the outset of their careers. 
It is also important to be wary about some ideas often put forward as solutions, such as requiring large increases in the minimum wage paid to hourly workers. 
The danger is that it will discourage businesses from hiring. 
It would be better to keep wage increases modest so that people get jobs and to look for other ways to subsidize education and health care for those who need such help. 
Inequality is real. 
But it can be addressed effectively only with policies and programs that foster growth and meaningful opportunities to benefit from it. 
The stakes are great, as economic growth and social cohesion depend on getting this right. 
But getting it right requires understanding that inequality is not so much the cause as it is the consequence of what ails us. 

Which Asian Century? 
NEW YORK – It has become something of a cliché to predict that Asia will dominate the twenty-first century. 
It is a safe prediction, given that Asia is already home to nearly 60% of the world’s population and accounts for roughly 25% of global economic output. 
Asia is also the region where many of this century’s most influential countries – including China, India, Japan, Russia, South Korea, Indonesia, and the United States – interact. 
But to point to Asia’s growing importance says nothing about its character. 
There can be two, very different Asian centuries, and the one that emerges will have profound consequences for the region’s peoples and governments – and for the world. 
One future is an Asia that is relatively familiar: a region whose economies continue to enjoy robust levels of growth and manage to avoid conflict with one another. 
The second future could hardly be more different: an Asia of increased tensions, rising military budgets, and slower economic growth. 
Such tensions could spill over and impede trade, tourism, and investment, especially if incidents occur between rival air or naval forces operating in close proximity over or around disputed waters and territories. 
Cyberspace is another domain in which competition could get out of hand. 
The question is this: Will twenty-first-century Asia resemble Europe – the dominant region of much of modern history – during the first half of the twentieth century, when it experienced two wars of unprecedented cost and destruction, or the second half, when tensions with the Soviet Union were effectively managed and Western Europe experienced unprecedented peace and prosperity? 
The reference to Europe is instructive, because Europe did not just get lucky. 
History unfolded as it did only because its political leaders demonstrated great vision and discipline. 
As a result, long-term adversaries like France and Germany were reconciled within a region-wide project – first a coal and steel community, which expanded to become the European Economic Community and, ultimately, the European Union – that integrated the continent politically and economically to such an extent that violent conflict was rendered unthinkable. 
All of this is worth considering, because few parallels are to be found in contemporary Asia. 
On the contrary, the region is notable for a lack of meaningful regional agreements and institutions, particularly in the political-military and security spheres. 
Moreover, a marked lack of reconciliation and settlement of long-standing disputes makes it all too easy to imagine not only a military incident involving two or more neighbors, but also the possibility that such an incident leads to something larger. 
Many of these disputes date back to World War II, or even before. 
Korea and China harbor strong anti-Japanese sentiment. 
There is no Russia-Japan peace treaty, and the two countries have competing claims over the Kuril Islands (known as the Northern Territories to the Japanese). 
The border between China and India is also a matter of contention. 
In fact, the regional security climate has worsened in recent years. 
One reason is the continued division of the Korean Peninsula and the threat that a nuclear-armed North Korea poses to its own people and its neighbors. 
China has added to regional tensions with a foreign policy – including advancing territorial claims in the East and South China Seas – that would be described diplomatically as “assertive,” and more bluntly as “bullying.” 
Meanwhile, Japan appears determined to extricate itself from many of the military constraints imposed on it (and, until recently, embraced by the vast majority of Japanese) as a result of its aggressive behavior in the 1930’s and 1940’s. 
These developments both reflect and reinforce heightened nationalism throughout the region. 
What is needed is more intense bilateral diplomacy among Asian governments to settle long-standing disputes. 
From there, regional pacts that promote free trade and contend with climate change should be negotiated. 
Finally, a regional forum should be established to regulate better the deployment of military force, including confidence-building measures to reduce the risk of incidents and to help manage them if they occur. 
Some of what is needed can be modeled on what Europe has achieved. 
But Europe is relevant for another reason: Europeans have succeeded in maintaining stability and building great prosperity for the last seven decades in no small part because of the American presence and role. 
The United States, an Atlantic power, was fully integrated into the region’s economic and security arrangements. 
Something along these lines is likely to be no less critical for Asia, where the US, which is also a Pacific power, has vital interests and deep commitments. 
America’s strategic “pivot” to Asia thus needs to be substantial and lasting. 
This will require that successive US administrations emphasize free trade, increase America’s air and naval presence, and invest in diplomacy designed to promote China’s integration within the region on terms consistent with the interests of the US, its allies (Japan, South Korea, the Philippines, and Australia), and its many friends. 
The alternative is an Asia left to its own devices – and an Asian century that is dominated by China or characterized by frequent bouts of diplomatic tension or even conflict. 
Few in Asia or beyond would benefit from such a future. 

The Sources of Russian Conduct 
NEW YORK – No set amount of time must pass before journalism gives way to history, but normally historians write with the advantage of perspective that reflects the passage of years, decades, or even centuries. 
Time is necessary for information to come to light, memoirs to be written, and the significance of events to reveal itself. 
What seems relatively trivial now may prove to have been anything but, just as what appears to loom large can fade in importance. 
But, for better or worse, the West does not have the luxury of waiting to make sense of recent events in Ukraine, simply because there is no assurance that what occurred in Crimea is unique. 
Thousands of Russian troops remain on Ukraine’s eastern border; every day, there are new reports of unrest inside Ukraine, many allegedly instigated by Russia. 
We thus need to move quickly to understand what recent events imply about Russia, its president, Vladimir Putin, and the international order. 
It is no less important to apply the lessons swiftly. 
Putin wants to restore Russia to what he regards as its rightful place in the world. 
He is genuinely angry over what he views as the humiliations suffered since the end of the Cold War, including the Soviet Union’s breakup and NATO’s enlargement – though he will never admit that Russia actually lost the Cold War. 
At the same time, Putin is preoccupied with perpetuating his rule and ensuring that he does not suffer the same fate as former Ukrainian President Viktor Yanukovych, who had been his proxy in Kyiv. 
And he clearly recognizes that the restoration of Russia’s former greatness is a goal shared by many of his countrymen. 
Foreign policy can make for good domestic politics. 
As a result, Putin can be expected to continue to interfere in Ukraine for as long as he can – and so long as it serves his aim of strengthening his grip on power at home. 
Western policy should seek to frustrate this strategy. 
Countering Russian interference in Ukraine does not warrant incorporating Ukraine into NATO. 
Doing so would either require coming to Ukraine’s defense militarily, which would entail enormous risks and difficulties, or not making good on such a commitment, which would raise substantial doubts worldwide about the United States’ credibility. 
US President Barack Obama was correct in describing Russia as a regional rather than a global power – on its periphery, it is strong, and it has a substantial stake in Ukraine’s future. 
Still, the West has several options. 
One is to strengthen Ukraine politically (helping with elections and getting a new government up and running) and economically. 
The recently agreed two-year, $27 billion financial-aid package, largely funded by the European Union and the International Monetary Fund, will help. 
Security assistance should emphasize intelligence and policing so that Ukraine is less vulnerable to Russian attempts to sow discord and cause unrest. 
Another option is to prepare a new round of economic sanctions against Russia – far stronger than those introduced following Russia’s invasion and annexation of Crimea. 
The new measures should target Russian financial institutions and limit what may be exported to Russia, and the US and EU should communicate their agreement on such sanctions to Putin, so that he understands the full price he will pay for destabilizing Ukraine. 
A public-diplomacy dimension to Western policy is also needed. 
Russians might think twice about supporting their government’s foreign policy if they came to appreciate its impact on their standard of living. 
And they might be surprised to learn the full extent of Putin’s personal wealth, a matter that should be documented and publicized. 
Steps can also be taken to weaken Russia’s energy stranglehold on Ukraine and much of Western Europe. 
The US, for its part, can begin exporting oil and increase its capacity to export natural gas. 
Europeans can take steps to introduce the technologies that have led to the boom in US gas production, and Germany can revisit its position on nuclear power. 
Recent events should also serve as a wake-up call for NATO. 
People and governments need to rid themselves of the comforting illusion that countries’ use of military force to acquire territory is an anachronism. 
European defense spending and capacity needs to increase, as does America’s presence in select NATO countries – something that can be achieved even as the US increases its presence in Asia. 
The strategy needed to resist Putin’s efforts to expand Russia’s influence beyond its borders – and to induce change within them – resembles nothing so much as the “containment” doctrine that guided Western policy for the four decades of the Cold War. 
Russia, a country of only 143 million people that lacks a modern economy, should be offered the opportunity to enjoy the benefits of international integration, but only if it acts with restraint. 
This is not to suggest the advent of Cold War II. 
But there is a strong case for adopting a policy that has proved its effectiveness in confronting a country with imperial pretensions abroad and feet of clay at home. 

Free Trade Forever 
NEWTON, MASSACHUSETTS – On December 7, representatives from the World Trade Organization’s 159 member countries reached agreement on the first multilateral trade deal in the WTO’s 19-year history. 
Although the Trade Facilitation Agreement – dubbed the “Bali package,” after the Indonesian island where the meeting took place – did not address the most pressing North-South trade issues, it remains an important economic and political milestone. 
The Bali package commits WTO members to moving toward lowering non-tariff trade barriers – for example, by establishing more transparent customs regulations and reducing trade-related paperwork. 
These changes might seem like bureaucratic minutiae, but the agreement’s impact – adding $1 trillion to global output and creating 21 million jobs worldwide – will be substantial. 
The agreement has been criticized for failing to meet the goals set out in the WTO’s 2001 Doha Development Agenda. 
But these objectives – including improvement of market access in agriculture, manufacturing, and services; clarification of international trade rules; and progress on addressing relevant environmental issues – were overly ambitious. 
Even the modest Bali package was touch and go, requiring an extra day of negotiations to reach agreement on contentious issues like Indian farm subsidies and the US embargo of Cuba. 
Nonetheless, it is clear that trade liberalization is gaining momentum. 
Consider the impressive scale and scope of other multilateral trade agreements – such as the Trans-Pacific Partnership, the Transatlantic Trade and Investment Partnership, and the Trade-in-Services Agreement – that are currently being negotiated. 
Current progress toward trade liberalization underscores how trade policy – especially that of the United States – has improved over the last hundred years. 
The early nineteenth century was characterized by high tariff rates in both the US and Europe. 
But, during the last few decades of the century, European tariff rates fell substantially, largely in response to the United Kingdom’s unilateral repeal of the Corn Laws, which had imposed substantial tariffs on imported grain. 
The US, however, continued to charge much higher tariffs. 
Unlike in Europe, partisan politics shaped US trade policy before World War II, with the Republicans raising tariffs and the Democrats reducing them. 
One of the most notable hikes occurred in 1922, when the Republican-controlled government passed the Fordney-McCumber Tariff, which raised the average import tariff rate by 64%. 
This triggered vehement protests – and strong retaliation – from America’s trading partners. 
From 1925 to 1929, 33 tariff revisions were made in 26 European countries, and 17 were made in Latin America. 
International conferences in Brussels in 1920, Portorose in 1921, and Genoa in 1922 – as well as the League of Nations’ World Economic Conference in Geneva in 1927 – endorsed a tariff truce, but to no avail. 
In 1930, US President Herbert Hoover and a Republican Congress, enacted the Smoot-Hawley Tariff Act, sending the tariff war into high gear. 
Though the Smoot-Hawley tariff increases were modest compared to those under Fordney-McCumber, their timing turned the act into a virtual synonym for bad trade policy. 
According to the League of Nations, Smoot-Hawley triggered “an outburst of tariff-making activities in other countries, at least partly by way of reprisals,” with substantial duty hikes made almost immediately by Canada, Cuba, France, Italy, Mexico, and Spain. 
Thus, though Smoot-Hawley was not a direct cause of the Great Depression, as many have claimed, it did contribute to a breakdown of international trade precisely when the world could least afford it. 
The two-thirds decline in aggregate imports from 1929 to 1933 was only partly a result of falling incomes, and hence import demand; retaliatory trade and exchange-rate policies also played a major role in bringing about the global trade collapse. 
Even when world trade finally began to revive after the depression ended, it remained fragmented, developing primarily within trading blocs and regions. 
It was only after World War II – when the General Agreement on Tariffs and Trade (succeeded in 1995 by the WTO) began the process of multilateral trade liberalization – that Smoot-Hawley’s destructive legacy was finally overcome. 
Of course, protectionist pressures have occasionally arisen since then. 
For example, during the 1992 US presidential campaign, Ross Perot argued that ratifying the North American Free Trade Agreement would lead to a “giant sucking sound,” as US jobs migrated to Mexico and American workers’ wages fell. 
And many countries have introduced minor – and not so minor – impediments to trade since WWII. 
Nonetheless, the overall trend has been toward increased openness. 
In fact, the post-war era has been the longest sustained period of trade liberalization in history – a particularly impressive feat, given that the world has just suffered the worst economic downturn since the Great Depression. 
Indeed, policymakers nowadays seem genuinely disinclined to resort to tariff increases. 
There is no denying that Bali was not a complete success, and much of the WTO’s Doha agenda remains unfulfilled. 
But the fact that countries have continued to pursue trade liberalization, however gradually, at a time of weak economic growth, suggests that free trade is here to stay. 

The Monetary Cosmopolitans 
NEWTON, MASSACHUSETTS – Can you imagine a French citizen being elected President of the United States? 
Or a Japanese prime minister of the United Kingdom? 
Or a Mexican chancellor of Germany? 
Probably not. 
Indeed, even if there were no legal obstacles, it would be difficult to imagine voters in a democracy installing a foreigner in their government’s top job. 
But, during the last few years, countries have increasingly turned to foreigners and people with considerable foreign experience to assume what is generally viewed as a country’s second most important position: head of the central bank. 
What has driven this shift, and should it be welcomed or discouraged? 
For example, Stanley Fischer, nominated in January by US President Barack Obama to succeed Janet Yellen as Vice Chair of the Federal Reserve, is an American immigrant from southern Africa who served as Governor of the Bank of Israel from 2005 until last year. 
And, in July 2013, Mark Carney, a Canadian who had served as central-bank governor in his home country, became the first foreigner to lead the Bank of England in its nearly 320-year history. 
Similarly, the widely respected governor of Ireland’s central bank, Patrick Honohan, spent nearly a decade at the World Bank in Washington, DC. 
One of Honohan’s deputies is a Swede with experience at the Hong Kong Monetary Authority; the other is a Frenchman. 
This represents a major departure from the tradition of filling central banks’ top leadership positions with people who have spent most of their careers there – a tradition that, over time, allowed central banks to be taken over by “groupthink.” 
With the entrenchment of a particular ideology or mode of thinking, monetary policymakers increasingly missed – by choice or inertia – opportunities to change, reinvigorate, and improve the running of these vital institutions. 
As central banks’ key role in the recovery from the post-2008 global economic crisis demonstrated, monetary policy must be flexible and innovative. 
That is where the different perspectives that foreigners bring can help. 
The Fed’s experience – shaped by a historically decentralized power structure – highlights the benefits of a policymaking process characterized by diverse views. 
When the Fed was established a century ago, monetary authority was distributed across 12 regional reserve banks, each of which had considerable autonomy. 
The fact that the heads of each of the regional Fed banks were called “governor” – the same title given to heads of the long-established European central banks – was indicative of their authority. 
But, in the aftermath of the Great Depression of the 1930’s, it became clear that such decentralization had prevented the Fed from formulating and implementing a coherent monetary policy. 
The heads of the regional banks were “downgraded” from governors to “presidents” – the first and only time in US history when the transition from governor to president was a demotion – and power was centralized in the Board of Governors based in Washington, DC. 
Nonetheless, an important legacy of the earlier system has remained: each of the regional banks maintains its own research department, and brings a different approach to the monetary-policy debate. 
In other words, the Fed’s structure continues to foster a robust and diverse mix of views – something that is severely lacking in many other central banks. 
Consider the Bank of Canada. 
Years ago, an employee at one of the regional Fed banks – who was also my graduate-school classmate – contrasted the responses to his research presentations in the United States and Canada. 
Whereas staff economists from the Federal Reserve System brought differing perspectives to the monetary-policy debate, their Canadian counterparts seemed to subscribe to a single “Bank of Canada view.” 
Two independent reviews of the Bank of England published in the wake of the global financial crisis found a similar lack of intellectual diversity and robust debate. 
One observed that Bank of England staff members tended to “filter” their advice to make it more palatable to their superiors. 
The other concluded that the crisis highlighted just how wrong the consensus view had been, and recommended a new approach that considered divergent views. 
This desire for change may have contributed to Carney’s appointment as the new governor, and his recent decision to bring more outside expertise into the Bank’s leadership. 
Avoiding groupthink is essential to developing innovative, effective policies capable of responding to new monetary-policy challenges – and that demands a flexible, dynamic policymaking process. 
The good news is that central banks have options for enriching their policy debates, even without the benefit of the Fed’s size, structure, and geographic spread. 
For starters, they can establish committees of outside experts or commission regular external reviews of policy and the policymaking process. 
Such reviews typically take place only after a crisis – when it is already too late. 
Another solution is to appoint a governor from outside the central bank, preferably one who has enough external experience to avoid being captured by groupthink. 
Or, perhaps better yet, they can hire a foreigner. 

Rift and Mastery 
PARIS – Like brothers in arms united in combat but divided in peace, Europe and the United States, which had fought depression jointly in 2009, started voicing disagreements in 2010 and begin 2011 with divergent positions on macroeconomic policy. 
The price of divergence could be steep: though the worst is over, effective coordination of policy is still needed at a time when rebalancing the global economy, as the G-20 has called for, is far from being accomplished. 
The transatlantic divide is evident with respect to monetary policy. 
In November of last year, the US Federal Reserve’s decision to launch a new cycle of “quantitative easing” (buying up government bonds through monetary creation) triggered fierce criticism in Europe. 
While the European Central Bank has also been buying government bonds since last spring, the amount is relatively small (€70 billion, compared to the Fed’s $600 billion program), and is meant only to support troubled eurozone members, with particular care taken to avoid any impact on money supply. 
A similar divergence, though less acute, has appeared with respect to fiscal policy. 
In December, as Europeans shifted towards fiscal rigor, the US Congress extended for two years the tax cuts initiated by George W. Bush – which almost everyone interpreted as yet another effort to boost the US economy. 
True, fiscal retrenchment in Germany is more cautious than official rhetoric suggests. 
But, overall, the eurozone and Great Britain have clearly shifted towards austerity, which the US is still very reluctant to consider. 
In Europe, this divergence is often attributed to what French President Charles de Gaulle used to refer to as America’s “exorbitant privilege”: the power to print the principal international reserve currency. 
But this explanation is only partly satisfying. 
Yes, China does pile up reserves in dollars. 
But no one forces it to do so, and the US would much prefer a stronger renminbi. 
Emerging-market countries could also invest in euros, if only they were offered such liquid assets as US Treasury bonds – therein lies the current debate over the proposed creation of “eurobonds.” 
And, while countries like Greece and Spain suffer from market constraints, such is not the case for Northern Europe. 
A second interpretation of the transatlantic divide is that the two sides’ policies reflect the differences in their situations. 
This is clearly the case with labor markets and unemployment: American companies have reacted to recession with massive layoffs, whereas European companies – with the exception of Spanish firms, but not of British companies – have been doing their best to hoard labor. 
As a result, productivity has stagnated in Europe since 2007, whereas it has improved by more than six percentage points in the US. 
Of course, another consequence is that the US unemployment rate is close to post-war peaks and will remain high much longer. 
And unemployed workers in the US lose their benefits after 99 weeks, making the political imperative for macroeconomic action much stronger than in Europe, where unemployment rose more slowly and benefits are more generous. 
As the economist Joseph Stiglitz puts it, America’s welfare state is, first and foremost, the Fed’s monetary policy. 
But there is also a third, subtler reading of the EU-US split, which has to do with beliefs. 
In the view of most Europeans, none of the ground that has been lost – or only very little of it – can be recovered. 
So, because supply has shrunk, it would be dangerous for the central bank or the budget to over-stimulate demand. 
And, because tax revenues, too, will not recover, the gap will have to be bridged by fiscal austerity. 
Americans, on the other hand, are convinced that whatever was lost during the recent recession will eventually be regained. 
The Obama administration says so, as does the Fed (albeit more prudently), and both act accordingly. 
In other words, Europeans are pessimistic about the future and thus are reluctant to stimulate growth, whereas Americans remain optimistic and prepared to give any policy instrument a chance. 
Thus, divergence over macroeconomic policy will continue – at least as long as investors remain willing to buy US public debt. 
Several consequences follow from this divergence: difficulties in policy coordination, given no agreement on the diagnosis; a very probable return to large US external deficits while Europe remains in balance; and a weaker dollar, which will become evident if the crisis in the eurozone subsides. 
All this could greatly complicate managing the G-20, and risks obscuring the question that all should be addressing: how to manage a global economy in which the balance between advanced and emerging countries is shifting at great speed. 

The Right Fight Against Terrorism 
LONDON – I traveled to Paris from London last Monday. 
It takes two and a half hours by train. 
We are neighbors, our histories and populations intertwined. 
My ten-year-old grand-daughter will go there next week with her parents as a birthday treat. 
She loves everything she has learned about Paris. 
So, like other Londoners, and citizens of free societies everywhere, she was horrified by the recent atrocities there. 
I suppose, she said, it could have happened here. 
So it could – just as it did in 2005, and just as it could again in Madrid, or in Amsterdam, Berlin, Rome, or any other European city. 
When President François Hollande announced that we are at war with the so-called Islamic State (ISIS), the “we” included you and me. 
France’s fight is Britain’s fight and Europe’s fight. 
It involves all of us. 
Globalization does not mean only mangoes at the supermarket in mid-winter, easy air travel, and the Internet. 
Terror and barbarity have been globalized, too. 
Men and women can be taught, trained, and armed thousands of miles away and sent to our neighborhoods to kill and maim. 
International terror requires an international response. 
But that response must include dialogue and diplomacy. 
We must not be driven by horror and fear into forgetting our civic values. 
That is precisely what the terrorists want. 
We must not demonize all Muslims. 
We must not burn interfaith bridges. 
We must not abandon the core tenets of European civilization, including the obligation to shelter refugees from evil. 
German Chancellor Angela Merkel’s instinctive reaction to the influx should still be applauded, not condemned. 
Populist rabble-rousing against men and women of different faiths and ethnicities will divide our societies at the moment when we should be united. 
It will play into the hands of the terrorists. 
From Beirut to Paris, the terrorists’ attacks are a deliberate effort to exacerbate tensions between communities. 
Marine Le Pen of France’s far-right National Front and others like her might as well be ISIS recruiting sergeants. 
Diplomacy was given a strong boost at the recently concluded G-20 meeting in Turkey. 
That means, above all, obliging the Middle East’s main rivals, Sunni-ruled Saudi Arabia and Shia-ruled Iran, to face up to their responsibility to reduce hostilities between Sunni and Shia groups and countries in West Asia. 
Western countries have been residual victims of the vicious struggles between Saudi and Iranian proxies. 
We need to end the divisions among those in Syria who oppose ISIS. 
That may involve giving a short-term role in a political transition to President Bashar al-Assad (partly to save Russia’s face). 
But a president who has barrel bombed his own citizens cannot conceivably be part of a longer-term peaceful settlement. 
The right political goals and diplomatic priorities are crucial. 
But we must also face up to the fact that we will not defeat ISIS without a bigger, more effective, and better coordinated military effort. 
We must drive ISIS out of its self-proclaimed caliphate in Syria and Iraq. 
Otherwise, the territory it controls will continue to be a haven and training ground for murderers. 
Perhaps more robust military intervention will provoke further atrocities. 
But what is certain is that the attacks on civilization will continue until we have cut off ISIS’s head. 
As terrorists often brag, we have to succeed in stopping their assaults every time; they only have to succeed every now and then. 
Opponents of military intervention cite failure in Iraq and Afghanistan to justify inaction. 
We should learn from those failures. 
But appeasement is not one of the lessons. 
We will not make our free societies safe by bombing ISIS with strong nouns and weak verbs rather than high explosives. 
To his credit, British Prime Minister David Cameron clearly understands the importance of increasing the military pressure on ISIS; he had been held back by a head-under-the-blanket faction in his own Conservative Party and in Parliament as a whole. 
But Europe – indeed, civilization – won’t be kept safe by wishful thinking. 
It may be that most of the boots on the ground will have to be worn by Arabs, Iranians, and Kurds, including members of the Peshmerga International Brigade. 
But they need stronger support – not just in the air or with weapons and training, but also from Western special forces. 
There is a strong argument, too, for NATO to recognize that one of its members, France, has been attacked, thereby activating Article 5 of the North Atlantic Treaty, which ensures mutual defense. 
The entire Alliance should commit itself to the defeat of terrorism. 
Yet this is not only Europe’s fight, or that of the United States. 
This is about global order in a stable and prosperous world. 
Russia and China should make clear in the United Nations Security Council that the destruction of ISIS is their fight as well. 
All those young men and women cut down in Paris must not have been slaughtered in vain. 
Their deaths should challenge us to make sure that Paris, the city of light, will help to banish the darkness that threatens to overwhelm the century ahead. 

The Right Time for Climate Action 
PARIS – During most of the roughly three decades since climate change became a global concern, governments optimistically assumed that a green transition would happen naturally over time, as rising fossil-fuel prices nudged consumers toward low-carbon alternatives. 
The impediment, it was believed, was on the production side, as gushing returns on oilfield investments spurred ever more ambitious exploration. 
Today, the tables have turned. 
With oil prices languishing around $40 a barrel, fossil-fuel companies do not need governments to tell them to stop investing. 
The challenge has moved to the consumer side of the equation. 
With fuel prices so low, what can be done to change consumption patterns? 
To be sure, there are some signs that cheaper energy could generate enough growth to drive oil prices back up. 
But nobody predicts a rebound strong enough to prompt the radical transformation that will be required if countries are to meet their emissions-reduction goals. 
A 2015 OECD report shows how far behind countries are on their emissions targets – never mind their commitment to limit the global temperature rise to well below 2° Celsius. 
Meanwhile, oil majors are keen to remind us that we will need to burn fossil fuels for many more years as we gradually shift to a new energy economy. 
So what are governments to do? 
There is near-universal agreement that no one will benefit from a dangerously warmer planet. 
But different countries have very different interests, depending on whether they are oil exporters or importers and how developed their economies are. 
Oil-producing developing countries should consider whether their resources have an economic future, given diminishing scope for emissions. 
Countries like Saudi Arabia, Iraq, and Iran – where oil is plentiful and cheap to extract – are likely to stay in business for some time. 
Even if the world rapidly decarbonizes, oil consumption will remain high enough for their resources to be worth extracting. 
But countries with less generous oil endowments need to implement economic reforms and eliminate subsidies. 
Saudi Arabia has made clear that it is no longer prepared to sacrifice market share to prop up more costly producers. 
Its decision to maintain output at current levels – effectively neutering the OPEC cartel – has already had a dampening effect on competing supplies; nearly $400 billion of fossil-fuel investments have been shelved. 
Many governments have been forced to act. 
Russia announced a 10% cut in public spending as oil prices continued to slide this year. 
And Indonesia should save almost $14 billion by scrapping gasoline subsidies and capping support for diesel fuel. 
On the other side of the spectrum, oil-importing developed countries are most likely efficient users of fossil fuels already. 
Their economies, having proved they can cope with oil at $100 a barrel or more, clearly do not need an infusion of cheap energy to thrive. 
It is therefore a good time to introduce carbon taxes, so that the oil windfall is not simply gobbled up at the gas station. 
These countries should shelve any delusions of finding “black gold,” enjoy the short-run benefits of cheap oil, and take action now to align infrastructure investments to changing technology. 
Meanwhile, oil-producing developed countries should bank the remaining rents to enable capital substitution and ensure life after oil. 
This is what Norway has done, to significant national advantage, over the past 25 years. 
Finally, it is governments of oil-importing developing countries that are likely to have the most urgent need for energy – and also the widest array of possibilities to meet that need. 
They will be looking to the global community for support and will need to take a hard look at whether the energy solutions on offer are modern or sustainable. 
The burden of proof must be on fossil-fuel-based solutions – particularly coal – to demonstrate their competitiveness after accounting for the full environmental, health, and social costs. 
It can sometimes seem like there is never a right time to take climate action. 
When growth is strong, people urge governments not to derail the gravy train. 
(Never mind that there is little evidence to suggest that a well-signaled, progressive implementation of a carbon tax would weigh on growth.) 
When growth is weak, people ask incredulously how climate policy advocates could consider making things worse. 
There is never likely to be a perfect moment for introducing new climate policies. 
Long-run problems require policies that send long-run signals. 
And these policies cannot be constantly fine-tuned to the volatility of the moment. 
Attempting to do so only fuels further volatility (which is what really hurts growth). 
Now is always as good a time as any to take action. 
And we should do so under no illusion that the transformative outcome we need will be a smooth, incremental process. 
Technological changes whip up gales of creative destruction. 
There will be – must be – many losers. 
But there will also be winners, as new technologies create new business opportunities. 
Governments that try to protect the status quo will not only fail on climate change; they will ultimately impose higher social costs, even as they fail to capitalize on the economic opportunities created by reform. 
Climate-change policies must be steady and consistent. 
Action must lubricate change, not repeatedly stop it in its tracks. 
Once investors see that the fossil-fuel game is over, governments must let the effects of the resulting capital reallocation play out. 
It will be bumpy. 
But there is no other choice. 
Trying to fine-tune an economic and technical adjustment path would be as futile as trying to control the price of crude oil. 

Privacy for Refugees 
LONDON – With people living so much of their lives online nowadays, it is easier than ever for governments and companies to collect large amounts of personal information. 
Not surprisingly, data privacy is a hot topic. 
But there are plenty of people being left out of the debates. 
And, unfortunately, those are the people who need the most attention. 
As much as Internet companies like Facebook or Google want to collect data about their users, there are limits to their power to do so. 
Most of the time, there is a way to opt out of providing personal data, even if it is sometimes buried deep in a complex set of privacy settings. 
If those opt-outs are not convincing enough, there are privacy-focused search engines or email providers. 
But some vulnerable populations – such as the nearly five million Syrians who have been forced from their home country – cannot opt out, unless they want to be sent right back to a warzone. 
If they hope to be granted refugee status – not to mention food, clothing, shelter, and other basic necessities – they have to give whatever information the NGOs, IGOs, aid agencies, and humanitarian workers request. 
In other words, for refugees, whether to provide personal information, from religious beliefs to biometric data, can be a matter of life and death. 
But what if those data fell into the wrong hands? 
With the organizations responsible for data security operating in low-resource, high-pressure circumstances, it is not an unreasonable question. 
The exposed refugees might be in serious danger. 
Sensitive information is being circulated among an increasingly wide array of actors, such as third-party financial institutions, technology developers, cloud computing service providers, and other humanitarian agencies. 
Every time that information is shared – whether it is entered into a new database or a new actor gains access to a single aggregated database – the risk of privacy breaches grows. 
There is no shortage of groups that would love to get their hands on the data. 
Over the last few years, the Syrian Electronic Army, which supports the brutal regime of President Bashar al-Assad, has successfully hacked into a number of secure databases. 
Of course, this is not to say that collecting data on refugees is fundamentally wrong. 
The reality is that many governments could not justify accepting refugees without a thorough vetting process – and that demands data. 
Moreover, using biometric data like iris scans, rather than bankcards, offers some advantages for aid-delivery – namely, ensuring that assistance is delivered to its intended recipient. 
But there is a need to assess whether all of the kinds of data that are currently collected are really needed. 
Does collecting them genuinely advance the objectives of providing support to refugees? 
Are the benefits of using biometric data significant enough that refugees should have no alternative? 
(According to a 2013 report, many refugees are indeed concerned about providing biometric data.) 
For the data that are deemed useful and necessary, there is a need to review collection, storage, and sharing processes, in order to ensure that sensitive information is never compromised. 
Exchanges of personal data among companies, humanitarian groups, and government agencies should be allowed only when they are truly necessary, and should be conducted as securely as possible. 
Privacy is not a privilege – a comfort that desperate people should have to give up. 
It is a fundamental human right, enshrined in the United Nations Universal Declaration of Human Rights. 
International law obliges data controllers and processors to protect data sets containing personal data, particularly in the context of large-scale monitoring of individuals. 
Though some IGOs are exempt from these requirements, such organizations must strive to implement best practices with regard to privacy, ethics, and data protection. 
After all, it makes little sense to collect data for the sake of protecting vulnerable populations, only to leave those data vulnerable to breaches by dangerous actors. 
The first step is to carry out a privacy impact assessment (PIA). 
A PIA is a tool used to identify, analyze, and mitigate privacy risks arising from technological systems or processes. 
While there is no single established approach to undertaking a PIA, experience has produced some best practices, comprising a set of privacy principles and criteria, according to which systems for collecting, storing, and share refugees’ data should be assessed. 
For a PIA to work, it must weigh privacy against other imperatives, such as efficient aid provision. 
Given the lack of experience with this type of assessment, the framework and those applying it should be flexible. 
In settings that are continually changing, in response to the needs and capabilities of a range of actors, an iterative approach with qualitative elements is imperative. 
There is no perfect methodology, and practice will always differ from theory. 
But a high-quality PIA can help an organization assess and mitigate the privacy risks associated with the use of information and communications technology, biometric technologies, geo-location tracking devices, and so on. 
It is not a solution to the privacy challenge faced by refugees and their advocates, but it is an important step in the right direction. 

Speaking to the Far Right 
NEW YORK – Something many right-wing populists have in common is a peculiar form of self-pity: the feeling of being victimized by the liberal media, academics, intellectuals, “experts” – in short, by the so-called elites. 
The liberal elites, the populists proclaim, rule the world and dominate ordinary patriotic people with an air of lofty disdain. 
This is in many ways an old-fashioned view. 
Liberals, or leftists, do not dominate politics any more. 
And the influence that great left-of-center newspapers, like The New York Times, once had has long been eclipsed by radio talk-show hosts, rightwing cable TV stations, tabloid newspapers (largely owned by Rupert Murdoch in the English-speaking world), and social media. 
Influence, however, is not the same thing as prestige. 
The great newspapers, like the great universities, still enjoy a higher status than the more popular press, and the same goes for higher learning. 
TheSun or Bild lack the esteem of the Financial Times or the Frankfurter Allgemeine Zeitung, and evangelical colleges in rural parts of the US cannot compete in terms of cachet with Harvard or Yale. 
Social status arouses more envy and resentment in our populist age than money or fame do. 
President Donald Trump, for example, is a very wealthy man, who was more famous than any of his rivals for the US presidency, including Hillary Clinton. 
And yet he seems to be in an almost permanent rage against people who have greater intellectual or social prestige than he does. 
The fact that he shares this resentment with millions of people who are much less privileged goes a long way toward explaining his political success. 
Until recently, figures on the extreme right had no prestige at all. 
Driven to the margins of most societies by collective memories of Nazi and fascist horrors, such men (there were hardly any women) had the grubby air of middle-aged patrons of backstreet porno cinemas. 
Stephen Bannon, still a highly influential figure in Trump’s world, seems a bit like that – a crank in a dirty raincoat. 
But much has changed. 
Younger members of the far right, especially in Europe, are often sharply dressed in tailor-made suits, recalling the fascist dandies of pre-war France and Italy. 
They don’t shout at large mobs, but are slick performers in radio and TV studios, and are savvy users of social media. 
Some of them even have a sense of humor. 
These new-model rightists are almost what Germans call salonfähig, respectable enough to move in high circles. 
Overt racism is muted; their bigotry is disguised under a lot of smart patter. 
They crave prestige. 
I had occasion to encounter a typical ideologue of this type recently at an academic conference organized by the Hannah Arendt Center at Bard College in the United States. 
The conference was about populism, and the ideologue was named Marc Jongen, a politician from the far-right Alternative für Deutschland (AfD) party with a doctorate in philosophy. 
The son of a Dutch father and an Italian mother, born in Italy’s German-speaking South Tyrol, Jongen spoke near-perfect English. 
Self-pity lay close to the surface. 
Jongen described Chancellor Angela Merkel’s decision to give shelter in Germany to large numbers of refugees from Middle Eastern wars as “an act of violence” toward the German people. 
He called immigrants and refugees criminals and rapists (even though crime rates among refugees in Germany are far lower than among “natives”). 
Islam was robbing the German Volk of its true identity. 
Men like Jongen were always being called Nazis. 
And so on. 
I had been asked to furnish some counterarguments. 
I did not call Jongen a Nazi. 
But I did my best to point out why I thought his claims were both wrong and dangerous. 
We shook hands at the end. 
And that, as far as I was concerned, was that. 
Then a minor academic storm broke out. 
More than 50 distinguished US academics signed a letter protesting the Hannah Arendt Center’s decision to invite Jongen to speak. 
The point was not that he didn’t have the right to express his opinions, but that Bard College should not have lent its prestige to make the speaker look respectable. 
Inviting him to speak made his views seem legitimate. 
This strikes me as wrongheaded for several reasons. 
First of all, if one is going to organize a conference on right-wing populism, it is surely useful to hear what a right-wing populist actually has to say. 
Listening to professors denouncing ideas without actually hearing what they are would not be very instructive. 
Nor is it obvious that a spokesman for a major opposition party in a democratic state should be considered out of bounds as a speaker on a college campus. 
Left-wing revolutionaries were once a staple of campus life, and efforts to ban them would rightly have been resisted. 
The protest against inviting Jongen was not only intellectually incoherent; it was also tactically stupid, because it confirms the belief of the far right that liberals are the enemies of free speech, and that right-wing populists are victims of liberal intolerance. 
I like to think that Jongen left the Bard conference politely discredited. 
Because of the protest, he was able to snatch victory from defeat. 


Righting the EU Constitution 
The prospect of multiple referenda on the European Union Constitution has dramatically altered the betting on ratification. 
Both europhiles and eurocrats shudder at the prospect that rejection in several member states, particularly in a large one, might kill the project, leaving the Union to muddle through with the Nice Treaty. 
On the other hand, if the protagonists are patient, the winds of democracy could lead to a stronger constitution, free of the risks of economic and judicial nightmare that some aspects of the present draft entail. 
The EU urgently needs to democratize its procedures and reorganize its institutions to ensure that this year's enlargement does not lead to bureaucratic deadlock. 
The draft Constitution provides acceptable answers to many questions of governance. 
But the elevation of the Social Chapter, previously a list of good intentions, to the status of fundamental constitutional rights, threatens to encumber workers and businesses in the member states with burdensome judicial proceedings and expensive social entitlements written by judges in Luxembourg whose last word is beyond appeal. 
The inclusion in Part II of the draft on "social rights" - such as the right not to be unjustly dismissed, or the right to receive old-age pensions, unemployment compensation, and health benefits (regardless of cost) - is in no way necessary to the functioning of the whole. 
These social protections are laudable, but all have a cost. 
The very term "social right" is a misnomer. 
If something is a "right," then cost is not an issue. 
For instance, no economic cost is too great for the defense of freedom of speech. 
The desirability of generous public pensions, on the other hand, cannot be dissociated from their cost to taxpayers. 
Social protections should be framed in laws enacted by democratically elected legislators, who are well placed to weigh the costs and benefits for their constituents. 
The most ardent advocate of expanded health care rights should agree that the forum for that advocacy is the Parliament, not the European Court of Justice. 
These protections have no place in a constitution, particularly one that cannot be easily amended. 
The fact that certain "social rights" have made their way into some national constitutions on the Continent is no reason to impose them, as the present draft does, on the entire Union. 
It is noteworthy that in the Scandinavian countries, which enjoy some of the most progressive social protections in Europe, these benefits are provided by statutory laws enacted by legislatures rather than by courts enacting constitutional "rights." 
They are the social dividend, allocated by national parliaments, of real economic growth. 
Supporters of the European Constitution in France, on both the left and the right, shrug and say that including the Social Chapter in the draft is a compromise. 
The "social rights" in Part II are seen as compensating voters on the left for, say, enshrining "competition" as a fundamental objective of the Union in Part I. But neither provision belongs in the Constitution. 
Natural monopolies are sometimes economically desirable, and it is legislators, not judges, who should decide whether and when they are to be permitted. 
For a decade, Britain stood almost alone against expanding the Social Chapter. 
In the constitutional convention, the Blair government accepted the inclusion of its provisions in the body of the text, but insisted on language limiting their reach. 
The trouble is that the British safeguards do not work. 
Article II-52 states that the Fundamental Rights in the Constitution (including its 12 "social rights") apply only to the actions of the Union, and of member states when they are implementing Union decisions . 
But as Europe integrates, these decisions will become pervasive. 
If EU environmental directives, for instance, call for the closure of a heavily polluting plant in Britain, the Constitution would give labor unions the right to judicial appeals against the resulting redundancies. 
Fortunately, this fault line in the British safeguards can be corrected without jeopardizing the document. 
The simplest solution is to remove the Fundamental Rights of Part II from the body of the text, and give them the status the Social Chapter had in the Treaty of Amsterdam: a declaration of intentions appended to the Treaty. 
All traditional individual rights are already covered in the Declaration of Human Rights, which will continue to be enforced by the court in Strasbourg. 
"Social rights" should not become mandates for judges; they should remain a guide to legislators. 
If a political compromise is needed, "competition" should be removed as a fundamental Union objective. 
Free movement of goods, services, labor, and capital certainly suffices. 
If this preferred solution proves unacceptable, an alternative would be to strengthen Article II-52, to state clearly that the twelve "social rights" of Part II apply to the Union, but not to the member states, even when these are implementing Union directives. 
If the Union decides, as it could, that all member states must provide public health care for all unemployed persons, it would be up to national parliaments, not 25 judges in Luxembourg, to determine how to address that objective. 
This would take some of the teeth out of the Union's social directives, and would give real substance to the principle of subsidiarity. 
By excising from the draft Constitution the prospect of a welfare state run by judges, its framers will increase the chances that Britain and other doubters will, in the end, ratify the final product. 

Rights for Robots? 
PRINCETON and WARSAW – Last month, Gecko Systems announced that it had been running trials of its “fully autonomous personal companion home care robot,” also known as a “carebot,” designed to help elderly or disabled people to live independently. 
A woman with short-term memory loss broke into a big smile, the company reported, when the robot asked her, “Would you like a bowl of ice cream?” 
The woman answered “yes,” and presumably the robot did the rest. 
Robots already perform many functions, from making cars to defusing bombs – or, more menacingly, firing missiles. 
Children and adults play with toy robots, while vacuum-cleaning robots are sucking up dirt in a growing number of homes and – as evidenced by YouTube videos – entertaining cats. 
There is even a Robot World Cup, though, judging by the standard of the event held in Graz, Austria, last summer, footballers have no need to feel threatened just yet. 
(Chess, of course, is a different matter.) 
Most of the robots being developed for home use are functional in design – Gecko System’s home-care robot looks rather like the Star Wars robot R2-D2. 
Honda and Sony are designing robots that look more like the same movie’s “android” C-3PO. 
There are already some robots, though, with soft, flexible bodies, human-like faces and expressions, and a large repertoire of movement. 
Hanson Robotics has a demonstration model called Albert, whose face bears a striking resemblance to that of Albert Einstein. 
Will we soon get used to having humanoid robots around the home? 
Noel Sharkey, professor of artificial intelligence and robotics at the University of Sheffield, has predicted that busy parents will start employing robots as babysitters. 
What will it do to a child, he asks, to spend a lot of time with a machine that cannot express genuine empathy, understanding, or compassion? 
One might also ask why we should develop energy-intensive robots to work in one of the few areas – care for children or elderly people – in which people with little education can find employment. 
In his book Love and Sex with Robots , David Levy goes further, suggesting that we will fall in love with warm, cuddly robots, and even have sex with them. 
(If the robot has multiple sexual partners, just remove the relevant parts, drop them in disinfectant, and, voilà, no risk of sexually transmitted diseases!) 
But what will the presence of a “sexbot” do to the marital home? 
How will we feel if our spouse starts spending too much time with an inexhaustible robotic lover? 
A more ominous question is familiar from novels and movies: Will we have to defend our civilization against intelligent machines of our own creation? 
Some consider the development of superhuman artificial intelligence inevitable, and expect it to happen no later than 2070. 
They refer to this moment as “the singularity,” and see it as a world-changing event. 
Eliezer Yudkowsky, one of the founders of The Singularity Institute for Artificial Intelligence, believes that singularity will lead to an “intelligence explosion” as super-intelligent machines design even more intelligent machines, with each generation repeating this process. 
The more cautious Association for the Advancement of Artificial Intelligence has set up a special panel to study what it calls “the potential for loss of human control of computer-based intelligences.” 
If that happens, the crucial question for the future of civilization is: Will the super-intelligent computers be friendly? 
Is it time to start thinking about what steps to take to prevent our own creations from becoming hostile to us? 
For the moment, a more realistic concern is not that robots will harm us, but that we will harm them. 
At present, robots are mere items of property. 
But what if they become sufficiently complex to have feelings? 
After all, isn’t the human brain just a very complex machine? 
If machines can and do become conscious, will we take their feelings into account? 
The history of our relations with the only nonhuman sentient beings we have encountered so far – animals – gives no ground for confidence that we would recognize sentient robots not just as items of property, but as beings with moral standing and interests that deserve consideration. 
The cognitive scientist Steve Torrance has pointed out that powerful new technologies, like cars, computers, and phones, tend to spread rapidly, in an uncontrolled way. 
The development of a conscious robot that (who?) was not widely perceived as a member of our moral community could therefore lead to mistreatment on a large scale. 
The hard question, of course, is how we could tell that a robot really was conscious, and not just designed to mimic consciousness. 
Understanding how the robot had been programmed would provide a clue – did the designers write the code to provide only the appearance of consciousness? 
If so, we would have no reason to believe that the robot was conscious. 
But if the robot was designed to have human-like capacities that might incidentally give rise to consciousness, we would have a good reason to think that it really was conscious. 
At that point, the movement for robot rights would begin. 

The Evolving Independent Economy 
BERKELEY – Working full-time for a single employer is no longer the norm in advanced economies. 
Instead, millions of “independent workers” – self-employed, freelance, or temporary employees – sell their labor, services, and products through digital platforms to numerous employers or clients. 
The growing share of independent work, which typically entails flexible hours, promises to bring significant aggregate economic gains, by raising labor-force participation rates, increasing the overall number of hours worked, and reducing unemployment. 
But the “gig economy” also creates complex new policy challenges in taxation, regulation, and access to social benefits and protections that traditionally have been provided through standard employer-employee relationships. 
According to a McKinsey Global Institute study, up to 162 million people throughout the United States and the EU-15 are currently engaged in some form of independent work. 
Based on a representative online survey of 8,000 workers in six countries (including the US), McKinsey found that 10-15% of the working-age population relies on independent work for their primary income. 
Another 10-15% – including students, retirees, household caregivers, and those with traditional jobs – take on such work to supplement their income. 
McKinsey’s findings challenge several common beliefs about independent work. 
First, the independent workforce is not dominated by young people: people under age 25 represent just 25% of independent workers. 
The independent workforce is also diverse in terms of income level, education, gender, occupation, and industry. 
Moreover, 70-75% of those engaged in independent work do so by choice, rather than out of necessity – a finding that is consistent with the results of other recent studies. 
Indeed, although 40-55% of low-income workers (earning $25,000 or less per year) engage in some independent work, they comprise less than 25% percent of all independent earners. 
Only about one-third of survey respondents said they rely on independent work because they cannot find conventional jobs or need supplemental income to make ends meet. 
That minority, however, still amounts to a large number of people. 
It is estimated that more than 50 million Americans and Europeans are engaged in independent work out of necessity, and more than 20 million rely on independent work as their primary source of income. 
Many are low-income workers who would otherwise be unemployed. 
This suggests that stronger economic – and, thus, employment – growth would reduce the number of workers engaged in independent work. 
But, regardless of macroeconomic conditions, independent work is likely to account for a rising share of work in the long run, owing to technological advances and individual preferences. 
While digital platforms for independent work are still in the early stages of their development, and are being used by only 15% of independent workers, they are proliferating and expanding rapidly. 
McKinsey estimates that 30-45% of the working-age population would prefer to earn an income, whether primary or secondary, from independent work. 
That trend poses challenges and opportunities for policymakers, workers, and employers. 
Policymakers need to collect better data on the independent workforce through regular surveys. 
They must also update how independent workers are categorized, in order to adapt taxation, regulation, and benefits and protections (including anti-discrimination laws and minimum wages) accordingly. 
The policy issues for high-skill professionals acting as independent agents are not the same as those for low-skill workers selling their services through large digital platforms like Uber. 
Updating the provision and delivery of benefits may be particularly challenging. 
Some European countries are tackling the issue by creating new classifications of work, with new benefit systems. 
British law distinguishes between traditional employees and “workers,” who are entitled to only some employee rights. 
In the US, there is a growing interest in a system of portable, pro-rated benefits – such as unemployment and disability insurance and pensions – tied to workers, rather than employers. 
Another option in the US would be new unions or collective organizations (guilds) of workers, both to negotiate the terms of independent-work contracts and to track and organize benefits for workers who serve many clients and employers. 
Similar systems are already in place for the construction and entertainment industries. 
Entrepreneurs also have opportunities to create new products and services tailored to the needs of the independent workforce. 
These could include shared office spaces, financial solutions that smooth out income between work assignments, training programs, and the creation of widely recognized credentials to enable independent workers to advance their work and income opportunities. 
Employers, for their part, will need to learn when to rely on internal talent and when to turn to independent workers. 
Many factors will influence that decision, including cost, quality, productivity, and the security of proprietary information. 
Finally, there is the responsibility of workers themselves to assert more control over their own careers, seeking opportunities and developing differentiated skills to avoid being relegated to a low-wage generalist talent pool or displaced by intelligent machines. 
This may prove to be the most important element of the emerging labor-market transformation: workers are a driving force behind it. 
Of course, digital technologies have also played a vital role in facilitating the rise of independent work. 
Digital platforms like Airbnb, Etsy, and Uber have been critical in reducing the friction and increasing the transparency of the markets that support independent work. 
And innovation in this area remains robust. 
But it is these platforms’ users who are really reshaping the labor market. 
Aided by digital technologies, they are advancing their own interest in earning more, while benefiting from more flexible working arrangements. 
The likely result of this trend will be a shift from the old model of business organization – in which most workers carry out specialized functions for a single employer within a rigid hierarchy – to one centered on lean core organizations that rely on a loose network of external providers for many tasks. 
Whether this new system is actually good for workers, employers, and economies, however, will depend on how all of the relevant actors address the challenges inherent in the transition. 

The Rise of the “Petroyuan” 
SYDNEY/ITHACA – It is now just ten months since China launched its oil futures contract, denominated in yuan (renminbi), on the Shanghai International Energy Exchange. 
In spite of forebodings and shrill alarms, the oil markets continue to function, and China’s futures contracts have established themselves and overtaken in volume terms the dollar-denominated oil futures traded in Singapore and Dubai. 
Of course the volume of trades on the Shanghai INE still lags behind that of the Brent oil contracts traded in London and the West Texas Intermediate oil futures traded in New York. 
The Chinese oil futures contract is, however, being taken seriously by multinational commodity traders (like Glencore) and is priced in a manner that is comparable to the Brent and WTI indices. 
As we argue in The Asia-Pacific Journal, these results suggest that China’s oil futures could bring the renminbi to the core of global commodity markets. 
The launch of the oil futures contract can be anticipated to widen the scope for renminbi-denominated commodity trading. 
As more of China’s oil imports come to be priced in its domestic currency, foreign suppliers will have more renminbi-denominated accounts with which they can purchase not only Chinese goods and services, but also Chinese government securities and bonds. 
This can be anticipated to strengthen Chinese capital markets and promote the renminbi’s internationalization – or at least the progressive de-dollarization of the oil market. 
For the past decade, China’s strategy for internationalizing the renminbi has involved greater reliance on the International Monetary Fund’s Special Drawing Rights as an alternative international reserve currency. 
The People’s Bank of China’s then-governor, Zhou Xiaochuan, spelled out the strategy in an essay in 2009. 
With new allocations of SDRs to emerging industrial powers like China, the SDR, based on a basket of currencies including the renminbi, could serve not only as a development tool, but also as a means of international payment to rival the US dollar. 
In the wake of the 2008 global financial crisis, an SDR-centered international financial system became an enticing prospect for other countries as well. 
Zhou’s 2009 essay galvanized these efforts, as he pointed to the evident inadequacies of the dollar-centered system (such as the impact of chronic US deficits) and outlined the SDR’s advantages as an alternative means of international financial settlement. 
The establishment of renminbi-based oil trading at a time when China and many other economies confront aggressive US tariffs, and possible further development of renminbi-based trade in other commodity markets, suggests that the US dollar could face an unprecedented challenge to its hegemony. 
It may in the near future no longer be seen as the anchor of the international monetary system, bringing to an end to what Valéry Giscard d’Estaing famously called the “exorbitant privilege” enjoyed by the US as a result of the dollar’s centrality in international trade. 
If China’s ultimate goals include internationalizing the renminbi, its more immediate objective, prompted in part by US tariffs or sanctions on China and other countries, is de-dollarization of the international system. 
This is reflected in the shift to promoting an oil futures contract traded in Shanghai, which represents a decisive break with China’s SDR-focused strategy. 
It is also a way for China to capitalize on the US trade sanctions imposed against it – exposing liabilities in these sanctions. 
Both Russia and Iran, for example, are selling oil to China and accepting payment in renminbi, in response to actual or potential sanctions imposed on them by the US. 
They also have extensive imports from China, as well as other reasons for seeking strengthened ties. 
China no doubt views the emergence of renminbi-denominated oil contracts as a means for Chinese companies to buy oil and gas in their own currency, thereby avoiding exposure to foreign currency fluctuations and firing a shot across the bow of US dollar supremacy. 
The fact that China is now the world’s largest oil importer, as well as its leading trading and manufacturing economy, lends weight to its “petroyuan” and other initiatives to internationalize the renminbi. 
If China can withstand US counterattacks, its efforts will lay the financial groundwork for the emergence of a multipolar world. 

Rise Up and Walk 
In July 2005, millions of people filled stadiums for the Live 8 concerts in support of Africa’s people. 
It was also for ordinary citizens that African leaders traveled to Scotland to meet the G-8 heads of state that summer. 
It was for these same people that the Jubilee 2000 campaign for debt relief was carried out by many individuals and organizations all over the world. 
And in St. Petersberg in July 2006, the G-8 leaders reaffirmed their commitment to the ambitious goals they had set the year before, although they did not go further. 
Nearly a year and a half on, there are signs of progress toward fulfilling the commitments to Africa’s development made by world leaders and committed campaigners. 
But it is fair to ask when a sustainable solution to Africa’s dehumanizing poverty will be found, not only by the G8 and the organizers of Live 8, but also by Africa’s leaders and people. 
Africa is a paradox. 
It is one of the richest continents on the planet, endowed with oil, precious stones, forests, water, wildlife, soil, land, agricultural products, and millions of women and men. 
Yet most of Africa’s people remain impoverished. 
I continue to ask myself, “Why?” 
One reason is that many Africans lack the knowledge, skills, tools, and the political will to create wealth from their resources. 
They are unable to add value to raw materials in order to sell processed goods in local and international markets and negotiate better prices and favorable trade rules. 
Another reason is that ordinary citizens suffer when debts are not cancelled, when financial assistance is not forthcoming, or when trade barriers are raised. 
I have also seen the need for ordinary Africans to embrace a set of values, like service for the common good, and commitment, persistence, and patience until a goal is realized. 
We also need Africans who love Africa so much that they want to protect their countries – their land – from environmentally destructive processes. 
The transformation of grasslands into deserts due to deforestation, encroachment into forests for subsistence farming, overgrazing, and loss of biodiversity and soil threaten the entire continent. 
Another value Africans must adopt is love and concern for young people. 
One of the most devastating experiences is to see youth wasting away because they are unemployed, even after they have completed secondary and tertiary education, or because their health has deteriorated. 
African governments should give priority to investments in technical education and HIV/AIDS prevention, treatment, care, and support programs. 
Without skills, people find themselves locked out of productive, rewarding economic activities, leaving them unable to meet their needs for housing, healthcare and nutrition. 
They get trapped in a vicious cycle of poverty and, sometimes, crime. 
Africa needs to prepare for the opportunities and challenges to come by deliberately working for peace and security. 
Much of Africa’s poverty is fueled by conflicts. 
In the course of my work over the past 30 years, I have observed that whether it is at the national or regional level, most conflicts are over resources. 
Who will control and utilize them? 
Who will be included or excluded? 
When resources are scarce, or so degraded that they can no longer sustain livelihoods, or inequitably distributed, conflict invariably ensues. 
In Africa, we need to manage our resources sustainably, accountably, and responsibly. 
And we need to share those resources equitably. 
Otherwise, we will continue to invest in wars and conflicts, or in fighting crime and domestic instability, rather than in promoting development and thereby eliminating poverty. 
African leaders should govern and serve for the benefit of the people, not themselves. 
But perhaps the most unrecognized problem in Africa, especially at the grassroots level, is the disempowerment of ordinary people. 
This is one of the main reasons why so many people are unable to take advantage of the many opportunities available in Africa. 
Africa’s people must be allowed to gain confidence, dignity, and a sense of self-worth. 
They must also be empowered with knowledge, skills, and tools to take action. 
This is why debt relief is so important. 
It provides governments additional resources to invest in initiatives that can empower their people. 
Despite the many challenges that remain, there has been much recent progress in Africa. 
There are indications of good governance in many countries. 
In many others, civil society continues to grow, supported by national governments, the African Union, and the international community. 
Many countries are resolving their conflicts and working for peace and stability. 
We must appreciate and encourage those who are making bold decisions. 
But much must still be accomplished, by Africans and with Africa’s many friends around the world. 
As in the Bible story, when Peter and John said to a beggar, “rise up and walk,” Africans are called upon to walk away from ignorance, inertia, apathy, and fatalism. 
To walk towards economic and political freedom. 
To walk to an Africa free of poverty. 

The Insecurity of Inequality 
NEW YORK – Global inequality today is at a level last seen in the late nineteenth century – and it is continuing to rise. 
With it has come a surging sense of disenfranchisement that has fueled alienation and anger, and even bred nationalism and xenophobia. 
As people struggle to hold on to their shrinking share of the pie, their anxiety has created a political opening for opportunistic populists, shaking the world order in the process. 
The gap between rich and poor nowadays is mind-boggling. 
Oxfam has observed that the world’s eight richest people now own as much wealth as the poorest 3.6 billion. 
As US Senator Bernie Sanders recently pointed out, the Walton family, which owns Walmart, now owns more wealth than the bottom 42% of the US population. 
I can offer my own jarring comparison. 
Using Credit Suisse’s wealth database, I found that the total wealth of the world’s three richest people exceeds that of all the people in three countries – Angola, Burkina Faso, and the Democratic Republic of Congo – which together have a population of 122 million. 
To be sure, great progress on reducing extreme poverty – defined as consumption of less than $1.90 per day – has been achieved in recent decades. 
In 1981, 42% of the world’s population lived in extreme poverty. 
By 2013 – the last year for which we have comprehensive data – that share had dropped to below 11%. 
Piecemeal evidence suggests that extreme poverty now stands just above 9%. 
That is certainly something to celebrate. 
But our work is far from finished. 
And, contrary to popular belief, that work must not be confined to the developing world. 
As Angus Deaton recently pointed out, extreme poverty remains a serious problem in rich countries, too. 
“Several million Americans – black, white, and Hispanic – now live in households with per capita income of less than $2 per day,” he points out. Given the much higher cost of living (including shelter), he notes, such an income can pose an even greater challenge in a country like the US than it does in, say, India. 
This constraint is apparent in New York City, where the number of known homeless people has risen from 31,000 in 2002 to 63,000 today. 
(The true figure, including those who have never used shelters, is about 5% higher.) 
This trend has coincided with a steep rise in the price of housing: over the last decade, rents have been rising more than three times as fast as wages. 
Ironically, the wealthy pay less, per unit, for many goods and services. 
A stark example is flying. 
Thanks to frequent flier programs, wealthy travelers pay less for each mile they fly. 
While this makes sense for airlines, which want to foster loyalty among frequent fliers, it represents yet another way in which wealth is rewarded in the marketplace. 
This phenomenon is also apparent in poor economies. 
A study of Indian villages showed that the poor face systematic price discrimination, exacerbating inequality. 
In fact, correcting for differences in prices paid by the rich and the poor improves the Gini coefficient (a common measure of inequality) by 12-23%. 
The better off also get a whole host of goods for free. 
To name one seemingly trivial example, I can’t remember when I last bought a pen. 
They often simply appear on my desk, unintentionally left behind by people who stopped by my office. 
They vanish just as often, as people inadvertently pick them up. 
The late Khushwant Singh, a renowned Indian journalist, once said that he attended conferences only to stock up on pens and paper. 
A non-trivial example is taxation. 
Rather than paying the most in taxes, the wealthiest people are often able to take advantage of loopholes and deductions that are not available to those earning less. 
Without having to break any rules, the wealthy receive what amount to subsidies, which would have a far larger positive impact if they were allocated to the poorest people. 
Beyond these concrete inequities, there are less obvious – but equally damaging – imbalances. 
In any situation where, legally, one’s rights are not enforced or even specified, the outcome will probably depend on custom, which is heavily skewed in favor of the rich. 
Wealthy citizens can not only vote; they can influence elections through donations and other means. 
In this sense, excessive wealth inequality can undermine democracy. 
Of course, in any well-run economy, a certain amount of inequality is inevitable and even needed, to create incentives and power the economy. 
But, nowadays, disparities of income and wealth have become so extreme and entrenched that they cross generations, with family wealth and inheritance having a far greater impact on one’s economic prospects than talent and hard work. 
And it works both ways: just as children from wealthy families are significantly more likely to be wealthy in adulthood, children of, say, former child laborers are more likely to work during their childhood. 
None of this is any individual’s fault. 
Many wealthy citizens have contributed to society and played by the rules. 
The problem is that the rules are often skewed in their favor. 
In other words, income inequality stems from systemic flaws. 
In our globalized world, inequality cannot be left to markets and local communities to solve any more than climate change can. 
As the consequences of rising domestic inequality feed through to geopolitics, eroding stability, the need to devise new rules, re-distribution systems, and even global agreements is no longer a matter of morals; increasingly, it is a matter of survival. 

Rising Uncertainties in the U.S. Economy 
CAMBRIDGE: America’s economy is entering a risky phase. 
The conditions that underpinned its long boom are weakening. 
It is a fool’s game to try to predict changes in public sentiments. 
Nonetheless, good economic reasoning can help us to anticipate the economic turbulence ahead. 
The US boom has been a mix of reality and wishful thinking. 
The reality is that technological advancement, combined with flexible and dynamic labor and capital markets, led to a rapid rise in productivity growth and the spread of new technologies. 
Lives in the US changed remarkably for the better recently, with improvements in the service economy, new medical technologies, access to information, and the like. 
Wishful thinking transformed economic gains into visions of easy wealth. 
The New Economy – which is real – became the “invincible” economy where risks are discounted, stocks always rise, world economic conditions are always beneficial, and budget surpluses continue forever. 
Optimism manifested itself in two ways. 
First, American stock markets rose giddily – adding $8 trillion in paper wealth to owners of US equities in a five-year period. 
Second, American consumers increased spending as a result of their paper wealth, reducing or eliminating their savings from income because their stock market wealth would protect them in the future. 
The combination of large business investments in new technologies, combined with high levels of consumer spending, fueled a spending boom. 
For every dollar of income produced in America, spending by consumers, businesses, and the government now equals one dollar and four cents. 
The extra four cents per dollar is paid for, in essence, by borrowing from abroad. 
Foreigners have been keen on buying US stocks and bonds, while American businesses and households used that capital to support their investment and spending. 
All of this will work out fine if the rosy scenarios continue. 
The problem is that many contrary economic signals are now appearing. 
Suddenly, doubts have arisen, and the cumulative effect of them could to turn a boom into slowdown, or even into recession. 
The first doubt is about the stock market. 
Euphoric investors acted as if profits would continue to grow at unprecedented rates. 
Recently, profits have not cooperated. 
As forecasts of profitability drooped, the stock market declined. 
The easy wealth of recent years has become less easy. 
Nobody is panicking yet, but nobody can rule out more declines. 
The second doubt concerns the world economy. 
Soaring oil prices will cut corporate profits and household purchasing power. 
Interest rates in the US might be raised to head off the inflationary effects of higher oil prices. 
Violence in the Middle East makes matters worse. 
The third doubt is about US economic management. 
While nobody can predict the outcome of the presidential election, we can be certain that a new, untested Administration will take over in January. 
George W. Bush’s proposals for a massive tax cut are risky – gambling on large future budget surpluses that might never appear, and gambling that a sharp tax cut won’t trigger a jump in interest rates. 
A Gore Administration would have more continuity with present policies, but first-year Administrations always create uncertainties and anxieties, and many of Gore’s spending proposals will create uncertainties about future budget prospects. 
The great economist John Maynard Keynes taught that changes in market sentiments – which he called “animal spirits” – have a life of their own; that swings in sentiment could swing an economy. 
Optimism turns to euphoria turns to pessimism turns to panic. 
America has had its share of euphoria; pessimism is now setting in. 
Panic is by no means assured, but cannot be ruled out. 
What would happen if more shocks undermine the confidence that fueled America’s boom? 
Suppose oil prices remain high, profit forecasts continue to fall, and the new Administration unsettles the markets. 
Stock prices would fall; interest rates would rise; budget surplus projections would be cut. 
Trillions of dollars of paper wealth already factored into spending decisions by households, firms, and government would disappear. 
Households would cut spending, and investors would reduce their American holdings, driving the dollar down against the Euro and other currencies. 
American politics would dramatically heat up, with a fierce debate over priorities. 
This would incite even more economic uncertainties. 
Depending on how rapidly and deeply such a swing occurs, America could merely slow down (the so-called “soft landing”), or fall into recession (the increasingly feared “hard landing”). 
Normally, a cutback in optimism reduces interest rates, helping sustain investment and consumer spending. 
But here, who knows? 
The Federal Reserve might keep interest rates high to fight the inflationary consequences of high oil prices. 
Or interest rates might remain high because of increased uncertainties about the size of future budget surpluses, or the risks of large tax cuts. 
For the rest of the world, economic maneuvering would be tricky. 
For many economies, exports to America would slow, and growth would depend either on finding new markets (say, increased sales in Europe and Japan if those economies picked up), or on being able to increase domestic consumption and investment within those economies. 
If investors take money out of the US and park it in other markets, those economies would enjoy a boost of wealth and spending. 
No doubt, then, that the world could compensate for slower growth in US by faster growth abroad, but there is also no doubt that such transitions are hard to manage. 
This is especially true because financial systems in many countries have still not recovered from their own recent crises. 
I am no pessimist, even less a doomsayer. 
Events in the world economy are notoriously hard to predict. 
America’s economy could continue to charge ahead. 
More realistically, the combination of optimism and productivity growth that powered America’s boom looks likely to be less robust in the coming year. 

The Eurozone’s Solidarity Fallacy 
FRANKFURT – Since 2010, many measures have been adopted to “crisis-proof” the eurozone. 
In addition to tighter budgetary rules and the start of a banking union, new efforts are underway to strengthen the European Stability Mechanism (ESM), which is now meant to serve as a backstop for the Single Resolution Fund (SRF). 
At a recent Eurogroup meeting, eurozone finance ministers agreed on reforms to allow fundamentally “sound” member states to access “contingent” ESM credit lines if they meet certain conditions, and for all sovereign-bond contracts to include collective-action clauses by 2022. 
With policymakers still debating whether to create a eurozone budget and deposit insurance scheme, we should consider what the reforms introduced so far might mean for the future. 
At issue is whether we want a monetary union in which member states are individually responsible for their policies, or one based on solidarity, complete with risk sharing and financial transfers. 
In accordance with the European Union’s solidarity principle, the reform has focused on introducing more safety nets and backstops, with a shared budget, joint unemployment and deposit insurance, and so forth. 
The assumption is that the more risks are shared, the more stable the eurozone will be. 
But this is a fallacy. 
In practice, the proliferation of new safeguards has introduced a high degree of moral hazard and created perverse incentives for governments and market participants alike. 
Under the latest eurozone reforms, the principle that those who assume a risk should be liable for it has been replaced by a principle of joint liability, implying financial transfers on an unprecedented scale in the event of a crisis. 
The current situation in Italy should serve as a warning to all those advocating risk sharing. 
Making matters worse, the sole focus on solidarity means that the eurozone’s real problems have gone unaddressed. 
These include high levels of public and private debt, weak institutions, overregulated markets, and still-incomplete balance-sheet corrections on the part of corporations and banks. 
The arguments in favor of expanded solidarity measures are unconvincing. 
Either risk-sharing instruments are unnecessary, or they can be deployed only under conditions in which they would undermine eurozone stability. 
Why, for example, should a “sound” eurozone member state need to obtain a “contingent credit line” unless it is harboring hidden weaknesses? 
Equally dubious are the justifications given for a shared eurozone budget. 
Is the purpose to stabilize the bloc in the event of shocks? 
Is it to make investments? 
Or is it to create financial incentives for domestic economic reforms? 
As to the first question, during its 20-year history, most of the eurozone’s shocks have been asymmetrical, centering on member states that pursued irresponsible policies. 
With the exception of the 2008 crisis, then, eurozone shocks have generally been small and self-inflicted, suggesting that the appropriate response should take the form of domestic policies to build more robust budgetary buffers. 
If the purpose is to provide investment funds, the EU budget, the “Juncker Plan,” and the European Investment Bank already perform this role. 
Europe’s problem is not a lack of financial resources, but rather a lack of suitable projects and limited capacity within member states. 
Finally, the argument for a joint budget to reward domestic economic reforms assumes that such reforms create large-scale financial burdens in the short term. 
But the empirical evidence for this is inconclusive. 
In any case, the costs of not carrying out necessary reforms would have to be offset against the costs of doing so, if only to make clear that structural reforms are in individual countries’ own interest. 
A eurozone deposit insurance scheme is similarly ill-advised at this time, given the scale of non-performing loans in many member states. 
The immediate need is for a drastic reduction of existing balance-sheet risks. 
As for future risks, the preferential regulatory treatment afforded to government bonds must end. 
Sovereign debt should come with equity backing, and emissions of government securities should be capped. 
Rather than install ever more safeguards, it is time to address the eurozone’s real weaknesses. 
The sovereign-debt crisis started with weak fiscal positions and doubts about the sustainability of public debts, combined with structural deficits that led to a loss in competitiveness. 
Economic reforms therefore remain essential. 
Unless the risks emanating from high public debt are systematically reduced, eurozone countries will be heavily exposed when the next crisis strikes. 
Moreover, budget rules should be made more transparent, credible, and enforceable through automatic sanctions against conduct displaying a lack of solidarity. 
The focus on “structural deficits” should be replaced by a simpler spending rule that is less dependent on the economic cycle. 
And an independent and credible European fiscal agency should be entrusted with budget monitoring and the implementation and enforcement of the rules. 
The highly politicized European Commission does not meet these requirements. 
The eurozone also needs an insolvency code, which would restore credibility to the Lisbon Treaty’s no-bailout clause. 
And, of course, the nexus between governments and banks should be broken without further delay. 
In view of this agenda, the latest reform efforts are a step in the wrong direction. 
Joint liability in the name of solidarity will quickly become a one-way street for governments that pursue imprudent economic policies to escape accountability. 
And, given the eurozone’s high level of public debt, joint liability entails enormous financial risks. 
The limits of the eurozone’s solidarity policies are now being tested. 
The proliferation of backstops not only prevents risk mitigation, but actually invites even more risk. 
In the event of a crisis, governments’ incapacity to assume this collective burden will be laid bare, with far-reaching implications for the sustainability of public finances and the financial and monetary stability of the eurozone. 
Needless to say, the entire point of reform is to prevent such a scenario. 
For Europe’s Economic and Monetary Union to be secure, risk sharing must give way to risk reduction. 

Europe’s Secret Bailout 
MUNICH – While the world worries about Donald Trump, Brexit, and the flow of refugees from Syria and other war-torn countries, the European Central Bank continues to work persistently and below the public radar on its debt-restructuring plan – also known as quantitative easing (QE) – to ease the burden on over-indebted eurozone countries. 
Under the ECB’s QE program, which started in March 2015 (and will likely be extended beyond its scheduled end in March 2017), eurozone members’ central banks buy private market securities for €1.74 trillion ($1.84 trillion), with more than €1.4 trillion to be used to purchase their own countries’ government debt. 
The QE program seems to be symmetrical, because each central bank repurchases its own government debt in proportion to the size of the country. 
But it does not have a symmetrical effect, because government debt from southern European countries, where the debt binges and current-account deficits of the past occurred, are mostly repurchased abroad. 
For example, the Banco de España repurchases Spanish government bonds from all over the world, thereby deleveraging the country vis-à-vis private creditors. 
To this end, it asks other eurozone members’ central banks, particularly the German Bundesbank and, in some cases, the Dutch central bank, to credit the payment orders to the German and Dutch bond sellers. 
Frequently, if the sellers of Spanish government bonds are outside the eurozone, it will ask the ECB to credit the payment orders. 
In the latter case, this often results in triangular transactions, with the sellers transferring the money to Germany or the Netherlands to invest it in fixed-interest securities, companies, or company shares. 
Thus, the German Bundesbank and the Dutch central bank must credit not only the direct payment orders from Spain, but also the indirect orders resulting from the Banca de España’s repurchases in third countries. 
The payment order credits granted by the Bundesbank and the Dutch central bank are recorded as Target claims against the euro system. 
At the end of September, these claims amounted to €819.4 billion, with the Bundesbank accounting for €715.7 billion, which was 46% of Germany’s net external assets at midyear. 
Since the beginning of the year, both countries’ combined claims have increased by €180.4 billion, or €20 billion per month, on average. 
Conversely, the Target debt of the Southern European countries – Greece, Italy, Portugal, and Spain (GIPS) – amounted to €816.5 billion. 
For the GIPS countries, these transactions are a splendid deal. 
They can exchange interest-bearing government debt with fixed maturities held by private investors for the (currently) non-interest-bearing and never-payable Target book debt of their central banks – institutions that the Maastricht Treaty defines as limited liability companies, because member states do not have to recapitalize them when they are over-indebted. 
If a crash occurs and those countries leave the euro, their national central banks are likely to go bankrupt because much of their debt is denominated in euro, whereas their claims against the respective states and the banks will be converted to the new depreciating currency. 
The Target claims of the remaining euro system will then vanish into thin air, and the Bundesbank and the Dutch central bank will only be able to hope that other surviving central banks participate in their losses. 
At that time, German and Dutch asset sellers who now hold central bank money will notice that their stocks are claims against their central banks that are no longer covered. 
One should not assume that anyone is actively striving for a crash. 
But, in view of the negotiations – set to begin in 2018 – on a European fiscal union (implying systematic transfers from the EU’s north to its south), it wouldn’t hurt if Germany and the Netherlands knew what would happen if they did not sign a possible treaty. 
As it stands, they will presumably agree to a fiscal union, if only because it will enable them to hide the expected write-off losses in a European transfer union, rather than disclosing those losses now. 

Risky Growth Engines 
WASHINGTON, DC – While the rich world puts its post-crisis house in order, developing countries as a whole are becoming the new engine of global growth. 
Increasingly, they are a force pulling the advanced economies forward. 
But switching locomotives is never free of risk. 
As my colleague Marcelo Giugale and I argue in our recent book The Day After Tomorrow, there are at least four tracks along which this switchover is taking place. 
First, public- and private-sector balance sheets in most emerging economies are relatively clean. 
While deleveraging is ongoing in advanced economies, many developing countries will be able to explore untapped investment opportunities – infrastructure bottlenecks being a glaring example. 
Second, there is a large inventory of technologies that the developing world is yet to acquire, adopt, and adapt. 
Thanks to breakthroughs in information and communication, transferring those technologies is becoming cheaper and safer. 
Furthermore, decreased transportation costs and the breakup of vertical production chains in many sectors are facilitating poorer countries’ integration into the global economy. 
Third, a flipside of the emergence of new middle classes in many emerging markets is that domestic absorption (consumption and investment) in developing countries as a whole may rise relative to their own production potential. 
Provided that South-South trade linkages are reinforced, one might see a new round of successful export-led growth in smaller countries. 
Finally, resource-intensive developing countries may benefit from strong projected relative demand for commodities in the medium term. 
As long as appropriate governance and revenue-administration mechanisms are put in place – particularly to avoid rent-seeking behavior – natural-resource availability may turn out to be a blessing rather than a curse for these countries. 
Most developing countries were already moving along these four tracks before the global financial crisis, owing largely to improvements in their economic policies during the previous decade. 
Given that these policies enabled these countries to respond well to shocks coming from the crisis epicenter, there are strong incentives to keep them in place. 
There is, however, a major threat to a smooth transition to new sources of global growth: the possibility of overshooting in the inevitable asset-price adjustment accompanying the shift in relative growth prospects and perceptions of risks. 
Indeed, because the creation of new assets in developing countries will be slower than the increase in demand for them, the price of existing assets in those markets – equities, bonds, real estate, human capital – are likely to overshoot their long-term equilibrium value. 
Recent history is full of examples of the negative side-effects that can arise. 
Each and every one of the recent booms and busts – in Latin America, Asia, and Russia in the 1990’s, and in Eastern Europe, Southern Europe, and Ireland more recently – shared some combination of unsustainably low financial costs, asset bubbles, over-indebtedness, wage growth unwarranted by productivity gains, and domestic absorption in excess of production. 
In every case, these imbalances were fueled by easily identifiable periods of euphoria and sudden asset-prices increases. 
True, external factors, such as foreign liquidity, were conducive – or at least permissive – to such periods of euphoria. 
Twin current-account and fiscal deficits (and/or currency and debt-maturity mismatches) were the rule. 
But our point is that powerful forces that drive up asset prices may be unleashed even without massive liquidity inflows. 
The scramble for available assets and a dangerous euphoria may occur through purely domestic mechanisms. 
So what should developing countries do, aside from maintaining sound macroeconomic policies, curbing excessive domestic financial leverage, and attempting to isolate themselves from volatile capital inflows? 
The most important task is to facilitate and strengthen the creation of new assets, and there is much that developing countries can do in this regard. 
They can take advantage of the current bonanza in available capital to build contestability, transparency, and institutional quality around markets in which greenfield investments can be implemented. 
They can ensure that the rules they have in place are consistent and favorable to funding investment projects with long maturities. 
And they can invest in their own capacity for project selection and design. 
These and other internal reforms would serve to moderate the furious rise in the price of developing-country assets. 
For that reason, they also constitute the best way to ensure that the next locomotives of global growth – and all the economies that are pulled by them – remain on the rails. 

Risky Risk Management 
LONDON – Mainstream economics subscribes to the theory that markets “clear” continuously. 
The theory’s big idea is that if wages and prices are completely flexible, resources will be fully employed, so that any shock to the system will result in instantaneous adjustment of wages and prices to the new situation. 
This system-wide responsiveness depends on economic agents having perfect information about the future, which is manifestly absurd. 
Nevertheless, mainstream economists believe that economic actors possess enough information to lend their theorizing a sufficient dose of reality. 
The aspect of the theory that applies particularly to financial markets is called the “efficient market theory,” which should have blown sky-high by last autumn’s financial breakdown. 
But I doubt that it has. 
Seventy years ago, John Maynard Keynes pointed out its fallacy. 
When shocks to the system occur, agents do not know what will happen next. 
In the face of this uncertainty, they do not readjust their spending; instead, they refrain from spending until the mists clear, sending the economy into a tailspin. 
It is the shock, not the adjustments to it, that spreads throughout the system. 
The inescapable information deficit obstructs all those smoothly working adjustment mechanisms – i.e., flexible wages and flexible interest rates – posited by mainstream economic theory. 
An economy hit by a shock does not maintain its buoyancy; rather, it becomes a leaky balloon. 
Hence Keynes gave governments two tasks: to pump up the economy with air when it starts to deflate, and to minimize the chances of serious shocks happening in the first place. 
Today, that first lesson appears to have been learned: various bailout and stimulus packages have stimulated depressed economies sufficiently for us to have a reasonable expectation that the worst of the slump is over. 
But, judging from recent proposals in the United States, the United Kingdom, and the European Union to reform the financial system, it is far from clear that the second lesson has been learned. 
Admittedly, there are some good things in these proposals. 
For example, the US Treasury suggests that originators of mortgages should retain a “material” financial interest in the loans they make, in contrast to the recent practice of securitizing them. 
This would, among other things, reduce the role of credit rating agencies. 
But there is no indication as to how much of the loan they would be required to hold, or for how long. 
Nor do these official responses to the crisis envisage limiting the amount of loans to some multiple of the borrowers’ income or some proportion of the value of the property being bought. 
This, it is feared, might slow recovery. 
It would have been better for both recovery and reform to promise to introduce such limitations in (say) two years time. 
Most disappointing to reformers has been the official rejection of the “Glass-Steagall” approach to banking reform. 
This would have restored the separation between retail and investment banking, which was swept away by the de-regulating wave of the 1980’s and 1990’s. 
The logic behind the separation was absolutely clear: banks whose deposits were insured by the taxpayers should not be allowed to speculate with their depositors’ money. 
Instead, the reform proposals have opted for a mixture of higher capital requirements for leading banks and pre-funding of deposit insurance by a special levy on banks. 
There seems to be little appetite for proposals to vary capital adequacy requirements counter-cyclically. 
This would enable capital buffers to be created in good years, which could then be drawn down in bad years. 
Admittedly, there are difficulties with all proposals to restrict the scope of “risky” banking, especially in the context of a global economy with free capital mobility. 
As is frequently pointed out, unless banking regulations are identical across frontiers, there will be plenty of scope for “regulatory arbitrage.” 
Similarly, banks would have incentives to “game” capital-adequacy requirements by manipulating how capital and assets are defined. 
Indeed, investment banks like Goldman Sachs and Barclays Capital are already inventing new types of securities to reduce the capital cost of holding risky assets. 
The underlying problem, though, is that both regulators and bankers continue to rely on mathematical models that promise more than they can deliver for managing financial risks. 
Although regulators now place their faith in “macro-prudential” models to manage “systemic” risk, rather than leaving financial institutions to manage their own risks, both sides lumber on in the untenable belief that all risk is measurable (and therefore controllable), ignoring Keynes’s crucial distinction between “risk” and “uncertainty.” 
Salvation does not lie in better “risk management” by either regulators or banks, but, as Keynes believed, in taking adequate precautions against uncertainty. 
As long as policies and institutions to do this were in place, Keynes argued, risk could be let to look after itself. 
Treasury reformers have shirked the challenge of working out the implications of this crucial insight. 

Road Runner Populism 
PRINCETON – Populist economics has rarely had it so good. 
The US economy is roaring, the stock market is soaring, and the Trump administration’s protectionism has apparently had a negligible impact on growth. 
Trump’s dictum that “trade wars are good” even seems to be catching on politically, confounding some of his critics. 
They still insist that tariffs are undesirable in general, but they now concede that such measures could be appropriate and useful to stymie China’s rise. 
A similar picture has emerged in Europe, where Hungarian Prime Minister Viktor Orbán and Poland’s de facto leader, Jarosław Kaczyński, are riding high on the back of full employment and labor shortages. 
Under these conditions, one of the populists’ strongest arguments is simply to point out that all the warnings by the globalist elite, Davos cosmopolitans, neoliberals, and one-percenters about the dangers of populist economics were baloney. 
The British Remainers behind “Project Fear” overstated the costs of Brexit; the UK economy has not collapsed after all. 
But, of course, it is only a question of when, not if, the economic reckoning will come. 
Populism is not only about promises to give more to more people; but, without those promises, all of the cultural elements of populism would look merely outdated and reactionary. 
And even reactionaries do not like reactionary politics if it hurts them in their wallets. 
In the United States, the midterm congressional elections in November will be decided by whether enthusiasm about the state of the economy is strong enough to compensate for the widespread disapproval of Trump’s personal style and divisive, sexist, and racist rhetoric. 
Yet it is precisely on this issue that the conventional wisdom breaks down. 
Classical economic liberalism assumes that bad policies will be punished immediately by bad outcomes. 
Over the past 25 years, bond-market vigilantes have argued that all-seeing, forward-looking financial markets will always anticipate the future consequences of populist policies and impose risk premia. 
According to this logic, as borrowing costs rise, populist governments will not be able to deliver on their rash promises, and sanity and orthodoxy will eventually return. 
Economists who study populism generally draw lessons from Latin America, where past episodes of nationalist over-promising have quickly led to massive fiscal deficits that could not be financed. 
In these cases, populist economics always produced cycles of inflation, currency depreciation, and instability, because global financial markets and other outsiders were skeptical from the start. 
The problem is that the Latin American experience is not universal. 
Bond markets are not as predictable as many seem to believe; nor can they be relied on as an ultimate source of discipline. 
Like markets generally, bond markets can be captured by a popular narrative (or what might euphemistically be called the management of expectations) that overstates the prospects of a certain outcome. 
Like today, the interwar period had liberals who predicted that the unconventional response to the Great Depression would end tragically, only to be exposed as purveyors of falsehood when their prophecies did not immediately come to pass. 
The most extreme response to the Depression came from Hitler’s Germany. 
The Nazis did not miss an opportunity to boast about how quickly their programs had wiped out unemployment and built new infrastructure. 
With the German government keeping inflation in check through extensive price and wage controls, there was much talk about an economic miracle. 
The Nazis’ apparent success in defying economic orthodoxy looked to many conventionally minded analysts like an illusion. 
Critics outside Germany saw only a deeply immoral polity pursuing a project that was doomed to fail. 
They were right about the immorality, of course; but they were wrong about the imminence of the project’s economic collapse. 
In 1939, the Cambridge University economist Claude Guillebaud published The Economic Recovery of Germany, which argued that the German economy was quite robust and would not collapse from overstrain or overheating in the event of a military conflict. 
Guillebaud was widely vilified. 
The Economist, that bastion of classical liberalism, pilloried him in an unprecedented two-page review, concluding that not even the chief Nazi propagandist Joseph Goebbels could have improved on his interpretation. 
His work, the editors lamented, was emblematic of a “dangerous tendency among democratic economists to play the Nazis’ game.” 
Guillebaud was also excoriated by other academics who were far more famous than him, such as the British economist Dennis Robertson. 
And yet Guillebaud was fundamentally right: Nazi Germany was not an economy on the brink of collapse, and the Western powers would have done well to start mobilizing a proper defense. 
The contemporary debate is similar. 
The record of populist economics in Europe is neither particularly bad nor particularly outstanding. 
More to the point, today’s populists have benefited from a general recovery that began before they arrived on the scene. 
When the next downturn comes, they will quickly find that their own reckless policies have severely constrained their ability to respond. 
At that point, Orbán, Kaczyński, and other Central European populists may decide to pursue more aggressive options. 
If populism had an avatar, it would be the immortal cartoon character Wile E. Coyote, who, in his futile pursuit of the Road Runner, routinely sprints over cliff edges and continues to move forward, suspended by the logic of his own belief. 
Eventually, he realizes that there is no ground beneath his feet, and he falls. 
But that never happens immediately. 
In the 1990s, when Russia was feeling the pinch of economic reforms, the Russian political provocateur Vladimir Zhirinovsky asked, “Why should we inflict suffering on ourselves? 
Let’s make others suffer.” 
The ultimate danger of nationalist populism always reveals itself during a setback. 
When things start to go wrong, the only way forward is at the expense of others. 
As in the past, when the illusion of today’s painless economic expansion ends, politics will return to the fore, and trade wars may lead to troop deployments. 

Reducing Speed to Save Lives 
NEW YORK – We can save so many lives around the world if we just slow down. 
Each year, more than 1.25 million people – many of them young people – die in automobile crashes. 
And a large proportion of these deaths are preventable: about one-third are due to vehicles traveling at excessive speeds. 
In low- and middle-income countries, that figure is closer to half. 
Regardless of where one lives, speeding is a lethal problem. 
Studies show that on most roads, in most countries, 40-50% of all cars travel above the posted speed limit. 
And whether or not a car is speeding can be the difference between life and death. 
For example, someone who is hit by a vehicle traveling at 50 miles (80 kilometers) per hour has a three times higher risk of dying than if they had been hit by a vehicle moving at 30 miles per hour. 
This means that just setting urban speed limits at 30 miles per hour or less, and allowing local authorities to reduce speed limits further around schools and other areas with high pedestrian traffic, would save many lives. 
It is encouraging that 47 countries around the world are already implementing these commonsense practices. 
But we must do far more to expand the reach of such measures, and to ensure that more governments adopt them. 
Not surprisingly, countries that have embraced a comprehensive approach to road safety, such as the Netherlands, Switzerland, and the United Kingdom, have had the most success in reducing their rates of death and injury from automobile accidents. 
These countries have made it a high priority to reduce rates of speeding, and they have taken steps to improve the safety of their roads, vehicles, drivers, and all others who use roads, including pedestrians and motorcyclists. 
For example, proactive countries have built their roads to include features that calm traffic, such as roundabouts. 
They have also established speed limits tailored to local road conditions, while stepping up enforcement to deter traffic violations. 
And they have begun to require that all new cars include life-saving technologies such as autonomous emergency braking. 
Municipal leaders worldwide – from Addis Ababa to Mumbai to Bangkok – have played a key role in implementing these measures, which are not just saving lives, but also making their cities healthier in other ways. 
Safer streets encourage more people to walk and cycle, helping to reduce air pollution, which has been linked to chronic respiratory disease, cancer, and other noncommunicable diseases. 
To build on these achievements, Bloomberg Philanthropies, the World Health Organization, and other partners are working with municipal leaders to help them gather the data needed to identify problem areas more effectively. 
They can then determine where to target their limited resources to make the biggest improvements. 
We are also providing support for local authorities to stage public-awareness campaigns that will help build grassroots support for new road-safety legislation and stronger penalties. 
Improving road safety is one of the biggest opportunities we have to save lives around the world. 
And the good news is that, starting with the solutions outlined above, we already know how to do it. 
The fourth annual United Nations Global Road Safety Week, May 8-14, provides a chance to draw more attention to these solutions. 
Over the course of the week, community events are being held in cities around the world, to help raise awareness of the problem and advance more solutions. 
These events will take many forms: street traffic will be slowed down, campaigns will be launched in many schools, and roundtable discussions will be held to explore how we can ensure that smart policies continue to spread. 
All of these events and initiatives will bring together local and national leaders in government, civil society, business, law enforcement, and other sectors. 
To learn more about the week’s events, and how every community can take steps to reduce speeding, we encourage readers to visit the Road Safety Week website. 
A world in which far fewer lives are lost to automobile accidents is possible and entirely within our reach. 
It is up to all of us to make it a reality. 

Will Americans Become Poorer? 
CAMBRIDGE – Robert Gordon of Northwestern University has launched a lively and important debate about the future rate of economic growth in the United States. 
Although his book The Rise and Fall of American Growth will not be published until January 2016, his thesis has already garnered coverage in the Economist and Foreign Affairs. 
Clearly, Gordon’s gloomy assessment of America’s growth prospects deserves to be taken seriously. 
But is it right? 
Gordon argues that the major technological changes that raised the standard of living in the past are much more important than anything that can happen in the future. 
He points to examples such as indoor plumbing, automobiles, electricity, telephones, and central heating, and argues that all of them were much more important for living standards than recent innovations like the internet and mobile phones. 
I agree with Gordon that I would rather give up my mobile phone and even the Internet than go without indoor plumbing and electricity. 
But that just means that we are lucky to be living now rather than a century ago (and even luckier to be living now than two centuries ago or in the middle ages). 
The fact that these major innovations happened in the past is not a reason to be pessimistic about the future. 
Gordon also points to the recent slowdown in real (inflation-adjusted) GDP growth. 
According to official US statistics, real GDP per worker grew at an average annual rate of 2.3% from 1891 to 1972, but by only 1.5% since then. 
But the official statistics on GDP growth fail to capture most of the gains in our standard of living that come from new and improved goods and services. 
That means that the official growth rate does not reflect the rise in real incomes that came with air conditioning, anti-cancer drugs, new surgical procedures, and the many more mundane innovations. 
Moreover, because the US government does not count anything in GDP unless it is sold in the market, the vast expansion of television entertainment and the introduction of services like Google and Facebook have been completely excluded from the national account. 
This means that the true rise in real incomes was actually faster than the official statistics imply – possibly much faster. 
That is true of the data for the first half of the twentieth century, and it continues to be true today. 
It is not clear whether the measurement problem was bigger in the more distant past than it has been recently; but it is irrelevant when we think about the future. 
Whether growth in per capita income that is officially estimated at 1.5% is in reality more like 3%, we are enjoying the higher level of real incomes inherited from the past. 
So will future generations. 
Indeed, there is simply no reason for the view, often expressed in surveys and appearing in Gordon’s book, that the children of today’s generation will not enjoy a standard of living as high as their parents’. 
That may be true for some people, especially those with relatively high incomes, but it is definitely not true for most people. 
Think about a 30-year-old new parent at the middle of the income distribution. 
Thirty years from now, the child will be as old as her median-income parent is now. 
If real incomes grow at just 1.5% a year, the median income 30 years from now will be nearly 60% higher than the income of today’s median-income individual. 
Even if the child earns 30% less than the median at that time, her income would still be higher than today’s median income. 
And if product innovations and improvements imply that per capita real incomes grow at 3% a year, the median income of someone 30 years from now would be more than twice today’s median income. 
So Americans are lucky that they have inherited the innovations of the past, and that real incomes will continue to grow in the future. 
But that is not a reason for complacency. 
The US can increase its future growth rate by improving its education system, raising its rates of saving and investment to where they were in the past, and fixing the features of its tax and transfer systems that reduce employment and earnings. 
Gordon focuses on the effect of technological innovation on Americans’ real incomes. 
But an important limitation of his argument is that it gives short shrift to policy innovation. 
America’s economy – and those of many other countries – could grow faster in the future if policymakers adopt the appropriate reforms. 

The Financial Fire Next Time 
NEW HAVEN – If we have learned anything since the global financial crisis peaked in 2008, it is that preventing another one is a tougher job than most people anticipated. 
Not only does effective crisis prevention require overhauling our financial institutions through creative application of the principles of good finance; it also requires that politicians and their constituents have a shared understanding of these principles. 
Today, unfortunately, such an understanding is missing. 
The solutions are too technical for most news reporting aimed at the general public. 
And, while people love to hear about “reining in” or “punishing” financial leaders, they are far less enthusiastic about asking these people to expand or improve financial-risk management. 
But, because special-interest groups have developed around existing institutions and practices, we are basically stuck with them, subject to minor tweaking. 
The financial crisis, which is still ongoing, resulted largely from the boom and bust in home prices that preceded it for several years (home prices peaked in the United States in 2006). 
During the pre-crisis boom, homebuyers were encouraged to borrow heavily to finance undiversified investments in a single home, while governments provided guarantees to mortgage investors. 
In the US, this occurred through implicit guarantees of assets held by the Federal Housing Administration (FHA) and the mortgage agencies Fannie Mae and Freddie Mac. 
At a session that I chaired at the American Economic Association’s recent meeting in Philadelphia, the participants discussed the difficulty of getting any sensible reform out of governments around the world. 
In a paper presented at the session, Andrew Caplin of New York University spoke of the public’s lack of interest or comprehension of the rising risks associated with the FHA, which has been guaranteeing privately-issued mortgages since its creation during the housing crisis of the 1930’s. 
Caplin’s discussant, Joseph Gyourko of the Wharton School, concurred. 
Gyourko’s own 2013 study concludes that the FHA, now effectively leveraged 30 to one on guarantees of home mortgages that are themselves leveraged 30 to one, is underwater to the tune of tens of billions of dollars. 
He wants the FHA shut down and replaced with a subsidized saving program that does not attempt to compete with the private sector in evaluating mortgage risk. 
Similarly, Caplin testified in 2010 before the US House Committee on Financial Services that the FHA was at serious risk, a year after FHA Commissioner David Stevens told the same committee that “We will not need a bailout.” 
Caplin’s research evidently did not sit well with FHA officials, who were hostile to Caplin and refused to give him the data he wanted. 
The FHA has underestimated its losses every year since, while proclaiming itself in good health. 
Finally, in September, it was forced to seek a government bailout. 
At the session, I asked Caplin about his effort, starting with his co-authored 1997 book Housing Partnerships, which proposed allowing homebuyers to buy only a fraction of a house, thereby reducing their risk exposure without putting taxpayers at risk. 
If implemented, his innovative idea would reduce homeowners’ leverage. 
But, while it was a highly leveraged mortgage market that fueled the financial crisis 11 years later, the idea, he said, has not made headway anywhere in the world. 
Why not, I asked? 
Why can’t creative people with their lawyers simply create such partnerships for themselves? 
The answer, he replied, is complicated; but, at least in the US, one serious problem looms large: the US Internal Revenue Service’s refusal to issue an advance ruling on how such risk-managing arrangements would be taxed. 
Given the resulting uncertainty, no one is in a mood to be creative. 
Meanwhile, there is strong public demand – angry and urgent – for a government response aimed at preventing another crisis and ending the problem of “too big to fail” financial institutions. 
But the political reality is that government officials lack sufficient knowledge and incentive to impose reforms that are effective but highly technical. 
For example, one reform adopted in the US to help prevent the “too big to fail” problem is the risk retention rule stipulated by the 2010 Dodd Frank Act. 
In order to ensure that mortgage securitizers have some “skin in the game,” they are required to retain an interest in 5% of the mortgage securities that they create (unless they qualify for an exemption). 
But, in another paper presented at our session, Paul Willen of the Federal Reserve Bank of Boston argued that creating such a restriction is hardly the best way for a government to improve the functioning of financial markets. 
Investors already know that people have a stronger incentive to manage risks better if they retain some interest in the risk. 
But investors also know that other factors may offset the advantages of risk retention in specific cases. 
In trying to balance such considerations, the government is in over its head. 
The most fundamental reform of housing markets remains something that reduces homeowners’ overleverage and lack of diversification. 
In my own paper for the session, I returned to the idea of the government encouraging privately-issued mortgages with preplanned workouts, thereby insuring them against the calamity of ending up underwater after home prices fall. 
Like housing partnerships, this would be a fundamental reform, for it would address the core problem that underlay the financial crisis. 
But there is no impetus for such a reform from existing interest groups or the news media. 
One of our discussants, Joseph Tracy of the Federal Reserve Bank of New York (and co-author of Housing Partnerships), put the problem succinctly: “Firefighting is more glamorous than fire prevention.” 
Just as most people are more interested in stories about fires than they are in the chemistry of fire retardants, they are more interested in stories about financial crashes than they are in the measures needed to prevent them. 
That is not a recipe for a happy ending. 

The Global Economy’s Tale Risks 
TOKYO – Fluctuations in the world’s economies are largely due to the stories we hear and tell about them. 
These popular, emotionally relevant narratives sometimes inspire us to go out and spend, start businesses, build new factories and office buildings, and hire employees; at other times, they put fear in our hearts and impel us to sit tight, save our resources, curtail spending, and reduce risk. 
They either stimulate our “animal spirits” or muffle them. 
Visiting Japan on a speaking tour, I am struck by the positive impact of the economy-related stories on people’s thinking and behavior, and also by how fragile that change is. 
Since Prime Minister Shinzo Abe assumed office in December 2012 and launched his program of monetary and fiscal stimulus and structural reform, the impact on Japanese confidence has been profound. 
According to the International Monetary Fund, the output gap – the difference between actual and potential GDP – narrowed from -3.6% in 2011 to -0.9% in 2013. 
Most of the rest of the world lacks a comprehensive, easily understood narrative of positive change similar to Japan’s “Abenomics.” 
The output gap for the world’s major advanced economies, as calculated by the IMF, remains disappointing, at -3.2% in 2013, which is less than half-way back to normal from 2009, the worst year of the global financial crisis, when the gap was -5.3%. 
We seem to be at the mercy of our narratives. 
Ever since 2009, most of us have just been waiting for some story to turn our hearts aglow with hope and confidence – and to reinvigorate our economies. 
Think of the story of the real-estate boom in the United States and other countries in the first half of the 2000’s. This was a story not of a “bubble”; rather, the boom was a triumph of capitalist enterprise in a new millennium. 
These stories were so powerful because a huge number of people were psychologically – and financially – invested in them. 
Most families owned a house, so they were automatically participating in the boom. 
And many homeowners, eager to participate even more in the boom and feel like savvy capitalists, bought more expensive houses than they normally would. 
With the abrupt end of the boom in 2006, that ego-boosting story also ended. 
We were not all investing geniuses after all. 
It was just a bubble, we learned. 
Our confidence in ourselves, and hence in our futures, took a hit, discouraging economic risk-taking. 
Then the financial crisis erupted, scaring the entire world. 
A story of opportunity and riches turned into one of corrupt mortgage lenders, overleveraged financial institutions, dimwitted experts, and captured regulators. 
The economy was careening like a rudderless ship, and the sharp operators who had duped us into getting on board – call them the 1% – were slipping away in the only lifeboats. 
By early 2009, the plunge in stock markets around the world reached its nadir, and fear of a deep depression, according to the University of Michigan Consumer Sentiment Survey, was at its highest level since the second oil crisis in the early 1980’s. 
Stories of the Great Depression of the 1930’s were recalled from our dimmest memories – or from our parents’ and grandparents’ memories – and retold. 
To understand why economic recovery (if not that of the stock market) has remained so weak since 2009, we need to identify which stories have been affecting popular psychology. 
One example is the rapid advance in smartphones and tablet computers. 
Apple’s iPhone was launched in 2007, and Google’s Android phones in 2008, just as the crisis was beginning, but most of their growth has been since then. 
Apple’s iPad was launched in 2010. 
Since then, these products have entered almost everyone’s consciousness; we see people using them everywhere – on the street and in hotel lobbies, restaurants, and airports. 
This ought to be a confidence-boosting story: amazing technologies are emerging, sales are booming, and entrepreneurship is alive and very well. 
But the confidence-boosting effect of the earlier real-estate boom was far more powerful, because it resonated directly with many more people. 
This time, in fact, the smartphone/tablet story is associated with a sense of foreboding, for the wealth that these devices generate seems to be concentrated among a tiny number of tech entrepreneurs who probably live in a faraway country. 
These stories awaken our fears of being overtaken by others on the economic ladder. 
And now that our phones talk to us (Apple launched Siri, the artificial voice that answers your spoken questions, on its iPhones in 2010), they fuel dread that they can replace us, just as earlier waves of automation rendered much human capital obsolete. 
I had the pleasure of meeting with Abe on this trip. 
He sticks to the script, telling a story of taking aggressive and definitive action against an economic malaise that has plagued Japan for decades. 
He inspires confidence; I felt it immediately. 
Abe is also described as reviving national patriotism, even nationalism. 
Though I heard none of this from him in my meeting, I think it may be a central part of his story, too. 
Nationalism, after all, is intrinsically bound up with individual identity. 
It creates a story for each member of the nation, a story about what he or she can do as part of a successful country. 
Some of Abe’s most controversial steps, such as visiting the Yasukuni Shrine despite Chinese and Korean objections, only increase the story’s impact. 
Still, it is not easy for national leaders, even those with Abe’s talents, to manage such stories, just as it is hard for film producers to make a blockbuster every time. 
No leader can consistently shape the narratives that affect the economy. 
But that does not rule out the need to try. 

Booming Until It Hurts? 
NEW HAVEN – In recent months, concern has intensified among the world’s financial experts and news media that overheated asset markets – real estate, equities, and long-term bonds – could lead to a major correction and another economic crisis. 
The general public seems unbothered: Google Trends shows some pickup in the search term “stock market bubble,” but it is not at its peak 2007 levels, and “housing bubble” searches are relatively infrequent. 
But the experts’ concern is notable and healthy, because the belief that markets are always efficient can survive only when some people do not completely believe it and think that they can profit by timing the markets. 
At the same time, this heightened concern carries dangers, too, because we do not know whether it will lead to a public overreaction on the downside. 
International agencies recently issued warnings about speculative excesses in asset markets, suggesting that we should be worried about a possible crisis. 
In a speech in June, International Monetary Fund Deputy Managing Director Min Zhu argued that housing markets in several countries, including in Europe, Asia, and the Americas, “show signs of overheating.” 
The same month, the Bank for International Settlements said in its Annual Report that such “signs are worrying.” 
Newspapers are sounding alarms as well. 
On July 8, the New York Times led its front page with a somewhat hyperbolic headline: “From Stocks to Farmland, All’s Booming, or Bubbling: Prices for Nearly All Assets around World Are High, Bringing Economic Risks.” 
The words “nearly all” are too strong, though the headline evinces the newfound concern. 
It is not entirely clear why the alarms are sounding just now, after five years of general expansion in markets since they hit bottom in early 2009. 
Why aren’t people blithely expecting more years of expansion? 
It seems that this thinking is heavily influenced by recent record highs in stock markets, even if these levels are practically meaningless, given inflation. 
Notably, just a month ago the Morgan Stanley Capital International All Country World Index broke the record that it reached on October 31, 2007. 
The International Monetary Fund announced in June a new Global Housing Watch website that tracks global home prices and ratios. 
The site shows a global index for house prices that is rising, on a GDP-weighted basis, as fast as during the boom that preceded the 2008 crisis, though not yet reaching the 2006 record level. 
There is also the US Federal Reserve’s announcement that, if the economy progresses as expected, the last bond purchase from the round of quantitative easing that it began in September 2012 will be in the month after the Federal Open Market Committee’s October 2014 meeting. 
That kind of news story seems also to affect observers’ thinking, though it is not really much in the way of news, given that everyone has known that the Fed would end the program before long. 
The problem is that there is no certain way to explain how people will react to such a policy change, to any signs of price overheating or decline, or to other news stories that might be spun as somehow important. 
We simply do not have much well-documented history of big financial crises to examine, leaving econometricians vulnerable to serious error, despite studying time series that are typically no more than a few decades long. 
Until the recent crisis, economists were talking up the “great moderation”: economic fluctuations were supposedly becoming milder, and many concluded that economic stabilization policy had reached new heights of effectiveness. 
As of 2005, just before the onset of the financial crisis, the Harvard econometricians James Stock (now a member of President Barack Obama’s Council of Economic Advisers) and Mark Watson concluded that the advanced economies had become both less volatile and less correlated with each other over the course of the preceding 40 years. 
That conclusion would have to be significantly modified in light of the data recorded since the financial crisis. 
The economic slowdown in 2009, the worst year of the crisis, was nothing short of catastrophic. 
In fact, we have had only three salient global crises in the last century: 1929-33, 1980-82, and 2007-9. 
These events appear to be more than just larger versions of the more frequent small fluctuations that we often see, and that Stock and Watson analyzed. 
But, with only three observations, it is hard to understand these events. 
All seemed to have something to do with speculative price movements that surprised most observers and were never really explained, even years after the fact. 
They also had something to do with government policymakers’ mistakes. 
For example, the 1980-82 crisis was triggered by an oil price spike caused by the Iran-Iraq war. 
But all of them were related to asset-price bubbles that burst, leading to financial collapse. 
Those who warn of grave dangers if speculative price increases are allowed to continue unimpeded are right to do so, even if they cannot prove that there is any cause for concern. 
The warnings might help prevent the booms that we are now seeing from continuing much longer and becoming more dangerous. 

Inequality Disaster Prevention 
NEW HAVEN – Thomas Piketty’s impressive and much-discussed book Capital in the Twenty-First Century has brought considerable attention to the problem of rising economic inequality. 
But it is not strong on solutions. 
As Piketty admits, his proposal – a progressive global tax on capital (or wealth) – “would require a very high and no doubt unrealistic level of international cooperation.” 
We should not be focusing on quick solutions. 
The really important concern for policymakers everywhere is to prevent disasters – that is, the outlier events that matter the most. 
And, because inequality tends to change slowly, any disaster probably lies decades in the future. 
That disaster – a return to levels of inequality not seen since the late nineteenth to early twentieth century – is amply described in Piketty’s book. 
In this scenario, a tiny minority becomes super-rich – not, for the most part, because they are smarter or work harder than everyone else, but because fundamental economic forces capriciously redistribute incomes. 
In The New Financial Order: Risk in the 21st Century, I proposed “inequality insurance” as a way to avert disaster. 
Despite the similarity of their titles, my book is very different from Piketty’s. 
Mine openly advocates innovative scientific finance and insurance, both private and public, to reduce inequality, by quantitatively managing all of the risks that contribute to it. 
And I am more optimistic about my plan to prevent disastrous inequality than Piketty is about his. 
Inequality insurance would require governments to establish very long-term plans to make income-tax rates automatically higher for high-income people in the future if inequality worsens significantly, with no change in taxes otherwise. 
I called it inequality insurance because, like any insurance policy, it addresses risks beforehand. 
Just as one must buy fire insurance before, not after, one’s house burns down, we have to deal with the risk of inequality before it becomes much worse and creates a powerful new class of entitled rich people who use their power to consolidate their gains. 
In 2006, I co-authored a draft paper with Leonard Burman and Jeffrey Rohaly of the Urban Institute and Brookings Institution’s Tax Policy Center that analyzed variations on such a plan. 
In 2011, Ian Ayres and Aaron Edlin proposed a similar idea. 
Underlying such plans is the assumption that some substantial degree of inequality is economically healthy. 
The prospect of becoming rich clearly drives many people to work hard. 
But massive inequality is intolerable. 
Of course, there is no guarantee that an inequality-insurance plan will actually be carried out by governments. 
But they are more likely to follow such plans if they are already legislated and take effect gradually, according to a formula known in advance, rather than suddenly in some revolutionary departure from past practice. 
To be truly effective, increases in wealth taxes – which fall more on highly mobile retired or other affluent people – would have to include a global component; otherwise, the rich would simply emigrate to whichever country has the lowest tax rates. 
And the unpopularity of wealth taxes has impeded global cooperation. 
Finland had a wealth tax but dropped it. So did Austria, Denmark, Germany, Sweden, and Spain. 
Increasing wealth taxes now, as Piketty proposes, would strike many people as unfair, because it would amount to imposing a retroactive levy on the work carried out to accumulate that wealth in the past – a change to the rules of the game, and its outcome, after the game is over. 
Older people who worked hard to accumulate wealth over the course of their lifetime would be taxed on their frugality to benefit people who didn’t even try to save. 
If they had been told that the tax was coming, maybe they would not have saved so much; maybe they would have paid the income tax and consumed the rest, like everybody else. 
Moreover, once the reality of a Piketty-type wealth tax was understood, the rich might procreate more, because wealth in the form of children cannot be taxed away – which is why it would probably be better to tax income and maintain a deduction for philanthropic contributions outside of the family. 
And, if there are to be wealth taxes, instituting them now to take effect only in the future – and only if inequality becomes much worse – would preempt the perception that the rules had been changed after the game had ended. 
The advantage of income-tax increases is that they could be based not just on current income, but on some average of income over the course of years, and could allow deductions for investments, thus sharing some features with wealth taxes without penalizing those who saved more to accumulate more wealth. 
Moreover, a long-term plan legislated by one or a few countries today, before any substantial impact on actual tax payments occurs, could help to promote an international dialogue about appropriate future policy toward inequality. 
That would create room for a more uniform tax response among countries, thus reducing the ability of the super-rich to evade taxation by switching location. 
Piketty’s book makes an invaluable contribution to our understanding of the dynamics of contemporary inequality. 
He has identified a serious risk to our society. 
Policymakers have a responsibility to implement a workable way to insure against it. 

Parallels to 1937 
NEW HAVEN – The depression that followed the stock-market crash of 1929 took a turn for the worse eight years later, and recovery came only with the enormous economic stimulus provided by World War II, a conflict that cost more than 60 million lives. 
By the time recovery finally arrived, much of Europe and Asia lay in ruins. 
The current world situation is not nearly so dire, but there are parallels, particularly to 1937. 
Now, as then, people have been disappointed for a long time, and many are despairing. 
They are becoming more fearful for their long-term economic future. 
And such fears can have severe consequences. 
For example, the impact of the 2008 financial crisis on the Ukrainian and Russian economies might ultimately be behind the recent war there. 
According to the International Monetary Fund, both Ukraine and Russia experienced spectacular growth from 2002 to 2007: over those five years, real per capita GDP rose 52% in Ukraine and 46% in Russia. 
That is history now: real per capita GDP growth was only 0.2% last year in Ukraine, and only 1.3% in Russia. 
The discontent generated by such disappointment may help to explain Ukrainian separatists’ anger, Russians’ discontent, and Russian President Vladimir Putin’s decision to annex Crimea and to support the separatists. 
There is a name for the despair that has been driving discontent – and not only in Russia and Ukraine – since the financial crisis. 
That name is the “new normal,” referring to long-term diminished prospects for economic growth, a term popularized by Bill Gross, a founder of bond giant PIMCO. 
The despair felt after 1937 led to the emergence of similar new terms then, too. 
“Secular stagnation,” referring to long-term economic malaise, is one example. 
The word secular comes from the Latin saeculum, meaning a generation or a century. 
The word stagnation suggests a swamp, implying a breeding ground for virulent dangers. 
In the late 1930s, people were also worrying about discontent in Europe, which had already powered the rise of Adolph Hitler and Benito Mussolini. 
The other term that suddenly became prominent around 1937 was “underconsumptionism” – the theory that fearful people may want to save too much for difficult times ahead. 
Moreover, the amount of saving that people desire exceeds the available investment opportunities. 
As a result, the desire to save will not add to aggregate saving to start new businesses, construct and sell new buildings, and so forth. 
Though investors may bid up prices of existing capital assets, their attempts to save only slow down the economy. 
“Secular stagnation” and “underconsumptionism” are terms that betray an underlying pessimism, which, by discouraging spending, not only reinforces a weak economy, but also generates anger, intolerance, and a potential for violence. 
In his magnum opus The Moral Consequences of Economic Growth, Benjamin M. Friedman showed many examples of declining economic growth giving rise – with variable and sometimes long lags – to intolerance, aggressive nationalism, and war. 
He concluded that, “The value of a rising standard of living lies not just in the concrete improvements it brings to how individuals live but in how it shapes the social, political, and ultimately the moral character of a people.” 
Some will doubt the importance of economic growth. 
Maybe, many say, we are too ambitious and ought to enjoy a higher quality of life with more leisure. 
Maybe they are right. 
But the real issue is self-esteem and the social-comparison processes that psychologist Leon Festinger observed as a universal human trait. 
Though many will deny it, we are always comparing ourselves with others, and hoping to climb the social ladder. 
People will never be happy with newfound opportunities for leisure if it seems to signal their failure relative to others. 
The hope that economic growth promotes peace and tolerance is based on people’s tendency to compare themselves not just to others in the present, but also to what they remember of people – including themselves – in the past. 
According to Friedman, “Obviously nothing can enable the majority of the population to be better off than everyone else. 
But not only is it possible for most people to be better off than they used to be, that is precisely what economic growth means.” 
The downside of the sanctions imposed against Russia for its behavior in eastern Ukraine is that they may produce a recession throughout Europe and beyond. 
That will leave the world with unhappy Russians, unhappy Ukrainians, and unhappy Europeans whose sense of confidence and support for peaceful democratic institutions will weaken. 
While some kinds of sanctions against international aggression appear to be necessary, we must remain mindful of the risks associated with extreme or punishing measures. 
It would be highly desirable to come to an agreement to end the sanctions; to integrate Russia (and Ukraine) more fully into the world economy; and to couple these steps with expansionary economic policies. 
A satisfactory resolution of the current conflict requires nothing less. 

Is Economics a Science? 
NEW HAVEN – I am one of the winners of this year’s Nobel Memorial Prize in Economic Sciences, which makes me acutely aware of criticism of the prize by those who claim that economics – unlike chemistry, physics, or medicine, for which Nobel Prizes are also awarded – is not a science. 
Are they right? 
One problem with economics is that it is necessarily focused on policy, rather than discovery of fundamentals. 
Nobody really cares much about economic data except as a guide to policy: economic phenomena do not have the same intrinsic fascination for us as the internal resonances of the atom or the functioning of the vesicles and other organelles of a living cell. 
We judge economics by what it can produce. 
As such, economics is rather more like engineering than physics, more practical than spiritual. 
There is no Nobel Prize for engineering, though there should be. 
True, the chemistry prize this year looks a bit like an engineering prize, because it was given to three researchers – Martin Karplus, Michael Levitt, and Arieh Warshel – “for the development of multiscale models of complex chemical systems” that underlie the computer programs that make nuclear magnetic resonance hardware work. 
But the Nobel Foundation is forced to look at much more such practical, applied material when it considers the economics prize. 
The problem is that once we focus on economic policy, much that is not science comes into play. 
Politics becomes involved, and political posturing is amply rewarded by public attention. 
The Nobel Prize is designed to reward those who do not play tricks for attention, and who, in their sincere pursuit of the truth, might otherwise be slighted. 
Why is it called a prize in “economic sciences,” rather than just “economics”? 
The other prizes are not awarded in the “chemical sciences” or the “physical sciences.” 
Fields of endeavor that use “science” in their titles tend to be those that get masses of people emotionally involved and in which crackpots seem to have some purchase on public opinion. 
These fields have “science” in their names to distinguish them from their disreputable cousins. 
The term political science first became popular in the late eighteenth century to distinguish it from all the partisan tracts whose purpose was to gain votes and influence rather than pursue the truth. 
Astronomical science was a common term in the late nineteenth century, to distinguish it from astrology and the study of ancient myths about the constellations. 
Hypnotic science was also used in the nineteenth century to distinguish the scientific study of hypnotism from witchcraft or religious transcendentalism. 
There was a need for such terms back then, because their crackpot counterparts held much greater sway in general discourse. 
Scientists had to announce themselves as scientists. 
In fact, even the term chemical science enjoyed some popularity in the nineteenth century – a time when the field sought to distinguish itself from alchemy and the promotion of quack nostrums. 
But the need to use that term to distinguish true science from the practice of imposters was already fading by the time the Nobel Prizes were launched in 1901. 
Similarly, the terms astronomical science and hypnotic science mostly died out as the twentieth century progressed, perhaps because belief in the occult waned in respectable society. 
Yes, horoscopes still persist in popular newspapers, but they are there only for the severely scientifically challenged, or for entertainment; the idea that the stars determine our fate has lost all intellectual currency. 
Hence there is no longer any need for the term “astronomical science.” 
Critics of “economic sciences” sometimes refer to the development of a “pseudoscience” of economics, arguing that it uses the trappings of science, like dense mathematics, but only for show. 
For example, in his 2004 book Fooled by Randomness, Nassim Nicholas Taleb said of economic sciences: “You can disguise charlatanism under the weight of equations, and nobody can catch you since there is no such thing as a controlled experiment.” 
But physics is not without such critics, too. 
In his 2004 book The Trouble with Physics: The Rise of String Theory, The Fall of a Science, and What Comes Next, Lee Smolin reproached the physics profession for being seduced by beautiful and elegant theories (notably string theory) rather than those that can be tested by experimentation. 
Similarly, in his 2007 book Not Even Wrong: The Failure of String Theory and the Search for Unity in Physical Law, Peter Woit accused physicists of much the same sin as mathematical economists are said to commit. 
My belief is that economics is somewhat more vulnerable than the physical sciences to models whose validity will never be clear, because the necessity for approximation is much stronger than in the physical sciences, especially given that the models describe people rather than magnetic resonances or fundamental particles. 
People can just change their minds and behave completely differently. 
They even have neuroses and identity problems, complex phenomena that the field of behavioral economics is finding relevant to understanding economic outcomes. 
But all the mathematics in economics is not, as Taleb suggests, charlatanism. 
Economics has an important quantitative side, which cannot be escaped. 
The challenge has been to combine its mathematical insights with the kinds of adjustments that are needed to make its models fit the economy’s irreducibly human element. 
The advance of behavioral economics is not fundamentally in conflict with mathematical economics, as some seem to think, though it may well be in conflict with some currently fashionable mathematical economic models. 
And, while economics presents its own methodological problems, the basic challenges facing researchers are not fundamentally different from those faced by researchers in other fields. 
As economics develops, it will broaden its repertory of methods and sources of evidence, the science will become stronger, and the charlatans will be exposed. 

Robert Rubin Revisited 
Economists and historians will long debate the contrast between the economic policies of the presidencies of Bill Clinton and George W. Bush. 
The Clinton administration took office with remarkably few cards, and the cards it held were dreadful: a long-term legacy of extremely slow economic growth, huge federal budget deficits created by the Ronald Reagan/George H. W. Bush administrations of 1980-1992, a relatively high "natural" rate of unemployment, and growing inflationary pressure. 
By contrast, George W. Bush's administration took office with stunningly good cards: a budget in substantial surplus, a trend of rapid productivity growth as the information-technology revolution reached critical mass, and a very low "natural" rate of unemployment. 
Despite its handicaps, nearly everything that the Clinton economic policy team touched turned to gold. 
Led by Robert Rubin, first as an Assistant to the President and later as Secretary of the Treasury, it turned the gargantuan Reagan/Bush deficits into huge surpluses; it successfully enhanced America's high-investment/high productivity growth recovery; it pursued initiatives to reduce trade barriers. 
The Clinton team could also take credit for the largely successful handling of the 1994 Mexican and 1997-1998 Asian financial crises. 
By contrast, nearly everything that George W. Bush's economic policy team has touched has turned to, well, if not lead, at least to a state that inspires observers, both inside and outside the administration, to shake their heads and mutter about a horribly wasted opportunity. 
On trade, on fiscal policy, on reform of social entitlements, on almost every issue you can name, the Bush team has worsened conditions substantially. 
Reading Rubin's recently published memoir In an Uncertain World , we can begin to understand this striking difference better. 
Begin by noting that the title page of In an Uncertain World states that its authors are Robert Rubin and Jacob Weisberg. 
How often does the person who crafts the prose for a memoir of a public figure get his or her name on the cover? 
Weisberg is not given a mere "with," but the full credit of a co-author that the word "and" delivers. 
This is a key facet of Robert Rubin's strength: he is a classy guy, one who believes that credit is to be shared. 
What Rubin sees as most important in developing policy is the habit of "probabilistic thinking." 
This means a willingness to ask, "What else might happen?," "What if we're wrong?," "What could happen next?," and to look at the full range of potential outcomes--at their costs as well as their benefits--rather than assuming that results will match some fashionable ideology or favorite administration model. 
All forecasts, after all, turn out to be wrong in at least one vital dimension. 
Pounding a table and shouting does not make unwanted facts disappear. 
Rubin's recognition that the world is a complicated, poorly-understood place, where lots of unexpected and surprising things happen--and where we cannot merely consult some map drawn by John Maynard Keynes or Milton Friedman or some neo-conservative pundit--seems to have been the most powerful of his secret weapons. 
But in reading In an Uncertain World , you soon see that "probabilistic thinking" was not Rubin's only weapon. 
He also worked for a president who cared deeply about policy as well as politics--and who was willing to be convinced, at least most of the time, that good policy would turn out in the long run to be good politics. 
Rubin also used the remarkable management skills that he had honed as chairman of the investment bank Goldman Sachs to great effect. 
I recall sitting in the back of the White House's Roosevelt Room and watching, amazed, as he guided meetings of the National Economic Council to the consensus he wanted by little more than raising his eyebrows and calling on people in the appropriate order. 
All of these policymaking skills, however, would have been of little use had they not been pointed in the right direction. 
I think that the principal reason for Rubin's (and Clinton's) extraordinary economic policy success--all the more so in view of the weak cards the administration was dealt--was the ability to hew to the true object of government: to always keep the big picture in mind. 
In his memoir, Rubin recalls a moment when he held firm on world trade: "Protecting industries is usually appealing, because the negative consequences of free trade are so visible.... 
In a discussion with President Clinton...I mentioned that one sector where we needed to push for reduced trade barriers was fish. 
Clinton remembered... seeing some poor fisherman casting their lines.... 
He wasn't going to do anything to hurt those vulnerable people. `But Mr. President,' I said, `to help those poor fishermen, you're going to prevent the vastly greater benefit that would come to the poor...from being able to buy cheap fish.'" 
We, too, need to keep our eye on the big picture. 
That means that we must make it more likely in the future that people as capable and wise as Robert Rubin will find it attractive to enter public service, and that once there, they will have the power to make a difference. 

Rockets into Ploughshares 
MOSCOW: The first law of scientific research - that it costs big money - is as immutable as the laws of gravity. 
So no surprise that Russian science fell into a black hole due to economic upheaval in the decade following communism's collapse. 
Economic freedoms that transformed Russia for good and ill brought despair to laboratories and research institutes as budgets were slashed and bright young scientists fled abroad while others (most famously the mathematician turned oligarch Boris Berezovsky) moved into banking and other businesses. 
This internal and external brain drain will impact Russia's economy for decades to come. 
It is also an unintentional gift from Russia to the West. 
The scale of this transfer of intellect may be unsurpassed in human history, and is greater than the flight of scientists from Nazi Germany in the 1930s. 
Take the institution which I headed for thirty-five years, the physics department of the Moscow Institute of Physics and Techniques (MIPT), comparable to America's acclaimed Massachusetts Institute of Technology. 
During the last ten years 1500 graduates from our Institute left for the US. 
According to a common means of assessment, educating a scientific specialist at a high level costs approximately $1million dollars. Thus, one Russian institute alone subsidized America with scientists with a nominal value of $1.5billion! 
Of course, the seeds of the collapse of Russian science were sown in the Soviet era, when three-quarters of scientific research was financed by the military. 
Without that Cold War imperative, science became an easy target for Kremlin budget cutters. 
But more than the bloated branches of military science were slashed. 
Over the past decade expenditures on total scientific research were reduced to less than 5% of their former value. 
Oceanographic and geological research, traditionally strong in Russia, have virtually ceased to exist. 
Harsh reforms have followed this starvation diet. Before 1991 there were 4,500 research and development (R&D) institutes in Russia. 
About five hundred belonged to the prestigious Academy of Sciences and worked mainly in basic science. The remaining "branch institutes" - industrial research facilities, design bureaus, field stations and so on - belonged to one or another ministry. 
These carried out applied R&D that, in capitalist systems, is mostly done by the private sector. Government privatized some 1,100 branch institutes, making their finances somebody else's problem. 
But privatization is brutal, because most of these bodies are ill-prepared to survive in a free market. 
For no system exists in Russia to translate research into marketable products and technologies. 
No system of venture capital - ie, one where investors support promising new scientific developments - exists. 
There is neither financial nor tax support for it. 
Russian banks would not know where to begin. 
Moreover, there are no technology parks of the type often connected with universities in the West and which facilitate the translation of achievements in modern science into useful applications. 
Without these support systems, Russia will continue to lose not only good people, but hope for its future. 
Yet, all is not lost. 
Compared to R&D activities, fundamental research is cheap and it is here that, although damaged, a solid Russian tradition remains that can be built upon. 
Asia's tiger economies have a strong high-tech base but are not noted for their scientists. 
Once our economy adopts - if it does - we will have a base of knowledge to feed off of. 
Adaptation is underway. 
Old structures are crumbling and being replaced. 
The Russian Academy of Science, the most powerful body in Russian science, has opened itself to new blood, increasing the number of specialists by 20% in recent years. 
Outside influences also matter. 
Financial and moral support from George Soros's International Science Foundation, for example, buoyed a peer review system established in 1992 within the Russian Foundation for Basic Research. 
Peer review is vitally important to the coming generation of scientists. With a viable peer review system in place, the chances of getting money is directly related to performance. 
The RFBR's main drawback is that it hands out only 6% of the national science budget. 
By comparison, 90% of civilian research in America is peer reviewed. Yet, despite continuing bias toward state control, the system is opening up. 
The Internet also assists this opening as it favours transmission of information and connections to and from Russia and the world. 
Russians, because of their high level of education, are very receptive to the Internet and use it with great familiarity. 
But it is not nearly enough. Despite open borders, scientific contacts, participation in conferences, even the exchange of publications, remain problematic. 
Isolation, indeed, is unbridgeable for some. 
A generation of scientists and R&D workers - those too old and entrenched to uproot their lives and adapt, but too young to retire - have no where to go. 
Many are in formerly powerful research centers now wasting away, some form entire populations in once closed research cities and one institute towns that were wholly dependent on a single defence institute or project. 
Their fate is like that experienced by the generation of Russian serfs liberated in the mid-19th century. 
After a lifetime under the yoke, feudal or communist, freedom is not an easy thing to get used to. 
Those who do adapt provide a model for all Russia. 
Modern science is democratic and meritocratic. 
Open to talent, and only talent, people who discover something new are recognized and rewarded. In science, a dictatorship of reason is combined with the freedom of ideas. 
That fusion is what all Russia needs, a reconciliation of the cold-minded calculations of the market with the search for truth. 
In that reconciliation lies the future of Russian science and of Russia itself. 

The Rights of Digital Man 
ABU DHABI – We have created an online world whose vastness exceeds our comprehension. 
As a measure of its magnitude, consider this: In 2012, the new Internet address system, IPv6, created more than 340 trillion trillion trillion (3.4 x 1038) addresses – that is, around 4.8 x 1028 addresses for every person on earth. 
That should be sufficient to service the five billion devices that currently connect to the internet, and the 22 billion devices forecast to be in use by 2020. 
The hard part of the connectivity explosion is not building capacity, but how it should be managed. 
We must answer profound questions about the way we live. 
Should everyone be permanently connected to everything? 
Who owns which data, and how should information be made public? 
Can and should data use be regulated, and, if so, how? 
And what role should government, business, and ordinary Internet users play in addressing these issues? 
Such questions can no longer be ignored. 
As the virtual world expands, so, too, do breaches of trust and misuse of personal data. 
Surveillance has increased public unease – and even paranoia – about state agencies. 
Private companies that trade in personal data have incited the launch of a “reclaim privacy” movement. 
As one delegate at a recent World Economic Forum debate, noted: “The more connected we have become, the more privacy we have given up.” 
But we can shape our future cyber-world in a way that keeps our data safe, reestablishes trust online, and welcomes in billions of new participants. 
Ensuring security will require that the Internet’s many stakeholders establish some kind of governance system. 
Organizations such as the Internet Corporation for Assigned Names and Numbers (ICANN) will need to become much more global in scope. 
At the same time, we must guard against over-regulation or government control. 
This might require us to phase out the Internet Assigned Numbers Authority to prevent it from falling under the control of an inter-governmental body, as some states have demanded. 
Governments certainly have an important part to play. 
But too much control would almost certainly stifle innovation, increase costs, and probably exclude important anti-establishment voices. 
A better approach, and one that would enhance public trust in the system, would be to establish diversified stewardship with multiple stakeholders. 
One such stakeholder group is business. 
Now that our personal data have become such a valuable asset, companies are coming under increasing pressure to develop online business models that protect rather than exploit users’ private information. 
In particular, Internet users want to stop companies befuddling their customers with convoluted and legalistic service agreements in order to extract and sell their data. 
This type of abuse could be limited by creating legal and social contracts to govern the authorization of data use. 
One idea, proposed by the information scientist Marc Davis, is to draw up a standard, readable seven-point “Terms of Service” agreement that empowers people’s control of the uses of their personal data. 
Another is to allow users themselves to decide from a preset menu how much personal information they are prepared to share. 
But the trust issue goes beyond just regulation. 
Companies must find ways to introduce new technologies and do business that are popular with their customers and retain their trust. 
(Indeed, in a world of human-robot interfaces, 3D printing, nanotechnology, and shale-gas extraction, any innovative company must ask itself this basic question.) 
Finally, we must consider the human dimension of our virtual world. 
Hyper-connectivity not only creates new commercial opportunities; it also changes the way ordinary people think about their lives. 
The so-called FoMo (fear of missing out) syndrome reflects the anxieties of a younger generation whose members feel compelled to capture instantly everything they do and see. 
Ironically, this hyper-connectivity has increased our insularity, as we increasingly live through our electronic devices. 
Neuroscientists believe that this may even have altered how we now relate to one another in the real world. 
At the heart of this debate is the need to ensure that in a world where many, if not all, of the important details of our lives – including our relationships – exist in cyber-perpetuity, people retain, or reclaim, some level of control over their online selves. 
While the world of forgetting may have vanished, we can reshape the new one in a way that benefits rather than overwhelms us. 
Our overriding task is to construct a digital way of life that reinforces our existing sense of ethics and values, with security, trust, and fairness at its heart. 

Stop Taxing the Sick 
WASHINGTON, DC – The debate over access to affordable medicines in emerging and developing countries frequently overlooks a critical issue: Governments in these countries routinely slap tariffs and other taxes on vitally important drugs. 
While these measures tend to be modest revenue generators, they make the affected medicines more expensive, which can put them out of reach for many who need them most. 
Like developed countries, emerging and developing countries import some – if not all – of their medicines, the cost of which is mainly covered by the patients themselves, given these countries’ lack of health insurance. 
Indians, for example, pay 70% of their health-care expenses out of their own pockets. 
With tariffs and other taxes increasing drug costs by as much as two-thirds in some areas, even the most basic generic drugs become unaffordable for the poorest people. 
As one research report on Delhi’s medicine market concluded, such levies are essentially a “tax on the sick” which the government could easily remove. 
The story is similar in many emerging markets. 
According to a 2012 study by the World Trade Organization, Argentina, Brazil, India, and Russia impose tariffs of around 10% on imported medicines, while Algeria and Rwanda, for example, maintain a 15% rate. 
The tariff in Djibouti is 26%. 
As the report noted, it is difficult to understand why small countries maintain high tariffs on health products – a move that serves only to drive up domestic prices. 
But tariffs are only part of the problem. 
Many countries also levy hefty sales taxes. 
Brazil imposes a 28% rate on prescription medicines, while medicines in India are subject to 5% value-added tax and a 3% education tax, on top of state taxes that range from 5% to 16%. 
Developing countries justify these taxes by claiming that they fund social spending. 
But, in 2011, India raised more in drug taxes than the government spent on medicines for the public. 
India’s health-care crisis might ease if the government stopped artificially hiking the prices of medicines that people need. 
Moreover, fiscal pressures notwithstanding, it seems highly regressive, if not downright perverse, to place the greatest financial burden on those in the poorest health (and who presumably are the target of such social programs). 
It is also economically counterproductive. 
Raising medicine prices reduces usage, leading to more illness, lower productivity, and slower GDP growth. 
There is a better way. 
Several countries, including Colombia, Ethiopia, Malaysia, Nicaragua, Pakistan, Tanzania, and Uganda, have substantially reduced or eliminated tariffs and taxes on medicines. 
The results have been dramatic. 
After Kenya removed tariffs and taxes on anti-malaria products, for example, it reported a 44% decline in infant mortality and disease between 2002 and 2009. 
India and China, as major pharmaceutical exporters themselves, have a clear interest in seeing lower medicine tariffs worldwide. 
India, hailed as “the pharmacy to the developing world,” is one of the largest exporters of finished drugs, while China produces 70-80% of these drugs’ active ingredients. 
Abolishing pharmaceutical tariffs would follow the example set by developed countries when they created the WTO two decades ago. 
As the World Health Organization declared: “governments should tax the things which make people ill, not the things which make them well.” 
To be sure, tax cuts would not address all of the many challenges surrounding access to healthcare in emerging and developing countries, such as the lack of hospitals, clinics, doctors, and public and private insurance. 
But removing tariffs is something that could be implemented quickly and that would benefit the neediest people immediately. 
As home to leading drug producers – and many of those most affected by these taxes – India and China should lead an international liberalization effort. 
The BRICS Summit, to be held on July 15-17 in Fortaleza, Brazil, might be a good place to start. 
These countries have certainly demonstrated a capacity to act together. 
Earlier this year, China joined 13 other WTO members calling for tariffs on environmental goods to be removed. 
China, India, and the other BRICS should form a similar coalition to press for the elimination of pharmaceutical tariffs, thereby broadening access to health care throughout the developing world. 
The world’s sick and vulnerable should not have to suffer needlessly. 

Intellectual Property and Economic Development 
WASHINGTON, DC – In his recent State of the Union address, US President Barack Obama reiterated his ambition to complete the Trans-Pacific Partnership, a proposed trade agreement among the US and 11 Pacific countries. 
Meanwhile, the European Union and China are pressing to close their own deals in Asia and elsewhere. 
If these proliferating trade pacts are to spur virtuous cycles of growth for developing countries, they must not only reduce trade barriers; they must also build the institutional framework of a modern economy, including robust intellectual property (IP) rights. 
Some activists and government officials get the relationship between strong IP protection and economic growth backwards, claiming that IP rights are an obstacle to development, and thus should not be enforced until after countries achieve high-income status. 
This attitude is particularly prevalent in India, which recently put trade negotiations with the EU on hold, and it was central to the failure of the Doha Round of global trade talks. 
As Indian Commerce Minister Anand Sharma put it, “inherent flexibilities must be provided to developing countries.” 
But the bottom line is that the ideas protected by IP rights are the dynamo of growth for developed and developing countries alike. 
Instead of diluting IP rights, developing countries like India should recognize that strengthening IP protection is a prerequisite for attracting the foreign investment that they need to help their economies grow, create jobs, and improve their citizens’ capacity to consume. 
Today, IP accounts for much of the value at large companies. 
One study found that in 2009, across a variety of industries in the US, intellectual capital – patents, copyrights, databases, brands, and organizational knowledge – held a 44% share of firms’ overall market value. 
Such companies have little desire to put their IP at risk of erosion or outright theft; they want to do business where they know that their IP is safe. 
Developing countries have a lot to gain from attracting multinational firms. 
Such companies bring technologically advanced imports and new management techniques that foster growth in domestic firms, while spurring industrial modernization. 
They also spawn new local companies that serve as suppliers, thereby boosting employment, augmenting workers’ skills, improving productivity, and increasing government revenue. 
Currently, India attracts a mere 2.7% of global spending on research and development; China, with its stronger IP rights, attracts close to 18%; and the US brings in 31%. 
United Nations data show that India’s stock of foreign direct investment (FDI) was equivalent to just 11.8% of its GDP from 2010 to 2012 – far lower than the developing-economy average of roughly 30%. 
According to a new study by the economists Robert Shapiro and Aparna Mathur, if India achieved Chinese levels of IP protection, its annual FDI inflows would increase by 33% annually. 
In the pharmaceutical sector – which is particularly vulnerable to IP infringement – a stronger IP regime could increase FDI inflows from $1.5 billion this year to $8.3 billion in 2020, with pharmaceutical R&D doubling to $1.3 billion over the same period. 
The increased FDI would create 18,000 new jobs in the pharmaceutical industry. 
If India could transform its IP regime to resemble the US system, which is more robust than China’s, the benefits would be even greater. 
Inward FDI could increase by as much as 83% annually by 2020; in the pharmaceutical industry alone, FDI could reach as much as $77 billion, with R&D rising to $4.2 billion and 44,000 new jobs being created. 
The Indian government’s ongoing assault on pharmaceutical IP makes these findings even more significant. 
Over the last two years, India has invalidated or otherwise attacked patents on 15 drugs produced by international firms in order to make way for local champions, claiming that exclusivity enables companies to charge high prices that harm consumers. 
Allowing local producers to copy patented medicines, officials assert, will bring down prices and expand access. 
But drug patents and prices are not the main – or even a major – obstacle to patients’ access to medical care in India. 
The bigger issue, as the IMS consultancy found last year, is the shortage of doctors, clinics, and hospitals, especially in rural areas. 
Even the public clinics and hospitals that do exist are often rendered useless by high rates of absenteeism by doctors. 
Medicine, however affordable, is of no value if no one is available to prescribe or administer it. 
Furthermore, Indians lack access to insurance programs, particularly for outpatient care. 
This, coupled with the lack of a public safety net, makes health problems a leading source of economic hardship, even for middle-class families. 
Far from improving citizens’ access to health care, weak IP protections are exacerbating India’s formidable health-care challenges. 
It is time for India’s leaders to recognize the positive role that IP can play in fostering growth and improving citizens’ wellbeing. 
It is equally important for trade negotiators worldwide to reject the notion that IP protection is a luxury that only rich countries can afford. 
The reality is that IP protection is an economic engine that developing-country citizens should not have to forego. 

Rogozin for President 
I have good news and bad news, but since I don't know which is which, I will convey them in their logical order. 
First, the name of Russia's next president is now known. 
Second, his name is Dmitriy Rogozin, the Motherland Party's most famous politician. 
Naturally, everything can change in the future, including Russia's constitutional norms. 
But for now, Dmitriy Rogozin is the only Russian politician who has both genuine prospects of winning and the corresponding, albeit not publicly stated, ambition to do so. 
There were many more candidates in 1997, three years before the 2000 presidential election, a veritable parade of names representing different sections of the nomenklatura and political spectrum: Chernomyrdin, Yavlinskiy, Lebed, Luzhkov, Nemtsov, Zhirinovskiy. 
Not all of them had realistic chances, but every one of them had the backing of a specific political force. 
And now? 
None of these former candidates remains a serious political contender, although some are still quite young. 
Nor is a presidential candidate likely to be found among the regional governors, or among the leaders of the "old" or "new" parties. 
Except Dmitriy Rogozin. 
Why? 
Russian voters tend to vote according to three main sentiments: anti-liberal, anti-oligarchic, and anti-Western (more precisely, anti-American). 
It is Rogozin who articulates all three in the most spectacular, persistent, and public manner. 
In addition, Rogozin is a pro-Putin politician, which is also very important to the bulk of voters, and he has managed to confirm this not only verbally, but also bureaucratically, by his work as the president's special representative for Kaliningrad Oblast affairs. 
Prior to Motherland's sensational victory in the 2003 general election, Rogozin wanted the post of minister of foreign affairs. 
But now he is playing for higher stakes. 
He will most likely nominate himself during the 2008 presidential election campaign, even if the Kremlin nominates another successor, although naturally he will try to ensure that he is anointed. 
So far, things are going extremely well for Dmitriy Rogozin. 
He is young, vigorous, charismatic, and educated, a patriot advocating a strong state. 
His electoral platform will remain the most promising in the immediate future, particularly since United Russia lacks the courage and flexibility to embrace contemporary Russian conservatism. 
At this point Rogozin is the most freethinking and freedom-loving politician in Russia. 
For example, Russia's most urgent foreign policy problems are its relations with the United States and the conflict over South Ossetia with neighboring Georgia. 
Rogozin very clearly articulates his positions on these issues, which are in variance with official policy - at least the one presented to the public. 
He reacts to Russia's domestic problems - widespread poverty, the situation in Chechnya, the fight against oligarchs - just as clearly, promptly, and explicitly, while most other politicians either keep silent or mumble incoherently. 
The so-called liberals are entirely invisible, and nobody cares about their opinion anyway. 
The Communists attract attention only by their internal squabbles. 
The nationalist warhorse Zhirinovskiy looks old and lifeless compared to Rogozin. 
The United Russia leaders are maneuvering between the president's contradictory remarks. 
The problem for United Russia is that Rogozin is already a master at their game. 
He remains a firm Putin supporter, skillfully combining criticism of virtually all aspects of Russia's foreign and domestic policy with a loyal - but not glorifying - attitude toward the president himself. 
In essence, Dmitriy Rogozin is currently the only real political orator in Russia - a highly advantageous position, particularly in an era of mediocrity. 
People have recently compared him to Georgia's President Mikhail Saakashvili - whether as an insult or as a compliment. 
Either intuitively or rationally, people feel that Rogozin, like Saakashvili, wants to assume the main post, is prepared to do so, and would start solving the state's territorial problems immediately. 
Parallels between Rogozin and Saakashvili appear even more logical in view of the current situation in the Caucasus. 
It is increasingly likely that Saakashvili's policy is aimed at instigating bloodshed in South Ossetia or Abkhazia and putting all the blame on Russia - a strategy that appears designed to bring the Americans to the region eventually. 
Against the backdrop of Russia's completely ambiguous policy in the Caucasus, this will give Rogozin an opportunity to remain at the top of public-opinion polls. 
If the next presidential election in Russia were held this year, and if no decision were made to banish him from Russians' TV screens, there can be little doubt that Dmitriy Rogozin would win. 
Details will change by 2008, but not trends, and Rogozin has mastered these trends better than anyone else. 
In fact, he is the only person who has mastered them so far. 
It can be dangerous to start one's electoral campaign before other candidates, but sometimes, if one starts much earlier than everyone else, serious rivals never appear. 

Rogue Diplomacy 
NEW DELHI – “Such very fine brains” filled with “such bad ideas.” 
That was how the late Daniel Patrick Moynihan, a former United States senator and perhaps the keenest mind to enter US politics since World War II, once described India, where he was US ambassador in the 1970’s. 
That snappy description of my country is also a very good way to describe the current – and seemingly unending – contretemps between the leaders of Iran and the US. 
As a new round of negotiations with Iran begins – with European Union High Representative Catherine Ashton the first into the breach – finding a way to move Iran-US relations beyond their freighted past is an urgent matter. 
In both countries, deep and mutually paralyzing suspicion has poisoned relations for three decades. 
Negotiations in such an atmosphere are almost fated to failure. 
America’s acceptance of Iran’s current regime is grudging. 
Iranian leaders demonize the US as if the millions killed in the 1980’s in the Iran-Iraq War (in which the US backed Saddam Hussein’s invading army) died only yesterday. 
So long as these dark shadows are allowed to linger, “resetting” relations between the two countries, in the manner of US-Russia relations, will be impossible. 
The list of disputes between the two countries is almost endless, but Iran’s plan to enrich uranium now stands above everything else. 
The Iranians insist that they need nuclear power to generate electricity. 
Their secretiveness, maintains the US, betrays the regime’s drive to develop nuclear weapons. 
Not surprisingly, given the Americans’ deeply ingrained suspicion, the agreement reached earlier this year between Iran and Turkey and Brazil to allow for the export of low-enriched uranium from Iran in return for fuel rods was “not acceptable” to the US. 
Indeed, after years of sanctions, threats, negotiations, and then more sanctions and threats, the US remains unclear about what specific nuclear program it might accept. 
So what does the US want? 
“Crippling sanctions,” Secretary of State Hillary Clinton once said, though she quickly retracted that impromptu remark. 
But no such caution restrains US senators like South Carolina’s Lindsey Graham, who says that the “evil (of) a nuclear … Iran” will affect the US “far more than (any) conflict.” 
Following the hopeful early months of the Obama administration, this “stop Iran” policy has become America’s focus. 
Iran, of course, repeatedly asserts its commitment to the Nuclear Non-Proliferation Treaty (NPT), but its past relations with Dr. A. Q. Khan – the self-proclaimed “godfather” of Pakistan’s nuclear-weapons program, and the world’s most notorious nuclear proliferator – invites skepticism. 
Indeed, the US holds the “Khan network” responsible for helping Iran start its own nuclear program. 
Mistrust is compounded by Iranian President Mahmoud Ahmadinejad’s incendiary pronouncements, particularly about Israel. 
Although the origins of Iran’s nuclear program are to be found in the “enlightened” presidency of Mohammad Khatami (1997-2005) – it was just before Ahmadinejad’s inauguration that Iran ended its self-imposed moratorium on uranium enrichment – Ahmadinejad’s bombast has made matters worse. 
And not just with the US. 
In September 2005, the International Atomic Energy Agency deemed Iran “non-compliant” with the NPT. 
Between 2006 and 2008, Iran was subjected to three United Nations Security Council resolutions, each imposing yet more sanctions. 
Yet, despite increasing economic costs, Iran’s response only hardened. 
Iran’s insecurity goes back at least to 1953, when US and British officials plotted the military coup that removed from office Mohammed Mossadegh, Iran’s first elected prime minister and an ardent nationalist, and installed General Fazlollah Zahedi. 
Mossadegh’s sin was his plan to nationalize Iran’s oil industry. 
But, in the process of laying claim to Iran’s oil, subverting its democracy, and jeopardizing its national security, the US and Britain committed a much graver sin: the wounding of Iranians’ national pride. 
Then there is the Shah’s ouster, Ayatollah Ruhollah Khomeini’s Islamic Revolution, the absurd abduction of US diplomats, President Jimmy Carter’s disastrous attempt to free them militarily, and the “Iran-Contra” scandal, when Reagan administration officials sought to sell weapons to Iran through third parties and channel the proceeds to anti-Sandinista guerrillas in Nicaragua. 
Iran sits at the heart of an extremely volatile region. 
The country’s Shia footprint stretches from the Mediterranean to the Hindu Kush. 
It has a vital role in Afghanistan; indeed, it was passively supportive of the removal of the Taliban from power in 2001. 
With such a country, “non-engagement” means having no policy at all. 
America’s failure to talk to Iran is as foolhardy as its decades-long failure to talk with Mao’s China. 
And the ongoing failure to talk to North Korea does not appear to be working either, as the recent shelling of South Korea demonstrates. 
Even if Iranian nuclear weapons are not acceptable to the US, President Barack Obama needs to start talking more openly about what is. 
His Nobel Peace Prize demands it. 
And talking should not be impossible. 
As India’s foreign minister, I engaged in successful talks with Iran frequently. 
Iran may be a self-proclaimed theocracy, but it has conducted foreign relations since the 1979 revolution in a rational, if not always emollient, way. 
Ahmadinejad may bluster, but there is usually considerable ambiguity and calculation behind his outbursts. 
Iran is obstinate, prideful, ambitious, and, yes, sometimes paranoid. 
But it also sees itself as vulnerable. 
A young population with no memory of the Islamic Revolution is desperate for the jobs that its leaders have failed to provide. 
In these circumstances, if Iran is offered a diplomatic ladder that it can climb down with its dignity intact – above all, a credible promise of an historic reconciliation with the US that includes specific economic benefits, not Obama’s current vague offers – a tired revolution’s troubled leadership might take it. 
That, not Western bluster and sanctions, is the way ahead. 

Myanmar’s Jihadi Curse 
NEW DELHI – Myanmar’s military has lately been engaged in a brutal campaign against the Rohingya, a long-marginalized Muslim ethnic minority group, driving hundreds of thousands to flee to Bangladesh, India, and elsewhere. 
The international community has rightly condemned the crackdown. 
But, in doing so, it has failed to recognize that Rohingya militants have been waging jihad in the country – a reality that makes it extremely difficult to break the cycle of terror and violence. 
Rakhine State, where most of Myanmar’s Rohingya reside, is attracting jihadists from far and wide. 
Local militants are suspected of having ties with the Islamic State (ISIS), al-Qaeda, and other terrorist organizations. 
Moreover, they increasingly receive aid from militant-linked organizations in Saudi Arabia and Pakistan. 
The main insurgent group – the well-oiled Arakan Rohingya Salvation Army, also known as Harakah al-Yaqin – is led by a Saudi-based committee of Rohingya émigrés. 
The external forces fomenting insurgent attacks in Rakhine bear considerable responsibility for the Rohingyas’ current plight. 
In fact, it is the links between Rohingya militants and such external forces, especially terrorist organizations like ISIS, that have driven the government of India, where some 40,000 Rohingya have settled illegally, to declare that their entry poses a serious security threat. 
Even Bangladesh acknowledges Rohingya militants’ external jihadi connections. 
But the truth is that Myanmar’s jihadi scourge is decades old, a legacy of British colonialism. 
After all, it was the British who, more than a century ago, moved large numbers of Rohingya from East Bengal to work on rubber and tea plantations in then-Burma, which was administered as a province of India until 1937. 
In the years before India gained independence from Britain in 1947, Rohingya militants joined the campaign to establish Pakistan as the first Islamic republic of the postcolonial era. 
When the British, who elevated the strategy of “divide and rule” into an art, decided to establish two separate wings of Pakistan on either side of a partitioned India, the Rohingya began attempting to drive Buddhists out of the Muslim-dominated Mayu peninsula in northern Rakhine. 
They wanted the Mayu peninsula to secede and be annexed by East Pakistan (which became Bangladesh in 1971). 
Failure to achieve that goal led many Rohingya to take up arms in a self-declared jihad. 
Local mujahedeenbegan to organize attacks on government troops and seize control of territory in northern Rakhine, establishing a state within a state. 
Just months after Myanmar gained independence in 1948, martial law was declared in the region; government forces regained territorial control in the early 1950s. 
But Rohingya Islamist militancy continued to thrive, with mujahedeen attacks occurring intermittently. 
In 2012, bloody clashes broke out between the Rohingya and the ethnic Rakhines, who feared becoming a minority in their home state. 
The sectarian violence, in which rival gangs burned down villages and some 140,000 people (mostly Rohingya) were displaced, helped to transform the Rohingya militancy back into a full-blown insurgency, with rebels launching hit-and-run attacks on security forces. 
Similar attacks have lately been carried out against security forces and, in some cases, non-Rohingya civilians, with the violence having escalated over the last 12 months. 
Indeed, it was a wave of coordinated predawn insurgent attacks on 30 police stations and an army base on August 25 that triggered the violent military offensive that is driving the Rohingya out of Rakhine. 
Breaking the cycle of terror and violence that has plagued Myanmar for decades will require the country to address the deep-seated sectarian tensions that are driving Rohingya toward jihadism. 
Myanmar is one of the world’s most ethnically diverse countries. 
Its geographic position makes it a natural bridge between South and Southeast Asia, and between China and India. 
But, internally, Myanmar has failed to build bridges among its various ethnic groups and cultures. 
Since independence, governments dominated by Myanmar’s Burman majority have allowed postcolonial nativism to breed conflict or civil war with many of the country’s minority groups, which have complained of a system of geographic apartheid. 
The Rohingya face the most extreme marginalization. 
Viewed as outsiders even by other minorities, the Rohingya are not officially recognized as one of Myanmar’s 135 ethnic groups. 
In 1982, the government, concerned about illegal immigration from Bangladesh, enacted a law that stripped the Rohingya of their citizenship, leaving them stateless. 
Successive governments have defended this approach, arguing that past secessionist movements indicate that the Rohingya never identified as part of the country. 
And, in fact, the common classification of Rohingya as stateless “Bengalis” mirrors the status of Rohingya exiles in the country of their dreams, Pakistan, where tens of thousands took refuge during the Pakistani military genocide that led to Bangladesh’s independence. 
Still, the fact is that Myanmar’s failure to construct an inclusive national identity has allowed old ethnic rivalries to continue to fuel terrorism, stifling the resource-rich country’s potential. 
What Myanmar needs now is an equitable, federalist system that accommodates its many ethnic minorities, who comprise roughly a third of the population, but cover half of the total land area. 
To this end, it is critical that Myanmar’s military immediately halt human-rights abuses in Rakhine. 
It will be impossible to ease tensions if soldiers are using disproportionate force, much less targeting civilians; indeed, such an approach is more likely to fuel than quell violent jihadism. 
But as the international community pressures Myanmar’s de facto leader Aung San Suu Kyi to take stronger action to protect the Rohingya, it is also vital to address the long history of Islamist extremism that has contributed to the ethnic group’s current plight. 


Gimme Shelter From Dictatorship 
NEW YORK – Following US President Barack Obama’s trailblazing visit to Cuba, a free concert by the Rolling Stones in Havana might seem like a relatively minor event. 
Obama revived relations with Cuba after more than a half-century of deep hostility. 
The septuagenarian Stones just played some very loud music. 
And yet, symbolically, the concert was not minor at all. 
To grasp the importance of the Stones’ performance in front of hundreds of thousands of adoring Cubans, one has to understand what rock and roll meant to people living under Communist dictatorships. 
In the 1970s, for example, Czechoslovakia, like other Communist states, was a dreary, oppressive, joyless place, where mediocre party hacks set the tone, and creativity was stifled under a blanket of enforced conformism. 
Rock and roll was considered a noxious form of capitalist decadence. 
A local rock band named Plastic People of the Universe, performing in English, was arrested in the late 1970s for “organized disturbance of the peace.” 
Recordings by the Rolling Stones and other Western groups were banned. 
And yet records were smuggled into Czechoslovakia and other Eastern European countries, where they were treasured by young rock fans, including the dissident playwright Václav Havel, who would later become the country’s president. 
The forbidden sounds – loud, anarchic, sexy – offered an escape from the drabness of a tightly policed normality. 
Rock and roll allowed people to imagine what it would be like to be free, if only for fleeting moments. 
For that reason, the authorities viewed it as profoundly subversive. 
Rock fans in Western democracies listened to groups like the Rolling Stones, the Velvet Underground, or Frank Zappa’s Mothers of Invention, for pleasure. 
There was a certain amount of political bluster among rock stars, to be sure, but this was widely regarded as frivolous posturing. 
Not in countries like Czechoslovakia, where the music – more than the posturing – was an expression of serious rebellion. 
Indeed, the defense of the Plastic People of the Universe became a public cause for dissidents like Havel, ultimately giving rise to Czechoslovakia’s Charter 77 movement. 
When Havel offered Zappa an official role in his democratic government after the Communist regime had fallen, Zappa was as astonished as everyone else. 
But it showed how much his music had meant to people like Havel, when they had to listen to it secretly, risking arrest. 
The role of rock music in countries behind the Iron Curtain was beautifully dramatized in Tom Stoppard’s 2006 play Rock ‘n’ Roll, in which a Havel-like character, named Ferdinand (after characters of the same name in Havel’s own plays), extolls the music as a supreme form of political resistance. 
Other people in the play scoff at this notion, treating musical subversion as trivial. 
Stoppard, like Havel, clearly doesn’t agree. 
The play ends with the Rolling Stones’ historic concert in Prague in 1990. 
Rock is ecstatic music. 
Ecstasy allows people to let go of themselves. 
This is not always benign. 
Mass hysteria at Nazi rallies was a form of ecstasy too. 
So is the behavior of soccer crowds, which can sometimes turn violent. 
I once witnessed a group of highly respectable Singaporeans letting go of themselves in an evangelical church service. 
Urged on by an excited Japanese preacher, men in grey suits started writhing on the floor, foaming at the mouth, and jabbering nonsense. 
It was not an edifying spectacle. 
In fact, it was frightening. 
But the Japanese preacher was not wrong to claim that people – especially, as he put it to his congregation, buttoned-up Japanese and Singaporeans – sometimes need a relief from everyday conformity. 
Music-induced ecstasy is not the same as speaking in tongues in a religious frenzy. 
But the experiences are related. 
That is why official guardians of social order are so often eager to ban such practices. 
Indeed, as far back as 380 BC, Plato warned against departing from traditional forms of music. 
Musical innovation, he wrote in The Republic, and especially exciting new sounds, were a danger to the polis. 
He believed that lawlessness began with unorthodox kinds of musical entertainment, and advised the authorities to put a stop to such things. 
Last month, Mick Jagger told his Cuban fans in Spanish that “finally the times are changing.” 
Perhaps they are. 
Obama struck a similar note in his farewell speech in Havana. 
He spoke about a new era, “a future of hope.” 
He told Raúl Castro, the stiff-legged Cuban strongman, who is more than a decade older than Jagger and almost three decades older than Obama, that he should not fear freedom of speech. 
These are fine words. 
But real political freedom in Cuba may be slow to come. 
And the example of China shows that individual hedonism can be successfully combined with political authoritarianism. 
(The Stones have already played in Shanghai, even though the Chinese authorities insisted on vetting their songs.) 
But it is a start. 
Rock and roll has officially come to Cuba. 
Jagger paid proper respect to Cuba’s own ecstatic musical traditions. 
Cubans already know how to dance. 
The next, much bigger step is for the autocrats to get off the floor. 

Rolling the Dice in Cyprus 
PRINCETON – The task was never going to be an easy one: impose losses worth about €5.8 billion ($7.5 billion) on lenders to the Cypriot government and depositors with the country’s banks. 
And now that effort has led Europe to its latest impasse. 
In marathon negotiations, the Cypriot government, under the supervision of the troika (the European Commission, the European Central Bank, and the International Monetary Fund), agreed to a one-time “tax” on bank deposits. 
But, despite an amendment to exempt accounts containing less than €20,000, the Cypriot parliament overwhelmingly rejected the plan, leaving Cyprus – and Europe – in limbo. 
In fact, large depositors are not unlike senior bondholders, and the proposed haircut was a small but welcome step forward. 
But, because it did not go far enough, a hole remained. 
There were other options. 
Lee Buchheit, the veteran sovereign-debt attorney who should have been in the negotiating room, and Mitu Gulati of Duke University have proposed an elegant “reprofiling” of Cyprus’s €15 billion sovereign debt that would instantly reduce the financing pressure on the country. 
But such considerations were off the table well before the deliberations began. 
Instead, the initial decision was to confiscate just under €3 billion from accounts containing less than €100,000 – the cutoff for deposit insurance. 
Make no mistake: this would have been the greatest policy error since the start of the financial crisis five years ago. 
Indeed, the proposal amounted to a rupture with the near-universal agreement that small depositors should be considered sacrosanct. 
After all, televised news footage of panicked depositors in long lines outside banks and at ATMs can cause immeasurable financial damage far beyond a country’s borders. 
Historians will argue whether forcing Lehman Brothers into bankruptcy in September 2008 precipitated the subsequent global financial crisis. 
Vincent Reinhart, formerly of the US Federal Reserve and now at Morgan Stanley, has argued that the Lehman decision was correct (the error came earlier, with the bailout of Bear Stearns, which created an expectation that all banks would be bailed out). 
Private risks must be privately borne. 
By contrast, the proposal to impose losses on small Cypriot depositors had no redeeming justification whatsoever. 
As in Ireland, the most vulnerable were being asked to take the hit, while large depositors were let off lightly and other lenders were to be spared. 
But it gets worse. 
There has never been an official explanation of why lenders to a sovereign should not share the pain, despite the “no bailout” principle on which the eurozone was founded. 
Most observers cite the authorities’ concern that if any sovereign does not honor its debts, all sovereign borrowers will be penalized. 
But such contagion risk is trivial compared to the wildfire that could be ignited by imposing losses on small depositors. 
In mid-2007, Cyprus qualified for eurozone membership by meeting the stringent Maastricht criteria, intended to ensure that new entrants would behave responsibly and flourish in the secure environment provided by the currency union. 
In the months leading up to the decision, the IMF urged Cyprus to take all necessary steps to ensure a favorable outcome. 
The benefits of Cyprus’s adoption of the euro may never be clear. 
By 2009, the IMF’s Article IV Staff Report was already ringing the alarm bells. 
Public debt was still low, but growing rapidly; the current-account deficit was ballooning (reaching 15% of GDP in 2008); and the banks had gone Icelandic, with assets worth more than three times Cyprus’s GDP. 
As the report noted, the huge and highly concentrated banking sector’s problems could “quickly escalate to systemic proportions with serious economic repercussions.” 
And so they have. 
This is a remarkable outcome, given that the risks have been so well known and understood. 
Indeed, the Cypriot authorities have been engaged in ongoing discussions with the troika for the past year. 
And yet, despite all of the preparation, a night of closed-door negotiations led to a stunningly elementary error. 
Compounding that error was the absence of any substantive decision concerning how to extricate Cyprus from its downward spiral. 
Cypriot debt, we are told, will rise to 140% of GDP, but will fall to about 100% of GDP in less than a decade. 
This appears to be another replay of the Greek scenario, with targets for reducing the debt burden repeatedly missed, until more drastic steps become inevitable. 
Most important, no restructuring of Cypriot banks appears imminent; on the contrary, the intent seems to be to keep large depositors from fleeing and preserve the highly risky system. 
The Central Bank of Cyprus has provided large loans to Cypriot banks under the Emergency Liquidity Assistance arrangement, implying that the collateral offered did not meet the standards of the ECB. 
More train wrecks are in the making. 
The problems in Cyprus now threaten international financial stability. 
If the idea of a European banking union is serious, now is the moment to advance it. 
That means reaffirming the commitment to deposit insurance, closing unviable banks, and recapitalizing the rest with European (not Cypriot) funds. 
The troika’s decision on Cyprus was akin to policymaking by rolling the dice. 
The coming days will reveal the extent of the immediate damage that it has caused. 
But, with another display of reactive and ad hoc decision-making, we are no wiser about how Europe intends to resolve its dilemmas. 
Could the Cypriot setback catalyze a fresh start? 


Romania, Serbia and the Orthodox Brotherhood 
BUCHAREST: The decision this week by Romania's government to open its air space to NATO warplanes is the most difficult any of the country's postcommunist governments has taken since the death of Nicolae Ceausescu. 
For the moment NATO initiated its air strikes against Serbia what can only be called a bout of "Serbomania" has gripped the country. 
What I mean by "Serbomania" is an extremely unbalanced, biassed, almost neurotically emotional pro-Serbian attitude, one completely lacking in any serious or reasoned critique of NATO' military action. 
What is more curious about Romania's outburst of "Serbomania" is that, not many months ago, the country was locked in a "NATO-mania" all its own. 
Indeed, up to the outbreak of this war, joining NATO was not only official Romanian policy, but enjoyed massive public and media support. 
According to surveys, about 90% of Romanians backed NATO membership. 
Most newspapers and broadcast media enthusiastically welcomed the prospect of NATO enlargement in the hope that Romania would be invited into the club. 
When, in 1997 at NATO's Madrid summit, Romania was turned down, public enthusiasm cooled. 
But that does not fully explain the open hostility toward NATO that is now on the march. 
It is not only that, today, many Romanian journalists and columnists agitate against NATO or have taken the Serbian side. 
What is most striking is the rationale people invoke for supporting Serbia. 
By and large, the all-pervasive view here is that of Harvard Professor Samuel Huntington who predicted that international politics after the Cold War would become a"clash of civilizations". 
Accordingly, many people here see the Balkan conflict as a struggle between "Western civilization" and the "Orthodox-Slavic" one in which Serbia and Romania belong. 
Ethnic cleansing and the plight of the Kosovar refugees, who are Muslim, doesn't seem to trouble anyone's sleep; nor is the ruthlessness of Slobodon Milosevic, who, after all, is no Orthodox patriarch, but a cunning ex-communist apparatchik, condemned in any way whatsoever. 
Reasoned arguments have evaporated from the pages of newspapers, which instead denounce NATO for waging war on "heroic" Serbia and play on public sympathy for the suffering of "our Orthodox brethren". 
An outstanding Romanian journalist, Cristian Tudor Popescu, a deputy editor-in chief of Adevarul the newspaper with the widest national circulation, went so far as to write that "Human Rights" are nowadays merely a tool that the West uses in its bid to control the world. 
The United States, he goes on, is out to destroy the independent nation-states worldwide so that it can expand its economic and cultural hegemony. 
Serbia, it seems, is just one of the first targets in an ongoing campaign of subjugation. 
So, the argument goes, Romanians must join with the Serbs and Russians in an anti-Western front. 
Somehow these people forget that Romania has always prided itself on being an "island of Latin culture surrounded by a Slavic sea". 
Moreover, unlike the Serbs or Bulgarians, Romanians have always perceived Russia as their arch-enemy, sentiments made white hot up during the communist era. 
Of course, most Romanians are Greek-Orthodox, as Greeks, Serbs, Bulgarians and Russians are. 
Yet, during the past two centuries this has not prevented them from fearing the Russians, patronizing the Bulgarians, and envying the Greeks. 
And if the Serbs enjoy a higher status in the national psyche, I suspect that this has less to do with the alleged "Orthodox brotherhood" than because people remember that both Tito and Ceausescu treated Russia as a common threat to their attempts to secure a more independent political way. 
Indeed, the weakest explanations for why nations hate or love each other are to be found in "history" or "civilization": both are easily twisted by cynics and opportunists in order to meet the "national interest" of the moment. 
"Serbomania" and "NATO-phobia", instead, reflect deeper local fears. 
Many Romanians compare Kosovo with Transylvania, where ethnic Hungarians make up the majority of the population. 
They believe that, if Kosovo is stripped from Serbia, Transylvania could one day leave Romania. 
But even if Serbia eventually loses Kosovo, it won't be because the West wanted that to happen. 
It will come about because the Serbian government, by its cruelty and intolerance, destroyed any hope of a peaceful coexistence between Kosovar Albanians and Serbs. 
Such, fortunately, is not the case in Romania, where representatives of the Hungarian minority are important members of the ruling coalition government. 
Many people, however, are today gravely disappointed in that government because of the country's dire economic conditions, and so have turned against everything the government does or says. 
Of course, not all important public voices belong to the "Serbomania chorus": in mid-April, a number of outstanding intellectuals published a manifesto standing up for NATO officially and urging the Romanian government not to backtrack. 
But most people, it seems, will continue to listen to the siren song of "Orthodox brotherhood" so long as their economic plight remains so severe. 
So "Serbomania" is just another symptom of a huge uncertainty; it exposes the deep insecurity many people across Eastern Europe feel about their countries, their pasts, their futures and, ultimately, about themselves. 

Romania's Hysteria 
BUCHAREST: Across Eastern Europe throughout this year, people have celebrated their peaceful, victorious revolutions against communism. 
In Romania, however, there was nothing “velvet” about communism's end. 
Ten years ago this December the center of Bucharest was ravaged by tank and sniper fire, leaving many people dead, as the part of the Romanian army that sided with those who wanted liberation fought street by street with loyalists of Ceausescu's Securitate. 
Today, our so-called revolution is still viewed differently than those that took place in other former communist countries. 
Elsewhere, people know that a real revolution took place; they have been building truly new societies. 
Our revolution of 1989 now seems more like a coup, with one part of the communist elite simply replacing that part which had become utterly discredited. 
As a member of the “Group for Social Dialogue” that sought to give direction to the forces of change during the fighting that December, I can say that we were never certain as to what forces were fighting with us and against us, nor for what reasons. 
The National Salvation Front that ruled Romania's first half-decade of transition, headed by Ion Iliescu, simply emerged triumphant from the bloodshed of 1989 as a fait accompli. 
It never really declared communism over, merely that the Ceausescu dictatorship was finished. 
Indeed, the only thing that I know for certain about those days is a strange curiosity: that Ceausescu endured his kangaroo court trial and execution with far more dignity than I would ever have imagined. 
Uncertainty about our “revolution” still has debilitating effects today. 
As then, people remain passive and uncommitted. 
Market-oriented reforms, long postponed by the Iliescu government, appear to have failed to raise living standards. 
As in Russia, they failed to bring about a legal free-market economy. 
On the contrary, the share of the black market economy has been increasing by such a speed that, according to some economists, the real economy (composed of both the "white" and the "black" economy) actually grew over the last two years, notwithstanding an official decline in GDP. 
Nevertheless, people complain that they are far worse off now than ten years ago. 
In November, several unions organized rallies where demonstrators cursed the ruling centre-right government and invoked the Ceausescu era as one relatively good and secure. 
Yet, as workers and unions step up their protests against privatization, market reforms, inflation, corruption or unemployment they seem to forget the taxes they withhold daily from state or local councils. 
They ask their government to provide viable jobs for them, to control crime and inflation, and to care for their health, while at the same time they do all they can to evade the taxes needed to pay for these things. 
In Romania, the gap between what people say and what people do remains a chasm. 
Private hypocrisy breeds public hypocrisy and crime. 
The less money the state has, the lower the salaries of civil servants and the value of pensions. 
So, in order to feed their families, many teachers, judges or policemen will quite naturally accept bribes. 
Because of lousy salaries in the state administration, many young and gifted people avoid government service, preferring to look for better-paid jobs in the private sector, or to emigrate. 
Those in business try to shrink their declared income to the smallest amount possible, or not declare any income at all. 
Thus the black market grows ever bigger and the state's ability to carry out its most basic services continues to diminish. 
As the state plunges into chronic weakness, a growing number of people yearn for it to be made stronger, even if our new liberties need to be sacrificed here and there. 
They want the state to provide for their welfare, to tackle crime, unemployment and inflation and to fight corruption, all of which the state is less and less capable of doing. 
Because most people confuse strength with efficiency, they believe that the state must again acquire sufficient power to enforce its will. 
The result of this vicious circle is obvious: an ever growing dissatisfaction with the democratic (even if imperfect) state founded in the aftermath of Ceausescu's fall. 
What Romania (and some other East-European countries, like Ukraine, Russia, Albania) is experiencing is not merely an economic or a political crisis; rather, it is a crisis of alienation. 
The gap between the rulers and the ruled widens everyday. 
Not only does each mistrust the other, but each tries to deceive each other as much as they can. 
Ten years ago our revolution was mere sleight of hand; now our politics is simply deception, too. 
This week, President Constantinescu sacked the prime minister, who in turn refused to leave office. 
Chaos, once again, seems at hand. 
Romania, indeed, seems almost ripe for any bold demagogue to offer to replace this so-called "weak and rotten state" with a "strong and sound" dictatorship. 
The only thing that seems to be holding us back from the brink is that dictatorships are out of fashion nowadays in Europe. 
But in deceiving ourselves into thinking that it is a moral imperative that the state impose order, we are joining the fashionable madmen, which is when the thin whine of hysteria can be heard. 
When that happens, a country is in trouble, and I think Romania already is there. 

Romano Prodi Raises The Stakes 
BRUSSELS: Romano Prodi, the new President of the European Commission, has wasted no time in laying down a challenge on the biggest issue facing Europe today: the pace and the scale of enlargement of the European Union, and what this enlargement will mean for the EU itself. 
It is a challenge whose implications may be deeply unwelcome to the governments, and the electorates, of many of the Member States. 
Indeed, Prodi told the European Parliament that he would recommend that membership negotiations, (currently under way with five countries from Central and Eastern Europe, plus Cyprus), should also be opened with the second wave of six applicants: the remaining five countries from the CEE, plus Malta. 
He also implied that the countries of the Balkans should become virtual members of the European Union, even before they could possibly qualify as real members. 
And he said that Turkey, until now treated by the EU as a political pariah, must be considered a potential candidate, provided it first makes far-reaching political reforms. 
First impressions of Prodi's remarks, in some candidate countries, was that he appeared to be recommending that EU membership should be easier and quicker. 
This was a serious misunderstanding. 
To be sure, Prodi was recommending a more flexible negotiating process, in which all the candidates from Central and Eastern Europe would be treated on their merits; so individual candidates in the second wave might be able to catch up with the first. 
And in fact some candidates in the second wave are making good progress. 
The Commission has particular praise for the efforts of Latvia, Slovakia and Bulgaria, and suggests that, in economic terms, Latvia could be included in the first wave. But there is no suggestion that the membership criteria should be relaxed. 
On the contrary, the Commission continues to insist that the political and economic criteria must be strictly adhered to. 
No doubt Prodi hopes that the candidate countries of Central and Eastern Europe can join as soon as possible. 
He even seemed to hint that the first accessions might possibly take place as early as January 1, 2003, which is at least a year earlier than most previous forecasts. 
But this was a misleading impression, for he went on to predict that even the most advanced membership negotiations would only be reaching their conclusion towards the end of 2002. 
Since negotiations must be followed by ratification in all the member states, and since ratification can be assumed to take at least one year, and possibly two, this implies that the first new members cannot expect to join before 2004 or even 2005. 
But the significance of the Commission's new line, is not so much the speed as the scale of the enlargement process on which the European Union is now embarked. 
Romano Prodi's policy may encourage the candidates, by allowing some to join quicker than others. 
But the point of his speech was to stress the fact that the European Union now faces the prospect of taking in 15 or 20 new members within the next 15 or 20 years. 
Hitherto EU governments have largely pretended that enlargement is a small-scale serial process, with individual new members coming in one after another. 
But if the Commission's new line is adopted by the member states, at their December summit in Helsinki, they will then have to deal with the fact that the EU is really engaged in a large-scale process of expansion which will include most if not all of Europe; and that, in this process, the Union will inevitably be transformed by such a doubling of membership. 
The first implication of such a massive expansion, is that there has to be a major overhaul of the Union's political and decision-making institutions. 
At their June summit, the member states agreed that there have to be some reforms of the institutions before the next enlargements, but they set a timid reform agenda limited to some minor tinkering at the edges. 
Prodi took issue with this minimalist approach soon after his nomination. 
He argued that more far-reaching reforms would be required, and appointed a three-man committee under Jean-Luc Dehaene, former Belgian prime minister, to make recommendations. 
This committee has now produced its report and, sure enough, it endorses the Prodi call for comprehensive reforms to improve the effectiveness of decision-making in Brussels. 
Some of their ideas are predictable, such as that majority voting should be the normal rule in the Council of Ministers. 
But there are two proposals which are more dramatic. 
The first is a call for more "flexibility". What this means is a multi-speed Union, in which some members can integrate more closely together than others. 
The implication is, first, that there might be member states which did not participate in all policies; and second, that Euro-sceptic countries like Britain, which is not in the Euro zone, could not prevent further integration by the 11 countries which are. 
The second proposal is that the European Union treaty should be re-organised into two separate parts. 
The first, containing the aims and general principles of the Union, plus the citizens' rights and the institutional framework, would be the real Treaty and could only be changed by unanimity, and with national ratifications. 
The second, containing detailed and workaday policy provisions, could be changed by the Union institutions, perhaps by majority vote. 
By implication, the process of drafting the real Treaty would require the member states to start thinking of it as the beginning of a Constitution. 
Initial reactions from member states has been unenthusiastic or hostile, especially from the British. 
Sooner or later they will have to face the fact that they cannot embark on the building of a mega-Union of 30-plus member states, without corresponding reforms to the decision-making institutions. 

Romney versus Obama 
CAMBRIDGE – While the presidential primary elections in the United States are not over, Mitt Romney is now almost certain to be the party’s nominee to face Democratic President Barack Obama in November. 
As Governor of Massachusetts, Romney built a record as a competent and moderate conservative, a political profile that suited him to the state’s electorate. 
But the Republican Party’s far right wing dominates the primaries, so Romney has worked hard to escape the “moderate” label by staking out very conservative positions. 
Now, as the party’s presumptive nominee, he must move back toward the political center, where the majority of voters are to be found. 
So which is the real Mitt Romney? 
And how can voters judge the two candidates? 
Obama has a proven track record, albeit one that has disappointed many who voted for him in 2008. 
Of course, his supporters argue that he had to adapt to two ongoing wars and the worst recession since the 1930’s. 
Moreover, after the 2010 mid-term elections, a hostile Republican-controlled House of Representatives blocked his initiatives. 
Romney, for his part, will hold up Obama’s early, still-unmet promises, while Obama will call Romney a “flip-flopper” who changes his positions to suit the moment (and the audience). 
In fact, the difficulty of predicting the eventual winner’s performance in office is not new. 
In his 2000 presidential bid, George W. Bush famously promised “compassionate conservatism” and a humble foreign policy, but governed very differently, as when he decided to invade Iraq. 
Likewise, Woodrow Wilson and Lyndon Johnson campaigned on promises of peace, but each took America to war shortly after being elected. 
Do such post-election changes in direction make a mockery of democracy? 
How can voters make intelligent judgments when campaigns are so carefully scripted and slickly promoted? 
Leadership theorists suggest that we should pay less attention to leaders’ policy promises than to their emotional intelligence – their self-mastery and ability to reach out to others. 
Contrary to the view that emotions interfere with clear thinking, the ability to understand and regulate emotions can result in more effective thinking. 
As Supreme Court Justice Oliver Wendell Holmes reputedly quipped after meeting Franklin D. Roosevelt: “Second-class intellect, but first-class temperament.” 
Most historians would agree that Roosevelt’s success as a leader rested more on his good nature than on his analytical skills. 
The energy and optimism that he unleashed in his administration’s first hundred days did not reflect concrete policy proposals in his campaign. 
Psychologists have wrestled with the concept of intelligence, and how to assess it, for more than a century. 
General IQ tests measure dimensions of intelligence such as verbal and spatial dexterity, but IQ scores generally predict only about 10-20% of success in life. 
And, while experts disagree about how much of the other 80% is attributable to emotional intelligence, they generally agree that it is an important and learnable skill that increases with age and experience, and that individuals possess it to varying degrees. 
Leaders work hard to manage their public images, which requires some of the same emotional discipline and skill that successful actors possess. 
Ronald Reagan’s experience in Hollywood served him well in this regard, and Roosevelt was a master at image management. 
Despite his pain and difficulty in moving on legs crippled by polio, he maintained a cheery exterior and avoided being photographed in a wheelchair. 
Whether they realize it or not, leaders always convey signals. 
Emotional intelligence involves the awareness and control of such signals, and the self-discipline that prevents personal psychological needs from distorting policy. 
If emotional intelligence is inauthentic, others will likely find out in the long run. 
Richard Nixon, for example, was strong on cognitive skills, but weak on emotional intelligence. 
He was able to strategize effectively on foreign policy, but was less able to control the personal insecurities that eventually led to his downfall – a shortcoming that emerged only over time. 
Indeed, it was not until well into his presidency that the public learned of his infamous “enemies list.” 
Bush showed emotional intelligence in midlife by mastering his problems with alcohol, and in displaying the courage to persevere with unpopular policies. 
But, at some point, perseverance becomes emotional stubbornness. 
Like Wilson, Bush had an obstinate commitment to his vision that inhibited learning and adjustment. 
Perhaps the flexibility that Obama and Romney have shown is not such a bad quality for a president after all. 
The rigors of the prolonged campaign provide voters with some clues about stamina and self-discipline. 
Each of the Republican candidates took a turn as front-runner in this race, and the rigors of the primary season exposed the flaws in some, like Texas Governor Rick Perry, who were initially attractive. 
Now, in the general election, how Romney, in particular, relates to his party’s platform will tell us something about the strength of his independence and future cabinet appointments. 
But the most important variable for voters to examine is the candidate’s biography. 
I do not mean the slick books and television advertisements that are produced for their campaigns. 
While image consultants and acting ability can mask a candidate’s character, an integrated life over time is the best basis to judge the authenticity of the next president’s temperament and how he will govern. 
Above all, sophisticated voters will themselves be emotionally intelligent enough to be prepared for surprises. 
When their candidate disappoints them – as he inevitably will, regardless of the election’s outcome – they will bear in mind that democracy is the worst system, except for all of the others. 

Ronald Reagan Putin 
On May 22, two free-market liberals will meet in the Kremlin: one an ex-oilman who is the son of a US president, the other an ex-KGB agent who is the son of a Saint Petersburg maintenance man. 
Despite their very different backgrounds, Presidents George W. Bush and Vladimir Putin are forging a remarkably close partnership. 
Indeed, cooperation in the international war on terrorism, the recent agreement to reduce stockpiles of nuclear weapons, and Russia's rapprochement with NATO appear to be only the beginning of a process that is deepening by the day Russia's integration with the West. 
But it is in economics, surprisingly, that the two men seem to share the most common ground. 
President Bush may be tempted to believe that Russia's current economic success is purely the result of high world oil prices. 
Prices aside, the difference between how Russian oil companies were managed in the early 1990s and how they are managed now is too dramatic to ignore. 
So, too, are management improvements in the food industry which have boosted output and quality. 
Throughout the economy, resources are finally flowing into the ever more efficient and well-organized market sector, rather than into the poorly managed Soviet industrial dinosaurs. 
For those who know Russia, this is a staggering turn of events. 
Four years ago, big Russian companies were interested in state subsidies, not structural reforms. 
Now, business leaders believe that the stock-market capitalization of their companies depends on the investment climate. 
The value of their assets matters to them. 
They want to know how much they can borrow from abroad, or at what price shares in their companies may be sold in New York or London. 
Putin does not deserve all the credit for this sea change, but what he has achieved over the last two years is far more than anyone had the right to expect: a simplified tax code, progress toward WTO membership, legal reform, greater transparency. 
Still, if oil prices fall sharply, he will face a huge political problem: bold structural reforms usually require years, not months, to show results. 
Russia's recent strong growth partly reflects the reforms of the early 1990s, and the reform achievements of 2000 and 2001 will feed through to measurable economic performance only in, say, 2005. 
But Putin has a true politician's sense of how to handle adversity. 
Here, he resembles former US President Reagan, whose popularity was rooted in an ability to feel the pulse of the public more accurately than his opponents. 
What distinguishes such leaders, whatever the political context, is that they understand what the public wants. 
Russia's pundits predict that if growth falls, so too will public support for reform. 
The public wants everything to be fine, in a simple, commonsense way. 
It wants economic growth and it wants it now. 
So Putin recently addressed the time-lag problem in a disarmingly simple way: in his state of the nation address in April, he demanded 8% growth this year, not the tepid 3-4% rate his government's ministers were targeting. 
In doing this, he seemed to be following the credo of Stanislav Strumilin, a mastermind of the Soviet "War Economy" in the late 1920s, who said: "I'd rather stand for high rates of growth than sit [in jail] for low ones." 
But by proclaiming his adherence to this goal, Putin is not exhorting workers to become Stakhonovites and "exceed production norms." 
Central planning is not about to stage a comeback. 
Instead, Putin is stoking public support for reform by lighting a fire under the state bureaucracy. 
For Russia's public knows deep in its bones that Russia's bloated yet ineffective state is the greatest threat to its economy. 
It knows that the bureaucratic apparatus remains outrageously large, and that civil servants retain numerous expensive perks - cars, dachas, medical services, and more - while most ordinary Russians scrape by on meager wages and vegetable gardens. 
The public also knows that bureaucrats will use any tactic to ensure inertia, and hence their own survival. 
For example, the Soviet system of public-finance management remains virtually intact. 
State spending left over from the previous year is routinely included in the federal budget, regardless of whether the renewed authorization serves a specific and necessary purpose. 
Military reforms have stalled, as if Russia had all the time in the world to rationalize and modernize its defenses. 
In short, bureaucrats do everything they can to force the government to sit on its hands. 
So the Russia that George W. Bush will visit is one of post-revolutionary economic stabilization, accompanied by a reactionary struggle against central authority - a struggle waged not by Russia's regions, but by the state's own bureaucrats. 
Some might argue that it is Putin's revitalization of central power that is reactionary. 
But liberal ideology does not demand an incompetent and weak state. 
It demands a state with limited aspirations to interfere in civil and economic life, but with the authority and resources to act decisively in those areas where it must. 
That is the type of state Putin is building. 

The Roots of Middle East Mistrust 
DURHAM – The mistrust that pervades Middle Eastern societies is hard to miss. 
As controlled experiments confirm, Arabs have substantially less trust in strangers, foreign or domestic, than, say, Europeans. 
This hampers progress on many fronts, from business development to government reforms. 
Low-trust societies participate disproportionately less in international commerce, and attract less investment. 
And, indeed, according to the World Values Survey and related research, trust among individuals in the Middle East is low enough to limit commercial transactions to people who know one another either personally or through mutual acquaintances. 
Because of their lack of trust, Arabs will often pass up potentially lucrative opportunities to gain through exchange. 
Likewise, in their dealings with public institutions, Arabs tend to seek the intermediation of an individual with whom they have some sort of personal connection. 
Among the consequences are inequities in what people can expect from such institutions. 
That undermines their effectiveness. 
Clearly, there is a need to address the Middle East’s trust deficit. 
A first step toward doing so is to understand its causes. 
One potentially important clue lies in the difference between perceptions of Muslims and Christians. 
To be sure, there are no official data quantifying the deficit; in most parts of the Middle East, too few Christians are left to make meaningful statistical comparisons. 
But casual evidence suggests that the region’s shoppers, merchants, and investors generally consider local Christians to be more trustworthy than local Muslims. 
“It has always been that way,” they say. 
My work with the economic historian Jared Rubin exploring Istanbul’s seventeenth- and eighteenth-century Islamic court records may offer insights into why. 
At that time, Istanbul was a cosmopolitan city; around 35% of its local residents were Christian, and 6% were Jewish. 
According to Islamic law (Sharia), Muslims had to do business according to Islamic rules, and if they wanted to adjudicate a conflict, they had to use an Islamic court. 
For their part, Christians and Jews could do business under their own rules, though they were free also to follow Islamic rules and to use Islamic courts, if they so desired. 
But, of course, if they were involved in a case against a Muslim, that had to be handled in an Islamic court. 
When a Muslim and a non-Muslim faced each other in a trial, the Muslim enjoyed significant advantages. 
First, the judges’ training predisposed them to give the benefit of any doubt to a fellow Muslim. 
Second, the court staff was entirely Muslim, which meant that testimony was viewed solely from a Muslim perspective. 
Third, whereas Muslims could testify against anyone, Christians and Jews could testify only against another non-Muslim. 
But these advantages had a downside. 
Because the legal system made it easier for Muslims to breach contracts with impunity, they were more often tempted to default on their debts and to renege on their obligations as business partners and sellers. 
Meanwhile, non-Muslims, whose obligations were enforced more vigorously, gained a reputation for trustworthiness. 
To reflect differences in perceived risk, lenders, who were predominantly Muslim, charged about two percentage points less for credit to Christian and Jewish borrowers than to Muslims (15% annually, as opposed to 17%). 
So it seems that perceptions of trustworthiness in the Arab world are rooted, at least partly, in the uneven enforcement of commitments under Islamic law. 
The sectarian differences in legal enforcement did not last. 
In the mid-nineteenth century, Islamic courts gave way to what were essentially secular courts, at least with respect to commerce and finance. 
The enforcement of commitments then became more balanced. 
The share of non-Muslims in the Middle East’s Muslim-majority countries has since diminished significantly, through emigration and population exchanges. 
As a result, few Middle Eastern Muslims have personal experience doing business with non-Muslims. 
Yet old impressions of Muslims being less trustworthy have endured, passed down through families and networks. 
Old habits of breaching contracts opportunistically have also survived in places, reinforcing the inherited stereotypes. 
The tendency to limit transactions to friends and acquaintances is a natural response in a low-trust environment. 
It is ironic that these damaging stereotypes emerged from a legal system explicitly intended to give the militarily and politically dominant Muslims an edge in their social and economic relations with Christians and Jews. 
Beyond raising the costs of economic transactions among Muslims at the time, rules meant to limit religious freedom – the denial of “choice of law” to Muslims and restrictions on non-Muslim judicial testimony – helped to create a culture of mistrust that now limits progress in various areas. 
Islamic law thus weakened the Muslim communities it was meant to protect. 
At a time when various political movements are seeking to re-impose Sharia, it is more important than ever to recognize the long-term damage caused by doing so already. 
What the Middle East needs today is not Islamic law, but wide-ranging efforts to rebuild trust among and within communities, and in private organizations and government. 
Reviving Islamic law would only deepen a trust deficit that is a key source of the Middle East’s current economic underdevelopment and political failures. 

The Rouhani Factor 
PALO ALTO – Iran’s presidential election on May 19 was paradoxical and potentially pivotal. 
It began as a sleepy affair – a likely victory for the incumbent, Hassan Rouhani, running against a motley crew of conservative has-beens or upstarts. 
Moreover, a two-term presidency has been the default in the Islamic Republic since 1981. 
Early attacks on Rouhani were thus seen as efforts by Supreme Leader Ali Khamenei, his conservative clerical allies, and the Revolutionary Guards to weaken and contain the incumbent in his second term. 
But then the election became a heated contest, as the conservatives coalesced around a dark horse candidate, Ebrahim Raisi, a hardline jurist with a history of brutality against the opposition. 
The fact that Khamenei had earlier named Raisi to head the largest religious endowment in Iran was now seen not as a sinecure, but as a move to position him as a possible future Supreme Leader. 
It was widely believed that a win for Raisi would virtually guarantee his success in the eventual battle to succeed Khamenei, who himself had been President when he was catapulted to the position of Supreme Leader, following the death of Ayatollah Ruhollah Khomeini. 
With Khamenei reported to be suffering from cancer, the question of succession has become acute. 
As a result, the conservatives’ considerable ideological, institutional, and propaganda apparatus was mobilized in favor of Raisi, and against Rouhani. 
In response, the hitherto careful and pragmatic Rouhani threw caution to the wind and unabashedly embraced the reform movement’s criticisms of the status quo. 
The grassroots of Iran’s reform and democratic movement – students, women, artists, and Iran’s quietly relentless civil society – swung into action and turned the election into a surprisingly heated referendum on the country’s future. 
Social media were widely used by both sides. 
Supporters of Rouhani used online platforms not only to mobilize voters, but also to fact-check Raisi’s proposals and expose his past actions in suppressing the opposition. 
More than once, Rouhani supporters subtly referred to the question of succession, by suggesting that the election was about Iran’s fortunes for the next 40 years. 
Conservatives used both social media and their control of Iranian radio and television to highlight the dire economic situation and Rouhani’s unfulfilled promises that all international sanctions would be lifted after Iran agreed in 2015 to the nuclear deal with the United Nations (and by extension, the United States). 
As a result, it became clear that two competing political paradigms were fighting for the soul of the Islamic Republic. 
The conservatives are animated by a desire to maintain their grip on Iran’s state-dominated economy; a preference for pious managers over technocrats; aversion to globalism; a proclivity to align Iran with Russia (and China) against the West, especially the US; persistent pursuit of Shia power by expanding Iran’s support for the likes of Syrian President Bashar al-Assad and Hezbollah in Lebanon; antipathy toward cultural openness; and persistent misogyny. 
In the past three elections, this paradigm has usually managed to gain 15-17 million votes. 
(The only exception was the widely disputed 2009 election, in which the conservative Mahmoud Ahmadinejad supposedly received more than 25 million votes, giving the world the “miracle” of his second term.) 
In order to increase his share of the vote, Raisi promised to triple the monthly cash subsidies paid by the government to virtually every citizen. 
The reformist paradigm, by contrast, advocates a more open society; a government managed by competent technocrats; an end to crony capitalism; a vigorous effort to attract foreign direct investment; less censorship; a more conciliatory relationship with Iran’s vast and powerful diaspora; and greater equality for women and marginalized religious and ethnic minorities. 
They also dismiss the idea of increasing cash subsidies as economically foolhardy and fiscally unaffordable. 
Some 40 million of Iran’s 55 million eligible voters – nearly 73% – went to the polls, often braving long lines. 
Twenty-five million of those 40 million (62.5%) voted for the reformist paradigm, delivering a landslide victory to Rouhani. 
At the same time, reformist candidates for city councils scored major victories throughout the country. 
In Tehran, for example, the reformist slate won every seat, ensuring that the current mayor – himself a conservative presidential candidate – will soon be out of a job. 
Even in Meshed, Raisi’s hometown and a bastion of conservative clerical power, a reformist woman candidate won more votes than any male. 
And yet, if the past is any indication, Rouhani’s decisive victory does not mean the end of conservative power. 
Khamenei, relying on the Revolutionary Guards, has a disproportionate share of power. 
In any case, Iran’s future trajectory will be determined not only by Rouhani and the conservative camp, but also by regional developments and the policy adopted by US President Donald Trump’s administration. 
In the 1980s, the US did not formulate its policy toward the Soviet bloc without careful consideration of political developments there. 
It would be folly for the US to formulate policy on Iran and the Middle East without giving domestic developments there the attention they deserve. 

Running From the Ruble 
PARIS – In recent weeks, the fall in the Russian ruble and Russian stock markets closely tracked the declines in global oil prices. 
But everything changed on December 15. The oil price remained stable, but the ruble and the stock-price indices lost 30% in the subsequent 24 hours. 
An unprecedented effort by the Central Bank of Russia (CBR) in the wee hours of December 16 to stabilize the ruble, by hiking the interest rate from 10.5% to 17%, proved useless. 
The cause of Russia’s “Black Monday” was readily apparent: the government bailout of state-owned Rosneft, the country’s largest oil company. 
Usually, bailouts calm markets; but this one recalled early post-Soviet experiments, when the CBR issued direct loans to enterprises – invariably fueling higher inflation. 
The CBR’s governor at the time, Viktor Gerashchenko, was once dubbed the world’s worst central banker. 
In 2014, the CBR is more constrained than it was in Gerashchenko’s era: it cannot lend directly to firms. 
Yet it has also become more sophisticated at achieving the same ends that Gerashchenko sought. 
In October, Rosneft issued $11 billion worth of ruble-denominated bonds (an unparalleled amount for the Russian market, equivalent to 70% of the total value of corporate bonds issued in Russia this year). 
The coupon on these bonds was actually 1.5 percentage points below sovereign bonds of similar maturity, which is also unusual, especially given that Rosneft currently is subject to Western sanctions. 
Then, unnamed investors (allegedly the largest Russian state banks) benefited from the CBR’s decision on December 12 to allow these bonds to be used as collateral for three-year CBR ruble loans at the policy rate. 
Moreover, the CBR scheduled a special auction for such loans on December 15 – with the total amount of the loans similar to that of Rosneft’s bond issue. 
Thus, the CBR would be able to provide a massive pile of rubles to Rosneft at below-market rates. 
So why did the deal trigger a panic? 
At first glance, this deal was intended to meet contemporary Russia’s most important economic challenge. 
Sanctions have cut off Russian banks and companies from Western financial markets. 
Russian companies have to repay or refinance about $300 billion of debt over the coming two years. 
Some of this debt is owed to Russian companies’ offshore owners, who will certainly be happy to roll it over. 
But in most cases, firms’ liabilities comprise real debt owed to major international banks. 
The best example is Rosneft, which borrowed about $40 billion in 2013 to buy its competitor, TNK-BP. 
About $10 billion of this debt has to be repaid in the fourth quarter of 2014, including a $7 billion payment on December 21 ($20 billion more will have to be repaid in 2015). 
Financial-market investors have been waiting patiently for the government to announce a strategy for addressing the issue of external corporate debt. 
The CBR did introduce a 12-month dollar facility for up to $50 billion, but this will barely last until the end of 2015. 
Given that the price of oil is likely to remain low, Asian financiers – even the Chinese – do not seem eager to refinance Russian companies, and sanctions are unlikely to be lifted, investors clearly wanted a bigger and bolder solution. 
Rosneft had repeatedly asked for $40 billion from Russia’s sovereign wealth fund. 
But, with that money already committed to other purposes, the government opted for a non-transparent and non-market-based solution that would have made Gerashchenko proud. 
Unfortunately, this solution poses several immediate problems. 
For starters, the risk of Rosneft defaulting – as well as the cost of providing subsidized loans – rests with the bondholders. 
If the bondholders are indeed the largest state-owned banks, the deal actually hurts the banking system: it increases the concentration of risk and implies additional losses from buying bonds with below-market interest rates. 
Second, because Rosneft must repay its external debt, it is likely to use its bailout cash to buy dollars, which can only result in further downward pressure on the ruble. 
Rosneft has denied this publicly, but the markets nonetheless seem to expect that the newly printed rubles will flood the currency markets. 
Third, the non-transparent structure of the deal undermines trust in the CBR’s integrity and independence. 
The day after Black Monday, Minister of Economy Alexey Ulyukaev said that the CBR should have increased interest rates sooner. 
This immediately raised suspicion that the CBR delayed the interest-rate hike in order to complete the deal at the lower rate. 
Finally, this bailout fails to answer the question it was supposed to address. 
Investors do not know whether the Rosneft bailout is a one-off deal and, if it is not, which companies can hope to receive similar treatment from the CBR. 
Thus, they do not understand how (and whether) Russian corporate debt will be repaid or refinanced – or how much trust they can place in the ruble. 

RUDI DORNBUSCH 
Rudi Dornbusch's death on July 25, at age 60, took a great economist and exceptional human being from us. 
Rudi was born and grew up in Krefeld, Germany. He was an undergraduate at the University of Geneva and completed his Ph.D. at the University of Chicago in 1971. 
He taught at the University of Rochester from 1972 to 1974, before returning to the University of Chicago as Associate Professor in the Graduate School of Business in 1974-75. In 1975 he accepted an offer from the MIT Department of Economics, where he taught until his death. 
Both the subject and style of Rudi's early work reflected the influence of his thesis adviser, Robert Mundell. 
The topic was exchange rates, output, and interest rates; the style was elegant and deceptively simple, with complex models reduced to the interaction of two curves. 
For some time, indeed, such diagrams were known as "Dornbusch diagrams". 
Many of these early articles are collected in his classic book Open Economy Macroeconomics , published in 1980. 
In 1976, soon after coming to MIT, Rudi wrote his most famous and influential article, "Expectations and Exchange Rate Dynamics", on the overshooting of exchange rates. 
The exchange rate fluctuations that came about following the shift to flexible exchange rates in 1973 were surprisingly large - far greater than fluctuations in domestic prices - and the question was why. 
Rudi provided a simple explanation. 
Price level and the level of output are "sticky", that is, they change only slowly. 
When a shock hits the economy, it is initially absorbed by interest rates and the exchange rate. 
Gradually the impact of the shock is transferred to output and domestic prices, and the exchange rate moves towards a new equilibrium. 
The "Dornbusch result" is that, in this process, the exchange rate typically overshoots its long run value. 
Because it overshoots, the exchange rate fluctuates more than the price level. 
As Ken Rogoff, the current IMF chief economist who studied under Rudi, commented on the 25 th anniversary of the article's publication: "The `overshooting' paper ... marks the birth of modern international macroeconomics." 
Even as he continued to produce outstanding theoretical articles, Rudi became interested in policy issues. 
He became one of the outstanding policy economists of our time, displaying the same rare talent demonstrated in his theoretical work: the ability to extract the essence of a complicated problem and explain it in terms that made it appear simple. 
He worked on a range of problems, typically the major international and national economic issues of the day, drawing on his knowledge of economic history to illuminate the present. 
For example, he applied the lessons of the dissolution of the Austro-Hungarian empire to the break-up of the Soviet bloc. 
Among his policy papers, the most famous is a 1994 paper that predicted Mexico's peso crisis, one of many papers on Latin America's economic problems. 
Another that warrants rereading is his 1990 paper "Macroeconomic Populism", which accurately depicts a temptation to which policymakers in Latin America and other countries often used to succumb. 
As his policy interests grew, Rudi's fame spread. 
He was an indefatigable traveller, speaker, and writer, and a frequent columnist. 
In his more popular articles, in his columns, and on the podium, his wit and the speed of his mind made him a formidable presence. 
He was one of the finest debaters and polemicists in the profession. 
He did not shy away from stating his views, often reflecting the advice of Keynes: "Words ought to be a little wild for they are the assault of thoughts on the unthinking". 
At various times he was persona non grata to the authorities in a number of countries after characterizing either their policies or their behaviour in ways they did not appreciate. 
It did not help that he was more often right than not. 
Despite his public persona, Rudi was an excellent confidential policy adviser. 
When I was in the IMF, I often called him to discuss a difficult situation. 
He would talk as long as necessary, and his advice was always thoughtful and nuanced, providing insights no one else had seen. 
For a short time, Rudi thought about joining the Clinton administration. 
Fortunately he did not, because he had little patience for bureaucracy, long meetings, and the need to toe an official line. 
His comparative advantage was on the outside, where he was free to develop his insights and express his views. 
Rudi was also a spectacularly successful teacher. 
As a thesis adviser, Rudi had few peers. 
Every outstanding American international macroeconomist who went to MIT, among them Jeffrey Frankel, Paul Krugman, Maurice Obstfeld and Ken Rogoff, was Rudi's student. 
Outstanding students of Rudi can be found all over the globe, many as policymakers. 
In their devotion to their teacher and friend lies the greatest compliment to his teaching and his mentoring. 
I had the good fortune to collaborate with Rudi in writing two textbooks and several articles. 
One textbook, Macroeconomics , sold well over a million copies worldwide and gave me as much satisfaction as anything I have done in my professional life. 
Rudi felt the same way. 
Rudi lit up any group in which he participated. 
He was among the most talented of men, and the warmest, generous with his time and himself, available for students and friends whenever they needed him. 
He fought his terminal cancer for over 18 months, never complaining, always expressing optimism that the latest experimental treatment would work. 
When he was finally forced to take to his bed, he said that he hoped his friends would remember him as he had been, not as he was at the end. 
That they will. 

Europe’s Rule-of-Law Crisis 
BRUSSELS – From the rubble of two world wars, European countries came together to launch what would become the world’s largest experiment in unification and cooperative, shared sovereignty. 
But, despite its impressive achievements over the decades, the European project now risks disintegration. 
An unresolved financial crisis, a refugee crisis, a deteriorating security environment, and a stalled integration process have created throughout Europe a toxic, unstable political environment in which populism and nationalism thrive. 
Perhaps the clearest manifestation of this is the erosion of the rule of law in the European Union. 
Two EU members in particular, Hungary and Poland, are now jeopardizing hard-won European democratic norms – and thus undermining the very purpose of European integration. 
In Hungary, liberal-democratic values have come under systematic attack from Prime Minister Viktor Orbán’s government. 
Since his return to the premiership in 2010, Orbán has committed Hungary to an authoritarian nationalist path, and he has exploited the refugee crisis to cement a “siege mentality” that helps him sustain popular support. 
In the process, fundamental rights have been ignored, media freedom has been curbed, refugees have been demonized, and Orbán is doing everything in his power to weaken the EU. 
Attempts by EU institutions to convince Orbán to change course have only emboldened him to commit further outrages against democratic norms. 
Meanwhile, a democratic crisis has emerged in Poland as well, starting last October, when the Law and Justice (PiS), a Euroskeptic party that also opposes immigration, secured an outright parliamentary majority by promising to implement populist economic policies and “put Poland first.” 
Yet, since the election, PiS has launched a series of attacks on the Polish constitution itself. 
Government legislation aimed at reforming Poland’s Constitutional Court has been condemned by the Court itself and the European democracy watchdog, the Venice Commission. 
The government has effectively precluded the Court from ruling on the constitutionality of legislation. 
This weakens a key pillar of the democratic rule of law – and thus is highly problematic for Poland and Europe alike. 
Hungary and Poland are the leading edge of a far-right agenda that has taken hold throughout Europe, pursued by parties that are exploiting the political vacuum created by the EU’s failure to address the financial and refugee crises. 
So how can the tables be turned? 
In democratic countries, it is vital that democracy’s enemies be fought with democratic means. 
It is vital that the outside world impress on the Hungarian and Polish people themselves that in a globalized world, nationalism offers only false security and economic irrelevance. 
Both countries, at the heart of Europe, have profited enormously in every sense from EU membership; they must not throw away their opportunity to make further progress. 
Hungarians and Poles rejected international isolation in 1989. 
After the fall of the Iron Curtain, both countries became staunch NATO allies even before they joined the EU. 
The geopolitical and security arguments for European unity are overwhelming, and there can be no united Europe without Hungary and Poland. 
But all of us, and in particular the peoples of Hungary and Poland, must remember that NATO, like the EU, was founded on the fundamental principles of democracy, individual liberty, and the rule of law. 
A government that flouts those principles jeopardizes the coherence and solidarity of the alliance. 
It is therefore vital that the United States and other NATO allies speak out now and insist that functioning democratic checks and balances are safeguarded. 
It would be unimaginable for NATO heads of state to go ahead with their planned leadership summit in Warsaw in June if Poland remains in its constitutional crisis, with the government disregarding the rule of law and the opinion of a respected international body. 
Hungarians and Poles must be reminded that Russian President Vladimir Putin is actively attempting to divide and weaken the EU and NATO. 
If Europe is to face down aggression from the Kremlin, it is essential that Poland and Hungary adhere to these groups’ fundamental values and principles. 
But it is also necessary that the EU itself develop a more comprehensive mechanism for safeguarding the rule of law within the Union. 
The EU has mechanisms to regulate economic policies, safeguard the environment, and police the Single Market. 
But Europe has always been much more than an economic project; it is also a union of values, which no member can be allowed to repudiate without consequence. 
Governments are created and fall apart, and politicians come and go; but democratic institutions should be spared from political interference. 
The sad reality is that, were they to apply for EU membership today, neither Hungary nor Poland would be admitted. 
Their people should weigh carefully what that means. 
Their current leaders claim to be defending national interests. 
But is it really in their countries’ interest to be sidelined by the US, NATO, and the rest of Europe? 

Rules for a Frugal Superpower 
WASHINGTON, DC – American foreign policy stands on the brink of substantial belt-tightening. 
The mounting expenses of servicing the growing national debt, combined with the skyrocketing costs of Social Security and Medicare as the 78-million-strong baby-boom generation retires, will leave less money for American initiatives abroad. 
As I argue in my new book The Frugal Superpower: America’s Global Leadership in a Cash-Strapped Era, the burden that these obligations will impose on Americans – in the form of higher taxes and fewer benefits – will weaken public support for the expansive international role that the United States has played since World War II. 
This will change the world, and not for the better. 
American foreign policy, for all its shortcomings, has underpinned political stability around the world. 
How, then, should the US adapt what it does abroad to minimize the damage to global security caused by its straitened circumstances? 
Here are three rules for a frugal superpower. 
Rule I: No More Nation-building 
During the first two post-Cold War presidencies, the US conducted military interventions in Somalia, Haiti, Bosnia, Kosovo, Afghanistan, and Iraq. 
The motives for these interventions varied, but all led to American efforts to establish working governments – nation-building – that proved protracted and frustrating. 
The relevant institutions cannot be built quickly and cannot be imported, ready-made, from abroad. 
For this reason, among others, the enterprise has not found favor with the American public. 
To its difficulty and unpopularity another drawback to nation-building must now be added: its expense. 
The US government will no longer be able to afford to invest hundreds of billions of dollars (the cost in Iraq alone will run into the trillions) trying to supply other people with decent government. 
Moreover, such projects make a far smaller contribution to US and global security and well-being than do other American foreign policies – policies that the US should make every effort to continue. 
Rule II: Concentrate on the Elephants 
“Don’t chase the rabbits,” an old saying has it, “because if you chase the rabbits, the elephants will kill you.” 
Somalia, Haiti, Bosnia, Kosovo, Afghanistan, and even Iraq qualify as rabbits – distractions from what should be the focus of US foreign policy. 
The functional equivalents of elephants are Europe, East Asia, and the Middle East. 
These are three of the most important parts of the world, and in each the American military presence plays a constructive role. 
In the first two, the US reassures each of these region’s countries that there will be no sudden change in the balance of power that will threaten them. 
In Europe, Germany can be confident that the US would help to contain an aggressive Russia, while Russia knows that Germany will remain tied to, and thus restrained by, the US. 
In East Asia, American air and naval forces provide a check on China, but also serve one of China’s strategic interests by keeping Japan from conducting an independent military policy. 
To keep the peace in both regions, a continuing US military presence of some kind will be needed. 
Complete American withdrawal could lead to suspicion, arms races, and, in the worst case, wars among the countries of Europe and Asia. 
In the Middle East, the US confronts Iran, which seeks to expand its power by any means it can, to oust neighboring countries’ governments in favor of ideologically sympathetic forces, and ultimately to evict America from the region. 
Nuclear weapons would make the threat posed by the Iranian regime all the more severe. 
Indeed, containing Iran while thwarting its nuclear ambitions is the single most urgent priority for today’s cash-strapped American superpower. 
Rule III: Raise the Gasoline Tax 
Iran’s quest to dominate the Middle East threatens the world because the region accounts for so much of the oil on which the global economy depends. 
If the world used less oil, Iran would become less threatening, because its radical rulers rely on oil revenues to purchase domestic support and pursue their regional goals. 
Reducing oil revenues by using less oil would also weaken other international troublemakers, actual and potential – Hugo Chávez of Venezuela, for example, and Vladimir Putin of Russia. 
Moreover, some of the money that the world pays for Saudi Arabia’s oil finds its way into the coffers of terrorist organizations. 
No single measure would do more to make the world a less dangerous place than a substantial reduction in its consumption of oil. 
And no single measure would do more to reduce global oil consumption than a sharp increase in the tax on gasoline in the country that consumes more of it than any other: the US. 
If Americans had to pay more for gasoline, they would use less of it. 
With a high gasoline price, alternative sources of energy such as ethanol and alternative forms of transportation such as electrically powered automobiles would become commercially viable. 
None of this would happen immediately. 
In the short term, Americans would have to make modest economic sacrifices in the form of higher fuel prices. 
Such sacrifices, however, would be well worthwhile. 

Rules for a Wired World 
NEW YORK: We hear much about the "new economy", based on networking and globalization. 
Is this "new economy" really new, or just the same old thing with a few new wrinkles? 
The world has fundamentally changed. 
The first thing that changed - and is still changing - is the velocity of change itself. 
It took 40 years for radio to get 50 million listeners in America. 
It took 13 years for television to gain a like number. 
It took 4 years for the World Wide Web to get 50 million domestic users, and its use is growing 1000% a year. 
The rule that the speed and number of transistors double every 18 months is now more than matched by the expectation that total bandwidth of the world’s communication systems will triple every 12 months. 
As bandwidth grows the cost of information transmission will move toward zero. 
Although this historically unprecedented velocity of change makes generalizations more hazardous than usual, it is safe to say that one basic way in which the world has changed is the manner in which wealth is created. 
When this happens the old ruling classes find it difficult to see themselves as obsolete. 
Just as the landed gentry ridiculed the new industrialists who sullied farmland with huge factories, so some industrialists ridicule today’s knowledge workers, calling them hamburger flippers. 
The more strident complain of "de-industrialization." 
It used to be thought that scarcity created value, that the more produced of a given item, the less its value. 
In a network economy the reverse is true: one fax machine is worth nothing; two fax machines something; 1000 machines connected together create real value, and that value goes up as more machines join the network. 
The same is true of networked computers. 
Every day more examples appear. 
In the industrial economy, if you suggested that the way to make your company rich was by pricing your product at zero and giving it away, you would earn very few promotions. 
In the new economy this tactic created millionaires. 
Netscape gave away the first 40 million copies of its software. 
Sun gave away its Java language. 
Both companies prospered by establishing a standard and then selling upgrades or enhancements. 
One problem in sorting out the truth is finding words to describe it. 
As the Agricultural Age faded, a whole new vocabulary was invented, and the world became familiar with terms like steam pressure, revolutions per minute, and assembly lines. 
As the Industrial Age fades, new words like bits, bytes, CD ROM, and floppy disks describe the new economy’s workings. 
Economics - which is supposed to understand changes in the way things are made - is lagging behind. 
Today, economic textbooks are full of formulas, but increasingly we learn that the old paradigm is giving way to a new science of complexity. 
The global market today is the very model of what scientists call a complex adaptive system, which are nonlinear and tend to resemble biological rather than mechanical systems. 
While we now have the ability to rent a car at a distant airport equipped with a Global Posting System to guide us unerringly to a hotel we have never seen, we still cannot put anywhere near the same of measure of reliance on any of our common economic measures. 
This shift to a complex, information-based global economy effects the way nations behave. 
When natural resources dominated production, conquest and control of territory seemed a way to enhance national power. 
As recently as WWII, armies fought for control of the Ruhr Basin. 
Nowadays such assets may constitute a liability. 
In the Industrial Age, plants became ever larger and less easy to move. 
As long as capital consisted largely of factories, heavy equipment and raw materials, there was little fear that assets could or would move, so governments held all the cards. 
In the new economy, intellectual capital dominates production, and it is mobile. 
It can and does move when the hand of government becomes too heavy or grasping. 
Money always goes where it wants, fleeing restrictions and staying where it is well treated. 
This old rule applies to both old and new economies. 
Nothing, however, is more portable and easy to move than intellectual capital. 
Bill Gates created a company with one of the largest market capitalizations in the world yet can move with ease through customs with "nothing to declare." 
His wife, however, may be assessed duty on her ring. 
Moreover, it is next to impossible to find a product that consists entirely of materials and parts produced in one country. 
This extraordinary manufacturing system of value added in many countries is made possible by the fact that information moves across, over, and through national borders as if they did not exist. 
Today software written in India rides the satellite to a building site in Chicago or an accounting firm in New York, or anywhere else in the world. 
The writer requires no green card, no entrance visa or physical journey to earn his or her money. 
This phenomenon constitutes a new kind of economic organization and changes the dynamics of how and where people earn their money. 
It is possible to have full employment in some remote village even though no businesses are hiring in that neighborhood, or even in that nation. 
Some old rules, of course, still apply. 
Markets go up and down; mass psychology plays its role. 
Adam Smith’s "invisible hand" still operates, albeit electronically at near the speed of light. 
Yet old rules survive because they are based, not only on economic dogma, but on human nature, which is unchanged. 
What Adam Smith described as "the natural effort of every individual to better his own condition" motivates the people who drive the new economy just as it did the old. 
But the manner in which one gets rich has changed dramatically. 

Rules for Calamity and Crisis 
NEW YORK -- Several years ago, my daughter lay in a coma after a serious fall. 
Two nurses came into her hospital room to prepare for a transfusion. 
One clutched a pouch of blood and the other held my daughter’s medical dossier. 
The first read aloud from the bag, “Type A blood,” and the other read aloud from the file, “Alexa Holmes, Type A blood.” 
They then proceeded, following a script, to switch props and roles, the first nurse reading from the file, “Alexa Holmes, Type A blood,” and the second reading from the bag, “Type A blood.” 
Why do well-trained professionals, when struggling with a rapidly unfolding emergency, adhere to rules laid down in advance? 
The principal reason is that in times of crisis people fall into predictable but avoidable errors, largely because of panic. 
Over time, detailed protocols have evolved for such confusing situations to encourage cool-headedness and minimize the risk of avoidable error. 
The value of improvisation in the face of novel threats does not imply that existing rules should be peremptorily discarded. 
This point is almost trite, but it remains virtually unnoticed by last-ditch defenders of the Bush administration’s foreign policy. 
Even today, the leading Republican presidential candidates suggest that the rule of law is an unaffordable luxury in the battle with al-Qaeda. 
They claim that constitutionalism and due process, if meticulously followed, reduce the government’s “flexibility” in devising ways to prevent terrorist attacks. 
It is easy to imagine situations in which flexibility can be increased by curtailing individual rights and abandoning pre-established decision-making rules. 
But generalizing from these exceptions is unwise. 
An administration that has consistently boasted of its willingness to bend (and sometimes break) the law to meet an unprecedented threat has become notorious not for its flexibility, but for its rigidity. 
Might there be a causal relation between the Bush administration’s cavalier, if not hostile, attitude toward law and its dazzling inability to acknowledge mistakes and manage midstream readjustments? 
Could it be that a willingness to flout the law and circumvent the Constitution tends to produce not nimbleness, but obduracy and intransigence? 
Just as adherence to rules can improve the performance of emergency-room personnel, so due process and constitutionalism can improve the performance, especially in a crisis, of law-enforcement officers and national-security policymakers. 
Requiring the government to test the factual basis of its decision to use force is not a shackle to be thrown off, but an incentive for forethought and a psychologically stabilizing support. 
A government that routinely makes fundamental national-security decisions based on undisclosed information, which no one outside a tiny circle of partisan loyalists ever has a chance to assess, is unlikely to make wise choices. 
The idea that executive officials will fight terrorism more effectively when they know that no one is watching is farfetched. 
A presidency that, having dismantled traditional checks and balances, is never compelled to provide coherent reasons for its policies, is soon likely to have few coherent reasons for its policies. 
The self-defeating proclivities of such laxly monitored executive power are now visible for all to see. 
Consider the decision radically to loosen evidentiary standards when deciding to incarcerate terrorist suspects in Guantánamo Bay or elsewhere. 
The result has been to encourage liars to clog the system with disinformation and false leads while discouraging honest people from reporting what they observe, lest an innocent neighbor be incarcerated on the basis of misperceptions. 
Secrecy is, of course, necessary in national-security affairs. 
But excessive secrecy leads to scarce resources being diverted into wild-goose chases. 
And, to hide from scrutiny, the executive branch inevitably ends up hiding from itself – for example, by preventing well-informed experts in the State Department from independently appraising decisions made in the Pentagon. 
Obligatory consultation with independent and informed people may be annoying, but it can avert misunderstandings and accelerate the painful process of correcting blunders. 
Having invaded an oil-rich Arab country that played no role in the terrorist attack of September 11, 2001, the United States has imprudently allowed itself to be sucked into its attackers’ primitive logic of collective punishment and group revenge. 
It thereby abandoned the most essential pillar of the rule of law, namely the individualization of culpability. 
Restricting criminal liability to actual perpetrators, carefully excluding clansmen and kin, is a fragile historical innovation aimed at interrupting spirals of bloody inter-communal violence. 
The administration arguably devoted most of its counterterrorism efforts not to law enforcement operations, but into “war” in Muslim lands because it failed to keep a cool head in the immediate aftermath of the attacks on New York and Washington. 
It thereby inadvertently confirmed the jihadists’ vilest propaganda, suggesting that Muslims worldwide can, for no apparent reason, become targets of America’s lethal fury. 
The surest way to rouse violent resistance is to communicate to people that there is nothing they can personally do to avoid being attacked. 
That is yet another reason why flouting inherited rules and protocols, in the name of national security, has made, and will continue to make, the terrorist threat catastrophically worse. 

Rumors of War 
War is widely thought to be linked to economic good times. 
World War II is often said to have brought the world out of the Great Depression, and war has since enhanced its reputation as a spur to economic growth. 
Some even suggest that capitalism needs wars, that without them, recession would always lurk on the horizon. 
Today, we know that these propositions are nonsense. 
The 1990s boom showed that peace is economically far better than war. 
The Gulf War of 1991 demonstrated that wars can actually be bad for an economy. 
That conflict contributed mightily to the onset of the recession of 1991 (which, it should be remembered, was probably the key factor in denying the first President Bush re-election in 1992). 
The current situation is far more akin to the Gulf War than to wars that may have contributed to economic growth. 
Indeed, the economic effects of a second war against Iraq would probably be far more adverse. 
WWII called for total mobilization, and it was that total mobilization, requiring a country's total resources, that wiped out unemployment. 
Total war means total employment. 
By contrast, the direct costs of a military attack on Saddam Hussein's regime will be minuscule in terms of total US government spending. 
Most analysts put the total costs of the war at less than 0.1% of GDP, the highest at 0.2% of GDP. 
Much of that, moreover, includes the usage of munitions that already exist, implying that little or no stimulus will be provided to today's economy. 
The Bush administration's (admittedly wavering) commitment to fiscal prudence means that much, perhaps most, of the war costs will be offset by expenditure cuts elsewhere. 
Investments in education, health, research, and the environment will almost inevitably be crowded out. 
Accordingly, war will be unambiguously bad in terms of what really counts: the standard of living of ordinary people. 
America will thus be poorer, both now and the future. 
Obviously, if this military adventure were in fact necessary to maintain security or to preserve freedom, as its advocates and promoters proclaim--and if it were to prove as successful as its boosters hope--then the cost might still be worth it. 
But that is another matter. 
I want to debunk the idea that it is possible both to achieve the war's ends and benefit the economy. 
There is also the uncertainty factor. 
Of course, resolving uncertainty is no reason to invade Iraq prematurely, for the costs of any war are high, and are not to be measured only, or primarily, in economic terms. 
Innocent lives will be lost--possibly far more than were lost on September 11, 2001. 
But the wait for war adds to uncertainties that already weigh on the American, and the global, economy: 
uncertainties arising from America's looming fiscal deficit, due to macroeconomic mismanagement and a tax cut that the country cannot afford; 
uncertainties arising from the unfinished "war on terrorism"; 
uncertainties associated with the massive corporate accounting and banking scandals, and the Bush Administration's half-hearted efforts at reform, as a result of which no one knows what America's corporations are worth; 
uncertainties connected to America's massive trade deficit, which has reached all- time records. 
Will foreigners be willing to continue to lend to the US, with all of its problems, at a rate in excess of a billion dollars a day? 
Uncertainties associated with Europe's stability pact. 
Will it survive, and will it be good for Europe if it does? 
Finally, the uncertainties associated with Japan: will it at long last fix its banking system, and if it does, how negative will be the short-term impact? 
Some suggest that the US may be going to war to maintain steady oil supplies, or to advance its oil interests. 
Few can doubt the influence that oil interests have on President Bush--witness the administration's energy policy, with its emphasis on expanding oil production rather than conservation. 
But even from the perspective of oil interests, war against Iraq is a risky venture: not only is the impact on price, and therefore on oil company prices, highly uncertain, but other oil producers, including Russian and European interests, will not easily be ignored. 
Indeed, should the US go to war, no one can predict the effect on oil supplies. 
A peaceful, democratic Iraqi regime could be established. 
Desperate for funds for reconstruction, that new regime could sell large amounts of oil, lowering global oil prices. 
Domestic US oil producers, as well as those in allied countries, such as Mexico and Russia, would be devastated, though users of oil around the world would benefit enormously. 
Or the turmoil throughout the Muslim world could lead to disruptions of oil supplies, with high prices the result. 
This will please oil producers in other parts of the world, but will have enormously adverse consequences for the global economy, akin to those resulting from the oil price hikes in 1973. 
Whichever way one looks at it, the economic effects of war with Iraq will not be good. 
Markets loathe uncertainty and volatility. 
War, and anticipation of war, bring both. 
We should be prepared for them. 

Running from Musharraf 
How times change the man. 
Pakistan’s embattled president, Pervez Musharraf, once declared, “I am not at all a politician. 
I don’t think I’m cut out for politics.” 
Eight years after seizing power and exiling his main civilian opponents, the general is moving heaven and earth to hold on to political office. 
Though he took power in a bloodless coup, there was little doubt about his popularity at the time. 
The public had tired of a civilian regime marked by corruption and economic chaos. 
Musharraf’s personal frankness and integrity appealed to the street and earned him de facto legitimacy. 
The general, who offered the father of modern Turkey, Kemal Atatürk, as his model, also seemed to represent a vision for his country that combined economic growth with support for secularizing impulses. 
But, given his unwillingness to seek support for his regime and his policies from the ballot box, Musharraf succeeded in undermining both. 
Over the years, he rigged referendums, browbeat the judiciary, and asked Islamic parties for support to shore up his government. 
A president’s modernizing vision degenerated into a dictator’s power-driven myopia. 
Musharraf admitted on television this year, “Yes, my popularity has been reduced.” 
Yet he clearly failed to comprehend that this was not just about approval ratings. 
The political core of his regime had become hollow. 
In March, he sacked the chief justice of the Supreme Court, Iftikhar Muhammad Chaudhry, probably because Chaudhry objected to Musharraf’s seeking a constitutionally questionable third term as president. 
It proved to be the tipping point, triggering waves of protests by lawyers and other groups in Pakistan’s main cities. 
Unable to vote the general out of office, the public took to the streets. 
Polls show Musharraf’s support has fallen to a third of the population, and that two-thirds oppose his seeking another presidential term. 
Simultaneously, there has been considerable erosion of support from Musharraf’s strongest external backer, the United States. 
After he seized power, America welcomed Musharraf’s willingness to fight al-Qaeda and the Taliban on his territory in exchange for large infusions of military aid. 
The general fought less out of conviction than pragmatism, but the end result was the same. 
Or so the US believed. 
Given the long-standing relationship between Pakistan’s Islamic militants and the military, it became clear there were limits to how far Musharraf was prepared to go in the “war on terrorism.” 
Musharraf is now desperate to beg, steal, or borrow any political legitimacy he can get – including from the two civilian political leaders he exiled. 
His most ambitious strategy has been to try to form a partnership with Benazir Bhutto, the head of one of the two largest democratic parties. 
Bhutto initially saw this as an opportunity to end her exile and ease herself into the prime ministership with a politically wounded partner. 
Her primary demand was that Musharraf surrender his uniform. 
The other civilian leader, Nawaz Sharif, responded by defying his exile, returning to Pakistan, and promptly being re-expelled. 
But Sharif succeeded in undermining the Bhutto-Musharraf plan, positioning himself as Pakistan’s genuine champion of democracy. 
In one move, he reversed the Pakistani political dynamic: being farthest from the dictator became more valuable than being closest to him. 
Unsurprisingly, Bhutto is now having second thoughts about an alliance with Musharraf, who has been reduced to chasing after her in an effort to salvage the deal. 
Musharraf, according to his lawyer’s depositions before the Supreme Court, plans to give up his uniform after the indirect presidential elections he scheduled for October 6. 
In preparation, he has replaced senior generals in the Pakistani army with officers considered more beholden to him, evidently hoping that this will ensure the military’s loyalty even after he removes himself from the chain of command. 
However, his options are shrinking rapidly. 
The US, concerned with ensuring stability in case of a transition to a new government, is keeping silent about its preference for Musharraf to remain head of both the government and the army. 
The Bush administration is slowly recognizing that for a Pakistani leader to be an effective counterterrorism ally, he or she must have a modicum of legitimacy. 
The two civilian leaders may soon begin vying with each other to see who can claim to be more anti-Musharraf. 
Even Osama bin Laden, sensing an opportunity to stir up trouble and win popular support, has issued a video calling for a jihad against Musharraf. 
Nor can Musharraf count on the military, despite his recent appointments. 
The generals have always placed the institution of the military above all else, including rulers from their own ranks. 
If they come to believe that Musharraf is sinking, they can be counted on to cut him loose, especially if he becomes a civilian. 

Running in Place on Trade 
NEW YORK – Meetings of G-20 leaders regularly affirm the importance of maintaining and strengthening openness in trade. 
June’s G-20 summit in Toronto, although not very effusive on trade, did not back away from it. 
Yet talk is cheap, and the open-mouth policy of (generally pro-trade) pronouncements has not been matched by action. 
The paradox is that this has been good for holding the line on protectionism. 
After all, actions are also necessary to “roll back” open trade. 
So we have largely stood still, in trade jargon. 
But lack of trade activism has also meant that we are not moving forward with trade liberalization. 
The long-standing Doha Round of multilateral trade negotiations seems to have been put on indefinite hold. 
That governments did not break out into protectionism after the global financial crisis hit surprised many. 
In retrospect, it is easy to see why. 
Policy is driven by three “I’s”: ideas, institutions, and interests (i.e., lobbies). 
On all three dimensions, protectionist policy was hemmed in. 
Progress in economic thought after 1929 initially led to the argument that, in a depression, tariffs are justified because they would divert insufficient aggregate world demand to one’s goods at the expense of others. 
But all could play this game, saddling the world economy with tariffs that would likely hurt all while failing to revive growth. 
The solution was obviously to forgo protectionism and increase aggregate demand instead. 
This lesson has been well learned. 
Institutions have also helped. 
Following the passage of America’s Smoot-Hawley Tariff in 1930, countries raised trade barriers in a tit-for-tat frenzy, with no rules to constrain their behavior. 
The architects of the postwar global order therefore established the General Agreement on Tariffs and Trade (GATT) in 1947, which embodied such rules – as does the World Trade Organization, which absorbed and expanded the GATT in 1995. 
Indeed, no country has defied WTO rules in the current crisis. 
Of course, we might still have yielded to pressure for protectionist measures, especially as WTO rules leave open the possibility of such a response. 
Thus, for instance, bound tariffs (i.e., agreed ceilings) allow countries to raise actual tariffs, which are often lower, without restraint. 
What has prevented the eruption of WTO-compliant trade wars has been the changed structure of the world economy, which has created strong anti-protectionist interests. 
Thus, when the United States Congress enacted “Buy America” provisions for public procurement, many US firms, such as Boeing, Caterpillar, and General Electric – all fearing retaliation in their foreign markets – lobbied successfully to moderate the legislation. 
The Doha Round ought to profit from some of these fundamental forces that favor open trade and impede protectionism. 
Indeed, conventional wisdom holds that, during a depression, citizens become risk-averse and will not support liberalization. 
But, with many people now aware that their jobs depend on trade in a closely integrated world economy, polls in the US and elsewhere show continued majority support for free trade. 
While the Doha negotiators have settled many important issues, the final negotiations first stalled last year, owing to America’s refusal to cut its agricultural subsidies further and India’s insistence on special safeguards to prevent exposing its millions of subsistence farmers to unfairly subsidized US competition. 
Today, domestic politics in the US and India has left America as the only stumbling block to progress. 
The last election freed India’s Congress Party of its coalition with the Communists, who opposed trade, and thus increased the flexibility of pro-trade Prime Minister Manmohan Singh. 
But the last election in the US ushered in a Democratic congressional majority that is indebted to trade-fearing unions, thus constraining the pro-trade President Barack Obama. 
Obama also faces falling support from business lobbies in manufacturing and services – sectors that are demanding more concessions from other nations. 
Were he to opt to close the Doha Round as it has been negotiated to date, he could become a general without any troops. 
His silence on Doha at the recent G-20 summit was deafening. 
So, how do we move forward on trade? 
One solution, favored by some Washington think tanks, is to go along and ask for more. 
But that would mean several years of re-negotiation. 
The Doha Round would then be de facto dead. 
The other option is to close the Round by resolving the US-India discord on agriculture. 
Mutual concessions can be crafted that ensure negligible political fallout for both leaders. 
This would also require marginal improvements in concessions by the major developing countries, and by the US and the European Union on services. 
The problem is that lobbyists in Washington would reject this modest solution if the Doha Round were the end game. 
So, part of the solution would have to be declaration of another Round to negotiate new aspirations and demands. 
We could even call this the Obama Round. 
After all, Obama should have to live up to his Nobel Prize as a multilateralist! 

Guilty Man 
NEW YORK – In 1940, with Britain standing alone against Nazi Germany, a short book called Guilty Men was published under the pseudonym of “Cato.” 
Its authors were the future Labour Party leader Michael Foot, the Liberal journalist Frank Owen, and the Conservative journalist Peter Howard. 
Guilty Men was a jeremiad that called to account the men – including Neville Chamberlain and Lord Halifax, then still members of Winston Churchill’s cabinet – whose appeasement of Adolf Hitler had helped to bring the United Kingdom to the brink of annihilation. 
Today, it is again time to name names, and not only in the UK, where democracy is writhing with Brexit fever. 
In the United States, a fetid paranoia has taken hold, with the white supremacist aggression in Charlottesville, Virginia over the August 12 weekend – where a peaceful counter-protester was killed and many were injured – just the latest manifestation. 
President Donald Trump, no surprise, doesn’t want to name names. 
It took him two days to condemn the racist groups that wreaked havoc in Charlottesville. 
And then he quickly backtracked, equating the Klansmen and “alt-right” extremists brandishing swastikas and chanting Nazi slogans with those who turned out to oppose them. 
In fact, Trump owes his presidency to the forces of rage and resentment on display in Charlottesville. 
But while Trump has gleefully fanned the flames of hatred in the US, he did not kindle them, just as the Brexiteers did not do so in the UK. 
We need to look beyond these figures to determine who really is responsible for fomenting a political climate where blatant lies and explicit racism and bigotry have entered the mainstream of public discourse. 
Only when we identify the sources of the odious virus now afflicting our democracies can we take practical steps to quarantine them. 
Let’s start with “patient zero” in this political plague: Rupert Murdoch. 
For decades, this impresario of the right-wing political-entertainment complex has coarsened politics in the UK and the US – not to mention his native Australia – for the sake of profit and political influence. 
Murdoch’s newspapers and television networks might as well have patented the recipe for the deceitful, dog-whistle politics that powered Trump’s rise and the Brexit vote. 
Of what, precisely, is Murdoch guilty? 
Let us put aside the ever-expanding roster of sexual harassment and assault complaints brought against his flagship Fox News Channel. 
These have been so numerous and egregious that even the network’s founder, the late Roger Ailes, and its leading money-maker, the on-air blowhard Bill O’Reilly, finally (and reluctantly) had to be sacked. 
Let us also put aside the scandalous hacking of private telephones in the UK, which culminated in the closure of Murdoch’s beloved tabloid The News of the World in 2011. 
To establish Murdoch’s culpability, it is enough to focus solely on the recent record of lies and deception from Murdoch-owned media outlets. 
There were, for example, the repeated attempts by Fox News to insinuate that the murder of Seth Rich, a young Democratic National Committee staffer, was orchestrated by Hillary Clinton’s presidential campaign team to hide Rich’s alleged role in leaking internal DNC emails. 
In fact, a recent lawsuit alleges that Fox News actually worked with the White House to promote this bogus story. 
This was hardly the network’s only anti-Clinton invention. 
Fox News host Sean Hannity and regular Fox commentator Newt Gingrich eagerly propagated one of the most bizarre conspiracy theories of our time: the claim that Clinton and her cohort were running a pedophilia ring out of a Washington, DC, pizzeria. 
This truly nutty story led an armed man to enter the pizzeria and fire a rifle. 
But that incident apparently gave neither Fox News nor its owner pause. 
Instead, the network went on to perpetuate the outright lie that Britain’s intelligence-gathering agency, the Government Communications Headquarters (better known as GCHQ), had been tasked by President Barack Obama to spy on Trump during the campaign. 
And it promoted the baseless story that former FBI Director James Comey, who Trump fired amid an intensifying investigation into his campaign’s potential collusion with Russia, had leaked classified memos. 
Of course, the sins of Murdoch’s media outlets are not limited to the US. 
To name one British example, the Murdoch-owned Sunday Times recently published a column by an Irish Holocaust denier repeating the old racist calumny that Jews love only money, while belittling women who work at the BBC for receiving lower pay – supposedly a result of their failure to assert themselves. 
In any responsible press organization, the publication or broadcast of even one of these genuine examples of fake news would be grounds for dismissal of the editors responsible – not least because of investors’ outrage. 
Yet Murdoch has continued to produce large enough profits to silence institutional shareholders such as the Vanguard Group, Fidelity Investments, and Franklin Templeton Investments. 
Individual investors are equally complacent. Consider Saudi Prince Al-Waleed Bin Talal, the second-largest shareholder of Fox News’s parent company. 
He is apparently more interested in making money than pushing back against, say, the network’s propagation of incendiary claims about Muslims, including that they are trying to impose Sharia law on the US. 
If markets cannot induce better behavior from Murdoch, it may be up to governments to step in. 
With Murdoch seeking to acquire full control of Sky Television, British regulators have a critical opportunity to prevent a Fox News clone from appearing on British television screens – if they have the courage, which UK regulators have not shown up to now. 
Previously, Murdoch and his sons were somehow deemed “fit and proper” owners for a UK television license. 
But as the catalogue of lies that Fox has promoted in the first six months of the Trump presidency has demonstrated, there is no man more unfit for ownership of a media outlet in a democracy than Rupert Murdoch. 
As a former citizen of a country – the Soviet Union – that was morally and politically corrupted by propaganda, I am well aware of the damage that can be done by weaponized “news.” 
Murdoch is one of the truly guilty men of our times, and he must be stopped. 

Refugees and Rural Poverty 
ROME – Development experts and policymakers understandably focus on migration to urban areas and the need for sustainable urbanization. 
But they should not lose sight of the dramatic changes happening in rural areas, which are too often ignored. 
While the growing demand for food – driven by rising population and incomes – is creating opportunities for rural people, hunger and poverty remain concentrated in rural parts of developing countries. 
Unless rural development receives more attention, young people will continue to abandon agriculture and rural areas in search of better livelihoods in cities or abroad. 
Last year at the United Nations General Assembly, world leaders adopted the 2030 Agenda for Sustainable Development and the Sustainable Development Goals (SDGs), which include a commitment to “leave no one behind.” 
And, with the number of forcibly displaced people reaching all-time highs this year, the UN will hold a summit on September 19 to discuss the problem. 
But no effort to address the issues surrounding the global surge in migrants and refugees will succeed unless it specifically targets the plight of the world’s rural poor. 
According to the World Bank, in 1990, some 37% of people in developing regions lived on less than $1.90 a day. 
By 2012, 12.7% did, amounting to more than one billion people rising out of extreme poverty. 
And yet, inequality between rural and urban areas has increased. 
Today, three-quarters of the world’s poorest and hungriest people live in rural areas. 
Small farms support 2.5 billion people worldwide, accounting for up to 80% of food produced in Asia and Sub-Saharan Africa. 
But most smallholder farmers still operate without many of the basic conditions needed to grow their businesses and invest in their communities, such as finance, infrastructure, market access, secure land ownership, and rights to resources. 
This means that efforts to transform rural areas must target these institutional factors (along with improving gender equality and safeguarding the rule of law), while also introducing new technologies to local communities. 
And, most important, rural people themselves must be involved, not only as stakeholders or beneficiaries of aid, but as partners. 
Two new studies provide important perspectives on the challenge of reducing poverty, hunger, and inequality worldwide. 
The International Fund for Agricultural Development’s (IFAD) Rural Development Report, to be launched on September 14, compiles new research for policymakers and others working to eradicate poverty. 
Leading thinkers analyzed rural-development efforts in more than 60 developing countries, drawing conclusions about what does and doesn’t work. 
One central finding is that development focused specifically on rural communities has a major positive impact on incomes, security, and food and nutrition. 
And these quality-of-life improvements then translate into better education, health care, and other critical services. 
At the same time, these gains have not been evenly distributed, and Sub-Saharan Africa has seen far less progress than other areas. 
The second study, funded by IFAD and recently released by the International Food Policy Research Institute, examines the worldwide economic downturn starting in 2012 in the context of rural populations. 
It finds that as a result of the downturn, 38 million more people will remain in extreme poverty in 2030 than likely would have otherwise, with farm households in middle-income countries particularly at risk. 
This poses a serious challenge for the SDGs to end poverty “in all its forms everywhere,” and it strengthens the case for policies and investments specifically targeting rural areas, which is where poverty-reduction measures are needed more and will have a larger impact. 
Rural areas’ progress so far reveals their future potential. 
In many cases, their economies have diversified and become more dynamic, and new roads and communication networks have reduced the physical and cultural distance between rural and urban residents. 
In small towns and villages, new types of societies are evolving wherein agriculture, while still important, is no longer the only thing that defines economic and cultural life. 
It is time to look at development more holistically, acknowledging that rural development and urban development are not mutually exclusive – each needs the other. 
If we neglect rural areas, persistent poverty and hunger will continue to drive migration flows, not only to urban areas, but also to neighboring and nearby countries and destinations farther abroad. 
Leaving rural areas behind will not move developing countries forward; on the contrary, for many, it threatens to throw the engines of progress into reverse. 

Rushdie a la Russe 
June will be a cruel month in Russia's courts. 
On June 16th, the rebellious oligarch Mikhail Khodorkovsky and his comrade-in-arms Platon Lebedev finally began to face the judges of the Meshchansky district court. 
No doubt, this case will attract the Russian and international press. 
Hearings began just the day before Khodorkovsky's trial opened in another case that is no less significant. 
But this case is not about oligarchs trying to interfere in politics; it is about a group of artists and curators whose professional activities have unexpectedly turned into a political hot potato. 
In January 2003, a gang of Russian Orthodox activists destroyed an exhibition in the Sakharov Museum and Public Center called "Caution! 
Religion." 
The organizers of the exhibition stated that they wanted to attract attention to the new role of religious institutions in Russian life. 
But the Orthodox fundamentalists found the art blasphemous and offensive, and some trashed the exhibition. 
Last December, prosecutors charged two Sakharov Museum officials and three of the exhibition's organizers with inciting religious hatred. 
They now face prison terms of up to five years. 
The vandals, meanwhile, were hailed by church officials as heroes. All charges against them were dismissed. 
The vandals had influential protectors. 
All of them were members of the congregation of St. Nicholas in Pyzhi, whose archpriest, Alexander Shargunov, is a well-known radical fundamentalist. 
In 1997, he established a movement called the Social Committee For the Moral Revival of the Fatherland. 
In 2001, the committee's Web site carried instructions on how to vandalize "immoral" billboards by splashing paint on them. 
Followers promptly destroyed 150 billboards in Moscow. 
A group of well-known nationalist intellectuals, including film director Nikita Mikhalkov, artist Ilya Glazunov, and writers Valentin Rasputin and Vasily Belov, weighed in with a petition calling the exhibition a "new stage of conscious Satanism." 
They wrote that Russia's enemies were bent on humiliating the powerless "Russian people, their objects of worship, and their historic values." 
Who, precisely, were these powerful enemies? 
The intellectuals didn't identify them, but the fascist political party Pamyat (Memory) did not hesitate. The appeal posted on its Web site called on Orthodox Christians to protect "our Lord Jesus Christ" from "Yid-degenerates," using the most derogatory Russian term for Jews. 
These alarming events in the art world have taken place against a background of rising nationalism and Orthodox assertiveness in Russia. 
The Orthodox Church has acquired enormous political clout in recent years, and few politicians risk offending it. 
The Sakharov Museum exhibition was subjected to a vituperative media campaign, and the matter was almost immediately taken up in the Duma, where nationalist deputies vied with each other to denounce the artists and laud the vandals. 
In February 2003, the Duma passed a decree stating that the Sakharov museum exhibition's purpose was to incite religious hatred and to insult believers and the Orthodox Church. 
The state prosecutor was ordered to take action against the organizers, with 265 of 267 deputies approving the measure. 
In April 2003, the Duma voted to toughen the law against inciting religious hatred by adding prison terms of up to five years for offenders. 
In December 2003, Sakharov Museum director Yuri Samodurov was charged with actions "leading to the provocation of hatred and enmity." 
If found guilty, he could be sentenced to up to five years in prison. 
Church officials are not calling for that harsh a penalty. 
In March 2004, the Moscow Patriarchy's External Relations Department issued a statement that surprised everyone. 
It asserted, in effect, that the Sakharov Museum exhibition organizers had committed an administrative rather than a criminal offense. 
The difference is that administrative offenses are punished with fines, at most, not prison terms. 
Such a softening of the church's position was probably the result of the public outcry in Russia's liberal press. 
Yet the pogrom at the Sakharov museum provoked a chain reaction of similar attacks on contemporary art by Orthodox fundamentalists whom the church has been unable to control. 
Anna Alchuk, an artist who participated in the exhibition in the Sakaharov Center and was later charged, said she had read all 14 volumes of evidence collected by the prosecutor, and that 11 volumes consisted entirely of letters from "working people" expressing outrage at the show and demanding that the artists be punished. 
Almost none of the writers had seen the exhibition - most had signed form letters. 
"The events around the exhibition discredit the Russian Orthodox Church, just as the fatwah condemning Salman Rushdie to death discredited Islam," said Elena Bonner, Andrei Sakharov's widow. 
The outcome of the court hearings is difficult to predict, but it will answer the question of whether Russians have lost the freedom artistic self-expression that they gained after communism's fall. 
Disillusion with "democracy Boris Yeltsin-style" has pushed President Vladimir Putin to search for an ideology based on nationalism and the glorification of the state. 
Putin calls it "managed pluralism." 
As we can now see, the Social Committee For the Moral Revival of the Fatherland wants to be among the managers. 


Russia and the Kosovo Card 
TBILISI – Look before you leap is as sound a principle in foreign policy as it is in life. 
Yet, once again, the Bush administration is preparing to leap into the unknown. 
Even though lack of foresight is universally viewed as a leading cause of its Iraq debacle, the United States (with British backing probable) is now preparing to recognize Kosovo’s independence unilaterally – irrespective of the consequences for Europe and the world. 
Kosovo has been administered since 1999 by a United Nations mission guarded by NATO troops, although it remains formally a part of Serbia. 
But, with Kosovo’s ethnic Albanian majority demanding its own state, and with Russia refusing to recognize UN mediator Martti Ahtisaari’s plan for conditional independence, the US is preparing to go it alone. 
Instead of thinking what Ahtisaari deemed unthinkable, a partition of Kosovo with a small part of the north going to Serbia and the rest linked to the Kosovars ethnic brethren in Albania or a separate state, the US plans to act without the UN’s blessing, arguing that only an independent Kosovo will bring stability to the Western Balkans. 
That argument is debatable – and the record of the Kosovar government suggests that it is wrong. 
But the US position is unambiguously misguided in not foreseeing that the “Kosovo precedent” will incite instability and potentially even violence elsewhere. 
Why the rush to give Kosovo independence? 
Many serious disputes have gone unresolved for decades. 
The Kashmir question has lingered since 1947, the Turkish occupation of Northern Cyprus since 1974, and Israel’s occupation of the West Bank from 1967. 
Yet no one is suggesting that unilateral solutions be imposed in these potential flashpoints. 
Nevertheless, the US – and most European Union members – argue that Kosovo’s situation is sui generis and will set no legally binding international precedent. 
But Russia sees things very differently. 
Indeed, it may seek to use this precedent to re-establish its authority over the nations and territories that were once part of the Soviet Union. 
Spain and Cyprus with their worries over secessionist-minded regions, are worried by any possible precedent. 
Romania fears the fallout from Kosovo’s unilaterally gaining independence on neighboring Moldova. 
The worry is that Russia will unilaterally recognize the breakaway Moldovan territory of Transdnistria, which Russian troops and criminal gangs have been propping up for 16 years. 
Ukraine – the great prize in Russia’s bid to recapture its former sphere of influence – is also deeply anxious. 
It fears that Russia will encourage separatist tendencies in Crimea, where the ethnic Russian population forms a majority. 
(Crimea was ceded to Ukraine by Nikita Khrushchev only in 1954). 
Russia may decide to abuse the Kosovo precedent further to divide Ukraine’s population between Russian speakers and Ukrainian speakers. 
But the biggest risks posed by unilateral recognition of Kosovo’s independence are in the South Caucasus, a region that abuts the tinderbox of today’s Middle East. 
Here, there is a real danger that Russia may recognize breakaway regions in the South Caucasus, – and back them more strongly than it does now. 
Even before Vladimir Putin became Russia’s president, the Kremlin was making mischief in Georgia, issuing Russian passports to citizens of Abkhazia (the largest breakaway region) and pouring money into its economy. 
Russia’s supposed “peacekeeping troops” in Abkhazia and South Ossetia, Georgia’s other secession-minded region, have in fact protected their rebel governments. 
Russia has also been enforcing a complete trade embargo on Georgia in the hope of weakening the resolve of its pro-Western president, Mikhail Saakashvili. 
Should Russia recognize Abkhazia’s independence, Saakashvili might be tempted to respond militarily to prevent his country from unraveling. 
Renewed conflict in Abkhazia would not only bring the risk of open warfare with Russia, but strain relations with Armenia, as there are near to 50,000 Armenians in Abkhazia who support the breakaway government. 
Another risk in the South Caucasus is that Russia (with Armenian support) will recognize Nagorno-Karabakh’s self-proclaimed independence from Azerbaijan. 
Nagorno-Karabakh, historically Armenian, endured a bloody secessionist war between1988 and 1994, with 30,000 killed and 14% of Azerbaijan’s territory occupied by Russian-backed Armenian forces. 
Since then, oil has fuelled an Azeri military buildup. 
So the government in Baku is far more prepared to respond to renewed warfare than it was in the 1990’s. 
Moreover, it has neighboring Turkey on its side. 
Turkey is already enforcing a punitive economic embargo on Armenia, including closure of its border. 
Military projections by the US have repeatedly suggested that Azerbaijan would lose such a battle, even with newly purchased equipment and Turkish military support. 
Armenian forces are well dug in and have received a significant boost from Russia’s diversion of heavy weaponry to Armenia from some recently closed Georgian military bases. 
Iran also must be factored into this equation, as it is becoming a strategic investor by building an oil refinery just across its border in Armenia, partly as a security measure in case of a US attack and partly to relieve its petrol shortages. 
Moreover, Iran remains eager to contain Azerbaijani revanchist claims over the large Azeri minority in northern Iran. 
The conflicts in Transdnistria and the South Caucasus are usually called “frozen conflicts,” because not much has happened since they began in the early 1990’s. 
Any unilateral move to give Kosovo its independence is likely to unfreeze them – fast and bloodily. 
And such potential bloodshed on Russia’s border may give Vladimir Putin the pretext he may desire to extend his rule beyond its constitutionally mandated end next March. 

Russia and the West After Iraq 
The US-led invasion of Iraq called into question the efficacy of today's international system. 
While the US will probably not achieve all of its goals in Iraq, the war has clearly confirmed and strengthened its global supremacy. 
How should Russia respond? 
Where do its interests lie, and what kinds of policy should its leaders pursue? 
In particular, how should Russia position itself vis-à-vis the incipient rivalry between Europe and the United States? 
The Iraqi crisis revealed deep differences between the US and Western Europe in matters of political culture, ethics, approaches to international politics, and the role of military force. 
These differences will hardly break the basic trans-Atlantic alliance built on the foundation of common values and interests. But they will necessarily heighten elements of competition, including competition for Russia. 
The war in Iraq has also revealed the critical state of the European Union's foreign and defense policies. 
Attempts to have Europe speak with one voice obviously failed. In light of even greater differences resulting from the enlargement, they are not likely to succeed in the near future. 
Moreover, as confrontation with the US intensifies, Washington will probably act to forestall any trend toward the unification of EU foreign and defense policy. 
In the absence of such common policy, the EU and its leading members will remain in the second league of world-class players for the foreseeable future. 
In this context, it was a mistake for Russia to side so strongly with France and Germany against the US. 
It was not as bad as during Soviet times, when we used to side with the Third World against both America and Europe, but it was still not in Russia's long-term interest. 
France was pursuing its own Gaullist goal of strengthening French national prestige by inflicting damage or even humiliation upon the US. 
Germany's chancellor was not motivated by European goals, either, but took an anti-war stand on Iraq to deal with his own domestic problems: the weakness of his government and pacifist sentiments among the majority of Germans. 
A struggle for preserving the vestiges of greatness may be a worthy goal; perhaps France, a country richer than Russia, can afford these objectives. 
But do Russians really want to tickle their vanity at the expense of the long-term interests of our economically devastated country? 
Nor does Russia need to cater to pacifism for domestic political considerations, as a pacifist movement is non-existent in my country. 
One goal of European foreign policy has always been to prevent excessive rapprochement between Russia and the US. 
Good US-Russian relations, however, could strengthen both countries, and especially Russia. 
Some people in Russia--traditional leftists and corrupt bureaucrats afraid of a more open system--indulge in anti-American rhetoric. 
But anti-Americanism is simply irrational for Russia, which only stands to gain from an alliance with the world's economic and political leader. 
Of course, good relations with Europe are a priority for Russia, especially economic links, human contacts, and social interactions. 
Russia will also benefit from an active foreign-policy engagement with the EU's leading members. 
But a strategic alliance with the EU in foreign and security policies remains unrealistic and inefficient. 
Europe will most likely continue to grow weaker, rather than stronger, in this field. 
That is why Europe will inevitably be a minor priority if Russia manages to restore and maintain special relations with the US. 
Russia could also play the role of a "transatlantic integrator," mediating the various conflicts and differences in the traditional Atlantic community. 
Obviously, we are more suited for this role than, say Poland, which is also trying to play it. 
A similar bridging role could perhaps be played by Russia with respect to China and India, with which we should establish maximally close relations. 
But close relations with the US do not mean that Russia must neglect its own interests, both political and economic. 
In the context of Iraq, for example, Russia should constructively support the rebuilding effort, even if, as of now, its participation has not been sought. 
But while supporting the new Iraqi government, Russia should not break off contacts, if they still exist, with moderate members of the Baath party, many of whom may come back to power. 
After all, Iraq has few other elites to rely upon, much as Russia had no non-Communist elite after 1991. 
Should such a possibility arise, Russia should take part in peacemaking and reconstruction operations in Iraq, rather than trying to put a spoke in Washington's wheel. 
Indeed, unlike Kosovo, where we have no serious interests and should withdraw from the peacekeeping efforts, Russia stands both to gain and lose a lot in Iraq. 
We have our interests to protect, the most important of which are economic: recovery of Iraqi debts owed to Russia, the contractually agreed-upon development of oil fields, restoration of public infrastructure. 
More generally, Russia must play the oil card, which still gives the country a powerful trump in international relations, especially in light of long-term destabilization of the Middle East. 
Russia will both derive large revenues from oil for many decades and can also play the role of an "energy stabilizer" that will be important for maintaining world peace. 
Wise use of oil resources will not only provide a long-term foundation for Russia's modernization, but will also enhance Russia's geopolitical influence. 

The Kremlin’s War on Liberalism 
MOSCOW – In the wake of the September 11, 2001, terror attacks in the United States, the so-called “War on Terror” was launched. 
But the US-led military invasions of Afghanistan and Iraq were not the whole of it; many countries also ramped up monitoring and policing of domestic media and ordinary citizens. 
Freedom of expression and personal privacy, governments claimed, would have to be curtailed for the sake of security. 
The damage has been particularly pronounced in Russia, where anti-terror regulations have often been used as a tool to muffle the voices of those who offer independent or alternative views, particularly views that are critical of President Vladimir Putin’s government. 
By using security as a pretext to flout Russia’s media legislation, which explicitly protects journalists from censorship, the government has undermined journalism considerably. 
That legislation was based on European and international law, and symbolized the victory of democracy in Russia. 
But the legislation’s integrity has been gradually eroded by amendments that limit free speech and journalists’ ability to work unimpeded, and by uneven application of existing rules. 
Consider the “law on counteracting extremist activities,” which restricts the rights to freedom of expression, assembly, and association. 
Enacted in 2012, amid nationwide protests against rigged elections, it has been used most often to target journalists and bloggers. 
Galina Arapova, the director of the Mass Media Defense Center (which has been targeted), has noted that the law can be applied whenever criticism is directed at entire groups or systems. 
This highlights the central problem with anti-extremism laws: “extremism” is far too broad a term to ensure that such laws are actually used to protect against terrorist attacks. 
There is similar ambiguity surrounding other related terms, such as “defamation” and “hate speech.” 
Defamation – defined with more broad descriptors like “libel” and “damage to reputation” – was reinstated as a criminal act in 2012 as well, with legislation that specifies “libel against judges, jurors, prosecutors, and law-enforcement officials” as an act worthy of harsh punishment. 
Such laws make investigations into official corruption far more difficult for independent journalists, who have often been taken to court by senior managers and state officials simply for reporting on their luxurious lifestyles. 
But, in recent years, the popularity of defamation lawsuits has declined, in favor of accusations of extremism and inciting hatred. 
Now, digging into corruption by local police is equivalent to inciting hatred against that “social group,” and “expert” linguists have also found journalists to be “inciting hatred” against employees of regional administrations, judges, and other authorities. 
Sometimes, such laws can be applied in truly bizarre ways, just to hamper the workings of the news media. 
For example, a newspaper could be accused of spreading hate and taken to court for publishing photos of the Nazi flag alongside an article about World War II. 
And the laws keep coming. 
In recent decades, more than 20 new laws and regulations that address the media have been introduced, most of them restrictive. 
These measures do not just limit the topics that journalists can safely cover; they also work to limit funding for independent media, by imposing restrictions on foreign investment and advertising. 
Such laws have forced many media organizations to move entirely online, or shut down altogether. 
Traditional media are not suffering alone. 
To target online publications, including blogs, Russia has imposed new regulations on Internet use. 
Any website with more than 3,000 visitors per day – not a particularly high number – is now considered a “media outlet” and therefore subject to the restrictive laws. 
Moreover, bloggers can no longer be anonymous, and online media can be banned without warning. 
The so-called “Yarovaya law,” signed by Putin last summer, takes this repression several steps further. 
Among other things, it obliges telephone and Internet providers to store records of all communications for six months and all metadata for three years; they must also help intelligence agencies decode encrypted messages. 
And it imposes harsher punishments for “extremism” (read: criticism) and “mass disturbances” (read: protests). 
The one law that is rarely applied is article 144 of the criminal code, which aims to protect journalists from harassment and other actions that obstruct their “lawful professional activities.” 
As a result, according to the Glasnost Defense Foundation, journalists’ rights are violated dozens of times each month in Russia. 
Journalists face threats, attacks, damage to equipment, unfair fines, firing, bans, and other forms of censorship, often soon after publishing some kind of criticism of regional authorities, law enforcement, or wealthy businesspeople. 
Knowing that no attempt to take legal action against the authorities or influencers who threaten them will produce any results, many journalists censor themselves. 
The Russian government’s assault on independent media has all but prohibited the kind of deep analysis and investigative reporting that is essential to a functioning democracy. 
Yet any outcry has been muted; in fact, few are discussing the repression at all. 
And that, after all, is precisely the point: lack of public engagement – not to mention inadequate professional solidarity and cooperation – means that Russia’s authorities can breathe easy. 


Shaking Russia’s Weak Economic Hand 
CAMBRIDGE – When Russian President Vladimir Putin meets his American counterpart, Donald Trump, at this week’s G20 summit in Hamburg, he will not be doing so from a position of economic strength. 
To be sure, despite the steep drop in oil prices that began three years ago, Russia has managed to escape a deep financial crisis. 
But while the economy is enjoying a modest rebound after two years of deep recession, the future no longer seems as promising as its leadership thought just five years ago. 
Barring serious economic and political reform, that bodes ill for Putin’s ability to realize his strategic ambitions for Russia. 
Back in 2012, when Putin appeared onstage with the Nobel laureate economist Paul Krugman at a Moscow bank conference, Russia’s 1998 economic crisis seemed a distant memory. 
With oil prices well over $100 a barrel, the government’s coffers were bursting. 
So Putin could proudly contrast Russia’s government budget surplus with the large recession-driven deficits across the West. 
He surely delighted in having Russian audiences hear Krugman’s view that Western democracies had come up badly short in handling the global financial crisis. 
In a different session, Russian academic economist Sergei Guriev (who later had to flee the country) argued that there was no hope for diversification of Russia’s resource-based economy as long as institutions such as courts were so weak. 
Too many key decisions rested with one man. 
Speaking in the same session, I emphasized that without fundamental reforms, a sharp drop in global energy prices would create profound problems. 
Inevitably, that drop came, with prices plummeting from $119 in February 2012 (for Brent crude oil in Europe) to $27 in 2016. 
Even the current level (under $50 in early July 2017), is less than half the 2011-2012 peak. 
For a country that depends on oil and natural gas for the lion’s share of export revenue, the price collapse has been a massive blow, rippling through the economy. 
The fact that Russia has avoided a financial crisis is remarkable – and largely due to the efforts of the Central Bank of Russia. 
Indeed, Elvira Nabiullina the CBR’s governor, has twice won international central banker of the year awards. 
But the burden of adjustment has largely fallen on consumers, owing to a roughly 50% drop in the ruble’s value relative to the dollar; real wages and consumption both fell sharply. 
As one Russian put it to me, he used to take 1,000 rubles to the supermarket and come home with two bags; now he comes home with one. 
The shock to the real economy has been severe, with Russia suffering a decline in output in 2015 and 2016 comparable to what the United States experienced during its 2008-2009 financial crisis, with the contraction in GDP totaling about 4%. 
Many firms went bankrupt, and in 2016 the International Monetary Fund estimated that almost 10% of all bank loans were non-performing (a figure that surely understates the severity of the situation). 
In many cases, banks chose to relend funds rather than take losses onto their books or force politically connected firms into bankruptcy. 
At the same time, though, the CBR moved aggressively to force smaller banks to raise capital and write down bad loans (something European policymakers have taken forever to do). 
And, in the face of intense lobbying by powerful oligarchs, the CBR kept interest rates up to tame inflation, which had reached more than 15% but has since fallen to close to 4%. 
Of course, Western sanctions, particularly restrictions on banks, have exacerbated the situation. 
But the media tend to over-emphasize this aspect of Russia’s economic woes. 
All countries that rely heavily on energy exports have suffered, especially those, like Russia, that have failed to diversify their economies. 
In a Western democracy, an economic collapse on the scale experienced by Russia would have been extremely difficult to digest politically, as the global surge in populism demonstrates. 
Yet Putin has been able to remain firmly in control and, in all likelihood, will easily be able to engineer another landslide victory in the presidential election due in March 2018. 
Russia’s state-owned media juggernaut has been able to turn Western sanctions into a scapegoat for the government’s own failures, and to whip up support for foreign adventurism – including the seizure of the Crimea, military intervention in Syria, and meddling in US elections. 
Most Russians, constantly manipulated by their country’s schools and media, are convinced that conditions are much worse in the West (a hyperbolic claim even in the era of “fake news”). 
Unfortunately, such disinformation is hardly a recipe for generating reform. 
And, without reform, there is little reason to be optimistic about Russia’s long-run growth trend, given its poor demographic profile, weak institutions, and abject failure to diversify its economy, despite having an enormously talented and creative population. 
Where will future growth come from? 
If the world continues to move toward a low-carbon future, Russia will confront an inevitable choice: launch economic and political reforms, or face continuing marginalization, with or without Western sanctions. 
No meeting between the US and Russian presidents can change that reality. 

A New Sino-Russian Alliance? 
CAMBRIDGE – Some analysts believe that 2014 ushered in a new era of Cold War-style geopolitics. 
Russian President Vladimir Putin’s invasion of Ukraine and annexation of Crimea was met with heavy economic sanctions from Europe and the United States, weakening Russia’s ties with the West and leaving the Kremlin eager to strengthen ties with China. 
The question is whether Russia will manage to build a real alliance with the People’s Republic. 
At first glance, it seems plausible. 
Indeed, traditional balance-of-power theory suggests that US primacy in power resources should be offset by a Sino-Russian partnership. 
Perhaps more convincing, there seems to be historical precedent for such a partnership. 
In the 1950s, China and the Soviet Union were allied against the US. 
After US President Richard Nixon’s opening to China in l972, the balance shifted, with the US and China cooperating to limit what they viewed as a dangerous rise in the Soviet Union’s power. 
With the collapse of the Soviet Union, that de facto US-China alliance ended, and a China-Russia rapprochement began. 
In 1992, the two countries declared that they were pursuing a “constructive partnership”; in 1996, they progressed toward a “strategic partnership”; and in 2001, they signed a treaty of “friendship and cooperation.” 
In recent years, China and Russia have cooperated closely in the UN Security Council and taken similar positions on Internet regulation. 
They have used diplomatic frameworks – such as the BRICS group of major emerging countries (along with Brazil, India, and South Africa) and the Shanghai Cooperation Organization (along with Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan) – to coordinate positions. 
And Putin has struck up a good working relationship with Chinese President Xi Jinping, based on their shared domestic illiberalism and desire to counter American ideology and influence. 
Their economic relationship, too, seems to be progressing. 
Last May, shortly after the annexation of Crimea, Russia announced a $400 billion deal to supply 38 billion cubic meters (bcm) of gas to China annually for 30 years, beginning in 2019. 
The contract, between Russia’s state-owned energy giant Gazprom and the China National Petroleum Corporation, entails the construction of a 2,500-mile gas pipeline to China’s Heilongjiang province (where, incidentally, the two countries nearly went to war a few decades ago). 
Though the exact price remains secret, it appears that Russia offered major concessions, after nearly a decade of negotiations, to ensure the deal’s success. 
Moreover, in November, Gazprom announced a framework agreement to deliver an additional 30 bcm of gas to China’s Xingjiang Province from western Siberia for 30 years via another new pipeline. 
If the “eastern” and “western” pipelines are completed as planned, the 68 bcm they deliver to China annually would dwarf the 40 bcm that Russia exports to its current largest customer, Germany. 
This may seem to portend an ever-deepening bilateral relationship. 
But there is a hitch: the gas deals amplify a significant bilateral trade imbalance, with Russia supplying raw materials to China and importing Chinese manufactures. 
And the gas deals do not make up for Russia’s lost access to the Western technology that it needs to develop frontier Arctic fields and become an energy superpower, not just China’s gas station. 
In fact, the problems with a Sino-Russian alliance run even deeper. 
With its economic, military, and demographic heft – China generates considerable unease in Russia. 
Consider the demographic situation in eastern Siberia, where six million Russians live across the border from up to 120 million Chinese. 
Furthermore, Russia’s economic and military power has been in decline, whereas China’s has exploded. 
Anxiety over China’s conventional military superiority probably motivated, at least partly, Russia’s 2009 announcement of a new military doctrine explicitly reserving the right to first use of nuclear weapons – a stance that resembles America’s Cold War force posture, aimed at deterring superior conventional Soviet forces in Europe. 
These imbalances suggest that Russia would resist a tight military alliance with China, even as the two countries pursue mutually beneficial tactical diplomatic coordination. 
China’s willingness to cooperate with Russia also has its limits. 
After all, China’s development strategy depends on its continued integration into the world economy – and, specifically, reliable access to American markets and technology. 
The Chinese Communist Party’s legitimacy depends on strong economic growth, and it will not risk this strategy for some “authoritarian alliance” with Russia. 
Even within multilateral forums, the relationship between Russia and China is far from balanced. 
Given that China’s economy is larger than the other four BRICS economies combined, the group’s initiatives – including its new development bank – are likely to reflect a disproportionate Chinese influence. 
And though the Shanghai Cooperation Organization has facilitated some diplomatic coordination, China and Russia remain locked in a struggle for influence in Central Asia. 
The Sino-Russian alliance in the twentieth century was a product of China’s weakness following World War II and at the beginning of the Cold War – and, even then, it lasted little more than a decade. 
Today’s China is strong, and unlikely to get too close to a Russia whose decline has been accelerated by its leader’s poor judgment. 
In short, when it comes to a Sino-Russian alliance challenging the West, history is not likely to repeat itself. 
Contrary to Putin’s hopes, 2014 will not be remembered as a year of successful Russian foreign policy. 

The Achilles Heel of Putin’s Regime 
WASHINGTON, DC – Russian President Vladimir Putin’s authority is weaker than it seems. 
In fact, the bedrock of Putin’s power – the clientelist economic arrangements that he has assiduously consolidated over the past generation – has become the main threat to his political survival. 
The reason is simple: the lack of credible property rights under Putin’s system of crony capitalism forces senior Russian officials and oligarchs to hold their money abroad, largely within the jurisdictions of the Western governments against which Putin rails. 
With the help of carefully selected loyalists, Putin has established three circles of power: the state, state-owned corporations, and loyalists’ “private” companies. 
The process began during his tenure as chairman of the Federal Security Service, from 1998 to 1999, when he wielded control over the secret police. 
But it was Putin’s first term as president, from 2000 to 2004, that amounts to a true masterpiece of power consolidation by a budding authoritarian. 
First, in the summer of 2000, he took charge of Russian television. 
Next, he established his “vertical of power” over the state administration and the regional administrations, as well as his “dictatorship of law” over the judicial system. 
And then, in the 2003 parliamentary election, Putin gained solid control over both the State Duma (the lower house) and the Federation Council (the upper house) of the Russian legislature. 
At the pinnacle of state power, the Security Council, he installed three KGB generals: Sergei Ivanov, Nikolai Patrushev, and Aleksandr Bortnikov. 
To strengthen the second circle of his power, Putin seized control over the state corporations one by one, beginning with Gazprom in May 2001, by appointing loyalists as chief executives and chairmen. The three top managers of state-owned companies are Igor Sechin of Rosneft, Aleksei Miller of Gazprom, and Sergei Chemezov of Rostec. 
Putin clinched his authority over the state sector in 2007, during his second term, with the creation of vast corporations that have since expanded substantially, with cheap state funding, often securing monopolies in their industries. 
Because these companies are treated as a source of power and rents, rather than of economic growth, they are peculiarly disinterested in competition, innovation, entrepreneurship, and productivity. 
The only relevant standard of corporate governance is loyalty to Putin. 
Then there is the third circle of power, comprising Putin’s most powerful cronies – the top four appear to be Gennady Timchenko, Arkady Rotenberg, Yuri Kovalchuk, and Nikolai Shamalov – and their companies. 
Their behavior is usually viewed as kleptocratic, though Putin has used his legislative authority to ensure that many of their dubious activities are technically legal. 
For example, cronies are entitled to buy assets from state companies at discretionary prices and fill government procurement orders with no competition. 
The system Putin has created is strikingly similar to the czarist system that prevailed until the “Great Reforms” of the 1860s. 
Indeed, Putin is often called a new czar, because his power is legally unlimited (though his preoccupation with opinion polls shows that public sentiment does matter). 
Rather than promoting institutional development, he has pursued far-reaching deinstitutionalization, aimed at concentrating executive, legislative, and judicial powers in his own hands. 
But in the absence of credible property rights, wealthy Russians, including Putin’s own cronies, know that the only safe places to keep their assets are abroad. 
And, thanks to a fully convertible ruble and the absence of restrictions on capital outflows, they can transfer their gains to offshore tax havens. 
This has naturally created a fourth circle of power, over which Putin has no control: the offshore tax havens themselves. 
And those havens are no longer as secure as they once were. 
With the Financial Action Task Force having reduced bank secrecy in Switzerland and cleaned up the many small island tax havens, there are two major remaining destinations: the United States and the United Kingdom, both of which permit anonymous currency inflows and allow asset owners to hide their identity. 
In the US, tens of billions of dollars move through law firms’ opaque bank accounts each year, facilitating money laundering. 
In general, Western governments do not really exert much control over such activities within their borders. 
In fact, while the assets of Putin’s cronies in the US and the European Union are supposed to be frozen, according to the sanctions imposed after Russia’s illegal annexation of Crimea in 2014, hardly any have been found. 
It is time to change this, by initiating comprehensive investigations into the assets of sanctioned people. 
The US and the UK, which presumably hold the vast majority of Russian offshore wealth, must also catch up with their counterparts in most of Europe by prohibiting the anonymity of beneficiary owners. 
The US should also proscribe the use of attorney-client privilege to transfer anonymous or dirty money into the country. 
The good news is that progress may be on the horizon. 
A new bill, which US President Donald Trump signed into law on August 2, calls for far-reaching investigations into “senior foreign political figures and oligarchs in the Russian Federation” – including “spouses, children, parents, and siblings” – and their assets within 180 days. 
As the veteran liberal Russian politician Leonid Gozman points out, “To judge from the statements of our propagandists, the Russian state is very valuable,” but it is also “a very fragile construct that can be destroyed by anything,” from the fight against corruption to efforts to oust kleptocratic officials. 
Given the vast stocks of Russian capital that have piled up in New York, London, and elsewhere, the West is ideally positioned to exploit this fragility. 

Russia Crosses the Line 
NEW YORK -- In weeks and years past, each of us argued that Russia was pursuing a policy of regime change toward Georgia and its pro-Western, democratically elected president, Mikheil Saakashvili. 
We predicted that, absent strong and unified Western diplomatic involvement, war was coming. 
Now, tragically, a full-scale Russian invasion of Georgia has happened. The West, especially the United States, could have prevented this war. 
Instead, regardless of whether it actually pulls back its troops to South Ossetia and Abkhazia, Russia has crossed the Rubicon, making this a watershed moment in the West’s post-Cold War relations with Russia. 
Exactly what triggered the fighting is unclear. 
Each side will argue its own version. 
But we know, without doubt, that Georgia was responding to repeated provocative attacks by South Ossetian separatists controlled and funded by the Kremlin. 
This was a not a war Georgia wanted; it had believed that it was slowly gaining ground in South Ossetia through a strategy of soft power. 
Whatever mistakes Georgia’s government made cannot justify Russia’s actions. 
The Kremlin invaded a neighbor, an illegal act of aggression that violates the UN Charter and fundamental principles of cooperation and security in Europe. 
Beginning a well-planned war (including cyber-warfare) as the Olympics were opening also violates the ancient tradition of a truce to conflict during the Games. 
Russia’s willingness to create a war zone 25 miles from the Black Sea city of Sochi, where it is to host the Winter Games in 2014, hardly demonstrates its commitment to Olympic ideals. 
In contrast, Russia’s timing suggests that Vladimir Putin seeks to accomplish its aggressive aims ahead of the US elections, thus avoid beginning relations with the next president on an overtly confrontational note. 
Russia’s goal was not simply, as it claimed, to restore the status quo in South Ossetia. 
It was and remains regime change in Georgia. 
This is why it quickly opened a second front in the other disputed Georgian territory, Abkhazia, just south of Sochi. 
Its great goal is to replace Saakashvili -- a man Putin despises -- with a president more subject to Kremlin influence. 
The current promised withdrawal does not mean it has abandoned that aim. 
As Swedish Foreign Minister Carl Bildt pointed out, the Kremlin’s rationale for invading has parallels to the darkest chapters of Europe’s history. 
Having issued passports to tens of thousands of Abkhazians and South Ossetians, the Kremlin claims it intervened to protect them -- a tactic reminiscent of one used by Nazi Germany at the start of World War II. 
Russia wants to roll back democratic breakthroughs on its borders, to destroy any chance of further NATO or EU enlargement and to reestablish a sphere of hegemony over its neighbors. 
By trying to destroy a democratic, pro-Western Georgia, the Kremlin is sending a message that, in its part of the world, being close to America and the West does not pay. 
This moment could well mark the end of an era in Europe during which Realpolitik and spheres of influence were supposed to be replaced by cooperative norms and a country’s right to choose its own path. 
Hopes for a more liberal Russia under President Dmitry Medvedev will need to be reexamined. 
His justification for the invasion reads more like Brezhnev than Gorbachev. 
Of course, no one wants a return to Cold War-style confrontation, but Russia’s behavior poses a direct challenge to European and international order. 
What should the West do now? 
First, Georgia deserves the West’s solidarity and support. 
The West must insure that fighting does not resume, that Russia does indeed withdraw fully, and that Georgia’s territorial integrity within its current international border is preserved. 
There must also be a major, coordinated transatlantic effort to help Georgia rebuild and recover. 
Second, we should not pretend that Russia is a neutral peacekeeper in conflicts on its borders. 
Russia is part of the problem, not the solution. 
For too long, the Kremlin has used existing international mandates to pursue neo-imperial policies. 
The West must disavow these mandates and insist on truly neutral international forces, under the United Nations, to monitor a future cease-fire and to mediate. 
Third, the West needs to counter Russian pressure on its neighbors, especially Ukraine -- most likely the next target in the Kremlin’s efforts to create a new sphere of hegemony. 
The US and the European Union must be clear that Ukraine and Georgia will not be condemned to some kind of gray zone. 
Finally, the US and the EU must make clear that this kind of aggression will affect relations and Russia’s standing in the West. 
While Western military intervention in Georgia is out of the question -- and no one wants a 21st-century version of the Cold War – Russia’s actions cannot be ignored. 
There is a vast array of political, economic and other areas in which Russia’s role and standing will have to be reexamined. 
The Kremlin must also be put on notice that its own prestige project -- the Sochi Olympics -- will be affected by its behavior. 
Weak Western diplomacy and lack of transatlantic unity failed to prevent an avoidable war. 

The Challenge of Russia’s Decline 
CAMBRIDGE – As Europe debates whether to maintain its sanctions regime against Russia, the Kremlin’s policy of aggression toward Ukraine continues unabated. 
Russia is in long-term decline, but it still poses a very real threat to the international order in Europe and beyond. 
Indeed, Russia’s decline may make it even more dangerous. 
Make no mistake: what is happening in Ukraine is Russian aggression. 
President Vladimir Putin’s pretense that Russian troops were not participating in the fighting was all but shattered recently, when a Russian fighter in Donetsk confirmed to the BBC Russian service that they are playing a decisive role in rebel advances. 
Russian officers, he reported, directly command large military operations in eastern Ukraine, including the siege and capture of the important transport center of Debaltseve in February. 
But the threat posed by Russia extends far beyond Ukraine. 
After all, Russia is the one country with enough missiles and nuclear warheads to destroy the US. 
As its economic and geopolitical influence has waned, so has its willingness to consider renouncing its nuclear status. 
Indeed, not only has it revived the Cold War-era tactic of sending military aircraft unannounced into airspace over the Baltic countries and the North Sea; it has also made veiled nuclear threats against countries like Denmark. 
Weapons are not Russia’s only strength. 
The country also benefits from its enormous size, vast natural resources, and educated population, including a multitude of skilled scientists and engineers. 
But Russia faces serious challenges. 
It remains a “one-crop economy,” with energy accounting for two-thirds of its exports. 
And its population is shrinking – not least because the average man in Russia dies at age 65, a full decade earlier than in other developed countries. 
Though liberalizing reforms could cure Russia’s ailments, such an agenda is unlikely to be embraced in a corruption-plagued country with an emphatically illiberal leadership. 
Putin, after all, has sought to promote a neo-Slavophile identity defined above all by suspicion of Western cultural and intellectual influence. 
Instead of developing a strategy for Russia’s long-term recovery, Putin has adopted a reactive and opportunistic approach – one that can sometimes succeed, but only in the short term – to cope with domestic insecurity, perceived external threats, and the weakness of neighbors. 
He has waged unconventional war in the West, while pursuing closer ties with the East, raising the likelihood that Russia will end up acting as China’s junior partner, without access to the Western capital, technology, and contacts that it needs to reverse its decline. 
But Russia’s problem is not just Putin. 
Though Putin has cultivated nationalism in Russia – according to Harvard University’s Timothy Colton, at a recent meeting of the Valdai Discussion Club, Putin called himself the country’s “biggest nationalist” – he found fertile ground to plow. 
Given that other high-level figures – for example, Dmitry Rogozin, who last October endorsed a book calling for the return of Alaska – are also highly nationalistic, a successor to Putin would probably not be liberal. 
The recent assassination of former Deputy Prime Minister and opposition leader Boris Nemtsov reinforces this assumption. 
So Russia seems doomed to continue its decline – an outcome that should be no cause for celebration in the West. 
States in decline – think of the Austro-Hungarian Empire in 1914 – tend to become less risk-averse and thus much more dangerous. 
In any case, a thriving Russia has more to offer the international community in the long run. 
In the meantime, the US and Europe face a policy dilemma. 
On one hand, it is important to resist Putin’s challenge to the fundamental principle that states should not use force to violate one another’s territorial integrity. 
Though sanctions are unlikely to change Crimea’s status or lead to withdrawal of Russian soldiers from Ukraine, they have upheld that principle, by showing that it cannot be violated with impunity. 
On the other hand, it is important not to isolate Russia completely, given shared interests with the US and Europe relating to nuclear security and non-proliferation, terrorism, space, the Artic, and Iran and Afghanistan. 
No one will benefit from a new Cold War. 
Reconciling these objectives will not be easy, especially given Ukraine’s continuing crisis. 
At February’s Munich Security Conference, many US senators advocated arming Ukraine – an approach that could exacerbate the situation, given Putin’s conventional military dominance there. 
With German leaders, including Chancellor Angela Merkel, opposed to this approach, pursuing it would also split the West, strengthening Putin’s hand further. 
Others at the conference argued that the West should change the game by expelling Russia from SWIFT, the international framework for clearing bank payments. 
But critics point out that this would damage SWIFT and the West, whose banks would lose the hundreds of billions of dollars that Russia currently owes them. 
For their part, the Russians have warned informally that this would be “the real nuclear option.” 
Designing and implementing a strategy that constrains Putin’s revisionist behavior, while ensuring Russia’s long-term international engagement, is one of the most important challenges facing the US and its allies today. 
For now, the policy consensus seems to be to maintain sanctions, help bolster Ukraine’s economy, and continue to strengthen NATO (an outcome that Putin undoubtedly did not intend). 
Beyond that, what happens is largely up to Putin. 


Putting Putin in his Place 
BRUSSELS – At least six crises are testing Europe’s stability: regional chaos caused primarily by the war in Syria, a potential British exit from the European Union, an influx of refugees on a scale not seen since World War II, unresolved financial challenges, Russian expansionism, and the return of nationalism to mainstream politics. 
Russian President Vladimir Putin has intentionally exacerbated at least four of these crises. 
In addition to his adventurism in Ukraine, he has injected obstructionism into European politics through his support of populist and euroskeptic parties, escalated the conflict in the Middle East by his military intervention in Syria and, as a consequence, aggravated the refugee crisis. 
The EU must wake up to the threat Putin poses and begin to counter his aggression. 
The nationalism sweeping Europe, indeed, has been partly fueled by Russian funding of far-right political parties, the rise of which has prevented Europe from crafting a collective response to the refugee crisis. 
In the United Kingdom, the pro-Putin UK Independence Party is nipping at Prime Minister David Cameron’s heels, so the government refuses to commit to taking Britain’s fair share of refugees. 
Similarly, Sweden has closed its borders, in response to the far-right Sweden Democrats’ rapidly rising poll numbers. 
This sorry calculus is being carried out across the continent. 
Meanwhile, Putin has derailed the international community’s efforts to negotiate a political solution to the conflict in Syria, the root cause of the refugee crisis. 
Russia’s support of the Syrian government’s assault on Aleppo has stymied the peace process, which depends on the cooperation of global players, regional powers, and the moderate opposition forces that Putin is bombing. 
On February 15, at least 50 people, including women and children, were killed by missile attacks on schools and hospitals in northern Syria, according to the United Nations. 
The French government called the attacks “war crimes” – and rightly so. 
Russia denied involvement, but fragments of Russian-built missiles were found at the scene. 
The aid group Médecins Sans Frontières has said that only Russia or the Syrian government could possibly be responsible for the attacks. 
Moreover, the fighting around Aleppo has displaced about 50,000 people, according to the International Committee of the Red Cross. 
Many of these desperate Syrians – consisting primarily of those who could not afford to flee sooner – will head toward Turkey and onward to Europe. 
Russia is dropping bombs even as Putin claims to be supporting a ceasefire. 
Clearly, he cannot be taken at his word, as the Kremlin’s record in Ukraine also shows. 
With the United States distracted by its presidential election campaign, Europe’s leaders find themselves huddled alone, with the Russian bear gnawing at the door. 
It is time for immediate action. 
First, European governments must put a swift halt to Russian financing of political parties within Europe. 
If necessary, the US Central Intelligence Agency should be asked to assist in identifying how these funds are transferred. 
The effort must be sustained until the pipelines funneling Russian cash to European parties are shut down for good. 
Second, the EU must prepare to impose enhanced economic sanctions on Russia. 
UN Security Council Resolution 2254, which provides a road map for the Syrian peace process, obliges all actors, including Russia, to stop indiscriminate attacks against civilians. 
If Russia fails to abide by its commitments, these sanctions should be triggered. 
Third, the EU must work with Turkey and other regional actors to establish safe havens on the Turkish-Syrian border, where refugees from Aleppo and elsewhere are headed. 
While this would entail some risk, there are no credible alternatives. 
Finally, Europe must stop making Putin’s job easier for him and implement a collective approach to the influx of refugees. 
As part of an emergency response, a European frontier force and coast guard must be established and charged with helping Greece manage its border, as well as saving lives and processing new arrivals. 
At the same time, EU funds must be used to improve conditions in the refugee camps in Turkey, Jordan, and elsewhere, to provide their residents with at least some hope of being able to meet their basic needs. 
And, yes, European leaders must agree to take a fair share of those in need, by allowing refugees to apply for asylum in the EU directly from the countries in which they are currently residing. 
George Soros was right when he recently argued that the biggest long-term threat to the stability of the EU is Russia. 
But he was wrong to suggest that the EU is set to buckle and collapse under the weight of the multiple crises it faces. 
It is time for Europe to assert itself, harness its economic might, and use it to put Putin in his place. 

Putin’s Winning Streak 
CHENGDU – Since Russia invaded Crimea last summer, the West has relied on a strategy of economic sanctions and international isolation to compel the Kremlin to withdraw its support for the rebels in eastern Ukraine. 
But Russian President Vladimir Putin’s recent series of diplomatic successes – in particular, with Iran, North Korea, and Pakistan – has all but negated the effectiveness of this strategy. 
To be sure, Putin was shunned at last month’s G-20 summit in Brisbane, with the Australian hosts and Western leaders berating him in bilateral meetings for violating Ukraine’s sovereignty and creating a rift with its Western economic partners. 
Putin left early, proclaiming that Western sanctions were harming European economies more than Russia anyway. 
But Putin was not deterred, proceeding to launch major initiatives with countries of vital security concern to the West, boosting Russia’s diplomatic leverage and enhancing its value to its most important, albeit still coy, partner: China. 
As Putin declared in a recent interview, his government is committed to ensuring that Russia does not become internationally isolated behind a new Iron Curtain. 
With Iran, the Kremlin has launched a joint bank that will enable Russian companies to expand bilateral trade without using Western currencies or worrying about Western financial sanctions. 
The deal builds on this summer’s “oil-for-goods” agreement, whereby Russia will exchange its own goods for as many as 500,000 barrels of Iranian oil daily. 
Bilateral security cooperation also progressed, with the Russian Navy holding a three-day maritime exercise with Iran’s Caspian fleet. 
So far, efforts to weaken Russia’s relationship with Iran – not to mention its other major Middle Eastern ally, Syria – have repeatedly failed. 
In October, Russia’s United Nations ambassador, Vitaly Churkin, faulted the US-led initiative against the Islamic State for its failure to involve Iran and Syria, which he called “logical allies in the fight against terrorism in the region.” 
Moreover, Russia has signed an agreement that will ensure that its own firms remain the dominant foreign players in Iran’s civil nuclear-energy sector, even if a nuclear deal leads Western powers to ease sanctions on Iran. 
Under the terms of the deal, Russia will help Iran construct at least two more nuclear reactors – and as many as eight. 
The new plants, like Iran’s first Russian-built reactor at Bushehr, would be subject to International Atomic Energy Agency monitoring and use only Russian-made nuclear fuel, which would be returned to Russia for storage to prevent Iran from developing dangerous nuclear technologies. 
Still, Russia has agreed to train more Iranian nuclear experts, and may allow Iran to manufacture some of the components of the uranium fuel rods itself. 
In North Korea, Russian diplomacy has made even more progress. 
Last summer, Putin forgave 90% of North Korea’s $11 billion Soviet-era debt, and announced that the remaining $1 billion could be used as part of a “debt-for-aid” program, funding health, energy, and educational projects in the country. 
This opened the way for new development projects and increased bilateral and regional investment. 
For example, Russian firms are planning to help rebuild North Korea’s railway network in exchange for access to the country’s undeveloped mineral resources. 
Russia has hosted more senior North Korean leaders than any other country this year, including the reclusive leader Kim Jong-un’s special envoy, Choe Ryong-hae, a senior official in the ruling Workers’ Party, who spent an entire week meeting with Russian political and economic leaders. 
In fact, Russian officials have indicated that Putin is prepared to become the first head of state to meet with Kim, who is eager to deepen ties with Russia to compensate for his faltering relationship with China. 
November was also a good month for Russian diplomacy in Pakistan, with Sergei Shoigu becoming the first Russian defense minister to visit the country since 1969. 
During his stay in Islamabad, Shoigu and Pakistani Prime Minister Nawaz Sharif signed an unprecedented agreement that could establish a framework for joint military exercises, reciprocal port visits, and a wide-ranging dialogue on regional security issues. 
Moreover, the Kremlin has relaxed its opposition to Pakistan’s full membership in the Shanghai Cooperation Organization, along with China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, and Uzbekistan. 
And the Russian government has agreed to sell Pakistan as many as 20 Mil Mi-35 “Hind E” heavy attack helicopters to aid in the fight against terrorism and drug trafficking. 
Until now, Russia has refrained from selling advanced military equipment to Pakistan, in order to avoid damaging its relationship with India. 
But, as Russia’s strategic relationship with India has strengthened, including through a joint mechanism to purchase and deliver Russian weapons to the Afghan government, Putin has gained the confidence to bolster cooperation with Pakistan. 
The announcement of several more bilateral deals during Putin’s recent visit to India suggests that his confidence was merited. 
All of this could augment Russia’s leverage with China, which has an interest in increasing its influence over Iran, North Korea, and Pakistan, but has subtly sought to exploit Russia’s isolation. 
Russia’s vast natural-gas wealth also appeals to China, which drove a hard bargain in the two countries’ recently concluded 30-year, $400 billion gas-supply deal. 
By giving key regional actors alternatives to bowing to US pressure on issues like nuclear non-proliferation and the fight against terrorism, Russia’s recent maneuvers have complicated American diplomatic efforts considerably. 
Though Putin has not broken from the international consensus on these issues, he could block progress in order to compel the US to change its policies toward Ukraine, Syria, and other countries. 
As a result, a dangerous global security situation could become even more so. 


Why Russia’s Economy Will Not Collapse 
GENEVA – The rapid depreciation of the ruble, despite a dramatic – and seemingly desperate – late-night interest-rate hike by the Central Bank of Russia (CBR) last month, has raised the specter of Russia’s economic meltdown in 1998. 
Indeed, the West has sought to animate that specter in its ongoing confrontation with Russian President Vladimir Putin. 
But, though Russia’s economy is undoubtedly in trouble, a full-blown collapse is unlikely. 
Oil and gas account for more than 60% of Russia’s exports; other primary commodities make up much of the rest. 
Given this, the recent sharp decline in world oil prices obviously represents a major shock – large enough, when combined with the effect of increasingly strict Western sanctions – to provoke a sizeable recession. 
To make matters worse, commodity prices are expected to remain low for some time. In that case, the income loss would become much more than a temporary setback. 
But Russia is no economic basket-case-in-waiting – at least not yet. 
The situation today is very different from that in 1998, when Russia was running twin fiscal and current-account deficits. 
Russia needed to borrow, and it was borrowing heavily in foreign currency. 
This meant that as the ruble depreciated, Russia’s debts rose. 
Eventually, default became inevitable. 
By contrast, in recent years, Russia has enjoyed a sizeable budget surplus, and public debt is below 20% of GDP. 
It is true that income from oil and gas, which represents the bulk of government revenues, has been halved when measured in dollars. 
But the Russian currency has fallen by about the same percentage, meaning that the government’s income in rubles remains approximately unchanged. 
Similarly, Russia’s current-account balance has been mostly in surplus in recent years. 
Gross public and private external debt is below 40% of GDP, and much of it is denominated in rubles. 
The sharp fall in export income is rapidly changing the situation, but Russia is starting from a comfortable position. 
To panic would be premature. 
The ruble’s free fall has been driven mainly by capital outflows. 
Russia’s famous oligarchs have already stashed most of their wealth abroad, but they retain significant savings at home. 
As the economic and political situation deteriorates, they are most likely pulling more money out. 
Small savers have every reason to switch into foreign currency as well. 
This has put the CBR in a challenging position. 
The ruble’s depreciation is bound to fuel inflation, already around 11% and far above the CBR’s 5% target. 
In that context, raising the interest rate sharply makes sense, and officials may be hoping that the hike will stem capital outflows – despite the risk that the decision, if interpreted as being aimed at defending the currency, could have the opposite effect. 
The trouble is that the higher interest rates are bound to deepen Russia’s economic downturn, making the CBR an easy scapegoat. 
Never mind that the central bank is not responsible for Russia’s troubles – the run on the ruble, the recession, and the flare-up of inflation – and that using interest rates to prevent capital outflows always fails. 
Embattled politicians can be counted on to point the finger. 
The threat to Putin is clear. 
He risks the fate of his predecessor, Boris Yeltsin, who presided during a period of unusually low oil prices. 
Until now, Putin has been lucky, coming to power just as oil prices started to rise. 
Most Russian citizens credit him with two decades of rising living standards, following decades of decline. 
Putin’s decision not to implement the unpopular reforms that would have created a strong non-oil export sector may have been bad for the economy’s long-term health, but it has allowed him to maintain widespread public support. 
His economic good fortune, combined with his readiness to stand up to the West, has created a misguided impression in Russia that the country is, once again, a world power. 
Many in the United States and Europe believe that ratcheting up economic pressure on Russia will help drive Putin out. 
This is an enormously dangerous gamble. 
As Russian living standards decline, Putin’s only viable strategy to remain in power will be an aggressive international posture. 
Foreign military adventures, after all, are most appealing when the domestic front is on fire. 
None of this means that the West should bow and forsake its principles. 
But it does mean that the time has come for a diplomatic approach that does not depend on the prospect of Russia’s economic collapse. 

Russia’s Ephemeral Middle East Alliances 
NEW YORK – The United States has lost two asymmetric wars in modern times: one against the Vietcong in Vietnam, and another against terrorist groups in the Middle East. 
When its defeat became apparent in Vietnam, the US pivoted away from the region, leaving the victor to clean up the mess – and, ultimately, to join the ASEAN structure of security and cooperation. 
The Middle East has been more difficult to leave behind, despite America’s best efforts, and remains wracked by conflict and shaken by shifting alliances. 
For Russian President Vladimir Putin, the region’s turmoil represents an important opportunity. 
By gaining a foothold in the Middle East, he hopes to revive Russia’s long-faded image as a world power, restore its status as America’s main geopolitical foil, and gain bargaining chips with which to promote his more immediate concerns in Russia’s near-abroad. 
Success in these areas, he calculates, will cement his power and popular support at home. 
On these fronts, Putin has made some progress, embedding Russia firmly within Middle Eastern politics. 
But Russia’s position in the region remains fragile. 
It is not currently capable of helping to establish – much less oversee – a new regional order, for a simple reason: the Kremlin lacks true allies there. 
To be sure, Russia does wield substantial influence in Syria (a Cold War legacy), and shared interests have enabled Putin to bond with some regional powers. 
But no Middle Eastern country today is a captive client of the Kremlin in the way that, say, Egypt was during the Cold War. 
Russia’s recent cooperation with Iran, for example, is no sign of a budding friendship, as some experts believe. 
Though both governments support Syrian President Bashar al-Assad, and Iran allowed Russia to use its airbases in the fight against ISIS, Iran is keen to retain its role as Assad’s main patron. 
Moreover, Iran would not want to jeopardize its efforts to rebuild its economic relations with the West – an objective that underpinned the international agreement on its nuclear program concluded in 2015. As for Russia, cooperating with Iran in a broader Middle East policy would destroy its standing among the region’s Sunni powers. 
Meanwhile, countries like Turkey and Egypt are largely engaging with Russia in a kind of protest, amid tensions with their closer allies in the West. 
Turkey, for example, was, until recently, at loggerheads with Russia over Turkey’s downing of a Russian warplane near its border with Syria last November. 
But Turkey has now reconciled with Russia, and wound down its role in the fight against Assad, Russia’s main partner in the region. 
This does not reflect some realization on Turkey’s part that Russia is a critical actor worth keeping on side. 
Rather, Turkish President Recep Tayyip Erdoğan wants Russia’s help in Turkey’s fight against Syria’s Kurds, whose nationalist ambitions Erdoğan is eager to contain, lest they incite separatism among Kurds in Turkey. 
Erdoğan is frustrated with Turkey’s Western allies, which have done his country no favors on the Kurdish issue. 
On the contrary, the Syrian Kurds are America’s most efficient partner in the war against the Islamic State (ISIS), which both Turkey and Russia are also fighting. 
Arming the Kurdish militias, as US President Barack Obama is now considering, would push Erdoğan further into Putin’s arms. 
Given Putin’s interest in dividing NATO, he would warmly welcome such an outcome. 
There are also economic incentives for the Russia-Turkey pairing, including about $30 billion in annual trade. 
Russia, weighed down by low commodity prices and persistent Western sanctions, is also eager to boost energy exports to Turkey. 
But the potential of the Turkey-Russia relationship is limited. 
For starters, whatever tensions exist between Erdoğan and the West, the Turkish president knows better than to risk the security guarantees afforded by NATO. 
Given this, any collusion with Putin in Syria is likely to be shallow and short-lived. 
Russia, for its part, has no interest in bolstering Turkey’s position as a major regional power. 
After all, it has long competed with Turkey for influence in the Black Sea and the Middle East. 
Russia’s reaction to Turkey’s rapprochement with its erstwhile ally Israel – with which it had been at loggerheads since 2010, when Israeli commandos stormed a Turkish ship that was part of a flotilla seeking to deliver aid to Gaza – reflects this rivalry. 
At first, Russia’s reaction was lukewarm, largely because, given Israel’s role as a rising energy power in the Middle East, the reconciliation jeopardized Russia’s plans of boosting energy exports to Turkey. 
But Putin subsequently endorsed the move, not because he likes the idea of Turkey, which also has close ties with Hamas, gaining a greater say in the affairs of Gaza, but because he wanted to present Russia as a key regional actor. 
Indeed, Putin next announced that he would be willing to host peace talks between Israel and Palestine. 
As he surely knows, Russia lacks the leverage, economic and otherwise, that would be needed to produce a deal. 
But he seems to have decided that the suggestion would reinforce the view of Russia as a regional player rivaling in importance Turkey or even the US. 
The truth, however, is that the US remains indispensable to any solution to the Israel-Palestine conflict. 
More broadly, the urge for Western-style freedom and democracy remains the dream of the Middle East’s younger generations; it has merely been obscured by the autocratic response to the Arab Spring uprisings, and the subsequent proliferation of radical Islamists. 
The US is now focused on a rising Asia. 
Instead of employing the weapons of war, it is using the tools of globalization – in particular, trade and investment linkages – to help shape the region’s development. 
When the Middle East is ready, the US will surely do the same there. 
And when that happens, whatever isolated military footholds and ephemeral alliances Russia has maintained will quickly be lost. 
Like the Soviet Union in Central and Eastern Europe, today’s Russia has no place in a region undergoing socioeconomic reform and democratic transitions. 

A War of Values With Russia 
COPENHAGEN – Russian authorities recently threatened to aim nuclear missiles at Danish warships if Denmark joins NATO’s missile-defense system. 
This was obviously an outrageous threat against a country that has no intention of attacking Russia. 
But it also reflects a more fundamental factor in the Kremlin’s foreign policy: desperation to maintain Russia’s strategic influence at a time of unprecedented challenges to its authority. 
Of course, Russia’s leaders know very well that NATO’s missile defense is not directed at their country. 
When I served as NATO Secretary General from 2009 to 2014, we repeatedly emphasized that the purpose was to defend Alliance members from threats originating outside the Euro-Atlantic area. 
Anyone with even a rudimentary knowledge of physics and engineering – two subjects at which Russians excel – can see that the system is designed to do precisely that. 
Russia’s nuclear threats, against Denmark and others, are the hallmark of a weak country in economic, demographic and political decline. 
NATO has not aggressively victimized Russia, as Kremlin propaganda claims. 
The current conflict between Russia and the West – centered on the crisis in Ukraine – is, at its core, a clash of values. 
Recall how the Ukrainian conflict began: Tens of thousands of Ukrainian citizens from all parts of society demanded, in overwhelmingly peaceful demonstrations, an association agreement with the European Union. 
No one was calling for a pogrom against Ukraine’s Russian-speakers, despite the Kremlin’s claims to the contrary. 
And NATO membership was not part of the deal. 
Yet Russia reacted swiftly and harshly. 
Long before violence engulfed the protests, Russian officials began accusing the demonstrators of being neo-Nazis, radicals, and provocateurs. 
As soon as Ukraine’s then-President Viktor Yanukovych fled Kyiv, Russian President Vladimir Putin began engineering the annexation of Crimea. 
This was not only a gross violation of international law; it also directly contravened Russia’s oft-stated insistence that no country has the right to ensure its security at the expense of another. 
The Ukrainian demonstrators marched against their government, not Russia’s. 
Indeed, the notion that Ukraine could pose a military threat to Russia is nothing short of absurd. 
Even if Ukraine were a NATO member, a war of aggression against Russia would be an absurd scenario, as it would not serve any of the allies’ interests. 
For Russia, the threat posed by the Ukrainian protesters was existential. 
In demanding change, freedom, and democracy – right on Russia’s doorstep, no less – the protesters challenged Putin’s model of “sovereign democracy,” in which the president eliminates all opposition, restricts media freedom, and then tells citizens that they can choose their leaders. 
The Kremlin feared that if the Ukrainians got what they wanted, Russians might be inspired to follow their example. 
That is why Russia’s leaders have been so keen to label Ukraine’s leaders as Russophobes and fascists. 
It is why they have portrayed the Baltic States for years as dysfunctional oppressors of their Russian citizens. 
And it is why they are now portraying the EU as decadent, immoral, and corrupt. 
The Kremlin is trying desperately to convince Russians that liberal democracy is bad, and that life under Putin is good. 
That requires not only spreading damaging lies at home, but also sowing violence and instability among its neighbors. 
In the face of a massive Russian propaganda assault, the West must continue to stand up for Ukraine, as well as for Georgia and NATO members like Estonia, Latvia, and Lithuania. 
Despite whatever pain we incur, we must maintain – and, if necessary, deepen – sanctions against Russia and reinforce NATO’s front line. 
And we must face up to the reality that, at long last, we may have to pay for our defense. 
The West’s greatest strength is democracy; it is what has enabled us to secure peace for two generations and bring an end to communist rule in Europe almost without a shot being fired. 
Though liberal democracy is far from perfect, it remains the best defense against extremism and intolerance – and the most powerful facilitator of human progress. 
If the West allows Russia to attack its neighbors simply because they might inspire Russians to seek reform, it will send the message that democratic values are not worth defending. 
It will undermine the West’s role as a model of prosperity and freedom that societies worldwide hope to emulate. 
And it will eliminate not only the West’s remaining moral authority, but also the sense of purpose that animates NATO. 
Such an approach would expose the West to attacks by Putin and similar aggressors. 
And it would be a slap in the face to all of the courageous men and women worldwide who risk their lives every day in the pursuit of freedom and democracy. 
No one should be fooled by the Kremlin’s spin doctors. 
The conflict in Ukraine is not about Ukraine. 
Nor is it about Russia, or even about NATO. 
It is about democracy. 
The West must respond accordingly. 

Putin in Denial 
WASHINGTON, DC – As 2014 came to a close, an enormous financial crisis erupted in Russia. 
World oil prices had fallen by almost half since mid-June, and the ruble plummeted in December, finishing the year down by a similar margin. 
Russia’s international reserves have fallen by $135 billion, and inflation has reached double digits. 
Things are only going to get worse. 
The current oil price will force Russia to cut its imports by half – a move that, together with the continuing rise in inflation, will diminish Russians’ living standards considerably. 
Add to that ever-worsening corruption and a severe liquidity freeze, and a financial meltdown, accompanied by an 8-10% decline in output, appears likely. 
Russia’s ability to negotiate its current predicament hinges on its powerful president, Vladimir Putin. 
But Putin remains unprepared to act; in fact, so far, he has pretended that there is no crisis at all. 
In both of his major public appearances in December, Putin referred simply to the “current situation.” 
In his New Year greeting, he boasted about the annexation of Crimea and the successful Winter Olympics in Sochi, carefully avoiding any reference to the economy. 
But, with the economy in free fall, Putin cannot pretend forever. 
And when he finally does acknowledge reality, he will have little room for maneuver. 
Of course, Putin could withdraw his troops from eastern Ukraine, thereby spurring the United States and Europe to lift economic sanctions against Russia. 
But this would amount to admitting defeat – something that Putin is not prone to do. 
Likewise, short of initiating a major war, Putin has few options for driving up oil prices. 
Moreover, even before the oil-price collapse, crony capitalism had brought growth to a halt – and any serious effort to change the system would destabilize his power base. 
In fact, Putin’s leadership approach seems fundamentally incompatible with any solution to Russia’s current economic woes. 
Though accurate and timely statistics on Russia’s economy – needed to guide effective measures to counter the crisis – are readily available to the public online, Putin claims not to use the Internet. 
Instead, the journalist Ben Judah reports, Putin receives daily updates on Kremlin politics, domestic affairs, and foreign relations from his three key intelligence agencies. 
His actions suggest that he considers economic data to be far less important than security information – perhaps the natural attitude of a kleptocrat. 
To be clear, there is no dearth of economic expertise among Russian policymakers. 
On the contrary, Russia’s key economic institutions boast competent managers. 
The problem is that policymaking is concentrated in the Kremlin, where economic expertise is lacking. 
Indeed, the last of the economic heavyweights – all of them holdovers from the 1990s – in Putin’s personal circle was Alexei Kudrin, who resigned as Finance Minister in 2011. 
Unlike in the US, none of Russia’s top economic managers sits on the National Security Council. 
Putin has usurped authority not just from his more knowledgeable colleagues, but also from the prime minister, who has traditionally served as Russia’s chief economic policymaker. 
Indeed, since Putin returned to the presidency in 2012, Prime Minister Dmitri Medvedev has been all but irrelevant. 
In short, Putin – who is no economic expert – makes all major economic policy decisions in Russia, delivering orders to top managers of state-owned enterprises and individual ministers in ad hoc, one-on-one meetings. 
As a result, Russian economic policymaking is fragmented and dysfunctional. 
Nowhere is this lack of coordination more obvious than in the sensitive currency market. 
In Russia, unlike in most other countries, the central bank does not retain the exclusive right to intervene. 
When the ruble tumbled in December, the finance ministry – which holds almost half of Russia’s foreign reserves, $169 billion, in two sovereign-wealth funds – deemed the central bank’s intervention to be insufficient. 
So it announced that it would sell $7 billion from its reserves to boost the ruble – a move that caused the exchange rate to overshoot on the upside. 
When the exchange rate plummeted again, the Kremlin urged the five largest state-owned exporting companies to exchange a portion of their assets into rubles, leading to another overshoot, followed by yet another sharp decline. 
Clearly, such uncoordinated interventions are exacerbating currency-market turmoil, with the ruble’s value fluctuating by 5% – and as much as 10% – in a single day. 
Russia’s fiscal situation, determined by Putin’s arbitrary budget management, is hardly better. 
Putin’s priorities are clear: first come the military, the security apparatus, and the state administration; second are the major infrastructure projects from which he and his cronies make their fortunes; social expenditures (primarily pensions), needed to maintain popular support, come last. 
Suddenly, oil revenues are no longer sufficient to cover all three. 
As hard as the finance ministry may try to balance expenditures and revenues, it lacks the needed political weight. 
Last year, the central government delegated more education and health-care expenditures to regional bodies, without allocating more resources – and there was nothing anyone could do about it. 
If Putin wants to save Russia’s economy from disaster, he must shift his priorities. 
For starters, he must shelve some of the large, long-term infrastructure projects that he has promoted energetically in the last two years. 
Though the decision in December to abandon the South Stream gas pipeline is a step in the right direction, it is far from adequate. 
Likewise, Putin should follow Finance Minister Anton Siluanov’s sensible recommendation to cut public expenditure, including on social programs and the military, by 10% this year. 
But experience suggests that Putin is unlikely to do so. 
Russia faces serious – and intensifying – financial problems. 
But its biggest problem remains its leader, who continues to deny reality while pursuing policies and projects that will only make the situation worse. 


Russia’s Bad Equilibrium 
MOSCOW – After more than two years of economic contraction, Russia seems to have achieved some semblance of stability. 
Though economic growth is expected to reach only about 1% in 2017, the fear of economic destabilization that has permeated the country since its 2014 invasion of Crimea – which was met with crippling sanctions from the West – has all but evaporated. 
The combination of foreign-policy optimism, creature comforts, and domestic repression seems to be a potent elixir. 
Just as in Leonid Brezhnev’s time, foreign policy is overshadowing Russia’s domestic politics. 
Unlike then, however, Russia’s prospects are looking up. 
US President Donald Trump has made clear his desire to improve relations with the Kremlin, and will reportedly meet with Russian President Vladimir Putin in June. 
The French presidential election, set for April, may also go Russia’s way. 
Both the center-right candidate, François Fillon, and the far-right candidate Marine Le Pen, are ardent friends of Putin, though centrist Emmanuel Macron, who is not, also stands a chance. 
Russia’s own presidential election, set to take place in March 2018, appears much less momentous, because no change is expected, with Putin being reelected and Dmitri Medvedev staying on as prime minister. 
That appears to be acceptable to most Russians, at least to comfortable Muscovites. 
Moscow’s infrastructure has never looked better: the city boasts a well-functioning and recently expanded metro system and modern, clean, and efficient airports. 
Even its once-chaotic parking lots have been put in order – and the need to park has been reduced by the proliferation of cheap and rapid car-sharing services. 
Residents can visit impeccable and luxurious shopping malls, and purchase virtually any food they desire (apart from Western cheeses) from upmarket grocery stores. 
Of course, there are Russians who are not satisfied with the current state of affairs. 
That, among other things, is what the all-powerful Federal Security Service (FSB) is for. 
Freedom House has just further downgraded Russia’s score for political rights, to the lowest possible level. 
The specter of repression was apparent at last month’s Gaidar Forum, an annual event held by the Russian Presidential Academy of National Economy and Public Administration that honors the Yeltsin-era reformer Yegor Gaidar. 
Each year, thousands of Russia’s social scientists and hundreds of foreigners gather for three days to discuss economic policy. 
Government ministers on the panels appear relaxed, open, and competent, but are careful to avoid stark statements. 
Russia’s key problems – the absence of real property rights, rule of law, and democracy – were mentioned this year, notably by former Finance Minister Alexei Kudrin, but only gently and in passing. 
As usual, most plenary discussions were devoted to details of the country’s well-functioning macroeconomic policy. 
Russia’s large economic establishment remains too well off to want to rock the boat. 
While the ministers’ stance may not be surprising, past Gaidar Forums have carried the hope – if not the expectation – of some challenge to the ruling elite. 
Moscow’s academic economists listen intently to the Forum each year, hoping to hear something radical, or even a little defiant, though they themselves are unwilling to mount a challenge. 
At last year’s Forum, a ten-person panel of prominent Russian liberal political analysts – a regular feature of the Forum, in which I participate – suspected that some defiance was on its way. 
Some panel members even predicted a challenge to the regime – say, that a member of the opposition would be elected to the Duma, or that economic hardship would fuel social unrest. 
Those predictions came to nothing. 
Few of Russia’s Europeanized liberals voted in the Duma election; the conservatives in the country’s south and east were far more enthusiastic. 
Our panel, it seems, overestimated economic results and underestimated the role of war and repression in consolidating support for Putin and his regional sultanates. 
In fact, the overwhelming sense among Russians is that Putin’s invasion of Ukraine and annexation of Crimea were good for Russia. 
It was a masterful play on Putin’s part. 
By transforming Ukraine into a weak and conflict-ridden enemy, he both quelled rising pro-democracy sentiment in Russia, inspired partly by Ukraine’s move toward the European Union, and aroused nationalist euphoria. 
Another foreign-policy development may have benefited Putin. 
According to Tatyana Vorozheykina, a professor at the Moscow School of Social and Economic Sciences, Russia’s destruction of Aleppo has given Putin another “win” to tout. 
Add to that the growing clout of right-wing populists in the West – a symptom of a larger crisis of liberalism – and it has been easy to portray Putin as the kind of leader countries need. 
This year, nobody on the Gaidar panel anticipated anything but policy inertia, more repression, and mass conformism. 
Putin’s regime has consolidated itself around the flag, and few within Russia are willing to challenge the status quo. 
The only potential sources of change, therefore, are external events and relationships – areas where Putin does not have full control. 
As it stands, Russia seems to be on strong geopolitical footing. 
But things are not always as they seem. 
For example, though Trump’s support for closer ties would seem to be good for Russia, a major ingredient of Putin’s nationalist appeal is his ability to reinforce Cold War drama. 
For that, he needs the US – and the West, more generally – to be his enemy. 
Amity could spell long-term trouble for Putin. 
In the short term, however, as the independent political analyst Dmitri Oreshkin put it at the Gaidar Forum, it is likely that only a “black swan” event abroad could bring about change in Russia. 
The country’s new equilibrium may not be good, but it appears stable – for now. 

The Turning Point of 2008 
NEW YORK – Ten years ago this week, Russian tanks halted a few hours’ march short of Tbilisi, the capital of Georgia. 
That short war in the Caucasus brought down the curtain on nearly two decades of post-Cold War Western hegemony in Europe. 
Encouraged by US President George W. Bush’s administration, Georgia had initiated NATO membership talks, impelling Russian President Vladimir Putin to defend the red line he had drawn the previous year. 
Russia, Putin announced at the Munich Security Conference in February 2007, would regard any further eastward expansion of Western institutions as an act of aggression. 
In August 2008, European diplomats scrambled to stop the fighting. 
Within weeks, however, the onset of the global financial crisis captured the world’s attention. 
In Washington, London, Paris, Berlin, and Moscow, preventing bank failures, not military escalation, was the most pressing problem. 
At first glance, the Georgian war and the global financial crisis seem unrelated. 
But this is to neglect the deeper currents driving the confrontation. 
The absorption of post-communist Europe into the West was not simply a matter of velvet revolutions. 
What Bush’s defense secretary, Donald Rumsfeld, called “new Europe” – the post-communist NATO allies and European Union members – depended on hundreds of billions of dollars in investment. 
The loans came from the same European banks that helped fuel the US real-estate boom and inflate the even bigger housing bubbles in the United Kingdom, Ireland, and Spain. 
The most extreme real-estate inflation in the world between 2005 and 2007 was on NATO’s Eastern frontier in the Baltics. 
Along with a security guarantee against Russia, the post-communist countries craved prosperity. 
By the early 2000s, former Soviet republics like Georgia and Ukraine, which had not gained admission to either NATO or the EU, feared being left behind. 
Their desire to “catch up” prompted the so-called color revolutions of 2003 and 2004, reflecting their belief that economic growth, democratization, and a pro-Western orientation went hand in hand. 
But it was not only the Soviet Union’s former satellites that benefited from the debt-fueled global boom. 
The authority and power of Putin’s regime, too, was (largely) a function of globalization – specifically, the huge surge in oil prices. 
In 2008, it seemed that Russia’s state-controlled energy giant Gazprom, benefiting from unprecedented growth in emerging-markets demand, led by China, might soon become the world’s largest corporation. 
In 2008, two pressure fronts of global capitalism were rushing toward each other across Eurasia. 
While Western investment drove economic growth in Central and Eastern Europe, the commodity boom sustained Russia’s geopolitical revival. 
Of course, these trends need not have led to a clash. 
According to the mantra of globalization, at least, trade benefits all sides. 
The EU insists on the innocence of its model of integration. 
The goal is peace, stability, and the rule of law, not geopolitical advantage, its senior representatives guilelessly maintain. 
Whether or not they truly believe it, the EU’s new post-communist members saw it differently. 
For them, NATO and EU membership were part of an anti-Russian package, just as they had been for West European countries in the 1950s. 
Whenever Germany pushed détente with Russia too far, tensions flared. 
In response to the agreement in 2005 to construct the Nord Stream gas pipeline, Poland’s then-foreign minister, Radek Sikorski, denounced it as a new version of the 1939 Molotov-Ribbentrop Pact. 
Although Ukraine, too, applied for NATO membership in 2008, it did not provoke Russian intervention. 
But the war in Georgia split the Ukrainian political class three ways, between those who favored alignment with the West, those who favored Russia, and those who preferred a policy of balance. 
These tensions were further exacerbated by the impact of the financial crisis. 
No part of the world economy was hit harder by that crisis than the former Soviet sphere. 
When global lending imploded, the most fragile borrowers were cut off first. 
Followed closely by a collapse in commodity prices, it dealt a devastating shock to the “transition economies.” 
As one of the world’s largest oil and gas exporters, Russia was one of the worst affected. 
But after the humiliation of the financial crises of the late 1990s, Putin had seen to it that Russia was armed with substantial dollar reserves – the third largest after China and Japan. 
Reserves of $600 billion enabled Russia to ride out the storm of 2008 without external help. 
The same was not true of its former satellites. 
Their currencies plunged. 
Interest rates soared. 
Inflows of foreign capital stopped. 
Some found themselves turning to the International Monetary Fund (IMF) for help. 
In fact, the impact of the 2008 crisis split Central and Eastern Europe. 
The political leadership of the Baltic states toughed it out, accepting savage austerity to continue on their path toward euro membership. 
In Hungary, the governing parties were discredited, opening the door to Prime Minister Viktor Orbán’s illiberal regime. 
But no country in the region was strategically more important, more fragile politically, or worse hit economically than Ukraine. 
In a matter of weeks, Ukraine was dealt a devastating one-two punch by the war in Georgia and the financial crisis. 
This opened the door to the successful presidential candidacy of pro-Russian Viktor Yanukovych in 2010, and set in train desperate financial negotiations with the IMF, the EU, and Russia, culminating in the crisis of 2013. 
Given current talk of trade wars, it bears recalling that it was an argument over Ukraine’s association agreement with the EU that led to Yanukovych’s overthrow and an undeclared war with Russia. 
Back in 1989, the end of the Cold War seemed to suggest that market-driven economic growth was an irrepressible force that gave the edge to the US-led West. 
It was a small step from there to assuming that extending capitalism to the post-Soviet world would continue to shift the balance of power in the West’s direction. 
The events of August and September 2008 taught two painful and deeply disconcerting lessons. 
First, capitalism is prone to disasters. 
Second, global growth did not necessarily strengthen the unipolar order. 
Truly comprehensive global growth breeds multipolarity, which, in the absence of an overarching diplomatic and geopolitical settlement, is a recipe for conflict. 
Ten years later, the West is still struggling to come to terms with these disconcerting realizations. 
Today all eyes are on Asia, the rise of China, and its growing influence across Eurasia, Africa, and Latin America. 
But Putin’s Russia continues to be a spoiler. 
So we should not forget the Georgian crisis of August 2008, when it first became obvious how dangerous the new global economic dispensation might become. 

Russia’s Hybrid War Against the West 
BRUSSELS – The United States FBI and CIA have both concluded that Russia ran a hacking and disinformation campaign aimed at influencing the US presidential election in Donald Trump’s favor. 
We may never know how successful Russia’s cyber operation was, but we do know that the Kremlin got the result it wanted. 
Time magazine was wrong to name Trump its person of the year. 
Clearly, this was Russian President Vladimir Putin’s year. 
The attack on the US may have been a precursor to further electoral meddling in Europe, where officials are now racing to counter Russian cyber operations before a series of major elections in 2017, including in the Netherlands, Germany, and France. 
Past cyber attacks in Europe bear an uncanny resemblance to the alleged Russian-sponsored hack on the Democratic National Committee in the US. 
In early 2015, a group with ties to the Russian government hacked into the German Bundestag, stole confidential files, and gave them to WikiLeaks, which published them. 
Germany’s Federal Office for the Protection of the Constitution has accused Russia of orchestrating similar attacks on German government computer systems. 
Meanwhile, in November, the European Commission also suffered a large-scale cyber attack, and while the culprit remains unknown, very few people or organizations are capable of carrying out such an operation. 
Cyber attacks are just one element in a broader hybrid war that Russia is waging against the West. 
Russia has also assisted far-right nationalist organizations and populist movements across Europe, such as by extending loans to Marine Le Pen’s National Front in France, and furnishing UK Independence Party politicians with prime-time media slots on the Russian state-funded television network Russia Today. 
US President Barack Obama has finally vowed to respond to Putin’s assault on American democracy, but he should have done more – and acted much sooner. 
Europeans would be foolish to expect assistance from the incoming Trump administration. 
Trump’s chief strategist, Stephen Bannon – a former executive chairman of the American “alt-right” disinformation website Breitbart News – has openly offered to help Le Pen win the French presidential election next spring. 
Official Russian sources admit that they spent €1.2 billion ($1.25 billion) on foreign media campaigns just this year. 
In the EU, thousands of fake-news websites have appeared, many of them with unclear ownership: the number of disinformation websites in Hungary doubled in 2014; and in the Czech Republic and Slovakia, some 42 new websites are now polluting the EU’s information ecosystem. 
And, less surreptitiously, the Kremlin has spent hundreds of millions of dollars funding propaganda outfits – such as the Sputnik “news” agency – even as the Russian economy implodes. 
Russia’s disinformation campaigns are complex and multifaceted, but the mission they share is to undermine trust in Western democratic authorities. 
Social-media trolling is one method. 
And social media is also a key vector for a Russian strategy that relies on historical revisionism (the claim that Russia alone won World War II is a staple of this approach); on conspiracy theories, promoted among European and American nationalist movements, which blame the West for, say, inciting the war in Ukraine; and denial of reality, such as the presence of Russian troops in Crimea and Ukraine. 
To defend against this onslaught, the West should promote media freedom, reward accountability, and provide legal avenues to shut down systemic disinformation channels. 
It bodes well that the EU recently amended its 2017 budget to reinforce the European External Action Service’s StratCom team, which had been badly underfunded, despite its critical mission of uncovering and debunking disinformation. 
But the EU and NATO should also take a lesson from the US election, by bolstering collective European cyber defenses, and pressuring member states to expand their own cyber capabilities. 
On the political front, Putin must be told that foreign interference in national elections will have severe negative consequences for Russian economic interests. 
Beyond government action, the private sector and civil-society organizations should step up their efforts to verify whether online news stories are accurate, balanced, and credible. 
Organizations working together can make a difference. 
For example, Russia terminated its Swedish-language edition of Sputnik, because Swedish media organizations were not using its products. 
But while Facebook has indicated that it will improve the vetting process for its content, voluntary measures may not be enough: some German lawmakers have suggested that legislation may be needed to clean up social-media platforms. 
Still, Europe’s strongest defense is its free press, together with nongovernmental organizations working to expose lies. 
Europeans must not become complacent about the current state of their free press. 
After all, Breitbart News is already in Britain and is planning to expand across the EU. 
Within days of Trump’s election, the New York Times reported, “Marion Maréchal-Le Pen, Marine Le Pen’s niece and a rising force in the National Front, tweeted, ‘I answer yes to the invitation of Stephen Bannon… to work together.” 
Western democracies have entered a period of volatility, and Russia is no longer playing by the rules of the game that applied even during the darkest days of the Cold War. 
Putin is actively waging a hybrid war against the West, one that we are only just beginning to comprehend, let alone confront. 
It is time to defend our values. 
This year made us fully aware of the scale of the challenge Putin is posing to Western democracy. 
In 2017, we must confront – and defeat – his tactics head-on. 

Let Russia Be Russia 
TEL AVIV – In his famous “X” article, published in 1947, George F. Kennan argued that the Soviet Union’s hostility toward the United States was virtually inexorable, given that it was rooted not in a classic conflict of interest between great powers, but in a deep-seated nationalism and insecurity. 
The same could be said of the current conflict between Vladimir Putin’s Russia and the West: It is, at root, a collision between the West’s supposedly universal values and Russia’s quest for a distinct identity. 
A country’s struggle for identity can shape its strategic behavior. 
The missionary ethos of American civilization helps to explain its conduct as a global power. 
The resurgence of Islamism is essentially a quest for a fulfilling identity by an ancient civilization overwhelmed by the challenges of modernity. 
And Israel’s emphasis on its Jewish identity has become a formidable obstacle to peace with the Palestinians. 
Putin’s defiant foreign policy is a response – mediated by an authoritarian political tradition, the reactionary tenets of Orthodox Christianity, and pride in Russia’s vast geography and natural wealth – to the humiliating loss of an empire. 
Seeing in Russia’s Cold War defeat the need to extol the non-Western roots of Russian history and tradition, Putin has fallen back on the same conservative values that emerged in response to the Napoleonic invasion of 1812, frustrating Peter the Great’s modernization efforts. 
When the deputy head of the presidential administration, Vyacheslav Volodin, said during a recent Valdai Discussion Club meeting in Sochi that “Putin is Russia and Russia is Putin,” he was expressing a profound Russian reality. 
In no other country has the ruler’s persona – from Catherine the Great and Ivan the Terrible to Lenin and Stalin – made such a deep mark on national history. 
But Putinism cannot be reduced to sheer lust for power. 
Putin knows that Russia’s reemergence on the global stage must be underpinned by a counterpoint to American exceptionalism, a national identity based on a distinct conception of history and distinct ideals. 
As Putin declared last year, the Soviet Union’s collapse dealt a “devastating blow” to Russia’s “cultural and spiritual codes,” and subsequent “attempts to civilize Russia from abroad” amounted to “primitive borrowing.” 
Instead of expecting a new national ideology to emerge on its own, Russia must pursue and develop its unique identity – with Putin leading the way. 
Securing a place for Russia in a new world order is integral to establishing such an identity. 
To this end, Putin has maximized the foreign-policy value of Russia’s vast oil and gas reserves, enabling the Kremlin to build partnerships with rising Asian powers, especially China. 
If, as some Russian officials have proposed, Russia begins an identity-defining large-scale project to develop its immense territory east of the Ural Mountains, including Siberia and the Far East, it would have a unique opportunity to deepen these connections further. 
More broadly, Putin’s defiance of US hegemony could attract support from countries and peoples worldwide that resent American-imposed values and norms. 
Indeed, for many international actors, Western notions of tolerance and political correctness – for example, acceptance of “non-traditional lifestyles,” such as homosexuality – are, in Putin’s words, an affront to the world’s “God-given diversity.” 
But Putin is not merely preaching values. 
The annexation of Crimea and continuing destabilization of Ukraine advance his broader ambition of resurrecting Russia’s cultural and political dominance in Eurasia and much of the former Soviet space. 
In Putin’s view, the 1945 Yalta Agreement, which divided Europe into Soviet and Western spheres of influence, did not die; its borders simply moved eastward. 
Tellingly, following a discussion of numerous global challenges at the recent Valdai meeting, Foreign Minister Sergei Lavrov identified a demonstration by ethnic Russians in Chișinău (Kishinev), Moldova’s capital, as the “most important question” to be addressed. 
Putin’s Russia is anything but shy when it comes to ethnic unity. 
Of course, the West – particularly the US – bears its share of responsibility for the failure to find a diplomatic solution to the current showdown with Russia. 
Before a lasting peace can be achieved, the US will need to reflect on the mistakes that characterized its post-Cold War period of hegemony, when its unilateral military adventures and neo-imperial ambitions left it overstretched, highly indebted, and locked in perpetual war. 
Without such introspection, the US and its European allies will probably continue to depend on economic sanctions to deter Russian aggression. 
But, though this approach could weaken Putin’s legitimacy by limiting his ability to deliver economic prosperity, it could also result in an anti-Western nationalist backlash. 
Moreover, as Deputy Prime Minister Igor Shuvalov has shown, sanctions can be presented as a blessing, forcing the Kremlin to diversify Russia’s commodities-based economy. 
National identities cannot be negotiated away; but diplomacy can dilute their aggressive manifestations. 
It is time for Russian and Western leaders to devise a grand bargain for peace in eastern Ukraine, one that goes beyond the Minsk Protocol to address the questions of global security and arms control that have impeded cooperation on issues like Syria’s civil war and Iran’s nuclear program. 
Russia does not need to upend the existing global order; it simply needs to find its place. 
And the US must let it. 

Russia’s Imperial Instinct 
WASHINGTON, DC – Russia is once again at the center of policy debates in many Western capitals. 
And for the third time in a row, a new US president will start his administration with ambitions to improve bilateral relations. 
To understand why achieving this goal has been so difficult, it helps to take a longer historical view of the Russian state. 
It is now a quarter-century since the Soviet Union disintegrated; and 2017 will mark the centennial of the Russian Revolution, which toppled the teetering, centuries-old czarist empire. 
As it happens, there are telling similarities between the periods that followed each of these imperial denouements. 
Russia’s history has been characterized by continuous expansion over the Eurasian continent. 
The czars’ eastward push into Siberia mirrored America’s westward push during the nineteenth century, and Russia’s expansion into Central Asia coincided with the European powers’ colonization of Africa. 
But as Imperial Russia expanded westward and southward, it always encountered opposition, and had to use force to keep newly acquired territories within its domain. 
After the 1917 revolution, many of these areas – from Tashkent to Tbilisi, and Kyiv to Helsinki – sought independence from Muscovy’s yoke. 
At first, Vladimir Lenin seemed amenable to these demands; but he soon deployed the new Red Army to impose Soviet power across the former Russian Empire. 
It succeeded in Ukraine, the southern Caucasus, and Central Asia. But it failed in Finland and the Baltic states, and it suffered a crucial defeat outside Warsaw in 1920. 
This allowed a string of independent states to emerge from the former Russian Empire’s western flank. 
But then Stalin came to power. 
Using terror and forced industrialization to try to make Russia great again, he sought to reassert imperial control over its former territories. 
Stalin found an opportunity in secret talks with Adolf Hitler, where he demanded the return of what had been lost after 1917, including the Baltic states, Finland, and part of Poland. 
He eventually got it. 
After Hitler’s Reich collapsed, not least owing to the sacrifices of the Red Army, Stalin had carte blanche to extend Soviet power deep into the heart of Europe. 
Only Finland preserved its independence – miraculously, and by force of arms. 
The Baltic countries were brutally brought back into the Soviet fold, and Poland and others were reduced to satellite states. 
In 1976, a top US State Department adviser to Henry Kissinger controversially argued that Russia had failed to establish “organic” relationships with these countries. 
True enough, as the Soviet Union collapsed, the satellite states hastened its demise by reasserting their sovereignty; in short order, almost every non-Russian republic in the former USSR demanded, and secured, independence. 
With Ukraine and countries in the South Caucasus achieving statehood, Russia controlled even less territory than it did after the 1917 revolution. 
Vladimir Putin, like Lenin a century ago, is intent on changing that. 
Since coming to power following Russia’s tumultuous attempts at liberal and democratic reform in the 1990s, it has become increasingly clear that Putin aspires to make Russia great again, both economically and geopolitically. 
Despite some obvious differences between the founding of the Soviet Union and now, the historical parallel is too obvious to ignore. 
Under Putin, Russia has invaded and occupied parts of Georgia, annexed Crimea from Ukraine, and militarily propped up two sham “republics” in Eastern Ukraine. 
Russia has also tried – so far unsuccessfully – to establish a Novorossiya across Southern Ukraine. 
Step by step, whenever opportunities present themselves, the Kremlin is ready to use all means at its disposal to regain what it considers its own. 
Putin may not have a firm or comprehensive plan for imperial restoration, but he undoubtedly has an abiding inclination to make imperial advances whenever the risk is bearable, as in Georgia in 2008 and Ukraine in 2014. 
So, what lessons can we take from the past? 
For starters, Russian imperialism has thrived when Europe and the West have been divided. 
This was the case when Hitler and Stalin entered into their non-aggression pact in 1939, and when Napoleon and Tsar Alexander entered into theirs in 1807. 
And we certainly should not forget the Yalta Conference in 1945. 
Expanding both NATO and the European Union to include the Central European and Baltic countries has been essential to European security. 
In any other scenario, we would probably already be locked in a profoundly dangerous power struggle with a revanchist Russia reclaiming what it had lost. 
The collapse of the Soviet Union in 1991 and the Russian Revolution in 1917 reshaped regional and global politics. 
In the immediate aftermath of each event, Russia demonstrated its historic inability to build harmonious relations with the countries along its periphery; and in the intermediate periods, it acted on its imperial ambitions at these countries’ expense. 
But Russia will come to terms with itself only if the West firmly supports these countries’ independence over a prolonged period of time. 
Eventually, Russia will realize that it is in its own long-term interest to break its historical pattern, concentrate on its domestic development, and build peaceful and respectful relations with its neighbors. 
We are certainly not there yet, but that’s no reason to throw in the towel – or throw out the lessons of history. 
We need a stable, prosperous, and peaceful Russia. 
And that can be achieved only with determined support for the independence and sovereignty of all of its neighbors. 

Putin’s Syrian Roulette 
LONDON – Two recent tragedies – the downing of a Russian civilian airliner over the Sinai Peninsula and the terrorist massacre in Paris two weeks later – seemed to give Russia and the West something to agree upon: the Islamic State (ISIS) must go. 
But a closer look at Russia’s military operations in Syria – not to mention Turkey’s downing of a Russian warplane – suggests that it would be premature to conclude that Russian and Western objectives can be brought into alignment. 
Of course, Russia claims that its Syrian intervention is aimed at defeating the Islamic State and “other terrorists.” 
But, according to the US State Department, more than 90% of Russian airstrikes so far have been directed not at ISIS or the Al Qaeda-affiliated Jabhat al-Nusra, but at the armed groups that are fighting both ISIS and Russia’s ally, Syrian President Bashar al-Assad. 
In fact, ISIS has made advances in Aleppo since the airstrikes began. 
This is not to say that annihilating ISIS is not on Russian President Vladimir Putin’s agenda. 
It almost certainly is. 
But he also has other objectives: to protect Assad’s regime, to expand Russia’s military presence and political influence in the eastern Mediterranean and the Middle East, and perhaps even to push up the price of oil. 
So far, Russian airstrikes have been concentrated in Latakia, Hama, and Idlib, where they have enabled Assad’s regime to make several advances. 
Putin seems to be trying to help Assad secure his coastal strongholds, toward which armed rebels made significant advances in August and September. 
These areas are part of the so-called “useful Syria,” which also includes the Lebanese border, Damascus, parts of Aleppo, and major cities in western, southern, and central Syria. 
Assad must maintain control over these areas to fortify his position in any political negotiations and eventual settlement, including a potential partition. 
Moreover, Russia’s installation of sophisticated air-defense capabilities in Syria has nothing to do with ISIS, which has no air force. 
Instead, it sets the stage for a no-fly zone, which would protect Assad’s regime and serve as a strategic counterweight to America’s presence at Turkey’s Incirlik Air Base. 
In fact, Turkey’s downing of the Russian warplane – which, incidentally, was targeting Syrian rebel groups – is prompting Russia to step up these efforts. 
Russian Defense Minister Sergei Shoigu has now announced that a cutting-edge S-400 SAM system will be deployed to Russia’s air base in Latakia. 
But there are serious problems with Putin’s strategy. 
For starters, the tactical airstrikes on which Russia is relying have not proved particularly effective in the past. 
Russia’s air force lacks the breadth of precision weapons and targeting systems fielded by the West – a reality that produced horrific consequences during the Georgian war in 2008 and the first and second Chechen wars in 1994-1996 and 1999-2009. 
Tolerance for “collateral damage” is much higher in Russia than in the West – and the reality of it plays into the hands of terrorist recruiters. 
The Kremlin has also been attempting to stoke ethnic tensions – a tactic used since the Czarist era – with Foreign Minister Sergey Lavrov claiming that Russia intervened in Syria to “protect minorities.” 
Putin made the same claim when he sent troops to invade two ethnic enclaves in Georgia, Abkhazia and South Ossetia, and recognized them as independent republics. 
Likewise, he justified Russia’s annexation of Crimea and invasion of parts of eastern Ukraine by emphasizing their substantial “ethnic Russian” populations. 
In the Middle East, however, the outcome could be reminiscent of what followed the Soviet invasion of Afghanistan 36 years ago. 
Regional players like Turkey and Saudi Arabia adamantly oppose leaving Assad in power, as that would advance the interests of their rivals, Iran and Hezbollah. 
Fifty-five Saudi clerics have released a statement urging “jihad” against the Russian invaders. 
Syria’s Muslim Brotherhood, whose leaders are based in Turkey and northern Syria, have echoed that sentiment, declaring that jihad against the “Russian invasion” is the “religious duty” of “every able-bodied Muslim.” 
If domestic resistance succeeds in driving Russia out of Syria, as happened to the Soviet Union in Afghanistan and to Russia in the first Chechen war, Putin could face trouble at home. 
Military defeat, combined with worsening economic conditions, would likely turn much of the public – and more than a few of his cronies – against him. 
But other outcomes are also possible. 
A partial Russian victory, like that in Georgia or Ukraine, would mean carving out pieces of western Syria under Russo-Iranian protection, and ultimately the de facto partition of the country. 
An outcome like that of the second Chechen war – less likely, given the major differences between the two theaters – would entail the installation of a loyalist regime, whether led by Assad or someone else, and the persistence of instability and a rural insurgency. 
The least likely scenario is one in which Russia leads a negotiating process that produces long-term peace and stability. 
A Russian-led “mediation” in Tajikistan ended the civil war of 1992-1997, and led opposition movements to hand over their weapons or to integrate into the regular army under Russian guarantees. 
But a few years later, many of these movements were banned, and their leaders and members were in jail, in exile, or in graves. 
None of these scenarios correspond with the slogans of Syria’s 2011 revolution, or with Western interests in stabilizing the country, stemming refugee outflows, and, eventually, promoting democratization. 
Unfortunately, this is not surprising: as has been true so many times in the past, the West currently has no credible strategy for containing Putin, even when he has no clear exit strategy or endgame in mind. 
All that is certain now is that, whatever happens in Syria, it will not happen without Russia. 


The Cold War and the Cold Shoulder 
TBILISI – The Ukraine crisis has shattered key Western assumptions about Russia, and many analysts and policymakers have fallen back on the belief that Russian President Vladimir Putin must be acting irrationally. 
But it is Western assumptions that need to be questioned. 
In particular, what has made Russia so keen to undermine the current international order, first in Georgia in 2008 and in Ukraine now? 
On the surface, these campaigns seem like post-imperial territorial conflicts. 
Russia, according to this view, recognizes that it cannot get its old empire back, so it is chipping away at neighboring territories instead, justifying its actions by a nebulous concept of ethnic and historical justice. 
And, like Serbia’s former President Slobodan Milošević, Putin dresses up foreign aggression as national salvation in order to bolster his domestic popularity and marginalize his opponents. 
Putin’s approach closely resembles the vision set out by Russian Nobel laureate Alexander Solzhenitsyn in his 1990 essay “Rebuilding Russia.” 
Referring to the former Soviet satellite states, he suggested letting those “ungrateful peoples” go, but keeping Russia’s rightful territories, such as eastern and southern Ukraine, northern Kazakhstan, and eastern Estonia, with their ethnic Russian populations, and Georgia’s Abkhazia and South Ossetia, which are cultural extensions of Russia’s North Caucasus. 
But it would be misleading to portray Putin as merely another out-of-control national romantic. 
He singled out Georgia and Ukraine not to redeem Russians’ emotional commitment to South Ossetia or Crimea, but to punish those countries for their dangerous liaisons with the West – in particular Georgia’s ambition to join NATO and Ukraine’s desire to sign an association agreement with the European Union. 
Indeed, Russia’s reaction is consistent with its recurrent discourse about being “squeezed out” of its own neighborhood and “encircled” by hostile Western powers. 
Western politicians’ vain attempts to convince Putin that the eastward expansion of NATO and the EU would benefit Russia by creating a zone of peace and prosperity along its borders were naive and insulting. 
It is not for Americans or Europeans, however reasonable they may sound, to tell Russia what is or is not in its interests. 
From the current Russian regime’s perspective, declarations that EU and NATO expansion is about spreading values, accountable institutions, and good governance, not military or economic competition, is beyond hypocritical. 
The spread of Western values and institutions is precisely what Putin fears most. 
Supporting democracy on Russia’s borders can have a dangerous “demonstration” effect, by encouraging ordinary Russians to demand the same for themselves. 
Indeed, Putin believes that the past decade’s democratic uprisings in Georgia and Ukraine were Western conspiracies against Russia. 
That may sound paranoid, but his anxiety is rational: European-style democracy on Russia’s borders would make it much harder to maintain authoritarian rule at home. 
But the insult represented by attempted EU and NATO expansion runs deeper. 
Russia’s Cold War defeat and the loss of its empire transformed the country from a global superpower into a second-rate regional actor within just a couple of years, with a decade of economic upheaval and decline to follow. 
This geopolitical collapse occurred in part because Russians (not to mention their “captive nations” in Central and Eastern Europe) were seduced into believing that Western-style democracy and free markets worked better. 
This implied that the West was morally superior, too – a difficult notion for the country of Pushkin and Dostoyevsky to swallow. 
Given this mindset, Putin and his supporters at home and abroad view democracy and free markets not as the path to peace and prosperity, but as part of a wicked conspiracy to destroy Russia. 
It does not help that when many Russians recall the country’s experiment with democracy in the 1990s, they remember nothing but misery and humiliation. 
Western leaders are deceiving themselves if they think that cajoling and reasoning with Putin, or offering token signs of respect, can break that mindset. 
But turning a blind eye to Russian aggression, as the West did when Russia attacked Georgia in 2008 – portraying the conflict as a clash between two hotheaded leaders – is not an option, either. 
In short, while it is perfectly rational for the West to want Russia as a partner, Russia considers the US and the EU enemies. 
The West can offer no conceivable partnership terms that Putin would accept. 
Either the West jettisons its fundamental values, or Russia must change. 
History suggests that Russia changes only when it experiences an unambiguous geopolitical defeat. 
Its loss in the Crimean War of 1853-1856 led to the abolition of serfdom and other liberal reforms. 
Its defeat by Japan in 1905 brought about Russia’s first parliament and the reforms of Pyotr Stolypin. 
The Afghanistan debacle of the 1980s created the environment that led to Mikhail Gorbachev’s perestroika. 
Ultimately, the Russian people will decide for themselves what constitutes a defeat. 
If Putin is able to portray his attack on Ukraine as a success, Russia will continue to bully and posture on the international stage. 
But if Russians come to believe that Ukraine was a misadventure, a very different country could emerge. 

Russia’s Neo-Feudal Capitalism 
WASHINGTON, DC – Vladimir Putin’s Russia is looking more and more like the sclerotic and stagnant Soviet Union of the Leonid Brezhnev era. 
But in one area, Putin’s regime remains an innovator: corruption. 
Indeed, in this, the 18th year of Putin’s rule, a new form of crony capitalism has been taking hold. 
Over the last decade, Putin has overseen a major renationalization of the Russian economy. 
The state sector expanded from 35% of GDP in 2005 to 70% in 2015. 
It would seem that, in Lenin’s words, the state had regained control of the “commanding heights” of the economy. 
And yet it would also seem that state-owned firms like the energy giants Gazprom and Rosneft operate like modern businesses. 
After all, they have corporate-governance rules and policies, supervisory and management boards, and annual shareholders’ meetings. 
They undergo independent international audits, publish annual reports, and maintain boards with independent directors. 
But appearances can deceive. 
Major state-owned companies’ rules and policies are mere formalities. 
They are not even really run by the state. 
Instead, they are controlled by a small group of cronies – former KGB officers, ministers, and senior officials in the president’s administration – who act as Putin’s personal representatives. 
The system carries the hallmarks of the ancient feudal model described by Harvard’s Richard Pipes in his classic Russia under the Old Regime: it affords a maximum of freedom to the ruler, who delegates tasks to the feudal lords. 
In effect, Russia’s state-owned companies have transformed public property into a new model of czarist ownership. 
International investors have caught on. 
They buy Russian stocks, but only for the sizeable dividend yields – not for shareholder influence. 
No surprise, then, that Gazprom’s market capitalization has collapsed from a peak of $369 billion in May 2008 to some $55 billion today. 
The operations of the so-called state corporations are particularly problematic. 
Legally, these firms, which include Vnesheconombank (VEB) and Russian Technologies (Rostec), are independent nongovernmental organizations. 
But they are established through the donation of state funds or property: when six such corporations were created in 2007, some $80 billion of assets and $36 billion of fresh state funds were transferred to them. 
This puts them under Putin’s direct control. 
State capitalism is usually associated with publicly directed strategies for investment and technological development. 
And, indeed, Russia’s state corporations are supposedly focused on advancing the public interest or creating public goods. 
In reality, managers do whatever they want, such as favoring friends through discretionary procurement or selling assets at submarket prices. 
Loyal chief executives of Russia’s big state companies enjoy long tenures, regardless of whether they meet ordinary standards of efficiency, profit, or innovation. 
No CEO has destroyed more value than Gazprom’s Alexei Miller, yet he has been at the company’s helm for 16 years and counting. 
In 2013, Miller’s official salary totaled $25 million. 
Today, there is no telling what he earns, as state executives’ remuneration is no longer published. 
In exchange for their outsize paychecks and ritzy fiefdoms, Putin’s lords must advance his interests – particularly when geopolitical issues emerge that threaten the regime’s survival. 
For example, Gazprom has obediently cut off gas flows to recalcitrant neighbors whom the Kremlin wants to punish, at major commercial cost, while supplying all of Russia, regardless of whether it gets paid. 
Rosneft has loaned billions to Venezuela’s state oil company – with the Venezuelan-owned US refiner Citgo as collateral – in a clear bid to exploit the country’s dire economic situation to gain access to its oil fields. 
Of course, Russia’s economy is not at its strongest, either. 
Yet Putin’s system seems equipped to survive even the disappearance of oil rents. 
Putin has allowed the “systemic liberals” in his administration to impose hard budget constraints even on the large state companies. 
Rosneft, for example, has been forced to abandon its most value-destroying investments, such as petrochemicals. 
As a result, financial stability is likely to be maintained. 
In any case, if the oil price remains at around $50 per barrel, Russian oil rents will remain substantial. 
Nonetheless, new challenges to this system are emerging – beginning with nepotism. 
Russia’s crony capitalism has bred a small class of incredibly wealthy individuals, whose children are given top state positions by the time they turn 30. 
Unsurprisingly, this breeds resentment among the young, able, and ambitious. 
For example, Petr Fradkov, the son of former Prime Minister Mikhail Fradkov, became first deputy chairman of VEB at the age of 29. 
Sergei Ivanov, the son of Putin’s former chief of staff of the same name, became first vice president of Gazprombank at 25 (and president of Alrosa, Russia’s state diamond company, at 36). 
Rosneft CEO Igor Sechin’s son Ivan became deputy director of a Rosneft department at 25. 
Russia’s new model of crony capitalism seems to be a deliberate effort to emulate the success of Russia’s ancient feudal system – a system that, after all, lasted for centuries. 
But times have changed, along with incomes, education levels, and exposure to outside ideas. 
In today’s world, such a system poses a genuine threat to Russia’s social and political stability. 
When opposition leader Alexei Navalny made a documentary about Prime Minister Dmitri Medvedev’s alleged corruption, more than 20 million people viewed it. 
Last month, tens of thousands of people in 90 Russian cities took to the streets to protest against corruption. 
The foundations of Putin’s neo-feudal regime, one suspects, may be cracking, even if the palace has yet to tremble. 

The Brexit Threat to British Security 
LONDON – Some moments in history are steeped in irony. 
To glimpse a current example, look no further than the United Kingdom. 
As the Brexit negotiations with the European Union approach a tipping point – this month’s European Council meeting – the British government is seeking its scorned European partners’ help in its dispute with Russia over the attempted murder of the former Russian double agent Sergei Skripal and his daughter in Salisbury, England. 
But even before the brazen attack on the Skripals – targeted with the Soviet-designed nerve agent Novichok – Prime Minister Theresa May had become more forthright in highlighting the values and interests shared by the UK and the EU, including with regard to security and defense. 
Indeed, at last month’s Munich Security Conference, she proposed a “deep and special partnership” on such matters. 
In May’s preferred scenario, the UK would continue to participate fully in EU agencies like EUROPOL, while upholding European Arrest Warrants (EAWs). 
Moreover, the UK would maintain its involvement in existing and future EU Common Security and Defense Policy (CSDP) missions, and coordinate with the EU on sanction regimes under the Common Foreign and Security Policy (CFSP). 
The attack on the Skripals has surely reinforced May’s interest in ensuring strong security cooperation after Brexit. 
The kind of external threat that the attack represented is best addressed in cooperation with allies. 
But can the UK’s allies take May seriously? 
Those “who threaten our security,” she said in Munich, “would like nothing more than to see us fractured...and to see us put debates about mechanisms and means ahead of doing what is most practical and effective in keeping our people safe.” 
Then, after reiterating that the UK had made a legitimate and democratic decision to leave the EU, she concluded that the ball is the EU’s court. 
Not to accept her generous offer of close security cooperation would, in her words, amount to putting “political doctrine and ideology” first. 
The irony of May’s stance has not been lost on the 27 EU states that the UK is leaving behind. 
After all, by casting doubt on the unity of Europe – and, indeed, the entire West – Brexit itself is causing serious damage to European security, all for the sake of political doctrine and ideology. 
To be sure, hardline Brexiteers like Trade Minister Liam Fox claim that the only external relationship the UK needs to buttress its security is NATO, led by the United States. 
Yet while NATO will obviously remain the paramount source of security for all of Europe, no one should be willing to entrust their security to US President Donald Trump, who seems to have more contempt for allies than for adversaries like Russia’s Vladimir Putin. 
As the intelligence chiefs of Britain, France, and Germany warned in a little-noticed joint statement released in Munich, any breakdown in security cooperation between the UK and the EU will have dire consequences. 
But May cannot expect to maintain the UK’s current level of security cooperation with the EU, especially in the context of the otherwise “hard” Brexit she envisages. 
When the UK departs from the EU, it will lose its right to shape the institutional frameworks that have long buttressed its security. 
This leaves May with two choices: either she can leave those frameworks behind – a highly risky move – or she can accept, at least for the most part, the EU’s terms. 
For example, the legal framework for security-related data must also cover commercial data. 
If the UK can tolerate giving jurisdiction in this area to a European high court, as May’s Munich speech seems to suggest, why not in other areas? 
The European Court of Justice has an impeccable reputation as an independent judicial body – one that has fairly defended the UK’s own interests many times. 
Such an approach would generate significant goodwill in the negotiations. 
This, together with the UK’s considerable security-related assets and expertise, would create space for the country to carve out unique concessions from the EU, such as full-time observer status in the EU’s influential Political and Security Committee. 
Whether or not such forms of cooperation – essential to ensuring security in both the UK and the EU – are realized, however, is far from certain. 
Though May now seems to hold a more realistic view of the security risks Brexit poses, others in her party remain obstinate. 
For example, Owen Paterson, a former Conservative cabinet minister, recently suggested doing away with the Good Friday Agreement, which has delivered two decades of peace to Northern Ireland – a highly reckless statement, given the political sensitivities that the Brexit vote triggered in Ireland. 
Other Brexiteers, like Environment Minister Michael Gove, are also long-time skeptics of the Good Friday accords. 
This suggests that, in the eyes of Brexit ideologues, security must take a back seat to their nationalist dreams. 
Perhaps the recent attack on a former Russian agent in a quiet English country town will be enough to remove the ideological blinders from more Brexiteers, showing them that a “Britain alone” is a “Britain vulnerable.” 
But it is also possible that by the time the UK’s citizens and leaders see Brexit from their allies’ perspective – as a selfish and destructive act of betrayal – it will be too late. 


What Putin Wants in Syria 
NEW YORK – On February 7-8, according to Western sources, a US-led airstrike on forces aligned with Syrian President Bashar al-Assad killed at least 300 Russians, all working for the private military firm Wagner. 
Russia’s Foreign Ministry, however, claims that only five Russian citizens, with no connection to Russia’s armed forces, were killed and a few dozen wounded. 
Foreign Minister Sergei Lavrov has even condemned Western reports about the deaths as “attempts to speculate on war.” 
At first glance, Russia’s response is somewhat surprising. 
At a time of rising tensions with the United States, the attack amounted to a golden opportunity for the Kremlin to condemn its rival. 
And, typically, Russia seizes such opportunities: just recently, Russia’s United Nations envoy, Vasily Nebenzya, attacked his US counterpart, Nikki Haley, for calling Vladimir Putin’s “legitimately elected” government a “regime.” 
Moreover, Russia is eager to hail its countrymen killed in battle as heroes. 
The military pilot Roman Filipov, killed in battle a few days before the US airstrike, has been celebrated for his valor. 
Andrei Malakhov, a television personality on the Kremlin-affiliated Rossiya 1 TV network, is now in Syria shooting a documentary about Filipov. 
Yet, in the case of the US-led strike, it was not Russian soldiers who died, but mercenaries, whose participation in the conflict reflects the Kremlin’s desire to maintain plausible deniability. 
The Russian foreign ministry’s statement in response to the Western reports says it all. 
“Russian citizens” were in Syria, it said, “of their own free will and for different reasons,” and the “ministry does not have the authority to assess the validity and legality of their decisions.” 
Russia has used such forces to do its bidding before, including during the illegal annexation of Crimea in 2014. 
The Kremlin could then argue that it was not a Russian invasion, but the will of the people living in Crimea. 
Similarly, in Syria, mercenaries enable the Kremlin to downplay Russia’s involvement, as well as its losses, which many observers predicted, from the outset of its intervention, would be staggeringly high. 
Putin surely doesn’t want to be accused of repeating the disastrous Afghan War of 1979-1989, which helped to bring about the Soviet Union’s collapse. 
That is why Putin has taken great care to present Russia’s military operation as a limited endeavor, undertaken solely for the purpose of ridding the world of the Islamic State (ISIS). 
In fact, last December, on a visit to the Russian airbase in Khmeimim, Putin announced the withdrawal of troops, precisely because that objective had officially been achieved. 
The Ministry of Defense declared that the situation had been “stabilized,” following the elimination of some 35,000 militants and 700 training camps. 
So, officially, Russia was to maintain in Syria only limited forces at Russia’s permanent military bases in Tartus and Khmeimim. 
These forces would carry out “missions related to Russian national interests.” 
Russian mercenaries, the authorities have been at pains to insist, are not Russian forces. 
But the entire intervention in Syria, including the mercenaries, has been primarily about defending Russian national interests. 
Most obvious, propping up the Assad regime enables Russia to maintain a foothold in the Middle East, while sending the message that popular revolts aimed at overthrowing Russian allies will not succeed. 
Russia’s showcasing and testing of new military technology, such as high-precision rockets and other armaments, has reinforced that message. 
Just last week, in response to the deployment of US stealth fighters and bombers, Russia moved fifth-generation Su-57 fighter jets to Syria, to “test them in real action.” 
Another reason for Russia’s continued involvement in Syria is that, by some estimates, more than 5,000 Muslim fighters of Russian origin from Central Asia and the Caucasus are fighting with ISIS there and elsewhere. 
The Kremlin is understandably concerned about the prospect of radicals with combat experience returning to Russian soil. 
The Western argument that Russia’s intervention in Syria only increases the likelihood of attacks on Russia’s territory holds little weight with Putin. 
If the US can defend its invasions of Afghanistan, Iraq, and Syria in terms of national security, Russia can do the same in Syria. 
Yunus-Bek Yevkurov, the president of the tiny Russian republic of Ingushetia in the North Caucasus, recently declared that the operation in Syria restored Russia’s reputation as a world power. 
(Putin wouldn’t admit it, but he covets praise from the leader of Ingushetia, which, like neighboring Chechnya and Dagestan, is often a breeding ground for Islamist radicalism.) 
He is right: key actors, including Egypt, Iran, Saudi Arabia, and Turkey, are being forced to recognize that Russia must have a say in determining the region’s fate. 
At a time when international sanctions are exacerbating Russia’s already-grim economic conditions, the Kremlin needs to ensure that its people – and the world – recognize this reality. 
Of course, it helps if Russians and others don’t realize how high the cost of such influence really is. 
So, rather than admit to casualties numbering in the hundreds, the Kremlin needs to underscore Russia’s importance in Syria, its position as a victor over ISIS, and its ability to defend its allies. 
More fundamentally, before the presidential election March 18, which Putin will win virtually unchallenged, it needs Russians to understand that their choice is either Putin or disarray. 

The Russian Threat Runs Out of Fuel 
BRUSSELS – For Europe, the defining event of 2014 was Russia’s annexation of Crimea and military intervention in eastern Ukraine’s Donbas region. 
The Kremlin’s actions directly challenged key principles that have guided Europe for more than six decades, particularly the renunciation of the use of force to alter national borders. 
But Russia is in no position to sustain its aggressive foreign policy. 
It has often been argued that Russia was reacting to the perceived encroachment on its “near abroad” by the European Union and NATO. 
But history suggests a simpler explanation: A decade of steadily rising oil prices had emboldened Russia, leaving it ready to seize any opportunity to deploy its military power. 
Indeed, the Soviet Union had a similar experience 40 years ago, when a protracted period of rising oil revenues fueled an increasingly assertive foreign policy, which culminated in the 1979 invasion of Afghanistan. 
Oil prices quadrupled following the first oil embargo in 1973, and the discovery of large reserves in the 1970s underpinned a massive increase in Soviet output. 
As a result, from 1965 to 1980, the value of Soviet oil production soared by a factor of almost 20. 
Burgeoning oil wealth bolstered the regime’s credibility – not least by enabling a significant increase in military spending – and rising economic and military strength gave the Soviet Union’s geriatric leadership a rejuvenated sense of invulnerability. 
The invasion of Afghanistan was not merely an improvised response to a local development (a putsch in Kabul); it was also a direct result of this trend. 
Putin’s reaction to the Euromaidan demonstrations in Ukraine followed a similar pattern. 
In both cases, a seemingly low-cost opportunity was viewed as yielding a large strategic gain – at least in the short run. 
Indeed, while the devastating consequences of the Soviet Union’s Afghan adventure are now well known, at the time the invasion was viewed as a major defeat for the West. 
The Soviet army’s retreat in 1988 is usually ascribed to the Afghan insurgency, led by Pakistan-trained mujahedeen with support from the United States. 
But the decline in oil prices during the 1980s, which cut the value of Soviet output to one-third of its peak level, undoubtedly played a role. 
Indeed, it led to a period of extreme economic weakness – a key factor in the Soviet Union’s dissolution just three years after its withdrawal from Afghanistan. 
During the 1990s, Russia was too preoccupied with its own post-Soviet political turmoil to object to EU or NATO enlargement to the east. 
Nor did it have the wherewithal, as its own production and oil prices continued to decline, hitting a trough of $10 per barrel in 1999-2000. 
Russia’s stance changed gradually during the early 2000s, as world oil prices – and Russian output – recovered, reinvigorating the country’s economic base at a time when its leadership was becoming increasingly autocratic. 
Only then did Russia start to claim that the US and its European allies had offered some implicit pledge not to expand NATO eastward. 
With oil prices steadily rising, the value of Russian oil production reached a new peak, roughly ten times the 1999 level, in 2008; Russia invaded Georgia the same year. 
Though prices collapsed during the Great Recession of 2009, they quickly recovered, with the value of Russian output reaching another peak in 2012-2013 – precisely when Russia’s position on the EU-Ukraine association agreement hardened. 
Given that the EU and Ukraine had already been negotiating the deal for more than two years, without much reaction from Russia, the EU was blindsided by the Kremlin’s sudden sharp objections. 
Clearly, Russia’s attitude toward its near abroad is not quite as erratic as it may seem. 
When oil prices rise, Russia expresses its latent resentments more aggressively, often employing its military. 
Moreover, at higher prices, the oil industry crowds out other export sectors that support open markets and a less aggressive foreign policy. 
The Soviet war in Afghanistan was followed by a long-term decline in oil prices. 
The recent price slide – to $50-60 per barrel, halving the value of Russia’s oil production – suggests that history is about to repeat itself. 
And oil prices are not Russia’s only problem. 
Western sanctions, which seemed to constitute only a pinprick a few months ago, appear to have inflicted serious damage, with the ruble having lost nearly half its value against the US dollar last year. 
Though financial markets will calm down when the ruble’s exchange rate settles into its new equilibrium, Russia’s economy will remain weak, forcing the country’s leaders to make tough choices. 
Against this background, a stalemate in the Donbas seems more likely than an outright offensive aimed at occupying the remainder of the region and establishing a land corridor to Crimea – the outcome that many in the West initially feared. 
President Vladimir Putin’s new Novorossya project simply cannot progress with oil prices at their current level. 
To be sure, Russia will continue to challenge Europe. 
But no amount of posturing can offset the disintegration of the economy’s material base caused by the new equilibrium in the oil market. 
In this sense, the US has come to Europe’s rescue in a different way: Its production of shale oil and gas is likely to play a greater role in keeping Russia at bay than NATO troops on Europe’s eastern borders. 

The Eruption of Moscow’s Housing Estates 
MOSCOW – Just a few months ago, it seemed that Russians had fully surrendered to the Kremlin’s “soft despotism.” 
The jailing or silencing of opponents across Russia had produced a pervasive feeling not of fear, but of despondency – the sense that words and actions simply do not matter, and that speaking and mobilizing are therefore useless. 
But recent protests suggest that Russians still have some fight left in them. 
To be sure, Russian Kremlin-backed “patriots” remain a potent force for denouncing President Vladimir Putin’s critics. 
At the May 9 Victory Day celebration, commemorating the defeat of Nazi Germany in 1945, more than a million people throughout the country marched, holding portraits of Stalin and the fallen in all Russian wars, including the current one in Ukraine. 
The so-called Immortal Regiment march, once a wonderful civic initiative, has been taken over by the Kremlin for profit and propaganda: it is a display of national unity, in which the state provides, for a fee, items like portrait-holders and ribbons. 
When one woman dissented, holding a sign about stopping all wars, the crowd carried out their Kremlin-inspired patriotic duty, shouting in anger, “You are embarrassing our war president.” 
As Alexis de Tocqueville once warned, a state doesn’t need to be fully totalitarian to experience tyranny. 
“The majority raises formidable barriers around the liberty of opinion,” and “undertakes to supply a multitude of ready-made opinions for the use of individuals, who are thus relieved from the necessity of forming opinions of their own.” 
This “tyranny of the majority” doesn’t need gulags to be effective. 
Yet, just a week after that Victory Day march, the minority stood up. 
Almost 30,000 people protested in Moscow against the Kremlin’s demolition of the so-called khrushchevki, the roughly 8,000 five-story apartment blocks constructed in Moscow under my grandfather Nikita Khrushchev’s leadership in the 1950s. 
In a country where Stalin is often deified, seeing Khrushchev held up as a hero for once was heartwarming. 
People carried signs adorned with his colorful language, “Ya vam pokazhu kuzkinu mat, restovratory khrenovy” (I’ll make you eat dirt, you freaking renovators). 
The khrushchevki’s purpose was to foster personal privacy. 
It was Stalinist urban practice to compel as many as 30 people to share rooms, a bathroom, and a kitchen in just one apartment. 
With the 1950s reform, families were freed from communal living: they not only got their own kitchens and bathrooms; they were able to live without fear that their private words, spoken in their own homes, would be overheard and reported to the KGB. 
Khrushchev hoped that the modest buildings would simply tide people over until the 1980s, when, he predicted, true proletarian luxury would arrive. 
But, contrary to his expectations, communism collapsed altogether, and the khrushchevki remained, having patiently withstood Russia’s winters, political and meteorological. 
In fact, the khrushchevki have been a symbol of a freer Russia for a half-century. 
Some are, no doubt, dilapidated and in need of replacement. 
But some require only renovation. 
A Dutch remodeling of a gray slab from that era just received a major architecture prize. 
But the Kremlin has its own plans. 
The khruschevki cover hundreds of square miles of valuable urban land – real estate that can be more profitable for the state and its functionaries if it is covered with hotels and business centers. 
Ordinary Russians’ efforts to protect their private property are similar to the protests of the early 2010s. 
At that time, political opposition was weak and diffuse, yet there were many public initiatives pursuing non-political goals, which inevitably led to confrontation with the Kremlin-imposed order. 
From motorists to volunteer ecologists, opposition groups seemed narrow. 
But they showed that private interests could attract greater interest than political pursuits. 
And their opposition to specific government policies led to the massive political protests against Putin’s return to the presidency in 2012. 
To counter the rising resistance, Putin turned to patriotic nationalism, which reached its apotheosis with the 2014 annexation of Crimea. 
The approach seemed to work. 
Protests faded, as their leaders were smeared, discredited, and silenced. 
One protest leader, Boris Nemtsov, was murdered in 2015. 
Garry Kasparov, the chess grandmaster turned dissident, went into exile. 
Alexey Navalny, the anti-corruption lawyer and the best-known remaining opposition leader, has faced everything from fake lawsuits to “patriots” spraying him with toxic chemicals. 
But, even before the khrushchevki protests, there were signs that dissent had not fully been quelled. 
In March, tens of thousands of mainly young people, led by Navalny, took to the streets to protest the alleged acquisition of untold (and undeserved) riches by Dmitry Medvedev, the former president and current prime minister. 
Putin, while corrupt, remains popular and powerful. 
But who is Medvedev to amass riches at the people’s expense? 
Of course, the goal of the March protests – like the recent khrushchevki demonstrations – was not to bring down the regime. 
Rather, the people wanted to be heard. 
And, with both surges of protest, the Kremlin authorities have been put on notice. 
Somewhat unexpectedly, the Russian authorities, who have forced ever-obedient Russians to move for centuries – from villages to cities, back to villages, to gulags, to khrushchevki – have rushed to provide further guarantees to the khrushchevki’s tenants. 
That means more time to agree on an acceptable replacement or ensure more housing alternatives from which to choose. 
Even Russia’s Ministry of Justice is now speaking out on behalf of the citizens. 
Yet the people are not satisfied. 
Another protest march is scheduled for the end of May. 
And, with political parties and human-rights organizations already on board, it promises to be even larger than the last one. 
Putin now has two choices: to suppress dissent as he did before 2012, and stake his popularity on another big conquest – say, the seizure of Kyiv – or to give the people what they want, revising the khrushchevki demolition plan to respect property rights. 
With Putin surely hoping that next year’s presidential election will be more orderly than the 2012 vote, the better choice may well be to listen, for once, to the people. 
If nothing else, it will be cheaper than fighting a war. 


A Trip Through Putin Country 
VLADIVOSTOK – Russia’s Baikal-Amur Mainline (BAM) railway “can be hardly named as a popular tourist attraction,” says one tourist website of the some 2,000-mile railway traversing Eastern Siberia and the Russian Far East. 
“Most people even never [sic] heard of it.” 
The BAM’s older rival, the Trans-Siberian Railway, is certainly more popular. 
Since opening in 1916 it has attracted many big names, including the travel writers Peter Fleming, Paul Theroux, and Colin Thubron. 
But it is the BAM – this unloved northern spur, initiated by Stalin in the 1930s, and completed under Leonid Brezhnev in 1984 – that offers the more useful window onto the Russian mood outside of cosmopolitan Moscow and St. Petersburg. 
Today, BAM land is overwhelmingly Putin land. 
I was inspired to take the BAM across Siberia by Dervla Murphy’s book, Through Siberia by Accident, even though Murphy, an intrepid Irish grandmother, broke a leg slipping in the train car’s primitive toilet. 
I was further motivated by the fact that my great-grandfather had built the far-eastern section of the Trans-Siberian Railway in the 1890s, yet I had never been to its terminus, Vladivostok, where my father was born. 
So three friends joined me on an improbable two-week railway adventure across Siberia. 
The BAM – like the Motherland Calls statue in Volgograd, the eternal flames at the Tomb of the Unknown Soldier and Victory Park in Moscow, and the giant hydroelectric plants that line the train’s route – is a symbol of the once-mighty Soviet Union. 
It was the regime’s last great thrust into the Far East. 
As Brezhnev put it, the BAM was “the construction project of the century,” pushing, cutting, and tunneling its way through thousands of miles of rivers, forests, and cliffs usually covered in permafrost. 
Today, it endures in the mythology of the Soviet Union chiefly as a monument to collective effort. 
Tynda is a typical BAM town. 
Across from the station stands a statue of a heroic young woman enveloped in machinery; in the park lay an ancient engine; and beyond there, rows of featureless apartment blocks stretch into the distance. 
A forlorn job application on a large signpost reads, “Nice girl, gentle without bad habits, will sell cement.” 
The BAM museum in Severobaikalsk is full of mannequins and photographs of BAM workers, their medals, and the machinery they used, including the giant metal samovars in which they made their tea. 
Pride of place goes to Fedor Fedorovich, the generic unsung hero whose task it was to prevent accidents by banging the rails and wagon couplings with a hammer to check for faults. 
To Tatiana Nicolaevna Vetrova, the museum’s curator, the BAM was a symbol of unity. 
The stations along its route – some quite striking – were built in the architectural style of the nations of the Soviet Union that had joined together to complete this mighty project. 
I asked Tatiana whether the museum had a brochure for tourists. 
“There are many academic treatises on the subject,” she replied. 
I persisted, requesting again a short guide for tourists, but she, too, was immovable, stating that there are too many facts to fit into a short space. 
Finally, Tatiana sold me the story of BAM, written in verse, for 350 rubles ($6). 
The railway was, the story said, “the roll-call of our youth.” 
BAMovstsy (as the construction workers are called) did not make much money, nor did they expect to. 
Instead – in an obvious criticism of capitalism – they worked for their country, and for one another. “How to make friends as we did then, that is what we teach our children.” 
The tone is overwhelmingly elegiac: back then, comrades came together to build a new world. 
In Tatiana’s words, the BAM was “a labor of love and heroic sacrifice built by the dedicated workers, for the sake of their children and grandchildren.” 
Like the Great Patriotic War of 1941-1945, the horrors fade, but the flame never dies. 
Yet the horrors were plentiful. 
Tatiana insisted that BAM construction was started in 1974, the politically correct date, after which “clean labor” was used. 
But the railway’s first section – initiated by Stalin to offer an eastern route that ran farther away from the Chinese border – was built by forced labor, including Russian inmates and German and Japanese prisoners of war, herded together in so-called BAMlags, now ghost towns. 
Even when volunteers were used, they were not nearly as enthusiastic as official accounts claim. 
Lacking adequate housing and electricity, few re-enlisted, and many deserted before completing their term. 
Nonetheless, the Brezhnev-era BAM construction showed what that dying Soviet system was still capable of achieving. 
Indeed, the railway’s completion amounts to an asterisk on the conventional assessment of how decrepit the late Soviet Union really was. 
The truth is that Siberian Russia – still home to 20-30 million Russians – benefited significantly more from the Soviet system than the European population centers did. 
The heart of Russia, we were often told by those we met during our BAM journey, is rural, not urban. 
In fact, the Soviet state sustained the Tsarist policy of subsidizing Russians to move east. 
Only now are they returning to Europe, replaced partly by an influx of Chinese and Uzbeks. 
Our journey on the BAM furnished poignant reminders of the region’s previous prosperity. 
One that stuck in my memory was a deserted kolkhoz (collective farm) on Lake Baikal, which once thrived on fishing and fur. 
The village, still inhabited and well maintained, consists of a few people growing vegetables, keeping chickens and the odd cow, and selling trinkets to visitors like me. 
At the same time, rusting fishing boats line the shore like beached whales. 
In the village, as we enjoyed a homemade lunch of soup and pancakes, our hostess praised Putin, whom she credited with restoring Russia to health after the Soviet Union’s disintegration. 
“Why is the West so down on Russia?” one of our fellow travelers asked. “Don’t they understand that a chaotic Russia is a much greater threat to the world than a united one?” 
It is hard to get a hearing on international law in BAM land. 

Putin’s New Prudence 
WASHINGTON, DC – This year, the Russian economy is the G-20’s worst performer, contracting by 3.8%, according to the International Monetary Fund’s latest forecast. 
And things could easily have been worse. 
President Vladimir Putin claims that his economic policies remain consistent; in fact, he has wisely changed course, limiting the damage that could have been done had he not. 
At the end of 2014, Russia was seized by financial panic. 
The Central Bank of Russia (CBR) responded to collapsing oil prices by floating the ruble, which immediately lost half its value. 
Desperate Russians rushed to buy whatever they could before their money became worthless. 
Inflation shot up to 16%. 
Putin’s prescription – given at his annual televised press conference last December – was not reassuring: “We intend to use the measures we applied, and rather successfully, back in 2008.” 
He was referring to Russia’s response to the financial crisis, when it carried out the largest fiscal stimulus in the G-20 – no less than 10% of GDP. 
The result: GDP fell by 7.8%, the largest drop in the G-20. 
In short, Putin was proposing to repeat a failed policy. 
Fortunately for Russia, Putin did not carry out his promise. 
In 2008-2009, the CBR pursued a policy of gradual devaluation, bailing out all big state-owned and private corporations, regardless of their performance. 
This time, Russia has maintained a floating exchange rate, conserving its reserves. 
The CBR stabilized the market by shock-hiking its interest rate, and has since reduced it gradually, as any sound central bank would. 
Russia did adopt an anti-crisis stimulus package; but, at 3.5% of GDP, it was just one-third the size of the 2008 package. 
And while the Russian government singled out some enterprises as “strategic,” it actually gave them very little money. 
Many big companies, most notably in the construction and aviation sectors, were forced into bankruptcy. 
Creative destruction, which in the late 1990s provided Russia with a decade of stratospheric growth, has been revived somewhat. 
Life is a little less secure for Russia’s rich. 
Since the expropriation of Yukos Oil Company in 2004, Putin’s policy had been highly benevolent to large state-owned firms. 
The state financed their purchases and investment projects with seemingly inexhaustible oil revenues. 
But now, with oil prices down sharply, Russia’s export revenue has plummeted by 30% this year, and state funds have become very scarce. 
Something had to give, and, to Putin’s credit, it was not fiscal conservatism. 
This year, Russia’s budget deficit is expected to be just 2% of GDP, rising to 3.5% in 2016 – a remarkably strong performance given that the country has had to weather a trade shock and international financial sanctions. 
Next year, the government is set to use $40-45 billion of its reserve fund for budget financing. 
But Russia can afford that: its total international reserves currently amount to $364 billion, and its public debt is barely 14% of GDP. 
Accomplishing this has required Putin to abandon some of his regime’s taboos. 
For the first 15 years of Putin’s rule, Russians’ standard of living rose steadily; but it has fallen sharply since November 2014. 
Real wages are set to plummet by 10% this year. 
Real pensions are also declining, and spending on health care and education is set to fall by 8% next year. 
State-owned firms have been affected as well. 
Gazprom, Rosneft (which absorbed Yukos), and Russian Railways have been publicly begging for government money. 
Last December, Putin accepted a complex financing scheme for Rosneft. 
But by August, it was clear that all three corporate giants would receive only a small share of what they wanted. 
The powerful head of Russian Railways, Vladimir Yakunin, an alleged former KGB officer and friend of Putin’s, was fired. 
Given Western financial sanctions, Putin’s effort to conserve state funds is entirely sensible. 
Still, the significance of these changes should not be exaggerated. 
Their macroeconomic impact is substantial, but no systemic reforms are on the agenda. 
Unlike China, Russia has made no attempt to rein in rampant corruption at the top. 
Nor has anything been done to strengthen the rule of law. 
Tens of thousands of presumably innocent Russian businessmen sit in pretrial detention because security officials want to seize their companies. 
Protectionism proliferates as Russia imposes ever more trade sanctions. 
The big question is how Russians will respond when they realize that the decline in their standard of living is not temporary, as it was in 1998. 
In 2014, Russia’s GDP was $2.1 trillion (at the current exchange rate). 
It has plunged to $1.1 trillion. 
These numbers do not reflect purchasing power, but the Russian middle class measure their salaries in dollars. 
So far, public reaction has been muted, but a two-week protest by Russia’s truck drivers over a new highway toll suggests that popular quiescence may not last. 
At his press conference last December, Putin laid out his expectations: “In a worst-case scenario, I believe [the crisis] would take a couple of years....After that, growth is inevitable, due to a changing foreign economic situation among other things. 
A growing world economy will require additional energy resources.” 
This December, Putin stated: “The current situation is complicated but…not critical.” 
That is no longer believable. 
Russia’s economy was stagnating even before the bottom fell out of global oil prices, and most experts expect energy prices to remain low for years. 
This confronts Putin with a challenge he has never faced: leading Russia at a time when there is no light visible at the end of the tunnel. 

Obama’s Russian Roadblock 
MOSCOW – In a recent speech in Berlin, US President Barack Obama reaffirmed his commitment to nuclear disarmament and proposed steps toward achieving that goal. 
But Russia has made clear that it does not plan to pursue further reductions to its nuclear arsenal any time soon. 
In the speech – delivered nearly 50 years after President John F. Kennedy addressed the then-divided city, highlighting the value of arms control between adversaries – Obama announced that the United States is prepared to cut its nuclear arsenal by up to one-third. 
He also proposed major reductions in the number of tactical nuclear weapons (TNWs) deployed in Europe. 
Moreover, he called upon the international community to renew its efforts to prevent Iran and North Korea from developing nuclear weapons; to bring the Comprehensive Nuclear-Test-Ban Treaty and the proposed Fissile Material Cut-Off Treaty into force; and to make nuclear energy safer. 
Three years ago, Russia seemed to share Obama’s aspiration to move beyond Cold War nuclear postures, with both countries agreeing to limit their deployed weapons to 1,550 as part of the New Strategic Arms-Reduction Treaty. 
In fact, Russia considers New START to be a “gold standard” treaty, based on core principles – modest and balanced reductions over an extended time period, adequate but not excessive verification measures, and recognition of the connection between strategic offense and defense – that should be applied to all future arms-control treaties. 
But Russian officials have since reaffirmed their hardline position, stating in various settings – including at the recent European Security Conference in Moscow – that Russia will not consider further cuts to its nuclear arsenal until the US addresses certain issues affecting Russian interests. 
In fact, many of the Kremlin’s demands may well be beyond the Obama administration’s capacity to deliver. 
One of Russia’s main concerns is America’s efforts to build up its ballistic missile defense system (BMDS). 
Although experts have disputed the capacity of America’s BMDS, Russian leaders remain convinced that it could seriously undermine Russia’s nuclear deterrent. 
Russian officials intimate that the US is using the threat of a North Korean or Iranian attack on the US with nuclear-armed ballistic missiles as a pretext to erect defenses against Russia (and probably China). 
Despite Obama’s assurances (and those of his predecessors), Russia asserts that America’s BMDS is actually intended to expand NATO’s role in Europe, complicate Russian diplomacy, and facilitate US military interventions. 
Russian President Vladimir Putin has even warned that, left unchallenged by Russia’s nuclear deterrent, the US would be tempted to intervene militarily in more countries, as it did in the former Yugoslavia, Iraq, and Libya. 
These concerns have driven Russia to demand that the US sign a binding treaty that limits the speed, location, and capabilities of its missile defenses and includes mandatory transparency provisions – even as Russian officials acknowledge that the US Senate would never ratify such a treaty. 
Another issue constraining nuclear disarmament is Russia’s view that, without nuclear weapons, its military capabilities would be no match for the conventional forces of the US and NATO. 
Indeed, many in Russia worry that a US attack against Russia’s nuclear deterrent and other defense assets that relies on America’s growing stock of long-range, precision-guided conventional weapons would be as devastating as a nuclear strike. 
These fears are exacerbated by Obama’s declared intention to work alongside NATO in seeking to reduce by as many as 5,000 Russia’s arsenal of TNWs – which dwarfs NATO’s holdings of roughly 200 – and to have the remaining warheads relocated away from NATO members’ territory. 
Many in Russia view their country’s dominance in this area as essential to offsetting imbalances in conventional weaponry. 
In fact, no formal arms-control treaty directly covers these non-strategic weapons; nor have they been the subject of targeted NATO-Russia negotiations. 
And, as long as the US has TNWs deployed near Russia’s border, Russian officials insist they will not initiate such talks. 
Even if the US managed to get Russia to the negotiating table, convincing it to accept sizable cuts in its TNWs arsenal could require the US to fulfill additional demands, such as limiting NATO’s military concentrations and facilities near Russia’s periphery and resurrecting the Treaty on Conventional Armed Forces in Europe on the Kremlin’s terms.Moreover, Russian leaders demand that other nuclear-armed states accept comparable limits on their TNWs stocks. 
Indeed, Russia wants to replace the predominately bilateral nuclear arms-control processes of the last 50 years with multilateral negotiations aimed at constraining the offensive capabilities of other nuclear states, including the United Kingdom, France, and China – and maybe other countries. 
But convincing these states to participate in arms-reduction negotiations, much less to accept new constraints on their relatively small nuclear arsenals, would be difficult. 
Like the Obama administration, they believe that the next round of cuts should focus on Russia and the US, which still possess almost all the world’s nuclear weapons. 
The fundamental challenge is that Russia’s leaders do not share Obama’s aversion to nuclear weapons. 
On the contrary, they believe that, while the likelihood of a nuclear war has fallen sharply since the end of the Cold War, nuclear deterrence has become more valuable for Russia and other countries that are outmatched by America’s conventional military power. 
This might prove to be an insurmountable obstacle to realizing the Obama administration’s vision of a nuclear-weapons-free world. 

Putin’s Medieval Dreams 
ATLANTA – While much of the world is busy dismantling monuments to oppressors, Russians are moving in the opposite direction, erecting statues to medieval warlords who were famous for their despotism. 
Understanding this revival can shed light on the direction of Russia’s politics. 
In October 2016, with the endorsement of Russia’s culture minister, Vladimir Medinsky, the country’s first-ever monument to Ivan the Terrible was unveiled in the city of Orel. 
A month later, Vladimir Zhirinovsky, the leader of the ultra-nationalist Liberal Democratic Party of Russia, called for Lenin Avenue in Moscow to be renamed Ivan the Terrible Highway. 
And in July of this year, President Vladimir Putin christened Moscow’s own tribute to the tyrant, declaring, erroneously, that “most likely, Ivan the Terrible never killed anyone, not even his son.” 
Most historians agree that Ivan lived up to his name; not only did he kill his son and other relatives, he also ordered the oprichnina, the state-led purges that terrorized Russia from 1565 to 1572. 
He also presided over Russia’s defeat in the Livonian War, and his misrule contributed to the Time of Troubles and the state’s devastating depopulation. 
Joseph Stalin initiated the modern cult of Ivan the Terrible. 
But, since the mid-2000s, Russia’s Eurasia Party – a political movement led by the pro-fascist mystic Alexander Dugin – has moved to position Ivan as the best incarnation of an “authentic” Russian tradition: authoritarian monarchy. 
Dugin’s brand of “Eurasianism” advocates the embrace of a “new Middle Ages,” where what little remains of Russian democracy is replaced by an absolute autocrat. 
In Dugin’s ideal future, a medieval social order would return, the empire would be restored, and the Orthodox church would assume control over culture and education. 
Eurasianism, which was marginal in the 1990s, has gained considerable popularity in recent years by contributing to the formation of the so-called Izborsky Club, which unites the Russian far right. 
On several occasions, Putin has referred to Eurasianism as an important part of Russian ideology; he has even invoked it as a founding principle of the “Eurasian Economic Union,” a burgeoning trade area of former Soviet states. 
Eurasianism has given ultra-nationalist groups common ground around which to unite. 
It has also given symbols of totalitarianism, like Ivan the Terrible and Stalin, new legions of support. 
Chief among them are members of the Eurasia Party, who consider political terror the most effective tool of governance and call for a “new oprichnina” – a staunchly anti-Western Eurasian conservative revolution. 
According to Mikhail Yuriev, a member of the political council of the Eurasia Party and author of the utopian novel The Third Empire, the oprichniks should be the only political class, and they should rule by fear. 
Ivan the Terrible is not the only medieval vestige being revived in Russia. 
Cultural vocabulary is also reverting. 
For example, the word kholop, which means “serf,” is returning to the vernacular, a linguistic devolution that parallels a troubling rise in Russia’s modern slavery. 
Data from the Global Slavery Index show that more than one million Russians are currently enslaved in the construction industry, the military, agriculture, and the sex trade. 
Moreover, serf “owners” are also happily identifying themselves as modern-day barins. 
Even Russian officials speak approvingly of modern slavery. 
Valery Zorkin, who chairs the Constitutional Court, wrote in Rossiyskaya Gazeta, the official government newspaper, that serfdom has long been a “social glue” for Russia. 
And another medieval term – lydi gosudarevy, which translates to “servants of his majesty” – has returned to favor among high-ranking bureaucrats. 
Nostalgia for serfdom compliments the desire for a return to autocracy. 
Prominent Russian intellectuals – including the filmmaker Nikita Mikhalkov, journalist Maksim Sokolov, and Vsevolod Chaplin, a Russian Orthodox cleric – call for the coronation of Putin, and petitions of support are gaining signatures online. 
Significantly, the protests against Putin’s regime in 2012 have since been interpreted not as a protest against Putin himself, but rather against the social order to which Eurasianism aspires. 
Putin’s tacit support for the Eurasian vision of a neo-medieval Russia invokes the historical memory of Stalinism. 
According to Dugin, “Stalin created the Soviet Empire,” and, like Ivan the Terrible, expresses “the spirit of the Soviet society and the Soviet people.” 
No wonder, then, that monuments to Stalin, too, are multiplying in Russian cities. 
Neo-medievalism is rooted in nostalgia for a social order based on inequality, caste, and clan, enforced by terror. 
The lionization of historical despots reflects the contemporary embrace of such pre-modern, radically anti-democratic and unjust values. 
For Ivan’s contemporary champions, the past is prologue. 


Putin in the Dock 
STANFORD – To read the international press, one would think that the last two years have been good ones for Russian President Vladimir Putin. 
His campaign in Ukraine has largely achieved its main goals; 
Russia has wrested control of Crimea and destabilized large portions of the rest of the country. 
Plunging oil prices may have wreaked havoc on Russia’s finances, but so far Putin’s popularity seems unaffected. 
But a long stream of little-remarked-upon legal defeats could have a dramatic impact on Putin’s fortunes. 
In 2014, for example, the European Court of Human Rights (ECHR) delivered 129 judgments against Russia, and in January, the Council of Europe deprived Russia of its voting rights for its violations of international law. 
As the rulings pile up, they are starting to pose a threat to Russia’s international standing, its financial health, and Putin himself. 
The rulings have not been merely symbolic. 
In July 2014, the Permanent Court for Arbitration in The Hague ordered Russia to pay $50 billion to former shareholders of the oil company Yukos for having illegally bankrupted the firm and distributed its assets to Rosneft, a state-owned producer. 
At its peak in 2003, Yukos was valued at $30 billion. The judgment is the largest ever awarded by the arbitration court, and it cannot be appealed. 
France and Belgium have begun seizing Russian assets to enforce the judgment. 
In a separate case, in June 2014 the ECHR ordered Russia to pay Yukos’s shareholders more than $2 billion “in respect of pecuniary damage.” 
This judgment was also the largest in that court’s history. 
Russia, which is in the midst of a liquidity crisis, will struggle to raise such huge sums; failure to comply, however, would jeopardize future foreign investments. 
The Yukos case could be a sign of things to come. 
In April, the European Commission issued a Statement of Objections to Russian gas giant Gazprom, charging it with violating Europe’s antitrust laws by partitioning Central and Eastern European gas markets, forbidding cross-border resale, and closing its pipelines to third parties. 
Gazprom faces a fine of 10% of its revenues, which totaled $177 billion in its last fiscal year. 
Already struggling with low gas prices, increased competition, and now falling production Gazprom will be hard pressed to come up with the necessary funds without sacrificing urgent infrastructure projects. 
Russia is also coming under increased pressure regarding alleged criminal conduct. 
Indeed, it recently vetoed a Security Council resolution, sought by Malaysia, Ukraine, the Netherlands, Australia, and Belgium, to establish a criminal tribunal to prosecute those responsible for the downing of Malaysia Airlines Flight 17 in July 2014 over rebel-occupied territory in eastern Ukraine. 
Evidence gathered by the five countries points to a missile fired from a Russian BUK system operated by a Russian crew. 
Were Russian guilt for the downing of Malaysia Airlines Flight 17 to be established, Putin’s depiction of his country as a bystander in the Ukrainian conflict would be exposed as a lie. 
In any case, Russia’s veto in the Security Council is a tacit admission of guilt, opening the door for the Netherlands – which lost the most citizens in the attack – to push for additional sanctions. 
Meanwhile, in July 2014, the United Kingdom reinstated a legal inquiry into the November 2006 polonium poisoning of Alexander Litvinenko, a former Russian state security officer who had become a UK citizen. 
Public hearings were held in London to identify “where responsibility for the death lies.” 
The inquiry devoted particular attention to a Russian law passed in March 2006 allowing the state to kill those, such as Litvinenko, deemed to jeopardize national security. 
A ruling by a British court that the Russian government ordered or abetted the murder of Litvinenko would have far-reaching consequences. 
The verdict would lend credibility to other charges of criminality, such as the bombing of four Russian apartment blocks in 1999 and the murders of several investigative journalists. 
It would also strengthen the European Parliament’s call for an independent international investigation of the murder of the Russian opposition political leader, former deputy prime minister Boris Nemtsov, and bolster his family’s petition for an international investigation. 
Finally, while Russia has established de facto control of Crimea, it is likely to find itself increasingly embroiled in legal challenges to its presence there. 
No credible government or international organization accepts Russia’s description of the annexation as a legal democratic act by the Crimean people. 
The United Nations, the G-7, the European Union, and the United States all characterize it as an illegal act. 
In May, German Chancellor Angela Merkel described it – in Putin’s presence – as “criminal and illegal under international law.” 
In June, Ukraine presented Russia with a 17-volume calculation of its losses from the annexation of Crimea, totaling nearly $90 billion. Additional losses could be billed for the Russian-supported war in southeast Ukraine, which has led to 6,000 deaths and large-scale damage to infrastructure. 
Russia is certain to find itself mired in years of legal battles in venues like the ECHR and the International Center for the Settlement of Investment Disputes. 
These endless legal challenges will scare off investment in Crimea, requiring Russia to subsidize its occupation for years to come. 
Putin has overplayed his hand. 
In addition to its exposure to liability for damage caused during the conflict in Ukraine, Russia faces legal penalties totaling roughly 4% of its GDP – roughly what it spends on education. 
Putin may have been able to bring his country’s legal system under his control, but he remains vulnerable to international rulings. 
With Russia too enmeshed in the international legal and financial system to cut ties and become a rogue state, its president is increasingly likely to face the consequences of his actions. 

Russia's "Great Game" in Iraq and Iran 
As America's debate over toppling Saddam Hussein's regime intensifies, Russia is moving to center stage. 
This week Russia signed a $40 billion trade and economic cooperation treaty with Iraq while meeting Iranian leaders to discuss nuclear non-proliferation. 
Christopher Granville, a former British diplomat and now chief strategist for United Financial Group, a Russian investment bank, analyzes Russia's long-term interests and likely actions. 
While no country seems able to trouble the Bush administration's military calculations concerning Iraq, Russia does combine serious interests in the region with marginally significant military capabilities. 
But Russia's real importance in any looming US-Iraq war lies not so much in its residual military power, as in the light its position sheds not only on the Iraqi problem but on that other member of the "axis of evil": Iran. 
So far, the most striking feature of the Putin administration's handling of the US-Iraq situation has been its silence. 
If forced to state a view, Russian diplomats stick to a standard line about implementing UN Security Council resolutions and the need for Security Council endorsement of any new actions against Iraq. 
Unlike other leading West European countries, President Putin and his government prefer to keep their heads down, reflecting their wish to nurture Russia's new and still-fragile rapprochement with the US. 
But this explanation does not fit Russian policy on Iran, where, despite US pressure, the Putin government is quite literally sticking to its guns by selling weapons and civil nuclear technology to Teheran. 
The nuclear issue came to the fore during the recent visit to Moscow by US Energy Secretary Spencer Abraham. 
American arguments against Russian cooperation center on Iran's motives for developing nuclear power. 
Given the country's massive hydrocarbon reserves, the Iranian regime has no obvious need for such a program besides its suspected ambition to develop nuclear weapons. 
Transfer of atomic energy know-how from Russia is seen as a first step towards achieving that goal. 
Russian officials reply that there can be no serious objection to such civil nuclear cooperation programs so long as the recipient country accepts the safeguards and inspection regime of the International Atomic Energy Agency (IAEA). 
This is the case with Iran. 
Russian officials like to point out that the US and other Western countries once planned similar cooperation program with countries, including North Korea, which do not accept the rigorous IAEA safeguards to which Iran has agreed. 
Russia's government argues in a similar vein that its conventional arms sales to Iran concerns supplies of equipment that have no bearing on concerns about the proliferation of weapons of mass destruction. 
It challenges the US and others to prove the contrary. 
In response, the US has made a partial, but not fully convincing, case--at least publicly. 
After talks with Mr Abraham, Russia indicated that implementation of nuclear projects in Iran beyond the existing one at Bushehr would be subject to a review of domestic political developments. 
But that seems more like a tactical move aimed at appeasing the US, rather than a reflection of genuine second thoughts on nuclear cooperation with Iran in principle. 
All of this suggests that the Putin administration has other goals besides proving Russia's new-found friendship with the US. 
Deeper interests underlie Russia's attitude toward Iran and its tacit accommodation of US war plans against Iraq. 
One need look no further than the country's external financial position. 
Russia inherited all of the Soviet Union's foreign financial claims and liabilities. 
It now spends up to $10 billion a year servicing Soviet-era debts. 
Soviet-era claims, on the other hand, are almost all beyond recovery. 
Oil-rich Iraq's debts, with a face value amounting to many billions of dollars (deriving mainly from export credits for arms sales), are a rare exception. 
Russia's main interest in Iraq is to get these loans repaid, and then resume arms sales, while simultaneously becoming a major, perhaps the dominant, foreign player in Iraq's oil and gas sector. 
Ever since the Gulf War, Russia has pursued these goals by promoting rehabilitation of Saddam's Iraq via the implementation of Security Council resolutions and the lifting of sanctions. 
That route now looks hopeless. 
So the US goal of regime change in Baghdad does not look too bad, even if it cannot be publicly supported. 
For President Putin it makes sense to stay on the sidelines over Iraq, at least for now, and to be repaid later for his helpful silence in the form of US influence on the successor Iraqi regime concerning repayment of the country's Russian debts. 
If the US war in Iraq fails, the situation will hardly be worse than it is now from the narrow point of view of Russian interests, while the resulting mess will be a problem for the US and its traditional allies rather than for Russia. 
The contrast between Russia's handling of Iraq and Iran underlines not only Mr Putin's famous pragmatism, but the sophistication and adroitness of his policy. 
This contrast also reflects the fundamental difference between Iran, an historical nation state, and the artificial creation that is Iraq. 
Russia's long-term interests in Iran require permanent engagement. 
Iran's Islamic revolution will inevitably run its course and mutate into a new form of nationalism, to some extent mirroring Russia's own transition out of the Soviet system. 
With Iraq, the opposite is true, because not only the regime but the country itself might cease to exist, or at least be radically transformed, should Hussein fall. 
Putin's goal is to put Russia in a position to exploit such transformations. 

Russia’s “Oil-for-Knowledge” Scheme 
Whenever you fill up your European compact car’s gas tank, or that of your American SUV, you pay as much as a Russian schoolteacher earns in a month. 
And every time you pay, you subsidize a regime that relies on energy, not information, as its main product. 
You finance the pre-modern and the inefficient, and perhaps worse: every time you pay, you may be collaborating with political evil. 
Russia began 2006, the year of its chairmanship of the G-8, by launching a gas war with Ukraine. 
Having a virtual monopoly on supply, Russia decided that it could dictate prices. 
But Ukraine has a virtual monopoly on delivery, so Russia blinked in this standoff as soon as gas supplies to Western Europe dropped. 
Modern economies rely not on monopolies, but on competition. 
Contemporary Russians consume competitive products: Nestle cereals, Mercedes cars, Hollywood movies. 
The problem is that they do not make them. 
Russians pay for this consumption from the profits of gas and oil. 
State-owned and private multinational companies drill fuel in Russia and sell it to Europe and North America. 
The government partially redistributes profits by collecting taxes and paying salaries. 
Gas prices are growing, and so are Russian salaries. 
This causes inflation, because, other than fuel, Russians do not produce much else. 
To avoid inflation, the government deposits a large part of its profits into a Stabilization Fund. 
But, because the Kremlin does not trust its own stocks and bonds, the Stabilization Fund invests in Western securities. 
Thus, the government loses its chance to modernize Russian cities, roads, hospitals, and universities. 
But inflation still grows, as do real estate prices. 
Mortgages are available at outrageously high interest rates. 
No civil servant, military officer, or professor is able to buy even a modest apartment, unless they have an additional – often illegal – source of income. 
Most don’t. 
Russia exposes an ugly truth of our era: illiberal societies can grow just as fast – even faster – than open ones. 
Oil-rich states need global networks to sell their oil, to export their capital, and to import technologies and technologists. 
Among current United Nations members, countries with large natural resource endowments are also more likely to have a non-democratic regime. 
In the 1980’s, Mikhail Gorbachev warned that Soviet oil resources were exhausted. 
Of course, due to the Western engineering and management that became available after Gorbachev launched his perestroika reforms, the country was soon producing more oil than ever – indeed, more than was ever believed possible – and oil men like Mikhail Khodorkovsky arose out of the blue. 
But, while machines work everywhere, managers must abide by local traditions and belong to indigenous social networks. 
If the cultural component is important, why share the profits with Western-minded people like Khodorkovsky? 
So no surprise that other managers, with better relations with those in power, now run Khodorkovsky’s Yukos Oil, as well as another major firm, Sibneft. 
Foreign managers don’t seem to mind. 
On the contrary, some of these managers, such as former German Chancellor Gerhard Schroeder, who now chairs a Gazprom subsidiary building a pipeline under the Baltic sea, are helping to expand Russia’s oil-based imperial designs over Europe. 
In the strange new world of today, the modern and the pre-modern depend on each other. 
Thus, Russians trade oil for the products of knowledge. 
Imported technologies are cheap if you convert their prices into barrels of oil, so the country produces a shortage of its own geologists and chemists, not to mention economists and lawyers. 
It needs only one gang of politicians. 
In fact, for such a country, local experts are not just redundant, but dangerous. 
In their moments of sincerity, Russian policymakers admit that Russia is, from their point of view, overeducated. 
They recently discovered what their Arab colleagues have known for a long time: that for an oil-rich regime, it is cheaper and safer to buy knowledge than to produce it. 
So hidebound conservatives run Russian universities. 
Scientists go on trial for technical espionage, while ex-KGB spies sign multi-billion dollar contracts. 
Non-governmental organizations are met with suspicion and harassment, with new legislation seemingly designed to vanquish them. 
Political parties are created or banned by anonymous Kremlin clerks. Elections are either canceled or faked. 
Oil-poor neighbors like Ukraine are blackmailed. 
An illiberal society can produce growth, but it cannot enjoy it. 
Redistribution schemes benefit the population if, and only if, they are controlled by democratic feedback. 
The Russian Stabilization Fund embodies an unstable combination of anxiety and greed that is typical for an undemocratic regime. 
Dependent on gas, oil, and multinationals, the G-8 countries accept quite a lot of guff from their current chair, Vladimir Putin. 
Still, the arrogance of Russia’s rulers may have breached the West’s tolerance. 
Alternative sources to Russian energy are not the only means to decrease prices. 
Global civil society has developed instruments to halt consumption that produces harm. 
Elegant ladies, for example, no longer buy fur coats. 
Many Westerners eagerly pay more for “Fair Trade” coffee. 
Would a similar approach work for the gas in your oven? 
A century ago, the idea of decolonization sounded just as absurd. 
Public awareness is as crucial now as it was decisive then. 

Russia's Ambivalent Muslim Heritage 
On his recent visit to Brussels, Russian President Vladimir Putin stunned European leaders and journalists alike with his comments about the Islamic desire to establish a global Caliphate. 
Sensational in his rhetoric, Putin presents Russia's brutal war against the Chechens as his country's contribution to the international war against Islamist terrorism. 
But is it really? 
Russia's attempts to subdue the Chechen insurrection are but another bloody chapter in a two hundred year colonial policy that began with Russia's subjugation of Caucasian mountain peoples in a cruel war that lasted for thirty years. 
This war lingered and flared well into the early Soviet era and, in 1944, the entire Chechen population was forcibly deported to Central Asia. 
Fifty years later, President Yeltsin resumed the war when Chechens made a new bid for independence. 
So, from a historic perspective, it is more appropriate to compare today's Chechen war with the other great wars of the era of de-colonialization, particularly the bloody French war in Algeria, than it is to view it as a "Clash of Civilizations" or a war on terror. 
All the while, the fighting and ruined cities of Chechnya cast a shadow on the otherwise much more complex encounter of Russia with the Islamic world. 
Indeed, the Chechens are only a fraction of the 13 million Muslims who live in Russia - 9% of the total population. 
But simultaneous with its attempts to crush the Chechen rebellion, Russia has pursued a very different path in its relations with the Volga Tatars and Bashkirs, who live in their own republics in the Volga-Ural area. 
In the early 1990s, Yeltsin concluded bilateral agreements with those republics, conceding extensive autonomy to Tatarstan and Bashkortostan. 
Although restoration of centralized political power in the Kremlin has marked Putin's presidency, Moscow and the two Muslim-dominated Russian republics still adhere to the Yeltsin-era bargain. 
The ambivalent relationship between Russia and its Muslims is deeply rooted in history. 
Russia conquered Muslim territories in the Volga-Ural area, Caucasus and Central Asia, and brutally suppressed any resistance. 
However, after loyalty was secured, the government adopted a more pragmatic policy. 
Until the mid 19th century, sedentary Muslim elites were co-opted into the imperial aristocracy, just as, in the 20th century, national communist elites were absorbed into the Soviet nomenclatura . 
Indeed, Russia's contacts with the Muslim world go back thousands of years and were rooted in a tradition of tolerance. 
With a few short-lived exceptions, Russia's imperial government did not support Orthodox evangelism. 
Forced conversion was unknown and Russia's policy with regard to Muslims was guided primarily by the political and economic interests of the state. 
After the Revolution, Soviet policy preserved the most important aspects of the old imperial approach. 
To be sure, the Communists tried to repress Islam as a religion - as they tried to repress all religions. 
But the Soviets encouraged the development of nations based on ethnic identity - Stalin, it is to be recalled, fancied himself a theorist of nationalities - and the ethnic identity of Soviet Muslims derived largely from their Islamic culture. 
In this sense, the Soviets helped keep Islam alive. 
What few people realize is that, overall, the history of Russian-Muslim relations stand in sharp contrast with the policy pursued by most West European governments over the centuries - policies have been rooted in anti-Islamic stereotypes since the Middle Ages. 
In Spain and Sicily, Muslims were discriminated against, forcibly baptized, and expelled since the 15th century. 
Five hundred years of warfare against the Ottomans also helped to fuel anti-Islamic prejudices and intolerance. 
Indeed, whenever Russia (as in the first half of the 18th century) or the Soviet Union (in the late 1920s and 1930s) combated Islam, its rulers pointed to the Western example. 
The policy toward the Muslims pursued by the Russian Empire, by contrast, largely preserved ethnic and religious communities. 
This pragmatism has mostly been preserved to this day. Reverting to the imperial Russian tradition, Boris Yeltsin, as the first president of an independent Russian nation-state, sought realistic solutions for the Muslim republics that desired autonomy or, as Chechnya, independence. 
This tolerant posture gave way to war in Chechnya in 1994, but the armistice of 1996, which de facto recognized Chechnya's independence, gave rise to new hopes of a better future. 
In 1999 Yeltsin and Putin, his then prime minister, resumed combat. 
The Chechen war was exploited in Putin's presidential election campaign and, after September 11, 2001, Putin has tried to legitimize his intransigence by presenting the war in Chechnya as Russia's contribution to its emerging partnership with the US in the war against terrorism. 
With the Soviet Union's disintegration, Russia and the West lost the enemy each had seen in the other. 
Both deem Islam the new enemy, one held in common. 
What they fail to see is that Islam is not a homogenous entity and that today's conflicts do not have religious or civilizing causes, but are rooted in political, social and economic reasons. 
Indeed, many Islamic movements are largely a reaction to former or still existing colonial dependence. 
The Putin government's focus on violence demonstrates that Russia hasn't learned from its long history of engagement with Islam. 
The Chechen War is not part of some Clash of Civilizations, but a retreat to a colonial policy that failed. 


Russia's Culture of Contempt 
Once again, everyone wants to know, where is Russia heading? 
The trial of Mikhail Khodorkovsky and the possible bankruptcy of his company Yukos, Russia's biggest company, have incited cries that President Putin is returning the country to the bad old days of dictatorship. 
But in assessing where Russia is heading, political and economic analysis are of little help. 
It is Russia's social culture that is determining the country's fate. 
Russia's political system, indeed, is not what prevents the country from moving forward, and it never has been. 
Whether Russians live under monarchy, communism, Yeltsin's cowboy market economy or Putin's supposed dictatorship of law, the result is always the same - the system despises its citizens, eliciting an equal and opposite reaction of derision and distrust. 
Russian capitalism hates the consumer as much as Russian communism did. 
Russia's people, whether they are waiters or waiting for service, are convinced that they will be ripped off and treated rudely, and so steel themselves with indifference. 
Neither the system nor the people are to blame for this state of affairs. 
It arises partly from the fact that Russia is an "imitation" culture. 
Russia's first rulers were Nordic princes in the 860's, men invited to bring order to the country - even then, or so it seems, Russians didn't trust themselves to rule themselves effectively. 
Sometimes, Russian imitation produces works of genius. 
After all, Pushkin and Gogol originally grew out of German and French models, although their sheer originality left the mimicry far behind. 
But Russia is simply not as good at copying practical things like laws and economic models as it is at transforming cultural impulses into works of art with a Russian soul. 
Its practical borrowings are invariably stillborn, mostly because of the country's ingrained culture of contempt. 
Consider Moscow, a highly seasoned imitator (though nowhere in the league of St. Petersburg, that baroque Italianate city on the Neva, as an urban mimic). 
Moscow nowadays has all the trappings of high-end capitalism: Prada, Fouchon, Rolls Royce. 
Its Café des Artistes is as wonderful a French bistro as you will find. 
But something is missing in the usual Russian way - proper utensils. 
Ask a waiter for a steak knife and you will draw a look that suggests you've asked for a sword. 
Some restaurants greet their customers with a guard who brusquely asks what they want, as if they came to buy stamps, not to have dinner. 
Of course, the guards know that their job is to ensure that everyone is safe and comfortable, but the Gulag-type notion of what a guard does is too embedded to be removed. 
Their real job is to be "against" - and this time, it is the customers they are to be against. 
The very existence of other people breeds suspicion in Russian guards, and who is to say that they are completely wrong? 
After all, contract killings and random shootings in restaurants are common affairs, and the idea of excessive protection from everyone goes back to Soviet days, when social contempt was cloaked in the guise of public safety. 
Small wonder, then, that Russians always cut corners, jump over fences, and never follow a path designated for walking - these paths were built not to make life easier for people, but to control them. 
Indeed, fences and barriers in Russia are usually built where there should be a footpath. 
But perhaps the authorities are right to want to keep us in line. 
Anyone who has ever flown into Russia will know this scene: the moment the captain requests the passengers to remain seated until the plane comes to a complete stop, all the Russians on board will respond by immediately standing up and piling into the aisles as if it's their last chance to get out. 
They know in their bones that the system is out to get them, even if the system is represented by a commercial airliner from a foreign country. 
The simplest things are complicated, and then destroyed, by this culture of suspicion and contempt. 
I once went for lunch to a Swedish-style buffet in Moscow. 
The choice of food was great, a sort of post-modern typical Russian kasha: sushi, salad, borsht, meat, and cabbage. 
But customers received only a small saucer for this feast, and the principle of the smorgasbord - all you can eat - was jettisoned. 
You were allowed to use the buffet only once. 
Customers - who know what a smorgasbord is - understandably try to stuff as much food as they can onto the tiny saucer, sushi on top of roast beef. 
If you dare to ask for a bigger plate or an extra helping, the waitress gives you that withering Soviet look - you want too much. 
Soviet socialism thought its citizens unworthy of any form of service altogether; Russian capitalism doubts that you can control your appetites, so it wants to control them for you. 
In the end, there is very little difference. 
And so Russia goes on, undertaking revolutionary changes and not changing at all. 
Incurable suspicion, mutual fear, ubiquitous contempt - confirmed everyday in large and small ways - are our immutable social condition. 

Russia’s Economic Imperialism 
Russia’s use of natural gas to exert economic and political pressure on Ukraine has caused grave concern in the West. 
But Russia’s pressure on Georgia has been even heavier – and has scarcely been noticed. 
In Georgia, as in Ukraine, Russian President Vladimir Putin seeks to implement the doctrine of a “liberal empire” put forward in October 2003 by Anatoli Chubais, the chairman of United Energy System (RAO UES), Russia’s energy monopoly. 
According to Chubais, Russia will never find a place in either NATO or the European Union, so it must create an alternativeto both, a new empire of its own. 
It can do this by using its huge and rich public-private monopolies to take over the key industries and economic institutions of former Soviet republics, thereby laying the groundwork for political domination. 
The resulting empire will be liberal, according to Chubais’s definition, because it can be built with money rather than tanks. 
Russia’s first step in fulfilling this plan in the South Caucasus was directed against Armenia, its strategic partner in the region. 
Seizing on a $93 million debt that Armenia owed to Russia, the Putin administration demanded payment in either cash or equity in Armenia’s major industries. 
Cash-strapped Armenia had no alternative but to hand over the shares, which it did in a 2002 treaty candidly titled “Possessions in Exchange for Debt” – a reminder of the infamous “debt-for-equity” swaps of the Yeltsin years (another Chubais invention), which spawned Russia’s oligarchs. 
Russia’s second step in rebuilding its empire in the Caucasus is to unite itself and Armenia in a single economic zone. 
Because Georgia stands directly in the geographical path to realizing this goal, Russia had to deal with it first. 
In the 1990’s, it used crude political pressure to bring Georgia into line, but it shifted to economic leverage in 2003. 
When US-based AES Silk Road failed to transform Georgia’s energy system, Chubais’s RAO UES bought AES’s holdings and other assets that amounted to 75% of the country’s electricity network. 
Then came Georgia’s “Rose Revolution.” 
Many state-owned firms were privatized for ten times the sums yielded in asset sales under the previous government of Edvard Shevardnadze. 
But an utter lack of transparency allowed Russian companies, and their subsidiaries registered in third countries, to snap up most of the new offerings. 
Typical was the Russian holding company Promyslennye investory (Industrial Investors), which managed to get a major gold mine and then half of a plant producing gold alloys. 
Russia’s main foreign policy instrument in Georgia is Gazprom, the state-controlled gas monopoly. 
Gazprom’s aim is to control not only the gas industry in Georgia, but also the only pipeline that feeds Russian gas to both Georgia and Armenia. 
Had the US not intervened in 2005 with $49.5 million to rehabilitate the pipeline, it would have ended up in Gazprom’s hands. 
Even then, pressure from Moscow may result in joint Russian-Georgian control of the pipeline, if not its outright sale to Gazprom. 
The Georgian government, without clear support from the West, may yet agree to such a deal, something that Moldova, which saw its gas cut off on January 1st, has just done. 
Gazprom is not the only state entity carrying out Russian policy in the South Caucasus. 
In 2004, Russia’s state-owned Vneshtorgbank acquired a controlling stake in Armenia’s Armsberbank. 
The following year, Vneshtorgbank purchased a controlling stake in the privatized United Georgian Bank, Georgia’s third largest. 
In effect, Vneshtorgbank renationalized United Georgian Bank, but the new owner was the Russian state. 
Recently, Chubais’s RAO UES has had the lead role in integrating Georgia into Russia’s “liberal empire.” 
When the Georgian authorities announced plans to privatize the Inguri Power Plant and renew construction of the long-stalled Khudoni Power Plant, slated to become Georgia’s largest, RAO UES immediately began staking out a dominant role for itself in both projects. 
The combination of massive pressure from the Russian side and silence from the West could leave Georgia’s entire power system – both gas and electricity – in Russian hands. 
Russia’s scheme to rehabilitate the rail line from its territory into the secessionist Georgian province of Abkhazia similarly mixes economics with neo-imperial aspirations. 
Even though it is focused on land that the United Nations recognizes as part of Georgia, the main beneficiaries of this project would be Russia and Armenia. 
If the international community allows this scheme to go forward, it will have endorsed Russia’s effort to separate Abkhazia from Georgia. 
Parallel with this, Russia and Armenia are planning a new rail link to Iran. 
Besides its obvious benefits to Iranian President Mahmoud Ahmadinejad’s retrograde government, this will deftly weaken the South Caucasus’s links with the West, which the US and Europe have spent a decade fostering. 
Thus, Russia’s effort to entrap Georgia and its neighbors in the nets of its new “liberal empire” is part of a well coordinated attempt to reorient the South Caucasus as a whole towards the anti-Western coalition of Russia and Iran. 
Western countries, and the US in particular, must provide firm backing and support to the South Caucasus to prevent Russia from realizing its destabilizing and dangerous neo-imperial dream. 

Russia’s Eternal Inflation 
In eternal Russia, nothing changes when it comes to monetary management. 
Year after year, the Russian Central Bank (RCB) blames the weather, the poor harvest, or other non-monetary factors for its feeble performance in lowering the inflation rate. 
Unlike many emerging-market and transition economies in the 1990’s, Russia did not abandon a fixed-exchange rate anchor in favor of an inflation-targeting regime as its guide to monetary-policy. 
As a result, the period since the financial crisis of 1998 has generated serious problems for monetary and exchange-rate policies. 
Faced with a balance-of-payments surplus – largely thanks to high oil prices – the RCB’s 2005 Monetary Program fudges: reducing inflation is a priority, but so is exchange-rate targeting in order to support growth. 
This “just-do-it” approach works fine in the United States, for example, where the Federal Reserve has established its anti-inflationary credibility. 
But the RCB’s track record since 1992 has done little to stabilize inflation expectations and to persuade businessmen, investors, government officials and ordinary Russians that it is genuinely focused on reining in price growth. 
During the early transition years, the lack of an effective monetary-policy framework reflected the challenge of establishing new institutions and regulations, as well as the difficulty of overcoming the legacy of central planning, under which budget and credit financing were indistinguishable. 
Sometimes the RCB acted as the government’s banker, providing liquidity without considering the financial markets; at other times, it focused on the financial markets, providing liquidity to banks. 
In both cases, there is no link between inflation and interest rates. 
To be sure, the muted impact of inflation on interest rates is not surprising in transition economies, where the mechanisms of monetary-policy transmission and financial intermediation took long periods to put in place and still need reform and regulation. 
It is inevitably a long road from a starting point where credits are channeled to state-owned enterprises through state-owned banks to an economic environment in which interest rates are a proper indicator of monetary policy. 
Moreover, Russia’s default and devaluation in 1998 undermined the progress that was accomplished – starting in 1996 – in the banking sector and the capital markets in general. 
But that excuse has worn thin. 
In recent years, slowing the pace of real exchange-rate appreciation to shelter domestic producers and employment from import competition seems to have gained clear precedence over disinflation. 
At the beginning of June, the RCB’s governor, Sergei Ignatyev, admitted not only that this year’s inflation target would be missed, but also that the RCB is not prepared to pursue inflation targets at the expense of a competitive exchange rate. 
This helps explain why the inflation rate, as measured by growth in the annual consumer price index, has remained stubbornly high. 
Indeed, for the first time since 1998, the annual inflation rate has been rising this year, rendering the official targets – 7.5%-8.5% in 2005, 6%-7.5% in 2006 and 5%-6.5% in 2007 – little more than lip service. 
Of course, many central banks around the world pursue both price stability and growth. 
But in Russia, there is no trade-off between the two, at least not using the exchange rate. 
As the IMF’s latest annual report on Russia’s economy points out, if the RCB continues to restrain the ruble’s appreciation for the sake of growth, the result will merely be higher inflation, which implies that the ruble would still strengthen in real terms, thereby damaging growth. 
Russian macroeconomic performance has greatly improved since the 1998 financial crisis, and this success can be attributed in part to improved monetary policy. 
But the RCB’s lack of resolve in adopting a framework where low inflation is clearly stated as the priority now threatens to undermine what has been achieved. 
As a starting point, the RCB should be charged with projecting inflation, formulate policies to stabilize prices, and either implement those polices or explain why it cannot and who could do so. 
The correct answer to the latter question – as the IMF suggests – may be the Ministry of Finance: the only sure way for Russia to reduce inflation and sustain growth is to maintain a sound fiscal policy. 
The reality is the opposite. 
Rather than using the oil windfall to pay for long-overdue reforms in health care, education, and utilities – and thus helping to ensure the macroeconomic stability needed to sustain rapid long-term growth – President Vladimir Putin has chosen large spending increases for public wages and pensions. 
As a result, Putin’s Russia appears headed for the Latin American model of self-inflicted stagflation. 

Russia's European Occupation 
When Gazprom, Russia’s natural gas monopoly, cut off supplies to Ukraine and Georgia in January 2006, the move was widely seen as a clear warning of the Kremlin’s willingness to use its energy resources to exert political influence over Europe. 
Twelve months later, Russia drummed home the significance of that act by shutting off oil supplies to Belarus for three days, causing a ripple effect on shipments to Western Europe. 
Despite these supply-side threats, there have been few signs of an effective European Union-wide policy that would reduce dependence on Russian energy. 
The European Commission’s energy proposals, issued in January, are a step in the right direction. But they will have little direct effect on Russia’s energy relations with Europe, because they do not oblige Russia to adopt more competitive and transparent energy transport and investment policies. 
On the contrary, European countries continue to forge bilateral deals with Russia, with little consideration for common EU interests. 
The West European EU members have shown scant concern over Russian pressure tactics against the new members in Central and Eastern Europe, calling into question the extent of EU solidarity regarding energy supplies. 
Since the Kremlin interrupted energy supplies to the Baltic states in 1990 in a futile attempt to stifle their independence movements, it has continued to use pipeline politics against countries such as Poland, Latvia, and Lithuania – all new EU members. 
For them, and for new democracies like Ukraine, Georgia, and Moldova, Russian energy dominance and its political consequences remain a serious threat. 
Russia has profited from Europe’s disarray by moving to cement greater long-term European dependence on its energy, particularly natural gas by continuing its divide-and-rule tactics toward European governments. 
Since January 2006, Moscow has negotiated separate deals with energy companies from Germany, France, Italy, Hungary, Serbia, Slovakia, and Denmark that could undercut Europe’s efforts to build additional pipelines aimed at bypassing Russia’s near monopoly of supplies from Central Asia. 
It initially appeared that Germany under Chancellor Angela Merkel would be more sensitive to the energy security of Central and Eastern Europe. 
However, Merkel approved the expensive Northern Europe Gas Pipeline (NEGP) beneath the Baltic Sea, negotiated between her predecessor Gerhard Schroeder and President Vladimir Putin, and strongly opposed by fellow EU member Poland, which the pipeline will bypass. 
The NEGP will cost at least eight times as much as the alternative Yamal II pipeline, which would have gone overland through Poland. 
Despite the European Commission’s good intentions, the EU’s larger members continue to resist submitting to a common EU energy policy. 
In mid-November, EU foreign ministers failed to agree on a common approach to Russian energy – just as reports resurfaced that Russia may seek to establish a natural gas cartel similar to OPEC. 
The EU’s political will to counter its increasing dependence on Russia in the immediate future is thus open to serious doubt. 
Indeed, for the next five to ten years, Russia will be able to fulfill its gas contracts in Europe only by monopolizing exports of gas to Europe from Kazakhstan, Turkmenistan, and Uzbekistan. 
But the EU so far has chosen to ignore that Gazprom’s monopoly is a clear violation of the anti-trust and competition policies of the revised Rome Treaty and WTO obligations. 
Russia clearly believes that the current tight world energy market and high prices give it enough leverage over the West to maintain its current approach. 
Russia consistently refuses to allow Western companies the same access to Russian facilities that Russian state energy companies already enjoy in Europe and the United States. 
That is likely to remain true as long as the West fails to adopt an energy strategy that causes the Kremlin to change course. 
Putin denies that Russia is using its energy resources to coerce European governments, arguing that the decrease in gas supplies to Western Europe during the cut-off of gas to Ukraine in January 2006 was the result of Ukrainian “theft.” 
In its dispute with Belarus in January 2007, Russia leveled a similar accusation of theft from the oil pipeline that crosses the country. 
It also claims to have been subsidizing the price of energy to the Commonwealth of Independent States, when in reality it is the Central Asians who have been subsidizing Russia to an even greater extent. 
Although the EU Commission appears to be committed to building a more open, competitive energy market in Europe, action against Russia’s noncompetitive practices within the EU has taken a back seat to internal differences over takeover battles for national energy “champions” involving companies from other member states. 
Russia must be convinced that its resources will be far more valuable if they are opened to international investment, managed transparently, and operated according to the legal and commercial rules of the international trading system. 
But that is unlikely in the absence of strong and unified European action. 

Russia’s Fascist Temptation 
Today’s Kremlin thinks that democracy was being built too quickly in Russia. 
The government does not say that it is against democracy, only that it is untimely and needs to be delayed – a logic that manifests itself in most official decisions. 
Thus, at the beginning of the current decade, the democratic system of political checks and balances that had been created in the 1990’s began to be dismantled. 
Before 2000, there was an influential, independent press and a parliament loyal to the president, but still independent. 
The Federation Council (the upper chamber of the Duma), too, was generally loyal to the president, as were regional governors, while remaining independent. 
There were also influential entrepreneurs and business organizations that were actively involved in the decision-making process. 
As a result of the disappearance of these checks and balances, the quality of the government’s decisions has fallen sharply. 
The notorious law on monetization of social benefits, which transforms in-kind benefits into cash, is a typical example. 
Despite the fundamental soundness of the step, it was poorly prepared and implemented, and the government seriously miscalculated its effects on the national budget. 
Moreover, it generated mass social protests, which the government evidently had not envisaged. 
Never would the law in its current form have passed through the old State Duma. 
MP’s would have read and analyzed it attentively, asked ministers many questions, and, if necessary, insisted on re-writing various tables presented in the draft. 
They would have understood that the calculations provided were at complete odds with reality, and they would have considered what to do about it. 
If there is no independent press able to caution against mistakes and a parliament that can do the same, then the mistakes will eventually manifest themselves on the streets. 
Democracy was not invented by fools. 
Experience tells us that if you don’t let the steam out of a pot, the pot will explode. 
But when we stifle, step by step, all that remains of a free press, when even small television channels that provide uncensored information seem dangerous, we are keeping the lid firmly on the pot. 
I would say that this is worse than a crime. 
It’s a mistake. 
As someone with some background in politics, I understand the strategy of today’s government: create an extreme threat, first and foremost through shadowy associations with fascist organizations, and then say to citizens, “You can’t deal with this threat on your own, so you should trust us to figure out what to do with it.” 
The message is then constantly reinforced by the view of the world formed by the media. 
I understand the reality of the fascist threat, but I also understand what the government wants us to take from it. 
I firmly believe that we should not allow ourselves to participate in these games, nor that we should believe that Russia’s fascist organizations don’t have anything to do with the government. 
I think that when the authorities conceive such strategies, they assume that the outcome will be manageable. 
In reality, this is not always the case. 
When you open a Pandora’s box, nobody can predict what will happen. 
It is very risky to create a dangerous situation for political ends, because, more often than not, it is likely that the situation will become uncontrollable. 
Indeed, the threat of fascism is real. 
But the more people who don’t accept the fascist alternative are mobilized politically, the smaller the threat will be. 
The most important question of the day is not the government’s perspective, that is, its desire to instill fear and eliminate checks and balances on its power. 
What matters are the actions of those who don’t want fascism in Russia and instead simply want Russia to be free. 
There are many such people, tens of millions, but they are not always politically engaged and united. 
The good news, then, is that there are far fewer people who seriously want to see a fascist regime in Russia than the government claims. 
We should not lose heart, but we do need to be politically active and united. 
After all, the Soviet Union was a totalitarian state that could rely on a powerful and ubiquitous secret police. 
And look how it ended up. 

Russia’s Fragile Power 
Russia sent an impressive delegation to the World Economic Forum at Davos this year. 
After strong representation under Boris Yeltsin, the level of Russia’s participants had slipped since Vladimir Putin became president. 
This year, however, the Russians sent their “A” team, and a well-attended session focused on “Russia’s More Muscular Foreign Policy.” 
With higher energy prices, many Russian officials are enjoying their renewed power. 
I was asked to comment on United States-Russian relations at a dinner with top officials from the government and Gazprom, the giant energy company. 
I said that America and Europe had too many illusions about democracy in Russia in the 1990’s, and were now going through a stage of disillusionment. 
There is concern about Russia’s future, how it will use its newfound power, and how the West should respond. 
One view is that Russian politics is like a pendulum. 
It had swung too far in the direction of chaos under Yeltsin, and has now swung too far in the direction of order and state control under Putin. 
It has not swung back to Stalinism; 
Czarism might be a better historical metaphor. 
Observers debate whether it will eventually reach a new equilibrium. 
The optimistic view is that property rights are becoming more deeply anchored than they were in the past, and that Russia’s future will depend on how fast a middle class with a stake in law-based government can be created. 
But others are not so sure. 
Sometimes pendulums continue to oscillate wildly unless there is some friction to slow them down, and sometimes they get stuck. 
Pessimistic observers foresee a continual decline of freedom rather than a liberal equilibrium. 
Faced with this uncertainty about the future of liberal democracy in Russia, how should western countries respond? 
This question is particularly difficult for the Bush administration, which is torn between the president’s early endorsement of Putin and his pro-democracy agenda. 
Secretary of State Condoleezza Rice declared in 2005 that “the fundamental character of regimes matters more today than the international distribution of power,” and Senator John McCain, a US presidential candidate, has urged removing Russia from the Group of Eight advanced countries. 
Yet, in addition to its democracy agenda, the West has a realist agenda based on very tangible interests. 
The West needs Russian cooperation in dealing with issues like nuclear proliferation in Iran and North Korea, the control of nuclear materials and weapons, combating the current wave of radical Islamist terrorism, and energy production and security. 
Moreover, Russia possesses talented people, technology, and resources that can help to meet new challenges like climate change or the spread of pandemic diseases. 
There may not be as much conflict between these two agendas as first appears. 
If the West were to turn its back on Russia, such isolation would reinforce the xenophobic and statist tendencies present in Russian political culture and make the liberal cause more difficult. 
A better approach would be to look to the long run, use the soft power of attraction, expand exchanges and contacts with Russia’s new generation, support its participation in the World Trade Organization and other market-oriented institutions, and address deficiencies with specific criticisms rather than general harangues or isolation. 
In any case, the sources of political change in Russia will remain largely rooted in Russia, and Western influence will inevitably be limited. 
But advocating engagement over isolation should not prevent friendly criticism, and in Davos I offered four reasons why Russia will not remain a major power in 2020 unless it changes its current behavior and policies. 
First, Russia is failing to diversify its economy rapidly enough. 
Oil is a mixed blessing. 
Riding on record-high energy prices and raw material exports, in January 2007 Russia became the world’s tenth-largest economy. 
But energy exports finance about 30% of a government budget that is based on forecasts that oil remains at $61 per barrel. 
Russian industrial exports primarily consist of armaments, with advanced aircraft accounting for more than half of sales. 
That leaves Russia vulnerable. 
A related problem is that Russia lacks a rule of law that protects and encourages entrepreneurs. 
These are precisely the people needed to help foster a vibrant middle class – the bedrock of a stable democratic market economy. 
Instead, corruption is rampant. 
Moreover, Russia’s demographic crisis continues, sustained by poor public health and inadequate investment in a social safety net. 
Most demographers expect Russia’s population to shrink significantly over the coming decades. 
Adult male mortality is much higher than in the rest of Europe, and it has not been improving. 
Finally, while one can understand a former superpower’s temptation to seize its opportunity to return to a muscular foreign policy, Russia’s bullying in the energy area is destroying trust and undercutting Russia’s soft power in other countries. 
Both Russia’s neighbors and Western Europe have become more wary of depending upon Russia. 
Most Russian participants at the Davos dinner seemed to ignore these criticisms, but it was interesting to hear one important official admit that reform might progress faster if oil prices dropped somewhat, and another accept the point that criticism should be welcomed as long as it is offered in a friendly spirit. 
The mere fact that high-level Russians reappeared in Davos to defend themselves may be a small but healthy sign. 

Russia’s Future and the West 
Russia is again seeking a role as a global power and is therefore flexing its muscles. 
Signs of change in Russian foreign policy have been mounting ever since President Vladimir Putin delivered a confrontational speech in Munich last February. 
Since then Russia planted its flag on the seabed below the North Pole to demonstrate its claims to the Arctic and its natural resources; announced its intention to build its own missile defense system and issued repeated threats against Europe because of the planned deployment of a small American defense system; exploded a “stray” missile or bomb in Georgia as a warning signal to the government in Tbilisi and its Western friends; buzzed America’s military base on the Pacific island of Guam with surveillance aircraft; blocked a decision on the final status of Kosovo in the UN Security Council; and launched a hacker attack against computer systems in Estonia. 
In addition, each winter there is a repeated threat of “problems” with oil and gas deliveries to Europe. 
High oil and gas prices, America’s self-inflicted global weakening due to its misadventure in Iraq, and the rise of China and India obviously have prompted Moscow to change its foreign policy. 
Yet none of this amounts to a fundamental change in Russia’s strategy, because Russia continues to adhere to its fundamental decision, made in the early 1990’s, to open itself to the West. 
Still, the style of Russian politics has changed from cooperation to confrontation. 
And, as history has shown, a change of style in foreign policy may quickly lead to a change in strategy. 
Currently, Russia is undergoing a restoration. 
Such periods always follow revolutions and times of far-reaching change. 
The power of the center is being restored, following its partial disintegration after the end of the Soviet Union. 
But, ever since the sixteenth century, the center has played the main role in shaping Russian history, and now looks to be no different. 
The restoration of central authority has been going on for some time. 
Indeed, today the center almost completely dictates Russian internal politics and economics, though not within a totalitarian or autocratic framework, but in a democratic and market-based fashion. 
Democracy has, of course, degenerated into what is sometimes called “managed democracy.” 
Theoretically, there remain different parties, elections, a pluralistic society, an independent judiciary, and a market economy. 
But in practice, the entire system is subject to control by the president. 
The people will still be allowed to vote for the president, but the real decision about who he will be will have been made beforehand. 
Even if its annual GDP approximates that of Italy, Russia still is a global power and too important to isolate, or even forget about. 
It retains enormous strategic weight. 
Russia’s future will be determined by whether it is successful in comprehensively modernizing its economy, which today is largely based on exports of oil, gas, and other natural resources. 
If Russia remains dependent on a natural-resource economy, it will again become a colossus with feet of clay. 
Indeed, it will not be nearly as powerful as the old Soviet Union. 
Only if Russia succeeds in productively reinvesting the gains from its petro-economy will it achieve sustainable modernization. 
But this also will require successful political modernization, which means nothing less than constraining the power of the center. 
The most important aspect of this will be to secure real judicial independence. 
Moreover, Russia needs a system of checks and balances compatible with its own culture and tradition, because this, together with the rule of law, is an indispensable precondition of a functioning democracy. 
Finally, Russia will need to build a functioning party system, capable of sustaining Russian democracy. 
Considering the country’s vast size, a two-party system seems to be the most appropriate. 
All these transformations will take time, and they will not come easily or be free of conflict. 
So, for the foreseeable future, the West will have to deal with a Russia that yearns for its lost imperial power and shapes its foreign policy to this end. 
In international politics, one side’s strength often reflects the other side’s weakness. 
The weakness of the US and Europe today is an open invitation for Russia to return to its old imperial politics. 
This development is anything but safe, particularly for Europe. 
Europe thus has a strategic interest in Russia’s successful modernization and in good bilateral relations. 
Above all, the European Union and its member states cannot allow Russia to recapture its imperial spheres of influence without severely damaging its own central interests. 
It is for this reason that securing the independence of Ukraine is so important, as is assuring Turkey’s European orientation. 
So, while Russia’s modernization and democratization are in Europe’s interest, its return to an imperial foreign policy and barely veiled authoritarianism at home is not. 
Most Russians look westward. 
In the next few years, Russia will offer Europe a great opportunity for closer cooperation, but it will also pose a risk of increased intrusion in European affairs. 
The right responses to these opportunities and risks require a united, strong Europe. 
Indeed, a strong and united Europe will also make an important contribution to Russia’s sustainable modernization. 
A weak and divided Europe will tempt Russia to pursue dangerous paths into the future. 

Russia's Great Gas Game 
BERLIN – Russia and the European Union are geopolitical neighbors. 
Whether or not their relationship is in fact neighborly, rather than tense and confrontational, is of critical importance to both. 
Unless it modernizes its economy and society, Russia can forget its claim to status as a world power in the twenty-first century and will continue to fall behind both old and newly emerging powers. 
Moreover, Russia needs partners for its modernization, because its population and economic potential are too small for it to play an important role by itself in the emerging new world order. 
Russia’s strategic nuclear weapons will be insufficient to ensure it a place among first-rank powers. 
But where can Russia turn? 
Towards East Asia? 
To the south and the Islamic world? 
Neither of these is a serious option. 
As it is, Russia can turn only towards the West, and to Europe in particular. 
For Europe, however, Russia’s role is of critical strategic importance. 
Even a partial revision of the post-Soviet order in the direction of an increased Russian grip on ex-Soviet states or satellites would drastically change EU strategy and security policy. 
Both sides claim to want improved bilateral relations, but there is room for doubt about whether Russians and Europeans actually think about their relations in the same terms. 
A look beyond the cordial rhetoric reveals profound differences. 
When Russia’s former president and current prime minister, Vladimir Putin, declared several years ago that the greatest disaster of the twentieth century was the demise of the Soviet Union, he didn’t just speak for himself but arguably for the majority of Russia’s political elite. 
The overwhelming majority of Europeans, however, probably view the USSR’s breakup as a cause for celebration. 
Indeed, today’s Russia avowedly seeks to reverse the post-Soviet order in Europe that emerged after 1989/1990, at least in parts of its neighborhood, while the Europeans and the West want to maintain it at all costs. 
So long as Moscow doesn’t understand these fundamental differences and draw the right conclusions from them, Europeans won’t view Russia’s opening towards the West as an opportunity, and Russia will always encounter deep mistrust in Europe. 
But this doesn’t preclude practical and pragmatic co-operation in numerous areas. 
Russia today has retained its strength only as a supplier of energy and other natural resources. 
It is therefore no surprise that Putin has sought to use this lever to rebuild Russia’s power and to revise the post-Soviet order. 
Russia’s natural gas supplies to Europe play a vital role in this regard, because here, unlike in the case of oil, Russia’s bargaining position is very strong. 
Even more importantly, its direct neighbors are either completely dependent on Russian gas supplies – Ukraine and Belarus – or, like Azerbaijan and Turkmenistan, are dependent on Russia’s pipeline system to sell their gas output. 
Russia certainly pursues economic interests with its gas-export policy – all the more so when gas prices are trending down – and it wants to expand its role on the European gas market to intensify the dependencies that now exist. 
But this is unlikely: Russia’s disruption of gas supplies in January 2009 made clear to the EU in no uncertain terms what price might have to be paid. 
That is why “diversification of gas-supplier countries” has since been EU policy – including, first and foremost, the Nabucco pipeline project, which would open a southern corridor between the Caspian Sea, Central Asia, northern Iraq, and Europe. 
Nabucco would reach Europe via Turkey and would drastically reduce Caspian supplier countries’ dependence on Russia’s pipelines, and the new southeastern EU members’ dependence on Russian gas supplies. 
So it comes as no surprise that the Kremlin is trying to scupper Nabucco. 
Two other developments promise to prevent increased European dependence on Russia: massive expansion of liquefied gas imports into the EU and – linked to this and to deregulation of the European gas market – the transition from long-term supply agreements and the oil-price peg to market-dependent spot prices. 
Nonetheless, the primary goal of Russian gas policy isn’t economic, but political, namely to further the aim of revising the post-Soviet order in Europe – a quest that is not about the EU as much as it is about Ukraine. 
Ukraine’s new prime minister, Mykola Azarov, was stunned when Putin unexpectedly confronted him during a joint press conference with a suggestion to merge the Ukrainian and Russian gas companies. 
Unlike the Ukraine government’s assent to extending the Russian Black Sea fleet’s deployment in Crimea – a decision that led to physical violence in Ukraine’s parliament – this was not a prolongation of the status quo, but a public demand for its revision. 
With the Nordstream pipeline in the Baltic and the exorbitantly expensive South Stream pipeline in the Black Sea, Russia is not just trying to create direct gas connections between Russia and the EU that bypass Ukraine and undermine Nabucco. 
The main goal is to put pressure on Ukraine, as well as on Azerbaijan and Turkmenistan, which want to supply Europe with gas independently of Russia. 
Once those aims are achieved and/or Nabucco goes ahead, South Stream will be shelved because it doesn’t make economic sense. 
In Europe and the United States, this challenge has been understood. 
Now it is necessary to stand by those in Ukraine who see a European future for their country, to open the southern corridor via Nabucco, and to accelerate development of a common European energy market. 
A decisive European policy will improve, rather than strain, relations with Russia, because it will result in more clarity and predictability. 

Russia’s Illiberal “Liberal Empire” 
Across the West, many people are questioning whether Russia will continue using natural gas as a means of putting economic and political pressure on Ukraine, Georgia, and other countries in what the Kremlin regards as its “near abroad.” 
Using the “energy weapon,” however, is not just a tactic: it is at the heart of the prevailing doctrine guiding Russian foreign policy. 
Russia’s policy toward the post-Soviet countries is based on the doctrine of a “liberal empire,” according to which Russia’s major government-owned and private companies should assume control of key economic entities across the territories of the former Soviet republics by acquiring their assets. 
In this context, the word “liberal” should be understood to suggest that the empire of the “new Russian dream” should be built by purely economic means, excluding all forcible action against other nations. 
Naturally, the key role in this model is given to the supply of energy to the post-Soviet countries. 
In particular, the Russian utility giant Gazprom uses increases in gas prices as a means to punish “disobedient” neighbors. 
Ukraine was punished in this way for its eagerness to integrate with the West following the Orange Revolution. 
However, after the return of the pro-Russian Victor Yanukovych to the position of Ukrainian prime minister, the country’s pro-Western orientation has been significantly weakened. 
So it should be no surprise that Ukraine under Yanukovych has faced no further problems with the supply of Russian gas. 
But Georgia remains a major Kremlin-Gazprom target. 
Russia’s attempt to drag Georgia into its imperial net started in the summer of 2003, when the Russian power monopoly United Energy System took control of 75% of Georgia’s electricity network. 
After the Rose Revolution of November 2003, Russian companies turned out to be the most avid purchasers of Georgian enterprises and their assets. 
The first significant obstacle in the way of Russia’s designs on Georgia was intervention by the US, which demanded that the Georgian government drop negotiations with Gazprom and banned Georgia from selling the gas pipeline that connects Russia and Armenia through Georgian territory. 
Russia punished Georgia almost immediately, banning the import of Georgian wines and mineral waters – both of which are key export goods. 
As Georgia’s prospects of joining NATO seemed to increase, Russian actions became more illiberal. 
Ethnic Georgians living in Russia, including those who are Russian citizens, became targets of persecution. 
Russia’s actions are aimed at fomenting an anti-government backlash in Georgia, thereby paving the way for pro-Russian political forces to come to power. 
But the illiberalism inherent in Russian imperialism is not limited to recent behavior, and, more disturbingly, it extends to the question of Georgia’s territorial integrity, as Russian troops continue to prop up secessionist regions. 
By provoking ethnic conflicts in the territories of former Soviet republics, Moscow hopes to keep them under its control and influence. 
Ironically, the Russian troops deployed in the renegade Georgian regions of Abkhazia and South Ossetia have been accorded the status of “peacekeepers.” 
But they are really illegal occupiers, as Russia’s decision to give Russian passports to these regions’ residents attests. 
Now Russia is threatening to recognize the independence of Abkhazia and South Ossetia if the West recognizes the Serbian province of Kosovo as an independent nation. 
To the extent that most of the residents of Abkhazia and South Ossetia have already been given Russian citizenship, the recognition of those two regions’ sovereignty would be entirely fictitious and, in fact, an interim measure on the way to their full annexation by Russia. 
To strengthen Russia’s political influence over Georgia’s separatist regions, Gazprom, without taking the trouble to ask for permission from Georgia’s democratically elected leaders, has begun constructing a gas pipeline connecting Russia and South Ossetia directly. 
Although there was no interruption of gas supply from Tbilisi to South Ossetia, this step is necessary for the Kremlin to ensure even greater integration of this Georgian region into Russia’s economic system. 
With Gazprom having already doubled gas tariffs for Georgia, the energy noose is tightening. 
But, thanks to gas supplies from neighboring Azerbaijan, Georgia has not yet been strangled. 
A revived Russian empire, whether it is constructed by force or through economic coercion, is not in anyone’s interests. 
Reigning in Russia’s illiberal “liberal empire” is the central question of European security today. 

Russia's Incompetent War on Terror 
In response to the recent wave of terrorist attacks, Vladimir Putin has demanded that even more power be vested in him. 
As leading Russian military expert Alexander Golts argues, the problem in Russia is not a lack of central power, but of power exercised incompetently and without individual initiative. 
The slaughter by terrorists of hundreds of Russian children in Beslan was final proof - if more was needed - of the utter incompetence of Russia's military and security services. 
In Beslan, camouflaged men representing four ministries fussed uselessly, with no clear leader or goals, losing precious minutes when the violence erupted. 
Meanwhile, Nikolai Patrushev, the director of the Federal Security Service (FSB, the former KGB) and Rashid Nurgaliev, the head of the Ministry of Internal Affairs (MVD), both sent to Beslan by President Vladimir Putin, were invisible as the tragedy unfolded. 
So once again Russians must face how ineffective their military is. 
Indeed, none of Russia's power structures, including the military, the FSB, and the MVD, are capable of performing effective anti-terrorist operations. 
Most Russians reached this conclusion long before the Beslan attack. 
In 2002, after terrorists took 800 theatergoers hostage, Putin ordered that an anti-terrorist component be added to Russia's military strategic plan. 
Some military analysts saw this as the beginning, at long last, of serious reforms, as the army was capable only of executing military operations in Russia's traditional way, i.e., using overwhelming force, as in WWII. 
Russia's traditional army cannot fight terrorists effectively because it disdains the ability of soldiers to work in small groups, and does not encourage individual initiative on the part of officers. 
All are simply expected to execute orders scrupulously. 
But it is individual training and the ability to make split-second decisions in a fluid situation that are required in anti-terrorist operations. 
Incidentally, when one such anti-terrorist operation was suggested in the Pankisi Gorge in Georgia, Putin decided against it, understanding that instead of eliminating terrorists it would likely turn into a full blown traditional war. 
From the outset, the Defense Ministry was skeptical of Putin's order to include anti-terrorism on the military agenda. 
It suggested, instead, that the army should play a secondary role in anti-terrorist operations. 
The Army's hostility to reform is deeply ingrained. 
Today, Russia's army has no professional institution for training non-commissioned officers. 
The Defense Ministry simply names sergeants from senior conscripts, which means that sergeants are not very different from their subordinates in either age or training. 
The internal conditions of the "power" ministries - the FSB and the MVD, which bear the main responsibility for antiterrorist operations - are equally grim. 
Now the Kremlin wants to merge the FSB and MVD into one Ministry of State Security, thereby creating a single anti-terrorist center. 
Putin has already decided to create an operational center of 13 groups in the Northern Caucasus region to coordinate the actions of the Defense and Emergencies Ministries. 
But there is little reason to believe that this proposed bureaucratic monster will provide better security than the existing FSB and MVD forces. 
The only positive result that may emerge from such a structural change could be that the number of anti-terrorist formations will grow. 
Yet even that is uncertain: before Beslan, the response to terrorist attacks in Ingushetia and Chechnya consisted of efforts to form additional traditional military divisions. 
It is now obvious that overwhelming numbers don't provide an advantage in fighting terrorism, because it is the terrorists who have the initiative. 
They plan when and where to strike. 
Confronting them effectively will require root-and-branch change in order to inspire Russian security officials to take the initiative. 
For example, Russian security structures have no information about the underground work of the terrorist organizations, which are spread across the entire Russian Federation. 
There is no credible intelligence penetration of these organizations. 
This must change if Russia is to prevent future Beslans. 
But fighting terrorists requires an entirely different kind of spying from "uncovering" traditional "spies," or neutralizing unpopular oligarchs such as Mikhail Khodorkovsky. 
To meet today's threats, troops must be able to take individual responsibility and initiative, and need to be trained to react resourcefully and at a moment's notice. 
These qualities simply don't exist in Russia's Sovietized military organizations, with their rigid hierarchies and culture of blind conformity. 
The entire military philosophy in Russia must be changed. 
But neither Russia's president nor its power ministries seem ready for this. 
Instead of confronting today's new and very real enemy, they would rather confront the old, traditional one - the West. 
After the Beslan tragedy, Putin offered an exotic explanation of terrorism: the terrorists, he claimed, are instruments in the hands of those who still fear Russia as a nuclear power. 
This is nonsense on stilts, though it obviously sounds pleasing to generals in the power ministries, because the only war they know how to wage is with "world imperialism." 
They are useless at fighting today's new terrorist enemy. 
Without major reform of all security and military forces - reforms that provide incentives for individual officers to show initiative and take responsibility - Russia's war on terror will remain one-sided: the terrorists will be doing all the attacking. 

Russia's Language is in the Soup 
Three hundred years ago Peter the Great cut a window into Europe. 
Foreign languages flooded into Russia: English, Dutch, French, and Italian. 
Today, new words and cultural concepts are also arriving in Russia at breathtaking speed. 
Sometimes they add to, sometimes they replace, Russian analogues. 
For example, Russia has had "shti" (cabbage soup), "ukha" (fish soup), "pokhlebka" (everything soup), "selyanka" (peasant soup), "botviniya" (cold beet soup), "okroshka" (spring vegetable soup). 
Now bullion, consommé, and even simply "soup" have arrived. 
There was less, now we have more. 
Isn't this good? 
But somebody thinks that all the old words should be deleted from our memories, that only one word -- soup -- should remain. 
Soup; soup in general, with no variations. 
Everything we eat with a spoon is soup; everything we eat with a fork is not soup. 
In all our menus we have soup - just that. 
Forget what you've known, never remember, never try to find out what words like gazpacho or bouillabaisse might mean. 
Don't ask what ingredients are used in making those dishes. 
You don't need to know all this. 
In fact, why be concerned about the foreign gazpacho? 
Forget even a simple difference between the "shchi" (cabbage soup) and the "borshch" (beet soup). 
There is none. 
"Ukha" (fish soup), what is "ukha?" 
With all sorts of fish available, let's eliminate the word for it. 
Why use a name when we have a product? 
Let all of those concepts disappear, evaporate; let only "soup" remain -- eat it, that's it. 
Clothes, too, are now generic in today's Russia, as in China under Mao--a blue fatigue. 
Let's live in "khroushchobas" (five-story uniform buildings built in the 1950-1960s during Khrushchev's leadership). 
Let all men be Sashas and all women Natashas. 
If we need to address them, we can simply say, "Eh!" 
Under free market capitalism we can, at long last, live up to the communist ideal, "The whole Soviet nation like one man!" 
Excellent synonyms like "good, beautiful, valuable, positive, lovely, exceptional, super, enchanted, magic, adorable, remarkable, sweet, perfect, spectacular, fantastic, great, grandiose, irresistible, intriguing, entertaining, luring, incomparable, attractive, striking, divine," are disappearing. 
What do we have nowadays? 
Only "krutoi" (cool), or "klevyi" (hot). 
It is really "cool", for example, to express oneself with just one-syllable words, selectively adopted from all the treasures of the English language. 
At this very moment your author is staring with disgust at a cardboard box on which some American has written: "Parm Plus! 
New Improved Taste." 
What he really wanted to say, of course, was that "This box contains Parmesan Cheese, which because of the newly added ingredients is infinitely better than other cheeses produced by our vicious competitors." 
This surgery resulted in the amputation of a perfectly healthy part of the word "parmesan," adding the empty but pompous suffix "plus." 
Think of this action as akin to a surgery that replaces a healthy leg with an artificial limb. 
Some inexplicable and unsurpassable force makes our journalists (especially young television and radio types), cut out whole bunches of Russian suffixes and throw them into the trash. 
"Blef-klub" (Bluff Club) for example is shown on "Kultura" TV. 
Its hosts and producers seem deaf to the nauseating connotations - vomit, nausea, and illness - that the word "blef" (blev) has in Russian. 
We must remember that despite the IMF, the World Banks, and all the market economic phenomena we have experienced in the last decade, Russian bread cannot grow in a foreign style. 
Economy of sounds and words does not work for the Russian language. 
Using English-speaking models we no longer get the slow, sequential flow of the Russian linguistic stream but a competition for asthmatics. 
The new generation, it seems, prefers new models of verbal exchange, not as enchanting as in the past, but perfectly suited to the simple communications required in today's simplified world. 
Everywhere people gripe about how teenagers grunt and do not speak. 
Here in Russia, grunting is all we now seem to do. 
This is what it a typical modern Russian conversation sounds like. 
A restaurant scene (words used in both Russian and English version are italicized): 
Client: I want soup . 
Waiter: Here is soup . 
C: Is soup hot ? 
W: Hot plus . 
C: (eating) Eh ?!?! 
W: Mhhh ? 
C: Soup is not hot . 
W: No? 
Not hot ? 
Then it's cool . 
C: Not cool. 
Soup --out. 
W: Well, it's one buck . 
C: Go to hell! 
Here is ruble plus . 
W: Eh! Ruble is shit. 
Give me a buck . 
C: No! 
W: I'll give you a black eye plus . 
Give me a buck . 
C: Here (punches a waiter in the eye) 
W: Mhhh! 
C: I saved a buck (runs away). 
This language can be used not only by male silent types, but also by lovely chirping ladies. 
Here is a beauty parlor scene (based on a true story). 
A lady enters with a fashion magazine. 
Hairdresser: So? 
Lady: Cut. 
H: How? 
L: Like here. 
Boxer -cut. 
H: (approvingly) Boxer is cool . 
L: So... 
H: So how was Cypru s? 
L: (perking up) O, Cyprus was cool . 
Beach, bar --all plus, juice, gin, drink . 
At night--husband into the douche , daughter--out, here is Greek Max -- knock, knock , then sex , cake, bucks, kreks, feks, peks . 
So here. 
At this point your author runs away, in despair, in search of the few remaining Russians who still converse in their native language. 

Russia’s Lawless Legality 
MOSCOW – Colonel Yuri Budanov is a convicted rapist and murderer. 
After serving half his prison sentence for the rape and murder of an 18-year-old Chechen, Elsa Kungayeva, he was released last December. 
Svetlana Bakhmina was a lawyer at Yukos, the oil company formerly run by Mikhail Khodorkovsky. 
In 2004, she was arrested and, in 2006, sentenced to six and a half years on embezzlement and tax fraud charges. 
Like Budanov, she applied for early release from prison in 2008. 
Her request was refused, as was her earlier plea in 2006 to suspend her sentence until her two small sons reached the age of 14 – a request she was entitled to make under Russian law. 
Vasily Aleksanyan was Executive Vice President of Yukos, and, as a lawyer, defended Khodorkovsky and his partner, Platon Lebedev, after their arrest in 2003. 
He was subsequently disbarred and was himself arrested in April 2006. 
By that time, Aleksanyan was critically ill with AIDS, for which treatment was withheld. 
In December 2008, the Moscow City Court approved his release on bail of 50 million rubles (around $1,775,000 at the time). 
Finally, consider Khodorkovsky and Lebedev themselves. 
Arrested in 2003, they were sentenced in 2005 to eight years in prison on charges of tax fraud. 
They are serving their sentence in Chita on the Chinese border, although Russian law prescribes that, for the crimes with which they were charged, they were entitled to be imprisoned near their place of domicile, i.e., in Moscow. 
When Dmitry Medvedev was elected as Russia’s president a little more than a year ago, he promised to do away with the “legal nihilism” in Russia. 
Although he was a close confidante of Vladimir Putin and probably was able to assume presidential office exclusively for that reason, many dared to hope that he would stop the vendetta against Khodorkovsky and all those who had been close to him. 
Disillusion fully set in only one year after Medvedev’s election, when a new case against Khodorkovsky and Lebedev was brought, this time for embezzlement of billions and money laundering. 
A cynical observer remarked at the preliminary hearing that by the looks of it the Russian authorities couldn’t make up their mind: either the former Yukos bosses didn’t pay taxes or they embezzled money. 
But since when does one pay taxes on embezzled funds? 
The courtroom where the new trial against Khodorkovsky and Lebedev is taking place is slightly larger than a spacious classroom. And it is full of heavily armed guards. 
Despite this, the two defendants are forced to sit inside a narrow cage whose glass front has only two small holes through which their lawyers can communicate with them. 
Every day, they are brought into the courtroom handcuffed like dangerous felons. 
One cannot help but contrast this with Budanov, the rapist and murderer who is now free to move about Russia at will. 
The judge refused without comment requests by the defense to remove the cage and to replace one of the prosecutors, who had already been a prosecuting counsel during the first trial. 
So the authorities’ aim seems clear: put Khodorkovsky and Lebedev away for a much longer time – more than 20 years if they are convicted. 
Few doubt that they will be. 
Still, this new trial of course is also a test case for Medvedev’s presidency. 
So far, he has done nothing to counteract the legal nihilism against which he himself has spoken. 
But maybe he will in the course of this trial, which resembles a personal vendetta even more than the first one did. 
To be sure, Khodorkovsky is no saint. 
Like many others in Russia who are allowed to enjoy their wealth in peace today (or maybe are lamenting its loss due to the financial crisis), he made his money in thoroughly obscure ways during the early post-Soviet years. 
But, instead of buying villas, yachts, or soccer clubs abroad, he invested his fortune in Russia. 
Of course, he did mainly fill his own pockets – and his social and political activities certainly were not entirely altruistic, either. 
But what made him public enemy number one for Putin was his desire to move Russia in a political direction that he viewed as positive and desirable. 
It was his ambition to subject the country to truly far-reaching social and political reforms that sealed his downfall and also brought about this new trial, which appears intended to silence him for good. 
Medvedev’s presidency will inevitably be measured by this case. 
Will he tolerate and endorse his prime minister’s personal aversions, or is he willing to put an end to the infamous spectacle of a judicial process that has been manipulated and abused from beginning to end? 
Little speaks for the latter scenario, but Russia has always been a country where hope dies last. 

Russia’s Lost Opportunity with Japan 
TOKYO – President Dmitri A. Medvedev visit to the south Kuril Islands, which the Soviet Red Army seized from Japan in the closing days of World War II, has demonstrated in unmistakable terms that Russia has no intention of returning the mineral-rich islands. 
This visit is not only a lost opportunity, given Russia’s need to modernize its economy and the help Japan could provide, but a grave strategic error in view of Russia’s increasing worries about China’s ambitions in Asia, which includes Russia’s lightly populated Siberian provinces. 
Russia, however, is only now beginning to realize that it must be much more pro-active in protecting its national-security interests in the Pacific region. 
The problem is that Russia’s focus is wrong-headed. 
For coinciding with China’s recent naval exercises in the Yellow Sea, the Russian Armed Forces carried out part of its “Vostok 2010” drills (involving 1,500 troops) on Etorofu, the largest island among the Russian-occupied Northern Territories of Japan. The entire Vostok 2010 exercise involved more than 20,000 troops. 
Russia’s illegal occupation of the south Kuril Islands began on August 18, 1945, three days after Japan accepted the Potsdam Declaration (or the Proclamation Defining Terms for Japanese Surrender), which ended the Pacific War. 
Stalin’s Red Army nonetheless invaded the Chishima Islands, and has occupied them, Southern Karafuto (or Southern Sakhalin), and the islands of Etorofu, Kunashiri, Shikotan, and Habomai – which had never been part of the Russian Empire or the Soviet Union at any point in history – ever since. 
Indeed, the lower house of Russia's Duma passed a resolution earlier this year designating September 2 as the anniversary of the “real” end of World War II, effectively making it a day to commemorate the Soviet Union's victory over Japan – and thus an attempt to undermine Japan’s claim that the occupation of the islands came after WWII’s end. 
On a trip to Russia’s Asian port of Vladivostok, Russian President Dmitri Medvedev declared that the social and economic development of Russia’s Far East is a national priority. 
By continuing to maintain its illegal occupation of Japanese territory, however, Russia precludes expansive Japanese involvement in this effort, effectively leaving the Chinese to dominate the region’s development. 
Russia’s persistence in its self-defeating occupation is surprising. 
Indeed, when Boris Yeltsin was Russia’s president, the country came close to recognizing the need to return the Northern Territories to Japan. 
But a nationalist backlash doomed Yeltsin’s efforts. 
Even Japan’s strategically myopic current government seems to understand that Russia needs to play some role in achieving a new balance of power in Asia. 
There are rumors that Prime Minister Naoto Kan’s administration is planning to break the logjam in the Japan-Russia relationship by appointing Yukio Hatoyama, his predecessor as prime minister, ambassador to Russia. 
Hatoyama is the grandson of Prime Minister Ichiro Hatoyama, who signed the Japanese-Soviet Joint Declaration on October 19, 1956, which formally restored diplomatic relations between two countries and also enabled Japan’s entry into the United Nations. 
That treaty, however, did not settle the territorial dispute, resolution of which was put off until the conclusion of a permanent peace treaty between Japan and the Soviet Union (now Russia). 
In the 1956 declaration, the two countries agreed to negotiate such a treaty, and the Soviet Union was to hand over Shikotan and Habomai islands to Japan once it was concluded. 
In the meantime, the status of the larger Etorofu and Kunashiri islands would remain unresolved and subject to negotiation. 
Japanese public opinion has remained adamant for decades that all four islands belong to Japan, and that no real peace can exist until they are returned. 
So sending Hatoyama as ambassador may elicit harsh criticism, as his grandfather once agreed to a peace process that returned only two islands, and many Japanese fear that his grandson may also be prepared to cut another unequal deal. 
Ambassadorial appointments should never be used as political stunts. 
This is particularly true for the appointment of an ambassador to a country that is critical to Asia’s balance of power. 
But it is not surprising coming from a government that lacks any coherent concept of Japan’s national security. 
Fortunately, Japanese voters sense their government’s irresolute nature, delivering it a sharp rebuke in the recent elections to the upper house of Japan’s Diet. 
But it is not only Japan that needs a government that takes regional security issues seriously. 
Russia should recognize that it has neglected its position in Asia for too long, and that only when it returns Japan’s Northern Territories can Japanese expertise be brought seriously to bear in developing Russia’s Far East. 
Only normal bilateral relations will allow the two countries to work together to forge a lasting Asian balance of power. 
Given his record, Vladimir Putin would not face the type of nationalist backlash Yeltsin confronted if he sought to reach an agreement that restored Japan’s sovereignty over its Northern Territories. 
Will he have the strategic vision to do so? 


Russia’s Moving Presidential Target 
Recently, a small event caused a major stir in Russian politics. 
An aide to President Vladimir Putin, Igor Shuvalov, said that it was realistic to expect the appearance of a new person whom Putin would consider his potential successor. 
The statement hit like a bombshell, producing an explosion of comments. 
There is nothing strange in this. 
Russia’s somewhat archaic political culture overly personifies power. 
Perceptions and assessments of the country’s future often depend heavily on the personality of its leader, his resoluteness, and his intellectual and moral qualities. 
Furthermore, Putin himself is interested in preserving uncertainty with regard to his successor for as long as possible. 
By doing so, he avoids the damage to his authority that would be caused by becoming a “lame duck,” particularly given Russia’s servile bureaucracy and its lack of reliable institutions and respected traditions to carry out a smooth transfer of power. 
Finally, different clans around the president have long been trying to promote their own candidates for succession. 
Statements similar to Shuvalov’s have already been made, and more can be expected. 
This ongoing discussion of the various candidates’ merits and drawbacks recalls how airplanes protect themselves from missile attacks by launching a false target. 
Public interest is the missile, and the target is the “ruling power,” which protects itself by providing a decoy in the form of aimless talk. 
But a more fundamental question is why Russia’s politicians, journalists, and analysts (and even some in the West) happily engage in this ruse. 
At the moment, who will succeed Putin is not important; what counts is the process that will result in the choice of Russia’s third president. 
The real historical significance of the choice that Russia will face in 2008 will be determined not by the next president’s personal qualities, but by his loyalties – that is, to whom he owes his job. 
Putin’s successor (whoever that will be) will come to power as a result of a deal within a narrow elite circle. 
This means that he will be accountable to and dependent on those who raised him to power, not in a symbolic sense, but in the quite real sense of fulfilling promises and facing sanctions if he does not. 
This narrow circle comprises not only very rich and resourceful people, but also members of informal but very effective organizations (which are often, perhaps not entirely correctly, called “mafia”). 
Thus, the implementation of Operation Successor (which may include the extension of the current president’s term) has imitated the way Putin himself came to power, and leaves Russia on the same path that Yeltsin set in the last years of his presidency – a path that will either ruin the country or bring it to a dead end. 
Politicians who come to power by winning a free and fair election are accountable primarily to voters. 
This does not necessarily lead them to work solely for the public good. 
Even winners of competitive elections have commitments to their campaign teams and sponsors. 
However, the existence of real political opposition creates a different atmosphere, which spreads beyond elections. 
Free elections do not determine politicians’ behavior, and do not necessarily ensure that moral, energetic, and intelligent people fill high offices. 
But freedom and democracy do restrict arbitrariness and theft, and encourage politicians, regardless of their moral qualities, to take public interests into account. 
If the next president comes to power by means of a free and fair election, Russia will have a real chance at a decent future. 
However, if Putin’s successor ��� or Putin himself – is imposed on the country in an uncompetitive way, Russia will remain on its current path to nowhere. 
This is a critical moment for Russia. 
Unfortunately, what is most important to comprehend in this moment is barely recognized, much less discussed. 

Russia's Naked Public Space 
Those who lived in Moscow in the late 1990's frequently encountered odd - and mostly incomprehensible - billboards. 
The first such billboard showed a young woman's face, but no bar of soap or bottle of perfume. 
No brand name, either. 
A short line said simply "I love you." 
Who loved this woman and why did he want everyone to know of his passion? 
Rumors had it that one of Russia's richest men wanted to impress his sweetheart. 
Next came a billboard showing a man's face, with foreign coins flowing down upon it. The line read, "Roma takes care of the Family, the Family takes care of Roma. 
Congratulations! 
Roma found a classy place for himself." 
There was never any public explanation for this message, either, just rumors - that "Roma" was Roman Abramovich (this was long before the tycoon bought the Chelsea football team, becoming a world celebrity), and that he had close ties with then President Boris Yeltsin's inner circle, known as "the Family." 
Even the few who claimed knowledge about Roma were unsure about who commissioned the billboard. 
It was simply taken for granted that what is supposed to be public space - the streets of Moscow - was appropriated for a vaguely menacing private message. 
Such "private" billboards kept appearing for about a year with varying themes. 
The implications of this game, however, run deeper than the actual messages sent and received. 
The billboards with their private messages were able to occupy public space so easily because in Russia public space is virtually empty: there's very little, if any, communication between state and society, and barely any public debate. 
Under Communism, public debate was confined to private kitchens. 
Everything beyond private space was state territory. 
Those who encroached upon it were punished. 
Perestroika turned the country into one big public space. 
Streets and squares, newspapers and literary journals became the ground for free public expression. 
Newspapers published in gigantic numbers. 
Russia's people wanted to make a difference and amazingly they did: their energy and cohesion put an end to Communist rule. 
Of course, what Russia had in the late 1980's and early 1990's wasn't institutionalized democracy, but revolutionary excitement. 
It was expected that out of this sea of democratic emotion new political institutions would emerge. 
Instead, political life here has been reduced to mere formality. 
Although there's nothing like Soviet oppression, the alienation between state and society resembles that of Soviet days. 
Unlike the Communist regime, the new Russian state doesn't treat its citizens like a flock of sheep. 
On the contrary, the state generally ignores its citizens - it is in no way accountable to the public, nor does it bother to explain what actually goes on inside the Kremlin. 
With political parties driven into irrelevance, parliament turned into a rubber stamp agency, and national television networks taken under government control, public discourse has all but disappeared. 
Ideas may be voiced, but there's barely any audience, and these utterances don't resonate; they die away with no implications or consequences. 
Russian society is atomized, with no sense of cohesion, solidarity, or collective drive in any interest group, professional or social, big or small. 
Big business won't stand up for the oil tycoon Mikhail Khodorkovsky, singled out by the Kremlin as a political enemy and imprisoned since last year. 
Instead, each businessman makes his own deals with the Kremlin to gain relative security. 
The same lack of cohesion is found among journalists. 
No professional solidarity was shown back in 2001, when Russia's private national television network NTV was taken over by the government. 
A considerable degree of freedom remains, but a submissive society freely gives ground to the state. 
Seven or eight liberal dailies publish critical opinion or even incriminating evidence against government officials. 
But their print runs range between 20 and 100 thousand copies, and their circulation is mostly limited to Moscow. 
With such small audiences, they are all but irrelevant. 
Worse, the broad public isn't anxious to get a better idea of how important government decisions are made. 
The old Soviet mindset persists: they up there will take their own decisions regardless of us down below. 
In this atmosphere of public silence, the virtually vacant public space is filled with odd voices that are not intended for public consumption. 
The billboards were "them" communicating in our common space, exchanging messages, as it were, over our heads . 
In March, a high-quality Moscow business daily, Vedomosti, published a letter from Mikhail Khodorkovsky. 
It was a mystery how the letter was smuggled out of jail. 
Did Khodorkovsky write the letter, or had he merely signed it? 
If he was the author, was it his political manifesto or an act of repentance? 
In the murky atmosphere surrounding Khodorkovsky's case, it is impossible to discover which theory is true. 
But the more relevant question is whom Khodorkovsky's letter aimed to address. 
Vedomosti readers may sympathize with Khodorkovsky's plight, but they account for only 60 thousand people. 
The public at large was basically unaware of Khodorkovsky's letter, because the state television networks did not report it. 
His missive was more likely an element in behind-the-scenes negotiations between Khodorkovsky and various Kremlin factions. 
Khodorkovsky's letter may have appeared in the public space, but it was not intended for public consumption. 
Rather, it was like the "I love you" billboard. 
For the time being, Khodorkovsky's love remains unrequited. 

Russia's Neurotic Invasion 
PARIS – At the very moment China was getting a “gold medal” in diplomacy for the success of the opening ceremony in Beijing, Russia earned a “red card” for the extreme and disproportionate violence of its military intervention in Georgia. 
Whereas China intends to seduce and impress the world by the number of its Olympic medals, Russia wants to impress the world by demonstrating its military superiority. 
China’s soft power versus Russia’s hard power: the two countries’ choices reflect their very different levels of self-confidence. 
China may play the victim versus the West, but its leaders know that their country is back on the world scene at a level that they deem appropriate and legitimate. 
Of course, domestically, China’s leaders lack confidence and behave accordingly towards their citizens. 
Yet, as China takes minuscule steps forward, Russia takes giant steps backward. 
For many years now, Georgia and Russia have been playing with fire, and war in the Caucasus looked preordained. 
Each side was waiting for a false move by the other to play its hand. 
It is more than likely that the young and impulsive Georgian President Mikheil Saakashvili fell into the trap that he had helped to create. 
He wanted to demonstrate to his Western partners that Georgia needed NATO protection from Russia, and that accession was therefore urgent. 
Regardless of whether some in the United States encouraged Saakashvili, he did not expect – but he should have – the “hyper-charged” reaction from Russia. 
For it is clearer than ever that Vladimir Putin is still in charge. 
The opportunity that Saakashvili presented to him to signal to the world Russia could no longer be humiliated was simply too tempting. 
Well aware of Russia’s emergence as a growing energy super-power, of the relative weakening of US clout and determination, of Europe’s deep divisions between pro-Russians, such as Germany and even more so Italy, and anti-Russians (mostly from the EU’s newest members in eastern Europe), and of the United Nations’ paralysis owing to Russia’s veto power, the Kremlin is sending a strong message to the world: “the time for concessions is over.” 
For the Kremlin, it is likely that South Ossetia and Abkhazia would remain under formal Georgian sovereignty only if the country did not join NATO. 
Yet Russia, like Saakashvili, is playing with fire: its strategy of encouraging separatist forces in the two Georgian provinces may inflame separatist tendencies in other parts of the Russian Federation (remember Chechnya?). 
Moreover, Russia is unnecessarily isolating itself from the world. 
Above all, this crisis confirms the new hierarchy of powers that now exists in the world. 
In this new world, China and Russia are back and America, though still on top, is declining. 
As for Europe, while the European Union mediates, in doing so it is also demonstrating the limits of its influence. 
The EU is truly “convincing” only when it can use the seductive power of a membership card. 
But Russia is not interested in joining, at least not on Europe’s terms. 
Russians are well aware that Americans want their help in the Middle East; on other issues, they listen to Europe and America with a stance oscillating between indifference and brutality. 
In the Caucasus, everyone is losing, though some more than others – foremost the civilians who have lost their lives or homes. 
Then comes the Georgian government, which has demonstrated its immaturity, if not irresponsibility. 
A lamb, after all, does not provoke a bear. 
But Russia, too, has unnecessarily damaged its international image. 
The Kremlin did not need such a display of unrestrained force and brutality to prove its case. 
China, in comparison, now looks like a respectable partner. 
As for the West, it is confronted with a dilemma. 
Can it reward Georgians for the leaders’ irresponsibility by rushing the country into NATO? 
On the other hand, can it afford to grant Russia the de facto right to control, directly or indirectly, countries like Georgia today and Ukraine tomorrow? 
The current crisis in the Caucasus does not mark the return of the Cold War, nor is it likely to mark the start of open warfare between Russia and the West; it is, more simply, the return of the traditional imperialism practiced by the Russian Empire more than a century ago. 
China is, with the exception of Tibet, a satisfied and confident status-quo empire. 
Russia by contrast is a revisionist imperialist power, whose lack of self-confidence is returning to haunt the world. 


Russia's Nostalgic Generals 
Generals everywhere are mocked for wanting to fight new wars the same way they fought the last one. 
Russia's military leaders--indeed, much of its foreign policy elite--is stuck in a similar rut. 
Both generals and diplomats are finding it hard to move beyond Cold War thinking, and their retrograde posture is hindering President Putin's efforts to push the country in a new direction. 
Around the world, Vladimir Putin is viewed as a strong man whose word is sacred. 
But this is hardly the case. 
In the Iraq crisis, both the Foreign Affairs and Defense Ministries voiced opinions starkly at odds with Putin. 
Such divisions occur regularly. 
Kremlin watchers, also stuck with Cold War mindsets, prefer to believe that President Putin and his ministers are playing a game of ``good cop/bad cop,'' in which, where the West is concerned, Mr Putin is good and everyone else is bad. 
If so, it's a strange game with perverse effects. 
For any foreign policy needs clear goals. 
But what happened during the Iraq war demonstrated that no real practical goal--such as securing repayment of Iraq's debts or preserving Russian interests in Iraqi oil--guided Russia's foreign policy. 
Instead, the Kremlin placed at risk its hard-won warm relations with the US for no clear reason. 
It is no secret that Russia's diplomats and military leaders were unhappy with Putin's decisive tilt toward the West after the war on terror began. 
Both the Foreign and Defense Ministries wanted a drawn-out fight over America's withdrawal from the ABM Treaty and NATO enlargement. 
They were mightily disappointed when Putin stated that he did not want any ``hysteria'' over these issues. 
But without the support of these two ministries, Putin cannot institutionalize his new foreign policy course. 
In other words, his efforts to reorient Russia's military to confront the most likely threats of the 21st century are being frustrated at the highest level. 
Defense Minister Sergei Ivanov does not even bother to hide his skepticism about the necessity of such a reorientation. ``In my view,'' he proclaims, ``it is still premature to speak of the specific content of changes to Russia's defense priorities and to the functions and tasks of its armed forces in connection with the threat of international terrorism.'' 
Underscoring his real agenda, he adds that, ``No radical revision of the fundamental principles governing the operation of the armed forces is required.'' 
Yet it is facile to say that antagonism to Putin's new course derives simply from adherence to Cold War stereotypes. 
Of course, Russia's generals readily believe the most paranoid explanations of American motives (particularly now, when American foreign policy seems so arrogant). 
But stereotypes can survive so long and be so influential only insofar as they serve the real interests of real people and institutions. 
The interest that Russia's military and diplomatic elite is defending is something I call the ``confrontation paradigm,'' within which the role--and budgets!--of the Foreign and Defense Ministries receive priority in public spending. 
Today, however, President Putin recognizes that economics will determine Russia's future, and so the ``power'' ministries must take a back seat to Russia's modernization and development. 
To promote their position, Russia's generals and diplomats adhere to the perception that the country remains besieged by enemies, the US and NATO most prominently. 
High-ranking diplomats understand that their way of thinking requires one sort of diplomacy, and that a foreign policy focused on realizing Russia's economic potential requires quite another. 
So confrontation with the West (even if only rhetorical) is a form of job protection by other means. 
The military brass act as they do for essentially the same reason. 
They maintain that Russia needs a big standing army in order to defend the country in any potential war with the US. 
Indeed, this year's annual session of the Academy of Military Sciences saw army commanders and military theorists try to prove that a future source of conflict will be America's desire to control the world's oil-rich regions. 
Lt. Gen. Alexander Rukshin, chief of the General Staff's main operative directorate, spoke of the need for modernization of command and control systems in preparation for such a war. 
He complained that the existing system has limited capabilities against America's precision weapons. 
Admiral Victor Kravchenko, the chief of the Navy staff, argued that the main threat to Russia is the US Navy. 
Indeed, only the continuance of a vast global threat can justify the existence of Russia's armed forces at their current size of 1.2 million personnel, as well as the current conscription system--deeply resented by oridinary Russians--and a reserve of many millions. 
Russian generals insist that conscription must be maintained so that, if necessary, a large-scale war can be waged. 
Like post-Soviet Bourbons, Russia's generals and diplomats have learned nothing and forgotten nothing. 
They continue to think as they have always done, because it is in their direct self-interest to do all they can to preserve the militarized state of a decadent era. 

Russia’s Pipeline to Empire 
Gerhard Schroeder, who less than a month ago was Germany’s Chancellor, has agreed to become chairman of the company that is building a gas pipeline from Russia, across the Baltic Sea to Germany, and on through Western Europe. 
In many countries, Schroeder would now be charged with the crime of conflict of interest. 
His apparent ethical lapse is magnified by the fact that, at this very moment, Russia is threatening to cut off Ukraine’s gas supplies if that country does not give in to the pricing demands of Kremlin’s state-owned gas behemoth, Gazprom. 
Russia’s strategic task is obvious: cutting off Ukraine’s gas currently means cutting off much of Europe’s gas as well, because some of its biggest gas pipelines pass through Ukraine. 
By circumventing Ukraine, Poland, and of course, the Baltic countries, the new pipeline promises greater leverage to the Kremlin as it seeks to reassert itself regionally. 
President Vladimir Putin and his administration of ex-KGB clones will no longer have to worry about Western Europe when deciding how hard to squeeze Russia’s postcommunist neighbors. 
Should Europe really be providing Putin with this new imperial weapon? 
Worse, might Russia turn this weapon on an energy-addicted EU? 
That a German ex-chancellor is going to lead the company that could provide Russia with a means to manipulate the EU economy is testimony to Europe’s dangerous complacency in the face of Putin’s neo-imperialist ambitions. 
Certainly Russia’s media are aware of Europe’s growing dependence on Russian energy. 
Indeed, they revel in it: after we integrate and increase our common gas business, Russian editorialists write, Europe will keep silent about human rights. 
Putin expresses this stance in a more oblique way with his commitment to pursuing what he calls an “independent policy.” 
What he means by that is that Russia is to be “independent” of the moral and human rights concerns of the Western democracies. 
Perhaps some European leaders really do believe that maintaining the Union’s cozy prosperity justifies silencing ourselves on human rights and other issues that annoy the Kremlin. 
Of course, we may speak up, briefly, about “commercial” matters like the expropriation of Yukos, but if the Kremlin puts a price on our values or criticism of Russian wrongdoing – as in, say, bloodstained Chechnya – Europeans seem willing to shut up rather than face the possibility of higher energy prices, or even a blockade like that now facing Ukraine. 
As Putin shuffles his court, subordinating the Duma to his will, the EU’s hopes for a growing “Europeanization” of Russia should be abandoned. 
The Russia that Putin is building has mutated from the post-Soviet hopes of freedom into an oil and gas bulwark for his new model ex-KGB elite. 
Indeed, Matthias Warnig, the chief executive of the pipeline consortium that Schroeder will chair, is a longtime Putin friend. 
The Wall Street Journal reported earlier this year that Warnig, who heads Dresdner Bank’s Russian arm, was an officer in the Stasi, the East German secret police, and met Putin in the late 1980’s when the Russian president was based in East Germany as a KGB spy. 
That Russians tolerate a government of ex-KGB men, for whom lack of compassion and intolerance of dissent are the norm, reflects their exhaustion from the tumult of the last 20 years. 
Now the Kremlin seems to think that what is good for ordinary Russians is good for independent nations as well: small and weak countries will be shown no mercy once Russia is given the tools to intimidate, isolate, and threaten them with the prospect of an energy blockade. 
As a former Head of State of newly independent Lithuania, I frequently endured such threats. 
The EU has signed numerous agreements with Russia including one for a “common space” for freedom and justice. 
The Kremlin is very good at feigning such idealism. 
Its control of Eastern Europe was always enforced on the basis of “friendship treaties,” and the Soviet invasions of Hungary in 1956 and Czechoslovakia in 1968 were “fraternal” missions. 
But look how Putin abuses that “common” space: barbaric treatment of Chechens, the businessmen Mikhail Khodorkovsky imprisoned, foreign NGO’s hounded, a co-leader of last year’s Orange Revolution, Yuliya Tymoshenko, indicted by Russian military prosecutors on trumped-up charges. 
If Europeans are serious about their common space for human rights and freedoms, they must recognize that those values are not shared by the calculating placemen of Putin’s Kremlin. 
The same is true of viewing Russia as an ally in the fight against terrorism. 
Is it really conceivable that the homeland of the “Red Terror” with countless unpunished crimes from the Soviet era, and which bears traces of blood from Lithuania to the Caucasus, will provide reliable help in stopping Iran and North Korea from threatening the world? 
It seems more likely that the Kremlin’s cold minds will merely exploit each crisis as an opportunity to increase their destructive power and influence. 
For decades, my region of Europe was left to the mercy of evil. 
So I cannot sit back in silence as Europe stumbles blindly into a new appeasement. 
We, the new democracies of Eastern Europe, have been taught by our legacy that behind Russia’s every diplomatic act lurks imperial ambition. 
Western Europeans, who have been spared this legacy, should heed our warnings. 
Dependence on Russia – even if its face is now that of the allegedly “charismatic” Gerhard Schroeder – will only lead to an abyss. 

Russia’s Population Implosion 
Years ago, Alexander Solzhenitsyn coined the phrase “preservation of the people,” by which he meant Russia’s cultural survival. 
Today, it applies to Russia in a far more literal way. 
Although I am a physicist, I began to study demography about15 years ago, in the belief that the key global problem was not so much the threat of nuclear annihilation as the dynamics of population growth. 
It was a grim recognition that Russia faces the opposite problem: a rapid decline in population that threatens every aspect of Russian life. 
Indeed, just in the last ten years, Russia’s population has dropped by 9.5 million, despite the many thousands of Russians returning from former Soviet republics. 
The birthrate has increased somewhat beginning since 2000, and now stands near 1.5 million a year, but this is 700,000-800,000 below the replacement rate. 
Many observers argue that Russians are not having enough children because life is so harsh. 
But the problem is not so simple. 
The United States, Europe, Japan, Australia, and Canada have all seen declining birth rates as well. 
In Spain, the birthrate of 1.07 per woman is even lower than in Russia. 
Russia’s uniqueness stems instead from the high rate of early death among males, which is directly attributable to poor diet and high consumption of alcohol and tobacco, and, indirectly, to the stresses caused by the wrenching economic and political changes that began with Gorbachev’s perestroika 20 years ago. 
The Soviet demographer Boris Urlanis wrote a famous article entitled “Take Care of the Men,” which caused a sensation when it was published around 25 years ago. 
Urlanis’s argument – that men, not women, are the more delicate creatures – is even more relevant now, with family life decaying, half of marriages ending in divorce, and the number of fatherless children rising to record levels. 
Here is where the revised meaning of Solzhenitsyn’s “preservation of the people” comes in. 
Solzhenitsyn himself recently suggested that Russia’s national idea should be based on Ivan Petrovich Shuvalov’s proposal to Empress Elizabeth 250 years ago. 
“Every move, every law should be assessed in terms of whether it helps to preserve the people,” according to Solzhenitsyn. 
“If not, down with the law.” 
Solzhenitsyn’s suggestion is crude, but right in a fundamental sense. 
Our public thought is fragmented, and the country’s intelligentsia, who are partly responsible for tending to society’s values and goals, are behaving in often-destructive ways. 
The live-for-the-moment mentality of hedonism and greed that they have encouraged is embodied in Moscow’s casinos, of which there are more than in the rest of Europe – or, for that matter, Las Vegas. 
These values – reflected in the way people dress, how they behave in public, and the language they speak – are not the values of human life. 
A crime subculture is spreading in Russia, and it is attaining the status of official culture. 
Where the intelligentsia is not directly complicit, its members have, simply by remaining silent, refused to accept the responsibility that accompanies freedom. 
By contrast, Solzhenitsyn, Tolstoy, and other writers in Russia’s great literary tradition fully understood this responsibility. 
The current Russian interpretation of freedom is instead characterized by a narrow, individualistic permissiveness that is incompatible with collective tasks. 
In other words, Russia’s population crisis is one manifestation of a crisis of ideas. 
This, of course, raises the broader question of whether declining birthrates, in Russia and elsewhere, imply a crisis of the liberal idea of freedom, with its focus on individual rights? 
Clearly, liberalism may be a contributing factor, if and where it is primitively understood to entail for the individual no countervailing obligations before society. 
Clearly, the belief that liberalism is at fault for declining birth rates and dysfunctional families has gained currency in the West, which now produces popular books like Pat Buchanan’s The Death of the West. 
But I think the crisis is deeper, reflecting a lack of awareness of the paths and goals of human development – an ignorance that cannot be reduced to Western-style democracy or liberal ideas. 
For Russia, the issue is simple because the crisis – which has led to more homeless children than after either the Civil War or World War II – is so stark. 
“Preservation of the people” requires nothing less than that our men take care of themselves so that they can take proper care of our children. 


Russia’s Renegade Puppet 
MOSCOW – Ramzan Kadyrov, the president of Chechnya, recently proposed to Ahmed Zakaev, a leader of the nationalistic and comparatively moderate Chechen opposition, that he return to Chechnya. 
Kadyrov promised Zakaev amnesty and various positions ranging from director of the local theater to Minister of Culture. 
Zakaev looked ready to accept the proposal. 
His position in the nationalist opposition was weak. 
There seem to be few, if any, fighters in Chechnya who recognize him as commander; his recent attempt to send an emissary to create a fighting unit directly under his command was not successful. 
At the same time, Zakaev maintained rather friendly relations with Kadyrov, whose achievements – making Chechnya practically independent – he implicitly acknowledged. 
The Kremlin supposedly would not have opposed the deal. 
But, although Zakaev was one of the most moderate members of the Chechen resistance, an amnesty for him needed the Kremlin’s approval, and he does not seem to have received it, which is probably why he refused Kadyrov’s offer. 
But the reason the Kremlin balked at offering Zakaev an amnesty is unlikely to be related him personally, but rather to Kadyrov. 
The return to Chechnya of an amnestied Zakaev would greatly increase Kadyrov’s prestige. 
But the Kremlin wants to avoid this, owing to Kadyrov’s growing power and its general unease with a Russian Muslim elite that, while formally acknowledging Russian suzerainty, increasingly demands a redistribution of power within the Russian Federation. 
For most of the past two decades, jihadists in the Caucasus and Central Asia were a major source of concern for the Kremlin. 
Fear of “Talibanization” of the Caucasus prompted the Kremlin’s recent announcement that Russian Muslims should be protected from extremist propaganda from abroad, and that Russian Muslim education and spiritual life should be controlled in order to direct them away from extremism. 
It was fear of extremism, as well as a more general increase violence, that led to the rise of the Kadyrov clan in 2004, when the Kremlin decided to engage in a “Chechenization” of the conflict. 
The plan implied that the Kremlin would provide the Kadyrovs – first Akhmad Kadyrov, and then, after his death, his son, Ramzan – broad autonomy (independence in all but name) and huge sums of money. 
The Kremlin closed its eyes to Kadryov’s amnesty of former guerrillas and their inclusion in his paramilitary units. 
In exchange, Kadyrov was to wage war against the remaining Islamist resistance and thus relieve Moscow of the burden of shedding Russian blood, or at least minimize the cost in Russian casualties. 
The plan initially worked. 
Kadyrov was able to create a strong force that could fight the guerrillas, basically on its own. 
Kadyrov’s efforts can also be credited with ending major terrorist attacks in Russia’s heartland, such as those that occurred in Moscow in 2002 and in Beslan in 2004. 
Kadyrov seemed an effective antidote to the jihadists. 
Still, the logical conclusion of the Kremlin’s Kadyrov policy appears to be precisely what it sought to prevent – Chechen independence – when it engaged in the first Chechen war almost a generation ago. 
Receiving from the Kremlin virtual carte blanche to do what he wants in Chechnya, Kadyrov made genuine efforts to transform himself into a popular leader. 
It is clear that he has not brought down the unemployment rate and has no intention of ending corruption. 
Still, he can be credited for some tangible results in bringing Chechnya a modicum of normality. 
The restoration of the capital, Grozny, was one of his clear achievements. 
Grozny was totally destroyed during the first Chechen war; both Russian and foreign observers compared it with WWII Stalingrad and assumed that it would be impossible to restore the city. 
It was suggested that a new Chechen capital be built. 
Yet, having enjoyed a huge subsidy from Moscow, Kadyrov has rebuilt Grozny and provided it with some security. 
Kadyrov also catered to the spiritual aspirations of the Chechen majority. 
He rejected Wahhabism – the ideological framework of the jihadists. 
But he maintained that Islam is an essential part of the Chechen tradition and presented himself as a leader who fully understood this. 
So he encouraged an Islamic dress code and built a huge mosque – one of the biggest, if not the biggest, in Europe. 
All of this brought Kadyrov wide support among the Chechen population. 
Even those who dislike him sometimes conclude that he is the best all the possible options, and he has improved his position by persistently weeding out Chechen military forces that are not directly under his command. 
His most recent effort was the liquidation of the “Vostok” battalion, despite its being an integral part of the Russian army. 
It was probably inevitable that Kadyrov’s increasing power would worry the Kremlin, especially after the Kremlin itself created a precedent for secession by recognizing the independence of Abkhazia and South Ossetia of the war with Georgia of 2008. 
Allowing Zakaev’s return would have worsened matters by increasing Kadyrov’s prestige at home, as well as his international visibility and legitimacy. 
That would have pushed Kadyrov even further away from Russian control at a time when the Kremlin has become increasingly unable, and possibly reluctant, to purchase his loyalty. 


Russia’s Skeptical G8 Partners 
Poor oil-rich Russia. 
It is trying so hard to have its turn as chair of the elite Group of Eight countries taken seriously. 
President Vladimir Putin, perhaps hoping to elevate the presidential summit talks in St. Petersburg in July, has laid out an ambitious agenda. 
He plans to lead his colleagues in erudite conversations about education, infectious diseases, and – to make sure that no one dozes off – “energy security.” 
And what has Putin gotten for his efforts? 
Not much. 
The Bush administration, led by Vice President Dick Cheney (but with his boss’s explicit approval), recently accused Russia of backsliding into its old “evil empire” ways. 
Putin shot back, portraying the United States as “Comrade Wolf,” ready to pounce on any nation that leaves itself vulnerable. 
Suspense seems to be building around how Bush and Putin will greet each other when they meet in St. Petersburg. 
Europeans, for their part, are still hysterical about getting caught up in the Russia-Ukraine gas dispute that left their pipelines dry for a few days at the beginning of this year. 
They see discussing “energy security” with Russia as akin to chatting about water safety with Comrade Crocodile. 
Of course, people who really want to be unkind will point out the absurdity of Russia’s membership in a club that includes the giant economies of US, Germany, Japan, England, France, Italy, and (less so) Canada. 
Why wasn’t Chinese president Hu Jintao, whose country’s economy is the world’s second largest (when measured at world prices), given a seat at the table instead of Putin? 
After all, even with all its energy resources, and even with today’s sky-high oil and gas prices, Russia’s national income is only about the size of Greater Los Angeles. 
Perhaps what Putin needs to do is stop suffering all the criticisms and go on the offensive. 
He could start by pointing out to his smugly democratic counterparts that he is probably more popular in Russia today than any of them are in their own countries. 
He might actually win a fair election tomorrow (not that he would ever risk finding out). 
Few of the others could make the same claim with a straight face. 
Of course, Putin’s success over the past few years in killing off any semblance of a free press – and when an ex-KGB man “kills off” a free press, it is not just a figure of speech – has helped mute open opposition. 
Even so, Putin does seem genuinely popular among a public longing for a leader who can anchor their country without sinking it. 
Putin might also argue that Russia’s fiscal position is far stronger that of the other G8 members. 
Yes, it helps that Siberia turned out to be a giant oil well, with the government sucking up much of the money. 
Venezuelan President Hugo Chavez is balancing his country’s books, too, for now. 
But, to be fair, oil is not the whole story. 
Most economists advocate rich countries’ replacing their complex and antiquated tax codes with a simple low flat tax, and they bemoan the fact that so few countries have tried it. 
Putin, however, implemented such a policy a few years ago, and the results have been nothing short of miraculous. 
Of course, the other G8 leaders might be less enamored of some of Russia’s other approaches to addressing budget problems. 
Most G8 countries seem incapable of achieving the political consensus required to take necessary steps such as raising the retirement age or significantly cutting the indexation of benefits to inflation. 
Russia, by contrast, has essentially abandoned its pensioners by inflating away the value of their incomes. 
Indeed, many of the elderly in rural Russia are forced to sustain themselves by growing potatoes on the tiny plots of land that the government allows them to till. 
That is, assuming they survive at all: since the fall of the Berlin Wall, Russian male life expectancy has plummeted from 65 years to around 60 years. 
There is growing evidence that the stress of transition is the leading cause of death, even above big killers in postcommunist Russia such as alcohol, murder, and AIDS. 
Should Putin tell his colleagues that they, too, could balance their countries’ intergenerational accounts by starving the elderly? 
So perhaps Putin had better not try to push his country’s accomplishments too far. 
Maybe the best plan is simply to let the vodka flow and hope for a round of smiles in the photo ops. 
In any case, when Putin tells his guests how they can pay Russia more to improve their own “energy security,” he may finally get the respect that he craves. 


Russia's TV Wars 
Pulling the plug on TV-6 was a sad day for Vladimir Putin's Russia. 
Not only did this event hurt the cause of freedom of speech, but the rule of law here has been deeply wounded and President Putin has squandered the goodwill of the very people in the West he seeks to emulate. 
Closing TV-6 in many ways reflects what has gone wrong in Russia since 1991. 
Many people share the blame for the failures that have occurred since communism's collapses. 
Indeed, the types of characters involved in TV-6's closure have been with us since then. 
Greed, power, position, and egos have beset the electronic media as they have everything else in the postcommunist era. 
The heavy-handed closures of NTV and TV-6 are merely two of the best examples of this country's halting leap toward normality, and both closures reveal Putin's selective approach to restructuring Russia. 
Emotions about this event, however, are more in evidence than reasoned thoughts. 
The idea of ``freedom of speech'' has indeed suffered a set back, but a return to Soviet era thought control is not in the offing. 
For both Russia's government and its market place of ideas are continuing to discover what a free media actually means. 
Some in government think that a ``free media'' should only champion and praise the ruling elite. 
Some rich ``New Russians'' see the media as a means for pushing their personal agendas at the expense of society's interests, making themselves even wealthier. 
Much of the TV-6 affair, indeed, was about money. 
Whoever secures the stations's license when it is opened for renewal in late March can, if he or she puts in a professional management, look forward to big revenues from advertising. 
This golden nest egg may have been part of the Kremlin's thinking about the station and its ownership all along. 
Only days ago President Putin and Premier Mihail Kasyanov claimed that their actions were designed to protect the people of TV-6. 
Putin's magnanimous words about the channel were, as usual, made while he was abroad. 
(Sometimes I wonder if it would be better for Russia if its president ruled from a more idealistic Western environment). 
But in reality his words were empty, and merely shrouded another episode in his personal vendetta against the oligarch Boris Berezovsky (TV-6's owner), one that is unbecoming in a statesman. 
It is, of course, valid to require Boris Berezovsky to obey the law but, as so often in Russian history, the cost has become higher than the aim. 
For Putin's Kremlin and his Media Minister have mocked the rule of law by twisting the rules to achieve their aim: to end Berezovsky's control of the station. 
Still, the so-called victims of the government's moves against TV-6 are not blameless. 
Many members of TV-6 merely carried over the war of words they had been waging against Putin when they worked at NTV, the channel Putin and his ministers took aim at in an earlier media struggle. 
NTV and TV-6 may be more truthful than state TV about the war in Chechnya, and both upstaged their rivals in exposing government corruption. 
Each however, espoused a journalism in the service of a personal agenda, which is little different than the subservient journalism practiced under state ownership. 
The ``dictatorship of law'' that President Puting speaks about so often now appears to be more about arbitrary political preferences than establishing a society that plays by the rules. 
Indeed, so far, all that the ``dictatorship of law'' amounts to is the triumph of might over right. 
The weak retain no recourse. 
TV-6 was exhausted, by legal assaults, into submission. 
But Putin's victory over Berezovsky is as empty as it is meaningless. 
The threat of force, not neutral enforcement of the law, remains the trump card. 
Here TV-6 and its managers miscalculated grievously. They thought that, in the end, Russia's legal code would protect them. 
Instead, serving the center of power, it crushed them. 
Russia's public is outraged, not because the loss of TV-6 appears as a triumph of politics as usual, but because it leaves one less broadcaster to entertain. 
Very few Russians I spoke to about TV-6 mentioned the issue of freedom of speech; they spoke, rather, about who is now stealing from whom. 
Putin is not seen as the bad guy, he is seen as a Russian ruler disciplining a dubious business-political interest. 
Nothing more, nothing less. 
Despite all that has happened, I continue to hope that Russia is not slouching back into its Soviet past. 
The mistakes that have been made tell us that Russia's ruling elite has yet to take the meaning of democratization seriously. 
Disagreement with the government, it must begin to see, is not sedition. 
Disagreement with government policy can often help rulers fine-tune or correct misdirected policies. 
On the other hand, would-be media magnets have yet to learn that the electronic media is not a personalized soapbox. 
Both sides have yet to realize that TV is more than a cash cow for advertising revenue. 
All the same, those in the West should not see the struggle over TV-6 as a defining moment. 
Putin and Russia are not evil. 
Reform continues, but it is occurring in ways much more painful than we hoped. 

Russia’s Ukrainian Path to the Future 
MOSCOW – Russia and the West are losing each other yet again. 
The magnetic attraction and repulsion between the two has been going on for centuries. 
Indeed, historians have counted as many as 25 such cycles since the reign of Tsar Ivan III. 
In the past, however, Russia’s sharp anti-Western turns were reversed – usually out of simple necessity – after relations reached rock bottom. 
Not this time. 
On the contrary, the deterioration of the relationship nowadays has developed a momentum of its own. 
There are four reasons for this. 
First, the “loss” of the Cold War, and with it imperial and superpower status, has created a deep and so far unresolved crisis in the collective mentality of Russia’s political class. 
Russian leaders continue to perceive the West as a phantom enemy in opposition to which all the traditional mythologies of Russian foreign policy are being resurrected. 
Second, by the end of Vladimir Putin’s second presidential term, Russia’s modernizing dreams had been shattered. 
Modernization, indeed, simply turned out to be yet another redistribution of property to those on top, particularly those who came out of the St. Petersburg mayoral office and the Federal Security Bureau (FSB). 
The image of the West as an enemy has become the only ideological excuse for Putin’s model of the corporate state. 
Third, the soaring price of oil has made the Kremlin’s inhabitants believe that they are all-powerful. 
Today’s Russia, which thinks of itself as a “great energy state,” laughs at its previous meager desire to catch up with little Portugal in terms of living standards. 
Finally, a series of Western mistakes and misfortunes, a crisis in transatlantic relations, lack of leadership, and the growing threat of Islamic fundamentalism (in both the Middle East and Europe) have led Russian leaders to believe that the West is a sinking ship, to be abandoned as soon as possible. 
While this belief unfortunately does have some validity, it requires one very important caveat: Russia is part of that ship. 
Russia can make advances to Hamas, Hezbollah, and Iran, and it can remind the Arab world that the Soviet Union helped it develop and offered it protection in the United Nations Security Council. 
But in the eyes of Islamic extremists, Russia is part of the “Satanic” West – indeed, its most vulnerable part. 
Thus, it is Russia, with a soaring birth rate among its Muslim citizens that is the most attractive for expansion and take-over. 
But Russia’s self-destructive confrontation with the West can be halted, and its centuries-old debate between Westernizers and the Slavophiles put to rest once and for all. 
This, however, will depend on Ukraine’s success on the path of European development it chose in the Orange Revolution of 2004-2005. 
Ukraine does, indeed, present a threat, but not to Russia’s security, as Kremlin propagandists claim. 
The real threat is to the Putin model of a corporate, authoritarian state, unfriendly to the West. 
For the Kremlin’s occupants, it is a matter of life and death that countries that were once part of the Soviet Union but chose a different model of development – Ukraine being the chief example – should never become attractive to ordinary Russians. 
The example posed by the Baltic nations does not threaten the Kremlin much, because they are perceived as foreign to the Russian psyche. 
Indeed, in Soviet films, Baltic actors were usually cast in the roles of Nazi generals and American spies. 
Ukrainians, on the other hand, are close to us in their culture and mentality. 
If they made a different choice, why can’t we do the same? 
Ukraine’s success will mark the political death of Putinism, that squalid philosophy of “KGB Capitalists.” 
If Ukraine succeeds in its European choice, if it is able to make it work, it can settle the question that has bedeviled Russian culture for centuries – Russia or the West? 
So the best way to help Russia today is to support Ukraine’s claim that it belongs to Europe and its institutions. 
This will influence Russia's political mentality more than anything else. 
For if Russia’s anti-Western paranoia continues and the Kremlin’s Eurasian fantasy of allying with China lasts another 10-15 years, Russia will end up seeing China swallowing its Far East and Siberia. 
Indeed, the weakened Russia that will be Putin’s legacy will then also lose the Northern Caucasus and the Volga region to their growing Muslim populations. 
The remaining Russian lands would then have no other choice but to attach themselves to Ukraine, which should by then have become a successful member of the European Union. 
After 1,000 years, Russia will have come full circle, returning to Kievan Rus after wandering on the roads of the Mongol hordes, empire, communism, and farcical Putinism. 
So Russia now has a choice: Ukrainian plan A or Ukrainian plan B. 



Putin on Ice 
VIENNA – Global temperatures are rising, but the former Soviet Union’s frozen conflicts show no sign of a thaw. 
On the contrary, the ice is expanding. 
Russia’s support for the election held by separatists in Donetsk and Luhansk – key cities in Ukraine’s Donbas region – indicates that the Kremlin has decided to create another semi-permanent “mini-Cold War,” this time in rebel-controlled areas of Russia’s most important neighboring country. 
But freezing Ukraine’s legitimate government out of the region is potentially far more destabilizing than the Kremlin’s support for the other ex-Soviet breakaway territories: Moldova’s Transnistria and the Georgian regions of Abkhazia and South Ossetia. 
By blurring its border with Ukraine, Russia is creating a new relationship with an anomalous, internationally unrecognizable entity that belongs, culturally and historically, not to the imaginary “Novorossiya” (New Russia) proclaimed by the separatists, but to the “undead” Soviet Union. 
The question is why Russian President Vladimir Putin and his entourage view a frozen conflict in Donbas, created to preclude a political settlement or lasting peace, as a positive outcome for their country. 
Within their current borders, Donetsk and Luhansk are of negligible geostrategic importance to Russia. 
Moreover, an independent Donbas would impose substantial costs on Russia, which would presumably be forced to rebuild and sustain an economy deprived of all other foreign investment. 
Unlike Transnistria or Abkhazia, Donbas is heavily industrialized and dependent on subsidies; its infrastructure is devastated; and its businesses are largely owned by oligarchs, who have fled to Kyiv, London, or Paris, rather than Moscow, to escape the conflict. 
Add to that the irregular legal status of these self-proclaimed “people’s republics,” which makes it impossible for Donbas’s industrial producers to trade with the world, and the region’s economic (and social) prospects seem bleak. 
Citizens of the other Russia-backed breakaway regions have long been subjugated by their squalid “feudal democratic” systems, in which local leaders routinely stage sham elections and base their power on mafia-style corruption and patronage. 
After months of empty promises by separatist leaders, the citizens of Donetsk and Luhansk are unlikely to acquiesce quietly to Donbas’s transformation into another internationally isolated pariah entity that benefits Russia-based criminal networks. 
By establishing a frozen conflict in Donbas, Russia has jammed a thorn into Ukraine’s side and, in the short run, complicated relations between Ukraine’s President Petro Poroshenko and the country’s prime minister, Arseniy Yatsenyuk. 
But it has also guaranteed that, in the longer run, the Ukrainian state will be reconsolidated around anti-Russian sentiment and policies – meaning that Russia will be unable to normalize its relations with Ukraine for decades. 
Furthermore, Putin’s support for the Donbas separatists is the final nail in the coffin of his regional integration project, a Russia-led Eurasian Economic Union. 
Ironically, Russia’s EEU ambitions are what fueled its forceful response to Ukraine’s Westward drift, with Putin recognizing that, without Ukraine, the bloc could not fulfill his vision as a viable rival to the European Union. 
Yet Russia’s flagrant and unapologetic violation of Ukraine’s territorial integrity has not only poisoned relations with Kyiv; it also implicitly threatens prospective EEU members, especially Kazakhstan, whose independent statehood Putin has openly questioned. 
What is the geopolitical payoff for Russia in turning an unstable Donbas into an enduring fixture of its southwestern hinterland? 
Why would the Kremlin show “respect” for elections that virtually no other country will recognize? 
The answer could be simply that the Kremlin has painted itself into a corner. 
Russia’s state-owned media, together with domestic nationalists, have fomented a frenzied public atmosphere that deprives Russia’s policy toward Ukraine of tactical flexibility. 
In lieu of a comprehensive strategy, the Kremlin is relying on ad hoc gestures to ensure that the Russian public, on whose support it depends, does not view it as betraying the rebels in Ukraine. 
For their part, Ukrainian rebel leaders, loath to lose their newly acquired fiefdoms, are lobbying fervently against any rapprochement between the Russian and Ukrainian governments. 
At the same time, Putin presumably wants to show the West that its policies toward Russia, including tough economic sanctions, will not work. 
Creating more frozen conflicts, which the West abhors but is powerless to resolve, may seem like a useful way to achieve this. 
In short, Russia’s actions in Donbas may be more symbolic and opportunistic than strategic. 
But that does not make them any less dangerous. 
Putin has now lost the initiative that he seized in Crimea by turning the bloody battle over Donbas into an unresolvable stalemate. 
With oil prices tumbling, Putin may now feel compelled to make another desperate and destructive move, in the hope of convincing the world that he is still in control of the situation. 
Efforts to identify some grand strategic vision behind such spoiler tactics, however, will continue to prove futile. 
Facing pressure from all sides, Putin is losing his geostrategic footing. 
His foreign-policy accomplishments over the last year should not be overestimated. 
By annexing Crimea, he lost Ukraine. 
And by “freezing” Donbas, he has buried his quasi-imperial EEU dream once and for all. 

How Americans Became Vulnerable to Russian Disinformation 
ATLANTA – As the United States marks the first anniversary of President Donald Trump’s election, the question of how Trump won still commands attention, with Russia’s role moving increasingly to center stage. 
Each new revelation in the investigation of Russia’s meddling in the 2016 campaign brings the vulnerability of the US democratic process into sharper focus. 
Last week, Congress unveiled legislation that would force Facebook, Google, and other social media giants to disclose who buys online advertising, thereby closing a loophole that Russia exploited during the election. 
But making amends through technical fixes and public promises to be better corporate citizens will solve only the most publicized problem. 
The tougher challenge will be strengthening institutions that are vital to the functioning of democracy – specifically, civics education and local journalism. 
Until gains are made in these areas, the threat to America’s democratic process will grow, resurfacing every time the country votes. 
Russian President Vladimir Putin’s intelligence operatives chose wisely in mounting their social media attack. 
Facebook hosts nearly 80% of all mobile social media traffic, while Google accounts for close to 90% of all online-search-related advertising. 
By inundating these two platforms with automated messages from tens of thousands of bogus user accounts, Russia was able to stoke discord along economic, racial, and political lines. 
Moreover, they did it cheaply. 
According to one analysis, with only modest ad purchases on Facebook, Russian agents gained access to a goldmine of online advertising data – such as Facebook’s customer targeting software – which enabled the “sharing” of Russia’s fake news hundreds of millions of times. 
At one point during this clandestine assault, an estimated 400,000 bots – software applications that run automated scripts – sent millions of fictitious political messages, which in turn generated some 20% of all Twitter traffic during the final month of the campaign. 
It is bad enough that the technology world’s marquee names were not prepared to parry foreign meddling in America’s most important election. 
But the social media giants’ persistent denial of responsibility for the volume of distorted and false information delivered as news, even as Russia’s role has grown clearer, is more troubling. 
Strip away the technobabble about better algorithms, more transparency, and commitment to truth, and Silicon Valley’s “fixes” dodge a simple fact: its technologies are not designed to sort truth from falsehoods, check accuracy, or correct mistakes. 
Just the opposite: they are built to maximize clicks, shares, and “likes.” 
Despite pushing to displace traditional news outlets as the world’s information platforms, social media’s moguls appear content to ignore journalism’s fundamental values, processes, and goals. 
It is this irresponsibility that co-sponsors of the recent advertising transparency bill are seeking to address. 
Still, Russia’s success in targeting American voters with bogus news could not have succeeded were it not for the second problem: a poorly educated electorate susceptible to manipulation. 
The erosion of civics education in schools, the shuttering of local newspapers – and the consequent decline in the public’s understanding of issues and the political process – conspire to create fertile ground for the sowing of disinformation. 
Consider the evidence: In 2005, an American Bar Association survey found that 50% of Americans could not correctly identify the country’s three branches of government. 
By the time the Annenberg Center for Public Policy asked the same question in 2015, the percentage of such respondents had grown to two thirds, and a staggering 32% could not name a single branch. 
This slippage is apparently age-dependent; a 2016 study of Americans with university degrees found that those over 65 years of age know far more about how their government works than those under 34. 
There is a clear correlation between democratic illiteracy and a de-emphasis on civics, government, and history education in schools. 
In 2006, for example, a national study that tracks student performance in various subjects found that only a quarter of America’s 12th graders were proficient in civics. 
A decade later, that percentage had sunk below 25%. 
Not surprisingly, overall educational quality and access to basic civics coursework have also suffered in recent years. 
In 2011, a think tank that ranks the 50 states on the rigor of their high schools’ US history courses gave 28 states failing grades. 
A 2016 survey of 1,000 liberal arts colleges found that only 18% required a US history or government course to earn a degree. 
High school or university courses by themselves will not keep gullible voters from falling for bogus news or inflammatory disinformation. 
But the viral spread of fake news stories initiated by Russian agents made one thing clear: an electorate lacking a basic civics education is more likely to fall for provocations designed to inflame partisan tensions. 
Changes in the news industry are increasing that risk. 
As Internet giants siphon away advertising revenue from traditional media outlets, social media have become many people’s main source of news. 
Traditional news organizations, especially local newspapers, are steadily disappearing, shrinking voters’ access to information that is vital to making informed political decisions. 
The numbers are striking. 
Since 2004, 10% of all small-market newspapers have closed or merged. 
Of those that survive, over a third have changed ownership, concentrating the industry into fewer hands. 
The result has been layoffs, cost-cutting, and diminished reporting on national and local issues. 
As for the media’s civic responsibility, that, too, seems to have suffered. 
The managers’ manual from one investment firm that owns three daily and 42 weekly newspapers does not mince words: “Our customer is the advertiser,” the document states. 
“Readers are our customers’ customers,” so “we operate with a lean newsroom staff.” 
Russia’s intervention in the 2016 US presidential election was historic, but it was also symptomatic of bigger challenges facing Americans. 
A population that does not fully understand its own democracy should concern not only civics teachers, but national security experts as well. 
The US didn’t need Putin to deliver that lesson. 
“If a nation expects to be ignorant and free,” Thomas Jefferson warned, “it expects what never was and never will be.” 

Russia Stays Home 
MADRID – Just three days before his return to the Kremlin as Russia’s president, Vladimir Putin met behind closed doors at his residence in Novo-Ogaryovo, outside Moscow, with US National Security Adviser Tom Donilon, who was there to transmit President Barack Obama’s renewed determination to strengthen cooperation with Russia. 
But Donilon returned home empty-handed: Putin will attend neither the G-8 summit on May 18-19 at Camp David, nor the NATO summit in Chicago on May 20-21, despite Obama’s effort to accommodate Russia by moving the G-8 summit from Chicago. 
As a result, what would have been the first meeting between Obama and Putin after his return to the Russian presidency has been postponed until the G-20 summit in Los Cabos, Mexico, set for June 18-19. 
This delay has provoked much speculation. 
Some point as a cause of Putin’s absence to recent tensions between Russia and the United States arising from Putin’s increasingly harsh response to the protests by his opponents at home. 
Others suggest that Putin’s aloofness stems from Kremlin infighting. 
Whatever may be driving Putin’s behavior, this month’s two summits will affect relations between the two countries considerably, given the global security issues to be discussed by the G-8 and the need to arrange for Russia’s participation in NATO’s anti-missile shield. 
Two matters – besides the shaky global economy – are especially important for the G-8 summit. 
First, Iran’s nuclear program is now on the diplomatic front burner. 
After more than a year of deadlock, negotiations resumed in April. 
Russia, as a permanent member of the United Nations Security Council, participates in these talks, and its cooperation is essential to resolving one of today’s most vexing international problems. 
Much the same can be said of Russia’s role in resolving the crisis in Syria, owing to the strategic relationship that the two countries have maintained since the Cold War. 
Indeed, with the growing possibility that former UN Secretary-General Kofi Annan’s peace plan for Syria might fail, and that civil war might erupt, Russia could be the international community’s only effective interlocutor left. 
In addition, it is essential to align the positions of Russia and the West on the anti-missile shield system now being developed by NATO, which will be a subject for discussion in Chicago. 
The principal aim of the system is to protect Europe and the US from possible attacks by short- and medium-range ballistic missiles from Iran and North Korea. 
But Russian leaders are skeptical about the true objectives of a shield, believing that it would undermine Russia’s security by curtailing the retaliatory (and thus deterrent) capacity of its nuclear missiles. 
In 2009, the “approach by stages of adaptation” launched by Obama seemed to ease bilateral tensions and prepared the way for the 2010 New START arms-reduction treaty, in which Russia and the US took a strategic leap to cut the number of nuclear-missile launchers by half. 
Following on this progress, at the end of 2010, the Russians agreed to study the possibility of cooperating with NATO on anti-missile defense. 
But the US was unable to offer legal – not just political – guarantees that an anti-missile system based in Europe would not obstruct Russia’s strategic potential. 
As a result, Russia is now so mistrustful that its military chief of staff, General Nikolai Makarov, recently declared that his country would not rule out pre-emptive attacks to destroy any part of the anti-missile shield that it views as a threat to its own security. 
One of the main arguments for this posture was Russia’s uncertainty about whether later steps in the “approach by stages of adaptation” might be a threat to its strategic ballistic missiles. 
Moreover, Russia opposes the deployment of military facilities in countries – like Romania – that joined NATO after 1999, a point made recently by former US ambassador to Ukraine Steven Pifer of the Brookings Institution. 
In view of the seriousness of the questions under consideration at the two summits, Putin’s presence would have been helpful. 
In addition to the inherent value of improving the personal chemistry between leaders, reducing tensions in the relationship between Russia and the West has become indispensable, given that negotiations over the missile shield, Iran, Syria, and other issues are bound to be long – and that the solutions are linked. 
Indeed, acceptable solutions today would open the way for an unprecedented nuclear-arms agreement in 2013. 
This is a matter of major importance, for which a good understanding between Russia and the US is essential. 
We must do everything within our power to realize Donilon’s proposal to Putin to, in essence, “reset the reset” and bridge the gap between the two countries concerning the future disposition of their nuclear arsenals. 
For Obama, success would vindicate the Nobel Peace Prize that he was awarded in 2009. 
Russia, we can be sure, would benefit as well. 

Russia’s Middle East Success 
MADRID – After years on the sidelines, Russia is back at the center of the Middle East geostrategic game. 
Against the background of an equivocal United States policy, Russia’s calculated intervention in the Syrian civil war is a rare case in which a limited use of power in the region resulted in a major diplomatic shakeup. 
In a recent interview with Jeffrey Goldberg, US President Barack Obama revealed his thinking in a number of key foreign-policy areas, particularly the Middle East. 
Cynically dismissive of both his European allies and his security advisers, including former Secretary of State Hillary Clinton, who supported military intervention in Syria, Obama minces no words in his fatalistic depiction of the troubled region. 
According to Obama, there is little, if anything, America can do to stabilize the Middle East. 
He even claimed to be proud of not enforcing the “red line” he had drawn in 2012 regarding Syrian President Bashar al-Assad’s use of chemical weapons, as neither international law nor the US Congress would have sanctioned intervention. 
That decision, Obama emphasized, enabled an agreement to remove, with Russian cooperation, most of Syria’s chemical-weapons stockpile. 
But, as Goldberg points out, the decision not to enforce the red line with air strikes may also have caused the Middle East to “slip from America’s grasp.” 
And, indeed, important strategic assets in the Middle East have been lost to unfriendly powers, from Russia to the Islamic State (ISIS). 
Add to that the alienation of close allies, many of which doubt the ability and willingness of an Asia-fixated US to stand by them, and Obama’s suggestion that the US should not be focused on the Middle East is shocking. 
Of course, a key motive for Obama’s reticence about engaging in the Middle East is fear of repeating the mistakes that left the US enmeshed in Afghanistan and Iraq – the result of what Obama called the US government’s unthinking “drift toward war in Muslim countries.” 
But Putin has just proved that a military intervention in the Middle East does not have to lead to a quagmire. 
In fact, far from fulfilling Obama’s pessimistic predictions, Russia’s Syrian operation may help drive forward a political settlement. 
By refusing to be drawn into a long and costly war that would allow Assad to recover most of Syria’s territory, Putin has effectively created a deadlock, which forces both the regime and the opposition to engage seriously in the Geneva peace talks. 
In this sense, says Monzer Makhous, a spokesman for the Syrian opposition, Russia’s decision to pull out “changes the entire situation.” 
What would a political settlement look like? 
One option, which Russia has championed, would be a federal system; indeed, the territorial divisions left behind by the Russians could form the basis of one. 
Assad’s Alawites could control territory in the West, running from Latakia in the north to Damascus in the south, and an autonomous Syrian-Kurdish region could be established in the northeast, with the rest of the country being left to the Sunni opposition. 
Peace is not yet around the corner, though. 
Iran and Saudi Arabia, with their proxies on the ground, remain at loggerheads over how to resolve the conflict; 
Turkey is engaged in its own war against the Kurds; and the Sunni opposition remains unwilling to compromise. 
Should Assad be tempted to recover Aleppo, the Sunni rebels would certainly break the ceasefire and blow up the entire political process. 
Even without a political settlement, Putin’s strategic achievements are notable. 
Russia’s military operation saved its imperiled ally, Assad, from defeat and secured its airbase in Latakia and its naval presence there and in Tartus. 
These strongholds will allow him to challenge US and NATO control in the eastern Mediterranean. 
The bottom line is that Russia has consolidated its position as a power to be reckoned with in the Middle East. 
With the US having largely followed Russia’s lead in the Syrian conflict since the crisis over Assad’s chemical weapons, Middle Eastern leaders now head to Moscow, not Washington, to advance their interests. 
King Salman of Saudi Arabia will visit the Kremlin this month to discuss economic cooperation worth billions of dollars. 
As for Saudi Arabia’s nemesis Iran, Ayatollah Ali Khamenei’s senior counselor, Ali Akbar Velayati, was in Moscow in February. 
Israel, for its part, risked a diplomatic crisis with Australia last month by abruptly canceling an official visit by President Reuven Rivlin, who instead headed to Moscow for an urgent meeting with Putin. 
(And this occurred just after Prime Minister Binyamin Netanyahu canceled a planned meeting with Obama in Washington, without even bothering to communicate that officially to the White House.) 
For Israel, Russia’s military offensive was a boon, as it will prevent the Iran-Hezbollah-Assad axis from dictating the Syrian conflict’s outcome. 
Having coordinated fully with the Russians on the Syrian front, the Israelis now expect Putin to work to keep Iranian forces away from their border on the Golan Heights, and to help bring United Nations observers back to the area. 
To be sure, Putin is nowhere near securing a return to the Soviet Union’s imperial days in the Middle East – not least because Russia’s capacity to sustain a military operation beyond its borders remains severely limited. 
But his smart use of hard power to achieve specific, achievable objectives in Syria has made Russia a focal point for the major actors in the Middle East – creating a serious geopolitical challenge for the US. 
The next American president, it is clear, will have to rethink US regional strategy. 

Darkness on the Edge of Europe 
KYIV – In 2014, Vladimir Putin discovered his inner Trotsky. 
For what Russia’s president is now offering Ukraine is a perverse twist on the formula Trotsky proclaimed during the peace negotiations at Brest-Litovsk in 1918: “No war, no peace.” 
In doing so, Putin has not only moved to trap my country in a frozen conflict that will prevent both democracy and the economy from flourishing; he has shredded the rules and norms that have kept the peace in Europe for three generations. 
No one should believe that the Minsk Protocol – agreed in September by representatives of Ukraine, Russia, and the Kremlin-backed armed militants in the eastern cities of Donetsk and Luhansk – marked the beginning of a return to normalcy in either Ukraine or Europe. 
Under that agreement, Ukraine’s government ceded de facto control of the Donbas region, supposedly for only three years, to Russia’s hired secessionists. 
But this imported hybrid war – and Russia’s bid to carve up Ukraine – is far from over. 
On the contrary, the Minsk Protocol marked only the end of the beginning of Putin’s program to turn Ukraine into a vassal state, and to restore a Russian veto over its neighbors’ international relations. 
His efforts to thwart Ukraine’s European future will continue, as will his efforts to hollow out our democracy and replace it with a Kremlin echo chamber, unless the world imposes such a high price for his imperial ambitions that the Russian people refuse to bear it. 
So, in 2015, the resolve that Europe and the United States have shown in opposing Putin’s designs must not only be maintained; it must be hardened. 
Yet, sadly, there have been signs of slackening Western commitment. 
The European Commission’s agreement in September to postpone full implementation of Ukraine’s association agreement with the European Union – the agreement that Ukrainians fought and died for in Kyiv last winter – signaled to Putin that cunning, force, and intimidation can win Western acquiescence in his subjugation of Ukraine and theft of Crimea. 
The delay, intended to show the EU’s determination to make the association agreement work, has instead only whetted Putin’s appetite. 
His hope is that some EU members’ interest in securing Russian gas supplies during the winter will cause them to forget their allies’ security interests – a classic divide-and-rule strategy, served chilled. 
Europe cannot afford to be taken in by it. 
Ukraine may now only be passing through the eye of the storm. 
Putin, knowing that the Russian Army’s current logistical systems for supplying Crimea are insufficient, appears to be readying plans to secure a land corridor from the Russian border through southeastern Ukraine. 
That is why some of the most sinister figures behind Russia’s other frozen conflicts, such as Lieutenant-General Vladimir Antyufeyev, the long-serving “state security minister” in Moldova’s breakaway Transnistria region, are now calling the shots among eastern Ukraine’s armed militants. 
Antyufeyev is using the tenuous ceasefire agreed under the Minsk Protocol to create a cloned KGB service, called the MGB, to intimidate Ukrainian citizens trapped in Donbas into submitting to proxy Kremlin rule. 
And, with the Donbas economy’s crown jewels having been “nationalized” (and the rest eviscerated), the region’s emerging industries are crime and kidnapping, of the sort seen in Transnistria, Georgia’s breakaway provinces of Abkhazia and South Ossetia, and other Kremlin-backed statelets. 
The desire to secure access to Crimea is also why the Russian Army is now focused on the strategic port of Mariupol, a gateway on the Sea of Azov, for a land bridge. 
Europeans should understand the inherent dangers in creating a land corridor through another country, given the Nazis’ use of the Danzig Corridor as a pretext to invade Poland in 1939. 
Surely, a day of reckoning will come for Putin, whose aggression is slowly wrecking the Russian economy. 
But when that day arrives remains too uncertain for Europe and the world to let down their guard and ease their pressure on the Kremlin. 
Indeed, if peace is to come to Ukraine – and if Putin is to be prevented from using the same strategy elsewhere – the world must let him know that some lines may never be crossed. 
After all, Ukraine is not the only country under the gun, as Putin’s recent threats to “protect” Russian citizens in Kazakhstan, not to mention his intimidation of the Baltic states, attest. 
This is not an issue that concerns only the West. 
China may soon need to decide whether it can sit back and let the Kremlin whittle away the geo-strategic gains and enhanced security that came with the Soviet empire’s demise. 
After all, it is no coincidence that China’s quarter-century of extraordinary economic growth came after the Soviet threat on its border was eliminated. 
Indeed, contrary to what Putin claims to the Russian public, the Chinese are not fully committed to backing him in his confrontation with the West. 
One sign of this is the hard bargain that President Xi Jinping struck in negotiating China’s recent huge gas contracts with Russia; another is that Chinese lending to Russia since the invasion of Crimea has actually declined. 
As Ukraine prepares for another year of confrontation, the world should understand that one fact is non-negotiable: our country will be an independent, fully sovereign state. 
No foreign government will gain a veto over any aspect of our internal decision-making. 
Our future is for Ukraine’s citizens to decide, period. 
This rules out our recognition – at any time and in any form – of Russia’s annexation of Crimea and occupation of Donbas. 
Ukrainians’ unity, spirit, and devotion to their freedom remain undented. 
War has forged a new patriotism that peace will not extinguish. 
We will continue to defy Putin and his efforts to reduce Ukraine to a semi-sovereign buffer state. 
But Ukraine’s ability to resist, and the international community’s ability to prevent brute force from having free rein, depends on whether world leaders understand that appeasement begets only further aggression. 
If they do not, 2015 could mark the return of a European and world order that was supposedly overcome seven decades ago. 

Putin’s Gas Problem 
HOUSTON – Russia watchers are rightly focusing on the latest brittle ceasefire in Ukraine, seeking to discern President Vladimir Putin's intentions there. 
But they would be wise not to overlook another unfolding struggle – one that will have profound long-term consequences for Europe and for Putin's ability to exert pressure on the continent. 
Last December, Russian's giant gas firm, Gazprom, and a Turkish pipeline company signed a memorandum of understanding to construct a pipeline from Russia to Turkey under the Black Sea. 
This new “Turkish Stream" is an alternative to the “South Stream" Black Sea pipeline from Russia to Bulgaria – a project that the Kremlin abandoned in December, in response to the sanctions imposed by the European Union after Russia's invasion of Ukraine and annexation of Crimea. 
The South Stream project failed to comply with EU competition and energy directives, and the announcement of the $12 billion Turkish Stream is likely to reinforce Russia's reputation as an unreliable partner, thus accelerating Europe's search for alternate supply sources. 
Indeed, in risking his most lucrative market, Putin is exhibiting an almost suicidal disregard for the Russian economy – apparently for no other reason than to cement enmity with Ukraine. 
The Kremlin intends to remove Ukraine from a gas-delivery system that has been in place since the 1980s, routing supplies instead through a new and untried network to a market that may not even exist. 
Last month, Gazprom announced its intention to cease shipments through Ukraine when the contracts with the country's gas pipeline company, Naftogaz, expire in 2019. 
Gas from the Turkish Stream will be delivered to the Greek border on a take-it-or-leave-it basis. 
Gazprom expects permission to carry out design and survey work “soon," with its first delivery to Turkey to arrive in 2017. 
Gazprom's erratic behavior is not a matter of minor concern for Europe. 
The continent relies on Russia for some 30% of its natural gas, 80% of which is transported through Ukraine. 
And the continent has been left out in the cold once before. 
In January 2009, Gazprom ordered cutbacks of deliveries through Ukraine, causing severe shortages in six countries in eastern and southeastern Europe. 
In late 2014, Russia cut off Ukraine completely, again signaling its readiness to use gas supplies as a weapon of foreign policy. 
The EU rushed in to broker a settlement that some contend was against Ukraine's interests. 
But, contrary to what Putin seems to believe, neither Europe nor Ukraine is likely to be the biggest loser in Russia's effort to redirect its gas exports. 
Gazprom receives two-thirds of its hard-currency revenues from Europe, and a period of falling exports and domestic economic crisis is not the ideal time to play games with your best customer. 
Indeed, the European market is already slipping away. 
Gazprom's European sales plummeted in the third quarter of last year and fell by 25% in the fourth quarter. 
The slump in demand is coming at a time when Russia is desperate for hard currency, owing to sanctions that exclude it from credit markets. 
Its major companies are facing huge debt refinancing needs, its currency reserves are collapsing, its economy is heading toward a deep recession, and the ruble is plumbing new lows. 
In redirecting its exports, Russia is in effect demanding that Europe spend billions of euros on new infrastructure to replace a perfectly good pipeline, only to satisfy Putin's desire to cause trouble in Ukraine. 
In January, Gazprom's CEO, Alexey Miller, imperiously brushed off European concerns, stating, “We have informed our European partners, and now it is up to them to put in place the necessary infrastructure starting from the Turkish-Greek border." 
The initial reaction in Europe was that Putin either was bluffing or had taken leave of his senses. 
“The decision makes no economic sense," was how Maroš Šefčovič, the European Commission's vice president for energy union, put it. 
“We're good customers. 
We're paying a lot of money. 
We're paying on time, and we're paying in hard currency. 
So I think we should be treated accordingly." 
Putin's erratic and economically oblivious policies are frittering away the last remnants of what was once Gazprom's monopoly position in the European gas market. 
Clearly, if Europe is to spend billions on pipelines, it would be better off doing so as part of an effort to diversify its sources of natural gas, rather than deepen its dependence on Russia. 
After all, memories are long, especially when it comes to frigid winters of unheated homes and closed factories. 
When one of Joseph Stalin's chief planners was asked why he was willing to defend a series of ludicrous proposals, he famously replied, “I'd rather stand for unrealistic plans than sit [in jail] for realistic ones." 
One can imagine that Gazprom officials are thinking along the same lines. 
If so, they should start thinking differently. 
Russia cannot afford more economic pain and suffering. 
But that is what it will get unless sober heads prevail. 

The US Election and the Ukraine Connection 
WASHINGTON, DC – Donald Trump has officially been inaugurated as US president, but questions about Russia’s interference in the election will not go away. 
Yet one key question is often lost in the fray: Why did Russian President Vladimir Putin do it? 
Of course, it is not difficult to guess why Putin preferred Trump to his opponent, former Secretary of State Hillary Clinton. 
But there is a difference between hoping for an outcome and going to great lengths – and incurring great risks – to help bring it about. 
In our view, the US intelligence agencies’ conclusion that, by helping Trump, the Kremlin was advancing its “longstanding desire to undermine the US-led liberal democratic order” is not entirely convincing. 
Russia’s meddling in the US election was unprecedented. 
Just three years ago, it would have been unimaginable: though the West’s relationship with Russia was far from ideal, and featured plenty of competition, it was also characterized by cooperation. 
As recently as June 2013, Putin and US President Barack Obama issued a statement that reaffirmed “their readiness to intensify bilateral cooperation based on the principles of mutual respect, equality, and genuine respect for each other’s interests.” 
Everything changed in February 2014, when Ukraine’s Maidan Revolution culminated in the ousting of the Kremlin-friendly President Viktor Yanukovych. 
That development – and Putin’s response to it – fundamentally transformed the West's relationship with Russia. 
Almost as soon as power changed hands in Kiev, the Kremlin’s foreign-policy posture became much more bellicose. 
Russia invaded and annexed Crimea, and then began supporting a grinding separatist insurgency in Ukraine’s Donbas region. 
The US and the European Union countered with increasingly harsh and sophisticated sanctions and a broader campaign to “isolate” Russia diplomatically. 
Russia took its assertive behavior to the skies, leading to a number of close encounters between Russian warplanes and Western jets (both civilian and military), and to the sea, boosting its submarine activity in the North Atlantic to Cold War-era levels. 
According to the Obama administration, there was a spike in harassment of US diplomatic personnel in Russia. 
On the political front, the Kremlin began supporting Euroskeptic and anti-EU forces. 
And it has gone out of its way to thwart Western efforts to address major international challenges, most prominently the Syrian civil war. 
Longstanding US-Russia agreements on nuclear security and non-proliferation have been angrily renounced. 
All of this culminated in Russia’s alleged leak of hacked emails aimed at discrediting the Clinton campaign. 
While Russia’s efforts to interfere in the US presidential election fit the broader pattern of escalation that began after 2014, they still represent quite a step change. 
Russia probably hacked the Democratic and Republican campaigns in the 2012 US presidential election, too, given its formidable cyber capabilities. 
But its intelligence agencies quietly analyzed the information, in order to improve their understanding of a potential adversary’s future leaders – hardly shocking behavior by a government. 
The election meddling also represented a significant risk for Russia. 
While the extent to which the leaked emails affected the vote is unknown, the Kremlin has certainly paid a price for its actions, alienating most of the American public, along with nearly the entire US political elite. 
The Kremlin’s determination to have its way in Ukraine drove it to take such a risk. 
As its behavior since 2014 suggests, the Russian government considers the post-revolutionary status quo in Ukraine – in particular, the country’s headlong rush toward the West – a direct threat to Russian national security. 
By annexing Crimea, supporting the Donbas separatists, and lashing out at the West directly, Russia wants to make clear that it will do whatever it takes to have its interests taken into account. 
But the West hasn’t cooperated. 
Despite the Kremlin’s escalation, the US and the EU have refused to acquiesce to the negotiation Russia wants, and continue to support Ukraine’s integration with the EU and NATO. 
And, though a formal offer of membership in either organization is at best a distant possibility, it has not been ruled out. 
Once it became clear that Western policymakers were not going to blink, the Kremlin apparently decided to try to replace them. 
In light of Russia’s unbending commitment to maintaining its influence in Ukraine, an inclusive settlement there may well be necessary to prevent the Kremlin from pursuing ever more aggressive options for asserting its position. 
Awareness of this uncomfortable reality should not lead the West to capitulate to Russia. 
Instead, it should strengthen the case for open dialogue and tough negotiation – precisely what has long been lacking in Western policy on the Ukraine crisis and toward the entirety of the post-Soviet Eurasian region. 
We have arrived at this point precisely because both Russia and the West have spent over a decade seeking unilateral advantages and eschewing negotiated compromises. 
Holding talks in the current atmosphere of mistrust, mutual recrimination, and fearmongering will require a substantial investment of political capital for a sustained period. 
Moving beyond current adversarial approaches to find common ground will take time. 
A quick deal won’t be possible. 
As Russia’s meddling in the US election amply demonstrates, the consequences of allowing the Ukraine crisis to continue extend far beyond that country’s borders. 
In order to find a new stable equilibrium in relations between Russia and the West, all parties must urgently make a good-faith effort to resolve it. 

The Rain on Russia’s Parade 
WASHINGTON, DC – When Russian President Vladimir Putin presides over the military parade commemorating Victory in Europe Day on May 9, he will not attract the crowd he could have expected a couple of years ago. 
Neither US President Barack Obama nor any leader from the European Union will be present to watch as tanks roll and military bands march through Red Square. 
Aside from the president of Serbia, the only leaders expected to be in attendance are from countries, such as China and Vietnam, that were not part of the European theater in World War II. 
Following Russia’s annexation of Crimea, and given Putin’s continued support for secessionists in eastern Ukraine, relations between Russia and the West are as bad as they have been since the Soviet Union disintegrated almost a quarter-century ago. 
Obama recently listed Russian aggression in Europe alongside Ebola and the Islamic State as one of the three main threats to US national security. 
Putin responded with claims that the US created the Islamic State and supports “neo-Nazis” in Ukraine and around the world. 
The diplomatic tension is ironic, because the parade in Moscow is meant to commemorate a victory made possible seven decades ago by the alliance of the United States, Great Britain, and the Soviet Union against Nazi Germany. 
Today, the former allies are unable to work together, even when facing a common enemy like the Islamic State. 
Previous commemorations – which were attended by US Presidents Bill Clinton and George W. Bush – emphasized the common endeavor. This year, Russian media have ceaselessly downplayed American and British contributions to the defeat of the Axis powers. 
The Nazi-Soviet pact, which carved up Poland and Romania between the Soviet Union and Germany, has been swept under the rug. 
Obama’s first term in office began with an attempt to “reset” relations with Russia. 
The surviving fruit of those efforts – the New Start arms-control treaty and cooperation on Iran and Afghanistan – are vestiges of the warmer ties that existed when Dimitri Medvedev was president of Russia. 
Bilateral relations began to deteriorate when Putin blamed the US – and then Secretary of State Hillary Clinton in particular – for supporting the thousands of Russians who protested his return to the presidency in December 2011. 
The Obama administration made several unsuccessful attempts in 2012 and 2013 to restart a dialogue with the Kremlin, but changed course in the summer of 2013, when Russia granted political asylum to former US intelligence contractor Edward Snowden. 
The war in Ukraine then took relations to their current depths. 
One year after the “little green men” – Russian soldiers without military insignias – began to appear, first in Crimea and then in the Donbas region, the situation in eastern Ukraine remains both stalemated and volatile. 
A fragile ceasefire remains in place in most parts of the contested region, but fighting continues to break out in some areas, and many worry that a new Russian-backed offensive could soon be launched around the strategic port of Mariupol. 
Worse, the war in Ukraine appears to be on its way to becoming a “frozen conflict,” with the Donbas maintained as a pseudo-state run by Russian-backed insurgents and mafias. 
Ukraine has lost control over both the region and its border with Russia, and it faces the constant possibility that the conflict could heat up once again, as Georgia’s did in 2008, when Russia sent in troops to support the breakaway regions of South Ossetia and Abkhazia. 
Meanwhile, Ukraine’s neighbors are left feeling vulnerable, worried that Russia’s efforts to destabilize the region may cross yet another border. 
The Kremlin shows no signs that it is interested in a solution to the crisis that would enable the government in Kyiv to regain full sovereignty over its territory. 
Even if the fighting does not spread, the US and its allies must re-evaluate their relations with Russia. 
The turning point was the annexation of Crimea, which effectively ended US and European hopes for integrating a modern post-Soviet Russia into the West. 
Putin has explicitly rejected a global order that he believes was imposed by the US in the 1990s, when Russia was weak – an order that, in his view, has run roughshod over his country’s interests. 
The ability of the next US president to work with Russia on issues of global order and Euro-Atlantic security will depend largely on the choices that Putin makes in Ukraine and elsewhere. 
His Victory Day celebration – with its display of advanced weaponry, underpinned by increased military spending – will serve as a demonstration of Russian nationalism and intransigence. 
As long as the US and Russia view each other as antagonists, creating a viable working relationship, let alone an alliance, will be impossible. 
Their inability to unite even in celebrating their shared triumph in World War II is a clear sign of the geopolitical challenges that lie ahead. 

Russia’s War on Ukraine’s Economy 
WASHINGTON, DC – Ukraine’s economy may no longer be in free fall, but it remains in dire straits. 
The country’s GDP contracted by 6.8% last year, and is forecast to shrink by another 9% this year – a total loss of roughly 16% over two years. 
While things seem, to some extent, to be stabilizing – depreciation of the hryvnia has eliminated the country’s current-account deficit, and a massive fiscal adjustment brought Ukraine’s budget into cash balance in the second quarter of this year – the situation remains precarious. 
Ukraine’s primary economic challenges are not homegrown; they are the result of Russian aggression. 
The country’s belligerent eastern neighbor has annexed Crimea, sponsored rebels in eastern Ukraine, pursued a trade war, intermittently cut off its supply of natural gas, and is threatening financial attack. 
So far, Ukraine has miraculously managed to withstand these assaults with little international support – but it is in desperate need of assistance. 
Russia’s annexation of Crimea in March 2014 seized 4% of Ukraine’s GDP. 
Since then, Russian-supported armed forces have occupied territories in eastern Ukraine that accounted for 10% of the country’s GDP in 2013. 
With the Donbas region’s production having plummeted by 70% in the months since, this has cost Ukraine some 7% of its 2013 GDP. 
Since 2013, Russian trade sanctions have slashed Ukraine’s exports to the country by 70% – accounting for a drop of 18% in Ukraine’s total exports. 
Last year alone, Ukraine’s exports to Russia – which included machinery, steel, agricultural goods, and chemicals – fell by half. 
Logistical issues, the lack of commercial links, and the specialization of some products meant that the goods could not be redirected in the short term. 
I estimate that the loss is likely to correspond to a 6% decline in Ukraine’s GDP. 
Businessmen everywhere are aware of Russia’s assault on Ukraine, and, unsurprisingly, few want to invest in a war zone. 
As a consequence, Ukraine’s net foreign-direct investment, which was slightly over 3% of GDP before the start of hostilities, has evaporated. 
This amounts to a corresponding reduction of 3% of GDP. 
In addition to this, Ukraine has faced an intermittent gas war. 
A financial assault may be yet to come. 
Leaving Crimea aside, we can attempt conservatively to sum up Ukraine’s economic losses from Russia’s aggression. 
Roughly 7% from lost production in occupied eastern Ukraine, 6% losses from trade sanctions, plus 3% from lost foreign direct investment amounts to 16% of GDP – that is, the total amount Ukraine is estimated to have lost from the beginning of 2014 to the end of this year. 
Russia’s apparent but undeclared aim is to make sure that democratic Ukraine fails, without looking entirely guilty of having caused that failure. 
This leads to an important conclusion: Ukraine is not the culprit but the victim, and it should be treated accordingly. 
One does not counter military aggression only with stabilization credits, but also with military support. 
European countries should note that, given the Kremlin’s saber-rattling in the Baltic and the Balkans, there is little reason to believe that the Russian threat is limited to Ukraine. 
Delivering arms to Ukraine before Russia attacks, openly or covertly, should be a priority. 
On July 1, Russia opened a new front in the economic war on Ukraine when the energy giant Gazprom, which is majority-owned by the Russian state and slavishly pursues Russian foreign-policy objectives, decided unilaterally to cut off the country’s gas supply. 
Given the global gas surplus, Europe is in a position to tell Russia in no uncertain terms that its corrupt practices are no longer acceptable. 
In particular, the European Commission should insist that Ukraine be able to continue to import gas from Gazprom in order to augment European supplies. 
Furthermore, the economic war is making it almost impossible for Ukraine to deal with the humanitarian emergency that Russian aggression has caused: more than 6,000 citizens killed, tens of thousands injured, and 1.3 million people internally displaced. 
The international community, again with the EU in the lead, must provide substantial humanitarian assistance. 
Ukraine’s stabilization program with the International Monetary Fund is sound but underfunded. 
An additional credit of roughly $10 billion is needed to raise Ukraine’s international reserves and stabilize its currency so that controls can be lifted. 
This money should come from the EU and the United States. 
Meanwhile, the EU should make Russia’s trade war with Ukraine the focal point of any trade negotiations with the Kremlin. 
And it should abolish its remaining strict import quotas for Ukrainian goods. 
Finally, every legal avenue to holding Russia to account must be pursued. 
Sanctions against Russian President Vladimir Putin’s cronies should not only be continued, but also deepened. 
And the US should follow on its success in tackling FIFA by exposing criminals in former Ukrainian President Viktor Yanukovych’s regime and Putin’s entourage. 
Given that many of them have international bank accounts in US dollars, they are liable to American prosecution. 
Ukraine should not be left to face Russia on its own. 

Trump Through Russian Eyes 
NEW YORK – I am an American, Moscow-born. 
And because of that, my Americanness, unlike that of Saul Bellow’s Augie March, once triggered something of a national debate back in Russia. 
In some places, school textbooks asked students whether it was right or wrong for Nina Khrushcheva to become an American citizen. 
I leave it to you to guess which position most people, especially those of the Soviet generation, supported. 
While you can take a Russian out of her homeland, in the end you can’t take Russia out of her. 
So, at a time when US politics has taken such a bizarre turn, perhaps my Russia-tinted lenses can help my fellow Americans make some sense of it. 
Indeed, from my perspective, many of the nastiest and most perverse features of Russian politics now seem present in the United States as well. 
The Big Lie – invented in Nazi Germany, perfected in the Soviet Union, and wielded expertly by Russian President Vladimir Putin – is today a core component of Donald Trump’s presidential campaign. 
So far, Trump has been allowed to get away with his lies. 
The news media have largely been what Lenin called “useful idiots,” so eager to use Trump to boost their own ratings that they did not notice or care that they were also boosting his. 
No surprise, then, that an emboldened Trump now delivers lies of ever more breathtaking audacity. 
For example, after spending years leading the so-called birther movement – which alleged that President Barack Obama was not born in the US, and was therefore constitutionally barred from holding office – Trump declared that it was actually his opponent, Hillary Clinton, who had invented the controversy back in 2008. 
It was up to Trump, apparently, to “finish” it. 
“President Barack Obama,” he stated triumphantly (as if there was ever really any doubt), “was born in the US. 
Period.” 
Some say that, in the wake of such bravura mendacity, the media are now turning on Trump. 
Indeed, his birther claim about Clinton seems to have been simply too ridiculous to let slide. 
Yet his national opinion poll ratings remain strong, suggesting that many of his supporters are willing to believe – or at least overlook – his flagrant lies. 
This may partly reflect another “Russian” feature of the current US election campaign: the power of oligarchs. 
Russia’s first post-Soviet president, Boris Yeltsin, cut deals with the country’s wealthiest citizens: they would finance his re-election campaign in exchange for privileged access to the crown jewels of Russian industry as they were privatized. 
Similarly nasty deals are being made in the US nowadays, thanks to another group of useful idiots: the conservative justices on the US Supreme Court who gave America the infamous 2010 Citizens United decision. 
By extending constitutional free-speech protection to political campaign donations, that ruling removed all constraints on the power of money over US politics. 
In Russia, the oligarchs are accountable to Putin. 
In the US, by contrast, it seems that the politicians are accountable to the oligarchs, who use their money to manipulate ordinary citizens. 
Exhibit A is Rupert Murdoch, Chair and former CEO of News Corporation and 21st Century Fox. 
Over the years, Murdoch newspapers played a leading role in smearing the European Union, thereby helping to bring about June’s Brexit vote. 
Now that Murdoch has taken over from Roger Ailes as CEO of Fox News – after Ailes resigned amid a swirl of sexual-misconduct allegations – he seems to have made it his mission to compel US voters to make a similarly disastrous choice. Indeed, since Murdoch’s takeover in July, Fox News has become all about Trump, not about news. 
Hosts who once expressed concerns about Trump now offer banalities. 
As for Ailes, he is openly advising Trump’s campaign. 
Perhaps the most disappointing parallel between Russia’s past and America’s present is what I call the silence of the rams: the refusal of those with influence to stand up and stop the insanity. 
In Russia in 1917, the October Revolution succeeded largely because the Bolsheviks’ opponents, often too concerned with protecting their own positions and prestige, failed to unify against them. 
In the US today, influential Republicans are following much the same route. 
To be sure, some leading Republicans openly oppose Trump. 
Former Massachusetts Governor Mitt Romney has worked hard in recent months to expose Trump as the dangerous fraud that he is. 
Moreover, 50 of America’s most senior Republican national security officials have signed a letter warning that Trump “would put at risk our country’s national security and well-being.” 
Senators Lindsey Graham and Ben Sasse have also denounced Trump as a threat to American freedom and to world peace. 
And former President George H.W. Bush reportedly will vote for Clinton. 
These Republicans are showing true patriotism, putting country before party. 
But what about Paul Ryan, the current Speaker of the House of Representatives, who acts as if Trump is worthy of the American presidency, and risks losing both party and country, only because Trump just might enact some policies that he supports? 
If Ryan is truly the grown-up Catholic altar boy that he likes to portray himself as being, he should denounce Trump’s xenophobic statements, deepening flirtation with the racist “alt-right,” dishonest business practices, and erratic foreign policy position. For what shall it profit a man if he shall gain his whole policy and lose his own soul. 
And, finally, where are the many old Republican lions? 
If they want to prevent Trump from taking their party’s reputation – and their country’s future – to the slaughterhouse, they had better roar soon. 
And yet former President George W. Bush remains on the sidelines, seemingly more embittered that Trump defeated his brother Jeb in the primary than animated by the threat posed by Trump. 
James Baker, who served both Ronald Reagan and George H.W. Bush, has not publicly said a word; nor has George Shultz, Henry Kissinger, Condoleezza Rice, or Dick Cheney. 
We know that Colin Powell loathes Trump, but only because his emails were leaked. 
When Yeltsin stepped down, he left Russia at the mercy of his handpicked successor, Putin. 
For the sake of their party and their own honor and reputations, these old lions should now openly disavow Trump, lest similar damage be inflicted on their – and my – country. 

Russian Propaganda’s Western Enablers 
TALLINN – Every day seems to bring a new revelation about Russia’s political meddling in Western countries. 
From Twitter trolls sowing discord among voters, to the Kremlin’s alleged support for extremist groups, Russian propaganda is undermining trust in democratic governance. 
And although Western politicians may talk tough in response to the Kremlin’s efforts to upend the status quo, their actions often betray a weaker hand. 
Russia’s ability to influence journalism and literature is a case in point. 
The Finnish author Sofi Oksanen once observed that Russia’s information warfare works because its targets are often willing participants. 
During the Cold War, for example, Finland’s economic dependence on raw materials and technology from Russia left its leaders loath to antagonize the Kremlin. 
This phenomenon – “Finlandization” – helps explain why, when Aleksandr Solzhenitsyn’s The Gulag Archipelago was translated into Finnish in 1974, the first edition was printed in neighboring Sweden. 
Even Britain has succumbed to this calculus. 
In 1944, the British establishment tried to prevent publication of George Orwell’s Animal Farm; then-editor T.S. Eliot argued that the book’s anti-Soviet “point of view” was “not convincing.” 
No one, it seemed, wanted to anger Stalin, who was then an ally of Great Britain. 
This type of indirect pressure continues to claim victims today. 
In the Baltic states, people are increasingly worried that geopolitical competition over the Nord Stream 2 gas pipeline linking Russia to Germany will affect writers’ freedom of speech to opine on Russian President Vladimir Putin’s regime. 
I don’t blame them. 
I am acutely aware of how dangerous it can be to run afoul of Russian interests. 
In 2009, I edited a series of essays with Oksanen documenting official practices in Estonia when it was part of the Soviet Union. 
Our book Fear Was Behind Everythingdetailed the terror that gripped Estonia under the Soviet system. 
For a half-century, any book that was critical of the communist regime was banned in the Baltic states and was not published in Finland, either. 
Our volume marked a turning point. 
Or so we thought. 
The idea for our book was inspired by an incident in 2007, when the statue of a Soviet soldier, the symbol of occupation forces in Estonia, was relocated from central Tallinn to a military cemetery elsewhere in the city. 
Russia protested the move, and deadly riots erupted amid rumors that the government was denying Estonian Russians the right to mourn their war dead. 
The next year, Johan Bäckman, a docent at Helsinki University, published a book about the incident, The Bronze Soldier, in which he called Estonia an “apartheid state” led by incompetent leaders whose citizens were incapable of coming to terms with their own history. 
His publisher was an Estonian-born journalist and former KGB officer, Vladimir Ilyasevich, who had worked in Finland and in other Nordic countries during the Cold War. 
Bäckman then trained his pro-Russian vitriol on me. 
First, he attacked a book I had written about my mother’s trauma in a Soviet gulag, and then he helped organized protests against the release of Fear Was Behind Everything. 
Because of these threats, we requested armed police protection on the day of the book’s launch in 2009. 
And, while Bäckman has since left his teaching job and directs most of his attention to spouting other pro-Putin falsehoods, the Russian-backed propaganda war he helped wage continues to affect my sense of security. 
Simply put, the old Soviet system of fear continues to wreak havoc on the truth and punish those who defend it on the page. 
While Russia’s propaganda efforts may be aimed at influencing governments, it is individuals who suffer the consequences. 
As the chief executive of the Estonian International Center for Defense and Security, Dmitri Teperik, recently argued, information wars are most dangerous for “civil activists” – like journalists, writers, and authors – because we are the ones on the front lines. 
Nearly three decades after the fall of the Iron Curtain, Russia maintains its Soviet-era proclivity to prey on peoples’ fears and insecurities. 
Its operatives are happiest when their opponents cease their activities – when writers stop writing, or publishers stop publishing. 
Unfortunately, Russia succeeds more than it fails because it is easy to misinform; as Noam Chomsky once said, people don’t know what they don’t know. 
The best chance truth has is if writers and authors persist in presenting readers with facts; every now and then, we are rewarded for these efforts. 
Earlier this year, the Finnish journalist Jessikka Aro took Bäckman to court, after having become a target of his malice since 2014, when she started exposing the Kremlin’s social media “troll” factory. 
The outcome of that case is pending. 
But, with any luck, Bäckman will be punished for his harassment and baseless attacks. 
His trial could even mark a definitive moment in the history of efforts to counter Russian propaganda, giving beleaguered writers and journalists the courage they need to stand up to Russia in ways that governments rarely have. 

Russian Realities 
At first glance, Russia bears many of the hallmarks of a great power. 
It possesses a large arsenal of nuclear weapons, a permanent seat on the United Nations Security Council, enormous reserves of oil and other minerals, a recent record of robust economic growth, and more territory than any other country despite being only three-fourths the size of the former Soviet Union. 
Closer inspection, however, reveals a different Russia. 
Much of its wealth reflects the increased value of energy, not productive economic activity. 
Russia’s armed forces are able to project little in the way of usable military might. 
The country’s population now numbers less than Pakistan’s and is declining by 500,000 people per year, leaving large portions of its vast landmass mostly uninhabited. 
Male life expectancy is now less than 60 years, owing to alcoholism, crime, drugs, disease, and a dreadful public health system. 
All this adds up to a Russia that, if not quite a Potemkin state, is anything but great. 
There are limits to what Russia can accomplish in the world in any positive sense, although its capacity to be a spoiler or create problems is considerable. 
Decisions made in Moscow can affect world energy prices, the future of the Iranian and North Korean nuclear programs, and the success of terrorists. 
For better and for worse, Russia still matters. 
But how much will it matter? 
One question concerns political stability. 
In order to remain intact and functional, the country needs a political system and a society that persuade talented young people to stay in Russia – and that provides them with the education to develop their talent. 
There also must be limits on the power of the central government and the presidency, a degree of regions autonomy, and rule of law – in short, the rudiments of a modern state and democracy. 
Alas, Russia is moving more in the opposite direction; political power is becoming more, not less, concentrated. 
The economic picture is similarly uncertain. 
High energy prices are a boon to Russia’s economy, but, as is often the case in the Middle East and other oil- and gas-rich regions, they can be a burden as well, feeding corruption and discouraging real economic activity. 
The challenge for Russia’s leaders is to use its oil wealth to educate Russia’s people and rebuild Russia’s infrastructure, thereby ensuring global competitiveness and employment growth. 
Russia also needs a national security strategy to complement its political and economic renewal. 
All stick and little carrot has failed to quell Chechen nationalism, and President Vladimir Putin’s similarly heavy-handed attempts to control Russia’s so-called “near abroad” – as in Ukraine during the Orange Revolution – have proven no more successful. 
Nor will any posture succeed that seeks to put Russia forward as a geopolitical counterweight to the United States. 
Such a strategy might be politically satisfying to some, but Russia lacks the resources to compete with the US and needs good bilateral relations in order to proceed with its own internal transformation. 
At the same time, the best way to help bring about a more liberal Russia – one that promises to be more stable at home and more responsible abroad – is by working with it. 
The outside world can and should support the strengthening of civil society, independent media, and a true transfer of political power in 2008. 
Isolating Russia makes no sense. 
Russian membership in the World Trade Organization has the potential to strengthen the rule of law, combat corruption, and give Russia a stake in better relations with the outside world. 
Closer ties between Russia and the European Union make sense for similar reasons. 
There should also be some understanding for what Russia and the Russian people have gone through over the past two decades. 
Losing a country and a special place in the world is the sort of trauma that could lead to the emergence of extreme and potentially violent nationalism. 
Russia should be treated as a major power, which means consultations on important global issues. 
Its voice should be heard on matters ranging from terrorism and weapons proliferation to global climate change and energy policy. 
Next year’s G-8 meeting in Russia provides an opportunity to do all of this and more. 
Amid all the attention being devoted to China and the potential for competition or even conflict with the US, it should not be forgotten that Russia’s future hangs in the balance, for history suggests that declining powers can pose as great a challenge to world order as rising ones. 
One need only consider Austria-Hungary and Ottoman Turkey at the start of the twentieth century or the former Yugoslavia at its end. 
So far, the decline of what was the Soviet Union has proceeded relatively well; 
Russia, the principal successor state, has avoided all-out civil war and war with its neighbors. 
But the challenge of integrating Russia remains. 
At best, Russia is a potential partner in the effort to manage globalization’s challenges; at worst, it is a potential problem. 
What is certain is that how Russia develops will be a key factor determining the character of this century, no less than the last. 

Toward a Rust Belt Powerhouse 
LONDON – A few days ago, US President-elect Donald Trump took to Twitter – his medium of choice – to declare that he did not need China’s permission to contact Taiwan, because China didn’t ask for permission to devalue its currency. 
At that moment, my hope that the Trump shake-up would be economically beneficial for the United States diminished. 
I believe that the developed economies need a jolt to escape their post-2008 malaise and their excessive reliance on easy monetary policy. 
Given Trump’s propensity for shaking things up, he seemed a good candidate for the job. 
But if the Trump disruption were actually going to help the US, it would need to focus on economic essentials, rather than simplistic – and often false – populist memes. 
Judging by his accusations against China, it seems that Trump is simply stirring the pot and riling up his supporters – not advancing any kind of constructive agenda. 
After all, any reasonable observer of China – including some of Trump’s own advisers, with whom I have worked in the past – knows that the country has not devalued its currency for some time. 
Yes, the Chinese renminbi has declined recently against the dollar, but not as much as the Japanese yen, the euro, or the British pound – and those declines have been driven by relative confidence in the US economy. 
In any case, the Chinese have a trade-weighted exchange-rate policy, not one based on keeping the renminbi at some targeted level relative to the dollar. 
Instead of accusing China of undermining US companies’ competitiveness, Trump should be focused on a genuine pro-growth strategy. 
Such a strategy could follow the British “northern powerhouse” model – which I helped to create as a member of the government – focused on revitalizing the economies of the former heartland of British manufacturing. 
London is the only city in the United Kingdom that ranks in the world’s top 50. 
That is a big deal in a world where, for the last 20 years, cities have accounted for more than 60% of economic growth, wealth expansion, and gains in living standards. 
Individually, the far smaller cities in England’s north cannot really compete with that. 
But, by linking together major cities – including Manchester, Sheffield, Leeds, and Liverpool – the north could become far more unified, with seven million people acting as a single regional economy, thereby providing many of the agglomeration benefits of major global cities. 
And, indeed, the distances between Manchester, Leeds, Liverpool, and Sheffield are smaller than the distances covered by the Central, District, and Piccadilly lines in the London Underground. 
With affordable state-of-the-art transport systems, therefore, it seems clear that these cities could take advantage of urban agglomeration benefits. 
Of course, the cities of England’s north are proud of their unique histories and eager to maintain their individual sense of identity. 
None of this would be taken away from them. 
While it is understandable that some have viewed the northern powerhouse strategy as a platform for emphasizing their own superiority, this is unhelpful, not least because it causes some decision-makers in the central government to doubt the project’s relevance. 
Why invest so much in these cities, when so many other areas of the country are also struggling? 
The only answer is precisely the opportunity to reap the benefits of integration. 
Fortunately, despite some doubts, the UK government has announced efforts to kick-start some of the necessary transport links, with the goal of shortening the Leeds-Manchester train journey to 30 minutes. 
But other elements of the northern powerhouse plan are just as important, especially the devolution of significant decision-making powers – and some spending and revenue powers – to the city level, in exchange for electing mayors (something the UK can learn from the US). 
After all, England is probably the most politically centralized economy in the OECD – a reality that probably contributes to its deep regional imbalances. 
Beyond devolution and transport, England’s north needs to improve dramatically the education and skills of its labor force, in order to attract and retain cutting-edge companies. 
Plans to replicate some of the remarkable improvements in London and southeast England’s educational attainment of the last 20 years are ambitious but achievable. 
The reality is that, with greater decision-making authority and more linkages and skills, England’s northern cities could become far more dynamic, potentially reversing decades of relative economic decline. 
In fact, I would venture to predict that the northern powerhouse project, which has already attracted the attention of local and foreign investors, will be one of the UK’s most important structural economic policies for many years to come. 
That is why it is critical that UK leaders continue to advance it. 
The northern powerhouse strategy provides valuable lessons for other countries. 
Already, China is pursuing a similar regional development strategy, aimed at revitalizing its old northern industrial belt, thereby taking some of the pressure off its ultra-dynamic coastal cities. 
The US should follow suit, with a plan to revitalize the so-called Rust Belt that was integral to Trump’s victory. 
As an added benefit, such an approach could spur “competitive envy” in other sluggish regions. 
That is what has happened in the UK, with progress in England’s north spurring some to argue for, say, a “Midlands engine,” covering the other major urban-based UK area outside of London, with many cities in close proximity to one another. 
Of course, the US is much larger than England, and its old industrial cities are much farther apart. 
But some of the ideas that have animated the northern powerhouse could enrich Trump’s economic plans considerably. 
Given that infrastructure investment is a key element of his agenda, and that devolution of powers to the states is popular among US Republicans, there certainly seems to be space for such an approach. 

A Formula for Health Equity 
KIGALI – Imagine a country where some 90% of the population is covered by health insurance, more than 90% of those with HIV are on a consistent drug regime, and 93% of children are vaccinated against common communicable diseases including HPV. 
Where would you guess this enchanted land of medical equity is? 
Scandinavia? 
Costa Rica? 
Narnia? 
Try Africa – Rwanda, to be precise. 
In my native country, health care is a right guaranteed for all, not a privilege reserved for the rich and powerful. 
Rwanda remains poor, but, over the past 15 years, its health care advances have gained global attention, for good reason. 
In 2000, life expectancy at birth was just 48 years; today, it’s 67. 
International aid has helped, but our achievements have come primarily from other, non-financial innovations. 
For starters, Rwanda has established a collaborative, cluster approach to governance that allows us to achieve more with the same amount of funding. 
Moreover, our civil servants embrace problem solving, demonstrating a level of resourcefulness that has produced many localized solutions to human development challenges such as ensuring food security and adequate supplies of clean water and housing. 
But perhaps the most important factor behind our dramatic health-care gains has been the national equity agenda, which sets targets for supporting the needy and tracks progress toward meeting them. 
Since implementing this approach, Rwanda has managed to decrease the percentage of people living in extreme poverty from 40% of the population in 2000 to 16.3% in 2015 
Aside from the obvious benefits, these gains matter because, as UNICEF recently noteda country’s potential return on investment in social services for vulnerable children is two times greater when the benefits reach the most vulnerable. 
In other words, Rwanda has achieved so much so fast because we are enjoying higher rates of return by investing in the poorest. 
In working toward health equity, Rwanda has made accessibility a top priority. 
As of 2016, nine out of ten Rwandans were enrolled in one of the country’s health insurance programs. 
The majority of the population is enrolled in the Community-Based Health Insurance (CBHI) scheme, which has increased access to health care for Rwanda’s most vulnerable citizens by waiving fees. 
As a result, the reach of health-care coverage in Rwanda is high by global standards – all the more remarkable for a country that suffered the horrors of genocide a generation ago. 
Consider the situation in the US: while the rate of uninsured Americans has dropped precipitously under the 2010 Affordable Care Act, the insured face rapid increases in premiums and out-of-pocket expenses. 
Perhaps the US should consider adopting a CBHI-type program, to reduce further the number of Americans facing financial barriers to medical care. 
Rwanda has crafted health care delivery with access in mind as well, by deploying community health workers (CHWs) to the country’s 15,000 villages. 
These local practitioners serve as the gatekeepers to a system that has reduced waiting times and financial burdens by treating patients directly – often at patients’ homes. 
The US could also benefit from a CHW program. 
The US is brimming with educated young people who, as CHWs, could bridge the gap between medical facilities and patients, thereby improving American social capital and health outcomes. 
As Rwanda’s experience has demonstrated, such programs not only broaden access to health care; they also lower overall costs by reducing unnecessary hospitalizations. 
Such programs have been shown to be transferable. 
Starting in 1997, Brigham and Women’s Hospital supported the HIV+ community of Boston through the Prevention and Access to Care and Treatment (PACT) program. 
That initiative was based on the CHW model implemented in rural Haiti by Partners In Health – a non-profit health-care organization that integrates CHWs into primary care and mental health. 
As a result of that initiative, the government insurer Medicaid spent less money on hospital stays, and inpatient expenditures fell by 62%. 
Other US communities could, and should, incorporate similar models into their treatment programs for chronic conditions. 
Innovation is what kick-started Rwanda’s health-care revival, and progressive thinking is what drives it forward today. 
For example, health centers established throughout the country provide vaccinations and treat illnesses that village-level CHWs cannot, and have extended obstetrics services to the majority of Rwandan women. 
Broadening access further, each district in Rwanda has one hospital, and each region in the country has a referral or teaching hospital with specialists to handle more difficult cases. 
While some hospitals still suffer from staff shortages, the government has sought to patch these holes through an initiative that employs faculty from over 20 US institutions to assist in training our clinical specialists. 
In just over two decades, thanks to homegrown solutions and international collaboration, Rwanda has dramatically reduced the burden of disease on its people and economy. 
As we look forward, our goal is to educate tomorrow’s leaders to build on the equitable health-care system that we have created. 
This is the mission of the University of Global Health Equity, a new university based in rural Rwanda that has made fairness, collaboration, and innovation its guiding principles. 
As a Rwandan doctor who contributed to building my country’s health-care system from its infancy, I am proud of what we have accomplished in so short a time. 
It wasn’t magic; it was a formula. 
Through continued global cooperation, other countries, including developed ones, can learn to apply it. 

The Heart of Africa’s New Medical School 
SAN FRANCISCO – Rwanda has achieved some of the most dramatic gains in health and poverty-reduction in the world. 
This small, landlocked African country (the size of Massachusetts, but with twice the population) has developed a primary health-care system with near-universal access to clinical care and insurance. 
Rwanda has reduced both economic and health-care inequality, and demonstrates how “health equity” helps to build strong societies. 
The secret to Rwanda’s success is that its leaders are building “modern institutions on traditional values.” 
They built a system of community justice, called Gacaca, which integrated their need for nationwide reconciliation with an ancient tradition of clemency. 
They breathed life back into a civic tradition of Umuganda, where one day a month, citizens, including the president, gather together to weed their fields, clean their streets, and build homes for the poorest among them. 
In 2015, the government of Rwanda and the Boston-based Partners In Health (PIH), with the help of the Bill & Melinda Gates Foundation and the Cummings Foundation, established the private, not-for-profit University of Global Health Equity (UGHE). 
The university is founded on the principle that every member of a community deserves the same care and opportunity, and focuses on the delivery of quality health care to those who need it most. 
Agnes Binagwaho, a co-founder of UGHE who is a former minister of health and an adjunct professor at Harvard Medical School, once said to me, “Why would I want to raise my children in a nation where all children don’t get the same medical care as they do?” 
Rwanda’s government has already pledged $43 million to UGHE in land and infrastructure support. 
Its leaders have launched a two-year, part-time Master of Science in Global Health Delivery to teach how to create national health care in developing countries. 
Lecturers from Rwanda’s Ministry of Health, Harvard Medical School, Yale University, and Tufts University taught Rwandan students everything from epidemiology to budget management. 
Last summer, UGHE began construction on a 250-acre campus in Butaro. 
This year, 250 professionals from as far away as Mexico and Australia will compete for 25 spots on that campus. 
Undergraduate and graduate degrees in nursing and oral health, and non-clinical programs in research and health management, are next. 
In 2018, UGHE’s campus will also be home to a school of medicine. 
It will provide space for generations of health professionals to learn how to heal patients, comprehend the sociology of disease, and build the health systems that make a strong society. 
UGHE’s founders believe that, by the time the university celebrates its ten-year anniversary, 480 students will have graduated; another 870 will be earning their degrees; and over 2,500 professionals will have attended executive education courses. 
They expect that over 1,000 of the students passing through the UGHE’s doors in that first decade will arrive from the rest of Africa, Asia, Europe, and the Americas. 
Rwandans will invite these international students to visit their communities to observe their traditions and learn how to care for their people. 
The young men and women will attend Rwandans’ weddings and funerals, learn to prepare and enjoy their foods, and acquire some of their language, the portal through which to view their sturdy values. 
Rwandans will teach their international guests that in Africa, family is an all-encompassing concept, and that, in Rwanda, an entire generation treats the next as its own children. 
The international network of UGHE alumni, unified by their commitment to realize health equity for their own communities, will become a global force for change. 
UGHE will also strengthen Rwandan society. 
Though regarded by many as one of the safest and least corrupt societies in the world, Rwanda faces a great shortage of doctors and nurses. 
There are 684 physicians in Rwanda, a total that is far below the 1,182 physicians proposed by the Ministry of Health, and only 27% of the World Health Organization’s recommended minimum of 2,576 physicians. 
UGHE has already generated jobs, by hiring local laborers, and has increased access to the region, by creating new roads. 
It could boost Rwanda’s GDP by 0.5% per year, and every dollar invested in UGHE could generate $2 worth of return in economic development, according to McKinsey & Company. 
Some social scientists assert that poverty is not just a matter of poor nutrition, lack of medical care, and inadequate shelter; it also means exclusion from global networks of trade, science and commerce. 
This isolation is pernicious, because it destroys people’s hope and aspirations for a better life. 
UGHE will be Rwanda’s newest institution, a public-private collaboration based on traditional values: community, trust, hard work, and optimism about the future. 
It will integrate each citizen of Rwanda into global networks of learning. 
The Rwandans will accomplish this, as they do many things, because they believe that the only investment that can bring infinite returns is in their children, and because graduates of the University of Global Health Equity will be their sons and daughters, too. 

Sacred Promises 
JOHANNESBURG – A promise to the poor is particularly sacred. 
It is an act of grace and great leadership when all efforts are made to keep these pacts, and that is why those G-8 countries that are leading the charge for the poorest, especially for those in Africa, deserve much credit. 
But we who praise must also be prepared to censure where it is clearly deserved. 
It saddens me that great nations like Italy and France are going in the wrong direction and falling behind with the pledges they made four years ago at the G-8 summit in Gleneagles, Scotland. 
We must all campaign to encourage leaders at the forthcoming G-8 meetings to get back on track and do what is right. 
Of course, African development must be driven by African citizens – from all areas of society. 
But we also need and welcome international support in our struggle against poverty and injustice. 
That means support from governments, and from good citizens in countries like Italy. 
I expect that most of us tend to be deeply distressed– and often devastated– when we look at the news and see what is happening in Darfur, Zimbabwe, and the Congo. 
“When are we going to get good news?” we ask. 
Well, I want to tell you that there is good news from Africa. 
When I went to Darfur recently, I was particularly struck by those humanitarian workers who keep going back into an awful situation. 
I want to stand up and shout loudly for the fact that there are so many young people who are incredibly idealistic, who do believe that poverty can become history, who believe that it is possible to have a world without war. 
Evil does not have a free rein. 
I come from a position that says that ours is a moral universe, and good will ultimately prevail. 
In Africa, just within the past decade, 34 million more children are now going to school, having the chance to learn to read and write and escape poverty. 
This is thanks to the efforts of African leadership and effective aid, including that of G-8 countries. 
It can be hard to imagine 34 million children. 
So imagine just one child who can now go to school and receive the gift of education. 
Give this child the face of a child you know. 
Give the face a name. 
It’s not about numbers; it’s about that child – somebody’s son, somebody’s brother. 
It is fantastic that this has happened. 
There is also good news in the fight against illnesses like HIV/AIDS. 
There are now an estimated three million people in Africa on life-saving AIDS treatment. 
Imagine that you are in a family affected by AIDS, your breadwinner received a death warrant, and you watched this person slipping away. 
Then she gets antiretroviral drugs and you see a metamorphosis. 
We thought our mother was dying, but now our mother is well enough to go to work. 
There are three million such individuals. 
Because aid has been given. 
A promise to the poor is particularly sacred. 
Not keeping that promise is a sin. 

Sadat’s Journey, 30 Years After 
TOLEDO -- If “one man of courage makes a majority,” as Andrew Jackson said, then 30 years ago, in November 1977, Egyptian President Anwar Sadat was such a man. 
His peace overture to Israel stunned the Middle East. 
He had, as he put it, gone “to the end of the earth” (the Knesset in Jerusalem), and in doing so transformed the region’s politics beyond recognition. 
From that moment, the question for the Arabs was no longer how to destroy Israel, but how to reach an accomodation with it. 
In his dramatic leap into the future, Sadat taught Arab leaders the realities of a changing world. 
For Sadat’s peace overture was born out of a sober strategic analysis of the regional balance of power. 
It was clear to him that Israel was a nuclear power that, in October 1973, had once again proven itself to be unbeatable in a conventional war – a war Sadat himself had never expected to win when he launched it. 
Understanding Clausewitz’s dictum that war is a continuation of politics by other means, Sadat had sent the Egyptian Army across the Suez Canal in order to unleash a peace process. 
He was defeated militarily, but his decision to go to Jerusalem meant that he would succeed politically. 
During all of their abortive attempts to destroy Israel, the Arabs had relied on the military backing of the Soviet Union. 
But a strategy of peace with Israel, Sadat knew, required an alliance with the United States. 
This alliance was so vital an objective for Sadat that one may rightly wonder what came first in his strategy. 
Perhaps Sadat might have opted to secure the American alliance without making peace with Israel if he had been able to do so. 
But he could not, and he knew it. 
Indeed, in 1974, when General Gamasy, the architect of the 1973 war, questioned Sadat’s flexibility in the disengagement talks with Israel, Egypt’s president calmed him down by saying, “Don’t forget, General, we are talking here about peace with the Americans!” 
Another shift implicit in Sadat’s strategy was to keep Egypt at a distance from pan-Arabism. 
Weary of inter-Arab politics, and tired of the high price Egypt had paid for the Palestinian cause, Sadat wanted to move away from Nasser’s pan-Arab ambitions and an excessive focus on the question of Palestine toward an emphasis on Egypt’s role as a power lying at the strategic crossroads between Asia and Africa. 
Sadat would, of course, continue to champion the Palestinian cause as the heart of an Arab consensus and sometimes as a fig leaf for his own Egypt-focused foreign policy. 
But, for all practical purposes, Sadat had embarked on a path leading to a separate peace with Israel. 
One lesson of Sadat’s initiative is that in protracted conflicts where deep emotions and historical hatreds are involved, when almost every conceivable diplomatic formula has been tried and failed, the shock of a visionary, generous, and imaginative step can open new paths. 
The major problem in the Arab-Isreli conflict, as in many other intricate disputes, has always been the incapacity or unwillingness of leaders to conduct a peace policy that is not supported by their societies’ prevailing, and frequently paralyzing, consensus. 
Leaders, more often than not, are hostage to the socio-political environment that produces them, rather than its shapers. 
Sadat gained a privileged place in history and achieved immortality the moment he fled from the comfortable prison of inertia, and from the pantomime solidarity and hollow rhetorical cohesion of Arab summits. 
The test of statesmanship did not end there. 
Sadat’s spectacular leap into the future needed to be met by Israel’s prime minister, Menachem Begin, at almost every juncture down a tortuous road to peace. 
Arguably, only a political “hawk” like Begin, a man with a keen sense of the dramatic and a political romantic with a beady eye to the judgment of history, could have responded in such a way to Sadat’s initiative. 
That Begin was able to rise to the occasion had much to do with the psychological impact of Sadat’s astonishing initiative. 
Through his visit to Jerusalem, Sadat made more ordinary the nature of the Arab-Israeli conflict. 
Sadat’s initiative transformed the conflict from a fight about Israel’s right to exist into a negotiation of interests between legitimate sovereign states. 
Here, indeed, is the central point: the need to move away from mythological, mutually exclusive rights of existence, conflicting historical narratives, and religious claims of ownership. 
Sadly, this is where the Palestinian-Israeli tragedy remains stuck to this very day, thus making the conflict practically insoluble. 
Through his visit to Jerusalem, Sadat shook away Israel’s siege mentality and gave psychological living space to an otherwise claustrophobic nation in the midst of a hostile Arab world. 
Peace is never a zero-sum game. 
In its peace with Israel, Egypt reached its strategic objective of an alliance with the US. 
But Israel was wrong to believe that Egypt could be a gateway into the Arab world. 
The gate to Israeli-Arab reconciliation remains where it was always been – in the hands of the Palestinians. 

Saddam and the Arabs 
With the end of Saddam Hussein's regime, the scope of his brutalization of the Iraqi people is becoming clear. 
Mass graves are unearthed, torture chambers opened. 
Countless Iraqis now openly recount horrifying stories of the murder and disappearance of loved ones. 
In the other Arab states, the political leadership and the media have not dwelled much on these aspects of Saddam's rule. 
They have good reason for avoiding such close scrutiny. 
Many of them benefited directly from Saddam's rule. 
Examining what he did in Iraq means examining their own role in supporting more than three decades of brutality. 
The heyday of Saddams's relations with the Arab world came during the Iran-Iraq war during the 1980s. 
Saddam's attack on Iran allayed the fears of Arab regimes that Ayatollah Khomeini's Iran would export its Islamic revolution. 
The late Jordanian monarch King Hussein would join Saddam in inspecting the frontlines. 
The Gulf states, especially Saudi Arabia and Kuwait, offered Saddam massive financial and media support. 
Egypt's centers of power, such as its army, businessmen, journalists, and ideological parties, played a prominent role in supporting Saddam's war against Iran. 
Syria was the sole exception to this chorus of Arab approval for Saddam, because its late leader, President Hafez al Assad, had aligned himself with Iran. 
Saddam's brutality within Iraq also served his neighbors' purposes. 
He repressed the Shiites, the traditional opponents of Sunni-dominated regimes in the region. He suppressed the Kurds, reassuring both Turkey and Syria, countries with sizeable--and restive--minority populations of their own. 
Indeed, by stifling any hint of democracy or political opposition in Iraq, Saddam's police state eliminated all risk of possible contagion of neighboring states. 
Outside Iraq, Saddam understood the uses of wealth and influence as a means of gaining friends. 
He put his oil reserves to good use, providing Jordan and Syria--each a failing economy--with deeply discounted supplies, assuring their goodwill. 
Saddam also focussed his attention on the media in the Arab world, understanding their power in controlling and regimenting an audience. 
Saddam spent unreservedly, buying off politicians, journalists, writers, and artists in Iraq, the Arab world, and beyond. 
Through a large and interlocking network of security and media organizations, Saddam financed scores of newspapers and magazines, lavishing on their hack writers sums of money that were unimaginable to ordinary Arab journalists. 
A political-intelligence-media network was constantly at work. 
Arab writers and artists invited to Saddam-sponsored cultural events would invariably find a pleasant surprise when opening brief cases distributed as presents--wads of dollars would be stuffed inside. 
For favored supporters, the rewards could be much greater: mansions, luxurious apartments, the latest cars. 
Dozens of Arab intellectuals engaged in this kind of business with Saddam. 
In the Arab world many of these people are literary celebrities, film idols, and media stars. 
Recently discovered documents reveal that hundreds of them received money and gifts from Saddam or his henchmen. 
At the center of this network were the cultural organizations that Saddam established in Arab and other capitals. 
Iraqi embassies acted as media centers, along with their despicable role in hunting dissidents of all political stripes. 
The sole concern of these lavishly-funded front organizations was to sell Saddam Hussein abroad and discredit his opponents. 
I experienced directly the difficulty of trying to offer an alternative view of Iraq and its cultural life. 
With a group of colleagues, I established a modest cultural group, with no external support whatsoever. 
We had a terrible time trying to publish our writings or getting coverage of the society's activities. 
I remember how much we agonized before we could print our first literary review, Al-Badeel (The Alternative), early years in our forced exile more than twenty years ago, starting in Lebanon. 
In the Arab region, Saddam manipulated people's sentiments by feeding them an ever-changing diet of secular, Islamist, and nationalist slogans. 
He crowned these with his call to liberate Palestine "from the river to the sea," that is, the destruction of Israel, outdoing the Palestinian leaders themselves. 
Indeed, it was Saddam who added the words "God is great" in his own handwriting to the Iraqi flag. 
Saddam also assigned his deputy Izzat Ibrahim to lead a so-called "faith drive." 
The campaign was designed to serve several purposes, including the suppression of any free, secular thinking. 
On a wider scale, it was meant to influence and win over Arab and Muslim minds by hollow but bombastic rhetoric. 
Unfortunately, many Arabs, rulers and ruled alike, fell for it. 
With the end of Saddam's regime, Iraq faces a reckoning for decades of physical brutality and cultural intimidation. 
Iraqis will have to revisit concepts--like nationalism, sovereignty, and Islamic community--that have never come under critical examination. 
How the Arab world reacts to Iraq's reckoning, and whether other Arabs will face their own complicity in Saddam's legacy, will tell us a great deal about what sort of Arab societies the future will bring. 

Saddam Hussein Before the Law 
What is at stake in the trial of Saddam Hussein, which is set to begin on October 19? 
Coming just four days after the referendum on Iraq’s constitution and touted as a “constitutional moment” akin to the trials of Kings Charles X and Louis XVI, the proceedings are supposed to help advance Iraq’s transition from tyranny to democracy. 
Will they? 
So far, all signs suggest that the trial is unlikely to meet its ambitious aims. 
From the outset in postwar Iraq, criminal justice resembled deracinated constitutionalism: atomistic trials, radical purges, and compromised elections. 
Most egregious was the post-invasion rush to “de-Ba’athification,” which eviscerated many of the country’s existing institutions. 
The mix of individual and collective responsibility associated with repressive regimes often creates a dilemma concerning how to deal with the old institutions. 
But, in Iraq, flushing out the military and the police merely left the country in a domestic security vacuum. 
By the time that mistake was recognized, the damage was done, needlessly sacrificing security. 
Moreover, potential sources of legitimacy in Iraq’s ongoing constitutional reform, such as parliament, were also destroyed. 
The lack of legitimate institutions needed to rebuild the rule of law is evident in the debate over what authority and whose judgment ought to be exercised over Saddam Hussein. 
Should the tribunal be national or international? 
This question highlights the problematic relationship of international humanitarian law to the use of force. 
In the Balkans, the indictment of Slobodan Milosevic by the United Nations’ International Criminal Tribunal for the former Yugoslavia (ICTY) provided a boost to political change in the region. 
Regime delegitimation has become a leading function of the new permanent International Criminal Court. 
But Iraq was different. 
Instead of recurring to an international forum, a devastating war was declared that went beyond deposing Saddam, wreaking damage on tens of thousands of civilians, and thus confounding the message of condemnation. 
The origins of successor justice in the war means that the debate over its legitimacy overlaps with the broader schism over the intervention itself. 
So far, the UN, the European Union, and most human rights groups have not cooperated with the Iraqi Special Tribunal (IST), owing to their opposition to the original military intervention, as well as the IST statute’s authorization of the death penalty. 
Ultimately, the debate over international versus national jurisdiction reflects a dichotomy that is no longer apt in contemporary political conditions, for it obscures the fact that international law is increasingly embedded within domestic law. 
Despite being putatively “national,” the Iraq tribunal couches the relevant offenses in terms of “crimes against humanity.” 
But it is only now, after the war, that successor justice is being aimed at refining and consolidating the message of delegitimation and regime change. 
Despite its close links to the invasion, Saddam’s trial is expected somehow to represent an independent Iraqi judgment, thereby constituting local accountability without exacerbating tensions and destabilizing the country further. 
Can it succeed? 
From the start, the IST must constitute a robust symbol of Iraqi sovereignty. 
But its close association with the United States-led invasion leaves it vulnerable to the charge of “victor’s justice.” 
Although officially adopted in December 2003 by the Iraqi Governing Council, the IST’s statute was framed under contract to the US government and approved by L. Paul Bremer, the Coalition Provisional Authority’s Administrator. 
The US remains the driving force behind the IST, supplying the needed expertise. 
For many Iraqis, it is hard to view the IST as anything other than an expression of the occupiers’ will. 
Indeed, the IST’s close association with the US-backed establishment of a successor regime is fraught with political pitfalls. 
Transitional criminal justice must be broad enough to reconcile a divided Iraq, and, therefore, include Shi’a and Kurdish crimes against humanity, while it apparently must also avoid embarrassing the US or its allies, particularly regarding their extensive dealings with Saddam’s regime. 
But the appearance of selective or controlled justice will defeat the tribunal’s purpose. 
So will the specter of illiberal trial procedures – another reason for the lack of international support for the IST. 
The original selection of judges by what was widely viewed as a wing of the occupation exposes the tribunal to allegations of bias and partiality, as have issues regarding access and transparency for defendants and others. 
Moreover, the IST statute says nothing about the standard of proof, which means that guilt does not clearly have to be established beyond a reasonable doubt. 
While the first set of charges concerns the well-documented killings in Dujail and elsewhere in the 1980’s, Milosevic’s trial by the ICTY shows that it is far more difficult to establish “superior authority,” linking the killings to the leader. 
According to Iraqi President Jalal Talabani, this problem has ostensibly been “solved” by means of extracted confessions. 
Of course, if the IST’s aim is to evoke the possibility of show trials rather than bolstering the rule of law, Talabani is quite right: problem solved. 
Criminal proceedings may then be downsized to a confession of a single massacre, as subsequent trials are shelved to open the way for punishment – unlike, say, the Milosevic trial, which is now dragging into its fourth year. 
But rapid punishment – most likely execution – threatens to bury the full record of decades of tyranny under the apparently overriding purpose of fighting the insurgency by other means. 
Saddam’s trial will thus demonstrate the limits of the law in jumpstarting regime transition. 
An intractable dilemma of transitional justice is that societies ravaged by brutal human rights legacies often appeal to the law to shore up the legitimacy of the successor regime, only to see these salutary aims subverted by the challenges and compromises that are inherent to the transition itself. 

Saddam's Stalingrad Strategy 
Expert in internal repression but utterly incompetent in military strategy, Saddam Hussein thinks that he can fight and win. 
His strategy seems to be to defend Baghdad as another Stalingrad, street by street, house by house. 
A war strategy that deliberately begins the way that most wars end, with a street-fighting defense of the capital city, is certainly original. 
It is also realistic in not even trying to defend Iraq's borders against American air power. 
But it is fantasy to think that the people of Baghdad will defend Saddam's regime. 
A sullen passivity is the most that Saddam can expect from Iraqis. 
Street-fighting will need to be done by those targeted by air bombardment: Saddam's elite troops. 
Whether they will fight after heavy bombing depends on the success of the air campaign. 
It is unlikely that Saddam's elite forces will be caught in well-identified barracks. 
They might be caught in encampments, however, even if frequently moved. 
Of course, the troops may be made invulnerable to bombing by being billeted among the civilian population, but armored vehicles and artillery cannot be hidden in apartment houses. 
Saddam's security system for Baghdad includes the Special Republican Guard, whose 16,000 men are Iraq's most disciplined, best equipped troops. 
It is not clear how many street-fighters Saddam can obtain from his five competing security forces (the 5,000-man Al Amn al-Khas Special Security Service, the 4,000-man, al-Mukhabarat al-Amma General Intelligence Directorate, the 5,000-man Al-Istikhbarat al-Askariyya Military Intelligence, the 5,000 man Al Amn al-Askariyya Military Security Service, and the 8,000-man Mudiriyat al-Amn al-Amma General Security Service) whose 25,000-30,000 men are distributed throughout Iraq. 
If it is numbers Saddam wants, he can get them from the "Fedayeen Saddam," which contains 15,000 men recruited from trusted tribes. 
For really big numbers, there is the Jaysh al-Sha'abi Popular Army, a party militia with 150,000 men and women in Baghdad alone. 
But street-fighting requires even more training, cohesion and leadership than open-field combat. 
Even in "heroic" Stalingrad, the workers' militia collapsed at the battle's beginning. 
Saddam's numerous secret police contain many clerks, executioners, and torturers, but not many trained soldiers. 
As for the Fedayeen Saddam, they are village ruffians unfamiliar with Baghdad's urban landscape. 
The men of the Special Republican Guard are supposed to be loyal because they are recruited largely from Saddam's own al-Bu Nasir tribe around Tikrit. 
But they are also a true praetorian guard, like their Roman predecessors. 
They have better uniforms and higher pay than ordinary soldiers - and officers too close to the intrigues of Iraq's palace politics to remain blindly devoted to Saddam. 
Quite a few have been executed over the years for plotting against Saddam. 
Not all of them were innocent. 
Recently, Saddam moved the "non-special" Republican Guard into Baghdad. 
Its ten divisions, with at least 100,000 men, are better trained and armed than the regular army, which is now weaker than in the first Gulf War of 1991, when it scarcely resisted before surrendering. 
By contrast, the Guard's 1st Hammurabi, 2nd Al Medina, 3rd Tawakalna, and 6th Nebuchadnezzar divisions all fought back against US forces in 1991. 
Despite their elite status, the Guard lacked the skill to hold their ground or inflict casualties. 
Of course, US forces had better equipment, but well-trained forces can sometimes offset technical disadvantages to score kills if not to win. 
Half of the Guard's divisions are lighter forces with more foot soldiers for street-fighting, but the rest are armored or mechanized and thus depend on tanks and combat carriers that can be easily targeted with precision weapons. 
Baghdad's long suffering population, with its majority of alienated Shi'ites and a million disaffected Kurds, is unlikely to remain unmoved by the imminent arrival of US and British troops. 
An uprising that would give the allies the city without a fight, however, is too much to expect so long as they fear that Saddam might survive to punish them. 
But neighborhood manhunts for torturers and informers might create a hostile climate that discourages Saddam loyalists. 
Even so, ousting Saddam will not be easy. 
The main offensive from Kuwait must advance for 500 kilometers to reach Baghdad. 
It is for this reason that the lighter forces centered on the 101st Airborne division and the British 16th Air Assault brigade will fly directly into the Baghdad area, linking up with armored columns racing up from Kuwait. 
The offensive into and around Iraq's second city of Basra will be no easier. 
Its implicit mission is to discourage Iran from venturing across the Shatt river border, contested territory and scene of the most intense fighting of the eight-year Iran-Iraq war. 
For that, units will have to be thinly spread from the southern tip of Iraq at Faw up to Amara, some 150 miles from Kuwait. 
With US/UK ground forces outnumbered in most fights, and with many terrain obstacles to overcome, this dual offensives would be highly risky were it not for air power. 
Fighter bombers and attack helicopters would be employed to intercept any counter-attacks against the flanks of the advancing columns, and to break up blocking forces. 
It will take that and more to reach Baghdad quickly. 
Before that, the initial "strategic" bombing will be of unprecedented dimensions, but not because there will be more strike aircraft than in the Gulf War. 
On the contrary, there will be less than half as many, not more than 700 in total. 
But in 1991, less than 150 aircraft were equipped to launch the precision weapons that did 90% of the useful bombing. 
Now all US and British strike aircraft use precision weapons. 
The number of separate targets that can be attacked in the first 48 hours should be five times as great as in 1991. 
More than 900 ship-launched cruise missiles - triple the number in 1991 - will double the impact of the initial air strikes. 
In addition to air defenses, command centers and communications, key targets will be the offices, barracks, depots, bunkers, and any known evacuation lodgings and tented camps of Saddam's Special and regular Republican Guards, and of his five different security organizations. 
Whatever else happens, the war will bring an all-out attack against the executioners and torturers of Iraq's peoples. 

The Trouble With Schrems 
PARIS – In October 2015, a court case launched by Max Schrems, a 28-year-old Austrian privacy activist and graduate student at the University of Vienna, led to the annulment of the so-called Safe Harbor agreement that governs how United States firms comply with the European Union’s privacy laws. 
The decision, by the European Court of Justice (ECJ), threw into legal uncertainty the collection, handling, transfer, and storage of user data by about 4,500 US companies. 
The ruling led many in Europe to draw comparisons between Schrems and Edward Snowden, the intelligence contractor who leaked classified information detailing America’s global surveillance programs. 
And, in fact, Schrems’s lawsuit was heavily informed by Snowden’s disclosures, which included details of a US National Security Agency program whereby US companies allegedly handed over to the NSA personal information stored on their computer systems. 
According to the ECJ’s ruling, the cooperation between US companies and the country’s intelligence agencies violates the right to privacy and data protection guaranteed by the EU Charter of Fundamental Rights. 
The court’s message was clear: Unless the US government modified the way it gathers intelligence, by restricting access to personal data and adopting a case-by-case approach to its investigations, it would be impossible for consumer information to be transferred from the EU to the US through the Safe Harbor framework. 
On February 2, the US and Europe struck a new agreement – the Privacy Shield – to satisfy the court’s stipulations, including “clear limitations, safeguards, and oversight mechanisms” on the use of personal data from Europe by law enforcement and national security officials. 
In addition, EU citizens will be given the right to bring civil action related to the protection of their personal data in the US against a US government agency. 
The Privacy Shield, which the EU’s 28 member states must formally approve, still needs to be endorsed by an “adequacy decision” of the EU Commission, probably in April. 
In the meantime, it will be reviewed by the Article 29 Working Party, comprising representatives of member states’ data-protection authorities. 
Until the Privacy Shield is approved, the Article 29 Working Party requests that US companies in Europe use alternative instruments – “Standard Contractual Clauses” and “Binding Corporate Rules” – to transfer their data to the US, so as to avoid being pursued by national data protection regulators in Europe. 
It is unsurprising that a deal was reached. 
In the wake of the attacks in Paris in November, most EU citizens have placed the highest priority on the fight against Islamic terrorism. 
Governments also want to improve the effectiveness of their intelligence gathering – and isolating themselves from the US would be no way to achieve that. 
The intense pressure to expand intelligence agencies’ capabilities is evident in the pressure that national governments have put on the European Parliament to adopt legislation allowing for the collection of airline passenger data. 
The directive, which would oblige airlines to provide governments with the names, addresses, phone numbers, credit card details, and travel itineraries of people traveling to and from airports in the EU, is expected to be voted on early this year. 
Despite the Privacy Shield agreement, Schrems’s lawsuit will likely continue to reverberate across the EU. 
The court’s ruling urges data-protection authorities to ensure that countries to which European citizens’ data are transferred comply with European legislation, and to suspend data transfers to those that don’t. 
As a consequence, in addition to its implications for companies and US intelligence gathering, the ECJ’s decision may call into question the behavior of the intelligence agencies of the EU member states. 
Indeed, even though the EU Treaty dictates that each member state is solely responsible for its own national security, the way national intelligence agencies use personal data can be expected to come under special scrutiny. 
Moreover, the application of the court’s jurisprudence to the transfer of data to third-party countries like China, Russia, or India could well cause diplomatic incidents. 
It is unlikely that EU regulators have heard the last from Schrems, who has already filed several claims similar to the one that overturned the Safe Harbor Privacy Principles. 
He has suggested a radical solution that would become a condition of doing business in the EU: All data relating to Europeans, he and others argue, must be hosted on EU-based servers. 
If that proposal gains traction, the implications could be far-reaching; indeed, it could prohibit the use of the Internet, with its myriad services valued at hundreds of billions of euros, in its current form. 

Safeguarding Asia’s Growth 
SEOUL – Emerging Asian countries should be proud of their economic resilience. 
Despite a global economy plagued by weak growth, persistently high unemployment, and heavy debt loads, the region’s emerging and developing economies grew at an average annual rate of 6.8% from 2000-2010, propping up global output and buttressing recovery efforts. 
The region’s success has been underpinned by dynamic growth in China and India, which account for almost 60% of the continent’s total GDP in purchasing power parity terms. 
Furthermore, economic-policy changes and structural reforms that were enacted in the wake of the 1997-1998 Asian financial crisis significantly reduced the region’s vulnerability to financial shocks over the past decade. 
But Asia cannot be complacent: financial systems remain fragile; economies are burdened with high fiscal and current-account deficits; and Asia remains too heavily dependent on North American and European export markets, increasing its vulnerability to external shocks. 
Moreover, if conditions in the eurozone continue to deteriorate, Asia could be more severely affected. 
Already, spillover effects from trade and financial transmission channels are beginning to take their toll: China’s GDP growth rate in the second quarter of 2012 averaged 7.6%, reflecting a significant slowdown, and India’s growth rate is expected to decline to roughly 6% this year. 
China’s potentially strong domestic-demand base and ample room for policy maneuvers can help it to avoid a hard landing. 
It has already aggressively loosened monetary policy, and it can employ further fiscal stimulus. 
But policy mismanagement and structural weaknesses in the financial sector and local governments could undermine efforts to safeguard growth. 
Meanwhile, India, constrained by a high fiscal deficit and persistent inflationary pressure, has less scope for expansionary policies and faces significant challenges in pursuing credible structural reform. 
This has serious implications for the rest of Asia. 
Over the last three decades, increased economic and trade integration has bolstered the region’s growth. 
For example, segmented production for global supply chains has stimulated trade in intermediate goods and promoted foreign direct investment. 
Now, however, closer economic integration means that sluggish growth in China and India will reduce job opportunities and slow the rate of poverty reduction throughout the region. 
Faced with weak demand in advanced countries, Asian economies are working to rebalance their sources of growth by shifting toward domestic and regional markets. 
As a result, growth in intra-regional trade has outpaced overall trade growth, with intra-Asian trade now accounting for more than half of the continent’s total trade turnover. 
But China’s established role as the assembly hub for the region’s production-sharing networks means that it is becoming a source of autonomous shocks – with a large and persistent impact on business-cycle fluctuations. 
So, what policies must emerging Asian economies pursue to reduce their vulnerability to regional and global volatility? 
The most immediate challenge is to safeguard the financial system’s stability against external shocks. 
Policy reform should aim to promote market transparency, improve risk management, and strengthen effective supervision and regulations. 
Second, emerging countries must develop more effective macroeconomic frameworks, including better macro-prudential regulation and a broader monetary-policy framework that takes into account asset prices and financial-market stability. 
A wide range of official measures could be employed to support domestic demand while protecting medium-term fiscal sustainability. 
And, to address volatile capital flows, countries should increase exchange-rate flexibility, maintain adequate international reserves, and implement carefully designed capital controls. 
Third, emerging economies must further rebalance their sources of growth. 
Reducing dependence on external demand – for example, by promoting private-sector investment and encouraging household expenditure – is crucial. 
Supply-side policies that promote small and medium-size enterprises and service industries accommodating domestic demand are also critical to ensuring more inclusive and sustainable growth. 
Finally, enhanced regional and global financial cooperation – including closer policy coordination at the G-20 and International Monetary Fund – would help countries to respond more effectively to shocks and crises. 
A key regional initiative is the $240 billion multilateral reserve pool of the ASEAN+3 (the Association of Southeast Asian Nations plus China, Japan, and South Korea), which can provide short-term liquidity to members when needed. 
Institutional arrangements in regional liquidity provision and economic surveillance must be enhanced. 
Asians need not be pessimistic; the perfect storm of a hard landing in China, a double-dip recession in the United States, and a collapse of the eurozone is unlikely. 
But they cannot rule out the downside risk of a synchronized global downturn. 
Only with preemptive policies designed to manage risk better can emerging Asian countries protect economic growth from the threat of current and future crises. 

Remaking Iran 
TEHRAN – Iranian President Hassan Rouhani recently marked the end of his first year in office not only with smiles, but also with further evidence of his efforts at domestic reform and geostrategic reorientation. 
In Iran’s case, these two imperatives have long gone hand in hand. 
Rouhani now says that Iran would be willing to work with the United States in Iraq. 
The dire threat to both Iranian and US interests posed by the Islamic State (formerly the Islamic State in Iraq and Syria) has, evidently, brought the two countries closer together. 
In the days since the anniversary of Rouhani’s election, Iran’s foreign minister, Mohammad Javad Zarif, overcame his earlier reservations and expressed optimism about reaching an international deal on his country’s nuclear program by the original deadline of July 20. 
If rapprochement with the West can be achieved, the removal of the international sanctions stemming from the nuclear program would give a tremendous boost to Rouhani’s economic policy. 
And it is here that Rouhani has invested much of his energy and political capital. 
Coming into office, Rouhani had a clear priority: fix an economy devastated by eight years of former President Mahmoud Ahmadinejad’s demagogic mismanagement. 
He replaced Ahmadinejad’s incompetent thugs with a reasonably qualified cabinet and capable administrators, and has embarked on an ambitious program of economic development, expanded health care, and environmental protection. 
Though Rouhani has made little headway combating rampant inflation, small business and the entrepreneurial middle class seem to be thriving. 
In early June, I found a recently opened complex of expensive restaurants opposite the new luxury Grand Hotel in Shiraz packed with affluent customers. 
Rouhani is vigorously cultivating economic ties with Gulf states, including Kuwait, whose ruler he entertained in Tehran in early June before leaving on an official visit to Turkey, where he signed ten deals aimed at doubling bilateral trade, to $30 billion, in 2015. 
On the environmental front, Rouhani is also busy undoing his predecessor’s damage. 
Tehran’s air pollution, widely blamed by those with respiratory illness on low-octane “Ahmadinejad gasoline,” has visibly declined with the introduction of high-octane fuel and other restrictions. 
Last but not least, Rouhani has launched his national health-insurance program, and ordered state hospitals, which dominate the health sector, to limit patients’ copayments for all medical expenses to 10%. 
Rouhani has made it clear that he wants to pay for the new health care by phasing out the monthly state stipends paid to more than seventy-four million registered citizens, which Ahmadinejad offered when he eliminated a wide range of subsidies. 
The strongest factor working in Rouhani’s favor is the support of Ayatollah Ali Khamenei, the country’s Supreme Leader, for the president’s domestic policies – just as he has fully backed the nuclear negotiations. 
Unlike Ahmadinejad’s reformist predecessor, Mohammad Khatami, who acted more like the leader of the loyal opposition than head of the executive, Rouhani has worked closely with Khamenei. 
In his speech to commemorate the 25th anniversary of Ayatollah Ruhollah Khomeini’s death on June 4, Khamenei fully appropriated the discourse of the dissident clerics aligned with Khatami. 
Thus, he described the regime instituted by Khomeini as a religious democracy in which all high state offices, including his own, derive their legitimacy from the will of the people as expressed in elections. 
But Rouhani needs more than Khamenei’s backing. 
Khamenei is 74 and has health problems. 
With Mohammad Reza Mahdavi Kani, the 83-year-old chairman of the Council of Experts (the body of clerics that elects the supreme leader) gravely ill, Ghorbanali Dorri-Najafabadi, an influential member and former intelligence and security minister, has suggested that the Council should proceed to elect Khamenei’s successor now. 
Clearly, the clerical elite is concerned about the future of its leadership after Khamenei. Should a succession process begin soon, it would significantly constrain Rouhani’s room for maneuver. 
Rouhani’s relations with the Iranian Revolutionary Guard Corps (IRGC) and other security forces are of more immediate concern. 
Last month’s unceremonious killing of a billionaire businessman detained by security forces on corruption charges seemed to reflect the tacit division of power between the president and Iran’s security apparatus. 
Nonetheless, tension is simmering beneath the surface. 
Rouhani seems to have halted the expansion of the IRGC’s economic empire. 
The IRGC’s commander, General Mohammad Ali Jafari, has publicly expressed his hostility to Rouhani’s administration, while General Hassan Firouzabadi, Chief of Staff of the Armed Forces, has countered by expressing his support for the president. 
It is in Iraq, however, that Iran faces its most complicated mix of challenge and opportunity. 
Determined to prevent the disintegration of the country, Iran has provided military and political support to Prime Minister Nouri al-Maliki’s government. 
This appears to align Iranian and American policies, with both determined to counter the gains of radical Islamist forces in Iraq and Syria. 
Rouhani’s circle is fully prepared to address this crisis by talking to the US. 
After a year in power, Rouhani’s program of economic development, environmental cleanup, and improved health care is proceeding smoothly and quietly. 
But, given the uncertainty of the domestic and international political context, there are no guarantees of success. 
Much depends on whether a nuclear deal with the international community is achieved, and the likelihood of that outcome has unexpectedly increased, owing to the common interest of Iran and the US in coping with the collapse of Iraq. 



The Four “Cs” of Innovation 
PARIS – Innovation is now widely acknowledged to be a prerequisite for sustainable economic growth. 
Whether the changes are profoundly disruptive, or merely provide incremental improvements in products, services, or business models, the results boost an economy’s long-run productivity. 
And innovation is necessary not only for developed economies, but also for emerging markets, which are receiving diminishing returns from simply transposing advanced economies’ best practices. 
But, while every country needs to innovate, the tried and tested approaches do not work for all markets. 
Clayton Christensen of Harvard Business School has identified three broad forms of innovation that make firms – and ultimately economies – stronger. 
Firms can make incremental changes to existing products, thereby becoming more competitive in an existing market segment; they can introduce products, like Sony’s iconic Walkman or Apple’s iPhone, that create new market segments; or they can develop a product – such as electricity, the car, or an Internet search engine – that is so disruptive that it renders an entire sector or way of doing business almost obsolete. 
The challenge for governments is to devise ways to encourage firms or individuals to engage in more such innovation to bolster economic growth. 
Much of the research in this area, influenced by the work of Harvard’s Michael Porter, has been dominated by “cluster studies,” which typically focus on improving productivity in emerging economies and regions within advanced economies. 
As a result, over the past two decades, policymakers’ attention has shifted from trying to understand Asia’s so-called tiger economies toward recreating the successful clusters of Silicon Valley, Boston’s Route 128, Taiwan’s Hsinchu Park, South Korea’s Daedeok Science Town, and Israel’s Silicon Wadi. 
Such clusters, however, often have attributes that cannot be replicated easily elsewhere. 
Silicon Valley’s achievements are, arguably, a function of a unique cultural legacy rather than government policy (though government has indirectly underpinned some of its most successful startups). 
Likewise, the early strategic government intervention – including planning, subsidies, and state ownership – that has underpinned innovation-led growth models in Israel, South Korea, and Taiwan is simply not available in many countries. 
Fortunately, there is a third approach, evident in the numerous innovation successes in Europe, Asia, the Middle East, and elsewhere that neither had state backing nor occurred within a uniquely creative business culture. 
Consider, for example, the Internet-based telecoms firm Skype, created in Estonia; Rovio’s “Angry Birds” video game, made in Finland; the TomTom GPS navigation system, developed in the Netherlands; 
Navigon, another navigation system, and SoundCloud, a music download service, both made in Germany; Maktoob, an Arabic Internet service provider, and Rubicon, a burgeoning animation educational company, both established in Jordan; and Infosys and Wipro, two of many successful technology ventures in India. 
In studying these and other cases, the Innovation and Policy Initiative at INSEAD has identified four factors – the “Four Cs” – that support technological innovation and entrepreneurship: cost, convenience, caliber, and creative destruction. 
Success lies in the ability of firms to combine these factors either in a single country or across several markets. 
For example, Niklas Zennström and Janus Friis left their native Sweden and Denmark, respectively, for low-cost, talent-rich Estonia to create Skype. 
Thus, the two Scandinavians’ creative-destructive thinking was combined with Estonia’s low-cost, enterprise-friendly environment. 
The Swedish founders of SoundCloud, Alexander Ljung and Eric Wahlforss, decided that they were better off in relatively cheap Berlin, at the heart of Europe’s underground music scene. 
Similarly, Samih Toukan and Hussam Khoury, who created Maktoob (now owned by Yahoo), were able to combine the comparative advantage of Jordan’s creative talent and low costs with the quality and convenience of Dubai’s infrastructure and business networks. 
Sometimes, the overwhelming benefits of one or more factors are decisive. 
The caliber of Finland’s infrastructure, workforce, and domestic networks overrode the concerns of Rovio’s Finnish founders about their country’s high costs and inconvenient location, so they decided to start their new business at home. 
But, increasingly, innovative startups operating in a mobile, globalized world will find that they can circumvent constraints in one location by shifting some or all of their assets or operations to another. 
The challenge for governments is to improve those less mobile factors of innovation – cost, caliber, and convenience – in order to attract, retain, and encourage free-flowing capital and the most creative citizens. 

Russia’s European Home 
MOSCOW – Last spring, after Russia annexed Crimea and began intervening in eastern Ukraine, the United States and the European Union introduced sanctions against Russian individuals and businesses. 
But if sanctions are to be an effective tool in countering Vladimir Putin’s ambitions – a topic of ongoing debate in the West – they must combine a firm hand toward Russia’s president with an open one toward its people. 
To understand the role that sanctions can play in managing the Kremlin, one need only consider the importance of money to its occupant. 
From the beginning of the century until very recently, Russia was flooded with petrodollars; as the flow of money increased, so did Putin’s audacity and aggression. 
As prices rose and production increased, this contribution increased substantially, averaging $73.5 billion annually from 2001 to 2004. Russia’s growing wealth emboldened Putin, a change exemplified in his decision to arrest and imprison Mikhail Khodorkovsky, the owner of oil giant Yukos, in 2003. 
And the trend continued. 
From 2005-2008, annual hydrocarbon revenues were $223.6 billion higher than in 1999; at the end of this period, Russia invaded Georgia. 
In 2011-2013, Russia’s annual oil and gas income peaked at $394 billion above 1999 levels, setting the stage for the Kremlin’s interventions in Ukraine. 
In all of these cases, Putin acted on the conviction that Russia’s oil wealth meant that rules – even international laws – did not apply to him. 
But with the introduction of sanctions, financial markets are closed, for the most part, to Russian businesses. Oil prices are plummeting; 
Russia’s finance minister estimates that the country’s losses since last spring have surpassed $140 billion. Russia’s strategic currency reserves are being pulled apart by Putin’s friends and may be exhausted by the end of the year. 
Moreover, the ruble has lost close to 50% of its value over the last six months. 
But, though the sanctions clearly are starting to bite, it will be some time before the bulk of the Russian public actually feels their impact. 
So the West needs to wait. 
There is little point in engaging in a search for diplomatic solutions. 
They simply do not exist. 
Putin has chosen to act without regard for territorial integrity. 
He has declared himself a defender not only of Russian citizens, but of all ethnic Russians, Russophones, and even Orthodox Christians. 
He believes that he possesses the right to intervene in his neighbors’ affairs, because, as he put it, “the Soviet Union was the same Russia, just called by another name.” 
In other words, Ukraine is merely a breakaway region of historical Russia. 
The Russian people, however, are modern enough to question these policies. 
The “Putin consensus” was built on the promise of rising prosperity – a promise that is quickly evaporating under the heat of sanctions. 
Most Russian elites think and act like businesspeople, not like romantic nationalists: As the economy sinks into prolonged recession, scrutiny and criticism of Putin’s policies will increase. 
The goal of Western sanctions should be to detach Russia’s pre-modern rulers from its modern population. 
This strategy may be of little use in tightly controlled societies like Iran or North Korea; but Russia is essentially European. 
Instead of wasting time trying to negotiate, the West should focus on elaborating and publicizing a post-Putin agenda. 
For starters, the West should explicitly deny any Russian claim to a right to interfere in the affairs of the EU and NATO. 
Ukraine should be embraced – even if Crimea and Donbas are lost. 
A “new Marshall plan” should be rolled out, one that can transform Ukraine into a free, prosperous country that can join the EU and NATO, should it so desire. 
Even more important, the West should make it clear that it extends its definition of Europe not just to Russia’s borders, but across them. 
Russia should be acknowledged as an integral and natural part of Europe – a country that might eventually join the EU. 
The grand strategy for the coming decades should be centered on a simple idea: Though Russia can never be allowed to influence Europe from outside, it will be welcome to gain a place of influence from within, if it accepts Europe’s rules and norms. 
Russians should be made to understand that they can choose one of two paths. 
They can follow Putin into isolation, probably ending up under Chinese influence (indeed, from China’s perspective, its claim to Siberia all the way to Lake Baikal is even stronger than Russia’s claim to Crimea). 
Or they can decide to move toward Europe, perhaps in the distant future joining the EU as its largest – and perhaps most influential – member. 
The West’s biggest mistake regarding Russia and Ukraine was to choose the path of indifference after the end of the Cold War. 
That led to the creation of the Commonwealth of Independent States in 1991 and the Budapest Memorandum on Security Assurances in 1994. If, instead, Russia and Ukraine had been encouraged to work toward joining the European Economic Community and were invited to join NATO, the arc of history would have been bent in a much more peaceful direction. 
History rarely offers a second chance. 
But this time it has. 
The mistakes of the 1990s should be remedied, and the starting point should be to offer those who want to join the West the opportunity to work toward doing so. 
If Ukraine is brought into the European fold, the Russian people will want to follow – much sooner than anyone can now imagine. 

The Maternal Thread of Life 
ISLAMABAD – Last month, Oxford University’s Green Templeton College held its annual Emerging Markets Symposium at Egrove Park. 
The theme this year was “Maternal and Child Health and Nutrition.” 
The final slide of the opening presentation, delivered by GTC fellow Stephen Kennedy, was a cartoon depicting two young contestants set to begin a race: one was strong and healthy, while the other was emaciated, shackled, carrying the baggage of disease, and confronting the massive barrier of malnutrition. 
The message was clear: not everyone begins life with the same chance of success. 
Of course, this is not a groundbreaking insight. 
The impact of factors like poverty, maternal literacy, sanitation, and housing conditions on children’s health – and, in turn, on social and economic outcomes – is well documented. 
The problem is that these factors are not amenable to isolated public-health interventions. 
But another, less widely discussed social determinant – maternal nutrition – could be. 
Since Hippocrates, people have been discussing how “nature” and “nurture” interact to shape a person’s development. 
Indeed, even in ancient civilizations, adequate maternal nutrition was considered essential to ensuring future generations’ survival and prosperity. 
But poverty and ignorance can thwart even the best intentions. 
The consequences of maternal malnutrition are far-reaching, including higher child-mortality rates, more birth defects, increased susceptibility to infection, and specific nutritional deficiencies that can lock a child into a vicious cycle of poor health early in life. 
Moreover, intrauterine malnutrition can increase the risk of chronic conditions like obesity, diabetes, and cardiovascular disease during adulthood. 
It is telling that most of the symposium’s 47 participants – influential public- and private-sector figures from around the world – were unaware of the extent to which a mother’s nutrition affects her offspring’s wellbeing. 
They were surprised by evidence that babies grow in the same way worldwide, as long as they receive the same care and are not constrained by environmental factors – evidence that challenged the widely held notion that ethnicity and gender are major determinants of a child’s development. 
This reflects a fundamental failing on the part of the scientific community to relay relevant data to decision-makers. 
In fact, upon hearing the evidence, a former Pakistani prime minister confessed that he would have been more proactive in this area had he known while he was in office what he knows now. 
The meeting’s participants agreed that strong efforts to support pre-conception care in the context of maternal- and child-health services were vital. 
After all, if an adequately nourished mother provides critical health benefits to her offspring throughout their lives, women can be viewed as the custodians of future generations’ health. 
These inter-generational biological connections are particularly pronounced in the case of female children. 
The influence of the levels and composition of maternal nutrition on a female fetus will carry through to adulthood, when she, too, becomes a mother. 
Given how few scientists have recognized the extent to which a woman’s eggs shape her grandchildren’s prospects, it is not surprising that policymakers remain so oblivious to the long-term impact of women’s health. 
But the evidence is clear, and it demands action. 
The good news is that there are solutions. 
Conditional cash transfers, text-message-based initiatives, school-based food programs, vitamin-fortification schemes, and local leadership have all proved effective in improving maternal nutrition. 
Such initiatives should be backed by policies that foster positive nutritional choices. 
Compelling policymakers to implement such policies will require a new set of skills that draws upon lessons from around the world. 
In Brazil, a television program on the role that folic-acid supplementation could play in the prevention of spina bifida (a congenital neural tube defect) immediately grabbed politicians’ attention. 
Initiatives aimed at enhancing the public’s knowledge of nutrition are also crucial – not least because they can motivate citizens to pressure their governments to take action. 
To this end, entertainment media like soap operas, which have emerged as important tools for empowering women in conservative Middle Eastern societies, could be employed. 
Forums like the Emerging Market Symposium can help to bridge the increasingly obvious gap between science and public policy. 
But, without strong domestic support for change, the impact of such meetings is limited. 
It is time to demand action – and past time for policymakers to deliver it. 

India’s East Asian Dream 
SINGAPORE – On August 15, Narendra Modi delivered his first Independence Day speech as Prime Minister. 
Though he continued the tradition of addressing the country from the ramparts of Delhi’s historic Red Fort, the speech broke with convention. 
Shunning a written text, Modi extemporized for an hour, mapping out an explicit vision for India, including an economic model that constitutes a clean break from India’s past. 
Since 1991, India has been slowly changing its policy framework away from the socialist vision of its first prime minister, Jawaharlal Nehru. 
However, for political reasons, the changes were always justified in an almost apologetic way. 
Indeed, many Nehru-era institutions continue to exist – and even thrive. 
In one fell swoop, Modi announced the abolition of one of the most important of these institutions: the powerful Planning Commission, which had continued to churn out Soviet-style “Five-Year Plans” and remained at the heart of a centralized resource-allocation process. 
Its successor, the National Development and Reform Commission, will probably function more as a think tank – providing ideas and ensuring policy coherence, but with no power to allocate. 
Modi also argued for a new economic-growth model based on export-oriented manufacturing. 
This means encouraging domestic entrepreneurs to manufacture goods for export and inviting the world’s top companies to relocate production to India. 
This effort is important, because India’s economy and exports are dominated by services, which have grown steadily relative to overall output, now accounting for almost 60% of GDP. 
By contrast, the industrial sector’s share of GDP has remain unchanged, at around 26%, for the last three decades (the manufacturing segment is even smaller, at 14.9% of GDP). 
When Modi’s emphasis on export-led manufacturing is viewed in the context of his government’s focus on heavy infrastructure projects – ranging from power generation to railways – it becomes clear that his growth model, with its mass deployment of labor and capital in industry, looks similar to East Asian countries’ strategy. 
It is also consistent with his frequent references to the need to create new cities, because urbanization is the spatial manifestation of industrialization. 
The shift to an “East Asian” growth model should not be surprising, given India’s demographic pipeline. 
India needs to create jobs for the ten million people per year who join the working-age population. 
It also needs to accommodate the millions who wish to shift away from agriculture, which still employs half of the workforce. 
Although the service sector was able to generate growth in the past, it has proved to be a poor job creator and only employs 27% of workers, far lower than its share of the economy. 
By contrast, construction and manufacturing are rightly seen to be more promising outlets for the mass deployment of semi-skilled workers. 
There are, of course, many obstacles in Modi’s path. 
India’s tax and regulatory regime is widely regarded as unfriendly to business; but Modi’s track record in government suggests that he is sensitive to this problem and will be able to make significant improvements. 
The greater challenge for Modi will be financing his growth model. 
The success of the East Asian model was predicated on a sharp increase in the investment rate. 
Beginning with Japan, every rapidly growing East Asian economy sustained investment rates in the range of 38-40% of GDP over its rapid-growth phase. 
China is currently investing almost half of its GDP. 
India’s fixed-investment ratio, by contrast, has declined in recent years to around 30% of GDP. 
Foreign capital can play a role in supporting rapid growth, but international experience shows that domestic savings is key to sustaining high investment rates. 
Mobilizing these savings will require careful thinking about how the domestic financial system can be expanded by an order of magnitude without risking a future crisis. 
Another major problem will be the migration of tens of millions of people as they are sucked into the expanding industrial economy. 
India does not have China’s sociopolitical controls, such as the hukou residential-permit system, to manage such a large-scale movement of people. 
Japan and South Korea are perhaps too small to serve as useful precedents. 
Modi may be hoping to preempt the problem through his project to create 100 “smart cities,” though how the program will be implemented remains unknown. 
Despite all of the obstacles and risks, Modi has articulated an explicit economic vision for the first time since Nehru. 
Unlike the apologetic reforms of the past two decades, Indians have been promised a confident new beginning. 

Who Will Run the World’s Deficits? 
SINGAPORE – These days everyone seems to want to run a current-account surplus. 
China has long run large surpluses. 
The eurozone is now running even larger ones, with swings in southern Europe augmenting Germany’s longstanding surpluses. 
Indeed, countries from Singapore to Russia are running large surpluses. 
Meanwhile, America’s external deficit – which for decades has helped to sustain surpluses elsewhere – is now smaller than it was before 2008, with many economists arguing that it should never revert to its previous levels (they argue that the shale-gas boom makes this unlikely, anyway). 
Financial markets have also made clear that the ability of other major deficit countries, like Brazil and India, to absorb capital flows is reaching its limit. 
Since the world is a closed system, this raises the question: Who will run the world’s deficits? 
Mainstream economists believe that the global economy should function as a balanced mechanical arrangement in which external surpluses and deficits are smoothed out over time. 
But periods of global economic expansion have virtually always been characterized by symbiotic imbalances. 
One part of the world runs large deficits for a prolonged period, creating demand; another part of the world runs surpluses, financing its counterparts’ deficits. 
This was true of Roman-Indian trade in the first and second centuries, and of the age of European exploration in the sixteenth century. 
It was also true of the two Bretton Woods arrangements, in which the US ran the necessary deficits. 
Admittedly, imbalanced systems create distortions. 
The Romans had to debase their coins, owing to the continuous loss of gold to India. 
The Spanish empire flooded the world with silver coins as it paid for its many wars. 
Bretton Woods I collapsed in 1971, when the dollar’s peg to gold became untenable, and Bretton Woods II ended in 2008, owing to the misallocation of capital. 
But these distortions did not prevent unbalanced systems from enduring for long periods. 
The only significant period of “balanced” economic expansion was in the early nineteenth century. 
The British East India Company deliberately imposed a triangular trade arrangement whereby Britain sold manufactured goods to India in order to buy opium, which it subsequently sold in China to finance the purchase of tea and other products. 
In other words, balanced global economic growth required war, colonization, and large-scale drug trafficking. 
So, what symbiotic imbalance will underpin the next round of global economic growth? 
Given that the current account is the difference between a country’s saving and investment rates, both of which are heavily influenced by demographics, we need to consider rapid changes in population dynamics. 
China currently saves and invests half of its GDP, but, as its workforce shrinks in the coming years, its investment rate is likely to fall sharply. 
However, aging will keep the saving rate from falling at the same pace. 
This differential will generate large external surpluses that will transform China from the “world’s factory” into the “world’s investor.” 
It would be convenient if global demographics were distributed in such a way that aging countries could run surpluses just when younger countries needed the capital. 
In reality, many major economies will be trying to save for retirement at the same time. 
Moreover, the younger countries are typically emerging markets, which have neither the scale nor the capacity to absorb the world’s excess savings efficiently. 
The US is the main exception: it has both the required scale and the youngest population of any major developed country. 
Given this, it will once again fall to the US to run the world’s largest external deficit, in what could be dubbed Bretton Woods III. 
It may seem appalling to expect such a highly indebted country to continue to run deficits; but the world is willing to finance the US at negative real interest rates. 
Indeed, the main international concern has been US policymakers’ reluctance to raise the government’s debt ceiling! 
If the US is unable or unwilling to run the required deficits, the global economy will flounder in a savings glut of low demand and cheap capital until another alternative emerges. 
Or perhaps the low cost of international capital will entice the US to absorb some of the world’s excess savings, triggering a new period of global expansion. 
While a Bretton Woods III arrangement would inevitably generate its own distortions, it could last for years if the capital is invested sensibly. 
The prospect of its eventual demise is not a good reason to wait for some theoretical ideal of global balance to materialize. 
If history is any indication, we will be waiting for a long time. 

The Last Pagans of Iraq 
SINGAPORE – With US President Barack Obama belatedly ordering air strikes and humanitarian airdrops of food and relief supplies to refugees in northern Iraq, the world is finally taking action against the Islamic State. 
Within a few months, the jihadist group, which until recently called itself the Islamic State in Iraq and Syria, has taken control of large parts of both countries, where it has proclaimed a new “Caliphate.” 
But the real reason to fear the Islamic State is not its lust for power; it is the systematic, cold-blooded way in which its members are erasing the region’s social, cultural, and demographic past. 
Within a few weeks, the Islamic State has virtually eliminated the entire Shia Muslim and Christian populations from the lands that it controls. 
The city of Mosul, home to one of the world’s oldest Christian communities, no longer has any Christians left. 
Priceless Assyrian artifacts have been publicly destroyed in a campaign against idolatry. 
Indeed, the Islamic State has not even spared Sunni co-religionists who do not adhere to their extreme interpretation of Islam. 
A number of revered shrines have been demolished, including one said to be the Tomb of Jonah. 
As terrible as all of this is, the worst of the persecution has been aimed at the Yezidi, an ancient religious group that lives among the Kurds. 
They number less than a half-million, and two-thirds of them live around Mosul in northern Iraq. 
The rest are scattered across neighboring countries like Syria, Armenia, and Turkey. 
More recent immigrant communities are to be found in Germany and the United States. 
Although influenced over the centuries by Christianity and Islam, the Yezidi religion has ancient pagan roots that go back at least to the late Bronze Age. 
Interestingly, their beliefs have many similarities with Hinduism – for example, they believe in reincarnation, say their prayers facing the sun at sunrise and sunset, and even have a system of castes. 
They also worship Tawûsê-Melek, the peacock angel – a bird that is found in the Indian sub-continent but not in Yezidi lands. 
While the origins of the Yezidi are uncertain, cultural and genetic evidence suggests that they may be remnants of Indian tribes that migrated west in the second millennium BC. 
There is considerable evidence of Indian links with the Middle East during the Bronze Age. 
For example, Zoroastrianism, the religion of ancient Iran – to which Yezidi religious beliefs have been linked – is closely related to early Hinduism. 
Over the centuries, both Christians and Muslims dubbed the Yezidi “devil worshippers,” and subjected them to relentless persecution, which was especially extreme under the Ottoman Turks in the eighteenth and nineteenth centuries. 
A series of massacres killed hundreds of thousands and almost led to their extinction. 
Under Saddam Hussein, the Yezidi were not subjected to overt religious persecution, though they remained under pressure to Arabize their culture. 
Matters have since taken a turn for the worse. 
In April 2007, gunmen dragged 23 Yezidi men from a bus and shot them dead. 
Four months later, a series of coordinated car-bomb attacks killed at least 300 more, including women and children. 
The Yezidis now face their greatest crisis ever. 
The Islamic State gave the Christians of Mosul the choice to convert, pay the jizya (a special tax levied on non-Muslims under Sharia law), or leave. 
The Yezidi have been given no such choice and are killed on sight as “devil worshippers.” 
The Yezidi heartland around Mosul is now largely under the Islamic State’s control. 
The small town of Sinjar, the only place in the world with a Yezidi majority, fell in the first few days of August as Kurdish fighters were forced to withdraw. 
Reports of large-scale massacres are trickling in. 
Many refugees escaped into the mountains, where they are trapped in shrinking enclaves. 
Hundreds are said to have died already of thirst and starvation. 
The most sacred Yezidi pilgrimage site at Lalish runs the risk of being demolished. 
Sadly, there has been little media outrage at the predicament faced by the Yezidi. 
Perhaps the US airdrops and promised strategic interventions, together with a possible coordinated operation by Kurdish forces (rearmed by the US), may rescue the survivors, but it appears unlikely that they will be able to return to their homes soon. 
Centuries ago, the last Zoroastrians fled persecution in Iran for India. 
Their descendants, the tiny Parsi community, still live there. 
Today, who will give refuge to the last pagans of Iraq? 


Sarko v Sego At Last 
The surprise in the first round of the French presidential election was that there was no surprise, except for the huge level of voter turnout. 
The two leaders of the Right and of the Left, the favorites in all the polls for a long time, came first and second. 
Four winners and one clear loser emerged from the first round. 
The first winner is democracy. 
For the first time in my lifetime, as I went to vote on Sunday with my children - in a peaceful celebration of that secular religion that is democracy when it works well - I had to wait in line patiently for a relatively long time. 
For 85% of the electorate went to vote in what has been the highest level of participation in presidential elections in France since Charles de Gaulle last ran for president in1965. 
The lesson of the first ballot of 2002, which saw a high level of abstention and the surprise elimination of the Socialist Lionel Jospin, partly explains that mobilization. 
Also, with the emergence of a new generation of political leaders, the French -- who were thought cynical towards politics -- seem to have regained their unique passion for it. 
The second winner is undeniably and by far Nicolas Sarkozy. 
With 31% of the vote he will come to the second ballot in a very favorable position. 
His strategy to attract the electorates of Jean Marie Le Pen’s extreme right, proved to be a winning one. 
A majority of French who voted for him, did it, according to reliable exit poll studies, above all because of his personality. 
They wanted a strong charismatic man to reawaken France economically and to reassure them in security terms. 
The third winner, though she is mathematically in a much less favorable position, is Segolène Royal. 
Her making it to the second round is a huge relief for the Socialist party after the Jospin debacle of 2002 - and with more than 25% of the votes, she did nearly as well as François Mitterrand in 1981. 
In order to have a serious chance to win, she has to transform the second ballot into a referendum against Nicolas Sarkozy. 
In a classical Left-Right contest she can only lose. 
The working class is disappearing in modern France and what’s left of it tends to go more to the extreme-right than to the extreme-left. 
Segolène. Royal has done well, but probably not well enough, unless in a face to face debate with Nicolas Sarkozy she can rally a majority of viewers to the radical modernity of electing a woman to the highest French position. 
It is not what she says but what she is, or even more so the fear of her opponent that constitute her best chance. 
The fourth winner, though his absence from the second ballot is a disappointment for him, is François Bayrou. 
With more than18% of the votes he tripled his score of 2002. 
He has turned the Center into a force. 
In the second ballot of France’s presidential elections, he will prove to be a Queen or more like a King maker. 
His votes are needed by both remaining candidates and it is likely they will tend to split equally between Left and Right, for he cannot commit himself to clearly support one candidate over the other. 
The clear loser in the first round is the leader of the extreme-right Jean-Marie Le Pen. 
With less than 11% of the votes in what will be the last campaign of his career, he turned into an “ageing detail of History”. 
In a campaign centered on the emergence of a new generation of political leaders, he lost his appeal. 
He did not mellow, but was swallowed by history’s zeitgeist. 
Now a second campaign begins. 
The key strategic move for the two remaining candidates will be to attract the votes of the Center without losing their core Leftist or Rightist constituencies. 
That means emphasizing in a reassuring way, economic credibility for Segolene Royal, and social compassion for Nicolas Sarkozy. 
The world and Europe in particular will be watching even more intensely this second round. 
One can nearly detect a kind of “North-South divide,” with south Europe (pre dominantly Spain and Italy standing behind Segolène Royal, and northern Europe, predominantly Germany and Britain (the US as well) aligning themselves behind Nicolas Sarkozy. 
For the European Union, new man or woman in the Elysee Palace may be a necessary condition for reinvigorating the European project, but it is not a sufficient condition. 
The French “No” to the referendum on Europe’s constitutional treaty in May 2005 revealed the depth of Europe’s crisis, it did not create it. 
Watching the celebration of patriotism behind the raising of the French flag and the singing of the national anthem during the first round of the campaign, one can easily believe that the British vision of a Europe of independent nation states has won already, if only by default. 
On May 6, the date of the second ballot, French citizens will choose between two risks. 
The first one, which is potential, given Sarkozy’s domineering personality is to have Sarkozy as president. 
The second risk may prove to be even a bigger one, and can be described as follows. At this particular juncture in time and given the condition of their economy can the French reject the candidate that incarnates by far the best hope for change and “Renaissance.” 
To succeed, Nicolas Sarkozy will have to turn his campaign slogan “Together everything becomes possible” into reality. 
That implies successfully integrating French immigrants into the wider community with a combination of economic growth, restoration of the authority of the State, but also and above all a far greater sense of solidarity and fraternity. 

Sarkozy, Carpe Diem! 
Nicolas Sarkozy’s presidential election triumph in May, and now the victory of his party, the UMP, in the parliamentary election, has created the most favorable opportunity in decades for deep structural reform in France. 
Not only did Sarkozy win the presidency with 53% of the vote, but his approval rating has since soared, to 62%, after he formed an inclusive government with high-ranking recruits from the opposition. 
In the first round of the parliamentary election, the UMP won a record-high 40% of the vote. 
While voters denied the UMP a landslide victory in the second round, its overall win meant that the governing party retained its legislative majority for the first time in 29 years. 
In the days following his election, Sarkozy brought France “back to Europe,” reinvigorating the Franco-German partnership and giving decisive support to German Chancellor Angela Merkel’s campaign to revive the European Union’s draft constitutional treaty. 
He demonstrated pragmatism by not vetoing ongoing EU accession negotiations with Turkey, thus avoiding unnecessary confrontation with Great Britain and Spain, despite maintaining his long-term opposition to full membership for Turkey. 
Likewise, his government’s discreet silence in the wake of the European Central Bank’s latest interest rate increase constitutes eloquent recognition of the ECB’s independence. 
But how will Sarkozy and his government respond to France’s internal challenges? 
With anemic growth, unemployment stuck between 9% and 10% for more than 20 years, and immigrant ghettos that vacillate between lawlessness and despair, France is indeed one of the sick men of Europe. 
Where adaptation to ruthless international competition and rapid technological change calls for flexibility and individual responsibility, the dominant culture in France continues to be one of assistance and entitlement. 
It is now clear that the French government will follow Sarkozy’s presidential program to the letter. 
The program’s flagship measure is the wholesale exemption of overtime hours from social security and income taxes. 
Many economists and some foreign observers are puzzled by the emphasis Sarkozy has placed on this expensive provision. 
Indeed, it might appear disproportionate to give higher priority to encouraging overtime than to stimulating employment. 
But France is not a normal country. 
For ten years, it has struggled with the costs of a mandatory 35-hour week – a ceiling that is now so embedded in the legislation regulating working hours that simple abrogation would lead to chaos. 
The alternative, a targeted tax holiday, constitutes a welcome break with the culture of “time off,” and an encouragement to those who, as Sarkozy’s campaign slogan put it, want to “work more in order to earn more.” 
The program’s other measures are a series of tax cuts for the middle class, entrepreneurs, and the wealthy, which, though expensive, constitute a similarly welcome break with France’s tradition of punitive taxation. 
However, none of these measures goes to the heart of France’s structural problems. 
The Gordian knot paralyzing initiative and blocking employment consists in the maze of regulations that stifle the labor market. 
French companies live under the constant threat of a surprise visit from the labor inspector to determine compliance with a thick book of arcane measures. 
Worse yet, the knowledge that some law or regulation covers every aspect of employment poisons the workplace and discourages attempts to resolve problems pragmatically. 
When both parties to a dispute know that they are likely to end in a labor court, neither has an incentive to compromise. 
The law’s most onerous provisions are those regulating the terms of employment contracts, for they condemn employers who decide to close a plant to a marathon of legal proceedings of uncertain duration and unpredictable outcome. 
This not only hampers restructuring, but also makes firms hesitant to hire and inhibits innovation. 
A stop-gap measure that permits firms to hire workers for temporary assignments, on condition that they not be renewed, condemns the least skilled to a demoralizing cycle of short-term jobs and repeated spells of unemployment. 
These marginal workers are predominantly immigrants and the children and grandchildren of former immigrants, whose social and economic integration is thus blocked, trapping them in increasingly violent suburban ghettoes. 
There is a simple, if radical, solution: abrogate the legal provisions that regulate the duration of employment contracts, and return the treatment of tenure and seniority to collective bargaining, as is the case elsewhere. 
The logical complement of such freedom would be to make employers pay for the social costs of plant closings, by levying a tax on layoffs, which would increase with seniority. 
The proceeds of the tax could be used in part to fund the much needed expansion of France’s underdeveloped public job placement services. 
Unfortunately, Sarkozy’s program in this critical area is vague. 
Job protection benefits the employed at the expense of the unemployed, and some unions, notably the most militant, are strongly opposed to greater flexibility, and have already threatened to block liberalizing measures in the streets. 
The pragmatic course, therefore, was to set general objectives during the campaign, and, after the elections, to encourage the unions to make the first proposals. 
Prime Minister François Fillon has called for tripartite negotiations on tenure and seniority this summer and fall. 
Will the government settle for marginal changes to the existing labor code, or will it seize its unique opportunity to break with a generation of stifling regulations? The future of the French economy, the stability of French society, and the influence of France in the world hangs on the outcome. 

Sarkozy Agonistes 
“Why do they hate us?” asked the Americans of the Islamic fundamentalists after 9/11. 
“Why do they not like me?” could be the question asked by Nicolas Sarkozy to the French after more than one year in power. 
Sarkozy is omnipresent both domestically and internationally. 
On July 13, the leaders of more than 40 countries attended the first gathering of the “Union for the Mediterranean” in Paris. 
France is back in the world and in Europe. 
Domestically, an ambitious and difficult program of long-awaited reforms, which a majority of French citizens recognize are inevitable, has begun, with some early results in the field of labor law and education. 
Sarkozy’s energy, willpower, and activism are nothing short of spectacular. 
And yet he is the least popular of the Fifth Republic’s presidents, the one whose “fall from grace” with the French has been the most spectacular, rapid, and durable, to the point where political experts, and his friends and foes alike, wonder whether he can rebound. 
What went wrong? 
“I don’t want a good General, I want a lucky one” the French Emperor Napoleon I used to quip. By that standard, he would not have wanted Sarkozy. 
Having campaigned on a promise to restore and improve the French people’s purchasing power, Sarkozy came to power, in May 2007, just a few weeks before the sub-prime mortgage crisis erupted, and a few months before commodity prices exploded. 
He then assumed the European Union presidency just days after the resounding Irish “No” to the Lisbon Treaty reduced his role to an exercise in damage control at best. 
And, to make matters worse, the French soccer team, whose World Cup victory in 1998 gave his predecessor Jacques Chirac a short respite and a passing popularity boom, was humiliated in June’s Euro championship. 
Yet the international context, with its unforeseen events, does not suffice to explain Sarkozy’s unpopularity with the French. 
His problem stems from the combination of his essence and style, which adds up to a brutal lack of coherence. 
As economic crisis engulfs France and most of the world, the French are not reassured by their young and energetic president. 
Of course, there is an element of deeply unfair subjectivity in this perception. 
But this is what politics is all about. 
The president’s physical appearance and his body language – if he was a Shakespeare character, he would probably be the traitor Iago in Othello – are part of the problem. 
His nervousness, his impulsiveness verging on vulgarity, is disconcerting even for the majority of French who voted for him. 
At home for example, the badly needed reform of the army has been accompanied by unnecessary malignity, as if a former interior minister imbued with a “police culture” was utterly incapable of understanding the “army culture” and its sense of honor. 
And his undeniable success in implementing his labor laws, exemplified by sparse street demonstrations, has been undermined by his irrepressible will to provocation, reflected in his gratuitous remark that “today when there is a strike in France, no one notices it!” 
In his foreign policy, too, Sarkozy seems to combine the right intuitions with the wrong tactics – that is, when his entire strategy is not marred by the pursuit of contradictory objectives. 
France’s policy toward China and the issue of the French and EU president’s attendance at the opening ceremony of the Beijing Olympics has represented a spectacular illustration of this lack of consistency. 
Sarkozy misjudged the balance of power between France and China, and France came out of that diplomatic episode badly bruised, with its president swallowing his human rights claims and bending to the diktat of realpolitik. 
In the same vein, there is a mismatch in Sarkozy’s approach to Europe between the message and the messenger, between careful diplomacy needed to create a new consensus within the European Commission and with countries like Ireland, and president’s rather authoritarian style. 
While Sarkozy’s popularity remains low, a majority of the French want him to succeed, for he has four more years to go, and there is no alternative around the corner. 
The left remains in disarray, caught between its internal feuds and the rise of anti-capitalist extremism at its margins. 
For a president bent on implementing reforms, “less can be more” – less aggressiveness and less ego. 
But can a man act against his deepest nature? 
The answer is probably no. 

Sarkozy and the Euro’s Perfect Storm 
The more French president Nicolas Sarkozy attacks the European Central Bank and the strong euro, the more he is criticized in the European media, by European finance ministers, European Union officials and the ECB itself. 
The critics are right. 
The fundamental reason behind France’s current economic weakness is its lack of competitiveness even in other euro-zone economies where the euro is not a factor. 
But Sarkozy has a point. 
A perfect storm is forming in the foreign exchange markets that threatens to catapult the euro to levels that will make even the euro-zone’s most efficient exporter—Germany—unable to compete in world markets. 
If German exporters can’t compete at 1.50 euros to the dollar, what chances do French exporters have? 
The euro is gaining ground for several reasons. 
A precipitating factor is that the Federal Reserve has had a dramatic change of heart about the strength of the US economy. 
Fed chairman Ben Bernanke is now extremely concerned that the economy’s housing market and mortgage problems will cause a recession unless interest rates are aggressively cut even if this means taking some risks with inflation. 
This new “no recession” Fed policy has started the US dollar down the path to new lows. 
The decline will likely be sustained by the substantial US current account deficit, which found in Bernanke’s cuts the spark it needed to make its impact fully felt in foreign exchange markets. 
Of course, if interest rates also were being cut in the euro-zone, the fall in the dollar against the euro would be moderated. 
This is Sarkozy’s major point. 
But the ECB has made it clear not only that interest rate cuts are not on the table—it is merely postponing, not abandoning, the interest rate increase originally planned for September. 
The perfect storm is forming because both Europe and America, for different reasons, are following monetary policies that encourage the euro to rocket to dangerous levels. 
The anti-inflation hawks in Frankfurt are not at all happy with Bernanke’s aggressive 50 basis point cut and the promise of more to come. 
It gives comfort to ECB critics like Sarkozy, and otherwise puts pressure on them to drop the central bank’s inflationary bias because of its effect on the euro. 
Some are recalcitrant and are more than willing to see the euro rise because, with rate hikes off the table, the strong euro may be the only way left for fighting the incipient inflation they fear. 
But this policy is unsustainable. 
The ECB should drop its inflationary bias because the European economy is weakening, and the weaker economy will contain whatever inflationary pressures now exist. 
The anti-inflationary bias, which made sense until recently, now is seriously out of whack with current economic realities. 
But European officials—and not only the ECB-- seem very reluctant to admit that their economy is faltering, fearing that it will further weaken confidence and add to the slowdown pressures. 
Every soft number — and there have plenty lately — is given a positive spin (“euro-zone economic fundamentals remain strong” or “the economy remains robust”) -- and the media goes along with the deception. 
The Ifo business confidence indicator in Germany has been down four months in a row but, according to Ifo, “the ECB does not have to change policy.” 
The European Commission’s economic index is plummeting, purchasing managers indices are down and so are German retail sales. 
Ordinary Europeans will pay a high price for their leaders self -deception and mistaken policies. 
The longer the ECB maintains its inflationary bias, the steeper the consequent economic decline as the economy crumbles under the weight of the skyrocketing euro and interest rates that are too high for current economic realities (though lower than where the ECB hawks had planned to go before the current financial crisis hit). 
Ironically, the ECB will have to cut interest rates sooner, and by greater amounts, because its inflationary bias is sending the euro to dangerous levels for the current state of its economy. 
It will not do ECB credibility any good if takes an economic collapse to convince it that the coast is clear on the inflation front. 
The ECB is not the old Bundesbank, which had such public support and trust in Germany that it could get away with almost anything. 
The ECB’s margin for error is much narrower—the support of its constituents less deep. 
A major policy mistake and the same public officials now criticizing Sarkozy for attacking the ECB will be joining him. 
Maastricht treaty or no Maastricht treaty, loss of public support for the ECB will diminish its independence. 

Sarkozy Goes to War 
PARIS – In 2003, France, under President Jacques Chirac, took the lead in opposing America’s planned invasion of Saddam Hussein’s Iraq. 
French Foreign Minister Dominique de Villepin’s flamboyant speech at the United Nations encapsulated the “spirit of resistance” against what proved to be a dangerous adventure. 
In 2011, under President Nicolas Sarkozy, France has again taken a highly visible stand on a question of war and peace, except that now the French, together with the British, are leading the fight to protect Libya’s people from their erratic, brutal leader, Col. Muammar el-Qaddafi. 
Why does France seem to crave such prominence? 
In the eyes of the French, France’s international status remains a key ingredient in forming their own national identity. 
The way we French are perceived by others affects how we perceive ourselves, and nothing is more troubling for us than to be perceived with indifference or, worse, not to be noticed at all. 
Suddenly, with the Libya issue, we can tell ourselves that we are catching up with Germany, whose pusillanimity is striking; we are showing the way to the United States; and the French (and British) flags are deployed in the streets of “liberated” Libya, together with that country’s own new flag. 
And, just as suddenly, the French, according to early polls, are proud again to be French. 
France’s seemingly natural propensity to intervene is reinforced in this case by three key factors: Sarkozy, Qaddafi, and the context of a wider Arab revolution. 
The Sarkozy factor is fundamental. 
The French president loves crises, with their concomitant surge of adrenaline. 
For him, this is what power is about: taking hard decisions under unfavorable circumstances. 
Of course, domestic considerations are not absent from Sarkozy’s thinking. 
In 2007, when he played a key role in the liberation of Bulgarian nurses imprisoned by Qaddafi, Libya’s leader was rewarded with what looked like a legitimacy prize: an official visit to Paris. 
He was no longer a pariah, but an eccentric partner. 
Today, by contrast, it all looks as if intervention may re-legitimate Sarkozy in the eyes of French citizens, whose votes he will need in next year’s presidential election. 
An energetic and daring gambler, Sarkozy is taking a high but legitimate risk that he can retake the moral (and political) high ground. 
Beyond Sarkozy is Qaddafi, the ideal villain. 
A caricature of a despot, he personifies the type of odious adversary whom all democrats want to see defeated. 
His behavior has been abominable for decades – and not only towards his people. 
The terrorist attacks on Western targets that he ordered include not only the Pan Am tragedy in Lockerbie, Scotland, but also a French UTA plane blown up over Africa. 
And not only is Qaddafi truly bad, but Libya is comparatively small, and his forces appear relatively weak (this remains to be proven on the ground). 
Aside from these personality factors, there is the regional context. 
Preventing Qaddafi from rebuilding the wall of fear that fell in Tunisia and Egypt is essential if the “Arab spring” is not to be succeeded by a new winter of discontent. 
What is now done in the sky over Libya – sanctioned by international law and, unlike in Iraq in 2003, with the ambivalent political support of the Arab League – is fundamental if the Arab revolutionaries are to take a positive view of the West. 
The West is not trying, as it did during the Crusades or the Imperialist conquests of the nineteenth and early twentieth centuries, to impose its religion or values on the Arabs. 
Instead, the West is defending common values, such as freedom, respect for human life, and the rule of law. 
We have a duty to protect Arab lives and values, as Arabs themselves have requested. 
France has a common history and geography with the countries on the southern Mediterranean shore. 
The duty to intervene – and the cost of indifference – is probably higher for France than for any other Western country. 
Indeed, France has a very large immigrant population that originated in the Maghreb, and for which the “Arab spring” is vitally important and a source of fascination and pride. 
And today, with France taking the lead in an international effort to protect the Libyan people from their leader, they can feel simultaneously proud of being French and of their Arab roots. 
These positive identities constitute the best protection against the sirens of fundamentalist Islam. 
Of course, an ideal scenario implies that the intervention “goes well,” and that it does not incite confusion or chaos in Libya or the wider region. 
France, together with Great Britain, and with the more distant support of the US, is undeniably risking much, for it is easier to start a war than it is to end one. 
But it is a worthwhile risk. 
The cost of non-intervention, of allowing Qaddafi to crush his own people, and of thus signaling to the world’s despots that a campaign of domestic terror is acceptable, is far more menacing. 
Sarkozy has chosen the right course. 
In fact, he has chosen the only possible way forward. 

Sarkozy’s Moment 
LONDON – A little more than three years ago, just as the financial crisis was getting into full swing, I published a guide to the international system of financial regulation, Global Financial Regulation: The Essential Guide. 
It described an elaborate spider’s web of committees, councils, and agencies with overlapping responsibilities, unrepresentative memberships, and inadequate enforcement powers – a system built up incrementally over decades, with no guiding architectural hand or central authority to promote coherent global regulatory standards. 
After all that has happened in the intervening years to demonstrate the dangers inherent in these flaws, and a plethora of summits and conferences, a 2008 guide to financial regulation ought now to be hopelessly out of date. 
Unfortunately, it is not. 
True, some things have changed for the better. 
At the apex of the pyramid, the G-7 was obliged to give way to the broader G-20, bringing countries like China and India into the decision-making nexus as full partners. 
G-20 summits are more cumbersome as a result, but that simply reflects the reality of the ongoing shift in economic power from West to East. 
There is no point in pretending that this shift is not happening, or that standards set in New York and London will be slavishly followed in Mumbai and Beijing if China and India are not involved in the process. 
So the increased importance of the G-20 should be welcomed. 
There has been one other important change, too. 
The Financial Stability Forum, created after the Asian financial crisis as an informal coordinating body – the United States resisted anything stronger – was renamed the Financial Stability Board. 
A “board” sounds more impressive, authoritative, and permanent than a mere “forum.” 
In the arcane world of international financial diplomacy, these subtle shifts in terminology matter. 
But the change in name should not blind us to the fact that the FSB has no more power than the FSF had. 
Successive G-20 summits have asked its chairman, Mario Draghi (now a favorite to succeed Jean-Claude Trichet as President of the European Central Bank), for updates on progress in reforming regulation, but the FSB has no authority over the Basel Committee on Banking Supervision, or any of the other standard setters. 
It cannot instruct them to change their rules. 
Nor can it achieve consistency between different standard setters’ approaches, or, indeed, consistency of implementation by different national regulators. 
Yet consistent implementation is crucial to avoiding another regulatory “race to the bottom.” 
There are already dangerous signs that global firms are moving activities into more congenial jurisdictions in order to avoid tighter regulation in the major financial centers. 
The G-20 should fill that gap urgently. 
President Nicolas Sarkozy of France, which chairs the G-20 this year, has asked for a review of the governance of the financial system. 
In response, the existing bodies are vigorously defending their autonomy, resisting any attempts to impose on them a modicum of coordination and discipline. 
The International Monetary Fund, for example, has always resented the FSB, arguing that the Fund itself should be the monitor of systemic risk – and thus serve as the de facto global financial regulator. 
But the IMF’s arguments have been weakened by a recently published report by its own evaluation office, highlighting the Fund’s failure to identify emerging risks in the run-up to the crisis. 
The IMF is too political a body to act as the systemic-risk watchdog. 
The next G-20 summit should implement a fundamental reform of the FSB. 
It should give the FSB a legal personality, enshrined in an international treaty. 
Currently, the Board has no formal status and only a small, though high-quality, permanent staff, hosted by the Bank for International Settlements in Basel. 
Draghi’s successor as chairman should be a full-time appointee, and the FSB should be given powers to direct the other standard setters, review the implementation of standards by individual countries, and publish the results. 
It would be unrealistic to think that the FSB could direct countries to strengthen their regulation, but it should have some form of arbitration power analogous to that held by the World Trade Organization. 
So, if a country is thought to be operating a lax regime to attract mobile international business, the FSB could expose that behavior and publish its conclusions. 
The anomaly that countries have decided to endow an international body with powers to regulate disputes in trading goods, but not in financial transactions, should be corrected. 
There is a strong argument for going further, and subsuming the standard setters – the Basel Committee, the International Organization of Securities Commissions, the International Association of Insurance Supervisors, etc. – in a single body. 
They could be co-located in a regulatory Tower of Babel in Basel. 
That might happen one day, as the borderlines between different sub-sectors of the financial system become more blurred. 
But, for now, however logical such an objective may be, it is probably too much to hope for. 
Even so, as the saying goes, it is important not to waste a good crisis. 
Sarkozy has a golden opportunity to put his mark on the global financial system. 
Surely a French president, eager for global success with a domestic election looming, will not pass up his chance? 
Indeed, Sarkozy has an additional incentive, given that he would be scoring a point against the IMF, led by Dominique Strauss-Kahn, his likely Socialist opponent in the next presidential election. 
So, for once, logic and personal political motivation are pushing in the same direction. 
That ought to be a winning combination. 

Sarkozy’s Secret Rupture 
PARIS – A year ago, when Nicolas Sarkozy was campaigning for the French presidency, he promised a “rupture” with the past. 
So far, few French people can see the sort of rupture that Sarkozy promised. 
But they are wrong to think that nothing has changed in the first year of his presidency. 
Sarkozy has, in fact, brought about a rupture, albeit in an unexpected area: the foreign policy consensus that has prevailed since the days of Charles de Gaulle. 
Of course, it is impossible at this early stage to evaluate with any degree of precision the long-term strategic repercussions of Sarkozy’s apparent decision to return France to NATO’s integrated military command and strengthen the French military commitment to NATO’s out-of-theater engagement – its first ever – in Afghanistan. 
But the implication of these decisions is clear: France under Sarkozy is now back at the heart of the Atlantic Alliance. 
Although this may seem mundane outside France, Sarkozy’s foreign policy revolution has incited fierce opposition at home. 
Indeed, all left-wing parties denounce Sarkozy’s rupture with the Fifth Republic’s military/diplomatic heritage. 
Of course, the left’s real quarrel with Sarkozy’s policy has at its roots in his conception of France’s relationship with the United States. 
Wariness of America was, to be sure, not just a leftist pose; many Gaullists over the decades have been tinged with anti-Americanism, too. 
But, although Sarkozy may not have sold his party on the merits of George Bush’s America, he has softened its once habitual suspicions about the US. 
As a result, a left-right divide has opened in this central area of French diplomacy – a division that has not been seen in France for four decades. 
The French left, not surprisingly, rejects Sarkozy’s Atlanticist impulses and frequently charge him with betraying General de Gaulle’s legacy. 
The majority of French people, however, appear to favor improving ties with the US. 
There is more than a little irony here. In the year that the Socialists are celebrating the fortieth anniversary of the May 1968 demonstrations against de Gaulle, they are also trying to steal his diplomatic clothes by proclaiming themselves the defenders of the independent French foreign policy that he championed. 
In the 1960’s, both Socialists and Centrists denounced de Gaulle’s “anti-Americanism.” 
On NATO, France’s Middle East policy, or the constitution, Francois Mitterrand (the Socialist leader in the 1960’s) and the opposition sharply criticized de Gaulle’s go-it-alone ways for shattering the Alliance consensus. 
Indeed, the Socialists opposed de Gaulle’s decision to withdraw France from NATO’s unified military command, opposed the creation of an independent French nuclear arsenal (they preferred the American nuclear guarantee), and were hostile to de Gaulle’s rupture with Israel after the Six Day War. 
But the Socialists began to change their stripes in the late 1970’s, rallying around the concept of nuclear dissuasion as a guarantee of national independence and beginning to distance themselves from America. 
Although Mitterrand did stand firm with the US on the stationing of Pershing missiles in Europe in the early 1980’s, which won him respect from President Ronald Reagan, by this point the Gaullist consensus on the fundamentals of French foreign policy had spread across all political groups. 
Even the Communist Party could be said to have basically embraced its tenets. 
Sarkozy has now broken with this so-called “Gaullist- Mitterrandist” orientation, which was based on the persistence of a belief in French “exceptionalism” in the field of foreign affairs. 
This does not mean that Sarkozy’s France will toe the American line on all international issues. 
Far from it. 

Sarkozy’s Société Générale Myopia 
SAN FRANCISCO -- The French government should be honoring Bank of France Governor Christian Noyer for saving Société Générale from certain bankruptcy in the current rogue trader scandal, not criticizing him, as some high government officials have done. 
“Loose lips sink ships” is received wisdom in central banking circles. 
But if President Nicolas Sarkozy’s team in the Élysée Palace had had its way, Noyer would have immediately informed the government of Société Générale’s troubles. 
Had that happened, there would have been an unacceptable risk that the news would leak to speculators before Société Générale had a chance to liquidate the extraordinary large stock positions that Jérôme Kerviel had amassed, presumably without the bank’s knowledge. 
The loss for Société Générale could have been far higher than the €5 billion it is reported to have incurred. 
Speculators could have “front run” the bank in the markets, selling short, driving equity prices down, and forcing the French financial institution to sell into a bottomless pit. 
Is a forced bankruptcy in extremely fragile global financial markets what the French government wanted for Société Générale? 
How can President Sarkozy, who has repeatedly attacked financial speculators, question the judgment of the very man who, by knowing how to keep his mouth shut in a crisis, thwarted them? 
Of course, independent central bankers are not Sarkozy’s favorite people. 
According to Laurent Dubois, a political science professor at the Sorbonne in Paris, Noyer may pay for Sarkozy’s battles with the European Central Bank. 
Sarkozy has “a problem with central banks’ independence,” and Noyer may become a “scapegoat.” 
Not likely – at least in the current political environment. 
Sarkozy’s recent poll numbers have been dropping like a stone. 
According to the TNS Sofres poll for Le Figaro Magazine, Sarkozy’s popularity tumbled a whopping eight percentage points in January, to just 41%, the lowest level since he took office last May and down from a high of 65% in July. 
Sarkozy, who during his electoral campaign vowed to be the “president who delivers on purchasing power,” now faces an angry French public whose primary complaint is that purchasing power is being eroded by inflation. 
In this changed political environment, Sarkozy is not likely to go after someone like Noyer who, as Bank of France Governor and a member of the ECB’s Governing Council, is widely viewed as a stalwart against inflation and a defender of French purchasing power. 
Why risk a “soft on inflation” label? 
Sarkozy might even tone down his attacks on the ECB, whose single-minded, inflation-fighting policies have made it one of his favorite targets. 
That would be a good thing. 
With Sarkozy off his back, ECB President Jean-Claude Trichet might feel freer to cut interest rates to counter the impending economic slowdown in Europe. 
Meanwhile, though Société Générale has been saved by Noyer’s professionalism and political courage, it has been badly wounded and will most likely be taken over by another bank. 
A foreign takeover would raise French protectionist hackles. 
“Société Générale will remain a great French bank,” Prime Minister Francois Fillon has said. “The government will not allow it to be the target of hostile raids by other banks.” 
The problem is that the French government is barred from doing this under an EU directive that it signed last year, which was specifically introduced to improve transparency in banking mergers. 
After Italy’s former central bank governor, Antonio Fazio, flagrantly abused his position to block a takeover of an Italian bank by ABN Amro, member countries agreed that future mergers would be assessed on five objective criteria, the idea being to prevent governments from blocking foreign bids purely for protectionist reasons. 
Noyer’s diplomatic skill certainly will be put to the test if he has to navigate the treacherous waters between the Scylla of French protectionism and the Charybdis of the EU’s five criteria for bank mergers. 
Foreign bank mergers have proved poisonous for euro-zone central bankers. 
So far, the only serious candidates to emerge for a Société Générale takeover are two French banks, Credit Agricole and BNP Paribas. 
But should a credible foreign offer for Société Générale appear in the coming weeks ­– and it well might – another disruptive conflict between the Bank of France and the government may be in the offing. 
The Société Générale rogue trader scandal has caused more problems than any of the main players possibly could have imagined. 

The US-Saudi Relationship After Khashoggi 
WASHINGTON, DC – The alleged killing of the Saudi Arabian dissident journalist Jamal Khashoggi, a permanent resident of the United States, in the Kingdom’s consulate in Istanbul has unleashed a tidal wave of criticism. 
In the US Congress, Democrats and Republicans alike have promised to end weapons sales to Saudi Arabia and impose sanctions if its government is shown to have murdered Khashoggi. 
But significant damage to bilateral ties, let alone a diplomatic rupture, is not in the cards, even if all the evidence points to a state-sanctioned assassination. 
Saudi Arabia is simply too crucial to US interests to allow the death of one man to affect the relationship. 
And with new allies working with old lobbyists to stem the damage, it is unlikely that the episode will lead to anything more than a lovers’ quarrel. 
Saudi Arabia’s special role in American foreign policy is a lesson that US presidents learn only with experience. 
When Bill Clinton assumed the presidency, his advisers were bent on distancing the new administration from George H.W. Bush’s policies. 
Among the changes sought by Clinton’s national security adviser, Anthony Lake, was an end to the unfettered White House access that Saudi Arabian Ambassador Bandar bin Sultan enjoyed during the Reagan and Bush presidencies. 
Bandar was to be treated like any other ambassador. 
But Clinton quickly warmed to Bandar, and Bandar and the royal court would become crucial to Clinton’s regional policies, ranging from Arab-Israeli peace talks to containing Iraq. 
In 1993, when Clinton needed a quote from the Koran to go alongside those from the Old and New Testament for a ceremony marking an Israeli-Palestinian accord, he turned to the Saudi ambassador. 
Before Donald Trump assumed office, he frequently bashed the Saudis and threatened to cease oil purchases from the Kingdom, grouping them with freeloaders who had taken advantage of America. 
But after the Saudis feted him with sword dances and bestowed on him the highest civilian award when he visited the Kingdom on his first trip abroad as US president, he changed his tune. 
Even the terror attacks of September 11, 2001, could not damage the relationship. 
Though al-Qaeda leader Osama bin Laden, himself a Saudi national, recruited 15 of the 19 hijackers from the Kingdom, senior Saudi officials dismissed the implications. 
In a November 2002 interview, the Saudi interior minister simply deemed it “impossible,” before attempting to redirect blame by accusing Jews of “exploiting” the attacks and accusing the Israeli intelligence services of having relationships with terrorist organizations. 
Americans seethed, and it appeared that the awkward alliance between a secular democracy and a secretive theocracy, cemented by common interests during the Cold War, was plunging into the abyss separating their values. 
But the alliance not only survived; it deepened. 
Bandar provided key insights and advice as President George W. Bush planned the 2003 Iraq invasion. 
Today, American politicians are again ratcheting up their rhetoric following Khashoggi’s disappearance. 
The Turks claim they have audio and video revealing his death, and Senator Lindsey Graham warned, “If it did happen there would be hell to pay,” while Senator Benjamin Cardin has threatened to target sanctions at senior Saudi officials. 
But Saudi Arabia wears too many hats for America to abandon it easily. 
Though the US no longer needs Saudi oil, thanks to its shale reserves, it does need the Kingdom to regulate production and thereby stabilize markets. American defense contractors are dependent on the billions the Kingdom spends on military hardware. 
Intelligence cooperation is crucial to ferreting out jihadists and thwarting their plots. 
But, most important, Saudi Arabia is the leading Arab bulwark against Iranian expansionism. 
The Kingdom has supported proxies in Lebanon, Syria, and Yemen to contain Iran’s machinations. 
Any steps to hold the Saudis responsible for Khashoggi’s death would force the US to assume responsibilities it is far more comfortable outsourcing. 
It is a role America has long sought to avoid. 
When the United Kingdom, the region’s colonial master and protector, decided that it could no longer afford such financial burdens, US leaders ruled out taking its place. 
Policymakers were too focused on Vietnam to contemplate action in another theater. 
Instead, Secretary of State Henry Kissinger conceived a policy whereby Iran and Saudi Arabia, backed by unlimited US military hardware, would police the Gulf. 
While Iran stopped playing its role following the 1979 Islamic Revolution, the Saudis still do. 
It is a quandary Trump seems to grasp. 
Though he vowed “severe punishment” if the Saudis did indeed kill Khashoggi, he refused to countenance canceling military contracts, instead lamenting what their loss would mean for American jobs. 
It is not only defense contractors who are going to bat for the Saudis. 
Before Khashoggi became Washington’s topic du jour, the Saudis paid about ten lobbying firms no less than $759,000 a month to sing their praises in America’s halls of power. 
But it may be the Saudis’ new best friend who will throw them a lifeline. 
As Iran has become the biggest threat to Israel, the Jewish State has made common cause with the Saudis. 
Former Saudi bashers such as Prime Minister Binyamin Netanyahu’s confidant Dore Gold now meet with the Kingdom’s officials. 
Following the 2013 military coup that toppled Egypt’s democratically elected government, Israeli leaders urged US officials to embrace the generals. 
They are likely to do the same today if US anti-Saudi sentiment imperils their Iran strategy. 
The US-Saudi relationship has been a rocky one, and its setbacks and scandals have mostly played out away from the public eye. 
Yet it has endured and thrived. 
This time, too, in the wake of Khashoggi’s disappearance, common interests and mutual dependence will almost certainly prevail over the desire to hold the Saudis to the standards expected of other close US allies. 

The Martyrdom of Jamal Khashoggi 
AMMAN – The London-based daily Al-Araby Al-Jadeed recently published a cartoon, by the Jordanian artist Emad Hajjaj, depicting a faceless man wearing a red and white keffiyeh and sweeping his brown thawb in such a way that it looks almost like he is performing a magic trick. 
Whipped up by his movement, papers float around him. 
At the bottom of the frame, the hand of another man, wearing what appears to be a white button-down shirt, reaches up, apparently having let go of his pen in order to try to grab onto something, to save himself. 
The caption reads, “The disappearance of Saudi journalist Jamal Khashoggi.” 
The cartoon names the victim, but not the perpetrator. 
True, any Arab – indeed, virtually everyone – knows exactly who is responsible for Khashoggi’s disappearance: Crown Prince Mohammed bin Salman of Saudi Arabia. 
But the fact that a well-known cartoonist had to disguise the culprit’s image speaks volumes about the fear felt by independent journalists in the Arab world. 
Khashoggi’s disappearance has only deepened their anxiety. 
Arab countries have a long history of rewarding journalists who toe the official line, while punishing those, like Khashoggi, who dare to speak truth to power. 
Since the failed Arab Spring revolutions – of which Tunisia is the only success story – citizens across the region have found themselves with a stark choice between radical Islamist regimes and military rule. 
Efforts presenting democratic alternatives have been systematically repressed. 
Discrediting, constraining, or otherwise silencing independent journalists is a key tool of this repression. 
Autocratic governments create laws and regulations to protect themselves and their cronies from criticism or exposure by independent media. 
They claim that only the journalists on their payroll – who praise their rulers and criticize the regime’s opponents – are legitimate; all others are enemies of the state. 
Such behavior is not limited to dictatorships. 
Even in the United States – long admired for its robust free press, protected by the First Amendment of the US Constitution, and powerful investigative journalism, which once brought down a president – President Donald Trump’s administration routinely attacks independent journalists, labeling them traitors, paid agents, and purveyors of “fake news.” 
Trump may simply be trying to appease his right-wing base and avoid accountability for his innumerable mistakes and misdeeds. 
But his attacks on the US press, together with his silence on attacks occurring elsewhere, have gone a long way to embolden violators of press freedom around the world. 
It does not help that many of those press-freedom violators – including Saudi Arabia – are among America’s closest allies. 
Trump has been true to America’s all-too-frequent willingness to place lucrative military contracts ahead of human rights, saying that he would be “very upset and angry” if Saudi Arabia were found to be responsible for Khashoggi ’s death, while ruling out a halt to big military contracts. 
America’s fellow NATO member Turkey is the world leader in imprisoning journalists, yet the Trump administration has complained only about the detention of one (recently released) American pastor, and that was just to placate America’s “religious right” (beginning with Vice President Mike Pence). 
The US authorities have said nothing about Al Jazeera journalist Mahmoud Hussein’s nearly two-year detention in Egypt. 
Nor has the Trump administration commented on the fact that, in March 2017, the United Arab Emirates sentenced the Jordanian journalist Tayseer al-Najjar to three years imprisonment and a fine of 500,000 UAE dirhams (approximately $136,000) over a Facebook post. 
Even countries that are not particularly close US allies – such as Myanmar, where two Reuters journalists have been sentenced to seven years imprisonment – do not face pushback from the US. 
Independent journalists have one goal: to find the truth and share it widely. 
When governments can repress those journalists with impunity, and when others compromise their supposed commitment to basic human rights for political or partisan goals, the truth remains hidden, with serious consequences. 
I have known Khashoggi for years, both in a professional and a personal capacity. 
He is a Saudi patriot, who is not opposed to his country’s system of rule. 
Yes, he has critiqued policies, such as the inhumane war in Yemen and how Saudi rulers deal with dissent. 
But his arguments were always based on facts. 
He is not a dissident or a rebel, but a monarchist who wants to see his country do better than it is. 
And now he may have paid the ultimate price for that. 
For Arab freedom fighters, the road ahead is long and treacherous. 
Building on the sacrifices of true heroes and genuine democrats, journalists and cartoonists like Hajjaj will continue to speak truth to power, as they fight for basic human rights like freedom of the press. 
It is truly unconscionable, however, that they must go into battle without the support of those who claim to have their backs. 

Saudi Arabia’s Revolution From Above 
BERLIN – Seven years after the Arab Spring unleashed a wave of revolutionary fervor across most of the Middle East and North Africa, Saudi Arabia is finally catching up, albeit in its own unique way. 
A younger generation is demanding that the arch-conservative Kingdom modernize, and it is being led not by revolutionaries in the streets, but by Mohammed bin Salman (MBS), the country’s 32-year-old crown prince and heir apparent. 
In terms of population and geography, Saudi Arabia is one of the largest Arab countries, and its staggering oil wealth has made it an indispensable strategic partner for the West, and particularly for the US. 
But, as a country caught between the Islamic Middle Ages and Western modernity, it has always abided extreme contradictions. 
State-of-the-art infrastructure and American-style shopping malls have come to Mecca and Medina, home to Islam’s most important holy sites. 
But, even to this day, Saudi Arabia is home to an anti-Western tribal society, ruled by one family, the House of Saud, as an absolute monarchy since the country’s founding in 1932. 
Its moral and legal codes appear medieval to most outsiders. 
And it adheres to the extreme reactionary version of Islam known as Wahhabism, a Salafist doctrine that influences many of today’s most radical Islamist groups. 
Owing to the long-term decline in oil prices and the need to provide education and employment to a fast-growing young population – who might otherwise turn to extremism – King Salman and MBS have apparently concluded that the country needs to modernize. 
To avoid a slow decline, or even an eventual disintegration, they are taking measures to open up the country, not just economically, but socially and culturally, too. 
Earlier this month, MBS – who seems to have studied Chinese President Xi Jinping’s own consolidation of power – ordered what the Saudi government has described as an anti-corruption purge. 
Already, dozens of high-level princes, former ministers, and wealthy and influential businessmen have been arrested and had their accounts frozen. 
The purge came not long after an announcement that Saudi women will no longer be banned from driving cars or attending public sports events. 
Clearly, the new leadership in Saudi Arabia intends to orchestrate a veritable revolution from above. 
But, lest we forget, the last autocratic ruler in the Middle East who attempted to bypass his country’s Islamic clergy and carry out a top-down revolution was the Shah of Persia, Mohammad Reza Pahlavi. 
He and his “White Revolution” were eventually swept away by Iran’s Islamic Revolution in 1979. 
One can only hope that MBS’s revolution will fare better. 
If it fails, the radical Salafists who will assume power in Riyadh will make the Iranian mullahs look like liberals. 
If it succeeds in modernizing the leading bastion of reactionary Islam, the stage would be set for other countries throughout the Islamic world to do the same. 
As part of his agenda, MBS has also launched an aggressive new foreign policy, particularly toward Iran. 
The modernizers around MBS know that the revolution’s success will require breaking the power of Wahhabism by replacing it with Saudi nationalism. 
And in order to do that, they need a compelling enemy. 
Shia Iran, with which the Kingdom is competing for regional hegemony, is the ideal foil. 
These domestic considerations help to explain why Saudi Arabia has thrown down the gauntlet and escalated tensions with Iran in recent months. 
Of course, from the Saudis’ perspective, they are merely picking up the gauntlet that Iran already threw down by interfering in Iraq, Syria, Lebanon, Bahrain, Qatar, Yemen, and other countries. 
So far, the battle for regional hegemony between Saudi Arabia and Iran has been limited to proxy wars in Syria and Yemen, with disastrous humanitarian consequences. 
Neither side, it seems, wants a direct military conflict. 
And yet that outcome can hardly be ruled out, given recent developments. 
In the Middle East, a cold war can turn hot rather quickly. 
Over the long term, the Saudi-Iranian rivalry will shape the Middle East in much the same way that the Israeli-Palestinian conflict once did. 
Consider, for example, an episode that occurred just hours before MBS launched his anti-corruption purge: Lebanese Prime Minister Saad Hariri, while visiting Saudi Arabia, announced his resignation from office. 
According to Hariri, the Iran-aligned Shia militant group and political party Hezbollah, with which his government had a power-sharing relationship, had made governing Lebanon impossible, and may have been plotting his murder. 
But Hariri, whose father, former Lebanese Prime Minister Rafic Hariri, was assassinated in 2005, raised more questions than answers. 
Why leave office now? 
Was he acting under Saudi pressure, and, if so, to what end? 
Shortly after Hariri’s announcement, Saudi Arabia intercepted a missile that Houthi rebels in Yemen had fired at Riyadh. 
According to Saudi Arabia, because the Houthis are backed by Iran, their attempted missile strike was tantamount to an Iranian “act of war.” 
This flurry of unusual developments in such a short span of time can hardly be a coincidence. 
The question now is whether civil war will return to Lebanon, and whether Saudi Arabia will try to involve Israel and the US in a confrontation with Hezbollah to push back against Iran. 
For now, the Saudis lack the power to do that on their own. 
In recent years, Saudi Arabia has suffered major defeats in the regional struggle for hegemony. 
The Sunni minority has been ousted from power in Iraq; and Bashar al-Assad’s Iran-backed regime has managed to hold on to power in Syria. 
MBS may be looking for ways to offset these defeats, in Lebanon or elsewhere. 
Saudi Arabia’s revolution from above is a high-risk endeavor that neutral observers must regard with ambivalence. 
Although it cannot be allowed to fail, given what that would entail, its success is likely to be accompanied by a dramatic increase in regional tensions and the possibility of war. 

Why We Need Women in the Military 
ISLAMABAD – Saudi Arabia’s decision to allow women to serve in the military – part of its Vision 2030 economic-reform program – has been widely celebrated as a step forward for gender parity in the notoriously unequal kingdom. 
But, when women begin to enlist, the battle for real equality within the military will have just begun. 
Beyond the explicit constraints that are expected – women will probably have to secure approval from their legal male guardians, and may be limited to non-combat roles – there is the need to dismantle the military’s rigid patriarchal systems. 
This will be a difficult feat, requiring sustained government commitment, effective organizational planning, and deep personal fortitude from the women who enlist. 
I should know. 
In 2001, I was one of the first women to join the Pakistan Air Force (PAF). 
But the road was not easy. 
I was born to a feminist father who encouraged me to be whatever I wanted to be, and what I wanted to be was a PAF officer. 
That aspiration seemed impossible during my childhood, when women could join the military only as doctors, certainly not in combat roles. 
But everything changed in 1999: President Muhammad Rafiq Tarar introduced a quota for women in the PAF. 
I became one of just eight women who passed the entrance exam for commissioned officers. 
The inclusion of women in the military was viewed as an experiment that could go either way, and the PAF greeted it only reluctantly. 
Our small group of woman cadets at the PAF training academy was instructed to maintain strict boundaries with the men with whom we would serve. 
“We can’t have any scandals around here,” our course commander told us. 
“These young men have never seen women in the academy, and they can be very flirtatious.” 
In our conservative society, he insisted, even “a hint of scandal” will suggest that the experiment failed, closing the door to other women who hoped to serve. 
“The responsibility of making this work lies on your shoulders.” 
We took our responsibility seriously, and I do not just mean avoiding “scandal.” 
We knew that we had to prove that we could handle the rigorous training. 
At first, male cadets remarked that we would not last a week. 
But we lasted a year and a half, and graduated with those male colleagues to become officers. 
Since then, the PAF has come a long way, with the number of female officers surging from a dozen in 2001 to around 300 today, working in ground support, engineering, and flying branches. 
Pakistan’s army and navy have also opened their ranks to women. 
Now, when a Pakistani woman wears her uniform, people don’t stare. 
Separate facilities, better leave structures, and altered work schedules have served to make this growing cohort of women in the Pakistani military more comfortable. 
And the culture is changing, too, with men less likely to underestimate their female counterparts. 
Yet discrimination persists. 
For example, women are often passed over in favor of men for training abroad, and they still cannot hold command positions. 
And this situation is far from exclusive to Pakistan: most of the countries with no restrictions on women serving in frontline combat roles are in Europe or the Anglosphere (the exceptions are Eritrea, Israel, and North Korea). 
To be sure, militaries around the world have gradually opened up to women. 
But numbers remain relatively low. 
In the United States, 15% of military personnel are female. 
In the United Kingdom, that figure stands at 10%. 
In India, women comprise just 5% of military personnel, and a mere 4% in Afghanistan. 
Boosting women’s participation further may become even more important as the nature of the military’s tasks changes in many regions. 
Countries are increasingly fighting asymmetric wars against terrorist groups. 
This demands less outright combat and more effective peacekeeping, through strategic decision-making, intelligence gathering, and civil engagement. 
Most of the vulnerable population in conflict areas are women and children. 
Against this background, women’s involvement becomes even more valuable. 
Women offer perspectives that are typically not found in male-dominated organizations. 
Moreover, as Major General Kristin Lund, the first-ever female commander of United Nations field operations, has pointed out, access to the local population is vital to support peacekeeping, and women have access to 100% of the population, compared to only 50% for men – an invaluable advantage for, say, intelligence gathering. 
To enable women to meet their full potential as military assets, persistent discrimination and other challenges – related, for example, to sexual harassment, health, and work-life balance – must be addressed. 
Sexual harassment can cost a woman her reputation, and sometimes even her life. 
More generally, gender segregation undermines the esprit de corps that is so important to military service. 
Addressing these issues will be particularly tough in Saudi Arabia – an extremely patriarchal and conservative society that is effectively structured around the exclusion of women. 
But there are steps that can and must be taken to help bring about the needed shift. 
For starters, the government will need to make significant changes, many of which the PAF eventually implemented. 
These may include hiring women from foreign militaries to train new recruits, allowing women and men to interact, implementing protections to encourage reporting of sexual harassment, amending rigid patriarchal structures to allow flexible work hours, and strategically deploying women, particularly for peace-keeping missions. 
Allowing women to join the Saudi military is a major step forward – one to which women have contributed greatly. 
But, as someone who walked this path less than two decades ago in Pakistan, I know that there is still a long way to go. 

The Kingdom Beyond Oil 
RIYADH – Over the past few weeks, the government of Saudi Arabia has been engaged in an unprecedented strategic policy review that could have ramifications for every aspect of the country’s social and economic life. 
The full details are expected to be announced in January, but it is already clear that the kingdom – the world’s nineteenth-largest economy – is in desperate need of far-reaching reform. 
There are two reasons why change has become urgent. 
The first is the dramatic drop in global oil prices, from above $100 per barrel in the middle of 2014 to below $40 today. 
With oil exports accounting for nearly 90% of government revenue, the pressure on Saudi finances has been intense; the fiscal balance has swung from a small surplus in 2013 to a deficit of more than 21% of GDP in 2015, according to projections by the International Monetary Fund. 
The second reason is demographic. 
In the next 15 years, some six million young Saudis will reach working age, putting enormous pressure on the labor market and potentially doubling its size. 
It is easy to be pessimistic about this confluence of circumstances, and many international commentators are. 
But there are also good reasons for optimism, most notably the new Saudi leadership’s recognition of the challenge and the possibilities that addressing them could create. 
According to research by the McKinsey Global Institute, Saudi Arabia has the potential to double its GDP and create six million additional jobs by 2030, enough to absorb the influx of young men – and, increasingly, young women – entering the labor market. 
To accomplish this however, the kingdom will have to dramatically reduce its unhealthy dependence on oil – a strategic goal that has been long discussed, but never implemented. 
Saudi Arabia has many sectors with strong potential for expansion. 
The country has substantial untapped deposits of metals and non-metallic minerals, including phosphate, gold, zinc, bauxite, and high-quality silica. 
Its retail sector is already growing quickly, but it lags behind in areas like e-merchandizing and supply-chain efficiencies. 
The country’s tourism sector could be developed and upgraded, not only for the millions of Muslim pilgrims who visit the holy sites of Mecca and Medina every year, but also for leisure tourists. 
Saudi Arabia has a long coastline on the Red Sea, as well as other unspoiled areas of natural beauty that could attract visitors. 
The manufacturing sector, too, could be built up; at the moment, the kingdom has only small-scale domestic manufacturing, despite being one of the largest markets in the region for cars, machinery, and other capital goods. 
Exploiting these opportunities will require trillions of dollars in investment, radical improvements in productivity, and the government’s firm, sustained commitment. 
Doubling GDP over the next 15 years will necessitate about $4 trillion in investment, two-and-a-half times the amount of money that flowed into the kingdom’s economy during the 2003-2013 oil boom. 
Attaining this level of investment will require radical policy reforms. 
During the oil boom, the state increased public-sector wages and social-welfare transfers – and thus was a major contributor to households’ growing prosperity. 
The public sector continues to dominate most aspects of the economy, especially employment; about 70% of Saudi nationals work for the state. 
But transforming the economy will require the participation of investors and businesses; indeed, we calculate that by 2025, at least 70% of the investment should come from the private sector. 
Achieving this will require overhauling the country’s regulatory and legal framework. 
It will also require large improvements in productivity. 
Saudi Arabia’s productivity growth has lagged behind that of most other G-20 countries, rising by just 0.8% in the past decade. 
Jump-starting productivity growth will require reworking the kingdom’s restrictions on business and labor practices. 
For now, the Saudi economy relies heavily on low-wage and low-productivity foreign workers on limited contracts; indeed, such workers hold more than half the jobs in the country. 
That will have to change if the economy is to raise productivity and modernize its non-oil sectors. 
The kingdom’s new leadership has some difficult but important choices to make as it formulates a detailed economic strategy. 
The most important priorities include boosting the efficiency of government spending and developing new sources of revenue to replace oil exports. 
The government has a number of options for new revenue, including a reform of wasteful energy subsidies and the introduction of levies that are standard in the G-20, such as value-added tax. 
Weaning Saudi Arabia’s economy off oil will not be easy, and the kingdom has an uneven track record in this regard. 
But there are encouraging early signs about the government’s focus, energy, and determination. 
One is the recent decision to levy a tax on unused land that could be developed for housing. 
Another is the new inter-ministerial coordination and cooperation that appears to be taking place under the auspices of the Council of Economic and Development Affairs, a body established in January 2015. 
If the government is able to sustain its resolve over the years it will take to set the economy firmly on a new trajectory, the kingdom will be thoroughly transformed – for the better. 

Living the Saudi Dream 
IRVING, TEXAS – Saudi Arabia wants it all: to salvage OPEC, achieve income diversification and industrialization, and preserve its market share in crude oil, petroleum products, petrochemicals, and natural gas liquids (NGLs). 
Whether the Saudis succeed will be determined largely by the shale-energy industry in the United States. 
The US shale revolution divided OPEC according to the quality of its members' crude oil. 
Exporters of light sweet crude – such as Algeria, Angola, and Nigeria – lost nearly all of their market share in the US, while exporters of sour or heavier crude, including Saudi Arabia and Kuwait, have lost little. 
Because almost all crude oil produced by the Gulf States is sour, and most of the global surplus is sweet, any production cut by Saudi Arabia and its neighbors would not drive prices back up and rebalance the oil market. 
The only way to do that – and prevent an OPEC breakup – would be to reduce the production of light sweet crude, including by US producers, which would thus lose market share. 
If this occurred, oil prices could be expected to rise again relatively quickly. 
If, however, Saudi Arabia remains more committed to its strategic development objectives, low oil prices could persist. 
Since the 1970s, several OPEC members, led by Saudi Arabia, have worked to diversify their industrial base by promoting sectors with a comparative advantage, such as petrochemicals, and building mega-refineries to enable the export of value-added products. 
At the same time, to boost revenues, they expanded exports of NGLs, which are not counted in OPEC quotas. 
But just when these countries were beginning to achieve success, the US shale revolution emerged, threatening all three of their main strategic objectives. 
The key to the competitiveness of Saudi Arabia's petrochemical industry was its use of natural gas and ethane, which was far less expensive than the oil product naphtha on which its global competitors depended. 
Now that the US is producing massive amounts of low-price natural gas and ethane, Saudi Arabia's competitive advantage – and market share – is beginning to deteriorate. 
The same goes for refining. 
Since the US does not allow exports of crude oil, the shale revolution pushed down the US benchmark price, the West Texas Intermediate, relative to international crude prices, sometimes with differentials as wide as $20. 
US refiners took advantage of lower prices to increase their exports of petroleum products – so much so, that they are now threatening the market share of Saudi refineries in Asia and elsewhere. 
Likewise, US companies have increased NGL production considerably, enabling the country to slash its liquefied petroleum gas (LPG) imports and expand its NGL exports significantly. 
As a result, Saudi Arabia has lost market share to US producers in Central and South America. 
But the recent collapse in oil prices could change this dynamic. 
In refusing to cut its own production, Saudi Arabia seems to be hoping that low oil prices will drive down investment in US shale energy, undermining production growth there. 
Low prices may already have contributed to delays in America's decision to begin exporting crude oil, as well as to the political viability of US President Barack Obama's veto of the Keystone XL pipeline, intended to transport oil from the Canadian tar sands to the Gulf of Mexico for export. 
Add to that the delay in the opening of the Mexican energy sector, and it seems that low oil prices could amount to a net gain for the Kingdom. 
Though Saudi Arabia's motivation in not cutting production was probably almost entirely economic, low oil prices could also offer distinct political advantages. 
Most notably, the decline in prices is creating serious challenges for Iran, the Kingdom's main rival in the region, as well as for the unstable, oil-dependent economies of Russia and Venezuela. 
None of these countries has adequate savings to cushion the blow of reduced revenues. 
Under these circumstances, it seems likely that Saudi Arabia will continue to refuse to cut oil production, leaving prices low until market forces trigger a rebound. 
And even then, the price increase could be limited. 
After all, game theory dictates that, once the surplus is eliminated, the dominant producer must prevent oil prices from rising high enough to cause it to lose market share again. 
That means that Saudi Arabia will try to compel non-OPEC countries, mainly in North America, to keep oil-production increases commensurate with growth in global demand. 
In short, it is in Saudi Arabia's interest for oil prices to rise high enough to sustain its own economy, but not so high that they can sustain significant increases in non-OPEC supply. 
In order to keep prices in this ideal range, Saudi Arabia may even increase production again. 
This strategy is not without risk. 
In the short run, excessively low prices could trigger political instability in some oil-producing countries, driving up prices. 
Similarly, delays in upstream investment, especially megaprojects, could push prices above the ideal level in the medium and long term. 
But perhaps the biggest risk lies with the US shale-oil industry. 
Over the next few years, US producers are likely to retrench, focus on sweet spots, improve technology, reduce costs, and increase production once again. 
At that point, Saudi Arabia's current strategy may no longer be adequate to sustain its market dominance. 

Saudi Arabia’s Democratic Baby Step 
This month’s elections in Iraq and for the presidency of the Palestinian Authority may be claiming all the world’s headlines, but another potentially far-reaching ballot is also underway, albeit to far less acclaim: the registration process for the municipal elections in Saudi Arabia in mid-February. 
As the heartland of some of the strongest Islamist forces anywhere, this Saudi effort – if successful and a harbinger of other needed changes – may have an even more profound impact than the elections in Iraq and Palestine. 
Roughly 40,000 Saudis are expected to compete for 1,700 seats in 178 municipal councils. 
The enthusiasm is obvious, and the campaign is already under way and highly spirited. 
Members of the Saudi royal family are not entering the race, as they already enjoy ultimate political power. 
But, sensing the public’s excitement, they have made sure to be photographed by local and international media while registering to get their electoral ID card. 
By the standards of Western, and even emerging Third World democracies, the Saudi municipal elections are an extremely modest affair. 
But in the Saudi context they are a real breakthrough. 
For Saudi Arabia is a country in which both rulers and ruled are equally arch- conservative, adhering, for the last two centuries, to the puritanical Wahhabi doctrine of Islam. 
During the last fifty years, repeated attempts by reform-oriented elements to open up Saudi Arabia’s society and polity had failed. 
But recent democratic trends worldwide have now reached the shores of this medieval desert kingdom and can no longer be ignored. 
To begin with, members of the small but steadily growing Saudi middle class have increasingly expressed their discontent publicly. 
Despite legal prohibition, Saudi women have defiantly driven their cars in the streets of Riyadh, while prominent intellectuals have published open letters to King Fahd and Crown Prince Abdullah demanding social and political reform. 
This pressure for change has been building for years. 
The first Gulf War (1990-91), brought nearly one million foreign fighters from 35 countries to the Arabian Peninsula, along with their modern weapons systems, communications gear, and different lifestyles. 
Such a massive foreign influx into so hermetic a country could not but have a significant domestic impact. 
Nearly all countries neighboring Saudi Arabia already practice one form of electoral participation or another, although most of these nods toward democracy are defective in some way. 
For years, ordinary Saudis watched with envy parliamentary debates on Arab satellite channels, in countries richer than theirs, such as Kuwait, as well as in poorer ones, such as Yemen and Jordan. 
Even the tiny state of Qatar has the rabble-rouser Al-Jazeera television channel, which is watched by more viewers in Saudi Arabia than in any other Arab country. 
Messages by their dissident compatriot Osama Bin Laden are periodically beamed from that channel, inciting Saudis against the royal family. 
Bin Laden’s constantly highlights the House of Saud’s corruption and repugnant connections with the United States. 
While democracy is not part of his agenda, his messages, as well as his followers’ periodic armed attacks inside the country, have no doubt contributed to the erosion of the regime’s legitimacy. 
But it was the terrorist attacks on the US in September 2001 that brought a sea change in the thinking, if not yet the practice, of at least part of the Saudi regime. 
The fact that most of the perpetrators of the attacks were identified as Saudis highlighted the country’s backward realities and provoked mounting international pressures for change. 
No doubt some of these pressures were motivated by sincere concerns, but others were driven by the desire of anti-Saudi groups in the US to settle old scores. 
The call for democratizing the Middle East has become a battle cry for the Bush administration, especially after the invasion and occupation of Iraq. 
Despite its reluctance to change, the Saudi royal family is obviously yielding to these multiple pressures from within, from neighbors, and from the wider world, although the extent of change is still nominal and obviously leaves much to be desired. 
Thus, for example, Saudi women, but not convicts, are barred from participating in the forthcoming municipal elections. 
Moreover, tens of human rights activists are currently in prison or on trial. 
To be sure, the Saudi system is still worlds away from being a Westminster-style democracy; indeed, it will probably never become one. 
All the same, this municipal election should be looked upon as a giant first step in the arduous journey toward Saudi democracy. 
Despite many misgivings regarding its conduct in other areas, the Saudi regime should be commended for this initiative. 

Saudi Arabia’s Iraq Dilemma 
Saudi Arabia broke ranks with the Arab world’s opposition to military action against Iraq when Foreign Minister Saud al-Faisal announced that the kingdom would allow the use of its military bases if the UN sanctions an attack on Iraq. 
The official Saudi press explains the new stance as reflecting the government’s desire to abide by Security Council resolutions. 
But it also underscores the Saudi regime’s growing feelings of internal fragility and external vulnerability. 
Domestic pressure on the Saudi royal family, the al-Sauds, arises from widespread opposition to any war against Iraq, as well as to America’s military presence. 
Dissent comes not only from the street, but also from the Wahhabi religious establishment, the al-Sauds’ longstanding ally and source of their legitimacy. 
External pressure arises specifically from the US, Saudi Arabia’s primary strategic protector. 
The al-Sauds have no easy option. 
They fear that cooperation with the Americans may not guarantee long-term stability, and worry that concessions on so fundamental an “Arab” cause as Iraq will further undermine their domestic legitimacy. 
How much erosion of legitimacy occurs will depend not only on whether war with Iraq takes place, but on what happens during the build-up and preparations for war: the media and propaganda struggles, and the political alliances that are forged. 
Should an attack on Iraq take place, the Saudi regime does not want to be marginalized as America embarks on its policy of “regime change”; it also does not want to be America’s next target. 
So, among a bad set of options, the least bad appears to be cooperation with the US. 
Yet cooperation with the US may not gain the al-Sauds much, because Saudi relations with America are strained to the breaking point. 
Ever since the terrorist attacks on New York and Washington last year, the regime—once central to American strategic interests in the region, has been made to feel dispensable by the US, which drops strong hints that there are alternatives to Saudi military bases, even to Saudi oil. 
Although the Saudis were not included in President Bush’s “axis of evil,” some American policymakers now view the country as a “kernel of evil.” 
Al-Qaeda’s terrorist network is seen as arising directly from fundamentalist Wahhabi teachings, which constitute an integral part of the Saudi regime. 
Problems with America run parallel with the regime’s rising domestic problems. 
War against Iraq will invariably be divisive and weaken the kingdom’s already delicate unity. 
Shi’as in the oil-rich east, who feel ambivalent about their “Saudi-ness” and are labeled as heretics by the Wahhabi authorities, will likely welcome regime change in Iraq if it enhances their ties with Iraqi co-religionists, which would bolster their political confidence. 
The population of Asir, the tribal area bordering Yemen from which most al-Qaeda recruits originate, is also alienated. 
Saudi Arabian participation in a war on Iraq could strengthen the appeal of al-Qaeda’s message there, invigorating calls for jihad against America’s military presence and the al-Sauds. 
Meanwhile, the Hejazis, who originate in the holy cities of Mecca and Medina, are alienated not only from the political process, but also from the religious establishment because they are not Wahhabi. 
They might welcome a return of their old Hashemite rulers to the Iraqi throne, an option discussed for any “regime change” that follows Saddam Hussein’s ouster. 
However, if war reinforces the Arab sense of defeat, Hejazi adherence to bin Laden’s message may grow. 
In the face of this domestic antagonism, the al-Sauds have few tools. 
The advent of Arab satellite television and the Internet limits the government’s ability to control public opinion. 
A declining economy has made the rising generation rebellious. 
War on Iraq could also reduce the importance of Saudi oil in world markets because increased Iraqi production is likely when sanctions are lifted. 
As al-Saud political and economic control declines, and in the absence of democratic reforms, the regime’s policy seems certain to shift from patronage to repression. 
Making matters worse, the al-Sauds realize that American demands will persist after any war on Iraq is concluded. 
America wants to restrict the influence of the Wahhabi religious establishment, reform the educational system, and bring about moves towards democracy. 
To appease the Americans, discussions are taking place about shifting state religious oversight to marginal tasks such as operating schools for memorization of the Koran and regulating tourism. 
The Wahhabi establishment’s role would begin to be limited purely to the social sphere. 
Such an attempt to secularize the state might backfire, however, as the regime could become even more vulnerable to accusations that it is an American lackey. 
For there is nothing at hand to replace the legitimizing sanction provided by the Wahhabis. 
To survive, the Saudi regime needs not only American guarantees, but also the support of the rising middle class. 
To attract that support, some steps towards freedom of the press have been taken, but censorship remains strict. 
Some educated people, however, emboldened by the satellite network al-Jazeera and its likes, seem poised to step beyond the current limits of toleration. 
So the Saudi dilemma has been heightened, not lessened, by its changed stance on Iraq. 
Ties with America may have been strengthened, but at the cost of upsetting the Saudi people. 
As war talk builds in the months ahead, the regime’s room for maneuver will narrow even more. 

Saudi Arabia’s Old Regime Grows Older 
LONDON – The contrast between the deaths, within two days of each other, of Libya’s Col. Muammar el-Qaddafi and Saudi Crown Prince Sultan bin Abdel Aziz is one of terminal buffoonery versus decadent gerontocracy. 
And their demise is likely to lead to very different outcomes: liberation for the Libyans and stagnation for the Saudis. 
But the death of Sultan, at 86, marks the beginning of a critical period of domestic and foreign uncertainty for the Kingdom. 
After all, Sultan’s half-brother, King Abdullah, 87, is still hospitalized in Riyadh, following a major operation last month. 
The regime is aging and ailing, and is perceived by the population as being on life support. 
Meanwhile, the succession is still being argued. 
Sultan’s death is the first time that the burial of a Saudi royal has been delayed to give the ruling family time to decide on the next in line – a sign of internal discord (and concord on the continuation of dynastic rule). 
The Saudi regime’s stability now depends on its ability to maintain unity and establish clarity in its system of succession. 
With the Crown Prince’s death, schisms are particularly threatening to the Kingdom’s stability (and that of oil exports), because the ruling Al Saud have swelled to 22,000 members, which has given rise to factional clashes among increasingly numerous claimants to power. 
Sultan had already been dead – politically, that is – for the last three years; indeed, since June 2011, when he left for New York for medical treatment, young Saudis speculated on numerous Web sites that this was also literally the case. 
Abdullah’s octogenarian line of successors recalls the final years of the Soviet Union, when one infirm leader after another succeeded to power for a brief period of inert rule. 
Many Saudi subjects feel the same pattern of continuous uncertainty and torpor. 
Making matters worse, the rule of succession is ambiguous. 
After Abdullah succeeded his brother Fahd, who ruled for 23 years until his death in 2005, he created an Allegiance Council, an ambiguous and mysterious family body that resembled the Vatican’s College of Cardinals. 
But here, restrictions are not based entirely on age, but on family bloodlines. 
The Council included the surviving royal princes of the 43 sons of Ibn Saud, the Kingdom’s founder, and the sons of their deceased brothers – for example, the late King Faisal’s brood. 
But, as Sultan’s health deteriorated, Abdullah bypassed his own creation and appointed Prince Naif, the interior minister, as a second deputy. 
In other words, Naif will be anointed Crown Prince. 
But, befitting this increasingly exsanguinous imperium, Naif, 82, is known to suffer from leukemia. 
Sultan’s fortune is estimated at $270 billion, which he distributed between his sons prior to his death in order to shore up their political position in the competitive princely arena. 
The reality is that every senior prince has placed his favorite sons in important positions in the Kingdom. 
Sultan secured the defense ministry for his son Khaled, and brought back Khaled’s notorious brother, Bandar to head the Intelligence Security Council. 
Abdullah guaranteed his son Mitaeb’s position as head of the National Guard. 
The new Crown Prince-in-waiting, Naif, has established his son Mohammed as the next interior minister. 
In short, despite Abdullah’s innovations in the succession process, it is an open secret that nothing guarantees a transition to a younger generation of leaders – or that an effective ruler will emerge. 
The story of the Al Saud’s succession struggle is no longer whispered behind closed doors. 
The Internet has opened a window on all of the royal family’s plots, ambitions, and double-dealings. 
The Al Saud resembles a family business, established in 1932. 
Ibn Saud managed to conquer and unite the vast territory of the Arabian Peninsula, give it his family name, and alienate, divide, and control his cousins and brothers in order to establish a clear and undisputed line of succession through his sons. 
After Ibn Saud’s death, his sons, though never entirely united, maintained enough coherence to keep the store running. 
That is no longer true of the thousands of princes that they produced. 
As the older generation dies off, the new generation has fallen to fighting in front of the customers. 
Indeed, with the ratio of royals to commoners now at one to a thousand (compared to one to five million in the United Kingdom), the challenge of managing princely privileges, salaries, and demand for jobs has never been more intense. 
Royal perks include lifetime sinecures and domination of the civil service, which enable the princes to award contracts and receive commissions on top of their salaries. 
So the Saudi regime is divided, its legitimacy is questioned, and sectarian tensions are growing. 
Moreover, while oil-export revenue is booming, the neighborhood is in revolutionary flames. 
In the short term, the iron-fisted Naif, as Crown Prince, will push the Kingdom into greater repression, in part by strengthening the hardline Wahhabi clerics’ place in the country’s power nexus. 
Magnificent sums of money, backed by Wahhabi dogma, will be deployed to ensure popular submission and silence. 
Whereas Abdullah at least talked about reform (though with no real consequences), Naif can barely bring himself to utter the word. 
Denial remains the Saudi rulers’ dominant mindset. 
The royals believe that custodianship of Islam’s holy places gives them a special status in the Arab world, and that no revolution can touch them. 
And, if anyone tries, they will follow Naif’s counsel: “What we took by the sword we will hold by the sword.” 
Throughout the region, newly mobilized (and thus empowered) Arab youth are trying to move their countries towards reform and liberalization. 
Saudi Arabia, unfortunately, is moving in the opposite direction. 

Saudi Arabia’s Shia Stand Up 
BEIRUT – On February 24, violent confrontations between Shia pilgrims and the Saudi religious police and security forces occurred at the entrance to the Prophet Mohamed’s Mosque in Medina. 
The timing and location of the clashes may have serious repercussions for domestic security, if not for the regime itself. 
Some 2,000 Shia pilgrims gathered near the mosque that houses the Prophet’s tomb for the commemoration of Mohamed’s death, an act of worship that the ruling Saudi Wahhabi sect considers heretical and idolatrous. 
Thus, the Mutawa’ah, the religious police of the Committee for the Preservation of Virtue and the Prohibition of Vice, armed with sticks and backed by police firing into the air, tried to disperse the pilgrims. 
The pilgrims resisted. 
Three pilgrims died and hundreds were injured in the ensuing stampede. 
A large number of pilgrims remain in detention, among them 15 teenage boys. 
Soon after, representatives of Saudi Arabia’s Shia community sought a meeting with King Abdullah in an effort to free the detainees. 
Dialogue seemed like a promising strategy: just ten days earlier, Abdullah had announced a promising reform agenda for the country. 
But the King refused to meet the Shia delegation. 
The violence outside the Medina mosque has led to unprecedented demonstrations in front of Saudi embassies in London, Berlin, and The Hague, with protesters demanding independence from the Saudi state. 
Such demonstrations are, of course, illegal in Saudi Arabia. 
But domestic suppression has only served to export and expand the problem. 
And now, the regime’s policies of repression, discrimination, and antagonism directed at the Shia and other politically marginalized groups increasingly threaten the Saudi state with disintegration. 
The Shia are a special case, constituting 75% of the population in the Eastern Province, the Kingdom’s main oil-producing region, and identifying far more strongly with Shia across the border in Iraq than with the Saudi state. 
Indeed, the empowerment of Iraq’s long-suppressed Shia has raised expectations among Saudi Arabia’s Shia that they, too, can gain first-class status. 
From the regime’s point of view, however, Shia Iran is now the most serious security threat. 
The Saudi authorities perceived the Shia demonstrations as an assertion of Iranian policy, as they coincided precisely with Iran’s celebration of the 30th anniversary of its Islamic Revolution. 
Suppression of the Shia is thus a part of the Kingdom’s strategy to counter Iran’s bid for regional hegemony. 
But this thinking is tremendously shortsighted. 
Only by transforming Saudi Arabia’s currently monolithic Saudi/Wahhabi national identity into a more inclusive one will the Kingdom become a model that is attractive to its minorities. 
Today, the disempowered Shia are forced to seek political connections and backing from the region’s wider Shia political movements to compensate for the discrimination they face at home. 
So the choice for the Saudi rulers is stark: empower the Shia within the system, or watch as they increase their power through external alliances. 
The threat that this would represent is not abstract: the Kingdom’s borders are very porous. 
So far, King Abdullah has shown no sign of opting for a policy of inclusion – not even a token gesture, such as a Shia minister. 
Moreover, Abdullah is unable even to stop Wahhabi satellite TV stations from denouncing the Shia “heretics,” or the hundreds of Wahhabi Web sites that call for the outright elimination of the Shia. 
But non-Wahhabi Saudis, mainly the Shia, continue to resist state dogma. 
Until the beginning of this year, they have not formed significant or open opposition movements, owing to a historically well-entrenched fear of repression. 
Shia unrest dates back to the Kingdom’s establishment in 1932, and violent confrontations with the Saudi state began with the Shia revolution in neighbouring Iran. 
The Iranian revolution prompted a Shia uprising in the Eastern Province in November 1979. 
Saudi Arabia’s Shia, an economically and politically marginalized community, staged an unprecedented intifada in the towns of Qatif, Saihat, Safwa, and Awamiyya. 
Tens of thousands of men and women demanded an end to the politics of discrimination against the Shia. 
Although, the Saudi security forces, the National Guard, and the marines crushed the rebellion, the domestic tensions that fueled it remain. 
And Ayatollah Khomeini challenged the Al Saud’s ideological monopoly and control of Mecca and Medina. 
Khomeini challenged the very concept of monarchy in Islam by declaring that “those with authority” are not Kings but religious scholars. 
The Saudi religious establishment has long been on alert to this rival and threatening entity. 
Sefr al Hawali, a prominent Saudi Wahhabi cleric, warned of the dangers of the “Shia arc” following the Shia intifada in Iraq in 1991. 
But, since the war in Iraq in 2003 and the empowerment of Shia across the region, the Saudi regime faces sizeable, restless, and politically ambitious Shia populations in neighboring Gulf countries, especially Kuwait and Bahrain, as well as in Lebanon. 
The demonstrations at Medina show that Saudi Shia are now themselves emboldened. 
Indeed, they have formed an opposition movement called Khalas (Salvation), aimed at mobilizing the new generation of Shia in the Eastern Province. 


Saudi Arabia’s Populist Temptation 
NEW YORK – Most efforts to comprehend the dynamics of Saudi Arabia’s ongoing political earthquake have focused on the psychology of the young crown prince, Mohammed bin Salman. 
But there are also structural reasons for Prince Mohammed’s brand of populism. 
Understanding these factors is key to finding a better path forward. 
In the past, political stability in Saudi Arabia rested on three separate deals: within the royal family; between the royal family and the Kingdom’s traditional elites; and between the state and the population. 
The deal within the Al Saud family is rooted in asabiyya – the ability of an ambitious tribe to stick together to monopolize power. 
But the royal family has grown too large and become too divided to justify the cost of maintaining its unity. 
Loosely estimated, the 5,000 or so third-generation princes and their entourage consume $30-50 billion per year. 
The deal among traditional elites is also rooted in the Kingdom’s genesis. 
These notable families were encouraged to accumulate economic power. 
Privileged access to government contracts, subsidies, capital, protection from competition, and the ability to import labor freely have embedded their companies deeply in the economy. 
This protected elite private sector grew to represent over 50% of Saudi GDP. 
But, because it is largely staffed by expats, it generates no trickle-down benefits to the local population, only negative externalities. 
The population, meanwhile, was offered economic security in exchange for loyalty – an arrangement institutionalized through a patronage network of high-paying public-sector jobs and a broad array of generous welfare benefits and consumer subsidies. 
As a result, more than 75% of Saudi citizens work for the state, and much of the rest of the public budget is spent on cradle-to-grave social support. 
But with per capita revenue from oil exports now only $5,000 a year for Saudi Arabia’s 20 million nationals, the system has become too costly. 
The challenge for Prince Mohammed is to oversee a transition to a less expensive political order, while generating sufficient economic efficiency gains to prevent the necessary adjustment from fueling instability and civil unrest. 
Other autocratic regimes in the region, with larger populations and less oil – such as Iraq, Egypt, Algeria, and Syria – followed a “republican strategy” that appeased the poor with various forms of patronage, and repressed economic elites. 
This blocked the rise of any credible opposition, at the cost of entrenching an anemic, largely informal, and consumption-based economy. 
Such a Venezuela-style approach could appeal to Prince Mohammed, because its populist fervor aligns with his purges of elites and neutralization of any serious opposition. 
Foreign and state-controlled firms could replace the notables in delivering necessary private services. 
And the balance of payments could be stabilized with lower consumption and imports, particularly that of the royals and the rich. 
The problem with this approach is that it would only delay the essential challenge of raising labor productivity. 
While other autocrats under pressure – such as Turkey’s Recep Tayyip Erdoğan and Russia’s Vladimir Putin – are increasingly choosing this myopic route of sacrificing the private sector on the altar of regime survival, the Kingdom can do better, given the assets at its disposal. 
The alternative of an authoritarian ruling coalition of traditional elites is even less attractive to Saudi Arabia’s current rulers, as it would entail lower levels of consumption for ordinary people – and thus, in all likelihood, higher levels of repression. 
Domestic strife is the last thing the crown prince needs. 
A better way forward requires more balance and better coordination. 
The pain of adjustment should be shared more widely among all groups, and reforms should focus much more on enlarging the economic pie. 
This route is feasible, thanks to Saudi Arabia’s abundance of low-hanging fruit: a youthful society clamoring for social emancipation, better-educated women yearning for more participation, and millions of jobs created for expats available for nationals to fill. 
What clouds this scenario is the low productivity of the elite private sector. 
To break free of its middle-income trap, Saudi Arabia needs to democratize, if not its politics, then at least its markets, through greater reliance on the rule of law and fair competition. 
Viewed from this perspective, Prince Mohammed’s current anti-corruption campaign will need to be followed by efforts to establish more inclusive rules for the private sector. 
If the Kingdom’s private sector can be made to work, the economic challenge becomes modest. 
About 200,000 young people enter the labor market every year. 
If as many jobs are needed to allow women to join and to slowly wind down the public sector, two million new jobs would be needed over the next five years. 
To put this in perspective, there are now nine million foreign workers employed in the Kingdom. 
Rather than new mega-investments in high tech, the difficult route of Saudization, initiated a decade ago, can gradually do the job, if augmented by greater support for competition and for small and medium-size enterprises. 
But the starting point is challenging, because public servants currently earn three times more than private-sector workers. 
To unify the labor market, a medium-term goal could be to reduce Saudi workers’ pay by a third, increase their productivity by a third, and subsidize the rest from state coffers. 
The populist temptation promises at best an authoritarian, middle-income welfare state. 
Saudi Arabia would be better served by a strategy of economic and social inclusion that broadens the basis of political support by convincing all influential groups – royals, notables, and mere mortals – to view their short-term losses as an investment in the Kingdom’s future. 

Saudi Arabia’s Bold Vision for Economic Diversification 
LOS ANGELES – Saudi Arabia has captured the world’s attention with the announcement of an ambitious agenda, called Vision 2030, aimed at overhauling the structure of its economy. 
The plan would reduce historical high dependence on oil by transforming how the Kingdom generates income, as well as how it spends and manages its vast resources. 
It is supported by detailed action plans, the initial implementation of which has already involved headline-grabbing institutional changes in a country long known for caution and gradualism. 
While the immediate catalyst for economic restructuring is the impact of the sharp fall in international oil prices, the rationale for these reforms has been evident for much longer. 
With oil sales generating the bulk of government revenues, and with the public sector being the predominant employer, Saudi officials have long worried that the Kingdom’s lack of economic diversity could place at risk its long-term financial security. 
The more than halving of oil prices in the last 18 months has been accompanied by a major change in how the oil market functions. 
With growth in non-traditional sources of energy – particularly the “shale revolution,” which drove a near-doubling in US production, to almost ten million barrels per day, in just four years – the Saudi-led OPEC oil cartel has less influence on market prices. 
In addition, certain members of OPEC, again led by Saudi Arabia, are now less willing to try to moderate fluctuations in the price of oil, as they correctly recognize that “swing producers” risk durable losses in market share. 
That’s why Vision 2030 is so important. 
Seeking to regain better control over its economic and financial destiny, the Kingdom has designed an ambitious economic restructuring plan, spearheaded by its energetic new deputy crown prince, Mohammed bin Salman Al Saud. 
In simplified terms, Vision 2030 focuses on three major areas, together with efforts to protect the most vulnerable segments of the population. 
First, the plan seeks to enhance the generation of non-oil revenues, by raising fees and tariffs on public services, gradually expanding the tax base (including through the introduction of a value added tax), and raising more income from a growing number of visitors to the Kingdom. 
Second, the authorities want to reduce spending by lowering subsidies, rationalizing the country’s massive public investment program, and diverting spending on arms away from foreign purchases. 
Third, the Kingdom seeks to diversify its national wealth and, in the process, increase current investment income. 
For example, the plan would raise funds via the IPO of a small part (up to 5%) of Saudi-Aramco, the giant oil conglomerate, and invest the proceeds in a broader range of assets around the world. 
This bold economic vision is not without risks. 
Economic transitions are inherently tricky, especially one of this scale and scope. 
Early successes are often needed to solidify the overwhelming buy-in of key constituencies, particularly those that naturally may be resistant to change at first (especially change that eliminates some of the traditional financial entitlements in moving from a familiar, albeit less secure, present toward what is now an unfamiliar future). 
The action plans underpinning the implementation of Vision 2030 inevitably involve progressing on multiple fronts simultaneously and in a carefully coordinated and monitored fashion. 
Requiring invigorated administrative and operational resources, it comes at a time when the Kingdom is not only dealing with lower oil earnings and drawing down its large reserves, but also is increasingly asserting its regional role, including in Syria and Yemen. 
Against this background, it is encouraging that the announcement of Vision 2030 has been followed rapidly by the implementation of some initial and notable steps. 
Sustaining this momentum in a manner that maintains consistent communication with key domestic stakeholders will likely prove critical in determining the plan’s success. 
How the Saudis proceed on this important economic restructuring is being closely watched by the other five members of the Gulf Cooperation Council – and by many other countries as well. 
The attention attracted by Vision 2030 is not surprising. 
The plan, after all, is about a lot more than fundamental economic reforms. 
If Saudi Arabia succeeds in transforming its economy, including reforming institutions and restructuring economic incentives, other countries that face similar challenges, in the region and beyond, will be inspired to follow suit. 

Saudi Arabia’s Reform Path 
BEIRUT – Nearly two years after oil prices began their precipitous decline, leading global producers are facing the prospect of major adjustments that will have far-reaching economic, social, and political consequences. 
While such adjustments will surely be enormously challenging – especially for middle-income countries like Saudi Arabia, which lack the massive wealth funds of, say, the United Arab Emirates – they present these countries with an important opportunity to consider more productive ways to organize their societies. 
It seems that Saudi Arabia has embraced this challenge. 
The long-time oil minister was replaced last week, soon after the Kingdom issued its Vision 2030 plan for ensuring sustainable long-term growth. 
The plan has been both hailed and criticized for its ambition, exemplified by the goal of turning the Kingdom into the world’s 15th largest economy over the next two decades – an economy characterized by its skilled labor force, open markets, and good governance. 
One key way Saudi Arabia hopes to achieve that is by diversifying its asset portfolio, selling shares in the state oil giant Aramco to create a sovereign-wealth fund. 
But Vision 2030 fails to address one critical issue: low labor-force participation. 
Only 41% of the working-age population currently is employed, compared to a 60% average across the OECD. 
Those who do work are employed largely by overstaffed public agencies. 
This is the Saudi economy’s largest inefficiency, and addressing it will be more difficult that addressing any other. 
The key will be not just to increase employment, but also to boost productivity. 
After all, unlike more sparsely populated Gulf Cooperation Council (GCC) members, such as the UAE and Qatar, Saudi Arabia, with its population of nearly 20 million (excluding non-nationals), can no longer afford low labor productivity. 
Indeed, oil revenues now amount to only $5,500 per capita – far from enough to act as a sustainable alternative. 
To succeed, Saudi Arabia will have to transform its incentive structure, so that Saudis, not migrants, fill newly created private-sector jobs. 
As it stands, the Kingdom’s underlying political settlement depends on the royal family’s alliances with businesses, which have a free hand to import labor, and guaranteed public-sector jobs for citizens. 
This settlement is traceable to the 1970s, when ambitious infrastructure programs turned local trading families into contractors, which then lobbied for more visas to staff up. 
As these firms evolved into mighty commercial and industrial companies, cheap foreign labor became central to their profitability. 
The GCC is now the only region open to global labor, ensuring that its businesses have the world’s lowest wages-to-skill ratio. 
As a result, the Kingdom’s reliance on foreigners has no parallel in modern economic history. 
In 2015, there were about nine million migrant workers in Saudi Arabia, constituting 60% of its labor force. 
The private sector has become a preserve for expatriates, who fill at least 83% of positions. 
In few other countries would nationals accept such open competition by foreign labor. 
Saudi nationals do, because they are employed by the state at above-market “reservation” wages. 
Roughly 3.4 million Saudis currently work in public administration and the security forces, at wages 2-4 times those in the private sector. 
If the wage gap between migrant and Saudi public-sector wages does not narrow dramatically, nationals simply will not be employable in the private sector. 
But whenever the Kingdom has tried to reduce public-sector hiring, unemployment has increased. 
Under the current incentives system, the authorities’ plans to privatize companies and improve civil-service productivity will actually destroy jobs occupied by Saudis. 
The challenge of creating jobs for Saudis may seem like a problem of riches. 
Some would argue that all the Kingdom needs to do is to substitute Saudi for foreign workers in existing positions. 
But simple substitution will not do. Current jobs are either too skill-intensive or not skill-intensive enough. 
Structural change will be needed to upgrade manual jobs. 
Greater reliance on capital and technology will also eliminate many menial positions. 
At the same time, many high-skill jobs, largely a product of massive energy and capital subsidies, need to be downgraded to create more medium-skill positions. 
Companies must not only pay sufficiently to attract Saudis into these positions, but also begin training them, in order to boost productivity. 
All of this presupposes that the labor market will become much tighter. 
The productive solution thus requires a dramatic reduction in the number of foreign workers, so that private-sector wages can rise to levels commensurate with Saudi reservation wages. 
The alternative is to slowly become a poor welfare state. 
The Kingdom has thus embarked on a “Saudization” program that requires businesses in some sectors to hire nationals. 
So far, the private sector has largely resisted these policies. 
Managing the labor market by decree is difficult. 
More effective methods to ration migrant jobs will have to be found, requiring both regulatory capacities and political will. 
Already, official unemployment stands at 11.6% – and at 32.8% for women and 29.4% for young people – while the rate would likely be much higher if discouraged workers were included. 
More than 200,000 young people enter the labor market annually. 
And as education levels continue to rise – nearly two-thirds of Saudi youth go to university – social pressure is set to grow as well. 
The real constraint to job creation in Saudi Arabia is found in its particular political economy. 
With lower oil rents to share, the domestic social contract is coming under strain. 
Cutting support for either businessmen or the population will weaken it further. 
How the ruling House of Saud will adjust remains uncertain. 
Backing the country’s entrepreneurs may require a rise in repression; backing the population will generate demands for democratization down the line. 
Either way, the choices made, whether implicit or explicit, will be profoundly important to the success of Vision 2030 and similar reform agendas. 

Saudi Arabia vs. the Arab Spring 
PRINCETON – Saudi Arabia is widely perceived as leading the counter-revolution against the Arab Spring uprisings. 
In reality, the Kingdom’s response is centered, as its foreign and domestic policy has long been, on “stability.” 
The Saudis don’t want anti-Saudi forces, including such enemies as Iran and Al Qaeda, to increase their influence in the Middle East. 
Some of the older Saudi leaders have seen this movie before. 
The nationalist revolutions of the 1950’s and 1960’s, inspired and galvanized by Gamel Nasser’s Egypt, nearly toppled the House of Saud. 
Nonetheless, today’s Saudi princes appear to recognize that something has genuinely changed in the Middle East: The younger generation of Arabs is no longer prepared to accept unaccountable, corrupt, and brutal governments. 
Saudi Arabia, a self-proclaimed bulwark of Islamic conservatism, where popular democracy has never been considered a legitimate form of rule, has been more aggressive in some arenas than in others. 
Domestically, the royal family struck quickly, adopting a ban on public demonstrations and acts of civil disobedience. 
The Kingdom’s traditional interpretation of Islam construes political legitimacy in terms of a ruler’s proper application of Islamic law. 
In return, his subjects owe him obedience within the constraints of Sharia religious law. 
Dissent, should it arise, must always take the form of well-intentioned advice given to the ruler in a private setting. 
Public demonstrations of dissent are regarded as contrary to Islam, because they foster divisiveness and lead to civil strife. 
The highest council of Saudi religious scholars recently declared demonstrations to be categorically un-Islamic. 
Confronted with the possibility of mass demonstrations on March 11 – the so-called Day of Rage on a Facebook page – the Saudi rulers enforced that ruling by deploying massive numbers of security forces in the streets. 
They also played the Shia card, an effective trump in Sunni-majority Saudi Arabia. 
The rulers argued that public protests throughout the region were being orchestrated by Shia Iran, and were anti-Sunni and sectarian. 
The threat of chaos, evident now in Libya, Syria, and Yemen, also weighed in the royal family’s favor. 
The House of Saud has a long historical claim on rule in Arabia, and its promise of stability remains key to its durability. 
A massive government subsidy package also accounted for domestic calm. 
Abruptly, some $130 billion was added to spending projections over the next five years. 
Salaries for all public servants, a majority of the national work force, were raised, as was the total number of public-sector jobs. 
King Abdullah pledged large numbers of new housing units, an important gesture in a country where young people, especially young married couples, cannot easily access the housing market. 
In neighboring Bahrain, the Saudis also moved quickly to bolster the Sunni-minority regime against a rising tide of protest led by the island kingdom’s Shia majority. 
Saudi troops marched into Bahrain under the banner of the Gulf Cooperation Council (GCC), and the Saudi rulers issued clear instructions to adopt an iron-fisted policy with the demonstrators, again arguing that Iran’s nefarious hand was at play in subverting the country. 
No doubt, the Saudis believe that a Shia-led Bahrain would lead to Iranian dominance at their very doorstep. 
Here, too, the Kingdom employed its policy of largesse through the GCC, promising Bahrain $10 billion over the next decade. 
Other large-scale financial commitments were made to Oman and Jordan, both Saudi allies that have managed to silence early whispers of mass protest. 
Farther away, in Libya and Syria, the Saudis have said little, perhaps to avoid picking the losing side in uncertain circumstances. 
The Kingdom has no love for Libyan leader Muammar el-Qaddafi, who tried to assassinate King Abdullah and has waged a concerted anti-Saudi propaganda campaign for at least a decade. 
The Saudis would surely like to see Qaddafi deposed, but they have no real stake in the Libyan uprising’s outcome. 
Closer to home, the Kingdom despises Syrian President Bashar al-Assad for his alliance with Iran and duplicity in Lebanon. 
But his fall would present the Saudis with the risk of a country led by the Muslim Brotherhood. 
Even worse is the prospect of Syria falling into chaos, dragging Lebanon – and maybe the broader region – with it. 
The Assad regime’s use of excessive force, especially the deliberate killing of thousands of mainly Sunni civilians, has nonetheless recently spurred a tougher stance. 
King Abdullah has called the killings unacceptable, and has withdrawn his ambassador from Damascus. 
The actual policy implications, however, remain to be determined. 
Neighboring Yemen is a much more immediate threat. 
The opposition is hopelessly divided, and the tribal and military leadership is utterly compromised. 
Ominously, the south is being taken over by hardcore Islamists, some allied with Al Qaeda. 
Throwing money around won’t work in Yemen, which is too large and complex to be pacified. 
In fact, the country is on the verge of total collapse. 
Today, the Saudis see 24 million Yemenis – hungry, heavily armed, and envious of Saudi wealth – looking across the border. 
If civil war erupts, the Saudis will not be able to stop the waves of refugees. 
But the Kingdom remains paralyzed, still wavering on whether to allow President Ali Abdullah Saleh, who is convalescing in Riyadh from injuries sustained in a bomb attack, to return to Sana to resume his rule. 
For all of their wealth and planning, the Saudis remain vulnerable to the turmoil surrounding them. 
At home, the legacy of Saudi family rule, fear of chaos, increased public spending, and abundant security forces have produced calm. 
But a modest political opening and economic diversification away from state-owned industry have been sacrificed. 
In Bahrain, things are quiet now as well, but the chances of further radicalization of the country’s Shia majority have increased, possibly benefiting Iran in the long run. 
Great change is coming to the Middle East. 
It is far from clear that a Saudi policy of stability at all costs will strengthen the regime. 

Why is Saudi Arabia at War in Yemen? 
RIYADH – Saudi Arabia has drawn a lot of criticism lately for its leading role in the war against Houthi rebels in Yemen. 
Some deride the Kingdom, the richest Arab state, for taking action against the poorest. 
Others have claimed that the fight against the Houthis – a Zaidi Shia-led religious-political movement – is just one element in a broader war on the Shia that Saudi Arabia has supposedly been waging. 
These are simplistic claims, reflecting a fundamental misunderstanding about the Kingdom’s role in Yemen – and, indeed, in the entire Arab world. 
Saudi Arabia is not out to get the Zaidis. 
In fact, it actively supported the Zaidi royal family in Yemen’s civil war in the 1960s. 
What the Kingdom has reacted to in Yemen is Iran’s cynical efforts to take advantage of Yemen’s internal conflict to build a military alliance with the Houthi rebels – an alliance with only one conceivable target: Saudi Arabia. 
Yet when Saudi officials tried to warn the international community about Iran’s activities in Yemen, it was met with denial. 
Western commentators, in particular, have twisted themselves into knots to avoid recognizing any Iranian involvement in the conflict, even as evidence to the contrary has mounted. 
In the last 18 months, the US Navy has intercepted four arms shipments from Iran to Yemen. 
Iran itself has claimed numerous times that it controls four Arab capitals, including Sana’a, and the Houthis have become closely tied with Hezbollah, Iran’s Lebanese political and military proxy. 
In fact, Hezbollah’s leader Hassan Nasrallah has claimed the Houthi cause as his own, allowing Houthi media to set up in Beirut’s southern suburbs and publicly welcoming Houthi fighters to train with his forces. 
The Houthis’ political slogans, propaganda, and modus operandi are all modeled after Hezbollah’s. 
The Saudi government entered the war in Yemen with its open eyes. 
Having fought the Houthis back in 2009, it had no illusions that this would be a cakewalk. 
Nor did it expect to have an instant impact with “shock and awe” tactics, as a former US ambassador to Yemen claimed. 
Saudi Arabia expected a messy, protracted, and expensive war, and that is what it has gotten. 
The fact that Saudi Arabia intervened thus highlights the severity of the threat it faced once the Houthis had overthrown Yemen’s legitimate government and seized control of Sana’a. 
Had Iran been allowed to solidify its alliance with the Houthis unobstructed, Northern Yemen would have become another South Lebanon, with an Iranian proxy actively working to subvert Saudi national security. 
Saudi Arabia had two clearly defined military objectives in Yemen. 
The first was to disrupt arms deliveries, making it much more difficult and costly – or, ideally, impossible – for Iran to supply the Houthis. 
The second was to send a clear message to the Houthis and their allies that an alliance with Iran would cost them dearly. 
Saudi Arabia has achieved both objectives. 
Yemen’s airports have been closed down and its seaports blockaded. 
With Iran now struggling to smuggle arms into Yemen, the flow of weapons has declined considerably. 
Meanwhile, Saudi Arabia has maintained a powerful air campaign against the Houthis. 
The costs of their alliance with Iran could not be clearer. 
But success in war never comes without sacrifice. 
And, unfortunately, Yemeni civilians have paid a high price, with an estimated 10,000 killed since the conflict began. 
For an air campaign waged for nearly two years against an unconventional army, this figure is not particularly high. 
The losses pale in comparison to, say, Syria, where the air campaign being carried out by Russian, Iranian, and Syrian forces racks up 10,000 civilian deaths in a matter of weeks. 
Moreover, claims that the Saudi coalition has intentionally targeted civilians – or infrastructure, for that matter – have not been substantiated by neutral parties. 
Anyone who has gained access to the battlefield has done so under Houthi oversight or control. 
And, in reality, it would not be in Saudi Arabia’s interest simply to destroy Yemen. 
After all, Saudi Arabia will probably have to provide the lion’s share of aid to Yemen once the war is over and the rest of the world has turned its attention elsewhere. 
Yet none of this diminishes the tragedy that these civilian casualties represent. 
It is a truly horrific situation that highlights the urgency of defeating the Houthis and ending the conflict in Yemen. 
But it makes little sense to cast blame on Saudi Arabia, which entered the conflict not to project power, but to neutralize an acute security – even existential – threat. 
Others may minimize the threats Saudi Arabia faces, but the Kingdom’s rulers know better. 
They see what Iran has done to Lebanon, Syria, and Iraq, and they hear what Iran and its allies say in their local media (never for Western consumption) about their hostile intentions toward the Kingdom and its rulers. 
If anything, Saudi Arabia has historically been willing to allow threats to reach a very high threshold – far higher than even a superpower like the United States would allow – before taking military action. 
For its own self-protection, Saudi Arabia will have to ensure that its embargo on Iranian military assistance to the Houthis in Yemen remains in place. 
If, say, the United Nations agreed to shoulder that responsibility, the war in Yemen could be ended very quickly, protecting civilians from further casualties. 
But if the world continues to deny Iran’s involvement in Yemen, and the threat that this poses to Saudi Arabia, the Kingdom will have little choice but to remain in Yemen. 
Its own safety depends on it. 

A Regulatory Race to the Bottom? 
DUBAI – Amid intense competition for the anticipated listing of Saudi Aramco – the world’s largest oil company, owned by the Saudi state – stock exchanges and financial-market regulators are under pressure to provide incentives for the company to dual-list its shares abroad. 
The United Kingdom’s Financial Conduct Authority (FCA) seems to be bowing to that pressure. 
Last month, the FCA issued a proposal to relax listing conditions for state-owned issuers wishing to qualify for the London Stock Exchange (LSE) Premium Listing Segment – the exchange’s “gold standard” segment, governed by stringent regulations. 
The proposal is presented as a mere technicality, but it is significant for reasons that extend beyond Saudi Aramco. 
In fact, it implies that regulators now believe that state-owned enterprises (SOEs) deserve special regulatory treatment. 
In its consultation paper, the FCA states that “sovereign owners tend to be different from private-sector individuals or entities both in their motivations and in their nature.” 
It is a valid assumption – and precisely the reason why SOEs should notbe given preferential regulatory treatment. 
Yet the FCA’s proposal would exempt SOEs accepted to the Premium Listing Segment from rules on related party transactions, if more than 30% of ownership is sovereign. 
In practice, this would mean that transactions between a listed SOE and the state would not be subject to the approval of minority shareholders. 
A listed SOE could therefore continue to perform social obligations unrelated to its core business, with shareholders unable to interfere. 
The debate over the FCA proposal reflects a broader struggle that has been going on in capital markets since 1993, when the Stockholm Stock Exchange was converted into a privately held firm. 
After that, developed-country stock exchanges increasingly functioned as profit-oriented utility companies, rather than as sources of national pride, like airlines or sport teams. 
As this shift has taken place, some powers were removed from stock exchanges, in order to safeguard against potential conflicts of interests, including the temptation to dilute regulatory standards to secure profitable listings. 
These powers were transferred to financial regulators, who were assumed to be sufficiently independent and therefore insulated from political pressure. 
The FCA proposal suggests that this assumption may no longer be credible, at least not in a United Kingdom hurtling toward Brexit, which has put the City of London’s reputation as a leading global financial center at risk. 
The question is whether this proposal is indicative of a new regulatory race to the bottom – and, if so, what consequences investors might face. 
To put matters into context, emerging-market companies account for a majority of the capital raised globally – 63% in 2008-2011, according to OECD estimates. 
SOEs account for 23% of total emerging-market capitalization, compared to a global average of 13%. 
International stock exchanges remain of interest to large emerging-market companies, including SOEs, which may be unable to attract sufficient foreign institutional investors at home. 
Already, a number of blue chip Middle Eastern corporates are listed on the LSE, though none complies with the Premium Listing Segment requirements. 
Moreover, governments in a growing number of emerging-market economies in the Middle East and elsewhere are considering privatizing energy and industrial SOEs. 
For example, Abu Dhabi’s national oil company, ADNOC, has announced plans to list its own retail business. 
That is why the FCA is looking to introduce a structural exemption, instead of simply making an exception for Saudi Aramco. 
Yet SOEs carry particular governance risks, exemplified in the corruption investigation into Brazil’s Petrobras, which is listed domestically and on the New York Stock Exchange. 
The retreat of government-linked companies from Russia and Central Asia from the LSE in recent years reflects similar risks. 
The FCA proposal assumes that “investors and the market are sufficiently able to assess the additional risks arising from sovereign ownership.” 
But this is questionable. 
Leading international marketplaces are dominated by institutional investors, a growing share of which are passive index followers that lack incentives to invest in governance oversight. 
Last year alone, passive funds grew 4.5 times faster than actively managed funds, narrowing the gap between the $23.9 trillion in actively managed assets and $6.7 trillion in passively managed assets. 
The rise of passive investors, such as Vanguard Asset Management, is facilitated by the same regulators who are encouraging the relaxation of listing standards for SOEs, as they seek to ensure lower management fees in the asset-management industry. 
With the expansion of passive investing set to continue, it is plausible that international institutional investors will have even less incentive to monitor governance in the long term. 
But active institutional investors may also be unable to play a stewardship role. 
For example, Norwegian Government Pension Fund Global, the world’s largest sovereign-wealth fund, has complained about Snapchat’s inclusion in the FTSE, which prevents it from voting its shares, even as it is forced to invest, since it tracks the index. 
While the inclusion of SOEs in the LSE’s Premium Listing Segment does not guarantee their inclusion in the FTSE – the latter requires 50% free float for non-UK issuers – one derogation could pave the way for another. 
And, in fact, without inclusion in the FTSE, the motivation for listing SOEs in the LSE’s Premium Listing Segment is unclear. 
In any case, if listed SOEs are included in global indexes, investors would be exposed to companies that can transact with their government owners, without consulting other shareholders. 
While it may seem excessive to require the Saudi government, which owns 95% of Aramco, to consult with the remaining shareholders, an LSE Premium Listing usually requires just 25% equity. 
The FCA proposal to give preferential treatment to SOEs clearly puts institutional investors at risk. 
This is the case for developed-economy investors, who may follow indexes or lack the resources to engage in stewardship with politically powerful SOEs. 
And it may be the case for emerging-market investors, if local regulators or exchanges also exempt SOEs from corporate-governance requirements. 
The political economy of capital markets today does not reward those who resist a regulatory race to the bottom. 
The ball is in the regulators’ court. 

Saudi Arabia’s Perilous Pivot 
JERUSALEM – “The most dangerous moment for a bad government,” the nineteenth-century French statesman and historian Alexis de Tocqueville observed, “is usually when it begins to reform itself.” 
Reform, after all, implies that traditional norms and institutions may have already been discredited, but that alternative structures have yet to be firmly established. 
Tocqueville’s classic example was the regime of Louis XVI, whose attempts at reform quickly led to the French Revolution, and to his own execution in 1793. 
Another example is Mikhail Gorbachev’s effort to reform the Soviet Union in the 1980s. 
By the end of 1991, the Soviet Union had collapsed and Gorbachev was out of power. 
Today, something similar could very well happen to the young Saudi crown prince, Mohammed bin Salman (widely known as MBS), as he takes steps to modernize his country. 
Saudi Arabia has long maintained (relative) internal stability by spreading its enormous oil wealth among its subjects, and by imposing on Saudi society fundamentalist Islamic doctrines based on the austere Wahhabi tradition. 
After the Kingdom’s founding in 1932, many Saudis enjoyed unprecedentedly high standards of living, and hundreds of members of the Saudi royal family were transformed from desert sheikhs into enormously rich members of the international moneyed elite. 
Various sons of the regime’s founder, Abdulaziz Ibn Saud, succeeded each other as rulers a kingdom that, following Arab tradition, bore the name of its founding and ruling dynasty (another is the current Hashemite Kingdom of Jordan). 
In recent years, however, the Saudi regime has had to worry about its future. 
Plummeting oil prices followed the 2011-2012 Arab Spring, which brought down rulers in Tunisia, Egypt, Libya, and Yemen, and seriously challenged the al-Assad family’s rule in Syria. 
MBS, for his part, has gotten the message: Since being named crown prince in June 2017, he has introduced sweeping reforms to the Saudi system. 
Some of MBS’s actions have garnered favorable international press coverage, not least his decrees allowing women to drive and curtailing the power of the religious police, who have long enforced public dress codes. 
These are positive steps toward emancipating the Kingdom from the more oppressive elements of Wahhabism. 
So, too, are the crown prince’s statements calling for more tolerance of Christian, Jewish, and other non-Muslim communities, as well as his strengthening of ties with Israel. 
Still, other new policies could prove problematic. 
MBS’s plan for diversifying the Saudi economy to reduce its dependence on oil is still on the drawing board. 
But, in the meantime, he has launched a (euphemistically named) “anti-corruption” campaign that has raised red flags for outside observers. 
Since last November, MBS has had hundreds of members of the Saudi elite – including princes and businessmen with international profiles – arrested on dubious grounds, and with no regard for the rule of law. 
To be sure, Saudi Arabia lacks a basic code of laws or legally enshrined rights. 
And many frustrated Saudis might welcome the fact that those rounded up in the purge have agreed, under duress, to “return” some of their obviously ill-gotten fortunes to the treasury – which, of course, is controlled by the crown prince. 
But even if MBS succeeds in shoring up his power and endearing himself to the people in the short term, it has become clear that he intends to rule as an authoritarian despot when he succeeds his father, King Salman bin Abdulaziz al-Saud. 
This would be a radical departure from the Kingdom’s tradition of power-sharing among princes within a highly decentralized system. 
MBS’s hardnosed political style also has international implications. 
For starters, he has taken an increasingly tough line against Iran and that country’s regional ambitions, thus exacerbating the Sunni-Shia divide. 
MBS’s approach – which includes ill-informed statements comparing the Iranian regime to Nazi Germany – has the support of other Sunni countries such as Egypt and Jordan, and from US President Donald Trump and Israeli Prime Minister Binyamin Netanyahu. 
But it hardly bodes well for the region’s stability. 
Moreover, MBS’s military intervention in Yemen has been a failure, and his decision to impose an embargo on Qatar – a small but wealthy Gulf country that challenges Saudi hegemony – has backfired. 
Similarly, his attempt late last year to depose Lebanese Prime Minister Saad Hariri ended in a fiasco. 
It is hard to say where Saudi Arabia may be heading. 
The country certainly needs comprehensive reforms. 
But the jury is still out on whether MBS’s approach is the right one. 
If he succeeds, he will emerge with a reputation as a reformer. 
Yet he clearly is not interested in establishing representative institutions or strengthening the rule of law, so his country will have become a personal dictatorship. 
Alternatively, MBS’s authoritarian tendencies and embarrassing foreign-policy failures might provoke internal opposition, both from the traditional elites he has vowed to decimate, and from the sizeable Shia minority in the Kingdom’s Eastern Province, whose members may look to Iran as a protector. 
And, on the international front, MBS’s escalation with Iran could spin out of his control. 
Despite its recent weapons purchases from the US, Saudi Arabia would still be outmatched in a military confrontation with Iran. 
If such a confrontation does take place, one must hope that it will not lead to a wider regional war. 

Saudi Arabia’s Shock Therapy 
BEIRUT – Saudi Arabia has long relied on oil to fuel its economic growth and development. 
Last year, oil accounted for about three-quarters of the Kingdom’s total export revenues and around 90% of government revenue. 
But the recent collapse in oil prices highlighted what should long have been clear: Saudi Arabia, like the other oil and gas rich nations of the Middle East, needs a more diverse development model. 
Since oil prices began to drop in mid-2014, Saudi Arabia has experienced a sharp decline in GDP growth, as well as lower liquidity and credit growth. 
Fiscal and current-account surpluses were transformed into deficits. This year, the two deficits are expected to reach 13% and 6.4% of GDP, respectively. 
Moreover, despite past growth, the Kingdom’s real national wealth has declined. 
Oil revenues, as is the case elsewhere in the region, were not efficiently transformed into human capital, infrastructure, and the innovative capacity needed to generate productivity growth and diversify economic activity. 
So, beyond adjusting to the “new normal” in oil prices, Saudi Arabia must design a radically new economic model that addresses structural impediments to productivity and growth. 
It is a tall order, one that most governments would pursue gradually. 
But Deputy Crown Prince Mohammad bin Salman’s National Transformation Program (NTP), announced last June, suggests that Saudi Arabia will take the opposite approach, subjecting the economy to a kind of shock therapy. 
In a 110-page list of policies and targets for ministries and governmental bodies to pursue in 2016-2020, the NTP identifies 543 specific reforms, with a price tag of SAR270 billion ($72 billion), excluding adjustment costs by the private sector. 
And, in fact, the crux of the proposed reforms is to expand the private sector’s role in the state-dominated economy, thereby creating more employment in higher-productivity areas. 
Financing the reforms – not to mention a massive $2 trillion public investment fund to support a post-oil economy – will require improved efficiency, rapid privatization, effective public-private partnerships, broad-based taxation (including a value-added tax of 5%, to be introduced in 2018), and spending cuts on existing infrastructure projects. 
All of this will need to be achieved efficiently, in order to facilitate the government’s other key goal: a balanced budget by 2020. 
The specific policy targets are tremendously ambitious. 
Saudi leaders will first partly privatize the Saudi Arabian Oil Company (Aramco), and establish the investment fund. 
They will also gradually reduce energy subsidies, in order to promote a shift away from energy-intensive activities. 
The plan includes specific targets to increase the contributions of real estate, information technology, services, tourism, and the defense and pharmaceutical industries to GDP. 
If the NTP is to deliver greater economic diversification, Saudi Arabia will need to harness high value-added, export-led growth and, eventually, greater regional and international integration. 
The program lays the necessary groundwork with plans to reform education to promote innovation and meet the needs of a changing labor market. 
Specifically, the NTP includes plans to achieve a 15% increase in mathematics and English-language attainment levels within five years, to be followed by an increasing focus on “STEM” subjects (science, technology, engineering, and mathematics). 
The NTP also aims to increase female labor-force participation, from 22% today to 28% by 2020. 
That, together with improved support and opportunities for the fast-growing population of young people, should reduce the unemployment rate from 11.6% to 9% in the next five years. 
From subsidy cuts to a lower public-sector wage bill, the NTP reforms effectively represent a new social contract for the Kingdom. 
The plan is thus a kind of “long march,” requiring effective public-private cooperation, broad public buy-in, and an explicit communication strategy to implement deep economic restructuring supported by fiscal and other macro-policy reforms. 
There is some precedent for this strategy: the oil-rich countries of Norway, Malaysia, Indonesia, and Mexico have all diversified their economies. 
But the external context in which those countries reformed – characterized by surging globalization and rapid growth – was very different from that prevailing today. 
And the transformations still took up to 20 years. 
The implementation of the NTP, by contrast, will be a race against time and a fight against the external headwinds of low oil prices, a weaker global economy, and retreat from globalization. 
Moreover, short-term domestic growth is likely to be stifled by policy uncertainty, fiscal consolidation, the immediate impact of reforms, and the needed reversal of the country’s monetary- and fiscal-policy stances, from pro- to counter-cyclical. 
Whether Saudi Arabia can meet these challenges remains uncertain. 
Success will depend, for example, on the economy’s absorptive capacity and the government’s institutional competence. 
It will also depend on the country’s ability to galvanize the energies and ambitions of impatient young Saudis and unleash private investors’ “animal spirits.” 
To succeed, Saudi Arabia will have to take additional steps. 
It should liberalize the foreign direct investment regime, allowing 100% foreign ownership in select cases, attract and retain foreign talent through the proposed “green card” immigration policy, and promote openness and tourism through an “open skies” policy. 
Moreover, domestic capital markets are needed for financing infrastructure and government deficits. 
And the country should embrace the disruptive power of financial technology and establish a second-tier stock exchange, which would advance financial inclusion and facilitate access to finance for dynamic small and medium-size firms. 
As if these macro-reforms were not enough, the NTP will also require a gradual move to a civil law system for managing the economy and business. 
And the new social contract will need to be accompanied by increased transparency and accountability from the public sector and greater public engagement. 
The NTP embodies the Saudi leadership’s awareness of the challenges it faces – and its willingness to tackle them. 
But the only certainty is that there will be many a slip twixt the cup and the lip on the long road to Saudi Arabia’s economic transformation. 

Savable Africa 
The G-8 Summit in Scotland in early July will bring together the political leaders of the richest countries to consider the plight of the poorest countries. 
So far, President George W. Bush has resisted Prime Minister Tony Blair’s call for a doubling of aid to Africa by 2010. 
This is a tragic mistake, one that results from a misunderstanding of the challenges facing Africa and of America’s responsibilities. 
American policy is based overwhelmingly on the idea that Africa can lift itself out of extreme poverty through its own efforts, that aid is largely misused because of corruption, and that the United States already gives generous amounts. 
This is wrong on all counts: Africa is trapped in poverty, many countries are well poised to use aid effectively, and America’s contribution is tiny relative to Africa’s needs, America’s promises, and America’s wealth. 
Africa suffers simultaneously from three challenges that trap it in poverty. 
First, Africa does not grow enough food. Unlike Asia, Africa did not have a Green Revolution in food production. 
In 1965, India averaged 854 kilograms of grain per hectare in use, while Sub-Saharan Africa averaged almost the same, 773 kilograms per hectare. 
But, by 2000, India was producing 2,293 kilograms per hectare, while Africa was producing only 1,118. 
Second, Africa suffers from disease unlike any other part of the world. 
Africa’s AIDS pandemic is well known; its malaria pandemic, which will claim three million lives and a billion illnesses this year, is not. 
India controlled malaria after the 1960’s, while Africa did not, one reason being that Africa’s malaria-bearing mosquitoes are particularly adept at transmitting the disease. 
Third, Africa is economically isolated, owing to very poor infrastructure, large over-land distances, and many landlocked countries. 
These geographical barriers keep much of Africa, especially rural Africa, out of the mainstream of international trade. 
Without the benefits of trade, much of rural Africa struggles at subsistence levels. 
Bush might think that America is doing a lot to help overcome these problems, but the truth is that US aid is minimal. 
Blair’s Africa Commission, as well as the UN Millennium Project, found that Africa needs about $50 billion per year in aid by 2010. 
America’s fair share of the total is about $15 billion per year. 
Yet official US aid to Africa is only $3 billion per year, and much of that covers salaries for American consultants rather than investments in Africa’s needs. 
This tragically small sum amounts to just three cents for every $100 of US gross national product, which is less than two days of US military spending. 
Not only is US aid a tiny fraction of what it should be, but American explanations for the lack of aid are wrong. 
Bush and others imply that Africa wastes the aid through corruption. 
But impoverished and slow-growing African countries like Ghana, Senegal, Mali, Benin, and Malawi are ranked as having less corruption than fast-growing Asian countries like Vietnam, Bangladesh, and Indonesia. 
Indeed, America’s own Millennium Challenge Account has already recognized such African countries for their strong governance. 
Good governance surely will help in Africa and elsewhere, but corruption should not be used as an excuse not to help Africa. 
On hunger, the key is to help Africa achieve its own Green Revolution. 
Rich countries should help African farmers use improved seed varieties, more fertilizer, and better water management, such as small-scale irrigation. 
The techniques are known, but Africa’s farmers are too poor to get started. 
With increased help to African farmers to grow more food (as opposed to shipping food aid from the US), it would be possible to double or even triple crop yields. 
On disease, malaria could be controlled by 2008 using proven, low-cost methods. 
But, again, Africa cannot afford them. 
The first goal should be to distribute long-lasting insecticide-treated bed nets to all of Africa’s rural poor within four years. The best estimates show that Africa needs about 300 million bed nets, and that the cost per net (including shipping) is around $10, for a sum of $3 billion. 
This cost would be spread over several years. 
In addition, Africa needs help with anti-malaria medicines, diagnostic equipment, and training of community health workers. 
On economic isolation, Africa needs help with the basics – roads and ports – but there is also an opportunity to “leapfrog” technology. Cell phones and Internet connectivity could reach all of Africa at low cost, ending the economic isolation of hundreds of millions of people. 
Some reasonable estimates put the cost at around $1 billion for an Africa-wide fiber-optic network that could bring Internet connectivity and telephone service across the continent’s villages and cities. 
Africa is ready to break out of poverty if the US and other rich countries help. 
Europe appears poised to do more, while the US appears to be the main obstacle. 
The G-8 Summit provides an opportunity for the US, which will spend $500 billion on its military this year, to make a lasting – and certainly more cost-effective – contribution to global security by saving millions of lives in Africa and helping its people escape extreme poverty. 

Save our Soils 
BERLIN – The United Nations has declared 2015 to be the International Year of Soils, and April 19-23 marks this year’s Global Soil Week. 
Such events, though not exactly glamorous, do not receive nearly the amount of attention they deserve. 
Intact soils are an invaluable and irreplaceable resource, one that performs myriad functions in achieving the international community’s main development and environmental goals. 
And now they are in urgent need of protection. 
Healthy soils are crucial to human nutrition and the fight against hunger. 
We rely on them not only for food production, but also to create new drinking water. 
They help to regulate Earth’s climate, storing more carbon than all of the world’s forests combined (only the oceans are a larger carbon sink), and are essential to maintaining biodiversity: a handful of fertile soil contains more microorganisms than there are humans on the planet. 
Two-thirds of Earth’s species live beneath its surface. 
But erosion and contamination are placing soils under severe stress. 
Worldwide, 24 billion tons of fertile soil is lost annually, partly owing to the growth of cities and infrastructure. 
In Germany alone, construction projects claim an average of more than 75 hectares per day. 
Inappropriate agricultural practices are also to blame: the liberal use of synthetic fertilizer, for example, decimates organisms inhabiting the soil and changes its structure. 
It takes millennia for fertile topsoil to form; in many places, a cloudburst is now all it takes to wash it away. 
At the same time, global demand for food, fodder, and biomass for fuels is growing, in turn driving up the value of land – a fact that has not escaped international investors’ attention. 
According to a World Bank estimate, 10-30% of arable land worldwide – land that would be used by millions of smallholders, pastoralists, and indigenous people – has been affected by large-scale investment. 
The struggle to secure land rights for individuals and communities has thus become a matter of survival in much of the world. 
Access to land is one of the key determinants of hunger, and it is even more unequally distributed than income. 
Some 20% of households affected by hunger are landless, and 50% of food-stressed households are smallholder families. 
In Europe, we have long since outgrown our domestic agricultural land, so now we “import” it on a grand scale from the global South. 
Just producing the fodder needed to cover the European Union’s meat consumption requires an area of agricultural land in Brazil the size of the United Kingdom. 
If every human ate as much meat as the average EU citizen, 80% of the world’s arable land would have to be dedicated to producing it, compared to 33% currently. 
And let us be clear: given that 100 calories of fodder produce at most 30 calories of meat, using fertile land for this purpose is sheer waste. 
This trend will be exacerbated to the extent that the “green growth” that many governments are promising relies on biofuels to replace fossil fuels like oil and coal. 
Biofuels do not benefit the climate nearly as much as wind or solar energy systems, yielding only one-tenth the energy per square meter. 
As a result, the biofuel requirements contained in the EU’s 2030 Framework for Climate and Energy would need a further 70 million hectares of land – an area larger than France. 
Protecting soils need not undermine prosperity. 
On the contrary, sustainable soil-protection practices can actually boost agricultural yields – especially those of smallholders. 
Crop diversification, recycling, and soil cover can all contribute to living, fertile, and active soil capable of optimal water management. 
One approach, so-called agro-ecology, is based on small farmers’ traditional knowledge and experience, making it readily adaptable to local conditions. 
A study of agro-ecological farming practices by Jules Pretty in 2006 examined 286 sustainable agricultural projects in 57 countries and concluded that yields had increased an average of 79%. 
Despite the proven success of such methods, the use of synthetic fertilizers has increased by a factor of more than five over the past 50 years, and many African governments spend up to 60% of their agricultural budgets to subsidize them. 
Particularly in tropical environments, such products lead to the destruction of the topsoil and biodiversity loss (and the runoff is transported to the oceans, where it damages marine ecosystems). 
And, though their main component, nitrogen, could be produced biologically and sustainably, that would run counter to the interests of a handful of powerful fertilizer producers and distributors. 
Policymakers must address the following question: How can poor people produce enough food to escape hunger and destitution in a manner that protects soils, mitigates climate change, and preserves biodiversity? 
Despite the issue’s urgency, approaches like agro-ecological production are not being promoted to any serious extent anywhere. 
Events like the International Year of Soils and Global Soil Week offer an opportunity to change that – from the ground up. 

Saving Europe By Reversing Brexit 
LONDON – “Never let a crisis go to waste” has always been one of the European Union’s guiding principles. 
But what about five simultaneous crises? 
Today, the EU faces what Frans Timmermans, European Commission Vice President, describes as a “multi-crisis”: Brexit, refugee flows, fiscal austerity, geopolitical threats from East and South, and “illiberal democracy” in central Europe. 
Rather than wasting its crises, the EU could be laid to waste by them. 
If so, Brexit will be the detonator for that demolition. 
By legitimizing the concept of an EU breakup, and thus turning a fantasy among political extremists into a realistic option of mainstream politics throughout Europe, Brexit threatens to trigger an irresistible disintegration process. 
It will also transform economics, by paralyzing the European Central Bank in the next euro crisis: while the ECB can always defeat market speculation, it is powerless against breakup pressures from voters. 
The EU therefore urgently needs to put the genie of disintegration back in its bottle. 
That means persuading Britain to change its mind about Europe, which, according to conventional wisdom on both sides of the English Channel, is impossible. 
But many “impossible” things are happening in politics nowadays. 
The referendum majority on June 23 was much narrower than that in Scotland’s 2014 independence referendum, or the negative votes on EU treaties in Ireland, Denmark, and the Netherlands, all of which were subsequently reversed. 
More important, the 52% who voted for Brexit were sharply divided in their aims, with some prepared to accept economic sacrifice for a “hard Brexit” (total separation from Europe), and others hoping for a “soft Brexit” that would minimize the impact on the UK economy. 
According to post-referendum polling, three-quarters of “Leave” voters expect Britain’s economy either to strengthen or to be unaffected by Brexit, and 80% believe the government will have more money to spend on public services as a result of their vote. 
Brexit voters are so optimistic because they were told (most prominently by current Foreign Secretary Boris Johnson) that Britain could “have our cake and eat it” – a new deal that would preserve all of the economic benefits of EU membership with none of the obligations or costs. 
When these expectations are disappointed, public opinion will change. 
Already, 66% of voters say maintaining market access is more important than restricting immigration, if Britain cannot have both. 
This directly contradicts Prime Minister Theresa May’s stated priorities – and probably explains why she refuses to talk about her Brexit strategy. 
Because public expectations of an economically innocuous soft Brexit will be impossible to reconcile with the rejection of all EU obligations demanded by the Conservative Party’s “hard Brexit” faction, May cannot win. 
Whichever course she chooses, she will antagonize half her party and a large proportion of Brexit supporters, not to mention the 48% of voters who want to stay in the EU. 
Once this backlash starts, plenty of ambitious Conservative politicians whom May purged from government will be eager to exploit it. 
Already, George Osborne, immediately sacked as Chancellor of the Exchequer when May took office, has thrown down the gauntlet, challenging her democratic mandate: “Brexit won a majority. 
Hard Brexit did not.” 
Even the weakness of Britain’s opposition parties works against May, allowing opponents to plot against her, secure in the knowledge that they cannot lose power. 
All this implies that British politics will become very fluid as economic conditions deteriorate and voters start to change their minds. 
The EU should encourage such second thoughts, which means that it must stop treating Brexit as inevitable and instead offer the possibility of a compromise that would meet British voters’ concerns, but only on the condition that Britain remains in the EU. 
The obvious way to accomplish this would be to conclude an EU-wide agreement on greater national control over immigration and other symbolic issues related to national sovereignty. 
Such an agreement need not be seen as a concession to British blackmail if it were extended to all EU countries and presented as a response to public opinion throughout the Union. 
By making a virtue of its response to democratic pressures, the EU could regain Europe-wide support. 
But to send a positive message to voters, European leaders will have to rediscover the knack for pragmatic compromise and inter-governmental bargaining that used to be the hallmark of EU diplomacy. 
For starters, defusing both Brexit and the refugee crisis will require some modest changes in immigration and welfare rules. 
Such reforms, which would be popular in almost all member countries, need not conflict with the EU’s founding principles if they preserve the right to work throughout Europe, but return some control over non-economic migration and welfare payments to national governments. 
Second, the interaction of the refugee and euro crises demands new fiscal rules. 
Dealing with immigrants is expensive and should ideally be funded by mutually guaranteed EU bonds. 
Alternatively, Mediterranean countries must be offered budgetary leeway, in exchange for assuming front-line responsibility for immigration controls. 
Third, the need for immigration reform, combined with “illiberal democracy” in Central Europe, calls for changes in EU spending priorities and foreign policy. 
Poland and other countries will accept restrictions on their citizens’ mobility only if offered additional structural funds and stronger security cooperation. 
Such incentives, in turn, could provide more levers to ensure respect for human rights. 
Finally, restoring the EU’s democratic legitimacy means ending the institutional tensions between the eurozone and the broader EU. 
The EU authorities must acknowledge that many member countries will never join the euro, which means abandoning their rhetoric about a “two-speed Europe,” with all heading – whether at high or low speed – toward the “ever closer union” that a single currency implies. 
Instead, the EU must reshape itself into two concentric circles: an inner core committed to deeper integration, and an outer ring whose voters have no interest in a single currency and a shared fiscal space. 
Such reforms may seem impossible, but EU disintegration seemed impossible before the Brexit vote. 
In revolutionary periods, the impossible can become inevitable in a matter of months. 
This week, former French President Nicolas Sarkozy called unexpectedly for a new European treaty and a second British referendum on its EU membership. 
In Europe, a revolutionary period has begun. 

Save the Emerging Markets 
CAMBRIDGE – If the world were fair, most emerging markets would be watching the financial crisis engulfing the world’s advanced economies from the sidelines – if not entirely unaffected, not overly concerned either. 
For once, what has set financial markets ablaze are not their excesses, but those of Wall Street. 
Emerging markets’ external and fiscal positions have been stronger than ever, thanks to the hard lessons learned from their own crisis-prone history. 
We might even have allowed these countries a certain measure of schadenfreude in the troubles of the United States and other rich countries, just as we might expect kids to take perverse delight from their parents’ getting into the kinds of trouble they so adamantly warn their children against. 
Instead, emerging markets are suffering financial convulsions of possibly historic proportions. 
The fear is no longer that they will be unable to insulate themselves. It is that their economies could be dragged into much deeper crises than those that will be experienced at the epicenter of the sub-prime debacle. 
Some of these countries should have known better and might have protected themselves sooner. 
There is little excuse for Iceland, which essentially turned itself into a highly leveraged hedge fund. 
Several other countries in Central and Eastern Europe, such as Hungary, Ukraine, and the Baltic states, were also living dangerously, with large current-account deficits and firms and households running up huge debts in foreign currency. 
Argentina, the international financial system’s enfant terrible , could always be relied on to produce a gimmick to spook investors – in this case a nationalization of its private pension funds. 
But financial markets have made little distinction between these countries and others like Mexico, Brazil, South Korea, or Indonesia, which until just a few weeks ago appeared to be models of financial health. 
Consider what has happened to South Korea and Brazil. 
Both economies have experienced currency crises within recent memory – South Korea in 1997-1998 and Brazil in 1999 – and both subsequently took steps to increase their financial resilience. 
They reduced inflation, floated their currencies, ran external surpluses or small deficits, and, most importantly, accumulated mountains of foreign reserves (which now comfortably exceed their short-term external debts). 
Brazil’s financial good behavior was rewarded as recently as April of this year when Standard & Poor’s raised its credit rating to investment-grade. 
(South Korea has been investment-grade for years.) 
But both are nonetheless getting hammered in financial markets. 
In the last two months, their currencies have lost around a quarter of their value against the US dollar. Their stock markets have declined by even more (40% in Brazil and one-third in South Korea). 
None of this can be explained by economic fundamentals. 
Both countries have experienced strong growth recently. 
Brazil is a commodity exporter, while South Korea is not. 
South Korea is hugely dependent on exports to advanced countries, Brazil much less so. 
They and other emerging-market countries are victims of a rational flight to safety, exacerbated by an irrational panic. 
The public guarantees that rich countries’ governments have extended to their financial sectors have exposed more clearly the critical line of demarcation between “safe” and “risky” assets, with emerging markets clearly in the latter category. 
Economic fundamentals have fallen by the wayside. 
To make matters even worse, emerging markets are deprived of the one tool that the advanced countries have employed in order to stem their own financial panics: domestic fiscal resources or domestic liquidity. Emerging markets need foreign currency and, therefore, external support. 
What needs to be done is clear. 
The International Monetary Fund and the G7 countries’ central banks must act as global lenders of last resort and provide ample liquidity – quickly and with few strings attached – to support emerging markets’ currencies. 
The scale of the lending that is required will likely run into hundreds of billions of US dollars, and exceed anything that the IMF has done to date. 
But there is no shortage of resources. 
If necessary, the IMF can issue special drawing rights (SDRs) to generate the global liquidity needed. 
Moreover, China, which holds nearly $2 trillion in foreign reserves, must be part of this rescue mission. 
The Chinese economy’s dynamism is highly dependent on exports, which would suffer greatly from a collapse of emerging markets. 
In fact, China, with its need for high growth to pay for social peace, may be the country most at risk from a severe global downturn. 
Naked self-interest should persuade the advanced countries as well. 
Collapsing emerging-market currencies, and the resulting trade pressures, will make it all the more difficult for them to prevent their unemployment levels from rising significantly. 
In the absence of a backstop for emerging-country finances, the doomsday scenario of a protectionist vicious cycle reminiscent of the 1930’s could no longer be ruled out. 
The United States Federal Reserve and the International Monetary Fund have both taken some positive steps. 
The Fed has created a swap facility for four countries (South Korea, Brazil, Mexico and Singapore) of $30 billion each. 
The IMF has announced a new quick-dispersing short-term facility for a limited number of countries with good policies. 
The questions are whether these will be enough and what happens to those countries that will not be able to avail themselves of these programs. 

Saved by Taxes 
What do we owe to our great-great-great-grandchildren? 
What actions are we obligated to take now in order to diminish the risks to our descendants and our planet from the increasing likelihood of global warming and climate change? 
Almost everyone – except the likes of ExxonMobil, US Vice President Dick Cheney, and their paid servants and deluded acolytes – understands that when humans burn hydrocarbons, carbon dioxide goes into the atmosphere, where it acts like a giant blanket, absorbing infrared radiation coming up from below and warming the earth. 
Likewise, almost everyone understands that while global warming might be a much smaller or larger problem than existing models suggest, this uncertainty is no excuse for inaction. 
In fact, uncertainty about global climate change should lead us to do more to guard against it than if we knew it would proceed exactly according to the central-case projections. 
Finally, almost everyone agrees that governments, non-profit institutions, and energy companies should be spending far more to develop technologies that generate non-carbon-emitting power, that remove it from the atmosphere to forests or oceans, and that cool the earth by reflecting more of the sunlight that lands on it. 
Clearly, the world’s rich countries should carry the burden of dealing with climate change over the next generations. 
After all, they could take an easy, emissions-intensive path to industrialization and wealth. 
Today, China, India, and other developing countries cannot, and it would be unfair to penalize them for that. 
So now is the time to build, not disrupt or impede, the international institutions that will manage our response to global climate change in the years ahead. 
But should we be doing anything else now and in the next decade? 
Economists like to think of things in terms of prices. 
And when economists see behavior that has destructive side effects, we like to tax it. 
Taxation makes individuals feel in their wallets the destruction they are causing. 
Imposing a tax on those who, say, drive low-mileage SUV’s is a way of harnessing humanity’s collective intelligence to decide when bad side effects are a reason to alter behavior. 
But it has to be the right tax. 
An SUV going ten miles in the city and burning a gallon of gasoline pumps about three kilograms of carbon into the atmosphere. 
Should the extra “global warming” tax be $0.05 a gallon, $0.50 a gallon, or $1.50 a gallon? 
Our views will change as we learn more, but at the moment the size of the tax hinges on a question of moral philosophy: how much do we believe we owe our distant descendents? 
The Australian economist John Quiggin has an illuminating discussion on his website ( http://johnquiggin.com ) that comes down on the side of a $0.50/gallon tax, because he projects that spending today to reduce carbon emissions is a good investment for the future. 
Assuming that annual per capita income grows at about 2% per year worldwide, a marginal expenditure of roughly $70 today to cut carbon emissions would be worth it if, accounting for damage from global warming and adjustment costs, the world of 2100 would be $500 richer in year-2006 purchasing power. 
On the other hand, critics point out that the world today is poor: average annual GDP per capita at purchasing power parity is roughly $7,000. 
We expect improved technology and its spread to make the world of 2100, at a 2% annual growth rate, much richer: $50,000 per capita of year-2006 purchasing power. 
So the critics argue that we need the marginal $70 per capita today much more than the richer people of 2100 will need the $500 that they would gain from being spared the effects of global climate change. 
But what the critics often don’t say is that the same logic applies to the world today. 
Average annual per capita incomes in the US, Japan, and Western Europe are currently around $40,000, and less than $6,000 for the poorer half of the world’s population. 
The same logic that says we need our $70 more than the people of 2100 need an extra $500 dictates that we should tax the world’s rich more, as long as each extra $500 in first-world taxes generates as little as an extra $70 in poor countries per capita incomes. 
In short, if the world’s rich are stingy today toward our much richer descendants, and if we want to leave our environmental mess to them to deal with, we should be lavish toward the world’s poor. 
Likewise, if we are stingy today toward the world’s poor, we should be lavish toward our descendents. 
At least, that is what we should do, if our actions are based on some moral principle, rather than that of Leonid Brezhnev: what we have, we hold. 

Saving a World that Doesn't Save 
Around the world, social security and health care are today's hottest economic issues due to the rising dependency ratio : the proportion of elderly people relative to younger, economically active, workers. 
According to the Population Resource Center, this ratio will double in the world's more developed regions and triple in less developed regions by 2050. 
With so many more old people in coming decades, governments will be hard pressed to raise enough money to pay for their needs by taxing the young. 
None of this is news. 
But that is the point: despite the vast attention currently paid to the looming old-age crisis, household saving rates have been falling in most of the world's rich countries. 
Why aren't people saving more for their future retirement? 
Why are they actually doing the opposite by saving less ? 
According to a recent study by the Organization for Economic Cooperation and Development (OECD), household saving rates declined between 1984 and 2001 in Australia, Austria, Belgium, Canada, Finland, Italy, Japan, Korea, New Zealand, Portugal, Spain, the United Kingdom, and the United States. 
In some countries, the decline has been dramatic: in the US during this period, the annual household saving rate - expressed as the share of disposable income - fell from 10.6% to 1.6%. 
One might think that, with declining birthrates in rich countries in recent decades, it should be easy to save more. 
Fewer children mean fewer expenses, and adults can work longer to earn extra income beyond their immediate needs. 
So why have so many different countries experienced a decline in savings? 
The answer must be that people do not decide whether to increase their savings on the basis of careful calculations about their future needs. 
The decision to stop spending and save stems from more immediate concerns, and we have to look at the economic factors - common to many countries of the world - that play on those concerns. 
A study in 2000 of saving rates in 150 countries, headed by Norman Loayza at the World Bank, found that some basic economic factors explained much of the variation in national saving rates, without any reference to cultural differences. 
Surprisingly, the study found that saving rates tend to be high when inflation is high, and to decline when inflation declines. 
Since inflation has been declining in most countries of the world over the last 20 years or so, this could help explain the global decline in saving rates. 
Loayza and his colleagues thought that inflation encourages saving because it creates an atmosphere of uncertainty. 
When people see high inflation, they conclude that the economy is precarious, so perhaps they should tighten their belts. 
Thus, inflation serves as a visceral reminder to save, while old age seems too far away for most people to think about. 
There is another reason why the high inflation of the past encouraged saving: the high interest rates that tend to accompany rapid price growth. 
Borrowers may be forced to "save" more by paying higher mortgage rates. 
Consider the US in 1980, when the personal saving rate was 11%. 
The inflation rate was 12% and 30-year fixed-rate home mortgages were over 15%. 
The real interest rate was not really high - just 3% - but one still had to pay that 15% interest out of current income. 
Imagine buying a house valued at three years' income and paying 45% of your income just to make mortgage payments. 
In America in 1980, this effectively forced some households to reduce their consumption expenditures drastically, contributing to the high saving rate of the time. 
When inflation fell, people eventually refinanced their mortgages at lower rates, breathed a sigh of relief, and started spending more. 
That example also underscores the strong improvement seen in mortgage institutions around the world during the past 20 years - another force tending to reduce saving. 
The easier it is to get a home mortgage, and the lower the down payment that lenders demand, the less young people need to save to buy their first house. 
The increase in credit cards and consumer credit has had the same general effect. 
Finally, declining saving rates around the world reflect strong growth in asset markets - namely, stocks and real estate - over the last twenty years. 
The explanation for this growth is subject to dispute, but it seems to reflect an optimistic attitude towards the future, as we enter a modern world in which technological advances are supposed to make corporations extremely valuable and our economies perform well. 
We value our assets more because we imagine that they will be in great demand in the future. 
Rising asset prices follow from this psychology. 
For most people, the troubles caused by the old-age crisis seem remote, while booming share or housing prices look concrete in brokerage statements or on the business pages of newspapers. 
People feel richer and save less. 
The problem is that these increases in value create the impression that our lack of saving for the last decade has had no serious consequences. 
We think we're still getting richer even though we save less. 
But since speculative prices are ultimately determined by psychology, they can also suddenly be deflated by psychology. 
Unless we come to terms with the lethal combination of declining saving rates and falling birthrates, many more people may retire poor than we ever imagined. 

SOS for China’s SOEs 
BEIJING – China’s economic slowdown has been the subject of countless debates, discussions, articles, and analyses. 
While the proposed remedies vary considerably, there seems to be a broad consensus that the illness is structural. 
But while structural problems, from diminishing returns to capital to the rise in protectionism since the global economic crisis, are certainly acting as a drag on growth, another factor has gone largely unnoticed: the business cycle. 
For decades, China’s economy sustained double-digit GDP growth, seemingly impervious to business cycles. 
But it wasn’t immune: in fact, the six-year slowdown China experienced after the 1997 Asian financial crisis was a symptom of precisely such a cycle. 
Today, China’s business cycle has led to the accumulation of non-performing loans (NPLs) in the corporate sector, just as it did at the turn of the century. 
While the rate of NPLs is, according to official data, lower than 2%, many economists estimate that it is actually more like 3-5%. 
If they are right, NPLs could amount to 6-7% of China’s GDP. 
Most of this debt is held by state-owned enterprises (SOEs), which account for just one-third of industrial output, yet receive more than half of the credit dispensed by China’s banks. 
Though the debt-equity ratio of the industrial sector as a whole has declined over the past 15 years, the SOEs’ has increased since the global financial crisis, to an average of 66%, 15 percentage points higher than that of other kinds of firms. 
A looming recession undoubtedly spurred this debt accumulation, possibly aided by former Prime Minister Wen Jiabao’s massive 2009 stimulus package. 
But it was lax financial discipline that enabled the debt buildup. 
Banks feel safe lending to SOEs, no matter how indebted, because the government implicitly guarantees the debt. 
As a result, the SOEs, not surprisingly, have developed a habit of debt-financed growth. 
That may not have been a problem when China’s economy was growing, but it represents a serious economic risk today, which is why the government has set deleveraging as one of its major tasks for this year. 
But execution has been slow, owing partly to China’s failure to enforce its bankruptcy law fully. 
The fact that commercial banks are not allowed to hold shares in companies has also impeded deleveraging, as it prohibits the use of direct debt-equity swaps to reduce SOE debt. 
This should change. 
China has employed debt-equity swaps to reduce NPLs in the state-sector before. 
In 1999, it established four asset-management companies (AMCs) to take on the weakest loans of the four largest state-owned banks, thereby improving those banks’ financial stability. 
Given China’s high growth rates in 2003-2012, the AMCs made handsome profits from those shares. 
Today, too, debt-equity swaps may be the only viable solution to the NPL problem. 
But the government does not need to rely on government-owned entities to assume the debt. 
Instead, it should allow private equity funds, which have accumulated large amounts of savings as they await good investment opportunities, to act as AMCs, bidding for the NPLs at a discount. 
Such an approach would not just address the NPL problem; by giving the private sector a stake in the SOEs, it would also help to spur performance-enhancing reforms. 
After all, despite their grim financial performance, many of China’s SOEs have a lot going for them, including state-of-the-art equipment, first-rate technical staff, and competitive products. 
Their problem is bad governance and poor management – a problem that, as China’s top leaders recognized in 2013, private-sector involvement can help resolve. 
Of course, there are some obstacles to introducing debt-equity swaps between the public and private sectors, beginning with concern about the loss of state assets. 
Given the severity of SOEs’ debt problem – the National Railway Company alone holds CN¥3 trillion (over $40 billion) in debt – discounts are inevitable when SOE debts are transferred to private AMCs. 
This could cause some to assert that the private firms are realizing unjust gains. 
In order to overcome this obstacle, China should engage in local experimentation – a tried-and-tested approach that has long guided the country’s reform efforts – beginning in the regions where the SOE debt problem is the most acute. 
The resulting revitalization of SOEs would also help quell any doubts about debt-equity swaps with the private sector. 
Another obstacle is the fear that, by allowing SOEs, yet again, to escape market discipline, debt-equity swaps would set a dangerous precedent. 
But the improvements to corporate governance that would follow from the introduction of private shareholders would reduce substantially the likelihood that SOEs would continue to abuse the financial system. 
Moreover, their NPLs are essentially sunk costs; debt-equity swaps are pretty much the only way to claw back anything at all. 
By allowing private-sector participation in debt-equity swaps, China could kill three birds with one stone: advance SOE deleveraging, strengthen corporate governance in the state sector, and enhance economic efficiency. 
With local experimentation, Chinese authorities map out that stone’s most effective trajectory. 

Saving Europe’s Lost Generation of Workers 
MILAN – More and more European young people are beginning to think just like Paul Nizan’s character Antoine Bloyé, who said, “When I was twenty, I would not call that the best time in my life.” 
The global financial crisis has hit them hard. 
The slow recovery from the recession may be even worse. 
Young people who entered the labor market through the backdoor of temporary contracts are now the first to be forced out as their contracts expire. 
For more than a decade, temporary employment has been the engine of job creation in Europe. 
Now, unsurprisingly, these temporary workers form the major pool where jobs are being destroyed. 
Since the beginning of the recession, in the third quarter of 2008, the European Union has lost five million jobs among those under 40 years old. 
Almost 90 per cent of total job losses have been concentrated in this age bracket. 
Those who are now leaving school and entering the job market run the risk of becoming a lost generation, like their Japanese cohorts who began their working lives at the beginning of Japan’s downturn in the 1990’s. 
Due to high economic uncertainty, firms are offering only fixed-term contracts. 
That is exactly what happened in Sweden during its financial crisis in the 1990’s, when the share of temporary workers in total employment increased from 10% to 16%, despite massive layoffs from fixed-term contracts. 
Such contracts involve less investment in on-the-job training, as temporary workers offer a sort of buffer to employers. 
Temporary workers also do not have access to bank loans and mortgages in many countries. 
Thus, the credit crunch is becoming a “youth crunch,” as highlighted by a recent survey carried out by the British Council in several European countries. 
On top of all this, rapidly growing public debt implies that new entrants to the labor market will sooner or later face a mountain of taxes. 
In countries like Germany, Italy, and the Netherlands, the rise in unemployment has been contained so far by massive use of short-time working schemes, which freeze workers with permanent contracts into their current jobs. 
This strategy will pay off only if a sustained economic recovery does not require a significant reallocation of labor. 
Recessions are typically times of reallocation, where the true comparative advantages of a country unfold. 
What is certain is that freezing workers in their current jobs under today’s conditions makes entering the labor market even more difficult for youngsters. 
Aging countries seeking to recover the ground lost in the current recession quickly cannot afford to lose entire generations. 
They need to define as soon as possible a labor-market entry strategy that encourages employers not only to hire young workers, but also to train them. 
That requires contracts that do not come with a fixed expiry date. 
Short-term contracts become a self-fulfilling prophecy, insofar as training is not provided on the job, and hence such workers are less productive and more vulnerable to shocks. 
Investment in the human capital of new cohorts (which is largely accumulated on the job) would benefit employers by increasing productivity. 
An entry strategy for young workers based on completing the reforms of employment protection carried out in most OECD countries in the last 20 years could offer them a clear “tenure track.” 
Currently, there are no long-term prospects after the expiration of a temporary contract. 
Governments could promote entry into the permanent labor market in stages by introducing graded employment protection and so avoiding the formation of a long-term dual market. 
Under this scheme, job-security provisions, mainly in the form of mandated severance payments, should increase steadily as workers acquire seniority. 
This would not discourage new hires under open-ended contracts, as employers would continue to benefit from substantial flexibility at the start of a worker’s employment, when the quality of new hires is being assessed. 
Cohorts entering the labor market during recessions typically ask for far more protection and state intervention during their entire working life than cohorts that enter the labor market in normal times. 
Neglecting the problem of entry into the labor market could backfire by increasing pressure for more public expenditure just when governments should start reducing the huge public debts accumulated during the recession. 
A reform offering a “tenure track” imposes no burden on public finances, and could avoid further distortions and highly costly measures later on. 
Far too many post-mortems of the economic crisis are now being written. 
They are misleading and dangerous, not only because the crisis in the labor market is not yet over, but also because they contribute to complacency, thereby reducing pressure for reform. 
The current recession will be truly over only when new cohorts of workers are able to enter the labor market quickly and through the main door. 

Saving Face and Peace in the Gulf 
PRINCETON – The West and Iran are playing a dangerous game. 
In the past ten days, Iran threatened to close the Strait of Hormuz and warned the United States against sending an aircraft carrier back into the Persian Gulf. 
The US predictably responded that its aircraft carriers could and would patrol wherever necessary to promote freedom of navigation. 
Iran then announced that it would conduct naval exercises in the Strait. 
In the game of “chicken,” two cars drive straight at each other at top speed; either one driver “chickens out” and swerves, or they collide in a fireball. 
Governments around the world cannot stand by and watch that game play out across the world’s energy lifeline. 
It is time for third parties to step in and facilitate solutions that allow Iran to save face while significantly and credibly reducing its supply of enriched uranium. 
Iran may or may not be planning to go all the way to production of a nuclear weapon. 
Nonetheless, it is in clear violation of its obligations under the Nuclear Non-Proliferation Treaty, as determined by the International Atomic Energy Agency, which is charged with monitoring the treaty. 
Its continuing non-compliance is destabilizing the entire Middle East, with serious repercussions for global security. 
Although the Iranian government could most likely be deterred from using a nuclear weapon, the price of a nuclear Iran could well be a regional arms race – a nuclear Saudi Arabia, possibly followed by Turkey and Egypt. 
Nuclear weapons, components, and materials in a region that is already volatile and violent, and that determines the world’s oil prices, is an appalling scenario. 
The market has already taken the measure of the past week’s tensions, driving up the price of some oil contracts to their highest levels in eight months. 
Trying to force Iran to back down with steadily mounting sanctions has not produced results. 
Despite the tightening economic noose – the US imposed sanctions on all companies that do business with Iran’s central bank, and the European Union plans to impose sanctions on Iranian oil exports by the end of January – many nuclear experts now estimate that Iran is very close to enriching enough uranium to build a bomb. 
But how else can the US, the EU, and the United Nations make clear that the “international community” means what it says? 
To go soft now is to lose all credibility with respect not only to Iran, but also to any other country thinking about pursuing a nuclear path. 
The logic is compelling enough, except that the current course leaves Iran’s government no alternative between publicly backing down, which it will not do, and escalating its provocations. 
After all, what government wants to be seen as “chickening out”? 
And, in this case, decision-makers on both sides face domestic opponents who are only too ready to pounce at the least sign of weakness. 
In the US, the Republican Party’s leading presidential candidate in this year’s election, Mitt Romney, declared at a recent debate, “If you elect me as President, Iran will not have a nuclear weapon.” 
His principal challenger, Rick Santorum, told NBC News that he would “order air strikes” if it “became clear that [Iran] was going to get nuclear weapons.” 
So this is no time for President Barack Obama to go wobbly. 
Iranian politics is much harder to read. 
In the ongoing power struggle between President Mahmoud Ahmadinejad and Supreme Leader Ali Khamenei, each is more likely to out-tough the other than to propose concessions to the West. 
Moreover, many Iranian analysts point out that Khamenei and his inner circle are convinced that the US is ultimately bent on regime change – and is willing to use force to achieve it. 
Hence Iranian missile tests, threats to close the Strait of Hormuz, and announcements of nuclear progress should be read as efforts to deter more than provoke. 
The more publicly the West threatens Iran, the more easily Iranian leaders can portray America as the Great Satan to parts of the Iranian population that have recently been inclined to see the US as their friend. 
The net effect is to keep Iran speeding down the road toward a crash. 
It is time for cooler heads to prevail with a strategy that helps Iran step back. 
The key players here are Brazil and Turkey, whose governments negotiated an ill-timed deal with Iran in May 2011, whereby Iran would transfer 1,200 kilograms of low-enriched uranium to Turkey in exchange for 1,200 kilograms of medium-enriched uranium for medical research at a Tehran reactor. 
That deal quickly fell apart, but it could be time to try again. 
The stage is already set in Turkey, which agreed on January 6 to host a new round of nuclear talks between Iran and the 5+1 group (the five permanent members of the UN Security Council + Germany). 
A new deal would probably have to go beyond the swap proposed in May 2011, but there are other possibilities. 
For example, add Egypt and Qatar to the equation and bring in the UN to provide an umbrella for a proposed regional nuclear-fuel bank, to which Iran would make the first contribution. 
Bring in South Korea (a major customer for Iranian oil) and Russia and begin exploring options for a global fuel bank. 
And ensure that all countries in the region reaffirm the basic rules of freedom of navigation in a way that allows them to claim vindication. 
Where the political will exists to allow the other side sufficient margin to reach an agreement, creative solutions can be found. 
Still, diplomats know that war can be preferable to humiliation, which is why saving face is just as important as threatening force – and why other countries should step in and provide the room that both sides need to avoid a head-on collision. 

Saving France, Saving Europe 
PARIS – The face of French politics changed dramatically in May and June. 
First, after 17 years of center-right presidents, François Hollande, a Socialist, was elected. 
Then, a month later, a center-left majority took control of the National Assembly, too, after ten years of right-wing domination. 
Meanwhile, the Senate, the French parliament’s upper house, a conservative bastion between the two world wars and ever since, swung to a Socialist majority for the first time in history at the end of 2011. 
The Socialists also control 20 of France’s 22 regional governments, a majority of the presidencies of the Departments, and most cities with more than 30,000 inhabitants. 
In short, we are now witnessing a stunning concentration of power that is unprecedented in French republican history. 
All of this occurred very peacefully, with no wave of triumphalism, or even much enthusiasm. 
Indeed, the abstention rate for a presidential election had never been higher before the contest between Hollande and Nicolas Sarkozy. 
France’s profound political shift reflects the persistence of the economic crisis that began in 2008. 
French electors did not vote for a dream. 
The Socialist Party’s program and its presidential candidate’s campaign promises were considerably less ambitious than they were in 1981, when François Mitterrand was elected. 
As a result, the campaign was quiet, almost cautious. 
Indeed, most candidates, notably Sarkozy and Hollande, might have been too cautious: the current crisis and possible future threats received little emphasis, which means that it may be difficult for Hollande to claim a mandate for any painful reforms that he will have to propose. 
And now there is no escape from the difficult reality that the budget deficit remains massive, at more than 4% of GDP in 2011. 
Except for creating 60,000 new jobs in education (following controversial cuts last year) and restoring the right (rescinded under Sarkozy) to retire at 60 for roughly 200,000 individuals, Hollande’s administration has barely any room to maneuver, and severe economic measures will have to be introduced in the 2013 budget. 
Moreover, France’s rapidly worsening foreign-trade deficit is boosting already-excessive debt levels, while output is falling and unemployment is rising. 
Unfit for modern markets, France’s tax system actually stifles the country’s businesses, reflected in a disturbing increase in bankruptcies among small and medium-size companies. 
In such conditions, France urgently needs to restore and maintain economic growth, and should seek to coordinate its policies with those of other eurozone member countries. 
After all, because most of the eurozone’s 17 member states suffer from heavy debt burdens, they are all anxious to find fiscally responsible ways to promote growth. 
Unfortunately, the eurozone’s institutions lack the powers needed to defend the monetary union effectively. 
Greek debt amounts to less than 2% of European GDP. 
Had the European Central Bank been entitled to deploy enough firepower when the Greek crisis first erupted, the threat would have lasted only two hours. 
Instead, it took three weeks to grant the ECB only partial authorization to act, causing speculation to take hold and spread to Portuguese, Spanish, and Italian debt, thereby jeopardizing the euro’s survival. 
Removing the risk of a euro implosion – which, given massive global imbalances, derivatives markets run amok, and the colossal scale of America’s budget deficit, could catalyze a major international crash – presupposes two fundamental changes in Europe. 
The first is political and involves sovereignty: Full European solidarity can be achieved only through stronger fiscal and monetary federalism, which would enable the eurozone to act, despite minority dissent. 
Europe has succeeded in missing this goal for a half-century; now it has no choice but to shoot straight. 
The second change involves economic doctrine. 
If markets self-correct, they do so only when defaults are registered and punished. 
But countries and their public services cannot default without inflicting severe pain on entire populations. 
Europe urgently needs an economic doctrine that, despite today’s deficits, preserves funding for the investments and research that promote growth. 
Here, Germany’s leaders, in particular, need convincing. 
Hollande, backed by Spain and Italy, accomplished a small step in that direction at June’s European Union summit, which finally endorsed the idea of a banking union. 
It is only the beginning, but Europe must start somewhere. 
So must France, whose great concerns can be resolved solely within the EU – and only if the EU carries out the essential political and economic changes that all of its members need. 

Can Global Capitalism Be Saved? 
LONDON – The politics of economic anxiety has now driven the electorates of the United Kingdom and the United States into the hands of populists. 
If only, so the received wisdom goes, economies could get back to a more “normal” rate of GDP and productivity growth, life would improve for more people, anti-establishment sentiment would wane, and politics would return to “normal” as well. 
Then, capitalism, globalization, and democracy could continue their forward march. 
But such thinking reflects an extrapolation from one largely aberrant period in history. 
That period is over, and the forces that sustained it are unlikely to align again anytime soon. 
Technological innovation and demographics are now a headwind, not a tailwind, for growth, and financial engineering can’t save the day. 
The aberrant period in history is the hundred or so years after the US Civil War, during which breakthroughs in energy, electrification, telecommunications, and transportation fundamentally reshaped societies. 
Human lives became markedly more productive, and life expectancies rose dramatically. 
The global population grew over 50% between 1800 and 1900, and then more than doubled over the following 50 years, with economies growing much faster than in previous centuries. 
By the end of the 1970s, growth began to slow in many of the developed Western economies, and US President Ronald Reagan and Federal Reserve Chair Alan Greenspan ushered in a debt cycle that supercharged activity. 
The US, until then a net creditor to the world, became a net borrower, with China and other emerging markets benefiting from America’s rising trade deficit. 
Financial leverage drove global growth onward for almost another 30 years. 
The 2008 global crisis brought an abrupt end to the era of financial engineering. 
But policymakers don’t like to see growth slow, and central bankers exhausted their toolkits in an attempt to stimulate economic activity despite insufficient demand. 
With less and less yield to be found in traditional fixed-income assets, investors piled into risk assets of all forms, driving up their price; the rich got richer, and the middle class was left further behind. 
As growth in the real economy continued to stagnate, angry populism surged, resulting in Brexit and President-elect Trump. 
For all that central bankers have done to revive economic growth, the forces of demographics and innovation have worked against them. 
Advanced economies’ aging populations are drawing more and more on social safety nets. 
China is also aging. 
Most of today’s (and tomorrow’s) demographic growth is in Africa, where it doesn’t drive global productivity to the extent that it does elsewhere. 
Furthermore, the current wave of technological innovation is not lifting all boats. 
Even as the likes of Uber and Amazon, and, more fundamentally, robotics, add convenience, they do so by displacing working-class jobs and/or driving down wages. 
This is typical of the process of “creative destruction” that Joseph Schumpeter famously described as being the handmaiden of growth in capitalist economies. 
The first wave of a breakthrough innovation chiefly benefits a few entrepreneurs. 
Then comes a wave of displacement, as the technology is adapted to existing industries. 
Three decades ago, it was Wal-Mart using computers and logistics to wipe out small “mom and pop” stores; today, it is Amazon taking on Wal-Mart. 
The third wave is the widespread diffusion of the innovation in ways that lift overall productivity and living standards. 
This takes much longer. 
Or, as the Nobel laureate economist Robert Solow observed in 1987, “You can see the computer age everywhere but in the productivity statistics.” 
Northwestern University’s Robert Gordon has argued that the economic impact of today’s innovations doesn’t hold a candle to that of plumbing or electricity. 
Perhaps, or it may be that we are at an early stage of the Schumpeterian cycle of innovation (enriching a few) and destruction (creating anxiety in vulnerable sectors). 
Eventually, average productivity and real incomes are likely to benefit as breakthrough technologies enable new kinds of growth. 
The problem is that it may take a decade or longer before robotics and the like feed a broader rising tide that lifts all boats. 
And whether Schumpeter or Gordon is right is irrelevant for politicians facing angry voters whose standard of living has declined. 
Today, their fed-up constituents reject globalization; tomorrow, they may become Luddites. 
The question now is whether a shift in focus from unconventional monetary policies to Keynesian demand management can save the day. 
It is widely assumed that monetary policy is a spent force in the US and Europe, and that fiscal stimulus and expansion – for example, via tax cuts and infrastructure spending – must take over. 
But this requires stable political systems that can sustain long-term fiscal strategies. 
Recent developments, particularly in Europe, suggest that such strategies will be difficult to implement. 
In the US, Trump’s victory, coupled with Republican majorities in both houses of Congress, paves the way for tax cuts and increased defense spending. 
The pump looks set to be primed. 
But fiscal expansion is likely to meet resistance from monetary policy, as the Fed resumes its “normalization” of interest rates. 
Still, the hope is that faster US growth and rising wages will quell voters’ populist rebellion. 
The onus, ironically, will remain on the Fed to “do the right thing” – namely, to normalize interest rates with extreme caution, while allowing the share of labor income in GDP to rise, even if that requires some overshooting of inflation. 
To paraphrase Dylan Thomas, we believers in markets should not go gently into the populist night. 
We should fight against the dying of the light of global capitalism with every tool we can muster. 
Today’s slowing growth and political backlash is not some “new normal.” 
Rather, it harks back to an “old normal,” last experienced in the 1930s. 
Whatever the right way forward for the global economy, we know that it cannot mean a return to the isolationism and protectionism of that era. 

Saving Public Sarkozy 
Ever since key public figures signed a manifesto in a French magazine denouncing the dangers of a monarchical drift – without ever mentioning the president’s name – the political atmosphere in France has been electric. 
Nicolas Sarkozy’s rapid fall from grace is unprecedented in the history of the Fifth Republic. 
His popularity ratings are plummeting, and his party, the conservative UMP, is predicted to fare badly in the municipal elections in mid-March. 
What is behind the collapse in Sarkozy’s popularity? 
Can he recover? 
These questions are crucial not only for France, because we are five months away from a French presidency of the European Union that should have been an important step in Europe’s own rebound. 
The attacks on Sarkozy are very personal, and focus as much on his “essence” as on his performance. 
Can he incarnate France with dignity and legitimacy? 
Can he transform intuitions and speeches into concrete actions? 
Has he already lost touch with reality, surrounded as he is by a court of media courtesans? 
In the eyes of a majority of French citizens, for whom presidents are “elected monarchs,” Sarkozy has “de-sacralized” the presidency. 
Unlike constitutional monarchies, France does not distinguish between the symbol and the reality of power. 
Sarkozy may want to be a combination of Margaret Thatcher and Tony Blair, but in symbolic terms he is also the Queen. 
And, in his quest for modernity and transparency, he has de-legitimized the symbolic dimension of his function by mixing his private and public lives. 
On the one hand, Sarkozy’s fascination with rich people has helped isolate him from the average Frenchman. 
Yet, on the other hand, his flashy style is considered vulgar by traditional French elites, who are keen to dissociate themselves from someone whose educational background and instinctive reactions clearly marks him as not one of them. 
His love life is not seen as a human, romantic affair and a sign of youthful energy, but as a possibly fatal distraction, the ultimate proof of his “immaturity.” 
Of course, if the international economic environment had been more favourable, and if there were not so much legitimate concern about declining purchasing power, the French might have shown greater indulgence towards their young president. 
But it looks as if Sarkozy, once obsessed with gaining power, has progressively lost touch with reality since achieving his goal. 
You cannot proclaim your impotence in the face of empty state coffers after pushing through useless and costly tax breaks for the richest. 
And you cannot adopt a Churchill-like call to sacrifice when you indulge in a series of highly publicized luxury weekends with your latest fiancée. 
Moreover, if Sarkozy has eroded, perhaps fatally, the “sacred” symbolic nature of the presidency, his governance has failed to provide any compensating reassurance. 
Multiplying initiatives, being everywhere at once, accelerating the pace of reforms at the risk of confusing quality and quantity, breaking taboos, and blurring the lines between secularism and religion, Sarkozy has reinforced lingering doubts about a brilliant politician’s ability to become a statesman or at least an effective ruler. 
The influence of his court has been seen as excessive and dangerous, marginalizing and frustrating the government, parliament, and his own party. 
But it is much too early to bury Sarkozy. 
While he has seemingly lost touch with the French people, he is deeply aware of and wounded by his declining popularity, and no one should underestimate his ability to reinvent himself with a new government after the municipal elections and greater distance from his immediate entourage. 
In any case, France is not Russia. 
Despite some troubling similarities between Sarkozy and Vladimir Putin, French democracy is not in danger. 
What is at stake is the dignity of the presidential office and, beyond that, France’s ability to modernize. 
Indeed, the most serious casualty of the current political climate in France is Sarkozy’s reform agenda. 
It is as if his personality had become the biggest obstacle to his determination to break with the past. 
Perhaps too much uncontrolled rupture in style can ultimately lead to paralysis in substance. 

Saving Resources to Save Growth 
NEW YORK – Reconciling global economic growth, especially in developing countries, with the intensifying constraints on global supplies of energy, food, land, and water is the great question of our time. 
Commodity prices are soaring worldwide, not only for headline items like food and energy, but for metals, arable land, fresh water, and other crucial inputs to growth, because increased demand is pushing up against limited global supplies. 
Worldwide economic growth is already slowing under the pressures of $135-per-barrel oil and grain prices that have more than doubled in the past year. 
A new global growth strategy is needed to maintain global economic progress. 
The basic issue is that the world economy is now so large that it is hitting against limits never before experienced. 
There are 6.7 billion people, and the population continues to rise by around 75 million per year, notably in the world’s poorest countries. 
Annual output per person, adjusted for price levels in different parts of the world, averages around $10,000, implying total output of around $67 trillion. 
There is, of course, an enormous gap between rich countries, at roughly $40,000 per person, and the poorest, at $1,000 per person or less. 
But many poor countries, most famously China and India, have achieved extraordinary economic growth in recent years by harnessing cutting-edge technologies. 
As a result, the world economy has been growing at around 5% per year in recent years. 
At that rate, the world economy would double in size in 14 years. 
This is possible, however, only if the key growth inputs remain in ample supply, and if human-made climate change is counteracted. 
If the supply of vital inputs is constrained or the climate destabilized, prices will rise sharply, industrial production and consumer spending will fall, and world economic growth will slow, perhaps sharply. 
Many free-market ideologues ridicule the idea that natural resource constraints will now cause a significant slowdown in global growth. 
They say that fears of “running out of resources,” notably food and energy, have been with us for 200 years, and we never succumbed. 
Indeed, output has continued to rise much faster than population. 
This view has some truth. 
Better technologies have allowed the world economy to continue to grow despite tough resource constraints in the past. 
But simplistic free-market optimism is misplaced for at least four reasons. 
First, history has already shown how resource constraints can hinder global economic growth. 
After the upward jump in energy prices in 1973, annual global growth fell from roughly 5% between 1960 and 1973 to around 3% between 1973 and 1989. 
Second, the world economy is vastly larger than in the past, so that demand for key commodities and energy inputs is also vastly larger. 
Third, we have already used up many of the low-cost options that were once available. 
Low-cost oil is rapidly being depleted. 
The same is true for ground water. 
Land is also increasingly scarce. 
Finally, our past technological triumphs did not actually conserve natural resources, but instead enabled humanity to mine and use these resources at a lower overall cost, thereby hastening their depletion. 
Looking ahead, the world economy will need to introduce alternative technologies that conserve energy, water, and land, or that enable us to use new forms of renewable energy (such as solar and wind power) at much lower cost than today. 
Many such technologies exist, and even better technologies can be developed. 
One key problem is that the alternative technologies are often more expensive than the resource-depleting technologies now in use. 
For example, farmers around the world could reduce their water use dramatically by switching from conventional irrigation to drip irrigation, which uses a series of tubes to deliver water directly to each plant while preserving or raising crop yields. 
Yet the investment in drip irrigation is generally more expensive than less-efficient irrigation methods. 
Poor farmers may lack the capital to invest in it, or may lack the incentive to do so if water is taken directly from publicly available sources or if the government is subsidizing its use. 
Similar examples abound. 
With greater investments, it will be possible to raise farm yields, lower energy use to heat and cool buildings, achieve greater fuel efficiency for cars, and more. 
With new investments in research and development, still further improvements in technologies can be achieved. 
Yet investments in new resource-saving technologies are not being made at a sufficient scale, because market signals don’t give the right incentives, and because governments are not yet cooperating adequately to develop and spread their use. 
If we continue on our current course – leaving fate to the markets, and leaving governments to compete with each other over scarce oil and food – global growth will slow under the pressures of resource constraints. 
But if the world cooperates on the research, development, demonstration, and diffusion of resource-saving technologies and renewable energy sources, we will be able to continue to achieve rapid economic progress. 
A good place to start would be the climate-change negotiations, now underway. 
The rich world should commit to financing a massive program of technology development – renewable energy, fuel-efficient cars, and green buildings – and to a program of technology transfer to developing countries. 


Saving the Stability Pact from Itself 
At their meeting in Scheveningen, the Netherlands, the EU's economic ministers (Ecofin) once again confronted the need to reform the Stability and Growth Pact (SGP). 
The issues surrounding reform remain controversial and unsettled, but this time, the ministers laid their cards on the table. 
The SGP's fundamental problem is that it must strike a balance between two contradictory goals: it must retain bite against excessive debt accumulation, yet it must also give governments more maneuvering room to enact structural reforms and restore Europe's competitiveness. 
As it stands, the SGP is an obstacle to such reforms. 
European leaders waste political energy and capital to meet demanding budget targets, while nothing is done to address the really vital challenges: aging populations, high tax burdens, declining competitiveness. 
The reason is that structural reforms tend to pay off in the long term, but cost money in the short term. 
The SGP originally aimed to protect European citizens from myopic governments, but it has ended up forcing even more myopic behavior. 
Take pension reform, which aims to reduce the scope of state-run, pay-as-you-go systems and expand private, fully funded schemes. 
This requires cutting compulsory contributions to the public system, while maintaining benefit levels for current retirees. 
The result is a temporary increase in budget deficits; the fiscal benefits appear only when private schemes start taking over pension liabilities from the state-run systems. 
But the SGP's current rules discourage this kind of reform by prohibiting temporary increases in the budget deficit - even if they promise long-term fiscal consolidation. 
European policymakers are becoming aware of the problem. 
Some EU countries - particularly new members in Central and Eastern Europe - have committed themselves to use privatization receipts to finance pension reform. 
But even this may not be enough to cover the cost. 
To overcome the SGP's bias against structural reforms, the European Commission asked at this last Ecofin meeting for more discretion and to put more emphasis on (explicit) debt: countries with a lower debt-to-GDP ratio would have greater freedom in fiscal policy. 
Economic ministers suggested that pension reform and long-term fiscal sustainability should also guide country evaluations under the SGP, while some countries insisted that it should be linked to the Lisbon agenda. 
This would give more flexibility on budget deficits to countries that are making progress towards meeting the agenda's reform targets. 
Some of these innovations would be useful. 
But they risk giving too much discretion to the Commission or to future European Council decisions. 
The rules-based approach of the SGP is fundamentally sound, but it requires operational criteria that can be defined with some precision. 
Otherwise, the rules become unenforceable. 
Consider the proposal to link the SGP to the Lisbon agenda, which contains more than 100 indicators. 
What happens if a country makes progress in one dimension, but regresses in another dimension? 
Inevitably, the Commission would have to decide the relevance of the different indicators - thus intervening in the national policymaking process with no political legitimacy. 
At the same time, if so much unchecked discretion was left to the Council, rather than to the Commission, "peer pressure" to restore budget balance might easily turn into "peer protection." 
So, can the SGP be made to work in favor, rather than against, structural reforms, without abandoning the rules-based approach of the SGP? 
We think so. 
The key is to select some comprehensive but operationally precise indicators of structural reforms, and then apply the same idea suggested by the Commission for public debt: countries that are making more progress on these indicators can get more leeway on their budget deficit. 
An obvious indicator that would meet this purpose is the implicit debt of public pension systems - i.e., the present discounted value of all future pension expenditures under existing legislation. 
Future deficits could, in theory, be reduced through higher contributions, but social security contributions are already far too high in Europe, inhibiting job creation and economic growth. 
The only way to restore growth without compromising the future is through pension reform that reduces future outlays from the state-run system. 
Of course, any estimate of the implicit pension debt requires caveats and arbitrary assumptions. 
But so does the SGP's current implementation - for example, in the conventions that define how budget deficit are measured and what qualifies as government revenue. 
Moreover, the Commission has already worked to harmonize the assumptions needed to forecast public pension outlays and achieve cross-country comparability. 
Finally, to strengthen cross-country comparability further, the benchmark should be variations in the stock of pension debt under given economic and demographic assumptions, rather than the debt level itself. 
There is also a more fundamental reason to focus on future variations in the stock of pension debt associated with pension reforms: the EU has no business interfering with pension liabilities of individual member states. 
Why should the rest of Europe care if, say, Spain preserves a generous pension system? 
The extra focus on implicit pension debts would also help to inform citizens. 
Surveys reveal that most European citizens are not fully aware of the extent of intergenerational redistribution. 
Many even believe that their contributions accrue to an individual, capitalized, account, rather than financing the benefits paid to current pensioners. 
The good news is that these surveys ( www.frdb.org ) suggest that better-informed citizens are more supportive of reforms and official estimates of the implicit pension debt would increase the transparency of the intergenerational redistribution implicit in pay-as-you-go systems. 
Thus, governments stand to gain stronger political support for reforms that cannot be postponed any longer. 

Saving the Trees of Life 
Nobody can get through the day without using a product that comes from a forest. 
To a greater extent than most people realize, the paper we write on, the water that comes out of our taps, the medicine that heals us, the wood that builds our houses and furniture, all originate from forests. 
Forests provide the fresh air we breathe and habitats for endangered species. 
They also provide us with recreational opportunities, increasingly important in our complex world. 
Approximately 1.5 billion of the world’s rural poor directly depend on forests for basic needs like food and fuel-wood. 
Yet deforestation continues. 
Every year, we lose 14.6 million hectares (56,000 square miles) of forests – an area almost four times the area of Switzerland. 
Irresponsible forest management, enhanced by poor governmental regulation and enforcement, and markets that reward illegal logging, are conspiring to denude the world’s most valuable and threatened forests. 
Once forests start to disappear, a host of environmental, social, and economic ills usually follow, affecting us all in some way. 
Indonesia’s Sumatra Island is a good example. 
Pulp and paper companies are driving rampant and illegal destruction of forests that contain the richest diversity of plants in the world. 
It is likely that plants not yet discovered will disappear along the way, as well as such endangered species as the Sumatran rhino and elephant, as well as the orangutan. 
When Sumatra’s forests disappear, entire communities of people will also find themselves with no proper place to live and no decent way to make a living. 
Moreover, the distortion to global markets caused by trading in illegally, cheaply produced products results in disadvantages for responsible corporate citizens. 
Developing countries are losing $15 billion in tax revenues annually due to illegal logging. 
To make matters worse, the demand for wood for reconstruction following last year’s tsunami is intensifying the already untenable demands being placed on Sumatra’s forests. 
Similar threats to forests are evident in the Amazon and Congo Basin. 
The recent UN Millennium Ecosystem Assessment (MEA) shows that forests in these and other critical regions are in serious decline due to mismanagement and will continue to disappear unless serious measures are taken. 
Information released by the government of Brazil indicates that deforestation of the irreplaceable forests of the Amazon, due to factors such as agricultural conversion, reached 2.6 million hectares (roughly 10,000 square miles) in the past year, bringing the total deforested area of the Amazon to 17%. 
But the battle against deforestation is not lost. 
Diverse organizations, environmentalists, and corporations concerned with the state of world’s forests are joining forces to reverse deforestation and improve forest management. 
For example, the World Wildlife Fund (WWF) and the World Bank have helped Brazil’s government kick-start an initiative that established over 17 million hectares (69,000 square miles) of new forest-protected areas such as national parks. 
The WWF/World Bank alliance also motivated partners to establish a trust fund to manage these protected areas in perpetuity. 
Similarly, a summit among the leaders of the Congo Basin countries resulted in extraordinary cross-border cooperation on forest conservation and responsible management. 
This in turn led to a $53 million initiative by the United States State Department to promote Congo forest conservation. 
Since the leaders first met in 1999, 3.5 million hectares (more than 13,000 square miles) of new protected areas have been established in the Congo Basin. 
Nevertheless, given the effects of last December’s Asian tsunami, the weight of evidence provided by the MEA, and deforestation statistics from key forest regions, our efforts must continue. 
The World Bank and WWF recently pledged to unite in an effort to assist in reducing the rate of global deforestation by 10% by 2010, and to work with other public and private sector institutions to pursue ambitious targets on forest conservation. 
WWF studies show that if the world’s forests are allotted among a mix of uses and types – including protected areas, responsibly managed commercial forests, and restored forest landscapes – we can provide the world’s needs for forest products while conserving important environmental and social values for the foreseeable future. 
Business leaders, governments, and civil society organizations must play their part in realizing this vision. 

How to Save the World Bank 
OXFORD – The World Bank is quietly sliding into insignificance, as its core fee-paying clients increasingly seek other lenders. 
If it is to survive, its management will need to streamline its loan approval processes and leverage the unique assets that distinguish it from its competitors. 
The Bank once comfortably earned enough to be self-sustaining. 
Today, it is rapidly becoming welfare-dependent. 
Periodic contributions from wealthy governments have propped up lending to poor countries, but these are unlikely to be increased, and some may be discontinued as donors redeploy aid budgets to refugee programs. 
The problem is not that emerging economies have no desire to borrow; they desperately need funds for infrastructure and other investments. 
The problem is that the Bank is too slow to process loans, which has increasingly made it the last choice for many of its potential clients. 
Whereas a commercial lender might take three months to prepare and disburse a loan, the Bank takes more than two years. 
And its efforts to speed up the process, which began in 2013, have reduced the average time only slightly, from 28 months to 25.2 months; in some regions (accounting for a third of the Bank’s lending), the wait has actually increased. 
One clear indicator of the Bank’s performance is how high a premium governments are willing to pay to avoid it. 
A 20-year loan from the World Bank has an interest rate of about 4%, and the poorest countries can borrow for less than 1% (“International Development Association loans”). 
Nonetheless, many countries are choosing much more expensive commercial loans or bond issues. 
For example, Ghana, despite being eligible for IDA loans, recently chose to raise money from the bond market, from which it received an interest rate several times higher. 
No wonder emerging economies are excited by the establishment of the BRICS countries’ New Development Bank and the China-led Asian Infrastructure Investment Bank: Both institutions have promised faster lending. 
If the World Bank is to survive, its management must streamline its complicated and unwieldy bureaucracy, fixing what internal reviews described over a decade ago as “fragmentation, duplication, and delay” in assurance, safeguards, and fiduciary processes. 
At the same time, the institution must identify what it is uniquely positioned to do. 
In 2013, the Bank declared a new goal – to eradicate extreme poverty by 2030. 
But this makes it just one of a multitude of organizations seeking to address poverty. 
What makes the World Bank special is that it is made up of 188 countries and can act on behalf of all of them, rather than being beholden to one or two. 
Furthermore, its financial structure enables it to be more autonomous, self-sustaining, and resilient than most other multilateral institutions. 
These are the attributes it must leverage. 
For starters, the Bank is uniquely placed to play the role of a “balancer” in the international aid system, helping to ensure that funds flow toward the countries that most need them. 
Individually, governments give a lot of aid, but most of it goes to recipient countries with which they have special ties or relationships. 
This “bilateral aid” is subject to the whims and trends of the aid industry, sometimes flowing only into specific sectors or to back particular approaches. 
The result is that some countries get more aid than they need, while others don’t get enough. 
According to Britain’s Department for International Development, only five of the 30 countries deserving the largest aid allocations get close to the right level. 
The Bank is uniquely placed to counterbalance the caprices of individual donors and ensure a better global allocation. 
Until now, however, its lending has tended to follow donor fashions, rather than complementing them. 
A second rationale for the World Bank is the need for “counter-cyclical” aid. 
At present, when the rich part of the world catches an economic cold, the poorer countries face a double contagion: Their trade earnings plummet, and flows of aid and investment from richer countries dries up. 
The resulting halts to projects or policies – half-built hospitals, unexpected shortages of medical supplies, bridges to nowhere – play havoc with their economies. 
As the Bank reviews its financial-management practices, a more consciously counter-cyclical approach could be adopted. 
A third rationale for the Bank has been its ability to share expertise and to develop and reinforce norms among the governments to which it lends. 
In practice, however, the Bank has struggled to do this effectively. 
Borrowers have often been reluctant to accept its advice, which they perceive as driven more by theory and ideology than by evidence and practice. 
Local officials in charge of implementation know that if the Bank’s advice proves impractical, unrealizable, or flawed in some other way, it is they, not some technocrats sitting in Washington, DC, who will lose their jobs (or the next election). 
Experience suggests that the Bank’s advice has influence only if its messenger is someone who really knows the country (ideally as a resident), is an expert on the issue at hand, and has the power to get approval in Washington. 
Senior Bank staff deployed in regions for long periods, such as Jim Adams in Tanzania and Uganda, or David Dollar in China, have enviable track records. 
The Bank as a whole, however, is unlikely to succeed if it continues to attempt to become a centralized provider of solutions. 
In short, the World Bank’s management and member countries need to work together to create a faster, more responsive institution, one that exploits its unique advantages to balance aid flows, provide counter-cyclical support, and offer meaningful advice. 
This approach could win back the fee-paying clients that comprise its self-sustaining resource base, provide it with its global reach, and allow it to continue to play a vital role in boosting economic growth and reducing poverty in developing countries. 

Saving the World's Fish 
It is difficult not to be a pessimist about the future of the world's fish population. 
Global marine catches, which had increased rapidly since WWII, stalled in the late 1980's and have been declining ever since. 
That decline will be difficult to halt. 
The rapid depletion of fish stocks is the inevitable outcome of sophisticated industrial technology being thrown at dwindling marine populations as demand rises, fueled by growth in human population and incomes. 
The decline has so far been masked in the developed world by seafood products that were not previously available, such as farmed salmon, and by massive fish imports from developing countries. 
But over-fishing has become a severe problem in the developing world as well. 
So fisheries worldwide are due for wrenching changes in the near future. 
A clear indication of the problem is "fishing down the marine food web"-- the increasing tendency to land fish and shellfish from the bottom of marine food chains, often the prey of the larger fish that were previously targeted. 
This trend provides low-quality substitutes for the high-quality fish that we were once accustomed to, and will inexorably lead us toward catching plankton, especially jellyfish. 
Yes, jellyfish, which were once a specialty consumed around East Asia, are now a product caught in the Atlantic as well, and exported across continents. 
The fishing industry is, on its own, incapable of reversing the "fishing down" trend, notwithstanding arguments by commentators who should know better. 
In his recent book The Skeptical Environmentalist , for example, the Danish public-policy analyst Bjørn Lomborg cited data reported by the UN Food and Agriculture Organization (FAO) that showed increasing figures for global fish catches. 
Lomborg used the figures to argue that if catches are up, then the underlying ecosystems must be in good shape, despite all the warnings from experts. 
But Lomborg is wrong, and the experts are right. 
We now know that the apparent increases in global fish catches in the 1990's were due to massive over-reporting to the FAO by China. 
We also know that fish catches can remain high (and in fact usually do) even as stocks collapse, as illustrated by cod off Eastern Canada, which yielded good catches until the fishery had to be closed because there were literally no fish left. 
But excessive catches are not even the whole story. 
Many fishing techniques now in use--bottom trawls foremost among them--literally tear up the habitat upon which fish depend. 
As a result, some fish stocks exploited in this manner do not seem to recover, regardless of quotas or other regulations on catches. 
Aquaculture, the farming of fish and other aquatic organisms, could in principle ameliorate the coming shortfall. 
However, aquaculture refers to two fundamentally different kinds of operations. 
One type of aquaculture is devoted to the farming of bivalves such as oysters and mussels, or to freshwater fish such as carp and tilapia. 
It relies on plants (plankton sometimes supplemented by agricultural by-products in the case of freshwater fish) to generate a net addition to the fish food supply available to consumers. 
Moreover, because this type of aquaculture is based predominantly in developing countries (mainly in China, but also in countries such as the Philippines and Bangladesh), it supplies cheap animal protein right where it is needed. 
The second type of aquaculture entails the farming of carnivorous fish such as salmon or seabass, and increasingly, the fattening of wild tuna in captivity. 
Salmon, seabass, or tuna eat flesh; in ecological terms, they are the wolves and lions of the sea. 
When fed only vegetable matter, such as soy meal, salmon do not grow well, and end up looking and tasting like tofu. 
There is no point even trying to feed tuna anything but fish. 
The more of this aquaculture there is, the less cheap fish, such as sardines, herring, mackerel, and anchovies, there will be for humans to buy and eat. 
Farming carnivorous fish increases rather than reduces pressure on wild stocks. 
It has led to massive imports by developed countries--where this type of aquaculture predominates--of fishmeal from fish caught and ground up in developing countries. 
One reason why acquaculture's practitioners can get away with this is that the public assumes that all of these operations are similar, and that they all add to the global fish supply. 
This is simply not the case. 
There is still time to save our fisheries, but only if they are reinvented not as the source of an endlessly growing supply of fish for an endlessly growing human population, but as a provider of a healthy complement to grain-based diets. 
Moreover, such reinvented fisheries will be smaller, and they will rely on fish that move out of marine reserves, the protected ocean areas that we must establish to enable marine ecosystems and the species within them to rebuild some of their past abundance, and to share it with us again. 

Saving World Trade 
CAMBRIDGE: The Asian financial crisis barely over, the world economy faces another major eruption, one with even greater significance to the health of the global economic system. 
The cause this time is not panicked bankers rushing out of emerging markets, but a crisis of legitimacy that threatens the world's trading regime. 
As the riots surrounding the failed World Trade Organization conference in Seattle demonstrated, a coalition of labor, environmental, and human rights advocates is intent on sabotaging the WTO, the institutional embodiment of global trade. 
The WTO is also in trouble with developing countries, which feel estranged from rules they feel do not benefit them. 
The chasm separating these groups from the agenda pursued by American and EU policymakers is growing, destabilizing the world economy. 
All sides agree that the stability of the international economy is predicated on a system of global rules. 
What is contested is the nature of these rules. 
Opponents of trade liberalization decry the secretiveness and "non-democratic" nature of the WTO, and the influence of corporate interests in rule-making. 
They see a trading system that privileges business over labor, the environment, and consumer safety. 
Developing countries complain about restrictive rules applied to their exports (garments, agricultural products, labor services), and fear that new demands they face over labor and the environment are designed to undermine their competitiveness. 
Finding a way out of this crisis requires clear principles for trade rules. 
Here are five principles on which all ought to agree, and which would allow us to move forward. 
Trade is a means to an end, not an end in itself. 
Advocates of globalization lecture incessantly about the adjustments countries must undertake in their policies and institutions in order to expand their international trade and become more attractive to investors. 
This way of thinking about trade confuses means for ends. 
Trade serves at best as an instrument for achieving goals societies seek: prosperity, stability, freedom, an improving quality of life. 
Nothing enrages WTO bashers more than suspicions that, when push comes to shove, the WTO allows trade to trump the environment or human rights. 
Developing countries should resist a system that evaluates their needs from the perspective of expanding world trade instead of alleviating poverty. 
Reversing our priorities has a powerful implication. 
Instead of asking what kind of multilateral trading system maximizes foreign trade and investment opportunities, we would ask what kind of multilateral system best enables nations to pursue their own values and developmental objectives. 
Trade rules must allow for diversity in national institutions and standards. 
No single recipe exists for economic advancement. 
Different countries have varying preferences over regulations that should govern new technologies (such as genetically modified organisms), restrictiveness of environmental regulations, intrusiveness of government policies, extensiveness of social safety nets, or the tradeoff between efficiency and equity. 
Rich and poor nations have different needs in the areas of labor standards or patent protection. 
Moreover, poor countries need the space to follow developmental policies that richer countries no longer require. 
When countries use trade to impose their institutional preferences on others, the result is erosion of trade's legitimacy. 
Trade rules should seek peaceful co-existence among national practices, not harmonization. 
Non-democratic countries cannot count on the same trade privileges as democratic ones. 
National standards that deviate from those in trade partners and thereby provide trade advantages are legitimate only to the extent that they are grounded in free choices made by citizens. 
Take the case of labor and environmental standards. 
Poor countries argue that they cannot afford the same stringent standards as advanced countries. 
Tough emission standards or regulations against child labor can backfire if they lead to fewer jobs and greater poverty. 
A democratic country such as India can argue, legitimately, that its practices are consistent with the wishes of its population. 
Non-democratic countries, such as China, do not pass the same prima facie test. 
Assertions that labor rights and the environment are trampled for the benefit of the few cannot be easily dismissed in those countries. 
Consequently, exports of non-democratic countries deserve greater international scrutiny, particularly when they entail costly dislocations in other countries. 
Countries have the right to protect their own social arrangements and institutions. 
Opponents of globalization argue that trade sets off a "race to the bottom," with nations converging towards the lowest levels of environmental, labor, and consumer protections. 
Others counter that there is little evidence that trade erodes national standards. 
One way to cut through this morass is to accept that countries can uphold national standards in these areas, by withholding market access if necessary, when trade undermines domestic practices enjoying broad support. 
Example: countries might seek temporary protection against imports from countries with weak enforcement of labor rights when such imports worsen working conditions at home. 
The WTO already has a safeguard system to protect firms from import surges. 
Extending this principle to protect environmental, labor, or consumer-safety standards with appropriate restraints against abuse might make the world trading system more resistant to ad-hoc protectionism. 
You do not have the right to impose institutional preferences on others. 
Using trade restrictions to uphold particular values must be distinguished from using them to impose values. 
Trade rules should not force Americans to eat shrimp caught in ways Americans find unacceptable; neither should they allow the U.S. to use trade sanctions to alter the ways that foreign nations fish. 
Citizens of rich countries concerned about the environment or of workers in the developing world can be more effective working through channels other than trade diplomacy or foreign aid. 
Trade sanctions should be used only against non-democratic countries. 
These are simple guidelines, easy to communicate to electorates confused by intricate trade regulations. 
Sticking to them would enhance the legitimacy of trade and put the world economy on a sounder footing. 

Saying No to Medical Technology 
As is recommended for all patients, DeBakey had an advance directive: he had stated, while in good health, what approach to medical care he would want if he became ill and unable to speak for himself. 
He specifically indicated that he would not want to undergo major surgery. 
A cardinal principle of contemporary medical ethics is that patients have the right to make this type of decision, and that physicians are obligated to follow their wishes. 
To disregard a patient’s preferences once he loses the ability to make decisions – as occurred when DeBakey’s wife reportedly stormed into a late-night hospital ethics committee meeting and demanded that the surgery take place – violates the hard-won respect for patients’ autonomy gained over the past 20 years. 
Much of the commentary about the case has centered on whether a patient’s wishes can be overridden, even by loving family members. 
What has largely been left out of the discussion is whether it is ever appropriate to perform invasive, dangerous, and expensive surgery on 97-year-olds – even if they want it. 
The operation performed on DeBakey involved putting him on cardiac bypass and opening the aorta, the artery that carries blood from the heart to most of the major organs of the body. 
The damaged part of the aorta was then replaced with a synthetic graft. 
The risks were high: in a group of elderly patients who had the procedure, the oldest of whom was 77, 18% died while hospitalized. 
Moreover, surviving the surgery does not mean returning to one’s usual state of health in a matter of a few weeks. 
It typically means, as DeBakey experienced and as his physicians anticipated, an extended hospitalization marked by reliance on machines, multiple complications, and considerable suffering. 
DeBakey spent three months in the hospital, much of the time unable to speak or eat, let alone leave his bed, read, or interact with others. 
He was attached to respirator and to another machine to clear wastes from his body, and was fed through a stomach tube. 
The cost of his hospital stay is estimated to have exceeded $1 million. 
While DeBakey is glad to be alive, how many people should we subject to the grueling treatment that he endured for the chance of a few more weeks or months of life? 
Is it reasonable for 99 or perhaps 999 people to suffer for days or months, only to die from complications of surgery, because one person might live? 
The number of potentially life-prolonging technologies offered by contemporary medicine is proliferating. 
An implantable cardioverter defibrillator can jolt the heart back to normal if an irregular, life-threatening rhythm develops in patients who have had a heart attack. 
The left ventricular assistance device is a partial artificial heart used in patients dying of heart failure. 
Sophisticated biopharmaceuticals – drugs typically used in patients with extremely advanced cancers – are also multiplying. 
Some of these therapies can provide additional months or even years of life to people in their prime. 
But does their use make sense for the oldest old, especially when they are invasive and costly? 
When the baby boomers begin turning 65 in the 2010, they will account for 13% of the population in the United States; by 2050, 21% will be over 65, and 5% will be over 85. 
Medicare expenditure – the money spent by the government insurance program for the elderly – is projected to soar from 2.6% of GDP currently to 9.2% in 2050, with technology accounting for over 50% of the cost increase. 
If we are to have the resources for public goods other than health care – say, education, national parks, and highways, not to mention medical care for children and the poor – we must put the brakes on technology. 
In rich countries, this does not mean rationing care based on age alone. 
But surely the place to start is to limit treatment that is burdensome and expensive, that has a miniscule chance of success, and that is proposed for people at the very end of life. 
We need to accept human mortality and, as a matter of both practice and policy, concentrate on improving older people’s quality of life. 
This means assuring compassionate nursing home care, coordinated management of chronic diseases, and competent palliative care as death approaches, rather than using ever more technology to try to eke out a little more life. 
It also means systematically considering cost and life expectancy in decisions about reimbursing high-technology medical care. 

Scandinavia’s Accounting Trick 
While most of the world’s advanced countries face increasing difficulties in coping with the forces of globalization and competition from low-wage countries, the Scandinavian countries -- Denmark, Finland, Norway, and Sweden -- seem to have managed these challenges quite well. To be sure, Scandinavian growth is mediocre. 
But Scandinavia is good in terms of levels of per capita GDP and unemployment. Its average per capita GDP was 39% above that of the other EU countries, and on average the unemployment rate stood at 6.7%, compared to 8% elsewhere in the old EU. 
What is the secret behind Scandinavia’s success? One explanation of Scandinavia’s strong performance is Sweden’s courageous product market liberalization, the reduced generosity of Denmark’s wage replacement system and the Nokia miracle in Finland. 
However, while these factors may explain some of Scandinavia’s success, the low rate of unemployment and the high level of GDP per capita also have a much more straightforward explanation: the high share of government employment in the labor force. When private jobs are no longer competitive, government jobs seem an easy solution to keeping people employed. 
Indeed, the share of government in employment in Scandinavia is surprising. In Sweden, it amounts to 33.5% of “dependent employment” (total employment excluding the self-employed), and 32.9% in Denmark. 
On average the share of state employment in the workforce across Scandinavia is 32.7%, compared to only 18.5% on average in the non-Scandinavian countries of the EU-15. 
In Germany, Europe’s largest economy, the government’s share of the workforce is only 12.2%. 
So the high share of government employment contributes to the region’s low unemployment rate. 
Moreover, it also contributes greatly to the high per-capita GDP figures, for the simple reason that the value-added created by these government jobs is part of GDP, even if it could never have been produced in the market economy. 
According to the rules of national income accounting, in the absence of market prices, the contribution of the government sector to GDP is measured by the wages paid out by the government, regardless of how productive or useful the government jobs are. 
Thus, the performance difference relative to Germany, say, could be caricatured as follows: while Germans collect part of the private value-added as taxes, which they then spend on unemployment benefits, Scandinavians in addition give their unemployed a desk and count the unemployment benefits as value-added in the government sector and, therefore, a contribution to GDP. 
Apart from the accounting trick implicit in Scandinavia’s success, the high share of government in employment may also make a real contribution to solving one of the most fundamental problems western economies now face. 
Prompted by capital flows to low-wage countries, specialization, outsourcing, and even immigration, the equilibrium price of unskilled labor has fallen throughout the western countries. Yet these countries hesitate to let actual wages fall for obvious social reasons. 
If they want to defend the incomes of the unskilled (or the less motivated), they have four options. 
The best option is to better educate the unskilled, but this is a cumbersome, time-consuming process that offers no short-term solution. 
Thus, only three options remain in the short and medium term. 
The first option is to defend the wages of the low skilled through minimum-wage laws or paying social replacement incomes which imply minimum wage demands against the private economy. 
This is the strategy that most EU countries, Germany in particular, have chosen. 
It results in mass unemployment that is inefficient and financially unsustainable. 
The second option is to pay wage subsidies instead of wage replacement incomes to allow for the wage dispersion necessary for full employment without letting the incomes of the unskilled fall. 
This is the strategy chosen by the United States with its earned-income tax credit. 
Edmund Phelps, this year’s Nobel laureate in economics, has also long advocated it. 
The third option is the Scandinavian way. 
Here government demand for labor keeps wages high. 
While many economists judge Germany’s strategy the worst and America’s the best, the Scandinavian strategy can be considered a second-best strategy. 
Indeed, it is better to let people clean public parks, nurse children, and take care of the old in government facilities than have them do nothing, as in Germany. 
Even though GDP is artificially inflated, some useful activities are carried out. 
Nevertheless, it might be better to let the market decide what kinds of products the low-skilled and less motivated part of the workforce should and could reasonably produce, which speaks for the American way of subsidizing wages. 
Thus, the Scandinavian way is more than a mere accounting trick, but it is also less than a truly recommendable strategy for coping with the challenges of globalization. 

Scarcity in an Age of Plenty 
NEW YORK – Around the world, protests against soaring food and fuel prices are mounting. 
The poor – and even the middle classes – are seeing their incomes squeezed as the global economy enters a slowdown. 
Politicians want to respond to their constituents’ legitimate concerns, but do not know what to do. 
In the United States, both Hillary Clinton and John McCain took the easy way out, and supported a suspension of the gasoline tax, at least for the summer. 
Only Barack Obama stood his ground and rejected the proposal, which would have merely increased demand for gasoline – and thereby offset the effect of the tax cut. 
But if Clinton and McCain were wrong, what should be done? 
One cannot simply ignore the pleas of those who are suffering. 
In the US, real middle-class incomes have not yet recovered to the levels attained before the last recession in 1991. 
When George Bush was elected, he claimed that tax cuts for the rich would cure all the economy’s ailments. 
The benefits of tax-cut-fueled growth would trickle down to all – policies that have become fashionable in Europe and elsewhere, but that have failed. 
Tax cuts were supposed to stimulate savings, but household savings in the US have plummeted to zero. 
They were supposed to stimulate employment, but labor force participation is lower than in the 1990’s. 
What growth did occur benefited only the few at the top. 
Productivity grew, for a while, but it wasn’t because of Wall Street financial innovations. 
The financial products being created didn’t manage risk; they enhanced risk. 
They were so non-transparent and complex that neither Wall Street nor the ratings agencies could properly assess them. 
Meanwhile, the financial sector failed to create products that would help ordinary people manage the risks they faced, including the risks of home ownership. 
Millions of Americans will likely lose their homes and, with them, their life savings. 
At the core of America’s success is technology, symbolized by Silicon Valley. 
The irony is that the scientists making the advances that enable technology-based growth, and the venture capital firms that finance it were not the ones reaping the biggest rewards in the heyday of the real estate bubble. 
These real investments are overshadowed by the games that have been absorbing most participants in financial markets. 
The world needs to rethink the sources of growth. 
If the foundations of economic growth lie in advances in science and technology, not in speculation in real estate or financial markets, then tax systems must be realigned. 
Why should those who make their income by gambling in Wall Street’s casinos be taxed at a lower rate than those who earn their money in other ways. 
Capital gains should be taxed at least at as high a rate as ordinary income. 
(Such returns will, in any case, get a substantial benefit because the tax is not imposed until the gain is realized.) 
In addition, there should be a windfall profits tax on oil and gas companies. 
Given the huge increase in inequality in most countries, higher taxes for those who have done well – to help those who have lost ground from globalization and technological change – are in order, and could also ameliorate the strains imposed by soaring food and energy prices. 
Countries, like the US, with food stamp programs clearly need to increase the value of these subsidies in order to ensure that nutrition standards do not deteriorate. 
Those countries without such programs might think about instituting them. 
Two factors set off today’s crisis: the Iraq war contributed to the run-up in oil prices, including through increased instability in the Middle East, the low cost provider of oil, while bio-fuels have meant that food and energy markets are increasingly integrated. 
Although the focus on renewable energy sources is welcome, policies that distort food supply are not. 
America’s subsidies for corn-based ethanol contribute more to the coffers of ethanol producers than they do to curtailing global warming. 
Huge agriculture subsidies in the US and the European Union have weakened agriculture in the developing world, where too little international assistance was directed at improving agriculture productivity. 
Development aid for agriculture has fallen from a high of 17% of total aid to just 3% today, with some international donors demanding that fertilizer subsidies be eliminated, making it even more difficult for cash-strapped farmers to compete. 
Rich countries must reduce, if not eliminate, distortional agriculture and energy policies, and help those in the poorest countries improve their capacity to produce food. 


Scenes from the Drug War 
The war on drugs takes many forms. 
Colombia presents the militarized version, with specially trained battalions of soldiers skimming over jungles and mountainsides, spraying defoliants from helicopter gun-ships. 
This “poisoned earth” policy kills coca plants, not peasant farmers. So many of these cross into Ecuador to cultivate coca there. 
Or you can take a poppy field and dig a large pond, fill it with fish, plant trees around it, buy some ducks and have your children watch them. 
This will, supposedly, eradicate a field of poppies, provide local people with protein from fish and fowl, help reforestation and also bring employment to local children. 
That, at least, was the idea behind a United States Agency for International Development (USAID)-funded poppy eradication program in Afghanistan. As in Colombia, however, the results were fleeting. 
Poppy, like coca, is an ideal cash crop for farmers with small areas of land and few resources. It needs little care and brings a secure income. 
Fighting poppy and/or coca production, on the other hand, is an ideal political stance for politicians. 
It is easier to vote to spend millions of dollars to eradicate poppy/coca production in poor countries than confront addiction at home. 
To see the folly of these endeavors, let me dissect a number of anti-poppy schemes undertaken in Afghanistan with which I was connected. 
The promise of funds to fight poppy production galvanized the American Embassy in Islamabad into action. 
The wife of the then American Ambassador personally threw her weight behind the program. 
Impatient, she flew to Quetta to discuss with Mullah Nasim Aukhundzada a poppy substitution program. 
Mullah Aukhundzada was the Amir of a big area of Helmand in Southwest Afghanistan, a major poppy producing area. 
He promised to slash poppy production in return for tractors, seed, and other goodies. 
Soon after, USAID funded its own big eradication program. 
Although it attracted some experienced advisers, political pressure for fast results left little time to prepare the groundwork. 
Instead of researching the focus area’s agricultural base, social structures, and local cultures the plan’s officers launched a program based on hearsay and feeble contacts. 
Wily and resourceful, Afghans were quick to take advantage of the ignorance, goodwill and craving for instant results of the program’s officers. 
As well as happily receiving requests from individual social, political or military representatives within the target areas, the USAID-sponsored program invited NGOs to submit their own proposals. 
These NGOs, who flourished during the fight against the Soviet occupation of Afghanistan, had seen their funding dry up after Russia’s withdrawal, so funds for fighting poppy seemed a gift from heaven. 
Although they lacked experience in narcotics eradication, many NGOs based in Peshawar and Pakistan’s North West Frontier jumped at the opportunity to secure USAID money, proposing ill-considered programs. 
Injections of American money promised to help pay office administration costs and keep NGO jobs alive. 
One self�serving program was “Afghanaid,” a British organization that provided an area in Nangahar with several teams of bullocks. 
After ploughing the land in preparation for winter wheat, however, the farmers slaughtered the cattle because they could not keep them fed throughout the winter, because no fodder was provided. 
This program was quickly dubbed the “Kebabs for Poppy” scheme. 
There are, of course, other amusing anecdotes. 
What is not amusing is the end result: the poppy eradication program achieved the opposite to what was intended. 
In a number of cases the program failed to deliver what it promised. 
Mullah Aukhundzada became so angry and humiliated when the promised goodies failed to materialize, that he ordered all the former poppy producing areas, as well as surrounding areas, to double poppy production the following year. 
In another instance a dashing young Afghan, who convinced the program’s administrators that his uncle (in reality a nonentity) represented many growers whom he could persuade to stop cultivating poppy, walked away with one hundred thousand dollars worth of aid. 
Another bitter irony was that, in areas that received assistance, neighboring farmers who cultivated food crops soon switched to cultivating poppy because then, too, could then qualify for aid. 
It is, of course, easier to mock the attempts of organizations such as USAID to tackle poppy production than provide a viable solution. 
So long as political masters yearn for quick fixes and high profile results, however, such programs are likely to yield only short�term successes. 
Indeed, helicopter gun-ships and expensive crop replacement programs may provide TV-friendly images that politicians love, but do nothing to lessen the demand for drugs. 
Peasant farmers may, for a time, be bribed or intimidated (the Taliban executes Afghan poppy growers) into cultivating crops other than poppy or coca. 
They may even be persuaded to dig a fishpond and to try and eek out a living from that. 
But when the pond dries up or the substitute crop or job fails, so long as there are rich drug users in the West, they will return to cultivating poppy or coca if it provides a livelihood for their families. 

Schengen and European Security 
BRUSSELS – Another key European project is under threat. 
Some two decades after border controls were first abolished under the Schengen Agreement – which now includes 26 countries, including four non-members of the European Union – Germany has reinstated controls at its border with Austria, and France at its border with Belgium. 
The controls are meant to be temporary, and the vast majority of other borders remain open. 
But more openness does not seem to be the direction in which Europe is headed – and that is a serious problem. 
The shift away from a “Europe without borders,” instigated by images of refugees walking across internal frontiers, was fortified by the news that most of those who carried out last month’s Paris attacks came from Belgium, and that some may have entered the EU via the Balkans, posing as refugees. 
The underlying assumption – reinforced by many European politicians, especially interior ministers – is that there is a tradeoff between security and openness. 
This is far from accurate. 
In fact, the reinstatement of border controls seems to be an example of “security theater” – a policy intended to make the public feel like something is being done. 
But, far from making Europeans safer, rolling back Schengen would actually hinder the fight against terrorism, because countries would be forced to devote valuable resources – thousands of police officers, if the agreement were to be abolished altogether – to checking documents at borders. 
Those resources would no longer contribute directly to investigations into terrorist activities. 
And those investigations need all the help they can get. 
After all, the objective – to identify a few terrorists hiding among millions of law-abiding citizens, before they commit a violent act – is the equivalent of finding a needle in a haystack. 
The recognition of the flawed logic behind reinstating border controls is probably why police officials have remained guarded in discussing the issue. 
It should be remembered that when five countries – Belgium, France, Germany, Luxembourg, and the Netherlands – agreed in 1985 (in the village of Schengen, Luxembourg) to abolish border controls, they did not do so on a whim or because some politicians had a lofty vision. 
However symbolic the agreement may have been, symbolism wasn’t the point. 
Participating countries’ security establishments had recognized that stopping people at the internal borders did not help them counter major threats, such as organized crime and drug smuggling. 
Truck drivers, who protested against long waits at customs stations, helped spur the effort. 
But it took another decade of hard-nosed, detailed negotiations, entailing efforts to strengthen the EU’s external borders, to reach the point, in 1995, where internal border controls could actually be lifted. 
The subsequent decision by non-EU countries like Switzerland to join the Schengen Area highlights the massive benefits, including for security, of maintaining open borders. 
Rather than attempt to control the masses of tourists and business travelers entering the country from all sides – essentially an exercise in futility in Switzerland – the country decided to focus police resources specifically on security threats. 
By joining Schengen, the Swiss police also gained access to the Schengen Information System and other important European databases on criminal suspects, stolen cars, and more. 
Of course, there are flaws in the Schengen system. 
Like the eurozone, the area began with only a small group of member countries, all of which had a similar outlook and capacity to implement common rules, but soon welcomed many others, some of which, it later became apparent, could not uphold agreed standards. 
In the eurozone, imbalances in competitiveness and fiscal positions – which were not noted during the perfunctory check, based on formal criteria, that was conducted before approving new members – led to a protracted economic crisis. 
In the Schengen Area, some countries’ inability to protect external borders adequately – owing to a lack of administrative capacity (especially true in Greece, but also, to some extent, Italy), together with geographic challenges like long and fractured coast lines – have undermined confidence in the face of the refugee crisis. 
The eurozone survived its crisis for two key reasons. 
First, a common institution, the European Central Bank, had the power to act. 
Second, member states relinquished some control over their banks, in order to boost the system’s overall stability. 
If the Schengen Area is to endure, it needs to evolve in a similar direction, establishing a common institution responsible for securing external borders, while reinforcing the framework for internal security. 
As it stands, defense of Schengen’s external borders is up to individual member states, including one, Greece, that is already facing a devastating economic crisis. 
The only EU-wide operation aimed at helping police the external border, called Frontex, is severely limited in scope. 
What the Schengen Area needs is a true European coast guard, with its own budget, ships, and personnel. 
The Mediterranean can be expected to remain the main security challenge for some time, owing both to illegal immigration and its proximity to terrorist training grounds. 
It thus makes sense for the new coast guard, backed by EU funds, to start there. 
Even a small fraction of the EU budget would far exceed the available resources of any individual country. 
Moreover, a European coast guard would provide a flexible tool with which to allocate resources as effectively as possible at any given moment. 
After all, even if security threats remain concentrated in the same broad area, the most urgent challenges can shift considerably over time. 
Last year, the problem was Southern Italy. 
Today, it is the Aegean. 
Tomorrow it might be somewhere else. 
Europe needs to prepare for any eventuality. 
It is not only possible to have both openness and security; the former can actually bolster the latter. 
The Schengen Area’s members need to recognize that the security rationale for abolishing internal borders remains as compelling today as it was when they joined. 

Closing America’s Jobs Deficit 
BERKELEY – The latest data on employment in the United States confirm that the American economy continues to recover from the Great Recession of 2008-2009, despite the slowdown engulfing the other G-20 nations. 
Indeed, the pace of private-sector job growth has actually been much stronger during this recovery than during the recovery from the 2001 recession, and is comparable to the recovery from the 1990-1991 recession. 
During the last 31 months, private-sector employment has increased by 5.2 million and the unemployment rate has now fallen below 8% for the first time in nearly four years. 
But the unemployment rate is still more than two percentage points above the long-run value that most economists view as normal when the economy is operating near its potential. 
Moreover, the number of long-term unemployed (27 weeks or longer) is about 40% of the total – thelowest share since 2009, but still far higher than in the previous recessions since the Great Depression, and about double what it would be in a normal labor market. 
So the US labor market, while healing, is still far from where it should be. 
That is partly because the job losses during the Great Recessionwere so large – twice as large as those of previous recessions since the Great Depression. 
In terms of US economic history, what is abnormal is not the pace of private-sector job growth since the 2008-2009 recession ended, but rather the length and depth of the recession itself. 
The downturn was a distinctive balance-sheet recession that caused sizeable declines in household wealth and necessitated painful deleveraging. 
Consistent with recoveries from such recessions, demand has grown slowly, despite unprecedented fiscal and monetary stimulus, and that explains why the unemployment rate remains high. 
Indeed, businesses cite uncertainty about the strength of demand, not uncertainty about regulation or taxation, as the main factor holding back job creation. 
Public-sector demand has also contracted, owing to state and local governments’ deteriorating budgets. 
As a result, public employment, which usually rises during recoveries, has been a major contributor to high unemployment during the last three years. 
Despite a modest uptick in the last three months, government employment is 569,000 below its June 2009 level – a 30-year low as a share of the adult civilian population. 
According to Hamilton Project calculations, if this share were at its 1980-2012 average of about 9.6% (it was actually higher between 2001 and 2007), there would be about 1.4 million more public-sector jobs and the unemployment rate would be around 6.9%. 
Recent reports suggest that there are more than three million unfilled job openings, and about 49% of employers say that they have difficulty filling positions, especially in information technology, engineering, and skilled trades. 
This has fanned speculation that a “mismatch” between workers’ skills and employers’ needs is a significant factor behind the elevatedunemployment rate. 
But there is scant evidence to support this view. 
The relationship between the unemployment rate and the job vacancy rate is consistent with patterns in previous recoveries. 
Nor is there anything unusual about the size of mismatches between job openings and worker availability by industry. 
Such industrial mismatches become larger during recessions, reflecting greater churn in the labor market as workers move between shrinking and expanding sectors; but they decline as the economy recovers. 
This pattern also characterizes the current recovery, and recent data suggest that mismatches between the demand and supply of labor by industry are back to pre-recession levels. 
But, as the US economy recovers, technological change is accelerating, fueling demand for more skills at a time when the workforce’s educational-attainment levels have plateaued. 
This is the real skills gap that existed before the Great Recession, and it is getting worse over time. 
The gap manifests itself in much higher unemployment rates for high-school educated workers than for college-educated workers at every stage of the business cycle. 
The gap also shows up in significant – andrising – inequality between the earnings of high-school educated workers and those with a college degree or higher. 
Earnings gains have been especially strong for those with tertiary degrees, while the real wages of high-school educated workers, especially men, have fallen sharply. 
It is becoming increasingly difficult for workers with low levels of educational attainment to find high-paying jobs in any sector, even when the economy is operating near full capacity. 
The US was the world leader in high school and college graduation rates for much of the twentieth century. 
Today it ranks in the middle of the OECD countries. 
A major factor behind that relative decline has been the US school system’s failure to ensure high-quality education for disadvantaged Americans, particularly children from poor, minority, and immigrant households. 
According to the most recent census, about one-quarter of children under the age of six live in poverty. 
They are less likely to have access to early-childhood programs that prepare them for school, and are more likely to attend schools that have high student/teacher ratios and that cannot attract and retain skilled teachers. 
As a result of these and other problems, the average American secondary-school student receives inadequate preparation in core subjects such as writing, mathematics, and analytical reasoning, which in turn reduces college enrollment and completion rates. 
The US experience is consistent with OECD evidence that students from countries with greater income inequality score lower on academic achievement tests. 
And a recent study by McKinsey suggests that the gaps in educational opportunity and attainment by income impose the equivalent of a permanent recession of 3-5% of GDP on the US economy. 
To address the skills gap, the US must boost the educational attainment of current and future workers. 
That means investing more in education at all levels – in early-childhood education programs, elementary and secondary schools, community colleges, trade-school programs for specific jobs in specific sectors, and financial aid for higher education. 
Above all, it means addressing the income disparities in educational opportunity and attainment. 



Science and Africa's Salvation 
Africa is a rich continent -- rich in bio-diversity, rich in mineral resources, rich in precious stones. 
It is also rich in traditional knowledge, especially knowledge associated with indigenous and medicinal plants. 
But Africa is also a poor continent. 
With roughly 13% of the world's population, it enjoys only 1% of the world's wealth. 
An estimated 50% of Africa's population lives in poverty and 40% suffer from malnutrition and hunger. 
Two-thirds of Africa's land is degraded and more than half of its population lives without safe drinking water. 
Malaria threatens many regions and HIV/AIDS has devastated the youth of many African nations, including Botswana, South Africa, Zimbabwe, where an estimated 25% of adults are afflicted with this deadly disease. 
Stark disparities exist not only between Africa and the rest of the world, but between Africa and the rest of the developing world. 
What accounts for this? 
There are many political, socioeconomic and environmental factors. 
Centuries of foreign colonialism followed by decades of homegrown authoritarian governments. 
A chronic lack of transparency in economic transactions often accompanied by corruption. 
Unsustainable use of natural resources. 
Marginal participation in the global economy. 
But another, less visible or dramatic factor, is also at work: Africa's woeful shortcomings in science and technology. 
By almost any measure, African science and technology is in a dismal state: in terms of the miniscule numbers and inadequate skills of its research and technical personnel; the poor and neglected quality of the infrastructure; the low level of instruction in primary and secondary schools; the miserly investments in universities and research institutes. 
What should African nations do to advance their scientific and technological capabilities? 
I suggest a five-step program: 
First, develop, sustain, and utilize local capacities and leadership . 
Developing scientific and technical capacity is less difficult than sustaining it, and sustaining it is less difficult than utilizing it. 
Yet, the ultimate impact of science and technology depends on all three factors. 
So African nations must invest in scientific and technological education and training. 
Each nation must also develop strategies that offer scientists and technologists local employment opportunities. 
To assure such sustainability, a vibrant educational system and an enduring, yet flexible, job base are needed. 
Second, mobilize the best and most relevant science and technology in Africa and elsewhere to address critical social and economic problems . 
The food, health and environmental issues faced by people in the least developed countries are of a different dimension (often of a different kind) to issues faced by people in rich countries. 
Such differences help to explain why science and technology initiatives in developed countries rarely target Africa's most critical problems. 
If Africa is to use science and technology to tackle its most pressing problems, it must develop its scientific and technical capacities. 
Otherwise, it will be forever beholden to "second-hand" science that likely will never quite fit the continent's circumstances. 
Of course, African nations should not turn their backs on research from beyond their borders. 
Indeed, efforts should be made to strengthen poorly funded, yet relevant, programs within UN organizations, and African nations should continue to pursue cooperative projects with constituencies with special ties to the continent. 
For example, sub-Saharan African scientists should seek to tap distant yet potentially strong ties with expatriate scientists of African origin working in rich countries. 
Third, build the case for supporting indigenous science and technology . 
This is a critical challenge for African scientists given competing demands on the continent's limited financial resources. 
African scientists not only have an obligation but a self-serving interest to convince governments of the value of science and the need to support such endeavors. 
Such efforts must include a willingness to engage the public in discussions on science-based issues, a desire to lobby the government for support, and, perhaps most importantly, a commitment to pursue research that focuses on critical social and economic problems -- that is, agendas that allow scientists to help their nations build stronger and more sustainable societies. 
Fourth, share innovative and successful experiences in the development and application of science and technology . 
Africa's successful experiences in the application of science and technology for development are all-too-often drowned out by dismal news across the continent. 
Identification of genetic molecular markers for improved tea harvests in Kenya, ongoing efforts to examine alternative treatments for river blindness in Uganda, research on sickle-cell anemia in Ghana, and detailed assessments in Madagascar of the effectiveness of medicinal plants treating diabetes are examples of science-based initiatives that deserve recognition within the larger scientific community and among the public. 
Fifth, strengthen and build African centers of excellence . 
Despite the dismal condition of most scientific and technological institutions in Africa, pockets of strength exist. 
For example: the Immunology Laboratories in Cameroon, the African Centre for Meteorological Applications in Niger, and the African Centre for Technology in Senegal could be transformed into international centers of excellence. 
Such a transformation would not only boost African science but could serve as models for developing of other institutions across the continent. 
To address its problems and avoid being marginalized even more, Africa must devise long-term strategies that enable it to sustain economic growth and compete in a world where development is increasingly dominated by scientific knowledge and technical skills. 
Science and technology cannot save Africa by themselves, but Africa without science and technology cannot be saved. 

Science and the Meaning of Life 
Most religions embrace and promote certain notions about the meaning of life, offering the faithful reasons why we and all other organisms exist. 
Indeed, perhaps the fundamental definition of religious faith is the believe that life serves a (divine) purpose. 
Science, however, has always given a resounding "no" to the question "Does life have a higher meaning?" 
At least until now. 
In a series of lectures and in a forthcoming book, science writers Eric Schneider and Dorion Sagan argue that even from a scientific perspective, life does serve a purpose, and thus does have a meaning that transcends the self. 
They arrived at this conclusion when trying to reconcile a contradiction that has long puzzled those who study both biology and physics. 
Living organisms obviously embody arrangements of matter into complex structures. 
They transform chemicals and, in an orderly fashion, transport and store them in purposeful ways. 
Above the level of individual organisms, they form societies and ecosystems. 
All of us are familiar with these fundamental biological notions, and we are all part of these processes. 
Order seems to be the name of the biological game, and evolution leads to more complex organisms and more organized structures. 
This is, of course, at odds with one of the fundamental principles of physics: the second law of thermodynamics, which holds that entropy - the degradation of all matter and energy in the universe to an ultimate state of inert uniformity - increases as a result of each and every process. 
The more the world develops the more disorder there will be. 
Physics even accepts the idea that entropy defines the direction of time. 
In the end everything will be broken down and randomly distributed. 
How do Schneider and Sagan reconcile the contradiction between what appears true of life - that it organizes matter into increasingly complex creatures and structures - and the notion that disorder should increase and order should be lost? 
Equally important, how can science see any meaning of life in the reconciliation of that apparent contradiction? 
The bottom line is that the second law of thermodynamics rules and that the existence of life helps increase entropy. 
In other words, life promotes disorder. 
Some might think that this could be true only if the logical end of evolution and intelligent life were to be a nuclear explosion that pulverized Earth. 
But that is not what Schneider and Sagan mean. 
Instead, they make a distinction between matter and energy and say that matter organized in structures disseminates energy gradients faster than randomly distributed matter. 
As one example, they consider a phenomenon of which beer drinkers have long been aware. 
If you want to empty a bottle of water (or beer) and turn it upside down, the water will come out in uneven glugs. 
If you spin the bottle and create an eddy inside it, the water will flow out much faster and more smoothly. 
The eddy in the bottle is a structure in the water. 
Water running down is matter losing its potential energy. 
The structure speeds up the dissemination of the energy gradient. 
Similarly, on a hot day, the air in a forest is cooler than over adjacent bare lands, thanks to evaporation and transpiration in the trees. 
The energy gradient, in this case that of heat, is disseminated more effectively by the structure of the forest and the life within it. 
The more complex the structure the more effective is the energy dissemination. 
Populations are better in this respect than single individuals; ecosystems even more so, and most effective of all - so far - are human high-tech societies. 
Thus, goes the argument, the second law of thermodynamics is not contrary to the existence of life; rather, it is the cause of life. 
That law drives evolution to higher levels of complexity and to more sophisticated societies and technologies for the sole purpose of disseminating energy gradients. 
So life, at long last, has a higher meaning in the eyes of science - even if serving the second law of thermodynamics is not exactly what the religiously faithful had in mind. 

Science and International Development Policy 
WASHINGTON, DC – On the surface, the village at the foot of the Tian Shan Mountains looks similar to its neighbors. 
Men stand near the canal wearing traditional kalpak hats, children play in the river, and women bake naan, the round flaky Kyrgyz bread. 
But unlike other communities along the Aspara River, this village is addressing the water security challenges they face, rather than ignoring them. 
Supported by a science-based international development program, the newly created local water management council now meets with a similar council across the international border in Kazakhstan. 
Together, the councils solved a decades-old problem that affected the ability to feed children, threatened regional security, and prevented enforcement of a 1948 treaty determining how much water each village may use to grow crops. 
Applying local solutions to development challenges, these Kyrgyz water management councils built diversion canals and installed a simple meter to monitor the amount of water used by each village. 
Constructed from material available in the villages, the new canals connect to the meter and computers, allowing real-time water-flow data to be shared in each village. 
Though the development assistance has concluded, these international water managers now are mitigating the impact of increasing water flow from glacial melt, while intensifying regional agriculture demand by co-designing water-use forecasts and planting drought-tolerant crops. 
Scientific water management thus solved both a development problem and a diplomatic problem, increasing water supply and fostering habits of transnational cooperation that empower villagers to tackle problems. 
A team of scientists and engineers, rather than diplomats and conflict-resolution experts, can provide a valuable pragmatic lens on what may appear to be a tangled set of political and cultural issues. 
During US-Soviet arms-control negotiations during the Cold War, and, more recently, during international negotiations over Iran’s nuclear program, Western and Iranian physicists often found common ground more readily than the politicians. 
Science- and engineering-based solutions to global challenges have also sparked major innovations, such as the Green Revolution, which tackled the devastation caused by wheat rust, and pioneering immunization techniques that dramatically reduced the spread of measles and polio. 
And such solutions continue to address development challenges. 
A recently developed microbicide reduces the transmission of HIV/AIDS by 39%. 
Geospatial data locate freshwater sources and improve development assistance effectiveness. 
And a new diagnostic tool identifies the presence of multidrug-resistant tuberculosis and guides medical staff to precise treatment solutions. 
The list goes on. 
The Famine Early Warning System Network (FEWS NET) alerts governments to possible food shortages. 
The Volcanic Disaster Assistance Program provides real-time information about impending natural disasters, from volcanoes to subsequent earthquakes and tsunamis. 
Looking forward, dirt-powered fuel cells could light remote villages so children can study, and large-scale water desalination plants may generate drinking water from the ocean. 
These are all examples that Mark Green, who has just been nominated to head up the US Agency for International Development, should bear in mind. 
Green’s commitment to the “aid reform agenda” has been hailed by organizations like the US Global Leadership Coalition, a network of CEOs and NGOs committed to elevating both development and diplomacy. 
And he was deeply involved in establishing the Millennium Challenge Corporation, which provides aid to countries that meet clearly specified economic and political criteria. 
To advance his goals, Green would do well to increase the role of science and technology in development practice, building on the work of the Global Development Lab at USAID, launched by Barack Obama’s administration. 
Scientific experimentation and technological innovation advance effectiveness and accountability through clear metrics of success and failure. 
Evidence-based solutions call for evidence: results delivered, not resources invested. 
Original development solutions grounded in science are thus created in parallel with innovative monitoring systems that require program evaluation. 
The result is an efficient and effective use of public and private financing. 
Moreover, science and technology-based approaches to development can sidestep partisan posturing. 
Notwithstanding the intense political debate in the US over climate change, science is upheld globally as a neutral endeavor, and often provides an opportunity for bilateral and multilateral cooperation that complements – and strengthens – diplomatic relationships. 
In recent years, a large number of civilian agencies – including those with a science focus – have been engaging in international assistance programs and initiatives, covering areas such as public health, education, disease prevention, police training, trade promotion, and clean water. 
Perhaps most important, the scientific method instills habits of mind – the pursuit of truth, knowledge, and good government – that are not only intrinsically valuable, but also essential for twenty-first-century economic progress. 
In a 2016 commencement address at the California Institute of Technology, the surgeon and writer Atul Gawande described science as “a commitment to a systematic way of thinking, an allegiance to a way of building knowledge and explaining the universe through testing and factual observation.” 
That commitment implies a “weird way of being,” Gawande continued. “You are supposed to have skepticism and imagination, but not too much. 
You are supposed to suspend judgment, yet exercise it. 
Ultimately, you hope to observe the world with an open mind, gathering facts and testing your predictions and expectations against them.” 
Science and technology can never be a panacea; the neutrality of the scientific method will always run up against the passions and interests of politics, which can drive scientists to create nerve gas and atomic weapons as readily as new seeds and desalinated water. 
Still, now more than ever, in what Alphabet Executive Chairman Eric Schmidt calls the “age of intelligence,” the dissemination of new tools and habits to expand knowledge is a core element of human development around the world. 

A Scientific Outlook for a Post-Factual World 
VIENNA – We have entered a disturbing new era. 
The sheer volume of false utterances and outright lies spewed during the United States’ presidential election campaign implies a growing disdain for factual knowledge, as does the proliferation of fake news disseminated without journalistic filters on social-media platforms such as Facebook and Twitter. 
By the time of the United Kingdom’s Brexit referendum in June, experts had already been deemed dispensable. 
With elites everywhere being accused of neglecting “real” people, frustration and anger are now trumping fact-based deliberation. 
In a climate of anxiety, confusion, and nostalgia for a fantastical past, raw emotion prevails. 
The rules of public discourse become obsolete, and the open horizon of possible futures is narrowed to a single escape route that fear-mongers portray as the only way forward. 
This is a poor way to cope with uncertainty, and it stands in striking contrast to the methods of science and free inquiry. 
In science, uncertainty is a powerful incentive for acquiring knowledge; indeed, it is the primary motivation for research, which is inherently uncertain. 
New discoveries often occur during open-ended explorations of the unknown. 
Scientists conducting fundamental research cannot predict what they will find or when they will find it. 
Many important discoveries are a result of serendipity: researchers find something unexpected that they were not looking for, but which they quickly recognize as significant. 
The scientific community rigorously seeks consensus about knowledge produced so far, but it knows that there is still much more to be discovered. 
All scientific knowledge is therefore preliminary, and will be extended, complemented, or replaced by new knowledge. 
At the same time, science and technology have enabled us to anticipate risks and identify additional unknowns. 
So, the more we know, the more we comprehend what we do not know. 
But, whereas the scientific community embraces uncertainty, remains ever curious, and is confident about the power of science and technology to create new opportunities for mankind’s collective future, other segments of society do not necessarily share this outlook. 
And it behooves scientists to understand why. 
There can be a fine line between experts’ prerogative to make technical judgments and non-experts’ prerogative to assess the consequences of those judgments. 
But between these positions lies a vast range of unintended consequences. 
When people translate knowledge into action, they initiate new interactions within complex systems, without necessarily knowing what the final consequences of those actions will be. 
Humans have evolved to understand simple cause-and-effect relationships. 
What we need now are more refined mathematical tools and simulation models to understand the hidden uncertainties that can emerge from interactions in complex social and natural systems. 
Likewise, humans have evolved to crave certainty. 
Past civilizations adopted divinatory practices in an effort to know the future. 
But, since then, humanity has made impressive strides away from believing in a predetermined destiny, and toward actively shaping the human condition. 
Science and technology were crucial to this progress, but they were not sufficient. 
We also needed new ideas about the scope of human agency. 
Encouraged by the achievements of modern science, we came to perceive the future as being radically open. 
Even though path dependencies, incomplete information, and cognitive biases can still frustrate human actions, we need no longer assume that past experiences must determine future outcomes. 
The future is inherently uncertain, which means that the present always could have turned out different than it has. 
Uncertainty is a cunning force in nature and lived experience. 
Its logic is always at work as we encounter constantly changing circumstances. 
It evolves and manifests itself in different ways: sometimes it challenges our assumptions and subverts our expectations; often, it takes us by surprise. 
Because of uncertainty, our achievements are not always what we intended them to be, and our lives are never simply routine. 
Uncertainty reveals opportunities to us that otherwise would have been wasted. 
Our lives are probabilistic, not determined, and the more we realize this, the less we need to feel threatened by uncertainty. 
Still, there is widespread disaffection today, and clever politicians are eager to exploit citizens’ anger. 
If people feel engulfed by crises, and view the future as fragile and precarious, they will be reluctant to embrace uncertainty. 
But this is where science has something to offer. 
Science makes visible that which would otherwise remain hidden. 
It alerts us to randomness in the physical and social world, and to the role that uncertainty plays in our communities and personal lives. 
By revealing the messiness of the world that we have created – intentionally and unintentionally – it allows us to imagine how we can create that world anew, even as we accept that the future will remain open and uncertain. 



Scientific Capitalism 
PRINCETON – To understand how we got ourselves into our current economic mess, complicated explanations about derivatives, regulatory failure, and so on are beside the point. 
The best answer is both ancient and simple: hubris. 
In modern mathematical economics, many people in the rich world decided that we had finally devised a set of scientific tools that could really predict human behavior. 
These tools were supposed to be as reliable as those used in engineering. 
Having ushered scientific socialism into its grave at the Cold War’s end, we quickly found ourselves embracing another Science of Man. 
Our new beliefs did not stem from some new experiment or unexpected observation, the way a real scientific paradigm shift does. 
Economists do not typically conduct experiments with real money. 
When they do, as when the Nobel laureate Myron Scholes ran the hedge fund Long Term Capital Management (LTCM), the dangers often outweigh the benefits (a lesson we still don’t seem to have learned.) 
And, since almost every observation that economists make turns out in a way that wasn’t predicted, no unexpected observation could ever actually change an economic paradigm. 
What really produced the change in economics that led to disaster was the simple fact that you could now get away with saying certain kinds of things in public. 
Some of us honestly thought that history was over. 
And after all, you can’t have a final, utopian society without having a final, scientific theory of human behavior, together with some mad scientists or philosophes to preside over the whole thing. 
The problem is that, no matter how “scientifically” these new beliefs were formulated, they are still false. 
Capitalism is, among other things, a struggle between individual people over the control of scarce resources. 
Like boxing and poker, it is a soft, restrained, private form of warfare. 
Military strategists have known for centuries that there is, and can be, no final science of war. 
In a real struggle over things that actually matter, we must assume that we are up against thinking opponents, who may understand some things about us that we don’t know about ourselves. 
For example, if profit can be made by understanding the model behind a policy, as is surely the case with the models used by the United States Federal Reserve, sooner or later so much capital will seek that profit that the tail will begin to wag the dog, as has been happening lately. 
The truth is that such models are most useful when they are little known or not universally believed. 
They progressively lose their predictive value as we all accept and begin to bet on them. 
But there can be no real predictive science for a system that may change its behavior if we publish a model of it. 
Markets might once have been fairly efficient, before we had the theory of efficient markets. 
If investing is simply a matter of allocating money to an index, however, liquidity becomes the sole determinant of prices, and valuations go haywire. 
When a substantial fraction of market participants are simply buying the index, the market’s role in ensuring good corporate governance also disappears. 
The formation of large bubbles in recent decades was partly a consequence of the commonness and incorrigibility of the belief that no such thing could ever happen. 
Our collective belief that markets are efficient helped make them wildly inefficient. 
Despite this, over the course of the last 20 years, economists began to act as if we thought we could genuinely predict the economic future. 
If the universe didn’t oblige, it wasn’t because our models were wrong; “market failure” was to blame. 
It is not clear how we could know that markets were failing whenever they fell significantly, but believed that we had no business second-guessing them when they climbed. 
Nor is it clear how we all knew that LTCM’s failure or the post-September 11 malaise posed grave risks to the system, but could seriously doubt that the dot-com craze was a bubble. 
We repeatedly rescued bubbles, and never deliberately burst them. 
As a result, our financial markets became a pyramid scheme. 
Moral hazard, we thought, could safely be ignored, because it is “moral,” which, as every true scientist knows, just means “imaginary.” 
But a market is not a rocket, economists are not rocket scientists, and moral hazard is, in human affairs, the risk that matters most. 
The false belief that we can collectively see the future using science has led us all to make various binding promises about things in that future that no human being can possibly guarantee. 
A promise of something that we should know cannot be guaranteed is also known as a lie. 
That vast tissue of lies is now tearing itself apart. 
Governments think we can stop this process by throwing money at it, but there are many reasons to believe that this won’t work. 
The banking system is probably already past saving – many institutions simply aren’t banks anymore, but vast experiments that didn’t work out as predicted. 
We could easily be “stimulating” and “rescuing” the economy for a rather long time, in ways that only delay the needed adjustment, before we are finally forced to allow the required creative destruction to occur. 
But that is not the real problem. 
The real problem is the pseudoscientific ideology behind today’s crisis. 
A final science of man has no room for the unplanned and unpredictable recovery that is the only kind a capitalist economy can have after a crisis of this size. 


The “Impact” Illusion in Science 
STANFORD – Government-funded scientific research runs the gamut from studies of basic physical and biological processes to the development of applications to meet immediate needs. 
Given limited resources, grant-making authorities are always tempted to channel a higher proportion of funds toward the latter. 
And, faced with today’s tight budget constraints, the inclination to favor projects that have demonstrable short-term returns is arguably stronger now than in the past. 
But to succumb to it is a mistake. 
Some of science’s most useful breakthroughs have come as a result of sustained investment in basic research or as by-products of unrelated efforts. 
Indeed, evaluating the impact of any research project is difficult. 
As Marc Kirschner, a professor at Harvard Medical School, pointed out in a thoughtful editorial in the journal Science: “One may be able to recognize good science as it happens, but significant science can only be viewed in the rear-view mirror.” 
Even preeminent researchers may underestimate the significance of their findings at the time they obtain them. 
When Salvador Luria, my university microbiology professor, received the 1969 Nobel Prize in Physiology or Medicine, he made the point eloquently, sending a humorous cartoon to all who had congratulated him on the award. 
It depicted an elderly couple at the breakfast table. 
The husband, reading the morning newspaper, exclaims, “Great Scott! 
I’ve been awarded the Nobel Prize for something I seem to have said, or done, or thought, in 1934!” 
Discoveries can come from unforeseen directions, as seemingly unrelated and obscure research areas intersect unexpectedly. 
In a 2011 editorial, the French biologist François Jacob described the research that led to his 1965 Nobel Prize in Physiology or Medicine. 
His lab had been working on the mechanism that under certain circumstances causes the bacterium E. coli suddenly to produce bacterial viruses. 
At the same time, another research group was analyzing, also in E. coli, how the synthesis of a certain enzyme is induced in the presence of a specific sugar. 
As Jacob put it, “The two systems appeared mechanistically miles apart. But their juxtaposition would produce a critical breakthrough for our understanding of life.” 
Thus was born the concept of an “operon,” a cluster of genes whose expression is regulated by an adjacent regulatory gene. 
Another quintessential example of both the synergy and serendipity of basic research is the origin of recombinant DNA technology, the prototypical technique of modern genetic engineering (sometimes called “genetic modification,” or GM). 
It resulted from a combination of findings in several esoteric, largely unrelated areas of basic research in the early 1970s. 
Research in enzymology and nucleic acid chemistry led to techniques for cutting and rejoining segments of DNA. 
Advances in fractionation procedures permitted the rapid detection, identification, and separation of DNA and proteins. 
And the accumulated knowledge of microbial physiology and genetics allowed foreign DNA to be introduced into a cell and made to function there. 
The result was the birth of modern biotechnology. 
Over the last 40 years, recombinant DNA technology has revolutionized numerous industrial sectors, including agriculture and pharmaceuticals. 
It has enabled the development of vaccines against infectious diseases and drugs that treat non-infectious illnesses like diabetes, cancer, cystic fibrosis, psoriasis, rheumatoid arthritis, and some genetic disorders. 
Another example is the creation of hybridomas, hybrid cells created in the laboratory by fusing normal white blood cells that produce antibodies with a cancer cell. 
Researchers wanted to combine the cancer cells’ rapid growth and the normal cells’ ability to dictate the production of a single specific “monoclonal” antibody. 
Their goal was to learn more about the rates of cellular mutation and the generation of antibody diversity. 
But, as it turned out, these immortal, antibody-producing cells were useful not only for scientific inquiry, but also as a novel technological instrument for a variety of medical and industrial applications. 
Indeed, the technology has led to the development of highly specific diagnostic tests; blockbuster anti-cancer drugs such as Rituxan (rituximab), Erbitux (cetuximab), and Herceptin (trastuzumab); and Avastin (bevacizumab), which is widely used to treat both cancer and diseases of the retina that commonly cause blindness. 
In his editorial, Kirschner bemoaned the “tendency to equate significance to any form of medical relevance,” noting that it caused research into non-mammalian systems to be treated “as intrinsically less valuable than studies on human cells.” 
As a result, simple but informative model systems can be overlooked, and an important link between basic science and human medicine can be lost. 
The past century of research on various non-mammalian model systems makes this point persuasively. 
For example, studies of Caenorhabditis elegans, a tiny roundworm, have provided a wealth of information on cellular differentiation, neural networks, meiosis, and programmed cell death. 
Studies of the fruit fly, Drosophila melanogaster, have significantly advanced our understanding of the mechanisms underlying Mendelian genetics. 
The amount of money funneled by governments into research is large. 
In the United States, the National Institutes of Health spends roughly $30 billion a year, and the National Science Foundation adds another $7 billion. As officials decide how that money is to be spent, they would be wise to glance in the rear-view mirror and fund the basic research that keeps science moving forward. 

Why Scientists Are Marching 
LONDON – On April 22, scientists from around the world will mark Earth Day by participating in an unprecedented “March for Science.” 
The aim of the march will be to “celebrate and defend science at all levels – from local schools to federal agencies.” 
For the rest of the world, it is important to understand why the usually sedate community of scientists will be leaving their labs and offices to take to the streets in a global demonstration of concern. 
The answer was signaled in November 2016, when Oxford Dictionaries named “post-truth” its “Word of the Year.” 
In an era in which “objective facts are less influential in shaping public opinion than appeals to emotion and personal belief,” scientists like us cannot afford to stay silent any longer. 
So we will be marching to return scientific “certainty” to its rightful place in public debate. 
“Post-truth” describes well a year in which disregard for facts became a pervasive feature in world politics. 
As a candidate, US President Donald Trump denied the overwhelming evidence for climate change, endorsed the discredited claim that vaccinations caused autism, and asserted that compact fluorescent light bulbs can cause cancer. 
But Trump does not have a monopoly on post-truth politicking. 
Policymakers in the US and Europe have trafficked in equally outrageous “expert views” on the consequences of their opponents’ positions on topics ranging from genetically modified foods to nuclear energy to Brexit. 
Recent social media attacks on a measles-rubella vaccination campaign even surfaced in India, fueling a mix of conspiracy theories, safety concerns, and questions of motivation – and demonstrating the extent to which lives can be imperiled when facts are ignored. 
Earlier warnings, such as Ralph Keyes’ 2004 book The Post-Truth Era: Dishonesty and Deception in Contemporary Life, attracted little attention from the science community. 
That’s because we’d heard it all before; “post-truth” responses to “objective facts” are as old as science itself. 
An early example was the persistent belief in a flat earth, a view maintained for centuries after the ancient Greeks had accumulated clear evidence to the contrary. 
In some places, the denial and invective hurled at Darwin and his theory of evolution in the nineteenth century continue to this day. 
“Don’t confuse me with the facts,” goes an old joke capturing the post-truth sensibility: “my mind is made up.” 
But now we have arrived at a watershed moment, when this sensibility has entered the political mainstream, influencing policies that will profoundly affect the health and wellbeing of the planet and its inhabitants. 
Those who regard the scientific method – the systematic observation, measurement, and hypothesis testing that has underpinned humans’ apprehension of ourselves and the world for centuries – as a core value of society must step forward to defend its central role in guiding public debate and decision-making. 
To be persuasive, however, we scientists must put our own house in order, by avoiding behavior that can fuel post-truth rhetoric. 
Lapses in ethical standards give ammunition to the enemies of science. 
When published findings are based on falsified data or deliberately misleading conclusions, the credibility of every scientist suffers. 
Peer review must be rigorous and always strive to detect and snuff out shoddy or deceptive work. 
Equally important, researchers must do a better job explaining what scientific “certainty” means, helping the public and policymakers to distinguish between proven hypotheses and unverified theories. 
They must show how alternate models are tested against all available evidence under controlled conditions, yielding observations that can be repeated – and measurements that can be reproduced – by other researchers. 
Conclusions that are not derived from such carefully controlled observations must remain conjecture. 
Those engaged in science urgently need to develop and implement more effective strategies to communicate scientific advances and discoveries that affect society and the environment. 
A central focus of this effort should be to explain and defend the methods and rigor of the underlying process of evidence collection and validation. 
Simply put, a higher level of science literacy among the public, the media, and especially among policymakers is essential to recognizing and rejecting unreasoned attempts to discredit science and scientists. 
In his 1946 book The Discovery of India, India’s first prime minister, Jawaharlal Nehru, advocated the development of a “scientific temper” – the adoption of the scientific method as a way of life. 
To defeat the post-truth threat, that temper is needed now more than ever. 
On April 22, let’s defend it with passion. 

Unlocking Private-Sector Funds for Sustainable Development 
WASHINGTON, DC – For the last three years, dozens of countries have gathered each July to present their national plans to achieve the Sustainable Development Goals (SDGs). 
At the latest of these United Nations High-Level Political Forums, governments rolled out impressive blueprints – almost none of which included realistic budgets or revenue sources. 
Estimates of the development investment gap are typically in the trillions of dollars, while official development assistance is hovering around $140 billion per year. 
One effective way to help close this funding gap is to catalyze substantial investment from the private sector. 
The private sector has long played an integral role in poverty reduction and economic development – a role that extends well beyond finance. 
Private companies create 90% of jobs (the most effective way to lift people out of poverty) in the developing world and facilitate improved efficiency, technological adoption and innovation, and the distribution of goods and services. 
Private-sector financing of the SDGs would occur via established institutional investors, including pension funds, sovereign-wealth funds, and insurers, which together represent trillions of dollars of “patient capital.” 
Yet, as it stands, institutional investors allocate only a small share of assets to so-called impact investing, while channeling huge sums toward a relatively small number of public companies. 
The key to achieving the SDGs is thus to impel public companies – especially the large firms that receive the majority of institutional investment – to account for environmental, social, and governance (ESG) criteria relevant to the SDGs in their decision-making. 
This approach recognizes the need to adopt a long-term perspective when implementing the SDGs, even as we respond to their urgency. 
The good news is that ESG-anchored investing is already on the rise, with most of the major institutional investors integrating ESG factors into their investment strategies, at least to some extent. 
The 2016 Global Sustainable Investment Review reported that $22.89 trillion worth of assets were “being professionally managed under responsible investment strategies” worldwide, up 25% from 2014. 
Europe accounted for $12 trillion, and the US total was $8.7 trillion, though the highest growth rates were in Japan and Oceania. 
Viewing ESG awareness as a way to mitigate risk and even as a source of upside opportunities, institutional investors are seeking to bring this approach into their mainstream activities. 
This bodes well for the SDGs, but there are still important challenges to overcome, beginning with an inadequate understanding of the link between ESG standards and the SDGs. 
Only a few investors and businesses are currently using SDGs as the basis for sustainability-focused strategies. 
But the only way to boost shareholder value and contribute to meeting the SDGs is for companies and investors to ensure, in advance, that they focus on ESG standards that are both material to their industry or business and useful to advance the SDGs. 
In a recent paper, Gianni Betti, Costanza Consolandi, and Robert G. Eccles map the relevant ESG issues identified by the Sustainability Accounting Standards Board (SASB) in 79 industries in ten sectors, grouped by SDGs. 
Companies that use this kind of mapping will understand to which SDGs they would be contributing – down to the target level – by performing well on their chosen ESG criteria. 
By reviewing data on companies’ ESG performance, investors can see how their funds are contributing to achieving the SDGs. 
Based on this information, they may decide to reallocate their resources or to engage with better-performing companies. 
In 2016, Mozaffar Khan, George Serafeim, and Aaron Yoon created portfolios of companies that were performing well and poorly on the material issues in their industry. 
The firms with the highest annualized active return (alpha) of 4.8% were performing well on the material issues and poorly on the immaterial issues. 
Those with the lowest alpha, -2.2%, were performing poorly on both. 
Critically, however, the divergences did not start to appear until after 7-8 years. 
This demonstrates that executives must balance attention to short-term performance with a long-term perspective. 
That includes an understanding of which ESG issues will be material to their industry in the future, and which SDG efforts in those areas they may serve to advance. 
Investors could consider taking a long-term view with regard to the financial performance of their ESG-based portfolios. 
They can expect periodic reports on ESG performance and its contribution to the relevant SDGs – just as they receive periodic reports on financial performance – in order to monitor progress and make adjustments if needed. 
In many ways, private firms are already contributing to the SDGs, but they are doing so in an ad hoc manner that is not adequately labeled or targeted. 
By creating smart, comprehensive, and clearly defined strategies, private companies can not only get credit for their efforts; they can also help governments to establish realistic budgets and clear financing plans for the SDGs. 

How to Achieve the SDGs 
MEDELLÍN – In September 2015, the leaders of 193 countries agreed to achieve the Sustainable Development Goals (SDGs) – the most ambitious plan ever to promote human development – by 2030. 
Nearly two years into the process, there are plenty of reasons for concern: the amount of financing raised so far is unlikely to be sufficient, and not all countries have adequate data to measure progress on the ground. 
It is enough to test even the most diehard optimist. 
But there is still plenty of reason for hope. 
I recently visited Colombia, which, at long last, is leaving behind its decades-long civil conflict with the Revolutionary Armed Forces of Colombia (FARC) and setting itself up for SDG success. 
In any country, achieving the SDGs will require government, business, aid agencies, multilateral banks, and civil society to work together, adopt flexible approaches, share knowledge, measure progress effectively, and recognize that the various targets are interconnected. 
Colombia seems to understand this, and is pursuing an integrated approach that leverages the strengths of each actor. 
Start with government. 
According to Colombia’s finance minister, Mauricio Cárdenas Santamaría, the country is localizing the SDGs through the planning department, using the SDG framework to guide reforms relating to the implementation of the peace agreement with the FARC, OECD accession, the National Development Plan, and the Paris climate agreement. 
Meanwhile, Cárdenas points out, Colombia’s policymakers are taking care to highlight the benefits of these efforts – in areas ranging from health care and education to employment – for the public. 
They recognize that a top-down approach will not work: to achieve the SDGs, all levels of the government, economy, and society must feel connected to the goals, understanding the concrete impact that achieving them will have. 
To get business on board, the Bogotá Chamber of Commerce, led by Monica de Greiff, is raising awareness of the SDGs among its 640,000 members and providing skills training in sectors like construction and health care. 
The aim is to achieve the SDGs’ targets while increasing the economy’s overall competitiveness. 
The good news is that, as Bruce MacMaster of the Bogotá-based business advocacy and think tank ANDI noted, businesses have a strong incentive to consolidate the gains of the peace process, especially in remote areas that have traditionally been cut off from government services. 
And, indeed, in Medellín, once the illicit drug capital of the world, the leaders of small and large businesses with whom I met are already integrating the SDGs into their business plans and supply chains. 
ANDI is working to support that effort, including by raising awareness among diverse industries, from mining to beverages, regarding their interest in keeping their water resources clean and abundant. 
The result will be more robust protection of watersheds – crucial to meet Goal 6, on water and sanitation, among others. 
Of course, in a truly bottom-up process, strong engagement with local communities and civil society is vital. 
And Colombian youth are already deeply involved in promoting and implementing the SDGs. 
On my visit, youth leaders in Medellín’s Comuna 13 proudly showed off the progress in their low-income neighborhood. 
In the 1990s, when Medellín had the world’s highest homicide rate, Comuna 13 was among the city’s most dangerous areas. 
Today, it is a vibrant area benefiting from strategic investments in public transportation (including cable cars and new metro stations), education (libraries and schools), and security. 
Similar strategic investments will be needed throughout the country to ensure that nobody is left behind; the empowerment of women and girls being one crucial objective. 
Leadership by municipal and regional governments to facilitate such local-level progress is particularly important. 
All of the SDGs have targets directly related to the responsibilities of local and regional governments, particularly regarding their role in delivering basic services. 
But it is SDG 11 – which focuses on making cities inclusive, safe, resilient, and sustainable – that is the lynchpin of the localization process. 
That process has the support of the World Bank, the United Nations, and other international development partners, which are working to provide more effective and coordinated support to all levels of government. 
But success will demand that local governments urgently improve their own capacity in key areas, such as expenditure control, revenue expansion, responsible fund-raising, and creditworthiness. 
In Colombia, the municipal development bank FINDETER is aiming to promote such learning, as it strengthens local governments’ public finances and their management and planning capacity. 
This will enable local governments to invest more effectively in infrastructure and service delivery, thereby advancing local development objectives. 
Enabling institutions like FINDETER will be critical to localizing the SDG-implementation process to leverage the efforts of local governments elsewhere. 
Beyond capacity-building, local governments must engage in smart innovation. 
In Colombia, innovation has been essential to Medellín’s progress in reducing urban crime and violence, improving mobility, and mitigating social exclusion. 
The same is true of the city of Bucaramanga’s success in attracting private investment and forging public-private partnerships to improve its competitiveness. 
Careful planning processes, including a strong national framework and effective monitoring, are needed to support such innovation and anticipate potential challenges and shocks. 
For example, in Colombia, obstacles may arise from continued drug trafficking, as well as from the ongoing crisis in Venezuela, which is causing thousands of desperately poor people to pour across Colombia’s border. 
Colombia still has a long way to go before achieving the SDGs. 
But its localized and integrated approach has put it on the right path. 
Other countries would do well to follow suit. 

Social Solidarity for Sustainable Development 
OSLO – The late Kofi Annan once said that climate change is the “existential issue of our time.” 
A wave of extreme weather events this past summer – from wildfires in California and Sweden to floods in India and drought in Australia – show just how right he was. 
And, as Annan also understood, addressing this crisis does not mean only protecting the economy or even the environment; it also means defending justice, preserving human rights, and committing to social solidarity. 
For more than four decades, these values have motivated my work to advance sustainable development at both the national and international levels. 
In the 1980s, while serving as Norway’s prime minister, I chaired the World Commission on Environment and Development, at the invitation of then-United Nations Secretary-General Javier Pérez de Cuéllar. 
The Commission’s 1987 report, “Our Common Future,” became a landmark document that brought sustainable development to the attention of presidents, prime ministers, and finance ministers worldwide. 
It spurred the 1992 Conference on Environment and Development in Rio de Janeiro, and it continues to influence global discussions. 
Today, I write as a member of The Elders, a group of independent leaders founded by Nelson Mandela to work for peace, justice, and human rights. 
Climate action is integral to progress in all of these areas. 
We know what needs to be done. 
Carbon dioxide emissions must be taxed and reduced. 
Fossil-fuel industries must have their subsidies cut off. 
And financial support must be delivered to the least-developed countries that are most vulnerable to the effects of climate change, despite having contributed almost nothing to the problem. 
Why aren’t these steps being taken? 
With a few regrettable and conspicuous exceptions, world leaders recognize the reality of climate change. 
They see the damage extreme weather events can inflict on homes, infrastructure, and livelihoods, and they hear climate scientists’ warnings that conditions will only deteriorate. 
But a sufficiently bold climate strategy demands courage and political commitment from leaders. 
Moreover, such strategies must be continuously updated to reflect changing socioeconomic realities – from globalization and artificial intelligence to greater awareness of gender and race discrimination – in order to secure the support of citizens, especially younger people. 
Of course, ordinary citizens – again, especially young people – also have a responsibility to help bring about effective climate action. 
The challenges the world faces may appear overwhelming, but the job of its citizens is simple: engage. 
This means changing their own behaviors, including by voting, demanding more action from leaders, and even stepping up to lead themselves. 
In his searing study of human courage and cowardice, “An Enemy of the People,” the Norwegian dramatist Henrik Ibsen wrote, “A community is like a ship; everyone ought to be prepared to take the helm.” 
With our global ship being tossed by stormy and dangerous waters, each of us must be ready to display leadership in an appropriate and realistic way, whether within our local community or at the national or international level. 
We already have charts that can guide us toward safety. 
The 17 UN Sustainable Development Goals, agreed by all 193 UN member states in 2015, cover all of the interconnected elements of human life and development, from health, education, and the environment to peace, justice, security, and equality. 
For example, there can be no development, sustainable or otherwise, without a healthy global population. 
Yet, as my fellow Elder, former UN Secretary-General Ban Ki-moon, and I saw firsthand on a recent trip to India, millions of people in that country alone are plunged into poverty each year due to health costs. 
The good news is that India is also demonstrating how innovative reforms at the state and national levels can improve access. 
In particular, the Delhi state government’s Mohalla Clinics, true to their name (mohalla means community or neighborhood in Hindi), offer a basic package of essential health services – including medicines, diagnostics, and consultation – free of charge. 
The health challenge India faces is shared by many countries worldwide, including far wealthier ones such as the United States. 
Addressing it will demand not just more innovation, but also the application of existing solutions like the Mohalla Clinics, based on the recognition that health is a public good and that effective health-care systems are built on social solidarity – the same principle that informs all of the SDGs. 
The fact is that every head of state, every government, and every citizen has a responsibility to ensure that we achieve the SDGs. 
In that sense, the goals refute the view that the best way to maximize prosperity and security is to put one’s own country and its interests first, while walling it off from its neighbors. 
Achieving the SDGs – and, thus, tackling the climate crisis – will require us to stand up to the vested political, business, and economic interests that seek to maintain our current unequal order. 
It will also demand that we overhaul our unsustainable lifestyles and our patterns of production and consumption, while confronting the issue of rapid population growth. 
Everyone will have to pull their weight. 
This year, people worldwide are marking the centenary of Mandela’s birth. 
Mandela, one of the most remarkable and visionary leaders the world has ever seen, understood that human development is a collective, holistic endeavor. 
“Overcoming poverty,” he once declared, “is not a task of charity, it is an act of justice.” 
Let us honor Mandela’s legacy by taking urgent, cooperative, and comprehensive action to achieve the SDGs. 
Let us build a world that we can proudly bequeath to our children and grandchildren. 

The Data Revolution for Sustainable Development 
NEW YORK – There is growing recognition that the success of the Sustainable Development Goals (SDGs), which will be adopted on September 25 at a special United Nations summit, will depend on the ability of governments, businesses, and civil society to harness data for decision-making. 
The key, as I have highlighted before, is to invest in building innovative data systems that draw on new sources of real-time data for sustainable development. 
We live in a data-driven world. 
Advertisers, insurance companies, national security agencies, and political advisers have already learned to tap into big data, sometimes to our chagrin; so, too, have countless scientists and researchers, thereby accelerating progress on new discoveries. 
But the global development community has been slower to benefit – not least because too much development data are still being collected using cumbersome approaches that lag behind today’s technological capabilities. 
One way to improve data collection and use for sustainable development is to create an active link between the provision of services and the collection and processing of data for decision-making. 
Take health-care services. 
Every day, in remote villages of developing countries, community health workers help patients fight diseases (such as malaria), get to clinics for checkups, receive vital immunizations, obtain diagnoses (through telemedicine), and access emergency aid for their infants and young children (such as for chronic under-nutrition). 
But the information from such visits is usually not collected, and even if it is put on paper, it is never used again. 
We now have a much smarter way to proceed. 
Community health workers are increasingly supported by smart-phone applications, which they can use to log patient information at each visit. 
That information can go directly onto public-health dashboards, which health managers can use to spot disease outbreaks, failures in supply chains, or the need to bolster technical staff. 
Such systems can provide a real-time log of vital events, including births and deaths, and even use so-called verbal autopsies to help identify causes of death. 
And, as part of electronic medical records, the information can be used at future visits to the doctor or to remind patients of the need for follow-up visits or medical interventions. 
Education provides the same kind of vast opportunity. 
Currently, school enrollment rates tend to be calculated based on student registrations at the beginning of the school year, even though actual attendance may be far below the registration rate. 
Moreover, officials wishing to report higher enrollment rates sometimes manipulate registration data, so we never get an accurate picture of who is actually at school. 
With mobile apps, schools and community education workers can log student and teacher attendance on a transparent, real-time basis, and follow up more easily with students who drop out, especially for reasons that could be overcome through informed intervention by community education workers. 
This information can be fed automatically into dashboards that education administrators can use to track progress in key areas. 
Such data collection can accelerate sustainable development by improving decision-making. 
But that is only the first step. 
The same techniques should also be used to collect some of the key indicators that measure progress on the SDGs. 
In fact, measuring progress at frequent intervals, and publicizing the successes and shortfalls, is vital to keeping the world on track to meet its ambitious long-term targets. 
Doing so would not only enable us to reward governments that are fostering progress; it would also keep laggard governments accountable for their weak performance and, one hopes, motivate them to redouble their efforts. 
The need for such real-time measurement became apparent over the last 15 years, when the world was pursuing the Millennium Development Goals. 
Given that many key indicators are not yet collected in real time, but only through laborious retrospective household surveys, the indicators for the key poverty-reduction goal are as much as five years out of date for many countries. 
The world is aiming for 2015 targets for poverty, health, and education, with, in some cases, key data only up to 2010. 
Fortunately, the information and communications technology revolution and the spread of broadband coverage nearly everywhere can quickly make such time lags a thing of the past. 
As indicated in the report A World that Counts: Mobilizing the Data Revolution for Sustainable Development, we must modernize the practices used by statistical offices and other public agencies, while tapping into new sources of data in a thoughtful and creative way that complements traditional approaches. 
Through more effective use of smart data – collected during service delivery, economic transactions, and remote sensing – the fight against extreme poverty will be bolstered; the global energy system will be made much more efficient and less polluting; and vital services such as health and education will be made far more effective and accessible. 
With this breakthrough in sight, several governments, including that of the United States, as well as businesses and other partners, have announced plans to launch a new “Global Partnership for Sustainable Development Data” at the UN this month. 
The new partnership aims to strengthen data collection and monitoring efforts by raising more funds, encouraging knowledge-sharing, addressing key barriers to access and use of data, and identifying new big-data strategies to upgrade the world’s statistical systems. 
The UN Sustainable Development Solutions Network will support the new Global Partnership by creating a new Thematic Network on Data for Sustainable Development, which will bring together leading data scientists, thinkers, and academics from across multiple sectors and disciplines to form a center of data excellence. 
We are delighted to be chairing this network, which has at its core a commitment to turn facts and figures into real development progress. 
We firmly believe the data revolution can be a revolution for sustainable development, and we welcome partners from around the world to join us. 

Are the Sustainable Development Goals Achievable? 
HONG KONG – US President Donald Trump’s recent speech at the United Nations has gotten a lot of attention for its bizarre and bellicose rhetoric, including threats to dismantle the Iran nuclear deal and “totally destroy” North Korea. 
Underlying his declarations was a clear message: the sovereign state still reigns supreme, with national interests overshadowing shared objectives. 
This does not bode well for the Sustainable Development Goals. 
Adopted by the UN just a year before Trump’s election, the SDGs will require that countries cooperate on crucial global targets related to climate change, poverty, public health, and much else. 
In an age of contempt for international cooperation, not to mention entrenched climate-change denial in the Trump administration, is achieving the SDGs wishful thinking? 
The SDGs were always bound to meet strong headwinds, owing to technological disruption, geopolitical rivalry, and widening social inequality. 
But populist calls for nationalist policies, including trade protectionism, have intensified those headwinds considerably. 
Simply put, populations are losing faith that the global development orthodoxy of good governance (including monetary and fiscal discipline) and free markets can benefit them. 
With all of the advanced countries confronting serious fiscal constraints, and emerging markets weakened by lower commodity prices, paying for global public goods has become all the more unappealing. 
Budget cuts – together with accountability issues and new technological challenges – are also hurting those tasked with delivering good governance. 
And markets increasingly seem to be captured by vested interests. 
Economic outcomes often have their origins in politics. 
Harvard Law School’s Roberto Unger has argued that overcoming the challenges of knowledge-based development will demand “inclusive vanguardism.” 
The democratization of the market economy, he says, is possible only with “a corresponding deepening of democratic politics,” which implies “the institutional reconstruction of the market itself.” 
Yet, in the US, the political system seems unlikely to produce such a reconstruction. 
Harvard Business School Professors Katherine Gehl and Michael Porter argue that America’s two-party system “has become the major barrier to solving nearly every important challenge” facing the country. 
Political leaders, Gehl and Porter continue, “compete on ideology and unrealistic promises, not on action and results,” and “divide voters and serve special interests” – all while facing little accountability. 
A forthcoming book by University of San Francisco Professor Shalendra Sharma corroborates this view. 
Comparing economic inequality in China, India, and the US, Sharma argues that both democratic and authoritarian governance have failed to promote equitable development. 
There are four potential combinations of outcomes for countries: (1) good governance and good economic policies; (2) good politics and bad economics; (3) bad politics and good economics; and (4) bad politics and bad economics. 
Other things being equal, there is only a one-in-four chance of arriving at a win-win situation of good governance and strong economic performance. 
That chance is diminished further by other disruptions, from natural disasters to external interference. 
There are those who believe that technology will help to overcome such disruptions, by spurring enough growth to generate the resources needed to mitigate their impact. 
But while technology is consumer-friendly, it produces its own considerable costs. 
Technology kills jobs in the short term and demands re-skilling of the labor force. 
Moreover, knowledge-intensive technology has a winner-take-all network effect, whereby hubs seize access to knowledge and power, leaving less-privileged groups, classes, sectors, and regions struggling to compete. 
Thanks to social media, the resulting discontent now spreads faster than ever, leading to destructive politics. 
This can invite geopolitical interference, which quickly deteriorates into a lose-lose scenario, like that already apparent in water-stressed and conflict-affected countries, where governments are fragile or failing. 
The combination of bad politics and economics in one country can easily produce contagion, as rising migration spreads political stress and instability to other countries. 
According to the UN High Commission for Refugees, there were 65 million refugees last year, compared to just 1.6 million in 1960. 
Given the endurance of geopolitical conflict, not to mention the rapidly growing impact of climate change, migration levels are not expected to decline anytime soon. 
The SDGs aim to relieve these pressures, by protecting the environment and improving the lives of people within their home countries. 
But achieving them will require far more responsible politics and a much stronger social consensus. 
And that will require a fundamental shift in mindset, from one of competition to one that emphasizes cooperation. 
Just as we have no global tax mechanism to ensure the provision of global public goods, we have no global monetary or welfare policies to maintain price stability and social peace. 
That is why multilateral institutions need to be upgraded and restructured, with effective decision-making and implementation mechanisms for managing global development challenges such as infrastructure gaps, migration, climate change, and financial instability. 
Such a system would go a long way toward supporting progress toward the SDGs. 
Unger argues that all of today’s democracies “are flawed, low-energy democracies,” in which “no trauma” – in the form of economic ruin or military conflict – means “no transformation.” 
He is right. 
In this environment, reflected in Trump’s embrace of the antiquated Westphalian model of nation-states, achieving the SDGs will probably be impossible. 

Crowdfunding or Crowdphishing? 
NEW HAVEN – If one were seeking a perfect example of why it’s so hard to make financial markets work well, one would not have to look further than the difficulties and controversies surrounding crowdfunding in the United States. 
After deliberating for more than three years, the US Securities and Exchange Commission (SEC) last month issued a final rule that will allow true crowdfunding; and yet the new regulatory framework still falls far short of what’s needed to boost crowdfunding worldwide. 
True crowdfunding, or equity crowdfunding, refers to the activities of online platforms that sell shares of startup companies directly to large numbers of small investors, bypassing traditional venture capital or investment banking. 
The concept is analogous to that of online auctions. 
But, unlike allowing individuals to offer their furniture to the whole world, crowdfunding is supposed to raise money fast, from those in the know, for businesses that bankers might not understand. 
It certainly sounds exciting. 
Regulators outside the US have often been more accommodating, and some crowdfunding platforms are already operating. 
For example, Symbid in the Netherlands and Crowdcube in the United Kingdom were both founded in 2011. 
But crowdfunding is still not a major factor in world markets. 
And that will not change without adequate – and innovative – financial regulation. 
There is a conceptual barrier to understanding the problems that officials might face in regulating crowdfunding, owing to the failure of prevailing economic models to account for the manipulative and devious aspects of human behavior. 
Economists typically describe people’s rational, honest side, but ignore their duplicity. 
As a result, they underestimate the downside risks of crowdsourcing. 
The risks consist not so much in outright fraud – big lies that would be jailable offenses – as in more subtle forms of deception. 
It may well be open deception, with promoters steering gullible amateurs around a business plan’s fatal flaw, or disclosing it only grudgingly or in the fine print. 
It is not that people are completely dishonest. 
On the contrary, they typically pride themselves on integrity. 
It’s just that their integrity suffers little lapses here and there – and not always so little in aggregate. 
In my new book with George Akerlof, Phishing for Phools: The Economics of Manipulation and Deception, we argue that unscrupulous behavior has to be factored into economic theory in a fundamental way. 
The economic equilibrium we live should be regarded, above all, as a phishing equilibrium, in which small-time individual dishonesty can morph into something more systemically important when it is carried on by business organizations under intense competitive pressure. 
Yes, competition rewards the sharp and hardworking. 
But it also often compels them to keep the frontiers of subtle deception in view. 
The SEC’s new rules for crowdfunding are complex, because they address a complicated problem. 
The concept underlying crowdfunding is the dispersal of information across millions of people. 
Most people, even the cleverest, cannot grasp the next breakthrough business opportunity. 
Those who can are dispersed. 
The economist Friedrich Hayek put it well in 1945: 
“[T]here is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of particular circumstances and place. 
It is with respect to this that practically every individual has some advantage over all others in that he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation.” 
The problem is that the promise of genuine “unique information” comes with the reality of vulnerability to deception. 
That’s why channeling dispersed knowledge into new businesses requires a regulatory framework that favors the genuinely enlightened and honest. 
Unfortunately, the SEC’s new crowdsourcing rules don’t go as far as they should. 
The 2012 US legislation that tasked the SEC with rulemaking for crowdfunding platforms specified that no startup can use them to raise more than $1 million a year. 
This is practically worthless in terms of limiting the scope for deception. 
In fact, including this provision was a serious mistake, and needs to be corrected with new legislation. 
A million dollars is not enough, and the cap will tend to limit crowdfunding to small ideas. 
Some of the SEC rules do work against deception. 
Notably, crowdfunding platforms must provide communication channels “through which investors can communicate with one another and with representatives of the issuer about offerings made available.” 
That is a good rule, fundamental to the entire idea of crowdfunding. 
But the SEC could do more than just avow its belief in “uncensored and transparent crowd discussions.” 
It should require that the intermediary sponsoring a platform install a surveillance system to guard against interference and shills offering phony comments. 
The SEC and other regulators could go even further. 
They could nudge intermediaries to create a platform that summarizes commenters’ record and reputation. 
Indeed, why not pay commenters who accumulate “likes” or whose comments on issuers turn out to be valuable in light of evidence of those enterprises’ subsequent success? 
For the financial system as a whole, success ultimately depends on trust and confidence, both of which, like suspicion and fear, are highly contagious. 
That’s why, if crowdfunding is to reach its global potential, crowdphishing must be prevented from the outset. 
Regulators need to get the rules right (and it would help if they hurried up about it). 

Global Warming’s Paper Trail 
STANFORD – One day in 1961, an American economist named Daniel Ellsberg stumbled across a piece of paper with apocalyptic implications. 
Ellsberg, who was advising the US government on its secret nuclear-war plans, had discovered a document that contained an official estimate of the death toll in a preemptive “first strike” on China and the Soviet Union: approximately 300 million in those countries, and double that globally. 
Ellsberg was troubled that such a plan existed; years later, he tried to leak the details of nuclear annihilation to the public. 
Although this attempt failed, Ellsberg would become famous instead for leaking what came to be known as the Pentagon Papers – the US government’s secret history of its military intervention in Vietnam. 
America’s amoral military planning during the Cold War echoes the hubris exhibited by another cast of characters gambling with the fate of humanity. 
Recently, secret documents have been unearthed detailing what the energy industry knew about the links between their products and global warming. 
But, unlike the government’s nuclear plans, what the industry detailed was put into action. 
In the 1980s, oil companies like Exxon and Shell carried out internal assessments of the carbon dioxide released by fossil fuels, and forecast the planetary consequences of these emissions. 
In 1982, for example, Exxon predicted that by about 2060, CO2 levels would double relative to the 1800s, and that this, according to the best science at the time, would push the planet’s average temperatures up by about 3°C. 
Later that decade, in 1988, an internal report by Shell projected similar effects, but also found that CO2 could double even earlier, by 2030. 
Privately, these companies did not dispute the links between their products, global warming, and ecological calamity. 
On the contrary, their research confirmed the connections. 
Shell’s assessment foresaw a 60-70 cm rise in sea level, and noted that warming could also fuel the disintegration of the West Antarctic Ice Sheet, resulting in a worldwide rise in sea level of “five to six meters.” 
That would be enough to inundate entire low-lying countries. 
Shell’s analysts also warned of the “disappearance of specific ecosystems or habitat destruction,” predicted an increase in “runoff, destructive floods, and inundation of low-lying farmland,” and said that “new sources of freshwater would be required” to compensate for changes in precipitation. 
Global changes in air temperature would also “drastically change the way people live and work.” 
All told, Shell concluded, “the changes may be the greatest in recorded history.” 
For its part, Exxon warned of “potentially catastrophic events that must be considered.” 
Like Shell’s experts, Exxon’s scientists predicted devastating sea-level rise, and warned that the American Midwest and other parts of the world could become desert-like. 
Looking on the bright side, the company expressed its confidence that “this problem is not as significant to mankind as a nuclear holocaust or world famine.” 
The documents make for frightening reading. 
And the effect is all the more chilling in view of the oil giants’ refusal to warn the public about the damage that their own researchers predicted. 
Shell’s report, marked “confidential,” was first disclosed by a Dutch news organization earlier this year. 
Exxon’s study was not intended for external distribution, either; it was leaked in 2015. 
Nor did these companies ever take responsibility for their products. 
In Shell’s study, the firm argued that the “main burden” of addressing climate change rests not with the energy industry, but with governments and consumers. 
That argument might have made sense if oil executives, including those from Exxon and Shell, had not later lied about climate change and actively prevented governments from enacting clean-energy policies. 
Although the details of global warming were foreign to most people in the 1980s, among the few who had a better idea than most were the companies contributing the most to it. 
Despite scientific uncertainties, the bottom line was this: oil firms recognized that their products added CO2 to the atmosphere, understood that this would lead to warming, and calculated the likely consequences. 
And then they chose to accept those risks on our behalf, at our expense, and without our knowledge. 
The catastrophic nuclear war plans that Ellsberg saw in the 1960s were a Sword of Damocles that fortunately never fell. 
But the oil industry’s secret climate-change predictions are becoming reality, and not by accident. 
Fossil-fuel producers willfully drove us toward the grim future they feared by promoting their products, lying about the effects, and aggressively defending their share of the energy market. 
As the world warms, the building blocks of our planet – its ice sheets, forests, and atmospheric and ocean currents – are being altered beyond repair. 
Who has the right to foresee such damage and then choose to fulfill the prophecy? 
Although war planners and fossil-fuel companies had the arrogance to decide what level of devastation was appropriate for humanity, only Big Oil had the temerity to follow through. 
That, of course, is one time too many. 

The Secret Success of Abenomics 
TOKYO – Tokyo is in the midst of a construction boom, with old high-rise office and apartment buildings being rebuilt in more modern and elegant forms, all while maintaining stringent environmental standards. 
So bright is Tokyo’s gleam – which is sure to impress visitors at the 2020 Olympic Games – that the city might seem like an anomaly, given gloomy reports that, after decades of stagnation, Japan’s GDP growth remains anemic. 
In fact, even the small cities of Kushiro and Nemuro in Hokkaido, located near the disputed islands between Russia and Japan, are being rebuilt and modernized at a brisk pace, as is apparent to any tourist (as I was this summer). 
What explains this divergence between disappointing national economic data and visible progress in Japanese cities? 
It may be a problem of calculation. 
According to official data, Japan’s economic growth slowed by one percentage point, in real terms, in the 2014 fiscal year. 
Yet, according to Bank of Japan researchers, tax data suggest that growth was more than three percentage points higher than the official figure, implying that GDP was some ¥30 trillion (about $300 billion dollars) larger than officially reported. 
There is good reason to believe that it was. 
Tax data account for distributed GDP and cover a broader swath of economic activity than traditional measures of output. 
And, because few taxpayers have incentives to inflate their reported income, the resultant figures are unlikely to be overestimates. 
More insights into Japan’s real progress can be derived from another source: the new System of National Accounts 2008, the latest international statistical standard for national accounting by the United Nations Statistical Commission. 
Tentative calculations using Japanese Cabinet Office data suggest that, according the standard of the 2008 SNA – which counts research and development, including intellectual property, among firms’ capital assets – Japan’s 2011 GDP exceeded the published data by 4.2%, or ¥19.8 trillion. 
A third failing of traditional GDP measurements for Japan lies in the fact that they account only for what is actually produced within the country’s borders. 
But we live in a globalized world, and nowadays, Japan’s citizens are acquiring considerable income from Japanese activities abroad. 
Given this, gross national income (GNI) might be a more accurate representation of Japan’s economic circumstances. 
In the 2015 fiscal year, Japan’s GNI grew by 2.5%, while its GDP grew by only 0.8%. 
Because Japan’s nominal GDP is now close to ¥500 trillion yen, the 1.7-percentage-point difference between GNI and GDP amounts to ¥8.5 trillion. 
To be sure, foreign activities are not the only reason why GNI is growing more quickly than GDP. 
Even within Japan, many firms have lately been earning revenues at record rates, thanks largely to Prime Minister Shinzo Abe’s economic revitalization efforts. 
In fact, the gradual economic growth spurred by so-called Abenomics, together with the low exchange rate that has prevailed until recently, has helped to spur the tourism that has enabled cities like Kushiro and Nemuro to fund their reconstruction. 
Taken together, the growth of Japan’s GNI and the implications of tax data and 2008 SNA suggest that Japan’s economy has been doing significantly better lately than the national statistics seem to suggest. 
Though each new calculation focuses on a different year, we can use them heuristically to estimate unaccounted-for economic progress in Japan. 
The result is substantial: a ¥30 trillion annual adjustment for distributed income and ¥19.8 trillion adjustment for R&D and intellectual property. 
Add the GNI adjustment of over ¥8.5 trillion, and Japan’s economy is nearly ¥70 trillion, or 14%, larger than official data suggest. 
While this is only a rough calculation, it is impossible to deny the potential differences that more comprehensive calculations can make. 
This has important policy implications. 
According to official statistics, which place Japan’s GDP at ¥500 trillion, Japan is still ¥100 trillion away from achieving a key goal of the second iteration of Abenomics: to achieve a ¥600 trillion economy. 
The revised reading of the statistics would reduce that shortfall by 70%. 
Simply put, Abenomics is not getting enough credit. 
The incompleteness of the official view can be frustrating, especially as Japanese stocks suffer setbacks, even as Chinese stocks increase, despite the fact that, unlike Japan, China faces considerable hidden economic risks. 
A more comprehensive and accurate representation of Japan’s economic progress is vital to give investors the confidence that Japan’s economy merits. 
That, in turn, would bolster the impact of Abenomics even further. 

Iraqi Hope Dies Last 
BAGHDAD – Ten years have passed since Saddam Hussein was removed from power, following more than three decades of tyrannical rule. 
The dream of Iraqis after Saddam’s fall was to build a new, prosperous, and democratic Iraq. 
A country at peace with itself and its neighbors, with a constitution upholding basic human rights and the rule of law, was the desire of almost everyone. 
But the United States and its allies, lacking a coherent vision of Iraq’s future, much less a sound policy for the post-Saddam era, declared Iraq an occupied country, with a US-appointed administrator to run the country, who soon decided to dismantle all existing security, military, and media institutions. 
He also introduced a de-Baathification law, which evicted members of the Baath Party from official positions without legal recourse, paving the way for sectarianism and, ultimately, communal violence and unrest. 
These unfortunate – and ultimately disastrous – events established an unstable foundation in a strategic country at the core of a highly troubled yet vital region of the world. 
As Iraq moved through progressive phases of mismanagement over the subsequent ten agonizing years, the country fractured, shattering the dreams of Iraqis who saw their beloved homeland once again sliding toward authoritarianism, with almost daily violations of the constitution. 
The world watched, seemingly helpless to do anything. 
Iraq’s last general election, in 2010, brought hope of recovery in the form of a power-sharing agreement among Sunni, Shia, and Kurds, which was supposed to ensure that the country did not revert to dictatorship. 
Iraqiya, which I lead, was the largest electoral bloc to emerge from that vote. 
But, despite our status, we agreed to give up the leadership position afforded by the Constitution in the belief that power-sharing and respect for the rights of all Iraqis is the only formula for governing the country democratically. 
These hopes, however, soon vanished, as Iraq’s two-term prime minister, Nouri al-Maliki, subsequently reneged on the agreement. 
Today, the very human rights that were guaranteed by the constitution are being violated, with a politicized judiciary routinely abused and manipulated in order to justify the prime minister’s actions. 
Instead of keeping the Maliki government in check, the courts facilitate its quest for ever-greater power. 
Making matters worse for ordinary Iraqis, public services have deteriorated to a dismal level, and unemployment is rising sharply, despite public expenditure in excess of $500 billion over the seven years of Maliki’s rule. 
Sectarianism and racism have become a regular feature of the political landscape. 
Corruption is rampant, and Baghdad is now considered one of the world’s worst places to live. 
If Iraq continues along its current disastrous path, mayhem and civil war will be the inevitable outcome, with dire consequences for the entire region. 
Yet Iraqis continue to hope for a better future. 
The advent of a new electoral cycle, which begins with local elections in April, may provide another opportunity to put Iraq on the right path. 
But that can happen only if the voting is free and the counting is fair. 
The current government, however, is unable to supervise free and fair elections. 
Significant measures must be taken, including the active involvement of neutral international agencies and observers to keep the government in check and ensure that voters can have their say. 
We are hopeful that Iraqis, who have had their fill of sectarian political parties, will be allowed freely to choose candidates who embrace a non-sectarian and non-racist agenda. 
Given a new law limiting senior officials to two terms in office, we also hope to see new and accountable leaders in positions of power. 
I am certain that power-sharing, reconciliation, and accountability are the only way forward for Iraq. 
Let us hope that this spring – ten years after the US invasion and Saddam’s downfall – brings Iraq a new and constructive beginning. 

Trump’s Weak Case Against China 
BEIJING – No one wins in a trade war. 
Yet US President Donald Trump seems determined to pursue one with China, which he accuses of causing America’s trade deficit, violating World Trade Organization rules, and using unfair practices to acquire foreign technology. 
While most economists marvel at Trump’s ignorance of how trade balances work, many broadly agree with his charges regarding intellectual property (IP). 
But the evidence supporting these claims is also weak, at best. 
The so-called Section 301 trade investigation launched by Trump’s administration last year accused China of acquiring foreign technologies using discriminatory licensing restrictions, unfair technology-transfer agreements, targeted outbound investment, unauthorized intrusions into US commercial computer networks, and cyber-enabled IP theft. 
“The weight of the evidence,” the report concludes, shows that China uses foreign-ownership restrictions to force US companies to provide their technologies to Chinese entities. 
But the case is not nearly as strong as the report makes it out to be. 
For starters, because Chinese firms are not starved for capital – thanks to China’s chronic savings glut – gaining access to foreign technologies is their main motivation for trying to attract direct investment from abroad. 
Under WTO rules, they are free to seek technology transfer from their foreign partners on a commercial and voluntary basis. 
Fortunately for China, foreign firms have been more than willing to enter its market, not least because of its preferential treatment of direct investment. 
In fact, for decades, foreign and domestic firms alike have willingly accepted China’s “market access for technology” strategy, which required foreign investors to “import” advanced technology in exchange for entering the Chinese market. 
Whatever downside they may see to this approach, the fact remains that foreign enterprises – including completely foreign-owned companies and foreign partners of Chinese firms – have benefited greatly from their investments in China. 
A 2006 World Bank report put the average rate of return for foreign multinationals in China at 22%. 
According to a report compiled by the Conference Board of World Enterprises, the average rate of return on capital for American multinationals in China in 2008 was 33%. 
That said, the earnings before interest and taxes of foreign enterprises in China had been worsening since 2009, but in 2017 the situation improved. 
This is an issue that the Chinese government must take seriously. 
In any case, no one can claim that foreign companies were forced to operate in the Chinese market. 
The argument that US firms have been compelled to transfer their technology to China thus lacks significance. 
In fact, that argument was never backed by persuasive evidence. 
While the US Trade Representative (USTR), which compiled the Section 301 report, claims to have conducted many surveys, all respondents are anonymous, and their assertions are little more than hearsay – nothing that would be admissible in a court of law. 
And, even if regarded as true, such claims would not definitively prove that forcing foreign enterprises to transfer their technology is prevalent in China. 
The Section 301 report’s accusations regarding outbound investment – namely, that China uses “government capital and highly opaque investor networks to facilitate high-tech acquisitions abroad” – are similarly flimsy. 
The USTR assumes that China’s government not only has a clearly defined investment strategy, but also that an army of obedient firms is willingly carrying it out. 
Yet the American Enterprise Institute reports that, from 2005 to 2016, Chinese companies have made just 202 investments, including mergers and acquisitions, in the US, only 16 of which – totaling $21 billion – were in technology sectors. 
Chinese investors spent far more than that – $94 billion – on real estate in the US in 2013 to 2016. 
The sectoral distribution of Chinese firms’ outward investment indicates that there is not even an effective market mechanism at work driving Chinese firms to invest in a rational way. 
Instead, companies are making independent – and often irrational – investment decisions, which sometimes lead to large losses. 
The final issue raised by the Section 301 report relates to cyber-enabled theft of IP and sensitive commercial information, which the US claims is carried out by the Chinese government. 
The report acknowledges that since 2015 – when China and the US agreed that neither would “conduct or knowingly support cyber-enabled theft of intellectual property, including trade secrets or other confidential business information for commercial advantage” – the number of detected incidents of Chinese cyber-espionage has declined. 
Yet some US officials insist that this likely reflects a shift toward more centralized, practiced, and sophisticated attacks by a smaller number of actors. 
The truth is that China has been making steady progress in its protection of property rights. 
As Nicholas Lardy of the Peterson Institute of International Economics points out, “China’s payments of licensing fees and royalties for the use of foreign technology have soared in recent years, reaching almost $30 billion last year, nearly a four-fold increase over the last decade.” 
In fact, Lardy continues, “China probably ranks second globally in the magnitude of licensing fees paid for technology used within national borders.” 
The Section 301 report was, it seems clear, based on rumor, imagination, and half-truth. 
The obvious question is how the Trump administration can base a policy decision as consequential as trade tariffs – which could trigger a catastrophic trade war – on such weak evidence. 
The obvious answer is that the report was intended to justify, rather than inform, the policy. 
This is not to say that the issues raised by the Section 301 report are mere fantasy, or that China’s fulfillment of its WTO commitments has been impeccable. 
On the contrary, China has plenty of room to improve its WTO compliance, especially when it comes to opening up its financial-services sector and strengthening IP protections. 
But trade-related issues should be addressed within the WTO framework, with the US using that body’s resolution mechanisms to address its grievances. 
In lieu of such an approach by the Trump administration, China should consider launching a new round of WTO negotiations in cooperation with Australia, Canada, the European Union, Japan, Mexico, and New Zealand. 
Multilateralism should be preserved, with or without the US. 
Trump’s trade war will not succeed in driving China to abandon its aspiration to catch up to the advanced economies. 
China is ready to fight a war of attrition. 
Unfortunately, both sides – as well as the rest of the world – will incur heavy losses in the process. 

The Myth of Secular Stagnation 
NEW YORK – In the aftermath of the 2008 financial crisis, some economists argued that the United States, and perhaps the global economy, was suffering from “secular stagnation,” an idea first conceived in the aftermath of the Great Depression. 
Economies had always recovered from downturns. 
But the Great Depression had lasted an unprecedented length of time. 
Many believed that the economy recovered only because of government spending on World War II, and many feared that with the end of the war, the economy would return to its doldrums. 
Something, it was believed, had happened, such that even with low or zero interest rates, the economy would languish. 
For reasons now well understood, these dire predictions fortunately turned out to be wrong. 
Those responsible for managing the 2008 recovery (the same individuals bearing culpability for the under-regulation of the economy in its pre-crisis days, to whom President Barack Obama inexplicably turned to fix what they had helped break) found the idea of secular stagnation attractive, because it explained their failures to achieve a quick, robust recovery. 
So, as the economy languished, the idea was revived: Don’t blame us, its promoters implied, we’re doing what we can. 
The events of the past year have put the lie to this idea, which never seemed very plausible. 
The sudden increase in the US deficit, from around 3% to almost 6% of GDP, owing to a poorly designed regressive tax bill and a bipartisan expenditure increase, has boosted growth to around 4% and brought unemployment down to a 18-year low. 
These measures may be ill-conceived, but they show that with enough fiscal support, full employment can be attained, even as interest rates rise well above zero. 
The Obama administration made a crucial mistake in 2009 in not pursuing a larger, longer, better-structured, and more flexible fiscal stimulus. 
Had it done so, the economy’s rebound would have been stronger, and there would have been no talk of secular stagnation. 
As it was, only those in the top 1% saw their incomes grow during the first three years of the so-called recovery. 
Some of us warned at the time that the downturn was likely to be deep and long, and that what was needed was stronger and different from what Obama proposed. 
I suspect that the main obstacle was the belief that the economy had just experienced a little “bump,” from which it would quickly recover. 
Put the banks in the hospital, give them loving care (in other words, hold none of the bankers accountable or even scold them, but rather boost their morale by inviting them to consult on the way forward), and, most important, shower them with money, and soon all would be well. 
But the economy’s travails were deeper than this diagnosis suggested. 
The fallout from the financial crisis was more severe, and massive redistribution of income and wealth toward the top had weakened aggregate demand. 
The economy was experiencing a transition from manufacturing to services, and market economies don’t manage such transitions well on their own. 
What was needed was more than a massive bank bailout. 
The US needed a fundamental reform of its financial system. 
The 2010 Dodd-Frank legislation went some way, though not far enough, in preventing banks from doing harm to the rest of us; but it did little to ensure that the banks actually do what they are supposed to do, focusing more, for example, on lending to small and medium-size enterprises. 
More government spending was necessary, but so, too, were more active redistribution and pre-distribution programs – addressing the weakening of workers’ bargaining power, the agglomeration of market power by large corporations, and corporate and financial abuses. 
Likewise, active labor-market and industrial policies might have helped those areas suffering from the consequences of deindustrialization. 
Instead, policymakers failed to do enough even to prevent poor households from losing their homes. 
The political consequences of these economic failures were predictable and predicted: it was clear that there was a risk that those who were so badly treated would turn to a demagogue. 
No one could have predicted that the US would get one as bad as Donald Trump: a racist misogynist bent on destroying the rule of law, both at home and abroad, and discrediting America’s truth-telling and assessing institutions, including the media. 
A fiscal stimulus as large as that of December 2017 and January 2018 (and which the economy didn’t really need at the time) would have been all the more powerful a decade earlier when unemployment was so high. 
The weak recovery was thus not the result of “secular stagnation”; the problem was inadequate government policies. 
Here, a central question arises: Will growth rates in coming years be as strong as they were in the past? 
That, of course, depends on the pace of technological change. 
Investments in research and development, especially in basic research, are an important determinant, though with long lags; cutbacks proposed by the Trump administration do not bode well. 
But even then, there is a lot of uncertainty. 
Growth rates per capita have varied greatly over the past 50 years, from between 2 and 3% a year in the decade(s) after World War II to 0.7% in the last decade. 
But perhaps there’s been too much growth fetishism – especially when we think of the environmental costs, and even more so if that growth fails to bring much benefit to the vast majority of citizens. 
There are many lessons to be learned as we reflect on the 2008 crisis, but the most important is that the challenge was – and remains – political, not economic: there is nothing that inherently prevents our economy from being run in a way that ensures full employment and shared prosperity. 
Secular stagnation was just an excuse for flawed economic policies. 
Unless and until the selfishness and myopia that define our politics – especially in the US under Trump and his Republican enablers – is overcome, an economy that serves the many, rather than the few, will remain an impossible dream. 
Even if GDP increases, the incomes of the majority of citizens will stagnate. 

Understanding Today’s Stagnation 
NEW HAVEN – Ever since the “Great Recession” of 2007-2009, the world’s major central banks have kept short-term interest rates at near-zero levels. 
In the United States, even after the Federal Reserve’s recent increases, short-term rates remain below 1%, and long-term interest rates on major government bonds are similarly low. 
Moreover, major central banks have supported markets at a record level by buying up huge amounts of debt and holding it. 
Why is all this economic life support necessary, and why for so long? 
It would be an oversimplification to say that the Great Recession caused this. 
Long-term real (inflation-adjusted) interest rates did not really reach low levels during the 2007-2009 period. 
If one looks at a plot of the US ten-year Treasury yield over the last 35 years, one sees a fairly steady downward trend, with nothing particularly unusual about the Great Recession. 
The yield rate was 3.5% in 2009, at the end of the recession. 
Now it is just over 2%. 
Much the same is true of real interest rates. 
During the Great Recession, the ten-year Treasury Inflation-Protected Security yield reached almost 3% at one point, and was almost 2% at the recession’s end. 
Since then, the ten-year TIPS yield has mostly declined and stayed low, at 0.5% in May 2017. 
The fact that people are willing to tie up their money for ten years at such low rates suggests that there has been a long trend toward pessimism, reflected in the recent popularity of the term “secular stagnation” to describe a perpetually weak economy. 
After former US Treasury Secretary Lawrence Summers used the term in a November 2013 speech at the International Monetary Fund, the New York Times columnist Paul Krugman picked it up, and it went viral from there. 
Although secular stagnation became a meme five years after the 2008 financial crisis, the term itself is much older. 
It first appeared in Harvard University economist Alvin Hansen’s presidential address to the American Economic Association, in December 1938, and in his book published the same year. 
Hansen described the “essence of secular stagnation” as “sick recoveries which die in their infancy and depressions which feed on themselves and leave a hard and seemingly immovable core of unemployment.” 
When Hansen delivered his speech, he expected the US economy’s economic stagnation to persist indefinitely. 
The depression that had started with the stock-market crash of 1929 was approaching its tenth year, and World War II had not yet arrived. 
Only after the war began, in 1939, did the stagnation end. 
Hansen’s Great Depression-era theory of secular stagnation was based on an observation about the US birth rate, which was unusually low in the 1930s, after having already declined dramatically by the late 1920s. 
Fewer births perpetuated the stagnation, Hansen surmised, because people did not need to spend as much on children, and felt less need to invest in the future. 
Indeed, according to World Bank statistics, the global average birth rate has also fallen since the 2008 financial crisis. 
But low fertility had nothing to do with that crisis in particular, given that birth rates have been steadily declining for the better part of a century. 
Another explanation is that the 2008 crisis is lingering in our minds, in the form of heightened fear that rare but consequential “black swan” events could be imminent, despite moderately strong consumer-confidence measures and relatively low financial-market volatility (with some exceptions). 
A recent paper by New York University’s Julian Kozlowski, Laura Veldkamp, and Venky Venkateswaran argues that it is rational to harbor such fears, because once a formerly unthinkable event actually occurs, one is justified in not forgetting it. 
My own theory about today’s stagnation focuses on growing angst about rapid advances in technologies that could eventually replace many or most of our jobs, possibly fueling massive economic inequality. 
People might be increasingly reluctant to spend today because they have vague fears about their long-term employability – fears that may not be uppermost in their minds when they answer consumer-confidence surveys. 
If that is the case, they might increasingly need stimulus in the form of low interest rates to keep them spending. 
A perennial swirl of good news after a crisis might instill a sort of bland optimism, without actually eliminating the fear of another crisis in the future. 
Politicians and the media then feed this optimism with rosy narratives that the general public is in no position to sort through or confirm. 
Since around 2012, the equity and housing markets have been hitting new records. 
But the same sort of thing happened regularly in the Great Depression: the news media were constantly reporting record highs for one economic indicator or another. 
A Proquest “News and Newspapers” search for the 1930-1939 period finds 10,315 articles with the words “record high.” 
Most of these stories are about economic variables. 
In 1933, at the very bottom of the depression, record highs were reported for oil production; wheat, gold, and commodity-exchange-seat prices; cigarette consumption; postal deposits; sales or profits of individual companies; and so forth. 
Such rosy reports may give people some hope that things are improving overall, without allaying the fear that they could still suffer an economically catastrophic event. 
Barring exceptionally strong stimulus measures, this sense of foreboding will limit their spending. 
Narrative psychology has taught us that there is no contradiction: people can maintain parallel and conflicting narratives at the same time. 
When people are imagining disaster scenarios, policymakers must respond accordingly. 

Secular Stagnation Revisited 
WARWICK – The public spat between Nobel laureate Joseph Stiglitz and former US Treasury Secretary Larry Summers is remarkable for the personal animosity that it reveals between two economists who essentially agree about the economics. 
Stiglitz levels a not-so-subtle attack on Summers for failing to insist on a larger fiscal deficit when he ran the National Economic Council under the Obama presidency. 
Summers responds that the politics made a larger fiscal stimulus infeasible. 
But while they agree that the Great Recession could have been overcome with a big fiscal stimulus, neither has laid out the economic model that underpins their confidence in this outcome. 
Summers reinvigorated the work of Alvin Hansen, who introduced the concept of secular stagnation in the 1930s. 
But I have not seen Summers lay out a fully articulated dynamic general equilibrium model that supports his advice. 
And in his written work on this topic, he has seamlessly shifted between a definition of secular stagnation that involves permanently lower growth rates as a result of low investment and permanently lower employment as a result of deficient aggregate demand. 
These are not the same thing. 
In his rebuttal to Stiglitz, Summers comes down in favor of the latter definition. 
In his words, “left to its own devices, the private economy may not find its way back to full employment following a sharp contraction.” 
I agree with this assertion. 
And I have provided an internally coherent theory whereby secular stagnation arises naturally as a consequence of low expectations on the part of households and firms about the future value of their assets. 
This theory integrates Keynesian economics with general equilibrium theory in a new way. 
Higher persistent unemployment has nothing to do with sticky prices. 
It is a consequence of missing factor markets. 
Summers is well aware of my work. 
We discussed it when I visited Harvard in 2011 and again when he gave a lecture at the LSE in 2012. 
Initially, he was supportive in private email correspondence. 
But when I pointed out that the theory does not unequivocally support fiscal expansion as the appropriate response to a recession, he became disinterested in my work. 
New ideas are often difficult to accept, and they require investment in a different way of thinking that can be difficult to absorb, even for people as smart as Stiglitz and Summers. 
We cannot continue to make unfounded assertions about economic policy using the failed interpretation of the General Theory that evolved from John Hicks’ attempt to reconcile Keynes with the classics. 
The current manifestation of that approach is so-called New Keynesian Economics, which Summers himself has rightly rejected because it is inconsistent with secular stagnation. 
But it is not enough to assert that secular stagnation is possible. 
It is time to confront alternative theories of secular stagnation with empirical evidence, as I have done. 
The assertion that money wages are downwardly rigid is not, in my view, a credible explanation of persistent unemployment. 
Nor was it a credible explanation for Keynes, who asserted that his theory did not rely on the assumption of rigid wages. 
In a fully articulated model with multiple possible equilibrium unemployment rates, one must explain how an equilibrium is selected. 
In my work, expectations – or so-called animal spirits – are a new and independent fundamental that determines the steady-state unemployment rate. 
When we feel rich, we are rich. 
And if animal spirits are indeed fundamental, it becomes important to understand the factors that determine swings in confidence. 
If a large dose of expansionary fiscal policy is not the answer, what is? 
My response is that the right way to respond to financial crises is with policies that restore the value of private assets. 
And the right way to prevent financial crises in the first place is to intervene in the financial markets to moderate swings in asset values and to head off recessions before they happen. 

Securing a More Secure World 
Committee reports are usually deadly dull, and UN committee reports are among the dullest. 
But the recent report of the UN Secretary General’s High Level Panel on Threats, Challenges, and Change broke that rule. 
Sixteen political leaders and former diplomats combined principle with political realism to produce the most comprehensive proposals for change since the UN was created in 1945. 
Secretary General Kofi Annan is to present the report in March. 
Then it will be up to governments to act. 
Many early comments focus on the Panel’s recommendations for enlarging the UN Security Council from 15 to 24 members. 
The report proposes two alternatives. 
One would add six new permanent members – such as India, Brazil, Egypt, South Africa, Japan, and Germany – as well as three two-year members. 
The other alternative would create eight semi-permanent members with renewable four-year terms and one additional member chosen for a two-year term. 
Either proposal would entail amending the UN Charter, which requires marshaling the support of a two-thirds majority of the 191 member states, including the five veto-wielding members of the current Security Council. 
Skeptics doubt that this is feasible. 
But focusing on enlargement of the Security Council risks diverting attention from the rest of the Panel’s analyses and 101 recommendations for reform, many of which do not require amending the Charter. 
According to the report, the General Assembly has lost vitality, the Security Council must be more proactive, the Commission on Human Rights suffers from a legitimacy deficit, the Secretariat should be more professional and better organized, and major institutional gaps hinder responses to economic and social threats to international security. 
The report is critical of the organization’s performance on genocide in Bosnia, Rwanda, and Darfur, as well as the late response to HIV/AIDS. 
In the panel’s words, the UN was created above all “to save succeeding generations from the scourge of war,” but today the biggest security threats we face “go far beyond states waging aggressive war. 
The preoccupation of the UN founders was with state security. 
When they spoke of creating a new system of collective security they meant it in the traditional military sense.” 
Today the threats are from non-state actors as well as states, and they jeopardize human security as well as that of states. 
Collective security nowadays means a broader sharing of responsibility for each other’s security. 
The Panel deals forthrightly with the new transnational threats posed by terrorists and the spread of weapons of mass destruction. 
Its members agreed that there could be “nightmare scenarios” that combine the two and might require the preventive use of force. 
They urge strengthening the non-proliferation regime through more intrusive inspections, and negotiation of arrangements for internationally guaranteed access to nuclear enrichment and reprocessing services, rather than allowing countries to construct them for themselves. 
They back President George W. Bush’s Proliferation Security Initiative aimed at stopping traffic in weapons of mass destruction. 
On terrorism, they break the long UN impasse over finding a definition, condemning all attacks against civilians, and propose a number of measures that member states should take. 
Regarding preventive use of force, traditional interpretations of Article 51 of the UN Charter (which provides a right of self-defense) allow a threatened state to take pre-emptive action in the face of imminent attack, but not to use force preventively against longer term threats. 
The Panel would broaden that interpretation to allow the preventive use of force in some instances, but only if approved by the Security Council. 
The Security Council would judge the legitimacy of such action by whether it met the age-old criteria of just war: the seriousness of the threat, the purpose of the response, whether force is a last resort, whether it is used in a proportionate way, and whether there is a reasonable balance of good and bad consequences. 
In that sense, President Bush won half his argument: preventive force can be justified, but not unilaterally. 
Afghanistan would fit; Iraq would not. 
Critics complain that this approach places too much trust in a Security Council that can be paralyzed by politics and the veto. 
Enlarging the Council could make maters worse. 
A state threatened by terrorist attacks originating in another state might feel less patient than a majority of the Council about what is the “last resort.” 
In Rwanda and Kosovo, the Security Council failed to act in time to save thousands of lives. 
Is there an alternative to waiting for the Security Council and acting unilaterally? 
Kosovo and Iraq provide instructive examples. 
In the former, the prospect of a Security Council veto prevented action, and a regional organization (NATO) acted without UN authorization. 
Although this called the legality of the action into question, the intervention benefited from a widespread sense of political legitimacy that limited its negative effects on international order. 
In the case of the Iraq War, President Bush never established a broad consensus that might have provided legitimacy in the face of a veto. 
Countries such as France and Germany that opposed action in Iraq were willing to use force in Kosovo despite the absence of Security Council authorization. 
If states feel compelled to act in the case of Council stalemate, they should know that they would do less damage to their reputations if they act within the Panel’s guidelines for legitimacy, even if they fail to satisfy its criterion for legality. 
No single report can create a more secure world, but those who support that goal must hope that governments and their publics will consider seriously the Panel’s recommendations. 

Securing Europe’s Energy Future 
Most Europeans agree that reliable, affordable, and sustainable energy is crucial to Europe’s security and prosperity; that energy can be used as a political weapon, as when Russia shut off gas to Ukraine in January 2006; and that Europe is far too dependent on energy supplies from undemocratic and unstable countries or regions. 
Yet, despite wide agreement on these matters, there is little consensus about how to address them. 
Both boldness and consensus are urgently needed, and those who doubt that Europe is capable of either can take heart from two recent European Commission decisions: a politically ambitious proposal to force the complete separation of networks of pipelines and wires from the companies that supply gas and electricity; and a proposal that Gazprom and other non-EU businesses can control Union energy assets only if they meet tough new conditions, including reciprocal access to, say, Russia’s market for EU energy companies. 
But the fundamental problem remains Europe’s vulnerability over energy: an emerging divide and rule strategy over the supply of gas that must be confronted head on. 
Today’s preference by individual EU members to act unilaterally on energy must be replaced by a common energy policy based on solidarity among member states and unity in defending EU interests vis-à-vis external partners. 
After all, such solidarity is what allowed Europe to prosper and integrate over the past 50 years. 
So why not stick to a winning formula where energy is concerned? 
Specifically, the EU must develop a diplomatic strategy aimed at strengthening cooperation with all major energy producing, transit, and consumer countries, while creating within the Union a mutually beneficial, open, transparent, and stable energy sector based on reciprocity. 
Until now, the geopolitical dimension of European energy security has been so neglected as to endanger the Union’s future. 
With China seeking to secure exclusive access to energy resources in Africa and the Russian energy giant Gazprom seeking de facto control of Western companies by investing billions of euros in them, Europe can no longer afford to take a wait-and-see approach. 
The EU must become more active, more determined and united in securing its energy interests and those of its member states. 
Indeed, the internal and external aspects of energy policy are interrelated. 
Europe cannot build an efficient external policy without achieving a minimum of harmonization of member state policies regarding energy flows, interconnections, infrastructure, investment, and greater progress toward a single energy market. 
Concrete provisions must be included in the new treaty to reform the EU’s institutions in order to ensure the capacity to negotiate an energy security framework with third countries. 
For example, all the Union’s future energy agreements should include an “energy security clause” that explicitly outlines a code of conduct and measures to be taken in the event of a supply disruption. 
We should replace today’s energy unilateralism by member states with a new common energy policy based on solidarity. 
A fundamental part of this must be serious consultation among member states on strategic decisions that may affect an EU partner. 
This principle of solidarity was missing when the decision to build a Baltic Sea pipeline to directly link Russia and Germany was taken. 
The possible negative environmental consequences of that pipeline are of serious concern to all the citizens of the Baltic region and should be given due attention. 
Of course, a common EU security strategy is not meant to undermine the rights of individual member states to choose their internal energy policies. 
But collective energy security requires increasing the EU’s ability to face – and face down – external energy challenges. 
To achieve this, viable instruments are needed. 
I suggest the creation of a new institutional post of Special Representative on foreign energy policy, which would facilitate the coordination of all policies related to the external aspects of energy security. 
Working under the authority of the High Representative on Foreign Policy, who under the terms of the new reform treaty will also become a Vice-President of the European Commission, this post would reinforce synergies within the EU. 
I also propose that a precise “road map” toward a common foreign policy on energy be created, which would indicate short-, medium-, and long-term objectives, together with a specific timeframe for their implementation. 
The existing Energy Charter Treaty – including the Transit Protocol – must remain a cornerstone of Europe’s energy security policy. 
The EU must continue to insist that Russia ratify it, stipulating that Russia is already bound by its terms. 
The EU should also negotiate a framework document in the context of the next Partnership and Cooperation Agreement negotiations in order to clarify the obligations contained in the Treaty, in particular its Transit Protocol. 
Common threats to Europe’s energy security demand a common response. 
In building the means to secure Europe’s energy future, we will also renew the spirit of European integration and give new strength to the EU as a global actor. 
The energy challenge that confronts Europe calls for an ambitious and courageous approach. 
Today’s EU was built on concrete achievements, combining vision and the instruments needed to implement it. 
In the interests of our common security, we must not forsake that legacy. 

Securing Synthetic Securities 
NEW YORK – Goldman Sachs, we can be sure, will vigorously contest the civil suit brought against it by the United States Security and Exchange Commission (SEC). 
But, regardless of the eventual outcome, the case has far-reaching implications for the financial reform legislation that the US Congress is now considering. 
Whether or not Goldman is guilty, the transaction in question clearly had no social benefit. 
It involved a complex synthetic security that was derived from existing mortgage-backed securities by cloning them into imaginary units that mimicked the originals. 
This synthetic collateralized debt obligation (CDO) did not finance the ownership of any additional homes or allocate capital more efficiently; it merely swelled the volume of mortgage-backed securities that lost value when the housing bubble burst. 
The primary purpose of the transaction was to generate fees and commissions. 
This is a clear demonstration of how derivatives and synthetic securities were used to create imaginary value out of thin air. 
Indeed, more triple-A CDOs were created than there were underlying triple-A assets. 
This was done on a large scale, despite the fact that all of the parties involved were sophisticated investors. 
The process continued for years, culminating in a crash that caused wealth destruction amounting to trillions of dollars. 
Such activity cannot be allowed to continue. 
The use of derivatives and other synthetic instruments must be regulated, even if all the parties are sophisticated investors. 
Ordinary securities must be registered with the SEC before they can be traded. 
Synthetic securities need to be similarly regulated, although the task could be assigned to a different authority, such as the Commodity Futures Trading Commission. 
Derivatives can serve many useful purposes, but they also contain hidden dangers. 
For instance, they can pile up hidden imbalances in supply or demand, which may suddenly be revealed when a threshold is breached. 
This is true of so-called “knockout options,” used in currency hedging. 
It was also true of the portfolio insurance programs that caused the New York Stock Exchange’s Black Monday of October 1987. 
The subsequent introduction of circuit-breakers tacitly acknowledged that derivatives can cause disruptions, but the proper conclusions were not drawn. 
Credit default swaps (CDS) are particularly suspicious instruments. 
They are supposed to provide insurance against default to bondholders. 
But, because they are freely tradable, they can be used to mount bear raids – a type of stock market strategy by which a trader (or group of traders) attempts to force down the price of a stock to cover a short position. 
In addition to insurance, they also provide a license to kill. 
Their use ought to be confined to those who have an insurable interest in the bonds of a country or company. 
It will be the task of regulators to understand derivatives and synthetic securities, and to refuse to allow their creation if they cannot fully evaluate the systemic risks. 
That task cannot be left to investors, contrary to the diktats of the market fundamentalist dogma that prevailed until recently. 
Derivatives traded on exchanges should be registered as a class. 
Tailor-made derivatives would have to be registered individually, with regulators obliged to understand the risks involved. 
Registration is laborious and time-consuming, and would discourage the use of over-the-counter derivatives. 
Tailor-made products could be put together from exchange-traded instruments. 
This would prevent a recurrence of the abuses that contributed to the 2008 financial crisis. 
Requiring derivatives and synthetic securities to be registered would be a simple and effective measure; yet the legislation currently under consideration in the US contains no such requirement. 
The Senate Agriculture Committee proposes blocking deposit-taking banks from making markets in swaps. 
This is an excellent proposal that would go a long way in reducing the interconnectedness of markets, thereby preventing financial contagion, but it would not regulate derivatives. 
Moreover, the five big banks that serve as market makers and account for more than 95% of over-the-counter transactions in the US are likely to oppose the proposal, because it would hit their profits. 
It is more puzzling that some multinational corporations are also opposed. 
The only plausible explanation is that tailor-made derivatives can facilitate tax avoidance and manipulation of earnings. 
Of course, these considerations ought not to influence the legislation. 

Securing the Future at the Evian Summit 
The paradox of our time is the great power of the world's richest countries to do good, but their seeming compulsion to miss every opportunity to do so. 
The US stands as the supreme example of this: a country that devotes $450 billion per year to military spending allocates only $12 billion per year to development assistance for poor countries. 
It can bomb Somalia, Afghanistan, and Iraq, but seems ill-equipped to help these places develop. 
Europe is little better, paralyzed as it is by internal divisions and budget deficits. 
Next week's G-8 summit in Evian, France is a chance to make a fresh start. 
For the one billion people represented at the G-8 Summit, life is extremely good in comparison with the rest of the planet, with average incomes at $25,000 per person or more and life expectancy around 80 years. 
For about three billion people in the world today, including China, much of India, and most of East Asia, economic development is proceeding reasonably well, even if it displays a lot of ups and downs (most recently, the shock of the SARS epidemic). 
Positive trends are also seen in Brazil and Mexico. 
But for the world's remaining two billion people, life remains desperate. 
For roughly one billion people, bare survival is nothing short of precarious. 
Millions die each year because they lack access to medicines, food, safe drinking water, and basic sanitation. 
Their life expectancy is often less than 50 years, and is falling in many places. 
The G-8 could end the suffering of the world's poorest billion people if it adopted realistic measures to solve their problems. 
They fail to do so not only because they are greedy, but also because they are scared. 
They think that global poverty is inevitable and too expensive to solve. 
But they can solve the problems of the world's poorest--with relatively little effort and with no noticeable negative impact on their own standard of living. 
The biggest problem areas are concentrated in sub-Saharan Africa, the Andean region, and Central Asia. 
Other pockets of extreme poverty, in China and India, are on the path of amelioration due to these two giants' rapid economic growth. 
But the problems in sub-Saharan Africa, the Andes, and Central Asia are not solving themselves. 
These regions are trapped in poverty. 
The worst situation, by far, is in Africa. 
The US government believes that these countries have only themselves to blame for their poverty. 
But this is the ignorant boasting of a rich country that fails to comprehend the situation on the ground. 
Africa is trapped in poverty for deep-seated reasons. 
It suffers from endemic malaria, which is like a SARS pandemic that lasts for centuries, not for a few months. 
It suffers from a climate prone to massive droughts and from soils depleted of nutrients. 
It suffers from the fact that most of its population lives in the rural interior, without paved roads to reach ports and facilitate access to international trade. 
Aside from a few countries in West Africa, it suffers from a serious shortage of energy resources, whether coal or oil or hydroelectric power. 
The US never had to grapple with any one of these problems in the severity that they grip Africa. 
The ultimate irony is that all of these deep problems are amenable to solutions, albeit solutions that require money. 
That is where the G-8 should come in. 
All that is required is for the G-8 leaders to commit, at Evian, to follow through on their previous promises, which for years have remained unfulfilled. 
During the past three years, the world's leaders have promised concrete action to cut global poverty by one half by the year 2015, in a series of commitments known as the Millennium Development Goals. 
But only baby steps have followed. 
The US increased foreign aid by perhaps $4 billion a year at the same time that it increased military spending by $150 billion annually and cut taxes by trillions of dollars. 
Clearly, the US has the means to do vastly more to help the world's poor, if only it had the foresight. 
Specifically, the G-8 leaders should commit to providing adequate financing for the Global Fund to Fight AIDS, Tuberculosis, and Malaria; to raise food productivity in Africa through a new Green Revolution; to ensure that all poor children have the opportunity to go to school; and to ensure that poor people everywhere have access to clean drinking water and sanitation. 
The total cost of this agenda, remarkably, would be much less than 1% of the annual income of rich countries. 
For the first time in history, the rich are so rich, and the poor so poor, that a tiny effort by the rich could end massive suffering. 
The Evian Summit will clarify whether greed, ignorance, and the bombast of war have closed the eyes of the US entirely, and whether Europe and Japan will look inward rather than outward. 

Limiting the Security Council Veto 
PARIS – Back in 2001, France floated a proposal that the five permanent members of the United Nations Security Council (P5) should voluntarily refrain from using their veto power when dealing with mass-atrocity crimes. 
And now, in the lead-up to the commemoration of this year’s 70th anniversary of the UN, French President François Hollande’s government is actively pursuing the idea again. 
Could such an arrangement really work? 
The predictable initial response is to dismiss the possibility out of hand. 
As Australia’s wartime prime minister, Ben Chifley, once famously remarked, “The trouble with gentleman’s agreements is that there aren’t enough bloody gentlemen.” 
It is indeed hard to believe that Russia and China, in particular, would be accommodating. 
Russia, for example, has exercised vetoes more than 100 times since 1946, most recently – and unhappily – four times since 2011 to block resolutions intended to halt the carnage in Syria. 
Nor has the United States, which has used its veto some 80 times (most frequently, in recent years, on Israel-related issues), shown much enthusiasm, notwithstanding its generally strong stand on genocide and related cases. 
Only the United Kingdom (which, like France itself, last resorted to the veto in 1989) has given any hint of support for the French initiative. 
The right to veto was the price demanded by China, France, Great Britain, Russia, and the US for joining the UN. 
No one believes that a formal Charter amendment to abolish or limit this right is remotely likely. 
But international pressure on the P5 has been mounting for the last 15 years – and especially since the General Assembly’s unanimous embrace in 2005 of the “responsibility to protect” (R2P) principle. 
Advocates of the French position want these countries to forswear their veto when a clear majority supports proposed action to mitigate the risk of a mass-atrocity crime. 
Distaste for the blocking of the Syrian resolutions has been particularly intense, and, at last count, 68 countries had given explicit support to the French proposal in various UN forums. 
The moral argument that the veto should not be used in cases of mass-atrocity crimes is overwhelming. 
The P5 have obligations under the UN Charter, as well as international humanitarian and human rights law, not to undermine the effectiveness of the UN or that body of law. 
And the political argument against using the veto in these situations – that it jeopardizes the credibility and legitimacy of the Security Council, whose structure is already seen as not reflecting the geopolitical realities of the twenty-first century – should also weigh heavily on the P5. 
But is it possible to craft a veto-restraint proposal to which all of the P5 can agree? 
In January, at a conference I attended in Paris that brought together French policymakers and international experts, it became clear that a draft agreement could meet most, if not all, objections. 
But it would need to have at least three key elements. 
First, the agreement would have to define the relevant cases clearly – neither too widely nor too narrowly – and build on well-established R2P language. 
The definition might be something like “situations where populations are suffering, or at imminent risk of, genocide, other crimes against humanity, or major war crimes.” 
Second, an agreement would need to include a mechanism to determine when such cases had actually arisen. 
This would need to be speedy, provide some assurance of objective assessment, and ideally generate strong concern across a wide cross-section of the international community. 
One way to meet these needs would be to have a double trigger. 
The first requirement would be a certification, communicated to the Security Council by the UN Secretary-General and his Office of Special Advisers on the Prevention of Genocide and R2P (which has the necessary resources, expertise, and credibility) that the case meets the agreed definition. 
The other would be a request for veto-restraint by at least 50 member states, including at least five members from each of the recognized geographical groupings. 
A third key element, unattractive ethically but probably necessary politically to win the support of the US and others, would be a provision allowing any P5 member to veto when it claimed a “vital national interest” to be at stake. 
The consolation is that trying to rely on such an escape clause in most atrocity cases would not pass the laugh test. 
Could Russia and China really have used it to veto Security Council resolutions on Myanmar and Zimbabwe in, respectively, 2007 and 2008? 
Even given the intensity of Russia’s political and military relationship with Bashar al-Assad’s regime in Syria, could it really claim that a resolution would place its own vital interests at risk? 
Many kinds of pushback can be expected, not least the argument that the veto exists not to protect the P5’s interests, but to ensure unanimity of the major players (conspicuously missing in the UN’s ill-fated predecessor, the League of Nations) in any action undertaken, in order to maintain international peace and security. 
We will be told that it is unconscionable to ask a P5 member to forgo a veto when it genuinely believes that a proposed resolution will cause more harm than good. 
One response is that it is almost impossible to find any such genuinely high-minded rationale for any veto ever cast in a mass-atrocity situation. 
Another is that any UN Security Council resolution requires at least nine affirmative votes (in a Council of 15). 
If there are genuine concerns on the merits, that requirement will prove a very high bar. 
The point of the veto restraint is, at minimum, to raise the political cost for those who would block action designed to ensure that there are no more Cambodias, Rwandas, Srebrenicas, or Syrias. 
The French proposal, though still evolving, has already struck a responsive chord internationally. 
The other P5 members will ignore it at their peril. 

Security in a Time of Hatred 
In the wake of the Palestinian suicide bombers and the mass murder and collective suicide that took place last September 11th the world is still trying to redefine what it means by security. 
We know about mass suicides of religious sects and about individual suicides in military operations. Never before, however, were the two combined on so devastating a scale. 
Never before have we witnessed a military operation whose participants accept their own death not as a mere possibility, but as an inevitable and, indeed, desired outcome. 
Suicidal mass murder results from organized hatred-the unconditional craving to harm an enemy not for what it has (as with envy) or for what it does (as with anger), but for what it is. 
What a person or group has or does can be changed by redistribution or sanctions, but what it is can only be eliminated. 
As an expressive act of religious mania, organized hatred is rooted in a collective revelation of divine order and the duties arising from it, along with the promise of eternal reward for those who are unconditionally committed to fulfilling God's plan. 
Envy, anger, and sadness hurt. 
But hatred may be accompanied by the self-pleasures of an heroic mission. 
There have been countless attempts to pin the hatred of the September 11th attackers on something else: surely, America's global economic power and political hegemony at least nurtured the conditions in which such hatred could develop. 
Hasn't the US administration implied as much, speaking of its "vision of a Palestinian state" and sometimes criticizing Israeli policy with hitherto unseen severity? 
But while shifts in US rhetoric may be "collateral benefits" of the current military campaign, the Israel-related explanation of organized hatred falls short. 
There were no Palestinians among the September 11th terrorists, and the Islamic world's solidarity with the Palestinian cause is in any case largely rhetorical and tactical. 
Similarly, few in the Islamic world seriously regard Iraq's defeat in the Gulf War as a humiliation inflicted by the US on all Muslims. 
Islamist terrorism differs fundamentally from Third World revolutionary and national liberation movements, with their comparatively rational anti-imperialist stance. 
What America and the West do or did in the past is irrelevant; to radical Islamics, what matters are the West's heretical liberalism, individualism, and secularism. 
So what is to be done to re-establish security? 
President Bush once told America's Congress that "Al Qaeda is to terror what the Mafia is to crime." 
It may be comforting to believe that beheading the hierarchy of some conspiratorial organization will prevent further attacks. 
But the analogy doesn't hold up sociologically. In contrast to fear (the Mafia's stock in trade), hatred cannot be generated and conditioned systematically. 
An unconditional will to destruction and self-sacrifice can neither be taught nor learned. 
Al Qaeda bundles together rather than produces the hatred of autonomous perpetrators. 
But it is impossible to behead networks, much less networks of unconditional haters. 
Nor can security now be based solely on deterrence, as Israel may be discovering. 
Unlike the Cold War, whose logic of mutually assured nuclear destruction assumed that everybody prefers survival to death, the "war" against terrorism is much less immune to escalation. 
Indeed, because Islamist terrorism relies on the logic of diffuse, unconditional hatred, the preventive effects of even the most precise military attack may be less than zero, and may, instead, merely provoke demonstrative acts of retaliation. 
On the other hand, the deep and morally justified indignation and shared anxiety (felt well beyond America) made it politically impossible to not respond militarily. 
The Bush Administration seems aware of the pitfalls, emphasizing at home and abroad how different the conduct of the ongoing anti-terrorism war will be, that it requires military, diplomatic, law enforcement, and humanitarian measures, and that victory will be hard to prove. 
But victory will be even harder to prove if this new type of international conflict continues to be used to justify goals that risk multiplying anti-Western grievances. 
China breezes into the WTO. 
President Bush seeks to win congressional approval for his "fast-track" authority to approve free-trade deals. 
Putin gets a pass on Chechnya. 
The US withdraws from the Anti-Ballistic Missile treaty. 
Efforts to open the southern border of the US and the eastern border of the EU are put on the back burner. 
None of these developments-or the massive subsidies doled out to US and European business interests since September 11th-move us any closer to understanding the origins of hatred and ensuring security. 
On the contrary, they risk redefining a conflict between supporters of minimal standards of civilized human coexistence and a despicable gang of religious fanatics as a struggle against the arrogant, predatory, and corrupt agents of Western rationality. 
Ensuring victory against organized hatred requires a very different approach, one that attracts the support of those whose material and spiritual conditions leave them most susceptible to religious extremism. 
This clearly calls for far more than military mobilization and discretionary allocations for debt relief and humanitarian assistance. 
Fighting organized hatred means that we must pay more systematic attention to "soft" issues in international politics, such as human rights, mutual recognition and confidence-building among civilizations and religions, supranational guarantees of stability and peace, and strategies for economic development that are reliable and fair. 
In short, genuine security in the wake of a plague of suicidal terrorists demands that we, too, display a willingness for self-sacrifice in the interest of undercutting support for those who hate the community to be secured. 

Seeing REDD on Climate Change 
CANCÚN – The official communiqué from the Cancún climate-change conference cannot disguise the fact that there will be no successor to the Kyoto Protocol when it expires at the end of 2012. 
Japan, among others, has withdrawn its support for efforts simply to extend the Kyoto treaty. 
This sounds like bad news, because it means that there will be no international price on carbon, and, without a market price, it is difficult to see how the reduction of carbon emissions can be efficiently organized. 
But appearances can be deceiving. 
Even as the top-down approach to tackling climate change is breaking down, a new bottom-up approach is emerging. 
It holds out better prospects for success than the cumbersome United Nations negotiations. 
Instead of a single price for carbon, this bottom-up approach is likely to produce a multiplicity of prices for carbon emissions. 
This is more appropriate to the task of reducing carbon emissions than a single price, because there is a multiplicity of sectors and methods, each of which produces a different cost curve. 
The market price of anything is always equal to the marginal cost. 
When there is a single price, all the various cost curves are merged into one and low-cost projects enjoy large rents. 
This makes the cost of reducing carbon emissions much larger than it needs to be. 
This was amply demonstrated by the working of the Kyoto Protocol in practice. 
The carbon-trading scheme that it established gave rise to many abuses. 
For example, formerly communist countries earned emission credits at zero cost on the heavy industries that they had to shut down and reaped windfall profits by selling them. 
So the demise of the Kyoto Protocol will be no great loss. 
The same applies to the protracted negotiations between developed and developing nations. 
The developed nations promised to pay reparations for their past sins at the Rio de Janeiro summit in 1992 but kept deferring their obligations by negotiating. 
Meanwhile, conditions changed with the passage of time: China, following decades of booming growth, replaced the United States as the largest emitter. 
The negotiations have taken on an increasingly unreal air. 
Currently, the dispute revolves around how governments will deliver $100 billion annually by 2020 to help developing countries confront climate change, given that even the $10 billion Fast Track Fund cannot be cobbled together without using smoke and mirrors. 
By failing to make any progress beyond keeping the talks alive, the Cancún summit has given the impression that nothing is happening, and that the situation is hopeless. 
That is not the case. 
Individual countries like Germany are making binding unilateral commitments that are not conditional on what other countries do, and “coalitions of the willing” are being formed to tackle particular sectors. 
The REDD+ partnership (Reducing Emissions from Deforestation and Forest Degradation), an effort to create financial value for the carbon stored in forests, is the prime example here. 
Indeed, the greatest progress is now being made where the problem is the most urgent: it is much easier to preserve forests than to restore them. 
The case of Indonesia deserves special attention. 
Indonesia has become the third largest polluter in the world, after China and the US, because much of its forest grows on peatlands. 
When the trees are cut and peatlands drained, the carbon accumulated over millennia is exposed and oxidized – often in the form of fires that envelope neighboring Singapore and Malaysia in smoke. 
Today, half of Indonesia’s peatlands remain intact; if they were exposed, emissions would double. 
President Susilo Bambang Yudhoyono is determined to prevent this, and he has received financial support for his efforts from Norway. 
Their partnership has already been joined by Australia, and others will soon follow. 
The partnership is path-breaking in several ways. 
Yudhoyono is introducing a moratorium on the exploitation of peatlands and virgin forests. 
A REDD+ agency will be charged with treating rain forests as a natural resource that is to be preserved and restored rather than exploited and destroyed. 
This will also transform governance and the delivery of official development assistance (ODA). 
The REDD+ agency will have a domestic governing board that will coordinate the activities of all the governmental units concerned with rain forests, and an international board that will authorize and monitor the spending of ODA funds. 
This means that ODA will support home-grown institutions instead of administering projects introduced from the outside. 
These efforts can serve as a prototype for assisting other countries such as Guyana, where the current forest-preservation scheme does not work so well. 
Eventually, it should lead to the establishment of a global fund for rain forests and agricultural adaptation because the benefits of carbon abatement accrue to mankind as a whole, not to individual countries. 
The global fund would introduce two prices: one for carbon saving by restoring forests and one for avoiding carbon emissions by preserving them. 
This in turn sets an example for other sectors. 
In this way, carbon pricing will be introduced and international cooperation established from the bottom up, on a sectoral basis rooted in demonstrated results. 
Thus, despite the widespread impression that the climate-change agenda has stalled, there are grounds for hope. 
But realizing that hope requires keeping pace with global warming, and that means speeding up the process of putting a price – or prices – on carbon emissions. 

Seeing Through Cultural Bias in Science 
Most people now accept that fields like politics and journalism reflect and perpetuate cultural bias. 
Yet we imagine science as free of unexamined cultural assumptions. 
This is more or less true for some fields - say, chemistry or physics. 
My own corner of science, ethology, or the study of animal behavior, is certainly not pristine. 
How we look at animals reflects how we view ourselves. 
The founder of Japanese primatology, Kinji Imanishi, could attest to this. 
Imanishi argued that nature is inherently harmonious rather than competitive, with species forming an ecological whole. 
This rather un-Darwinian perspective so upset a British paleontologist, the late Beverly Halstead, that in 1984 he traveled to Kyoto to confront Imanishi. 
Unconstrained by first-hand knowledge of Imanishi's works, which were never translated, Halstead told him that his theory was "Japanese in its unreality." 
What compelled Halstead to be so rude? 
Why did he later write an article criticizing not just Imanishi's views, but his country? 
Why did " Nature, " one of the most prestigious journals in science, publish it, in 1985, beneath the patronizing assertion that the "popularity of Kinji Imanishi's writings in Japan gives an interesting insight into Japanese society"? 
Could not the same be said of Darwin's theory of unremitting competition, which grew out of a society giving birth to free-market capitalism? 
Even if Imanishi's ecological and evolutionary ideas were problematic, he and his followers were right about quite a lot. 
In fact, well before Halstead's contemptuous pilgrimage, Western ethologists began adopting Eastern concepts and approaches--although without being aware of their sources. 
To understand how this could occur is to appreciate the role of different cultural assumptions about the relations between humans and animals and how linguistic hegemony affects science. 
Eastern philosophy has no counterpart to Plato's "great chain of being," which places humans above all other animals. 
In most Eastern belief systems, the human soul can reincarnate in many shapes and forms. 
A man can become a fish and a fish can become God. 
There are no grounds in Eastern thought for resisting the central idea of evolutionary theory: that all animals are historically linked. 
Unlike in the West, this acceptance of evolution was never tainted by hubris or an aversion to acknowledging human-like characteristics in animals. 
Japanese primate researchers assumed that each individual animal had a distinct personality, and they did not hesitate to give their subjects names. 
They plotted kinship relationships over multiple generations, believing that primates must have a complex family life, just like us. 
They did all of this well before any Western scientist thought of it. 
In 1958, when Imanishi and his students toured the US to report their findings, they were ridiculed for humanizing their subjects and for believing that they could distinguish between all those monkeys. 
The Western view of apes regarded them as akin to Rousseau's "noble savage" - autonomous individuals, devoid of social ties and obligations, driven by instinct to swing haphazardly from one fruit tree to the next. 
But while Jane Goodall was describing female chimpanzees and their dependent offspring as the only socially bonded units in the primate world, a Japanese team, working only 130 kilometers away, eventually proved that chimpanzees live in large communities with stable memberships. 
We now know that chimpanzee society is male-bonded, and there is ample evidence of territorial warfare between communities. 
The initial discovery arose from the assumption that chimpanzees, so close in evolution to humans, could not be as "individualistic" as Western science supposed. 
The same initial assumption led Imanishi in 1952 to suggest that animals might have culture, which he reduced to its lowest common denominator: the social rather than genetic transmission of behavior. 
If individuals learn from one another, over time their behavior may diverge from that of other groups, thus constituting a distinct culture. 
We now know that cultural learning among animals is widespread, including birdsong, the use of tools by chimpanzees, and the hunting techniques of whales. 
Yet only a few decades ago, some Western professors forbade their students even to make reference to papers by Japanese colleagues! 
How could a cultural outlook that the West treated with such raw condescension - even in 1985 - simultaneously shape Western science so profoundly? 
The answer lies in language. 
A single language for scientific papers and conferences is clearly desirable, and the language of international science is English. 
Good scientific ideas formulated in bad English either die or get repackaged. 
Like a Hollywood interpretation of a French novel, their origins become erased. 
Eastern thinking could creep into ethology unnoticed partly because it filtered into the literature through awkward formulations and translations that native English speakers found it easy to improve on. 
The problem is not the English language per se , but the attitude and behavior of many native speakers. 
Naturally, you speak and write your own language faster and more eloquently than any other, and this can place scientists whose English is poor at a severe disadvantage. 
Imanishi's influence is now pervasive - all primate scientists have adopted the technique of following individuals over time, and animal culture is the hottest topic in our field. 
But Imanishi's writings are rarely, if ever, cited. 
We should not wonder at the difficulties that other cultural and linguistic groups must experience in gaining a voice and proper acknowledgment in science. 

Seeking Sovereignty in Europe and Iraq 
Two very different efforts at "nation building" are galvanizing world attention: America's struggle to construct a viable polity in Iraq and the EU's ambitious project of making Europe into a true "Union." 
While many issues involved are distinct, a "democratic deficit" looms large in both undertakings. 
Why and what will it take to overcome it? 
Sovereign regimes require a political identity. 
To understand this, lets reflect on a few considerations with a Rousseauian flavour. 
Jean-Jacques Rousseau was the conflicted genius who first articulated many basic themes of modernity, from democracy through authenticity, with all their contradictory demands. 
He is a great thinker, whose advice is always disastrous to follow. 
The first modern, democratic revolutions transferred power from monarchs to the "nation" or the "people." 
But this required inventing a new kind of collective agency that could decide and act together, to which one could attribute - a la Rousseau -- a "will." 
This new entity requires strong cohesion, because popular sovereignty means more than simply the will of the majority. 
After all, many sorts of bodies, even the loosest aggregations, can adopt majority decision-making. 
Suppose that during a public lecture, some people feel hot and ask that the windows be opened; others disagree. 
One might decide the matter by a show of hands, with the minority accepting the outcome favored by the majority as legitimate. 
Yet the audience might be comprised of individuals unknown to one another, without mutual concern, brought together only by the lecture. 
Democratic societies, by contrast, need to be bonded more powerfully than some chance grouping. 
Popular sovereignty entails certain types of decision procedures--grounded ultimately on the will of the majority (restricted by respect for liberty and individual rights)--and offers a particular justification for collective decision-making. 
Under a regime of popular sovereignty, we are free in a way that we are not under an absolute monarch or an entrenched aristocracy. 
To see why, consider such a regime from an individual's standpoint. 
Say that I am outvoted on some important issue. 
I must abide by an outcome I oppose. 
My will is thwarted, so why should I consider myself free? 
Why does it matter that it is the majority of my fellow citizens, rather than the decisions of a monarch, that is overriding my will? 
Indeed, we can even imagine that a potential monarch, waiting to return to power in a coup, agrees with me on the issue in question. 
Wouldn't I be freer after a counter-revolution, when my will--at least on this matter--would then be put into effect? 
This question is not merely theoretical. 
It is rarely put on behalf of individuals, but it regularly arises for sub-groups, such as national minorities, who see themselves as oppressed by majorities. 
Perhaps no answer can satisfy them. 
Whatever one says or does, they may be unable to see themselves as part of a larger sovereign people. 
They therefore see its rule over them as illegitimate, which is precisely the point: the logic of popular sovereignty requires an idea of collective agency based on a sense of individual belonging that is much stronger than in our lecture audience. 
Of course, some extreme philosophical individualists believe that appealing to a greater collective is pure humbug, concocted to get voters to accept voluntary servitude. 
But without deciding this philosophical issue, we can ask: what feature of our "imagined communities" persuades people to accept that they are free under a democratic regime, even when their will is overridden on important issues? 
The answer that we as individuals accept is that we are free because we rule ourselves in common, rather than being ruled by some agency that need not take account of us. 
Our freedom consists in having a guaranteed voice in the sovereign, in being heard and participating in making decisions. 
We enjoy this freedom because of a law that enfranchises all of us, so that we enjoy this freedom together. 
Our freedom is realized and defended by this law, whether or not we win or lose any particular decision. 
This law also defines the community whose freedom it realizes and defends-a collective agency, a people, whose acting together by the law preserves their freedom. 
Such is the answer, valid or not, that people accept in democratic societies. 
Insofar as this freedom is crucial to their identity, they identify strongly with this ongoing collective agency--the "nation" or the "people"--and hence feel a bond with their co-participants in it. 
Only an appeal to this kind of membership can rebut the challenge of those considering support for a monarch's or general's or provisional government's coup in the name of their freedom. 
The crucial point is that regardless of who is right philosophically, it is only insofar as people accept some such appeal that the legitimacy principle underlying popular sovereignty can work to secure their consent. 
If identification with the community is rejected, the government will be illegitimate in the eyes of the rejecters. 
In short, there can be no democracy without a shared identity as participants in a common agency. 
This notion--which boils down to citizenship --underscores the central challenge now posed by both the Iraqi and European projects. 
Simply put, are Iraqis too divided, too long oppressed, to develop anything like the sense of common identity and collective agency that popular sovereignty requires? 
In some ways, much less is at stake in building a new democratic community out of the already free and prosperous European countries. 
But whether the "democratic deficit" on the European level be remedied also depends on whether a shared European identity can be forged out of the 25 nations that will soon make up the European Union. 
Both projects are audacious. 
Neither is guaranteed success. 



Selecting Our Children 
MELBOURNE – In April, Germany’s parliament placed limits on the use of genetic diagnosis. 
Is the new German law a model for other countries to follow as we grapple with the ethical issues posed by our growing knowledge of human genetics? 
Some provisions of the German law draw on the widely shared ethical principles of respect for individual autonomy and privacy. 
No one can be tested without his or her consent. 
Neither employers, nor insurance companies, may require genetic testing. 
Individuals are granted both the right to know – to be informed of the results of any genetic test about themselves – and the right to choose to live in ignorance of what a genetic test may predict about their future. 
To discriminate against or stigmatize anyone on account of their genetic characteristics is prohibited. 
Desirable as these provisions seem, they could impose a heavy cost on German companies. 
If insurance companies outside Germany are permitted to require genetic tests while German companies are prohibited from doing so, then people who know they have life-shortening genetic diagnoses will get their life insurance from German insurance companies. 
These companies will then find themselves making more payments for premature deaths relative to their competitors. 
To cover the increased costs, they will have to raise premiums, making themselves uncompetitive. 
In an attempt to mitigate this problem, the law specifies that anyone taking out an insurance policy valued at more than €300,000 may be required to disclose the results of prior genetic tests. 
But if people lie about whether they have previously been tested, that provision will be moot. 
As genetic testing becomes increasingly able to predict not only health, but also some cognitive and personality traits, the prohibition on employer testing may also put German employers at a disadvantage in the international marketplace. 
They will invest resources in training employees whom their competitors will exclude from the initial pool of recruits. 
This may be a humane thing to do, for it gives every individual a chance, irrespective of the genetic odds against their paying their way for the company. 
But, in the long term, if we are serious about prohibiting such tests, we need an international agreement – on both insurance and employment – to ensure a level playing field for all countries. 
That will not be easy to achieve in a globally competitive economy in which some nations have demonstrably less respect for individual human rights than others. 
The German law’s most controversial feature is a prohibition on prenatal genetic testing for diseases that will manifest themselves only in adulthood. 
Consider, for example, a woman who knows that her partner has the gene for Huntington’s disease. 
Any child of his has a 50% chance of inheriting the condition. 
If the child does inherit it, he or she will, at around 40, begin to suffer uncontrollable movements, personality changes, and a slow deterioration of cognitive capacities. 
People with Huntington’s disease usually die about 15 years after the onset of the symptoms. 
There is no cure. 
No parents could want this future for their children. 
Prenatal testing of fetuses (or of in vitro embryos before transfer to the uterus) is now well established throughout the developed world. 
If the test is positive, the pregnancy can be terminated, or, in the case of pre-implantation diagnosis, the embryo will be discarded. 
The new German law makes such tests a crime. 
The same is true of tests for the genes that strongly predispose women to breast cancer. 
As genetics advances, more such late-onset conditions will become detectable prenatally. 
What could be the thinking behind such a law? 
One might take the view that 40 years of life before the onset of Huntington’s disease or breast cancer is better than no life at all. 
But if we take that into account, should we not also take into consideration the life of the child who the parents would have had, if they had been able to use prenatal diagnosis and be sure of having a child who does not carry the gene for the disease? 
Surely that child has better life prospects. 
When we have a choice between lives with such different prospects – and can make the choice before the embryo or fetus has any awareness at all – shouldn’t we be able to choose the child with the better prospects? 
It is not surprising that questions about genetic tests should receive special attention in Germany, given the national imperative of avoiding any repetition of the crimes of the Nazi era. 
But, in their laudable desire to distance themselves as much as possible from those atrocities, Germany’s legislators have enacted a law that makes it a crime to use modern science to avoid undoubted human tragedies. 
That is an absurd outcome. 

The Who, Where, and When of Secession 
CAMBRIDGE – This week, Kurds in northern Iraq voted overwhelmingly in favor of independence for the country’s Kurdistan Region. 
With some 30 million Kurds divided among four states (Iraq, Turkey, Syria, Iran), nationalists argue that they deserve the world’s recognition. 
In Spain, some 7.5 million Catalans have raised the same question. 
Does it matter that polls show Catalans, unlike Kurds, to be closely divided on the issue? 
Does it matter that the states bordering Iraqi Kurdistan might use force to resist secession? 
National self-determination, the principle that US President Woodrow Wilson put on the international agenda in 1918, is generally defined as the right of a people to form its own state. 
But who is the “self” that makes this determination? 
Consider Somalia, whose people, unlike those of most other newly independent African states, had roughly the same linguistic and ethnic background. Neighboring Kenya was formed by colonial rule from dozens of peoples or tribes. 
Somalia claimed that the self-determination principle should allow Somalis in northeastern Kenya and southern Ethiopia to secede. 
Kenya and Ethiopia refused, resulting in a number of regional wars over the Somali national question. 
The ironic sequel was that Somalia itself later fragmented in a civil war among its clans and warlord leaders. 
Today, its northern region, Somaliland, exists as a de facto independent state, though it lacks international recognition or United Nations membership. 
Voting does not always solve problems of self-determination. 
First, there is the question of where one votes. 
In Ireland, for example, Catholics objected for many years that if a vote were held within the political area of Northern Ireland, the two-thirds Protestant majority would rule. 
Protestants replied that if a vote were held within the geographical area of the entire island, the Catholic majority would rule. 
Eventually, after decades of strife, outside mediation helped bring peace to Northern Ireland. 
There is also the question of when one votes? 
In the 1960s, the Somalis wanted to vote immediately; Kenya wanted to wait 40 or 50 years while it reshaped tribal allegiances and forged a Kenyan identity. 
Another problem is how one weighs the interests of those left behind. 
Does secession harm them, by taking resources away or causing other disruption? 
Iraqi Kurdistan holds significant oil reserves, and Catalonia is estimated to account for a fifth of Spain’s GDP. 
Spain’s government argues that the upcoming independence vote in Catalonia is illegal under the Spanish constitution. 
History is not encouraging. 
After the Habsburg Empire was dismantled in 1918, the Sudetenland was incorporated into Czechoslovakia, even though most people there spoke German. 
After the agreement reached in Munich with Adolf Hitler in 1938, the Sudeten Germans seceded from Czechoslovakia and joined Germany. 
But the loss of the mountainous frontier where they lived was a terrible setback for Czech defenses. 
Was it right to allow self-determination for the Sudeten Germans, even if it meant stripping Czechoslovakia (which Germany dismembered six months later) of its military defenses? 
To take another African example, when the people of eastern Nigeria decided to secede and form the state of Biafra in the 1960s, other Nigerians resisted, in part because Biafra included most of Nigeria’s oil. 
They argued that the oil belonged to all the people of Nigeria, not just the eastern area. 
After the Cold War ended, self-determination became an acute issue in Eastern Europe and the former Soviet Union. 
In the Caucasus, Azeris, Armenians, Georgians, Abkhazians, and Chechens all demanded states of their own. 
In Yugoslavia, Slovenes, Serbs, and Croats managed to carve out independent republics, but the Muslims in Bosnia-Herzegovina were less successful, and were subjected to a campaign of “ethnic cleansing” by both Croatian and Serb forces. 
In 1995, a NATO peacekeeping force was sent to the troubled area, but when NATO intervened militarily in Kosovo in 1999, Russia backed Serbia’s objections to secession, and Kosovo has still not been admitted to the UN. 
In turn, Russia invoked self-determination to support Abkhazia’s secession from Georgia in 2008, and its invasion and annexation of Crimea in 2014. 
Self-determination turns out to be an ambiguous moral principle. 
Wilson thought it would bring stability to Central Europe; instead, Hitler used the principle to undermine the region’s fragile new states in the 1930s. 
The lesson remains valid today. 
Given that less than 10% of the world’s states are homogeneous, treating self-determination as a primary rather than secondary moral principle could have disastrous consequences in many parts of the world. 
Indeed, hostile ethnic groups are often mixed like a marble cake, rather than neatly separable like a layer cake. 
That makes partition difficult, as India discovered in 1947. 
Perhaps that is why only a few new states have been admitted to the UN in this century. 
After it seceded from Sudan, ethnic turmoil inside South Sudan continued, practically unabated. 
The best hope for the future is to ask what is being determined as well as who determines it. 
In cases where groups cohabit a state uneasily, it may be possible to allow a degree of autonomy in the determination of internal affairs. 
Countries like Switzerland or Belgium provide considerable cultural, economic, and political autonomy to their constitutive groups. 
Where autonomy is not enough, it may be possible to arrange an amicable divorce, as when Czechoslovakia peacefully divided into two sovereign countries. 
But absolute demands for self-determination are more likely to become a source of violence, which is why they must be handled extremely carefully. 
Before invoking self-determination as a moral principle, one must heed the diplomatic version of the Hippocratic Oath: Primum non nocere (first, do no harm). 


Mine Your Digital Business 
BOSTON – Nearly everyone has a digital footprint – the trail of so-called “passive data” that is produced when you engage in any online interaction, such as with branded content on social media, or perform any digital transaction, like purchasing something with a credit card. 
A few seconds ago, you may have generated passive data by clicking on a link to read this article. 
Passive data, as the name suggests, are not generated consciously; they are by-products of our everyday technological existence. 
As a result, this information – and its intrinsic monetary value – often goes unnoticed by Internet users. 
But the potential of passive data is not lost on companies. 
They recognize that such information, like a raw material, can be mined and used in many different ways. 
For example, by analyzing users’ browser history, firms can predict what kinds of advertisements they might respond to or what kinds of products they are likely to purchase. 
Even health-care organizations are getting in on the action, using a community’s purchasing patterns to predict, say, an influenza outbreak. 
Indeed, an entire industry of businesses – which operate rather euphemistically as “data-management platforms” – now captures individual users’ passive data and extracts hundreds of billions of dollars from it. 
According to the Data-Driven Marketing Institute, the data-mining industry generated $156 billion in revenue in 2012 – roughly $60 for each of the world’s 2.5 billion Internet users. 
As impressive as this figure sounds, it is just the first step for the data economy. 
By 2020, the global Internet population will reach five billion; ten billion new machine-to-machine connections will be created; and mobile data traffic will rise 11-fold. 
Given the dramatic growth in the amount of data being generated, together with ever-expanding applications across industries, it is reasonable to expect that individual data will soon be worth more than $100 per Internet user. 
Within ten years, the data-capture industry can be expected to generate more than $500 billion annually. 
Based on these projections, one might wonder what kind of compensation the creators of this multibillion-dollar data can expect. 
As it stands, the answer is none at all. 
Individual users are at the bottom of a broken economy. 
The value that their data generate is being collected by third parties, and sold to whatever cash-rich organization is willing to purchase it. 
This does not have to be the case. 
The first step toward reclaiming some of the value of our own data is to view this information as an asset, rather than as a by-product. 
At that point, Internet users can find ways to take control of their own creation. 
Already, Facebook users can export all of their personal data as a zip file simply by clicking a link on their profiles. 
Presumably, they could sell that information directly to the organizations that want it, instead of allowing Facebook to do so. 
Of course, the data market does not yet exist on this scale. 
But, as Facebook’s data-export facility demonstrates, a new model that turns data into an asset and consumers into producers is not a distant prospect. 
Such a model would empower billions of Internet users by making them beneficiaries of a transactional exchange – one that adds value in every direction. 
Beyond enabling individual Internet users to monetize their data, this model would benefit data buyers by connecting them more closely to consumers – not least by diminishing the mistrust that can arise when users are not complicit in the sharing and use of their data. 
Indeed, firms that acknowledge that personal data are personal property will be in a better position to build relationships with individual consumers, thereby gaining deeper insights into their specific needs and desires. 
If passive data are worth hundreds of billions of dollars when sold by third parties, the data that individuals choose to share – reliable, honest insights into their motivations as consumers – should be worth much more. 
By recognizing the individuals behind the data, companies can access and share in that value, within a fully inclusive data economy. 
Personal data is exactly that – personal. 
People should choose whether to share it, and they should be able to share it on their own terms. 

Selling America 
A year ago, then United States National Security Adviser Condoleezza Rice announced that, “We are engaged primarily in a war of ideas, not of armies.” 
She was right, but it is a war that the US is losing, because it is regularly out-flanked by Al-Qaeda. 
Rising anti-Americanism around the world threatens to deprive the US of the soft or attractive power that it needs to succeed in the struggle against terrorism. 
As Iraq has shown, hard military power alone cannot provide a solution. 
Poll after poll confirms that America’s soft power has declined, particularly in the Islamic world. 
Even in supposedly friendly countries like Jordan and Pakistan, more people say they trust Osama Bin Laden than George Bush. 
Information is power, and today a much larger part of the world’s population has access to it. 
Long gone are the days when US Foreign Service officers drove Jeeps to remote regions of the Third World to show reel-to-reel movies to isolated villagers. 
Technological advances have led to an information explosion, and publics have become more sensitized to propaganda. 
The world is awash in information, some of it accurate, some misleading. 
As a result, politics has become a contest about credibility. 
Whereas the world of traditional power politics is typically defined by whose military or economy wins, politics in an information age is about whose story wins. 
Governments compete with each other and with other organizations to enhance their own credibility and weaken that of their opponents. 
Unfortunately, the US government has not kept up. 
Even the Pentagon’s Defense Science Board admits this, reporting that America’s strategic communication “lacks Presidential direction, effective interagency coordination, optimal private sector partnerships, and adequate resources.” 
In the final years of the Clinton administration, Congress mistakenly abolished the US Information Agency and gave its tasks to a new Undersecretary for Public Diplomacy in the State Department. 
This office has subsequently been left vacant or, for two of the past four years, filled on only an interim basis. 
The entire budget for public diplomacy (broadcasting, information, and exchange programs) is $1.2 billion, about the same as France, or what McDonald’s spends on advertising. 
The US government spends 450 times more on hard military power than on soft power. 
In 1963, Edward R. Murrow, the famous journalist who directed the US Information Agency in the Kennedy Administration, defined public diplomacy as interactions not only with foreign governments, but primarily with non-governmental individuals and organizations, often presenting a variety of private views in addition to government views. 
Skeptics who treat “public diplomacy” as a euphemism for broadcasting government propaganda miss the point. 
Simple propaganda lacks credibility and thus is counterproductive. 
Public diplomacy, by contrast, involves building long-term relationships. 
Most important in the current situation will be the development of a long-term strategy of cultural and educational exchanges aimed at developing a richer and more open civil society in Middle Eastern countries. 
Given low official credibility, America’s most effective spokesmen will often be non-governmental. 
Indeed, some analysts have even suggested that the US create a non-partisan corporation for public diplomacy that would receive government and private funds, but would stimulate independent cross-border communications. 
Corporations, foundations, universities, and other non-profit organizations can promote much of the work of developing an open civil society. 
Companies and foundations can offer technology to help modernize Arab educational systems and take them beyond rote learning. 
American universities can establish more exchange programs for students and faculty. 
Foundations can support the development of institutions of American studies in Muslim countries, or programs that enhance journalistic professionalism. 
They can support the teaching of English and finance student exchanges. 
In short, there are many strands to an effective long-term strategy for creating soft power resources and promoting conditions for the development of democracy. 
The response to the recent tsunami disaster in Asia is a case in point. 
President George W. Bush pledged – albeit belatedly – $350 million in relief to the victims, and sent high-level emissaries to the region. 
There has also been an impressive outpouring of private support by American charities and non-profit organizations. 
The images of US soldiers battling in Iraq have been supplemented by images of America’s military delivering relief to disaster victims. 
But effective follow-up is essential. 
Bush’s prior announcements of increased development assistance and stronger efforts to combat HIV/AIDS in Africa were not only moral imperatives, but also important investments in American soft power. 
Unfortunately, the funds needed to implement these initiatives have not flowed as rapidly as the rhetoric. 
Equally important, none of these efforts at relief or public diplomacy will be effective unless the style and substance of US policies are consistent with a larger democratic message. 
That means that Condoleezza Rice’s chief task as Secretary of State will be to make American foreign policy more consultative in style as she seeks a political solution in Iraq and progress on Middle East peace. 
Only then will she be able to begin the job of repairing America’s tattered reputation by shoring up its neglected public diplomacy. 

Semi-Rational Exuberance 
In 1996, Yale economist Robert Shiller looked around, considered the historical record, and concluded that the American stock market was overvalued. 
In the past, whenever price-earnings ratios were high, future long-run stock returns were low. 
But now prices on the broad index of the S&P 500 stood at 29 times the average of the past decade's earnings. 
On the basis of econometric regression analyses carried out by Shiller and Harvard’s John Campbell, Shiller predicted in 1996 that the S&P 500 would be a bad investment over the next decade. 
In the decade up to January 2006, he argued, the real value of the S&P 500 would fall. 
Even including dividends, his estimate of the likely inflation-adjusted returns to investors holding the S&P 500 was zero – far below the roughly 6% annual real return that we have come to think of as typical for the American stock market. 
Shiller’s arguments were compelling. 
They persuaded Alan Greenspan to give his famous “irrational exuberance” speech at the American Enterprise Institute in December 1996. 
They certainly convinced me, too. 
But Shiller was wrong. 
Unless the American stock market collapses before the end of January, the past decade will have seen it offer returns that are slightly higher than the historical averages – and much, much greater than zero. 
Those who invested and reinvested their money in America’s stock market over the past decade have nearly doubled it, even after taking account of inflation. 
Why was Shiller wrong? 
We can point to three factors, each of which can take roughly one-third of the credit for annual real returns of 6%, rather than zero, over the past decade: 
· The high-tech revolutions behind the very real “new economy,” which have accelerated American companies’ productivity growth. 
· Shifts in the distribution of income away from labor and toward capital, which have boosted corporate profits as a share of production. 
· Increasing risk tolerance on the part of stock market investors, which appears to have raised long-run price-earnings ratios by around 20%. 
None of these three factors was obvious in 1996 (although there were signs of the first and inklings of the third for those smart or lucky enough to read them). 
In 1996, betting on Shiller’s regression analyses was a reasonable and perhaps intelligent thing to do. 
But it was also an overwhelmingly risky thing to do, as anyone who followed the portfolio strategy implicit in Shiller’s analysis learned. 
This takes nothing away from the importance of the question that Shiller addressed. 
Just why is it that stock markets around the world are subject to fits of “irrational exuberance” and “excessive pessimism”? 
Why don’t rational and informed investors take more steps to bet heavily on fundamentals and against the enthusiasms of the uninformed crowd? 
The past decade offers us two reasons. 
First – if we grant that Shiller’s regression analyses correctly identified long-run fundamentals a decade ago – betting on fundamentals for the long term is overwhelmingly risky. 
Lots of good news can happen over a decade, enough to bankrupt an even slightly leveraged bear when stock prices look high; and lots of bad news can happen, enough to bankrupt an even slightly leveraged bull when stock prices look low. 
Thus, even in extreme situations – like the peak of the dot-com bubble in late 1999 and early 2000 – it is very difficult even for those who believe that they know what fundamental values are to make large long-run bets on them. 
It is even more difficult for those who claim to know this and who want to make large long-run contrarian bets to convince others to trust them with their money. 
If it were easy to pierce the veils of time and ignorance and to assess long-run fundamental values with a high degree of confidence, it would be simple and safe to make large contrarian long-run bets on fundamentals. 
In that case, the smart money would smooth out the enthusiasms – positive and negative – of the uninformed crowd. 
But, of course, we cannot overcome long-run uncertainty. 
As J.P. Morgan put it when asked to predict what stock prices would do, “They will fluctuate.” 

Send in the Clowns 
New York -- Beppo Grillo is one of Italy’s most famous comics. He is also one of Italy’s most influential political commentators. 
His blog attracts 160,000 hits daily, and if he could run for prime minister (he can’t, because of a criminal record), more than half of Italy’s voters, according to a poll last year, would have considered voting for him. 
Grillo is yet another reminder of a modern phenomenon: the important role of comedians in contemporary politics. 
Until a few years ago, the one TV program most Mexicans turned to for political information was called The Morning Quickie, broadcast from 6-10 a.m. 
The host, interviewer, and main commentator was Victor Trujillo, better known as Brozo the Clown, adorned with a green wig and a red rubber nose. 
It was Brozo the Clown who exposed a major corruption scandal in the office of a former Mexico City mayor. 
While staid TV pundits ask the usually vapid questions during presidential debates in the United States, candidates know that the really important thing is to get laughs on the comedy shows of David Letterman or Jay Leno. 
And, for several years, American liberals have looked to Jon Stewart, another comic talent, for critical political commentary. 
Of course, comic entertainment in politics is not just a modern phenomenon. 
Nero was a murderer who understood that he had to amuse the masses to gain popular support. 
Then there is the long tradition of the court jester with license to criticize the despot by sweetening his barbs with jokes. 
The annual Gridiron Club Dinner in Washington, where the president is lampooned by the press, is a relic of this custom. 
In the US, especially, the borderlines between showbiz and politics (or indeed religion) have always been porous. 
The similarities between the variety show, the evangelical meeting, and the party convention are striking. 
Europeans like to sneer at American political jamborees as being hopelessly vulgar. 
In fact, democracy demands a degree of showmanship and pizzazz; politicians need to appeal to the mass of voters, and not just to an elite, which can afford to ignore hoi polloi. 
To be utterly boring, holding forth for hours on end, regardless of entertainment value, is the privilege of autocrats. 
Only communist rulers could force millions of people to buy their complete works, filled with wooden ideas written in turgid prose. 
The problem with many democratic politicians today is that they have become almost as dull as the old communist autocrats. 
Most, especially in Europe, are professional politicians with no experience apart from working the levers of party machines. 
Gone, for the most part, are the colorful rogues and public-spirited idealists who used to liven up parliamentary politics. 
Like bureaucrats, professional politicians have mastered the art of saying nothing interesting in public. 
They are managed by equally professional press handlers, masters of spin and the television sound bite. 
In these dying days of serious newspaper journalism, slick television shows, packaged by highly-paid anchormen – who never utter an original thought themselves, and would never expect a politician to do so – are the only venues where professional politicians feel secure enough to “face” the public. 
As a result, the public is turned off. 
Not since the 1930’s has popular disgust with politicians in Europe, the US, as well as Japan, run so high. 
This is dangerous, because such sentiments can end in disgust with liberal democracy itself. 
Does the future belong, then, to the clowns, the anarchic blogosphere, the anti-politicians, and the populist showmen who entertain the masses with jokes, slurs, and indiscretions on TV channels, which some of them actually own? 
If the success of a TV pundit with a red rubber nose is a rebuke to the dull and fawning anchormen, the political success in recent years of entertainers, demagogues, and public figures who make a virtue of their indiscretion is a slap in the face of the professional political class which they profess to despise. 
The recent re-election of the great showman Silvio Berlusconi illustrates this perfectly. 
Although none of the aspiring candidates for the US presidency can match him in terms of zaniness, similar trends are plain to see. 
John McCain managed to defeat his more conventional Republican rivals by seeming to be totally different from them: a maverick who says what he damned well wants, a tough guy with the knowing wink of the old ladies’ man. 
Barack Obama, at least when he began his campaign, had all the charisma of the holy roller, turning on the crowds with the rhetorical spark of a great evangelist. 
That is why he barged his way past Hillary Clinton, the consummate operator of the party machine. 
In some ways, Obama’s candidacy illustrates the problems facing our democracies today. 
People don’t trust the professionals. 
But electing a clown is not the answer either. 
Obama happily combines showmanship and seriousness in a way that could inject new life into the democratic system. 
But he has been maneuvered into a peculiar dilemma. 
Attacked for being shallow, indiscreet, and flashy by the Hillary camp, he has toned down his revivalist rhetoric, and adopted a more sober, more cautious, more professional air. 
Yet, by doing so, he may have made himself less popular, and is being accused of elitism to boot. 
Here is one case where a bit more vulgar showbiz may be exactly what democracy requires. 

Senegal’s Democracy Put to the Test 
Senegal, a country whose population is 90% Muslim, is one of the Islamic world’s most peaceful and democratic countries. 
This tranquility has been helped by the elaborate “rituals of respect” that have developed between the secular state and the Sufi orders, and the excellent relations between the country’s Muslim majority and the Catholic minority at all levels of society. 
The secular state and religious groups have cooperated on AIDS prevention – to the extent AIDS affects only about 1% of the population, compared to more than 20% in some African countries. 
The secular state, supported by feminist groups and some transnational non-governmental organizations, banned female genital mutilation in 1999, without triggering massive Muslim protests. 
Mistakenly viewed by some as an example of French laicité, which might be characterized as “freedom of the state from religion,” Senegal, although once a French colony, has crafted a very different model of “equal respect and equal support for all religions.” 
In fact, secularism in Senegal resembles that in India more than anywhere else. 
In Senegal, fundamentalist schools, as well as Iranian and Saudi Arabian aid in the education sector, find little space or demand. 
The Senegalese government spends about 40% of the state budget on education and provides free public schooling to almost 85% of all primary school age children. 
By contrast, Pakistan, spends just 8% and six million primary age children have no public schooling. 
Furthermore, since 2003 state schools offer religious instruction (using authorized textbooks that are never Wahhabi in spirit), with the informal approval of secular and Sufi teachers alike. 
Parents are increasingly sending their sons, and now their daughters, to these tolerant, accredited, and democracy-compatible schools. 
Some parents still elect to send their children to private, often Franco-Arabic, schools. 
However, the Senegalese pattern of state-religious relations allows the government to provide partial funding to such private religious schools. 
In return, the state inspects such schools regularly. 
The only schools the state does not supervise are Koran-based schools, which some parents use as a complement – but seldom a full substitute – for state education. 
But most of the traditional religious teachers in such schools practice Senegalese rituals of respect, and, in any case, view Saudi Arabian-style schools as alien competitors. 
Yet, despite all these positive developments, Senegal’s unusual democracy is imperiled. 
The reasons have nothing to do with the rise of political Islam, but everything to with poor electoral practices by elected incumbents and international indifference. 
The current president, Abdoulaye Wade, who is over 80 years old, is running for re-election on February 25. 
Wade has substantial international prestige, because he led the final phase of the country’s long democratic transition in 2000. 
But Wade postponed legislative elections, originally scheduled for June 2006, first to February 2007, and later, by presidential decree, to June 2007. 
Two weeks ago there were almost daily discussions about the possibility of the presidential elections being postponed indefinitely . 
It now appears that there will be a presidential election, but will it be fair? 
A month before the election, only 64% of citizens who had registered had received their voting cards. 
On January 28, a peaceful but “unauthorized” demonstration by opposition parties was brutally repressed by the police and three presidential candidates were arrested for the day. 
None of this was shown on television. 
In a country with little tradition of political violence, too many mysterious things are happening. 
An early strong critic of Wade, Talla Sylla, had his face beaten with a hammer. 
Abdou Latif Coulibaly, the author of two books critical of Wade, received a death threat, as did Alioune Tine, the leader of a main human rights organization, Raddho. 
So Senegal’s “rituals of respect” may not be holding. 
The Bush administration, in bad need of a democratic Muslim ally, wants Wade to fill that bill, and seems to have decided, in the words of one high, but disappointed, US official, to give Wade a “pass.” 
Whereas the US is willing to spend $147 billion next year in the name of an implausible democracy in Iraq, it refuses to spend any imagination or money to shore up one of the most creative models of peace and democracy in the Islamic world. 
That is terrible for Senegal and Africa, as well as for America’s credibility. 
The European Union says that it has been caught unawares by the situation and has not budgeted any funds for election observers to go to Senegal. 
France, the former colonial ruler – and still a influential force in the country – has been silent. 
But Senegal’s democracy hangs in the balance. 
In the coming weeks, attention by the international press, by international election observers, and by supporters of tolerance around the world could make a critical difference. 

Sense and Nonsense about Disproportionate Force 
As the war in Lebanon continues, the term “disproportionate force” is being bandied about as if some crystal clear principle of international law lay behind it, telling us when force is disproportionate and why it is illegal. 
But civilian deaths as a result of military combat are not enough to say that “disproportionate force” has been used. 
Nor has that standard, whatever it is, been met if more children die on one side than the other. 
So what, then, does “disproportionate force” mean, and what is its place in the law of war? 
Let’s go back to basics. 
In the domestic law of self‑defense, the use of force must always be both necessary and proportionate to the interest being protected. 
A good example is whether a storeowner may shoot looters who are escaping with his goods. 
If there is no other way to stop the thieves, the use of force is necessary. 
But is it proportional? 
That depends on whether the cost to the looters of being shot so clearly outweighs the value of the stolen goods that the storeowner should do nothing, at least at the moment. 
He always has recourse to the police and the possibility that they might recover the goods. 
In other words, force becomes disproportionate when the costs of using it are too high. 
However, this does not mean that force becomes “disproportionate” simply when the costs outweigh the benefits. 
After all, a woman may use deadly force to avoid being raped, even though the life of the aggressor, one would think, is worth more than the sexual integrity of the potential victim. 
Anytime physical harm is threatened, it seems that the use of all necessary force is permissible. 
Suppose a terrorist is pulling out his victim’s teeth one by one, and that the only way to stop him is to kill him. 
Most people would say that doing so is permissible, even though the harm to the aggressor is much greater than the value of the victim’s teeth. 
How, then, do we know when force is disproportionate? 
This is a matter of constant debate. 
Many legal systems now take the position that, with regard to property offenses at least, the victim must be willing to surrender his property when the only available option is to kill the thief. 
Let us try to apply these principles to international conflict. 
Two distinct realms of self‑defense exist within the law of war. 
One is the justification for going to war in the first place; the second is the use of force in combat in the course of war, such as killing civilians who are attacking soldiers. 
In the justification of armed conflict, everyone agrees that the defending state may use all necessary force to repel an aggressor. 
When Argentina invaded and occupied the Falkland Islands, the United Kingdom could take whatever measures were necessary to remove them. 
But let us suppose that the British bombed Buenos Aires. 
For the use of force to be necessary, it must yield a direct military advantage that contributes to thwarting the aggression. 
It would not be acceptable to argue that to bomb a city on the mainland was necessary in order to compel the Argentine population to put pressure on the military junta to withdraw from the islands. 
So bombing Buenos Aires in that context would have been unnecessary and therefore could not possibly qualify as proportionate. 
International lawyers commonly confuse the concepts of necessity and proportionality, claiming that both apply in wars of self‑defense. 
But this is not as clear as it is in domestic criminal law. 
I know of no case in the international version of shooting escaping looters where a court has affirmed that the use of force was necessary but not proportionate. 
There are two reasons why international law is tolerant of the use of all, or nearly all, necessary force. 
First, in international conflicts, the defending army must always protect the lives of its citizens, not just property interests. 
Second, with rare exceptions, there is no international police force that can assist a defending nation. 
The problem of disproportionate force has different contours on the battlefield, when soldiers are already at war. 
Among all the dozens of war crimes in international law, none mentions the element of disproportionate force. 
The closest adjective used in the Rome Statute is “clearly excessive” force. 
Intentional targeting of civilians is prohibited, as is an attack on military targets in the knowledge that there will be “clearly excessive” harm relative to the value of the military target. 
As one would expect, there is no criterion, not even a theory, for determining when the use of force carries an excessive cost to civilian bystanders. 
The specific problem in Lebanon, particularly Israel’s bombing of southern Beirut, is deciding when the targets are protected civilians or part of a militant terrorist organization and thus subject to legitimate attack. 
We have too little information about many of these attacks to know one way or the other. 
This is an area where the concepts are clear but the facts remain murky. 
Journalists on the ground would do well to inquire about the relevant military objectives rather than pass judgment on the basis of the numbers of civilians killed, which may have minimal relevance to legal analysis. 

Sense and Nonsense about Self-Defense 
If patriotism is, as Samuel Johnson suggested, the last refuge of a scoundrel, then self-defense is the last refuge of an aggressor. 
The justification of self-defense comes readily to the lips of both paranoids and those who reasonably wish to defend themselves against imminent attack. 
The argument for America's putative invasion of Iraq is, of course, self-defense, that is, the need to shield itself and its allies against Saddam Hussein's possible use of weapons of mass destruction. 
But claims of "self-defense" also find less reputable invocations. 
Timothy McVeigh, the Oklahoma City bomber who murdered 168 people in 1995, thought he was defending the US Constitution against a predatory federal government. 
Yigal Amir thought he was defending Israel against a Prime Minister willing to surrender sacred land to the enemy when he assassinated Yitzak Rabin later in the same year. 
Perpetrators of violent acts rarely concede that they are aggression pure and simple, rather than actions in defense of life, liberty, or some other important value. 
Is there a sensible boundary between sense and nonsense in claiming self-defense? 
Lawyers must seek this distinction, for if we surrender to the rhetorical claims of statesmen and paranoids, the line between aggression and self-defense will disappear. 
The UN has tried to delimit the scope of self-defense, but it goes too far by permitting states to resort to force only if "an armed attack occurs." 
This makes little sense, because states must retain the right to defend themselves against impending attacks as well. 
Imagine, say, the Japanese warplanes zeroing in on Pearl Harbor on December 7 th , 1941. 
The United States Navy surely had the right to defend itself--if it could--before the bombs fell. 
Or consider Nasser's massing of Egyptian troops on Israel's border in 1967, threatening to wipe it off the map. 
Is this not akin to a mugger pointing a gun at your head and threatening to shoot? 
If self-defense is not permissible in cases of manifest, imminent attack, then the doctrine can hardly appeal to ordinary moral intuitions. 
But these clear examples quickly fade into an ambiguous and disputed range of cases, such as Israel's fear of Iraq's Osirak nuclear reactor in 1981. 
Building a nuclear reactor is a far cry from launching a nuclear missile. 
Israel's bombing of the Osirak reactor must, therefore, be regarded as a "preemptive" or a "preventive" strike--words meant to capture the shadow land of self-defense. 
There is little point in struggling with the meaning of these elusive words, because both miss the point. 
Some say that the real point is the risk of attack and the destruction that might occur if weapons of mass destruction are deployed. 
They employ something like a cost/benefit analysis based on a subjective sense of danger. 
But there is no way of making an objective assessment of fear, and even if it were possible, using cost/benefit analysis to invade the territory of another country would wreak havoc with the global system of national sovereignty and international law. 
The better way to make sense of self-defense is to invoke two principles that underlie legal claims of justification in both domestic and international law. 
The first principle is reciprocity, which implies that if Israel had the right to attack the Osirak reactor, then Iraq had the right to bomb the Israeli nuclear facility at Dimona. 
If America now has the right to attack Baghdad, then Iraq--which has made no public statements of aggressive intent toward the US--has the reciprocal right to attack Washington. 
What is good for the goose must be good for the gander. 
There is no way for a state to claim as a matter of law: You are a "rogue" state and we are good guys, and therefore we operate under different rules. 
Admittedly, prior actions and intentions matter in making a judgment about whether to fear an attack. 
In the relationship between Israel and Iraq, Saddam Hussein's lobbing of scud missiles at Tel Aviv in 1991 has relevance in judging the dictator's current intentions toward Israel. 
But there is no comparable evidence of Iraqi aggressive behavior against US territory. 
This brings into focus the second requirement of self-defense. 
Evidence of aggressive design must be public and visible to all. 
Publicity is a critical element in a legal culture. 
Impending aggression cannot be documented in secret dossiers but only by events that can be filmed by CNN. 
The aggressor must do something that all can see as a dangerous threat by, for example, aiming a guided missile at a country and threatening to use it. 
If we look back at irrational claims of individual self-defense--McVeigh, Amir, and others--we see that their fears were based on private evidence not shared by more than a small circle of friends and co-conspirators, at most. 
Insisting on public evidence provides some guarantee against paranoid self-defense by individuals and political manipulation by national leaders. 
If the requirements of reciprocity and publicity are applied to the current plans to invade Iraq, the implications are clear. 
If they are not, President George W. Bush risks engaging in unlawful aggression against a foreign country. 

Sentries 
The notion that people have inalienable rights – the right to free speech and association, or the right not to be tortured – simply by virtue of their existence as human beings: that notion is, of course, a fiction. 
Actually people are merely sacks of meat on sticks. 
Such, it seems, is the ironclad certainty that grounds most tyrannies all over the world – anything their subjects are or have, they sustain or retain at the whim of the regime. 
Indeed, the notion of absolute rights inhering in human beings by virtue of their humanity initially arises as a wild assertion in the face of eons of stark evidence to the contrary. 
But it is a magical assertion. 
"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain inalienable rights, that among these are Life, Liberty and the Pursuit of Happiness...." 
The truly revolutionary realization in that passage from America’s Declaration of Independence is contained not so much in the words "truths" or "self-evident" or "created equal" or any of the rest: rather, it's in the calm self-certainty of those first two words: "We hold...." 
Note how the text doesn’t launch out with "It is manifestly self-evident that...," or any similar construction, as logic might dictate. 
In fact, the self-evidence of the assertion remains fugitive, immanent until some people insist upon it, mutually pledging their Lives, Fortunes, and Sacred Honor, in the process. 
It is holding such truths to be self-evident that first makes them so – and more specifically, doing so in concert, alongside others. 
Over fifty years ago, the UN’s General Assembly proclaimed a "Universal Declaration of Human Rights." 
Most UN member states, however, instantly dismissed the document’s assertions as so much dead letter. 
It was left to individual citizens, often through public stances of preposterous courage, to realize that document’s basic premises. 
Theirs is a labor, of course, that remains far short of completion. 
But fundamental to that work has been the simple, endlessly repeated act of bearing witness, of compiling accurate, reliable information about the victims of renegade regimes. 
Such monitoring has usually takes place on the ground, in the midst of depredations, and it can be very dangerous. 
Take the case of Maria Victoria Fallon, a lawyer in Medellin, capital of Colombia’s most violent state. 
Her group monitors and documents the often murderous collusion of right-wing paramilitaries and Colombia’s army. 
Since its formation in 1987, five of her group’s presidents have been gunned down. 
In the last three years over thirty Colombian rights monitors have been assassinated or disappeared. 
A couple of months ago, Vicky (as she is known to friends) received her own first death threat. 
The voice on the end of the line was calm, educated, even polite. 
Unless she left Medellin within 24 hours, it told her, she too would be killed. 
"Please pay attention," the voice continued. 
"This is no joke." 
Maria Victoria left Medellin the next day, though for only a few weeks. 
She is now back in Medellin, at work, despite increasing threats. 
In Tunisia, the regime polishes a reputation for moderation. 
In fact, its human rights record is shockingly retrograde. 
Torture, grossly unfair trials and denial of basic rights are commonplace. 
Anyone attempting to draw attention to such facts is routinely suppressed. 
Several weeks ago, Dr. Moncef Marzouki, a professor of community medicine at the University of Sousse and veteran of an earlier prison term for helping to found the Tunisian League for Human Rights in 1994 as the Arab World’s first independent human rights organization, was once again tried on trumped-up charges. 
Once again, he was sentenced to prison, this time for yet a year’s term, though the conviction is under appeal (the prosecutors are seeking a longer sentence). 
Jeanine Mukanirwa, deputy director of PAIF (Promotion and Support for Women’s Initiatives), the leading women’s organization in her native Goma, Eastern Congo, recently ran afoul of insurgent rebels, in part owing to her group’s work documenting violence aimed at women by all the region’s warring parties. 
Fleeing west to the country’s capital, Kinshasa, early in 2000, she joined a group coordinating the peace efforts of a variety of civil organizations, apparently offending the country’s rulers. 
She was arrested last December and remains detained under frightening conditions. 
Bearing witness in such a manner ought not to work. 
How can it? 
How can mere vigilance, insistence on the rule of law in the face of armored, entrenched tyrannies, ever make a difference? 
We hold these truths...these truths and nothing else: aside from them we are naked before power. 
But holding such truths is magical. 
It's smoke and mirrors, of course: nothing is there except the bold insistence that something is there: this ineffable yet essential thing called human rights. 
But if enough people insist upon those rights insistently enough, over time a light begins to shine. 
Not only does it shine, it illumines; it actually begins to melt tyrannies. 
It's uncanny. 
But let’s be clear about the nature of that light. 
The old proverb notwithstanding, “Truth” alone never set anyone free. 
It's always been people telling the truth that accomplishes that miracle. 


Moralism and the Arts 
NEW YORK – Chuck Close is an American artist, famous for painting large portraits. 
Severely paralyzed, Close is confined to a wheelchair. 
Former models have accused him of asking them to take their clothes off and of using sexual language that made them feel harassed. 
This behavior prompted the National Gallery in Washington, DC, to cancel a planned show of Close’s work. 
And Seattle University has removed a self-portrait by the artist from a university building. 
If we were to remove all the art from museums or galleries because we disapproved of the artists’ behavior, great collections would soon be severely depleted. 
Rembrandt cruelly mistreated his mistress, Picasso was beastly to his wives, Caravaggio lusted after young boys and was a murderer, and so on. 
And what about literature? 
Céline was a vicious anti-Semite. 
William S. Burroughs shot his wife in a drunken haze, and Norman Mailer stabbed one of his. 
And movie directors? 
Forget sexually inappropriate language: Erich von Stroheim shot mass orgies for his own pleasure. 
Charlie Chaplin liked very young girls. 
And then there is Woody Allen, accused of but never charged with molesting his seven-year-old adopted daughter. 
The New York Times movie critic A.O. Scott wrote an interesting article about this. 
He grew up idolizing Allen. 
To a bookish young man, Allen, the anxious intellectual who still gets the girl, was a kind of role model. 
But now that we know the accusations against the comedian and movie director, we are forced, in Scott’s view, to reappraise the work in that light. 
There may be something sinister and immoral in the films that we should take into account. 
In other words, bad behavior, or even alleged bad behavior, can taint an artistic work, because the artist cannot be separated from his art. 
This is at least a more interesting proposition than the notion that art should be disqualified just because we don’t like the way the artist behaved in private. 
But is it right? 
Oscar Wilde famously said that there is no such thing as an immoral book, just well or badly written books. 
This is open to challenge. 
There is a moral component to most forms of human expression, including art. 
Moral depravity can make for bad art. 
This may be one reason why there are so few examples of good Nazi art. 
Racial hatred was morally reprehensible in a way that Communist idealism, for example, was not. 
Sergei Eisenstein made Communist propaganda films, but these are also great works of art. 
Leni Riefenstahl’s Nazi propaganda films are technically astonishing, but otherwise repellent. 
It is also true that art can transcend the private behavior of the artist. 
A writer, filmmaker, or painter who behaves badly toward wives or lovers can produce art that is deeply sympathetic to women. 
By the same token, perfectly behaved people can break all kinds of social taboos in their art. 
To judge the moral component of artistic expression, then, we must look not at the person who made it but at the work itself. 
Last year, an online petition with 8,000 signatures asked the Metropolitan Museum of Art in New York to remove a famous painting by Balthus, showing an adolescent girl sitting on a chair with a patch of her underwear showing. 
To see this as a form of child pornography, or “the objectification of children,” as the signatories did, seems highly dubious. 
Balthus was moved by the dreaminess of girls on the cusp of adulthood. 
But even if Balthus, in his private life, was attracted to young women, there is nothing in the painting that suggests moral depravity or abuse. 
The same can be said about Allen’s movies, whatever the truth may be about his alleged misdeeds. 
It is no secret that Allen finds young women attractive; his current wife was not yet 20 when he started an affair with her. 
She was also the adopted daughter of Allen’s partner at the time. 
One of Allen’s best known and most successful films, “Manhattan,” released in 1979, when he was in his forties, featured a relationship between a middle-aged man (Allen) and a young girl, played by Mariel Hemingway, who was 16 at the time of filming. 
These relationships were unconventional. 
Some might find them creepy. 
But this is not the same as molesting a child. 
Nor is there anything in “Manhattan,” or any other film by Allen, that reveals any interest in assaulting young children. 
This would be the case even if everything alleged against the director were true. 
Again, morality is not irrelevant. 
It is hard to imagine admiring art that espouses child abuse, racial hatred, or torture (even though this seems to get people much less agitated than sexual content). 
But just as we should not condemn a work of art because of the artist’s private behavior, we should also be careful about applying norms of social respectability to artistic expression. 
Some art is meant to provoke, transgress, and push boundaries. 
People can do things in works of imagination that they would never do in life. 
That is the way it should be. 
If we limited artistic expression to subjects that are commonly regarded as socially respectable, we would soon be left with moralistic kitsch, just the kind of thing rulers of authoritarian states like to promote in public, while doing things that are far worse than most artists would like to imagine. 

Does Europe Really Need Fiscal and Political Union? 
CAMBRIDGE – Greece’s combative former finance minister, Yanis Varoufakis, and his nemesis, former German finance minister Wolfgang Schäuble, were at loggerheads on Greek debt throughout Varoufakis’s term in office. 
But they were in full agreement when it came to the central question of the eurozone’s future. Monetary union required political union. 
No middle way was possible. 
This is one of the interesting revelations in Varoufakis’s fascinating account of his tenure as finance minister. 
“You are probably the one [in the Eurogroup] who understands that the eurozone is unsustainable,” Varoufakis quotes Schäuble as telling him. “The eurozone is constructed wrongly. 
We should have a political union, there is no doubt about it.” 
Of course, Schäuble and Varoufakis had different ideas regarding the ends that political union would serve. 
Schäuble saw political union as a means to impose strong fiscal discipline on member states from the center, tying their hands and preventing “irresponsible” economic policies. 
Varoufakis thought political union would relax creditors’ stranglehold on his economy and create room for progressive politics across Europe. 
Nevertheless, it is remarkable that these two officials from opposite ends of the political spectrum arrived at an identical diagnosis about the euro. 
The convergence is indicative of the growing sense of the need for fiscal and eventual political union if the euro is to be maintained without damage to economic performance or democratic values. 
French President Emmanuel Macron has advanced similar ideas. 
And the leader of Germany’s Social Democrats, Martin Schulz, has also thrown his weight behind a “United States of Europe” in recent days. 
But there is also an alternative, much less ambitious view, according to which neither fiscal nor political union is needed. 
What needs to be done instead is to de-link private finance from public finance, insulating each from the malfeasance of the other. 
With this separation, private finance can be fully integrated at the European level, while public finance is left to individual member states. 
This way, countries can reap the full benefit of financial integration while national political authorities are left free to manage their own economies. 
Brussels would no longer be the bogeyman, insisting on fiscal austerity and drawing the ire of countries with high unemployment and low growth. 
Martin Sandbu of the Financial Times has been a strong proponent of the view that a workable monetary and financial union does not require fiscal integration. 
He believes the critical reform is to prevent bank bailouts by public authorities. 
The price of bank failures should be paid by the banks’ owners and creditors; we should have bail-ins rather than bailouts. 
Sandbu argues that this would not only insulate public finance from the follies of banks; it would also lead to an equilibrium that mimics fiscal risk-sharing between countries that are net borrowers and countries that are net lenders. 
When banks in the former fail, it is creditors in the latter that would bear the cost. 
“With banking union, there is no need for fiscal union,” he argues. 
In a forthcoming book, the University of California, Berkeley, economist Barry Eichengreen also makes the case for re-nationalizing fiscal policy, which he views as essential to stemming the tide of European populism. 
Eichengreen thinks returning fiscal policy to national authorities would require preventing banks from holding too much government debt, in order to minimize the risk that national fiscal mismanagement topples the banking system. 
Governments that go bust would have to restructure their debts rather than get bailouts from other EU states. 
Advocates of cutting the Gordian knot between private and public finance recognize that governments’ approach to banks must change radically if this separation is to work. 
But it is not clear that their proposed remedies would work. 
As long as economic policy remains the province of national governments, sovereign risk will likely continue to distort the operation of cross-border finance. 
Sovereign states can always change the rules ex post, which means full financial integration is impossible. 
And the costs of local financial shocks cannot be diversified away as easily. 
Consider what happens when a large bank goes bankrupt in the US – an economic union where the Sandbu and Eichengreen rules already apply. 
The regional economic spillovers are limited by the fact that other borrowers can continue to function normally: creditworthiness is determined by a borrower’s fundamentals and not its state of residence. 
No one expects a state government to interfere in inter-state payments, rewrite bankruptcy rules, or issue its own currency in case of extreme distress. 
State governments in the US exercise little sovereignty in large part because they have less need of it: their residents receive transfers from the center and send their representatives to Washington, DC, to help make federal policy. 
But EU member states are in a very different position vis-à-vis the EU institutions in Brussels. 
Because they retain sovereignty, they cannot make similarly credible commitments not to interfere with financial markets. 
So the risk remains that a severe enough financial shock in the EU will affect all other borrowers in the same country in a self-fulfilling manner. 
Pretending that we can separate private from public finance may exacerbate, rather than moderate, financial boom-and-bust cycles. 
In contemporary societies, finance must serve a public purpose beyond the logic of financial market profitability. 
So it is irrevocably politicized – for good as well as bad reasons. 
It appears that conservative and progressive policymakers alike are resigning themselves to this reality. 

Separatism, Italian-Style 
ROME – Many separatist movements in Europe have resorted to various violent terrorist acts since the second half of the twentieth century. 
From the 1960’s onwards, bombs and death were the order of the day in regions like Northern Ireland, Corsica (France), South Tyrol (Italy), and the Basque country (Spain). 
Indeed, the specter of violent separatism has reared its head again in Spain. 
The Basque terrorist organization ETA has ended its truce with the Spanish government, and, on the occasion of the 50th anniversary of its founding, placed bombs in the town of Burgos and on the island of Majorca. 
Fortunately, elsewhere in Europe, reason seems to prevail nowadays and the resort to violence has been curtailed. 
But that does not mean the end of separatism. 
Italy, for example, is under constant threat of cultural and economic separatism, albeit in a peaceful way. 
Silvio Berlusconi's ally in government, the Lega Nord (Northern League), is continuously conjuring up schemes to embarrass the national government with threats to the concept of national unity. 
The Lega Nord, led by the charismatic Umberto Bossi, holds the decisive votes in Parliament to keep the Berlusconi government afloat. 
It uses this power to blackmail the government into introducing measures which discriminate between citizens of Italy’s north and south. 
Exponents of the Northern League, such as MEP Mario Borghezio, MP Roberto Cota, and Senator Federico Bricolo, are well known for their xenophobic statements in Parliament, particularly against those from non-EU countries. 
But their chauvinism does not stop there: they constantly propose measures to discriminate between northern Italian citizens from Veneto or Lombardy and southerners from Naples, Calabria, or Sicily. 
During this summer of “separatist” folly, the first proposal concerned the appointment of headmasters of schools in the Veneto region: the local councilors in the province of Vicenza approved a measure to reserve all headmaster posts in the province for northern Italian teachers. 
At the end of July, another Lega Nord MP, Paola Goisis, proposed in Parliament that teachers from Italy’s south should not be allowed to teach in northern schools unless they are well versed in the history, traditions, and dialects of the area where the school is located. 
The Italian Minister for Education, Mariastella Gelmini, agreed to discuss the proposal. 
The third attack on Italian unity launched at the beginning of August by the President of the Lega Nord group in the Senate, Federico Bricolo, who proposed adding a proviso to Article 12 of the Italian Constitution whereby the flags and anthems of the different regions would be officially recognized on an equal footing with the national anthem and flag. 
The Lega Nord’s latest provocation is its proposal that state employees receive different salaries for the same job, depending on whether they live in the north or the south. 
Agriculture Minister Luca Zaia has gone so far as to argue that relating salaries to the cost of living in different regions will force the south to be self-sufficient and stop relying on help from the north. 
This proposal seems to have found a certain degree of support from Berlusconi, though he would likely be the only one in the country to agree with it. 
The trade unions, employers’ associations, all opposition political parties, and even many of Berlusconi’s own MPs have united against what they consider to be an aberration. 
Zaia’s vivid imagination does not stop there: he has now proposed that popular Italian TV series be dubbed or subtitled in the local dialect! 
And Berlusconi, consumed as he is with defending his difficult position as the main protagonist in a seemingly endless soap opera of sex scandals, is not capable of reining in such blatant provocations on the part of the Lega Nord. 
The result is that Berlusconi’s supposed allies such as former Minister Gianfranco Micciche and current Governor of Sicily Raffaele Lombardo, are seriously thinking of setting up a “Party of the South” to ensure that Italy’s southern regions have enough clout to withstand the Lega Nord’s onslaught. 
Whether such plans materialize remains to be seen. 
What seems certain is that, unlike in Spain, Italy’s separatist movements are gaining ground through a bloodless revolution. 
Mao was wrong: political blackmail seems to be a more effective tool than the barrel of a gun. 

September 11, 2002 
In the year since the terrorist attacks of last September 11th, many of us have repeatedly looked in the mirror to ask: What has changed? 
Shock and sadness remain with us, but there is also a determined sense that we face challenges - as individuals and as a civilization - that were unknown a year ago. 
Even more unsettling, we recognize that America or another country may well be attacked by surprise once again, and are left wondering if such an event will match or exceed the horror of last year. 
We have all been hurt and are convinced that there are people who, having honed their malignant audacity to a sharp point, are now planning to hurt us again. 
In memory, then, the Twin Towers still stand tall, still cast a shadow into our lives. 
What happened to them was unimaginable until, through deliberate action, it became real. 
Against all expectation, and contrary to our wishes, this violence has put us in front of choices we had not seen before. 
In many ways, this is the story of the 20th century. 
Violence and brutality that were once beyond the realm of possibility now seem commonplace. 
Adapting to the latest horror, we conclude - repeatedly, and despite all evidence to the contrary - that we have at last seen all that there is to see. 
But then we are shocked into recognizing that our imagination failed us - there was worse to come. 
The philosopher Berel Lang brilliantly analyzed how cataclysmic violence reshapes our conception of the world. 
In "The Future of the Holocaust," he wrote that those generations born before the genocide of European Jewry "at least began life in a different world, one from which genocide was absent, in which that occurrence was quite inconceivable." 
For those born afterward "that absence was dismissed before they were born. 
They do not remember the world without it." 
There is no comparison to be made between the Holocaust and the events of September 11th, yet Lang's insight underscores a larger point about the transforming power of new forms of mass violence. 
Thinking about ourselves, and the world we now live in, his phrase is worth repeating: "They do not remember the world without it." 
September 11, 2001 emerges then as the starting point of something new: a world in which the events of September 11th have become real. 
From that bright September morning onward, those events have been and will be a reference point for anyone who would use them. 
A year ago, the idea that some number of young men would come to the US to train as pilots, hijack four fully loaded passenger jets, and then turn them into missiles to be exploded into some of the most important symbols of Western civilization - was inconceivable. 
Today, it is a contingency that must be accounted for in every trip to the airport. 
This is not only a matter of heightened security. 
Our understanding of the world, of our freedom to act in the world, and the possibilities of violence aimed at us because of who we are - these have all changed. 
Here lies the difference between September 11, 2001 and September 11, 2002. 
Until then, we shared a certain sense of what was and was not possible. 
Since then, we struggle with the shock that something so large could have happened - could have taken so much from us - without our having anticipated any of it. 
This first anniversary of the attack will be the first and sharpest of many annual reminders that once again history has turned the unimaginable into the real. 
This is the realization that lies underneath our all-encompassing focus on security. 
We will not wait for another version of this lesson. 
It has now become the central principle of our interaction with the world, and it will be for the foreseeable future. 
Beyond the vast questions of geopolitics and security, we might also hope for another realization to come out of September 11th. 
The international dimension of the attacks also includes an encounter with the after-effects of violence, and the longer-term problems of understanding what happened and how it changed us. 
In this, Americans are finding out that they now have more in common with many members of the international community than they had ever imagined possible. 
Americans, too, are now recovering from a brutal act of violent dislocation, a phenomenon the United States has long been spared, but one familiar in many places around the world. 
The events of September 11th hit America because of who Americans are, and those events transformed the moral horizon of the world community. 
Yet, even so, Americans are not alone in living in the aftermath of violence. 
September 11, 2002 commands an authority that was unimaginable a year ago. 
The calendar has now fully cycled, setting the attack itself apart from our memories of what happened. 
In commemorating the passage of a year, we mark the passage from "before" to "after." 
Looking back a year, we see how the future has changed. 

Sequencing a Vampire 
NEW HAVEN – Human African trypanosomiasis (HAT) – also known as sleeping sickness – has long plagued rural sub-Saharan African populations. 
A parasitic infection, it is often fatal when left untreated. 
And treatment is complex, requiring the kind of highly skilled medical staff that is difficult to find in the affected areas. 
The parasites that carry the infection – Trypanosoma brucei gambiense in central and western Africa and T. b. rhodesiense in eastern Africa – are transmitted through the bite of an infected tsetse fly (Glossina morsitans morsitan). 
In the early twentieth century, HAT epidemics decimated populations in many parts of Africa. 
Though the systematic screening and treatment of millions of people dramatically reduced disease transmission in the 1930’s, the relaxation of such efforts allowed HAT to reemerge in the 1950’s and 1960’s, reaching epidemic levels by early 1990’s. 
A World Health Organization campaign finally got the disease under control by 2008, with only about 10,000 people contracting it each year. 
But millions remain at risk. 
Clearly, tsetse flies pose a serious danger in the areas that can least afford or access treatment. 
And the threat is not limited to humans. 
African animal trypanosomiasis, or nagana, is caused by the parasites Trypanosoma congolense, T. vivax, and T. brucei – all of which are transmitted by the tsetse fly. 
Nagana, too, is fatal if left untreated, leading to considerable livestock losses. 
In cattle production alone, economic losses amount to an estimated $1-1.2 billion annually, with total agricultural losses reaching roughly $4.75 billion. 
Moreover, nagana limits cattle rearing in ten million square kilometers of Africa. 
Given the lack of effective vaccines and inexpensive, easily deliverable drugs, reducing tsetse numbers is the most effective approach to controlling such diseases. 
This can be achieved through traps and targets (insecticide-soaked screens), which attract the flies to a device that collects and/or kills them. 
But much can be done to enhance the effectiveness of these methods, whether by improving the devices themselves or by implementing control programs in various ecological settings. 
In both cases, a better understanding of tsetse biology is invaluable. 
The recently completed genome sequence of Glossina morsitans morsitans provides several clues that could transform tsetse research and disease-control practices. 
First, the researchers looked for clues about how the tsetse, which feeds exclusively on the blood of vertebrates, identifies its host. 
To this end, researchers analyzed genes for more than 12,300 proteins to understand critical processes like olfaction (smell), gustation (taste), and vision. 
They found that tsetse have fewer genes for olfactory and gustation receptors, and more genes for detecting carbon dioxide – key to helping them find a host. 
Researchers also pursued a deeper understanding of the genes involved in sensing colors, in order to help determine which shade of blue – the color that has long been known to attract tsetse flies – would work best for traps. 
Future research on the molecular aspects of olfaction and vision can guide the development of more effective mechanisms for luring flies to the traps or repellants that could be applied to animals to protect against tsetse bites. 
Similarly, knowledge of symbiosis and tsetse reproduction can be harnessed to develop new methods to control tsetse populations. 
Though tsetse flies cannot synthesize essential vitamins, for example, they host a variety of symbiotic bacteria that do it for them. 
Particularly interesting is the tsetse’s unusual mode of reproduction: it bears its offspring live. 
The female supports the development of a single embryo that becomes a larva, which grows in its mother’s uterus, nourished by milk secreted by specialized glands. 
The female gives birth to a fully mature larva, which pupates and remains dormant underground until it hatches as an adult. 
The genome study revealed the molecular basis of this trait – novel proteins produced in the milk gland. 
Gene-expression studies have shown that when the female is pregnant, a 40% increase in gene activity in her milk gland accounts for almost half of all gene activity during pregnancy. 
In other words, lactation is critical to the tsetse’s survival. 
Researchers have also found that a single transcription factor, the Ladybird late, regulates the synthesis of all milk proteins; without it, flies lose their fecundity. 
It has been suggested that chemical inhibitors for this factor could make it impossible for the fly to give birth, thereby reducing tsetse populations. 
But this is not the tsetse’s only rare trait. 
Unlike many other animals, female tsetse flies can remain fertile throughout their lifetime. 
Researchers have found a strong antioxidant response produced between pregnancy cycles, which helps the females to avoid damage from oxidative stress. 
Finding a way to prevent this antioxidant response could thus help to compromise females’ reproductive systems. 
Having the tsetse fly’s genetic blueprint is a critical first step toward developing mechanisms to reduce tsetse numbers. 
For the people of rural Africa, such advances cannot come soon enough. 

 

Serbia's Choice 
On January 20, Serbs go to the polls for the first round of a presidential election that may decide the country’s future for decades to come. 
As Kosovo’s new government moves toward a unilateral declaration of independence, Serbs face a stark choice: retain Kosovo and effectively sever ties with the European Union, or accept the painful reality of Kosovar independence and embrace a new future within the EU. 
Serbia’s liberal pro-European president, Boris Tadic, remains the favourite to win, but opinion polls suggest that his lead over Tomislav Nikolic of the ultra-nationalist Serbian Radical Party has narrowed to within the margin of error. 
Nikolic, whose party’s leader, Vojislav Seselj, is currently being tried for war crimes in The Hague, has campaigned on an anti-Western, Euro-skeptic, and openly chauvinist platform, exploiting the Kosovo issue at every turn and putting Tadic and other pro-Europeans on the defensive. 
His argument that Kosovo should remain an integral part of Serbia, and that Russia is a more natural (Slavic) ally for the Serbs than perfidious Europe, resonates strongly in a country traumatized by its recent past. 
Tadic’s real problem, however, lies not with his enemies but with his friends. 
His coalition partner, Prime Minister Vojislav Kostunica, increasingly espouses hardline nationalist rhetoric that is indistinguishable from that of Nikolic and the Radicals. 
In addition to rehabilitating many Milosevic-era figures and refusing to arrest indicted war criminal General Ratko Maldic, Kostunica often speaks contemptuously about the EU and insists that if the EU recognizes Kosovo’s independence, Serbia will turn away from Europe and seek closer relations with Russia. 
Under pressure from all sides, Tadic has thus had to maintain the fiction of defending a maximalist position on Kosovo (“no surrender”) while striving to maintain and enhance Serbia’s relationship with the EU, which he sees as crucial to reversing the terrible legacy of two decades of war and isolation. 
Unlike the peaceful secession of Montenegro in 2006, the loss of Kosovo represents a damaging blow to Serbia, given its place in the national consciousness. 
Kosovo serves as the source of the foundation myth of Serbian statehood and the repository of its cultural and historical lore. 
It is the spiritual essence of “celestial Serbia,” the site of its most important Orthodox churches, and therefore far from being just a piece of territory. 
The EU, in this narrative, is merely the latest in a long line of predatory and unscrupulous foreign powers that have assaulted Serbian identity and pride. 
From the perspective of the European Union (and many liberal Serbs), this narrative has the familiar ring of jingoism, obsessive self-regard, and an enduring attachment to victimhood. 
Serbia remains stuck in a nineteenth-century world of nationalism and refuses to recognize the new global realities of economic interdependence, inter-state reciprocity, and collectivism -- all of which characterize today’s EU. 
EU officials emphasize that an independent Kosovo will be subject to an unprecedented level of oversight. 
The EU will effectively “manage” Kosovo’s independence through the deployment of a large police force and civilian administration. 
Moreover, Kosovo’s ambition to join the EU in the next decade means that its treatment of the Serb minority will attract very close and intensive scrutiny. 
Tadic and other outward-looking Serbs understand the nature of the EU accession process, and, in particular, how it acts as a mechanism of conflict resolution and encourages foreign direct investment, enhanced trade, accelerated economic growth, and more effective public administration. 
The EU’s eastern enlargement provides conclusive evidence to support this view, and demonstrates how the EU’s evolution has also encouraged a fundamental re-conceptualization of sovereignty as something de-territorialized and diffuse rather than static and unchanging. 
Thus, although Serbia’s loss of sovereignty over Kosovo will undoubtedly be painful in the short term, the long-term gains for the entire Western Balkans region from eventual EU accession are vastly more significant. 
As a natural regional leader, Serbia can expect to reap the benefits as all states advance toward membership. 
The difficulty for Tadic lies in convincing Serbian voters that drawing closer to the EU is infinitely preferable to remaining attached to an outmoded concept of statehood that can only lead to isolation and backwardness. 

Putin’s Dilemma 
PARIS – Many critics argue that the sanctions imposed on Russia for its actions in Ukraine are ineffective, because they are too limited in scale and scope. 
Moreover, sanctions are seen as allowing President Vladimir Putin to blame the West for Russia’s internal problems. 
Indeed, some of Putin’s supporters within Russia welcome the sanctions as a means to compel Russian autarky – and thus strategic independence from the West. 
These arguments are wrong. 
Though the sanctions are not backed by China, they are already having a powerful effect, and the expectation that they will be tightened further is a huge concern for investors and the Russian government. 
Full autarky, meanwhile, would imply a dramatic decline in Russian living standards – the foundation of Putin’s domestic support. 
The latest sanctions are unprecedented. 
The European Union went even further than the United States. 
Exposure to Russian markets varies widely among EU countries – and between the EU and the US. 
But, after the downing of Malaysia Airlines Flight 17, Russia can no longer pursue a divide-and-rule strategy that leverages these differences. 
Both the EU and the US have now sanctioned Russia’s highest officials and leading companies and banks. 
The EU list includes all of the main state-owned banks (the country’s largest). 
Most important, the EU added Sberbank, a cornerstone of Russia’s financial system, with assets totaling almost 30% of Russian GDP and about half of Russian retail deposits. 
Currently, the sanctions only limit Sberbank’s access to European capital markets. 
In the immediate future, Sberbank – and other sanctioned banks – will be able to replace European funds with liquidity provided by the Central Bank of Russia (CBR) or Asian sources. 
But the fact that Sberbank is on the list has created enormous anxiety for all foreign investors in Russia. 
They are right to be worried; Russia’s financial system is highly vulnerable. 
The banking sector’s total external debt is $214 billion, of which $107 billion is due within a year (and $129 billion within two years). 
Non-financial firms’ external debt totals $432 billion, with $128 billion due within a year (and $175 billion within two years). 
These are large numbers even for Russia, with its currency reserves of $480 billion. 
Likewise, though the ban on exports to Russia of technology for the oil and gas sector holds no immediate implications for the Russian economy, over the course of the next few years, Russia will have to use Western technology to develop new oil fields. 
Otherwise, its oil output will stagnate or even fall, hitting the ruble and living standards hard. 
Financial markets and Russia’s government understand the gravity of the medium-term risks. 
To avoid ruble depreciation and inflationary pressure, the CBR raised its benchmark interest rate to 8% (from 5.5% before the Crimea crisis). 
But this may not be enough, given that Russia’s recently introduced “counter-sanctions” – an embargo of food imports from the EU and the US – will contribute significantly to price growth. 
Since January, Russian stocks have lost 16% of their value on the MSCI index, after already trading at a 50% discount in 2013, while Brazilian and Turkish equities are up by 13% and 27%, respectively. 
With MSCI now set to offer investors emerging-markets indices that exclude Russia, a massive sell-off of Russian stocks by index funds will drive down prices further. 
Indeed, the net capital outflow is expected to grow from $60 billion in 2013 to at least $100 billion dollars this year, with some estimates as high as $200 billion. 
One consequence of all of this is that the government can no longer balance its books and has started to discuss spending cuts and new taxes, in particular a sales tax. 
Over the last ten years, the question has been whether to keep the existing 18% value-added tax or replace it with a sales tax. 
Now the debate is whether to introduce a sales tax on top of the VAT or to raise the VAT rate. 
In addition, Finance Minister Anton Siluanov has said that the government must use this year’s pension contributions for projects in Crimea, while some highway construction has been postponed indefinitely. 
The government now says that it will expropriate next year’s pension contributions as well (Deputy Minister of Economic Development Sergei Belyakov was fired after publicly apologizing for the move). 
In a leaked letter, Deputy Prime Minister Arkady Dvorkovich explicitly acknowledged to Prime Minister Dmitri Medvedev the impossibility of fulfilling Putin’s spending promises, and proposed a radical revision of current fiscal plans. 
Apparently, fear of even more serious economic troubles – for example, further capital flight when taxes are raised – has precluded an open invasion of eastern Ukraine. 
Russian leaders seem to understand that, despite rising support for “self-sufficiency,” autarky has never worked for Russia. 
Even in the Stalin era – when the economy was much more closed than in Czarist times – industrialization required the import of Western capital and knowhow. 
More important, Putin’s popularity rests on historically high living standards. 
Annual household consumption is now double the level achieved in the Soviet Union’s dying days. 
Consumption growth has been driven largely by Russia’s integration into the global economy – and cannot be sustained without it. 
The last generation of Soviet leaders well understood the importance of maintaining living standards, which is why they used revenues from oil and gas exports to import consumer goods. 
When oil prices collapsed in the mid-1980s, household consumption collapsed; soon after, so did the Soviet Union. 
Today, though oil prices remain high, Russia’s budget and financial system face severe problems over the next 2-3 years. 
If the West introduces full-blown sanctions against the largest Russian banks – as the US has already done against relatively small banks – those problems may become insurmountable. 
How will Russia’s government respond? 
Putin cannot afford to return to the pre-Crimean status quo, which would be viewed domestically as a major political defeat. 
This implies that sanctions will remain in place. 
But, having already deployed political repression, censorship, and propaganda, Putin’s tools for maintaining control as Russians’ living standards decline will be limited. 
The nature of that dilemma makes it impossible to predict what he will do next. 


Russia’s New Stagnation 
PARIS – In early November, the Russian government released its latest macroeconomic forecast. 
It could not have been an easy decision: Whereas President Vladimir Putin and his government campaigned in 2012 on a promise that the Russian economy would grow at 5-6% per year during his six-year term, the growth rate is now expected to average just 2.8% from 2013 to 2020. 
Minister of Economic Development Alexei Ulyukaev explicitly acknowledged that achieving the targets set by Putin “will take longer.” 
In some cases, that means much longer. 
For example, in May 2012, Putin promised to increase Russia’s labor productivity by 50% by 2018; the current forecast does not envision this outcome even by 2025. 
For independent observers, the ministry’s grim forecast comes as no surprise. 
Judging by low stock prices and high capital outflows, investors were already betting against high growth rates. 
Now Putin and Prime Minister Dmitry Medvedev are pessimistic as well. 
Medvedev, who had been publicly forecasting 5% annual growth as recently as January, told foreign investors in October that this year’s growth rate would not exceed 2%. 
Previously, the government blamed the country’s economic problems on the global slowdown. 
Today, that argument makes little sense. 
The global economy – and the US economy, in particular – is growing faster than expected, and world oil prices are above $100 per barrel. 
The ministry’s forecast answers the perennial “who is to blame” question very clearly: the slowdown reflects Russia’s own “internal problems.” 
The ministry’s baseline forecast assumes that the price of oil – Russia’s main export – will grow at 9% per year in real terms over the next 17 years, or more than three times the forecast for Russia’s annual GDP growth. 
A week after the ministry’s forecast was released, the European Bank for Reconstruction and Development – Russia’s largest foreign direct investor – followed suit, cutting its growth forecast for Russia to 1.3% in 2013 and 2.5% in 2014. 
The EBRD’s view was even more straightforward: the slowdown is the result of the Russian government’s lack of structural reform. 
Poor governance, weak rule of law, and state-owned companies’ assault on competition undermine Russia’s business climate and cause capital flight. 
Russia’s ruling elite understands very well that reforms are needed; indeed, the Putin-Medvedev era, now in its 14th year, has suffered no shortage of reform programs. 
Back in 2008, for example, Aleh Tsyvinski and I praised then-President Medvedev for his seemingly credible commitment to implementing the changes that Russia’s economy needs. 
But Medvedev’s one-term presidency – like Putin’s administrations before and since – did not deliver on these promises. 
The Russian government’s reluctance to fight corruption and strengthen the country’s legal institutions reflects a perverse – yet stable – political equilibrium. 
In 2010, Tsyvinski and I predicted a “70-80 scenario” in Russia in the coming years: As oil prices, which had plummeted to $40 per barrel, recovered and surpassed $70-80/barrel, Russia would return to the stagnation of the 1970’s and 1980’s. 
Sure enough, GDP growth from 2010 to 2012, though averaging a respectable 4%, turned out to have been driven by the post-crisis recovery and the further increase in oil prices to $100/barrel. 
Now all of these short-term factors have been exhausted, and a Brezhnev-like period of stagnation has begun. 
Russia’s political elite understands that the economy is capable of 5-6% annual growth. 
The problem is that the reforms needed to achieve such growth – fighting corruption, protecting property rights, privatization, and integration into the global economy – directly threaten the elite’s ability to hold on to power and extract rents. 
For those in power, a big piece of a shrinking pie is preferable to no piece of a growing one, which is what most of the current elite would receive under a fair legal system with clear rules and predictable enforcement. 
Seen against this background, the November release of the ministry’s grim forecast for growth is both surprising and welcome. 
At the very least, the authorities deserve praise for frankly admitting that Putin’s promises are impossible to fulfill, rather than continuing to ignore, sugar-coat, or divert attention from the evidence. 
The growing realism of the government’s internal – and public – discourse is no small matter. 
It is finally leading, for example, to the much-needed discussion of budget cuts. 
What this – and officials’ new candor more broadly – means for Vladimir Putin’s political future remains to be seen. 


Serious Negotiations or Hot Confrontation with Iran? 
Berlin – For two weeks, it looked like the regime in Iran had finally gotten the message that, if it continues to pursue its nuclear program, serious military confrontation is likely to result. 
Indeed, there were interesting – and previously unheard of – statements and signals from Teheran that suggested an increased willingness to start negotiating about Iran’s nuclear program and regional security issues. 
And America’s decision to send Undersecretary of State William Burns to a meeting with Iran’s top nuclear negotiator suggests that those signals are being taken seriously. 
But the recent military muscle-flexing with rocket tests and the rejection of a compromise by Iranian President Mahmoud Ahmedinejad and his foreign minister show that the country’s leadership is seriously divided over the strategic line that Iran should pursue. 
Iran’s leadership still harbors the misconception that Israeli threats against its nuclear facilities are an expression of the domestic difficulties of Prime Minister Ehud Olmert’s government. 
This is plainly wrong. 
Olmert’s government has serious problems, but they are not the reason that the situation between Israel and Iran is coming to a head. 
On the contrary, a cross-party consensus exists in Israel concerning Iran’s possible nuclear armament and regional hegemony. 
All sides agree that, unless there is a diplomatic solution, Iran’s possession of nuclear weapons must be prevented in good time and by any means necessary. 
Moreover, Saudi Arabia and some other Arab countries share this view, albeit behind closed doors. 
If Iran adopts a more realistic approach, there is real hope for a diplomatic solution. 
The most recent offer of the 5+1 group (the United Nations Security Council’s five permanent members and Germany) was well received in Teheran. 
In addition to far-reaching political and economic cooperation, the offer promises cooperation on nuclear matters, including the construction and supply of the newest light-water reactors in Iran, as well as Iranian access to nuclear research and development – provided that there is a negotiated settlement. 
But what was really new is that Iran also responded positively to the procedure proposed by the 5+1 group. 
In the pre-negotiation phase, this means that Iran would agree not to install any new centrifuges, necessary for increasing the volume of uranium being enriched, while the 5+1 group would refrain from calling for new sanctions in the Security Council. 
Once negotiations start, Iran would, under the supervision of the International Atomic Energy Agency, suspend its uranium enrichment and all related activities for six months – something that the Iranian government refused even to discuss in the last four years. 
For its part, the Security Council would suspend all its deliberations related to the Iranian nuclear program. 
The aim of these negotiations is a comprehensive agreement between Iran and the 5+1 group that would resolve both the nuclear conflict and address regional security issues (Iraq, the Israeli-Palestinian conflict, Lebanon, Persian Gulf, Afghanistan) while opening up extensive international and regional cooperation. 
There were also signals emanating from Iran that, having , having mastered uranium enrichment technology, the authorities could envisage continuing enrichment in a third country in a joint consortium with the West. 
A similar proposal made by Russia was unceremoniously dismissed only a short time ago. 
Moreover, while there is no willingness to accept Israeli hegemony, the tone vis-à-vis Israel is beginning to change. 
Ahmadinejad’s vile anti-Semitism has of late been indirectly, but fairly openly, criticized by one of the closest confidants of Iran’s supreme religious leader, former Foreign Minister Ali Akbar Velayati. 
Iranian spokesmen also indicate that there is an official awareness of Israel’s importance for a comprehensive regional solution, and that doing business with Israel is no longer inconceivable. 
One hasn’t heard this sort of language in all the years since Ahmadinejad came to power. 
But is Iran really serious? 
Or are these simply the old stonewalling tactics? 
Does the government just want to buy time once more, now to make it through the America’s presidential elections? 
Given the public contradictions in the Iranian leadership’s behavior, is there a reliable Iranian position, and, if so, who represents it? 
These crucial questions can only be answered by the practical test of negotiations, this time with direct American participation. 
If Iran is serious, the result may be nothing less than the long awaited “Grand Bargain” – a regional reconciliation of interests between Iran, on one side, and America, Europe, and the region’s US allies on the other. 
But if Iran is playing for time, its behavior is shortsighted and foolish. 
The conflict, and thus the danger of a military confrontation, will not disappear under a new US administration. 
On the contrary, should the negotiations fail, the confrontation will resurface in short order, and be far more dangerous. 
Neither John McCain nor Barack Obama will take a softer stance than the current American administration on the question of Iran’s regional hegemony and its nuclear program. 
Indeed, if a diplomatic solution fails, they are more likely to react more forcefully. 
It is therefore imperative that diplomacy, which looks possible at the moment, be given a chance. 
If the top leadership in Teheran has realized that it makes a great deal more sense, and is more in keeping with Iran’s interests, to consolidate the successes of its foreign policy in the last few years, and to strengthen the regime, rather than risk everything in a military showdown with unforeseeable consequences, then there is a real chance for a diplomatic solution. 
If not, the region will be plunged into a hot confrontation. 
There’s wisdom, which Iran’s leaders should heed, in the old adage that a bird in the hand is worth two in the bush. 

Services without Tears 
NEW YORK – A famous claim in economics is that the cost of services (such as health care and education) tends to increase relative to the cost of goods (such as food, oil, and machinery). 
This seems right: people around the world can barely afford the rising health-care and school-tuition costs they currently face – costs that seem to increase each year faster than overall inflation. 
But a sharp decline in the costs of health care, education, and other services is now possible, thanks to the ongoing information and communications technology (ICT) revolution. 
The cost of services compared to the cost of goods depends on productivity. 
If farmers become much better at growing food while teachers become little better at teaching kids, the cost of food will tend to fall relative to the cost of education. 
Moreover, the proportion of the population engaged in farming will tend to fall, since fewer farmers are needed to feed the entire country. 
This is the long-term pattern that we’ve seen: the share of the workforce in goods production has declined over time, while the cost of goods has fallen relative to that of services. 
In the United States, around 4% of the population in 1950 was employed in agriculture, 38% in industry (including mining, construction, and manufacturing), and 58% in services. 
By 2010, the proportions were roughly 2%, 17%, and 81%, respectively. 
In the meantime, health-care and tuition costs have soared, along with the costs of many other services. 
But a productivity revolution in service-sector delivery is now possible. 
As a professor, I feel it in my own classroom. 
Ever since I began teaching 30 years ago, it had seemed that the technology was rather fixed. I would stand before a class and give a one-hour lecture. 
Sure, the blackboard gave way to an overhead projector, and then to PowerPoint; but, otherwise, the basic classroom “production system” seemed to change little. 
In the past two years, everything has changed – for the better. 
At eight on Tuesday mornings, we turn on a computer at Columbia University and join in a “global classroom” with 20 other campuses around the world. 
A professor or a development expert somewhere gives a talk, and many hundreds of students listen in through videoconferencing. 
Information technology is revolutionizing the classroom and driving down the costs of producing first-rate educational materials. 
Many universities are putting their classes online for free, so that anyone in the world can learn physics, math, or economics from world-class faculty. 
At Stanford University this fall, two computer-science professors put their courses online for students anywhere in the world; now they have an enrollment of 58,000. 
The same breakthroughs now possible in education can occur in health care. 
The US health-care system is notoriously expensive, partly because many of the key costs are controlled by the American Medical Association and private-sector health-insurance companies, which act like monopolists, driving up costs. 
Such monopoly pricing should be ended. 
Yet there are other reasons for high health-care costs. 
Many people suffer from chronic ailments, such as heart disease, diabetes, obesity, and depression and other mental disorders. 
These diseases can be expensive to address if they are poorly managed and treated. 
Far too many people end up in the emergency room and the hospital because they lacked the advice and help to keep their conditions under control without institutional care, or even to prevent their disorders entirely. 
Now information technology is coming to the rescue. 
Innovative companies like CareMore in California are using ICT to keep their clientele healthy and out of the hospital. 
For example, when CareMore’s patients step on the scale at home each day, their weight is automatically transmitted to the health-care unit. 
If there is a dangerous weight swing, which could be caused by congestive heart failure, the clinic brings the patient in for a quick examination, thereby heading off a potentially devastating crisis. 
These innovative companies’ approaches combine three ideas. 
The first is to use ICT to help individuals monitor their health conditions, and to connect individuals with expert advice. 
The second is to empower outreach workers (sometimes called “community health workers”) to provide home-based care in order to prevent more serious illnesses and to cut down on the high costs of doctors and hospitals. 
The third idea is to recognize that many illnesses arise or become worse because of individuals’ social circumstances. 
Perhaps the patient is isolated, lonely, suffering from depression, out of work, or facing some other personal or family calamity. 
If these social conditions go unaddressed, they may give rise to an expensive, even deadly, medical condition. 
Smart healthcare is therefore holistic, helping people not only as patients arriving in the emergency room, but also as individuals and family members in their own homes and communities. 
Holistic health care is more humane, effective, and cost-efficient. 
The ICT revolution provides the means to achieve holistic health care in new and powerful ways. 
In economic terms, information and communications technologies are “disruptive,” meaning that they will outcompete the existing, more expensive ways of doing things. 
Implementing disruptive technologies is never easy. 
Existing high-cost producers, especially entrenched monopolists, resist. 
National budgets may continue to favor the old ways. 
Nevertheless, the promise of great cost savings and major advances in service delivery is at hand. 
The world’s economies, rich and poor alike, have much to gain from accelerated innovation in the information age. 

Serving Two Masters 
Talk about corruption in developing countries -- and in some developed ones -- is running rampant. 
In the past, corruption was usually said to be located within the ranks of public servants, and this was used as a partial justification for privatization, especially in developing countries. 
Cheerleaders of the private sector, however, failed to reckon with the ability of company bosses to indulge in corrupt practices on an almost unfathomable scale, something American corporate capitalism has demonstrated amply of late. 
Corrupt bosses put to shame petty government bureaucrats who steal a measly few thousand dollars -- even a few million. 
The scale of theft achieved by those who ransacked Enron, Worldcom, and other corporations is in the billions of dollars, greater than the GDP of many countries. 
My research over the past thirty years focused on the economics of information. 
With perfect information -- an assumption made by traditional economics, though one not fully appreciated by free market advocates -- these problems would never have occurred. 
Shareholders would instantly realize that the books were cooked, and roundly punish the offending company's share price. 
But information is never perfect. 
Because of tax advantages and inappropriate accounting practices firms richly rewarded executives with stock options. 
With these in hand, company bosses could ensure that they were well paid without doing anything to benefit their company's bottom line. 
All they needed to do was boost the stock price, then cash in their option. 
It was a system almost too good to be true: while executives received millions in compensation, no one seemed to be bearing the cost. 
Of course, this was a mirage: by issuing such options shareholder value was diluted. 
Moreover, this was worse than dishonest: stock options provided managers with strong incentives to get the value of their stocks up fast. 
What mattered was not a company's long-term strength but its short-term appearance. 
Corporate officers respond to incentives and opportunities. 
Over the last decade-and-a-half, executive compensation in America soared. 
So, too, did the fraction of that compensation that is tied to a company's stock price, to the point where the fraction related to long-term performance is quite small. 
It was as if managers were actively discouraged from looking at fundamentals. 
The proponents of markets are right that incentives matter, but inappropriate incentives do not create real wealth in the economy, only a massive misallocation of resources of the sort we see now in such industries as telecoms. 
Overinflated prices lead firms to overinvest. 
As research over the past three decades demonstrates, when information is imperfect -- as it always is! -- Adam Smith's invisible hand, by which the price system is supposed to guide the economy to efficient outcomes, is invisible in part because it is absent. 
With the wrong incentives, with the kinds of incentives that were in place in corporate America, a drive for the creation of the appearance of wealth took hold, at the cost of actual wealth. 
By the same token, auditing firms that make more money from consulting than from providing auditing services have a conflict of interest: they have (at least in the short run) an incentive to go easy on their clients, or even, as consultants, to help their clients think of ways - "within the rules," of course -- that improve the appearance of profits. 
Or analysts at investment banks that earn large fees from stock offerings may -- as we have seen not so long ago -- tout stocks even when they are dubious about them. 
If these banks also have a commercial bank division, they may have an incentive to maintain credit lines beyond a prudent level, because to cut such lines would put at risk high potential future revenues from mergers and acquisitions and stock and bond issues. 
Moreover, a distortion of private incentives affects public incentives as well, and the two become intertwined. 
As "money talks" in politics, private incentives distort public policy and prevent it from correcting market failures in ways that, in turn, further distort private incentives. 
America's Securities and Exchange Commission's head recognized the problems posed by conflicts of interests in accounting, but his efforts to put in place rules to address the problem met with overwhelming resistance from the industry--until the scandals made change irresistible. 
Similarly, the accounting problems with executive stock options were recognized by the Financial Accounting Standards Board, but again early efforts at reform met with resistance, from the obvious sources. 
Here, political pressure, including from the US Treasury, was put on the supposedly independent Board not to make the change. 
These problems arise at both the national and international levels. 
Some countries try to fight against this vicious circle. 
For example, because we rightly suspect government officials who move too quickly into private sector jobs related to their public roles, many democracies have rules against such "revolving doors." 
To be sure, there are costs in imposing such restrictions -- they may, for example, deter qualified individuals from accepting public employment -- and the restrictions seldom eliminate conflicts of interest altogether. 
But restrictions of this kind - affecting both private and public sectors -- are often necessary because of imperfect information: we cannot really be sure what motivates an individual, even if the individual seems of the highest integrity. 
The loss of public confidence that may result from not acting may be even higher than the cost of governmental regulation -- indeed, this loss recently resulted in billions of dollars of reductions in the value of shares. 
Conflicts of interest will never be eliminated, either in the public or private sector. 
But by making ourselves more sensitive to their presence and becoming aware of the distorted incentives to which they give rise, as well as by imposing regulations that limit their scope and increasing the amount of required disclosure, we can mitigate their consequences, both in the public and the private sector. 

Where Free Speech Ends 
NEW YORK – I have long defended freedom of speech for all, even those expressing the most appalling views. 
Yet I applauded when a United Nations court sentenced Vojislav Šešelj, a Serbian politician, to ten years in prison for inciting war crimes with a nationalist speech in the former Yugoslavia during the early 1990s. 
Freedom of speech is a fundamental human right. 
That is why, when I was the executive director of the American Civil Liberties Union in 1977, I defended that right for a group calling themselves American Nazis, who wanted to hold a demonstration in Skokie, Illinois – home to a large number of Holocaust survivors. 
The ensuing dispute ended up involving several court cases, all of which the ACLU won. 
In the wake of that battle, which aroused controversy for years after it concluded, some applauded my defense of free speech; others viewed it with revulsion. 
But if I were faced with the same situation today, I would not hesitate to take the same position. 
When it comes to Šešelj’s case, however, the Appeals Chamber of the International Residual Mechanism for Criminal Tribunals was right to convict. 
Šešelj, who had served as president of the Serbian Radical Party, was initially prosecuted for a number of ultra-nationalist speeches he had delivered during a time when he was notorious for trying to foment conflict with Croats and Bosnians. 
The Trial Chamber of the International Criminal Tribunal for the former Yugoslavia eventually acquitted Šešelj. 
The Appeals Chamber upheld the lower court’s decisions on every charge but one, covering a speech delivered at a rally in Hrtkovci on May 6, 1992. 
According to the court, Šešelj declared in that speech that “there was no room for Croats in Hrtkovci,” and called on the Serbs in the audience “promptly” to “get rid of the remaining Croats” in that village and the surrounding areas. 
The crowd responded with chants of “Croats, go to Croatia” and “This is Serbia.” 
But it is not the content that stood out; on the contrary, Šešelj’s other nationalist speeches were just as hateful. 
What distinguished the Hrtkovci speech, according to the Appeals Chamber, is that ethnic cleansing quickly followed, “in the context of coercion, harassment, and intimidation.” 
The court noted that Šešelj enjoyed considerable influence in his party and was even viewed by some “as if he were a god.” 
Context is also what differentiates Šešelj’s Hrtkovci speech from the American Nazis’ planned Skokie rally. 
Again, the content of the speeches delivered would have been equally hateful. 
But in Skokie, most of the people who would have attended the march loathed the Nazis, who were thus in no position to coerce, harass, or intimidate anyone. 
The only threat of violence was against the Nazis themselves, which, given advance notice of the event, could have been managed by an adequate police presence. 
In fact, once the Nazis won the legal right to march in Skokie, they moved their demonstration to Chicago. 
They probably knew that their handful of supporters would be far outnumbered by counter-protesters. 
In other words, the Nazis might have been too scared to march. 
The distinction between content and context was decisive in another landmark decision on free speech in the US. 
In the 1969 case of Brandenburg v. Ohio, the US Supreme Court overturned the conviction of a Ku Klux Klan leader charged with advocating violence for his participation in a KKK rally, where he delivered an inflammatory speech. 
The key, again, was context: the Supreme Court held that the incitement of violence charge did not hold up, because the speech was not delivered in a context where violence was imminently likely. 
So the Brandenburg, Šešelj, and Skokie cases all reinforce the same principle: context matters above all. 
One can be prosecuted for inciting a criminal action, such as forcible deportation or ethnic cleansing, in a context where that action is likely to be carried out imminently by members of one’s audience. 
If that risk is not imminent, however, the right to free speech must be respected. 
That is why, to take a famous example from an earlier Supreme Court decision, if one yells “Fire!” in a crowded theater, one’s right to free speech provides no protection from prosecution; in any empty theater, there is no danger of a stampede, and thus no crime would be committed. 
The concrete consequences of Šešelj’s conviction will be limited. 
Since he already spent nearly 12 years in pre-trial detention, he will not be sent back to prison. 
And because Serbian law disqualifies an elected official from serving in government after being sentenced to more than six months in prison, he should be blocked from reclaiming his seat in the Serbian parliament, though it remains unclear whether Serbia will uphold its own law. 
Nonetheless, the precedent set by the Šešelj decision is important, as it establishes the limits of free speech under international law at a time when ethnic cleansing is being incited and carried out. 
In Myanmar, for example, the Rohingya have been brutally driven from their villages, with attacks often following speeches by extremist Buddhist monks who conduct themselves just as Šešelj did. 
They may never be prosecuted for their hateful words; but, because those words were uttered in a context where the threat of lawless action was imminent, they could be punished without violating their right to freedom of speech. 

Set the IMF Free 
BRUSSELS – The International Monetary Fund is back in business. 
During the bubble years, neither its advice nor its money seemed to be needed. 
But now more and more countries need balance-of-payments support, and there is general agreement that the global monetary system needs a body to oversee its overall stability. 
The IMF is the only candidate for this task, but experience has shown that the Fund can fulfill this role only if its governance is reformed. 
Granting balance-of-payments support has important fiscal implications, and it is natural that there should be continuing close oversight by those who ultimately provide the capital – the IMF’s member states. 
But looking after the stability of the global financial system, including the assessment of exchange-rate policies and global payment imbalances, is a different responsibility. 
For these analytical functions, there is no need for close oversight. 
On the contrary, independence and professional expertise should be decisive. 
Thus, a key change should be to distinguish between the IMF’s financial measures and its analytical functions, especially the surveillance of exchange rates and other sources of global financial risk. 
The IMF’s Executive Board, which consists exclusively of representatives of member countries, currently runs the Fund’s daily business. 
The Board thus does not perform oversight functions, but rather serves essentially as an extended Management Board, which delegates the execution of its decisions to the Managing Director and the staff. 
This modus operandi needs to be changed in order to give the IMF the independence it needs if it is to become a credible, impartial judge of balance-of-payments disequilibria and sources of risk to global financial markets. 
This requisite independence of the IMF staff can be achieved by stipulating that the Board oversees only the work of the Fund’s analytical functions and, more importantly, that its composition and decision-making mode are overhauled in the following ways: 
- The Executive Board should be enlarged by the addition of several (possibly 3-5) independent members (as in the private sector), and the voting principle should be one person, one vote. 
The independent board members would constitute only a small minority, but their presence and professional expertise would give them disproportionate weight. 
- Management would be free to take a position on all issues not involving the use of Fund resources, unless it is was explicitly overruled by the expanded board. 
This would give management considerable de facto independence, since under the one person, one vote principle the larger member countries could no longer block issues just because they are politically inconvenient. 
For all decisions involving the resources of the Fund (lending to member countries or the size of quotas, etc.), the existing decision-making procedure could remain unchanged. 
All financial decisions would thus continue to be taken by the existing Executive Board, with weighted voting reflecting the financial contributions of member countries. 
The European Central Bank provides an interesting analogy, because it has two voting procedures, depending on the issue at hand. 
The ECB’s Governing Council comprises the six members of the Executive Board plus the governors/presidents of the 16 national central banks of the eurozone countries. 
The Governing Council takes the really important decisions on monetary policy based on one person, one vote. 
When the Maastricht Treaty was negotiated, the Germans considered this provision an important concession. 
But it is indispensable if the ECB is really to be independent, and if one expects that all members of the Governing Board, particularly the governors of national central banks, base their decisions only on the interests of the entire euro area (and not of their home country). 
However, on financial matters (in particular the distribution of profits and losses), the voting rules are different: the Executive Board does not participate and the votes of the national central bank presidents in the Governing Council are weighted by their respective capital shares. 
When the G-20 leaders meet in London, they should consider giving the IMF the independence it needs to become an effective guardian of global financial stability. 

Set the Universities Free 
After pensions and healthcare, higher education is the third great public service in serious trouble in many countries, notably in Europe. 
Proud Germany, the inventor of the modern university system as most of the world currently knows it, now sees its students ranked at the bottom in tests of knowledge and competence. 
The nature of the trouble in higher education is similar to that affecting all the public services: a massive growth in demand that can no longer be met from the public purse. 
This means, above all, that the much-vaunted middle classes are being asked--or soon will be asked--to contribute more toward the costs of these services, either by higher taxes or through privatisation of the financial burdens. 
Additional private pensions in Germany, rising charges for healthcare everywhere, and "top-up fees" for university students in the United Kingdom have become hot political issues bedevilling governments almost everywhere. 
For the most part, the quick fixes they have imposed so far have not been very successful. 
In the case of higher education, there is of course an alternative. 
In the absence of sufficient funds, one can simply let the universities deteriorate. 
On the European Continent this has been happening since the 1970s. Overcrowded classes in often inadequate physical surroundings without necessary equipment have led to ever longer periods of study, a deterioration in the quality of degrees, and much unhappiness among both students and professors. 
In the United Kingdom, where this did not happen in the 1970s and 1980s, every university place could have been filled with a Continental European trying to escape declining institutions at home. 
Now, however, the miseries of expanding the number of university students without adequate public finance have invaded Britain as well. 
Even Britain's Secretary of State for Education admits that higher education would need 18 billion additional euros in the budget merely to return standards of education to where they were ten years ago in terms of staff-student ratios and the condition of buildings and equipment. 
Within a decade the funds available per student have declined by 40%. 
Where can the needed funds come from? 
Not much, it is clear, can be gained from increased taxation. 
While some still believe that the taxpaying public might be persuaded to spend an additional "penny in the pound" (i.e., 1% of tax) of income tax to keep higher education going, most know that this path can be ruled out for general economic as well as political reasons. 
Thus, alternatives will have to be found despite the fact that they all hit groups whose votes governments need for electoral survival. 
One alternative is to let universities shrink again to a manageable size. 
To some extent this has happened in Europe. 
In Britain, however, the opposite is taking place. 
The government has set a target according to which 50% of each generation should enter higher education by 2010. However absurd this target may be, mass higher education is here to stay. 
This is why the subject is no longer one for a small privileged elite, but rather one for general political debate. 
A second alternative is to charge the beneficiaries of higher education for what they get. 
This can be done in several ways: by means tests that impose duties on many parents; by loans to be repaid under favourable conditions; by a special tax on graduates; or by mixtures of such approaches involving a generous system of bursaries as well as charges on well-to-do parents. 
All these methods have their problems. 
They require massive transitional expenditure as they are introduced. 
They may deter some of those who are qualified from seeking higher education. 
They impose burdens on politically sensitive groups. 
They may not be sufficient to save universities from bankruptcy. 
But what is the alternative? 
Continental European students who used to come to Britain now join their British colleagues in casting their eyes across the Atlantic. 
More than ever, the American system is regarded as a model. 
In a mysterious way it seems to combine equal access with excellence. 
The mystery is of course easily resolved; its name is differentiation. 
The American university system is not a "two-tier" or "two-class" system but one of almost infinite variety. 
This is true for its financial parameters too. 
Public and private contributions are combined in many ways. 
To be sure, there is the additional feature that many higher education institutions have an endowment, which they can use to balance inequities. 
It will take some time to build up such endowments in Europe and elsewhere. 
Even so, the principle is surely right: universities must be set free. 
They must be free to admit students of their choice and to charge them what is needed. 
The role of the state, here as elsewhere, is one of correcting inequities rather than running the whole show. 
Such thoughts may seem heretical now, but without heresy there will be no reform. 
For the problem of the next generation remains to combine public and private contributions to services that simply cannot remain wholly financed by taxpayers and wholly run by public bureaucracies. 

Learning from Rwanda 
GENEVA – How is it that Rwanda, among the world’s poorest countries – and still recovering from a brutal civil war – is able to protect its teenage girls against cancer more effectively than the G-8 countries? 
After just one year, Rwanda reported vaccinating more than 93% of its adolescent girls against the human papillomavirus (HPV) – by far the largest cause of cervical cancer. 
Vaccine coverage in the world’s richest countries varies, but in some places it is less than 30%. 
In fact, poor coverage in the world’s richest countries should come as no great surprise, especially when one considers the demographics of those missing out. 
Where available, evidence suggests that they are mainly girls at the lower end of the socioeconomic spectrum – often members of ethnic minorities with no health-care coverage. 
This implies that those who are at greatest risk are not being protected. 
It is a familiar story, one that is consistent with the global pattern of this terrible disease, which claims a life every two minutes: those most in need of protection have the least access to it. 
Of the 275,000 women and girls who die of cervical cancer every year, 88% live in developing countries, where mortality rates can be more than 20 times higher than in France, Italy, and the United States. 
That is not just because vaccines are not readily available; it is also because women in these countries have limited access to screening and treatment. 
Without prevention, they have no options if they get sick. 
Alarmingly, in some of the wealthy countries, where both screening and treatment should be readily available, vaccine coverage now appears to be declining, raising a real danger that socioeconomically disadvantaged girls there will face a similar fate. 
If it turns out that girls at risk of not receiving all three doses of the HPV vaccine are also those with an elevated risk of being infected and missing cervical screenings as adults, they may be slipping through not one but two nets. 
It is still not clear why this is happening. 
What we do know is that HPV is a highly infectious sexually transmitted virus, which is responsible for almost all forms of cervical cancer. 
HPV vaccines can prevent 70% of these cases by targeting the two most common types of the virus, but only if girls have not yet been exposed to the virus, which means vaccinating them before they become sexually active. 
Yet efforts to communicate this to the public have been met with skepticism from some critics, who argue that the vaccine gives young girls tacit consent to engage in sexual activity, ultimately leading to an increase in promiscuity. 
However, quite apart from the evidence to the contrary, intuitively this makes no sense. 
To suggest that giving girls aged 9-13 three injections over six months gives them a green light to engage in sex and sets them on a path to promiscuity is utter nonsense. 
It is like saying that people are more likely to drive dangerously if they wear a seat belt; in fact, the opposite is more often the case. 
Whether such attitudes and misinformation account for poor vaccine coverage in places like France and the US is still not known. 
It may simply be that some parents or girls mistakenly believe that one shot of the HPV vaccine is enough to provide protection, or that some socially disadvantaged girls lack sufficient access to in-school vaccination services. 
Or perhaps the cost of the vaccine is a barrier in some of these countries. 
Whatever the reason, unless coverage for all three doses increases, cervical cancer and pre-cancer rates will increase. 
In countries like Rwanda, people know this only too well, which is why they have been so eager to tighten the net on HPV. 
They have seen the horrors of cervical cancer, with women in the prime of their lives presenting with late-stage disease and suffering slow and painful deaths. 
Without changes in prevention and control, deaths from cervical cancer worldwide are projected to rise almost two-fold by 2030, to more than 430,000 per year. 
And now, with help from my organization, the GAVI Alliance, a public-private partnership created to improve access to new vaccines for the world’s poorest children, other low-income countries are following Rwanda’s lead. 
As of this year, Ghana, Kenya, Laos, Madagascar, Malawi, Mozambique, Niger, Sierra Leone, Tanzania, and Zimbabwe have all taken steps to introduce HPV vaccines, with more countries expected to follow. 
G-8 countries’ generous contributions to organizations like mine show that they understand the importance of childhood immunization. 
But, while HPV infection rates may be falling in some of these countries, are they falling fast enough? 
In the US, for example, the G-8 country for which we currently have the most data, infection rates have halved in the six years since the vaccine was first introduced. 
Yet failure to reach the 80% coverage mark means that 50,000 American girls alive today will develop cervical cancer, as will another 4,400 girls with each year of delay. 
So it is worth remembering that even in wealthy countries, there is an urgent need to overcome challenges in protecting the hardest-to-reach girls, who often are at high risk of HPV infection. 
Overcoming these challenges is essential to reducing cervical cancer and pre-cancer rates in the coming years. 
Rwanda’s success should be the norm, not the exception. 

Seven More Years of Hard Times? 
NEW HAVEN – Much of the talk emerging from the August 2010 Jackson Hole Economic Symposium, attended by many of the world’s central bankers and economists, has been about a paper presented there that gave a dire long-runassessment of the future of the world’s economies. 
The paper, “After the Fall,” was written by economists Carmen Reinhart and Vincent Reinhart. 
Their work draws upon a recent book that Carmen Reinhart co-authored with Kenneth Rogoff, entitled This Time Is Different: Eight Centuries of Financial Folly. 
According to the Reinharts’ paper, when compared to the decade that precedes financial crises like the one that started three years ago, “GDP growth and housing prices are significantly lower and unemployment higher” in the subsequent “ten-year window.” 
Thus, one might infer that we face another seven years or so of bad times. 
Economic theory is not sufficiently developed to predict major turning points based on first principles or mathematical models. 
So we have to be historically oriented in our method. 
History may be a “soft” social science, but we have to look at it, even distant history, if we are to grasp other examples of major crises. 
Moreover, we have to look at the entire world. 
Most economists study the recent history of their own country, which is easiest to do, and their results sound superficially important to most of their countrymen. 
But major financial crises are rare by the standards of any one country, and we have to range widely through history to get enough information about how such crises play out. 
The research by the Reinharts and Rogoff is an expansion and generalization of many people’s informal economic thinking, which often compares the present with stories of major past episodes. 
Ever since the current crisis began in 2007, many people have been wondering if the Great Depression that followed the 1929 stock-market crash and the banking crises of the early 1930’s is relevant to our experience today. 
The troubling fact about the Great Depression is that it was severe, global, and lasted over a decade – and that it followed the collapse of an equity and real-estate boom, roughly as happened before the current crisis. 
Likewise, many people have been wondering if the weakness that followed the equity and real-estate crash in Japan at the beginning of the 1990’s is relevant to our experience today. 
They used to refer to Japan’s “lost decade.” 
Now it is more appropriate to describe that experience as the “lost decades.” 
Are these examples models for our future? 
They certainly make one stop and think. 
But they do not stand as convincing evidence about what will happen – after all, two observations are hardly enough to prove the point. 
But now the Reinharts and Rogoff have systematically studied many more examples in modern financial history. 
There is also the world financial crisis that attended the oil shocks of 1973 and 1979, and there are the country-specific financial crises in Spain in 1977, Chile in 1981, Norway in 1987, Finland and Sweden in 1991, Mexico in 1994, Indonesia, Korea, Malaysia, the Philippines, and Thailand in 1997, Colombia in 1998, and Argentina and Turkey in 2001. 
So, there are many more than just two modern cases (though they are not all entirely independent, because they are somewhat bunched in time). 
From them, the Reinharts and Rogoff found, for example, that median annual growth rates of real per capita GDP for advanced countries were one percentage point lower in the decade following a crisis, while median unemployment rates were five percentage points higher. 
How did this happen? 
They note that, in general, debt levels and leverage rose during the decade preceding these crises, propelling increases in asset prices for a long time. 
Reinhart and Rogoff describe a “this time is different syndrome” during the pre-crisis boom, whereby these bubbles are allowed to continue for far too long, because people think that past episodes are irrelevant. 
There seems to be the germ of a new economic theory in the work of the Reinharts and Rogoff, but it remains ill defined. 
It seems to have a behavioral-economics component, since the “this time is different syndrome” seems psychological rather than rational. 
But it is still not so sharp a theory that we can really rely on it for making confident forecasts. 
Moreover, there are reasons to suggest that this time really might be different. 
I hate to say so, not wanting to commit the sin defined by their “syndrome,” but this time might be different because all of the modern examples of past crises came during a time when many economists worldwide were extolling the virtues of the “rational expectations” model of the economy. 
This model suggested that a market economy should be left alone as much as possible, so that is what governments tended to do. 
According to “rational expectations,” bubbles simply did not exist – which meant that actual bubbles were allowed to grow. 
But that mindset is waning, and government and business leaders now routinely warn of bubbles and adopt policies to counter them. 
So, this time really is at least a little different. 
In that case perhaps all of those crisis-induced bad decades are no longer relevant. 
But any such hopes that the aftermath of the current crisis will turn out better are still in the category of thoughts, theories, and dreams, not science. 
It is not true that if you break a mirror, you will have seven years’ bad luck. 
That is a superstition. 
But if you allow a financial market to spin wildly until it breaks down, it really does seem that you run the risk of years of economic malaise. 
That is a historical pattern. 

Seven Years in Afghanistan 
KABUL –We began a journey in Afghanistan seven years ago with the war that ousted the Taliban from power. 
Much has been accomplished along the way, for Afghanistan and for the world. 
In less than 45 days in 2001, we Afghans were freed from the menace of terrorism and the Taliban. 
Back then, Afghanistan’s people held great hopes for an immediately wonderful future. 
Some of those hopes were fulfilled. 
Our children are back in school. 
Roughly 85% of Afghans now have access to some health care, up from 9% before 2001. 
Child mortality – among the worst in the world in 2001 – has dropped by 25%. 
Democracy, a free press, economic gains, and better livelihoods – all of that is there. 
But, sadly, we are still fighting the Taliban and Al Qaeda. 
What is it that we have not done right that makes us – and the rest of the world – less secure? 
After the liberation in 2001, the international community concentrated on Afghanistan alone as the place to fight extremism and terrorism, while we Afghans argued that our country is not the right place to fight. 
The war on terrorism cannot be fought in Afghan villages. 
Instead, a regional approach was and is needed. 
It must be concentrated on the sanctuaries of those who train, equip, and motivate the extremists and send them out to hurt us all. 
But we were not heard. 
Regardless of whether that was the result of a lack of knowledge or a lack of will, events have proven us right. 
Unfortunately, for the past two years, Pakistan has been suffering as much or perhaps more than Afghanistan has suffered. 
Almost the entire tribal belt along the Pakistan/Afghanistan border is suffering. 
Just as schools were burned in Afghanistan from 2004 onwards, for the past year schools – especially for girls – have been burned there, leaving 80,000 children without facilities. 
Bridges have been blown up, soldiers and police killed. 
Bombs have exploded from Karachi to Lahore to Islamabad. 
The violence has spread to India as well, with bombings in Gujarat, Bangalore, and Delhi. 
So the problem is regional, and it concerns institutional support for extremism that incites terrorism. 
Unless we collectively address the roots of the problem by ending that support, as well as financial support for radicalism in all forms, we will not defeat terrorism. 
This has not been properly understood in the West, which has been fighting the symptoms of terrorism, but has failed to attack its underlying causes. 
Fortunately, today I see signs of recognition of this malaise. 
And democratic change in Pakistan is good news for Afghans, Pakistani people, and, by extension, many others around the world. 
Pakistan’s new president, Asif Ali Zardari, has suffered from terrorism as we have suffered. 
His wife, Benazir Bhutto, was killed by terrorists. 
I visited Pakistan for President Zardari’s inauguration, and for the first time I saw a dim ray of hope. 
If we can all work together – Afghanistan, Pakistan, India, the United States, and our allies – I see a possibility of moving beyond the days when a government thinks it needs extremism as an instrument of policy. 
When all governments in the region reject extremism, there will be no place for extremists, and terrorism will wither away. 
But this also requires helping those people who out of desperation have fallen prey to extremist forces. 
Last year, I pardoned a 14-year-old boy from the Pakistan tribal area in Waziristan who had come to Afghanistan to blow himself up as a suicide bomber. 
Only utter hopelessness can drive so young a man to such an act. 
We must rescue these people by giving them a better future, which only more education and new opportunities can bring. 
Desperation and poverty are the tools used by evil forces to raise their terrorist cadres. 
But that environment will not change if political will is lacking, and if there is no action by the US and the governments of the region to get our economies to create jobs that offer hope. 
Moreover, in order to deny terrorists institutional support, we must bring institutional strength to Afghanistan. 
We must enable Afghans to look after themselves and defend their country, to have a future in Afghanistan, to have hope of raising their children in Afghanistan. 
Recently, I spoke to an Afghan man very close to me. 
He has a son who works in the Afghan Foreign Office. 
That young man was born in the US but returned to Afghanistan four years ago. 
The father asked, “Do you think I should take my son back to the US?” 
I said, “Why? 
Let him live here, let him work here, let him be an Afghan.” 
He said, “Yes, but will he have a future?” 
A viable future means security as well as bread. 
We have started to bring hope by educating young Afghans, but we have not yet succeeded in bringing them a secure life, free from the danger of bombs and aerial bombardment. 
Only when that happens will Afghanistan be secure. 
And if the two other conditions are fulfilled – removal of political backing for radicalism and help for the desperate – we will have a safer life not only in Afghanistan, but in Pakistan, India, and the rest of the world. 

Sex, Berlusconi, and Putin’s Bed 
ROME – Italian Prime Minister Silvio Berlusconi’s political and sexual exploits make headlines around the world, and not just in the tabloid press. 
These stories would be no more than funny – which they are certainly are – if they were not so damaging to Italy and revelatory of the country’s immobile politics. 
For, despite the rampant scandals, “national Silvio” (“Il Silvio Nazionale”) remains by far Italy’s most popular and successful politician (though his approval ratings have now dipped below the 50% mark in opinion polls for the first time since his second return to the premiership in 2008). 
Part of the reason for Berlusconi’s longevity despite his many stumbles is cultural. 
As in other Latin or Mediterranean countries with a strong Catholic tradition, Italian society long ago learned to accept serenely a life of duplicity: on the one hand, a strong attachment to church and family values, and on the other a second life – often lived in plain sight – composed of mistresses and other “dubious” connections. 
Today’s Italian Catholic political leaders often embrace such a lifestyle. 
In recent years, aside from Berlusconi himself, other divorcés like Centrist Catholic Party Leader Pier Ferdinando Casini and Parliament Speaker Gianfranco Fini could easily deliver passionate speeches in the morning on the importance of the traditional family unit and the sacredness of marriage, attend a touching audience with the Pope in the afternoon, and then rush off in the evening to their unmarried partners and mothers of their latest offspring. 
Italian society’s tacit acceptance of such behavior has become more openly acknowledged in recent years, thanks perhaps to Berlusconi and his vast media holdings. 
In the 1970’s, the average Italian working-class family’s major ambition for its children was for them to study, go to university, and become a doctor or a lawyer. 
Since the late 1970’s, and especially during the 1980’s and 1990’s, Berlusconi's three private TV channels have portrayed a false and illusory model of quick success, as seen in American soap operas such as “Dallas.” 
Since the 1990’s, his channels broadcast “Big Brother” and Italian variety shows dominated by male comedians, musclemen, and scantily clad young girls, popularly known as “veline.” 
In the space of just 30 years, Berlusconi's TV stations managed to impose this illusory portrait of success on Italian society. 
And today, the ambition of many working-class Italian mothers is to see their daughters become a successful scantily clad “velina” who, in turn, manages to hit the gossip columns by flirting with the latest muscleman-turned-TV heartthrob or some budding young football player. 
Graduating as a doctor or a lawyer is no longer a mark of success. 
Despite his lack of muscles and hair, Berlusconi is the embodiment of this form of success. 
The former cabaret singer who became one of the richest businessman in the world, has also managed to become Italy’s most powerful politician – and one of the world’s most colorful. 
Until a few weeks ago, the average Italian viewed him as a role model, someone who had succeeded in many spheres of life. 
That has now changed. People have become less admiring of Berlusconi, because the hypocrisy has gone too far. 
It may be trendy for an Italian politician to flaunt his Mediterranean macho image, but that image becomes hard to stomach when the prime minister launches a campaign to eradicate street prostitution, with possible jail sentences for clients, while sleeping with paid escorts. 
Nor are Italians reassured to learn that Berlusconi fielded a number of candidates during the recent European Parliament elections whose only discernible qualification was that they were pretty young girls who had possibly spent some time in the prime minister’s company at his Sardinian Villa or Roman Palazzo. 
Today, it seems all but certain that Berlusconi will never be elected President of Italy, the post to which he has always aspired. 
Moreover, rumors are rife that he is now being attacked for his behavior by members of his own party. 
Indeed, some maintain that Berlusconi will be forced to resign as prime minister by the end of the year. 
Such rumors may well turn out to be true, for the heart of the scandal now concerns the taped conversations between a paid escort and Berlusconi during their romps in his Sardinian villa on the big bed given to him by his Russian counterpart, Vladimir Putin. 
A downfall plotted to happen on a Kremlin-supplied bed would be a denouement that not even one of Berlusconi’s TV channels could dream up. 

Sex and Surveillance 
NEW YORK – It is impossible to hear about sexual or sex-crime scandals nowadays – whether that involving Dominique Strauss-Kahn or those of former New York Governor Eliot Spitzer, Italian Prime Minister Silvio Berlusconi, or the half-dozen United States congressmen whose careers have ended in the past couple of years – without considering how they were exposed. 
What does it mean to live in a society in which surveillance is omnipresent? 
Like the heat beneath the proverbial boiling frogs, the level of surveillance in Western democracies has been ratcheted up slowly – but far faster than citizens can respond. 
In the US, for example, President George W. Bush’s Patriot Act is being extended, following a series of backroom deals. 
Americans do not want it, and they were not consulted when it was enacted by their representatives under the pressure of a government that demanded more power in the wake of the terrorist attacks of September 11, 2001. That does not seem to matter. 
A concerted effort is underway in the US – and in the United Kingdom – to “brand” surveillance as positive. 
New York City subway passengers are now advised that they might experience random searches of their bags. 
Activists in America are now accustomed to assuming that their emails are being read and their phone calls monitored. 
Indeed, the telecom companies Verizon and AT&T have established areas on their premises for eavesdropping activity by the National Security Agency. 
The spate of sex scandals is a sign of more serious corruption and degradation than most commentators seem to realize. 
Yes, sex criminals must be punished; but political career after political career, especially in America, is ending because of consensual affairs. 
Consensual sex between adults is no one else’s business. 
But now that public figures – especially those deemed to be “of interest” to intelligence agencies – are susceptible to being watched three-dimensionally, the chances of being compromised are far higher than they were in the days of the UK’s Profumo affair, which brought down a British defense secretary in the early 1960’s. 
And there is no end to this crash-and-burn surveillance strategy, owing to the nature of the information that is caught in the net. 
After all, the human sex drive, especially if it compels risky or self-destructive behavior, has held appeal for dramatists since the ancient Greeks, who originated the story of Achilles and his vulnerability. 
And, because sex scandals are always interesting to read about – certainly compared to yet another undeclared war, or a bailout that created jobs costing an estimated $850,000 each – they will always be useful diversions. 
Citizens’ attention can be channeled away from, say, major corporate theft and government malfeasance toward narratives involving two hapless individuals (and their wives and children, who are usually suffering quite enough without the media’s heavy breathing). 
Another reason to mourn the normalization of a surveillance society lies in the link between sexual privacy and other kinds of psychological liberation. 
That is why closed societies monitor their citizens’ sexual lives. 
The combination of sexuality and privacy has an anarchic, subversive effect on citizens. 
Connecting with another person in an unscrutinized, uncivilized, unmediated, unobserved way inevitably reminds people that there are aspects of the human soul that cannot and must not be subjected to official control. 
For this reason, closed and closing societies have always feared sexual liberationists, and have sought to link political dissidence with sexual anarchy. 
In the 1950’s, communism and the homosexual “threat” became wedded in the American public imagination. 
In Britain’s decadent 1890’s, feminists, socialists, and Utopians were portrayed as free-love menaces to family life – even if they had no sexually transformational agenda at all. 
Everyone has secrets – that is what people realize too late when a surveillance society falls softly into place. 
Think about your own privacy and secrets. 
If you or your spouse strayed, would you want to discuss it in private, or have the world discuss it with you – or have a government official tell you that he will discuss it with your spouse, unless you do as requested? 
You might even choose not to address it at all. 
Most people take for granted that they would have that choice, because they do not realize that living in a surveillance society means that eventually everyone must face the same anxieties about exposure as public figures do. 
Of course, the issue is broader: If you are a recovering alcoholic, make a pass at someone of the same gender, have a gambling problem, suffer from bipolar illness, or have had a conversation with your accountant about your taxes that skirted what was proper, are you ready to be “outed”? 
Official surveillance has been marketed as a national-security imperative. 
In fact, it gives the state the power to blackmail anyone it wishes. 
Consider the official US diplomatic cables released by WikiLeaks that revealed that State Department employees were asked to obtain “biometrics” on public officials at the United Nations. 
Are we entering an era of geopolitics by blackmail? 
Perhaps we should defuse the threats posed by a surveillance society by having an annual day of amnesty. 
On Amnesty Day – not a state holiday, to be sure – we would reveal to our loved ones, constituents, or employers the secrets that we think put us at risk. 
Or we could work to eliminate the threat of exposure of private behavior. 
For example, as consumers of media, we have power: the next time you are peddled a sex scandal, refuse to buy it. 
Sexual impropriety – of whatever flavor – is not among the most important things in the world; the loss of freedom is. 


Sexy Culture 
Why is there culture? 
What motivates people to write poems, paint, or sing? 
Most people engaged in these activities would respond with answers like, “because I like to” or, “because it fulfills me,” if not, “I feel obliged not to waste my talent.” 
They tend to believe that culture reflects the existence of a soul type, or that it's an expression of humans’ intelligence and creativity. 
Natural science – as so often – has a more mundane answer, one that has to do with natural selection. 
In his seminal work on evolution, On the Origin of Species by Means of Natural Selection, or the Preservation of Favored Races in the Struggle for Life, Charles Darwin used the much-cited expression “survival of the fittest.” 
Most people find it easy to understand that being especially strong or fast, or able to withstand hunger, heat, or cold, can increase the chances of survival. 
Intelligence also falls into that category. 
But to squeeze cultural excellence into the group of characteristics defining “the fittest” is not so easy and requires some leap of faith. 
In his later work, Darwin introduced another selection criteria that may be just as important, but which has received much less attention: mating preference, or sexual selection. 
His reason for doing so was to explain male peacocks’ obviously hindering tail feathers and male lions’ apparently useless manes. 
These characteristics would reduce rather than enhance the bearer’s chances of survival, but obviously they prevailed in generation after generation. 
Thus, Darwin argued, they must increase the probability of more offspring by making the males more attractive to female mates. 
As Darwin did not believe that pure aesthetics would guide female peacocks and lions in their choice of mating partners, he had to find a rational reason for females’ preference for males with hindering characteristics. 
The very fact, he reasoned, that these features make life harder signals to prospective partners that individuals who can do reasonably well with them have an especially good genetic set-up and are thus likely to produce strong offspring. 
They should therefore be preferred mates. 
Evolutionary biologists have since taken the concept further. 
If someone can do difficult things, not only carrying peacock tail feathers or a long dark lion mane, but also things that require much practice without contributing to physical fitness and survival, and yet stay alive, that individual must have especially good genes. 
They are therefore sexually attractive. 
Culture – at least the culture we are proud of and don’t sneer at – is highly elitist. 
We admire the best, and only the best, according to some cultural and time-dependent standard. 
It does not help much to sing pop songs or opera arias in the bathroom. 
You must be able to draw a listening and cheering crowd to qualify for the elite. 
Likewise, the amateur painter does not increase her or his attractiveness much compared to a van Gogh or a Picasso. 
The same goes for writers. 
A vanity press autobiography does not bring you to the top. 
For that, you have to be a Nobel laureate or at least the author of a couple of well regarded books. 
The bottom line is that while many are called, few are chosen. 
Reaching the top requires not only talent and luck, but also a lot of practices – that is, time wasted from the point of view of survival. 
Sport is in this respect also a form of culture, albeit one that is often sneered at by those engaged in pursuits like classical music or serious literature. 
Most sports certainly contribute to physical fitness – as do some other expressions of culture, such as ballet – but what we admire in a player who can do extraordinary things with a ball is a technique that is utterly useless outside the playing field and has taken thousands of hours of practice to bring to perfection. 
Here, of course, it’s only the best that become local or national heroes. 
To be a devoted football or basketball player in the lowest series brings ridicule rather than fame. 
It must be hard and require enormous effort to acquire the unique skills that mark the superstar and earn societies’ respect and admiration. 
Following this reasoning, what makes the poet, the painter, and the singer attractive is uselessness combined with the difficulty of their activity. 
The harder and more futile the activity, the better and more sexually attractive is the performer. 
Naturally, self-awareness of this underlying wish to be sexually attractive is not required. 
The mechanism works all the same. 
The poet, painter, and singer may think they do what they do for more high-minded reasons, but scientists know otherwise. 
Hey, science is hard, too! 
But, in line with the logic of natural selection, to become sexually attractive, the scientist only has make sure that the results of his or her work are useless. 

Shades of Gray 
It takes a very close look at the results of the recent elections in the German state of North-Rhine-Westphalia to find among the list of “Others” the tally for “The Greys”: they got 0.1% of the vote. 
In other words, one in a thousand voted for them, although they claimed to speak for that state’s retired and elderly people – over 30% of the population. 
“Generation consciousness,” unlike the “class consciousness” of old, is obviously not a defining factor in people’s political preferences. 
Many more “Greys” voted for the Greens than for their “own” party. 
This is an important fact. 
Most Europeans – and many in other parts of the world – live in rapidly aging societies. 
Nurseries and schools are closed while retirement homes and hospices spring up everywhere. 
Rising life expectancy coupled with low birth rates shape the demography of almost all prosperous countries. 
By the middle of the century – unless there is a dramatic turnaround – about half the population will be economically inactive for reasons of age. 
This trend will have many consequences, most obviously for the welfare state, notably pensions and healthcare. 
While expenditure for both is rising rapidly, the offsetting revenues are coming from ever fewer people in employment. 
As a result, the “generational contract” looks less and less viable, because we can no longer rely on today’s workers to pay for today’s pensioners. 
Insurance-based systems of entitlements created by personal contributions are increasingly taking the place of national health and pension services. 
This is a profound change that creates much friction in the transitional phase. 
For example, the transitional phase is a period in which public debt inevitably increases. 
Governments must continue to pay benefits to today’s pensioners, and they can do so only by borrowing money to replace the revenues that tomorrow’s pensioners are now diverting to personal insurance schemes. 
Debt, however, is a burden imposed by current citizens on future generations. 
Understandably, there are signs that younger politicians of all parties are resisting this development. 
Indeed, a party of the young might well have better prospects than the “Greys.” 
Shifting political interests are, however, but one part of the changes in an aging society. 
More visible are changes in lifestyle. 
People who live longer while not being in employment want to enjoy their lives. 
A plethora of magazines tell pensioners what they can do. 
Advice ranges from sex in old age to tourism. 
Tourism, in particular – cruises as well as more adventurous trips – has become a favorite pastime for the elderly. 
At the same time, images of life in our own societies are shifting. 
No one is surprised to see grey-haired people dancing and singing and petting. 
For many of them, life seems to become an almost permanent holiday. 
To be sure, the impression is deceptive. 
Old people who have families are often found in a new role as educators of the young. 
While their sons and daughters go to work, they become the real parents of the next generation. 
Today’s young children often see more of their grandmother than of their mother. 
One may well wonder what this means in terms of social values. 
The impression of a generation on permanent holiday is deceptive in another respect. 
Much public debate is devoted to child poverty and how to relieve it. 
However, there is at least as much old-age poverty. 
The point is that it is less visible. 
Occasionally, newspapers report that an old person has been found dead after days, having suffered a lonely demise from illness or even starvation. 
For the most part, old-age poverty is hidden, often by the victims themselves, who are too proud to talk about their condition. 
This is in part the explanation for the failure of the “Greys,” that is, of political groups catering to the interests of the elderly. 
While such interests do exist, they do not lead older people to close ranks and organize themselves. 
If they are poor or otherwise disadvantaged, they are most likely to regard this as their personal, almost private destiny. 
Like the unemployed, they do not want a political party devoted to their plight. 
Beyond that, the key feature of an aging society is the independence of the elderly. 
Their vote is precisely not an expression of group interest. 
They make up their own minds and contribute to the unpredictability of modern elections. 
In that sense, too, an aging society adds to the responsibilities of the young. 

Pakistan’s War at Home 
SINGAPORE – Last month, after years of indecision, Pakistan’s military launched a full-scale military operation in the North Waziristan Tribal Agency aimed at eliminating terrorist bases and ending the region’s lawlessness. 
In particular, the army wants to clear out foreign fighters who are using the territory as a base for various jihads around the Muslim world. 
But, by triggering yet another refugee crisis, the operation risks spreading the terrorist threat to other parts of Pakistan, including its largest city and commercial center, Karachi. 
Operating from sanctuaries established in the tribal agency, various terrorist groups, in association with organizations elsewhere in the country, have already attacked Pakistan’s four neighbors – Afghanistan, China, India, and Iran. 
Of the region’s foreign fighters, Uzbeks belonging to the Islamic Movement of Uzbekistan have recently become the most visible threat, taking responsibility for the June 8-9 attack on Karachi’s Jinnah International Airport, in which 30 people, including all ten of the militants, were killed. 
In launching the North Waziristan operation, General Raheel Sharif, Pakistan’s new Chief of Army Staff, stated that his forces would draw no distinction between supposedly “good” and “bad” Taliban. 
The former, including the Haqqanis – named after Jalaluddin Haqqani, who led the Islamic resistance against Soviet forces in Afghanistan – had been trained and equipped by the Inter-Services Intelligence (ISI), Pakistan’s main security agency. 
Following the United States’ invasion of Afghanistan in 2001, the Haqqanis created a sanctuary in the North Waziristan Tribal Agency. 
The ISI countenanced this in the hope that the Pashtun group would later act as Pakistan’s proxies in Afghanistan after US combat troops depart at the end of 2014. 
But the Haqqanis, it appears, did not keep to any such bargain, and allowed their Uzbek guests in North Waziristan to launch the Karachi airport attack. 
This conflict, however, will not be easy to contain or manage. 
Pashtuns, the main ethnic group on both sides of the Afghanistan-Pakistan border, are engaged in a bitter struggle in both countries to assert what they consider to be their legitimate political and economic rights. 
Karachi, hundreds of miles to the south, will not escape the fallout from the North Waziristan operation. 
The military, which planned to flush out the main militant hideouts with air strikes, and then send in ground troops, instructed residents to leave the area beforehand. 
Some 350,000 people have already fled, creating a humanitarian crisis on a scale similar to that in 2009 when the military broke the Taliban’s grip on the Swat Valley. 
The movement of so many people is likely to have a profound effect on Pakistan. 
According to a report by the United Nations High Commissioner for Refugees, released just five days after the assault, at the end of 2013 there were 51.2 million forcibly displaced people in the world, six million more than the year before, and the largest number since World War II. 
Pakistan plays host to more refugees than any other country, with 1.5 million registered in the country, in addition to an estimated 3.5 million internally displaced people. 
As has been the case on previous occasions, internally displaced people from North Waziristan are unlikely to remain in the camps set up for them in adjoining districts. 
Many will head for Pakistan’s large cities, particularly Karachi. 
The city’s population of 20 million already includes around six million Pashtuns, more than the number in Kabul and Peshawar combined. 
Indeed, Karachi is sometimes called an “instant city,” having grown 50-fold as a result of several waves of migration since Pakistan gained independence in 1947. 
The first wave, of around two million people, arrived in Karachi when eight million Muslims fled India for Pakistan. 
The second wave included Pashtun construction workers who helped build the new commercial capital. 
The third wave comprised refugees displaced during Afghanistan’s war against Soviet occupation. 
And the fourth began in the early 2000s, following the US invasion of Afghanistan, which also gave rise to Pashtun resistance on both sides of the border, and contributed in turn to Islamic extremism in the tribal areas. 
The current displacement from North Waziristan, therefore, can be seen as part of this fourth wave. 
Even if the army succeeds in clearing out the militants, some of the internally displaced people, bearing battle scars, will end up in Karachi. 
They will be in no mood to lay down their arms if the municipal authorities fail to develop inclusive political institutions that give minority ethnic groups a fair political voice. 
In that case, the long-term consequence of the military’s North Waziristan campaign may well be more violence where it can cause the most damage. 

Pakistan’s Political Renaissance 
LAHORE – Pakistani institutions are evolving rapidly. 
With executive authority increasingly in the hands of elected representatives, rather than dispersed among various competing institutions, the political establishment has been revitalized – and it has taken three important steps toward strengthening democracy and the rule of law. 
Is Pakistan, a country long prone to military coups, finally developing a well-functioning political system? 
On November 27, Pakistani President Mamnoon Hussain – acting on the prime minister’s advice, as the constitution dictates – announced that General Raheel Sharif would succeed General Ashfaq Parvez Kayani as Chief of Army Staff, even though Sharif was not among the military establishment’s favored candidates. 
Unlike Kayani – who has directed the Directorate-General of Military Operations and the Inter-Services Intelligence (Pakistan’s spy agency) – Sharif has not served in any of the positions that typically prepare someone to lead Pakistan’s best-funded and most influential institution. 
This was not Prime Minister Nawaz Sharif’s first act of defiance against the military. 
Just days earlier, he asked the Supreme Court to appoint a three-judge special tribunal to investigate charges of treason against Pakistan’s former president, General Pervez Musharraf, for imposing emergency military rule and suspending the constitution in November 2007. 
The decision, which Musharraf claimed was intended to stabilize the country and stem the tide of Islamist extremism, facilitated the removal of dozens of senior judges from the Supreme Court and the provincial high courts – including Chief Justice Iftikhar Muhammad Chaudhry, Pakistan’s highest-ranking judge. 
Chaudhry’s suspension the previous March, following his refusal to bow to government pressure to resign, had incited relentless protests by Pakistan’s legal community and made him a symbol of the people’s desire for a fairer, more independent judicial system. 
In a sense, this movement, which contributed to Musharraf’s electoral defeat the following February and the return of democracy to Pakistan, prefigured the 2010-2011 revolutions in Tunisia and Egypt that sparked the Arab Spring. 
Musharraf will be tried under Article Six of Pakistan’s constitution, according to which “any person who abrogates or subverts or suspends or holds in abeyance…the Constitution by use of force or show of force or by any other unconstitutional means shall be guilty of high treason.” 
Parliament has defined high treason as a capital offense. 
By appointing a special tribunal to try Musharraf, the Sharif government is sending a strong signal to the military – particularly its senior commanders – that they are not above the law. 
This message is especially important now, given doubts about the government’s resolve stemming from its decision last June to drop high-treason charges against Musharraf for leading, while serving as Chief of Army Staff, the 1999 coup against the elected government, headed by Sharif himself. 
The Pakistani government’s third move to tame the military was the announcement that Justice Tassaduq Hussain Jillani, the Supreme Court’s second most senior judge, would succeed Chaudhry, who was reinstated in 2009, after his mandatory retirement this year. 
(Jillani will serve for only seven months before he, too, retires.) 
By establishing the seniority rule for the most important Supreme Court appointment, Sharif has depoliticized the process. 
These three moves promise, at long last, to establish civilian control over the military and ensure judicial independence. 
This would put Pakistan on sounder political footing than several other large Muslim countries, which are currently engaged in similar – but far less successful – efforts to institute more accountable governance. 
For example, in Bangladesh, the executive – namely, Prime Minister Sheikh Hasina and her Awami League government – is attempting to monopolize political power. 
The judiciary already does the executive’s bidding; if current plans succeed, the ruling party will soon dominate the legislature as well. 
Although the Bangladeshi military is watching events unfold with some apprehension, it lacks the will to install a caretaker government, as it did in 2007, when it brought peace and stability to the country by establishing a nonpartisan technocratic administration. 
Unfortunately, unlike Sharif’s actions in Pakistan, this effort did not spur the development of a more stable political order. 
In Egypt, supporters of the democratically elected President Mohamed Morsi of the Muslim Brotherhood are still battling the army and security forces, which deposed him in July. 
With the liberal opposition apparently unable to create a political organization capable of challenging the Brotherhood within a recognized framework – and, indeed, largely supporting the military coup – Egypt’s fate is increasingly being decided on the street. 
Even in Turkey, where the rule of law is relatively strong and the constitution well established, the opposition has failed to organize a credible political party with broad public support. 
Thanks to the efforts of Sharif’s government, Pakistan now has reasonably well-developed political parties, which compete in regularly scheduled elections; an autonomous judiciary capable of defending the constitution; and a military that appears to have accepted civilian control. 
After nearly seven decades of tumult, Pakistan may soon serve as a model for other large Muslim countries. 

Shaky Social Contracts 
LONDON – “Enrich yourselves,” China’s Deng Xiaoping told his fellow countrymen when he started dismantling Mao Zedong’s failed socialist model. 
In fact, elites everywhere have always lived by this injunction, and ordinary people have not minded very much, provided that the elites fulfill their part of the bargain: protect the country against its enemies and improve living conditions. 
It is this implied social contract that is now endangered by economic collapse. 
Of course, the terms of the contract vary with place and time. 
In nineteenth-century Europe, the rich were expected to be frugal. 
Conspicuous consumption was eschewed. The rich were supposed to save much of their income, as saving was both a fund for investment and a moral virtue. 
And, in the days before the welfare state, the rich were also expected to be philanthropists. 
In the opportunity culture of the United States, by contrast, conspicuous consumption was more tolerated. 
High spending was a mark of success: what Americans demanded of their rich was conspicuous enterprise. 
Societies have also differed in how wealthy they allow their elites to become, and in their tolerance of the means by which wealth is acquired and used. 
One dividing line is between societies that tolerate self-enrichment through politics, and those that demand that the two spheres be kept separate. 
In Western countries, politicians and civil servants are expected to be relatively poor. 
In most of the rest of the world, a political career is regarded as a quasi-legitimate road to wealth. 
But the broad conclusion remains: wealth is conditional on services. 
When the services fail, the position of the wealthy is threatened. 
In the current crisis, popular anger is – no surprise – directed against bankers. 
Their speculative frenzies ruined shareholders, customers, and the economy. 
Anger has come to focus on banking executives’ huge compensation packages, composed largely of bonuses. 
Rewarding success is acceptable; rewarding failure is not. 
Governments face a dilemma. Big banks cannot be allowed to fail; but the public expects bankers to be punished. 
Few will be ruined or imprisoned. 
But the banking system is sure to be re-regulated, as it was after the Great Crash of 1929-1932, when President Franklin Roosevelt promised to drive the money changers from the temple. 
The global economy’s downturn increases countries’ political risk to varying degrees, depending on the severity of the shock and the nature of the implied social contract. 
Political systems in which power is least controlled, and the abuse of wealth greatest, are most at risk. 
The more corrupt the system of capitalism, the more vulnerable it is to attack. 
The general problem is that all of today’s versions of capitalism are more or less corrupt. 
“Enrich yourselves” is the clarion call of our era; and in that moral blind spot lies a great danger. 
Despite efforts to give it precision, estimating political risk is not an exact science. 
It requires political theory, not econometrics. 
Forecasting models, based on “normal distributions” of risk over short slices of recent time, are notoriously incapable of capturing the real amount of risk in a political system. 
One of the “safest” political systems of recent times was President Suharto’s regime in Indonesia. 
Suharto came to power in 1966, establishing a quasi-military dictatorship and encouraging Indonesians to “enrich themselves.” 
Despite the depredations of his family, enough Indonesians did so over the next 30 years to make his rule seem exceptionally stable – until the East Asian financial crisis of 1997-1998 sent the Indonesian economy into a tailspin, triggering violent riots that forced Suharto out. 
Similarly, few regimes seemed more stable than that of the Shah of Iran, another long-term ruler, who, having bankrupted his country, was forced to flee the fury of a mob in 1979. 
The lesson is clear. 
Autocracies, which are much praised for their decisiveness, and for guaranteeing “law and order,” are paper tigers. 
They appear immovable until the moment they are evicted by popular anger. 
In face of economic failure or military defeat, their emperors turn out to be naked. 
In such situations, the great advantage of democracies is that they allow a change of rulers without a change of regime. 
Failure discredits only the party or coalition in power, not the entire political system. 
Popular anger is channeled to the ballot box. 
In such countries, there may be “New Deals,” but no revolutions. 
In estimating political risk today, analysts must pay particular attention to the character of the political system. 
Does it allow for an orderly transition? 
Is it competitive enough to prevent discredited leaders from clinging to power? 
Analysts also must pay attention to the nature of the implied social contract. 
Broadly speaking, the weakest contracts are those that allow wealth and power to be concentrated in the same few hands, while the strongest are built on significant dispersal of both. 
Deepening economic recession is bound to catalyze political change. 
The Western democracies will survive with only modest changes. 
But strongmen who rely on the secret police and a controlled media to maintain their rule will be quaking in their shoes. 
Even Venezuela’s Hugo Chávez, who built his power on populist anti-Americanism, must be praying for the success of US President Barack Obama’s stimulus package to lift his falling oil revenues. 
The big countries with the highest political risk are Russia and China. 
The legitimacy of their autocratic systems is almost entirely dependent on their success in delivering rapid economic growth. 
When growth falters, or goes into reverse, there is no one to blame but “the system.” 
Igor Yurgens, one of Russia’s most creative political analysts, has been quick to draw the moral: “the social contract consisted of limiting civil rights in exchange for economic well-being. 
At the current moment, economic well-being is shrinking. 
Correspondingly, civil rights should expand. 
It’s just simple logic.” 
The rulers in Moscow and Beijing would do well to heed this warning. 

The Changing Geopolitics of Energy 
TOKYO – In 2008, when the United States’ National Intelligence Council (NIC) published its volume Global Trends 2025, a key prediction was tighter energy competition. 
Chinese demand was growing, and non-OPEC sources like the North Sea were being depleted. 
After two decades of low and relatively stable prices, oil prices had soared to more than $100 per barrel in 2006. 
Many experts spoke of “peak oil” – the idea that reserves had “topped off” – and anticipated that production would become concentrated in the low-cost but unstable Middle East, where even Saudi Arabia was thought to be fully explored, with no more giant fields likely to be found. 
The US was regarded as increasingly dependent on energy imports, and this, together with rising prices, was seen as a major limit on American geopolitical influence. 
Power had shifted to the producers. 
The NIC analysts did not neglect the possibility of a technological surprise, but they focused on the wrong technology. 
Emphasizing the potential of renewables such as solar, wind, and hydro, they missed the main act. 
The real technological breakthrough was the shale-energy revolution. 
While horizontal drilling and hydraulic fracturing are not new, their pioneering application to shale rock was. 
By 2015, more than half of all the natural gas produced in the US came from shale. 
The shale boom has propelled the US from being an energy importer to an energy exporter. 
The US Energy Department estimates that the country has 25 trillion cubic meters of technically recoverable shale gas, which, when combined with other oil and gas resources, could last for two centuries. 
The International Energy Agency now expects North America to be self-sufficient in energy in the 2020s. 
Facilities built to receive liquefied natural gas (LNG) imports have been converted to process exports. 
World markets have also been transformed. 
Previously, gas markets were geographically restricted by dependence on pipelines. 
That gave market power to Russia, which used it to exercise political and economic leverage over its European neighbors. 
LNG has now added a degree of flexibility to gas markets and reduced Russian leverage. 
In 2005, only 15 countries imported LNG; today, that number has tripled. 
Moreover, the smaller scale of shale wells makes them much more responsive to fluctuations in market prices. 
It is difficult to turn on and off the billion-dollar multiyear investments in traditional oil and gas fields; but shale wells are smaller, cheaper, and easier to start and stop as prices change. 
This means that the US has become the so-called swing producer capable of balancing supply and demand in global hydrocarbon markets. 
As Harvard’s Meghan O’Sullivan points out in her smart new book Windfall, the shale revolution has a number of implications for US foreign policy. 
She argues that the new energy abundance increases US power. 
Shale-energy production boosts the economy and creates more jobs. 
Reducing imports helps the balance of payments. 
New tax revenues ease government budgets. 
Cheaper power strengthens international competitiveness, particularly for energy-intensive industries like petrochemicals, aluminum, steel, and others. 
There are also domestic political effects. 
One is psychological. 
For some time, many people in the US and abroad have bought into the myth of American decline. 
Increasing dependence on energy imports was often cited as evidence. 
The shale revolution has changed that, demonstrating the combination of entrepreneurship, property rights, and capital markets that constitute the country’s underlying strength. 
In that sense, the shale revolution has also enhanced American soft power. 
Skeptics have argued that lower dependence on energy imports will cause the US to disengage from the Middle East. 
But this misreads the economics of energy. 
A major disruption such as a war or terrorist attack that stopped the flow of oil and gas through the Strait of Hormuz would drive prices to very high levels in America and among our allies in Europe and Japan. 
Besides, the US has many interests other than oil in the region, including nonproliferation of nuclear weapons, protection of Israel, human rights, and counterterrorism. 
The US may be cautious about overextending itself in the Middle East, but that reflects its experience with the costly invasion of Iraq and the general turmoil of the Arab Spring revolutions, rather than illusions that shale produces political “energy independence.” 
America’s ability to use oil sanctions to force Iran to negotiate an end to its nuclear-weapons program depended not only on Saudi willingness to make up Iran’s exports of a million barrels per day, but also on the general expectations that the shale revolution created. 
Other benefits of shale energy for US foreign policy include the diminishing ability of countries like Venezuela to use oil to purchase votes at the United Nations and in regional organizations of small Caribbean states, and Russia’s reduced ability to coerce its neighbors by threatening to cut off gas supplies. 
In short, there has been a tectonic shift in the geopolitics of energy. 
Although no one can know the future of energy prices, modest world prices may last for some time. 
Both technology and politics could of course upend this prediction. 
Technological advances could increase supply and reduce prices; politics is more likely to disrupt supply and cause prices to rise. 
But the disruptions are unlikely to be sharp or long-lasting in the wake of the shale revolution, which is what makes it a geopolitical revolution as well. 

Shaping the Post-Carbon Economy 
NEW YORK – At the end of this year, representatives of the 170 nations that are signatories to the United Nations Framework Convention on Climate Change will meet in Copenhagen for what they hope will be final negotiations on a new international response to global warming and climate change. 
If successful, the centerpiece of their efforts would be a global deal on how to reduce harmful greenhouse gases, by how much, and when. 
The agreement would go into effect in 2012, when the current Kyoto accord expires. 
Research at McKinsey into the effectiveness and cost of more than 200 mechanisms for reducing carbon emissions – from greater car efficiency to nuclear power, improved insulation in buildings, and better forest management – suggests that only concerted global action can ensure levels that the scientific community says is necessary to avoid the disastrous consequences of climate change. 
Our detailed analysis, conducted in 21 countries and regions over two years, suggests that every region and sector must play its part. 
If this isn’t daunting enough, consider this: if we delay taking action by even a few years, we probably won’t hit the required targets, even with a temporary decline in carbon emissions associated with reduced economic activity in the near term. 
The good news is that we can achieve what’s needed, we can afford to do it, and we can do it all without curtailing growth. 
The latest version of the McKinsey global carbon abatement cost curve identifies opportunities to stabilize emissions by 2030 at 1990 levels, or 50% below the “business as usual” trend line. 
Making these reductions would cost about €200-350 billion annually by 2030 – less than 1% of projected global GDP in 2030. 
The total up-front financing would be €530 billion by 2020 – less than the cost of the current US financial-sector bailout plan – and €810 billion by 2030, which is well within range of what financial markets can handle. 
Developing and developed nations alike must invest in reducing emissions. 
But the lion’s share of these investments result in lower energy usage, and thus reduced energy costs. 
Capturing the energy efficiency prize is critical both to climate and energy security – and it relies on a well-known set of policy signals and a proven set of technologies. 
None of this lowers growth or increases energy costs, and some of it potentially stimulates growth. 
Similarly, a global change to a new, more distributed power sector – with more renewable energy and a smarter grid infrastructure – could have growth benefits. 
Making all this happen requires moving toward a new model for ensuring that we are more productive globally with core resources that we have long taken for granted. 
To the extent that we invest across sectors and regions to improve our carbon productivity (GDP per unit of carbon emitted), we will weaken the pollution constrain on global growth. 
Improving carbon productivity requires improving land productivity. 
Forests and plants remove carbon from the atmosphere, potentially accounting for more than 40% of carbon abatement opportunities between now and 2020. 
Without carefully managing tropical forests – 90% of which grow in developing nations that have pressure to clear the land for other economic purposes – we cannot meet our global targets for reduced carbon emissions. 
Helping soybean farmers, palm-oil planters, and cattle ranchers from Brazil to Southeast Asia to use land more productively, thereby reducing pressure on tropical forests, must be an integral part of the solution. 
If increased agricultural productivity is necessary, so, too, is improved water management. 
Given that agriculture uses 70% of the world’s reliable water supply (and the potential impact of climate change on water reliability), a comprehensive approach to climate security will need to embrace better water policies, better integrated land management, and agricultural market reform. 
Our research suggests that annual growth in water productivity must increase from 0.3% to more than 3% in the coming decades. 
In other words, resources and policies are inter-dependent. 
Moving to a model in which carbon emission levels and growth move in opposite directions – what we call a post-carbon economy – may start with agreements in Copenhagen to reduce carbon in the air. 
But it can succeed only if we embark now on an agenda to boost natural resource productivity more broadly and on a more integrated basis. 
What this suggests is that we need new global rules of the road for total resource productivity. 
If we are to achieve the necessary levels of energy, land, water, and carbon productivity, we must develop an integrated global framework that recognizes resource inter-dependencies. 
A developed nation cannot meet carbon emission targets by outsourcing its dirtiest production to a developing country, and a developing country cannot meet its targets by chopping down forests to build the plants or expand low-productivity agriculture. 
To get to the post-carbon economy, countries will have to recognize their inter-dependence, strengthen global coordination of resource policies, and adapt to new, more contingent models of sovereignty. 

 

Sharing the Burden of Hard Times 
PRINCETON – The economic gloom that shrouded the world in 2008 has led many to ask whether the apparent prosperity that preceded it was real. 
We know that in countries as diverse as China, India, Russia, and the United States, the number of billionaires soared. 
More generally, the top 1% of the population prospered. 
But the gap between the rich and poor widened, and at least in the US, the incomes of the poor and the middle class stagnated.ampnbsp; 
No wonder that many are now skeptical about taxpayer-funded schemes to bail out banks, insurance companies, and even automakers. 
Is this just another case of politicians making sure that, even in hard times, the wealthy elite that supports them will once again do better than everyone else? 
But, in assessing the benefits achieved by economic growth, it is a mistake to focus on whether the income gap between rich and poor widened or narrowed. 
If a person’s annual income increased from $300 to $500 that may be enough to lift him out of extreme poverty, and will make a huge difference to his welfare and that of his family. If, at the same time, the income of a person earning a million dollars increased by $100,000, the income gap will have widened. 
But since $100,000 doesn’t make that much difference to the welfare of a person earning a million dollars, the gap in welfare will have narrowed. 
I believe that we shouldn’t really be focusing on inequality anyway. 
We should give priority to reducing unnecessary suffering. 
So the right question to ask is this: did the economic growth of recent years make the poor better off? 
If we take a worldwide perspective, it clearly did. 
In 1981, about four in every ten people on the planet was living in the degrading condition that the World Bank terms extreme poverty. 
Now, it is less than one in four. 
Even in absolute terms, despite population growth, the number of extremely poor people fell during that period, from 1.9 billion to 1.4 billion. 
There have been especially dramatic reductions in poverty in countries like China and India. 
Does it matter so much that a few Chinese and Indians have become billionaires, if in the process hundreds of millions escaped extreme poverty? 
But the prospects for a continuing reduction in world poverty in 2009 are not good. 
If the recession cuts deep in the developed nations, many workers will lose their jobs. 
Families that can no longer keep up with their mortgage payments will lose their homes. 
All of this causes real suffering. 
People become accustomed to a level of comfort, and hope to move up to something even better. 
When those expectations are disappointed, it is hard to accept having less than one had in the past. 
There may be a sense of shame, and a loss of self-esteem, at being poor, even in hard times. 
Nevertheless, the poor in industrialized nations will remain, in most cases, poor only by comparison with those who are better off. 
In the US, 97% of those classified by the Census Bureau as poor own a color TV and a car. 
When Americans lose their jobs, even if they have no assets, they still have some access to health care and food stamps.ampnbsp; 
The situation of the 1.4 billion people living in extreme poverty is different. 
They are poor by an absolute standard based on the most basic human needs. 
If the recession reduces demand for imports from developing nations, many people living in those countries will lose their jobs. 
They will have no social security to fall back on. 
They will struggle to feed their families. 
When a poor family’s income drops, one of the few expenses on which it can cut back is the cost of sending the children to school. 
The most basic health care services will usually be beyond their means. 
This will be where the recession hits hardest. 
Some will see globalization as the cause of this hardship, for if the poor were not linked to the rich through trade, they would not be affected by the recession. 
True, but they would also have missed out on the growth that helped so many of them to escape poverty. 
It’s difficult to see self-sufficiency providing an adequate standard of living for the world’s growing population. 
In this dire situation, what will the rich countries do? 
They have, on several occasions, pledged to increase their aid to the poor, and some European countries have started to meet their higher targets. 
But they will be tempted to use the current hard times as a reason for backtracking. 
US President-elect Barack Obama said, prior to his election, that he would double America’s foreign aid, and make it more effective in helping the poor. 
But, as the recession hit, and the cost of the bailout became apparent, he indicated that he might have to postpone implementing this commitment. 
It is understandable why, in the midst of an election campaign, a candidate would say that, for, even in the best of times, increasing foreign aid wins few votes in America. 
Doubling US foreign aid would, however, still leave it below $50 billion a year – a modest sum compared to the $685 billion that the US spent on defense in 2008. 
I doubt that any $50 billion in the Pentagon’s budget could do more to make the world safer than doubling aid to the world’s poorest people. 
It is not a step that should await the return of prosperity. 


Sharm el-Sheikh Redux 
Driven by a common fear of Islamic fundamentalism, and by a false assumption that it is an illegitimate political force, the Middle East’s so-called “moderates” have once again gathered at the Egyptian seaside resort of Sharm el-Sheikh, the traditional venue for emergency regional summits, to rally “moderates” against “extremists.” 
In the spring of 1996, the so-called “moderates” – Egyptian President Hosni Mubarak, Jordan’s King Hussein, Yasser Arafat, and even some representatives of the Gulf dynasties – convened in Sharm el-Shekh with President Bill Clinton and United Nations Secretary-General Kofi Annan in a desperate bid to block radical Islam’s emergence. 
They were also expected to give an electoral boost to Prime Minister Shimon Peres of Israel who, severely undermined by Hamas’s devastating campaign of suicide terrorism, was on the verge of electoral defeat at the hands of Benjamin Netanyahu. 
But Islamic fundamentalism remained unimpressed. 
Both its jihadist and political identity have, indeed, only gained momentum ever since. 
In October 2000, Sharm el-Sheikh was the scene of another summit, with most of the same actors. 
This time, the call went out for an end to the Palestinian Intifada and for Israelis and Palestinians to reach a final peace agreement. 
Both objectives were endorsed by all the participants; neither was implemented. 
As one of the players at that summit, I understand the reason for the gap between what was agreed by the “moderates” and the harsh realities that have driven the “extremists” forward. 
The only way Arafat could stop the Intifada and stem the advance of Hamas was through an especially generous peace deal from Israel. 
But such a deal became impossible precisely because the Intifada had raised Palestinian expectations to such heights that it became impossible for Israel to meet them. 
Notwithstanding Israeli Prime Minister Ehud Olmert’s commendable gestures at Sharm el-Sheikh in 2007, the summit’s achievements are bound to be short-lived. 
It is unrealistic to believe that transferring to the Palestinians tax revenues that are owed to them, removing a limited number of checkpoints in the occupied West Bank, and even releasing 250 Fatah prisoners “with no blood on their hands” will calm the Palestinian volcano, and thus enhance Palestinian President Mahmoud Abbas’s leadership and Fatah’s edge over Hamas. 
Indeed, all indications are that Hamas might soon boost its popularity by exchanging Israeli corporal Gilad Shalit for even more prisoners, including some “with blood on their hands.” 
This alliance of Middle East moderates comes with a price that neither Israel nor the Bush administration seems ready to pay. 
The Israeli-American strategy of driving a wedge between Gaza and the West Bank while shunning negotiations on a peace settlement that could give Abbas the ultimate tool to undermine Hamas is a policy at war with itself. 
Moreover, no matter how critical the moderate Arabs may be of the Hamas coup in Gaza, the Arab leaders cannot afford the domestic fallout of shunning Hamas. 
Indeed, Mubarak has already called for a resumption of inter-Palestinian dialogue, which might lead to yet another attempt at a national unity government, the same kind of government with which both Israel and the US refused to do business. 
Abbas is being asked to play for high stakes – defeating Hamas and with it the cause of Islamic fundamentalism in the region – with inadequate resources. 
And, by mortgaging his entire Middle East policy to the concept of an “ideological confrontation” against the forces of evil, Bush is putting his entire strategy on the weary shoulders of a defeated Palestinian president without really providing him with the necessary tools. 
Worse still, by ladling money and arms to Abbas without offering him a political horizon that would deepen his support among ordinary Palestinians, while at the same time imprisoning all Hamas leaders in the West Bank, Israel and the United States are condemning Abbas to seeming a collaborator in the eyes of his people. 
Of course the Arabs are not free of blame either. 
No Israeli government will risk making a far-reaching peace offer to a Palestinian Authority whose rule is characterized by abdication and anarchy. 
Hamas’s emergence as a formidable military force also reflects the Egyptians’ inept performance in preventing the smuggling of weapons into Gaza. 
Taming Hamas is in Egypt’s interest, but it refuses to pay the price of a direct confrontation because that might lead Egyptian forces to be perceived as Israel’s protectors. 
Indeed, Mubarak’s strategic vision is desperately narrow. 
His role as a broker of sorts is mostly aimed at endearing himself to the US, where Congress is highly critical of his human rights record. 
On his home front, he needs to cultivate, at the lowest possible price, an image as a champion of the Palestinian cause. 
The latest Sharm el-Sheikh summit is also a message to the Saudis: Cairo, not Mecca, is the center of Middle East politics. 
Calling for Israeli concessions is perfectly legitimate, even necessary. 
But the credibility of such demands is undermined by the Arabs’ inability to alleviate Palestinian misery and, no less importantly, by their failure to help the Palestinians face the hard choices they will need to make if an orderly Palestinian state is ever to emerge. 

Sharon’s Triumph 
Israeli Prime Minister Ariel Sharon’s disabling stroke has thrown Israeli politics into turmoil yet again. 
Or so it seems. 
Sharon was considered a certain victor in the planned March elections, for which he had organized his own Kadima (Forward) party, attracting leading figures from the Labor party on the left and the Likud party on the right. 
But will his departure from public life really be as destabilizing as many observers suggest? 
To be sure, it was Sharon’s personal appeal that made Kadima so popular. 
His conservative and nationalist credentials sustained his popularity on the right, while his new security strategy – including full withdrawal from the Gaza Strip – attracted supporters from the left. 
In short, Sharon was the ideal center candidate: a leader who reconciled a dovish approach with a hawkish outlook. 
Yet Sharon’s untimely departure has by no means reversed the fundamental political and strategic shifts that he initiated. 
In the short term, while Kadima will get fewer votes without Sharon at the helm, some voters will be swayed by sympathy for the stricken leader. 
Indeed, polls show that the party could still finish first. 
Moreover, Kadima still has an impressive triumvirate at the top of its list. 
Acting Prime Minister Ehud Olmert, a veteran political maverick and former mayor of Jerusalem, inspired several of Sharon’s initiatives. 
Shimon Peres, a former prime minister and Labor party leader, appeals to many voters from the left. 
Former chief of staff and defense minister Shaul Mufaz provides the security expertise. 
Their differences will be harder to patch up without Sharon, but they have closed ranks and could well lead Kadima to victory. 
At the same time, the main alternative candidates on the left and right have positioned themselves too far toward the extremes to recapture the center easily. 
On the left is Amir Peretz of the Labor party, a populist and trade-union federation leader with little national leadership experience and even less familiarity with security matters. 
Many Israelis distrust his ability to lead the country. 
It had generally been expected that Labor would come in second in the election and form a coalition government with Kadima. 
Without Sharon, Peretz might have more leverage in the partnership, particularly since Olmert has been more willing than Sharon to embrace policy changes perceived as dovish. 
A Kadima-Labor coalition would have its problems, but it would still form the basis of a solid government. 
On the right is Bibi Netanyahu, a former prime minister and leader of Sharon’s old Likud party. 
A year ago, Netanyahu seemed certain to succeed Sharon. But his opposition to the Gaza Strip withdrawal, coupled with his strong criticism of Sharon, cost him his position as heir apparent. 
To gain control of the rump Likud, Netanyahu had to move sharply to the right. 
In the longer term, Netanyahu may again rise to the top in a post-Sharon era, if he is able to regain the center. 
But in the upcoming elections, he is likely to be left out in the cold. 
More importantly, continuity on the political front is likely to extend to strategy and policy. 
Sharon embodied a new national consensus, accepted by at least two-thirds of the population, that reflects deep-seated changes in the country and its situation. 
From the left comes the idea that, in return for full peace, Israel is ready to withdraw from most of the territory captured in 1967 and accept a Palestinian state. 
From the right, the consensus acknowledges that currently there is no Palestinian partner for real peace. 
The left’s advocacy of territorial withdrawal gained currency as a result of a general recognition that holding onto land, especially Palestinian-populated areas, is not in the national interest. 
Israel does not intend to claim this land in the future, never derived any economic benefit from it, and now regards staying there as a security problem rather than an asset. 
With the Cold War over, the USSR gone, and the Arab world weakened, a conventional war with the armies of Arab states is no longer likely, rendering obsolete the strategic considerations underlying Israel’s occupation of this territory. 
At the same time, though, there is no hesitation about waging a tough defensive war against Palestinian terrorism. 
Israel will complete its defensive security fence and strike back against terrorists and those who fire missiles at Israeli civilian targets. 
No one believes that Palestinian leader Abu Mazin can or will do anything to stop such attacks. 
Indeed, it is understood on both the left and the right that he and his colleagues will not live up to any commitment they make. 
The Palestinian movement is falling apart, the radicals are gaining control, and nobody is going to make peace. 
The bad news, then, is that the conflict will go on for decades, owing to intransigence and growing chaos on the Palestinian side. 
The good news is that Israel can defend itself with relatively low casualties, its economy is improving, and tourism is recovering. 
As Palestinian extremism and anarchy become clearer, Israel’s stance may gain greater international sympathy, strengthening prospects for better relations with the Arab world and the West. 
It was Sharon who sensed a sea change in Israeli sentiment and acted upon it. 
But Sharon was the messenger, not the message. 
The era of Israeli pragmatism that he opened will not end with his departure. 

Shell's Corrupt Shell Game in Nigeria 
Under fire from shareholders, and facing investigations in the United States, the United Kingdom, and the Netherlands for misrepresenting its oil reserves, Royal Dutch/Shell is trying to shift the blame to Nigeria. 
Confidential company documents made available in late March suggest that Shell withheld vital information on the extent of the downward revaluation of its Nigerian reserves - by 1.5 billion barrels (60% of the country's total reserves) - because it wanted to strengthen Nigeria's hand in negotiating with OPEC to increase the country's production quota. 
Nigeria presently produces two million barrels per day. 
OPEC calculates member countries' quotas based on proven reserves. 
Nigeria, grappling with a worsening economic crisis, wants to double daily production to four million barrels, to reflect new discoveries that the Nigerian National Petroleum Corporation (NNPC) claimed in December 2003 had increased reserves to 34 billion barrels. 
Officials also argue that Nigeria's large population relative to other OPEC members, and the urgent need to earn foreign exchange to invest in infrastructure and social services, necessitates preferential treatment. 
Shell claimed it did not want to jeopardize these negotiations by making public the true state of its Nigerian reserves. 
This image of Shell as a sensitive, caring company mocks the evidence. 
At the heart of Shell's oil reserves scandal is the desire for profit and the elaborate mechanisms that it nurtured in collaboration with corrupt military dictators over the years to ensure that its operations yield enormous dividends at the expense of ordinary Nigerians. 
Shortly after General Ibrahim Babangida seized power in a coup in 1985, the military government signed a "Memorandum of Understanding" with Shell and other oil companies. 
The Memorandum, revised in 1991, entitled Shell to a guaranteed profit of between $2 and $2.50 per barrel produced as long as oil prices remain in the range of $12.50 to $23.50, and provided that it invests a minimum of $1.50 on every barrel it produces. 
As a further sweetener, Shell was entitled to a bonus of ten to fifty cents per barrel for every operating year in which it discovers new oil fields with reserves greater than the volume of the oil it extracts. 
Shell has been laughing all the way to the bank ever since. 
On average, world oil prices have not fallen below the stipulated $12.50 baseline since 1986. Moreover, Shell also operates a joint venture partnership between the NNPC, the French oil company Elf, and Agip of Italy. 
The Joint Operating Agreement guiding the venture, in which the Nigerian government has 55% equity, stipulates that while all parties share in the cost of operations, Shell prepares the annual work programs and budget. 
Control over operating costs is the key to understanding of Shell's big profits in Nigeria. 
The NNPC's executives admit that proper monitoring of the company's operating costs consistently eludes them and that what keeps Shell and the other western oil companies in business is not the theoretical margin, but the returns they build into their costs. 
Because the operational budget is set by Shell, and because the NNPC is plagued by corruption and lacks the expertise to verify production claims, the operating company has a powerful incentive to inflate costs. 
Similarly, new reserves "discovered" by Shell to enable it to press a claim for the Reserves Addition Bonus was a key source of company profits until 1999, when a new government reviewed the Memorandum of Understanding. 
Production costs have been a subject of bitter dispute between Shell and Nigeria's government since the early 1990's. 
Alarmed that the production costs put forward by Shell were always increasing, in 1996 Nigeria's petroleum minister promised to establish a monitoring unit to scrutinize all of Shell's invoices and claims. 
Nothing came of this. 
Last February, the newly elected Senate attempted to block $1.6 billion from going to Shell and two other companies for production expenses until they provided adequate documents to support their claims. 
This effort was brushed aside by President Olusegun Obasanjo and NNPC officials. 
The latest scandal is unlikely to elicit vigorous responses from Nigeria's government, even though it has been paying millions of dollars for new oil finds that exist only in Shell's imagination. 
Nigerian officials are anxious to swat away charges that Shell padded its figures for reserves in Nigeria to take advantage of lax oversight and regulatory mechanisms and reap millions of dollars in bonus payments. 
Indeed, Shell insists that Nigeria owes it $385 million more. 
Shell has powerful friends in Nigeria's government. 
In the mid 1990's, the company worked closely with the late dictator, General Sani Abacha, to suppress the Movement for the Survival of Ogoni People, a grassroots environmental and minority rights organization led by Ken Saro-Wiwa, who was later executed by the regime. 
Human Rights Watch investigators linked Shell officials to gross human rights violations committed by government troops at the time. 
This slick alliance of corrupt state officials and self-serving company executives, anxious to keep the petrodollars flowing, is still in place. 
Facing the sharp end of the stick are the seven million Niger delta peasants, who bear the brunt of the violence, environmental devastation, and social anarchy that Big Oil produces wherever it sets up its drilling rigs. 

 

The Return of Fiscal Policy 
NEW YORK – Since the global financial crisis of 2008, monetary policy has borne much of the burden of sustaining aggregate demand, boosting growth, and preventing deflation in developed economies. 
Fiscal policy, for its part, was constrained by large budget deficits and rising stocks of public debt, with many countries even implementing austerity to ensure debt sustainability. 
Eight years later, it is time to pass the baton. 
As the only game in town when it came to economic stimulus, central banks were driven to adopt increasingly unconventional monetary policies. 
They began by cutting interest rates to zero, and later introduced forward guidance, committing to keep policy rates at zero for a protracted period. 
In rapid succession, advanced-country central banks also launched quantitative easing (QE), purchasing massive volumes of long-term government securities to reduce their yields. 
They also initiated credit easing, or purchases of private assets to reduce the costs of private-sector borrowing. 
Most recently, some monetary authorities – including the European Central Bank, the Bank of Japan, and several other European central banks – have taken interest rates negative. 
These policies boosted asset prices and economic growth, while preventing deflation. But they are reaching their limits. 
In fact, negative policy rates may hurt bank profitability and thus banks’ willingness to extend credit. 
As for QE, central banks may simply run out of government bonds to buy. 
Yet most economies are far from where they need to be. 
If below-trend growth continues, monetary policy may well lack the tools to address it, particularly if tail risks – economic, financial, political, or geopolitical – also undermine recovery. 
If banks are driven, for any reason, to reduce lending to the private sector, monetary policy may become less effective, ineffective, or even counter-productive. 
In such a context, fiscal policy would be the only effective macroeconomic-policy tool left, and thus would have to assume much more responsibility for countering recessionary pressures. 
But there is no need to wait until central banks have run out of ammunition. 
We should begin activating fiscal policy now, for several reasons. 
For starters, thanks to painful austerity, deficits and debts have fallen, meaning that most advanced economies now have some fiscal space to boost demand. 
Moreover, central banks’ near-zero policy rates and effective monetization of debt by way of QE would enhance the impact of fiscal policy on aggregate demand. 
And long-term government bond yields are at an historic low, enabling governments to spend more and/or reduce taxes while financing the deficit cheaply. 
Finally, most advanced economies need to repair or replace crumbling infrastructure, a form of investment with higher returns than government bonds, especially today, when bond yields are extremely low. 
Public infrastructure not only increases aggregate demand; it also increases aggregate supply, as it supports private-sector productivity and efficiency. 
The good news is that the advanced economies of the G7 seem poised to begin – or perhaps have already begun – to rely more on fiscal policy to bolster sagging economic growth, even as they maintain the rhetoric of austerity. 
In Canada, Prime Minister Justin Trudeau’s administration has announced a plan to boost public investment. 
And Japanese Prime Minister Shinzo Abe has decided to postpone a risky consumption-tax hike planned for next year, while also announcing supplementary budgets to increase spending and boost the household sector’s purchasing power. 
In the United Kingdom, the new government, led by Prime Minister Theresa May, has dropped the target of eliminating the deficit by the end of the decade. 
In the wake of the Brexit vote, May’s government has designed expansionary fiscal policies aimed at spurring growth and improving economic conditions for cities, regions, and groups left behind in the last decade. 
Even in the eurozone, there is some movement. 
Germany will spend more on refugees, defense, security, and infrastructure, while reducing taxes moderately. 
And, with the European Commission showing more flexibility on targets and ceilings, the rest of the eurozone may also be able to use fiscal policy more effectively. 
If fully implemented, the so-called Juncker Plan, named for European Commission President Jean-Claude Juncker, will boost public investment throughout the European Union. 
As for the United States, there will be some stimulus, regardless of whether Hillary Clinton or Donald Trump wins the presidential election. 
Both candidates favor more infrastructure spending, more military spending, loosening limits on civilian spending, and corporate-tax reform. 
Trump also has a tax-reduction plan that would not be revenue-neutral, and thus would expand the budget deficit (though the effect on demand would likely be small, given the concentration of benefits at the very top of the income distribution). 
The fiscal stimulus that will result from these uncoordinated G7 policies will likely be very modest – at best, 0.5% of GDP of additional stimulus per year for a few years. 
This means that more stimulus, particularly spending on public infrastructure, will probably be warranted. 
Nonetheless, the measures undertaken or contemplated so far already represent a step in the right direction. 

Shifting the Afghan “Great Game” 
Tel Aviv – So President Barack Obama has decided to “stay the course.” 
The obstinate battle cry of the Bush administration in Iraq has now won out in Obama’s planned surge of an additional 30,000 troops in Afghanistan. 
A Taliban victory there, the advocates of the surge had warned, would radicalize the entire region and create a domino effect, with Islamic insurgencies unleashed across Central Asia. 
Al Qaeda, inextricably entwined with the Taliban, would also claim victory if America had signaled a retreat. 
But victory for the forces of jihad is not the only possible scenario. 
Al Qaeda, for example, has now become a franchised global concern whose capabilities no longer depend on its Afghan base. 
In fact, disconnected from the heroin trade, which has turned the Taliban into a colossal economic concern, Al Qaeda is in clear financial decline. 
Nor is it clear that NATO’s withdrawal would inevitably usher in a Taliban takeover. 
A fragmentation of the country along ethnic lines is a more probable scenario. 
In reality, the question of what to do in Afghanistan concerns the old vocation of the “white man’s burden,” which never seems to die, however costly and duplicitous it might be. 
For, even if the calamities predicted by the prophets of doom are the most likely scenario, why are they a greater threat to the West than they are to regional powers like India, China, Russia, and Iran (for which the Sunni Taliban are a dangerous ideological challenge). 
None of these countries is considering a military solution to the Afghan crisis. 
Pakistan’s macabre association with the Taliban stems mostly from its constant effort to pressure its mortal enemy, India. 
A stable and secular Afghanistan is therefore a vital strategic necessity for India. 
Indeed, India was alone in the non-aligned movement in supporting the Soviet invasion of Afghanistan in the 1980’s, and it also desperately supported the secular Northern Alliance after the Taliban victory of the 1990’s. 
Nor can China’s interest in the stability of both Afghanistan and Pakistan be underestimated. 
Afghanistan, along with Pakistan and Iran, is part of a vital western security zone for China. 
It is a corridor through which it can secure its interests in Pakistan, a traditional ally, and ensure its access to vital natural resources in the region. 
Moreover, China’s Muslim-majority province of Xinjiang, bordering on Afghanistan, can be dangerously affected by a Taliban takeover in Kabul or by the dismemberment of the country. 
Russia, of course, has no appetite to repeat the Soviet Union’s calamitous military adventure in Afghanistan. 
But this does not mean that a Taliban victory or an Afghan crisis that spirals out of control is no threat to the Kremlin’s standing in Central Asia, a region it considers its strategic backyard. 
The Russians are especially concerned by the regularly involvement of jihadis from Chechnya, Dagestan, and Central Asia with Taliban fighters. 
So, while the US gets to play the “Ugly American” once again, the regional powers promote their interests in that war-torn country with a smiling face and away from the battlefield. 
America’s difficulties in Afghanistan – and the serious problems it faces in harnessing Pakistan’s government to a more robust fight against the Taliban both at home and in Afghanistan – provide an opportunity for these powers to attempt to shift the dynamics of the “Great Game” to their benefit. 
Soft power is their means. 
Afghanistan is the recipient of the largest assistance program that India has for any country in the world. 
That program focuses on the Afghanization of the development process, as well as on allowing the security forces to operate autonomously. 
As in Africa, where it is consistently replacing Western influence with its massive financial firepower, China’s strategy in Afghanistan is mostly focused on business development – with a stabilizing effect on the country that should not be underestimated. 
China’s development of the Ainak Copper Mine is the largest single foreign direct investment in Afghanistan’s history. 
China is also engaged in constructing a $500 million electric plant and railway link between Tajikistan and Pakistan. 
Russia’s economic influence in Afghanistan is far less robust, but it is growing. 
While the West is busy fighting the Taliban, the Russians, like the other regional powers, are building roads and electricity stations, and conceiving regional diplomatic solutions to what has become a Vietnam-like quagmire for the West. 
If both war and diplomacy fail, these regional powers believe they will be better positioned than the West to shift the Afghan Great Game in their favor. 
China’s diplomatic recipe for Afghanistan and Pakistan is the right one, and the US should focus on it. 
A settlement over Kashmir is the key to stability in Afghanistan, which would then no longer be a strategic playground for India and Pakistan. 
Instead of persisting in a counterproductive war effort, the US should use its leverage on India and Pakistan to bring them back to peace negotiations. 
Beyond the additional troops, President Obama must strive for an inclusive settlement in Afghanistan. 
This means engaging Afghanistan’s neighboring states to promote a settlement of national reconciliation that includes all the major stakeholders -- the government, the Taliban and the warlords -- in the country. 

Israel’s Last Founding Father 
TEL AVIV – In 2006, a year before Shimon Peres was elected as Israel’s president, Michael Bar-Zohar published the Hebrew edition of his Peres biography. 
It was aptly titled Like a Phoenix: by then, Peres had been active in Israeli politics and public life for more than 60 years. 
Peres’s career had its ups and downs. 
He reached lofty heights and suffered humiliating failures – and went through several incarnations. 
A pillar of Israel’s national security leadership, he subsequently became an ardent peacemaker, always maintaining a love-hate relationship with an Israeli public that consistently declined to elect him Prime Minister but admired him when he did not have or seek real power. 
Undeterred by adversity, Peres kept pushing forward, driven by ambition and a sense of mission, and aided by his talents and creativity. 
He was a self-taught man, a voracious reader, and a prolific writer, a man moved and inspired every few years by a new idea: nanoscience, the human brain, Middle Eastern economic development. 
He was also a visionary and sly politician, who never fully shook off his East European origins. 
When his quest for power and participation in policymaking ended in 2007, he reached the pinnacle of his public career, serving as President until 2014. 
He rehabilitated the institution after succeeding an unworthy predecessor and became popular at home and admired abroad as an informal global Elder on the international stage, a sought-after speaker in international fora, and a symbol of a peace-seeking Israel, in sharp contrast to its pugnacious prime minister, Binyamin Netanyahu. 
Peres’s rich and complex political career passed through five main phases. 
He began as an activist in the Labor Party and its youth movement in the early 1940s. 
By 1946, he was considered senior enough to be sent to Europe as part of the pre-state delegation to the first post-war Zionist Congress. 
He then began to work closely with Israel’s leading founder, David Ben-Gurion, at the Ministry of Defense, mostly in procurement, during Israel’s Independence War, eventually rising to become the ministry’s director-general. 
In that capacity, Peres became the architect of the young state’s defense doctrine. 
Running a sort of parallel foreign ministry, his main achievement was the creation of a close alliance and strong security cooperation – including with respect to nuclear technology – with France. 
In 1959, Peres moved to full-time politics, supporting Ben-Gurion in his conflict with Labor’s old guard. 
Later, he was elected to the Knesset, Israel’s parliament, and became Deputy Minister of Defense and subsequently a full member of the cabinet. 
His career entered a new phase in 1974, when Prime Minister Golda Meir was forced to resign after the October 1973 debacle, in which Anwar Sadat’s Egyptian forces successfully crossed the Suez Canal. 
Peres presented his candidacy, but narrowly lost to Yitzhak Rabin. 
As compensation, Rabin gave Peres the position of defense minister in his government. 
Nonetheless, their contest in 1974 marked the start of 21 years of fierce rivalry, mitigated by cooperation. 
Twice, in 1977, after Rabin was forced to resign, and in 1995-1996, after Rabin was assassinated, Peres succeeded his rival. 
He was also Prime Minister (a very good one) in a national unity government in 1984-1986; but, despite trying for nearly 30 years, he never won his own mandate from Israeli voters for the post he coveted the most. 
In 1979, Peres transformed himself into the leader of Israel’s peace camp, focusing his efforts in the 1980s on Jordan. 
But, though he came tantalizingly close to a peace deal in 1987, when he signed the London Agreement with King Hussein, the agreement was stillborn. 
In 1992, the Labor Party’s rank and file concluded that Peres could not win an election, and that only a centrist like Rabin stood a chance. 
Rabin won and returned, after 15 years, to the premiership. 
This time, he kept the defense portfolio for himself and gave Peres the foreign ministry. 
Rabin was determined to manage the peace process and assigned to Peres a marginal role. 
But Peres was offered by Rabin’s deputy an opportunity to champion a track two negotiation with the PLO in Oslo, and, with Rabin’s consent, took charge of the talks, bringing them to a successful conclusion in August 1993. 
Here was the prime example of competition and collaboration that typified the Rabin-Peres relationship. 
It took Peres’s boldness and creativity to conclude the Oslo Accords; but without Rabin’s credibility and stature as a military man and security hawk, the Israeli public and political establishment would not have accepted it. 
The grudging cooperation between Rabin and Peres continued until November 4, 1995, when Rabin was murdered by a right-wing extremist. 
The assassin could have killed Peres, but decided that targeting Rabin was the more effective way to derail the peace process. 
Succeeding Rabin, Peres tried to negotiate a peace deal with Syria on the heels of Oslo. 
He failed, called an early election, ran a bad campaign, and lost narrowly to Netanyahu in May 1996. 
The next ten years were not a happy period for Peres. 
He lost the leadership of Labor to Ehud Barak, joined Ariel Sharon’s new Kadima party and his government, and was the object of criticism and attacks by the Israeli right, who blamed him for the Oslo Accords. 
Peres began to play down the Nobel Peace Prize that he had shared with Yasser Arafat and Rabin after Oslo. 
The discrepancy between his stature on the international stage and his position in Israeli politics became glaringly apparent during these years – disappearing, however, when he became President in 2007. 
Peres was an experienced, gifted leader, an eloquent speaker, and a source of ideas. 
But perhaps most important, he was an Israeli leader who had a vision and a message. 
This was the secret of his international stature: people expect the leader of Israel, the man from Jerusalem, to be just that type of visionary figure. 
When the country’s political leadership does not meet that expectation, a leader like Peres assumes the role – and gains the glory. 

Shining a Light on Climate Change 
NEW YORK – A light bulb may not be the first thing that springs to mind when thinking about revolutionary technology. 
Yet science and smart policy have the potential in today’s world to transform an ordinary household object into a revolutionary innovation. 
Recently, I visited an ambitious project to promote energy-saving lighting in China. 
By phasing out old-fashioned incandescent light bulbs and introducing a new generation of lighting, China expects to cut national energy consumption by 8%. 
This can have a profound global impact. 
Consider this: lighting accounts for 19% of world energy consumption. 
Scientists say we can reduce that by a third or more merely by changing light bulbs. 
A breakthrough like this highlights one of the many ways in which ordinary people and businesses can reduce energy use and cut greenhouse gases. 
It underscores the essential role that governments can – and must – play in promoting the green economy. 
And it highlights the special responsibility of the government of China to lead in the global fight against climate change. 
China is one of the world’s fast-growing economies. 
Last year it also became the leading emitter of greenhouse gases. 
It is clearly important for the world that China pursues sustainable economic and energy policies – those that reduce both emissions and poverty. 
The key is giving a priority to clean energy, which can create new jobs, spur innovation, and usher in a new era of global prosperity. 
Those who embark on this path early will reap rewards. 
They will be winners in the global marketplace. 
And assuming that prosperity is shared equitably, they will also strengthen stability at home. 
There can be no argument that China today is a global power. 
And with global power comes global responsibilities. 
Without China, there can be no success this year on a new global climate framework. 
But with China, there is an enormous potential for the world to seal a deal in Copenhagen. 
On September 22nd, I will convene a summit of world leaders to look at the challenges — and the opportunities — we face in the run-up to Copenhagen. 
At the G8 summit in Italy this summer, it was agreed to reduce carbon emissions by 80% by 2050. 
I applauded this. 
But I also said that was not enough. 
To be credible, we need to match ambitious long-term goals with ambitious mid-term targets, with clear baselines. 
I will repeat this call in September. 
I will also emphasize that major developing economies have a critical role in the negotiations: Brazil, India, Mexico, South Africa and, perhaps most important of all, China. 
Already China has devoted a sizable portion of its national stimulus spending to renewable energy and green economic growth. 
It has become a world leader in wind and solar technology. 
China’s dynamic renewable energy sector is worth nearly $17 billion and employs close to 1 million workers. 
This is impressive, but it is just a beginning. 
China, for example, has enough wind resources to generate more electricity than it currently uses. 
Imagine the potential. 
Imagine if, thanks to wind and solar, China could wean itself from coal, which accounts for 85% of its carbon emissions. 
And if China were to do it, so could much of the rest of the world. 
In so doing, China can serve as a model not only for developing nations, but for the whole world. 
We must also adapt to those climate impacts that are already wreaking havoc on communities, particularly in the least developed countries. 

The Promise of Abenomics 
TOKYO – Japanese Prime Minister Shinzo Abe’s program for his country’s economic recovery has led to a surge in domestic confidence. 
But to what extent can “Abenomics” claim credit? 
Interestingly, a closer look at Japan’s performance over the past decade suggests little reason for persistent bearish sentiment. 
Indeed, in terms of growth of output per employed worker, Japan has done quite well since the turn of the century. 
With a shrinking labor force, the standard estimate for Japan in 2012 – that is, before Abenomics – had output per employed worker growing by 3.08% year on year. 
That is considerably more robust than in the United States, where output per worker grew by just 0.37% last year, and much stronger than in Germany, where it shrank by 0.25%. 
Nonetheless, as many Japanese rightly sense, Abenomics can only help the country’s recovery. 
Abe is doing what many economists (including me) have been calling for in the US and Europe: a comprehensive program entailing monetary, fiscal, and structural policies. 
Abe likens this approach to holding three arrows – taken alone, each can be bent; taken together, none can. 
The new governor of the Bank of Japan, Haruhiko Kuroda, comes with a wealth of experience gained in the finance ministry, and then as President of the Asian Development Bank. 
During the East Asia crisis of the late 1990’s, he saw firsthand the failure of the conventional wisdom pushed by the US Treasury and the International Monetary Fund. 
Not wedded to central bankers’ obsolete doctrines, he has made a commitment to reverse Japan’s chronic deflation, setting an inflation target of 2%. 
Deflation increases the real (inflation-adjusted) debt burden, as well as the real interest rate. 
Though there is little evidence of the importance of small changes in real interest rates, the effect of even mild deflation on real debt, year after year, can be significant. 
Kuroda’s stance has already weakened the yen’s exchange rate, making Japanese goods more competitive. 
This simply reflects the reality of monetary-policy interdependence: if the US Federal Reserve’s policy of so-called quantitative easing weakens the dollar, others have to respond to prevent undue appreciation of their currencies. 
Someday, we might achieve closer global monetary-policy coordination; for now, however, it made sense for Japan to respond, albeit belatedly, to developments elsewhere. 
Monetary policy would have been more effective in the US had more attention been devoted to credit blockages – for example, many homeowners’ refinancing problems, even at lower interest rates, or small and medium-size enterprises’ lack of access to financing. 
Japan’s monetary policy, one hopes, will focus on such critical issues. 
But Abe has two more arrows in his policy quiver. 
Critics who argue that fiscal stimulus in Japan failed in the past – leading only to squandered investment in useless infrastructure – make two mistakes. 
First, there is the counterfactual case: How would Japan’s economy have performed in the absence of fiscal stimulus? 
Given the magnitude of the contraction in credit supply following the financial crisis of the late 1990’s, it is no surprise that government spending failed to restore growth. 
Matters would have been much worse without the spending; as it was, unemployment never surpassed 5.8%, and, in throes of the global financial crisis, it peaked at 5.5%. 
Second, anyone visiting Japan recognizes the benefits of its infrastructure investments (America could learn a valuable lesson here). 
The real challenge will be in designing the third arrow, what Abe refers to as “growth.” 
This includes policies aimed at restructuring the economy, improving productivity, and increasing labor-force participation, especially by women. 
Some talk about “deregulation” – a word that has rightly fallen into disrepute following the global financial crisis. 
In fact, it would be a mistake for Japan to roll back its environmental regulations, or its health and safety regulations. 
What is needed is the right regulation. 
In some areas, more active government involvement will be needed to ensure more effective competition. 
But many areas in which reform is needed, such as hiring practices, require change in private-sector conventions, not government regulations. 
Abe can only set the tone, not dictate outcomes. 
For example, he has asked firms to increase their workers’ wages, and many firms are planning to provide a larger bonus than usual at the end of the fiscal year in March. 
Government efforts to increase productivity in the service sector probably will be particularly important. 
For example, Japan is in a good position to exploit synergies between an improved health-care sector and its world-class manufacturing capabilities, in the development of medical instrumentation. 
Family policies, together with changes in corporate labor practices, can reinforce changing mores, leading to greater (and more effective) female labor-force participation. 
While Japanese students rank high in international comparisons, a widespread lack of command of English, the lingua franca of international commerce and science, puts Japan at a disadvantage in the global marketplace. 
Further investments in research and education are likely to pay high dividends. 
There is every reason to believe that Japan’s strategy for rejuvenating its economy will succeed: the country benefits from strong institutions, has a well-educated labor force with superb technical skills and design sensibilities, and is located in the world’s most (only?) dynamic region. 
It suffers from less inequality than many advanced industrial countries (though more than Canada and the northern European countries), and it has had a longer-standing commitment to environment preservation. 
If the comprehensive agenda that Abe has laid out is executed well, today’s growing confidence will be vindicated. 
Indeed, Japan could become one of the few rays of light in an otherwise gloomy advanced-country landscape. 

Securing the Rule of Law at Sea 
TOKYO – Japan is in a better position than ever before to play a larger and more proactive role in ensuring peace in Asia and the world. 
We enjoy the explicit and enthusiastic support of our allies and other friendly countries, including every ASEAN member country and the United States, Australia, India, the United Kingdom, and France, among others. 
All of them know that Japan stands for the rule of law – for Asia and for all people. 
We are not alone. 
In most Asia-Pacific countries, economic growth has nurtured freedom of thought and religion, as well as more accountable and responsive political systems. 
Though the pace of such changes varies from country to country, the idea of the rule of law has taken root. 
And that means that the region’s political leaders must ensure respect for international law. 
Nowhere is that need clearer than in the area of international maritime law. 
The Asia-Pacific region has achieved tremendous growth in the span of a single generation. 
Regrettably, a large and relatively disproportionate share of the fruits of that growth is going toward military expansion. 
The sources of instability include not only the threat of weapons of mass destruction, but also – and more immediately – efforts to alter the territorial status quo through force or coercion. 
And those efforts are taking place largely at sea. 
Recently, US President Barack Obama and I mutually reaffirmed our countries’ alliance as the cornerstone of regional peace and security. 
Moreover, the United States and Japan are strengthening trilateral cooperation with like-minded partners to promote regional and global peace and economic prosperity. 
Already, Australian Prime Minister Tony Abbott and I have agreed that we should do exactly that. 
The history of international maritime law is long, stretching back to ancient Greece. 
By Roman times, the seas were open to all, with personal possession and partitioning prohibited. 
Since the dawn of the Age of Exploration, large numbers of people have crossed the seas for myriad reasons, and marine-based commerce has connected the world’s regions. 
Freedom on the high seas became a foundational principle for human prosperity. 
No particular country or group created international maritime law as it now exists. 
It is the product of humankind’s collective wisdom, cultivated over a great many years for the wellbeing of all. 
Today, many benefits for humanity depend on the seas from the Pacific to the Indian Oceans remaining fully open. 
But what, exactly, does that mean? 
If we distill the spirit that we have infused into international law over the ages and reformulate it as three principles, the rule of law at sea becomes a matter of common sense. 
First, states should make and clarify their claims based on international law. 
Second, states should not use force or coercion in trying to realize their claims. 
And, third, states should seek to settle disputes by peaceful means. 
All three of these very simple – almost self-evident – principles must be emphasized, because all governments in Asia and the Pacific must uphold them rigorously. 
Consider Indonesia and the Philippines, countries whose leaders have peacefully reached agreement on the delimitation of their overlapping exclusive economic zones. 
Likewise, my government strongly supports the Philippines’ call for a resolution to the territorial dispute in the South China Sea that is truly consistent with the three principles of international maritime law, just as we support Vietnam’s efforts to resolve conflicting territorial claims through dialogue. 
Rather than attempting to consolidate changes to the status quo by piling one fait accompli upon another, the region’s governments should make a firm pledge to return to the spirit and provisions of the 2002 Declaration on the Conduct of Parties in the South China Sea, to which all parties concerned previously agreed. 
In today’s world, countries should not fear that coercion and threats will replace rules and laws. 
I strongly hope that ASEAN member states and China can swiftly establish a truly effective code of conduct for the South China Sea. 
Japan and China have an agreement that then-Premier Wen Jiabao and I concluded in 2007, during my first term as Prime Minister. 
We made a commitment to create a maritime and air communication mechanism in order to prevent unforeseen incidents between our countries from generating tensions and miscalculation. 
Unfortunately, this commitment has not translated into the implementation of such a mechanism. 
We do not welcome dangerous encounters by fighter aircraft and vessels at sea. 
What Japan and China must exchange are words. 
Should we not meet at the negotiating table, exchange smiles and handshakes, and get down to talking? 
I believe that following through on the 2007 agreement would advance the cause of peace and stability in the entire region. 
But I also know that ensuring long-term security will require many more agreements, each one a crucial strand in a region-wide web of freedom and prosperity. 

Military Transparency and Asian Security 
TOKYO – We have all heard the saying, “Sunshine is the best disinfectant.” 
That is particularly true where Asian security is concerned. 
Indeed, I believe that a framework under which Asian governments publicly disclose their military budgets needs to be established if we are to build trust and avoid a regional arms race. 
More broadly, keeping military expansion in check, enlarging the number of countries that conclude the Arms Trade Treaty, and improving mutual understanding among national defense authorities are now the paramount issues facing Asia. 
They should be the focus of the East Asia Summit, which in turn should become the premier forum for taking up regional security issues and ensuring that stability is maintained. 
Military expansion is inherently incompatible with Asia’s move toward the center of the global economy. 
The fruits of prosperity should be reinvested in improving people’s lives, not in weapons that can take them. 
And yet safeguarding the rule of law counts most. 
For example, Japan will offer its utmost support for efforts by ASEAN member countries to ensure the security and free navigation of the seas and skies. 
But let me be transparent about what Japan will actually support, and how. 
We have already provided three new patrol vessels to Indonesia through grant aid cooperation and have decided to provide ten more to the Philippine Coast Guard. 
Moreover, we are moving forward with the necessary survey to enable us to provide such vessels to Vietnam. 
No less important, when Japan sends hardware, experts and training follow, and we convey our sense of pride in committing ourselves to our duties. 
By cultivating a high degree of morale and proficiency, we strengthen the bonds between the peoples of Japan and recipient countries. 
In the Philippines, Indonesia, and Malaysia alone, Japan has trained more than 250 coast guard personnel. 
In 2012, when we invited senior officials responsible for enforcing maritime law in each of the five major ASEAN countries to a month-long training program, three members of the Japan Coast Guard were assigned to each trainee, with all of them living, eating, and sleeping together under the same roof. 
Recently, Japan formulated a new framework for transfers of defense equipment and technology to other countries. 
On the basis of appropriate controls and strict inspections, we can now offer rescue, transport, surveillance, and minesweeping equipment. 
To support ASEAN countries in safeguarding the seas, Japan will combine various options, including official development assistance, capacity building by the Japan Self-Defense Forces (JSDF), and provision of defense equipment and technology. 
No country can secure its own peace alone anymore. 
That is why it is incumbent upon us in Japan to reconstruct the legal basis for collective self-defense and international cooperation, including participation in United Nations peacekeeping operations – a reform that my administration has begun. 
The importance of this reform can hardly be overstated. 
The JSDF is now working to foster peace in South Sudan, under the flag of the UN mission there, alongside units from Cambodia, Mongolia, Bangladesh, India, Nepal, the Republic of Korea, and China, as well as many civilian UN staffers and NGO personnel from various countries. 
All are partners with us in assisting South Sudan’s nation-building process. 
But imagine now that civilian workers there, powerless to defend themselves, came under sudden attack by armed elements. 
Under the approach that Japanese governments have taken up to now, the JSDF would be unable to rescue the civilians. 
Is this really an appropriate response? 
My government is thinking hard about this dilemma, and close consultation is underway within the ruling coalition. 
It is precisely because Japan depends so heavily on the international community for the stability of its external environment that we wish to work even more proactively for world peace. 
Many generations of Japanese have walked a single path – that of freedom, human rights, and the rule of law – and we will continue to walk this path for generations to come. 
But, as we revitalize Japan’s economy, we need “new” Japanese who shoulder global responsibilities commensurate with their country’s size and economic resources. 
These new Japanese will lose none of their good qualities. 
They will still loathe poverty, embrace universal values, and find joy in hard work. 
If anything has changed, it is that women are much more visible among these new Japanese. 
For example, all three of the Japanese judges and public prosecutors who helped draft Cambodia’s civil code were young women. 
The new Japanese will actively serve the cause of Asian peace. 
In August 2011, President Benigno Aquino III of the Philippines and Chairman Murad Ebrahim of the Moro Islamic Liberation Front met in Narita, Japan. 
Three months ago, in March, the two sides finally reached a comprehensive peace agreement. 
When the new Bangsamoro local government assumes power two years from now, Japanese assistance teams will be there from the start. 
Japan is already focusing on giving women in the region the skills they need to earn a living. 
In Mindanao, where Japan built a vocational training center for women, the sounds of gunshots and angry cries have been replaced by the whir of sewing machines. 
All of this is nothing other than an expression of Japan’s determination to spare no effort for the sake of peace, security, and wider prosperity in the Asia-Pacific region. 
By working with our regional allies and partners, including the United States and ASEAN, we will translate that determination into a rock-solid zone of stability. 

Japan’s New Dawn 
DAVOS – For years, pundits called Japan the land of the setting sun. 
They said that for an economy as mature as Japan’s, growth would be impossible. 
They said that our public debt was unsustainable. 
They pointed to our supposed psyche of resignation as a symptom of relative decline. 
But now such voices are rarely heard. 
Japan’s economy has swung from negative to positive growth and is on the verge of breaking free from chronic deflation. 
This spring, wages will increase – a long overdue development that will lead to greater consumption. 
Our fiscal position has also improved steadily, with my government on track to consolidate public finances. 
And, as the economy has turned around, Japan’s people have become more vibrant and upbeat – a mood reflected in public enthusiasm over the choice of Tokyo to host the 2020 Olympic and Paralympic Games. 
So it is not twilight, but a new dawn, that is breaking over Japan. 
And that is because we have overcome the notion that certain reforms could never be carried out. 
I have maintained that I am willing to act like a drill bit, strong enough to break through the solid rock of vested interests. 
And so we have. 
For example, we will completely liberalize Japan’s electricity market. 
By the time the Olympians arrive in six years, the power sector will be fully competitive, with electricity generation separated from distribution. 
We will also foster medical care as an industry. 
Japan is on the forefront of regenerative medicine, and we will make it possible to generate stem cells at private-sector labs. 
And I have just proposed additional reforms, because we also need large-scale health-care providers in the form of holding companies, much like America’s Mayo Clinic. 
Moreover, we are eliminating the “rice production adjustment” system, which has been in place for more than 40 years. 
Barriers to private companies’ entry into the agricultural sector will be removed, and farmers will be allowed to grow the crops they want, without official control over supply and demand. 
Soon, our deregulation package will be set in motion. 
Over the next two years, in designated areas, no vested interests will remain impervious. 
For example, in Japanese cities aspiring to world-class status, limits on floor space will become a thing of the past. 
We will soon see high-quality housing, business complexes, and zero-emissions towns appearing, one after another. 
Likewise, the Trans-Pacific Partnership (TPP) will remain a central pillar of my economic policies, and we will press ahead with the Japan-European Union Economic Partnership Agreement. 
As a result, Japan’s economy will become even more deeply integrated into global flows of knowledge, trade, and investment. 
Companies and people from abroad will find Japan among the most business-friendly places in the world. 
Japan’s management of public funds – such as the Government Pension Investment Fund, which now holds about $1.2 trillion – will also undergo far-reaching change. 
We will press ahead with reforms, including a review of the GPIF’s portfolio, to ensure that public funds contribute to growth-nurturing investments. 
We must also make our corporate taxes internationally competitive. 
In April, the tax rate on companies will fall by 2.4 percentage points. 
And we will put in place tax incentives aimed at encouraging companies to use their cash for capital investment, research and investment, and wage increases. 
At the same time, we will reform labor-market rules that tie workers to old industries. 
New industries require innovative and creative human resources, and we will redirect our subsidies so that workers without meaningful employment in declining industries can move on and find rewarding work in rising sectors. 
Of course, given that Japan’s population is rapidly aging, and the number of children is falling, investors find themselves asking an obvious question: “Where will Japan find the innovative and creative human resources that it needs?” 
Arianna Huffington once quipped that if Lehman Brothers had been “Lehman Brothers and Sisters,” the firm would have survived. 
Japan’s corporate culture is even more male-dominated – a world of pinstripes and button-downs. 
I was greatly encouraged when Hillary Clinton told me that Japan’s GDP could be 16% larger if women participated in the labor market at the same rate as men. 
Indeed, Japan’s female labor force is the economy’s most underused resource. 
Japan must become a place where women shine. 
By 2020, we want women to occupy 30% of leading management positions – a goal that presupposes a more flexible working environment, as well as support from foreign workers to take over domestic and personal services. 
A major impetus for change will come in the form of legal reforms, to be introduced at the next parliamentary session, that will increase the number of external directors on corporate boards. 
Next month, we will also propose a stewardship code that will enable institutional investors to play a greater role in corporate governance. 
I am confident that the combined effect of these reforms will enable Japan to double its inward direct investment by 2020, rebooting the entire country and changing its economic landscape dramatically. 
But there is still much to do. 
Soon, three years will have passed since the catastrophic earthquake and tsunami struck northeastern Japan on March 11, 2011, causing the failure of the Fukushima Daiichi nuclear power plant. 
While the recovery is far from complete, the love and compassion reflected in the world’s response touched us deeply, as has the survivors’ spirit of perseverance and mutual aid to overcome hardship. 
It is in the same spirit that Japan is now set to contribute even more positively to world peace and development. 
In our age, no single country can preserve peace by itself. 
None of us alone can solve the challenges that the world faces without helping one another. 
In Cambodia, for example, a Japanese-built hospital for mothers and newborns has helped to reduce the country’s infant-mortality rate. 
In the Philippines, Japan’s Self-Defense Forces mounted a major relief effort after the devastating typhoon in November. 
And our servicemen and women based in Djibouti remain on high alert against piracy, protecting ships from around the world. 
Japan is surrounded by neighbors with unlimited possibilities: China, South Korea, the ASEAN countries, India, Russia, and, across the Pacific Rim, the TPP partner countries. 
Indeed, with Asia becoming the engine driving the world economy, the need to achieve lasting peace and prosperity has never been greater, because the global knock-on effect of any threat to regional stability would be enormous. 
The foundation underpinning prosperity is freedom of movement for people and goods. 
On sea-lanes, in air space, and now in outer space and cyber space, freedom of movement must remain secure. 
The only way to maintain these indispensable public goods is by rigorously upholding the rule of law and promoting fundamental values like freedom, human rights, and democracy. 
There is no alternative. 
Asia’s growth dividend must not be wasted on military expansion. 
We must use it to invest in innovation and human capital, which will further boost growth in the region. 
As is true elsewhere, trust among Asian countries is crucial for their peace and prosperity, and this can be achieved only through dialogue and adherence to international law, not through force or intimidation. 
In order to create a region of trust and order, I would like to appeal to Asia and the world. 
To prevent unchecked military expansion in Asia, defense budgets should be made completely transparent, with verifiable public disclosure. 
Moreover, Asian governments should create a mechanism for crisis management and strong communication channels among our armed forces. 
We must also establish rules that promote behavior based on international maritime law. 
Only then can we achieve lasting growth and prosperity in Asia, enabling all of us in the region to realize our great potential. 
Japan has pledged that it will never again wage war, and we have never stopped working for a world that is at peace. 
It is my fervent hope that Japan’s economic revival, with its promise of increased global and regional prosperity, will help to bring such a world closer. 

The Fate of Abe’s Japan 
TOKYO – As Shinzo Abe sits down this week in Seoul with South Korean President Park Geun-hye and Chinese Premier Li Keqiang, he does so as the leader of a country that many people around the world now seriously underestimate. 
That dynamic certainly will be felt during the three Northeast Asian powers’ first summit since 2012. 
Three decades ago, many erred in the opposite direction in their assessments of Japan. 
Many Americans feared being overtaken after Japanese per capita income surpassed that of the United States; Japanese manufacturing set the international standard; and some books even predicted an eventual war with a Japanese nuclear superpower. 
Such views extrapolated from Japan’s impressive postwar economic growth; today, after more than two decades of malaise, they simply remind us of the danger of linear projections. 
That danger remains with us. 
In response to China’s rapid rise and the assertiveness of its Communist Party leadership, the current conventional wisdom portrays Japan as a country of secondary importance – which is equally mistaken. 
Despite its economic slowdown, Japan retains impressive power resources. 
It is a democracy that has been at peace for 70 years, with a stable society and a high standard of living. 
Its per capita income is five times that of China, and Beijing residents can only envy Tokyo’s air quality and product safety standards. 
Its economy remains the world’s third largest overall, sustained by highly sophisticated industry. 
While China has nuclear weapons and more soldiers, Japan’s military is better equipped in some areas (and obviously has the technological capacity to develop nuclear weapons very quickly). 
Moreover, Japan’s culture (both traditional and popular), overseas development assistance, and support of international institutions are impressive sources of soft power. 
Yes, Japan faces severe demographic problems, with the population projected to shrink from 127 million to below 100 million by 2050. 
The current birth rate is 1.4 (well below the replacement rate of 2.1), and the Japanese are resistant to accepting large numbers of immigrants. 
When Abe became Prime Minister almost three years ago, he vowed to restore Japan’s standing as a “first-tier country” by implementing an economic stimulus package, dubbed “Abenomics,” and reinterpreting Japan’s constitution to stiffen the country’s defense posture. 
But, whereas Abenomics was enacted quickly, the Diet enacted the defense legislation only recently – and after more than a year of effort. 
Many in Abe’s Liberal Democratic Party would have preferred fundamental reform of Japan’s defense doctrine, by removing the constitution’s limits on the country’s armed forces. 
But public opinion and Abe’s coalition partner, Komeito, did not allow it. 
Nonetheless, Japan’s interlocutors at the Seoul summit, China and South Korea, which suffered enormously from Japanese aggression in the last century, have protested loudly. 
Both are suspicious of Abe, who exacerbated tensions with nationalist rhetoric and a visit to the controversial Yasukuni Shrine early in his current administration. 
Indeed, Chinese President Xi Jinping has resisted meeting with Abe, as has Park, who will do so for the first time at the Seoul summit. 
On the other hand, Abe has repaired the strained relations with the US that Japan had under his predecessors, and President Barack Obama reiterated the strength of the bilateral alliance during Abe’s state visit to the White House last April. 
Under the new defense guidelines, US and Japanese forces are able to plan and exercise more effectively, and the alliance is in its best condition in decades. 
Abe has thus been relatively successful in terms of foreign and defense policy. 
But the situation on the economic front is more mixed. 
Inflation and unemployment are low, but growth is largely flat, and few experts I spoke with in Tokyo recently expect it to accelerate significantly. 
The first two components (or “arrows”) of Abenomics – loose monetary and fiscal policies – helped to restore demand. 
But the third arrow of structural reform has remained in the quiver. 
Since his success in the Diet election last year, Abe has talked about liberalizing electricity markets, improving corporate governance, and undertaking tax reform. 
In addition, he hopes to use the recently concluded Trans-Pacific Partnership trade agreement to force reform of the inefficient agriculture sector. 
One important constraint is labor supply. 
Abe has proposed relaxing visa conditions for expatriate workers; but immigration on a scale that would make a major economic difference is unlikely, given the homogeneity and insularity of Japan’s traditional culture. 
The difficulty of loosening limits on immigration will require Japan to mobilize its underused female human resources. 
But that effort, too, must overcome formidable cultural obstacles. 
Abe has spoken frequently (including at the United Nations) about opportunities for women, and has called for women to make up 30% of Japan’s managers. 
But today they account for less than 10% of managers and about 1% of senior executives. 
The World Economic Forum’s index of gender inequality gives Japan a low rating. 
Government measures like family leave and more nurseries for working mothers can help, but traditional attitudes change slowly. 
Unless it is addressed, the labor constraint implies that Japan will not reach its full potential economically – and thus in regional and global affairs as well. 
Japan is a successful, comfortable society, which has much to contribute to the world. 
The danger is that it is so comfortable that it will look inward and prove the conventional wisdom right. 

Shinzo Abe’s Grand Arrival 
Japan’s new prime minister, Shinzo Abe, has wasted little time in making his mark, particularly in foreign policy. 
His official visits to China and South Korea – two key countries with which relations suffered under the administration of Junichiro Koizumi – came within a week of his taking office and at a moment of crisis, with North Korea setting off an underground nuclear blast. 
That Prime Minister Abe and Chinese President Hu Jintao agreed that a North Korean nuclear test “cannot be tolerated” suggests that this new activism may help to stabilize Asian security. 
As Abe made clear when he delivered the prime minister’s general policy speech late last month, his focus on foreign policy is set to intensify. 
But, while Abe’s commitment to what he describes as “future-oriented” relations with China and South Korea represents a welcome departure from the Koizumi government’s record, his policy agenda in fact implies considerable continuity with Japan’s heightened focus on diplomacy and security issues. 
In particular, emphasizing a “shift to more assertive diplomacy,” Abe’s policy speech cited Japan’s initiative in proposing sanctions against North Korea to the United Nations Security Council, and its success in overseeing – through close coordination with the United States and other countries – the resolution’s unanimous adoption. 
At the same time, he indicated his intention to advance diplomacy aimed at strengthening the solidarity among Asian nations, founded on “the Japan-US alliance for the world and for Asia.” 
Abe also stressed his intention to boost ties with Russia, promote cooperation with the ASEAN countries, and develop a strategic dialogue with Australia and India. 
Likewise, under Abe, Japan will develop its official development assistance, seek to secure stable energy supplies, and pursue permanent membership of the UN Security Council. 
Toward North Korea, on the other hand, continuity will prevail, with Abe re-emphasizing the principle that normalization of relations requires resolution of abduction cases – some dating to the 1970’s – involving Japanese citizens who were seized from coastal towns. 
At the same time, Japan will remain committed to the six-party talks on North Korea’s nuclear program. 
Abe recognizes the new challenges posed by proliferation of weapons of mass destruction and terrorism, and has acknowledged the rising expectation, at home and abroad, that Japan’s contribution to international security must grow. 
Most importantly, he has proposed exercising the right collective self-defense on a case-by-case basis - thus far barred by the article 9 of Japan’s constitution – in order to maintain peace and promote effective functioning of the Japan-US alliance. 
Abe says that he would “expect” the early adoption of the referendum law needed to amend the constitution. 
Abe’s choice of personnel clearly reflects his focus on diplomatic and security issues. 
Yasuhisa Shiozaki, who occupies the key position of cabinet secretary, is a long-time ally, while the foreign minister, Taro Aso, though a rival within the Liberal Democratic Party (LDP), shares Abe’s policy priorities. 
Akio Kyuma, the Director-General of the Defense Agency, which is expected to be transformed into the Ministry of Defense, was instrumental in preventing Aso’s ally, Fukushiro Nukaga, from running for LDP president. 
Furthermore, Abe will seek to reorganize the prime minister’s office to reinforce its ability to function as a political headquarters that can make quick decisions on national strategy concerning diplomatic and security issues. 
Thus, the prime minister’s office will more closely resemble the US White House, which he hopes will enable both countries to communicate their intentions continuously and reliably. 
Based on his previous experience as cabinet secretary, Abe wants to create and operate a Japanese version of America’s National Security Council. 
For this, he has appointed Yuriko Koike, a former cabinet member, as one of his five assistants, while one of the other four, Kyoko Nakayama, is responsible solely for the abduction issue. 
Moreover, although the current assistants’ authority is limited, Abe plans to submit legislation aimed at strengthening the prime minister’s office, including an amendment of the cabinet law. 
This would enable the prime minister’s assistants to “command and instruct” the relevant ministries and agencies. 
Abe’s government may also review to increase the number of staff to which the assistants are entitled. 
All of this has given rise to depictions of the Abe administration as a “cabinet of hawks” or “the buddy club” Nevertheless, its popular support is the third highest since the end of World War II (63% according to Asahi Shimbun , and 70% according to Yomiuri Shimbun ). 
This implies that Abe enjoys a strong mandate to implement his government’s policies. 
But high expectations, both domestically and internationally, can lead to huge disappointments. 
If Abe is to create the “beautiful country” that he promised in his policy speech, he must not lose momentum in exercising strong leadership. 

The Second Opening of Japan 
TOKYO – US President Barack Obama is visiting Tokyo at a unique moment in my country’s history, with Japan’s economy moving onto a stable new growth path that will take full advantage of its geographic position. 
Japan no longer considers itself the “Far” East; rather, we are at the very center of the Pacific Rim, and a neighbor to the world’s growth center stretching from Southeast Asia to India. 
There can be little doubt that this growth center will continue to propel Japan’s economy for the foreseeable future. 
Japanese direct investment is expanding in Vietnam and India, for example, which will boost demand for Japanese machine tools and capital goods. 
But, to maximize its opportunities, Japan must open its economy further and become a country that actively incorporates capital, human resources, and wisdom from abroad. 
Japan must be a country capable of growing by channeling the vitality of a growing Asia. 
To this end, we have sharply accelerated the pace of negotiations on economic partnership agreements, or EPAs, with various partners around the world. 
Earlier this month, Australian Prime Minister Tony Abbott and I reached agreement in principle on a Japan-Australia EPA. 
Next in line is the Trans-Pacific Partnership (TPP), which would unite 12 countries in the world’s largest trading area. 
Both Japan and the United States attach great importance to rules, uphold the principles of freedom and democracy, and possess the most advanced technologies and industries. 
We intend to overcome our differences and together forge, in the form of the TPP, a twenty-first-century economic order for Asia and the Pacific that will serve as an unshakable foundation for growth. 
My government is also pushing hard to realize an EPA with the European Union. 
Given that the US and the EU already are engaged in trade talks, an EPA between Japan and the EU, coupled with the TPP, will give rise to a truly immense market – a single enormous growth engine that will benefit the entire global economy. 
But Japan’s economic frontiers extend well beyond Asia and the Pacific, to Latin America and Africa – more reason to abandon our long-held inward-looking perspective. 
A large number of highly motivated and ambitious young people have already come to Japan from around the world, especially from neighboring Asian countries, to study or work. 
Japan must remain their hope. 
We must not be disrespectful of them, and our arms must always be wide open towards them. 
Japan, I believe, is that kind of country. 
In the near future, we will designate six National Strategic Economic Growth Areas – Tokyo, Kansai, Okinawa Prefecture, and the cities of Niigata, Yabu, and Fukuoka – to serve as models for the rest of the country. 
In health care, education, agriculture, and employment practices, we are identifying policies and practices that have fallen out of step with today’s needs, and we will move quickly to reform them. 
The National Strategic Economic Growth Areas will insert the probe of reform down into our regulatory system, which has hardened into bedrock. 
Another habit that Japanese must change is our pervasive male-oriented thinking. 
We have already resolved to ensure that at least 30% of all personnel hired by the national government are women. 
I am also now urging publicly traded companies to add at least one woman as a board member. 
Once we reach the point at which it is no longer news to have a woman or a non-Japanese serving as a CEO, Japan will have reinvented itself and recovered its true spirit of risk-taking and innovation. 
“Womenomics” tells us that a society in which women are dynamically engaged will also have a higher birth rate. 
My government intends to address, urgently, the need to expand day-care facilities and other such infrastructure as the foundation for a society that benefits from all of its members’ skills and talents. 
We are fully capable of change; indeed, we relish it, as the world will see in the months and years to come. 
But some things about Japan are unchanging, and some must not be changed. 
One of these is our track record, which supports our ambition to be a “proactive contributor to peace.” 
Japan has made more than its fair share of financial contributions to the United Nations and its organizations, both historically and today. 
And our embrace of our global responsibilities extends to Japan’s Self-Defense Forces. 
Members of the Self-Defense Forces displayed exemplary cooperation with the US and Australian armed forces in the wake of the Great East Japan Earthquake in 2011, and they have earned deep appreciation and respect everywhere they have been deployed, including Haiti, Indonesia, and most recently, the Philippines. 
To make a proactive contribution to peace means that Japan will bear its own share of responsibility for assuring the security that supports global prosperity and stability. 
Working alongside countries with which we share common values and interests, we will safeguard and cultivate international public goods, ranging from space and cyberspace to the skies and the seas. 
As the world will see during Obama’s visit, Japan is back and thriving. 
And its return is indispensable for global stability and prosperity. 

The Middle East Crack-Up 
JERUSALEM – The horror stories emerging from northern Iraq, as well as the continuing slaughter in Syria’s civil war, point to a tectonic shift in the Middle East. 
Almost 100 years after World War I, the regional state system established after the dissolution of the Ottoman Empire is unraveling. 
The contemporary map of the Middle East was drawn by the victorious Western imperial powers, Great Britain and France, during and after WWI. 
While the war was still raging, they signed an agreement drafted by the diplomats Sir Mark Sykes and François George-Picot, which delineated their respective spheres of influence across the Levant – an agreement that entirely disregarded the region’s history, ethnic and religious traditions and affiliations, and the will of local populations. 
The modern states of Iraq, Syria, and Lebanon thus arose as separate, independent entities. 
Their borders were arbitrary and artificial, and none had ever existed in such form. 
(The case of Palestine was even more complicated, owing to Britain’s conflicting promises to Arabs and Jews.) 
Eventually, Iraq, Syria, and Lebanon became independent countries, modeled on the Westphalian idea of the modern nation-state. 
Their leaders maintained this system – and its borders – as the best available. 
None of these rulers, especially the authoritarian ones who emerged after independence, had an interest in rocking the boat. 
That Western-imposed system is now unraveling. 
Nation-states cannot be sustained when they do not reflect the wishes of their populations. 
The United States-led invasion of Iraq put an end not only to Saddam Hussein’s rule, but also to Sunni-minority control, established by the British generations ago. 
The Shia majority, once unleashed, viewed US-backed democratic elections as a vehicle for imposing hegemonic control over the country. 
Iraq today is not the unitary Arab nation-state that it was, and it is doubtful whether that state can be restored. 
The Kurdish Regional Government in the north is a de facto state, with its own army, border authorities, and control (up to a point) of the natural resources located on its territory. 
Foreign consulates in the KRG’s capital, Erbil, effectively function as embassies. 
In Syria, what started as peaceful pro-democracy demonstrations deteriorated quickly into an armed insurrection of the Sunni majority against the hegemony of the Alawite sect, led by the Assad family. 
As with Iraq, it is difficult to see how Syria can be reconstituted as a unitary Arab nation-state. 
The de facto dismemberment of both countries’ central state authorities gave rise to a totally new player – the Islamic State, which has announced the establishment of a caliphate straddling Iraq and Syria, totally disregarding the old Sykes-Picot arrangement. 
The Islamic State, an offshoot of Al Qaeda, probably will not succeed in creating a viable, cross-border entity, but its brutal effort and Islamist ideology certainly suggest that the old borders, and the states delineated by them, are on their way out. 
Indeed, the group’s recent incursions into Lebanon may also undermine the fragile inter-communal balance there. 
The unraveling of the Western-imposed state system is taking place elsewhere in the greater Middle East. 
Sudan – a vast, multiethnic, and multi-confessional country, established as a political entity by the British in the 1890s – is continuing to fray. 
The emergence, after a prolonged and bloody civil war, of an independent South Sudan in 2011, freed the local Christian and animist population from the Arab/Muslim yoke. 
But Darfur is still bleeding, and South Sudan is far from being a stable polity. 
Libya, too, is disintegrating. 
The two provinces of Tripolitania and Cyrenaica, which Italy wrested from the Ottomans just before WWI, were forced together into an entity called “Libya,” despite their profound historical and cultural differences. 
Since Muammar el-Qaddafi’s demise in 2011, Libyans have failed to establish a coherent state structure of any sort, cycling through six prime ministers. 
Pious Western sermons about the need to form a unified, democratically elected government sound utterly irrelevant, given the extent of social and political fragmentation. 
There is one exception to this regional development: Egypt. 
For all of its internal tribulations, there is no doubt that Egypt is a coherent entity, deeply anchored in history and in the consciousness of its population. 
For all of the problems confronting the Coptic Christian community, no one doubts that they are as Egyptian as the Muslim majority. 
But Egypt, too, has followed a defining regional pattern. 
Whereas secularism in the West arose with the emergence of liberal and democratic forces inspired by the Enlightenment, in the Muslim Middle East it has always been imposed by authoritarian rulers: the Shah in Iran, Atatürk in Turkey, Saddam in Iraq, Assad in Syria, and Nasser and Mubarak in Egypt. 
This explains why Syria’s Christian and Druze minorities now support Assad, and why the Copts in Egypt support military rule: democratic majoritarian rule means Muslim hegemony. 
Europe endured centuries of violent religious and national struggle, culminating in the horrors of the two world wars, before achieving its current stable state system. 
The Middle East probably will pay less in terms of time and violence; but the idea that what emerges will necessarily be European-style nation-states may turn out to be a Western conceit. 
The late literary theorist and public intellectual Edward Said might even have called it an example of paternalistic Orientalism. 

The Great American Losing Streak 
JERUSALEM – The interim agreement reached in Geneva between the five permanent members of the United Nations Security Council plus Germany (the P5+1) and Iran is probably the best deal to curtail Iran’s nuclear program that could be reached, given current circumstances. 
The United States and its Western allies were unwilling to risk a military option, and not concluding a deal would have allowed Iran to proceed unimpeded toward acquiring nuclear weapons. 
In an ideal world, Iran should have been forced to scrap its nuclear program altogether and hand over all of its enriched uranium to an outside power; but, realistically, that was unattainable. 
So the outcome of the Geneva talks is that Iran has secured some international legitimation as a nuclear-threshold power, which deeply worries its regional neighbors, from Saudi Arabia and Israel to Turkey, Egypt, and the small and vulnerable Gulf states. 
Western statesmen are right to congratulate themselves on averting an immediate major crisis. 
But they are wrong to believe that they have resolved the Iranian nuclear threat. 
Indeed, it is naïve to imagine that a final agreement with Iran will be achieved in the coming six months: Iran’s seasoned diplomats will make sure that that does not happen. 
So, while the interim agreement may not be a replay of the Munich Agreement in 1938, as many critics contend, it may have set the stage for an even more combustible future. 
US President Barack Obama may not be in office when the fire ignites, but if things do go terribly wrong, he may be remembered as another statesman who, like Neville Chamberlain, was blind to the consequences of his peaceful intentions. 
The main reason for pessimism stems from the interim agreement’s wider geopolitical context, which has been ignored in favor of the regional dimension. 
In fact, the agreement, which alleviates much of the economic pressure on the Iranian regime, is a result of Russia’s success in delaying international sanctions against Iran and its stubborn refusal to tighten them further. 
For the Kremlin, Iran’s nuclear program is only one chapter in a campaign to reassert Russia’s role as a great power. 
Indeed, the interim agreement should be viewed as another in a string of recent Russian diplomatic victories over the US. 
The current US administration lacks the type of grand strategy that animates Russian President Vladimir Putin. 
Instead, it considers every issue separately, unsure about how to balance its role as a global power with its commitment to liberal values, and led by a president who apparently believes that soaring rhetoric is a substitute for strategic thinking. 
There should be no illusion: The interim agreement with Iran is a resounding triumph for Putin, not for Obama and US Secretary of State John Kerry. 
That victory was quickly followed by another – Ukraine’s decision to reject an association agreement with the European Union, opting instead to join Putin’s pet project, a Eurasian customs union designed to reconstitute much of the Soviet Union as a single economic zone. 
Meanwhile, the Syrian crisis also is going the Kremlin’s way, with President Bashar al-Assad remaining in power, despite Obama’s insistence that he leave. 
Obama’s threat last summer to use limited force in Syria was empty rhetoric. 
It might have convinced Assad to give up his chemical weapons, but Russia’s threat to veto any muscular Security Council resolution against Syria guaranteed that his murderous regime would retain control. 
Even if a Geneva II meeting on Syria is convened in January, Russia will ensure that Assad remains on the throne. 
America’s strategic vacuum can also be seen in Egypt in the wake of the military’s overthrow of President Mohamed Morsi’s Muslim Brotherhood government. 
Obama’s uncertainty about how to deal with the coup has created an absurd situation in which most Western-oriented groups in Egypt – the military and secular elites who underpinned Mubarak’s alliance with the US – have now turned, in desperation, to Russia as a source of future military supplies. 
Decades of American strategic thinking and diplomacy, initiated by Henry Kissinger in the 1970’s, aimed at weaning Egypt from its Russian alliance, now appear in danger of going down the drain because of Obama’s inability to make up his mind about Morsi’s overthrow. 
Of course, it is not easy to support a military coup against a democratically elected president (even one who, like Morsi, undermines the democratic values and institutions that brought him to power). 
But one wonders how Obama would have reacted in 1933 had the German military toppled Hitler (who, after all, was appointed Chancellor after winning an election). 
One does not have to demonize Russia – or Putin – to be worried by these developments. 
Russia is entitled to its place as a leading power. 
And the US should shun a domineering policy. 
But, confronted with a resolute Russian policy of imperial re-assertion, now also visible in the Caucasus, the US seems unable to see how global developments are linked. 
Is anyone in Washington asking how the Geneva agreements on Syria and Iran are connected to Ukraine’s refusal to move closer to the EU, much less developing a strategic response? 
The choice facing the US is not former President George W. Bush’s megalomaniacal swashbuckling or global withdrawal. 
Russia’s resurgence calls for a reasoned American response, combining its preponderant power and recognition of the inherent limits on the use of that power. 
The current US administration seems incapable of this, and Tea Party isolationism certainly is not the answer. 
A rudderless US foreign policy is no response to a resurgent and neo-authoritarian Russia flexing its geopolitical muscle. 
Nostalgia for a Metternich, or a Kissinger, may not be out of order. 

A Separated Peace 
MADRID – Back in 1996, Binyamin Netanyahu won a general election by mobilizing large constituencies against then-Prime Minister Shimon Peres’s alleged intention to “divide Jerusalem.” 
Nearly two decades later, Netanyahu remains committed to old, vacuous slogans about a “united Jerusalem” – a conviction that could, yet again, unravel the Israel-Palestine peace process. 
As US Secretary of State John Kerry prepares to present a framework agreement for a conclusive round of Israeli-Palestinian peace negotiations, Netanyahu’s hardline position on Jerusalem is simply a non-starter. 
In a last-ditch effort to improve the proposal’s chances of success, US President Barack Obama – who has largely avoided taking a proactive role in the peace process during his second term – met with Netanyahu at the White House to urge him to moderate his position. 
But changing Netanyahu’s mind will not be easy – not least because of the domestic political pressure that he faces. 
Since Israel captured East Jerusalem in the 1967 Six-Day War, the country’s political class has championed the city as Israel’s “united eternal capital” – a vision that they remain unwilling to abandon. 
The problem is that no serious negotiation with the Palestinians could accommodate this position. 
Jerusalem’s Arab population – which already accounts for more than 40% of the total – is growing by 3.5% annually, compared to 1.5% among Israelis. 
Once this sizeable swath of voters begins participating in municipal elections – which they have so far avoided, lest they be viewed as legitimizing Israeli rule – control of the city council is likely to pass to a Palestinian majority. 
Peres understood that a Jerusalem united under exclusively Israeli rule was not feasible, assuring Norway’s foreign minister in a 1993 letter – critical to the conclusion of the Oslo accords – that Israel would respect the autonomy of Palestinian institutions in East Jerusalem. 
Likewise, in 2000, Prime Minister Ehud Barak endorsed the Clinton Parameters, which called for Jerusalem’s division into two capitals along ethnic lines. 
Prime Minister Ehud Olmert followed suit in his 2008 peace proposal to Palestinian Authority President Mahmoud Abbas; he also recommended internationalizing the Old City’s administration. 
Yet Netanyahu and his supporters remain adamant that Jerusalem will not be split. 
What they fail to grasp is that the 1980 Jerusalem Law, which declared the city – “united in its entirety” – to be Israel’s capital did not actually result in unity. 
The subsequent effort to “Israelize” the city, by building a network of Jewish neighborhoods in Palestinian-dominated East Jerusalem, has failed to secure a solid Jewish majority, largely owing to the unwillingness of middle-class Israelis to settle there. 
Indeed, not only has the settlement project turned East Jerusalem into a hub of political and social tension, but the high financial cost – more than $20 billion in total – forced the diversion of limited resources from growth-oriented investment in West Jerusalem. 
As a result, Jerusalem has become Israel’s poorest city. 
Unsurprisingly, the 200,000 members of Israel’s liberal and prosperous middle class that abandoned the city in the last 20 years find Tel Aviv – Israel’s economic capital, and a center of technology-driven growth – far more appealing. 
Complicating the situation further is the division between secular Israelis and the fanatic Orthodox communities whose rejection of the secular state and yearning for a society based on the strictest interpretation of Halacha (Jewish religious law) epitomize a deep-seated fear of Arabs and an uncompromising distrust of gentiles. 
Such communities, which comprise 30% of Jerusalem’s population, make the notion of a united, peaceful Jerusalem farfetched, at best. 
In 1966, a year before Israeli paratroopers ostensibly united Jerusalem, the composer Naomi Shemer sang of, “the city that sits solitary, and in its heart a wall.” 
Today, the wall dividing Jerusalem is not made of concrete or brick – but that does not make it any less real. 
This enduring division is exemplified in the contrast between municipal services and infrastructure in the city’s Jewish and Arab neighborhoods. 
Of course, to some degree, Jerusalem’s Palestinian residents benefit from Israel’s advanced social-security and health-care systems, the likes of which their brethren in the Palestinian Authority can only imagine. 
Nonetheless, they continue to identify themselves as Palestinian, with only 10,000 of Jerusalem’s 300,000 Palestinian residents having agreed to apply for Israeli citizenship. 
But the Jerusalem issue is subject to an even more fundamental confusion: What are Jerusalem’s actual boundaries? 
In the cavalier spirit that prevailed after 1967, the Israeli government extended the city’s boundaries from 10,875 acres to more than 31,000 acres. 
Netanyahu’s claim that this extended Jerusalem is the biblical capital of the Jewish people is a historical travesty. 
A Jerusalem controlled by non-productive Orthodox Jewish communities and disenfranchised Palestinians is destined for economic and political collapse. 
Kerry’s plan to divide the city along ethnic lines amounts to Israel’s last chance to avoid such an outcome and legitimize the city as its internationally recognized capital. 
By agreeing to a divided Jerusalem, Netanyahu would be initiating the long-overdue departure from the hubris and megalomania that has brought the city to its current state of stagnation and isolation. 
Giving up on a “united” Jerusalem is the only way to secure the city’s “eternal” status. 

The Rise of an Insecure Giant 
SEOUL – By the time China overtakes the United States as the world’s largest economy sometime in the next few years, it will have cemented its status as a major military power – one whose drive to assert itself strategically already is inspiring serious anxiety among its neighbors. 
But the truth is that China is a solitary, vulnerable rising power – one that faces potentially crippling domestic challenges. 
China is currently encircled by US military installations and allies. 
While Asian countries are largely willing to maintain and even expand their economic ties with China, none (except North Korea, which depends on Chinese aid) is prepared to accept it as the region’s primary power. 
In fact, US allies like Indonesia and India have emerged as global players largely in response to China’s rise. 
For its part, the US has shifted substantial military power toward Asia – with high-profile military deployments in Australia and the Philippines, and 60% of America’s naval capabilities now deployed in the region – and has enhanced its defense ties with Japan and South Korea. 
Moreover, it is helping to spearhead the Trans-Pacific Partnership, an economic and trade agreement that excludes China but includes many of its regional neighbors. 
Against this background, US claims that its strategic rebalancing is not about containing China are not particularly convincing. 
Indeed, the US is pursuing a strategy of primacy in Asia, not a partnership between equals, and this, together with China’s own internal tensions, is undermining China’s ability to participate productively in regional and global forums. 
As it stands, China lacks the confidence and experience needed to navigate the international arena. 
For example, it will not consider resolving in an international forum its dispute with Japan in the East China Sea over the Diaoyu Islands (called the Senkaku Islands in Japan). 
International law, China understands, is a double-edged sword that can be used against China in other territorial disputes, or even in its domestic affairs. 
Similarly, China’s miserly initial offer of $100,000 in aid following the recent typhoon in the Philippines demonstrates how far the country is from being a mature member of the international community. 
As a Chinese official admitted at a recent seminar in Seoul, concepts like “regional order” have never been a part of the country’s political vocabulary. 
With regard to Japan, China faces a conundrum. 
It is relatively content with Japan being a US security protectorate, because it fears the alternative: a Japan that expands its independent military reach. 
But US efforts to avoid precisely such an outcome cannot be good news for the Chinese, either, given that they entail a deepening of the bilateral defense relationship and support for upgrading Japan’s military capabilities. 
In short, China’s regional exceptionalism has landed it in a strategic trap. 
It is unwilling to accept American leadership in Asia; but it is also reluctant to assume a more prominent role in promoting regional integration, fearing the concomitant pressure for more economic liberalization, adherence to international norms and rules, and a more transparent approach to its military buildup. 
Even the proliferation of China’s economic ties in Africa, the Middle East, and South America may reflect vulnerability rather than imperial ambition. 
China’s voracious quest for new energy sources has already caused it to overstretch its limited ability to protect its sea lanes. 
Despite bold reform plans – outlined at the recent Third Plenum of the 18th Central Committee of the Chinese Communist Party – China’s prospects remain compromised by deep-rooted contradictions. 
For example, the inherent tension between the social change that development demands and the imperative of political stability required by authoritarian rule makes the current situation unsustainable in the long run. 
Likewise, if the reform outline’s promise of a “decisive role” for the market ends up raising wages for poor Chinese, domestic demand might increase, but China will lose its main competitive advantage in international markets. 
This kind of dilemma has contributed to the fall of other developing-country dictatorships. 
China understands that, for now, US strategic primacy is an immutable reality. 
Even so, its leaders’ strategic anxiety was on display at President Xi Jinping’s June meeting with US President Barack Obama, where he demanded, with the vagueness characteristic of Chinese officials, “mutual respect” and recognition of China’s “territorial integrity.” 
The ostensibly trivial expression “mutual respect” actually modulates China’s true desire: a return to the Westphalian principle of non-interference in states’ domestic affairs, particularly their human-rights records. 
China has staunchly opposed Western efforts, whether in Syria or in North Korea, to circumvent this principle with doctrines like the “Responsibility to Protect.” 
Similarly, Xi’s call for the US to respect its “territorial integrity” carries a specific and pointed message. 
In China’s view, the US has increasingly been encroaching on its rights with regard to Taiwan, while refusing to recognize China’s many other territorial and maritime claims against US allies in the South China Sea. 
Experience demonstrates the dangers that can arise when vulnerable powers act independently. 
One need look no further than Israel, with its penchant for overreaction on security matters, or Iran, with its insistence on enriching uranium, to see what can happen when an isolated power bases its actions on a sense of existential vulnerability. 
China’s rise is fraught with fear and uncertainty. 
Encirclement by a foreign power that threatens to encroach on what it considers to be its inalienable sovereign rights is bound to drive it to become a revolutionary power bent on upending the status quo. 
Before China and the US overstep each other’s boundaries, they should abandon the concepts of “primacy” and “containment” in favor of a concert of Asian powers capable of resolving their differences. 

The Gaza Trap 
TEL AVIV – Israel’s “Operation Protective Edge” against Hamas in Gaza is the kind of asymmetrical warfare that has characterized nearly all Middle East conflicts in recent years. 
Victories in such wars are always elusive. 
Whatever the achievements of Israel’s superior army and its anti-missile systems, and however appalling the devastation of Gaza, Hamas will survive, if only because Israel wants it to. 
The alternative – jihadist anarchy that would turn Gaza into a Palestinian Somalia – is simply too unbearable to contemplate. 
Hamas leader Khaled Meshal’s boastful rhetoric cannot hide the fact that Hamas’s military power has been dealt a devastating blow. 
But, unless Israel is ready to pay an exceptionally high price in terms of its international standing by occupying Gaza and destroying its entire military hierarchy and arsenal, Hamas can still claim victory, having survived yet another onslaught by Israel’s colossal military machine. 
The superior power in an asymmetrical conflict always has a problem defining its objectives. 
In this case, Israel aspires to achieve “quiet” with few enough Palestinian civilian casualties to minimize international criticism. 
But the failure to achieve this goal is precisely where the superior power is defeated in asymmetrical conflicts. 
Moreover, “quiet” is not a strategic goal; nor is Israel’s way of pursuing it – a war every two or three years – particularly convincing. 
The real question is this: Assuming that Israel gets the quiet that it wants, what does it intend to do with Gaza in the future? 
And what does it intend to do with the Palestinian problem of which Gaza is an integral part? 
The question of Palestine is at the root of the asymmetrical wars that Israel has been facing in recent years, not only against Hamas, Qatar’s Palestinian client, but also against Hezbollah, Iran’s proxy in the region. 
These wars are creating a new kind of threat to Israel, for they add to the conflicts’ strictly military dimension the domains of diplomacy, regional politics, legitimacy, and international law, in which Israel does not have the upper hand. 
As a result, in asymmetrical conflicts, Israel finds its military superiority vitiated. 
These are political battles that cannot be won by military means. 
The asymmetry between the nature of the threats and Israel’s response ends up putting the superior military power in a position of strategic inferiority. 
The spread of violence to the West Bank – and Palestinian President Mahmoud Abbas’s support of Hamas’s objectives – means that Israel cannot avoid the conflict’s political consequences. 
Hamas, a neglected opponent of Abbas’s diplomatic strategy, is gradually becoming the avant-garde of Palestine’s struggle for liberation. 
Contrary to what Prime Minister Binyamin Netanyahu believes, the main existential threat facing the country is not a nuclear-armed Iran. 
The real peril is to be found at home: the corrosive effect of the Palestinian problem on Israel’s international standing. 
The devastation caused by Israel’s periodic asymmetrical confrontations, combined with the continuing occupation of Palestinian lands and the ever-growing expansion of settlements, has fueled a growing campaign to undermine Israel’s legitimacy. 
For example, the seemingly benign Boycott, Divestment, and Sanctions movement, viewed by many of its supporters as a legitimate form of non-violent resistance, has continued to gain ground. 
BDS’s opponents (including me) regard the movement as a political subterfuge intended to bring about the implosion of the Jewish state. 
The Palestinian mainstream, represented by Abbas, made a strategic decision to opt for a Palestinian state based on the 1967 borders. 
Israel’s strategic response would normally be that it aspires to be a “Jewish democratic state,” which presupposes a Jewish majority. 
But if the never-ending peace process continues to fail to produce a two-state solution, how can Israel avoid the reality of a single state in a continuous state of civil war? 
There is only one way out of the Gaza tragedy that can provide justice to its many victims: The parties to the conflict and the regional actors now vying to act as mediators must leverage the ongoing calamity into a grand peace agenda. 
This would mean launching a Marshall Plan to upgrade Gaza’s infrastructure and improve social conditions. 
It would also entail lifting the blockade and opening Gaza to the world. 
The price Hamas would have to pay is complete disarmament and demilitarization of Gaza under international supervision, with Abbas’s Palestinian Authority controlling the border crossings into Israel and Egypt. 
Simultaneously, negotiations for a two-state solution should resume, with an unequivocal commitment by the United States and the other members of the so-called Middle East Quartet (the United Nations, the European Union, and Russia) to use all possible influence on the parties to prevent another failure. 
Israel is devoid of a convincing strategy; what it has is a series of improvisations aimed at securing the nation’s physical survival on as much land as the international community might allow. 
But improvisation is simply unsustainable in the long run. 
For example, Israel has reached out to those Arab countries that are willing to subordinate the Palestinian problem to discreet bilateral relations, essentially on security matters. 
But any such “alliances” that Israel might be able to develop – say, with Saudi Arabia and Egypt – can only be circumstantial and ephemeral. 
The challenge for Israel is to tie its military tactics and diplomacy to a clearly defined political goal. 
And a credible national strategy must recognize that as long as the Palestinian conflict remains unresolved, Israel’s moral foundations and international standing will be dangerously compromised. 

Why Israel? 
TEL AVIV – Israel’s latest war in Gaza has echoed through Europe’s capitals in a powerful and destructive way. 
In Berlin, London, Paris, Rome, and elsewhere, Israel is being denounced as a “terrorist state.” 
Angry demonstrators burned synagogues in France and, of all places, Germany, with some even chanting “Jews to the gas!” 
The grotesque coupling of legitimate solidarity with Palestine and anti-Jewish invective seems to have forged a politically correct form of anti-Semitism – one that, 70 years after the Holocaust, is raising the specter of Kristallnacht over Europe’s Jewish communities. 
Israelis are struggling to comprehend why five million refugees and 200,000 deaths in Syria mean so much less to the Western conscience than the 2,000 Palestinians killed in Gaza. 
They cannot quite grasp how European demonstrators can denounce Israel’s wars as “genocide” – a term that has never been applied to the Syrian hecatomb, the obliteration of Grozny by Russia, the 500,000 casualties in Iraq since the United States-led invasion in 2003, or US airstrikes in Afghanistan and Pakistan. 
In fact, the answer is simple: Defining Israel’s sins in terms borrowed from the Holocaust is Europe’s righteous way to rid itself of its Jewish complex. 
“The Holocaust,” as Thomas Keneally wrote in Schindler’s Ark, “is a Gentile problem, not a Jewish one.” 
Or, as the psychiatrist Zvi Rex famously quipped, “Germans will never forgive the Jews for Auschwitz.” 
There is no denying that Gaza’s agony is a humanitarian disaster. 
But it does not even approach other humanitarian crises of recent decades, including those in the Democratic Republic of the Congo (DRC), Sudan, Iraq, and Afghanistan. 
In fact, since 1882, the entire Arab-Jewish/Israeli conflict has produced barely half the number of casualties that Syria has in just three years. 
Since 1950, the Arab-Israeli conflict ranks 49th in terms of fatalities. 
This does not square with the global vilification of Israel that is drowning out legitimate criticism. 
When other countries falter, their policies are questioned; when Israel’s behavior is controversial or problematic, its right to exist comes under fire. 
There are more United Nations resolutions devoted to human rights abuses committed by Israel than to abuses by all other countries combined. 
Stories about Israel focus almost exclusively on the Palestinian conflict. 
Joyce Karam, the Washington bureau chief of the Pan-Arab newspaper Al-Hayat, believes that this is because “Muslim killing Muslim or Arab killing Arab seems more acceptable than Israel killing Arabs.” 
Syrian, Libyan, and Yemenite victims are faceless; the lionization of the incomparably fewer Gazan casualties makes them unique. 
This is not to say that Israel should be consoled by the macabre arithmetic of bloodshed. 
The hypocrisy of some of Israel’s critics in no way vindicates its colonial encroachment on Palestinian space, which makes it the last developed, “Western” country occupying and manhandling a non-Western people. 
Most of today’s conflicts – in Colombia, Somalia, the DRC, Sudan, and now even Iraq and Afghanistan – are internal. 
Even a major power like Russia faces punishing sanctions for refusing to end its occupation of a foreign land. 
Israel’s clash with Palestine represents a particularly compelling drama for the West. 
The story of Israel extends far beyond the current conflict, to recount an extraordinary symbiosis between Jewish heritage and European civilization that ended in calamity. 
From its birth, Israel has borne the scars of the greatest crime ever committed on Europe’s soil. 
The plight of the Palestinians – the victims of Zionism’s triumph – touches another neuralgic point in the European mind. 
Nonetheless, the Israel-Palestine tragedy is unique. 
It is an absorbing odyssey of two nations with mutually exclusive claims on sacred lands and religious shrines that are central in the lives of millions of people worldwide. 
It is also a war of conflicting images, in which both parties claim a monopoly on justice and martyrdom. 
Jewish persecution, and the way that Zionism has employed it, has become a model for Palestinian nationalism. 
Catchwords like “exile,” “diaspora,” “Holocaust,” “return,” and “genocide” are now an inextricable component of the Palestinian national ethos. 
It is important to note that the Holocaust does not give Israel immunity from criticism, nor can every attack on Israel’s policies be dismissed as anti-Semitism. 
Prime Minister Binyamin Netanyahu’s Israel is rightly perceived as a status quo state that aspires to have it all: continued control over and settlement of the Palestinian territories and “quiet for quiet” from the Palestinians. 
But Hamas’s control within Gaza is equally problematic. 
In order to end its fatal flirtation with jihadism and bolster stability, Gaza must pursue an economic and political deal with Israel that represses the temptation of war. 
Just as the rehabilitation of the Egyptian towns along the Suez Canal in the wake of the 1973 Yom Kippur war paved the way for an Israeli-Egyptian peace, a prosperous Gaza would serve the interests of all parties involved – beginning with Israel. 

The Post-National Mirage 
MADRID – The German philosopher Jürgen Habermas once defined our times as “the age of post-national identity.” 
Try convincing Russian President Vladimir Putin of that. 
Indeed, the great paradox of the current era of globalization is that the quest for homogeneity has been accompanied by a longing for ethnic and religious roots. 
What Albert Einstein considered a “malignant fantasy” remains a potent force even in united Europe, where regional nationalism and xenophobic nativism have not come close to disappearing. 
In the Balkan wars of the 1990’s, communities that had shared the same landscapes for centuries, and individuals who grew up together and went to the same schools, fought one another ferociously. 
Identity, to use a Freudian expression, was reduced to the narcissism of minor differences. 
Nationalism is essentially a modern political creation wrapped in the mantle of a common history and shared memories. 
But a nation has frequently been a group of people who lie collectively about their distant past, a past that is often – too often – rewritten to suit the needs of the present. 
If Samson was a Hebrew hero, his nemesis Delilah must have been a Palestinian. 
Nor have ethnic loyalties always matched political boundaries. 
Even after the violent dismemberment of multiethnic Yugoslavia, none of the successor states can claim to be wholly homogeneous. 
Ethnic minorities in Slovenia and Serbia (even with the exclusion of Albanian Kosovo) account for between 20-30% of the total population. 
Dictatorships, unlike democracies, are ill-equipped to accommodate ethnic and religious diversity. 
As we saw in Yugoslavia and are now seeing in the Arab Spring revolts, a multiethnic or multi-religious society and an authoritarian regime can be a recipe for state implosion. 
The dissolution of the Soviet Union, too, had much to do with the collapse of its multinational structure. 
Dozens of ethnic minorities live in China, where Muslim Uighurs, in particular, face official repression. 
India is a case apart. 
The vastness of Indian nationality, with its plethora of cultures, ethnicities, and religions, has not immunized it against ethnic tensions, but it has made India more a seat for a major world civilization than a mere nation-state. 
Conversely, ethnocentric nationalism is bound to distort a people’s relations with the rest of the world. 
Zionism is a case in point. 
The enlightened ideology of a nation rising from the ashes of history has become a dark force in the hands of a new social and political elite that have perverted the idea. 
Zionism has lost its way as a defining paradigm for a nation willing to find a bridge with the surrounding Arab world. 
The European Union, a political community built on democratic consensus, was not established in order to bring about the end of the nation-state; its purpose has been to turn nationalism into a benign force of transnational cooperation. 
More generally, democracies have shown that they can reconcile multiethnic and multilingual diversity with overall political unity. 
So long as particular groups are willing to abandon the politics of secession and embrace what Habermas calls “constitutional patriotism,” political decision-making can be decentralized. 
The recent electoral defeat of the secessionists in Quebec should serve as a lesson for separatists throughout Europe. 
Decades of constitutional uncertainty caused companies to leave Quebec in droves, which ruined Montreal as a corporate hub. 
Ultimately, the Québécois rebelled against the separatists’ delusion that the state from which they wanted to secede would cheerfully serve their interests. 
Likewise, the longstanding hemorrhage of talent and capital from Scotland might accelerate should nationalists succeed in persuading a majority of Scots to vote for secession this autumn. 
A similar risk can be found in Catalonia’s bid for independence from Spain. 
The central state always has its own nation-building responsibilities. 
Putin can manipulate Ukraine not because there is a shred of credibility to his claim that the Russian minority there faces persecution, but because Ukraine’s corrupt democracy failed to build a truly self-sustaining nation. 
Consider, by contrast, Italy’s annexation of South Tyrol, a predominantly German-speaking region. 
The move was decided at the Versailles Peace Conference after World War I without consulting the population, which was 90% German-speaking. 
Yet today, South Tyrol enjoys extensive constitutional autonomy, including full cultural freedom and a fiscal regime that leaves 90% of tax revenues in the region. 
The bilingual, peaceful coexistence of the province’s inhabitants can serve as a lesson to both rigid central governments and unrealistic secessionist movements elsewhere. 
For example, an unofficial poll recently showed that 89% of residents in Italy’s northern “Repubblica Veneta” back independence. 
But, though the Venetians’ desire to secede from the poorer South might sound familiar to other regions in Europe where taxpayers feel aggrieved at subsidizing other, allegedly feckless, regions, the politics of secession can be taken to absurd extremes. 
Scotland could reach those extremes. 
The residents of Shetland, Orkney, and the Western Isles are already demanding the right to decide whether to remain part of an independent Scotland. 
One can easily imagine the government in Edinburgh opposing the new secessionists, just as Westminster opposes Scottish independence today. 
When the historian Ernest Renan dreamed of a European Confederation that would supersede the nation-state, he could not yet envisage the challenge posed by micro-states and para-states. 
He believed that “man is a slave neither of his race nor his language, nor of his religion, nor of the course of rivers nor of the direction taken by mountain chains.” 
Maybe so. 
But we have yet to prove it. 

Asia’s Middle Eastern Shadow 
TEL AVIV – In 2010, then-US Secretary of State Hillary Clinton announced America’s eastward shift in global strategy. 
The United States’ “pivot” to the Asia-Pacific region was required not only because of the security threats posed by the rise of China, but also as a consequence of America’s long and costly obsession with the Middle East. 
The Middle East has long confronted the US with formidable challenges, which ultimately exceeded America’s imperial capacities and sapped public support. 
But the real question now is whether America is still able and willing to uphold its global pretensions. 
After all, Asia is no less a demanding theater than the Middle East. 
Indeed, dealing with it might require reconciling the pivot to Asia with an ongoing presence in the Middle East, if only because the two regions have much in common. 
For starters, in a region replete with territorial disputes and old rivalries that are as bitter as the Arab-Israeli conflict, America faces a geopolitical environment with no security architecture and no agreed conflict-resolution mechanism. 
The division of the Korean Peninsula, the India-Pakistan conflict over Kashmir, and the question of Taiwan (which by 2020 the US will no longer be able to defend from a Chinese attack, according to a 2009 study by the RAND Corporation) appear as intractable as the Israeli-Palestinian dispute. 
Moreover, like the Middle East, Asia is home to an uncontrolled arms race that includes both conventional capabilities and weapons of mass destruction. 
Four of the world’s ten largest militaries are in Asia, and five Asian countries are full-fledged nuclear powers. 
Nor does the Middle East have a monopoly on Islamist extremism, ethnic tension, or terrorism. 
China’s restive Muslim Uighurs, the Hindu-Muslim conflict in India, the ethnic cleansing of the Rohingya Muslims in Myanmar, the secessionist Muslim insurgency in the Philippines, and the ethnic separatist insurgency in southern Thailand all highlight Asia’s complex tapestry of unresolved religious and ethnic trouble spots. 
Moreover, America’s Asian pivot is occurring at a time when its international credibility has been badly eroded by domestic political dysfunction and disappointing performance in the Middle East. 
This, for example, explains Japan’s fear that the US might eventually reach an accommodation with China over the disputed Senkaku Islands (Diaoyu Islands in Chinese). 
Indeed, Japan’s quest to re-establish its own military capability is a vote of limited confidence in its US ally. 
Obama’s recent wavering on the use of force in Syria has left many in Asia doubting whether they can rely on America not only if China forcibly asserts its maritime claims, but also if North Korea carries out its threats to attack the South. 
Conspicuously, South Korean President Park Geun-hye’s “Trustpolitik” – a soft-power approach to North Korea that calls for deeper cooperation with China, the North’s most important ally – is particularly popular. 
As in the Middle East, America’s bilateral military relationships in Asia are often with “frenemies,” countries that share an alliance with the US while deeply mistrusting one another. 
US Secretary of Defense Chuck Hagel’s agreement in early October with his South Korean counterpart on a Tailored Deterrence strategy became untenable a few days later, when the US promised Japan a massive upgrading of its military capabilities. 
South Korea views this as tantamount to outsourcing China’s containment to an unrepentant imperial power. 
In any case, an American withdrawal from the Middle East is hardly a recipe for countering China’s rise in East Asia, given that the two regions are increasingly intertwined. 
While the US is pivoting to the East, leaving old allies like Saudi Arabia and Egypt deeply resentful, China is pivoting westward. 
China’s exports to the Middle East are already more than twice those of the US. 
Its annual exports to Turkey total $23 billion, and now include military supplies, such as a missile-defense system that is not compatible with those of Turkey’s NATO allies. 
If China’s penetration into the Middle East persists at the current pace, it might even be able to obstruct the flow of energy resources to America’s Asian allies. 
In a global competition, a superpower’s competitors are bound to exploit its weaknesses. 
The 2008 financial crisis, which destroyed the mystique of Western economic prowess, led to a marked a shift in China’s global strategy. 
The Chinese began toying with the idea of abandoning their “peaceful rise” in favor of what then-President Hu Jintao defined at a July 2009 conference of Chinese diplomats as “the democratization of international relations” and “global multipolarity.” 
The US, as hegemon in the Middle East for many years, could not solve any of the region’s major problems single-handedly. 
If its pivot to Asia is to be credible, the US will eventually have to agree to be one among a number of great powers in Asia, a co-equal partner with China, Japan, and India in shaping the region’s strategic environment. 

The Birth Pains of Arab States 
TEL AVIV – Caught off guard by the unraveling of the Iraqi state – spurred by the rapid advance of militants from the Islamic State in Iraq and Syria (ISIS) – Americans and Europeans have reverted to their penchant for self-flagellation. 
And, indeed, a major share of the responsibility for the tumult in Iraq – not to mention Syria – undoubtedly lies with the West’s pernicious colonial legacy and wrongheaded policies in the Arab Middle East. 
But, ultimately, the turmoil in the Arab world reflects the difficult encounter of an old civilization with the challenges of modernity. 
To be sure, US President George W. Bush’s Iraqi enterprise was calamitously ill-conceived, as was President Barack Obama’s subsequent failure to leave an adequate residual force in Iraq after the United States withdrew its troops. 
Indeed, America’s hasty departure allowed ISIS to gain ground, while blurring the border with Syria. 
In its push to carve out an Islamic state, ISIS invaded Syria from Mosul long before they invaded Mosul from Syria. 
But history is frequently shaped by overwhelming impersonal forces – such as religion, ethnic identity, and cultural attitudes – that are not receptive to solutions based on force, let alone intervention by foreign armies. 
Even if the US never invaded Iraq, it is not far-fetched to assume that the transition from Saddam Hussein’s leadership would have been violent, with an outcome resembling either Syria today or Yugoslavia in the 1990s, when a brutal civil war ended in the country’s division along ethnic lines. 
In his famous attack on determinism, the philosopher Isaiah Berlin did not deny that structural factors could be a driver of history; he simply rejected their use as a pretext for avoiding moral responsibility. 
Though Arab elites could not control, say, the forces of Western imperialism, their failure to acknowledge their share of responsibility for the problems plaguing modern Arab societies amounts to a betrayal of their peoples. 
Today, the Arab predicament is, at its core, a crisis of the concept of the Arab state. 
Arabs have long denigrated Israel’s ethnic concept of nationalism, arguing that religion is not a legitimate basis for statehood – as if European countries did not begin as and remain Christian republics for centuries, and as if the Arab countries surrounding Israel were a monument to religious and ethnic diversity. 
In fact, Arab countries are imploding precisely because of their incapacity to reconcile such diversity. 
Of course, that struggle is not unique to Arab countries. 
For Europe, creating a peaceful, quasi-federal union required two world wars and the redrawing of national boundaries through ethnic cleansing – and it continues to be challenged by xenophobic and nationalist movements. 
Likewise, Yugoslavia’s multi-ethnic experiment ended violently, following the collapse of its dictatorship. 
The Arab world’s struggle to create a viable sociopolitical order will not be any easier. 
Indeed, Syria and Iraq – now composed of separate Kurdish, Shia, and Sunni quasi-states, with the latter extending into Syria – might not be the last countries in the region to face challenges to the arbitrary borders established in the region by colonial powers at the end of World War I. 
The Arab Spring revolutions are not just about the new Arab generation’s yearning for democracy, which still remains mostly unfulfilled; they are now mainly about the long-simmering frustration of minorities that were neglected in the post-colonial era and repressed by autocrats seeking to impose unity on multi-ethnic societies. 
Today, the Middle East is experiencing the collapse of the notion that Arab states can accommodate religiously diverse societies. 
This is not a problem that a foreign power can resolve. 
The mistake that the US has made in the Middle East has been to attempt to cut short the maturation process that major historical changes demand. 
Indeed, by invading Iraq, the US was effectively trying to circumvent the logic of the historical cycle. 
If Europe had to endure centuries of religious wars and two successive world wars to settle its national and ethnic disputes, how could the US expect to be able to export democracy and respect for minorities to the Middle East on the wings of F-16s? 
It is telling that the two most successful democratic transitions in the Arab world in recent years – Tunisia and Kurdistan – occurred with minimal meddling from the West. 
The future of the Arab Middle East is in the hands of its peoples – and history does not allow for shortcuts. 
Like all other civilizations in history, the Arabs must engage in a long process of trial and error aimed at overcoming their structural challenges – a process that is likely to extend throughout much of the twenty-first century. 
However pernicious Western policies might have been, Islamist forces are a natural outcome in Arab lands, a genuine response to the failures of secular Arab nationalism and the modern Arab state. 
This is not to say that the West cannot offer any assistance. 
But it must do so with humility and cultural sensitivity, using smart diplomacy instead of “counter-terrorist strikes.” 

Negotiations in a Strategic Trap 
TEL AVIV – The Israeli-Palestinian peace process, stymied by irreconcilable differences between the parties, has always depended on the strategic regional context. 
It was born, after all, in the wake of the first Gulf War, and was facilitated by the regional consequences of the Cold War’s end. 
These days, the process is shaped by two major regional dynamics, the so-called Arab Spring and the Iran nuclear deal. 
The Iran deal has turned into one of the most serious crises of trust ever in the United States’ relations with its Middle East allies. 
Though they have no alternative, both Israel and the Arab states will find it difficult to trust future US commitments to their security. 
To Israeli Prime Minister Binyamin Netanyahu, US President Barack Obama betrayed Israel when he sacrificed Egypt’s former president, Hosni Mubarak, and paved the way for the Muslim Brotherhood’s rise to power. 
Now he has wielded the knife a second time by reaching a deal with Iran, supposedly behind Netanyahu’s back. 
Israel’s conventional strategic wisdom was based on an equation of “Bushehr versus Yitzhar” – that is, a readiness to dismantle West Bank settlements if the Iranian centrifuges in Bushehr were dismantled. 
As far as Netanyahu is concerned, this is not taking place. 
Nor do the Arab revolutions counsel Israel’s strategic planners to take security risks. 
Israel, they would say, is now surrounded by imploding, failing states/regions (Lebanon, Syria, Gaza, and Egypt’s Sinai Peninsula), as well as by a strategically vital buffer state, Jordan, whose long-term survival cannot be taken for granted. 
The anarchy along Israel’s borders is becoming a breeding ground for Sunni extremists for whom the Jewish state is the ultimate enemy. 
To create a Palestinian state when existing Arab states are crumbling – and with a part of Palestine controlled by Hamas – does not seem like a brilliant idea. 
Netanyahu is a conservative in revolutionary times. 
Unimpressed with what others saw as the beginning of an era of democracy in the Arab world, he preferred not to budge on any front, including Palestine. 
Now he is faced with a strategic nightmare come true: Iran’s possible integration into the international community without having to dismantle its nuclear-weapons potential. 
In this context, US Secretary of State John Kerry’s peace initiative has become trapped in a paralyzing power game. 
Should the process fail, Kerry warns, the US will not be able to rescue Israel from the wave of international condemnation and sanctions that would be unleashed against it. 
But Netanyahu’s card is more than a threat. 
His friends in the US Senate have already introduced a bill, which currently has 59 cosponsors, that would impose new sanctions on Iran; this is tantamount to torpedoing the entire Iran deal. 
It is this reality that has led the Americans to endorse two Israeli positions – recognition of Israel as a Jewish state and intrusive security arrangements – that the Palestinians are bound to reject. 
Recognizing the “Jewish state” would be a betrayal of the constituent ethos of Palestinian nationalism, while intrusive security arrangements would be a standing invitation to radical groups to fight what would be seen as occupation in disguise. 
Instead of controlling the extremists, a robust Israeli security presence in Palestine would precipitate the collapse of its institutions. 
Iran will not change its regional policies overnight. 
The nuclear deal is not the “grand bargain” that Iran proposed to the US in 2003 and that was supposed to address, in addition to the nuclear dispute, a wide array of regional issues, including the Israeli-Palestinian conflict. 
For Iran, a strategic partnership with the US would be the ultimate betrayal of the Islamic revolution, an inconceivable change of identity. 
With or without a nuclear deal, Iran, which was disinvited from the Geneva II conference on Syria, because of its rejection of the conference’s US-inspired terms of reference, aspires to challenge America’s policies and represent an alternative path for the region. 
“We did not agree to dismantle anything,” Iran’s foreign minister insisted in defiance of the US interpretation of the nuclear deal. 
Such talk allows Netanyahu to persist in his doomsday rhetoric. 
One would expect that, with the rising Iranian threat fostering tacit security cooperation between Israel and its more stable Arab neighbors (particularly Saudi Arabia), Netanyahu would aspire to resolve the Palestinian issue, thus removing the last obstacle to an overt strategic partnership. 
That was exactly the rationale behind Prime Minister Yitzhak Rabin’s endorsement of the Oslo process from the outset. 
But Netanyahu’s school of thought is radically different. 
Not only does it advocate an Israeli presence in the West Bank (the Biblical homeland of Judea and Samaria); it also links territorial concessions to the Palestinians to the neutralization of existential threats emanating from the outer circle of the region. 
Among US presidents, George W. Bush identified most strongly with this right-wing Israeli philosophy, and his war in Iraq and policies toward Iran accorded with it perfectly. 
Indeed, both he and his father moved to promote an Israeli-Palestinian peace settlement only after their respective Iraq wars. 
The 1991 Madrid Peace Conference followed the Gulf War, while the “road map” came after the Iraq War. 
Now, however, international acceptance of Iran as a nuclear-threshold state, together with the threat emanating from imploding Arab neighbors, flatly contradicts Netanyahu’s assumptions about the conditions that must be fulfilled for Israel to offer “painful concessions” to the Palestinians. 
Someone clearly looks likely to fall into a strategic trap, but who? 

History Strikes Back 
MADRID – When the Cold War ended and the Soviet Union collapsed, the victors were beyond complacent, for they were certain that their triumph had been inevitable all along. 
Many in the West assumed that liberal capitalism’s victory over totalitarian socialism would necessarily bring an end to wars and sanguinary revolutions. 
Today, two powerful leaders – Russian President Vladimir Putin and Chinese President Xi Jinping – are demonstrating just how farfetched this view was. 
The predominant Western view was exemplified in Francis Fukuyama’s 1992 book The End of History and the Last Man, which presumed that Western liberal democracy was the endpoint of humanity’s sociocultural evolution. 
In other words, Christian eschatology was transformed into a secular historical postulate. 
That transformation was not new. 
Hegel and Marx embraced it. 
In 1842, the historian Thomas Arnold stated, with typical Victorian complacency, that Queen Victoria’s reign contained “clear indications of the fullness of time.” 
All of these historical prophets – whether heralding the realization of the Absolute Idea or the dictatorship of the proletariat – proved to be miserably wrong. 
Not long after the West’s Cold War victory, the rise of Islamic fundamentalism and the return of national tribalism, even in the heart of “post-historical” Europe, challenged the concept of “the end of history.” 
The Balkan wars of the 1990’s, America’s wars in Afghanistan and Iraq, the bloody Arab revolts, and the exposure of Western capitalism’s ethical and systemic flaws in the global economic crisis undercut the idea further. 
But perhaps the most salient reminders that history is still very much alive come from China and Russia. 
After all, neither China’s one-party state-capitalist system nor Russia’s plutocratic political economy is particularly liberal, and neither country is especially averse to asserting its (self-identified) rights by military means. 
For China, this means “defending” its territorial claims in the East and South China Seas with an increasingly assertive foreign policy, conspicuously backed by growing military muscle. 
This behavior is amplifying long-festering regional tensions, while fueling competition between China and the United States/Japan alliance – a situation that recalls the pre-World War I struggle for maritime dominance between the United Kingdom and Germany. 
For its part, Russia has ruthlessly strived to recover its lost continental empire, be it through the brutal repression of Chechnya, the 2008 war in Georgia, or the current assault on Ukraine. 
In fact, Russia’s recent actions in Crimea share many disturbing features with Adolf Hitler’s 1938 seizure of Czechoslovakia’s German-speaking Sudetenland – an important catalyst of World War II. 
The fact is that Putin’s actions are not just about Crimea, or even about Ukraine. 
Just as Hitler was driven by the desire to reverse the humiliating terms of the Treaty of Versailles, which ended WWI, Putin is focused on reversing the Soviet Union’s dismemberment, which he has called “the greatest geopolitical tragedy of the twentieth century.” 
Putin is thus challenging one of America’s greatest foreign-policy achievements: the end of the division of Europe and the establishment of free countries that could be drawn into the Western sphere of influence. 
And, unlike US President Barack Obama in Syria and Iran, Putin respects his own red lines: the former Soviet republics are not for the West to grab, and NATO will not be allowed to expand eastward. 
Moreover, Putin has made ethnic nationalism a defining element of his foreign policy, using Crimea’s Russian-speaking majority to justify his adventure there. 
Likewise, ethnic nationalism drove Hitler’s assault on the European order: the Sudetenland was mostly German, and the Austrian Anschluss was aimed at merging the two vital parts of the German nation. 
In his controversial 1961 study of WWII’s origins, the historian A.J.P. Taylor vindicated Hitler’s decision to take over the small successor states that were created at Versailles to check Germany’s power – a strategy by the victors that Taylor called “an open invitation for German expansionism.” 
The same could presumably be said today of Russia’s fatal attraction to the former Soviet republics. 
Of course, no one wants a new European war. 
But Putin’s provocations and the legacy of Obama’s foreign-policy failures could spur him to cut his political losses by taking unexpected action. 
After all, Obama’s entire foreign-policy agenda – a nuclear deal with Iran, an Israel-Palestine peace agreement, reconciliation with estranged allies in the Middle East, and America’s strategic pivot toward Asia – now hinges on his capacity to tame Putin. 
China’s role is complicating the situation further. 
By acquiescing in Russia’s actions in Crimea, Xi is joining Putin in challenging the world order that emerged from America’s Cold War victory. 
In doing so, China has allowed power calculations to outweigh its own long-held principles, particularly non-interference in other countries’ internal affairs – a change that its leaders would defend by asserting that the US has repeatedly demonstrated that power ultimately determines principles. 
German Chancellor Angela Merkel – whose East German upbringing should have given her especially acute insight into Putin’s authoritarian mindset – has described the Russian leader as detached from reality, guided by nineteenth-century Machtpolitik. 
But it is Europe that has been living in a fantasy: a “post-historical” world where military power does not matter, subsidies can tame nationalist forces, and leaders are law-abiding, well-mannered gentlemen and women. 
Europeans truly believed that the Great Game between Russia and the West was settled in 1991. 
Putin’s message is that the last quarter-century was merely an intermission. 

Putin’s Rearguard Battle 
MADRID – Russia’s recent diplomatic successes in Syria and Iran, together with foreign-policy missteps by US President Barack Obama, have emboldened President Vladimir Putin in his drive to position Russia as capable of challenging American exceptionalism and Western universalism. 
But Putin’s recent address to Russia’s Federal Assembly was more a reflection of his resentment of Russia’s geopolitical marginalization than a battle cry from a rising empire. 
To be sure, with America exhausted from its fruitless wars in the Middle East, and Europe turning inward as it faces its own crises, the case for a multipolar discourse is more convincing today than at any other time since the Cold War. 
But this does not change the fact that Russia is a declining power, whose diplomatic triumphs are mere tactical achievements that do not add up to a strategic game changer for the world. 
If, as Lenin put it, communism was, “Soviet power plus the electrification of the whole country,” Putinism can be reduced to nuclear weapons and oil extraction. 
In all other areas, the West retains a clear advantage: Russia’s demographic decline, antiquated military forces, one-dimensional economy, low productivity, and chronic internal unrest dwarf the challenges faced by the US and Europe. 
In fact, Putin’s recent address was replete with references to Russia’s weaknesses – specifically, “interethnic tensions,” local-government authorities “constantly shaken by corruption scandals,” an incompetent administration, capital flight through economic “offshore activity,” and the inability to achieve “technology breakthroughs.” 
These traits certainly are not the makings of a dominant power in a globalized world. 
Like it or not, talk of Russia competing with the West is nothing more than sentimental nostalgia or meaningless rhetoric. 
For Putin, the agreement reached in 1945 at the Yalta Conference is not dead; its limits on the Kremlin’s influence have simply shifted eastward, essentially to the boundaries of the former Soviet Union. 
While Putin managed to stop Georgia from joining NATO, his Eurasian Economic Community (EurAsEC) is a poor replica of the Council for Mutual Economic Assistance (Comecon), which included all of the countries of the Eastern Bloc and a few other socialist states. 
Likewise, the Collective Security Treaty Organization, a Russia-led Eurasian defense alliance, is a far cry from the old Warsaw Pact. 
Moreover, although Putin and his Ukrainian counterpart, Viktor Yanukovych, have so far managed to derail Ukraine’s association agreement with the European Union, they probably will not be able to block it for long. 
Despite having been cajoled by Putin with lavish financial support and cheap gas, Ukraine is unlikely to join a Russia-led EurAsEC, which is more a means of anchoring former Soviet republics to Russia’s sphere of influence than it is a vehicle to promote trade. 
But the most serious threat to Russia’s global status is the coming obsolescence of its nuclear arsenal. 
Putin has been unable to counter America’s development of “prompt global strike,” which would render Russia’s nuclear deterrent irrelevant, by enabling the United States to hit targets worldwide with conventional weapons within an hour. 
Russia is no more able to compete with Western technology and capabilities today than the Soviet Union was when it collapsed under the stress of its arms race with the US. 
In his address to the Federal Assembly, Putin positioned himself as a defender of conservative values against “tolerance, neutered and barren” (a euphemism for gay rights) and a champion of morality and traditional family values. 
Russia might not be a superpower anymore; but, according to Putin, it represents a morally superior civilization battling America’s foreign-policy recklessness, malevolent economic practices, and moral depravity. 
Putin’s moral claims are, however, mired in politically unsustainable contradictions. 
“Today, many nations,” he warned, “are revising their moral values and ethical norms, eroding ethnic traditions and differences between peoples and cultures.” 
But Russia is a kaleidoscope of ethnicities and cultures, whose efforts to assert themselves were dismissed in the very same address as the criminal behavior of “ethnic mafias.” 
Furthermore, the Western values that Putin rejects in the name of Russian nationalism (and anti-Americanism) are precisely those that many Russians endorse. 
More than a cultural statement, Putin’s description of Russia in Slavophile or Eurasianist terms reflects his aspiration to forge an alliance with China and other emerging economies to offset America’s global dominance. 
But Putin cannot expect China to underwrite his pretentions. 
China may have joined Russia in opposing the West’s embrace of “humanitarian intervention” in other countries’ internal conflicts, but the Cold War premise that ideological affinity is an adequate basis for military alliance would not work for China today. 
Simply put, China has no interest in revolutionizing an international system from which it has benefited so much. 
For all of his grandstanding, Putin’s ambitions are not new. 
Indeed, he represents a continuation of Russia’s centuries-old drive to be treated as a great power in a world order that it views as a Hobbesian struggle of all against all. 
But authoritarianism and ham-fisted diplomacy are not exactly a recipe for success in the twenty-first century. 

A New Peace Paradigm 
TEL AVIV – The collapse of yet another attempt by the United States to broker an Israeli-Palestinian peace agreement should do more than provoke finger-pointing. 
It should spur a fundamental reconsideration of a paradigm of peacemaking – direct bilateral negotiations, under US guidance – that lost its relevance long ago. 
While the US remains an indispensable global actor, it is no longer willing to use coercive diplomacy in its quest to build a new order. 
But it is not just a matter of willingness; the US has lost its ability to intimidate other countries, even allies and clients like Israel and the Palestinian Authority. 
In the Middle East alone, the US has overstretched its capabilities in two controversial wars; repeatedly failed to broker a peace between Israel and Palestine; estranged key regional powers; and performed disappointingly on issues like Iran’s nuclear program and Syria’s civil war. 
All of this has diminished its capacity to shape the region’s future. 
The problem is not limited to the Middle East. 
Despite its professed strategic pivot toward Asia, US President Barack Obama’s administration has done little to address China’s increasingly assertive efforts to stake its territorial claims in the South and East China Seas or North Korea’s affronts to the status quo on the Korean Peninsula. 
Add to that America’s weak response to Russia’s annexation of Crimea, and it is no wonder that Israeli and Palestinian leaders have dismissed its peace overtures. 
US Secretary of State John Kerry, in his bid for an Israeli-Palestinian settlement, operated as if conflict resolution could be achieved through non-coercive solutions, deriving from the good will of the relevant parties. 
According to this plainly naive approach, the negotiation process operates according to its own embedded logic, independent of considerations of power, coercion, and leverage. 
But treating force and diplomacy as distinct phases of foreign policy gives the negotiating parties the sense that American power lacks purpose and resolve. 
Diplomatic ripening sometimes requires the mediator to be a manipulator and an arm-twister. 
Indeed, America’s only successful attempts at peace diplomacy in the Middle East involved a masterly combination of power, manipulation, and pressure. 
Secretary of State Henry Kissinger used it to lead Israel toward groundbreaking interim settlements with Egypt and Syria following the 1973 Yom Kippur War. 
President Jimmy Carter used it to conclude the 1978 Camp David Accords, establishing diplomatic relations between Egypt and Israel. 
And Secretary of State James Baker used it to overcome the recalcitrance of Israeli Prime Minister Yitzhak Shamir during the 1991 Madrid Peace Conference. 
If the US cannot provide this today, it must relinquish its monopoly on international conflict resolution. 
It is time for the US to recognize that it cannot resolve the Israeli-Palestinian conflict, defuse the Iranian nuclear dispute, change North Korea’s behavior, or stop the Syrian civil war on its own. 
Over the last two decades, the world grew accustomed to US-led international coalitions for war in the Middle East. 
America should now try to form a different kind of coalition – one aimed at achieving peace. 
Such an alliance would entail a larger role for the other three members of the so-called “Middle East Quartet” – the European Union, Russia, and the United Nations – and key Arab countries. 
Within this new peace paradigm, the Israeli-Palestinian conflict would become amenable to a truly international solution. 
If Iran’s nuclear program demands negotiations with the five permanent members of the UN Security Council, plus Germany, and North Korea’s requires the so-called “six-party talks,” why should the resolution of the Israeli-Palestinian conflict be left exclusively to the US? 
As if the Israeli-Palestinian conflict’s depth and duration were not enough to merit an international solution, there is also the issue of Palestine’s mistrust of the US. 
For Palestinians, the US – a staunch ally of Israel whose leaders have strong domestic political incentives not to challenge it – cannot act as an honest broker in negotiations. 
Under a truly international paradigm, the principles underlying a peace deal – two states along the 1967 border (with territorial swaps to accommodate Israel’s settlement blocs), two capitals in Jerusalem, an agreed solution to the refugee problem, and robust security arrangements – could be enshrined in a Security Council resolution. 
After establishing the terms of a fair deal, the international alliance – under US leadership – could devise an implementation strategy. 
Such an international approach would also require a broader peace process, aimed at achieving a regional settlement between Israel and its Arab neighbors. 
This is critical, because the future Palestinian state could not offer Israel much security. 
Even now, Palestine is a relatively minor security challenge for Israel; the more formidable threats, which have compelled Israel to build up its military considerably, come from the Arab states that surround it. 
The promise of a regional settlement that offers Israel the needed security guarantee – not to mention a considerable boost to its international standing – would make the painful concessions, including compromises on borders and Jerusalem, which are critical to the creation of a Palestinian state, more digestible for Israeli leaders. 
The initiators of the 2002 Arab Peace Initiative understood this; perhaps now the US will come to appreciate it as well. 

Shock and Panic 
CARDIFF – No medical therapy is treated more differently by countries, regions, hospitals, and doctors than electroconvulsive therapy (ECT). 
This is surprising in an era when treatments that work should supposedly be used with some uniformity. 
In fact, despite a consensus that ECT is the most effective treatment for severe depressive disorder, it comes at the bottom of the list in most treatment regimens for mood disorders. 
Some of the unease about ECT stems from psychiatry’s dark past, when patients in many countries had fewer legal rights than prisoners. 
Not so long ago, physical treatments such as lobotomy and ECT could be inflicted on patients without their consent, and sometimes for punitive purposes. 
But there is no comparable protest against the use of antipsychotic drugs, which have similarly been forced on people – and even used to torture prisoners. 
And, whereas few people now get ECT involuntarily, and in all cases consent is sought, a large and growing number get antipsychotic drugs under false pretences, including children, vulnerable adults, patients with Alzheimer’s, and a host of others whose lives are shortened by treatment, with no effort undertaken to seek their consent. 
Although ECT’s opponents believe that it causes brain damage, this is difficult to prove. 
Like antipsychotic drugs, antidepressants, and tranquilizers, ECT has an immediate organic effect. 
But, while ECT rarely, if ever, causes clear clinical evidence of brain damage and has not been shown to do so in animal studies, antipsychotic drugs regularly do, in the form of tardive dyskinesia and other syndromes. 
The same is true of antidepressants. 
There is no dispute that ECT can cause short-term memory loss. 
But critics have found it difficult to demonstrate memory or other cognitive problems that endure beyond three months. 
Nor can enduring autobiographical memory disturbances and inability to remember lists be readily attributed to ECT, because ECT is rarely given on its own. 
Indeed, very few of those who receive ECT do not also receive benzodiazepines, which do cause significant autobiographical memory problems when given alone, and antipsychotic drugs, which cause difficulties with lists of names or telephone numbers, and other comparable problems. 
Yet these drugs are rarely, if ever, blamed for cognitive disturbances following psychiatric treatment. 
The failure of ECT’s critics to demonstrate what to them seems obvious indicates an active conspiracy to minimize treatment-induced problems and to block those who have been injured by treatment from seeking redress. 
In fact, at recent guideline meetings in the United Kingdom on the issue of ECT, there have been no representatives from psychiatry, but many from patient groups. 
Organized psychiatry appears to have little interest in ECT, or is scared of harassment from patient advocates. 
As a result, even evidence that a person’s mood and clinical state has been significantly improved after ECT can be transformed into evidence of brain damage. 
When patients come forward to say they were helped by ECT, or a patient’s medical record points to clinical improvement with treatment, the apparent improvements are read as indicating the disinhibition and vacuousness that accompanies brain damage. 
There are better targets in mental health than ECT. 
Where is the concern about the millions who are becoming physically dependent on antidepressants? 
Where are the protests about the one-year-olds being treated with antipsychotic drugs? 
How is it possible that, because no company with currently patented drugs is campaigning to help medical and nursing staff recognize the catatonic features displayed by one in ten patients going through a psychiatric unit – features that could be treated rapidly with benzodiazepines or ECT – these features are missed completely? 
Why is it all but impossible to find anything but vilification of ECT on the Internet, and anything but glowing testimonies about drug treatments? 
ECT’s critics seem to think that if they do not protest against its use at every opportunity, its advocates will inflict it on people who do not need it. 
But, in contrast to psychotropic drugs, there are no marketing departments geared to maximizing ECT. 
This visceral focus on ECT has almost certainly led to ever more people ending up on drugs, and ever more brain damage and memory problems as a consequence. 
It sometimes seems that the critics are behaving according to the romantic illusion that if they can just abolish ECT, mental illness will disappear with it. 

Shorting Fiscal Consolidation 
NEW HAVEN – Real long-term interest rates – that is, interest rates on inflation-protected bonds – have fallen to historic lows in much of the world. 
This is an economic fact of fundamental significance, for the real long-term interest rate is a direct measure of the cost of borrowing to conduct business, launch new enterprises, or expand existing ones – and its levels now fly in the face of all the talk about the need to slash government deficits. 
Nominal interest rates – quoted in terms of dollars, euros, renminbi, etc. – are difficult to interpret, since the real cost of borrowing at these rates depends on the future course of inflation, which is always unknown. 
If I borrow euros at 4% for ten years, I know that I will have to pay back 4% of the principal owed as interest in euros every year, but I don’t know what this amounts to. 
If inflation is also 4% per year, I can borrow for free – and for less than nothing if annual inflation turns out to be higher. 
But, if there is no inflation over the next ten years, I will pay a hefty real price for borrowing. 
One just doesn’t know. 
Economists like to subtract the nominal government bond yield from the inflation-indexed bond yield of the same maturity to get a market estimate of the inflation rate from now to that maturity date. 
But such forecasts of “implied inflation” can be wild, if not absurd. 
During the heat of the 2008 financial crisis, for example, the inflation-indexed yield in the US rose so high for a brief period that implied annual inflation for the next seven years suddenly dropped to -1.5%. 
(A subsequent study by PIMCO bond traders Gang Hu and Mihir Worah concluded that this was linked to technical and institutional factors concerning the Lehman Brothers bankruptcy.) 
The real reason inflation-indexed bond yields are an interesting economic variable is that they report on a market in which both investors and borrowers know exactly what is coming, in real terms. 
Notably, the issuer, that is the borrower, can rationally plan such borrowing to make real investments. 
The supposed threat posed by government debt levels hasn’t hurt these markets, at least in the relatively few countries that have inflation-indexed bonds. 
Long-term inflation-indexed bond yields have fallen to around 1% a year, or less, in the United States, Canada, the United Kingdom, and the eurozone. 
Elsewhere, yields have been a little higher – around 2% in Mexico, Australia, and New Zealand – but still very low by historical standards. 
All these countries have shown roughly the same downward trend in real interest rates for many years, and notably since 2000. 
If one were to extrapolate this trend, ten-year interest rates would move into negative territory in a few years or so for most of them. 
In the US and the UK, yields on intermediate-term (5-year) inflation-indexed bonds are already actually negative this year. 
One may ask: how can an interest rate be negative? 
Why would anyone lend (buy a bond) for less than nothing? 
One can never have negative nominal interest rates (except through some oddity of taxes or regulations), since lenders would rather hold their cash than effectively pay borrowers. 
But there is nothing to stop negative real interest rates, since routine investors may have no alternative risk-free instrument that offers a positive real return. 
The low level of real interest rates does not appear to be due to the 2007-2009 financial crisis. 
In fact, there was a temporary upward spike in real long-term interest rates during the financial crisis in countries with indexed bonds. 
The rate has come down to low levels only during the period of recovery from the immediate crisis. 
Instead, low long-term real interest rates appear to reflect a general failure by governments over the years to use the borrowing opportunities that the inflation-indexed markets present to them. 
This implies an arbitrage opportunity for governments: borrow massively at these low (or even negative) real interest rates, and invest the proceeds in positive-returning projects, such as infrastructure or education. 
Opportunities for governments to do this exceed those of the private sector, which in many cases continue to be constrained by slow economic growth. 
Moreover, unlike private firms, governments can count as profits on their investments the benefits of positive externalities (benefits that accrue to everyone). 
Surely, governments’ levels of long-term investment in infrastructure, education, and research should be much higher now than they were five or ten years ago, when long-term real interest rates were roughly twice as high. 
The payoffs of such investments are, if anything, higher than they were then, given that many countries still have relatively weak economies that need stimulating. 
It is strange that so many governments are now emphasizing fiscal consolidation, when they should be increasing their borrowing to take advantage of rock-bottom real interest rates. 
This would be an opportune time for governments to issue more inflation-indexed debt, to begin issuing it, or to issue nominal GDP-linked debt, which is analogous to it. 

Should Africa Follow the EU Model? 
The African Union, which replaced the Organization for African Unity (OAU) in 2002, is trying to reproduce the European Union's institutions and ways of acting. 
But copying the EU blueprint means that nothing has been learned from the past and that nothing is being done to avoid the pitfalls Europe has endured. 
The biggest flaw in the EU model has been its reliance on a bureaucratic road to unity. 
In Africa, such an approach is particularly noxious because there is no real commitment on the part of African rulers to unity, which offers the prospect of creating a bureaucracy with no mission but to waste Africa's scarce resources. 
It will invariably recycle retired and failed politicians and be a way station for vast patronage. 
Of course, Africa needs unity. 
The go-it-alone strategy practiced by most African countries has left them vulnerable to the whims of former colonial powers determined to perpetuate an international division of labor that assigns to Africa the role of supplier of basic products and raw materials, rather than skilled, well-paid labor. 
So unity is needed to rebuild Africa. 
But that unity must be built step by step, with the primary focus on increasing regional trade within Africa. 
This should be followed by a determined strategy to end Africa's position as the "ghetto continent," one used by the industrialised countries--in collusion with most African rulers--as a dumping ground for obsolete products. 
Africa must cease being a region to be ransacked, burdened with ill-considered debts by the IMF and World Bank, and so left with institutionalised famine, lawlessness, and horrendus corruption. 
If true African unity is to emerge, Africa's rulers must be committed to it, not just in words, but by deeds. 
They could begin that long process by taking the following steps: 
hire staff based solely on merit; 
involve both elites and masses (professional associations, trade unions, NGOs, indeed all of civil society) in formulating policies. 
Unlike the EU, African unity cannot be built on the will of the elites alone; 
educate people now on the costs and benefits of cooperation and integration, which requires partial surrender of national sovereignty to regional authorities. 
The EU may well have avoided significant constitutional tensions had its member states' governments initiated such programs much sooner; 
restructuring of existing regional and continental groupings in order to give priority to increasing the volume of intra-Regional trade. 
This involves consolidating institutions such as regional Organisations for Economic Cooperation, African Payments Unions, regional clearing houses, and compensatory mechanisms; 
The AU must secure an AAA bond rating in order to tap international capital markets on the most favorable terms, which includes issuing bonds on African exchanges. 
Such a scenario will be possible only with the involvement of the UN Security Council, which might consider running a scheme based on the Iraqi oil-for-food program. 
This time, the UN would earmark part of the export revenues of any given AU member for specific and defined programs and budget contributions. 
A zero tolerance policy must be applied for arrears on contributions. 
The AU will also have to keep an eye on the abuse of state funds by African rulers and local elites. 
An entirely new financial culture needs to be implemented to eliminate corruption, and this will require that Africans monitor other Africans. 
But clean finance will only be possible with clean politics. 
So the AU should set criteria and create a surveillance system for democratic elections across Africa. 
Suitable control systems should be put in place to stop and correct any failure to meet the established rules by any means necessary, including suspension of membership or exclusion of culprit countries. 
Here the AU should look to Europe, which began its process of unification with a mere six highly committed members. The quality, not quantity, of member states is what matters. 
The role of the AU should extend to cultivating ways to involve the private sector in restructuring both Africa's economy and its politics. 
Here the international community will have to help, for just as Southeast Asia's economies needed some protection for their infant industries, so Africa's may also need a brief respite from the whip of the global market during the first stage of building the AU. 
This is not a call for total protectionism; the AU's members should compete fiercely between themselves during this stage. 
Speculation on Africa's basic products and raw materials, which has driven down prices for most commodities over the last four decades, might be addressed by creating a mechanism that ties, for an agreed time, the prices of these items to those of industrial goods and services. 
A program for African renewal along the lines outlined above offers the best hope for creating stability, new jobs, and establishing democracy in a continent that desperately needs all three. 
Africa's unity must become more than a slogan if Africa is to renew itself and prosper. 

Should Bondholders be Bailed Out? 
CAMBRIDGE – A year after the United States government allowed the investment bank Lehman Brothers to fail but then bailed out AIG, and after governments around the world bailed out many other banks, key question remains: when and how should authorities rescue financial institutions? 
It is now widely expected that, when a financial institution is deemed “too big to fail,” governments will intervene if it gets into trouble. 
But how far should such interventions go? 
In contrast to the recent rash of bailouts, future government bailouts should protect only some creditors of a bailed-out institution. 
In particular, the government’s safety net should never be extended to include the bondholders of such institutions. 
In the past, government bailouts have typically protected all contributors of capital of a rescued bank other than shareholders. 
Shareholders were often required to suffer losses or were even wiped out, but bondholders were generally saved by the government’s infusion of cash. 
For example, bondholders were fully covered in the bailouts of AIG, Bank of America, Citigroup, and Fannie Mae, while these firms’ shareholders had to bear large losses. 
The same was true in government bailouts in the United Kingdom, Continental Europe, and elsewhere. 
Bondholders were saved because governments generally chose to infuse cash in exchange for common or preferred shares – which are subordinate to bondholders’ claims – or to improve balance sheets by buying or guaranteeing the value of assets. 
A government may wish to bail out a financial institution and provide protection to its creditors for two reasons. 
First, with respect to depositors or other creditors that are free to withdraw their capital on short notice, a protective government umbrella might be necessary to prevent inefficient “runs” on the institution’s assets that could trigger similar runs at other institutions. 
Second, most small creditors are “non-adjusting,” in the sense that they are unable to monitor and study the financial institution’s situation when agreeing to do business with it. 
To enable small creditors to use the financial system, it might be efficient for the government to guarantee (explicitly or implicitly) their claims. 
But, while these considerations provide a basis for providing full protection to depositors and other depositor-like creditors when a financial institution is bailed out, they do not justify extending such protection to bondholders. 
Unlike depositors, bondholders generally are not free to withdraw their capital on short notice. 
They are paid at a contractually specified time, which may be years away. 
Thus, if a financial firm appears to have difficulties, its bondholders cannot stage a run on its assets and how these bondholders fare cannot be expected to trigger runs by bondholders in other companies. 
Moreover, when providing their capital to a financial firm, bondholders can generally be expected to obtain contractual terms that reflect the risks they face. 
Indeed, the need to compensate bondholders for risks could provide market discipline: when financial firms operate in ways that can be expected to produce increased risks down the road, they should expect to “pay” with, say, higher interest rates or tighter conditions. 
But this source of market discipline would cease to work if the government’s protective umbrella were perceived to extend to bondholders. 
If bondholders knew that the government would protect them, they would not insist on getting stricter contractual terms when they face greater risks. 
The problem of “moral hazard” – which posits that actors will take excessive risks if they do not expect to bear fully the consequences of their actions – is commonly cited as a reason not to protect shareholders of bailed-out firms. 
But it also counsels against protecting firms’ bondholders. 
Thus, when a large financial firm runs into problems that require a government bailout, the government should be prepared to provide a safety net to depositors and depositor-like creditors, but not to bondholders. 
In particular, if the firm’s equity capital erodes, the government should not provide funds (directly or indirectly) to increase the cushion available to bondholders. 
Rather, bonds should be at least partly converted into equity capital, and any infusion of new capital by the government should be in exchange for securities that are senior to those of existing bondholders. 
Governments should not only avoid protecting bondholders after the fact, when the details of a bailout are worked out; but should also make their commitment to this approach clear in advance. 
Some of the benefits of a government policy that induces bondholders to insist on stricter terms when financial firms take larger risks would not be fully realized if bondholders believed that the government might protect their interests in the event of a bailout. 
In other words, governments should establish bailout policies before the need to intervene arises, rather than make ad hoc decisions when financial firms get into trouble. 
The best policy should categorically exclude bondholders from the set of potential beneficiaries of government bailouts. 
This would not only eliminate some of the unnecessary costs of government bailouts, but would also reduce their incidence. 


Should China be “Contained”? 
CAMBRIDGE – This month marks the 40th anniversary of Henry Kissinger’s secret trip to Beijing, which launched the process of mending a 20-year breach in diplomatic relations between the United States and China. 
That trip, and President Richard Nixon’s subsequent visit, represented a major Cold War realignment. 
The US and China put aside their intense hostility in a joint and successful effort to contain an expansionist Soviet Union. 
Today, the Soviet Union has vanished, and Chinese power is growing. 
Some Americans argue that China’s rise cannot be peaceful, and that the US, therefore, should now adopt a policy of containing the People’s Republic. 
Indeed, many Chinese officials perceive that to be the current American strategy. 
They are wrong. 
After all, Cold War containment of the USSR meant virtually no trade and little social contact. 
Today, by contrast, the US not only has massive trade with China, but also extensive social contact, including 125,000 Chinese students attending American universities. 
With the end of the Cold War, the containment of the Soviet Union ushered in by Kissinger’s visit could no longer serve as the basis for US-China relations. 
Moreover, relations with China cooled after the Tiananmen Square shootings in 1989, and the Clinton administration had to devise a new approach. 
When I was supervising the Pentagon’s East Asia Strategy Review in 1994, we rejected the idea of containment of China for two reasons. 
If we treated China as an enemy, we were guaranteeing an enemy in the future. 
If we treated China as a friend, we could not guarantee friendship, but we could at least keep open the possibility of more benign outcomes. 
In addition, it would have been difficult to persuade other countries to join a coalition to contain China unless China resorted to bullying tactics, as the Soviets did after World War II. 
Only China, by its behavior, could organize the containment of China by others. 
Instead of containment, the strategy that the Clinton administration devised could be termed “integrate but hedge” – something like Ronald Reagan’s “trust but verify” approach to strategic agreements with the Soviets. 
On one hand, the US supported China’s membership in the World Trade Organization and accepted Chinese goods and visitors. 
On the other hand, the Clinton-Hashimoto Declaration of April 1996 affirmed that the US-Japan security treaty, rather than being a Cold War relic, would provide the basis for a stable and prosperous East Asia. 
Clinton also began to improve relations with India, a strategy that has enjoyed bipartisan support in the US. 
The Bush administration continued to improve bilateral relations, while deepening and formalizing the economic dialogue with China. 
Then Deputy Secretary of State Robert Zoellick made clear that the US would accept the rise of China as a “responsible stakeholder.” 
That policy continues to guide the Obama administration, which has broadened the annual economic consultations with China to include security issues. 
As I argue in my new book The Future of Power, one of the major power shifts of the twenty-first century is Asia revival. 
In 1800, Asia represented half the world’s population and half the world’s economy. 
By 1900, the industrial revolution in Europe and North America drove down Asia’s share of global output to 20%. 
By the middle of this century, Asia should again represent half the world’s population and GDP. 
This is a natural and welcome evolution, as it enables hundreds of millions of people to escape from poverty. 
At the same time, however, it has given rise to fears that China will become a threat to the US. 
Such fears appear exaggerated, particularly when one considers that Asia is not one entity. 
It has its own internal balance of power. 
Japan, India, Vietnam, and other countries do not want to be dominated by China, and thus welcome a US presence in the region. 
Unless China develops its “soft power,” the rise in its military and economic power is likely to frighten its neighbors into seeking coalitions to balance its rise. 
It is as if Mexico and Canada sought an alliance with China to balance US power in North America. 
After the 2008-2009 financial crisis, as China recovered rapidly and resumed 10% annual economic growth, some Chinese officials and commentators urged a more assertive foreign policy to reflect China’s new strength. 
Many mistakenly believed that the US was in decline, and that the crisis presented new strategic opportunities for China. 
For example, China began pressing territorial claims in the South China Sea, as well as escalating a longstanding border dispute with India. 
The net result is that over the past two years, China has worsened its relations with Japan, India, South Korea, Vietnam, and others – quite a remarkable record that confirms the US strategic premise that “only China can contain China.” 
But it would be a mistake to focus only on the hedging part of American strategy. 
The US and China (as well as other countries) have much to gain from collaborating on transnational issues. 
One cannot devise and implement solutions to global financial stability, climate change, cyber terrorism, or pandemics without such cooperation. 
If power is the ability to obtain the outcomes one wants, it is important to remember that sometimes our power is greater when we act with others rather than merely over others. 
This important dimension of a “smart power” strategy for the twenty-first century is not captured by the concept of containment. 
When Kissinger landed in Beijing four decades ago, he ushered in not only a Cold War transformation, but also a new era of US-Chinese engagement. 

Should Europe Regulate Sovereign Wealth Funds? 
WIESBADEN – State-controlled investments from overseas – so-called sovereign wealth funds (SWFs) – are now the subject of intense debate. 
The United States and France have made their fears known. 
In Germany, too, the debate centers on SWFs’ political and economic significance for the country’s future. 
The problem has been exacerbated by the growing wealth of a number of countries, some of them formerly run by socialist or communist regimes. 
China, Russia, India, and the Gulf States have integrated their wealth into the global economy, to the immense benefit of world trade. 
The openness of Germany’s markets makes them especially attractive to global trade. 
This openness will not change, yet there are some who now call for new safety fences – in other words, for protection. 
For example, Russian investors are interested in taking a massive share in the German-French aerospace company EADS, which is already 5%-owned by a Russian bank. 
For many, this proposal has underscored a change in investors’ behavior. 
But what, exactly, has changed? 
SWFs have been around for years. 
Among the first countries to invest their considerable state-owned funds were Kuwait, the United Arab Emirates, Norway, and Singapore. 
They invested, and still invest, their budgetary surpluses worldwide in government bonds and state-owned enterprises. 
Industrialized countries like the US and Japan also have so-called “reserve funds.” 
Some of these funds are huge. 
In the UAE, the Abu Dhabi Investment Authority has estimated capital assets of $875 billion, making it probably the world’s largest state-owned investment company. 
In July 2007, another rich UAE fund, Dubai International Capital, bought 3% of EADS, after taking a stake of almost 2% in the automotive manufacturer Daimler in January 2006. 
The Kuwait Investment Authority, also a state-owned fund, holds 7% of Daimler. 
Singapore possesses two SWFs – Temasek-Holdings, with capital assets of roughly $100 billion, and the Government of Singapore Investment Corporation, with approximately $330 billion. 
Both funds are invested worldwide, including with the port operator PSA. 
Some funds are subject to considerable restrictions. 
Japan limits its state investments overseas to bonds, mostly those issued by the US. 
Until recently, China, which holds foreign currency reserves of more than $1.2 trillion (the world’s largest), followed this policy, too. 
But a $3 billion investment by the Chinese SWF in the US investment firm Blackstone suggests a more worryingly strategic investment policy, one that appears aimed at advancing its own industrial interests in certain markets. 
Russia, where the line between state-controlled and privately controlled companies is often blurry, has demonstrated this strategy in Europe. 
Indeed, Russian investments in aerospace, telecommunications, and, most of all, in the energy sector, are the main source of concern for Germany. 
Are state-controlled investors now aiming primarily for strategic rather than purely financial returns? 
Because SWFs’ resources are so substantial, it is advisable to take precautions to avoid becoming a target of politically motivated market manipulation, or becoming economically and psychologically dependent on foreign governments’ decisions. 
Most Western countries already have instruments to deter foreigners from making unwanted investments, not only in defense industries, but also in other sectors. 
But, while Germany’s Foreign Trade and Payments Act protects against takeovers in the defense industry (though the law needs strengthening) elsewhere Germany has no system for examining investments by SWFs that may be strategically motivated. 
The International Monetary Fund now encourages more transparency by foreign investors, and has plans for a code of conduct. 
The EU Commission also favors voluntary agreements aimed at strengthening transparency. 
Some SWFs now seem willing to engage in constructive dialogue. 
But assessing potential threats is not easy. 
Most investments are seen to benefit a country’s economy, if not its security. 
We in Germany need to distinguish one from the other. 
Bills have been drafted that amount to amendments to the Foreign Trade and Payments Act and related regulations. 
While strengthening the act, they seek to avoid affecting the openness of the German economy. 
Under proposed new legislation, if a foreign investment in a German company amounts to more than 25%, an assessment can be made of whether public order or safety might be threatened. 
In my view, this would address the concerns about SWFs, while not generally impeding investment because it would apply only in a very few cases. 
Germany has also drawn up a plan to protect its industries that is modeled on US regulation. 
Since 1988, the US president can prohibit foreign direct investment if it is seen as a threat to national security. 
An additional control was introduced last year, so now all direct investments in which a foreign government is involved are scrutinized by the Committee on Foreign Direct Investment. 
The principle of reciprocity should clearly apply to transnational investments. 
Germany is open to foreign investors, but in return we Germans demand the same market access abroad. 
Much remains to be done in this area even in Europe, as Germany’s own experiences with France and Spain demonstrate. 
In China and almost all Middle Eastern countries, foreigners are restricted to minority shareholdings and must contend with high import duties and numerous non-tariff barriers. 
Protective measures must remain the exception rather than the rule. 
We Europeans must accept the challenges of global competition, and transnational investments are the basis of thriving economic development at home and abroad. 
Nevertheless, we must not allow ourselves to become the passive economic playthings of other nations, or of big state-owned enterprises. 
We must play an active part in shaping globalization, and that means crafting appropriate rules. 

Should Iran Be Attacked? 
President George W. Bush has said that Iran’s development of nuclear weapons is unacceptable, and recent press accounts suggest that his administration is exploring preventive military options. 
In Iran, President Mahmoud Ahmadinejad has defied the diplomatic efforts of the European Union and others, using the nuclear issue to stir rally domestic support. 
Is it too late to prevent a showdown? 
Iran claims that its nuclear program is aimed solely at peaceful uses, and that it has the right to develop uranium enrichment and other technologies as a signatory of the Nuclear Non-Proliferation Treaty (NPT). 
But it spent 18 years deceiving inspectors from the watchdog International Atomic Energy Agency, leading some countries to argue that Iran destroyed its credibility and forfeited its rights to enrichment on its own soil. 
Russia has offered to provide nuclear enrichment and reprocessing services for the civilian reactor it is building in Iran. 
If Iran were interested solely in peaceful uses, the Russian offer or some other plan (such as placing stocks of low enriched uranium in Iran) could meet their needs. 
Iran’s insistence on enrichment inside the country is widely attributed to its desire to produce highly enriched uranium for a bomb. 
Would an Iranian bomb really be so bad? 
Some argue that it could become the basis of stable nuclear deterrence in the region, analogous to the nuclear standoff between the United States and the Soviet Union during the Cold War. 
But statements by Iranian leaders denying the Holocaust and urging the destruction of Israel have not only cost Iran support in Europe, but are unlikely to make Israel willing to gamble its existence on the prospect of stable deterrence. 
Nor is it likely that Saudi Arabia, Egypt, and others will sit passively while the Persian Shia gain the bomb. 
They will likely follow suit, and the more weapons proliferate in the volatile Middle East, the more likely it is that accidents and miscalculations could lead to their use. 
Moreover, there are genuine fears that rogue elements in a divided Iranian government might leak weapons technology to terrorist groups. 
These are the dangers that lead some to contemplate air strikes to destroy Iran’s nuclear facilities before they can make weapons. 
At first glance, a “surgical” strike may look tempting. 
But military options are less attractive when carefully analyzed. 
Iran’s nuclear facilities are dispersed; some are underground. 
If one adds suppression of air defenses, such a strike might involve roughly 600 targets – far from surgical. 
Moreover, while an air strike might set back Iran’s program by a few years, it would solidify nationalist support for the government and the nuclear program, particularly because one attack would not be enough. 
The process of protracted strikes could thwart positive political changes among the younger generation, thus reducing the chances of a more democratic and benign Iran emerging in the future. 
At the same time, Iran has effective means of retaliation. 
It might not be able to close the Strait of Hormuz, but threats to refineries, storage facilities, and tankers would send oil prices even higher. 
Moreover, Iran’s support of terrorist organizations, such as Hezbollah, could bring violence to other countries. 
With the outcome of Bush’s ill-advised war in Iraq uncertain and his legacy depending heavily upon finding a political solution, Iran’s support for Iraqi Shiite radicals could give it considerable leverage. 
When Bush administration officials say that “all options are on the table,” they are warning the Iranians that the use of force is possible. 
But one is tempted to believe them when they add that they are now focused on diplomacy. 
As Theodore Roosevelt once said, negotiations may go better when you talk softly but carry a big stick. 
At the same time, however, Iran knows how costly it would be for the Americans (and perhaps the Israelis) to use force, which reduces the effect of the threat. 
At present, a diplomatic solution does not look promising. 
Iran has threatened to leave the NPT if sanctions are imposed, and Russia and China worry that even modest targeted sanctions could escalate and ultimately legitimize an American use of force that they wish to avoid. 
China wants to preserve its access to Iranian oil, and Russia seeks to preserve a valuable commercial market. 
But both realize that a failure to resolve the issue in the context of the UN (in which they are major stakeholders as permanent members of the Security Council) could severely damage the future of that institution. 
Today, the diplomatic package consists mostly of penalties, albeit the small ones of targeted sanctions. 
Their main effect will be psychological if widespread support for them creates a sense in Iran that it has isolated itself. 
Unlike North Korea, Iran is more likely to care about its international standing. 
The diplomatic package could be made more attractive if the US would add more positive incentives. 
Through a credible intermediary, the US could offer to consider security guarantees and relief from existing sanctions if Iran agrees to forego domestic enrichment and accept the Russian offer, perhaps garbed as an IAEA-backed international consortium in which Iran could participate. 
This would mean abandoning the temptations of coercive regime change that hamstrung American diplomacy in Bush’s first term. 
By increasing economic and cultural ties, diplomacy might unleash the soft power that could contribute to more gradual regime transformation over the longer term. 
Meanwhile, such an approach might avoid the costly use of force and buy time for a more benign outcome than what lies at the end of the current path of events. 

Should Shareholders Be Kings? 
The story takes place in France, in Belgium, and in Luxemburg. 
But it is really a pan-European story, and in economic terms it encompasses the entire world. 
Mittal, the biggest steelmaker in the world, has successfully gained control of Arcelor, the second biggest, through what initially was a hostile takeover bid. 
This is no mere corporate takeover; it is a conflict between business and social models. 
Arcelor, originally French and Luxemburguese but now predominantly Belgian, has a strong base in Brazil and operates throughout much of the world. 
It specializes in high-quality, special steel products designed for the most complicated uses. 
These high-quality products are purchased on middle- and long-term contracts, mainly by long-time customers. 
Arcelor, one of the oldest steel manufacturers in the world, depends very little on the highly speculative world market for raw steel, and its workforce is (on average) highly qualified and stable. 
Mittal, by contrast, is a conglomerate that has come out of nowhere to become the world’s leading steel company in a mere two decades. 
It did so by brilliantly consolidating and rationalizing steel plants throughout the world. 
Its president is Indian, but it has no factory in India. 
Mittal is mainly based in Eastern Europe, but also has a strong presence in Asia (South Korea) and Latin America. 
Mittal is a strong but fragile company, for it is highly subject to the speculative waves of the global market for raw steel. 
It tightens costs, and outsources work as much as possible, so its workforce is paid less than Arcelor’s employees and is less stable. 
Moreover, Arcelor represented a perfect takeover target: most of its capital belongs to diverse shareholders. 
The opposite is true of Mittal, where the Lakshmi Mittal and his family own more than 60% of the shares. 
This explains why Mittal’s shares are traded in Amsterdam, one of the few stock markets in the world that allows for the listing of companies with so little free-floating capital. 
Thus, there is no reciprocity: Mittal could bid for Arcelor, but Arcelor could not bid for Mittal. 
The stakes are much clearer than they usually are in these types of battles. 
Mittal has an obvious interest in gaining control of Arcelor in order to improve its global geographic balance, boost its market share in high-end steel products, and reduce its vulnerability to the speculative jolts that occur in the raw steel market. 
Conversely, Arcelor has absolutely no interest in the success of this takeover. 
If it is led into a more adventurous strategy, its sustained policy of research and heavy investment in up-market steel products may be weakened. 
Its workforce stands to suffer, slowly but surely, from erosion of its relative advantages in terms of wages and job security. 
This explains why the management, most of the workers, and the Unions of Arcelor refused Mittals offer. 
But the shareholders of Arcelor have made their choice. 
The immediate profit offered by Mittal was enough. 
Mittal won. 
So the shareholders chose to cash in on a temporary bonus, taking a risk on the progressive erosion of the firm, and perhaps the end of its policy of focusing on high quality while treating its workers with respect. 
There are very few fixed-term contracts or part-time contracts in Arcelor. 
This choice directly concerns more than 150,000 employees. 
Indirectly, it concerns all of us, for the choice made by Arcelor’s shareholders is far from being an exception; on the contrary, it reveals the deep economic and social significance of corporate takeovers of this type. 
Where are our societies headed if company owners consider that quality is too expensive and that workers must be made insecure in order to make them less demanding? 
A system governed by such rules is prone to give rise to various social conflicts, and perhaps to violence. 
Above all, such a system is neither viable nor sustainable in the long run. 
For this reason, it is dangerous to maintain the outdated legal concept according to which a company belongs only to its owners or shareholders. 
Indeed, in reality, the company is a community of men and women who draw their incomes from the same economic and technical venture. 
It would be prudent to adapt the law to this state of facts, and to give employees, too, a say in their destiny. 
In the wake of Mittal’s takeover of Arcelor, governments must address this gap in the law, as no society can afford to permit the economic system to continue its march toward indifference to the welfare and security of workers. 

Blaming the Fed 
FRANKFURT – Critics of the US Federal Reserve are having a field day with embarrassing revelations of its risk assessments on the eve of the financial crisis. 
By law, the Fed is required to publish the transcripts of its Federal Open Market Committee (FOMC) meetings with a five-year lag. 
While the full-blown crisis did not erupt until the collapse of Lehman Brothers in September 2008, it was clear by the summer of 2007 that something was very wrong in credit markets, which were starting to behave in all sorts of strange ways. 
Yet many Fed officials clearly failed to recognize the significance of what was unfolding. 
One governor opined that the Fed should regard it as a good thing that markets were starting to worry about subprime mortgages. 
Another argued that the summertime market stress would most likely be a hiccup. 
Various critics are seizing on such statements as evidence that the Fed is incompetent, and that its independence should be curtailed, or worse. 
This is nonsense. 
Yes, things could and should have been done better; but to single out Fed governors for missing the coming catastrophe is ludicrous. 
The Fed was hardly alone. 
In August 2007, few market participants, even those with access to mountains of information and a broad range of expert opinions, had a real clue as to what was going on. 
Certainly the US Congress was clueless; its members were still busy lobbying for the government-backed housing-mortgage agencies Fannie Mae and Freddie Mac, thereby digging the hole deeper. 
Nor did the International Monetary Fund have a shining moment. 
In April 2007, the IMF released its famous “Valentine’s Day” World Economic Outlook, in which it declared that all of the problems in the United States and other advanced economies that it had been worrying about were overblown. 
Moreover, it is misleading to single out the most misguided comments by individual governors in the context of an active intellectual debate over policy. 
It is legitimate to criticize individual policymakers who exercised poor judgment, and they should have a mark on their record. 
But that does not impugn the whole FOMC, much less the entire institution. 
Central banks’ state-of-the-art macroeconomic models also failed miserably – to a degree that the economics profession has only now begun to acknowledge fully. 
Although the Fed assesses many approaches and indicators in making its decisions, there is no doubt that it was heavily influenced by mainstream academic thinking – including the so-called real business cycle models and New Keynesian models – which assumed that financial markets operate flawlessly. 
Indeed, the economics profession and the world’s major central banks advertised the idea of the “great moderation” – the muting of macroeconomic volatility, owing partly to monetary authorities’ supposedly more scientific, model-based approach to policymaking. 
We now know that canonical macroeconomic models do not adequately allow for financial-market fragilities, and that fixing the models while retaining their tractability is a formidable task. 
Frankly, had the models at least allowed for the possibility of credit-market imperfections, the Fed might have paid more attention to credit-market indicators as a reflection of overall financial-market conditions, as central banks in emerging-market countries do. 
Last but not least, even if the Fed had better understood the risks, it would not have been easy for it to avert the crisis on its own. 
The effectiveness of interest-rate policy is limited, and many of the deepest problems were on the regulatory side. 
And calibrating a response was not easy. 
By late 2007, for example, the Fed and the US Treasury had most likely already seen at least one report arguing that only massive intervention to support subprime loans could forestall a catastrophe. 
The idea was to save the financial system from having to deal with safely dismantling the impossibly complex contractual edifices – which did not allow for the possibility of systemic collapse – that it had constructed. 
Such a bailout would have cost an estimated $500 billion or more, and the main beneficiaries would have included big financial firms. 
Was there any realistic chance that such a measure would have passed Congress before there was blood in the streets? 
Indeed, it was precisely this logic that me led to give a very dark forecast in a widely covered speech in Singapore on August 19, 2008, a month before Lehman Brothers failed. 
I argued that things would not get better until they got much worse, and that the collapse of one of the world’s largest financial firms was imminent. 
My argument rested on my view that the global economy was entering a major recession, and I had the benefit of my quantitative work, with Carmen Reinhart, on the history of financial crises. 
I was not trying to be sensational in Singapore. 
I thought that what I was saying was completely obvious. 
Nevertheless, my prediction gained bold front-page headlines in many major newspapers throughout the world. 
It gained headlines, evidently, because it was still far from a consensus view, although concerns were mounting. 
Were concerns mounting at the Fed as well in the summer of 2008? 
We will have to wait until next year to find out. 
But, when we do, let us remember that hindsight is 20-20. 

Should the Troops Come Home Now? 
Last weekend’s announcement that Iraqi lawmakers have finally formed a unity government is welcome news, both for Iraq and for George W. Bush and Tony Blair. 
The American and British governments, increasingly unpopular at home, desperately needed some tangible evidence of progress to assuage their domestic critics and to begin to speak openly of an exit strategy. 
But Iraq’s greatest challenges lie ahead. 
If Bush and Blair declare victory before the real battles have begun, they will undermine the very process to which both have committed so much at such great cost. 
Bush waited weeks for a positive development that would allow him to suggest he can reduce troop levels in Iraq from 133,000 to 100,000 by the end of 2006. 
Blair, still stung by his Labour Party’s defeat in local elections in early May, also welcomed the good news from Iraq. 
During a triumphal surprise visit to Baghdad on May 22, he said he expected Iraqi forces to take responsibility for “territorial security” in much of the country by the end of the year. 
“It is the violence that keeps us here,” he said. 
“It is the peace that allows us to go.” 
The optimism is premature. 
The formation of a unity government is only the first of many hurdles Iraq’s new government must clear if it is to build a durable peace. 
Its first task will be to remove those provisions of Iraq’s constitution that pit Iraq’s Sunni, Shia, and Kurds against one another. 
Under current Iraqi law, the parliamentary committee charged with making these constitutional changes has four months to complete its task. 
The four-month clock began ticking on May 3, following the first meeting of Iraq’s new parliament. 
The changes are badly needed. 
The committee must enact a new hydrocarbon law that guarantees each of Iraq’s factions a fair share of the country’s oil wealth, which accounts for 97% of total export revenue. 
Under the current constitution, local governments have the right to exploit (and profit directly from) oil extracted from new sites beneath their territory, while only a share of the income from existing sites must go to Iraq’s central government. 
On May 15, two small independent energy companies (Turkey’s Genel Enerji and Canada’s Addax Petroleum) became the latest foreign firms to begin drilling in Kurdish-controlled territory under an agreement with the regional government. 
Kurdish politicians within the new parliament have good reason to protect these lucrative deals as debate begins over constitutional changes. 
But the central government will need a large share of that income if it is to finance the construction of new institutions of governance, invest in critical infrastructure, undertake onerous reforms aimed at economic liberalization, and provide the resource-poor (and already restive) Sunnis of central Iraq with a greater share of the country’s wealth. 
The constitution must also be amended to reverse the worst effects of a de-Baathification process that aimed to dismantle the vestiges of Saddam Hussein’s regime. 
In practice, de-Baathification has excluded thousands of Iraqis – most of them Sunnis who joined the party during the Saddam era only to secure good jobs – from the country’s political and economic life. 
Finally, the Iraqi government must begin dismantling the militia groups that still outgun the fledgling Iraqi army, and it must defeat the largely Sunni-led insurgency. 
Each of these tasks is formidable. 
If Bush and Blair prematurely withdraw large numbers of the troops that support Iraqi stability, the country’s new government would have little chance of success. 
There is some reason for optimism that efforts to stem the tide of violence can succeed. 
Media reports of Iraqi bloodshed focus overwhelmingly on Baghdad – where the large majority of foreign journalists are based – creating the impression that the desperate security situation there is representative of the country as a whole. 
But in the Kurdish-controlled areas of the north and Shiite-dominated provinces in the south, levels of crime and deadly violence compare favorably with those in many cities in the United States. 
But attacks in Iraq’s “Sunni triangle” (and Baghdad in particular) occur at a rate rivaling those in Chechnya and the Niger Delta. 
Since Sunni militants destroyed the Shiite Askariya mosque in February, hundreds of Iraqis have been killed in a series of tit-for-tat sectarian attacks. 
Tens of thousands have fled from mixed Sunni-Shiite cities to safer havens in ethnically homogenous enclaves that are effectively controlled by Sunni and Shiite militias. 
Only the presence of foreign troops slows the further balkanization of the country’s already fractious politics. 
That’s why the temptation for Bush and Blair to limit further political damage at home by prematurely declaring victory in Iraq is so dangerous. 
If they use the good news to begin withdrawing significant numbers of the foreign troops who bolster Iraq’s stability at a crucial and vulnerable moment, they will have undermined the project to which both have devoted so much political capital. 
And they will leave the new Iraqi government at the mercy of forces that would eventually pull the country apart. 

Hands Off Syria? 
WASHINGTON, DC – More than any of the previous events in the Arab Spring, Syria’s turmoil has presented serious difficulties for Western policymakers. 
Just as Syria comprises a more complex society than the other Arab countries currently in the throes of political transition, so, too, are its external relations more complex. 
As a result, any attempt at decisive military intervention would be not only difficult, but also extremely risky. 
Syria’s leading role in Lebanon, even after withdrawing its occupying forces there, is only one complication. 
Another is Alawite-minority rule in a Sunni-majority country, which makes Syria a proxy for Shia Iran in the Sunni Arab world. 
Still other Syrian minority groups – non-Alawite Shia, Orthodox and Catholic Christians, and Druze – are linked to neighboring countries and regional players, inviting intense external interest and even active support. 
Turkey, Saudi Arabia, and Russia all have strategic interests and factional connections to Syria. 
The United States and its NATO allies would, of course, prefer a democratic, Western-oriented regime to emerge in Syria. 
But, given the country’s complex society and external ties, the West should happily settle for a stable government not dominated by Russia or Iran, and not in military conflict with its neighbors, including Israel. 
So what is the best US and Western policy? 
A negotiated end to the current warfare could leave President Bashar al-Assad’s regime in power, albeit with a different face in charge. 
Such an outcome would be a triumph for the cause of hardline dictatorship, suppression of human rights, and Iran and Russia. 
But it also becomes less feasible as the violence mounts. 
That leaves supporting the rebels, but which ones, and how? 
Yet another factor militating against intervention is that the distribution of power resulting from the Arab Spring is leaving the US with limited influence and little intelligence. 
But the US and the West cannot leave the matter entirely to others or confine their efforts to the United Nations, where Russia and China prevent any effective action. 
So, what should be done? 
In my view, the US could work with Turkey, Saudi Arabia (taking care not to support Islamic extremists), and its NATO allies, especially France and Britain, to create a prospective successor government for Syria, and to arm its military element. 
Such a government would have to be representative and coherent. 
And Western powers would need to be sure that their weapons would not fall into potentially unfriendly hands. 
The fact that Iran is arming the Assad regime calls for countervailing action. 
Some have suggested a more active military role for the US, beginning with a no-fly zone. 
It may come to that. 
But the French and British, who urged that course in Libya, have made no such proposal for Syria. 
One reason is that Syria has a substantial air-defense system, which would have to be suppressed by a bombing campaign – causing significant civilian casualties and risking the loss of aircraft and crews. 
Before starting down that road, the US should be convinced that military action would not require US ground forces in Syria. 
It should also be confident (which is impossible now) about the nature of a successor government. 
To meet these criteria would require convening interested countries in order to gain greater insight into both internal Syrian and regional implications of military action. 
The attention devoted to the Syrian issue during the “non-aligned” countries’ recent Tehran summit was a parody of such an exercise. 
Holding such a conference is easier said than done. 
Merely finalizing the guest list would be a major diplomatic feat. 
Surely, Turkey, Egypt, Saudi Arabia, and Iraq must be invited. 
Russia, the US, and perhaps France and Britain should be present as well. 
But to omit a neighbor like Israel, a Syrian client like Lebanon, or a patron like Iran would be peculiar – and inviting all of them would be a formula for chaos. 
The uprising in Syria, the most violent of the Arab Spring rebellions, is playing out slowly and lethally. 
The estimated 10,000 deaths over the last 18 months equal the number killed in just a few days in 1982 in the city of Hama by Assad’s father, Hafez al-Assad, whose scorched-earth policy strengthened his hold on power and incurred only rhetorical condemnation from the international community. 
The repercussions are likely to be all the more disruptive when, sooner or later, the regime falls. 
The Assads, like other authoritarian Arab leaders, kept a lid on internal violence and their own citizens’ aspirations. 
But the sheer complexity of conditions in Syria means that the regime’s endgame could trigger a transition unlike any other in the Arab Spring, different in both its domestic course and in its effects on the region. 
Diplomats make careers of finding procedural solutions to insoluble dilemmas; surely, they hope, there is a conference table with a shape that matches a given strategic configuration. 
So far, the US has handled the various forms of political transition in the Arab Spring without severely damaging missteps. 
Syria poses the toughest challenge yet. 

Should We Affirm Affirmative Action? 
Equal rights for all citizens are fundamental to a liberal order. 
Such rights offer opportunities for political participation, to form associations, and to speak one's mind. 
But they also open doors to economic participation, and doors to participation in social institutions like education. 
Constitutional guarantees of these rights are the great achievement of the long battle for citizenship that marked the last two centuries. 
However, such legal guarantees of rights are often insufficient. 
Even the right to vote means little for someone who is totally dependent on other people or institutions. 
Equality before the law remains an empty promise for those who cannot afford to make use of it or simply do not know how to do so. 
The civil right to an education according to talent requires encouragement of many kinds. 
Thus, one great theme of social progress in the last century was to imbue the abstract concept of equal rights with social substance. 
This meant active encouragement by information, by political education, for example. 
As far as education was concerned, it often meant committing resources to financial assistance for students, such as subsidized loans or scholarships. 
Yet when all this was done, certain stubborn obstacles to equal participation remained. 
Major groups remained underrepresented among societies' most successful citizens. 
This was notably the case for women and for some cultural minorities, especially if these were defined by unchosen "ascriptive" characteristics, such as skin color. 
Few people from these groups were found among senior managers, government ministers, professors, doctors, and lawyers, so that the suspicion grew that there are largely invisible barriers blocking access to such positions. 
Perhaps entrenched institutional cultures militated against women or black people. 
Wanting real citizenship for all meant that more had to be done than offering legal guarantees, information, or even financial support. 
It was a courageous step, first taken in the United States, to decide that at least for a while a new kind of policy was needed to remedy long-term injustices. 
Affirmative action , as it was called, consisted of rules that set aside a certain percentage of representation among candidates for office, students and teachers, police and the military, and in other walks of life to members of hitherto disadvantaged groups. 
The US Supreme Court became the guardian of affirmative action. 
Wherever it was seriously tried, affirmative action undoubtedly had some success. 
This is notably the case in countries that were once homogeneous but now have to deal with citizens who are black or Muslim or are otherwise in an identifiable and neglected minority position. 
But at the very moment that other countries were looking to America for a policy model, affirmative action began to raise questions, of which three are particularly important. 
First, is there not a risk of a kind of inverted injustice by which the traditionally privileged become the new underprivileged? 
The US Supreme Court confronted this question when it first dealt with the case of a white student who was not admitted to medical school despite having better academic qualifications than other applicants. 
In Britain, children in private schools must now fear to be at a disadvantage because of the pressure on universities to admit more students from state schools. 
This takes us back to the old and vexing question: can we be equal and excellent too? 
Second, is equal representation at all levels really what all groups want or need? 
After all, the "feminization" of the teaching profession in many countries has not done any harm. 
Many countries have benefited from the entrepreneurialism of their Chinese or Jewish minorities. 
Are we perhaps pursuing too mechanical an ideal which confuses the absence of privilege and disadvantage with the absence of diversity? 
Third, is affirmative action in some cases producing a new kind of rigid segmentation that destroys the very civil society it was intended to create? 
Are women, for example, always the best defenders of women's interests? 
The same question can be raised for members of religious groups and ethnic minorities, or even of certain social classes. 
One shudders to think of parliaments in which the main criterion of membership is to belong to a group in need of affirmative action. 
Indeed, in some countries, democracy fails to deliver imaginative and effective governance because the main objective seems to be to have all major groups on board. 
To repeat the earlier point: affirmative action was and is a courageous final step in the fight for universal citizenship rights - not just on paper, but in reality. 
But affirmative action must not become an enduring principle of a liberal order. 
If any set of rules needs a "sunset clause" to enforce review after a specific and limited period, it is affirmative action. 
The flexibility of the US Supreme Court in this regard is admirable. 
Elsewhere it is probably best to include in the laws of countries and the statutes of organizations a clause that makes affirmative action lapse after five years, or at most ten. 
Such a clause could be renewed, but there is nothing so effective as a firm deadline to force a thorough review and concentrate minds. 

Should We Trust Our Moral Intuitions? 
When we condemn the behavior of a politician, celebrity, or friend, we often end up appealing to our moral intuitions. 
“It just feels wrong!” we say. 
But where do these intuitive judgments come from? 
Are they reliable moral guides? 
Recently, some unusual research has raised new questions about the role of intuitive responses in ethical reasoning. 
Joshua Greene, a philosophy graduate now working in psychology who has recently moved from Princeton University to Harvard, studied how people respond to a set of imaginary dilemmas. 
In one dilemma, you are standing by a railroad track when you notice that a trolley, with no one aboard, is heading for a group of five people. 
They will all be killed if the trolley continues on its current track. 
The only thing you can do to prevent these five deaths is to throw a switch that will divert the trolley onto a side track, where it will kill only one person. 
When asked what you should do in these circumstances, most people say that you should divert the trolley onto the side track, thus saving a net four lives. 
In another dilemma, the trolley, as before, is about to kill five people. 
This time, however, you are not standing near the track, but on a footbridge above the track. You cannot divert the trolley. 
You consider jumping off the bridge, in front of the trolley, thus sacrificing yourself to save the five people in danger, but you realize that you are far too light to stop the trolley. 
Standing next to you, however, is a very large stranger. 
The only way you can prevent the trolley from killing five people is by pushing this large stranger off the footbridge, in front of the trolley. 
If you push the stranger off, he will be killed, but you will save the other five. 
When asked what you should do in these circumstances, most people say that it would be wrong to push the stranger. 
This judgment is not limited to particular cultures. 
Marc Hauser, at Harvard University, has put similar dilemmas on the web in what he calls a “Moral Sense Test,” available in English, Spanish, and Chinese ( http://moral.wjh.harvard.edu ). 
After receiving tens of thousands of responses, he finds remarkable consistency despite differences in nationality, ethnicity, religion, age, and sex. 
Philosophers have puzzled about how to justify our intuitions in these situations, given that in both cases, the choice seems to be between saving five lives at the cost of taking one life. 
Greene, however, was more concerned to understand why we have the intuitions, so he used functional Magnetic Resonance Imaging, or fMRI, to examine what happens in people’s brains when they make these moral judgments. 
Greene found that people asked to make a moral judgment about “personal” violations, like pushing the stranger off the footbridge, showed increased activity in areas of the brain associated with the emotions. 
This was not the case with people asked to make judgments about relatively “impersonal” violations like throwing a switch. 
Moreover, the minority of subjects who did consider that it would be right to push the stranger off the footbridge took longer to reach this judgment than those who said that doing so would be wrong. 
Why would our judgments, and our emotions, vary in this way? 
For most of our evolutionary history, human beings – and our primate ancestors – have lived in small groups, in which violence could be inflicted only in an up-close and personal way, by hitting, pushing, strangling, or using a stick or stone as a club. 
To deal with such situations, we developed immediate, emotionally based intuitive responses to the infliction of personal violence on others. 
The thought of pushing the stranger off the footbridge elicits these responses. 
On the other hand, it is only in the last couple of centuries – not long enough to have any evolutionary significance – that we have been able to harm anyone by throwing a switch that diverts a train. 
Hence the thought of doing it does not elicit the same emotional response as pushing someone off a bridge. 
Greene’s work helps us understand where our moral intuitions come from. 
But the fact that our moral intuitions are universal and part of our human nature does not mean that they are right. 
On the contrary, these findings should make us more skeptical about relying on our intuitions. 
There is, after all, no ethical significance in the fact that one method of harming others has existed for most of our evolutionary history, and the other is relatively new. 
Blowing up people with bombs is no better than clubbing them to death. 
And surely the death of one person is a lesser tragedy than the death of five, no matter how that death is brought about. 
So we should think for ourselves, not just listen to our intuitions. 

Showdown in Bali 
BALI – This month’s international meeting in Bali will set a framework that will attempt to prevent the impending disaster of global warming/climate change. 
There is now little doubt that greenhouse gases, such as carbon dioxide, are leading to significant changes in climate. 
Nor is there doubt that these changes will impose huge costs. 
The question is no longer whether we can afford to do something, but rather how to control emissions in an equitable and effective way. 
The Kyoto Protocol was a major achievement, yet it left out 75% of the sources of emissions: the US, the largest polluter, refused to sign. 
(With Australia’s new government now having signed the Protocol, America is now the sole holdout among the advanced industrial countries.) 
No requirements were put on developing countries, yet within the not-too-distant future, they will contribute half or more of emissions. 
And nothing was done about deforestation, which is contributing almost as much to increases in greenhouse gas concentrations as the US. 
The US and China are in a race to be the world’s worst polluter; 
America has long won the contest, but in the next few years, China will claim that dubious honor. 
But Indonesia is number three, owing to its rapid deforestation. 
One concrete action that should be taken at Bali is support for the initiative of the Rainforest Coalition, a group of developing countries that want help to maintain their forests. 
These countries are providing environmental services for which they have not been compensated. 
They need the resources, and the incentives, to maintain their forests. 
The global benefits of supporting them far outweigh the costs. 
The timing of the conference is not propitious. 
George W. Bush, long a skeptic about global warming, and long committed to undermining multilateralism, remains America’s president. 
His close connections with the oil industry make him loathe to force it to pay for its pollution. 
Still, the Bali meeting’s participants can agree on a few principles to guide future negotiations. 
These include, first, that solutions to global warming require the participation of all countries. 
Second, there can be no free riders, so trade sanctions – the only effective sanctions that the international community currently has – can and should be imposed on those not going along. 
Third, the problem of global warming is so vast that every instrument must be employed. 
Better incentives must be part of the solution. 
But there is a raging controversy over whether the Kyoto protocol’s cap-and-trade system or taxes work better. 
The problem with the Kyoto system is assigning caps that will be acceptable to developed and developing countries. 
Giving emission allowances is like giving away money – potentially hundreds of billions of dollars. 
Kyoto’s underlying principle – that countries that emitted more in 1990 are allowed to emit more in the future – is unacceptable to developing countries, as is granting greater emission rights to countries with a higher GDP. 
The only principle that has some ethical basis is equal emission rights per capita (with some adjustments – for instance, the US has already used up its share of the global atmosphere, so it should have fewer emission allowances). 
But adopting this principle would entail such huge payments from developed countries to developing countries, that, regrettably, the former are unlikely to accept it. 
Economic efficiency requires that those who generate emissions pay the cost, and the simplest way of forcing them to do so is through a carbon tax. 
There could be an international agreement that every country would impose a carbon tax at an agreed rate (reflecting the global social cost). 
Indeed, it makes far more sense to tax bad things, like pollution, than to tax good things like work and savings. 
Such a tax would increase global efficiency. 
Of course, polluting industries like the cap-and-trade system. 
While it provides them an incentive not to pollute, emission allowances offset much of what they would have to pay under a tax system. 
Some firms can even make money off the deal. 
Moreover, Europe has grown used to the concept of cap-and-trade, and many are loathe to try an alternative. 
Yet, no one has proposed an acceptable set of principles for assigning emission rights. 
For some, this is not a concern. 
With developing countries standing to lose even more than developed countries if nothing is done about global warming, many believe they can be cajoled, threatened, or induced to be part of a global agreement. 
Developed countries need only figure out the minimum price they have to pay developing countries to go along. 
But developing countries worry that a new global agreement on emissions, like so many other international agreements, will leave them in a disadvantageous position. 
In the end, Realpolitik may rule. 
But the world today is different from the world of 25 years ago, or even 10 years ago. 
Flourishing democracies in many developing countries mean that their citizens demand fair treatment. 
Principles do matter. 
The Bali meeting’s participants should bear this in mind: global warming is too important to be held hostage to another attempt at squeezing the poor. 


Hope Amid the Middle East’s Turmoil 
LONDON – Syria is a living nightmare. 
Egypt hovers on the brink. 
But, as the opening of peace talks between Israel and the Palestinian Authority shows, there are signs of hope. 
And, though it may seem counter-intuitive, the region’s turmoil is finally bringing to the surface its fundamental problems in a way that allows them to be confronted and overcome. 
Now is a time not for despair, but for active engagement. 
No one put the chances of reviving the Israel-Palestine peace process at more than minimal. 
Yet it has happened. 
And these are not talks about talks, but a full-blown revival of final-status negotiations, with an undertaking by both parties to remain in the process for at least nine months. 
To those of us who have toiled, often fruitlessly, on this issue in the past, it is a huge achievement brought about by US Secretary of State John Kerry’s sheer dogged determination and the willingness of Israel’s Prime Minister Binyamin Netanyahu and Palestinian Authority President Mahmoud Abbas to take political risks with their domestic public opinion. 
Much less noted was the visit of Yemen’s president, Abd Rabbuh Mansur Hadi, to Washington, DC. 
Against all the odds, Yemen is undergoing a process of political transformation, with 500 delegates from all parts of society working on plans for democracy, justice, and equality. 
In Iraq, after years of declining sectarian violence, the casualty figures are up again, in part owing to the war in neighboring Syria. 
Yet, even in Iraq, Grand Ayatollah Ali al-Sistani, the country’s most influential Shia cleric, recently issued a seminal statement proclaiming the need for a civil, not religious state, with equal freedom for all to participate. 
Sistani also expressed disagreement with those close to Iran who want Shia to go to Syria to fight for Bashar al-Assad’s regime alongside Hezbollah. 
Similarly, at the start of Ramadan, King Abdullah of Saudi Arabia, who is also the custodian of the two holy mosques, made a powerful statement reclaiming the faith of Islam from those who would pervert it in the name of politics. 
Libya and Tunisia are far from settled, as the recent assassination of Tunisia’s leading opposition politician and the presence of unrestrained militia in Libyan towns show. 
But the democrats are not giving up. 
Across the northern part of Sub-Saharan Africa, there are now huge challenges from well-armed and well-financed terrorist groups that have imported toxic Islamist ideology from the Middle East. 
Countries such as Nigeria, for example, have suffered horribly from terrorism based on a brand of religious extremism that is alien to their society. 
But, again, despite it all, the country is experiencing rapid economic growth and has just implemented a major reform – widely considered impossible until recently – of the power sector. 
Meanwhile, with a genuinely inclusive and objectively administered constitution, Egypt could pivot back toward democracy. 
Elections by early 2014 have been promised, and all parties, including the Muslim Brotherhood, could take part. 
Or Egypt could become paralyzed and unable to rectify its dire economic situation and restore order, without which no progress is possible. 
But Egypt’s internal divisions reveal a deeper awakening in the region that has its own significance. 
Lessons about government, governance, and democracy that took the West centuries to learn are being taken in at extraordinary speed. 
It is now clear that the status quo in the region will not hold. 
The idea of “strong man” government – a regime that maintains order, and that the rest of the world likes to deal with because it is predictable – has gone. 
It doesn’t matter whether the “strong man” is a psychopath, like Saddam Hussein, or a moderate, like Hosni Mubarak, who kept peace in the region. 
This is the twenty-first century, and ordinary people want to shape their country’s politics. 
The choice is between evolution and revolution. 
Evolution, if attainable, is clearly preferable. 
Frankly, Syria would have been better for it. 
People have had a taste of politics conducted by firestorm. 
Across the region, there is fatigue with the wildness and disorder that politics conducted by firestorm brings. 
There is growing recognition that change is best accompanied by stability, and that democracy works only if debate is conducted in an atmosphere in which arguments can be bold, even harsh, but not inflammatory. 
There is also a burgeoning acceptance that religious freedom is a necessary part of free and open societies. 
The discussion about religion’s role in government and society is now out in the open. 
This is enormously important and healthy. 
For the first time, there is lively and intelligent debate around this issue, which is at the core of the Middle East’s problems. 
Open societies are incompatible with closed economies. 
A functioning private sector that creates adequate jobs, and schools that educate the large young population for today’s inter-connected world, are prerequisites of progress. 
The Israeli-Palestinian issue is crucial for all the obvious reasons. 
But it is also a test of the region’s capacity to forge a different and better future. 
If these two peoples can find common ground to create two states, both democratic and free, after decades of bitterness and bloodshed, the region would have an enormously powerful model of hope. 
But the opening of the peace talks in Washington, DC, would not have happened without the full engagement of the US and other international partners. 
This is the lesson that we should bear in mind as Syria disintegrates before our eyes. 
However much we may wish to look away, the consequences of allowing the bloodbath in Syria to take its own course may well be disastrous for the region and for the West’s security. 
Surely we can begin to see certain common threads running through the terror attacks of September 11, 2001, Afghanistan, Iraq, the Arab revolutions, Iran, Syria, Egypt, and the spread of terror based on religious extremism. 
One concerns how states emerge from years of repression to build institutions capable of responding to the needs of the modern world. 
Another – plainly linked – is Muslim-majority countries’ efforts to define the relationship between religion and politics. 
The entire world has a massive interest in where these threads lead. 

Silent Burmese Days 
PRAGUE -- In the coming days – perhaps even hours – the destiny of Burma (also known as Myanmar), and the fates of over fifty million Burmese, will be decided. 
Today’s crisis has been brewing for many years. 
But nobody knew with any precision just when open revolt against Burma’s military dictatorship would erupt. 
I fear that, with only a few exceptions, most countries have been surprised and caught off guard – once again – by the rapid course that events have taken in Burma. 
So they seem to be completely unprepared for the crisis and thus at a loss as to what to do. 
How many times and in how many places has this now happened? 
Worse, however, is the number of countries that find it convenient to avert their eyes and ears from the deathly silence with which this Asian country chooses to present itself to the outside world. 
In Burma, the power of educated Buddhist monks – people who are unarmed and peace loving by their very nature – has risen up against the military regime. 
That monks are leading the protests is no great surprise to those who have taken a long-term interest in the situation in Burma. 
An overwhelming number of Burma’s Buddhist monks have found it difficult to bear the central and regional governments’ efforts to corrupt their monastic orders, and to misuse the example of the monks’ self-restraint to increase the pressure on other believers. 
Of course, without universal and coordinated international political, economic, and media support for these brave monks, all development in Burma may quickly be put back nearly 20 years. 
On a daily basis, at a great many international and scholarly conferences all over the world, we can hear learned debates about human rights and emotional proclamations in their defense. 
So how is it possible that the international community remains incapable of responding effectively to dissuade Burma’s military rulers from escalating the force that they have begun to unleash in Rangoon and its Buddhist temples? 
For dozens of years, the international community has been arguing over how it should reform the United Nations so that it can better secure civic and human dignity in the face of conflicts such as those now taking place in Burma or Darfur, Sudan. 
It is not the innocent victims of repression who are losing their dignity, but rather the international community, whose failure to act means watching helplessly as the victims are consigned to their fate. 
The world’s dictators, of course, know exactly what to make of the international community’s failure of will and inability to coordinate effective measures. 
How else can they explain it than as a complete confirmation of the status quo and of their own ability to act with impunity? 

Make Your Own Silicon Valley 
SEATTLE – California may be the world’s largest and best-known technology hub, but it is not alone in fostering innovative startups. 
In fact, such firms are emerging – almost unnoticed – everywhere, from Asian megalopolises like Singapore and Shanghai to small European cities like Espoo in Finland and Dwingeloo in the Netherlands. 
Many international startups – including Sweden’s Spotify, Estonia’s Skype, Israel’s Waze – and, most recently, China’s Alibaba – have gained billion-dollar valuations. 
Clearly, the key features of Silicon Valley that foster innovation and entrepreneurship – a dense concentration of human talent, a competitive spirit, easy access to capital, and a supportive regulatory environment – can be replicated in and adapted to a wide variety of contexts. 
Indeed, these pillars of creativity and progress have been erected even in countries whose economies, politics, and cultures diverge sharply from those of the United States. 
Of course, not every country approaches innovation in the same way. 
Finland, for example, owes its dynamic computer-games cluster largely to a student-driven movement in higher education. 
Though Rovio Entertainment’s release in 2009 of the popular video game Angry Birds catalyzed an innovation boom in Espoo, it is Aalto University – Finland’s equivalent of Stanford in California – that continues to fuel innovation in the area, by nurturing programmers, designers, and others with the necessary talents. 
Aalto students also have launched Europe’s most dynamic startup conference, which will bring together more than 10,000 entrepreneurs and financiers this November. 
Moreover, the university’s Startup Sauna seed-accelerator program helps promising early-stage startups take their first steps toward success. 
Located on campus, the program’s facilities resemble colorful Google offices, but with a Finnish twist: video conference rooms have been built into sauna-like structures. 
Since its establishment in 2010, 126 companies have graduated from Startup Sauna, having raised more than $37 million in funding. 
Today, Finland boasts more than 200 gaming startups, which export 90% of their products. 
According to Aalto, Finland’s gaming sector experienced 260% revenue growth in 2012-2013, adding 1,000 jobs and $1.5 billion in total value to the Finnish economy just last year. 
In the Netherlands, the government has taken the lead in promoting innovative activities. 
Two and a half years ago, the Dutch government teamed up with IBM and a group of small and medium-size local businesses to jumpstart a big-data hub in the far-northern village of Dwingeloo, home to the Netherlands Institute for Radio Astronomy. 
Like Silicon Valley-based initiatives, the project unites academia, talent-rich local companies, and multinationals behind a common goal – in this case, to build the world’s largest radio telescope. 
The device will process and analyze radioactive waves collected from two million individual antennae, enabling researchers to map the shape of the universe by (they hope) 2020. 
IBM provides the processing power for the data, while local Dutch companies are building all of the components. 
Beyond its own specific objectives, the initiative can help to catalyze a broader transformation of the Dutch tech culture. 
Jan de Jeu, Vice President of the University of Groningen, anticipates experts in Dwingeloo and the northern Netherlands training more scientists and IT specialists in the fundamental challenges related to the storage, transfer, and analysis of enormous data sets, thereby creating what de Jeu calls “The Data Industry Valley.” 
In Southeast Asia, Hong Kong benefits, first and foremost, from a business culture that is unencumbered by either red tape or corruption. 
It takes about two days to set up a new business; taxes are low; and ample co-working spaces are available. 
Furthermore, the government-funded Cyberport Incubation Program supports the development of Hong Kong’s information and communications technology industry by providing companies with start-up capital, access to advanced facilities, and training in entrepreneurship, technology, and business development. 
As a result, the number of entrepreneurs has grown by 300% in the last three years. 
For its part, Singapore is increasingly seeing the effects of a decade of regulatory reforms, including government grants and tax incentives to encourage foreign investment in the technology sector. 
In 2002-2009, more than 11,000 startups were established. 
Singapore’s social-media startup Bubble Motion (recently rebranded as Bubbly) generated more than 20 million users in its first two years – nearly double the number that Facebook or Twitter accrued in the same period in their history. 
It counts influential Silicon Valley firms such as Sequoia Capital, Northgate Capital, and Comcast Ventures as investors. 
On mainland China, Alibaba recently made history by raising $25 billion in the world’s largest initial public offering to date. 
Company founder Jack Ma said that his ambition is to create a thriving “ecosystem” around the corporate headquarters in Hangzhou. 
Alibaba employees, ex-employees, and stockholders already injected more than $6 billion in the local economy in 2013, with Zhejiang University and the Fudi Startup Incubator Centers (founded by a former Alibaba employee) encouraging frenetic startup activity. 
California’s enclave of tech companies remains the crown jewel of entrepreneurial ecosystems. 
But international innovators are increasingly recognizing that, as valuations in Silicon Valley soar, the real bargains for tech-savvy investors may be found outside of the US. 

Socrates in Silicon Valley 
LONDON – If Socrates’s gadfly was in Silicon Valley, it would have a lot of lazy horses to sting. 
The citizens of the techno-polis appear oblivious to how the outside world’s perception of them has changed, and radically so. 
Once universally revered as a hotbed of innovation, the world’s premier technology hub is increasingly viewed with suspicion and resentment. 
Yes, Silicon Valley is still admired as a source of invention and creative destruction; but it is also widely viewed as having lost its ethical compass. 
With proliferating reports of lax attitudes toward data privacy, wanton disregard for the dignity of the less fortunate, and a growing sense that technology companies are pushing their preferred policy agenda on the rest of the world, discontent and disillusion are rising. 
Viewed from outside, the world sees companies that exude a sense of entitlement – for example, by flouting local regulations as they expand into cities around the world, from Berlin to Rio de Janeiro. 
Supremely confident in the power of their knowledge and skills, they are convinced that they will guide the world onto the Path of Truth. 
This overweening certitude is not new – the United States, after all, was founded on missionary zeal – but the ethical arrogance is. 
Of course, not all technology companies should be tarred with the same brush as the main offenders. 
But the recent spate of high-profile cases harms the reputation of the sector as a whole. 
As the world looks to Silicon Valley and sees an echo chamber of self-righteous conceit, mature and law-abiding technology companies are assumed to be inside it, too. 
The cases are becoming legion. 
Uber, the data-abusing car-sharing app that spikes prices during peak demand and threatens journalists who write negatively about it, has been banned in Spain, the Netherlands, Thailand, and two Indian cities so far, including New Delhi (after a driver allegedly raped a passenger). 
These reports follow the revelation that pictures shared on Snapchat may not be deleted, as promised. 
In August, Brazilian authorities banned the social-networking app Secret after the company failed to respond to cyberbullying concerns, with Israel considering a similar move. 
The list goes on. 
Silicon Valley is risking a backlash that will not do anyone any good. 
Its leaders are increasingly out of step with the public’s expectation of ethical and conscientious behavior. 
If they fail to generate new ideas and devise novel approaches, their problems will only multiply further. 
One thing that would help is fresh blood. 
Much of Silicon Valley’s success stems from its tight networks – people who have been successful and support one another. 
But history shows that the same structures can also choke off innovation. 
Organizations, like species, become inbred and weak, and eventually perish, when they fail to embrace diversity. 
Indeed, one of the most revealing facts to come to light about Silicon Valley in recent months is the extreme ethnic and gender imbalance at large technology companies, including Apple, Google, Facebook, and Twitter. 
No one is shocked, but clearly something needs to change. 
Somehow a place that prides itself on innovation and doing things differently should be doing this differently as well. 
Above all, there is value in questioning and challenging the status quo. 
Independence in thought and deed is vital for any company to function and to build things that last and contribute to economic growth and prosperity. 
In Plato’s Apology, Socrates advocates for the examined life – the habit of rigorous self-reflection and posing hard, heterodox, and possibly upsetting questions. 
The tech sector needs to embrace that credo. 
Ironically, questioning prevailing wisdom – and thereby inventing radically new solutions – has been Silicon Valley’s modus operandi from the outset. 
But it has followed this approach on a macro level and for problems elsewhere in the economy, without examining itself. 
Silicon Valley’s citizens must start applying their skill at innovation – and their pride in “breaking things” – to themselves. 
The only way to evolve is by adapting to new environmental pressures, and now Silicon Valley – owing in large part to its own behavior – is facing plenty of them. 
Unless it changes, it will be overtaken. 
The good news is that if any place has proved that it can innovate, it is Silicon Valley. 
Now, however, its citizens must recognize that they do not have all the answers; unfortunately, so far at least, there seems to be no awareness among them that there is even a problem. 
Like the “skilled craftsmen” described by Socrates, “on the strength of their technical proficiency, they claimed a perfect understanding of every other subject, however important.” 
As Plato’s teacher knew – and as every fresh report of the tech sector’s abusive behavior should remind us – a little knowledge can be a dangerous thing. 

Silicon Valley Everywhere 
CAMBRIDGE – During the last decades of the twentieth century, Silicon Valley was the unparalleled epicenter of high-tech innovation. 
Other regions tried to imitate its success, but none succeeded. 
France’s Sophia Antipolis, a top-down attempt by the government to create an innovation hub near Cannes, never evolved beyond its origins as a relatively tranquil technology park – notwithstanding its mythological name, California-like weather, and the surrounding area’s unbeatable gastronomy. 
In the twenty-first century, however, Silicon Valley’s competition has gotten fiercer – as reflected by the increasing number of locations affixing the chemical element to their names: Silicon Alley (New York), Silicon Wadi (Tel Aviv), Silicon Sentier (Paris), etc. 
In London, for example, the emergence of Silicon Roundabout in the late 2000s caught the British government almost by surprise. 
Now rebranded Tech City, the innovation hub in the old Shoreditch neighborhood has evolved into one of London’s key economic engines and talent magnets. 
Similar scripts are playing out around the world. 
In Berlin, a new startup is said to be founded every 20 minutes. 
Paris is busy building what will be Europe’s largest incubator at Halle Freyssinet. 
And in Tel Aviv, the phrase “Startup Nation” has gone from a political slogan to economic reality. 
For the first time, “unicorns” (startups that reach a valuation of more than $1 billion) are no longer the exclusive preserve of the United States – a reality that would have been unthinkable only a few years ago. 
A bright generation of global youth – from Mumbai to Prague to Kenya to Singapore – is betting on innovation, and American venture capital funds, sustained by access to cheap financing, are sating their investment appetites overseas. 
There are several factors behind this phenomenon. 
In a globalized world, capital flows have accelerated and extended their reach. 
Innovators around the world are able to muster support from traditional venture capitalists or from crowd-funding platforms such as Kickstarter. 
Ideas move even faster – propelled, sustained, and strengthened by the Internet. 
And the ability to turn them into reality is keeping pace, as global supply chains and new technologies like 3D printing reduce implementation times. 
Meanwhile, the Great Recession that followed the 2008 global financial crisis has disrupted traditional industries, while creating a large surplus of creative talent and affordable workspaces. 
As a highly mobile, well educated, risk-taking workforce converges on urban hubs, the excitement of city life, coupled with the availability of co-working spaces and a variety of supporting mechanisms, helps to sustain innovative momentum. 
Former New York City Mayor Michael Bloomberg provided what is perhaps the pithiest summary of the attraction of urban life. 
Speaking at Stanford University’s 2013 commencement, he quipped, “I believe that more and more Stanford graduates will find themselves moving to Silicon Alley, not only because we’re the hottest new tech scene in the country, but also because there’s more to do on a Friday night than go to the Pizza Hut in Sunnyvale. 
And you may even be able to find a date with a girl whose name is not Siri” (the digital personal assistant installed on Apple’s handheld devices). 
Bloomberg is generally credited as one of the major forces behind Silicon Alley. 
During his tenure in office, he funded early-stage technology companies, hired the city’s first chief digital officer, and launched a new university to develop high-tech talent. 
Similar policies are now being implemented in many urban areas, in order to attract a critical mass of creative, technologically savvy people. 
Cities, as a recent World Economic Forum report highlights, are rapidly becoming not just drivers of innovation, but also testing grounds for new technologies, such as reprogrammable space, self-driving mobility, urban farming, and intelligent street lighting. 
Meanwhile, vehicle-hailing apps like Uber and apartment-sharing platforms like Airbnb are demonstrating how cities have become some of the most fertile environments for technological development. 
That is yet another reason why many new startups are putting down roots in urban centers. 
Most likely, this proliferation of innovation is just the beginning. 
As the Internet continues its penetration of all aspects of our lives, we are entering what the computer scientist Mark Weiser has called the era of “ubiquitous computing” – a time when technology is so prevalent that it “recedes into the background of our lives.” 
Before long, the digital world and the physical world will be indistinguishable. 
The era of “Silicon Everywhere” is upon us – and it is taking shape in the world’s cities. 


Turkey’s Iran Strategy 
ISTANBUL – Following Iranian Foreign Minister Javad Zarif’s recent visit to the Gulf states, the Islamic Republic’s charm offensive is set to continue with President Hassan Rouhani’s trip to Turkey early next month. 
Unlike the majority of Iran’s Arab neighbors, Turkey unequivocally welcomed the interim nuclear deal concluded last month between Iran and the P5+1 (the United Nations Security Council’s five permanent members and Germany). 
But Turkish policymakers are keenly aware that the agreement may upend the Middle East’s fragile balance of power. 
From Turkey’s perspective, the nuclear deal, if successfully implemented and made permanent after six months, is set to eliminate a major security concern. 
Prime Minister Recep Tayyip Erdoğan’s government does not want to be faced with a nuclear Iran, fearing the emergence of an asymmetric power relationship with the Islamic Republic after centuries of balanced ties. 
But Turkey also did not want a military intervention in Iran, led by the United States. 
It was believed that a military strike would create even more problems in terms of regional stability and security. 
That is why Turkish policymakers have consistently championed a diplomatic solution to the Iranian conundrum, which is what they got with the latest deal. 
There are other reasons why Turkish officials have welcomed the interim agreement so warmly. 
First, they interpret the deal as vindication of their ill-fated effort in May 2010 (together with Brazil) to reach an agreement with Iran on the disposition of Iran’s nuclear fuel. 
Turkish authorities continue to highlight that earlier tripartite agreement with Iran. 
The foreign ministry, for example, released a statement noting that, “The agreement…constitutes the first concrete positive development concerning Iran’s nuclear program since the Tehran Declaration of 2010.” 
Turkey is also satisfied that the deal does not weaken its position on sovereign rights under the Nuclear Non-Proliferation Treaty. 
Turkey has consistently defended the interpretation that states have the right to establish domestic uranium-enrichment programs under the NPT, provided that they comply with their treaty commitments. 
Even at the peak of diplomatic tensions with Iran, Turkey refrained from adopting America’s more maximalist position, which challenged the validity of Iran’s right to enrich uranium. 
So the tacit and conditional acceptance of this right is a satisfactory outcome for Turkey. 
Though Turkey currently has no plans to develop a fuel cycle of its own, its ambitious agenda for developing nuclear power has made policymakers intent on safeguarding the rights recognized by the NPT, including the right to enrich uranium. 
There are also significant economic considerations for Turkey, which relies on Iran for a substantial share of its energy imports. 
Equally important, as a neighboring country, Iran has been a traditional trading partner – a relationship worth more than $15 billion per year. 
As a result, Turkey’s export potential has been negatively affected by the rising stringency of the sanctions regime against Iran, with trade losses estimated at $6 billion for the first nine months of 2013. 
The gradual easing of the sanctions is expected to benefit Turkey’s export industries, which hope to satisfy pent-up Iranian demand for consumer and investment goods. 
Finally, in contrast to Arab states like Saudi Arabia, Turkey is generally comfortable with the deal’s geopolitical ramifications. 
The improvement of Iran’s relationship with the West and the easing of diplomatic pressure on the Islamic Republic is not a major concern. 
But, for the Gulf states – and also possibly for Israel – this scenario is viewed as opening the door to stronger Iranian influence throughout the region. 
These countries believe that, following the interim agreement, the US will fail to demonstrate sufficiently strong resolve to deter Iran from seeking regional hegemony. 
In that case, tensions between Saudi Arabia and Iran will become more acute in the years ahead, emerging as the main destabilizing factor in the region. 
It is in this context that Turkey’s role as a secular power, one capable of transcending the sectarian divide, will become more important than ever. 
Turkish policymakers would be well advised to seize this opportunity to consolidate the country’s effectiveness as a regional actor, one that is uniquely positioned to stem the danger of a widening – and potentially extremely dangerous – rift. 

 

Single Financial Regulators Are the Future 
Why have some countries chosen to create a single national financial services regulator? 
Four reasons predominate: 
First, market developments - say, the increasing number of financial conglomerates and the blurring of boundaries between financial products - make sector-based regulation increasingly less viable. 
Most countries see cross-sector mergers and acquisitions in the financial services industry; and financial services firms expand through internal growth into new business sectors. 
Indeed, groups that include some combination of banking, insurance, securities and fund management activities are increasingly common. 
Moreover, complex products that enable firms to unbundle, repackage and trade risks in ways that blur the boundaries between formerly distinct sectors are introduced consistently. 
The UK was not the first country to favor a single regulator capable of regulating these conglomerates as groups, and understanding the cross-sector nature of their business. 
Norway, Denmark and Sweden led the way here, but many others soon followed, or announced an intention to do so. 
Second, economies of scale and scope are available to an integrated regulator. 
The UK's Financial Services Authority (rather the many regulated firms who meet its costs) benefits from the economies of scale that arise from the move to a single set of central support services; unified management; and a unified approach to standard_setting, authorization, supervision, enforcement, consumer education and tackling financial crime. 
This is reflected in the FSA costing less, in real terms, than the sum of its individual predecessor regulatory bodies. 
Economies of scope arise because a single regulator can tackle cross_sector issues more efficiently and effectively than a multiplicity of regulators. 
Consistent and coherent standards can be set for regulated firms, differentiating between sectors only when it is appropriate to do so, and so reducing incentives for regulatory arbitrage. 
Prudence and conduct of business regulation can be brought together, because both depend on the quality of a firm's senior management and high-level systems and controls. 
A risk-based approach supervising individual firms can be adopted by a single regulator, with resources allocated not only across firms but also across sectors on the basis of the likelihood of problems arising and of the impact on consumers and on market confidence if problems emerge. 
A single regulator can assess the real and potential impact, on all sectors, of industry and market-wide issues such as turbulence in markets and economies, the development of e-commerce, the shift to low inflation, the implications of demographic changes, and risk transfers between banks and insurance firms. 
Third, there are benefits in setting single, clear and consistent objectives and responsibilities, and to resolving trade_offs among these within a single agency. 
The FSA's four statutory objectives are to maintain confidence in the financial system; to promote public understanding of the financial system; to secure the appropriate degree of protection for consumers; and to reduce as far as possible the chances of a financial services firm being used for criminal purposes. 
In pursuing these objectives, the FSA pays keen attention to seven ``principles of good regulation:'' 
· the efficient, economic use of its resources; 
· the responsibilities of those who manage the affairs of authorized persons; 
· the principle that a burden or restriction imposed on a regulated firm should be proportionate to the benefits; 
· the desirability of facilitation of innovation in connection with regulated activities; 
· the international character of financial services and markets and the desirability of maintaining the UK's competitive position; 
· the need to minimize adverse effects on competition from the FSA's discharge of its general functions; 
· the desirability of facilitating competition between firms regulated by the FSA. 
Fourth, there are advantages for the regulatory regime, for the costs of regulation, and in preventing regulatory failures in making a single regulator clearly accountable against its statutory objectives. 
The buck cannot be passed from one regulator to another if a regulatory failure occurs. 
Although independent of government, the FSA can be called to account by government and parliament, and recognises the interests of all of its stakeholders. 
It must publish an annual report describing how it has met its statutory objectives and carried out its functions. 
It must also consult publicly - including a cost benefit analysis - on proposed rules and regulatory guidance before issuing them; and must take account of the views of both a consumer panel and a practitioner panel established on a statutory basis. 
What does the approach of a single regulator imply for innovation and new ideas? 
The experience here suggests that the outcome is positive. 
Internally, bringing together different regulatory agencies to create a new integrated approach enhances innovation, because rather than simply follow the old practices of any predecessor agency, the best ideas are chosen. 
As new issues arise the need and the ability to adopt a cross-sector perspective generates novel regulatory responses. 
Meanwhile, constant and considerable innovation in the firms and markets the FSA regulates; the obligation on the FSA to be an open, transparent and consultative regulator, and to pay careful attention to the impact of its actions on competition and innovation; and participation in international discussions and negotiations all contribute to the FSA's development of a new, efficient, risk-based and innovative regulatory regime. 
The importance of giving clear incentives, so that regulators are innovative and facilitate innovation in financial services, must not be underestimated. 
Regulators must be held to account for doing so. 

Sink or Swim in the Philippines 
MANILA – The tragedy of the sinking of the Princess of the Stars ferry in the waters off Romblon in the Philippines – with hundreds of corpses still believed trapped inside – is proof that the country is prone not only to natural calamities, but to manmade ones as well. 
The decision to allow the vessel to sail directly into the path of Typhoon Frank resulted from plain and simple incompetence. 
Worse still, the same shipping line has been involved in at least three other tragedies at sea in the past 11 years, including the “Dona Paz” disaster in 1987, which killed more than 4,000 people and was described as the world’s worst maritime disaster in peace time. 
That record adds even more ignominy to the sense of loss suffered by the loved ones of those who died or remain missing. 
If only Philippine authorities could learn the lessons of past tragedies, this latest one might well have been averted. 
Philippine law, like that of most jurisdictions worldwide, classifies the business of transportation as a public convenience. 
It is undertaken not as an ordinary business under traditional conditions of laissez-faire, but as one vested with the public interest. 
Of prime concern is the fact that sea travel has been and will always be perilous. 
For a thousand years, states have regulated maritime transportation for the purpose of promoting safety at sea. 
In theory, the Philippine authorities should have exercised their regulatory oversight with far more diligence. 
Instead, Manila port officials and the Philippine coast guard permitted the Princess of the Stars to set sail, despite clear warnings by the weather bureau that the ship was headed for the eye of the typhoon. 
So the problem is not one of regulation, but of the will to enforce it. 
Moreover, it is more than strange that a company with so dismal a safety record has continued to operate. 
Surely, the fact that the Philippines is notorious for being one of the world’s most corrupt countries explains why non-seaworthy vessels with incompetent crews continue to ply their routes. 
Quite simply, it is a root failure of the rule of law in the Philippines that is to blame for the plight of the victims. 
Part of the problem lies in the fact that Philippine law places a very low value on human life. 
Indeed, in Philippine courts, the cost of indemnity for a human life is valued at only $2,500. 
In the country’s statute books, the value is even lower – just $100. 
This valuation may not constitute the full amount of damages that the heirs of those who have died as a result of a crime or a breach of contract may eventually recover. 
Nevertheless, the refusal of Philippine courts to award damages beyond actual damages and nominal moral damages has made loss of life affordable to those who intend to be derelict in their contractual obligations. 
Of course, exemplary and punitive damages in order to discourage conduct inimical to society do exist in the statute books. 
But Philippine courts have refused to resort to the use of such damage awards as a tool for controlling behavior, particularly of businessmen. 
Recent attempts by Filipino lawyers to prosecute civil claims for environmental tort and human rights abuses before American courts demonstrate just how desperate Filipino claimants are to seek redress against those who have acted negligently or with impunity. 
All of this explains why Sulpicio Lines, the owner of the Princess of the Stars, has remained in commercial operations despite its many lapses. 
Simply put, the Philippine courts have not made it sufficiently costly for it to maintain non-seaworthy vessels. 
Worse, litigation in the Philippines takes at least five years on average to be concluded. 
Even those Filipinos who can afford to litigate have to wait; a claimant in the Dona Paz tragedy, for example, waited 19 years before recovering $250,000 in damages. 
As a general rule, though, Filipino ferry and ship passengers are poor and cannot afford the services of lawyers or the high filing fees demanded by the courts. 
As a consequence, they settle for the crumbs that are eventually offered by the ship owners after a disaster. 
This lawless legality is all too common in a country where 85% of people live in abject poverty. 
To many of them, sea travel remains the only viable means of transportation. 
Non-seaworthy vessels notwithstanding, their only alternative would be to swim – or, like those on board the Princess of the Stars, to sink. 

Sinking the Sunshine Policy 
Last week's naval battle between North and South Korean warships sank more than a South Korean frigate. 
It also probably sank the "Sunshine Policy" of rapprochement with North Korea that once appeared to be the crowning achievement of Kim Dae Jung's presidency in South Korea. 
Two years have passed since Kim Dae Jung and North Korea's Chairman Kim Jong Il met in Pyongyang, the North's impoverished capital. 
Since then, Kim Jong Il has failed to make his promised return visit to Seoul. 
That failure suggests that North Korea's fundamental hostility to the South remains unabated. 
Why? 
We can only speculate that North Korea's military is resisting any real change because the regime's survival depends on its "military first" politics. 
So long as North Korea's military remains the guardian of the regime by advocating this doctrine, it will be impossible for Kim Jong Il to change his country's ruling domestic and foreign policies. 
Many explanations for the North's aggressive behavior are in contention in the South. 
Perhaps North Korea wanted to disrupt the World Cup tournament that South Korea was co-hosting with Japan and in which South Korea's national team had achieved stunning success. 
More plausible is the idea that the North wanted to deliver a message: it does not want to be ignored by the South, the US, China, or any other concerned party. 
Whatever its motivations, one thing is clear: North Korea is not going to help President Kim sustain the "Sunshine Policy" as the primary legacy of his government after he leaves office in February 2003. 
North Korea's relations with America are also at a new low water mark. 
Just before the naval skirmish broke out, the Bush administration sent Assistant Secretary of State James Kelly to Pyongyang to probe North Korea on missile and nuclear weapon proliferation and conventional forces. 
Nothing came of that visit. 
So the trend is worrying. 
In February, President Bush declared the North a member of the "axis of evil" and in March the Pentagon singled North Korea as a possible target for a preemptive nuclear strike should it invade South Korea. 
In April the Bush administration refused to certify that North Korea is abiding by the 1994 agreement to freeze its nuclear weapons program. 
Now America is asking that North Korea accept International Atomic Energy Agency inspection on its nuclear sites. 
The US wants to find out whether the North is hiding nuclear weapon materials before South Korean workers begin to create the foundations for the two light water nuclear reactors promised in that 1994 agreement. North Korea must also soon declare whether or not it will continue its declared moratorium on testing ballistic missile in early 2003. 
Unlike the Clinton administration, which saw engagement with North Korea as a goal in itself, the Bush administration is focused on preventing North Korean missiles sales to "rogue" regimes like Iran, ensuring verified compliance with international obligation on nuclear safeguards, and reducing conventional military forces along the border with South Korea. 
So America is committed to what can only be called "conditional engagement" with the North as part of its global campaign against international terrorism and weapons of mass destruction. 
The "Sunshine Policy" is on the defensive in South Korean domestic politics, too. 
The unilateral and persistent way in which President Kim and his associates pursued their opening to the North caused enormous divisiveness on an issue over which the country was usually very united. 
Opponents of Mr. Kim's policy point out that the South keeps making concessions without gaining anything from the North in return. 
During last month's local government campaign, indeed, Mr. Lee Hoi-Chang, the opposition Grand National Party Candidate for president, repeatedly emphasized the principle of reciprocity and vowed to abrogate the "Kim/Kim" summit agreement if Kim Jong Il's government continued to insist that the South accept the North's terms for the constitutional construction of a reunified Korea. 
President Kim Dae Jung's opponents romped to victory in a landslide that suggests the unpopularity of his policies. 
There is little doubt that the naval confrontation in which four South Korean sailors were killed further damaged President Kim's credibility on policy toward the North. 
President Kim himself demanded an apology, but the North only accused South Korea of initiating an armed provocation against it. 
Unless the North reverses this position, President Kim's efforts to stick to the "Sunshine Policy" will look increasingly weak in the eyes of South Korea's public. 
Such a perception will make it hard for his successor - whoever he is - to revitalize the "Sunshine Policy" even if he wants to do so. 
Despite its seeming slow death, the "Sunshine Policy" did deliver benefits. 
Primarily, it opened North Korea to South Korea and the world. 
As a result, North Korea has begun to enter the international system and its dependence on South Korea, the US, China and other donors has deepened. 
But it is also true that this opening failed to change North Korea's behavior in any fundamental way. 

The Six-Day War at 50 
NEW YORK – The world is about to mark the 50th anniversary of the June 1967 war between Israel and Egypt, Jordan, and Syria – a conflict that continues to stand out in a region with a modern history largely defined by violence. 
The war lasted less than a week, but its legacy remains pronounced a half-century later. 
The war itself was triggered by an Israeli preemptive strike on the Egyptian air force, in response to Egypt’s decision to expel a United Nations peacekeeping force from Gaza and the Sinai Peninsula and to close the Straits of Tiran to Israeli shipping. 
Israel struck first, but most observers regarded what it did as a legitimate act of self-defense against an imminent threat. 
Israel did not intend to fight on more than one front, but the war quickly expanded when both Jordan and Syria entered the conflict on Egypt’s side. 
It was a costly decision for the Arab countries. 
After just six days of fighting, Israel controlled the Sinai Peninsula and the Gaza strip, the Golan Heights, the West Bank, and all of Jerusalem. 
The new Israel was more than three times larger than the old one. 
It was oddly reminiscent of Genesis: six days of intense effort followed by a day of rest, in this case the signing of a cease-fire. 
The one-sided battle and its outcome put an end to the notion (for some, a dream) that Israel could be eliminated. 
The 1967 victory made Israel permanent in ways that the wars of 1948 and 1956 did not. 
The new state finally acquired a degree of strategic depth. 
Most Arab leaders came to shift their strategic goal from Israel’s disappearance to its return to the pre-1967 war borders. 
The Six-Day War did not, however, lead to peace, even a partial one. 
That would have to wait until the October 1973 war, which set the stage for what became the Camp David Accords and the Israel-Egypt peace treaty. 
The Arab side emerged from this subsequent conflict with its honor restored; Israelis for their part emerged chastened. 
There is a valuable lesson here: decisive military outcomes do not necessarily lead to decisive political results, much less peace. 
The 1967 war did, however, lead to diplomacy, in this case UN Security Council Resolution 242. 
Approved in November 1967, the resolution called for Israel to withdraw from territories occupied in the recent conflict – but also upheld Israel’s right to live within secure and recognized boundaries. 
The resolution was a classic case of creative ambiguity. 
Different people read it to mean different things. 
That can make a resolution easier to adopt, but more difficult to act on. 
It thus comes as little surprise that there is still no peace between Israelis and Palestinians, despite countless diplomatic undertakings by the United States, the European Union and its members, the UN, and the parties themselves. 
To be fair, Resolution 242 cannot be blamed for this state of affairs. 
Peace comes only when a conflict becomes ripe for resolution, which happens when the leaders of the principal protagonists are both willing and able to embrace compromise. 
Absent that, no amount of well-intentioned diplomatic effort by outsiders can compensate. 
But the 1967 war has had an enormous impact all the same. 
Palestinians acquired an identity and international prominence that had largely eluded them when most were living under Egyptian or Jordanian rule. 
What Palestinians could not generate was a consensus among themselves regarding whether to accept Israel and, if so, what to give up in order to have a state of their own. 
Israelis could agree on some things. 
A majority supported returning the Sinai to Egypt. 
Various governments were prepared to return the Golan Heights to Syria under terms that were never met. 
Israel unilaterally withdrew from Gaza and signed a peace treaty with Jordan. 
There was also broad agreement that Jerusalem should remain unified and in Israeli hands. 
But agreement stopped when it came to the West Bank. 
For some Israelis, this territory was a means to an end, to be exchanged for a secure peace with a responsible Palestinian state. 
For others, it was an end in itself, to be settled and retained. 
This is not to suggest a total absence of diplomatic progress since 1967. 
Many Israelis and Palestinians have come to recognize the reality of one another’s existence and the need for some sort of partition of the land into two states. 
But for now the two sides are not prepared to resolve what separates them. 
Both sides have paid and are paying a price for this standoff. 
Beyond the physical and economic toll, Palestinians continue to lack a state of their own and control over their own lives. 
Israel’s objective of being a permanent Jewish, democratic, secure, and prosperous country is threatened by open-ended occupation and evolving demographic realities. 
Meanwhile, the region and the world have mostly moved on, concerned more about Russia or China or North Korea. 
And even if there were peace between Israelis and Palestinians, it would not bring peace to Syria, Iraq, Yemen, or Libya. 
Fifty years after six days of war, the absence of peace between Israelis and Palestinians is part of an imperfect status quo that many have come to accept and expect. 

Sixty Years of the Palestinian “Catastrophe” 
As the state of Israel celebrates its 60th birthday, Palestinians remember the Nakbeh, or “catastrophe” – their story of dispossession, occupation, and statelessness. 
But, for both sides, as well as external powers, the events of 1948 and what has followed – the occupation since 1967 of the remaining lands of historic Palestine – represents a tragic failure. 
Israel is most at fault for this failure, owing to its continued military occupation and illegal settlements. 
Despite giving lip service to peace, the Israeli army’s refusal to leave the occupied territories continues to be in direct contravention to what the preamble to United Nations Security Council resolution 242 termed the “inadmissible taking of land by force.” 
But the international community, Palestinians, and Arabs all bear responsibility as well, albeit at different levels. 
Indeed, the list of disappointments pre-dates Israeli statehood and the Nakbeh itself: the King-Crane Commission of 1919, the 1937 Peel Report, the British White Paper of 1939, the Anglo-American Committee of Inquiry of 1945, and the UN Partition Plan of 1947. Since then, we have had UN resolutions 194, 242, and 338, the Rogers Plan, the Mitchell Plan, the Tenet Plan, Camp David, Taba, the Saudi plan, the “road map,” the Geneva Initiative, the People’s Choice, and the Arab Peace Initiative. 
To be sure, Palestinians and Arabs are also to blame for their inability to empathize, recognize, and understand the plight of the Jewish people. 
Although Palestinians had nothing to do with European anti-Semitism and the Nazi Holocaust, they should not have turned a blind eye to the Jews’ tragedy. 
Palestinians were so locked in their opposition to Zionism that they were unable to appreciate the Jews’ existential needs, just as they failed to appreciate the effects of indiscriminate acts of violence against Israeli civilians. 
Consumed with legitimate anger, Palestinians and Arabs failed to come up with a serious approach to reach out to Israelis and failed to devise a workable political strategy that would address Palestinian daily needs and national aspirations. 
Cross-border attacks, hijackings, Arab and international diplomacy, secret talks, non-violent resistance, suicide bombings, rockets, regional Arab initiatives, international peace envoys: nothing has succeeded in ending the occupation. 
With each approach, Palestinian leaders, believing Arab states’ hollow proclamations of solidarity with their cause, have failed to measure accurately their own powers vis-à-vis the Israelis. 
Indeed, the Arab states have come nowhere close to matching the level of US and European aid to the Palestinians, much less the even higher level of Western support – political and military, as well as financial – that has been the key to Israel’s ability to withstand Palestinian demands for freedom. 
While European public and private support to Israel, especially in its founding years, is believed to be very extensive, the US has created a firewall of vetoes and political protection for Israel, in addition to providing massive financial support. 
Writing in the Washington Report on Middle East Affairs , Shirl McArthur, a retired US Foreign Service officer, estimates that direct US aid to Israel between 1949 and 2006 totaled $108 billion. 
After the US, Germany is the principal donor of both economic and military aid to Israel. 
By far the largest component of German aid has been in the form of restitution payments for Nazi atrocities. 
Total German assistance to the Israeli government, Israeli individuals, and Israeli private institutions has been roughly $31 billion, or $5,345 per capita, bringing combined US and German assistance to almost $20,000 per Israeli. 
In the face of Israel’s strength, the Palestinian national movement’s failure has now played into the hands of Islamists. 
The Islamic Resistance Movement (known by its Arabic acronym, Hamas), which emerged during the first Intifada in 1987, grew more powerful in the 1990’s, after the return of the PLO’s Yasser Arafat and the creation, as a result of the Oslo Accords, of the Palestinian Authority. 
Hamas’s rejection of the Oslo Accords bore political fruit as it became increasingly clear to Palestinians that the handshakes on the White House lawn would not produce the coveted end to the Israeli occupation, or even of Israel’s illegal settlement activities. 
Yet, despite history’s long train of failures, Hamas’s June 2007 seizure of control of Gaza, and its pariah status in the West, we are repeatedly told by the US that 2008 will be the year of a peace agreement. 
Meanwhile, the Arab peace proposal, which calls for a Palestinian state on the 1967 borders and a fair solution to the refugee problem in exchange for normalization of Arab states’ relations with Israel, appears doomed. 
After 60 years of failures, and as the generation that lived through the Nakbeh passes from the scene, a political settlement that can provide Palestinians with freedom in an independent state alongside a secure Israel and a fair solution of the refugee problem is more necessary – but also appears less possible – than ever. 

Education in the Age of Automation 
SEOUL – As digital technologies and automation have advanced, fears about workers’ futures have increased. 
But, the end result does not have to be negative. 
The key is education. 
Already, robots are taking over a growing number of routine and repetitive tasks, putting workers in some sectors under serious pressure. 
In South Korea, which has the world’s highest density of industrial robots – 631 per 10,000 workers – manufacturing employment is declining, and youth unemployment is high. 
In the United States, the increased use of robots has, according to a 2017 study, hurt employment and wages. 
But while technological progress undoubtedly destroys jobs, it also creates them. 
The invention of motor vehicles largely wiped out jobs building or operating horse-drawn carriages, but generated millions more not just in automobile factories, but also in related sectors like road construction. 
Recent studies indicate that the net effects of automation on employment, achieved through upstream industry linkages and demand spillovers, have been positive. 
The challenge today lies in the fact that the production and use of increasingly advanced technologies demand new, often higher-level skills, which cannot simply be picked up on the job. 
Given this, countries need to ensure that all of their residents have access to high-quality education and training programs that meet the needs of the labor market. 
The outcome of the race between technology and education will determine whether the opportunities presented by major innovations are seized, and whether the benefits of progress are widely shared. 
In many countries, technology has taken the lead. 
The recent rise in income inequality in China and other East Asian economies, for example, reflects the widening gap between those who are able to adopt advanced technologies and those who aren’t. 
But education-job mismatches plague economies worldwide, partly because formal education fails to produce graduates with skills and technical competencies relevant to the labor market. 
In a report by the Economist Intelligence Unit (EIU), 66% of executives surveyed were dissatisfied with the skill level of young employees, and 52% said a skills gap was an obstacle to their firm’s performance. 
Meanwhile, according to an OECD survey, 21% of workers reported feeling over-educated for their jobs. 
This suggests that formal education is teaching workers the wrong things, and that deep reform is essential to facilitate the development of digital knowledge and technical skills, as well as non-routine cognitive and non-cognitive (or “soft”) skills. 
This includes the “four Cs of twenty-first century learning” (critical thinking, creativity, collaboration, and communication) – areas where humans retain a considerable advantage over artificially intelligent machines. 
The process must begin during primary education, because only with a strong foundation can people take full advantage of later education and training. 
And in the economy of the future, that training will never really end. 
Given rapid technological progress, improved opportunities for effective lifelong learning will be needed to enable workers to upgrade their skills continuously or learn new ones. 
At all levels of education, curricula should be made more flexible and responsive to changing technologies and market demands. 
One potential barrier to this approach is a dearth of well-trained teachers. 
In Sub-Saharan African countries, for example, there are some 44 pupils for every qualified secondary school teacher, on average; for primary schools, the ratio is even worse, at 58 to one. 
Building a quality teaching force will require both monetary and non-monetary incentives for teachers and higher investment in their professional development. 
This includes ensuring that teachers have the tools they need to take full advantage of information and communication technology (ICT), which is not being used widely, despite its potential to ensure broad access to lifelong learning through formal and informal channels. 
According to the EIU report, only 28% of secondary-school students surveyed said that their school was actively using ICT in lessons. 
ICT can also help to address shortages of qualified teachers and other educational resources by providing access across long distances, via online learning platforms. 
For example, the Massachusetts Institute of Technology’s OpenCourseWare enables students around the world to reach some of the world’s foremost teachers. 
This points to the broader value of international cooperation. 
The education challenges raised by advancing technologies affect everyone, so countries should work together to address them, including through exchanges of students and teachers and construction and upgrading of ICT infrastructure. 
All efforts to bolster education should emphasize accessibility, so that those who are starting out with weaker educational backgrounds or lower skill levels can compete in the changing labor market. 
Well-designed and comprehensive social safety nets – including, for example, unemployment insurance and public health insurance – will also be needed to protect vulnerable workers amid rapid change. 
The artificial intelligence revolution will be hugely disruptive, but it will not make humans obsolete. 
With revamped education systems, we can ensure that technological progress makes all of our lives more hopeful, fulfilling, and prosperous. 

Slamming the Euro Door 
LONDON – Last week, central bankers from around the world assembled in Frankfurt to bask in the glory of the euro’s first ten years. 
But for those coming from euro candidate countries, the event was a cold shower. 
Just as the global financial crisis has made euro membership seem more urgent and necessary than ever, euro incumbents have started floating proposals that would raise the bar for entry. 
Under the proposal that was openly discussed in Frankfurt, in addition to the macroeconomic Maastricht criteria that have been in place since the euro’s launch, the quality of a country’s banking system would be used as an additional criterion for euro entry. 
Leaving aside the hypocrisy of Western governments pontificating on this topic while they are bailing out banks after massive regulatory failures, the proposal is seriously flawed. 
To fully appreciate the proposal’s absurdity, consider the extraordinarily successful East European growth model of the past two decades. 
The model advocated by Western Europe and embraced by Eastern Europe has been based on the idea that capital should flow from capital-rich to capital-poor countries. 
Economists have to go back to the nineteenth-century United States to find a similar textbook example of successful growth, with large current-account deficits financed mainly through foreign direct investment. 
Financial flows have been accompanied by unprecedented financial integration, with most East European banks now controlled by Western parents. 
This model has worked remarkably well not just in generating growth, but also, as documented in the European Bank for Reconstruction and Development’s 2008 Transition Report , in improving the institutions that support markets and democracy in Eastern Europe. 
But it has also left these countries vulnerable to the twists and turns of global financial markets. 
Over the last year and a half, they withstood these pressures remarkably well; but, as the global crisis hits them with full force, they are now seeking help from the International Monetary Fund. 
The main vulnerability in the current crisis has been massive exposure to foreign exchange movements. 
Actors in all parts of the economy, households and companies alike, have bet that their local currencies would continue to appreciate. 
Mortgages in Swiss francs and car loans in Japanese yen have been common throughout the region. 
But it was probably in Hungary, the first country to seek an IMF package, that these practices were most widespread. 
Yet this vulnerability was largely created, or at least accommodated, by Western banks. 
The funding from the parent banks that in the earlier phase of the crisis helped provide liquidity to the East European banking systems now appears more as a liability and possible source of contagion. 
It was also the West European financial regulators and supervisors who, under “home rule,” were supposed to discourage these excesses. 
The penetration of foreign banks has also effectively deprived countries in Central and Eastern Europe of monetary policy tools, leaving them with little control over extremely rapid credit growth. 
Add to this the impact of the current West European bank rescue packages on the banking systems of Eastern Europe. 
On one hand, these programs help promote stability by supporting the parent banks active in the region. 
On the other hand, the interventions have also undermined the East European financial systems. 
Governments in Eastern Europe cannot credibly match the broad deposit guarantees issued by their Western neighbors, and the generous recapitalizations have brought down Western banks’ relative funding costs, further weakening local institutions’ competitiveness. 
Finally, many governments explicitly or implicitly restrict parent banks’ ability to use government funds to back up their East European subsidiaries, many of them critical to the stability of the local financial systems. 
To make the quality of the banking system a new criterion for euro membership is not only hypocritical; it is also counterproductive. 
Relatively high levels of inflation have been the main reason why euro membership was perceived as increasingly remote in most countries, and why the prospect of euro entry has had a diminishing impact on domestic reform efforts. 
A small consolation in the current crisis is that inflation rates are now coming down. 
More importantly, the crisis has demonstrated the value for these small economies of being part of a larger currency area. 
Instead of exploiting the current opportunity of unprecedented leverage over euro candidates to push them to meet the Maastricht criteria, euro incumbents are contemplating a new and exceedingly vague criterion based on the quality of banking systems. 
And whose banks are these? 
Who are we kidding? 

Sleepwalking in the Balkans 
SARAJEVO - Almost exactly 13 years ago, American leadership brought an end to Bosnia's three-and-a-half-year war through the Dayton peace agreement. 
Today that country is now in real danger of collapse. 
As in 1995, resolve and transatlantic unity are needed if we are not to sleepwalk into another crisis. 
Bosnian Serb Prime Minister Milorad Dodik, once the darling of the international community (and especially the United States) for his opposition to the nationalist Serb Democratic party, has adopted that party's agenda without being tainted by their genocidal baggage. 
His long-term policy seems clear: to place his Serb entity, Republika Srpska, in a position to secede if the opportunity arises. 
Exploiting the weaknesses in Bosnia’s constitutional structure, the international community's weariness and EU inability to stick by its conditionality, he has, in two years, reversed much of the real progress in Bosnia over the past 13, crucially weakened the institutions of the Bosnian state, and all but stopped the country's evolution into a functioning (and EU-compatible) state. 
Dodik's actions have been fuelled by Russian encouragement and petrodollars. 
In addition his rival, the senior president of all of Bosnia-Herzegovina, Haris Silajdzic, has stressed the need to abolish the two entities that make up Bosnia, to create one non-federal country. 
Dodik professes to respect Dayton and Silajdzic wishes to revise it, but both men are violating its basic principle: a federal system within a single state. 
This toxic interaction is at the heart of today's Bosnian crisis. 
As a result, the suspicion and fear that began the war in 1992 has been reinvigorated. 
A destructive dynamic is accelerating, and Bosnian and Croat nationalism is on the rise.& Recent local elections gave a fillip to nationalist parties. 
This tipping point is the result of a distracted international community. 
While the Bush administration largely turned its back on Bosnia, the EU became deeply engaged; EU membership has been the critical lever for pressing reforms in Bosnia since it was made policy in 2003. 
But the EU did not develop a coherent strategy, and by proclaiming progress where it has not been achieved, the EU weakened not only its own influence in the country, but also the Office of the High Representative (OHR) and the international military presence (the European Union Force, Eufor, which succeeded NATO) the drivers of progress in Bosnia since Dayton. 
The degeneration of the OHR's influence coincided with the withdrawal of the US military and the hollowing-out of Eufor, which now has little in the way of operational capacity. 
Despite the danger signals, France and Spain apparently want to pull the plug on Eufor altogether before the end of the year, seemingly to prove the purely technical point that EU missions can end. 
The EU, fixated on a still undefined ampquot;transitionampquot; from OHR to an EU-centered mission, seems intent on emptying its toolbox before it knows what tools it will need to enable Bosnia's transition. 
It failed, for example, to back its man on the ground, the able Slovak diplomat Miroslav Lajcak, at a crucial moment, fatally undermining his authority. 
Like Dodik, Russia is exploiting weak EU resolve, making trouble for the US and EU where possible. 
Yet the Kremlin’s stake in Bosnia pales in comparison to those of the EU or US.& Russia’s attempts to close the high representative's office, regardless of whether the job is done, must be rebuffed. 
It has to remain open - or a similarly strong organization set up - until the conditions for the transition to a more normal EU presence are met. 
The US, lame duck president or not, must re-engage. 
Javier Solana, the EU's foreign policy chief, should initiate an independent study with the task of producing a new transatlantic policy, backed by America's full engagement and strong EU conditionality, which can lead to deeper and broader international involvement in Bosnia. 
A collapse of the Dayton peace agreement would be an unnecessary and unwanted additional problem for the next US president. 
The EU’s foreign policy attention has recently focused on Kosovo, but it is Bosnia that has always been the bigger and more dangerous challenge. 
That country's decline can still be arrested, provided the EU wakes up, the new US administration gets engaged, and both renew their commitment to Bosnia's survival as a state, by maintaining an effective troop presence and beginning the process of strengthening the international community's approach long-term, including finding ways to untie Bosnia's constitutional knot. 
It's time to pay attention to Bosnia again, if we don't want things to get nasty very quickly. 
By now, the entire world knows the price of that. 

Sleepwalking through America’s Unemployment Crisis 
NEWPORT BEACH – It was relegated to the Q&A session, rather than featured prominently in the opening statement, at last week’s first-ever press conference of US Federal Reserve Board Chairman Ben Bernanke. 
It is an issue that too many in Washington, DC are willing to dismiss as “transitory,” despite visible evidence to the contrary. 
It is extremely vulnerable to high oil and food prices. 
And it undermines the operational assumptions that underpin the long-standing characterization of the US economy as vibrant and responsive. 
The issue is the scope and composition of unemployment in America – a problem that is yet to be sufficiently recognized for its increasingly detrimental impact on the country’s social fabric, its economic potential, and its already-fragile fiscal position and debt dynamics. 
Let us start with the facts: 
· At 8.8% almost three years after the onset of the global financial crisis, America’s unemployment rate remains stubbornly (and unusually) high; 
· Rather than reflecting job creation, much of the improvement in recent months (from 9.8% in November last year) is due to workers exiting the labor force, thus driving workforce participation to a multi-year low of 64.2%; 
· If part-time workers eager to work full time are included, almost one in six workers in America are either under- or unemployed; 
· More than six million workers have been unemployed for more than six months, and four million for over a year; 
· Unemployment among 16-19 year olds is at a staggering 24%; 
· With virtually no earned income and dwindling savings, the unemployed are least able to manage the current surge in gasoline and food prices, they are effectively shut off from credit, and many have mortgage debt that exceed the value of their homes. 
These and many other facts speak to an unpleasant and unusual reality for the United States. 
The country now has an unemployment problem that is large in magnitude and increasingly structural in nature. 
The consequences are multifaceted, involving immediate personal anguish, rising social and political tensions, economic losses, and budgetary pressures. 
This is much more than a problem for the here and now. 
High and intractable unemployment has serious negative long-term consequences that threaten to become exponentially worse. 
This is a crisis. 
Substantial international research shows that the longer one is unemployed, the harder it is to get a job. 
This erodes an economy’s skills base and saps its long-term productive capacities. 
And, if unemployment is particularly acute among the young, as is the case today, too many of the unemployed risk becoming unemployable. 
Undoubtedly, the Great Recession triggered by the global financial crisis has contributed to this worrisome situation. 
Unfortunately, the problem is much deeper, as it was long in the making. 
At its root, America’s jobs crisis is the result of many years of under-investment in human resources and the social sectors. 
The education system has lagged the progress made in other countries. 
Job retraining initiatives have been woefully inadequate. 
Labor mobility has been declining. 
And insufficient attention has been devoted to maintaining an adequate social safety net. 
These realities were masked by the craziness that characterized America’s pre-2008 “Golden Age” of leverage, credit, and debt entitlement, which fueled a gigantic but unsustainable boom in construction, housing, leisure, and retail. 
The resulting job creation, though temporary, lulled policymakers into complacency about what was really going on in the labor market. 
As the boom turned into a prolonged bust, the longer-term inadequacies of the job situation have become visible to all who care to look; and they are alarming. 
Left to its own devices, America’s unemployment problem will deepen. 
This will widen the already-large gap between the country’s haves and have-nots. 
It will undermine labor’s skills and productivity. 
It will accentuate the burden imposed on the gradually declining number of people who remain in the labor force and have jobs. 
And it will make it even harder to find a medium-term solution to America’s worsening public-debt and deficit dynamics. 
The US government has little time to waste if it is to avoid an even more protracted and entrenched unemployment problem. 
It must move now to address the problem’s sources through multi-year programs that range from educational restructuring and worker retraining to productivity enhancement and housing-sector reform. 
And it must do so while better protecting the long-term unemployed, many of whom bear little responsibility for their current, once unthinkable, and unfortunately long-lasting predicament. 
It is past time for the US to wake up and confront in a holistic fashion its unemployment crisis. 
As everyone who has ever had an unpalatable job knows, shutting off the alarm and pulling the blanket over one’s head is not a solution. 

Slouching Toward Fanaticism in Pakistan 
President Bush's comparison of the capture of Khalid Shaikh Mohammed (reputed to have planned the attacks on the World Trade Center and the Pentagon) to the liberation of Paris in 1944 was certainly hyperbolic, but the arrest was a political blessing for the US President all the same. 
For Pakistan's General Pervez Musharaf, Mohammed's apprehension is a mixed bag: it gained a pat on the back from Mr. Bush but simultaneously revealed the falsity of General Musharaf's claims that Pakistan is largely Al-Qaida free. 
Indeed, it is now starkly apparent that much of Al-Qaida and its top leadership prefer refuge in Pakistan to any other place. 
The reason would be obvious to anyone who witnessed the recent "million man march" in Karachi organized by Pakistan's newly formed coalition of religious parties, known as the MMA. 
Called to protest America's impending attack on Iraq, marchers set effigies of George Bush and Tony Blair on fire as smiling portraits of Osama bin Laden, draped with fresh flowers, looked on. 
Speaker after speaker accused General Musharaf's government of treachery and denounced its cooperation with the FBI in nabbing Al-Qaida members. 
Before the terrorist attacks on America and the ouster of the Taliban in next-door Afghanistan, Pakistan's religious parties had few seats in either the federal or provincial assemblies. 
Resentment against the US after the bombing of Afghanistan rocketed the religious alliance's popularity sky-high. 
The religious alliance has now formed governments in two of Pakistan's four provinces, the Frontier and Baluchistan, and openly declares its intent to shatter Pakistan's pro-American policy. 
The rise of the MMA is sure to make a fundamental change upon not only Pakistani foreign policy but also upon the country's society and culture. 
Almost immediately after assuming office, the new governments ordered an end to music in public transport, required public buses to stand still for the five daily prayers, and closed down video shops and cinema houses. 
Folk singers have been threatened, abducted, and forbidden to sing in public. 
Cable television operators see their premises ransacked. 
More of this awaits. 
New laws, expected to be passed by the Frontier Assembly soon, follow the lead of Afghanistan's former Taliban government. 
For example, women without "hijab" and a chaperone may not leave their homes; shops shall not advertise the sale of sanitary pads or undergarments; hair-removing creams and lotions may not be sold; use of perfume and makeup will be banned; women will not be allowed to use male tailors; male doctors may not treat women patients; women guests at hotels will not be allowed in the swimming pool; coeducation has been identified as a cause of fornication and is to be phased out; family planning shall be declared un-Islamic, and the sale of contraceptives banned. 
Driven by its compulsion to make war on Iraq at all costs, Washington has shown little inclination to consider the war's long-term impact on countries lying at the periphery of the war zone. 
In a special trip to Islamabad, US Assistant Secretary of State Christina Rocca sought to reassure a visibly nervous Pakistani government that the war would be "quick and short." 
Even if Rocca is right, the anger flowing in Pakistan's streets will drastically weaken moderate opinion while further radicalizing Islamic groups. 
However, if the war drags on, if Baghdad comes under siege with heavy civilian casualties - or if weapons of mass destruction are actually used - all bets could be off. 
Mounting anger within the Pakistan Army, whose soldiers exchanged fire with American troops two months ago, would make Musharaf's isolation total, perhaps forcing him to abandon the American-led coalition. 
To appease radical opinion, Islamic militant leaders who were jailed a year ago are now operating freely again. 
A taped speech by the released head of the Lashkar-i-Tayyaba, Hafiz Saeed, was played on Kashmir Day at mosques in Rawalpindi. 
Lashing out at India and America, the firebrand cleric rhetorically asked, "Allah has told us to make atom bombs. 
America is telling us not to. 
O Muslims, to whom shall we listen, Allah or America?" 
Meanwhile, across the border in Afghanistan, US forces are experiencing frequent ambushes and rocket attacks upon their bases. 
This has led to aggressive US Army sweeps, backed in some cases by heavy bombers. 
The heightened activity, much of it concentrated along the Pakistani border, suggests that some of Pakistan's army intelligence officers have resumed their support of the Taliban and its friends. 
Waiting for spring to come is ex-mujahideen commander Gulbuddin Hekmatyar - a former favorite of the CIA and Pakistan's ISI during the Soviet occupation of Afghanistan. 
He is massing his forces and weapons for a determined strike against American forces. 
Hekmatyar and Al-Qaida expect their task to be easier since the enemy is likely to have its attention focused on Iraq. 
Fighting terror backed by radical Islam requires a sophisticated understanding of its political and economic roots. 
America's plan to liberate Iraq with cruise missiles betrays not only crude ignorance, but also a lack of will to try and deal with the causes of terrorism. 
America's strategic myopia may well provide bin Laden and his kind with a fresh flood of recruits and make Pakistan, the Islamic world's only nuclear-armed state, ungovernable. 

Slouching Toward Gaza 
With barrages of Kassam rockets being launched daily on Israeli towns from the Hamas-ruled Gaza strip and Israeli politicians competing over who would offer the harshest response, the question for Israel today has been reduced to whether or not to invade. 
But neither side is free of contradictions, and both are trapped in a seemingly insoluble conundrum. 
As a government, Hamas is to be judged by its capacity to provide security and decent governance to Gaza’s population, but as a movement it is incapable of betraying its unyielding commitment to fight the Israeli occupier to the death. 
After all, Hamas was not elected to make peace with Israel or to improve relations with the United States. 
However encouraging some sporadic signs of a shift toward political realism might be, it is not on Hamas’s immediate agenda to betray its very raison d’être by endorsing the US-led Annapolis peace process. 
Hamas’s offensive is not an attempt to draw Israel into a costly invasion that might shake its regime. 
Rather, it is a move aimed at establishing a balance of threat based on sustaining a low-intensity conflict even if a new lull is agreed upon. 
A now increasingly arrogant and extremely well armed Hamas expects such a lull to be agreed upon only in exchange for new concessions from both Israel and Egypt. 
These include the opening of Gaza’s borders, including the Egyptian-controlled Rafah crossing, the release of Hamas detainees in Egypt, the suspension of Israeli operations against Hamas activists in the West Bank, and the right to respond to any perceived Israeli violation of the ceasefire. 
But Hamas’s brinkmanship is a dangerous exercise, for a low-intensity conflict can easily degenerate into an all-out flare-up if its rockets cause a politically unbearable number of casualties on the Israeli side. 
In fact, Israel’s top leaders have already approved the army’s plans for an invasion of Gaza, with the timing and the nature of the casus belli left open. 
Hamas is playing with fire on the Egyptian front, too, having haughtily interrupted the Egyptian-led reconciliation process with Mahmoud Abbas’s PLO and pledging to derail the Egyptian and Saudi initiative to extend Abbas’s presidential term until 2010. Hamas has made clear its intention to appoint as president the Palestinian parliament speaker – a Hamas member now in an Israeli prison – once Abbas’s presidency officially ends on January 9. 
Hamas radicalism is not devoid of a political purpose – to bury whatever remains of the two-state solution. 
The meager results of the Oslo peace process are regarded by Hamas as vindication of its consistent view that the Oslo accords were doomed to failure, and that Israel and America never intended to respect the minimal requirements of Palestinian nationalism. 
But, while Hamas has never been indifferent to daily political calculations, nor is it confined to them. 
A fundamentally religious movement for whom the future belongs to Islam, Hamas sees itself as being engaged in a long-term armed struggle for the liberation of all of Palestine. 
Nor is the movement’s brinkmanship entirely irrational, for the legacy of Israel’s 2006 abortive attempt to destroy Hezbollah is that, for the first time in the country’s history, the military establishment is advocating restraint and actively curbing the more hawkish measures being proposed in cabinet meetings. 
Israel’s reluctance to invade Gaza stems from a sober analysis of the meaning of such a move. 
Indeed, Defense Minister Ehud Barak, the Labor Party leader, might be ready to pay a high political price during an electoral season by accepting even a new lull that is intermittently violated by Hamas. 
The invasion of such a small and densely populated strip of land where civilians have been systematically used by Hamas as human shields is bound to expose Israel's military to accusations of war crimes. 
However justified Israel’s action might be, and however critical of Hamas’s repressive regime the international community might be, it will not take long before the wide media coverage of civilian casualties will put Israel, not Hamas, in the dock of world opinion. 
Moreover, reoccupation of Gaza would force Israel to reassume full and exclusive responsibility for the 1.5 million Palestinians now under Hamas control. 
But, even if Israel is ready to pay the price of harsh international condemnation, it is not clear success in such a war really means. 
Is toppling the Hamas regime a realistic option? 
Ismail Haniyeh’s government might collapse, but Hamas would remain a powerful indigenous Palestinian organization around which the population would certainly rally. 
And, even under renewed occupation, with Israeli armored divisions are deployed throughout the strip, Kassam missiles might still be launched – the ultimate humiliation for the occupier. 
And, finally, after a mortal blow had been dealt to whatever remains of the peace process, and cemeteries in Israel and in devastated Gaza are again filled with new casualties, Israel would want to withdraw, and negotiate yet another ceasefire with…the same Hamas. 

Slouching Toward Sanity 
BERKELEY – In America today – and in the rest of the world – economic-policy centrists are being squeezed. 
The Economic Policy Institute reports a poll showing that Americans overwhelmingly believe that the economic policies of the past year have greatly enriched the bankers of Midtown Manhattan and London’s Canary Wharf (they really aren’t concentrated along Wall Street or in the City of London anymore). 
In America, the Republican congressional caucus is just saying no: no to short-term deficit spending to put people to work, no to supporting the banking system, and no to increased government oversight or ownership of financial entities. 
And the banks themselves are back to business-as-usual: anxious to block any financial-sector reform and trusting congressmen eager for campaign contributions to delay and disrupt the legislative process. 
I do not claim that policy in recent years has been ideal. 
If I had been running things 13 months ago, the United States Treasury and Federal Reserve would have let Lehman and AIG fail – but I would have discounted their debt for cash at face value, provided that the debt also came with sufficient equity warrants. 
That would have preserved the functioning of the system while severely punishing the banking and shadow-banking systems’ equity holders, and today nobody would be claiming that their risk management practices were adequate and did not need reform. 
If I had been running things 19 months ago, I would have nationalized Fannie Mae and Freddie Mac and for the duration of the crisis shifted monetary and financial policy from targeting the Federal Funds rate to targeting the price of mortgages. 
Ever since 1825, the purpose of monetary policy in a crisis has been to support asset prices to prevent the financial markets from sending to the real economy the price signal that it is time for mass unemployment. 
Nationalizing Fannie and Freddie, and using them to peg the price of mortgages, would have been the cleanest and easiest way to accomplish that. 
Nevertheless, policy over the past two and a half years has been good. 
A fundamental shock bigger than the one in 1929-1930 hit a financial system that was much more vulnerable to shocks than was the case back then. 
Despite this, unemployment will peak at around 10%, rather than at 24%, as it did in the US during the Great Depression, while nonfarm unemployment will peak at 10.5%, rather than at 30%. 
Nor will we have a lost decade of economic stagnation, as Japan did in the 1990’s. 
Admittedly, the bar is low when making this comparison. 
But our policymakers did clear it. 
It is worth stepping back and asking: What would the world economy look like today if policymakers had acceded to the populist demand of no support to the bankers? 
What would the world economy look like today if Congressional Republican opposition to the Troubled Asset Relief Program (TARP) program and additional deficit spending to stimulate recovery had won the day? 
The only natural historical analogy is the Great Depression itself. 
That is the only time when (a) a financial crisis caused a widespread, lengthy, and prolonged reinforcing chain of bank failures, and (b) the government neither intervened nor passed the baton to a consortium of private banks to support the system as a whole. 
It is now 19 months after Bear Stearns failed and was taken over by JP MorganChase with the assistance of up to $30 billion of Federal Reserve money on March 16, 2008, and industrial production stands 14% below its peak in 2007. 
By contrast, 19 months after the Bank of the United States, with 450,000 depositors, failed on December 11, 1930 – the first major bank collapse in New York since the Knickerbocker Trust failure during the panic and depression of 1907 – industrial production, according to the Federal Reserve index, was 54% below its 1929 peak. 
Opponents of recent economic policy rebel against the hypothesis that an absence of government intervention and support could produce an economic decline of that magnitude today. 
After all, modern economies are stable and stubborn things. 
Market systems are resilient webs that offer the best possible incentives to people to make deals and use resources productively. 
A 54% fall in industrial production between its 2007 peak and today is inconceivable – isn’t it? 
If so, then the unavoidable conclusion must be that things would not have been so bad if the government had refused to implement an expansionary fiscal policy, recapitalize banks, nationalize troubled institutions, and buy financial assets in non-standard ways. 
The problem, though, is that all the theoretical reasons to think that depressions as deep as the Great Depression simply do not happen to market economies applied just as well to the 1930’s as they do to today. 
But it did happen. 
And it could have happened again. 

Slouching Towards Europe 
When communism in Eastern Europe collapsed, the region's new democratic leaders agreed that joining the European Union--fast--must be their priority. ``Back to Europe!'' became the slogan, one enthusiastically backed by a majority of their populations. 
Yet eight months before that dream formally comes true, doubts in Eastern Europe about the benefits of EU membership are mounting. 
What has gone wrong? 
For the new democracies in Europe's east, EU membership has five basic dimensions: historical symbolism, security, economic prosperity, political stability, and a guarantee of the rule of law. 
Each dimension has dominated at different times over the last fourteen years; attached to each are different expectations in Eastern and Western Europe. 
The historical symbolism of the EU has always been more strongly felt in the East than in Western Europe. 
While Eastern Europe's peoples perceived membership as confirmation of their historical affiliation with the West and as another step away from Soviet rule, the EU seemed in no hurry to meet those expectations. 
Instead, the EU emphasized the technical criteria of membership. 
West Europeans did not seem concerned that early enlargement eastward might speed the consolidation of the region's democratic revolutions. 
Reduced to a highly technical and bureaucratic process, enlargement became almost totally devoid of any moral and political ethos. 
Meanwhile, the security dimension of EU membership diminished in importance when the US opted for rapid NATO enlargement. 
The fact that the Americans were quicker on their feet than the EU also helped to solidify a sense of loyalty that many people in the new democracies feel toward the US. 
Here, indeed, the EU missed a big opportunity to tie enlargement to a daring internal reform that would transform it into a superpower. 
Instead, enlargement was turned into a dull exercise, in which the ultimate benefits of EU membership became blurred in the minds of ordinary people by the complex process of adopting the acquis communautaire (the body of EU law). 
Inevitably, for many the EU appeared to be a bureaucratic monster. 
In the end, Eastern Europe's pro-EU elites were left with only one means of stirring enthusiasm for EU membership: general pronouncements about how the EU delivered peace and stability to a notoriously war-prone continent, as well as the promises of economic prosperity. 
Going ``back to Europe'' was gone; East Europeans were brought back to Europe by the US. 
Now, unfortunately, even the economic benefits of EU membership seem unclear. 
Throughout the accession process, the EU made it clear that it could not and would not offer the same level of economic solidarity as it offered previous newcomers to the Union. 
The new members could, of course, benefit from investment pouring in from current EU countries. 
After all, for many West European companies the existence of a common economic area--and, eventually, an enlarged monetary union--will make it easy to relocate their operations to those parts of Europe with lower costs but identical legal standards. 
But even these benefits may be curtailed by the continuing economic downturn in much of Western Europe. 
A significant change in Europe's economic fortunes cannot be expected unless deep structural changes are introduced. But only tentative reforms have appeared so far. 
Slower growth in the new member states could also delay the planned introduction of the Euro, which in turn could deter many Western companies from investing in the region. 
There seems to be a Catch-22 at work here: introducing the common currency may prompt foreign investment, although this will depend on the ability of the new members to lower their public finance deficits. But fiscal consolidation requires strong economic performance, which depends on foreign investment. 
With the economic benefits of EU membership now seeming much less than expected, the intensity of pro-EU sentiments in the candidate countries has significantly declined. 
Although overwhelming majorities voted in favor of membership in virtually all candidate countries where membership referendums have taken place, many people did not turn out to vote. 
The best word to describe the referendums that have taken place so far is apathy. 
Eastern Europe's post-revolutionary enthusiasm for Europe has evaporated. 
To make matters even more complicated, East European countries will join the EU at a time when it has initiated a major internal reform embodied by a new European Constitution. 
Given their experiences with the drawn-out enlargement process, most candidate countries are leery about the motives of some large EU countries. 
If those countries have been egoistic in the past fourteen years, why should candidates believe they would not misuse new decision-making mechanisms to the detriment of small countries--hence the opposition of some candidate countries to creating the post of a European president. 
Such fears have also been strengthened by schizophrenic behavior, particularly French President Jacques Chirac's chastising candidate countries for voicing support for the US regarding Iraq. 
So on May 1, 2004, when the dream of expansion is fulfilled, there will likely be little jubilation on either side of Europe. 
Instead, apprehension and the desultory hope that it will all somehow work out in the end will dominate. 
Then again, given Europe's experience with revolution--in both the East and the West--perhaps that apathy should be welcomed. 

Trouble in Emerging-Market Paradise 
NEW YORK – During the last few years, a lot of hype has been heaped on the BRICS (Brazil, Russia, India, China, and South Africa). 
With their large populations and rapid growth, these countries, so the argument goes, will soon become some of the largest economies in the world – and, in the case of China, the largest of all by as early as 2020. 
But the BRICS, as well as many other emerging-market economies – have recently experienced a sharp economic slowdown. 
So, is the honeymoon over? 
Brazil’s GDP grew by only 1% last year, and may not grow by more than 2% this year, with its potential growth barely above 3%. 
Russia’s economy may grow by barely 2% this year, with potential growth also at around 3%, despite oil prices being around $100 a barrel. 
India had a couple of years of strong growth recently (11.2% in 2010 and 7.7% in 2011) but slowed to 4% in 2012. 
China’s economy grew by 10% per year for the last three decades, but slowed to 7.8% last year and risks a hard landing. 
And South Africa grew by only 2.5% last year and may not grow faster than 2% this year. 
Many other previously fast-growing emerging-market economies – for example, Turkey, Argentina, Poland, Hungary, and many in Central and Eastern Europe – are experiencing a similar slowdown. 
So, what is ailing the BRICS and other emerging markets? 
First, most emerging-market economies were overheating in 2010-2011, with growth above potential and inflation rising and exceeding targets. 
Many of them thus tightened monetary policy in 2011, with consequences for growth in 2012 that have carried over into this year. 
Second, the idea that emerging-market economies could fully decouple from economic weakness in advanced economies was far-fetched: recession in the eurozone, near-recession in the United Kingdom and Japan in 2011-2012, and slow economic growth in the United States were always likely to affect emerging-market performance negatively – via trade, financial links, and investor confidence. 
For example, the ongoing eurozone downturn has hurt Turkey and emerging-market economies in Central and Eastern Europe, owing to trade links. 
Third, most BRICS and a few other emerging markets have moved toward a variant of state capitalism. 
This implies a slowdown in reforms that increase the private sector’s productivity and economic share, together with a greater economic role for state-owned enterprises (and for state-owned banks in the allocation of credit and savings), as well as resource nationalism, trade protectionism, import-substitution industrialization policies, and imposition of capital controls. 
This approach may have worked at earlier stages of development and when the global financial crisis caused private spending to fall; but it is now distorting economic activity and depressing potential growth. 
Indeed, China’s slowdown reflects an economic model that is, as former Premier Wen Jiabao put it, “unstable, unbalanced, uncoordinated, and unsustainable,” and that now is adversely affecting growth in emerging Asia and in commodity-exporting emerging markets from Asia to Latin America and Africa. 
The risk that China will experience a hard landing in the next two years may further hurt many emerging economies. 
Fourth, the commodity super-cycle that helped Brazil, Russia, South Africa, and many other commodity-exporting emerging markets may be over. 
Indeed, a boom would be difficult to sustain, given China’s slowdown, higher investment in energy-saving technologies, less emphasis on capital- and resource-oriented growth models around the world, and the delayed increase in supply that high prices induced. 
The fifth, and most recent, factor is the US Federal Reserve’s signals that it might end its policy of quantitative easing earlier than expected, and its hints of an eventual exit from zero interest rates, both of which have caused turbulence in emerging economies’ financial markets. 
Even before the Fed’s signals, emerging-market equities and commodities had underperformed this year, owing to China’s slowdown. 
Since then, emerging-market currencies and fixed-income securities (government and corporate bonds) have taken a hit. 
The era of cheap or zero-interest money that led to a wall of liquidity chasing high yields and assets – equities, bonds, currencies, and commodities – in emerging markets is drawing to a close. 
Finally, while many emerging-market economies tend to run current-account surpluses, a growing number of them – including Turkey, South Africa, Brazil, and India – are running deficits. 
And these deficits are now being financed in riskier ways: more debt than equity; more short-term debt than long-term debt; more foreign-currency debt than local-currency debt; and more financing from fickle cross-border interbank flows. 
These countries share other weaknesses as well: excessive fiscal deficits, above-target inflation, and stability risk (reflected not only in the recent political turmoil in Brazil and Turkey, but also in South Africa’s labor strife and India’s political and electoral uncertainties). 
The need to finance the external deficit and to avoid excessive depreciation (and even higher inflation) calls for raising policy rates or keeping them on hold at high levels. 
But monetary tightening would weaken already-slow growth. 
Thus, emerging economies with large twin deficits and other macroeconomic fragilities may experience further downward pressure on their financial markets and growth rates. 
These factors explain why growth in most BRICS and many other emerging markets has slowed sharply. 
Some factors are cyclical, but others – state capitalism, the risk of a hard landing in China, the end of the commodity super-cycle – are more structural. 
Thus, many emerging markets’ growth rates in the next decade may be lower than in the last – as may the outsize returns that investors realized from these economies’ financial assets (currencies, equities, bonds, and commodities). 
Of course, some of the better-managed emerging-market economies will continue to experience rapid growth and asset outperformance. 
But many of the BRICS, along with some other emerging economies, may hit a thick wall, with growth and financial markets taking a serious beating. 


Slumdog Oscar 
NEW DELHI – Indians haven’t often had much to root for at the Oscars, Hollywood’s annual celebration of cinematic success. 
Only two Indian movies have been nominated in the Best Foreign Language Film category in the last 50 years, and neither won. 
So Indians take vicarious pleasure in the triumphs of “mainstream” pictures with an Indian connection – the seven Oscars won by Richard Attenborough’s Gandhi in 1983, for instance, or the success of The Sixth Sense, written and directed by a Philadelphian of Indian descent, Manoj Night Shyamalan. 
This year, the country’s attention has been riveted by the surprise Oscar winning best picture, Slumdog Millionaire – set in India, with Indian characters, Indian actors and Indian themes – which was nominated in ten categories. 
Indeed, for the first time, Indian citizens won for best song and for A. R. Rahman’s musical score. 
Movies made by Westerners about India have rarely been worth writing home about, ranging as they’ve done from the ignorant racism of Steven Spielberg’s Indiana Jones and the Temple of Doom to David Lean’s well-intentioned but cringe-inducing Passage to India , with Alec Guinness warbling away in brown-face. 
But most Indians regard Slumdog Millionaire as an exception. 
Directed by Scotland’s Danny Boyle ( Trainspotting ), and based on the page-turning novel Q and A by Indian diplomat Vikas Swarup, the film has captured the hearts of audiences and critics around the world with its tale of a child from the slums, a tea-boy in a call-center, who wins a TV quiz show modeled on Who Wants to be a Millionaire . 
Exuberant, exciting, gaudy, and gritty in a way that can only be called Dickensian, Slumdog Millionaire brings contemporary Mumbai to life from the seamy side up, and it does so with brio, compassion, and all-round cinematic excellence. 
This being India, the film – which is just beginning its cinematic release in the country, months after it hit Western screens – has also provoked dissent. 
Protests have been mounted by slum-dwellers against the movie’s title: the term “slumdog,” coined by the screenwriter, has given great offense, with demonstrators holding up postcards declaiming, “We are not dogs.” 
(To the dismay of Indian liberals, a judge has admitted a petition against the filmmakers, but it is difficult to believe the case will go far.) 
Others have, more predictably, decried the film’s searingly authentic depiction of India’s poverty and slum life. 
Slumdog Millionaire was filmed in large part with small hand-held digital cameras on location in Dharavi, Mumbai’s (and Asia’s) biggest slum, and does not skip the mounds of garbage, cesspits, and overflowing drains. 
There is even a scene involving human excrement that is both revolting and hilarious. 
But this is not an exercise in the pornography of poverty. 
Slum life is depicted with integrity and dignity, and with a joie de vivre that transcends its setting. 
It is easy to see why this movie would appeal to international filmgoers in a way that a bleaker film like City of Joy , which was set in the slums of Calcutta, could not. 
Others have protested that the film shows Indians as conniving, unprincipled, and ruthless, and that the only compassionate people in the film are a pair of white tourists who give the protagonist some money. 
This may reveal something of Boyle’s view of human nature, but most Indian viewers know they live in a land largely devoid of larger-than-life heroes. 
We Indians have learned to take human beings as they are, which is to say, as grossly imperfect. 
And the film’s hero, played by the teenage British-Indian actor Dev Patel with a look that combines intensity and expressiveness, and yet seems utterly genuine, is as sincere a protagonist as you could hope to find. 
So, Slumdog Millionaire following its four Golden Globes and Screen Actors’ Guild awards, seven BAFTA awards (the British Oscars), and eight Academy Awards, is a cause to celebrate in India. 
And, if some of the film’s larger-than-expected profits are directed toward the slums where the movie was made, the protestors are quite likely to fade away. 
What they want, after all, is a share of the glory. 
Slumdog Millionaire is the work of an artist at the peak of his powers. 
India is Boyle’s palette, and Mumbai – that teeming “maximum city,” with 19 million strivers on the make, jostling, scheming, struggling, and killing for success – is his brush. 
The portrait that emerges has been executed with bold strokes, vivid colors, and striking images. 
It would have stayed in the mind’s eye a long time, whether or not it swept the Oscars. 

Small Economies, Big Problems, and Global Interdependence 
WASHINGTON, DC – Greece’s GDP, at about $300 billion, represents approximately 0.5% of world output. 
Its $470 billion public debt is very large relative to the Greek economy’s size, but less than 1% of global debt – and less than half is held by private banks (mainly Greek). 
Barclays Capital estimates that only a few globally significant foreign banks hold close to 10% of their Tier 1 capital in Greek government bonds, with the majority holding much less. 
So, at least on paper, Greece should not be a systemically important economy. 
Yet there are several reasons why the Greek crisis is having substantial spillover effects. 
Moreover, Greece is not alone in this respect. 
First, in the Greek case, there is the fear of contagion to other distressed European economies, such as Portugal and Ireland, or even Spain and Italy. 
There are also substantial investments by American money-market funds in instruments issued by some of the exposed banks. 
Then there are various derivatives, such as credit-default swaps, through which banks holding Greek debt have insured themselves against non-payment. 
If CDSs are concentrated in particular financial institutions, these institutions could be at risk – more so than the primary purchasers of Greek debt themselves. 
But no one knows who is holding how much of these derivatives, or whether they reduce or magnify the risk, because CDSs are not transparently traded on open exchanges. 
Finally, Greece’s difficulties imply problems for managing the euro, as well as possible disorderly behavior in foreign-exchange markets, which threaten to augment uncertainty and negatively influence the already-weakening global recovery. Clearly, the world economy has a large stake in Greece’s recovery. 
In the same vein, consider a completely different case, that of Yemen. 
Greece and Yemen have no relevant similarities, except the contrast between their size and possible spillover effects. 
Yemen’s GDP is only 10% the size of Greece’s, representing 0.05% of global output, and its economy is not significantly linked to the international financial system. 
But Yemen’s population is close to that of Saudi Arabia, and its border is very hard to control. 
Chaos in Yemen, coupled with the growing strength of extremists, could seriously destabilize Saudi Arabia and threaten oil production. 
In that case, the price of oil could shoot up to $150 a barrel or more, dealing a heavy blow to the global economy. 
One can find other examples of this kind. 
Recall that the 1997 Asian crisis started in Thailand – again, not a large economy. 
The strong trade, financial, and natural-resource-related interconnections that have developed in the world economy turn many otherwise small countries, or problems, into global systemic risks. 
The implications for global economic governance need to be understood and addressed. 
At the Seoul G-20 summit in November 2010, the assembled leaders encouraged the International Monetary Fund to work with the Financial Stability Forum to develop an early-warning system for global financial risks, and to analyze spillover effects on “large economies” (China, the United States, the United Kingdom, Japan, and the eurozone). 
The spillover reports are currently being discussed by the IMF’s board. 
A synthetic report by the Fund’s Managing Director is to be presented to the International Monetary and Financial Committee when officials from the IMF’s member states meet in September. 
This step, if pursued seriously, would enable a deeper analysis of interdependence in the world economy. 
It could also increase the IMF’s legitimacy as an institution that is global not only in its membership, but also in its treatment of different types of members. 
So long as the IMF’s macroeconomic surveillance was in fact applied only to developing countries, with the G-7 and other rich countries evading a serious monitoring process, the Fund could not be perceived as fair and impartial. 
As these examples indicate, however, systemic importance is not just a question of size. 
What matters is the interconnections that link a particular country, institution, or group of institutions (for example, Lehman Brothers and AIG) to the wider world economy. 
Surveillance of systemic risk must proactively test and analyze these interconnections, and try to imagine the “hard to imagine.” 
After all, as we now know only too well, systemic risk can emerge in unexpected places. 
Interdependence has become much more complex than it was even a decade ago. 
The IMF needs to be empowered to analyze the macroeconomic and macro-financial risks that have emerged, establish an early-warning system, and propose possible preemptive policy measures. 
The Fund’s almost universal membership and its staff’s technical expertise should enable it to carry out effective multilateral surveillance, provided that it accelerates its own governance reforms, so that surveillance is perceived as being in everyone’s interest. 

Small Stock Markets in a Globalized World 
Globalization means the unavoidable transformation of nations, businesses, and individuals--in Africa no less than anywhere else in the world. 
All must adapt, and stock exchanges are no exception. 
As technological advances in information technology combine with de-regulation and globalization to fuel growing competition, the world's securities markets are being forced to update, consolidate, and expand their activities, and to rationalize their governance structures in order to become more cost efficient, transparent, and accountable. 
Emerging markets, like those on the African continent, including the two leaders South Africa and Egypt, have no choice but to follow the lead of the global securities industry, because globalization has changed stock exchanges' traditional role. 
The internet and computer-based trading have shattered geographic boundaries and revolutionized investment, not only by opening up new avenues for trading, but by democratizing access to information that was once the exclusive preserve of professional investors. 
However large or small, whether in a Cairo internet café or a New York office, today's investors demand, and increasingly get, instant information and immediate execution of trades. 
Navigating these changes is essential for emerging-market stock exchanges if they are to be competitive on a global level. 
In particular, they must prepare themselves to deal with falling prices for financial services. 
The global investor of tomorrow will be able to execute transactions more efficiently and less expensively than ever before, as better technology and heightened competition essentially push trading costs to zero. 
Thus, in order to maintain cash flow, stock exchanges must enhance their services to deliver higher added value. 
For example, stock exchanges have already begun extending trading hours into the evening, earlier in the morning or both, deepening liquidity and benefiting investors, issuers, and brokers alike. 
In light of these innovations, the next generation of stock markets must invest substantially in technology to enable instant worldwide price discovery and trade execution in a fair, orderly, low-cost, and well-regulated environment without time-zone limitations. 
This may require broader "demutualization," a step currently under consideration by the Bombay, Kuala Lumpur, New Zealand, and Sao Paulo stock exchanges following its successful implementation by exchanges in Australia, Sweden, Hong Kong, Singapore, and London. 
African exchanges should consider it, too. 
Demutualization means transforming a stock exchange into a for-profit organization, with shares that can be owned by members, financial institutions, and the public. 
Under this scheme, the long-term profitability and survival of an exchange depends on the value of its traded shares, just like any other listed company. 
The main advantage of demutualization for stock exchanges is that it puts an end to the ownership monopoly of member firms, who are often reluctant to take decisions that benefit the market and issuers but that conflict with their own vested interests. 
In particular, demutualization will allow stock markets greater leeway to merge, acquire each other, or form partnerships, creating a few truly global giants. 
This will help expose foreign investors to listed companies at home and local investors to companies abroad. 
The efficiencies created by these economies of scale can then be passed on to investors and issuers alike. 
Serious challenges remain, of course, including differences in securities legislation, listing and trading rules, information disclosure requirements, and clearing, settlement, and payment systems. 
Thus, the world is not likely to move to a single consolidated securities market anytime soon, but rather to a collection of diverse markets that include some domestic players and others with a more global reach. 
Stock exchanges in emerging markets will increasingly be forced to contemplate regional or global integration or alliances, lest they remain solely domestic in nature. 
As the internationalization of securities markets progresses, however, there will be less to contemplate. 
Listing and trading rules will be harmonized, and standards of information disclosure will become uniform across exchanges. 
Global regulatory initiatives, particularly those aimed at standardizing accounting and other disclosure requirements, will be enforced vigorously. 
These changes will further empower investors, giving them greater control over trading via access to company information that is formatted to a global standard. 
For the Cairo and Alexandria Stock Exchange, where I work, and the Johannesburg Stock Exchange--Africa's two largest--the agenda is clear. 
They must adopt listing rules that emphasize timely disclosure for both domestic and international investors, implement international accounting standards, and prohibit insider trading in order to encourage listings by local and regional blue-chip issuers and attract international investors. 
Indeed, as the recent collapse of corporate giants such as Enron and World.com clearly demonstrates, the ability to protect investors adequately and retain their confidence will be crucial for securities markets to compete effectively as globalization proceeds. 
This is even truer in emerging-market exchanges, where one bad apple can ruin the reputation of an entire country's business. 
More than ever before, an attractive market will be one that provides the highest value of all: fair and effective regulation. 
In short, stock exchanges in Africa and in emerging markets elsewhere will not survive the globalization of the securities industry unless they focus on improving their transparency, integrity, and efficiency. 
Ensuring sound corporate governance and protection of minority shareholders' rights must come first. 

Mission: Save the Environment 
CHEVY CHASE, MARYLAND – Picture this. 
It is 1966. You are standing in a government office in Washington, DC, watching a uniformed official tell a man in business attire, “Your mission is to eradicate an enemy that has killed more people than both world wars combined. 
You will have a paltry budget, a small team, and should you fail, the Secretary will disavow any knowledge of your actions.” 
It sounds like a scene from a Hollywood movie. 
And, indeed, it mirrors the opening scenes of the Mission: Impossible television series that premiered that year. 
But it really happened, if not in precisely those words. 
The official was Assistant Surgeon General James Watt; the man with the mission was Communicable Disease Center (CDC) scientist Donald Henderson; and the enemy was smallpox. 
The mission certainly seemed impossible. 
At the time, smallpox was killing as many as two million people, and infecting another 15 million, each year. 
Yet, like in the series, Henderson and his team at the World Health Organization defied expectations. 
In just over a decade, smallpox became the first – and, so far, the only – infectious human disease ever to be fully eradicated. 
The key to this tremendous medical achievement was not, as one might expect, some major health breakthrough (the smallpox vaccine had been around since the eighteenth century). 
It was diplomacy, flexibility, and cooperation. 
From the beginning, the WHO lacked faith in a vaccination campaign. 
Many, including the WHO director-general, believed that, to stop smallpox, all 1.1 billion people in the 31 affected countries, including those in remote villages, would have to be inoculated – a logistical nightmare. 
That is why WHO delegates debated for days before agreeing, by the slimmest margin ever, to provide a measly $2.4 million per year for the effort – too little to cover the costs of whatever vaccine was not donated, let alone fund the necessary logistical support. 
Many donors shared this pessimism, believing that their money would be better spent on, say, health-care infrastructure. 
Even UNICEF decided against contributing to the campaign. 
In fact, the decision to assign Henderson to the unenviable job of spearheading the campaign stemmed from the WHO director-general’s decision to put an American in charge, so that the United States, not the WHO, would take the blame for the program’s failure. 
(Henderson tried to refuse the role, but there was no “should you choose to accept it” in this episode.) 
Yet Henderson managed to turn a bad hand into a winning one, with a key insight. 
Henderson recognized that the Soviet Union – which had been pressing for an eradication campaign for several years, and had already pledged to donate 25 million doses of vaccine annually – would not be enthusiastic about an American leading the charge. 
So he reached out to the Soviet deputy health minister, Dimitri Venediktov, with whom he established a rapport that enabled the two sides to work together on strategy and logistics, in addition to their vaccine donations (the US had agreed to provide 50 million doses each year). 
The two most unlikely allies ended up leading the fight together. 
Henderson’s knack for diplomacy was matched by an eye for talent and leadership. 
He insisted that all of his staff spend at least a third of their time in the field, working with local officials and visiting villages, so that they could see firsthand the challenges of mass vaccination. 
Among those personnel was William Foege, a Lutheran missionary doctor working as a consultant for the CDC in Nigeria. 
One day in December 1966, Foege got word of a smallpox case in another village and immediately traveled there to vaccinate the victim’s family and other villagers. 
But Foege was worried that a wider outbreak might be unfolding, and he did not have enough doses to vaccinate everyone in the area. 
So he adopted a different tactic: he sent runners into all villages within 30 miles to check for more cases, and then vaccinated people only in the four places where cases turned up. 
This created a “ring” of vaccination around infected people that broke the chain of infection. 
Foege’s strategy was extended to eastern Nigeria, then introduced to other parts of West Africa, and ultimately applied to the most challenging environment of all: India, with its half-billion people. 
It took 130,000 trained health workers 20 exhausting months, but they eliminated the scourge of smallpox that had tormented India for millennia. 
Then, in spite of natural disasters, the kidnapping of WHO personnel, and civil war, health workers repeated that success in Bangladesh, Ethiopia, and Somalia. 
Finally, in 1980, the world was officially free of smallpox. 
Fifty years after the launch of this daring mission, the tremendous achievement that emerged from it is fading from memory. 
But the lessons it carries for galvanizing a fractious international community to tackle a shared challenge could not be more important, especially at a time when urgent problems like environmental degradation demand global solutions. 
As Foege has pointed out, the eradication of smallpox proves that “global efforts are possible.” 
We do not “have to live in a world of plagues, disastrous governments, conflict, and uncontrolled health risks.” 
Instead, “the coordinated action of a group of dedicated people” can “bring about a better future.” 
Humanity cannot live in a world of polluted air and water, empty seas, vanishing wildlife, and denuded lands. 
The ecological challenges we now face are matters of public health and welfare, just as smallpox was. 
Our mission, whether we want to accept it or not, is to summon the collective will to halt our self-destruction. 

Smart Development Targets 
ABUJA, NIGERIA – Over the next 15 years, the international community will spend $2.5 trillion on development, with national budgets contributing countless trillions more. 
In September, the world’s 193 governments will meet at the United Nations in New York to agree on a set of global targets that will direct these resources. 
With so much at stake, it is vital that we make the smartest choices. 
Because it is only natural for politicians to promise to do everything, the UN is currently poised to consider an impossibly inclusive 169 targets. 
The proposed targets range from the ambitious (“end the epidemics of AIDS, tuberculosis, and malaria”) to the peripheral (“promote sustainable tourism”) to the impossible (“by 2030 achieve full and productive employment and decent work for all women and men, including for young people and persons with disabilities”). 
But promising everything to everyone provides no direction. 
In truth, having 169 priorities is like having none at all. 
That is why my think tank, the Copenhagen Consensus, asked 82 of the world’s top economists, 44 sector experts, and UN organizations and NGOs to evaluate which targets would do the most good for every dollar, euro, or peso spent. 
A team of eminent economists, including several Nobel laureates, then prioritized these targets in value-for-money terms. 
It turns out that not all targets are equal. 
Some generate amazing economic, social, and environmental benefits per dollar spent. 
Many others generate only slightly more than a dollar per dollar spent. 
Some even generate a net loss, doing less than a dollar of good per dollar spent. 
If the world were to spend money equally across all 169 UN targets, it would do about $7 of social good for each dollar spent. 
That is respectable, but we could do much better. 
The panel of eminent economists has produced a much shorter list of just 19 targets that will do the most good for the world. 
Every dollar spent on these targets will likely produce $32 of social good – more than four times more effective than spending on all 169. 
Being smart about development spending could be better than quadrupling the global aid budget. 
The short list covers a lot of ground; what connects the targets is the amount of good they will do for people, the planet, and prosperity. 
Consider a few targets that would do so much to help people. 
Tuberculosis is a “hidden” disease, but a much bigger problem than headline-grabbing Ebola. 
More than two billion people carry the TB bacterium, and at some point about 10% of them will develop the disease, which kills some 1.5 million victims per year (compared to 20,000 dead in the recent Ebola outbreak). 
Yet treatment is inexpensive and, in most cases, highly effective. 
Spending a dollar on diagnosis and treatment pays back $43 by giving people many more years of productive life. 
Another outstanding use of resources is to reduce childhood malnutrition. 
Good nutrition is especially critical for young children, because it allows their brains and bodies to develop better, producing life-long benefits. 
Well-nourished children stay in school longer, learn more, and end up being much more productive members of society. 
The available evidence suggests that providing better nutrition for 68 million children each year would produce $45 in long-term social benefits for every dollar spent. 
Some targets that benefit the planet also provide excellent value. 
Cutting fossil-fuel subsidies, which amount to nearly $550 billion a year – would reduce pollution and CO2 emissions while freeing up resources for investment in health, education, and infrastructure. 
In total, each dollar not spent on fossil-fuel subsidies would provide more than $15 of planetary benefits. 
Focusing on coral reefs turns out to be a surprisingly efficient target. 
It preserves biodiversity, with healthy reefs producing more fish and attracting more tourists. 
Each dollar spent protecting them can provide benefits worth $24. 
Perhaps the most important, cross-cutting problem is poverty, which afflicts billions of people and underlies most other development problems. 
When you are poor, your children will more likely suffer malnutrition and succumb to TB. 
When you are poor, you are more likely to slash and burn rain forest or fish atop coral reefs with dynamite. 
Better nutrition and greater access to education will help. 
But so will targets for prosperity, allowing hundreds of millions to lift themselves out of poverty. 
As we have seen repeatedly – in China, South Korea, Chile, India, and elsewhere – fewer trade restrictions can lift incomes and reduce poverty. 
Economic models show that a successful reduction of trade barriers like that foreseen in the ongoing Doha Round of multilateral trade talks could add $11 trillion to global GDP by 2030. 
This would mean $1,000 more for each person in the developing world every year, and would lift a staggering 160 million people out of poverty. 
This list of smart targets will not solve all of the world’s problems; no realistic list, however ambitious, can. 
But the 19 targets identified by the Copenhagen Consensus can help the world’s governments to concentrate on key priorities. 
These targets will do more than four times as much good per dollar spent as spending across all 169 targets would do. 
Governments should stop promising everything to everyone and start focusing on delivering the most possible. 
For more information about the project and all 19 targets, visit www.post2015consensus.com 

Smart Taxes 
ATHENS/BERLIN – Governments throughout the European Union and around the world confront a seeming Catch-22: the millstone of national debt around their necks has required them to reduce deficits through spending cuts and tax increases. 
But these are impeding the consumer spending needed to boost economic activity and kick-start growth. 
As the debate shifts from austerity towards measures aimed at stimulating growth, smarter taxation will be essential to getting the balance right. 
When governments think about the difficult task of raising taxes, they usually think about income tax, business taxes, and value-added tax (VAT). 
But there are other taxes that can raise significant amounts of revenue with a much less negative impact on the economy. 
These are the taxes that governments already levy on electricity and fossil fuels. 
Such taxes play a crucial role in cutting the carbon emissions that cause climate change. 
But recent research shows that they can also play a useful role in raising government revenue at little cost in terms of economic growth. 
Euro for euro, dollar for dollar, yen for yen: energy and carbon taxes have a lower negative impact on a nation’s economy, consumption, and jobs than income tax and VAT. 
For example, an increase in direct taxes, such as income tax, can reduce consumption by twice as much as energy and carbon taxes that raise the same amount of revenue. 
Maintaining consumption at as high a level as possible is vital to reviving economic activity, which means that freeing money for consumers to spend is just as important. 
Energy and carbon taxes can raise revenue while leaving the economy in a stronger state to sustain a recovery. 
Conventional taxes raise revenue, but pose a much greater risk of depressing growth in the process. 
This is not the only reason why looking more closely at energy and carbon taxes makes sense. 
The current framework for energy taxation, particularly in Europe, is not sustainable. 
Tax rates on different fuels vary by more than 50% across the EU, causing major distortions in the single market. 
Creating a level playing field on energy taxation in the EU would harmonize economic incentives, eliminate gas-tank tourism by drivers crossing borders for lower prices, and improve the business climate in all of Europe’s economies. 
Rising energy bills, driven by the cost of fossil fuels, are a massive political issue in many countries in Europe and elsewhere, including the United States, where consumer energy prices have become a major issue in the run-up to this year’s presidential election. 
But, relative to other forms of taxation, energy taxation tends to benefit consumers overall. 
The gains from avoiding the negative impact of conventional taxes work across the economy, particularly as the least well-off maintain a higher level of disposable household income. 
Most energy and carbon taxes are levied by national governments. 
But in Europe there is another option for raising revenues: the European Union Emission Trading Scheme (ETS). 
In terms of the effect on GDP and jobs, the cost of increasing revenue from this source would be as much as one-third less than that of raising the same amount via income taxes or VAT. 
Given Europe’s fiscal deficits and the economic impact of reducing them, that is a huge potential prize. 
But, first, the issues depressing the carbon price must be addressed. 
Taking the massive over-allocation of carbon-emission permits out of the ETS will be vital. 
Finance ministers everywhere need to think more imaginatively about their fiscal options. 
Energy and carbon taxes can produce less economic pain and more gain than conventional taxes can. 
Europe needs fiscal consolidation, reductions in carbon emissions, and a strategy for economic growth. 
Greater reliance should be placed on energy taxes and an effective ETS to deliver all three. 

Smarter Thinking on Climate Change 
COPENHAGEN – Politicians and commentators are understandably pessimistic about the chances of an international deal on carbon cuts emerging from the United Nations summit in Mexico this December. 
Nothing has been resolved since the Copenhagen climate talks fell apart last year. 
Fortunately, recent research points to a smarter way to tackle climate change. 
There is no longer any mainstream disagreement about the reality of global warming. 
The crucial questions concern the economics of our response. 
But this debate can be just as heated. 
Ever since I published The Skeptical Environmentalist in 2001, I have always acknowledged that man-made global warming is real. 
Yet activists have repeatedly labeled me a “climate-change denier.” 
This is not because I have ever suggested that the basic science of global warming is wrong. 
Rather, it reflects anger and frustration over my insistence on pointing out that drastic carbon cuts make no sense. 
The Copenhagen Consensus Center – a think tank where I serve as director – recently asked a large group of top climate economists to explore the costs and benefits of different responses to global warming. 
At the same time, we convened a second, equally stellar group of economists, including three Nobel laureates, to examine all of the research and rank the proposals in order of desirability. 
Cambridge University Press is publishing their research and findings this month, under the title Smart Solutions to Climate Change. 
The book includes a chapter by prominent climate economist Richard Tol, who has been a contributing, lead, principal, and convening author for the United Nations’ Intergovernmental Panel on Climate Change. 
In his chapter, Tol shows why grand promises of drastic, immediate carbon cuts are such a flawed strategy. 
Tol found that trying to keep temperature increases under 2°C, as the G-8 industrialized nations have promised to do, would require emissions reductions of about 80% by mid-century. 
Based on conventional estimates, this would avoid total climate damages of about $1.1 trillion across the century. 
However, it would cut economic growth by around $40 trillion a year. 
In other words, we would effectively be spending $40 trillion every year by the end of the century to do just over $1 trillion worth of total good. 
In fact, this estimate is wildly optimistic. 
The calculation assumes that over 100 years, politicians everywhere in the world will consistently enact the most efficient, effective laws imaginable to reduce carbon emissions. 
Dump that far-fetched assumption and the cost could jump by a factor of ten or even 100. 
To put it starkly, such drastic carbon cuts are likely to do a lot more damage than climate change to our quality of life (especially for those in the developing world). 
The reason is simple. 
Despite all of the optimistic talk about wind, solar, geothermal, and other sustainable, non-carbon-emitting energy sources, no alternative is remotely ready to shoulder the energy burden currently borne by fossil fuels. 
This is why I have long urged policymakers to increase significantly the amount of money invested in research and development of green-energy alternatives. Now there is research that shows exactly how we can put this approach into action. 
In Smart Solutions to Climate Change, Chris Green of McGill University and Isabel Galiana look at current rates of progress and conclude that by 2050 alternative energy sources will produce less than half the power needed to be able to stabilize carbon emissions. 
By 2100, the gap would be even wider. 
The challenge is enormous. 
Galiana and Green find that devoting just 0.2% of global GDP – roughly $100 billion a year – to green energy R&D would produce the kind of game-changing breakthroughs needed to fuel a carbon-free future. 
Not only would this be a much less expensive fix than trying to cut carbon emissions, but it would also reduce global warming far more quickly. 
And, unlike carbon cuts, this is a solution that developing countries would be likely to embrace. 
Even with a major R&D effort, green energy won’t become affordable overnight. 
To ensure that we have enough time to conduct the necessary R&D, we should step up our commitment to research into climate-engineering technology. 
In Smart Solutions to Climate Change, Eric Bickel and Lee Lane of the University of Texas offer compelling evidence that a tiny investment in climate engineering could result in bigger and faster reductions in global warming than would a vastly more expensive program of carbon cuts. 
The publication of Smart Solutions to Climate Change has generated considerable interest, including some from activists who believe that my enthusiastic support of its proposals represents a major shift in my thinking. 
In fact, I have advocated R&D spending for years. 
What is new – and exciting – is that with the publication of this research, we may finally be starting a constructive discussion about how we really can respond intelligently to this challenge. 

Smiles on the Rhine 
On February 23, a day after addressing America’s allies in Brussels, President George W. Bush will meet German Chancellor Gerhard Schroeder in the old city of Mainz on the Rhine. 
After the falling-out over Bush’s Iraq adventure, the two countries – so central to the transatlantic relationship in the past – are once again on speaking terms. 
But, however welcome the return to cordiality may be, it is no more than that. 
If Bush and Schroeder are now showing the world how well they get along together, it is not because they are off to a new start, but because it suits their tactical interests. 
Had the American people chosen John F. Kerry over George W. Bush last November, the reunion would be seen by both sides as a new beginning, resonant with personal warmth. 
But both continue to doubt that past substantive divisions can really be overcome. 
Thus, the meeting in Mainz will be one of those diplomatic courtesy calls that gloss over important bilateral differences. 
There will be no meeting of minds between Bush and Schroeder, because, on most key issues, their minds hold opposite views. 
Consider what is potentially the most contentious issue, how to cope with Iran’s nuclear program. 
Germany has been determined, together with France and Britain, to get Iran to stop uranium enrichment through incentives and negotiation. 
While the US has now explicitly welcomed the European initiative, it remains openly skeptical and unwilling to join, thus weakening the chances of success. 
Failure would lead America to seek the UN Security Council’s formal condemnation of Iran, coupled with sanctions. 
Indeed, the US is already trying to soften up Iranian resistance by hinting at a possible use of force. 
But there is no support in Europe for military action, and little backing for sanctions. 
If the negotiations should fail, the transatlantic cleavage could once again become glaringly wide. 
The divisions are no less marked in another transatlantic quarrel, this one over whether to lift the European Union’s embargo on arms exports to China, imposed following the Tiananmen Square massacre 15 years ago. 
Schroeder has been pushing the EU to lift the embargo, a move that now appears imminent. 
But for the US, the step is seen, not without reason, as an encouragement to China in its conflict with Taiwan. 
It will be interpreted as a stab in the back of US efforts to maintain stability in the region. 
Nor will there be much progress on a matter dear to Berlin, namely Germany’s application to enter the UN Security Council as a permanent member. 
The prospect is uncertain enough as it stands that Bush may be spared the need to veto it. 
But it would make an immense difference for Germany’s chances if the US actively supported what is, after all, a reasonable objective of one of its most important allies. 
But the Mainz meeting will not bring the two sides closer to working out a common position on any of these issues, or even to seeing the other side’s point of view. 
Instead, they will dwell on what is by now uncontroversial: welcoming the recent, if still fragile, progress in Israel-Palestine relations, supporting stability in post-election Iraq and Afghanistan, and extolling the transatlantic link. 
The drafters of the farewell communiqué are, no doubt, already at work listing all the issues on which the two governments see eye to eye. 
Bush and Schroeder will make up for the paucity of substance with a good deal of friendly banter and bonhomie before the press assembled in Mainz. 
That is, of course, better than nothing. 
But it amounts merely to a temporary papering over of differences, not their resolution. 
Worse, there is no sign that either man is willing to speak his mind in order to signal to the other side what he will expect when the next crisis looms. 
Future misunderstandings and misgivings are thus inevitable. 
The welcome return to civility is not, therefore, a return to mutual trust. 
After all, the test of alliance does not lie in praising agreements, but in thrashing out disagreements in a spirit of cooperation. 
Neither Bush nor Schroeder seem ready for this. 
If nothing else happens, the chief transatlantic partners will be no better prepared for the next crisis than they were for the last. 
As Leslie Gelb, the former president of The Council on Foreign Relations in New York, recently remarked, leaders in Europe and the US have lost the habit of serious cooperation. 
What could revive that habit? 
Perhaps only a miracle: real progress in the Israel-Palestine conflict, which both the US and the Europeans could then claim to have helped bring about. 
Common success could make both sides realize that they still have a common cause. 
But that miracle will not materialize in Mainz. 

Surveillance and American Liberty 
CAMBRIDGE – Ever since Edward J. Snowden disclosed the National Security Agency’s ongoing collection of massive amounts of electronic-communications data generated by United States citizens and non-citizens alike, attention has been lavished on his personal status. 
But the more important issue, even before Russia granted him temporary asylum, is the status of American civil liberties. 
Is the US guilty of hypocrisy, as Russia, China, and others have charged? 
To answer that question, it is important to distinguish between two issues that have become conflated in public debate: electronic espionage against foreign entities and domestic surveillance of a government’s own citizens. 
Before Snowden’s disclosures, cyber espionage had become a major point of contention in US-China relations. 
It was discussed at the June “shirt-sleeves summit” between Presidents Barack Obama and Xi Jinping, and the two governments agreed to create a special working group on the issue. 
The US accuses China of using cyber espionage to steal intellectual property on an unprecedented scale. 
Among other public sources, it could point to a study by the cyber-security firm Mandiant, which traced many such attacks to a People’s Liberation Army facility in Shanghai. 
China counters that it is also the victim of innumerable cyber intrusions, many originating in the US. 
Both countries have a point. 
If a proverbial Martian were watching the flow of electrons between East Asia and North America, he would probably notice robust two-way traffic. 
But if he looked inside the data packets, he would see very different content. 
American policy is not to steal intellectual property, while China’s policy appears to be the opposite. 
At the same time, both governments constantly hack into each other’s computers to steal traditional political and military secrets. 
Spying is not a violation of international law (though it often violates various domestic laws), but the US argues that theft of intellectual property violates both the spirit and letter of international trade agreements. 
China is not the only country that steals intellectual property. 
Some of America’s allies, now professing outrage at disclosures of US spying, have been known to do the same thing to the US. 
According to the US, when it inspects a non-American’s e-mail, it is searching for terrorist connections, and has often shared the findings with its allies. 
In that sense, security surveillance can benefit both the US and other countries. 
After all, part of the plot that culminated in the terrorist attacks of September 11, 2001, was hatched by an Egyptian living in Hamburg. 
But the Americans are not without sin. 
As Snowden’s information revealed, the US was monitoring the communications of European Union representatives as they were preparing for trade negotiations. 
This did not produce a joint benefit; it was a bad decision, and one that Obama should renounce. 
It is tactically useful for Russia, China, and others to conflate espionage issues with civil liberties and accuse the US of hypocrisy. 
But those charges seem odd coming from countries with weak rule of law and heavy Internet censorship. 
Snowden revealed two major surveillance programs inside the US. 
In terms of civil liberties, examining the content of a message from a suspect non-American source is less controversial. 
The more hotly debated program is one in which the NSA maps the origin and destination of US citizens’ telephone traffic and stores it for possible later inspection (presumably with a court order). 
This application of technological capacity to store what is called “big data” raises a new set of issues about intrusion into citizens’ privacy. 
Defenders of the program point out that it is consistent with current law and with America’s constitutional philosophy of checks and balances, because both the legislative and judicial branches approved it. 
Opponents argue that the court created in 1978 under the Foreign Intelligence Surveillance Act (FISA) was designed for an era before the advent of big data, and that current practice stretches the provisions of the Patriot Act, passed after the September 11 attacks. 
The opponents call for new laws. 
Last month, the current legal framework survived a close vote (217 to 205) in the House of Representatives. 
Most interesting was the split in both parties. 
The opposition consisted of a coalition of conservative Tea Party Republicans and liberal Democrats. 
The issue is bound to arise again, with several pending bills proposing revisions of the FISA court. 
Rather than demonstrating hypocrisy and acceptance of the erosion of civil liberties, the Snowden disclosures have provoked a debate that suggests the US is living up to its democratic principles in its traditionally untidy ways. 
America faces a trade-off between security and liberty, but the relationship is more complex than it appears at first glance. 
The worst threats to liberties come when insecurity is greatest, so modest trade-offs can sometimes prevent greater losses. 
Even such a great defender of freedom as Abraham Lincoln suspended habeas corpus under the extreme conditions of the American Civil War. 
And such decisions may not be recognized as mistaken or unjust until later – consider Franklin Roosevelt’s internment of Japanese-American citizens early in World War II. 
In the decade after September 11, 2001, the pendulum of public sentiment swung too far to the security pole; but it has begun to swing back in the absence of major new terrorist attacks. 
A recent ABC News-Washington Post poll showed that 39% of Americans now say that protecting privacy is more important than investigating terrorist threats, up from only 18% in 2002. 
Ironically, the programs that Snowden revealed seem to have helped prevent massive new terrorism events, such as a bomb attack on the New York subways. 
If so, they may have prevented the implementation of more draconian anti-terrorist measures – thus enabling the current debate. 

A New Birth for Social Democracy 
ISTANBUL – Nowadays, with the global economy undergoing fundamental transformation, workers worldwide are coming under significant pressure. 
Particularly in developed economies, social policies must adjust to provide the support that lower-income groups need, while encouraging growth and advancing wellbeing. 
The pressure has been unrelenting and inescapable. 
In the United States, real (inflation-adjusted) compensation for men with only a high school diploma fell by 21% from 1979 to 2013. 
In much of Europe, which provides stronger wage protection, unemployment has soared, especially since the euro crisis began in 2008. 
Germany and some Northern European countries remain an exception, although the German labor market contains a large low-wage, mini-jobs segment. 
Driving these trends is the changing nature of work. 
For starters, services have been gaining ground worldwide, especially in developed economies. 
From 1970 to 2012, the GDP share of services in the OECD countries increased from 53% to 71%. 
New technology and “intelligent” machines are not only displacing many types of workers in both the manufacturing and services sectors; they are also facilitating the rise of new business models, in which individuals perform (mostly low-paid service) jobs within loose networks, instead of as dedicated employees of structured organizations. 
For example, the ride-sharing service Uber now has 162,000 active drivers in the US alone and is displacing traditional taxi services. 
The startup Handy hopes that its app achieves similar success in connecting customers to independent contractors providing various household services. 
As technology races ahead and value chains become globalized, workers must adapt, whether by changing jobs, relocating, or acquiring new skills – a challenge that is particularly burdensome for older workers, but demands a new approach to life planning for all. 
Some people – especially those who acquired valued and flexible skills early in life, as well as those who are already in strong positions because of inherited wealth – can flourish in this new economy. 
Millions of others, however, are ill-prepared for the new age. 
And it is their growing anxiety that is fueling the rise of identity politics, with populist leaders and movements appealing to ethnic or religious solidarity in the face of the impersonal forces of change. 
Center-left parties face a particularly difficult challenge, as their lower-income electoral base is lured away by anti-immigration, chauvinist competitors. 
Making matters worse, the fragmentation of production (whether in goods or services), together with intensifying fiscal pressures, militates against these parties’ traditional reliance on collective bargaining to create systems and policies that insure citizens against shocks and misfortune. 
The right-wing response to this challenge – essentially to dismantle the welfare state – would leave the majority of citizens exposed to economic shocks and structural shifts (merely reinforcing their sense of isolation and vulnerability). 
The progressive response, by contrast, must entail strong social policies – including both insurance and protection – compatible with new technologies and types of work. 
Concretely, this means that, instead of generalized social protection, each citizen would have a lifelong individual budget of support and security, while requiring that eligible recipients show initiative in determining how to adapt. 
The main difference between the progressive vision of a society underpinned by these “citizen accounts” and the conservative idea that individual citizens should create personal retirement accounts, take out student loans, or cover their own health insurance is the public sector’s role. 
Not only would the public sector take primary responsibility for financing social protection; public policy would also frame cooperation among government, employers, and recipients to eliminate duplication and bolster effectiveness and fairness. 
For example, a lifelong “family account” would enable paid maternity and paternity leave, provide child-care support, and allow time away from work to care for the sick or elderly. 
It would combine some general rules with income-adjusted financial contributions by the state, employers, and individuals. 
A “learning account” would set the parameters for educational support, including lifelong opportunities to acquire new skills and to teach skills to others. 
Basic forms of such a scheme already exist in many countries. 
Norway offers 49 weeks of parental leave with full pay, or 58 weeks with 80% pay. 
Both parents must use at least 10% of this budget, but they can also roll part of it over to use when their children start school (and again benefit greatly from parental support). 
Of course, few countries are as wealthy as Norway; but the principle – including support for elder care – can be applied to 30-, 40-, or 50-week periods. 
France, too, is now moving in this direction, creating “individual activity accounts” that aim to streamline its social policies, without sacrificing its sense of national solidarity. 
To be sure, this approach will not magically resolve all of the challenges countries currently face. 
Fiscal constraints will remain, as governments continue to fund public goods. 
Adequate taxation of high-income individuals and high-profit companies, together with strong and sustained efforts to reduce tax avoidance, will become even more vital to defend the revenue base. 
And unions will still be needed to defend their members’ interests. 
Nonetheless, a new social contract is needed to account for the increasingly important role that individual preferences, and individual responsibility, play in today’s world. 
Each citizen should feel empowered, not isolated and abandoned, in the face of globalization and technological transformation. 
With this approach, social democracy can again drive progress, instead of being stifled by identity politics and market fundamentalism. 
That would serve not only the cause of social justice, but also the goal of sustaining the skilled, happy, and healthy workforce that a successful economy requires. 

Social Democracy Lives in Latin America 
MONTEVIDEO, URUGUAY – Amongst the different leftist governments in Latin America, there are new and rather strident populist regimes (Venezuela, Bolivia, Ecuador), which seem to grab all the attention. 
But there is also a social-democratic strain to Latin American politics – a historical novelty in the region – that is gaining strength. 
In Brazil, Chile and Uruguay, social democracy is proving that it can work. 
What distinguishes these social democratic governments from their populist counterparts is that they are composed of a left that is integrated into competitive, multi-party democracies. 
These social democrats were once part of a socialist, revolutionary, or reformist left, tightly allied with labor unions. 
But they ultimately accepted the market economy, and came to lean toward ideological moderation and to compete for votes in the political center. 
At the same time, motivated by their political competition and their own leftist ideology, these social democratic governments emphasize both economic growth and social inclusion. 
These governments’ potential to innovate depends on the political resources and power at their disposal. 
The first government of the left in Uruguayan history has comparative advantages in this respect, for, unlike in Brazil and Chile, Uruguay’s social democrats have ruled as a one-party majority government. 
The Frente Amplio (FA) brings together nearly all the country’s left-wing groups and has the loyal support of labor unions. 
Moreover, Uruguay’s president, Tabaré Vázquez won his office five years ago in the first round and, by uniting the posts of head of state and party leader, was able to forge a strong presidential leadership and popularity. 
As a result, during the cycle of economic prosperity that lasted until 2008, with rising commodity prices and internal dynamism, the Vázquez government insured macroeconomic stability, fiscal balance, and an open market, encouraging competitiveness as well as domestic and foreign private investment. 
Despite this economic orthodoxy, Vázquez’s government also pursued important policy innovations: protection of human rights was improved; tax reform, including introduction of a general, progressive income tax was undertaken and a more inclusive health system was created. 
In addition, the government forged policies for the poor with non-contributory income transfers and family allowances, which benefited minors and female who are heads of household. 
Public education was boosted by bigger expenditure and a “one laptop per child” program. 
A labor policy favorable to workers and unions revived Wage Councils for setting pay. Vázquez’s term ends in March 2010. 
He cannot run again and the looming presidential election promises to be close. 
Indeed, despite the government’s successes, there could be a change, as the Partido Nacional of the center-right bloc is now running neck-and-neck with the FA. 
In the FA primaries, José Mujica won the presidential nomination by defying Vázquez and placing himself farther to the left than his rival, Danilo Astori, who represented a continuation of the present administration. 

The Social Media Threat to Society and Security 
MUNICH – The current moment in world history is a painful one. 
Open societies are in crisis, and various forms of dictatorships and mafia states, exemplified by Vladimir Putin’s Russia, are on the rise. 
In the United States, President Donald Trump would like to establish his own mafia-style state but cannot, because the Constitution, other institutions, and a vibrant civil society won’t allow it. 
Not only is the survival of open society in question; the survival of our entire civilization is at stake. 
The rise of leaders such as Kim Jong-un in North Korea and Trump in the US have much to do with this. 
Both seem willing to risk a nuclear war in order to keep themselves in power. 
But the root cause goes even deeper. 
Mankind’s ability to harness the forces of nature, both for constructive and destructive purposes, continues to grow, while our ability to govern ourselves properly fluctuates, and is now at a low ebb. 
The rise and monopolistic behavior of the giant American Internet platform companies is contributing mightily to the US government’s impotence. 
These companies have often played an innovative and liberating role. 
But as Facebook and Google have grown ever more powerful, they have become obstacles to innovation, and have caused a variety of problems of which we are only now beginning to become aware. 
Companies earn their profits by exploiting their environment. 
Mining and oil companies exploit the physical environment; social media companies exploit the social environment. 
This is particularly nefarious, because these companies influence how people think and behave without them even being aware of it. 
This interferes with the functioning of democracy and the integrity of elections. 
Because Internet platform companies are networks, they enjoy rising marginal returns, which accounts for their phenomenal growth. 
The network effect is truly unprecedented and transformative, but it is also unsustainable. 
It took Facebook eight and a half years to reach a billion users, and half that time to reach the second billion. 
At this rate, Facebook will run out of people to convert in less than three years. 
Facebook and Google effectively control over half of all digital advertising revenue. 
To maintain their dominance, they need to expand their networks and increase their share of users’ attention. 
Currently they do this by providing users with a convenient platform. 
The more time users spend on the platform, the more valuable they become to the companies. 
Moreover, because content providers cannot avoid using the platforms and must accept whatever terms they are offered, they, too, contribute to the profits of social media companies. 
Indeed, the exceptional profitability of these companies is largely a function of their avoiding responsibility – and payment – for the content on their platforms. 
The companies claim that they are merely distributing information. 
But the fact that they are near-monopoly distributors makes them public utilities and should subject them to more stringent regulation, aimed at preserving competition, innovation, and fair and open access. 
Social media companies’ true customers are their advertisers. 
But a new business model is gradually emerging, based not only on advertising but also on selling products and services directly to users. 
They exploit the data they control, bundle the services they offer, and use discriminatory pricing to keep more of the benefits that they would otherwise have to share with consumers. 
This enhances their profitability even further, but the bundling of services and discriminatory pricing undermine the efficiency of the market economy. 
Social media companies deceive their users by manipulating their attention, directing it toward their own commercial purposes, and deliberately engineering addiction to the services they provide. 
This can be very harmful, particularly for adolescents. 
There is a similarity between Internet platforms and gambling companies. 
Casinos have developed techniques to hook customers to the point that they gamble away all of their money, even money they don’t have. 
Something similar – and potentially irreversible – is happening to human attention in our digital age. 
This is not a matter of mere distraction or addiction; social media companies are actually inducing people to surrender their autonomy. 
And this power to shape people’s attention is increasingly concentrated in the hands of a few companies. 
It takes significant effort to assert and defend what John Stuart Mill called the freedom of mind. 
Once lost, those who grow up in the digital age may have difficulty regaining it. 
This would have far-reaching political consequences. 
People without the freedom of mind can be easily manipulated. 
This danger does not loom only in the future; it already played an important role in the 2016 US presidential election. 
There is an even more alarming prospect on the horizon: an alliance between authoritarian states and large, data-rich IT monopolies, bringing together nascent systems of corporate surveillance with already-developed systems of state-sponsored surveillance. 
This may well result in a web of totalitarian control the likes of which not even George Orwell could have imagined. 
The countries in which such unholy marriages are likely to occur first are Russia and China. 
Chinese IT companies in particular are fully equal to the US platforms. 
They also enjoy the full support and protection of President Xi Jinping’s regime. 
China’s government is strong enough to protect its national champions, at least within its borders. 
US-based IT monopolies are already tempted to compromise themselves in order to gain entrance to these vast and fast-growing markets. 
These countries’ dictatorial leaders may be only too happy to collaborate with them, in the interest of improving their methods of control over their own populations and expanding their power and influence in the United States and the rest of the world. 
There is also a growing recognition of a connection between the dominance of the platform monopolies and rising inequality. 
The concentration of share ownership in the hands of a few individuals plays some role, but the peculiar position occupied by the IT giants is even more important. 
They have achieved monopoly power while also competing against one another. 
Only they are big enough to swallow start-ups that could develop into competitors, and only they have the resources to invade one another’s territory. 
The owners of the platform giants consider themselves the masters of the universe. 
In fact, they are slaves to preserving their dominant position. 
They are engaged in an existential struggle to dominate the new growth areas that artificial intelligence is opening up, like driverless cars. 
The impact of such innovations on unemployment depends on government policies. 
The European Union, and particularly the Nordic countries, are much more farsighted than the United States in their social policies. 
They protect the workers, not the jobs. 
They are willing to pay for retraining or retiring displaced workers. 
This gives workers in Nordic countries a greater sense of security and makes them more supportive of technological innovations than workers in the US. 
The Internet monopolies have neither the will nor the inclination to protect society against the consequences of their actions. 
That turns them into a public menace, and it is the regulatory authorities’ responsibility to protect society against them. 
In the US, regulators are not strong enough to stand up to the monopolies’ political influence. 
The EU is better positioned, because it doesn’t have any platform giants of its own. 
The EU uses a different definition of monopoly power from the US. 
Whereas US law enforcement focuses primarily on monopolies created by acquisition, EU law prohibits the abuse of monopoly power regardless of how it is achieved. 
Europe has much stronger privacy and data protection laws than America. 
Moreover, US law has adopted a strange doctrine that measures harm as an increase in the price paid by customers for services received. 
But that is almost impossible to prove, given that most giant Internet platforms provide a majority of their services for free. 
Moreover, the doctrine leaves out of consideration the valuable data that platform companies collect from their users. 
The EU Commissioner for Competition Margrethe Vestager is the champion of the European approach. 
It took the EU seven years to build a case against Google. 
But, as a result of its success, the process of instituting adequate regulation has been greatly accelerated. 
Moreover, thanks to Vestager’s efforts, the European approach has begun to affect attitudes in the US. 
It is only a matter of time before the global dominance of the US Internet companies is broken. 
Regulation and taxation, spearheaded by Vestager, will be their undoing. 

Prisoners of the American Dream 
CAMBRIDGE – Given worsening economic inequality in the United States, many observers might assume that Americans would want to reduce income differences by instituting a more progressive tax system. 
That assumption would be wrong because, in December, the US Congress passed a sweeping tax bill that will, at least in the short term, disproportionately benefit higher-income households. 
Despite their country’s mounting income gap, Americans’ support for redistribution has, according to the General Social Survey, remained flat for decades. 
Perhaps John Steinbeck got it right when he supposedly said that, “Socialism never took root in America because the poor see themselves not as an exploited proletariat, but as temporarily embarrassed millionaires.” 
For those who believe that a society should offer its members equal opportunity, and that anyone who works hard can climb higher on the socioeconomic ladder, redistribution is unnecessary and unfair. 
After all, equal opportunists argue, if everyone begins at the same starting point, a bad outcome must be due to an individual’s own missteps. 
This view approximates that of a majority of Americans. 
According to the World Values Survey, 70% of Americans believe that the poor can make it out of poverty on their own. 
This contrasts sharply with attitudes in Europe, where only 35% believe the same thing. 
Put another way, most Europeans consider the poor unfortunate, while most Americans consider them indolent. 
This may be one reason why European countries support more generous – and costlier – welfare transfers than the US. 
Americans have deep-seated, optimistic views about social mobility, opinions that are rooted in US history and bolstered by narratives of rags-to-riches immigrants. 
But today, Americans’ beliefs about social mobility are based more on myth than on fact. 
According to survey research that colleagues and I recently conducted and analyzed, Americans estimate that among children in the lowest income bracket, 12% will make it to the top bracket by the time they retire. 
Americans also believe that with hard work, only 22% of children in poverty today will remain there as adults. 
The actual numbers are 8% and 33%, respectively. 
In other words, Americans overestimate upward social mobility and underestimate the likelihood of remaining stuck in poverty for generations. 
They also believe that if everyone worked hard, the American Dream of self-made success would hew closer to reality. 
European respondents are more pessimistic about mobility: unlike Americans, they overestimate the odds of remaining in poverty. 
For example, French, Italian, and British respondents said, respectively, that 35%, 34%, and 38% of low-income children will remain poor, when the reality is that 29%, 27%, and 31% will. 
Views about social mobility are not uniform across the political spectrum or across geographic regions. 
In both the US and Europe, for example, people who call themselves “conservative” on matters of economic policy believe that there are equal opportunities for all children, and that the free-market economy in their country is fair. 
The opposite holds true for those who call themselves economically “liberal.” 
These people favor government intervention, because they believe that, left to their own devices, markets will not ensure fairness, and may even generate more inequality. 
An even more striking pattern is that Americans are overly optimistic about social mobility in parts of the country where actual mobility is low – including the southeastern states of Georgia, Alabama, Virginia, North Carolina, and South Carolina. 
In these states, respondents believe that mobility is more than two times greater than it is. 
By contrast, respondents underestimate social mobility in northern states – including Vermont, Montana, North Dakota, South Dakota, and Washington – where it is higher. 
As part of our study, we shared data on social stratification in Europe and America with our participants. 
We found that self-identified liberals and conservatives interpreted this information differently. 
When shown pessimistic information about mobility, for example, liberals became even more supportive of redistributive policies, such as public education and universal health care. 
Conservatives, by contrast, remained unmoved. 
While they acknowledged that low social mobility is economically limiting, they remained as averse to government intervention and redistribution as they were before we shared the data with them. 
Part of the reason for conservatives’ reaction, I believe, is mistrust. 
Many conservatives hold government in deep disdain; only 17% of conservative voters in the US and Europe say they can trust their country’s political leaders. 
The share of conservatives with an overall negative view of government was 80%; among liberals, it was closer to 50%. 
Moreover, a high percentage of conservatives say the best way to reduce inequality is to lower taxes on businesses and people. 
But suspicion of government may also stem from a belief that political systems are rigged, and that politicians can’t or won’t improve things because they have become “captured” by entrenched interests, mired in legislative stalemate, or stymied by bureaucracy. 
In short, when conservatives learn that social mobility is lower than they thought, they believe government is the problem, not the solution. 
As J.D. Vance noted in his 2016 memoir Hillbilly Elegy, many on the American right now believe that “it’s not your fault that you’re a loser; it’s the government’s fault.” 
We may be so polarized in the US and Europe that, even after receiving the same information, we respond in opposite ways. 
The left will want more government, and the right will want less. 
Clearly, reality is not so neat. 
But what is clear is that people’s views about social mobility have as much to do with ideology and geography as with their circumstances. 

The Urban Village 
CAMBRIDGE – “I want to be a part of it – New York, New York,” Frank Sinatra sang of the city that has attracted so many of the world’s most ambitious people, from artists and performers to businesspeople and bankers. 
In a sense, this is not a difficult phenomenon to explain; metropolises like New York City, with their multicultural populations, multinational corporations, and multitude of talented individuals, are rife with opportunities. 
But the impact of large cities runs deeper than economic or even cultural power; cities can fundamentally change people’s lives – and even the people themselves. 
In 2010, Geoffrey West, together with a team of researchers, discovered that several socioeconomic measures – both positive and negative – increase with the size of the local population. 
In other words, the larger the city, the higher the average wage, productivity level, number of patents per person, crime rate, prevalence of anxiety, and incidence of HIV. 
In fact, when a city doubles in size, every measure of economic activity increases by about 15% per capita. 
That is why people move to the big city; indeed, it is why cities thrive. 
This law remains constant across city sizes. 
And it is not unique. 
A growing body of evidence suggests that similar functions govern even more aspects of urban life than the research by West’s team indicated. 
How can cities as ostensibly different as New York, with its towering profile, and Paris, characterized by wide boulevards, function so similarly? 
If, as Shakespeare suggested, a city is nothing but its people, the answer may lie in the characteristic patterns of connection, interaction, and exchange among residents. 
HIV – indeed, any sexually transmitted disease – provides a particularly vivid example of the way that social networks shape urban life, as it spreads through linkages of sexual partners. 
Ideas – and the innovations that result from them – spread in a similar manner. 
Just a few years ago, a broad investigation of these complex social networks would have been virtually impossible. 
After all, the available tools – isolated laboratory experiments and written questionnaires – were both imprecise and difficult to apply on a large scale. 
The Internet has changed that. 
By enmeshing billions of people in seamless connectivity, online platforms have transformed the scope of social networks and provided new tools for researchers to investigate human interaction. 
In fact, an entirely new field of study is emerging at the intersection of data analytics and sociology: computational social science. 
Using data collected online or through telecommunications networks – the wireless providers Orange and Ericsson, for example, have recently made some data available to researchers – it is now possible to address, in a scientific way, fundamental questions about human sociability. 
A recent paper (of which one of us, Carlo Ratti, is a co-author) uses anonymized data from telecommunications networks across Europe to explore how human networks change with city size. 
The results are striking: in large cities, people not only walk faster (a tendency recorded since the 1960s), but they also make – and change – friends faster. 
This phenomenon is likely rooted in the fact that, in accordance with West’s findings, the total number of human connections increases with city size. 
London’s eight million inhabitants regularly connect with almost twice the number of people as Cambridge’s 100,000 residents. 
This increasing exposure to people – and hence to ideas, activities, and even diseases – could explain the impact of city size on socioeconomic outcomes. 
But another tendency is also consistent across cities of all sizes: people tend to build “villages” around themselves. 
This behavior is quantified as the networks’ “clustering coefficient” – that is, the probability that a person’s friends will also be friends with one another – and remains extraordinarily stable across metropolitan areas. 
Simply put, humans everywhere are naturally inclined to live within tight-knit communities. 
Of course, this idea has been suggested before. 
The urbanist Jane Jacobs, for example, described the rich interactions occurring in New York City neighborhoods – what she called an “intricate ballet, in which the individual dancers and ensembles all have distinctive parts which miraculously reinforce each other.” 
What computational social science offers is the prospect of quantifying such observations and gaining insights that could shape the design of urban environments in the future. 
The question is whether these insights could also unlock the power of human interactions in small towns, enabling them to access some of the social and economic advantages of a large city. 
In this sense, it is critical to recognize the fundamental difference between “urban villages” and their rural counterparts. 
In the latter, social networks are largely predetermined by family, proximity, or history. 
City dwellers, by contrast, can explore a wide variety of options to create custom-made villages according to their social, intellectual, or creative affinities. 
Perhaps that is why Sinatra left his hometown of Hoboken, New Jersey. 
Only in a city like New York could he find the Rat Pack. 

What Has Google Ever Done for Us? 
ATHENS – Even Google’s fiercest critics use its technologies to research their fiery tirades against it or, more mundanely, to find their way around a foreign city. 
Let’s be honest: life without Google would be awfully more tedious in a variety of important ways. 
But that is not a good reason to leave Google and the other tech giants alone. 
On the contrary, the nature and importance of their contribution make it imperative that they be placed under democratic control – and not just because of the well appreciated need to protect individual privacy. 
In recent years, Big Tech companies have been subjected to scrutiny for perfecting a dark art pioneered by commercial newspapers, radio, and television: attracting and holding our attention, in order to sell access to our senses to paying advertisers. 
Whereas readers, listeners, and viewers were customers paying for some commodity, commercial electronic media learned how to profit by transacting directly with vendors while reducing us, and our data, to a passive commodity at the heart of the transaction. 
Google, Facebook, and others were able to take this odd production process, where our attention is the traded commodity, to a different level, thanks to their stupendous capacity to personalize our screens. 
Unlike their forebears, they can capture the attention of each one of us with person-specific (or even mood-specific) attractors, before selling to the highest bidder access both to our data and to our senses. 
Underlying the backlash against Big Tech has been the sense that we are all becoming proletarianized users. 
In the 1970s and 1980s, we were annoyed when commercial channels ambushed us with advertisements seconds before the end of a cliff-hanger movie or basketball match. 
Now, we can no longer even recognize the tricks used in real time to hold and sell our attention. 
Alienated from a market trading in us, we have become cogs in a production process that excludes us as anything but its product. 
Data protection and privacy regulations are meant to return to us some of our lost autonomy regarding what we see, what guides our choices, and who knows what we choose. 
But regulating Big Tech to protect our data and restore “consumer sovereignty” is not enough. 
Against a background of automation and labor casualization, these firms’ monopoly profits boost inequality, fuel discontent, undermine aggregate demand for goods and services, and further destabilize capitalism. 
The problem is that traditional government interventions are an exercise in futility: Taxing free services is pointless. 
Taxing robots, to fund humans, is as impossible as it is to define them. 
And while taxing Big Tech’s profits is essential, these firms’ skilled accountants and abundant opportunities to shift profits to different jurisdictions makes this difficult. 
A simple solution exists, if we look beyond taxation. 
But it requires accepting that capital is no longer privately produced, as least not in the case of Google et al. 
When James Watt built one of his famed steam engines, it was his creation, his product. 
A buyer who put the engine to work in, say, a textile factory could think of his profit stream as a just reward for having taken the risk of purchasing the machine and for the innovation of coupling it to a spinning jenny or a mechanical loom. 
By contrast, Google cannot credibly argue that the capital generating its profit stream was produced entirely privately. 
Every time you use Google’s search engine to look up a phrase, concept, or product, or visit a place via Google Maps, you enrich Google’s capital. 
While the servers and software design, for example, have been produced capitalistically, a large part of Google’s capital is produced by almost everyone. 
Every user, in principle, has a legitimate claim to being a de facto shareholder. 
Of course, while a substantial part of Big Tech’s capital is produced by the public, there is no sensible way to compute personal contributions, which makes it impossible to calculate what our individual shares ought to be. 
But this impossibility can be turned into a virtue, by creating a public trust fund to which companies like Google transfer a percentage – say, 10% – of their shares. 
Suddenly, every child has a trust fund, with the accumulating dividends providing a universal basic income (UBI) that grows in proportion to automation and in a manner that limits inequality and stabilizes the macro-economy. 
This attractive solution must overcome two obstacles. 
First, we tend to think of taxation as a panacea. 
But a UBI funded via taxation is sure to trigger a backlash among struggling working people who cannot see the logic of subsidizing the idle, rich or poor. 
Second, corporate shares are typically given to employees only. 
To be sure, there are excellent reasons for taxing profits in order to fund benefits for the poor, and for worker-ownership schemes. 
But these are separate issues from the one at hand: how to stabilize society by granting property rights over Google’s capital to everyone who helped create it, including unwaged carers, the precariously employed, and society’s dropouts. 
And then, as one would expect, there is the motivated fallacy peddled by the defenders of the status quo. 
The Financial Times’ Alphaville column recently dismissed the case for transferring a block of shares from Big Tech corporations, like Google, to a public trust fund by misrepresenting the underlying argument as a failure to appreciate what Google has done for us. 
To repudiate society’s property rights over the returns to capital that we, as users, have created, Big Tech’s defenders invoke users’ large consumer surplus (the sum we would be prepared to pay for access to free services such as Gmail and Google Maps). 
This is a little like justifying the confiscation of your shares in a company with the argument that the company is providing valuable services to you and others. 
In using Big Tech’s services, we manufacture a portion of its capital in real time. 
Property rights over that portion – for all of us, rather than for any of us – must follow. 

Harnessing the Hope of Social Science 
VIENNA – In his opening address at the 2016 Nobel Prize Award Ceremony, Nobel Foundation Chairman Carl-Henrik Heldin drew parallels between our current milieu and the late nineteenth-century world in which Alfred Nobel lived and worked. 
Nobel’s era was one of rapid industrialization and economic expansion. 
Progressive political ideas about peaceful international cooperation flourished, but nationalism, xenophobia, geopolitical tensions, and terrorism were also on the rise. 
Anarchists assassinated a Russian Czar, an Austrian Empress, and American and French presidents, and the outbreak of World War I dealt a near-fatal blow to European civilization. 
The similarities to today’s world are obvious. 
Scientists continue to surprise us with amazing discoveries, and billions of people around the world have been lifted out of poverty. 
But dark clouds have formed on the horizon. 
Terrorists have struck Europe with a vengeance, and millions of refugees fleeing wars and hunger are taxing European institutions, and straining social cohesion. 
Populist movements have emerged, calling for closed borders and new walls, and their rejection of expertise has led Heldin to a “grim truth”: that “we can no longer take it for granted that people believe in science, facts, and knowledge.” 
Of course, our expectations will always be in tension with reality. 
A decade ago, hardly anyone would have predicted that the European project would be tested by a massive influx of refugees and asylum-seekers. 
Before Donald Trump was elected President of the United States, it was hard to imagine that a mendacious conspiracy theorist who flouts all rules of political decorum could win enough support. 
And prior to the Brexit referendum, few expected that a majority of British voters would swallow the lie that they could retain the benefits of European Union membership without any of the responsibilities. 
Our imagination is constrained by past experience, and this contributes to a lack of foresight. 
But while our capacity to predict the future is limited, social-science research into the problems we confront today may be able to loosen those constraints. 
The social sciences are often considered pessimistic; in fact, they are based on hope: a deep-seated belief that social improvement is possible. 
The intellectual roots of today’s social sciences – newcomers compared to the humanities and natural sciences – are to be found in Nobel’s milieu. 
The political, economic, and social turmoil that emerged in response to rapid industrialization and urbanization caused many to wonder whether order was even possible. 
The social sciences developed in the shadow of the nation-state, which had to develop a functioning administration, modern institutions, and policies to support order. 
Much of the work that followed was guided by the belief that technological progress is inseparable from social progress. 
Today, the International Panel on Social Progress – a major international effort based on the work of some 300 social scientists – shares this belief, and recognizes the importance of good governance in all policy fields. 
Good governance is the lynchpin that holds societies together in an era of uneven globalization, accelerating technological innovation, growing inequalities, and social injustice. 
So, could we have foreseen the political events of the past year? 
As it happens, an impressive body of social-science research shows that the mounting public disaffection that policymakers ignored or simply missed had been in the making for some time. 
Politicians, the media, and the public may have neglected the white working class; but social scientists did not. 
One does not have to quote Thomas Piketty to know that rising inequalities now threaten to tear apart the social fabric of the advanced economies. 
Such inequalities have been analyzed since the 1980s. 
And the working and living conditions for the most vulnerable populations in Europe and the US have been studied by social scientists for years. 
Meanwhile, much of what we know about terrorism – the conditions that fuel it, who is susceptible to radicalization, how terrorist networks function – comes from social scientists who have patiently gathered data, conducted interviews often under difficult conditions, and analyzed terrorist networks for many years. 
And there are numerous studies that shed light on nationalism and populism, too. 
These problems persist, despite our insight into them, because of the complex relationship between scientific knowledge and human action. 
Cognitive biases limit our ability to foresee future outcomes, leading to unintended consequences when we turn ideas into action. 
We are not good at understanding the complexity inherent in large, interlinking systems, from which major, unexpected events can emerge. 
Knowledge alone can never replace action. 
Graphs, figures, simulation models, and even seemingly incontestable facts make no difference until action and context are taken into account. 
And this raises additional questions: How do we apply the knowledge that we have, and what comes next when we do? 
If we want to avert Heldin’s “grim truth,” we will have to build bridges between knowledge and possible courses of action. 
In an era no less tumultuous than Nobel’s, social science furnishes us with the hope that our situation could be different, because it generates the knowledge to make it so. 

A Future-Oriented US Fiscal Policy 
NEW YORK – At last, Republican candidates in the US presidential campaign have begun focusing on the economy. 
At a time of rising anxiety among middle-income voters about wealth inequality, and growing awareness of the unsustainability of Social Security and Medicare, this conversation could not be more important. 
Unfortunately, not enough attention is being paid to the link between these two key issues. 
In fact, tackling the problems with Social Security and Medicare is the key to addressing what ails the middle class. 
But fiscal-policy progressives, in particular, remain fixated on using higher tax rates on the wealthy to fund higher incomes for everyone else. 
Income redistribution may be an attractive idea for some – including, to a lesser extent, the Republicans who support a watered-down version, in which relatively high marginal tax rates support expanded family assistance – but it is fool’s gold. 
As a recent Brookings Institution paper shows, higher marginal tax rates would do little to diminish income inequality in the US. 
Likewise, higher taxes cannot resolve the problem posed by the mounting unfunded liabilities of Social Security and Medicare. 
Maintaining these programs in their current form would require growth-destroying tax increases on middle-income Americans, as well as continuing cuts in government funding for defense, education, and research. 
There is only one way to ensure broadly shared prosperity in the US: a future-oriented fiscal policy aimed at boosting employment and productivity, maintaining low marginal tax rates, strengthening support for workers, and investing in education, innovation, and infrastructure. 
The alternative – allowing the past, in the form of interest payments on the national debt and entitlement spending, to continue dictating fiscal policy – would block prosperity among middle-income households, by requiring continuous tax increases and reduced public investment. 
To fund this future-oriented policy, US leaders must implement reforms that enhance the long-run viability of the social safety net. 
As it stands, Social Security and Medicare are unsustainable, with the long-term gap between projected income and promised benefits reaching tens of trillions of dollars – well in excess of the official debt the federal government has accumulated over its history. 
Closing the gap with tax hikes – the burden of which would be borne largely by middle-income households – would threaten both economic growth and living standards. 
And offsetting spending cuts provides no safety valve. 
Health care and Social Security already consume half of the US federal budget, up from one-sixth in 1965, and these outlays relative to GDP are projected to more than double by 2040. 
With no change in course, the programs’ “trust fund” balances will be depleted by the 2030s. 
Avoiding that outcome will require US political leaders to constrain the growth of entitlement spending and bolster support for middle-income individuals. 
While Social Security and Medicare remain important to ensure wellbeing in retirement, their role must be updated to suit today’s needs. 
For example, to ensure that no one who has worked for 30 or more years will live in poverty in old age, Social Security needs a higher minimum benefit for lower-income workers, with more affluent seniors seeing less growth in benefits over time. 
Adopting the chained consumer-price index for federal benefit calculations would ensure that benefits more accurately represent inflation, while slowing the rate of benefit growth for individuals. 
Beyond stabilizing Social Security’s finances, US leaders should implement policies that place a higher value on work. 
Seniors working past the retirement age of 67 should not be subject to the payroll tax, and the retirement earnings test should be eliminated, so that seniors can work full-time without losing out on Social Security benefits. 
Finally, incentives for private retirement saving should be expanded. 
A similarly honest and modern approach can also secure Medicare, without large tax increases on middle-income Americans. 
For starters, bipartisan proposals for premium support, with seniors receiving subsidies to purchase private health insurance, should be implemented. 
To enable individuals to prepare to cover the associated deductibles and copayments, health savings accounts – funds which are not subject to income tax at the time of deposit, and can be used tax-free at any time to cover qualified medical expenses – should be expanded and strengthened. 
Premium support can significantly reduce Medicare spending, as it establishes a framework for more efficient spending on benefits, driven by competition and innovation in care and coverage. 
So far, the only US presidential candidate who has recognized the need for such a future-oriented approach is former Florida Governor Jeb Bush, who has proposed modernizing reforms of Social Security and Medicare that avoid imposing high costs on middle-income Americans and a heavier debt burden on future generations. 
Two other Republican candidates, Ohio Governor John Kasich and Florida Senator Marco Rubio, have also raised constructive reform ideas. 
By contrast, former Secretary of State and Democratic candidate Hillary Clinton and a leading Republican contender, Donald Trump, have opposed reform of Social Security and Medicare. 
Senator Bernie Sanders, Clinton’s Democratic rival, actually proposes to expand the programs’ unfunded liabilities. 
With so few presidential candidates recognizing the link between reforming Social Security and Medicare and ensuring broadly shared prosperity, the US faces serious risks. 
The progressive redistributive agenda could continue to advance, or the conservative entitlement-reform agenda could fail. Either way, the US would face growth-limiting tax increases and limits on the contributions that public investment can make to the country’s future. 
There is a fiscal path to enhancing prosperity for middle-income Americans. 
It requires support for growth, rewards for work, investment in opportunity, and, unavoidably, reforms to Social Security and Medicare. 
One hopes that, as the campaign progresses, honest and forward-looking fiscal-policy debates recognizing this fundamental truth gain traction. 

Populism With Socialist Characteristics 
PHILADELPHIA – Scholars and journalists have tirelessly covered the rise of populist nationalism in Europe, and especially the hardline governments in Hungary and Poland. 
With a few hours and a lot of googling, one can learn much about how both countries’ governments have commandeered public media, cracked down on privately owned TV stations and newspapers, weakened constitutional courts, attacked immigrants, promoted hate speech against Jews, Muslims, and other minority groups, and unleashed online trolls. 
But one would still be unable to answer the fundamental question: Why are these governments so popular? 
The answer is one that most analysts have overlooked: these governments are not only nationalist; they are also socialist. 
Consider Poland, where the ruling Law and Justice (PiS) party won 38% of the vote in the October 2015 parliamentary election. 
In April 2018, despite mounting authoritarianism and official complaints from the European Union, opinion polls put support for the far-right PiS at 40%. 
The PiS does not owe its rising popularity to its anti-immigrant stance alone. 
In fact, the Catholic nationalist right has won around 30% of the vote in Polish elections since 1989 with consistently anti-Semitic, anti-EU, anti-immigrant, and anti-Russian appeals. 
What is new about this PiS government is its more moderate face. 
PiS is led, at least superficially, by younger politicians, including President Andrzej Duda and Prime Minister Mateusz Morawiecki, who succeeded Beata Szydło (also a relatively new face in Polish politics). 
Each was focus-grouped for broader public appeal. 
The strategy worked. 
In 2015, PiS won its usual base, plus an additional 5-10% of more moderate voters. 
And, having lured these moderates, PiS has kept them, by offering what previous governments have rejected. 
Although the Civic Platform, which governed until 2015, grew out of the Solidarity movement of the 1980s, it betrayed its working-class base by pursuing radical neoliberal economic policies that increased economic inequality. 
The former communist party, having embraced social democracy in the 1990s, betrayed its roots in the same way. 
By contrast, PiS has established the most significant addition to the Polish social safety net since 1989: the Family 500+ program. 
Launched in 2016, Family 500+ embodies the nationalism, traditional family values, and social consciousness that the PiS seeks to promote. 
The program pays families 500 złoty ($144) per month to provide care for a second or subsequent child. 
Families apply each September, when children go back to school. 
Except for poor families, a family with only one child receives nothing, while families with two children qualify for the monthly benefit. 
Families with three children get 1,000 złoty, and 500 złoty for each additional child. 
The program has been enormously popular. 
Some 2.4 million families took advantage of it in the first two years. 
The benefit, equivalent to 40% of the minimum wage, has almost wiped out extreme poverty for children in Poland, reducing it by an estimated 70-80%. 
Liberal pro-European politicians and policymakers are not convinced. 
They complain that such a generous family benefit will weaken work incentives and blow up the government budget. 
But initial evidence suggests that Family 500+ has actually increased economic activity. 
It has also reversed the post-communist decline in fertility, increased wages (particularly for women), and enabled families to buy school materials, take vacations, buy more clothes for their kids, and rely less on high-priced credit for basic household needs. 
And, thanks to rapid economic growth, the government deficit has steadily fallen, not grown. 
No wonder liberals have trouble gaining traction with the electorate. 
Many Poles see a government that finally does something for ordinary people, and all liberals can do is complain, ironically, that it is anti-democratic. 
The truth is that Family 500+ is working. 
Poland’s fertility rate – which had fallen after 1989 to among the lowest in Europe – has risen since 2016 from 1.29 to 1.42 births per female. 
In its first year, Family 500+ provided a significant stimulus to the economy, as poor families spend nearly all of the benefit on consumer items. 
One footwear chain’s revenues grew by 44%. 
Sales of family holidays increased by 14%. 
Instead of borrowing to pay for the expensive “school sets” students are required to purchase, Poles used their 500+ benefits instead. 
And while women’s employment rates decreased as women left minimum-wage jobs, salaries, particularly for store clerks, rose sharply. 
Given the dramatic success of the program, other countries are following suit. 
Lithuania introduced a less generous version of Family 500+ in 2018. 
Those who care about democracy in Poland, Hungary, and elsewhere in Europe and beyond should acknowledge that many voters are buying into the nationalist right’s vision of a social state that advances national priorities, cares for the poor, and supports families. 
Liberal democrats cannot out-xenophobe the nationalist right. 
But they can and should slip their own ideological blinders and learn a thing or two from their adversaries about policies that work for the people. 

Socialism or Global Division? 
For the first time in history, we have the knowledge, the technology, and the wealth to design a different world. 
We have the resources to “make poverty history.” 
But, though we have the power to change the world, we are not taking the steps needed to do so. 
In 2000, the world’s governments adopted the United Nations Millennium Development Goals, which aim to halve global poverty by 2015. 
Yet the international community has lacked the political will needed to meet these basic responsibilities to humanity, causing people to lose faith in politics. 
Unless we take action, our citizens will lose hope in the power of democracy – or find hope in extremism, fundamentalism, and violence. 
To restore people’s trust not only in politics, but also in their own potential, our policies must guarantee responsible governance and institutions that work for and with responsible citizens. 
As the largest political organization in the world, the Socialist International can unite the world’s citizens around a new global agenda to achieve these goals. 
Our first challenge is to democratize globalization. 
We must reconfigure globalization from the bottom-up, bringing in the two-thirds of the human race that is currently excluded from the process, on terms that reflect the socialist principles of inclusion, cultural diversity, and sustainable development. 
How can citizens have a democratic say in world economic development when the IMF and World Bank work on the principle of “one dollar, one vote”? 
There can be no real democracy when we have a massive concentration of capital and power in the hands of the few; when multinational corporations challenge the power of democratically elected representatives; when organized criminals can buy off police officers, judges, and politicians; when monopolization of the media erodes fundamental freedoms. 
Democratizing globalization will take time. 
But we can accelerate the process by strengthening regional cooperation and integration. 
This calls for new channels of cooperation with progressive forces in other parts of the world – in China, the United States, India, and the Arab world. 
To tackle global problems, we need to strengthen and democratize international institutions like the United Nations. 
But we need to look beyond reform of the Security Council and start creating a democratic global architecture that puts globalization at the service of citizens, not markets. 
Today, the top priority for socialists is to re-establish a balance between economic productivity and social justice. 
While we have some successful precedents, such as the Nordic model, it is difficult for nations to achieve this balance. 
As capitalist markets give way to vast commercial networks, and as market economies become market societies, governments and unions are increasingly restricted in scope. 
This has disempowered and divided our citizens. 
Citizens of developed countries increasingly feel like mere objects of consumerism, while citizens of developing countries struggle for daily survival. 
In both cases, but in different ways, people feel impoverished. 
To be sure, we have very diverse societies, but we also face new forms of inequality. 
Lack of labor standards in one part of the world undermines the social welfare of workers in other parts of the world. 
Mass migration from poor countries has created fear and xenophobia in richer countries, especially among the working class. 
Similarly, free trade has turned farmers and service workers in the developing and developed world against each other. 
Environmental concerns have become a “blame game.” 
The developed world fears the depletion of vital resources by the developing world, which in turn blames the developed world for destroying the environment in pursuit of profit. 
To bridge these divides, we must rethink the nature of employment in an increasingly automated, borderless, and mobile global economy. 
As capital is globalized, so basic labor standards should be global. 
Forced labor, child labor, and discrimination in the workplace must be eliminated. 
We must also make our own politics more democratic. 
We must fight exclusion from our political parties, just as we fight exclusion in our societies. 
This means welcoming migrants and minorities, creating more opportunities for women and the disabled, and empowering citizens through education and participation. 
Empowering citizens means giving them both the power to decide and the knowledge to decide well. 
In PASOK, the Greek Socialist party that I lead, we are undertaking far-reaching reforms in this direction. 
Likewise, the goal of the Socialist International is a world governed not by free markets, but by free people. 

Trump’s Climate-Change Sociopathy 
NEW YORK – President Donald Trump’s withdrawal of the United States from the Paris climate agreement is not just dangerous for the world; it is also sociopathic. 
Without remorse, Trump is willfully inflicting harm on others. 
The declaration by Nikki Haley, the US ambassador to the United Nations, that Trump believes in climate change makes matters worse, not better. 
Trump is knowingly and brazenly jeopardizing the planet. 
Trump’s announcement was made with a bully’s bravado. 
A global agreement that is symmetric in all ways, across all countries of the world, is somehow a trick, he huffed, an anti-American plot. The rest of the world has been “laughing at us.” 
These ravings are utterly delusional, deeply cynical, or profoundly ignorant. 
Probably all three. 
And they should be recognized as such. 
After Trump claimed to be representing “Pittsburgh, not Paris,” the mayor of Pittsburgh immediately declared that Trump certainly is not representing his city. 
In fact, Pittsburgh has made the transition from a polluted, heavy industrial economy to an advanced, clean-tech economy. 
And it is home to Carnegie Mellon University, one of the world’s great centers of innovation in information technologies that can promote the transition to zero-carbon, high-efficiency, equitable, and sustainable growth – or, more simply, an economy that is “smart, fair, and sustainable.” 
Trump’s announcement was rooted in two profoundly destructive developments. 
The first is the corruption of the US political system. 
Trump’s announcement was not really his alone. 
It reflected the will of the Republican leadership in Congress, including the 22 Republican senators who sent Trump a letter the week before, calling on him to withdraw from the Paris accord. 
These senators, and their counterparts in the House of Representatives, are on the take of the oil and gas industry, which spent $100 million on campaign contributions in 2016, of which 90% went to Republican candidates. 
(In fact, the total was almost certainly far above $100 million, but much is untraceable.) 
The second destructive development is the twisted mindset of Trump and his closest advisers. 
Their view, defended with “alternative facts” that have no basis in reality, is paranoid and malevolent, aimed at inflicting harm on others, or at best indifferent to harm befalling others. 
“The Paris agreement,” rants Trump, “handicaps the United States economy in order to win praise from the very foreign capitals and global activists that have long sought to gain wealth at our country’s expense.” 
This is nuts. 
The Paris accord is a universal agreement among 193 UN member states to cooperate in decarbonizing the world’s energy system and thereby head off the dangers of climate disaster, such as a multi-meter sea-level rise, extreme storms, massive droughts, and other threats identified by the global scientific community. 
Some of these threats are already evident in vulnerable parts of the planet. 
The Paris climate agreement requires each country is to do its part with “common but differentiated responsibilities.” 
America’s differentiated responsibilities start with the fact that the US is, by far, the largest cumulative greenhouse-gas emitter in the world. 
As such, the US has contributed more to ongoing climate change than any other country. 
And US per capita emissions are higher than in any other large country, by far. 
The Paris accord does not victimize the US; on the contrary, the US has a world-beating responsibility to get its house in order. 
According to data from the World Resources Institute, the US accounted for an astounding 26.6% of global greenhouse-gas emissions from 1850 to 2013. 
America’s population today is just 4.4% of the world’s population. 
In short, it is America, where per capita emissions have always been several times higher than the world average, that owes the world climate justice, not the other way around. 
Consider the most recent data for the year 2014 from the International Energy Agency’s Energy Statistics 2016. 
The world’s CO2 emissions from energy and industry averaged 4.5 tons per person (32.4 billion tons per 7.2 billion people in the IEA tabulation), while US emissions were nearly four times that level, 16.2 tons per person (5.2 billion tons for 320 million people). 
Trump carries on about the Paris agreement’s supposed bias in favor of India, but fails to acknowledge that India’s per capita emissions are 1.6 tons, just one-tenth of the US level. 
Trump also bemoans the US contributions to the Green Climate Fund (and sneers at the name for some reason as well). 
He complains that the US has already given over $1 billion, without explaining to the American people and the world that $1 billion is a contribution of $3.08 per American. 
Indeed, the $10 billion expected from the US over many years is a mere $30.80 per American. 
Here’s the simple truth: The entire world needs to move quickly and resolutely to a low-carbon energy system, in order to end emissions of CO2 and other greenhouse gases by mid-century. 
This is not a move against the US. 
It’s a global imperative – true for the US, China, India, Russia, Saudi Arabia, Canada, and other fossil-fuel-rich countries, as well as for fossil-fuel-importing regions such as Europe, Japan, and most of Africa. 
Fortunately, the technologies exist: solar, wind, geothermal, hydroelectric, ocean, nuclear, and other low-carbon energy sources. 
Here’s more simple truth: With its large, rich, fossil-fuel-intensive economy, the US has done more than any other country to bring about the global peril of climate change, so it should accept its responsibility in helping to get us all out of danger. 
At a minimum, America should be eagerly cooperating with the rest of the world. 
Instead, Trump’s sociopathic behavior, and the corruption and viciousness of those surrounding him, has produced utter disdain for a world nearing the brink of human-made catastrophe. 
The next human-caused climate disasters should be named Typhoon Donald, Superstorm Ivanka, and Megaflood Jared. 
The world will not forget. 

The Authoritarian Temptation 
NEW YORK – Twenty-four years ago this month, Soviet hardliners, desperate to stop the country’s nascent democratic transition, arrested Mikhail Gorbachev and declared martial law. 
In response, millions of protesters poured into the streets of Moscow and towns across the Soviet Union. 
Key elements of the army refused to accept the coup, and it soon collapsed – with the Soviet Union soon to follow. 
Even though economic conditions were dire in the USSR’s final months, people could see the freedoms that were coming and, unlike today, were willing to stand up for them. 
Indeed, in the early years of the democratic transition that followed, most post-communist voters did not succumb to the temptation to elect extremists who promised to end the hard times they were enduring. 
Instead, they usually chose the most sensible candidate available. 
Russians, for example, rejected Vladimir Zhirinovsky, a clownish Donald Trump-like nationalist and anti-Semite, in favor of Boris Yeltsin, who had stared down tanks during the failed 1991 coup and recognized that his country’s future lay with democracy and the West. 
In Romania, the extremist poet Corneliu Vadim Tudor lost to a succession of corrupt pragmatists, beginning with Ion Iliescu, who had led the ouster of the country’s last communist leader, Nicolae Ceaușescu. 
Since then, the world has been turned upside down. 
As life has gotten easier, with people’s material expectations largely met, voters have increasingly favored neo-autocrats who promise to “protect” the people from this or that threat. 
Russian President Vladimir Putin, of course, leads this group, but there are also Hungarian Prime Minister Viktor Orbán and Czech President Miloš Zeman. 
And the trend extends beyond the former communist countries to include, for example, Turkish President Recep Tayyip Erdoğan. 
The French philosopher Jean-François Revel saw the rise of violent dictatorships in the twentieth century as driven by a “totalitarian temptation.” 
What we are witnessing today is something a bit less sinister – call it an “authoritarian temptation.” 
But it is a growing threat not only to democracy, but also to global stability. 
After all, the one thing today’s autocrats have in common with their totalitarian predecessors is contempt for the rule of law, both domestically and internationally. 
One cause for this shift toward authoritarianism is that many countries no longer view the United States as a beacon of democracy and a model of stability and prosperity to be emulated. 
Putin’s claim that democratization is actually an American plot “to gain unilateral advantages” resonates with many societies following the disastrous invasion of Iraq and revelations about the National Security Agency’s spying on citizens and leaders worldwide. 
But even before these developments, the Cold War’s winners – and especially the US – were showing a boastfulness that probably alienated many. 
When even allies are treated with disrespect – recall George W. Bush’s infamous shout of “Yo, Blair,” as if then-British Prime Minister Tony Blair were some cowhand – people naturally wonder whether their country, too, is deemed subservient. 
Rising “soft” dictators – what the journalist Bobby Ghosh calls authoritarian democrats – have used these feelings of unease and alienation to attract votes. 
Their supporters do not want to be oppressed, but they do want stability and national sovereignty – desires that their leaders fulfill partly by limiting opposition. 
Given the reach of today’s mass media and social networks, only a few people must be targeted to cow the rest of society into conforming to the leader’s vision. 
So, instead of building gulags, neo-authoritarians launch criminal cases. 
The defendants range from political opponents and critics in Russia – such as the oil oligarch Mikhail Khodorkovsky and the anti-corruption lawyer Alexei Navalny – to independent journalists in Erdoğan’s Turkey. 
Citizens seem convinced. 
At least 70% of Russians agree with Putin that this kind of “managed democracy” is superior to the chaotic version practiced in the West. 
Almost half of Hungary’s citizens find membership in the European Union, whose liberal values Orbán mocks, unnecessary. 
And more than 70% of Turks have a negative view of the US, which Erdoğan blames for the rise of social media (the “worst menace” facing Turkey today – trumping, it seems, even the Islamic State’s deadly attacks in Turkish cities). 
When the Berlin Wall fell in 1989, people did not understand the link between capitalism and democracy. 
Many wanted a Western lifestyle, with access to the kinds of jobs and goods available in the US, but seemed not to recognize that access to that lifestyle requires increased economic and personal freedom – precisely the kind of freedom that underpins democratic societies. 
If, in the current environment, Western powers attempted to point this out to the people of Russia, Hungary, or Turkey, they would likely stoke even greater resentment. 
The better option would be to work on the countries’ leaders. 
If the Putins, Erdoğans, and Orbáns of the world want to continue to benefit economically from the open international system, they cannot simply make up their own rules. 
The power of such an approach can be seen in Russia, where Western sanctions, imposed following Putin’s annexation of Crimea, are the main factor limiting the pro-Russian rebels’ incursion in eastern Ukraine. 
Putin’s efforts to reclaim “great power” status for Russia may find support among his people; but that support will probably dwindle if Russians face the prospect of losing all of the comforts derived from the relatively open economy that their country has had for more than two decades. 
At a time when more and more Russians are being denied passports to travel outside the country, those tempted by authoritarianism would do well to recall the elementary point made by John F. Kennedy in his Berlin speech in 1963. 
“Freedom has many difficulties, and democracy is not perfect,” Kennedy said. 
“But we never had to put up a wall to keep our people in.” 

Soft Power and Hard Batons 
LONDON – We all remember one phrase from the first presidential campaign by a Clinton. 
When Bill Clinton was running for the job in the early 1990’s, one of his staff explained what the central issue in the election was. 
“It’s the economy, stupid.” he said. 
Economics explains all – jobs, prices, savings, houses. 
It determines the public mood and sets the political agenda. 
The point is reinforced by a curious glossy magazine advertisement that you might have seen recently. 
It is for expensive luggage. 
Mikhail Gorbachev sits in the back of a limousine. 
He is being driven past the Berlin Wall. 
On the seat next to him is the luxury brand, a leather attaché case. 
The message? 
Who cares about the Wall; forget politics; money rules. 
Maybe that’s really how it is. 
Today the world wrestles with the consequences of America’s addiction to borrowing and with the greed and stupidity of many global banks. 
Drivers grumble at the cost of filling their cars’ gas tanks. 
Housewives in poor countries – and in better-off countries, too – despair at the rising cost of feeding their families. 
In Asia, Africa, the Middle East, and Latin America, their husbands and sons riot over food prices. 
So the economy is the big story. 
But two others jostle for our attention. 
They tell us a lot about the politics of the world in a new century. 
It’s not only the economy that matters, after all. 
First, there is Tibet, where apparently the local economy has been growing fast. 
This does not seem to have impressed the Tibetans. 
Last year, it was Burma’s Buddhist monks who were shot and beaten with batons. 
This year it is monks in Tibet. 
The history is complicated. 
But I have no problem in accepting that Tibet is part of China. 
Many Chinese dissidents take the same view. 
It seems to be the Dalai Lama’s opinion as well. 
But can that position be sustained only through state violence? 
The Dalai Lama is not a devious terrorist. 
China does itself no favors by remaining time-warped in the Maoist 1960’s when discussing this issue. 
The Chinese have been so smart in so many areas. 
They devised the “one country, two systems” formula for Hong Kong. 
Is it really beyond the capacity of their political system to work out a formula for Tibet that recognizes its cultural and religious autonomy within the Chinese state? 
I hope that this issue does not derail the Chinese effort to use the Olympics as an opportunity to show the world that their country has emerged again as one of the world’s leaders. 
It would make no sense at all to boycott the Games. 
A boycott would merely provoke nationalist hostility in China. 
But those who attend the Games should not be placed under any constraints about giving their views – if they have any – politely but firmly about human rights. 
What has happened in China economically in the last 25 years is momentous. 
China has become the workshop of the world. 
Its success is not a threat to the rest of us. 
It is good news for everyone. 
Momentous, sure – but China is not yet a superpower. 
It is not a mark of a superpower’s quiet, self-confident authority to beat up Buddhist monks and attack their spiritual leader. 
The other big global political story is the American presidential election. 
This is super-charged American soft power. 
A tight contest between the two Democrats, Barack Obama and Hillary Clinton, has yet to be resolved. 
Waiting to take on the winner is a tough genuine war hero, John McCain. 
The contest between Obama and Clinton, though it has produced some lamentable protectionist sentiments, has captured the world’s attention. 
Obama himself represents two qualities that enthuse many people, not just the young. 
Obama’s success demonstrates that the United States is still the land of opportunity. 
If he were to win the election, imagine the impact on the world of his first speech from the podium to the United Nations General Assembly. 
He would be there as president of the most globalized country in the world; in a sense he would be everyone’s president. 
Second, he does democratic politics a service. 
Like an earlier son of Illinois, Adlai Stevenson, he believes that the average man and woman are a great deal better than average. 
Faced with the embarrassment of his pastor’s views on race and on America, Obama did not go into a huddle with spin-doctors to fathom how he should deal with the problem. 
Instead, he delivered a thoughtful, eloquent, and moving speech about race. 
He treated the issue head-on, and intelligently. 
Confronted with an awkward problem, he responded with reason. 
Whatever else happens in the presidential race, that speech marked a special moment. 
So why is all of this – Tibet on the one hand and American soft power on the other – so significant? 
It’s simple. 
The century ahead will not be a struggle between China and the US for global leadership. 
This is not a balance-of-power gladiatorial contest. 
There will, however, be a battle of ideas. 
Does the world want and need Leninism with its shopping malls? 
Do governments have to lock up dissidents in order to deliver prosperity? 
Or does the world want the sort of freedom that embraces politics as well as economics? 
That is what my children would call a “no brainer.” 

Soft Power and the Struggle Against Terrorism 
Last year, at the World Economic Forum in Davos, Switzerland, George Carey, the former Archbishop of Canterbury, asked Secretary of State Colin Powell why the United States seemed to focus only on its hard power rather than its soft power. 
Secretary Powell replied that the US had used hard power to win World War II, but he continued: "What followed immediately after hard power? 
Did the US ask for dominion over a single nation in Europe? 
No. 
Soft power came in the Marshall Plan¼.We did the same thing in Japan." 
After the war in Iraq ended, I spoke about soft power (a concept I developed) to a conference co-sponsored by the US Army in Washington. 
One speaker was Secretary of Defense Donald Rumsfeld. 
According to a press account, "the top military brass listened sympathetically," but when someone asked Rumsfeld for his opinion on soft power, he replied, "I don't know what it means." 
One of Rumsfeld's "rules" is that "weakness is provocative." 
He is correct, up to a point. 
As Osama bin Laden observed, people like a strong horse. 
But power, defined as the ability to influence others, comes in many guises, and soft power is not weakness. 
On the contrary, it is the failure to use soft power effectively that weakens America in the struggle against terrorism. 
Soft power is the ability to get what one wants by attracting others rather than threatening or paying them. 
It is based on culture, political ideals, and policies. 
When you persuade others to want what you want, you do not have to spend as much on sticks and carrots to move them in your direction. 
Hard power, which relies on coercion, grows out of military and economic might. 
It remains crucial in a world populated by threatening states and terrorist organizations. 
But soft power will become increasingly important in preventing terrorists from recruiting new supporters, and for obtaining the international cooperation necessary for countering terrorism. 
The US is more powerful than any country since the Roman Empire, but like Rome, America is neither invincible nor invulnerable. 
Rome did not succumb to the rise of another empire, but to the onslaught of waves of barbarians. 
Modern high-tech terrorists are the new barbarians. 
The US cannot alone hunt down every suspected Al Qaeda leader. 
Nor can it launch a war whenever it wishes without alienating other countries. 
The four-week war in Iraq was a dazzling display of America's hard military power that removed a vicious tyrant. 
But it did not remove America's vulnerability to terrorism. 
It was also costly in terms of our soft power to attract others. 
In the aftermath of the war, polls showed a dramatic decline in the popularity of the US even in countries like Britain, Spain, and Italy, whose governments supported the war. 
America's standing plummeted in Islamic countries, whose support is needed to help track the flow of terrorists, tainted money, and dangerous weapons. 
The war on terrorism is not a clash of civilizations - Islam versus the West - but a civil war within Islamic civilization between extremists who use violence to enforce their vision and a moderate majority who want things like jobs, education, health care, and dignity as they pursue their faith. 
America will not win unless the moderates win. 
American soft power will never attract Osama bin Laden and the extremists. 
Only hard power can deal with them. 
But soft power will play a crucial role in attracting moderates and denying the extremists new recruits. 
During the Cold War, the West's strategy of containment combined the hard power of military deterrence with the soft power of attracting people behind the Iron Curtain. 
Behind the wall of military containment, the West ate away Soviet self-confidence with broadcasts, student and cultural exchanges, and the success of capitalist economics. 
As a former KGB official later testified, "Exchanges were a Trojan horse for the Soviet Union. 
They played a tremendous role in the erosion of the Soviet system." 
In retirement, President Dwight Eisenhower said that he should have taken money out of the defense budget to strengthen the US Information Agency. 
With the Cold War's end, Americans became more interested in budget savings than in investing in soft power. 
In 2003, a bipartisan advisory group reported that the US was spending only $150 million on public diplomacy in Muslim countries, an amount it called grossly inadequate. 
Indeed, the combined cost for the State Department's public diplomacy programs and all of America's international broadcasting is just over $1 billion, about the same amount spent by Britain or France, countries that are one-fifth America's size and whose military budgets are only 25% as large. 
No one would suggest that America spend as much to launch ideas as to launch bombs, but it does seem odd that the US spends 400 times as much on hard power as on soft power. 
If the US spent just 1% of the military budget on soft power, it would quadruple its current spending on this key component of the war on terrorism. 
If America is to win that war, its leaders are going to have to do better at combining soft and hard power into "smart power." 

The Point of Sharp Power 
WASHINGTON, DC – In recent years, Russia and China have poured considerable resources into arenas typically associated with “soft power,” a term coined by the American political scientist Joseph S. Nye and understood as the “ability to affect others by attraction and persuasion.” 
Either directly or through compliant surrogates, these two countries have devoted billions of dollars to increasing their global influence through media, culture, think tanks, academia, and other spheres. 
Despite these immense investments, however, observers – including Nye himself – have scratched their heads, wondering why these authoritarian regimes continue to suffer a deep soft-power deficit, even as they have grown more assertive internationally. 
Russia and China tend to do poorly in global public opinion surveys and indices of soft power, reinforcing the notion that attraction and persuasion are incompatible with authoritarianism. 
Internationally, autocrats are not “winning hearts and minds.” 
Nonetheless, Russia, China, and other well-resourced and ambitious regimes are projecting more influence beyond their borders than at any time in recent memory – and not principally through what Nye calls “hard power”: military might or raw economic coercion. 
To be sure, Russia has used military force with some frequency in the last decade – in Georgia, Ukraine, and Syria, for example. 
But Russia’s fighter jets and tanks are not driving Moscow’s global surge in influence. 
Similarly, China is flexing its military muscles in the South China Sea and along its disputed border with India. 
But, like Russia, China has been far more active using other forms of influence over the last decade. 
Theorists are therefore in a bind: these regimes are not relying chiefly on hard power, are unsuccessful at generating soft power, but are still able to project real influence abroad. 
Given the resurgence of authoritarianism around the world, it is an opportune time to reflect on this apparent paradox. 
The Financial Times recently observed that in China’s “efforts to build soft power outside its borders,” the country “needs to tread more lightly and take a more reciprocal and less authoritarian approach.” 
In a recent commentary, Nye makes the similar observation that “China could generate more soft power if it would relax some of its tight party control over civil society.” 
The same could be said of Russia and other countries with governments that prioritize state control over openness, independent culture, and civil society – all of which are crucial ingredients of soft power. 
But such exhortations to Chinese or Russian authorities are bound to fall on deaf ears. 
Any significant liberalization would contradict these regimes’ own political needs and objectives to retain control at any cost. 
The analytical trap is to assume that authoritarian governments, which suppress political pluralism and free expression in order to maintain power at home, would be inclined to act differently internationally. 
These regimes have shrewdly adopted some of the forms, but not the substance, of soft power. 
What they pursue is better understood as “sharp power,” whose key attributes are outward-facing censorship, manipulation, and distraction, rather than persuasion and attraction. 
While “information warfare” forms a part of the authoritarians’ repertoire, it is by itself an inadequate description of sharp power. 
Much activity undertaken by authoritarian regimes – whether it is China in Latin America, or Russia in Central Europe – falls outside of this definition, as colleagues and I detailed in a December 2017 report, “Sharp Power: Rising Authoritarian Influence.” 
With hindsight, we can see the misconception that took hold at the end of the Cold War, when conventional analysis assumed that authoritarian regimes would liberalize and democratize. 
Nearly three decades ago, when the United States emerged from the Cold War as a global hegemon and the term soft power was introduced, political analysts did not take sufficient account of regimes like the ones in control of Russia and China today. 
As my colleague Jessica Ludwig and I wrote in Foreign Affairs in November, “the democracies’ complacency concerning the evolution of malign, sharp power has been informed by their reliance on the soft power paradigm.” 
Analysts who view the authoritarians’ behavior in terms of efforts “to boost their countries’ soft power are missing the mark and risk perpetuating a false sense of security.” 
A sound diagnosis is necessary in order to devise an appropriate response. 
Authoritarian governments are not playing by the rules governing democracies. 
Systematic repression is the autocratic regimes’ calling card, and the “sharp power” they generate cannot be shoehorned into the familiar and reassuring framework of “soft power.” 
Without more precise terminology, the world’s democracies will have little hope of countering these states’ increasingly multifaceted influence. 

The Holy Grail of Future Work 
NEW YORK – Understanding the future of work is difficult, if not impossible. 
According to the MacArthur Foundation, 65% of today’s schoolchildren will eventually be employed in jobs that don’t exist yet. 
As technology, globalization, and many other factors continue to redefine work, one constant will be the need for soft skills, or “skills for life.” 
Peer-to-peer deliberation, brainstorming, and collaboration are familiar to working professionals today, but we can’t assume that they come naturally, especially to the millions of students without access to proper training and college- and career-planning resources. 
In fact, a growing global skills gap suggests that many young workers are already falling behind. 
According to the United States Bureau of Labor Statistics, the US economy has 5.9 million job openings, while 7.8 million people remain unemployed. 
In Europe, 5.6 million young people are unemployed, while another two million are neither working nor in school. 
As young people worldwide express their eagerness to work, many businesses say they struggle to find candidates with the appropriate qualifications for open positions. 
For example, one recent survey in East Africa found as many as 63% of recent graduates “lacking job market skills.” 
This skills gap is extremely expensive. 
In China, it is estimated to cost the economy $250 billion annually. 
In the US, the annual cost is $160 billion, with companies losing $14,000 for every job unfilled for longer than three months, while taxpayers bear the cost of unemployment insurance and other safety-net programs. 
In the United Kingdom and Australia, respectively, the skills gap costs $29 billion and $6 billion per year. 
When jobs are unfilled for too long, they are more likely to be permanently outsourced to countries with lower labor costs or a better-suited talent pool. 
This trend is now threatening traditionally stable economies; according to some estimates, by 2020 as many as 23 million workers in advanced economies will not have the right skills to be gainfully employed in meaningful careers. 
Meanwhile, the myth that soft skills are innate – and that only technical skills can be taught – continues to fuel the skills gap. 
In reality, seemingly abstract traits like problem-solving ability, work ethic, and self-awareness can be developed in the right setting and with the right tools. 
Many students cannot pinpoint exactly which skills they lack, but they are acutely aware that they lack self-esteem as a result. 
Consider Abi, a student from Boston who had difficulties in her home life and once believed she would never be successful. 
Simple mentoring and training programs carried out by College For Every Student (a nonprofit organization funded by the GE Foundation) taught her essential skills and boosted her confidence, setting in motion a virtuous cycle of personal development. 
Indeed, the skills gap is even wider for young people from low-income households, who largely miss out on educational and job opportunities. 
Only 9% of people within this underprivileged demographic earn a college degree, whereas college is a prerequisite for most jobs in today’s economy. 
By 2018, over 60% of the 47 million job openings in the US will require some kind of post-secondary education. 
And in Europe, less than 25% of students feel they have received sufficient information on post-secondary education opportunities. 
The skills gap and the opportunity gap go hand in hand. 
If we do not improve access to college-level education and career-ready skills training for youth from all economic groups, the skills gap will widen, and inequality will continue to worsen, with obvious implications for social and political stability. 
Fortunately, the problem can be solved. 
Guaranteeing future economic health and stability in an era of unprecedented change requires, at a minimum, that we expand access to education and skills training for all future workforce participants – not just a select few. 
Whatever approach we take must be collaborative and comprehensive, ensuring that young people learn the soft skills they will actually need for all future scenarios. 
With targeted funding and a shared strategic framework, governments, educators, and businesses can close the skills gap for the current crop of young people, and for generations yet to come. 
Today’s young people are diverse, smart, and determined to tackle the challenges facing tomorrow’s workforce. 
Private and public institutions have a responsibility to teach today’s students how to prepare for those challenges. 
With the right strategy, we can help millions of young people secure a place in the twenty-first-century economy. 
Every student developing soft skills today could potentially change the world for the better in the decades to come. 
That will be a future from which we will all benefit. 

The Solar Price Revolution 
POTSDAM – A silent revolution is under way. 
In November, Dubai announced the construction of a solar energy park that will produce electricity for less than $0.06 per kilowatt-hour – undercutting the cost of the alternative investment option, a gas or coal-fired power plant. 
The plant – which is expected to be operational in 2017 – is yet another harbinger of a future in which renewable energy crowds out conventional fossil fuels. 
Indeed, hardly a week seems to pass without news of a major deal to construct a solar power plant. 
In February alone, there were announcements of new solar power projects in Nigeria (1,000 megawatts), Australia (2,000 MW), and India (10,000 MW). 
There can be no doubting that these developments are good for the fight against climate change. 
But the major consideration driving them is profit, not the environment, as increased efficiency in energy distribution and, where necessary, storage, reduces the cost of producing renewable energy. 
As efforts to improve the management of electricity from fluctuating sources yield further advances, the cost of solar power will continue to fall. 
Within ten years, it will be produced in many regions around the globe for 4-6 cents per kilowatt-hour, according to a recent study by the Fraunhofer Institute for Solar Energy Systems (commissioned by the think tank Agora Energiewende). 
By 2050, production costs will fall to 2-4 cents per kilowatt-hour. 
As Patrick Graichen, Agora’s executive director, points out, most forecasts of the world’s future energy supply fail to take into account solar power’s looming victory over its fossil-fuel competitors. 
Updating them would paint a realistic picture of the costs and impact of our energy production and consumption on the world’s climate, reveal the importance of renewable energy to economic development, and enable better planning of energy infrastructure. 
We should not underestimate the tremendous potential the sun and wind have for building global wealth and fighting poverty. 
As solar power becomes increasingly cost-effective, countries located within the planet’s sun belt could develop entirely new business models as cheap, clean energy enables them to process their raw materials locally, adding value – and profit – prior to export. 
Unlike large-scale conventional power plants, solar installations can be built in months; in addition to being cost-effective, they provide a quick means of responding to growing global demand. 
And, because solar plants can generally be operated independently of complex interregional electricity grids, they provide less developed countries a way to electrify their economies without building expensive new infrastructure. 
Solar power plants thus could play the same role for energy that mobile phones did for telecommunications: rapidly reaching large, underserved communities in sparsely populated regions, without the need to invest in the cables and accompanying infrastructure that once would have been necessary. 
In Africa, 66% of the population has gained access to electronic communications since 2000. 
There is no reason why solar power could not do likewise for access to electricity. 
The time to invest in large-scale solar energy production is now. 
For starters, construction costs for solar power plants are finally low enough to produce electricity at a competitive, stable price for more than 25 years. 
The price of oil may have plunged for now, but it will rise again. 
Solar power plants provide insurance against fossil fuels’ inherent price volatility. 
Even more important, the cost of capital currently is very low in many countries. 
This is a decisive factor for the economic viability of solar power plants, because they need very little maintenance but require relatively high upfront investment. 
The Fraunhofer study shows that differences in capital expenditure are as important for costs per kilowatt-hour as differences in sunlight. 
Solar power is currently cheaper in cloudy Germany than in sunny regions where the cost of borrowing is higher. 
The amount of sunlight that shines on a country is impossible to change. 
But the cost of capital is something over which a country can maintain a certain amount of control. 
By creating a stable legal framework, providing credit guarantees in the context of international agreements, and involving central banks in large-scale investments, governments can help to make solar power more accessible. 
Factors like these explain why international climate policies increasingly focus not only on solar power, but on other forms of renewable energy as well. 
Technological breakthroughs have boosted these energy sources’ competitiveness relative to fossil fuels. 
As a result, instruments that make their adoption more affordable are becoming some of the most important weapons we have in the fight against climate change. 

Solidarity Fatigue 
Democracy tarnishes its heroes as surely as revolutions devour their children. 
For 25 years, the leaders of Solidarity personified the qualities needed to win Poland’s struggle for democracy: unbending courage in the face of the communist Leviathan and magnanimity and clear-sighted determination during the transfer of power. 
All of these were great and noble qualities, and all of them now seem utterly superfluous to most Poles. 
That is the sad lesson of Poland’s parliamentary election two weeks ago, and of Sunday’s indecisive presidential election (which will be decided by a run off between Donald Tusk and Lech Kaczynski on October 23rd.) 
To be sure, the communists-cum-postcommunists who have dominated Polish politics since 1989 were utterly repudiated – the left got scarcely 11% of the vote in the parliamentary poll. 
But Solidarity’s old guard has also been cast aside. 
Poland yearns for something new. 
Poland’s recent elections were the first in which the postcommunist left was irrelevant. 
The postcommunists know that they can no longer live off their legacy of organization and discipline, so they have chosen a clever and attractive 34-year-old leader. 
He has nothing to do with the communist era and has sacked all former Party members from important positions, even barring former Prime Minister Leszek Miller from standing for parliament. 
This is undoubtedly all to the good. 
But the overall health of Polish democracy is another matter. 
Turnout for the parliamentary election was 40%, which puts Poland near the bottom in voter participation among the democratic nations of the world, and about 25-30% below the European average. 
Political apathy reflects many factors, but two stand out. 
A few days before the parliamentary election, people were asked if they hoped for a better life. 
An astounding 60% said that they do not. 
Hopeless people do not vote. 
Second, one of the necessary conditions of a functioning democracy are clear and sufficiently distinct party political programs. 
That is not the case in Poland. 
Parties’ programs changed with the public opinion polls, and their economic proposals were either too complicated or too muddled for voters to grasp. 
So the 40% who voted did so for emotional reasons, not as a clear political choice. 
Among the leading politicians of the parties that overwhelmingly won the parliamentary elections – the neo-liberal Civic Platform and the conservative-populist Law and Justice – almost every face has been around since 1989. 
So the members of the new government, although not physically old, are politically geriatric. 
The Solidarity/postcommunist divide seems to have pickled Polish politics, leaving it without a new generation of leaders and thus without enthusiasm. 
Unsurprisingly, the young are the most estranged. 
When I asked my students at Warsaw University how many intended to vote, only two raised their hands. 
Perhaps others were ashamed to say they care about politics and did, in fact, vote, but they can’t have been many. 
An entire generation has grown up to be apolitical, even anti-political, which bodes ill for the future. 
The most difficult problems in Poland are unemployment, which hovers around 20% – the highest rate in the EU – and the growing divide between rich and poor. 
Indeed, only in Russia (and perhaps in Ukraine) is the income gap wider. 
Yet neither of these issues was raised decisively in the campaign. 
The main issues that both victorious parties highlighted were the communist past and public corruption. 
Both are important issues, but they are secondary to the problems of joblessness and poverty. 
Indeed, it is estimated that 30% of Polish children do not get enough to eat. 
This is Europe, so they do not die of hunger. 
But that a third of all children in a member country of the European Union live on one meal a day is a source of shame – and thus should also be a primary political issue. 
This is all the more peculiar given that the victorious parties that emerged out of Solidarity are keen to promote its values, particularly “solidarity” with a small “s.” 
But their purpose is purely instrumental, for to call somebody a “liberal” nowadays in Poland is more pejorative than calling him a “son of a bitch.” 
Indeed, “liberal” in both its meanings – economic and moral – is disdained. 
Liberals are viewed as vampires, seeking only to make money for themselves and their cronies. 
So it is understandable that both leading presidential candidates, Donald Tusk and Lech Kaczynski, ran as fast as they could from “liberal” ideas. 
But what does small-s solidarity mean in practical terms? 
Nobody knows, and neither Tusk nor Kaczynski was saying. 
They suggested only some vague notions of state intervention on behalf of the poor and needy. 
The death of postcommunism in Poland has thus been greeted not with a bang but with a whimper. 
There is nothing devastating in this, of course, but Poland’s political malaise may one day prove dangerous, and so should be scrutinized in other democracies, old and new. 

Solidarity in a Pluralist Age 
VIENNA – Solidarity is essential to democratic societies; otherwise, they fall apart. 
They cannot function beyond a certain level of mutual distrust or a sense on the part of some members that other members have abandoned them. 
Many view the development of an individualistic outlook as the greatest threat to solidarity nowadays. 
But this is closely linked to a diminishing sense of common identity. 
It is no accident, for example, that Europe’s most successful welfare states were created in ethnically homogeneous Scandinavia. 
People in those countries had the sense that they could understand their neighbors and fellow citizens, and that they shared a close link with them. 
The challenge nowadays is to maintain that sense of intense solidarity amid diversifying populations. 
There are two ways to do this. 
One is to hark back to older modes of solidarity. 
French identity, for example, is based on the country’s unique brand of republican secularism, known as laïcité. 
But France’s efforts to shore up solidarity by insisting on laïcité and erecting a dam against Muslim immigrants are both ineffective and counter-productive, because they exclude from a sense of fully belonging to the nation many people who are actually in France already. 
The other way to preserve solidarity is to redefine identity. 
All democratic societies today are faced with the challenge of redefining their identity in dialogue with some elements that are external, and some that are internal. 
Consider the influence of feminist movements throughout the West. 
These are not people who came from outside their countries. 
They are people who in some ways lacked full citizenship, who demanded it, and who redefined the political order by obtaining it. 
Today the great task is to calm the fears that our traditions are being undermined; to reach out to people who are coming into our lands from other countries; and to find a way of recreating our political ethic around the kernel of human rights, equality, non-discrimination, and democracy. 
If we succeed, we can create a sense that we belong together, even though our reasons for believing so may be different. 
But increasing individualism – a focus on one’s own ambitions and economic prosperity – in many countries poses a stubborn obstacle to realizing this vision. 
Indeed, the utter lack of a sense of solidarity among so many people – horrifyingly evident in the US health-care debate – is now undermining the very basis of what a modern democratic society is. 
A society’s sense of solidarity can be sustained only if all of its different spiritual groups recreate their sense of dedication to it: if Christians see it as central to their Christianity, if Muslims see it as central to their Islam, and if the various kinds of lay philosophies see it as central to their philosophies. 
Religion provides a profound and powerful base of solidarity, and to marginalize it would be a big mistake, just as marginalizing atheistic philosophies would be a mistake. 
Democratic societies, in their tremendous diversity, are powered by many different engines of commitment to a common ethic. 
They cannot afford to switch off any of these engines and hope to maintain a political community. 
Historically, the political ethic of confessional societies has been grounded in a single, basic foundation. 
In Europe, various kinds of laïque societies have tried to invent themselves out of the ruins of the Christian foundation, but they have made the same mistake in another way, with a kind of Jacobin insistence on the civil religionof the Enlightenment. 
Well, we can no longer have a civil religion – not one based on God, nor on laïcité and the rights of man, nor, indeed, on any particular view. 
We live, today, in uncharted territory. 
We face a challenge that is unprecedented in human history: creation of a powerful political ethic of solidarity self-consciously grounded on the presence and acceptance of very different views. 
This can succeed only if we engage in vigorous exchange with each other in order to create a kind of mutual respect for these different views. 
The advancing force of Islamophobia in Europe and the US, with its attempt to reduce Islam’s complex and varied history to a few demagogic slogans, is the kind of utterly ignorant stupidity – there’s no better description of it – on which democratic societies founder. 
But that is true of any kind of dismissive view of the “other.” 
Our societies will hold together only if we talk to each other with openness and frankness, and, in doing so, recreate a certain sense of solidarity from all our different roots. 

Solidarity Takes Power 
WARSAW: Ten years ago in September I was charged with forming the first non-communist government in what was still the communist world. 
The Soviet Union still existed, as did the Warsaw Pact, the Red Army retained bases across Poland, Solidarity had only recently come up from underground and many of its leaders were only just out of prison. 
Restoring Solidarity's public role was essential in all that was to follow. 
After martial law was imposed in 1981, Poland's authorities, led by General Jaruzelski, argued that they were willing to reach agreement with "society". It was "only" Solidarity to which they objected. 
For me, however, legalization of Solidarity was fundamental; I firmly believed that the sphere of freedom that we could wrest from the government would be real only if it was protected not by small groups, but by a powerful social movement. 
When the authorities indicated that they were serious about legalizing Solidarity, I concluded that political negotiations – known as the Roundtable talks – were desirable. 
Still, until nearly the very end, I feared that the authorities would "trick" us in some way, and I was not personally eager to participate in the new political structures. 
For I believed that the sphere of liberty offered at the Roundtable negotiations would have to coexist for a long time with "their" sphere – i.e. the sphere of Communism. 
Entry into the political structures of the regime posed the risk that, in time, the process would "suck us in." 
Only when it became clear that Solidarity was going to enter the government and take the reigns of power, did I come to accept our historic new role. 
Someone once compared my position in forming the first Solidarity government to that of a soldier disarming a minefield. 
But I was not only disarming a minefield, I was trying to construct something on top of that disarmed minefield. 
Moreover, we did not want to merely patch things up, but to change virtually the whole political and economic landscape of our country. 
Half-measures would not work; the regime had to be fundamentally reformed. 
We also had to explain to the Russians that we wanted to be friendly, but that decisions now would be taken by us. 
I sent a clear message to this effect, through an emissary of the Soviet Politburo, two days after I was nominated as prime minister, and I amplified it later, during my first visit to Moscow. 
But even if Moscow's reaction to the Polish reforms was very much on everyone's mind, Moscow was not the first destination on my travels, as the ritual of all previous governments demanded. 
My first official visit was to the Vatican. 
Indeed, in extraordinary times like those, symbols matter, and many of my early actions as prime minister were wholly or in part symbolic. 
The first one had taken place even before I formed my government, barely upon my arriving in my office at the Council of Ministers, then still staffed exclusively with officials from the old regime. 
As I entered that intimidating building, I felt as if it, together with my new responsibilities, rested on my shoulders. 
I sat at my desk and I said to those around me: "Let's try to call the Pope." 
I did not seek to receive instructions; I said only: "Holy Father, I would like you to pray for me." 
My second official act was the following: Next to my desk was a table with many telephones. 
Among them was a hotline to the first secretary of the Polish Communist Party. 
I asked to have that line disconnected. 
"If the first secretary of the Communist Party wants to talk to me," I said, "he can call me on the normal phone." 
It was important to make the new outlines of power clear: the State is independent from the Party. 
The bureaucrats around me had to learn that. 
Indeed, it took a while until they understood that they could have their party organization, but only outside the office, and that there would be no official Party "cell" in the Council of Ministers. 
Those symbolic gestures spoke to the core of our entire political program. 
In my inaugural speech, I said that we needed to "draw a thick line between us and the past, that we were not responsible for what we inherited but only for what we will do ourselves." 
My words were later twisted in the most bizarre ways by my critics. 
But the spirit of my speech was simple. 
We intended fundamental changes, but we sought to introduce them in an evolutionary, peaceful way. 
Change without vengeance – which did not mean without considering the past, just without retribution. 
This was what I meant by drawing a "thick line" between the past and the present. 
There were then over two million members of the Communist Party in Poland. 
I had to tell them whether democratic Poland was also going to be their country, or whether they would be second-class citizens. 
Besides, the whole administrative apparatus of the State, which could not be changed in a month, had to serve the new Poland. 
Communists controlled the security forces, the army, all the organs of the state. 
They could provoke confrontations, directed not only against me, but also against their own leaders who had signed the Roundtable agreements. 
After many years of conflicts, with the memories of the martial law of 1981 still fresh in the minds of most Poles, a policy of national reconciliation was a crucial element of our program. 
Decommunization meant for me, above all, the decommunization of the regime, of the system itself. 
Insofar as guilty individuals were concerned, on the other hand, we believed that people responsible for crimes should be judged by the courts, and the government, which stood for the independence of the judiciary, could not interfere with this. 
Similarly, the moral evaluation of the past – which was certainly needed – was, in my mind, primarily a matter of a broad public debate, not one of government decree or other acts of the state. 
The government's responsibility was to put into effect political and economic reforms, far-reaching reforms – and these required social peace. 
We stood before a stark alternative: either destroy that social peace by anticommunist witch-hunts or reform the old regime and move ahead to a new era of national peace and economic prosperity. 
We chose reform. 


New Frontiers in Affordable Housing 
SHANGHAI – Providing decent, affordable housing is a growing challenge in developing and developed economies alike. 
With demand far exceeding supply, the adverse effects – on mobility, productivity, and growth – are (or will be) increasingly apparent. 
Fortunately, there are ways to narrow the affordable-housing gap substantially, using mostly market-based approaches at the municipal level. 
Worldwide, 330 million low- and moderate-income urban households either live in substandard housing or are so financially stretched by housing payments that they must forgo spending on essentials like health care and education. 
By 2025, that figure could reach 440 million households, or about 1.6 billion people (one-third of the world’s urban population) – and that does not even cover some of the world’s poorest people, who often live outside of cities, on urban streets, or as squatters, leaving them unaccounted for in census estimates. 
Replacing today’s substandard housing and building the additional units needed by 2025 would require an investment of an estimated $16 trillion – a daunting figure, to say the least. 
But there are four key “levers” that can reduce the cost of housing delivery by 20-50%, thereby making housing affordable (amounting to no more than 30% of total income) for households earning 50-80% of the median income in most cities. 
The first lever is more efficient land use. 
Acquisition of land for development in the right location at a reasonable price has the greatest potential for reducing housing costs. 
Location is especially important in developing countries, where many areas lack adequate transport, water, electricity, and sanitation infrastructure. 
Investment in these areas would improve and expand land use – whether by unlocking unused land or equipping areas to support more inhabitants – thereby helping to reduce housing costs. 
Similarly, cities can loosen land-use restrictions, such as unit size requirements, to allow for higher-density, and thus more valuable, projects. 
In exchange for providing the increased value to real-estate developers, municipal authorities could require that a portion of the land or a certain number of units be set aside for affordable housing. 
Such a cross-subsidy would increase the housing supply across income bands, at no direct cost to the public. 
The final step toward improving land use is the implementation of measures to discourage land hoarding. 
China, for example, imposes an idle-land tax on formerly public land if its owners fail to initiate the development process within a year. 
This brings us to the second key lever to expand affordable housing: a more cohesive and efficient construction industry. 
As it stands, the housing-construction industry is highly fragmented, impeding its ability to take advantage of economies of scale, and builders often rely largely on the same methods used 50 years ago. 
By standardizing design elements like ceiling heights, fixtures, and flooring, construction companies can cut costs and raise productivity, as workers gain experience with repetitive tasks. 
Further savings are possible through industrial approaches, such as the use of components – for example, walls and flooring slabs – built offsite. 
And most builders lag behind other industries in terms of the efficiency of purchasing and other processes. 
Together, these improvements could cut housing-construction costs by up to 30% and delivery time by 40-50%. 
The third key lever to make housing more affordable relates to operations and maintenance – everything from heating the building to repairing cracked tiles – which account for 20-30% of total housing costs. 
Here, the biggest opportunity lies in efforts to improve energy efficiency, with insulation, windows, and other retrofits generating energy savings of 20-30%. 
Additional savings would be possible if maintenance and repair companies were more transparent and competitive, and operated on a larger scale. 
To this end, public institutions could certify and list suppliers that meet quality standards, or bring owners together in buying consortia – an approach that has helped the United Kingdom’s social-housing agencies cut costs on some items by more than 20%. 
The final affordable-housing lever is expanded access to finance, especially for low-income households, which often face the highest borrowing costs – if they can gain access to finance at all. 
For the world’s many “unbanked,” who cannot accumulate savings or establish a credit record, the only option is to pay steep risk premiums for high loan-to-value mortgages. 
To expand access to finance, countries can improve underwriting by establishing credit bureaus, which are uncommon in developing economies, and training and certifying property appraisers. 
In some countries, collective-savings programs – that is, provident funds and building societies – have helped low-income households to accumulate down payments, with the pooled savings also providing capital for low-interest mortgages. 
At the same time, to reduce financing costs for developers, municipal bodies can “de-risk” projects by committing to purchase affordable units or guaranteeing qualified tenants. 
Cities can also streamline approval processes to accelerate completion. 
These four levers, if used systematically, can reduce the costs of housing for those who need it the most, while creating a better-functioning market that provides more choices for households across income levels. 
Indeed, while municipal and national governments will have to take additional measures to address the needs of their poorest citizens, cities have powerful tools at their disposal for closing their affordable-housing gaps. 
Though no single solution will work everywhere, initiatives that integrate land policy and more accessible finance with efforts to modernize housing construction and management can lead to progress everywhere. 


Somalia’s New Pirates 
MOGADISHU – Somalia is blessed with the largest coastline in continental Africa. 
Our rich marine waters are some of the most productive in the world, teeming with schools of yellowfin tuna, blue marlin, dolphinfish, and sardines. 
For more than 30 years, however, this bountiful marine wilderness has also been a source and site of conflict, as foreign illegal, unreported, and unregulated (IUU) fishing vessels have plundered our waters – stealing our fish and selling their catches at distant ports. 
Just a few years ago, the encroachment of illegal, unreported, and unregulated fishing vessels sparked a wave of piracy in Somalia that cost the global maritime shipping industry billions of dollars in lost revenue. 
As illegal foreign fishing vessels fled our waters, Somali pirates quickly shifted their focus toward more lucrative vessels, such as cargo ships and oil tankers. 
And, now that piracy has mostly been eliminated, there is growing evidence that foreign fishing vessels have returned to plunder our waters once again. 
A new report by the group Secure Fisheries, called Securing Somali Fisheries unveils new satellite data showing that foreign IUU fishing vessels are now catching three times more fish than Somalis. 
They are targeting some of the highest-value fish in our waters, leaving their Somali counterparts to compete over lower-value fish. 
The report shows that, making matters worse, these foreign fleets have contributed to overfishing our swordfish, snapper, marlin, and shark populations. 
Foreign bottom trawlers have fished recklessly and acted with impunity, dragging heavy nets, razing the bottom of our seafloor, and damaging an astounding 120,000 square kilometers (46,000 square miles) of important marine habitat. 
The damage is so extensive that even if trawling were stopped today, this area may need many years to recover. 
This pillaging of our marine ecosystem is taking place even as Somalia has made great strides over the last 18 months toward better management of our waters. 
In June 2014, my government laid claim to Somalia’s 200-nautical-mile exclusive economic zone (EEZ), in line with the United Nations Convention on the Law of the Sea. 
This past December, we also passed the Somali Fisheries Law, which explicitly outlaws bottom trawling. 
This groundbreaking legislation calls for improved monitoring of fish landings, an ecosystem-based approach to fisheries’ management whereby the area would be managed holistically, and the protection of threatened and endangered fish species. 
But, despite all our progress in strengthening fisheries’ management domestically, we lack the ability to police our vast waters. 
The international community could make a significant difference in this area, by helping my government monitor and control Somalia’s EEZ, as well as through improved sharing of the critical intelligence gathered by international naval patrols. 
According to the Secure Fisheries’ report, eliminating IUU fishing today would enable Somalia to begin to license and sell commercially valuable tuna sustainably, generating up to $17 million per year. 
These funds could then be reinvested into better infrastructure – such as port construction, improved cold storage, and modern processing facilities – to support our artisanal and industrial fishing fleets. 
The elimination of IUU fishing would also allow our overfished stocks to recover and help build a prosperous Somali domestic fishery, along with increased government support and funding for data collection and resource management. 
The report shows that healthy fish stocks could provide significantly greater amounts of resources than they currently do. 
In fact, almost half of our managed fisheries are currently exploited at sustainable levels. 
But we need more investment in better infrastructure to realize our industry’s full potential. 
Fishing in Somali waters must not be allowed to remain a free-for-all, where far-flung foreign fleets exploit the ecosystem in unsustainable ways. 
I call upon the international community to collaborate with my government to ensure that IUU fishing in Somali waters is stopped for good. 
Doing so would improve maritime security and promote a vibrant domestic fishing industry that benefits and helps sustain all Somalis. 
A sustainable, dynamic fishing industry would help us build a more stable and prosperous Somalia. 
Given our country’s great potential and its strategic location, that is an outcome that everyone should be willing to support. 

Somalia’s Endless Hell 
MOGADISHU -- Somalia’s internal conflict is propelled by a combustible mix of religion, politics, and clan rivalry. 
Civilians are killed daily in Mogadishu, there are roadside bombs and mortar attacks, and politicians and journalists are targeted. 
Making matters worse, the country has suffered this year from both floods and drought. 
This combination of insecurity and natural disasters has displaced huge numbers of people and caused suffering on a scale painful to behold. 
According to the most recent United Nations figures, 400,000 people, or roughly one-third of Mogadishu’s population, have fled the city. 
Yet Somalia still rarely gets into the headlines. 
This partly reflects the near impossibility of gathering news. 
Few foreign journalists venture in – it is too difficult and too dangerous for them to work inside the country – and local reporters are harassed by the authorities. 
And, even when there is news, the world’s capacity to absorb bad and sad stories from yet another hellish place is limited. 
Since last December, Somalia has been in a de facto state of civil war. 
The secular government, supported by the UN, the European Union, and the United States, with military reinforcements from Ethiopia, has been fighting insurgents from the Union of Islamic Courts, a group accused of harboring al-Qaeda terrorists whose leaders are supported by Eritrea. 
The lawlessness and absence of security makes finding a political solution almost impossible. 
When local elders and delegates wanted to assemble in Mogadishu for a reconciliation conference, security conditions forced them to postpone the conference for several months (though when they did meet, in big numbers and for a long time, they achieved no breakthrough). 
A plane with the UN envoy for human rights was denied landing rights in Baidoa (seat of the Somali parliament) not long ago, and pilots sometimes refuse to fly foreigners to Mogadishu, because it is too dangerous. 
The same lack of security applies to delivering aid: on a recent visit to North Somalia to assess humanitarian needs, a team from the International Rescue Committee of which I was a part spent more time, effort, and funds on security issues than on inspecting wells and evaluating the need for latrines, although the lack of water and sanitation is acute. 
On a 25 mile stretch of road between the southern cities of Kismayo and Jilib, there are at least 35 checkpoints manned by armed men who take $50 to $200 from passing travelers. 
Offshore, piracy seriously disrupts aid being brought in by ships. 
One incident in southern Somalia vividly demonstrated how insecurity can hamper humanitarian work. 
While our assessment team was in the town of Marare, a banal scene of two friends in their twenties having breakfast turned into a major drama when one of the boys mishandled his Kalashnikov and accidentally killed his friend. 
The boys were from the same clan, but, alas, from different sub-clans. 
The customary procedure is that the victim’s family gets to kill someone from the perpetrator’s sub-clan. 
The elders of the two sub-clans spent four days negotiating a less bloody solution, and the agreed price of 100 camels – worth $7,000 – was paid as compensation. 
But during those four days, work at the local hospital (run by an international non-governmental organization) was impeded, as all staff from the perpetrator’s sub-clan stayed away from their jobs, lest they be targeted for a revenge killing. 
The dilemma that the accident presented is not easy for a foreigner to understand. 
But the way the elders steered clear of a violent resolution is an admirable example of good governance. 
If only such practices were used to tackle the vast majority of the problems that overwhelm Somalia. 
In this quintessential “failed state,” this sort of elders’ wisdom may be the only option to start dealing with the quagmire created by the lawlessness that has gripped the country since the departure of the dictator Said Barre in 1991. 
Ignoring the situation in Somalia and not trying to reestablish law and order is not an option. 
The two main factions fighting in Mogadishu are backed, respectively, by Ethiopia and Eritrea. 
Because those nations - among the poorest in Africa - have an unresolved border dispute that led to a 1998-2000 war in which tens of thousand died on both sides and hostilities in the area continue, their involvement, by proxy, in the Somali civil war may have grave implications for the entire Horn of Africa. 

Sons of the Mau Mau 
WASHINGTON – At the beginning of last year, Kenya seemed to be descending into madness. 
Those scenes return as if from a nightmare: children massacred inside burning churches, mobs using machetes at will in city slums, a country on the brink of breakdown. 
By the time the dust settled, more than 1,500 people had been killed and over 400,000 displaced, following an election that observers dismissed as rigged. 
Kenya was saved from the abyss by a shotgun marriage between the country’s ethnic Kikuyu president, Mwai Kibaki, and his Luo challenger, Raila Odinga, who was given the post of prime minister. 
The power-sharing government, fostered by former United Nations Secretary-General Kofi Annan and the Western powers, stabilized the country and gave Kenyans hope in a tough year that has seen food and fuel prices skyrocket and drought plague the north. 
But if the government is to succeed and prevent further violence, Kenya must tackle the roots of its election chaos. 
These include poverty, tribalism, and the failure of the country to live up to the vision of its first president, Jomo Kenyatta. 
Speaking in 1952 – prior to independence – Kenyatta said: “It has never been known in history that a country prospers without equality. 
As long as people are held down, corruption is sure to rise, and the only answer to this is a policy of equality. 
If we work together as one, we must succeed.” 
Today’s Kenya bears little resemblance to this vision – 48% of Kenyans live in poverty and 75% of young people are unemployed. 
Urban slums like Nairobi’s Kibera – home to over one million people – remain largely untouched by government services. 
Into this vacuum have stepped tribal gangs including the ethnic Kalenjin Sabaot Land Defence Force and the Luo Taliban, which was named, according to one member, in honor of its Afghan heroes’ “defense of their people and way of life.” 
These groups frequently challenge law and order through intimidation, extortion, and violence. 
But no group has provoked government ire like the Kikuyu Mungiki. 
The organization—which claims one million members—is guilty of horrific acts of violence that continue unabated, including the recent beheading of the son of one of Kibaki’s key allies. 
Mungiki’s origins can be traced in part to the sons and daughters of Mau Mau fighters, the dispossessed Kikuyu who fought the Kikuyu elite and British colonists in the 1950s. 
Today, they have vowed to fight government elites, Christianity, and foreign influences like the IMF and World Bank, which they accuse of re-colonizing Kenya. 
Western culture is shunned and traditional Kikuyu beliefs like female circumcision promoted. 
Kibaki has responded harshly to Mungiki, waging a “war on terror”-style campaign to defeat it, which has lead to thousands of deaths, according to Kenyan human rights groups. 
Kibaki was aided by the Bush administration, which was concerned that Kenyan instability would harm Western business interests and jeopardize American anti-terror operations in Somalia. 
Yet, at the same time Kenya’s president was trying to suppress Mungiki, some of his Kikuyu allies in government allegedly activated Mungiki as attack dogs following attacks on the Kikuyu by the Luo and other tribes in the post-election chaos. 
Many Kenyans suspect that these politicians’ names are on a “secret list” of guilty officials from all sides contained in a recent report by Kenyan Justice Philip Waki. 
The discrepancy in Mungiki’s treatment by the government is a good indication of what is going wrong in Kenya. 
The state fails to provide for its citizens; poverty, political marginalization, and land disputes then fester, fueling ethnic militias that function as a kind of tribal shadow government, often providing social services. 
The state then brutally crushes the militias, making matters worse, and politicians manipulate the actors for their own purposes. 
To break this cycle, Kenya needs a new approach to government – a return to Kenyatta’s original vision of justice and equality, and a way for the poor to benefit from economic growth and globalization. 
This does not mean using state power to crush groups that have arisen in part due to the state’s own failures, but rather to uphold law and order by prosecuting only the guilty and understanding why such groups are gaining recruits in the first place. 
Odinga’s pledge last year to begin a dialogue with Mungiki is a good step, but it must be followed with action. 
Kenyans should be proud of what they have accomplished in a year that has also seen the election of a man they claim as their own, Barack Obama, as America’s president. 
But if the old pattern continues, and massive poverty-stricken populations are left out of the political process, the country could explode in another orgy of violence. 
For all the parties involved, including the coalition government and its Western allies, the stakes are much too high for a return to “business as usual.” 

Sorting out the Debate on Globalization 
CAMBRIDGE: Confusion reigns supreme in the heated debate on globalization. 
For some, globalization is the road to prosperity for poor countries, and it certainly seems that countries such as Singapore, Taiwan, Korea, Chile and a few others have gotten much richer in the past 25 years through an economic strategy based on export growth and participation in the global economy. 
For others, globalization is a curse under which poor countries are bound to fall further and further behind. 
There is little doubt that after twenty years of IMF and World Bank programs in Africa, those countries are still mired in poverty, with little benefit to show from all of those Washington-inspired programs. 
So who’s right in this debate which has spilled into the streets of Seattle, Washington, and now Prague, during the cycle of international economics meetings in the past year? 
The answer, of course, is that life is more complicated than the contrasting positions of globalization as panacea or curse. 
Different parts of the world face different kinds of challenges. 
For some, globalization is a pretty reliable ticket to success; for others, it will have little effect by itself, since the most pressing social and economic crises hitting those countries can’t be solved by free trade or market reforms alone. 
First, some countries are heavily burdened by their physical geography. 
Some places in the world are very remote from international trade – think of the Andean highlands, the mountainous regions of Iran, Iraq, and Afghanistan; the landlocked countries of Africa, such as Rwanda, Burundi, Burkina Faso, or the landlocked regions of Central Asia. 
These countries are not much helped by globalization. 
They are, in general, stuck in poverty and economic isolation. 
For them, globalization is not a curse, but it is hardly a solution. 
Globalization also does little to eliminate the high incidence of disease linked to tropical climate. 
In parts of Nigeria, a person can expect to be bitten by an infective mosquito carrying malaria up to 300 times in a year, while I am pretty much assured that no mosquito will give me malaria in Boston. 
Africans suffer about 500 million cases of malaria per year, causing around 2 million deaths. 
Malaria can destroy economic growth and hinder foreign investment just as much as war or economic mismanagement. 
Second, national development strategies matter a lot. 
Countries that deliberately avoided world markets through heavy protectionism lost out in the past twenty years. 
Countries that chose socialism all went bankrupt. 
Export-led growth has proved to be necessary for economic development for the simple reason that countries need to purchase technology from world markets (much of it in the form of high-tech machinery), and they can afford to do so only if they are generating sufficient export earnings. 
But free trade is not enough. 
In today’s knowledge economy, the countries that are the biggest success stories are basing their development not only on export growth but also on major investments in science and technology, and higher education. 
A full development strategy therefore requires a combination of globalization with sufficient public investment. 
Many of the protesters at the IMF, World Bank, and WTO meetings have been ill informed about the potential benefits of world markets, but they have been absolutely right about the politics of globalization. 
Many countries are clearly not benefiting from globalization, and are falling further and further behind into extreme poverty. 
The protesters have also understood that, despite repeated promises of financial help, debt cancellation, and support for disease control, the rich countries – and the IMF and World Bank, which the rich countries control – have done very little to help. 
We therefore need a new strategy for globalization that ensures that much more of the world will benefit from the expansion of world markets. 
The rich countries should help the poor countries to overcome the burdens of their geography by helping to fund a major fight against as AIDS, malaria, and other tropical infectious diseases. 
The rich countries can do vastly more to assist the poor countries in becoming a part of the information-technology revolution. 
They should also help support scientists and universities in the poor countries that will be the key to finding technological solutions to the deepest challenges of disease, low agricultural productivity, and environmental degradation facing the poorest peoples of the world. 
Just tens of dollars per person per year would generate tens of billions of dollars of increased foreign assistance and make a profound difference in the quality of life, and in the benefits of globalization, for the world’s poorest people. 

Soulless Bodies 
The world’s leading scholar in artificial intelligence once described people as machines made of meat. 
This nicely captures the consensus in the fields of psychology and neuroscience, which tell us that our mental lives are the products of our physical brains, and that these brains are shaped not by a divine creator, but by the blind process of natural selection. 
But, with the exception of a small minority of philosophers and scientists, nobody takes this view seriously. 
It is offensive. 
It violates the tenets of every religion, and it conflicts with common sense. 
We do not feel, after all, that we are just material bodies, mere flesh. 
Instead, we occupy our bodies. 
We own them. 
We are spontaneously drawn to the view defended by René Descartes: We are natural-born dualists, so we see bodies and souls as separate. 
This dualism has significant consequences for how we think, act, and feel. 
The philosopher Peter Singer discusses the notion of a moral circle – the circle of things that matter to us, that have moral significance. 
This circle can be very small, including just your kin and those with whom you interact on a daily basis, or it can be extremely broad, including all humans, but also fetuses, animals, plants, and even the earth itself. 
For most of us, the circle is mid-sized, and working out its precise boundaries – does it include stem cells, for instance? – can be a source of anguish and conflict. 
The nature of these boundaries is related to our common-sense view that some objects have souls and others do not. 
If one attributes a soul to something, then it has value; if one sees something as a mere body, it does not. 
This is often explicit; historically, debates about abortion, for example, are often framed in terms of the question: When does the soul enter the body? 
This reasoning can apply as well to how we regard adults. 
Normally, when we interact with others we see them as both body and soul. 
We appreciate that they have beliefs, desires, and consciousness, and we recognize that they are solid physical things that take up space and are subject to gravity. 
Both stances coexist well enough in the normal course of things. 
But when we emphasize one perspective over another, there are moral consequences. 
Social psychologists have shown that simply getting an experimental subject to take another person’s perspective will make the subject care more about the person and be more likely to help. 
Focusing on the soul, then, leads to moral concern, and can expand the moral circle. 
The opposite can occur when someone is viewed solely as a body, and one emotion that supports this outcome is disgust. 
The psychologist Paul Rozin has shown how disgust, as Charles Darwin first noted, is an evolutionary adaptation that deters us from bad meat, so it is naturally triggered by animals and animal waste products. 
But disgust can readily extend to people. 
People, after all, are made of meat. 
Hence, every movement designed to stigmatize or malign some group – Jews, blacks, gays, the poor, women, and so on – has used disgust. 
Once a group of people is viewed as disgusting, attention shifts away from them as moral individuals. 
They become soulless bodies, and the moral circle closes in to exclude them. 
Our reaction to soulless bodies is well illustrated in a story told about Descartes after he died. 
It was known that Descartes had an illegitimate daughter, Francine, who died when she was five years old. 
According to the story, Descartes was so struck with grief that he created an automaton, a mechanical doll, built to appear identical to his dead daughter. 
The two were inseparable. 
When Descartes crossed the Holland Sea, he kept the doll in a small trunk in his cabin. 
Curious about the contents of the trunk, the captain of the ship crept down to Descartes’ cabin one night and opened it. 
To his horror, the robot Francine arose. 
The captain, struck with revulsion, grabbed her, dragged her up to the deck of the ship, and threw her overboard. 
This story captures how disturbing – in some cases, revolting – we find a body without a soul, and it embodies the emotional pull that our common-sense dualism often has. 
But it also raises a serious problem. 
Science tells us that common-sense dualism is wrong. 
There is no consensus as to precisely how mental life emerges from a physical brain, but there is no doubt that this is its source. 
Thus, if a “soul” means something immaterial and immortal, then it does not exist. 
All of us are soulless bodies, no less than the robot Francine. 
This is perhaps the main reason why the scientific rejection of dualism may be so hard to swallow: it seems to diminish the moral status of people. 

Boosting South Africa’s Diversity Dividend 
CAPE TOWN – After an insight-filled and enjoyable visit to South Africa – my first to this beautiful country in 15 years – I am leaving with mixed feelings. 
The country’s ongoing process of economic and political development has left those living here, as well as concerned observers like me, both hopeful and worried about the future. 
A quarter-century ago, South Africa embarked on its extraordinary transition away from nearly 50 years of stifling apartheid, by following Nelson Mandela’s principled vision to “forgive but never forget.” 
When its black majority was finally given a say in governance, it elected an African National Congress (ANC) government that, by refraining from confiscating and nationalizing private property held by the privileged minority, distinguished the country from many others, in Africa and elsewhere, that have emerged from repressive colonial rule. 
Instead, the Mandela-led government recognized the country’s diversity as a potential source of long-term unity and wellbeing, and decided to pursue a remarkably inclusive approach. 
This model has inspired many others outside of South Africa, not least in countries still ruled by authoritarian regimes that use fear tactics to maintain their grip on power. 
Mandela’s approach showed that orderly and inclusive transitions are possible, and that previously suppressed and imprisoned freedom advocates can transform themselves to form a legitimate and effective government. 
But the outcomes of South Africa’s transition are far from perfect. 
Today, growth is insufficiently inclusive and far too slow, with the annual GDP growth barely positive last year. 
The country’s Gini coefficient is one of the worst in the world, reflecting stark levels of income inequality; its rate of unemployment, at 26.5%, is alarmingly high and hits young people the hardest; and too many people are stuck in disastrous poverty cycles. 
Poor governance has undoubtedly contributed to this disappointing situation, which falls short of what Mandela envisioned for the country he loved. 
Among other things, the government has mismanaged public finances, and it has stumbled in its pursuit of a new economic-growth model. 
At the same time, falling commodity prices in recent years have only added to the economy’s economic and monetary challenges. 
With the country performing well below its considerable potential, “black economic empowerment” efforts that are meant to reduce historical inequalities have suffered. 
But public-sector shortfalls, which have become more visible and better understood recently, are not the only reason for this. 
Another, less visible problem is that private businesses’ own efforts to ensure diversity have not gained sufficient traction. 
South African companies are not the only ones to struggle in this area. 
In fact, much of the business community around the world, including in the West, is still trying to figure out how to make inclusion and diversity programs successful, including with respect to leveling a playing field that is still tilted against women. 
Research has shown that inclusion is good for business. 
As a result, many Western companies recognize that introducing more diversity into the decision-making process at most levels will boost their resilience and agility. 
But they are still struggling to overcome blind spots and biases, both conscious and unconscious, stemming from structural and behavioral obstacles that women face, especially when trying to secure senior positions for which they are amply qualified. 
As Harvard University’s Mahzarin Banaji, for example, has demonstrated, companies fall victim to blind spots and unconscious biases for a variety of reasons. 
These include the manner by which our brains have evolved, childhood exposures and experiences, historical interactions, and heuristic shortcuts that we unconsciously use to interpret information and frame issues. 
Countering these factors will require companies to figure out how to sustain the heightened states of awareness and understanding that bring biases to light. 
South African companies, particularly in the financial sector, can no longer pay only lip service to inclusion. 
They will need to implement behavioral nudges, and modify corporate structures in order to encourage more inclusive, merit-based behaviors. 
CEOs and senior management teams must revamp their operations, remind their colleagues of the strong business case for diversity, and make a much stronger effort to identify, train, and mentor talented individuals of all races. 
Specifically, they should expand individual and collective apprentice-based and vocational programs, modernize their methods for measuring performance, and intensify their efforts to include recent research on the benefits of cognitive diversity and “superadditivity” in internal and external communications. 
We should all be on guard against the risk of outdated influences affecting our behaviors and decisions. 
As I argued in my recent book The Only Game in Town, “No company and certainly no country will be able to harvest its realizable potential if it fails to embrace and empower human talent regardless of gender, race, culture, sexual orientation, and perspectives.” 
South Africa will need much more than improved economic governance if it is to overcome its challenges and unleash its full potential in an increasingly uncertain global economy. 
Rather than waiting for the politicians to do something about it, South African businesses should deepen their engagement with ever-broader segments of the population. 
Doing so would not only improve productivity, competitiveness, and business results over time. It would also help to reduce the violence that accompanies marginalization, hopelessness, and alienation. 

Reigniting South African Growth 
JOHANNESBURG – A paradox of Sub-Saharan Africa’s rapid economic expansion is the fact that the region’s most sophisticated economy seems not to be part of it. 
Since 2008, South Africa has recorded average annual GDP growth of just 1.8%, less than half the rate of the previous five years. 
The International Monetary Fund expects output in the rest of Sub-Saharan Africa to grow at a rate of close to 5% next year, but South Africa is projected to manage little more than 1% growth. 
More worrying still, the country’s unemployment rate – at over 25% – is one of the highest in the world. 
South Africa needs to reclaim the economic initiative, by – literally – building the Africa of the future. 
Countries across the continent are racing to construct the roads, ports, power stations, schools, and hospitals they will need to sustain their growth and meet the needs of their fast-growing and urbanizing populations. 
And what they need most of all is expertise. 
But while South Africa has highly capable architecture, construction, and engineering sectors, its current share of foreign-built projects in Sub-Saharan Africa stands at only 7%, compared to 32% for China. 
According to the McKinsey Global Institute (MGI), a coordinated effort by South African construction firms, banks, financial institutions, and government ministries – in partnership with their counterparts in other African countries – could triple this share, potentially creating 80,000 new domestic jobs from exports of construction services by 2030. 
The opportunities are not limited to the construction industry. 
South Africa has the know-how to meet Africa’s burgeoning need for a wide range of services, from banking and insurance to retail and transport. 
The country currently provides only 2% of Sub-Saharan Africa’s service imports – a market worth some $40 billion annually. 
The contrast with other regions’ economic leaders is telling. 
Brazil provides 26% of Latin America’s service imports, and the United Kingdom provides 19% of Europe’s. 
South Africa is home to several well-established, innovative banks that are well placed to offer low-cost, digital services to millions of currently unbanked African households and businesses. 
Indeed, South African banks already command a 12% share of Sub-Saharan Africa’s banking market (outside their home country); with the regional market growing by more than 10% per year, they could nearly double this share by 2030. 
The potential is just as promising in insurance. 
South Africa has a highly developed insurance sector, with a long history of creating products for every demographic and income level. 
It is ideally placed to provide insurance to the rest of Sub-Saharan Africa, where just 1% of households have insurance of any kind. 
South Africa also has been punching below its weight in merchandise trade. 
It should be playing a much more active role both in meeting Africa’s demand for imports and in stimulating industrial and agricultural development across the continent. 
The recently announced Tripartite Free Trade Area, which will create an integrated market across 27 African countries, is a major opportunity for South Africa and the rest of the region. 
That agreement could help South Africa triple its exports of agricultural goods. 
It could also bring products from other African countries into South Africa’s strong supply chains and trade networks, benefiting the entire region. 
The key to reigniting South Africa’s economic growth is an ambitious regional strategy driven by government and business leaders working in partnership. 
A massive scale-up of vocational education is particularly important, as this will provide young South Africans with the technical skills needed to support the expansion of export industries. 
Putting in place infrastructure to support growth – notably power generation, which currently lags demand – will also be crucial. 
South Africa’s economic transformation since its transition to democracy two decades ago has been remarkable. 
But its renaissance is in danger of running out of steam. 
Only by boldly seizing the initiative can South Africa put itself at the core of Africa’s economic renewal, and only by embracing its role as regional leader can it revitalize its own prospects. 

Africa Versus the International Criminal Court 
NEW YORK – On October 19, South African President Jacob Zuma’s government delivered documents to the United Nations (UN) signaling its intent to withdraw from the International Criminal Court (ICC). 
Many ICC observers were taken by surprise. 
A week earlier, Burundi charted a course to become the first member state to leave the ICC. 
The ICC had indicated that it would investigate, and possibly indict, government officials after Burundian President Pierre Nkurunziza threw his country into turmoil by pursuing a third term, in violation of the constitution. 
Many people have died in the unrest Nkurunziza caused, giving him and other officials an incentive to withdraw from the ICC. 
But no indictments are pending in South Africa, leading many people to wonder what precipitated the government’s decision. 
Withdrawing from the ICC is no simple matter. 
Under the 2002 Rome Statute, which established the court, a country remains an ICC member for at least one year after it notifies the UN of its intent to withdraw. 
Moreover, that country is required to continue cooperating with the ICC on any proceedings that began prior to the effective withdrawal date. 
Thus, the ICC will be allowed to complete any prosecutions that it begins within the next year. 
That means that the court not only can indict Burundian officials; it can also pursue them indefinitely if they do not surrender, or are not turned in by the Burundian government. 
In South Africa, the Zuma government’s decision to withdraw from the ICC is legally questionable. 
In fact, it may not even take effect, because Zuma has so far acted on his own. 
He has not brought the matter before the South African Parliament, which ratified the original decision to join the ICC and should participate in any decision to withdraw; and he has not given the South African public an opportunity to debate the issue or influence an eventual legislative decision. 
If this unilateral action stands, it will leave South Africa in an ambiguous position. 
While the country’s status as an ICC member state would end, the government would still be bound to cooperate with the ICC in accordance with the Implementation Act that the South African Parliament adopted in 2002. 
The decision to withdraw seems to reflect Zuma’s own fit of pique following Sudanese President Omar al-Bashir’s trip to South Africa in June 2015. 
Bashir was indicted by the ICC in 2009 and 2010 for genocide, crimes against humanity, and war crimes committed in Darfur, and when he attended an African Union summit in South Africa last year, the Southern Africa Litigation Center (SALC), a nongovernmental organization, filed suit under the 2002 Implementation Act, demanding that the government arrest him. 
The High Court and the Supreme Court of Appeal of South Africa both ruled in the SALC’s favor, but Zuma’s government thwarted their decisions by helping Bashir slip out of the country. 
The Zuma government also appealed their rulings, and the matter was scheduled to come before the country’s Constitutional Court on November 22. 
But when the government announced its ICC decision, it also said it would withdraw its Constitutional Court appeal, suggesting that Zuma is hitting back through other means at those who have embarrassed him through the judiciary. 
Another factor behind recent decisions to withdraw from the ICC is an ongoing campaign among some countries to accuse the court of singling out African leaders. 
Although this charge has some merit, it is worth mentioning that all prosecutions against Africans have been referred to the ICC by African governments themselves or the UN Security Council. 
The only exception is a case involving post-election ethnic violence in Kenya in 2007, which was referred to the ICC by former UN Secretary-General Kofi Annan after he helped mediate the dispute. 
As it happens, the ICC will likely have a more diversified caseload soon. 
It is actively monitoring crimes in other parts of the world, including the widespread extrajudicial killings of suspected drug users in the Philippines. 
The ICC has only completed a handful of prosecutions in Africa, but its actions seem to have significantly curbed violent crimes in several countries. 
It would be very unfortunate if other African states chose to follow the Burundian and South African governments’ lead. 

South Africa’s Rhino Paradox 
JOHANNESBURG – Earlier this year, South Africa’s Constitutional Court overturned a 2009 moratorium on trade in rhinoceros horns. 
It was a devastating blow for animal conservation groups, which had hailed a measure that aligned South Africa with the global ban on the trade in effect since 1977. 
But as the court’s ruling sinks in, commercial breeders and animal rights groups face a crucial question: could the creation of a legal market for farmed horns curb a poaching pandemic that claims some 1,500 wild rhinos annually? 
For South Africa’s rhino industry, the court’s decision was a watershed. 
John Hume, the world’s most successful rhino breeder, hosted the country’s first online horn auction in August. 
Writing on the auction’s website, he argued that “the demand for rhino horn is high, and open trading of the horn has the potential to satisfy this demand to prevent rhino poaching.” 
Opponents of the trade say demand for horns could increase as a result of legalization, reviving dormant interest. 
This growth could outpace commercial supply, and even fuel more illegal poaching of wild animals. 
Critics also worry that ending the ban will remove any lingering stigma associated with possessing rhino horn, further boosting demand. 
Breeders and traders like Hume concede that demand “is not going to die down anytime soon.” 
But they argue that because horns are a renewable resource – they grow back when trimmed, albeit slowly – what South Africa actually needs are incentives to encourage responsible breeding and conservation. 
“If we do not take the steps to meet the demand,” Hume argues, “we won’t save the rhino.” 
We still do not know how the court’s decision will affect demand for a resource that is prized throughout Asia for its medicinal value. 
What is clear, however, is that placing too much trust in a commercial conservation approach is risky. 
Evidence suggests that while farming of rhinos may have niche market possibilities, it will not prevent poaching of wild rhinos. 
Similar efforts to protect wild animals through farming have fallen short. 
For example, a 2010 study in Vietnam found that commercial farming of the Southeast Asian porcupine, a popular meat source, had not dramatically reduced the hunting of wild porcupines. 
It is the same story for elephant ivory, bear bile, and mule deer musk. 
Demand for wild products often far exceeds what commercial breeding can realistically offer. 
Commercial breeding programs are further disadvantaged because of the perception among some buyers that wild products are more valuable. 
As University of Johannesburg scientist Laura Tensen has noted, “wild animals are considered superior because of their rarity and high expense.” 
That is especially true for rhinos. 
Poachers often prove the veracity of their illicit product by showing buyers horns that have been removed from the base of the skull, an extraction method that kills the animal. 
Only the most conscience-stricken consumer would ensure that horns they purchase are sourced from licensed breeders. 
Historically, poaching has also been immune to fluctuations in the retail price of rhino horns. 
For the price mechanism to eradicate poaching, demand would need to bottom out. 
With demand actually increasing, and without a threshold price to encourage breeding, supply-side interventions are unlikely to be effective in protecting wild rhinos. 
Currently, rhino horn sells for as much as $60,000 per kilogram in parts of Asia. 
Breeders are convinced that with permitting systems and detection technologies, legal horns could be identified, law enforcement could prevent illegal horns from being trafficked, and domestic trading could reduce the stress on wild populations. 
But these arguments hinge on a number of conditions that are, at the moment, purely aspirational. 
For starters, commercial breeding will succeed only if farmed horns are viewed as a substitute for products sourced from wild animals. 
But as researchers like Tensen report, that is unlikely in the near term, given the higher status associated with non-farmed products. 
Law-enforcement efforts would also need to be increased to detect illegal supplies and break up laundering rings. 
Unfortunately, the illegal syndicates that smuggle wildlife products, often with assistance from government officials, are adept at evading detection. 
Finally, the pro-farming argument assumes that commercial breeders will eventually supply horn at lower prices than poachers. 
But captive breeding is costly. 
Scientists at the University of California, San Diego, for example, have shown that white rhinos rarely produce fertile offspring in captivity. 
Furthermore, the horns of young adults grow by only about six centimeters a year, and that rate diminishes with age. 
Commercial breeders dispute that their operations amount to “captivity,” and Hume’s model is meant to replicate wild conditions as much as possible. 
Yet if farmed solutions were ever to be seen as an alternative to wild harvesting, other breeders would need to replicate such conditions. 
The cost would be significant, and corners would no doubt be cut. 
While breeders are eager to defend their trade, economists have debunked the myth that a legal domestic market in rhino horns will conserve wild populations. 
Even if farmed supplies from South Africa satisfied a portion of the demand globally, it will not alter demand among consumers drawn to wild product, or those who are indifferent about the source. 
South Africa will most likely soon be home to parallel markets, with extensive laundering of illegal horn. 
That may be acceptable to breeders, but it defies reason for those trying to conserve wild rhinos. 

South America's Growing Financial Storm 
CAMBRIDGE: The international financial crisis continues, with South America feeling the brunt of the storm. 
Deep economic emergencies have hit Brazil, Peru, Colombia, Ecuador, and Venezuela. 
Brazil's crisis will cause a recession in neighboring Argentina. 
Even Chile, the outstanding performer of the region, will have very slow growth in 1999. 
South America's unfolding crisis points out, once again, three major problems in today's international financial system: pegged exchange rates, volatile international capital movements, and the International Monetary Fund itself. 
South America was bound to experience some pain in the wake of East Asia's financial crisis of 1997-8. 
Most South American countries are heavy commodity exporters, and the Asian crisis drove down world market prices for a wide range of commodities, including oil, copper, and agricultural products. 
Ecuador, Colombia, and Venezuela are hard hit by falling oil prices. 
Chile has been hit by the remarkable decline in copper prices, with prices falling from around $1.30 per pound to the current $0.61 per pound. 
Brazil suffers from declining agricultural prices, though it benefits from falling oil prices. 
Pain was compounded in three ways. 
First, much of the region pegged its exchange rates to the U.S. dollar. 
After the start of the Asian crisis, and with the fall in commodities prices, markets began to anticipate currency devaluations in the region. 
In a flexible exchange rate system, currencies would have gradually depreciated, as happened in some other commodity exporting countries (such as Canada, Australia, and New Zealand). 
Instead, many Latin American countries tried to defend the exchange rates by raising interest rates sharply. 
This was a mistake: high interest rates helped to push their economies into deep recession. 
Second, international banks that had been lending to South America abruptly withdrew their funding in the second half of 1998. 
This has become a familiar story. 
Big international banks pour in lots of short term capital into a region, and then suddenly pull the plug, demanding immediate repayments, and being unwilling to roll over the credits. 
In the five main crisis countries of East Asia (Indonesia, Korea, Malaysia, the Philippines, and Thailand), for example, international banks lent $65.3 billion in net flows in 1996, only to withdraw $25.6 billion in 1997 and $35.0 billion in 1998. 
In South America, it seems to be the same story, though we don't have the data yet. 
In South America, the big crunch came after Russia's default of August 18, 1998. 
When Russia announced its suspension of payments on debt servicing, banks drew in their credits from other emerging markets around the world, especially countries with overvalued currencies and large bank debts. 
Brazil was hard hit, and eventually thrown into recession. 
The same occurred in most of Andean countries -- Venezuela, Colombia, Ecuador and Peru. 
These countries were vulnerable because of the falling commodities prices and the overvalued currencies. 
Sudden withdrawal of credits was enough to push them to the edge of recession. 
The third stage of the crisis involves the International Monetary Fund. 
This institution, supposedly in place to service its members, is a mix of incompetence and bias towards creditor interests. 
In the Fall of 1998, the IMF called the Latin American Finance Ministers to Washington for a crisis-prevention meeting. 
But the IMF's advice actually deepened the crisis. 
The IMF told all of the countries to raise interest rates to restore international investor confidence. 
In the case of Brazil, the IMF also told the government to prevent a depreciation of its highly overvalued exchange rate. 
This high-interest rate strategy helped push the region into a sharp decline in the first half of 1999. 
Brazil's defense of its currency backfired. 
Brazil spent $45 billion in foreign exchange reserves in a failed attempt to defend the currency, which ended up collapsing anyway in January 1999. 
Even with all of these mistakes, the IMF keeps its iron-grip on the fates of South America. 
If it rejects a country's policies, the country faces virtual destruction by market panic, as has now occurred in Ecuador. 
The Managing Director, Mr. Michel Camdessus, thinks he is the economic czar of the region, overriding his own staff as he dispenses commands to sovereign governments. 
The developing world should not wait for a "new financial architecture" to save itself. 
Four steps should be considered: 
* countries should allow for flexibility in exchange rates, rather than trying to defend fixed exchange rates with crushingly high interest rates; 
* regional groups of countries -- in Central America, South America, and elsewhere -- might consider steps towards monetary union within the region. 
Regional currencies, flexible against the dollar and Euro, might be a better defense against financial panic than individual national currencies; 
* countries should limit short-term borrowing from international banks. 
Short-term bank lending from abroad is unstable and therefore dangerous; 
* developing countries should raise their collective voices against the excessive power of the International Monetary Fund. 

South Asia at War 
CAMBRIDGE – Last month’s terrorist assault in Mumbai targeted not only India’s economy and sense of security. 
Its broader goal was to smash the India-Pakistan détente that has been taking shape since 2004. 
The attackers did not hide their faces or blow themselves up with suicide jackets. 
Anonymity was not their goal. They wanted to be identified as defenders of a cause. 
Unless this cause is fully understood, and its roots revealed across the region, this attack may prove to be the beginning of the unmaking of South Asia. 
Regional conflict, involving all of the region’s states and increasing numbers of non-state actors, has produced large numbers of trained fighters, waiting for the call to glory. 
Within both India and Pakistan, economic disparities and a sense of social injustice have created fertile ground for conflict. 
The use and abuse of religious fervor, whether “jihadi” or “Hindu fundamentalist,” are striking at the roots of communal harmony across South Asia. 
Much of the current trouble can be traced to Afghanistan, whose tragedy could never have remained confined within its designated borders. 
The dynamics of the region changed when the Afghan freedom fighters of 1980’s were converted into “mujahidin” through a criminal enterprise in which both the West and the Muslim world happily participated. 
Pakistan, always insecure about India, became the hub of this transformation. 
The West thought it had moved on after the fall of the Soviet empire, but the region – and increasingly the global community – continues to pay a heavy price for this unholy project. 
The ills of two decades in South Asia can be attributed to the Afghan jihad years: the rise of the Taliban, the dominance of Pakistani-sponsored religious fanatics within the Kashmir freedom movement, and the eventual spread of sectarian conflict within Pakistan. 
In Afghanistan, Pakistan’s military and intelligence agencies sought “strategic depth” against India. 
Moreover, they wanted payback for India’s role in supporting the revolt in the 1960’s and 1970’s that led to Bangladesh’s independence from Pakistan. 
India is not blameless here. 
It was pursuing a two-pronged strategy – making the argument that all was well in Kashmir (a blatant lie) and supporting ethnic confrontation in Pakistan. 
Violent intelligence wars between Pakistan’s Inter-Services Intelligence (ISI) and India’s Research and Analysis Wing (RAW) have become a brutal reality in South Asia. 
Lashkar-e-Taiba (LET, Army of the Pure), a Pakistan-based militant outfit supporting insurgency on the Indian side of Kashmir, was a product of these years. 
According to Indian investigators, this group is implicated in the Mumbai attacks. 
Pakistan’s clampdown on its offices throughout the country essentially confirms this conclusion, though Pakistan is publicly demanding more evidence. 
LET was the armed wing of an Ahle-Hadith organization, a South Asian version of Saudi-style fundamentalism, whose purpose was to hit Indian forces in Kashmir. 
Though the group was banned by former Pakistani President Pervez Musharraf after the terrorist attacks on the United States of September 11, 2001, some of its operators went underground and others joined Jamaat-ud-Dawa (JuD, Party of Proselytizing) – an organization that runs religious educational centers and charities. 
Given its established linkages with Pakistan’s intelligence outfits, the group was never targeted strongly. 
In fact, it was even involved in rescue operations on the Pakistani side of Kashmir after the devastating 2005 earthquake there. 
What Pakistan’s military strategists failed to realize was that groups like LET and JuD had local agendas as well – converting Pakistan into a theocracy. 
Hafiz Saeed, the founder of LET and currently the head of JuD, once proudly argued that: “We believe in the Clash of Civilizations, and our Jihad will continue until Islam becomes the dominant religion.” 
JuD, along with many other like-minded groups, radicalized thousands of young Pakistanis. 
Through its web and print publications, it also routinely challenged the teachings of the Sufi mystics who originally brought Islam to South Asia by promoting pluralism and love for humanity. 
Even while demanding strong action against JuD, India must recognize that Pakistan is itself a victim of terror. 
Any military confrontation with Pakistan will only empower Pakistani radicals. 
India also needs to look inward, as anti-Muslim violence in Gujarat and the activities of Hindu fundamentalist groups have potentially created recruitment opportunities for Muslim extremists within India. 
An amicable resolution of the Kashmir conflict will only help improve peace prospects in South Asia. 
For Pakistan, a concerted and sustained effort against all extremist groups operating in the country is necessary. 
Militants of all stripes must be decommissioned completely and transparently. 
Equally important for Pakistan is to expand and reform its public education system and improve basic services so that radical groups cannot lure young people into their educational and welfare networks. 
Otherwise, the status quo can gravely threaten Pakistan’s – and South Asia’s – future. 

Trade in a Time of Protectionism 
COLOMBO – As China’s economy slows and growth in the developed world remains anemic, governments across Asia are working to keep their economies on an upward trajectory. 
In Sri Lanka, where I am Prime Minister, the challenge is to find a way to accelerate our already steady economic growth. 
One thing is clear: We cannot expect the rest of the world to welcome our economic ambitions the way it once opened its arms to China’s rapid rise as an economic power or – in earlier decades – cheered on the growth of Japan and the so-called Asian Tigers, including South Korea. 
Today, we Asians are witnessing, on an almost daily basis, fierce political assaults on the tools and policies that have helped lift hundreds of millions of our citizens out of poverty. 
Indeed, this year, free trade appears to be the scapegoat of choice among the world’s assorted populists and demagogues. 
In the United States’ presidential election campaign, for example, the leading candidates in both the Republican and Democratic primaries have questioned the wisdom of seeking greater openness in world trade. 
In the United Kingdom, euroskeptics campaigning for the country to leave the European Union denigrate the benefits of the single European market. 
Elsewhere in Europe, populists are demanding that the drawbridges of trade be raised. 
Open trade is under attack even in parts of Asia. 
Japanese Prime Minister Shinzo Abe had to drag some of his country’s special-interest groups kicking and screaming into the Trans-Pacific Partnership. 
Similarly, Indian Prime Minister Narendra Modi has been unable to convince state governors to lower trade barriers within the country. 
And in Sri Lanka, the “economic and technology agreement” that my government recently planned to sign with India, in order to bring about greater economic integration, has come under ferocious political attack. 
For the most part, however, Asia’s political leaders retain a very positive view of the benefits of open trade. 
After all, much of the past four decades of robust growth can be attributed to the fact that world markets were receptive to Asian goods. 
All we needed to do to get our economies growing, it seemed, was to identify our comparative advantage, produce quality goods at competitive prices, and then export as much as we could. 
For decades, this model worked extraordinarily well, and China, Japan, South Korea, and the countries of Southeast Asia benefited greatly from it. 
Even today, with world trade in the doldrums, regional trade remains a key component of these countries’ growth strategies. 
In South Asia, however, we have been much slower to take advantage of the opportunities that can arise from more open trade – with regrettable consequences: The region is home to 44% of the world’s poorest people. 
We have an obligation to try to use trade to lift our people out of poverty. 
But with free trade rapidly becoming a global bugbear, the window for generating growth by tapping into world markets appears to be closing quickly. 
If trade is to become a key driver of growth in Sri Lanka or elsewhere in the region, we will most likely have to generate it ourselves – by transforming South Asia from one of the world’s least economically integrated regions into one of its most integrated. 
Today, intra-regional trade accounts for just 5% of South Asia’s total trade, compared to 25% for the Association of Southeast Asian Nations. 
This vast untapped potential presents the region with an opportunity for growth that does not rely on the strength of the world economy. 
Last year, the World Bank estimated that annual trade between India and Pakistan could jump from $1 billion today to $10 billion – if tariffs and other barriers were slashed to levels recommended by the World Trade Organization. 
Tariffs and other needless restrictions hobble trade among all South Asian countries. 
These obstacles were supposed to be swept away with the establishment of the South Asian Association for Regional Cooperation, the largest of all the world’s regional trading blocs, with close to two billion people. 
But SAARC’s reliance on bilateral negotiations has slowed the process to a crawl, keeping the region much poorer than it needs to be. 
If SAARC is to succeed, a new multilateral mechanism for cooperation will be needed. 
As climate change takes its toll, the stakes will only get higher. 
Our still largely agrarian countries, with much of their territory in low-lying coastal regions, are dangerously exposed to rising sea levels and violent weather. 
Receding Himalayan glaciers will disrupt the lives – and livelihoods – of some 600 million people in Pakistan, Nepal, and northern India. 
The political obstacles to effective action will be stiff. 
Indeed, there is political opposition to greater regional economic integration in every SAARC country. 
But the scale of the challenges facing the region should impel all of SAARC’s members toward greater cooperation. 
It is time for SAARC’s member governments to rise to the challenge. 
By working together, we can lay the foundations of a regional economy as dynamic as that of our neighbors to the east. 

South Asia’s Whispering Enemies 
ISLAMABAD – The leaders of the member countries of the South Asian Association for Regional Cooperation met last week in the Maldives for their 17th annual summit. 
Previous SAARC summits achieved little in the way of regional cooperation. 
If they are remembered at all, it is for the progress made in getting India and Pakistan to talk to each another. 
While this time was no different, there are growing signs of a thaw in relations. 
Improvement in the India-Pakistan relationship – the main obstacle to greater economic cooperation in South Asia – has come whenever the two countries’ governments have agreed to work together to achieve a common good. 
That happened in 2004, when, after agreeing to initiate what they called a “composite dialogue” that would cover eight issues that had kept them apart for decades, India and Pakistan also agreed to work towards the creation of the South Asia Free Trade Area (SAFTA). 
Without such limited agreements, stasis in South Asia is the rule. 
SAFTA was launched in July 2006, but it did little to increase trade between India and Pakistan, which has barely developed since 1947, when the two countries fought the first of many trade – as well as real – wars against each other. 
In November 2008, after a group of terrorists attacked Mumbai, India’s financial center, India accused Pakistan of involvement in the attack and suspended all dealings with its neighbor. 
The composite dialogue was put on hold, with both sides unable to cast off the heavy burden of decades of hostility and intense rivalry. 
Nevertheless, bilateral relations have warmed slightly over the past 18 months. 
The process began at a meeting in Bhutan between Prime Minister Manmohan Singh of India and Yousaf Raza Gilani, his Pakistani counterpart. 
India agreed to begin talking again with its neighbor, accepting Pakistan’s argument that it, too, was a victim of terrorism. 
Since that meeting, the two countries’ prime ministers have met four times, always on the sidelines of international gatherings. 
Their foreign ministers have met three times, and their commerce ministers once. 
The Indians agreed to resume the suspended dialogue with Pakistan, despite the failure fully to resolve the Mumbai attacks legally, as well as Pakistan’s inability or unwillingness to move against the two domestically-based terrorist groups that India had accused of having masterminded those and several other attacks on its territory. 
The most important outcome of these renewed contacts was the Pakistani cabinet’s decision, on November 2, to grant India most-favored-nation (MFN) status in trade relations. 
Under the rules of the World Trade Organization, MFN status should have been given after both countries became members. 
India granted Pakistan MFN status in 1996, but Pakistan held back, hoping to win concessions from India on the unresolved issue of Kashmir. 
That, of course, did not happen, and Pakistan has at last changed its mind. 
What that implies is that trade with India will be conducted according to the same set of regulations and tariffs that govern other countries’ trade with Pakistan. 
India responded to Pakistan’s gesture by supporting its bid for membership of the United Nation’s Security Council, and by withdrawing its objections to the European Union’s grant of special privileges to Pakistani textile exporters. 
So the Maldives SAARC meeting offered an opportunity for further easing of tensions. 
The summit started with a one-on-one meeting between the two countries’ prime ministers. 
After an hour together, they emerged to tell the press that no new steps aimed at improving relations had been agreed upon. 
Gilani did, however, say that they had “discussed all core issues, including Kashmir,” and that they “hope the next round will be more constructive, more positive, and will open up a new chapter in the history of both countries.” 
Given that Pakistan’s relations with the United States are arguably at an all-time low, Pakistani leaders seem determined to lower the temperature on its disputes with other global powers, particularly India. 
Gilani extended another invitation to Singh to visit Pakistan. 
Singh, in keeping with past practice (he has received at least six invitations from various Pakistani leaders, starting with then-President Pervez Musharraf), remained non-committal, but showed warmth towards his Pakistani counterpart. 
“I always regard Gilani as a man of peace, and every time I meet him my belief is further strengthened,” he told the press. 
More was expected from the SAARC summit than was achieved, owing in large part to the unmet expectations for the meeting between the Indian and Pakistani prime ministers on the sidelines of the main event. 
The “Addu Declaration,” issued after the conclusion of the meeting, promised small moves by the eight SAARC member states, rather than a breakthrough on matters such as the settlement of trade disputes, granting of transit rights, and encouragement of cross-border investments. 
Enduring hostility between India and Pakistan, the region’s largest economies, remains the key barrier to such a breakthrough. 
Neither Gilani nor Singh was certain of domestic public support for further warming of relations, so they played it safe, rather than displaying the bold leadership that the occasion demanded. 

Where We Must Vaccinate 
KARACHI/GANDHIDHAM-GUJARAT – With measles outbreaks currently spreading across Europe and the Midwestern United States, and meningitis infecting US college students, health experts are doing something they never thought they’d have to do in early 2017: reminding people in developed countries that vaccines save lives. 
Perhaps vaccines are a victim of their own success: they work so well in protecting people against certain illnesses that many in the West have forgotten how devastating preventable diseases can be. 
With the recent outbreaks in the US and Europe, parents are being reminded that foregoing vaccinations for their children is a deadly gambit. 
Sadly, in many other parts of the world, particularly South Asia, parents need no reminding that immunization saves lives. 
What they need is access to vaccines. 
Preventable disease outbreaks, rare as they are in Western countries, are all too frequent occurrences in a region that is home to the world’s largest number of unvaccinated children. 
In the early 1980s, one of us almost lost our baby son to bacterial meningitis, because no vaccine was available in Pakistan at the time. 
The boy made a full recovery, but only because of an early diagnosis and care at a premier hospital, which is out of reach for many parents in Pakistan. 
The boy’s siblings were later vaccinated, too, but only after stocks of the vaccine were secured in the US and hand-carried back to Pakistan. 
Fortunately, going to such lengths is largely unnecessary today. 
On average, 90% of children in South Asia now receive vaccines for preventable illnesses such as tetanus, influenza, diphtheria, and pertussis, and the number of infants protected against Hepatitis B has increased by nearly 60% in the last decade. 
Moreover, six countries in the region were declared polio-free in 2014, following extensive vaccination campaigns. 
Only those living in marginalized and remote areas remain unvaccinated for polio, typically owing to local hesitancy and refusals. 
Collectively, these remarkable figures amount to a public health miracle. 
But too many children are still suffering needlessly. 
The just-concluded World Immunization Week (April 24-30) should spur us to redouble our efforts to vaccinate the millions of children in South Asia who remain unprotected from preventable illnesses. 
Globally, more than 11 children under the age of five die every minute, many of them in South Asia, from preventable diseases. 
Despite the region’s progress, one in four children remain unprotected against diseases like measles and hepatitis, and the figures are even higher for major killers such as pneumonia and meningitis. 
As a result, the mortality rate for children in South Asia today is almost twice as high as it was in the US 50 years ago. 
We have the tools to address these shortcomings and ensure that no child dies unnecessarily from an illness that vaccination could have prevented. 
To succeed, however, several obstacles must be overcome. 
First, we must resolve systemic weaknesses in the region’s underdeveloped health systems, by improving training for health workers, ensuring proper storage and transportation of vaccines, and developing effective ways to deliver them. 
These improvements, together with more effective information sharing in the medical profession, are critical for better planning and accountability as well. 
Second, we must actively confront the growing anti-vaccine lobby, which threatens to undo the gains made in recent years. 
These groups spread falsehoods about vaccine safety that can lead parents to leave their children unprotected. 
Foregoing vaccinations not only puts the health of individual children at risk; it also raises the likelihood of outbreaks that jeopardize the health of entire communities. 
Finally, we must continue to encourage countries in the region to increase vaccine coverage rates, in particular with newer vaccines proven to protect against pneumonia and diarrhea, the two leading infectious killers of children. 
Positive steps are already being taken to realize these goals. 
In Pakistan, for example, officials in Punjab province, hoping to protect one million children from a common form of diarrhea, recently introduced the rotavirus vaccine. 
Next door, India has vaccinated close to four million children since launching an initiative to expand the rotavirus vaccine’s coverage in ten states, and plans to reach 13 million children by the last quarter of 2017. 
There is still much to do in both countries. 
In India, 13 million children annually are not reached with the rotavirus initiative; in Pakistan, five million children annually are not vaccinated. 
But, with help from Gavi, the Vaccine Alliance, more vaccines are being brought to the world’s poorest communities through funding, training, and delivery. 
Health officials everywhere can learn from and replicate the gains made in these two countries. 
We are at a pivotal moment in the global vaccination drive. 
As pediatric professionals who have dedicated our lives to protecting children from preventable diseases, we believe it is within the world’s capacity to end this needless suffering. 
Vaccines are a proven tool for improving children’s health and development. 
Ensuring that children have access to them is an achievable public health goal behind which parents and pediatricians everywhere should unite. 

Avoiding Conflict in the South China Sea 
OXFORD – When a US Navy P8-A surveillance aircraft recently flew near Fiery Cross Reef in the Spratly Islands in the South China Sea, it was warned eight times by the Chinese Navy to leave the area. 
Chinese Foreign Minister Wang Yi said that, “China’s determination to safeguard its sovereignty and territorial integrity is as firm as a rock.” 
US Defense Secretary Ashton Carter replied that, “[T]here should be no mistake about this: the United States will fly, sail, and operate wherever international law allows us, as we do all around the world.” 
So, is a US-China conflict in the South China Sea imminent? 
In 1995, when I was serving in the Pentagon, China began building structures on Mischief Reef, which is claimed by the Philippines and lies much closer to its shores than to China’s. 
The US issued a statement that we took no position on the competing claims by five states over the 750 or so rocks, atolls, islets, cays, and reefs that comprise the Spratlys, which cover a vast area – 425,000 square kilometers (164,000 square miles) – of the South China Sea. 
We urged that the parties involved settle the disputes peacefully. 
But the US took a strong stand that the South China Sea, which includes important sea lanes for oil shipments from the Middle East and container ships from Europe, and over which military and commercial aircraft routinely fly, was subject to the United Nations Law of the Sea Treaty (UNCLOS). 
To back up its territorial claim, China relies on a map inherited from the Nationalist period – the so-called “nine-dashed line,” which extends nearly a thousand miles south of mainland China and sometimes as close as 40 or 50 miles from the coastline of states like Vietnam, Malaysia, Brunei and the Philippines. 
All of these states claim the 200-mile exclusive economic zones granted under UNCLOS. 
When the dispute over Mischief Reef erupted, Chinese officials failed to clarify the meaning of the nine-dashed line, but, when pressed, they agreed that the dashes demarcated areas where China had sovereign claims. 
At the same time, they agreed that the South China Sea was not a Chinese lake, and that it was governed by the UN treaty. 
On this basis, the US and China avoided conflict over the issue for nearly two decades. 
But China did not avoid conflicts with its maritime neighbors. 
Although it pledged to adhere to a code of conduct negotiated by the Association of Southeast Asian Nations in 2002, it used its superior military might in disputes with the Philippines and Vietnam. 
In 2012, Chinese patrol vessels chased Philippine fishing boats away from Scarborough Shoal off the Philippine coast, and the Philippine government has taken the dispute to the International Tribunal for the Law of the Sea (ITLOS), which China claims has no jurisdiction. 
In 2014, after China stationed an oil rig in waters claimed by Vietnam, ships from the two countries engaged in ramming and water-cannon battles at sea; anti-Chinese riots in Vietnam followed. 
The region’s smaller states sought American support. 
But the US remained careful not to be drawn into the competing claims over sovereignty, some of which are tenuous, while on others China sometimes has a stronger legal position. 
Moreover, the US had to focus on larger issues in its relationship with China. 
This began to change when China initiated an active policy of dredging sand to fill in reefs and build islands in at least five locations. 
Earlier this year, analysts released images of what is expected to be a 10,000-foot (3,000-meter) runway on Fiery Cross Reef. 
The US argues that UNCLOS grants foreign ships and planes free access beyond a 12-mile territorial limit, while China claims that military flights cannot cross its 200-mile economic zone without its permission. 
If China claimed such a zone for each of the sites it occupies, it could close off most of the South China Sea. 
As one US official put it, China seems to be trying to “create facts on the ground” – what Admiral Harry Harris, the US commander in the Pacific, calls a new “great wall of sand.” 
China correctly declared that it was within its sovereign rights to dredge, and that it was merely following the lead of its neighbors, whose governments had also been creating structures to bolster their claims. 
But American suspicions were heightened by the fact that in 2013, in a separate dispute between China and Japan over the Senkaku/Daiyou Islands in the East China Sea, the Chinese government unilaterally declared an Air Defense Identification Zone without prior warning. 
The US response was to fly two B-52 bombers through the unrecognized zone. 
This set a precedent for the recent naval reconnaissance flight (which had a team of CNN reporters on board). 
The US response was designed to prevent China from creating a fait accompli that could close off large parts of the South China Sea. 
Nevertheless, the original policy of not becoming embroiled in the sovereignty dispute continues to make sense. 
The irony is that the US Senate’s failure to ratify UNCLOS means that the US cannot take China to ITLOS over its efforts to convert reefs into islands and claim exclusion zones that could interfere with the right of free passage – a major US interest. 
But, because China has ratified UNCLOS and the US respects it as customary international law, there is a basis for serious direct negotiation over clarification of the ambiguous nine-dashed line and the preservation of freedom of the seas. 
With properly managed diplomacy, a US-China conflict in the South China Sea can and should be avoided. 


South Korea’s Looming Crisis 
SEOUL – Twenty years after the Asian financial crisis, South Korea seems to have learned its lesson, having taken great pains to strengthen its economic resilience. 
But now the country is confronting a new set of internal and external risks, which may foreshadow another major economic crisis – or worse. 
Given the ongoing nuclear crisis with North Korea, a new bout of economic tumult is the last thing the country needs. 
In July 1997, a currency crisis that struck Thailand quickly spread to neighboring economies. 
South Korea was not hit right away, and many believed that it would be spared. 
By that November, however, the country faced a sudden withdrawal of foreign capital, which, together with financial institutions’ inability to borrow from abroad, quickly depleted the country’s international reserves. 
The following month, South Korea turned to the International Monetary Fund for assistance, and launched painful structural reforms. 
Companies and financial institutions went bankrupt, and millions of jobs were lost. 
In 1998, the economy contracted by 5.5%. 
But things turned around a year later: GDP growth soared to 11.3%, and government-led reforms made progress toward addressing structural weaknesses, including an under-supervised financial system and an over-leveraged corporate sector. 
As a result, the economy weathered the 2008 global financial crisis far better than most, foreign-exchange reserves far exceed short-term external liabilities, and companies and banks are financially sound. 
In this respect, the Asian financial crisis amounted to a blessing in disguise for South Korea. 
Yet South Korea is now beset by some of the same structural problems Japan faced during its two decades of stagnation: rapid population aging, labor-market inefficiency, institutional weakness, and low productivity in the service sector. 
Demographic constraints are tightening. 
South Korea’s fertility rate fell to 1.17 last year – one of the world’s lowest – and continues to decline. 
Fourteen percent of the population is aged 65 or older, a figure that is expected to reach 28% by 2035. 
As the labor force shrinks and the burden of supporting the elderly grows, the economy is losing vitality. 
More problematic, however, are South Korea’s low labor-market efficiency and weak institutions. 
According to the World Economic Forum’s latest global competitiveness report, South Korea ranks 73rd worldwide for labor-market efficiency, as a result of tight restrictions on employee-employer relations. 
And it ranks 58th for institutional quality, owing to excessive government regulations, opaque corporate governance, and policy instability. 
Finally, productivity in the services sector amounts to just 45% that of the manufacturing sector, on average, compared with an OECD average of 90%. 
The problem is most acute in finance, real estate, business services, and community and government services. 
Externally, South Korea is highly vulnerable to the escalating North Korean nuclear threat. 
In recent months, North Korea has fired several ballistic missiles and conducted a nuclear test, spurring an exchange of incendiary rhetoric between North Korean leader Kim Jong-un and US President Donald Trump. 
This war of words, in which both sides have threatened to launch “preemptive strikes,” is raising fears of a military conflict on the Korean Peninsula. 
The United States is now attempting to pressure China to take responsibility for curbing the North Korean nuclear threat, with the US Treasury considering imposing sanctions on Chinese individuals, companies, and banks doing business with North Korea. 
But while China has lately agreed to enforce economic sanctions more actively, it doesn’t want the North Korean regime to collapse. 
Moreover, China has focused some of its ire on South Korea. 
Beyond aggressively calling for the withdrawal of the US military’s Terminal High Altitude Area Defense (THAAD) system from South Korea, which it views as a threat to its own security and the region’s strategic balance, China is using its economic might to retaliate against the South. 
In particular, as a result of China’s ban on group tours to South Korea, 49% fewer Chinese tourists visited the country in the first eight months of this year than in the same period last year. 
Moreover, China accounts for 25% of South Korea’s total exports, giving it substantial leverage on trade. 
Making matters worse, South Korea’s second-largest trading partner – the US, which accounts for 13% of all exports – is also putting pressure on the country. 
Despite the critical importance of re-affirming the US-South Korea alliance, the Trump administration, concerned about the massive bilateral trade deficit, has threatened to renegotiate the bilateral free-trade agreement. 
While the economic impact of such a move would be serious for South Korea’s export-dependent economy, the most urgent imperative is to avoid any military conflict on the Korean Peninsula. 
To that end, South Korean President Moon Jae-in, a longtime advocate of the “Sunshine Policy” toward the North, wants to employ “balancing sanctions and dialogue.” 
But, so far, South Korea has not managed to improve diplomatic relations with its own ally, the US, not to mention with China. 
And it has gotten nowhere near reviving inter-Korean talks. 
This failure has many Koreans scared. 
Would the unpredictable Trump go so far as to sacrifice South Korea (and Japan) to save San Francisco? 
The possibility is so bone-chilling that the South is now debating whether to develop its own nuclear weapons or bring US tactical nuclear bombs back to its territory. 
Either approach would antagonize China, potentially leading to an armed clash on the Korean Peninsula. 
In the 1990s, South Korea waited for matters to come to a head before responding. 
This time, it must nip the incipient crisis in the bud. 
That means accelerating domestic structural reforms to improve productivity, enhance labor-market efficiency, upgrade institutions, and foster a business environment that supports modern service industries and innovative start-ups. 
It also means strengthening both economic and diplomatic ties with major countries, while working with the US and China, in particular, to end the North Korean nuclear standoff. 
Neither agenda will be easy to pursue. 
But South Korea’s future prosperity, if not its very survival, depends on its leaders’ efforts on both fronts in the months and years ahead. 

Soul Searching in South Korea 
SEOUL – The impeachment, and removal from office, of South Korean President Park Geun-hye on charges of corruption and abuse of power has rocked the country’s political establishment and divided the electorate. 
Not since the Asian financial crisis of 1997, rooted partly in the flawed economic policies of Park’s father, Park Chung-hee, have South Koreans faced such an impasse. 
It’s still too early to know who will succeed her in the Blue House (the presidential seat); a special election has been called for May 9. 
But this much is clear: with Park’s unceremonious departure, a change in South Korea’s ruling party is all but assured. 
And with new blood must come renewed vigor to tackle governance problems – from dirty money in politics to incoherent foreign policy – that have plagued South Korea for far too long. 
South Korea’s current political crisis began in October 2016, when allegations emerged that Park had pressured the chaebols – the country’s giant family-owned conglomerates – to funnel huge sums of money into two foundations controlled by her close personal friend, Choi Soon-sil. 
Word of Park’s cronyism left many South Koreans feeling betrayed by a president who had vowed to lead differently. 
Park, whose authoritarian style resembled that of her father, routinely disregarded basic norms of liberal democracy. 
She scoffed at the rule of law and separation of government powers. 
After being accused of corruption, she simply ignored calls to appear before the Constitutional Court to testify. 
Prosecutors have issued another summons for her to appear in court on March 21; it is still unclear if she will, even though she has now lost her immunity from prosecution. 
Park’s removal from office almost certainly means that political power will shift from the formerly Saenuri, or “New Frontier” (now the Liberty Korea) Party to opposition forces. 
At the moment, candidates from the center-left Democratic Party of Korea are leading in an effort to end nine years of conservative rule. 
Moon Jae-in, a former Democratic Party of Korea leader and the runner-up to Park in 2012, is the opposition’s front-runner by a wide margin. 
Whoever becomes South Korea’s next president will be greeted by profound political, economic, and foreign policy challenges. 
On the domestic front, the president will inherit a political system in need of significant reform. 
Aside from calls to solidify the separation of powers by establishing a more robust system of legal checks and balances, there is near-consensus on the need to overhaul the current five-year, single-term presidency. 
Established in 1987 during South Korea’s transition to democracy, the short timeframe hampers the incumbent’s ability to devise, implement, and sustain long-term policies. 
Park, like many of her predecessors, pushed to change the term limits, but her efforts were stymied by bad timing. 
These and other changes will require democratic leadership, based on active communication with various segments of society. 
South Koreans are hopeful in this regard, believing that anyone will be better than Park. 
(According to one opinion poll, her approval rating before leaving office was a dismal 4%). 
The next president’s biggest economic challenge will be to untangle the ties between politicians and chaebol owners. 
At the moment, the chaebols’ proximity to political power reduces the transparency of corporate governance, discourages competition, and weakens the innovative potential of small- and medium-size enterprises. 
The arrest in February of the Samsung heir Lee Jae-yong, on bribery charges, indicates the scope of the problem. 
With all major presidential candidates emphasizing the importance of fixing the chaebol problem, changes on this front are possible. 
Finally, and perhaps most important, the next president will face a foreign-policy puzzle that perplexed Park for most of her tenure. 
Her successor will need more diplomatic acumen to stabilize relations with Japan, China, and Russia, while simultaneously working to denuclearize North Korea and thus reduce the threat Kim Jong-un’s regime poses to the region. 
Here, the wildcard is US President Donald Trump, who is creating his own brand of uncertainty in Asia. 
How Trump chooses to deal with North Korea, in particular, will be an early test for South Korea’s next leader. 
If, as I suspect, the Trump administration turns to tightened sanctions (including secondary boycotts) and dialogue, leaders in Seoul will be able to adjust accordingly. 
There will still be scope for agreement if political leaders on all sides are willing to listen. 
The United States’ deployment in South Korea of an advanced anti-missile system is a case in point. 
While the move has angered China’s leaders, there remains room for compromise, especially if the system’s deployment is made temporary and linked to North Korea’s denuclearization. 
South Korea has experienced – and survived – political and economic upheaval before. 
After all, it was Park’s own father who, in the 1960s and 1970s, helped to build a system that did little to discourage the corrupting links between politicians and chaebols. 
The weak financial institutions and shady corporate sector that grew from his legacy conspired to make the pain of the 1997 financial crisis even worse. 
Then, as now, failure at the top prompted voters to demand a new direction. 
Conservative leaders’ collective inability to insulate South Korea from the events of 1997 cleared the way for a liberal opposition leader, Kim Dae-jung, to assume the presidency in 1998. 
South Korea is very likely on the cusp of another political housecleaning. 
But, regardless of who arrives at the Blue House in May, their job – and the job of their party – will be to tackle the challenges that Park was so ill equipped to address. 

South Korea's Dangerous New Dawn 
North Korea's decision to expel UN atomic energy inspectors is but another reason to view Roh Moo Hyun's election as South Korea's president two weeks ago as an historical watershed. 
The beginning of his term not only coincides with one of the most dangerous episodes on the Korean peninsula in decades, but his presidency will also test South Korea's relations with the US to a degree that has not been seen for many years. 
Roh's victory over Lee Hoi Chang signifies a generational shift in Korean politics, with the young determined to gain a freer hand in Korea's relations with the US. 
Indeed, generational differences were the deciding factor in the race, replacing the regional sentiments that dominated every presidential race before this one. 
According to one report, over 60% of people in their twenties and thirties voted for Roh to produce a margin of 2.3% in this first two-man, head-to-head presidential race in 31 years. 
Roh's populist and nationalist stance will be swiftly and sorely tested by reality when he assumes power in February. 
But couple the generational changeover thaty put him in office with a strong popular desire for continued engagement with North Korea--notwithstanding North Korea's growing nuclear brinkmanship--and the recipe is complete for disputes with the US. 
Roh, a self-made man who passed a bar examination without going to college and law school, succeeded in convincing voters that he would usher in a new brand of politics reflecting South Korea's growing wealth and middle class sentiments, thereby sweeping away insider-dominated politics, regional bickering, and factional struggles. 
His style and rhetoric projected the fresh (for Korea!) image of a common man committed to eliminating the ossified networks of cronyism and corruption. 
For the first time in modern Korean history, the presidential campaign actually debated the central issues facing the country, rather than focussing on parties and personalities. 
Candidate Roh called for a new relationship between South Korea and the US, one based on the principle of independence and equality. 
For example, he said that he would not kow-tow to the US or visit Washington just for the sake of a photo opportunity He also promised to continue President Kim Dae Jung's "Sunshine policy" of engagement with the North. 
Remarkably, Roh won the election despite North Korea's decision to reactivate nuclear reactors that had been frozen since 1994. 
A few years ago this would have doomed Roh's candidacy. 
That he overcame this obstacle without changing his stance on engaging North Korea means that times have radically changed. 
A popular yearning for change, not the security situation, is now the overriding concern of ordinary Koreans. 
Roh's campaign also took advantage of a rising tide of anti-Americanism. 
The acquittal by a US military court of two American soldiers who accidentally killed two Korean schoolgirls with their armored car last June triggered street demonstrations across the country. 
Although President George W. Bush apologized twice for the deaths of the girls, demands continue to escalate for changing the Status of Force Agreement (SOFA) that governs the legal treatment of American troops stationed in South Korea. 
Ordinary Koreans insist that US soldiers who commit crimes should be tried in Korean courts. 
This expression of wounded national pride was enabled by South Korea's tremendous performance in the World Cup football tournament last summer, which helped convince ordinary Koreans that their country was fully grown up--and thus might be able to stand on its own without the presence of 37,000 US troops. 
Indeed, many ordinary people now view the US presence, and not North Korea's communist regime, as the biggest obstacle to unification. 
According to a recent poll, only 54.8% of Koreans now support the stationing of American troops in the country, while 31.7% oppose it. 
These sentiments will form part of the diplomatic test shaping Roh's presidency from the start, for he must re-engineer relations with America at the same time that the Bush administration is fretting about North Korea's nuclear ambitions and its role in spreading weapons of mass destruction to rogue states. 
For now, Korean voters--apparently impervious to the threat that North Korea's nuclear weapons poses--support Roh's policy of maintaining dialogue and economic exchange with the North. 
Under President Roh, South Korea's domestic politics and relations with the US and North Korea will require an almost total overhaul. 
Can he walk the tightrope of maintaining security on the peninsula, keeping America engaged, and retaining the support of the voters who elected him? 
Reconciling those goals would test even the most experienced and cynical of politicians, so it is anyone's guess as to whether President Roh can succeed. 
Failure, however, offers such a horrific prospect that no one can possibly hope for it. 

South Korea’s G-20 Challenge 
BERKELEY – On January 1, South Korea takes over the G-20 chairmanship from the United Kingdom. 
Korea is not the first emerging market to chair the G-20, but it is the first to do so since the global financial crisis. 
And it is the first to do so since the G-20 emerged as the steering committee for the world economy. 
G-20 chairs can have considerable influence. 
They coordinate the group’s work. 
They organize its meetings. 
Like most committee chairs, they have significant agenda-setting power. 
During the UK’s year chairing the G-20, Gordon Brown had a clear agenda. 
He saw the G-20 as a vehicle for building consensus on coordinated monetary and fiscal stimulus and financial regulation. 
He also viewed it as a forum to address the problems created for the poorest countries by the global financial crisis. 
And he used the chairmanship to elicit commitments to resist protectionism. 
In retrospect, Brown’s agenda-setting problem was easy. 
Given the nature and gravity of the crisis, it was brutally obvious what the priorities for the G-20 should be. 
The priorities for President Lee Myung-bak are less obvious. 
Some will say that he should get G-20 countries to coordinate an orderly exit from their expansionary monetary and fiscal policies. 
But growth in the advanced economies will almost certainly remain weak in 2010. 
With the United States, Europe, and Japan still suffering post-crisis hangovers, this issue can be safely left to the country that chairs the G-20 in 2011. 
Others will say that a priority should be agreement on slowing climate change. 
But this is best addressed in Copenhagen, in the presence of all world leaders, not in the cozy confines of the G-20. 
Small countries – think of Mauritius – are often the ones affected most dramatically by global warming. 
They are excluded from the G-20, which is supposed to be made up of the 20 largest economies as a matter of design. 
Instead, President Lee should give priority to four issues, starting with financial reform, a problem that Brown targeted but did not solve. 
Progress here has been inadequate, despite much talk. 
In particular, there has been little action on issues like creating a cross-border resolution authority to deal with the failure of a large financial group, something that can only be done at the international level. 
The window of opportunity for financial reform is now closing, and business-as-usual will only result in more crises and more bailouts. 
South Korea must therefore do everything it can to reinvigorate the debate. 
The second priority should be more progress on global rebalancing. 
Asian countries need to do even more to stimulate spending, and they need to move together. 
China is incapable of solving this problem on its own, because its economy is still only one-third the size of America’s. 
But if Asian countries move together, China will be more willing to let its exchange rate against the dollar become unstuck. 
The second factor contributing to the crisis could then be addressed once and for all. 
Third, the G-20 must address its own legitimacy deficit. 
After all, no one anointed these 20 countries as the designated representatives of the world. 
Who speaks for the other 173 internationally recognized countries? 
Why should there be so many European G-20 members – other than the fact that they were incumbent members of the earlier “G’s” – and not more African members? 
Here, South Korea can propose an obvious solution. 
Align G-20 membership with the composition of the International Monetary Fund’s Executive Board. 
Twenty-four countries sit there. 
Big ones have their own seats, while smaller ones represent groups of countries, known as “constituencies.” 
In many cases, the constituencies rotate the chair among their members. 
Everyone is represented. 
Finally, the G-20 needs an emerging-markets caucus. 
The US and the Europeans are in constant contact, doing their best to agree on positions and table common proposals. 
Emerging markets, failing to do the same, have punched below their weight. 
They have allowed the advanced countries to drive the G-20 process. 
This is the most delicate issue of all for South Korea. 
As chair, it needs to act as an “honest broker.” 
It can’t be seen as giving emerging markets special encouragement. 
And, given its location, South Korea would be torn between encouraging an emerging-market caucus and encouraging an Asian caucus – for Asia, too, needs to organize itself better in order to represent its interests in the G-20. 
Thus, the initiative here might best come from another G-20 country – maybe Brazil, South Africa, or even Russia. 
But South Korea could usefully drop a hint. 

South Korea’s Growing Soft Power 
CAMBRIDGE – When the Association of Southeast Asian Nations met in Thailand last month, South Korea was an important presence. 
Quietly, South Korea has moved away from being defined by its problematic North Korean neighbor, and is becoming an important middle-ranking power in global affairs. 
A South Korean is Secretary-General of the United Nations; Seoul will host next year’s G-20 summit; and the country has just reached a free-trade agreement with the European Union. 
This was not always so. 
If geography is destiny, South Korea was dealt a weak hand. 
Wedged into an area where three giants – China, Japan, and Russia – confront each other, Korea has had a difficult history of developing sufficient “hard” military power to defend itself. 
Indeed, at the beginning of the twentieth century, such efforts failed and Korea became a colony of Japan. 
After World War II, the peninsula was divided along the lines of Cold War bipolarity, and American and UN intervention was necessary to prevent South Korea’s subjugation in the Korean War. 
More recently, despite its impressive hard-power resources, South Korea has found that an alliance with a distant power like the United States continues to provide a useful insurance policy for life in a difficult neighborhood. 
In a recent survey of G-20 nations published in the newspaper Chosun Ilbo , the Hansun Foundation ranked South Korea 13th in the world in terms of national power. 
South Korea ranked 9th in hard power resources but performed more poorly in terms of soft power. 
In the newspaper’s words, “state of the art factories, high-tech weapons, advanced information communications infrastructure are the key components that a country must have for stronger international competitiveness.” 
But for these “hard power” ingredients to become true engines of the country’s growth and prosperity, they must be backed by more sophisticated and highly efficient “soft power.” 
South Korea has impressive soft-power potential. 
Sometimes, Koreans compare their country of 50 million to a neighbor like China or a superpower like the US and believe that they cannot compete with such giants. 
That may be true in the domain of hard military power, but it is not true of soft-power resources. 
Many countries that are smaller than South Korea do well with soft power. 
The political clout of countries such as Canada, the Netherlands, and the Scandinavian states is greater than their military and economic weight, owing to the incorporation of attractive causes such as economic aid or peacemaking in their definitions of their national interest. 
For example, in the past two decades, Norway, a country of only five million people, has taken a lead in peace talks. 
Similarly, Canada and the Netherlands have enhanced their soft power not only by their policies in the UN, but also by overseas development assistance. 
Such legitimizing policies are readily available to South Korea. 
Moreover, in terms of attractive values, South Korea has a compelling story to tell. 
In 1960, it had approximately the same level of economic wealth as Ghana, one of the more prosperous of the newly independent countries in Africa. 
Today, the two countries are vastly different. 
Over the next half-century, South Korea became the world’s 11th largest economy, with per capita income reaching more than $15,000. 
It joined the OECD and is an important member of the G-20. 
It has become the home of world-famous brands and a leader in the adoption of the Internet and information technology. 
Even more important, South Korea also developed a democratic political system, with free elections and peaceful transfer of power between different political parties. 
Human rights are well protected, as is freedom of speech. 
South Koreans often complain about the disorderliness of their political system, and the Hansun Foundation Report rated South Korea 16th among the G-20 in the efficiency of legislative activities, and 17th in political stability and efficiency. 
According to the survey, “The low standings are not surprising, given habitually violent clashes between governing and opposition parties over sensitive bills and unending bribery scandals involving politicians.” 
Nevertheless, while improvement in these areas would certainly enhance South Korea’s soft power, the very fact of having an open society that is able to produce and discuss such criticisms makes South Korea attractive. 
Finally, there is the attractiveness of South Korean culture. 
The traditions of Korean art, crafts, and cuisine have already spread around the world. 
Korean popular culture has also crossed borders, particularly among younger people in neighboring Asian countries, while the impressive success of the Korean diaspora in the US has further enhanced the attractiveness of the culture and country from which they came. 
Indeed, the late 1990’s saw the rise of “Hallyu,” or “the Korean wave” – the growing popularity of all things Korean, from fashion and film to music and cuisine. 
In short, South Korea has the resources to produce soft power, and its soft power is not prisoner to the geographical limitations that have constrained its hard power throughout its history. 
As a result, South Korea is beginning to design a foreign policy that will allow it to play a larger role in the international institutions and networks that will be essential to global governance. 

South Korea’s Political Springtime 
SEOUL – The ascension to power of the pudgy 29-year-old Kim Jong-un in North Korea has grabbed headlines around the world, but the most important story involving Korean young people and politics is taking place in the South. 
There, young voters are becoming angrier, more politically active, and increasingly hostile to the old established parties. 
This demographic challenge to South Korea’s status quo suggests a “liberal” awakening that could completely alter the country’s political landscape. 
The election last autumn of the activist Park Won-soon as mayor of Seoul demonstrated the growing strength of the youth vote, which took the ruling Grand National Party completely by surprise. 
Young people mobilized themselves spontaneously, using all the tools of social networking and modern communications, to turn out not only voters their own age, but countless others exasperated with South Korea’s rigidity and insulated opportunities. 
The sudden surge in young voters has called into question the long-presumed victory of the governing GNP’s likely candidate, Park Guen-hye, in the presidential election due to be held in December. 
Indeed, many political analysts now regard the GNP as a sinking ship, particularly after a staffer to one of the party’s MPs allegedly masterminded a cyber-attack on the National Election Commission’s Web site to prevent young voters from getting to the polls. 
While some pundits and politicians now suggest that the GNP could collapse sooner than corrupt and poverty-stricken North Korea, Park Geun-hye, an iconic woman in South Korean politics, has made it clear that she will not abandon the GNP. 
To further highlight her resolve, Park became the GNP’s interim leader last month. 
In Park’s eyes, abandoning the GNP simply because of the party’s deepening unpopularity would show her to lack principles and trustworthiness. 
Her refusal to strike out on her own is probably the main reason why she continues to lead various opinion polls. 
Nevertheless, recent polls show that a majority of voters distrust the incumbent government and the ruling party. 
Indeed, Ahn Cheol-soo, a successful entrepreneur turned pro-reform professor at Seoul National University and the main backer of the city’s new mayor, has now rocked South Korean politics by dropping broad hints that he might become a presidential candidate. 
Ahn has already become a lightning rod for all of the country’s anti-Park and anti-President Lee Myun-bak forces, attracting young people as well. 
Ahn’s most obvious merits are his personal history of overcoming severe challenges and his modest demeanor. 
His signature commercial achievement – the development of anti-virus software – made him immensely wealthy. 
His decision to give away a large portion of his fortune has made him immensely popular. 
More importantly, Ahn knows how to talk to people who are frustrated by South Korea’s rigid economy and business environment, particularly South Korean youth. 
He also seems cognizant of the growing power of social networking in politics. 
Although the 49-year-old professor remains formally uncommitted to running for office, his frankness and tolerance aids his ability to communicate a clear political message of the need for fundamental change. 
Rarely in South Korean politics has a candidate’s personality played so important a role. 
Ahn’s economic beliefs, formed mainly by his experiences as a CEO fighting against the entrenched power of South Korea’s chaebol (vast, politically well-connected industrial conglomerates), has rekindled a debate on both the right and the left about whether the chaebol are still capable of leading the country’s economy effectively. 
In an era of growing inequality and joblessness, Ahn’s criticism of the chaebol is both smart economics and smart politics. 
Economically frustrated youth welcome Ahn with loud cheers wherever he appears, because he expresses their anxiety that the chaebol are stifling new companies that could create much-needed jobs. 
One big obstacle that Ahn will face if he decides to run is the need to organize a political party, or else to forge a coalition among South Korea’s fractured opposition parties. 
Neither is an easy task, and the precedent of incompetence established by Japan’s Democratic Party since it defeated the long-ruling Liberal Democratic Party may make some South Korean voters reluctant to abandon the familiar and battle-tested GNP. 
But, despite these worries, it is difficult to imagine that Ahn would stand aside this April while voters’ demand for him continues to soar. 
The near-certainty that Ahn will join the fray is not good news for the already-unstable GNP, especially for Park. 
In one of her very rare appearances on a popular television talk show on January 2, she called Ahn “a very popular professor with young people.” 
Indeed, while she acknowledged that young men and women have “rebelled” against the established parties, Ahn supposedly spurred them to do so through a series of lectures called “Youth Concert.” 
While the “Ice Princess,” as Park is nicknamed, will undoubtedly retain her core voters, more than 20 million South Koreans now access Twitter or Facebook on their cellphones, and follow politics on them. 
These are new or disenchanted voters; how they vote in April – and how many of their fellow citizens follow their lead – will determine whether South Korea has its own political spring. 

A Greener Grid for East Asia 
SYDNEY – Not long ago, the future of nuclear power was in Asia. 
In 2015, nine of the ten reactors that opened globally were on the continent. 
But recent declarations by South Korea and Taiwan that they will “go green” have called into question nuclear power’s long-term viability, at least in East Asia. 
Indeed, 2017 may mark the end of the region’s nuclear love affair – and the start of a new one with renewables. 
South Korean President Moon Jae-in and Taiwan’s President Tsai Ing-wen have both set ambitious national agendas to boost renewable energy generation while calling for a phase-out of nuclear. 
For years, overreliance on traditional fuels discouraged investment in clean technologies for power generation, despite the fact that both countries are innovators in green industries, like energy storage and smart grids. 
Whereas 22% of South Korea’s energy needs, and 14% of Taiwan’s, are met by nuclear, those ratios are now set to drop dramatically. 
Blueprints are still being formulated, but taken together the two countries’ commitments mark a major shift in regional energy planning toward greener, cleaner technologies. 
Moreover, they will pave the way for increased investment in renewable-power installations, placing their countries on a new competitive footing in the regional market. 
South Korea’s strategy calls for a phased withdrawal from the nuclear industry, through non-renewal of existing licenses and bans on future plants. 
Last month, Moon, who was elected in May and campaigned on a nuclear-free agenda, called for an increase in the use of renewables, to 20% of the country’s total power generation, by 2030, up from the current 5%. 
He has also pledged to close ten coal-fired power plants by the end of his term in 2022. 
Currently, coal accounts for about a quarter of the country’s energy consumption. 
Natural gas would be used as a “bridging fuel” during the transition to greener power. 
Given that South Korea currently operates 25 nuclear reactors and had plans to build six more, the shelving of nuclear power is a significant shift in the country’s energy strategy. 
Indeed, some have expressed doubts about the feasibility of Moon’s plans. 
There are also questions about how the energy-policy overhaul will affect the country’s lucrative export market for nuclear technology. 
But Moon remains resolute. 
In Taiwan, Tsai is equally committed. 
Last year, responding to public opposition to nuclear energy in the wake of Japan’s 2011 Fukushima meltdown, Tsai vowed to make Taiwan nuclear-free by 2025. 
Today, coal and natural gas provide more than two thirds of the country’s electricity needs, with renewables accounting for 5%. 
Tsai has called for the share of renewables to increase to 20% over the next eight years, with the capacity coming primarily from solar and offshore wind. 
This new load would easily replace the electricity generated by the country’s six nuclear reactors. 
Critics contend that green technologies are not mature enough to replace traditional fuels for industrial-scale energy use. 
But these claims are a few years too late. 
Significant declines in start-up costs and energy-storage prices, as well as improved battery performance, have made renewables more competitive than ever. 
As Francesco Starace, Chief Executive of Enel, Europe’s largest energy company by market capitalization, told the Financial Times in June, renewables are becoming the “cheapest and most convenient way of producing electricity.” 
South Korea and Taiwan are not the first East Asian powers to go greener. 
China has been moving in that direction for years, and now leads the world in installed renewable-energy capacity. 
But by joining the renewables revolution, Taiwan and South Korea will make it easier for other regional players to enter the market, because expanded investment opportunities will increase competitiveness and further drive down already declining costs. 
In fact, if there is one valid criticism of Moon’s and Tsai’s visionary goals, it is that they could be realized even faster. 
For example, if both leaders were to allow the purchase of renewable power from the planned Global Energy Interconnection or the Asian Super Grid, they could increase the share of green energy more rapidly. 
South Korea and Taiwan have few natural resources of their own, and are heavily reliant on imported fuel to generate electricity. 
The introduction of competition to the national monopolies in both countries would also speed the shift to renewables. 
But for now, what is most important is the precedent that South Korea and Taiwan are setting. 
The renewables market in East Asia is about to blossom. 
When it does, the region’s decades-old dependence on nuclear power will finally be broken. 

Unlocking ASEAN’s Potential 
SINGAPORE – Can ten countries with different cultures, traditions, languages, political systems, and levels of economic development act in concert to expand their collective potential? 
That is the question with which the Association of Southeast Asian Nations (ASEAN) has been wrestling for decades. 
Judging by their leaders’ ambitious vision for cooperation, the answer may be yes. 
What began as a straightforward push to reduce trade tariffs has evolved into a blueprint for a dynamic open market of 600 million consumers and a production base that can compete directly with the world’s largest economies. 
Once in place, the so-called ASEAN economic community (AEC) will transform Southeast Asia – and its role in the global economy. 
ASEAN’s economic potential is undoubtedly impressive. 
Taken together, the group’s members – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam – would comprise the world’s seventh-largest economy. 
Moreover, ASEAN’s international trade has almost tripled over the last decade. 
And foreign-direct investment has been flowing into the region, with multinationals hoping to capitalize on its rapidly expanding middle class and strategic location at the intersection of China, Japan, and India. 
The AEC plan aims to build on this momentum by removing barriers to the movement of goods, services, capital, and people throughout the region. 
The McKinsey Global Institute (MGI) estimates that, by implementing this integration strategy fully and capturing a larger share of global manufacturing, the ASEAN countries could gain $280-625 billion in annual GDP by 2030. 
Part of that growth stems from encouraging local companies to expand beyond their home markets. 
By making exporting more efficient and less costly – up to 20% cheaper, in some sectors – a wide range of goods and services would become attainable for millions of new consumers. 
This could boost consumption across Southeast Asia, leading to a virtuous circle of growth. 
But ASEAN’s quest to become a unified market is far from complete. 
While average tariff rates in the original five member states (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) have been virtually zero since 2010, some barriers must still be dismantled. 
An MGI survey of regional businesses identified restrictions on foreign investment and ownership, inconsistent standards and regulations, and inefficient customs procedures as the biggest remaining barriers to trade. 
Though full integration appears unlikely by ASEAN’s target date of 2015, lately the effort has been imbued with a renewed sense of urgency. 
As wages in China rise, Southeast Asian economies have a window of opportunity to become the next “factories to the world.” 
Of course, competing on the basis of low wages alone would be inadequate to raise living standards in the long term. 
ASEAN will also need to compete on productivity – an area in which countries like Cambodia, Indonesia, and Vietnam are currently at a disadvantage. 
Excluding Singapore and Brunei, average labor productivity in ASEAN remains about 40% lower than in China. 
For ASEAN to become a real manufacturing powerhouse, its lower-income economies will need to focus on modernizing equipment and processes and building their workforces’ skills. 
They must also increase – and sustain – investment to address glaring infrastructure gaps and bring down high logistics costs. 
Some critics insist that, even with such efforts, ASEAN members vary too widely in terms of their level of economic development to create a smoothly functioning single entity. 
But ASEAN, unlike the European Union, is not attempting to form a monetary union. 
In fact, ASEAN’s focus on trade makes diversity an advantage, as companies seek to benefit from low-cost labor in some countries and intermediate manufacturing capabilities in others, all while gaining access to one of the world’s most sophisticated financial and logistics centers. 
Though member states may sometimes have to compete with one another for market share and multinational operations, their areas of specialization would largely be complementary. 
ASEAN’s lower-income economies have expressed concern that they will miss out on many of the benefits of deeper integration. 
But this does not have to be the case. 
Mexico, for example, has arguably enjoyed greater economic benefits from the North American Free Trade Agreement than the United States or Canada has. 
Nonetheless, this uneasiness reflects a central challenge facing ASEAN. 
From its inception, the group has fundamentally been a top-down project, driven by the region’s leaders instead of its people. 
But, as member countries have become more democratic, solidifying public support has become increasingly important – meaning that ASEAN leaders must work to communicate the benefits of integration more effectively. 
At the same time, ASEAN governments must urge businesses – many of whose leaders, according to MGI’s survey, have limited awareness of the opportunities that integration presents – to expand into neighboring markets. 
Here, removing a handful of key administrative barriers could go a long way. 
As it stands, restrictions on foreign investment and trade barriers continue to shield many domestic industries from competitive pressures. 
Now, ASEAN countries must decide whether to retreat into protectionism or reaffirm their commitment to a more open approach. 
Though the latter option would undoubtedly create winners and losers, it could also stimulate the region’s overall productivity growth. 
As a regional grouping, ASEAN does not have the kind of deep institutional ties and infrastructure links that bind together the EU’s members. 
Nor has it built the kind of seamless supply chains that funnel massive trade flows through North America. 
But, if ASEAN can execute the vision outlined in the AEC plan, it could exceed the sum of its parts. 

Southeast Asia’s Pakistan Problem 
MANILA -- Pakistan’s near political chaos, the result of President Pervez Musharraf’s declaration of martial law last year and the assassination of former Prime Minister Benazir Bhutto, has had a tsunami-like impact across Southeast Asia. 
Should Musharraf’s government backslide even more on its commitments to restore parliamentary democracy, Pakistan’s crisis would not only be exacerbated, but it might begin to infect the wider region. 
At direct stake today is Pakistan’s future, but its future may determine the political fates of neighboring countries that are also struggling with violent Islamic fundamentalism. 
Will Pakistan be dragged along the path of Islamic extremism and emergency rule, or finally achieve modernity as a secular nation under civilian leadership? 
That choice matters as an example across Asia, because Pakistan has long been the traditional sanctuary of Al Qaeda and its Taliban cohorts, who hide in the inhospitable Pakistani-Afghani border region. 
These Islamic terrorists, with their global reach, could well tilt the balance from one extreme to the other in a number of countries. 
The fallout from Bhutto’s assassination was bound to reach beyond Pakistan’s borders. 
The country’s mushrooming instability has triggered a bitter debate in the United States about the long-term viability of Musharraf’s military-backed government and whether US financial support for Pakistan should continue. 
Now, however, is not the time to freeze out Pakistan, despite the seeming chaos. 
Last September, Osama bin Laden’s deputy, Al-Zawahiri, released videotapes calling for jihad in Pakistan and around the world. 
Bin Laden’s most recent threats have been equally universal. 
Indeed, given extremist violence in Sri Lanka (Tamil Tigers), West Bengal (Naxalites), Bangladesh (Islamic fundamentalists), Southern Thailand (Islamic separatists), Java (Jemaah Islamiyah), and Basilan (Abu Sayyaf), the possibility that Al Qaeda and its satellites are plotting attacks elsewhere, especially against soft targets, poses a real danger to the region. 
Regional leaders understand this. 
A year ago at their Cebu (Philippines) summit, the leaders of ASEAN adopted the “ASEAN Convention Against Terrorism.” 
The Convention aims to prevent the commission of terrorist acts by implementing early warning systems; the use of ASEAN members’ respective territories by those who finance, plan, facilitate, or commit terrorist acts; and movement of terrorists and terrorist groups by means of effective border control and identity/travel documentation. 
But cooperation against terror is easier said than done, given the region’s diversity of governance, culture, language, and religion, as well as ASEAN’s central policy of keeping out of non-interference in its members’ internal affairs. 
This policy has enabled the group to remain united over the years, despite severe disagreements. 
Where anti-terrorist planning is concerned, however, non-interference has become ASEAN’s biggest handicap. 
Yet to be forewarned of a weakness is to be forearmed. 
The first and crucial preventive step that any government can take in the face of a renewed Al Qaeda offensive in southeast Asia is fully to respect the creativity, mobility, technical expertise, and financial capabilities of suicidal groups. 
Recall a letter from the convicted terrorist Ramzi Yousef, which was found in his Islamabad safe house after he was arrested in February 1995. 
Yousef seethed with resentment about the discovery of his “Bojinka” (explosives) cell in Manila the month before and vowed: 
We will take the harshest of measures in order that all Filipino interests inside and outside the Philippines will be subject to destruction....Our measures will include assassinating prominent figures, foremost among them the Filipino President (RAMOS)....We also have the ability to use chemicals and poisonous gas against vital institutions, residential populations, and drinking water sources... 
At the height of the Soviet-Afghanistan war in the 1980’s, Pakistan was the covert conduit for Filipino Muslim militants passing to and from Afghanistan and back to the island of Mindanao, which has long been a stronghold of Muslim rebels. 
Their experience in guerrilla warfare produced leaders such as the brothers Abdurajak and Khadaffy Janjalani who founded the terrorist Abu Sayyaf Group, which is now wrecking havoc in the Philippines. 
Indeed, just last November, a member of the Philippines’ Congress, Wahab Akbar, a Muslim representing Basilan, was killed with five others in front of the House of Representatives by an improvised explosive device of the type used in Pakistan, Afghanistan, and Iraq. 
His death should serve as a warning to all Southeast Asian governments: we must fight Al Qaeda together, or we shall lose to them separately. 

Southeast Asia’s Widening Arms Race 
Southeast Asia’s return to prosperity since the financial crisis of 1997 has brought a region-wide splurge on new weapons. 
Most Southeast Asian countries are, indeed, now busily modernizing their armed forces. 
So far, most have done so without compromising their autonomy in security matters. 
But, with China’s military build-up causing nervousness everywhere, many governments in the region are starting to work with outside powers. 
Indonesia’s President Susilo Bambang Yudhoyono has perhaps been the most assertive. 
In addition to becoming more active in world diplomacy, Yudhoyono will meet Russian President Vladimir Putin in Moscow this month to discuss buying Russia’s newest fighter jets. 
Indonesia is seeking to form an air-defense squadron of 12 jets, with eight Russian fighters to complement the two Russian Su-27SK’s and Su-30MKM’s that it has already bought. 
Elsewhere in the region, Singapore has apparently opted to purchase 12 new F-15SG fighter aircraft from the United States. 
Thailand’s Prime Minister, Thaksin Shinawatra, met Putin late last year and tentatively agreed to purchase 12 Su-30MKM’s. 
Malaysia has agreed to buy 18 Su-30MKM’s over the next two years, while Vietnam has purchased 36 SU-27SK’s, 12 of which are already in service. 
With the exception of Singapore, it seems that Russian fighter-attack aircraft are the region’s weapon of choice at the moment. 
Russia’s growing slice of the local arms market worries the US, the world’s biggest weapons supplier and still Asia’s greatest military power. 
Thus, for example, last November, the US lifted its six-year embargo on military sales to Indonesia, imposed in 1999 in response to human rights abuses in East Timor. 
Indonesia immediately expressed its intention to purchase C-130 transport aircraft, as well as fast patrol boats to conduct “anti-terrorism and anti-piracy measures.” 
Yet Indonesia is also trying to align itself with Asia’s rising power, China, by seeking greater defense and security cooperation. 
As a result of these improved relations, Indonesia has received Chinese short-range missile technology. 
The possibility that Southeast Asia’s governments might begin to play America and China off against each other is one of the concerns that most animates the latest US quadrennial defense review, which is intended to “focus on the Pacific Ocean” in awareness of China’s growing naval power. 
Undoubtedly, the US will try to build closer ties with Indonesia through greater military cooperation, because Indonesia borders the region’s key sea lines of communications. 
In particular, Indonesia will inevitably become involved in the tug of war between the US and China for influence over the vitally important Malacca Strait. 
Because China must import vast quantities of oil through the Malacca Strait, that sea lane has become a central element in the country’s security strategy. 
For this reason, China is attempting to use economic and military aid as leverage to improve relations even with countries with which it has had military confrontations with in the past, most prominently Vietnam and the Philippines. 
India, too, is now joining the military build-up. 
It has actively led regional multilateral joint exercises, such as the naval joint exercise that India’s navy hosted in the Andaman Sea, in the eastern Indian Ocean, earlier this year. 
Nine Asian-Pacific countries took part, including Indonesia, Malaysia, Singapore, and Thailand. 
Both India and China are each seeking greater influence over the strategically important country of Myanmar. 
For example, after Myanmar signed an agreement with China in 2005 to supply natural gas, India responded by cutting its own gas deal with Myanmar. 
South Korea, too, has joined the scramble. 
President Roh Moo-hyun visited Malaysia and agreed to expand mutual economic cooperation mainly in information technology, bio-technology, and resources and energy. 
Roh reportedly also discussed exporting defense materials worth $2.3 billion, including training aircraft, destroyers, and armed vehicles. 
Moreover, in January 2006, Korean Defense Minister Yoon agreed with the Philippines to deliver two used patrol boats. 
In this crowded power play, only Japan is left out, choosing for the most part to remain aloof and cultivate its relations with the US. 
But, despite deep historical animosity over World War II, there are increasing calls in the region for Japan to expand its influence to counterbalance China. 
In reality, Japan is not ready for this, because it still strongly adheres to “self-imposed restraints” against “influence over other countries in security and defense,” including weapons exports. 
In the 1960’s, as its economic takeoff was proceeding, Japan initiated a serious dialogue with regional players, aiming to build stronger relations with countries that it had once conquered and occupied. 
It is no overstatement to say that those efforts, which boosted trade and investment in the region, formed the foundation of Japan’s national power today. 
But now Japan’s political and economic influence in South East Asia is gradually declining, owing in part to its failure to exert influence over security and defense matters. 
For those Asian countries that recall Japan’s moderate and sensible advancement of regional policies since the 1960’s, there is a growing expectation that Japan should re-think its stance. 
At a time of regional uncertainty about Chinese policies – including the looming prospect of China’s first aircraft carrier – Japan’s participation in the evolving Asian security framework is fundamental to stability. 
The time when Japan could remain on the sidelines is over. 

A Rule of Law for Sovereign Debt 
NEW YORK – Governments sometimes need to restructure their debts. 
Otherwise, a country’s economic and political stability may be threatened. 
But, in the absence of an international rule of law for resolving sovereign defaults, the world pays a higher price than it should for such restructurings. 
The result is a poorly functioning sovereign-debt market, marked by unnecessary strife and costly delays in addressing problems when they arise. 
We are reminded of this time and again. 
In Argentina, the authorities’ battles with a small number of “investors” (so-called vulture funds) jeopardized an entire debt restructuring agreed to – voluntarily – by an overwhelming majority of the country’s creditors. 
In Greece, most of the “rescue” funds in the temporary “assistance” programs are allocated for payments to existing creditors, while the country is forced into austerity policies that have contributed mightily to a 25% decline in GDP and have left its population worse off. 
In Ukraine, the potential political ramifications of sovereign-debt distress are enormous. 
So the question of how to manage sovereign-debt restructuring – to reduce debt to levels that are sustainable – is more pressing than ever. 
The current system puts excessive faith in the “virtues” of markets. 
Disputes are generally resolved not on the basis of rules that ensure fair resolution, but by bargaining among unequals, with the rich and powerful usually imposing their will on others. 
The resulting outcomes are generally not only inequitable, but also inefficient. 
Those who claim that the system works well frame cases like Argentina as exceptions. 
Most of the time, they claim, the system does a good job. 
What they mean, of course, is that weak countries usually knuckle under. 
But at what cost to their citizens? 
How well do the restructurings work? 
Has the country been put on a sustainable debt path? 
Too often, because the defenders of the status quo do not ask these questions, one debt crisis is followed by another. 
Greece’s debt restructuring in 2012 is a case in point. 
The country played according to the “rules” of financial markets and managed to finalize the restructuring rapidly; but the agreement was a bad one and did not help the economy recover. 
Three years later, Greece is in desperate need of a new restructuring. 
Distressed debtors need a fresh start. 
Excessive penalties lead to negative-sum games, in which the debtor cannot recover and creditors do not benefit from the larger repayment capacity that recovery would entail. 
The absence of a rule of law for debt restructuring delays fresh starts and can lead to chaos. 
That is why no government leaves it to market forces to restructure domestic debts. 
All have concluded that “contractual remedies” simply do not suffice. 
Instead, they enact bankruptcy laws to provide the ground rules for creditor-debtor bargaining, thereby promoting efficiency and fairness. 
Sovereign-debt restructurings are even more complicated than domestic bankruptcy, plagued as they are by problems of multiple jurisdictions, implicit as well as explicit claimants, and ill-defined assets upon which claimants can draw. 
That is why we find the claim by some – including the US Treasury – that there is no need for an international rule of law so incredible. 
To be sure, it may not be possible to establish a full international bankruptcy code; but a consensus could be reached on many issues. 
For example, a new framework should include clauses providing for stays of litigation while the restructuring is being carried out, thus limiting the scope for disruptive behavior by vulture funds. 
It should also contain provisions for lending into arrears: lenders willing to provide credit to a country going through a restructuring would receive priority treatment. 
Such lenders would thus have an incentive to provide fresh resources to countries when they need them the most. 
There should be agreement, too, that no country can sign away its basic rights. 
There can be no voluntary renunciation of sovereign immunity, just as no person can sell himself into slavery. 
There also should be limits on the extent to which one democratic government can bind its successors. 
This is particularly important because of the tendency of financial markets to induce short-sighted politicians to loosen today’s budget constraints, or to lend to flagrantly corrupt governments such as the fallen Yanukovych regime in Ukraine, at the expense of future generations. 
Such a constraint would improve the functioning of sovereign-debt markets by inducing greater due diligence in lending. 
A “soft law” framework containing these features, implemented through an oversight commission that acted as a mediator and supervisor of the restructuring process, could resolve some of today’s inefficiencies and inequities. 
But, if the framework is to be consensual, its implementation should not be based at an institution that is too closely associated with one side of the market or the other. 
This means that regulation of sovereign-debt restructuring cannot be based at the International Monetary Fund, which is too closely affiliated with creditors (and is a creditor itself). 
To minimize the potential for conflicts of interest, the framework could be implemented by the United Nations, a more representative institution that is taking the lead on the matter, or by a new global institution, as already suggested in the 2009 Stiglitz Report on reforming the international monetary and financial system. 
The crisis in Europe is just the latest example of the high costs – for creditors and debtors alike – entailed by the absence of an international rule of law for resolving sovereign-debt crises. 
Such crises will continue to occur. 
If globalization is to work for all countries, the rules of sovereign lending must change. 
The modest reforms we propose are the right place to start. 

A Step Forward for Sovereign Debt 
NEW YORK – Every advanced country has a bankruptcy law, but there is no equivalent framework for sovereign borrowers. 
That legal vacuum matters, because, as we now see in Greece and Puerto Rico, it can suck the life out of economies. 
In September, the United Nations took a big step toward filling the void, approving a set of principles for sovereign-debt restructuring. 
The nine precepts – namely, a sovereign’s right to initiate a debt restructuring, sovereign immunity, equitable treatment of creditors, (super) majority restructuring, transparency, impartiality, legitimacy, sustainability, and good faith in negotiations – form the rudiments of an effective international rule of law. 
The overwhelming support for these principles, with 136 UN members voting in favor and only six against (led by the United States), shows the extent of global consensus on the need to resolve debt crises in a timely manner. 
But the next step – an international treaty establishing a global bankruptcy regime to which all countries are bound – may prove more difficult. 
Recent events underscore the enormous risks posed by the lack of a framework for sovereign debt restructuring. 
Puerto Rico’s debt crisis cannot be resolved. 
Notably, US courts invalidated the domestic bankruptcy law, ruling that because the island is, in effect, a US colony, its government had no authority to enact its own legislation. 
In the case of Argentina, another US court allowed a small minority of so-called vulture funds to jeopardize a restructuring process to which 92.4% of the country’s creditors had agreed. 
Similarly, in Greece, the absence of an international legal framework was an important reason why its creditors – the troika of the European Commission, the European Central Bank, and the International Monetary Fund – could impose policies that inflicted enormous harm. 
But some powerful actors would stop well short of establishing an international legal framework. 
The International Capital Market Association (ICMA), supported by the IMF and the US Treasury, suggests changing the language of debt contracts. 
The cornerstone of such proposals is the implementation of better collective action clauses (CACs), which would make restructuring proposals approved by a supermajority of creditors binding on all others. 
But while better CACs certainly would complicate life for vulture funds, they are not a comprehensive solution. 
In fact, the focus on fine-tuning debt contracts leaves many critical issues unresolved, and in some ways bakes in the current system’s deficiencies – or even makes matters worse. 
For example, one serious question that remains unaddressed by the ICMA proposal is how to settle conflicts that arise when bonds are issued in different jurisdictions with different legal frameworks. 
Contract law might work well when there is only one class of bondholders; but when it comes to bonds issued in different jurisdictions and currencies, the ICMA proposal fails to solve the difficult “aggregation” problem (how does one weight the votes of different claimants?). 
Moreover, the ICMA’s proposal promotes collusive behavior among the major financial centers: The only creditors whose votes would count for the activation of CACs would be those who owned bonds issued under a restricted set of jurisdictions. 
And it does nothing to address the severe inequity between formal creditors and implicit ones (namely, the pensioners and workers to whom sovereign debtors also have obligations) who would have no say in a restructuring proposal. 
All six countries that voted against the UN resolution (the US, Canada, Germany, Israel, Japan, and the United Kingdom) have domestic bankruptcy legislation, because they recognize that CACs are not enough. 
Yet all refuse to accept that the rationale for a domestic rule of law – including provisions to protect weak borrowers from powerful and abusive creditors – applies at the international level as well. 
Perhaps that is because all are leading creditor countries, with no desire to embrace restrictions on their powers. 
Respect for the nine principles approved by the UN is precisely what’s been missing in recent decades. 
The 2012 Greek debt restructuring, for example, did not restore sustainability, as the desperate need for a new restructuring only three years later demonstrated. 
And it has become almost the norm to violate the principles of sovereign immunity and equitable treatment of creditors, evidenced so clearly in the New York court’s decision on Argentine debt. 
The market for credit default swaps has led to non-transparent processes of debt restructuring that create no incentive for parties to bargain in good faith. 
The irony is that countries like the US object to an international legal framework because it interferes with their national sovereignty. 
Yet the most important principle to which the international community has given its assent is respect for sovereign immunity: There are limits beyond which markets – and governments – cannot go. 
Incumbent governments may be tempted to exchange sovereign immunity for better financing conditions in the short run, at the expense of larger costs that will be paid by their successors. 
No government should have the right to give up sovereign immunity, just as no person can sell himself into slavery. 
Debt restructuring is not a zero-sum game. 
The frameworks that govern it determine not just how the pie is divided among formal creditors and between formal and informal claimants, but also the size of the pie. 
Domestic bankruptcy frameworks evolved because punishing insolvent debtors with prison was counterproductive – a prisoner cannot repay his debts. 
Likewise, kicking debtor countries when they’re down only makes their problems worse: Countries in economic free-fall can’t repay their debts, either. 
A system that actually resolves sovereign-debt crises must be based on principles that maximize the size of the pie and ensure that it is distributed fairly. 
We now have the international community’s commitment to the principles; we just have to build the system. 

A Year of Sovereign Defaults? 
MIAMI – When it comes to sovereign debt, the term “default” is often misunderstood. 
It almost never entails the complete and permanent repudiation of the entire stock of debt; indeed, even some Czarist-era Russian bonds were eventually (if only partly) repaid after the 1917 revolution. 
Rather, non-payment – a “default,” according to credit-rating agencies, when it involves private creditors – typically spurs a conversation about debt restructuring, which can involve maturity extensions, coupon-payment cuts, grace periods, or face-value reductions (so-called “haircuts”). 
If history is a guide, such conversations may be happening a lot in 2016. 
Like so many other features of the global economy, debt accumulation and default tends to occur in cycles. 
Since 1800, the global economy has endured several such cycles, with the share of independent countries undergoing restructuring during any given year oscillating between zero and 50% (see figure). 
Whereas one- and two-decade lulls in defaults are not uncommon, each quiet spell has invariably been followed by a new wave of defaults. 
The most recent default cycle includes the emerging-market debt crises of the 1980s and 1990s. 
Most countries resolved their external-debt problems by the mid-1990s, but a substantial share of countries in the lowest-income group remain in chronic arrears with their official creditors. 
Like outright default or the restructuring of debts to official creditors, such arrears are often swept under the rug, possibly because they tend to involve low-income debtors and relatively small dollar amounts. 
But that does not negate their eventual capacity to help spur a new round of crises, when sovereigns who never quite got a handle on their debts are, say, met with unfavorable global conditions. 
And, indeed, global economic conditions – such as commodity-price fluctuations and changes in interest rates by major economic powers such as the United States or China – play a major role in precipitating sovereign-debt crises. 
As my recent work with Vincent Reinhart and Christoph Trebesch reveals, peaks and troughs in the international capital-flow cycle are especially dangerous, with defaults proliferating at the end of a capital-inflow bonanza. 
As 2016 begins, there are clear signs of serious debt/default squalls on the horizon. 
We can already see the first white-capped waves. 
For some sovereigns, the main problem stems from internal debt dynamics. 
Ukraine’s situation is certainly precarious, though, given its unique drivers, it is probably best not to draw broader conclusions from its trajectory. 
Greece’s situation, by contrast, is all too familiar. 
The government continued to accumulate debt until the burden was no longer sustainable. 
When the evidence of these excesses became overwhelming, new credit stopped flowing, making it impossible to service existing debts. 
Last July, in highly charged negotiations with its official creditors – the European Commission, the European Central Bank, and the International Monetary Fund – Greece defaulted on its obligations to the IMF. 
That makes Greece the first – and, so far, the only – advanced economy ever to do so. 
But, as is so often the case, what happened was not a complete default so much as a step toward a new deal. 
Greece’s European partners eventually agreed to provide additional financial support, in exchange for a pledge from Greek Prime Minister Alexis Tsipras’s government to implement difficult structural reforms and deep budget cuts. 
Unfortunately, it seems that these measures did not so much resolve the Greek debt crisis as delay it. 
Another economy in serious danger is the Commonwealth of Puerto Rico, which urgently needs a comprehensive restructuring of its $73 billion in sovereign debt. Recent agreements to restructure some debt are just the beginning; in fact, they are not even adequate to rule out an outright default. 
It should be noted, however, that while such a “credit event” would obviously be a big problem, creditors may be overstating its potential external impacts. 
They like to warn that although Puerto Rico is a commonwealth, not a state, its failure to service its debts would set a bad precedent for US states and municipalities. 
But that precedent was set a long time ago. 
In the 1840s, nine US states stopped servicing their debts. 
Some eventually settled at full value; others did so at a discount; and several more repudiated a portion of their debt altogether. 
In the 1870s, another round of defaults engulfed 11 states. 
West Virginia’s bout of default and restructuring lasted until 1919. 
Some of the biggest risks lie in the emerging economies, which are suffering primarily from a sea change in the global economic environment. 
During China’s infrastructure boom, it was importing huge volumes of commodities, pushing up their prices and, in turn, growth in the world’s commodity exporters, including large emerging economies like Brazil. 
Add to that increased lending from China and huge capital inflows propelled by low US interest rates, and the emerging economies were thriving. 
The global economic crisis of 2008-2009 disrupted, but did not derail, this rapid growth, and emerging economies enjoyed an unusually crisis-free decade until early 2013. 
But the US Federal Reserve’s move to increase interest rates, together with slowing growth (and, in turn, investment) in China and collapsing oil and commodity prices, has brought the capital inflow bonanza to a halt. 
Lately, many emerging-market currencies have slid sharply, increasing the cost of servicing external dollar debts. 
Export and public-sector revenues have declined, giving way to widening current-account and fiscal deficits. 
Growth and investment have slowed almost across the board. 
From a historical perspective, the emerging economies seem to be headed toward a major crisis. 
Of course, they may prove more resilient than their predecessors. 
But we shouldn’t count on it. 

The Soviet Union Is Dead for Good 
MOSCOW – This New Year’s Eve marks the 25th anniversary of the formal dissolution of the Soviet Union. 
But, rather than celebrating, many Russians – and some people in the West – are ambivalent about that outcome. 
Russian President Vladimir Putin tops the list of doubters. 
He made known his position on the USSR’s disintegration in 2005, when he called it “a major geopolitical tragedy of the twentieth century.” 
And some in the West consider the new states that emerged from the wreckage – Ukraine and the Baltic republics, in particular – to be the primary source of Russia’s ressentiment and revanchism in the post-Cold War world. 
These doubts stand in sharp contrast to the consensus that prevailed for many years after the collapse of communism in Europe in 1989-1991. It was widely accepted that the end of the Cold War marked not only the liberation of Central and Eastern Europe, but also the triumph of liberal ideas. 
But the end of the USSR could also be seen as a victory for nationalism. 
Indeed, it was fear of nationalist violence that led then-US President George H.W. Bush and German Chancellor Helmut Kohl to try to help the USSR’s last president, Mikhail Gorbachev, hold the Soviet Union together (though only after having allowed the Baltic States to secede). 
They failed – and later claimed victory for the full demise of the Soviet empire. 
In reality, the Belovezha Accords, which formalized the break-up of the USSR, completed a process of dissolution that started in 1989. 
The differences between the Warsaw Bloc countries and the Soviet republics were important, but one similarity was crucial: in all of these countries, the Kremlin had imposed communism at gunpoint. 
The USSR could have survived only as long as Russia maintained control of the empire – and only if Gorbachev had been willing to use force to prolong that control. 
Many Western strategists and scholars based their assessment on a false assumption: the Soviet Union could also become free, if only its name was properly edited and the right constitution drafted for it. 
But that was hopeless. 
The peoples that comprised the USSR had different histories long before Russian domination; and, under the Soviet system’s nationalities policy, their identity as members of distinct political units had actually been consolidated. 
After the demise of the USSR, they quickly displayed very different social and political preferences. 
One cannot imagine even a partly free political space, as Russia was becoming, that they could share. 
Of course, after gaining their independence, some of these new nation-states have been struggling to develop democratic institutions and viable economies. 
Others, no surprise, became outright dictatorships. 
But before embarking on those routes, the word “freedom” could be meaningfully applied only to the idea of liberation from Kremlin control. 
The dissolution of the Soviet Union deserves to be celebrated, because it created a new chance for development across the vast landmass that the USSR once controlled. 
But it should also be celebrated because this dissolution was achieved in such a relatively orderly and peaceful manner. 
To be sure, in some countries, especially my own, Georgia, there was a period of civil war and chaos. 
But that was our responsibility. 
In the heyday of the Soviet Union, when Georgians of my generation dreamed about the eventual demise of the empire (because all empires eventually break up), we did not dare to imagine that it would happen in a peaceful and orderly manner. 
And yet, despite its peaceful and orderly dissolution, the Soviet Union still refuses to die completely. 
Putin has decided to turn bitterness about Russia’s loss of control over its immediate neighbors into the centerpiece of his policies, both domestically and internationally. 
The invasions that he has ordered – in Georgia (2008) and Ukraine (2014) – brought temporary satisfaction to beleaguered Russians in need of national affirmation. 
But Putin’s aggressive behavior has also instilled fear among his neighbors, along with widespread concern and confusion within the international community. 
What other political projects Putin will seek to implement to restore Russia’s lost greatness remain to be seen. 
But whatever he does, the Belovezha Accords created a new reality that can be revised only at the margins. 
Most of the nations of the former Soviet Union have squandered many opportunities over the past 25 years; nonetheless, they are now accustomed to being the masters of their own fate. 
Putin will find this almost impossible to reverse. 

Defusing the Third Space Race 
WASHINGTON, DC – With China, Russia, and the United States fine-tuning anti-satellite (ASAT) warfare capabilities, the third round of competition to “seize the high ground” of space is well underway. 
This round is distinctive, because it has three contestants, whereas the first and second rounds, which occurred during the Cold War, had only two. 
But, like its predecessors, today’s space race poses the risks of quick escalation and intensification of conflict among major powers. 
A set of common-sense rules could help defuse and prevent conflict in space. 
Unfortunately, Russia and China seem uninterested in negotiating a code of conduct for responsible space-faring countries. 
The first space race began in 1957, when the Soviet Union launched Sputnik, the first artificial Earth satellite. 
US President Dwight Eisenhower’s administration opted to leave Sputnik and its successors alone, recognizing that the US could outpace Soviet space programs and had more to gain from not destroying them. 
Eisenhower’s successor, John F. Kennedy, arrived at the same conclusion. 
But he went a step further, joining with the Soviet Union to champion a United Nations resolution on cooperation in space. 
Kennedy’s eyes had been opened by a July 1962 US atmospheric nuclear test that inadvertently destroyed at least six satellites, including some belonging to the USSR. 
A few months later, the Cuban missile crisis spurred agreement on a ban on atmospheric testing. 
In 1967, US President Lyndon Johnson and Soviet leader Leonid Brezhnev turned UN resolutions into the Outer Space Treaty, which marked the end of the first military space competition. 
The second round of competition emerged in the mid-1970s. 
Brezhnev’s Soviet Union tested a new type of ASAT weapon, and President Gerald Ford’s administration decided to respond in kind. 
Under President Jimmy Carter, the US tried diplomacy to limit ASAT programs, but the superpowers couldn’t begin to agree on how to define a space weapon. 
Then, in 1983, President Ronald Reagan’s administration launched its Strategic Defense Initiative, which ratcheted up the competition. 
The second wave of competition ebbed in 1987, when Reagan and Mikhail Gorbachev agreed to a treaty eliminating intermediate-range missiles, and ended when the Soviet Union dissolved. 
The latest round of military competition in space began in 2001, when the US, under President George W. Bush, withdrew from the Anti-Ballistic Missile Treaty and demonstrated advanced space-enabled military targeting in its war in Iraq. 
At that time, Russia was in no position to compete. 
But the Kremlin gradually boosted investment in “counter-space” capabilities. 
China did the same, demonstrating a new “hit-to-kill” ASAT weapon system in 2007. 
China’s test, like the US atmospheric nuclear test in 1962, was highly damaging to the space environment, creating a vast, indiscriminate, and lethal debris field. 
In 2008, the US used a specially adapted sea-based interceptor missile to shoot down a malfunctioning US intelligence satellite just before its reentry into the atmosphere. 
The US now uses an unmanned miniature version of the space shuttle to practice “proximity operations”: approaching other satellites without harming them. 
Russia has launched three satellites for proximity operations. 
Chinese ASAT tests have succeeded to the point that they are now designed to miss their targets. 
The third round of military competition in space remains less intense than the first two, but it is gathering momentum. 
The question is how to defuse it. 
Russia and China support an international treaty to prevent the weaponization of space. 
But their proposal has significant drawbacks, including the same old difficulty of agreeing on what constitutes a space weapon. 
Most space-related capabilities, like lasers and proximity operations, have both peaceful and military applications. 
Monitoring and verifying compliance is another challenge. 
And even if provisions could be agreed, ratifying and implementing a treaty could take decades, as with the Comprehensive Nuclear-Test-Ban Treaty. 
A simpler – though by no means easy – approach would be to agree on a code of conduct for space. 
The good news is that the framework for such an international code – conceptualized by the Stimson Center (which I co-founded) in 2002 – already exists, drafted in detail by the European Union. 
The bad news is that China and Russia, along with many developing countries, have voiced strong objections. 
Developing countries disapprove of the EU’s attempt to avoid a UN-based drafting process. 
And they have balked at the draft code’s affirmation of a national and collective right to self-defense – a right enshrined in the UN Charter. 
China and Russia would like to limit the code to civilian and commercial space activities – even though military space programs are the crux of the problem and the main impetus for developing a code in the first place. 
The draft treaty supported by Russia and China would constrain only weapons in space, not their ground-based ASAT programs. 
Russia and China are clearly not ready to curtail their ASAT capabilities; and the US is ramping up its own. 
Transparency and confidence-building measures can help. 
So can guidelines for the sustainable use of outer space, which may emerge from the UN’s Committee on the Peaceful Uses of Outer Space. 
But the third round of space competition will not end until all major powers are ready to endorse a code of conduct for responsible behavior. 


Europe’s Return to Crisis? 
BRUSSELS – Just four months ago, when the Europhile Emmanuel Macron was elected as France’s president, it seemed that the European Union could finally look forward to a period of calm. 
But calm is the last thing one can see on the streets of Barcelona, where demonstrations in favor of Catalonian independence – a referendum on which was brutally suppressed by government forces – have been met with equally potent protests against it. 
As Spain’s internal conflict escalates, a return to crisis in Europe may seem all but inevitable. 
Yet what is happening on the ground in Spain actually indicates that the European economic recovery is strengthening, while highlighting the limits of what the EU can achieve. 
The strength of the EU’s economic recovery is revealed by the absence of any significant financial-market reaction to the tumultuous scenes in Catalonia. 
Had a similar situation arisen a few years ago, there would have been a run on Spanish government bonds, and Spain’s stock market would have tanked. 
Today, however, markets are taking the country’s profound political uncertainty in stride. 
This vote of confidence is built on solid foundations. 
The entire eurozone economy is growing at respectable, albeit unspectacular, rates. 
And the Spanish economy has been growing faster than the eurozone average, all while keeping its external accounts in slight surplus. 
This means that Spain’s recovery is based on increasing supply, rather than rising domestic demand, as was the case during the pre-crisis construction boom. 
Add to that the existence of eurozone institutions that can address temporary financing difficulties faced by banks or states, and it becomes clearer why Spain’s deep political crisis has not been accompanied by dangerous financial-market gyrations. 
But the Catalonia crisis also underscores the limitations of the EU’s model of integration, which are rooted in the fact that the Union is ultimately based on the nation-state. 
This model cannot be described as inter-governmental. 
Rather, it is based on indirect implementation: almost everything the EU does and decides is carried out by national governments and their administrations. 
This distinction can be seen most strikingly in the area of monetary policy, where the decision-making mechanism is definitely not intergovernmental: the European Central Bank’s Governing Council operates on the basis of a simple majority. 
But the implementation mechanism is certainly indirect: once a decision is made, it is carried out by national central banks – an approach that can have important implications. 
For example, the vast bond-buying operations nominally undertaken by the ECB in recent years have been handled largely by national central banks, which purchase their own governments’ bonds. 
The European Court of Justice in Luxembourg – another common institution of crucial importance – also relies on a decision-making mechanism that is not inter-governmental. 
Yet its judges are nominated by national governments, and national courts and administrations enforce its decisions. 
A comparison with the United States highlights the weaknesses of this approach. 
While the US Federal Reserve also has a regional structure, the individual District Reserve Banks cover several states and aren’t tied to any state government or institution. 
Likewise, US Supreme Court justices are nominated by federal institutions (the Senate accepts or rejects nominees put forward by the president), not by state governments. 
For the EU, relying on its member states to build common institutions was arguably the only way to start the integration process, given deep mistrust among countries that had fought so many brutal wars against one another. 
And yet a union that relies on the nation-state, not just for implementation, but also for legitimacy, can function only as well as its individual members. 
But, today, with most of them are beset by internal strife, that model is reaching its limits. 
In Greece, weak administrative and judicial systems have impeded economic recovery. 
In Poland and Hungary, “illiberal” governments are undermining judicial independence. 
And in Spain, the political system seems incapable of resolving the conflict between the regional government of Catalonia, with its aspirations of greater self-determination, and the central government in Madrid, which argues that even considering the question would undermine the constitutional order. 
Even Germany is facing internal political challenges. 
Having lost about one-fifth of her voters in the recent federal election, Chancellor Angela Merkel will have to reckon with three unruly coalition partners during her fourth – and probably last – term. 
As for Italy, opinion polls suggest that a majority of voters now support populist and/or Euroskeptic parties. 
While outright Euroskeptic parties appear unlikely to gain power anywhere, these political shifts do not bode well for European integration. 
The EU faces little outright hostility. 
Today it is facing, instead, an “obstructionist indifference,” as many of its member states are increasingly preoccupied with their internal challenges, making European integration little more than a second thought throughout most of the continent. 
Those EU leaders who do still want to advance integration can no longer count on the argument, used during the financial crisis, that there is no alternative. 
And the permissive consensus of the first years of integration is long gone. 
If further progress toward “ever-closer union” is to be made, Europe’s leaders will have to find a new model that can overcome their citizens’ deepening apathy. 

Spanish Leadership for Europe’s Roma 
NEW YORK – Continued discrimination against Roma in Europe not only violates human dignity, but is a major social problem crippling the development of Eastern European countries with large Roma populations. 
Spain, which has been more successful in dealing with its Roma problem than other countries, can take the lead this month as it assumes the European Union presidency. 
Up to 12 million Roma live in Europe today, primarily in the East. 
Despite the region’s overall economic growth over the past two decades, life for many Roma is worse now than ever. 
During the communist era, Roma received jobs and housing. 
But the heavy industries in which many were employed have now closed, and unemployment is widespread. 
Many Roma live in deplorable conditions unworthy of modern Europe. 
These economic hardships are deepened by social tension. 
The majority population is very hostile towards Roma, and discrimination against them occurs at every level. 
For example, Roma children are often automatically put into classes for the mentally disabled, simply because they are Roma. 
Despite court rulings ordering reform, Roma are regularly denied equal access to housing, education, and healthcare, creating a vicious cycle of poverty and marginalization. 
Reality and stereotype reinforce each other in a reflexive fashion. 
The EU is slowly realizing that it has a major social problem on its hands. 
Denied opportunities in the East, many Roma have moved to Western Europe, fueling a new wave of hostility. 
In Italy, the Berlusconi government’s treatment of Roma settlements – destroying homes and fingerprinting Roma based solely on their ethnicity – blatantly violated human rights. 
This prompted the EU to create the new position of Fundamental Rights Commissioner, with confirmation hearings set to begin in January; 
In the meantime, violations continue. 
On a positive note, the Decade of Roma Inclusion, established in 2005, is receiving strong support from the structural funds administered by the European Commission and is making some inroads. 
Yet this is not enough to reverse a rising tide of violence and discrimination, compounded by the recent economic recession. 
What is needed now is a comprehensive European strategy to address Roma issues across borders. 
This strategy must address both intolerable living conditions for Roma and the hostile stereotypes that prevail within majority populations, because they mutually reinforce each other. 
This is not only a human rights issue, but also an economic one. 
Following current demographic trends, by 2040, Roma will comprise roughly 40% of Hungary’s working-age population. 
Statistics are similar for neighboring countries. 
Unless the Roma are well educated and socially integrated – in stark contrast to today’s reality – these countries’ economic future is bleak. 
The key to success is the education of a new generation of Roma who do not seek to assimilate into the general population, but deliberately retain their identity as Roma. 
Educated, successful Roma will shatter the prevailing negative stereotypes by their very existence. 
I speak with some authority on this subject. 
My foundation network has made the education of Roma a priority since its inception in Hungary in 1984, and across the rest of Eastern Europe since 1989. 
These efforts have produced a small, well-educated Roma elite who are now making an important contribution to the emancipation of Roma. 
These leaders have blazed a trail for future advocates, but there are far too few of them. 
In conjunction with the launch of the Decade of Roma Inclusion in 2005, my foundation network formed an alliance with the World Bank and transferred its Roma educational programs to a newly established Roma Education Fund. 
Last year, the Fund directly assisted 30,000 Roma children and 800 university students. 
It also provided invaluable support to member countries’ public education systems to strengthen Roma inclusion. 
The Fund plans to double its activities in the next five years, but, again, this is not enough. 
Given the need, it ought to grow ten-fold. 
The scale of this challenge demands a comprehensive, institutional response from the EU that goes well beyond the Decade and the capacity of my foundations. 
While the European Roma Platform launched in 2009 paid lip service to Roma issues, it did not go far enough. 

Speculators at the Pumps 
WASHINTGTON, DC – Until a few weeks ago, while oil prices were surging, debate raged about the relative roles of economic fundamentals and speculation in boosting oil prices. 
Although oil prices have now fallen back from their peak, that debate must not be forgotten, for it has profound policy implications that government officials would be derelict to ignore. 
Of course, if higher prices are due to fundamentals, oil markets are working as they should. 
But if they are due to speculation, then policymakers speculators must act to rein in behavior that has imposed huge and needless costs on the global economy. 
And, when the evidence is confronted, it points to speculation as a culprit. 
Whereas many oil market participants have blamed speculation, most economists defend how oil markets have performed and point to economic fundamentals. 
One argument that economists use is that higher prices are due to the weak dollar. 
Because oil is priced in dollars, a weak dollar makes oil cheaper to users in other countries, which increases global demand. 
A second argument is that higher oil prices are due to lower interest rates and anticipations of higher long-term prices. 
That supposedly reduced supply by encouraging producers to store oil in the ground and pump it later. 
A third argument is that if speculation were to blame for price increases, there should have been an increase in oil inventories, because speculators do not consume oil but instead store it for later sale. 
Since there has been no rise in inventories, there has been no speculation. 
All three arguments are weak. 
The price of oil has risen far more than the dollar has fallen. 
That means that oil prices have increased in other countries, which should have reduced, not increased, demand. 
Moreover, it is high oil prices that weakened the dollar, not vice versa. 
This is because high oil prices raised inflation in the United States, worsened the US trade deficit, and increased the likelihood of a US recession by acting as a tax on consumer spending. 
Nor have there been any reports of unusual production cutbacks – the linchpin of the second argument. 
Indeed, the spike in oil prices actually gives independent producers an incentive to boost production. 
The last time real oil prices reached current levels was 1980, which shows that hoarding oil in the ground can be bad business. 
OPEC also has a strong interest in maintaining production. 
It wants to keep prices lower to maintain the global economy’s oil addiction and deter technological substitution of alternative energy sources. 
Finally, the storage argument fails to recognize different types of inventory. 
Thus, record-high speculative prices have likely caused bunker traders to release inventory, but those releases may have been purchased by speculators who are now active lessees of commercial storage capacity. 
The implication is that speculators can drive up prices and increase their inventory holdings even as total commercial inventories remain little changed. 
Additionally, oil market speculation may have induced “echo speculation,” whereby ultimate users buy refined products in advance to protect against future price hikes. 
They then take delivery on their premises so that overall refined inventories rise, but that increase is not part of reported commercial inventories. 
Proving that speculation is responsible for higher prices is always difficult, because it tends to occur against a background of strong fundamentals. 
However, there is considerable evidence that strongly indicates rampant speculation in today’s oil markets. 
One key sign is the documented change in the character of oil trading, with speculators (i.e., financial institutions and hedge funds) now accounting for 70% of trades, up from 37% seven years ago. 
With regard to market fundamentals, there have been no changes in demand and supply conditions that explain the scale of the unanticipated jump in oil prices. 
Moreover, the actual behavior of oil prices is consistent with speculation. 
In June, oil prices leapt by $11 in one day, and in July they fell back by $15 in three days. 
Such volatility does not fit a fundamentals-driven market. 
Despite the oil market’s size, speculation can move prices because of the inelasticity of demand and supply. 
Oil demand is slow to change because of behavioral inertia and fixed technology, while adjusting production takes time. 
These features make the oil market vulnerable to speculation. 
Such speculative purchases may barely register in inventories, because the purchases are small compared to the overall market, and because of the global storage system’s many margins of accommodation. 
As a result, speculatively driven high prices can persist for a considerable time before economic fundamentals bring them down, as finally seems to be happening. 
With prices falling, the imperative to act inevitably tends to recede. 
That is the nature of the behavioral response to crisis and why a bad status quo can persist. 
But leaving the system unchanged will maintain the global economy’s vulnerability to future bouts of speculation that we cannot afford. 
Just consider how the current bout has raised global inflation, lowered incomes of the global poor, weakened the dollar, deepened the US trade deficit, aggravated global financial instability, and increased the likelihood of a global recession. 
That is an overwhelming indictment that merits urgent policy action. 

A Speech of Hope for Greece 
ATHENS – On September 6, 1946 US Secretary of State James F. Byrnes traveled to Stuttgart to deliver his historic “Speech of Hope.” 
Byrnes’ address marked America’s post-war change of heart vis-à-vis Germany and gave a fallen nation a chance to imagine recovery, growth, and a return to normalcy. 
Seven decades later, it is my country, Greece, that needs such a chance. 
Until Byrnes’ “Speech of Hope,” the Allies were committed to converting “…Germany into a country primarily agricultural and pastoral in character.” 
That was the express intention of the Morgenthau Plan, devised by US Treasury Secretary Henry Morgenthau Jr. and co-signed by the United States and Britain two years earlier, in September 1944. 
Indeed, when the US, the Soviet Union, and the United Kingdom signed the Potsdam Agreement in August 1945, they agreed on the “reduction or destruction of all civilian heavy-industry with war potential” and on “restructuring the German economy toward agriculture and light industry.” 
By 1946, the Allies had reduced Germany’s steel output to 75% of its pre-war level. 
Car production plummeted to around 10% of pre-war output. 
By the end of the decade, 706 industrial plants were destroyed. 
Byrnes’ speech signaled to the German people a reversal of that punitive de-industrialization drive. 
Of course, Germany owes its post-war recovery and wealth to its people and their hard work, innovation, and devotion to a united, democratic Europe. 
But Germans could not have staged their magnificent post-war renaissance without the support signified by the “Speech of Hope.” 
Prior to Byrnes’ speech, and for a while afterwards, America’s allies were not keen to restore hope to the defeated Germans. 
But once President Harry Truman’s administration decided to rehabilitate Germany, there was no turning back. 
Its rebirth was underway, facilitated by the Marshall Plan, the US-sponsored 1953 debt write-down, and by the infusion of migrant labor from Italy, Yugoslavia, and Greece. 
Europe could not have united in peace and democracy without that sea change. 
Someone had to put aside moralistic objections and look dispassionately at a country locked in a set of circumstances that would only reproduce discord and fragmentation across the continent. 
The US, having emerged from the war as the only creditor country, did precisely that. 
Today, it is my country that is locked in such circumstances and in need of hope. 
Moralistic objections to helping Greece abound, denying its people a shot at achieving their own renaissance. 
Greater austerity is being demanded from an economy that is on its knees, owing to the heftiest dose of austerity any country has ever had to endure in peacetime. 
No offer of debt relief. 
No plan for boosting investment. 
And certainly, as of yet, no “Speech of Hope” for this fallen people. 
It is the mark of ancient societies, like those of Germany and of Greece, that contemporary tribulations revive old fears and foment new discord. 
So we must be careful. 
Teenagers should never be told that, due to some “prodigal sin,” they deserve to be educated in cash-strapped schools and weighed down by mass unemployment, whether the scene is Germany in the late 1940s or Greece today. 
As I write these lines, the Greek government is presenting the European Union with a set of proposals for deep reforms, debt management, and an investment plan to kick-start the economy. 
Greece is indeed ready and willing to enter into a compact with Europe that will eliminate the deformities that caused it to be the first domino to fall in 2010. 
But, if Greece is to implement these reforms successfully, its citizens need a missing ingredient: Hope. 
A “Speech of Hope” for Greece would make all the difference now – not only for us, but also for our creditors, as our renaissance would terminate the default risk. 
What should such a declaration include? 
Just as Byrnes’ address was short on detail but long on symbolism, a “Speech of Hope” for Greece does not have to be technical. 
It should simply mark a sea change, a break with the past five years of adding new loans on top of already unsustainable debt, conditional on further doses of punitive austerity. 
Who should deliver it? 
In my mind, the speaker should be German Chancellor Angela Merkel, addressing an audience in Athens or Thessaloniki or any Greek city of her choice. 
She could use the opportunity to hint at a new approach to European integration, one that starts in the country that has suffered the most, a victim both of the eurozone’s faulty monetary design and of its society’s own failings. 
Hope was a force for good in post-war Europe, and it can be a force for positive transformation now. 
A speech by Germany’s leader in a Greek city could go a long way toward delivering it. 

Spend in haste, repent at leisure: America’s latest bailout plan 
Cambridge – With minds concentrated by fears of another 1930’s-style Great Depression, America’s politicians have adopted, virtually overnight, a $700 billon bailout plan to resuscitate the country’s rapidly deflating financial sector. 
The final deal is an elaborate piece of financial and political engineering whose ultimate effect is almost impossible to predict. 
There are good reasons, however, to be skeptical that this will be the panacea that credit markets are (literally) banking on. 
The plan’s central conceit is that government ingenuity can disentangle the trillion-dollar “sub-prime” mortgage loan market, even though Wall Street’s own rocket scientists have utterly failed to do so. 
To boot, we are told that government is so clever that it might even make money on the whole affair. 
Perhaps, but let’s not forget that a lot of very smart people in the financial industry thought the same thing until quite recently. 
Just a year ago, the United States had five major freestanding investment banks that stood atop its mighty financial sector. 
Collectively, their employees shared more than $36 billion dollars in bonuses last year, thanks to the huge profits these institutions “earned” on their risky and aggressive business strategies. 
These strategies typically involve far more risk – and sophistication – than the activities of traditional commercial banks. 
In mid-August, I had the temerity to predict that risks had come home to roost, and that a large US investment bank might soon fail or be forced into a highly distressed merger. 
Little did I imagine that today, there would be no freestanding investment bank left on Wall Street. 
Indeed, after years of attracting many of the world’s best and brightest into ultra-high paying jobs, collapsing investment banks are now throwing them out left and right. 
One such victim, a former student, called me the other day and asked, “What am I supposed to do now, get a real job?” 
This brings us back to the US Treasury’s plan to spend hundreds of billions of dollars to unclog the sub-prime mortgage market. 
The idea is that the US government will serve as buyer of last resort for the junk debt that the private sector has not been able to price. 
Who, exactly, does the Treasury plan to employ to figure all this out? 
Why, unemployed investment bankers, of course! 
Let’s ponder this. 
Investment bankers have been losing their cushy jobs because they could not figure out any convincing way to price distressed mortgage debt. 
Otherwise, their firms would have been able to tap the trillions of dollars now sitting on the sidelines, held by sovereign wealth funds, private equity groups, hedge funds, and others. 
Now, working for the taxpayer, these same investment bankers will suddenly come up with the magic pricing formula that has eluded them until now. 
Little wonder that academics across the political spectrum have expressed considerable skepticism. 
True, the Treasury will take equity stakes in some firms, so there is some upside potential. 
But the main concern centers around the Treasury’s apparent intention to pay more than double the current market price (20-30 cents on the dollar) on the premise that Treasury’s success in untangling the mortgage market will make any discount seem like a bargain. 
Does such nitpicking fail to recognize the urgency of fixing the financial system? 
Isn’t any plan better than none? 
I, for one, am not convinced. 
Efficient financial systems are supposed to promote growth in the real economy, not impose a huge tax burden. 
And the US financial sector, in greasing the wheels of the real economy, has been soaking up an astounding 30% of corporate profits and 10% of wages. 
Thus, unlike in the 1930’s, the US faces a hypertrophied financial system. 
Isn’t it possible, then, that rather than causing a Great Depression, significant shrinkage of the financial sector, particularly if facilitated by an improved regulatory structure, might actually enhance efficiency and growth? 
I am not suggesting that the government should sit on its hands. 
It needs to provide an expanded form of deposit insurance during this time of turmoil, so that there are no more Northern Rock-style bank runs. 
That was a big lesson of the 1930’s. 
The government may also need to consider injecting funds more directly into the mortgage sector while the private sector reconstitutes itself. 
Certainly, the government must also find better ways to help homeowners and their lenders work out efficient bankruptcy proceedings. 
It makes no sense for banks to foreclose on homes when there are workout options whereby people could stay in their homes and banks could recover far more money. 
Eventually, after further twists, turns, and huge expenditures, the US will emerge from its epic financial crisis. 
But there is a significant risk that this latest step, however grand, might end up doing more for profits and bonuses in the financial sector than for the rest of the economy. 

China and the Deep Blue Sea 
HO CHI MINH CITY – Since December 2013, China has added more than 1,200 hectares to islands in the South China Sea. 
The geopolitical implications of these land reclamation efforts are well documented: The majority of the activity has taken place on the Spratly Islands, an archipelago in the waters between Vietnam, Malaysia, and the Philippines, all of which – along with China, Taiwan, and Brunei – have competing claims to the region. 
What has been less discussed is the project’s environmental impact, which borders on catastrophic. 
China’s activities are endangering fish stocks, threatening marine biodiversity, and creating a long-term threat to some of the world’s most spectacular sea life. 
Thousands of coral reefs, seagrass beds, and other shallow-water ecosystems are rapidly being destroyed and buried as China’s leaders rush to stake their claim to the region. 
The land reclamation project is undermining the ecological connection between the Spratly Islands and the South China Sea, choking off the supply of nutrients upon which these ecosystems depend. 
Moreover, China’s bellicose stance, together with the undefined ownership of the region and its fish stocks, has led to destructive overfishing, degrading the marine ecosystem and threatening endangered species, including sea turtles, sharks, and giant clams. 
Since 2010, the fishery reserves in the Spratly Islands and the western part of the South China Sea have been reduced by 16%. 
Approximately 300 million people depend on the South China Sea’s marine resources for their livelihoods; should China continue on its current course, the risk of massive economic dislocation will grow. 
But the South China Sea is an important body of water for the entire world, not only for the countries that border it. 
It is an essential international maritime transportation route – connecting the Indian Ocean to the Pacific Ocean – through which roughly 300 vessels, including 200 oil tankers, pass daily. 
The international community should condemn China’s militarization of the Spratly Islands and urge it to reverse course, thereby minimizing the risk of a conflict that could be even more disastrous for the marine environment. 
More broadly, all countries responsible for the degradation and destruction of the South China Sea’s shallow-water ecosystems must halt activities that threaten the region’s biodiversity and economic productivity. 
China’s claim to the Spratly Islands and a large portion of the South China Sea is based on the so-called nine-dash line, a demarcation extending far south of its territory that has been repeatedly contested since it was first proposed after World War II. 
And China’s recent land reclamation efforts violate several international environmental conventions, most notably the Convention on Biological Diversity (CBD) and the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES). 
China’s actions in the South China Sea also contravene the 1982 United Nations Convention on the Law of the Sea, which guarantees the right to navigation within its waters. 
And its militarization of the Spratlys is clearly a violation of the Declaration on the Conduct of Parties in the South China Sea. 
That declaration requires its signatories (the members of the Association of Southeast Asian Nations and China) to “exercise self-restraint in the conduct of activities that would complicate or escalate disputes and affect peace and stability.” 
This includes “refraining from action of inhabiting on the presently uninhabited islands, reefs, shoals, cays, and other features and to handle their differences in a constructive manner.” 
Thirteen years after that declaration, ASEAN should redouble its efforts to reach an accord with China over the status of the Spratly Islands and the South China Sea. 
And the international community should support that effort. 
All countries in the region have the responsibility to monitor and preserve the marine environment and manage its resources. 
But the real responsibility lies with China. 
When it comes to international law, it is up to the world’s most powerful countries to lead by example. 
China must live up to its obligations – beginning in the South China Sea. 

Spying on Eros 
A Sydney-based Muslim cleric, Sheik Hilaly, recently made headlines in Australia when he publicly reflected that immodest women invite rape because they are like “uncovered meat.” 
More unfortunate still was his implication that this was the cause of a series of gang rapes in Sydney in 2000, in which the attackers’ legal defense was that they thought the women were sexually available because they wore Western clothes. 
Although local Muslim leaders have since criticized Hilaly’s attitude, the incident again raises the question of attitudes regarding sex in “orthodox” communities, and how they can be reconciled with prevailing norms in the West. 
Meanwhile, in the United States, the controversy over government spying on its citizens seems to have died down, mostly because people are now convinced that their government will only look at the really bad guys. 
What do these two issues have in common? 
Gathering sophisticated intelligence is largely a matter of understanding trends. 
It is less important, for instance, to steal a copy of North Korea’s bomb designs than to know the morale and capability of its scientists. 
It is important to know how much deprivation in a country would swing public opinion. 
Like most social science, measurement of these dynamics is conducted indirectly. 
Intelligence analysts operate like scientists, in the sense that they develop theories, then measure and test them. 
Like scientists, they prefer to work with huge amounts of data, which is why the US government wants a record of every call and financial transaction made by every inhabitant of the country. 
Tracking the movement of individuals by the locator in their cell phones is possible, and it is surely under consideration. 
That is because intelligence agents look for indicators, correlations, and causes. 
Causes are the hardest to understand. 
For example, the civil services in Iraq have recently crossed a threshold beyond which they are now probably impossible to administer. 
A significant reason is believed to be the steady flight of intellectuals from Iraq, which seems obvious, but is difficult to measure. 
Indicators and correlations are easier to demonstrate. 
If a lot of people are leaving their seats during a sporting event, you might consider it an indication that the event is not exciting. 
During the Cold War, Western intelligence agencies developed an immense catalogue of indicators and correlations. 
If train traffic on certain routes increased, it suggested that army food supplies were being delivered, thus hinting at impending military action. 
Likewise, shipments of toilet paper are amazingly accurate indicators of military activity. 
Once the Soviets realized this, they began to send bogus shipments around the country on random schedules, creating shortages for the baffled civilian population. 
As it turns out, another extremely useful view into a society is the type of pornography it consumes, together with how that pornography is manufactured and delivered. 
Yes, it is true. 
Spies are interested in prurient behavior everywhere. 
One reason is that pornography in orthodox societies is illicit, so the distribution channels opened by sexual materials are usually used for other goods as well. 
In the Muslim world, there is a significant, important flow of pornography. 
According to one story, possibly apocryphal, in the 1970’s, the Islamic insurgency in Iran was initially planned using material delivered through porn-related channels because the mosques were so tightly controlled. 
But there are other trends indicated by pornographic content that are useful to spies. 
Movies produced for the sexual gratification of consumers reveal cultural norms of restriction, transgression, and otherness. 
In fact, porn is so specifically tuned to the tastes of consumers that shifts can indicate changes in a society almost immediately. 
Interestingly, many purveyors of pornography initially thought that better quality video would make their product more desirable. 
However, it seems that high production values were actually less popular. 
So a “casual” production style was adopted, similar to the design of worn and ripped jeans. 
Part of the raw appeal of pornography, it seems, is that the product itself be raw, and conspicuously illicit. 
But local tastes nonetheless vary widely. 
Japanese porn features schoolgirls, often bound. 
Egyptian porn before Nasser featured local beauties and voyeurism, but now focuses on fair-haired and pale-skinned women, sometimes with forced sex as a theme. 
Egyptian-born Sheik Hilaly, in Sydney, may have been verbalizing a latent sense of otherness and mistaking it for insight. 
This means that tinkering with the content of porn could be in the national interest, under certain circumstances. 
Anyone privy to details of such activities cannot comment on them, but one story circulating in the research community involved attempts to introduce condoms into African porn as part of an anti-AIDS effort. 
Then, of course, there is the biggest market of all: the US, where it is estimated that annual revenue for pornography in 2004 exceeded the combined revenue of the ABC, CBS, and NBC television networks by many billions of dollars. 
We should not be surprised if someone eventually tries to tweak the content of pornography to exploit Americans’ cultural proclivities on behalf of other products, causes, or even political candidates. 

Squaring Asia’s Nuclear Triangle 
TOKYO – Just before the fourth trilateral summit between Japan, China, and South Korea began on May 21, Chinese Premier Wen Jiabao, South Korean President Lee Myung-bak, and Japanese Prime Minister Naoto Kan jointly visited the areas affected by the Great East Japan Earthquake, offering encouragement to the disaster’s victims living in evacuation centers. 
Since the accident at Fukushima Daiichi Nuclear Power Plant in March, Kan has aimed at lifting the bans that many countries have imposed on imports of Japanese agricultural products, and so offered the two heads of state cherries from Fukushima in a bid to highlight their safety. 
At the summit, the three countries issued a joint statement outlining cooperation on a wide range of issues, including nuclear safety, disaster prevention, economic growth, and the environment. 
The lessons learned from Japan’s earthquake and nuclear accident would be shared with China, South Korea, and the wider international community, and, in an addendum, the Japanese authorities promised to “continue to provide information…with the greatest transparency possible.” 
In fact, the Kan administration – which loathes the involvement of bureaucrats, who are professionals, in managing public affairs – delayed notifying neighboring countries when it was forced to order the release of water containing low concentrations of radioactive material. 
For Kan, the real priority was his government’s effort to maintain its grip on power, not reassuring Japan’s neighbors of the actions it was taking to contain a potential threat to their citizens. 
The codicil to the summit communiqué was created to address these concerns. 
It emphasized the importance of sharing information about nuclear safety, and incorporated specific measures, including the creation of a framework for rapid notification in the event of an emergency and exchanges of experts to assist in managing future nuclear crises and ensuring that regional concerns are taken into account. 
Ever since the Fukushima accident, opposition to nuclear power has been growing in China and South Korea, both of which had been planning a massive expansion of their nuclear generating capacity – and both of which face a change of political leadership next year. 
China’s succession, though set, will nonetheless bring a period of uncertainty, while South Korea will undoubtedly face its usual no-holds-barred democratic battle in its coming presidential election. 
Given these political realities, keeping ordinary citizens content about civilian nuclear power has become a greater priority than usual in both countries. 
This confluence of political need has created an opportunity for all three countries to cooperate more closely in the management of civilian nuclear power, and this opportunity should not be missed. 
Sensing this, China and South Korea have provided humanitarian and economic aid to areas affected by the earthquake, and both countries were quick to send specialized teams to Japan to search for the missing. 
The first country to send a rescue team to Japan, however, was Taiwan (which also was the largest single provider of donations, amounting to ¥20 billion). But, owing to what Kan’s government called “confusion on the ground,” Taiwan’s rescue team was kept waiting for days. 
And, while the people of Japan were grateful for Taiwan’s unexpected generosity, the Japanese government failed to offer any thanks, despite running advertisements in major newspapers expressing gratitude for the relief sent from other countries. 
(Eventually, a public campaign raised the money to run an advertisement in a Taiwanese newspaper.) 
Taiwanese President Ma Ying-jeou was as surprised as the Japanese by the size of the contributions made by his people. 
Ma had been tilting his government’s policies increasingly toward China, concluding a bilateral framework agreement on economic cooperation. 
But, in the wake of Taiwanese society’s outpouring of sympathy for Japan, he has adjusted his stance. 
The Ma government has also been kept on its toes by the opposition Democratic Progressive Party’s call for the phase-out of nuclear power in Taiwan by 2025. 
Taiwan has three nuclear power plants, and, like the plant at Fukushima, they directly face the ocean. 
Two are located within 20 kilometers of the capital, Taipei, and it is generally agreed that there would be no escape for the vast majority of the capital’s citizens should a major nuclear accident occur. 
Construction of a fourth nuclear power plant, which began in 1999, was suspended by DPP President Chen Shui-bian the following year. Although Chen’s government, under pressure from the opposition Kuomintang, later restarted work on the plant, design revisions have repeatedly delayed its completion. 
Opposition from local residents remains stiff. 
At their recent trilateral summit, Japan, China, and South Korea skillfully evaded direct mention of the delicately poised security issues that they face. 
And, while they did bring nuclear safety to the fore and agreed to cooperate and share information with each other, efforts to meet this region-wide challenge cannot succeed without bringing Taiwan into the discussions. 
Taiwan should also be allowed to participate in the International Atomic Energy Agency in the area of nuclear safety, just as it became an observer at the World Health Organization during the SARS and avian flu pandemics of the 1990’s. 
Where nuclear safety is concerned, China must rethink its policy of isolating Taiwan from international bodies. 

Sri Lanka’s Rebirth 
COLOMBO – Sri Lanka has been deservedly praised for the progress it has made since the end of the war against the separatist Tamil Tigers in 2009. 
The economy has grown at an average annual rate of 6.7%, and education and health statistics are impressive. 
All developing countries face myriad challenges, but this is especially the case for a country that has suffered an intense 30-year civil war. 
The government will need to set priorities; but success will require a comprehensive approach. 
Underlying wars such as the fight with the Tamil Tigers are, typically, social and economic grievances such as real or perceived discrimination, and the failure of government to address wealth and income disparities adequately. 
Thus, more than transitional justice is required in Sri Lanka (or, to take another example, in Colombia, where peace with the FARC guerillas seems increasingly likely). 
What is required is full integration of the Tamils, Sri Lanka’s embittered minority, into the country’s economic life. 
Markets on their own won’t solve this problem. 
Sri Lanka will need balanced affirmative-action programs that address the various dimensions of economic disparity and are attuned to the inequalities within the Tamil population. 
It will do no good to give a leg up to Sri Lanka’s many rich Tamils, while leaving poor, lower-caste Tamils further behind. 
Economic integration of the northern Tamil region will require heavy public investment in infrastructure, education, technology, and much else. 
Indeed, such investments are needed for the entire country. 
And yet tax revenue as a share of GDP is only 11.6%, about one-third that of Brazil. 
Like many other developing countries, Sri Lanka simply enjoyed the fruits of high commodity prices in recent years (tea and rubber account for 22% of exports). 
Sri Lanka should have used the commodity boom to diversify its export base; the previous government of Mahinda Rajapaksa did not. 
With export prices down, and with tourism likely to suffer from the global economic downturn, a balance-of-payments crisis looms. 
Some suggest that Sri Lanka turn to the International Monetary Fund, promising belt tightening. 
That would be hugely unpopular. 
Too many countries have lost their economic sovereignty in IMF programs. 
Besides, the IMF would almost surely tell Sri Lankan officials not that they’re spending too much, but that they’re taxing too little. 
Fortunately, there are many taxes that the authorities can impose that would increase efficiency, growth, and equity. 
Sri Lanka has abundant sunshine and wind; a carbon tax would raise considerable revenue, increase aggregate demand, move the country toward a green economy, and improve the balance of payments. 
A progressive property tax would encourage more resources to go into productive investments, while reducing inequality and, again, boosting revenues substantially. 
A tax on luxury goods, most of which are imported, would serve similar goals. 
Some in the country, citing inadequate inflows of foreign direct investment (despite marked improvement in the business climate), argue for lower corporate taxes. 
But such tax concessions are relatively ineffective in bringing in the kind of long-term investment that Sri Lanka needs; so to embrace them would needlessly eviscerate the already weak tax base. 
Likewise, another frequently proposed strategy, public-private partnerships, may not be as beneficial as advertised. 
Such partnerships usually entail the government bearing the risk, while the private sector takes the profits. 
Typically, the implicit cost of capital obtained in this way is very high. And while the private sector can, and frequently does, renege on its contractual obligations (through bankruptcy) – or force a renegotiation under the threat of reneging – the government cannot, especially when an international investment agreement is in place. 
Twenty-first century development strategies need to be different. 
They should be based on learning – learning to produce, learning to export, and learning to learn. 
There can be leapfrogging: in Sri Lanka’s case, the benefits (apart from direct employment) to be gained from certain low-skilled manufacturing stages like garments may be limited. 
Given its education levels, Sri Lanka may be able to move directly into more technologically advanced sectors, high-productivity organic farming, and higher-end tourism. 
But if Sri Lanka pursues such activities, it will need to ensure good environmental policies for the entire island. 
That will necessitate sound urban planning. 
Sri Lanka is fortunate to have a low level of urbanization today; but this is likely to change in the next two decades. 
This gives the country the opportunity to create model cities, based on the adequate provision of public services and sound public transport and attuned to the cost of carbon and climate change. 
Sri Lanka, beautiful and ideally located in the Indian Ocean, is in a position to become an economic hub for the entire region – a financial center and a safe haven for investment in a geopolitically turbulent part of the world. 
But this won’t happen by relying excessively on markets or underinvesting in public goods. 
Fortunately, with peace and the emergence of representative political institutions, Sri Lanka today has a better opportunity than ever to make the right choices. 

Winning Sri Lanka’s Peace 
COLOMBO – Winning a war or revolution, only to lose the subsequent peace, is one of the grim political truths of our time. 
In Iraq, a quick military victory over Saddam Hussein’s regime soon gave way to insurgency, civil war, and the rise of the murderous Islamic State. 
In Libya, Syria, Yemen, and elsewhere, the hopes unleashed by the Arab Spring have similarly turned into an often-violent despair. 
Today, a half-decade after the end of its 36-year civil war, Sri Lanka is at a crucial moment in its own efforts to consolidate peace and secure its long-term benefits. 
Newly elected President Maithripala Sirisena and I, as prime minister, are determined to win that peace, and to help our country become what it always should have been: a prosperous Asian island of democracy, civility, and open society. 
The risks of a failed peace are appearing only now, because, since 2009, when the war with the Tamil Tigers ended in an enormous spasm of violence, the government led by former President Mahinda Rajapaksa made only the most half-hearted of efforts to bring about reconciliation with our Tamil citizens. 
Reconstruction of war-ravaged Tamil districts, as well as other parts of our society damaged by years of fighting and terrorism, has barely begun. 
That neglect was part of a deliberate strategy by Rajapaksa, who saw keeping Sri Lanka on a semi-war footing, and our Tamil citizens aggrieved and alienated, as the most effective way to maintain his iron-fisted rule. 
But, though his divide and rule strategy worked for a while, allowing him to concentrate an unprecedented amount of power in his own hands, it could not hide the truth of our social divisions and continuing impoverishment. 
So, in the presidential election of this past January, Sirisena stunned the world by creating a winning coalition of Sri Lankans of all faiths and ethnicities who want to rebuild their democracy, not continue down the path of authoritarian rule. 
In the months since Sirisena’s triumph, Sri Lankan democracy has been revived, and the hard work of building a durable domestic peace has begun. 
We plan to quickly call a Parliamentary election, which will take place one year ahead of schedule, in order to replace Rajapaksa’s echo chamber with a fully functioning assembly, one that holds the government to account. 
Moreover, presidential power is now exercised within the limits established by law, not according to the whims of one man. 
Our judges no longer feel intimidated. 
Our business leaders no longer fear shakedowns and takeovers by the president’s greedy family members and cronies. 
As we liberate all of our citizens from fear, we will rebuild Sri Lanka as a free society. 
The authoritarian model of capitalism that Rajapaksa introduced to our country, and that much of the world seems to be embracing nowadays, is not for us. 
Of course, some of our neighbors are advising us to take a different path, to reform our economy and not worry too much about re-establishing political freedom. 
Our experience with authoritarian rule, however, is that it undermines the goal of post-conflict reconciliation and reconstruction by its need to maintain our society’s divisions artificially. 
The best way to avoid a relapse into conflict and arbitrary rule is to ensure that Sri Lanka’s leaders are held accountable through representative institutions. 
But we cannot fully turn the page on authoritarian rule, restore the full range of democratic freedoms, and rebuild our economy in an inclusive way on our own. 
Too much of our country’s wealth has been damaged by war, taken flight abroad, or been siphoned off through corruption. 
We simply lack the resources to undertake the great task of reconstruction without assistance. 
So we need the world’s democracies to stand with us and support us, lest our people become discouraged and be tempted by the autocratic forces waiting in the wings to return to power in the coming parliamentary election. 
We need to demonstrate to our people that reconciliation, democracy, tolerance, and the rule of law constitute the only route to long-term peace and shared prosperity. 
Sadly, the help that we have received so far is too little to enable my government to be as effective as it can and should be in rebuilding our country and resetting our strategic position in the world. 
Still, there is reason for hope. 
Though our political institutions need a thorough overhaul, I am proud to say that, despite Rajapaksa’s best efforts to corrupt and hollow them out, our victory was made possible because the election commission and court workers adhered to the law. 
Equally important, when the votes were counted, Sri Lanka’s military leaders honored their oaths and bravely rebuffed Rajapaksa’s unconstitutional order to annul the election and maintain him in power. 
These acts of civic heroism form a strong basis on which to refound Sri Lanka’s state and society. 
With the world’s help, we will do just that. 

Sri Lanka’s False Dawn 
NEW YORK – As the Sri Lankan government celebrates the first anniversary of its historic triumph over the Liberation Tigers of Tamil Eelam (LTTE), it is increasingly clear that the battlefield victory will prove pyrrhic unless the legitimate grievances of Sri Lanka’s minority communities are recognized and addressed. 
By failing to reach out meaningfully to the Tamil-speaking minority, and by cracking down on opposition voices and any kind of dissent in Sri Lanka, the government is throwing away a once-in-a-generation opportunity. 
But it is not too late for President Mahinda Rajapaksa’s government to change course and begin to build a truly multi-ethnic society. 
Indeed, the country’s future depends on his doing just that. 
The end of the civil war was an unambiguously positive development for Sri Lanka. 
The Tamil Tigers led a ruthless campaign for an independent territory against Sri Lanka’s government for most of the past three decades. 
They killed not only government officials, but often Tamil leaders willing to explore compromise solutions with the government, as well as civilians from all ethnic groups. 
Indeed, the LTTE has been accused of a range of human-rights violations, in addition to such killings, including abduction, child conscription, and using civilians as human shields. 
The Sri Lankan army, police, and other state organs also perpetrated major abuses during the conflict. 
The final throes of the war last year were horrific, with 20,000-40,000 civilians (mostly ethnic Tamils) killed in a period of a few months by both the Sri Lankan government forces and the Tigers. 
We may never know the exact number of casualties during the last phase of the conflict, because the government did not allow international organizations or media into the area. 
Rajapaksa’svictory in the presidential election this past January, followed in April by a win for his United People’s Freedom Alliance in parliamentary elections, ensured a majority for the president and his party. 
These victories create an opportunity for the government to reach out to the opposition and to minority groups to build a truly inclusive and democratic Sri Lanka, but this has not yet happened. 
Instead, government policies since the end of the war have targeted opponents and critics, possibly laying the foundation for a new round of conflict. 
Opposition candidate General Sarath Fonseka was harassed and soon arrested after the presidential elections. 
More than 250,000 Tamil civilians were kept in virtual internment camps long after the end of hostilities and prevented from exercising their civil rights or returning to their homes. 
No significant special efforts have been made to reach out to the Tamil-speaking minority in order to understand better and address those legitimate concerns that found illegitimate expression through the LTTE. 
If this trend continues, Sri Lanka will become doomed to repeat its tragic history. 
Sri Lanka is blessed with brilliant people, indefatigable civil-society organizations, decent courts and infrastructure, and abundant natural resources. 
But none of these attributes will lead to long term security, stability, and prosperity for the country unless the government plays a more constructive role. 
A first step in the national healing process must include exploring in a public way the grievances of the country’s minorities, both Tamil and Muslim, and discussing the violations perpetrated by the LTTE and the government during the conflict. 
As was the case in South Africa, this approach can lay an essential foundation for a sustainable and effective reconciliation process. 
The government must open itself far more to hearing and responding to the legitimate voices of the Sri Lankan people across the country’s political spectrum and ethnic divides. 
If these grievances cannot be addressed through legitimate means, they will find other far less healthy outlets over time. 
The government must also make every effort to establish the rule of law, including implementation of the 17th Amendment to the Constitution, which calls for independent judicial institutions, and of the 13th Amendment, which devolves power to the provinces. 
Reports of new amendments being drafted in order to rescind these guarantees would be extremely disturbing if confirmed. 
Sri Lanka must do far more to ensure minority rights and protections not just because it is the right thing to do, but because it is the best possible investment the country can make in its future. 
It is not too late to embrace this future, but soon it will be if the government does not change course immediately. 

The Global Economy Without Steroids 
WASHINGTON, DC – Economic growth is back. 
Not only are the United States, Europe, and Japan finally expanding at the same time, but developing countries are also regaining strength. 
As a result, world GDP will rise by 3.2% this year, up from 2.4% in 2013 – meaning that 2014 may well be the year when the global economy turns the corner. 
The fact that the advanced economies are bouncing back is good news for everyone. 
But, for the emerging and developing economies that dominated global growth over the last five years, it raises an important question: Now, with high-income countries joining them, is business as usual good enough to compete? 
The simple answer is no. 
Just as an athlete might use steroids to get quick results, while avoiding the tough workouts that are needed to develop endurance and ensure long-term health, some emerging economies have relied on short-term capital inflows (so-called “hot money”) to support growth, while delaying or even avoiding difficult but necessary economic and financial reforms. 
With the US Federal Reserve set to tighten the exceptionally generous monetary conditions that have driven this “easy growth,” such emerging economies will have to change their approach, despite much tighter room for maneuver, or risk losing the ground that they have gained in recent years. 
As the Fed’s monetary-policy tightening becomes a reality, the World Bank predicts that capital flows to developing countries will fall from 4.6% of their GDP in 2013 to around 4% in 2016. 
But, if long-term US interest rates rise too fast, or policy shifts are not communicated well enough, or markets become volatile, capital flows could quickly plummet – possibly by more than 50% for a few months. 
This scenario has the potential to disrupt growth in those emerging economies that have failed to take advantage of the recent capital inflows by pursuing reforms. 
The likely rise in interest rates will put considerable pressure on countries with large current-account deficits and high levels of foreign debt – a result of five years of credit expansion. 
Indeed, last summer, when speculation that the Fed would soon begin to taper its purchases of long-term assets (so-called quantitative easing), financial-market pressures were strongest in markets suspected of having weak fundamentals. 
Turkey, Brazil, Indonesia, India, and South Africa – dubbed the “Fragile Five” – were hit particularly hard. 
Similarly, some emerging-market currencies have come under renewed pressure in recent days, triggered in part by the devaluation of the Argentine peso and signs of a slowdown in Chinese growth, as well as doubts about these economies’ real strengths amid generally skittish market sentiment. 
Like the turbulence last summer, the current bout of market pressure is mainly affecting economies characterized by either domestic political tensions or economic imbalances. 
But, for most developing countries, the story has not been so bleak. 
Financial markets in many developing countries have not come under significant pressure – either in the summer or now. 
Indeed, more than three-fifths of developing countries – many of which are strong economic performers that benefited from pre-crisis reforms (and thus attracted more stable capital inflows like foreign-direct investment) – actually appreciated last spring and summer. 
Furthermore, returning to the athletic metaphor, some have continued to exercise their muscles and improve their stamina – even under pressure. 
Mexico, for example, opened its energy sector to foreign partnerships last year – a politically difficult reform that is likely to bring significant long-term benefits. 
Indeed, it arguably helped Mexico avoid joining the Fragile Five. 
Stronger growth in high-income economies will also create opportunities for developing countries – for example, through increased import demand and new sources of investment. 
While these opportunities will be more difficult to capture than the easy capital inflows of the quantitative-easing era, the payoffs will be far more durable. 
But, in order to take advantage of them, countries, like athletes, must put in the work needed to compete successfully – through sound domestic policies that foster a business-friendly pro-competition environment, an attractive foreign-trade regime, and a healthy financial sector. 
Part of the challenge in many countries will be to rebuild macroeconomic buffers that have been depleted during years of fiscal and monetary stimulus. 
Reducing fiscal deficits and bringing monetary policy to a more neutral plane will be particularly difficult in countries like the Fragile Five, where growth has been lagging. 
As is true of an exhausted athlete who needs to rebuild strength, it is never easy for a political leader to take tough reform steps under pressure. 
But, for emerging economies, doing so is critical to restoring growth and enhancing citizens’ wellbeing. 
Surviving the crisis is one thing; emerging as a winner is something else entirely. 

Stability in Kosovo Demands Development of the Bal 
In attending the Southeastern Europe Stability Pact Summit in Sarajevo this weekend, President Clinton highlights the importance for the United States as well as Europe of the future of this troubled region. 
What is at stake is more than the reconstruction of Kosovo. 
It is the effort to build relations of cooperation and exchange to replace a centuries-old legacy of conflict; it is the economic growth and political development of an entire region whose potential has been blocked by the last remaining vestiges in Europe of National Communism. 
As important as all this is, rebuilding Kosovo alone will not suffice. 
On strictly economic grounds, Kosovo itself is not viable other than as an integrated part of a prospering region. 
The rebuilding of Bosnia-Hercegovina stands as a vivid example of a flawed reconstruction. 
Roads and public buildings have been completed, but there are no jobs. 
Roughly half of the urban labor force in Bosnia is on the payroll of international organizations and NGOs, and the other half is unemployed. 
Limited on all sides by embargoes and conflict, the country's few private businesses do not have sufficient markets to survive. 
Moreover, even if Kosovo could survive economically in isolation from its neighbors, such survival would do little to break the barriers of hatred and distrust, which have repeatedly threatened the political stability of the region. 
What is needed is an Economic Development Plan that is truly regional in scope. 
Its thrust must be to integrate the 53 million people in the various political entities of the Balkan peninsula into a dynamic regional economy that is open and prosperous. 
It must aim at fostering communication and exchange between all of the elements of the former Republic of Yugoslavia, and Albania, Bulgaria and Romania. 
Such a regional plan requires the promotion of trade between these countries. 
To do this, the infrastructure for trade needs to be developed. 
The Balkans are, physically, the most segmented region of Europe. 
Even where customs are no obstacle, as between Albania and Macedonia, very few goods are exchanged. 
There is no direct rail link between Zagreb and Belgrade. 
The war has added immensely to this segmentation and fragmentation by blocking traffic on the Danube and by destroying international road and bridge links. 
Major investments are required to restore and rebuild the transportation network of the region. 
Because this war time destruction was concentrated, some of the reconstruction aid will also be concentrated. 
In order to ensure that this aid brings benefits to the region as a whole, and that its impact is therefore multiplied throughout all the economies of the region, half of the construction projects should be set aside for businesses based in Southeast Europe. 
In order to be successful, such a regional development plan must enlist the participation and cooperation of the authorities of the region. 
It is natural that it has fallen upon the European Union to be the motor of the development of Southeast Europe. But the implementation should not be exclusively dictated from Brussels. 
The EU would do well, in this regard, to copy a page from the history of the reconstruction of Western Europe after World War II. 
In that case, the United States gave the aid. 
But the nations of Western Europe allocated it. 
In fact, the aid was conditional on their willingness to cooperate and foster exchange amongst themselves. 
The European Union should act in a similar manner towards Southeast Europe today. 
The governments of the region must take the lead and assume real responsibility. 
The first place to start is with the Agency for the Reconstruction of Kosovo, based in Pristina. 
At present, all fifteen member nations of the European Union are represented on its Board. 
But the nations of the region are not. 
In as much as the integration of Kosovo into the regional economy is the eventual objective, it would be well to allow now for regional authorities to participate in the reconstruction plans. 
The disparity in political conditions of the entities in Southeast Europe today argues for an eclectic and practical approach - as apolitical as possible -- towards cooperation. 
A number of specific, interlocking organizations are called for, rather than one single Organization for Economic Cooperation. 
The focus of one should be the restoration of traffic on the Danube and the extension of the transportation networks of the region. 
The focus of another should be energy infrastructure. 
In each case, however, a substantial portion of the decision making should be entrusted to specialized authorities of the region, with the proviso that the aid will be given on condition that they cooperate. 
For example, the future shape of the transportation network for Southeast Europe should not be exclusively planned from Brussels. 
Authorities from the region should participate in decisions about where to rebuild bridges and highways. 
Working together, the United States, the European Union, and the people of Southeast Europe have the opportunity to transform an area of conflict into an area of cooperation and development. 
In order to succeed, they must look beyond the reconstruction of any single province, and plan, in concrete, practical steps, for the development of the region as a whole. 
The stability of the region and the credibility of the Western paradigm of markets and liberal democracy are at stake. 

Stabilizing the Horn 
STRASBOURG – After almost two decades as a failed state torn by civil war, perhaps the world should begin to admit that Somalia – as it is currently constructed – is beyond repair. 
Some of the country, however, can meet at least a basic standard of governance. 
The northernmost region, Somaliland, situated strategically at the opening to the Red Sea and home to roughly 3.5 million of Somalia’s 10 million people, is more or less autonomous and stable. 
But this stability fuels fears that Somaliland’s people will activate the declaration of independence they adopted in 1991. 
At the end of September, Somaliland will hold its third presidential election, the previous two having been open and competitive. 
Unlike many developing countries, it will welcome foreign observers to oversee the elections, though, unfortunately, most Western countries and agencies will stay away, lest their presence be seen as legitimizing Somaliland’s de facto government. 
But Somaliland’s strategic position near the world’s major oil-transport routes, now plagued by piracy, and chaos in the country’s south, mean that independence should no longer be dismissed out of hand. 
Indeed, following a fact-finding mission in 2007, a consensus is emerging within the EU that an African Union country should be the first to recognize Somaliland’s independence. 
A 2005 report by Patrick Mazimhaka, a former AU deputy chairman, provides some leeway for this, as Mazimhaka pointed out that the union in 1960 between Somaliland and Somalia, following the withdrawal of the colonial powers (Britain and Italy), was never formally ratified. 
Ethiopia is the obvious candidate to spearhead recognition, given its worries about jihadi unrest within Somalia. 
Moreover, landlocked Ethiopia uses Somaliland’s port of Berbera extensively. 
Yet Ethiopia may hesitate, owing to its fears that formally recognizing Somaliland’s independence could undermine Somalia’s fragile Western-backed Transitional Federal Government. 
But, as Somalia’s new president, Sheikh Sharif Sheikh Ahmed, is a former head of the Islamic Courts, Ethiopia may choose the current status quo in Somaliland over the dream of stabilizing Somalia. 
The key regional obstacle to recognition is Saudi Arabia, which not only objects to the secular, democratic model promoted by Somaliland, but is a strong ally of Somalia, which is a member of the Arab League (despite not being Arab) and the Organization of the Islamic Conference. Saudi Arabia supports the TFG financially and politically. 
Saudi pressure on Somaliland has ranged from banning livestock imports between 1996-2006, to threatening to reject the Somaliland passports of Hajj pilgrims. 
When Somaliland’s people vote at the end of September, they will not be deciding explicitly on secession, but their steady effort at state building does amplify their claims to independence. 
So, two years after Kosovo’s independence, and a year after Russian troops wrenched Abkhazia and South Ossetia from Georgia, it is high time for diplomats and statesmen to provide some guidelines as to when and in what circumstances secession is likely to be acceptable. 
Does any self-selected group anywhere have the right to declare independence? 
If so, the richest parts of any country could decide to go it alone, thus impoverishing their fellow citizens. 
Even if greed is ruled out as an acceptable motive, in favor of traditional ethno-cultural nationalism, a profusion of tiny tribal states might make the world far more unstable. 
Moreover, does anyone, for example, want to see China return to the years of bloody warlordism of the early twentieth century? 
Not likely. 
Thus clear principles are needed, as neither self-determination nor the inviolability of national borders can be treated as sacrosanct in every case. 
So let me attempt to outline some basic principles: 
· No outside forces should either encourage or discourage secession, and the barriers for recognizing secession should be set high. 
Secession is in itself neither good nor bad: like divorce, it may make people more or less content. 
· A declaration of independence should be recognized only if a clear majority (well over 50%-plus-one of the voters) have freely chosen it, ideally in an unbiased referendum. 
· The new state must guarantee that any minorities it drags along – say, Russians in the Baltic states, or Serbs in Kosovo – will be decently treated. 
· Secessionists should have a reasonable claim to being a national group that, preferably, enjoyed stable self-government in the past on the territory they claim. 
Nations need not be ethnically based; few are entirely. 
But most nations are unified by language, a shared history of oppression, or some other force of history. 
On this, admittedly subjective, measure, Somaliland qualifies as a nation. 
It was briefly independent (for five days) in 1960 after the British withdrawal, before throwing in its lot with the formerly Italian south, a decision which its people have regretted ever since. 
In this brief period, 35 countries, including Egypt, Israel, and the five Permanent Members of the Security Council, recognized Somaliland diplomatically (interestingly, Israel was the first to do so). 
If Somaliland’s imminent multi-party elections are reasonably fair and open, the outside world, including the AU and the United Nations, will need to reconsider its status, which has been fudged since the collapse of Siad Barre’s regime in 1991. 
All three of Somaliland’s parties contesting the forthcoming election are adamant about wanting recognition of the region’s independence, which was confirmed overwhelmingly by a referendum in 2001. 
So there is no question of one clan or faction imposing independence on the others. 
Given the interests of all the world’s great powers in stabilizing the Horn of Africa, there does seem to be movement toward accepting Somaliland’s claims. 
An independent Somaliland could be a force for stability and good governance in an otherwise hopeless region. 

Stabilizing the Stans 
WASHINGTON, DC – Recent violence in Kazakhstan and Tajikistan, following civil strife in Kyrgyzstan in 2010, has intensified international concern about Central Asia’s security as the region becomes increasingly important for delivering NATO supplies to the International Security Assistance Force (ISAF) in Afghanistan. 
Central Asian countries allow NATO members and partners to transport supplies through their territory to support military forces in Afghanistan – an essential complement to the flow of supplies to the ISAF through Pakistan, which is vulnerable to tensions with the United States. 
These countries have been logical partners for NATO in Afghanistan. 
They share Western concerns about a revival of the Afghan Taliban and their potential support for extremist Islamist movements in other Central Asian countries. 
Indeed, all five of the post-Soviet Central Asian countries – Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan – have been targeted by Muslim extremist organizations linked to the Taliban and al-Qaeda. 
Moreover, Central Asian leaders are eager to maintain NATO’s presence in Eurasia as a way to balance China and Russia. 
Although the region’s leaders generally enjoy good relations with both countries, they fear that Russian military and Chinese economic dominance could lead to the rise a Sino-Russian condominium at their expense. 
All Central Asian countries suffer from pervasive corruption, acute income inequalities, political succession problems, and transnational criminal groups that cooperate more effectively than the region’s frequently feuding governments do. 
Deteriorating public services contributed to the overthrow of Kyrgyzstan’s government, and could lead alienated citizens to support Islamist terrorists and other extremists. 
Although Kazakhstan, Uzbekistan, and other Central Asian countries have resumed rapid economic growth, much of their recent progress simply correlates with surging world oil and gas prices. 
Growth could easily slow following the next energy-price slump or other external shock, such as proposals in Russia to limit employment and remittance opportunities for Central Asian workers there. 
All five countries have yet to fully recover from the disintegration of Soviet infrastructure networks, and require urgent domestic and region-wide measures to strengthen their education, transportation, energy provision, health care, and other public services. 
And their myriad interdependencies increase the risks of transnational threats, such as disease outbreaks, and resource-related confrontations. 
Social disorder in Tunisia, Egypt, Libya, and other Arab countries has invariably led observers to regard Central Asia’s autocracies as potentially vulnerable to similar upheaval. 
Some Central Asian leaders have been in power for many years, and only Kyrgyzstan, the most impoverished of the five, has developed a competitive multi-party political system. 
Elsewhere, political parties are weak or are tools of the regime. 
But other factors make the Arab scenario less plausible in Central Asia. ­­Security forces are more closely aligned with ruling elites; independent political groups and social-media networks are less well developed; economic performance remains high in some countries; and a previous wave of revolutions produced disappointing results in Ukraine and Kyrgyzstan. 
Ensuring long-term stability will require poverty reduction, job creation, reduced income inequality, and the development of these countries’ human resources. 
Private-sector activity will not expand without healthy national banks subject to rigorous financial discipline and greater supervisory autonomy. 
Governments, facing pressure to increase spending, need to develop targeted social safety nets that protect their poorest people through cash or near-cash transfers. 
The International Monetary Fund recommends additional reforms aimed at improving labor-market flexibility, strengthening national competitiveness through investment in transportation and telecommunications infrastructure, and diversification away from natural-resource exports. 
Moreover, reducing trade barriers between these countries is essential for taking advantage of regional synergies and economies of scale. 
Central Asia’s economies need greater access to their neighbors’ markets, energy, and transportation infrastructure. 
Above all, these states need to create a more favorable climate for business and foreign investment through enhanced transparency, improved governance, and more effective political, economic, and social institutions. 
Although some Central Asian countries have made progress, most still lag other emerging markets in accountability, rule of law, and reducing corruption. 
Elsewhere in the post-Soviet world, Georgia’s success shows that determined governments can reduce even entrenched venality. 
In the meantime, Central Asian countries need sustained donor support, because private investment flows have not recovered to levels that preceded the global financial crisis. 
But foreign donors must exercise greater oversight and conditionality in their regional aid programs, as well as ensure that their assistance is better coordinated and integrated than in the past. 
Central Asia’s hydrocarbon reserves, and its pivotal location, make it strategically important for many countries. 
Russian energy managers count on the region’s oil and gas supplies to supplement stagnating domestic production. 
Western governments aim to circumvent Russia’s pipelines and import some oil and gas directly. 
China views the region’s resources as an essential complement to its more vulnerable maritime energy imports from Africa and the Persian Gulf, and has invested billions of dollars constructing overland pipelines. 
All of this serves to increase the political uncertainty that threatens the region’s stability. 
These countries urgently need structural reforms that can generate more inclusive economic growth and political institutions that channel, rather than suppress, legitimate popular demands. 
Citizens who can help to shape their country’s public policies through elections and other legal political activities are less likely to resort to extra-constitutional means. 


Stagnant and Paralyzed 
MILAN – The recent dramatic declines in equity markets worldwide are a response to the interaction of two factors: economic fundamentals and policy responses – or, rather, the lack of policy responses. 
First, the fundamentals. 
Economic growth rates in the United States and Europe are low – and well below even recent expectations. 
Slow growth has hit equity valuations hard, and both economies are at risk of a major downturn. 
A slowdown in one is bound to produce a slowdown in the other – and in the major emerging economies, which, until now, could sustain high growth in the face of sluggish performance in the advanced economies. 
Emerging countries’ resilience will not extend to double-dip recessions in America and Europe: they cannot offset sharp falls in advanced-country demand by themselves, notwithstanding their healthy public-sector balance sheets. 
America’s domestic-demand shortfall reflects rising savings, balance-sheet damage in the household sector, unemployment, and fiscal distress. 
As a result, the large non-tradable sector and the domestic-demand portion of the tradable sector cannot serve as engines of growth and employment. 
That leaves exports – goods and services sold to the global economy’s growth regions (mostly the emerging economies) – to carry the load. 
And strengthening the US export sector requires overcoming some significant structural and competitive barriers. 
What the world is witnessing is a correlated growth slowdown across the advanced countries (with a few exceptions), and across all of the systemically important parts of the global economy, possibly including the emerging economies. 
And equity values’ decline toward a more realistic reflection of economic fundamentals will further weaken aggregate demand and growth. 
Hence the rising risk of a major downturn – and additional fiscal distress. 
Combined, these factors should produce a correction in asset prices that brings them into line with revised expectations of the global economy’s medium-term prospects. 
But the situation is more foreboding than a major correction. 
Even as expectations adjust, there is a growing loss of confidence among investors in the adequacy of official policy responses in Europe and the US (and to a lesser extent in emerging economies). 
It now seems clear that the structural and balance-sheet impediments to growth have been persistently underestimated, but it is far less clear whether officials have the capacity to identify the critical issues and the political will to address them. 
In Europe, risks spreads are rising on Italian and Spanish sovereign debt. 
Yields are in the 6-7% range (generally viewed as a danger zone) for both countries. 
Combined with their low and declining GDP growth prospects, their debt burdens are becoming sufficiently onerous to raise questions about whether they can stabilize the situation and restore growth on their own. 
Italy and Spain expose the full extent of Europe’s vulnerability. 
Like Greece, Ireland, and Portugal, membership in the euro denies Italy and Spain devaluation and inflation as policy tools. 
But the declining value of their sovereign debt – and the size of that debt relative to that of Europe’s smaller distressed countries – implies much greater erosion of banks’ capital base, raising the additional risk of liquidity problems and further economic damage. 
The domestic policy focus in Europe has been to cut deficits, with scant attention to reforms or investments aimed at boosting medium-term growth. 
At the EU level, there is not yet a complementary policy response designed to halt the vicious cycle of rising yields and growth impairment now faced by Italy and Spain. 
Credible domestic and EU-wide policies are needed to stabilize the situation. 
Neither is forthcoming. 
Recent market volatility has been partly a response to the apparent rise in the downside risk of policy paralysis or denial. 
In the US side, the integrity of sovereign debt was kept in question for too long. 
During those months of political dithering, US treasuries became a riskier asset. 
Then, with the immediate default risk removed, money stormed out of risky assets into Treasuries to wait out the economic bad news – mainly feeble and declining growth, employment stagnation, and falling equity prices. 
Little in America’s domestic policy debates hints at a viable growth and employment-oriented strategy. 
In fairness, some believe that cutting the budget is a sufficient growth strategy. 
But that is neither the majority view, nor the view reflected by the markets. 
Structural and competitive impediments to growth have been largely ignored. 
There is little recognition that domestic aggregate demand cannot be restored to its pre-crisis levels except through growth. 
In fact, the household savings rate continues to rise. 
The details may elude voters and some investors, but the focus of policy is not on restoring medium- and long-term growth and employment. 
Indeed, there is profound uncertainty about whether and when these imperatives will move to the center of the agenda. 
In the emerging economies, by contrast, inflation is a challenge, but the main risk to growth stems from the advanced countries’ problems. 
In addition, reforms and major structural changes are needed to sustain growth, and these could be postponed, or run into delays, in a decelerating global economy. 
The resetting of asset values in line with realistic growth prospects is probably not a bad outcome, though it will add to the demand shortfall in the short run. 
But uncertainty, lack of confidence, and policy paralysis or gridlock could easily cause value destruction to overshoot, inflicting extensive damage on all parts of the global economy. 
This somewhat bleak picture could change, though probably not in the short run. 
Stability can return, but not until domestic policy in the advanced countries, together with international policy coordination, credibly shifts to restoring a pattern of inclusive growth, with fiscal stabilization carried out in a way that supports growth and employment. 
In short, we confront two interacting problems: a global economy losing the struggle to restore growth and the absence of any credible policy response. 
Too many countries seem to be focused more on political outcomes than on economic performance. 
Markets are simply holding up a mirror to these flaws and risks. 

The End of Globalization? 
BRUSSELS – China has just announced that last year, for the first time since it began opening up its economy to the world at the end of the 1970s, exports declined on an annual basis. 
And that is not all; in value terms, global trade declined in 2015. 
The obvious question is why. 
While global trade also fell in 2009, the explanation was obvious: The world was experiencing a sharp contraction in GDP at the time. 
Last year, however, the world economy grew by a respectable 3%. 
Moreover, trade barriers have not risen significantly anywhere, and transport costs are falling, owing to the sharp decline in oil prices. 
Tellingly, the so-called Baltic Dry Index, which measures the cost of chartering the large ships that carry most long-distance trade, has fallen to an all-time low. 
This indicates that markets do not expect a recovery, meaning that the data from 2015 could herald a new age of slowing trade. 
The obvious conclusion is that the once-irresistible forces of globalization are losing steam. 
The situation in China is telling. 
In recent decades, as it became the world’s leading trading economy, China transformed the global trading system. 
Now the value of both imports and exports have fallen, though the former have declined more, owing to the collapse of global commodity prices. 
In fact, commodity prices are the key to understanding trade trends over the last few decades. 
When they were high, they drove increased trade – to the point that the share of trade to GDP rose – fueling hype about the inevitable progress of globalization. 
But in 2012, commodity prices began to fall, soon bringing trade down with them. 
Assume that one ton of steel and ten barrels of oil are needed to produce one car. 
In 2002-2003, that bundle of raw materials was worth around $800, or about 5% of the value of a $16,000 car. 
This implies that, during the early 2000s, industrial countries had to export five cars for every one hundred bundles of these raw materials they imported. 
By 2012-2013, the value of the raw materials needed for a car increased to about $2,000, about 10% of the cost of the same car (prices of cars had increased by much less). 
Industrial countries thus had to export double, namely ten cars for the same amount of imports of raw materials. 
Clearly, there is a direct link between the trends in trade and commodity prices (see figure). 
Given that this connection affects all manufactured goods that require raw material inputs, it should be no surprise that, as commodity prices have declined, so has global trade. 
One might argue that this example concerns only the value of trade, and that in recent decades, the growth of trade by volume also has exceeded that of real GDP growth. 
But commodity prices affect trade volumes as well, because higher commodity prices force industrial countries to increase the volume of their exports (ten cars instead of five, in the example provided), in order to cover the costs of the same volume of raw material imports. 
Because food, fuels, and raw materials comprise about a quarter of global trade, when their prices fluctuate – especially as strongly as they have in recent decades – aggregate trade figures are obviously affected. 
Given the massive drop in commodity prices lately, there is little need to seek any other explanation for the recent slowdown in trade. 
This is not to say that globalization and trade are one and the same. 
Globalization entails many other features, including the surge in cross-border financial transactions and tourism, data exchange, and other economic activities. 
In fact, these other interconnections have fed back into trade, as they have enabled the emergence of global value chains, whereby different steps of the production process occur in different countries. 
But this phenomenon has been overestimated. 
According to the World Trade Organization, the foreign value-added contained in exports is only around 15% for most large economies, such as the United States and the European Union. 
In other words, global value chains have little impact on these larger trading economies. 
China is the only exception. 
Its position as an assembly platform for the world’s products meant that it imported most of the highest value-added elements of those goods. 
But as the country’s industrial structure matures – Chinese-assembled iPhones now contain more Chinese-made parts than they did just a few years ago – it will move closer to the US and the EU in value-added terms, not the other way around. 
This is yet another reason why trade might diminish in importance. 
When something is widely hyped, there is nearly always a real reason for it. 
Most economies are more open today than they were a generation ago. 
But it is now becoming clear that the perception that globalization is some overwhelming and inexorable force largely reflected the side effects of the last decade’s commodity boom. 
If prices remain low, as seems likely, the next decade might well see global trade stagnate, as the trade pattern “rebalances” from emerging economies to the established industrial powers. 

The Great Income Stagnation 
BERKELEY – Nowadays, the inequality debate often focuses on the disproportionate accumulation of income and wealth by a very small share of households in the United States and other advanced economies. 
Less noticed – but just as corrosive – is the trend of falling or stagnating incomes for the majority of households. 
For much of the post-World War II period, until the 2000s, strong GDP and employment growth in the advanced economies meant that almost all households experienced rising incomes, both before and after taxes and transfers. 
As a result, generation after generation grew up expecting to be better off than their parents. 
But, according to new research from the McKinsey Global Institute, that expectation may no longer be warranted. 
During the last decade, income growth came to an abrupt halt for most households in the developed countries, with those headed by single women or comprising young, less educated workers among the hardest hit. 
Real income from wages and capital for households in the same part of the income distribution was lower in 2014 than in 2005 for about two-thirds of households in 25 advanced economies – more than 500 million people. 
From 1993 to 2005, by contrast, less than 2% of households in these economies had flat or falling incomes. 
Increases in government transfers and lower tax rates reduced the effect of stagnating or falling market incomes on disposable incomes. 
Nonetheless, 20-25% of households faced flat or falling disposable incomes from 2005 to 2014, compared to less than 2% in the preceding 12 years. 
A major culprit behind this reversal is the deep recession and slow recovery following the 2008 economic crisis in the advanced economies. 
From 1993 to 2005, GDP growth contributed about 18 percentage points to annual median household income growth, on average, in the US and Europe; that figure plunged to just four percentage points from 2005 to 2014. 
But the post-crisis drop in growth is far from the only problem. 
(If it were, the last decade could be just an anomaly.) 
Longer-term factors like weak investment, decelerating labor-force growth, and a sharp slowdown in productivity growth have reduced income growth for the median household in most advanced countries relative to the 1993-2005 period. 
Demographic shifts – including changing family structure, low fertility rates, and population aging – have led to reductions both in the overall size of households and in the number of working-age earners per household. 
And labor-market shifts – driven by technological change, the globalization of low- and medium-skill jobs, and the growing prevalence of part-time, temporary employment – have caused the wage share of national income to decline and the distribution of that income among households to become increasingly uneven. 
None of these trends is going to be reversed anytime soon. 
On the contrary, some are likely to strengthen. 
McKinsey’s research confirms the role of such long-term factors in undermining incomes for the majority of households. 
It shows that most households’ real market incomes remained flat or fell, even though aggregate growth remained positive in the 2005-2014 period. 
In the US, in particular, the ability of labor to protect its share of national income, and of lower- and middle-income households to protect their share of the wage pool, eroded substantially. 
As a result, real growth in median disposable income slowed by nine percentage points from 1993 to 2005, and by another seven percentage points from 2005 to 2014. 
Sweden, where median households received a larger share of the gains from output growth in the 2005-2014 period, has bucked this negative trend. 
In response to the growth slowdown of the last decade, Sweden’s government worked with employers and unions to reduce working hours and preserve jobs. 
Thanks to these interventions, market incomes fell or were flat for only 20% of households. 
And generous net transfers meant that disposable incomes increased for almost all households. 
To be sure, the US also intervened after the crisis, implementing a fiscal stimulus package in 2009 that, along with other transfers, raised median disposable income growth by the equivalent of five percentage points. 
A four-point decline in median market income thus became a one-percentage-point gain in median disposable income. 
But that did not change the fact that, from 2005 to the end of 2013, market incomes declined for 81% of US households. 
Similarly, recent research by Berkeley’s Emmanuel Saez shows that real market income for the bottom 99% in the US grew in both 2014 and 2015 at rates not seen since 1999. 
Nonetheless, by the end of 2015, real market incomes for that group had recovered only about two-thirds of the losses borne during the 2007-2009 recession. 
In other words, while disposable income did not fall in either Sweden or the US, the US approach was to compensate for a decline in market incomes, which Sweden had managed to head off. 
The consequences of such failures are far-reaching. 
Stagnating or falling real incomes do not just act as a brake on consumption demand and GDP growth; they also fuel social and political discontent, as citizens lose confidence in existing economic structures. 
MGI surveys in France, the United Kingdom, and the US have found that people whose incomes are not growing, and who do not anticipate an improvement, tend to view trade and immigration much more negatively than those who are experiencing or foresee gains. 
The Brexit vote in the UK and bipartisan opposition to trade agreements in the US are clear signs of this. 
Recent debate about income inequality in the US and other developed countries has focused on the rapid surge in incomes for the few. 
But stagnating or falling incomes for the many add a different dimension to the debate – and demand different types of solutions that emphasize wage growth for the majority of the income distribution. 
With most households continuing to face stagnating or falling incomes – and with younger generations thus on track to be poorer than their parents – such solutions are urgently needed. 

Scapegoating the EU Won’t Fix Italy 
BRUSSELS – Italy is making international headlines again. 
In the country’s election on March 4, the populist Five Star Movement (M5S) and the right-wing League party captured a combined parliamentary majority by tapping into the public’s discontent over immigration and economic stagnation. 
Now, M5S’s Luigi Di Maio and the League’s Matteo Salvini have formed a new government. 
Despite their differences, both place most of the blame for Italy’s problems on “Europe” – meaning European Union rules and shared principles. 
The perception among Italian voters that the EU has left them alone to deal with the problem of migration from Northern Africa is not particularly surprising. 
Of the hundreds of thousands of migrants who have crossed the Mediterranean from Libya in recent years, the vast majority land in – or are rescued and brought to – Italy. 
Most are in fact economic migrants, but they present themselves as refugees because that is the only legal way to stay in Europe. 
Even so, Italian populists are simply wrong to claim that Italy is absorbing a disproportionate and unfair share of asylum seekers. 
In reality, some 400,000 asylum applications have been submitted in Italy since 2014. 
This represents about 11% of the EU total of 3.9 million, which is roughly equivalent to Italy’s share of the EU’s total population. 
The migration crisis has appeared to be more acute in Italy because its system for processing asylum applications and repatriating those who do not qualify is slower than in other member states. 
Moreover, the distribution of migrants and refugees in Italy tends to be concentrated around metropolitan centers that lack adequate housing, which also makes the problem seem much larger than it actually is. 
A new M5S/League government would most likely demand changes to the EU’s Dublin Regulation, according to which the EU member state where an asylum seeker first sets foot is usually responsible for processing his or her claim. 
Reforming this system makes sense. 
But it would not change much for Italy, given that the country would still have to accept the same proportion of refugees as it does today. 
Contrary to what Italian populists have claimed, the solution to Italy’s migration problem can be found at home. 
Italy needs a better system for processing asylum applications, funneling refugees to available housing, and integrating them into society. 
One arrives at a similar conclusion on economic matters. 
Populist politicians argue that the EU’s Stability and Growth Pact prevents the government from stimulating demand, and thus job creation. 
But this ignores the fact that all eurozone countries are subject to the same rules. 
And it does not account for Italy’s weak economic growth rate, which consistently falls short of the eurozone average in good times and bad. 
Many economists now believe that in the member states hit hardest by the 2008 global financial crisis and the subsequent euro crisis, “austerity” aggravated the recession. 
But even if one believes that, it doesn’t change the fact that those same countries have staged much stronger recoveries than Italy has. 
Moreover, the claim that Italy has been barred from running higher deficits to stimulate growth is simply false. 
Italy has received a number of waivers from EU fiscal rules in recent years, allowing it to increase its deficit somewhat. 
Similarly inconvenient facts apply to Italy’s massive public debt, which was accumulated through excessive public spending financed by domestic savers (in stark contrast to Greece). 
Given the source of this debt, the M5S/League’s earlier proposal to request debt forgiveness from the European Central Bank makes no sense. 
A new M5S/League government could still insist that the EU no longer count the debt held by the Banca d’Italia in its official statistics. 
But, again, we are talking about debt held by an Italian institution, which means that “Europe” has nothing to do with it. 
With the recent return of growth and abatement of migratory pressure, European leaders are now exploring options for EU- and eurozone-level reforms. 
But if Italy defies common rules or refuses to accept the fundamental principles of sound budgeting, any reform will be dead on arrival. 
That would not bode well for the EU. 
But at least today’s situation is nothing like the peak of the euro crisis, when problems in Italy (and the rest of the eurozone periphery) threatened to spill over into core member states. 
So far at least, the moderate financial-market reaction to the M5S/League coalition has scarcely affected the rest of Europe. 
Investors seem to have concluded that while a populist government would pose a problem for Italy, it would not endanger the euro. 
The likelier outcome of an M5S/League government, then, is not a euro meltdown, but stagnation. 
The eurozone’s current incomplete governance framework will likely remain the status quo. 
There is a political lesson here for the rest of Europe’s populists. 
Scapegoating the EU to paint over domestic problems might pay off in elections, but it will also lead to national isolation. 
In the long run, it is a losing strategy. 

Stalin, Our Contemporary 
NEW HAVEN – Eighty years ago, in the autumn of 1930, Joseph Stalin enforced a policy that changed the course of history, and led to tens of millions of deaths across the decades and around the world. 
In a violent and massive campaign of “collectivization,” he brought Soviet agriculture under state control. 
Stalin pursued collectivization despite the massive resistance that had followed when Soviet authorities first tried to introduce the policy the previous spring. 
The Soviet leadership had relied then upon shootings and deportations to the Gulag to preempt opposition. 
Yet Soviet citizens resisted in large numbers; 
Kazakh nomads fled to China, Ukrainian farmers to Poland. 
In the autumn, the shootings and deportations resumed, complemented by economic coercion. 
Individual farmers were taxed until they entered the collective, and collective farms were allowed to seize individual farmers’ seed grain, used to plant the next year's harvest. 
Once the agricultural sector of the USSR was collectivized, the hunger began. 
By depriving peasants of their land and making them de facto state employees, collective farming allowed Moscow to control people as well as their produce. 
Yet control is not creation. 
It proved impossible to make Central Asian nomads into productive farmers in a single growing season. 
Beginning in 1930, some 1.3 million people starved in Kazakhstan as their meager crops were requisitioned according to central directives. 
In Ukraine, the harvest failed in 1931. 
The reasons were many: poor weather, pests, shortages of animal power after peasants slaughtered livestock rather than losing it to the collective, shortages of tractors, the shooting and deportation of the best farmers, and the disruption of sowing and reaping caused by collectivization itself. 
“How can we be expected to build the socialist economy,” asked a Ukrainian peasant, “when we are all doomed to hunger?” 
We now know, after 20 years of discussion of Soviet documents, that in 1932 Stalin knowingly transformed the collectivization famine in Ukraine into a deliberate campaign of politically motivated starvation. 
Stalin presented the crop failure as a sign of Ukrainian national resistance, requiring firmness rather than concessions. 
As famine spread that summer, Stalin refined his explanation: hunger was sabotage, local Communist activists were the saboteurs, protected by higher authorities, and all were paid by foreign spies. 
In the autumn of 1932, the Kremlin issued a series of decrees that guaranteed mass death. 
One of them cut off all supplies to communities that failed to make their grain quotas. 
Meanwhile, the Communists took whatever food they could find, as one peasant remembered, “down to the last little grain,” and in early 1933 the borders of Soviet Ukraine were sealed so that the starving could not seek help. 
Dying peasants harvested the spring crops under watchtowers. 
More than five million people starved to death or died of hunger-related disease in the USSR in the early 1930’s, 3.3 million of them in Ukraine, of which about three million would have survived had Stalin simply ceased requisitions and exports for a few months and granted people access to grain stores. 
These events remain at the center of East European politics to this day. 
Each November, Ukrainians commemorate the victims of 1933. 
But Viktor Yanukovych, the current Ukrainian president, denies the special suffering of the Ukrainian people – a nod to Russia’s official historical narrative, which seeks to blur the particular evils of collectivization into a tragedy so vague that it has no clear perpetrators or victims. 
Rafal Lemkin, the Polish-Jewish lawyer who established the concept of “genocide” and invented the term, would have disagreed: he called the Ukrainian famine a classic case of Soviet genocide. 
As Lemkin knew, terror followed famine: peasants who survived hunger and the Gulag became Stalin’s next victims. 
The Great Terror of 1937-1938 began with a shooting campaign – directed chiefly against peasants – that claimed 386,798 lives across the Soviet Union, a disproportionate number of them in Ukraine. 
Collectivization casts a long shadow. 
When Nazi Germany invaded the western Soviet Union, the Germans kept the collective farms intact, rightly seeing them as the instrument that would allow them to divert Ukrainian food for their own purposes, and starve whom they wished. 
After Mao made his revolution in 1948, Chinese communists followed the Stalinist model of development. 
This meant that some 30 million Chinese starved to death in 1958-1961, in a famine very similar to that in the Soviet Union. 
Maoist collectivization, too, was followed by mass shooting campaigns. 
Even today, collective agriculture is the basis for tyrannical power in North Korea, where hundreds of thousands of people starved in the 1990’s. 
And in Belarus, Europe’s last dictatorship, collective farming was never undone, and a former collective farm director, Aleksandr Lukashenko, runs the country. 
Lukashenko is running for a fourth consecutive presidential term in December. 
Controlling the land, he also controls the vote. 
Eighty years after the collectivization campaign, Stalin’s world remains with us. 


Stalin Lives 
The legacy of dead dictators from vanquished totalitarian regimes should no longer be ambivalent. 
Only Germany’s lunatic fringe dares to commemorate Hitler. 
Not even the pathetic remnant of the Khmer Rouge celebrates Pol Pot’s memory. 
Yet, as Russia approaches the 60th anniversary of its victory over Nazi Germany, marking Stalin’s role in that victory is proving to be damnably awkward. 
Indeed, earlier this year, Moscow was roiled by debates about whether or not to build a statue to the dead dictator. 
In large bookstores across Russia, a huge number of political biographies and histories portray Stalin and his era. 
Some of these, based on newly opened archival material, are critical. 
But the majority of these books and authors portray Stalin in a positive light. 
Indeed, when Russians are asked to list the most important people of the twentieth century, Stalin is still tied for first place – with Lenin. 
Some see the hand of what remains of the Communist Party behind this. 
The Party has moved far from its old Leninist ideals, as it seeks support nowadays through a witch’s brew of Russian nationalism, hyper-orthodox Christianity, and “state Stalinism.” 
Of course, towns and cities are no longer named for Stalin. 
In the late 1950’s, countless Stalin monuments were demolished. 
Yet many symbols of Stalin’s rule have been carefully preserved, including the national anthem he personally approved in 1944. There are seven high-rises in Moscow that Russians still call “Stalin’s vysotki.” 
Next to Lenin’s tomb is Stalin’s grave and monument, where heaps of fresh flowers are always to be seen on the anniversaries of his birth, his death, and the victory over Hitler. 
To be sure, Khrushchev’s uncovering of Stalin’s crimes and cult of personality in 1956 made a huge impression both in the Soviet Union and abroad. 
But many people in the political elite and military circles were enraged by Khrushchev’s revelations. 
This incited many attempts to rehabilitate Stalin, especially during the 20 years of Leonid Brezhnev’s rule, which we now call the period of “stagnation.” 
Mikhail Gorbachev continued to uncover the crimes of Stalinism, shedding light on dark pages that Khrushchev lacked the courage to open to public view. 
During Boris Yeltsin’s presidency, this criticism became even stronger. 
But demolishing the ideological, political and economic structures of the past is not enough to renew society. 
Yeltsin understood this. 
Eight years ago the remains of the Romanov family were publicly buried in the Peter-Paul castle in Saint Petersburg. 
Nicolas II gained the status of saintly martyr. 
The reburial of the Romanovs, however, didn’t touch the public’s emotions for long. 
Over 50% of Russia’s population, including teachers, scientists, doctors, and military personnel, have seen their quality of life fall since communism’s demise. 
No surprise, then, that they are nostalgic for the past, including Stalin. 
People of the older generation do, of course, remember the hardships of the 1930’s and 1940’s. But most Russians do not view the entire Soviet period as some sort of black hole. 
They see a time of hardship, yes, but also of great achievements – in economic development, science, culture, education, and defense of the motherland during the war. 
Today, Russians listen to old Soviet songs and watch Soviet-era movies. 
May 1 (Labor Day), and November 7 (the anniversary of the Bolshevik Revolution) remain much more meaningful than newly installed postcommunist holidays, such as June 12 (Independence Day). 
In fact, for many Russians, the declaration of Russia’s independence in 1990 represents a low point in the country’s history, a year of anarchy and disarray. 
What can Russians be proud of in the 15 years of postcommunism? 
Shock therapy that ruined the economy and gave away the country’s wealth to private but rarely clean hands? 
Neither democracy nor markets are seen by most Russians as absolute values, because they have failed to deliver either prosperity or security. 
What victories has Russia’s army achieved in these years? 
It could not even subdue Chechnya, a small republic within the Russian federation. 
The Russian federation remains a collection of multinational states in need of some unifying idea of statehood and nationality to keep them together. 
The easiest and the most understandable idea for Russians to cling to is patriotism. 
Only two events have the power to mobilize and energize this sense of patriotism: the October revolution of 1917 and the Great Patriotic War of 1941-1945, which turned the USSR and Russia into a great world power. 
The victory over fascism, because so many of its participants remain active, is a living event in our memory. 
Victory Day this year will likely be the last “round” anniversary of 1945 that Russia can commemorate while many thousands of veterans are alive and able to participate. 
So the Kremlin is preparing to mark the event on a scale that Russia has never seen before. 
Needless to say, Stalin’s name will be mentioned countless times during these celebrations. 
But it would be a mistake to see this public recognition of Stalin as a real yearning for every aspect of the system he created. 
Instead, acknowledging Stalin is a way for Russians to recall a time of great deeds and perhaps even greater sacrifices. 
Patriotism everywhere is always based on such notions. 


The Triumphs and Struggles of Arab Startups 
DUBAI – The recent STEP conference in Dubai – the biggest startup conference for the Middle East and North Africa (MENA) region – attracted a lot of buzz. 
It seemed to indicate that the region’s startup scene was coming of age. 
Yet MENA entrepreneurs are still facing serious structural impediments to progress. 
The successes of the region’s startups should not be underestimated. 
According to Wamda, a regional accelerator platform, more than a dozen startups – including Bayt, Careem, MarkaVIP, Namshi, News Group, Propertyfinder, and Wadi.com – now have estimated valuations above $100 million. Souq.com, a 3,000-employee company founded in 2005, is poised to be the region’s first “unicorn,” with a valuation above $1 billion. 
Yet the regional environment remains far from conducive to entrepreneurship. 
Beyond the wars, terrorism, and political turbulence plaguing the Arab world – not to mention the usual challenges facing entrepreneurs outside Silicon Valley, such as lack of adequate risk capital, talent, or infrastructure – is a slew of deep-rooted structural problems. 
One of those problems relates to enterprise demographics. 
According to one study, in 2011, family businesses represented up to 70% of the MENA private-sector economy – a higher share than in any other region. 
This means that a large segment of the business community raises funds, shares equity, and manages operations within small, tight-knit social circles. 
The conventional wisdom of drawing on friends, family, and fools for new business endeavors seems to translate in the MENA region as, “If you are not a friend or family, you must be a fool.” 
While this might help to contain risk, it also fosters a risk-averse business culture. 
And yet a willingness to take risks is pivotal to innovation and entrepreneurship. 
Moreover, keeping businesses in the family reduces their disruptive potential, even when they do manage to innovate. 
This family-oriented, or “tribal,” business culture is the result of a long history of inefficient commercial judicial systems, arbitrary nationalization programs, and a lack of effective corporate governance. 
While most countries have made improvements on these fronts, the tribal business tradition remains entrenched, and will take time to dislodge. 
But steps can be taken now to help mitigate some of the problems associated with this business culture, such as a lack of availability of adequate risk capital for new entrepreneurs. 
In Lebanon, for example, the central bank has launched an unprecedented startup support initiative, Circular 331, through which it guarantees up to 75% of risk capital made available by local banks, amounting to up to 3% of their assets. 
Since its launch in 2013, the program has generated more than $400 million in risk capital. 
A second major hindrance to innovative entrepreneurship in the MENA region lies in the way governments manage their critical role as clients. 
Through the procurement of goods and services – which comprises about 10-15% of GDP in developed countries and up to 20% of GDP in developing countries – governments can serve as important drivers of growth and innovation. 
Silicon Valley’s genesis and growth, it should be recalled, was propelled by government contracts and procurement. 
But in MENA countries, the conditions for doing business with the government – including tendering requirements, payment schedules, and bureaucratic demands – tend to be prohibitive for small firms (10-50 employees). 
With small businesses unable to access the market for public goods and services, they miss out on important opportunities to mature and expand, which limits their capacity to spur broader economic growth and development. 
A third major impediment to innovative entrepreneurship in MENA countries relates to the industrial structure. 
Construction, banking, telecommunications, tourism, and traditional manufacturing represent a significant share of the region’s private-sector economy. 
Companies in these industries tend to be not only family-owned, but also large in size and heavy in capital investment, and they do not typically view startups as potential strategic business partners. 
All of this implies high barriers to entry for new businesses, which face severely limited opportunities to disrupt, spin off, or even leverage major industries. 
Even startups that make some initial headway struggle to scale up in the B2B sector. 
Unsurprisingly, in these major industries, disruptive entrepreneurship and innovation tend to arrive slowly and late. 
While telecommunications is something of an exception in this sense, even its development is hampered by government regulation. 
MENA startups have achieved the most success online, where the large established players did not show early interest and barriers to entry, in terms of capital investment and market access, are relatively low. 
Indeed, most of the successful companies in this domain sell directly to consumers and conduct transactions via digital payment services that enable them to avoid transactional barriers, such as government procurement regulations and high bank fees. 
The progress that such startups have managed to achieve highlights their potential to spearhead innovation and generate economic growth. 
It should thus serve as a powerful incentive for MENA governments and businesses to change their approach. 
Specifically, governments should do more to leverage their spending to support new, innovative businesses, while established companies should open up their operations and cooperate with startups to scale up innovative activities that can inject dynamism into markets. 
Startups are proven hubs of innovation and drivers of economic growth, employment, and development. 
It is time for the MENA countries to make the most of that potential. 

Starving for Capital in Sub-Saharan Africa 
Sub-Saharan Africa's appalling poverty and living conditions have been exposed repeatedly through television and the Internet. 
But these agonizing pictures represent only the symptoms of an underlying - and largely unreported - malady: capital flight. 
Capital flight stems from myriad causes: debt servicing, the awarding to foreign firms of almost all contracts financed by multilateral lenders (and exemptions from taxes and duties on these goods and services), unfavorable terms of trade, speculation, free transfer of benefits, foreign exchange reserves held in foreign accounts, and domestic private capital funneled abroad. 
According to the UN Industrial Development Organization (UNIDO), every dollar that flows into the region generates an outflow of $1.06. 
Most of this hemorrhage is debt-fueled: approximately 80 cents on every dollar that flows into the region from foreign loans flows out again in the same year. 
This implies active complicity between creditors (the OECD countries and their financial institutions, especially the IMF and the World Bank) and borrowers (African governments). 
Capital flight provides creditors with the resources they need to finance additional loans to the countries from which these resources originated in the first place - a scheme known as "round-tipping" or "back-to-back" loans. 
Borrowers, in turn, use these foreign loans to increase their accumulation of private assets held abroad, even as strict budget discipline and free capital movement - implemented in line with IMF and World Bank structural adjustment programs - have led to skyrocketing interest rates. 
The lethal combination of these factors thwarts any prospect of economic growth while leading to an unsustainable level of debt. 
The pool of fleeing capital includes assets acquired legally at home and legally transferred abroad; capital acquired legally at home and illegally transferred abroad; and illegally acquired capital that is funneled abroad illegally. 
Using the latter two types to impose "odious debts" on Africans undermines western lenders' credibility concerning money laundering, good governance, transparency, fiscal discipline, and macroeconomic policies conducive to economic growth. 
Repudiating unwarranted and unjustified debts would be consistent with economic logic and international law. 
Well-functioning credit markets require that lenders face the consequences of irresponsible or politically motivated lending. 
But two obstacles must be overcome. 
First, African leaders, who should repudiate these debts, are the ones who contracted them in the first place, with the obvious aim of enriching themselves. 
Second, creditors may retaliate by withdrawing subsequent lending. 
These obstacles are neither insurmountable nor unique to sub-Saharan Africa. 
Capital flight is most likely to be sparked by uncertainty regarding good governance, political stability, civil liberties, accountability, property rights, and corruption. 
Sound economic policies, sustainable economic growth, and adequate rates of return on investment tend to reverse capital flight. 
According to figures released by the American investment bank Salomon Brothers, the return of flight capital was estimated at around $40 billion for Latin America in 1991, led by Mexico, Venezuela, Brazil, Argentina, and Chile. 
China recovered $56 billion between 1989 and 1991. 
Equally revealing, several Middle East economies are booming. 
The United Arab Emirates and Saudi Arabia are flooded with capital as a result of billions of dollars poured back into the region in the past two years by domestic investors. 
The Saudi stock market index is up by 78% since the start of the year, hugely out-performing the main US and European indices - and this in a region plagued by conflict, nuclear tensions, terrorism, and acute political challenges. 
As for sub-Saharan Africa, the "Washington Consensus" - economic liberalization, deregulation of capital movements, suppression of subsidies, and privatization - runs against the very policies needed to promote political improvements, a stable macroeconomic environment, enlarged financial markets, and lower debt overhang. 
Private firms that have acquired public assets should be induced, through legislation, to recapitalize these companies. 
New shares should be earmarked for residents to encourage the repatriation of private capital. 
Capital controls and fiscal incentives will keep legitimate private capital at home and promote domestic investment. 
These are the essential conditions for launching sustainable economic growth in the region. 
Common sense points to the need for the OECD countries, the IMF, and the World Bank to sever their dubious complicity with sub-Saharan African leaders and support policies that are in the long-term interest of the West and the world. 
Ignoring the negative investment climate would be unwise. 
According to the New York Times , quoting US military personnel, the Sahara Desert is becoming a "new Afghanistan." 
This threat, together with terrorist attacks in Kenya, Tanzania, Tunisia, and Morocco, has prompted the Bush administration to install military bases in the region. 
But only policies that privilege social justice and economic development can win the fight against terrorism definitively. 
Tony Blair is America's closest ally in their "war on terror." 
He also believes that conditions in Africa are "a scar on the conscience of the world," and has established a Commission for Africa that will report to the G8. 
But, in addition to the trade distortions that Blair has promised to address, he and other Western leaders should put an end to scandalous "round-tipping" or "back-to-back" loans and return the funds embezzled by African leaders and their Western friends. 

The Disunited States of American Gun Control 
LONDON – The Las Vegas massacre and its aftermath are pure Americana. 
A deranged person lugs nearly two dozen high-tech assault weapons to a 32nd-floor hotel room to spray death upon concertgoers in a mass murder and suicide. 
In response, the culture wars flare anew, with gun-control advocates in pitched battle against gun enthusiasts. 
Yet there is consensus on one deep truth: nothing much will change. 
After a week of televised, heart-wrenching funerals, American life will go on until the next massacre. 
Mass violence is deeply rooted in American culture. 
America’s European settlers committed a two-century-long genocide against the native inhabitants, and established a slave economy so deeply entrenched that only a devastating civil war ended it. 
In almost all other countries, even Czarist Russia, slavery and serfdom were ended by decree or legislation, without a four-year bloodletting. 
When it was over, America established and enforced a century-long system of apartheid. 
To this day, America’s homicide and imprisonment rates are several times higher than Europe’s. 
Several large mass shootings occur each year – in a country that is also waging several seemingly endless wars overseas. 
America is, in short, a country with a past history and current stark reality of racism, ethnic chauvinism, and resort to mass violence. 
The Las Vegas shootings make clear once more the need to ban assault weapons. 
When America had such a ban, from September 1994-September 2004, it helped to limit mass shootings; yet Congress failed to renew the ban, owing to intense lobbying from gun enthusiasts. 
Nor is the ban about to be reinstated any time soon at the federal level. 
A prohibition against “bump stocks,” the device used by the Las Vegas killer to enable his semi-automatic rifles to fire like fully automatic weapons, appears possible; but there will be little more federal action than that. 
When Australia banned assault weapons in 1996, mass shootings stopped abruptly. 
America’s gun lovers reject such evidence, and mass shootings like the one in Las Vegas serve only to reinforce their belief that firearms are their only true protection in a dangerous world. 
According to compelling recent survey data, the attachment to guns is especially intense among less-educated white Republican men residing mainly in rural and suburban areas in the South and Midwest – the same demographic that forms the core of support for President Donald Trump. 
Despite the deep ideological divisions in the country, there is a glimmer of hope. 
Under the US Constitution, states have the authority to ban assault weapons and regulate firearms (though not to ban handguns and rifles outright, given the Supreme Court’s interpretation of the Second Amendment’s “right to bear arms”). 
My own state, New York, already bans assault weapons, as do a handful of other states. 
Rather than fighting another ill-fated battle in Washington, it is more promising to encourage many more states to exercise their prerogatives. 
States that do will have lower rates of mass shootings, more secure citizens, and more vibrant economies. 
Las Vegas will suffer not only from the trauma of the recent massacre, but also from a diversion of tourism and conferences, at least until Nevada cracks down on assault weapons and can guarantee visitors’ safety. 
America today doesn’t just have red (conservative) states and blue (progressive) states, but de facto red countries and blue countries, that is, distinct regions with distinct cultures, heroes, politics, dialects, economies, and ideas of freedom. 
In New York City, freedom means not having to fear that the thousands of strangers sharing the city’s sidewalks and parks with you on any given day are carrying deadly weapons. 
In Texas or Las Vegas, freedom is the comfort of carrying your trusty firearms anywhere you like. 
It’s time to let red states and blue states go their own way. 
We don’t need to fight another civil war to agree on an amicable and limited move to much looser linkages across the states. 
In this, the conservatives have it right: Let’s reduce the power of the federal government and turn more revenues and regulations back to the states, subject to the constitutional limits on the division of powers and fundamental rights. 
That way, each side of the culture wars can move closer to its preferred outcomes without impeding the other side from doing the same. 
My own state would thrive in such a looser federation, using its increased margin of maneuver to tighten its own regulations and to scale up its social services with the savings in taxes now paid to the federal government. 
And the weaker federal government would mean fewer US “wars of choice” in the Middle East. 
At some point, the US will end up with federal gun control legislation. 
When more Congressmen come to realize that their own lives are on the line – which, sadly, they are – we will finally see national action. 
Two members of Congress have already been shot this decade (Gabrielle Giffords in 2011 and Steve Scalise earlier this year). 
For now, however, members of Congress will remain caught in the political crossfire of mad gunmen and pro-gun lobbyists. 
This is terrifying, but sadly the case. 
In Trump’s America, gun violence and instability are being stoked daily. 
A rapidly implemented, national-scale solution would be ideal. 
But until that happens, more US states should be encouraged to choose gun sanity for themselves. 

State of the Art, or Art of the State? 
September is traditionally the time when opera companies and orchestras return to their home cities from Aix, Salzburg, Tanglewood, and countless other summer festivals. 
This rentrée is also marked (on both sides of the Atlantic) by the return of worries about how classical music is financed. 
American symphonic life is Euro-centric in almost every respect except for its funding. 
Whereas Americans depend upon tax-deductible private donations and box office receipts to finance live classical music, Europeans prefer direct government support for the arts. 
Ironically, while arts advocates in the United States have long argued for adoption of the “European model” – which has produced a rich and varied artistic life for Europeans –Europe is being forced to change its system of support to one that depends more on private money and the box office. 
Unfortunately, Europe’s system of direct government financial support is falling victim to Europe’s slow economic growth and budget deficits. 
Particularly for those countries that have adopted the euro, government spending on the arts will be constrained for some time by the requirement that fiscal deficits be kept to 3% of GDP. 
The resulting pressure on Europe’s performing arts institutions is causing concern at various different levels. 
Traditionally, Europe’s social democracies have preferred allocating scarce goods and services like concerts and operas by queues (financed by huge subsidies to keep prices low) rather than by willingness to pay. 
Now, this will change. 
Performing arts advocates in Europe point to the US where, among other things, music directors of even major orchestras are now expected to fully participate in fundraising activities and be active in the local community on the orchestras behalf. 
The same thing, they fear, will happen in Europe. 
Some conductors, not wanting to carry a tin cup as they wave their batons, have rejected important posts in the US for this reason, feeling that it would interfere with their art. 
Daniel Barenboim is rumored to have left the Chicago Symphony Orchestra in part because he objected to the fundraising demands that were being made of him. 
But US experience shows that getting artistic leaders like orchestra music directors to participate in fundraising need not be bad for the artistic side of the job. 
Michael Tilson Thomas in San Francisco, for example, has combined effective fundraising and artistic leadership to propel the San Francisco Symphony to the top rank of US orchestras. 
It also should be reassuring to Europeans who are concerned that greater reliance on private money necessarily means conservative programming that the San Francisco Symphony has one of the most adventuresome repertoires in the US. 
If the audience has progressive tastes, private money and innovative programming are entirely compatible. 
A corollary is that public money makes it possible for adventuresome programming even if audience tastes run to the conservative side. 
This is one reason performing artists in Europe like public money – it liberates them from a diet of only Beethoven and Mozart. 
Moreover, the audience may come to appreciate an adventuresome repertoire the more it becomes exposed to it. 
Of course, with reduced public spending on the performing arts, not only will there be greater reliance on private money, but ticket prices will have to rise as well. 
Some argue that this is a bad thing, because they prefer queuing to the price system and fear that higher prices will compromise future audiences by excluding young people. 
But cheap prices for the performing arts do not solve the thorny problem of access for youth. 
First, youth may not take advantage of cheap tickets to the extent that they are not interested in going to hear live classical music at any price. 
Second, even if they do want to go, they may not be able to get seats, which often are not available because subscriptions stay in the same hands year after year. 
What good are cheap prices, which serve mainly to subsidize the same subscription holders, if there are no seats? 
If a taste for classical music is to be subsidized, some more targeted subsidies should be preferred to cheap prices. 
The best way to bring youth to the performing arts is through education. 
Because American orchestras can’t count on schools or government to provide the basic music education necessary to ensure a continuing audience for classical music, some orchestras are doing it themselves with private money. 
In San Francisco, for example, the Symphony runs a $23 million privately funded project – called Keeping Score – that includes a national public television series, radio shows, interactive music learning, and school music programs. 
This type of innovative program is relevant for European as well as American orchestras. 
The problem of youth and access to the performing arts exists on both sides of the Atlantic. So does poor music education in state schools. 
If orchestras don’t look after their own futures, they may well not have one to look after. 

States of Risk 
LONDON – The Great Recession of 2008-2009 was triggered by excessive debt accumulation and leverage on the part of households, financial institutions, and even the corporate sector in many advanced economies. 
While there is much talk about de-leveraging as the crisis wanes, the reality is that private-sector debt ratios have stabilized at very high levels. 
By contrast, as a consequence of fiscal stimulus and socialization of part of the private sector’s losses, there is now a massive re-leveraging of the public sector. 
Deficits in excess of 10% of GDP can be found in many advanced economies, and debt-to-GDP ratios are expected to rise sharply – in some cases doubling in the next few years. 
As Carmen Reinhart and Ken Rogoff’s new book This Time is Different demonstrates, such balance-sheet crises have historically led to economic recoveries that are slow, anemic, and below-trend for many years. 
Sovereign-debt problems are another strong possibility, given the massive re-leveraging of the public sector. 
In countries that cannot issue debt in their own currency (traditionally emerging-market economies), or that issue debt in their own currency but cannot independently print money (as in the euro zone), unsustainable fiscal deficits often lead to a credit crisis, a sovereign default, or other coercive form of public-debt restructuring. 
In countries that borrow in their own currency and can monetize the public debt, a sovereign debt crisis is unlikely, but monetization of fiscal deficits can eventually lead to high inflation. 
And inflation is – like default – a capital levy on holders of public debt, as it reduces the real value of nominal liabilities at fixed interest rates. 
Thus, the recent problems faced by Greece are only the tip of a sovereign-debt iceberg in many advanced economies (and a smaller number of emerging markets). 
Bond-market vigilantes already have taken aim at Greece, Spain, Portugal, the United Kingdom, Ireland, and Iceland, pushing government bond yields higher. 
Eventually they may take aim at other countries – even Japan and the United States – where fiscal policy is on an unsustainable path. 
In most advanced economies, aging populations – a serious problem in Europe and Japan –exacerbate the problem of fiscal sustainability, as falling population levels increase the burden of unfunded public-sector liabilities, particularly social-security and health-care systems. 
Low or negative population growth also implies lower potential economic growth and therefore worse debt-to-GDP dynamics and increasingly grave doubts about the sustainability of public-sector debt. 
The dilemma is that, whereas fiscal consolidation is necessary to prevent an unsustainable increase in the spread on sovereign bonds, the short-run effects of raising taxes and cutting government spending tend to be contractionary. 
This, too, complicates the public-debt dynamics and impedes the restoration of public-debt sustainability. 
Indeed, this was the trap faced by Argentina in 1998-2001, when needed fiscal contraction exacerbated recession and eventually led to default. 
In countries like the euro-zone members, a loss of external competitiveness, caused by tight monetary policy and a strong currency, erosion of long-term comparative advantage relative to emerging markets, and wage growth in excess of productivity growth, impose further constraints on the resumption of growth. 
If growth does not recover, the fiscal problems will worsen while making it more politically difficult to enact the painful reforms needed to restore competitiveness. 
A vicious circle of public-finance deficits, current-account gaps, worsening external-debt dynamics, and stagnating growth can then set in. 
Eventually, this can lead to default on euro-zone members’ public and foreign debt, as well as exit from the monetary union by fragile economies unable to adjust and reform fast enough. 
Provision of liquidity by an international lender of last resort – the European Central Bank, the International Monetary Fund, or even a new European Monetary Fund – could prevent an illiquidity problem from turning into an insolvency problem. 
But if a country is effectively insolvent rather than just illiquid, such “bailouts” cannot prevent eventual default and devaluation (or exit from a monetary union) because the international lender of last resort eventually will stop financing an unsustainable debt dynamic, as occurred Argentina (and in Russia in 1998). 
Cleaning up high private-sector debt and lowering public-debt ratios by growth alone is particularly hard if a balance-sheet crisis leads to an anemic recovery. 
And reducing debt ratios by saving more leads to the paradox of thrift: too fast an increase in savings deepens the recession and makes debt ratios even worse. 
At the end of the day, resolving private-sector leverage problems by fully socializing private losses and re-leveraging the public sector is risky. 
At best, taxes will eventually be raised and spending cut, with a negative effect on growth; at worst, the outcome may be direct capital levies (default) or indirect ones (inflation). 
Unsustainable private-debt problems must be resolved by defaults, debt reductions, and conversion of debt into equity. 
If, instead, private debts are excessively socialized, the advanced economies will face a grim future: serious sustainability problems with their public, private, and foreign debt, together with crippled prospects for economic growth. 

Can US States Right Trump’s Wrongs? 
VENICE – US President Donald Trump, with the help of a Republican-controlled Congress, is undermining many of the fundamental values that Americans hold dear. 
He is jeopardizing their access to health care by seeking to repeal the 2010 Affordable Care Act (“Obamacare”). 
His budget proposes massive cuts in everything from early childhood education to food stamps and medical research. 
His tax reform plan, and especially its much lower top rate for “pass-through” business income, implies significant further redistribution of income to the wealthy. 
Most recently, his misguided decision to withdraw from the Paris climate agreement jeopardizes America’s global standing. 
Worse, it puts the health and welfare of the planet at risk. 
This is a good time to remember that the United States is a federal system, not a unitary state with an all-powerful central government (think France). 
Its system is enshrined in the Tenth Amendment of the US Constitution, which stipulates that all powers not expressly assigned to the federal government are “reserved to the states.” 
Traditionally, states’ rights were invoked by southern states to defend slavery, and then nearly a century of Jim Crow (the legal framework for racial segregation), from federal interference, thereby preserving southern business owners’ and farmers’ control of their black labor force. 
More recently, socially conservative states have appealed to the Tenth Amendment to oppose progressive legislation and the expansion of federal powers more generally. 
Now the tables have turned. 
Can Americans who oppose the contraction of social programs and revocation of progressive federal legislation use states’ rights to counter these trends? 
Consider environmental policy. 
California already has its own relatively stringent standards for vehicle emissions. 
Fourteen other states have adopted those standards, which therefore cover 40% of the US population. 
Auto companies can’t afford to produce two different sets of cars for states with strict and lenient emission rules. 
So California could well dictate emissions standards for the country. 
Moreover, one can imagine California signing voluntary climate deals with China and other countries in an effort to restore the culture of oversight and accountability of the Paris accord. 
Indeed, the state’s cap-and-trade carbon program is the model for the carbon-trading scheme that Chinese officials are currently considering. 
It is worth recalling that California is the world’s sixth largest economy, a fact that makes it a plausible interlocutor for environmentally conscious countries. 
After that, however, it gets harder. 
The California State Senate just passed a bill to create a single-payer health plan without specifying how to pay for it. 
One possibility is a 15% payroll tax. 
Another is to plow Medicare dollars provided by the federal government into the plan. 
But it is unclear whether either approach is politically viable. 
Like the residents of other “blue” (Democratic) states, Californians clearly prefer more spending on education and social services. 
The problem is that they are already subject to some of the highest personal income and business taxes in the country. 
Groups like the Howard Jarvis Taxpayers Association warn that further increases could lead to a massive exodus of businesses and jobs. 
Two of my Berkeley colleagues, Emmanuel Saez and Gabriel Zucman, have come up with a two-part solution to this problem. 
First, they would tax the global profits of companies on the basis of the share of their sales occurring in California. 
Second, they would levy a modest 1% wealth tax on residents with assets of more than $20 million. Critics will warn of a brain drain, but do we really think that a 1% tax would convince, say, the venture capitalist Peter Thiel to pack up and move to New Zealand? 
There are two scenarios – one benign, the other vindictive – for what another of my Berkeley colleagues, Laura Tyson, has called “progressive federalism.” 
In the benign scenario, people will club together in different states on the basis of their preferences for big or small government, public or private provision of services, and international cooperation or isolationism. 
Mick Mulvaney, Trump’s budget director, has himself made the case. “If you live in a state that wants to mandate maternity coverage for everybody, including 60-year-old women, that’s fine,” And if you don’t, “then you can figure out a way to change the state that you live in” or alter “state legislatures and state laws,” in Mulvaney’s words. 
“Why do we look to the federal government to try and fix our local problems?” 
In the vindictive scenario, by contrast, Trump and the Congress could seek to limit progressive states’ rights. 
They could prohibit use of Medicare funds for single-payer health plans. 
They could refuse to renew the waiver of Environmental Protection Agency regulations that allows California to impose its more stringent emissions standards. 
They could invoke the Commerce Clause of the Constitution as part of an effort to prevent states from signing climate accords with foreign countries. 
They could eliminate the federal deductibility of state taxes to increase the cost of funding state programs. 
They could curtail federal support for public services in sanctuary cities and states with immigrant-friendly policies. 
We Americans are about to find out in which US, benign or vindictive, we now live. 

Stay the Course in North Korea 
NEW YORK – Barack Obama’s election was historic on many levels. 
Between now and his inauguration on January 20, he will need to hone his policies. 
Much of the early focus of the Obama administration will undoubtedly be on the economy and the war in Iraq. 
But it is critically important that the new administration pay serious attention to other foreign-policy issues right from the start. 
American relations with North Korea, and the ongoing six-party talks, certainly belong at the top of the list. 
Here, the United States must not only stay the course, but also build on the efforts of the last few years. 
The risks of changing course cannot be overstated. 
Not long after President George W. Bush came into office, his administration took a hard-line stance against the North Korean regime, calling for a review of the Clinton administration’s policy, and eventually tagging North Korea as a member of the “axis of evil.” 
While North Korea had done much over the preceding years to warrant a more critical eye, in retrospect these policies set back prospects for peace and stability in the region. 
After all, North Korea’s reaction to the Bush administration’s policies was to drop out of the Nuclear Nonproliferation Treaty, restart its nuclear program, and further develop its weapons production. 
Indeed, it is believed that North Korea during this time increased its stockpile of nuclear weapons. 
Moreover, while there is plenty of blame to go around on all sides, America’s change of policy stalled for years the potential for progress in relations between the six parties. 
It is only more recently, under the watch of US Assistant Secretary of State Christopher Hill, that the Bush administration’s policy toward North Korea has become more pragmatic. 
After North Korea threatened to restart its nuclear facility at Yongbyon, the Bush administration in early October removed the country from its terrorism blacklist. 
In exchange, North Korea promised to allow access to its facilities for inspections, while also dropping its opposition to Japanese and South Korean participation in inspections. 
At this point, the road forward is fraught with peril and uncertainty. 
As a presidential candidate, Obama spoke of the need for “sustained, direct, and aggressive diplomacy” to deal with North Korea. 
This formulation seems to suggest an understanding of the often-lengthy process of dealing with its regime, but it remains unclear how far Obama might be willing to go to secure America’s interests. 
At the same time, Obama’s advocacy of direct diplomacy caused concern during the campaign, with some questioning whether this meant that he would meet a leader such as Kim Jong-il without preconditions. 
While it is difficult to predict how far he might move in this direction, it would be politically difficult for Obama to meet the North Korean leader in such a manner, something that he is likely to learn early in his presidency. 
The on-again, off-again talks on North Korea can fluster even the most experienced of negotiators. 
That being the case, Obama needs to build a strong team of experienced Korea hands to push the agenda forward. 
While trying to build on the limited progress of recent years, they will have to confront a number of additional obstacles in building a cohesive and sustainable peace on the Korean Peninsula. 
North Korea’s leader, Kim Jong-il, is reportedly ill. 
What this means for continuing the negotiations remains to be seen. 
Relations between North and South Korea have taken a turn for the worse this year, following the election of South Korean President Lee Myung-bak, who has taken a more hard-line approach toward the North. 
And then there is Japan, a member of the six-party talks and a steadfast US ally, which was angered by the recent delisting of North Korea, because the North has yet to satisfy fully Japanese inquiries into the abduction of its citizens by North Korean agents decades ago. 
These are just a few of the issues that will complicate US relations with North Korea and the denuclearization of the Korean Peninsula. 
But America must stay the course. 
As Obama’s new administration takes over, the choice is between making some progress, as has occurred in recent years, and facing a nuclear North Korea. 
The choice is now Obama’s. 
The future of peace and stability in Northeast Asia hangs in the balance. 


The Resource Revolution 
SAN FRANCISCO – The world is on the threshold of the biggest business opportunity in a century, rivaling both the first Industrial Revolution, which transformed labor productivity, and the second,which mobilized unprecedented amounts of capital to build cities. 
The new revolution centers on the third primary factor of production: natural resources. 
The revolution arrives not a moment too soon. 
After centuries of wasteful production and consumption practices – facilitated by ever-lower commodity prices that have declined by an average of 0.7% a year in peacetime over the past century – the world is in dire need of technologies that enable producers and consumers alike to do more with less. 
Making matters more urgent, resource extraction is becoming increasingly expensive, as production shifts to locations that present difficult logistical – and often political – challenges. 
Meanwhile, levels of air, water, and soil pollution are rising rapidly in China, India, Indonesia, Brazil, and other emerging economies. 
In order to achieve their growth objectives, companies must fundamentally rethink the way they integrate technology and use natural resources in their productive processes. 
Over the last two decades, companies have had to improve their performance by only 1-2% annually to achieve an increase in profits, and many have focused almost exclusively on capital and labor productivity. 
As a result, even the most successful managers lack the skills to cope with today’s resource-constrained markets. 
In this environment, companies cannot compete on the basis of twentieth-century (if not nineteenth-century) technologies and practices. 
There is much more value in pioneering new, higher-productivity business models, based on five key changes: 
• Substituting costly, toxic, or scarce materials with cheaper, more efficient, higher-performance, and more abundant alternatives. 
• Embedding software in resource-intensive industries to optimize their production processes or products. 
• “Virtualizing” processes – that is, moving them out of the physical world. 
• Embracing circularity, which entails finding value in products after their initial use. 
• Eliminating waste. 
The good news is that progress is already being made. 
America’s burgeoning shale oil and gas industry, for example, has transformed its entire energy sector by revolutionizing resource extraction. 
Today, drilling is not only a dirty process characterized by heavy equipment, toxic mud, and sulfurous fumes. 
With the integration of information technology and hydraulic-fracturing (“fracking”), the central players are experts using joysticks and high-resolution screens to maneuver drill bits through geological formations. 
Individual companies have pioneered change in other sectors. 
Cree and Philips have developed LED lighting technologies that offer 23 times longer life, measurably better color, easier control, and 85% lower operating costs than traditional incandescent bulbs. 
Similarly, OPower has used behavioral science and cloud-based software to motivate consumers to cut their energy consumption by 2-4% annually – a change that is beginning to reshape power markets. 
And DIRTT (Doing it Right This Time) is building office interiors at as little as half the traditional cost through software-enabled virtualization, waste elimination, and optimization of the construction process. 
These innovations exemplify the massive potential for businesses to improve resource productivity. 
Indeed, using tools provided by information technology, biology, and nanotechnology, the world can triple growth in resource productivity, raising it to 3 to 5% annually over the next two decades. 
But this cannot occur without strong and forward-thinking leadership, which, unfortunately, is sorely lacking in today’s business environment. 
Indeed, managers today seem consistently surprised by the pace of change and thus find themselves behind the curve. 
For example, many automobile manufacturers ignored the shift toward electric and hybrid vehicles – though sales were increasing at a rate of more than 50% annually – until their sales of conventional cars plummeted in key markets. 
Likewise, many are shocked that the cost of solar power is increasingly undercutting that of nuclear, coal, and gas technologies, even though this shift is in line with a trend that began in 1970. 
Companies should devote more attention to developments in related industries as well. 
Automakers must monitor the consumer electronics industry to track advances in battery technology. 
And power companies need to analyze the development of semiconductors to anticipate the likely drop in demand for electricity, after more than a century of growth. 
To win in the resource revolution, companies must balance technological, physical, and human-capital inputs, while adopting a more intelligent approach to organizational design and talent management. 
Whether the primary imperative is spotlighting data and analytics or forming new partnerships in other sectors to gain access to specialized expertise, aggressive innovation, and ambitious efficiency goals are critical. 
Forward-thinking entrepreneurs are already reaping the benefits of this fast-moving revolution. 
Those who fail to adapt will fail to survive – and soon. 


Stem Cell Obscurantism 
On May 19, a group of Korean scientists published in the magazine Science the results of research that for the first time isolated human embryonic stem cell lines specifically tailored to match the DNA of male and female patients of various ages. 
The next day, British scientists at Newcastle University announced that they had successfully produced a cloned human embryo using donated eggs and genetic material from stem cells. 
Both breakthroughs constitute a stunning advance in stem cell research. 
Embryonic stem cells are pluripotent, meaning that they have the ability to develop into any type of human tissue. 
This carries great promise, in particular, for sufferers of spinal cord injuries and diseases. 
Years of studies, and the passionate pleas of patients worldwide, are finally opening the way to a technique – somatic cell nuclear transfer, also known as “therapeutic cloning” – that may bring about epochal changes for the health of us all. 
No less remarkable than the latest discoveries was the timing of their announcement, which came on the eve of a vote in the United States Congress to expand federal funding for research on embryonic stem cells created during in vitro fertilization (but never implanted in a womb). 
Both announcements also came a month ahead of an Italian referendum – the largest popular consultation on the matter ever held anywhere – that seeks to change a law adopted last year that prohibits both in vitro fertilization and stem cell research. 
The debate over therapeutic cloning is, of course, hardly limited to the US and Italy. 
The UN General Assembly ended a two-year debate on the matter in March 2005 by approving a non-binding declaration that calls upon states to “prohibit all forms of human cloning inasmuch as they are incompatible with human dignity and the protection of human life.” 
The declaration passed with 84 votes in favor, 34 against, and 37 abstentions. 
Last summer, in response to the UN decision, 78 Nobel laureates signed a petition discouraging the adoption of an international ban on human cloning, because “it would condemn hundreds of millions of individuals afflicted by debilitating diseases to a life deprived of hope.” 
The petition, initiated by Luca Coscioni Association, an NGO devoted to the promotion of the freedom of scientific research, called on governments to reject prohibitions in favor of “rules that protect the right to life and health by ensuring freedom of research, choice, and knowledge.” 
There is, of course, widespread consensus against cloning devoted to the reproduction of human beings, and most of the world has outlawed the technique. 
So this is not the issue. 
The Nobelists’ point is that, as far as therapeutic cloning is concerned, rather than attempting global prohibition, it would be much wiser, and possibly more effective, to promote an international regulatory regime through ample legalization of stem cell research. 
But, as the UN declaration – and the long debate surrounding its adoption – illustrate, scientific arguments are not at the center of national and international debates, which revolve around questions concerning the beginning of “human life.” 
As we know, science and religion offer different answers. 
Some Christian theologians, for example, believe that life begins at conception, while scientists maintain that nerve and brain cells emerge around 14 days after conception. 
Scientists generally agree that research should be done within that period – and always allowed on spare embryos that will never be implanted. 
In such a crucially important debate, the quality of the information offered is paramount, and it is no coincidence that those who oppose stem cell research prefer to avoid a public debate that would force them to confront scientific arguments. 
They know all too well that whenever a secular and scientific debate has been permitted and encouraged, the general public – regardless of nationality and religious or political affiliation – has overwhelmingly expressed itself in favor of stem cell research. 
We saw a clear example of this last November in California, where 60% of the electorate voted in favor of Proposition 71 on state funding for stem cell research. 
Similarly, the latest polls in Italy suggest that the overwhelming majority of those who intend to vote are in favor of therapeutic cloning. 
However, a referendum in Italy requires 50% turnout to validate the outcome. 
Revealingly, the Vatican, knowing that it cannot win, is currently campaigning strongly for mass abstention. 
More than the advancement of science is at stake here. 
The Vatican’s stance on the Italian vote is emblematic of a broader threat to the very foundation of modern liberal democracy: the constitutional separation of Church and State. 
In an era of growing concern about religious fundamentalism, liberal democratic institutions must reaffirm their role in protecting individual rights for all. 
And, in order to enable the full enjoyment of our freedoms – be they of worship or scientific research – the state must reassert its secular nature. 
We need mechanisms to address violations of moral or religious beliefs, but we cannot place restrictions on individuals’ ability to contribute to the public welfare. 

Patenting Immaculate Conception? 
HAARLEM – In 1899, the German-American scientist Jacques Loeb engineered the asexual reproduction of sea urchins through artificial parthenogenesis (the manipulation of egg cells to enable embryonic development without fertilization). 
His speculation about complete parthenogenesis in mammals – not to mention his use of the term “immaculate conception” to describe the process – prompted public concern about whether scientists should be “playing God.” 
With the International Stem Cell Corporation (ISCC) seeking patents in Europe for a technology that produces stem cell lines from the parthenogenetic activation of an unfertilized ovum, the time has come to answer that question. 
The question is how. 
Problems with the patenting of parthenogenetically activated cells are nothing new. 
Such cells resemble human embryos, which, under European Union patent law, cannot be patented. 
Following a ruling by the European Court of Justice (ECJ) in 2011 that those cells constitute human embryos, patent applications for parthenogenetic cells in the United Kingdom and other countries have been delayed and even rejected. 
(The ISCC does hold patents for its stem cells in the United States.) 
But on December 18, 2014, the ECJ reversed its 2011 ruling, determining that an unfertilized human ovum stimulated by parthenogenesis “does not constitute a human embryo, if it does not in itself have the inherent capacity of developing into a human being.” 
The ECJ based its ruling on written (unpublished) observations submitted by EU member states. 
The UK High Court then remitted the application to the UK Intellectual Property Office, which granted the patent in October. 
The ECJ did not rule explicitly that parthenogenesis of human ova is patentable. 
It did not examine whether parthenogenesis constituted “a process for the cloning of a human being,” which would not be patentable under EU law. 
And it did not consider whether the activated egg cell – a “parthenote” – counts as a germ cell, which also cannot be patented in the EU (though it did pose the question to the applicants at the hearing). 
The national court and the patent office did not, as far as we can establish from their websites, examine these exclusions from patentability either. 
Nor did they consider that parthenotes develop until the blastocyst embryonic stage, harboring the capacity for full attachment. 
But even if the ISCC’s patent applications are not excluded on these grounds, there is another potential roadblock for applicants: Under European law, an invention can be patented only if its commercial exploitation is deemed not to controvert “ordre public” or morality. 
As Loeb pointed out more than 100 years ago, when it comes to inventions involving bodily materials and biological processes, moral questions are difficult to answer. 
They should not, it now seems clear, be left to the patent office or even the courts. 
In fact, the European Patent Office (EPO) is not particularly committed to assessing the moral implications of the patents it grants; in its view, “ordre public” would be violated only in the extreme case of a truly outrageous invention. 
As a result, while the application procedure allows for third parties to submit to the patent office their observations on the claimed invention’s patentability, it is unlikely to spur a genuine assessment of an application’s moral implications. 
An opposing third party would have to shoulder the entire burden of proof, while the patent office avoided taking any real action, in order to avoid “presumptuous” interference in the public debate. 
As for the courts, the recent case highlighted the absence of a procedural mechanism to ensure consideration of a patent’s morality. 
So who should answer questions about an invention’s implications for “ordre public”? 
The answer is straightforward: the public itself. 
Inclusive, transparent, and effective public debate about these potentially consequential issues demands, first and foremost, that citizens are well informed. 
After all, when it comes to technological advances relating to biological materials and processes, this is only the beginning. 
On December 24, 2014, just six days after the ECJ’s ruling, scientists published the results of their efforts to make rudimentary egg and sperm cells starting from a person’s skin cells. 
There are also pending patent applications for a novel form of genetic manipulation – CRISPR/Cas9-mediated gene editing – which a team of Chinese researchers has already attempted to use to edit the genome of a human embryo. 
Notably, under the ECJ’s “inherent capacity” definition, the embryos used in that experiment would not constitute a human embryo, and thus would not be excluded from patentability. 
As the International Summit on Human Gene Editing recently stated, it would be irresponsible to proceed with a clinical use of germline editing without broad societal agreement. 
The same should go for patenting it. 
If, based on an understanding of the processes and their implications, a majority of a country’s citizens find them to controvert morality, democratic principles would demand a government response. 
In line with the EU’s 1998 biotech directive, debates should occur on a country-by-country basis. 
Already, European states have made conflicting decisions on these topics. 
In Switzerland, a substantial majority of voters decided in 2004 to ratify the Stem Cell Research Act, which regulates how human embryonic stem cells are produced and used in research. 
Swiss stem-cell law is now more restrictive than that of, say, the UK, but less restrictive than that of Germany. 
Specifically, Swiss law prohibits the development of parthenotes, the derivation of stem cells from parthenotes, and the use of such stem cells. 
It also excludes from patentability processes for parthenogenesis using human germ cells, as well as parthenotes created by such processes. 
These prohibitions are based not just on the need to protect human embryos, but also on concerns relating to the availability of donated egg cells, on which parthenogenesis depends – an issue that neither the courts nor the patent office have considered. 
A country-by-country, public-driven approach to assessing the morality of inventions involving biological materials and processes would reinforce both EU law and democratic principles. 
As recent rulings have made clear, the current system is far from adequate when it comes to upholding ordre public. 

Step in, Prodi! 
COPENHAGEN: The "joint reaction" of 14 European Union governments against their partner – Austria – threatens to weaken the Union at the moment when it faces its greatest challenge: opening its membership to the new democracies of Central and Eastern Europe. 
For the political boycott implemented by the 14 against Austria undermines the Treaty on European Union, and raises serious doubts about the functioning of EU-institutions. 
If the present deadlock is not broken soon, serious damage will be done to European integration. 
The intentions of the 14 were the noblest imaginable: that the Union should be safeguarded against the xenophobia manifested in the rhetoric of the leader of the Austrian Freedom Party, Mr. Jörg Haider. 
When Austrian conservatives in January started negotiations with Haider’s party on a new coalition to take power after many years of complacent conservative/socialist governments, alarm bells rang across Europe. 
Suddenly, 14 members of the European Council of state and government leaders found themselves able to take a quick decision. 
Too quick, alas. 
They decided to establish political boycotts against Austria, should the new coalition become a reality. 
When Austria’s new coalition government was sworn in, the boycotts ensued. 
The problem is that the Treaty on European Union sets out clear rules for how member governments shall treat each other if the fundamental principles common to them are endangered: 
* Article Six of the Treaty describes these common values: "…principles of liberty, democracy, respect for human rights and fundamental freedoms, and the rule of law…" 
* Article Seven states that the European Council "may determine the existence of a serious and persistent breach by a Member State of …(these) principles after inviting the government of the Member State in question to submit its observations. 
Where such a determination has been made, the Council, acting by a qualified majority, may decide to suspend certain of the rights deriving from the application of this Treaty to the Member State in question, including the voting rights of the representatives of that Member State in the Council." 
So far, so clear. 
Now 14 heads of state and government deem it appropriate to invent their own new rules. 
They tried to camouflage their joint action as something that had nothing to do with the EU. 
They talked about a "joint reaction" by 14 governments, as if they accidentally happened to put their heads together, as such Orwellian ‘newspeak’ would fool anybody. 
I am definitely no admirer of Mr. Haider and his so-called "Freedom" Party. 
His attitudes toward opening Europe to the new postcommunist democracies are worrying; his lack of sensitivity in regards to the shadier sides of Europe’s history is disgusting. 
These are just two reasons why we kicked him and his party out of the European Liberal and Democrat Party (ELDR) some years ago. 
But a democratically elected government should be judged on its politics, not on the rhetoric of a populist politician, however vulgar and repulsive. 
The action against Austria causes anxiety all over Europe, not least among the new democracies applying for membership. 
The new Austrian government was judged by its European partners without being able to "submit its observations" as stated in the Treaty. 
Everybody is confused: which set of common values have been broken by the Austrians? 
Why act, for example, against the Austrian Freedom Party when no action was taken in other European countries (like Italy) when parties from the extreme right took part in government? 
Does Europe have one set of rules for small countries and another for big ones? 
What if communists suddenly appear in government coalitions? 
Will that also lead to political boycotts from other EU-governments? 
If not, is that because 11 out of the 14 governments today are socialist/social-democrats, and jumped to help out when fellow Austrian socialists were poised to lose power? 
Do we have one set of rules for the extreme right and one for the extreme left? 
These nagging questions threaten to undermine the authority of the European Council. 
This institution has grown in influence over the last 10-15 years. 
Heads of state and government meet more frequently than before and are increasingly active in EU decision making. 
They have developed what sometimes looks like an old-boys-network. 
They have often given a welcome boost to European integration, when snap decisions needed to be taken and red tape cut. 
But when they act as in this case – without consultations with their diplomats and the Commission ("guardian of the Treaty") – it begins to look like the sort of arrogance of power that makes European integration seem so frightening to a lot of people. 
The 14 government leaders have painted themselves into a corner. 
Nowadays it is not a pretty sight to watch the proceedings of the Councils of Ministers: some ministers behave like small children in a kindergarten. 
I don’t want to shake your hand; 
I don’t want to sit beside you; 
I won’t listen when you talk…. 
This is not a dignified way to act. 
The big question is: can this situation be reversed? 
In their wisdom the 14 forgot to tell the Austrians what to do in order to be accepted again as playmates by their colleagues. 
Perhaps the president of the European Commission should try to cut this Gordian knot. 
After all, it is his responsibility, and of those of his colleagues in the Commission, to safeguard the Treaty. 
He cannot remain a passive spectator when one member state is being mugged by the others in clear conflict with the Treaty’s rules. 
Step in, Signor Prodi! 
Save what is left of everyone’s faces. 

Trump and the Cosmopolitans 
NEW YORK – President Donald Trump’s administration has announced that it wants to cut legal immigration to the United States by half, and favor well educated immigrants who speak good English. 
When a CNN correspondent named Jim Acosta, the son of a Cuban immigrant, challenged Trump’s senior policy adviser, Stephen Miller, by stating that the US traditionally welcomed the world’s poor, most of whom did not speak any English, Miller accused Acosta of “cosmopolitan bias.” 
Acosta asked whether the new policy would mean that only people from Britain or Australia would be allowed to come. 
He may have been a little provocative. 
But the implication of Miller’s complaint was that Acosta’s “bias” was a kind of racism. 
Coming from an administration that panders, at least occasionally, to white supremacists, this was remarkable, to say the least. 
One wonders whether Miller had any idea of the historical use of “cosmopolitan” as a derogatory term. 
As the descendant of poor Jews, fleeing Belarus more than a century ago, he should have. 
“Rootless cosmopolitan” was the code phrase used by Joseph Stalin for Jews. 
In the early years after World War II, the Soviet dictator launched a campaign against Jewish intellectuals, scientists, and writers, who were accused of disloyalty to the Soviet Union and bias toward the West. 
Not considered to be part of the native Russian people, Jews were assumed to belong to an international cabal, and hence to be inherently treacherous. 
But Stalin didn’t invent this idea. 
In the 1930s, Fascists and Nazis also denounced Jews, as well as Marxists and Freemasons, as “cosmopolitans” or “internationalists” – people whose loyalty was suspect. 
It is the kind of vocabulary that emerges from nativist movements that are hostile to ethnic or religious minorities, or to financial or intellectual elites who supposedly conspire to undermine the true sons and daughters of the nation. 
To prewar Fascists, the US was often regarded as the symbol of cosmopolitan decadence. 
The offensive use of “cosmopolitanism,” then, has a profoundly anti-American provenance. 
One of the oddities of the Trump administration is that several of its main representatives have revived traditionally anti-Semitic rhetoric, even though some of them, like Miller, are Jewish. 
The chief ideologue of ethnic nationalism in the Trumpian Age, Steve Bannon, is a reactionary Catholic. 
He has a penchant for early-twentieth-century French and Italian fascist thinkers, such as Charles Maurras (of the Action Française) and Julius Evola, a sinister figure who admired Heinrich Himmler and worked for the German police during World War II. 
But to see anti-cosmopolitanism as an especially Catholic pathology would be a mistake. 
The first offensive use of cosmopolitanism came as part of the Protestant rebellion against the Catholic Church. 
Rome, to Protestant rebels at the time of the Reformation, was regarded as the center of a global “cosmopolitan” network which oppressed national aspirations. 
Traces of this prejudice can still be found in some opponents of the European Union, who see the EU’s Brussels headquarters as the new Rome. 
It is unlikely that Miller, who grew up in a liberal family in California, is an anti-Semite. 
Perhaps his early attraction to right-wing extremism was a form of rebellion, too, albeit a rebellion that soon put him in the company of toxic allies. 
As a student at Duke University, he became friends with Richard Spencer, who would later become a promoter of “peaceful ethnic cleansing” to preserve white civilization, whatever that may be. 
One thing that unites many of Trump’s followers, as well as right-wing populists in other countries, including Israel, is a shared grievance against Muslims and the liberal urban elites who are often accused of coddling them. 
When Miller speaks of cosmopolitan bias that is probably what he means. 
But distrust of Muslims is only part of the story. 
Social elites, liberal intellectuals, and critical journalists are the enemy of those who crave power but feel looked down upon by people who appear to be more sophisticated. 
This is not always a matter of social class. 
President George W. Bush, for example, despised American reporters who spoke French. 
This, too, is not a new phenomenon. 
The upper classes in many societies often like to distinguish themselves from the common herd by adopting the language and manners of foreigners whose cultures were thought to be superior. 
European aristocrats in the eighteenth century spoke French. 
Modern English nationalism started as a revolt against this kind of foppery in the name of John Bull, roast beef, and Old England. 
Not all populist rebellions are inherently racist or fascist. 
Democracy, too, was a product of resistance to aristocratic rule. 
But it is hard to believe that Trump, or his ideologues, like Miller or Bannon, are interested in expanding democratic rights, even though they pretend to speak for the common – or as they like to say – “real” people. 
Bannon, for one, is proudly anti-liberal. 
He is said to have described himself as a Leninist who seeks to destroy the state. 
Still, let us give Miller the benefit of the doubt. 
When he uses cosmopolitanism as a curse, he has no idea of the term’s antecedents. 
The history of fascist, Nazi, and Stalinist anti-Semitism is unknown to him. 
The past does not really exist. 
He is simply an ignorant critic of what he sees as the liberal establishment. 
But ignorance can be as dangerous as malice, especially when it is backed by great power. 

The Trump Whisperer 
NEW YORK – There are a lot of oddballs in US President Donald Trump’s entourage, but few are as odd – or as sinister – as 33-year-old Stephen Miller, Trump’s senior policy adviser. 
Miller resembles a type on the far right that is more common in Europe than the US: young, slick, sharp-suited, even a trifle dandyish. 
He is a skilled rabble-rouser, whose inflammatory rhetoric against immigrants and refugees – “We’re going to build that wall high and we’re going to build it tall!”– drives the crowds at Trump rallies into a frenzy. 
One of his crowd-pleasing notions is that migrants will infect Americans with terrible diseases. 
Miller plays to all of Trump’s worst instincts: belligerent chauvinism, vindictive loathing of liberals, and hostility to minorities. 
His partisanship is extreme. 
In his own words: “Everything that is wrong with this country today, the people who are opposed to Donald Trump are responsible for!” 
He may actually believe this. 
What is odd about Miller, among other things, is the seeming clash between his views on immigrants, refugees, and minorities and his personal background. 
He is a descendent of Jews who came to the United States after fleeing pogroms in Belorussia. 
He grew up in California. 
His parents were Democrats. 
But he was already reading far-right literature (anti-gun control magazines and the like) in high school and has since consorted with ideologues whose ideas are often hard to distinguish from anti-Semitism. 
Trump’s speech last year commemorating Holocaust Remembrance Day failed even to mention Jews; some believe that Miller was the author. 
Miller calls himself a patriot. 
There is of course nothing unusual about Jews being American, French, British, Russian, or indeed German patriots. 
Nor is there is any reason why Jews should not be conservative. 
Margaret Thatcher appointed several Jews to high office, prompting the former prime minister Harold MacMillan’s sniffy remark that her cabinet contained “more Old Estonians than Old Etonians.” 
There are other Jews around Trump, too, apart from Miller. 
Trump appointed Gary Cohn as Director of the National Economic Council and made Steven Mnuchin his Treasury Secretary. 
Neither is a nativist. 
Cohn almost resigned last year when Trump defended violent white-supremacist mobs in Charlottesville, Virginia. 
He did resign this year, but in protest against the introduction of tariffs on steel imports. 
Like Mnuchin, Cohn believes in low taxes and unfettered free enterprise. 
(Jared Kushner can be left out of this discussion, because the only reason for his presence in the White House is his marriage to Trump’s daughter, Ivanka.) 
What is unusual is to be Jewish and a nativist (at least outside Israel). 
The Frankfurter Allgemeine Zeitung reported recently that a number of Jews had joined the anti-immigrant Alternative für Deutschland (AfD) party. 
Many of them seem to be of Russian descent. 
An exaggerated fear that Muslims are about to destroy the West appears to be their main motive for joining the far right. 
Miller is haunted by a similar apocalyptic vision. 
And there are others of this ilk: the casino magnate and major Trump supporter Sheldon Adelson, for example. 
But there are sound reasons why Jews in the diaspora normally do not become nativists. 
Nativist movements that insist on the special privileges of blood and soil have invariably been bad for minorities, especially Jews, leading to the kind of violence that drove Miller’s great-grandparents out of their country. 
Some people find it puzzling that anti-Semites have accused Jews of being either archetypal Bolshevists or archetypal capitalists. 
Historically, most Jews, living in poor villages, were neither. 
But the attraction of left-wing ideas for Jewish intellectuals is hardly mysterious. 
Karl Marx himself hoped that once the workers of the world united, ethnic and religious distinctions would cease to matter. 
And Voltaire, who was no great friend to the Jews, once remarked about the London stock exchange: “Here Jew, Mohammedan, and Christian deal with each other as though they were all of the same faith, and only apply the word infidel to people who go bankrupt...” 
Capitalism, as we know, transcends borders. 
Emigration, by no means always voluntary, has been the fate of Jews since the 8th century BC. 
Open societies, religious tolerance, and freedom of movement have been rare blessings. 
Hence the traditional appeal of places like Amsterdam, or indeed the US. 
It explains why American Jews continue to vote largely for the Democratic Party, even after they became more prosperous. 
Norman Podhoretz, a conservative American intellectual, once wrote a book entitled Why Are Jews Liberals? 
He was baffled by the idea that, as his fellow conservative Milton Himmelfarb famously quipped, “Jews earn like Episcopalians and vote like Puerto Ricans.” 
But it isn’t baffling at all. 
Distrust of nativism is the result of long and bloody experience. 
And now it underpins a growing disenchantment among American Jews with Israel. 
Nativism, stressing Jewish rights at the expense of the Arabs, is on the rise in the Holy Land, too. 
Although Israeli Prime Minister Binyamin Netanyahu invokes the Holocaust whenever it suits him, he is ideologically closer to evangelical Christian zealots and hard-right nativists like his Hungarian counterpart, Viktor Orbán, than he is to most Jewish Americans. 
This is why, despite much talk of powerful Jewish lobbies in Washington, most Jews will continue to vote against Trump, even though he is an almost slavish supporter of the Israeli government and openly hostile to the Palestinians. 
It is also why Miller remains an oddball. 
Celebrating the Jewish new year, Rosh Hashanah, last month, Miller’s former rabbi, Neil Comess-Daniels, denounced Miller’s politics as “completely antithetical to everything I know about Judaism.” 
I am not sure Jewish theology supports such a vehement assertion, but his sentiments are clear. 
When William Kristol, a neo-conservative commentator who once flirted with the hard right, expressed his disgust with Trump, David Horowitz, one of Miller’s mentors, called Kristol a “renegade Jew.” 
Sigmund Freud would have called this “projection.” 
In fact, the concept goes back at least as far as the Babylonian Talmud, which warned: “Do not taunt your neighbour with the blemish you yourself have.” 

Diet and Growth 
KIGALI – There is no greater hindrance to a country’s long-term economic development than childhood undernourishment. 
When a growing body does not get enough essential vitamins and nutrients, the harmful effects last long into adulthood. 
In low-income countries, diets consist primarily of starches, such as rice, and legumes, like peas, that contain very little protein. 
So even a child with a full belly does not necessarily get the right balance of nutritious food and vitamins required for healthy physical development. 
This takes an enormous toll. 
Undernourished children are more susceptible to illness. 
According to UNICEF, children who suffer from severe under-nutrition are 9.5 times more likely to die from diarrhea and 6.4 times more likely to die from pneumonia. 
Fully one in three preventable deaths among young children worldwide – up to 2.5 million each year – are the result of inadequate nutrition. 
Worldwide, one in four children under the age of five is stunted, meaning that chronic under-nutrition has caused serious and often irreversible physical and cognitive damage. 
There were 165 million stunted children in 2001, equivalent to half the population of the United States. 
Stunted children often struggle to reach their potential in school and ultimately the workplace, diminishing economic productivity and development. 
A World Bank study found that under-nutrition can cost an individual up to 10% of his or her potential lifetime earnings, and as much as 3% of a country’s GDP. 
To combat this problem, we need a multi-pronged approach that marshals all available resources to ensure good nutrition among children. 
That starts with strong leadership in countries where the challenge is acute. 
While my country, Rwanda, has reduced child mortality by 70% over the past decade, the rate of stunting remains high, with 44% of children under the age of five chronically malnourished. 
Rwandan President Paul Kagame has initiated a national emergency plan to address the fundamental causes of malnutrition. 
This means not only increasing available food sources for children, but also educating families about the importance of nutritious diets. 
Between 2006 and 2011, for example, we doubled the agriculture budget, distributed more than 2,000 cows to low-income families, and expanded milk delivery and fruit and vegetable gardens across the country. 
Community health workers in each of Rwanda’s 15,000 villages, as well as nurses at health centers across the country, periodically measure the weight and height of each child under the age of five, referring for help those identified as malnourished or at risk. 
At the same time, ensuring that these efforts translate into better health outcomes requires a revolution in the way families prepare their children’s food. 
Our government has started a massive educational campaign to broaden understanding of the importance of nutritious diets. 
Pamphlets have been distributed across the country detailing the kinds of foods that children need, how to cook them, and the need for proper hygiene and exclusive breastfeeding for children under the age of six months. 
In each village, a woman skilled in communication will teach families how to prepare balanced meals and ensure adequate nutrition for children. 
Providing proper nutrition in a child’s first thousand days is particularly important. 
The British medical journal The Lancet has described a package of effective interventions to accomplish this. 
Recommended measures include providing essential vitamins and minerals through enriched foods and supplements; promoting breastfeeding and nutritious complementary feeding for weaning babies; and treating severely malnourished children with therapeutic foods such as specially fortified peanut butter. 
There is an emerging consensus on the need to address under-nutrition worldwide. 
Last year, the Copenhagen Consensus – an esteemed panel of economists including several Nobel Laureates – ranked child nutrition as the top priority on its list of cost-effective investments that would improve global welfare. 
In many low-income countries, making these investments will require forging partnerships with foreign governments – and we welcome the vital role that donor programs, aid agencies, and volunteer organizations can play by working within the framework of national plans. 
Regional collaboration will also be key to fulfilling our commitment to succeed in fighting malnutrition. 
For us, this means working closely with our neighbors in the East African Community. 
On June 8, just ahead of the G-8 Summit, the United Kingdom will convene a summit on Nutrition for Growth. 
Leaders from rich and poor countries, foundations, non-governmental organizations, and private industry will gather to make specific commitments to invest in nutrition. 
I hope that they will increase their efforts – and that they think hard about how to ensure that all sectors of recipient countries’ economies benefit through local procurement. 
Simply flooding markets with cheap high-calorie, low-nutrient grains will never solve chronic malnutrition. 
A change of mindset among development partners is required, along with long-term commitments to building sustainable, diversified, and equitably distributed systems of food production and distribution. 
The investments needed to make this happen represent a fraction of most donor assistance to low- and middle-income countries, but would have a massive global impact on human development in the long term. 
All of these efforts – production of affordable and nutritious food, ensuring its availability everywhere, and education about how to prepare it – will be essential if Rwanda and other countries are to succeed in ensuring that children receive the nourishment they need to live healthy and productive lives. 
Our job will not be finished until every child is assured a healthy and balanced diet and the opportunity to reach his or her full potential. 

Tackling Science’s Gender-Parity Problem 
LONDON – Two years ago, the United Nations designated February 11 the International Day of Women and Girls in Science. 
As we approach another commemoration, it is worth reflecting on female scholars’ countless contributions to science and technology. 
But even more important is to consider why the UN acted in the first place. 
Simply put, women have long suffered in their pursuit of science careers, and the global scientific community must recommit to making them full partners in the quest for human knowledge. 
Achieving gender parity would yield an enormous payoff for scientific discovery. 
Last year marked the 150th anniversary of the birth of Poland’s Marie Curie, one of the greatest scientists of all time. 
Curie was the first woman to win a Nobel Prize, the only woman to win two, and the only person to do so in two different sciences: physics in 1903 and chemistry in 1911. 
Curie faced immense gender barriers during her career. 
In 1891, having been blocked from studying or working at universities in Poland, she joined the Sorbonne in Paris. 
Working with her husband, Pierre Curie, she conducted groundbreaking research on radiation. 
But when their work was nominated for the 1903 physics prize, her name was omitted. 
After her husband complained, the Nobel committee made an exceptional concession, and she was added to the award (she and her husband shared it with the French physicist Henri Becquerel). 
Much has changed since then, and gender equality in the sciences has greatly improved. 
For example, the L'Oréal-UNESCO For Women in Science awards program, which honors female researchers working in the life and physical sciences, is now in its 20th year. 
Past winners have included experts in everything from quantum electronics to molecular biology (one of us, Vivian Wing-Wah Yam, won the prize in 2011). 
Nonetheless, gender parity in the sciences remains a distant goal. 
Evidence suggests that bias is endemic in nearly every scientific field, and that institutional discrimination is still crippling careers and impeding scientific innovation. 
The gender gap in science begins at a young age. 
As early as elementary school, girls are discouraged from pursuing careers in math and science, and this bias continues into university, where fewer women study for PhDs, hold research positions, or join the faculty. 
Globally, less than 30% of the world’s researchers are female. 
Even for women who do get on the academic ladder, the climb is slowed by inadequate opportunities for grants, promotions, and leadership. 
One measure of this is seen in publication rates. 
Producing scholarly papers is critical for career advancement, but studies show that women publish fewer articles than their male colleagues, are less likely to be primary authors, and rarely serve as reviewers. 
Worse, sexual harassment is prevalentin science-related academia and industry. 
Like many other professions, the science community needs to do more to address the issue in a meaningful way. 
The cumulative effect of this discrimination is to rob the world of talented female scientists. 
Even among those with science-related degrees, fewer women than men remain in their field of study or are ever recognized for their work. 
Of the 599 Nobel Prizes awarded in the sciences since 1901, only 18 have gone to women, just 3% of the total. 
Major changes – from grade schools to technology companies – are needed to build gender parity into science-related fields. 
Easy fixes can target individual industries. 
For example, bringing more female editors into the field of science publishing could raise the percentage of women appearing in peer-reviewed publications. 
Other adjustments would have broader reach. 
A recent study of grant programs in Canada found that when referees are trained to recognize gender discrimination, funding outcomes naturally rebalance. 
Launching similar training efforts in other countries could have a profound impact on how science grants are awarded – and how many are awarded to women. 
And yet, while individual tweaks can be beneficial, the world’s scientific community must move beyond piecemeal solutions to tackle gender bias in a more holistic way. 
Academic institutions, research centers, and science-related employers must commit to diversifying their bases of recruitment, and improve efforts to recognize and respond to discrimination. 
Moreover, through improving cultural competencies (the ability to recognize and respond to biases), organizations can create environments that are equitable and physically, spiritually, socially, and emotionally safe for both women and men. 
Achieving gender equity, diversity, and inclusion in the sciences will require cooperation across many sectors. 
It will also take time. 
But, 150 years after Marie Curie’s birth, it is clear that action is long overdue. 
That is why this February 11, as the world observes the third International Day of Women and Girls in Science, scientists from across the disciplines should take a moment to reflect on how far their female colleagues have come, and to remember how far we still have to go. 

Steve Bannon’s European Adventure 
NEW YORK – After being cast out of the White House and Breitbart News, Stephen K. Bannon, often referred to as the mastermind of Donald Trump’s presidential campaign, has vowed to remake Europe. 
His organization, called “The Movement” and based in Brussels, aims to unite Europe’s right-wing populists and take down the European Union in its current form. 
Bannon sees this effort as part of a “war” between populism and “the party of Davos,” between the white, Christian, patriotic “real people” (in the words of his British supporter, Nigel Farage) and the cosmopolitan globalist elites. 
In the media, at least, Bannon is taken seriously. 
It would seem to be a tall order for this permanently disheveled American media blowhard and promoter of cranky ideas about cyclical cataclysms to change the history of Europe. 
Despite meeting such right-wing luminaries as Hungary’s strongman Viktor Orbán, Italy’s Deputy Prime Minister Matteo Salvini, and Boris Johnson, the clownish former British foreign secretary, all of whom wish him well, Bannon has almost no experience in European politics. 
He stunned a sympathetic audience in Prague by ranting against “unfair competition” from foreign countries that use cheap labor. 
Much of the Czech Republic’s GDP comes from exports, for just that reason. 
But the main problem facing Bannon’s effort is that right-wing populist leaders are a disparate bunch. 
Bannon himself is a Catholic reactionary with fantasies, fueled by his love of Hollywood heroes, of being a warrior against the forces of evil. 
Orbán is an autocrat who exploits popular disillusion with post-communism by blaming immigrants and the EU, even though the Hungarian economy depends on the single market and subsidies from Brussels. 
Northern European demagogues, like Geert Wilders, see Islam as the main threat to Western civilization, but defend such causes as gay rights (because Muslims supposedly hate them). 
In Britain, Johnson stands for, well, Johnson, but his fellow Brexiteers are less interested in the Islamic threat than in a grandiose version of English nationalism. 
France’s National Front, now called the National Rally, is a Le Pen family enterprise trying hard to dissociate itself from its anti-Semitic, Vichyite roots. 
As was true of European fascism in the 1920s and 1930s, it is not easy to find much ideological coherence in these various political strands, let alone in Bannon’s Movement. 
What they all have in common, however, is reliance on animus, sometimes directed at Muslims, sometimes at any kind of immigrants, very often against the EU, and always against the liberal elites – whom British Prime Minister Theresa May described as “citizens of nowhere.” 
There is something conspiratorial about this animus, a notion that the common man is at the mercy of a shadowy network of string-pullers that rules the world. 
In the days when Stalin identified enemies of the people as “rootless cosmopolitans” (meaning Jews), the headquarters of this omnipotent global network was thought to be New York, with branch offices in London and Paris. 
Now it is located in Brussels. 
Immigrants, particularly from Muslim countries, bear the brunt of populist propaganda. 
Bannon wrote the first draft of Trump’s so-called Muslim ban, barring immigrants from several predominantly Muslim countries. 
Orbán has fortified his borders to protect “Christian civilization.” 
Salvini wants to deport all illegal migrants from Italy. 
The Brexit campaign, led by Johnson, warned British voters that their country would soon be “swamped” by Turkish immigrants, even though Turkey is nowhere close to joining the EU. 
But however unpleasant anti-immigrant rhetoric and policies may be, the main target of the populists’ ire remains the sinister globalist elite, represented by George Soros and other liberals whom they accuse of promoting human rights, compassion for refugees, and religious tolerance to further their own interests. 
They are the ones who are supposedly swamping Christian lands with aliens. 
They are stabbing Western civilization in the back. 
Bannon has actually expressed admiration for Soros, even though he sees him as a kind of Satan. 
He wants to be the Soros of the right. 
It might seem ironic that radical nationalists, like Bannon, should be seeking to unite in a global movement, as though they were mimicking their internationalist enemies. 
But the populists’ goal is not to destroy elitism; it is to replace the old elites. 
Hence the common language of self-pity, as though Orbán, Salvini, Wilders, and the rest were being oppressed by the “Davos Party.” 
Often from marginal backgrounds, they feel excluded, insufficiently recognized, even looked down upon. 
It is their turn to rule, they believe – and to exact revenge for all the slights they think they have received on the way up. 
This is why Donald Trump, the uncouth property developer with a huge chip on his shoulder, is their hero. 
Trump clearly feels more comfortable speaking to dictators than democratically elected leaders. 
He likes the idea of one strongman dealing with another. 
But this doesn’t make him an internationalist, any more than jamborees of European right-wing populists make for a coherent international movement. 
These are occasions for mutual flattery and strutting in front of the cameras. 
Whether the populists can do more than that – collectively bring down the EU and reorder the Western world – is hard to tell. 
Given their diverse interests, rivalry may cause them to splinter. 
For example, whereas Trump and Bannon see China as the great global enemy, Orbán has been greedily accepting any Chinese money on offer. 
And the English nationalists are driving their country into a not-so-splendid isolation. 
A true “nationalist international” can emerge only when such contradictions are addressed. 
But wherever the global right ends up, it is unlikely that Bannon’s Movement will be the vehicle that gets it there. 

Nationalists of the World, Unite? 
WASHINGTON, DC – Steve Bannon’s extensive travels in Europe this year have not drawn as much attention as they should have, given that he is the key theoretician of US President Donald Trump’s signature brand of nationalism. 
Bannon now wants to build a federation of nationalist parties in Europe. 
And yet, one wonders how an “America First” ideologue can pursue his political project anywhere other than in America. 
By joining forces with the French far-right leader Marine Le Pen – herself an open supporter of Russian President Vladimir Putin – Bannon seems to have in mind a new type of “neo-nationalist international.” 
As more countries transform themselves into “nationalist autocracies” and “illiberal democracies” under strongman rule, nationalism has become an ideological common denominator. 
But the question is whether one should take seriously the oxymoron of nationalist internationalism. 
Historically, internationalism has generally been the preserve of the left, starting with the French Revolutionaries’ attempts to export their political project across Europe. 
That effort was brought to an end by Napoleon’s Bonapartist dictatorship. 
But it is interesting to imagine what would have happened if Europe’s then-ideologically receptive states had also gone the way of imperial republicanism. 
At the beginning of the last century, socialist internationalism came closer than its precursors to realizing its global ambitions. 
Firmly rooted in classical Marxism, the socialist movement regarded the nation-state as a transitory vehicle for achieving proletarian universalism. 
Most countries would eventually adopt communism under an international framework, and the nation-state would become obsolete. 
At the time, leading communists such as Rosa Luxemburg – and even Vladimir Lenin for a while – believed that communist institutions would gain a foothold in post-World War I Germany, and then radiate to the rest of the world. 
With the collapse of Imperial Russia, the Bolsheviks envisioned the Soviet Union serving as the vanguard of global communism. 
But when communist revolutions in the rest of Europe failed, Joseph Stalin and Nikolai Bukharin reconceived the Soviet Union’s historic task as the construction of “socialism in one country.” 
The Soviet Union itself was originally conceived as a federation of socialist republics under the yoke of a dual institutional structure comprising a bureaucracy of “habitual” ministries, on the one hand, and the Communist Party, on the other. 
Under this arrangement, party commissars formed a parallel power structure, and reported to the Communist Party Central Committee. 
In theory, the federation’s republics were coequals, and Russian nationalism was subdued. 
In reality, the Russian republic immediately dominated the others, because it was the seat of power. 
On the economic front, the Soviet Union did not have an explicit nationalist-protectionist policy. 
Yet, because production was centrally planned from Moscow, economic policymaking played a protectionist role, favoring some Soviet republics over others. 
For decades after World War II, many communist and left-socialist opposition parties in Europe would follow the Kremlin’s lead. 
These included the French and Italian Communist Parties, each of which commanded around one-third of their respective countries’ fragmented electorates, as well as Germany’s Social Democratic Party, which did not formally abandon its Marxist roots until the 1959 Bad Godesberg Congress. 
Meanwhile, the West went on to dominate the world economy. 
With the United States leading the way, Western countries liberalized trade and encouraged others to open up their economies. 
Over time, newly independent emerging-market countries would join the Western-led international order. 
And even China, a nominally communist country, would eventually embrace Western economic principles in its pursuit of growth. 
Within Western democracies during this time, socialism was largely abandoned and replaced by social democracy, which rejected central planning in favor of markets as a mechanism for allocating resources. 
Against this historical backdrop, how should one interpret Bannon’s initiative? 
His objective is certainly not to build a right-wing alternative to the Soviet federation and the Communist International. 
Leading European right-wing nationalists such as Jérôme Rivière of the French National Rally (the recently renamed National Front) have rejected that idea outright. 
“Bannon is [an] American and has no place in a European political party,” Rivière told Politico in July. 
“We reject any supra-national entity and are not participating in the creation of anything with Bannon.” 
Bannon’s mission, then, is not to improve policymaking or build new institutions for managing the economic and technological challenges of the twenty-first century. 
Rather, his sole focus is on weakening and, if possible, unraveling “liberal-social” gains, such as the European project. 
At the heart of that project are two strains of internationalism that Bannon and his allies want to destroy: one of the liberal center-right, the other of the liberal center-left. 
That goal, more than any policy similarities, is what unites Europe’s far-right parties. 
Despite its weaknesses, Europe is still the center of liberal internationalist thinking. 
And that makes it the ideological bête noire of nationalists everywhere. 

An Economist’s Guide to War and Peace 
NEW YORK – Stories of conflict fill today’s headlines: whether it is Syria’s civil war, street battles in Ukraine, terrorism in Nigeria, or police crackdowns in Brazil, the gruesome immediacy of violence is all too apparent. 
But, while commentators debate geostrategic considerations, deterrence, ethnic strife, and the plight of ordinary people caught in the middle, dispassionate discussion of another, vital aspect of conflict – its economic cost – is rare. 
Violence comes with a hefty price tag. 
The global cost of containing violence or dealing with its consequences reached a staggering $9.5 trillion (11% of global GDP) in 2012. 
This is more than twice the size of the global agriculture sector and dwarfs total spending on foreign aid. 
Given these colossal sums, it is essential that policymakers properly analyze where and how this money is spent, and consider ways to reduce the total. 
Unfortunately, these questions are seldom given serious consideration. 
To a large extent, this is because military campaigns are usually motivated by geostrategic concerns, not financial logic. 
Although opponents of the Iraq war might accuse the United States of coveting the country’s oil fields, the campaign was uneconomical, to say the least. 
The Vietnam War and other conflicts were also financial catastrophes. 
Similar doubts accompany arms spending during peacetime. 
One might, for example, question the financial logic of Australia’s recent decision to spend $24 billion on the purchase of problem-plagued Joint Strike Fighters while simultaneously preparing the country for the most stringent budget cuts in decades. 
Wasteful, violence-related spending is not just a matter of war or deterrence. 
Tough and expensive law-and-order campaigns, for example, though appealing to voters, generally have little effect on underlying crime rates. 
Whether it is a world war or local policing, conflicts always involve big increases in government spending; the question is whether they are worth the cost. 
Of course, money spent to contain violence is not always a bad thing. 
The military, the police, or personal security details are often a welcome and necessary presence, and, if properly deployed, will save taxpayers’ money in the long run. 
The pertinent issue is whether the amount spent in each instance is appropriate. 
Certainly, a few countries have struck a fair balance, addressing violence for a relatively small outlay; so there are ways to reduce unnecessary expenditure. 
Effective budgeting for potential or ongoing conflict is best achieved by emphasizing prevention. 
We know what underpins peaceful societies: an equitable distribution of income, respect for minority rights, high education standards, low levels of corruption, and an attractive business environment. 
Moreover, when governments overspend to contain violence, they waste money that could otherwise be invested in more productive areas, such as infrastructure, business development, or education. 
The higher productivity that would result, say, from building a school rather than a jail, would improve citizens’ wellbeing, thereby reducing the need to invest in violence prevention. 
I term this the “virtuous cycle of peace.” 
Compare, for example, the almost $10 trillion spent in 2012 worldwide on violence containment to the global costs of the recent global financial crisis. 
Mark Adelson, the former chief credit officer of Standard & Poor’s, estimates that total global losses from the crisis were as high as $15 trillion in 2007-2011, which is just half the cost of spending on violence during the same period. 
If policymakers dedicated the same amount of time and money to preventing and containing conflict, the payoff, in terms of less violence and faster economic growth, could be huge. 
Governments might begin by re-evaluating their aid spending. 
Globally, they already spend 75 times more on violence containment than their total combined overseas development aid. 
And it is no coincidence that countries with the highest expenditure on violence as a percentage of GDP are also among the world’s poorest – North Korea, Syria, Liberia, Afghanistan, and Libya to name a few. 
Might this money be better directed toward investments that reduce or prevent conflict? 
Apart from the obvious humanitarian reasons for investing in peace, especially when carried out within established international development frameworks, such investment is also one of the most cost-effective ways to develop an economy and balance a budget. 
That makes it a discussion well worth having. 

The Peace-Prosperity Cycle 
NEW YORK – At the 68th session of the United Nations General Assembly, which began on September 17, world leaders are laying the foundations of a development agenda to succeed the Millennium Development Goals (MDGs), which expire in 2015. 
The upcoming Sustainable Development Goals will be based on the understanding that economic development is key to improving human well-being and securing the most vulnerable people’s rights. 
But, in order to make genuine progress, policymakers must address the factors that constrain development, particularly violence and conflict. 
According to the Global Peace Index, containing violence – including internal and external conflicts, as well as violent crimes and homicides – cost the world almost $9.5 trillion, or 11% of global GDP, last year. 
That is 75 times the volume of official overseas development assistance in 2012, which amounted to $125.6 billion, and nearly double the value of the world’s annual agricultural production. 
(For further perspective, the post-2008 global financial crisis caused global GDP to fall by 0.6%.) 
This means that if the world were to reduce its violence-related expenditure by approximately 50%, it could repay the debt of the developing world ($4.1 trillion), provide enough money for the European Stability Mechanism ($900 billion), and fund the additional amount required to achieve the MDGs ($60 billion). 
Reducing violence-related expenditure by even 10% would save $473 billion, while contributing to output growth worth an additional $473 billion – money that could be channeled toward infrastructure, health care, or educational services. 
And these are conservative estimates; they do not reflect costs related to property crime, burglary, vehicle theft, domestic violence, surveillance equipment, lost wages, and lower productivity, because accurate data are not yet available. 
Just as long-term economic development requires political stability, peace can be achieved only in an environment of economic progress and prosperity. 
External shocks, such as sudden food-price fluctuations, may raise tension within communities – especially those that lack adequate social-safety nets – and even lead to conflict. 
This occurred in Colombia in the 1990’s, when an unexpected drop in coffee prices lowered wages and intensified conflict in coffee-dependent regions. 
Likewise, pervasive or rising unemployment undermines peace by encouraging the proliferation of criminal networks, gangs, and rebel groups. 
Indeed, in the World Bank’s 2011 World Development Report, young people in conflict-affected countries cited unemployment and idleness as the most compelling reasons for joining such organizations. 
Given this, governments must intensify their efforts to foster job creation and improve employment opportunities –including finding ways to finance relevant policies and programs. 
They could begin by enhancing the efficiency of violence-related expenditure. 
In the United States, for example, researchers with the Institute for Economics and Peace found that more than one out of every seven dollars spent – a total of almost $2.2 trillion in 2010 and a staggering 37% of that year’s federal budget – is devoted to preventing and dealing with the consequences of violence. 
In other words, US violence-related expenditure is almost equal to the output of the entire British economy, approximately $2.4 trillion. 
Just as the ongoing health-care debate focuses on reducing costs while improving outcomes, a public debate centered on the costs and effectiveness of violence prevention and recovery programs should be launched. 
With thorough analysis, governments could identify surplus funds that might be redirected to development pursuits, thereby bolstering productivity, enhancing human well-being, and laying the foundations for a peaceful society. 
For example, a mere 5% annual reduction in federal spending on violence containment in the US over the next three years could provide the capital to update the entire country’s school infrastructure. 
The virtuous cycle by which prosperity engenders peace, which in turn fuels greater prosperity, is also apparent in education investment. 
Education enhances workers’ skills, knowledge, and behaviors, thereby boosting their productivity. 
This promotes stability and social cohesion, while making communities more resilient to economic, geopolitical, or natural disasters. 
Peaceful and prosperous Scandinavian countries, which boast high education levels, are a case in point. 
But the cycle runs in reverse, too. 
In Greece, for example, the recent economic downturn, exacerbated by strict austerity measures, has fueled violent demonstrations. 
And prolonged conflict has had a devastating impact on Iraq’s economy. 
Three decades ago, after Iraq initiated hostilities with Iran, its per capita annual GDP plummeted, from $5,374 in 1980 to $1,253 in 1991. 
It is easy to perpetuate the vicious cycle between economic hardship and conflict; indeed, such an outcome requires only that policymakers do nothing. 
Reversing the cycle, however, is a difficult undertaking – one that requires carefully crafted policies, effective programs, and substantial investment. 
In formulating the post-2015 development agenda, world leaders must recognize the tremendous impetus that less violent, more harmonious societies would provide for economic development. 
By stimulating a virtuous cycle of peace and prosperity, policymakers can contribute to the well-being of people worldwide. 
Now that is a goal worth pursuing. 

A Bad Bet on Synthetic Biology 
LAS VEGAS – Las Vegas seems to be an apt place to launch a risky corporate gamble that could destroy the livelihoods of millions of small-scale farmers. 
Earlier this month, the international food conglomerate Cargill chose the city’s famous Strip to introduce what it hopes will be its next blockbuster product: EverSweet, a sweetener made of “the same sweet components in the stevia plant.” 
And yet, despite Cargill’s heavy reliance on stevia in its promotional material, EverSweet does not contain a single leaf of the plant. 
Cargill’s new product is an example of synthetic biology, a form of genetic engineering that uses modified organisms to manufacture compounds that would never be produced naturally. 
What makes EverSweet taste sweet is not stevia; it is a compound produced by a bioengineered yeast. 
Synthetic biology is high-tech, and it is also potentially high-risk. 
Even as it attracts billions of dollars in investment, it is the subject of growing international concern. 
Tellingly, Cargill does not advertise its use of the controversial technology; instead, the company describes EverSweet as the product of “specially crafted baker’s yeast,” as if it were a recipe brewed for centuries in Bavarian villages. 
Discerning the risks that may be posed by food ingredients made from this kind of genetic engineering – different from those known from other types of transgenic foods – is still at an early stage. 
In a recent opinion, European Union scientific committees concluded that while the risk assessment used for evaluating genetically modified organisms should be applicable to aspects of synthetic biology, in specific cases new approaches may be needed to evaluate the safety of the technology. 
And yet there is one area in which the dangers are already apparent: the economic damage that will be caused as lab-grown compounds replace field-grown stevia. 
The Guarani indigenous people of Paraguay have grown and used the herb for centuries. 
More recently, it has become a food-industry craze, driven in part by fear of obesity lawsuits. 
As major brands like Coke and Pepsi aggressively market stevia-sweetened cola drinks as natural and healthy, the agricultural acreage of the plant has exploded. 
Analysts expect the stevia market to reach $275 million by 2017. 
The global leaders in stevia production are Paraguay, China, and the United States, with Kenya close behind. 
Early in 2015, Marian Bassey (representing the ETC Group) met stevia farmers in Kenya to understand what competition from synthetic biology might mean for them. 
They were very worried. 
For Ann Nduta Kanini, a widowed mother of eight, selling stevia has allowed her to send her children to school and put food on the table. 
When we asked Paul Mwangi Kigaa, another small-scale farmer, what Cargill’s use of synthetic biology would mean for him and his neighbors, he answered that “growing stevia in their factories will affect our lives!” 
Moreover, poor farmers have been actively encouraged to invest in stevia, because its cultivation can help preserve fragile and unique ecosystems. 
In its annual survey of leading global risks, the World Economic Forum noted that, “the invention of cheap, synthetic alternatives to high-value agricultural exports … could suddenly destabilize vulnerable economies by removing a source of income on which farmers rely.” 
Nor are stevia farmers the only ones who should be concerned. 
Ingredients that are being replaced or are likely to be exchanged for products made through synthetic biology include vanilla, saffron, coconut oil, patchouli, olive squalene, and rose oil. 
Indeed, the world’s largest cosmetics, flavor, and fragrance companies are hoping that synthetic biology will help them replace more than 200 natural botanical extracts. 
According to the International Federation of Essential Oils and Aroma Trades (IFEAT), around 95% of these botanical products are produced by small-scale farmers, bringing much-needed cash income to some of the world’s poorest communities. 
Fortunately, consumers are becoming increasingly aware of the risks posed by synthetic biology, and companies are responding. 
Earlier this year, the iconic ice cream brand Ben and Jerry’s pledged not to use any ingredients produced through synthetic biology. 
Similarly, Häagen-Dazs confirmed that it will not use vanilla flavor produced through synthetic biology in its ice cream. 
And, after the natural cleaning products brand Ecover was petitioned by tens of thousands of angry consumers, the company quickly rolled back an experiment in which it used algal oil produced through synthetic biology in a laundry detergent. 
These are unlikely to remain isolated examples. 
The Non-GMO Project, an increasingly influential labeling organization, has ruled that the 33,000 products carrying its seal must not use synthetic biology. 
Meanwhile, the European Stevia Association (EUSTAS), has expressed concern that EverSweet will undermine stevia’s reputation as safe and natural. 
The dark clouds gathering around synthetic biology may not have been visible at Cargill’s sunny product launch. 
But, by competing with poor farmers and misleading consumers about the origins of its ingredients, EverSweet and other examples of synthetic biology are generating bitterness at both ends of the product chain. 
That is why what happened in Vegas should stay in Vegas. 


Beyond Secular Stagnation 
NEW YORK – As Larry Summers rightly points out, the term “secular stagnation” became popular as World War II was drawing to a close. 
Alvin Hansen (and many others) worried that, without the stimulation provided by the war, the economy would return to recession or depression. 
There was, it seemed, a fundamental malady. 
But it didn’t happen. 
How did Hansen and others get it so wrong? 
Like some modern-day secular stagnation advocates, there were deep flaws in the underlying micro- and macroeconomic analysis – most importantly, in the analysis of the causes of the Great Depression itself. 
As Bruce Greenwald and I (with our co-authors) have argued, high growth in agricultural productivity (combined with high global production) drove down crop prices – in some cases by 75% – in the first three years of the Depression alone. 
Incomes in the country’s major economic sector plummeted by around half. 
The crisis in agriculture led to a decrease in demand for urban goods and thus to an economy-wide downturn. 
WWII, however, provided more than just a fiscal stimulus; it brought about a structural transformation, as the war effort moved large numbers of people from rural areas to urban centers and retrained them with the skills needed for a manufacturing economy, a process which continued with the GI bill. 
Moreover, the way the war was funded left households with strong balance sheets and pent-up demand once peace returned. 
An analogous structural transformation, this time not from agriculture to manufacturing, but from manufacturing-led growth to services-led growth, compounded by the need to adjust to globalization, marked the economy in the years before the 2008 crisis. 
But this time, mismanagement of the financial sector had loaded huge debts onto households. 
This time, unlike the end of the WWII, there was cause for worry. 
As Summers well knows, I published a widely cited commentary in The New York Times on November 29, 2008, entitled “A $1 Trillion Answer.” 
In it, I called for a much stronger stimulus package than the one President Barack Obama eventually proposed. 
And that was in November. 
By January and February 2009, it was clear that the downturn was greater and a larger stimulus was needed. 
In that Times commentary, and later more extensively in my book Freefall, I pointed out that the size of the stimulus that was needed would depend both on its design and economic conditions. 
If the banks couldn’t be induced to restore lending, or if states cut back their own spending, more would be required. 
Indeed, I publicly advocated linking stimulus spending to such contingencies – creating an automatic stabilizer. 
As it turned out, the banks weren’t forced to expand lending to small and medium-size businesses; they cut it drastically. 
States, too, slashed spending. 
Obviously, an even larger stimulus in dollar terms would be needed if it was poorly designed, with large parts frittered away in less cost-effective tax cuts, which is what happened. 
It should be clear, though, that there is nothing natural or inevitable about secular stagnation in the level of aggregate demand at zero interest rates. 
In 2008, demand was also depressed by the huge increases in inequality that had occurred over the preceding quarter-century. 
Mismanaged globalization and financialization, as well as tax cuts for the rich – including the cut in capital-gains tax (overwhelmingly benefiting those at the very top) during the Clinton and Bush administrations – were major causes of accelerating concentration of income and wealth. 
Inadequate financial regulation left Americans vulnerable to predatory banking behavior and saddled with enormous debts. 
There were thus other ways of increasing aggregate demand besides fiscal stimulus: doing more to induce lending, to help homeowners, to restructure mortgage debt, and to redress existing inequalities. 
Policies are always conceived and enacted under uncertainty. 
But some things are more predictable than others. 
As Summers again knows full well, when Peter Orszag, the head of the Office of Management and Budget at the beginning of Obama’s first administration, and I analyzed the risks of mortgage lender Fannie Mae in 2002, we said that its lending practices at that time were safe. 
We did not say that no matter what it did, there was no risk. 
And what Fannie Mae did later in the decade mattered very much. 
It changed its lending practices to resemble more closely those of the private sector, with predictable consequences. 
(Even then, notwithstanding the right-wing canard blaming Fannie Mae and the other government-sponsored lender, Freddie Mac, it was private-sector lending, especially by the big banks, that underlay the financial crisis.) 
But what was predictable and predicted was the manner in which under-regulated derivatives could inflame the crisis. 
The Financial Crisis Inquiry Commission put the blame squarely on the derivatives market as one of the three central factors driving the events of late 2008 and 2009. 
Earlier in President Bill Clinton’s administration, we had discussed the dangers of these fast-multiplying and risky financial products. 
They should have been reined in, but the Commodity Futures Modernization Act of 2000 prevented the regulation of derivatives. 
There is no reason economists should agree about what is politically possible. 
What they can and should agree about is what would have happened if… 
Here are the essentials: We would have had a stronger recovery if we had had a bigger and better-designed stimulus. 
We would have had stronger aggregate demand if we had done more to address inequality, and if we had not pursued policies that increased it. 
And we would have had a more stable financial sector if we had regulated it better. 
These are the lessons that we should keep in mind as we prepare for the next economic downturn. 

Stimulate or Die 
NEW YORK – As the green shoots of economic recovery that many people spied this spring have turned brown, questions are being raised as to whether the policy of jump-starting the economy through a massive fiscal stimulus has failed. 
Has Keynesian economics been proven wrong now that it has been put to the test? 
That question, however, would make sense only if Keynesian economics had really been tried. 
Indeed, what is needed now is another dose of fiscal stimulus. 
If that does not happen, we can look forward to an even longer period in which the economy operates below capacity, with high unemployment. 
The Obama administration seems surprised and disappointed with high and rising joblessness. 
It should not be. 
All of this was predictable. 
The true measure of the success of the stimulus is not the actual level of unemployment, but what unemployment would have been without the stimulus. 
The Obama administration was always clear that it would create some three million jobs more than what would otherwise be the case. 
The problem is that the shock to the economy from the financial crisis was so bad that even Obama’s seemingly huge fiscal stimulus has not been enough. 
But there is another problem: In the United States, only about a quarter of the almost $800 billion stimulus was designed to be spent this year, and getting it spent even on “shovel ready” projects has been slow going. 
Meanwhile, US states have been faced with massive revenue shortfalls, exceeding $200 billion. 
Most face constitutional requirements to run balanced budgets, which means that such states are now either raising taxes or cutting expenditures –a negative stimulus that offsets at least some of the Federal government’s positive stimulus. 
At the same time, almost one-third of the stimulus was devoted to tax cuts, which Keynesian economics correctly predicted would be relatively ineffective. 
Households, burdened with debt while their retirement savings wither and job prospects remain dim, have spent only a fraction of the tax cuts. 
In the US and elsewhere, much attention was focused on fixing the banking system. 
This may be necessary to restore robust growth, but it is not sufficient. 
Banks will not lend if the economy is in the doldrums, and American households will be particularly reluctant to borrow – at least in the profligate ways they borrowed prior to the crisis. 
The almighty American consumer was the engine of global growth, but it will most likely continue to sputter even after the banks are repaired. 
In the interim, some form of government stimulus will be required. 
Some worry about America’s increasing national debt. 
But if a new stimulus is well designed, with much of the money spent on assets, the fiscal position and future growth can actually be made stronger. 
It is a mistake to look only at a country’s liabilities, and ignore its assets. 
Of course, that is an argument against badly designed bank bailouts, like the one in America, which has cost US taxpayer hundreds of billions of dollars, much of it never to be recovered. 
The national debt has increased, with no offsetting asset placed on the government’s balance sheet. 
But one should not confuse corporate welfare with a Keynesian stimulus. 
A few (not many) worry that this bout of government spending will result in inflation. 
But the more immediate problem remains deflation, given high unemployment and excess capacity. 
If the economy recovers more robustly than I anticipate, spending can be canceled. 
Better yet, if much of the next round of stimulus is devoted to automatic stabilizers – such as compensating for the shortfall in state revenues – then if the economy does recover, the spending will not occur. 
There is little downside risk. 
Nevertheless, there is some concern that growing inflationary expectations might result in rising long-term interest rates, offsetting the benefits of the stimulus. 
Here, monetary authorities must be vigilant, and continue their “non-standard” interventions – managing both short-term and long-term interest rates. 
All policies entail risk. 
Not preparing for a second stimulus now risks a weaker economy – and the money not being there when it is needed. 
Stimulating an economy takes time, as the Obama administration’s difficulties in spending what it has allocated show; the full effect of these efforts may take a half-year or more to be felt. 
A weaker economy means more bankruptcies and home foreclosures and higher unemployment. 
Even putting aside the human suffering, this means, in turn, more problems for the financial system. 
And, as we have seen, a weaker financial system means a weaker economy, and possibly the need for more emergency money to save it from another catastrophe. 
If we try to save money now, we risk spending much more later. 
The Obama administration erred in asking for too small a stimulus, especially after making political compromises that caused it to be less effective than it could have been. 
It made another mistake in designing a bank bailout that gave too much money with too few restrictions on too favorable terms to those who caused the economic mess in the first place – a policy that has dampened taxpayers’ appetite for more spending. 
But that is politics. 
The economics is clear: the world needs all the advanced industrial countries to commit to another big round of real stimulus spending. 

Stimulating Equality 
NEW YORK – With unemployment climbing in the United States and other OECD countries, job creation is a key objective for policymakers. 
In the US, President Barack Obama recently proposed to increase public spending by about $600 billion over the next two years to create an additional four million jobs. 
But Obama is also concerned with reversing a sharp rise in income inequality (which is now at an 80-year high). 
Is it possible for leaders to do both at the same time? 
The answer is unequivocally yes, but only if they focus on government spending rather than reforming their tax systems. 
That lesson is even more powerful for other advanced countries like Germany and France, which spend a far higher percentage of GDP on public programs (35% and 43%, respectively, in 2005) than the US (only 25%). 
America’s tax system has surprisingly little redistributional punch. 
Using a measure of “comprehensive income” – money income, total capital gains on wealth, imputed rent on owner-occupied housing, non-cash government benefits, and public consumption – income taxes are generally progressive. 
Federal income taxes as a proportion of income increase steadily from 2% at the 10th percentile (that is, a family ranked tenth from the bottom out of 100) to 14% at the 90th percentile, but then falls off slightly to 13% at the very top, reflecting the favorable treatment of capital gains and investment income under the Bush administration’s income-tax laws. 
On the other hand, social security taxes – the biggest tax for more than two-thirds of families – are mildly regressive. 
Social security taxes as a proportion of income rise gradually from 5% at the 10th percentile to 9% at the 80th percentile, stay there at the 90th percentile, but then fall off sharply to 5% at the top. 
This decline reflects the wage cap on social security taxes (currently at $102,000). 
The total tax burden on families also includes sales taxes, which are steeply regressive, and property taxes, which are progressive. 
Total personal taxes are mildly progressive, increasing steadily as a share of income from 14% at the 10th percentile to 28% at the 90th percentile, but then falling off sharply to 22% at the top, owing to the favorable treatment of capital gains and investment income, the wage cap on social security taxes, and the sharp regressivity of sales taxes. 
On the other hand, total transfers have a much bigger equalizing effect on incomes. 
Cash transfers, like social security and unemployment insurance, are highly equalizing. 
When the value of non-cash government benefits, like Medicaid, Medicare, and Food Stamps, are also included, total transfers become extremely progressive. 
As a proportion of income, they fall almost continuously, from 50% at the 10th percentile to 2.5% at the very top. 
But government spending on goods and services, like education, highways, police, and sanitation, has distributional consequences, too, and can be allocated to actual beneficiaries in much the same way as government transfers. 
Educational expenditures are allocated on the basis of the number of schoolchildren in the family. 
Highway spending is allocated in proportion to the number of cars owned by the family and estimated miles driven. 
Collective goods like fire and police protection are allocated on a per capita basis. 
Public consumption is just as progressive as transfer payments. 
As a proportion of income, it declines almost continuously, from 34% at the 10th percentile to 3% at the very top. 
The main beneficiaries of public spending are the poor and the middle class. 
When you add together government transfers and public consumption and subtract taxes paid, you get a figure for net government expenditures. 
This is extremely progressive. 
As a share of income, it declines sharply from 70% at the 10th percentile to -16% at the top (in other words, the top bracket pays more in taxes than it receives in government benefits). 
In fact, the crossover point between positive and negative net government expenditures is at the 66th percentile. 
The extremely progressive nature of net government expenditures comes about equally from government transfers and public spending; very little is contributed by taxes. 
It is not just the poor who benefit from net governmental expenditures. 
The middle class is also a big beneficiary. 
Between 1959 and 2005, about half of the growth of the middle class’s income came from increased net government expenditures. 
Indeed, from 2000 to 2004, the increase in net government expenditures accounted for 150% of income growth, as other sources of income shriveled up. 
Net government spending also helped to reduce overall inequality over those years. 
As Obama and other leaders around the world implement stimulus packages in the months ahead, they should recognize that the question of who benefits goes beyond the number of jobs created. 
Government spending, no less than government transfers, has actual beneficiaries. 
If these packages target education (very redistributive) or sanitation, fire, police, and highways (mildly redistributive), they can create jobs and reduce inequality. 

Stock Market Fantasies 
Historically, the stock market has performed well. 
In his celebrated 2002 book Stocks for the Long Run , Jeremy Siegel shows that the American stock market returned 6.9% per year in real terms between 1802 and 2001. Though the return varied by decade, even turning negative in some decades, overall it performed fairly consistently. 
This 6.9% annual average return has since been referred to as “Siegel’s constant,” as if Siegel had discovered a new law of nature. 
The idea that stocks will perform well in the future has many promoters today, especially among those trying to sell investments in stocks. 
In the United States, President George W. Bush’s Commission to Strengthen Social Security cited Siegel for its claim that the government should encourage people to invest in stocks. 
Bush has been traveling the country promoting a plan to introduce personal retirement accounts invested in stocks and bonds. 
The plan assumes a 6.5% real return for stocks – only slightly below Siegel’s constant –in future decades. 
But most people don’t believe that the stock market will perform so well in the future. 
Siegel himself recently projected only a 6% average real return for US stocks over the next four decades. 
Others have lower expectations. 
I have been conducting surveys of US investors under the auspices of the Yale School of Management, asking what percentage change they expect for the Dow Jones Industrial Average. 
The expected one-year increase in the Dow in 2005 averages 4.8% for institutional investors and 4.3% for individual investors. 
On closer inspection, the idea that the market will yield a real 6.9% a year in the future appears suspect. 
Think about it: investing in the stock market at 6.9% a year, and reinvesting any dividends, means that, in a tax-free account, the real value of the investment will double every ten years. 
At that rate, a 20-year-old who in 1960 invested $4,000 a year in a tax-free account in the US stock market would have one million dollars by age 65 today. 
Should we expect to be able to do that in the future? 
Obviously, most people didn’t invest this way in 1960. 
But could most people have? 
If so, how would the economy, with the labor and material resources at its disposal, provide the large houses, luxury cars, and high-end services that millionaires expect? 
It is natural to suppose that it could not. 
In fact, statistics on past stock market performance mislead because of what statisticians call “selection bias,” which occurs when the sample from which a statistic is derived is not representative of all the data. 
Several kinds of selection bias must be considered when we look at Siegel’s constant. 
The most fundamental problem is that, in examining stock market investments, we are selecting an economic activity because it was a consistent success in the past. 
We are trying to extrapolate the past experience of a small fraction of the world population that we have chosen to examine because they made a lot of money. 
Of course, if one looks at many different investment strategies and many different countries, one can find something that performed spectacularly in the past, even if there is no strategy that can be expected to do so well in the future. 
The US had one of the world’s most successful stock markets in the twentieth century. 
Elroy Dimson, Paul Marsh, and Mike Staunton wrote in their book Triumph of the Optimists that of 15 countries that have advanced economies today, the US stock market ranked fourth in its rate of return between 1900 and 2000, behind Australia, Sweden, and South Africa. 
The geometric average real return of the US stock market was 6.7%, but the median geometric real return for the other countries was only 4.7%. 
But even this comparison involves a selection bias. 
Countries with more successful markets are more likely to have complete data on both prices and dividends for a hundred years. 
A study by Philippe Jorion and William Goetzmann found 39 countries with reliable stock price data – though not dividend data – for a good part of the twentieth century. 
Their sample included countries in Latin America and Asian countries beyond Japan. 
They found that the median real stock price appreciation from 1920 to 1996 for all these countries was only 0.8%, compared to 4.3% for the US. 
The US was actually ranked first among the 39 countries. 
Of course, even looking at these countries entails selection bias, for it excludes countries without price data for much of the twentieth century, notably China and Russia, where communist revolutions terminated the stock markets, resulting in -100% returns for investors. 
The particular problems that prevented us from observing the returns on these stock markets will never be repeated, but it is wrong to assume that problems of that scale will not recur. 
There is also the selection bias that we infer from looking at the twentieth century, the most successful in terms of economic growth in human history. 
The twenty-first century will be different in ways that we cannot fathom today. 
Of course, investing in stocks is not a bad thing. 
Indeed, the stock market is an important component of any modern economy. 
But we should not make plans that rely on high returns, as many (including some governments) appear to be doing. 

Is the Stock Market Loaded for Bear? 
NEW YORK – In recent days, the initial New Year optimism of many investors may have been jolted by fears of an economic slowdown resulting from interest-rate hikes. 
But no one should be surprised if the current sharp fall in equity prices is followed by a swift return to bullishness, at least in the short term. 
Despite the recent slide, the mood supporting stocks remains out of sync with the caution expressed by political leaders. 
Market participants could easily be forgiven for their early-year euphoria. 
After a solid 2017, key macroeconomic data – on unemployment, inflation, and consumer and business sentiment – as well as GDP forecasts all indicated that strong growth would continue in 2018. 
The result – in the United States and across most major economies – has been a rare moment of optimism in the context of the last decade. 
For starters, the macro data are positively synchronized and inflation remains tame. 
Moreover, the International Monetary Fund’s recent upward revision of global growth data came at precisely the point in the cycle when the economy should be showing signs of slowing. 
Moreover, stock markets’ record highs are no longer relying so much on loose monetary policy for support. 
Bullishness is underpinned by evidence of a notable uptick in capital investment. 
In the US, gross domestic private investment rose 5.1% year on year in the fourth quarter of 2017 and is nearly 90% higher than at the trough of the Great Recession, in the third quarter of 2009. 
This is emblematic of a deeper resurgence in corporate spending – as witnessed in durable goods orders. 
New orders for US manufactured durable goods beat expectations, climbing 2.9% month on month to December 2017 and 1.7% in November. 
Other data tell a similar story. 
In 2017, the US Federal Reserve’s Industrial Production and Capacity Utilization index recorded its largest calendar year gain since 2010, increasing 3.6%. 
In addition, US President Donald Trump’s reiteration of his pledge to seek $1.5 trillion in spending on infrastructure and public capital programs will further bolster market sentiment. 
All of this bullishness will continue to stand in stark contrast to warnings by many world leaders. 
In just the last few weeks, German Chancellor Angela Merkel cautioned that the current international order is under threat. 
French President Emmanuel Macron noted that globalization is in the midst of a major crisis, and Canadian Prime Minister Justin Trudeau has stated that the unrest we see around the world is palpable and “isn’t going away.” 
Whether or not the current correction reflects their fears, the politicians ultimately could be proved right. 
For one thing, geopolitical risk remains considerable. 
Bridgewater Associates’ Developed World Populism index surged to its highest point since the 1930s in 2017, factoring in populist movements in the US, the United Kingdom, Spain, France and Italy. 
So long as populism lingers as a political threat, the risk of reactionary protectionist trade policies and higher capital controls will remain heightened, and this could derail economic growth. 
Meanwhile the market is mispricing perennial structural challenges, in particular mounting and unsustainable global debt and a dim fiscal outlook, particularly in the US, where the price of this recovery is a growing deficit. 
In other words, short-term economic gain is being supported by policies that threaten to sink the economy in the longer term. 
The Congressional Budget Office, for example, has forecast that the US deficit is on course to triple over the next 30 years, from 2.9% of GDP in 2017 to 9.8% in 2047, “The prospect of such large and growing debt,” the CBO cautioned, “poses substantial risks for the nation and presents policymakers with significant challenges.” 
The schism in outlook between business and political leaders is largely rooted in different time horizons. 
For the most part, CEOs, hemmed in by the short termism of stock markets, are focused on the next 12 months, whereas politicians are focusing on a more medium-term outlook. 
As 2018 progresses, business leaders and market participants should – and undoubtedly will – bear in mind that we are moving ever closer to the date when payment for today’s recovery will fall due. 
The capital market gyrations of recent days suggest that awareness of that inevitable reckoning is already beginning to dawn. 

Stock Markets’ Fear of Falling 
NEW HAVEN -- The sharp drop in the world’s stock markets on August 9, after BNP Paribas announced that it would freeze three of its funds, is just one more example of the markets’ recent downward instability or asymmetry. 
That is, the markets have been more vulnerable to sudden large drops than they have been to sudden large increases. 
Daily stock price changes for the 100-business-day period ending August 3 were unusually negatively skewed in Argentina, Australia, Brazil, Canada, China, France, Germany, India, Japan, Korea, Mexico, the United States and the United Kingdom. 
In the US, for example, the Standard and Poor’s 500 index in July recorded six days of declines and only three days of increases amounting to more than 1%. 
In June, the index dropped more than 1% on four days, and gained more than 1% on two days. 
Going back further, there was a gigantic one-day drop on February 27, 2007, of 3.5%, and no sharp rebound. 
The February 27 decline began with an 8.8% one-day drop in the Shanghai Composite, following news that the Chinese government might tax capital gains more aggressively. 
This news should have been relevant only to China, but the drop there fueled declines worldwide. 
For example, the Bovespa in Brazil fell 6.6% on February 27, and the BSE 30 in India fell 4% the next day. 
The subsequent recovery was slow and incremental. 
In the US, the skew has been so negative only three other times since 1960: at the time of the 6.7% drop on May 28, 1962, the record-shattering 20.5% plummet on October 19, 1987, and the 6.1% decline on October 13, 1989. 
Stock markets’ unusually negative skew is not inconsistent with booming price growth in recent years. 
The markets have broken all-time records, come close to doing so, or at least done very well since 2003 ( the case in Japan) by making up for the big drops incrementally, in a succession of smaller increases. 
Nor is the negative skew inconsistent with the fact that world stock markets have been relatively quiet for most of this year. 
With the conspicuous exception of China and the less conspicuous exception of Australia, all have had low standard deviations of daily returns for the 100-business-day period ending August 3 when compared with the norm for the country. 
The February 27 drop in US stock prices was only the 31st biggest one-day drop since 1950. 
But all of the other 30 drops occurred at times when stock prices were much more volatile. 
Thus, the February 27th drop really stands out, as do other recent one-day drops. 
Indeed, one of the big puzzles of the US stock market recently has been low price volatility since around 2004, amid the most volatile earnings growth ever seen. 
Five-year real earnings growth on the S&P 500 set an all-time record in the period ending in the first quarter of 2007, at 192%. 
Before that, between the third quarter of 2000 and the first quarter of 2002, real S&P 500 earnings fell 55% – the biggest-ever decline since the index was created in 1957. 
One would think that market prices should be volatile as investors try to absorb what this earnings volatility means. 
But we have learned time and again that stock markets are driven more by psychology than by reasoning about fundamentals. 
Is psychology somehow behind the pervasive negative skew in recent months? 
Maybe we should ask why the skew is so negative. 
Should we regard it as just chance, or, when combined with record-high prices, as a symptom of some instability? 
The adage in the bull market of the 1920’s was “one step down, two steps up, again and again.” 
The updated adage for the recent bull market is “one big step down, then three little steps up, again and again,” so far at least. 
No one is looking for a sudden surge, and volatility is reduced by the absence of sharp up-movements. 
But big negative returns have an unfortunate psychological impact on markets. 
People still talk about October 28, 1929, or October 19, 1987. 
Big drops get their attention, and this primes some people to be attentive for them in the future, and to be ready to sell if another one comes. 
In fact, willingness to support the market after a sudden drop may be declining. 
The “buy-on-dips stock market confidence index” that we compile at the Yale School of Management has been falling gradually since 2001, and has fallen especially far lately. 
The index is the share of people who answered “increase” to the question, “If the Dow dropped 3% tomorrow, I would guess that the day after tomorrow the Dow would: Increase? 
Decrease? 
Stay the Same?” 
In 2001, 72% of institutional investors and 74% of individual investors chose “increase.” 
By May 2007, only 48% of institutional investors and 59% of individual investors chose “increase.” 
Perhaps the buy-on-dips confidence index has slipped lately because of negative news concerning credit markets, notably the US sub-prime mortgage market, which has increased anxiety about the fundamental soundness of the economy. 
But something more may be at work. 
Everyone knows that markets have been booming, and everyone knows that other people know that a correction is always a possibility. 
So there may be an underlying sensitivity to price drops, which could fuel a succession of downward price changes, amplifying public concerns about problems in the economy and heralding a profound change in investor sentiment. 

Stocks and the Long Run 
BERKELEY – After the second 40% decline in America’s Standard & Poor’s composite index of common stocks in a decade, global investors are shell-shocked. 
Funds invested, and reinvested, in the S&P composite from 1998-2008 have yielded a real return of zero: the dividends earned on the portfolio have been just enough to offset inflation. 
Not since 1982 has a decade passed at the end of which investors would have been better off had they placed their money in corporate or United States Treasury bonds rather than in a diversified portfolio of stocks. 
So investors are wondering: will future decades be like the past decade? 
If so, shouldn't investments in equities be shunned? 
The answer is almost surely no. 
At a time horizon of a decade or two, the past performance of stocks and bonds is neither a reliable guarantee nor a good guide to future results. 
Periods like 1998-2008, in which stocks do relatively badly, are preceded by periods – like 1978-1988 and 1988-1998 – in which they do relatively well, and are in all likelihood followed by similar periods. 
Do the math. 
At the moment, the yield-to-maturity of the ten-year US Treasury bond is 3.76%. 
Subtract 2.5% for inflation, and you get a benchmark expected real return of 1.26%. 
Meanwhile, the earnings yield on the stocks that make up the S&P composite is fluctuating around 6%: that is how much money the corporations that underpin the stocks are making for their shareholders. 
Some of that money will be paid out in dividends. 
Some will be used to buy back stock – thus concentrating the equity and raising the value of the stock that is not bought back. 
Some will be reinvested and used to boost the company’s capital stock. 
You can argue that the corporate executives have expertise and knowledge that allows them to commit the funds they control to higher-return projects than are available in the stock market. 
Or you can argue that they are corrupt empire-builders who dissipate a portion of the shareholders’ money that they control. 
The sensible guess is that these two factors cancel each other out. 
Thus, the expected fundamental real return on diversified US stock portfolios right now is in the range of 6% to 7%. 
The expected market return is that amount plus or minus expected changes in valuation ratios: will stocks return more as price-earnings ratios rise, or return less as price-earnings ratios fall? 
Once again, the sensible guess is that these two factors more or less cancel each other out. 
Compare the 6% to 7% real return on stocks to a 1.25% real return on bonds. 
But aren’t stocks risky? 
Couldn’t earnings collapse? 
Couldn’t the market undergo another 40% decline in the near future? 
Aren’t bonds safer? 
The answers to these questions are yes, yes, yes, and yes. 
Remember: we already had another 40% decline in 2000-2003, and are in another one right now. 
We also had the long slide from 1977-1982 that followed a 40% collapse from 1973-1975. Before that, we had declines in 1946-1949, 1937-1942, and the biggest of them all in 1929-1933. 
But stock market declines that are not accompanied by steep and persistent collapses in earnings are by their nature temporary: they are provoked by steep rises in perceived risk, and if those risks turn out to be overblown, stocks rebound when the perception of risk falls. 
And how about stock market declines that are accompanied by a steep and persistent collapse in earnings – by depressions? 
In the pre-World War II era, when governments held fast to the gold standard, depressions were times of deflation. 
But in the post-World War II era, in which social democratic governments maintain welfare spending and Keynesian economic advisers seek to use fiscal policy to boost output, an earnings depression is much more likely to be accompanied by inflation. 
True, a steep and persistent collapse in earnings will erode wealth invested in stocks. 
But the inflation that accompanies it will produce a steeper and larger erosion of real wealth invested in nominal bonds. 
As Edgar L. Smith wrote in The Atlantic Monthly back in 1924, when the principal risks are macroeconomic, bonds are no safer than diversified portfolios of stocks – in fact, they are riskier. 
All these arguments apply only to long-term investors who can afford to wait out another 40% decline in values and keep their money invested until perceived risk drops. 
(And if perceived risk never drops than you have worse things to worry about than the performance of your portfolio.) 
For retirees and other people who need to spend soon, the year-to-year variability of the stock market commands caution. 
But for those who do not need to spend soon, the recent decline in equity values is more an opportunity than a catastrophe. 
We liked the stocks in our portfolio a year ago for their long-term prospects. 
Today’s short-term crisis does not materially alter their long-term prospects. 
And now we have an opportunity to buy more, and cheaply. 

Stop Coddling Belarus 
Lenin once said that capitalists were so cynical that they would sell the Soviets the rope with which they would hang them. 
Lenin and communism have passed away, but that cynical indifference to suffering when profits are involved remains. 
Belarus provides a glaring example. 
The European Parliament has consistently denounced Belarus as Europe’s last dictatorship, yet EU member governments continue business as usual with Aleksander Lukashenka, the country’s wayward and near lunatic despot. 
This is especially true when there is a chance to save or make money. 
For example, for more than a decade, Germany’s police forces, customs service, and even the Bundeswehr have been ordering uniforms from a state-owned factory in the city of Dzherzinsky, named after the father of the Red Terror and founder of the Soviet KGB, Feliks Dzherzinsky. 
Similar examples of such indifferent cynicism abound. 
By treating Lukashenka as a favored business partner at the same time that the EU is trying to isolate him as an international pariah, European hypocrisy stands naked. 
Instead of indirectly propping up Lukashenka’s regime through such cozy deals, Europe’s governments must begin to act in accordance with what Europe’s parliament has long understood: underwriting Lukashenka economically only prolongs his misrule. 
So it is now more important than ever that European parliamentarians unite and make their position clear. 
The European Parliament has, indeed, taken the lead. 
Since last year it has been enlisting people with historic knowledge and understanding of totalitarian regimes to help guide its response to events in Belarus. 
This advice helped shape the parliament’s strong stance against maintaining unnecessary economic engagement with Lukashenka and his henchmen. 
But there are two radically different attitudes regarding Belarus’s participation in European activities. 
On one hand, the Parliamentary Assembly of the Council of Europe has denied Belarusian politicians even informal access to meetings in Strasbourg. 
The Assembly condemned Lukashenka’s usurpation of power when he twisted the constitution to grant himself a virtual lifetime presidency, and it has denounced the disappearance of those Belarussians who have dared to think differently from the regime. 
The Organization for Security and Cooperation in Europe (OSCE) has also taken a strong stand against the Belarusian dictator. 
As the Final Report of its 2004 mission to observe the Belarusian parliamentary elections clearly stated, the vote “fell significantly short of OSCE commitments.” 
Similarly, the 2004 referendum to eliminate term limits on the presidency “took place with unrestrained Government bias in favor of the referendum,” and without “the conditions, particularly freedom of expression and freedom of the media, to ensure that the will of the people serves as the basis of government authority.” 
But at the same time the OSCE is condemning these anti-democratic practices, its own Parliamentary Assembly maintains full-fledged cooperation with the Belarusian parliament. 
Indeed, the OSCE treats the Lukashenka-controlled parliament in the same way it does any EU parliament. 
So real parliaments and sham parliaments are treated as equals. 
The idea would be laughable if it were not so tragic. 
This absurd situation must change. 
It is the duty of all members of EU national parliaments to reject this affront to their democratic dignity. 
Only democratic parliaments should sit as equals in Europe’s democratic forums. 
The goal is not to ensure Europe’s democratic purity, but to change the nature of Belarus’s government. 
For that to happen, Europe’s democratic voice must be heard within Belarus. 
That won’t be easy. 
Of the 1,500 different media outlets in Belarus today, only a dozen or so retain any form of independence. 
Even that small number is likely to diminish, as Lukashenka keeps up political, financial, and legal pressure on them. 
Indeed, Belarus’s last independent daily newspaper recently went out of business. 
The European Commission has allocated two million euros to establish an independent radio station for Belarus, which must operate outside of the country because of Lukashenka. 
Working with the Belarusian association of journalists, this independent media outlet will broadcast from Latvia, Lithuania, Poland, and perhaps Ukraine. 
This meager effort, however, is an insufficient response by Europe’s democracies to the full panoply of Lukashenka’s dictatorship: his docile courts, brutal jails, and corrupt police. 
Are a few hours of radio broadcasting really all Europe and the democratic west can muster? 
If so, Lukashenka must be laughing aloud. 
Parliamentarians across Europe and the West must join their voice together in a well-defined, united and ringing declaration that forces Western leaders to apply real pressure to Europe’s last dictator. 
Such pressure brought results a year ago, with the success of the Orange Revolution in Ukraine. 
Nothing less than a united position against the despot of Belarus is necessary if Lukashenka – and his Russian backers – are to be forced to change their ways. 

Stop Digging And Start Thinking 
October 9, 2006 will become a day to remember. 
North Korea probably exploded a nuclear bomb on that day. 
Was it a test that failed? 
The future may provide answers, but the political fallout is clear and the impact substantial. 
First, international pressure, led by the US, China, Russia, and Japan was not enough to prevent North Korea from taking this fateful step. 
A terrible dictatorship, a regime without a future and a dwarf in terms of power-politics defied the international giants. 
There is now justifiable outrage, and a call for sanctions is heard everywhere. 
But what will be the effect of sanctions against a regime whose goal is survival through self-isolation – a regime that will have no qualms in ruthlessly sacrificing its people? 
Also, can China really permit strong sanctions against its neighbor, a regime fighting for survival, one equipped with nuclear arms and missiles, and a humanitarian disaster of the highest order among its population? 
Just how credible and effective can sanctions be? 
Second, the Security Council now looks like a paper tiger because its authority was successfully challenged by a worn-out regime. 
This fact will be noted everywhere, particularly in Teheran. 
If the boundaries between nuclear haves and have-nots becomes more permeable, or even dissolves altogether, the entire multilateral security system could be called into question. 
On October 9, the gate leading down this path was thrown open. 
Third, the Non-Proliferation Treaty (NPT) regime, which was on the brink of toppling even before North Korea’s actions, is threatening to disintegrate. 
A number of small and mid-sized powers will now ask themselves a radically new question: if North Korea can be a nuclear power, why not us? 
If in these times of militarily-accomplished regime change real sovereignty can only be guaranteed by nuclear arms, why not go this route? 
A collapse of the non-proliferation regime will increase not only the risk of regional nuclear arms races, but also of a transfer of nuclear know-how and technology, increasing the risk of nuclear confrontation. 
Fourth, the nuclear crisis triggered by North Korea demonstrates that the US – for the first time since the Cold War's end – is no longer the main player on the international scene and that its options are both limited and problematic. 
Following the hand-over from Clinton to Bush, the US gave up its strategy of engaging the North Korean regime to moderate its behavior and thus unnecessarily reduced its own options. 
China has now become the main player in the North Korean crisis, and in the region as a whole. 
This will have a serious impact across the Pacific and cause America to focus its strategic attention there. 
Europe might thus be called on to take up the slack in the Eastern Mediterranean and the Middle East, both sooner and on a much larger scale than Europeans suspect. 
So what is to be done? 
There is no way around a strategy of engagement and containment with regard to North Korea or the crisis will escalate. 
The US will have to enter talks – direct and bilateral if necessary. 
Indeed, it looks like that is what will be needed. 
China, humiliated by Kim Jong Il, will for the first time have to assume leadership in the region and resolve, or at least contain, the crisis. 
Looking to the future, the whole approach to nuclear non-proliferation must change. 
It is no use lamenting the real danger of nuclear proliferation, while in practice standing idle as the Non-Proliferation Treaty falls apart. 
If the world is not one day to consist of a few big nuclear powers and many mid-sized and small ones, then the big nuclear powers must now undertake a serious disarmament and non-proliferation initiative. 
Part of this initiative must be to provide, as a corollary to new disarmament requirements and control mechanisms, the assurance of non-discriminatory access to nuclear know-how, research, and technology. 
This will require an international institutional solution to the problem of enrichment, with participation in the enrichment process entailing new obligations, above all, the willingness to assure transparency through verification and intensive inspections. 
Moreover, only new strides towards disarmament by the big nuclear powers, and a guarantee of access to technology and know-how under international control, can stop the trend toward “nuclear sovereignty.” 
Five years after President Bush called Iraq, Iran, and North Korea an “axis of evil,” developments in these countries remain depressing. 
Iraq is a disaster, and nothing indicates that the situation can be turned around. 
With each day, questions about the fallout for the region become more pressing. 
Civil war? 
Disintegration and thus the “Balkanization” of Iraq? 
Will it really be possible to limit the disaster to Iraq itself? 
Now North Korea seems to have the Bomb. 
Iran is intensively working toward the same end, while continuing to expand its hegemonic position in the region. 
If to the “axis of evil,” we add Afghanistan, Pakistan, Lebanon, Syria, Israel and the Palestinians, along with terrorism, the resulting picture is anything but hopeful. 
Should the US be tempted now, in response to the failure of its policy, to consider a military “option” against Iran, the nuclearization of the international system will not be arrested. 
Indeed, such a step will only push the Middle East into an explosive mega-conflict with unpredictable and uncontrollable consequences. 

Just Say No to Agricultural Gene Drives 
LAGOS – First, the agribusiness giants came to take our land and disrupt our food systems with synthetic pesticides, fertilizers, proprietary seeds, and genetically modified organisms (GMOs). 
Now, these firms’ hired hands are upping the ante with “gene drives,” a deliberately invasive technology designed to propagate genetic material across an entire population or species. 
As a result, Africans are now confronting a new and serious threat to our land, biodiversity, rights, and food supply. 
To mark World Food Day (October 16) this year, the Alliance for Food Sovereignty in Africa (AFSA) – a network of farmers’ organizations operating in 52 out of 54 African countries – is joining with hundreds of other leading advocates worldwide to oppose the use of gene drives. 
We have called on the United Nations and other multilateral organizations to enact a global moratorium on the release of these biotechnologies into the environment, and particularly in agricultural settings. 
Gene drives have been described as “genetic forcers,” because they literally force genetically engineered traits onto entire populations of insects, plants, fungi, and other organisms. 
What was once a nightmare scenario regarding GMOs – the uncontrolled spread of harmful engineered genes across an ecosystem – may become a deliberate strategy. 
Specifically, researchers have already created “engineered selfish genes” that spread themselves automatically in two insect species. 
Normally, the offspring of sexually reproducing organisms have a 50% chance of inheriting a gene from their parents. 
But with gene drives, the probability is almost 100%, meaning that the offspring and all of its future progeny will carry the trait. 
Gene drives pose a clear threat to natural systems. 
If released into the environment, they could potentially alter food chains, eradicate beneficial organisms such as pollinators, and disrupt indigenous agro-ecological practices and cultures. 
The researchers behind gene drives have only just begun to consider the implications of laboratory-produced genes behaving at odds with what their theoretical models predict. 
Yet one cannot rule out the possibility that genes for female sterility could find their way into species that pollinate crops or serve as a food source for birds, reptiles, and even humans. 
Nor can one discount scenarios in which artificial genes disable beneficial natural genes, or even cause outbreaks of new diseases. 
Gene-drive developers have spent millions of dollars trying to sell this technology as a quick fix for achieving ambitious health and conservation goals, such as those outlined in the UN’s 2030 Agenda for Sustainable Development. 
In my part of the world, West Africa, scientists with millions of dollars from the Bill & Melinda Gates Foundation’s “Target Malaria” project are aggressively pursuing a plan to release gene-drive mosquitos into the wild (after first conducting a test run with bioengineered non-gene-drive mosquitos). 
Needless to say, many of us in the region feel as though we are being used as lab rats in an experiment that could devastate African farming families’ capacity to feed themselves and their communities. 
Moreover, it is an experiment that could prove doubly self-defeating, given that malnutrition can heighten the risk of death from malaria. 
Fearing for their health and that of their environments, African farmers who are committed to agro-ecological practices – as well as groups like AFSA, La Coalition pour la Protection du Patrimoine Génétique Africain (COPAGEN), and Terre À Vie – are leading the campaign against field experiments with genetically modified mosquitos. 
Local communities are not blind to the fact that the use of gene drives against malaria-transmitting mosquitos is largely a public-relations gambit. 
The real end game is agriculture. 
According to “Forcing the Farm,” a new report from the ETC Group and the Heinrich Böll Foundation, even leaders in the gene-drive field quietly accept that the technologies they are developing will be used in agribusiness more than in any other sector. 
After all, gene drives have the potential to change the entire business model of industrial agriculture. 
Rather than merely altering the crops that farmers bring to harvest, biotechnology corporations will now try to control the genetic makeup of every component in the agricultural ecosystem, from the pollinators to the weeds and pests. 
For example, some researchers want to use gene-drive organisms (GDOs) to infiltrate and eliminate entire pest species within a few generations. 
Having been sold on gene drives as a possible magic bullet, farming organizations such as the California Cherry Board and the US Citrus Research Board are collaborating with Agragene Inc., the world’s first agricultural gene-drive company. 
And, of course, the major agribusiness firms – Monsanto-Bayer, Syngenta-ChemChina, DowDuPont (now Corteva Agriscience), and Cibus – are lurking in the shadows of gene-drive policy discussions, having been advised by scientists and public relations advisers to keep a low profile. 
Some gene-drive proponents have argued that GDOs could be compatible with agro-ecological approaches such as organic farming. 
But make no mistake: a gene-driven farm would epitomize the industrial approach to agriculture, which has failed the test of sustainability. 
That is why it is increasingly being rejected in favor of an agro-ecological model based on the principle of “food sovereignty.” 
The latter approach, which has been endorsed by the UN Human Rights Council, calls on farmers to share their existing knowledge and seeds with one another other, and to protect local ecosystems. 
Next month, representatives from more than 190 countries will meet in Sharm el Sheikh, Egypt, for the 14th meeting of the Conference of the Parties to the Convention on Biological Diversity (UN Biodiversity Conference). 
While there, they will consider whether to press the brakes on gene drives, to ensure that farmers and indigenous peoples are fully consulted before these technologies are unleashed in their communities. 
One hopes that the international community will uphold its duty to protect food supplies, as well as the rights of farmers around the world. 

Stop the Band-Aid Treatment 
The Middle East is a tinderbox, with some key players on all sides waiting for every opportunity to destroy their enemies with bullets, bombs and missiles. 
One of the special vulnerabilities of Israel, and a repetitive cause of violence, is the holding of prisoners. 
Militant Palestinians and Lebanese know that a captured Israeli soldier or civilian is either a cause of conflict or a valuable bargaining chip for prisoner exchange. 
This assumption is based on a number of such trades, including 1,150 Arabs, mostly Palestinians, for three Israelis in 1985; 123 Lebanese for the remains of two Israeli soldiers in 1996; and 433 Palestinians and others for an Israeli businessman and the bodies of three soldiers in 2004. 
This stratagem precipitated the renewed violence that erupted in June when Palestinians dug a tunnel under the barrier that surrounds Gaza and assaulted some Israeli soldiers, killing two and capturing one. 
They offered to exchange the soldier for the release of 95 women and 313 children who are among almost 10,000 Arabs in Israeli prisons, but this time Israel rejected a swap and attacked Gaza in an attempt to free the soldier and stop rocket fire into Israel. 
The resulting destruction brought reconciliation between warring Palestinian factions and support for them throughout the Arab world. 
Hezbollah militants in south Lebanon then killed three Israeli soldiers and captured two others, and insisted on Israel’s withdrawal from disputed territory and an exchange for some of the several thousand incarcerated Lebanese. 
With American backing, Israeli bombs and missiles rained down on Lebanon. 
Soon, Hezbollah rockets supplied by Syria and Iran were striking northern Israel. 
It is inarguable that Israel has a right to defend itself against attacks on its citizens, but it is inhumane and counterproductive to punish civilian populations in the illogical hope that somehow they will blame Hamas and Hezbollah for provoking the devastating response. 
The result instead has been that broad Arab and worldwide support has been rallied for these groups, while condemnation of both Israel and the United States has intensified. 
Israel belatedly announced, but did not carry out, a two-day cessation in bombing Lebanon, responding to the global condemnation of an air attack on the Lebanese village of Qana, where 57 civilians were killed and where 106 died from the same cause 10 years ago. 
As before there were expressions of “deep regret,” a promise of “immediate investigation” and the explanation that dropped leaflets had warned families in the region to leave their homes. 
The urgent need in Lebanon is that Israeli attacks stop, that Lebanon’s regular military forces control the southern region of the country, that Hezbollah cease as a separate fighting force, and future attacks against Israel be prevented. 
Israel should withdraw from all Lebanese territory, including Shebaa Farms, and release the Lebanese prisoners. 
Yet Prime Minister Ehud Olmert has rejected such a cease-fire. 
These are ambitious hopes, but even if the UN Security Council adopts and implements a resolution that would lead to such an eventual solution, it will provide just another band-aid and temporary relief. 
Tragically, the current conflict is part of the inevitably repetitive cycle of violence that results from the absence of a comprehensive settlement in the Middle East, exacerbated by the almost unprecedented six-year absence of any real effort to achieve such a goal. 
Leaders on both sides ignore strong majorities that crave peace, allowing extremist-led violence to preempt all opportunities for building a political consensus. 
Traumatized Israelis cling to the false hope that their lives will be made safer by incremental unilateral withdrawals from occupied areas, while Palestinians see their remnant territories reduced to little more than human dumping grounds surrounded by a provocative “security barrier” that embarrasses Israel’s friends and fails to bring safety or stability. 
The general parameters of a long-term, two-state agreement are well known. 
There will be no substantive and permanent peace for any peoples in this troubled region as long as Israel is violating key UN resolutions, official American policy and the international “road map” for peace by occupying Arab lands and oppressing the Palestinians. 
Except for mutually agreeable negotiated modifications, Israel’s official pre-1967 borders must be honored. 
As were all previous administrations since the founding of Israel, US government leaders must be in the forefront of achieving this long-delayed goal. 
A major impediment to progress is the US administration’s strange policy that dialogue on controversial issues will be extended only as a reward for subservient behavior and will be withheld from those who reject US assertions. 
Direct engagement with the Palestine Liberation Organization or the Palestinian Authority and the government in Damascus will be necessary if secure negotiated settlements are to be achieved. 
Failure to address the issues and leaders involved risks the creation of an arc of even greater instability running from Jerusalem through Beirut, Damascus, Baghdad and Tehran. 
The people of the Middle East deserve peace and justice, and we in the international community owe them our strong leadership and support. 

Stopping the War on Children 
LONDON – Twenty years ago this month, the United Nations General Assembly received a report by former Mozambican Education Minister Graça Machel detailing the effects of armed conflict on children. 
Documenting a pattern of systematic and targeted attacks, including killing, rape, and forced recruitment into armed groups, Machel concluded: “This is a space devoid of the most basic human values….There are few further depths to which humanity can sink.” 
Machel was wrong. 
A generation later, humanity is plumbing even greater depths of moral depravity. 
Children living in conflict zones are being targeted for violence on an unprecedented scale, and the elaborate system of UN human-rights provisions designed to protect them is violated with impunity. 
On the twentieth anniversary of the Machel report, the international community must draw a line and stop the war against children. 
That war takes many forms. 
In some cases, children are front-line targets. 
Rape, forced marriage, enslavement, and abduction have become standard tactics for groups such as the Islamic State in Iraq and Syria, Boko Haram in northern Nigeria, and their counterparts in Afghanistan, Pakistan, and Somalia. 
Killing kids for attending school is viewed as a legitimate military strategy. 
In other cases, children are under attack from both state and non-state actors. 
In South Sudan, since the eruption of conflict in 2013, government and rebel forces have killed, raped, and recruited children into armed groups. 
So brutal, systematic, and widespread are the attacks that it seems highly likely that they are carried out with the highest level of political authorization. 
And, indeed, according to a UN Human Rights Council report published earlier this year, South Sudanese government forces have been heavily implicated in such activities, which may explain why no one has been held accountable for the May 2015 murder of 130 children in Unity State. 
Children are also collateral damage, which stems from the relentless erosion of the laws and norms designed to protect civilians in conflict zones. 
In Syria, children living in Aleppo, Homs, and other cities have been barrel-bombed and gassed by government forces acting in open defiance of international law. 
The sanctity of schools and health centers is a dead letter: more than 25% of all schools in Syria have been destroyed or forced to close. 
Political leaders in Saudi Arabia clearly regard the Geneva Convention, the legal pillar of protection for civilians, as irrelevant. 
Last August, a Saudi Arabian airstrike on a suburb of Saada, Yemen, hit a school and killed ten children. 
This was but one episode in a larger trend of attacks on schools, health centers, and markets. 
Over the last year, the Saudi-led coalition in Yemen has struck four health facilities supported by the non-governmental organization Doctors Without Borders. 
The current violence against children is a far cry from what Machel envisaged two decades ago. 
Following her recommendations, in 1997 the General Assembly established a Special Representative for Children and Armed Conflict, to identify and report to the Secretary-General and Security Council on parties in conflicts that are responsible for persistent and egregious violations. 
The special representative monitors six types of violations of children’s rights: killing and maiming, sexual violence, military recruitment, attacks on schools and health centers, abduction, and denial of humanitarian access. 
Each is barred by international law, including the 1949 Geneva Convention, which requires parties in a conflict to protect civilians and maintain unimpeded humanitarian access, and the Convention of the Rights of the Child, the world’s most widely ratified human-rights treaty, which provides a comprehensive list of children’s rights. 
Violence against children persists not because of a deficit of rights, but because of what Eva Svoboda of the Overseas Development Institute describes as a crisis of compliance. 
The international community is failing to uphold the laws, norms, and rules that define civilized standards. 
To put it bluntly, killing, maiming, and terrorizing children has become a cost-free enterprise. 
The crisis of compliance starts at the top of the UN system and trickles down, through the Security Council, to the General Assembly and member governments. 
Consider the Saudi campaign in Yemen. 
Earlier this year, Saudi Arabia was put on the UN secretary-general’s “list of shame” for bombing Yemeni civilian targets and killing children. 
By June, however, it had been removed from the list following intensive lobbying by the Saudi government and its arms-supplying American and European allies. 
Regardless of these allies’ intent, the signal they sent is clear: protecting lucrative arms deals takes precedence over protecting children’s rights. 
The endless cycle of reporting on violations of child rights is in danger of becoming a pantomime. 
While the special representative’s office has done an excellent job exposing attacks on children – and in some cases negotiating the release of child soldiers – the punishments do not fit the crimes. 
As world leaders gather in New York this month for the 71st Session of the General Assembly, it is time to reassert the values underpinning UN human-rights provisions. 
The only way to end impunity for heinous crimes against children is by enforcing genuine accountability – and by bringing the perpetrators to justice. 
At a minimum, institutions such as the International Criminal Court in The Hague and the African Court on Human and Peoples’ Rights should be collaborating far more closely with the UN special representative. 
But so vast is the scale of the problem, and so deeply embedded the culture of impunity, that bolder initiatives may be needed. 
Given the failure of existing institutions, it may be time to establish a new one – an International Criminal Court for Children, authorized to investigate and prosecute state and non-state actors for war crimes against kids. 
We have collectively allowed human-rights laws to become irrelevant paper tigers. 
But if there is one cause that can rally a divided world, it is surely the protection of children in warzones. 

Stopping America’s Federal Debt Explosion 
CAMBRIDGE – The US Congressional Budget Office (CBO) has just delivered the bad news that the national debt is now rising faster than GDP and heading toward ratios that we usually associate with Italy or Spain. 
That confirms my view that the fiscal deficit is the most serious long-term economic problem facing US policymakers. 
A decade ago, the federal debt was just 35% of GDP. 
It is now more than double that and projected to reach 86% in 2026. 
But that’s just the beginning. 
The annual budget deficit projected for 2026 is 5% of GDP. 
If it stays at that level, the debt ratio would eventually rise to 125%. 
Even that projection assumes that interest rates on the national debt will rise slowly, averaging less than 3.5% in 2026. 
But if the US debt ratio really is on the fast track to triple-digit levels, investors in the US and abroad may rightly fear that the government has lost control of the budget process. 
With debt exploding, foreign bondholders could begin to worry that the US will find a way to reduce its real value by stoking inflation or imposing a withholding tax on all government bond interest. 
In that case, investors will insist on a risk premium: higher interest rates on Treasury debt. 
Higher interest rates, in turn, would increase the deficit – and thus the future level of the debt ratio – even more. 
The high and rising level of the national debt hurts the US economy in many ways. 
Paying the interest requires higher federal taxes or a larger budget deficit. 
In 2016, the interest on the national debt is equal to nearly 16% of the revenue from personal income tax. 
By 2026, the projected interest on the national debt will equal more than 31% of this revenue, even if interest rates rise as slowly as the CBO projects. 
Foreign investors now own more than half of net government debt, and that proportion is likely to keep growing. 
Even if they are now willing to accept newly issued bonds when interest and principal on outstanding ones are due, the time will come when the US will have to pay the interest by exporting more goods and services than it imports. 
And boosting net exports will require a weaker dollar to make US products more attractive to foreign buyers and foreign goods more expensive to US buyers, implying a loss in Americans’ standard of living. 
Increased borrowing by the federal government also means crowding out the private sector. 
Lower borrowing and capital investment by firms reduces future productivity growth and growth in real incomes. 
So it is important to find ways to reduce the budget deficit and minimize the future debt ratio. 
The good news is that a relatively small reduction in the deficit can put the debt ratio on a path to a much lower level. 
Cutting the deficit to 2% of GDP, for example, would cause the debt ratio eventually to reach 50%. 
Deficit reduction requires cutting government spending, increasing revenue, or both. 
Neither is politically easy; but neither should be impossible. 
Cutting spending is made more difficult by the reductions in relative outlays that have already occurred. 
The share of GDP devoted to defense has fallen from 7.5% of GDP in 1966 to 3.2% of GDP this year, and the CBO projects it to fall to 2.6% during the next decade. 
That would be the lowest GDP share since World War II, representing a level of spending that military experts believe is dangerously low. 
Other spending is split between the annually appropriated amounts (known as non-defense discretionary spending) and the programs in which spending follows from established rules that are not subject to annual review (known as the “mandatory” spending programs, primarily Social Security retirement benefits and health-care spending). 
The non-defense discretionary spending is also heading toward 2.6% of GDP – also the smallest share of GDP since WWII. 
It is the mandatory programs that have grown rapidly, driving up the deficit. 
The mandatory programs’ share of GDP, only 4.5% in 1966, is now 13.3% and projected to reach 15% in 2026. 
These programs are largely benefits for middle-class seniors and not welfare programs targeted at the relatively poor. 
That’s why most experts agree that slowing the rise in these so-called “entitlement” programs has to be part of reducing future deficits. 
Federal taxes now take 18.3% of GDP and are projected to remain at that level for the next decade, unless tax rules or rates are changed. 
The rate structure for personal taxation has changed over the past 30 years, with the top tax rate rising from 28% in 1986 to more than 40% now. 
The corporate rate of 35% is already the highest in the industrial world. 
Higher marginal tax rates would weaken incentives and distort economic decisions. 
That’s why I and others who think about shrinking the deficit focus on changing tax rules to limit the special features known as “tax expenditures,” which represent government spending built into the tax code. 
These items range from small ones, like the $7,500 tax credit that goes to a buyer of an electric car, to large (for example, the deduction for mortgage interest and the exclusion from taxable income of employer payments for employee health insurance). 
The mortgage deduction alone will reduce tax revenue in 2016 by $84 billion, or more than 5% of the personal income tax collected. 
The exclusion of health insurance premiums from employees’ taxable income will reduce revenue by more than $200 billion, or about 15% of receipts from the personal income tax. 
Nothing to start shrinking the deficit will happen before this year’s presidential election. 
But tackling the spending and revenue components of deficit reduction should be high on the agenda when the new president takes office next year. 

Stopping Latin America’s Budding Arms Race 
In recent weeks, many observers of the Latin American military situation have detected what could be the beginning of a new arms race in the region. 
Brazilian President Luis Inacio “Lula” da Silva was photographed boarding the Tikuna, his country’s first conventional, domestically built submarine. He used the opportunity to highlight his support for the Brazilian military. 
Similarly, Venezuela’s President Hugo Chávez has broadcast his intention to purchase Russian Mig fighter jets and Brazilian low-flying surveillance aircraft, and to expand military expenditures. He is doing so, perhaps, because of recent problems with Colombia. 
Even Chile, after a lengthy process of weighing its options, is still pondering whether to acquire a dozen American-built jet fighters or a joint Swedish-Brazilian alternative. 
Is there a new arms race underway in Latin America? 
If so, is there any conceivable way it could help address the hemisphere’s economic and social dilemmas? 
Regional wars and border conflicts have existed since time immemorial in Latin America. There was the Chaco war and the Chilean-Bolivian conflagration in the nineteenth century, the so called “Soccer War” between Honduras and El Salvador in the 1960’s, the clash between Ecuador and Peru in the 1980’s, and Antarctic border disputes between Chile and Argentina that were finally settled in the early 1990’s. 
But the main reason for heavy military spending in Latin America has always been chiefly domestic. 
Either the military ran various countries, and gorged itself with hardware and troop increases, or weak civilian governments, terrified of military coups or blackmail, placated their armed forces with all sorts of unnecessary martial goodies. By international standards, arms spending in Latina America is low relative to GDP; but it is nonetheless excessive relative to the region’s needs. 
Today the situation is more complex. 
In Venezuela, keeping his former comrades in arms happy is obviously a concern for Chávez. 
But festering conflicts with his Colombian neighbors are also a factor, particularly in view of the constant accusations and suspicions that Chávez comforts and supports the FARC guerrillas in Colombia. 
High oil prices allow Venezuela to go on this military spending spree, and there seems little that anybody can do about it. 
In Brazil, matters are somewhat different. 
Lula has been able to neatly dovetail his socialist roots with traditional Brazilian nationalism, which has always been strong in the country’s armed forces. 
“ O Brasil, país grande ” is a universal slogan in South America’s giant – a country that has borders with nine neighbors and fears that its distant jungle frontiers cannot easily be patrolled. 
Similar sentiments are apparent elsewhere in the region. 
But the question everywhere in Latin America is whether it would not be a better idea to implement former – and perhaps future – Costa Rican President Oscar Arias’s idea of Latin American disarmament, to turn “spending on swords” into investments in ploughshares. 
Arias, the 1987 Nobel peace prize recipient, has a good reason for pushing this idea: his country has no standing army. 
Still, it is a bold initiative that should be revived in view of Latin America’s incipient arms race. 
Indeed, it could be the cornerstone of a new program for the next Secretary General of the Organization of American States, who is to be elected in the coming weeks. 
Obviously, I am rooting for the Mexican candidate, Foreign Minister Luis Ernesto Derbez. 
But whoever wins will need new ideas and initiatives to reinvigorate a dormant institution. 
Stopping Latin America’s budding arms race is about as good an idea as there can be. 

Storm Clouds over the Euro 
The creation of the European Monetary Union (EMU) was an unprecedented achievement, promising deeper and larger markets. 
The stimulus to trade and investment is manifest. 
But will the Euro last? 
Two current developments will shape the answer. 
The first is the outcome of battles raging in France, Germany, and elsewhere over social security reform. 
The second is the debate over the inclusion of ``social rights'' in the EU's draft Constitution. 
Welfare state entitlements are vastly different from country to country in Europe. 
These differences portend intense conflicts within EMU. 
France, Germany, and Italy must scale back their social commitments, raise taxes, or borrow. 
But in the Eurozone's increasingly competitive environment, raising taxes would drive away business, while cutting benefits may be tantamount to political suicide. 
So the temptation to borrow is high. 
The Stability and Growth Pact is designed to block that temptation by keeping budget deficits below 3% of GDP. 
But the Pact is already straining, and today's serial violations may appear mild when the baby boom generation begins to retire and public pension and health liabilities become cash demands. 
Some national deficits may rise to twice the Pact's limit. 
If that happens, the affected countries can expect no help from the European Central Bank, which is prohibited from bailing out member states. 
Italy and Belgium, heavily indebted when the Euro was launched, could become the classic victims of a vicious circle, in which high deficits trigger rising interest rates, higher borrowing costs, even higher deficits, and eventually default. 
If an EMU country defaults, it will come under intense pressure to leave the Euro in order to regain control of its currency and pay at least its domestic liabilities in devalued national paper. 
If that country is large, the shock waves could push other members over the edge with it. 
Recent events in Argentina provide a warning as to how such a crisis can unfold. 
Ballooning provincial deficits, which Argentina's central government could not control--but was obliged to finance--pushed the country into default, forcing it to abandon a monetary pact (the currency's one-to-one peg to the dollar) to which the population was attached. 
The Euro faces a second basic challenge. 
The governments that launched EMU anticipated that their workers and businesses would eventually be sufficiently mobile and flexible to adjust to economic changes affecting them differentially. 
At present, workers throughout the EU resist moving to change jobs, and social regulations hamper the mobility and adaptability of businesses. 
Legislatures are under pressure to relax these constraints. 
But little noticed social provisions in the EU draft Constitution, which Europe's leaders are expected to sign in less than a year, could compromise the liberalizing process. 
In Part II of the draft Constitution, a list of ``social rights'' is incorporated as ``constitutional rights,'' enforced by the European Court of Justice. 
These include protection against ``unjustified dismissal,'' the right to ``working conditions that respect the worker's health, safety and dignity,'' and ``entitlement to social security benefits [apparently regardless of cost] ... in cases such as illness, old age, and loss of employment.'' 
Faced with these new statutes, the Court might well change its basic approach. 
Since its inception, the Court's thrust has been to enforce the economic freedoms mandated by successive agreements since the Treaty of Rome. 
A Bill of Social Rights will require the Court to balance this liberalizing mission with attention to the new protections. 
In this new legal environment, national efforts to dismantle business restrictions could grind to a halt. 
The consequences for the Euro would be grave. 
Without further liberalization, EMU will remain subject to potentially fatal strains arising from shocks that affect some countries more than others. 
Imagine that the economic boom that Greece is experiencing in the run-up to the 2004 Olympics turns to bust after the games end. 
Because the drachma does not exist anymore, it cannot be devalued. 
If the ECB considers a large reduction of interest rates, contrary to its inflation objectives, the bank won't be able to help by cutting interest rates to benefit Greece. 
So the appropriate response for Greece would be an energetic restructuring program, involving closing some businesses, requiring changes in working conditions, and perhaps even cutting wages. 
But if regulations block Greek firms from laying off workers, and if militant Greek unions refuse any changes in working conditions, the result could be a wave of bankruptcies and a surge in unemployment. 
The Greek government, already burdened by social security obligations, would have to increase unemployment payments, at a time when its revenues would be collapsing. 
Radical proposals to leave the Euro, and restart the Greek economy with a program of devaluation and budgetary expansion, could become compelling. 
In truth, many of the rigidities underlying this hypothetical crisis are not attributable to provisions in the draft Constitution. 
Greece has not liberalized sufficiently to insure its economy against idiosyncratic shocks, despite impressive reforms to date. 
A new Bill of Social Rights would not create destructive rigidities, but it could slow down the liberalizing process that countries like Greece need to withstand the vicissitudes of a common currency. 
A Euro crisis can be avoided. 
But to do so the nations of Europe must lift the twin clouds of pension debt and regulatory protections. 
France and Germany are pursuing modest but nonetheless courageous reforms. 
If their liberalizing efforts, and those of others, are not to stall, their leaders should see to it that the draft Bill of Social Rights is not frozen in its present form in the EU Constitution. 
Instead, these rights should be left in the hands of national legislatures, which have the flexibility to change their minds. 

Story Time for the World Economy 
NEW HAVEN - Since hitting bottom in early March, the world’s major stock markets have all risen dramatically. 
Some, notably in China and Brazil, reached lows last fall and again in March, before rebounding sharply, with Brazil’s Bovespa up 75% in May compared to late October 2008, and the Shanghai Composite up 54% in roughly the same period. 
But the stock market news just about everywhere has been very good since March. 
Does this suggest that the world economic crisis is coming to an end? 
Could it be that everyone becomes optimistic again at the same time, bringing a quick end to all our problems? 
Speculative booms are driven by psychological feedback. 
Rising stock prices generate stories of smart investors getting rich. 
People become envious of others’ successes, and begin to wonder if rising prices don’t portend further increases. 
A temptation arises to get into the market, even among people who are fundamentally doubtful that the boom will continue. 
So rising prices feed back into more rising prices, and the cycle repeats again and again – for a while. 
During a boom, people considering getting into asset markets weigh the fear of regret if they don’t against the pain of possible loss if they do. 
There is no authoritative answer about what the “right” decision is, and no consensus among experts about the proper level of exposure to these markets. 
Should it be 30% in stocks and 70% in housing? 
Or the reverse? 
Who knows? 
So the ultimate human decision must be based on the relative salience of these discordant emotional factors. 
In a boom environment, the emotional factors are biased toward getting into the market. 
But one must ask what would sustain such a movement now. 
There seems to be no dramatic fundamental news since March other than the price increases themselves. 
The human tendency to react to price increases is always there waiting to generate booms and bubbles. 
The feedback is only an amplification mechanism for other factors that predispose people to want to get into the markets. 
The whole world can’t recover all of the enthusiasm of a few years ago from feedback alone, for there is a giant coordination problem: we are not all attentive to price increases at the same time, so we make decisions to buy at very different times. 
As a result, things happen slowly, and, meanwhile, more bad news may be revealed. 
The only way world confidence can return dramatically is if our thinking coordinates around some inspiring story beyond that of the price increases themselves. 
In my 2009 book with George Akerlof, Animal Spirits , we describe the ups and downs of a macroeconomy as being substantially driven by stories . 
Such narratives, especially those fueled by accessible human-interest stories, are the thought viruses whose contagion drives the economy. 
The contagion rate of stories depends on their relation to feedback, but plausible stories have to be there in the first place. 
The narratives have substantial persistence in that they affect our views. 
The story that drove the worldwide stock-market bubble that peaked in 2000 was complex, but, put crudely, it was that bright, aggressive people were leading the way to a new era of capitalist glory in a rapidly globalizing economy. 
Such people became new entrepreneurs and world travelers on the way to prosperity. 
This narrative seemed plausible to casual observers, because it was tied to millions of little human-interest stories about the obvious successes of those – friends, neighbors, and family members – who had the vision to participate enthusiastically in the new environment. 
But it is hard today to re-create such a narrative, given so many stories of trouble. 
The stock markets’ rebound since March seems not to be built around any inspirational story, but rather the mere absence of more really bad news and the knowledge that all previous recessions have come to an end. 
At a time when the newspapers are filled with pictures of foreclosure sales – and even of surplus homes being demolished – it is hard to see any cause for the markets’ rebound other than this “all recessions come to an end sooner or later” story. 
Indeed, the “capitalists triumphant” story is tarnished, as is our faith in international trade. 
So, here is the problem: there isn’t a plausible driver of a dramatic recovery. 
Starting an economic recovery is like launching a new movie: nobody knows how people will react to it until people actually get to see it and talk about it among themselves. 
The new movie Star Trek , based on yet another remake of a television show from more than 40 years ago, surprised everyone by raking in $76.5 million on its first weekend. 
That old story just got some excitement back with this new movie. 
Similarly, we have to hope that some of the same old stories that propelled us in the past – the rise of capitalism and its internationalization throughout the world economy – can somehow be dusted off and revived yet again to invigorate the animal spirits that drive economic recovery. 
Our efforts to stimulate the economy should be focused on improving the script for those stories, making these stories believable again. 
This means making capitalism work better, and making it clear that there is no threat of protectionism. 
But the rationale must be to get the world economy out of its current risky situation, not to propel us into yet another speculative bubble. 

Strangers in the Land? 
Migration is the side of globalization that, to borrow Oscar Wilde's phrase, dare not speak its name. 
Advocates of globalization dance around the topic because they fear it will incite nativist backlash. 
Respectable opponents of globalization avoid it in fear that they will be called racists or insensitive to the plight of the world's poorest. 
This silence is not only disingenuous; it is certainly dangerous. 
In theory, global economic integration implies a world where the markets for goods, services, capital, and labor are perfectly integrated. 
Although many markets are nowadays increasingly open--even if others, notably agriculture, remain distorted by protectionism--integrating global labor markets has largely been left out of the globalization process. 
This is hardly surprising. 
Over the centuries, governments have always been concerned to protect "their" local poor and unskilled from immigrant competition. 
Of course, such concerns are quickly discarded when countries become rich and local workers no longer want to perform menial jobs. 
The history of much of the great migrations to the US in the 19 th and 20 th centuries fits this model. 
So do the Indo-Pakistani and Afro-Caribbean migrations to Britain that followed the UK's post-war imperial retreat, and the migrations of Algerians to France and Turks to Germany during the "economic wonder" of the 1960s. 
But political leaders and citizens in the developed world are wrong to think that economic migration can be turned on and off like a spigot. 
Despite massive government efforts in Europe and the developed world to restrain immigration after the oil price shocks of the 1970s, labor inflows into the rich countries started to increase in the 1980s to an annual average of about 1.4 million in Europe and 2.3 million in the US. 
The number of foreign-born workers increased throughout the OECD area (Japan being the sole exception). 
Foreign workers now account for 25% of Australia's labor force, 10.3% in the US, and 5.3% in Europe. 
These flows reflect the growing shortage of skilled workers and declining populations (particularly in Europe) that are beginning to bedevil the developed world. 
So Germany, if not warmly welcoming, finds itself soliciting Indian computer programmers, while Canada and other countries entice China's middle classes with a safe haven in which to invest just in case things go wrong at home. 
But this tolerance is confined to the skilled and the wealthy. 
No one wants to open the door to large-scale immigration by the poorest of the poor. 
Underlying this discrimination, especially in Europe, is cultural aversion to immigrants from regions with alien cultures, which may account for the absence of widespread protests against the EU's eastward enlargement. 
Indeed, the economic justification--that skilled immigrants tend to be net economic contributors while low-skilled workers impose a fiscal burden and threaten low-skilled natives--is weak. 
Immediate welfare costs, for example, can be passed on to the next generation, which will encompass these immigrants' children. 
More importantly, immigration's overall benefits outstrip the costs. 
In Britain, for example, the net annual contribution to GDP from immigrants is £2.5 billion, according to a recent Home Office report. 
Facts, however, rarely pose an effective obstacle to hardened nativists, which is why governments worried about immigrants prefer to see some jobs go to people in poor countries rather than see poor people come to jobs in rich countries. 
Open international trading relations (especially allowing farmers in developing countries greater access to rich countries' markets) is, of course, the best way to achieve this. 
Indeed, liberalization of agriculture would provide a viable substitute for migration in many cases. 
Farm politics in Europe and America, however, make this virtually impossibile. 
Recent academic studies by Sergei Guriev of Moscow's New Economic School and Guido Freibel of the University of Toulouse expose a link between strict immigration rules and illicit trafficking in human beings, confirming the need for reform. 
If such criminal activity is to be stopped, the despair found in poor countries must be reduced. 
Politicians in rich countries will be forced to strike a better balance between more liberal immigration policies and less trade protectionism. 
History offers bitter lessons concerning the failure to meet this challenge. 
The economic historian Harold James notes that the countries that turned toward aggressive militarism in the 1930s had previously been large suppliers of emigrants. 
Japan, Germany, and Russia all saw large outflows of their populations before the First World War, but these flows slowed to a trickle as countries like the US closed their doors to immigrants in the wake of the Great Depression that began in 1929. 
In today's world, Africa and Asia are the world's biggest suppliers of migrants. 
If more jobs do not appear in these places, and doors to immigration remain shut, it should be no surprise that events born of frustration and hopelessness will occur with ever-greater frequency. 
Liberal immigration policies and the economic growth promised by globalization are the keys to preventing dire conditions in poor countries from being translated into violence at home and abroad. 

Strasbourg’s Trial of Strength 
LONDON: The withdrawal of the censure vote in the European Parliament in Strasbourg on January 14th, which would have forced the resignation of all of the members of the Council of Ministers, should not be judged simply on whether such a vote was won or lost, but mainly as a fundamental turning point in the relationship between the European Parliament and the Commission. 
The threat of censure marks a vital turning point in the relationship between the Parliament and the Member States in the Council of Ministers. 
For no matter which way the vote went, and even with its withdrawal, the European Parliament, by flexing its muscles as it did, would still have emerged strengthened. 
Ostensibly, the purpose of the Parliament’s censure motion was to sanction the Commission for what was alleged to be the maladministration of the European Union’s 1996 budget; and there were (and remain) accusations in the air of fraud and corruption. 
The paradox of the situation, however, is that, in political terms, the very holding of a vote of censure will be more important than whether it was successful or not. 
In order to succeed, the Commission’s critics in Parliament needed to muster a very large majority in order to carry a vote of censure: two thirds of the votes cast, and over half of all the members of the Parliament. 
Auditors have undoubtedly revealed some maladministration of parts of the budget. 
Yet if the detailed accusations are justified, the blame probably lies more, either with the previous Commission of Jacques Delors (now long out of office), rather than the present Commission presided by Jacques Santer, or else with the Member States, who spend 80% of the Union budget. 
Even though the vote of censure did not take place, it seems almost inevitable that the very fact of threatening such a vote will, at least temporarily, weaken the position of the Commission, as one of the European Union’s key institutions, and that it will correspondingly strengthen the position of the European Parliament. 
One of the central dilemmas of the European Union’s institutional structure is that a comprehensive vote of censure is the only instrument allowed under the Treaty by which the European Parliament can sanction the Commission. 
There is no provision for the Parliament to register even a moderate protest or a targeted sanction against detailed elements of the record of the European executive. 
If a vote of censure is carried, however, with the necessary majority, all 20 Commissioners would be required to resign. 
Since the Commission is an essential part of the administration and policy-making of the Union, the mass resignation of the Commissioners would inevitably plunge the Union into a state of confusion and paralysis, or worse. 
That is why a Parliamentary censure motion of the sort just attempted is often described as a "nuclear weapon". 
And since, in addition, the Commission and the Parliament have traditionally tended to regard each other as essential allies (on the side of European integration), against the Council of Ministers (representing the nation states), it is not surprising that a censure vote has only been tried four times in the past 20 years, and never carried. 
If there is one thing that is clear about the European Union’s institutional arrangements, it is that it is insufficiently democratic for the degree of integration that is now underway or planned. 
There is, of course, no agreement on what in detail should be done about this. 
But at a time when the European Union is making large integrationist strides forward, in the shape of the single currency and the negotiations that will begin on expansion eastward, it must in principle be obvious to any democrat that there must be some counterbalancing strengthening of the democratic factor. 
This is why this week’s attempted censure vote in the European Parliament should not be deplored as a reckless act of irresponsibility, but should rather be recognised for what it is, and therefore welcomed, as a necessary and unavoidable act in support of the democratic principle. 
Reckless and undisciplined? 
Yes, of course; but that is the only way that Parliaments have, over the centuries, ever pushed forward the frontiers of democratic power against the executive. 
If the democratic principle is not strengthened, it is most unlikely that the European Union will be able to deal satisfactorily with any of the massive challenges lying immediately ahead: making a success of the Single Currency, revising the Union’s spending policies, and reforming the Union’s existing policies and institutions. 
And if the Union does not master these problems in short order, there will be no enlargement to Central and Eastern Europe: it is as simple as that. 
The immediate consequence of this week’s trial of strength is that the Member States will be compelled to offer the Parliament a more moderate alternative to the use of the "nuclear weapon". 
Which means that they will be compelled to recognise that the Parliament should have the right to a more extensive, a more flexible, and a more democratic, power of sanction. 
For had a censure vote been carried, the entire Commission would have been forced to resign, and the Union would likely have been paralysed for months, which is manifestly over the top. 
Even in defeat, with the current Commission remaining in office, its credibility may be fatally weakened for the last 11 months of its term in office. 
This is not to say that the Commission will be permanently wounded, for the Union desperately needs a vigorous Commission. 
But the Commission cannot in the long run be vigorous unless the Union’s democratic principle is strengthened. 

Euro Lessons for East Asia 
SEOUL – East Asia could learn two valuable lessons from the eurozone crisis. 
First, do not rush the process of financial and monetary integration; and, second, develop adequate institutional frameworks before proceeding. 
In fact, East Asian countries are unlikely to move toward a regional fixed exchange-rate system or a monetary union with a single currency in the immediate future, owing to the region’s great diversity in terms of economic and political conditions. 
Perhaps, in a few decades, the region’s countries will develop institutions to promote financial integration, such as a single bank supervisory agency of the type that the European Union is now creating. 
Nevertheless, Asian policymakers should improve cooperation mechanisms designed to prevent and manage crises. 
Most promising is the Chiang Mai Initiative Multilateralization (CMIM) of the ASEAN+3 – the 10 members of the Association of Southeast Asian Nations plus China, Japan, and South Korea. 
This $120 billion regional reserve pool was launched in 2010 to provide short-term liquidity to members in an emergency. 
The ASEAN+3 is now strengthening the CMIM by doubling the total fund size to $240 billion. 
The group also agreed to enhance the CMIM’s flexibility by reducing the minimum portion of crisis lending to be tied to the International Monetary Fund’s lending program from 80% to 70%. 
The CMIM has yet to be tested in a crisis. 
In its infancy, it might not be able to provide adequate emergency support in a timely and flexible manner. 
The $240 billion fund is small, amounting to only about 1.5% of the region’s GDP. 
European experience suggests that large-scale systemic shocks call for greater financial support. 
Unlike the IMF or the European Stability Mechanism, CMIM contributions are self-managed by the respective country’s authorities. 
And countries may choose not to contribute to a swap request. 
This suggests that the CMIM could be especially constrained amid a systemic shock or political disputes among member countries. 
Moreover, an “IMF stigma” remains among those countries in the region that were discontented with the Fund’s role during the 1997-1998 Asian financial crisis. 
IMF conditionality for the activation of the majority of their borrowing could make countries reluctant to turn to the CMIM for support. 
Another challenge is the CMIM’s limited capacity for economic surveillance and monitoring. 
Last year, ASEAN+3 established a regional surveillance unit, the ASEAN+3 Macroeconomic Research Office (AMRO), to monitor regional economies, detect emerging vulnerabilities, and support effective decision-making by the CMIM. 
But it is unclear whether AMRO has sufficient capacity and expertise to monitor 13 countries effectively. 
Indeed, East Asian countries may find it difficult to conduct candid surveillance of one another’s policies and enforce firm policy conditionality. 
The example of Greece before and during the eurozone crisis shows that it is often hard for countries to be tough on their neighbors. 
The ASEAN+3 must continue to increase its resources, enhance its independence and improve its operational procedures. 
A fully capable regional financial safety net could contain the contagion of financial shocks emanating from individual economies and prevent disruptions to the region’s key growth drivers – intra-regional trade and investment. 
The CMIM could help East Asian countries to reduce their reliance on accumulating, as a form of self-insurance, costly reserves that fuel global imbalances. 
With greater resources and an improved governance structure, AMRO could play a more effective role in regional economic surveillance and monitoring, without which moral-hazard risks associated with financial safety nets would rise. 
Enhanced regional control would contribute to better information-sharing and decision-making as well, implying that the IMF-linked portion of CMIM crisis lending could be reduced in step with the strengthening of AMRO’s capacity and performance. 
The ASEAN+3 should aim to develop the CMIM into a full-capacity regional financial safety net supported by AMRO as a capable and credible secretariat – a de facto Asian Monetary Fund, possibly with broader membership. 
But, until the CMIM and AMRO are fully developed, their close cooperation with the IMF is desirable. 
Indeed, at the Cannes G-20 Summit in November 2011, leaders agreed on principles for cooperation between the IMF and regional financing arrangements, including open information-sharing and joint missions. 
In particular, the IMF and ASEAN+3 financing arrangement should establish a regular channel of dialogue to facilitate information exchange and prepare concrete guidelines for cooperation and an appropriate division of tasks. 
Establishing constructive and effective guidelines could help to prevent the sort of conflicts and confusion over lending conditions during crises that we have seen among the IMF, EU, and the European Central Bank in the eurozone. 
Given the “IMF stigma” in Asia, a co-financing facility that provides precautionary credit lines without policy conditionality to qualified member countries would be useful. 
Asian countries have learned from their region’s own crisis in the 1990’s, as well as from the eurozone’s ongoing crisis, that effective management of cross-border capital flows requires well-constructed national, regional, and global responses. 
To respond effectively to crises, East Asian countries must continue to improve the regional financial safety net and surveillance mechanism, while strengthening their cooperation with the IMF. 

Education for Fragile States 
WASHINGTON, DC – This week, the Bill & Melinda Gates Foundation will release its annual Goalkeepers report card assessing progress toward the UN Sustainable Development Goals. 
Among the expected findings is a prediction that by 2050, nearly 90% of global poverty will be concentrated in Sub-Saharan Africa, and two-thirds of the world’s poorest people will live in just ten countries. 
The ability to identify human-development hotspots – what we call “severely off-track countries” (SOTCs) – should, in theory, make it easier to apply solutions. 
Unfortunately, some aid agencies tend to avoid fragile states out of fear that their resources will be wasted. 
Currently, less than a quarter of OECD countries’ programmable aid is allocated to SOTCs. 
But the perception that fragility presages failure is misplaced. 
With adequate planning, it is possible to implement projects that improve lives in even the riskiest places. 
Best of all, we know where to start: by investing more in human capital, and especially in education. 
According to the Goalkeepers report, the number of children enrolled in primary school in Africa increased from 60 million in 2000 to some 250 million today, and the rate of growth was equal for boys and girls. 
But while more children are attending classes, school quality remains uneven. 
The challenge now is to ensure that all children, including those who are in school – at all grade levels – are learning the full breadth of skills they need to thrive. 
To give young people the best chance of success, the two “bookends” to primary school – early childhood education and secondary education – must also be sturdy. 
Early childhood education prepares children for primary school by teaching cooperation, perseverance, self-control, and other essential skills. 
These formative years are critical for a child’s education, because, according to UNESCO, more than half of all children and adolescents worldwide never develop foundational competencies crucial to becoming life-long learners. 
At the other end of the spectrum, secondary education helps adolescents prepare for the job market. 
To succeed at this level, students must achieve minimum proficiency in reading, math, and numerous non-cognitive skills. 
But even here, educational outcomes are disappointing. 
In low-income countries, nine out of ten young people lack basic secondary-education level proficiency across a suite of essential skills, ranging from literacy and critical thinking to mathematics, and problem solving. 
In Sub-Saharan Africa alone, an estimated 200 million young people (about 90% of the primary and lower secondary-school population) are not able to read basic texts. 
Development specialists know that a good education is transformative for students as well as families, communities, and countries. 
One study from 2008 found that the quality of a country’s education system – and the cognitive abilities of its graduates – positively influences economic growth. 
That fact alone should be enough to convince fragile states and their donors to invest in expanding access to quality education. 
But there are other, more indirect benefits, especially for women and girls. 
For starters, better-educated women delay pregnancy and typically have smaller families. 
Development experts, demographers, and education advocates recognize that in many parts of the world, female empowerment is proportionate to family size. 
For example, our research has found that a woman with zero years of schooling will have, on average, 4-5 more children than a woman with at least 12 years of schooling. 
Increasing educational opportunities for girls would also benefit the planet. 
The International Institute for Applied Systems Analysis has projected that if every girl in the world completed secondary education, fertility rates would drop and the global population growth would slow by as many as two billion people by 2045, and more than five billion by 2100. 
The deceleration would be even greater if the 214 million women worldwide who want to avoid pregnancy but cannot acquire contraception could access family-planning services. 
It is no coincidence that many of these women live in countries where fewer girls than boys attend school. 
Taken together, schooling and family planning could translate into a 120-gigaton reduction in carbon dioxide emissions over the next three decades, as fewer people consumed fewer resources. 
It is no surprise that environmentalists like Paul Hawken believe that education – and educating girls in particular – is among the most effective steps the world can take to combat climate change. 
The annual Goalkeepers report is a reminder issues like gender inequality, malnutrition, violence, and political instability will plague the world’s poorest people for decades to come. 
Among solutions, few are as effective as quality education. 
If fragile states and international donors directed more resources to strengthening education’s three pillars – early, primary, and secondary – the world’s SOTCs would finally have a chance to get back on track. 

Strengthening IMF Surveillance 
In today’s globalized economy, one country’s economic and financial policies can reverberate far beyond its borders. 
Be it the spread of inflation or the impact of currency devaluation half a world away, global economic forces can have a direct impact on every person’s livelihood. 
Under such circumstances, international cooperation is essential to ensure stability and growth and prevent disruptive crises. 
But for such cooperation to be effective, the international community needs the right tools. 
The International Monetary Fund provides one of the most important tools. 
For many years, the IMF has engaged its member countries in a process known as “surveillance,” in which it monitors, analyzes, and consults on each country’s economic policies – both exchange rate policies and relevant domestic policies. 
These regular checkups help to identify potential vulnerabilities and maintain economic stability. 
However, the increasingly complex policy challenges of the globalized economy demand a fresh look at this process. 
This June, the IMF’s Executive Board did just that, reaching a broad consensus on updating surveillance to make it more focused and effective. 
This is one of the most important reforms to the Fund’s work in the 30 years since the surveillance process was designed. 
Indeed, it is part of a much broader reform effort aimed at strengthening the IMF and will have implications extending well beyond the Fund’s boardroom. 
The new reform brings three critical changes. 
First, it affirms that surveillance should focus on what matters for stability, and gives detailed guidance in this area. 
IMF advice should not be spread too thin. 
Second, there is now clear advice to the Fund’s member countries on how they should run their exchange rate policies, and on what is acceptable to the international community. 
Finally, the reform sets out clearly for the first time what is expected of surveillance, and so should promote candor and evenhanded treatment of every country. 
In other words, the Fund must ensure that it deals with every country the same way, including delivering clear and sometimes difficult policy messages and sharing its views with the international community. 
The new approach to exchange rate policies represents one of the most significant advances. 
Under the IMF Articles of Agreement, members are required to collaborate to promote a stable system of exchange rates and to avoid manipulation with a view to gaining an unfair trade advantage. 
Past guidance in this area was limited, focusing entirely on manipulation and on avoidance of short-term volatility. 
This guidance remains, but what we meant by manipulation is now clearer. 
We have also addressed those policies that have caused the most harm to the system in recent years, including overvalued or undervalued exchange rate pegs maintained for domestic reasons. 
This change comes at a crucial time for the world economy. 
Countries are experiencing strong growth, inflation is low, and the threat of crisis has receded considerably. 
Few countries need to borrow from the IMF – a highly positive trend. 
But improved surveillance is essential to ensure that the global economy remains on an even keel. 
By clarifying what surveillance entails, the new decision should help the IMF and its members see eye to eye on the Fund’s role, help those involved in surveillance do their job properly, and make the Fund more accountable for delivering on this key responsibility. 
This reform represents a victory for multilateralism that demonstrates ownership of how Fund surveillance will be strengthened and members’ willingness to live up to their responsibilities in the process. 
Of course, it is critically important that it received very broad support from industrial countries, emerging economies, and developing countries. 
The international community needs a setting where it can debate the most sensitive economic issues, including – but certainly not limited to – exchange rate issues. 
The IMF offers that venue. 
At the same time, it can provide the nonpartisan technical expertise that enables governments to define policies that will ensure continued economic stability. 
The goal is to support policies that are good for each member country – but also for other countries – through dialogue and persuasion. 
This is the very essence of international cooperation. 

 

A Verifiable Path to Nuclear Disarmament 
WASHINGTON, DC – As officials from the United States and North Korea prepare for the June 12 summit meeting between Donald Trump and Kim Jong-un, nuclear experts must come to terms with a significant question: If Kim commits to dismantling his nuclear stockpile, how can the world be sure that he is following through? 
There is no question that North Korea poses a unique challenge to the nuclear nonproliferation regime; the political context for advancing disarmament globally is very different. 
Still, the technical aspects of verifying that a nuclear warhead has been dismantled are the same everywhere. 
Although a consensus on how to reduce global stockpiles of nuclear weapons may be a long way off, it is not too soon to begin preparing for the day when disarmament – in North Korea or elsewhere – is on the agenda. 
For nearly four years, the International Partnership for Nuclear Disarmament Verification has been working to improve the weapons dismantlement process. 
As co-chairs of an IPNDV working group, we are collaborating with experts from more than 25 nuclear- and non-nuclear-armed countries to develop formulas, technologies, and expertise that will help in the implementation of future disarmament agreements. 
Ultimately, the partnership’s goal is to address capability gaps in the monitoring and verification of nuclear-weapons disposal. 
Our work so far has focused on four key areas. 
First, despite decades of strategic arms-control agreements and unilateral disarmament, the international community has no standardized way to guarantee that a country claiming to disarm is actually doing so. 
For example, previous treaties in the SALT and START series to reduce US and Soviet or Russian arsenals were aimed at limiting the number of nuclear warheads deployed on bombers, missiles, and submarines. 
Inspectors verified the inventories of those delivery systems, but not the warheads themselves. 
This remains a major gap that will become even more contentious as the number of weapons declines – and the need for stronger verification increases. 
Next, the world requires a more diverse set of “verifiers” to build confidence in the disarmament process. 
During the height of the Cold War, the Soviet Union and the US were the two main nuclear-armed states – accounting for the bulk of the 70,000 weapons then in existence. 
While Russia and the US still possess the vast majority of the world’s 14,000-15,000 nuclear weapons, efforts to reduce stockpiles have grown more complicated as the number of nuclear-armed states has increased. 
Third, with nuclear-weapons inventories still too high, a strong verification regime could help build political will for further reductions. 
The lower the number, the more important verification will become. 
Moving toward zero, verification becomes absolutely critical. 
Finally, because policymakers will no doubt make demands related to verification during future disarmament negotiations, persuasive answers, supported by strong technical evidence, will be critical to allaying fears about cheating. 
Since IPNDV was founded in December 2014, our members have been exploring the most challenging technical aspects of verifying weapons dismantlement. 
One key question we have sought to tackle is how to involve countries without nuclear weapons. 
While our work in this area is ongoing, what we are essentially developing is a system of “verification with a blindfold” – whereby states and inspectors unable to observe dismantlement directly can still be assured that it is carried out according to agreed procedures. 
Other challenges we are working to address include long-term tracking of weapons as they are replaced or refurbished, and closing gaps in the documentation stage of dismantling. 
How can assurance be provided that verification tools meet the safety and security requirements of nuclear-weapons facilities? 
How can verification provide the high level of assurance required by states as the number of nuclear weapons approaches zero? 
Our work is not occurring in a vacuum. 
When the parties to the Non-Proliferation Treaty (NPT) meet every five years to review the treaty’s effectiveness, progress on nuclear disarmament is usually a weak spot. 
While the IPNDV’s recommendations will never be a substitute for negotiations that engage nuclear-armed states, we believe they can improve the prospects of achieving the NPT’s goal of global denuclearization. 
Nuclear disarmament poses many monitoring and verification challenges, but the huge scale of the task is no excuse for inaction. 
Eventually, the political headwinds will subside, and denuclearization will proceed again. 
When that happens, the world must be ready with the technical solutions to guarantee the credibility of countries’ promises. 

The World Cup of Press Freedom 
PARIS – President Vladimir Putin worked hard to bring the 2018 FIFA World Cup to Russia, but now that the spectacle is underway, his influence has waned. 
He cannot control the referees or the performance of Russia’s national team, the Sbornaya, which is ranked 70th in the world – the lowest-seeded team in the tournament. 
But he has far more control over how the tournament is covered, at least by Russian media. 
In the World Press Freedom Index, compiled each year by Reporters Without Borders (RSF), Russia is ranked 148th out of 180 countries. 
Rather than accepting the competition that comes with pluralism, the Kremlin is intent on rigging the rules of politics and to fix media “matches” in his favor. 
From criminalizing defamation to barring news that offends the “religious feelings of believers,” Putin’s media laws are becoming increasingly restrictive. 
Their vague wording allows them to be applied in a selective and arbitrary manner, and press-freedom advocates that seek to challenge the status quo are coming under increased scrutiny. 
Like a rigged player transfer system, the leading Russian media are under the Kremlin’s thumb. 
The government has managed television broadcasters – Russians’ main source of news – since the early 2000s, when ORT and NTV were seized from the moguls Boris Berezovsky and Vladimir Gusinsky, respectively. 
Following the 2014 revolution in Ukraine, these and other national broadcasters increased their output of pro-Kremlin propaganda. 
For example, in 2015, a documentary that aired on state-owned Rossiya 1 accused human-rights activist Nadezhda Kutepova of “industrial espionage,” lies that eventually forced her into exile. 
The following year, the same channel used forged documents to accuse leading Kremlin critic Alexei Navalny of being an agent for Britain’s MI6 intelligence agency. 
Putin’s grip on state media has been tightening since December 2013, when channels were regrouped in the Rossiya Segodnya consortium to improve the presentation of Russia’s “story.” 
Television is not the only Kremlin-controlled medium; the Internet is being muzzled as well. 
Websites are blocked, bloggers are monitored, search engines and news aggregators are censored, and VPNs are banned. 
In April of this year, Russia cut off access to the encrypted messaging network Telegram, joining countries like China and Iran. 
Most worrying of all, more and more Internet users are being jailed for their comments on social media, or for simply endorsing content with a “like.” 
The Nobel laureate Albert Camus said that the little he had learned about life had been “on the football field,” and that, like adversity, a kicked ball “never arrives from the direction you expected it.” 
Something similar could be said of the media playing field in Russia. 
Since 1999, when Putin first became prime minister, 34 journalists have been killed while reporting in the country, including investigative reporter Nikolai Andrushchenko, who was beaten to death last year in St. Petersburg. 
In the vast majority of these cases, the investigations stalled and the perpetrators have never been identified. 
With the stakes so high, many media owners have chosen to leave the game entirely, selling their outlets to pro-Kremlin oligarchs, many of whom were, fittingly, previously asked by Putin to buy soccer clubs. 
Some media organizations continue to provide high-quality journalism, but they have nowhere near as many readers or viewers as the leading state-controlled media. 
The only independent national broadcaster, Dozhd, was dropped by satellite and cable services in 2014. 
Galina Timchenko, the editor of Russia’s most widely read news website, Lenta.ru, was fired the same year, along with most of her staff. 
The editorial team of the RBC media group suffered a similar fate in 2016. 
Nor have the closures spared leading regional outlets like Siberian broadcasterTV-2 or Kaliningrad’s top independent weekly newspaper, Novye Kolesa. 
Each of these outlets was distinguished by its coverage of sensitive stories – from conflict in Ukraine to high-level corruption. 
Russia today has less press freedom and more journalists, media workers, and bloggers behind bars than at any time since the Soviet Union’s collapse in 1991. 
In Crimea and Chechnya, even the most basic media protections are non-existent. 
With the Kremlin’s blessing, these regions have been turned into news and information “black holes,” where the authorities are free to act without fear of consequences. 
In its World Cup group-stage matches, Russia competed against other low-ranked countries like Egypt (45th in soccer and 161st on RSF’s press freedom index) and Saudi Arabia (ranked 67th by FIFA and 169th by RSF). 
On paper, only Uruguay (14th in soccer and 20th in media freedom) was a well-rounded opponent. 
And yet, while Russia has made it through to the tournament’s knockout round, the excitement of the games, and the unlikeliness of Russia’s success, amount to a fleeting distraction. 
This may not be the Press Freedom World Cup, but with Russia under the global spotlight, the international community can push for the release of jailed journalists and human-rights defenders; the repeal of draconian laws; the relaxation of government control over the media; and an end to impunity. 
This opportunity is unlikely to come again anytime soon. 
The world must not miss its chance to capitalize. 


Securing Nuclear Material 
VIENNA – World leaders have devoted increasing attention in recent years to the risk of terrorists obtaining nuclear or other radioactive material. 
That’s the good news. 
But all of us need to act with greater urgency in translating good intentions into concrete action. 
The risk of nuclear or other radioactive material falling into the wrong hands is all too real. 
There have been embarrassing security lapses at nuclear facilities, and sensitive material is often inadequately secured. 
Indeed, the International Atomic Energy Agency (IAEA) records numerous cases of theft and other unauthorized activities involving nuclear and radioactive material every year. 
Most of these incidents are fairly minor, but some are more serious. 
Some material goes missing and is never found. 
An incident in Moldova two years ago involving highly enriched uranium – which can be used in a nuclear weapon – illustrates both the scale of the threat and the possibility of effective counter-measures if countries take the problem seriously. 
Police seized a quantity of the substance from an individual who was attempting to sell it. 
The smugglers had tried to evade detection by building a shielded container – a worrisome level of sophistication on their part. 
Fortunately, the Moldovan authorities had been working hard to improve their detection capabilities. 
They had also shared information with their counterparts in other countries. 
The uranium was seized in a sting operation. 
Arrests were made and several people received prison sentences. 
Most cases of attempted trafficking do not involve nuclear material; rather, they involve radioactive substances of the type held in hospitals, factories, and other locations all over the world. 
These locations are generally not as well protected as nuclear facilities. 
Even a relatively small amount of material such as cobalt-60 – used in radiotherapy – could cause serious harm if combined with conventional explosives in a so-called dirty bomb (or otherwise deliberately used to expose the public to dangerous radiation). 
Foreign and energy ministers will have an opportunity to strengthen the global nuclear security framework when they meet at the International Conference on Nuclear Security: Enhancing Global Efforts in Vienna on July 1-5. 
This will be the first such event that is open to all countries. 
At the top of the agenda should be ratification of improvements to a crucial nuclear security instrument – theConvention on the Physical Protection of Nuclear Material. 
The proposed amendment would oblige countries to protect nuclear material when it is being used or stored, not just when it is being transported internationally, as is the case now. 
It would also require countries to protect nuclear facilities against acts of sabotage, which could have consequences similar to those of nuclear accidents. 
The proposed amendment was agreed in 2005, but it still has not entered into force, because not enough countries have ratified it. 
That needs to change if major vulnerabilities are to be addressed successfully. 
Nuclear security is a matter of global concern, and global action is required. 
Efforts by just a handful of major players will not be sufficient to keep the world safe. 
We cannot afford to have weak links in our chain of defense. 
All countries must play their part. 
Even countries that do not possess nuclear or other radioactive material need to act. 
There is evidence that criminal and terrorist gangs have attempted to traffic material through countries perceived to have lax security. 
It is imperative that they do not succeed. 
One simple measure would make a big difference: All countries should allow peer reviews of their nuclear-security arrangements by international experts. 
Peer reviews have been shown to work – for example, in improving safety at nuclear power plants. 
Everyone benefits. 
Bringing experts in nuclear security together to share their experience is a no-brainer. 
More countries need to do it. 
Following Moldova’s example, all countries should also ensure that law-enforcement officers are properly trained to respond to the menace of nuclear terrorism. 
Countries must invest in equipment and infrastructure and share information across borders. 
The fact that there has been no major nuclear terrorist attack should not lull us into a fall sense of security. 
The threat remains. 
We must seize the opportunity to ensure that our worst nightmare never becomes our waking reality. 

Strengthening the Stabilizers 
PARIS – The G-20 summit in Cannes in early November is a major opportunity to address the mandate, governance, and institutional capacity of the Financial Stability Board, the international body that monitors, and makes recommendations about enhancing, the international financial system. 
The meeting is particularly timely, because the FSB will soon be under new leadership, as its current chairman, Mario Draghi, takes over in November as President of the European Central Bank. 
In the midst of the financial meltdown in 2008-2009, the G-20 established the FSB, building on its predecessor, the Financial Stability Forum, and charged it with coordinating urgent international regulatory-reform efforts to ensure greater financial stability and global consistency of rules. 
Even as the G-20 wrestles with the challenges of the global economic slowdown and the euro crisis, the mandate to the FSB remains central to a substantial financial-reform agenda – and to avoiding national and regional divergence in areas critical to the global financial system’s stability. 
The FSB has been criticized for lacking enforcement capability. 
But, in today’s world of sovereign states, treaties creating new international institutions with supranational powers are not realistic alternatives. 
Moreover, the FSB’s achievements are significant. 
Its agenda is rapidly expanding, and it is becoming an influential and permanent component of the international economic and financial architecture, even as challenging questions surround its future. 
Pragmatic steps to clarify the FSB’s mandate and enhance its operational effectiveness can and should be taken. 
Today, the FSB is without legal standing (it is only the product of a political statement). 
Institutionally, it is simply an extension of the Bank for International Settlements in Basel. 
It is funded through the BIS, which also seconds its small staff. 
Its internal governance processes are underdeveloped and lack transparency. 
As the only entity that integrates central banks, supervisors, treasuries of major economies, and international standard-setting bodies, the FSB is uniquely positioned to set priorities on financial regulation, provide regulatory coherence across the financial sector, oversee consistent implementation, and, in conjunction with the International Monetary Fund, to assess systemic vulnerabilities. 
But, while it should identify regulatory gaps and encourage more proactive work by the various standard-setting bodies, it should not take on daily operational responsibilities. 
It should, however, foster a culture of consultation with industry as a necessary dimension of legitimacy, which implies more transparent approaches to considering the market impact of proposed standards. 
Effective execution of such an ambitious mandate is particularly important in view of two emerging G-20 priorities for the FSB: regulatory initiatives with respect to the functioning of markets, including so-called “shadow banking” (the less regulated forms of private financing), and new mechanisms to foster consistent implementation of standards. 
Expectations of a greater FSB focus on shadow banking stem not only from non-bank financial institutions’ role in fueling the 2008-2009 crisis, but also from the concern that stiffer capital and liquidity requirements for banks might shift risk away from the financial sector’s regulated core. 
This will require carefully balancing the need to mitigate risks in the unregulated sector with the benefits that its efficiency and innovation provide to the financial system. 
The FSB, along with the Basel Committee on Banking Supervision, has been quietly considering new mechanisms for monitoring implementation of standards, particularly in the context of Basel III rules. 
FSB membership should imply accountability in implementation of standards. 
In the absence of formal enforcement powers, the pragmatic alternative is to develop mechanisms for monitoring implementation of standards on an ongoing basis, and to incorporate systematic, impartial peer reviews. 
The Cannes Summit should articulate a renewed commitment to consistent implementation of agreed regulatory reforms, and to minimizing divergence in national regulation that could create systemic risks or significant competitive advantage. 
The G-20 should provide the political support to develop a framework that relies on monitoring, consultation, mutual oversight, reporting, and publication. 
It is in the financial industry’s interest to support the development of these mechanisms as a means to address the competitive implications of divergent national regulation. 
Finally, the G-20 should provide the FSB with adequate institutional capacity to address its tasks, but without creating a bureaucracy. 
The first order of business is to endorse a capable and dedicated new FSB chairman. 
Beyond that, the FSB should be given legal capacity through proper incorporation – an institutionally intermediate point between its purely political status now and the extreme of a treaty organization. 
This would enable to FSB to hire the best possible talent, receive funding from governments, and enter into more formal arrangements with other international bodies in order to carry out its responsibilities more effectively. 

Africa’s Farms of the Future 
HARARE – Launching a business can be hard work, especially in Africa, where weak governance systems and inconsistent access to critical resources impede success. 
For Africa’s farmers, the challenges are particularly pronounced. 
Given the vast economic and social benefits of a dynamic and modern agricultural sector, providing farmers with the incentives, investments, and regulations that they need to succeed should become a top priority. 
The recent boom in Africa’s telecommunications sector – which has revolutionized entire industries, not to mention people’s lifestyles – demonstrates just how effective such an approach can be. 
There are more than a half-billion mobile connections on the continent today; indeed, in many respects, Africa leads the world in mobile growth and innovation. 
Why has Africa been unable to replicate that growth in the agriculture sector? 
Why, instead of bumper crops, does Africa have an annual food-import bill of $35 billion? 
According to the Africa Progress Panel’s latest annual report, Grain, Fish, Money – Financing Africa’s Green and Blue Revolutions, the problem is straightforward: the odds are stacked against Africa’s farmers. 
This is particularly true for smallholder farmers, most of whom are women. 
These farmers, who cultivate plots about the size of one or two football fields, typically lack reliable irrigation systems and quality inputs, such as seeds and soil supplements. 
Moreover, they rarely earn enough to invest in the needed machinery, and cannot gain access to credit. 
As if that were not enough, farmers are facing increasingly volatile climate conditions that increase the likelihood that their crops will fail. 
Maize yields, for example, are set to decline by one-quarter over the course of the twenty-first century. 
And, when the crops are ready, farmers face major obstacles – including inadequate rural road systems and a lack of cold storage facilities – in delivering them to the market. 
Despite these risks, which dwarf those faced by the telecoms industry, Africa’s smallholders remain as efficient as their larger counterparts – a testament to their tenacity and resilience. 
Yet, instead of supporting farmers, African governments have erected even more obstacles to growth, including excessive taxation, insufficient investment, and coercive policies. 
Africa’s farmers need an enabling environment that enables them to overcome the challenges they face. 
In such a context, the continent’s agricultural sector could unleash a revolution akin to that fueled by the communications industry. 
The good news is that both the private and public sectors – motivated by soaring demand for food, especially in Africa’s rapidly growing cities, and rising global food prices – seem ready to propel this shift. 
Private firms have begun to channel investment toward Africa’s agricultural sector, including through initiatives like Grow Africa (of which I am co-Chair), which facilitates cooperation between national governments and more than a hundred local, regional, and international companies to achieve targets for agricultural growth. 
Over the last two years, these firms have pledged more than $7.2 billion in agricultural investment. 
For their part, African governments and development partners, recognizing the central role that agriculture can play in their economic-development agendas, have begun to reverse a three-decade decline in public investment in agriculture. 
In fact, agriculture has the potential to reduce poverty twice as fast as any other sector. 
The impact of such efforts is already becoming apparent in many parts of the continent. 
From Ghana to Rwanda, high levels of agricultural investment are fueling impressive economic growth in rural areas, thereby boosting job creation and reducing poverty and hunger. 
But these gains remain fragile. 
To sustain them, African governments must recommit to the African Union’s Maputo Declaration on Agriculture and Food Security, which includes a pledge to channel at least 10% of their budgets toward agricultural investment. 
And, they must provide farmers with the infrastructure, energy supplies, and supportive policies that they need in order to get their products to the market. 
The communications sector also has a key role to play. 
Mobile technology has already begun to transform Africa’s agricultural industry, by providing farmers with valuable information like market prices, input support through e-vouchers, and even access to credit. 
Many of these innovative services are more accessible to African smallholders than they are to their American or European counterparts. 
Finally, private-sector actors, farmers’ organizations, and civil-society groups must cooperate to advance agricultural development. 
For example, the Alliance for a Green Revolution in Africa, supplies high-quality seeds – many of which are drought-resistant – to millions of smallholder farmers across the continent. 
The African Union has declared 2014 the Year of Agriculture and Food Security in Africa. 
With broad action on policy, investment, and technology, Africa’s farmers can double their productivity within five years. 
It is time to give the agriculture sector the opportunity that all Africans need to usher in an era of shared prosperity. 

Escaping the New Normal of Weak Growth 
MILAN – There is no question that the recovery from the global recession triggered by the 2008 financial crisis has been unusually lengthy and anemic. 
Some still expect an upswing in growth. 
But, eight years after the crisis erupted, what the global economy is experiencing is starting to look less like a slow recovery than like a new low-growth equilibrium. 
Why is this happening, and is there anything we can do about it? 
One potential explanation for this “new normal” that has gotten a lot of attention is declining productivity growth. 
But, despite considerable data and analysis, productivity’s role in the current malaise has been difficult to pin down – and, in fact, seems not to be as pivotal as many think. 
Of course, slowing productivity growth is not good for longer-term economic performance, and it may be among the forces holding back the United States as it approaches “full” employment. 
But, in much of the rest of the world, other factors – namely, inadequate aggregate demand and significant output gaps, rooted in excess capacity and underused assets (including people) – seem more important. 
In the eurozone, for example, aggregate demand in many member countries has been constrained by, among other things, Germany’s large current-account surplus, which amounted to 8.5% of GDP in 2015. 
With higher aggregate demand and more efficient use of existing human capital and other resources, economies could achieve a significant boost in medium-term growth, even without productivity gains. 
None of this is to say that we should ignore the productivity challenge. 
But the truth is that productivity is not the principal economic problem right now. 
Tackling the most urgent problems confronting the world economy will require action by multiple actors – not just central banks. 
Yet, thus far, monetary authorities have shouldered much of the burden of the crisis response. 
First, they intervened to prevent the financial system’s collapse, and, later, to stop a sovereign-debt and banking crisis in Europe. 
Then they continued to suppress interest rates and the yield curve, elevating asset prices, which boosted demand via wealth effects. 
But this approach, despite doing some good, has run its course. 
Ultra-low – even negative – interest rates have failed to restore aggregate demand or stimulate investment. 
And the exchange-rate transmission channel won’t do much good, because it does not augment aggregate demand; it just shifts demand around among countries’ tradable sectors. 
Inflation would help, but even the most expansionary monetary measures have been struggling to raise inflation to targets, Japan being a case in point. 
One reason for this is inadequate aggregate demand. 
Monetary policy should never have been expected to shift economies to a sustainably higher growth trajectory by itself. 
And, in fact, it wasn’t: monetary policy was explicitly intended to buy time for households, the financial sector, and sovereigns to repair their balance sheets and for growth-enhancing policies to kick in. 
Unfortunately, governments did not go nearly far enough in pursuing complementary fiscal and structural responses. 
One reason is that fiscal authorities in many countries – in particular, in Japan and parts of Europe – have been constrained by high sovereign-debt levels. 
Furthermore, in a low interest-rate environment, they can live with debt overhangs. 
For highly indebted governments, low interest rates are critical to keep debt levels sustainable and ease pressure to restructure debt and recapitalize banks. 
The shift to a high sovereign-debt-yield equilibrium would make it impossible to achieve fiscal balance. 
In the eurozone, the European Central Bank’s commitment, announced in 2012, to prevent debt levels from becoming unsustainable is politically conditional on fiscal restraint. 
There are also political motivations at play. 
Politicians simply prefer to keep the burden on monetary policy and avoid pursuing difficult or unpopular policies – including structural reforms, debt restructuring, and the recapitalization of banks – aimed at boosting market access and flexibility, even if it means undermining medium-term growth. 
The result is that economies are stuck in a so-called Nash equilibrium, in which no participant can gain through unilateral action. 
If central banks attempt to exit their aggressively accommodative policies without complementary actions to restructure debt or restore demand, growth, and investment, growth will suffer – as will central banks’ credibility, or even their independence. 
But exit they must, because expansionary monetary policies have reached the point at which they may be doing more harm than good. 
By suppressing returns to savers and holders of assets for a protracted period, low interest rates have spurred a frantic search for yield. 
This takes two forms. 
One is rising leverage, which has increased globally by about $70 trillion since 2008, largely (though not entirely) in China. 
The other is capital-flow volatility, which has driven policymakers in some countries to pursue their own monetary easing or to impose capital controls, in order to prevent damage to growth in the tradable sector. 
It is past time for political leaders to show more courage in implementing structural and social-security reforms that may impede growth for a time, but will stabilize their countries’ fiscal position. 
More generally, fiscal authorities need to do a much better job of cooperating with their monetary counterparts, domestically and internationally. 
Such action will probably have to wait until the political consequences of low growth, high inequality, mistrust of international trade and investment, and the loss of central-bank independence become too great to bear. 
That probably won’t happen right away; but, given the rise of populist leaders seizing on these adverse trends to win support, it may not be too far off. 
In this sense, populism can be a beneficial force, as it challenges a problematic status quo. 
But the risk remains that, if populist leaders do secure power, they will pursue policies that lead to even worse results. 


Structural Booms 
Why are there economic booms and busts, those long swings between expansion and slowdown? 
Traditional explanations focus on bad monetary policy. 
My research argues that they are usually structural, the result of powerful shifts in expectations about future productivity and profitability. 
In the Interwar period, big swings were marked by hyper-inflations and deep deflations. 
Small wonder that for the Austrian, Keynesian and Monetarist schools it was always “cherchez la monnaie”. After World War II, however, long swings in economic activity continued, while only moderate price and inflation patterns emerged. 
In the 1960s, unemployment nearly disappeared in several European countries, but without rising inflation. 
In the 1990s, employment soared in several industrial countries, again with little or no inflation. 
I see these powerful upswings as investment booms as having structural causes and effects. 
Entrepreneurs foresaw new opportunities for profitable use of capital in the medium-term future. 
So they stepped up investment in new facilities, new customers and new employees. 
Most business investing leads through non-monetary channels to higher employment – without inflationary over-heating. 
The turn-of-the-century German school, led by Arthur Spiethoff and Gustav Cassel, viewed the pre-WWI booms in the same non-monetary way. 
They didn’t deny that “excesses” of speculation may arise. 
But they held that structural booms may die of natural causes – with no necessity for the over-building, purge and catharsis depicted by the later Austrian school. 
In recent research I conducted with Gylfi Zoega, we hypothesised that such shifts in expectations, and thus in future economic expansion, can be detected in advance from tell-tale shifts in the stock markets. 
Share prices may serve as a kind of proxy for the expectations and attitudes of businessmen. 
It turns out there that is extensive evidence that a sustained shift in share prices is followed by a gradual change in unemployment. 
Since 1900 at least, there has been a pronounced long-term relationship between share prices and employment in the US and the UK, and over a somewhat later period in France, too. 
Since 1960, when figures for more OECD countries are available, there is the same statistical link in all of those countries except Sweden: the higher the share prices, the lower the unemployment rate. 
The strength of this relationship depends on a country’s economic institutions. 
Some OECD economies have long been relatively capitalist – the US, the UK, the Netherlands, Canada and Australia. 
Within them, new businesses have relatively easy access to finance (domestic and foreign) and can enter or exit a wide range of industries without big hurdles. 
Other countries have long been more nearly corporatist – Italy, Germany, Austria and Japan. 
They have a rather closed system of big corporations and big labour unions loosely directed by an interventionist government with the collaboration of big banks. 
Statistical evidence shows that the same given change in share prices is followed by a greater change in employment in the more capitalist economies than in the more corporatist ones. 
To what particular labour and capital-market institutions might responsiveness to share prices be strongly linked? 
We argued that more responsive economies have fewer employment protections to scare entrepreneurs away from starting new firms, and have less industry-wide or economy-wide wage bargaining, which may also deter entrepreneurs. 
Evidence confirms that the most responsive OECD economies scored well on these counts. 
We also hypothesised that more responsive economies would be less encumbered by bureaucratic “red tape” that raise the costs of starting and developing firms. 
Further, they would have a well-developed stock market, since stock options help motivate entrepreneurs to start new businesses and venture capitalists will want an exchange in which to sell the shares in the start-ups they acquire. 
Finally, they would show large numbers with a university education. 
Countries that scored poorly in responsiveness to share prices tend also to score badly on the OECD’s index of “red tape” and on university education. 
We measured the progress of each country’s stock-market by the level of stock-market capitalisation as a ratio to GDP in 1988, a decade before the late 1990s investment booms began. 
We found that the greater the level of capitalisation, the more responsive employment was to share prices. 
With these capitalisation figures alone you could have predicted which OECD economies would boom in the late 1990s. 
If my thesis is right – the root cause of big booms in capitalist economies over recent decades (as well as during the pre-WWI decades) is a structural shift in expected future profitability – what does it mean for the choice of an economic system and for economic stabilisation? 
Many Western nations react to perceived flaws by drawing back somewhat from capitalism through increased public sector employment, public expenditure, and social control over the private sector. 
Countries that, in the past, pursued some such policies include Norway, Austria, Italy, Germany, Sweden, and France. 
It is plausible – though not a certainty – that an economy dominated by large public expenditure and public employment is capable of greater stability. 
Yet countries that continued with these policies in the 1990s were deprived of the once-in-a-generation investment boom enjoyed in the more capitalist countries. 
Now a cultural shift appears underway in several of those economies, with more possibly to come. 
“Shareholder value” has gained force; access to an organised stock exchange has widened. 
If so, these countries will be exposed to wider swings. 
What then? 
It is doubtful that there is a positive benefit – net of future cost – from jiggling tax rates to stabilise employment. 
Yet governments can attack speculative excesses and thus reduce job instability by doing for capital markets what they have long done for product and labour markets: set up systems to monitor markets for the safety of investors, ensure transparency, and promote good corporate governance. 
The job instability that remains would be a small price to pay for the stimulus, excitement and progress that a well-designed capitalism brings. 

The People vs. Democracy? 
PRINCETON – The election result in Italy, where populists and far-right parties topped the polls, following the twin disasters of Brexit in the United Kingdom and Donald Trump’s election in the United States, seems certain to harden a common liberal belief: the people brought these calamities on themselves. 
“Ordinary citizens,” according to this view, are so irrational and ill-informed that they make terrible choices. 
Some go a step further and attribute to them coherent preferences for anti-democratic leaders. 
Indeed, a new book asserts that the problem is one of The People vs. Democracy. 
Such diagnoses are deeply mistaken. 
By focusing on individual citizens’ beliefs, they miss the structural reasons for today’s threats to democracy. 
As a result, they are also bound to yield the wrong practical lessons. 
If one really believes voters are incompetent or illiberal, the obvious next step is to take even more decision-making power away from them. 
But, rather than retreating to technocracy, we should tackle the specific structural problems that have aided the triumph of populist politicians. 
There is plenty of evidence that citizens are not as well informed as democratic theory would like them to be. 
Especially in the US, political scientists have repeatedly shown that a realistic view of the people diverges drastically from civics textbook wisdom. 
But elections are neither citizenship tests nor exams in master’s programs in public administration. 
Voters do not need detailed knowledge and preferences on every policy question; broad orientations and the capacity to take cues from trusted authorities – politicians, journalists, or, God forbid, experts – can be enough. 
The problem starts when citizens view every issue purely as a matter of partisan identity, so that the credibility of climate science, for example, depends on whether one is a Republican or a Democrat. 
It gets worse when partisan identity becomes so strong that no arguments from or about the legitimacy of the other side ever get through. 
Trump was not elected as the candidate of a grassroots movement of globalization’s angry white losers, but as the leader of an establishment party. 
Long before Trump, that party – and its cheerleaders in the right-wing media – had started to demonize its opponents and effectively told its followers that they could never opt for “European-style socialists” and other un-American abominations under any circumstances. 
Thus, Republicans who readily admitted that Trump was not qualified to be president voted for him anyway. 
In the US, polarization is not an objective reflection of given cultural differences; it has at least partly been a conscious elite project to divide the country for political advantage and sometimes even personal profit. 
After all, polarization is also big business, as a quick look at the earnings of major figures on Fox News and talk radio can confirm. 
Observers who claim that Europe is now split between a liberal-democratic West and an East where deeply illiberal electorates have brought populists to power make the same mistake of explaining all political outcomes in terms of culture. 
They, too, attribute authoritarian outcomes to what voters allegedly “really wanted.” 
But recall the crucial elections in Hungary in 2010 and Poland in 2015: as my colleague Kim Lane Scheppele has pointed out, voters then did exactly what democratic theory told them they should do in a two-party system. 
In Hungary, a dismal economic record and corruption discredited the major left party, so it was time to vote for the other side. 
In Poland, the center-right Civic Platform had an excellent economic record but was widely perceived as having become complacent after many years in power. 
In 2010, Viktor Orbán did not campaign on a promise to draft a new constitution, weaken checks and balances, and radically reduce media pluralism. 
Instead, he presented himself as a competent mainstream Christian Democrat. 
In Poland, the Law and Justice (PiS) party went out of its way to stress its character as a reasonable conservative party which simply wanted to provide more benefits to families with children. 
Many people remembered the dismal, polarizing performance of PiS leader Jarosław Kaczyński as prime minister from 2006 to 2007. 
But Kaczyński kept out of the limelight, and let someone else lead the government. 
Even today, he is nominally a simple member of the Sejm (parliament) – even if he controls the administration from behind the scenes. 
Once in power, populists like Orbán have engaged in all-out cultural warfare. 
In the name of “unifying the nation,” they have divided their societies, betting that, after getting most media under their control, they can manipulate public opinion to remain in power. 
As in the US, the imperative is not to lament people’s authoritarian tendencies, but to tackle the structural problems that have enabled populists to do well. 
For example, not everything populists say about those “left behind” is wrong; nor is it always a mistake to suspect that parts of the state have been captured by special interests. 
But these ground-level grievances always need to be articulated and represented with the help of media and political parties. 
It is media and party systems that are visibly failing in many countries and require systematic re-building. 
To be sure, more and better civic education also would help. 
Such education has been declining for decades, because it does not easily fit curricula that rely heavily on standardized testing. 
If done properly, it is also very time-consuming and thus detracts from subjects that appear more useful in the short run, in the sense that they are supposed to contribute more directly to economic success. 
Civic education can be crucial in helping young people to manage disagreements and recognize other citizens as legitimate opponents in democratic conflicts. 
Cultural differences will not and should not disappear, but if the people themselves have learned to live with them, populists will not succeed in using them as political weapons. 

Homelands for Plants 
DURHAM, NORTH CAROLINA – My day begins with a cup of coffee and ends with hot chocolate. 
In between, I consume a variety of food and medicines, including my daily 81mg dose of aspirin. 
A brightly colored orchid enlivens my study, and, through the window, I catch a glimpse of my green garden. 
In short, my life – like everyone’s – is enabled, enriched, and extended by a wide variety of plants and their derivatives. 
But the biodiversity on which all of us depend is under threat, as human activity devastates forests and other plant-rich habitats. 
The question now is how quickly are species being destroyed – and what can be done to stop it. 
Designing effective conservation strategies must begin with knowledge of the species we need to protect. 
So far, taxonomists have described roughly 297,500 plant species. 
How many have they not yet described? 
Where are we likely to find them? 
It might seem that, as the pool of undescribed species diminishes, the rate at which taxonomists describe new species should decline. 
But the opposite has happened, with rates often increasing nearly exponentially from year to year – a phenomenon that can be explained largely by the growing number of taxonomists. 
Indeed, it is only the ratio of new species to taxonomists describing them that is declining. 
Based on this development, mathematical models predict that roughly 15% more plant species exist than are currently known, for a total of some 350,000 species – a figure that is consistent with expert opinion. 
Perhaps half of the undescribed species have already been collected and housed in herbaria, where they await detection and analysis. 
To find the rest, taxonomists must rely on three general patterns governing species’ geographical distribution: 
· Most species have very small geographical ranges and are uncommon locally. 
· The number of species found in any one habitat varies considerably. 
Large tracts of boreal forest across North America and Eurasia have only a handful of tree species, while the Amazon basin may house 16,000. 
· Species with small geographical ranges are often concentrated in the same areas, but they tend to be in areas different from where the largest numbers of species live. 
Based on these patterns, one could predict that most undescribed species have small geographical ranges and are scarce within them – that is why we have not found them yet. 
Moreover, they are likely to be located within known concentrations of species with small ranges, in areas like Central America, the Caribbean, the northern Andes, Brazil’s coastal forests, southern Africa, Madagascar, Southeast Asia, New Guinea, Western Australia, and many tropical islands. 
Given that most plants that are currently threatened with extinction – 20% of known species, and probably 30% of all species – fall within this category, efforts to preserve plant biodiversity should emphasize such concentrations of small-range species. 
The fact that endangered plant species tend to be concentrated geographically raises the stakes for conservation efforts in those areas. 
But it could also facilitate success by enabling policymakers to focus on narrow areas instead of vast habitats. 
The nearly 200-member Convention of Biological Diversity – which embodies the global consensus on the need to protect ecological diversity – aims to do just that. 
The CBD’s Strategic Plan for Biodiversity calls for the formal protection of at least 17% of the most ecologically important terrestrial areas, while the Global Strategy for Plant Conservation seeks to protect 60% of plant species. 
Given that some 67% of plant species live entirely within the selected areas, and an additional 14% live partly in these areas, this approach is highly promising. 
Moreover, while some 13% of the world’s land area is currently protected, only 14% of the 17% that contains the most plant species fall within the protected areas. 
In order to improve the CBD’s chances of success, countries with higher concentrations of unique species need more robust protections. 
Given that many of these countries are in the developing world, the international community should support such efforts. 
The situation is complicated by the “Noah’s Ark” effect: while a small total area can house many species, it may not be able to ensure their long-term sustainability. 
In other words, even if the aggregate size of all protected areas is large, the individual areas may not be large enough to support viable populations. 
The ecological questions involved – how much area countries should protect, and where – are not easy to answer; doing so requires ever-deeper knowledge of plant species and their habitats. 
And translating those answers into action demands something that may be even more difficult to secure: strong and sustained political will. 

Stumbling in the Dark 
SAO PAULO – As well-intentioned gestures go, Earth Hour is hard to beat. 
At the stroke of 8:30 p.m. on Saturday, March 27, nearly a billion people in more than 120 countries demonstrated their desire to do something about global warming by switching off their lights for an hour. 
In a show of official solidarity, the lights also went out at many of the planet’s most iconic landmarks, from the Opera House in Sydney to the Great Pyramid at Giza, not to mention Beijing’s Forbidden City, New York’s Empire State Building, London’s Big Ben, Paris’s Eiffel Tower, and the skylines of both Hong Kong and Las Vegas. 
What ever else it may be, Earth Hour is surely one of the most successful publicity stunts ever dreamed up. 
First organized in Sydney, Australia, in 2007 by the local chapter of the World Wildlife Fund, its popularity and the level of participation (both individual and official) that generates has exploded in recent years – to the point that there is barely a corner of the earth that the campaign hasn’t touched. 
As Greg Bourne, CEO of World Wildlife Fund in Australia, put it: “We have everyone from Casablanca to the safari camps of Namibia and Tanzania taking part.” 
But has Earth Hour actually done anything to halt – or even slow – global warming? 
Not so much. 
The event’s popularity is not hard to fathom. 
Who but the most die-hard global-warming denier could resist the notion, as Earth Hour’s American website phrased it this year, that merely “by flipping off your lights on March 27 at 8:30 p.m. local time you will be making the switch to a cleaner, more secure nation”? 
Needless to say, this was not quite the case. 
The main thing that anyone accomplished by turning off the lights at nighttime for an hour was to make it harder to see. 
The environmental impact was negligible. 
Indeed, even if everyone in the world had participated the requisite hour, the result would have been the equivalent of turning off China’s carbon emissions for roughly 45 seconds. 
Of course, this wildly optimistic calculation assumes that nobody used more power afterwards. 
Recent research by two Canadian psychologists found that people who spent money on green products were, immediately afterwards, less likely to be generous and more likely to steal than those who bought non-green stuff. 
Apparently doing something virtuous – like turning off the lights– makes us feel entitled to act badly afterwards. 
The Earth Hour organizers acknowledged the symbolic nature of the exercise. 
Turning off the lights is just a “call to action,” they noted. 
As WWF Director-General James Leape explained, it provides “a global platform for millions of people to voice their concern about the devastating effects of climate change.” 
Added another WWF official, “It’s saying to our politicians, you can’t give up on climate change.” 
All well and good. 
But according to Andy Ridley, Earth Hour actually has a more specific agenda than that. 
In addition to being the guy who first came up with the idea for the event over drinks with friends in a Sydney pub several years ago, Ridley is also the executive director of Earth Hour Global, so he presumably speaks with some authority on the subject. 
“What we’re still looking for in this coming year,” he told the Associated Press last week, “is a global deal that encourages all countries to lower their emissions.” 
Therein lies the big problem with Earth Hour. 
As much as we would like to believe otherwise, the fact is that carbon emissions won’t be lowered by a deal. 
If that were politically possible, it would have been done a long time ago – if not at the 1992 “Earth Summit” in Rio de Janeiro, then in Kyoto 12 years later; and if not in Kyoto, then in Copenhagen last December. 
But it wasn’t. 
Indeed, after nearly two decades of trying, the best climate deal that countries have been able to agree on is one that imposes no real obligations, sets no binding emissions targets, and requires no specific actions by anyone. 
Surely, there is a lesson here. 
Alas, the organizers of Earth Hour prefer to ignore this inconvenient reality. 
But there is no getting around it. 
If we are serious about wanting to solve global warming, we need to take action that actually does good – as opposed to wasting valuable resources on empty agreements and moral posturing that merely make us feel good. 
Switching off our lights and promising to cut carbon emissions may make us feel momentarily virtuous, but that’s all it does. 
A meaningful solution to global warming needs to focus on clean-energy research and development, instead of fixating on empty promises of reductions in carbon emissions. 
For just 0.2% of global GDP, or $100 billion a year, we could bring about the game-changing technological breakthroughs that will be required to make green energy cheap enough to fuel a carbon-free future. 
So let’s stop stumbling around in the dark and do something meaningful for a brighter future. 

The Stupid Economy 
PRINCETON – Most discussions about the march of robotics and artificial intelligence (AI) have understandably concentrated on fears of massive job losses. 
But the implications of these technologies are actually far more terrifying. 
We have been brought to the brink of an alarming evolutionary transformation, not just of human capacities, but of the individual self. 
History provides only a partial guide for the uncertain future we face. 
What we know from the first Industrial Revolution is that new technologies can fundamentally alter humans and other species. 
The key to this process, according to Cambridge University’s Tony Wrigley, the great historian of the era, was the replacement of human- and animal-driven mechanical energy by more productive forms, such as coal and other fossil fuels. 
To be sure, the large-scale devaluation of human and animal muscle power did not happen immediately. 
At first, many auxiliary tasks – including mining the coal, or creating intermediate products in workshops – still required enormous physical exertion. 
But, after around two centuries, physical strength was rarely in demand. 
Gradually, the basic nature of work had changed. 
By the late twentieth century, farmers sat on tractors, and even coal mining had become largely mechanized. 
There were few people in developed economies still earning incomes from the sweat of their brows. 
Human physiognomy also changed, especially when the Industrial Revolution’s full potential was realized. 
Sedentary lifestyles produced visibly different people. 
Waistlines expanded as previously salubrious diets, needed to fuel massive physical exertion, became increasingly unhealthy. 
Some people saw these changes happening, and worried about them. 
A growing minority started to pursue intense physical activity not in fields or factories, but in leisure settings. 
The sweat of one’s brow was no longer associated with productive work, but with consumption – often conspicuous consumption. 
Gyms became new sources of community. 
And as coworkers started to exercise together, enlightened employers came to see such recreation as a valuable source of physical and mental wellbeing. 
The Industrial Revolution was driven by mental activity. 
Another way of thinking about it, then, is as an “industrious revolution,” a term advanced by Jan De Vries of the University of California, Berkeley, Joel Mokyr of Northwestern University and the University of Tel Aviv, and other historians. 
In an industrious revolution, inter-connected groups of innovators compete with one another to devise new solutions to existing problems, resulting in a virtuous circle. 
By putting a premium on mental endeavors and making physical routines obsolete, the transformation over the past three centuries gave people more opportunities to think. 
As humankind’s collective intelligence rose to new heights, the dream of human perfectibility emerged. 
But that, we now know, was an illusion. 
The level of intellectual attainment that resulted from the Industrial Revolution may turn out to have been a plateau. 
The technological revolution now underway is generating a different sort of replacement. 
Many tasks that once required human intelligence – making connections and drawing inferences; recognizing patterns; tracing the implications of complex events – are now better handled by AI applications. 
Whether the job is to scan thousands of pages of legal contracts for inconsistencies, or to make radiological assessments, an algorithm can now do it more reliably and less expensively. 
Soon, this will also be true of driving a vehicle. 
At the same time, modern behavioral economics has shown that human thought can introduce irrational elements into otherwise straightforward processes. 
The search is on to discover and control for characteristics of the human mind that could produce distorting, unproductive, or inefficient results. 
Apparently, the next stage in human perfectibility will require us to give up independent thinking and judgment altogether. 
AI and automation have obvious implications for employment. 
But they will also affect the human mind. 
The jobs of the future, most of them in the services sector, will require a different set of skills, particularly interpersonal skills that robotic applications – even Siri or Alexa – cannot provide. 
The ability to perform complex calculations or sophisticated analyses will be far less important. 
The problem is that many older activities – be it driving in difficult conditions on a mountain road or taking on a complex legal case – are a source of fulfillment for countless people, because they provide opportunities to confront difficult, intrinsically motivated challenges. 
Soon, those activities, like plowing a medieval field, may be lost forever. 
Worse still, ample evidence shows that people may have reason to regret retiring from mentally demanding jobs and embarking on a life of leisure. 
It turns out that not having to think on a regular basis is neither restful nor enjoyable. 
On the contrary, it tends to lead to poor mental and physical health, and a deteriorating quality of life. 
The elimination of countless cognitive tasks has alarming implications for the future. 
Just as the Industrial Revolution made most humans physically weaker, the AI revolution will make us collectively duller. 
In addition to flabby waistlines, we will have flabby minds. 
It’s not the economy, stupid; it’s the stupid economy. 
Already, central banks are urgently exploring new ways to dumb down their statements for an increasingly unsophisticated public. 
Mass stupidity will be driven by technology. 
But, as with the cult of physical fitness that took hold during the Industrial Revolution, a new industry of intelligence training will likely emerge to counter mental deterioration. 
Listening to someone constructing a logically articulated argument will become an exclusive source of aesthetic pleasure and distinction. 
“Difficult” works of literature or visual arts will become an ever more attractive form of conspicuous consumption. 
And yet something about this seems deeply unpleasant. 
It is bad enough to listen to people boast about their physical fitness. 
But braggadocio about superior intellect will be far worse. 
The need to prove oneself as a lasting relic of the old human supremacy will threaten not just the common good, but also our common humanity. 


Electrifying Africa’s Labor Market 
NAIROBI/PARIS – Africa is on the verge of an unemployment crisis portending profound economic, political, and social ramifications. 
But the crisis can be averted, and one of the solutions may be as simple as turning on the lights. 
Every year, some 13 million young people look for work in Africa, but only about three million of them find jobs. 
The continent’s youth population is projected to double by 2050, to 840 million, and yet Africa’s schools and universities are not producing enough graduates with the technical skills to succeed in the workplace of tomorrow. 
Although the African Development Bank (AfDB) hopes to create 25 million new jobs within a decade through its Jobs for Youth in Africa initiative, it is not immediately clear where those opportunities will come from. 
But one industry is poised to fill the jobs gap: the renewable energy industry. 
This industry – and especially small-scale power generation like rooftop solar panels and green mini-grids – has the potential to power African employment growth. 
In fact, we calculate that up to one-fifth of the AfDB’s jobs commitment could be met by economic activity linked to the off-grid solar industry alone – through direct and indirect employment. 
Worldwide, job growth in the renewables industry is booming, while employment in traditional power generation is shrinking (primarily owing to the closure of coal plants). 
African countries should expect a similar trend as they work to achieve universal electricity access. 
To meet this goal, the AfDB estimates that roughly 40% of the continent’s new connections – 75 million households – will need to come from off-grid solutions. 
While investment in decentralized renewables in Africa is increasing, more than 600 million people in Sub-Saharan Africa still lack access to electricity. 
Connecting these customers, most of whom live in rural areas, will require a huge number of skilled workers and entrepreneurs. 
Although off-grid energy demand has the potential to create more than 4.5 million jobs globally, according to the International Renewable Energy Agency, only about 76,000 renewable-energy jobs have been created in all of Africa, less than 1% of the 10.3 million globally. 
If managed and supported properly, Africa’s renewables revolution could create jobs far beyond the energy sector itself. 
Once Africa’s consumers have access to electricity, they will want home appliances and other goods, which will generate demand for new services and create even more opportunities for skilled workers. 
Moreover, electrification can help stimulate growth in small- and medium-sized enterprises, which suffer disproportionately when power is expensive or unreliable. 
With half of all African businesses owning or sharing a generator and citing electricity as a major constraint, decentralized renewables could keep Africa’s SMEs productive and their workers employed. 
Off-grid solutions would also enable the launch of new businesses, especially in agriculture, and shorten their path to profitability. 
Expanded access to renewable energy would benefit African countries in many other ways, too, such as by reducing poverty, improving gender equality, enhancing sanitation, and limiting greenhouse-gas emissions. 
As former United Nations Secretary-General Ban Ki-moon often said, affordable and clean energy “will be essential” to meeting nearly all of the objectives set by the UN Sustainable Development Goals. 
But achieving universal access will require a trained workforce, and at the moment, Africa suffers from a dearth of capable human capital. 
Energy companies like ours – M-KOPA has over 800 full-time employees, for example – are already finding it difficult to hire “job-ready” talent for the renewables sector. 
In nearly every region, African countries have been slow to ensure that the next generation of energy workers is ready; capacity building has been an afterthought. 
This must change, and quickly. 
Africa’s clean-energy future will require many skilled technicians, and governments need to start training them now. 
Public-private partnerships, like Schneider Electric’s Access to Energy program, have trained many electricians globally, but only a fraction have been in Africa. 
Two years ago, Akinwumi A. Adesina, the AfDB’s president, lamented that many African countries were “essentially training our youths for the jobs of yesterday, not the jobs of the future.” 
Now is the time to reverse this pattern. 
With dedicated support from governments, industry, civil society, and multilateral agencies, decentralized renewables can do more than illuminate a continent; they can also put it to work. 

Preventing the Next African Famine 
NEW YORK – After falling for more than a decade, the number of hungry people in the world is rising once again. 
This year was marked by the worst global food crisis since World War II, with South Sudan, Yemen, Somalia, and Nigeria either experiencing famine or teetering on the brink. 
More than 20 million people in those four countries alone remain severely food-insecure, and the United Nations estimates that $1.8 billion in immediate humanitarian aid is needed. 
Political instability and conflict have contributed heavily to this food insecurity, but insufficient food production has also likely heightened tensions and exacerbated hunger. 
In Sub-Saharan Africa, where three of the four countries on the verge of famine are located, crop yields have long lagged behind the rest of the world, owing to poor farm inputs, such as low-quality seeds and fertilizer. 
Investing in agriculture is one of the most effective ways to end hunger and improve political stability. 
There are 50 million smallholder farmers in Sub-Saharan Africa alone, and they support many millions more. 
Countries on the continent that have invested heavily in agricultural development and smallholder farmers have been successful at avoiding famine. 
Consider the example of Ethiopia, which experienced one of the worst famines in history in the mid-1980s. 
An estimated one million people died during that crisis, which was caused by a combination of conflict and drought, and it took many years for the country to recover. 
Today, Ethiopia is peaceful, but drought conditions have returned. 
In 2016, the country suffered its driest growing season in 50 years. 
And yet Ethiopia did not experience famine last year. 
There were hungry people, to be sure, but disaster was avoided. 
Oxfam attributes this to the fact that the government was better prepared to deliver food and water to millions. 
The country has also vastly improved its farming infrastructure, and new irrigation and drinking water systems provide rural areas with easy access to clean, safe water sources. 
For more than a decade, the Ethiopian government has made agricultural development a top priority. 
In 2010, it created the Ethiopian Agricultural Transformation Agency, a public entity dedicated to boosting the productivity of the agriculture sector. 
As the noted British author and Africa researcher Alex de Waal has noted, “Politics creates famine, and politics can stop it.” 
Ethiopia proves his point. 
While domestic and international contributions still flow during relief efforts, it is Ethiopia’s long-term investments that have increased the country’s resilience. 
An increase in strategic agricultural investments, from African donors or international sources, could help other countries in the region reap similar rewards. 
Climate change is making such investments even more urgent, as extreme weather events – both flooding and droughts – are becoming more common throughout Sub-Saharan Africa. 
Even without government support, however, farmers can take modest and cost-effective steps immediately to mitigate climate shocks. 
By using smart farming techniques such as drought-resistant seeds, intercropping, composting, and crop diversification, farmers can blunt the effects of extreme weather at very low costs. 
Trees are one of the most effective tools we have for fighting climate change, and they also make economic sense for small farmers. 
A farmer who invests $2 in seedlings can make a profit of more than $80 in ten years, when some of the full-grown trees can be cut and sold. 
Trees also benefit the environment while they are growing – by absorbing carbon, improving soil health, and preventing erosion. 
Farmers who have an asset base of trees, livestock, or cash generated by selling crop surpluses are better able to withstand weather shocks. 
And, as our organization is currently demonstrating in six African countries, farmers can build their asset bases with training and financial support. 
That is why we believe African governments and bilateral donors should deepen their investments in programs that provide farmers with the skills to produce long-term crops, especially trees, sustainably. 
Inexpensive practices – such as planting crops in rows, weeding correctly, and applying fertilizer in micro-doses – are also proven methods to increase crop production dramatically. 
With the effects of climate change expected to intensify in coming years, Africa’s smallholder farmers must prepare now for a more turbulent future. 
The United States has historically been the world’s largest donor to global food security programs, but the future of this leadership role under President Donald Trump is uncertain. 
While global food security initiatives enjoy bipartisan support in the US Congress, the Trump administration’s proposed foreign aid budget recommends deep funding cuts to these programs. 
As US support waivers, African and European governments, foundations, institutional donors, and practitioners must be ready to step in to help African farmers build long-term resiliency. 
Investing in agriculture is the most efficient way to improve food security in Africa, while ensuring that people on the front lines of the fight against climate change can maintain thriving economies and sustainable, healthy environments. 
Only through careful planning, and by following the lead of countries like Ethiopia, can Sub-Saharan Africa address the underlying causes of hunger. 
Although food security is a complex problem to solve, preventing future famines doesn’t have to be. 


Financial Equality for Africa’s Women Farmers 
NAIROBI – Around the world, social movements like #MeToo and #TimesUp are inspiring important conversations about the inequitable practices women have long faced in every aspect of their lives. 
In some cases, these discussions have led to measurable changes in how women are treated on the job, at home, and elsewhere in society. 
Unfortunately, most of the focus to date has been on women in the West, or those living in urban areas. 
Rural women, and particularly poor female farmers in Sub-Saharan Africa, have not yet benefited from the recent focus on gender equality. 
But if Africa’s gender gap is ever to be closed, the unique obstacles that African women confront must become part of the global dialogue. 
Sub-Saharan Africa is among the world’s most gender-unequal regions. 
According to the United Nations Development Programme (UNDP), “perceptions, attitudes, and historic gender roles” limit women’s access to health care and education, and lead to disproportionate levels of family responsibility, job segregation, and sexual violence. 
But perhaps the biggest obstacle to gender equality in Sub-Saharan Africa is money; simply put, women have less of it. 
According to the World Bank, 37% of women in the region have a bank account, compared to 48% of men. 
And, while the percentages are low for both sexes, what is troubling is that the gap has widened over the past several years, even as total financing available to the world’s poor has increased steadily. 
Today, women dominate African agriculture, the continent’s most important industry. 
But this has not translated into greater control of finances. 
One measure of this deficiency is rates of borrowing; in East Africa, where my organization works, women borrow 13% less money for farm-related activities than men do. 
Illiteracy, limited land ownership, and restrictions on agency and mobility all conspire to reduce rural women’s access to farm financing. 
These barriers have had a dramatic impact on social and economic progress. 
For starters, the lack of capital makes it difficult for women to buy quality seeds and fertilizer, or even to access farmland, which in turn reduces agricultural productivity. 
Crop yields in the region lag far behind global averages, in part because women are unable to invest enough in their operations. 
Gender inequality is also costly on a macro level. 
The UNDP estimates that failure to integrate women into national economies costs the countries of Sub-Saharan Africa a combined $95 billion in lost productivity every year. 
When women living in poverty are unable to work or contribute socially, growth stagnates. 
On the other hand, when women farmers have access to financing, the benefits go far beyond the fields. 
Financial empowerment has been proven to increase female participation in community decision-making. 
Moreover, women’s financial inclusion helps combat social marginalization and improves family wellbeing; when mothers have a degree of control over household finances, their children are less likely to die from malnutrition and more likely to thrive. 
Given these benefits, the question is not whether women in rural Africa need expanded access to farm-related capital, but rather how to provide it. 
One solution is to craft programs that consider disparities in education and mobility when awarding loans. 
Accounting for social discrimination is essential if girls and women are to benefit fully from available financing. 
Another option is to build on successful mediation efforts that help women discuss financial inclusion with their husbands. 
But one of the most important changes would be committed leadership by financial institutions. 
If banks and lending services offered products that met the needs of women, more women would have access to financial resources. 
For example, banks could devise specific loan programs for crops that are traditionally grown by female farmers – such as groundnuts or sunflowers. 
Financial institutions could also encourage female leadership in farmers’ cooperatives, and support markets where women sell their harvests. 
At current rates of financial inclusion, it will take the world more than 200 years to achieve gender parity. 
That is unacceptable. 
Progress toward women’s empowerment does not have to be that slow. 
If governments, international actors, and the financial industry make a concerted effort to devise and sustain more gender-focused policies, it won’t be. 

Sub-Saharan Africa’s Leadership to Nowhere 
Why are the countries of sub-Saharan Africa the poorest in the world? 
One reason is the set of ill-designed development strategies that the IMF and the World Bank have implemented in the region for nearly half a century. 
But the centuries-old culture of leadership that is ingrained in many African societies has played an equally disastrous role. 
Indeed, the overwhelming majority of African rulers regard their countries as their personal possessions, to be used as they see fit. 
This conception of power led in past centuries to kings handing over their subjects to slave traders. 
Nowadays, leaders squander their countries’ resources and revenues, leaving the majority of their populations mired in poverty, disease, hunger, war, and hopelessness. 
The current oil rush in West Africa is a perfect illustration of the problem. 
Instead of being an asset, oil has become a liability that generates poverty, corruption, ethnic conflict, and ecological disaster. 
It need not be this way. 
Venezuela’s President Hugo Chávez, for example, is using his country’s oil revenues to provide free literacy training and health care, to help alleviate the debts of his Argentinean and Ecuadorian neighbors, to forge energy alliances in Latin America and the Caribbean, and to propose a strategic rapprochement with the Andean countries. 
He has revived pan-Americanism, and Venezuela has become a member of Mercosur, the regional grouping whose other members include Argentina, Brazil, Chile, Uruguay, and Paraguay. 
But, if a dysfunctional culture of leadership has put a similar agenda of unity and social progress out of reach for sub-Saharan Africa, so have the IMF and the World Bank. 
When sub-Saharan African countries gained independence in the late 1950’s and early 1960’s, their leaders inherited bankrupt states with no access to international capital markets. 
As a result, newly established African leaders had no alternative but to sub-contract economic development to the IMF and World Bank and the Western countries that control them. 
Economic liberalization, deregulation of capital movements, suppression of subsidies, privatization of valuable public assets (liquidation would be a more appropriate word), fiscal austerity, high interest rates, and repressed demand became the order of the day. 
Structural adjustment programs demanded by the IMF and the World Bank ended up transforming these countries into dumping grounds for over-subsidized Western agricultural surpluses and over-priced and obsolete manufactured goods. 
It was obvious from the outset that the IMF/World Bank strategy was doomed to fail. 
Their loans were designed to perpetuate Africa’s role as a supplier of raw materials, while entangling the continent in an inextricable web of debts and dependency on the “aid industry.” 
The IMF can cut off not only its own credit, but also most loans from the larger World Bank, other multilateral lenders, rich country governments, and even much of the private sector. 
But consider Argentina, which suffered a deep four-year depression, beginning in 1998. Rejecting IMF demands for higher interest rates, utility price increases, budget tightening, and maintenance of the peso’s unsustainable link to the US dollar, Nestor Kirchner’s government was able to chart its own economic course. 
Despite repeated threats from the IMF, Argentina took a hard line with foreign creditors, who were owed $100 billion. 
In September 2003, Argentina did the unthinkable: a temporary default to the IMF itself. 
The Fund eventually backed down, leading to a rapid and robust economic recovery. 
Similarly, sub-Saharan Africa’s development cannot not be delegated to others. 
Fortunately, there is hope that the region can resist the West’s destructive neo-liberal agenda. 
According to the US Energy Department, America’s annual oil imports from Africa will soon reach 770 millions barrels, bringing an estimated $200 billion to the continent over the next decade. 
If oil prices remain high – likely in the foreseeable future, given strong demand from the US, Japan, China, and India – oil revenues could reach $400-600 billion. 
To reap the benefits, sub-Saharan Africa must form an oil-based confederation under the tutelage of thoroughly reformed regional groupings aimed at encouraging economic integration and political union. 
This would provide the region with the muscle to pursue a development strategy similar to that adopted in the past by the US, the European Union’s member states, and the East Asian countries. 
All of these countries imposed capital controls and regulated inward foreign investment in the early stages of their economic development. 
Sub-Saharan Africa is no different. 
The focus must be put on diversifying the economy and enhancing the productive capacity of domestic suppliers. 
This will mean designing foreign partnerships with a view to ensuring that local businesses benefit from technology transfer and training, thereby generating higher value-added in domestic production and exports. 
It also implies subsidizing and protecting domestic production, just as all developed nations once did – and still do whenever it suits them. 
The first step towards implementing such policies, however, must be to re-invent and reinvigorate a pan-African identity. 
Europe, Asia, and, increasingly, Latin America, are showing that regional integration provides the healthiest path to development. 
In Africa, this will not be possible until a new breed of genuinely public-spirited leaders emerges. 
Reducing sub-Saharan Africa’s dependence on the IMF and the World Bank might bring that day closer. 


From Poverty to Empowerment 
MUMBAI – As India gears up for its general election next month, it has some cause to celebrate: extreme poverty is finally in retreat. 
In 2012 – two decades after the government launched a series of economic reforms aimed at opening up the economy – the official poverty rate had reached 22%, less than half the rate in 1994. 
But it is time for India to raise its aspirations. 
Escaping abject destitution, though an important milestone, is not the same as achieving a decent standard of living and sense of economic security. 
To that end, there is still much to be done. 
Indeed, the extent of the task is reflected in a new McKinsey Global Institute report, “From Poverty to Empowerment,” which uses an innovative analytical framework, the “empowerment line,” to estimate the cost to the average citizen of fulfilling eight basic needs: food, energy, housing, potable water, sanitation, health care, education, and social security. 
According to this metric, 56% of Indians in 2012 “lacked the means to meet essential needs.” 
Remarkably, this number is more than 2.5 times larger than the number of people still living below the poverty line in India. 
Even more striking is that the “empowerment gap” – that is, the additional consumption required to bring these 680 million people to the empowerment line – is seven times larger than the cost of eliminating extreme poverty. 
Furthermore, while the empowerment line is a measure of individual consumption, a household’s ability or willingness to spend is not sufficient to guarantee a decent life. 
People also need access to community-level infrastructure like health clinics, schools, power grids, and sanitation systems. 
But the average Indian household lacks access to 46% of basic services, with the severity of the gaps varying widely across districts. 
What can India’s government do to provide its citizens with the dignity, comfort, and security that they deserve? 
Given that roughly half of current public spending on social programs fails to deliver better outcomes for the poor, simply directing more funds through existing channels is unlikely to have much of an impact. 
Instead, policymakers should focus on supporting employment and productivity gains – historically the most potent weapons against poverty. 
Of course, this will not be easy. 
India’s economy has slowed in recent years. 
If economic growth remains on its current trajectory, with no major reforms, more than one-third of the population will remain below the empowerment line in 2022, with 12% still trapped in extreme poverty. 
To avoid such an outcome, India’s government should pursue a set of bold reforms that boost growth by encouraging businesses to invest, scale up, and hire. 
The reform agenda should be based on four key priorities: 
· The addition of 115 million non-agricultural jobs over the next decade to absorb the growing pool of workers and accelerate the shift toward more modern industries. 
· A doubling of agricultural productivity growth, in order to raise India’s farm yields to the levels achieved in other emerging Asian countries. 
· A doubling of real (inflation-adjusted) public spending on social services over ten years, with much of the increase allocated to fill gaps in health care, the provision of clean drinking water, and sanitation. 
· An overhaul of social-service delivery. 
With the right set of measures, more than half a billion people could cross the threshold of consumption required for an economically empowered life, and Indians could gain access to more than 80% of the basic services they need by 2022. 
Jobs and productivity growth could contribute 75% of the potential gains, while increased public spending alone, without measures to improve its effectiveness, would contribute less than 10%. 
To realize this potential, policymakers should eliminate arcane regulations that handcuff businesses; accelerate infrastructure projects; make the labor market more flexible; remove market distortions; and expand vocational training for the poor and uneducated. 
At the same time, they should work to place the efficiency of all public spending on par with that in India’s best-performing states. 
All of this demands a strong commitment to better governance and a relentless focus on outcomes. 
Common-sense strategies – such as improving coordination among the plethora of ministries and departments that comprise the bureaucracy, and establishing accountable and empowered agencies to deliver results in high-priority areas – could go a long way toward meeting this demand. 
Moreover, technology could be used to streamline government services and render them more transparent. 
Finally, closer engagement with private- and social-sector actors and local communities could help to increase efficiency, while reducing the burden on the public sector. 
India’s young and dynamic population is demanding a better quality of life. 
With strong and sustained political will and results-oriented policies, India’s government can deliver it. 

Fighting Climate Change Region by Region 
LONDON – A new global agreement to address climate change is taking shape, with the United States joining the European Union in formally submitting its plan to cut greenhouse-gas (GHG) emissions to the United Nations Framework Convention on Climate Change (UNFCCC). 
The US has sent a strong signal by being one of the first to offer this commitment to concrete climate action. 
In the days ahead, many other countries, including China and India, are expected to add their plans to the mix. 
Together, these plans (known as “intended nationally determined contributions,” or “INDCs”) will represent a collective global effort to invest in a prosperous, low-carbon future. 
And today, we, as co-chairs of The Climate Group’s States & Regions Alliance, call on national government leaders to join that effort with ambitious climate plans. 
We make this call to our national leaders because we believe it is right, and because we know it is possible. 
We believe it is right because, as the leaders of large state and regional governments, responsible for implementing our own climate plans, we have learned that addressing climate change is both a duty and an opportunity. 
It is a duty, because climate change now affects our everyday lives. 
And it is an opportunity, because promoting sustainable development creates new clean-technology jobs and more diversified, greener, and resilient economies. 
We know it is possible because we are doing it. 
Each of our regions has reduced GHG emissions to 1990 levels or below; and, since we began, our economies have more than doubled in size. 
This has been achieved partly through the innovative policies adopted by our respective governments. 
A carbon market covering 85% of GHG emissions is at the center of the Québec government’s strategy for fighting climate change. 
On January 1, 2014, Québec linked its carbon market with California’s, creating the largest regional carbon market in North America. 
All the revenues generated by the sale of Québec emission units go into the province’s Green Fund, and are reinvested in initiatives aimed at further reducing GHG emissions and helping Québec’s residents adapt to the effects of climate change. 
Québec will invest more than $3.3 billion toward this goal by 2020, contributing to the growth of its economy. 
The Basque Country established a program called Local Agenda 21, designed to support the creation of local sustainability plans across the region. 
As a result of the program, almost all Basque municipalities have adopted such plans, consisting of more than 25,000 projects in areas such as mobility, waste management, and economic development. 
These local plans are now driving sustainable development in the region, with knowledge sharing among municipalities laying the foundation for further progress. 
South Australia, meanwhile, has developed the most supportive regulatory framework for renewable energy investment in Australia, enabling an increase in renewables’ share in power generation from virtually zero in 2003 to almost 40% today. 
This shift is putting downward pressure on wholesale electricity prices and offsetting the cost of South Australia’s Renewable Energy Target in the short term, all to the benefit of consumers. 
This also positions South Australia as a leader in new energy industries. 
The state now accounts for more than 40% of the country’s operating capacity for wind-generated power, and has one of the world’s highest penetration rates for solar (one in four households has a photovoltaic system). 
Now we are looking to the future. 
We have taken the lead, working to cut emissions by 20% by 2020 in the Basque Country and Québec, and by 60% by 2050 in South Australia – but we need partners at the national level. 
In our regions, businesses need consistent, long-term policy signals in order to make further investments toward a low-carbon economy. 
Working together, subnational and national governments can achieve much more than when working apart. 
So, as we prepare for the UN Climate Change Conference in Paris in December, we encourage our national leaders not to waver. 
On the contrary, they should join us at the forefront of the fight against climate change by putting forward ambitious national plans that leverage the leadership of subnational governments to achieve the needed GHG emissions reductions. 

Subsidies that Save 
Was France’s recent wave of protests against an amendment that would have increased employers’ freedom to fire young workers a blessing in disguise? 
To defuse the protests, President Jacques Chirac was forced to withdraw the provision, and instead has proposed hiring subsidies as a way to reduce youth joblessness. 
A related proposal for targeted wage subsidies is being floated in Germany. 
Advocates of greater labor-market flexibility insist that paying employers to hire young people is the wrong approach. 
Allow employers to fire workers more easily, they argue, and employers will hire them more readily. 
The limitation of this approach, however, is that a free market for labor will neither eradicate unemployment nor transform marginal, low-end workers into high-productivity, high-wage employees. 
If the proposed subsidies in France and Germany have a defect, it is not that they are unnecessary, but that they do not go far enough. 
In the advanced economies of the West, many people in all age groups are effectively left out of formal employment. 
In the United States, the pay of less qualified workers is so meager that, if their situation is not dire, they find it emotionally difficult to keep a job for long, or they become too demoralized or distracted to be adequate employees, or minimum-wage laws make them unaffordable to law-abiding employers. 
In Europe, they are excluded from employment by labor agreements and in some cases by minimum-wage laws. 
In both cases, these workers lose the opportunity for engagement and personal development that most legitimate jobs provide. 
This deprivation in turn generates high social costs, including crime, violence, and dependency. 
The latter pathologies then become a weapon in the populist attack on free enterprise, which Western countries require for economic dynamism – and thus prosperity. 
So those who are included and benefit by free enterprise, yet are burdened by the social costs of exclusion, should all be willing to pay something to remedy these conditions. 
The best remedy is a subsidy for low-wage employment, paid to employers for every full-time low-wage worker they hire and calibrated to the employee’s wage cost to the firm. 
The higher the wage cost, the lower the subsidy, until it has tapered off to zero. 
With such wage subsidies, competitive forces would cause employers to hire more workers, and the resulting fall in unemployment would cause most of the subsidy to be paid out as direct or indirect labor compensation. 
People could benefit from the subsidy only by engaging in productive work – that is, a job that employers deem worth paying something for. 
Ideally, the subsidies will go for employing workers of all ages. 
However, it is understandable that plans under current discussion envision focusing first on the youngest and oldest workers. 
Some people still think of wage subsidies as a welfare hand-out. 
But these subsidies are very different from social assistance and social insurance programs. 
Although such programs have been substantial in Europe and the US, the working poor remain as marginalized as ever. 
Indeed, social spending has worsened the problem, because it reduces work incentives and thus creates a culture of dependency and alienation from the commercial economy, undermining labor force participation, employability, and employee loyalty. 
What is needed is higher employment and pay through higher demand for the least productive workers. 
Some would count on the free market to solve the problem with time. 
But market forces alone are unlikely to solve the unprecedented levels of labor-market exclusion that developed from the mid-1970’s to the early 1990’s. 
The prevailing belief in a reliable tendency to return to some normal degree of inclusion has little ground to stand on. 
True, most recessions are reversed, just as most booms end. 
Nevertheless, what is “normal” is itself shifting all the time. 
Many argue that subsidies of any kind should never be countenanced, in part because they are extremely difficult, if not impossible, to abolish, even if they are no longer needed. 
According to this view, the total payment to a factor of production should not exceed its marginal productivity, so desirable outcomes should be promoted through tax incentives. 
But, as early twentieth-century theorists pointed out, collaboration and exchange within a nation’s diverse labor force increase everyone’s productivity. 
There is a mutual gain from economic cooperation in addition to what each type of talent could produce independently – an insight later built on by the philosopher John Rawls. 
A society can let the free market distribute this gain, or it can intervene to direct it to the least advantaged, so that some get more than their marginal product, others less. 
Since the least skilled workers face morale problems that lower their wages and erode their employability, it makes sense to deliver the mutual gain that is redistributed to them through subsidies that encourage greater self-support and employment. 
And, unlike tax incentives, wage subsidies target only employment of low-wage workers. 
Both Europe and the US must do more to promote low-wage workers’ inclusion. 
A good economy not only sustains growing output and national income; it also ensures its participants’ capacity for self-sufficiency and ability to realize their potential. 
A substantial low-wage employment subsidy is a fair and efficient way to achieve this important goal. 

Success in Afghanistan Needs China and Russia 
NEW YORK – Preoccupation with Afghanistan’s disputed presidential election is understandable. 
Ending the country’s violence will require a government with both the legitimacy and capacity to tackle the underlying sources of the Taliban insurgency. 
But achieving success in Afghanistan – defined as achieving a sustainable democratic regime able to contain political violence, prevent the reconstruction of a terrorist base with global reach, and dampen a narcotics-funded insurgency that threatens neighboring countries – requires greater policy harmonization among the world powers that have a stake in the outcome. 
Much recent attention has focused on how NATO, Afghan, and Pakistani security forces can collaborate to defeat the insurgency and prevent the country from becoming a terrorist haven again. 
But the past few years have underscored NATO’s inability to achieve sustained political, economic, and security improvements in Afghanistan without more effective international collaboration, particularly with China and Russia. 
For several years, representatives of the Shanghai Cooperation Organization (SCO), whose dominant members are China and Russia, have identified narcotics trafficking from Afghanistan as a major regional insecurity. 
NATO should use these concerns to explore potential collaboration on Afghan security issues. 
Securing additional assistance from China and Russia – to supplement the support already provided by the SCO’s Central Asian members as well as SCO observers Pakistan and India – is imperative. 
Afghanistan is an area of vital interest to the SCO. 
Its members are eager to assist the Afghan government to counter regional narcotics trafficking and terrorism. 
President Hamid Karzai has been a regular guest at SCO summits since 2004, and has called on the SCO to make combating narcotics trafficking a priority. 
The members have established an SCO-Afghan Working Group to provide a coordinating mechanism for the large number of SCO initiatives that concern Afghanistan. 
The convening of a special conference under SCO auspices in March 2009 further confirmed the unique status Afghanistan has obtained. 
The SCO and Afghan governments adopted a joint statement that expressed support for the efforts of the NATO-led International Security Assistance Force (ISAF) to counter regional narcotics trafficking. 
SCO members showed no interest in contributing troops to the ISAF, but the declaration did encourage “other countries…to participate in the collective efforts” to combat regional terrorism and to “consider taking part in transiting non-military cargoes needed by ISAF.” 
Several SCO members are already assisting NATO countries to deliver supplies into Afghanistan, while Russia is allowing the United States to ferry military items across its border into Central Asia and onward to Afghanistan. 
This collaboration should be expanded, because China and Russia, perhaps more than any other countries, share common interests with the West in Afghanistan. 
A major drug route passes from Afghanistan through Central Asia and into Russia and Europe. 
The lax regimes on Russia’s borders with the former Soviet republics of Central Asia facilitate the smuggling of narcotics and other contraband. 
The Taliban, and especially al-Qaeda, have also used their positions in Afghanistan to support other Eurasian terrorist movements, especially the Islamic Movement of Uzbekistan and its various offshoots. 
Although China is not situated along the “Northern Route” through which Afghan narcotics traditionally enter Central Asia and Europe, new trafficking networks have developed since 2005 that transport illicit drugs from Afghanistan through Pakistan and Central Asia into China. 
In addition, Chinese officials remain concerned about the Taliban’s ties with Islamic extremist groups advocating independence for China’s restive Xinjiang region. 
Moreover, China has become a major economic stakeholder in Afghanistan. 
According to Chinese government figures, as of last year, 33 projects in Afghanistan involved Chinese companies. 
In May 2008, China obtained a major economic stake in Afghanistan when Chinese firms won a $3.5 billion contract to develop Afghanistan’s huge Aynak copper field. 
The contract also involves the construction of a power plant and a railroad connecting the mines to China through Pakistan. 
It represents the largest foreign direct investment project in Afghanistan’s history and creates hundreds of jobs. 
Yet Chinese entrepreneurs are reluctant to invest in Afghanistan due to the widespread violence there. 
Insurgent attacks have killed 11 Chinese workers since 2004. 
Chinese investors would presumably eagerly acquire additional natural resources in Afghanistan if the security situation improved. 
For example, northern Afghanistan has unexplored reserves of oil and natural gas that could help meet China’s energy needs. 
Since SCO members have stated that they are not prepared to provide combat troops to the NATO-led ISAF, closer collaboration should first concentrate on revitalizing the Afghan economy and providing alternative livelihoods to those involved in narcotics. 
Afghanistan’s long-term economic viability depends on the development of improved transportation, communication, and other networks to better integrate the country into the regional economy. 
China and Russia could provide economic assistance and investment to Afghanistan, creating more projects that provide Afghanistan with badly needed jobs and revenue. 
In turn, NATO and Afghan forces could assign troops to protect these projects from further attacks, ideally with some kind of Chinese and Russian financial assistance to blunt objections that Western soldiers are dying to enrich foreign companies. 
China’s close ties to Pakistan could also prove useful in assisting European and American efforts to keep the Pakistani military and intelligence services allied against the Taliban. 
Meanwhile, all these international actors could help fund and train the Afghan army and national police. 
In the end, Afghans themselves will need to sustain the economic and security progress that foreign allies can only help to jumpstart. 

Sudan between Peril and Hope 
ALGIERS – The future of Sudan hangs in the balance. 
National elections are due in April. 
A referendum on the future status of the south of the country is supposed to follow in 2011. 
Both were key ingredients of the 2005 Comprehensive Peace Agreement, which ended 20 years of civil war between north and south. 
Both polls hold real promise. 
But they also are in real doubt. 
Sudan’s political leaders are backtracking on the commitments under the peace agreement. 
Cooperation and consensus are hard to find. 
The terrible tragedy of the country’s western Darfur region continues unabated. It was the support of the international community that helped bring Sudanese parties together in 2005. 
Many key countries in Africa and the West guaranteed the agreement. 
Sudan urgently needs the same efforts now. 
With the right international support, Sudan could move decisively towards peace and democracy in the coming months. 
If the international community fails the challenge, conflicts and tensions that have already cost hundreds of thousands of lives will continue and worsen. 
We dare not let this happen. 
Ever since Nelson Mandela brought together a group of former global leaders to form The Elders, we, its members, have focused on Sudan’s plight. 
We chose the country for our first visit as a group, and over the past two years have closely monitored the humanitarian catastrophe in Darfur and other parts of the country. 
During our 2007 visit, we met political and civil-society leaders from across the country, as well as representatives from United Nations agencies, the African Union, and diplomats. 
But it was our meetings with the ordinary people of Sudan that left the deepest impression. 
We heard personal stories of unimaginable heartbreak, pain, and despair. 
Violence, displacement, human-rights abuses, and poverty had clearly taken a huge toll. 
Sudan has been ravaged for decades by bitter conflicts rooted in abject poverty, struggles over resources, and ethnic and religious tensions. 
But, despite widespread depravity and injustice, we also found a remarkable resilience and optimism. 
Just like people all around the world, the Sudanese are determined to build a better life for their children and grandchildren. 
They long for peace, stability, and a say in shaping their country’s future. 
They want educational and economic opportunities to lift themselves and their families out of poverty. 
So far, these hopes have been dashed. 
This is not just a tragedy for Sudan’s long-suffering people, but is also having a damaging impact across the region and the wider world. 
After all, Sudan is not a small, insignificant country; it is the tenth largest – the biggest in Africa and in the Arab world. 
It occupies a pivotal position on our continent, bordering Egypt to the north and Kenya to the south, as well as seven other countries. 
Fighting has displaced two million of Sudan’s 40 million people since 2003, with large numbers forced to take refuge in neighboring countries. 
And refugee flows are only way Sudan’s instability has spilled across borders. 
We should need no reminders of the threat that failed states pose to international security. 
While Sudan’s people may be among the poorest in the world, their country is rich in natural wealth, including oil and precious metals. 
Properly developed in a stable and secure country with accountable leadership and good governance, these resources could be used to improve standards of living and tackle Sudan’s many challenges. 
But there is little hope of this unless the people and leaders of Northern and Southern Sudan come together and fully implement the Comprehensive Peace Agreement. 
Indeed, unless the proper groundwork is laid for the upcoming elections and the referendum, Sudan faces even greater peril. 
As a first step, it is crucial to ensure that the elections are free, open, and inclusive. 
All people and regions of the country must participate, including the internally displaced and citizens in Darfur’s rebel-controlled areas. 
Moreover, full and unfettered access by international election observers to monitor next year’s elections and the referendum in 2011 is essential. 
Only then will the Sudanese population have confidence in the results, thereby providing a foundation on which to build genuine democracy and reform. 
Otherwise, there is a real danger that the elections will heighten, not reduce, tensions and violence. 
These polls, though vitally important, are not the only challenges that Sudan and its people face. 
The country’s complex and inter-linked problems cannot be tackled in a piecemeal fashion. 
Nor can individual countries and regional organizations, pursuing different agendas, help Sudan overcome its problems. 
Their efforts may be well intentioned, but, without better coordination, they will remain ineffective. 
We urgently need the international community to put in place a clear, coherent, and comprehensive strategy aimed at the elections, the referendum, and beyond. 
In particular, there must be far greater regional and international support for efforts to prepare the ground for a mediated agreement in Darfur and to resolve outstanding disputes between the leaders of north and south on preparations for the elections, referendum, and other key aspects of the peace agreement. 
More generally, the international community – and African nations in particular – must put the needs of Sudan’s people before the interests of its leaders. 
The door to a better future for Sudan remains open. 
But success depends on keeping to the timetable for progress set out in the Comprehensive Peace Agreement. 
Without swift and bold action from the international community – particularly from those who guarantee the peace agreement – to ensure that promises are kept, this opportunity will be lost. 

The Federal Reserve in a Time for Doves 
CAMBRIDGE – The battle is on to replace current US Federal Reserve Chairman Ben Bernanke. 
One might expect the Fed chairmanship – arguably the second most powerful official position in the United States, and certainly the world’s most powerful financial position – to be determined by a conclave of central bankers. 
In fact, the choice is largely at the discretion of the US president. 
So let us consider two of the leading candidates, Lawrence Summers, a former US treasury secretary, and current Fed Vice Chair Janet Yellen. 
Both Summers and Yellen are brilliant scholars with extensive experience in public service. 
Whereas the mainstream press seems intent on exploring their candidacies as a contest of contrasting personalities, the fact is that both candidates are extremely well qualified. 
Moreover, both have a reputation for believing that the Fed should not place excessive weight on price stability relative to unemployment. 
Normally, this dovish bias would be a handicap; nowadays, it is an advantage. 
The importance of technical competence in monetary policy has been proved repeatedly by central banks around the world. 
According to research published in 2003 by the economists Christina Romer and David Romer, the quality of monetary policy depends critically on whether central bankers have a clear and nuanced understanding of policy making and inflation. 
The 1920’s, 1930’s, and 1970’s are replete with examples of central bankers who did not understand the basics, and whose economies paid the price. 
What this means is not just competence in setting interest rates, but also competence in regulatory policy. 
Some are criticizing Summers’s ardent pursuit of financial deregulation during the 1990’s, when he headed the US Treasury under President Bill Clinton. 
But these critics overlook his role in helping to fight that decade’s sovereign-debt crises, and his insistence that the US begin issuing inflation-indexed bonds. 
In a complex and ever-changing policy setting, it is almost impossible to get every call right, and the important thing is to learn from one’s mistakes. 
Winston Churchill famously regretted overseeing the United Kingdom’s catastrophic return to the gold standard in 1925, when he was Chancellor of the Exchequer. 
His performance, needless to say, improved in later years. 
As for Yellen, it is true that she was President of the San Francisco Federal Reserve during the last years of the massive US housing bubble – which was particularly acute in her district. 
But Yellen’s speeches on financial risks showed more foresight than those of most of her peers. 
Typically, one looks to the head of the central bank to serve as a bulwark against political pressure to push down interest rates and raise inflation. 
My own research in 1985 on inflation and central-bank independence showed that, in normal times, one generally wants a central banker who places greater emphasis on price stability relative to unemployment than an ordinary informed citizen might do. 
Installing a “conservative” central banker helps to keep inflation expectations in check, thereby holding down long-term interest rates and mitigating upward pressure on wages and prices. 
For the past 25 years, the mantra of “inflation targeting” (introduced in my 1985 paper) has served as a mechanism for containing inflation expectations by reassuring the public of the central bank’s intentions. 
But excessive emphasis on low inflation targets can be counterproductive in the aftermath of the worst financial crisis in 75 years. 
Rather than worrying about inflation, central bankers should focus on reflating the economy. 
The real problem is that they have done such a good job convincing the public that inflation is the number-one evil that it is difficult for them to persuade anyone that they are now serious about reflation. 
That is why appointing a “dove” would not be a bad thing at all. 
Yellen has already developed a reputation as a dove within the Fed, with speeches consistently showing strong concern about today’s high unemployment. 
And, though many on the left regard Summers as suspiciously conservative, that is hardly the case when it comes to inflation. 
His 1991 paper on monetary policy is widely cited as among the first to make the case for avoiding very low inflation targets, in part to give the central bank more room to lower interest rates. 
Back then, Summers clearly viewed himself as a monetary-policy dove: “I would support having someone in charge of monetary policy who is more inflation-averse than I.” 
But now Summers’s dovishness is not a problem. 
In the face of downward nominal-wage rigidity, higher inflation would facilitate sectoral adjustment and achieve a small but useful impact on reducing debt burdens. 
If normal times call for a conservative central banker who helps to anchor inflation expectations, now is the rare time when we need a more unorthodox central banker who will fight deflation expectations. 
A central-bank version of the Vatican’s papal conclave would have a hard time deciding whether to send up the fumata bianca for Yellen or for Summers – or perhaps for someone else (another former Fed vice chair, Donald Kohn, now appears to be in the mix) with similar inclinations. 

The Problem With Secular Stagnation 
DELHI – In a recent exchange between former US Federal Reserve Chairman Ben Bernanke and former US Treasury Secretary Larry Summers on the plausibility of secular stagnation, one point of agreement was the need for a global perspective. 
But from that perspective, the hypothesis of secular stagnation in the period leading up to the 2008 global financial crisis is at odds with a central fact: global growth averaged more than 4% – the highest rate on record. 
The same problem haunts Bernanke’s hypothesis that slow growth reflected a “global savings glut.” 
From a Keynesian perspective, an increase in savings cannot explain the surge in activity that the world witnessed in the early 2000s. 
Supporters of the secular-stagnation hypothesis, it seems, have identified the wrong problem. 
From a truly secular and global perspective, the difficulty lies in explaining the pre-crisis boom. 
More precisely, it lies in explaining the conjunction of three major global developments: a surge in growth (not stagnation), a decline in inflation, and a reduction in real (inflation-adjusted) interest rates. 
Any persuasive explanation of these three developments must de-emphasize a pure aggregate-demand framework and focus on the rise of emerging markets, especially China. 
Essentially, the world witnessed a large positive productivity shock emanating from the emerging markets, which accelerated world growth while reinforcing disinflationary pressures that had already been set in motion by the so-called Great Moderation in business-cycle volatility. 
This key development helps to reconcile two of the three major global developments: faster growth and lower inflation. 
The real puzzle, then, is to square rising global productivity growth with declining real interest rates. 
Bernanke correctly emphasized that long-term real interest rates are determined by real growth. 
So the positive productivity shock should have raised the return to capital and, hence, equilibrium real interest rates. 
Moreover, this tendency should have been accentuated by the fact that the productivity shock reflected a decline in the global capital-to-labor ratio implied by the integration of Chinese and Indian workers into the global economy. 
But this did not happen: instead, global real interest rates declined. 
Central to understanding this puzzle are two distinctive features of the emerging-market productivity shock: it was resource-intensive and mercantilist in origin and consequence. 
Both features increased global savings. 
For starters, because relatively poor but large countries – India and especially China – were the engines of global growth, and were resource-hungry, world oil prices soared. 
This redistributed global income toward countries with a higher propensity to save: the oil-exporting countries. 
Even more important were mercantilist policies. 
China and other emerging-market countries pursued an economic strategy that defied the standard tenets of growth and development theory. 
Mercantilist growth was based on – and to some extent required – pushing capital out rather than attracting it. 
By limiting foreign inflows and keeping domestic interest rates low, China was able to maintain a relatively weaker currency, which served to sustain its export-led growth model. 
This led to massive current-account surpluses (more than 10% of GDP at one point), which sent capital flowing to the rest of the world. 
Recognizing the significance of this strategy exposes a common fallacy whereby the global savings glut is attributed to emerging-market countries’ desire to insure themselves against financial turmoil by acquiring dollar reserves. 
That may have been true in the immediate aftermath of the Asian financial crisis of the late 1990s, but it was quickly overtaken by the growth imperative. 
In other words, the self-insurance motive might explain China’s first trillion dollars of reserve holdings, but it has nothing to do with the subsequent three trillion. 
Further contributing to the savings glut was growth itself. 
As incomes rose, already-prudent Asians became even more prudent, and profitable companies became even more profitable. 
This endogenous response to rapid productivity growth was a key factor contributing to the savings glut. 
Old development verities that savings drive growth had to be re-assessed, because, to some extent, emerging-market growth drove savings. 
Here lies the explanation of the interest-rate puzzle. 
As savings (and hence the global supply of loanable funds) increased, real rates came under downward pressure. 
Low rates, in turn, provided the lubrication needed to finance the asset bubble in the US and elsewhere. 
According to Summers, high savings caused weak growth; under the alternative explanation offered here, it was primarily rapid growth – and its distinctive features – that drove high savings. 
Today, as world growth decelerates, secular stagnation seems plausible once again. 
But secular stagnation is an ailment of countries at the economic frontier. 
For the rest of the developing world, the real worry is not a shortfall of demand; it is the need to sustain high rates of productivity growth so that they can catch up with the advanced economies. 
As policymakers gather in Washington for their ritual conversations this week, they should not lose sight of that key distinction. 

The Sunni Arc of Instability 
ABU DHABI – While international observers fixate on the Sunni-Shia rivalry’s role in shaping geopolitics in the Islamic world, deep fissures within the Sunni arc that stretches from the Maghreb-Sahel region of North Africa to the Afghanistan-Pakistan belt are increasingly apparent. 
Moreover, it is Sunni communities that produce the transnational jihadists who have become a potent threat to secular, democratic states near and far. 
What is driving this fragmentation and radicalization within the ranks of Sunni Islam, and how can it be managed? 
The importance of addressing that question cannot be overstated. 
The largest acts of international terror, including the September 11, 2001, attacks on New York and Washington, DC, and the 2008 Mumbai attack, were carried out by brutal transnational Sunni organizations (Al Qaeda and Lashkar-e-Taiba, respectively). 
The Sunni militant group Boko Haram, known internationally for abducting 276 schoolgirls in April and forcing them to marry its members, has been wreaking havoc in Nigeria for years. 
And the Sunni extremists of the Islamic State, whose dramatic rise has entailed untold horrors to Iraq and Syria, are seeking to establish a caliphate, by whatever means necessary. 
The influence of these organizations is far-reaching. 
Just last month, individuals inspired by these groups’ activities carried out two separate attacks, one in the Canadian parliament and another on police officers in New York. 
Political and tribal sectarianism in the Sunni Middle East and North Africa is both a reflection and a driver of the region’s weakening political institutions, with a series of failed or failing states becoming hubs of transnational terrorism. 
A lawless Libya, for example, is now exporting jihad and guns across the Sahel and undermining the security of fellow Maghreb countries and Egypt. 
Several largely Sunni countries – including Syria, Iraq, Yemen, Libya, Somalia, and Afghanistan – have become de facto partitioned, with little prospect of reunification in the near future. 
Jordan and Lebanon could be the next states to succumb to Sunni extremist violence. 
The Sunni tumult has underscored the fragility of almost all Arab countries, while diluting the centrality of the Israel-Palestine conflict. 
The post-Ottoman order – created by the British, with some help from the French, after World War I – is disintegrating, with no viable alternative in sight. 
The sectarianism plaguing the Sunni belt is affecting even the relatively stable oil sheikdoms of the Gulf, where a schism within the Gulf Cooperation Council is spurring new tensions and proxy competition among its members. 
Saudi Arabia and the United Arab Emirates view Qatar’s efforts to aid Islamists like the Muslim Brotherhood as an existential threat, even as their own wealth has fueled the spread of Salafi jihadism and Al Qaeda ideology. 
Both countries, along with Bahrain, have recalled their ambassadors from Qatar. 
This rupture is compounded by a rift between the Middle East’s two main Sunni powers, Egypt and Turkey, whose relationship soured last year, after the Egyptian military ousted the Muslim Brotherhood government, backed by pro-Islamist Turkish President Recep Tayyip Erdoğan. 
Egypt recalled its ambassador from Ankara and expelled the Turkish ambassador from Cairo. 
In September, the Egyptian foreign ministry accused Erdoğan of seeking to “provoke chaos” and “incite divisions in the Middle East region through his support for groups and terrorist organizations.” 
A similar divide exists between Afghanistan and Pakistan over the latter’s provision of aid and sanctuary to Afghan militants – a divide that will only deepen when the United States-led NATO coalition ends its combat operations in Afghanistan this year. 
Pakistan’s support has spawned two incarnations of the Taliban: the Afghan Taliban, sponsored by the Pakistani military, and the Pakistani Taliban, the Pakistani military’s nemesis. 
Successive Afghan governments have refused to recognize the frontier with Pakistan known as the Durand line, a British-colonial invention that split the large ethnic Pashtun population. 
Such conflicts are spurring the militarization of Sunni states. 
The UAE and Qatar have already instituted compulsory military service for adult males. 
And Kuwait is considering following in Jordan’s footsteps by reintroducing conscription, which is already in place in most Sunni states (and Iran). 
Against this background, efforts to tame the deep-seated Sunni-Shia rivalry (by, for example, improving relations between Saudi Arabia and Iran), though undoubtedly important, should not take priority over a strategy to address the sectarianism plaguing the Sunni belt. 
That strategy must center on federalism. 
Had federalism been introduced in Somalia, for example, when the north-south rift emerged, it probably would not have ended up as a failed state. 
Today, federalism can allow for the orderly management of key Sunni countries, where a unitary state simply is not practical. 
The problem is that federalism has become a dirty word in most Sunni countries. 
And the emergence of new threats has made some governments, most notably Saudi Arabia’s, staunchly opposed to change. 
What these countries do not seem to recognize is that it is the petrodollar-funded export of Wahhabism – the source of modern Sunni jihad – that has gradually extinguished more liberal Islamic traditions elsewhere and fueled the international terrorism that now threatens to devour its sponsors. 
Stagnation is not stability. 
On the contrary, in the Sunni arc today, it means a vicious cycle of expanding extremism, rapid population growth, rising unemployment, worsening water shortages, and popular discontent. 
Political fissures and tribal and ethnic sectarianism add fuel to this lethal mix of volatility and violence. 
It is time for the Sunni world to recognize the need for a federalist approach to manage the instability and conflict that plagues it. 
Even the US must reconsider its regional policy, which has long depended on alliances with despotic Sunni rulers. 
In a region ravaged by conflict, business as usual is no longer an option. 

Super-Sizing the IMF is Wrong 
CAMBRIDGE – As the global financial crisis radiates out from the developed economies into emerging markets, it is ravaging not only governance-challenged economies such as Venezuela, Russia, and Argentina. 
The crisis is also striking countries like Brazil, Korea, and South Africa, which appeared to have made substantial and lasting progress towards macroeconomic stability. 
For this reason, the future shape of the International Monetary Fund is rapidly moving to the top of the agenda for world leaders as they prepare to meet in Washington in mid-November to discuss the future of the global financial system. 
Just a short time ago, the IMF seemed relegated to a sustained period of irrelevance as it failed to modernize either its euro-centric political representation or its arcane government-to-government lending facilities. 
Suddenly, the Fund has moved to center stage as the only agency seemingly capable of stemming the vicious downward spiral that is currently seizing emerging-market stocks and bonds. 
World leaders should be happy that the IMF stands ready to take the lead in the next phase of the global financial crisis, even if its lending resources of approximately $250 billion are inadequate to stem the current run on emerging markets. 
Emerging-market companies alone have hundreds of billions coming due in the next twelve months, far more than their governments’ reserves can cover if credit markets do not normalize. 
Unlike United States Federal Reserve chairman Ben Bernanke, most emerging-market central bankers are in no position to extend blank checks across their economies without a boomerang effect on interest rates and exchange rates. 
(We will see how investors judge the dollar once the smoke clears and the huge expansion of US money and debt becomes evident.) 
But it would be a terrible mistake simply to super-size the IMF in its current guise by greatly scaling up its lending facilities, as many propose. 
Rather, the Fund’s role, even in the current crisis, should be sharpened as an interlocutor between lenders and developing country borrowers, rather than simply as a replacement for all other loan sources. 
The key reforms for the IMF remain (1) improving governance by reducing European representation while increasing that of Asia, and (2) focusing the Fund’s mission on monitoring and surveillance rather than as a direct provider of bailout loans. 
Contrary to popular opinion, now is exactly the right time to make these changes. 
Rich country governments, led by central banks, should provide the large scale funding needed to stem the run on developing country finances. 
The Fund’s main role should be in monitoring. 
Without its own currency, the IMF is poorly positioned to intervene with the overwhelming force needed for lender-of-last-resort operations. 
In principle, the IMF could be allowed to print money (it already has its own accounting unit, the so-called Special Drawing Rights). 
But this is not realistic, given the lack of an adequate system for global governance. 
Even the euro area, which is far more cohesive than the world as a whole, has not quite figured out how to use its central bank as lender of last resort. 
The IMF’s lending resources have shrunk dramatically relative to world trade and income compared over the past 50 years. 
But increasing its resources to a trillion dollars or more is not a realistic option, either. 
The IMF does not have an adequate framework for handling the massive defaults that could easily attend a huge surge in lending, much less the political will to distinguish between countries that are facing genuine short-term liquidity problems and countries that are actually facing insolvency problems. 
So what should world leaders do with the IMF? 
In the short run, the IMF could help coordinate additional loans from countries such as the US, Japan, and China, to help maintain economic and political stability in the developing world. 
Without directly acknowledging America’s central role in causing the financial crisis, the US Federal Reserve has already offered to exchange up to $30 billion each with the central banks of Korea, Brazil, Mexico and Singapore. 
The IMF can also play a useful role in helping surplus countries manage their foreign exchange reserves, much as the Bank for International Settlements already does. 
World leaders can allow the IMF to sell some of its gold stock to endow the agency with enough cash to fund its monitoring and surveillance functions. 
Then in the future, it will not need to make crisis loans just to keep the lights on in the building. 

Stalking a Killer Fungus 
SINGAPORE – Warnings of the rise of so-called superbugs – disease-causing microbes that are resistant to many (or all) antibiotics – have been coming thick and fast in recent years. 
What many people seem not to realize is that superbugs are already here – and they are already killing people. 
A prime example is Candida auris, a multidrug-resistant fungal infection that is emerging as a serious global health threat. 
C.auris was first identified in Japan in 2009, in the ear of a patient who complained of an infection. (Auris is Latin for ear.) 
Since then, C. auris has been documented as the cause of wound infections, bloodstream infections, ear infections, and respiratory infections in countries across four continents, including India, Kuwait, Pakistan, South Africa, South Korea, and countries in South America. 
In the United States, the Centers for Disease Control and Prevention reports that the fungus infected 13 people from May 2013 to August 2016, four of whom have died. 
While it remains unclear whether those deaths were due to the C. auris infection or to underlying health conditions, the need to address the scourge of C. auris – which has led to the deaths of up to 70% of those infected – cannot be disputed. 
There is evidence that C. auris is spread in health-care settings. 
Indeed, the fungus seemed to have a greater effect on people with serious long-term conditions. 
As they frequent hospitals, and nursing homes, they come into contact with many health-care professionals, caregivers, and pieces of medical equipment, all of which could spread the fungus onto their skin or into their bodies. 
In the United Kingdom, 50 C. auris cases were reported at London’s Royal Brompton Hospital alone from April 2015 to July 2016. 
Of the 13 US cases, four – two in Illinois, one in Maryland, and one in New Jersey – occurred at the same health-care institutions at different times, and genome sequencing showed that patients treated in the same hospital in New Jersey had nearly identical strains. 
Not only are Candida infections particularly common in hospitals, but their fatality rates also seem to be higher among patients in hospitals and, specifically, intensive-care facilities. 
After all, such patients are already in an immune-compromised state, and have been using antibiotics, which can kill off healthy bacteria. 
But the main reason C. auris represents such an acute threat is that treatment options are severely limited. 
While most C. auris infections are treatable with a class of antifungal drug called echinocandins, some have demonstrated varying levels of resistance to echinocandins, as well as to the other two classes of antifungal drugs, azoles and polyenes. 
Even when the drugs do work, they are relatively toxic: azoles and polyenes are nephrotoxic (damaging to the kidneys), and echinocandins are hepatotoxic (damaging to the liver). 
Most are also fungistatic, meaning that they stop fungi from replicating, but do not kill them. 
And they interact with drugs that patients may be taking for other long-term conditions, such as chemotherapy agents and immunosuppressants. 
Moreover, developing new antifungal drugs is not a priority for pharmaceutical manufacturers. 
Antifungal drugs are more difficult to develop than antibacterial drugs, because fungal cells are eukaryotic, like human cells, rather than prokaryotic like bacterial cells. 
As a result, drugs must be selective enough to work on the fungal cells, without damaging human cells. 
And, while the global market for human antifungal therapeutics is worth over $6 billion and growing, owing to population aging and growing risks from fungal infections, generic competition is strong. 
So even if companies do invest in breakthrough drugs, cheaper options will soon be available, reducing profit margins considerably. 
In lieu of effective treatments, controlling the spread of C. auris becomes all the more critical. 
This requires, first and foremost, better diagnosis. 
C. auris is not easy to identify. 
Because biochemical-based tests cannot differentiate between C. auris and other invasive Candida infections, several cases of C. auris were initially misidentified as C. haemulonii. 
Many microbiology laboratories currently do not routinely differentiate Candida isolates or use yeast identification methods. 
Hospitals and medical centers need molecular techniques to identify C. auris accurately. 
Once diagnosed, C. auris patients need to be isolated; medical equipment must be thoroughly disinfected; and strict precautions need to be enforced for health-care workers. 
Otherwise, outbreaks among already vulnerable people could become even more common. 
The spread of C. auris highlights the need for coordinated local and international public-health initiatives to address the emerging problem of drug-resistant infections in hospitals. 
If private pharmaceutical companies are not going to invest in the development of novel or more effective drugs and new and better diagnostics, the public sector has to step in. 
The rise of the super-fungi must be stopped. 

Supporting Human Embryonic Stem Cell Research 
Most of the cells in our bodies have a short life span and a specific job to do. 
Stem cells, found in many organs from skin to bone marrow, are different. 
The “ancestors” of ordinary cells, they can replenish themselves indefinitely. 
Given the right biochemical signals, these cells can divide and transform themselves into a range of different cell types as and when the need arises. 
Such versatility means that stem cells have the potential to regenerate damaged organ tissues and provide amazing new treatments for a range of now devastating diseases. 
Indeed, stem cells may perhaps make it possible for humans to “grow new organs” to replace diseased ones, thereby providing for the possibility of new forms of cell-based therapies. 
On the basis of research with comparable cells from mice, scientists envision that stem cells could be used to replace bone marrow in patients suffering from cancer, produce pancreatic cells for alleviating diabetes, or neuronal cells for treating Parkinson's disease, Alzheimer's disease, and various brain and spinal cord disorders. 
Stem cells used in this research are best derived from very early stage embryos created by in vitro fertilization, but this leads to ethical dilemmas. 
The idea that human embryos could be created with the express purpose of “harvesting” them for medical purposes incites fear of a “brave new world” revisited. 
Even if that extreme is unlikely, the possibility of abuse of any sort generates strong opposition. 
Most of those who oppose stem cell research do not question its scientific and medical value, but object to the use of human embryos. 
These critics, especially in Germany, where stem cell research evokes nightmares of Nazi era eugenics, argue that research with stem cells derived from embryos is unnecessary because multi-potential stem cells occur naturally in adult tissues as well. 
While guardedly encouraged by recent reports of the remarkable plasticity of stem cells obtained from adult tissues, scientists know little about their potential for prolonged maintenance outside the body, their capacity for differentiation, and whether they can be obtained in the quantities needed to explore their utility for clinical use. 
If embryonic stem cell research were to be halted based on that hope, it is possible that years may pass before scientists could determine if adult-derived stem cells are equivalent to embryonic stem cells in their potential to treat disease. 
We cannot afford the luxury of proceeding with these promising technologies sequentially. 
We owe it to those who are in need to explore all possible avenues that could lead to medical cures. 
While research on adult-derived stem cells should be pursued aggressively, it should not be at the expense of an aggressive program to explore the full potential of stem cells for use in human therapies. 
Another restriction has been recently adopted in the United States, where the issue was explored by the National Biomedical Ethics Advisory Commission in extensive hearings and discussions with ethicists, religious leaders, scientists and physicians. 
They concluded that it is ethically permissible to prepare stem cell lines from frozen embryos, but only from those obtained in the course of in vitro fertilization procedures and deemed by donors and their physician to be in excess of clinical requirements. (More eggs are usually fertilized than are actually implanted in women who want to become pregnant.) 
Following these discussions, the US National Institute of Health (NIH) promulgated guidelines that allow the use of government funds for stem-cell research but, in their present form, prohibit federally-funded investigators from creating new stem cell lines. 
That restriction requires that stem cell lines must be obtained only from privately-funded or commercial sources that follow the protocols mandated by the guidelines. 
I believe that restricting the use of government funds for the creation of stem cells, although politically prudent, imposes substantial scientific handicaps. 
We know that a variety of poorly understood factors cause embryonic stem cells to lose their capacity to differentiate into all possible cell types. 
This loss of capacity to differentiate may be caused by the particular mode in which the stem cells are derived, the conditions surrounding their growth, and other variables of handling. 
Enabling individual government-funded investigators to derive stem cell lines using a variety of conditions in their own laboratories, as permitted recently in Britain and France, is the best route to determining what conditions are critical for generating cells for specific therapeutic purposes. 
Embryonic stem cells prepared in a scientist’s own laboratory are most likely to have been derived, stored and maintained in ways that maximize their potency for particular uses. 
Cells obtained from commercial sources are likely to be of unknown genetic background and history and therefore be less useful for some important studies. 
While various remote contingencies are sometimes invoked, the fundamental ethical choice posed by stem cell research is more circumscribed: whether human embryos, which will ultimately be legally discarded, should be used to create potentially life-saving therapies for those in need. 
Those who oppose abortion irrespective of its purpose argue that sacrificing a human embryo to obtain stem cells is akin to abortion and therefore immoral. 
But harvesting stem cells from very early stage embryos that will in the end be discarded is, in my view, ethically distinct from abortion. 
For we must also consider the moral consequences of failing to pursue this line of research if it has the potential to save and improve human lives. 
What greater morality exists than doing all we can do to help individuals whose lives are blighted by disease and disability? 


The Global Economy on the Fly 
ISTANBUL – In the last four weeks, I have traveled to Sofia, Kuala Lumpur, Dubai, London, Milan, Frankfurt, Berlin, Paris, Beijing, Tokyo, Istanbul, and throughout the United States. 
As a result, the myriad challenges facing the global economy were never far away. 
In Europe, the tail risk of a eurozone break-up and a loss of market access by Spain and Italy were reduced by last summer’s decision by the European Central Bank to backstop sovereign debt. 
But the monetary union’s fundamental problems – low potential growth, ongoing recession, loss of competitiveness, and large stocks of private and public debt – have not been resolved. 
Moreover, the grand bargain between the eurozone core, the ECB, and the periphery – painful austerity and reforms in exchange for large-scale financial support – is now breaking down, as austerity fatigue in the eurozone periphery runs up against bailout fatigue in core countries like Germany and the Netherlands. 
Austerity fatigue in the periphery is clearly evident from the success of anti-establishment forces in Italy’s recent election; large street demonstrations in Spain, Portugal, and elsewhere; and now the botched bailout of Cypriot banks, which has fueled massive public anger. 
Throughout the periphery, populist parties of the left and right are gaining ground. 
Meanwhile, Germany’s insistence on imposing losses on bank creditors in Cyprus is the latest symptom of bailout fatigue in the core. 
Other core eurozone members, eager to limit the risks to their taxpayers, have similarly signaled that creditor “bail-ins” are the way of the future. 
Outside the eurozone, even the United Kingdom is struggling to restore growth, owing to the damage caused by front-loaded fiscal-consolidation efforts, while anti-austerity sentiment is also mounting in Bulgaria, Romania, and Hungary. 
In China, the leadership transition has occurred smoothly. 
But the country’s economic model remains, as former Premier Wen Jiabao famously put it, “unstable, unbalanced, uncoordinated, and unsustainable.” 
China’s problems are many: regional imbalances between its coastal regions and the interior, and between urban and rural areas; too much savings and fixed investment, and too little private consumption; growing income and wealth inequality; and massive environmental degradation, with air, water, and soil pollution jeopardizing public health and food safety. 
The country’s new leaders speak earnestly of deepening reforms and rebalancing the economy, but they remain cautious, gradualist, and conservative by inclination. 
Moreover, the power of vested interests that oppose reform – state-owned enterprises, provincial governments, and the military, for example – has yet to be broken. 
As a result, the reforms needed to rebalance the economy may not occur fast enough to prevent a hard landing when, by next year, an investment bust materializes. 
In China – and in Russia (and partly in Brazil and India) – state capitalism has become more entrenched, which does not bode well for growth. 
Overall, these four countries (the BRICs) have been over-hyped, and other emerging economies may do better in the next decade: Malaysia, the Philippines, and Indonesia in Asia; 
Chile, Colombia, and Peru in Latin America; and Kazakhstan, Azerbaijan, and Poland in Eastern Europe and Central Asia. 
Farther East, Japan is trying a new economic experiment to stop deflation, boost economic growth, and restore business and consumer confidence. 
“Abenomics” has several components: aggressive monetary stimulus by the Bank of Japan; a fiscal stimulus this year to jump start demand, followed by fiscal austerity in 2014 to rein in deficits and debt; a push to increase nominal wages to boost domestic demand; structural reforms to deregulate the economy; and new free-trade agreements – starting with the Trans-Pacific Partnership – to boost trade and productivity. 
But the challenges are daunting. 
It is not clear if deflation can be beaten with monetary policy; excessive fiscal stimulus and deferred austerity may make the debt unsustainable; and the structural-reform components of Abenomics are vague. 
Moreover, tensions with China over territorial claims in the East China Sea may adversely affect trade and foreign direct investment. 
Then there is the Middle East, which remains an arc of instability from the Maghreb to Pakistan. 
Turkey – with a young population, high potential growth, and a dynamic private sector – seeks to become a major regional power. 
But Turkey faces many challenges of its own. 
Its bid to join the European Union is currently stalled, while the eurozone recession dampens its growth. 
Its current-account deficit remains large, and monetary policy has been confusing, as the objective of boosting competitiveness and growth clashes with the need to control inflation and avoid excessive credit expansion. 
Moreover, while rapprochement with Israel has become more likely, Turkey faces severe tensions with Syria and Iran, and its Islamist ruling party must still prove that it can coexist with the country’s secular political tradition. 
In this fragile global environment, has America become a beacon of hope? 
The US is experiencing several positive economic trends: housing is recovering; shale gas and oil will reduce energy costs and boost competitiveness; job creation is improving; rising labor costs in Asia and the advent of robotics and automation are underpinning a manufacturing resurgence; and aggressive quantitative easing is helping both the real economy and financial markets. 
But risks remain. 
Unemployment and household debt remain stubbornly high. 
The fiscal drag from rising taxes and spending cuts will hit growth, and the political system is dysfunctional, with partisan polarization impeding compromise on the fiscal deficit, immigration, energy policy, and other key issues that influence potential growth. 
In sum, among advanced economies, the US is in the best relative shape, followed by Japan, where Abenomics is boosting confidence. 
The eurozone and the UK remain mired in recessions made worse by tight monetary and fiscal policies. 
Among emerging economies, China could face a hard landing by late 2014 if critical structural reforms are postponed, and the other BRICs need to turn away from state capitalism. 
While other emerging markets in Asia and Latin America are showing more dynamism than the BRICs, their strength will not be enough to turn the global tide. 

 

Surviving America’s Political Meltdown 
NEW YORK – The US is in the midst of a political meltdown, unable to manage a domestic economic agenda or a coherent foreign policy. 
The White House is in turmoil; 
Congress is paralyzed; and the world is looking on in astonishment and dread. 
If we are to survive and overcome this collapse, we must understand its sources. 
There are two power centers in Washington, DC: the White House and the Capitol. 
Both are in disarray, but for different reasons. 
The dysfunctionality of the White House is largely a matter of President Donald Trump’s personality. 
To many experts, Trump’s behavior – grandiose self-regard, pathological lying, lack of remorse or guilt, expressive shallowness, parasitic lifestyle, impulsiveness, failure to accept responsibility for his own actions, and short-term marital relationships – are symptoms of narcissistic personality disorder. 
The consequences could be dire. 
Pathological narcissists have a tendency to indulge in violent conflicts and wars (think of Lyndon Johnson and Vietnam or of Andrew Jackson and the ethnic cleansing of Native Americans). 
At a minimum, Trump lacks the psychological characteristics needed for constructive governance: honesty, dignity, competence, empathy, relevant experience, and the capacity to plan. 
According to some observers, Trump also shows signs of diminished mental capacity. 
The hope in Washington is that “adults in the room” will keep Trump’s dangerous tendencies in check. 
But the “adults” in Trump’s administration are increasingly military figures rather than civilians, including three generals (John Kelly, the new White House Chief of Staff, National Security Adviser H.R. McMaster, and Secretary of Defense James Mattis). 
Wise civilian leaders are the key to peace, especially given that America’s vast war machine is always revving. 
Recall John F. Kennedy’s military advisers, who advocated war during the Cuban Missile Crisis, or consider Mattis’s anti-Iran belligerence. 
There are two other escape valves: the 25th Amendment, which charts a course for removing a president who is unable to discharge the responsibilities of office, and impeachment for “high crimes and misdemeanors.” 
Both measures are extreme in the US constitutional order, and both would depend on the agreement of Republican leaders. 
Nonetheless, one or the other may prove necessary and even urgent in the event that Trump’s psychological instability or political weakness leads him to launch a war. 
The political meltdown in Congress is less dramatic, but serious nonetheless. 
There, the cause is not a personality disorder; it’s money. 
The legislative branch has been deeply corrupted by corporate lobbying and campaign contributions. 
Two brothers, the industrialists David and Charles Koch, worth a combined $100 billion, virtually own the votes, and voices, of Speaker Paul Ryan and Senate Majority Leader Mitch McConnell. 
The result is politically perverse. 
Ryan and McConnell relentlessly push legislation favored by the Koch Brothers rather than the American people. 
The attempted repeal of President Barack Obama’s signature health-care legislation, the 2010 Affordable Care Act (“Obamacare”) had nothing to do with voters’ views or interests; it was simply what the Koch brothers (and other Republican mega-donors) wanted. 
That’s why the repeal legislation was kept secret until the last moment and was never subjected to expert testimony or analysis – or even considered by a Congressional committee. 
The legislation could pass only if it was hidden from view and voted on in the middle of the night. 
In the end, three Republican senators jumped ship, siding with the American people rather than with the Kochs. 
Between Trump’s narcissism and the Koch brothers’ money, the US government has become a shambles. 
Washington is still filled with many smart and talented people of both parties, but America’s political institutions and formal processes are diminished. 
The federal government is hemorrhaging scientific expertise, as researchers leave or are purged, and as agency budgets are targeted for deep cuts. 
Seasoned diplomats are flooding out of the State Department. 
Lobbyists, meanwhile, are installing cronies and hacks throughout the government. 
Through the din, new drumbeats of war can be heard, most ominously against Iran and North Korea. 
Is it posturing or real? 
Nobody knows. 
Trump’s foreign and military policies are now announced in early-morning tweets, without the foreknowledge of the White House staff or senior officials. The situation is dangerous and deteriorating. 
I suggest three immediate steps, and a fourth longer-term step. 
The first step is to take Trump off Twitter. 
The US – and the world – needs public policy by consultation and deliberation, not one man’s worsening pathology. 
The American people, by a large margin, concur that Trump’s tweets are hurting national security and the presidency. 
Second, congressional leaders should agree, on a bipartisan basis, to constrain Trump’s belligerent proclivities. 
Article I, Section 8 of the US Constitution vests the authority to declare war with Congress, and Congress needs to reassert that authority now, before it’s too late. 
Third, the world’s major powers – most urgently, America’s NATO allies, China, and Russia – should make clear that any unilateral US attack on Iran or North Korea would constitute a grave and illegal violation of the peace, and that matters of war and peace must be agreed within the UN Security Council. 
If the US had heeded the UN Security Council’s collective wisdom in the recent past, it would have avoided several ongoing disasters, including the chaos in Iraq, Libya, and Syria, and saved trillions of dollars and many hundreds of thousands of lives. 
The fourth, longer-term step is constitutional reform to move away the US away from its volatile presidential system to a parliamentary system, or at least to a mixed presidential-parliamentary system, as in France. 
The power of the president – and therefore the danger of a runaway presidency – is far too great. 
Much more needs to be done to restore democratic legitimacy in the US, including introduction of stricter limits on campaign financing and lobbying. 
First and foremost, however, we must survive the dangerous Trump presidency by preserving the peace. 

Surviving Motherhood 
Mothers’ Day is upon us in many countries around the world. 
Children of all ages will give flowers, make breakfast, call home. 
This is as it should be. 
On my travels around the world, particularly to its poorest and most troubled places, I have learned that it is mothers who keep families together — indeed, who keep entire societies intact. 
Mothers are society’s weavers. 
They make the world go round. 
Yet too often, the world is letting mothers down. 
Becoming a mother – the rite of passage that Mothers’ Day celebrates – can carry a terrible burden of fear, anxiety, and loss for many women and their families. 
Women such as Leonora Pocaterrazas, 21, who died in childbirth not long ago in the mountain village of Columpapa Grande, Bolivia, leaving her husband to raise three other children on his own. 
Or Sarah Omega, just 20, who spent 18 hours in labor at a hospital in Kenya. 
Her baby died, but she survived, despite terrible injuries, determined to speak out so that others would not have to endure the same ordeal. 
“Life lost its meaning,” she told American lawmakers in 2008. 
Her testimony helped persuade Congress to commit more development aid to maternal health. 
These are just two of the very personal stories behind the shocking statistics reported by the United Nations’ Population Fund. 
The figures show the chasm that exists between rich and poor countries where motherhood is concerned. 
It is a divide that the UN is determined to bridge. 
In the rich world, when a mother dies giving birth, we assume that something went wrong. 
For women in the developing world, by contrast, dying in childbirth is simply a fact of life. 
In some countries, one woman in eight will die giving birth. 
Complications from pregnancy and childbirth are the leading cause of death among girls aged 15 to 19 worldwide. 
In poor countries, pregnant women often must fend for themselves; they have no healthcare and nowhere to turn. 
They may struggle to find proper nutrition and work long hours in factories and fields until the day they go into labor. 
They give birth at home, perhaps with the help of a midwife who most likely has no medical training. 
I myself was born at home, in a small village in the Korean countryside. 
One of my childhood memories is asking my mother about a curious custom. 
Women who were about to give birth would gaze at their simple rubber shoes, which were kept by the back door. 
My mother explained that they were wondering if they would ever step into those shoes again. 
Giving birth was so risky that they feared for their lives. 
In the United States, just 100 years ago, women were roughly 100 times more likely to die in childbirth than they are today. 
We know how to save mothers’ lives. 
Simple blood tests, a doctor’s consultation, and someone qualified to help with the birth can make a huge difference. 
Add some basic antibiotics, blood transfusions, and a safe operating room, and the risk of death can almost be eliminated. 
Recent figures show that we are making progress in helping women throughout the world. 
Yet we still have very far to go. 
Every year, hundreds of thousands of women die in childbirth, 99% of them in developing countries. 
That is why, as Secretary-General, I have spoken out for the needs of mothers and pregnant women at every opportunity. 
Last month, the UN launched a joint action plan with governments, businesses, foundations, and civil-society organizations to advance this vital cause. 
I am counting on people around the world to back us in ending this silent scandal. 
No woman should have to pay with her life for giving life. 
On Mothers’ Day, let us honor mothers around the world by pledging to do everything we can to make motherhood safer for all. 

Surviving the Great Capital Flood 
Despite recent financial market turbulence, the underlying dynamic of the world economy remains essentially unchanged. 
The big issue is not how to deal with a downturn, but rather how to sustain today’s global boom and the capital flows that go with it. 
With the world expected to continue growing rapidly, there are excellent investment opportunities that will be funded only if capital continues to move into countries that can use it productively. 
The good news is that some countries have large savings that they want to invest in other countries, and are not put off by short-run market gyrations. 
In fact, our projections show that gross (or total) capital inflows to emerging markets will increase from US$400-500 billion just before the Asian crisis of 1997 to US$800-900 billion both in 2007 and 2008. 
These inflows are expected to top US$1 trillion in the not-so-distant future. 
With 20-20 hindsight, it is clear that in 1997-98, weak bank regulation and corporate governance aggravated the depth of the economic contraction that followed the “sudden stop” of capital flows. 
But what exactly does this imply for how middle- and low-income countries today should set their capital-account policies amid the current flood? 
Should a country with weaknesses in its financial system simply avoid letting capital in? 
While this has become more difficult, countries can still choose – at least to some degree – how open they are to capital inflows. 
But capital controls are not the only variable that determines financial openness. 
The evidence suggests that other factors such as the quality of economic and political institutions are at least as important in determining how much capital a country will attract. 
But what determines the extent to which countries benefit from financial globalization? 
A recent study by the IMF’s research department, using data from the past 30 years to assess the effects of financial globalization, conveys two messages. 
First, countries should be cautious about external financial liberalization when financial sector development and institutional quality are below key thresholds. 
In other words, don’t jump into the water unless you can swim. 
Second, caution has costs: financial openness may itself catalyze improvements in fundamentals that enhance the benefits of globalization. 
Capital controls, whatever their benefits in terms of mitigating the risks associated with volatile capital flows, are costly in a variety of ways. 
In other words, everyone really should learn to swim. 
The first message will resonate with those who believe that a key lesson of the Asian crisis a decade ago is that countries opened themselves to certain types of flows – especially foreign currency debt – before they were ready. 
The implication is that countries should first strengthen their domestic financial sectors and corporate governance, and only later open the capital account. 
But even if capital controls could still fully insulate a country from the forces of financial globalization, such a goal would not be desirable. 
Opening up to foreign direct investment and other non-debt capital flows may serve to boost economic growth without adverse side effects on macroeconomic volatility or a risk of crisis. 
This is the case for countries with both relatively weak and strong fundamentals. 
One conclusion, therefore, is for countries to be cautious about removing capital controls when they have not yet reached the relevant “safety” thresholds, but equally to stress the sizable net benefits for countries that exceed the thresholds. 
The latter, in turn, provides strong incentives for countries to address institutional shortcomings so that they can reap the potential benefits of external financial liberalization. 
Of more pressing immediate concern is the fact that capital is currently flowing to many countries regardless of whether they are ready to receive it. 
There are large current-account surpluses among emerging markets (a big change from 1997, when most emerging markets had deficits). 
Indeed, several large oil exporters and Asian manufacturing exporters will have sizable surpluses for as long as we can forecast. 
This capital has to be invested somewhere. 
We think that capital from these countries is increasingly flowing not so much “uphill” to developed countries (as it did over the past five years), but rather “around the hill” to other emerging markets and poorer developing countries. 
But is everyone really ready to receive such large amounts of capital and to carefully manage its macroeconomic impact? 
The risk today is not imminent crisis, but rather that the capital flows arising from the global boom will not be well managed, leading to the buildup of vulnerabilities. 
So the danger is that, when the party ends – and it is hard to know when that will be – a lot of mopping up will need to be done. 

How to Survive the Trump Era 
NEW YORK – In barely a month, US President Donald Trump has managed to spread chaos and uncertainty – and a degree of fear that would make any terrorist proud – at a dizzying pace. 
Not surprisingly, citizens and leaders in business, civil society, and government are struggling to respond appropriately and effectively. 
Any view regarding the way forward is necessarily provisional, as Trump has not yet proposed detailed legislation, and Congress and the courts have not fully responded to his barrage of executive orders. 
But recognition of uncertainty is not a justification for denial. 
On the contrary, it is now clear that what Trump says and tweets must be taken seriously. 
Following the election in November, there was near-universal hope that he would abandon the extremism that defined his campaign. 
Surely, it was thought, this master of unreality would adopt a different persona as he assumed the awesome responsibility of what is often called the most powerful position in the world. 
Something similar happens with every new US president: regardless of whether we voted for the new incumbent, we project onto him our image of what we want him to be. 
But, while most elected officials welcome being all things to all people, Trump has left no room for doubt that he intends to do what he said: a ban on Muslim immigration, a wall on the border with Mexico, renegotiation of the North American Free Trade Agreement, repeal of the 2010 Dodd-Frank financial reforms, and much else that even his supporters dismissed. 
I have, at times, criticized particular aspects and policies of the economic and security order created in the aftermath of World War II, based on the United Nations, NATO, the European Union, and a web of other institutions and relationships. 
But there is a big difference between attempts to reform these institutions and relationships to enable them to serve the world better, and an agenda that seeks to destroy them outright. 
Trump sees the world in terms of a zero-sum game. 
In reality, globalization, if well managed, is a positive-sum force: America gains if its friends and allies – whether Australia, the EU, or Mexico – are stronger. 
But Trump’s approach threatens to turn it into a negative-sum game: America will lose, too. 
That approach was clear from his inaugural address, in which his repeated invocation of “America first,” with its historical fascist overtones, affirmed his commitment to his ugliest schemes. 
Previous administrations have always taken seriously their responsibility to advance US interests. 
But the policies they pursued usually were framed in terms of an enlightened understanding of national interest. 
Americans, they believed, benefit from a more prosperous global economy and a web of alliances among countries committed to democracy, human rights, and the rule of law. 
If there is a silver lining in the Trump cloud, it is a new sense of solidarity over core values such as tolerance and equality, sustained by awareness of the bigotry and misogyny, whether hidden or open, that Trump and his team embody. 
And this solidarity has gone global, with Trump and his allies facing rejection and protests throughout the democratic world. 
In the US, the American Civil Liberties Union, having anticipated that Trump would quickly trample on individual rights, has shown that it is as prepared as ever to defend key constitutional principles such as due process, equal protection, and official neutrality with respect to religion. 
And, in the past month, Americans have supported the ACLU with millions of dollars in donations. 
Similarly, across the country, companies’ employees and customers have expressed their concern over CEOs and board members who support Trump. 
Indeed, as a group, US corporate leaders and investors have become Trump’s enablers. 
At this year’s World Economic Forum Annual Meeting in Davos, many salivated over his promises of tax cuts and deregulation, while eagerly ignoring his bigotry – not mentioning it in a single meeting that I attended – and protectionism. 
Even more worrying was the lack of courage: it was clear that many of those who were concerned about Trump were afraid to raise their voices, lest they (and their companies’ share price) be targeted by a tweet. 
Pervasive fear is a hallmark of authoritarian regimes, and we are now seeing it in the US for the first time in my adult life. 
As a result, the importance of the rule of law, once an abstract concept to many Americans, has become concrete. 
Under the rule of law, if the government wants to prevent firms from outsourcing and offshoring, it enacts legislation and adopts regulations to create the appropriate incentives and discourage undesirable behavior. 
It does not bully or threaten particular firms or portray traumatized refugees as a security threat. 
America’s leading media, like The New York Times and The Washington Post, have so far refused to normalize Trump’s abnegation of American values. 
It is not normal for the US to have a president who rejects judicial independence; replaces the most senior military and intelligence officials at the core of national security policymaking with a far-right media zealot; and, in the face of North Korea’s latest ballistic missile test, promotes his daughter’s business ventures. 
But when we are constantly barraged by events and decisions that are beyond the pale, it is easy to become numb and to begin looking past major abuses of power at the still-greater travesties to come. 
One of the main challenges in this new era will be to remain vigilant and, whenever and wherever necessary, to resist. 


Earth Calling the Financial Sector 
NEW YORK – Financial markets serve two crucial purposes: to channel savings toward productive investments, and to enable individuals and businesses to manage risks through diversification and insurance. 
As a result, the sector is essential to sustainable development, which represents unprecedented global-scale investment opportunities and risk-management challenges. 
That is why, when world leaders meet this July in Addis Ababa, Ethiopia, at the Conference on Financing for Development, the financial industry should be ready to offer practical, global solutions to the challenges associated with financing economic growth, poverty reduction, and environmental sustainability. 
We have now entered the Year of Sustainable Development. 
At three back-to-back global summits – the conference in Addis Ababa, September's meeting at the United Nations to adopt Sustainable Development Goals (SDGs), and the UN Climate Change Conference in Paris in December – 193 governments will attempt to ensure that global growth and poverty reduction continue within a safe natural environment. 
It will be a close call. 
The global economy, despite all of the huge bumps in the road, is delivering aggregate annual growth of 3-4%, leading to a doubling of output every generation. 
Yet the global economy is not delivering sustainable growth in two basic senses. 
In many parts of the world, growth has been deeply skewed in favor of the rich; and it has been environmentally destructive – indeed, life-threatening when viewed on a century-long time scale, rather than according to quarterly reports or two-year election cycles. 
Climate change is the greatest of these environmental threats (though by far not the only one). 
Given the current trajectory of global fossil-fuel use, the planet's temperature is likely to rise by 4-6 degrees Celsius above its pre-industrial level, an increase that would be catastrophic for food production, human health, and biodiversity; indeed, in many parts of the world, it would threaten communities' survival. 
Governments have already agreed to keep warming below 2º Celsius but have yet to take decisive action toward creating a low-carbon energy system. 
The financial industry has a central role to play in catalyzing the global transition to inclusive, sustainable growth. 
After all, effective financial markets should convey accurate long-term information to savers and investors, thereby enabling businesses, pension funds, insurance pools, sovereign wealth funds, and others to allocate their resources to projects that provide solid long-term payoffs, and protect their savings from financial calamities. 
Given climate change, that means accounting for whether, say, entire low-lying coastal areas or agricultural regions will be able to cope. 
Effective financial markets should also channel far more global saving from high-income countries with relatively weak long-term growth prospects to low-income regions with relatively strong growth prospects, owing to new opportunities to leapfrog development with smart, information-based infrastructure. 
Just a decade ago, hundreds of millions of rural Africans lived outside of the flow of global information. 
Now, with the rapid spread of broadband, once-isolated villages benefit from online banking, transport services, and ICT-enabled agribusiness and health and education programs. 
To seize the benefits of these new technologies at scale, and to avoid investments that aggravate cascading environmental crises, the finance industry will need to understand how the SDGs will reshape the investment landscape. 
The time has come to embrace the concept of true long-term investing, which requires marshaling the capacity of institutionally mobilized capital to support investment opportunities that will secure a sustainable future for all. 
We know that enormous public and private investment is required for the transition toward a low-carbon economy, to win the global fight against poverty and disease, and to provide high-quality education and physical infrastructure worldwide. 
Today's savvy investors, and the financial industry as a whole, need to look ahead, beyond today's market prices and policies to the market prices and policies of the future. 
For example, today there is no global price on carbon to shift energy investment from fossil fuels to renewable sources; but we know that, in order to keep global warming below the 2º limit, such a price is coming soon. 
As stewards of long-term capital, today's investors cannot ignore the coming carbon price and the shift toward low-carbon energy sources. 
That means devising practical ways to finance and encourage the required shift. 
We believe that financial leaders want their industry to play its vital role in sustainable development, and we urge them to contribute actively to the unique opportunity that this year represents. 
Today's financiers can choose to be remembered either for the 2008 crisis, over which they presided, or for their creative and resourceful efforts to encourage long-term sustainability. 
Assuming that they choose the latter, the financial industry should work with governments to create a global investment framework that includes appropriate incentives to take on the challenges of sustainable growth. 
This implies the continued globalization of finance, which will be essential to allocate money from capital-rich regions to their poor, capital-scarce counterparts, as well as to develop local capital markets that can facilitate capital formation and protect countries from the vagaries of global sentiment. 
Financial leaders should also involve citizens (the savers) in the journey to a fairer and more sustainable global economy. 
That means encouraging responsible investing by adopting ever higher standards of stewardship – for example, by requiring companies' portfolios to meet certain sustainability targets. 
It also means contributing to a new framework for global infrastructure investment that steers resources away from environmentally destructive projects and reduces the wastage often associated with political patronage. 
Since the Industrial Revolution, finance has been a powerful enabler of human progress. 
The great task of this generation's financial leaders is to mobilize investment in the skills, infrastructure, and sustainable technologies that can end poverty, spread prosperity, and protect the planet. 
Those who act first will be the wiser – and wealthier – for it. 

Sustainability in the Trump Era 
COPENHAGEN – The forces fighting global warming and battling to strengthen environmental protection must brace for heavy collateral damage as a result of Donald Trump’s victory in the United States’ presidential election. 
Judging by Trump’s campaign rhetoric, and by statements from his Republican allies, environmental protection in the US will be gutted in a frenzy of deregulation and inducements for domestic oil, coal, and gas producers. 
Environmentalists are assessing the potential damage and developing strategies to avoid an onslaught driven by the most extreme anti-sustainability forces that have ever controlled Capitol Hill. 
The list of possible victims is long and depressing. 
If worse comes to worst, America will become much less green, while dealing a crippling blow to international cooperation. 
At the recent climate conference meeting (COP 22) in Marrakesh, attention focused on the various ways a Trump administration might kill the climate agreement reached at COP 21 in Paris last year. 
Death could come by assassination, with Trump tearing up the agreement. 
Or it could come by starvation, with the US refusing to do or pay its share. 
Or it could be tortured to death, with the US asking everyone else to do more. 
Surely, there are more options, but we are not compelled to contemplate them. 
We don’t need to – and we shouldn’t. 
Very little is known about what the Trump administration will actually do. 
Some hope reason will prevail at least to some extent, particularly given that markets are now pushing the green transition. 
Others fear it will not. 
But the simple fact is that we don’t know what Trump will do, because he doesn’t know, either. 
His administration’s environmental policy is not carved in stone; it’s written in water, which always seeks the fastest route to the lowest point. 
How deep the zealots and the coal lobby will be able to make that point depends partly on the barriers built by the rest of us. 
That means concentrating on mobilizing the forces that can strengthen the case for America to remain part of the global move toward environmental sustainability. 
This will not convince diehards in the new administration, but it may sustain more moderate forces. 
So, who is this “we” that must now take action? 
First, “we” are US state governments and legislatures, nongovernmental organizations, local communities, and corporations. 
All need to galvanize Americans’ support for protecting local environments and contributing to global solutions. 
Second, “we” are the international community: the almost 200 members of the United Nations that in 2015 adopted the Sustainable Development Goals and the Paris climate agreement. 
It is critically important that all UN members, whether big or small, insist that these global agreements still direct the world’s actions, regardless of what Trump does. 
It must be abundantly clear to the incoming administration that the combined economic and environmental interest in pursuing the sustainability agenda will continue to push countries and companies alike in that direction. 
It is helpful that China has already said that it will not forego the opportunities inherent in the green transition, and that it will take the global lead if the US bows out. 
And China will not be alone. 
While many will regret the absence of American leadership, or even steps in the opposite direction by the Trump administration, the US is no longer strong enough to make all the difference. 
Other countries will fill the gap and gain the benefits, and they should make that known loud and clear. 
Trump’s America can depart the train, which may well happen, but it cannot stop it. 
The rest of the world will continue to move ahead. 
Corporate America and capital markets ought to reinforce that message, not as a political statement, but as a warning that a US economy that sacrifices the opportunities implied by the sustainability agenda will be less attractive to investors – and thus less prosperous. 
Last month, 365 major US companies and investors did just that, issuing a public appeal to Trump not to abandon the Paris climate agreement. 
If Trump is to deliver more jobs and higher incomes to his voters, one vehicle to do so is to promote the green agenda of energy efficiency and renewables. 
The fourth component of the “we” who must act are engaged consumers worldwide. 
Marching in the streets shouting slogans at elected leaders will not make the difference. 
Acting to organize consumers locally, nationally, regionally, and globally might. 
The message needs to be sent not only by individual consumers, but also by organizations with the capacity to encourage and amplify the message: “We will not buy products and services defying the sustainability agenda, and we will give preference to quality products and brands that respect and promote sustainability.” 
Whatever form it takes, the message should be direct and transparent, and it should also target US corporations taking advantage of any relaxation of domestic environmental and emission standards. 
Most of us did not vote for Trump, and we are not obliged to follow his lead. 
It’s the other way around: the more strongly we organize to stay the course and reinforce action to halt global warming and promote sustainability, the more likely it will be that pragmatic members of the new majority can minimize the damage at home and abroad. 

The Future of Fish Farming 
NEW HAVEN – Demand for seafood is skyrocketing, and will continue to rise throughout this century. 
The only way to meet it will be through aquaculture. 
Yet, while next-generation aquaculture will be far more ecologically responsible than its predecessors, it will also use far more energy. 
If that additional energy is not clean and cheap, new aquaculture technologies cannot serve our broader environmental and climate goals. 
The rise in demand for seafood is a good thing, to a point. 
Fish are more efficient than pork and beef, because they require fewer inputs to yield the same amount of protein. 
So, as global meat consumption continues torise, it makes sense for a sizeable share of it to come from the sea. 
On the other hand, rising demand for seafood poses significant ecological risks. 
According to the United Nations Food and Agriculture Organization, nearly one-third of global fish stocks are already harvested at an unsustainable level, meaning wild populations cannot regenerate quickly enough to make up for the rate at which they’re fished. 
And, because wild populations lack the carrying capacity to meet the increase in demand, more fish have to be farmed. 
For that reason, aquaculture is already the leading mode of fish production for human consumption. 
But, like fishing, it also poses ecological risks. 
Because aquaculture systems often operate on coastlines or near inland rivers or ponds, they tend to disrupt natural habitats, contribute to nitrogen pollution, and add undue pressure on feeder fish stocks. 
For example, fish farming is one of the main drivers of mangrove deforestation in Southeast Asia. 
But even with these conservation challenges in mind, aquaculture remains the only option for meeting future demand. 
The path that the industry takes today will thus have far-reaching environmental implications for years to come. 
In the near term, fish farms can in fact be made cleaner. 
A few responsible producers have introduced new techniques and technologies to combat pollution, from monitoring feed uptake with video cameras to integrating filter feeders like shellfish and seaweed into their systems. 
Others are attempting to reduce their reliance on forage fish by replacing fish meal with plant proteins, or by adopting new biotechnologies to produce fish feed more sustainably. 
But so long as these aquaculture systems are embedded in coastal or freshwater environments, they will continue to contribute to habitat loss and ecological disruption. 
For the long term, then, experts generally offer two ways forward: land-based recirculating systems and offshore aquaculture. 
Both could potentially mitigate the negative externalities of aquaculture and make fish production sustainable well into the future. 
In the first approach, fish farms would be moved from the ocean to recirculating aquaculture systems (RAS), in which fish are housed in indoor tanks that are regulated by pumps, heaters, aerators, and filters. 
One of the biggest advantages of this approach is its adaptability: an RAS can be located almost anywhere, from urban lots to retired hog barns. 
Better yet, these systems are designed to recycle nearly all of the water they use, which eliminates the problem of coastal pollution. 
Accordingly, the advocacy organization Seafood Watch currently gives all RAS-farmed fish a “Best Choice” tag. 
The other option is to move aquaculture in the opposite direction: out to sea. 
Offshore systems harness the forces of the ocean, by using deeper waters and stronger currents to funnel excess nutrients and waste away from sensitive coastal ecosystems. 
As a result, they have no need for mechanical pumps or filters (although motorized pens may eventually take to the seas). 
In the United States, the aquaculture industry has started to move toward RAS production. 
For example, a Norwegian firm has just announced plans to build a huge new land-based salmon farm in Maine. 
And examples of offshore projects can be found off the coasts of Norway, California, and Hawaii. 
But both systems are still a niche, rather than the norm. 
One of the primary problems with cleaner approaches to aquaculture is that they are energy-intensive. 
With land-based systems, natural processes such as filtration and water exchange and dispersal must be carried out mechanically, which requires a lot of electricity. 
That isn’t necessarily a problem in places with low-carbon electricity grids, like France, but it would be in a place like Nova Scotia, which relies heavily on coal. 
Likewise, offshore operations require diesel fuel for transport and maintenance, and that will remain the case until electric boats or low-carbon liquid fuels become more viable. 
Although open-ocean aquaculture should still require less diesel fuel than commercial fishing – and could run on renewable energy sources like solar, wind, or waves – offshore aquaculture is more energy-intensive than conventional fish farms. 
And even if newer aquaculture systems can overcome their current operational and regulatory challenges, their biggest hurdle will be the unavailability of cheap, low-carbon energy. 
As long as fossil fuels account for most global energy use, the environmental promise of next-generation aquaculture will go unrealized. 
This is true for a wide range of industries. 
Without cleaner and cheaper energy across the board, we will not be able to meet our broader environmental and climate goals. 
Our current energy technologies – nuclear and renewables included – still have a way to go to meet energy demand. 
In the meantime, the aquaculture industry will need to make further investments and develop new innovations to put itself on a path to sustainability – be it on land or in the sea. 

Improving the Sustainability of Development Finance 
WASHINGTON, DC – To achieve the United Nations Sustainable Development Goals by 2030, trillions of dollars in state spending, investment, and aid will be needed annually. 
Although estimates vary widely, one UN report from 2014 suggests that total investment of as much as $7 trillion will be required for infrastructure improvements alone. 
But whatever the final tally, these sums are far beyond the means of governments, and leaders working to implement the 17 SDGs will expect their domestic banking sectors to provide much of the funding. 
This is a reasonable expectation. 
In emerging markets, banks hold assets estimated at more than $50 trillion, meaning that they could impact dramatically how sustainable development is financed. 
At the moment, however, many lenders don’t have the capacity to evaluate properly the financial, environmental, social, and governance-related risks associated with these types of projects. 
If the international community is to meet its SDG targets, sustainable finance practices will need to be strengthened. 
Fortunately, collaboration is already producing results. 
In May 2012, banking regulators from ten countries asked my organization, the International Finance Corporation (IFC), to help them establish the Sustainable Banking Network (SBN) to fund initiatives that are “greener, environmentally friendly, and socially inclusive.” 
Since its formation, the network has grown to include 34 countries, accounting for $42.6 trillion in bank assets – equivalent to more than 85% of emerging markets’ total bank holdings. 
Today, the SBN connects regulators, bankers, and agencies in emerging economies to improve finance practices for sustainability projects. 
These efforts, though entirely voluntary, are already having a measurable impact. 
For example, in 2016, the SBN became a key partner to the G20’s Green Finance Study Group, which helped advance the bloc’s global “green finance” agenda, and underscored the importance of environmental risk management within financial systems. 
Moreover, many of the network’s biggest economies have developed policies for sustainability financing that are in line with international best practices. 
Together, these efforts are encouraging regulators in member and non-member countries to deepen their support for socially conscious lending. 
To maintain this momentum, the SBN needs tools to measure progress accurately, which is why the IFC has just released its first annual SBN Global Progress Report. 
The report’s measurement framework, designed to track the adoption and impact of policies by member organizations and states, was developed by and agreed upon by all SBN participants, with support from the IFC. 
It represents a remarkable level of global consensus and breaks new ground for financial-sector analysis. 
In the report, eight SBN countries (Bangladesh, Brazil, China, Colombia, Indonesia, Mongolia, Nigeria, and Vietnam) received high marks for innovation. 
Reforms in these countries included the introduction of large-scale and transparent monitoring programs, and new regulations that require banks to include environmental and social risk assessments in their decision-making processes. 
These countries also introduced market incentives to entice banks to finance more environmental projects. 
One motivation for compiling an annual report is to document insights and lessons learned, and thereby help banking sectors engage in more productive reforms. 
In this regard, the IFC views this inaugural report largely as a blueprint to accelerate and streamline change. 
Much work remains to be done to improve practices for financing sustainability in the world’s emerging economies. 
For example, the SBN is now focused on helping developing countries capitalize on climate-related investment opportunities, which are estimated to be valued at some $23 trillion. 
The network is also working to accelerate growth in the green bond market, which would help push other parts of the global financial system participate in planning and initiatives. 
Still, SBN members have much to celebrate. 
In just five years, the organization has grown from an ambitious idea into a network of committed regulators, bankers, policymakers, and international development organizations. 
As I have noted before, with the support of the SBN, countries committed to building better finance frameworks are putting their ideas to work. 
Ending poverty, protecting the planet, and building a more equitable future for humanity – the overarching goals of the SDGs – will be costly. 
But with the right financial frameworks in place, and with new ways to measure progress, the investments we make today don’t need to break the bank. 

Chocolate’s Sustainability Challenge 
HERSHEY, PENNSYLVANIA – In the 1970s and 1980s, when multinational firms first linked sustainability to business success, the chief catalyst was vulnerability, not altruism. 
Consumer pressure, political boycotts, and costly lawsuits were damaging companies’ bottom lines, and environmental policies helped shield companies from bad publicity and protect shareholders from painful losses. 
Today, corporate social responsibility and sustainability are no longer fear-based. 
Instead, sustainability is viewed simply as a necessity for the future. 
This is particularly true for industries that depend on agriculture – such as the chocolate business. 
With chocolate consumption near historic highs, chocolate companies like the one I work for should be relishing our success. 
But we are facing a looming challenge. 
Unless we can help produce a more sustainable cocoa crop, the world may one day need to find a new favorite treat. 
Cocoa trees thrive in just a thin band of countries along the equator, where the climate is warm and humid. 
Just two countries – Côte d’Ivoire and Ghana – produce the overwhelming majority of the chocolate that Americans eat. 
West African cocoa is an important part of Hershey’s unique flavor, but in that region, cocoa trees are aging and becoming less productive. 
In the past, when cocoa farmers faced diminishing crop yields, they would simply clear forests and start over. 
But today this approach is environmentally and socially unacceptable. 
The only sustainable solution is to seed old cocoa farms with new trees. 
Unfortunately, population growth, urbanization, and weak land rights are driving up demand for land, thereby undermining many farmers’ ability to invest in and replant their property. 
As a result, farm rehabilitation is not occurring at the scale or pace that companies like mine need if we are sustainably to meet demand well into the future. 
The scale of the challenge we face is significant. 
To meet global demand for 7.2 million metric tons of chocolate annually, multinationals like Hershey rely on millions of cocoa farmers, each of whom farms a tiny plot, often 1-2 hectares (2.5-5 acres). 
Our complex value chains reach deep into some of the most remote corners of the world. 
To keep the confections coming, we need new approaches to help those farmers grow cocoa sustainably. 
If we in the cocoa sector handle the current challenge well, we can help forge a way forward for more sustainable sourcing of other agricultural products. 
That is the motivation behind Hershey’s new partnership with the US Agency for International Development (USAID) and ECOM, our biggest cocoa supplier in Ghana. 
Last year, we launched a small pilot program to help smallholder farmers increase cocoa production, eliminate cocoa-driven deforestation, and boost resiliency. 
In particular, the initiative is designed to address two challenges faced by every grower in West Africa: land tenure and financing. 
According to Ghana’s Lands Commission, less than 2% of the country’s 800,000 cocoa farmers have a legal right to the land they cultivate. 
Instead, farmers access property through informal agreements with a chief or a landowner. 
Traditionally, these oral agreements have allowed farmers to clear forests and begin farming. 
But once cocoa trees stop producing after 30 years or so – or sooner if disease strikes – farmers must obtain permission from the original landowner to replant. 
At a time of historically high demand for land, chiefs and landowners are increasingly refusing farmers’ requests to replant. 
That leaves farmers with two options, neither of them good: clear virgin forests and start again or get out of the business entirely. 
The partnership with USAID and ECOM seeks to address this problem by eliminating some of the hurdles to replanting. 
ECOM has created an innovative financing model that helps farmers remove old or diseased tree, and replant with resilient and more productive hybrids. 
Shade trees, maize, and plantains are also being planted to help diversify incomes and increase productivity. 
ECOM manages the farms for three years, giving a share of the profits back to the farmers while recouping initial start-up costs. 
At the same time, USAID is mapping cocoa farmers’ land and documenting their customary rights to it. 
Local chiefs certify the maps, thereby improving the security of farmers’ tenure. 
Chiefs are also being trained in mediation, to help support farmers’ land claims. 
Because this approach manages to tackle an issue that has long been viewed as almost too complex to manage. it could become a model for the future. 
As population growth increases demand and reduces the land available to meet it, companies will have to incorporate sustainability into their operations. 
That means rolling up their sleeves and helping to address stubborn local challenges, such as land rights, that impede both economic development and the long-term health of international supply chains. 


The Year of Sustainable Development 
NEW YORK – The year 2015 will be our generation’s greatest opportunity to move the world toward sustainable development. 
Three high-level negotiations between July and December can reshape the global development agenda, and give an important push to vital changes in the workings of the global economy. 
With United Nations Secretary-General Ban Ki-moon’s call to action in his report “The Road to Dignity,” the Year of Sustainable Development has begun. 
In July 2015, world leaders will meet in Addis Ababa, Ethiopia, to chart reforms of the global financial system. 
In September 2015, they will meet again to approve Sustainable Development Goals (SDGs) to guide national and global policies to 2030. 
And in December 2015, leaders will assemble in Paris to adopt a global agreement to head off the growing dangers of human-induced climate change. 
The fundamental goal of these summits is to put the world on a course toward sustainable development, or inclusive and sustainable growth. 
This means growth that raises average living standards; benefits society across the income distribution, rather than just the rich; and protects, rather than wrecks, the natural environment. 
The world economy is reasonably good at achieving economic growth, but it fails to ensure that prosperity is equitably shared and environmentally sustainable. 
The reason is simple: The world’s largest companies relentlessly – and rather successfully – pursue their own profits, all too often at the expense of economic fairness and the environment. 
Profit maximization does not guarantee a reasonable distribution of income or a safe planet. 
On the contrary, the global economy is leaving vast numbers of people behind, including in the richest countries, while planet Earth itself is under unprecedented threat, owing to human-caused climate change, pollution, water depletion, and the extinction of countless species. 
The SDGs are premised on the need for rapid far-reaching change. 
As John F. Kennedy put it a half-century ago: “By defining our goal more clearly, by making it seem more manageable and less remote, we can help all people to see it, to draw hope from it, and to move irresistibly toward it.” 
This is, in essence, Ban’s message to the UN member states: Let us define the SDGs clearly, and thereby inspire citizens, businesses, governments, scientists, and civil society around the world to move toward them. 
The main objectives of the SDGs have already been agreed. 
A committee of the UN General Assembly identified 17 target areas, including the eradication of extreme poverty, ensuring education and health for all, and fighting human-induced climate change. 
The General Assembly as a whole has spoken in favor of these priorities. 
The key remaining step is to turn them into a workable set of goals. 
When the SDGs were first proposed in 2012, the UN’s member said that they “should be action-oriented,” “easy to communicate,” and “limited in number,” with many governments favoring a total of perhaps 10-12 goals encompassing the 17 priority areas. 
Achieving the SDGs will require deep reform of the global financial system, the key purpose of July’s Conference on Financing for Development. 
Resources need to be channeled away from armed conflict, tax loopholes for the rich, and wasteful outlays on new oil, gas, and coal development toward priorities such as health, education, and low-carbon energy, as well as stronger efforts to combat corruption and capital flight. 
The July summit will seek to elicit from the world’s governments a commitment to allocate more funds to social needs. 
It will also identify better ways to ensure that development aid reaches the poor, taking lessons from successful programs such as the Global Fund to Fight AIDS, Tuberculosis, and Malaria. 
One such innovation should be a new Global Fund for Education, to ensure that children everywhere can afford to attend school at least through the secondary level. 
We also need better ways to channel private money toward sustainable infrastructure, such as wind and solar power. 
These goals are within reach. 
Indeed, they are the only way for us to stop wasting trillions of dollars on financial bubbles, useless wars, and environmentally destructive forms of energy. 
Success in July and September will give momentum to the decisive climate-change negotiations in Paris next December. 
Debate over human-induced global warming has been seemingly endless. 
In the 22 years since the world signed the UN Framework Convention on Climate Change at the Rio Earth Summit, there has been far too little progress toward real action. 
As a result, 2014 is now likely to be the warmest year in recorded history, a year that has also brought devastating droughts, floods, high-impact storms, and heat waves. 
Back in 2009 and 2010, the world’s governments agreed to keep the rise in global temperature to below 2° Celsius relative to the pre-industrial era. 
Yet warming is currently on course to reach 4-6 degrees by the end of the century – high enough to devastate global food production and dramatically increase the frequency of extreme weather events. 
To stay below the two-degree limit, the world’s governments must embrace a core concept: “deep decarbonization” of the world’s energy system. 
That means a decisive shift from carbon-emitting energy sources like coal, oil, and gas, toward wind, solar, nuclear, and hydroelectric power, as well as the adoption of carbon capture and storage technologies when fossil fuels continue to be used. 
Dirty high-carbon energy must give way to clean low- and zero-carbon energy, and all energy must be used much more efficiently. 
A successful climate agreement next December should reaffirm the two-degree cap on warming; include national “decarbonization” commitments up to 2030 and deep-decarbonization “pathways” (or plans) up to 2050; launch a massive global effort by both governments and businesses to improve the operating performance of low-carbon energy technologies; and provide large-scale and reliable financial help to poorer countries as they face climate challenges. 
The United States, China, the European Union’s members, and other countries are already signaling their intention to move in the right direction. 
The SDGs can create a path toward economic development that is technologically advanced, socially fair, and environmentally sustainable. 
Agreements at next year’s three summits will not guarantee the success of sustainable development, but they can certainly orient the global economy in the right direction. 
The chance will not come along again in our generation. 

The Next Phase of Climate Action 
FEZ – Last November, while much of the world was trying to unpack Donald Trump’s election as US president, the United Nations Climate Change Conference (COP 22) was held in Marrakesh, Morocco. 
Participants from all over the world, including 38 heads of state and government, came together to create a plan for implementing the 2015 Paris climate agreement, which aims to limit global warming to well below two degrees Celsius above pre-industrial levels. 
It was an important step forward, but the issue remains far more complex – and politically charged – than most would care to admit. 
The global cooperation that has emerged lately is certainly welcome. 
But, while teamwork is critical to success, so is recognition of the distinct roles and responsibilities of governments in the industrialized and developing worlds. 
The industrialized countries have long produced massive amounts of emissions and other kinds of pollution, while consuming a huge share of the world’s resources – including 90% of the world’s water – all in the name of their own development. 
As a result, these countries now enjoy high standards of living and food security. 
The situation for developing countries is very different. 
Not only have they contributed substantially less to climate change; they are also suffering its worst effects, including food shortages and the loss of livelihoods, brought about by increasingly extreme and frequent weather events like floods and droughts. 
Africa is paying a particularly heavy price. 
Though the continent is responsible for only 4% of greenhouse-gas emissions, it is suffering more than any other continent from climate change, as rising temperatures, shifting seasons, and proliferating droughts deplete biodiversity, destroy ecosystems, and undermine security and stability. 
Lake Chad, once an immense reservoir of fresh water, has lost around 90% of its surface area since 1963 and is at risk of drying out permanently. 
Four million hectares of forest disappear every year in Africa – double the world average. 
Agriculture, predominantly subsistence farming, employs over 60% of the African workforce, implying widespread destruction of livelihoods, to say nothing of increased food insecurity as crops are disrupted. 
Indeed, Africa’s agricultural yields could be reduced by 20% from now until 2050, as the population grows twofold. 
Entire sections of Africa’s coastline, including almost one-third of its coastal infrastructure, will be submerged. 
Already, Africa has ten million “climate refugees.” 
If nothing is done, that figure will rise to almost 60 million in just three years. 
This jeopardizes not only the tremendous economic progress that the continent has made in recent years, but also the basic rights of tens of millions of Africans. 
The industrialized countries have pledged to support their developing-country counterparts, like those in Africa, in their effort to steel themselves against climate change. 
But their promises are modest, relative to what is actually needed, and doubts about whether they will be fulfilled persist. 
Policymakers often tout “sustainable development,” but lack clear answers for how to achieve it. 
In many cases – Trump being the most notable example – they seem determined to do just the opposite. 
As it stands, economic power is being used as a political tool, wielded by leaders attempting to evade their global responsibilities. 
The world’s “great powers” do not adhere to UN agreements meant to regulate industries that emit greenhouse gases and dump heavy metals in the sea and soil. 
They not only hold fast to their nuclear industries; they mismanage those industries’ waste, which can destroy ecosystems, from oceans to forests, while infecting humans with deadly diseases. 
Trump has explicitly declared his intention to ignore the Paris agreement. 
But, as the Marrakesh declaration emphasizes, success in mitigating climate change will require political commitment at the highest level. 
Moreover, climate action must take into account the special needs and context of developing countries, especially the least-developed economies and those most vulnerable to the effects of climate change. 
With this in mind, the declaration demands greater efforts to eradicate poverty, ensure food security, and meet the agriculture challenges posed by climate change. 
And it calls for greater support for climate projects, including through capacity building and technology transfer from developed to developing countries. 
Notwithstanding Trump’s reluctance, many countries seem to recognize the imperative to act. 
Participants in the Africa Action Summit, held on the sidelines of the Marrakesh conference, offered their own commitment to build an Africa that is resilient to climate change and able to advance sustainable development. 
To that end, African states must identify ways to access the necessary funding; design mechanisms to support the implementation of flagship programs; strengthen their institutions’ capacity to tackle climate risks; and seize opportunities in low-carbon development in the fields of energy, technological innovation, and “green” industries. 
External support will be vital to enable these efforts. 
Of course, the responsibility for mitigating climate change does not fall only on government. 
NGOs, for example, are already having a major impact, implementing educational programs and even staging protests to raise awareness of the environmental challenges we face. 
But, in many ways, government is critical to enabling such contributions. 
While tackling climate change effectively will be virtually impossible without civil-society organizations’ participation, their impact has often been undermined by the political considerations of their governments, which may, for example, favor incumbent energy suppliers over green alternatives in order to preserve existing jobs. 
Some governments have already implemented important measures to support the shift toward more environmentally friendly practices, including financial and market incentives. 
Only with more such initiatives, as well as a commitment to follow through on the Marrakesh declaration and to support the goals of the Africa Action Summit, can governments put their countries, and the world, on the path toward true sustainable development. 

Data for Development 
NEW YORK – The data revolution is rapidly transforming every part of society. 
Elections are managed with biometrics, forests are monitored by satellite imagery, banking has migrated from branch offices to smartphones, and medical x-rays are examined halfway around the world. 
With a bit of investment and foresight, spelled out in a new report, prepared by the UN Sustainable Development Solutions Network (SDSN), on Data for Development, the data revolution can drive a sustainable development revolution, and accelerate progress toward ending poverty, promoting social inclusion, and protecting the environment. 
The world’s governments will adopt the new Sustainable Development Goals (SDGs) at a special United Nations summit on September 25. 
The occasion will likely be the largest gathering of world leaders in history, as some 170 heads of state and government adopt shared goals that will guide global development efforts until 2030. 
Of course, goals are easier to adopt than to achieve. 
So we will need new tools, including new data systems, to turn the SDGs into reality by 2030. 
In developing these new data systems, governments, businesses, and civil-society groups should promote four distinct purposes. 
The first, and most important, is data for service delivery. 
The data revolution gives governments and businesses new and greatly improved ways to deliver services, fight corruption, cut red tape, and guarantee access in previously isolated places. 
Information technology is already revolutionizing the delivery of health care, education, governance, infrastructure (for example, prepaid electricity), banking, emergency response, and much more. 
The second purpose is data for public management. 
Officials can now maintain real-time dashboards informing them of the current state of government facilities, transport networks, emergency relief operations, public health surveillance, violent crimes, and much more. 
Citizen feedback can also improve functioning, such as by crowd-sourcing traffic information from drivers. 
Geographic information systems (GIS) allow for real-time monitoring across local governments and districts in far-flung regions. 
The third purpose is data for accountability of governments and businesses. 
It is a truism that government bureaucracies cut corners, hide gaps in service delivery, exaggerate performance, or, in the worst cases, simply steal when they can get away with it. 
Many businesses are no better. 
The data revolution can help to ensure that verifiable data are accessible to the general public and the intended recipients of public and private services. 
When services do not arrive on schedule (owing to, say, a bottleneck in construction or corruption in the supply chain), the data system will enable the public to pinpoint problems and hold governments and businesses to account. 
Finally, the data revolution should enable the public to know whether or not a global goal or target has actually been achieved. 
The Millennium Development Goals, which were set in the year 2000, established quantitative targets for the year 2015. 
But, although we are now in the MDGs’ final year, we still lack precise knowledge of whether certain MDG targets have been achieved, owing to the absence of high-quality, timely data. 
Some of the most important MDG targets are reported with a lag of several years. 
The World Bank, for example, has not published detailed poverty data since 2010. 
The data revolution can end the long lags and dramatically improve the quality of the data. 
For example, rather than relying on household surveys every few years to calculate the mortality rate, systems of civil registration and vital statistics can collect mortality data in real time, with the added benefit of information on cause of death. 
Likewise, poverty data could be collected at relatively low cost and with much higher frequency than today, by using smart phones to replace paper-based surveys. 
Some analysts have suggested that the use of mobile phones could bring down the cost of surveys by up to 60% in some East African countries over a ten-year period. 
Private companies, such as Gallup International, could work alongside the more traditional public-sector statistical offices to accelerate data collection. 
The data revolution offers a breakthrough opportunity for service delivery, management, accountability, and validation, thanks to a dense ecosystem of technologies that collect information in multiple ways: remote sensing and satellite imagery, biometric data, GIS tracking, facilities-based data, household surveys, social media, crowd-sourcing, and other channels. 
To support the SDGs, such data should be publicly available for all countries at high frequency – at least within one year for key targets, and in real time in sectors where service delivery is vital (health, education, and the like). 
Private companies, including telecoms, social marketing companies, systems designers, survey firms, and other information providers, should all be integrated into the data “ecosystem.” 
In preparing the new report, the SDSN teamed up with several partner agencies to prepare a “needs assessment” on how to launch the data revolution for the SDGs. 
The report offers an action plan that builds on partnerships between national statistical systems and private information firms and other non-governmental data providers. 
As the report emphasizes, low-income and lower-middle-income countries will need financial help to create these new data systems. 
While the cost estimates are necessarily provisional, especially in this era of disruptive technological change, the new study suggests that proper data systems for the SDGs will require at least $1 billion per year to cover all of the 77 lower-income countries. 
Of that sum, around half should be financed through official development assistance, which implies an increment of at least $200 million per year above current donor flows. 
Now is the time for such an increased commitment of funding. 
In July, the world will assemble in Addis Ababa for the International Finance for Development Conference, and just weeks after that, at UN Headquarters to adopt the SDGs in late September. 
With quick action before these two summit meetings, the world will be ready to launch the SDGs with the data systems that they need to succeed. 

Harnessing Disruption for Sustainability 
GENEVA – After decades of reluctance on the part of world leaders, a rapid, smooth, and purposeful transition toward sustainable development seems unlikely. 
Indeed, throughout human history, such major changes have more often been forced upon the world by circumstances, with leaders focusing on shorter-term concerns like political turmoil or economic stagnation until serious disruptions to their economies and societies arise. 
But this need not be the case. 
Policymakers can develop solutions that leverage immediate challenges to guide the shift toward a more sustainable, inclusive future. 
This year, which has been dubbed “the year of sustainable development,” provides an ideal opportunity in this regard. 
At high-level meetings in Sendai, Japan, in March and in Addis Ababa, Ethiopia, in July, world leaders will pursue closer collaboration on disaster-risk reduction and on mobilizing finance for development, respectively. 
In September, the United Nations will launch its Sustainable Development Goals, to serve as the framework for global development efforts until 2030. 
Moreover, global climate negotiations will reach a critical point in December, when world leaders meet for the United Nations Climate Change Conference in Paris. 
And the agendas of the forthcoming G-7 and G-20 summits will both feature measures to combat climate change. 
Such multilateral frameworks catalyze progress. 
Indeed, agreements like last year’s deal between China and the United States to reduce carbon-dioxide emissions – not to mention initiatives to mobilize business, such as We Mean Business – are unlikely to happen without them. 
Nonetheless, as Mancur Olson famously observed, it is the individual interests of the parties that drive collective success. 
For example, China’s recent embrace of sustainable development, which will serve the planet’s long-term interests, is driven by the domestic challenges posed by air, water, and land pollution. 
Rather than agonize over growing disruptions, China’s government has decided to hasten the shift toward a dynamic green economy, even if it means stranding assets and allowing businesses that do not suit China’s shifting needs to fail – an approach that will deliver a long-term competitive advantage. 
The rest of the world should recognize the benefits of allowing short-term disruptions to drive, not distract from, the sustainability agenda. 
One area where such an opportunity is already apparent is financial reform. 
Today’s historically low interest rates should encourage long-term investment, as they lower the current cost of capital. 
But new financial regulatory frameworks – such as Basel III, which aims to reduce risk in the banking sector, and Solvency II, the European Union’s equivalent for insurance companies – are inadvertently discouraging such investment. 
This undermines both short-term efforts to boost employment and the long-term objective of sustainable growth. 
It does not have to be this way. 
As the UN Environment Programme emphasized in a briefing at the World Economic Forum in Davos, saving the financial sector from itself can accelerate the transition to sustainable development. 
For example, effective risk management and longer-term policy objectives would be better aligned if regulators reduced capital requirements for banks that extend loans for climate-resilient and environmentally friendly investments. 
Similarly, central banks’ inflated balance sheets – the result of short-term crisis-response measures – could, through refinancing arrangements, be used to boost green investment. 
Further quantitative easing, such as by the European Central Bank, could be directed toward greener asset-backed securities. 
Even perverse signals can be mitigated and leveraged. 
Instead of allowing low oil prices to encourage consumption, governments could take the opportunity to impose a small, politically acceptable energy or carbon-equivalent tax – an approach advocated by many economists and development specialists, including Jeffrey Sachs, Lawrence Summers, and Kemal Derviş. 
Such a tax would not only sustain the price signals needed to steer societies onto a more sustainable energy path; it would also provide revenues that could be channeled toward employment creation and long-term green investments, thereby leveraging private capital. 
Likewise, central banks’ macro-prudential activities, which evolved largely in response to the global financial crisis, could focus on longer-term risks to the financial sector, including the cumulative impact of climate change, environmental policies, and disruptive clean technologies. 
Bank of England Governor Mark Carney has taken the lead in initiating a prudential review of the impact of climate change on the United Kingdom’s insurance sector. 
Other institutions – including multilateral bodies like the Bank of International Settlements, the Financial Stability Board, and the G-20 – should follow suit. 
What the world needs now are leaders who are willing to bridge the gap between daunting short-term demands and desirable long-term outcomes. 
Instead of remaining preoccupied with the present, world leaders should view 2015 as an opportunity to ensure that today’s disruptive crises provide the foundation for tomorrow’s sustainable prosperity. 

Seize the Sustainable Future 
BEIJING – For the first time in years, a healthy dose of optimism seems to be in order. 
The global economy – a few trouble spots aside – is finally moving beyond the financial crisis. 
Technological breakthroughs have put renewable energy on a competitive footing with fossil fuels. 
And the international community seems poised to forge critical agreements on sustainable development and the fight against climate change. 
And yet the risk remains that these gains will be frittered away, as policymakers, business leaders, and investors focus on short-term concerns at the expense of looming threats to the global economy. 
If we are to lock in our progress, we will need to address the failures of our financial system at their roots, putting in place standards, regulations, and practices that make it compatible with the long-term needs of a more inclusive, sustainable economy. 
This year, the world has the potential to do just that. 
The transition to a green economy now seems to be a certainty, rather than a hopeful aspiration, as growing public acceptance and technological advances make investments in clean energy increasingly practical. 
In 2014, global investment in renewable energy increased by 17%, even as oil prices plummeted, according to a recent report by the United Nations Environment Programme (UNEP). 
The trend was driven by a boom in solar energy in China and Japan and increasing European investment in off-shore wind power. 
Stock exchanges from Shanghai to São Paulo have established reporting requirements to inform investors about how companies are weaving sustainability into their strategies. 
Green bonds have taken off, with upwards of $40 billion issued in 2014, and they are likely to become only more popular as clearer standards and regulations are established. 
Even central banks have turned their attention to the environment. 
The People’s Bank of China has joined with UNEP to identify practical steps to ensure “green” financial-market reform, and the Bank of England (BoE) has initiated a prudential review of the systemic risks posed by climate change to the United Kingdom’s insurance sector. 
September will mark the launch of the UN’s Sustainable Development Goals, the world’s first universally adopted, measurable targets for ending poverty and hunger while protecting the environment and the planet’s natural-resource base. 
And, later this year, the international community is expected to agree on binding commitments to cut emissions and finance the fight against climate change. 
But, although the signs are all pointing in the right direction, success is far from guaranteed. 
The gains could slip away if the moment is not seized. 
The real question is one of timing, and the irreversible damage that delays could inflict. 
More than 80% of the 140 countries surveyed in UNEP’s “Inclusive Wealth” report registered a deterioration in their stock of natural capital. 
The economic damage resulting from environmental degradation is estimated to be roughly $7 trillion a year, much of it irreversible. 
The longer we wait, the worse our problems will become. 
What is needed is a major international effort to realign financial and capital markets in ways that support sustainable development. 
Our financial system’s current design all but guarantees what BoE Governor Mark Carney has called the “tragedy of horizons” – a market failure resulting from the inability of investors, companies, and governments to act on problems, such as climate change, with consequences that will be felt only far in the future. 
Policymakers and business leaders cite many reasons for focusing on immediate concerns. 
Indeed, the very policy actions needed to reduce the risks of another financial crisis force banks and asset managers to lend and invest for the short term, passing up often more profitable, but less liquid, longer-term opportunities. 
Short-term pressures will always be present, but they can be overcome with the proper tools: improved pricing of environmental risks, climate-sensitive credit ratings, environmental lender liability, and efforts to mitigate the environmental risks to financial stability. 
A sustainable future is within reach, but only if we put in place the policies that make it possible. 

Leaving Our Children Nothing 
STOCKHOLM – Our generation has a unique opportunity. 
If we set our minds to it, we could be the first in human history to leave our children nothing: no greenhouse-gas emissions, no poverty, and no biodiversity loss. 
That is the course that world leaders set when they met at the United Nations in New York on September 25 to adopt the Sustainable Development Goals (SDGs). 
The 17 goals range from ending poverty and improving health to protecting the planet’s biosphere and providing energy for all. 
They emerged from the largest summit in the UN’s history, the “Rio+20” conference in 2012, followed by the largest consultation the UN has ever undertaken. 
Unlike their predecessor, the Millennium Development Goals, which focused almost exclusively on developing countries, the new global goals are universal and apply to all countries equally. 
Their adoption indicates widespread acceptance of the fact that all countries share responsibility for the long-term stability of Earth’s natural cycles, on which the planet’s ability to support us depends. 
Indeed, the SDGs are the first development framework that recognizes a fundamental shift in our relationship with the planet. 
For the first time in Earth’s 4.5-billion-year history, the main factors determining the stability of its systems are no longer the planet’s distance from the sun or the strength or frequency of its volcanic eruptions; they are economics, politics, and technology. 
For most of the past 12,000 years, Earth’s climate was relatively stable and the biosphere was resilient and healthy. 
Geologists call this period the Holocene. 
More recently, we have moved into what many are calling the Anthropocene, a far less predictable era of human-induced environmental change. 
This fundamental shift necessitates a new economic model. 
No longer can we assume – as prevailing economic thinking has – that resources are endless. 
We may have once been a small society on a big planet. 
Today, we are a big society on a small planet. 
And yet, far from being utopian, the SDGs are achievable by 2030. 
Some countries, including Denmark, Finland, Norway, and Sweden are well on the way to achieving many of them, and much progress is being made elsewhere around the world. 
In the last few decades, poverty has been halved. 
Despite the headlines, violent conflict is on the wane. 
Diseases are being eradicated. 
The global population is set to stabilize. 
The ozone layer is showing signs of recovery. 
And the digital revolution is disrupting entire industries in ways that could benefit the planet. 
Eradication of extreme poverty is well within our reach. 
Today, about 800 million people live on less than $1.25 a day. 
According to a recent World Bank report, about 30% of them live in India, a sleeping giant about to industrialize, given the right incentives. 
Poverty is declining in other countries as well, including Nigeria (where 10% of the poorest live), China (home to 8%), and Bangladesh (6%). 
The main source of doubt concerns wealthy countries’ commitment to help developing countries cut greenhouse-gas emissions as they end poverty. 
Without the proper assistance, poor countries risk becoming locked into reliance on coal and oil for at least another generation, putting the entire planet in danger of out-of-control climate change. 
World leaders need to realize that the cost of transforming the global energy system is far less than coping with the consequences of burning the planet’s remaining fossil fuels. 
Research published this month concluded that consuming all remaining hydrocarbons would result in the melting of the entire Antarctic ice sheet, potentially raising sea levels by 58 meters. 
And higher sea levels are just one potential threat. 
Drought and crop failure resulting from climate change, for example, could trigger violent conflict. 
Fortunately, there is abundant evidence that countries and industries can thrive without contributing to climate change. 
By 2030, several countries are likely to have freed themselves from fossil fuels, with Sweden, France, and Germany probably in the lead. 
These countries will have less air pollution, improved health and wellbeing, and thriving economies. 
They will also place less pressure on the biosphere. 
By some estimates, life on Earth has never been so diverse. 
The value of biodiversity is that it makes our ecosystems more resilient, which is a prerequisite for stable societies; its wanton destruction is akin to setting fire to our lifeboat. 
Ending poverty and reducing emissions, including by effectively managing land use and halting deforestation, will go a long way toward stopping the trend and reversing the damage. 
Companies such as Ikea and Unilever are leading the way with genuine efforts to assume responsibility for the planet’s climate, resources, and ecosystems. 
One reason is that rising consumer awareness makes ecosystem degradation bad for business. 
At the same time, all industries, from information technology to agriculture, depend on services provided by nature. 
Managing forests, rivers, grasslands, and coral reefs in sustainable ways makes them more resilient and increases their ability to absorb greenhouse gases, which is good for business. 
We are the first generation that can make an informed choice about the direction our planet will take. 
Either we leave our descendants an endowment of zero poverty, zero fossil-fuel use, and zero biodiversity loss, or we leave them facing a tax bill from Earth that could wipe them out. 

Development’s Digital Divide 
STOCKHOLM – On September 25, world leaders will gather in New York to adopt the new Sustainable Development Goals. 
The SDGs, comprising 17 goals and 169 related targets, are the result of extensive political negotiations, and will set the benchmarks over the next 15 years for achieving the international community’s overarching objective: to “end poverty in all its forms everywhere.” 
The SDGs are noble and certainly ambitious. 
And yet, in a time of profound scientific and technological change, they remain remarkably conventional. 
Information technology – this century’s defining social and economic development – receives only a brief mention (in one of the sub-targets). 
Nowhere in the document is there even a hint of the revolutionary role that the nascent explosion in connectivity, information, and data could play in ending poverty. 
There can be no doubting the impact that information technology will have on economic growth. 
Governments, politicians, and international organizations must harness the potential of the Internet to serve global development and individual empowerment. 
Issues concerning security and governance have dominated discussions of cyber policy over the past few years. 
This is to some extent justifiable: The breadth of topics is staggering, ranging from international norms for state behavior in cyberspace to challenges like cybercrime and growing censorship. 
But it is also clear that the countries that will gain the most from the ongoing information revolution are those that manage to keep their eyes on the real prize: using this explosion in technology to strengthen their economies and improve the lives of their citizens. 
A 2009 study by the World Bank found that a 10% increase in fixed broadband penetration boosts a developing economy’s GDP by about 1.4%. 
These findings likely vastly understate the impact of the technology; after all, much of the developing world is seeing a rapid rollout of mobile broadband, with much higher capacity than what was available at the time of the study. 
The phenomenon is most evident in Asia and Africa – which together account for three-quarters of the global growth in smartphone use this year. 
As smartphone subscriptions increase from 2.9 billion to 7.7 billion worldwide in the next five years, 80% of the new accounts are expected to be opened by users on these two continents. 
The widespread adoption of information technology in the developing world opens up myriad possibilities; we are only at the beginning. 
Data analysis has been used to fight Ebola in West Africa, and mobile phone networks have been used to bring modern banking to unserved populations throughout the developing world. 
These new technologies empower people – most notably the rapidly growing youth population – and create new avenues for economic and social development. 
Indeed, mobile connectivity may turn out to be the most important development tool ever for the billions of people in emerging Africa and Asia. 
Of course, there will still be a digital divide. 
But, increasingly, it will be generational rather than geographical. 
Within a decade, the majority of young people in Africa will likely be as well connected as those in Europe or North America. 
This will change the world profoundly. 
The big question is whether governments are aware of the potential power of this development. 
If the SDGs are any indication, it is likely that they are not. 
The goals and targets that the world is about to embrace do not adequately reflect the significance of this epochal change. 
The absence of awareness is also reflected in the preparations for a high-level UN meeting on international policy concerning the Internet and development that will take place in December. 
The event, a review of the progress made since the 2005 World Summit on the Information Society, is the culmination of a three-year negotiation process. 
Unfortunately, political wrangling over issues of Internet governance and cybersecurity have dominated the preparations for the meeting, and there has been little discussion of the revolutionary possibilities that an open, dynamic, and free Internet can provide. 
Governments are being left behind as entrepreneurs and innovators race ahead. 
But maximizing the potential of the new technology requires the stable and predictable operating environment, as well as the support for basic research, that only governments can provide. 
It is time for world leaders to put the potential of the Internet at the top of the development agenda. 

A Year of Ocean Regeneration 
OXFORD – The importance of the world’s ocean cannot be overstated. 
They supply 50% of the oxygen we breathe, feed billions of people, and provide livelihoods for millions more. 
They are the great biological pump of global atmospheric and thermal regulation, and the driver of the water and nutrient cycles. 
And they are among the most powerful tools for mitigating the effects of climate change. 
In short, the ocean is a critical ally, and we must do everything in our power to safeguard them. 
This is all the more important, given the unprecedented and unpredictable threats that we currently face. 
Though the ocean has been integral to slowing climate change, absorbing over 30% of the greenhouse-gas emissions and 90% of the excess heat generated since the Industrial Revolution, the cost has been huge. 
Ocean acidification and warming has been occurring at alarming rates, and are already having a serious impact on some of our most precious marine ecosystems – an impact that will only intensify. 
Today, vast swaths of the world are experiencing what is likely to be the strongest El Niño on record. 
The adverse weather resulting from the phenomenon – which originates in the Pacific, but affects the ocean worldwide – is expected to affect adversely over 60 million people this year, compounding the misery wrought last year. 
It is a sobering reminder of our vulnerability to both natural and human-induced shocks to the earth’s systems. 
Despite all of this, we continue to degrade our oceans through the relentless destruction of habitats and biodiversity, including through overfishing and pollution. 
Disturbingly, recent reports indicate that the ocean may contain one kilogram of plastics for every three kilograms of fish by 2025. 
These actions are facilitated by chronic failures of global governance; for example, one-fifth of all fish taken from the ocean is caught illegally. 
Urgent action must be taken not just to address climate change broadly by reducing greenhouse-gas emissions, but also to enhance the health and resilience of our oceans. 
Fortunately, in 2015 – a watershed year for global commitments – world leaders established conservation and restoration of the world’s oceans as a key component of the new United Nations development agenda, underpinned by 17 so-called Sustainable Development Goals. 
Specifically, SDG 14 commits world leaders to end overfishing, eliminate illegal fishing, establish more marine protected areas, reduce plastic litter and other sources of marine pollution, and increase ocean resilience to acidification. 
The Global Ocean Commission celebrated this strong endorsement of urgent action to protect the ocean, which closely reflects the set of proposals contained in the Global Ocean Commission’s 2014 report From Decline to Recovery: A Rescue Package for the Global Ocean. 
So the world now has an agreed roadmap for ocean recovery. 
But how far and how fast we travel is yet to be determined. 
And the task ahead – translating admirable and ambitious commitments into effective collaborative action at the local, national, and international levels – is immense. 
The challenge is compounded by the weak and fragmented state of global ocean governance. 
Unlike other SDGs – such as those related to health, education, or hunger – there is no single international body charged with driving forward the implementation of the ocean SDG. 
As a result, it is not clear who will be responsible for monitoring and measuring progress and ensuring accountability. 
To ensure that SDG 14 does not fall by the wayside, the governments of Fiji and Sweden proposed convening a high-level UN conference on ocean and seas in Fiji, with Swedish support, in June 2017. 
Their proposal was subsequently co-sponsored by 95 countries and adopted unanimously in a UN General Assembly resolution. 
By drawing attention to the progress being made toward meeting SDG 14 targets and shining a spotlight on where results are lagging, the conference will provide a much-needed “accountability moment.” 
At the same time, by bringing together relevant stakeholders, it will help to catalyze deeper cooperation among governments, civil society, and the private sector. 
This is a promising step forward, reflecting the tremendous momentum that efforts to protect the ocean have gained in recent years. 
As the Global Ocean Commission’s work comes to a natural conclusion, its many partners and supporters will be working hard to sustain this momentum, ensuring that building healthy and resilient oceans remains a global priority until it is a global reality. 
The key to success, according to the Global Ocean Commission’s final report, will be the creation of an independent, transparent mechanism for monitoring, measuring, and reporting on the essential actions needed to achieve the SDG 14 targets, as well as additional UN conferences between now and 2030. 
Current and future generations alike need – and deserve – a healthy, resilient ocean. 
Growing awareness of – and strong commitments to resolve – the challenges facing our oceans is heartening. 
But it is just the beginning. 
One hopes that 2016 turns out to be the year when the world enters a new era of ocean regeneration. 

Why the Sustainable Development Goals Matter 
ROME – Following the progress made under the Millennium Development Goals, which guided global development efforts in the years 2000-2015, the world’s governments are currently negotiating a set of Sustainable Development Goals (SDGs) for the period 2016-2030. 
The MDGs focused on ending extreme poverty, hunger, and preventable disease, and were the most important global development goals in the United Nations’ history. 
The SDGs will continue the fight against extreme poverty, but will add the challenges of ensuring more equitable development and environmental sustainability, especially the key goal of curbing the dangers of human-induced climate change. 
But will a new set of goals help the world shift from a dangerous business-as-usual path to one of true sustainable development? 
Can UN goals actually make a difference? 
The evidence from the MDGs is powerful and encouraging. 
In September 2000, the UN General Assembly adopted the “Millennium Declaration,” which included the MDGs. 
Those eight goals became the centerpiece of the development effort for poor countries around the world. 
Did they really make a difference? 
The answer seems to be yes. 
There has been marked progress on poverty reduction, disease control, and increased access to schooling and infrastructure in the poorest countries of the world, especially in Africa, as a result of the MDGs. 
Global goals helped to galvanize a global effort. 
How did they do this? 
Why do goals matter? 
No one has ever put the case for goal-based success better than John F. Kennedy did 50 years ago. 
In one of the greatest speeches of the modern US presidency, delivered in June 1963, Kennedy said: “By defining our goal more clearly, by making it seem more manageable and less remote, we can help all people to see it, to draw hope from it and to move irresistibly towards it.” 
Setting goals is important for many reasons. 
First, they are essential for social mobilization. 
The world needs to be oriented in one direction to fight poverty or to help achieve sustainable development, but it is very hard in our noisy, disparate, divided, crowded, congested, distracted, and often overwhelmed world to mount a consistent effort to achieve any of our common purposes. 
Adopting global goals helps individuals, organizations, and governments worldwide to agree on the direction – essentially, to focus on what really matters for our future. 
A second function of goals is to create peer pressure. 
With the adoption of the MDGs, political leaders were publicly and privately questioned on the steps they were taking to end extreme poverty. 
A third way that goals matter is to spur epistemic communities – networks of expertise, knowledge, and practice – into action around sustainable-development challenges. 
When bold goals are set, those communities of knowledge and practice come together to recommend practical pathways to achieve results. 
Finally, goals mobilize stakeholder networks. 
Community leaders, politicians, government ministries, the scientific community, leading nongovernmental organizations, religious groups, international organizations, donor organizations, and foundations are all motivated to come together for a common purpose. 
That kind of multi-stakeholder process is essential for tackling the complex challenges of sustainable development and the fight against poverty, hunger, and disease. 
Kennedy himself demonstrated leadership through goal setting a half-century ago in his quest for peace with the Soviet Union at the height of the Cold War. 
In a series of speeches starting with his famous commencement address at American University in Washington, DC, Kennedy built a campaign for peace on a combination of vision and pragmatic action, focusing on a treaty to end nuclear tests. 
Just seven weeks after the peace speech, the Americans and Soviets signed the Limited Test Ban Treaty, a landmark agreement to slow the Cold War arms race that would have been unthinkable only months earlier. 
Though the LTBT certainly did not end the Cold War, it provided proof that negotiation and agreement were possible, and laid the groundwork for future pacts. 
But there is nothing inevitable about achieving large-scale results after stating a goal or goals. 
Stating goals is merely the first step in implementing a plan of action. 
Good policy design, adequate financing, and new institutions to oversee execution must follow goal setting. 
And, as outcomes occur, they must be measured, and strategies must be rethought and adapted in a continuing loop of policy feedback, all under the pressures and motivations of clear goals and timelines. 
Just as the world has made tremendous progress with the MDGs, we can find our way to achieving the SDGs. 
Despite the cynicism, confusion, and obstructionist politics surrounding efforts to fight poverty, inequality, and environmental degradation, a breakthrough is possible. 
The world’s major powers may appear unresponsive, but that can change. 
Ideas count. 
They can affect public policy far more profoundly and rapidly than detractors can imagine. 
In his final address to the UN in September 1963, Kennedy described contemporary peacemaking by quoting Archimedes, who, “in explaining the principles of the lever, was said to have declared to his friends: ‘Give me a place where I can stand – and I shall move the world.’” 

Globalizing Sustainable Development 
WASHINGTON, DC – The question of how the world can end extreme poverty and improve human wellbeing will take on new urgency in 2015, as the Millennium Development Goals (MDGs) expire and a new set of goals – the proposed Sustainable Development Goals (SDGs) – are finalized. 
United Nations Secretary General Ban Ki-moon’s “Synthesis Report,” outlining the main elements of the post-2015 agenda, provides strong guidance regarding what sustainable development should look like and what world leaders must do over the next 15 years to achieve it. 
After two years of crafting the “what” of sustainable development, the year ahead must focus on how to get it done. 
The central ambition is bold: the eradication of extreme poverty by 2030. To make that happen, the SDGs will need to shift away from the twentieth-century model of development, in which rich countries gave money to poor countries, mostly to feed the hungry and improve health and education. 
The MDGs were remarkably successful in several of these areas. 
But the picture has changed significantly since then. 
A new set of emerging economies – including China, India, Brazil, and South Africa – is racing to modernize. 
The private sector is assuming a greater role in economic development. 
And environmental degradation is threatening the gains of recent decades. 
The SDGs will have to transcend the idea of a planet divided starkly between those who give aid and those who receive it. 
The new goals must account for a world undergoing rapid globalization, in which all countries have assets as well as needs. 
Today’s challenges go beyond health, food, and education. 
The SDGs will have to integrate these concerns with the demands of the growing global middle class, the effects of shifting political and economic power, and the challenges of environmental sustainability, including climate change. 
Three ingredients will be essential to achieving the goals: financing mechanisms, trade, and partnerships. 
Forty years after rich countries promised to dedicate 0.7% of GDP to aid, their commitments remain at less than half that level. 
Though most emerging economies no longer rely on aid, it remains crucially important for low-income countries. 
That said, even if aid targets were met, the shift to sustainable development will cost much more than what aid alone can cover. We need to look for new sources of funds, ensure that government spending is aligned with the sustainable-development agenda, and target those areas where the money can do the most good. 
In much of the developing world, investing in sustainable development is complicated by the fact that tax revenues are too low to pay for what is needed. 
This is not always a matter of raising tax rates; it is also often a matter of collecting what people and companies owe. 
Closing loopholes and cracking down on evasion are two ways to ensure that taxes are collected. 
The OECD estimates that a dollar of aid spent on improving tax collection yields an average of $350 in revenue. 
A shared commitment that builds on initiatives by the G-8 would make tax evasion that relies on tax havens or money laundering harder to hide. 
Governments cannot deliver a sustainable future alone. 
The private sector also has an important role to play in energy, agriculture, and urban development, including transport and water systems that can drive innovation and economic opportunity. 
While levels of private finance dwarf international public finance, directing these private funds to programs that reach the poorest and protect the environment requires the right policy incentives, such as a price on carbon, regulatory certainty, and the wise use of public money. 
Trade boosts domestic production and generates revenue that can help pay for development. 
There have been important gains in market access in the past 15 years: 80% of developing countries’ exports to developed countries are now tariff-free, while average tariffs are down overall. 
But non-tariff barriers can cost exporting countries more than tariffs do. 
What is needed is an international partnership that helps low-income countries integrate into the globalized marketplace while improving environmental and labor standards. 
The SDGs can create political momentum for these efforts, which could then be framed by the World Trade Organization in December 2015. 
Making development sustainable will also require accelerated innovation and diffusion of technology between now and 2030. 
A global partnership could spur investment in research and development and ease the flow of information among scientists, business people, and policymakers. 
Such new and creative partnerships can make progress on complex problems that governments, civil society, or the private sector cannot or will not solve alone. 
For example, the GAVI Alliance (formerly the Global Alliance on Vaccines and Immunization), a partnership comprising international organizations, philanthropies, governments, companies, and research organizations, has immunized 440 million children since 2000 and helped avert more than six million deaths. 
We must improve and expand these types of partnerships to other challenges, such as infrastructure, agriculture, and energy. 
Between now and September 2015, when heads of state will gather for the UN General Assembly, we have a historic chance to set the world on a more sustainable path that will eradicate poverty and enhance prosperity for all. 
Ambitious goals provide a firm foundation for a brighter future. 
Over the coming months, however, leaders must work together to set the world on the right course to realize this vision. 


Sustainable Energy Now 
WASHINGTON, DC – The world has never been closer to achieving the dream of a more sustainable and secure energy future. 
Renewable energy from the wind and sun is becoming competitive with fossil-fuel-based power generation, and oil prices are hitting lows not seen for years. 
These developments put us at the edge of a global energy transformation – as long as we get the next steps right. 
Countries are already seizing the moment. 
With the oil-price drop that started in mid-2014, the first priority became clear: reform fossil-fuel subsidies before prices go back up. 
These subsidies have sapped government budgets, encouraged wasteful energy use, and increased pollution and carbon-dioxide emissions. 
India has lifted controls on the price of diesel. 
Indonesia has moved away from gasoline subsidies. 
Others are following suit. 
Money saved from ending subsidies can be better used to create safety nets that protect the poor when energy prices rise. 
But phasing out fossil-fuel subsidies, while critical, is only a first step in the right direction. 
By taking advantage of new technologies, now widely available at affordable prices, countries can finally move toward long-term energy security and away from the inherent volatility of oil markets. 
For low-income countries, this means reducing the use of imported oil to produce electricity. 
Kenya, for example, depends on heavy fuel oil and diesel for 21% of its electricity; the comparable figure in Senegal is a whopping 85%; and some island states use imported diesel for all of their electricity needs. 
For some countries, this is currently the only viable option, but over the long run this dependence can mean higher energy costs and vulnerability to price volatility and supply shocks. 
With the right policies and international support, these countries can invest in the infrastructure needed to achieve a more diversified energy mix. 
For many countries, the next step will be preparing electricity grids to integrate high levels of variable renewable energy like solar and wind. 
Thanks to the drop in the cost of solar panels and wind turbines, both are expanding at a faster pace than ever expected. 
According to a new World Bank report, as of 2014, 144 countries had established national plans to expand renewable energy, and almost 100 had set specific targets and incentives. 
In just seven years, from 2006 to 2013, the world’s installed capacity for wind power quadrupled, while use of photovoltaic systems grew almost 20-fold. 
And all signs indicate that the pace of adoption is accelerating. 
Old concerns about integrating wind and solar into traditional electricity systems are dropping away. 
In Mexico, ambitious and frequently remote renewable-energy projects – hydropower, solar, and wind – are being connected to the grid. 
China, which has the world’s largest installed capacity for renewable energy, is studying the requirements and costs of upgrading the grid to bring in higher levels of distributed solar power. 
As the World Bank report shows, with the right investments and policies, countries can now meet a large share of their electricity needs from variable renewable energy without compromising the reliability of the grid or the affordability of electricity. 
These investments include energy storage, improved forecasting systems, and smart grids – all of which have benefited from breakthroughs in technology and falling prices. 
Perhaps most important, energy markets must be opened to new players. 
For poorer rural areas, this means creating a fertile environment for entrepreneurs and small power producers to develop mini-grids – generally powered by solar, small hydro, or solar-diesel hybrids – that can bring electricity to communities that would otherwise wait for years for grid connections. 
In Tanzania, small power producers are now able to sell to customers without going through a lengthy licensing process. 
In India, remote cellular towers, which would otherwise have to be powered by diesel generators, are serving as “anchor customers” for new mini-grids. 
National power utilities must become nimble – willing to work with independent and individual power producers – and enable smart grids that can better manage supply and demand. 
This is a challenge even for high-income countries such as Germany and the United States, where some utilities are seeing their business upended as consumers sell power back into the grid. 
Here, developing countries, with less invested in traditional business models and facing an urgent need for power supplies, may be able to leapfrog the advanced countries, just as they have with mobile phones. 
The terms “sustainable energy” and “renewable energy” are often used interchangeably. 
But perhaps a broader definition is needed. 
Truly sustainable energy is not only clean, with a minimal impact on pollution and CO2 emissions. 
It is also affordable for governments and citizens alike; it is reliable, drawing on sources upon which we can depend for decades to come; and it contributes to shared prosperity, by bringing services and benefits to all members of society. 
Thanks to lower oil prices, innovation, and economies of scale in the renewable-energy sector, that vision can now be turned into reality. 

Sustainable Medicine 
There is hardly a developed country where health care reform has not become a kind of chronic disease of modern medicine: as soon as some reforms are implemented, a call comes for yet another round. 
Costs continue to climb, but nothing seems to contain their growth for very long. 
Why? 
Politics surely plays a role. 
But a more fundamental reason is the nature of modern medicine itself. 
Most developed countries have a growing number and proportion of elderly. 
Since health care costs for those over 65 are approximately four times higher than for those under 65, aging societies place massive claims on medical resources. 
This is compounded by the constant introduction of new (and usually more expensive) technologies, together with increased demand for high-quality health care. 
We want more, expect more, and complain more loudly if we don't get it. 
When we do get it, we quickly raise the bar, wanting still more. 
The net result has been an average general system-wide cost increase of 10%-15% annually in the United States for the past several years--and with no end in sight. 
European countries are under severe cost pressures as well, undermining their cherished ideal of equitable access. 
Unfortunately, greater use of co-payments and deductibles, privatization of health-care infrastructure, and waiting lists for elective surgery and other non-emergency care are unlikely to work much better in the future than they have in the past. 
What is needed is a radical change in how we think about medicine and health care, not simply better ways to reorganize existing systems. 
We need a "sustainable medicine" that is affordable to national health care systems and provides equitable access in the long term. 
The notion of "sustainability" comes from environmentalism, which seeks to protect the earth and its atmosphere in order to sustain indefinitely human life of a good quality. 
As with environmentalism, sustainable medicine requires reformulating the idea of progress that drives technology costs and fuels public demand. 
The Western idea of progress, translated to medicine, sets no limits on the improvement of health, defined as the reduction of mortality and the relief of all medical miseries. 
However much health improves, it will never be sufficient--so further progress is always required. 
But unlimited progress cannot be paid for with finite funds. 
Long-term affordability and equitable access requires a finite vision of medicine and health care, one that does not try to overcome aging, death, and disease, but tries to help everyone avoid a premature death and to live decent, even if not perfect, lives. 
This implies shifting medical resources sharply towards health promotion and disease prevention. 
Billions of dollars have been spent on mapping the human genome. 
Comparable sums must be spent on understanding and changing health behaviors that are most likely to bring about disease. 
Why is obesity increasing almost everywhere? 
Why do so many people continue smoking? 
Why is it so difficult to persuade contemporary people to exercise? 
Sustainable medicine also requires comparing health care expenditure with spending on other socially important goods. 
In a balanced society, health care may not always be the top priority. 
At the same time, we often overlook the health benefits of spending money in ways that have nothing to do with the direct delivery of medical care: education and health, for example, are strongly correlated: the higher the former the better the latter. 
In any case, sustainable medicine acknowledges that rationing is and always will be a part of any health care system. 
No system can give everyone everything they need. 
Our aspirations will always exceed our resources, particularly since medical progress itself raises public expectations. 
But, to be fair, rationing requires the knowledge and general consent of all who are subject to it. 
One place to start is to evaluate the economic impact of new technologies, preferably before they are released to the public. 
Evidence-based medicine--a popular technique for controlling costs--is ordinarily aimed only at the efficacy of diagnostic or therapeutic procedures. 
But if drug companies must test new products for their safety and efficacy, why not also for their economic impact on health care? 
New technologies should not be dropped into health care systems uninvited. 
Only if a technology does not significantly raise costs, or does so only exceptionally, should governments be willing to pay for it. 
Most fundamentally, a finite model of medicine must accept human aging and death as part of the human life cycle, not some kind of preventable condition. 
Medicine must shift its focus from length of life to quality of life. 
A medicine that keeps people alive too long is not a decent and humane medicine. 
We can live to be 85, but we are likely to do so with chronic conditions that leave us sick and in pain. 
This is not an argument against progress: I, for one, am glad that people don't die of small pox at 40 anymore. 
But aging and death will still win out in the end. 
Medical progress is like exploring outer space: no matter how far we go, we can go further. 
With space travel, the economic limitations of unlimited exploration soon became obvious: no more moon walks. 
Medicine needs an analogous insight. 
Slower technological progress may seem a high price to pay for sustainable health care. 
But our current systems carry an even higher price, threatening justice and social stability. 
At the same time, only about 40% of the rise in health status over the past century is attributable to medical progress, with the rest reflecting improved social and economic conditions. 
This trend is likely to continue, so that even if technological progress slows, people are almost certain to live longer lives in the future--and in better health--than they do now. 
That outcome should be acceptable to everyone. 

Sweden’s Russia Problem 
STOCKHOLM – With a general election approaching in September, Swedish voters are being warned that now it’s their turn to be targeted by Russian interference in the democratic process. 
According to Sweden’s Civil Contingencies Agency (MSB), which is leading the country’s efforts to counter foreign-influence operations, such interference is very likely, and citizens should be on the lookout for disinformation and fake news. 
There’s just one problem: separating Russian “lies” from Sweden’s messy political reality will not be easy. 
In recent months, Russian trolls have targeted Swedes by distributing believable stories and politically charged gossip about social unrest and moral decay. 
In one case, Russian agents allegedly flooded social media with news meant to influence the Swedish debate on immigration. 
The MSB said Russia’s goal was to fuel Swedish domestic disputes and divert attention away from Russian activities elsewhere in Europe. 
That may be true. 
But what makes Russia’s actions all the more dangerous is Sweden’s own missteps, which have caused false stories to gain currency. 
Immigration and soaring crime rates have divided the country; 
Russia is merely seeking to exploit these rifts for its own gain. 
Sweden’s political troubles are not new. 
For the past four years, the country has been governed by a minority coalition comprising the Green Party and the Social Democrats, a bloc that is barely tolerated by center-right forces. 
But the government has hobbled along, unified primarily by its members’ opposition to the alternative. 
After a strong showing by the anti-establishment, anti-immigration Sweden Democrats in the 2014 general election, center-right parties refused to cooperate with the party and tacitly sided with the left, fueling resentment among many voters. 
This bitterness has only sharpened since, as the current government has downplayed the damage caused by the country’s immigration policies. 
Instead of engaging with sensible critics on the topic, the government has labeled its opponents “populists” and accused them of damaging “the image of Sweden.” 
In fact, what is most damaging to the country’s reputation are politicians who continue to refuse dialogue. 
To be sure, Swedish politics has given Russia plenty of ammunition in its efforts to influence public opinion. 
But it is also disturbing how Russia’s history of electoral meddling has become an excuse for Swedish leaders to ignore much-needed reforms. 
For example, in April, Katrin Stjernfeldt Jammeh, the mayor of the southern city of Malmö, summoned the MSB to discuss how to protect the “image of Malmö” from “foreign entities” that might try to sully it in order to influence the upcoming vote. 
But the mayor missed the point: Malmö’s image problem is the result of mismanagement, not distorted public perception. 
Despite a population of less than 330,000, Malmö stands out in Western Europe for its high levels of unemployment and welfare dependency, soaring crime rates, radicalization, segregation, and social unrest. 
Oscar Jonsson, a doctoral student at King’s College London who specializes in Russian non-military warfare, told me that what makes countering Russian interference so difficult is that the tactics are subtle, sophisticated, and often believable. 
In Sweden’s case, Russian agents are accused of feeding false narratives into the Swedish social-media mill, which, because they contain grains of truth, are then shared by Swedes themselves. 
Russian agents wash their hands of the operation, and often achieve their goals. 
“It is a kind of information laundering,” Jonsson says. “That is why it’s very hard to assess the full scope of Russian influence.” 
Sweden has certainly taken this threat to its democracy seriously. 
The government has launched public information campaigns and is training election workers, strengthening cyber defenses, and conducting ongoing threat and vulnerability assessments. 
But officials concede that they may be fighting a losing battle. 
As one MSB spokesperson put it recently, the agency’s limited resources are “not in any way on par with the capability of the aggressor.” 
Faced with this reality, Swedish authorities can limit the impact of electoral meddling by focusing more on restoring social and political stability. 
To do this, leaders must resolve the issue of immigration, overcome parliamentary deadlock, and restore law and order in cities. 
As it has elsewhere, Russia is attempting to alter the Swedish narrative by casting blame and diverting attention. 
Swedish politicians can respond effectively, but their best strategy to fight Russia’s social-media fires is to remove the fuel. 

The End of Scandinavian Non-Alignment 
STOCKHOLM – Having debarked from ports in western Sweden, military convoys from various NATO countries are crowding Swedish streets and prompting the police to issue traffic warnings. 
They are on their way to Norway, where some 50,000 soldiers, airmen, and seamen will come together for NATO’s largest military exercise in years. 
The operation – “Trident Juncture” – has a clear goal: to demonstrate the alliance’s ability to defend Norway against a foreign aggressor. 
There is no need to name the potential aggressor. 
Obviously, it is not Sweden or Finland, both of which have contributed soldiers to the exercise. 
During the Cold War, Finland did occasionally come under Soviet pressure as the Kremlin sought to expand its room for maneuver. 
But it always remained firm in its commitment to defend its Nordic and Western identity. 
Similarly, Sweden has always abstained from joining NATO, owing to its longstanding geopolitical neutrality, and out of solidarity with the Finns. 
And while Denmark and Norway did join the alliance, they long opted out of hosting foreign forces during peacetime. 
But in recent years, Northern Europe’s security landscape has changed. 
In response to Russian aggression and revisionism, NATO has deployed battalion battle groups in Estonia, Latvia, and Lithuania, as well as air force squadrons to police those countries’ skies. 
And in both Sweden and Finland, defense spending is increasing, and there is an ongoing debate about whether to upgrade the privileged partnership with NATO to full membership. 
For its part, Sweden already acknowledges that its territory would fall well within the theater of NATO operations should a conflict arise in Northern Europe, and this realization has increasingly factored into its own security policy and defense preparations. 
The Swedish foreign-policy establishment understands that any threat to the sovereignty of the Baltic countries or Norway would also be a threat to Sweden’s security. 
Hence, Sweden is not just participating in Trident Juncture, but also developing a security partnership with Poland to see to the defense of the Baltic Sea area. 
Sweden’s deepening partnership with NATO is a far cry from its Cold War-era doctrine of non-alignment. 
Back then, the custodians of neutrality would have shouted down any hint of collaboration with NATO and the West as an act of treason. 
The strategy was to persuade the Kremlin that no such thing could ever happen. 
But, of course, it was always a charade. 
The Soviet Union had recruited enough high-level assets in the Swedish government to know about its secret ties to the West. 
Whatever the Swedish people were led to believe about their country’s neutrality, the Soviets knew it was a lie. 
Now the ruse is over: full-scale military integration with NATO is in the offing. 
Still, full NATO membership remains a controversial issue in Sweden. 
In the old days, Swedish foreign policy was torn between two very different approaches. 
On one hand, Sweden was an extroverted activist, sounding more like a non-governmental organization than a nation-state; on the other hand, it maintained a hyper-realist “deep security” policy, albeit one that was talked about only in low voices behind closed doors. 
To this day, the same clash of cultures stands in the way of a rational debate about security policy. 
As for Finland, it always had plenty of the second approach, but almost none of the first. 
And in the absence of much domestic disagreement, it has had an easier time adjusting to new geopolitical realities. 
For example, Finland has explicitly said that it considers NATO membership to be an important option for its security policy, which is something that the Swedish center-left has not yet been willing to countenance. 
Nevertheless, with Trident Juncture, Swedes will see a Swedish-led brigade (comprising Swedish and Finnish units) join with NATO forces in a large-scale defense drill. 
They will witness the extent to which the Swedish, Finnish, and Norwegian air forces are already integrated. 
And they will watch as Finland leads naval exercises in the Baltic Sea. 
In the years ahead, Sweden will continue to move closer to NATO. 
Joint exercises will lead to deeper operational alignment and the establishment of common deterrence capabilities for all of Northern Europe and the Baltic Sea area. 
To be sure, today’s mobilization is not driven by an acute threat from Russia. 
But Russia’s aggressive effort to modernize its military all but requires the West to increase its own defense capacity in the region. 
We need to send a clear message that opportunistic acts of aggression will be answered, both now and in the future. 
By preparing a proper defense, we can ensure peace and stability in the region, which is a prerequisite for moving toward a more constructive relationship with Russia in the long run. 


Sweden’s Other Rape Suspects 
NEW YORK – It is difficult for me, as an advocate against rape and other forms of violence against women, to fathom the laziness and willful ignorance that characterize so much of the media coverage of the sexual-assault allegations against WikiLeaks founder Julian Assange. 
To report that we are simply witnessing Swedish justice at work, one must be committed to doing no research – not even the bare minimum of picking up a phone. 
In fact, we are witnessing a bizarre aberration in the context of Sweden’s treatment of sex crime – a case that exposes the grim reality of indifference, or worse, that victims there and elsewhere face. 
If I were raped in Uppsala, where Assange is alleged to have committed his crime, I could not expect top prosecutors to lobby governments to arrest my assailant. 
On the contrary, “ordinary” Swedish rapists and abusers of women should assume that the police might not respond when called. 
When I tried the rape-crisis hotline at the government-run Crisis Center for Women in Stockholm, no one even picked up – and there was no answering machine. 
According to rape-crisis advocates in Sweden, one-third of Swedish women have been sexually assaulted by the time they leave their teens. 
Indeed, according to a study published in 2003, and other later studies through 2009, Sweden has the highest sexual-assault rate in Europe, and among the lowest conviction rates. 
When I reached the Stockholm branch of Terrafem, a support organization for rape survivors, a volunteer told me that in her many years of experience, Sweden’s police, prosecutors, and magistrates had never mobilized in pursuit of any alleged perpetrator in ways remotely similar to their pursuit of Assange. 
The far more common scenario – in fact, the only reliable scenario – was that even cases accompanied by a significant amount of evidence were seldom prosecuted. 
This, she explained, was because most rapes in Uppsala, Stockholm, and other cities occur when young women meet young men online and go to an apartment, where, as in the allegations in the Assange case, what began as consensual sex turns nonconsensual. 
But she said that this is exactly the scenario that Swedish police typically refuse to prosecute. 
Just as everywhere else, Sweden’s male-dominated police, she explained, do not tend to see these victims as “innocent,” and thus do not bother building a case for arrest. 
She is right: According to a report by Amnesty International, as of 2008, the number of reported rapes in Sweden had quadrupled in 20 years, but only 20% of cases were ever prosecuted. 
And, while the prosecution rate constituted a minimal improvement on previous years, when less than 15% of cases ended up in court, the conviction rate for reported rapes “is markedly lower today than it was in 1965.” 
As a result, “in practice, many perpetrators enjoy impunity.” 
Until 2006, women in Uppsala faced a remarkable hurdle in seeking justice: the city’s chief of police, Göran Lindberg, was himself a serial rapist, convicted in July 2010 of more than a dozen charges, including “serious sexual offenses.” 
One victim testified that she was told her rapist was the police chief, and that she would be framed if she told anyone about his assaults. 
Lindberg also served as the Police Academy’s spokesman against sexual violence. 
The Uppsala police force that is now investigating Assange either failed to or refused to investigate effectively the sadistic rapist with whom they worked every day. 
In other words, the purported magical Swedish kingdom of female sexual equality, empowerment, and robust institutional support for rape victims – a land, conjured by Swedish prosecutors, that holds much of the global media in thrall – simply does not exist. 
In the Assange case, the Swedish police supported the accusers in legally unprecedented ways – for example, by allowing them to tell their stories together and by allowing testimony from a boyfriend. 
But other alleged victims of gender-based abuse, sometimes in life-threatening circumstances, typically receive very different treatment. 
In particular, according to WAVE, a pan-European consortium of service providers for rape and sexual-abuse survivors, when migrants, who comprise 13.8% of Sweden’s population, report rape and abuse, they face high systemic hurdles in even telling their stories to police – including longstanding linguistic barriers in communicating with them at all. 
Likewise, Swedish intake centers for victims of male violence are woefully underfunded – like all support services for rape and abuse victims across Europe and North America – leaving many women who face threats to their safety and that of their children waiting for unavailable places in shelters. 
When I emailed the Rape Crisis support institute in Uppsala, listed by the global rape-crisis organization RAINN, I received an automatic reply saying that the facility was temporarily closed. 
So, for most raped Swedish women, the shelters are full, the hotlines inactive, and the police selectively look the other way – that is, unless they are busy chasing down a globally famous suspect. 
We have been here before. 
Last year, when my left-wing colleagues were virtually unanimous in believing the New York Police Department’s narrative of a certain victim and a guilty-before-due-process rapist, I made the same call – to the local rape-crisis center. 
There, Harriet Lesser, who works every day with victims whose alleged attacker is not the managing director of the International Monetary Fund, confirmed that the official support shown for the victim – in advance of any investigation – was indeed unprecedented. 
Let me be clear: I am not saying that Assange, much less Dominique Strauss-Kahn, committed no crime against women. 

Sweden in Crisis 
STOCKHOLM – After decades of adherence to more or less stable rules and predictable patterns, Swedish politics has entered uncharted territory in recent weeks. 
Many are shocked that the government collapsed and had to call a new election only two months after taking office. 
After all, Sweden had been a rare beacon of success in Europe in the years since the 2008 global financial crisis. 
So what happened? 
The immediate cause of the government’s demise was Parliament’s rejection of the center-left coalition’s proposed budget, in favor of the budget presented by the center-right Alliance parties, which formed the previous government. 
Having failed to pass its first budget – owing to the abrupt decision by the far-right Swedish Democrats (SD) to support the Alliance alternative – the government could not simply continue as if nothing had happened. 
The background to this episode was the September election, which the four-party Alliance lost after eight years in power (during which I served as Foreign Minister). 
The Alliance government was widely considered to have been successful; but eight years is a long time in politics. 
Fair enough. 
But, though the Alliance certainly lost, the main opposition Swedish Social Democratic Party and its allies on the left did not win. 
In fact, the three leftist parties in Parliament gained a slightly smaller share of the popular vote than they did in the 2010 election. 
The big winner was the populist SD, which doubled its share of the vote, to more than 13%. 
And, because no other party was prepared to cooperate with the SD, the only viable alternative was a minority government. 
To be sure, the Social Democrat-Green coalition, with the support of only 38% of MPs, was bound to be an uncertain exercise. 
But it could have worked, had the government not quickly veered sharply to the left, forging budget and other agreements with the ex-Communist Left party. That strategy sealed the government’s fate, though the end came sooner and more dramatically than expected. 
But Sweden’s current political muddle is also rooted in longer-term changes, which to some extent reflect broader European trends. 
One is the structural decline of the once-dominant Social Democrats. 
For decades, any election in which the party won less than 45% of the vote was viewed as a disaster. 
Now the Social Democrats’ popular support hovers at around 30%, and the last two elections yielded the worst results in a century. 
The other trend is the rise of the populist SD. 
Until 2010, Sweden seemed immune to the rise of far-right parties like those in Denmark, Norway, and Finland. 
Since then, however, the SD has fundamentally changed the country’s political landscape. 
Anti-immigrant sentiment is part of the story, though Swedish public opinion has become much more favorable toward immigration since the early 1990s. 
For some, immigration has become a symbol of a society gone astray. 
For others, the number of immigrants over the last few years has simply been too high. 
In fact, the numbers are high – not in comparison with a country like Turkey, but certainly relative to other European Union countries. 
Sweden and Germany receive the largest inflows of immigrants by far – and Germany is nearly ten times the size of Sweden. 
Our tradition of being open to refugees is not new. 
People came from the Baltic countries in the 1940s, Hungary in 1956, Chile after the 1973 coup, and Iran after the 1979 revolution. 
For decades, Swedish industry was dependent on immigrant workers. 
During the Bosnian War of the 1990s, Sweden opened its doors to some 100,000 people – a challenge at any time, much less during a period of profound economic crisis. 
But it still turned out well: The Bosnian immigrants have fared roughly as well as the Swedes who received them, and they have enriched our society. 
In the new century, refugees have come increasingly from the Middle East and the Horn of Africa. 
One percent of Sweden’s population today is from Iran, and almost 2% are from Iraq. 
Indeed, after the Iraq war, the small town of Södertälje took in more Iraqi refugees than the United States did. 
Given the numbers, immigration in Sweden has worked much better than expected. 
But there are problems. 
The Swedish labor market’s sometimes rather strict systems and stable structures have impeded integration relative to many other countries. 
And now the number of immigrants is increasing again, reflecting chronic turmoil in the Middle East and elsewhere, as well as Europe’s increasingly turbulent and dangerous neighborhood, largely owing to Russian revisionism and military expansion. 
Sweden, already a humanitarian superpower in terms of the aid it provides to conflict regions, certainly will not close its doors. 
But other European countries will have to bear more of the burden, and the authorities will have to do more to facilitate integration. 
In particular, the pace of job creation achieved in the last few years must be maintained. 
For all of its economic success during the past two decades, not least since the 2008 crisis, industry is hollowing out, and structural issues are beginning to be felt. 
Our celebrated welfare state will come under strain from an aging population. 
Indeed, in this respect, immigration is more a part of the solution than a part of the problem. 
There is no guarantee that the election in March will resolve Sweden’s political crisis, particularly if the SD performs well again. 
A German-style grand coalition has never been tested in Sweden; and Austria’s experience suggests that it could play into the extremists’ hands. 
But a more cooperative atmosphere might well be needed. 
In that case, the key question will be whether the Social Democrats can ditch their allies further to the left. 

Swine Flu for Grownups 
PRINCETON – No one knows how the swine flu (H1N1) pandemic will evolve. 
Will it keep spreading, or will it fizzle? 
Will it retreat during the northern hemisphere’s summer and return in the fall? 
Will it stay mild or turn more severe? 
Flu experts just don’t know. 
What is certain is that health officials risk mishandling how they explain this new and potentially alarming threat to the public. 
Although they know a lot about virology and public health, they often know next to nothing about how to talk (and listen!) to people about risks. 
So here’s a primer on the swine flu pandemic risk communication, framed in terms of what health officials shouldn’t do when they’re telling you about this new disease. 
1. 
Don’t feign confidence. 
Nobody likes uncertainty; we all wish the experts knew exactly what will happen. 
But we cope better with candidly acknowledged uncertainty than with false confidence. 
When health officials tell us confidently that X is going to happen, and then Y happens instead, we lose trust in their leadership. 
Smart officials are planning for various swine flu pandemic scenarios, and expecting surprises that will force them to change their plans. 
They should tell us so. 
2. 
Don’t over-reassure. 
So far, this pandemic is mild. 
But even a mild influenza virus kills a lot of people, especially those with other medical problems. 
And experts worry that the novel H1N1 virus could mutate into a more severe strain. 
Yet officials endlessly insist that there is, as a Scottish health official put it, “absolutely no need for the public to be concerned.” 
This is false and it could backfire. 
Even before a situation deteriorates (if it does), people sense when they are being “calmed” rather than informed. 
Not trusting that officials will be candid about alarming information, we rely more on rumors. 
Not trusting official over-reassurances, we become even more alarmed. 
3. 
Don’t worry about panic. 
Panic is rare in emergencies. 
Although people may feel panicky, they almost always behave well. 
But “panic panic” – leaders’ fear that they will be unable to stop their people from panicking – is both common and harmful. 
In the grip of “panic panic,” officials issue over-reassuring statements, suppress or delay alarming news, and speak contemptuously about how the public is “irrational,” “hysterical,” or “panicking.” 
Such disdainful communication further reduces trust. 
4. 
Don’t obsess over accusations of fear-mongering. 
Nothing officials say is likely to cause panic, but they may be accused of causing panic no matter what they say. 
Even when officials over-reassure, they’re often accused of fear-mongering by critics who can’t bear any signs of public concern. 
That particular criticism is inevitable, and officials should shrug it off. 
Far more officials have lost their jobs for under-warning the public about risks that turned out to be serious than for over-warning about risks that didn’t. 
5. 
Don’t fight the adjustment reaction. 
While panic is rare, it is natural for people to need some time to adjust to a new risk – and this swine flu pandemic is new to us all. 
We cannot skip what risk communicators call the “adjustment reaction” phase, during which we may become temporarily overanxious and hypervigilant, and may even take precautions that are technically unnecessary or premature. 
Adjustment reactions are brief, but useful – a cognitive, logistical, and emotional rehearsal for possible hard times ahead. 
Health officials should guide people through their adjustment reactions, not demand that they skip that step. 
6. 
Don’t oversell what the government is doing. 
If I could ban one phrase from official statements, my first choice would be “Everything is under control.” 
(“There’s no need to panic” would be a close second.) 
Experts agree that pandemics can be slowed, but not “contained.” 
Officials who promise – or imply – that they can keep this pandemic from their borders, or stop it once it has arrived, are setting themselves up for public outrage later. 
7. 
Don’t oversell what the public can do. 
It is good risk communication to offer people things to do. 
Action gives us a sense of control, and helps us bear our fear. 
And if H1N1 becomes more severe, people (and communities) who have prepared for that possibility will probably fare better than those who have not. 
But hygiene recommendations like hand-washing and cough-covering help only a little. 
Flu spreads more slowly if we all do our share, but it still spreads. “It’s not much, but it’s all we’ve got” is just as effective a message as “It will prevent the flu” in getting people to adopt these measures – and truth is far more sustainable than exaggeration. 
8. 
Don’t ask the impossible. 
Recommending measures that the public cannot implement creates a sense of futility, not a sense of control. 

Sykes-Picot, Middle East Underwriter, Dead at 100 
BERLIN – On May 16, 1916, in the middle of World War I, Great Britain and France signed a secret pact in London. 
Officially known as the Asia Minor Agreement, the deal, negotiated by the diplomats Mark Sykes and François Georges-Picot, has determined the fate and political order of the Middle East ever since. 
But not for much longer. 
A century ago, Europe’s soon-to-be-victorious powers, concerned with dividing the region (then part of the Ottoman Empire), drew a “line in the sand” (as the author James Barr called it) stretching from the Mediterranean port of Acre in northern Palestine to Kirkuk in northern Iraq, on the border with Iran. 
All territories north of that line, in particular Lebanon and Syria, would go to France. 
Territories to its south – Palestine, Transjordan, and Iraq – would go to Great Britain, which mainly sought to protect British interests along the Suez Canal, the main naval route to British India. 
Simultaneously, however, the United Kingdom was negotiating with Arabs who had sided with the British and French in an uprising against Ottoman rule – first and foremost with Hussein bin Ali, Sharif of Mecca. 
Hussein had been promised Syria in the event of a military victory over the Turks. 
But under the Sykes-Picot agreement, Syria had been awarded to France. 
So one of the two sides was certain to be cheated out of the spoils of its victory, and it was clear from the beginning which side was weaker, namely the Arabs striving for independence. 
The secret agreement negotiated by Sykes and Picot subsequently led to the formation of states that served the great European colonial powers’ geopolitical interests, not the social, religious, and ethnic realities of the region. 
A political order was forced upon the Muslim Middle East by Christian European powers that had flouted their commitments to Arab independence – an order that has been at the root of a century of war and conflict. 
In the Arab world, the trauma of that betrayal and the defeat of the national movement has lingered. 
But Sykes and Picot did bring about a reconciliation between the two great Entente powers, and the regional order they created in the aftermath of centuries of Turkish/Ottoman rule endured. 
The European hegemons, Britain and France, took the place of the Sublime Porte, guaranteeing this order either directly or via regional proxies. 
After World War II, the United States assumed the role of ultimate guarantor of the Sykes-Picot system. 
But America’s experience in Iraq following its 2003 intervention, and spreading turmoil there and elsewhere, led the US to withdraw its forces and reduce its involvement in the region. 
With that, the Sykes-Picot system began to collapse. 
That is why today’s main crises in the Middle East are playing out precisely in the heartland of the Sykes-Picot Agreement: Syria, Lebanon, and Iraq. 
The “Kurdish question,” too, has returned to the fore. 
Only Israel and Jordan seem to be stable – with an emphasis on “seem.” 
Without reconciliation between Israelis and Palestinians, it is only a matter of time before the Palestinian powder keg ignites once again. 
And Jordan’s stability rests largely on the loyalty of the army and the Bedouin tribes to the monarchy, as well as a highly efficient secret service. 
But these are insufficient bases of resilience, particularly given the tectonic shifts occurring next door, in Iraq and Syria. 
Those two countries are now the main theaters in the battle for a post-Sykes-Picot Middle East order. 
Both had been unstable for a long time, ruled by secular Ba’athist dictators who faced popular majorities that adhered to a rival Muslim sect, in addition to a large population of Kurds, who have long dreamed of independence. 
The post-Sykes-Picot order will be the result of fighting in the coming years between regional powers – first and foremost Iran and Saudi Arabia – and their religiously motivated auxiliaries, such as the Shia Hezbollah or the Sunni Islamic State. 
Any Western military intervention would only exacerbate the situation. 
The era when a Western hegemon could maintain control of the Middle East, by military force if necessary, is over. 
Regional forces, not external powers (including Russia), will create the new order in the Middle East emerging out of the remains of the Sykes-Picot system. 
By the time proxy wars like the one in Syria have finished their work, the Sykes-Picot Agreement will be history. 
But the new order could be slow to emerge, because none of the region’s powers is strong enough to impose its will on the others. 
Should they opt for a useless struggle for hegemony, the Middle East will face a major political and humanitarian calamity. 
In the end, total exhaustion on all sides will force reconciliation and the first steps in the direction of a regional peace settlement. 
One thing is clear: The longer the breakthrough to a new order takes, the worse off everyone will be. 
A prolonged process and period of balkanization in the Middle East would result in nothing but more misery and suffering – constituting an enormous ticking time bomb for world peace. 
For those outside the region, the only hope is that no one within it can have a serious interest in that. 

Sympathy for Greenspan 
BERKELEY – In the circles in which I travel, there is near-universal consensus that America’s monetary authorities made three serious mistakes that contributed to and exacerbated the financial crisis. 
This consensus is almost always qualified by declarations that the United States has been well served by its Federal Reserve chairmen since at least Paul Volcker’s tenure, and that those of us who have not sat in that seat know that we would have made worse mistakes. 
Nevertheless, the consensus is that US policymakers erred when: 
· the decision was made to eschew principles-based regulation and allow the shadow banking sector to grow with respect to its leverage and its compensation schemes, in the belief that the government’s guarantee of the commercial banking system was enough to keep us out of trouble; 
· the Fed and the Treasury decided, once we were in trouble, to nationalize AIG and pay its bills rather than to support its counterparties, which allowed financiers to pretend that their strategies were fundamentally sound; 
· the Fed and the Treasury decided to let Lehman Brothers go into uncontrolled bankruptcy in order to try to teach financiers that having an ill-capitalized counterparty was not without risk, and that people should not expect the government to come to their rescue automatically. 
There is, however, a lively debate about whether there was a fourth big mistake: Alan Greenspan’s decision in 2001-2004 to push and keep nominal interest rates on US Treasury securities very low in order to try to keep the economy near full employment. 
In other words, should Greenspan have kept interest rates higher and triggered a recession in order to avert the growth of a housing bubble? 
If we push interest rates up, Greenspan thought, millions of Americans would become unemployed, to no one’s benefit. 
If interest rates were allowed to fall, these extra workers would be employed building houses and making things to sell to all the people whose incomes come from the construction sector. 
Full employment is better than high unemployment if it can be accomplished without inflation, Greenspan thought. 
If a bubble develops, and if the bubble does not deflate but collapses, threatening to cause a depression, the Fed would have the policy tools to short-circuit that chain. 
In hindsight, Greenspan was wrong. 
But the question is: was the bet that Greenspan made a favorable one? 
Whenever in the future the US finds itself in a situation like 2003, should it try to keep the economy near full employment even at some risk of a developing bubble? 
I am genuinely unsure as to which side I come down on in this debate. 
Central bankers have long recognized that it is imprudent to lower interest rates in pursuit of full employment if the consequence is an inflationary spiral. 
Some days I think that, in the future, central bankers must also recognize that it is imprudent to lower interest rates in pursuit of full employment when doing so risks causing an asset price bubble. 
Other days, however, I think that, even with the extra information we have learned about the structure of the economy, Greenspan’s decisions in 2001-2004 were prudent and committed us to a favorable and acceptable bet. 
What I do know is that the way the issue is usually posed is wrong. 
People claim that Greenspan’s Fed “aggressively pushed interest rates below a natural level.” 
But what is the natural level? 
In the 1920’s, Swedish economist Knut Wicksell defined it as the interest rate at which, economy-wide, desired investment equals desired savings, implying no upward pressure on consumer prices, resource prices, or wages as aggregate demand outruns supply, and no downward pressure on these prices as supply exceeds demand. 
On Wicksell’s definition – the best, and, in fact, the only definition I know of – the market interest rate was, if anything, above the natural interest rate in the early 2000’s: the threat was deflation, not accelerating inflation. 
The natural interest rate was low because, as the Fed’s current chairman Ben Bernanke explained at the time, the world had a global savings glut (or, rather, a global investment deficiency). 
You can argue that Greenspan’s policies in the early 2000’s were wrong. 
But you cannot argue that he aggressively pushed the interest rate below its natural level. 
Rather, Greenspan's mistake – if it was a mistake – was his failure to overrule the market and aggressively push the interest rate up above its natural rate, which would have deepened and prolonged the recession that started in 2001. 
But today is one of those days when I don’t think that Greenspan’s failure to raise interest rates above the natural rate to generate high unemployment and avert the growth of a mortgage-finance bubble was a mistake. 
There were plenty of other mistakes that generated the catastrophe that faces us today. 

Defusing the Syrian Time Bomb 
TEL AVIV – It is remarkable that a stern warning about the scale of the threat posed to the United States by Syria’s civil war has gone practically unnoticed. 
Is President Barack Obama’s administration stumbling toward the abyss? 
Earlier this month, the Wall Street Journal reported that, according to the CIA’s deputy director, Michael Morell, “Syria’s volatile mix of Al Qaeda extremism and civil war now poses the greatest threat to US national security” – indeed, “probably the most important issue in the world today.” 
By contrast, Morell described the Iranian regime’s “merging of...nuclear ambitions with its desire to be a hegemonic power in the Middle East” as a mere “cause for concern.” 
Morell, who is preparing to step down from the CIA soon, has little reason to dissemble. 
Just two months ago, in mid-June, when the Syrian crisis was the focus of international attention and the subject of heated policy debate, such a statement by a senior administration official would have drawn strong reactions from several quarters. 
But Syria has since moved from the center of attention, displaced by the coup and ongoing crisis in Egypt, the threat of an Al Qaeda terror offensive in Yemen and elsewhere, and the renewal of Israeli-Palestinian negotiations. 
The apparent (and deceptive) lull in the fighting in Syria has contributed to this shift. 
After the government’s military achievements in Quseir and Homs, there has been some tactical regrouping by the opposition. 
Both sides are trading minor blows as they prepare for a major round of fighting in Aleppo, Syria’s largest city, now held by the opposition. 
Overall, and despite the regime’s recent victories, the fighting remains at a stalemate. 
So this is a convenient time for the international community to look away from a crisis that seems to have no good solutions. 
But this does not diminish the gravity of what is happening in Syria, or lessen the seriousness of Morell’s warning. 
As Morell put it, the most acute danger is that a regime with a large stockpile of weapons of mass destruction will be supplanted by a regime affiliated with, or dominated by, Al Qaeda. 
Pointing to the inflow of jihadis, Morell said that Syria’s “current track is toward the collapse of its central government,” after which it would replace Pakistan as Al Qaeda’s preferred haven. 
Morell thus placed himself squarely within one of the two principal schools of thought in the policy debate on Syria (a debate that is articulated almost exclusively in geopolitical terms and ignores humanitarian issues). 
One school regards Syria primarily as a theater of battle against Al Qaeda and other extremists. 
Its adherents, preoccupied with the prospect of a jihadi takeover in Syria, argue (sometimes implicitly and sometimes explicitly) that the US and its allies must not support or intervene on the side of the rebels and, in fact, should view Bashar al-Assad’s regime as the lesser evil. 
Those who fear a jihadi takeover cite recent events in Sinai. 
Just a few days ago, Israel closed its airport in Eilat after receiving a warning that jihadis in Sinai planned to attack it with rockets. 
This, it is argued, is only a dress rehearsal for what can be expected in a post-Assad Syria. 
The other school of thought does not take this scenario lightly. 
Nonetheless, it argues that a victory in Syria by a coalition of Russia, Iran, Hezbollah, and Assad’s regime would pose an even greater danger. 
Moreover, in the event of the Assad regime’s fall, there would be plenty of ways to deal with the jihadi groups in Syria. 
But the most appropriate response to Morell’s statement is that the US does not necessarily have to choose between two sharply defined options. 
Yes, Syria’s secular opposition is weak and divided, while the jihadis are more dynamic; but jihadi supremacy in the event of an opposition victory is not inevitable. 
The US and its allies should conduct a robust policy, make a more significant investment in the secular opposition, and articulate clear goals. 
In June, Obama announced that Assad’s regime had used chemical weapons against its own population and had thus crossed his administration’s “red line.” 
But no coherent action or policy followed this powerful statement. 
For Obama, Syria’s fate simply does not seem urgent; but when the decisive battle for Aleppo begins, it may be too late. 
Morell’s warnings may yet be vindicated – by default, if not by design. 


Syria’s Continuing Chemical Fallout 
THE HAGUE – The international community’s failure to bring the Syrian civil war to an end is a tragedy – especially for the country’s long-suffering people. 
In one respect, multilateral action has had a clearly positive impact: the elimination of the Syrian government’s chemical-weapons program. 
And yet there are persistent reports that chemical weapons, including sulfur mustard (commonly known as mustard gas) and chlorine bombs deployed against civilians, continue to be used in Syria. 
The stakes could not be higher. 
The perpetrators of these attacks must be identified and brought to justice. 
Allowing the use of chemical weapons to go unpunished not only could reverse one of the few promising developments in the Syrian conflict; it also threatens to undermine international norms on the use of toxic gas and nerve agents, increasing the possibility that they will be used in terrorist attacks. 
In August 2013, rockets containing deadly sarin gas struck Ghouta, a rebel-controlled suburb near Damascus. 
Horrific images of women and children dying in agony mobilized international consensus against the use of these types of weapons. 
In October 2013, following Syria’s accession to the Chemical Weapons Convention, a joint mission of the Organisation for the Prohibition of Chemical Weapons (OPCW) and the United Nations was tasked with eliminating the country’s chemical arsenal and production facilities. 
Less than a year later, the mission accomplished what no military intervention could have achieved; the strategic threat from Syria’s chemical weapons was effectively eliminated. 
Work to clarify certain aspects of the government’s initial declaration about its weapons program is ongoing; but 1,300 metric tons of chemical weapons, including sulfur mustard and precursors for deadly nerve agents, have been accounted for and destroyed under the watchful eyes of OPCW inspectors. 
This achievement must not be allowed to be rolled back. 
The Chemical Weapons Convention is one of mankind’s most successful disarmament efforts. 
Since 1997, 192 countries have agreed to be bound by its provisions, and 91% of the world’s declared chemical weapons have been destroyed. 
The continued use of chemical weapons in the Syrian conflict is not only causing terrible suffering among the country’s civilian population; it also risks eroding the convention’s credibility. 
A fact-finding mission established by the OPCW in April 2014 found “compelling confirmation” that a toxic chemical – most likely chlorine gas – was used “systematically and repeatedly” as a weapon in villages in northern Syria. 
It was on the basis of these findings that the UN Security Council agreed in August 2015 to create a joint investigative mechanism of the OPCW and the UN and task it with identifying those responsible for the use of chemical weapons in the conflict. 
The fog of war cannot be allowed to create a fog of responsibility. 
The perpetrators of chemical attacks must be held to account, whoever they are. 
International investigators deployed in Syria bring vital expertise to this important mission. 
It is crucial that political leaders express confidence in their impartiality, allow them to carry out their work unobstructed, and not second-guess their conclusions. 
Once those responsible for the use of chemical weapons have been identified, the international community must ensure that they are prosecuted, in order to send a clear signal about the inviolability of the global ban. 
Persistent allegations that non-state actors are using chemical weapons in Syria and northern Iraq are of particular concern, as they raise the possibility of toxic chemicals being used in terrorist attacks. 
Manufacturing nerve agents is a complex process, but extremists can easily deploy toxic industrial chemicals – such as chlorine gas – if they have them in their possession. 
A conventional attack against a chemical facility is another potentially devastating risk – one that is not beyond the capabilities of a well-funded terrorist group. 
Nearly two decades after the Chemical Weapons Convention entered into force, the treaty is facing a major test. 
The threat that toxic gas or nerve agents will be deployed in a conflict between countries has been all but eliminated. 
Failure to punish their use in the Syrian civil war risks undermining the regime that has brought us to the threshold of a chemical weapons-free world. 

Syria’s Final Countdown 
TEL AVIV – A series of crucial defeats of the Syrian army has laid to rest any illusions that the government in Damascus is in control of its country. 
By spreading his forces thinly across Syria, President Bashar al-Assad has drastically reduced his capacity to win decisive battles, and he is now being forced to evacuate wide areas of the country to concentrate his army around Damascus and the Alawite enclave in the northwest. 
As it becomes clear that Assad is likely to lose the war, his closest allies – as well as world powers and regional players – are beginning to plan for the end game. 
In late May, the leader of Hezbollah, Hassan Nasrallah, gave a speech that spoke volumes about the impact of the Syrian war on his organization. 
“The threat we face is existential,” Nasrallah said. “We now have three options: to expand the war and fight far more than we have fought in the last four years, to capitulate and be slaughtered, or to disperse throughout the world, walking humiliated and purposeless from catastrophe to catastrophe.” 
More than 3,000 Hezbollah fighters have died in Syria, and another 4,000 have been injured. 
Syrian militants, including Islamic State fighters, have penetrated Lebanon, threatening to rekindle the country’s ethnic war and undermining Hezbollah’s legitimacy as the guarantor of its security. 
Assad’s fall would deny the organization its vital logistic hinterland in Syria, making it vulnerable to challenges by insurgent Sunni militias. 
Iran, too, is likely to face a reckoning, as its ally in Damascus approaches defeat. 
The country’s strategic calculations are bound to have been affected by the ascension of Salman bin Abdulaziz Al Saud to the Saudi throne, a real game changer that has resulted in a shift of alliances among the region’s Sunni powers. 
Stronger ties among Saudi Arabia, Turkey, and Qatar – and the spectacular successes of the latter’s Sunni proxies in Syria – will put pressure on Iran to cut Assad loose or risk being drawn even deeper into the Syrian quagmire. 
The regional proxy war between the Iran-backed Assad government and Sunni-backed rebels has largely undermined America’s influence on the course of events in Syria. 
Sunni fighters have ignored calls by the United States to focus on fighting the Islamic State instead of the Assad regime. 
In fact, the most effective fighting force in the country is Jaish al-Fatah – The Army of Conquest – a collection of Sunni rebel groups, some of which the US considers to be terrorist organizations. 
The US is rightly worried that a victory by Jaish al-Fatah and others might empower anti-Western elements in Syria. 
Drawing from its sad experience in Iraq, the US government fears that Assad’s fall would be quickly followed by the collapse of the Syrian army, leaving the country without a stabilizing force. 
Rather than turning their attention to the Islamic State, the fractious victors would most likely turn on one another. 
As in Libya, the fighting would make the country ungovernable. 
Meanwhile, Russia, which considers the naval base of Tartus to be strategically vital, can be counted on to do all it can to prevent a total defeat of the regime. 
When Secretary of State John Kerry proposed, at a meeting last May, a joint international approach to contain the conflict, Russian President Vladimir Putin was not interested. But the Russian regime is not blind to the realities of the battlefield. 
Following the loss of the city of Palmyra to the Islamic State, families of Russian advisers began to be repatriated. 
In preparation for a possible future without Assad, the Kremlin is now trying to gain influence in opposition groups. 
For now, Assad is doing his best to cling to power. 
A power-sharing agreement is all but unthinkable, and Syria’s geography is not well suited to an orderly division along sectarian lines. 
Assad’s war aims have been reduced to avoiding decisive defeat and gaining international legitimacy, in the hope of a favorable political solution. 
The rise of the Islamic State did lend support to the government’s claims that Syria risks being taken over by terrorist groups; nonetheless, the regime is finding itself increasingly isolated. 
Assad’s final days are unlikely to be pretty. 
The tight-knit members of his clan, his political allies, and many members of the Alawite minority will be fighting for their survival. 
Unless a political solution is somehow found, Syria’s fate will come down to the prophetic words a Sunni frontline fighter from Homs told a German reporter in 2012. “It’s a question of numbers,” he said. 
“There are 18 million Sunnis against him. 
Assad must kill them all. Otherwise, we’ll win and kill him and his henchmen.” 

Solving Syria in the Security Council 
NEW YORK – The ongoing bloodletting in Syria is not only the world’s greatest humanitarian disaster by far, but also one of its gravest geopolitical risks. 
And the United States’ current approach – a two-front war against the Islamic State and President Bashar al-Assad’s regime – has failed miserably. 
The solution to the Syrian crisis, including the growing refugee crisis in Europe, must run through the United Nations Security Council. 
The roots of US strategy in Syria lie in a strange– and unsuccessful – union of two sources of American foreign policy. 
One comprises the US security establishment, including the military, the intelligence agencies, and their staunch supporters in Congress. 
The other source emerges from the human-rights community. 
Their peculiar merger has been evident in many recent US wars in the Middle East and Africa. 
Unfortunately, the results have been consistently devastating. 
The security establishment is driven by US policymakers’ long-standing reliance on military force and covert operations to topple regimes deemed to be harmful to American interests. 
From the 1953 toppling of Mohammad Mossadegh’s democratically elected government in Iran and the “other 9/11” (the US-backed military coup in 1973 against Chile’s democratically elected Salvador Allende) to Afghanistan, Iraq, Libya, and now Syria, regime change has long been the coin of the US security realm. 
At the same time, parts of the human-rights community have backed recent US military interventions on the grounds of the “Responsibility to Protect,” or R2P. 
This doctrine, adopted unanimously by the UN General Assembly in 2005, holds that the international community is obliged to intervene to protect a civilian population under massive attack by its own government. 
In the face of the brutality of Saddam Hussein, Muammar el-Qaddafi, and Assad, some human-rights advocates made common cause with the US security establishment, while China, Russia, and others have argued that R2P has become a pretext for US-led regime change. 
The problem, as human-rights advocates should have learned long ago, is that the US security establishment’s regime-change model does not work. 
What appears to be a “quick fix” to protect local populations and US interests often devolves into chaos, anarchy, civil war, and burgeoning humanitarian crises, as has happened in Afghanistan, Iraq, Libya, and now Syria. 
The risks of failure multiply whenever the UN Security Council as a whole does not back the military part of the intervention. 
The US intervention in Syria can also be traced to decisions taken by the security establishment a quarter-century ago to overthrow Soviet-backed regimes in the Middle East. 
As then-Under Secretary of Defense Paul Wolfowitz explained to General Wesley Clark in 1991: “We learned that we can intervene militarily in the region with impunity, and the Soviets won’t do a thing to stop us… [We’ve] got about five to ten years to take out these old Soviet ‘surrogate’ regimes – Iraq, Syria, and the rest – before the next superpower [China] comes along to challenge us in the region.” 
When al-Qaeda struck the US on September 11, 2001, the attack was used as a pretext by the security establishment to launch its long-desired war to topple Saddam. 
When the Arab Spring protests erupted a decade later, the US security establishment viewed the sudden vulnerability of the Qaddafi and Assad regimes as a similar opportunity to install new regimes in Libya and Syria. 
Such was the theory, at any rate. 
In the case of Syria, America’s regional allies also told President Barack Obama’s administration to move on Assad. 
Saudi Arabia wanted Assad gone to weaken a client state of Iran, the kingdom’s main rival for regional primacy. 
Israel wanted Assad gone to weaken Iran’s supply lines to Hezbollah in southern Lebanon. 
And Turkey wanted Assad gone to extend its strategic reach and stabilize its southern border. 
The humanitarian community joined the regime-change chorus when Assad responded to Arab Spring protesters’ demand for political liberalization by unleashing the army and paramilitaries. 
From March to August 2011, Assad’s forces killed around 2,000 people. 
At that point, Obama declared that Assad must “step aside.” 
We don’t know the full extent of US actions in Syria after that. 
On the diplomatic level, the US organized the “Friends of Syria,” mainly Western countries and Middle East allies committed to Assad’s overthrow. 
The CIA began to work covertly with Turkey to channel arms, financing, and non-lethal support to the so-called “Free Syrian Army” and other insurgent groups operating to topple Assad. 
The results have been an unmitigated disaster. 
While roughly 500 people per month were killed from March to August 2011, some 100,000 civilians – around 3,200 per month – died between September 2011 and April 2015, with the total number of dead, including combatants, reaching perhaps 310,000, or 10,000 per month. 
And, with the Islamic State and other brutal extremist groups capitalizing on the anarchy created by the civil war, the prospect of peace is more distant than ever. 
Military intervention led or backed by the US in Afghanistan, Iraq, and Libya has produced similar debacles. 
Toppling a regime is one thing; replacing it with a stable and legitimate government is quite another. 
If the US wants better results, it should stop going it alone. 
The US cannot impose its will unilaterally, and trying to do so has merely arrayed other powerful countries, including China and Russia, against it. 
Like the US, Russia has a strong interest in stability in Syria and in defeating the Islamic State; but it has no interest in allowing the US to install its choice of regimes in Syria or elsewhere in the region. 
That is why all efforts by the UN Security Council to forge a common position on Syria have so far foundered. 
But the UN route can and must be tried again. 
The nuclear pact between Iran and the Security Council’s five permanent members (the US, China, France, Russia, and the UK) plus Germany, has just provided a powerful demonstration of the Council’s capacity to lead. 
It can lead in Syria as well, if the US will set aside its unilateral demand for regime change and work with the rest of the Council, including China and Russia, on a common approach. 
In Syria, only multilateralism can succeed. 
The UN remains the world’s best – indeed its only – hope to stop the Syrian bloodbath and halt the flood of refugees to Europe. 

Rethinking Humanitarian Aid in Civil Wars 
LONDON – In recent months, nongovernmental organizations and journalists have accused the United Nations of bias toward Syrian President Bashar al-Assad’s regime and failure to distribute humanitarian aid to rebel-controlled areas of Syria. 
To an extent, these criticisms are justified. 
The UN does work closely with the Syrian government, and humanitarian aid has not consistently reached areas outside of government control. 
But the detractors overlook an inherent contradiction in the UN’s responsibilities in countries facing civil war. 
According to the UN Charter, one of the organization’s purposes is to coordinate relief operations during and after disasters of a “humanitarian character” in which national authorities cannot cope on their own. 
The UN Office for the Coordination of Humanitarian Affairs has overall responsibility for the UN’s disaster-relief efforts, and its activities should be guided by the four principles of humanity, neutrality, impartiality and independence. 
It works with national governments, specialized UN agencies, and collaborating international and local NGOs. 
But the UN also has a mandate to respect its member states’ sovereignty, which means that it must acknowledge an internationally recognized regime’s authority over its territory and the people living there. 
This is not an issue when countries are ruled by governments that have exclusive jurisdiction over their territory and a genuine concern for their citizens’ welfare. 
But it becomes problematic when these conditions don’t exist, such as in civil wars. 
When militant groups capture territory within a country, it gives rise to a situation that the sociologist Charles Tilly called dual or multiple sovereignty. 
The rebels, rather than the internationally recognized regime, become the de facto sovereigns of areas they control. 
This poses a challenge for the UN because of its twin mandates to deliver humanitarian aid impartially and to respect its member states’ sovereignty. 
The challenge becomes stark when an internationally recognized regime denies the UN permission to deliver humanitarian aid to opposition-controlled areas. 
From the regime’s perspective, the fear is that providing aid to these areas will sustain hostile communities, and could be perceived as acknowledging the rebels as de facto political leaders. 
This civil-war scenario characterizes Syria. 
The Assad regime has lost control of vast swaths of territory within the Syrian Arab Republic’s nominal borders, and it has little concern for the welfare of communities living in rebel-controlled territory, as evidenced by the Syrian Army’s indiscriminate violence toward civilians in those areas. 
And yet, despite the Assad regime’s contempt for humanitarian norms, the UN still must obtain its permission to operate in rebel-controlled areas. 
In fact, the UN’s Humanitarian Response Program for Syria stipulates that “the Government of Syria bears the primary responsibility for protecting its citizens.” 
In theory, the Syrian government allows humanitarian aid to be transported across the frontlines from areas it controls to rebel-controlled territory. 
In practice, however, delivering aid has been extremely difficult, owing to ongoing fighting and bureaucratic obstacles put in place by the Syrian government. 
What’s more, the government does not permit cross-border aid: although this would be the most effective delivery method for rebel-controlled areas, it would subvert the government’s control of aid distribution and further undermine its own sovereignty claims. 
The UN has very little power to influence the Syrian government’s humanitarian-aid strategy, and if it openly defies the regime, it could lose permission to operate in the country at all. 
Meanwhile, as the Syria crisis has worsened, pressure has mounted to improve humanitarian-aid delivery in rebel-controlled areas, and the UN has pursued a number of options. 
For example, the UN has helped negotiate temporary ceasefires so that humanitarian-aid agencies can access besieged areas; UN agencies have quietly furnished local NGOs working in rebel-controlled areas with sorely needed supplies and technical advice; and the UN Security Council has passed resolutions to bypass the Syrian government and allow cross-border humanitarian-aid delivery. 
Accusations that the UN is biased toward the Assad regime are unfair, given the reality on the ground. 
The UN has no other option but to cooperate with the internationally recognized regime, regardless of how that regime treats the population in areas outside of government control. 
While the UN has worked to overcome these constraints, its efforts have been necessarily slow, reactive, and ad hoc. 
Worse still, its efforts were possible only because the humanitarian crisis deteriorated to such an extent that it could no longer be ignored. 
Ideally, the international humanitarian-aid regime would more accurately reflect the political realities in countries afflicted by civil war, and the UN would be able to work with all parties that control territory. 
One way to achieve this would be to revise the UN Charter so that it permits the organization to engage with de facto political leaders in rebel-controlled areas. 
The argument for making this change is especially strong in cases such as Syria, where the government has acted without concern for the wellbeing of communities living in rebel-controlled areas. 
Another possibility would be to transfer responsibility for humanitarian aid in conflict zones to an NGO that is not under the same pressure to respect the sovereignty of internationally recognized regimes. 
Such a change would be incongruous with the current system of international politics, which is based on the inviolability of nation-states. 
But surely delivering humanitarian aid to those who need it should be prioritized over the sovereignty of governments that do not respect the welfare of all their citizens. 

The Syrian Time Bomb 
BERLIN – The ongoing conflict in Syria has much in common with the Thirty Years’ War, which devastated the heart of Europe – particularly the German city of Magdeburg, the Aleppo of the time – from 1618 to 1648. 
Viewed from a distance, the war was a succession of conflicts that visited immeasurable suffering upon Europe’s population, ending, with the Peace of Westphalia, only when all of the parties involved had become utterly exhausted. 
The Thirty Years’ War was nominally a religious conflict between Catholic and Protestant Christians, just as the main divide in today’s Middle East is between Sunni and Shia Muslims. 
But, as in Syria today, religion masked a deeper struggle for power and regional dominance. 
The Syrian war started during the Arab Spring, after Syrian protesters called for democracy and an end to President Bashar al-Assad’s dictatorship. 
But it soon became an international affair. 
Iran and Hezbollah, the Lebanese Shia militia it supports, along with Russia, intervened militarily and prevented Assad’s fall to rebel forces, which were backed by Turkey and Saudi Arabia, representing the Sunni side of the divide. 
Meanwhile, the war had also expanded to include a US-led campaign against the Islamic State (ISIS). 
And when ISIS was defeated last year, another conflict, this time between Turkey and Kurds in Northern Syria, quickly ensued. 
Now, the US-allied Kurdish YPG (People’s Protection Units) fighters who proved indispensable in the fight against ISIS are being targeted by Turkey, which raises the possibility of a direct military confrontation between two NATO allies. 
Moreover, there is also a growing risk of a confrontation between the US and Russia, underscored by recent reports that a US airstrike killed dozens of Russian mercenaries in Syria. 
With every new chapter, the Syrian tragedy seems to get more dangerous. 
The conflict is no longer about who holds power in Damascus, but about who holds hegemony in the Middle East. 
The struggle is not only between Russia and the US, but also pits Shia Iran against Sunni Saudi Arabia, which has increasingly aligned itself with Israel, another US ally. 
Turkey, for its part, is driven primarily by the fear that a Kurdish state will be established in Northern Syria, which could encourage separatist Kurdish factions in Southeast Turkey. 
Indeed, the Kurds in Northern Iraq (Kurdistan) have already been vying for their own state, and even held an independence referendum last year. 
Finally, Israel, the region’s military superpower, has its own security interests in Lebanon and southern Syria. 
Until recently, Israel had mostly kept out of the war. 
But it has had to intervene from the air to block arms shipments from reaching Hezbollah, and to prevent Iran from establishing a presence near its northern border. 
Israel’s involvement increased earlier this month when it shot down an Iranian drone that had entered its airspace from Syria. 
When Israeli warplanes responded by striking Iranian targets in Syria, one was downed by Syrian antiaircraft fire (the pilots reached Israeli territory safely), prompting Israel to strike Assad’s forces directly. 
As these events unfolded, it quickly became clear that Israel could not rely on the supposed special relationship between Russian President Vladimir Putin and Israeli Prime Minister Binyamin Netanyahu. 
Russia proved either unwilling or unable to control Iran. 
So, whether it likes it or not, Israel is now an active player in Syria. 
It is precisely on this front that another war could ensue, this time between Israel and Iran. 
Such a conflict would serve neither party’s interests, but it is easy to see how it could happen anyway, given the current realities. 
Israel simply cannot stay out of the conflict while Assad’s regime, Russia, Iran, and Hezbollah secure a military victory. 
The facts on the ground are fundamentally threatening Israel’s own security, and dramatically strengthening its enemy, Iran. 
A war between Iran and Israel (with Saudi Arabia in the background) would imperil the entire region, because it would be yet another front in the battle for hegemony. 
But Europe, too, would be directly affected, and not just because a larger conflict would send even more refugees north. 
With US President Donald Trump threatening to sabotage the Iran nuclear deal, Europe could find itself with a dangerous arms race – or even another great war – unfolding not far from its borders. 
Given these dangers, Europe can no longer afford to watch from the sidelines. 
Europeans must defend the Iran nuclear agreement for the sake of their own security. 
And because the European Union has longstanding obligations to Israel, it must not allow a violent hegemonic struggle that would directly threaten Israel. 
Now, more than ever, is the time for European diplomacy. 
With another great war looming in the Middle East, European leaders must act. 

The Key to a Syrian Accord 
DAVOS – The Syrian peace talks that are scheduled to resume in Geneva on January 25 will take place under a framework set out in Vienna in October. 
These principles, agreed upon by the most important foreign players in Syria’s war, include a commitment to secular governance, the eventual defeat of the Islamic State (ISIS) and other terrorist groups, the maintenance of Syria’s prewar borders, the preservation of its state institutions, and the protection of minority groups. 
What they do not include is an effort to address the largest obstacle to lasting peace: the ongoing attacks against civilians and other atrocities that are intensifying divisions among the Syrian factions who will eventually have to govern together. 
If the deliberate carnage does not stop soon, diplomacy alone will be unlikely to suffice to end the conflict. 
The war has continued for so long, in part, because both the Syrian government and the armed groups it is fighting believed that they would ultimately prevail. 
Russia’s entry into the conflict has helped change that calculus. 
But, while Russian airpower has bolstered the government enough to keep it from collapsing, it has not been enough to make significant progress against the opposition. 
Meanwhile, the attacks in Europe by ISIS, combined with the mass exodus of Syrian refugees, has spurred a new push for a political compromise. 
The European Union, the United States, and other interested countries hope that Syria’s warring parties will stop fighting each other, and turn their weapons instead on ISIS and other extremist groups, such as Jabhat al-Nusra. 
One of the toughest nuts to crack in the peace negotiations is the fate of Syrian President Bashar al-Assad and his henchmen. 
The Assad regime is responsible for the highest number of civilian casualties by far, having carried out indiscriminate attacks in populated opposition-held areas, besieged entire populations, blocked the delivery of humanitarian aid, and tortured and executed prisoners. 
And yet, while Assad’s opponents insist that he relinquish power, that clearly will not be a precondition for the talks. 
As a practical matter, Assad leads one of the conflict’s most powerful factions, one that must be represented at the negotiating table if peace is to be achieved. 
Furthermore, the abrupt removal of Assad could deal a fatal blow to the Syrian state – an outcome that is in no one’s interest (with the exception of ISIS and other extremists). 
The dissolution of Syria’s security forces and judicial system could be especially dangerous for Syria’s minorities. 
That is why a managed transition must be the goal of all participants in the talks. 
One logical compromise would be for Assad to retain power for a short period. 
Even Russia and Iran, his most vociferous supporters, have hinted that they could accept his departure if he steps down through negotiations, rather than being ousted by a popular revolt (and as long as the successor regime is friendly to them). 
If Assad and his murderous cronies agree to relinquish power, they will undoubtedly seek amnesty for their crimes. 
That must be firmly rejected. 
Since the early 1990s, the international community has rightly withheld its imprimatur from amnesties for mass atrocities. 
Indeed, international law requires that such proposals be rejected. 
In any case, an amnesty in Syria would not protect Assad from prosecution. 
If a future Syrian government were to join the International Criminal Court and consent to retroactive jurisdiction, the court would be free to prosecute any mass atrocities it saw fit to investigate. 
Similarly, foreign courts exercising universal jurisdiction over alleged Syrian war criminals found on their territory would be free to ignore an amnesty. 
And precedents from Argentina, Chile, and Peru have shown how even in countries where the atrocities occurred, amnesties granted under pressure of violence can be ruled invalid. 
Of course, it would not be realistic to expect Assad and his henchmen to deliver themselves directly to prosecutors in The Hague. 
They are more likely to use their power in Syria to shield themselves and, if weakened, flee to Moscow or Tehran, delaying efforts to apprehend them. 
In the meantime, negotiators face the difficult question of who should replace Assad. 
According to the Vienna declaration, that question would ultimately be decided by UN-supervised elections. 
But credible elections in war-torn Syria, where millions have been displaced, will take much time and preparation to organize. 
In the meantime, it will be necessary to establish a coalition government by agreement. 
The Vienna declaration calls for “credible, inclusive, non-sectarian governance.” 
In practice, this will mean choosing political figures who have credibility among both Syria’s Sunni majority and the Alawite and other minorities whose members have largely turned to Assad for protection. 
The international community could facilitate agreement by insisting on the exclusion of people from any side who, through a fair, open, and contested process, are found responsible for serious abuses. 
Achieving an accord along such lines depends on developing a level of trust among Syria’s warring factions that is currently lacking. 
It is difficult to shake hands with opponents who are killing one’s families and neighbors. 
That is why US Secretary of State John Kerry is wrong to prioritize striking a deal over ending atrocities. 
Stopping the deliberate slaughter of civilians is not a byproduct of a peace deal, but a prerequisite for successful negotiations. 

The Syrian Knot 
BERLIN – For four years, a bloody war has raged in Syria. 
What began as a democratic uprising against Bashar al-Assad’s dictatorship has developed into a cat’s cradle of conflicts, partly reflecting a brutal proxy struggle among Iran, Turkey, and Saudi Arabia for regional domination. 
This struggle, as the fighting in Yemen has shown, has the potential to destabilize the entire region. 
And now Russia, by means of its military intervention on Assad’s behalf, is seeking to enhance its status as a global power vis-à-vis the West (and the United States in particular). 
So the conflict in Syria is taking place on at least three levels: local, regional, and global. 
And, because the fighting has been permitted to fester and spread, around 250,000 people have died, according to United Nations estimates. 
This summer, the UN Refugee Agency put the number of refugees who had fled Syria at four million, in addition to 7.6 million internally displaced people. 
In the meantime, the flow of Syrian refugees to Europe has developed into one of the greatest challenges the European Union has ever faced. 
The Syrian civil war has also become one of the most dangerous breeding grounds for Islamist terrorism, as the Islamic State (ISIS) attacks in Ankara, Beirut, and Paris, and the bombing of a Russian passenger plane above the Sinai Peninsula, have shown. 
Moreover, Turkey’s downing of a Russian warplane has heightened the risk that major powers will be drawn directly into the fighting. 
After all, Turkey, as a NATO member, would be entitled to the Alliance’s military assistance were it to be attacked. 
For all these reasons, the Syrian war must be brought to an end as quickly as possible. 
Not only is the humanitarian disaster worsening almost on a daily basis; so are the security risks emanating from the war. 
Following the November 13 terrorist attacks in Paris, a new opportunity to end Syria’s agony has emerged, because all the important players (except ISIS) are now willing to sit down together at the negotiating table. 
But, although all players have agreed to fight ISIS first and foremost, the big question remains whether they will in fact do so. 
The Kurds in northern Syria and Iraq are the most effective fighters against ISIS, but their own national ambitions put them at odds with Turkey. 
Iran and Saudi Arabia are fighting primarily against each other for regional predominance, relying on non-state actors. 
Russia is fighting for global status and against any form of regime change. 
Russia thus finds itself allied with Iran in supporting Assad’s dictatorship, while Iran, in turn, is pursuing its own geopolitical interests by backing its Shia ally in Lebanon, Hezbollah, for which the Syrian hinterland is indispensable. 
France is more serious than ever about fighting ISIS, while Germany and other Europeans feel obliged to assist it – and to stem the flow of refugees emanating from the region. 
The US, meanwhile, is operating with handbrakes on. 
President Barack Obama primarily wants to avoid involving the US in another Middle East war before the end of his term. 
With the main global power remaining on the sidelines, however, the inevitable result has been a highly dangerous power vacuum, which Russian President Vladimir Putin is seeking to exploit. 
In particular, because the US refuses to lead and Europe is too weak militarily to influence developments in Syria on its own, there is a threat of a de facto European alliance with Putin’s Russia. 
That would be a grave error, given that any kind of cooperation with Russia wouldn’t contain or end the war in Syria: In fact, there is reason to fear the opposite: Any military cooperation with Assad – which is Putin’s aim and price tag – would drive a large majority of Sunni Muslims into the arms of radical Islamists. 
Such a tendency is already visible in Iraq. 
The Shia-dominated government of former Prime Minister Nouri al-Maliki played a decisive role in radicalizing Iraqi Sunnis and convincing them to support ISIS. 
It would be extremely stupid to repeat the same mistake willfully in Syria. 
Indeed, striking such a bargain would have nothing to do with realpolitik, because the war in Syria cannot be ended with either ISIS or Assad still in the picture. 
Any Western collaboration with Russia must avoid two outcomes: the linking of Syria with Ukraine (the negotiations with Iran on limiting its nuclear program succeeded without such a linkage) and military cooperation with Assad. 
Instead, an attempt should be made to link a military intervention against ISIS, conducted under the auspices of the UN Security Council, with an agreement on a political transition process that moves from an armistice to a national unity government for Syria and the end of the Assad regime. 
And there are other big challenges looming beyond Syria: Iraq’s descent into chaos, closely linked to the Syrian tragedy, threatens to turn into a new theater of conflict between Iran and Saudi Arabia. 
Unless this fight for regional hegemony is contained, further proxy wars – with all the risks they entail – are inevitable. 
Ultimately, the decisive battle with Islamist extremism will take place within the Sunni community. 
Which form of Sunni Islam will prevail – the Saudi-Wahhabi version or a more modern and moderate one? 
This is the decisive question in the fight against ISIS and its ilk. 
In this context, an important factor will be how the West treats its Muslims – as welcome citizens with equal rights and obligations, or as permanent outsiders and fodder for jihadist recruiters. 

A Wary Return to Raqqa 
BERLIN – In mid-October, the Syrian Democratic Forces, a US-backed, predominantly Kurdish militia with ties to the Kurdistan Workers’ Party (PKK) in Turkey, “liberated” my hometown, Raqqa, from Islamic State (ISIS) fighters. 
Arabs, a majority of the region’s population, had little to do with ISIS’s ouster. 
In a city where locals have long been relegated to second-class status, the triumph of the Democratic Union Party (PYD) – the Syrian branch of the PKK – has kindled fears that history is repeating. 
Activists from Raqqa have long referred to our dilapidated city as an “internal colony,” owing to its long history of economic, political, and social marginalization at the hands of Syrian governments. 
In the early 1970s, Raqqa – then small and poor – was nonetheless moving forward and flourishing. 
Schools were multiplying as attendance surged. 
Other public services were improving as well, and parents believed that their children would lead more prosperous lives than they and previous generations had. 
This was certainly true of my parents, who sacrificed a lot to raise their nine children. 
They were not happy when, in the 1970s, their older sons became communists, strongly opposing the brutal regime of Hafez al-Assad, President Bashar al-Assad’s father. 
But this was not a farfetched transformation in a city where people were assuming new identities – such as Nasserist, Baathist, Islamist, or communist – downplaying their regional and tribal origins. 
But by the time I was arrested in 1980, as a university student in Aleppo, the future my parents once envisioned had begun to vanish. 
Five years later, another son was arrested, followed by a third six months after that. 
Our mother died of cancer while the three of us were in prison, hardly exceptional for Syrians at the time. 
We were among many from across the political and ideological spectrum who were arrested and tortured for daring to oppose the Assad regime. 
Syrians suffered from extreme repression, with people denied the right to assemble or even to discuss issues publicly, and the country was reduced to a political desert. 
I didn’t get out of jail until 1996, when I was 35. 
Returning to Raqqa then, after 16 years behind bars, I was struck by what Assad’s regime – 26 years in power at that time – had done to my city. 
There was no trace of political life, no public debate, no young people talking about the books they were reading or the films they were watching. 
Before my arrest, Raqqa had three cinemas. 
By the time I was released, there was only one, used mostly for weddings. 
The cult of Hafez had, by then, replaced Syrians’ free will. 
The elder Assad’s images were ubiquitous; among the first landmarks to greet me upon my release was a huge statue of the president. 
The walls were covered in vapid quotations from the hollow speeches of “the master of the nation.” 
Raqqa was in rapid decline by then, and the city’s despair would intensify over the next decade. 
By 2007, even Abdullah Dardari, the deputy prime minister for economic affairs and a chief architect of Syria’s economic reforms (which were upended by the 2011 civil war), described Raqqa as a long-forgotten city. 
The arrival of ISIS only hastened the colonization of my ephemeral metropolis. 
Sadly, even with ISIS gone, the sense of siege remains. 
Western forces and their proxy, the PYD militia, whose real loyalty is to their leaders in Turkey, now control Raqqa. 
One of the first things that our new PYD liberators/occupiers did after declaring victory was to display their own foreign identity by installing a huge portrait of the PKK’s jailed leader, Abdullah Ocalan. 
Not a single Syrian symbol was offered in tandem. 
Worse, after a military operation that destroyed 90% of the city and killed some 1,800 residents, the city’s new rulers have not even begun to remove the bodies buried beneath the rubble. 
Instead, long-time residents have been prevented from returning to their homes. 
For those of us with long memories, it is impossible not to draw comparisons with past rulers – the Assad regime and ISIS. 
(The fascist organization that the Western media calls ISIS – a name that confers on it Islamic credentials – is more likely to be called Daesh in the Islamic world, a name coined by my brother Khaled, who was in jail with me in the 1980s.) 
What is different this time is the seemingly inevitable march toward ethnic conflict. 
The city’s previous victims are its latest victims as well. 
The exploited, impoverished, underrepresented, despised, and dehumanized population is living under even worse conditions, more marginalized than ever. 
The locals are being dealt with as tribes, according to the modern colonial model. 
Raqqa’s “liberation” is not ours. 
The population is more estranged than ever. 
Our past struggles for freedom and justice are being ignored. 
The locals who fought against ISIS, and who were made to disappear at its hands (including my brother Feras, abducted in July 2013), are still missing. 
And ISIS has served as the ideal monster for many colonial occupiers eager to appear less villainous than they are. 

Navigating the Syrian Endgame 
STOCKHOLM – After a suspiciously sudden conversion, Russian President Vladimir Putin now claims to be worried about the fate of millions of refugees who have fled the carnage in Syria. 
In a recent meeting with German Chancellor Angela Merkel, Putin expressed his hope that the European Union would help to rebuild Syria so that its displaced people could start to return home. 
And in recent weeks, Russian diplomats have been hawking the same message across European capitals. 
To be sure, now that Bashar al-Assad’s regime has reclaimed most of the country’s territory, Syria’s civil war is clearly winding down. 
But that outcome was not inevitable. 
On the contrary, the Syrian army was very close to collapsing at one point. 
Only with the crucial help of Iranian-backed militias and Russian air support did Assad manage to turn things around. 
Meanwhile, US efforts to establish a “moderate” armed opposition achieved little, apart from giving the Kurdish People’s Protection Units (YPG) – an offshoot of the Kurdistan Workers’ Party (PKK) – control of the strip of northern Syria abutting the Turkish border. 
The only thing left to do now is to destroy Al Nusra’s remaining enclave in Idlib and broker some kind of settlement between the YPG and Assad. 
Assad has survived at a horrible cost. 
More than half of the Syrian population has been displaced internally or forced to flee to nearby countries or to Europe. 
Much of Syria’s infrastructure – from housing blocks to hospitals – lies in ruins. 
And, needless to say, the country’s economy has been shattered, owing to the direct effects of the conflict and to sanctions that were imposed as part of the failed effort to force Assad into a political settlement. 
No other country in the past half-century has suffered so heavy a toll in human lives and physical destruction. 
There can be no doubt that the responsibility for this tragedy rests with the Assad regime and its Russian and Iranian sponsors. 
Of course, they will say they were fighting terrorism, as if that excuses their indiscriminate methods and reckless disregard for civilian lives. 
But future generations will remember the true source of the terror that was visited upon the Levant over the past seven years. 
The estimated cost of rebuilding Syria varies widely. 
While a 2017 World Bank study puts the price at around $225 billion, more recent assessments suggest a total closer to $400 billion; others expect the sum to approach $1 trillion. 
And that does not even count the human costs of the war. 
It is clear from Putin’s European charm offensive that Russia has no intention of footing even a small part of the bill. 
Apparently, the Kremlin does not feel as though it has a duty to rebuild the cities and restore the livelihoods that its bombs destroyed. 
Nor is the United States particularly eager to help. 
Just last week, the Trump administration canceled $230 million in funding for the reconstruction of Raqqa and other areas liberated from ISIS. 
It is now hoping that Saudi Arabia will foot the bill instead. 
If there is any wisdom in that move, it remains to be seen. 
With the US stepping back, it is obvious why Putin suddenly wants to talk to the Europeans about the plight of Syrian refugees. 
He didn’t care about them when his bombs were falling on their neighborhoods and forcing them to flee. 
But now that he wants Europe to bail out Assad, he has found some compassion. 
But it is not clear that Assad even wants displaced Syrians to return. 
If anything, he seems ready to exploit the situation to reengineer the country’s ethnic and political composition, making it safer for his own minority sect, the Alawites. 
Hence, a new law grants refugees just one year to reclaim their property before the government seizes it; and other bureaucratic requirements seem designed to allow Syrian authorities to refuse reentry to anyone they don’t like. 
Moreover, Assad has stated explicitly that European companies are not welcome to help with the reconstruction, and that preference should be given to Russian firms. 
Clearly, the regime is preparing to profit from any rebuilding assistance that comes its way. 
For all of these reasons, the last thing that Europeans should do is send money directly to Assad. 
A far better option is to offer direct financial support to individuals and families that are willing and able to return to their country. 
At the same time, the EU should not lift sanctions until a credible political settlement between the regime and opposition forces has been reached. 
The question is whether such a settlement is even possible. 
So far, every realistic proposal has been torpedoed by Assad’s insistence that he remain in power. 
Assad would do well to remember that he now rules over the wreckage of a country. 
Even when the guns fall silent, his regime will not be secure. 
His inability to revive Syria will leave him vulnerable in the same way that his refusal to countenance political reforms did eight years ago. 
Europe has no interest in saving Assad from that dilemma. 
Help for Syria must await a genuine political solution. 
After the destruction that the Assad regime has wrought, there is no other way forward. 

Syria’s Agony 
MADRID – The English author and priest William Ralph Inge once said that “A man may build himself a throne of bayonets, but he cannot sit on it.” 
Syria’s Assad dynasty, however, seems to believe that it can defy that dictum. 
Historically, few autocrats have understood that change produced peacefully by government is the most viable conservative solution to popular demands, and the best way to avoid violent revolution. 
This is the wisdom that Egypt’s Hosni Mubarak, Libya’s Muammar el-Qaddafi, Tunisia’s Zine El Abidine Ben Ali, and Yemen’s Ali Abdullah Saleh all failed to learn. 
It is the central lesson of the Arab Spring, and one that Syrian President Bashar al-Assad has bloodily ignored. 
A country whose weight in Middle East politics has stemmed more from its role as an engine of the Arab-Israeli conflict than from its objective military or economic power, Syria under the Assads always feared that abandoning ideological confrontation with the Zionist enemy would undermine the regime. 
Indeed, pundits explained Syria’s initial immunity to the Arab Spring by pointing to the regime’s staunch defense of Arab dignity, reflected in its resolute hostility towards Israel. 
But, as the younger Assad has been forced to recognize, times have changed. 
The new Arab generation’s quest for dignity is rooted in a yearning for decent government and civil rights that was long denied under the pretext of conflict with the “Zionist crusaders.” 
One of the most secular regimes in the Arab world – Saddam Hussein’s Iraq was another – the Syrian Baath system, based on a trinity of party, army, and ethnic loyalty, has now drawn the country into a sectarian war between its Sunni majority and the small Shia-Alawite minority that has ruled for the last 45 years. 
Since the rebel Free Syria Army, which is mostly Sunni, split from the regular army, Assad has used the Alawite core of his forces and the shabeeha – a notorious Alawite paramilitary group – to conduct his ruthless campaign for survival. 
The regime is now facing its moment of truth. 
The disintegration of Assad’s iron rule into a bloody civil war shows once again that the disorderly collapse of dictatorships, such as Josip Broz Tito’s in Yugoslavia, or Hussein’s in Iraq, tends to foment inter-ethnic war and national dismemberment. 
Other minorities in Syria, such as Christians, Druze, and Kurds, have reason to dread a change for the worse. 
The Christians, in particular, who were protected by Assad, now fear that if the Baath regime is overthrown, they will suffer the same consequences as Christians in Iraq. 
US Secretary of State Hillary Clinton rightly warned the opposition recently that, thus far, they have been unable to unite the minorities behind them precisely because it is unclear to these groups that they will fare better without Assad than with him. 
The Sunni al-Qaeda flourishes in conditions of mayhem. 
Denied their Iraqi and Afghan bases by Western intervention, al-Qaeda militants are now flocking into Syria from Libya and Iraq, and are probably responsible for some of the recent terrorist atrocities in Aleppo and Homs. 
Al-Qaeda’s move to the Levant also threatens to spark a momentous confrontation between Sunni radicals – some of whom have recently taken control of part of the Syrian-Lebanese border – and the Shia Hezbollah in Lebanon. 
Assad would welcome extending the conflict to Lebanon as a distraction. 
Indeed, as in Iraq, Syria’s sectarian strife looks increasingly like a jihadist religious war. 
Sunni clerics in Syria and throughout the Arab world are issuing fatwas to give the Free Syria Army the halo of holy warriors fighting the Alawite infidels who have denied Syria its true Sunni identity. 
Conspicuously, whole battalions of this splinter Sunni army are being named after early Muslim heroes, such as Khalid bin al-Walid, the companion to the prophet Muhammad who conquered the Levant; 
Saladin, who recaptured Palestine from the Crusaders; and Moawiyah Bin Abi Sufian, Muhammad’s brother-in-law. 
Shielded by China and Russia from foreign intervention, Assad now has license to pursue his goals with no mercy for his opponents. 
Both China and Russia feel betrayed by the West’s behavior in Libya, where it clearly transcended the United Nations mandate by toppling the Qaddafi regime. 
And, given their own potentially explosive political and ethnic tensions at home, neither is inclined to support foreign intervention. 
Moreover, Russia, still traumatized by its Cold War defeat, wants to maintain the Syria-Iran axis as a key bargaining chip in its difficult relations with the West, while both it and China are simply weary of the West’s naiveté. 
As they see it, the immediate choices in the Arab world are not between dictatorship and democracy, but between malevolent stability and apocalyptic mayhem. 
And yet the West is also hesitant to act, owing to fears of a repeat of the Iraq debacle. 
Transforming Syria’s Baath regime into a workable democracy is practically impossible, just as it was in the case of Hussein’s Baathist regime in Iraq. 
But the prospect of a jihadist-style ethnic war that extends throughout the Levant is not especially attractive, either. 
For Russia and China, too, that cannot be a happy prospect. 

Syria's Culture of Fear and Stalemate 
It is not surprising that the new, young leader of an Arab country should be tremendously concerned, during his first years in office, with establishing his legitimacy and stature. 
In replacing his father, the late President Hafiz al-Assad, Syria's current President, Bashar al-Assad, urgently needed to demonstrate his command of his country's situation even more than other relatively new Arab leaders, such as Jordan's King Abdullah or Morocco's King Muhammad. 
For Bashar al-Assad selection as the replacement for his father, within minutes of Assad's death on June 10, 2000, had stunned Syria's entire system, despite the years of preparing public opinion for this succession. 
Having failed to put forward a clear and effective program of internal reform, the young President sought to make up for his domestic failure in the realm of foreign affairs. 
Here, no surprise, the ongoing Arab-Israeli conflict provided the most visible opportunity to establish his leadership credentials, especially in the aftermath of the democratic election of Ariel Sharon as Israel's new Prime Minister, a man reviled in the Arab world. 
During the recent Arab Summit in Beirut, the young President capitalized on the absence of the Egyptian, Libyan and Palestinian leaders (among others) to strike a positive chord with audiences in Syria and across the Arab world. 
In a well-rehearsed, self-assured manner reminiscent of his late father, Bashar al-Assad aimed a provocative lecture at his colleagues, supporting the Palestinians' "right of resistance," calling upon Arab countries to sever their relations with Israel, urging an Iraqi-Kuwaiti reconciliation, and endorsing Saudi Crown Prince Abdallah's peace initiative. 
With these demands, the young President emerged in many Syrian eyes as the summit's "Man of the Hour," a leader with a deep understanding of the issues at hand. 
Through his confident performance, the new President gained in stature. 
More importantly, his performance deflected attention from any consideration of economic or political reform within Syria, at least for now. 
Initially, President Bashar's accession to power was accompanied by a modest, but noticeable political thaw. 
Popular forums and private discussion clubs sprung up across Syria, allowing relatively open debate. 
After a few months, these popular forums were brought to an abrupt halt, as security services enforced a stringent set of regulations that effectively closed these open gatherings. 
The shortness of this Syrian "spring" came as a hard blow to the expectations of many of the country's intellectuals and professionals, young and old. 
This blow was felt all the more sharply as it became obvious that curtailment of these popular forums did not stir a wide public reaction. 
Forced to recognize the prospect of being marginalized yet again by the new government, Syrian intellectuals turned their attention to Sharon and the growing conflict between Israelis and Palestinians. 
Once again, the Palestinian cause became a substitute for focused attention on Syria's domestic situation, offering Syrian intellectuals and professionals a politically safe way to vent their frustrations. 
As for the Syrian "Street," that amorphous mixture of average citizens and popular consensus, not only did it lack any sympathy for the intellectuals, it also failed to show any systematic interest in domestic politics. 
The main concerns of the average Syrian, it seems, are definite improvements in living standards and a reduction in the high unemployment rate. 
Broader concerns about reform - civil law, women's rights, and the role of religion in society - remain issues that the Syrian Street prefers to avoid. 
For better or worse, restrictions in these areas are well-understood constants of Syrian life. 
Challenging them in difficult and insecure times is not an appealing prospect. 
The passivity of Syrian society is the result of a tacit agreement between people and government. 
The government does not dabble too much in social affairs, while the people do not involve themselves too much in internal politics. 
Meanwhile, the Arab-Israeli conflict serves as a mutually agreed upon rallying point for Syria's government and governed. 
As the pretext for ignoring the repression of basic freedoms, that conflict has come to be described in powerful national and religious rhetoric throughout Syrian society. 
What might otherwise be seen as a political conflict has acquired significant socio-cultural dimensions. 
It is therefore legitimate to wonder whether Syria's President can act with any real initiative toward the Arab-Israeli conflict. 
Despite the dictatorial nature of his regime, President al-Assad still needs to satisfy popular sentiment regarding Israel. 
To betray this consensus runs the risk of mobilizing people on behalf of other, more domestically-oriented concerns. 
This is the risk of all popular mobilization in the Middle East; Syria simply exhibits a more potent version of it. 

Syria’s Dangerous Liaisons 
All eyes turned to Syria following the assassination of former Lebanese Prime Minister Rafik Hariri. 
Opposition groups in Lebanon, as well as Hariri supporters, openly accused Syrian President Bashar Assad’s regime of being responsible for the killing. 
The Bush administration, while not formally blaming Syria, virtually did so and recalled its ambassador to Damascus. 
The US is said to be extremely angry at Syria’s refusal to withdraw its forces from Lebanon in line with a United Nations resolution. 
Growing opposition to Syrian hegemony in Lebanon is but one of four related problems Syria faces, all of which it has addressed inadequately. 
The other three are Syria’s behavior in Iraq, its relations with the US, and the need for domestic reform. 
While corrosive immobility is a trademark of the Syrian regime, these challenges threaten to reinforce each other and marginalize Syria internationally even more so than today. 
In Lebanon, the Syrians have repeatedly misread the Bush administration’s intentions. 
Last September, the US, together with France, sponsored UN Security Council Resolution 1559 demanding a Syrian pullout and the disarming of militias – mainly Hezbollah. 
This came after Assad last September imposed an unconstitutional extension of Lebanese President Emile Lahoud’s mandate, despite French and American warnings. 
Yet to this day, Syrian officials privately say that they don’t think the US is serious about a withdrawal. 
Syria’s leaders also continue to dismiss demands from within Lebanon for an end to Syria’s 28-year military presence. 
Such demands escalated dramatically after Hariri’s death, as tens of thousands of the former prime minister’s partisans, who previously sat on the fence when it came to Syria, shouted “Syria out.” 
Indeed, a broad multi-communal opposition front has formed in Beirut to demand Syria’s departure. 
Yet rather than address the front’s demands and shape a healthy bilateral relationship between equal countries, Syria has sought to divide the opposition and reassert control. 
Hariri’s assassination makes that far more difficult, and Syria must prepare for a strong backlash from the US and France. 
In Iraq, since the fall of Baghdad on April 9, 2003, Damascus has shown undue nostalgia for the old system. 
Though the Syrian and Iraqi Baath parties were bitter foes, there was consolation in that both were members of a confederacy of despotisms. 
For the Syrians, a democratic Iraq friendly to the US was always far worse than Saddam Hussein, the enemy they knew – and later profitably traded with – during the years of international sanctions against Iraq. 
Syria’s suspected support for Iraqi Baathist exiles threatens to damage relations with the new Iraq. 
Baghdad has repeatedly accused the Assad regime of allowing Iraqi funds to be channeled to insurgents, and recently notified the Syrians that the photograph of a senior Syrian intelligence official taken with an Islamist combatant was found on the latter’s body in Falluja. 
As a legitimate Iraqi authority emerges following the elections, the Syrians will have to show foresight in jettisoning their pro-Saddam acquaintances. 
The Bush administration’s growing impatience with Syrian involvement in the Iraqi insurgency is a major reason for Syria’s deteriorating relationship with the US. 
Indeed, there is palpable disdain for Syria in Washington. 
That is why Syria’s denials that it is playing a spoiler role in Iraq are rarely taken seriously, and why Assad has not gained American support for renewed negotiations with Israel over the Golan Heights. 
There are signs that the Syrians are unable to gauge American intentions on other issues as well. 
For example, Assad apparently still does not realize how much the Bush administration associates his regime with terrorism. 
Syrian officials believe that because the Baath Party is secular, the US will invariably support it against an Islamist resurgence. 
They fail to see that American officials regard Syria as complicit in the activities of Islamist terrorist groups in the Palestinian territories, Iraq, and Lebanon. 
At home, Assad’s regime also finds itself in a bind. 
Political and economic reform, when it advances, does so at a glacial pace. 
A major item of discussion in Syria is the revival of Islam as an alternative to a political and economic system offering few incentives except to regime grandees. 
France’s opposition to Syria’s presence in Lebanon was at least partly a reflection of disenchantment with Assad’s reformist ambitions, and the European Union has expressed similar reservations. 
Assad is now in a consolidation phase, leaving little room for reform. 
Indeed, his new interior minister, Ghazi Kanaan, an old-school hardliner, spearheaded a crackdown on reformers and Kurds in the past year or so. 
The reshuffle last November that brought Kanaan and others into the cabinet was seen to reflect Assad’s preferences. 
In the coming month, several rounds of retirements should allow the president to place more of his people in positions of power. 
Consolidation, however, is not reform. 
Assad must show that his enhanced authority can lead to genuine transformation. 
Until now, the president has toed a hard line on Iraq, on Lebanon, and in domestic affairs. 
If he’s a reformer, few are convinced. 
Syria may pay a heavy price for that ambiguity. 

Syria’s Sectarian Stalemate 
PRINCETON – What began in Syria as a revolt against an oppressive regime has evolved into a sectarian civil war and, more recently, into a proxy conflict. 
In the process, the struggle has become increasingly convoluted, with conflicting agendas among allies, together with deep-seated communal tensions, rendering the situation nearly intractable. 
On one side, the United States, the European Union, Turkey, Jordan, Saudi Arabia, and Qatar are backing the opposition – a welter of armed factions with diverse agendas and ideologies that range from Syrian nationalist to global jihadi. 
This disunity reflects the fissures in Syrian society, a result of more than four decades of brutal authoritarian rule. 
On the other side, Russia and Iran (and its proxy, Lebanon’s Hezbollah), each for its own reasons, are supporting President Bashar al-Assad’s regime. Russia’s motivations are tied to the legacy of the Cold War. 
The Assad regime has consistently adopted an anti-Western stance, aligning itself with the Soviet Union and later with Russia. 
Today, Syria represents Russia’s only remaining toehold in the Arab world, while all of Assad’s regional opponents are US allies. 
Iran’s involvement reflects a different, much older struggle – that between Sunni and Shia for control of the Middle East. 
With Shia-dominated Iran providing weapons, money, troops, and training for Assad’s forces, the conflict’s sectarian dimension has taken on greater significance. 
Indeed, government forces have devolved into a sectarian army, motivated by the fear that, if the largely Sunni rebels are victorious, they will annihilate the Shia-affiliated Alawite minority that has ruled Syria for decades. 
As it stands, Assad’s regime possesses an overwhelming military advantage, with an air force, tanks, missiles, and chemical and biological weapons. 
In order to defeat them, the opposition needs more sophisticated weapons – and its backers are ready to oblige. 
Turkey, Saudi Arabia, Jordan, and Qatar – all Sunni-led countries – have sharply increased their military aid to the Syrian rebels in recent months. 
Even the United States, which has so far refused to provide lethal aid for fear of arming global jihadis, recently announced that it is working on a plan to deliver weapons to opposition forces. 
Sunni-Shia tensions tend to rise sharply during geopolitical power struggles, such as in Iraq in 2006-2008. 
Prior to that, the last great Sunni-Shia battle in the Middle East involved near-constant war between the Sunni Ottoman Empire and Iran’s Shia Safavid Empire during the sixteenth and seventeenth centuries. 
The Ottomans won by a small margin, ultimately securing control over Iraq. 
But the protracted conflict contributed to the decline of both empires and devastated Iraq, leaving behind a deep sectarian cleavage. 
This does not bode well for Syria. 
Since the 1970’s, the Assads have failed to foster Arab nationalism in order to unite the religiously divided population, resorting instead to divisive sectarian politics to control Syria’s population. 
While ensuring that their Alawite allies filled key positions in the military and intelligence services helped the Assads to retain their grip on the country, it was a strategy that widened and reinforced the Sunni-Shia rift among the population. 
When the Arab Spring began to unfold, Assad adopted the same approach, hoping that it would rally his Alawite supporters and scare the rest of the public into submission. 
This time, however, the plan backfired. 
Syria’s Sunni population, inspired by the revolutions in other Arab countries and outraged by the regime’s brutality, simply stopped being afraid – a potentially game-changing development for Arab authoritarianism. 
Now, the consequences of the Assads’ failure to promote a shared national ideology are becoming fully exposed. 
Syria’s Sunnis are increasingly invoking theology to justify hatred of the Shia minority, and forms of Sunni exclusivism, similar to Al Qaeda’s ideology and worldview, are becoming the norm. 
While Assad has secured the Alawite community’s renewed support, he has done so at the cost of increasing the very real danger that the rebels will punish all Alawites for the regime’s crimes. 
As the war grinds on, prospects for a negotiated solution are diminishing. 
As Iran throws its weight – and billions of dollars – behind the Alawites, and the Gulf States do likewise in support of the Sunnis, Syria is being torn apart. 
Soon, it will be too far gone for either side to be able to claim victory. 


Syria’s Balkan Tragedy 
BERLIN – Pacifist doctrines may say otherwise, but combining diplomacy with the threat of military force is a highly effective tactic, as we have just seen in Syria. 
It was the credibility of the United States’ threat of military intervention that seems to have led Syrian President Bashar al-Assad to cut a deal brokered by his main allies, Russia and, less directly, Iran. 
Assad now appears prepared to give up his chemical weapons in exchange for remaining in power. 
But what will happen to America’s credibility, and that of the West, if the agreement falls apart? 
The deal struck by the US and Russia triggered widespread relief in most Western capitals, where political leaders simply are not prepared for military intervention, even if Syria’s government is killing its own people with poison gas (on this score, the agreement amounts to a confession by Assad). 
After a decade of war in Afghanistan and Iraq, the West would rather stay at home; neither the US nor the United Kingdom – nor most other NATO members – wants to become entangled in another Middle East conflict that cannot be won. 
Indeed, there are only bad options for the US in Syria. 
Military intervention has no visible end point and would only increase chaos. 
But staying out will produce nearly the same result and dramatically shake America’s credibility in a crisis-ridden region, with serious consequences for the future. 
Furthermore, deployment of chemical weapons invites escalation. 
Most people in the West regard Syria’s civil war as a continuation of the sectarian violence in Iraq. 
But Syria is not Iraq. 
America’s president is not searching for excuses to start a war; Assad’s chemical weapons are not a fanciful pretext. 
The scale of the violence in Syria underscores the risk implied by inaction. 
Of course, there is no denying the dangers associated with a military intervention: regional expansion of the conflict, the deaths of many more innocent people, and the strengthening of extremist forces among the rebels, to name only a few. 
But all of this has been happening already, and it will continue to happen, especially without American military intervention. 
The civil war will escalate further, because it is part of a larger contest for supremacy between Iran and its Shia allies and Saudi Arabia, Turkey, and the other Sunni countries. 
If the US had not responded to the Assad regime’s use of chemical weapons, the entire world would have asked what a US guarantee is worth if an American president’s “red line” is crossed without consequences. 
In Jerusalem, Tehran, and other Middle East capitals, as well as on the Korean Peninsula and in other global hotspots, the consequences would be (and probably already are) dire. 
From the outset of the Syrian conflict, the US and its European allies have lacked a strategy. 
Is their goal to end the civil war or bring about regime change? 
And who or what should take Assad’s place? 
Or does the West aspire to reach a compromise with Russia and Iran that would leave Assad’s regime in place? 
The latter goal would shift the axis of US policy in the Middle East, with far-reaching strategic consequences, because such a compromise could only be reached at the expense of America’s Sunni allies. 
Even if Russia and Iran are pursuing separate agendas in supporting Assad, both countries’ interests are inextricably connected to the continuation of the regime, not necessarily to Assad’s political survival. 
For Russia, regime change in Syria – its last military outpost in the region – would be another bitter defeat; for Iran, it would mean losing its most important ally in the Arab world, implying even deeper isolation. 
Thus, in contrast to the West’s temporizing, the strategy of Assad’s allies is clearly defined: military victory for the regime, backed by ample supplies of weapons and, in the case of Iran, Lebanese proxy troops from Hezbollah on the ground. 
Obama committed a fateful error when, for domestic political reasons, he decided to ask the US Congress to agree to a limited punitive military strike. 
A defeat in Congress – entirely foreseeable – would have been a foreign-policy disaster. 
And, though the Russian diplomatic initiative (based on a joint proposal with Iran) averted this disaster, everything has its price. 
That price is not necessarily a gain in prestige for the Kremlin. 
The true risk implied by the US deal with Russia lies elsewhere. 
It was not weakness or helplessness that induced Obama to play for high stakes. 
If he succeeds – Syria’s chemical weapons are destroyed, a peace conference ends the civil war, a transitional government takes power, and the US and Iran launch direct negotiations about Iran’s nuclear program and regional stability in the Middle East – he will truly deserve his Nobel Peace Prize. 
If Obama fails, however, Syria will not be a second Iraq, but more likely a repetition of the Bosnian calamity. 
For years, the war in Bosnia and Herzegovina escalated, alongside a “diplomatic process” marked by a series of broken promises, culminating in the massacre at Srebrenica of thousands of civilians supposedly under United Nations protection. 
In the end, intervention was necessary anyway. 
Are the US and its European allies prepared for a scenario in which the agreement with Russia breaks down and Syria’s chemical weapons are not destroyed under international control? 
This is the decisive moral and political question for the West. 
If and when the time comes, it had better have an answer. 

Missile Strikes Are Not a Syria Strategy 
NEW YORK – “A perfectly executed strike…Could not have had a better result. 
Mission Accomplished.” 
So tweeted US President Donald Trump just hours after more than a hundred American, French, and British cruise missiles hit three sites in Syria believed to be associated with chemical weapons production. 
The mission that was “accomplished” was to deliver the message that using chemical weapons would not be cost-free for those responsible. 
Ideally, punitive strikes such as these would deter Syria’s government, or any other, from ever using chemical weapons again in violation of the Chemical Weapons Convention. 
But it is far from clear that Trump has achieved that deterrent effect. 
The somewhat smaller strike undertaken a year ago failed to change Syrian behavior, and the latest attack is no more likely to do so. 
What Bashar al-Assad’s government achieved with chemical weapons – gaining control of rebel-held areas in Douma and eastern Ghouta – outweighed the price it paid. 
And it is a near-certainty that the Syrian government continues to possess chemical weapons, and could produce additional supplies without detection. 
Military action to enforce the international norm against the use of chemical weapons is legitimate and welcome, as was the decision to coordinate the response with allies and to threaten additional strikes if chemical weapons were used again. 
It is important to signal that opposition to the use of any weapon of mass destruction is both deep and broad. 
At the same time, the United States appears to have gone to considerable lengths to avoid engaging Russian and Iranian forces. 
This reduced the risk of escalation, but it also ruled out many potential targets, limiting the price paid by the Syrian government for what it had done. 
For this and other reasons, what the missile strikes accomplished should not be exaggerated. 
The Syrian government could reasonably interpret US policy as follows: “We will stand by and do nothing while you terrorize or kill your own people so long as you do not use chemical weapons.” 
In fact, this has been the case for the past seven years, as nearly a half-million Syrians have died and more than ten million have been forced from their homes. 
Trump’s foreign policy is not so much immoral as it is amoral. 
It bears emphasizing that the missile strikes were not designed to undermine the Assad regime’s long-term prospects. 
Thanks in large part to Russian and Iranian support, Assad is firmly in control and will likely remain so for the foreseeable future. 
This is a bitter pill for many to swallow, but it is the reality. 
So where does this leave US policy and, for that matter, the policy of the French, British, and anti-Assad Arab governments? 
Trump remains committed to ending America’s military presence (now some 2,000 troops) in Syria. 
He made this clear when he announced the missile strikes: “America does not seek an indefinite presence in Syria under no circumstances,” he said. “As other nations step up their contributions, we look forward to the day when we can bring our warriors home.” 
But if the goal is to avoid creating a situation in which the Islamic State (ISIS) or other terrorist groups could reconstitute themselves, that day remains far off. 
The US is reportedly attempting to persuade Egypt, Saudi Arabia, the United Arab Emirates, and Jordan to create a Sunni force that would maintain order in areas liberated from ISIS. 
It is far from clear whether such a force will come into being, and even less certain that it could stand on its own, given these countries’ modest capabilities and extensive commitments. 
A considerable US military presence and involvement will still be required. 
An ongoing US troop presence is also required to maintain coordination with Syrian Kurdish forces, who did most of the fighting against ISIS. 
But sustaining support for the Kurds without causing additional problems with Turkey, which has introduced forces into the area to weaken Kurdish control, may prove impossible. 
That fact calls for reducing US military reliance on access to Turkish bases. 
Trump has said nothing about the plight of internally displaced Syrians. 
America, which accepted more than 10,000 Syrian refugees as recently as two years ago, has rolled up its welcome mat, accepting only a trickle last year. 
And the matter of who should pay, and how much, to support Syrian refugees and the neighboring countries that have taken them in remains unresolved. 
A final question involves diplomacy. 
There is no realistic hope of engineering a political transition in Damascus, but it may be possible to arrange local cease-fires and create areas where Syrian civilians (but not government forces) could live in safety. 
Such arrangements, however, would likely require Russian involvement and support to keep the Syrian and Iranian governments on board. 
Russia has acted irresponsibly of late, but there remains the chance it will choose to offer limited help, if only to hold down the costs of its Syria policy. 
None of this adds up to a solution; 
Syria is likely to remain a broken country for years to come, with an illegitimate government that controls most but not all of the state’s territory. 
But limiting the violence and improving the lot of at least some Syrians might be possible if the US does not rush to leave, if Sunni governments contribute soldiers and money, and if Russia can be persuaded to play a somewhat more constructive role. 



The Greek Austerity Myth 
BRUSSELS – Since the anti-austerity Syriza party's victory in Greece's recent general election, the “Greek problem" is again preoccupying markets and policymakers throughout Europe. 
Some fear a return to the uncertainty of 2012, when many thought that a Greek default and exit from the eurozone were imminent. 
Then as now, many worry that a Greek debt crisis could destabilize – and perhaps even bring down – Europe's monetary union. 
But this time really is different. 
One critical difference lies in economic fundamentals. 
Over the last two years, the eurozone's other peripheral countries have proven their capacity for adjustment, by reducing their fiscal deficits, expanding exports, and moving to current-account surpluses, thereby negating the need for financing. 
Indeed, Greece is the only one that has consistently dragged its feet on reforms and sustained abysmal export performance. 
Providing an additional shield to the peripheral countries is the European Central Bank's plan to begin purchasing sovereign bonds. 
Though the German government does not officially support quantitative easing, it should be grateful to the ECB for calming financial markets. 
Now Germany can take a tough stance on the new Greek government's demands for a large-scale debt write-off and an end to austerity, without fearing the kind of financial-market turbulence that in 2012 left the eurozone with little choice but to bail out Greece. 
In fact, both of the Greek government's demands are based on a misunderstanding. 
For starters, Syriza and others argue that Greece's public debt, at a massive 170% of GDP, is unsustainable and must be cut. 
Given that the country's official debt constitutes the bulk of its overall public debt, the government wants it reduced. 
In fact, Greece's official creditors have granted it long enough grace periods and low enough interest rates that the burden is bearable. 
Greece actually spends less on debt service than Italy or Ireland, both of which have much lower (gross) debt-to-GDP ratios. 
With payments on Greece's official foreign debt amounting to only 1.5% of GDP, debt service is not the country's problem. 
The relatively low debt-service cost also removes the justification for Syriza's demands for an end to austerity. 
The last bailout program from the “troika" (the International Monetary Fund, the ECB, and the European Commission), initiated in 2010, foresees a primary budget surplus (which excludes interest payments) of 4% of GDP this year. 
That would be slightly more than is needed to cover interest payments, and would thus allow Greece finally to begin to reduce its debt. 
The new Greek government's argument that this is an unreasonable target fails to withstand scrutiny. 
After all, when faced with excessively high debt, other European countries – including Belgium (from 1995), Ireland (from 1991), and Norway (from 1999) – maintained similar surpluses for at least ten years each, typically in the aftermath of a financial crisis. 
To be sure, one can reasonably argue that austerity in the eurozone has been excessive, and that fiscal deficits should have been much larger to sustain demand. 
But only governments with access to market finance can use expansionary fiscal policy to boost demand. 
For Greece, higher spending would have to be financed by lending from one or more official institutions. 
For the same reason, it is disingenuous to claim that the troika forced Greece into excessive austerity. 
Had Greece not received financial support in 2010, it would have had to cut its fiscal deficit from more than 10% of GDP to zero immediately. 
By financing continued deficits until 2013, the troika actually enabled Greece to delay austerity. 
Of course, Greece is not the first country to request emergency financing to delay budget cuts, and then complain that the cuts are excessive once the worst is over. 
This typically happens when the government runs a primary surplus. 
When the government can finance its current spending through taxes – and might even be able to increase expenditure, if it does not have to pay interest – the temptation to renege on debt intensifies. 
It was widely anticipated that Greece would be tempted to follow this route when the troika program was initiated. 
Last year, the new Greek finance minister, Yanis Varoufakis, confirmed the prediction, arguing that a primary surplus would give Greece the upper hand in any negotiations on debt restructuring, because it could just suspend repayments to the troika, without incurring any financing problems. 
That approach would be a mistake. 
The practical problem for Greece now is not the sustainability of a debt that matures in 20-30 years and carries very low interest rates; the real issue is the few payments to the IMF and the ECB that fall due this year – payments that the new government has promised to make. 
But, to follow through on this promise (and hire more employees), Greece will need more financial support from its eurozone partners. 
Moreover, the country's financial system will need continuing support from the ECB. 
In other words, Greece's new government must now try to convince its European partners that it deserves more financial support, while pushing for a reduction of its existing debt and resisting the austerity policies on which previous lending was conditioned. 
For Syriza and its voters, the political honeymoon could be short. 

A Greek Burial for German Austerity 
BERLIN – Not long ago, German politicians and journalists confidently declared that the euro crisis was over; Germany and the European Union, they believed, had weathered the storm. 
Today, we know that this was just another mistake in an ongoing crisis that has been full of them. 
The latest error, as with most of the earlier ones, stemmed from wishful thinking – and, once again, it is Greece that has broken the reverie. 
Even before the leftist Syriza party’s overwhelming victory in Greece’s recent general election, it was obvious that, far from being over, the crisis was threatening to worsen. 
Austerity – the policy of saving your way out of a demand shortfall – simply does not work. 
In a shrinking economy, a country’s debt-to-GDP ratio rises rather than falls, and Europe’s recession-ridden crisis countries have now saved themselves into a depression, resulting in mass unemployment, alarming levels of poverty, and scant hope. 
Warnings of a severe political backlash went unheeded. 
Shadowed by Germany’s deep-seated inflation taboo, Chancellor Angela Merkel’s government stubbornly insisted that the pain of austerity was essential to economic recovery; the EU had little choice but to go along. 
Now, with Greece’s voters having driven out their country’s exhausted and corrupt elite in favor of a party that has vowed to end austerity, the backlash has arrived. 
But, though Syriza’s victory may mark the start of the next chapter in the euro crisis, the political – and possibly existential – danger that Europe faces runs deeper. 
The Swiss National Bank’s unexpected abandonment of the franc’s euro peg on January 15, though posing no immediate financial threat, was an enormous psychological blow, one that reflected and reinforced a massive loss of confidence. 
The euro, as the SNB’s move implied, remains as fragile as ever. 
And the subsequent decision by the European Central Bank to purchase more than €1 trillion ($1.14 trillion) in eurozone governments’ bonds, though correct and necessary, has dimmed confidence further. 
The Greek election outcome was foreseeable for more than a year. 
If negotiations between the “troika” (the European Commission, the ECB, and the International Monetary Fund) and the new Greek government succeed, the result will be a face-saving compromise for both sides; if no agreement is reached, Greece will default. 
Though no one can say what a Greek default would mean for the euro, it would certainly entail risks to the currency’s continued existence. 
Just as surely, the mega-disaster that might result from a eurozone breakup would not spare Germany. 
A compromise would de facto result in a loosening of austerity, which entails significant domestic risks for Merkel (though less than a failure of the euro would). 
But, in view of her immense popularity at home, including within her own party, Merkel is underestimating the options at her disposal. 
She could do much more, if only she trusted herself. 
In the end, she may have no choice. 
Given the impact of the Greek election outcome on political developments in Spain, Italy, and France, where anti-austerity sentiment is similarly running high, political pressure on the Eurogroup of eurozone finance ministers – from both the right and the left – will increase significantly. 
It does not take a prophet to predict that the latest chapter of the euro crisis will leave Germany’s austerity policy in tatters – unless Merkel really wants to take the enormous risk of letting the euro fail. 
There is no indication that she does. 
So, regardless of which side – the troika or the new Greek government – moves first in the coming negotiations, Greece’s election has already produced an unambiguous defeat for Merkel and her austerity-based strategy for sustaining the euro. 
Simultaneous debt reduction and structural reforms, we now know, will overextend any democratically elected government because they overtax its voters. 
And, without growth, there will be no structural reforms, either, however necessary they may be. 
That is Greece’s lesson for Europe. 
The question now is not whether the German government will accept it, but when. 
Will it take a similar debacle for Spain’s conservatives in that country’s coming election to force Merkel to come to terms with reality? 
Nothing but growth will decide the future of the euro. 
Even Germany, the EU’s biggest economy, faces an enormous need for infrastructure investment. 
If its government stopped seeing “zero new debt” as the Holy Grail, and instead invested in modernizing the country’s transport, municipal infrastructure, and digitization of households and industry, the euro – and Europe – would receive a mighty boost. 
Moreover, a massive public-investment program could be financed at exceptionally low (and, for Germany, conceivably even negative) interest rates. 
The eurozone’s cohesion and the success of its necessary structural reforms – and thus its very survival – now depend on whether it can overcome its growth deficit. 
Germany has room for fiscal maneuver. 
The message from Greece’s election is that Merkel should use it, before it is too late. 

Overcoming South Asia’s Peace Spoilers 
MONTREAL – Long-anticipated peace negotiations between India and Pakistan appear to have been delayed until after India’s May parliamentary elections, and the prospects for subsequent talks are not clear. 
Victory for Narendra Modi’s nationalist Bharatiya Janata Party (BJP), a resurgent Taliban in the wake of the United States’ impending troop withdrawal from Afghanistan, and Pakistan’s continuing failure to negotiate with or suppress the Pakistani Taliban, point to a period of intense uncertainty and potential conflict. 
But this is no reason to give up trying for peace. 
True, Modi’s peacemaking credentials are already highly questionable, both at home and in Pakistan. 
He was Gujarat’s chief minister in 2002 when riots killed more than a thousand Muslims. 
Many fear that, as Prime Minister, he would polarize the entire country along communal lines. 
And, thus far, he has taken an uncompromising position on Pakistan, and will probably continue to talk tough, at least for the time being. 
But Modi is likely to take cues from his BJP predecessor, Atal Bihari Vajpayee, who visited Lahore in 1999 to talk peace with his Pakistani counterpart Nawaz Sharif (who returned to power in 2013). 
There are good reasons for Modi to do so. 
Peace with Pakistan would strengthen his personal standing nationally and internationally, thus constituting a step toward fulfilling the BJP’s great-power ambitions for India. 
It would also help revive India’s weakened economy by spurring foreign investment, the benefits of which Modi has already seen in Gujarat. 
Sharif has offered India olive branches of his own, and with good reason: Rapprochement with India is essential to strengthening his position in Afghanistan and improving his capacity to suppress violence at home. 
Peace with India would also allow him to undercut the power of Pakistan’s military and its intelligence wing, the ISI. 
Although entering peace talks with a future Modi government would risk provoking a domestic backlash, Sharif might still be willing to break the ice if the main political parties support his moves. 
Unfortunately, many in South Asia do not want peace. 
Numerous attempts by India’s current Indian Prime Minister Manmohan Singh to re-start talks with Pakistan have been thwarted by violations along Kashmir’s line of control or as a result of cross-border artillery fire – episodes that seem to occur at the slightest provocation. 
For now, Indian policymakers regard Sharif’s overtures with suspicion. 
They are wary of what his negotiations with the Pakistani Taliban might bring, and they doubt that he retains control over Pakistan’s policies on Kashmir or Afghanistan. 
Indeed, the biggest obstacle to India-Pakistan peace negotiations is their vulnerability to spoilers. 
As soon as the process begins, powerful vested interests are likely to disrupt it – violently – because a peace agreement would undermine their power base and the political support that they derive from continuing the conflict. 
There are plenty of precedents for this. In 1999, Pakistan’s General Pervez Musharraf destabilized the Lahore peace process by sending rangers to occupy the Kargil Heights on Kashmir’s Indian side. 
India’s military response effectively buried the talks. 
In December 2001, the attack by the Pakistan-based militant groups Lashkar-e-Taiba (LeT) and Jaish-e-Mohammed (JeM) on India’s parliament wrecked unofficial discussions between the BJP government and Musharraf’s military regime. 
India also has its spoilers. 
The February 2007 bombing – apparently by Hindu fundamentalists – of the Samjhauta Express, a biweekly train service connecting New Delhi and Lahore, occurred just before a visit by Pakistan’s foreign minister, killing 68 people, both Pakistanis and Indians. 
The fact that both countries have weak governments that lack popular support strengthens the spoilers’ position. 
India’s Congress-led coalition may view a tough stance toward Pakistan as the only way to ward off domestic criticism from the BJP and other opposition parties. 
And many Indians doubt the value of negotiating with a Sharif government that, given civil-military tensions, may not serve its full term. 
The appointment of the pliable general Raheel Sharif as army chief has helped defuse the situation; but, with Pakistan and India backing opposing sides in Afghanistan, the military and the ISI could reassert themselves should tensions there rise. 
Fortunately, violence inside Kashmir has decreased for now, though it could easily flare up again if the Taliban were to consolidate its power in Afghanistan, and the ISI were to ratchet up support for groups like LeT and JeM. 
Though current political volatility in both India and Pakistan rules out full peace talks for the time being, that should not prevent the two sides from initiating confidence-building measures by trying to resolve lower-level disagreements, including territorial disputes over Siachen, Sir Creek, and the Wullar barrage/Tulbul navigation project. 
Differences over water rights and dam construction could be negotiated at diplomatic levels or through back channels. 
The two countries could also develop economic and commercial cooperation, work together to combat terrorism and drug trafficking, and promote friendly exchanges in various social and cultural fields. 
Increased trade relations might also create countervailing economic interests in favor of peace. 
Recent agreements to establish more border trading posts and bank branches are good starting points, and Pakistan has already made some moves to reciprocate India’s offer of Most Favored Nation trading status under a different name. 
This alone may not guarantee the success of negotiations, if and when they take place, but it could remove incentives to spoil them. 
And if the two countries can find ways to prevent smaller disputes from escalating, it would generate a more conducive atmosphere in which to address Kashmir, the largest source of conflict of all. 

Tabloid Climate Science 
NEW DELHI – The scientists whose research has revealed the extent of global climate change are now getting the tabloid treatment. 
First came the scandal of leaked (actually hacked) e-mails at the climate institute of Britain’s East Anglia University. 
Now comes the supposed news that the Himalayan glaciers are not, in fact, retreating, and will therefore not disappear by 2035. 
The first story was timed to appear just before December’s COP15 climate-change summit in Copenhagen. 
The second is designed to bury whatever hopes still exist for signing a successor treaty to the Kyoto Protocol. 
Coming one after the other, these inflated scandals have, at least for now, dealt a massive blow to the credibility of the evidence that underpins the battle against global warming. 
But how justified are these attacks, particularly the attacks on the Intergovernmental Panel on Climate Change, the United Nations body that has set the gold standard for analyzing global climate change? 
One tell-tale sign is the climate skeptics’ contempt for the actual data in the Indian government’s study, which is being used to undermine the IPCC report and the impeccable credentials of the scientist Syed Iqbal Hasnain, the source of the IPCC’s alarming quote on the Himalayas. 
There is also the unholy glee with which they have set about destroying an icon of the anti-global warming movement, the Nobel Laureate R.K Pachauri, by attributing financial motives to his research. 
Hasnain, who is currently conducting a study of the accumulation of black carbon on snow at high altitudes in the Himalayas, is not some egotistical scientist seeking the limelight. 
He was Professor of Glaciology at Jawaharlal Nehru University’s School of Environmental Sciences and a fellow of the Indian Institute of Technology and of Delft Technical University in the Netherlands. 
Between 1995 and 1999, he chaired a working group on Himalayan Glaciology within the International Commission on Snow and Ice. 
He is also the author of Himalayan Glaciers: Hydrology and Hydrochemistry and scores of scientific papers. 
Hasnain made his remark to the New Scientist in 1999, only five years after the retreat had reached its peak and only two to three years after the slowdown began – far too soon to say that the trend had changed. 
The IPCC’s use of his remark may have been rash, but was not misleading because in 2003-2004, the year before it finalized its fourth report, the changed trend would have been barely perceptible 
What the 2009 report for the Indian Ministry of Forests and Environment actually says is that the average retreat of glaciers, approximately five meters per year since the 1840’s, when records began to be kept, accelerated sharply between the 1950’s and 1990’s. But the retreat slowed after the mid-1990’s until, for some of the biggest and best-known glaciers, such as Gangotri and Siachen, it had “practically come to a standstill during the period 2007-2009.” 
But, the retreat of a glacier’s “snout” is only one of three measures of how glaciers can change. 
The other two are its “mass balance” and the rate at which melt-water is discharged. 
The Himalayan glaciers have not stopped losing mass, although they are losing it at a somewhat slower rate than before. 
Evidence collected on 466 glaciers by the Indian Space Applications Center from 1962 to 2004 shows a 21% loss of glacier area and a 30.8% of glacier volume. 
The same study also shows that smaller glaciers are shrinking much more rapidly than larger ones. 
While glaciers that cover more than five square kilometers have lost 12% of their mass, those under one square kilometer have lost 38 percent. 
Applying the overall ratio of mass lost to area covered, this means that the smallest (and most numerous) Himalayan glaciers lost up to 57% of their mass between 1960 and 2004. 
What could have caused the glacier snouts to have stopped retreating? 
One factor could be deposits of dust and black carbon (collectively called aerosols) upon the snow, which, up to an accumulation of 400 grams per square meter sharply raises the rate of melting. Between 400 and 600 grams, it has no further effect, but when it exceeds 600 grams, it acts as a shield against the sun, and slows down melting. 
Much thicker coatings of aerosols at the lower ends of glaciers might explain the tendency in several glaciers, noted in the Indian report, to become narrower in the middle, forming two distinct parts. 
The slowdown in the retreat of the snout of glaciers could, therefore, be a consequence of the very rapid rise of human population in the hills and desertification caused by overgrazing – purely local factors that boost aerosol levels. 
Only more research focused on the differences between glaciers in heavily populated areas and those in uninhabited ones like Siachen will answer this question definitively. 
But relying upon population growth and desertification to prolong their lives would be robbing Peter to pay Paul. 
What needs to be explored is not the validity of the secular trend, but the nature of the local influences working against it. 
By rushing to apologize for a statement they clearly did not understand, British Secretary for Energy and Climate Change Ed Miliband and others have impugned not only the honesty of scientists like Hasnain, but also the credibility of science itself. 


Tackling Non-Inclusive Growth 
MILAN – Several years ago, I had the privilege of chairing a commission on growth in developing countries. 
Its members had significant economic, political, and social policymaking experience in the developing world, and despite their differences, they all agreed on certain crucial points. 
Two still stand out in my memory. 
First, as we concluded in our final report, non-inclusive growth patterns will always ultimately fail. 
Such patterns cannot produce the sustained high growth that is necessary for reducing poverty and fulfilling basic human aspirations for health, security, and the chance to contribute productively and creatively to society. 
They underutilize and misuse valuable human resources; and they often give rise to political or social turmoil, often marked by ideological or ethnic polarization, which then leads either to wide policy swings or to policy paralysis. 
Our second broad conclusion was that sustained growth requires a coherent, adaptable strategy that is based on shared values and goals, trust, and some degree of consensus. 
Of course, achieving that is easier said than done. 
Many developing countries have experienced extended periods of slow or no growth. 
In some cases, a country’s leaders are simply confused, and do not understand what needs to be done. 
In most cases, however, the ingredients of an effective “growth model” are well known, and the problem is a lack of political or social consensus about how to implement it. 
Achieving a higher growth equilibrium is rarely a gradual or incremental transition. 
It requires a discontinuous leap in expectations and policies, and a fundamental shift in the political and social consensus. 
When these shifts occur, leadership plays a crucial role, by providing citizens with an alternative vision, based on common values, that all stakeholders can support. 
Such leadership can come from above, from below, or from a representative group. 
But as the persistence of low-growth equilibria in many countries shows, it often doesn’t come at all. 
The spillover effects of non-inclusive growth are already evident almost everywhere, to varying degrees, in the form of social polarization, policy gridlock and incoherence, and a generalized loss of public trust. 
In this respect, developing countries’ experience holds potentially important lessons for policymakers and various stakeholders in advanced economies. 
There has been some progress in identifying the factors causing economic inclusiveness to decline in the last three decades. 
This is important: only by understanding the nature of the challenge can we develop more effective responses to it. 
If we misdiagnose the problem with a flawed or rushed analysis, our response will be ineffective, and probably even counterproductive. 
That said, the analyses conducted so far have not yet generated widespread awareness of the threat that non-inclusive growth poses to productivity and economic performance as conventionally measured. 
The adverse economic effects of non-inclusive growth grow and multiply slowly over time, and will continue to do so in the absence of collective action – usually but not necessarily manifested through government – to shift prevailing distributional patterns. 
Some would disagree with this proposition, because they believe that the factors behind economic performance and dynamism are independent of distributional patterns. 
But I would remind them of the second lesson from developing countries’ experience: non-inclusive growth patterns undermine trust and eventually governance, in turn undercutting policymakers’ ability to sustain policies and strategies that support high growth. 
To put it bluntly, insightful analysis has its uses, but change will not happen without a widespread social and political convergence around shared values and objectives – something that is sorely missing in many countries today. 
People need to trust one another and their leaders, and they need to agree on how to assess and respond to polarizing economic and social trends. 
At the same time, continued inaction will fuel alienation, creating a vicious circle of distrust and paralysis that will have to be broken before effective action can occur. 
There are already many important initiatives dedicated to various dimensions of the inclusiveness challenge, which include not just income and wealth inequality, but also automation, artificial intelligence, and the future of work. 
Despite their good intentions, it remains to be seen if any of these initiatives will pave the way for effective policy responses. 
The value of insightful analyses of such complex problems should not be discounted. 
But we cannot assume that getting the diagnosis right will be sufficient to overcome political gridlock. 
The other key ingredient is direct engagement. 
Restoring public trust will require a deep and sustained commitment, and a new consensus that is broad enough to overcome the political and social divides that are now legion across advanced economies. 
From this perspective, the proliferation of commissions and other initiatives that are structured around inclusion, which might seem excessive and redundant under less polarized circumstances, is actually very encouraging. 
Convening diverse voices from business, industry, labor, government, academia, and civil society – and doing so as frequently as possible – is exactly what is needed right now. 
The engagement aspect of the inclusive-growth mission may seem a bit nebulous, especially next to concrete analysis. 
Nevertheless, it is crucial. 
Bringing together people who disagree or even distrust one another is the first step toward building a foundation for collective action in the future. 

Tackling Rare and Orphan Diseases 
STANFORD – Rare diseases are commonly neglected, simply because they are, well, rare. 
In the aggregate, however, they affect huge numbers of people. 
In the United States, rare diseases are defined as those that affect fewer than 200,000 people. 
But there are more than 6,800 of these conditions, and worldwide they afflict hundreds of millions of people. 
And yet only about 250 treatments are available for these diseases. 
One reason for this is that small numbers of patients make studying illnesses and testing drugs difficult. 
As a result, medical professionals often know little about the symptoms and biology of these diseases. 
Earlier this year, I participated in a Rare Disease Day program in California. 
The topic was an obscure but large collection (more than 70) of diseases caused by a specific type of genetic error – one that takes place in the machinery of cells that chemically attaches sugars to proteins and lipids. 
Little is known about what causes the mutations that give rise to these congenital disorders, and treatments exist for only a few. 
These defects can lead to a wide spectrum of problems, because accurate glycosylation, as the process is called, is essential for the functioning of many signaling molecules, such as hormones and neurotransmitters, as well as the receptors to which these molecules bind. 
Along with health professionals, the audience at the conference included children afflicted with these diseases, along with their families. 
For an entire afternoon, the health professionals met in small groups with the families and children. 
As the discussion went on, one child would occasionally let out a blood-curdling scream. 
Another would periodically make quacking noises. 
Still others sat in various stages of deterioration. 
At one point, I was sitting about a foot away from an adorable little girl – I think she was about two years old – and every couple of minutes she would have a seizure. 
Her eyes would roll back, and her head would drop to her chest. 
The medications she is taking are able to prevent only the most violent and generalized of her seizures. 
Then she would recover and resume pressing the screen of her little child’s laptop. 
Her anguished father spent the entire session stroking her arm. 
Watching the parents was difficult. 
Some were hyper-alert, asking lots of questions; they seemed to have devoured every scientific paper, blog, and newspaper article in existence. 
Others just seemed confused. 
The worst were those with blank stares of deep despair. 
For most of the parents, the random bad luck of their child’s genetic defect had stolen their lives, turning their days into a series of endless visits to medical specialists. 
Most of the kids need large numbers of medicines. 
Many must be fed via gastric feeding tubes inserted surgically through an incision in their abdomens. 
One woman was there with her 32-year-old son. 
There is much that governments can do to help those dealing with rare diseases. 
First, they can redirect research funding from less critical pursuits to projects in molecular genetics that can offer insights into metabolic disorders. 
Second, they can reduce the burden of regulatory red tape on the very small clinical trials of new treatments for rare diseases. 
Finally, policymakers can create financial incentives – which could include tax breaks on research and development – to encourage drug companies to develop therapies that otherwise would not provide an attractive return on investment. 
In the world of medicine, practitioners of a few difficult, draining specialties are – in my book – well on the path to sainthood. 
I would include among them pediatric oncologists, the staff of burn units, the volunteers who treat patients with lethal infectious diseases such as Ebola, and the professionals who diagnose and treat debilitating genetic diseases and work with the afflicted families. 
These unsung heroes need all the support we can provide. 

Governments Must Stand Up for Health 
GENEVA – It was just a century ago that the Spanish flu epidemic spread across the world and killed tens of millions of people. 
Long before the moon landing, the Internet, or the discovery of the Higgs boson, the world was at the mercy of a disease that struck indiscriminately and did not respect national boundaries. 
The epidemic required an absolutely extraordinary response. 
A hundred years on, contagious diseases continue to cross borders faster and more efficiently than people or goods. 
But other epidemics, of chronic and noncommunicable diseases (NCDs), are also a scourge to communities around the world. 
In fact, in terms of the scale of human suffering and the costs for society, these diseases can be even more devastating than their contagious counterparts. 
At the United Nations General Assembly in New York, global heads of state are meeting on September 26-27 to highlight two major health threats. 
On the first day, they will discuss strategies to end tuberculosis (TB), an ancient bacterium that remains the world’s deadliest infectious disease. 
TB claims more than 4,000 lives per day, and is among the top ten causes of death globally. 
To make a bad situation worse, it is also a major cause of deaths linked to antimicrobial resistance, as well as the leading killer of people with HIV. 
Then, on the second day, world leaders will convene to discuss plans to beat leading NCDs such as cancer, diabetes, and cardiovascular and lung disease. 
Combined, NCDs are responsible for seven out of every ten deaths globally. 
All told, NCDs kill 41 million people every year, including 15 million people in the prime of their lives, aged 30-70. 
In addition to confronting TB and NCDs, world leaders will also discuss ways to promote mental health and wellbeing. 
Developing countries bear the brunt of the TB and NCD epidemics, as most of the people suffering and dying prematurely from these diseases are in low- and middle-income countries. 
But while TB and NCDs are very different types of health threats, the best response to them is the same: We must build stronger health systems that are capable of delivering universal health coverage (UHC). 
UHC makes health care accessible to everyone, no matter their circumstances. 
It delivers the full range of essential services, from prevention and treatment to palliative and rehabilitative to all people, not just those who can afford it. 
The principles underlying UHC apply equally to protecting people against TB, NCDs, and promoting mental health. 
But while the urgent need for UHC is widely understood, real change will not happen without a greater commitment from the highest levels of government. 
This means that presidents and prime ministers must become the champions of their people’s health. 
Only by ensuring a government-wide response can UHC be achieved, given that what drives good and bad health so often lies outside the remit of health ministries. 
By highlighting the challenges posed by TB and NCDs, the UN is giving political leaders a unique chance to put the wellbeing of their citizens first. 
They should remember that promoting health pays dividends on many other fronts, too, from economic development to security. 
So far, governments have already committed to achieving key global targets for TB and NCDs. 
With respect to TB, the world still needs to treat the 40 million people living with the disease, and provide preventive care to another 30 million, all by 2022. 
And to meet the UN Sustainable Development Goals (SDGs), we must end the epidemic by 2030. 
Countries can meet these targets by making investments geared specifically toward scaling up prevention, detection, treatment, and research. 
As for NCDs, the SDGs commit governments to reduce premature deaths from these diseases by one-third. 
Progress toward this goal has not been fast enough to ensure that it is met before 2030. 
Fortunately, there are low-cost ways for governments to meet these targets and save lives. 
Regulatory measures can protect people from exposure to the common causes of NCDs: tobacco, alcohol, physical inactivity, and foods and drinks high in trans-fats, salt, and sugar. 
Investments in health systems can improve disease detection and treatment for conditions like hypertension and diabetes. 
Vaccinating girls against the human papillomavirus (HPV), and screening women on a routine basis, can drastically reduce deaths from cervical cancer. 
At meetings in Russia and Uruguay last year, health ministers from around the world committed to accelerating action against TB and NCDs. 
Now it is time to take the next step. 
The UN General Assembly is a unique opportunity for world leaders to foster a true global good – better health for their citizens – by advancing universal coverage to end TB, beat NCDs, and promote better mental health. 

Taiwan and China, At It Again 
Why is Taiwan's relationship with China so intractable an issue? 
Why, when they share common economic interests - one million Taiwanese live on the Mainland, working in some 50,000 firms in which Taiwanese have invested over $400 billion - does China aim 500 short-range missiles at Taiwan? 
The run-up to Taiwan's presidential election on March 20th is one current source of tension. 
The incumbent, Chen Shui-bian, has initiated a referendum process that might someday be used to ask Taiwanese if they want to formalize today's de facto independence. 
This infuriates China. 
After all, as Mao Zedong told Edgar Snow in 1936, "It is the immediate task of China to regain all our lost territories," explicitly including "Formosa." 
Since then, China has sought to make good on Mao's pledge. 
China's new leadership often evinces a new judiciousness and moderation in its diplomacy. 
But Luo Yuan, a senior colonel at the Chinese Academy of Military Sciences, recently declared that if Taiwan's leaders "refuse to come to their senses and continue to use referenda as an excuse to seek independence, they will push [their] compatriots into the abyss of war." 
In an age when self-determination is a hallowed principle how is it possible that Taiwan - which has been part of China during only four of the last eleven decades, and has never been under the control of the People's Republic of China - is shunned by every nation when it deigns to wonder aloud why it should not be allowed to go its own way? 
The reasons have deep historical roots. 
When Mao and the Chinese Communists came to power in 1949, they promised "reunification of the Motherland," which included bringing Xinjiang (the Muslim desert regions of the West), Tibet, Mongolia, Hong Kong, Macao, and Taiwan back under central government control. 
It became a matter of national pride for a country that had been guafen , "cut up like a melon," by predatory colonial powers, to end national feelings of humiliation by restoring itself to wholeness. 
Communist propaganda relentlessly proselytized for re-unification as a "sacred" duty. 
As Tibet, Hong Kong, and Macao returned "to the embrace of the Motherland," Mao's commitment seemed close to realization. 
The fact that only Taiwan stands in the way makes reunification all the more non-negotiable. 
But, there is another dynamic at work. 
Over the last two decades, almost every other plank of the Communist Party's platform (world-wide people's war, proletarian struggle leading to a classless utopia, a triumph over global capitalism, etc.), has been abandoned. 
This leaves unification as the last tie to Mao's revolution and justification for one-party rule. 
China's leadership plays up this "revolutionary" commitment, for it helps generate nationalist sentiment, one of the few things (besides strong economic performance) that legitimizes the Communist monopoly on power. 
China's leaders ought to reflect on the fact that their country is no longer the "sick man of Asia." 
It is increasingly powerful, globally pro-active, and economically robust. 
So it is a timely moment to reappraise its position and to begin acting from strength, not weakness. 
In short, it is time for China's leaders to change the chemistry of their long feud with Taiwan. 
After all, China and Taiwan have struggled politically even as their economies become increasingly unified. 
In due course, they may well be able to become more unified on the political front - if they do not push their disagreements too aggressively. 
For economic convergence, if allowed to ripen, could set Taiwan and the PRC on an evolutionary course toward common sovereignty. 
How can such a scenario be realized? 
China must declare, loudly and clearly, that greater democracy, not mutant Leninism, is its ultimate political goal, and that as this evolutionary process takes place and the political climate becomes more congenial, they look forward to discussing how to better weave a political, as well as an economic, fabric with Taiwan. 
Such a declaration alone would give Taiwanese the ability to imagine that they may one day find it in their interest to be part of China. 
For its part, Taiwan needs to calm down. 
Its leaders must understand that, even though "independence" may sometimes seem like a logical scenario, Taiwan is a small, vulnerable island, and China an emerging superpower. 
Even though Taiwan may have a "right" to independence, its leaders need to remind their people that provocative actions will gain them little. 
In 1973, as Sino-US relations were thawing, Mao admitted to Henry Kissinger that, though he did not believe reunification would come peacefully, "We can do without Taiwan for the time being, and let it come after 100 years... 
Why is there a need to be in such great haste?" 
Mao's advice is not bad. 
China must take to heart its newfound dynamism and strength, and write a new scenario for its relations with Taiwan that emphasizes persuasion instead of missiles. 
For the first time in fifty years, China and Taiwan share real interests. 
What blocks matrimony is China's lack of democracy. 
Most Chinese would probably like to see this absence remedied as much as they favor full reunification. 
Only democracy in China can bring lasting peace to the Taiwan Straits. 

Taiwan's Democratic Labor Pains 
Young democracies can be cruel: their voters are often as unforgiving as political opponents. 
The two weeks since Taiwan's disputed presidential election of March 20 - only the third such democratic vote in the country's history - has tested this truism almost to the breaking point. 
Taiwan's young democracy must now cope with the balancing act that President Chen Shui-bian's re-election has thrust upon it. 
While canvassing for votes in his hometown in southern Taiwan on the eve of the election, President Chen and Vice President Annette Lu were both wounded by an assassin's bullet. 
The sympathy this secured gave the President his razor-thin margin of victory - with just 50.1% of the votes - over Lien Chan, the candidate of the Kuomintang Party and People's First Party (KMT-PFP) coalition. 
Opposition street protests and shouts that the assassination was stage followed. 
A recount was demanded. 
None of this is surprising, because Taiwan's society is evenly and deeply polarized. 
President Chen's Democratic Progressive Party (DPP) called for "one country on each side of the Taiwan Strait" and for "preventing the return of an alien regime" (meaning the KMT, which came to Taiwan in 1949). 
But while Chen's campaign to safeguard Taiwan against threats from mainland China clearly galvanized the party's supporters, it made the uncommitted nervous and the rival KMT angry. 
For the KMT-PFP coalition, the campaign was a virtual holy war, conducted not only to revive an ailing economy, but also to keep the country's official name: the "Republic of China." 
With so much at stake, both camps mobilized millions of people. 
President Chen upped the stakes even more by holding Taiwan's first-ever popular referendum. 
It called for beefing up Taiwan's defense in the face of mainland China's missile threats and for building a peaceful framework of relations across the strait that separates Taiwan from the mainland. 
Not only did China denounce the referendum as provocative, but so did the US President George W. Bush. 
In the weeks since the vote, Taiwan has staggered ahead. 
President Chen agreed to a recount. 
But the questions on everyone's lips are whether the loser of the recount will accept the result, and whether Taiwan's young democracy can survive this tumult? 
For the most important issue facing Taiwan today is not re-unification with China, but consolidating and deepening our democratic institutions. 
Traditions of tolerance must replace the turbulence that has so far dominated the building of Taiwan's democracy. 
The one benefit to be gained from the referendum is that, for the first time, Taiwan's citizens were asked to debate issues related to national defense and cross-Strait relations. 
Any citizen could take part in one of ten nationally televised debates and argue with government officials. 
Moreover, the presidential candidates themselves engaged in two rounds of televised debates and gave another two televised speeches - a political openness new to Taiwan and unique in the Chinese political world. 
Although China's rulers dismissed the election, Taiwan's open democratic exercises will have vast repercussions for other Chinese political communities in their pursuit of greater political pluralism. 
From this perspective, Taiwan's democratic traditions can only grow stronger. 
The DPP is a relatively young party, formed only in 1986. For a long time, indeed, Taiwan was overshadowed by the KMT. 
That dominance is now definitively a thing of the past. 
The uneven distribution of power between the two parties had many predicting a victory for the KMT-PFP coalition. 
Indeed, the DPP had never been able to win more than 40% of the vote previously. 
Its victory has now made it a fixture on the political landscape. 
Having ruled for four years, the DPP has already redrawn Taiwan's political map. 
Its calls for more reforms, its belief in Taiwan, and the urgency of its appeal to defend the island against undue influence from China have now captured the allegiance of a small majority of the population. 
Yet this should not be considered an outright victory for Taiwanese nationalism. 
Were it not for the shooting incident on the election's eve, the opposition might have eked out a victory, with the soft economy the deciding factor. 
The slim majority, and the clear differences between the two political camps, will assure a robust two-party system in the future. 
But more than two strong parties have emerged from the campaign. 
The law, too, is giving democracy here a boost. 
For example, the two parties are now engaged in tense negotiations to amend the Presidential and Vice-Presidential Election and Recall Law to avert any repeat of the current confused circumstances surrounding the current recount. 
In the future a compulsory recount will be held should the winning margin be less than 1%. 
A "sunshine law" to regulate political donations was enacted before the ballots were cast. 
The finances of the president and his/her family will henceforth be more strictly monitored. 
Taiwan's democratic experiences are messy, but no messier than the vote that brought President Bush to power four years ago. 
Yes, Taiwan's recent vote will leave a divided country behind, but those divisions are democratic divisions, and people are now organizing for the next elections. 
Instead of writing off Taiwan's democratic experiment as doomed to instability or worse, the disputed vote will help consolidate and invigorate our democratic order. 


Taiwan’s Journey From Troublemaker to Peacemaker 
OXFORD – Is the “harmonious society” that Chinese President Hu Jintao constantly proclaims being realized in China’s relations with Taiwan? 
Before Ma Ying-jeou became President of Taiwan (officially known as the Republic of China) in May 2008, Taiwan was regularly portrayed in China as a “troublemaker,” and was the main cause of tension between China and the United States. 
Now Taiwan has become something of a diplomatic afterthought because it no longer makes trouble. 
At the US-China Strategic and Economic Dialogue, indeed, Taiwan was barely mentioned, as North Korea, Iran, and the value of the renminbi claimed the most attention. 
It has always been unfair to demonize the Taiwanese merely for wanting what most people around the world take for granted: to uphold their basic human rights and way of life, including the right to decide through a democratic process their own future. 
China, however, rejects such sentimentality about self-determination. 
And, as a rising power, China is not a force that leaders, even democratic ones, dismiss lightly. 
For years, China’s ruling Communist Party has maintained that Taiwan is a “core national interest,” despite the reality that Taiwan has existed and functioned as a virtual state for 60 years. 
China has long threatened to use force if the international community should formally recognize Taiwan’s independence. 
But the atmosphere gradually changed in recent years, and the “troublemaker” label, applied under Ma’s predecessor, President Chen Shui-bian of the Democratic Progressive Party (DPP), has not been used for two years. 
Of course, Taiwan under President Ma still wants the same rights that it desired under Chen. 
But Ma has taken a different approach. 
He has eased tensions with China by focusing on what both sides can agree upon. 
China’s leaders find his language inoffensive. 
He seeks to advance Taiwan’s national interests without arousing the People’s Republic’s threat to use force. 
And he has sought to forge closer trade and transport links. 
Ma’s strategy suits China, whose leaders welcome being able to avoid confrontation with Taiwan, given their current focus on engineering their country’s “peaceful rise.” 
Moreover, China does not wish to see the DPP and its aggressively pro-independence leaders return to power. 
When Ma’s popularity fell dramatically as Taiwan’s economy suffered from the global financial crisis, China’s leaders worked with Ma to pre-empt just such an outcome. 
This has allowed Ma’s administration to claim credit for improving relations with China. 
But the fundamental causes underlying the threat of a China-Taiwan war – and conflict between China and the US, which has long been committed to supporting Taiwan should China seek to determine its status unilaterally – have not been removed. 
The Chinese Communist Party remains committed to forcing Taiwan to accept the idea of ultimate “reunification,” while the Taiwanese remain determined to decide their own future. 
But each side’s interests need not be mutually exclusive. 
The right to national self-determination does not imply an assertion of de jure independence. 
For example, acknowledgement of Scotland’s right to choose independence has not resulted in Scotland leaving the United Kingdom. 
What people in Taiwan want is nothing more and nothing less than acknowledgement that they can decide their own future. 
Given China’s deep distrust, it will never believe that a DPP president who insists on the Taiwanese people’s right to determine their future will not secretly push for independence. 
But, since China knows that Ma is not advocating independence, they are able to countenance with greater equanimity his commitment to sustain the Republic of China on Taiwan. 
If ever there were an opportunity for China and Taiwan to find a way to ensure that future confrontations do not escalate and drag the US into a conflict, it is now. 
What Ma must do is forge a clearer consensus within Taiwan that the independence vs. unification issue is a phoney one. 
The real issue is whether both sides can acknowledge that Taiwan’s people have the right to determine their future. 
China’s leaders need to be persuaded that conceding this point does not imply letting Taiwan move towards de jure independence. 
This may require that the Taiwanese abandon their tendency to hold regular referenda to show that they enjoy this right. 
And the People’s Republic will need to recognize that the best way to entice Taiwanese to embrace reunification is to make the proposition so attractive that they cannot resist. 
There is no need to set a timetable for this. 
As a rising superpower, China should feel confident that time is on its side. 
The whole world shares an interest in preventing disagreements between Taiwan and China from becoming a cause for military confrontation between the US and China. 
Ma has created the necessary conditions for deactivating the trigger. 
It is time for the rest of the world to support him in removing it forever, so that Taiwan will continue to fade as a global concern. 

Taiwan's Sovereignty Dilemma 
To allay China's fury over his private trip to Taiwan this summer before becoming Singapore's prime minister, Lee Hsien Loong said that his country will not support Taiwan should it declare formal independence from mainland China. 
Indeed, no country, declared Lee, would take a different line. 
This diplomatic strike occurred at roughly the same time that Taiwan was failing - for the thirteenth time - in its bid to re-enter the United Nations, having been expelled when China was admitted in 1971. 
While Taiwanese athletes competed in the recent Athens Olympics, advertisements supporting the team were removed on its arrival at Athens airport. 
Returning home from a trip to three Central American allies, Premier Yu Shyi-kun's entourage was forced to transit in Okinawa to escape the effects of Typhoon Aere, inciting a protest from China against Japan's government. 
Such symbolic politics forms a key part of the mainland's relentless effort to isolate Taiwan internationally. 
To display its displeasure at Lee Hsien Loong's visit, China's government warned Singapore that a bilateral free-trade deal might be in jeopardy. 
Commenting on Taiwan's UN application, Chinese Foreign Ministry spokesman Kong Quan demanded that Taipei stop pursuing its "two China's" policy. 
China's diplomatic offensive against Taiwan escalated in early August, when President Hu Jintao telephoned US President George W. Bush to demand a halt to the sale of advanced weapons to Taiwan. 
Hu told Bush that the Taiwan issue was "very sensitive," and that China would "absolutely not tolerate Taiwan independence." 
As a result of such pressure, Taiwan has become the most isolated country in modern history, which is all the more glaring in view of its economic and political success. 
Indeed, that anomaly, if not rectified, is increasingly dangerous. 
Frustrated by a lack of recognition, popular disgust in Taiwan with terms like "China" and "Chinese" is rising. 
So is support for distinct countries on each side of the Taiwan Strait. 
Although opinion polls indicate that a majority still supports the status quo, many are beginning to believe that if the country's official name, the Republic of China, is not acceptable to the international community, then another name might be. 
Millions of people took to the streets during the presidential election last March to demand a name change. 
The latest source of contention - both on the domestic front and in relations with the mainland - concerns whether to write a new constitution. 
Enacted in Nanjing before the Chiang Kai-chek's Kuomintang government resettled in Taipei after the Chinese Civil War of the 1940's, Taiwan's constitution is considered by some an anachronism, unfit for a democracy with a population of over 23 million. 
Within Taiwan, the debate over constitutional reform has led to disturbing developments. 
Most worryingly, it has heightened tensions between Taiwan's various ethnic groups over national identity and relations with China. 
Of course, Taiwan's parlous relations with China have suffered further as a result, with China's government denouncing calls for a new constitution as a calculated move towards independence. 
China's Taiwan Affairs Office issued a warning on the eve of President Chen Shui-bian's inauguration in May, forcing Taipei to choose between war and peace. 
Alarmed by a potential conflict between the two archrivals, the Bush administration urged Chen, who won a second term in March, to exercise restraint. 
Consequently, in his inauguration speech on May 20, Chen promised to amend the constitution via the current mechanism, rather than adopting an entirely new constitution via referendum. 
But the passage of recent constitutional reforms by the Legislative Yuan illustrates the continuing volatility of the situation. 
In addition to replacing the multi-member-district, single-vote electoral system with a single-member-district, two-round voting system, the amendment reduces the number of seats in the Yuan by half. 
The reforms have been lauded as a crucial step towards a more stable two-party system. 
Similarly, a higher electoral threshold for winning seats should counter vote buying by candidates. 
For China, however, the reforms are a smoke screen erected by Taiwan's government. 
China fears that the government still wants to write a new constitution - one from which Taiwanese independence would be derived. 
This senseless political warfare has hampered cross-strait economic relations. 
Bilateral trade turnover reached $50 billion in 2003, and Taiwanese took almost four million trips to the mainland. 
It is imperative for both economies that direct transport links be established immediately. 
But, here, too, political sensitivities loom large. 
China wants the link defined as domestic in nature, with rights reserved exclusively to airlines registered on either side, while Taiwan insists that services be open to foreign competition. 
Thus does the fight over sovereignty overshadow all bilateral issues. 
Indeed, with China bent on unification, it refuses even to define relations with Taiwan as "bilateral," while China's growing global influence suggests that Taiwan's diplomatic fortunes are not about to improve. 
That, however, may merely strengthen support in Taiwan for independence as the only way out. 

Take From the Poor, Give to the Rich 
President Bush seems poised to wreck America's budget for years to come. 
When Bush came into office, the outlook was for budget surpluses as far as the eye could see. 
Today, through a combination of irresponsible Republican-led tax cuts, a slowing economy, the bursting of the stock market bubble, and a massive increase in defense spending, huge deficits dominate the fiscal horizon. 
Worse is coming, because the Bush Administration and the Republican-led Congress are preparing to deepen the fiscal mess. 
The damage they will do will likely weaken the US and add instability to the world economy. 
Traditionally, America's Republican Party stood for balanced budgets. 
This changed with the Reagan Administration, when conservative Republicans favored tax cuts even at the cost of large budget deficits. 
President Reagan told the American people that they could enjoy tax cuts, a military build-up, and continuation of their favorite spending programs all at the same time. 
The result - no surprise - was a series of vast budget deficits that took years to clean up. 
Both President George Bush Sr. and Bill Clinton had to raise taxes to clean up the Reagan-era mess. 
Those tax increases probably contributed to President Bush Sr's defeat by Bill Clinton in 1992. 
Yet Clinton bravely decided to complete the process of restoring fiscal balance, in part to protect the long-term financing of the Social Security retirement program. 
When Clinton left office in 2000, the budget situation was the best in decades. 
Then along came President George Bush Jr. to replay Reagan: large tax cuts, a big increase in military spending, and continuation or even expansion of popular spending programs. 
The result was predictable. 
In January 2001, the cumulative budget outcome for the years 2002-2011 was projected to be $5.6 trillion dollars in surplus. 
By mid-2002, those projected surpluses had vanished. 
In view of these changed economic conditions, and the shadow of war in Iraq, you might expect the Bush Administration and the Republican-led Congress to be cautious in advocating new tax cuts. 
But no, their highest priority is to enact more tax cuts that will mainly benefit the rich. 
At the same time, the Administration is calling for big increases in military spending. 
With the November 2004 presidential election now coming into view, you can be certain that no meaningful cuts in non-military spending programs will be made. 
So massive budget deficits seem here to stay. 
If domestic spending simply stays constant as a fraction of national income, the cumulative budget outcome for the next ten years will be a combined deficit of $1.5 trillion. 
But this figure may be optimistic, because it probably doesn't adequately factor in the costs of a possible war in Iraq, nor another round of tax cuts, nor the risk of higher interest rates in the years ahead. 
Why are Republicans so unconcerned about this mess? 
Some Republican care more about tax cuts for the rich than they do about almost anything else. 
Others believe that deficits will force major cuts in domestic government spending, thus shrinking the state, which is their heart's desire. 
The problem with this latter view is that most taxpayers like domestic programs, and will not readily support major spending cuts. 
A more intriguing question is why do Americans vote for such policies, when they should know that trouble will probably result. 
One answer is that many voters do not see the looming budget troubles. 
A better answer is that most Americans did not actually vote for these policies. 
Voter turnout in the 2002 election was only around 40%, of which around half went to the Republicans, or around 20% of eligible voters. 
Of course, the outlook need not be so bleak. 
War in Iraq may be avoided. 
Proposed tax cuts may be watered down or abandoned. 
But I predict large budget deficits for years to come, and a growing sense of unease within the US and abroad about America's macroeconomic situation. 
Foreign investors may decide to cut back financing America's budget and current account deficits on favorable terms. 
The dollar may weaken, and fears of inflation may become more pronounced. 
All of this will make US policymakers less confident and less flexible in their responses to economic shocks. 
The poor, both inside the US and abroad, could suffer the most, as President Bush and the Congress tell the American people and the world that, due to the large budget deficits, there is no money available to address problems of poverty, disease, and education. 
Unless ordinary Americans wake up to these fiscal risks, the rich may walk away with another multi-billion-dollar gift as the country and the world bear the harsh consequences for years to come. 

Take the Euro and Run 
For the eight post-communist countries that the EU promises to admit in 2004, joining its Economic and Monetary Union (EMU) poses an accompanying obligation. 
Unlike the United Kingdom or Denmark, the new members cannot opt out of the euro. 
They can only control when to adopt it, which in principle could be as early as two years after EU admission. 
Obviously, accepting the Maastricht Treaty, with its tough constraints on fiscal, monetary, and wage policies, is far more than an economic decision. 
But in the final analysis, the conviction--or lack of it--that joining EMU will bring powerful economic benefits is the force likely to guide decisions about whether to embrace the euro as soon as possible. 
EMU is founded on the idea, pioneered by the Nobel laureate Robert Mundell, that the costs and benefits of monetary integration depend on whether or not countries share certain properties. 
A group of countries characterized by economic openness, trade and financial market integration, similar economic structures, price and wage flexibility, labor mobility and other factors of production may, according to this view, form an optimum currency area (OCA). 
Do the post-communist candidate countries share the OCA properties required for successful EMU membership? 
Their degree of economic openness, measured by the share of exports and imports in their GDP, is as high as that of current EMU members. 
This is vital, because the more open an economy, the more the prices of internationally traded goods determine domestic inflation, thus making an independent exchange rate policy less necessary for influencing relative prices and competitiveness. 
Similarly, trade integration and comparable economic structures tend to synchronize the business cycles of member countries, making common monetary and exchange rate policies more likely to serve the interests of all. 
Trade integration can be measured by the EU's share in a country's exports. 
For all but three candidate countries, this is more than 60%, and often larger than for current EU members. 
Economic structure reflects the contributions of different sectors of the economy to GDP and employment. 
The economic structures of the four candidates who are OECD members (the Czech Republic, Hungary, Poland, and Slovakia) are similar to today's EMU members, although industry's share in GDP is higher and that of services lower. 
Employment patterns also reflect the legacy of central planning, with industrial employment higher than in the EMU. 
Still, all indicators show that the candidate countries are closely integrated financially with the EU, permitting them to run higher current account deficits than they could otherwise. 
In Hungary, non-residents hold 20% of government securities and account for 70% of the equity market's capitalization. 
Of 31 commercial banks, only five are domestically owned. 
Foreign owners--mostly EU-based banks--now control roughly 95% of assets in the Czech and Slovak banking sectors. 
The candidate countries also display greater flexibility of nominal prices and wages. 
A recent OECD study measuring regulation of product markets and employment protection in member countries indicates that the Czechs, Hungarians, and Poles are more committed to removing price controls, facilitating entrepreneurship, and liberalizing labor markets than many EU members. 
This dampens the need for the exchange rate to function as a mechanism of adjustment for potential shocks. 
Throughout Europe, cross-country labor mobility is hampered by cultural and language barriers, limited portability of social benefits, and administrative restrictions. 
But the importance of labor mobility for a currency union should not be exaggerated. 
It would be impractical and socially undesirable to depend on labor mobility to help overcome temporary shocks, and an independent monetary policy can do little to address the permanent shocks that labor mobility can ameliorate. 
In the end, mobility of capital compensates for lower labor mobility. 
So current EMU members and EU candidate countries clearly share OCA properties. 
But a successful currency union requires more than this. 
For example, if the transmission mechanism of monetary policy varies among countries, their responses to a common policy may also vary. 
Factors affecting the transmission mechanism in the candidate countries--legal frameworks, the degree of financial depth, the maturity of debts, and the availability of non-bank financing--differ markedly from those in the current EMU members. 
But such differences exist within the EMU as well, while the effects of short-term interest rate changes on output and prices are nonetheless fairly similar. 
Yet the degree of many candidate countries' economic openness has narrowed the scope for independent monetary policy. 
Vast amounts of short-term capital, speculating on interest rate convergence or equity market gains, are flowing into the most advanced candidate countries, driving up their currencies and increasing their vulnerability to a sudden capital-flow reversal. 
EMU membership will diminish this volatility and eliminate exposure to it. 
Even if EMU membership did not promise a more stable and competitive business environment, increased efficiency, and faster growth throughout the enlarged euro area, minimizing exposure to financial contagion is reason enough to join as soon as possible. 
Markets can be a brutal and disruptive teacher, as we know from the monetary crises that wracked developing countries in the 1990s. 
By eliminating nominal exchange rate uncertainty, a common currency area has the additional benefit of lowering transaction costs and investment risks. 
Economists disagree over how much this increases trade. 
But the effect on output growth, which is what matters in the end, is bigger the more open an economy is--one more way that the candidate countries could gain considerably from early EMU membership. 

Taking August Seriously 
TOULOUSE – Europe’s holiday month of August is no time for serious politics. 
The world and its worries are meant to close down while Europeans repose. 
I usually spend the month with my family at our old converted farmhouse in southwestern France. 
It is the deepest countryside. 
As I write this under a vine in my vegetable garden, I look west across wooded hills and cannot see another building. 
In our hamlet, there is one small working farm, a couple of holiday houses and the ruins of seven or eight other houses. 
A century ago, this would have been a community of more than 50 people. 
Today, there are two full-time residents, the farmer and her elderly mother. 
Otherwise, the inhabitants are vacation visitors. 
Progress in France brought a fairly recent migration from country to town. 
“How is it,” a local pig farmer asked me a few a years ago, “that we locals all want to get out of here, and you northern European city dwellers want to buy up our old farmhouses and move in?” 
It is a part, I suppose, of the urban, middle-class northern European dream – the pursuit of the sun by day and silence by night. 
Even in the 15 years that we have owned this former tobacco farm, further progress has left its mark. 
In our village, there used to be two of every shop – butcher’s shop, bakery, hardware store. 
Now, there is only one. 
Supermarkets in the surrounding towns have driven the smaller shops out of business. 
I guess they provide more choice, and they are probably cheaper. 
But the commercial life has been squeezed out of local villages. 
Another mark of progress is the arrival of a broadband Internet connection. 
So now I can use my laptop just as though I was at home in London, and the satellite dish gives us the world’s television and radio stations as well. 
This is an advance in many respects. 
But I used to be able to switch off from the world when on holiday, cut off from the intrusions of technology. 
Today there are no excuses. 
I am always on duty. 
Thanks to our television, we have of course been able to witness signs of progress elsewhere. 
Maybe the terrible floods in Pakistan and China are not the direct result of climate change. 
But the evidence seems to suggest that variations in climactic conditions are increasing in scale and frequency. 
We know that a 17-fold increase in the carbon dioxide in our atmosphere over the last century is part of the price of the surge in our prosperity, and that the world’s poorest citizens will bear the heaviest burden in paying it. 
We have also been able to watch on our televisions this month what appears to be the final stages in the battle to cap the huge oil spill off the coast of Florida and Louisiana. 
Will this environmental disaster persuade Americans to look harder at their incontinent use of energy? 
Will it affect their love affair with the internal combustion engine and air conditioning? 
I rather doubt it. 
Defining progress in ways that make it sustainable and allow us to maintain the best of the past is difficult. 
Opposition to globalization and market forces has often been the preferred way of trying to hang on to an idealized view of what life used to be like. 
This produces paradoxical results here in France, where – despite all the anti-globalization rhetoric – McDonald’s is more popular than anywhere else in Europe. 
French companies do spectacularly well in the global market place. 
At home, meanwhile, small, distinctively French businesses – cheese makers, patisseries, or restaurateurs – get hammered by heavy taxes and social-welfare costs while supermarkets flourish selling products from Asia. 
So, how do we keep the best of what is familiar and foster the identity of our local neighborhoods and regions while embracing the sort of changes that make most of us better off? 
How can we make markets and technology serve us rather than – as so often seems to be true – vice versa? 
One partial solution is to try harder to put a price on what we call progress. 
What are the real costs of out-of-town shopping malls in terms of increased traffic and loss of green spaces, for example? 
What may make sense in the vast open reaches of Texas will not necessarily work in rural France or Britain. 
How can we ensure that technology meets the needs of the poor and does not simply increase the divide between laptop-owning, Blackberry-using Westerners like me and the poor in India or China? 
Above all, when will we agree to assign real costs to the energy we use, especially carbon-based resources? 
The casualties of our failure to do so will be future generations of flood victims in Asia and China, farmers in drought-hit Russia and Africa, and everyone’s grandchildren, like my five, with whom I have spent this summer. 
What sort of legacy will today’s “progress” bequeath to them? 
We like to think that older generations always leave a better world for those that follow. 
Is that still true? 

Taking Disarmament Seriously 
MELBOURNE – People sometimes forget that the boy who cried wolf ended up being eaten. 
True, nobody has been killed by a nuclear weapon since the attacks on Hiroshima and Nagasaki, 65 years ago this month. 
And, with Cold War tensions long past, it is all too easy for policymakers and publics to resist the doomsayers, be complacent about the threats that these weapons continue to pose, and to regard attempts to eliminate them, or contain their spread, as well-meaning but futile. 
But the truth is that it is sheer dumb luck – not statesmanship, good professional management, or anything inherently stable about the world’s nuclear weapon systems – that has let us survive so long without catastrophe. 
With 23,000 nuclear weapons (equivalent to 150,000 Hiroshimas) still in existence, more than 7,000 of them actively deployed, and more than 2,000 still on dangerously high launch-on-warning alert, we cannot assume that our luck will hold indefinitely. 
We know now – with multiple revelations about human error and system breakdown on both the American and Russian sides during the Cold War years and since – that even the most sophisticated command and control systems are not foolproof. 
We know that some of the newer nuclear-armed states start with systems much less sophisticated than these. 
And we know that, across the spectrum of sophistication, the risk of destabilizing cyber attack beating cyber defense is getting ever higher. 
So it should be obvious that maintaining the status quo is intolerable. 
Moreover, there is the real risk of proliferation, especially in the Middle East, multiplying the dangers that nuclear weapons will be used by accident or miscalculation as well as design. 
There is also the sometimes exaggerated but unquestionably non-negligible risk of non-state terrorist actors getting their hands on insufficiently secured weapons or fissile material and exploding a bomb in a major population center. 
And there is the disconcerting prospect that new civil nuclear-energy players will insist on building uranium-enrichment or plutonium-reprocessing plants of their own, rightly described as “bomb starter kits.” 
President Barack Obama came to office alert to all these threats and determined, as no other US president – and almost no other world leader – has been, to eliminate them. 
His leadership inspired hope that more than a decade of sleepwalking was behind us, and brought some modest gains over the last 18 months. 
They include the conclusion of the US-Russia new START treaty, which would reduce deployed strategic weapons; some modest limitations on the role of nuclear weapons in US nuclear doctrine; a Washington summit that reached useful agreement on the implementation of improved nuclear-security measures; and hard-to-achieve consensus at the recently concluded pentannual Nuclear Non-Proliferation Treaty (NPT) Review Conference on useful steps forward, including a 2012 conference on achieving a nuclear-weapons-free zone in the Middle East. 
But START treaty ratification is going nowhere fast in the US Senate and progress on other key issues has been slow or shaky: bringing the Comprehensive Test Ban Treaty into force; starting negotiations on a new treaty to ban the production of fissile material for nuclear weapons; strengthening the non-proliferation regime with effective measures to detect violations and deter treaty walk-outs; reaching agreement on some form of international management of the most sensitive aspects of the fuel cycle; and, above all, starting new rounds of serious disarmament talks, involving not just the two nuclear superpowers, but all eight nuclear-armed states. 
Arms control and disarmament is a grinding, unglamorous business that brings few quick returns. With domestic issues and re-election anxieties now dominating most political agendas, it will be all too easy for commitment to wane. 
If that is to be avoided, continued leadership from the top – above all from Obama and Russian President Dmitri Medvedev – will be indispensable. But there are a number of major contributions that less powerful states and leaders, as well as civil-society organizations, can make. 
The most immediately important task is for those with credible voices to take every opportunity to bridge the complacency gap. 
The messages must be stark: nuclear weapons are not only the most indiscriminately inhumane weapons ever invented, but the only ones capable of destroying life on this planet as we know it. 
Carbon dioxide can also kill us, but not as quickly as bombs. 
The second major task is to set a clear global disarmament action agenda – with credible timelines and milestones. 
It is probably too difficult right now to set a reliable target date for getting all the way to “global zero”: there are still too many difficult technical problems of verification and enforcement to be worked through, as well as the obvious geopolitical and psychological ones. 
But it is not incredible to set a date like 2025 as a target for minimizing the world’s nuclear arsenal to less than 10% of its current size, with very few weapons actually deployed, and their role in all states’ military doctrine dramatically reduced. 
Nor is it too early to begin work on crafting a new Nuclear Weapons Convention that provides a workable framework for multilateral negotiations, and on devising an independent high-level monitoring mechanism that would spell out clear benchmarks for progress, track how they are being met, and create real pressure for change. 
These are all recommendations of the International Commission on Nuclear Non-Proliferation and Disarmament. 
As the world commemorates the 65th anniversary of the bombing of Hiroshima and Nagasaki this August, we should recognize that our luck is running out – and take them seriously. 

Taking Drug Safety Seriously 
Health hazards – nuclear reactors, guns, and contaminated foods – surround all of us, so governments take an active role in limiting these hazards through regulations, which, in many cases, are very successful. 
But the situation is far different concerning the safety of prescription drugs. 
Indeed, as far as protecting the public is concerned, drug safety is the regulator’s neglected stepchild. 
The magnitude of the problem is huge. 
In the United States alone, it is estimated that every year up to 100,000 patients die due to serious adverse drug reactions (ADR’s). 
If true, drug-induced death would qualify as the fourth or fifth leading cause of death (depending on which mortality estimates are used). 
Moreover, the direct annual hospital costs attributable to ADR’s run into the billions of dollars, and this does not include all the suffering that ADR’s cause that does not lead to hospitalization (or death). 
The difficulties in determining cause and effect must be acknowledged. 
Whether a patient’s death or hospitalization is due to a particular drug, the underlying illness, or a combination of the two can be hard to determine. 
But this makes drug safety all the more important. 
Inherent to drug safety is the fact that all drugs, in addition to their benefits, cause harm in certain patients. 
Drug approval and use requires a careful weighing of desirable and undesirable effects. 
These judgments vary, depending on whether they are made by a drug company, which stands to benefit from sales, or a patient at risk of suffering a serious adverse effect. 
Incomplete knowledge complicates this assessment. 
The rush to get new drugs to market often leads to inadequate safety documentation. 
More than half of all approved drugs produce a serious adverse reaction that is not known at the time of regulatory approval. 
For example, when the new class of painkillers called Cox-2 inhibitors was introduced, regulators, physicians, and patients were unaware that these drugs could cause heart attacks and strokes. 
Tens of thousands of innocent patients – perhaps more – suffered such ADR’s before the first two drugs of this class were withdrawn. 
Proper and complete documentation of harmful drug effects is difficult. 
Spontaneous reporting rates to regulatory agencies are low – approximately 1% – and ongoing monitoring is passive in many countries. 
There is also a general reluctance to report unfavorable drug effects. 
Physicians may feel guilty and fear litigation, drug companies worry about the threat to corporate profits and regulatory agencies must face the question: “Why was the drug approved in the first place?” 
It is especially difficult to attribute an adverse reaction to a drug if the medical event is common in the user’s age group or in the condition being treated. 
Because the risk of heart attacks is high in older people, many of whom have arthritic pain requiring treatment with painkillers, it took six years to link Cox-2 inhibitors to a two- to three-fold increase in the risk of heart attacks. 
A recent Harris Survey in the US concluded that 60% of adults are either not confident at all or not very confident that drug makers will publicly and in a timely manner disclose data on their products’ adverse effects. 
Their skepticism is hardly groundless: internal documents obtained in recent lawsuits reveal that drug companies often fail to submit critical safety information to regulatory agencies, as required by law, and fail to communicate such information to physicians and patients. 
One problem is that the consequences for neglecting drug safety are non-existing or minimal. 
The time has come to get serious: 
· Citizens and government must make drug safety a priority and commit adequate resources to fixing the problems; 
· Penalties for drug companies’ failure to report and communicate safety information must be increased dramatically if they are to serve as effective deterrents; 
· Regulatory agencies need enforcement authority so that stricter rules can be implemented; 
· The drug-safety problem must be seen as a systemic failure. 
It is unfair to blame clinicians for serious ADR’s, particularly in the absence of complete safety information. 
Fixing the problem requires full cooperation from clinicians, but this requires ending their fear of litigation. 
This approach works well in the airline industry: pilots reporting near misses are not penalized; 
· Patients need to be better informed about the risks of prescription drugs and more involved in detection and reporting. 
Package inserts in fine print are useless; 
· Monitoring of ADR’s must be more pro-active. 
This requires more funding, which should come from the main beneficiary of drug sales – the pharmaceutical industry – just as oversight of aviation safety is funded by the airlines. 
Above all, the success of any comprehensive effort to improve drug safety hinges upon establishing an independent office of drug safety to advocate, coordinate, and provide direction to the regulatory agenda. 
Such an office exists in the United Kingdom. 
Other governments should follow this model in order to fulfill their neglected role as guardian of public health. 

Taking Sides in the War Within Islam 
PARIS – French Prime Minister Manuel Valls was right when he recently said that there is no good excuse for jihadism. 
Rejecting the culture of excuses, said Valls, also meant resisting the temptation to dwell on explanations of the jihadist impulse. 
And Valls was right again on April 4 when he warned against the danger of an ideological victory for Salafism, the doctrine underlying jihadism, which views Europe (and, within Europe, France) as prime ground for proselytization. 
Successive French governments, over three decades, abdicated responsibility for engaging in this debate. 
But while passivity may have ensured social peace in the short term, it enabled values other than those of the republic to take root in wide swaths of French cities. 
And this was followed by willful blindness, as governments refused to recognize that militant Islamic fundamentalism was actually Islamo-fascism, the third global variant of totalitarianism that diehard critics had been decrying for a quarter-century. 
This failure of government was abetted by the complicit myopia prevailing at the extremes of the political spectrum. 
In 2012, Marine Le Pen, the leader of the far-right National Front, lumped together (in order to condemn them both) the religious symbol that is the yarmulke and the political emblem that is the veil. 
And just this month, Green Senator Esther Benbassa claimed that a miniskirt is no less alienating than a chador. 
What were Le Pen and Benbassa doing if not making acceptable a form of barbarism whose occasionally human face should never allow us to forget that people are killing, maiming, and raping in its name? 
Compounding the problem is the well-known advantage that extremists have over moderates, by virtue of yelling the loudest. 
Just as the Montagnards drowned out the Girondins in the Legislative Assembly during the French Revolution, the rabid jihadists are drowning out the large number of Muslims who want nothing more than to be left alone to practice their faith in peace and with respect for others and the law. 
And finally, there is the timorous backpedaling we tend to see from our leaders whenever religious fanatics stigmatize those who offend them. 
Yesterday it was the Indian novelist Salman Rushdie; today it is the Algerian novelist Kamel Daoud. 
The first reflex of too many leaders at such times is to stigmatize the victims a second time, by suggesting that they were asking for it. 
In any event, the result is plain: Appeasement of violent radicalism only encourages more of the same. 
As a consequence, we find ourselves in an undeclared state of intellectual emergency, one that, regrettably, has given rise to the states of emergency that our governments proclaim in the wake of terrorist attacks. 
Dealing with this emergency requires, above all, saying and doing the opposite of what has most often been said and done. 
Specifically, we must call a spade a spade. 
An Islamist may be a lost Muslim or a Muslim gone astray, but he or she is a Muslim all the same. 
We must stop repeating ad nauseam that these aberrant Muslims have “nothing to do with Islam.” 
In other words, we must acknowledge that two Islams are locked in a fight to the death, and that because the battlefield is the planet and the war threatens values that the West embraces, the fight is not solely the Muslims’ affair. 
Once we do that, we must devote ourselves to identifying, untangling, and exposing the networks of Islamic hate and terror with the same energy and ingenuity that are now being applied to unraveling the global schemes of tax evaders. 
How long will we have to wait for the Panama Papers of Salafism? 
What is stopping the great newspapers from flushing out from the dark web the Mossack Fonsecas of global jihad and its criminal offshore companies? 
We must also aid, encourage, and ideologically arm Muslims who reject the Islam of hate in favor of an Islam respectful of women, their faces, and their rights, as well as of human rights in general. 
Is that not what we did in the not-so-distant past with regard to the brave people we called dissidents in the Soviet world? 
And were we not right, at the time, to ignore those who told us that the dissidents were a minority who would never, ever, prevail against the granite ideology of communism? 
That means protecting and defending Daoud (to take just one current example), a French-language writer of Muslim origin who suggested that those seeking sanctuary in Europe would do well to learn to appreciate European values. 
For that, Daoud has been saddled with a double fatwa: one from his “assassin brothers,” to borrow the Algerian-French journalist Mohamed Sifaoui’s phrase, and another from a handful of supposedly progressive and anti-racist French intellectuals who accused him of “recycling the most hackneyed clichés of Orientalism” when he urged Arab men to respect the dignity of women. 
Genuine anti-racists, anti-imperialists, and believers in republican democracy must take the side of the Islam of moderation and peace in its war against the criminal Islam of the Salafists. 
It is a war that is ideological, theological, and political, a war that cuts across worlds, cultures, and what we are right to call civilizations, from the lost city neighborhoods of France to those areas – for example, Kurdistan, Morocco, Bosnia, and Bangladesh – where enlightened Islam remains alive and well. 
That, in broad strokes, is our urgent task. 
This is our war. 

Beating the Child Killers 
GENEVA – Ask most people to name the two biggest causes of death among children, and they will most likely say malaria and HIV. 
In fact, it is pneumonia and diarrhea – the “forgotten killers” – that are responsible for the highest death toll, claiming more than two million of the most vulnerable lives every year. 
Together, these two diseases account for 29% of all deaths of children under five years old. 
That is more than double the total for HIV and malaria combined, and nearly as many as all other infectious diseases, injuries, and other post-neonatal conditions put together. 
Yet as shocking as these statistics are, what is perhaps even more surprising is just how preventable pneumonia and diarrhea are – so much so that it would be quite feasible to introduce measures that by 2025 would reduce their death toll to almost zero. 
That is precisely what we are now aiming to do. 
An ambitious new plan, called the Integrated Global Action Plan for the Prevention and Control of Pneumonia and Diarrhea, launched this month by the World Health Organization and UNICEF, aims to step up existing interventions and pool global efforts, with the goal of reducing the number of deaths from pneumonia to less than three children per 1,000, and of diarrhea-related deaths to below one in 1,000. 
This would effectively end the preventable deaths of more than two million children every year. 
For any other infectious disease or global health threat, achieving this kind of reduction in incidence rate and mortality would be nothing short of miraculous. 
Yet, for pneumonia and diarrhea, we have every reason to believe that we can succeed, because we already know what works. 
For example, infants who are not exclusively breastfed for the first six months have a ten-fold increase in the risk of death from diarrhea, and are 15 times more likely to die from pneumonia. 
Similarly, basic sanitation, such as improved hand washing and access to clean water, and better nutrition can also produce significant risk reduction, much of which can be achieved through simple education programs. 
Immunization is also highly effective. 
Vaccinating children against rotavirus, for example, can protect them from a pathogen that is responsible for 37% of all diarrhea deaths in children under five, thus saving 450,000 lives every year. 
Similarly, vaccines exist to protect against pneumococcal disease, which accounts for a half-million pneumonia-related deaths annually. 
When combined, these interventions significantly reduce both pneumonia and diarrhea; the problem is that, too often, they do not reach the children most at risk, such as those living in extreme poverty or hard-to-reach communities in the world’s poorest countries. 
That is why we now need the Integrated Global Action Plan. 
The two diseases share so many common causes and risk factors, prevention strategies and interventions, and delivery platforms for care in clinics, communities, and schools that it makes sense to bring them together. 
But, if those hard-to-reach children are to benefit, our efforts must be scaled up significantly. 
Until recently, this simply would not have been possible, at least not on the immunization front. 
The vaccines protecting against rotavirus and pneumococcal disease are both barely more than a decade old. 
In the past, such new vaccines would take, on average, 15 years to reach developing countries – and then at prices that would place them beyond the reach of those most in need. 
This is one of the reasons why my organization, the GAVI Alliance, was created: to help accelerate the introduction of new vaccines and make them more affordable and accessible in developing countries. 
Through our unique public-private business model, we have worked with our partners to help increase supplies of these vaccines while simultaneously bringing down their price. 
Indeed, since 2006, the price of rotavirus vaccine has fallen by 67%, to just $2.50 per dose, while the price of a dose of pneumococcal conjugate vaccine has plummeted by 90%, to $3.50. 
Such price reductions have and will continue to play a crucial role in saving the lives of millions of children and achieving the Millennium Development Goal of reducing child mortality by two-thirds. 
To date, GAVI has helped countries immunize more than 13 million children against pneumococcal disease and five million children against rotavirus, with plans to strengthen its efforts in countries where immunization coverage is below 70%. 
None of this means that we will not still face significant obstacles. 
But the one thing that we know about immunization is that we can reach everyone. 
We did it with smallpox, which has now been eradicated, and we are doing it with polio (with less than 100 cases worldwide this year). 
The challenge now is to do the same with all of our life-saving vaccines – particularly those that target the biggest killers of children. 

Taking the Long View 
NEW YORK – The coming year will be a narrative of tension – a series of difficult choices between the imperatives of the present and those of tomorrow. 
How we resolve this tension will be the measure of our vision and our leadership. 
As a community of nations, we face three immediate tests in the coming year. 
The first has just begun. 
Not the global financial crisis, important as it is. 
I am speaking, here, about climate change, the one truly existential threat. 
We have only 12 short months until a key summit in Copenhagen, where world leaders will gather next December to reach an agreement to curb global warming. 
We need a deal that will extend, deepen, and strengthen the Kyoto Protocols. 
We need a new treaty for the twenty-first century that is balanced, inclusive, and comprehensive – one that all nations can embrace. 
We took an important step in early December in Poznan, Poland, where climate ministers and experts met to hammer out a work plan toward the future. 
The negotiations were difficult. 
They promise to become even more so. 
Some argued that, amid our current difficulties, we cannot afford to tackle climate change. 
I say we cannot afford not to. 
The future of the planet is at stake. 
Our second test is economic. 
Clearly, we need a global stimulus. 
Major economies have responded to the current crisis with ambitious fiscal and monetary rescue plans. 
The emergency G-20 summit in Washington in November showed that governments are working together to coordinate policies. 
Those efforts were broadened at a more recent meeting in Doha. 
All of this is welcome. 
But we need to do more. 
Above all, we need to think boldly and freshly. 
If we are to spend our way out of the financial crisis, we should be smart about it. 
And that means that these expenditures must be investments . 
They must be sustainable , so that we are not merely throwing money at problems but, instead, are using those funds to lay the foundations of a more stable and prosperous future. 
China has shown leadership. 
Fully one-third of its recently announced $586 billion economic stimulus program will be channeled into green growth and infrastructure. 
The Chinese have seized an opportunity to address several challenges at once – to create jobs, conserve energy, and combat climate change. 
The United States under President Barack Obama plans to do the same. 
These policymakers know that investment in alternative fuels and eco-friendly technologies will deliver a massive future pay-off in terms of a safer environment, energy independence, and sustainable growth. 
But they also know that green investment can produce jobs and spur growth in the here and now. 
Other nations should follow suit. 
We will never usher in an era of sustainable prosperity in the absence of a big, global push, with all nations moving in the same direction. 
If ever there were a time for bold and ambitious vision – a chance to chart a new and better path – it is now. 
Our third test is a matter of pragmatic principle. 
Climate change and global finance are not our only crises. 
Indeed, they compound other threats: food insecurity, volatile energy and commodity markets, and the terrible persistence of poverty. 
No nation has been spared. 
But it is the poorest nations that feel these blows most sharply. 
If not handled correctly, today’s financial crisis will become tomorrow’s human crisis. 
Social unrest and political instability will grow, exacerbating all other problems. 
The danger, ultimately, is a cascading series of crises, each building on the others, with potentially devastating consequences for all. 
During the coming year, therefore, we must act in a spirit of global solidarity. 
Measures we take to deal with the financial crisis must be in the interests of all nations – the poorest as well as the rich and powerful. 
Aid programs for developing nations should be considered a part of any global stimulus and long-term economic recovery plan. 
At the very least, that means not using the financial crisis as an excuse to reduce international aid and development assistance. 
We must honor our commitments under the Millennium Development Goals as a pragmatic as well as a moral responsibility. 
We stand on the threshold of a new multilateralism. 
The pendulum of history is swinging back toward the United Nations and collective action. 
The challenges we face as a community of nations today are increasingly those of collaboration and cooperation: fighting climate change, rebuilding the global financial system, and promoting sustainable development. 
In this interconnected world, the challenge is to see the nexus among these three sets of problems. 
With vision, we will find solutions to each that are solutions to all. 
But it will take leadership to translate that vision into action, just as it will take leadership to balance our larger long-term interests against the fierce urgencies of now. 

Talent versus Capital in the Twenty-First Century 
GENEVA – When financial policymakers attempt to promote economic growth, they almost invariably focus on looking for new ways to unleash capital. 
But, although this approach may have worked in the past, it risks giving short shrift to the role that talent plays in generating and realizing the ideas that make growth possible. 
Indeed, in a future of rapid technological change and widespread automation, the determining factor – or crippling limit – to innovation, competiveness, and growth is less likely to be the availability of capital than the existence of a skilled workforce. 
Geopolitical, demographic, and economic forces are relentlessly reshaping labor markets. 
Technology, in particular, is changing the nature of work itself, rendering entire sectors and occupations obsolete, while creating completely new industries and job categories. 
By some estimates, almost half of today’s professions could be automatable by 2025. 
Speculation about what will replace them ranges from predictions of unexpected opportunities to forecasts of large-scale unemployment as machines displace most human labor. 
The first signs of this disruption are already visible. 
Global unemployment has topped 212 million, according to the International Labor Organization, and another 42 million new jobs will need to be created each year if the world economy is to provide employment to the growing number of new entrants into the labor market. 
Meanwhile, last year, 36% of employers worldwide reported facing difficulties in finding talent, the highest percentage in seven years. 
Addressing this mismatch in supply and demand will require governments, business leaders, educational institutions, and individuals to overcome incentives to focus on the short term and begin to plan for a future in which change is the only constant. 
All must rethink what it means to learn, the nature of work, and the roles and responsibilities of various stakeholders in ensuring that workers around the world are able to fulfill their potential. 
Human-resource executives at some of the world’s largest companies anticipate profound disruptions from the increased adoption of mobile Internet and cloud technology, the use of big data, flexible work arrangements, 3-D printing, advanced materials, and new energy supplies, according to early results from a survey by the World Economic Forum. 
Their view of the overall impact on employment levels in their industries was for the most part positive – provided that new workforce skills can be developed rapidly in their own sectors and in the labor market more broadly. 
As technology increasingly takes over knowledge-based work, the cognitive skills that are central to today’s education systems will remain important; but behavioral and non-cognitive skills necessary for collaboration, innovation, and problem solving will become essential as well. 
Today’s schools and universities, which are dominated by approaches to learning that are fundamentally individualistic and competitive in nature, must be redesigned to focus on learning to learn and acquiring the skills needed to collaborate with others. 
Uniquely human skills, like being able to work in teams, manage relationships, and understand cultural sensitivities will become vital for businesses across all sectors and must become a core component of future generations’ education. 
Moreover, with education increasingly becoming a lifelong pursuit, businesses must rethink their role in providing for a competitive workforce. 
Some companies have already grasped this and are investing in their employees’ continuous learning, re-skilling, and up-skilling. 
Yet most employers still expect to obtain pre-trained talent from schools, universities, and other companies. 
Business will increasingly have to work with educators and governments to help education systems keep up with the needs of the labor market. 
Given rapid change in the skill sets required for many occupations, business must redirect investment to on-the-job training and lifelong learning, particularly as millennials enter the workforce, seeking purpose and diversity of experience where their predecessors sought remuneration and stability. 
Business cycles naturally entail peaks and troughs in employment, and socially responsible businesses should follow successful examples like Coca-Cola, Alcoa, Saudi Aramco, Africa Rainbow Minerals, and Google in working toward mitigating joblessness and enhancing people’s abilities to earn a livelihood. 
Governments, too, have a role to play in creating an environment in which their citizens can reach their potential. 
Policymakers must use stronger metrics to assess human capital and reexamine investment in education, curriculum design, hiring and firing practices, women’s integration into the workforce, retirement policies, immigration legislation, and welfare policies. 
Regulatory support for entrepreneurship and small and medium-size enterprises remains one of the most underused means of unleashing creativity, enhancing growth, and generating employment. 
Protecting workers and consumers is critical, but shielding specific industries from the impact of new business models will not hold off the next wave of transformation. 
Rather than seeking to rein in disruptive businesses such as Airbnb and Uber, governments should introduce regulations that enable their sustained growth, while looking for ways to leverage their technologies and entrepreneurial approaches to boost social welfare. 
Such policies include online education courses for the unemployed, digital workers’ insurance, virtual unionization, and tax policies geared for the sharing economy. 
Unlocking the world’s latent talent, and thus its full capacity for growth, requires us to look beyond business cycles and quarterly reports. 
The future is full of potential, but only if we are smart enough – and courageous enough – to grasp it. 



Talking to the Taliban 
WASHINGTON, DC – The Obama administration has affirmed that, while it will not participate directly, it supports the idea of peace negotiations between the Afghan Taliban and the Afghan government. 
This nod from the White House followed the publication of reports that representatives of Afghan President Hamid Karzai had begun preliminary high-level talks regarding a possible coalition government and an agreed timetable for a NATO military withdrawal from Afghanistan. 
The issue of negotiating a rapprochement between Afghanistan’s government and the Taliban is undoubtedly controversial. 
The hope is that the Taliban leadership is not cohesive – that, whereas some of its members are probably committed to al-Qaeda’s absolutist ideology, others might accept a compromise settlement. 
Karzai and Western leaders have repeatedly insisted that their reconciliation offer does not extend to al-Qaeda members, who are seen as alien foreign elements whose extremist convictions and past terrorist activities make them unacceptable negotiating partners. 
Although al-Qaeda and the Taliban are united in their desire to expel Western troops from Afghanistan and reestablish a strict Islamic government in which they enjoy a monopoly of political and religious power, some Taliban leaders might accept more moderate goals. 
More importantly, the Taliban in government would not necessarily support Islamic insurgencies in other countries or engage in distant terrorist attacks in Western countries, whereas al-Qaeda almost certainly would. 
In recent years, Taliban representatives, aware of widespread eagerness to end the country’s decades of fighting, have insisted that their political ambitions are confined to Afghanistan. 
Al-Qaeda leaders, by contrast, remain wedded to the goal of establishing radical Islamist regimes throughout the Muslim world and waging war against a long list of governments that they see as hostile to this objective. 
The key uncertainty is whether an Afghan government that includes the Taliban would and could prevent al-Qaeda from reestablishing bases in regions under Taliban control. 
Some argue that the Taliban, eager to return to power, would want to reconcile with the international community or at least prevent further Western military strikes. 
But it is hard to imagine the Taliban using force to prevent their al-Qaeda allies from reestablishing a military presence in Afghanistan and exploiting that presence to organize additional terrorist attacks in other countries. 
The Taliban and al-Qaeda fighters in Afghanistan are closely integrated at the operational level, with al-Qaeda members embedded in most important Taliban field operations. 
Thus far, the Taliban leadership has publicly rejected Karzai’s reconciliation overtures. 
For example, they greeted the inauguration of the June 2010 Peace Jirga with rocket attacks and suicide bombers. 
Until now, Taliban representatives have demanded that all Western troops leave Afghanistan before they even consider engaging in direct talks with the Afghan government. 
Karzai has sought to finesse the issue by arguing that a peace agreement that ended the insurgency would bring about the withdrawal of all foreign military forces. 
Another obstacle is many Taliban leaders’ opposition to Afghanistan’s current constitution, which was adopted after the Taliban lost power. 
It includes a number of liberal-democratic principles that many Taliban consider objectionable, if not blasphemous. 
For example, the constitutional provision guaranteeing women equal rights is a major source of dispute. 
Fearing the loss of guaranteed schooling for girls and other rights, many women’s rights groups, in Afghanistan and elsewhere, oppose negotiating with the Taliban. 
The 2001 Bonn Agreement, the 2006 London Compact, and NATO’s April 2008 Bucharest Declaration also list a range of political, economic, and social objectives for Afghanistan that in many cases conflict with Taliban values. 
Human rights groups suspect that even if the Afghan government and Taliban representatives profess to respect the constitution in any future peace agreement, they will not enforce some of its provisions in practice. 
Even if Taliban leaders affirmed their willingness to talk, it would be hard to trust their intentions. 
They could easily imitate the North Vietnamese strategy of professing to accept a compromise peace settlement in order to secure a foreign military withdrawal. 
They then could resume offensive operations against the still weak Afghan Security Forces, which have yet to demonstrate much military effectiveness. 
The Pakistani Taliban has employed a variant of this strategy in the past, ostentatiously negotiating truces with the military in order to allow their forces to rest and regroup before resuming their attacks shortly thereafter. 
Unlike in Pakistan, moreover, the Afghan insurgents could resume fighting with the expectation that their main adversary, the international forces, would be considerably hobbled in their response, because Western publics would prevent their governments from sending their troops back to battle. 
One reason why progress in the reconciliation processes has been slower than anticipated is that Western governments have not pressed Karzai to engage in genuine peace negotiations with Taliban leaders until coalition forces have had the opportunity to reverse the deteriorating situation on the battlefield. 
US policymakers in particular wanted to take advantage of the ongoing surge in NATO combat forces in Afghanistan – which reached 150,000 in August, of which some two-thirds were American – to shake Taliban commanders’ conviction that they were winning the war. 
It would be a mistake to disconnect the situation on the battlefield from the reconciliation process. 
If NATO’s forces work sufficiently well, they might weaken the insurgency enough that the Afghan military could prove adequate to overcoming the remaining hard-liners, even after foreign troops reverse their current surge and scale down their presence during the next few years. 

Taming “Speculative Capitalism” 
Nicolas Sarkozy, the leading contender in the French presidential election, recently lashed out against what he called “speculative capitalism,” and says he wants to “moralize the financial zone” created by the euro. 
What does Sarkozy mean by “speculative capitalism?” 
Something immoral, apparently, but what? 
The term has rarely been used before, and seems to be redundant. 
After all, capitalism is practically a synonym for speculation, isn’t it? 
Sarkozy is expressing a wave of sentiment that is neither unique to his party nor to France. 
At stake with his comments are emerging ideas and attitudes that will inform the twenty-first century economy. 
So we should think hard about what “speculative capitalism” means. 
Sarkozy has called free trade “a policy of naiveté,” and wants to take a number of steps that would stand in the way of economic globalization. 
Although he does want to make the French labor market less rigid, he would block foreign takeover bids of French companies and protect Airbus workers from possible job losses. 
Protecting France from speculative capitalism seems to mean interfering with free trade to protect local jobs. 
To be sure, Sarkozy is right to note the enormous risks that workers and their communities face in this rapidly globalizing world. 
But putting this problem center stage should not mean protecting existing jobs come what may. 
Capitalists put their money where they think it can get the highest return; that is what we call speculation. 
They buy companies, break them up, recombine them, fire some employees, and hire others. 
To do this profitably, they cannot afford to let patriotism or sentiment interfere. 
They do business in whatever country is most advantageous. 
Rewarding successful ventures is the basic idea of capitalism – a dynamic process that Joseph Schumpeter called “creative destruction.” 
Under capitalism, one is immoral if one reneges on a contract or breaks the law, but not if one speculates. 
Planned economies were never able to flourish because uncertainty about the future is just too high, something that is best left to the speculators, with the potential of reward if they are right and the disciplining whip of the market if they are wrong. 
Concerns about free trade similar to Sarkozy’s are gaining strength around the world. 
In an article last year in the US journal Foreign Affairs , Alan Blinder, a former advisor to President Bill Clinton and Vice-Chair of the US Federal Reserve Board, argued that the process of globalization has the potential to cause massive job loss in the future. 
Given that electronic communications technology has a powerful potential to replace employees with others who are thousands of miles away, we may now be seeing only the beginning of this process. 
Blinder is absolutely right that the problem could get worse. 
Deniers of the problem – such as economist Jagdish Baghwati – cannot prove that the worst will not happen. 
We ought to prepare for the possibility of massive turmoil in our economies in coming years, even if we cannot prove that it will happen, just as we should take steps against global warming, even if some scientists doubt that it is a problem. 
According to Blinder, governments should encourage education for jobs that are harder to outsource overseas. 
He wants the government to subsidize “personally-delivered service” jobs, which cannot be delivered over the Internet, to encourage the expansion of such jobs instead of “impersonally-delivered services.” 
Subsidies, of course, interfere with free trade. 
But Blinder’s solution appears to be a creative new idea, and one may think of legitimate justifications for the government to interfere with free markets this way. 
His idea certainly is more focused and theoretically sound than Sarkozy’s plans to protect existing jobs. 
In fact, Blinder’s proposal is only one of many possible government policies aimed at dealing with the Internet-age turmoil in the market for jobs and livelihoods. 
Capitalist institutions include risk-management schemes that provide insurance, hedging, and diversification. 
Government can promote the democratization of such institutions so that they protect people from the very risks that they are worrying most about. 
Such possibilities include livelihood insurance, home equity insurance, income-linked loans, and GDP-linked and home-price-linked securities. 
Moreover, government can make our social insurance (a government institution that complements private insurance) more incentive-compatible and better at managing risks – and not just the risks of the extreme losers – by, say, launching inequality-indexation of the tax system. 
And governments should improve our information infrastructure, so that financial contracts can better capture the outcomes of economic risks. 
So Sarkozy shouldn’t be lashing out against “speculative capitalism.” 
On the contrary, he should be asking how capitalism can be developed even further, with new institutions in finance and insurance to deal with the very important problem that his campaign has highlighted. 

Taming Bigotry 
MELBOURNE –At a time when the horrific events in Norway remind us how much murderous bigotry there still is in the world, perhaps a story from the other side of it can restore a little optimism that some positive, historically significant, changes in attitude really are occurring. 
Last month in Australia, a major-league football player was fined, suspended, and – as a result of intensive negative coverage in the press – experienced profound public humiliation. 
What was unusual about the case, and the scale of the response, was his offense. 
It was not a thuggish tackle, abuse of the umpire, or match-fixing in collusion with gamblers. 
It was just a taunting remark heard only by his opponent. 
But his opponent was Nigerian-born, and the remark was a racist insult. 
Just a few days earlier, in an incident that also drew significant media attention and condemnation, a spectator hurling racial abuse at a Sudanese-born player was escorted from the ground and banned from attending future matches unless he undertook racism-awareness education. 
Not many years ago, in Australia – as in most of the rest of the world – these kinds of incidents would have passed utterly unremarked and without redress. 
They were not serious – just part of the game, uttered in the heat of the gladiatorial contest on the field and the passionate partisan cheering in the stands. 
A famous player of the 1990’s said at the time, “I’d make a racist comment every week if I thought it would help win the game.” 
And spectators were no different: “Of course, I sing out ‘black bastard,’ but I don’t mean it. 
It’s just a way of letting out your feelings.” 
It seemed not to occur to anyone that the black players who were the subject of this abuse could possibly have rather different feelings about it. 
And all of this was happening in a country that seemed, institutionally at least, to have put its racist past behind it. 
The notorious “White Australia” immigration policy was abandoned in the late 1960’s, robust anti-discrimination legislation was enacted in the 1970’s, and innumerable efforts were made to remedy through land rights and social-justice programs the injustices experienced over many decades by indigenous Aboriginal and Torres Strait Islander people. 
Casual racism – disparaging remarks made about other ethnic and national groups around the workplace, or over the bar or the family dinner table (as I can well remember growing up in the 1950’s) – had become much less prevalent in Australian private life, and certainly wholly absent from public life, by the 1990’s. 
But sport was somehow different. There, it was just letting off steam, no different from cheering or booing; or it was a “legitimate” tactic, no different from needling an opponent by challenging his manhood. 
That mood and behavior began to change with the action of a star Aboriginal Australian Rules footballer, Nicky Winmar, one of the very few then playing in the top professional league. 
In 1993, he had had enough. 
After a man-of-the-match performance, throughout which he had been racially taunted, he turned to the opposing team’s cheer squad, raised his top with one hand and pointed dramatically to his chest with the other. 
The declaration was unequivocal: “I’m black, and I’m proud of it.” 
The demand for action generated by this incident, and by the highly publicized on-field abuse of another star Aboriginal player, Michael Long, two years later, led the Australian Football League to introduce in 1995 a “Racial and Religious Vilification” code of conduct. 
The code combines a robust conciliation process with appropriate punitive measures and a strong educational program. 
The code has been overwhelmingly successful in ridding Australian football of the on-field racism that made life miserable for most indigenous players, with the number of indigenous players at the elite level more than doubling over the last decade. 
It has since been embraced by every football competition in Australia, and has proved an influential model for other sports in Australia and worldwide. 
For example, Australia’s reforms are reflected in the anti-racism policies adopted in the last decade by the international football governing bodies, FIFA and UEFA (though in many cases the translation of policy into effective, enforceable action at the national level has left much to be desired). 
For a long time, however, there has been doubt in Australia about how much real across-the-board commitment there was to the underlying message that racial vilification anywhere, anytime, by anyone, in any context, is simply unacceptable. 
There was considerable sentimental attachment toward Aboriginal sportsmen and women, and indeed toward Australia’s indigenous people generally – apparent in the outpouring of emotion, remarked worldwide, that accompanied Prime Minister Kevin Rudd’s moving “Apology to the Stolen Generation” in 2008. But would this sentiment extend to those of African descent and to members of other ethnicities who were gradually becoming a more visible part of Australian life? 
The evidence of the last few weeks is that history, at last, really has moved on. 
The revelation of the abuse of players of Sudanese and Nigerian origin generated a surge of genuine, visible, and tangible public repugnance – a very real sense that the perpetrators had shamed not only themselves, but also their country. 
For an Australian of my generation, that is a very new, and hugely welcome, experience. 
And there is every reason to hope, and believe, that our experience is gradually becoming universal. 

Taming Finance in an Age of Austerity 
NEW YORK – It was not long ago that we could say, “We are all Keynesians now.” 
The financial sector and its free-market ideology had brought the world to the brink of ruin. 
Markets clearly were not self-correcting. 
Deregulation had proven to be a dismal failure. 
The “innovations” unleashed by modern finance did not lead to higher long-term efficiency, faster growth, or more prosperity for all. 
Instead, they were designed to circumvent accounting standards and to evade and avoid taxes that are required to finance the public investments in infrastructure and technology – like the Internet – that underlie real growth, not the phantom growth promoted by the financial sector. 
The financial sector pontificated not only about how to create a dynamic economy, but also about what to do in the event of a recession (which, according to their ideology, could be caused only by a failure of government, not of markets). 
Whenever an economy enters recession, revenues fall, and expenditures – say, for unemployment benefits – increase. 
So deficits grow. 
Financial-sector deficit hawks said that governments should focus on eliminating deficits, preferably by cutting back on expenditures. 
The reduced deficits would restore confidence, which would restore investment – and thus growth. 
But, as plausible as this line of reasoning may sound, the historical evidence repeatedly refutes it. 
When US President Herbert Hoover tried that recipe, it helped transform the 1929 stock-market crash into the Great Depression. 
When the International Monetary Fund tried the same formula in East Asia in 1997, downturns became recessions, and recessions became depressions. 
The reasoning behind such episodes is based on a flawed analogy. 
A household that owes more money than it can easily repay needs to cut back on spending. 
But when a government does that, output and incomes decline, unemployment increases, and the ability to repay may actually decrease. 
What is true for a family is not true for a country. 
More sophisticated advocates warn that government spending will drive up interest rates, thus “crowding out” private investment. 
When the economy is at full employment, this is a legitimate concern. 
But not now: given extraordinarily low long-term interest rates, no serious economist raises the “crowding out” issue nowadays. 
In Europe, especially Germany, and in some quarters in the US, as government deficits and debt grow, so, too, do calls for increased austerity. 
If heeded, as appears to be the case in many countries, the results will be disastrous, especially given the fragility of the recovery. 
Growth will slow, with Europe and/or America possibly even slipping back into recession. 
Stimulus spending, the deficit hawks’ favorite bogeyman, did not cause most of the increased deficits and debt, which are the result of “automatic stabilizers” – the tax cuts and spending increases that automatically accompany economic fluctuations. 
So, as austerity undermines growth, debt reduction will be marginal at best. 
Keynesian economics worked: if not for stimulus measures and automatic stabilizers, the recession would have been far deeper and longer, and unemployment much higher. 
This does not mean that we should ignore the level of debt. 
But what matters is long-term debt. 
There is a simple Keynesian recipe: First, shift spending away from unproductive uses – such as wars in Afghanistan and Iraq, or unconditional bank bailouts that do not revive lending – toward high-return investments. 
Second, encourage spending and promote equity and efficiency by raising taxes on corporations that don’t reinvest, for example, and lowering them on those that do, or by raising taxes on speculative capital gains (say, in real estate) and on carbon- and pollution-intensive energy, while cutting taxes for lower-income payers. 
There are other measures that might help. 
For example, governments should help banks that lend to small- and medium-size enterprises, which are the main source of job creation – or establish new financial institutions that would do so – rather than supporting big banks that make their money from derivatives and abusive credit card practices. 
Financial markets have worked hard to create a system that enforces their views: with free and open capital markets, a small country can be flooded with funds one moment, only to be charged high interest rates – or cut off completely – soon thereafter. 
In such circumstances, small countries seemingly have no choice: financial markets’ Diktat on austerity, lest they be punished by withdrawal of financing. 
But financial markets are a harsh and fickle taskmaster. 
The day after Spain announced its austerity package, its bonds were downgraded. 
The problem was not a lack of confidence that the Spanish government would fulfill its promises, but too much confidence that it would, and that this would reduce growth and increase unemployment from its already intolerable level of 20%. 
In short, having gotten the world into its current economic mess, financial markets are now saying to countries like Greece and Spain: damned if you don’t cut back on spending, but damned if you do as well. 
Finance is a means to an end, not an end in itself. 
It is supposed to serve the interests of the rest of society, not the other way around. 
Taming financial markets will not be easy, but it can and must be done, through a combination of taxation and regulation – and, if necessary, government stepping in to fill some of the breaches (as it already does in the case of lending to small- and medium-size enterprises.) 
Unsurprisingly, financial markets do not want to be tamed. 
They like the way things have been working, and why shouldn’t they? 
In countries with corrupt and imperfect democracies, they have the wherewithal to resist change. 
Fortunately, citizens in Europe and America have lost patience. 
The process of tempering and taming has begun. 
But there is far more yet to do. 

Taming North Korea 
The fires of the Middle East must not be allowed to distract the world’s attention from the threat posed by North Korea’s nuclear ambitions, which it demonstrated by its recent test of a long-range missile. 
Yet that is what appears to be happening. 
In mid-July, the Group of Eight’s summit in St. Petersburg ended by calling on North Korea to stop its missile tests and to abandon its nuclear weapons program. 
This followed a UN Security Council resolution that condemned North Korea’s missile launches of July 5, demanded that it return to the negotiating table, and required UN members to prevent the import and export of any material or money related to North Korea’s missile or unconventional weapons programs. 
China’s President Hu Jintao urged progress in the stalled talks so that “the entire Korean peninsula can be denuclearized.” 
This seemed like a diplomatic breakthrough, but there was less forward movement than meets the eye. 
During its first term, the Bush administration hoped that it could solve the North Korean nuclear problem through regime change. 
The hope was that isolation and sanctions would topple Kim Jong Il’s dictatorship. 
But the regime proved resistant, and the Bush administration agreed to enter into six-party talks with China, Russia, Japan, and the two Koreas. 
In September 2005, it appeared momentarily that the talks had produced a rough agreement that North Korea would forgo its nuclear program in return for security guarantees and removal of sanctions. 
But the loosely worded accord soon collapsed, and North Korea refused to return to the talks until the US stopped shutting down bank accounts suspected of counterfeiting and laundering money for Kim’s regime. 
Diplomacy remained stalled until North Korea launched a series of missiles into the Sea of Japan in July. 
Japan called for UN Security Council sanctions, and after ten days of wrangling, all five permanent members agreed on a resolution condemning North Korea’s actions. 
Why did North Korea risk taking actions that defied China, its main benefactor, and brought about the UN resolution? 
In part, it acted because it saw the great powers offering Iran an interesting package of incentives to give up its nuclear enrichment program, while North Korea was being relegated to a diplomatic side track. 
But it also acted because taking such risks has proven successful in the past, and here, Kim probably believed the risks were low. 
Kim knows that the five other countries in the six-party talks are divided. 
While all five want a non-nuclear North Korea, China and South Korea place a higher priority on the stability of the North Korean regime than the US and Japan do. 
South Korean public opinion is split on how to handle the North, but the majority fear that a sudden collapse would have catastrophic effects on the South’s economy. 
Many in the younger generation have no direct memories of the Korean War. 
Thus, South Korea’s “sunshine policy” of economic engagement with the North commands majority approval. 
Similarly, China, with its focus on economic growth, fears that a collapse of the North Korean regime would threaten stability on its borders. 
Thus, while China has occasionally pressed North Korea to abandon its nuclear weapons program, it has been unwilling to exercise its economic leverage to a point that threatens the regime. 
Because its preferred approach of regime change has proven slower than expected, and because time plays into Kim’s hands, the Bush administration faces three other options in attempting to deal with North Korea’s nuclear weapons. 
It could use force, and some officials have argued that if North Korea launched a war in response to a limited American air strike, Kim would lose his regime. 
Thus, war would be unlikely. 
But is unlikely that an air strike would destroy North Korea’s hidden facilities, which include more than 10,000 artillery tubes buried in caves along the demilitarized zone, North Korea could simply shell Seoul in response and wreak havoc on the South Korean economy. 
Thus, South Korea, together with China, would likely react strongly against an American air strike. 
A second option is sanctions. 
Some in the Bush administration believe that even if economic sanctions would not end the regime, they might cause enough pain to cause Kim to give up its weapons. 
They point to the success of efforts to shut down illegal banking transactions and to the Proliferation Security Initiative, in which other countries agree to interdict transport of nuclear materials. 
But success depends upon China, and South Korea and China failed to participate in recent PSI exercises. 
Moreover, in the wrangling over the UN resolution, China threatened a veto if there were any references to Chapter VII of the Charter, which allows enforcement. 
Knowing that China will not allow sanctions to cut too deeply, Kim is unlikely to give up his nuclear ace. 
That leaves the third option, a diplomatic bargain, for which Kim’s price is direct talks with the US, a security guarantee, and the type of economic incentives that were offered to Iran. 
Bush has allowed his representative to the six-party talks to meet separately with the North Koreans within the six-party framework, but he failed to provide adequate incentives. 
Given North Korea’s past deceptions, and the difficulty of verifying denuclearization in a totalitarian country, a verifiable agreement will be difficult to reach. 
But given the other options, the US would be wise to start thinking of a new diplomatic package. 

Taming Politicians on Both Sides of the Atlantic 
Despite occasional grumbles from politicians, no one seriously doubts the European Central Bank's independence, or that monetary policy within the euro zone is therefore well insulated from political pressures. 
But the recent death of the Stability and Growth Pact-killed off by Germany, its father, with France acting as co-conspirator and willing accomplice-reminds us of a key lesson: elected politicians find it hard, if not impossible, to relinquish substantial power in the area of fiscal policy. 
The same is true across the Atlantic. 
The US Federal Reserve Board is, of course, very independent. 
But any attempt to limit the fiscal discretion of America's Federal government in the manner of the Stability Pact-for example, the infamous Gramm/Rudman rules of the Clinton era-always collapse in the end in the face of presidential and congressional pressure. 
Monetary policy can be used to stimulate an economy just as much as fiscal policy, if not more, in election years, which politicians will always want to do. 
But reckless use of either mechanism for short-term goals may create long-term costs, justifying some restrictions on politicians' latitude in influencing macroeconomic policies. 
When politicians can control inflation by exercising decisive sway over central banks, they can use their power to devalue the burden of public debt, avoiding the need for more taxation to pay it off. 
This was the great lesson of the 1970's and early 1980's, when rampant inflation forced politicians to surrender this power to independent central banks, which alone could convince markets that price stability would be restored. 
Yet monetary policy is not a unique species of economic policymaking. 
Aspects of fiscal policy could also be delegated to independent bureaucrats in order to keep politicians in line. 
Why not, for example, entrust an independent bureaucracy with some redistributive goals or control over the level of public investment or deficit management? 
An independent fiscal authority could arguably implement a society's long-term goals in these areas better than politicians, who have their eyes on the next election. 
Indeed, as a matter of principle, it is not clear why monetary policy and fiscal policy should be treated so differently, with one completely delegated to a bureaucratic agency and the other completely discretionary and in the hand of politicians. 
So why do we see this large difference in reality in both America and Europe? 
The answer is that fiscal policy is the key tool politicians use to attract and maintain the support of a winning coalition of voters, say retirees, public employees, and middle-class homeowners, while imposing the costs on the losers. 
It is not necessary to please 100% of the voters, only enough to win. 
The fiscal card is critical in choosing which groups of voters to buy. 
Independent fiscal authorities-or fiscal rules such as the Stability Pact-stand in the way of this political use of fiscal policy, which is costly. 
After all, if politicians could not win elections by taking money from some-including future generations, which will have to foot a portion of the bill-and giving it to others, they would have to work much harder to display some ability in producing public benefits for all. 
This is far more difficult! 
Of course, monetary policy also has redistributive effects. 
Think about the different effects of interest rates on debtors versus creditors. 
However, monetary policy is a much more awkward, indirect and imprecise way of choosing winners and losers than fiscal policy. 
Independent central banks can occasionally be a pain for politicians, but at least they can be used as scapegoats when necessary-a role whose political benefits outweigh the costs of losing control over a useful tool. 
These considerations should guide the choice of what will follow the Stability Pact in Europe. 
It is now abundantly clear that national governments (especially those of large countries) will never accept substantial limitations on their fiscal discretion. 
They may have suspended their freedom of fiscal maneuver long enough to launch the euro, but in normal times, national governments will reclaim their fiscal turf. 
So the European Commission should stop fighting a rearguard battle that merely weakens its credibility, especially in the eyes of small countries, which are the only ones that can be bullied into accepting unwanted fiscal rules. 
Realistically, all that the Commission can ask of European national governments is for transparency and clarity in their fiscal accounts. 
Preventing the political use of fiscal policy is an impossible task. 
But at least a country's fiscal actions should not be hidden in its budgets' obscure methodological footnotes. 
Even this limited goal may not be easy to achieve. 
A strategic lack of transparency is the bread and butter of shrewd politicians who want to please a lobby by hiding the costs of the public's largesse from the majority of citizens. 
The rules that govern politicians' behavior must not be written as if disinterested, well-intentioned public servants will apply them. 
Politicians are willing to go to great lengths to please their supporters and win elections. 
The best that we can plausibly hope for is to ensure that the worst of what they do is done out in the open. 

Taming the Private Equity “Locusts” 
The full repercussions of the financial crisis triggered by bad mortgages in the United States are still unclear, but the unforeseen effects already include an unstoppable demand for greater transparency in financial markets, and better regulation. 
One part of the financial markets not subject to the transparency and disclosure rules that apply to, say, banks and mutual funds, are hedge and private equity funds. 
Once relatively small, the five biggest private equity deals now involve more money than the annual budgets of Russia and India. 
Assets in private equity and hedge funds stand at $3 trillion today and are expected to reach $10 trillion by the end of 2010. 
The funds now rely heavily on investment from pension funds, and on money borrowed from banks and other non-private sources. 
Indeed, these private funds account for about two-thirds of all new debt. 
So, if there is a debt problem, as in the US mortgage crisis, one must also look at private funds’ role in creating it. 
They are, in short, a major challenge to financial stability, and, unless regulated, they are likely to contribute to future crises. 
The big private equity funds have proven to be a menace to healthy companies, to workers’ rights, and to the European Union’s Lisbon Agenda (aimed at making Europe the world’s most competitive economy). 
Typically, they take over companies with borrowed money – often more than 80% of the price. 
These “leveraged buy-outs” leave the company saddled with debt and interest payments, its workers are laid off, and its assets are sold. 
A once profitable and healthy company is milked for short-term profits, benefiting neither workers nor the real economy. 
In Britain, the Automobile Association was bought by private equity in 2004. 
The AA had made a profit of £75 million and was expanding its services with 10,000 staff. 
Annual profits have since risen to £190 million, but 6,000 workers have been laid off and both costs and waiting times for AA members needing its vehicle repair and recovery services have increased. 
In Denmark, the telecommunications company TDC was taken over by a group of private equity firms in 2005, with 80% of the purchase financed by borrowing. 
The company’s debt/asset ratio leapt from 18% to 90% as company reserves for long-term development – essential in the telecoms industry – were used to service the loan. 
These funds are largely tax-exempt, often because they are registered offshore, although they operate from the world’s major onshore financial centers. 
One fund manager admitted that he pays less tax than his cleaning lady. 
In the US, it has been calculated that the funds cost $2-3 billion in lost tax revenues – an amount three times that of the EU’s budget for humanitarian aid. 
Trade unions in the United Kingdom, Germany, Canada, and elsewhere have long pointed to the damage caused by leveraged buy-outs. 
So have such senior politicians as former German Vice-Chancellor Franz Müntefering, who described private equity funds as “locusts,” and leading Democrats in the US Congress’s House Committee on Financial Services. 
The European Parliament’s Socialist Group, the UK’s House of Commons, and the Australian parliament have all investigated these private funds. 
Charlie McCreevy, the EU’s internal market commissioner, is staunchly resisting any move towards greater control of private equity and hedge funds. 
But the tide is turning against him. 
At the EU’s autumn summit, British Prime Minister Gordon Brown, German Chancellor Angela Merkel, and French President Nicolas Sarkozy agreed in a joint statement that more transparency is needed in financial markets. 
In a separate move, Brown promised to close any legal loopholes that enable hedge fund managers to exempt themselves from paying taxes. 
Both the private equity and hedge fund industries reacted by publishing voluntary codes of conduct. 
Paul Marshall, a hedge fund chairman, told the Financial Times that he hoped voluntary action by the industry “will take the pressure off.” 
At least that was transparent. 
Nobody wants to demonize or unnecessarily restrict private equity and hedge funds, and venture capital’s investment in innovative and high-risk new companies highlights their potentially useful role. 
But this accounts for only a minor part (5%) of the private equity industry. 
Given that the largest part of the industry (60%) is based on leveraged buy-outs and extreme debt, it seems only reasonable to demand that they honor the transparency and tax rules accepted by everyone else. 
Ultimately, private funds should be regulated globally. 
We can enact measures in each of our member states and in the EU, but coordinated action by the EU and the US would be a realistic start. 
Private funds cannot operate without these two giant markets, and would have to comply with their requirements. 
The will to act exists in the EU. 
Faced with the leaders of Europe’s three largest economies, McCreevy is not a serious obstacle. 
The White House’s current occupant is a more formidable obstacle to reform, but change is coming. 
Even so, ensuring transparency and disclosure cannot fully address heavily debt-laden leveraged buy-outs, which would still be objectionable. 
There is a need to set a limit on the amount of debt that a company can accumulate, and change acquisition and merger legislation to include leverage. 
The latter clearly falls within the EU’s competence. 
There is also a need to protect our pension savings, which are now heavily invested in private equity. 
In short, we need a proper supervisory system for the financial services sector in Europe. 
There is still a lot of talking to do. 
Serious discussions are needed to reach EU-wide and inter-governmental agreements, and to encourage the US to move in the same direction. 
But, for the sake of our pensions, our savings, our jobs, and our welfare states, the sooner change comes, the better. 

Taming the Stock Option Game 
CAMBRIDGE – Executive compensation is now a central concern of company boards and government regulators. 
There is an aspect to this debate, however, that deserves greater scrutiny: the freedom of executives to pick the moment when they can cash out on their equity-based incentives. 
Standard pay arrangements give executives broad discretion over when they sell shares and exercise options that have been awarded to them. 
Such discretion is both unnecessary and undesirable. 
The freedom to time the moment they cash out enables executives to use the special knowledge they have about their companies to sell before a stock-price decline. 
Although insider-trading laws supposedly prevent executives from using “hard” material information, executives usually also have “soft” information at their fingertips which gives them an advantage over the market. 
Indeed, it is a well documented fact that executives make considerable “abnormal” profits – that is, above-market returns – when trading in their own firms’ stock. 
A second problem with executives being free to time the sales of their stock options and shares is that such freedom provides them with an incentive to use their influence over company disclosures to rig the stock price from declining before they execute their trades. 
Empirical studies have identified a connection between the level of executive selling and earnings manipulation – both legal and illegal. 
What should be done about this? 
For starters, executives’ payoff from stock sales should not depend on a single stock price. 
Rather, the payoff should be based on the average stock price over a significant period of time. 
Under one possible arrangement, executives seeking to cash out shares would sell them to the company in return for a price based on the average stock price during, say, the subsequent six months. 
Alternatively, an executive wishing to unload equity could be permitted to sell the shares in the market, but only gradually, according to a pre-specified, automatic plan that would be self-executing (say, one-sixth of the number of shares the executive seeks to sell on the first trading day of each of the subsequent six months). 
This approach would still leave executives free to select the period in which they cash out shares, though not the exact day. 
To improve the link between pay and performance further, and limit executives’ ability to weaken it by using their access to inside information and control over company disclosures, executives could be required to announce their choice of period substantially in advance. 
Alternatively, this period could be specified in advance when equity-based compensation is granted. 
Under a pre-trading disclosure arrangement, an executive wishing to sell a given number of shares would have to announce such an intention substantially in advance, say, more than six months. 
So, to be able to sell 100,000 shares from July to December of a given year and receive the average stock price during that period, an executive might, for example, have to announce the sale before the year begins. 
With such advance disclosure, any inside information that the executive has when making the sale decision could emerge and become incorporated into the stock price before the payoff from the sale is determined. 
Furthermore, the market price would incorporate inferences made from the executive’s notice of the planned sale. 
As a result, the average stock price during the payoff period would more accurately reflect the stock’s actual value, improving the link between pay and performance. 
An alternative to requiring pre-trading disclosure is to adopt a “hands-off” arrangement that leaves executives no discretion over when their equity-based compensation is cashed out. 
Under such an arrangement, the restricted shares and stock options granted in any given year are cashed out in future years according to a fixed, gradual, and pre-announced schedule set at the time the restricted shares and stock options are granted. 
The company’s board should set the schedule in a way that ensures that executives always retain the desired level of equity ownership. 
Because such a hands-off approach leaves executives no discretion over when they cash out their equity-based compensation, it provides the most effective method for preventing executives from “gaming” the market and for ensuring that they are not rewarded for their information advantage. 
There is absolutely no reason to let executives’ payoffs be based on the happenstance of the stock price on a single day, at best, much less on their ability to use their access to inside information or control over disclosures. 

Taming the Tigers 
BRUSSELS – Three years ago, Sri Lanka elected Mahinda Rajapaksa as president because he pledged to take the offensive against the Liberation Tigers of Tamil Eelam, the guerillas who have been fighting for 25 years to carve out an independent homeland for the country’s Tamil minority. 
Many well-meaning people saw Rajapaksa’s promise as warmongering, and, even as Sri Lanka’s army has been pressing toward victory, urged him to negotiate with perhaps the world’s most fanatical terror organization (the Tamil Tigers, it should be recalled, virtually invented the cult of the modern suicide bomber.) 
Fortunately, Rajapaksa listened more to his war-ravaged citizens than to outsiders, and today what seemed impossible – military victory over the Tigers, the oldest, largest, and wealthiest guerrilla army in South Asia – appears at hand. 
Over the past few months, the Tigers have suffered a series of devastating blows. 
Instead of commanding much of northern Sri Lanka, they are now confined to a shrinking pocket, and are reduced to mindless military stunts such as the recent bombing by light aircraft of the tax administration building in the capital, Colombo. 
Thousands of Tamil Tiger fighters have deserted. 
A rebel army has dwindled to a fanatical few. 
But fighting the Tigers and seeking a peace deal have never been alternatives. 
President Rajapaksa’s predecessors spent years engaged in fruitless talks and ceasefires, during which the guerrillas remained committed to their aim of dividing the country, and making demands for political and socio-economic changes that no democracy could accept, even as they carried on killing and kidnapping. 
Weakening the Tigers militarily has thus always been a necessary condition for achieving a political settlement with Sri Lanka’s Tamils. 
Now that the guerrillas are boxed in, what can Rajapaksa reasonably offer to them and ordinary Tamils? 
The Tigers’ leaders have committed crimes against humanity, and some of them engage in criminal activities. 
So they have little incentive to demobilize. 
Some Sri Lankans say the best place for the Tiger leaders is jail. 
True, but in politics the best justice can be the enemy of the general good. 
Though the Tigers can no longer destroy Sri Lanka’s democracy, fighting to the last guerrilla is in nobody's interest. 
Ending this conflict will require political adroitness as well as continued military firmness. 
Achieving a lasting peace, though difficult, is possible. 
On the most basic level, it will almost certainly require security guarantees for the Tigers’ leaders. 
But it should not, as some say, include any offer of power-sharing with the guerillas (ordinary Tamils are another matter). 
Sri Lanka is a democracy. 
In exchange for laying down their arms and ending a pointless and destructive war, Tiger soldiers should be encouraged to take part in politics, but on exactly the same terms as any other Sri Lankan. 
Nobody should underestimate the difficulty of rebuilding Sri Lanka’s war-ravaged north and reconciling the Tamils at a time of global recession. 
In countries with strong ethnic, tribal, and religious divisions, unless it is made clear from the start that everything possible will be done to foster reconciliation, communal enmity will most likely simmer. 
Any “victory” that the Tamils perceive as leading to subjugation of their rights and aspirations for equality with the majority Sinhalese will be short-lived. 
So Rajapaksa must offer the Tamil people a political compromise, perhaps including some cabinet positions, as well as the promise of a revived economy. 
Indeed, the Rajapaksa government, and the majority Sinhalese, must understand that the political and economic reforms needed to achieve a lasting peace are inextricably intertwined. 
One cannot succeed without the other. 
On the political front, a power vacuum must be avoided. 
Although one of the main goals of reconstruction must be the creation of a democratic system that the Tamils regard as their own, establishing effective governance, and fast, in Sri Lanka’s north matters just as much. 
Order must be restored rapidly, with zero tolerance of looting and other crimes. 
Nevertheless, victory over the Tigers need not rule out some form of decentralization that guarantees the Tamils some political say, so long as a degree of local autonomy does not destroy Sri Lanka’s unity. 
The alternative to such a political compromise may be a return to the tragic and bloody secessionist course that the Tigers sought for so long. 
Indeed, no effort should be spared to get skeptical Tamil groups to participate in the forthcoming peacemaking. 
Of course, it may take some time for the Tamils and their leaders to learn the mutual tolerance and self-discipline of democratic government. 
Handing over any local power before those leaders are ready to use it would be an error, with potentially disastrous consequences. 
In the Eastern Province, a good start has been made, with former terrorists now winning through the ballot box and not the bullet. 
Economic reform also must begin without delay. 
Sri Lanka’s economy must open up –�not an easy thing to achieve at a time when liberal economic reforms appear to be in disrepute. 
But such an opening is essential if the country’s Tamils are to have real hopes for their future within the country. 
Sri Lanka’s Buddhist traditions and historic links with Burma, Thailand, Cambodia and Laos makes it easy for it to be a future member of ASEAN, which Sri Lanka should try to join as a means of anchoring its economy in the wider region. 
Some of what needs to be done, including the sequencing of reconstruction measures, is now better understood – not least due to the different recent experiences in rebuilding Bosnia, Colombia, and other war-torn states. 
These efforts demonstrated the need to have an effective legal system and functioning state institutions before embarking on big structural reforms. 

Taming the World's Mega Cities 
It has recently been suggested that a wall be built around Rio de Janeiro's notorious shantytowns. 
It would have the same purpose as that infamous wall that once divided Berlin, and the wall that Israel is building to cut itself off from the Palestinian territories: to isolate people. 
In Rio, the people who would be isolated are the denizens of the city's vast and crime-infested favelas . 
The wall, of course, will never be built. 
Even if it was, the problems of mass urbanization in the twenty-first century will not be solved by such crude methods. 
What the United Nations calls the "century of urbanization" will require creativity and imagination, innovations and not brute brick walls or even more subtle security frontiers. 
Consider São Paulo, the world's fourth largest city and my home. 
Our past and present is the future for many others. 
Of the world's six billion people, more than 50% live in cities and towns. 
Even in a country as big as Brazil, over 80% of the population lives in urban areas. 
The pace of urbanization is astonishing. 
In 1975, only 38% of the world's population lived in cities; by 1998, the rate had grown to 47%. 
By 2015, the number will reach or exceed 55%. 
In 1975, only 100 cities topped one million in population; by 2015, 527 cities will exceed that mark. 
More critically, while there were only two "mega cities" with populations over 10 million in 1960, and 18 now, some 26 will exist in 2015. 
The new geography requires new relationships and planning strategies. 
Mega cities put demands on regional economies, peacemaking efforts, and economic and human development. 
Those factors are all the more complicated because of the massive global unbalance that characterizes current urbanization. 
Twenty-one of the mega cities estimated for year 2015 will be in developing and less developed countries, while 80% of the global cities that play host to decision-making actors are in the northern hemisphere. 
This situation will be aggravated by some of the dangers associated with a global economy led by the financial sector. 
So far, unemployment has become increasingly concentrated in one hemisphere, while income and capital is concentrated in the other. 
The result has been a widening gap between rich and poor, together with a commensurate rise in the type of urban poverty that so bedevils cities like Rio de Janeiro. 
Eventually, the southern hemisphere's more dramatic urban problems will spill over into mass migration to northern cities. 
Imagine urban geography as an archipelago . 
On its islands live the modern consumers globally connected in their consuming behaviors, computers and abilities to earn sufficiently well to maintain their lifestyles and speedy rhythm. 
Surrounding these islands, however, are oceans of excluded people. 
New York City stands out as a very big island with a small ocean, while in Mumbai, we find a tiny island and a vast ocean. 
This image was very much on my mind when the mayor of São Paulo, Marta Suplicy, asked me to set up a new Strategic Master Plan for our 10.4 million people - a number that grows to 17.4 million when the greater metropolitan area is considered. 
The ten-year plan was prepared in six months and debated for another six months in more than 200 public meetings before being approved by the city council in 2002. 
The main innovations were based on the perception that urban development is a collective task in which local government should orient and induce private investments to achieve more livable cities. 
With this in mind, we used a new planning tool that allows building rights to drift. 
This means that we can preserve acreage for watersheds, parks, or other environmental or historical sites, but allow property owners to sell and transfer their building rights elsewhere. 
That means the city gets more green space and retains more of its history without halting badly needed construction. 
We also reduced the free building floor area; but we allowed builders to reach higher up. 
In exchange, they have to contribute to a public fund for housing, environmental, and infrastructure improvements. 
In other words, they have to purchase virtual land from the city. 
Starting this year, this mechanism is expected to produce $40 million annually. 
Moreover, higher density buildings will be near subway stations or other public mass transport. 
We also envisage detailed neighborhood planning aimed at adding more public space. 
Such physical innovations go hand in hand with other initiatives that seek to redistribute the fruits of development. 
These include income distribution programs, special schools in poor sectors that integrate education, cultural and sport facilities, and a recycling system for the 13,000 tons of waste produced daily, thereby creating new working opportunities for street collectors. 
Most importantly, these and other reforms - such as new transportation systems and a public-health system based on family doctors - must be undertaken with the participation of the people affected. 
It is the citizens of urban enclaves who are taking part in establishing budget priorities and counseling government through a decentralized policy of administration. 
These changes are meant to eventually benefit income distribution and to improve the quality of life for all of São Paulo's residents. 
Many of these innovations, I believe, can be reproduced in other large cities as well. 

Taming Traffic 
In Paris, New York, and Mexico City, rich and poor alike escape the summer heat in city parks. 
But in many places in the developing world, open public spaces are as rare as stable democracies. 
That may be no accident. 
If it appears frivolous to write about public space in cities like Bogota, Delhi, and Lima, where poverty and squalor run rampant, consider that the government's subsidy of grass and concrete for pedestrians is a measure of its respect for human dignity and the democratic values. 
Public spaces are where poor and rich meet as equals. 
If governments cannot level the playing field in a global economy, they can at least equalize the enjoyment of a city during leisure time. 
In the Third World, this means offering residents clean and plentiful public parks and keeping the sidewalks clear for pedestrians. 
While the latter is taken for granted in the developed world, sidewalks in Latin America are often akin to disputed territory. 
Pedestrians shouldn't have to compete with cars. 
City and government officials should ensure that parks and paved paths become as ubiquitous to a city's landcape as parking spaces. 
As Mayor of Bogotá, I was almost impeached for insisting that pedestrians win this war with the automobile and commerce. 
Shop-owners and drivers complained that sidewalks should continue to be shared with parked cars, as they had been for years. 
We had to explain that although sidewalks live next to roads, they do not belong to the same family. 
Rather, sidewalks are close relatives of parks and plazas. 
Sidewalks are not merely for going from one place to another, they are for talking, playing, kissing, or sitting on a bench. 
To suggest that parking bays can be carved out of sidewalks is like saying a park or a plaza can be turned into an open-air parking lot with trees. 
People need to walk to be happy. 
A bird can survive inside a small cage and even lay eggs and bear descendants. 
We, too, could live out our lives in the confines of an apartment. 
But just as a bird is happier in a cage the size of an auditorium and even happier when flying free, we walk better on a sidewalk three or ten meters wide. 
We are exuberant if offered an esplanade cleared of cars, noise and pollutants. 
For thousands of years, city streets were pedestrian, even if shared with horses and carriages. 
Paintings up to the end of the 19th century depict cityscapes with people all about the street. 
Any eight-year-old child was safe walking about these streets. 
All this changed dramatically when automobiles appeared. 
Streets became lethally dangerous, particularly for children. 
As automobiles drove pedestrians off to the side of streets, cities in the Third World should have developed a parallel network of exclusively pedestrian walkways. 
Nothing of the sort happened. 
On the recently built road from Delhi to Agra to facilitate the flow of tourists to the Taj Mahal, there must be at least 200 pedestrians and bicyclists for each motor vehicle. 
But there are no sidewalks or bicycle paths alongside it. 
This regressive design is not exclusive to India; it is typical of the Third World. 
Investing in road infrastructure tends to be regressive in societies where only a minority own automobiles. 
But upper income people drive and they make the decisions. 
Building an infrastructure for an ever-growing number of cars was a daunting task, one that absorbed the attention and resources of many Third World governments over the past three decades. 
After clogging every square meter of city street, they cut road space through the most spectacular natural settings. 
Practically no urban lakefront, riverbank, coastline, or mountainside has not been threatened. 
Quality public pedestrian space, on the other hand, demonstrates official respect for human dignity and for society's most vulnerable members--the handicapped, children and the elderly. 
A progressive strategy towards public space deepens democracy, since the pedestrians and bicyclists who benefit most directly are lower-income citizens. 
This is especially true in developing countries, where the population of cities will increase by more than two billion inhabitants over the next 30 years. 
The new urban areas to be created could be different, more egalitarian, and environmentally more sustainable than those built over the last 100 years. 
Public space networks of greenways, parks, plazas, exclusively pedestrian avenues, and streets could be the backbone of the new Third World city. 
As for mobility in a pedestrian city, it is possible to structure low-cost bus-based transit systems and to severely restrict car use during peak hours. 
Generally, cities in developing countries cannot afford architectural jewels such as Notre Dame; but they can have formidable pedestrian avenues shaded by enormous tropical trees. 
Environmental and social sustainability worldwide depends to a large degree on what happens in developing countries' cities over the next few decades. 
There is not much reason for optimism now. 
But there could be: if the Third World frees its feet, its mind will follow. 

Taming Voodoo Economics 
Americans have once again finished a presidential campaign season in which the quality of the debate over economic policy was abysmal. 
On the Republican side, hacks, spin masters, and many people who ought to have known better suddenly developed an extraordinary appreciation for something called the "CPS Household Survey of Employment" as a supposed guide to month-to-month changes in the labor market. 
The CPS survey was never designed to do this, but it offered the most favorable gloss on the Bush administration's dreadful record on employment. 
On the Democratic side, the same sorts of hacks and PR men focused like a laser beam on the bad employment news of the George W. Bush years, ignoring the good news about output and productivity. 
And, again, Republicans responded tendentiously, by focusing on the unemployment rate rather than on the job numbers - as if it were a good thing that the lousy labor market since 2001 has artificially depressed the number of people looking for work. 
Similarly, Republicans glibly touted the Bush tax cuts - the equivalent of which President Bush's father, President George H. W. Bush, two decades ago called "voodoo economics" - as the acme of economic wisdom. 
They paid no heed to the large drag that Bush's unbalancing of America's public finances will impose on the US economy over the next several decades. 
Democrats, for their part, pretended that the tax cuts had already harmed the economy, when they ought to know that the greatest damage is still to come. 
The Republicans magnified their economic quackery by frantically trying to minimize public perceptions of the long-run fiscal problems of America's social-insurance system, largely to deflect attention from the fact that Bush threw away the budget surpluses President Clinton had bequeathed him - and with them what may have been the country's last best chance to fix things in this regard short of some form of disaster. 
These same Republicans also argued for government spending restraint while blocking the institutional changes to Congressional procedures needed to make spending restraint possible. 
All of this economic legerdemain was magnified by television, print, and Internet journalists. 
Aside from a small number of good stories in the business press, it is difficult to argue that anyone who read or listened to English-language media coverage of the campaign could have learned anything interesting or relevant to the question of whose economic policy was likely to be better for America. 
The economics profession bears part of the blame for this. 
Nobel Prize winners such as Edward Prescott have no business talking about the benefits of tax cuts without pointing out that a tax cut accompanied by spending increases is not a tax cut at all, but rather a tax shift onto the future - and a tax shift that raises risk and discourages accumulation. 
But much of the problem stems from an under-briefed, undereducated, and uncurious press corps. 
Indeed, the tendency towards superficiality in coverage of economic issues may have led campaign managers to believe that the press will so distort their message that they dare not even try to set out what they regard as the true rationales for their economic policies. 
At this point, I as a pundit am supposed to come up with my magic plan, my clever scheme for fixing things and putting the world to rights. 
I don't have one. 
But there is one glimmer of hope. 
The past two generations have witnessed the rise of independent central banks whose monetary policy, largely insulated from partisan politics, aims for the maximum possible employment and purchasing power consistent with price stability. 
Monetary policy in the industrial core has been far from perfect in this age of independent central banks, but it has been much better than what came before, representing a victory for technocracy. 
The American political system, at least, appears incapable of setting out the central fiscal policy issues in ways that give voters a chance to make informed judgments and distinguish between candidates-even between candidates whose programs are serious and those whose programs are mathematically impossible jokes. 
It may well be time for another technocratic push: a Fiscal Stabilization Board that would take its place beside the Federal Reserve Board. 
Just as the Federal Reserve exists to ensure that monetary policy is not inconsistent with price stability, the Fiscal Stabilization Board would guarantee that spending authority remains in line with the legislated level of taxes. 
Let the debate begin. 

Tanzania’s Illiberal Tilt 
JOHANNESBURG – During a recent phone call with a Tanzanian journalist and human rights activist whom I know well, many of my questions were met with uncharacteristic silence. 
My friend is bold, plucky, and usually talkative. 
But on this occasion, politics was too dangerous for her to discuss. 
With Tanzania’s journalists being threatened, assaulted, and kidnapped, our conversation remained confined to the mundane. 
Tanzania, one of Africa’s most stable democracies is sliding toward authoritarianism. 
For months, President John Magufuli has been targeting his political opponents, attacking journalists, and closing news outlets. 
While his moves have drawn international criticism, Magufuli continues his assault on free speech and political rights. 
Tanzanians are being silenced like never before, and the world should be very worried. 
Until recently, Tanzanians believed their country was headed in the opposite direction. 
After taking office in late 2015, Magufuli introduced a reform-oriented agenda that earned him high praise. 
Among his initiatives was a campaign to redirect public spending to fight cholera, and a payroll audit to identify “ghost workers” – non-existent government employees who drain some $2 million from the budget every month. The private sector was not spared with mining companies being accused of under paying their taxes. 
In fact, Magufuli’s anti-corruption efforts were so popular that many Tanzanians viewed their president as the epitome of morality; on social media, the hashtag #WhatWouldMagufuliDo went viral. 
But today, that hashtag has become a parody. 
In banning protests, closing media organizations, and cracking down on his critics, Magufuli has shown Tanzanians, who have never had a strongman leader, that he intends to follow in the footsteps of the many the region has known. 
Magufuli’s assault on press freedom has been particularly troubling. 
In June 2017, authorities ordered the popular Swahili language newspaper Mawio to cease publication for two years, after it ran a story about tax evasion by local mining companies. 
The article named former Tanzanian presidents Benjamin Mkapa and Jakaya Kikwete, which the government claimed was a violation of the Media Services Act of 2016. 
Then, in January, five prominent television stations were fined for airing a statement by the Legal and Human Rights Center regarding possible rights violations during local elections last year. 
Having muzzled traditional news organizations, the state then set its sights on online media. 
In March, the Tanzania Communications Regulatory Authority began requiring bloggers and digital publishers to register with the government and pay a $920 license fee. 
The Electronic and Postal Communications (Online Content) Regulations also require Internet cafes to install surveillance cameras, and bloggers to report on-site visitors and other operational details. 
Anyone who posts content that is deemed to “cause annoyance, threatens harm or evil, encourages or incites crimes,” or jeopardizes “national security or public health and safety” can have their costly license revoked. 
Tanzania’s High Court has issued a temporary injunction blocking the new regulations; nonetheless, the government is still getting its way. 
For example, after the influential online whistleblower site Jamii Forums stopped publishing in mid-June because it was in violation of the rules, other bloggers voluntarily followed suit. 
Media outlets are not the only victims of Magufuli’s crackdown; civil-society organizations are also being targeted. 
For example, in late 2017, the government began what it called an NGO “verification” exercise, ostensibly to update the federal database of non-governmental organizations, but more likely aimed at curtailing the number of groups operating beyond government control. 
Registration was so costly and time-consuming that many organizations were forced to choose between closing and operating illegally. 
African governments have joined dozens of civil-society groups in calling for Magufuli to reverse course. 
But at the moment, an atmosphere of impunity is emboldening those intent on silencing human rights defenders, journalists, and opposition leaders. 
In April, efforts to organize anti-government protests were met with official threats and intimidation. 
One police official even warned that anyone who ignored the government’s ban on demonstrating would be “beaten like stray dogs.” 
Such threats come amid a surge in political violence. 
In September 2017, for example, Tundu Lissu, an outspoken government critic, was shot during a failed assassination attempt. 
Two months later, Azory Gwanda, a freelance journalist who wrote several news stories about the murders of local officials and police officers, was abducted and is still missing. 
And in February, machete-wielding assailants murdered opposition politician Godfrey Luena outside his home. 
Why are Magufuli and his supporters so intent on stifling dissent? 
Some analysts believe the president is attempting to cement power for the ruling Chama Cha Mapinduzi party. 
Others argue that Magufuli’s anti-corruption drive pushed CCM elites into the arms of the opposition, and that his political survival depends on removing the threat they now pose. 
Whatever the reason, there is no excuse for government-sanctioned attacks on freedom of expression, association, and assembly. 
Two years ago, Magufuli – who is known as “The Bulldozer” – came to office vowing to end graft and curb wasteful government spending. 
As noble as these goals are, they will be overshadowed if he continues his campaign against those who entrusted him with their hopes. 

Where the Water Is 
HAMILTON, CANADA – In many parts of the world, there are simply no more conventional freshwater resources available to meet growing demand. 
Beyond limiting economic development, the lack of sufficient freshwater resources threatens the wellbeing of billions of people by causing conflict, social unrest, and migration. 
The only way to address this challenge is by radically rethinking water-resource planning and management in a way that emphasizes the creative exploitation of unconventional water sources. 
There is a large and growing number of unconventional sources of fresh water with massive potential, beginning with desalinated seawater or highly brackish groundwater. 
Already, there are 18,000 desalination facilities in more than 100 countries producing roughly 32 billion cubic meters (8.45 trillion gallons) of fresh water – about one-third of the volume passing over Niagara Falls annually. 
Some 44% of global desalinated-water production is taking place in the Middle East and North Africa, and new facilities are being built across Asia, the United States, and Latin America. 
Annual desalination capacity worldwide is increasing by 7-9%, on average. 
Recent studies show that, though the cost of irrigation with desalinated water remains higher than with conventional fresh water, it is declining. 
A couple of decades ago, desalinated water cost more than $5 per cubic meter (264 gallons); today, it costs less than $0.50. 
A second promising alternative source of fresh water is fog: a vertical mesh can be used to capture moisture from the air, with the droplets accumulating in a tank or distribution system. 
Given that fog is very common even in dry areas, fog-harvesting systems amount to a practical, cost-effective way to deliver fresh water directly to rural communities. 
Some countries are already taking advantage of this technology. 
In Cape Verde, a square meter of a collection system yields up to 12 liters (3.2 gallons) of fresh water daily in peak season. 
In Eritrea, a 1,600-square-meter net harvests up to 12,000 liters per day. 
The world’s largest fog collection and distribution system was built in 2015 in the mountains of Morocco – an area with low water availability but abundant fog six months out of the year. 
Fog harvesting today costs $1-3 per cubic meter of water. 
Costs are expected to decrease further as the market for equipment grows and as more village populations take charge of operations and maintenance. 
Given their simplicity, fog-harvesting systems have minimal running costs and are easily managed by unskilled teams. 
Similarly, “micro-catchment rainwater harvesting” – which uses particular slopes and contours to increase runoff from rain and concentrate it in a planting basin where it is effectively “stored” in the soil – is useful for dryland ecosystems where most precipitation is lost. 
Several projects in the Middle East and North Africa demonstrate the potential of this approach to sustain vegetation growth in very dry areas. 
Yet another unconventional source of freshwater is used greywater and wastewater from urban areas. 
Mechanisms for safely collecting, treating, and reusing such water have been demonstrated and documented, with stringent effluent-discharge regulations in North America, Northern Europe, and Japan setting an example for the world. 
Groundwater confined in deep geological formations and in offshore aquifers may also be tapped. 
A final – and particularly surprising – potential option, which the United Arab Emirates is now exploring, is iceberg towage. 
While Canada’s oil and gas industry regularly tows icebergs to avoid damage to offshore platforms, for the UAE, keeping ice intact over a 10,000-kilometer (6,200-mile) southward journey, which can take up to a year, is no easy feat. 
But, given how much water is locked in an average-size iceberg, it is worth consideration. 
Despite the demonstrated promise of unconventional water sources, not to mention the urgency of the water challenge in many countries, the potential of these solutions remains woefully underexplored. 
While most water-scarce countries regulate the use of desalinated water, decision-makers need to update their investment strategies, water-management policies, and public budgets to integrate the full range of water resources. 
To this end, governments must abandon their outdated assumption that tapping unconventional water sources would be technically impractical or excessively costly. 
Efforts should be made to analyze the potential benefits of such investment, taking into account the economic, social, environmental, and health trade-offs of water scarcity. 
Governments must also clarify the responsibilities of national water agencies and improve the capacity of water-related institutions at all levels to institute large-scale unconventional-water programs. 
Best practices should be clarified, innovations identified and tested, and knowledge and experience shared. 
The private sector also has a role to play in the shift toward unconventional water resources – a role that must extend beyond current efforts to tap desalinated water and urban greywater and wastewater. 
Finally, local institutions, nongovernmental organizations, and local communities must be mobilized – for example, through public campaigns showcasing the benefits of harnessing the potential of unconventional water resources. 
Sustainable Development Goal 6 calls for universal access to clean water and sanitation. 
If governments do not embrace unconventional water resources, achieving that goal will be as difficult as getting water from a stone – and the consequences for water-scarce regions will be dire. 


Targeting Non-Communicable Diseases 
INDIANAPOLIS – Around the world, one of the major factors destroying lives and hampering economic growth is also one of the hardest to address. 
Non-communicable diseases (NCDs) – such as heart disease, diabetes, and cancer – now account for two-thirds of all deaths worldwide. 
In addition to cutting lives short, NCDs exact a massive economic toll on their victims, their families, and their communities, sapping economic productivity and driving up medical costs. 
Over the next two decades, the total economic losses from NCDs could top $30 trillion. 
Addressing the complex challenge posed by NCDs will require a coordinated international effort. 
Fortunately, there have been some important recent steps in that direction. 
In September, the United Nations adopted the Sustainable Development Goals, a set of 17 objectives that will guide the global development agenda for the next 15 years. 
Alongside targets like eliminating poverty and measures to protect the environment is a commitment to reducing mortality caused by NCDs – the first time the UN’s official development agenda has taken direct aim at the problem. 
This is a welcome milestone, but it is only the first of many on a long road. 
The physical and economic burdens associated with NCDs fall the hardest where they are least easily borne: low- and middle-income countries, where 80% of NCD-related deaths occur. 
Millions of people who have recently escaped poverty could be pushed back into it as a result. 
The attention and peer pressure generated by the SDGs can help drive progress. 
But achieving the targets will require sustained focus, drawing on the resources and expertise of governments, international non-profit organizations, and, crucially, the private sector. 
My experience in the health sector has led me to conclude that two important factors will prove crucial in addressing the challenges posed by NCDs. 
Progress will depend, first and foremost, on crafting effective local approaches that can be adapted, replicated, and scaled up. 
There are no one-size-fits-all solutions to problems like diabetes or heart disease. 
But, given that NCDs afflict communities in all parts of the world, there is much common ground that need not be continually rediscovered. 
In 2013, for example, the Carlos Slim Foundation conducted a rigorous baseline assessment at eight primary-care clinics to understand the state of diabetes prevention and treatment. 
Based on the data gathered during the study, the Foundation piloted what is known as the CASALUD model to improve screening, treatment, and prevention using low-cost, user-friendly devices that can measure a range of relevant vital signs, including blood glucose levels. 
Participating clinics have been equipped with an online system to track drug inventories and avoid shortages. 
The approach was so effective that Mexico’s health office is using the CASALUD model as the basis for its national campaign to fight obesity, which can fuel diabetes and other NCDs – a great example of scaling up based on local experience. 
The second key to success in the fight against NCDs is a commitment to tapping the resources of the private sector. 
This includes not only the mobilization of private investment, but also the deployment of the vast amounts of technical, operational, and locally tailored expertise that private companies have gained in the course of doing business around the world. 
By forming partnerships with governments and international and local organizations, companies can help reduce the impact of devastating and costly diseases. 
I know this because my company is involved in just such an effort: the Lilly NCD Partnership, in which we are cooperating with partners and the governments of India, Mexico, South Africa, and Brazil to tackle NCDs. 
In Brazil, for example, we are working closely with key local organizations, including the Federal University of Rio Grande do Sul, to improve disease prevention – with a focus on helping mothers who were diagnosed with gestational diabetes while pregnant and are now at risk of developing type 2 diabetes. 
Programs like ours demonstrate what can be achieved through substantive, locally driven public-private partnerships around the world. 
Ensuring the success of the SDGs – including the reduction of mortality from NCDs – will require companies to move beyond traditional philanthropy and forge creative solutions to socioeconomic problems. 
If we recognize that innovation stems from understanding local conditions and optimizing the vast resources of the private sector, we can ensure better health – and more rapid economic growth – far into the future. 

Tariffs and Tortillas 
BUENOS AIRES – Ever since Mexico’s so-called “Tortilla crisis” this past January, street protests against food shortages and high prices, or against increasing taxes on agricultural production, have spread from Haiti to Central American countries, and across Latin America. 
Governments have sometimes reacted with protective measures or macroeconomic initiatives, but in some cases with repression. 
The paradox of Latin America’s food crisis is that, although the region is a major food producer, it sometimes needs to rely on imports to prevent sporadic shortages. 
According to the World Bank, Latin America and the Caribbean exported $55 billion of foodstuffs in 2006; yet the continent’s poorest families spend 50% of their budgets on food, and this at a time when Latin America has been experiencing its best economic performance since the 1970’s. 
Food prices, which have shot up 83%, are not likely to start falling until after 2009. 
For Latin America, this is more than a challenge; it is an opportunity. 
The central challenge is political: correcting state policies formulated when resources, including oil, natural gas and food commodities, were not considered a driving force in the global economy. 
The key here is to avoid the trap of protectionism and international isolation. 
Even before the current crisis, Latin America’s recent “left turn” in politics was tied to the food problem. 
During his first term, Brazil’s President Luiz Inácio Lula da Silva implemented a “Zero Hunger” plan targeting the most vulnerable people in Brazilian society. 
Around this time, Argentina’s then President Nestor Kirchner was using price controls to keep food prices low. 
In Venezuela, Hugo Chávez took a further radical turn and launched a widespread plan of land reform. 
None of these measures was uncontroversial; nor did they prevent the impact of today’s global food price inflation. 
Lula was accused of corruption and patronage. 
The Kirchner government faced a serious challenge to its credibility when it came under suspicion of manipulating the inflation rate. 
In Venezuela, land reform and socialist rhetoric did not prevent chronic shortages of milk, sugar, and beef. 
Yet, despite these failings, such policies retained enough popularity to insure their continuity. 
Given this history, it is no surprise that the first reaction of Latin American governments to today’s food crisis was unilateral. 
On April 23, Brazil announced a temporary suspension of rice exports to prevent internal shortages. 
Bolivia prohibited the export of corn, rice, meat, and vegetable oil. 
Argentina’s decision in March to drastically increase the tax on agricultural exports provoked a widespread clash with rural producers, leading to a novel and complex social polarization while generating a political crisis that is still ongoing. 
Some of the measures even endangered bilateral relations. 
To curb inflation, Argentina decided to suspend the sale of wheat to its principal export market, Brazil, where the price of bread had increased 20% over the last 12 months. 
In Peru, social mobilization against higher food prices led to a renegotiation of the free-trade agreement with the US. 
Compared to other regions, the impact of the crisis in Latin America, with the exception of Haiti, has (so far) not been dramatic. 
The reason is the abundance of natural resources and persistent international demand, which has sustained growth. 
But regional cooperation to find creative solutions to a crisis that is in many respects interrelated remains absent. 
So far, the only initiative with a regional perspective has come from Caracas in the form of the so-called Bolivarian Alternative of the Americas (ALBA). 
Mexico, Peru, and other nations were suspicious of the anti-American rhetoric of the ALBA grouping, but some practical proposals – such as the creation of a bank of agricultural products to reduce costs for small and midsize producers – have come out of it. 
One of the inevitable consequences of the current food crisis will be a re-consolidation of the state’s role in agriculture. 
Pressure to place food security on the regional political agenda is clear evidence of this. 
After the last world food crisis in 1973, agriculture was almost forgotten as a factor in growth. 
While liberalization was promoted in the late 1980’s and embraced during the 1990’s, food markets in the developed world remained highly protected, with Latin American countries suffering the consequences. 
One indirect, yet tragic, result has been Bolivian, Peruvian, and Colombian peasants’ continuing cultivation of coca leaves as a means of economic survival. 
For Latin American policymakers, assuring food security can really be achieved only if a new international regime of genuinely free trade for agricultural commodities is built. 
Without such a global agreement, the muddled interventions of today will continue, with little hope of any real improvement. 

Tax and spend (Please) 
Excessive taxation can dull incentives and hinder growth. 
But too little taxation can do the same. 
Governments with meager tax revenues can't provide basic public goods. 
Worse yet, low tax revenues in poor countries often result from defects in tax collection systems (rather than low tax rates) that also promote unproductive enterprise. 
India illustrates the importance of a well-designed tax system. 
In Bangalore, high-tech companies have built world-class campuses replete with manicured lawns and high-speed data communication networks. 
Outside these campuses, however, lie open sewers, uncollected garbage, and roads in acute disrepair. 
Whereas technology companies instantaneously transmit terabytes of data to remote continents, local transport proceeds at an almost medieval pace. 
As a result, businesses in Bangalore run their own bus services, contract with private suppliers for drinking water, and install generators to protect themselves from interruptions in electricity supply. 
The state can't fix the shambles because it is broke. 
India's government debt exceeds 70% of GDP, so more than half its tax receipts go to paying interest. 
But the debt isn't because of excessive spending in the past. 
India's government expenditures amount to about 15% of GDP, compared to an average of around 40% of GDP in the OECD. 
Rather, India's financial difficulties stem from a badly designed and administered tax system. 
Rates and rules for personal and corporate income taxes appear reasonable by international standards. 
Nonetheless, India's government collects income taxes amounting to only about 3.7% of GDP, about half that in South Korea and the other Asian tigers. 
Agriculture in India accounts for about a quarter of GDP, but even wealthy farmers don't pay taxes. 
Export-oriented companies in the software and other industries enjoy tax holidays on their profits, although their employees do pay taxes on their personal incomes. 
Despite reasonable rates, tax evasion is widespread. 
Cheating occurs because the government hasn't invested in personnel or in the systems to detect tax evaders, who rarely face jail time and can often bribe their way out of trouble when they do get caught. 
More subtly, the evasion of "direct" taxes on incomes and profits reflects the mess in the system of "indirect" taxes levied on production and consumption. 
Excise taxes account for over 60% of India's indirect taxes, which in turn represent the same proportion of its total tax receipts. 
The basic excise tax has been fixed at 16% of the value of a firm's output. 
Then there are a variety of concessions, exemptions, and surcharges. 
For instance a "concessionary duty rate" of 8% is levied on categories like food products, matches, cotton yarn, and computers. 
An additional "special excise duty" (SED) of 8% is levied on products that include polyester filament, cars, air conditioners and tires. 
An "additional excise duty" (AED, not to be confused with the SED) is levied on "goods of special importance." 
Exemptions from excise taxes are numerous and complex, including businesses with total annual revenues of less than 10 million rupees and firms located in certain troubled or backward areas. 
Overall, the exemptions fall under 70 broad categories, subdivided into 259 entries, 52 conditions, and 7 lists, each containing numerous items. 
Exemptions invite abuse. 
For a price, low ranking officials, who have considerable discretion in applying the conditions, can be persuaded to reach favorable interpretations. 
Goods taxed at high rates (for example, polished granite) are sold as goods taxed at lower rates (for example, as unpolished granite). 
Evasion of excise taxes is more contagious than evasion of taxes on profits and incomes. 
If one firm evades excise taxes, and the tax rate is high compared to pre-tax profit margins in the industry, its competitors also have to cheat, just in order to survive. 
As evasion increases, governments levy "additional" or "special" duties, inciting further evasion. 
Collections of direct taxes also suffer. 
The bribe paid to the excise tax collector for a favorable classification, the difference between the value of polished and unpolished granite, and the under-reporting of true revenues create "black" funds, which cannot be declared on income-tax returns. 
In addition to impairing the state's ability to provide basic public goods, schemes to evade indirect taxes also discourage businesses from adopting more productive technologies, which requires technologies that involve large-scale operation. 
But, because indirect taxes are more easily avoided by operating many small units instead of one large unit, economies of scale cannot be realized. 
It's worth noting that in the software industry, where all units are exempt from indirect taxes, Indian companies do operate at efficient scale. 
Could India emulate China's example, where the rationalization of indirect taxes in 1994 set the stage for a great boom? 
Or are coalition governments in a vigorous democracy incapable of such reform? 
Last year India's BJP-led government introduced legislation mandating sharp reductions in the budget deficit. 
It then appointed a task force to formulate the necessary changes in tax and spending policies. 
This July, the task force proposed raising taxes (rather than cutting spending), through, among other things, removing most indirect tax exemptions. 
India's new Congress-led government, too, seems to favor these proposals. 
If Congress and the opposition parties follow through, they will go a long way to sustaining the country's economic growth and in dispelling the idea that democracies cannot do what's needed to encourage development. 

Big Polluters, Pay Up 
JAKARTA – Earlier this year in Myanmar, torrential rain caused mudslides that wiped out hundreds of houses and caused large-scale crop destruction. 
More than 1.3 million people were affected, and over 100 died. 
In Vietnam, the same deluges caused toxic slurry pits from coal mines to overflow and run through villages, and into the World Heritage-listed Ha Long Bay; the death toll was 17. 
As such weather events become increasingly frequent and intense, the need to mitigate and adapt to climate change is becoming more urgent than ever. 
And make no mistake: These events are, at least partly, the result of climate change. 
As the climate scientist Kevin Trenberth of the US National Center for Atmospheric Research points out, nowadays, “[a]ll weather events are affected by climate change, because the environment in which they occur is warmer and moister than it used to be.” 
International climate negotiators recognize this, to some extent. 
The effects faced by the people of Myanmar and Vietnam are considered unavoidable costs of failing to adapt to climate change, which officials classify as “loss and damage.” 
But such language fails to capture the full scale of the consequences – especially their impact on human lives. 
The people who died in Myanmar and Vietnam are not just “unavoidable costs,” and their loved ones cannot simply “adapt” to losing them. 
This kind of bloodless rhetoric reflects the inadequacy of the responses to climate change that international negotiations have so far produced. 
In fact, if the industrialized world had done what was needed to stop climate change, as promised a generation ago, Myanmar and Vietnam most likely would have been spared their recent “loss and damage.” 
The so-called advanced economies failure to fulfill their commitments means that Myanmar and Vietnam are hardly the most vulnerable developing countries today. 
The tiny island states of the Pacific, for example, have been unable to erect adequate defenses against the “king tides” that are encroaching on their land and causing the freshwater “lenses” beneath their atolls to become brackish. 
Their populations – among the world’s poorest people – are paying for climate change with their lives and livelihoods. 
And without the resources to adapt, they will continue to suffer. 
But it gets even more perverse. 
Those behind the problem – the world’s biggest polluters – continue to reap billions in profits, while receiving huge energy subsidies from governments (projected to reach $5.3 trillion in 2015, or about $10 million per minute). 
So who are these polluters? 
According to a 2013 study by the scientist Rick Heede, nearly two-thirds of carbon dioxide emitted since the 1750s can be traced to just 90 of the largest fossil fuel- and cement-producing entities, most of which still operate. 
Fifty are investor-owned companies, including ChevronTexaco, ExxonMobil, Shell, BP, and Peabody Energy; 31 are state-owned companies, such as Saudi Aramco and Norway’s Statoil; and nine are states like Saudi Arabia and China. 
Recognizing the blatant injustice – not to mention the destructiveness – of this state of affairs, a new initiative, launched by the Carbon Levy Project and supported by a growing number of individuals and organizations, has emerged to demand compensation for vulnerable developing countries from the big polluters. 
Specifically, the Carbon Levy Project proposes a tax at the point of extraction for fossil fuels. 
Such a tax is consistent with international law, including the “polluter pays” principle, and would provide a new and predictable source of finance – amounting to billions of dollars – for the communities that need it most, without letting governments off the hook for providing public sources of finance. 
And, by raising the cost of extracting fossil fuels, it would contribute to the eventual phase-out of a sector that has no place in a climate-safe world. 
Fortunately, the world will not have to wait for moral suasion to carry the day. 
Fossil-fuel companies and governments are already facing intensifying legal pressure. 
Typhoon survivors in the Philippines delivered a complaint to the country’s Commission on Human Rights, calling for an investigation into big fossil-fuel companies’ responsibility for causing climate change. 
The Dutch group Urgenda and nearly 900 co-plaintiffs successfully sued the Dutch government, forcing it to adopt more stringent climate policies. 
A Peruvian farmer now intends to sue the German coal company RWE to cover the costs of protecting his home, which lies in the flood path of a glacial lake. 
And the signatories of the Peoples’ Declaration for Climate Justice from Pacific Island countries are committed to bringing a case against big polluters for activities resulting in the destruction of their homes. 
If no action is taken, such lawsuits will only become more frequent and difficult to defeat. 
Big Oil, Big Gas, and Big Coal need to accept responsibility for climate change and start making real contributions to adaptation, or prepare to battle for their own survival – a battle that, in the long term, they simply cannot win. 

Why Tax Cuts for the Rich Solve Nothing 
NEW YORK – Although America’s right-wing plutocrats may disagree about how to rank the country’s major problems – for example, inequality, slow growth, low productivity, opioid addiction, poor schools, and deteriorating infrastructure – the solution is always the same: lower taxes and deregulation, to “incentivize” investors and “free up” the economy. 
President Donald Trump is counting on this package to make America great again. 
It won’t, because it never has. 
When President Ronald Reagan tried it in the 1980s, he claimed that tax revenues would rise. 
Instead, growth slowed, tax revenues fell, and workers suffered. 
The big winners in relative terms were corporations and the rich, who benefited from dramatically reduced tax rates. 
Trump has yet to advance a specific tax proposal. 
But, unlike his administration’s approach to health-care legislation, lack of transparency will not help him. 
While many of the 32 million people projected to lose health insurance under the current proposal don’t yet know what’s coming, that is not true of the companies that will get the short end of the stick from Trump’s tax reform. 
Here’s Trump’s dilemma. 
His tax reform must be revenue neutral. 
That’s a political imperative: with corporations sitting on trillions of dollars in cash while ordinary Americans are suffering, lowering the average amount of corporate taxation would be unconscionable – and more so if taxes were lowered for the financial sector, which brought on the 2008 crisis and never paid for the economic damage. 
Moreover, Senate procedures dictate that to enact tax reform with a simple majority, rather than the three-fifths supermajority required to defeat an almost-certain filibuster by opposition Democrats, the reform must be budget-neutral for ten years. 
This requirement means that average corporate-tax revenue must remain the same, which implies that there will be winners and losers: some will pay less than they do now, and others will pay more. 
One might get away with this in the case of personal income tax, because even if the losers notice, they are not sufficiently organized. 
By contrast, even small businesses in the United States lobby Congress. 
Most economists would agree that America’s current tax structure is inefficient and unfair. 
Some firms pay a far higher rate than others. 
Perhaps innovative firms that create jobs should be rewarded, in part, by a tax break. 
But the only rhyme or reason to who gets tax breaks appears to be the effectiveness of supplicants’ lobbyists. 
One of the most significant problems concerns taxation of US corporations’ foreign-earned income. 
Democrats believe that, because US corporations, wherever they operate, benefit from America’s rule of law and power to ensure that they are not mistreated (often guaranteed by treaty), they ought to pay for these and other advantages. 
But a sense of fairness and reciprocity, much less national loyalty, is not deeply ingrained in many US companies, which respond by threatening to move their headquarters abroad. 
Republicans, partly out of sensitivity to this threat, advocate a territorial tax system, like that used in most countries: taxes should be imposed on economic activity only in the country where it occurs. 
The concern is that, after imposing a one-off levy on the untaxed profits that US firms hold abroad, introducing a territorial system would generate a tax loss. 
To offset this, Paul Ryan, the speaker of the US House of Representatives, has proposed adding a tax on net imports (imports minus exports). 
Because net imports lead to job destruction, they should be discouraged. 
At the same time, so long as US net imports are as high as they are now, the tax would raise enormous revenues. 
But there’s the rub: the money must come from someone’s pocket. 
Import prices will go up. 
Consumers of cheap clothing from China will be worse off. 
To Trump’s team, this is collateral damage, the inevitable price that must be paid to give America’s plutocrats more money. 
But retailers such as Walmart, not just its customers, are part of the collateral damage, too. 
Walmart knows this – and won’t let it happen. 
Other corporate tax reforms might make sense; but they, too, imply winners and losers. 
And so long as the losers are numerous and organized enough, they are likely to have the power to stop the reform. 
A politically astute president who understood deeply the economics and politics of corporate tax reform could conceivably muscle Congress toward a reform package that made sense. 
Trump is not that leader. 
If corporate tax reform happens at all, it will be a hodge-podge brokered behind closed doors. 
More likely is a token across-the-board tax cut: the losers will be future generations, out-lobbied by today’s avaricious moguls, the greediest of whom include those who owe their fortunes to scummy activities, like gambling. 
The sordidness of all of this will be sugarcoated with the hoary claim that lower tax rates will spur growth. 
There is simply no theoretical or empirical basis for this, especially in countries like the US, where most investment (at the margin) is financed by debt and interest is tax deductible. 
The marginal return and marginal cost are reduced proportionately, leaving investment largely unchanged. 
In fact, a closer look, taking into account accelerated depreciation and the effects on risk sharing, shows that lowering the tax rate likely reduces investment. 
Small countries are the sole exception, because they can pursue beggar-thy-neighbor policies aimed at poaching corporations from their neighbors. 
But global growth is largely unchanged – the distributive effects actually impede it slightly – as one gains at the expense of the other. 
(And this assumes that the other does not respond and fuel a race to the bottom.) 
In a country with so many problems – especially inequality – tax cuts for rich corporations will not solve any of them. 
This is a lesson for all countries contemplating corporate tax breaks – even those without the misfortune of being led by a callow, craven plutocrat. 

Tax Justice Reconsidered 
Cutting taxes has been the religion of free market conservatives ever since the days of Ronald Reagan and Margaret Thatcher. 
Now others, including President Jacques Chirac of France, Edmund Stoiber in Germany, and even Sweden's socialists have joined the call for lower taxes. 
Economic efficiency is the main argument used to justify tax cuts, but confused claims of tax "fairness" have always played an important role as well. 
Surprisingly, the same confusion afflicts both supporters of tax cuts and their opponents. 
Taxes are a society's most important instrument for enacting its overall conception of justice. 
But most debates about tax justice consist merely in conflicting claims concerning the fairest way to share out tax burdens among different income groups. 
This approach is hopelessly myopic, because there is no way to evaluate the fairness of any distribution of tax burdens relative to income if you consider this distribution in isolation from the values that a society esteems and aims to uphold. 
Consider the controversy about whether graduated income taxes should be replaced by a single-rate or "flat" tax. 
Russia's 13% flat tax, introduced last year, has been much praised by American conservatives, including President Bush, and the idea enjoys significant support in the US Congress. 
While the official case for the introduction of a flat tax in Russia was largely one of economic efficiency, with a particular emphasis on increasing compliance, flat tax advocates in the US play up the fairness of taxing everyone at the same percentage. 
To many people, a flat or equal tax seems intrinsically fair. 
Others, however, contend that a flat tax is intrinsically unfair. 
Fairness in taxation, on this view, does not require equal treatment. 
Rather, fairness requires that people pay taxes at a higher percentage if they have more money: a fair share of the tax burden is one that reflects the taxpayer's ability to pay. 
Some countries--including Germany, Italy, and Spain--have even enshrined the principle of "ability to pay" in their constitutions. 
These competing principles of fairness underlie not only the political debate. 
With notable exceptions, they are found in legal and economic writings on tax policy. 
But extracting the "right" view from these conflicting principles is impossible, because the entire framework--that is, the search for a standard of fairness in the distribution of tax burdens--is based on a fundamental mistake. 
Any claim about the fair distribution of tax burdens must make use of a baseline of comparison--something in relation to which the burden of each taxpayer is measured. 
Almost without exception, the baseline used is pretax income. 
At first glance, this seems appropriate. 
People earn wages or acquire income in other ways; then the government takes some of it away from them in taxes. 
The only question is how much of each person's income is it fair for the government to take. 
But it is a mistake to assume that the pretax distribution of income is a morally significant starting point, and that the fairness of tax burdens depends on how they depart from it. 
In fact, the distribution of pretax income has no moral significance at all, and therefore the distribution of tax burdens assessed against that baseline can have no moral significance either. 
This is a matter of simple logic. 
The distribution of pretax income would have moral significance if everyone owned their pretax income until taxes took some of it away. 
But we couldn't possibly have a property right in the whole of our pretax incomes. 
Our incomes are earned in a world with government, which is necessarily a world that already has taxes in it. 
Without the legal and economic institutions, supported by taxes, that make a market economy possible, we would have nothing--or at any rate nothing resembling what we have now. 
What we earn before taxes is the result of what we and others do against the background of governmental policies and institutions, taxation included. 
Pretax income can't be an independent moral baseline for tax fairness because it makes no sense to evaluate taxes as departures from a baseline that taxes themselves helped to create . 
To reject the spurious debate about fairness in the distribution of tax burdens is not to deny the moral significance of tax questions. 
But the real questions about justice and taxes are different. 
Instead of treating taxes as government incursions on preexisting property rights, we should see taxes as part of the legal and economic structure that is needed to create and design a system of property rights. 
Justice in taxation lies with the goals and implementation of government's overall economic policy, including tax policy. 
Whether we believe those goals are just will depend on the extent to which they reflect our commitments to human welfare, liberty, equality, and individual responsibility--or whichever other values we may think deserve recognition in our society. 
That is what political arguments over tax policy should be about--not whether the rich should be taxed at a higher rate than the poor. 
Traditional debates about tax fairness address an illusory issue, and draw attention away from the true moral importance of taxes: that justice in taxation is inseparable from the justice of the overall economic and social system whose existence taxation supports. 

Tax the Oligarchs 
Around the world, there is concern about the arrest of Russian oil billionaire Mikhail Khodorkovsky. 
The worry is that Russia may be backtracking from democracy and the rule of law. 
Russia faces numerous problems posed by the legacy of Communism and the way the transition from Communism to a market economy was handled. 
One set of problems concerns politics and the difficulties of creating democracy and the rule of law after decades of totalitarianism. 
Another relates to economics. 
Two grievous economic policy errors were committed during Yeltsin's presidency. 
The first, as I argue in my book Globalization and its Discontents , was to create incentives that led to asset stripping rather than wealth creation. 
The other was to squander the few positive legacies left from the Communist era. 
One such legacy was a high level of human capital, especially in technical and scientific areas, much of which was lost, as many of the country's most talented people emigrated. 
Another squandered legacy -- with serious political consequences -- was the relative equality bequeathed by Communism. 
Politics and economics are in fact inextricably linked here: the erosion of the middle classes, which accompanied the rise of a few enormously wealthy oligarchs, and the descent of millions into poverty, made creation of a democratic society and the rule of law much more difficult. 
The reason is simple. 
It is not the Rockefellers and the Gateses of this world that are the strongest advocates of a "level playing field" and respect for law (including the law of competition). 
Historically, it is the middle classes that have an inherent stake in fairness and equality, thus playing an instrumental role in instituting the rule of law. 
For this reason, coming to terms with the illegitimate privatizations of the 1990's, which are at the root of wealth inequality in Russia, is something that still needs to be done -- and not only as a matter of justice; it is important for the long-term performance of Russia's economy. 
Ultimately, security of property rights -- and the growth it enables -- depends primarily on the legitimacy with which those rights are viewed by society. 
If those who hold wealth are seen as having obtained it in ways that lack legitimacy, no legal system can make property secure. 
If property is not secure -- or even is not perceived as secure -- incentives are distorted. 
Those in control of Russian businesses will thus continue to strip assets and convert them into forms of wealth that can be easily taken out of the country. 
Worse, if the legacy of illegitimate privatizations is not addressed, the economic oligarchy will likely be transformed into a political one as well. 
It is in light of this that Putin's moves against Khodorkovsky should be seen. 
For if the oligarchs succeed in keeping their ill-gotten gains, it is not hard to imagine someone like Khodorkovsky -- who was already starting to build a political machine alongside his business empire -- cashing in his Yukos shares, parking his wealth in a safe haven offshore, and using it to manipulate Russian politics. 
What is to be done, then, with the tainted property gained during the wild privatizations of the 1990's? 
It probably would have been easier for Russia's government to recapture some of the oligarchs' ill-gotten gains earlier, say, after the ruble crisis of 1998, when many of them fell into arrears on their loans. 
Although that opportunity has passed, I still think that it will be far easier to address this problem now than, say, in another decade. 
Once Khodorkovsky and his ilk sell their stakes to foreign interests and take their money out of Russia, there will be little that can be done. 
But wouldn't a reversal of the illegitimate privatizations of the 1990's create new problems and undermine Russia's attempt to establish secure property rights? 
I believe some of the inequities of the past can be addressed without any direct attack on "property rights," no matter how dubiously acquired. 
Russia could impose an "excess capital gains tax," analogous in spirit to the tax imposed on US oil companies when their profits soared, through no effort of their own, from high oil prices in the 1970's. 
A tax could be imposed, say, at the rate of 90%, on the "excess" gains from the acquisition of state assets--e.g., on gains in excess of 10% cumulative returns on original equity investments. 
The tax would be payable either when the company is listed on a stock market or when the assets are sold. 
Such a tax would leave the oligarchs with plenty, and could even compensate them for their efforts at restructuring enterprises. 
To encourage domestic investment, and recognizing that it is difficult to tax assets held abroad, an "exit" tax could also be imposed on capital taken out of the country. 
It would be a move somewhat similar to that contemplated in the US by the Clinton administration, which proposed a tax on billionaires who surrendered their citizenship in order to avoid taxation. 
The money raised by the new tax could help restore, for instance, Russia's ailing health and educational systems. 
To be sure, the tax would not solve all of Russia's problems. 
It would not eliminate huge inequalities. 
It would not create a new middle class. 
It would, however, go some way towards rectifying the consequences of the "wealth grabs" of the Yeltsin era. 
Most importantly, while it would not ensure the creation of a viable democracy, it would at least reduce the threat to democracy posed by the increasingly poisonous role played by money in Russian politics. 

Why Taxation Must Go Global 
BERLIN – We are witnessing profound changes in the way that the world economy works. 
As a result of the growing pace and intensity of globalization and digitization, more and more economic processes have an international dimension. 
As a consequence, an increasing number of businesses are adapting their structures to domestic and foreign legal systems and taxation laws. 
Thanks to technical advances in the digital economy, companies can serve markets without having to be physically present in them. 
At the same time, sources of income have become more mobile: There is an increasing focus on intangible assets and mobile investment income that can easily be “optimized” from a tax point of view and transferred abroad. 
Tax legislation has not kept pace with these developments. 
Most of the tax-allocation principles that apply today date back to a time when doing business internationally primarily meant transporting goods across a border to a neighboring country. 
But rules that were devised for this in the 1920s and 1930s are no longer suitable for today’s international integration of economic processes and corporate structures. 
They need to be adapted to the economic reality of digital services. 
In the absence of workable rules, states are losing revenue that they urgently need in order to fulfill their responsibilities. 
At the same time, the issue of fair taxation is becoming more and more pressing, because the number of taxpayers who make an adequate contribution to financing public goods and services is decreasing. 
The resulting tensions between national fiscal sovereignty and the borderless scope of today’s business activities can be resolved only through international dialogue and uniform global standards. 
Within the European Union, permitting groups of states to forge ahead with joint solutions to issues that can be addressed only multilaterally has worked well in the past. 
If such measures prove successful, other states follow. 
This approach can also serve as a global governance model for resolving international problems. 
In today’s world, even large states cannot establish and enforce international frameworks on their own. 
Groups of countries still can. 
This has been demonstrated in the context of financial-market regulation; it is starting to become clear with regard to the regulatory framework for the digital economy; and it is now being confirmed in the area of taxation. 
The Seventh Meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes took place in Berlin this week, bringing together representatives from 122 countries and jurisdictions, as well as the EU. 
A joint agreement on the automatic exchange of information on financial accounts was signed on Wednesday. 
The joint agreement was originally an initiative by Germany, France, Italy, the United Kingdom, and Spain. 
Roughly 50 early-adopter countries and territories decided to take part, while other countries have indicated their willingness to join. 
The agreement is based on the Common Reporting Standard, which was developed by the OECD. 
Under the CRS, tax authorities receive information from banks and other financial service providers and automatically share it with tax authorities in other countries. 
In the future, virtually all of the information connected to a bank account will be reported to the tax authorities of the account holder’s country, including the account holder’s name, balance, interest and dividend income, and capital gains. 
Various measures are in place to ensure that banks can identify the beneficial owner and notify the relevant tax authorities accordingly. 
The CRS thus expands the scope of global, cross-border cooperation among national tax authorities. 
In this way, we can establish a regulatory framework for the age of globalization. 
The automatic exchange of information is a pragmatic and effective response to the perceived lack of global governance regarding international tax issues. 
By making taxation fairer, governments will have a positive impact on people’s acceptance of their tax regimes. 
This great success in the fight against international tax evasion would have been unthinkable only a few years ago. 
Now it is important to continue the efforts of the OECD and the G-20 in the area of corporate taxation. 
We need to make sure that creative tax planning in the form of profit-shifting and artificial profit reduction is no longer a lucrative business model. 
A “beggar-thy-neighbor” taxation policy, by which one country pursues tax policies at the expense of others, is just as dangerous as beggar-thy-neighbor monetary policies based on competitive currency devaluation. 
It leads to misallocations – and will ultimately reduce prosperity around the world. 
That is why we need to agree on uniform international standards in order to achieve fair international tax competition. 
The progress achieved in Berlin on the automatic exchange of tax information shows that, by working together, we can realize this goal. 

Taxing the Israeli Occupation 
CAIRO – Arab intellectuals and policymakers have often accused Europe of using financial generosity to cover up its political impotence over the Arab-Israeli conflict. 
If Europe is to be taken seriously as a global player, they argue, it must also flex some muscle when it delivers the money. 
In Arab eyes, European officials implicitly plead guilty to these charges by pointing to Europe’s complex multilateral politics and the European Union’s bureaucratic nature. 
Europe’s Arab interlocutors are unimpressed: they want Europe to stop talking like a Great Power and start acting like one. 
But it is precisely the EU’s desire to look more and more like a nation-state that has pushed its position on the Arab-Israeli conflict in the wrong direction. 
Europe’s inability to play a political role in the Middle East peace process was wrongly diagnosed as resulting from a European bias against Israel. 
Policy advisers argued that gaining Israel’s trust was necessary to win support for a European role in the peace process. 
Almost nothing became too dear in this quest: technology transfers, upgraded relations, association agreements, and even, reportedly, the prospect of joining the EU. 
European policy thus revolved around simultaneously seducing Israel and bribing the Palestinian Authority. 
Financing Israel’s occupation of Gaza and the West Bank served both objectives at the same time, at a cost to European taxpayers of several billion euros. 
Yet this policy earned Europe neither recognition nor relevance. 
Palestinians continued to trivialize Europe’s contribution, and Israelis to loathe it for “financing Palestinian terror.” 
In the end, Europe paid a lot of money only to expose its own weakness. 
How much worse can things get before the EU abandons its counter-productive policy? 
The idea that Europe can seduce the occupier into giving it a role in ending the occupation seems wrong-headed. 
Israel does not want an even-handed mediator but an unconditional supporter. 
This is partly why Israel prefers the United States as sole mediator, and it is also why Israel’s acceptance of a monopoly role for the US evaporates as soon as any American president starts developing views different from its own. 
When this happens, America’s ability to project power makes all the difference. 
In other words, no matter what blandishments are showered on Israel, when push comes to shove it is the ability to use power – not charm – that determines whether or not an outside power has a say in Arab-Israeli peacemaking. 
Europe ’s failure to play a role in resolving this conflict does not result from its supposed anti-Israeli views, but from the fact that the EU is not a state. 
States are not given roles; they acquire them by the power assets they can deploy. 
And Europe cannot deploy the type of power needed to tilt the balance in Arab-Israeli peacemaking. 
But Europe can do other things. 
To change the Israeli-Palestinian dynamic, external actors now need to influence the political calculus inside Israel and Palestine by lowering the political cost of peace and raising the cost of occupation . 
Any meaningful Arab-Israeli peace depends on Israel’s return of Palestinian territories, with certain conditions, but no Israeli government will be willing or even able to do so unless the political calculus inside Israel changes. 
Making withdrawal a tolerable political option (or making occupation a more costly one) is needed to trigger a meaningful peace process. 
Europe has already tried incentives for withdrawal, but that alone will not suffice; the cost of occupation must also be raised. 
In plain English, an “occupation tax” is needed. 
This would be different from applying sanctions, which would risk triggering a “ Masada Complex” that might push Israel to further extremes. 
Instead, an occupation tax would target the settlers’ economy and the violation of Palestinians’ human rights. 
Such a tax should start with turning the EU current exclusion of settlements’ products from preferential customs treatment into a full-scale ban on imports from settlements – and any transactions with them. 
Companies and banks should be barred from doing business in or with settlements, especially with construction companies and their suppliers. 
Pressure should be exerted on Israel to end its financial assistance to settlements. 
The occupation tax should also include action aimed at ending the virtual impunity enjoyed by the Israel Defense Force. 
IDF officials argue that some level of human rights violation is inevitable during occupation, and that the IDF’s record is not much worse than any other occupation army. 
They are right; an occupation cannot be sustained without the systematic violation of human rights. 
That is precisely why these violations must be made costly: to signal to Israeli voters that the cost of occupation is bound to rise. 
This can be done if Europe supports investigations of suspected war crimes and other violations of international humanitarian law committed by the IDF, as well as the establishment of international tribunals when such crimes occur. 
Only the US can bring Israelis and Palestinians to a new negotiation process, much less draft a blueprint for a political solution. 
Europe and others can support such a process, but mainly by affecting the internal political calculus in Israel. 
Such a role would better protect Europe’s broader interests in the Middle East, while allowing it to remain faithful to its values. 

Taxing Tissue 
Today’s biomedical research is a collaborative research enterprise, requiring the contributions of patients, universities and industry. 
Today’s laws, however, allow only universities and industry, which supply basic knowledge and technology, to profit from their contributions; patients, who supply tissue, may not be compensated. 
Some consider this unfair, as it allows tissue donated by patients to be wholly appropriated by universities and industry. 
Others consider this wise, as compensating individual tissue donors could block scientific progress and technological development. 
Is there a way to redress the double standard in biomedical research that is both fair and wise? 
Ironically, the double standard has both a moral and an economic underpinning. 
European law solemnly declares that the human body and its parts shall not give rise to financial gain , for reasons of human dignity. 
American law denies patients a property right in their tissue for reasons of economic policy. 
Recognizing such a right would impose a duty on universities and industry to negotiate fair compensation with every donor of all tissue used in their research. 
Moreover, compared with the contributions of universities and industry to the end product, the importance of tissue contributed by patients is minimal. 
Finally, why should tissue donors be entitled to compensation, as they or their progeny may benefit in the long run from the technological advances to which they contribute? 
Opponents of the double standard draw on principles of fairness, equity, and distributive justice. 
They view the double standard as a possible source of public distrust in the biomedical research enterprise. 
In fact, patients’ contributions to that enterprise are no longer minimal, as they supply university and industry with crucial compilations of tissue and associated medical data. 
Consequently, they have increasingly abandoned altruistic participation and are demanding compensation for their tissue. 
However, given current European and American law, these claims require a novel legal underpinning in order to be valid and enforceable. 
Various models have been proposed. 
Charitable trust model . 
Donors would transfer their tissue to a charitable trust, and would collectively appoint a trustee, who would have legal fiduciary duties to use the tissue for the benefit of the public. 
The trust agreement could allow the donor group to participate in the governance of the trust and thus have a say in the distribution of any benefits. 
But, while the model is fair in a number of ways, it implies that parts of the human body can give rise to financial gain. 
Moreover, the model is unwise to the extent that tissue donors could block the development of knowledge and applications. 
And, by definition, it would work only if the trust is funded on a public basis. 
Contract model. 
Tissue can be removed only with donors’ prior consent. 
Thus, prior to giving their consent, tissue donors can negotiate acceptable compensation. 
Patients suffering from rare disorders have adopted this approach. 
Prior to supplying their tissue to universities and industry, these patients negotiate ownership rights in any technology that arises from the research. 
This model seems fair enough: if people can exploit such natural endowments as their beauty or scientific genius, then why not their tissue? 
It may be unwise , though, because the knowledge and applications over which they retain control may have implications for other diseases. 
In such circumstances, should they further their own interests by continuing to exploiting their control, or should they further the interests of those other patients by donating their tissue? 
Global public good model . 
In this view, the human genome is a common heritage of humankind and a global public good whose benefits should be shared with all. 
Benefit-sharing may be fair in that it includes giving special assistance to research participants, such as access to medical care or to new treatments stemming from the research, but it may be unfair in failing to define the recipients of such benefits. 
In addition, the model bears an arbitrary element, as the sharing of benefits is not subject to control by the donors of tissue, much less to democratic control, and may prove self-serving for universities and industry. 
The unfair and unwise elements of these models nonetheless suggest a solution that is both fair and wise: a tissue tax. 
Instead of allowing donors to claim individual compensation for their tissue, a tax would be imposed every time a tissue-based application actually yields a profit. 
This would be fair , as it would ensure collective compensation for the use of tissue in general, rather than for individual tissue donors, and it would be wise in that it would not block scientific and technological progress. 
While universities and industry may be wary of taxation, they might prefer a tissue tax over endless negotiations with countless tissue donors over the sharing of uncertain future benefits. 
Moreover, unlike direct compensation schemes, a tissue tax does not exert undue influence on individuals or groups to donate tissue. 
And, instead of being arbitrary, a tissue tax would be subject to democratic control: no taxation without representation. 
In brief, the introduction of a tissue tax would be both a fair and a wise way to redress the double standard that currently governs the collaborative biomedical research enterprise. 


Tea Party Victory, Global Defeat 
CANBERRA – You wouldn’t expect much interest beyond the United States, or even beyond his own state, when an 80-year-old conservative legislator, who has already served six terms, loses his party’s endorsement to run yet again. 
But the crushing defeat of Senator Richard Lugar in the recent Indiana Republican primary, in a Tea Party-supported campaign of shocking mindlessness, has reverberated in capitals around the world, including my own. 
On most issues, Lugar is and always has been a natural conservative. 
In recent times, he opposed all of President Barack Obama’s major domestic legislation, including the economic stimulus package, health-care reform, and financial-services regulation, and has consistently supported anti-abortion legislation. 
With his 36-year record in the US Senate, national stature, and essentially conservative constituency, he would certainly have won again in November. 
But none of this was persuasive enough for Indiana primary voters, who backed his rival, State Treasurer Richard Mourdock, by an astonishing 20-point margin. 
The problem for Lugar was two-fold. 
First, he was of the old school that instinctively embraced compromise across party lines in the Senate on crucial issues, in order to avoid the kind of gridlock that is always potentially endemic in a presidential system (unlike a parliamentary one), where the elected executive has no guaranteed majority in the legislature. 
If party lines are strictly maintained, US presidents may be unable to pass any legislation at all, or to make any judicial or other senior appointments. 
Lugar, for example, had voted to confirm Obama’s Supreme Court nominations. 
Mourdock’s position, by contrast, was that, “Bipartisanship ought to consist of Democrats coming to the Republican point of view.” 
Second, and most alarmingly for those around the world who crave decent and intelligent international leadership from the US, Lugar was mocked by his opponents for his foreign-policy expertise and reputation as an outstanding statesman, who for decades had played an absolutely central role on arms control and disarmament issues. 
His signature achievement was joint authorship with then-Democratic Senator Sam Nunn of the 1992 Cooperative Threat Reduction program (universally known as “Nunn-Lugar”), which successfully secured and dismantled nuclear and other weapons of mass destruction in former Soviet states. 
Beyond that, Lugar had fully supported Obama’s vision, like that of Ronald Reagan before him, of a world without nuclear weapons, and his endorsement of the New START treaty with Russia, reducing the number of deployed strategic weapons, was crucial in securing its narrow ratification by the Senate last year. 
But, for Mourdock and his supporters, “The time for being collegial is past – it’s time for confrontation.” 
One television advertisement said it all about the low-rent cynicism of the Tea Party-driven campaign. 
It featured two clips of Obama saying, “I’ve worked with Republican Senator Dick Lugar to pass a law,” and, “What I did was reach out to Senator Dick Lugar.” 
The context was not explained, but what Obama said in full was this: “I’ve worked with Republican Senator Dick Lugar to pass a law that will secure and destroy some of the world’s deadliest, unguarded weapons,” and, “What I did was reach out to Senator Dick Lugar, a Republican, to help lock down loose nuclear weapons.” 
With the defeat of Lugar, and the simultaneous exit of the last Republican moderates, like Senator Olympia Snowe of Maine, who were prepared to put national interests ahead of partisanship, the Senate is unlikely to produce the 60 votes needed to ratify further US-Russia arms-control treaties, should they be negotiated. 
Moreover, the Comprehensive Nuclear Test Ban Treaty, which would replace a fragile international moratorium, cannot come into force without US Senate ratification. 
At a personal level, I am also afraid that Lugar’s defeat may be the end of an era of enormously attractive and distinctive civility in the way that America’s most senior legislators conducted themselves. 
As Australia’s foreign minister, and a global NGO head, I met Lugar many times, and, whether or not we agreed on issues, he was always a model of gentle courtesy. 
I can’t help but compare that to the occasion, not so long ago, when I accompanied my then co-chair of the International Commission on Nuclear Non-Proliferation and Disarmament, former Japanese Foreign Minister Yoriko Kawaguchi, in a call on Jon Kyl, the most ideologically fierce Senate opponent of Obama-style arms control. 
On my arrival in his office, a senior Kyl staffer, after consulting the senator, said brusquely: “We only agreed to talk to the Japanese, not you. 
Would you please leave?” 
There was nothing like a perfectly understandable, “Sorry, we misunderstood, and are only prepared now for a bilateral session. 
Can we see if we can possibly reschedule a joint meeting later?” 
I suppose that I should be grateful that he said “please.” 
But it’s the kind of experience that I had never had before in Washington, and I fear that it’s not unique. 
In the past, anguish at home and abroad about the quality of US governance – its apparent arrogance, mindless parochialism, and incapacity to deliver coherent, credible, and decent policy outcomes – has for the most part proved short-lived. 
Maybe that will be the case again. 
But the passing from the national stage of Richard Lugar has properly rung new alarm bells not only among concerned Americans, but also among policymakers far removed from the US and its partisan battles. 

Tea Time in America 
NEW YORK – Ever since the first “Tea Party” convention was held last month in Nashville, Tennessee, with Sarah Palin as one of the keynote speakers, America’s political and media establishments have been reacting with a combination of apprehension and disdain. 
The Speaker of the US House of Representatives, Nancy Pelosi, has called the Tea Party adherents Nazis, while the mainstream media tend to portray them as ignorant and provincial, a passive rabble with raw emotion but little analytical skill, stirred up and manipulated by demagogues to advance their own agendas. 
To be sure, the Tea Party’s brand of aggrieved populism – and its composition of mostly white, angry, middle-class voters – has deep roots in the United States, flaring up during times of change. 
But observers who have drawn comparisons to the Know-Nothings, the racist, paranoid, anti-Catholic, and anti-immigrant party that surged in the 1850’s, are reading the movement far too superficially. 
Indeed, those who deride and dismiss this movement do so at their peril. 
While some Tea Partiers may be racist or focused on eccentric themes – such as the validity of Barack Obama’s birth certificate – far more of them, those who were part of the original grass-roots effort, are focused on issues that have merit. 
If you actually listen to them, instead of just reading accounts transmitted through the distorting mirror of the mainstream media, you hear grievances that are profound, as well as some proposals that are actually ahead of their time. 
For example, Tea Party activists, using a group called End the Fed, were among the first to focus critical attention on the unelected and unaccountable US Federal Reserve Board. 
Now legislation is being put forward to establish greater transparency at the Fed – surely a laudable outcome. 
While those attracted to the Tea Party movement are a diverse group, some common themes emerge. 
They see a struggle for the soul of the Tea Party between true libertarians, who are worried about individual liberties, and traditional conservatives. 
Many who spoke to me directly in my Facebook community believe that Congress is utterly broken and regard faith in either of America’s major parties as naïve. 
They view the Democrats and the Republicans alike as obstacles to change, drowning out the voices of the people as they kowtow to special interests. 
They are concerned about concentrated Federal control, spiraling debt, and the loss of individual rights. 
Are they really wrong? 
After all, the movement took shape following the US government’s massive – and bipartisan – bailout of Wall Street banks. 
And, at a time when the Chinese government, America’s main creditor, has begun sending clear signals about its preferences for US domestic policy – even as it ignores American criticism of its human rights record – are the Tea Partiers merely being paranoid? 
As little as I like Sarah Palin, the fact is that entrenched lobbying and other special interests mean that a “changing of the guard” in Washington is too often only a change in branding. 
As Barack Obama submits to the pressures of a US Department of Defense in which private contractors comprise 65% of the staffing budget, proposes preventive detention of Guantánamo detainees, and perpetuates the status quo in myriad other ways, her question – “So how’s that whole hopey-changey thing workin’ out for ya?” – is not the wrong question. 
Indeed, for nearly a decade, concentration of executive power has threatened America’s system of checks and balances and given the Federal government the authority to spy on citizens, withhold information, and aggressively arrest and even Taser protesters – or to hire private contractors to do so. 
In these circumstances, the Tea Party activists’ focus on supporting states’ autonomy – and even on property rights and the right to bear arms – can seem like a prescient effort to constrain overweening corporate and military power in national government. 
That is why the elites in general are so quick to ridicule this movement. 
A movement that is genuinely populist in origin poses a threat to their own position in the power structure. 
For once, a grassroots movement has arisen that is composed of people – some with Ivy League degrees, but many without – who are taking seriously the Internet-age promise that you don’t have to yield leadership to an established class of politicians and pundits. 
This is also why the Republicans are seeking to capture the Tea Party movement’s energy for partisan purposes, overrunning it with well-paid operatives, particularly from former Representative Dick Armey’s fundraising and advocacy organization. 
Moreover, Tea Party gatherings have increasingly become a platform for Republican candidates seeking the support of a highly mobilized electoral base. 
I hope that the Republican establishment does not succeed in co-opting the Tea Party – and that the Democratic establishment does not, either. 
And I hope that the movement captures the imagination of progressives, who are equally disgusted with the corruption of the status quo, and who can agree on many thematic goals, even if their policy proposals might be different. 
At its worst, any populist movement can descend to demagoguery. 
But the Tea Party movement at its best (or in its origin) is constitutionalist. 
That is an awakening – and long overdue – sentiment in America, and one that spans the political divide. 
The Tea Party movement’s adherents are angry – and, in many respects, justifiably so – but most of them are not crazy. 
That diagnosis better suits those who prefer to ignore them. 

Teaching PIIGS to Fly 
NEW YORK – Greece’s fiscal problems are, as I have argued many times, but the tip of a global iceberg. 
For the next installment of the recent global financial crisis will be rising sovereign risk, especially in advanced economies that run massive budget deficits and accumulate large stocks of public debt as they socialize private financial losses in order to revive economic growth. 
Indeed, history suggests that severe recession and socialization of private losses often lead to an unsustainable build-up of public debt. 
Moreover, financial crises triggered by excessive debt and leverage in the private sector are followed after a few years by sovereign defaults and/or high inflation to wipe out the real value of public debts. 
Greece is also the canary in the coal mine for the euro zone, where all the PIIGS economies (Portugal, Italy, Ireland, Greece, and Spain) suffer from the twin problems of public-debt sustainability and external-debt sustainability. 
Euro accession and bull-market “convergence trades” pushed bond yields in these countries toward the level of German bunds, with the ensuing credit boom supporting excessive consumption growth. 
Most of these economies were suffering a loss of their export markets to low-wage Asia. 
A decade of wage growth exceeding productivity gains led to real appreciation, loss of competitiveness, and large current-account deficits. 
In Spain and Ireland, a housing boom exacerbated external imbalances by reducing national saving, pumping up consumption, and boosting residential investment. 
And the euro’s appreciation in recent years – driven in part by the European Central Bank’s excessively tight monetary policy – was the final nail in the competitiveness coffin. 
Thus, restoring competitiveness, not just fiscal adjustment, is necessary to revive sustained growth. 
There are only three ways to accomplish this. 
A decade of deflation would work, but it would be accompanied by economic stagnation, thus becoming – as in Argentina earlier this decade – politically unsustainable, leading to devaluation (exit from the euro) and default. 
Accelerating structural reforms that increase productivity while keeping the growth of public and private wages in check is the right approach, but it is likewise politically difficult to implement. 
Or a weaker euro could be had if the ECB were willing – quite unlikely – to ease monetary policy further to allow real depreciation. 
But a weaker euro would not eliminate the need for structural reforms; otherwise, the benefits would go mostly to countries like Germany that undertook painful reforms to restore competitiveness via a reduction in relative unit labor costs. 
A shadow or actual International Monetary Fund program would vastly enhance the credibility of a policy of fiscal retrenchment and structural reforms. 
Under the former, the European Commission would impose fiscal and structural conditionality on Greece, while the EU and/or ECB would provide financing, which would be absolutely necessary, because announcing even the best conceived reform program would not be sufficient to restore lost policy credibility. 
Markets will remain skeptical, especially if implementation leads to street demonstrations, riots, strikes, and parliamentary foot-dragging. 
Until credibility is re-established, the risk of a speculative attack on public debt – reflected in the current rise in credit default swap spreads – would linger, given the ongoing budget deficit and the need to roll over maturing debt. 
Since the European Union has no history of imposing conditionality, and ECB financing could be perceived as a form of bailout, a formal IMF program would be the better approach. 
The most successful programs undertaken in the presence of a risk of a fiscal and/or external debt financing crisis were those – as in Mexico, Turkey, and Brazil – where a large amount of liquidity/financing support by the IMF beefed up an increasingly credible commitment to adjustment and reform. 
Loan guarantees from Germany and/or the EU are less desirable than an IMF program, as it is very hard to design and credibly implement conditionality in such guarantees. 
IMF support, on the other hand, is paid out in tranches and is conditional on achieving various policy targets over time. 
The Greek authorities and the EU had until recently denied the need for financing, owing to concern that it would signal weakness and create a stigma. 
That was a grave mistake. 
Fiscal adjustment and structural reform without financing is more fragile and liable to fail without a war chest of liquidity to prevent a run on public debt while the appropriate policies are implemented and gradually gain credibility. 
At the same time, if Greece does not fully adjust its policies to restore fiscal sustainability and competitiveness, a partial bailout by the EU and the ECB will still be likely in order to avoid the risk of contagion to the rest of the euro zone and the consequent threat to the monetary union’s survival. 
A default by Greece, after all, could have the same global systemic effects as the collapse of Lehman Brothers did in 2008. 
Sovereign spreads are already pricing the risk of a domino effect from Greece to Spain, Portugal, and other euro-zone members. 
The EU and the ECB are worried about the moral hazard of any “bailout.” 

Leaving the Data Dark Ages 
PARIS – During the High Medieval Period, from the eleventh to the thirteenth century, serfs in France had no property rights. 
Instead, those with land had to hand over most of what they produced to the local seigneur (lord) who could confiscate their land upon their death (“mainmorte”). 
In return, they did receive services, such as protection from conflict and access to a mill or village oven. 
They had little choice: opting out of the deal and, say, building their own mill would have been strictly forbidden. 
This dynamic arrangement – which continued until the French Revolution, when peasants gained full property rights – looks a lot like consumers’ relationships with Internet firms today. 
In this age of digital feudalism, we have little choice but to agree, with one click, to an impenetrably long and convoluted set of terms and conditions, which subjects us to constant monitoring by the platforms we use. 
The platforms collect our personal data and sell them to many more actors, including advertising companies that can then serve us targeted ads. 
For Internet firms, this is a highly lucrative practice: the value of users’ personal data is expected to reach 8% of European GDP by 2020. 
In exchange, the firms offer “free services,” such as social media, to the digital serfs who produce the data. 
This is not a “sharing economy,” but an optimized extractive economy – based on the near-infinite availability of raw material (our personal data) – that enriches a few companies at the expense of consumers. 
And, like the economy of the High Medieval Period, it is ripe to be revolutionized through property rights. 
Property rights have protected and empowered individuals for millennia, evolving as technology does. 
For example, the printing revolution brought intellectual property rights (thank you, Beaumarchais), and the Industrial Revolution popularized the patent system. 
What the digital revolution must bring is the right to personal data ownership, including the classic elements of property rights: usus (I use my data as I wish), abusus (I destroy my data as I wish, without any fancy “right to be forgotten”), and fructus (I sell my data for profit if I wish). 
Personal data ownership would spur the emergence of a personal-data market, with some of the world’s 3.5 billion Internet users claiming remuneration for sharing their data, according to the value they produce. 
Other users, prioritizing privacy over profit, would pay a fair market price to benefit from a service anonymously. 
This is what the US tech executive Sheryl Sandberg was hinting at recently, when she suggested that a full-blown opt-out from data collection on Facebook would be a “paid product.” 
The change would be profound, and the practical challenges could be overcome with existing technological solutions. 
For example, to support data management, users could each have a “smart account” that stores the information and the contractual conditions for its use. 
As for pricing, intermediaries would likely emerge to negotiate directly with the big platforms on behalf of millions of users, leading over time to the creation of a proper marketplace. 
Effective legal implementation of the right to personal data ownership will certainly take work. 
Yet personal data ownership remains a more rational and realistic solution than other approaches that have been put forward, such as the right to “informational self-determination” established by Germany’s constitutional court in 1983. 
The potential benefits of giving individuals more control over their digital lives extend beyond economic fairness. 
Such a system could also crack open the much-maligned “filter bubbles” that have arisen as a result of social-media algorithms, which show users content that reinforces their existing biases and beliefs. 
In this sense, personal data ownership could help to ease the dangerous political polarization that now afflicts many countries. 
Today, not a single legal system recognizes personal data ownership. 
But the idea is gaining ground all over the world. 
Brittany Kaiser – an executive-turned-whistleblower at Cambridge Analytica, the political data firm that allegedly misused users’ data from Facebook and other platforms to influence political campaigns – now advocates that users treat their data as property, just like their houses. 
Owning a house doesn’t make you a greedy real-estate speculator; it allows you to participate fully in what the philosopher John Rawls called a “property-owning democracy.” 
The same goes for data. 
In France, the think tank I created, GenerationLibre, issued a 150-page report on personal data ownership, which prompted a fierce public debate. 
At the European level, the General Data Protection Regulation, which has just come into force, prepares the ground for property rights by guaranteeing the portability of personal data. 
In the United States, the author and researcher E. Glen Weyl, together with legendary virtual reality pioneer Jaron Lanier and others, recently argued that data should be treated (and remunerated) as labor. 
(I would prefer to treat data as capital, as they originate from our self-owned personality, but this is essentially just semantics.) 
And, on a practical level, a growing number of startups are developing data-monetization services. 
In his bestselling book Homo Deus, the historian Yuval Noah Harari anticipates the advent of “dataism,” whereby personal free will is sacrificed at the altar of the algorithm. 
But humans do not have to be at the mercy of data flows. 
By establishing personal data ownership, the very notion of individuality could be fortified, bolstering the liberal values that have made our civilization succeed. 

When Will Tech Disrupt Higher Education? 
CAMBRIDGE – In the early 1990s, at the dawn of the Internet era, an explosion in academic productivity seemed to be around the corner. 
But the corner never appeared. 
Instead, teaching techniques at colleges and universities, which pride themselves on spewing out creative ideas that disrupt the rest of society, have continued to evolve at a glacial pace. 
Sure, PowerPoint presentations have displaced chalkboards, enrollments in “massive open online courses” often exceed 100,000 (though the number of engaged students tends to be much smaller), and “flipped classrooms” replace homework with watching taped lectures, while class time is spent discussing homework exercises. 
But, given education’s centrality to raising productivity, shouldn’t efforts to reinvigorate today’s sclerotic Western economies focus on how to reinvent higher education? 
One can understand why change is slow to take root at the primary and secondary school level, where the social and political obstacles are massive. 
But colleges and universities have far more capacity to experiment; indeed, in many ways, that is their raison d’être. 
For example, what sense does it make for each college in the United States to offer its own highly idiosyncratic lectures on core topics like freshman calculus, economics, and US history, often with classes of 500 students or more? 
Sometimes these giant classes are great, but anyone who has gone to college can tell you that is not the norm. 
At least for large-scale introductory courses, why not let students everywhere watch highly produced recordings by the world’s best professors and lecturers, much as we do with music, sports, and entertainment? 
This does not mean a one-size-fits-all scenario: there could be a competitive market, as there already is for textbooks, with perhaps a dozen people dominating much of the market. 
And videos could be used in modules, so a school could choose to use, say, one package to teach the first part of a course, and a completely different package to teach the second part. 
Professors could still mix in live lectures on their favorite topics, but as a treat, not as a boring routine. 
A shift to recorded lectures is only one example. 
The potential for developing specialized software and apps to advance higher education is endless. 
There is already some experimentation with using software to help understand individual students’ challenges and deficiencies in ways that guide teachers on how to give the most constructive feedback. 
But so far, such initiatives are very limited. 
Perhaps change in tertiary education is so glacial because the learning is deeply interpersonal, making human teachers essential. 
But wouldn’t it make more sense for the bulk of faculty teaching time to be devoted to helping students engage in active learning through discussion and exercises, rather than to sometimes hundredth-best lecture performances? 
Yes, outside of traditional brick-and-mortar universities, there has been some remarkable innovation. 
The Khan Academy has produced a treasure trove of lectures on a variety of topics, and it is particularly strong in teaching basic mathematics. 
Although the main target audience is advanced high school students, there is a lot of material that college students (or anyone) would find useful. 
Moreover, there are some great websites, including Crash Course and Ted-Ed, that contain short general education videos on a huge variety of subjects, from philosophy to biology to history. 
But while a small number of innovative professors are using such methods to reinvent their courses, the tremendous resistance they face from other faculty holds down the size of the market and makes it hard to justify the investments needed to produce more rapid change. 
Let’s face it, college faculty are no keener to see technology cut into their jobs than any other group. 
And, unlike most factory workers, university faculty members have enormous power over the administration. 
Any university president that tries to run roughshod over them will usually lose her job long before any faculty member does. 
Of course, change will eventually come, and when it does, the potential effect on economic growth and social welfare will be enormous. 
It is difficult to suggest an exact monetary figure, because, like many things in the modern tech world, money spent on education does not capture the full social impact. 
But even the most conservative estimates suggest the vast potential. 
In the US, tertiary education accounts for over 2.5% of GDP (roughly $500 billion), and yet much of this is spent quite inefficiently. 
The real cost, though, is not the squandered tax money, but the fact that today’s youth could be learning so much more than they do. 
Universities and colleges are pivotal to the future of our societies. 
But, given impressive and ongoing advances in technology and artificial intelligence, it is hard to see how they can continue playing this role without reinventing themselves over the next two decades. 
Education innovation will disrupt academic employment, but the benefits to jobs everywhere else could be enormous. 
If there were more disruption within the ivory tower, economies just might become more resilient to disruption outside it. 

Is Big Tech Destroying Retail Markets? 
WASHINGTON, DC – Information technology is not just transforming markets; it is also making them ubiquitous, particularly for household consumers. 
From pretty much anywhere in the world, one can now search out goods and services, compare prices from multiple sellers, and give detailed shipping and delivery instructions, all with a mouse click or a screen tap. 
No doubt, this is a dream come true for anyone who grew up shopping in real, hands-on markets, with sellers displaying their wares on store shelves, on public squares, or along dusty roads. 
In many cases, routine purchases required long waits or extensive bargaining. 
But with online markets, savings are generated in many dimensions, and transaction costs are sharply reduced at all stages of the process. 
Online markets have the potential to improve consumer welfare substantially, by fueling competition on price, efficiency, and customer experience, whether through search engines or single platforms such as Amazon. 
And if consumers spend smaller shares of their disposable income on each purchase they make, they will have room to consume more, thus boosting overall economic activity. 
But are online markets meeting this potential? 
If anything, the description above is already dated. 
Nowadays, online retailers use consumers’ Internet activities and other personal data to deliver “targeted pricing.” 
To take one particularly controversial example, airlines now use travelers’ data to customize ticket prices in ways that essentially cancel out the savings once offered by online markets. 
Indeed, if you search online for a more expensive car or a more expensive vacation, that fact will be documented by tracking cookies or other means of online surveillance. 
And with these data, digital advertisers and retailers will offer you more expensive watches, home furnishings, or airline tickets than they would to a lower-income user searching within the same categories. 
And in some cases, they might even offer different prices to different people for the same good or service. 
Part of the segmentation of online markets involves web companies testing price points to estimate precisely the demand curve and its links to household characteristics. 
For example, a May 2017 article in The Atlantic notes that, “As Christmas approached in 2015, the price of pumpkin-pie spice went wild. … Amazon’s price for a one-ounce jar was either $4.49 or $8.99, depending on when you looked.” 
This form of price discrimination is legal as long as it does not occur on the basis of race, ethnicity, gender, or religion. 
Taken to the extreme, it means that data about our preferences, incomes, and spending patterns could soon be used to determine an individually calibrated price for all transactions. 
In that scenario, 100% of consumer surplus could potentially be extracted 100% of the time. 
To be sure, price discrimination will not happen for every good and service, and the trend could be tempered by competition from offline retailers or new entrants vying for market share by offering lower prices to everyone. 
Alternatively, the data collected in some industries could become so widely shared across competing firms that they will all converge on a single price for each individual. 
In fact, companies today are probably already facing this kind of price segmentation, especially those that have amassed a lot of public data. 
This suggests that markets could potentially become extremely fragmented, such that consumers’ choices will be strictly limited to the offerings that have been selected according to their data profiles. 
As any student of economics understands, this kind of situation decreases overall welfare, because every consumer will be forced to pay the maximum of what they are willing to spend for each good or service they purchase, keeping nothing “extra” for themselves. 
Making matters worse, rapidly rising capital and skill requirements for production, among other factors, is sustaining a trend toward less competition among companies across a wide range of sectors in advanced economies. 
This, together with the systematic “extraction” of consumer surplus, will have far-reaching macroeconomic implications, particularly through changes in private consumption patterns. 
For consumers, the slice of the economic pie made available by their disposable incomes will shrink in real terms, leading to a fall in aggregate demand. 
Thus, at the end of the day, there will be less for everyone. 
Amid the ongoing debate about how the dominant tech firms should and should not be allowed to use personal data collected from users online, many of these firms have continued to decide these questions for themselves – and, by extension, for the rest of us, too. 
For the sake of social welfare in the years and decades ahead, we must ensure that these decisions are compatible with the creation and maintenance of healthy, competitive markets. 
After all, a system that benefits consumers benefits everyone. 

The Tech Literacy Imperative 
DAVOS – In many parts of the world, young children grow up surrounded by technology. 
At their fingertips – literally – lies a limitless amount of entertainment, gaming, learning, and social networking. 
Their world has always been connected. 
They learn to scroll before they can walk. 
And yet, as confident as they may be using technology, too many children have no idea how it all works. 
Nor do they fully appreciate how it underpins their lives – or how it will shape their futures. 
I think of this as the tech literacy paradox. 
Today’s children may be great consumers of technology, but rarely are they truly tech literate. 
They may look like savvy digital natives, but their knowledge is only screen-deep. 
They are passive users, not active creators. 
And most of them have little real interest in finding out how the technology on which they depend actually functions. 
This has important implications. 
Economies are undergoing radical shifts in terms of how they produce, distribute, and consume goods and services. 
Every aspect of life and work is changing. 
Greater tech literacy will be essential to ensure that the human implications of the ongoing Fourth Industrial Revolution are positive. 
If young people are to participate fully in our increasingly tech-enabled world, greater numbers of them will have to be tech literate. 
If they are to be empowered citizens, not just beguiled consumers, they will need to understand how technology affects their lives and prospects. 
Not only will there be more tech jobs in the future; increasingly, more jobs will have a tech dimension to them, especially as scientific advances play a major role in solving some of society’s biggest challenges – climate change, health care, poverty, and inequality. 
That is why BT has made a long-term commitment to use our skills and capabilities to help build a culture of tech literacy. 
We want young people to know that they will be the creators and builders of our future – in every sense. 
We want them to get excited about looking beyond the screen, to make and do stuff. 
That means learning to code, of course. 
But it also means becoming fluent in computational thinking and problem solving. 
And, perhaps most important, it means becoming an engaged tech citizen. 
For example, all young people should understand who has access to their personal data, how it is being used, and why that matters. 
Accomplishing this will not be easy. 
It will take more than simply making sure that children have access to iPads. 
Any initiative to boost tech literacy must focus on three areas. 
First, kids must be inspired to learn about the technology they use every day; they must “connect” with tech concepts and find them exciting. 
At BT, we are collaborating with tech entrepreneurs and education thinkers to develop fresh and creative ways to engage young people’s innate curiosity. 
Second, teachers must be supported, as many do not feel confident to teach tech literacy. 
We can help with that. 
Already, we have engaged with thousands of teachers in the United Kingdom; in the last school year, we reached nearly 350,000 primary-school children, and we aim to reach five million by 2020. 
We have also collaborated with education innovators at MIT to bring new coding tools into classrooms. 
Third, schools must be properly equipped. 
Making sure students have access to the latest technology is a challenge even for advanced countries. 
In the UK, we are working to ensure that our high-speed fiber broadband connects the hardest-to-reach schools. 
And we are using our expertise to help teaching professionals who are eager to make tech an integral part of schools’ everyday life. 
A successful tech literacy program requires a long-term, sustained commitment to all three pillars of this approach. 
We expect it will take a school generation to realize the cultural shift we believe is necessary. 
Previous industrial revolutions unlocked social progress only when they were accompanied by changes in education – in particular, concerted efforts to boost literacy and numeracy. 
If we want everybody to benefit from the radical upheavals transforming the world’s economies, further changes in education will be needed. 
Among the most important of these will be those that build a strong culture of tech literacy. 

Recovering the Promise of Technocracy 
SINGAPORE – The prevailing mood nowadays is one of pessimism. 
After a year in which Donald Trump was elected President of the United States and the United Kingdom voted to leave the European Union, many are anticipating more populist victories – and damaging policies – in 2017. 
Add to this slow global economic growth and rising geopolitical tensions, and it is easy to conclude that the world is headed down the same path of nationalism and protectionism that sparked World War I. 
But this misses the point. 
The rise of populism is merely a symptom of political leaders’ failure to address voters’ economic grievances. 
Instead of obsessing about the degeneration of democracy at the hands of political leaders who cannot fulfill their promises to frustrated voters, we must define a better form of government that can address those grievances. 
I propose a direct technocracy. 
As I explain in my new book Technocracy in America, a direct technocracy would ensure that regular public consultation shapes decision-making by committees of accountable experts. 
This approach combines the virtues of direct democracy with the benefits of meritocratic technocracy, which leverages data to make long-term, utilitarian decisions. 
Simply put, a direct technocracy marries good ideas and efficient execution. 
This system isn’t entirely hypothetical. 
Both the hyper-democratic Switzerland and the ultra-technocratic Singapore apply its principles effectively. 
And their records are impressive: both countries boast good health, ample wealth, low corruption, high employment, national military and civil services, and massive state investment in innovation. 
They respond efficiently to citizens’ needs and preferences, apply international experience to domestic policymaking, and use data and alternative scenarios for long-term planning. 
Combining the best elements of these two regimes would produce an ideal system – the kind of system that could actually respond to the demands of the disillusioned US voters who elected Trump. 
But progress toward implementing such a system would require the American political mindset to change substantially. 
The American narrative tends to confuse politics with governance, democracy with delivery, and process with outcomes. 
But the “will of the people” is not just to repeat their desires over and over without results. 
Good governments are equally focused on inputs and outputs. 
Their legitimacy comes both from the process by which they are selected and the provision of what citizens universally proclaim they want: solid infrastructure, clean air and water, ease of doing business, good schools and decent housing, freedom of expression, and employment opportunities. 
Americans also tend to view meritocracy and technocracy as “rule by elites” – and, specifically, liberal elites. 
But technocracy is not a liberal phenomenon. 
The pedigreed intellectuals from liberal think tanks and universities who occupied positions of influence in President Barack Obama’s administration wouldn’t necessarily qualify as true professional technocrats. 
If they did, the Wall Street bailout engineered by then-Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner would have been accompanied by an equally robust and unconventional policy for Main Street. 
By contrast, in countries like Sweden and South Korea, technocratic fiscal-transfer programs have ensured that the bottom 20% of earners maintain a disposable income that keeps pace with inflation, and therefore enables them to continue to participate economically. 
The governments of Switzerland and Singapore can hardly be called liberal, but they have undertaken similar measures on wages and subsidies. 
Liberal or not, the “elites” to whom Trump voters delivered such a strong rebuke in the presidential election were not technocrats. 
On the contrary, many of them – on the left and the right – are self-serving and out-of-touch political operators. 
Whereas the American system allows for frequent near-shutdowns of government, a genuine technocracy would keep government functioning, even when elected leaders do nothing. 
It would also be marked by high levels of bureaucratic autonomy and impartial hiring and promotion – areas in which the US had been backsliding. 
Moreover, a real technocracy would boast a robust civil service trained in bureaucratic management techniques that use data to measure and optimize welfare. 
But the US federal civil service has steadily been weakened over the years, especially since a Republican-controlled Congress implemented deep cuts in the 1990s. 
Clearly, the problem that the US faces is not too much technocracy, but too little. 
And it is not just the US. 
Britain’s once-vaunted civil service has also atrophied since the 1970s, and technocratic leaders would have seen immediately that Europe’s inhumane and counterproductive post-crisis austerity policies could not create jobs, raise incomes, generate taxes, or boost consumption. 
Instead of allowing politics to masquerade as meritocracy, we must demand utilitarian governance. 
Tossing out self-serving elites will not work, if we replace them with clueless populists peddling “alternative facts.” 
The real solution is to increase our reliance on actual facts and genuine expertise; we just have to ensure that we are listening to real experts, to professional technocrats who have advanced in their careers on the basis of merit. 
For example, in the US, reliable technocrats would push through the worker re-skilling programs that were promised as long ago as the early 2000s to train the labor force to meet the changing demands of the economy. 
Such programs, not individual deals to save a few hundred manufacturing jobs for a few more years, will prepare American workers to improve their economic lot in the long term. 
In Europe, forward-looking technocrats would pursue further integration and mutualize eurozone debt. 
They would reject the current painful unraveling, which will neither jump-start growth nor enable Europe to remain competitive and influential on the world stage. 
Just as there is no perfect democracy, there is no perfect technocracy. 
But, in an increasingly complex world, meritocratic and utilitarian technocracy is likely to produce far better outcomes than today’s divisive and fact-averse populism. 

A Tale of Two Realities 
MADRID – The opening line of Charles Dickens’s A Tale of Two Cities retains its universality to this day. 
“It was the best of times, it was the worst of times,” Dickens writes, “it was the age of wisdom, it was the age of foolishness, … it was the spring of hope, it was the winter of despair.” 
Dickens’s classic novel, set in London and Paris during the French Revolution, decries both the social injustices of the despotic ancien régime and the excesses of the French revolutionaries. 
When asked his opinion of the French Revolution almost two centuries later, former Chinese Premier Zhou Enlai reportedly answered that it was “too early to say.” 
That quip – though possibly the result of a misunderstanding – perfectly captures Dickens’s own ambivalence about the period of which he wrote. 
The Enlightenment ideals that inspired the French to rise up against Louis XVI also drove the American Revolution. 
And both were set against the backdrop of another sea change: the onset of industrialization. 
The combination of more liberal political regimes and transformational scientific advances inaugurated the most prosperous period in the history of humankind. 
The late British economist Angus Maddison once estimated that whereas global per capita GDP did not even double between 1 AD and 1820, it increased more than tenfold between 1820 and 2008. 
And this spectacular growth has been accompanied by equally extraordinary improvements in a wide range of socioeconomic indicators. 
Global average life expectancy, for example, has risen from 31 to almost 73 years in just two centuries. 
Two centuries ago, the science and medical communities had not yet accepted the germ theory of disease, and the smell of beef was commonly thought to cause obesity. 
Today, such beliefs seem grotesque, owing to rapid progress in our scientific understanding. 
Not only can we now read the human genome; we are also learning how to edit and write it. 
For Harvard psychology professor Steven Pinker, such achievements are signs that “the Enlightenment is working.” 
Moreover, Pinker argues that more moral progress has been achieved in the last few centuries than most macroeconomic measurements can reflect. 
For example, he points to the expansion – both geographic and substantive – of protections for individual and collective rights, as well as an overall reduction in violence. 
The sheer magnitude of the Enlightenment’s achievements tends to be undervalued, because we are prone to remembering and normalizing catastrophes rather than quotidian improvements. 
But while this bias is detrimental to decision-making, so, too, is excessive complacency. 
After all, there are plenty of reasons – many of which are secondary effects of the Enlightenment – for people to feel uneasy about the future. 
In his 2013 book, The Great Escape, Nobel laureate economist Angus Deaton shows how progress in reducing aggregate privation, famine, and premature death over the past 250 years has left many social groups behind. 
While inequality at the global level has recently been mitigated by the economic rise of countries like China, numerous studies find that inequality within countries has been increasing. 
In countries such as the United States, broad segments of the population lack access to adequate medical treatments, and even democracy seems to be eroding. 
Today’s conventional wisdom links the emergence of populist movements around the world, including the election of President Donald Trump in the US, to the people who have missed out on the benefits of globalization. 
Yet many of Trump’s policies – not least slashing taxes for the rich – are intended to perpetuate the privileges of the economic elite. 
Trump has done very little to address the fears of those who feel left behind, but he is attempting a classic bait-and-switch to disguise this fact. 
Accordingly, he singles out China as the source of Americans’ economic woes. 
The result of Trump’s “America First” approach and fear mongering about all things foreign has been to undermine global cooperation. 
Nationalism, one of the potentially harmful legacies of the late-eighteenth-century social revolutions, has made a comeback on the heels of rising nativist and xenophobic fears. 
Likewise, the Enlightenment’s scientific and technological legacy has not been wholly positive. 
The theories of Albert Einstein and the discovery of fission in 1938 made nuclear power possible, but also led to the bombings of Hiroshima and Nagasaki, and to the disasters at Chernobyl and Fukushima. 
Similarly, technological progress has left critical national infrastructure potentially vulnerable to cyberattacks. 
And, as the 2008 crisis revealed, financial engineering carries many risks of its own. 
All of these dangers are accompanied by what is perhaps the greatest threat humanity has ever faced: climate change. 
The peculiarity of this threat lies in the fact that it has not manifested in the form of a single, sudden shock. 
Rather, it is a cumulative phenomenon, which we might still be able to mitigate. 
Just as technological advances got us into this predicament, so might they rescue us from it. 
After all, technological innovation, along with an international effort to adopt the 1987 Montreal Protocol, is how the world put a stop to the erosion of the ozone layer. 
Fortunately, scientific rationality is capable of creating tools to remedy its own excesses. 
Unfortunately, however, the state of political leadership today may mean that these tools remain unused. 
The world is in desperate need of leaders who are willing to maximize the benefits of science and technology through collective management and international cooperation. 
Without such leadership, what is quantifiably the best of times could very well become the worst. 

Technological Cooperation 
In early February, the United States National Academy of Engineering released a report on “Grand Challenges for Engineering in the 21st Century.” 
The goal is to focus attention on the potential of technology to help the world address poverty and environmental threats. 
The list includes potential breakthroughs such as low-cost solar power, safe disposal of CO2 from power plants, nuclear fusion, new educational technologies, and the control of environmental side effects from nitrogen fertilizers. 
The report, like the Gates Foundation’s similar list of “Grand Challenges” in global health, highlights a new global priority: promoting advanced technologies for sustainable development. 
We are used to thinking about global cooperation in fields such as monetary policy, disease control, or nuclear weapons proliferation. 
We are less accustomed to thinking of global cooperation to promote new technologies, such as clean energy, a malaria vaccine, or drought-resistant crops to help poor African farmers. 
By and large, we regard new technologies as something to be developed by businesses for the marketplace, not as opportunities for global problem solving. 
Yet, given the enormous global pressures that we face, including vastly unequal incomes and massive environmental damage, we must find new technological solutions to our problems. 
There is no way, for example, to continue expanding the global use of energy safely unless we drastically alter how we produce electricity, power automobiles, and heat and cool our buildings. 
Current reliance on coal, natural gas, and petroleum, without regard for CO2 emissions, is now simply too dangerous, because it is leading to climate changes that will spread diseases, destroy crops, produce more droughts and floods, and perhaps dramatically raise sea levels, thereby inundating coastal regions. 
The National Academy of Engineering identified some possible answers. 
We can harness safe nuclear energy, lower the cost of solar power, or capture and safely store the CO2 produced from burning fossil fuels. 
Yet the technologies are not yet ready, and we can’t simply wait for the market to deliver them, because they require complex changes in public policy to ensure that they are safe, reliable, and acceptable to the broad public. 
Moreover, there are no market incentives in place to induce private businesses to invest adequately in developing them. 
Consider carbon capture and sequestration. 
The idea is that power plants and other large fossil fuel users should capture the CO2 and pump it into permanent underground storage sites, such as old oil fields. 
This will cost, say, $30 per ton of CO2 that is stored, so businesses will need an incentive to do it. 
Moreover, public policies will have to promote the testing and improvement of this technology, especially when used at a large scale. 
New kinds of power plants will have to be built to make carbon capture economical, new pipelines will have to be built to transport the CO2 to storage sites, and new monitoring systems will have to be designed to control leaks. 
Likewise, new regulations will be needed to ensure compliance with safety procedures, and to assure public support. 
All of this will take time, costly investments, and lots of collaboration between scientists and engineers in universities, government laboratories, and private businesses. 
Moreover, this kind of technology will be useful only if it is widely used, notably in China and India. 
This raises another challenge of technological innovation: we will need to support the transfer of proven technologies to poorer countries. 
If rich countries monopolize new technologies, the goal of worldwide use to solve worldwide problems will be defeated. 
Thus, technological developments should involve a collaborative international effort from the start. 
All of this will require a new global approach to problem solving. 
We will need to embrace global goals and then establish scientific, engineering, and political processes to support their achievement. 
We will need to give new budgetary incentives to promote demonstration projects, and to support technology transfer. 
And we will have to engage major companies in a new way, giving them ample incentives and market rewards for success, without allowing them to hold a monopoly on successful technologies that should be widely adopted. 
I believe that this new kind of global public-private partnership on technology development will be a major objective of international policy making in the coming years. 
Look for new global cooperative approaches to clean energy systems, medicines and vaccines, improved techniques for fish farming, drought-and-temperature resistant crop varieties, high-mileage automobiles, and low-cost irrigation techniques. 
Rich countries should fund these efforts heavily, and they should be carried out in collaboration with poor countries and the private sector. 
Successful technological breakthroughs can provide stunning benefits for humanity. 
This will be an exciting time to be a scientist or engineer facing the challenges of sustainable development. 

Digital Disruption’s Silver Lining 
SEATTLE – Technology is often oversold as either a panacea for the world’s problems or an unshakeable curse inflicting disruption and displacement on the most vulnerable. 
But historically, neither of these characterizations is accurate. 
From the steam engine to the personal computer, inventions have transformed societies in complex ways. 
On balance, however, technology has always created more jobs and economic opportunities than it has destroyed. 
That trend is likely to continue. 
Why am I so upbeat? 
Because everywhere I look, leaders are repositioning their economies to ensure that technological change and automation are assets rather than liabilities. 
As the University of Oxford-based Pathways for Prosperity Commission recently observed, with “optimism and collective action,” so-called frontier technologies can empower even the poorest countries. 
For much of modern history, export-driven industrialization and natural-resource wealth were viewed as the only mechanisms for sustained growth in the developing world. 
But today, new technologies, and the ability to combine them with old innovations, have given people more say over their economic fortunes. 
For example, the Africa Soil Information Service, which is funded by the Bill & Melinda Gates Foundation, has combined remote sensing software and open-source data to lower the cost of soil mapping by 97%. 
This has given Africa’s smallholder farmers new tools for making evidence-based decisions about their operations, thereby increasing crop yields and reducing operating expenses. 
Similarly, Twiga Foods in Kenya is using technology to optimize its supply chain by matching rural fruit and vegetable growers with small- and medium-size vendors in Nairobi. 
Twiga’s approach has helped farmers access more lucrative markets, increased consumer choice, and dramatically reduced post-harvest losses and waste. 
Digital inclusion can be a powerful force, particularly for women. 
Go-Jek, a ride-sharing and food-delivery service In Indonesia, has increased drivers’ income by an average of 44% while connecting many of its suppliers, who are usually women, to banking services for the first time. 
To be sure, capitalizing on the transformative potential of technology will require investing more money in people, particularly in women and children. 
As we argued in this year’s Gates Foundation Goalkeepers Report, better health care and education – two pillars of the World Bank’s “human capital index” – can unlock productivity and innovation, reduce poverty, and generate prosperity. 
These gains are essential to countries’ ability to achieve the targets set by the United Nations Sustainable Development Goals. 
Harnessing technology will also require sensible economic reforms, better infrastructure, more capable institutions, and strategies to deliver digital solutions to marginalized populations. 
Some countries are already taking these steps. 
Indonesia, for example, has launched an ambitious program to connect an additional 100 million people to broadband, a recognition of the importance that connectivity plays in fostering economic opportunity. 
And yet, for the bulk of the world’s “bottom billion,” basic phone and Internet services remain prohibitively expensive. 
That is why governments, donors, and the private sector must work together to create business and pricing models that allow for cost recovery while still providing an adequate level of digital service to the poorest consumers. 
One poverty-reduction strategy worth exploring is communal access to technology. 
Affordability is not the only factor that keeps technology out of the hands of the poor. 
The digital divide mirrors larger patterns of social discrimination, especially for women. 
Wherever women live, they are about 40% less likely than men to have ever used the Internet, which suggests that social inequities are also driving disparities in digital access. 
Closing this gap is vitally important. 
When women have access to the full range of digital services – from mobile banking to telemedicine – they are generally wealthier, healthier, and better educated. 
As policymakers in both developed and developing countries make decisions and investments that will shape the landscape in which technological change unfolds, it is gratifying to see countries engaging in meaningful dialogue about their digital futures. 
As long as citizens who understand technology and its ramifications are included in these conversations, it is possible to design solutions that meet everyone’s needs. 
Today’s cutting-edge technologies are evolving at a dizzying speed. 
But with foresight and preparation, the world can minimize the disruption they will inevitably cause to ensure lasting and inclusive growth. 
If we coordinate our investments in people with our spending on innovation, the new “digital age” will leave no one behind. 

The Age of Adaptation 
GENEVA – The world needs to stop looking backward. 
Since the 2008 financial crisis, we have wasted far too much energy trying to return to the days of rapid economic expansion. 
The flawed assumption that the post-crisis world's challenges were only temporary has underpinned policies that have yielded only lackluster recoveries, while failing to address key problems like high unemployment and rising inequality. 
The post-crisis era is over, and the “post-post-crisis world" is upon us. 
It is time to adopt a new framework of realistic solutions that promote shared prosperity within the global economy of today and tomorrow. 
In this new era, economic growth will occur more slowly – but potentially more sustainably – than it did before the crisis. 
And technological change will be its driving force. 
Indeed, just as the Industrial Revolution transformed the productive potential of societies in the nineteenth and twentieth centuries, a new wave of technological breakthroughs is reshaping economic and even social dynamics today. 
The difference is that this revolution's impact will be even greater. 
One outstanding feature of this revolution is the scope and scale of its disruptiveness. 
The Industrial Revolution occurred relatively slowly, like long waves in the ocean; though it began in the 1780s, its impact was not really felt until the 1830s and 1840s. 
The current technological revolution, by contrast, hits economies like a tsunami, with little warning and inexorable force. 
The pace of change has been accelerated by the interconnected nature of today's world. 
Technological progress is occurring within a complex and deeply integrated ecosystem, meaning that it simultaneously affects economic structures, governments, security arrangements, and people's daily lives. 
In order to prepare a country to reap the benefits of rapid, far-reaching change, policymakers must account for the entirety of the ecosystem in which it is taking place, ensuring that government, business, and society all adjust to every shift. 
In other words, competing in the twenty-first century economy will require relentless adaptation. 
Nothing is off limits. 
Every practice and standard will have to be rethought. 
Every industry will be at risk of being turned on its head. 
The car-sharing service Uber, for example, has not only changed how people get around; it also appears to be leading a retail revolution in which goods and services are “Uberized" – customers pay to use them, not own them. 
The manufacturing industry, meanwhile, will be similarly transformed by 3D printing technology. 
Supply chains will be eliminated or reshaped – an expectation that the CEO of a major aluminum manufacturer recently described. 
He knows that, in order to succeed, firms will have to anticipate and respond to such trends. 
Gone are the days of big fish eating small fish. 
In the post-post-crisis world, fast fish will dominate – and slow fish will die. 
But the current technological revolution is not just reshaping what we produce and how we produce it; it is fundamentally reshaping who we are – our habits, interests, and worldviews. 
Consider the vast difference between the way young people and older generations interpret privacy in the Internet age. 
It is also extending our lifespans, with one in two babies born today in Switzerland expected to live more than 100 years. 
On balance, the impact of technological progress will be positive. 
But that does not negate the massive challenge it will pose. 
For example, job automation will ultimately propel more people toward higher-paying, more productive employment that is better suited to the new era of “talentism," when human imagination and innovation, not capital or natural resources, drive economic growth. 
But, if workers fail to acquire the skills to fill these new positions, they will be left behind. 
Government, more than any other sector, can shape the impact of technological change, ensuring that challenges are addressed and opportunities are seized. 
Indeed, it should be at the forefront of such change, by creating an environment that encourages private-sector innovation and creativity, while ensuring that citizens are equipped to compete. 
Of course, governments cannot always be ahead of the curve. 
They will also have to react and respond to new needs and demands, such as the expectation that public services meet the same level of high-tech efficiency and convenience that private companies offer. 
Change may be frightening, but it is inevitable. 
And, in fact, it is an important source of opportunity to improve our systems, our strategies, and ourselves. 
The latest wave of technological change is far from cresting. 
We should be excited – and filled with hope – by where it could take us. 

Innovation and Its Discontents 
CAMBRIDGE – Technological innovation is often extolled for its power to overcome major development challenges, fuel economic growth, and propel societies forward. 
Yet innovations frequently face high barriers to implementation, with governments sometimes banning new technologies outright – even those that could bring far-reaching benefits. 
Consider the printing press. 
Among other things, the new technology was a boon to world religions, which suddenly had an efficient means of reproducing and disseminating sacred texts. 
Yet the Ottoman Empire forbade the printing of the Koran for nearly 400 years. 
In 1515, Sultan Selim I is said to have decreed that “occupying oneself with the science of printing was punishable by death.” 
Why oppose such a beneficial technology? 
As I argue in my book Innovation and Its Enemies: Why People Resist New Technologies, the answer is not simply that people are afraid of the unknown. 
Rather, resistance to technological progress is usually rooted in the fear that disruption of the status quo might bring losses in employment, income, power, and identity. 
Governments often end up deciding that it would be easier to prohibit the new technology than to adapt to it. 
By banning the printing of the Koran, Ottoman leaders delayed employment losses for scribes and calligraphers (many of whom were women who were glorified for their mastery of the art). 
But protecting employment was not their main motivation; after all, beginning in 1727, they did allow non-religious texts to be printed, despite protests by calligraphers, who responded to the edict by putting their inkstands and pencils in coffins and marching to the High Porte in Istanbul. 
Religious knowledge was a different matter. 
It was both the glue that held society together and a pillar of political power, so maintaining a monopoly over the dissemination of that knowledge was critical to maintaining the authority of Ottoman leaders. 
They feared going the way of the Catholic pope, who lost considerable authority during the Protestant Reformation, when the printing press played a key role in spreading new ideas to the faithful. 
Of course, the erection of barriers to technological innovation does not always start with the government. 
Those with a vested interest in the status quo may push their governments to impose bans. 
They may do so through protest, as the Ottoman calligraphers did, and as Irish opponents of genetically modified potatoes did in 2002, by marching in Dublin to express their opposition to the “death of good food.” 
Opponents of new technologies may also employ slander, misinformation, and even demonization – an approach that has certainly succeeded in the past. 
In 1674, English women issued a petition against coffee, alleging that it caused sterility and thus should be consumed only by people over 60 – a very small market at the time. 
The following year, King Charles II ordered the suppression of coffeehouses, though he was probably motivated more by the desire to protect the market share of local beverages, such as alcoholic drinks and then-newly introduced tea, than by the infertility rumors. 
In the 1800s, the American dairy industry spearheaded a similar misinformation campaign about margarine, claiming that it caused sterility, stunted growth, and male baldness. 
Derided as “bull butter,” opponents claimed that margarine contained “diseased and putrid beef, dead horses, dead hogs, dead dogs, mad dogs, and downed sheep.” 
In response, the federal government introduced new restrictions on margarine, covering everything from labeling (as with genetically modified foods today), the use of artificial coloring, and interstate movement. 
New taxes reinforced butter’s primacy further. 
In 1886, a Wisconsin congressman declared outright his “intent to destroy the manufacture of the noxious compound by taxing it out of existence.” 
Resistance to tractors in the early 1900s took a slightly different form. 
Producers and traders of draft animals feared mechanization, which threatened their way of life. 
But they knew that they could not improve their product faster than engineers could improve theirs, and thus that blocking the spread of tractors would be impossible. 
Instead, they sought to prevent the displacement of farm animals, by pursuing a campaign touting their virtues. 
The Horse Association of America issued leaflets declaring that, “A mule is the only fool-proof tractor ever built.” 
The group also pointed out that horses could reproduce themselves, whereas tractors depreciated. 
People almost never reject technological progress out of sheer ignorance. 
Rather, they fight to protect their own interests and livelihoods, whether that be operating a dairy farm or running a government. 
As we continually attempt to apply new technologies to improve human and environmental wellbeing, this distinction is vital. 
Avoiding barriers to technological progress requires understanding and addressing its downsides. 
For example, as machines become increasingly capable, robots are replacing a growing number of workers. 
It will not be long before those robots will be able not only to perform more complex tasks, but also to learn faster than workers can be trained. 
The notion that some workers will not go the way of the draft animal is irrational. 
But if we recognize these losses and address them head-on, we can avoid a backlash against potentially beneficial technological innovations, including advances in robotics. 
The key will be to focus on “inclusive innovation,” ensuring that those who are likely to lose from the displacement of old technologies are given ample opportunity to benefit from new ones. 
Only then can we make the most of human creativity. 

Innovation Crisis or Financial Crisis? 
CAMBRIDGE – As one year of sluggish growth spills into the next, there is growing debate about what to expect over the coming decades. 
Was the global financial crisis a harsh but transitory setback to advanced-country growth, or did it expose a deeper long-term malaise? 
Recently, a few writers, including internet entrepreneur Peter Thiel and political activist and former world chess champion Garry Kasparov, have espoused a fairly radical interpretation of the slowdown. 
In a forthcoming book, they argue that the collapse of advanced-country growth is not merely a result of the financial crisis; at its root, they argue, these countries’ weakness reflects secular stagnation in technology and innovation. 
As such, they are unlikely to see any sustained pickup in productivity growth without radical changes in innovation policy. 
Economist Robert Gordon takes this idea even further. 
He argues that the period of rapid technological progress that followed the Industrial Revolution may prove to be a 250-year exception to the rule of stagnation in human history. 
Indeed, he suggests that today’s technological innovations pale in significance compared to earlier advances like electricity, running water, the internal combustion engine, and other breakthroughs that are now more than a century old. 
I recently debated the technological stagnation thesis with Thiel and Kasparov at Oxford University, joined by encryption pioneer Mark Shuttleworth. 
Kasparov pointedly asked what products such as the iPhone 5 really add to our capabilities, and argued that most of the science underlying modern computing was settled by the seventies. 
Thiel maintained that efforts to combat the recession through loose monetary policy and hyper-aggressive fiscal stimulus treat the wrong disease, and therefore are potentially very harmful. 
These are very interesting ideas, but the evidence still seems overwhelming that the drag on the global economy mainly reflects the aftermath of a deep systemic financial crisis, not a long-term secular innovation crisis. 
There are certainly those who believe that the wellsprings of science are running dry, and that, when one looks closely, the latest gadgets and ideas driving global commerce are essentially derivative. 
But the vast majority of my scientist colleagues at top universities seem awfully excited about their projects in nanotechnology, neuroscience, and energy, among other cutting-edge fields. 
They think they are changing the world at a pace as rapid as we have ever seen. 
Frankly, when I think of stagnating innovation as an economist, I worry about how overweening monopolies stifle ideas, and how recent changes extending the validity of patents have exacerbated this problem. 
No, the main cause of the recent recession is surely a global credit boom and its subsequent meltdown. 
The profound resemblance of the current malaise to the aftermath of past deep systemic financial crises around the world is not merely qualitative. 
The footprints of crisis are evident in indicators ranging from unemployment to housing prices to debt accumulation. 
It is no accident that the current era looks so much like what followed dozens of deep financial crises in the past. 
Granted, the credit boom itself may be rooted in excessive optimism surrounding the economic-growth potential implied by globalization and new technologies. 
As Carmen Reinhart and I emphasize in our book This Time is Different, such fugues of optimism often accompany credit run-ups, and this is hardly the first time that globalization and technological innovation have played a central role. 
Attributing the ongoing slowdown to the financial crisis does not imply the absence of long-term secular effects, some of which are rooted in the crisis itself. 
Credit contractions almost invariably hit small businesses and start-ups the hardest. 
Since many of the best ideas and innovations come from small companies rather than large, established firms, the ongoing credit contraction will inevitably have long-term growth costs. 
At the same time, unemployed and underemployed workers’ skill sets are deteriorating. 
Many recent college graduates are losing as well, because they are less easily able to find jobs that best enhance their skills and thereby add to their long-term productivity and earnings. 
With cash-strapped governments deferring urgently needed public infrastructure projects, medium-term growth also will suffer. 
And, regardless of technological trends, other secular trends, such as aging populations in most advanced countries, are taking a toll on growth prospects as well. 
Even absent the crisis, countries would have had to make politically painful adjustments to pension and health-care programs. 
Taken together, these factors make it easy to imagine trend GDP growth being one percentage point below normal for another decade, possibly even longer. 
If the Kasparov-Thiel-Gordon hypothesis is right, the outlook is even darker – and the need for reform is far more urgent. 
After all, most plans for emerging from the financial crisis assume that technological progress will provide a strong foundation of productivity growth that will eventually underpin sustained recovery. 
The options are far more painful if the pie has ceased growing quickly. 
So, is the main cause of the recent slowdown an innovation crisis or a financial crisis? 
Perhaps some of both, but surely the economic trauma of the last few years reflects, first and foremost, a financial meltdown, even if the way forward must simultaneously treat other obstacles to long-term growth. 

Humanizing an Inhuman Future 
WASHINGTON, DC – The impact that groundbreaking technological advances like artificial intelligence will have on the functioning of our economies and labor markets has been a hot topic for a long time. 
But Jerry Kaplan’s recent book Humans Need Not Apply: A Guide to Wealth and Work in the Age of Artificial Intelligence has impressed upon me the true size of the socioeconomic stakes. 
One relatively well-known example of the digital revolution’s impact on the workings of markets is the ability to earn huge returns in high-speed trading by being a microsecond “ahead” of everyone else. 
Another is the capacity for price discrimination by new electronic market makers like Uber, which thus appropriate every penny of the old “consumer surplus” of microeconomic theory. 
Soon a new kind of enhanced Uber could emerge, integrating car, bus, ship, airplane travel, and hotel rooms into one super-app. 
In fact, some car manufacturers are now working on exactly that. 
A key question is why good old competition does not whittle away these profits rapidly. 
The answer often lies in the business model. 
Companies borrow a lot to start up, accumulate large fixed costs, and offer such low prices at first that they lose money. 
This enables them to expand their businesses virtually competition-free until they have established what is essentially a monopoly. 
At that point, they can hike prices and engage in price discrimination relatively freely. 
As Kaplan points out, that is precisely what Amazon has done. 
It first achieved massive scale, enabling it to store unordered products at diffuse locations and thereby reduce transport costs. 
Now it can offer fast and free delivery, which smaller companies cannot beat. 
Add to that complex algorithms that set prices in a way that maximizes profits, and the company’s dominance seems relatively secure. 
As this approach facilitates the rise of global super-firms, it creates serious problems for labor markets and societies, because it destroys mid-level jobs based on old skills faster than comparable jobs based on new skills can be created. 
Equally serious, it contributes to shocking levels of income inequality, with a few households not only enjoying massive wealth, but also wielding considerable political influence. 
If income becomes too concentrated too quickly, desired investment will tend to fall short of available savings, creating a Keynesian macroeconomic imbalance. 
(Contrary to popular belief, what matters is not the actual amount of income flowing toward top earners, but the changes in that income.) 
As it stands, the impact of these technological disruptions remains relatively small in the advanced countries. 
But it could affect some 20% of GDP and 40% of jobs by 2030. 
That is a huge shift, happening at an unprecedented speed. 
Though we are becoming accustomed to breaking records – in 2013, more than 90% of all data ever accumulated in human history had been accumulated in the previous two years – the reality is that the speed and scale of this transformation pose major challenges. If we fail to address them adequately, the outcome is unlikely to be a safer and more prosperous society, but rather one in which frustration and hopelessness increase, potentially leading to extreme behaviors. 
One proposal, made by Kaplan, is to create a “job mortgage.” 
Companies with a future need for certain skills would become a kind of sponsor, involving potential future job offers, to a person willing to acquire those skills. 
The worker could secure a loan against their projected future income to finance their studies. 
The loans would be repaid once the job began. 
If no job materialized, the individual would be held responsible for repaying only a fraction of the loan, with the balance absorbed by the company, which thus bears a share of the risk. 
There would also be a cap on repayments as a percentage of income. 
Other proposals focus on reforming legal frameworks to reflect more accurately new ways of working. 
For example, those who are partly self-employed and partly employed by a third party would have to be better incorporated into social policies. 
Such changes would undoubtedly be useful. 
But none of these proposals reflects the scale of the transformation that we are confronting. 
What we really need is fundamentally to transform the way our societies function – and fast. 
France Stratégie, which advises the French government, and the American entrepreneur Nick Hanauer have proposed social-policy reforms that share a similar conceptual foundation. 
Individuals earn “claims” over their lifetimes, first by being legal residents, and then by, say, obtaining educational degrees, earning professional certifications, performing community service (including military service), and making money. 
These claims can be exchanged for various benefits, such as family leave, retraining, or supplementary retirement income. 
The system would include all residents and be completely portable, with plenty of room for people to choose how and when to use their claims. 
Complementary arrangements – with, say, potential employers offering additional credits for retraining – could also be implemented. 
At the same time, governments must upgrade competition policy to protect against the emergence of global monopolies. 
Here, new mega-regional trade deals, such as the Transatlantic Trade and Investment Partnership and the Trans-Pacific Partnership, should prove invaluable, provided that today’s powerful players are not permitted to dictate terms that advance only their interests. 
International cooperation should also be strengthened to prevent multinationals from avoiding taxes by shifting profits among jurisdictions. 
Such tax avoidance has reached hundreds of billions of dollars. 
Tinkering with existing systems will not be enough to prepare us for the technology-driven transformation that we are facing. 
We need a comprehensive strategy aimed at making markets – and politics – truly competitive, and ensuring that public policy works for the benefit of all. 

Is Our Economic Future Behind Us? 
CHICAGO – With the global economy yet to recover from the 2008 economic crisis, concern about the future – especially of the advanced economies – is intensifying. 
My Northwestern University colleague Robert J. Gordon captures the sentiment of many economists, arguing in his recent book The Rise and Fall of American Growth that the enormous productivity-enhancing innovations of the last century and a half cannot be equaled. 
If true, advanced economies should expect slow growth and stagnation in the coming years. 
But will the future really be so bleak? 
Probably not. 
In fact, pessimism has reigned over economists’ outlooks for centuries. 
In 1830, the British Whig historian Thomas Macaulay observed that, “[i]n every age, everybody knows that up to his own time, progressive improvement has been taking place; nobody seems to reckon on any improvement in the next generation.” 
Why, he asked, do people expect “nothing but deterioration”? 
Soon, Macaulay’s perspective was vindicated by the dawn of the railway age. 
Transformative advances in steel, chemicals, electricity, and engineering soon followed. 
When it comes to our technological future, I would expect a similar outcome. 
Indeed, I would go so far as to say, “We ain’t seen nothin’ yet.” 
Technological advances will create a tailwind of hurricane-like proportions to the world’s most advanced economies. 
My optimism is based not on some generalized faith in the future, but on the way science (or “propositional knowledge”) and technology (“prescriptive knowledge”) support each other. 
Just as scientific breakthroughs can facilitate technological innovation, technological advances enable scientific discovery, which drives more technological change. 
In other words, there is a positive feedback loop between scientific and technological progress. 
The history of technology is full of examples of this feedback loop. 
The seventeenth-century scientific revolution was made possible partly by new, technologically advanced tools, such as telescopes, barometers, and vacuum pumps. 
One cannot discuss the emergence of germ theory in the 1870s without mentioning prior improvements in the microscope. 
The techniques of x-ray crystallography used by Rosalind Franklin were critical to the discovery of the structure of DNA, as well as to discoveries that led to over 20 Nobel prizes. 
The instruments available to science today include modern versions of old tools that would have been unimaginable even a quarter-century ago. 
Telescopes have been shot into space and connected to high-powered adaptive-optics computers, to reveal a universe quite different from the one humans once imagined. 
In 2014, the builders of the Betzig-Hell microscope were awarded a Nobel Prize for overcoming an obstacle that had previously been considered insurmountable, bringing optical microscopy into the nanodimension. 
If that is not enough to quash technological pessimism, consider the revolutionary instruments and tools that have emerged in recent years – devices that would never even have been dreamed of a few decades earlier. 
Start with the computer. 
Economists have made valiant efforts to assess computers’ impact on the production of goods and services, and to measure their contribution to productivity. 
But none of these measures can adequately account for the untold benefits and opportunities computers have created for scientific research. 
There is no lab in the world that does not rely on them. 
The term in silico has taken its place next to in vivo and in vitro in experimental work. 
And entire new fields such as “computational physics” and “computational biology” have sprung up ex nihilo. 
In line with Moore’s Law, advances in scientific computation will continue to accelerate for many years to come, not least owing to the advent of quantum computing. 
Another new tool is the laser. 
When the first lasers appeared, they were almost an invention in search of an application. 
Nowadays, they are almost as ubiquitous as computers, used for seemingly mundane daily uses ranging from document scanning to ophthalmology. 
The range of research areas that now rely on lasers is no less broad, running the gamut of biology, chemistry, genetics, and astronomy. 
LIBS (laser-induced breakdown spectroscopy) is essential to the protein analysis on which so much research in molecular biochemistry depends. 
Recently, lasers enabled the confirmation of the existence of gravitational waves – one of the holy grails of physics. 
Yet another technological innovation that is transforming science is the gene-editing tool CRISPR Cas9. 
Already, sequencing genomes is a fast and relatively cheap process, its cost having dropped from $10 million per genome in 2007 to under $1,000 today. 
CRISPR Cas9 takes this technology to a new, truly revolutionary level, as it enables scientists to edit and manipulate the human genome. 
While that idea may give some people pause, the technology’s potential beneficial applications – such as enabling essential crops to withstand climate change and water salination – cannot be overestimated. 
Furthermore, digitization has lowered access costs for researchers substantially. 
All research relies on access to existing knowledge; we all stand on the shoulders of the giants (and even average-size figures) who came before us. 
We recombine their discoveries, ideas, and innovations in novel – sometimes revolutionary – ways. 
But, until recently, learning what one needed to know to come up with scientific and technological innovations took a lot more work, with countless hours spent scouring libraries and encyclopedia volumes. 
Nowadays, researchers can find nanoscopic needles in information haystacks the size of Montana. 
They can access mega-databases, where they can find patterns and empirical regularities. 
The eighteenth-century taxonomist Carl Linnaeus would be envious. 
Our scientific knowledge is surging forward, leading to innumerable new applications. 
There can be no doubt that technology will forge ahead as well, in scores of expected and unexpected areas. 
It will bring economic growth, albeit perhaps not the kind that will register fully if we continue to rely on our outdated standards for national income accounting. 

Technology and Economic Growth 
ROME: The story of Elihu Thompson, the inventor of the electric dynamo, and ultimately a founder of one of America's great companies, General Electric, recurs frequently in the speeches of Alan Greenspan. 
The chairman of America's Federal Reserve Board is understandably fascinated by the great inventions of the late 19th century which revolutionized industrial production in America and around the globe. 
Some may be surprised that a central bank governor is interested in technological innovation, and even more that economists at the Fed are studying the impact of computers on economic growth (their research on this subject, indeed, may be found on the Fed's internet site: www.bog.frb.fed.us). 
Such research may also shed light on whether the current extraordinary expansion of the U.S. economy, which has lasted uninterrupted for the past nine years, is simply a prolonged streak of luck or represents the effect of a new technological revolution, similar to the one which occurred at the end of the 19th century and which is best symbolized by the spread of electric power. 
The answer to that question not only has important consequences for American monetary policy, but also suggests a few reflections on today's economic conditions in Europe as well as Europe's new single currency. 
The reason why the Federal Reserve is studying the electric dynamo is, obviously, not the Fed's interest in history. 
The story of the diffusion and utilization of the dynamo offers strong analogies with the opportunities and problems posed by today's new information technologies for the organization of enterprises. 
The first industrial applications of the dynamo began in 1890, but one needed to wait some thirty years before seeing the effects of that then “new technology” on the productivity of enterprises. 
The most important reason for this delay was the resistance of managers towards adapting the organization of labor in their firms to the new mode of production. 
Once this transformation took place, however, rapid growth in productivity followed fast. 
The story of the electrical dynamo is extremely timely, and so it is perhaps no accident that Alan Greenspan has been studying it so carefully. 
The research conducted so far by Fed economists shows that a long time has also been needed for the impact of computers to be felt in measurable improvements in productivity for the entire American economy. 
Indeed, so long was this lag that some economists and business leaders came to have doubts about whether information technology would have any effect on productivity. 
The reason for this delayed impact was the same as a hundred years earlier in the case of the electric dynamo: the difficulties that firms encountered in modifying the organization of their labor forces in such a way as to benefit from such technologies as e-mail and the internet. 
Recent data on productivity, which grew at a pace of nearly 5% in the third trimester of last year, shows that, for many American companies, much of these difficulties are already things of the past. 
After a decade of enterprise restructuring, the United States has ushered in the era of the internet. 
In the 1980s, the organization of American firms was revolutionized by a new generation of CEOs who took apart their firms, only to reconfigure them anew. 
These restructuring efforts created the ideal conditions for the introduction of new technologies. 
While this was happening, the European counterparts of America's managers, with a few exceptions, have either been busy reconciling the demands of their “hard core” shareholders – composite groups of stakeholders, rarely united by common interests – or sought to secure government assistance and protection against international competition. 
The case of Mannesmann in its fight to avoid takeover by Vodaphone is only the most recent example; a few months ago the French government openly discouraged any idea of a takeover of Société Générale by non-French investors. 
The interests of the Fed in the application of technology to production are so distant from the preoccupations of the European Central Bank that one is tempted to view the two institutions as living on different planets. 
The ECB continues to be exclusively preoccupied by inflation and budgets – problems which the United States solved almost ten years ago during the Bush administration and which also in Europe continue to obsess us only by reason of limited intellectual agility. 
An economy may perhaps make up ten years of neglect, but during a technological revolution, ten years are as long as a century. 
This, more than any other reason, is the cause for why the euro is weak. 

Technology and Inequality 
CAMBRIDGE – Until now, the relentless march of technology and globalization has played out hugely in favor of high-skilled labor, helping to fuel record-high levels of income and wealth inequality around the world. 
Will the endgame be renewed class warfare, with populist governments coming to power, stretching the limits of income redistribution, and asserting greater state control over economic life? 
There is no doubt that income inequality is the single biggest threat to social stability around the world, whether it is in the United States, the European periphery, or China. 
Yet it is easy to forget that market forces, if allowed to play out, might eventually exert a stabilizing role. 
Simply put, the greater the premium for highly skilled workers, the greater the incentive to find ways to economize on employing their talents. 
The world of chess, with which I am closely familiar, starkly illustrates the way in which innovation in the coming decades may have a very different effect on relative wages than it did over the past three decades. 
During the late eighteenth and early nineteenth centuries, a brilliantly inventive chess-playing “automaton” toured the world’s capitals. 
“The Turk” won games against the likes of Napoleon and Benjamin Franklin, while challenging many great minds to penetrate its secrets. 
Concealing a human player in a shifting compartment amid a maze of impressive-looking gadgetry, it took decades for outsiders to correctly guess how the Turk really worked. 
Today, the scam has been turned on its head: chess-playing machines pretend to be chess-playing humans. 
Desktop-based chess programs have considerably surpassed the best human players over the past decade, and cheating has become a growing scourge. 
The French chess federation recently suspended three of its top players for conspiring to obtain computer assistance. (Interestingly, one of the main ways to uncover cheating is by using a computer program to detect whether a player’s moves consistently resemble the favored choices of various top computer programs.) 
Of course, there are many other examples of activities that were once thought exclusively the domain of intuitive humans, but that computers have come to dominate. 
Many teachers and schools now use computer programs to scan essays for plagiarism, an ancient transgression made all too easy by the Internet. 
Indeed, computer-grading of essays is a surging science, with some studies showing that computer evaluations are fairer, more consistent, and more informative than those of an average teacher, if not necessarily of an outstanding one. 
Expert computer systems are also gaining traction in medicine, law, finance, and even entertainment. 
Given these developments, there is every reason to believe that technological innovation will lead ultimately to commoditization of many skills that now seem very precious and unique. 
My Harvard colleague Kenneth Froot and I once studied the relative price movements of a number of goods over a 700-year period. 
To our surprise, we found that the relative prices of grains, metals, and many other basic goods tended to revert to a central mean tendency over sufficiently long periods. 
We conjectured that even though random discoveries, weather events, and technologies might dramatically shift relative values for certain periods, the resulting price differentials would create incentives for innovators to concentrate more attention on goods whose prices had risen dramatically. 
Of course, people are not goods, but the same principles apply. 
As skilled labor becomes increasingly expensive relative to unskilled labor, firms and businesses have a greater incentive to find ways to “cheat” by using substitutes for high-price inputs. 
The shift might take many decades, but it also might come much faster as artificial intelligence fuels the next wave of innovation. 
Perhaps skilled workers will try to band together to get governments to pass laws and regulations making it more difficult for firms to make their jobs obsolete. 
But if the global trading system remains open to competition, skilled workers’ ability to forestall labor-saving technology indefinitely should prove little more successful than such attempts by unskilled workers in the past. 
The next generation of technological advances could also promote greater income equality by leveling the playing field in education. 
Currently, educational resources – particularly tertiary educational resources (university) – in many poorer countries are severely limited relative to wealthy countries, and, so far, the Internet and computers have exacerbated the differences. 
But it does not have to be that way. 
Surely, higher education will eventually be hit by the same kind of sweeping wave of technology that has flattened the automobile and media industries, among others. 
If the commoditization of education eventually extends to at least lower-level college courses, the impact on income inequality could be profound. 
Many commentators seem to believe that the growing gap between rich and poor is an inevitable byproduct of increasing globalization and technology. 
In their view, governments will need to intervene radically in markets to restore social balance. 
I disagree. 
Yes, we need genuinely progressive tax systems, respect for workers’ rights, and generous aid policies on the part of rich countries. 
But the past is not necessarily prologue: given the remarkable flexibility of market forces, it would be foolish, if not dangerous, to infer rising inequality in relative incomes in the coming decades by extrapolating from recent trends. 

How Inequality Found a Political Voice 
MILAN – It took a long time for widening inequality to have an impact on politics, as it suddenly has done in recent years. 
Now that it is a central issue, national economic priorities will need to shift substantially to create more equitable, inclusive economies and societies. 
If they do not, people could embrace explosive alternatives to their current governments, such as the populist movements now sweeping many countries. 
Political leaders often speak of growth patterns that unfairly distribute the benefits of growth; but then they do relatively little about it when they are in power. 
When countries go down the path of non-inclusive growth patterns, it usually results in disrespect for expertise, disillusionment with the political system and shared cultural values, and even greater social fragmentation and polarization. 
Acknowledging the importance of how economic benefits are distributed is of course not new. 
In developing countries, economic exclusion and extreme inequality have always been unconducive to long-term high-growth patterns. 
Under these conditions, pro-growth policies are politically unsustainable, and they are ultimately disrupted by political dislocations, social unrest, or even violence. 
In the United States, rising inequality has been a fact of life at least since the 1970s, when the relatively equitable distribution of economic benefits from the early post-World War II era started to become skewed. 
In the late 1990s, when digital technologies began to automate and disintermediate more routine jobs, the shift toward higher wealth and income inequality became turbocharged. 
Globalization played a role. 
In the 20 years before the 2008 financial crisis, manufacturing employment in the US rapidly declined in every sector except pharmaceuticals, even as added value in manufacturing rose. 
Net jobs loss was kept roughly at zero only because employment in services increased. 
In fact, much of the added value in manufacturing actually comes from services such as product design, research and development, and marketing. 
So, if we account for this value-chain composition, the decline in manufacturing – the production of tangible goods – is even more pronounced. 
Economists have been tracking these trends for some time. 
Massachusetts Institute of Technology economist David Autor and his colleagues have carefully documented the impact of globalization and labor-saving digital technologies on routine jobs. 
More recently, French economist Thomas Piketty’s international bestseller, Capital in the Twenty-First Century, dramatically widened our awareness of wealth inequality and described possible underlying forces driving it. 
The brilliant, award-winning young economists Raj Chetty and Emmanuel Saez have enriched the discussion with new research. 
And I have written about some of the structural economic shifts associated with these problems. 
Eventually, journalists picked up on these trends, too, and it would now be hard to find anyone who has not heard of the “1%” – shorthand for those at the top of the global wealth and income scales. 
Many people now worry about a bifurcated society: a thriving global class of elites at the top and a stressed-out class comprising everyone else. 
Still, despite these long trends, the political and policy status quo remained largely unchallenged until 2008. 
To understand why it took politics so long to catch up to economic realities, we should look at incentives and ideology. 
With respect to incentives, politicians have not been given a good enough reason to address unequal distribution patterns. 
The US has relatively weak campaign-finance limits, so corporations and wealthy individuals – neither of which generally prioritizes income redistribution – have contributed a disproportionate share to politicians’ campaign war chests. 
Ideologically, many people are simply suspicious of expansive government. 
They recognize inequality as a problem, and in principle they support government policies that provide high-quality education and health-care services, but they do not trust politicians or bureaucrats. 
In their eyes, governments are inefficient and self-interested at best, and dictatorial and oppressive at worst. 
All of this began to change with the rise of digital technologies and the Internet, but especially with the advent of social media. 
As US President Barack Obama showed in the 2008 election cycle – followed by Bernie Sanders and Donald Trump in the current cycle – it is now possible to finance a very expensive campaign without “big money.” 
As a result, there is a growing disconnect between big money and political incentives; and while money is still a part of the political process, influence itself no longer belongs exclusively to corporations and wealthy individuals. 
Social-media platforms now enable large groups of people to mobilize in ways reminiscent of mass political movements in earlier eras. 
Such platforms may have reduced the cost of political organizing, and thus candidates’ overall dependence on money, while providing an efficient alternative fund-raising channel. 
This new reality is here to stay, and, regardless of who wins the US election this year, anyone who is unhappy with high inequality will have a voice, the ability to finance it, and the power to affect policymaking. 
So, too, will other groups that focus on similar issues, such as environmental sustainability, which has not been a major focus in the current US presidential campaign (the three debates between the candidates included no discussion of climate change, for example), but surely will be in the future. 
All told, digital technology is shuffling economic structures and rebalancing power relationships in the world’s democracies – even in institutions once thought to be dominated by money and wealth. 
A large, newly influential constituency should be welcomed. 
But it cannot be a substitute for wise leadership, and its existence does not guarantee prudent policies. 
As political priorities continue to rebalance, we will need to devise creative solutions to solve our hardest problems, and to prevent populist misrule. 
One hopes that this is the course we are on now. 

The Illusion of Freedom in the Digital Age 
LONDON – Over the last few weeks, media around the world have been saturated with stories about how technology is destroying politics. 
In autocracies like China, the fear is of ultra-empowered Big Brother states, like that in George Orwell’s 1984. 
In democracies like the United States, the concern is that tech companies will continue to exacerbate political and social polarization by facilitating the spread of disinformation and creating ideological “filter bubbles,” leading to something resembling Aldous Huxley’s Brave New World. 
In fact, by bringing about a convergence between democracy and dictatorship, new technologies render both of these dystopian visions impossible. 
But that doesn’t mean that there is nothing to fear. 
Much of the coverage of the 19th National Congress of the Communist Party of China (CPC) focused on President Xi Jinping’s consolidation of power. 
He is, observers warn, creating an information-age dictatorship, in which the technologies that were once expected to bring freedom to China’s 1.4 billion citizens have instead enabled him to entrench his own authority. 
By providing the government with highly detailed information on the needs, feelings, and aspirations of ordinary Chinese, the Internet allows China’s leaders to preempt discontent. 
In other words, they now use Big Data, rather than brute force, to ensure stability. 
And the data are big indeed. 
More than 170 million face-recognition surveillance cameras track every step citizens make. 
An artificial-intelligence-enhanced security system can spot criminal suspects as they cycle beside a lake or purchase dumplings from a street vendor, and immediately alert the police. 
Data surveillance cameras feed into China’s “social credit” data bank, where the regime compiles thick files on its people’s creditworthiness, consumption patterns, and overall reliability. 
The CPC is also using technology to manage its own ranks, having developed dozens of apps to communicate with party members. 
Meanwhile, it blocks some of the empowering features of technology: by forcing all tech companies to have their servers within China, it effectively “in-sources” censorship. 
The impact of technology on American politics has been even more visible, but it is analyzed in terms of the market, rather than the state. 
Among the most eye-catching stories has been the role that “fake news” played in shaping last year’s presidential election. 
Facebook has admitted that 126 million Americans might have seen fake news during the campaign. 
More recently, Special Counsel Robert Mueller, who is conducting an investigation into whether US President Donald Trump’s campaign colluded with Russia’s interference in the 2016 election, charged one-time campaign chairman Paul Manafort with 12 counts – including “conspiracy against the United States” – for his actions prior to the campaign. 
A foreign policy adviser to the Trump campaign, George Papadopoulos, was also indicted for lying to the FBI about meetings with individuals closely associated with the Russian government during the campaign, though he has already pleaded guilty and has been cooperating with investigators since the summer. 
But beyond such bombshell developments is a broader anxiety about the ability of tech companies to control the information people receive. 
With Big Tech’s secret algorithms determining how we perceive the world, it is becoming increasingly difficult for people to make conscious decisions – what philosophers perceive as the basic dimension of free will. 
Big tech companies, worth more than some countries’ GDP, seek to maximize profits, not social welfare. 
Yet, at a time when attention is supplanting money as the most valuable commodity, the impact of their decisions is far-reaching. 
James Williams, a Google engineer turned academic, argues that the digital age has unleashed fierce competition for our attention, and few have benefited more than Trump, who is for the Internet what Ronald Reagan was for television. 
At the same time, the impact of technology on politics is relatively independent of regime type. 
Technology is blurring the comforting distinction between open and closed societies, and between planned and free economies, ultimately making it impossible for either to exist in its ideal form. 
By revealing the US National Security Administration’s massive government surveillance, Edward Snowden made clear that the state’s desire for omniscience is not limited to China. 
On the contrary, it is central to the idea of national security in the US. 
In China, things are moving in the opposite direction. 
To be sure, the Chinese government is pressuring the biggest tech companies to give it a direct role in corporate decision-making – and direct access to their data. 
At the same time, however, the Internet is changing the nature of Chinese politics and the Chinese economy, pushing both to become more responsive to consumer needs. 
For example, a friend who worked for the search engine Baidu explained to me how the company tries to enhance the consumer experience of censorship, testing the ways in which people prefer to be censored. 
Jack Ma of tech giant Alibaba thinks that China can use Big Data to design perfectly calibrated state interventions that enable it to outperform free-market economies. 
In the coming decades, Ma believes, “the planned economy will get bigger and bigger.” 
In the digital age, the biggest danger is not that technology will put free and autocratic societies increasingly at odds with one another. 
It is that the worst fears of both Orwell and Huxley will become manifest in both types of system, creating a different kind of dystopia. 
With many of their deepest desires being met, citizens will have the illusion of freedom and empowerment. 
In reality, their lives, the information they consume, and the choices they make will be determined by algorithms and platforms controlled by unaccountable corporate or government elites. 

Is Traditional Banking Unbreakable? 
NEW YORK – It is a rare industry nowadays that is not at risk of being upended by digital technology. 
Amazon, having swept away bookshops, is now laying siege to the rest of the retail sector. 
In transportation, Uber is outrunning traditional taxi companies, while Airbnb is undermining the foundations of the hotel industry. 
Meanwhile, smartphones are transforming how we communicate and revolutionizing the way we discover and patronize businesses. 
So it is no surprise that banking and financial-services companies are not safe from the immense transformations wrought by technological innovation. 
Indeed, for the last decade, digital startups have been penetrating areas traditionally dominated by the financial industry. 
But there is reason to believe that finance will prove resilient. 
Today, money can be sent to the other side of a country – or the world – simply by tapping an app, without ever interacting with a traditional financial-services company. 
Migrants’ remittances alone, which the World Bank estimates will total $586 billion this year, represent a tremendous growth opportunity for companies competing with banks to move money. 
Meanwhile, would-be disrupters are offering opportunities to save and invest – the very heart of traditional banking institutions’ operations. 
Startups such as Acorns – an app that automatically allocates a proportion of everyday purchases to a pre-selected investment portfolio – are making rapid inroads into a very competitive marketplace. 
Acorns, launched in 2014, already manages more than 650,000 investment accounts. 
The company – and others like it – are not just moving into the market; the simplified investment and savings processes they offer are expanding and transforming it. 
According to research by the digital ad agency Fractl, approximately 85% of millennials are saving a portion of their paycheck – a larger percentage than their predecessors. 
Lending, too, is being transformed by technology. 
Crowdsourced funding and peer-to-peer lending schemes give borrowers the opportunity to circumvent many of the hurdles of traditional banking – including, in some cases, collateral requirements and credit ratings. 
According to the research firm Massolution, the crowdfunding market has grown exponentially, from $880 million in 2010 to $16.2 billion in 2014. 
Global crowdfunding volumes are expected to double this year, surpassing $34 billion. In 2016, crowdfunding is expected to provide more funding than traditional venture capital. 
Even financial services traditionally characterized by face-to-face dealings with clients, such as investment banking advisory services, have been affected. 
When Google conducted its initial public offering in 2004, it chose to bypass the investment banking industry, which traditionally underwrites the process of taking a company public. 
Instead, the company opted for an electronic auction in which anyone could participate. 
Other companies – like the financial research firm Morningstar – have followed suit. 
While these attempts to revolutionize the equity capital markets have yet to gain widespread traction, their very existence is evidence of the opportunities for disruption in this sector. 
But it would be premature to conclude that traditional banking has yielded to new financial platforms. 
Many of the new entrants have benefited from advantages that would be difficult to maintain were they to scale up in size and importance. 
Traditional banking is subject to intense oversight, and regulations have only become more onerous in recent years, as regulatory authorities reacted to the 2008 global financial crisis by tightening rules on leveraging ratios and know-your-customer requirements. 
Many upstarts in the sector have carved out a competitive advantage by avoiding thresholds beyond which they would face substantial regulatory scrutiny and requirements. 
This places a significant constraint on the size and type of financial transactions these new companies can offer. 
By steering clear of services that might draw the scrutiny of financial authorities, digital startups face a natural limit to the size of their market. 
Indeed, this arrangement – albeit informal – can be viewed as the way regulators manage the systemic risk posed by new entrants. 
As the digital revolution evolves, much of the financial terrain in which technology companies are making the deepest inroads will come into much sharper regulatory focus. 
This will favor the established players. 
As a result, the digital revolution’s assault on the traditional banking industry is by no means overwhelming. 
In finance, at least, technology firms should not be viewed simply as a threat, but as a source of productivity-boosting innovation. 

Where Will All the Workers Go? 
NEW YORK – Technology innovators and CEOs seem positively giddy nowadays about what the future will bring. 
New manufacturing technologies have generated feverish excitement about what some see as a Third Industrial Revolution. 
In the years ahead, technological improvements in robotics and automation will boost productivity and efficiency, implying significant economic gains for companies. 
But, unless the proper policies to nurture job growth are put in place, it remains uncertain whether demand for labor will continue to grow as technology marches forward. 
Recent technological advances have three biases: They tend to be capital-intensive (thus favoring those who already have financial resources); skill-intensive (thus favoring those who already have a high level of technical proficiency); and labor-saving (thus reducing the total number of unskilled and semi-skilled jobs in the economy). 
The risk is that robotics and automation will displace workers in blue-collar manufacturing jobs before the dust of the Third Industrial Revolution settles. 
The rapid development of smart software over the last few decades has been perhaps the most important force shaping the coming manufacturing revolution. 
Software innovation, together with 3D printing technologies, will open the door to those workers who are educated enough to participate; for everyone else, however, it may feel as though the revolution is happening elsewhere. 
Indeed, the factory of the future may be 1,000 robots and one worker manning them. 
Even the shop floor can be swept better and cheaper by a Roomba robot than by any worker. 
For the developed countries, this may seem like old news. 
After all, for the last 30 years, the manufacturing base in Asia’s emerging economies has been displacing that of the old industrial powers of Western Europe and North America. 
But there is no guarantee that gains in service-sector employment will continue to offset the resulting job losses in industry. 
For starters, technology is making even many service jobs tradable, enabling them to be offshored to Asia and other emerging markets. 
And, eventually, technology will replace manufacturing and service jobs in emerging markets as well. 
Today, for example, a patient in New York may have his MRI sent digitally to, say, Bangalore, where a highly skilled radiologist reads it for one-quarter of what a New York-based radiologist would cost. 
But how long will it be before a computer software can read those images faster, better, and cheaper than the radiologist in Bangalore can? 
Likewise, in the next decade, Foxconn, which produces iPhones and other consumer electronics, plans to replace much of its Chinese workforce of more than 1.2 million with robots. 
And soon enough voice recognition software will replace the call centers of Bangalore and Manila. 
Job-reducing technological innovations will affect education, health care, government, and even transportation. 
For example, will we still need so many teachers in the decades to come if the cream of the profession can produce increasingly sophisticated online courses that millions of students can take? 
If not, how will all of those former teachers earn a living? 
Governments, too, are shedding labor – particularly governments burdened by high deficits and debts. 
And, by transforming how services are provided to the public, the e-government trend can offset the employment losses with productivity gains. 
Even transportation is being revolutionized by technology. 
In a matter of years, driverless cars – courtesy of Google and others – may render millions of jobs obsolete. 
And, of course technological innovation that is capital-intensive and labor-saving is one of the factors – together with the related winner-take-all effects – driving the rise in income and wealth inequality. 
Rising inequality then becomes a drag on demand and growth (as well as a source of social and political instability), because it distributes income from those who spend more (lower- and middle-income households) to those who save more (high-net-worth individuals and corporate firms). 
Obviously, this is not the first time the world has faced such problems, and the past can help to serve as a model for resolving them. Late nineteenth- and early twentieth-century leaders sought to minimize the worst features of industrialization. 
Child labor was abolished throughout the developed world, working hours and conditions became more humane, and a social safety net was put in place to protect vulnerable workers and stabilize the (often fragile) macroeconomy. 
As we begin to seek enlightened solutions to the challenges that the Third Industrial Revolution presents, one overall theme looms large: The gains from technology must be channeled to a broader base of the population than has benefited so far. 
That requires a major educational component. 
In order to create broad-based prosperity, workers need the skills to participate in the brave new world implied by a digital economy. 
Even that may not be sufficient, in which case it will become necessary to provide permanent income support to those whose jobs are displaced by software and machines. 
Here, too, we should attend carefully to the lessons of the past. 

The Coming Technology Policy Debate 
STANFORD – What do the leaks of unflattering email from the Democratic National Committee’s hacked servers during the 2016 US presidential election campaign and the deafening hour-long emergency-warning siren in Dallas, Texas, have in common? 
It’s the same thing that links the North Korean nuclear threat and terrorist attacks in Europe and the United States: all represent the downsides of tremendously beneficial technologies – risks that increasingly demand a robust policy response. 
The growing contentiousness of technology is exemplified in debates over so-called net neutrality and disputes between Apple and the FBI over unlocking suspected terrorists’ iPhones. 
This is hardly surprising: as technology has become increasingly consequential – affecting everything from our security (nuclear weapons and cyberwar) to our jobs (labor-market disruptions from advanced software and robotics) – its impact has been good, bad, and potentially ugly. 
First, the good. 
Technology has eliminated diseases like smallpox and has all but eradicated other, like polio; enabled space exploration; sped up transportation; and opened new vistas of opportunity for finance, entertainment, and much else. 
Cellular telephony alone has freed the vast majority of the world’s population from communication constraints. 
Technical advances have also increased economic productivity. 
The invention of crop rotation and mechanized equipment dramatically increased agricultural productivity and enabled human civilization to shift from farms to cities. 
As recently as 1900, one-third of Americans lived on farms; today, that figure is just 2%. 
Similarly, electrification, automation, software, and, most recently, robotics have all brought major gains in manufacturing productivity. 
My colleague Larry Lau and I estimate that technical change is responsible for roughly half the economic growth of the G7 economies in recent decades. 
Pessimists worry that the productivity-enhancing benefits of technology are waning and unlikely to rebound. 
They claim that technologies like Internet search and social networking cannot improve productivity to the same extent that electrification and the rise of the automobile did. 
Optimists, by contrast, believe that advances like Big Data, nanotechnology, and artificial intelligence herald a new era of technology-driven improvements. 
While it is impossible to predict the next “killer app” arising from these technologies, that is no reason, they argue, to assume there isn’t one. 
After all, important technologies sometimes derive their main commercial value from uses quite different from those the inventor had in mind. 
For example, James Watt’s steam engine was created to pump water out of coal mines, not to power railroads or ships. 
Likewise, Guglielmo Marconi’s work on long-distance radio transmission was intended simply to create competition for the telegraph; 
Marconi never envisioned broadcast radio stations or modern wireless communication. 
But technological change has also spurred considerable dislocation, harming many along the way. 
In the early nineteenth century, fear of such dislocation drove textile workers in Yorkshire and Lancashire – the “Luddites” – to smash new machines like automated looms and knitting frames. 
The dislocation of workers continues today, with robotics displacing some manufacturing jobs in the more advanced economies. 
Many fear that artificial intelligence will bring further dislocation, though the situation may not be as dire as some expect. 
In the 1960s and early 1970s, many believed that computers and automation would lead to widespread structural unemployment. 
That never happened, because new kinds of jobs emerged to offset what dislocation occurred. 
In any case, job displacement is not the only negative side effect of new technology. 
The automobile has greatly advanced mobility, but at the cost of unhealthy air pollution. 
Cable TV, the Internet, and social media have given people unprecedented power over the information they share and receive; but they have also contributed to the balkanization of information and social interaction, with people choosing sources and networks that reinforce their own biases. 
Modern information technology, moreover, tends to be dominated by just a few firms: Google, for example, is literally synonymous with Internet search. 
Historically, such a concentration of economic power has been met with pushback, rooted in fears of monopoly. 
And, indeed, such firms are beginning to face scrutiny from antitrust officials, especially in Europe. 
Whether consumers’ generally tolerant attitudes toward these companies will be sufficient to offset historic concerns over size and abuse of market power remains to be seen. 
But the downsides of technology have become far darker, with the enemies of a free society able to communicate, plan, and conduct destructive acts more easily. 
The Islamic State and al-Qaeda recruit online and provide virtual guidance on wreaking havoc; often, such groups do not even have to communicate directly with individuals to “inspire” them to perpetrate a terrorist attack. 
And, of course, nuclear technology provides not only emissions-free electricity, but also massively destructive weapons. 
All of these threats and consequences demand clear policy responses that look not just to the past and present, but also to the future. 
Too often, governments become entangled in narrow and immediate disputes, like that between the FBI and Apple, and lose sight of future risks and challenges. 
That can create space for something really ugly to occur, such as, say, a cyber attack that knocks out an electrical grid. 
Beyond the immediate consequences, such an incident could spur citizens to demand excessively stringent curbs on technology, risking freedom and prosperity in the quest for security. 
What is really needed are new and improved institutions, policies, and cooperation between law enforcement and private firms, as well as among governments. 
Such efforts must not just react to developments, but also anticipate them. 
Only then can we mitigate future risks, while continuing to tap new technologies’ potential to improve people’s lives. 



Robotization Without Taxation? 
NEW HAVEN – The idea of a tax on robots was raised last May in a draft report to the European Parliament prepared by MEP Mady Delvaux from the Committee on Legal Affairs. 
Emphasizing how robots could boost inequality, the report proposed that there might be a “need to introduce corporate reporting requirements on the extent and proportion of the contribution of robotics and AI to the economic results of a company for the purpose of taxation and social security contributions.” 
The public reaction to Delvaux’s proposal has been overwhelmingly negative, with the notable exception of Bill Gates, who endorsed it. 
But we should not dismiss the idea out of hand. 
In just the past year, we have seen the proliferation of devices such as Google Home and Amazon Echo Dot (Alexa), which replace some aspects of household help. 
Likewise, the Delphi and nuTonomy driverless taxi services in Singapore have started to replace taxi drivers. 
And Doordash, which uses Starship Technologies miniature self-driving vehicles, is replacing restaurant delivery people. 
If these and other labor-displacing innovations succeed, surely calls to tax them will grow more frequent, owing to the human problems that arise when people lose their jobs – often jobs with which they closely identify, and for which they may have spent years preparing. 
Optimists point out that there have always been new jobs for people replaced by technology; but, as the robot revolution accelerates, doubts about how well this will work out continue to grow. 
A tax on robots, its advocates hope, might slow down the process, at least temporarily, and provide revenues to finance adjustment, like retraining programs for displaced workers. 
Such programs may be as essential as our work is to healthy human life as we know it. 
In his book Rewarding Work, Edmund S. Phelps emphasized the fundamental importance of maintaining a “place in society – a calling.” 
When many people are no longer able to find work to support a family, troubling consequences ensue, and, as Phelps stresses, “the functioning of the entire community may be impaired.” 
In other words, there are externalities to robotization that justify some government intervention. 
Critics of a robot tax have emphasized that the ambiguity of the term “robot” makes defining the tax base difficult. 
The critics also stress the new robotics’ enormous, undeniable benefits to productivity growth. 
But let’s not rule out so quickly at least modest robot taxes during the transition to a different world of work. 
Such a tax should be part of a broader plan to manage the consequences of the robotics revolution. 
All taxes, except a “lump-sum tax,” introduce distortions in the economy. 
But no government can impose a lump-sum tax – the same amount for everyone regardless of their income or expenditures – because it would fall heaviest on those with less income, and it would grind the poor, who might be unable to pay it at all. 
So taxes have to be related to some activity indicative of ability to pay taxes, and whatever activity it is will be discouraged as a result. 
Frank Ramsey published a classic paper in 1927 arguing that to minimize taxation-induced distortions, one should tax all activities, and he proposed how to set tax rates. 
His abstract theory has never been a fully operational principle for actual tax rates, but it provides a powerful argument against presuming that the tax should be zero for all but a few activities, or that all activities should be taxed at the same rate. 
Activities that create externalities might have a higher tax rate than Ramsey would have proposed. 
For example, taxes on alcoholic beverages are widespread. 
Alcoholism is a major social problem. 
It destroys marriages, families, and lives. 
From 1920 to 1933, the United States tried a much harsher market intervention: outright prohibition of alcoholic beverages. 
But it turned out to be impossible to eliminate alcohol consumption. 
The alcohol tax that accompanied the end of Prohibition was a milder form of discouragement. 
Discussion of a robot tax should consider what alternative we have to deal with rising inequality. 
It would be natural to consider a more progressive income tax and a “basic income.” 
But, these measures do not have widespread popular support. 
If support is not widespread, the tax, even if imposed, will not last. 
When taxes on high incomes are raised, usually in wartime, it turns out to be only temporary. 
Ultimately, it seems natural to most people that taxing successful people to benefit unsuccessful people is demeaning to the latter, and even the recipients of the handout often do not really want it. 
Politicians know that: they usually do not campaign on proposals to confiscate high incomes and pad low incomes. 
So, taxes must be reframed to remedy income inequality induced by robotization. 
It may be more politically acceptable, and thus sustainable, to tax the robots rather than just the high-income people. 
And while this would not tax individual human success, as income taxes do, it might in fact imply somewhat higher taxes on higher incomes, if high incomes are earned in activities that involve replacing humans with robots. 
A moderate tax on robots, even a temporary tax that merely slows the adoption of disruptive technology, seems a natural component of a policy to address rising inequality. 
Revenue could be targeted toward wage insurance, to help people replaced by new technology make the transition to a different career. 
This would accord with our natural sense of justice, and thus be likely to endure. 

Tempting Science 
Scientists everywhere are increasingly uneasy at the rising influence of business upon university research. 
They realize that direct financial connections with the private sector can damage their reputation for independence and integrity. 
Nevertheless, the traditional doors separating academia from industry are being quietly dismantled - sometimes even smashed down. 
Specious free-market doctrines are devaluing the public services that those doors protected, not least the free flow of well-informed, critical speech that is vital to open inquiry. 
Of course every scientist wants more money to do research; and every nation needs as much good science as it can get. 
But good science is expensive: so if some perfectly reputable company is prepared to pay for it, why be choosy? 
Industrial research is an immense asset to society, not least in advancing scientific knowledge. 
But commercial firms are not philanthropies. 
They are under constant competitive pressures; shareholders expect a return on their investment. 
Even when not trying to buy exclusive access to profitable new discoveries, they are always in the market for preferential consideration. 
Valuable gifts may appear to purchase intangible favours. 
Cash for scientific answers is not as obviously corrupt as cash for parliamentary questions, but smells as nasty. 
So far, there have been few open scandals. 
Scientists in both academia and industry can still be trusted to do their work with honesty. 
In most fields of university research, direct external influences - military and political as well as commercial - are trivial. 
But a number of worrying cases of falsification or fabrication can be traced back to direct pressures from funding sources. 
In some disciplines it is becoming difficult to find academic scientists who are not in some way dependent on corporate support. 
The bodies that fund and publish research are now asking specialist referees and authors to declare all such connections, in case these might seem to affect their scientific judgement. 
Disclosure of `conflict of interest' is becoming as mandatory in the world of science as in politics and law. 
Most academic scientists doubtless hope that formal countermeasures like these will hold back the forces of Mammon. 
But increased transparency also reveals the blatant instrumentalism that now pervades university research. 
Demonstrable utility is the over-riding priority. 
Even governments now fund science primarily for its promise of public or private gain. 
Yet academic science plays an important `non-instrumental' role in society. 
It enriches us spiritually with trustworthy knowledge about humanity and the world. 
It warns us of hidden environmental dangers and opens up unexpected paths of technical progress. 
It brings an element of hard-nosed critical rationality into all societal debate, and fosters awareness of uncertainty and change in the professional education of skilled practitioners. 
Above all, academic scientists are in continual demand as independent experts in public arenas of controversy and decision. 
In short, university research is the principal intelligence agency of civil society. 
It is often supposed that science is able to perform these functions because it is so completely rational and objective. 
Unfortunately, this supposition is not supported by serious philosophical analysis or sociological observation. 
In reality, what makes scientific knowledge so credible is that it is produced by an open , imaginative , self-critical , disinterested , communal process . 
It is these institutional characteristics of scientific research that win our worldly-wise trust. 
People seldom appreciate how deeply these characteristics are woven into the university tradition. 
For example, lecturers and professors are not tested for their expertise, nor employed to carry out specific research projects. 
Nevertheless, customary practices such as `publish or perish,' peer review and academic tenure ensure that they are indeed good scientists. 
They retain their intellectual autonomy, but could only have won their university posts - and thereby access to research facilities - on the basis of competitive assessments of the originality and promise of their published research. 
University research organised in this manner is only one of many possible ways of carrying out `public science.' 
The key point is that up to now it has had a distinctive non-instrumental role that cannot be performed by `proprietary science.' 
However technically sound they may be, research results that have been deliberately produced, in secret, for corporate profit are inevitably suspected of bias. 
By admitting `conflict of interest,' scientists engaged in such research show that they cannot disengage themselves from the worldly agendas of their patrons. 
Nor can they exemplify to their students the fundamental scientific values of intellectual autonomy and open dissent. 
No matter how potent and sincere their expertise, it can do little to strengthen civil society or the public good. 
Of course the funding of science raises many political and economic problems. 
For example, how should governments justify public expenditure on completely `useless' disciplines such as particle physics and astronomy? 
But these problems are not solved by handing them over to `market forces.' 
Indeed, it is in highly commercialised fields such as biomedicine that the merging of public and proprietary science is most worrying. 
This is precisely where societal demands for trustworthy scientific knowledge and non-partisan expertise are most pressing. 
The fashionable call for ever-closer union between academia, industry and government ignores a vital element of the scientific enterprise. 
These great sectors of our economy and polity will surely go on evolving internally, and interacting energetically, beyond anything we can easily foresee. 
In each sector, the research system will be reformed and reconfigured along with the knowledge that it produces. 
But scientists in all three sectors should fight openly against changes that fail to recognise, celebrate, and fully support the distinctive, irreplaceable role of `public science' in an open, pluralistic society. 

Ten Consequences of Trump 
LONDON – For those of us who were wrong about the United States’ presidential election, it is worth suppressing emotional reactions, at least for a month or two, and attempting a dispassionate judgment about what Donald Trump’s administration may mean for the world. 
So here are ten likely consequences of the Trump presidency, divided equally between the good and the bad. 
The good news starts with US growth, which will almost surely accelerate well above the 2.2% average annual rate during President Barack Obama’s second term. 
This is because the Republican aversion to public spending and debt applies only when a Democrat like Obama occupies the White House. 
With a Republican president, the party has always been glad to boost public spending and relax debt limits, as it was under Presidents Ronald Reagan and George W. Bush. 
Thus, Trump will be able to implement the Keynesian fiscal stimulus that Obama often proposed but was unable to deliver. 
The resulting deficits may be described as “supply-side economics,” rather than Keynesian stimulus, but the effect will be the same: growth and inflation will both increase. 
As the US economy runs into the limits of full employment, additional growth will push inflation higher, but that bad news can wait until 2018 and beyond. 
Second, sensible tax reforms, such as an amnesty for multinational companies that repatriate foreign profits, will finally become law. 
The Republicans’ hegemony will enable easy agreement on tax cuts financed mainly by higher public borrowing, rather than by facing down special-interest lobbies’ resistance to the elimination of exemptions and loopholes. 
These tax reforms will create even bigger budget deficits, which in turn will stimulate more growth and inflation. 
A third boost to economic growth will come from deregulation. 
While battles over energy and environmental laws may dominate the headlines, the biggest economic impact will come from reversing bank regulations. 
As banks are encouraged to loosen lending standards, especially for middle-income households, an upswing in residential construction and debt-financed consumption should add further growth impetus. 
Excessive deregulation could cause a re-run of the 2007 financial crisis, but that, too, is a risk for 2018 and beyond. 
Fourth, Trump could be good for geopolitical stability, at least in the short term. 
Trump’s preference for transactional realpolitik over Obama’s liberal interventionism should stabilize relations with Russia and China as the world is divided into spheres of influence. 
Trump could give Russia freer rein in Ukraine and Syria in exchange for restraint in Central Europe and the Baltics. 
China’s inevitable dominance in Asia could be accepted, provided it avoids outright wars with Japan, Taiwan, and other countries whose security is, in theory, guaranteed by treaties with the US. 
The Middle East is bound to remain a cauldron of geopolitical unrest; but, even here, Trump’s preference for local strongmen over “democracy promotion” could restore a degree of stability (at the cost of human rights). 
Finally, Trump’s election could force Americans to recognize flaws in their own democracy, even as they abandon global “democracy promotion.” 
The fact that Trump lost the popular vote by more than two million could re-energize efforts to reform the Electoral College – efforts that already have resulted in the necessary legislation in states representing 61% of the required votes. 
And the overwhelming opposition to Trump in trend-setting states such as California and New York could encourage their voters to elect legislatures to counteract federal conservatism with progressive state laws on issues ranging from air quality and health care to abortion, treatment of immigrants, and gun control. 
Now for the bad news. 
For the first time since the 1930s, the US has a president who views trade as a zero-sum game. 
Trump’s protectionist campaign rhetoric may not have been meant literally, but if he fails to deliver any of the trade curbs that he promised, Republicans will suffer a backlash from what is now their core voter constituency, voters in declining industries and regions. 
US global leadership is therefore bound to shift away from free trade, globalization, and open markets. 
Nobody can predict the full effects of the biggest regime change in global economic management since the 1980s; but they will surely be negative for emerging economies and multinational companies, whose development models and business strategies have assumed free trade and open capital flows. 
A second, more immediate, threat stems from enacting large tax cuts and boosting public spending in an economy already nearing full employment, which implies accelerating inflation, higher interest rates, or probably some combination of the two. 
Given the likelihood of additional trade protectionism and measures to remove immigrant workers, the increase in inflation and long-term interest rates could be quite dramatic. 
The impact on financial markets will be disruptive, regardless of whether the Fed aggressively tightens monetary policy to pre-empt rising prices or lets the economy “run hot” for a year or two, allowing inflation to accelerate. 
With the US economy growing faster than expected and long-term interest rates rising, excessive strengthening of the dollar is a third major risk. 
Even though the dollar is already overvalued, it could move into a self-reinforcing upward spiral, as it did in the early 1980s and late 1990s, owing to dollar debts accumulated in emerging markets by governments and companies tempted by near-zero interest rates. 
Fourth, the combination of a dollar squeeze and protectionism spells big trouble for developing countries, with the possible exception of some relatively closed economies such as Brazil, Russia, and India, whose development strategies are less reliant on free trade and foreign financing. 
Finally, the most dangerous consequence of Trump’s victory may be its contagion effect on Europe. 
Just as Britain’s referendum proved uncannily predictive of Trump’s win, Trump looks like a leading indicator of populist upheavals in Europe, which could trigger another euro crisis and threaten the breakup of the European Union. 
The next anti-establishment victories, according to opinion polls, will be in Italy’s constitutional referendum and Austria’s presidential election. 
Globalists can only hope that the polls again turn out to be wrong – but in the opposite direction. 

Ten Reasons Why China is Different 
NEW HAVEN – The China doubters are back in force. 
They seem to come in waves – every few years, or so. 
Yet, year in and year out, China has defied the naysayers and stayed the course, perpetuating the most spectacular development miracle of modern times. 
That seems likely to continue. 
Today’s feverish hand-wringing reflects a confluence of worries – especially concerns about inflation, excess investment, soaring wages, and bad bank loans. 
Prominent academics warn that China could fall victim to the dreaded “middle-income trap,” which has derailed many a developing nation. 
There is a kernel of truth to many of the concerns cited above, especially with respect to the current inflation problem. 
But they stem largely from misplaced generalizations. 
Here are ten reasons why it doesn’t pay to diagnose the Chinese economy by drawing inferences from the experiences of others: 
Strategy. 
Since 1953, China has framed its macro objectives in the context of five-year plans, with clearly defined targets and policy initiatives designed to hit those targets. 
The recently enacted 12th Five-Year Plan could well be a strategic turning point – ushering in a shift from the highly successful producer model of the past 30 years to a flourishing consumer society. 
Commitment. 
Seared by memories of turmoil, reinforced by the Cultural Revolution of the 1960’s and 1970’s, China’s leadership places the highest priority on stability. 
Such a commitment served China extremely well in avoiding collateral damage from the crisis of 2008-2009. 
It stands to play an equally important role in driving the fight against inflation, asset bubbles, and deteriorating loan quality. 
Wherewithal to deliver. 
China’s commitment to stability has teeth. 
More than 30 years of reform have unlocked its economic dynamism. 
Enterprise and financial-market reforms have been key, and many more reforms are coming. 
Moreover, China has shown itself to be a good learner from past crises, and shifts course when necessary. 
Saving. 
A domestic saving rate in excess of 50% has served China well. 
It funded the investment imperatives of economic development and boosted the cushion of foreign-exchange reserves that has shielded China from external shocks. 
China now stands ready to absorb some of that surplus saving to promote a shift toward internal demand. 
Rural-urban migration. 
Over the past 30 years, the urban share of the Chinese population has risen from 20% to 46%. 
According to OECD estimates, another 316 million people should move from the countryside to China’s cities over the next 20 years. 
Such an unprecedented wave of urbanization provides solid support for infrastructure investment and commercial and residential construction activity. 
Fears of excess investment and “ghost cities” fixate on the supply side, without giving due weight to burgeoning demand. 
Low-hanging fruit – Consumption. 
Private consumption accounts for only about 37% of China’s GDP – the smallest share of any major economy. 
By focusing on job creation, wage increases, and the social safety net, the 12th Five-Year Plan could spark a major increase in discretionary consumer purchasing power. 
That could lead to as much as a five-percentage-point increase in China’s consumption share by 2015. 
Low-hanging fruit – Services. 
Services account for just 43% of Chinese GDP – well below global norms. 
Services are an important piece of China’s pro-consumption strategy – especially large-scale transactions-based industries such as distribution (wholesale and retail), domestic transportation, supply-chain logistics, and hospitality and leisure. 
Over the next five years, the services share of Chinese GDP could rise above the currently targeted four-percentage-point increase. 
This is a labor-intensive, resource-efficient, environmentally-friendly growth recipe – precisely what China needs in the next phase of its development. 
Foreign direct investment. 
Modern China has long been a magnet for global multinational corporations seeking both efficiency and a toehold in the world’s most populous market. 
Such investments provide China with access to modern technologies and management systems – a catalyst to economic development. 
China’s upcoming pro-consumption rebalancing implies a potential shift in FDI – away from manufacturing toward services – that could propel growth further. 
Education. 
China has taken enormous strides in building human capital. 
The adult literacy rate is now almost 95%, and secondary school enrollment rates are up to 80%. 
Shanghai’s 15-year-old students were recently ranked first globally in math and reading as per the standardized PISA metric. 
Chinese universities now graduate more than 1.5 million engineers and scientists annually. 
The country is well on its way to a knowledge-based economy. 
Innovation. 
In 2009, about 280,000 domestic patent applications were filed in China, placing it third globally, behind Japan and the United States. 
China is fourth and rising in terms of international patent applications. 
At the same time, China is targeting a research-and-development share of GDP of 2.2% by 2015 – double the ratio in 2002. 
This fits with the 12th Five-Year Plan’s new focus on innovation-based “strategic emerging industries” – energy conservation, new-generation information technology, biotechnology, high-end equipment manufacturing, renewable energy, alternative materials, and autos running on alternative fuels. 
Currently, these seven industries account for 3% of Chinese GDP; the government is targeting a 15% share by 2020, a significant move up the value chain. 
Yale historian Jonathan Spence has long cautioned that the West tends to view China through the same lens as it sees itself. 
Today’s cottage industry of China doubters is a case in point. 
Yes, by our standards, China’s imbalances are unstable and unsustainable. 
Chinese Premier Wen Jiabao has, in fact, gone public with a similar critique. 
But that’s why China is so different. 
It actually takes these concerns seriously. 
Unlike the West, where the very concept of strategy has become an oxymoron, China has embraced a transitional framework aimed at resolving its sustainability constraints. 
Moreover, unlike the West, which is trapped in a dysfunctional political quagmire, China has both the commitment and the wherewithal to deliver on that strategy. 

Ten Years after the Mouse Roared 
CAMBRIDGE – Al Qaeda’s attack on the United States ten years ago was a profound shock to both American and international public opinion. 
What lessons can we learn a decade later? 
Anyone who flies or tries to visit a Washington office building gets a reminder of how American security was changed by 9/11. 
But, while concern about terrorism is greater, and immigration restrictions are tighter, the hysteria of the early days after 9/11 has abated. 
New agencies such as the Department of Homeland Security, the Director of National Intelligence, and an upgraded Counter Terrorism Center have not transformed American government, and, for most Americans, personal freedoms have been little affected. 
No more large-scale attacks have occurred inside the US, and everyday life has recovered well. 
But this apparent return to normality should not mislead us about the longer-term importance of 9/11. 
As I argue in my book The Future of Power, one of the great power shifts of this global information age is the strengthening of non-state actors. 
Al Qaeda killed more Americans on 9/11 than the attack by the government of Japan did at Pearl Harbor in 1941. 
This might be called the “privatization of war.” 
During the Cold War, the US had been even more vulnerable, in technological terms, to a nuclear attack from Russia, but “mutual assured destruction” prevented the worst by keeping vulnerability more or less symmetrical. 
Russia controlled great force, but it could not acquire power over the US from its arsenal. 
Two asymmetries, however, favored Al Qaeda in September 2001. 
First, there was an asymmetry of information. 
The terrorists had good information about their targets, while the US before September 11 had poor information about the identity and location of terrorist networks. 
Some government reports had anticipated the extent to which non-state actors could hurt large states, but their conclusions were not incorporated into official plans. 
Second, there was an asymmetry in attention. 
A larger actor’s many interests and objectives often dilute its attention to a smaller actor, which, by contrast, can focus its attention and will more easily. 
There was a good deal of information about Al Qaeda in the American intelligence system, but the US was unable to process coherently the information that its various agencies had gathered. 
But asymmetries of information and attention do not confer a permanent advantage on the wielders of informal violence. 
To be sure, there is no such thing as perfect safety, and, historically, waves of terrorism have often taken a generation to recede. 
Even so, the elimination of top Al Qaeda leaders, the strengthening of American intelligence, tighter border controls, and greater cooperation between the FBI and the CIA have all clearly made the US (and its allies) safer. 
But there are larger lessons that 9/11 teaches us about the role of narrative and soft power in an information age. 
Traditionally, analysts assumed that victory went to the side with the better army or the larger force; in an information age, the outcome is also influenced by who has the better story. 
Competing narratives matter, and terrorism is about narrative and political drama. 
The smaller actor cannot compete with the larger in terms of military might, but it can use violence to set the world agenda and construct narratives that affect its targets’ soft power. 
Osama bin Laden was very adept at narrative. 
He was not able to do as much damage to the US as he hoped, but he managed to dominate the world agenda for a decade, and the ineptness of the initial American reaction meant that he could impose larger costs on the US than were necessary. 
President George W. Bush made a tactical error in declaring a “global war on terrorism.” 
He would have done better to frame the response as a reply to Al Qaeda, which had declared war on the US. 
The global war on terror was misinterpreted to justify a wide variety of actions, including the misguided and expensive Iraq War, which damaged America’s image. 
Moreover, many Muslims misread the term as an attack on Islam, which was not America’s intent, but fit Bin Laden’s efforts to tarnish perceptions of the US in key Muslim countries. 
To the extent that the trillion or more dollars of unfunded war costs contributed to the budget deficit that plagues the US today, Bin Laden was able to damage American hard power. 
And the real price of 9/11 may be the opportunity costs: for most of the first decade of this century, as the world economy gradually shifted its center of gravity toward Asia, the US was preoccupied with a mistaken war of choice in the Middle East. 
A key lesson of 9/11 is that hard military power is essential in countering terrorism by the likes of Bin Laden, but that the soft power of ideas and legitimacy is essential for winning the hearts and minds of the mainstream Muslim populations from whom Al Qaeda would like to recruit. 
A “smart power” strategy does not ignore the tools of soft power. 

Ten years of European Security and Defence Policy 
BRUSSELS – 2009 is a landmark year for the European Union's role in the world. 
It marks ten years of European Security and Defence Policy (ESDP), during which the EU became a global provider of security, making a real difference to people's lives all over the world. 
At the same time, we are on the threshold of a new era when the Lisbon Treaty enters into force and provides fresh impetus for our external action. 
In ten years, we have deployed 20 operations on three continents to help prevent violence, restore peace and rebuild after a conflict. 
From Kabul to Pristina, from Ramallah to Kinshasa, the EU is monitoring borders, overseeing peace agreements, training police forces, building up criminal justice systems and protecting shipping from pirate attacks. 
Thanks to our achievements, we are receiving more and more calls to help in a crisis or after a war. 
We have the credibility, the values and the will to do this. 
The EU was ahead of its time in 1999. 
The comprehensive, multi-faceted nature of our approach was novel. 
And the EU remains the only organisation that can call on a full panoply of instruments and resources that complement the traditional foreign policy tools of its member states, both to pre-empt or prevent a crisis and to restore peace and rebuild institutions after a conflict. 
This is where the EU's unique added value lies. 
We combine humanitarian aid and support for institution-building and good governance with crisis-management capacities, technical and financial assistance, and political dialogue and mediation. 
The EU's joint civilian-military approach makes us flexible and able to offer tailor-made solutions to complex problems. 
Today's conflicts demonstrate more clearly than ever that a military solution is neither the sole nor the best option, particularly during the stabilization of a crisis — a truth President Barack Obama has also emphasised. 
The ESDP first cut its teeth in the Balkans. 
When the Yugoslav wars broke out in the 1990's we watched as our neighbourhood burned because we had no means of responding to the crisis. 
We learned our lesson and organised ourselves, acquiring a set of capabilities coupled with decision-making procedures and a security doctrine. 
In 2003, we prevented a fresh outbreak of hostilities in the former Yugoslav Republic of Macedonia through our diplomatic efforts and then deployed Operation Concordia. 
In 2004, Operation Althea took over from the NATO peacekeeping force in Bosnia and Herzegovina. 
Today, we are still deeply engaged in the Balkans, fighting organised crime and building up the institutions of law and order. 
For example, EULEX Kosovo is the largest EU mission to date, with some 2,000 staff, working in the police and judicial system and in mobile customs teams. 
The EU's crisis-management and peace-building activities are not restricted to its backyard. 
We have made a real difference in Africa, helping, for example, to provide a secure environment for elections in the Democratic Republic of Congo and protecting refugees and aid workers from the fall-out of the Darfur crisis. 
Last year, we mounted EUNAVFOR, our first-ever naval operation, to combat piracy in the waters off Somalia. 
Who would have guessed 10 years ago that the EU would one day lead a taskforce of 13 frigates in the Indian Ocean that would cut the success rate of pirate attacks by half? 
This year the EU has 12 operations running concurrently — more than ever before. 
Since 2003, some 70,000 men and women have been deployed in 23 crisis-management operations. 
They come from EU member states and non-EU countries that also take part in our operations, including Norway, Switzerland, Ukraine, Turkey and the United States. 
Of these 23 missions, six have been military and the other 17 civilian. 
We deploy army or navy personnel when and where they are needed but our business is peace-building not waging war. 
The EU is not a military alliance. 
The solution to any crisis, emergency or conflict, must always be political and our ESDP actions are always firmly anchored in political strategies, formed by consensus. 
Our ESDP missions have taken us as far afield as Aceh, Indonesia, where we monitored the peace agreement reached after the 2004 tsunami, following decades of civil war. 
Working closely with the Association of South-Eastern Asian Nations (ASEAN), we mediated between rebels and the government and oversaw the decommissioning of weapons. 
As we gain experience and expertise we are mounting increasingly ambitious operations. 
Our success with Operation Artemis, in the Democratic Republic of Congo, where the EU intervened in 2003 after violent clashes and a humanitarian crisis in Bunia, helped prepare us to mount our EUFOR operation in Chad and the Central African Republic and EUNAVFOR Somalia, which South Africa has expressed an interest in joining. 
Last year, we showed how rapidly we could mobilize when we deployed a monitoring mission to the Caucasus in less than three weeks to help defuse the crisis between Russia and Georgia, following the EU-mediated peace agreement. 
As a member of the International Quartet, the EU is deeply engaged at diplomatic level in the Middle East Peace Process and the moment an agreement is reached between the Israelis and Palestinians we will be ready to help implement it on the ground. 
We already have a mission in the West Bank helping to build up the Palestinian civil police and criminal justice system. 
In Somalia, we are considering security-sector reform measures to complement EUNAVFOR Somalia and the humanitarian aid and political support that we are already providing. 
To respond to the growing calls to help tackle regional and global security challenges, the EU must improve the efficiency and coherence of its external action still further. 
We currently have a gap between our ambitions and our resources which must be addressed. 
Clearer priorities and more sensible budgeting decisions are needed. 
And we need to strengthen our civilian and military capabilities and boost their funding in order to back up our political decisions. 
The EU's unique, joint civilian-military approach must be further developed to make us yet more flexible. 
Our capacity to deploy rapid reaction forces also needs strengthening. 
In the second decade of ESDP, the Lisbon Treaty will put all this within the EU's grasp. 

Terror Or Reform In The Greater Middle East 
Last week's brutal bombing in Madrid is part of a wave of terror that has made victims of Christians as well as Muslims. 
Everywhere debate is focused on the best way to combat this form of terrorism and on the importance, in this context, of the Greater Middle East initiative that the United States wants the G8 and NATO to approve in June. 
Agreement is uncertain. 
Unlike European leaders such as Joschka Fischer, Germany's Foreign Minister, the US excludes the Israeli-Arab conflict from the initiative, and wants to concentrate solely on the social and economic problems that feed extremism and terrorism in the Islamic world. 
Concern with the region did not begin with the attacks in the US in September 2001 or with the Madrid bombings. 
Already in the 1980's and 1990's, Europe had launched the "Barcelona Process" to promote democracy, security and development in the region. 
Then, as now, fears about regional instability, economic stagnation, and social backwardness abounded. 
There were anxieties, too, that the increasing loss of legitimacy of Arab nationalist regimes would benefit radical Islamists - fears confirmed by Algeria's bloody civil war of the 1990's. 
But if defending the status quo no longer seems possible, regime change incites its own fears. 
Many suspect that Islamist radicals will be the big winners in any democratic opening. 
This led some to support the Algerian government's military crackdown after Islamists won the first round of 1991 legislative elections. But the stubborn inertia of authoritarian regimes only encourages radicalization, so there is a clear need for a gradual process of liberalization. 
This dilemma underscores the difficulty in crafting a democratization strategy for so vast a region as "the Greater Middle East," which stretches from Mauritania to Pakistan. 
After all, any such strategy must, by definition, ignore local specificities and regional realities. 
What is needed instead are policies that reflect particular circumstances in different states and regions, together with an awareness that democracy is, above all, a statement about national realities and depends primarily on domestic factors. 
If imposing a single strategy is unviable, what should the European option be, and what policy should the G8 and NATO adopt? 
Any truly viable policy must get eight things right: 
· Court public opinion. 
It is not only Middle East governments that should be involved. Civil society and public opinion must also be included. 
· Support democratic transition. 
Incumbent leaders must have the proper incentives to initiate gradual processes of reform. 
Each positive initiative, whether it comes from governments or civil societies, should be supported. 
The historical parallel here is not, as is often suggested, with the Organization for Security and Cooperation in Europe, but with the Marshall Plan, which provided real incentives, not lofty rhetoric and hortatory appeals, for integration and democratic consolidation. 
· Reinforce anti-terrorist cooperation. 
The fight against terrorism, which requires short-term successes, must be differentiated from the long-term process of reform. 
The priority in fighting terrorism should be police and intelligence service cooperation, which produces much faster results and limits the capacity of extremists to mobilize. 
· Be coherent and consistent. 
Human rights cannot be defended if antiterrorism activities fail to respect the rule of law. 
Nor can democracy be advanced if authoritarian regimes are supported simultaneously merely because - like Saddam Hussein's Iraq - they are secular and anti-Islamist. 
· Sustain long-term commitments. 
Initiatives such as the Euro-Mediterranean Partnership and the European Neighborhood Policy need sustained political engagement and resources if they are to work. 
NATO's attempt to change public perceptions of its objectives and operations is also in effect a long-term effort. 
Larger projects, such as the Greater Middle East initiative, are much less sustainable than targeted initiatives and are more susceptible to the exigencies of electoral campaigns. 
· Get America's role right. 
As with postwar European integration, America has a crucial role to play. 
It must contribute in its own unique way to resolving conflicts that hinder inclusion and feed radicalism. 
The main US focus must be on finding a fair solution to the Israeli-Palestinian question and to the Iraq crisis. 
Of course, America's economic support for political reform would be welcome. 
· Capitalize on institutional diversity. 
Because NATO and the EU share complementary priorities, both can develop mechanisms for inclusive security cooperation in peacekeeping operations. 
· Address the question of political Islam. 
None of these tasks can be achieved without serious reflection about political Islam. 
Its diversity must be recognized, so that groups that resort to violence can be differentiated from those that do not. 
There can be no democratic transition if Islamic currents that reject violence and accept democracy's ground rules are not integrated into the public arena. 
A key factor in the success of any EU Middle East initiative will be the millions of European citizens of North African origin, who have a political, cultural, and economic role to play. 
That is why the current French debate on the headscarf is so important, for it concerns the rights of Muslim women in European societies and the protection of diversity. 
Democracies can deal with political Islam and respect fundamental rights. 
They can fight obscurantism and respect diversity. 
Indeed, the main lesson of recent years is that their own security requires that they support democratic openings elsewhere. 

Terror vs. Liberty 
The terrorism that we have come to associate with Al Qaeda is special in many ways. 
It is global, technologically sophisticated, but, above all, it is not about an achievable political objective. 
It is not aimed at creating a united (Catholic) Ireland, an independent Basque country, or even a Palestinian state, but at a particular worldview and those who represent it. 
It is aimed at what used to be called the West, that is, a liberal order of things, a free world. 
Because the United States is the most visible and powerful representative of that free world, it is aimed against America and its closest allies in Europe and elsewhere. 
This is a critical fact to remember. 
What we describe under the heading of Al Qaeda is an essentially negative, destructive movement. 
It does not offer an alternative view of the modern world other than the implicit claim that modernity is neither necessary nor desirable. 
Moreover, that claim, when made by men who appear to be religious leaders, is almost certainly dishonest. 
Such leaders are using religion for their own highly modern political purposes; they use it to organize and mobilize their supporters - to commit individual or collective suicide, if need be. 
In this they are not entirely dissimilar from the totalitarian leaders of fascist movements, who likewise built on popular frustration to pursue an essentially destructive purpose in the name of anti-modern beliefs and promises. 
Violence born from such sources is difficult to fight. 
Signs of frustration with modernity are never hard to find. 
They are present in highly developed countries, but above all in entire regions of the world that are suspended between a yesterday that no longer exists and a tomorrow that has not yet come into being. 
How, then, do free countries deal with terrorist expressions of organized frustration? 
Without doubt, the first priority for any free country must be to protect its citizens and assets against acts of terrorist violence. 
Given a globalized movement of fury, this is not simple. 
It requires measures that do not come easily to citizens, groups, and authorities steeped in a tradition of liberalism and tolerance. 
We must accept that there are limits to tolerance. 
Opting out of the values and customs of free societies is problematic, but it is ultimately acceptable. 
Non-aggressive demonstrations of difference - including Islamic headscarves worn by students or teachers in largely Christian countries - should be bearable. 
But violence should never be tolerated. 
The monopoly on the use of violence exercised by democratic states must be preserved, which may involve expelling non-citizens who choose violence or advocate its use, and the detention of citizens who have practiced or threatened it. 
However, it is of critical importance that the treatment of terrorists and those suspected of terrorist acts remains strictly within the rule of law. 
Indefinite detention without trial is as unacceptable as defining people as "illegal combatants," to whom no rules of any kind apply. 
The status of the prisoners held at Guantanamo Bay and the recent incidents of possibly systematic humiliation and torture of Iraqi prisoners cast doubt on the very values on which a liberal order is based. 
Such incidents make one wonder whether the terrorists have, in the end, achieved their aim of destroying the West and what it stands for. 
Terrorism aimed at the destruction of the liberal order is a test of that order. 
This is particularly so if one accepts - as I do - intervention in the internal affairs of countries in order to prevent genocide or the murderous suppression of minorities and opposition groups. 
But intervention must never borrow methods from those against whom it is undertaken. 
This applies also to the intervening powers' objectives. 
Terrorism of the Al Qaeda type is basically destructive. 
Any response must be basically constructive. 
The frustration of many in the economically developed countries is, like the frustration of entire countries in developing regions, a challenge. 
This challenge cannot really be met by simply promising unlimited opportunities, as they uniquely exist in America. 
It requires a sense of social responsibility that accompanies and cushions the painful process of modernization. 
People who are suspended between a lost past and a future not yet gained need help. 
Such assistance will not yield immediate results, but awareness of the medium term - which means readiness to face it by delaying immediate gratification - is also a sign of a liberal order. 
Thus, fighting Al Qaeda is not a war. 
It is partly self-defense, partly an assertion of the rule of law in difficult circumstances, and partly a constructive effort to redress the causes of frustration. 

Terrorism and Counter-Terrorism Reconsidered 
The arrests in London of 21 terrorists who appear to have planned to blow up a number of airplanes over the Atlantic reminds us, if any reminder is needed, of the terrorist attacks on New York and Washington of September 11, 2001. 
9/11 remains the date that has come to signify modern terrorism in all of its terrible capacity to cause death and destruction. 
Five years may be too short a period for historians to judge the full significance of the event, but it does offer an opportunity to take stock. 
At best, it is a mixed record. 
Terrorist attacks have occurred subsequently in Indonesia, Madrid, London, Egypt, and most recently Mumbai. 
Thousands of innocent men, women and children have been killed. 
There is also the steady drumbeat of terrorist violence in Iraq – violence that risks pushing the country into full-scale civil war. 
But the terrorists still have not done anything on the scale of 9/11. 
The reason for this is worth thinking about. 
It may reflect the ouster of the government of Afghanistan and the elimination of al-Qaida’s safe haven there. 
Improved and better coordinated intelligence, law enforcement, and homeland security efforts at both the national and international levels have made it more difficult for terrorists to succeed. 
And as the recent arrests in London suggest, it is also possible that the desire of some terrorists to accomplish something more dramatic than the 9/11 attacks may have complicated their ability to implement their plans and increased the prospect that they will be detected. 
None of this should make anyone sanguine. 
Globalization makes it easier for terrorists to acquire the tools of their trade and to move about. 
The odds also favor terrorists, in that one success can compensate for multiple failures. 
Modern technology, possibly including weapons of mass destruction, increases the possibility that any terrorist success will cause damage of great magnitude. 
In addition, Iraq is producing a new generation of experienced terrorists along the lines that Afghanistan did two decades ago. 
So what needs doing? 
One answer put forward by the Bush administration is to promote democracy. 
The thinking is that young men and women will be less likely to become terrorists if they are members of societies that provide them with political and economic opportunities to live meaningful and satisfying lives. 
Unfortunately, the evidence does not support this. 
Individuals growing up in mature democracies such as the United Kingdom can still become alienated and radicalized. 
A more democratic Iraq has become a more violent Iraq. 
Similarly, elections in Palestine did not persuade Hamas to turn its back on violence any more than elections in Lebanon dissuaded Hezbollah from initiating the current crisis in the Middle East. 
Moreover, even if democracy were the answer, it is extraordinarily difficult to bring about, as Iraq shows. 
Building a true democracy (as opposed to simply holding elections) is an enterprise that requires decades or even generations. 
In the meantime, however, we require a policy to deal with the terrorism that confronts us. 
What is more, democracy is irrelevant to those who are already committed terrorists. 
Their goals of re-creating some 7th century caliphate or, in the case of Iraq, restoring Sunni domination are unlikely to be satisfied by free men and women openly choosing their political system and leadership. 
So what, then, needs doing? 
The first thing to do is to drop the metaphor of a “war on terrorism.” 
Wars are mostly fought with arms on battlefields between soldiers of opposing countries. 
Wars have beginnings and ends. 
None of these characteristics apply here. 
Terrorism can now be carried out with boxcutters and airplanes as easily as with explosives. 
Office buildings and commuter trains and coffee shops are today’s battlefields. 
There are no uniforms, and often those doing the killing are acting in the name of causes or movements. 
And there is no end in sight. 
To the contrary, terrorism is now part of the fabric of contemporary life. 
There is another reason to jettison the martial vocabulary. 
Terrorism cannot be defeated by arms alone. 
Indeed, other instruments of policy, including intelligence, police work and diplomacy, are likely to play a larger part in any effective policy. 
Second, it is essential to distinguish between existing and potential terrorists. 
Existing terrorists need to be stopped before they act; failing that, societies need to protect themselves and have ready the means of reducing the consequences of successful attacks. 
But much more than that can - and should - be done to persuade young men and women not to become terrorists in the first place. 
The aim must be to create an environment in which terrorism is seen as neither acceptable nor necessary. 
Terrorism must be stripped of its legitimacy; those carrying it out must be shamed. 
No political cause justifies the taking of innocent life. 
Arab and Muslim leaders need to make this clear, be it in public pronouncements by politicians, lectures by teachers, or fatwas by leading clerics. 
The initial critical reaction on the part of several Arab governments to Hezbollah’s kidnapping of Israeli soldiers is a sign that such criticism is possible, as are selective comments by a number of Muslim religious leaders. 
But terrorism also needs to be stripped of its motivation. 
This translates into the United States and others spelling out the gains Palestinians can expect in a peace agreement with Israel and what Sunnis and Shia can reasonably expect in Iraq’s new political order. 
Bringing about a lasting cease-fire in Lebanon will also help calm the emotions that will lead some to become terrorists and others to tolerate or support them. 
The way ahead is clear: vigilance against violence coupled with political possibility. 
Such a counter-terrorism policy will not eliminate the scourge of terrorism any more than modern medicine can eliminate disease. 
But it does hold out the promise of reducing it to a scale that will not threaten the openness, security, or prosperity of modern societies. 

Five Truths about Terrorism 
SAO PAULO – American politics has been captured by terrorists. 
In December 2015, polls showed that one in six Americans, some 16% of the population, now identify terrorism as the most important national problem, up from just 3% in the previous month. 
This is the highest percentage of Americans to mention terrorism in a decade, although it is still lower than the 46% measured after the terrorist attacks of September 11, 2001. 
The effect of this change in public opinion has been particularly strong in the Republican presidential primary. 
It certainly boosted the candidacy of Donald Trump, whose anti-Muslim rhetoric has been particularly tough (if not incendiary). 
Some politicians are starting to call the battle against terrorism “World War III.” 
Terrorism is a problem for the United States, as the attack in San Bernardino, California in December showed. 
But it has been blown out of proportion, both by the presidential candidates and by a news media that adheres to the old adage, “If it bleeds, it leads.” 
To put terrorism in proper perspective, Americans – and others – should bear in mind the following considerations. 
Terrorism is a form of theater. 
Terrorists are more interested in capturing attention and putting their issue at the forefront of the agenda than in the number of deaths they cause per se. 
The Islamic State (ISIS) pays careful attention to stagecraft. 
The barbaric beheadings that are broadcast and disseminated through social media are designed to shock and outrage – and thereby capture attention. 
By exaggerating their effect and making every terrorist act a lead story, we play into their hands. 
Terrorism is not the biggest threat facing people in advanced countries. 
Terrorism kills far fewer people than auto accidents or cigarettes. 
Indeed, terrorism is not even a big threat – or a small one, for that matter. 
One is likelier to be struck by lightning than to be killed by a terrorist. 
Experts estimate that an American’s annual risk of being killed by a terrorist is one in 3.5 million. Americans are more likely to die in an accident involving a bathtub (one in 950,000), a home appliance (one in 1.5 million), a deer (one in two million), or on a commercial airliner (one in 2.9 million). 
Six thousand Americans die annually from texting or talking on the phone while driving. 
That is several hundred times more than die from terrorism. 
Radical Islamic terrorism kills fewer Americans than attacks by disgruntled workplace and school shooters. 
Terrorism is not World War III. 
Global terrorism is not new. 
It often takes a generation for a wave of terrorism to burn out. 
At the beginning of the twentieth century, the anarchist movement killed a number of heads of state for utopian ideals. 
In the 1960s and 1970s, the “new left” Red Brigades and Red Army Faction hijacked planes across national borders and kidnapped and killed business and political leaders (as well as ordinary citizens). 
Today’s jihadist extremists are a venerable political phenomenon wrapped in religious dress. 
Many of the leaders are not traditional fundamentalists, but people whose identity has been uprooted by globalization and who are searching for meaning in the imagined community of a pure Islamic caliphate. 
Defeating them will require time and effort, but ISIS’s parochial nature limits the range of its appeal. 
With its sectarian attacks, it cannot even appeal to all Muslims, much less Hindus, Christians, and others. 
ISIS will eventually be defeated, just as other transnational terrorists were. 
Terrorism is like jiu jitsu. 
The smaller actor uses the larger actor’s strength to defeat it. 
No terrorist organization is as powerful as a state, and few terrorist movements have succeeded in overthrowing one. 
But if they can outrage and frustrate citizens of the state into taking self-defeating actions, they can hope to prevail. 
Al-Qaeda succeeded in luring the US into Afghanistan in 2001. 
ISIS was born in the rubble of the subsequent US-led invasion of Iraq. 
Smart power is needed to defeat terrorism. 
Smart power is the ability to combine hard military and police power and the soft power of attraction and persuasion. 
Hard power is needed to kill or capture die-hard terrorists, few of whom are open to attraction or persuasion. 
At the same time, soft power is needed to inoculate those on the periphery whom the die-hards are trying to recruit. 
That is why attention to narrative and how US actions play on social media is as important and as necessary as precision air strikes. 
Antagonistic rhetoric that alienates Muslims and weakens their willingness to provide crucial intelligence endangers us all. 
That is why the anti-Muslim posturing of some of the current presidential candidates is so counterproductive. 
Terrorism is a serious issue, and it deserves to be a top priority of our intelligence, police, military, and diplomatic agencies. 
It is an important component of foreign policy. 
And it is crucial to keep weapons of mass destruction out of terrorists’ hands. 
But we should not fall into the terrorists’ trap. 
Let the actions of thugs play out in an empty theater. 
If we let them take over the main stage of our public discourse, we will undermine the quality of our civic life and distort our priorities. 
Our strength will have been used against us. 

Complacency Will Be Tested in 2018 
NEW HAVEN – After years of post-crisis despair, the broad consensus of forecasters is now quite upbeat about prospects for the global economy in 2018. 
World GDP growth is viewed as increasingly strong, synchronous, and inflation-free. 
Exuberant financial markets could hardly ask for more. 
While I have great respect for the forecasting community and the collective wisdom of financial markets, I suspect that today’s consensus of complacency will be seriously tested in 2018. 
The test might come from a shock – especially in view of the rising risk of a hot war (with North Korea) or a trade war (between the US and China) or a collapsing asset bubble (think Bitcoin). 
But I have a hunch it will turn out to be something far more systemic. 
The world is set up for the unwinding of three mega-trends: unconventional monetary policy, the real economy’s dependence on assets, and a potentially destabilizing global saving arbitrage. 
At risk are the very fundamentals that underpin current optimism. 
One or more of these pillars of complacency will, I suspect, crumble in 2018. 
Unfortunately, the die has long been cast for this moment of reckoning. 
Afflicted by a profound sense of amnesia, central banks have repeated the same mistake they made in the pre-crisis froth of 2003-2007 – over staying excessively accommodative monetary policies. 
Misguided by inflation targeting in an inflationless world, monetary authorities have deferred policy normalization for far too long. 
That now appears to be changing, but only grudgingly. 
If anything, central bankers are signaling that the coming normalization may even be more glacial than that of the mid-2000s. 
After all, with inflation still undershooting, goes the argument, what’s the rush? 
Alas, there is an important twist today that wasn’t in play back then –central banks’ swollen balance sheets. 
From 2008 to 2017, the combined asset holdings of central banks in the major advanced economies (the United States, the eurozone, and Japan) expanded by $8.3 trillion, according to the Bank for International Settlements. 
With nominal GDP in these same economies increasing by just $2.1 trillion over the same period, the remaining $6.2 trillion of excess liquidity has distorted asset prices around the world. 
Therein lies the crux of the problem. 
Real economies have been artificially propped up by these distorted asset prices, and glacial normalization will only prolong this dependency. 
Yet when central banks’ balance sheets finally start to shrink, asset-dependent economies will once again be in peril. 
And the risks are likely to be far more serious today than a decade ago, owing not only to the overhang of swollen central bank balance sheets, but also to the overvaluation of assets. 
That is particularly true in the United States. 
According to Nobel laureate economist Robert J. Shiller, the cyclically adjusted price-earnings (CAPE) ratio of 31.3 is currently about 15% higher than it was in mid-2007, on the brink of the subprime crisis. 
In fact, the CAPE ratio has been higher than it is today only twice in its 135-plus year history – in 1929 and in 2000. 
Those are not comforting precedents. 
As was evident in both 2000 and 2008, it doesn’t take much for overvalued asset markets to fall sharply. 
That’s where the third mega-trend could come into play – a wrenching adjustment in the global saving mix. 
In this case, it’s all about China and the US – the polar extremes of the world’s saving distribution. 
China is now in a mode of saving absorption; its domestic saving rate has declined from a peak of 52% in 2010 to 46% in 2016, and appears headed to 42%, or lower, over the next five years. 
Chinese surplus saving is increasingly being directed inward to support emerging middle-class consumers – making less available to fund needy deficit savers elsewhere in the world. 
By contrast, the US, the world’s neediest deficit country, with a domestic saving rate of just 17%, is opting for a fiscal stimulus. 
That will push total national saving even lower – notwithstanding the vacuous self-funding assurances of supply-siders. 
As shock absorbers, overvalued financial markets are likely to be squeezed by the arbitrage between the world’s largest surplus and deficit savers. 
And asset-dependent real economies won’t be too far behind. 
In this context, it’s important to stress that the world economy may not be nearly as resilient as the consensus seems to believe – raising questions about whether it can withstand the challenges coming in 2018. 
IMF forecasts are typically a good proxy for the global consensus. 
The latest IMF projection looks encouraging on the surface – anticipating 3.7% global GDP growth over the 2017-18 period, an acceleration of 0.4 percentage points from the anemic 3.3% pace of the past two years. 
However, it is a stretch to call this a vigorous global growth outcome. 
Not only is it little different from the post-1965 trend of 3.8% growth, but the expected gains over 2017-2018 follow an exceptionally weak recovery in the aftermath of the Great Recession. 
This takes on added significance for a global economy that slowed to just 1.4% average growth in 2008-2009 – an unprecedented shortfall from its longer-term trend. 
The absence of a classic vigorous rebound means the global economy never recouped the growth lost in the worst downturn of modern times. 
Historically, such V-shaped recoveries have served the useful purpose of absorbing excess slack and providing a cushion to withstand the inevitable shocks that always seem to buffet the global economy. 
The absence of such a cushion highlights lingering vulnerability, rather than signaling newfound resilience – not exactly the rosy scenario embraced by today’s smug consensus. 
A quote often attributed to the Nobel laureate physicist Niels Bohr says it best: “Prediction is very difficult, especially if it’s about the future.” 
The outlook for 2018 is far from certain. 
But with tectonic shifts looming in the global macroeconomic landscape, this is no time for complacency. 

Testing America’s Financial Stability 
WASHINGTON, DC – Far-reaching financial-reform legislation has just been enacted in the United States – a landmark response to the most devastating financial crisis in decades, and one that takes important and welcome steps toward addressing the many weaknesses in the US regulatory and financial system that the crisis revealed. 
While the Obama administration and the US Congress were drawing lessons from the crisis and deliberating on reforms, the International Monetary Fund was also assessing the US financial system under the Financial Sector Assessment Program (FSAP). 
The FSAP was introduced in the wake of the Asia crisis in the mid-1990’s to enable objective assessment of the strengths and vulnerabilities of countries' financial systems, including the extent to which they measure up to international standards. 
The latest global crisis prompted the G-20 to re-affirm the importance of these FSAP “check-ups” to efforts to promote global stability, and it has even committed its members to undergo them regularly. 
So, with the US now having undertaken this exam, what insights does it provide about the health of the US financial system and recent regulatory reforms? 
The review contains many positive conclusions. 
It commends the US authorities for their bold and decisive action to stem the risk of systemic collapse during a period of extreme market turmoil. 
Although the crisis has imposed devastating costs nationally and internationally, the mistakes that led to the Great Depression seem to have been avoided. 
The US authorities also acted quickly to introduce reform legislation that addresses the weaknesses that led to the crisis. 
The passage of the Dodd-Frank Act by Congress represents a significant milestone in the reform of the US financial sector. 
Under the new act, a systemic risk regulator has been established, oversight of the shadow banking sector has been strengthened, and new mechanisms have been created to deal with the failure of systemically important non-banks. 
These reforms provide a basis for a safer and sounder financial system. 
Nevertheless, the FSAP assessment emphasizes that the job is not yet finished, and that there is critical work still to be done. 
First, while broad financial stability has been restored, and bank capital has been boosted significantly as a result of last year's “stress tests,” there are still important pockets of weakness. 
For, even if growth continues at its current pace, more capital will be needed, especially for small and mid-sized banks. 
These needs seem manageable, but, as recent events in Europe and recent US data have reminded us, the recovery and confidence remain fragile, especially against the backdrop of high public debt. 
If the economy were to weaken, the need for additional bank capital could be significant. 
Second, the Dodd-Frank Act represents a huge step forward in improving regulation of both individual financial institutions and the system as a whole. 
But it missed an important opportunity to streamline US supervisory agencies, leaving it unclear whether the longstanding gaps and conflicting mandates that contributed to the crisis have really been resolved. 
The legislation provides a skeleton for the new regulatory architecture, and it will be up to the new Financial Stability Oversight Council to put supervisory muscle on these bones: to improve interagency cooperation, tighten rules governing systemically important institutions, and respond quickly and forcefully to systemic risks. 
Third, reducing systemic risks will require determined action to ensure that financial institutions are not too big to fail. 
The new legislation takes important steps in this direction, calling for additional capital and other charges on firms in proportion to their systemic risks, requiring systemically important firms to prepare “living wills” so that they can be easily wound up, and introducing a special resolution framework if they do fail. 
But these measures cannot be a substitute for strong and pre-emptive consolidated supervision; rules and regulations cannot be a substitute for the “will to act.” 
Fourth, reform of US housing finance remains unfinished business. 
Public policies to subsidize US mortgage lending have been costly, inefficient, and have encouraged excessive risk-taking, which helped push the system toward crisis. 
Concrete proposals for addressing this situation are now being formulated, but the financial system cannot be said to be repaired without a decisive resolution of America's [government-sponsored] mortgage agencies and significant cuts in US subsidies for mortgage borrowing. 
In sum, the US authorities have done much to strengthen the financial sector. 
Their participation in the FSAP assessment – and their agreement to publish the results – speaks to their commitment to global efforts to ensure that the crisis of the last three years will not be repeated. 
The true test, however, will be how the recent reforms are implemented domestically, and how they will be coordinated internationally. 

Testing Medicine 
Most people are surprised to learn that rigorous application of formal rules of evidence to evaluate medical research and decide on the best treatments is a recent phenomenon. 
They might be just as surprised to learn that health policy is not yet subject to the same approach. 
So-called “evidence-based medicine” entails a hierarchy of empirical proof that ranks medical studies according to their quality. 
Physiological research on animals, or of human responses in laboratory settings, rank low on the hierarchy. 
Observational studies that compare outcomes for patients who receive particular treatments and control subject who do not rank higher, but may still be misleading. 
Convincing studies of drugs and surgical procedures usually come only from randomized trials, in which patients receive treatment or don’t according to a process analogous to a coin flip. 
Well-conducted randomized trials incorporate additional safeguards against bias, including use of placebo medication that allows investigators to blind patients and caregivers to whether patients are, or are not, receiving active treatment. 
Doctors have made many errors that they could have avoided had these principles been applied. 
For example, for a decade leading doctors advocated hormone replacement therapy to lower cardiovascular risk in post-menopausal women. 
These recommendations, based on physiological and observational studies, proved profoundly misleading. 
Randomized trials ultimately showed no benefit, and a clear increase in breast cancer and vascular blood clots. 
Similarly, cardiologists once prescribed drugs to reduce sudden death in patients after heart attacks. 
The drugs suppressed arrhythmias – disturbances of the heartbeat associated with sudden death. 
The logic seemed clear: suppress the asymptomatic but nasty-looking arrhythmias, and you will reduce sudden death. 
Unfortunately, when investigators undertook randomized trials, they found that treated patients had a higher death rate. 
Clinicians stopped using the drugs, but not before causing a large number of unnecessary deaths. 
But awareness that principles of evidence-based medicine should also guide health policy has been slower to take root. 
Here, although randomized trials are not feasible, it remains possible to follow evidence-based medicine’s primary rule: to base action on systematic summaries of the highest quality evidence available. 
Consider the issue of whether countries should fund health care publicly, through taxes, or privately, through health insurance and user fees. 
Private health insurance has proved enormously wasteful, with large administrative expenditures on activities that include developing insurance packages, marketing those packages, and assessing claims. 
Public funding eliminates these activities, resulting in far lower administrative costs. 
Likewise, user fees discourage the poor and elderly from accessing needed health services, whereas public funding largely eliminates inequities in the provision of care while producing health outcomes that are as good as, if not better than, mixed public-private funding models. 
Public funding also benefits a country’s economy, because large employers are spared the expense of providing health benefits to their workers. 
Thus, the evidence suggests that public funding of all key aspects of medical care – physician and hospital services, drugs, and devices –- offers benefits of equity, efficiency, and industrial advantage. 
The medical community has come to accept the need for systematic reviews to guide decisions regarding drugs and surgical therapies, but their use in health policy is only now taking hold. 
Systematic reviews have summarized the evidence regarding the provision of hospital services by large for-profit companies versus not-for-profit providers. 
The primary studies forming the basis of these reviews come largely from the United States, where for-profit and not-for-profit providers work side by side in the same environment, and where large administrative databases allow accurate detection of death rates. 
But, while these observational studies are threatened by bias from patient selection – sicker patients mean higher death rates, for example ­– the available administrative databases document patient characteristics such as age, severity of illness, and co-morbidity, including diabetes and high blood pressure. 
This information allows statistical approaches that level the playing field, helping to protect against biases associated with patient selection. 
These systematic reviews have shown that for-profit hospital care leads to higher death rates than not-for-profit care, despite higher charges to third-party payers. Systematic reviews have demonstrated the same phenomenon in outpatient dialysis facilities – lower death rates in not-for-profit facilities – and have also shown higher quality care in not-for-profit nursing homes. 
The reason that not-for-profit providers can achieve higher quality care with better health outcomes at lower cost is evident. 
While for-profit providers have higher administrative costs and larger executive salaries, their main burden relative to not-for-profit provision is the need to generate returns for their shareholders. 
These additional costs mean that approximately 20% of the total income that not-for-profit providers can devote to patient care is unavailable. 
The result is cutting corners, deficiencies in care, and poorer outcomes for patients. 
Principles of evidence-based medicine have transformed the way we look at clinical interventions and may prevent repetitions of public-health disasters such as the inappropriate promotion of hormone replacement therapy and anti-arrhythmic drugs. 
Application of these principles to health policy can lead to wiser decisions about how to run our health systems. 
The available evidence provides strong support for public funding of health services delivered by not-for-profit providers. 



Better THAAD than Dead 
WASHINGTON, DC – South Korea is moving forward with plans to host an advanced missile-defense system – known as Terminal High Altitude Area Defense, or THAAD – in partnership with the United States Army. 
The decision by South Korean President Park Geun-hye has sparked controversy, with China and Russia objecting, and some commentators predicting the start of a “new Cold War.” 
But China and Russia should welcome THAAD, because it alleviates the need for South Korea or Japan to pursue other defense options, which could include the development of nuclear weapons. 
South Korea and Japan have good reason to shore up their defenses. 
The threat of North Korean aggression is real and will not be eliminated anytime soon. 
North Korea is escalating its bellicose rhetoric and behavior as it strengthens its military capabilities, which include weapons of mass destruction, long-range ballistic missiles, and cyber and special forces. 
The US has repeatedly warned North Korea not to pursue nuclear weapons or ballistic missiles, to no avail. 
And diplomacy – both sanctions and inducements – has failed to stop the North. 
Many people in South Korea and Japan now worry about the strength of America’s commitment to defend them from external attack. 
Recent developments have undermined US credibility, from President Barack Obama’s failure to enforce his “red line” warning against the use of chemical weapons in Syria, to the Republican Party’s nomination of Donald Trump as its presidential candidate. 
In fact, Trump has only made nuclear-weapons proliferation in Asia more likely. 
He recently complained to the New York Times that the US spends too much money on missile defenses and troops stationed in South Korea and Japan, and promised that, if elected, he would require both countries to contribute more to their own defense. 
If they do not do so willingly, Trump says, he is “absolutely prepared to tell those countries, ‘Congratulations, you will be defending yourself.’” 
Some members of South Korea’s governing conservative Saenuri Party now openly call for the acquistion of nuclear weapons, believing that this will deter a North Korean attack and prompt China to increase pressure on its client to roll back its weapons programs. 
If South Korea develops a nuclear arsenal, Japan is likely to do the same, especially given China’s aggressive pursuit of its claim to the Japanese-occupied Senkaku Islands (which the Chinese claim as the Diaoyu Islands). 
Japan has an enormous stockpile of separated plutonium and the technical wherewithal to be a “virtual nuclear power”: without having any nuclear weapons on hand, it could quickly develop them if necessary. 
By developing nuclear weapons, South Korea and Japan would each be risking its relationship with the US and exposing itself to economic and energy sanctions. 
Such a move by South Korea, in particular, really would be the start of a new Cold War, or worse. 
A nuclear standoff on the Korean Peninsula would be characterized by both sides’ incentive to strike first to wipe out the other’s ability to counterattack. 
Short of that doomsday scenario, nuclear weapons are of limited use in deterring small-scale provocations. 
The possibility of a US nuclear strike did not stop North Korea from sinking a South Korean warship in 2010. 
Moreover, if South Korea and Japan develop nuclear weapons, a regional – or even global – arms race could result; and not every country seeking to develop its own nuclear arsenal would be favorably disposed to the West. 
This would be an extremely dangerous scenario: All things being equal, more nuclear-weapon states implies a higher risk of nuclear war, nuclear terrorism, and nuclear accidents. 
Against this backdrop, the case for THAAD is clear. 
The US, South Korea, and Japan should cooperate on missile defense as the first line of regional deterrence, while also fortifying and dispersing vulnerable targets, deepening trilateral intelligence sharing on North Korean threats, and working with the international community to disrupt the North’s weapons programs. 
The effectiveness of deterrence is difficult to prove: by definition, nothing happens when it works; if a country is deterred from attacking, it is a non-event. 
Skeptics can plausibly argue that the presumed aggressor never planned to attack, or canceled an assault for other reasons. 
Nonetheless, the historical record speaks for itself: since 1953, North Korea has not launched a large-scale military assault on South Korea, and has limited its threats against Japan to belligerent rhetoric. 
This most likely reflects the consistent and credible threat of US retaliation. 
South Korea and Japan should not alienate the US by setting out on their own – no matter what Trump tells them. 

Thai Lessons for China 
BEIJING – Whatever the effects of political turmoil in Thailand, they are not helping the cause of democracy in China. 
The images of pro-democracy protesters and the subsequent military crackdown in downtown Bangkok have been openly shown in Chinese media without any apparent bias. 
Indeed, there is no need to embellish the political message for China. 
If a relatively well-off and religious country known as the “land of smiles” can so rapidly degenerate into bloody class warfare, what would happen if the Chinese Communist Party lost its monopoly on power? 
It is not hard to imagine a Chinese-style red-shirt rebellion, with populist leaders tapping resentment and hot-headed youth torching symbols of power and privilege in Beijing. 
If multi-party democracy leads to violent and uncompromising electoral blocs, then most reflective people will prefer one-party rule that ensures social stability. 
Still, it would be a mistake for the Chinese government to treat the events in Thailand as an excuse to postpone political reform. 
The gap between rich and poor is about the same in both countries, and there are tens of thousands of class-based “illegal disturbances” in China every year. 
The Chinese government is promoting social welfare in the countryside, but it must also give more institutional expression to social grievances. 
That requires more representation by farmers and workers in the National People’s Congress and sub-national legislative organs, more freedom for public-spirited journalists to investigate cases of social injustice, and more freedom for civic organizations to act on behalf of the environment and those who do not benefit from economic reform. 
Can China open up without going the way of multi-party rule? 
In fact, the great nineteenth-century British political thinker John Stuart Mill advocated liberal government without multi-party rule. 
In his classic work Considerations on Representative Government, he denounced “the shibboleth of the party.” 
In a democracy, the party of the majority is most likely to be constituted by those “who cling most tenaciously to the exclusive class interest.” 
Instead of multi-party politics, Mill favored democratic elections constrained by such mechanisms as extra votes for the educated and institutional mechanisms to protect the rights of minorities. 
In Mill’s view, an open society ruled mainly by educated elites is the most desirable form of government. 
In a similar vein, the Confucian tradition has long emphasized the value of political meritocracy. 
Confucius himself emphasized that everybody should have an equal opportunity to be educated. 
But not everybody will emerge with an equal ability to make informed moral and political judgments. 
Hence, an important task of the political process is to select those with above-average morality and ability. 
In subsequent Chinese history, the meritocratic ideal was institutionalized by means of the Imperial examination system. 
Confucians do not oppose electoral democracy, but they argue that it must be constrained by meritocratically selected political leaders who look after the interests of non-voters. 
Democracies can do a good job of representing the interests of voters, but nobody represents the interests of non-voters – including future generations and foreigners (consider global warming) – who are affected by government policies. 
That should be the task of meritocratically selected elites. 
As it happens, the Chinese Communist Party is becoming more meritocratic. 
Since the 1980’s, an increasing proportion of new cadres have university degrees, and cadres are promoted partly on the basis of examinations. 
But choosing educated elites is only part of the story. 
The elites are also supposed to rule in the interest of all, and to allow for their voices to be heard. 
In practice, it means a more open and representative political system, but not necessarily multi-party politics. 

Thailand in Denial 
BANGKOK – Thailand’s political and social fabric is fraying. 
Indeed, the country’s future looks as shaky as it has never been. 
In other prosperous democracies, the middle class provides the glue that holds society together. 
In Thailand, by contrast, the bourgeoisie, centered in Bangkok, is barely emerging as a social and political force. 
Instead, for a half-century, an unspoken social contract among four broad groups has held Thailand together: the “Palace” – a euphemism used here to avoid violating draconian lèse majesté laws; big business, the custodian of economic growth; the military, which ensures, first and foremost, the sanctity of the Palace and the moral values it represents; and the common people, mostly rural and urban poor, who accept the rule of the other three estates. 
Thailand’s national mythology is that it is a happy Buddhist country, a “land of smiles” bound together by compassion and harmony under the benevolent grace and blessings of the Palace and the generosity of big business. 
The less fortunate classes are docile, content to accept their subservient roles and satisfied with the social welfare, no matter how skimpy, provided by their betters. 
The poor and the military hold the Palace in genuine reverence. 
Palace staff and people in the countryside kneel before the monarchy not merely as a matter of protocol, but out of genuine love and respect. 
Forbes magazine ranked the Thai monarchy in 2009 as the richest of all the world’s royals, putting its net worth at $30 billion – a figure that locals consider too low. 
That royal wealth necessarily entails substantial investments in and with Thai big business in all sectors of the economy. 
Thailand’s blue-chip firms gain much from direct involvement with the Palace and from social proximity to it. 
One Hong Kong scion whose wife is from an elite Thai family estimates that perhaps 20 families control most of Thai business. 
The Thai military is constitutionally subordinate to civilian leadership, but in reality it owes its allegiance to the Palace. 
In the current crisis, army generals have told the public that they are reluctant to use force, a position that was not theirs to take. 
How long this inactivity will last is anyone’s guess. 
Mobs wearing red shirts to symbolize their loyalty to former Prime Minister Thaksin Shinawatra are now camped out in two major commercial areas, paralyzing a large part of the local economy. 
They demand that the government dissolve the current legislature immediately, and that Prime Minister Abhisit Vejjajiva resign because he was never elected and is viewed as a front man for the traditional anti-Thaksin monied groups. 
Many believe that the current crisis will pass, and that Thailand will revert to its historical harmony among the four groups. 
But this view ignores the country’s new political dynamics. 
First and foremost, Thailand’s lower classes have decided that docility is a thing of the past. 
They are angry and frustrated by the status quo. 
Save for the handouts they got under Thaksin, they benefited little from the economic growth of the past three decades. 
The vast gap between the urban rich and the rest has grown worse over the years, with no discernible “trickle-down” effect. 
Even in the prime commercial districts and chic neighborhoods of Bangkok, the nation’s richest city, a short walk reveals miles of cracked pavements, piles of uncollected garbage, and rats scurrying freely. 
Such wrenching sights are typically accompanied by the pungent odor of a sewage system that is more a problem than a solution, especially during the rainy season. 
The sight of run-down physical infrastructure, punctuated by super-modern shopping malls with global consumer brand names well beyond the purchasing power of most citizens, is not what you would expect in an economy once described as a potential Asian Dragon. 
The wealthy dwell in air-conditioned houses, travel in chauffeur-driven cars, and shop in luxury malls, apparently oblivious to how the rest of the country lives. 
Poor rural families see too many of their children become prostitutes in order to survive. 
The poor view the coup against Thaksin of 2006, and the later disbanding of his party, as revenge by the traditional elites who wanted the old ways back, and who would get what they wanted by force since they could no longer get it through the ballot box. 
It is a view that is not entirely wrong. 
In late 2008, anti-Thaksin mobs wearing yellow shirts and led by prominent business figures occupied Bangkok’s Suvarnabhumi International Airport with impunity, seeking to annul the result of a general election in which pro-Thaksin forces gained power, despite Thaksin’s exile overseas. 
Yellow is the color of Thai royalty, and the Palace was believed to be sympathetic to the mobs. 
Now Thaksin loyalists – the “red shirts” – are doing much the same, demanding change through mob behavior. 
They believe that they, too, are entitled to act with impunity. 
The red shirts are not blind to Thaksin’s excessive corruption. 
But they see him as a rare Thai politician who actually bothered to connect with them. 
Moreover, as prime minister, Thaksin made a point of delivering much-needed services to the underclasses: subsidized medical care and micro-loans to name just two. 
But the unspoken issue behind Thailand’s unrest is that, with the country’s 82-year-old king ailing, the Palace’s moral force has come into question. Indeed, Thai Foreign Minister Kasit Pirmoya, breaking taboos that have governed the country for years, recently spoke about the need to re-examine the country’s lèse majesté laws so that public discourse could intelligently address the role of the Palace in Thailand’s future. 
What Thaksin did for the poor required only political self-interest. 
Yet even that elementary wisdom has never occurred to traditional ruling elites too set in their myopic and arrogant ways. 
Until it does, Thailand’s otherwise promising future will be increasingly remote. 

Thailand in Yellow and Red 
BANGKOK – After three consecutive years of deadly street protests, Thailand has arrived at the point where it will need to hold new elections, as the current term of its national assembly expires this December. 
Indeed, Prime Minister Abhisit Vejjajiva has indicated that he will call for the dissolution of the lower house by the first week of May. 
This follows a parliamentary no-confidence motion, which his government barely survived. 
Accordingly, the stage is set for a general election at mid-year. 
But, in view of the political volatility of recent years, this semblance of stability and constitutional regularity is deceptive. 
Echoing popular movements elsewhere, Thailand remains locked in conflict and polarization between an entrenched regime propping up Abhisit and burgeoning new voices clamoring for enfranchisement. 
Any peaceful outcome to this conflict will require far-sighted concessions and compromises. 
Thailand’s street politics during this political crisis date back to 2005, when the corrupt and abusive government of Thaksin Shinawatra, which had been re-elected in a landslide that year, was toppled by a military coup. 
Two years later, after the military regime rammed through a new constitution, Thaksin’s proxy political party won another election, as his popular base of “red shirts” in Thailand’s downtrodden northeast and northern regions remained loyal to him. 
Thaksin’s yellow-clad royalist foes, the People’s Alliance for Democracy (PAD), took to the streets against him again in 2008, as the judiciary ordered the dissolution of his party for the second time. 
In April 2009, and again in April-May 2010, the disenfranchised red shirts camped in the streets of Bangkok to demand new elections, but were dispersed by the army, with 91 fatalities. 
Despite their setbacks and lost credibility following the torching of Bangkok’s central business district, the red shirts have grown in number and demonstrate monthly against Abhisit’s government. 
And, after two years, PAD yellow shirts have also returned to the streets to show their disillusion with Abhisit. 
PAD ringleaders now denounce all politicians as corrupt and extol the virtue of the monarchy. 
Using the weapons of an anti-corruption drive and rising nationalism (the result of a periodically violent border dispute with Cambodia), the royalist-conservative movement is implicitly pointing to an extra-constitutional solution to Thailand’s political standoff. 
Another military coup is their unspoken answer. 
While these machinations are par for the course for Thailand’s topsy-turvy democracy, they point to a deeper structural schism. 
Thailand’s six-decade-old incumbent regime, which relies on symbiosis between the monarchy and the military, is unable to tolerate elections that empower the rural masses unwittingly awakened by Thaksin’s premiership. 
These masses, along with the urban poor, make up the bulk of the red shirts. 
They demand a voice in politics, a stake in the country’s grossly unequal economy, and the chance for upward mobility that they saw in Thaksin and his populist programs. 
They know that elected politicians are prone to graft, but now refuse blatant disenfranchisement and the formation of governments like Abhisit’s, which was brokered in an army barracks. 
For Thailand’s military-political axis and its supporting pillars in the judiciary and bureaucracy, suppressing these voices has become increasingly unworkable. 
Moreover, Thailand already attracts unwanted attention for its draconian security laws. 
Bangkok, for example, has been under either a state of emergency or provisions of the internal security act for more than a year, in violation of basic civil liberties. 
There are now unprecedented scores of political prisoners. 
Around the country, many red shirts are persecuted, and several have been murdered under mysterious circumstances. 
More than 100,000 Web pages have been blocked for “subversive” content. 
More charges of lèse majesté have been filed, and with more convictions than ever. 
But the establishment’s efforts to put a lid on the seething Thai kettle appear untenable. 
Cold War exigencies, which benefited and cemented the military-monarchical alliance in the 1960’s and 1970’s, have been replaced by the imperatives of democracy. 
The electorate is no longer passive in the face of rampant corruption and vote-buying. 
But solutions for the country’s ills must be found within the boundaries of law and constitutionalism. 
Another military putsch would nudge Thailand backwards, from a democratic outlier on the world stage to an authoritarian outcast. 
A way forward beckons. 
The remarkable 64-year reign of 83-year-old King Bhumibol Adulyadej deserves credited for Thailand’s unity and stability, which kept communism at bay and enabled steady economic development, warts and all. 
But times have changed. 
Entrenched regimes everywhere can endure only if they recognize and accommodate popular aspirations. 
Of course, Thaksin’s legacy of corruption and of a pandering populism must be rejected, but the profound awakening of the Thai electorate that did occur, almost accidentally, during his premiership needs to be built upon, not suppressed. 
Thailand needs elections that are not subverted by judicial decisions. 
The coup-era constitution will then require a revamp. 
And the lèse majesté code, which literally allows anyone to file charges against anyone else, must be reformed. 
Perhaps the Royal Household itself should be tasked with filing such charges. 
The list goes on. 
The opacity of the Crown Property Bureau, worth an estimated $30 billion, eventually will have to be addressed. 
And the question of royal succession also needs clarification as Thailand’s constitutional monarchy navigates the uncertain path ahead. 
These are delicate issues, given Thailand’s raw and rabid polarization between those with vested interests in the old order and those intent on putting an end to what they claim are neo-feudalistic privileges and entitlements. 
Unless good-faith efforts at compromise are shown by all sides, Thailand will not retake its rightful place among the world’s up-and-coming democracies. 

Thailand on the Precipice 
BANGKOK – The two-month siege of downtown Bangkok by the so-called “Red Shirts” has ended in bloodshed. 
More than 60 people, including two foreign reporters and a few soldiers, died in the Thai army’s suppression of the urban rebellion. 
The Thai government had no choice but to use force after negotiations with the protestors broke down. 
Both sides deeply mistrusted the other, even though the government’s five-point “road map” for a peaceful resolution implicitly acknowledged the existence of serious socioeconomic problems and included an early general election this November – a concession to the protestors, who argue that the government lacks legitimacy because it was never elected. 
Much of Thailand is now under an all-night curfew, imposed after radical Red Shirts set fire to more than 35 landmark buildings in Bangkok. 
The militants’ targets included branches of Bangkok Bank, the country’s largest and a pillar of the establishment; 
Siam Square, owned by the Palace; and a deluxe shopping mall owned by one of the richest Thai Chinese families. 
That anarchic fury reflected the disappointment of radicals at their leaders for prematurely surrendering to the authorities rather than fighting to their last breath. 
Those who did not surrender wanted to show their defiance. 
The fires were also a volcanic outburst of class hatred by the disenfranchised, rural and urban, against the Bangkok-based wealthy ruling class. 
That class is an interlocking network of millionaire generals, big-business owners and their marriage-linked clans, and the Palace, an institution protected by lèse majesté laws that carry severe penalties. 
The ruling elite, whose public face at present is the attractive, mild-mannered, Oxford-educated prime minister, Abhisit Vejjajiva, is pinning all the troubles on one man, former Prime Minister Thaksin Shinawatra, exiled abroad and a fugitive from Thai justice. 
In this narrative, Thaksin masterminded the siege by hiring a small group of rogue army officers, and by paying the poor to go to Bangkok to start a civil war. 
It is entirely plausible that Thaksin did help finance the protest. 
It is also likely that some radical hot heads wanted to overthrow the government by mob action. 
But to insist that protesters, old and young, fathers and mothers, numbering as many as 150,000, were willing to risk their lives sitting under a scorching Tropical sun for two months only for money strains credulity. 
That the elite believes this story is one indication of just how condescending and out-of-touch its members are. 
Many in the elite have even turned their ire at foreign news media for allegedly distorting the truth by overplaying the protesters’ grievances. 
CNN and BBC have been attacked for their alleged bias in showing the “human side” of the protesters and giving insufficient time to the uglier aspects. 
Both outlets ran live broadcasts throughout the protest, showing all the drama that the cameras could capture. 
While official “spin control” is in full throttle, a growing number of thoughtful analysts are voicing concern that facile caricatures do not serve Thailand’s interests. 
After all, the sense of disenfranchisement among voters in the country’s populous north and northeast, as well as among the urban poor, is real. 
It is not something manufactured by Thaksin. 
Nor are the peasants so ignorant to be easily conned by a crafty politician promising much delivering little or none. 
This patronizing view conveniently ignores the fact that in the last four elections, Thaksin and his allies won by lopsided margins. 
Thaksin’s rural development policies were clearly welcomed by people who, for the first time, felt connected to the leaders they had elected. 
So the ruling elite engineered a coup to secure the power they had failed to win at the ballot box. 
They then made use of the “Constitutional Court” to ban Thaksin’s party, the largest in the country. 
But, even as it made Thaksin’s party illegal, the Constitutional Court failed to unearth any evidence of widespread violations. 
Instead, it ruled on a minor side issue that many claim was based on a retrospective law. 
Thailand’s Old Boys Club – generals-turned-politicians, political parties backed by tycoons with an eye on fat government contracts, and that unnameable hereditary institution whose only agenda is to maintain its longevity – has misgoverned the country for the past half-century. 
Under its stewardship, one of Asia’s more promising economies has instead become a borderline failed state, enervated by 17 coups since World War II. 
Few who now hold the reins of power in Bangkok could honestly throw the first stones. 
Yet they do. 
A peaceful resolution of deep-rooted problems requires wise political leadership, as well as recognition that past injustices cannot be redressed all at once. 
The art of politics is about skillful compromises, with no side getting exactly what it considers fair and just. 

Thailand’s Endless Endgame 
BANGKOK – The hospitalization of King Bhumibol Adulyadej has brought Thailand’s most daunting question to the fore. 
The country’s wrenching political struggle over the past several years has, at bottom, concerned what will happen after the ailing 81-year-old king’s reign, now at 63 years, comes to an end. 
Thailand’s endgame is being shaped by several key events: the military coup of September 2006, the current military-supported constitution and election in 2007, street protests and seizures of Government House and Bangkok’s airports in 2008, the army-brokered coalition government of Prime Minister Abhisit Vejjajiva that has ruled since January this year, and the Bangkok riots in April. 
At stake is the soul of an emerging Thailand, with far-reaching ramifications for developing democracies elsewhere as well as the broader international community. 
Thailand’s color-coated crisis pits largely urban, conservative, and royalist “yellow” shirts against the predominantly rural “red” columns of former Prime Minister Thaksin Shinawatra. 
For much of Thailand’s long economic boom of the past two decades, wealth resided mostly in the Bangkok metropolitan area, a boon to the burgeoning urban middle class, but deeply resented by the rural majority. 
While the rural population had more than enough to eat, their economic opportunities and upward mobility were limited by a shoddy education system and docile state-run media that fed them soap operas and official messages. 
For a nobody to become a somebody, all roads led to Bangkok and its prestigious prep schools and universities. 
Thailand’s farms became increasingly alienated from the urban elite. 
Thaksin recognized this urban-rural divide and shrewdly exploited it, upending the elite consensus that had long prevailed. 
That consensus rested on a nexus of the military, the monarchy, and the bureaucracy. 
Military rule and putsches stemming from factional infighting among generals were the norm until the early 1970’s, when university students overthrew a military dictatorship and opened up democratic space. 
Parliament, political parties, and politicians then came and went alternately with military coups, which invariably suppressed the maturation of democratic institutions. 
The rural-urban divide wedded the grassroots rural population to upcountry patronage networks and vote-buying, while elected politicians reaped their rewards through corruption and graft. 
In turn, the military stepped in from time to time – once every four years on average since 1932 – ostensibly to suppress corruption, but retarding democratic rule in the process. 
All this changed when Thailand promulgated a constitution in 1997 that promoted political transparency and accountability and government stability and effectiveness. 
Its logical but flawed outcome was the triumph of Thaksin and his once-invincible Thai Rak Thai party, which became the first to complete a full term and be re-elected – by a landslide in 2005. 
Thai Rak Thai’s populism featured income redistribution, cheap health care, micro-credit schemes, and a dazzling array of policy innovations that ushered Thailand into twenty-first-century globalization. 
The direct connection of Thaksin and his party to the electorate bypassed and threatened the established trinity of institutions that had long called the shots in Thailand. 
Thaksin and his cronies handed the establishment an opportunity to strike back by abusing power and profiting personally from it. 
A billionaire telecommunications tycoon, Thaksin presided over the trebling of his family’s assets in the stock market. 
He also engineered an extrajudicial drug-suppression campaign that claimed 2,275 lives. 
Thaksin’s sins are voluminous, and became the basis of the rise of his yellow-shirted opponents, the People’s Alliance for Democracy (PAD), which entered the electoral arena as the New Politics Party. 
The PAD spent much of last year demonstrating against the two successive Thaksin-nominated governments that arose from the December 2007 election, reinvigorating Thai Rak Thai’s anti-PAD red-shirted allies, the United Front for Democracy against Dictatorship (UDD). 
After more than three years, Thailand’s crisis has become a knotty saga. 
Abhisit’s pledges of reform and reconciliation in the wake of April’s riots have made little headway. 
The PAD wants to maintain the 2007 charter. 
The UDD favors reinstatement of the 1997 constitution. 
Enraged by a sense of social injustice, the reds rail against the establishment’s double standards, while the pro-establishment yellows have hunkered down for a battle of attrition. 
In the process, what had been a pro- and anti-Thaksin fight has gradually become a pro- and anti-monarchy struggle. 
The rigidly hierarchical forces of the establishment are insecure and fearful of what will happen after the king dies. 
Lèse majesté cases alleging insults against the immediate royal family are on the rise. 
Many thousands of Web sites challenging establishment interests and deploring post-coup machinations have been blocked. 
Thaksin’s appeal splits the reds. 
Many repudiate his corruption but, in challenging the post-coup status quo , have no recourse except to use him as a rallying symbol. 
Likewise, all yellows find Thaksin’s misrule intolerable, but not all are fanatical royalists. 
A stalemate has taken hold, with the denouement likely to be reached only after the royal succession. 
A new consensus is imperative if Thailand is to regain its footing. 
That consensus would have to be based on mutual recognition and accommodation. 
The reds will need to distance themselves from Thaksin’s abuses of power as much as the yellows will have to accept some of Thaksin’s policy legacy, particularly grassroots opportunities for jobs, education, and upward mobility. 


Thailand Turns Banana Republic 
BANGKOK – “Thailand’s future is up for grabs,” proclaimed the eminent Thai scholar Thitinan Pongsudhirak just before the country’s Constitutional Court ruled, in effect, that the ruling People Power Party (PPP) and its two smaller coalition partners are “illegal,” and hence must disband due to “election frauds” committed by party executives a year ago. 
Party leaders, including Prime Minister Somchai Wongsawat, are barred from politics for five years. 
With that one stroke, Thailand’s popularly elected government fell. 
Parliament must now reconstitute itself without the three parties loyal to Somchai. 
In Thailand’s current crisis, history is repeating itself, for the PPP under Somchai was the same Thai Rak Thai (Thais Love Thais) Party formed by the ousted Prime Minister Thaksin Shinawatra, a figure much-hated by the country’s Bangkok-based elite. 
The PPP was created because TRT had been outlawed at the time of Thaksin’s removal. 
What is perverse about this is that every recent poll in Thailand shows that Thaksin remains wildly popular with the vast majority of Thais, most of whom live outside Bangkok. 
So, despite the ousting of two Thaksin proxies in a row by the court and the elite, Thais are likely to return yet another Thaksin loyalist if they are allowed to vote in an unrigged election. 
The current crisis has been brewing for some time, but the breaking point came when anti-government protestors occupied Bangkok’s main airport. 
The protestors march under the banner of the “People’s Alliance for Democracy,” but the truth is that they have resorted to undemocratic means to topple a democratically elected government. 
This parade of toppled and ousted governments has led Pavin Chchavalpongpun, another eminent Thai scholar, to call his country a “failed state.” 
That description may not yet be true, but the shadow of state failure is certainly growing. 
Thaksin’s unforgivable sin was his violation of Thailand’s unwritten rules about how the country’s ruling elites are to behave. 
The key rule here is that the winner in any power play must not shut out his opponents. 
In a land of “smiles” and plenty, the winner must not take all. 
But Thaksin, a self-made billionaire, allowed his greed and huge electoral successes to get the better of him. 
After his two landslide victories, he thought he could have it all. 
The traditional Bangkok elites had always thought of him as an uncouth upstart. 
Once in power, he essentially shut them out of the “grabbing” game, preserving it for himself and his cronies. 
Thaksin’s supposedly legal “tax planning,” which allowed him to pay zero capital gains tax on the billion dollar sale of his flagship telecom company, Shin Corporation, in 2006, offended the rising urban professional classes. 
But Thaksin had by then won over Thailand’s rural population through popular policies including handouts. 
Some of these projects were the proverbial bridges to nowhere. 
But others did meet real rural needs: cutting medical costs, providing subsidized agricultural loans, and maintaining price supports. 
Thaksin’s rural base rewarded him by returning him to power, ignoring his personal corruption. 
Thaksin’s detractors call his rural strategy (which his proxy successors have followed) cynical vote buying. 
But Thaksin’s rural base wonders why the anti-Thaksin groups and his predecessors in power never tried to do much for them. 
Such vote buying to win hearts and minds is, after all, a fair game for any party to indulge in. 
The going “wage” for the “Rent-A-Crowds” at the heart of the crisis was 300 Baht a day per person, plus food, transportation, and a clean yellow T-shirt – yellow being the Royal color. 
These protests have run, on and off, for nearly 200 days, with crowd sizes ranging from a few hundred to tens of thousands. 
It is widely known that the anti-Thaksin business elites provided the money to keep people in the street. 
Thailand ’s universally loved and respected King has not taken a public stand on the occupation of the airports nor on any other recent public demonstrations. 
Some analysts say anti-government leaders have hijacked the Royal Color to pretend that they have his support. 
Nevertheless it is widely believed that Thaksin committed “lèse majesté” by attempting to undermine the moral authority of the crown, a cornerstone of the kingdom, perhaps replacing it with a republic that he would control. 
Lèse majesté is a grave crime in Thailand. 
It is true that Thailand’s queen herself recently presided over the funeral of a protestor killed in a clash with the police. 
From that point on, policing of the protests became utterly passive. 
The queen is rumored to have said she would pay the medical expenses of any injured demonstrators. 

Thaksin and the Lessons of Hong Kong 
HONG KONG – Former Thai Prime Minister Thaksin Shinawatra was gracious when he ended his exile in Hong Kong: “Thank you, Hong Kong, for having me here, so warmly. 
Hong Kong is a destination where I would always like to come.” 
If Thaksin is sincere, he could serve Thailand by bringing back a few of his host city’s more admirable virtues. 
Two stand out: a largely uncorrupt, efficient, transparent, and accountable government, and an open and competitive economy. 
Hong Kong is, of course, by no means perfect: Mainland China’s politics and habits are slowly infecting the island. 
Nevertheless, Transparency International, the world’s premier corruption rating agency, ranked Hong Kong as the 14th cleanest society in 2007. 
From 2001 when Thaksin first became prime minister, to 2007 under military rule, Thailand’s corruption ranking plunged from an already low 61 to 84, which puts the country in the same league as Gabon and Swaziland, two countries notorious for violent and corrupt leaders who routinely trample on their citizens’ rights. 
Thailand’s public sector is historically plagued by frequent military coups, managed with rare exception by incompetent generals and civilians who rule with condescension towards the people who pay them to serve. 
Public accountability, government transparency, and official integrity remain largely slogans. 
Thailand was once touted as a future “Asian Tiger.” 
None of the four “tiger” economies – Singapore, Hong Kong, Taiwan, and South Korea – were as blessed with natural resources and fertile soil. 
And, unlike Thailand, all of them had suffered from war or internal strife. 
Yet, even the most cursory analysis reveals the vast gap in economic performance between them and Thailand in the past 50 years. 
The cause is obvious: the inferior quality of governance in Thailand. 
While a relatively small business, military, and political elite misgoverned Thailand – often cynically, and sometimes incompetently – others in Asia, with more selfless and competent public servants, succeeded in finding their competitive niche in the modern world. 
Much of Asia, including China, focused on meeting the challenge of globalization, whereas Thailand’s elite has protected the country’s economy to serve its parochial interests. 
Thus, in the Heritage Foundation’s annual rankings of countries by how free and competitive their economies are, Thailand routinely comes up short. 
In 2007, Thailand was ranked 54th, compared to first and second place for Hong Kong and Singapore, respectively. 
Taiwan was ranked 25th and Korea 41st. 
Korea’s relatively low ranking reflects the inclusion of North Korea. 
Yet several South Korean companies, such as Samsung and Hyundai, have become global household names competing successfully against far more established brands, such as Sony and Honda. 
Indeed, South Korea has shown how a poor country without natural resources can become a world-class economy. 
China was at the bottom of the rankings 30 years ago, but at its present rate it will soon overtake Thailand. 
In several key sectors such as financial services and retail, China is already more open than Thailand. 
The quality of China’s roads and telecommunication puts to shame Thailand’s uneven, badly maintained streets and its slow and expensive Internet service. 
Likewise, China has identified three of its universities as candidates to join the world’s top 10 in the near future. 
Without quality education, there cannot be a quality work force, and without that, no country can hope to compete in a world where the march of globalization cannot be stopped. 
To that end, the government is injecting public capital, while wealthy graduates are pouring in private money in the style of American alumni donors. 
By contrast, Thailand’s government and local elite seem content to remain a provincial country shielded from global competition in science and technology. 
Foreign employers are appalled by the poor quality of Thailand’s education system, whose graduates have little foreign language proficiency and possess scant analytical skills. 
Competition is not a zero-sum game. 
The successes of Hong Kong, Singapore, China, and South Korea should serve as a powerful reminder that Thailand has great potential, if only its elites would stop behaving like spoiled children playing a game at which only they are allowed to win. 
Thaksin has unique qualifications to serve Thailand well. 
He is one of the country’s rare politicians who understands economics, and how to put the government to good public use. 
In his new life as a “non-politician,” Thaksin can tell many of his business and political friends to chart a new course for Thailand, one that would help the country become a near “tiger.” 
Or he can let history judge him even more harshly. 
The choice is his. 

Thaksin Returns 
Former Thai Prime Minister Thaksin Shinawatra has returned to Bangkok 17 months after being deposed in a military coup. 
Thaksin has repeatedly denied that he intends to reenter politics, from which he has been barred for five years. 
But how realistic is it to expect so driven and flamboyant a man to stay away from the limelight? 
Thaksin already is believed by many to be providing advice to the government of Prime Minister Samak Sundaravej. 
Indeed, Samak’s People Power Party (PPP) is widely considered a proxy for Thaksin. 
It was, after all, formed from the remains of Thaksin’s Thai Rak Thai party, which was disbanded after the coup. 
Of course Thaksin’s political revival can’t get underway unless and until he has been acquitted of corruption charges. 
But he is likely to have made all the calculations related to the charges and other allegations before leaving London, and to have concluded that his chances of remaining free are high. 
After all, Thaksin is too serious a man to risk freedom for the sake of sentimentality. 
Moreover, he remains very popular in Thailand, if not in Bangkok. 
His presence in the country might well spark a clamor for his “reluctant” return to politics. 
Now, add to all this a soccer team. 
Thaksin’s ownership of the Manchester City football club might not seem of great importance to observers outside Thailand and Asia. 
But Thais are soccer enthusiasts and even bigger fans of the English Premier League. 
Thaksin’s ownership is a source of considerable pride, especially outside elite circles in Bangkok. 
His proprietorship provides Thais with a direct connection to an elite team in the world’s most popular sport. 
This, in turn, gives him a substantial popularity dividend to add to his store. 
It was not for nothing that he had two Man City players accompany him on his return to Thailand. 
The PPP’s victory in the December polls has also been seen as vindication of sorts for Thaksin. 
Given the opportunity to vote, voters turned to a party not unlike Thaksin’s pre-coup Thai Rak Thai. 
So why not complete the picture? 
Obviously, none of this will please Thaksin’s opponents. 
So the possibility of demonstrations, stalemate, and a new crisis cannot be discounted. 
The situation is all the more uncertain in view of a problem facing the PPP. 
Just hours before Thaksin returned to Bangkok, Thailand’s Election Commission convicted the speaker of the parliament’s lower house of fraud after he paid civil servants to campaign on behalf of the party. 
The Supreme Court must uphold the ruling, but if it does, the speaker will lose his parliamentary seat. 
And more ominously, the case could easily snowball, leading to the dissolution of the PPP and an end to Thaksin’s nascent political recovery. 
This would throw the party, government, and country into fresh turmoil. 
Thus, under almost any scenario, Thaksin’s return could well mark a return to those fraught days of 2006 just before the last coup. 


That Stalling Feeling 
NEW YORK – Despite the series of low-probability, high-impact events that have hit the global economy in 2011, financial markets continued to rise happily until a month or so ago. 
The year began with rising food, oil, and commodity prices, giving rise to the specter of high inflation. 
Then massive turmoil erupted in the Middle East, further ratcheting up oil prices. 
Then came Japan’s terrible earthquake, which severely damaged both its economy and global supply chains. 
And then Greece, Ireland, and Portugal lost access to credit markets, requiring bailout packages from the International Monetary Fund and the European Union. 
But that was not the end of it. 
Although Greece was bailed out a year ago, Plan A has now clearly failed. 
Greece will require another official bailout – or a bail-in of private creditors, an option that is fueling heated disagreement among European policymakers. 
Lately, concerns about America’s unsustainable fiscal deficits have, likewise, resulted in ugly political infighting, almost leading to a government shutdown. 
A similar battle is now brewing about America’s “debt ceiling,” which, if unresolved, introduces the risk of a “technical” default on US public debt. 
Until recently, markets seemed to discount these shocks; apart from a few days when panic about Japan or the Middle East caused a correction, they continued their upward march. 
But, since the end of April, a more persistent correction in global equity markets has set in, driven by worries that economic growth in the United States and worldwide may be slowing sharply. 
Data from the US, the United Kingdom, the periphery of the eurozone, Japan, and even emerging-market economies is signaling that part of the global economy – especially advanced economies – may be stalling, if not dropping into a double-dip recession. 
Global risk-aversion has also increased, as the option of further “extend and pretend” or “delay and pray” on Greece is becoming less desirable, and the specter of a disorderly workout is becoming more likely. 
Optimists argue that the global economy has merely hit a “soft patch.” 
Firms and consumers reacted to this year’s shocks by “temporarily” slowing consumption, capital spending, and job creation. 
As long as the shocks don’t worsen (and as some become less acute), confidence and growth will recover in the second half of the year, and stock markets will rally again. 
But there are good reasons to believe that we are experiencing a more persistent slump. 
First, the problems of the eurozone periphery are in some cases problems of actual insolvency, not illiquidity: large and rising public and private deficits and debt; damaged financial systems that need to be cleaned up and recapitalized; massive loss of competitiveness; lack of economic growth; and rising unemployment. 
It is no longer possible to deny that public and/or private debts in Greece, Ireland, and Portugal will need to be restructured. 
Second, the factors slowing US growth are chronic. 
These include slow but persistent private and public-sector deleveraging; rising oil prices; weak job creation; another downturn in the housing market; severe fiscal problems at the state and local level; and an unsustainable deficit and debt burden at the federal level. 
Third, economic growth has been flat on average in the UK over the last couple of quarters, with front-loaded fiscal austerity coming at a time when rising inflation is preventing the Bank of England from easing monetary policy. 
Indeed, inflation may even force the Bank to raise interest rates by the fall. 
And Japan is already slipping back into recession because of the earthquake. 
All of these economies were already growing anemically and below trend, as the ongoing process of deleveraging required a slowdown of public and private spending in order to increase saving rates and reduce debts. 
And now, in addition to the string of “black swan” events that advanced economies have faced this year, monetary and fiscal stimulus has been removed in most of them, or soon will be. 
If what is happening now turns out to be something worse than a temporary soft patch, the market correction will continue further, thus weakening growth as the negative wealth effects of falling equity markets reduce private spending. 
And, unlike in 2007-2010, when every negative shock and market downturn was countered by more policy action by governments, this time around policymakers are running out of ammunition, and thus may be unable to trigger more asset reflation and jump-start the real economy. 
This lack of policy bullets is reflected in most advanced economies’ embrace of some form of austerity, in order to avoid a fiscal train wreck down the line. 
Public debt is already high, and many sovereigns are near distress, so governments’ ability to backstop their banks via more bailouts, guarantees, and ring-fencing of questionable assets is severely constrained. 
Another round of so-called “quantitative easing” by monetary authorities may not occur as inflation is rising – albeit slowly – in most advanced economies. 
If the latest global economic data reflect something more serious than a hiccup, and markets and economies continue to slow, policymakers could well find themselves empty-handed. 
If that happens, the risk of stall speed or an outright double-dip recession would rise sharply in many advanced economies. 

Thatcher and the Big Bang 
LONDON – In the United States, for people of a certain age, Margaret Thatcher was a superstar, and Americans have been surprised at the sharply divided views on display in the Britain that she governed for 11 years. 
But Britons were not astonished. 
Like Tony Blair, Thatcher has long been a British product with more appeal in export markets than at home. 
All aspects of her legacy are earnestly disputed. 
Was she prescient about the problems of European monetary union, or did she leave Britain isolated on the fringes of the continent? 
Did she create a new economic dynamism, or did she leave the United Kingdom bitterly divided, more unequal, and less cohesive than before? 
Did she destroy the power of vested interests and create a genuine meritocracy, or did she entrench bankers and financiers as the new elite, with disastrous consequences? 
Indeed, one issue that has come under the microscope is Thatcher’s reforms of the City of London in the late 1980’s. 
In 1986, her government was instrumental in what is known colloquially as the “Big Bang.” 
Technically, the main change was to end “single capacity,” whereby a stock trader could be a principal or an agent, but not both. 
Before 1986, there were brokers, acting for clients, and jobbers, making a market, and never the twain could meet. 
This system had been abandoned elsewhere, and the reform opened London to new types of institutions, especially the major US investment banks. 
The first and most visible consequence was the demise of the long lunch. 
Beginning with a gin and tonic just after noon, and ending with a Napoleon brandy at three o’clock, lunch prior to the Big Bang was often the most arduous part of a stockbroker’s day. 
That cozy culture ended soon after the thrusting, brash Americans, who worked even over breakfast, hit town. 
But some believe that there were downsides, too. 
Philip Augar, the author of The Death of Gentlemanly Capitalism, argues that “Good characteristics of the City were thrown out along with the bad,” and that Thatcher’s reforms “put us on a helter-skelter course towards the financial crisis.” 
How justified is this charge? 
Can we really trace the roots of today’s malaise back to the 1980’s? 
Was the Iron Lady an author of the world’s current misfortunes? 
Nigel Lawson, Thatcher’s Chancellor of the Exchequer at the time, denies it. 
(Full disclosure: I was an adviser to Lawson in the 1980’s). 
He points out that the reforms were accompanied by new regulation. 
The Financial Services Act of 1986 put an end to the pure self-regulation regime. 
Financial interests opposed it vigorously at the time, viewing it as the thin end of a dangerous wedge, though they could not have guessed just how thick that wedge would eventually become. 
It is also difficult to trace back to the 1980’s the origins of the credit explosion and the proliferation of exotic and poorly understood financial instruments that lay at the heart of the 2007-2008 crisis. 
The most dangerous trends, including the upsurge of global imbalances and the dramatic financialization of the economy, accelerated dangerously from about 2004 onwards. 
Thatcher herself was not an enthusiast for credit, once famously saying, “I don’t believe in credit cards.” 
Indeed, she espoused a rigorous philosophy about borrowing: “The secret of happiness is to live within your income and pay your bills on time.” 
But perhaps there is a deeper level on which we can see some connections between Thatcherism and the crisis. 
Her mantra, “You can’t buck the market,” did contribute to a mindset that led governments and central banks to be reluctant to question unsustainable market trends. 
Thatcher was referring specifically to the dangers of fixed exchange rates, and can certainly not be counted as one of the principal architects of the so-called “efficient markets hypothesis.” 
But she was a strong believer in the expansion of private markets, and was instinctively suspicious of government intervention. 
As the late economist and European central banker Tommaso Padoa-Schioppa once put it, Thatcher “shifted the line dividing markets from government, enlarging the territory of the former at the expense of the latter.” 
Padoa-Schioppa regarded this as a factor contributing to the US and UK authorities’ reluctance to step in at the right time before the 2007-2008 crisis. 
Thatcher was certainly no friend of central bankers. 
She remained, to the end, hostile to central-bank independence, regularly rejecting the advice of her chancellors to allow the Bank of England to control interest rates. 
She feared that independent central banks would serve the interests of their banking “clients,” rather than those of the economy as a whole. 
She was especially hostile to what she saw as the excessive independence of the European Central Bank. 
In her last speech in Parliament as Prime Minister, she attacked the ECB as an institution “accountable to no one,” and drew attention to the political implications of centralizing monetary policy, accurately forecasting the dangers of a “democratic deficit,” which now worries many in Europe, and not just in Cyprus or Portugal. 
So, in the financial arena, as elsewhere, there is light and shade in the Thatcher inheritance. 
Her Alan Greenspan-like belief in the self-correcting features of financial markets, and her reverence for the integrity of the price mechanism, do not look as well-founded today as they did in the 1980’s. 
So, in that sense, she can be seen as an enabler of the market hubris that prevailed until 2007. 
On the other hand, it is difficult to imagine that a Thatcher government would have run a loose fiscal policy in the 2000’s. 
And it is equally unlikely that, had she had her way, the eurozone would be the camel – a horse designed by committee – that it is today. 

The $200 Trillion Question 
Perhaps the most remarkable trend in global macroeconomics over the past two decades has been the stunning drop in the volatility of economic growth. 
In the United States, for example, quarterly output volatility has fallen by more than half since the mid-1980’s. 
Obviously, moderation in output movements did not occur everywhere simultaneously. 
Volatility in Asia began to fall only after the financial crisis of the late 1990’s. 
In Japan and Latin America, volatility dropped in a meaningful way only in the current decade. 
But by now, the decline has become nearly universal, with huge implications for global asset markets. 
Indeed, the main question for 2007 is whether macroeconomic volatility will continue to decline, fueling another spectacular year for markets and housing, or start to rise again, perhaps due to growing geopolitical tensions. 
I lean slightly toward the optimistic scenario, but investors and policymakers alike need to understand the ramifications of a return to more normal volatility levels. 
Investors, especially, need to recognize that even if broader positive trends in globalization and technological progress continue, a rise in macroeconomic volatility could still produce a massive fall in asset prices. 
Indeed, the massive equity and housing price increases of the past dozen or so years probably owe as much to greater macroeconomic stability as to any other factor. 
As output and consumption become more stable, investors do not demand as large a risk premium. 
The lower the price of risk, the higher the price of risky assets. 
Consider this. If you agree with the many pundits who say stock prices have gone too high, and are much more likely to fall than to rise further, you may be right—but not if macroeconomic risk continues to drain from the system. 
At the end of 2000, at the height of the Internet stock boom and just before the 2001 crash, the economists James Glassman and Kevin Hassett published Dow 36,000 . 
At the time, the Dow Jones industrial average of US stocks was trading at around 11,000, so the book’s premise seemed outrageous. 
Certainly the timing was bad: global stock prices began to collapse a few months later, and it took years for them to fully recover. 
But Glassman and Hassett did have a point. 
Their admittedly crude analysis shows why, if volatility continues to fall in 2007, prices of stocks and other assets can still go a lot higher. 
They asked how investors would price stocks if they expected historical average returns to continue, while also deciding that the risk was essentially zero. 
That may sound extreme, but some scholars, such as the 2004 Nobel Prize winner Ed Prescott, have shown that, historically, holding a large diversified portfolio of stocks long enough is generally a far better investment than ultra-safe US Treasury bonds. 
A back-of-the-envelope calculation shows that with the risk premium removed, stocks prices could easily triple from existing levels, with price/dividend ratios soaring to over 200, compared to historical averages of 40 to 50. 
Of course, there is a big hole in the Dow 36,000 logic. 
Stocks are risky, depressions can happen, and it is dangerous to extrapolate the past to the future. 
If prices rise simply because investors decide that there is no longer any risk, then prices will collapse all the more precipitously if investors collectively change their minds. 
This brings us to the $200 trillion question (roughly the value of global money and asset markets, including housing): What could cause macroeconomic volatility to start rising? 
Don’t look to central banks; most are likely to manage the near-term risks to inflation and growth reasonably well. 
Hedge funds could throw a scare. 
The Germans tried to use their leadership in the G8 to achieve greater transparency in hedge funds, but they were beaten back by the US and Great Britain. 
To my mind, though, the greatest risk is geopolitical instability. 
By and large, China has been a far more constructive counterpart to the US than the former Soviet Union ever was. 
But, given huge income disparities. China’s leaders still face enormous challenges in maintaining domestic stability, and continuing quiescence cannot be taken for granted. 
At the same time, there are at least a half-dozen other global hot spots – some might be tempted to include the US Senate – that could trigger a major breakdown in world trade. 
In short, if the macroeconomic moderation that dominated 2006 continues into 2007, look for further asset price inflation (but don’t hold your breath for the Dow to hit 36,000). 
But if a major flare-up causes investors to lose confidence in low volatility, the bottom could fall out from under equity and housing prices. 
In that case, do investors and policymakers have a plan B? 

The “Browning” of African Technology 
Forget MIT. 
Hello, Tsing Hua University. 
For Clothilde Tingiri, a hot young programmer at Rwanda’s top software company, dreams of Beijing, not Cambridge, animate her ambitions. 
Desperate for more education, this fall she plans to attend graduate school for computer science – in China, not America. 
The Chinese are no strangers to Rwanda. 
Near Tingiri’s office, Rwanda’s largest telecom company, Rwandatel, is installing new wireless telephony equipment made by Huawei of Shenzen. 
Africa boasts the world’s fastest-growing market for wireless telephony, and Huawei – with offices in 14 African countries – is running away with the business, sending scores of engineers into the bush to bring a new generation of low-cost technology to some of the planet’s poorest people. 
Motivated by profit and market share rather than philanthropy, Huawei is outpacing American and European rivals through lower prices, faster action, and a greater willingness to work in difficult environments. 
According to Chris Lundh, the American chief of Rwandatel, “That’s the way things work in Africa now. 
The Chinese do it all.” 
Well, not quite. 
Across sub-Saharan Africa, engineers from India – armed with appropriate technologies honed in their home market – are also making their mark. 
India supplies Africa with computer-education courses, the most reliable water pumps, low-cost rice-milling equipment, and dozens of other technologies. 
The sudden influx of Chinese and Indian technologies represents the “browning” of African technology, which has long been the domain of “white” Americans and Europeans who want to apply their saving hand to African problems. 
“It is a tectonic shift to the East with shattering implications,” says Calestous Juma, a Kenyan professor at Harvard University who advises the African Union on technology policy. 
One big change is in education. 
There are roughly 2,000 African students in China, most of whom are pursuing engineering and science courses. 
According to Juma, that number is expected to double over the next two years, making China “Africa’s leading destination for science and engineering education.” 
The “browning” of technology in Africa is only in its infancy, but the shift is likely to accelerate. 
Chinese and Indian engineers hail from places that have much more in common with nitty-gritty Africa than comfortable Silicon Valley or Cambridge. 
Africa also offers a testing ground for Asian-designed technologies that are not yet ready for US or European markets. 
A good example is a solar-powered cooking stove from India, which has experimented with such stoves for decades. 
Wood-burning stoves are responsible for much of Africa’s deforestation, and, in many African cities, where wood accounts for the majority of cooking fuel, its price is soaring. 
The Indian stove is clearly a work-in-progress; it is too bulky and not durable enough to survive the rigors of an African village. 
But with India’s vast internal market, many designers have an incentive to improve it. 
How many designers in America or Europe can say the same? 
Of course, technology transfer from China and India could be a mere smokescreen for a new “brown imperialism” aimed at exploiting African oil, food, and minerals. 
In recent years, China’s government alone has invested billions of dollars in African infrastructure and resource extraction, raising suspicions that a new scramble for Africa is underway. 
But Africans genuinely need foreign technology, and the Chinese, in particular, are pushing hard – even flamboyantly – to fill the gap. 
This year, Nigeria’s government bought a Chinese-made satellite, and even paid the Chinese to launch it into space in May. 
China was so eager to provide space technology to Africa’s most populous country that it beat out 21 other bidders for a contract worth $300 million. 
China’s technology inroads are usually less dramatic, but no less telling. 
In African medicine, Chinese herbs and pharmaceuticals are quietly gaining share. 
For example, the Chinese-made anti-malarial drug artesunate has become part of the standard treatment within just a few years. 
Likewise, Chinese mastery over ultra-small, cheap “micro-hydro” dams, which can generate tiny amounts of electricity from mere trickles of water, appeals to power-short, river-rich Africans. 
Tens of thousands of micro-hydro systems operate in China, and nearly none in Africa. 
Americans do-gooders like Nicholas Negroponte, with his $100 laptop, have identified the right problem: Africa is way behind technologically and rapid leap-frogging is possible. 
But Chinese and Indian scientists argue that Africa can benefit from a changing of the technological guard. They may be right. 

The "Challenge" of Turkey 
Samuel Huntington did alert us to the danger. 
In his now famous thesis on the "Clash of Civilizations" he gave Turkey as an example of a " torn country," one divided internally, according to him, between East and West, a country neither in Europe nor in the Middle East, with a fault line running within rather than at the border. 
The recent bombings in Istanbul underscore, once again, the importance of Turkey's overcoming Huntington's fault line to emerge firmly as a prosperous, secular and stable democracy. 
If Turkey succeeds, it will show that there is nothing inevitable about the 21st century becoming one of a "Clash of Civilizations," during which the Cold War's divisions are replaced by new religious antagonisms that resemble the Middle Ages. 
The concept of borders itself must be rethought in today's world: borders that run in minds and on the internet are as important as lines that divide geographical space. 
Turkey's success in moving forward as a modern democracy will depend, of course, on many factors, most of them internal to Turkey and having to do with domestic leadership and decisions that political and economic actors will make in Turkey. 
But the terrorists who struck with such deadliness understand the global, not just regional, nature of the struggle for Turkey's soul. 
External factors will be critical in determining where Turkey ends up. 
Indeed, the single most important factor, which will have a decisive impact on developments to come and could set the stage for a remarkable success story, or, on the contrary, lead to failure, is the European Union's forthcoming decision on whether or not to start negotiations towards Turkey's full EU membership in 2005. 
In December of 2002, EU leaders committed the Union to start negotiations with Turkey on full membership, provided Turkey fulfilled the relevant criteria common to all candidate countries. 
A December 2004 summit, to take place under a Dutch chairmanship, is to see the EU review Turkey's progress and decide, provided the criteria are met, on whether to start negotiations "without delay." 
Economically, politically, institutionally, Turkey needs the "anchor" of the European integration process. 
Europe and Turkey together must prove to themselves, and to the world, that Huntington's "clash of civilizations" is not unavoidable; that Christians, Jews, Moslems, and other believers and non-believers can build the "European Project" together; that a society with a large majority of Moslems, can be democratic and secular; and that Turks and Greeks can do what the French and Germans have done: overcome a century-long antagonism to build a "good neighborhood". 
The "borders" between East and West that Ataturk largely abolished in Turkey must not be allowed to form again in the minds of a new generation. 
The situation here is not unlike that which the EU faced in Eastern Europe, a region which also needed an "anchor" after the fall of communism. 
The EU provided that anchor almost without hesitation and the result has been spectacular. 
Countries with command economies and scant experience of democracy are about to become full members of the Union, after a decade of rapid transformation. 
The anchor was there from the beginning. 
Europe was decisive and generous, and it worked. 
In 1990, Turkey had a more advanced market economy and a much greater experience with democracy than the Eastern European countries about to join the EU. 
But, in the case of Turkey, Europe has long been reluctant to provide the same sort of incentives and hopes. 
This has hurt Turkey's progress. 
But when Europe did move more decisively, as it did at the Copenhagen summit in 2002, economic and political progress in Turkey accelerated in a very tangible way. 
Turkey must, of course, fulfill the conditions common to all candidate countries, measured in a fair and reasonable manner. 
But if it does fulfill these conditions, further hesitation by Europe will undermine all those who want to bring Turkey's democratic transition to a successful conclusion. 
No doubt the challenge for Europe of integrating a large Turkey, bordering on the Middle East, is great. 
The rewards of success, however, would be immense -- for Turkey, for Europe, and for the world. 
Few moments in history hold the promise of the EU summit of December 2004. 
A year remains before us. 
Turkey must work hard to get ready. 
The Unites States must think long-term and gently support the process, instead of toying with the misconceived notion of Turkey as part of a new "greater Middle East." 
Most importantly, European statesmen, who know in their hearts what is required, must show the courage and the wisdom to lead. 

 


The "Limits to Growth" Revisited 
Since the Cold War’s end, all kinds of barriers have come down, and the world economy has fundamentally changed. 
Until 1989, the global market encompassed between 800 million and one billion people. 
Today, it is three times larger, and growing. 
Indeed, we are witnessing one of the most dramatic revolutions in modern history, and it is occurring almost unnoticed. 
From a model applicable to the minority of the world’s population, “Western consumer society” is becoming the dominant economic model of the world, one to which there is increasingly no alternative. 
By mid-century, the lives of seven billion people might be governed by its laws. 
The West has established the economic model of the twenty-first century, with its hitherto unheard of standard of living, and almost all nations and regions are trying to equal it, no matter what the cost. 
When, in the 1970’s, the Club of Rome issued its famous report on the “Limits to Growth,” the reaction was one of concern. 
Over the years, however, as the world economy continued to grow without interruption – and, in the current age of globalization, seemingly without limits – the dire predictions of the Club of Rome have become increasingly an object of ridicule. 
And yet the Club of Rome’s basic insight – that we live and work in a finite global ecosystem, with exhaustible resources and capacities – has returned to challenge us again. 
The world is not preoccupied today by the “limits to growth,” but awareness of the consequences of growth on the earth’s climate and ecosystem is becoming prevalent. 
China, for example, needs annual growth rates of 10% to keep its huge economic, social, and ecological problems under control. 
There would be nothing sensational about this if China were a country like Luxembourg or Singapore. 
But China has 1.3 billion people. 
So the consequences of its economic growth are much more serious. 
Global demand for energy, raw materials, and food is increasingly influenced by rising demand in China and India, whose combined population is 2.5 billion. 
Other large and populous emerging countries in Asia and South America are following in these giants’ footsteps. 
Steadily rising prices of raw materials, agricultural products, and energy already reflect fears about future shortages. 
These undesirable consequences of the expansion of world markets have assumed alarming proportions within a relatively short period of time. 
China is on course, this year or next, to overtake the United States as the world’s largest CO2 emitter, even though its per capita emissions are only one-fifth or even less of the US level. 
What will the world look like when China reduces this difference to one-half? 
And India is following close behind China in its level of carbon emissions. 
Will the global ecosystem be able to absorb these additional pollutants without considerable changes in the ecosphere? 
Obviously not, as a large majority of climatologists are now warning. 
These basic data have been known for a long time, and only a few deny that rapidly accelerating man-made climate change is occurring. 
But one might conclude from the bizarre debates we engage in about climate change that what the world needs is a change in its political and psychological mood, rather than a profound social and economic transformation. 
So, despite grand rhetoric, very little is being done. 
Emerging countries continue to grow every year. 
The US has almost totally backed away from the global fight against pollution, and, through uncontrolled growth, solidifies its position as the world’s leading polluter. 
The same pattern holds true for Europe and Japan, albeit on a slightly smaller scale. 
In view of this global challenge, the G-8 countries have made a heroic decision: the eight richest industrial countries – which are also the largest polluters – promised to “seriously examine” cutting their emissions in half by 2050. 
This rhetorical heroism is enough to leave the world speechless. 
Indeed, it remains to be seen if the European Union will even be able to implement its promise to cut CO2 emissions by 20-30% by 2020. 
So far, the EU has not really come up with any practical ways to do this. 
But the solution to the challenge of global climate change is as plain as day. 
The only chance of improvement is to decouple economic growth from energy consumption and emissions. 
This must happen in the emerging countries, and even more urgently in the old industrial economies. 
Such decoupling can occur only if we do away with the illusion that pollution is cost-free. 
We can no longer get away with subsidizing economic growth and standards of living at the expense of the global environment. 
Human population has simply become too large to be able to afford it. 
Doing away with this illusion requires the creation of a global emissions market – still a very distant goal. 
It also requires more energy efficiency, which means a reduction of waste in both energy production and consumption. 
Rising energy prices already point in this direction, but this knowledge has yet to register. 
Finally, it requires a technological and politico-economic breakthrough in favor of renewable energy, rather than a return to nuclear power or coal. 
In essence, then, we are confronted by a three-pronged challenge of a new “green” industrial revolution. 
Coping with this global challenge also offers an enormous opportunity for future prosperity and social justice that we must seize. 
Of course, there will be many powerful losers as we make these changes. 
They are not about to accept their “disempowerment” without a struggle. 
At the moment, they still seem to have the upper hand, as evidenced by much talk and no action. 
This is precisely what needs to change. 

The “New” Iraq Insurgency 
Sun Tzu, the great Chinese philosopher of war, once wrote, “If you know the enemy and know yourself, you need not fear the result of a hundred battles.” 
The absence of such knowledge invites trouble, often disaster. 
This certainly applies to the ongoing conflict in Iraq, where understanding the insurgents is both crucial and difficult. 
To some degree, the Iraq insurgency reflects its historic predecessors. 
The conflict is “armed theater,” in which the antagonists are simultaneously locked in struggle with each other and sending messages to wider audiences, particularly the Iraqi people. 
Like all insurgencies, public support – or the lack of it – will determine the outcome. 
Moreover, it is likely to be a protracted performance. 
History suggests that once an insurgency reaches “critical mass,” it takes a decade or more to eradicate it. 
And, like past insurgencies, the Iraq conflict is one in which the insurgents use horrific acts to intimidate the public, expose the shortcomings of the government, and goad the regime into overreactions that might turn the public against it. 
But the Iraq insurgency deviates from its forebears in vital ways. 
Its cultural context differs from twentieth-century insurgencies, particularly the use of a radical ideology derived from religion. 
By contrast, twentieth-century insurgencies were usually secular, based on economic class, sectarian differences, or other deep political cleavages. 
The intermingling of religious passion and political radicalism makes the Iraqi insurgency particularly dangerous and difficult to quell. 
The strategic context of the Iraq insurgency is also new. 
In the twentieth century, the superpowers supported insurgency and counterinsurgency as a type of proxy conflict. 
The Iraq conflict, by contrast, is part of the world’s first global insurgency – the web of individual conflicts spawned by Islamist extremism, most of them related in some way to al Qaeda, and the global war on terrorism. 
For the first time in history, terrorism gives insurgents the ability to strike directly at their enemies’ external allies. 
Moreover, the organization and methods of the Iraq insurgency, while not unique, differ from those seen in the late twentieth century. 
Multiple insurgencies co-exist in time and space, each with differing objectives and tactics. 
One component is the jihadists, some of them foreign and some local, with direct ties to al Qaeda or, at least, sympathy with its worldview. 
The jihadists appear to want a Taliban-style Iraq that could serve as a bastion for the wider global Islamist insurgency. 
A second component consists of former Ba’athist officials seeking a return to power. 
With access to extensive funds, this group appears to sub-contract many of its operations to organized crime or “casual” insurgents motivated more by pay than by ideology. 
The third component is sometimes called “Sunni nationalist,” but that phrase is a misnomer, because this group’s members are less concerned with Iraq as a nation than with Sunni domination of post-Hussein Iraq and responding to what they see as personal injustices or abuses. 
This group appears to rely heavily on tribal structures, kinship, and other local affiliations. 
While successful twentieth-century insurgencies developed some degree of hierarchy and a political wing, the Iraq insurgency remains a loose, amorphous network. 
The various components, and the subdivisions within them, do not appear to be centrally commanded. 
Some may cooperate; others do not. 
Finally, the insurgency as a whole remains nihilistic, focused on destroying the new Iraqi government and the emerging economic and political system rather than articulating a coherent alternative. 
In many ways, the Iraq insurgency is analogous to urban street gangs: each component shares behavioral and organizational similarities but pursues its own aggrandizement and undertakes autonomous operations within its “turf” rather than pursuing a master plan or strategy. 
The good news for those who desire stability and democracy in Iraq is that an amorphous, disorganized, and nihilistic insurgency cannot “win” in the traditional sense of replacing the government and forming a new regime. 
The bad news is that an amorphous, disorganized, and nihilistic insurgency can eventually evolve into a coherent, efficient, and purposeful one. 
This would obviously pose a much more serious threat, but even an amorphous, disorganized, and nihilistic insurgency can survive and block stability, democratization, and prosperity for many years. 
To return to the analogy, urban street gangs cannot seize political power, but they can certainly keep their neighborhoods dangerous, backward, and grim. 
There are, then, three paths for Iraq: evolution of a more serious insurgency, persistent violence at current levels, or resolution of the insurgency. 
At least three factors will determine which path that injured nation takes. 
One factor is the will of the new government. 
Insurgent movements that succeed do so because the government’s will collapses. 
It is not clear at this point how much determination Iraq’s emerging democratic leaders will have. 
A second factor is restraint on the part of the Shi’ite community. 
There are ominous indications that the relative forbearance of this group may end. 
If that happens, the insurgency will be superseded by a much more dangerous sectarian civil war. 
The third factor is the willingness of outside groups – both states and non-state groups – to prolong Iraq’s misery by supporting the insurgency, whether overtly or by inaction. 
Until states such as Saudi Arabia, Syria, and others vigorously dry up the inflows of people and money that sustain the insurgency, Iraq will never become stable, democratic, and prosperous. 

The “New Normal” for Growth 
Cambridge – Markets are bubbling over signs of “green shoots” in the global economy. 
An increasing number of investors see a strong rebound coming, first in China, then in the United States, and then in Europe and the rest of the world. 
Even the horrible growth numbers of the last couple quarters don’t seem to discourage this optimistic thinking. 
The deeper the plunge, the stronger the rebound, some analysts say. 
Perhaps these optimists are right. 
But how strong an expansion can one reasonably expect when the worst is finally over? 
Is the “new normal” going to be the same as the “old normal” of the boom years from 2002 to 2007? 
I have trouble seeing how the US and China, the main engines of global growth for two decades, can avoid settling on a notably lower average growth rate than they enjoyed before the crisis. 
Let’s start with the US, the epicenter of the financial crisis, and still the most important economy in the world. 
In the best of worlds, the US financial sector will emerge from the crisis smaller and more heavily regulated. 
Not to worry, some economists, say. 
The US grew rapidly in the 1950’s and 1960’s with a relatively heavily regulated banking system. 
Why not again? 
Sure, but the early post-war financial sector wasn’t called upon in those days to support nearly as diverse and sophisticated an economy as it is today. 
If authorities set the clock back several decades on banking regulation, can we be so sure they will not also set the clock back on income? 
US consumption, the single biggest driver of global growth, is surely headed to a lower level, on the back of weak housing prices, rising unemployment, and falling pension wealth. 
During the boom, US consumption rose to more than 70% of GDP. 
In the wake of the crisis, it could fall down towards 60%. 
And what about the major political shift the US has experienced? 
Tired of go-go growth, voters now look for more attention to addressing environmental concerns, health-care issues, and income inequality. 
But achieving these laudable goals will be expensive, coming on top of the giant budget deficits the US is running to counter the financial crisis. 
Higher taxes and greater regulation cannot be good for growth. 
True, there is room to run the government more efficiently, especially in the areas of education and health care. 
But will these savings be enough to offset the burden of a significantly larger overall government? 
I hope so, and certainly the Obama administration is a breath of fresh air after the stunning ineptness of the Bush-Cheney years. 
But governments all over the world are always convinced that their expansions can be substantially financed by efficiency gains, and that dream usually proves chimerical. 
Chinese growth is set to slow over the longer run, as well. 
Even before the financial crisis, it was clear that China could not continue indefinitely on its growth trajectory of 10% or more. 
Environmental and water problems were mounting. 
It was becoming increasingly clear that as China continued to grow faster than almost anyone else, the rest of the world’s import capacity (and tolerance) could not keep up with China’s export machine. 
China was becoming too big. 
With the financial crisis, the Chinese economy’s necessary adjustment towards more domestic consumption has become far more urgent. 
True, even as exports have collapsed, the government has managed to prop up growth with a huge spending and credit expansion. 
But, while necessary, this strategy threatens to upset the delicate balance between private- and public-sector expansion that has underpinned China’s expansion so far. 
The growing role of the government, and the shrinking role of the private sector, almost surely portends slower growth later this decade. 
Europe, too, faces challenges, and not just from the fact that it now has the worst downturn of the world’s major economic regions, with Germany’s government warning of a surreal 6% decline in GDP for 2009. 
The ongoing financial crisis will almost surely slow the integration of the accession countries in Central and Eastern Europe, whose young populations are the single most dynamic source of growth in Europe today. 
Not all regions will necessarily have slower economic expansion in the decade ahead. 
Assuming continuing reforms in countries such as Brazil, India, South Africa, and Russia, emerging markets could well fill some of the growth gap left by the largest economies. 
But, in all likelihood, after years of steadily revising up its estimates of trend global growth, the International Monetary Fund will start revising them down. 
Even after the crisis, global growth is almost certain to remain lower than the pre-crisis boom years for some time to come. 
This change may be good for the environment, for income equality, and for stability. 
Governments are right to worry about the quality of growth, not just its speed. 
But when it comes to tax and profit estimates, investors and politicians need to reorient themselves to the “new normal” – lower average growth. 


The “Right” Growth for Africa 
Africa has the highest level of poverty in the world and is one of the two regions where poverty has not declined in the past twenty years. 
As the United Nations Economic Commission for Africa’s forthcoming Economic Report on Africa 2005 shows, the proportion of the poor – those living on less that one dollar a day – halved between 1980 and 2003 at the global level, from 40% to 20%. 
But in Africa, the share of the poor increased slightly, from 45% to 46%. 
Africa’s poverty rate in 2003 exceeds that of the next poorest region, South Asia, by 17 percentage points. 
Recognizing the link between economic growth and poverty reduction, those who crafted the UN’s Millennium Development Goals (MDG’s) estimated that halving poverty by 2015 in Africa requires countries to achieve an average minimum growth rate of 7% annually. 
Whether or not African countries will reach this goal is an open question. 
Since the mid-1990’s, African economies have been recording growth rates that are higher than world averages. 
According to the World Bank, the average growth rate for the period 1996-2002 in Africa was about 3.6%, compared to the world average of 2.7%. 
Growth in Africa in 2004 averaged 5.1%, the fastest in eight years. 
Growth rates this year and in 2006 are projected at 4.7% and 5.2%, respectively. 
These average rates mask stark differences between countries. 
In 2004, for example, Chad’s 39.4% annual growth rate contrasted sharply with Zimbabwe’s -6.8% economic contraction. 
Nevertheless, there is no doubt that African economies, taken together, have recovered from the dark years of the 1980’s. 
So the big question is why growth hasn’t translated into poverty reduction. 
One reason is that Africa’s recent growth rates, while high by international standards, remain too low to have a substantial impact on poverty. 
Initial conditions are so low that only high and sustained growth levels may have a noticeable impact on poverty reduction. 
In no year has Africa, as a continent, achieved the 7% average growth rate required by the MDG’s. 
Consider Ethiopia. 
With its per capita GDP of about $100, a growth rate of 7% means that a typical Ethiopian will increase his income by $7 a year (if this additional income is evenly distributed). 
But if this rate of growth were sustained over a period of just ten years, per capita income would double, which underscores the need for sustained high growth rates. 
Very few countries in Africa have posted growth rates consistent with the MDG’s threshold. 
In 2004, only six countries – Chad, Equatorial Guinea, Liberia, Ethiopia, Angola and Mozambique – had annual growth rates higher than 7%. 
And only four countries sustained a growth rate of 7% or more over the past five years. 
Moreover, most of the observed growth was generated by capital rather than labor-intensive sectors. 
If the fruit of economic growth reaches the poor through employment creation, growth in capital-intensive sectors has a limited effect on poverty reduction. 
Indeed, recent growth in Africa appears to have been fueled by increases in oil exports and high oil prices. 
Eight of the top 10 performers in 2004 are either oil-exporting countries or post-conflict economies, with the latter’s high annual growth rates explained mostly by the proverbial “dead cat bounce” – the low base period over which growth is measured. 
Economic growth reduces poverty only if it benefits the poor, and the effect of growth on poverty reduction is a function of the pattern of income distribution within a country. 
Africa as a continent has the world’s second highest measure of income concentration. 
This suggests that the new wealth created over the last ten years has mostly benefited the rich. 
To help reduce its poverty, Africa must strive to increase even further its growth rates and sustain them over a long period. 
Moreover, there must be greater balance between capital-intensive and labor-intensive activities. 
But encouraging labor-intensive industries, which create jobs for the poor, must not be at the expense of capital-intensive industries. 
Finally, Africa’s income distribution must become more equitable. 
This is difficult, given that a skewed income distribution is usually a legacy of a country’s history. 
But it is not impossible, particularly for those African countries that succeed in modernizing their political institutions. 

The “What If?” of 1989 
NEW YORK – For weeks, the scene has been re-played on TV screens around the world, as if the events were breaking news: joyous Berliners dancing atop the infamous Wall, toppled 20 years ago on November 9, 1989. 
“Die Mauer ist Weg,” the people cried out, punching their fists in the air before the cameras at the Brandenburg Gate. 
“The Wall is gone!” 
Without doubt, it is one of the iconic images of the twentieth century. 
For Americans, especially, it was the totemic emblem of victory in the Cold War. 
Yet, if you were there that night, as I was for Newsweek, the moment is more ambiguous, especially with the hindsight of two decades. 
Simply put, history could easily have happened very differently, and almost did. 
Egon Krenz, the Communist boss of the German Democratic Republic, called it a “botch.” 
He was savoring a rare moment of triumph when his party spokesman stopped by in the late afternoon of November 9. 
“Anything to announce?” asked Günter Schabowski, innocently. 
Krenz hesitated, then handed him a press release. 
It was to announce a major initiative he had forced through parliament only hours earlier, and which the country’s restive people had been demanding in the streets for weeks: the right to travel. 
Krenz intended to give it to them – but only the next day, November 10. 
Oblivious to this critical fact, Schabowski went off and read it out to the world in a now-famous vignette. 
“When does it take effect?” reporters asked. 
Confused, Schabowski neglected the all-important date: “sofort,” he said. 
“Immediately.” 
In a heartbeat, the damage was done. 
Astounded East Germans surged like a human sea to the crossing points to the West. 
Border guards, receiving no instructions and not knowing what else to do, opened them up. 
The rest is history. 
Accident has always shaped human destiny. 
Even so, it is worth asking, What if Schabowski had not messed up? 
Imagine that, the next day, Krenz’s travel laws had taken effect in an orderly and efficient German way. 
Strictly speaking, the Wall would not have fallen. 
It would have been opened, not breached. 
The Communists, not the people, would have done it. 
Change might have come by evolution, not revolution. 
Might Krenz and the Communist reformers who had seized power just weeks earlier have been able to channel popular unrest, or even defuse it? 
Instead of a unified Germany today, could there still be two Germanys, East and West? 
The “what if” game can be played out endlessly. 
Without the drama of that night at the Wall, with all its inspiring visuals, would the Velvet Revolution in Prague have come one week later? 
Would Romanians have found the courage to rise against Nicolae Ceausescu a month later? 
The dominoes of Eastern Europe might have toppled differently. 
A few might not have toppled at all. 
Forty-eight hours after the first Germans clambered atop the Wall, I stood through a freezing night with several thousand West Berliners in the muddy no-man’s-land that was Potsdamer Platz at the old heart of pre-war Berlin. 
The hump of Hitler’s bunker curved softly under the earth a football pitch or so away. 
An East German construction crew was knocking a new passage through the Wall, and it was tough going. 
A giant crane strained to lift a 12-foot-high slab, yanking it back and forth like some dinosaur gnawing its prey. 
Finally, it gave way and was hoisted above the crowds, twisting slowly, as if from a gibbet. 
Television spotlights illuminated its broken surface, scrawled with grafitti. 
All the unresolved conflicts of Europe were on that chunk of painted concrete: a neo-Nazi swastika, surrealistic faces of Europe’s dead from war and Holocaust and secret police purges. 
Most notable was a word: Freiheit. 
Freedom. 
How odd that it should be that slab, that word, that evening. 
As the sun set in the west, a huge and perfect orange ball burning into the earth, the moon had risen in the east, as perfectly full and round as the sun, cool and bluish white. 
It was as though they were in balance, moving on an invisible axis, with Berlin poised between them, at once suspended and a fulcrum. 
Freiheit. 
It was almost enough to make one believe in destiny, there in that haunted land of ghosts. 
We often think of history as something inevitable, a culmination of great, grinding forces that can only lead to one destination. 
But the reality of 1989, one of the organizers of the mass protests at the time told me, is that “it was possible at any point, at any time, for events to take a different course.” 
Why this, not that? 
The answer seems to consist in those countless individual choices at key moments, the accidents of human messiness, such as Schabowski’s “botch,” so small and so understandable, yet so earthshaking. 
Among them, too, were the choices of courageous protestors to go into the streets, to speak out – or, as this particular protestor put it to me, not to have to explain to the next generation, “We sat and waited.” 
Those dancing on the Wall, 20 years ago, made their choice. 

Did Capitalism Fail? 
NEW YORK – Until six days before Lehman Brothers collapsed five years ago, the ratings agency Standard & Poor’s maintained the firm’s investment-grade rating of “A.” 
Moody’s waited even longer, downgrading Lehman one business day before it collapsed. 
How could reputable ratings agencies – and investment banks – misjudge things so badly? 
Regulators, bankers, and ratings agencies bear much of the blame for the crisis. 
But the near-meltdown was not so much a failure of capitalism as it was a failure of contemporary economic models’ understanding of the role and functioning of financial markets – and, more broadly, instability – in capitalist economies. 
These models provided the supposedly scientific underpinning for policy decisions and financial innovations that made the worst crisis since the Great Depression much more likely, if not inevitable. 
After Lehman’s collapse, former Federal Reserve Chairman Alan Greenspan testified before the US Congress that he had “found a flaw” in the ideology that self-interest would protect society from the financial system’s excesses. 
But the damage had already been done. 
That belief can be traced to prevailing economic theory concerning the causes of asset-price instability – a theory that accounts for risk and asset-price fluctuations as if the future followed mechanically from the past. 
Contemporary economists’ mechanical models imply that self-interested market participants would not bid housing and other asset prices to clearly excessive levels in the run-up to the crisis. 
Consequently, such excessive fluctuations have been viewed as a symptom of market participants’ irrationality. 
This flawed assumption – that self-interested decisions can be adequately portrayed with mechanical rules – underpinned the creation of synthetic financial instruments and legitimized, on supposedly scientific grounds, their marketing to pension funds and other financial institutions around the world. 
Remarkably, emerging economies with relatively less developed financial markets escaped many of the more egregious consequences of such innovations. 
Contemporary economists’ reliance on mechanical rules to understand – and influence – economic outcomes extends to macroeconomic policy as well, and often draws on an authority, John Maynard Keynes, who would have rejected their approach. 
Keynes understood early on the fallacy of applying such mechanical rules. 
“We have involved ourselves in a colossal muddle,” he warned, “having blundered in the control of a delicate machine, the working of which we do not understand.” 
In The General Theory of Employment, Interest, and Money, Keynes sought to provide the missing rationale for relying on expansionary fiscal policy to steer advanced capitalist economies out of the Great Depression. 
But, following World War II, his successors developed a much more ambitious agenda. 
Instead of pursuing measures to counter excessive fluctuations in economic activity, such as the deep contraction of the 1930’s, so-called stabilization policies focused on measures that aimed to maintain full employment. 
The “New Keynesian” models underpinning these policies assumed that an economy’s “true” potential – and thus the so-called output gap that expansionary policy is supposed to fill to attain full employment – can be precisely measured. 
But, to put it bluntly, the belief that an economist can fully specify in advance how aggregate outcomes – and thus the potential level of economic activity – unfold over time is bogus. 
The projections implied by the Fed’s macro-econometric model concerning the timing and effects of the 2008 economic stimulus on unemployment, which have been notoriously wide of the mark, are a case in point. 
Yet the mainstream of the economics profession insists that such mechanistic models retain validity. 
Nobel laureate economist Paul Krugman, for example, claims that “a back-of-the-envelope calculation” on the basis of “textbook macroeconomics” indicates that the $800 billion US fiscal stimulus in 2009 should have been three times bigger. 
Clearly, we need a new textbook. 
The question is not whether fiscal stimulus helped, or whether a larger stimulus would have helped more, but whether policymakers should rely on any model that assumes that the future follows mechanically from the past. 
For example, the housing-market collapse that left millions of US homeowners underwater is not part of textbook models, but it made precise calculations of fiscal stimulus based on them impossible. 
The public should be highly suspicious of claims that such models provide any scientific basis for economic policy. 
But to renounce what Friedrich von Hayek called economists’ “pretense of exact knowledge” is not to abandon the possibility that economic theory can inform policymaking. 
Indeed, recognizing ever-imperfect knowledge on the part of economists, policymakers, and market participants has important implications for our understanding of financial instability and the state’s role in mitigating it. 
Asset-price swings arise not because market participants are irrational, but because they are attempting to cope with their ever-imperfect knowledge of the future stream of profits from alternative investment projects. 
Market instability is thus integral to how capitalist economies allocate their savings. 
Given this, policymakers should intervene not because they have superior knowledge about asset values (in fact, no one does), but because profit-seeking market participants do not internalize the huge social costs associated with excessive upswings and downswings in prices. 
It is such excessive fluctuations, not deviations from some fanciful “true” value – whether of assets or of the unemployment rate – that Keynes believed policymakers should seek to mitigate. 
Unlike their successors, Keynes and Hayek understood that imperfect knowledge and non-routine change mean that policy rules, together with the variables underlying them, gain and lose relevance at times that no one can anticipate. 
That view appears to have returned to policymaking in Keynes’s homeland. 
As Mervyn King, the former governor of the Bank of England, put it, “Our understanding of the economy is incomplete and constantly evolving….To describe monetary policy in terms of a constant rule derived from a known model of the economy is to ignore this process of learning.” 
His successor, Mark Carney, has come to embody this view, eschewing fixed policy rules in favor of the constrained discretion implied by guidance ranges for key indicators. 
Rather than trying to hit precise numerical targets, whether for inflation or unemployment, policymaking in this mode attempts to dampen excessive fluctuations. 
It thus responds to actual problems, not to theories and rules (which these problems may have rendered obsolete). 
If we are honest about the causes of the 2008 crisis – and serious about avoiding its recurrence – we must accept what economic analysis cannot deliver in order to benefit from what it can. 

The Abuse of History and the Iranian Bomb 
TEL AVIV – Saturated with their often tragic history, Jews tend to pay great reverence to the past. 
But the past, especially when not handled with care, can be the enemy of the future and distort our reading of the challenges of the present. 
This is certainly the case with the analogy that Israeli leaders insist on drawing between the destruction of European Jewry in the Holocaust and the threat posed to the Jewish state by a nuclear-armed Iran. 
Holocaust Remembrance Day in Jerusalem this year again saw Israeli leaders competing with each other in feeding the gloom of the national psyche and public hysteria surrounding Iran’s intentions. 
President Shimon Peres, who, unlike Prime Minister Binyamin Netanyahu, is skeptical of the utility of an attack on Iran’s nuclear installations, spoke of the “threat of extermination” facing Israel. 
Even Defense Minister Ehud Barak, usually a coolly rational thinker, chose Yad Mordechai, a Kibbutz named after Mordechai Anilewitz, the leader of the Warsaw Ghetto uprising, to alert world opinion against “Holocaust deniers, first and foremost the Iranian president, who calls for the destruction of the Jewish people.” 
Netanyahu, not surprisingly, was especially outspoken. 
To him, Iranian President Mahmoud Ahmadinejad is another Hitler, and the world is now facing the same challenges that it faced on the eve of Hitler’s rise to power. 
Iran’s race to develop nuclear weapons, Netanyahu warned, can be understood only in the context of its leaders’ “repeated vows to wipe the Jewish state off the face of the earth.” 
Supposedly, now, as then, the world is criminally indifferent. 
Netanyahu’s Holocaust analogy would have been a mere intellectual curiosity if he were not the person who would be responsible for taking the decision about whether to attack Iran’s nuclear installations and thus drive the Middle East into an apocalyptic confrontation. 
The career of his political mentor, Menachem Begin, demonstrated that distorted analogies between past and present can inspire irresponsible policies. 
In his disastrous 1982 invasion of Lebanon, Begin perceived himself as a God-sent vindicator of the legacy of the Holocaust. 
He chose to portray what was a cynical alliance of convenience between Israel and the Christian Phalange as a lesson to humanity and a rebuke of that hypocritical Christian Europe which had betrayed the Jews during the Holocaust. 
He would show them how the Jewish state, created by Holocaust survivors and now led by one, would come to the rescue of a Christian minority threatened with destruction. 
To Begin, Arafat in Beirut was Hitler in his Berlin bunker. 
Indeed, Abba Eban ridiculed Begin for behaving “as if Israel were a kind of disarmed Costa Rica and the PLO was Napoleon Bonaparte, Alexander the Great, and Attila the Hun all wrapped into one.” 
Begin was the best proof that Israel’s critics needed that the Zionist revolution, although it created a state out of the ashes of the Holocaust, had failed to eradicate the collective self-image of the Jew and the Israeli as victim. 
Netanyahu seals the image of Israel as a nation totally incapable of breaking out of the prison of its past. 
Israel is not wrong to cast serious doubts on the efficacy of the measures that the United States pretends to take in the hope of curtailing Iran’s nuclear ambitions. 
Neither the planned sanctions nor the recently published US Nuclear Posture Review, a far less revolutionary document than expected, will curb Iran’s nuclear appetite. 
Instead of believing in its capacity to stop Iran’s nuclear program, the world is preparing to live with a nuclear-armed Iran. 
But this would not be Israel’s problem alone. 
Such a resounding collapse of the Nuclear Non-Proliferation Treaty would pose a formidable challenge to the world community, particularly to the Middle East. 
Iran’s viciously anti-Semitic rhetoric is a transparent attempt to deceive its terrified Arab neighbors by presenting its military might as the spearhead of an all-Muslim confrontation with Israel. 
In fact, a nuclear Iran would launch the entire region into nuclear anarchy. 
Saudi Arabia, Egypt, and Turkey would all seek their own “Sunni” bomb to counter the threat of a Shia nuclear empire on their doorsteps. 
When he did not feel the need to exploit the solemnity of Holocaust remembrance ceremonies, Barak conveyed the right message to the rising Iranian power. 
A year ago, knowing full well that Iran was irreversibly on its way to getting the bomb, he soberly challenged Netanuyahu’s dangerous distortion of history. 
“Israel is not European Jewry,” Barak said at the time. 
“We are a strong country to which the whole world attributes nuclear capabilities, and in regional terms we are a superpower.” 
He then expressed his dislike for comparing the Iranian threat to the Holocaust, “because it cheapens the Holocaust and stretches current challenges beyond their proper place. 
There is none that will dare to destroy Israel.” 
History has not come full circle. 
Israel needs to decide whether it is a regional superpower or a Jewish ghetto waiting for an imminent pogrom to begin. 
History in the hands of manipulative politicians and incorrigible ideologues can be either a dangerously inebriating weapon to mobilize the masses, or, as James Joyce put it in Ulysses, “a nightmare” from which it is difficult to wake. 
By obsessively filtering their conflict through the nightmare of the Holocaust and the Nakbah, Israelis and Palestinians have doomed the chances of a peaceful settlement of their dispute. 
Viewing the current conflict between such formidable military powers as Israel and Iran through a similar lens can only breed untold catastrophe. 

The Accidental Empire 
NEW YORK – It is now clear that the main cause of the euro crisis is the member states’ surrender of their right to print money to the European Central Bank. 
They did not understand just what that surrender entailed – and neither did the European authorities. 
When the euro was introduced, regulators allowed banks to buy unlimited amounts of government bonds without setting aside any equity capital, and the ECB discounted all eurozone government bonds on equal terms. 
Commercial banks found it advantageous to accumulate weaker countries’ bonds to earn a few extra basis points, which caused interest rates to converge across the eurozone. 
Germany, struggling with the burdens of reunification, undertook structural reforms and became more competitive. 
Other countries enjoyed housing and consumption booms on the back of cheap credit, making them less competitive. 
Then came the crash of 2008. 
Governments had to bail out their banks. 
Some of them found themselves in the position of a developing country that had become heavily indebted in a currency that it did not control. 
Reflecting the divergence in economic performance, Europe became divided into creditor and debtor countries. 
When financial markets discovered that supposedly riskless government bonds might be forced into default, they raised risk premiums dramatically. 
This rendered potentially insolvent commercial banks, whose balance sheets were loaded with such bonds, giving rise to Europe’s twin sovereign-debt and banking crisis. 
The eurozone is now replicating how the global financial system dealt with such crises in 1982 and again in 1997. 
In both cases, the international authorities inflicted hardship on the periphery in order to protect the center; now Germany is unknowingly playing the same role. 
The details differ, but the idea is the same: creditors are shifting the entire burden of adjustment onto debtors, while the “center” avoids its own responsibility for the imbalances. 
Interestingly, the terms “center” and “periphery” have crept into usage almost unnoticed. 
Yet, in the euro crisis, the center’s responsibility is even greater than it was in 1982 or 1997: it designed a flawed currency system and failed to correct the defects. 
In the 1980’s, Latin America suffered a lost decade; a similar fate now awaits Europe. 
At the onset of the crisis, a breakup of the euro was inconceivable: the assets and liabilities denominated in a common currency were so intermingled that a breakup would have led to an uncontrollable meltdown. 
But, as the crisis has progressed, the financial system has become increasingly reordered along national lines. 
This trend has gathered momentum in recent months. 
The ECB’s long-term refinancing operation enabled Spanish and Italian banks to buy their own countries’ bonds and earn a large spread. 
Simultaneously, banks gave preference to shedding assets outside their national borders, and risk managers try to match assets and liabilities at home, rather than within the eurozone as a whole. 
If this continued for a few years, a euro breakup would become possible without a meltdown, but it would leave the creditor countries with large claims against debtor countries, which would be difficult to collect. 
In addition to intergovernmental transfers and guarantees, the Bundesbank’s claims against peripheral countries’ central banks within the Target2 clearing system totaled €644 billion ($804 billion) on April 30, and the amount is growing exponentially, owing to capital flight. 
So the crisis keeps growing. 
Tensions in financial markets have hit new highs. 
Most telling is that Britain, which retained control of its currency, enjoys the lowest yields in its history, while the risk premium on Spanish bonds is at a new high. 
The real economy of the eurozone is declining, while Germany is booming. 
This means that the divergence is widening. 
The political and social dynamics are also working toward disintegration. 
Public opinion, as expressed in recent election results, is increasingly opposed to austerity, and this trend is likely to continue until the policy is reversed. 
Something has to give. 
In my judgment, the authorities have a three-month window during which they could still correct their mistakes and reverse current trends. 
That would require some extraordinary policy measures to return conditions closer to normal, and they must conform to existing treaties, which could then be revised in a calmer atmosphere to prevent recurrence of imbalances. 
It is difficult, but not impossible, to identify some extraordinary measures that would meet these tough requirements. 
They would have to tackle the banking and the sovereign-debt problems simultaneously, without neglecting to reduce divergences in competitiveness. 
The eurozone needs a banking union: a European deposit-insurance scheme in order to stem capital flight, a European source for financing bank recapitalization, and eurozone-wide supervision and regulation. 
The heavily indebted countries need relief on their financing costs. 
There are various ways to provide it, but they all require Germany’s active support. 
That is where the blockage is. 
German authorities are working feverishly to come up with a set of proposals in time for the European Union summit at the end of June, but all signs suggest that they will offer only the minimum on which the various parties can agree – implying, once again, only temporary relief. 
But we are at an inflection point. 
The Greek crisis is liable to come to a climax in the fall, even if the election produces a government that is willing to abide by Greece’s current agreement with its creditors. 
By that time, the German economy will also be weakening, so that Chancellor Angela Merkel will find it even more difficult than today to persuade the German public to accept additional European responsibilities. 
Barring an accident like the Lehman Brothers bankruptcy, Germany is likely to do enough to hold the euro together, but the EU will become something very different from the open society that once fired people’s imagination. 
The division between debtor and creditor countries will become permanent, with Germany dominating and the periphery becoming a depressed hinterland. 
This will inevitably arouse suspicion about Germany’s role in Europe – but any comparison with Germany's past is quite inappropriate. 
The current situation is due not to a deliberate plan, but to the lack of one. 
It is a tragedy of policy errors. 
Germany is a well-functioning democracy with an overwhelming majority for an open society. 
When the German people become aware of the consequences – one hopes not too late – they will want to correct the defects in the euro's design. 
It is clear what is needed: a European fiscal authority that is able and willing to reduce the debt burden of the periphery, as well as a banking union. 
Debt relief could take various forms other than Eurobonds, and would be conditional on debtors abiding by the fiscal compact. 
Withdrawing all or part of the relief in case of nonperformance would be a powerful protection against moral hazard. 
It is up to Germany to live up to the leadership responsibilities thrust upon it by its own success. 

The Achievement Myth 
NEW YORK – In late September, the American press was filled with data on women’s happiness. 
Marcus Buckingham, a business consultant, made the case that the data showed that women have become less happy over the past 40 years. 
Blogs, newsmagazines, and daytime talk shows agonized over the notion that feminism – all that freedom, all those choices – was actually making women sadder. 
In fact, the women had told the researchers whom Buckingham cited that they were ‘not satisfied’ with many areas of their lives. 
If Western women have learned anything in the past 40 years, it is how to be unsatisfied with the status quo – an important insight for the rest of the world, as we seek to export Western-style feminism. 
There is truth, for good and for ill, to the idea that Western-style “consciousness-raising” is also about teaching women how to be dissatisfied. 
The contemporary Western women’s movement announced itself in 1963, with Betty Friedan’s The Feminine Mystique and that book’s permission to complain – to identify in many ways “the problem that has no name.” 
Waves of discourse followed, helping Western women see what was “not enough” in many aspects of their lives, such as the low-paying jobs in which men took credit for their work – and pinched their bottoms. 
The movement also raised the bar sexually: Shere Hite let women know in 1973 that if they could not reach orgasm through intercourse alone, they weren’t aberrant – they could ask for more and subtler sexual attention. 
Do you want to run your own business? 
Go, girl! 
Do you dream of equal parenting, or of being a Supreme Court Justice? 
Right on, sister! 
In every area of their lives, those who articulated Western feminism invited women to demand more. 
But the downside of this aspirational language and philosophy can be a perpetual, personal restlessness. 
Many men and women in the rest of the world – especially in the developing world – observe this in us and are ambivalent about it. 
Indeed, the definition of Western feminism as “always more” has led to a paradox. 
Our girls and young women are unable to relax. 
New data in the West reveal that we have not necessarily raised a generation of daughters who are exuding self-respect and self-esteem. 
We are raising a generation of girls who are extremely hard on themselves – who set their own personal standards incredibly, even punishingly high – and who don’t give themselves a chance to rest and think, “that’s enough.” 
What if we in the West, by letting feminism be defined as always doing more, doing it better, and outdoing others, have failed to give our daughters a definition of success that sometimes simply lets them be? 
Unfortunately for us in the West, Second Wave feminism was articulated by ambitious, highly educated women who went to elite colleges and viewed professional accomplishment as the apex of overall accomplishment. 
Not much space was given to other forms of achievement, such as caring for elderly parents, being a nurturing member of the community, or – how very un-Western! – attaining a certain inner wisdom, insight, or peace. 
What if we have externalized the feminist ideal primarily as a set of accomplishments and rigors, rather than embracing it as an expansion of all kinds of freedom – which can also sometimes include freedom from eternal aspiration? 
The redefinition of feminism as “always seeking more” fulfills the requirements of consumer capitalism and a post-industrial work ethic. 
It is not necessarily a victory for women – or men – that, 40 years on, professional women are just as exhausted as professional men traditionally have been. 
When children of working mothers were asked in one recent survey what they wanted to change in their life situation, they did not say that they wanted to spend more time with their mothers. 
They said that they wished their mothers could be less exhausted and stressed. 
My aunt Anasuya, who is one of my most important role models, delayed conventionally defined achievements in the professional world as she focused on raising a family. 
Now, with her children grown, she has gone off to Tibet for months to realize her dream of becoming a practitioner of Tibetan medicine. 
Feminism certainly opened the way for her to have a life of choices, and now to reach for this unusual goal. 
But I don’t know that feminism made space explicitly to honor what I admire most about her: her open door. 
She is continually taking in students who need a home, or refugee single mothers in economic need, or simply making one more place at the table for teenagers whose parents are struggling with issues of their own. 
In terms of the way she amplifies the lives of others, hers is one of the most successful “careers” I know – and one pursued while exuding calm, serenity, and peace. 
Should Western feminism deepen its definition of a successful woman’s life, so that more than credentials can demonstrate well-made choices? 
I believe the time is right to do so. 
As markets collapse, unemployment skyrockets, and the foundations of our institutions shift in seismic ways, this could be a moment of great opportunity for women and those for whom they care. 
Perhaps seeing how futile it is to rest one’s sense of self on externalized, professionalized achievement is a wake-up call – and a first step to a deeper freedom, and an even deeper sense of feminine destiny. 

The Afghan Endgame Mirage 
STOCKHOLM – On a recent visit to Afghanistan and Pakistan, I could not fail to notice the increasingly frequent international calls for an “endgame” in Afghanistan. 
But an endgame for that country is a dangerous illusion: the game will not end, and neither will history. 
The only thing that could come to an end is the world’s attention and engagement in Afghanistan, which could well lead to catastrophic consequences. 
Much international focus is now on the year 2014, the target date for completion of the gradual transfer of responsibility for security from international forces to the Afghan government. 
This process is not without challenges, but there is no reason to believe that it could not be finalized more or less according to plan and the current timetable. 
My belief is that there is another, far more critical challenge facing Afghanistan in 2014: the election of a new president. 
In a system where so much power – open and hidden, constitutional and traditional – is centered around the president, the election could well turn into an all-out battle for the country’s future. 
The presidential election of 2009 – in which Hamid Karzai gained a second term – was a highly contentious affair, and neither the Afghan political system nor the international community came through it with flying colors. 
Together with the battle over the Taliban’s future role in the country, the struggle for power in 2014 could reanimate divisions that take the country back to the brink of a wider civil war, with the liberal technocrats of Kabul crushed between a resurgent Northern Alliance and a wider “Pashtun Pact.” 
Such a scenario would, of course, spell disaster for Afghanistan. 
But the implications would be far broader. 
We must not ignore the grave dangers that it would pose for Pakistan, where a new round of jihadist rhetoric and mobilization could be fatal to hopes of building a stable and more secure country. 
We should have learned the lesson of the 1980’s: ignorance is not bliss. 
What, then, is the proper policy for the international community? 
First, we must focus on what is most important – a transition to a post-Karzai system that is seen as reasonably legitimate by all parts of Afghanistan. 
This is primarily a question of making the elections as free and as fair as possible, and here the United Nations’ role will be critical. 
But it is also imperative to establish a wide national consensus on the rules of the game. 
Karzai can leave no better legacy than an orderly transition, and has no interest in seeing all that he has achieved go up in flames. 
Second, we must encourage a true regional dialogue that prevents Afghanistan from becoming a battleground for devastating proxy wars. 
Here, the key will be to bridge the gulf between Pakistan’s government and the forces of northern Afghanistan. 
Pakistan must do whatever is necessary to convince everyone that it will not play a hidden game with the Taliban – assuming, of course, that it has no such intention. 
It is equally important that Pakistan and India engage in an open dialogue that can establish trust and transparency in their respective policies concerning Afghanistan. 
Today, this dialogue hardly exists, and their mutual maneuvering, fueled by mistrust, could easily destabilize their weaker neighbor. 
Finally, for reasons of history, geography, and culture, Iran’s role in Afghanistan cannot and should not be ignored. 
There is no reason why the West’s strategic objectives concerning Afghanistan should change fundamentally in the coming years. 
The key now is to get our priorities right. 
Securing an orderly political transition and encouraging a deep and broad regional dialogue should now be at the top of the international agenda for Afghanistan. 
Not only are these objectives important in themselves; they are also central in creating the right framework for a settlement between the various Afghan parties and the Taliban. 
Some now argue that large-scale engagement in Afghanistan was a mistake. 
But, in the mirror of history, we can see that the greater mistake has been to abandon the country altogether. 
Afghanistan connects Central and South Asia, and a breakdown of order there would pose grave risks in both directions. 
Moreover, the world – not just the West, but Russia and China as well – would risk global proliferation of drugs, weapons, and terror. 
The task now is not to seek an illusory endgame. 
The book is not finished; we are merely entering a new chapter. 
What we must do now is create the framework for a more stable Afghanistan, and for sustained international engagement in a region that is crucial for global stability. 

The Age of Authoritarian Democracy 
MOSCOW – The world is currently being shaken by tectonic changes almost too numerous to count: the ongoing economic crisis is accelerating the degradation of international governance and supranational institutions, and both are occurring alongside a massive shift of economic and political power to Asia. 
Less than a quarter-century after Francis Fukuyama declared “the end of history,” we seem to have arrived at the dawn of a new age of social and geopolitical upheaval. 
Dramatically, the Arab world has been swept by a revolutionary spring, though one that is rapidly becoming a chilly winter. 
Indeed, for the most part, the new regimes are combining the old authoritarianism with Islamism, resulting in further social stagnation, resentment, and instability. 
Even more remarkable, however, are the social (and antisocial) grassroots demonstrations that are mushrooming in affluent Western societies. 
These protests have two major causes. 
First, social inequality has grown unabated in the West over the last quarter-century, owing in part to the disappearance of the Soviet Union and, with it, the threat of expansionist communism. 
The specter of revolution had forced Western elites to use the power of the state to redistribute wealth and nurture the growth of loyal middle classes. 
But, when communism collapsed in its Eurasian heartland, the West’s rich, believing that they had nothing more to fear, pressed to roll back the welfare state, causing inequality to rise rapidly. 
This was tolerable as long as the overall pie was expanding, but the global financial crisis in 2008 ended that. 
Second, over the past 15 years, hundreds of millions of jobs shifted to Asia, which offered inexpensive and often highly skilled labor. 
The West, euphoric from its victory over communism and its seemingly unstoppable economic growth, failed to implement necessary structural reforms (Germany and Sweden were rare exceptions). 
Instead, Western prosperity relied increasingly on debt. 
But the economic crisis has made it impossible to maintain a good life on borrowed money. 
Americans and Europeans are beginning to understand that neither they, nor their children, can assume that they will become wealthier over time. 
Governments now face the difficult task of implementing reforms that will hit the majority of voters hardest. 
In the meantime, the minority that has benefited financially over the past two decades is unlikely to give up its advantages without a fight. 
All of this cannot fail but to weaken Western democracy’s allure in countries like Russia, where, unlike in the West or to a large extent the Arab world, those who are organizing the massive demonstrations against the government belong to the economic elite. 
Theirs is a movement of political reform – demanding more freedom and government accountability – not of social protest, at least not yet. 
A few years ago, it was fashionable to worry about the challenge that authoritarian-style capitalism (for example, in China, Singapore, Malaysia, or Russia) presented to Western democratic capitalism. 
Today, the problem is not only economic. 
Western capitalism’s model of a society based on near-universal affluence and liberal democracy looks increasingly ineffective compared to the competition. 
Authoritarian countries’ middle classes may push their leaders toward greater democracy, as in Russia, but Western democracies will also likely become more authoritarian. 
Indeed, measured against today’s standards, Charles de Gaulle, Winston Churchill, and Dwight Eisenhower were comparatively authoritarian leaders. 
The West will have to re-adopt such an approach, or risk losing out globally as its ultra-right and ultra-left political forces consolidate their positions and its middle classes begin to dissolve. 
We must find ways to prevent the political polarization that gave rise to totalitarian systems – communist and fascist – in the twentieth century. 
Fortunately, this is possible. 
Communism and fascism were born and took root in societies demoralized by war, which is why all steps should be taken now to prevent the outbreak of war. 
This is becoming particularly relevant today, as the smell of war hangs over Iran. 
Israel, which is facing a surge of hostile sentiment among its neighbors in the wake of their “democratic” upheavals, is not the only interested party. 
Many people in the advanced countries, and even some in Russia, look increasingly supportive of a war with Iran, despite – or perhaps owing to – the need to address the ongoing global economic crisis and failure of international governance. 
At the same time, huge opportunities beckon in times of far-reaching change. 
Billions of people in Asia have extricated themselves from poverty. 
New markets and spheres for applying one’s intellect, education, and talents are appearing constantly. 
The world’s power centers are beginning to counterbalance each other, undermining hegemonic ambitions and heralding a creative instability based on genuine multipolarity, with people gaining greater freedom to define their fate in the global arena. 
Paradoxically, today’s global changes and challenges offer the potential for both peaceful coexistence and violent conflict. 
Whether fortunately or not, it is up to us – alone – to determine which future it will be. 

The Age of Extinction 
This year’s G8 summit in Germany was unusual in that, a month later, people are still talking about whether or not it achieved anything. 
But one breakthrough at the summit is undeniable: amidst all the talk of economic growth and exchange rates, a new statistic appeared on the agenda of the world’s richest countries: extinction rates. 
For the first time, the leaders of the world’s most powerful nations took notice of a constituency that they have largely ignored – the wild animals, fish, and plants that make up all the millions of living species on the planet besides humans. 
Scientists predict that at least a third and as much as two-thirds of the world’s species could be on their way to extinction by the end of this century, mostly because people are destroying tropical forests and other habitats, over-fishing the oceans, and changing the global climate. 
The world’s wealthiest countries endorsed the idea of an international study to examine the economic benefits of conserving the world’s wildlife. 
While this is a good first step, we already know much. 
Wild species of bats, birds, and amphibians add several billion dollars each year to the world’s agricultural economy by controlling pests and pollinating major crops – a free service that they get little credit for providing. 
Coral reefs, 27% of which have already disappeared, sustain marine resources that add $375 billion to the global economy each year. 
Likewise, more than a quarter of all medicinal drugs, representing billions of dollars in sales and reduced healthcare costs, possess active ingredients derived from wild species. 
And when natural forest habitat is cleared, the hardened soils left behind allow pooled water to breed mosquitoes that have increased the number of worldwide deaths from malaria. 
Economists already understand that for more than a billion of the world’s poorest people, income does not come from any bank or government program, but from the intricate tapestry of forests, oceans, and wildlife that surrounds them. 
Yet billions of the world’s poorest people live on degraded landscapes, deforested and eroded soils, and over-fished coastlines where conservation is vital to lifting them out of poverty. 
As a result, conservation is as much a human rights issue as an environmental one. 
The new study endorsed by the G8 heads of state will certainly direct welcome new attention to this fact. 
But, given that many scientists believe that we have only a couple of decades left to protect the world’s remaining natural habitats, it is imperative that concrete and urgent steps to protect wildlife be taken now. 
In addition to bringing global warming under control by reducing greenhouse gas emissions, we must build a much larger and more sophisticated global conservation reserve system that encompasses the most wildlife-rich land and marine areas. 
Existing reserves in areas with the highest concentrations of species, which lie mostly in developing countries, need to be extended and linked through corridors. 
This will enable wildlife to move into new environments, escape habitat destruction, and adapt to climate changes. 
At the same time, people living in or near such reserves must be given the assistance they need to farm, fish, and earn a livelihood in ways that do not destroy the very ecosystems on which both they and wildlife depend. 
We already know how to do this. 
It just costs more than we have been willing to spend. 
The wealthy G8 nations – which alone can afford to invest in such an ambitious worldwide project – together spend several hundred million dollars a year on global conservation activities. 
Conservation experts say that the annual investment will eventually need to be close to $6 billion – roughly what the world spends every year on potato chips. 
Eventually, a worldwide carbon trading system could generate much of the money needed to finance a global conservation network. 
This would offer the double benefit of capturing greenhouse gas pollution and saving the world’s wildlife from oblivion. 
Until then, the world’s richest countries are the only ones that can begin pulling together the seed money, a “Global Species Rescue Fund,” to get the effort started. 
Next year’s G8 meeting in Japan must go beyond studying the problem to making a significant down payment on solving it. 
Rich or poor, industrial or rural, we are all connected to the world’s diversity of life. 
The oceans, forests, grasslands, and all the places called home by the millions of other species sharing our planet are a part of our lives too. 
It is time we recognized that, and demanded that our leaders work to create a sustainable future for ourselves and a legacy that our children will admire. 

The Age of Human Rights 
NEW YORK: At the dawn of the 21st century, the United Nations has become more central to the lives of more people than ever. 
Through our work in development, peacekeeping, the environment and health, we are helping nations and communities to build a better, freer, more prosperous future. 
Above all we have committed ourselves to the idea that no individual – regardless of gender, ethnicity or race – shall have his or her human rights abused or ignored. 
This idea is enshrined in the Charter of the United Nations and the Universal Declaration of Human Rights. 
It is the source of our greatest inspiration and the impulse for our greatest efforts. 
Today, we know more than ever that without respect for the rights of the individual, no nation, no community, no society can be truly free. 
Whether it means advancing development, emphasizing the importance of preventive action, or intervening – even across state boundaries – to stop gross and systematic violations of human rights, the individual has been the focus of our concerns. 
The promotion and defense of human rights is at the heart of every aspect of our work and every article of the United Nations' Charter. 
Above all, I believe human rights are at the core of our sacred bond with the peoples of the United Nations. 
When civilians are attacked and massacred because of their ethnicity, as in Kosovo, the world looks to the United Nations to speak up for them. 
When men, women and children are assaulted and their limbs hacked off, as in Sierra Leone, here again the world looks to the United Nations. 
When women and girls are denied their right to equality, as in Afghanistan, the world looks to the United Nations to take a stand. 
Perhaps more than any other aspect of our work, the struggle for human rights resonates with our global constituency, and is deeply relevant to the lives of those most in need – the tortured, the oppressed, the silenced, and the victims of “ethnic cleansing” and injustice. 
If, in the face of such abuses, we do not speak up and speak out, if we do not act in defense of human rights and advocate their lasting universality, how can we answer that global constituency? 
For in a world where globalization has limited the ability of states to control their economies, regulate their financial policies, and isolate themselves from environmental damage and human migration, the last right of states cannot and must not be the right to enslave, persecute or torture their own citizens. 
The UN's achievements in the area of human rights over the last fifty years are rooted in the universal acceptance of the rights enumerated in the Universal Declaration, and in the growing abhorrence of practices for which there can be no excuse, in any culture, under any circumstance. 
Still, I believe it is not enough for the United Nations to be known by what we are against. 
The world needs to know who we are against, no less. 
In the age of human rights, the United Nations must have the courage to recognize that just as there are common aims, there are common enemies. 
We should leave no one in doubt that for the mass murderers, the “ethnic cleansers”, those guilty of gross and shocking violations of human rights, impunity is unacceptable. 
The United Nations will never be their refuge, its Charter never the source of comfort or justification. 
Perhaps the most important challenge lies in combating the most outrageous violations in the field of human rights – the gross violations, which in too many cases include summary executions, widespread forced displacements, massacres, and indiscriminate attacks on civilians. 
Of all gross violations, genocide knows no parallel in human history. 
The tragic irony of this age of human rights – where greater numbers are enjoying human rights than perhaps ever in history – is that it has been repeatedly darkened by outbursts of indiscriminate violence and organized mass killings. 
In Cambodia, in the 1970s, up to two million people were killed by Pol Pot's regime. 
And in the 1990s, from Bosnia to Rwanda, thousands upon thousands of human beings were massacred for belonging to the wrong ethnicity. 
Each time the world says “never again.” 
Yet it happens again. 
The vicious and systematic campaign of “ethnic cleansing” conducted by Serbian authorities in Kosovo appeared to have one aim: to expel or kill as many ethnic Albanians in Kosovo as possible, thereby denying a people their most basic rights to life, liberty and security. 
The result was a humanitarian disaster throughout the entire region. 
We all deeply regret that the international community, despite months of diplomatic efforts, failed to prevent this disaster. 
What gives me hope – and should give every future "ethnic cleanser" and every state-backed architect of mass murder pause – is that a universal sense of outrage was provoked leading to the eventual return of the Albanian population to Kosovo. 
Emerging slowly, but I believe surely, is an international norm against the violent repression of minorities, which will and must take precedence over concerns of state sovereignty. 
It is a principle that protects minorities – and majorities – from gross violations. 
Let me therefore be very clear: even though we are an organization of Member States, the rights and ideals the United Nations exists to protect are those of peoples. 
No government has the right to hide behind national sovereignty in order to violate the human rights or fundamental freedoms of its peoples. 
Whether a person belongs to the minority or the majority, that person's human rights and fundamental freedoms are sacred. 

The Age of Oskar 
ZURICH: Europe's new master and man of the future, Oskar Lafontaine, is man of the past. 
He is not of the comfortable center left that many of us have become used to, he is of the unreconstructed left, 1960s-style. 
Lafontaine is bright, a schemer, and winner in Germany's struggle for domestic political mastery. 
If he gets his way Lafontaine will shape the future of Europe, and not for the better. 
Skirmishes with the centre-left are nothing new for Europe: Jacques Delors championed a Christian-Democrat view; Lionel Jospin comes from even further left than that. 
They both wound up in the middle, compromising with capital markets. 
True, across Europe, even in corporate boardrooms, there remains an unwillingness to go to the US extreme of "perform or perish" Politicians of all stripes are committed to the cradle to grave welfare state, no mater its expense and debilitating effects on the economy. 
Lafontaine's agenda is a move backwards, as if the Continent's tentative moves on the road to a competitive market economy, beyond the welfare state, have reached a cul de sac for Europe. 
Let there be no doubt: Lafontaine runs Germany, not Chancellor Schroeder. 
Schroeder is a provincial politician who was used by the Social Democrats used as the safe face for their new/old approach. 
Lacking convictions, he could be everything to everybody from new left to center with any socialist taint concealed by the industrialist-advisors who lent Schroeder a Blairite and Clintonian veneer. 
With the elections over, Schroeder disappeared and the Social Democrat party leader and parliamentary leader, Lafontaine, took over. 
Soon Schroeder will be kissing babies while Lafontaine sets the agenda and changes the world. 
From the perspective of the deregulation, restructuring and modernization which Germany and Europe need, you couldn't ask for a worse outcome. 
Yet, the outcome was predictable. 
Only a broad coalition could defeat Kohl and it was essential that it should not spell out any detail or any concrete steps. 
Once elected, however, the coalition needed a program and since Schroeder had failed to seek a mandate or stand for anything, he was pushed aside by people with a program: Lafontaine with his left-activism and crude Keynesianism on the one hand, and the Greens with their (often nutty) pet projects on the other. 
There is little doubt that Lafontaine understands that he can strengthen his hand even more by reaching for European support. 
This can be done by allying himself with the activists -- say the new ex-communist government of Massimo D'Alema in Italy -- sidelined over the past few years by the rigors of setting up EMU. 
The ambition must be to turn Brussels into a machine for sheltering labor from the market economy. 
Until the world financial crisis revived skepticism about the benefits of unrestrained capitalism, this would have been difficult. 
Now it is easy to give speeches about the need to control markets, the need to create demand, the merits of using the State to achieve better economic outcomes. 
What can Lafontaine accomplish? 
First and foremost, deregulation of labor markets and social benefits is going to go into reverse or, at least, into the slow lane. 
Second, the Continent's recent budget discipline will come under attack in a very crude spend and create demand way. 
Third, war will be declared on the European Central Bank since cheap money is the easiest way to create jobs and take credit for it. 
All of this will be counterproductive: stock prices might rise under the pressure of demand, but that won t last. 
Long term interest rates will rise as savers perceive that discipline is lost, wage increases will be encouraged by pro-labor governments and that means inflation. 
In sum, an agenda thought dead has come back. 
Whatever Lafontaine may think, the fixed exchange rates he has called for won't be part of the world economy. 
Britain will not sign up to a Europe going off the deep end and the US will not link and fix its currency to the euro unless things get so bad in America that a protectionist like Richard Gephardt becomes president. 
Deep skepticism of European macroeconomics will make the US want independence from a "European plot" to overthrow the market economy. 
Lafontaine now has claimed center stage and the first act of his drama may well be impressive simply because Europe is dying to have some growth. 
His fiscal pushes and demands for lower interest rates will get that, for a time, but such growth won't last. 
In this global economy it is simply too late to believe that big government, printing money and borrowing from one's children are the ways to get ahead. 

The Age of the Judge 
Alexander Hamilton, the renowned author of many of the Federalist Papers that set out the rationale for adopting the US Constitution, had no doubt about the relative weight of the three great powers of state. 
In Federalist No. 78, he wrote that the executive commands ``the power of the sword,'' thus the instrument of legitimate violence. 
The legislature commands the ``power of the purse'' and so makes all the rules. 
But the judiciary ``has no influence over either the sword or the purse,'' it has ``neither Force nor Will, but merely judgement,'' making it ``beyond comparison the weakest of the three departments in power.'' 
Hamilton went on to make the case for the independence of judges in order to strengthen their position, and this case remains unassailable. 
Beyond that, however, the observer of contemporary politics will hardly recognize the picture drawn by America's great constitutional theorist. 
For the American President, the appointment of Supreme Court justices is of major importance because the Court has the power to determine the course of affairs in important respects, as in matters of racial equality. 
In Germany, many controversial political issues are taken to the Constitutional Court by minorities defeated in parliament. 
In Italy and also in Spain, judges (in both cases, investigating judges) seem to influence political debate more than the interplay of government and opposition. 
Even in Britain, where the sovereignty of parliament was until recently sacrosanct, and the separation of powers underdeveloped, a Supreme Court will now be created to scrutinize political decisions on the basis of the European Convention of Human Rights. 
How did it come about that the third power is by no means ``the weakest'' nowadays? 
Is this right? 
In technical terms, one reason for the change is probably the complexity of overregulated modern societies. 
Judges are experts in complexity which cannot be said of parliamentarians nor even of the executive. 
Beyond that, however, the power of the judiciary stems precisely from the assumption of independence which Hamilton regarded as crucial for their position. 
There is a strong and perhaps growing desire to find ``independent'' views amidst today's always strongly partisan--and often overly polemical--political controversies. 
Ordinary people vaguely associate independence with truth, and partisanship with lies or at least with untrustworthiness. 
Thus, little protest is heard if a judge is asked to conduct an independent inquiry even into such matters as the motives for the Iraq war. 
In democracies, courts are heard, and obeyed, even if their judgements affect the original parliamentary power of the purse, as in recent German cases concerning the pension entitlements of particular groups. 
Politicians clearly do not like this shift in power toward the judiciary. 
If they are personally affected, like Italian Prime Minister Silvio Berlusconi, they do not actually attack the power of the judiciary, but question judges' independence. 
Undeniably, the independence of judges today requires more than lifetime tenure and reasonable emoluments (which were Hamilton's concerns). 
In modern societies, influences on apparently independent people are numerous and hard to control. 
But the debate about possibly biased Italian or Spanish or Belgian judges in highly sensitive cases detracts from the deeper question of whether the increase in the powers of the judiciary may not have gone too far. 
Is there a case for a pendulum swing back to the more political powers, notably the legislature? 
I believe that such a swing is necessary. 
Politics is by its nature about conflicts, which are sensibly regulated by the rules of democratic constitutions. 
Politics is also about trial and error. 
Political decisions can--or at any rate, should--never claim to represent the truth. 
They are intrinsically time-bound attempts to come to terms with issues, and they should be allowed to run their course if they are based on deliberations by elected majorities of representatives. 
It could even be argued that the ``juridification'' of the political process itself has gone too far. 
Parliamentary committees advised by legal experts try too hard to get things right forever and forget their original intentions in the process. 
So there is a case for going back to political basics. 
This is relevant for the current debate about reforms in many democratic countries. 
It could be argued that the greater the power of the judiciary is in a country, the slower the pace of reform becomes. 
Such slowness is ultimately self-defeating, because it leads into a cul-de-sac from which only dramatic steps provide an escape. 
More confident politics and less reliance on Hamilton's third power would add to the flexibility of a society. 
It may even serve to strengthen trust in the true independence of judges, who are badly needed as an instance of last resort, when the rights of individuals is at risk--and hence the very rule of law itself. 

The Agony and Ecstasy of Synthetic Drugs 
NEW YORK – The world is speeding up. 
Communications, travel, and productivity are increasing. 
For some people, synthetic drugs have become a way to deal with today’s fast and competitive times. 
Around the world, in order to enhance performance, people are popping pills and powder known as amphetamine-type stimulants (ATS). 
From ravers in all-night discos to assembly-line workers or long-haul truckers, more than 30 million people use amphetamine, methamphetamine (meth), or ecstasy at least once a year – more than the combined number of those who take cocaine and heroin. 
The global market for these stimulants is estimated at $65 billion. 
Part of the attraction of these synthetic drugs is that they are readily available, affordable, and convenient to use (no need to shoot up, snort, or smoke). 
Amphetamines speed up the way the body works: users experience increased confidence, sociability, and energy. 
This buzz is considered harmless: “pills do not kill or spread HIV/AIDS,” it is said. 
But what goes up must come down. 
People who become dependent on “uppers” may suffer paranoia, kidney failure, and internal bleeding, and even serious mental health problems, brain damage, or heart attack. 
Meth users often develop rotten teeth and horrible scabs caused by scratching themselves due to a sensation of insects crawling under their skin. 
The message about the dangers of ATS seems to be getting through to young people in the developed world, thanks in part to graphic public awareness campaigns. 
After substantial increases in the 1990’s – when meth was considered public enemy number one in the United States and Japan – the use of synthetic drugs has stabilized in North America, Europe, Australia, and New Zealand, albeit at high levels. 
In Australia, for example, 2.3% of the population use meth, and 3.5% use ecstasy at least once a year – one of the highest rates in the world. 
Evidence suggests that the problem is shifting to new markets in East and Southeast Asia and the Near and Middle East. 
Asia, with its huge population and increasing affluence, is driving demand. 
In 2006, almost half of Asian countries reported an increase in meth use. 
This year, more than half of China’s provinces had serious ATS-related problems. 
The upsurge is not limited to Asia. 
Something strange is going on in Saudi Arabia. 
Last year, the Kingdom seized almost 14 tons of amphetamine, mostly in the form known as Captagon (probably manufactured in Southeast Europe). 
That’s one-quarter of all amphetamines seized in the world. 
Seven years ago, Saudi Arabia accounted for only 1% of all such seizures. 
In South Africa, the number of seized meth laboratories has consistently gone up for the past five years, while domestic consumption has increased. 
Part of the shift may be due to changes in demand. 
For societies in transition or going through rapid modernization, synthetic drugs seem to be a by-product of hyperactive growth. 
The shift is also due to a strong supply push from increasingly aggressive criminal groups with tentacles around the world. 
A decade ago, synthetic drugs were a do-it-yourself cottage industry. 
The ingredients for meth, for example, are readily available, recipes are easy to obtain, and batches of the drug can be cooked up in a kitchen. 
But in the past few years, the production of ATS has become a big global business. 
Organized crime is taking over all aspects of this illicit trade, from smuggling precursor chemicals to manufacturing and trafficking the drugs. 
With little initial investment, industrial-scale factories can make huge profits by manufacturing millions of tablets. 
Increasingly sophisticated labs are being discovered in, for example, Indonesia and Malaysia. 
In 2007 alone, 75 ATS laboratories were seized in China. 
No doubt there are many other such labs in parts of the world where law enforcement is weak or corrupt, or local officials are complicit. 
Myanmar is a notorious example. 
Producers and suppliers adapt quickly to the latest trends, and cater to local markets. 
When one lab is shut, another opens. 
When one type of precursor chemical is unavailable, producers switch to an alternative. 
North America still accounts for 84% of all reported ATS laboratories in the world, and Western Europe has traditionally been a production center for synthetic drugs (particularly in the Czech Republic and the Netherlands). 
In the past few years, however, decreasing lab seizures in the US and the European Union have been offset by a rise in production in neighboring countries, like Canada and Mexico in North America, and Turkey in Southeast Europe. 
Greater regional cooperation is needed to prevent such displacement. 
Before it is too late, countries in the developing world need to get their heads out of the sand. 
Many are in denial about the problem, and do not even report their situation to the United Nations. 
The most vulnerable are ill-equipped to fight the pandemic through information gathering, regulatory frameworks, law enforcement, forensics, or health care. 
In general, more information is needed on new types of synthetic drugs (like the hallucinogen ketamine), developments in production techniques, emerging trafficking routes, and new markets. 
Stabilization of the problem in the developed world shows that containment is possible. 
But unless more attention and resources are devoted to prevention, treatment, and law enforcement in youthful and increasingly affluent societies in the developing world, these countries may soon be facing a similar epidemic of drug abuse. 

What America Wants in Egypt 
PRINCETON – Both the Muslim Brotherhood and Egypt’s liberal opposition are roundly criticizing the United States. That is hard on Ambassador Anne Patterson, Secretary of State John Kerry, and Deputy Secretary of State William Burns, who just visited Cairo. 
But it is also evidence that the US is trying to pursue the right policy. 
The US is doing its best to support not a particular party, but rather a conception of liberal democracy that entails free and fair elections and a mode of governance that respects and includes minority views and upholds individual rights. 
To pursue this course, however, will require standing up to Israel and Saudi Arabia. 
The young people who led Egypt’s revolution two and a half years ago have been suspicious of the US for the simple reason that it supported former President Hosni Mubarak’s regime for 30 years. 
From the US perspective, President Barack Obama pivoted quickly from Mubarak to the people; but it did not look that way on Cairo’s streets. 
When the Muslim Brotherhood’s Mohamed Morsi was elected President in 2012, many Egyptians assumed that America must have supported him, because they could not imagine that the US would accept a result that it did not want. 
When Patterson tried to work with Morsi’s government in ways that allowed her to pursue US interests, including pushing for more inclusive and rights-respecting policies, the liberal opposition saw her as supporting the Muslim Brotherhood. 
But when the US refused to call the Egyptian military’s removal of Morsi a coup (a designation that would have required it to cut off the $1.5 billion in aid provided annually to the Egyptian army), Muslim Brotherhood supporters concluded that America supported the army’s decision. 
So what should the US and other governments that support liberal democracy do now? 
The answer could affect Egypt’s political future and that of countries throughout the region. 
As many commentators have pointed out, from the Islamists’ standpoint, Morsi’s removal looks remarkably like the Algerian military’s overthrow in 1992 (with US support) of an elected Islamist government; the Turkish military’s “soft coup” in 1997, when it forced an elected Islamist government out of power; and the US government’s reversal of its support for “Arab democracy” after Hamas won elections in Gaza in 2006. 
If the choice for Islamists is still bullets or ballots, bullets may now look more promising. 
More generally, military interference with civilian politics, for any reason, weakens the processes, institutions, and checks on state power that make liberal democracy work. 
Yet an estimated 17 million Egyptians marched to protest Morsi’s government, the majority of them citizens who had been mobilized through a petition process to demand a government responsive to their needs. 
Morsi and his Freedom and Justice Party (the Muslin Brotherhood’s political wing) gave no sign that they were prepared to accept real compromise, as opposed to tactical delays, in achieving their vision of an Islamic state. 
In his final speech, Morsi rallied his troops for the barricades and bloodshed rather than for the compromise that would have kept him in office. 
Genuine liberal democracy requires accepting that in a pluralist, divided country, it is possible to govern only through inclusion, not imposition. 
Anything else suggests that political Islam is the Marxism of our time, preparing a long-term strategy ultimately aimed at replacing the system rather than reforming it. 
The liberal-democratic alternative is to participate in the push and pull over the role of religion in public life within limits set by a super-majoritarian constitution, as more religiously oriented parties do in the US, Europe, and Israel. 
Given these competing considerations, the US should start by calling the events that began on June 30 a coup, but not yet a military coup, on the grounds that a true military coup replaces the existing government with a military government. 
That has not happened, and it may not happen if genuinely free and fair elections, with the participation of all parties, take place within six months. 
The US should therefore declare that it will cut off its aid to Egypt’s military at a specified date unless elections take place. 
But that decision involves US-Israeli relations as much as US-Egyptian relations, because US aid has been aimed at securing and preserving Egypt’s peace treaty with Israel. 
In the last two weeks, Israel has increased cooperation with Egypt’s generals to pursue Islamist extremists in Sinai. 
Equally important, the US and as many other countries as possible should make clear to Egypt’s military that the detention of Muslim Brotherhood leaders must stop unless the military tries them for publicly inciting violence. 
While it is legitimate to demand that the Brotherhood become a regular legal organization, rather than a shadowy network fronted by the Freedom and Justice Party, criminalization of political activity has no place in a constitutional democracy. 
It is the classic first step toward dictatorship, as is censorship of Muslim Brotherhood media. 
Egyptian elections will not be free and fair if they follow a political purge, as in Iran or Russia. 
But stopping the military’s campaign against Brotherhood leaders requires engaging Saudi Arabia and the United Arab Emirates. 
These two countries authorized a combined $8 billion in aid to Egypt immediately after June 30, and they make no secret of their desire to eradicate the Brotherhood. 
But political stability that is bought in this way cannot last for more than a few months. 
Over the longer term, an elected government will have to bring enough parts of Egyptian society together to be able to make tough choices about dismantling the military’s corrupt state within a state, cutting subsidies, and rebuilding the economy’s foundations. 
Pushing the Muslim Brotherhood back underground is a recipe for further instability. 
Revolutions often seesaw between extremes before the forces strong enough to overthrow governments become strong enough and legitimate enough to govern. 
All friends of the Egyptian people must support the principles and processes of liberal democracy, regardless of the politicians and parties that we offend. 

The Al Jazeera Revolution Turns Ten 
When it first appeared, the new satellite channel broadcast from Qatar reflected its own name. 
Al Jazeera – Arabic for “the island” – represented a haven of professional, independent, current affairs programming in a sea of one-sided, government-controlled Arab media. 
Until Al Jazeera’s mostly BBC-trained journalists arrived on the scene, the average Arab citizen’s news television diet was nothing more than protocol news, wire service video reflecting the latest in the Palestinian conflict, and dramatic photos of earthquakes or wild fires. 
Al Jazeera not only provided live interviews and broadcasts from the field; it introduced live debate to the Arab world. 
Its program Al Itijah al Mu’akess (“the opposite direction”) brought the sort of verbal jousts that most of the world takes for granted but Arabs had never seen televised. 
The guests that Faisal Qassem brought to the Doha studios (or via satellite) included people from the same Arab country or region but representing completely opposing points of view. 
While hard-hitting professional news and programs like Al Itijah al Mu’akess provided viewers with unique television, it took major world conflicts to bring Al Jazeera acclaim. 
The Palestinian intifada, the terrorist attacks against New York and Washington in September 2001, and the invasion of Afghanistan and Iraq propelled Al Jazeera to global influence. 
In its first years, Al Jazeera was simultaneously hailed as a pioneering media outlet for reform in the Arab world and as an instigator of internal conflict and strife. 
Almost every Arab ruler at one time or another attempted to silence the station by closing its local bureau and pressing the Qatari rulers to muzzle its freewheeling journalists. 
Neither worked. 
In fact, the pressures only added to the station’s popularity among Arab viewers. 
The United States initially seemed favorable to Al Jazeera. 
The station’s encouragement of democratic reform and coverage of different points of view were compatible with the proclamations of US foreign policy. 
But this changed dramatically after 9/11, when it became clear that Iraqi and Afghan civilian victims of US bombs (as well as prisoners of war) would receive more coverage than was being provided by the embedded western media machine (Al Jazeera’s one embedded journalist did not remain so very long). 
When Al Jazeera reporters interviewed Osama bin Laden and the station broadcast his videos, America’s gloves came off. 
Senior US officials publicly vilified the station. 
But the more the US and authoritarian Arab regimes attacked the station, the more the station became a reflector of some of the radical Islamic trends. 
In the Danish cartoon case and the recent controversy over the Pope’s statements, the station was clearly seen as making the news rather than just covering it. 
Despite its popularity, however, Al Jazeera has not succeeded financially. 
The enmity of the Saudis to the station and its Qatari owners resulted in boycotts. 
Multi-national advertisers who covet the huge Saudi market were informed in no uncertain terms that they would lose hefty contracts if they advertised on Al Jazeera. 
Nevertheless, the station, whose owners have deep pockets, expanded to add a direct satellite broadcast, a children’s station, two sports stations, and soon an international, English-language station. 
Although no one has yet caught up to Al Jazeera’s news and current affairs popularity, the Saudi-owned Middle East Broadcasting Center has introduced a successful 24-hour station, Al Arrabiyeh, which is challenging Al Jazeera’s lead. 
The Lebanese Broadcasting Corporation and Egypt’s Dream have also won large segments of the general Arab public with entertainment programs. 
Al Jazeera has made Qatar famous and the Arab world better informed. 
Despite its inadequacies and biases, Al Jazeera has changed the Arab world for the better. 
While no state-run TV station had live current affairs programs ten years ago, now even stations from some of the most dictatorial regimes are forced to raise their level and allow live interviews. 
As it celebrates its tenth anniversary, Al Jazeera is no longer new, but it remains a trendsetter. 
It has broken new ground in politics and culture, but its impact on social and economic life has been minimal. 
So, as Al Jazeera moves into media adolescence, it must begin to think about how it can become a social pioneer in the Arab and Islamic world. 
God knows, change is still needed on that front. 

 

The Allure of Asia 
President Bush is in Asia to attend the Asian Pacific Economic Council in China, but he should pay attention to another Asian summit to which he was not invited. 
In December, Malaysia will host an East Asian meeting that deliberately excludes the United States. 
According to many close observers, America’s attractiveness is declining in the region where the allure, or “soft power,” of others has increased. 
Asian countries have impressive potential resources for soft power. 
The arts, fashion, and cuisine of Asia’s ancient cultures have had a strong impact on other parts of the world for centuries, but Asia went through a period of relative decline as it lagged behind the industrial revolution in the West, and this undermined its influence. 
In the 1950’s, Asia conjured up images of poverty and starvation. 
There was a brief political infatuation among some Westerners in the 1960’s with Nehru jackets and Maoist revolution, but it was brief. 
As John Lennon sang in 1968, “if you go carrying pictures of Chairman Mao, you ain’t gonna make it with anyone anyhow.” 
Asia’s resurgence began with Japan’s economic success. 
By the end of the century, Japan’s remarkable performance not only made the Japanese wealthy, but also enhanced the country’s soft power. 
As the first non-Western country that drew even with the West in modernity while showing that it is possible to maintain a unique culture, Japan has more potential soft-power resources than any other Asian country. 
Today Japan ranks first in the world in the number of patents, third in expenditure on research and development as a share of GDP, second in book sales and music sales, and highest for life expectancy. 
It is home to three of the top twenty-five multinational brand names (Toyota, Honda, and Sony). 
The decade-long economic slowdown of the 1990’s tarnished Japan’s reputation, but it did not erase Japan’s soft-power resources. 
Japan’s global cultural influence grew in areas ranging from fashion, food, and pop music to consumer electronics, architecture, and art. 
Japanese manufacturers rule the roost in home video games. 
Pokemon cartoons are broadcast in 65 countries, and Japanese animation is a huge hit with filmmakers and teenagers everywhere. 
In short, Japan’s popular culture was still producing potential soft-power resources even after its economy slowed down. 
Now, with signs of a reviving economy, Japan’s soft power may increase even more. 
But there are limits. Unlike Germany, which repudiated its past aggression and reconciled with its neighbors in the framework of the European Union, Japan has never come to terms with its record in the 1930’s and 1940’s. 
The residual suspicion that lingers in countries like China and Korea sets limits on Japan’s appeal that are reinforced every time the Japanese prime minister visits the Yasukuni Shrine. 
Japan also faces serious demographic challenges. 
By mid-century, Japan’s population could shrink by 30% unless it attracts 17 million immigrants – a hard task in a country historically resistant to immigration. 
Moreover, the Japanese language is not widely spoken, and Japan’s meager English-language skills make it difficult to attract international talent to its universities. 
Japan’s culture remains inward-looking. 
Looking ahead, China and India are the looming giants of Asia, with their huge populations and rapid economic growth rates. 
Not only are their military, or “hard power,” resources growing; there are signs that their soft-power resources are increasing, too. 
In 2000, Chinese novelist Gao Xingjian won China’s first Nobel prize for literature, followed a year later by the Indian diaspora writer V.S. Naipaul. 
The Chinese film “Crouching Tiger, Hidden Dragon” became the highest grossing non-English film, and Indian movies like “Monsoon Wedding” were global box-office successes. 
Indeed, “Bollywood” produces more movies every year than Hollywood. 
The list goes on. 
Yao Ming, the Chinese star of the National Basketball Association’s Houston Rockets, could become another Michael Jordan, and China is set to host the 2008 Summer Olympics. 
Large expatriate communities in the US – 2.4 million Chinese and 1.7 million Indians – have increased interest in their home countries among other Americans. 
Moreover, transnational connections in the information industry are close, as Western high-tech companies increasingly employ affiliates in Bangalore and Shanghai to provide real-time services. 
But the real promise for China and India lies in the future. 
A country’s soft power rests upon the attractiveness of its culture, the appeal of its domestic political and social values, and the style and substance of its foreign policies. 
In recent years, both China and India have adopted foreign policies that have increased their attractiveness to others. 
But neither country yet ranks high on the various indices of potential soft-power resources that are possessed by the US, Europe, and Japan. 
While culture provides some soft power, domestic policies and values set limits, particularly in China, where the Communist Party fears allowing too much intellectual freedom and resists outside influences. 
Both countries have a reputation for corruption in government. 
India benefits from democratic politics, but suffers from overly bureaucratized government. 
In foreign policy as well, both countries’ reputations are burdened with the problems of longstanding disputes over Taiwan and Kashmir. 
Moreover, in the US, the attraction of an authoritarian China is limited by the concern that it could become a future threat. 
The soft power of Asian countries, then, lags behind that of the US, Europe, and Japan, but it is likely to increase. 
Indeed, if the US continues to pursue unattractive policies, it may find that its absence from the summit in Malaysia in December is a harbinger of things to come. 

The America that Can Say No 
NEW YORK –­ Early this month, Kyrgyzstan’s president Kurmanbek Bakiyev went cap in hand to Moscow to ask for financial aid. 
To make his request more palatable, Bakiyev announced that he was demanding that the United States close its airbase in Kyrgyzstan, which resupplies NATO troops in neighboring Afghanistan. 
Similarly, late last year, Iceland’s government asked Russia to help bail out its banking system, while Pakistani President Asif Ali Zardari visited China in hopes of securing an emergency infusion of cash. 
Some observers cite these episodes as evidence of decline in America’s international clout. 
But there’s a larger point: so far, except for relatively small sums offered to the Kyrgyz, Russia and China haven’t offered much help. 
Amid much talk of a “post-American world,” many observers see a shift from a US-dominated international order toward a multipolar system, in which countries like China, Russia, and several others compete for global leadership on a range of common challenges and risks. 
More than five years ago, China’s President Hu Jintao proclaimed that, “the trend toward a multipolar world is irreversible and dominant.” 
When Vladimir Putin complained during a conference in Munich last year that US unilateralism stoked conflict around the world, an offended Senator John McCain responded that confrontation was unnecessary in “today’s multipolar world.” 
When Putin welcomed Venezuelan President Hugo Chávez to Russia last September, he observed that, “Latin America is becoming a noticeable link in the chain of the multipolar world that is forming.” 
Chávez agreed: “A multipolar world is becoming reality.” 
All of them have it wrong. 
US dominance is clearly on the wane, but a multipolar order implies that several emerging powers hold competing views about how the world should be run, and that they are prepared to act to advance their global agendas. 
That is not the case. 
Instead, we are witnessing the birth of a non-polar order, in which America’s chief competitors remain too busy with problems at home and in their immediate neighborhoods to shoulder the heaviest international burdens. 
None of the emerging powers has even begun to use its growing political and economic clout to advance truly global ambitions – or to take on responsibilities that Washington can no longer afford. 
Start with Russia. 
Despite its growing ties with Venezuela and efforts to coordinate energy policy with natural gas-rich countries in North Africa, the Kremlin has no aspirations to rebuild Soviet-scale influence in Latin America, Africa, or Southeast Asia. 
Nor does it have Soviet-style ideological appeal. 
Instead, Russia’s leaders are busy protecting Russian markets, banks, and companies from the worst effects of the global financial crisis, consolidating state control over domestic economic sectors, and extending their foreign-policy leverage across former Soviet territory. 
China’s need to satisfy its hunger for imported oil and other commodities has given it an international presence. 
But its influence is more commercial than political. 
China’s leaders must devote their attention to a staggering array of pressing problems at home: averting an economic slowdown that could push millions out of work and into the streets, the fallout from rural land reform, and efforts to manage enormous environmental and public health problems. 
India must hold its own in China’s lengthening shadow. 
Facing elections next year, the ruling Congress Party is spending the government’s time and money on subsidies for consumers, wage hikes for state employees, and debt relief for farmers. 
Brazil is similarly preoccupied, appearing to have no grander near-term aspirations than to promote stability in Latin America, manage the effects of the global financial crisis, and inspire others in the developing world. 
In short, there is a vacuum of global leadership just at the moment when it is badly needed. 
President Barack Obama’s attention is now concentrated on stimulating the anemic US economy, crafting tax cuts, reforming energy and health-care policies, and restoring confidence in US financial institutions. 
The European Union continues its internal debate over how best to bail out its failing banks and industries, handle the fallout from EU and euro-zone expansion, and manage increasingly rocky relations with Russia. 
Who, then, can take the lead on efforts to create a new global financial architecture that reflects the complexities of twenty-first-century commerce? 
Who can drive consensus on a multilateral response to climate change? 
Who will replace an obsolete nonproliferation regime, provide collective security in emerging international hotspots, and build momentum behind Middle East Peace talks? 
The international summit meeting in Washington in November 2008 underlined the problem. 
The world’s richest countries (the G7) turned to the emerging powers within the G20 to help coordinate a response to the global financial slowdown. 
Difficult as it is for seven countries to agree on anything, imagine the challenge of building consensus among 20. 
Consider the competing views within this group on democracy, transparency, the proper economic role of government, new rules of the road for financial markets and trade, and how best to ensure that the United Nations, International Monetary Fund, and the World Bank fairly reflect today’s global balance of power. 
For the next several years, when those in crisis turn to the US for help, they are increasingly likely to hear the word no. 
And it is not at all clear that anyone else is willing and able to say yes. 

The American Anti-Intellectual Threat 
NEW YORK – In recent years, the United States has been more a source of global instability than a source of global problem-solving. 
Examples include the war in Iraq, launched by the US on false premises, obstructionism on efforts to curb climate change, meager development assistance, and the violation of international treaties such as the Geneva Conventions. 
While many factors contributed to America’s destabilizing actions, a powerful one is anti-intellectualism, exemplified recently by Republican vice-presidential nominee Sarah Palin’s surging popularity. 
By anti-intellectualism, I mean especially an aggressively anti-scientific perspective, backed by disdain for those who adhere to science and evidence. 
The challenges faced by a major power like the US require rigorous analysis of information according to the best scientific principles. 
Climate change, for example, poses dire threats to the planet that must be assessed according to prevailing scientific norms and the evolving capacity of climate science. 
The Nobel Prize-winning global scientific process called the Inter-Governmental Panel on Climate Change (IPCC) has set the gold standard for scientific rigor in analyzing the threats of human-induced climate change. 
We need scientifically literate politicians adept at evidence-based critical thinking to translate these findings and recommendations into policy and international agreements. 
In the US, however, the attitudes of President Bush, leading Republicans, and now Sarah Palin, have been the opposite of scientific. 
The White House did all it could for eight years to hide the overwhelming scientific consensus that humans are contributing to climate change. 
It tried to prevent government scientists from speaking honestly to the public. 
The Wall Street Journal has similarly peddled anti-science and pseudo-science to oppose policies to fight human-induced climate change. 
These anti-scientific approaches affected not only climate policy, but also foreign policy. 
The US went to war in Iraq on the basis of Bush’s gut instincts and religious convictions, not rigorous evidence. 
Likewise, Palin has called the Iraq War “a task from God.” 
These are not isolated albeit powerful individuals out of touch with reality. 
They reflect the fact that a significant portion of American society, which currently votes mainly Republican, rejects or is simply unaware of basic scientific evidence regarding climate change, biological evolution, human health, and other fields. 
These voters generally do not reject the benefits of technologies that result from modern science, but they do reject the evidence and advice of scientists regarding public policies. 
Recent survey data by the Pew Foundation found that while 58% of Democrats believe that human beings are causing global warming, only 28% of Republicans do. 
Similarly, a 2005 survey found that 59% of self-professed conservative Republicans rejected any theory of evolution, while 67% of liberal Democrats accepted some version of evolutionary theory. 
To be sure, some of these deniers are simply scientifically ignorant, having been failed by the poor quality of science education in America. 
But others are biblical fundamentalists, who reject modern science because they take the word of the Bible as literally true. 
They reject geological evidence of climate change because they reject the science of geology itself. 
The issue here is not religion versus science. 
All of the great religions have traditions of fruitful interchange with – and, indeed, support for – scientific inquiry. 
The Golden Age of Islam a millennium ago was also the age in which Islamic science led the world. 
Pope John Paul II declared his support for the basic science of evolution, and Roman Catholic bishops are strongly in favor of limiting human-induced climate change, based on the scientific evidence. 
Several leading scientists, including one of the world’s greatest biologists, E.O. Wilson, have reached out to religious communities to support the fight against human-induced climate change and the fight for biological conservation, and those religious communities have reached back in harmony with science. 
The problem is an aggressive fundamentalism that denies modern science, and an aggressive anti-intellectualism that views experts and scientists as the enemy. 
It is those views that could end up getting us all killed. 
After all, that kind of extremism can even lead to war, based on perverted views that a particular war is God’s will rather than a failure of politics and cooperation. 
In many statements, Palin seems intent on invoking God in her judgments about war, an ominous sign for the future if she is elected. 
She would certainly stoke many enemies who will look to their own brands of fundamentalism to strike back at the US. 
Extremists on both sides end up putting at risk the vast majority of humans who are neither extremists nor anti-science fundamentalists. 
It is difficult to know for sure what is giving rise to fundamentalism in so many parts of the world. 
What is happening in the US, for example, is not happening in Europe, but it is of course characteristic of some parts of the Middle East and Central Asia. 
Fundamentalism seems to emerge in times of far-reaching change, when traditional social arrangements come under threat. 
The surge of modern American fundamentalism in politics dates to the civil rights era of the 1960’s, and at least partly reflects a backlash among whites against the growing political and economic strength of non-white and immigrant minority groups in US society. 
Humanity’s only hope is that the vicious circle of extremism can be replaced by a shared global understanding of the massive challenges of climate change, food supplies, sustainable energy, water scarcity, and poverty. 
Global scientific processes like the IPCC are critical, because they offer our best hope of forging a consensus based on the scientific evidence. 
The US must return to the global consensus based on shared science rather than anti-intellectualism. 

The American Hangover 
NEW YORK – As turmoil stalks America’s financial markets and protests fill its streets, Americans’ lifestyle choices are evolving in a telling way: once seen by the rest of the world as an exuberant teenager – the globe’s extrovert, exporter of rock ’n’ roll and flashy Hollywood movies – Americans are now becoming decidedly withdrawn, or at least inward-looking. 
Trends in leisure activities reflect that change: frugality and making do are in; gaudy consumerism is out. 
This change is due to the fragile economy, of course, but I believe that it is also psychological. 
After two wars and a half-dozen undeclared conflicts in the past decade, America has entered a period of unprecedented cultural hibernation. 
Gardening, scrapbooking, knitting, and cooking have all become newly, shabbily chic. 
In the urban neighborhoods to which the young and hip are moving, city garden plots and heirloom tomatoes grown in window boxes have replaced Lexuses and Priuses. 
Other young hipsters have moved farther out into the country in search of an idyllic new narrative fantasy. 
The young couple – he with a beard and she in a sundress and rubber boots – are homesteading in the Hudson River Valley with a flock of chickens, or in New Mexico in an ecofriendly straw-bale house. 
They have replaced the young couple of five years ago – he with the hedge fund, she with interior decorators – in a McMansion in Westchester County. 
The food sections of urban newspapers that, five years ago, would have covered the latest fusion cuisine, now run dreamy profiles of the guy with the Ivy League degree who has stepped off the grid, and done fine for himself by starting a line of homemade pickles. 
Farmers’ markets, wood stoves, solar panels, and Agway farm-supply stores are the new focus of aspirational dreams for people who not long ago were high on boundless credit, consuming luxury brands scaled down for the middle class, and fantasizing about the kind of life on display in glossy magazines. 
Even Hollywood story lines now echo this desire to escape to a “simpler life,” with its aversion to excessive wealth and indulgence. 
In the soon-to-be-released “We Bought a Zoo,” a single father heals his family by moving to the country and homesteading with a menagerie of wild animals – shabby house and spectacular natural vistas guaranteeing a redemptive setting for domestic life. 
Other films cast excess as nauseating. 
The blockbuster “The Hangover Part II” depicts three young male friends engaged in a night of carousing in Thailand, in which they are free to satisfy every appetite – from transsexual sex workers to drugs and chaos of all kinds. 
At the end, however, the lead character indulges his longing for marriage, family, and the quiet life of a dentist. 
In a parallel plot aimed at women, the movie “Bridesmaids” features a bride-to-be who is about to get “everything” – in the guise of a dull but extremely affluent groom – but flees the excess around her and escapes to her humble apartment. 
After bank bailouts, Bernard Madoff-type financial scandals, and a housing bubble that left Americans high and dry, it is as if the collective unconscious is recasting life on yachts and perfectly manicured golf courses as distasteful, and thrifty, often rural simplicity as a virtuously cleansing relief. 
Not surprisingly, the last time American culture had such a reversal of iconography was during the Great Depression, when films like “The Grapes of Wrath” cast down-to-earth simplicity – versus the corruption of wealthy elites – as a shining virtue. 
(“Whenever there’s a cop beating up a guy, I’ll be there….wherever people are eatin’ the stuff they raise and livin’ in the houses they build, I’ll be there, too,” as Tom Joad said). 
Ronald Reagan asserted in 1980 that it was “morning in America,” but in America now, it is the morning after. 
This drive toward an off-the-grid, eat-what-you-raise, bike-there-on-your-own, solar-powered collective fantasy is inevitable: Americans were pumped full of hope that more consumption would make them happier, and instead were left with a pile of debt. 
They were asked to admire the top of the income pyramid, only to find that they were looking at a pyramid scheme. 
It is no wonder therefore, that a kind of survivalist chic has become the updated version of the radical, communal chic of the 1960’s. 
Americans have lost their faith in those who, in the boom times, purred, “Trust us.” 

The American Leader We Need 
LONDON – Around the world, America’s presidential election campaign has attracted as much attention as domestic political controversies in each of our own countries. 
The interest the world has taken in America’s vote is the best example of America’s soft power, and a lesson in democracy from the world’s only superpower. 
If only we could all vote as well as watch and listen, because the outcome is vital for everyone around the world. 
What does the world want – and, perhaps more importantly, what does it need – from a new American President? 
Much as some may hate to admit it, anti-Americanism is a sentiment that has been fed and nurtured during the Bush years. 
Yet the world still needs American leadership. 
Yes, we are witnessing the emergence of China, Brazil, and India as important global economic players. 
Yes, we have watched the humiliating fall of Wall Street’s masters of the universe. 
Yes, American military prowess has drained away into what Winston Churchill called “the thankless deserts of Mesopotamia,” and its moral authority has been weakened by events in places from Guantánamo Bay to Abu Ghraib. 
All that is true. 
Yet the United States remains the world’s only superpower, the only nation that matters in every part of the globe, the only country capable of mobilizing international action to tackle global problems. 
A new president’s first task will be to return America’s economic competitiveness and self-confidence. 
It will not be easy to rein in over-spending and over-borrowing, to restore the real family values of saving, thrift, responsibility, and fair reward. 
Achieving these goals is bound to involve a greater regard for social equality, after a period in which the very rich have been able to protect a “Roaring Twenties” lifestyle through cleverly exploiting the “culture wars” – i.e., the populist prejudices of their much poorer fellow citizens. 
With America turning away from its global role of borrower of last resort, the rest of us will need to sharpen our competitive edge to sell in other markets. 
What is imperative is that this should not be impeded by a return to protectionism. 
A new American president would do well to remember the disastrous consequences of protectionism in the 1920’s and 1930’s. President Herbert Hoover’s failures should be a sanguinary lesson. 
We all look to the next US president to re-engage with the world community and international organizations, accepting that even a superpower should accept the rules that apply to others. 
The United Nations is far from perfect. 
It needs reform – as do the bodies that provide global economic governance. 
That will take time. 
But a necessary if not sufficient condition for change is America’s commitment to and leadership of the process. 
Forget the distraction of trying to create an alternative to the UN – the so-called “League of Democracies.” 
It won’t work. 
We want a new president who will aim to make a success of the Nuclear Non-Proliferation Treaty Renewal Conference in 2010 by scrapping more weapons, abandoning research into them, and challenging others to do the same. 
That would be the best backdrop to establishing tougher surveillance and monitoring, beginning to engage with Iran, and searching for a way to involve India and Pakistan in a global nuclear agreement. 
Ahead of that, a new president should unleash America’s creative potential in boosting energy efficiency and developing clean technologies. 
It would be a welcome surprise if a comprehensive follow-up to the Kyoto Treaty could be agreed next year. 
But at least we should aim to agree on the process that will move world-wide discussions in the right direction and, as part of that, America should aim to engage Europe, China, and India, in particular, on technological developments like clean coal. 
America’s relationship with China will be a key to prosperity and security in this new century. 
I do not think that a struggle for hegemony is inevitable, or that it would be desirable. 
The US should focus more attention on China, without ever pretending that China’s record on human rights can be swept under the carpet. 
China cannot sustain its economic development without political changes and environmental improvements. 
In the Middle East, Israeli Prime Minister Ehud Olmert offered wise advice to the next US president upon his retirement. 
Israel and Palestine have become, he said, the hopeless and bloody prism through which American diplomacy often seems to see the world. 
It has long since been time to move on, making a sustained drive for the sort of settlement that was almost achieved in the Clinton years. 
There is s paradox in all this. 
The world has for years called for a multilateral approach from Washington. 
When we get one, will the rest of us – Europe, for example – actually respond with sufficient commitment and drive? 
It would at least be a welcome challenge to be required to put our efforts where our mouths have been. 


The American Way of Debt 
After almost 15 years of unprecedented growth - interrupted only by a brief slowdown in 2000-2001 - the United States has accumulated a huge stock of foreign liabilities, equivalent to 25% of its GDP. 
With the current account deficit now exceeding 5% of GDP, US foreign debt is rising fast. 
But no country can accumulate debt forever - and what cannot last sooner or later must end. 
In early 1985, when the US current account deficit reached $120 billion, about a third of today's level at current prices, the rest of the world stopped financing it. 
The outcome was a sudden fall in the value of the dollar, which depreciated by 50% against the Deutschemark. 
Europe should not welcome a sequel. 
Indeed, the world itself cannot afford the disappearance of the US current account deficit - at least not quickly. 
Take away US imports and the timid growth Europe has seen in the past year would immediately disappear. 
This may already be happening: the appreciation of the euro, from $1.20 to $1.30 in the past few months, was enough to bring European growth to a standstill during the third quarter of this year. 
Before the dollar started to weaken, exports from the 25 EU member states were growing at 6.5% per year, compared with 2% for consumption and 3% for investment. 
Even in Japan, the recent recovery was almost entirely led by exports. 
But as the yen strengthens, Japan, too, seems to stop growing. 
With central banks around the world full of dollars and trade imbalances becoming worrisome, there are three possible solutions. 
One is that domestic saving in the US increases. 
But this is unlikely, at least in the near future, given President Bush's ambitious fiscal plans and the continuing war in Iraq. 
US private savings are also slightly negative, and an increase might lead to a slowdown in the short run. 
The second possibility is a more pronounced devaluation of the dollar, bringing it well beyond the current levels relative to both the euro and the yen. 
Revaluation of the Chinese yuan would also help. 
The third option is a pick up of growth in Europe, which would increase US exports. 
This could happen only if European companies cut costs and increase productivity. 
As always, a litany of plans and promises for "structural reforms" can be heard, but none of them is likely to be implemented anytime soon. 
So what can be done? 
One alternative is to increase working hours without increasing salary per hours proportionally. 
Americans and Europeans worked the same number of hours in the early 1970's. Today, Europeans work 50% less on average in France and Germany than in the US. 
This is partly due to higher taxes in Europe, and this cannot be undone: nobody can force someone to work if they consider their take-home pay too low because of a high marginal tax rate. 
But the relative decline in work hours is also due to trade unions' success in winning compulsory vacation time. 
Labor reform leading to longer hours would not reduce the total income of the employed, but it would reduce production costs. 
Some discussion of this idea is beginning to appear in the press and, it is to be hoped, behind close doors among policymakers and union leaders. 
Until this happens, it is in the rest of the world's interest to let the US continue to run an unprecedented current account deficit by financing it at the rate of $500 billion per year. 
This allows the Chinese to keep their currency stable vis-à-vis the dollar, remain super-competitive, and thus enable a gradual shift of 200 million workers from agriculture into manufacturing, the authorities' aim over the next 10 years. 
In Europe, America's external deficit keeps the sole source of growth alive. 
But, again, this will not last forever. 
Eventually, Europe will have to stop thinking that the US can save its economy and will have to start relying on its own resources. 
But don't be surprised if the next European downturn will be blamed on the US and the depreciation of the dollar. 
It is always useful to have a scapegoat. 

The Anatomy of Sarkozy 
A majority of the French say that they want Finance Minister Nicholas Sarkozy to play an important role in shaping the country's future. 
No Frenchman wants that more than the ambitious "Sarko" himself. 
So Sarkozy will step down as finance minister next month to take the reigns of the ruling conservative party (UMP), washing his hands of Chirac's muddled government and hoping to use the party machine to bulldoze his way into the Elysée Palace in two years. 
But is Sarkozy much different from Chirac? 
Will he really try to end France's misguided belief in its own economic "exceptionalism?" 
The challenge is massive: a 10% unemployment rate that has lasted for 20 years, with more than 20% of people under 25 unemployed, and five million people - nearly a quarter of the working population - employed by the state. 
The salaries and pensions of these fonctionnaires represent about 40% of the national budget. 
This "French exception" also includes vested interests like the railways and agriculture, sectors so powerful that any attempt at reform is immediately frozen by street demonstrations. 
Indeed, instead of being turned off by such tactics, ordinary Frenchmen and women often turn violent activists like Jose Bové, who destroyed a McDonald's restaurant, into heroes. 
Can "Supersarko" (the satirical Canard Enchaîné newspaper's nickname) tackle "la France des privileges?" 
Possibly. 
Sarkozy does not identify with the privileged elite. 
Although born into comfort, he did not pass through the elite training grounds, the Grandes Écoles, but instead went to university like millions of other French. 
He cultivates the image of a "regular guy" who doesn't read poetry or philosophy at breakfast. 
Hence the sneering elite suspicion - evident, among other places, in the pages of Le Monde - that he is a mere populist. 
But these are appearances. 
What does Sarkozy's record as finance and economy minister say about his instincts? 
As finance minister, Sarkozy presided over improving economic indicators that are due more to luck than skill. 
For example, the French statistical agency now expects annual real GDP growth to accelerate to 2.5% this year, compared to the 1.7% on which the budget was based. 
This recovery - almost entirely based on domestic demand - gave Sarkozy an extra five billion euros in tax revenues. 
Without having to resort to big spending cuts, he could announce that France will reduce its budget deficit in 2005 from 3.6% to 2.9% - below the 3% ceiling for eurozone countries for the first time since 2001. 
To keep consumer spending high, Sarkozy has moved forward with tax reform and reduction - including inheritance tax breaks encouraging the drawdown of savings, worker tax credits, and incentives to prevent outsourcing of jobs abroad. 
Unsurprisingly, consumer spending rose by 6% year on year in the second quarter of this year, while the household savings rate is set to fall to 14% this year, from 17% in 2002. 
Sarkozy is also planning to cut corporate taxation, which, at 35.4%, remains 20% higher than the European average. 
At the same time, Sarkozy has shown some inclination towards structural reform. 
He recently blamed France's budgetary problems on the country's 35-hour workweek. 
Besides the adverse effect such tight restrictions have on companies' flexibility and effectiveness, these rules also cost 16 billion euros per year - more than is spent on higher education. 
Sarkozy has also spoken of forcing France's eager healthcare consumers to pay a flat fee covering part of the costs of treatment. 
But this economic modernizer has a populist side, leading the charge for standardized tax rates in the EU and "encouraging" retailers to cut the price of brand-name products like Coca Cola and Danone yogurt. 
Moreover, Sarkozy displays plenty of the interventionist and nationalist instincts of the establishment that he appears to challenge, including the recent announcement of an "economic growth package" - code for demand-boosting public expenditure. 
To be sure, Sarkozy seems free of the most powerful negative impulse of French nationalism, anti-Americanism. 
He likes to point out that most French young people want to go to the US, and has even been nicknamed "Sarkozy the American." 
But Sarkozy's bailout of Alstom - a company regarded as a "national champion" - had all the hallmarks of the old dirigisme , calling for the government to take a bigger stake while ruling out a strategic partnership with Germany's Siemens. 
For good measure, Sarkozy said that France had become too exclusively friendly with Germany. 
Corporatist France is hard to govern. 
The trap for politicians like Sarkozy lies in adding new layers of state bureaucracy instead of trying to dismantle and deregulate. 
On the one hand, the government heavily taxes enterprises, impeding job creation; on the other, France is to spend 12.8 billion euros on "social cohesion" to tackle unemployment, disaffection, and increasing religious extremism. 
In other words, the state spends in order to clean up the mess it created. 
Can Sarkozy break this vicious circle? 
Can he reform a state that undermines output by taxing producers and encourages idleness by increasing unemployment benefits? 
Mr Chirac's future is behind him, so he dreads Sarkozy. 
The battle that will now take place between them seems certain to paralyze government and any hope of reform in the short run. 
But Sarkozy has powerful friends in the press, as well as most of the battalions of the Gaullist UMP behind him. 
He has many enemies, but also a reputation for prodigious energy and efficiency. 
Sarkozy's maverick ways could save France. 
But first he must overcome his own residual tendency to expect too much from an overburdened state. 


The Anti-Drug God that Failed 
Russians and Ukrainians are once again being made victims of a utopian dream. 
Since the end of communism in 1991, these countries (and others) have experienced a dramatic increase in the use of illicit drugs. 
They have responded with draconian policies that mirror the simplistic message of a drug-free society espoused by UN drug treaties and the institutions that seek to enforce them. 
Today, these policies are contributing to an explosion of HIV infections in much of the developing world. 
The UN treaties that guide global drug policy reflect none of the recent findings on drug use and addiction. 
Indeed, most UN drug conventions were enacted long before the appearance of HIV/AIDS--a disease fuelled by injection drug use in the former Soviet Union and many parts of Asia. 
Consider Russia and Ukraine, which have the world's fastest-growing rate of HIV infection. 
The number of people infected with HIV in Russia and Ukraine has increased by more than 18 times over the past five years. 
As many as 1.5 million Russians and 400,000 Ukrainians are estimated to have HIV; at least 85% of known infections are attributed to intravenous drug use. 
Governments in Russia and Ukraine allocate the bulk of their drug-related resources to law enforcement in a misguided attempt to comply with the UN drug treaties. 
Individual users suffer police abuse and are driven away from vital health and treatment services. 
Meanwhile, the flow of drugs continues undiminished. 
Repressive policies have never succeeded in eliminating demand for drugs. 
They do not tackle any of the economic, social, or health factors associated with the use of illicit drugs. 
Locking up drug users is not a solution--in Russia, it is easier to score drugs in prison than outside. 
Moreover, in a repressive climate, drug users who avoid arrest are more likely to face increased discrimination, reducing their motivation to take measures to protect their own health and the health of those around them. 
In such circumstances--without hope for a better future or the opportunity for compassion-based interaction with society--drug use and HIV spread rapidly. 
Russia and Ukraine are not alone in facing these twin epidemics. 
Pakistan, Iran, China, the Central Asian countries, and other places with rising rates of intravenous drug use are bound for the same public health catastrophe if they pursue similar discredited policies. 
Public health intervention to reduce the damage caused by drugs has been proven--by decades of research in dozens of countries--to be vastly more effective at lowering HIV infection rates and healthcare costs. 
Using a conservative model, the British medical journal Lancet estimated that the US would have recorded net savings of $500 million if it had implemented a national syringe exchange program between 1987-1995. 
Similarly, an international survey found that HIV infection among intravenous drug users decreased by 5.8% per year in cities with syringe exchange programs, and increased by 5.9% per year in cities without such programs. 
No major study has shown that syringe exchange programs increase rates of drug use. 
Indeed, studies in the US, Australia, and elsewhere show that drug treatment rates tend to remain steady or rise, because syringe exchange participants gain greater access to rehabilitative care. 
UN agencies such as the Commission on Narcotic Drugs or the Office on Drugs and Crime are not mandated to prescribe specific drug strategies. 
However, their narrowly focused anti-drug stance strongly influences the policies and practices of member nations. 
Many individual governments, obsessed with compliance, are unable or unwilling to consider the negative public health effects of harsh anti-drug policies. 
International institutions chose to look the other way in the 1990's as HIV/AIDS killed millions in Africa, infecting more than 25% of the population in some countries. 
Because of similar ignorance, this terrible epidemic now looms over the former Soviet Union and other regions. 
Have we really learned nothing? 
It is not too late for international and national policymakers to reconsider their strategies. 
In defiance of the UN conventions, some countries have adopted more pragmatic approaches to dealing with drug use and HIV. 
By treating drug use first and foremost as a problem of public health, nations can fight the spread of HIV far more effectively. 
To achieve this, they should take the following steps: 
· Adopt anti-discrimination and equal-protection laws to guarantee the civil liberties and human rights of drug users and people living with HIV; 
· Acknowledge drug use as a public health issue, not a law-and-order issue, with government policies reflecting this reality; 
· Explicitly legalize needle exchange and the use of methadone and other "substitute" medications for treatment; 
· Create national programs that encompass a full range of pragmatic, inclusive, and accessible harm reduction services, from education and drug treatment to substitution therapy and needle exchange; 
· Include drug users and their advocates in developing policies on drug use at both international and national levels. 
Continuing resistance to calls to restructure anti-drug strategies and goals will only worsen the HIV epidemic and contribute to the deaths of millions of vulnerable people. 

The Anti-History Boys 
BERKELEY – If you asked a modern economic historian like me why the world is currently in the grips of a financial crisis and a deep economic downturn, I would tell you that this is the latest episode in a long history of similar bubbles, crashes, crises, and recessions that date back at least to the canal-building bubble of the early 1820’s, the 1825-1826 failure of Pole, Thornton ampamp; 
Co, and the subsequent first industrial recession in Britain. 
We have seen this process at work in many other historical episodes as well – in 1870, 1890, 1929, and 2000. 
For some reason, asset prices get way out of whack and rise to unsustainable levels. 
Sometimes the culprit is lousy internal controls in financial firms that over-reward subordinates for taking risk. 
Sometimes the cause is government guarantees. 
And sometimes it is simply a long run of good fortune, which leaves the market dominated by unrealistic optimists. 
Then the crash comes. 
And when it does, risk tolerance collapses: everybody knows that there are immense unrealized losses in financial assets and nobody is sure that they know where they are. 
The crash is followed by a flight to safety, which is followed by a steep fall in the velocity of money as investors hoard cash. 
And that fall in monetary velocity brings on a recession. 
I will not say that this is the pattern of all recessions; it isn’t. 
But I will say that this is the pattern of this recession, and that we have been here before. 
But if you ask the same question of a modern macroeconomist – for example, the extremely bright Narayana Kocherlakota of the University of Minnesota – you will find that he says that he does not know, and that macroeconomic models attribute economic downturns to various causes. 
Most, he points out, “rely on some form of large quarterly movements in the technological frontier. 
Some have collective shocks to the marginal utility of leisure. 
Other models have large quarterly shocks to the depreciation rate in the capital stock (in order to generate high asset price volatilities)...” 
That is, downturns are either the result of a great forgetting of technological and organizational knowledge, a great vacation as workers suddenly develop a taste for extra leisure, or a great rusting as the speed at which oxygen corrodes accelerates, reducing the value of large things made out of metal. 
But modern macroeconomists will also say that all these models strike them as implausible stories that are not to be taken seriously. 
Indeed, according to Kocherlakota, nobody really believes them.: “Macroeconomists use them only as convenient short-cuts to generate the requisite levels of volatility” in their mathematical models. 
This leads me to ask two questions: 
First, is it really true that nobody believes these stories? 
Ed Prescott of Arizona State University really does believe that large-scale recessions are caused by economy-wide episodes of forgetting the technological and organizational knowledge that underpin total factor productivity. 
One exception is the Great Depression, which Prescott says was caused by real wages far exceeding equilibrium values, owing to President Herbert Hoover’s extraordinary pro-labor, pro-union policies. 
Likewise, Casey Mulligan of the University of Chicago really does appear to believe that large falls in the employment-to-population ratio are best seen as “great vacations” – and as the side-effect of destructive government policies like those in place today, which lead workers to quit their jobs so they can get higher government subsidies to refinance their mortgages. 
(I know; I find it incredible, too.) 
Second, regardless of whether modern macroeconomists attribute our current difficulties to causes that are “patently unrealistic” or simply confess ignorance, why do they have such a different view than we economic historians do? 
Regardless of whether they have rejected our interpretations and understandings or simply have built or failed to build their own in ignorance of what we have done, why have they not used our work? 
The second question is particularly disturbing. 
After all, economic theory should be grappling with economic history. 
Theory is crystallized history – it can be nothing more. 
Someone observes some instructive case or some anecdotal or empirical regularity, and says, “This is interesting; let’s build a model of this.” 
After the initial crystallization, theory does, of course, develop according to its own intellectual imperatives and processes, but the seed of history is still there. 
What happened to the seed? 
This is not to say that the macroeconomic model-building of the past generation has been pointless. 
But I do think that modern macroeconomists need to be rounded up, on pain of loss of tenure, and sent to a year-long boot camp with the assembled monetary historians of the world as their drill sergeants. 
They need to listen to and learn from Dick Sylla about Alexander Hamilton’s bank rescue of 1825; from Charlie Calomiris about the Overend, Gurney crisis; from Michael Bordo about the first bankruptcy of Baring brothers; and from Barry Eichengreen, Christy Romer, and Ben Bernanke about the Great Depression. 
If modern macroeconomists do not reconnect with history – if they do not realize just what their theories are crystallized out of and what the point of the enterprise is – then their profession will wither and die. 

The Anti-Hunger Imperative 
BRUSSELS – There are plenty of summits to choose from this year, but the World Summit on Food Security deserves not to be lost in the crowd. 
This meeting in Rome from November 16-18 provides badly needed political momentum to three linked issues that rank among the most challenging of the current era: food security, biodiversity, and climate change. 
Collectively, we are failing in the fight against world hunger. 
More than one billion people in the world today do not have enough food to meet their basic daily nutritional needs, and the situation in developing countries is getting worse. 
This is, first and foremost, a moral outrage. 
How can it be that in the twenty-first century, when we have taken men to the Moon and back, we still cannot feed everyone on this planet? 
Policymakers must recognize, moreover, that food insecurity is linked to the lasting effects of the economic crisis and ongoing climate change, and that it represents no less a threat to our global community. 
To be fair, world leaders have responded. 
At the recent G-8 summit in L’Aquila, Italy, we made a firm commitment “to act with the scale and urgency needed to achieve global food security,” and we collectively pledged $20 billion over three years. 
This is a sizeable commitment, but it may not be enough – more needs to be done to increase agricultural production, to free up the potential of trade to address food insecurity, and to deal with the increasing impact of climate change on agriculture. 
The European Commission, too, has responded, with finance for food security coming via a number of instruments. 
Our European Union food facility, agreed last year, is mobilizing an additional $1.5 billion for a rapid response to rising food prices. 
And we will pump in another $4 billion in the coming three years to fund activities that help countries improve food security and adapt to climate change. 
Extra money to address food security problems, among other things, should be one of the key outcomes of the finance package that the EU strongly supports for the next crucial event on the summit calendar: the Copenhagen climate conference in December. 
Changing weather patterns and the increasing magnitude and frequency of extreme weather events will require substantial investments if farmers are to adapt successfully. 
These changes hit the poorest the hardest, and global trends mask deep regional disparities. 
Small farmers, predominantly in developing countries, will bear the brunt of climate change. 
If we do not act quickly, the 40 poorest countries, predominantly in sub-Saharan Africa and Latin America, will by 2080 lose from 10% to 20% of their basic grain-growing capacity due to drought. 
But answers to this problem are close to hand. 
The impact of biodiversity is often insufficiently understood, which means that we have undervalued its contribution to tackling global challenges. 
The more diverse the variation of life forms within a given ecosystem, the more resilient it is to change. 
So biodiversity can act as a natural “insurance policy” against sudden environmental changes and a buffer against losses caused by them (as well as by pests and diseases). 
Biodiversity is essential for reliable and stable long-term food production. 
The famines in Ireland in the nineteenth century and in Ethiopia in the late twentieth century provide clear evidence of the vulnerability of undiversified crops to environmental changes, and the dramatic consequences of such vulnerability for the population. 
Crop diversity can also deliver important ecosystem benefits. 
Varieties that are tolerant to drought and flood can not only increase productivity, but also can prevent soil erosion and desertification. 
In southern Ghana, for example, farmers have managed to reduce crop failures arising from rainfall variability and unpredictability by cultivating several drought-tolerant types of the same crop species. 
In addition, crop diversification has reduced the need for costly and environmentally damaging pesticides. 
So I am convinced that we should raise the profile of biodiversity in tackling climate change and food insecurity, and that we need more high-level attention to this subject. 
Next week, when leaders meet in Rome, I hope that we will agree on the key priorities to fight hunger and food insecurity, and in particular to establish an authoritative source of advice on food security to governments and international institutions. 
In fact, we need for food security what the United Nations’ Intergovernmental Panel has done for climate change: a science-based red-alert system for the planet. 
And at the start of a new five-year term at the European Commission, I will continue to do all I can to promote this important issue. 
But even the best and most up-to-date donor policies will remain vain exercises if governments in developed countries fail to translate their commitments into hard cash and improvements in agricultural investment worldwide. 
So finally let the World Summit on Food Security provide tangible evidence of a commitment from all governments to a common objective: a world free of hunger. 
History will judge us unfavorably if we fail. 

The Anti-Terrorist Temptation 
The ongoing Middle East crisis is not only directly relevant to that troubled region but more generally to the global "war against terror" conducted under US leadership. 
While some important victories have been won in this war, for lack of US leadership one battle has already been lost - the definition of the enemy. 
Terror is a shadowy enemy. 
What makes it so damnably difficult to confront is the fact that it takes many forms. 
True, all terrorists act criminally by taking the lives of innocent people to further some real or imagined objective. 
While each has different motives, none of the causes they espouse justify their acts. 
In most cases terror is local in cause, action, and motivation: ETA in Spain, the IRA in Northern Ireland, suicide bombers in Palestine, Chechen rebels, the Tamil Tigers. 
In contrast, the Al Qaeda terrorists of September 11 th acted on a global scale and with a global motive. 
Initially they were rightly defined as a different species: America declared war not on all kinds of terrorists but, to quote President Bush, against those "of global reach." 
That was an essential distinction. 
The first law in strategy is to be clear about who your enemy is, to focus on him and not be deflected. 
Unfortunately, the Bush Administration lost its focus. 
The Middle East crisis demonstrates the disturbing consequences of this: lack of a clear US policy towards that escalating conflict has clearly been caused by target confusion. 
With the help of powerful groups within the US Administration, the Israeli government succeeded in redefining America's enemy in the "war on terror" to mean not only Osama bin Laden's globally operating Al Qaeda network, but every militant group of Palestinians that resists Israel's occupation. 
So American efforts to bring about a cease-fire were stillborn. 
True, the intransigence of the two belligerents frustrates the intervention of most outside powers. 
But where the Middle East is concerned America always has real clout. 
A decisive US effort behind President Bush's initial call for the immediate withdrawal of Israeli troops from the occupied territories could have worked. 
But his words, however, had lost authority. 
Prime Minister Sharon replied that he was fighting America's war on terrorism. 
As William Kristol, a supporter of the Sharon line and a leading conservative US commentator wrote: "You can't have a peace process in which one of the partners is a sponsor of terrorism. 
Not if you are engaged in a serious war on terrorism." 
Sharon is not alone in hijacking the definition of the terrorist enemy. 
Wherever in today's world revolt is quashed by military oppression, the oppressors claim that they are only following America's lead. 
Kristol's dogma is eagerly applied by President Putin in Russia's brutal war in Chechnya, by Uzbekistan's authoritarian regime against Islamic groups of all kinds, by India's heavy-handed operations in Kashmir. 
That danger was foreseeable; failing to avoid it a costly mistake. 
Not only does it tie America's Middle Eastern policy to the intransigence of Sharon and the death wish of Palestinian suicide bombers, it also weakens the international coalition against Al Qaeda. 
Even powerful America cannot hunt down everyone everywhere who employs violence as a political weapon. 
Nor can it maintain an international coalition of states against Al Qaeda-type terror if its members are asked to subscribe to today's wider, vaguer goal. 
Local terrorism affects different states differently and divides instead of unites. 
Worst of all, the US is in danger of losing control of the campaign as all those regimes and governments fighting local terrorists in America's name obscure the fight against global terrorism. 
True, Al Qaeda's tentacles reach into many conflicts. 
Chechen fighters and Kashmiri insurgents apparently receive financial support, weapons and training from sources linked to bin Laden's network. 
This argues for targeting such support, not lumping all of these groups together. 
If you throw your blanket too wide, you cannot complain about nasty bedfellows. 
Instead of leading others in a coalition against your enemy, you risk being led astray by them. 
In the long blockade against Napoleonic France, captains in Britain's Royal Navy would on the eve of battle drink the following toast: "Confusion to the French!" 
They knew that confusion on the part of the defender offers the best chance for successful attack. 
In the "war on terror," it is now the attacker who is confused. 
The fight against Al Qaeda continues and must continue. 
But it will now take much longer unless today's confusion is replaced by clarity. 


The Arab Drama 
PRINCETON – The Arab world has entered the most dramatic period in its modern history. 
Oppressive regimes are being swept away, as Arab people finally take their fate into their own hands. 
The excitement of the moment, however, does not tell us what the future holds. 
At best, democracy is still off in the distance: the military still dominates in Egypt and Tunisia, tribal forces are on the rise in Libya and Yemen, and sectarian divides between Sunni and Shia are likely to dominate politics in Bahrain, as they have in Iraq since 2003. 
There is no single narrative that makes sense of this all. 
Regimes throughout the Middle East, the United States, and European governments, as well as Al Qaeda and other Islamist groups, are all struggling to understand what comes next. 
Scholars of the region, like myself, are also recognizing that our understanding of Arab politics did not anticipate this wave of successful protest. 
Until the uprising in Tunisia, we thought that political change would be led either by Islamist forces or by a coup by a group of military officers – not by disorganized, youth-led masses. 
The Middle East’s demographic youth bulge is well known, but no one predicted that its members would mobilize social media and cell phones to topple long-established dictators. 
The technologies of the Internet were thought to fragment societal forces rather than unite them in a common cause. 
And the regimes were considered to be too brutal, as we see tragically in Libya, to go down without a fight. 
By its own admission, Al Qaeda has been caught off guard, no doubt because the group’s central argument has been that the fall of oppressive Arab governments could come only through violence. 
In response to recent events, Ayman al-Zawahiri, Al Qaeda’s second in command, released a tedious Powerpoint-like analysis of Egyptian constitutional law and political history. 
Like Egypt’s now-deposed President Hosni Mubarak, al-Zawahiri’s tone was patronizing and condescending. 
If anything, the lecture underscored how out of touch Al Qaeda’s senior leaders are with the spirit of the time. 
A younger Al Qaeda ideologue is more convincing, however. 
In a message dated February 16, 2011, entitled “The People’s Revolution and the Fall of the Corrupt Arab System: A New Beginning and the Shattering of the Idol of ‘Stability,’” a Libyan who goes by the name Atiyat Allah writes, “It is true that this revolution is not the ideal that we had desired….[W]e hope that this is the first step to better times yet.” 
Allah goes on to argue that these revolutions did more than just topple regimes like Mubarak’s. 
More importantly, they have destroyed the doctrine of “stability” that allowed the regimes and the West to exploit the region and provide security for Israel. 
Admitting surprise at the speed of events, Allah advises Al Qaeda groups to engage gently with the rising forces in these countries. 
Tactically, he argues, this is the only way for Al Qaeda to achieve its ultimate goal of taking power. 
Other Al Qaeda thinkers have expressed admiration for the ability of young men like Wael Ghonim to mobilize thousands of his fellow Egyptians by conveying his sincere desire for change and love of country. 
There is certainly a degree of envy for what others have accomplished and a sense of desperation about how Al Qaeda can capitalize on this change. 
Unlike the uprisings in Egypt and Tunisia, the current fighting in Libya presents Al Qaeda with an opportunity to confirm its classic narrative about the importance of change through violence. 
More troubling still is that Libya’s violence reveals certain features of the Middle East that had been forgotten after the heady success in Tunis and Cairo. 
Most clearly, political change will not occur in the same fashion across the diverse countries of the Arab world. 
Unlike Tunisia and Egypt, which are largely homogeneous societies, Libya has important tribal cleavages, whereas Bahrain, Yemen, and Syria are riven by sectarianism. 
In the absence of strong national institutions, change in these countries risks significant bloodshed. 
In addition, the excessive violence in Libya might send the message to other peoples in the region that the cost of change is too high to pay, and that the relatively peaceful transitions seen in Egypt and Tunisia might not be replicable. 
Finally, the chaos in Libya has shown how dependent the rest of the world is on the political fate of Middle Eastern societies. 
Should chaos of the kind witnessed in Libya occur in the Persian Gulf countries, for example, the world could literally come to a standstill, given the quantity of oil that they supply. 
While unlikely anytime soon, this possibility should give everyone pause and spur us to find policies that will help Arabs find the political dignity and good governance they deserve through an ordered, peaceful process. 
The alternative is a world in which we remain hostage to the region’s pathologies, which provide ample opportunity for Al Qaeda to reassert its narrative and influence. 

The Arab Revolutions’ Reality Check 
BERLIN – Two years after popular uprisings began to convulse the Middle East, few people speak of an “Arab Spring” anymore. 
Given Syria’s bloody civil war, the rise to power of Islamist forces through free elections, the ever-deepening political and economic crises in Egypt and Tunisia, increasing instability in Iraq, uncertainty about the future of Jordan and Lebanon, and the threat of war over Iran’s nuclear program, the bright hope of a new Middle East has vanished. 
Add the region’s eastern and western peripheries – Afghanistan and North Africa (including the Sahel and South Sudan) – and the picture becomes even grimmer. 
Indeed, Libya is increasingly unstable, al-Qaeda is actively engaged in the Sahel (as the fighting in Mali shows), and no one can foresee what will happen in Afghanistan after the US and its NATO allies withdraw in 2014. 
All of us tend to make the same mistake repeatedly: we think at the beginning of a revolution that freedom and justice have prevailed over dictatorship and cruelty. 
But history teaches us that what follows is usually nothing good. 
A revolution not only overthrows a repressive regime; it also destroys the old order, paving the way for a mostly brutal, if not bloody, fight for power to establish a new one – a process that affects foreign and domestic policy alike. 
Normally, revolutions are followed by dangerous times. 
Indeed, exceptions to this pattern are rare: South Africa is one, owing to the genius of one of the century’s most outstanding statesmen, Nelson Mandela. 
The alternative option can be observed in Zimbabwe. 
Central and Eastern Europe after 1989, though a very interesting reference point for analysts of the Arab revolutions, is not an appropriate reference point, because the region’s new domestic and foreign order resulted from the change in external conditions stemming from the collapse of Soviet power. 
Internally, nearly all of these countries had a very clear idea about what they wanted: democracy, freedom, a market economy, and protection from the return of the Russian empire. 
They wanted the West, and their accession to NATO and the European Union was logical. 
Nothing of the sort applies to the crisis belt of the Middle East. 
No power anywhere, within the region or without, is willing and able to implement the barest vision of a new regional order – or even a vision for parts of it. 
Chaos is a constant threat, with all of its accompanying risks and threats to world peace. 
In addition to poverty, backwardness, repression, rapid population growth, religious and ethnic hatred, and stateless peoples (such as the Kurds and the Palestinians), the region has unstable borders. 
Many were drawn by the colonial powers, Great Britain and France, after World War I, and most, with the exception of Iran’s and Egypt’s, have little legitimacy. 
As if this were not enough, some countries – including Iran, Saudi Arabia, and even tiny (but very rich) Qatar – have ambitions to be regional powers. 
All of this worsens an already tense situation. 
All of these contradictions are currently exploding in Syria, whose population is suffering a humanitarian catastrophe, while the world stands by, up to now unwilling to intervene. 
(If chemical weapons are deployed, intervention will become inevitable.) 
Although intervention would be temporary and technically limited, everyone seems to be avoiding it, because the stakes are very high: not only a devastating civil war and massive human suffering, but also a new order for the whole of the Middle East. 
Any military intervention would entail a confrontation not only with the Syrian military (supported by Russia and China), but also with Shia Iran and its Lebanese proxy, Hezbollah. 
Moreover, no one can guarantee that intervention would not quickly lead to another war with Israel. 
The dangers of both action and inaction are very high. 
The most likely outcome in Syria is that the human catastrophe will continue until President Bashar al-Assad’s regime collapses, after which the country very likely could be divided along ethnic and religious lines. 
And Syria’s disintegration could further balkanize the Middle East, potentially unleashing new violence. 
Frontline states like Lebanon, Iraq, and Jordan will not manage to remain aloof from a disintegrating Syria. 
What will happen with Syria’s Kurds and Palestinians, or its Christians, Druze, and smaller Muslim minorities? 
And what about the Alawites (the backbone of Assad’s regime), who could face a terrible destiny, regardless of whether the country splits up? 
Unanswered questions abound. 
Of course, even in the face of this misery, we should not lose hope in agreements reached by diplomatic means; but, realistically, the chances are dwindling every day. 
The whole of the Middle East is in motion, and a new and stable order will take a long time to establish. 
Until then, the region will remain very dangerous, not only internally, but also for its neighbors (including Europe) and the world. 

The Arab Spring and Europe’s Turn 
NEW HAVEN – Until now, and with few exceptions, the West has nurtured two distinct communities of foreign-policy specialists: the development community and the democratic community. 
More often than not, they have had little or no connection with one another: development specialists dealt comfortably with dictatorships and democracies alike, believing that prosperity can best be created by concentrating exclusively on economic issues and institutions. 
The consequences of this approach have a special resonance in the Arab world today. 
But, as the recent United Nations Security Council debates on the Arab Spring have shown, it is not the major emerging countries that will influence events in the region. 
Brazil has barely uttered a word in reaction to the region’s tumult, while Russia and China have little taste for sanctions against Libya in light of their own autocratic governments. 
All of this adds up to a unique opportunity for the European Union to support its neighbors’ transition from revolutionary upheaval to democratic government. 
At the same time, we need to promote the progress of other regimes in the region toward inclusive democracy. 
Indeed, the EU is their natural partner in this endeavor. 
Since the launch of the Barcelona Process in 1995, EU Mediterranean policy has been criticized for not linking financial aid to democratic reform, and for giving priority to European concerns like immigration, security, and cooperation on counter-terrorism. 
At the same time, EU policy has sidelined clear southern priorities, like opening up Europe’s agriculture and textile markets. 
The result is that the vision of the official Euro-Mediterranean Policy (EMP) has lagged far behind its original goals. 
Europe should shift its focus on immigration and security back to policies that reflect the original objectives of the Barcelona Declaration. 
The EMP’s central goals were to advance a “comprehensive partnership” and political reform, and to create “a common area of peace and stability,” together with a Euro-Mediterranean free-trade area. 
Moreover, the associated MEDA funding mechanism crucially and specifically included the European Initiative for Democracy and Human Rights. 
This link between security, democracy, and human development has since been broken and needs to be restored through investment in good governance, regional development, and education. 
The EMP evolved in 2004 into the European Neighborhood Policy framework, and in 2007, the European Neighborhood Policy Instrument (ENPI) replaced MEDA as the EU’s main financing mechanism for Euro-Mediterranean policy. 
This put human rights funding into the National Indicative Program (NIP), which encompasses 17 countries: ten in the south and seven in Eastern Europe. 
Although good governance and human rights remained among the ENP’s proclaimed goals, official communications of the European Commission show that it emphasized security and border control. 
When the EMP was “re-launched” in 2008 under the newly established Union for the Mediterranean (UfM) to give it greater political emphasis, the result was an exercise in “realism” that further weakened the original EMP. 
And, for all its high-flown language, the UfM is an empty shell. 
This is partly due to unfortunate timing: the UfM’s launch coincided with the outbreak of the Gaza War and became entangled in the complexities of Arab-Israeli relations. 
But the initiative also failed to gain momentum among political leaders. 
To implement the far-reaching vision of the Barcelona Process, the ENP will have to revisit the way it distributes its financial support, rebalance the funding that it provides to the EU’s eastern and southern neighborhoods, and place much greater emphasis on democracy, the rule of law, and human rights. 
Education remains a key area where the EU should contribute to the development of the southern neighborhood, if only because young people are a growing majority of the Arab population. 
Although many Arab states have been opening new schools and universities, and are allowing more private educational institutions to flourish, the quality of education in the region still leaves much to be desired. 
Religion remains a compulsory subject throughout university programs, while inquisitiveness, critical thinking, and objective analysis are all widely discouraged. 
As the Jordanian intellectual and former foreign minister Marwan al-Muasher has argued, state and religious interpretations of history, science, and political values are hammered into Arab students. 
Wilfried Martens, President of the European People’s Party (EPP) in the European Parliament and former Prime Minister of Belgium, recently made a similar point: “The West is not at war with Islam. 
Christianity is not at war with Islam. 
And neither is democracy. 
All three, however, are incompatible with a certain interpretation which claims that the scripture is the basis upon which to build a state.” 
Of the Arab countries receiving ENP funds, only Egypt has channeled a high proportion – nearly 50% – toward education. 
In any case, Europe’s spending on education in the region is scattered among inter-regional, national, and thematic programs, which makes it difficult to see how these funds’ effectiveness might be measured. 
Europe now faces key decisions that concern both its values and its interests in the Arab world, and the reconciliation of its short- and long-term objectives. 
Infrastructural investment and economic reform are crucial for the Mediterranean region’s future development, but they cannot transform the region without a parallel emphasis on democracy, the rule of law, human rights, and education. 
To advance both objectives, the EU must link its investment and aid programs to concrete progress on democratization, and press for much greater accountability and improvement in reforming educational systems throughout the region. 

The Arab Spring’s Balance Sheet 
CAIRO – Last year’s events in Egypt and Tunisia drew the curtain on a tottering old order and delivered much of the Arab world into a long-awaited new era. 
But what that new era will look like remains very much an open question, given the many challenges that the region’s countries still face. 
The old order that has begun to vanish extends beyond the former regimes. 
The region’s entire value system – a political culture forged by autocracy – is being transformed. 
Arab men and women have shed the sense of humiliation and inferiority that despotism imposed on them – and that fostered desperation, anger, violence, and insularity. 
This transformation, though far from complete – indeed, it may well last years – has nonetheless started to bear fruit. 
If the 2011 uprisings had not occurred, we would now be witnessing another year of autocracy, with more talk of dynastic successions. 
That would mean further humiliation for ordinary people, who bear the brunt of corruption, as government officials and their crony capitalists continued to siphon off public funds. 
The Arab media would still be heaping uncritical praise on the region’s presidents and their families, while development programs would be looted by them. 
Education would continue to stagnate, and Arab societies, which are divided across sectarian, tribal, and regional lines, would experience rising levels of retribution and violence. 
The infamous “death boats,” on which hundreds of young North African men risked their lives every year in search of employment and a better life abroad, would continue to deliver those who survived the journey onto Europe’s unwelcoming shores. 
And Arabs’ rage would reach unprecedented levels, causing utter mayhem and destruction. 
Arab youth have rescued the Arab world from this fate. 
Their conscientiousness and integrity have restored people’s self-confidence. 
The old regimes’ opponents have demonstrated bravery without recklessness, and differences of opinion without bigotry. 
Indeed, we have seen Islamists, liberals, and leftists standing together in defiance. 
We have seen Muslims and Copts protect each other in Cairo. 
In Yemen, we have seen local tribesmen follow a woman, Nobel Peace Prize winner Tawakel Karman, in the fight for freedom. 
And we have seen the Arab media foster a mature debate about democracy, constitutionalism, and the role of Islam in the modern state, rather than dispensing disinformation and crass propaganda. 
But the transformation must not stop here. 
The new and old political forces should initiate a dialogue to create a consensus on the rules of political engagement. 
As the people become their own masters, those who fail to engage in this process will eventually find themselves without political power. 
Other countries in the region, and beyond, should embrace the Arab Spring. 
In particular, the members of the Gulf Cooperation Council (GCC) should abandon their hesitance to support the post-revolution governments. 
Ultimately, the changes occurring in the Arab world will contribute to the entire region’s economic prosperity and political stability. 
Today, Tunisia and Egypt are experiencing severe economic crises. 
Before Tunisia’s revolution, for example, 500,000 of its labor force of 3.6 million were unemployed, and that number has since risen to 700,000. 
Egypt has lost roughly $9 billion in capital flight in recent months. 
But, according to Egypt’s prime minister, Kamal al-Ganzouri, the country’s Arab “brethren” have delivered only $1 billion of the $10.5 billion in aid and loans that they promised. 
Moreover, Tunisia and Egypt have so far received none of the $35 billion promised by the G-8 countries. 
And, given the current global economic crisis, the funds are not likely to be forthcoming in the near future. 
The region’s emerging democracies urgently need an Arab initiative that resembles the Marshall Plan – a program to attract large-scale investment in infrastructure, industry, and agriculture (and in the region’s wealth of untapped technical skills), thereby boosting employment. 
The initiative should also encourage free movement of goods and people within the region, by lifting the customs restrictions and complicated procedures that hinder bilateral and multilateral trade. 
Creating regional development banks and building a Mediterranean express railway from Alexandria to Rabat would serve this goal. 
But long-term investments will not solve the immediate crisis. 
Egypt and Tunisia need immediate cash deposits and grants, and their newly elected leaderships should not be forced to resort to begging. 
In the past, the Gulf countries have supported Egypt and Tunisia. 
It is now in the GCC’s best interests to support them again as they make the transition to freedom. 
Meanwhile, the United States and the European Union should recognize the nature and depth of the unfolding changes. 
The Arab public is fully aware of the close alliances that existed between the West and the now-defunct despotic regimes, yet they have exhibited no desire for vengeance or retribution towards the West. 
It is past time for the West to accept the Arab people’s will and to stop exaggerating the repercussions of change. 
The West must support genuine democracy in the Arab world. 

The Arab Springtime of Nations? 
JERUSALEM – Two things stand out in the Middle East since the Arab Spring began – one that happened, and one that did not. 
What happened was that for the first time in modern Arab history, authoritarian regimes and rulers were toppled, or seriously challenged, by popular demonstrations, not – as in the past – through military coups. 
But what did not happen might be as important as what did. 
While dictators associated with military juntas were challenged overnight, the Arab Spring never came to the region’s conservative monarchies. 
The dynastic rulers of Morocco, Jordan, Saudi Arabia, and the Gulf states (with the exception of Bahrain) remain more or less firmly in the saddle, even though Saudi Arabia’s regime, at least, is in many respects far more oppressive than were the former Egyptian and Tunisian regimes. 
Of course, oil money helps to sustain autocracy, but this is not a factor in Morocco and Jordan. 
It appears that these monarchies enjoy a form of traditional authority that the region’s secular nationalist rulers never had. 
Being descendants of the Prophet, as in Morocco and Jordan, or having custodianship of the holy sites of Mecca and Medina, as in Saudi Arabia, bestows a legitimacy on the countries’ rulers that is directly linked to Islam. 
The only monarchical regime that was seriously challenged during the Arab Spring was the Sunni ruling family in Shia-majority Bahrain, where precisely this sectarian divide seems to have been the crucial ingredient in the uprising, which was then brutally suppressed with Saudi military help. 
Yet, for all of the success epitomized by the protests in Cairo’s Tahrir Square, bringing down a dictatorship is one thing – a drama lasting a few weeks – while the transition to a functioning, consolidated democracy is quite another. 
Here, a lengthy process is involved, and its success – exemplified in the post-communist transitions in Eastern Europe – depends on key preconditions. 
Where these conditions exist – for example, a vibrant and autonomous civil society, as in Poland, or a strong pre-authoritarian tradition of pluralism, representation, and tolerance, as in the Czech Republic – the transition is relatively smooth. 
Where they are lacking or weak, as in Russia or Ukraine, the outcome is much more problematic. 
Simply put, a rosy outlook for countries like Egypt cannot be assumed on the basis of exhilarating images on CNN or Al Jazeera, or the fact that masses of young, well-educated, English-speaking men and women are connected through Facebook and Twitter. 
The great majority of Egyptians were not in Tahrir Square, and many of them lack not only access to online social networks, but also electricity and safe drinking water. 
Democracy and free speech are not at the top of their agenda. 
Egypt’s silent majority also identifies with the authenticity represented by various Islamic groups, while principles of democracy and civil rights seem to them to be imported Western abstractions. 
So the tremendous victory of the Muslim Brotherhood and the Al-Nour Party in Egypt – as well as that of Ennahda in Tunisia – should come as no surprise. 
A similar scenario could unfold in Syria, if and when President Bashar al-Assad falls from power, while both post-Qaddafi Libya and post-Saleh Yemen point to the difficulties that these countries face in constructing a coherent democratic regime. 
Looking at Egypt’s prospects realistically, one should not exclude the possibility that the two strongest forces in the country – the military and the Muslim Brotherhood – ultimately will find a way to share power. 
The Brotherhood’s vision of democracy is purely majoritarian, not liberal: winning an election, according to its spokespeople, permits the victor to rule according to his views. 
Minority rights, institutional checks on government power, human rights – the liberal aspects of democracy – are entirely absent. 
Another, more fundamental, dimension to current and future changes in the region may come into view as well. 
Most international borders in the Middle East and North Africa were drawn by imperial powers – Britain, France, and Italy – either after World War I and the breakup of the Ottoman Empire (the Sykes-Picot agreements), or, as in Libya and Sudan, earlier. 
But in no case did these borders correspond with local popular will, or with ethnic or historical boundaries. 
In other words, none of these countries, except Egypt, had ever been a discrete political entity. 
Until recently, their rulers had a common interest in keeping this Pandora’s Box of borders tightly sealed. 
That has changed, and we see the region’s imperially imposed frontiers being called into question. 
In Iraq, the emergence of a de facto Kurdish autonomous region in the north has put an end to Saddam Hussein’s centralized Arab-controlled state. 
With South Sudan’s independence,the rest of Arab-dominated Sudan could face further division, with Darfur leaving next. 
In Libya, the transitional authorities are finding it extremely challenging to create a coherent political structure that can unite two very different provinces, Cyrenaica and Tripolitania, which were held together only by the Qaddafi regime’s brutality. 
In Benghazi, there are already calls for autonomy, if not outright independence. 
Similarly, Yemen’s unity is far from assured. 
The divisions between its south and north, which had been two different countries – with totally different histories –until Saleh’s dictatorship, are resurfacing again. 
In a post-Assad Syria, the ethnic and religious fissures betweenSunnis, Alawites, Druze, Christians, and Kurdsmight equally threaten the country’s unity. 
In his brutal way, Assad may be right that only his iron grip keeps the country together. 
And developments in Syria will undoubtedly have an impact on neighboring Lebanon. 
The end of communist autocracies in the Soviet Union, Yugoslavia, and even Czechoslovakia brought about a dramatic wave of state creation. 
Likewise, no one should be surprised if democratization in the Arab world, difficult as it might be, brings in its wake a redrawing of borders. 

The Arab World’s Democratic Opening 
Roughly 400 million Muslims currently live in non-Arab Muslim majority states – including Turkey, Indonesia, Bangladesh, Senegal, Mali, and Albania – that have held relatively free elections for their highest political offices. 
These countries may not yet be full democracies, but, because they hold competitive elections, they have met a necessary condition for being a democracy. 
But since Lebanon was torn apart thirty years ago by civil war and violence, exacerbated by PLO, Israeli, Syrian, French, and US military incursions, not a single Muslim has lived in an electorally competitive Arab state. 
This is why it is so important for the world to think deeply about the current opportunities for democracy in Palestine and its neighbors. 
Modern democracies share at least seven preconditions: 
· a functioning state; 
· a monopoly over the use of legitimate force; 
· borders that have strong national and international recognition; 
· agreement on who are its citizens; 
· a government that rules from within the national territory; 
· an elected government responsible to its citizens; 
· a reasonably integrated legal system. 
Obviously, when the PLO was headquartered in Jordan, Lebanon, or Tunisia, and there was not yet a Palestinian Authority, Palestine did not meet any of these seven prerequisites. 
Indeed, partly owing to Yasir Arafat’s own actions or inactions, at his death Palestine still had none of them. 
For example, while Palestine’s state capacities were destroyed by Israel, especially following the second Intifada, Arafat made matters worse by constantly bypassing and eviscerating potential mechanisms of accountability, such as the elected Palestinian Legislative Council. 
He failed to do anything about Palestine’s legacy of four different and contradictory legal systems. 
Moreover, Arafat contributed to the absence of a legitimate monopoly of force by ignoring the semi-autonomous armed actions of his own Fatah-based militia, as well as the Fatah-based Al–Aqsa Martyrs’ Brigades, not to mention other groups’ armed militias. 
But let us imagine what was unimaginable even a few months ago: a world where the present diminution of conflict holds, and where discussions between Israel and Palestine arrive at a mutually acceptable recognition of each state’s sovereignty. 
To be sure, this is possible only if the United States pushes Israel much harder than it has so far to give Palestine viable borders. 
How might such a world affect prospects for peace and democracy in the Middle East? 
Palestinian President Mahmoud Abbas desperately wants to construct a functioning state. 
With cessation of Israeli incursions, and large-scale international aid from the European Union, the US, Japan, and some Arab League countries, he could begin to make a plausible go of it. 
With an effective state, and an inclusive and functioning electoral system, Abbas could then disarm his own Fatah-based militia. 
With peace, and the prospect of doing well in July’s parliamentary election, in which it has agreed to participate, Hamas would have powerful incentives to transform itself from an armed movement outside the system into a political party committed to competing for power at the ballot box. 
By disarming any remaining militias, Abbas could claim what Max Weber called the necessary ingredient of any state, namely a “monopoly of the legitimate use of force.” 
Palestine has more elements of a vigorous civil society than virtually any other country in the Arab world, including an active human rights movement, which initially focused only on Israeli abuses, but that has increasingly criticized violations by the Palestinian Authority itself. 
Palestine also has a powerful women’s movement (Palestine being the first Arab country to give women the vote, in 1946). 
Finally, and ironically, because so many Palestinians have worked in Israel, spent time in Israeli prisons, often speak and read Hebrew, and are regularly exposed to the Israeli media and the rough and tumble of Israeli politics, Palestine has more young citizens than any other Arab country who have observed life in a democracy at first hand. 
So democracy in an independent Palestinian state is possible. 
Lebanon has had regular elections since its civil war ended in 1990. 
But a country without sovereignty, or control over its domestic politics, does not have a democratically serviceable state. 
Syria, bolstered by the 14,000 troops it stationed in Lebanon, has imposed its choice as Lebanon’s president and otherwise interfered with Lebanese politics. 
So Lebanon cannot be considered electorally competitive. 
With a just and stable Israeli-Palestinian peace, Syria might be forced not only to withdraw its troops, but also to lessen its interference in Lebanese politics. 
Lebanon could return to the democratic track, and Hezbollah might use democratic, not military, politics as its survival strategy in the newly sovereign Lebanon, especially if an international peacekeeping force were consensually allowed to demilitarize the Golan Heights. 
The only two Arab countries ever to recognize Israel were Egypt in 1978 and Jordan in 1994. 
But this was an asymmetrical peace. 
Both countries recognized Israel, but Israel did not recognize Palestine, and Israel’s construction of settlements on occupied land continued. 
In Jordan and Egypt, protests against the asymmetrical peace led to growing social fragmentation and processes of regime-led domestic de-liberalization. 
A symmetrical peace between Israel and Palestine would, by contrast, incite much less Islamic resistance. 
A symmetrical peace agreement might also contribute to a new dynamic in Jordan and Egypt, namely re-liberalization of society. 
Palestine and its immediate neighbors have their best opportunity in thirty years to produce democratic states. 
They can do so if they seize the current opening, and if the international community intensifies its support for an end to the Arab-Israeli conflict. 

The Arab Young and Restless 
NEW YORK – Many factors underlay the ongoing upheavals in the Middle East: decades of corrupt and authoritarian rule, increasingly literate and digitally-connected societies, and skyrocketing world food prices. 
To top it off, throughout the Middle East (as well as Sub-Saharan Africa and most of South Asia), rapid population growth is fueling enormous demographic pressures. 
Egypt’s population, for example, more than doubled over the course of Hosni Mubarak’s rule, from 42 million in 1980 to 85 million in 2010. 
This surge is all the more remarkable given that Egypt is a desert country, its inhabitants packed along the Nile. 
With no room to spread out, population densities are rising to the breaking point. 
Cairo has become a sprawling region of some 20 million people living cheek-by-jowl with inadequate infrastructure. 
Rapid population growth means a bulging youth population. 
Indeed, half of Egypt’s population is under age 25. 
Egypt, like dozens of countries around the world, is facing the extreme – and largely unmet – challenge of ensuring productive and gainful employment for its young people. 
Employment growth is simply not keeping up with this population surge, at least not in the sense of decent jobs with decent wages. 
The unemployment rate for young people (15-24 years old) in North Africa and the Middle East is 30% or more. 
The frustration of unemployed and under-employed youth is now spilling over into the streets. 
The problem of high youth unemployment is certainly not confined to the developing world, however. 
In the United States, the overall unemployment rate is around 9%, but among 18-25 year olds, it is a staggering 19%. 
And this includes only young people actually at work or looking for work. 
Many more have simply become discouraged and dropped out of the labor force entirely: not at school, not at work, and not looking for work. 
They don’t protest much, but many end up in prison. 
The world’s labor markets are now interconnected. 
Young people in countries as diverse as Egypt and the US are in effect competing with young Chinese and Indians for jobs. 
China’s low-paid, reasonably productive manufacturing workers and high-quality infrastructure (roads, power, ports, and communications) has set the standard for competitiveness globally. 
As a result, low-skilled workers in Egypt, the US, and other countries must either raise their productivity enough to compete at a decent wage, or accept extremely low pay or outright unemployment. 
So creating decent jobs at decent wages is at the heart of being internationally competitive. 
That requires equipping workers with a good education, strong on-the-job training, and supportive infrastructure. 
While the private sector must create most of the jobs, the public sector must create the underlying conditions for high productivity. 
That is a tall order. 
Only one high-income region has done a reasonably good job of preparing its youth, and its overall economy, for tough global competition: Northern Europe, including Germany and Scandinavia (Denmark, Finland, Norway, and Sweden). 
In these countries, public education is excellent, and the transition from school to work often involves programs like the apprenticeships for which Germany is especially famous. 
In developing countries, the main advances are found in countries that emphasize excellence in education, public investment in infrastructure, and serious on-the-job training. 
South Korea is probably the leading success story, with superb educational attainment and strong employment of young people having taken it from developing-country to high-income status within one generation. 
And South Korea has accomplished this feat in China’s intensely competitive immediate neighborhood. 
The US, by contrast, is a case of failure, except for youth from high-income households. 
American children raised in affluence succeed in obtaining an excellent education and have good job prospects after a bachelor’s degree. 
But, as the rich have successfully pressed for tax cuts and reductions in government spending, children from poor and working-class households are far less likely to receive a high-quality education, and the US government has failed to provide for training or adequate infrastructure. 
The result is a growing youth unemployment crisis among poor and working-class youth. 
The countries of North Africa and the Middle East should learn from East Asia and Northern Europe, and take pains to avoid the failures of the US. 
If democracy is to take hold and flourish in Egypt, Tunisia, and elsewhere in the Arab world, the new reform-minded governments must make the youth unemployment crisis their highest priority. 
Middle Eastern countries should elaborate strategies to improve the quality and increase the length of schooling, invest in job training, establish private-sector apprenticeships, and develop small and medium-sized businesses. 
They should identify key infrastructure projects needed to ensure private-sector productivity. 
And they must work together to deepen regional trade integration, thereby creating a much larger market. 
The deposed authoritarian rulers – Tunisia’s Zine El Abidine Ben Ali, Mubarak, and soon Libya’s Col. Muammar el-Qaddafi – stashed away billions of dollars stolen from the public treasury. 
This ill-gotten money should be recovered and put into a special fund for youth employment. 
Moreover, with oil prices back above $100 per barrel, the Gulf states are enjoying a bonanza. 
They, too, should create a special fund for youth employment in the region through the Islamic Development Bank. 
There can be no better way to use the region’s resources than to ensure that its young people’s lives are enriched by education, skills, and high-quality jobs. 

The Arabs Look Inward 
Across the Arab world, the fall of Baghdad on April 9th is seen as a day of shame, reminiscent of June 5th 1967, when Israel defeated the armies of three Arab countries, conquering the West Bank, Gaza Strip, and East Jerusalem in a mere six days. 
Arab intellectuals, and indeed the wider Arab public, are now busy trying to analyze and understand the lessons of the Iraqi earthquake. 
Meanwhile, supporters of the former Ba'athist regime in Iraq and others are now busy defending the same old totalitarian mindset. 
Their tactic has been to obstruct a clear review of the Iraqi catastrophe by suggesting that any criticism of Saddam's regime is tantamount to supporting the American occupation of Iraq. 
For example, Fahd Al-Fanek, a former Ba'ath Party member, is now a columnist for the Jordanian newspaper Al-Ra'i. 
In April, he wrote that the end of Saddam's hold on power in Iraq ``provided the opportunity for the enemies of the regime to shed crocodile tears at democracy and to denounce repression and dictatorship as an indirect gesture welcoming the American occupation.'' 
None of the anti-Saddam sentoment, Al-Fanek argued, was ``intended to serve the cause of democracy, but to support the American position and justify the American occupation.'' 
Interestingly, such retrospective support for Saddam and his dictatorial regime is now being met with growing indignation in the Arab World, because ordinary Arabs are only now learning of the crimes perpetrated by the Ba'ath Party regime. 
Apologists for Saddam's rule are now facing some difficult questions. 
There is precedent for such soul-searching in the Arab world. 
In the aftermath of Israel's 1967 victory, Sadeq Jalal Al-Azm, a well-know Syrian intellectual and a professor of philosophy, published a book entitled ``Self-criticism after the defeat,'' which sharply criticised many aspects of Arab political culture. 
Al-Azm's book became a sensation, stimulating a wave of reviews and polemical exchanges. 
Back then, the paramount question was: How did a small state like Israel defeat the armies of three Arab countries and occupy vast areas of Egyptian, Jordanian and Syrian territory in a few days? 
This question still echoes through the decades, and the many answers have dwelled not only on military failings, but on broader questions concerning Arab political, economic, cultural, and technological development. 
The prevailing response in the 1960's to Israel's triumph was that the Arabs should adapt the guerilla strategies pursued by the Vietnamese, Chinese, and Cubans. 
Later on, the Soviet model became popular among nationalist and leftist movements fighting for independence when they seized power in Syria, Iraq, and South Yemen. 
Demands for democracy, popular participation, and political pluralism were shelved in favor of pan-Arab national slogans urging Arab unity, the liberation of Palestine and opposition to imperialism. 
But looking back on the 1970's and 1980's, the socioeconomic failures of the despotic regimes that embodied this worldview are glaringly obvious. 
Their countries sank deeply into debt, with low rates of growth, endemic corruption, and bloated public sectors. Prisons were overcrowded, and cultural expression was stifled. 
Unsurprisingly, these regimes viewed the slightest criticism as treason and subversion. 
This was the stagnant context in which Iraq embarked on its military expansionism in 1991, aimed at the occupation of Kuwait. 
Although the Iraqi forces were quickly expelled from Kuwait, Saddam's overwhelming defeat did nothing to undermine his stature in the Arab world. 
The remnants of Saddam's army were not pursued within Iraq, allowing him to crush the popular insurrection staged in the south, and remain in power. 
Despite trying to annex an Arab neighbor, Saddam was able to claim the nationalist mantle against the Americans. 
Today, the previously unknown crimes committed by Saddam's regime against numberless thousands of Iraqis are being revealed. 
Around the Arab world, people are comparing the nationalist rhetoric of the regime with the scope of its barbarism. 
Shame at the price the Iraqi people have paid for the false face of the Baathist regime can be detected everywhere. 
It is becoming clear that no achievement, regardless of how great it may be, can justify the human cost that the Iraqi people paid over the last four decades. 
In the weeks since the overthrow of Saddam's regime, and despite the American occupation, Iraqis are exercising an increasing degree of control over their daily lives. 
They are choosing local councils, publishing newspapers, and organizing various political and social organizations. 
The reconstruction of Iraq, which has now begun, will continue. 
The echoes of the Iraqi quake are being felt in every Arab capital, including those that put their faith in oil riches to protect them from popular discontent. 
Demands for political and economic reform are escalating. 
The winds of change will blow once again through the Middle East, which remains threatened by both religious fundamentalism and foreign pressure. 
The best alternative to both is a voluntary movement toward democratic openness and political pluralism, enabling citizens across the Arab world to participate in making the future of their countries. 

The Arafat Succession Scramble 
To understand what the Palestinian cause will look like without Yasir Arafat, consider the various titles that he currently holds. 
Arafat is Chairman of the PLO executive Committee, President of the Palestinian National Authority, Commander-in-chief of the Palestinian forces, and head of the Fatah movement. 
The PLO embodies Palestinian national aspirations for independence and statehood. 
It is the highest political body for all Palestinians, both those living in Palestine and the refugees and other Palestinians in the diaspora. 
Arafat’s successor will need to juggle between negotiations with Israel, which will require concession on refugees’ “right of return” to Palestine, and the aspirations of more than three million Palestinians who wish to come back to the homes from which they were expelled in the wars of 1948 and 1967. 
Arafat’s successor as President of the Palestinian National Authority will be bound by the Oslo Accords, which created an interim government, now headed by Prime Minister Ahmad Qurei, that is responsible for the day-to-day lives of Palestinians in the West Bank and Gaza. 
Palestinians will have to decide whether to make the position of PNA president a powerful one or merely symbolic, as it now is. 
The latter option would make Qurei an empowered prime minister, which is what many Palestinians and others want. 
The position of the commander of the Palestinian forces supposedly puts the various Palestinian military, security, and intelligence units under one leader, who is expected to ensure the rule of law. 
But these forces are now in disarray, with most uniformed Palestinian security agencies needing to be reorganized after four years of intensive effort by Israel to crush them. 
The key factor in internal security is local paramilitary units. 
These units, most of which are not controlled by the PNA’s central leadership, are more loyal to grassroots figures than to uniformed PNA officers. 
Local Fatah leaders like Marwan Barghouti have tremendous power over the nationalist armed units that are loosely organized under the title of the Al Aqsa Martyrs’ Brigades. 
Barghouti advocated and was trying to implement internal Fatah elections when the Israelis arrested him. 
As a street leader who was elected as the head of the Bir Zeit University student council, he gained legitimacy by being chosen by his peers. 
When the Oslo process began, he refused to accept any official position within the Palestinian Authority, choosing instead to remain close to the local Fatah cadres. 
Whoever fills Arafat’s shoes will need to make sure that these brigades are satisfied that their status, demands, and leaders are respected. 
Indeed, the power struggle that will ensue in the post-Arafat era will ultimately center on Al Fatah, the backbone of the PLO. 
A worldwide assembly chooses Fatah’s 100-member revolutionary council, which in turn elects a 20-member central committee, where most of the power struggle will take place. 
Many young street leaders will insist on an emergency meeting of the revolutionary council, or even holding the sixth general assembly (which would be the first since 1988). 
Events in recent months show that the Al Asqa Martyrs’ Brigades have forced even Arafat to take their demands into consideration. 
While much of the power struggle will take place within the nationalist camp, one must not overlook the Islamist camp led by Hamas and Islamic Jihad. 
Although the Islamists are unlikely to interfere in the post-Arafat power struggle, they will not sit idly by if the new leadership moves in what they consider the wrong direction. 
Of course, the new leadership will have to reach some agreement with the Islamists regarding the rules of the game, both domestically and vis-à-vis Israel. 
Without such an agreement, and if the new leadership cracks down hard on the Islamists, a violent civil war could erupt. 
Most importantly, in order to consolidate his leadership, the next Palestinian leader must make some hard decisions and show some tangible results quickly. 
The experience of the first Palestinian prime minister, who resigned largely because of his inability to deliver any improvements to his people – particularly personal and collective security, the rule of law, and an end to chaos in Palestinian areas – remains fresh in the public’s memory. 
At the same time, a freeze on settlement activities, release of Palestinian political prisoners – including Marwan Barghouti – and the removal of the hundreds of checkpoints between Palestinian cities would revive a feeling of hope, without which no Palestinian leader can negotiate what the world wants: a peace settlement. 
The problem is that no Palestinian leader, no matter who he is, can deliver these changes. 
They represent a direct challenge to the Israeli occupiers, neighboring Arab countries, and the international community, led by the United States. 

The Arrogance of Chinese Power 
NEW DELHI – Success breeds confidence, and rapid success produces arrogance. 
That, in a nutshell, is the problem that both Asia and the West face in China, and which has been demonstrated once again at the G20 summit in Canada. 
Rising economic and military power is emboldening China’s government to pursue a more muscular foreign policy. 
Having earlier preached the gospel of its “peaceful rise,” China is now beginning to take the gloves off, convinced that it has acquired the necessary muscle. 
That approach became more marked with the global financial crisis that began in the fall of 2008. 
China interpreted that crisis as symbolizing both the decline of the Anglo-American brand of capitalism and the weakening of American economic power. 
That, in turn, strengthened its two-fold belief – that its brand of state-steered capitalism offers a credible alternative, and that its global ascendance is inevitable. 
Chinese analysts gleefully point out that, after having sung the “liberalize, privatize, and let the markets decide” song for so long, the United States and Britain took the lead in bailing out their financial giants at the first sign of trouble. 
By contrast, state-driven capitalism has given China economic stability and rapid growth, allowing it to ride out the global crisis. 
Indeed, despite perpetual talk of an overheating economy, China’s exports and retail sales are soaring, and its foreign-exchange reserves now approach $2.5 trillion, even as America’s fiscal and trade deficits remain alarming. 
That has helped reinforce the Chinese elite’s faith in the country’s fusion of autocratic politics and state capitalism. 
The biggest loser from the global financial crisis, in China’s view, is Uncle Sam. 
That the US remains dependent on China to buy billions of dollars worth of Treasury bonds every week to finance its yawning budget deficit is a sign of shifting global financial power – which China is sure to use for political gain in the years ahead. 
The current spotlight may be on Europe’s financial woes, but the bigger picture for China is that America’s chronic deficits and indebtedness epitomize its relative decline. 
Add to the picture the two wars that the US is waging overseas – one of which is getting hotter and increasingly appears unwinnable – and what comes to mind among China’s leaders is the historian Paul Kennedy’s warning about “imperial overstretch.” 
Against that background, China’s growing assertiveness may not surprise many. 
Deng Xiaoping’s advice – “Hide your capabilities and bide your time” – no longer seems relevant. 
Today, China is not shy about showcasing its military capabilities and asserting itself on multiple fronts. 
As a result, new strains are appearing in China’s relationship with the West, and were in full view at last year’s Copenhagen climate-change summit, where China – the world’s largest polluter with the fastest-growing carbon emissions – cleverly deflected pressure by hiding behind developing countries. 
Since then, China has added to the strains by continuing to manipulate the value of the renminbi, maintaining an abnormally high trade surplus, and restricting goods manufactured by foreign companies in China from entering the domestic market. 
On political and security issues, China has aroused no less concern. 
For example, China’s expanding naval role and maritime claims threaten to collide with US interests, including America’s traditional emphasis on freedom of the seas. 
Yet the plain truth is that America’s economic and military travails are crimping its foreign-policy options vis-à-vis China. 
The US seems more reluctant than ever to exercise the leverage that it still has to press China to correct policies that threaten to distort trade, foster huge trade imbalances, and spark greater competition for scarce raw materials. 
By keeping its currency undervalued and flooding world markets with artificially cheap goods, China pursues a predatory trade policy. 
This undercuts manufacturing in the developing world more than in the West. 
But, by threatening to destabilize the global economy, China threatens Western interests as well. 
Furthermore, its efforts to lock up supplies of key resources mean that it will continue to lend support to renegade regimes. 
Still, America shies away from exerting any kind of open pressure on China. 
US policy today is a study in contrast relative to America’s unabashed exercise of leverage in the 1970’s and 1980’s, when Japan emerged as a global economic powerhouse. 
Japan kept the yen undervalued and erected hidden barriers to foreign goods, precipitating strong pressure – and periodic arm-twisting – by the US for Japanese concessions. 
Today, the US cannot adopt the same approach with China, largely because China is also a military and political power, and the US depends on Chinese support on a host of international issues – from North Korea and Burma to Iran and Pakistan. 
By contrast, Japan has remained a fully pacifist economic power. 
It matters greatly that China became a global military player before it became a global economic player. 
China’s military power was built by Mao Zedong, enabling Deng to focus single-mindedly on rapidly building the country’s economic power. 
Before Deng launched his “four modernizations,” China had acquired global military reach by testing its first intercontinental ballistic missile, the DF-5, with a range of 12,000 kilometers (7,500 miles), and developing a thermonuclear warhead. 
Without the military security that Mao created, it might not have been possible for China to build economic power on the scale that it has. 
In fact, the 13-fold expansion of its economy over the past three decades generated even greater resources for China to sharpen its military claws. 
China’s rise thus is as much Mao’s handiwork as it is Deng’s. 
But for Chinese military power, the US would treat China like another Japan. 

The Art of Finance 
PRINCETON – In the middle of September’s financial meltdown, a remarkable event occurred in London. 
While the City of London was shaken by the collapse of Lehman Brothers and the run on HBOS, Sotheby’s staged a record-breaking auction for the works of the artist Damien Hirst, which produced a gross take of around $200 million. 
Compared to the values that were being destroyed on Wall Street, this was small change; but it was a remarkable vote of confidence in the work of one artist. 
Financial bubbles, like the one that has just definitively burst, are intimately related to the world of art. 
Renaissance Florence depended on the patronage of the Medici. 
Sixteenth-century Venice turned the wealth of the spice trade into the canvases of Titian and Tintoretto. 
The world’s next great commercial center was Amsterdam, where again the successful burghers pushed for a new style of art and produced the age of Rembrandt. 
The great nineteenth- and early twentieth-century financiers, men like J.P. Morgan, Henry Frick, and Andrew Mellon, spent a large part of their fortunes on art. 
From their viewpoint, collecting art was not simply a matter of benevolence or public spiritedness. Nor was it simply a very expensive hobby. 
Their galleries showed in a visible and very public way the discernment and judgment that their financial business depended on. 
Financial judgment, by contrast, is not by its nature open to inspection. 
It depends on inside deals, on moving ahead of the market. 
It is impossible to tell who is making good bets and who is gambling recklessly. 
Consequently, it is helpful to have a proxy activity that enables outsiders to see that the process of discernment and valuation really occurs. 
The recent era of global finance – maybe we can already possibly speak of it as being past – differed from the financial surge of a century ago. 
Its cultural manifestations also appeared to be novel. 
To some of its participants, collecting contemporary art showed how finance had become much more of a creative process than it was the world of the older financiers. 
Morgan or Mellon collected largely old masters from the cinquecento, whose reputation was clearly and solidly established. 
The new art collectors, however, were more like the Medici: they were really stimulating new cultural creation. 
As with their investments, the habitués of contemporary art markets relied not purely on their own judgment, but on teams of sophisticated advisers and dealers who could give opinions on what trends best caught the spirit of the age. 
Naïve outsiders found the world of contemporary art bewildering. 
Why was a cow preserved in formaldehyde a great cultural achievement? 
What did the sheets of cloth covered by regularly interspersed colored dots – the products of Hirst’s large and mechanized workshops – have to do with artistic innovation or originality? 
But was not the same incomprehension on the part of the broad public characteristic of the increasingly sophisticated financial products that were being traded? 
Indeed, the nature of the risks involved was not clear, it seems, even to regulators or the senior management of the firms that were building the business. 
Some modern artists and their patrons explicitly point to the parallel between contemporary art and new financial products. 
Deutsche Bank, Europe’s most prominent art-collecting bank, published the view of academic experts to the effect that customers, the broad public, were “extremely conservative, boring, lack imagination, and don’t know their own minds.” 
After financial implosions, such as the collapse of the dot-com bubble in 2000 or the sub-prime meltdown of 2007-8, such views appear arrogant. 
The parallel between bewildering and apparently meaningless art and unintelligible financial products is damning rather than reassuring. 
So why was the Hirst auction such a success? 
In part, because the art involved was far from being unintelligible. 
The most eagerly anticipated item, a bull with golden horns and hooves, was entitled, with obvious intent, “The Golden Calf.” 
But there was also another motive driving the bidders. 
One hint was that Russian buyers paid the big money, at the very moment that Russia’s banking system was melting down. 
At the same time, there was a surge in demand for gold jewelry. 
The search for non-financial assets looks like characteristic behavior in any financial crisis – what was known during the great drama of hyperinflation in Weimar Germany as “die Flucht in die Sachwerte,” the flight to material assets. 
Art also functions as a store of value. 
But in order to be sure of the reliability of this function, the purchaser must be convinced of the long-term valuation of the object of desire. 
The bankers of the Italian Renaissance also bought works of art because they reminded them of timeless values that transcended quotidian transactions. 
They saw their acquisitions of paintings and sculptures as a connection to eternity. 
Who can say the same for the products of Damien Hirst? 

The Asian Cockpit 
LONDON – With the July terrorist attack on the Indian embassy in Kabul – which left 41 dead and the finger of suspicion pointing at the Pakistani intelligence services – the world was again reminded why the Indian sub-continent has eclipsed the Middle East as the world’s flash-point. 
Both American presidential candidates, Barack Obama and John McCain, have made clear that they expect the Pakistani government to take action against militants, and that they would be willing to authorize strikes inside Pakistan. 
But a more comprehensive Euro-Atlantic approach will be required to deal with the region’s problems. 
The story of Western failure in Afghanistan is now all too familiar, painfully illustrated, almost weekly, by the repatriation of fallen NATO soldiers. 
But the story is repeated across the border in Pakistan, with serious consequences for both countries. 
The optimism that followed the recent Pakistani elections has turned to concern as the government’s negotiations with militants appear to have made a terrorist safe-haven safer and attacks against NATO forces in Afghanistan more frequent. 
Pakistan’s military and intelligence services are sympathetic to an Islamic fundamentalist creed, militant groups affiliated with al Qaeda operate freely on its territory, and government infighting has made it difficult to establish civilian control over the military. 
In any case, the ability of the Pakistani military to deal with the current threat, let alone a widespread insurgency, is questionable, as is Western leverage on Pakistan’s security forces. 
As a result, loss of control of parts of Pakistan to an increasingly capable alliance of militant groups is a serious near-term threat. 
If American policy has failed to deal with this growing problem, European policy has focused on technical assistance, with the European Union providing €125 million in aid between 2002 and 2006. 
Moreover, Europe is Pakistan’s largest trading partner, accounting for 27.4% of total exports and 17% of imports. 
In 2005 alone, EU imports from Pakistan totaled €3.4 billion. 
Yet, despite this, it is hard to escape the conclusion that the EU’s role in Pakistan bears all the hallmarks of the pre-Maastricht polity that it no longer wants to be: technocratic, apolitical, and marginalized by the United States. 
This needs to change. 
The US, even under a new president, cannot succeed in the region without a united front with Europe. 
And Europe cannot hope to achieve its aims with technical programs alone. 
To create a framework for US-European cooperation, work needs to begin now. 
Several reports that will influence the McCain and Obama campaigns are already being written in Washington. 
But none of these will be able to chart a way forward for transatlantic cooperation. 
Moreover, they risk repeating the standard pattern of US-European cooperation: the US as the policy developer and Europe as the apolitical and hesitant money-spender. 
Genuine transatlantic cooperation will require that solutions be developed jointly, and that European leaders “own” the policy options. 
Otherwise, European governments will find it difficult to explain the need to step up efforts in the region, and the European Commission’s technical programs will continue to define the EU’s policy. 
To build the necessary unity and a political strategy, a European Baker-Hamilton-style commission is necessary. 
Such a commission, with senior European members, could examine the key issues in the region, visit all countries and players and develop a set of recommendations for a new transatlantic approach to begin in early January 2009 when a new U.S president is in place. 
And who better to launch this than Nicolas Sarkozy? 
The French president has already played a crucial role in bridging the U.S/European divide on the Afghan mission and - after a successful donor's conference - has taken the help of the EU's rotating, six-month presidency. 
Ideally, such a commission should be independent, but endorsed by the French, German and British governments and EU foreign policy chief Javier Solana, as well as, however tacitly, Senators McCain and Obama. 
Everyone knows of the dangers posed by instability on the Afghan-Pakistan border, in Pakistan and the region. 
In July, Pakistani and Indian soldiers waged a 12 hour gun battle across disputed border. 
But so far, little has been done to develop the kind of Euro-Atlantic consensus about policy options necessary for a new U.S president and Europe to collaborate. 
Worse still, the rejection by Ireland of the Lisbon Treaty threatens to push the issue further back in the queue. 
But European leaders must not take their eyes off real-world problems and drafting a new Euro-Atlantic policy on Afghanistan and Pakistan is as real as it gets. 

The Asian Crisis Ten Years After 
This July marks the tenth anniversary of East Asia’s financial crisis. 
In July 1997, the Thai Baht plummeted. 
Soon after, financial panic spread to Indonesia and Korea, then to Malaysia. 
In a little more than a year, the Asian financial crisis became a global financial crisis, with the crash of Russia’s ruble and Brazil’s real. 
In the midst of a crisis, no one knows how far an economy will drop or for how long. 
But capitalism, since its beginning, has been marked by crises; each time, the economy recovers, but each crisis carries its own lessons. 
So ten years after Asia’s crisis, it is natural to ask: what were the lessons, and has the world learned them? 
Could such a crisis recur? 
Is another crisis imminent? 
Some similarities exist between the situation then and today: before the 1997 crisis, there had been rapid increases in capital flows from developed to developing countries – a six-fold increase in six years. 
Afterward, capital flows to developing countries stagnated. 
Before the crisis, some thought risk premia for developing countries were irrationally low. 
These observers proved right: the crisis was marked by soaring risk premia. 
Today, the global surfeit of liquidity has once again resulted in comparably low risk premia and a resurgence of capital flows, despite a broad consensus that the world faces enormous risks (including the risks posed by a return of risk premia to more normal levels.) 
In 1997, the IMF and the United States Treasury blamed the crisis on a lack of transparency in financial markets. 
But when developing countries pointed their fingers at secret bank accounts and hedge funds, IMF and US enthusiasm for greater transparency diminished. 
Since then, hedge funds have grown in importance, and secret bank accounts have flourished. 
But there are some big differences between then and now. 
Most developing countries have accumulated massive foreign currency reserves. 
They learned the hard way what happens to countries otherwise, as the IMF and US Treasury marched in, took away economic sovereignty and demanded policies intended to enhance repayment to Western creditors, which plunged their economies into deep recessions and depressions. 
Reserves are costly, for the money could have been spent on development projects that would enhance growth. 
Nevertheless, the benefits in reducing the likelihood of another crisis and another loss of economic independence far outweigh the costs. 
This growth in reserves, while providing insurance to developing countries, created a new source of global volatility. 
Especially as the dollar lost its sacred place as a store of value under the Bush administration, rebalancing these multi-trillion dollar portfolios entails selling off dollar holdings, contributing to the dollar’s weakening. 
Developing countries have also increasingly borrowed in their own currencies during the last few years, thus reducing their foreign exchange exposure. 
For those developing countries that remain heavily indebted abroad, an increase in risk premia would almost certainly bring economic turmoil, if not crisis. 
But the fact that so many countries hold large reserves means that the likelihood of the problem spreading into a global financial crisis is greatly reduced. 
In the midst of the 1997 crisis, a consensus developed that there was a need for a change in the global financial architecture: the world needed to do better in preventing crises and dealing with them when they occur. 
But the US Treasury and the IMF realized that the likely reforms, as desirable as they were for the world, were not in their interest. 
They did what they could to ensure that no meaningful reforms occurred during the crisis, with the knowledge that after the crisis, momentum for reform would dissipate. 
They were more right than they knew. 
Who, after all, could have anticipated that Bill Clinton would be followed by a US president committed to undermining the multilateral system in all its manifestations? 
For example, when the IMF correctly suggested, after Argentina’s crisis, that there needed to be a better way of restructuring debt (an international bankruptcy procedure), the US vetoed the initiative. 
When the OECD proposed an agreement to restrict bank secrecy, the Bush administration vetoed that initiative, too. 
Indeed, the two most important lessons of the crisis have not been absorbed. 
The first is that capital market liberalization – opening up developing countries’ financial markets to surges in short-term “hot” money – is dangerous. 
It was not an accident that the only two major developing countries to be spared a crisis were India and China. 
Both had resisted capital market liberalization. 
Yet today, both are under pressure to liberalize. 
The second lesson is that in a highly integrated world, there is a need for a credible international financial institution to design the rules of the road in ways that enhance global stability and promote economic growth in developing countries. 
With the IMF so dominated by the US (it is the only country with a veto) and Europe (which, by custom, appoints its head), the Fund was long seen as representing the interests of international creditors. 
Its failures in the 1997 crisis further undermined its credibility, and its failure to do anything about the massive global financial imbalances that represent the main threat to global financial stability today, have underscored its limitations. 
Reforms are still needed – including an overhaul of the global reserve system. 
We may not be facing a repeat of the global financial crisis of 1997, but make no mistake, imperfections in the global financial system can still be costly, both in terms of global prosperity and stability. 


The Atlantic Divide In Black and White 
Relations between Continental Western Europe and the US have never been so strained in recent decades as they are now. 
Is the cause a short-run disagreement about a specific issue, the war in Iraq? Or is the transatlantic ideological divide deep, pervasive, and unlikely to disappear anytime soon? 
Before diplomats and pundits begin to paper over the two sides' differences, it is necessary to reflect on their sources. 
For we believe that the transatlantic divide does mirror fundamental differences in values--with the immediate caveat that these differences do not, and should not, bring the two sides into conflict. 
The profoundly different values that America and Europe hold can best be viewed by examining how each perceives poverty, inequality, and the welfare state. 
According to the World Value Survey, a respected attitudinal study conducted in about 40 countries, 60% of Americans believe that the poor are "lazy," a view shared by only 26% of Europeans. 
Nearly the exact opposite proportions (60% of Europeans and 29% of Americans) believe that the poor are trapped in poverty. 
Similarly, evidence drawn from surveys about well being indicates that Americans are much less bothered by inequality than Europeans. 
In fact, even the American poor do not mind inequality, which they see as a social ladder that they can climb. 
The European poor view inequality as an insurmountable social obstacle. 
These basic differences lead to obvious consequences for social polices. 
Europe spends twice as much as the US on social programs, and total government spending in Europe is close to 50% of GDP. 
In the US, government consumes about 30% of GDP. 
These numbers are not just about social spending, but have implication for issues like defense and foreign policy. 
If Europe wants to play a more active role in international affairs it must become a military power: the US spends about 4% of its GDP more than Europe for military purposes. 
But this is difficult for Europe to achieve, let alone contemplate: looming deficits and exhausted taxpayers make it hard, if not impossible, to divert several percentage points of GDP to military spending. 
But where do these differences in attitude toward fundamental issues like inequality come from? 
One explanation is that America is a more mobile society where the poor are not trapped and can seemingly get out of poverty if they really try. 
If the poor remain poor, Americans conclude, it must be because they are lazy. 
The European poor do not have such mobility and thus lack the supposed chance that poor Americans possess. 
Even if they try hard, they feel trapped. 
The alternative, and much more likely, explanation is that these differing views reflect profound ideological differences that pay little attention to economic reality. 
In other words, the ideological differences across the Atlantic are much larger than actual differences in social mobility and the supposed laziness of the poor. 
European culture remains profoundly affected by the Marxist intellectual tradition in which classes are viewed as cast in stone--which implies that it is almost impossible for a poor person to become rich, or, apropos the tradition, for a "proletarian" to become a "capitalist." 
Marxism assumes social immobility to justify the concept of "class." 
In many European countries, political institutions were shaped in revolutionary periods in which socialist parties and ideas enjoyed mass support. 
European constitutions often reflect an emphasis on equality and redistribution. 
In America, the Marxist cultural influence was very limited. 
Indeed, outside of universities, it scarcely ruffled American life. 
Instead, the culture (or myth) of the "self-made man" provides the ideological tool for America's social conservatives to justify limited government intervention. 
The US Constitution, though reshaped, amended, and adapted to fit changing times, reflects its origins as a document written and designed to protect private property against the predations of the State. 
The second source of the transatlantic divide in attitudes toward fundamental issues like inequality has to do with racial bias. 
The US is a racially fragmented society, so it is convenient for the majority of wealthy whites to view the poor (many of them black) as different and lazy compared to hard-working whites. 
Indeed, even controlling for income, whites are much less receptive to redistributive policies than non-white Americans, precisely because they perceive them as favoring racial minorities. 
Even poor whites oppose redistributive policies, owing to racial distrust, if not downright animosity. 
Historically, America's racial and ethnic divisions also inhibited the development of a homogeneous working-class culture and movement, which empowered socialist and Communist parties across Europe in the 20 th century. 
In more homogeneous European countries, the differences between rich and poor are much less obvious: in Sweden, rich and poor are all white, often tall and blond. 
Not surprisingly, the European right is beginning to use immigration as a tool to attack the welfare state. 
As Europe becomes increasingly multi-cultural, political pressures against the welfare state seem certain to grow. 
For now, Americans and Continental West Europeans remain very different in their basic attitudes concerning poverty, inequality, and the welfare state. 
It remains to be seen whether these attitudes will persist in their current form, and whether the transatlantic divide widens or narrows. 



The Autumn of the Commandante 
The death watch for Fidel Castro is something that only Gabriel Garcia Marquez could get right. 
His novel Autumn of the Patriarch captures perfectly the moral squalor, political paralysis, and savage ennui that enshrouds a society awaiting the death of a long-term dictator. 
Commandante Fidel’s departure from power, of course, will be solely a matter of biology, and the few pictures of him that have emerged since he took ill last year clearly show biology at work. 
When the end comes, change in Cuba could be as vast as any that greeted the end of the last century’s great dictators. 
Stalin, Franco, Tito, Mao: all were mostly alike in their means and methods. 
How they passed from the scene, however, was often very different, and these differences can shape societies for years and decades to come. 
Consider the Soviet Union. 
On March 9, 1953, from the Gulf of Finland to the Bering Sea, everything stood still; likewise in Warsaw, Budapest, Prague, and East Berlin. 
In Beijing, Mao Zedong himself bowed low before an immense effigy of Joseph Stalin. 
Huge mourning crowds, crying, nearly hysterical, could be seen all over the vast empire Stalin had ruled. 
Yet, within days, the word Stalinism was being expunged from a new Soviet dictionary, and three years later my grandfather, Nikita Khrushchev, denounced Stalin’s “cult of personality” in his famous “Secret Speech” to the Communist Party’s XXth Congress. 
The Khrushchev thaw that followed may have been short-lived, but for the first time in Soviet history the possibility of change was opened – a possibility that Mikhail Gorbachev seized upon in 1985. 
The death of Marshal Josip Broz Tito brought forth an outpouring of another sort. 
For decades, his personal rule imposed a false unity on Yugoslavia. 
Following his death in 1980, that artificial state began to unravel, culminating in the genocidal wars in Bosnia, Croatia, and Kosovo of the 1990’s. 
Not all long-term dictatorships, however, end in disintegration and mayhem. 
Mao’s death allowed for Deng Xiaoping’s return from disgrace and internal exile. 
Deng quickly routed Mao’s “Gang of Four” heirs, and in only a few years opened China’s economy, fueling a capitalist revolution that has transformed China far more completely – and successfully – than Mao’s socialist revolution ever did. 
The Communist Party, of course, remains in power, and Mao’s portrait still looms over Tiananmen Square. 
But both are mere relics of ideas and ideals that in reality have been consigned to the dustbin of history. 
Spain, too, escaped violent dissolution when Generalissimo Francisco Franco’s fascist dictatorship collapsed at his death. 
Here the old dictator can take some credit, for by re-establishing the monarchy under King Juan Carlos just before he died, Franco provided Spain with a foundation on which to build anew. 
Little did Franco realize that what Juan Carlos would build, with the help of a clever young Franco-era bureaucrat named Adolfo Suarez, was the modern, democratic Spain of today. 
It was no accident that communist countries were (and are) usually run by geriatric leaders, and democracies by younger men and women. 
That difference matters. 
Old leaders can preside successfully over smoothly running countries that need no radical re-examination of their policies and purposes. 
There are exceptions to this rule, of course – Churchill, Adenauer, Deng, Reagan – but states cannot count on fortune bringing an exceptional ruler their way. 
Younger leaders are more likely to be able to cope with the chop and change of difficult times. 
Political competition makes it necessary for all politicians, whatever their age, to stay on their toes, anticipate new problems, and remain open to new ideas aimed at addressing them. 
No one can keep himself ensconced in high office subject only to death or his own boredom. 
One-party systems, one-man charismatic dictatorships, or a mixture of the two, as in Tito’s Yugoslavia, are a guarantee of sclerotic minds and inert governments. 
So what will become of Cuba after Fidel departs? 
Many observers portray Raúl Castro, Fidel’s younger brother and designated heir, as a pragmatist – the “practical Castro.” 
When Cuba’s lavish Soviet subsidies vanished in the early 1990’s, it was Raúl who recognized that the regime’s survival required economic reforms, pressing to allow private agricultural markets to reopen in order to boost food production and stave off possible starvation. 
However, this is the same man who, as the head of Cuba’s internal security apparatus, for many years represented the knuckles of an iron-fisted regime, directly responsible for imprisoning – and often torturing – thousands of dissidents. 
So perhaps the best that could be hoped for is a Russian-style experiment with liberalization that is quickly called off by the regime’s nervous Old Guard. 
Moreover, with the support of oil-rich allies like Venezuela’s President Hugo Chávez – and with the recent discovery of significant crude reserves off Cuba’s own coast – introducing reforms could well become less urgent. 
In that case, Raúl may seek to cling grimly to the fossilized system that he helped build and maintain with such brutality. 
But Raúl Castro is an old man himself, so we can hope for the prospect that some Deng or, better yet, a Suarez will ultimately emerge from the wreckage of Fidelism. 
But for now, younger communist officials, like Foreign Minister Felipe Perez Roque, remain ideological hardliners whom many Cubans refer to as “los Taliban.” 
If they take control and stick to their guns, Cuba could face another long biology lesson. 

The Ayatollah and the Witches 
WASHINGTON, DC – Mahmoud Ahmadinejad has now made the mistake that all Iranian presidents make: he has challenged the authority of the country’s Supreme Leader, Ayatollah Ali Khamenei. 
He is doomed to fail. 
The challenge posed by Ahmadinejad is such a predictable part of Iranian politics that it has come to be known as “the president’s symptom.” 
It emerges from a president’s confidence that, as a popularly elected leader, he should not be constrained by the Supreme Leader’s oversight. 
But the Islamic Republic’s history is littered with its presidents’ failed attempts to consolidate an independent power center. 
Ultimately, divine authority trumps political authority. 
This dual authority is embedded in the Islamic Republic’s constitution, and inevitably tilts toward the divine, particularly in a president’s second term. 
Ahmadinejad is not an exception to this rule. 
In fact, because he has pushed harder than his predecessors, his star is falling faster. 
Moreover, the controversial presidential election of June 2009, and the political crisis that ensued, irreparably damaged Ahmadinejad’s democratic legitimacy. 
Khamenei was forced to use his authority to support the president, and has since repeatedly condemned the “Green Movement” that opposed Ahmadinejad’s re-election. 
As a result, Ahmadinejad has been the most costly president for Khamenei to date, because he forced the Supreme Leader to deplete his power in the face of a common enemy – a move that called into question his own judgment and tarnished his reputation. 
Ahmadinejad himself, however, has generally ignored the post-election crisis in his public statements, and evidently believed that Khamenei’s post-election support meant that the Supreme Leader would remain passive in the face of encroachments on his traditional powers and prerogatives. 
Indeed, for the last two years, Ahmadinejad has repeatedly undermined parliament, and abruptly dismissed ministers tied to Khamenei, like Foreign Minister Manouchehr Mottaki and Intelligence Minister Heydar Moslehi. 
Since becoming Supreme Leader 22 years ago, Khamenei has been relatively weak, but has adapted by seeking to encourage weakness in the Islamic Republic’s other high offices. 
He has supported factionalization in the government, and, when necessary, has weakened factions that he previously supported. 
Most importantly, he has ensured that Iran’s presidents remain weak, regardless of their agenda or popularity. 
So, now that the threat posed by the Green Movement has diminished – at least in Khamenei’s eyes – the time has come to call Ahmadinejad to account. 
Both men are hard at work preparing for the March 2012 parliamentary election, as well as the 2013 presidential election, and Khamenei has taken off the gloves. 
He has given official propagandists the green light to attack Ahmadinejad and his cronies explicitly, portraying them as people who do not believe in the principle of the guardianship of the Shia jurist, the key concept bequeathed by the Islamic Republic’s founder, Grand Ayatollah Ruhollah Khomeini. 
In the official view, Ahmadinejad and his circle lack rationality and wisdom; indeed, they are said to be in the grip of superstition. 
There are even rumors that some of them have resorted to witchcraft to summon spirits from beyond the grave, and that Ahmadinejad has had direct contact with the hidden Imam (the Shia messiah). 
Likewise, the judiciary, under Khamenei’s control, has accused the vice president, Mohammad Reza Rahimi, of leading an economic mafia, and many of Ahmadinejad’s allies have been arrested or are under investigation. 
It is likely that the Guardian Council, which can veto legislation and bar candidates from standing in elections, will use its power to shift the balance in favor of Ahmadinejad’s conservative critics. 
The anti-Ahmadinejad camp’s leaders, the brothers Ali and Sadeq Larijani, who head the parliament and judiciary, respectively, will help Khamenei to push the president from the center of power. 
But, since Khamenei cannot accept a single, united political faction, it is extremely unlikely that he will let the Larijani camp (which includes Tehran Mayor Mohammad Baqer Qalibaf and former Foreign Minister Ali Akbar Velayati) become powerful enough to win the next presidential election. 
Khamenei will likely create a new faction to compete with traditional conservatives after Ahmadinejad’s decline. 
This might force him to pick a new face for the next presidential election, someone with little domestic-policy experience and little influence on ordinary people’s lives. 
One possible candidate is Said Jalili, Iran’s current nuclear negotiator, or someone like him. 
Only those with a strong background in intelligence or the Revolutionary Guards, and a low profile in domestic politics, need apply. 
Having full control over the judiciary, the intelligence apparatus, and the military makes Khamenei seem invincible against all political factions or elected officials. 
This will lead the regime down an increasingly autocratic path, applying more aggression at home and defying the West with greater self-confidence. 
But the concentration of power in the Supreme Leader’s hands poses risks for the Islamic Republic. 
When Khamenei dies, there is no strong and obvious successor. 
And, since he has systematically weakened Iran’s political institutions so that the Islamic Republic itself has come to be identified with his person, his absence will create a vacuum. 
His strength today foreshadows greater uncertainty in Iran’s future. 

The Ayatollah Contemplates Compromise 
WASHINGTON, DC – The recent nuclear talks in Istanbul between the five permanent members of the United Nations Security Council, plus Germany, and Iran have shifted the world’s focus to the possible terms of a deal when the sides meet again, probably in Baghdad on May 23. 
So, what accounts for the new seeming willingness of Iran’s leaders to reach an agreement? 
Economic sanctions and political isolation have, of course, deeply hurt the regime, especially the Revolutionary Guards, whose leaders and industries have been directly targeted by the international community. 
But these are not the only factors. 
The regime’s propaganda machine is already portraying the Istanbul talks as a triumph for the Islamic Republic and a setback for the West. 
Indeed, it is setting the stage for a significant compromise by preparing both the Iranian public and the global community. 
Iran, it must be remembered, cares as much about its image as it does about its nuclear achievements. 
A successful strategy must allow Iran to come out of talks with a smile on its face, even if it gives up the most sensitive parts of its nuclear program. 
Ayatollah Ali Khamenei, Iran’s Supreme Leader, has made an uncompromising nuclear policy central to his domestic authority. 
For years, he sabotaged the efforts of Iranian officials who might have cut a deal with the West because he doubted their loyalty to him. 
Those whom Khamenei did trust were not skillful enough to craft a policy of compromise that would preserve his ability to portray himself as a tough anti-American leader. 
As the talks move ahead, the United States and its allies must stick to a dual-track policy: intensifying political pressure and economic sanctions, while negotiating seriously. 
They should insist on transparency in Iran’s nuclear program, while offering a gradual easing of sanctions in exchange for verifiable guarantees that the regime is not pursuing nuclear weapons. 
If things break down, the possibility of a pre-emptive military strike, whether by Israel or the US, remains an option. 
Regardless of their outcome, the new negotiations have put Khamenei in a perilous position. 
As the person in charge of Iran’s nuclear policy, compromising is as dangerous for him as digging in his heels. 
This might be the last chance for Iran to change its nuclear policy, prevent military confrontation, and save the economy. 
But, for Khamenei, nuclear concessions might also undermine his monopoly over domestic politics. 
Khamenei is not a suicidal jihadist. 
In 23 years of leadership, he has avoided risky domestic and foreign policies. 
But he is not immune to miscalculation. 
In 2005, Mahmoud Ahmadinejad relied on Khamenei’s financial and political support to win the presidency. 
Today, however, Khamenei is profoundly regretful about that choice. 
Ahmadinejad disobeys his orders, tries to discredit him with the public by challenging his authority, and undermines key institutions, including the judiciary and the parliament. 
It is an open secret in Iranian political circles that Khamenei also regrets permitting volunteers of the Basij militia to attack the British embassy last November. 
The troubling conclusion to be drawn from these episodes is that even if Khamenei is not looking for a military confrontation, he may very well be susceptible to misjudgments about how to avoid one. 
Khamenei faces a deeper problem: he is not Ayatollah Ruhollah Khomeini, his predecessor and the Islamic Republic’s founding Supreme Leader, who shaped the system’s identity. 
Khomeini was so self-confident, and his authority was so well consolidated, that he was not afraid to make concessions if he thought it necessary for the regime’s well-being. 
Khamenei’s political standing is closely associated with the current nuclear policy, and he lacks the charisma and authority necessary to move the political and religious elite toward compromise. 
For Khamenei, nuclear capability is not a goal but rather a means to force the West and its regional allies to recognize the regime’s strategic interests. 
Moreover, he is convinced that the West is seeking to undermine the Islamic Republic through a “soft” assault of culture and politics, and that compromise on the nuclear program would lead inevitably to concessions on human rights and democracy, and eventually to regime change. 
Given this, a guarantee that the West, especially the US, is not seeking the overthrow of Iran’s leaders would have to be a key component of a nuclear compromise. 
Indeed, Khamenei might well demand that this guarantee cover Farsi broadcasts, financial and political support to opposition groups, and censorship of the Internet. 
The nuclear crisis should be resolved through negotiations, before, in US President Barack Obama’s phrase, the window closes. 
The problem for Khamenei – and thus for those negotiating with Iran – is that there is scant benefit for him in success. 
The biggest obstacle to a successful outcome is the contradiction of his situation: to compromise, he must save face; but, to save face, he must not compromise. 

The Ayatollahs’ Tipping Point 
SOUTHAMPTON, ENGLAND – Once the crowds were in the streets in Tehran, one could, if one knew the script, begin the countdown: if today there are mass protests, tomorrow there will be threats of retaliation in the name of “national security.” 
By day three, we will see journalists imprisoned and media shut down; day four, bloody reprisals against protesters by secret police; day five, arrests of key opposition figures. 
Sure enough, right on schedule, each of those steps was set in motion in Iran, within the space of a week. 
These same ten steps occurred in Thailand in 2006 – in ten days, and in seven days in Myanmar a year later. 
The script is so well known by now among the world’s would-be dictators that it can take less than a week to lock down a country. 
None of this should surprise anyone anymore. 
We should understand that this time-tested script for establishing or enforcing a dictatorship exists – but so does a counter-strategy for opening up a closed society. 
When a would-be dictator – anywhere, any time, on the right or the left – wants to close an open society or initiate a crackdown against a democracy movement, he follows ten classic steps: invoke a threat, create secret prisons, develop a paramilitary force, establish a surveillance apparatus, arbitrarily detain citizens, infiltrate citizen groups, target key individuals, go after journalists, call criticism “treason,” and subvert the rule of law. 
Once these steps are put in place, it is extremely difficult for a pro-democracy movement to survive – but not impossible if counter-pressure is applied correctly. 
History shows again and again – throughout the modern era and around the world – that people do indeed have some powerful tools to reestablish an open society if they were willing to use them. 
The counter-script for establishing or restoring pro-democratic conditions consists of more mass protest; the appearance and display of resistance symbols; the emergence of enough spokespeople throughout society that all of them cannot be arrested at once; overt civil and covert disobedience, at every level of society, that brings the economy to a halt; withdrawal of support by lawyers and judges for the regime’s decisions; international sanctions tied to human rights and clean elections; the refusal – tricky but not unattainable – of many soldiers and police to fire at unarmed citizens; and, finally, when the rule of law is reestablished, serious prosecutions of the defeated regime’s ringleaders. 
When we see footage of nonviolent protesters being brutally beaten by police and militia members, it is painful to deliver the message that, if history is a guide, continued street protest will make the difference between Iran being like Myanmar or, possibly, like Czechoslovakia. 
Time and again, when mass street protest has been sustained for more than a week or two, a regime – even one that has begun beating and arresting protesters –eventually finds it practically and psychologically difficult to sustain its hold. 
Street protest, if it can sustain itself for more than that crucial first week, has an effect that is both tactical and emotional; mass protest during the French Revolution made it clear to the courtiers that this rebellion would be too profound to quell in the usual manner; street protests in the American colonies, in the face of arrest or worse, made the colonies ungovernable even before George III waged a costly, unpopular war. 
In Estonia in the 1980’s, the small, illegal protests that surrounded the public singing of the banned national anthem grew, and Estonians were emboldened as their numbers swelled by the thousands daily. 
In the United States, street protests helped bring the Vietnam war to an end, and the mass protests of the civil rights movement showed that, as Martin Luther King, Jr. put it, “business as usual” could no longer continue. 
According to King, disruptive mass protest exposes the tension that has been hidden or ignored, so that it can be addressed. 
Iran’s citizens – and all people longing to resist a tyrannical government or to protest in an established democracy – should bear that lesson in mind. 
Protest that works must disrupt business as usual and, ideally, stop traffic. 
Iranian citizens have shown great courage, and they would do well to continue pouring into the street and sitting down, lying down, or standing still. 
Unless a regime is willing to start machine-gunning its citizens, peaceful, steady, long-term disruption of “business as usual” always works. 
What the West can do is apply pressure on Iran – and on other governments in the future – to assure and account for the safety of protesters. 
Natan Sharansky said that this tactic – the West tracking and demanding accountability for the treatment of individual internal dissenters – helped break up the Soviet Union. 
In this crisis, the US president should form a united front with human rights groups, which can advise him exactly how to follow, sustain, and support those Iranians who have been or may yet be arrested, or worse. 
Barack Obama says that America “stands with” those who support free assembly. 
That will be welcome news to people living under dictatorial regimes installed and propped up by the US, and to the opposition leaders and journalists languishing in US-supported prisons in those countries for having engaged in just such protest. 
But it is a start. 
What a real revolution it would be if the Western democracies did indeed begin to frame their foreign policies with human rights and democratic processes as their benchmark. 

The Bailout Bias 
WARSAW – The seemingly never-ending debate over the eurozone’s fiscal problems has focused excessively on official bailouts, in particular the proposed purchase of government bonds on a massive scale by the European Central Bank. 
Indeed, we are warned almost daily – by the International Monetary Fund and others – that if bailout efforts are not greatly expanded, the euro will perish. 
For some, this stance reflects the benefits that they would gain from such purchases; for others, it reflects mistaken beliefs. 
Creditors obviously support bailing out debtor countries to protect themselves. 
Many political leaders also welcome official crisis lending, which can ease market pressure on them. 
The media, meanwhile, always thrives on being the bearers of bad news. 
Mistaken beliefs, on the other hand, are reflected in metaphors like “contagion” and “domino effect,” which imply that financial markets become blind, virulent, and indiscriminate when they are disturbed. 
Such terms provoke fear that, once confidence in any one country is lost, all others are in danger. 
According to this logic, it follows that only a formidable countervailing power – such as massive official intervention – can halt the ravenous dynamics of financial markets. 
Widespread use of expressions like “aim a bazooka at the eurozone,” and “it’s them or us,” demonstrates a pervasive Manichean view of financial-market behavior vis-à-vis governments. 
But financial markets, even when agitated, are not blind. 
They are capable of distinguishing, however imperfectly and belatedly, between macroeconomic conditions in various countries. 
This is why interest-rate spreads within the eurozone have been widening, with Germany and the Nordic countries benefiting from lower borrowing costs and the “problem” countries being punished by a high-risk premium. 
Another, related, fallacy is the assumption that reforms can reap benefits only in the long run. 
This misconception reduces the short-term solution to affected governments’ sharply higher borrowing costs to bailouts. 
In fact, properly structured reforms have both short- and long-term effects. 
For example, one does not need to wait for the completion of a pension reform to see reduced yields on government bonds. 
Markets react to credible announcements of reforms, as well as to their implementation. 
The countries that have been severely affected by the financial crisis illustrate the impact of reform. 
One group – Bulgaria, Estonia, Latvia, and Lithuania (BELL) – experienced a surge in yields on their government bonds in 2009, followed by a sharp decline. 
Another group – Portugal, Ireland, Italy, Greece, and Spain (PIIGS) – has had more mixed outcomes: yields have soared on Greek and Portuguese bonds, while Ireland’s were falling until recently. 
These differences can be explained largely by the variations in the extent and structure of these countries’ reforms. 
Proper reforms can produce confidence and growth. 
Official crisis lending can buy time to prepare, and it can help to stop a banking-sector crisis, but it cannot substitute for reform. 
All bailouts can create moral hazard, because they weaken the incentive to implement reforms that will avoid bad outcomes in the future. 
To some extent, official crisis lending replaces the pressure from financial markets with pressure from experts and creditor countries’ politicians. 
Among the proposed eurozone bailouts, none has come under the spotlight as much as the idea that the ECB should purchase massive quantities of the problem countries’ bonds. 
Advocates of this approach stretch the concept of “lender of last resort” to suggest that providing liquidity to commercial banks is the same as funding governments. 
They also present the alternative to a bailout as a “catastrophe.” 
Finally, they cite similar policies implemented by the United States Federal Reserve, the Bank of England, and the Bank of Japan – as though merely mentioning past examples is evidence that ECB lending will work. 
These rhetorical devices must not overshadow careful analysis of the various options. 
There has been surprisingly little comparative analysis of the effects of quantitative easing (QE) in Japan, the US, and Britain. 
Yet the evidence indicates that QE is no free lunch. 
Although it may offer potential benefits in the short run, costs and risks invariably emerge later. 
In Japan, QE may have contributed to delays in economic reform and restructuring, thereby weakening longer-term economic growth and exacerbating fiscal distress. 
In the US, it failed to avert the slowdown during 2008-2011, while America’s 2011 inflation figures may turn out to be higher than they were in 2007. 
In Britain, economic growth is even slower, while inflation is much higher. 
And these countries’ QE has also fueled asset bubbles in the world economy. 
Massive purchases of government bonds by the ECB would be the worst type of bailout. 
The fact that such purchases are potentially unlimited would exacerbate the problem of moral hazard. 
It would also increase the risk of inflation, along with other negative economic consequences. 
Moreover, such a bailout could undermine the ECB’s trustworthiness as guardian of the euro’s stability, particularly in light of the new political power that it would obtain. 
And it would further undermine the rule of law in the EU at a time when confidence in the Union’s governing treaties is already fragile. 
The key to resolving the eurozone crisis lies in properly structured reforms in the ailing countries. 
Indeed, experience shows that there is no substitute. 

The Balkans on Trial 
Serbia’s long tragedy looks like it is coming to an end. 
The death of Slobodan Milosevic has just been followed by Montenegro’s referendum on independence. 
Independence for Kosovo, too, is inching closer. 
The wars of the Yugoslav succession have not only been a trial for the peoples of that disintegrated country; they also raised huge questions about the exercise of international justice. 
Do international tribunals of the sort Milosevic faced before his death promote or postpone serious self-reflection and reconciliation in damaged societies? 
Do they strengthen or undermine the political stability needed to rebuild wrecked communities and shattered economies? 
The evidence on these questions is mixed. 
Indeed, the record of the International War Crimes Tribunal for Former Yugoslavia (ICTY), based in The Hague, may be instructive in judging the credibility of the strategy of using such trials as part of the effort to end civil and other wars. 
In 13 years, the ICTY, with 1,200 employees, spent roughly $1.25 billion to convict only a few dozen war criminals. 
Moreover, whereas members of all ethnic groups committed crimes, in its first years, the ICTY indicted and prosecuted far more Serbs than others, fueling a perception, even among opponents of Milosevic’s regime, that the tribunal was political and anti-Serbian. 
We may regret that Milosevic’s own trial ended without a conclusion. 
But a conviction only of Milosevic, however justified, without parallel penalties for his Croat, Bosniak, and Kosovo-Albanian counterparts would hardly have contributed to serious self-reflection within the post-Yugoslav nations. 
To be sure, the arrest of General Ante Gotovina, adored by many Croats as a hero, but responsible for the brutal expulsion of a quarter-million Serbs from Croatia and north-west Bosnia – the biggest ethnic cleansing in Europe since WWII – improves the ICTY’s standing. 
But Milosevic’s Croatian and Bosniak counterparts, Franjo Tudjman and Alija Izetbegovic, respectively, remained unindicted when they died. 
So, too, the main commanders of the Kosovo Liberation Army (UCK). 
Ramush Haradinaj, the prime minister of Kosovo, was accused but later released from detention. 
I have always been convinced that Milosevic should have been put on trial in Belgrade. 
After all, Milosevic’s critics and political rivals such as the journalist Slavko Curuvija and Milosevic’s former mentor, Ivan Stambolic, were assasinated by Serb police agents, who also tried three times to murder the opposition leader Vuk Draskovic. 
There was, moreover, ample evidence of corruption among Milosevic’s inner circle, including members of his immediate family. 
Holding the trial in Belgrade might have served better to catalyze a sober examination of the past. 
The atmosphere was certainly favorable. 
The majority of Serbs hold Milosevic responsible for the decline of their society. 
Even before his fall, the opposition controlled most big Serbian cities, and in 2000 he lost the election that he called to shore up his authority. 
The relatively small turnout at his funeral confirmed that only a minority of Serbs considers him a national hero. 
Meanwhile, with the exception of Slovenia, the democratic transformation in the post-Yugoslav region remains uneasy. 
Wars, ethnic cleansing, embargoes, and sanctions created not only psychological traumas, but also black markets, smuggling, large-scale corruption, and de facto rule by mafias. 
The bombing of Serbia by NATO in 1999 heavily damaged its economy, with serious consequences for neighboring countries. 
The definitive end of what remains of Yugoslavia may – at least today – pose no danger of war, but the Muslim Sandjak region will now be divided by state boundaries, and Albanian extremists, with their dreams of a Greater Albania, believe their influence in a separate Montenegro will be reinforced with a yes vote on independence. 
Most Serbs and Croats in Bosnia believe that the best solution to the problems of that sad country would be to join the territories that they inhabit with their “mother” countries. 
Then there is the unresolved status of Kosovo, where the Albanian majority demands independence, and extremists threaten to fight for it. 
As one Kosovo Liberation Army commander warned, “If we kill one KFOR soldier a day, these cowards will leave.” 
With independence, the extremists would gain a territorial base from which to undermine Macedonia, southern Montenegro, and southern Serbia, jeopardizing stability in the entire region. 
Serbia is offering Kosovo the formula “less than independence, more than autonomy.” 
It demands security guarantees for the Serbian minority and cultural monuments, as well as control of the borders with Albania and Macedonia to stop traffic in arms, drugs, and women, and to prevent the use of Kosovo by Albanian extremists. 
Any resolution of Kosovo’s status is problematic, but the international community should not repeat old mistakes. 
In 1991, the principle that only a politically negotiated division of Yugoslavia would be recognized was abandoned. 
Now, as then, a change of boundaries without the consent of all concerned parties would not only violate international law, but could also lead to violence. 
The international community must not be gulled into thinking that war-crimes trials marginalize, rather than mobilize, extremists and nationalists. 
Pressure on Croatia and Serbia to arrest and hand over suspects – a condition of EU accession negotiations – has yielded several extraditions and may result in more. 
But further trials alone are unlikely to bring about the long-term settlements that the region’s fragile states need in order to ensure stability and democratic development. 
The people of the Balkans should feel that the EU offers them political and economic support. 
They deserve it. 

The Banality of Abu Ghraib 
As more images of debased Iraqi detainees ricochet around the world, many viewers are as bewildered as they are outraged. 
How could ordinary American soldiers, whether they were following orders or acting on their own, appear so untroubled, even exhilarated by their brutish conduct? 
To be sure, over-eager military-intelligence interrogators, as well as the Bush Administration's high-handed attitude toward international law, helped precipitate the crisis. 
But few commentators have focused enough attention on the site of this macabre theatre - not a battlefield, but a prison. 
Prison experts are the least surprised by the grotesque reports filtering out of Abu Ghraib. 
They recognize that prisons, as uniquely divisive and authoritarian institutions, regularly give rise to behaviors that appear depraved to the wider world but come to seem acceptable - even normal - behind bars. 
Indeed, some of the most publicized prison scandals have erupted in the United States, which incarcerates more people in absolute and per capita terms than any other country. 
Compared to Saddam Hussein's murderous old regime at Abu Ghraib, of course, American prisons are relatively well managed. 
But as mandatory sentencing rules have landed more and more Americans behind bars, incidents that bear a disquieting resemblance to the degenerate cruelties photographed in Iraq have come increasingly to light. 
The connection is no accident. 
Some of the US scandals tie American prison personnel directly to Abu Ghraib. 
In Virginia, for instance, human rights advocates report that inmates at two "supermax" prisons have been hooded and subjected to "excessive and malicious use of force by prison staff," often involving electric shock devices and rubber bullets. 
John J. Armstrong, now the assistant director of operations for US prisons in Iraq, resigned from his previous post when he was named in two wrongful death lawsuits at one of those prisons. 
Sergeant Ivan Frederick, the man directly in charge of the infamous Abu Ghraib "hard site," previously worked as a Virginia corrections officer. 
In Pennsylvania, a 1998 inquiry into a supermax prison notorious for racist guards revealed videotapes of routine beatings and elaborate rituals of humiliation. 
Specialist Charles A. Graner, identified as a ringleader in the Abu Ghraib depravity, has worked at that prison since 1996. 
Some of the worst abuses have surfaced in Texas, America's death penalty capital and home to more prisoners than Germany, France, Belgium, and the Netherlands combined. 
When George W. Bush was governor, a federal judge ruled that the state's entire penal system was pervaded by a "culture of sadistic and malicious violence." 
Texas prison guards regularly rely on excessive force, the judge concluded, officials ignore sexual enslavement, and the state's isolation units function as "virtual incubators of psychoses." 
Despite this appalling record, the US occupation authorities in Iraq appointed a former director of the Texas prison system, Lane McCotter, to help set up operations at Abu Ghraib in May 2003. 
Two months earlier, McCotter's private prison company was cited by the US Justice Department for lax supervision and mistreatment of inmates at a New Mexico jail. 
Before that, McCotter led Utah's corrections department, but was forced to resign after the death of a schizophrenic inmate who had been stripped naked and strapped to a restraining chair for 16 hours. 
Of course, malicious imprisonment is by no means uniquely American. 
Even in Western Europe, which boasts the most rehabilitation-oriented penal systems, ghastly scandals periodically erupt. 
In 2000, the chief physician at Paris's crumbling La Santé penitentiary, Veronique Vasseur, wrote a scathing exposé of "virtually medieval" conditions, complete with rat infestations, rotten food, extreme temperature variations, desperate self-mutilations, bullying, drug-dealing guards, and widespread sexual assault, often perpetrated by staff. 
According to a 2003 report, conditions have worsened since Dr. Vasseur's report, and France's overcrowded prisons are on a "descent to hell." 
Particularly troubling is France's protracted incarceration of pre-trial suspects. 
In a country that regards itself as a civilized counterweight to belligerent American hegemony, nearly half of all prisoners have never been convicted of a crime. 
Why do prisons the world over concentrate such suffering and misconduct? 
Partly by design. 
Prisons herd together angry, unruly people against their will. 
While the best facilities provide programs to help prisoners reintegrate into society, prisons also subject inmates to strict, often arbitrary discipline and depersonalizing rituals like numbering and strip searches - practices that foster more rage than reformation. 
On the other side of the bars, low-paid, often poorly trained corrections officers exercise near-absolute authority over an irascible population. 
In time, even the most well meaning come to regard their wards with cold detachment, if not dehumanizing contempt. 
Not all prisons succumb to these corrosive and polarizing dynamics. 
But penologists recognize that certain factors - including overcrowding, insufficient guard training, detached management, shoddy infrastructure, racial tensions, and lack of public accountability - make disaster almost inevitable. 
Many of these conditions pervade prisons worldwide. 
All of them were present in Iraq - in addition to the strains of combat and officially approved interrogation techniques that senior US officials now admit violated the Geneva Conventions. 
Rather than heeding warnings from the Red Cross and others, however, Pentagon officials let dangerous prison dynamics spin out of control. 
A flurry of investigations will now try to figure out what went disastrously awry at Abu Ghraib. 
But ensuring that "justice is done," as US Secretary of State Colin Powell promised, means that judgment must not stop at the low-ranking soldiers who were foolish enough to pose for demented snapshots. 
More importantly, the abuses in Iraq demand careful scrutiny of detention practices not only there, but in our own communities as well. 

Central Banking’s New Face 
LONDON – A changing of the guard is underway at many of the world’s leading central banks. 
Haruhiko Kuroda is now installed as the governor of the Bank of Japan (BOJ), faced with the daunting task of ending two decades of stagnation. 
Mark Carney, the Bank of Canada’s current governor, who is set to take over as the governor of the Bank of England (BoE) in July, is already making his presence felt in British monetary-policy debates. 
And in the United States, the expected conclusion of Ben Bernanke’s term as Chairman of the Federal Reserve Board in January is already inviting speculation about his successor. 
The only holdouts among the world’s leading economies are the eurozone and China. 
But that does not necessarily imply constancy. 
Mario Draghi has been the president of the European Central Bank for barely a year, and the governor of the People’s Bank of China, Zhou Xiaochuan, was almost replaced when he reached retirement age in February. 
Twenty years ago, such developments would have interested mostly bankers and businesspeople. 
But, since the global financial crisis, the need to revive and sustain economic growth in the US, the United Kingdom, and Japan – and to avoid financial collapse in the eurozone – has prompted major central banks to be more outspoken and pursue more aggressive monetary policies, including unconventional measures like quantitative easing (QE). 
As a result, many central bankers have become household names; some even have tabloid nicknames, like “super Mario” Draghi. 
This new prominence has also forced some central bankers to reassess their decision-making processes. 
In Japan, outsiders recently got a rare glimpse into the BOJ’s activities when minutes of a policy meeting were leaked. 
Likewise, the accidental release a day early of the minutes from the Fed’s March rate-setting meeting to more than 100 people, including banking executives, congressional aides, and bank lobbyists, raised questions about how the bank controls the disclosure of privileged information. 
In fact, the Fed has been under increasing scrutiny since 2008, when near-zero nominal interest rates drove it to become the first central bank to adopt QE. 
In a push to reduce the cost of borrowing, the Fed purchased long-term assets in the market, injecting liquidity into the financial system. 
The BoE and the ECB have since adopted similar measures. 
In early April, the BOJ announced plans to unleash the most aggressive bond-buying program of all, promising to inject $1.4 trillion into the economy over the next two years in order to meet an inflation target of 2%. 
This is monetary policy on steroids, and, to opponents of inflation-inducing money creation, it amounts to playing with fire. 
But, for Japan, which has been struggling with deflation for a generation, it is a risk worth taking. 
Whether Kuroda’s assault will bolster domestic consumption and investment remains to be seen. 
Unconventional measures are part of a broader transformation of monetary policymaking. 
In addition to becoming bolder and more expansive, it has become increasingly intertwined with fiscal policy. 
This is most explicit in Japan, where monetary policy is a central component of Prime Minister Shinzo Abe’s economic strategy, dubbed “Abenomics,” implying collaboration between the government and the central bank. 
Does this undermine central-bank independence by amounting to a de facto subordination of unelected technocrats to elected politicians? 
Arguably, Japan is an exceptional case, with the constraint of the zero bound on nominal interest rates demanding, at long last, a deviation from conventional measures. 
In Europe, however, Bundesbank President Jens Weidmann has criticized the ECB for overstepping its mandate with its “outright monetary transactions” program, through which Draghi aims to fulfill his pledge to guarantee the euro’s survival. 
As a result, questions about the role of monetary policy and the independence and accountability of central banks, once confined to rarefied academic discussions, are fixtures of broad policy debate. 
But, rather than try to define a single approach, central bankers should aim to develop individualized approaches within the orthodox monetary-policy framework, which revolves around price stability and independence. 
For example, the Fed’s mandate dictates that price stability can be explicitly linked to active support for GDP growth and employment; for the BoE and the ECB, it can be a condition for achieving the broader goal of sustainable growth and employment. 
As long as politicians observe the rule of non-interference – at least publicly – central banks will be perceived as unconstrained by political interests. 
The BOJ, by demonstrating that aggressive money creation is a legitimate approach to fighting deflation, has broken previously sacrosanct conventions. 
At the same time, it has taken the unprecedented step of incorporating monetary policy into a comprehensive economic strategy based on coordination among different policy areas and their associated institutions. 
This integrated approach could prove effective in countries where the real economy and the financial sector are closely linked, ensuring the timely, orderly implementation of policies, while preventing adverse spillovers. 
Such coordination would infringe on central-bank independence no more than multilateral cooperation undermines the sovereignty of the countries involved. 
While the impact of Abenomics on Japan’s economy remains to be seen, its impact on debates about monetary policy and the relationship between central banks and governments is already becoming apparent. 
One hopes that Carney will follow this trend of challenging conventional wisdom at the BoE. 
A new era of active and varied monetary policy may have begun, with potential benefits for all. 

The Bankers’ Capital War 
PARIS – Almost everyone nowadays agrees that banks need more capital. 
Christine Lagarde chose to make it her first campaign as Managing Director of the International Monetary Fund. 
And conventional analyses of the financial crisis focus on the weak capital base of many banks, which left them with insufficient reserves to absorb the losses they incurred when asset prices fell sharply in 2007-2008. 
Taxpayers, notably in the United States and the United Kingdom, were obliged to step in to fill that hole. 
The same disaster movie is now playing in the eurozone. 
We can only hope that the bankers are eventually rescued from the burning eurotower by Super-Sarkozy and Wonder-Frau Merkel – and that the Basel Committee of Banking Supervisors ensures that there will be no sequel. 
The Basel Committee has proposed strengthening considerably both the quantity and the quality of capital in the global banking system. 
This would mean much larger core equity capital for all banks and a range of additional reserves – a capital conservation buffer, a countercyclical buffer, and a surcharge for systemically vital institutions – to be added by local regulators as they see fit. 
Unfortunately, the final implementation date for these new obligations has been deferred until 2019 – by which point a few banks might still be left standing. 
In fact, the view that banks need more capital, while widespread, is not unanimous. 
Two notable holdouts are Jamie Dimon and Walter Bagehot. 
Dimon, the Chairman and CEO of J.P. Morgan, has been making his contrarian views known to regulators, most recently almost coming to blows, according to eyewitnesses, in a spat with Governor of the Bank of Canada Mark Carney, who chairs a group that is designing parts of the new regime. 
Walter Bagehot is in no position to threaten Carney, or any other regulator. 
He died in 1877. 
But in his great work on finance, Lombard Street, published in 1873, he asserted that, “A well-run bank needs no capital. 
No amount of capital will rescue a badly run bank.” 
I expect that Dimon, who has steered Morgan through the crisis without the need for public support, would say “amen.” 
Of course, regulators cannot easily require all banks to be “well-run” in Bagehot’s sense. 
So banks require capital as a backstop. 
It is not a bad substitute for perfect judgment, and at least it can be defined and measured. 
But how much capital is enough? 
Even if, at heart, they take the Bagehot view, all bankers recognize that market confidence requires them to demonstrate a more solid capital base to attract wholesale funding, as well as to satisfy the stricter demands of regulators. 
But a wide gap has opened up between the financial authorities and the banks on the costs and benefits of the much higher requirements now demanded by Basel. 
Basel 3, the Basel Committee’s new global regulatory standard on banks’ capital adequacy and liquidity, will more or less double the equity requirements, and will impose extra costs on banks deemed “too big to fail.” 
The Committee’s analysis of the economic consequences found that the impact on growth would be modest, perhaps reducing GDP by 0.33% after five years – easily within the margin of forecast error. 
The OECD took a different view, putting the growth impact at about twice that level, and rather higher in Europe, where companies rely far more on bank financing than they do in the US. 
In sharp contrast, the Institute of International Finance, the leading trade association for the world’s top banks, believes that the impact of higher capital requirements could be far stronger. 
The IIF believes that GDP could be fully 5% lower after five years, with unemployment more than 7% higher. 
The IIF’s forecast may seem alarmist, but the competing estimates are based on some intriguing analytical differences. 
Regulators take the view that the impact of higher capital requirements on the cost of credit to borrowers will be modest, as the overall cost of funds to banks will not rise much. 
They rest their case on the famous Modigliani-Miller theorem, which implies that a company cannot alter its capital cost by changing the balance between equity and debt on its balance sheet. 
If there is more equity, then logically debt should be cheaper, as the company (or bank) is better insulated from default. 
Bankers accept that, in the long run, the theorem might hold, but argue that it will take time, especially given recent events, to persuade investors that banks are genuinely safer, and that their shares should be thought of as closer to utility stocks, yielding a lower return. 
Indeed, Franco Modigliani also argued that investors have a “preferred habitat,” and that coaxing them out of it carries some cost. 
That does not bode well for banks, which have been a very poor investment in the last few years. 
Moreover, the banks assume that they will need to hold more capital than regulators ostensibly require in order to maintain a margin of safety. 
These assessments are unusually divergent. 
Though economists are notoriously disputatious, their estimates do not often differ by a factor of ten. 
It would be wise, before the rules are set in stone, to refer the issue to the World Institute for the Resolution of Economic Disputes in Baltimore, or “The Wire.” 
Unfortunately, there is no such institute, in Baltimore or anywhere else. 
There is no one who can offer a timely and, above all, authoritative view on which forecast is the more compelling scenario. 
The stakes of not knowing are very high. 

The Banking Conundrum 
BARCELONA – Central bankers and regulators tend to worry that too much competition in the financial sector increases instability and the risk of systemic failure. 
Competition authorities, on the other hand, tend to believe that the more competition, the better. 
Both can’t be right. 
There is a trade-off between competition and stability. 
Indeed, greater competitive pressure may increase the fragility of banks’ balance sheets and make investors more prone to panics. 
It may also erode the charter value of institutions. 
A bank with thin margins and limited liability does not have much to lose, and will tend to gamble – a tendency that is exacerbated by deposit insurance and too-big-to-fail policies. 
The result will be more incentives to assume risk. 
Indeed, for banks close to the failure point in liberalized systems, the evidence of perverse risk-taking incentives is overwhelming. 
That is why crises began to increase in number and severity after financial systems in the developed world started to liberalize in the 1970’s, beginning in the United States. 
This new vulnerability stands in stark contrast to the stability of the over-regulated post-World War II period. 
The crises in the US in the 1980’s (caused by the savings-and-loan institutions known as “thrifts”), and in Japan and Scandinavia in the 1990’s, showed that financial liberalization without proper regulation induces instability. 
In an ideal world, the competition-stability trade-off could be regulated away with sophisticated risk-based insurance mechanisms, credible liquidation and resolution procedures, contingent convertibles, and capital requirements with charges for systemic institutions. 
The problem is that regulation is unlikely to eliminate completely market failures: the competition-stability trade-off can be ameliorated, but not eliminated. 
For example, the United Kingdom’s Independent Commission on Banking (ICB) has proposed ring-fencing retail activities from investment-banking activities in separately capitalized divisions of a bank holding company. 
This is a compromise aimed at minimizing the incentive to gamble with public insurance while allowing some economies of scale for banking activities. 
But the devil is in the details, and, even in the most optimistic scenario, the trade-off between competition and stability will remain. 
One shortcoming of the measure consists in the fact that the crisis has hit both universal and specialized banks. 
Furthermore, the definition of the boundary between retail and investment-banking activities will leave an important grey area and generate perverse incentives. 
And the regulatory boundary problem persists: risky activities may migrate to areas where regulation is lax and reproduce the problems with the shadow banking system that we have witnessed during the crisis. 
As a result, investment-banking operations might need to be rescued if they pose a systemic threat. 
The massive regulatory failure exposed by the financial crisis that began in 2008 underscores the need to concentrate on reforms that provide the correct incentives to banks. 
But, if the past is any guide to the future, we should be aware of the limits of regulation. 
The UK’s ICB has rightly stated that there is room to improve both competition and stability, given the current weak regulatory framework, but it would be imprudent to strive for the complete elimination of market power in banking. 
The design of optimal regulation has to take into account the intensity of competition in the different banking segments. 
For example, capital charges should account for the degree of friction and rivalry in the banking sector, with tighter requirements in more competitive contexts. 
It follows, then, that prudential regulation and competition policy in banking should be coordinated. 
This is all the more true in crisis situations, in which a protocol of collaboration should be implemented to delineate liquidity help from recapitalization, and to establish the conditions for restructuring in order to avoid competitive distortions. 
What implications does this have for market structure? 
Concentration in well-defined deposit and loan markets is linked with competitive pressure. 
In more concentrated markets, banks tend to offer worse terms to customers. 
The crisis has affected both concentrated banking systems (for example, the UK and the Netherlands) and non-concentrated systems (e.g., the US and Germany). 
In both cases, it has brought consolidation, leaving fewer players with increased market power and too-big-to-fail status. 
Witness the takeover by Lloyds TSB of the troubled HBOS (Halifax/Bank of Scotland) in the UK, or post-crisis consolidation in the US. 
All this would not be so problematic if the increased market power of the merged institutions were a temporary reward for past prudent behavior. 
In that case, the benefits would wane in importance as new competitors entered the banking fray. 
But if banks’ market power increases due to barriers to entry, consumers and investors will suffer. 
An active competition policy will be needed. 
But the degree to which the authorities will be able to push for more competition in banking will depend crucially on the regulatory framework. 
Let us fix and strengthen that framework, while bearing in mind that a simple mandate to maximize competitive pressure in banking is no more possible, or desirable, than one that would aim at eliminating instability completely. 

The Bankrupt Theology of Financial Deregulation 
GENEVA – Now that the global financial crisis is abating, it is time to take stock of our mistakes and ensure that they are not repeated. 
Beyond regulatory improvements, preventing payment incentives from rewarding reckless risk taking, and building Chinese walls between originators of securities and rating agencies, we need to discover what made this crisis so difficult to predict. 
The International Monetary Fund is our global watchdog, and many believe that it failed to foresee the crisis because it was distracted or looking in the wrong places. 
I disagree. 
The problem is that the IMF was unable to interpret the evidence with which it was confronted. 
I served on the IMF Board in June 2006 when it discussed its annual review of the United States. 
The staff “saw” the relaxation of lending standards in the US mortgage market, but noted that “borrowers at risk of significant mortgage payment increases remained a small minority, concentrated mostly among higher-income households that were aware of the attendant risks.” 
A few months later, in September 2006, just ten months before the sub-prime mortgage crisis became apparent to all, the Global Financial Stability Report (GFSR), one of the IMF’s flagship publications, stated that “[m]ajor financial institutions in mature...markets [were]...healthy, having remained profitable and well capitalized.” 
Moreover, “the financial sectors in many countries” were supposedly “in a strong position to cope with any cyclical challenges and further market corrections to come.” 
The IMF’s radar started blinking only in April 2007, virtually when the problem was already hitting its windshield, but still with little sense of urgency. 
Clearly the Fund’s surveillance of the US economy was ineffective, and its multilateral surveillance of financial markets no better. 
Admittedly, the IMF was not alone in failing to interpret the underlying facts that triggered the crisis, but that is little consolation. 
Before the crisis, the IMF’s best-known function – lending to countries with balance-of-payment problems – was becoming irrelevant. 
Many emerging markets preferred to self-insure by accumulating reserves rather than borrow from the Fund. 
Ironically, this was leading the IMF to focus on its supervisory role. 
So, in searching for the causes of the IMF’s failure, we can rule out distraction by more urgent matters. 
The Fund normally expects that problems come from the usual suspects – economically volatile developing countries – but this time the crisis was developing a few miles away from its headquarters. 
Perhaps this proximity was at the root of the IMF’s failure to interpret the evidence right under its nose. 
If so, it is a failure that raises two key questions. 
First, is the Fund’s governance structure suited to exercising arms-length surveillance of its main shareholders? 
And, second, did ideological blinders prevent the IMF from acknowledging that deregulation could contribute to a disastrous outcome? 
It is inconceivable that the Fund, with its qualified and dedicated staff, would have failed so miserably in detecting and calling attention to the vulnerabilities piling up in the US mortgage market had they occurred in a developing country. 
But power in the IMF currently follows the logic of its lending role. 
The more money a country puts into the pool of resources, the more influence it gets. 
I, for one, am not happy with the way in which “quotas” to the IMF are calculated, but I have to admit that exchanging money for votes is a perfectly adequate governing structure for a lending institution. 
But it is not adequate for an institution that is meant to exercise arms-length surveillance of its members – particularly its most influential member, whose domestic policies have global systemic implications. 
That “money-for-influence” governance structure indirectly impairs the Fund’s capacity to criticize its most important members’ economies (let alone police compliance with their obligations). 
And, as I have witnessed several times, if the IMF staff ever do become too candid in their criticism of powerful members, the target governments use their leverage to water down the public communiqués issued by the Board. 
Let us now consider the second question – whether the Fund suffered from a mindset that blinded it to the causes of what was happening. 
As early as August 2005, Raghuram Rajan, the IMF’s Economic Counselor (chief economist) at the time, was warning of weaknesses in the US financial markets. 
Rajan saw that something potentially dangerous was happening, warning that competition forces were pushing financial markets “to flirt continuously with the limits of illiquidity” and concealing risks from investors in order to outperform competitors. 
Perhaps most revealingly, though, Rajan nonetheless optimistically argued that “[d]eregulation has removed artificial barriers preventing entry of new firms, and has encouraged competition between products, institutions, markets, and jurisdictions.” 
In other words, he clearly believed that regulation created “artificial barriers,” and that “competition between jurisdictions” – that is, between regulators – was to be welcomed. 
Such beliefs come naturally to those committed to the view that markets perform better without regulation, and Rajan’s statement is a good illustration of the IMF’s creed at the time. 
And it was this boundless faith in markets’ self-regulatory capacity that appears to be at the root of the Fund’s failure to find what it was not looking for. 
There are now encouraging signs of change at the IMF, but this should not reassure us. 
As the political economist Fred Block has noted, “societies invariably draw back from the brink of full-scale experimentation with market self-regulation.” 
Unfortunately, this also makes self-regulation a faith that is very difficult to dispel, because its priests can always claim that its failures result not from theological bankruptcy, but from insufficient orthodoxy. 

The Battle for Bahrain 
MANAMA - The fervor for change that inspired revolutions in Tunisia and Egypt is now rocking Bahrain. 
But the uprising in Manama differs from the mass protests that turned out longtime rulers in North Africa. 
Indeed, sectarian fault lines, together with the security forces’ complete fealty to the monarchy, seriously diminish the likelihood of peaceful regime change. 
Whereas Tunisia and Egypt are relatively homogeneous countries – Sunni Muslims constitute more than 90% of their inhabitants – Bahrain’s Sunnis, including the royal family and the country’s political and economic elite, comprise only about one-third of the population. 
The rest are Shia. 
Each of these groups is making different, if not contradictory, demands. 
The Shia focus on political reforms that would reflect their majority status. 
Aggrieved Sunnis, however, want socio-economic changes, such as affordable housing. 
And, whereas Egyptian protesters of all types found common ground in insisting that President Hosni Mubarak resign, Bahrainis will find it almost impossible to agree on a rallying cry. 
The ruling al-Khalifa family will not relinquish its power willingly. 
To preserve itself, the regime relies on imported security forces that are beholden only to the royal family. 
Drawn from Jordan, Pakistan, and Yemen, they are not reluctant to beat and kill protesters, for they know that any change at the top would mean defeat not only for the al-Khalifas, but for themselves as well. 
Indeed, Bahraini security forces have been ruthless in their attacks against demonstrators, killing six. 
Given this alignment of forces, and the bloodshed that has already occurred in Manama’s Pearl Square, the scenes from Cairo of protesters arm-in-arm with soldiers and hugging tank crews are unlikely to be replayed here. 
Moreover, whereas in Egypt, historically a stable country, 18 days of chaos were enough to convince the military to restore order by ousting Mubarak, Bahrainis have greater experience with social unrest than Egyptians or Tunisians do. 
Political instability is a way of life in Bahrain. 
From the turmoil in the 1920’s, following administrative reforms, to labor protests in the 1950’s, the country is accustomed to agitation. 
As a result, factional strife is unlikely to panic the rulers and is even less likely to persuade them that the king must abdicate to save the country. 
The legislature’s role and influence in these three countries also vary. 
In Tunisia and Egypt, authoritarian regimes allowed no political space for dissenting voices. 
When Mubarak felt his power was slipping and reached out to his adversaries, he found disorganized opposition parties with little political experience and no support in society. 
They could not formulate coherent positions and practical demands. 
Instead, they clung to hard-line positions, leaving Mubarak unable to find a solution to the impasse. 
But here in Bahrain, the situation is different. 


The Battle for Hope 
PARIS – Since the arrival of President Barack Obama in the White House, there has been an undeniable rapprochement between Europe and the United States. 
But on the deeper and more fundamental level of emotions and values, is it possible that the gap between the two sides of the Atlantic has widened? 
Today, there is much more collective hope and much more individual fear in America in the wake of the global economic crisis. 
But the reverse is true in Europe. 
Here one encounters less collective hope and less individual fear. 
The reason for this contrast is simple: the US has Obama, and Europe has the welfare state. 
So what can be done to promote an “Americanization” of Europe in political terms and a “Europeanization” of America in social terms? 
Comforted by a new President who incarnates a return of hope, who inspires and reassures at the same time, Americans are starting to believe that the worst of the economic crisis is behind them. 
What was at the beginning of this spring no more than “a glimmer of hope,” to use Obama’s phrase, has become a more serious and positive trend. 
Animated collectively by a combination of natural optimism and deep nationalism, Americans have made their president’s campaign slogan, “Yes, we can,” their own. 
By contrast, when the personal situations of many individual Americans are examined through European eyes, the extreme individualism that constitutes a key part of American optimism translates into an unacceptable social scandal. 
“Cities of Tents are Filling with the Victims of the Economic Crisis,” read one headline a month ago on the front page of a mass-circulation American newspaper. 
Journalists report tragic stories of middle-class Americans losing their jobs and homes, potentially putting their lives at risk without any social protection. 
Who will pay for your costly cancer treatment if you lose the health insurance policy that came with your job? 
It is wrong to assume, as some ultra-free marketers do, that the absence of social protection makes you stronger. 
The ambition of a country and a society born of the principles of the Enlightenment cannot be to create a people armed to the teeth with guns yet entirely disarmed in the face of illness. 
Moreover, in a society that “lives to work,” where one’s job is such a central component of one’s identity, the loss of work is more destabilizing than in a culture where one “works to live,” as in Europe. 
Americans’ perspective on retirement is highly revealing: they are afraid of it. 
What will they do? 
This perspective is not simply rooted in economics, even if today a large proportion of older Americans are rushing back to work as the downturn wrecks their retirement plans. 
The geographic separation of families, owing to America’s size and Americans’ mobility, makes the association between retirement and being a grandparent less practicable in the US than it is in Europe. 
In Europe, meanwhile, there is undeniably less collective hope and probably a little less individual fear. 
Perhaps because they are older and more cynical, European societies seem to bask in a “collective moroseness,” from which they have difficulty emerging. 
The record level of abstention in the recent European Parliament elections is further proof of that growing cynicism and alienation. 
Of course, it is neither possible nor desirable to “clone” Obama in each of the European Union’s 27 member states. 
But what is needed to reduce the deficit of hope that plagues Europe today? 
The answer is far from obvious. 
Europe suffers from a shortage of leaders who can speak in its name; from a shortage of ambition (what, after all, is the collective ambition of Europeans now that the EU is perceived more as part of the problem than part of the solution). 
But, above all, Europe suffers from an identity deficit, for no one seems to know what it means to be a European nowadays. America, by contrast, seems to have an abundance of all the things Europe lacks. 
Formulated in such terms, the European challenge seems even more formidable than the American one. 
Nevertheless, it is far from clear that the US will find it easier to reform its health and social security system, and thus alleviate the individual fears of its citizens, than for Europe to inspire its citizens with a sense of collective hope. 
In reality, Europe and America should represent a source of mutual inspiration that would reduce the human consequences of inequality in the one, and restore a sense of hope in the other. 

The Battle for Turkey’s Constitution 
ISTANBUL – On September 12, Turks will vote on a set of constitutional amendments proposed by the ruling Justice and Development Party (AKP), which has been in power for eight years. 
Since the vote falls on the 30th anniversary of the 1980 military coup, Prime Minister Recep Tayyip Erdogan is portraying the referendum as an opportunity to reject the military regime’s legacy. 
Turkey’s constitution has been amended repeatedly since the coup. 
But its anti-democratic core remains intact – and, unfortunately, the current proposals do not dramatically alter that. 
Most of the previous amendments relied on agreements between governing and opposition parties, and were not put to a popular vote. 
This time, the AKP acted on its own and was barely able to garner from its own ranks the requisite majority for a referendum. 
Far from being an occasion for popular condemnation of the coup on its anniversary, the referendum is a mark of the AKP’s failure to gain widespread support for its project. 
With another general election due next year, civil-society groups preferred that priority be given to lowering the 10% electoral threshold for parties to enter parliament, thus broadening political participation. 
The new parliament would then work on constitutional reform. 
That, however, was out of the question: the AKP benefited from the rules put in place for the 2002 and 2007 general elections, in both cases converting pluralities of the popular vote into large parliamentary majorities. 
In 2007, the AKP government briefly seemed interested in a new constitution, having weathered threats of a military coup just before the elections. 
A distinguished group of academics was assigned to produce a draft. 
But, before any public debate could occur, the AKP decided to amend only two articles of the constitution, in order to allow female university students to wear headscarves on campus. 
The amendment won parliamentary approval, but was subsequently rejected by the Constitutional Court. 
Moreover, in a case brought to the Constitutional Court, the AKP’s support for the amendment was used as evidence that the party was violating Turkey’s secular constitution. 
In the end, the party was found guilty and subjected to a fine. 
From the AKP’s point of view, the Constitutional Court – and the judiciary in general – had replaced the military as the last bastion of Turkey’s secularist establishment. 
The AKP then drafted a set of constitutional amendments that would change the composition of the Constitutional Court and of the Supreme Council of Judges and Public Prosecutors, the body that handles the nomination and promotion of judges and prosecutors. 
Other proposed changes were added for democratic window-dressing. 
Indeed, the AKP insisted on submitting the entire package to a single “yes/no” vote, despite repeated calls from civil-society groups and opposition parties to allow for votes on each amendment separately. 
One new “democratic” amendment would create an ombudsman’s office – long demanded by the European Union – but without a guarantee of autonomy. 
Likewise, an affirmative-action clause for women is little different from a provision in the current constitution. 
State employees would be granted the right to engage in collective bargaining, but would have no right to strike. 
The authority of military courts would be curtailed to some extent. 
Most important among such amendments is the repeal of Provisional Article 15, which has provided immunity from prosecution to all actors of the military regime established by the 1980 coup. 
Whatever symbolic value this may have is overshadowed by the fact that the statute of limitations already precludes any legal action on this issue. 
Opposition proposals to sharpen this provision were rejected by AKP leaders. 
On the other hand, the key amendments sought by the AKP would increase the number of seats on the Constitutional Court and the Supreme Council, but without changing significantly the way appointments to these bodies are made. 
The president – to be directly elected in the future given another AKP-initiated amendment that was approved by a referendum in 2007 – thus maintains the predominant role, which underscores the AKP’s confidence that it will continue to control the presidency in the years ahead. 
But Turkish voters care less about these amendments than about jobs, social security, and the continuing loss of lives in the never-ending war with the PKK Kurdish rebels. 
The AKP has largely squandered the goodwill that first brought it to power on a wave of voter revulsion at the old political elite’s rampant corruption. 
It has now created its own elite and shares the same political culture. 
People will base their votes in the referendum not on the substance of the amendments, but on how they feel about the AKP’s eight years in power. 
Nationalist right-wing and statist left-of-center groups are campaigning against the amendments, Islamist-leaning groups support them, and Kurdish groups advocate a referendum boycott, wishing to support neither the old establishment nor the current government. 
Moreover, the socialist and the liberal left are divided over whether some progress is better than none, with opponents arguing that half-hearted changes to the constitution would preclude eventual real reform. 
With the campaign dragging on for months, the referendum has thoroughly polarized Turkish politics. 

The Battle for Ukraine 
The old axioms are true: firmness can pay; resolution can see you through. 
We who are struggling to maintain our democracy in Ukraine believe this. 
Now, more than ever, we must believe this, for Russian troops wearing Ukrainian uniforms have entered our country, because Ukrainian soldiers are refusing to carry out orders to crush those who are demonstrating to defend our democracy. 
We will need the solidarity of our neighbors, and of freedom-loving peoples around the world, to assure that our democratic dreams are realized in peace. 
The struggle to secure the victory of Viktor Yushchenko, the true winner in last Sunday’s presidential election, as Ukraine’s new president is not one that we sought. 
But, that battle for our freedom having been imposed upon us, we will not be found wanting in either courage or resolve. 
The days and nights ahead will be difficult, and the secret presence of Russian troops will make them all the more dangerous. 
The forces of Prime Minister Viktor Yanukovych foolishly stuffed ballots and intimidated the country’s electoral commission to an absurd degree. 
They then tried to force the Ukrainian people to swallow this sham – threatening to ban public gatherings, close our borders to new visa seekers, and silence any word of our protests on television. 
More and more members of a governmental machine that thought it could impose a fraudulent election on Ukraine’s people are shying away from imposing that choice by force. 
Members of the army, the security services, and government officials are all balking at doing the bidding of the Yanukovych clique. 
Such a volatile ruling elite cannot be counted on to be consistent from now on. 
The way ahead is a minefield. 
We recognize that an unstable government can swing back to uncompromising intransigence. 
It will try to erode our support by infiltrating our protests with loyalists who will carry the virus of defeatism, and it will seek to outflank us by appealing to ordinary, hard-working Ukrainians, worried about feeding and clothing their children, that a tottering economy needs stability to be saved. 
It will try to divide the country between Russian and Ukrainian speakers. 
But it is too late for divide and misrule strategies to work. 
Ukrainians know that the choice they make now, that their decision to stand firm with Viktor Yushchenko today, will determine their freedom forever, as well as the health of their nation – its independence as well as its economic strength. 
So we will stand firm in the cold and the snow to see that our democratic choices are respected. 
To do otherwise is to surrender not only our freedom, but our hopes for better lives. 
We defy those who seek to corrupt our democracy, but we stand with the hand of friendship extended to all of our neighbors, including Russia. 
It has no reason to intervene. 
A vibrant Ukrainian democracy will need the comradeship of Russia and of Europe to build the kind of society that our people desire. 
Our boldness is tinged by realism. 
By securing our democracy, we help secure Russia’s own. 
For we are engaged not in revolution, but in peaceful democratic evolution. 
Ukrainians have endured the worst that man can do to his fellow man: Stalin’s orchestrated famines of the 1930’s and the Nazi slaughterhouse of World War II. 
So do not doubt our ability to endure and stand firm. 
We shall persist, and our democracy shall prevail. 
Stand with us. 

The Battle of the Temples 
BANGKOK – The military skirmishes between Thailand and Cambodia that have claimed more than two dozen lives, caused scores of injuries, and displaced tens of thousands of people since February are primarily attributable to domestic politics in both countries. 
Rooted in ancient enmities and the legacy of the colonial era, the fighting is damaging the entire region. 
So virulent is the dispute that even a short-term settlement will require third-party mediation. 
A secure peace will depend mainly on how the endgame to Thailand’s domestic political crisis plays out in the coming months – and on Cambodia’s willingness to stay out of this process. 
At issue in the conflict is 4.6 square kilometers that adjoin a millennium-old Hindu temple known as “Preah Vihear” to Cambodians and “Phra Viharn” to Thais. 
Cambodia insists that the disputed land has been under its territorial sovereignty since a landmark case decided by the International Court of Justice in 1962. 
In its 9-to-3 verdict, the ICJ ruled that Cambodia’s map, drawn up by French surveyors in 1904-1907, put the temple area in Cambodia, and that Thailand (known as Siam until 1939) had not objected previously. 
During the hearings, Cambodia asked the ICJ to rule on the adjoining land, but the judges confined their decision only to the temple, as Cambodia originally requested. 
The French-made map became the core of the dispute, because it manipulated natural geographic divisions. 
Thailand rejects the map, which contravenes a Franco-Siamese agreement in 1904 stipulating a demarcation along a watershed line separating the two countries. 
Moreover, the French mapping effort took place just a decade after Siam ceded a clutch of territories – much of today’s western Cambodia – to France, which was then perched above Indochina as the colonial master At that time, a vulnerable Siam was compelled to sign a host of unequal treaties with European powers in exchange for maintaining its independence. 
Until recently, the overlapping claims on the 4.6 square kilometers were not a serious issue. 
Villagers and merchants from both sides conducted a brisk business and border trade unfettered by the authorities. 
Bilateral tensions flared when Thai politics heated up after the September 2006 military coup that overthrew the democratically elected prime minister, Thaksin Shinawatra, on charges of corruption and disloyalty to the monarchy. 
In 2008, after the self-exiled Thaksin’s proxy force, the People’s Power Party, took power following an election victory, the Thai government signed a joint communiqué agreeing to Cambodia’s listing of Preah Vihear Temple as a UNESCO World Heritage site. 
The communiqué became a lightning rod for Thaksin’s opponents at home, spearheaded by the People’s Alliance for Democracy. 
The PAD depicted the UNESCO registration of Preah Vihear as a treasonous sell-out of Thai sovereignty, and used it to destabilize the pro-Thaksin government. 
When the PAD seized control of Government House and Bangkok’s two airports, its protest leaders hectored Cambodian Prime Minister Hun Sen and likened him to a hooligan. 
Exacerbating matters, the PAD progenitor of that insult became Thailand’s foreign minister after Thaksin’s opponents regained power in December 2008, led by Prime Minister Abhisit Vejjajiva and reinforced by the army. 
At that point, tensions with Cambodia became inevitable. 
Hun Sen had scores to settle with the anti-Thaksin coalition of the Democrat Party, the PAD, and the army. 
In 2009, Hun Sen appointed Thaksin as economic adviser to the Cambodian government and invited him to deliver a high-profile public address in Phnom Penh. 
The bilateral relationship has been rocky ever since, alternating between periods of friction and conciliation. 
The spate of armed clashes along the border this year stems from PAD provocations. 
Although some of its members entered the cabinet under Abhisit, PAD leaders felt betrayed and abandoned by Abhisit and some of his powerful backers. 
The PAD’s yellow-clad supporters returned to the streets, this time under the banner of ultra-nationalism over Preah Vihear and a domestic anti-corruption campaign. 
The PAD has openly called for a military coup to clean up Thai politics. 
The PAD initially found little traction. 
The Thai army stayed out of the Preah Vihear controversy, and Abhisit’s government shrugged off the PAD’s machinations. 
But, as the anti-establishment, pro-Thaksin “red shirts” staged huge protests of their own against the army’s suppression of their fellow demonstrators in April-May of last year, the men in uniform became agitated. 
A major tipping point may have been the red-shirt leaders’ allusion to the conspicuous royal silence in response to the army’s violent suppression, which heightened the army’s fear of a clear and present danger to the monarchy. 
The Thai army abandoned its neutral posture and became increasingly belligerent. 
It unilaterally ruled out the presence of regional observers on the Thai-Cambodian border, a deal mediated by Indonesian Foreign Minister Marty Natalegawa in February. 
The Abhisit government, congenitally beholden to the army, took its cue and effectively reneged on the Indonesia-brokered peace drive. 
It was a blow not only to Indonesia as the chair of Association of Southeast Asian Nations this year, but also to ASEAN itself, particularly given the organization’s quest to become an ASEAN Community by 2015. 
If ASEAN is not allowed a mediating role, the Thai-Cambodian spat may wind its way back to the United Nations Security Council, which earlier delegated the issue to ASEAN amidst heavy lobbying by Cambodia and Thailand. 
Cambodia wants to multilateralize the border conflict as much as Thailand tries to limit it to bilateral negotiations. 
Though the Thai-Cambodian border battles have involved tanks and heavy artillery, they are unlikely to degenerate into open, large-scale warfare. 
The ASEAN framework acts as a safety net and mutual commercial interests should ultimately prevail. 
But sporadic shooting and verbal antagonism between the two sides will continue, as Thailand’s powers-that-be close ranks in a right-wing turn towards the symbols and institutions of royalism, entangling Hun Sen, who should have stayed on the sidelines, in the endgame unfolding in Bangkok. 

The Beautiful Game’s Ugly Blemish 
ANN ARBOR – The quality of refereeing at the World Cup had been a source of relief until June 18, when referee Koman Coulibaly of Mali disallowed a perfectly legitimate goal by the United States that would have given it an all-important win over Slovenia. 
Worse still, Coulibaly never had to account for his terrible decision, or explain it to anyone – not the players and coaches on the pitch, and not the public at large. 
Referee decisions in football, no matter how egregiously erroneous, are incontestable and immutable. 
Football fans the world over will always remember the outrageous error that awarded France the decisive goal against Ireland to qualify for the tournament, despite obvious hand-play by the French superstar Thierry Henry. 
We believe that a concerted effort to reform football (soccer) refereeing is urgently needed. 
Refereeing errors increasingly mar the game on all its levels – country and club, major and minor leagues, globally televised tournaments and matches, and local games. 
Since such errors have major implications for the outcome of key tournaments which define this most global of sports, their ubiquity and frequency jeopardize the game’s very integrity – and thus its essential legitimacy. 
Such episodes, after all, are increasingly part of the public domain, owing to new media that have rendered the game even more global than it was. 
What makes this issue so central to football’s future is that these errors do not result from referees’ negligence, inattentiveness, or incompetence. 
Rather, they reflect the game’s speed, its players’ athleticism, the size of the playing surface, and a puzzling resistance by the game’s leading authorities to adapt nineteenth-century rules to twenty-first century resources. 
First, there is a need for video evidence. 
This would literally furnish the game changer in those few key situations that decide a match, such as an unjustifiably denied goal, an erroneous red card, or an egregious offside call. 
One could establish a sort of über-official who surveys video monitors, immediately overrules blatantly wrong calls, and directly communicates this decision with the referee and linesmen on the field (who are already equipped with earphones). 
Alternatively, one could give each team the opportunity to challenge up to two referee decisions per game, employing video replays to review rules infractions and settle disputed calls. 
This procedure would give the referees on the field the opportunity, if necessary, to overrule their initial decisions. 
And quick reviews would not waste much time or interrupt the flow of the game. 
Under current conditions, the berating of the referee by the slighted team’s players consumes more game time than any review ever will. 
Second, we need to make use of the perfectly functioning electronic chip already inside the ball to settle decisively whether a ball has crossed the field’s boundaries or its all-important goal lines. 
Consider how an essentially equivalent technology has successfully reduced line-related controversies in major tennis tournaments. 
Third, serious consideration should be given to introducing a second referee, with each given responsibility for one half of the huge playing field. 
After all, the US National Basketball Association employs three referees on a playing surface one-ninth the size of a football field. 
Lastly, the culture of secrecy and non-accountability that permeates soccer’s major governing bodies such as FIFA, UEFA and the various country federations needs to be changed. 
No other major team sport tolerates the arrogance of governing bodies who feel no responsibility to explain their actions. 
These measures – and many others that include the overdue use of available technology – would augment the effectiveness of often-clueless referees, whose authority has declined sharply with the proliferation of decisive mistakes in major games and championships. 
While none of these measures is new, implementing them would add significant clarity and fairness to football, and thus enhance the legitimacy of the game. 
Above all, referees must be accountable for their decisions. 
They must not be permitted to decide games of utmost importance in an arbitrary manner that need never be explained to anyone. 
Many of these overdue reforms have long been promoted by leading football experts, such as the Dutch world-class striker Marco van Basten and the former FIFA referee Markus Merk of Germany. 
A majority of football fans around the world also supports decisive reforms that easily minimize refereeing errors. 
Like the Irish, many of them have become increasingly alienated by football’s old ruling regime and the conservative authorities that guard it. 
Of course, we are fully aware that human error will never be eliminated from affecting outcomes in any sport. 
Nor should it be. 
Indeed, we actually believe that the “we wuz robbed” dimension of all sports adds to their lore and legend. 
But those responsible for a global product on the scale of football surely must act boldly to minimize the most egregious and avoidable errors, and thereby preserve the game’s integrity. 

The Beauty in Ugly Elections 
Elections in countries that have been strangers to democracy are never pretty, as Afghanistan's recent vote demonstrated and as any election in Iraq is likely to be. 
But electoral flaws are not always the whole picture. 
Consider Kazakhstan, where five million people cast ballots in September for their parliament's lower house. 
Western media judged the election a failure. CNN reported it "neither equitable nor free." 
The Economist snidely referred to the "results" in quotation marks. 
Most quoted the OSCE's finding that the elections were riddled with "serious shortcomings." 
Those elections were flawed. But only a small percent of the breaches were the result of deliberate manipulation. 
We were there, and visited eight urban and rural polling places, talked with roughly a hundred voters, election officials and observers, as well as officials from six parties. 
The majority of shortcomings resulted from organizational ineptitude. 
The worst cases of outright manipulation occurred when local bureaucrats - all appointed from above - pressured voters to support President Nursultan Nazarbayev's Otan Party. This problem will doubtless persist until more local officials are chosen through elections. 
Many, probably most, of the other problems were managerial in nature. 
Often, voter lists were incomplete or inaccurate. 
The head of the Central Electoral Commission has now proposed that members of the local public join election officials and administrators in compiling the lists. 
Electronic voting, used at 10% of polling stations, also caused problems. 
Even though voters could choose between electronic and paper ballots, difficulties remained, especially among older voters. 
Another problem was the bar code system designed to prevent duplicate voting. 
Some qualified voters didn't get their bar codes; others feared that employers might use them to learn how they voted. 
Despite the new election law's assurance of equal coverage in the main media, government TV channels devoted more time to the pro-government parties. 
Protests by some parties that could not afford the high cost of TV spots and billboards mirror similar complaints in the US. 
Far more serious was the lack of transparency in the Central Electoral Commission and the political imbalances on some local commissions. 
Some of this may have been deliberate, but incompetence also played a part. 
So how bad was the election? 
Exit polls suggest that ballot totals fairly closely reflect voter choices. 
But how to explain charges of "gross violations" by the Ak Zhol Party, the largest opposition group, or the decision by the Minister of Information, an Ak Zhol candidate, to resign in protest? 
Or the 89 charges of violations filed by just one bloc? 
The ex-minister's charge is disingenuous. 
He himself presided over many violations, a fact noted by the OSCE back in 1999. 
He resigned only after winning election to parliament. 
Clearly, Ak Zhol used accusations of impropriety as a weapon against the government parties. Indeed, many opposition groups engaged in dirty tricks. 
Nevertheless, the elections represented significant progress. 
First, they were competitive. 
The official registration of ten parties, including opposition groups, surpassed any previous election, and the OSCE admitted that voters had "a real choice." 
Had systematic manipulation occurred, one-third of the races would not have gone to runoffs. 
Moreover, there were real surprises. 
The Asar Party, founded and led by President Nazarbayev's daughter, was expected to claim second place, assuring her eventual succession. 
But, despite ample funding and abundant media access, Asar finished third. 
At the same time, 17% of all candidates were women, far more than in earlier elections. 
Runoff votes will send more women than ever to Kazakhstan's parliament. 
Turnout was relatively high, at 57% of registered, particularly given that the OSCE had intoned that "public interest does not seem to be high"; other experts wrote of "voter fatigue." 
Defying such sour predictions, voters clearly felt that elections matter. 
For the first time, parties could make their case in seven debates aired on national television. 
Many voters changed their choices after watching these. 
Another first was that observers from all parties monitored the polling. 
Thousands of volunteers took their role seriously, producing the complaints that the Prosecutor is now investigating. 
Another 1,029 foreign observers came from as far away as India and Thailand. 
The government knew monitors would turn up improprieties, but believes that it has nothing to hide, and much to gain, from honest criticism. 
Even the experiment with electronic voting machines was a qualified success. 
The decision to use them should have been made earlier to allow more training, but most voters experienced no problems. 
Equally important, no newspapers were closed, stories suppressed, or journalists harassed, as occurred in earlier Kazakh elections. 
Obviously, the election's flaws cannot be swept under the carpet. But nor is Kazakhstan seeking to do so. 
Public debate about how to improve the system has commenced. 
At the same time, the process as a whole further legitimizes elections in the eyes of people accustomed by Soviet rule to dismissing all votes as charades. 
Kazakhstan deserved the criticism it received from Western election monitors. 
But it also earned kudos that have been withheld. 
Kazakhstan's elections mark a big step forward. 
Even an ugly election can be beautiful if it advances democracy - an important lesson for countries like Afghanistan and Iraq. 

The Beginning of the End for Guantánamo 
The “war on terror” has forced democracies to grapple with the extent to which they can afford to protect the civil rights and liberties of both their citizens and foreigners. 
The debate has been most intense in the United States, where the refrain that the Constitution is not a “suicide pact” and that national security can justify extraordinary measures is heard repeatedly. 
Some measures – unauthorized searches of bank records and wiretapping of telephone calls – compromise the liberty of all. 
Others – most notoriously, the confinement of roughly 450 alleged Muslim fighters in Guantánamo Bay – impinge on people thought to be the enemy. 
Amid rising allegations of abuse, President George W. Bush’s government realized some time ago that it could not maintain its Guantánamo detention camp forever. 
Yet it did not want to repeat the experience of the Zacharias Moussaoui trial, in which, after many propagandistic appeals from the dock, the alleged twentieth September 11, 2001, hijacker was finally convicted and sentenced to life imprisonment. 
So the Bush administration proposed a middle way: a military commission under military judges, which would recognize fewer rights for the accused and bar appeals to civilian courts. 
In its recent decision in Hamdan v. Rumsfeld , the US Supreme Court said “no”: Bush’s exercise of executive power went too far. 
As a result, the decision will have a lasting impact on America’s constitutional structure. 
Salim Ahmad Hamdan served as Osama bin Laden’s personal driver. 
Other than drive his boss around and attend meetings, he did nothing more to promote the terrorist attacks of September 2001. 
Yet his driving and his knowledge of Al Qaeda’s purposes struck the military as sufficient to charge him with entering a conspiracy to kill civilians and engage in terrorists acts. 
When his trial began, the prosecution tried to exclude Hamdan from the room during the testimony of a witness against him. 
The government wanted to protect its sources. 
But this unusual procedure, permitted in the military commissions, runs afoul of accepted canons of federal, Constitutional, and international law. 
The defense immediately sought an injunction in federal court to prevent the trial from continuing. 
The federal court ruled that under the Geneva Conventions, Hamdan, as a prisoner of war, was entitled to a court hearing that followed the same procedures as one judging soldiers of the detaining power, that is, an American court martial. 
The Supreme Court, however, sidestepped the question of whether Hamdan was a prisoner of war, arguing instead that the conflict was governed by common Article III in all the Geneva Conventions, which regulates armed conflict ”not of an international character.” 
In such cases, there is a duty to guarantee that all sentences are passed “by a regularly constituted court affording all the judicial guarantees which are recognized as indispensable by civilized peoples.” 
Bush’s military commissions were found to fall below this standard. 
While the discussion of the Geneva Conventions and procedural rights is important, the more profound portion of Justice John Paul Stevens’ majority opinion addresses the boundaries of the law of war, and specifically whether the conspiracy charge against Hamdan constitutes a violation of this body of customary international law. 
Everyone agrees that, under US law, the jurisdiction of military tribunals is limited to violations of the laws of war, so if conspiracy cannot be charged, Hamdan and others like him cannot be tried in any military courts, not just the ad hoc commissions. 
In order to resolve the question of whether conspiracy constitutes a crime under the laws of war, Justice Stevens followed the arguments made in the brief that I submitted on behalf of Experts on Conspiracy and the Law of War. 
The law of war, the Court reasoned, must reflect the consensus of all legal systems. 
But conspiracy, as a stand-alone offense, is particular to Anglo-American common law. 
This argument has been well known since the Nuremberg trials, which rejected charges of conspiracy to commit war crimes and crimes against humanity. 
Justice Stevens cited Telford Taylor, the chief prosecutor in Nuremberg, who made the same point about the oddity of conspiracy charges in international tribunals. 
Moreover, arguments about international law in the post-WWII period have quietly dropped all references to conspiracy charges. 
This admittedly has not been an explicit process, but the pattern is undeniable. 
As Justice Stevens wrote, “The crime of ‘conspiracy’ . . . does not appear in either the Geneva Conventions or the Hague Conventions – the major treaties on the law of war.” 
He could have added the Rome Statute and UN resolutions establishing the ad hoc tribunals for the former Yugoslavia and for Rwanda. 
The international community’s rejection of conspiracy charges is correct, I believe, because international criminal proceedings are oriented to post hoc justice – to judging those who are alleged to have already brought about massacres and other major crimes that concern the international community. 
Conspiracy, by contrast, is suited to a legal system that emphasizes early police intervention, before criminal plans are carried out. 
Early intervention is possible in a domestic legal system, but there is no international police force that could fulfill a similar function. 
The Bush administration is now left in an embarrassing position. 
It does not want to prosecute the Guantánamo detainees in federal courts, but it is unlikely that it can prosecute them under the law of war as interpreted in the Hamdan decision. 
Although Hamdan recognizes the legitimacy of confining enemy combatants until the end of hostilities, doing so is untenable. 
The international community will not accept this form of massive preventive detention, with continuing allegations of abuse and torture. 
Sooner or later, Bush will have to decide between prosecutions in federal court or closing the camp. 

The Benefits of Chinese FDI 
BERKELEY – In a rare act of bipartisanship, the United States Congress recently passed legislation to encourage more inward foreign direct investment. 
Democrats and Republicans agree that FDI, or “insourcing,” is important to US jobs and competitiveness. 
They are right. 
But, even as they propose new measures to court foreign investors, many members of Congress in both parties harbor deep concerns about FDI from China, on both national-security and economic grounds. 
These concerns are unwarranted, and discriminatory policies to restrict such investment are ill-advised. 
The US government already has adequate controls in place to review and block FDI from all countries, including China, that pose anti-competitive and national-security risks. 
Investments that clear these controls benefit the US economy in numerous ways and should be welcomed. 
Foreign-owned firms in the US account for 5% of private-sector employment, 17% of manufacturing jobs, 21% of exports, 14% of research and development, and 17% of corporate-income taxes. 
Recognizing FDI’s significant contributions to the US economy, President Barack Obama’s Council on Jobs and Competitiveness endorsed the administration’s new Select USA program to coordinate government-wide efforts to promote it. 
To be sure, the US remains the world’s leading destination for FDI, accounting for 15% of global flows. 
But its share is declining, while China, using both carrots (like tax holidays and special enterprise zones) and sticks (like explicit and implicit local-content requirements) to attract foreign companies, has become the second-largest destination. 
China has remained a small source of FDI outflows, but that, too, is changing rapidly. 
Chinese outward FDI soared from an average of $3 billion per year before 2005 to $60 billion in 2010, catapulting China into the top five sources of FDI on a three-year moving-average basis. 
Given the size of China’s economy, its growth rate, and the experience of other developing economies, FDI from China is likely to increase by $1-2 trillion by 2020. 
An increase in FDI outflows is a priority in China for two reasons. 
First, China has an understandable interest in diversifying its substantial holdings of foreign-exchange reserves away from low-yielding US Treasuries to real productive assets with higher returns. 
That is why China established its sovereign-wealth fund, China Investment Corporation, and why CIC decision-makers are seeking more FDI opportunities. 
Second, China’s businesses have been encouraged to “go global” and invest abroad to find new markets, secure access to energy and raw materials, and enhance their competitiveness by acquiring new technologies, brands, and management skills. 
In a recent report, the People’s Bank of China urged Chinese companies to acquire foreign firms as the first stage of a ten-year plan to ease China’s capital-market restrictions – long a goal of US policymakers. 
So far, China’s FDI outflows have been concentrated in developing countries and a handful of resource-rich developed countries, including Australia and Canada, and have been aimed at facilitating trade and acquiring access to natural resources. 
But the patterns and destinations of China’s outward FDI will change as rising wages, an appreciating real exchange rate, and the entry of new suppliers from other emerging countries erode Chinese companies’ competitiveness, motivating them to invest abroad to upgrade their technology and management capabilities, find new growth opportunities, and move up the value chain. 
Currently, the US receives only about 2-3% of FDI flows from China. 
But China’s direct investments in the US have increased rapidly, from less than $1 billion annually in 2003-2008 to more than $5 billion per year in 2010-2011. At least 38 US states now host FDI projects from China, and competition for Chinese investment has intensified as states’ budgets have contracted. 
Of course, alongside the potential economic benefits of attracting a much larger share of Chinese FDI, legitimate competitive and national-security concerns do need to be addressed. 
First, like all mergers and acquisitions involving both domestic and foreign investors, investments in or acquisitions of US companies by Chinese companies, whether state-owned or private, must be evaluated by the US Justice Department for their impact on market competition. 
Investments with significant anti-competitive effects must be modified or blocked. 
Second, the Committee on Foreign Investment in the United States (CFIUS) must screen investments in or acquisitions of US companies by foreign companies, including Chinese companies, for national-security risks. 
Such screening is a common and justifiable practice around the world. 
In recent years, CFIUS has defined national security broadly to encompass not only defense activities and dual-use technologies, but also critical infrastructure, including telecommunications, energy, and transport – areas of particular interest to Chinese companies. 
Many Chinese investors view the CFIUS screening process as protectionist and targeted at them, but there is no evidence of this. 
The United Kingdom, Canada, France, and Israel accounted for more than half of all CFIUS cases reviewed in 2008-2010, while China accounted for only about 5%. 
Only a small fraction of Chinese FDI in the US is subject to CFIUS review, and most of these projects, like most reviewed by CFIUS, are approved, sometimes with mitigation measures. 
CFIUS does not review greenfield investments, which account for about 50% of Chinese FDI in the US. 
But Chinese FDI, especially in sensitive sectors like energy, does often trigger Congressional hearings, ad hoc resolutions, and calls for tougher CFIUS action. 
As a result of high-profile Congressional opposition, China’s state-owned energy company CNOOC withdrew its bid for Unocal, an American energy company, in 2005, before a CFIUS review that most likely would have cleared the deal on national-security grounds. 
China still points to this episode as evidence that Chinese FDI is not welcome in the US. 
Feeding this perception, some members of Congress are now exhorting CFIUS to block CNOOC’s proposed acquisition of Nexen, a Canadian energy company with holdings in the Gulf of Mexico, until China resolves ongoing disputes with the US over preferential government procurement policies and barriers to FDI by US companies in China. 
Heeding these calls would be a costly mistake that would undermine the objective, non-discriminatory CFIUS process and encourage Chinese companies to look elsewhere at a time when Chinese FDI is poised to explode and the US economy sorely needs the jobs, capital, and trade benefits that it would bring. 

Inflation Is Still the Lesser Evil 
CAMBRIDGE – The world’s major central banks continue to express concern about inflationary spillover from their recession-fighting efforts. 
That is a mistake. 
Weighed against the political, social, and economic risks of continued slow growth after a once-in-a-century financial crisis, a sustained burst of moderate inflation is not something to worry about. 
On the contrary, in most regions, it should be embraced. 
Perhaps the case for moderate inflation (say, 4-6% annually) is not so compelling as it was at the outset of the crisis, when I first raised the issue. 
Back then, against a backdrop of government reluctance to force debt write-downs, along with massively over-valued real housing prices and excessive real wages in some sectors, moderate inflation would have been extremely helpful. 
The consensus at the time, of course, was that a robust “V-shaped” recovery was around the corner, and it was foolish to embrace inflation heterodoxy. 
I thought otherwise, based on research underlying my 2009 book with Carmen M. Reinhart, This Time is Different. 
Examining previous deep financial crises, there was every reason to be concerned that the employment decline would be catastrophically deep and the recovery extraordinarily slow. 
A proper assessment of the medium-term risks would have helped to justify my conclusion in December 2008 that “It will take every tool in the box to fix today’s once-in-a-century financial crisis.” 
Five years on, public, private, and external debt are at record levels in many countries. 
There is still a need for huge relative wage adjustments between Europe’s periphery and its core. 
But the world’s major central banks seem not to have noticed. 
In the United States, the Federal Reserve has sent bond markets into a tizzy by signaling that quantitative easing (QE) might be coming to an end. 
The proposed exit seems to reflect a truce accord among the Fed’s hawks and doves. 
The doves got massive liquidity, but, with the economy now strengthening, the hawks are insisting on bringing QE to an end. 
This is a modern-day variant of the classic prescription to start tightening before inflation sets in too deeply, even if employment has not fully recovered. 
As William McChesney Martin, who served as Fed Chairman in the 1950’s and 1960’s, once quipped, the central bank’s job is “to take away the punch bowl just as the party gets going.” 
The trouble is that this is no ordinary recession, and a lot people have not had any punch yet, let alone too much. 
Yes, there are legitimate technical concerns that QE is distorting asset prices, but bursting bubbles simply are not the main risk now. 
Right now is the US’s best chance yet for a real, sustained recovery from the financial crisis. 
And it would be a catastrophe if the recovery were derailed by excessive devotion to anti-inflation shibboleths, much as some central banks were excessively devoted to the gold standard during the 1920’s and 1930’s. 
Japan faces a different conundrum. 
Haruhiko Kuroda, the Bank of Japan’s new governor, has sent a clear signal to markets that the BOJ is targeting 2% annual inflation, after years of near-zero price growth. 
But, with longer-term interest rates now creeping up slightly, the BOJ seems to be pausing. 
What did Kuroda and his colleagues expect? 
If the BOJ were to succeed in raising inflation expectations, long-term interest rates would necessarily have to reflect a correspondingly higher inflation premium. 
As long as nominal interest rates are rising because of inflation expectations, the increase is part of the solution, not part of the problem. 
The BOJ would be right to worry, of course, if interest rates were rising because of a growing risk premium, rather than because of higher inflation expectations. 
The risk premium could rise, for example, if investors became uncertain about whether Kuroda would adhere to his commitment. 
The solution, as always with monetary policy, is a clear, consistent, and unambiguous communication strategy. 
The European Central Bank is in a different place entirely. 
Because the ECB has already been using its balance sheet to help bring down borrowing costs in the eurozone’s periphery, it has been cautious in its approach to monetary easing. 
But higher inflation would help to accelerate desperately needed adjustment in Europe’s commercial banks, where many loans remain on the books at far above market value. 
It would also provide a backdrop against which wages in Germany could rise without necessarily having to fall in the periphery. 
Each of the world’s major central banks can make plausible arguments for caution. 
And central bankers are right to insist on structural reforms and credible plans for balancing budgets in the long term. 
But, unfortunately, we are nowhere near the point at which policymakers should be getting cold feet about inflation risks. 
They should be spiking the punch bowl more, not taking it away. 

Cartography’s New Golden Age 
MOUNTAIN VIEW, CALIFORNIA – Noé Diakubama, an emigrant from the Democratic Republic of Congo who now lives in Paris, is one of this century’s intrepid pioneers. 
Using online mapmaking tools, he created the first map of his village, Mbandaka, which he and his wife have modified more than 100,000 times since 2009. Noé literally put Mbandaka – and the people who live there – on the map. 
Noé is not the only such pioneer. 
There is a vast and growing community of online mapmakers creating useful, accessible maps of lesser-known areas – and transforming people’s lives in the process. 
During the Age of Exploration, which extended from the fifteenth to the seventeenth century, adventurers like Christopher Columbus, Ferdinand Magellan, and James Cook embarked on dangerous journeys to distant lands, from New Zealand to Newfoundland, drawing detailed charts of their voyages. 
By advancing geographic knowledge, they broadened people’s worldview, enhanced trade, and helped to usher in the Industrial Revolution. 
Today, people like Noé are spearheading a second golden age of cartography, which promises to bring equally significant economic and social benefits. 
Indeed, accurate maps break down geographic barriers, empowering individuals to reach their desired destinations, enabling businesses to reach consumers anywhere, and enriching people’s outlooks. 
The Internet is transforming the way maps are made, enabling ordinary people – dubbed “citizen cartographers” – to work alongside intrepid adventurers and professional geographers. 
These cartographers – whose only common characteristic is Internet access – are embracing the opportunity to depict the places that they know and love, whether to help their neighbors get around or to give faraway people a glimpse of their local environments. 
Using online tools like Google Map Maker, they are contributing to the shared goal of building a digital map of the world. 
Some even host “mapping parties,” at which communities gather around computers, in schoolyards or church halls, to add layers of detail that extend beyond topography. 
By including human elements, such as popular cafés or local walking trails, they create comprehensive, useful tools for others, and enhance their understanding of their own community. 
Digital maps can be as dynamic as the communities that they depict. 
While paper maps can accurately portray static features like rivers and mountains, they cannot easily be updated when new buildings are constructed, roads are rerouted, or new restaurants open. 
By contrast, digital maps can be modified instantly, keeping locals apprised of developments in their area and helping visitors to feel like natives in unfamiliar places. 
Similarly, a digital map can be tailored to an individual’s interests or needs. 
A keen cyclist might want a map showing bicycle paths, including information about the terrain. 
But a tourist might prefer a map that highlights specific attractions or indicates public-transport links. 
Such customization leads to many millions of versions of the world – all of them accurate. 
Digital mapping technology is having the most profound impact on the world’s most remote and undeveloped regions. 
In Africa, for example, road coverage on Google Maps increased from 20% in 2008 to 75% last year, while the number of towns and villages for which detailed maps are available grew by more than 1,000%. 
This has not only facilitated trade and transport, but also translates into faster response times for emergency services, saving thousands of lives each year. 
In fact, modern tools like maps and satellite navigation contribute to annual savings of up to 3.5 billion liters of gasoline and more than one billion hours of travel time. 
As a result, farmers are better able to get their goods to market before they perish, and to build more efficient irrigation systems, which save the global agricultural industry $8-22 billion annually. 
The mapping movement’s growing momentum promises to result in the accurate and comprehensive representation of almost every inch of the world, including road data, photos, and business listings. 
This will create even more opportunities for economic growth, improve access to health care and other services, contribute to social development, and broaden – both figuratively and literally – people’s worldview. 
To advance the world’s geographic knowledge, explorers used to have to head out to sea, enduring inclement weather and debilitating disease, unsure of where they were going – or whether they would ever return home. 
While today’s online cartographers do not face the same risks, they, too, are embarking on a journey into the unknown in search of knowledge, excitement, and better lives. 

A New World’s New Development Bank 
NEW YORK – At the conclusion of their summit in Durban in March, the leaders of the BRICS (Brazil, Russia, India, China, and South Africa) announced their intention to establish a New Development Bank aimed at “mobilizing resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries.” 
The significance of this decision cannot be overemphasized. 
For starters, it reflects the enormous successes in economic development during the last four decades (the BRICS’ aggregate GDP is now greater than that of the advanced countries when the Bretton Woods institutions were founded) and the rebalancing of global economic power that this implies. 
Indeed, the decision demonstrates the BRICS’ ability and willingness to work together, for their own benefit and for that of the entire world. 
Emerging markets and developing countries are taking the future into their own hands – at a time when rich countries are muddling through their own self-inflicted problems. 
A new development bank is clearly needed. 
The infrastructure requirements alone in emerging-market economies and low-income countries are huge – 1.4 billion people still have no reliable electricity, 900 million lack access to clean water, and 2.6 billion do not have adequate sanitation. 
At the same time, an estimated two billion people will move to cities in the next quarter-century. 
And policymakers must ensure that the investments are environmentally sustainable. 
To meet these and the other challenges confronting the developing world, infrastructure spending will have to rise from around $800 billion to at least $2 trillion annually in the coming decades. 
Otherwise, it will be impossible to achieve long-term poverty reduction and inclusive growth. 
While the private sector can meet some of these needs, it can go only so far, especially given the nature of infrastructure projects’ risks, the huge upfront costs, and the high cyclical sensitivity of global financial markets. 
The funding gap is beyond what existing international financial institutions can meet – and the advanced countries’ malaise means that significant recapitalization is not in the cards. 
Annual infrastructure financing from multilateral development banks and overseas development assistance is likely to amount to no more than $40-60 billion, or 2-3% of projected needs. 
A development bank anchored in emerging markets and developing countries can help to address this gap and become a powerful catalyst for change, both in the developing world and – through collaboration and example – in existing institutions. 
The world today is markedly different from the world at the time of the founding of the World Bank and many of the regional development banks. 
The BRICS’ proposed New Development Bank presents an important opportunity to reflect these changes, with modern financial instruments, strong governance, and a broad-based mandate. 
For example, changes in financial markets (including the large amounts of money in sovereign wealth funds and public pension funds) provide opportunities for new development partnerships, which the New Development Bank can help to catalyze and orchestrate. 
So, too, should its deployment of a wide range of modern instruments enable it to meet the diverse range of project needs while ensuring adequate risk management. 
The new bank should maximize its multiplier effects by sharing and reducing risk through collective action and “crowding in” other financing; by setting a powerful example in adopting innovative and cost-effective approaches; and through its policy and institutional impact beyond projects that it finances. 
While the older institutions have attempted to adapt, their governance remains out of sync with today’s economic and political realities. 
The new bank’s governance structure has yet to be worked out, but it promises to be more consistent with contemporary best practices. 
Most important, the New Development Bank will give greater voice to the perspectives and interests of those in developing countries and emerging markets. 
As with the outdated governance arrangements, conceptions of development that informed the existing multilateral institutions’ mandates are markedly different from modern development thinking. 
For example, there was no awareness of the challenge posed by climate change, and that all countries (including those in the developing world) must reduce their greenhouse-gas emissions and adapt to changes that will be particularly adverse to poor countries. 
Likewise, there was no comprehension of the innovation and opportunities entailed in pursuing more sustainable paths of inclusive economic growth. 
Of course, the World Bank and the regional development banks now recognize such imperatives, and the New Development Bank should not relieve the developed countries of their responsibilities. 
But, with the shortfall of assistance from developed to developing countries, the new bank can provide essential help to developing countries and emerging markets as they undertake smarter and more sustainable infrastructure investment for growth and poverty reduction. 
Given the need to act quickly – and given the slowness with which the developed world has been responding – this new institution is all the more welcome. 
The new bank can make a major contribution to the global economy’s health by facilitating the transition to new poles of growth and demand, helping to rebalance global savings and investments, and channeling excess liquidity to productive use. 
It will not only be a driver for sustainable growth in the developing and emerging world, but will also foster reform in the existing multilateral financial institutions – changes from which all of us, in the developed and developing world alike, will benefit. 

The Benefits of US-China Strategic Economic Dialogue 
In recognition of the importance and complexity of the US-China economic relationship, in September 2006 President George W. Bush and President Hu Jintao created the “Strategic Economic Dialogue” between our countries. 
Their intent was not to replace the many economic dialogues already taking place, but to create a senior-level forum that was both comprehensive and strategic. A forum that would also build trust on both sides by demonstrating progress on the immediate issues we face. 
The SED has made substantial progress in achieving these goals. 
The US and China have built stronger relationships and established constructive channels of communication that didn’t previously exist. 
These innovations have helped keep the US-China economic relationship on an even keel, even in times of tension. 
Because we have a framework for high-level discussions, we can – and do – pick up the phone and talk. 
The SED meeting next week in Beijing will focus on five areas: integrity of trade and product safety; balanced economic development, including financial sector reform; energy efficiency and security; environmental sustainability; and bilateral investment. 
The meeting comes at a delicate time, as a new group of leaders moves into China’s senior positions, and as the agenda has been broadened to include food and product safety, energy efficiency and security, and environmental sustainability. 
These issues carry deep implications for economic ties. 
Consumers need to have confidence in the safety of the products they purchase, whether produced at home or abroad. 
China’s management of food and product safety issues will have a long-term impact on trade relations, the sustainability of China’s growth strategy, and its further integration into the global trading system. 
US and Chinese government agencies are working together to address these issues. 
Likewise, for both our countries, greater energy efficiency and security requires reliance upon market price signals, technology, innovation, and diversified energy sources. 
The Global Nuclear Energy Partnership, clean coal development through FutureGen, and industrial efficiency audits represent some of the most productive areas of ongoing cooperation. 
We also encourage China’s active participation in the Major Economies Meeting efforts to develop a post-2012 framework for greenhouse-gas reduction. I was pleased to see that a large Chinese energy company, Shanghai Electric, recently indicated public support for substantial reductions in greenhouse-gas emissions. 
One pressing issue – for the US, China, and the global economy – is China’s move to a more flexible exchange-rate policy. 
China is reforming its policy, as a part of a move to a more market-determined exchange rate. 
In the past year, the RMB has appreciated by 6%, but the pace is not fast enough to reduce China’s global trade surplus, its internal imbalances, or foreign-exchange-market pressures. 
A more flexible currency is especially important now, when inflation risks are rising in China. 
Increased currency flexibility would allow China’s central bank to use monetary policy to enhance China’s financial and price stability. 
As Premier Wen Jiabao recently emphasized, China must now undertake comprehensive measures to control mounting inflation, growing asset bubbles, and an overheating economy. 
We share these concerns. 
In the US-China relationship, the RMB exchange rate has become a touchstone for broader anxieties about competition from China. 
As globalization advances and economies become more tightly integrated, worries about the effects of foreign competition – through trade or through foreign investment – have fueled economic nationalism and protectionist sentiments. 
Americans have been through this type of debate before. 
Twenty years ago, we were gripped by fear that Japan would overtake our economic leadership – a concern that was unfounded then and, in hindsight, looks profoundly mistaken. 
America continues to lead the world in standard of living, productivity, and innovation. 
China’s continued economic growth and integration into the global economy gives America even greater opportunities to grow and succeed. 
The biggest risk to both US and Chinese prosperity is that China’s growth stalls, or that it pulls back from further global integration and reforms too slowly. 
Indeed, economic nationalism is growing in China, too. 
Some Chinese are suspicious that the US push for RMB appreciation and financial-market liberalization is really an attempt to gain trade advantages and generate profits for American companies while slowing China’s economic expansion. 
They mistakenly believe that yen appreciation during the mid-1980’s caused Japan’s weak economic performance in the 1990’s. Rather, we now know that Japan’s economic difficulties were caused by the growth, and then collapse, of a huge asset bubble, and the failure to use monetary policy to prevent deflation after the bubble burst. 
Financial liberalization is not about foreign firms drilling holes in China’s economy. 
Foreign participation in the financial sector brings expertise needed to provide more efficient savings instruments, risk management, and allocation of capital. 
But to use that expertise – the most valuable asset a globally competitive financial institution has – investors need to control the operations of firms in which they have a stake. 
This is why China’s equity limits for foreign investment in Chinese financial institutions are costly to the Chinese economy, and why raising these limits is important. 
There are also those in China who argue that the US focus on food and product safety is part of a strategy to restrict Chinese imports and reduce the bilateral trade deficit. 
This argument has no basis in fact. 
Numerous other countries, notably European Union members, share our concerns. 
Finally, after welcoming foreign investment, which contributed greatly to Chinese manufacturing growth and export competitiveness, some in China would now tighten restrictions on foreign investment to protect China’s domestic industries. 
The US faces similar pressures, even though we are one of the world’s most open economies. 
But neither country can protect its way to prosperity: protectionism harms China’s industrial development and our efforts to build stronger trading relationships. 
I am committed to working to maintain economic openness, because it is good for America and for our workers. 
But, frankly, it will be easier to do this if the American public and the US Congress see that China is serious about reform and expanding access to its markets. 
The SED is one valuable tool in combating protectionist sentiments. 
In this and other bilateral dialogues, the US has demonstrated that we welcome and encourage the rise of a prosperous and stable China. 
We supported China’s membership in the World Trade Organization, the Inter-American Development Bank and the Financial Action Task Force. 
We supported a greater voting share for China, and other rapidly growing emerging markets, in the IMF and the World Bank. 
But China’s government must recognize that, while increased participation allows China to advance its interests, it also brings greater responsibilities. 
The agreements we have achieved thus far are like signposts showing progress along the road to mutual economic prosperity. 
While progress has not been as rapid as we would like, these signposts point the way to further benefits for Americans and Chinese alike. 

The Berlusconi Paradox 
ROME – One storm has passed in Italy. 
Another, perhaps bigger storm, has yet to begin. 
Not for the first time, Italian politics are a landscape of paradoxes and oxymora. 
Thus, a prime minister who gained massive support from voters only two and a half years ago, won mid-term elections, survived two confidence votes in Parliament, and still enjoys high approval ratings is constantly under pressure. 
Sixteen years have passed since Silvio Berlusconi, a blessing and a curse for the Italian people, made his first foray into the political ring. 
Berlusconi has been in power for eight of those years, though, as Giuliano Ferrara, the editor of Il Foglio, puts it, the popular perception is that, given his commanding personality, he has ruled the whole time. 
The Berlusconi era is approaching its twilight, yet his sun is unwilling to set. 
Berlusconi, the head of a diversified media empire (television, radio, press, Internet, movies, advertising, and books), decided to establish a political party at a time when he believed that post-communists could win power otherwise. 
Until 2006, Berlusconi relied on three supporters: Northern League federalists, the post-fascists led by Gianfranco Fini, and the Catholic Union of the Center (UDC), under Pier Ferdinando Casini’s leadership. 
In 1994, Fini and Casini were around 40 years old and seen as rising stars of Italian politics. 
Standing alongside Berlusconi, they did indeed rise, but the tycoon’s star out-shone their own. 
They felt like powerless minority shareholders. 
In 2008, Casini split from Berlusconi. 
The vote of confidence that just took place finalized Berlusconi’s divorce with the leader of the Italian right, Fini. 
In both cases, Berlusconi won, but he has paid a heavy price. 
His government initially had a margin of more than 100 seats in Parliament; now, with Casini and Fini gone, it is down to three. 
Berlusconi himself seems captive to his only remaining partner: the Northern League, which is at its popular zenith (though its charismatic leader, Umberto Bossi, is seriously ill). 
Not surprisingly, the League is calling for new elections in the spring, whereas Berlusconi would prefer to widen the government’s majority by bringing back Casini – a path beset with hurdles and hazards. 
After all, Berlusconi’s power, while strong, is also strongly contested. 
On the international scene, the American diplomatic cables recently released by WikiLeaks highlight American suspicions about Italy, which are not limited to the country’s ties – too close, according to the US State Department – to Vladimir Putin’s Russia, to Libya, and to Iran. 
What is probably most striking for the Anglo-Saxon cultural paradigm is Berlusconi’s boldness in his use of power – not only when dealing with young and attractive women, but, first and foremost, when advancing his companies’ interests against those of their competitors. 
The overt government backing provided to Berlusconi’s Mediaset against Rupert Murdoch’s Sky caused a far greater stir internationally than it did in Italy. 
Berlusconi regards his “commercial diplomacy” as a formidable defensive weapon, which may help explain why he is not too concerned about how his actions in this area are perceived on the international front. 
Nor he is overly worried about the domestic scene, since opponents are deeply divided and thus unable to offer an electoral alternative. 
Berlusconi’s worries, instead, have more to do with a possible criminal verdict by the Constitutional Court on corruption charges, and a related ban from public office. 
That is why, if fresh elections are to be held, Berlusconi may well turn them into a personal referendum. 
These are the machinations of Italian politics. 
Finance Minister Giulio Tremonti is a safe pair of hands for the country’s fiscal policy, yet the government has been unable to revive economic growth. 
Social unrest, on the other hand, has already erupted, with violent protests by students and radical trade-union factions fueling alarm – as have threats and aggression against officials of both trade unions and employers’ associations. 
Matters could get worse in 2011, as rising unemployment cuts household consumption. 
And widening interest-rate spreads on government bonds do not bode well, either, as this will quickly lead to pressure for further spending cuts. 
Despite these sources of concern, Italy is a robust country that knows how to deal with economic crisis. 
But will it be able to deal with a brewing political crisis, too? 
The answer is likely to be as paradoxical as Italian politics: temporarily definitive. 

The Best and Brightest Fanatics 
In Britain and Australia, several Muslim medical doctors and engineers have been arrested following a series of failed car bombings. 
The arrest of these well-educated professionals, together with the Egyptian doctor Ayman al-Zawahiri’s role as al-Qaeda’s deputy leader, raises questions that go far beyond disaffection among Muslims and the consequences of America’s misadventures in the Middle East. 
Doctors and engineers, after all, are professionals. 
They are well-off, well-established members of society, not marginal figures whom we might expect to be drawn to desperate acts of violence. 
Moreover, they come from a scientific background, and science is usually not associated with religious zeal or political fanaticism. 
Of course, only a minority of zealous Muslims espouses political violence, and only a tiny number of Muslim professionals set off bombs. 
Nevertheless, the presence of doctors and engineers in fundamentalist movements stands out. 
In fact, fundamentalist leaders often have professional backgrounds. 
Doctors who organize groups based on literalist readings of scripture and engineers who lead Islamist political parties are familiar figures throughout the Muslim world. 
One reason for this is the difference between the cultures of basic science and applied science. 
Throughout the world, physicists and biologists tend to be more skeptical and less religious. 
Among engineers and biomedical professionals, however, conservative, even fundamentalist religious leanings are not so unusual. 
This phenomenon is not unique to Islam. 
In the United States, literalist Christians with engineering backgrounds have long led opposition to Darwin’s theory of evolution. 
Compared to biologists, the ranks of medical doctors include a much larger proportion of creationists. 
Likewise, in Muslim countries, it is not unusual for engineering professors to denounce Darwin as a fraud, and many well-known doctors argue that modern technological and scientific developments are prefigured in the Koran. 
In the Muslim world, applied science has even more religious and political entanglements. 
In their effort to overcome centuries of military and commercial backwardness, Muslims have sought to industrialize, rationalize administration, and adopt modern forms of political life. 
However, a constant concern has been to adopt these changes without corrupting Muslim culture – to become technologically adept and yet remain devout Muslims. 
In this effort, professionals in applied science, as people who would help Muslim countries catch up with the West, have enjoyed enormous prestige. 
Engineering programs are in high demand, and engineers enjoy a status comparable to lawyers and doctors in the West. 
The best and the brightest young Muslims go into applied science, while basic science languishes. 
With their important role in modernization, applied scientists engage in cultural debates as well. 
A doctor may choose a secular path, or try to integrate a traditional faith with a modern profession. 
Such choices are directly connected to debates over the direction the whole society should take. 
To complicate matters further, the Islamic world is in a period of religious experimentation. 
Traditional doctrines and supernaturalism remain vigorous, but the structures of religious authority are changing. 
Today’s fundamentalism is a modern way of being religious, more suitable to a literate, urban population than a peasantry guided by traditional religious scholars. 
Traditionally, Muslim scholars achieved status by mastering socially useful knowledge, which was Islamic law. 
Today, however, applied science is also useful knowledge for the modern world. 
As a result, in a modernizing environment, doctors and engineers can find themselves in positions of religious authority, leading a Koran study group and interpreting scripture. 
The Muslim world is home to many successful movements that combine doctrinal conservatism with a modern outlook that supports capitalism and embraces technology. 
Professionals have been integral parts of such movements, because modernization encourages action rather than resignation. 
Political ideas are easily translated into religious language, and in extreme circumstances, violent jihadism is used to express political frustrations. 
But the possibility of violence should not distract us from noticing that fundamentalist convictions also motivate positive political activism. 
Islamists (such as those in Hamas) gain credibility among Muslim populations because of the social services and community support that they help to organize. 
Indeed, fundamentalist professionals often excel in such activism. 
Their puritanical religious style sets forth an ideal morality with clear-cut rules that are similar to the constraints of an engineering project. 
Engineers set out to change the world according to a blueprint, as they were trained to do. 
Religiously colored political violence will always attract some professionals. 
But, again, it is a tiny number. 
The majority of observant Muslims are peaceful, and most Islamists today have adopted more moderate, democratic politics. 
Increasingly Islamism is becoming a form of right-wing populism. 
But, like right-wing Christians in the US, Islamists can be legitimate parts of a democratic political landscape. 
Indeed, one virtue of democracy is its ability to dampen violent tendencies. 
If we are to encourage democratic trends in political Islam, we must learn to think of Islamists as political opponents rather than as violent adversaries who may have medical and engineering degrees. 

The Best Investments 
KOLKATA – On the eastern edge of Kolkata, Dulu Bibi, a 25-year-old mother of four, worries about the cost of treating her two sick boys. 
Her husband earns 80-90 rupees ($1.90 or €1.40) a day. 
The family’s basic diet is low in the essential micronutrients that children need to thrive. 
Dulu’s two sons, aged three and one, are weak and feverish, lack appetite, and cry a lot. 
“If I have to spend 150-200 rupees on medicine,” she asks, “what will I eat and feed my children with?” 
Dulu’s story is heartbreaking – and heartbreakingly common – in the developing world: three billion people survive on diets that lack micronutrients like vitamin A and Zinc, and are at increased risk of illness from common infections like diarrheal disease, which kills nearly two million children annually. 
Micronutrient deficiency is known as “hidden hunger.” 
This is a fitting description, because it is one of the global challenges that we hear relatively little about in the developed world. 
It draws scant media attention or celebrity firepower, which are often crucial to attracting charitable donations to a cause. 
But there is a larger point here: billions of dollars are given and spent on aid and development by individuals and companies each year. 
Despite this generosity, we simply do not allocate enough resources to solve all of the world’s biggest problems. 
In a world fraught with competing claims on human solidarity, we have a moral obligation to direct additional resources to where they can achieve the most good. 
And that is as true of our own small-scale charitable donations as it is of governments’ or philanthropists’ aid budgets. 
In 2008, the Copenhagen Consensus Center, which I direct, asked a group of the world’s top economists to identify the “investments” that could best help the planet. 
The experts – including five Nobel Laureates – compared ways to spend $75 billion on more than 30 interventions aimed at reducing malnutrition, broadening educational opportunity, slowing global warming, cutting air pollution, preventing conflict, fighting disease, improving access to water and sanitation, lowering trade and immigration barriers, thwarting terrorism, and promoting gender equality. 
Guided by their consideration of each option’s costs and benefits, and setting aside matters like media attention, the experts identified the best investments – those for which relatively tiny amounts of money could generate significant returns in terms of health, prosperity, and community advantages. 
These included increased immunization coverage, initiatives to reduce school dropout rates, community-based nutrition promotion, and micronutrient supplementation. 
This last initiative, which could do so much to help Dulu Bibi’s family in Kolkata, is extraordinarily cheap. 
Providing Vitamin A for a year costs as little as $1.20 per child, while providing Zinc costs as little as $1.00. 
By highlighting the areas in which even small investments can accomplish a great deal, the project influenced philanthropic organizations and governments. 
This month, the Copenhagen Consensus Center releases the Guide to Giving (www.copenhagenconsensus.com) so that those of us without a government treasury or charitable foundation at our disposal can also consider how to use the experts’ lessons. 
Some reject the need to set priorities. 
But it happens whether we like it or not. 
A few causes and issues get the most airtime, attention, and money. 
The Copenhagen Consensus provides a framework on which we can build informed decisions, based on what can be achieved with similar “investments” in different areas. 
Should we contribute to organizations that focus on saving lives today, immediately making the world a better place (with spin-offs lasting longer), or fund education to benefit future generations? 
Often we hear catchphrases like “without an education there is no future” or “without water one cannot survive,” as if it is obvious that we should focus first on one or the other. 
But many people go without proper education and access to clean drinking water. 
The difficult task that the expert panel undertook was to look at the extra good that an additional donation – even as little as $10 – could achieve with respect to many good causes. 
The contrast between saving lives today and aiming at tomorrow becomes clear when efforts to tackle global warming are included in the comparison. 
How could $10 best be spent? 
Should we, say, buy carbon offsets, or donate to a charity providing micronutrient supplements? 
By putting all benefits to individuals, communities, and countries in monetary terms, we can compare the two options. 
Expert researchers for the Copenhagen Consensus found that carbon offsets are a relatively ineffective way of reining in global warming and reducing its effects – $10 would avoid about $3 of damage from climate change. 
By contrast, $10 spent on Vitamin A supplements would achieve more than $170 of benefits in health and long-term prosperity. 
One lesson we can draw is that while global warming may exacerbate problems like malnutrition, communities bolstered by adequate nutrition will generally be less vulnerable to climate-based threats. 
Overall, we can typically best help through direct interventions, including micronutrient supplements, fortification, biofortification, and nutritional promotion. 
There are billions of stories like Dulu Bibi’s and billions of other stories that demand our attention. 
By embracing simple lessons from economics, all of us – individuals, governments, and philanthropies – can ensure that our generosity yields the greatest benefit possible. 

The Big Bang of Economic Freedom 
Why is it so difficult to implement the deregulation needed to make an economy more competitive? 
Why do so many governments try to achieve this end, and why do almost all of them fail? 
All citizens stand to benefit from competitive markets for products and services, but more often than not, the broad coalition required to sustain pro-competitive policies never materializes; political support simply isn't there. 
Why? 
This question is important not only in transition economies and other emerging market countries, but in rich countries as well--in fact almost everywhere, except possibly the US and the UK, which long ago embarked on a process of radical and far-reaching economic liberalization. 
New Zealand and Ireland followed suit and their economies have been booming ever since. 
Lack of competition is typically due to over-regulation. 
Taxicabs in European cities are expensive because the number of licenses is strictly controlled. 
With market entry blocked, license owners face little pressure to hold down fares, and the officials who allocate licenses are well placed to collect votes or bribes. 
In short, regulation tends to distort incentives, stimulating what economists call rent-seeking behavior: the taxi driver and the license official collect unearned premiums (rents) solely because they can exploit their position as insiders, not because they are more productive. 
Notaries are another example of this phenomenon. 
Public notaries in many countries charge extremely high fees for services that are virtually useless. 
Fees are high because the notaries themselves control access to their profession. 
Without government regulation (including rules requiring that consumers purchase their useless services), public notaries would not have the position from which they draw rents. 
Examples of the benefits of deregulation abound. 
The taxi market in Ireland is deregulated, and fares there are cheap. 
For some time after US airlines were deregulated, the five-hour flight from New York to Los Angeles cost much less than the half-hour trip from Zurich to Frankfurt. 
Similar discrepancies were found in the price of a coast-to-coast phone call in the US and that of a domestic long-distance call in France. 
Whereas regulation creates unearned rents for overprotected minorities (taxi drivers, notaries, airline pilots, and telecom or electricity workers), deregulation reduces these rents and redistributes them to the general public. 
But because overprotected minorities enjoy privileged access to politicians, it is no surprise that deregulation incites so much fierce--and effective--opposition. 
Public utilities are a good example of this. 
Whenever a government attempts to liberalize the electricity industry, unions and firms join forces in opposition. 
Workers and management oppose deregulation because openness to competition would eliminate their unearned premiums. 
The wages of electrical workers are high precisely because they have appropriated a part of the rents created in an uncompetitive electricity market. 
Is there a way to weaken this opposition? 
What if a government, instead of fighting the electricity industry alone, unleashed an economic "big bang," trying to liberalize most markets at once? 
An analogous "all or nothing" procedure was used in the US in the 1980s to close unneeded military bases. 
Since 1945, there had not been a single base closure. 
Even though the Pentagon itself wanted to close many of them and use the money elsewhere, no measure could be gotten through the Congress, because military bases qualify as "pork" - the favors for their constituents that help congressmen get re-elected -- and, according to old and sacred informal rules, no congressman will ever vote against pork in a colleague's district. 
But a plan to close numerous bases passed by an overwhelming majority when the congressional leadership finally agreed to present a single list of bases to be closed; the list could only be voted up or down, without any possibility of amendments. 
Good sense triumphed over pork. 
The cause of economic liberalization would be greatly advanced by adopting similar strategies. 
For example, electricity workers would realize that, as consumers, their gains from lower prices throughout the economy more than compensate them for the loss of rents in their own firms. 
The big bang approach gives workers a stake in liberalization and thus makes deregulation politically easier to pursue. 
Deregulating product markets has an additional benefit: it facilitates liberalization of the labor market. 
Evidence gathered by the OECD shows a strong positive correlation across countries between the degree of competition in the product market and the extent to which labor market regulations increase the powers of workers when they bargain with firms. 
Bargaining is mostly about the distribution of excess rents between the firm and its workers. 
In a competitive industry, where there are no excess rents, there is little to bargain about. 
In some cases, however, regulation works in the opposite direction: it keeps the price of public services artificially low, rather than too high. 
This is true of railway fares throughout continental Europe, which are subsidized by government. 
Here again, winning the battle for deregulation requires convincing consumers that they stand to benefit. 
Railway fares will be higher, but taxes will be lower, because only those who actually use trains will pay the costs, rather than the non-traveling taxpayers. 
Deregulations of airlines and bus transportation will also create healthy competition for railroads and help keep prices from rising too far. 
Piecemeal deregulation is doomed to fail. 
Generating sufficient political support to enact reforms that can survive the opposition of vested interests requires attempting to deregulate the entire economy simultaneously, not select industries, one by one. 
The key to eliminating inefficient, unproductive subsidies to minorities is to implement tax reductions for all. 

The Big Blink 
CHICAGO – World growth is likely to remain subdued over the next few years, with industrial countries struggling to repair household and government balance sheets, and emerging markets weaning themselves off of industrial-country demand. 
As this clean-up from the Great Recession continues, one thing is clear: the source of global demand in the future will be the billions of consumers in Africa, China, and India. 
But it will take time to activate that demand, for what is now being produced around the world for industrial-country consumers cannot simply be shipped to emerging-market consumers, especially the poorer ones among them. 
If we want to talk about billions of new consumers, rather than the tens of millions who have incomes similar to the middle classes in industrial countries, we must recognize that many emerging-market consumers have much lower incomes than industrial-country consumers, and live in vastly different conditions. 
Their needs are different, and producers around the world have, until recently, largely ignored them. 
But times are changing. 
Increasingly, producers are focusing on people who, if not at the bottom of the income pyramid, comprise the vast numbers nearer the base. 
For example, an Indian company, Godrej, is making an innovative refrigerator targeted at poor villagers. 
Village women typically are forced to cook multiple times during the day because the food that they prepare in the morning spoils in the heat. 
They would like to be able to refrigerate uneaten food, which would limit waste as well as time spent cooking. 
Unfortunately, with electricity supply intermittent even when available, compressor-based electric refrigerators, which consume a lot of power, have not been an option. Godrej’s engineers observed that if the objective was only to keep food from spoiling, and not necessarily to make ice, it would be sufficient if the refrigerator cooled to a few degrees above zero centigrade. 
This would allow the use of a less power-hungry fan instead of a compressor, and the fan could run on batteries rather than relying on the power grid. 
This is the kind of frugally engineered product that can create enormous new consumer demand in emerging markets. 
Companies in the industrial world are taking note. 
General Electric, for example, is cutting down the functions provided by its medical equipment to only what is strictly useful in order to supply remote rural clinics across the developing world. 
“Just-enough” functionality makes the equipment affordable without compromising quality. 
Over the next decade, growth in this kind of developing-country demand will help offset the slow growth of demand in industrial countries. 
But the process cannot be rushed. 
Unfortunately, with high levels of unemployment in industrial countries, policymakers want to do something – anything – to increase growth fast. 
The aggressive policies that they are following, however, could jeopardize the process of adjustment. 
Consider the United States Federal Reserve’s foray into quantitative easing. 
Clearly, the Fed’s objective is to increase bond prices, in the hope that lower long-term interest rates will propel corporate investment. 
In addition, the Fed hopes that lower long-term interest rates will push up asset prices, giving households more wealth and greater incentive to spend. 
Finally, by demonstrating a willingness to print money, the Fed hopes to increase inflationary expectations from their current low levels. 
Even though the markets seem to be anticipating substantial levels of quantitative easing, US corporate investment remains subdued. 
And US households seem wary of splurging again as they did in the past, no matter how wealthy they feel. 
The Fed has, however, succeeded in enhancing expectations of inflation in the US. 
With its anticipated bond purchases keeping a lid on interest rates, the net effect is that investors do not see an adequate real return from holding dollar assets, which is perhaps one reason the dollar has been depreciating. 
Emerging markets are worried because they believe that the Fed’s ultra-aggressive monetary policy will have little effect in expanding US domestic demand. 
Instead, it will shift demand towards US producers, much as direct foreign-exchange intervention would. 
In other words, quantitative easing seems to be as effective a method of depreciating the dollar as selling it in currency markets would be. 
Because they know that it will take time for domestic demand to pick up, emerging markets are unwilling to risk a collapse in exports to the US by allowing their currencies to strengthen against the dollar too quickly. 
They are resisting appreciation through foreign-exchange intervention and capital controls. 
As a result, we might not see steady growth of demand in emerging markets. 
Instead, excess liquidity and fresh asset bubbles could emerge in the world’s financial and housing markets, impeding, if not torpedoing, growth. 
In the ongoing showdown over currencies, who will blink first? 
The US (and other industrial countries) could argue that it has high levels of unemployment and should be free to adopt policies that boost growth, even at the expense of growth in emerging markets. 
These countries, in turn, could argue that even very poor US households are much better off than the average emerging-market household. 
Rather than bickering about who has the stronger case, it would be better if all sides compromised – if everyone blinked simultaneously. 
The US should dial back its aggressive monetary policy, focusing on repairing its own economy’s structural problems, while emerging markets should respond by allowing their exchange rates to appreciate steadily, thereby facilitating the growth of domestic demand. 

The Bigger Issue in Sudan 
TEL AVIV – The most immediate result of the arrest warrant issued for Sudanese President Omar Hassan al-Bashir by the International Criminal Court last month was the expulsion of most aid agencies from the country. 
But this global focus on Sudan’s Darfur region, though justified, has overshadowed an even more vital issue: sustaining the quest for a broader peace in all of Sudan. 
What is most needed now is to build an international consensus on a strategy to implement fully the 2005 Comprehensive Peace Agreement (CPA) for Sudan. 
The CPA ended Africa’s longest civil war, which had left behind over two million dead. 
That agreement not only contains benchmarks that should lead to self-determination for Sudan’s South; it also spells out a democratization process in Sudan itself. 
After all, the oppressive nature of the regime in Khartoum is at the root of the many conflicts that have torn the country apart. 
If the government in Khartoum persists in undermining the reform process and derailing the referendum on self-determination promised for the South in January 2011, a return to full-scale civil war, with calamitous consequences for the peoples of Sudan and the entire region, is a real possibility. 
The commitment of Sudan’s government to the CPA has always been equivocal. 
Indeed, since the civil war’s end in 2005, the Sudan People’s Liberation Army (SPLA) in the South has frequently had to confront militias that operate as government proxies. 
Moreover, Sudanese security forces continue to arm Arab tribes straddling the North-South border with the aim of destabilizing the mostly Christian South. 
The arrest warrant for al-Bashir should not be allowed to spur further attempts by his government to sabotage the CPA and the fragile process leading to the 2011 referendum. 
Nor should the international neglect that has for too long allowed the Darfur genocide to go unpunished recur when it comes to sustaining the quest for peace in Sudan. 
The South’s drive for independence has gained momentum because of the North’s failure to make unity attractive through reform and elections, as stipulated by the CPA. 
A second factor pushing secession forward is the SPLA’s lack of commitment to the New Sudan ideology of its founder, John Garang, who had negotiated the CPA and died in a plane crash in 2005. 
Garang fought for a united, secular, and democratic Sudan, a lofty dream that the Islamist regime in Khartoum admittedly has had no intention of implementing. 
Self-determination for the South has thus become the only practical way out of the country’s dilemma, and one fully consistent with the 2005 peace agreement. 
Because the North possesses the capacity, but not the political will, to implement the CPA, and the South has the will but not the capacity, continued disengagement by the international community might doom the prospects for peace. 
The Government of Southern Sudan suffers from serious financial constraints, owing to unrealistic assumptions about its oil revenues. 
As a result, its ability to maintain services – and the military capacity to respond to any maneuver by the Khartoum government aimed against the peace agreement – is seriously compromised. 
Only the United States appears to be committed to creating the conditions needed to implement the CPA. 
President George W. Bush, who twice received Southern Sudanese president Salva Kiir at the White House, approved a program in 2006 to transform the SPLA into a professional army. 
More recently, leading American congressmen have been impressing on President Barack Obama the need for a muscular effort to implement the CPA. 
Recommendations presented recently to the Senate’s Foreign Relations Committee, suggested that security guarantees for Southern Sudan be given in order to deter a renewal of the civil war. 
Financial assistance is of course vital, but the political commitment of the international community is just as important. 
For example, although the United Nations Mission in Sudan is supposed to monitor implementation of the CPA, Darfur has practically monopolized its attention. 
Moreover, whatever monitoring is taking place is rarely followed by action. 
The secession of a Southern Sudanese Christian state from a Muslim country, a major member of the Arab League, would have far-reaching strategic implications. 
China, a close ally of the government in Khartoum, is now carefully weighing its oil interests and its strategic concerns in the South. 
A high-powered Russian delegation recently arrived in Juba, the South Sudanese capital, with the proclaimed aim of “playing a more active role on the African continent.” 
And Japan, a major consumer of Middle East oil, has recently invited President Kiir to Tokyo. 
Sadly missing in this diplomatic action is the European Union. 
International law and the indictment of war criminals are important for a civilized world order, but they are no substitute for active financial and political engagement to support an internationally legitimate, and urgently needed, peace accord such as the CPA in Sudan. 

The Biodiversity Challenge 
LONDON – In this, the United Nations’ International Year of Biological Diversity, and with the Convention on Biological Diversity meeting in Japan, it is clear that the environmental challenges we face are severe and increasing, and that the need for action has never been more urgent. 
Our lives, and those of all other creatures on this planet, are both part of and dependent on biodiversity. 
Simply put, biodiversity is the web of life, including all organisms found in every habitat, from the fish of the deep oceans to the birds of the tropical rainforests and everything in between. 
Plant and fungal diversity lies at the very foundation of biodiversity, and on them all other life depends. 
Plants absorb carbon dioxide and produce oxygen, thereby providing the air we breathe and helping to regulate the climate. 
They provide food, medicine, fuel, shelter, clean water, and fertile soils. 
Plant diversity sustains us now, and in the future it will enable us to adapt, innovate, and ultimately survive. 
And yet, despite our dependence on this incredible natural heritage for our very lives and wellbeing – and those of future generations – we are squandering it at an unprecedented rate.amp#160; 
Our generation faces biodiversity loss on a massive scale. 
Species extinctions are occurring at a rate far greater than the natural cycle, owing largely to habitat destruction caused by human activities such as deforestation and land clearance. 
Evidence suggests that climate change will accelerate this loss. 
But there is hope amid the gloom. 
In fact, there is no technical reason why a species should go extinct, and great achievements in protecting biodiversity are being made. 
For example, scientists and conservationists around the world are collaborating on projects such as the Millennium Seed Bank partnership, founded and coordinated by the Royal Botanic Gardens, Kew. 
This partnership of more than 100 institutions in over 50 countries has already conserved 10% of the world’s wild plant species, and is working towards conserving 25%, focusing on those that are rare, endangered, and useful. 
What is needed now is the political will and financial resources to underpin these efforts. 
The major meeting of the Convention on Biological Diversity taking place in Nagoya, Japan, from October 18-29, is an opportunity in this regard, and we at Kew are hopeful for positive outcomes in terms of international agreements in the key areas of biodiversity conservation, sustainable use and access, and benefit-sharing. 
Meanwhile, at the national level, it is essential that biodiversity conservation is “mainstreamed,” becoming an integral part of government policy and sustainable management practices worldwide. 
Poverty alleviation, central to the UN Millennium Development Goals, is largely measured in GDP growth, but must include sustainable management of the natural capital on which economic health depends. 
Indeed, we should not forget the infinite spiritual and recreational benefits that the natural world provides to people and cultures everywhere. 
This is a component of human well-being that cannot be measured in GDP alone. 
It has been argued that much biodiversity has been lost as a result of a lack of understanding of its true value. 
Two major initiatives are helping to highlight the value of our natural capital: the UN-backed study, “The Economics of Ecosystems and Biodiversity” (TEEB), and the UN Collaborative Program on Reducing Emissions from Deforestation and Forest Degradation in Developing Nations (REDD+). 
Once the true value of our natural resources is understood, rather than taken for granted as if there were an infinitely available supply, the vital importance of conserving biodiversity should be better recognized. 
Effective conservation programs are based on sound scientific knowledge. 
Kew’s leading work in understanding and conserving plants around the world is hence a key pillar in the fight against biodiversity loss. 
Its collections contain some of the largest and most comprehensive records of plant diversity in the world, and are a global point of reference for research. 
A deep understanding of plant science is essential in planning and executing conservation projects. 
Kew’s recent work with the International Union for Conservation of Nature, London’s Natural History Museum, and the Zoological Society of London to create the Sample Red List Index (SRLI) for plants has revealed for the first time that one in five of the world’s plant species is threatened with extinction. 
As a result, we now have a baseline from which to measure progress in plant conservation around the world. 
We have the knowledge, expertise, and partnerships to make a very real positive difference to biodiversity conservation worldwide, and we welcome support from all parts of society to help us deliver this. 
Biodiversity is essential to our health, wealth, and well-being, and we now have the ability to halt its destruction and turn the tide. It is simply a question of priorities. 
Committing the political will, and a small fraction of the world’s financial resources, to biodiversity conservation – and the scientific research that underpins it – would bring indispensable long-term benefits, including a healthy planet for our children. 
The time to start is now. 


The Black Hole in America’s GDP 
CAMBRIDGE – The massive downturn in American’s economy will last longer and be more damaging than previous recessions, because it is driven by an unprecedented loss of household wealth. 
Although the fiscal stimulus package that President Obama recently signed will give a temporary boost to activity sometime this summer, the common forecast that a sustained recovery will begin in the second half of 2009 will almost certainly prove to be overly optimistic. 
Previous recessions were often characterized by excess inventory accumulation and overinvestment in business equipment. 
The economy could bounce back as those excesses were absorbed over time, making room for new investment. 
Those recoveries were also helped by interest rate reductions by the central bank. 
This time, however, the fall in share prices and in home values has destroyed more than $12 trillion of household wealth in the United States, an amount equal to more than 75% of GDP. 
Previous reactions to declines in household wealth indicate that such a fall will cut consumer spending by about $500 billion every year until wealth is restored. 
While a higher household saving rate will help to rebuild wealth, it would take more than a decade of relatively high saving rates to restore what was lost. 
The decline in housing construction has added to the current shortfall in aggregate demand. 
The annual number of housing starts has fallen by 1.2 million units, cutting annual GDP by an additional $250 billion. 
While this will eventually turn around as the inventory of unsold homes shrinks, the recovery will be slow. 
So the US economy faces a $750 billion shortfall of demand. 
Moreover, the usual automatic stabilizers of unemployment benefits and reduced income tax collections will do nothing to offset this fall in demand, because it is not caused by lower earnings or increased unemployment. 
Although the recently enacted two-year stimulus package includes a total of $800 billion of tax reductions and increased government spending, it would be wrong to think that this will add anything close to $400 billion a year to GDP in each of the next two years. 
Most of the tax reductions will be saved by households rather than used to finance additional spending. 
Moreover, a substantial part of the spending will be spread over the following decade. 
And some of the government spending in the stimulus package will replace other outlays that would have occurred anyway. 
An optimistic estimate of the direct increase in annual demand from the stimulus package is about $300 billion in each of the next two years. 
The stimulus package would thus fill less than half of the hole in GDP caused by the decline in household wealth and housing construction, with the remaining demand shortfall of $450 billion in each of the next two years causing serious second-round effects. 
As demand falls, businesses will reduce production, leading to lower employment and incomes, which in turn will lead to further cuts in consumer spending. 
To be sure, an improvement in the currently dysfunctional financial system will allow banks and other financial institutions to start lending to borrowers who want to spend but cannot get credit today. 
This will help, but it is unlikely to be enough to achieve positive GDP growth. 
A second fiscal stimulus package is therefore likely. 
However, it will need to be much better targeted at increasing demand in order to avoid adding more to the national debt than the rise in domestic spending. 
Similarly, the tax changes in such a stimulus package should provide incentives to increase spending by households and businesses. 
Although long-term government interest rates are now very low, they are beginning to rise in response to the outlook for a sharply rising national debt. 
The national debt held by US and foreign investors totaled about 40% of GDP at the end of 2008. 
It is likely to rise to more than 60% of GDP by the end of 2010, with the debt-to-GDP ratio continuing to increase. 
The resulting increase in real long-term interest rates will reduce all forms of interest-sensitive spending, adding further to the economy’s weakness. 
So it is not clear what will occur to reverse the decline in GDP and end the economic downturn. 
Will a sharp dollar depreciation cause exports to rise and imports to fall? 
Will a rapid rise in the inflation rate reduce the real value of government, household, and commercial debt, leading to lower saving and more spending? 
Or will something else come along to turn the economy around. 
Only time will tell. 

The Blair Option in Palestine 
The release of an abducted BBC journalist in Gaza is being seen by some as an attempt by Hamas (which denies any part in the kidnapping) to curry favor with Tony Blair, who on stepping down as Britain’s prime minister was appointed international envoy to Israel and Palestine. 
Blair has the thankless task of helping the Palestinian President Mahmoud Abbas build institutions for a viable state, following Hamas’ military takeover of Gaza. 
Given the stakes, this is a task worth doing despite the high risk of failure. 
But unless Blair gets a lot of unexpected support, failure is what will happen. 
Four basic facts govern Blair’s role: 
Blair isn’t the first statesman to try helping the Palestinians. 
James D. Wolfensohn, former head of the World Bank, tried earlier in Bush’s term. 
Wolfensohn made some progress, but it was not enough, especially when the United States, Israel, and the European Union chose to starve the Palestinians financially after Hamas won its unexpected victory in the January 2006 Palestinian elections. 
Wolfensohn quit in frustration. 
Blair is the most senior out-of-power statesman ever to get engaged in the Arab-Israeli conflict. 
He cannot be dismissed as a functionary with no political base. 
His role has been blessed both by Abbas and Israeli Prime Minister Ehud Olmert. 
He has a long history of engagement in Arab-Israeli issues, and for years pressed for effective outside efforts to move the Palestine problem toward resolution. 
At the same time, Blair won’t just take orders from the US. 
That would be the kiss of death, following Blair’s controversial mimicking of US policy in Iraq. 
Instead, at least on paper, Blair will work for the so-called Quartet, which also includes the EU, the United Nations, and Russia. 
Also, his formal role is limited to helping the Palestinians sort out their economic and political affairs, not trying to negotiate a peace settlement – a task reserved for US Secretary of State, Condoleezza Rice. 
But Blair’s high political profile means that what he does can’t be divorced from the broader politics or quietly played down if things don’t go well. 
At the least, Blair must press for a radical increase in funds provided by the outside world to the Palestinian government as well as to the 1.4 million Palestinians trapped in Hamas-run Gaza. 
So far America has pledged $40 million in humanitarian funds for Gaza (just $30 a person), and about $86 million in security training money for the West Bank. 
These sums will be added to Palestinian tax receipts that Israel collected but refused to hand to over to a government that included Hamas; Israel is now releasing about half of the approximately $700 million. 
But total funds pledged by all sources are only a small fraction of what is urgently needed. 
If Abbas is to compete with Hamas and its well-developed social-welfare structure and to avert human catastrophe in Gaza, he needs billions rather than millions of dollars in aid. 
Along with a major increase in US funds, the EU needs to increase its aid dramatically. 
But if outside money is to flow, Blair must get the Palestinian government to rein in its rampant corruption. 
All this requires clear thinking. 
At the RAND Corporation, for example, a team of researchers has laid out a comprehensive approach to building a successful Palestinian state, covering governance, security, education, health, water, investment – as well as long-term economic relations with Israel and the outside world. 
RAND’s practical ideas have drawn praise from some Palestinian as well as Israeli leaders, precisely because they are about people more than about politics. 
But even if Blair can get the economic development issues right, he can’t stop there if Abbas is to have a chance to succeed. 
Blair will need to gain Israel’s assurances that life for Palestinians, both in the West Bank and in Gaza, will become better. 
That includes greater freedom of movement, both within the West Bank and between it and Gaza. 
Blair will also likely press Israel to prove its intentions by stopping all settlement activity in the West Bank – no new settlements, no expansion of existing ones. 
By the same token, Blair will need to press the Palestinians to deliver a virtual cessation of attacks on Israel from Palestinian territories, including by Hamas, lest all peace efforts be blown apart by renewed fighting. 
As always, such a cessation would be at the mercy of extremists competing for power or bent on making peace impossible. 
In the process, Blair will have to talk to all parties, including Hamas – an Israeli and US sticking-point. 
These are all needs to be met even before the US can try again to broker a political settlement between Israel and the Palestinians. 
In the end, the obstacles may cause the “Blair option” to fall short. 
But everyone committed to a positive outcome for Israel, Palestine, and the Middle East should wish Blair good luck. 

The Blinders of History 
A distorted view of the present is the worst way to prepare for the challenges of the future. 
To describe the struggle against international terrorism as “World War IV,” as the leading American neo-conservative Norman Podhoretz does in his new book, is wrongheaded in any number of ways. 
First of all, when and where was World War III? 
The Cold War, precisely because it never became “hot,” was never the equivalent of World War I or II. 
Of course, the “World War” reference may be intended to create an “us” versus “them” logic, but this does not correspond to the nature of the challenge posed by radical Islam, given the complexity and the many divisions that exist within the Muslim world. 
Indeed, by militarizing our thinking, it renders us incapable of finding the right answers, which must be as much political as security-oriented. 
As always, words are important, because they can easily be turned into weapons that boomerang on those who use them inappropriately. 
Wrong analogies have already led America to disaster in Iraq, which had nothing in common with Germany or Japan after World War II – the parallel that some in the Bush administration used in arguing that democracy could be made to sprout in former dictatorships through occupation. 
Obviously, the terrorist threat is real and endures, as the recent foiled plot in Germany attests. 
That plot, which included a young German convert to Islam, showed once again that terrorists can threaten us from both without and within. 
The nihilistic and destructive instincts that some young Germans of the Baader/Meinhof generation acquired from extreme leftist ideology in the 1970’s, it seems, can be transformed into a “romanticization” of al-Qaeda. 
We must of course protect ourselves in the most serious and determined manner from the threat that terrorism may pose should, say, extremists acquire nuclear or biological weapons. 
Intelligence, diplomacy, security forces, and educating people to the requirements of life lived under the shadow of an invisible menace must all be brought to bear. 
A certain “Israelization” of our daily lives has unfortunately become inevitable. 
But that does not mean that we must become literally obsessed with terrorism at the expense of losing sight of broader historical challenges. 
The assassination of the heir of the Austro-Hungarian Empire at Sarajevo in July 1914 was not the cause of World War I, but its pretext. 
The big picture then was not the “anarchist plot” to destabilize empires, but the rise of exasperated nationalisms, coupled with the suicidal instinct of a decaying order and the fatal mechanism of the logic of “secret alliances.” 
The big picture then was that, with the transportation revolution and the deployment of mass armies, war could no longer be seen as the continuation of politics through other means. 
The industrialization of war had made it “obsolete” in rational terms. 
Less than the defeat of Germany, Austria, and the Ottoman Empire, World War I meant the suicide of Europe. 
The big picture today is the possible passage of global leadership from the West to Asia. 
The paranoid reaction of neoconservatives in America to the terrorist threat can only accelerate that process, if not render it inevitable, by endangering our democratic values and thereby weakening the “soft power” of the United States, while giving fuel to the terrorist cause. 
Terrorism is the product of a fusion within a part of Islam of religious extremism, thwarted nationalism, and what Dostoyevsky called “nihilism.” 
Our challenge is to understand the root causes of these forces and to make distinctions among them. 
In other words, we are faced with the challenge of complexity, which requires us to ensure that a small minority is not joined by greater forces. 
Greater stability in the Middle East, which implies a settlement of the Israeli-Palestinian conflict, together with more effective integration of Muslims in our societies based on social justice and a stronger humanistic message, are the key elements of a cohesive Western strategy. 
If we lose sight of that in our struggle against terrorism and its causes, we will be left unable to face successfully the long-term challenge of “Chindia.” 

The Blinders of the Left 
Is it 1956 for the Left? 
Well, yes. 
All over the world, the Left was thrown into confusion and crisis after Khrushchev's 1956 speech exposing (some of) Stalin's crimes. 
It wasn't only Communist Party members who were dazed by Khrushchev's revelations; progressives of all stripes - from trade unionists to Trotskyites - were forced, if they were honest and brave enough, to reassess long-cherished beliefs. 
September 11 th has thrust those of us who consider ourselves progressives - who believe in democracy, feminism, human rights and socialism - into a 1956-type crisis. 
By this I do not mean that the Islamic fundamentalists who declared war on ``the infidels'' (including so many of their own people) are Stalinists (though the two groups certainly share some characteristics). 
I do mean that we must, if we are honest and brave enough, reassess many of our long-cherished beliefs. 
Questioning authority must now start with our own. 
Are we up to that task? 
I am not at all sure that we will do better than our forebears in the 1950s; years of self-imposed political correctness have resulted in muddled, strident and obtuse ways of approaching (or is it avoiding?) the world. 
I should say here that I consider this piece primarily a self-critique; but I know, too, that though the universe of ``progressives'' I am addressing is not infinite, it is larger than one. 
The holy grail of much Leftist thinking over the past two or three decades has been cultural relativity. 
Terrified of being thought racist, imperialist, arrogant, elitist or ``too Western,'' we averted our eyes from (and sometimes even supported) barbarisms of all types. 
Along with this came an odd reverence for ``traditional cultures'' - strange for those who fancy themselves forward-looking rationalists - at least if those cultures flourish in the so-called Third World. 
For example: a student of mine defended female genital mutilation in Africa on the grounds that it is ``traditional.'' 
True, I replied; and so was slavery in the American south. 
That's different!, she cried. 
Ah, but it's not. 
Indeed, if Marx was writing today, he'd be vilified for blasting the idiocy of rural life, for today every idiocy is interpreted - all evidence to the contrary - as a form of intelligence. 
Then there is the opiate of the people, which has somehow metamorphosed into a self-conscious, nay dialectical, cry for national liberation. 
Ah, but it's not. 
Bitter irony: this attempt to purify ourselves of racism resulted in a racist worldview. 
What else can we call our willful ignorance of the agony of so many in the underdeveloped world: the torture chambers that litter virtually every Arab nation, the million ``martyrs'' in the lunatic Iran-Iraq war, the thousands of state executions in China, the grotesque subjugation of women? 
(The Taliban's strictures against women make the Nuremberg Laws look almost mild, though in spirit the two sets of decrees are one.) 
Our ``solidarity'' with the Third World has been anything but. 
Yet another irony: our belief in human rights in some ways abetted this betrayal. 
I often hear it said these days that human rights are inalienable - as if rights, like genes or DNA, reside ``within'' us from birth. 
Convenient, this; for who needs to defend, much less create, something innate? 
Rights, however, are not natural: they are artificial human constructs, the result of deliberate thought, of history, of ethical and political work . 
We don't inherit rights: we make them. 
The moment we stop building institutions that embody them (and resort to basking in feelings that sentimentalize them), they cease to exist. 
Hannah Arendt put it well (the year was 1951, but it could be today): ``No paradox of contemporary politics is filled with a more poignant irony than the discrepancy between the efforts of well-meaning idealists who stubbornly insist on regarding as `inalienable' those human rights, which are enjoyed only by citizens of the most prosperous and civilized countries, and the situation of the rightless themselves. . . . Equality . . . is not given us, but is the result of human organization insofar as it is guided by the principle of justice. 
We are not born equal; we become equal as members of a group on the strength of our decision to guarantee ourselves mutually equal rights.'' 
Starting in the 18 th century and continuing into the middle of the 20 th , the Left defined itself as the defender of knowledge, science, secularism, progress, skeptical thought and universal (not relative) freedoms. 
All this has been horribly turned on its head; in place of our forebears' robust values, we substituted timid, frightened rationalizations for all sorts of voodoo ideologies and practices. 
September 11 th - by which I mean not just the World Trade Center massacre, but the skein of hateful, reactionary worldviews and organizations it revealed with unmistakable force - is a clarion call. 
There are times when things change, when history bends if not quite breaks. 
This is that time. 
Because it is, we must un-learn the wretched habit of thinking that truthfulness resides in the messenger rather than the message. 
If a neo-liberal or conservative has more to tell us than a Noam Chomsky, so be it. 
All morality begins in realism: our ability to see the world as it is, rather than as we want it to be, must henceforth be (and should always have been) the starting point of Left-leaning politics. 
Are we honest and brave enough (which in this case also means scared enough) to shuck our romantic fantasies about the downtrodden, and our shameful rationalizations borne of guilt, bravado and indifference? 
Our lives - and certainly the kind of world, if any, that we bequeath to future generations - depend on this. 

The Bogey of Fiscal Stimulus 
NEW YORK – After the economic disaster of 2008-2009, people are understandably wary of the devastation that yet another financial crisis can wreak. 
But the likelihood of another crisis is quite small, and its adverse impact would be far less devastating this time around, as there are no more massive credit or asset bubbles to burst. 
That has not stopped pundits and the media from exaggerating such fears, distracting from greater efforts to overcome protracted stagnation for much of the developed world, which will inevitably drag down economic recovery elsewhere, especially in developing countries. 
The current favorite bogeyman is public debt. 
Much is being made of high levels of sovereign debt on both sides of the Atlantic, and in Japan. 
As the economics commentator Martin Wolf has noted, “The fiscal challenge is long term, not immediate.” 
Likewise, while Japan has the highest debt-to-GDP ratio among rich countries, this is not a serious problem because the debt is domestically held. 
And Europe’s debt problems are now widely acknowledged to be due to ill-conceived aspects of European integration. 
The international community has, so far, failed to develop effective and equitable arrangements for restructuring sovereign debt, despite the clearly dysfunctional and problematic consequences of past international public-debt crises. 
This prevents timely debt workouts when needed, effectively impeding recovery. 
High public debt is also being invoked in support of fiscal austerity in many developed countries. 
But, rather than helping, the rush to budget cutting is reversing earlier recovery efforts. 
With private-sector demand still weak, austerity is slowing, not accelerating, recovery. 
It has already reduced growth and employment. 
And, while financial markets insist on deficit reduction, the recent decline in equity and bond prices – and the loss of confidence that this reflects – suggests that they also recognize the adverse implications of fiscal consolidation at a time of weak private demand. 
Opponents of fiscal stimulus cynically claim that all such efforts are bound to fail, citing as evidence US President George W. Bush’s tax cuts! 
Others point out that the US Fed’s “quantitative easing” efforts have been modestly successful, at best. 
While undoubtedly mitigating the impact of the crisis, Europe’s “automatic stabilizers” are now said to be enough to ensure recovery, despite strong evidence to the contrary. 
Slower growth means less revenue, and a faster downward spiral. 
Most major countries’ fiscal deficits nowadays reflect the recent collapse of tax revenues that followed the growth downturn, as well as very costly financial-sector bailouts. 
And yet many policymakers are insisting on immediate action to rectify not only fiscal deficits, but also trade imbalances and banks’ balance-sheet weaknesses. 
While these undoubtedly need to be addressed in the longer term, prioritizing them now effectively stymies stronger, sustained recovery efforts. 
The wrong public policies can induce recessions. 
This happened in 1980-1981, when the US Federal Reserve raised real interest rates, ostensibly to kill inflation, inducing a global economic downturn as well. 
This contributed not only to sovereign-debt and fiscal crises, but also to protracted stagnation outside East Asia, including Latin America’s “lost decade” and Africa’s “quarter-century retreat.” 
Another distraction is exaggerating the threat of inflation. 
Recent inflation in many countries has been the result of higher commodity prices, especially fuel and food prices. 
In these circumstances, domestic deflationary policies will only further slow growth – and are helpless to stem imported inflation. 
Unfortunately, today’s top policy priority is to address remote possibilities, whereas the urgent task at hand – coordinating and implementing efforts to raise and sustain growth and job creation – is being ignored. 
Meanwhile, cuts in social and welfare spending are only making things worse, as employment and consumer demand fall further. 
The pressure on employment and household budgets is likely to persist. 
Strident calls for structural reforms mainly target labor markets, rather than product markets. 
Growing worker insecurity is seen as the basis for a healthy economy. 
Labor-market liberalization in such circumstances not only undermines remaining social protection, but is also likely to diminish real incomes, aggregate demand, and, hence, recovery prospects. 
Moreover, in recent decades, profits have risen not only at the expense of wages, but also with much more accruing to finance, insurance, and real estate compared to other sectors. 
The outrageous increases in financial executives’ remuneration in recent years, which cannot be attributed to increased productivity, have exacerbated the financial sector’s focus on the short term, while worsening its risk exposure in the longer term, thereby exacerbating systemic vulnerability. 
Growing income inequality in most countries before the Great Recession only made matters worse, by reducing household savings and increasing credit for consumption and asset purchases, rather than augmenting investment in new economic capacity. 
What the world needs now are leaders who look to the long-term future. 
The international financial institutions created after World War II were set up to ensure not only international monetary and financial stability, but also the conditions for sustained growth, employment generation, post-war reconstruction, and post-colonial development. 
Unfortunately, current policy is justified in terms of “pro-market” – effectively pro-cyclical – choices. 
But it is counter-cyclical efforts, institutions, and instruments that are sorely needed instead. 
Global leadership today seems to be held hostage by financial interests and associated media, ideologists, and oligarchs whose political influence enables them to secure more rents and pay lower taxes in what must truly be the most vicious of circles. 
Indeed, the menace that now confronts us is not public debt or inflation, but a downward economic spiral that will be increasingly difficult to reverse. 

The Bonus Risk 
CHICAGO – In its July session, the European parliament approved some of the strictest rules in the world on the bonuses paid to bankers. 
The aim is to curb risk-taking by financial institutions. 
The new rules require that no more than 30% of bankers’ bonuses be paid in cash, that between 40% and 60% be deferred for at least three years, and that at least 50% be invested in “contingent capital,” a new form of debt that converts to equity when a financial company is in distress. 
The most innovative aspect of these new rules is that the limits do not apply only to financial institutions’ chief executive officers, but to all the top managers (though the definition of top managers is delegated to national parliaments). 
The alleged justification for this major interference in private contracting is the systemic effect that these bonuses can have. 
High pay in the banking sector, so the argument goes, rewards success but does not penalize failure. 
Managers can easily move from firm to firm when things go badly, avoiding any punishment. 
This system rewards managers for taking risks, even when the risk is excessive. 
This distortion is perceived to be one of the main causes of the 2008 financial crisis. 
The problem with this argument is that there is no evidence supporting the first crucial link in its logic. 
Much research has tried to establish a connection between bankers’ compensation schemes and risk-taking, but has failed to find one. 
At most, such research has found that more highly paid executives took greater risks, but it is unclear whether this is a cause or an effect. 
Executives in highly leveraged institutions should be paid more, because they bear more risk. 
To be sure, these investigations are limited to the top five executives, for which data is publicly available. 
Unfortunately, there is no publicly available data to establish a causal relationship between bonuses’ pay-for-performance sensitivity and risk-taking for lower-level managers. 
In this respect, the Financial Crisis Inquiry Commission (FCIC), established by the United States government, has a unique opportunity. 
Thanks to its subpoena powers, the FCIC can collect and analyze such data. 
It is to be hoped that when its report is published in December, we will be able to answer this question. 
If we assume that a causal relationship exists, the European directive seems to be fairly well designed, with one main shortcoming. 
It is well designed because it interferes not with the level of compensation (as many have demanded), but with the form that this compensation takes. 
It requires that most of an annual bonus not only be deferred for three years, but also that it be put at risk. 
If the company performs poorly in the three years, the manager will lose part or all of his or her accumulated bonus. 
This reduces incentives to take risk, though it does not eliminate them. 
The main shortcoming is that these restrictions can be circumvented easily, since they apply only to bonuses, whereas banks maintain discretion over the mix between salary and bonus. 
Currently, bank managers receive their bonuses at the beginning of each year, with the level based on their individual performance during the previous year. 
It would be very easy to transform last year’s bonus, based on last year’s performance, into this year’s salary. 
The salary, which can be paid entirely in cash, will be renegotiated every year, thereby skirting all the regulatory restrictions. 
Without direct government intervention, it would be difficult to fix the problem. 
In large financial institutions, however, the incentive to gamble at taxpayers’ expense does not apply only to managers; it extends to bondholders, who are de facto protected by the government. 
Having access to insured credit, banks’ shareholders find it irresistible to borrow excessively. 
Restricting managers’ incentive pay without changing shareholders’ incentives will only force shareholders to be more actively involved in the company and choose other ways to increase the level of risk-taking. 
If the problem is the moral hazard implied by being too big to fail, the solution is not to restrict pay, but to eliminate the hazard by forcing shareholders to issue more equity or lose their stock when banks’ debt starts to become risky. 
As Oliver Hart and I explained in a recent paper, this can be done easily, with a regulator intervening every time the credit-default swaps on the financial institutions’ debt becomes too high. 
If we want to intervene on pay in addition to (not instead of) reforming capital requirements, the most effective way is a variation of the tax imposed by former British Prime Minister Gordon Brown: a special tax on all compensation above a certain threshold that is not paid in stock. 
This tax would have two positive effects: it would induce banks to recapitalize, thereby reducing their excessive leverage, while forcing managers to have more skin in the game. 
If the solution is so simple, why has no elected body implemented it? 
My fear is that politicians want to be perceived as tough on bankers, but have no interest in really fixing the problem. 

The Borders of Liberalism 
When it comes to whether and how to regulate the economy, Western societies have a history of liberal theory upon which to rely. 
But when it comes to immigration, there is not much in the liberal tradition to which they can turn. 
As a result, in both Europe and the United States, much of the debate over immigration is dominated by illiberal voices, the most insistent belonging to politicians who promise to protect the cultural integrity of the homeland against the presumed degeneracy of the alien. 
Xenophobia is an illiberal response to immigration from the right, but multiculturalism represents much the same thing from the left. 
Many multicultural theorists, although committed to openness toward immigrants, are not committed to the openness of immigrants to their new home. 
For them, newcomers, living in an environment hostile to their way of life, need to preserve the cultural practices they bring with them, even if some of those practices – for example, arranged marriages, gender segregation, religious indoctrination – conflict with liberal principles. 
Group survival counts more than individual rights in the moral accounting of many multiculturalists. 
One way to maintain a commitment to openness when addressing the vexing question of national borders is to recognize that cosmopolitanism is a two-way street. 
Immanuel Kant teaches us that the circumstances in which we find ourselves must always be judged against the circumstances in which, but for chance, we might have found ourselves. 
From this perspective, it is unfair that someone who happens to be born in the US is likely to live longer and better than someone born in Kenya. 
This does not mean that the US must open its borders to everyone from Kenya. 
But it does mean that a New Yorker should recognize that any advantages he may have over a Nairobian are due to an accident of birth rather than merit. 
From the perspective of Kantian cosmopolitanism, the least an American can do is to welcome a certain amount of immigration from Africa. 
But embracing cosmopolitanism also means that once a society admits new members, those members are obliged to open themselves to their new society. 
Multiculturalists are reluctant to endorse this part of the cosmopolitan bargain, but liberals must. 
One can understand why, living in a foreign country they may perceive as hostile, immigrants opt to close themselves off, and some host countries – France, for example –may be too hasty in demanding that immigrants accept new ways of life. 
But attempting to live a closed life in an open society is bound to be self-defeating and not something a liberal society should encourage. 
An instructive example of the cosmopolitanism bargain came in 2006, when Great Britain’s former foreign minister, Jack Straw, raised concerns about the nijab, the full-head covering worn by some Muslim women. 
Straw defended women’s right to wear less intrusive headscarves; yet he also argued that something is seriously wrong when, in conversation with another person, one cannot engage in face-to-face interaction. 
Straw was saying that to wear the nijab is a decision to close yourself off from everyone around you. 
He was not making a xenophobic argument that Muslims do not belong in Great Britain, or a multiculturalist argument that Muslims should be allowed to wear whatever traditional garb they believe best expresses their cultural and religious sensibilities. 
Nor was he asking for the full assimilation of immigrants to British customs. 
Instead, through a carefully chosen example, Straw was illustrating what it means to be open to others while expecting openness in return. 
Some argued that, in suggesting to Muslim women what they should wear, Straw was interfering with religious freedom. 
In fact, liberal values sometimes contradict each other. 
Islam, for example, has historically permitted certain forms of polygamy, but no liberal society is obliged to extend religious freedom in ways that undermine its commitment to gender equality. 
Fortunately, Straw’s example does not pose such a sharp dilemma. 
As he pointed out, wearing the nijab is not commanded by the Koran and represents a cultural choice, not a religious duty. 
So long as other ways are available for Muslim women to cover their heads, agreeing not to wear the nijab is a way of signifying one’s membership in a liberal society at minimal cost to one’s religious commitments. 
For liberals, the question is never whether borders should be completely open or closed; a society open to all would have no rights worth protecting, while a society closed to all would have no rights worth emulating. 
If one is looking for an abstract principle to follow on questions of immigration, liberalism cannot provide it. 
But a liberal society will allow people in and make exceptions for conditions under which they must be kept out, rather than keeping people out and making exceptions for when they should be allowed in. 
A liberal society will also view the world as teeming with potential that, however threatening to ways of life that are taken for granted, forces people to adapt to new challenges rather than trying to protect themselves against the foreign and unknown. 
Finally, a liberal society will not focus on what we can offer immigrants, but on what they can offer us. 
The goal of openness implied by immigration is worth preserving, especially if both its demands and its promise apply across the board. 

The Borgia Candidate for Russia’s Presidency 
In the latest interview given by Andrei Lugovoi, the man Great Britain wants Russia to extradite for poisoning the dissident Alexander Litvinenko with radioactive polonium, there was a remarkable moment that has not been fully appreciated. 
Lugovoi, still rather diffident but with unmistakable pride, mentioned that when he is seen in public, he usually finds himself surrounded by people who want to shake his hand, congratulate him on his valor, and ask for his autograph. 
“Well, have you thought about a career in politics?” the interviewer asked. 
Unfortunately, the interviewer did not pursue the matter any further. 
This is a pity, because Lugovoi’s status in Russia tells us much about my country in the seventh year of President Vladmir Putin’s rule. 
Perhaps surprisingly, Lugovoi seems not to have wondered why he is enjoying such an enthusiastic reception from his compatriots. 
Are ordinary Russians showing solidarity with a victim unjustly hounded by the British Crown Prosecution Service? 
That seems unlikely. 
When did Russians ever ask a victim for an autograph? 
I myself have been attracting the interest of the Russian Public Prosecutor’s Office for several months now, and I have yet to encounter any public support in the street, let alone a single autograph hunter. 
In Russia, you get asked for your autograph if you are a proper hero: an ice-hockey player, a cosmonaut, a high-society prostitute, or, like Lugovoi, an executioner. 
Part of Lugovoi’s acclaim is derived from the fact that the list of unspeakable crimes committed by the late Alexander Litvinenko in the course of his brief life is growing longer in Russian media reports with every passing day. 
These are crimes so treacherous that any right-minded Russian patriot can only thirst to see such a person subjected to the supreme measure of national retribution. 
But only one such “patriot” was granted the honor of being allowed to perform this act. 
That is why Lugovoi is being asked for his autograph. 
This should not, of course, be taken to mean that the patriots gushing over Lugovoi’s achievement concede the justice of the British allegations. 
The social awareness of Homo Putinicus, meticulously burnished by television propagandists, is such that pride in Lugovoi’s achievement and indignation at the infamous campaign unleashed against him by those who hate Russia can jangle within the breast of ordinary Russians without the slightest dissonance. 
We are evidently facing the mystery of Russian thought that has proved so unfathomable to others, so unyielding to every analytical scalpel, and about which our Slavophiles and Eurasians wrote at length. 
But I see a practical turn in all this that no one has yet broached. 
Wouldn’t Lugovoi’s entrance into politics bring about the ideal solution to the problem of finding an heir for Putin? 
That search, after all, is threatening to divide the nation’s elite. 
So why not choose a man like Lugovoi who truly represents what that elite stands for? 
Let us compare two potential presidential candidates, Putin in 1999 and Lugovoi in 2007. 
The similarities are striking: the modest social background, the KGB milieu, the criminal vocabulary, the mentality and physique, the mercilessness towards “enemies of the people.” 
The underworld manners of both go hand in hand with that lively interest in business which is so essential if “liberal reforms” in Russia are to be continued. 
Finally, there is the additional, highly significant coincidence that both men, at the start of their political careers, were largely dependent on the oligarch Boris Berezovsky, but subsequently fell out with him. 
Regarding their professional attainments, Lugovoi in 2007 seems to have the edge. 
Successfully carrying out a large-scale operation in the middle of London beats a desk job in the GDR-USSR House of Friendship in Dresden in the years of perestroika and communist collapse. 
So perhaps the Russian people might take to their hearts this executioner with the rank of lieutenant colonel, just as eight years ago they took to their hearts another KGB lieutenant colonel, Vladimir Putin? 
Would the sybaritic, globe-trotting Lugovoi agree to wear the crown? 
Running the Kremlin is, after all, a testing job. 
We have all seen Putin’s face age dramatically over the last eight years. 
But Lugovoi’s face, too, has also changed markedly over the last eight months of press conferences. 
Once a wary non-entity, he has grown bolder. 
His is the face of Putin’s new Russia, of a smug Russia that is “getting off its knees” and reaching for its gun. 

The Message from Boston 
PRINCETON – America has grown up. 
Public reaction to the Boston Marathon bombings and the identity of the perpetrators reveals a very different nation from the one reflected in the traumatized and occasionally hysterical responses to the terror attacks of September 11, 2001. 
The magnitude of the two attacks was, of course, very different – thousands were killed and major national landmarks destroyed in 2001, whereas the Boston bombing killed three people and injured roughly 260. 
Still, it was the first major attack on the United States since 2001, and the contrast between now and then is instructive. 
Consider the social-media buzz within minutes of the bombing. 
The New York Post, a tabloid, emitted a stream of sensational reportage claiming that 12 people had been killed and that a Saudi national was “under guard” at a Boston hospital. 
Veteran reporters and columnists immediately countered with questions about the Post’s sources and the lack of confirmation for what it was reporting. 
Kerri Miller of Minnesota Public Radio tweeted that she had covered the Oklahoma City bombing in 1995, which was first reported as a gas explosion, then as an attack by foreign terrorists, and finally as the work of domestic extremists. 
This caution and restraint stemmed directly from a collective awareness of the many innocent Muslim-Americans who suffered from Americans’ ignorance and wrath following the 2001 attacks. 
Indeed, equally striking was the number of pundits who suggested that the Boston bombing was homegrown, more similar to the Oklahoma City attack or the mass shooting last December of first graders in Newtown, Connecticut, than to the 2001 plot. 
The America of 2013, unlike the America of 2001, is willing to recognize its own pathologies before looking for enemies abroad. 
Moreover, even amid the shock and grief fueled by images of the bombing and the many victims with shattered, shredded limbs, Americans found at least a little bandwidth to comprehend that bombs are still a feature of daily life in Iraq and Syria. 
Today’s America is one that recognizes that it is not the world’s only country, and by no means the worst off. 
Many commentators remarked on Americans’ resilience, and that of Bostonians in particular. 
Much like Londoners after the attacks on their public-transport system in July 2005, Boston’s citizens were determined to prove that life goes on. 
American flags flew at half-mast; President Barack Obama addressed the nation; the country mourned with the families of the victims and with the young athletes who will never run again. 
But even amid a massive police manhunt and a citywide lockdown, planners were already focusing on ensuring that next year’s marathon will redeem the tragedy of this one. 
Likewise, when it became clear that the bombing suspects, Tamerlan and Dzhokhar Tsarnaev, were Chechens who had emigrated from the Russian province of Dagestan, the reaction – at least among regular participants in public debate – was far more nuanced than a decade ago. 
Back then, Fareed Zakaria’s cover story for Newsweek – entitled “The Politics of Rage: Why Do They Hate Us?” – painted a broad-brush portrait of Muslim youth in the Middle East raging against brutal and oppressive dictatorships funded and supported by the US government. 
Zakaria was right in many ways, but he had to bring his readers up to speed on six decades of history in a few short pages. 
By contrast, David Remnick, the editor of The New Yorker, weighed in with a piece on the Tsarnaev brothers that opened with Stalin’s banishment of the Chechen people “from their homeland in the northern Caucasus to Central Asia and the Siberian wastes.” 
Remnick’s lead-in was intended not to introduce a summary account of the brutal and violent history of the Chechen people, but to frame a detailed account of the specific history of the Tsarnaev family. 
Remnick included a series of tweets from the younger brother, Dzhokhar, only 19, beginning with a message from March 12, 2012 (“a decade in America already – I want out”). 
In Remnick’s words, the tweets show “a young man’s thoughts: his jokes, his resentments, his prejudices, his faith, his desires.” 
Even amid Americans’ anger and grief at the senselessness of what the Tsarnaev brothers did, we can see them not as faceless embodiments of Islamic rage, but as individuals, as human – even as sad. 
The ability to distinguish individual features from the mass, to reach nuanced judgments, and to control initial impulses of rage and revenge are hallmarks of maturity in societies and people alike. 
But America has also grown up in another way, learning to choose transparency over secrecy, and to rely on the power of its citizens. 
After September 11, 2001, the security expert Stephen E. Flynn called on the government to “engage the American people in the enterprise of managing threats to the nation.” A decade later, the FBI immediately called on all who attended the Boston Marathon to send photos and videos of the area around the finish line – anything that could help investigators identify the bombers. 
The resulting flood of information enabled the authorities to identify the two suspects far sooner than would have been possible had they relied on traditional police methods. 
The US of 2013 is both more reflective than it was a decade ago and more consciously connected to the world. 
The result is a citizenry that is less likely to interpret events, even attacks, in simplistic and often counter-productive us-versus-them terms. 
The cancer of violence is all too often found within the US, fed in part by the same inequality, alienation, lack of opportunity, and fervent search for absolute truth that we discern abroad. 
The brutal repression of Chechnya, violent Islamic extremism, an American cult of violence, immigrants’ dashed dreams, and plenty of other factors still to be uncovered create a complex pattern of risk that is difficult to unravel and even harder to minimize. 

The Boundaries of Anti-Semitism 
Anti-Semitism nowadays is more subtle than spray-painting swastikas and other acts of vandalism. 
Hundreds of European scholars are circulating a petition calling for a boycott of Israeli institutions; other academics want the EU to deny grants to Israeli universities and scientific institutions. 
One British academic fired an Israeli colleague because she loathes the state of Israel. 
So, what is new about today's anti-Semitism, asks George Fletcher? 
Civilized people are loath to admit that they are racist, sexist, or anti-Semitic. 
But they disagree about when these taboos are violated. 
If they think that blacks make better athletes or that women make better caretakers, they deny that this is bias. 
But what about those who believe that "rich Jews" control, say, the media? 
Are they merely mistaken, or is that "mistake" a moral vice? 
Today, drawing the boundaries of anti-Semitism is difficult, because much of the world disapproves of Israel's military crackdown in the occupied West Bank and Gaza strip. 
Whether criticism of Israeli policies is right or wrong, pundits and politicians who speak out on the issue should not be lumped together with those who say that Hitler should have finished the job. 
Yet many Americans think that much of Europe's critique of Israeli policies expresses a zeal that cannot be explained simply by Europeans' renunciation of their own colonial past and thus their sensitivity to an Israeli occupation that looks like annexation. 
As one commentator put it, Europeans feel a collective guilt about the Holocaust that makes them eager to have Israel stamped as an aggressor contemptuous of Palestinian humanity. 
The Germans, as one quip puts it, will never forgive the Jews for Auschwitz. 
But guilt and anger have deeper roots in Europe's image of the Jew. 
More than most people realize, the Gospels treat recalcitrant Jews--those who refused to accept Jesus as their Messiah--as perpetrators of a crime that lives on in every generation. 
Anti-Semites often cite a passage in Matthew in which a Jewish crowd cheers for Christ's execution and voluntarily accepts permanent guilt: "His blood be on us and on our children." 
Matthew then attributes to the Jews a recurrent lie explaining away the resurrection and disappearance of Jesus's body: "His disciples came at night and stole Him away while we slept." 
The later Evangelist John concludes that because Jews deny the Christian Messiah they must be "sons of the devil." 
Just as whites attribute extraordinary sexual powers to black men, the Christian West's instinct is to treat Jews as the masters of extraordinary forces--including the power to kill deities and control world finance. 
A cartoon earlier this year in the Italian newspaper La Stampa captured this latent sentiment perfectly. 
A group of Israeli soldiers surround a manger with a baby. 
The caption reads: Will they kill him again? 
To be sure, at the time of Jesus, Jews constituted a hegemonic majority in Jerusalem. 
Jews who rejected Jesus were, indeed, among the first to be intolerant toward the early Christians. 
But other hostilities soon took hold, and by the fourth century, Christians had more to fear from each other than from outsiders. 
Yet the fear of Jewish prowess continued to shape the thinking of the West, both consciously and unconsciously. 
In the fall of 2001 the Parisian Comedie Francaise staged a brilliant production of Shakespeare's Merchant of Venice . 
As though it were second nature in French culture, the director presented Shylock's attempt to collect his pound of flesh by recalling the image of the crucifixion. 
Antonio is stretched out on a rock with arms perpendicular, the Jew Shylock leaning over his breast with his knife drawn. 
This is apparently the natural way for Christians to think of Jews--reenacting in every generation the crime described by Matthew. 
It is as though a form of original sin entered a subspecies of humanity descended from Abraham, Isaac, and Jacob. 
The belief in both the diabolical power and the permanent guilt of the Jews is, to my mind, the essence of anti-Semitism. 
It is when this image is invoked in politics that critics cross the line between the constructive and the vicious. 
A good example of this politicized imagery is a poster distributed by Amnesty International in Switzerland. 
It displayed a composite picture of an Israeli tank and a soldier taking aim at a defenseless Palestinian. 
The caption read: Let the killing stop. 
Only Palestinian victims are listed. 
Under protest, the poster was withdrawn. 
The Catholic Church has abandoned its anti-Jewish teachings, but this does not that mean that the culture engendered by Christianity can easily redefine its premises. 
In fact, the Christian image of the all-powerful Jew feeds the conspiracy theories that infect the way Muslims regard Jews. 
In the Arab media, Jewish conspiracies constitute the single most popular explanation for everything from the September 11 th terrorist attacks to the Monica Lewinsky affair during the Clinton presidency (Miss Lewinsky being the Jewish spy who infiltrates the White House). 
Israelis blame their critics for not shedding these irrational beliefs. 
They find it hard to negotiate peace in a world that approaches them armed with the hateful echoes of medieval superstition. 
In contrast to the Muslim world, Europeans pride themselves on being objective. 
But it is time that they come to grips with their inner conflicts about Jewish guilt--and their own. 

The Bourbons of Global Finance 
ANN ARBOR, MICHIGAN – Today’s International Monetary Fund (and, to a lesser degree, the World Bank) recall Talleyrand’s description of France’s Bourbon kings: it has learned nothing and forgotten nothing. 
At a time when rich countries like the United States are running deficits of 12% of GDP because of the global financial meltdown, the IMF has been telling countries like Latvia and Ukraine, which did not start the crisis but have turned to the Fund to help combat it, that they must balance their budgets if they want aid. 
Such hypocrisy would be laughable if global economic conditions weren’t so dire that even countries that once swore never again to deal with the IMF have returned to its door, cap in hand. 
Some leading economists in Argentina justify this reversal by arguing that the world now has an “Obama IMF,” one presumably friendlier and more attuned to local problems than the “Bush Fund.” 
But, as the IMF programs for Latvia and Ukraine suggest, the main difference may only be a smile. 
To be sure, IMF Managing Director Dominique Strauss-Kahn recently called for a global fiscal response to the worsening recession. 
But will the Fund now abandon its long-held emphasis on government cutbacks, monetary contraction, and overall austerity, policies that – in the opinion of many development economists – do considerably more harm than good? 
Are the IMF and the World Bank actually willing to reconsider their failed policies? 
In recent years, lending by both institutions contracted dramatically, even though they have increasingly become the exclusive lenders to the world’s poorest countries. 
In 2005, Argentina and Brazil were the first of the countries that previously denounced the IMF’s neo-liberal agenda to begin repaying their loans. 
Repayments followed from other large debtors, including Indonesia, the Philippines, Serbia, and Turkey. 
Indeed, the IMF’s outstanding general resource account (GRA) credits to middle-income developing countries fell by an unprecedented 91% from 2002 to 2007, as richer developing countries gained access to sources of financing that were free of the Fund’s conditionality. 
But poorer countries, for which international capital markets remain off limits, have no alternative but to rely on the World Bank and IMF. 
In September 2007, a year before warning signs gave way to a full-blown financial meltdown, Strauss-Kahn himself suggested that the IMF was in a “crisis of identity.” 
Indeed, the unprecedented decline in GRA lending, the IMF’s main source of income, forced the Fund to announce a $100 million cost-cutting plan in April 2008. 
Similar financial pressures affected the World Bank, with its main source of income, IBRD lending, down 40% in 2007 from its late-1990’s levels. 
But the world’s pain has been these institutions’ gain. 
Since the crisis went global last autumn, the IMF has had countries parading to its door. 
Between November 5, 2008 and January 12, 2009, the Fund committed nearly $50 billion to seven countries (Hungary, Ukraine, Iceland, Pakistan, Latvia, Serbia, and Belarus). 
The World Bank, too, has recently been resurrected in places like Ecuador, Bolivia, and Peru, with loans to that region of Latin America up four-fold year on year since last September, reaching nearly $3 billion. 
Unfortunately, for both institutions, such countries’ growing demand for financing merely means business as usual. 
Consider the recent standby arrangement with Latvia, whose conditions include a massive 25% cut in public-sector wages, a similar reduction in government expenditures, and a huge tax increase. 
Ukraine’s government, moreover, was told to balance its budget by massively slashing state pensions. 
Only when conditions in the country deteriorated even more in the wake of the Fund holding back on the second tranche of its loan did the IMF agree to loosen its conditions. 
However in Latvia, the IMF has continued to demand austerity even in the wake of plummeting growth and rising unemployment which have lead to riots and political instability. 
Recent World Bank loans are similarly conditioned, in part, on “fiscal discipline.” 
Insistence on such policies at a time when the US and most of the rest of the rich world are following virtually the opposite economic strategy indicates the need for fundamental rethinking of what actually generates growth and development. 
There is a growing body of alternative ideas in this area –including work by the Nobel laureates Joseph Stiglitz and Paul Krugman – which the IMF and the World Bank should consider. 
More importantly, American control has meant that throughout their history these institutions have been used as an adjunct of US foreign policy. 
Given the centrality of orthodox stalwarts like Larry Summers and Timothy Geithner in the Obama administration, the prospect of serious reform appears dim. 
Summers was a key architect of neo-liberal policies while at the World Bank and the US Treasury during the Clinton administration, and Geithner is a former senior IMF official. 
Both men are likely to support the prevailing global double standard, which allows rich countries to use fiscal expansion in the face of recession, while forcing poor countries into greater austerity. 
But the Obama administration can still help – for example, by asking the Federal Reserve to expand the currency swap arrangements that it recently offered to Singapore, South Korea, and Brazil to other developing countries. 

The Bourgeois Roots of Tunisia’s Revolution 
PARIS – Tunisia, one of the Arab League’s 22 members, is in the throes of a severe and profound crisis, albeit possibly one with a favorable resolution. 
It is the smallest North African country, covering 163,000 square kilometers – more or less twice the size of Belgium, Netherlands, and Luxembourg – and containing a population of 10.5 million. 
It is also full of charm and moderation in terms of its climate, history, and culture. 
It once was the pillar of the cultural dynamism and influence of the Roman Republic and Empire. 
The first African region to be Christianized, it was the land of Saint Augustine and the main source for Catholic evangelism in Africa. 
Originally mainly Berber, it was conquered by the Arabs, Islamized, and became for centuries a dependency of the Sublime Porte, and therefore Turkish. 
It became a French protectorate, not a colony – as in the case of neighboring Algeria – in the nineteenth century. 
That difference helps explain the relatively greater preservation of Tunisia’s social structures and local traditions. 
Upon achieving independence in 1956, Tunisia adopted a French-style republican constitution that established a presidential system of government. 
The first president, Habib Bourguiba, was the leader of the liberation movement, which emerged victorious much more quickly – and much less violently – than its counterpart in Algeria. 
A highly Westernized leader, Bourguiba maintained the secular character of the state that he took over from France, as well as many of its economic ties with the West (particularly France, of course), in a much more committed way than Algeria did after it gained independence. 
Some rare attempts over the years by Marxist groups to seize power failed. 
Unlike other African or Middle Eastern countries, Tunisia remained largely a land of free enterprise, allowing for some industrial development. 
In recent years, it has become Africa’s leading exporter of industrial goods, outperforming even South Africa and Egypt. 
In 1987, the aged Bourguiba became too debilitated to continue in office. 
His interior minister, Zine el Abidine Ben Ali, having been named Prime Minister, soon managed to certify Bourguiba as medically unfit and ousted him from the presidency. 
The new leader was already noted for having repressed the Islamic movement, a policy he intensified after becoming President. 
Non-Muslim and secular Tunisian citizens – and a large part of world opinion, notably in France – were grateful. 
They made excuses for the brutality that lay behind Ben Ali’s policy, endorsing the results without observing and questioning the means by which they were achieved. 
But those means ended up leading to the almost total suppression of any freedom of expression in Tunisia: a censored press, imprisonment of journalists, political trials, and arbitrary arrests within all circles of society, not merely those with ties to the Islamic movement. 
The aim was to suppress any and all forms of democratic opposition. 
Ben Ali’s regime ultimately became a pure dictatorship. 
He and his family built up empires within the local economy, cornering nearly all sectors and making a fortune for themselves. 
But the industrialization policy was maintained. 
A genuine middle class emerged, comparable to Egypt’s, but unlike that in any other Arab country, with the possible exception of Morocco. 
And then, as occurred everywhere else, the global economic crisis that began in 2008 constrained growth, fueling social tensions. 
Since the press and parliament were muzzled, the only way to relieve those tensions was in the streets. 
The police shot at the crowd on several occasions, but proved too weak to intimidate the demonstrators. 
The decisive moment came when the army abstained from suppressing the protests. 
Once the army’s refusal to support his regime became clear, Ben Ali fled to Saudi Arabia, after France refused to welcome him into exile. 
For a brief moment, there was hope for a national-unity government, in which Ben Ali’s rump cabinet and the opposition would unite to prepare a presidential election. 
But an infuriated public would have none of it. 
The only option left was a coalition comprised of old oppositions, which, given the absence of a respected institutional framework, will make a return to stability slow, difficult, and perilous. 
So Tunisia is in danger. 
Islamism could eventually emerge victorious. 
But it is also possible that Tunisia is experiencing the Arab world’s first-ever “bourgeois” revolution. 
If so, Tunisia’s uprising could be a game-changing event for the entire region. 


The BP Oil Spill’s Lessons for Regulation 
CAMBRIDGE – As the damaged BP oil well continues to spew millions of gallons of crude from the depths of the floor of the Gulf of Mexico, the immediate challenge is how to mitigate an ever-magnifying environmental catastrophe. 
One can only hope that the spill will be contained soon, and that the ever-darkening worst-case scenarios will not materialize. 
The disaster, however, poses a much deeper challenge to how modern societies deal with regulating complex technologies. 
The accelerating speed of innovation seems to be outstripping government regulators’ capacity to deal with risks, much less anticipate them. 
The parallels between the oil spill andtherecent financial crisis are all too painful: the promise of innovation, unfathomable complexity, and lack of transparency (scientists estimate that we know only a very small fraction of what goes on at the oceans’ depths.) 
Wealthy and politically powerful lobbies put enormous pressure on even the most robust governance structures. 
It is a huge embarrassment for US President Barack Obama that he proposed – admittedly under pressure from the Republican opposition – to expand offshore oil drilling greatly just before the BP catastrophe struck. 
The oil technology story, like the one for exotic financial instruments, was very compelling and seductive. 
Oil executives bragged that they could drill a couple of kilometers down, then a kilometer across, and hit their target within a few meters. 
Suddenly, instead of a world of “peak oil” with ever-depleting resources, technology offered the promise of extending supplies for another generation. 
Western officials were also swayed by concerns about the stability of supplies in the Middle East, which accounts for a large proportion of the world’s proven reserves. 
Some developing countries, most notably Brazil, have discovered huge potential offshore riches. 
Now all bets are off. 
In the United States, offshore drilling seems set to go the way of nuclear power, with new projects being shelved for decades. 
And, as is often the case, a crisis in one country may go global, with many other countries radically scaling back off-shore and out-of-bounds projects. 
Will Brazil really risk its spectacular coastline for oil, now that everyone has been reminded of what can happen? 
What about Nigeria, where other risks are amplified by civil strife? 
Oil experts argue that offshore drilling never had the potential to amount to more than a small share of global supply. 
But there now will be greater concerns about deep drilling in any sensitive environment. 
And the problem is not just with oil. 
The big news in energy these days is the revolution in technology for tapping shale gas. 
With important reserves near populated areas, governments will need to temper their enthusiasm and think about the balance between risks and riches. 
The basic problem of complexity, technology, and regulation extends to many other areas of modern life. 
Nanotechnology and innovation in developing artificial organisms offer a huge potential boon to mankind, promising development of new materials, medicines, and treatment techniques. 
Yet, with all of these exciting technologies, it is extremely difficult to strike a balance between managing “tail risk” – a very small risk of a very large disaster – and supporting innovation. 
Financial crises are almost comforting by comparison. 
Speculative bubbles and banking crises have been a regular feature of the economic landscape for centuries. 
Awful as they are, societies survive them. 
True, people who thought, “This time is different,” before the recent Great Recession were proven wrong. 
But, even if we are not getting any better at dealing with financial crises, things have not necessarily been getting worse, either. 
Perhaps the G-20 government leaders have not done quite as brilliant a job plugging the hole in the financial system as they claim. 
The raging sovereign-debt problems in continental Europe, and the brewing ones in the US, Japan, and elsewhere are proof enough of that. 
But, compared to British Petroleum’s efforts to plug its deep-sea oil hole, the G-20 leaders look omnipotent. 
If ever there were a wake-up call for Western society to rethink its dependence on ever-accelerating technological innovation for ever-expanding fuel consumption, surely the BP oil spill should be it. 
Even China, with its “boom now, deal with the environment later” strategy should be taking a hard look at the Gulf of Mexico. 
Economics teaches us that when there is huge uncertainty about catastrophic risks, it is dangerous to rely too much on the price mechanism to get incentives right. 
Unfortunately, economists know much less about how to adapt regulation over time to complex systems with constantly evolving risks, much less how to design regulatory resilient institutions. 
Until these problems are better understood, we may be doomed to a world of regulation that perpetually overshoots or undershoots its goals. 
The finance industry already is warning thatnew regulation may overshoot – that is, have the unintended effect of sharply impeding growth. 
Now, we may soon face the same concerns over energy policy, and not just for oil. 
Given the huge financial stakes involved, achieving global consensus will be difficult, as the Copenhagen climate-change fiasco proved. 
The advanced countries, which can best afford to restrain long-term growth, must lead by example. 

What International Community? 
NEW YORK – Whenever something bad happens – Iran moving closer to acquiring nuclear weapons, North Korea firing another missile, civilian deaths reaching another grim milestone in Syria’s civil war, satellites revealing an alarming rate of polar-ice melt – some official or observer will call upon the international community to act. 
There is only one problem: there is no “international community.” 
Part of the reason stems from the absence of any mechanism for “the world” to come together. 
The United Nations General Assembly comes closest, but little can be expected from an organization that equates the United States or China with, say, Fiji or Guinea-Bissau. 
To be fair, those who founded the UN after World War II created the Security Council as the venue in which major powers would meet to determine the world’s fate. 
But even that has not worked out as planned, partly because the world of 2013 bears little resemblance to that of 1945. 
How else could one explain that Britain and France, but not Germany, Japan, or India, are permanent, veto-wielding members? 
Alas, there is no agreement on how to update the Security Council. 
Efforts like the G-20 are welcome, but they lack authority and capacity, in addition to suffering from excessive size. 
The result is “multilateralism’s dilemma”: the inclusion of more actors increases an organization’s legitimacy at the expense of its utility. 
No amount of UN reform could make things fundamentally different. 
Today’s major powers do not agree on the rules that ought to govern the world, much less on the penalties for breaking them. 
Even where there is accord in principle, there is little agreement in practice. 
The result is a world that is messier and more dangerous than it should be. 
Consider climate change. 
Burning fossil fuels is having a measurable impact on the earth’s temperature. 
But reducing carbon emissions has proved impossible, because such a commitment could constrain GDP growth (anathema to developed countries mired in economic malaise) and impede access to energy and electricity for billions of people in developing countries, which is unacceptable to China and India. 
Stopping the spread of nuclear weapons would seem a more promising issue for global collaboration. 
The Nuclear Non-Proliferation Treaty (NPT) limits the right to possess nuclear weapons to the Security Council’s five permanent members, and then only temporarily. 
But agreement is thinner than it appears. 
The NPT allows countries the right to develop nuclear energy for purposes such as electricity generation, a loophole that allows governments to build most of what is necessary to produce the fuel for a nuclear weapon. 
The inspection regime created in 1957 under the International Atomic Energy Agency (IAEA) is a gentlemen’s agreement; inspectors can inspect only those facilities that are made known to them by the government in question. 
Governments (such as Iran’s) can and do carry out illegal nuclear activities in secret sites that international inspectors either do not know about or cannot enter. 
At least as important, there is no agreement on what to do when a country violates the NPT, as Iran and North Korea (which withdrew from the treaty in 2003) have done. 
More international cooperation exists in the economic realm. 
There has been real progress toward reducing tariff barriers; the World Trade Organization has also established a dispute-resolution mechanism for its 159 members. 
But progress on expanding free trade at the global level has stalled, as many countries disagree on the treatment of agricultural goods, the elimination of subsidies, and trade in services. 
Meanwhile, cooperation in the realm of cyberspace is just getting started – with difficulty. 
The US is most concerned about cyber security and the protection of intellectual property and infrastructure. 
Authoritarian governments are more concerned about information security – the ability to control what is available on the Internet in order to maintain political and social stability. 
There is no agreement on what, if anything, constitutes an appropriate target for espionage. 
The prevalence of non-state actors is further complicating efforts. 
Another area where there is less international community than meets the eye is human suffering. 
Governments that attack their own people on a large scale, or allow such attacks to be carried out, expose themselves to the threat of outside intervention. 
This “Responsibility to Protect,” or R2P, was enshrined by the UN in 2005. 
But many governments are concerned that R2P raises expectations that they will act, which could prove costly in terms of lives, military expenditure, and commercial priorities. 
Some governments are also worried that R2P could be turned on them. 
Russian and Chinese reticence about pressuring governments that deserve censure and sanction stems partly from such concerns; the absence of consensus on Syria is just one result. 
In short, those looking to the international community to deal with the world’s problems will be disappointed. 
This is not reason for despair or grounds for acting unilaterally. 
But so long as “international community” is more hope than reality, multilateralism will have to become more varied. 
In the trade area, this implies regional and bilateral accords. 
On climate change, it makes sense to seek “mini-agreements” that set minimum common standards for fuel efficiency, slow deforestation, or limit the largest economies’ carbon output. 
In these and other areas, governments will need to rally around regional undertakings, form coalitions of the relevant or willing, or simply seek understandings among countries to do their best to adopt common policies. 
Such approaches may lack the reach and legitimacy of formal global undertakings, but they do have the advantage of getting something done. 

The Bubble of American Supremacy 
by George Soros 
As American and British troops prepare to invade Iraq, public opinion in these countries does not support war without UN authorization. 
The rest of the world is overwhelmingly opposed to war. 
Yet Saddam Hussein is regarded as a tyrant who needs to be disarmed, and the UN Security Council unanimously passed resolution 1441 which demanded that Saddam destroy his weapons of mass-destruction. 
What caused this disconnect? 
Iraq is the first instance when the Bush doctrine is being applied and it is provoking an allergic reaction. 
The Bush doctrine is built on two pillars: first, the US will do everything in its power to maintain its unquestioned military supremacy and, second, the US arrogates the right to preemptive action. 
These pillars support two classes of sovereignty: American sovereignty, which takes precedence over international treaties and obligations; and the sovereignty of all other states. 
This is reminiscent of George Orwell's Animal Farm : all animals are equal but some animals are more equal than others. 
To be sure, the Bush doctrine is not stated starkly; it is buried in Orwellian doublespeak. 
The doublespeak is needed because the doctrine contradicts American values. 
The Bush administration believes that international relations are relations of power; legality and legitimacy are mere decorations. 
This belief is not false but it exaggerates one aspect of reality to the exclusion of others. 
The aspect it stresses is military power. 
But no empire could ever be held together by military power alone. 
Yet that belief guides the Bush administration. 
Prime Minister Sharon of Israel shares the same belief and look where that has led. 
The idea that might is right cannot be reconciled with the idea of an open society. 
Hence the need for Orwellian doublespeak. 
But nobody is in possession of the ultimate truth. 
Those who make such claims are bound to be wrong at times, and so can enforce their claims only by coercion and repression. 
Bush makes no allowance for the possibility that he may be wrong, and he tolerates no dissent. 
If you are not with us, you are with the terrorists, he proclaims. 
Of course, the presence of extremist views in the executive branch does not make America a totalitarian state. 
The principles of open society are enshrined in the Declaration of Independence and the institutions of American democracy are protected by the Constitution. 
There are checks and balances, and the President must obtain the support of the people. 
Nevertheless, the Bush doctrine could do untold harm before it is abandoned - as eventually it will be. 
I see parallels between the Bush administration's pursuit of American supremacy and a boom-bust process or bubble in the stock market. 
Bubbles do not arise out of thin air. 
They have a solid basis in reality, but misconception distorts reality. 
Here, the dominant position of the US is the reality, the pursuit of American supremacy the misconception. 
For a while, reality reinforces the misconception, but eventually the gap between reality and its false interpretation becomes unsustainable. 
During the self-reinforcing phase, the misconception may be tested and when a test is successful the misconception is reinforced. 
This widens the gap, leading to an eventual reversal. 
The later it comes, the more devastating the consequences. 
There seems to be an inexorable quality about this, but a boom-bust process can be aborted at any stage. 
Most stock market booms are aborted long before the extremes reached by the recent bull market. 
The sooner this happens, the better. 
That is how I view the Bush administration's pursuit of American supremacy. 
The Bush administration came into office with an ideology based on market fundamentalism and military supremacy. 
Prior to September 11 th , it could not make much headway in implementing its ideology because it lacked a clear mandate and defined enemy. 
Terrorism provided the ideal enemy because it is invisible and never disappears. 
By declaring war on terrorism, President Bush gained the domestic mandate he lacked. 
But his policies have already caused severe unintended consequences. 
The EU and NATO are divided. 
The US is perceived as a giant bully throwing its weight around. 
Afghanistan has been liberated, but law and order has not been established beyond Kabul. 
Indeed, President Karzai must be protected by American bodyguards. 
The Israeli-Palestinian conflict festers. 
Beyond Iraq an even more dangerous threat looms in North Korea - a crisis precipitated by President Bush in his eagerness to break with what he deemed to be Clinton's appeasement. 
Bush repudiated the sunshine policy introduced by President Kim Dae Jung of South Korea and included North Korea in the axis of evil. 
Rapid victory in Iraq with little loss of life could bring about a dramatic change in the overall situation. 
Oil prices could fall, stock markets could celebrate, consumers could resume spending, and business could step up capital expenditures. 
America would end its dependency on Saudi oil, the Israeli-Palestinian conflict could become more tractable and negotiations could start with North Korea without loss of face. 
That is what Bush counts on. 
But military victory in Iraq is the easy part. 
It is what comes after that gives pause. 
In a boom-bust process, passing an early test tends to reinforce the misconception which gave rise to it. 
That is to be feared here. 
It is not too late to prevent the boom-bust process from getting out of hand. 
The UN could accede to Chief Inspector Blix's request for several months to complete his inspections. 
America's military presence in the region could be reduced, but it could be beefed up again if Iraq balks. 
Invasion could take place at summer's end. 
This would be a victory for the UN and for the US whose prodding made the Security Council act resolutely. 
That is what the French propose, but that is not what is going to happen. 
President Bush has practically declared war. 
It is to be hoped that Iraq's conquest will be swift and relatively painless. 
Removing Saddam is a good thing; yet the way President Bush is going about it must be opposed. 
In the long run, open society cannot survive unless the people who live in it believe in it. 

The Buck Stops at the Top 
Recent news coverage showed Ken Lay, the former CEO of Enron, being led away in handcuffs. 
Finally - years after Enron's collapse - Lay faces charges for what happened when he was at the helm. 
As is so often the case in such circumstances, the CEO pleads innocence: he knew nothing about what his underlings were doing. 
Bosses like Lay always seem to feel fully responsible for their companies' successes - how else could they justify their exorbitant compensation? 
But the blame for failure - whether commercial or criminal - always seems to lie elsewhere. 
America's courts (like Italy's courts in the case of Parmalat) will make the final judgment over criminal and civil liability under existing law. 
But there is a broader issue at stake in such cases: to what extent should a CEO be held responsible for what happens under his watch? 
Clearly, no CEO of a large corporation, with hundreds of thousands of employees, can know everything that goes on inside the company he or she runs. 
But if the CEO is not accountable, who is? 
Those below him claim that they were just doing what they thought was expected of them. 
If they were not following precise orders, they were at least responding to vague pro forma instructions from the top: don't do anything illegal, just maximize profits. 
The result, often enough, is a climate within which managers begin to feel that it is acceptable to skirt the edges of the law or to fudge company accounts. 
Even though a CEO cannot know everything, he or she is still ultimately responsible for what occurs in the company they run. 
They choose their subordinates, so it is their responsibility to ask the hard questions about what is going on under their watch. 
More importantly, it is their responsibility to create a climate that encourages, or discourages, certain kinds of activities. 
Simply put, it is their responsibility to be true leaders. 
What's true for business bosses is doubly true for presidents and prime ministers. 
The United States is in the process of choosing who will lead it for the next four years. 
President George W. Bush may claim that he didn't know that the information he was provided by the CIA concerning weapons of mass destruction in pre-war Iraq was so faulty. 
He may also claim that, with many thousands of troops under his command, it was impossible for him to ensure that US soldiers were not committing atrocities, torture, or violations of civil liberties. 
But there is a fundamental sense in which Bush, like Ken Lay, is culpable, and must be held accountable. 
Just as a CEO with a record not only of poor performance, but also of massive corporate misconduct, should be fired, so, too, should political leaders be held to a similar standard. 
Bush had a responsibility for the behavior of the people working for him. 
Instead, almost across the board in his administration, he chose as advisors people akin to Ken Lay. 
Bush chose as his Vice-President a man who once served as CEO of Halliburton. 
Dick Cheney clearly cannot be held responsible for corporate misconduct after he left Halliburton, but there is mounting evidence about misconduct that took place while he was at the helm. 
Similarly, at the Securities and Exchange Commission, Bush appointed in the person of Harvey Pitt a fox to guard the chickens - until public outrage forced Pitt's resignation. 
Bush chose the people who provided him with faulty information about Iraq, or at least he chose the heads of the organizations that provided the faulty information. 
He chose his defense secretary and attorney general. 
He, and the people he appointed, created an environment of secrecy, a system in which the normal checks on the accuracy of information were removed. 
Most importantly, Bush did not ask the hard questions - perhaps because he, like those below him, already knew the answers they wanted. 
They created a closed culture, impervious to contradictory facts, a culture in which civil rights have been given short shrift and some people have been deemed not to deserve any rights protection at all. 
Only such a culture - one that undermined the longstanding presumption that an accused person is innocent until proven guilty - could produce the Bush administration's niggling legal distinctions concerning what is and what is not torture. 
The abuses that have been documented at places such as Abu Ghraib and Guantanamo may not have been an inevitable consequence of the administration's legal memos, but surely those memos increased enormously the likelihood that torture would be viewed as acceptable. 
Many Americans will reject Bush this November because of the poor performance of the economy or the quagmire in Iraq. 
Others will oppose him due to his environmental record or his budget priorities. 
But the intensity of opposition in America to Bush runs deeper than any single issue. 
There is a growing recognition that the values he and his administration reflect are the antithesis of what America has long stood for - the values of an open society, in which differences of view are freely debated within a culture of civility and mutual respect for the rights of all. 
The battle being waged in America today to restore these values is one that has been waged repeatedly around the world. 
Both in America and elsewhere, much hinges on the outcome, for it is nothing less than a battle to force our leaders to accept responsibility for their actions. 

The Bumpy Road Ahead 
CAMBRIDGE – If stock market and interest-rate spreads are to be believed, America’s economy has seen the worst and may be on its way to a slow recovery. 
But the troubles for the world economy are just starting. 
If globalization does not get the fix it needs, economic prospects will be dim for rich and poor countries alike. 
The worst that could happen is a return to the 1930’s, when countries put up high trade barriers and retreated into isolationism, to the detriment of all. 
Fortunately, this is a remote scenario today. 
But the next worst thing is to assume that a minor patch-up will be enough to render globalization healthy and sustainable. 
It will take real effort and creativity to repair the deep cracks in globalization revealed by the financial crisis. 
First, the good news. 
The global response to the crisis may not have been stellar, but neither has it been the free-for-all that might have been feared. 
The G-20 could not agree on coordinated fiscal stimulus or concrete steps towards banking reform. 
But it did coalesce behind the International Monetary Fund and provided it with additional resources. 
Despite scores of new protectionist measures around the world since the onset of the financial crisis, the vast majority are nothing to lose sleep over. 
Globalization has not received a mortal blow – at least not yet. 
The real test is yet to come. 
The problem is that none of globalization’s underlying weaknesses is likely to be adequately addressed under the current agenda. 
Financial regulation and supervision will surely be strengthened, but they will remain national in character, with little safeguard against cross-border spillover and regulatory arbitrage. 
Moreover, the World Trade Organization’s agenda will remain irrelevant and, in any case, deadlocked. 
China has yet to discover and adopt an alternative growth strategy that does not rely on a large trade surplus. 
Trade and immigration (legal and illegal), if left unchecked, will continue to exert downward pressure on rich countries’ labor markets. 
The financial crisis has not helped improve the image of globalization, which has long been deeply unpopular among ordinary voters in most of the world’s advanced countries. 
As a result, globalization’s tendency to produce macroeconomic imbalances and financial fragility, its adverse impact on equality and social peace in many countries, and its weak political legitimacy will continue to generate tension and periodic crises. 
Two other developments will greatly aggravate these weaknesses. 
The first is that the United States and other advanced countries are unlikely to recover their previous economic dynamism even after financial stability is restored. 
Rich-country households have suffered a momentous loss of wealth (amounting to tens of trillions of US dollars). 
This implies that consumption growth will remain muted for some time. 
With public debt rising very rapidly, and in some countries projected to exceed 100% of GDP, governments will not be in a position to take up the slack. 
The restructuring of economies away from finance will necessarily take some time. 
Stagnation rather than growth will be the name of the game. 
Second, global leadership is likely to remain in very short supply. 
The US will be crippled by its high debt, under-performing economy, and discredited economic model. The European Union will be preoccupied with its own internal integration process. 
And China, where income per person is one-eighth the level of the US (adjusted for purchasing power parity), is simply too poor to become the new hegemony. 
History teaches that global economic order is difficult to establish and maintain in the absence of a dominant economic power. 
The interwar period, which suffered from a similar crisis of leadership, produced not only a collapse of globalization, but a devastating armed conflict on a global scale. 
So the stakes in righting the world economy could not be higher. 
Mismanage the process, and the consequences could be unimaginable. 
Unfortunately, many of the solutions on offer are either too timid or demand too much of a global leadership that is in short supply. 
The conundrum of global reform is that the proposals that go far enough, such as establishing a global financial regulator, are wildly unrealistic, while those that are realistic, such as reform of the IMF, fall far short of what is needed. 
What we need is a vision of globalization that is fully cognizant of its limits. 
We can start with a simple principle: We should strive not for maximum openness in trade and finance, but for levels of openness that leave ample room for the pursuit of domestic social and economic objectives in rich and poor countries alike. 
In effect, the best way to save globalization is to not push it too far. 
Consider a traffic analogy. 
One way to prevent traffic accidents is to require everyone to drive a similar car, travel at the same speed, and head in the same direction. 
Another is to enforce some simple rules: don’t drive in the fast lane if going slow, stop at red lights, use a signal before a turn, and so on. 
The first approach may maximize the traffic load that can be carried safely, but it fails to take most people where they want to go and is ultimately self-defeating. 
The second approach allows drivers to make their own choices, even if this means that they will have to slow down or stop on occasion. 
Similarly, healthy and sustainable globalization should not impose a straitjacket of common rules on everyone. 
The financial crisis laid bare the soft underbelly of globalization. 
It would be a mistake to respond by trying to take globalization to the next level. 
The economic and political obstacles that block deep integration cannot be wished away by exhortations. 
It would serve us far better to take these limits into account and scale down our ambitions. 

The Burma Road Goes Through Beijing 
NEW YORK amp#45;amp#45; Three hard facts are setting the boundaries for the talks United Nations negotiator Ibrahim Gambari is undertaking as he shuttles between Burma’s ruling generals and the detained opposition leader Aung San Suu Kyi. 
First, despite the heroic leadership of the Buddhist clergy and the pro-democracy community, almost 50 years of military misrule and terror tactics have worn down Burma’s people, who will likely find it hard to maintain their defiance without obvious splits among the ruling generals or widespread desertions among ordinary soldiers. 
Second, Burma’s generals know that they face a stark choice: either maintain power or risk imprisonment, exile, and possible death. 
In their eyes, this leaves them with virtually no choice but to hold on to power at all costs. 
Finally, as long as China provides political, financial, and military support for Burma’s rulers, it will be all but impossible for any meaningful change to occur. 
Until China decides that it has more to gain from a more legitimate government in Burma than it does from the current incompetent military regime, little can happen. 
China’s decision to block the UN Security Council from condemning the Burmese regime’s assault on the Buddhist monks and other peaceful protestors underscores its long-standing political support for the junta. 
This past January, China, alongside Russia, vetoed a Security Council resolution that condemned Burma’s human rights record and called on the government to stop attacks on ethnic minorities, release political prisoners, and begin a transition towards national reconciliation and democracy. 
For years, China has also blocked meaningful sanctions against Burma. 
China’s economic ties to Burma’s rulers are strategically important for both sides. 
Annual bilateral trade, estimated at $1.1 billion – a huge figure, given Burma’s total GDP of $9.6 billion – provides an economic lifeline for the Burmese government. 
China is also Burma’s largest military supplier. 
At the same time, the $2 billion oil pipeline that China is seeking to build from Burma’s southern coast to China’s Yunnan province will allow China to get Middle East oil to its southern provinces more easily and securely. 
When completed, the pipeline will make China much less susceptible to foreign military pressure in the event of international conflict. 
So the stakes in Burma are high for China, as are Chinese fears of about how any future “national reconciliation” government might react to China’s record of complicity with the corrupt military rulers. 
It should be remembered that America and its allies, faced with strategic fears of a similar type during the Cold War, also supported repugnant and oppressive regimes in places like Zaire, Chile, and Indonesia. 
But America and the West did, at key turning points, realize that times had changed so much that these dictators had outlived their usefulness. 
Thus, despots like Ferdinand Marcos in the Philippines and Chun Doo-hwan in Korea were jettisoned, because the price of supporting their despicable regimes became greater than the benefits. 
In today’s Internet age, the costs of China’s support for Burma’s generals are rising fast. 
Just as in Darfur, where China’s perceived support for the Sudanese government translated into harsh criticism and threats to brand the 2008 Olympics the “Genocide Games,” China’s backing of the Burmese generals, particularly if the death toll rises, could cause similar problems. 
Indeed, an Olympic boycott will become more likely if scenes of murdered or brutalized Buddhist monks are flashed around the world. 
Moreover, Burma’s public health woes and drug and human trafficking are increasingly being exported to southern China. 
Although China has expressed some vague concerns over the crisis to the Burmese government, it has not taken any action that could meaningfully affect the regime’s calculations, despite its singularly unique leverage. 
To encourage China to take the lead in fostering national reconciliation in Burma, the international community must convince China that pushing for reform and change can be a win-win proposition. 
The international community must make clear that China’s interests would be protected during a transition to a more open society in Burma, and that some version of the oil pipeline project will be supported by any new regime. 
Because China has been competing with India for access to Burma’s natural resources, India also needs to be actively included in efforts to pressure the Burmese regime, a process that the Association of Southeast Asian Nations (ASEAN) might effectively coordinate. 
In a statement issued on September 27, ASEAN foreign ministers expressed a surprising degree of condemnation of the crackdown in Burma. 
They could play an essential leading role in a process including the Burmese parties, China, India, the European Union, Russia, and the United States that could devise a roadmap for change in Burma. 
Such an international process simply cannot happen without China. 
The road to change in Burma runs through Beijing. 

The Bush Black Hole 
In 2001, President George W. Bush misled the American people. 
He said that a tax cut that was not designed to stimulate the economy would stimulate it, and the American people believed him. 
But it did not. 
He told Americans that the large surpluses that were among President Bill Clinton's legacies meant that the US could afford to cut taxes massively. 
Wrong again. 
He did not warn Americans how dubious such estimates can be. 
In 2003 President Bush misled the American people about the economy once more. 
Weeks after persuading Congress to pass another tax cut--in some ways even more inequitable than the first--his administration revealed how bad the fiscal position had become. 
The $230 billion surplus inherited from Clinton had turned into a $450 billion deficit. 
Now, after handing billions to rich Americans through tax cuts that almost exclusively benefit them, the Bush administration is passing the hat around, asking for contributions from other countries to help pay for the cost of the Iraq war. 
Even setting aside the other dubious aspects of Bush's Iraq policy, the conjunction of misguided giveaways to America's richest people with an international US begging bowl is hardly likely to evoke an outpouring of sympathy. 
Meanwhile, as all of this happens, the US trade deficit mounts. 
America, the world's richest country, evidently can't live within its means, borrowing more than a billion dollars a day. 
As the US thrashes around for someone to blame, it was inevitable that it would focus on China, with its large trade surplus, just as the twin fiscal and trade deficits of the Reagan era led to a focus on Japan two decades ago. 
But this is blame shifting, nothing more. 
America's fiscal and trade deficits are intimately linked. 
If a country saves less than it invests, it must borrow the difference from abroad, and foreign borrowing and trade deficits are two sides of the same coin. 
National saving has two components--private and public. 
With Reagan's irresponsible tax cuts, combined with America's paltry savings, the US had no choice but to borrow abroad. 
Now, under "Bush II," America is repeating that folly. 
Matters may get even worse once investment is rekindled, unless private savings increase in a way America has not seen before. 
Some people abroad now tend to gloat at America's problems. 
For many, it is another reason to question America's ability to provide effective leadership. 
It took America a dozen years to work its way out of Reagan's fiscal mess. 
It may take just as long to clean up the mess Bush has created. 
But non-Americans' Schadenfreude is misguided. 
Globalization means that mistakes in one country--especially in the world's largest economy--have powerful repercussions elsewhere. 
Three things are worth noting here. 
First, America's deficits are certain to sop up vast amounts of the world's pool of savings. 
But the world will recover eventually from its current slowdown, and that shortage of savings will become important. 
It will mean higher real interest rates, lower investment, and lower growth, all of which will be especially costly for developing countries. 
Second, America's huge trade deficit may be a major source of global instability. 
Will the world continue to finance this deficit willingly, to put its money into a country with such a demonstrated lack of competence in macroeconomic management (to say nothing of the corporate, banking, and accounting scandals)? 
What returns will they demand? 
What happens if global investors decide that they should change their portfolio mix, shifting slightly away from American assets? 
A weak Europe and skittishness about emerging markets has been one of America's great strengths, but how long can the US rely on the weakness of others? 
Finally, in searching for others to blame, America may once again enter an era of protectionism, as it did under Reagan. 
Bush may trumpet free markets, just as Reagan did. 
But just as he may exceed Reagan in fiscal irresponsibility, so he may outflank Reagan in trade hypocrisy. 
By one reckoning, close to a quarter of American imports were covered by some form of trade restrictions at the peak of Reagan protectionism (including so called voluntary export restraints). 
Expect no less from Bush. 
Last year, Bush showed little reluctance in imposing steel tariffs--in clear violation of WTO rules. 
The good news is that, the world is beginning to see a rule of law in trade--a legal framework that, although not totally fair to developing countries, and in which economic power still counts for a great deal, may circumscribe America's ability to revert to the protectionism of the past. 
Europe has committed itself to fiscal responsibility--with almost too much zeal, failing to recognize that a well designed deficit in times of recession may yield high returns. 
The Bush administration has pushed forward tax cuts that lead to deficits while providing only a modest amount of stimulus. 
Equally worrying--both for America and the world--is the path on which it has embarked: deficits as far as the eye can see. 
The Bush administration's policies bode ill for America in the long run--and hence for the world. 

The Bush Bust? 
CAMBRIDGE: America’s long boom is at risk. 
Signs abound of an impending slowdown, even of recession. 
These dark clouds are gathering as transition from the Clinton to Bush Administrations gets belatedly underway. 
The quality of economic management in the new Administration’s first year will set the course for many years to come. 
When President-elect Bush talks about using huge tax cuts to keep the economy humming, it is time to start worrying. 
Large tax cuts are a short-term “solution” that could do serious long-term damage. 
Rapid growth and huge increases in stock market wealth are nowadays almost taken as a matter of fundamental right by many Americans. 
They can’t imagine the US economy slowing, or share prices falling and staying down. 
They have read too many phony analyses of the New Economy promising unbounded riches and full employment forever. 
The problem with these New Economy prophecies is that a bit of truth is mixed with huge exaggerations. 
Yes, the New Economy is delivering big increases in US productivity; no, the New Economy has not ended economic slowdowns or recessions. 
Still, less does it guarantee that companies should have stock market prices set at several hundred times their annual earnings. 
America looks set to enter into a slowdown driven by a slowdown in business investment. 
Undoubted advances in information technology led to an incredible restructuring of the American business sector, which re-wired itself to take advantage of electronic commerce and improved computer-based management, logistics, and communications systems. 
The result was an astounding surge in business fixed investment in computers and other information technology hardware. 
Investments in information processing equipment and software rose by about 19% per year between 1993 and 1999, and in 1999 constituted about half of all US business equipment investment. 
This surge in business spending boosted overall demand. 
Indeed, it so greatly fueled American demand that total spending (consumption plus investment) actually grew much faster than production. 
The result is a trade deficit now standing at over $400 billion per year. 
That trade deficit is financed by foreign investments in America, as savers the world over increase their holdings of US stocks and bonds. 
The IT boom also led to visions of a long-term growth miracle in America, which in turn led to unrealistic expectations about future profitability. 
High profit expectations, in turn, contributed to the unprecedented boom in the stock market between 1996 and 1999. 
In short, real gains in productivity due to the New Economy became exaggerated in the public’s mind. 
Rapid growth is expected; a booming stock market taken for granted. 
Now the economy reflects the fact that these expectations are out of line with reality. 
Business investment spending is slowing down, since firms have already stocked up on information technology systems and don’t need to replace or upgrade them for the moment. 
Profit expectations are falling to earth, as company after company announces disappointing sales and profits. 
The stock market has fallen big, by around half since March in the high-technology NASDAQ market. 
Everybody counts on Alan Greenspan’s Federal Reserve Board to save the day, and there is little doubt that an interest rate cut would help maintain strength in consumer demand and housing construction. 
But there are reasons to doubt that such a cut will affect business investment, the part of demand likely to swing sharply in the coming years. 
Moreover, the Federal Reserve will be cautious in cutting interest rates when the dollar is falling, the economy is near full employment, and higher energy prices are working their way through the economy. 
The Fed’s ability to control the business cycle at this moment is modest, at best. 
In steps the Bush Administration, facing a divided Congress and a cloud over its legitimacy. 
President-elect Bush talks about his $1.3 trillion tax cut proposal as an “insurance policy” against recession. 
What was portrayed during the election campaign as a long-term measure, however dubious, is now portrayed as the medicine needed to keep America’s economy growing in the short run. 
Several things are wrong with this. 
First, prolonged debate over the tax cut proposal, virtually inevitable if the new President insists on it, will create huge uncertainties in financial markets and at the Federal Reserve Board. 
If America spends the spring debating an enormous tax cut, you can bet that business and investor confidence will continue to weaken. 
Second, a large tax cut hampers the ability of the Fed to ease interest rates. 
Third, and most importantly, large tax cuts will undermine the solid fiscal conditions so crucial to America’s boom. 
A return to fiscal deficits, which could result from the combination of large tax breaks and a much slower-growing economy, would make the economy more vulnerable to shocks in coming years. 
We have learned repeatedly that, in the face of a weakening economy, prudence works best. 
Desperate actions such as huge tax cuts, or huge cuts in interest rates, almost always fail. 
With prudent management, a slowdown will likely be short and mild. 
Countries who try to keep their economies growing too fast for too long, using drastic steps such as large tax cuts or highly expansionary monetary policies, frequently end up in a financial mess that takes years to clean up. 
President-elect Bush’s pronouncements display an unhealthy bias towards short-run macroeconomic meddling, rather than sound emphasis on the long term. 

The Bush in Obama 
GUANTÁNAMO BAY, CUBA – Hearings are underway in the United States Senate to assess what to do with the 240 detainees still behind bars at Guantánamo Bay, and what will become of the military tribunals and detention without trial that the Bush administration and a compliant Congress put into place. 
The US Congress is also debating what will happen to the detention camp itself, which was established in 2002 to house men who were allegedly “the worst of the worst,” in a setting deliberately framed by Bush attorneys as “legal outer space.” 
But are those Senate hearings actually window dressing on a new reality that is just as bad as the old one – and in some ways worse? 
Military tribunals without due process are up and running again. 
While President Barack Obama has released a few prisoners, notably the Chinese Uighurs, and sent another for a real trial in New York City, he is now, chillingly, signalling that he is about to begin “preventive detention,” which would empower him to hold forever an unspecified number of prisoners without charges or trials. 
On a visit to Guantánamo, Department of Defense spokesman Joe DellaVedova told me that a series of panels are reviewing the detainees’ files, a process that will take until this year’s end. 
The review will sort the detainees into three categories: those who will be tried in criminal courts in the US; those who will be released and sent to other countries; and those who “can’t be released and can’t be tried and so have to be held indefinitely…what is being called ‘preventive detention.’” 
I was stunned. 
DellaVedova’s comment suggested that the review process was merely political theatre. 
If there is to be a genuine review of the accusations against these detainees, how can it be known in advance that the third category will be required? 
Indefinite preventive detention is, of course, the foundation of a police state. 
Human rights organizations knew that Obama had prepared the way, in public-relations terms, for some criminal trials – talking up the “supermax” security of some US prisons, and noting that other terrorists have successfully been tried by America’s justice system. 
(Other democracies, such as the United Kingdom and Spain, always try terrorism suspects, including alleged Al Qaida members, in ordinary criminal trials). 
But, six months after he ordered an end to torture and CIA “black sites,” and promised to close Guantánamo within a year, Obama seems to be re-branding Bush’s worst excesses. 
He has brought in planeloads of journalists to Guantánamo Bay to show them a “safe, transparent, and humane” facility that now offers fresh baklava and video viewing from a shackled loveseat. 
But the roughly 240 detainees remain incarcerated without having been charged with any crime, and will still not get a fair trial, even under Obama’s proposed military commissions. 
After all, the prosecutor, the judge, and the “panel” are all to be US government employees. 
Furthermore, Obama’s Justice Department has invoked Bush’s argument that the State Secrets Act bars evidence about torture from being disclosed, which means that anyone who was tortured can never appear in court. 
Moreover, Obama has sought to suppress hundreds of photographs depicting sexual assault in US-run prisons, and has done nothing to roll back the Patriot Act. 
Why should Obama, a constitutional scholar, be backtracking this way? 
First, he does not dare appear to be “soft on terror.” 
Second, perhaps he needs to be able to try the Guantánamo detainees in a rigged setting, or even keep them from trial forever: lawyers claim that torture, including sexual torture, was so endemic in the CIA and the military that Obama could be holding scores, if not hundreds, of prisoners whose bodies are crime scenes. 
According to Wells Dixon, a lawyer at the Center for Constitutional Rights who represents some of the detainees, the Obama administration cannot risk calling the torture practices crimes, so it calls them “classified sources and methods” that cannot be revealed in court. 
“I can’t even tell you about the way my clients were tortured or I will be prosecuted,” he says. 
In fact, even the explanation of why this material is classified cannot be reproduced, because it is privileged. 
Nor has the access of lawyers to their Guantánamo clients improved under Obama. 
“We are subject in all detainee cases to a protective order,” Dixon says. 
“Under this order, everything the detainee says is classified,” unless the Department of Defense “Privilege Team” decides otherwise. 
Dixon then told me a revealing story of one of his clients, Majid Khan, a so-called “high-value detainee” who was held for three years in CIA “black sites.” 
Khan was tortured, Dixon said, though “the government would say that what happened to him is an ‘intelligence source or method.’” 
Because Dixon has a security clearance, he cannot discuss those classified “sources and methods.” 
On the other hand, Dixon continued, “When the government does something to [Khan] that they say is classified, they have disclosed to him classified information. 
But since he doesn’t have a security clearance, there is nothing that prevents him, unlike me, from saying to the outside world, ‘This is what they did to me.’ 
Nothing prevents that – except for the fact that he is physically in custody.”’ 
The “logical conclusion,” according to Dixon, is that Khan “must be detained for the rest of his life – regardless of whether he is ever charged with a crime – because if he was ever released, nothing would prevent him from disclosing this information. 
Majid Khan – and there are many more like him – is a classic product of the Bush administration’s disregard for the fundamental principles of the rule of law. 
Unfortunately, Obama’s administration, for all its lofty rhetoric, appears too willing to perpetuate it. 

The Bush Repression 
How will President George W. Bush’s administration be remembered historically? 
After five years in office, and with another three years to go, some answers are already apparent. 
Others are emerging gradually. 
The latter category includes an increasing assault on civil liberties within the United States that now compares to that of Richard Nixon’s administration more than thirty years ago. 
Of course, civil liberties were bound to suffer in the wake of the terrorist attacks of September 11, 2001. 
Throughout American history, threats to national security, whether real or imagined, have led to clampdowns on the rights of citizens and, to a far greater extent, on the rights of immigrants and others suspected of acting in the interests of alien forces. 
In the twentieth century, abuses of civil liberties were particularly severe during four periods. 
In the years 1917 to 1919, US participation in World War I and anarchist bombings after the war led to almost two thousand federal prosecutions, mass roundups of aliens, and summary deportations. During World War II, Japan’s attack on the US was followed by the internment of more than 120,000 Japanese-Americans because of their race, including many who were born in the US. 
In the late 1940’s and the 1950’s, the Cold War and fears that the Red Menace would sap American resolve from within led to myriad anti-subversive programs, with tens of thousands of Americans losing their livelihoods as a result. 
Finally, during the Nixon years, the president’s paranoia about opposition to the Vietnam War and to his policies fuelled a pattern of abuses that eventually brought about his resignation in disgrace. 
The Nixon administration’s legacy is particularly instructive in assessing the Bush record. 
Though Americans tend to lump Nixon’s violations of civil liberties together under the heading of “Watergate,” much more was involved than the break-in at Democratic Party headquarters and the subsequent cover-up. 
The participants in those events included the “Plumbers,” a personal secret police established by Nixon and so named because one of their tasks was to eliminate leaks of information that the White House did not want to disclose. 
Another secret assault on civil liberties was Nixon’s adoption of the “Huston Plan” which authorized political surveillance by burglary, electronic eavesdropping, and the use of the military to spy on civilians. 
Nixon used these methods against political opponents, journalists, and government employees suspected of disloyalty to the president. 
As far as we know, Bush has not gone that far. 
Nevertheless, electronic eavesdropping without court authorization, of the sort Bush ordered starting in 2002, played a particularly important part in Nixon’s downfall. 
One of the three counts against Nixon in the vote to impeach Nixon by the House of Representatives’ Judiciary Committee was based on such eavesdropping. 
In fact, Bush pursued his policy despite a 1978 law – adopted in response to the Nixon-era abuses – that specifically requires judicial approval, and in contradiction to his public assurance that no such eavesdropping takes place without a court order. 
Now that his electronic surveillance program has been exposed, Bush’s Justice Department has launched an investigation into how the news became public, threatening the journalists who reported the information. 
But even before the latest revelations, the Bush administration’s assaults on civil liberties were legion, including its imprisonment of hundreds of men without charges at Guantánamo Bay in an effort to evade judicial review of their cases. 
It also rounded up, jailed, and deported hundreds of aliens in an anti-terrorist drive none of whose targets was shown to have any link to terrorism. 
The list does not stop there. 
Bush’s subordinates authorized methods of interrogation that led to torture, and his administration adamantly resisted legislation that would ban its use. 
It even insisted that it could imprison an American citizen, José Padilla, incommunicado for an indefinite period without criminal charges until, faced with the prospect of Supreme Court review, it suddenly pressed charges that had nothing to do with the allegations that had formed the basis for his detention. 
Indeed, a hallmark of the Bush administration’s violations of civil liberties is that many involve efforts to evade judicial review. 
Guantánamo, the deportations, the Padilla case, and the electronic eavesdropping program all share this characteristic. 
At the same time, Bush has systematically packed the federal courts with judges chosen for their readiness to defer to presidential power. 
His latest nominee to the US Supreme Court, Judge Samuel Alito, exemplifies this trend. 
The mood in the US today is far from the point that it reached in 1973 and 1974, when the drive to impeach Nixon and convict him in the US Senate forced him to resign. 
But, while it seems safe to predict that Bush will serve out the rest of his term, it also appears certain that history will look upon him as a president who sought to undermine civil liberties. 
Unfortunately, given Bush’s repeated assertions – in defiance of America’s constitutional tradition of checks and balances – that his office endows him with unilateral powers to violate rights, he appears to be untroubled by that prospect. 



The Business of Fighting Poverty 
From China to Chile, from South Korea to South Africa, there is little debate about whether or not private investment is essential for prosperity and growth. 
But private investment too rarely benefits the poorest of the poor--precisely those who need it most. 
Some blame an unfair world trading system, in which wealthy nations knock down all trade barriers except their own. 
Others point to the debt burdens shouldered by poor countries, or to the volatility of emerging markets. 
But regulatory obstacles and unexploited marketplace gaps also prevent private capital from flowing to the poorest countries. This keeps small businesses in poor nations and regions from reaching their full potential. 
Based on our own experiences--in Mexico, which has opened up to foreign investment and trade, and in Canada, which is a leading aid donor and a major source of private investment in developing countries--we are convinced that many of these problems can be identified, isolated and fixed. 
The entrepreneurial energy is already there: visit the tiniest town in the poorest country on market day and you will see the private sector in action. 
If small businesses could expand beyond the village square, they could drive their countries' growth better than any aid agency. 
This is why, when UN Secretary-General Kofi Annan and UN Development Program Administrator Mark Malloch Brown asked us to lead a new Commission on Private Sector and Development, we agreed. 
For we are both strong believers in the need for substantial foreign aid flows to the world's poorest countries. 
We believe equally strongly in the public sector's role in providing essential services and infrastructure. 
But ultimately, private investment must be the main source of income growth and job creation in poor countries--just as it is in industrialized nations. 
If we can identify specific measures that work to unblock the private sector's potential, these recommendations can be adopted both by individual countries and by multilateral agencies like the UNDP. 
Some preliminary conclusions have already emerged: 
Even when budget deficits and inflation are under control, business growth is often inhibited by national and local impediments. Legal frameworks for business may be lacking, or bureaucracy may be excessive. 
More action to create an ``enabling regulatory environment'' could spur immense business growth; 
In the industrialized world, private financing can underwrite essential public utilities like power plants and water systems. 
This is rarely possible in the developing world, which suffers from outmoded regulatory structures and underdeveloped capital markets. 
Yet many poor countries have untapped financial resources. 
Alongside efforts to attract foreign investment, equal energy should be directed at mobilizing and unleashing domestic capital; 
In Canada, as in the US and Western Europe, a modest home, a small plot of land or a solid credit history can be enough to secure a loan. 
But such small-scale loans are hard to obtain in developing countries, which often lack the necessary institutional arrangements such as credit agencies and clear property rights. 
Hernando de Soto, a member of our Commission, estimates that roughly $9.3 trillion in land value--largely in the hands of the poor--lies unexploited as collateral to spur investment and growth; 
Companies now tapping the huge consumer demand represented by the poor in developing countries are reaping big returns. 
We are investigating what business insights and policy steps made such successes possible. 
Often, policymakers eliminated legal bottlenecks or created new institutional mechanisms to facilitate investment. 
Of course, continuing macroeconomic reform remains necessary. 
Market liberalization and trade expansion lifted millions out of poverty in the 1990's, particularly in China and India. 
In other regions, developing countries that liberalized their economies and encouraged foreign investment grew faster than they otherwise would have. 
But many countries--54, in fact--were poorer in 2000 than they were in 1990, as documented in the 2003 UN Human Development Report . 
In most cases, these countries embraced macroeconomic reform, liberalizing trade and investment rules and improving fiscal management. 
But these policies did not automatically prompt the expected--and urgently needed--private investment. 
Part of the reason for this may be that economic reform must now move from the macro level to the micro level, from trade and monetary policy to the web of legal and financial impediments entangling small business. 
When the business potential of the developing world is unleashed, the benefits will be more than economic. 
Indeed, private enterprise can create powerful interests vested in peace. 
Although businesses are competitive by nature, true entrepreneurs also instinctively collaborate in building new markets: a manufacturer in one country or region seeks marketers, financiers and distributors in other countries and regions. 
Ties among private companies enhance global stability. 
In the formative years of the North American economy, the entrepreneurial Quakers were wryly said to have come to the New World ``to do good, and they ended up doing well.'' 
Investors in developing economies should have the opportunity to do the same. 

The Caesar Temptation 
BUENOS AIRES – On June 28 a coup deposed Honduran President Manuel Zelaya, ending his attempt to hold a referendum that would permit his re-election. 
That same day in Argentina, former president Nestor Kirchner was defeated in a mid-term election that many people viewed as a test of whether or not he or his wife Cristina, Argentina’s current president and Nestor’s successor, would continue as president after the vote of 2011. 
Both events crystallized a peculiar Latin American phenomenon: the temptation to empower a new, local Caesar. 
This “Caesarism” is not a new idea. 
Instead, it marks the return of a practice that had seemed to have been consigned to history’s dustbin which has now returned with a vengeance. 
In 1919, the first edition of Democratic Caesarism , by the Venezuelan historian and sociologist Laureano Vallenilla Lanz, was published and widely circulated across the continent. 
Vallenilla claimed to be seeking an effective (as opposed to the formal) constitutional system for his country. 
To achieve this end, Vallenilla argued that, at least in the case of Venezuela, a charismatic leader, confirmed in power through regular elections, would be best placed to concentrate political power successfully and guarantee institutional order. 
Ninety years later, it looks as though, with the rise of a variety of neo- caudillos , Vallenilla’s idea of the “good Caesar” is coming back. 
Indeed, the victory of presidential incumbents across Latin America has become the predominant trend in the region’s elections. 
For most of the nineteenth century and well into the Cold War era, re-election of a sitting president was generally prohibited in the great majority of Latin American countries, owing to a general fear of leaders remaining permanently in power, abetted by the prevalence of electoral fraud. 
Permanence and fraud are, of course, the hallmarks of authoritarian governments everywhere. 
In the last century, coups d’état were often the means by which (mostly military) rulers remained in power for many years, outlawing and persecuting the opposition. 
Nowadays, leaders are achieving the same end at the ballot box. 
This phenomenon is relatively new. 
With Latin America’s most recent democratic transition, which began in the 1980’s, national constitutions and electoral laws were gradually reformed and modernized. 
Several democratically elected leaders urged constitutional modifications in order to remain in power. 
Over time, what had been an exception became routine: the possibility of consecutive terms or alternating re-election of presidents in countries with little democratic tradition. 
This trend was accompanied by the fact that these societies were marked by a high degree of inequality, as well as unstable economies, weak political parties, fragmented oppositions, and fragile institutions. 
Indeed, in Latin America today there are 14 representative democracies that allow presidential re-election: seven consecutively and seven discontinuously. 
But something new has recently been introduced in Latin America’s political system: the notion of unlimited re-election. 
Hugo Chávez first achieved this in Venezuela, and there are other specters of potentially perpetual re-elections. 
In the Dominican Republic, Leonel Fernández (1996-2000, 2004-2008, 2008-2012) began serving his third four-year term in office in 2008, and the party in power has not ruled out the possibility of modifying the Carta Magna to allow him yet another term. 
In Colombia, Álvaro Uribe (2002-2006, 2006-2010), in power since 2002, got his chance for a first re-election in 2006 through a questionable constitutional reform, and appears set to try for a third term by forcing a referendum to amend the constitution again. 
In Brazil, Luis Inácio Lula da Silva, in power since 2003, was re-elected in 2007, and now many members of his party are pushing for a constitutional reform that would allow him a third term. 
In a recent interview with the British journalist David Frost, Nicaragua’s President Daniel Ortega, who returned to power in 2006, declared himself in favor of immediate re-election. 
Before having completed a year in office, Fernando Lugo, President of Paraguay, declared himself in favor of presidential re-election, currently prohibited in his country. 
In Bolivia and Ecuador, immediate re-election is already possible. 
In short, Latin America appears to be becoming a region of democracy by plebiscite. 
Many of the presidents re-elected, either directly or by alternating terms with someone else, a la the Kirchners, won because they seemed to be responding to social demands for more security or less poverty. 
So Latin America is now constantly presented with “extraordinary” situations that supposedly require a certain individual, such as a great, benevolent cacique , to occupy the center of the political scene and govern with an enormous discretionary capacity. 
But, as the English philosopher Jeremy Bentham once wrote, the more one is exposed to the exercise of political power, the greater the temptations. 
True to that dictum, the excessive personalization of politics, the search for political hegemony, and the fragmentation of the opposition reflected in Latin America’s neo-caesarism have served to concentrate power in the executive and hollow out countervailing institutions, including intermediary bodies between the state and society. 
The attraction of remaining in power is getting stronger across the region. 
In view of this, it is essential to seek better systems of checks and balances as well as to strengthen and sharpen public control of the executive. 
All of these tasks are domestic; the danger posed by the profusion of re-elected presidents will not be checked by external forces. 
Moreover, since Abu Ghraib and Guantánamo, the United States has lost its formerly strong authority in promoting democracy. 
Confused and self-absorbed, Europe is not in the best position to wield influence. 
Russia and China continue to apply their own authoritarian formulas at home and have little to offer internationally to curb caudillismo . 
So the problem of democratic caesarism is one for Latin America’s people to confront. 

The Cancer Season 
As summer beckons, we should take a moment to focus on the sun's dark side. 
The source of all life on Earth, the sun is also a fountain of environmental carcinogens. 
Specifically, we now know that the sun's ultraviolet radiation is the primary cause of most skin cancers. 
Skin cancer, long thought to be a disease of little public health significance, has now become epidemic. 
An estimated 90,000 new cases of malignant melanoma and well over one million cases of non-melanoma skin cancer will occur in the United States this year. 
Melanoma will cause 8,000 deaths, and non-melanoma skin cancer will kill another 2,000. 
Melanoma is now the most common cancer in women aged 24 to 35. 
Once a disease of men in their fifties and sixties, it is not unusual for women in their twenties to develop basal cell cancer or squamous cell cancer. 
While the incidence of skin cancer has risen dramatically, so has our understanding of its causes. 
For over fifty years, ultraviolet radiation from the sun has been the number one suspected cause of skin cancer. 
Epidemiologic data from Australia, animal studies with artificial sources of ultraviolet light, and the development of skin cancer in individuals with a genetic inability to correct the DNA damage caused by ultraviolet radiation provided circumstantial evidence of the connection. 
Recent work has made the causal link between the sun and skin cancer at the molecular and cellular level. 
Ultraviolet radiation causes specific and unique mutations in the tumor suppressor gene that produces a protein called p53. 
This protein is involved in a process called apoptosis in which damaged cells commit "suicide" to ensure that their defective genes are not passed on to daughter cells. 
(This is perhaps the first indication that self-sacrifice may be an intrinsic human trait!) 
Damaged by the sun, but not quite able to commit suicide, the mutated cell continues to proliferate at the expense of normal surrounding cells, resulting in a pre-cancerous growth that can progress to a full-blown squamous cell carcinoma. 
But how should we communicate to people about skin cancer and its prevention? 
If our key message is "stay out of the sun forever," we are doomed to fail. 
Creating a culture of cave dwellers is no way to decrease the incidence of skin cancer. 
Moreover, in educating the public we confront formidable forces: cultural icons who are as bronze as the statuary in the Louvre, the sheer pleasure of being in the sun, and the perceived incremental health benefits of ultraviolet radiation. 
The dearth of pale actors, actresses, corporate leaders, and politicians confirms that a tan is identified with health, wealth, and power, rather than the travails of the working class, as in the past. 
The artificial tanning industry promises that ultraviolet radiation from their machines causes less damage than natural sunlight. 
But in both cases, a tan is the body's response to injury. 
Microscopic pigment granules produced by skin pigment cells aggregate around the cell's nucleus to shield the DNA from the marauding rays and prevent mutation. 
It is irrelevant whether the ultraviolet radiation came from a bulb or a star. 
Whether natural or artificial, ultraviolet radiation causes the skin to age prematurely. 
The inescapable irony is that teenagers and young women pursue a tan to look more attractive, but trade a moment or two of sunny radiance for a whole lifetime of premature wrinkles, fine lines, and haggard-looking skin. 
As young people consider themselves immortal, not even appeals to lifelong vanity, let alone warnings about cancer, are sufficient to deter them from the tanning booths. 
But the difficulties of educating the public about the causes of skin cancer do not diminish our obligation to try. 
There are enough other diseases about which we do not have a clue as to the cause. 
With skin cancer, we know very well how we can prevent it - and prevention is always easier than treatment. 
A good place to start is to ensure that the public has access to accurate information. 
While pseudoscience and the anti-aging industry represent an important source of potential misinformation, the Internet often provides damaging false information as well. 
Amazingly, the Internet has the same level of credibility with the patient as television does with the consumer: "I read it on the Web, so it must be true." 
At the same time, tanning parlors should be regulated. 
While barbers, hairdressers, taxi drivers, bar owners, and doctors are often licensed, permits are rarely required to operate a tanning parlor. 
None of the other professions listed above, however, knowingly exposes its clients to a confirmed environmental carcinogen. 
Until the tanning industry chooses to police itself, customers should eschew the bulbs and pursue the spray: wear an artificial tan. 
This preventable disease should be the focus of a comprehensive educational campaign similar to anti-smoking campaigns, which are now bearing fruit in many countries. 
In addition, scientific research on this most accessible of human organs will continue to identify innovative treatments and modes of prevention, which may well become applicable to other cancers. 

The Carry Trade Carries On 
LONDON – The Bank for International Settlements recently reported that $4 trillion a day is traded in global foreign-exchange (FX) markets, up from $3.3 trillion in 2007. 
But, while the size of the FX business always grabs headlines, the way that currencies are traded also matters – and this has evolved mightily over the years. 
Any introductory finance textbook will tell you that investors care about the returns of their overall portfolio, not just its individual assets. 
Investors prize assets that are relatively uncorrelated, or even better, negatively correlated with the returns of the market as a whole. 
Owning such assets tends to stabilize overall returns. 
That is fine in theory, but where do such assets come from? 
Some stock prices are normally relatively uncorrelated with the market. 
But stock prices tend to move much more closely together at times of market dislocation. 
So the relationship is liable to go wrong at the worst possible time: when a hedge would be most useful, the asset you were relying on becomes a risk. 
Many financial derivatives were developed for exactly this reason – to allow both financial and non-financial companies to hedge their overall returns. 
But not all investors are able to trade derivatives. 
Partly for these reasons, using currencies to hedge overall portfolios, or to have exposures that are related to other asset markets, has become increasingly popular. 
FX markets have two important advantages in this respect. 
First, FX is all about relative prices – if the dollar appreciates some other currency must depreciate. 
So it offers natural hedges. 
Second, FX markets are very liquid. 
Even during the worst of the recent financial crisis, when many markets almost stopped functioning, the FX market carried on relatively normally. 
Some of the more important examples of how currencies have become hedges involve the yen. 
Japanese interest rates have been close to zero for many years – significantly lower than those in most other economies, especially in the pre-crisis period. 
Low Japanese rates led to a “search for yield” by Japanese investors who increasingly invested their savings in foreign currencies, where they received higher interest rates: the famous “FX carry trade.” 
This was not without risk. 
What matters to Japanese investors is the overall return in yen terms, not simply the difference in interest rates. 
If the yen were to appreciate against the currency where the money was invested, it would be possible to get a lower return than simply keeping the money in a Japanese bank account. 
Indeed, economic theory suggests that the interest-rate differential should be offset on average by depreciation of the currency with the higher interest rate, the differential thus reflecting the compensation required by investors to hold money in relatively risky currencies. 
But the carry trade has tended to produce positive returns. 
And in the period prior to the financial crisis, the yen depreciated against most currencies, as well as having lower interest rates, so borrowing in yen and investing in high-interest-rate currencies such as the Australian dollar or the Turkish lira was very profitable. 
This led to increased flows into the carry trade, which for a while increased its success, because higher inflows tended to exacerbate the weakness of the low-interest-rate currencies. 
The carry trade during this period was primarily aimed at maximizing returns rather than managing risks. 
But it did lead to two developments in risk management. 
First, whereas in equity markets, few advocate investing in just one company’s shares rather than a diversified portfolio, that is essentially what happened in FX markets, where the traditional way of investing in the carry trade was to use a single exchange rate. 
So products were developed that allowed investors to borrow easily in several currencies at once and invest in a portfolio of high-interest-rate currencies. 
This protected investors from a general sell-off of the carry trade and lessened their exposure to idiosyncratic risks. 
The second development was that the carry trade appeared to perform strongly when other risky assets also did well, and vice versa. 
More specifically, exchange rates such as the Australian dollar/yen became strongly correlated with global equity markets. 
This meant that an investor who was pessimistic about equities, but who might face constraints in hedging that risk by using derivatives or selling equities short, could reduce his exposure to equity markets by reversing the carry trade – borrowing in Australian dollars and investing in Japanese yen, for example. 
Of course, a good hedge lasts only as long as such correlations persist. 
But, while many financial relationships broke down once the financial crisis started, this one actually became more pronounced, and has become a popular strategy. 
The relationship between the Chinese economy and the Australian dollar is another interesting example. 
Chinese growth has been stellar, but many investors find it difficult to put their money directly in the economy. 
Australia has been a particularly large beneficiary of Chinese growth, which is relatively commodity-intensive. 
This has tended to increase metals prices, fueling Australia’s large export surplus in metals. 
That means that buying the Australian dollar is seen as a proxy for investing in China. 
Because it is traded in developed and liquid markets that have no capital-account restrictions, many investors have bought or sold it according to their view of China’s economic prospects. 
Investment strategies such as this must be entered into with caution: simply assuming that a past correlation will persist is never a good idea. 
But currency values are driven by macroeconomic developments, and therefore FX does offer natural hedging opportunities in liquid and transparent markets. 
So if the correlation makes sense given the fundamentals, it seems sensible to bet on its persistence. 
And it does seem likely that such strategies will continue. 

The Cartoonist’s Responsibility 
The recent events surrounding the publication of cartoons in Denmark have left everybody astounded – especially editorial cartoonists like myself. 
For once I have decided to trade my brushes for a laptop on this issue, principally because the space normally allocated to my cartoons cannot say what I want to say. 
Had I been given enough space, I would have drawn this article! 
The debate over the cartoons has been intense to the point that it is now tedious, ranging from freedom of expression to a clash of cultural values and even to a clash of civilizations. 
What is also apparent is the fact that the debate has been exploited and hijacked by radical and extreme elements on both sides of the divide – those defending the right of free speech and those who defend the Muslim faith 
What has also clearly come out is that faith has a deeper significance than merely belonging to the faithful. 
It is held dearly, and it is closely connected to the lives of those who maintain it. 
Although the Danish cartoons might not appear offensive to many, they certainly insult principles that Muslims hold sacred. 
With my limited knowledge of Islam and the respect that I have for that faith, I would not have drawn them. 
One has the right to sneeze, but that does not include the right to sneeze in somebody’s face. 
The cartoonists involved have admitted they know very little about Islam. 
In one of the cartoons, the Prophet Mohamed depicted as a terrorist, thereby explicitly equating Islam with terrorism. 
As an editorial cartoonist, I always try to find more about my subjects before rendering my final sketches. 
All of us (including cartoonists) agree that cartoons are a powerful tool of communication. 
But how responsibly do cartoonists exercise that power? 
I recently attended a presentation on the constraints of creativity faced by editorial cartoonists. 
What limitation to artistic freedom do editorial cartoonists encounter in their work? 
Top cartoonists from the United States, Switzerland, Turkey, South Africa, Singapore, Japan, Kenya, and Israel showcased their unpublished work. 
The general feeling was that there was no absolute freedom. 
Cartoonists and editors loosely agreed that there would always be cultural and religious issues to take into account when determining what can and should be published. 
But should such considerations override free speech at any cost? 
I don’t think so. 
Freedom of expression is never categorically right or wrong; instead, it accommodates rights and wrongs. 
The Danish cartoons were offensive, but did their publication warrant the killing of innocent individuals, attacking Danish and Western embassies and their citizens, and the burning of the Danish flag around the world? 
Did those who drew those cartoons represent Danes and the West? 
Did those who burned the Danish flag and issued the threats represent Islam? 
My answer is no. 
The issue is therefore not about the beliefs themselves as much as it is about how the faithful deal with offense, and why. 
For example, there have been publications of equally insensitive anti-Semitic cartoons in many Arab countries, against which no Muslim ever raised a finger. 
And, as a cartoonist from Africa, I’ve seen racist and offensive cartoons in some Western publications. 
Do they represent Western values? 
No, yet they reflect part of the cultural problem of the West. 
I think Muslims have the right to show and demonstrate their anger against the cartoons. 
But they need to do so in a peaceful manner, with regard to the rights of others. 
That right, unfortunately, includes drawing and publishing cartoons that may not please them. 

The Case Against Emergency Food Aid 
Niger’s food emergency has reached the world’s headlines, but the crisis there is only one part of a much larger disaster. 
On an extended trip this summer through rural areas of Asia, the Middle East, and Africa on behalf of the United Nations, I visited countless villages afflicted with extreme hunger and struggling to survive against the odds. 
The villages that I visited – in Tajikistan, Yemen, Mali, Ethiopia, Rwanda, Malawi, Cambodia, and elsewhere – reflect the condition of hundreds of millions of impoverished people worldwide. 
Whether caused by drought, exhausted soils, locusts, lack of high-yield seeds, the results were the same: desperation, disease, and death. 
Incredibly, the actions of the richest countries – which promised solidarity with the world’s poorest people at the G-8 Summit in July – have intensified the hunger crisis. 
Even today, donor governments’ aid efforts are poorly directed. 
They respond to hunger emergencies such as Niger’s with food relief, but fail to help with long-lasting solutions. 
The expanding hunger crisis reflects a lethal combination of growing rural populations and inadequate food yields. 
Rural populations are growing because poor farm households choose to have many children, who work as farmhands and serve as social security for their parents. 
This intensifies poverty in the next generation, as average farm sizes shrink. 
Food yields per acre (or hectare) are inadequate because impoverished farm households lack some or all of the four inputs needed for modern and productive agriculture: soil-nutrient replenishment (through organic and chemical fertilizers), irrigation or other water-management techniques, improved seed varieties, and sound agricultural advice. 
The problem is especially severe in landlocked countries like Mali, Niger, Rwanda, and Malawi, where high transport costs leave villages isolated from markets, and in regions that depend on rainfall rather than river-based irrigation. 
Yields, on average, barely support survival, and crop failures are common and deadly, while long-term global climate change, caused mainly by high energy consumption in the rich countries, may be exacerbating the frequency and severity of droughts. 
These impoverished villages need financial help to buy vital inputs for farming and to invest in basic infrastructure such as roads and electrification. 
Instead, donor governments and the World Bank have insisted for years that impoverished countries cut financing to these villages, under the guise of promoting “macroeconomic stability” – a polite way of demanding debt repayment – and reflecting the ideological delusion that the private sector will step in. 
Instead, these policies have left hundreds of millions of people even more desperately poor and hungry, and even more vulnerable to drought, pests, and soil depletion. 
Millions die each year, either of outright starvation or from infectious diseases that their weakened bodies cannot withstand. 
And still, after twenty years of preaching that private markets would pick up the slack, these impoverished communities are further away than ever from using improved seeds, fertilizers, and small-scale water management technologies. 
The irony is that donors then respond with very expensive emergency food aid, which typically proves to be too little and too late. 
A shipment of an equivalent dollar amount of fertilizer and improved seeds from, say, the United States to Africa would yield perhaps five times more food. 
But donors have not yet implemented this obvious and basic lesson. 
Malawi today is an urgent case in point. 
Because of rural impoverishment and a drought earlier this year, dire hunger afflicts millions of people. 
Donors are rallying for food aid, but they are resisting the obvious need to help the poorest million farmers (and their four million dependents) get soil nutrients and improved seeds in time for the planting season this autumn. 
The cost of sending such help would be around $50 million, and the benefits would be $200 million to $300 million in increased food production next year (and hence less needed in emergency food aid). 
Moreover, Malawi has a proven track record of sharply higher food yields when impoverished farmers are helped with inputs. 
Yet donors continue shipping expensive food aid while ignoring Malawi’s desperate need to grow more food. 
Over the longer term, increased food yields could be turned into sustained economic growth. 
First, rural households would be encouraged to have fewer children, and to invest more in each child’s health and education. 
Child survival rates would rise, reinforcing lower fertility rates. 
At the same time, increased educational opportunities for girls and women, and low-cost contraceptives provided by family-planning services, would empower them to marry later and have fewer children. 
Second, and simultaneously, donors should help impoverished countries to invest in roads, ports, rural electricity, and diversified production (both agricultural and non-agricultural), in order to promote higher productivity and alternative livelihoods in the longer term. 
Villages currently trapped in hunger and subsistence agriculture would become commercial centers for food processing and exports, and even for rural industry and services supported by electrification, mobile phones, and other improved technologies. 
This is a year of both widespread hunger and solemn promises by the rich countries. 
But emergency food aid is not enough. 
Impoverished communities in Africa, the Middle East, and Asia are ripe for a “green revolution,” based on modern scientific techniques for managing soils, water, and seed varieties. 
Donors should lend their support by backing long-term solutions aimed at increasing food production, slowing population growth, and mitigating long-term global climate change. 

The Case against Kosovo Independence 
Kosovo’s march toward independence is gathering pace, with the leaders of Kosovo’s Albanians – Hashim Thaci and Agim Ceku – threatening to declare unilateral independence any day now. 
This is something that Serbia will undoubtedly reject, with the backing of Vladimir Putin’s Russia. 
Much of the world seems to think that Serbia’s role in the Balkan wars of the 1990’s puts it in the wrong, and that that should be the end of the matter. 
But Serbia’s point of view is not without merit, and many other countries with territorially concentrated ethnic minorities have reason to be anxious about the precedent that might be set if Kosovo’s declaration of independence is recognized. 
Consider, first, that Kosovo is the historical heart and religious soul of Serbia. 
Hundreds of Serb Orthodox churches, monasteries, and holy sites in Kosovo attest to this. 
Moreover, Kosovo’s demographic transformation over the last 100 years, when Albanians overtook the local Serb population, partly reflects an influx of Albanians from Albania – for decades a political and economic basket case, owing to Enver Hoxha’s hermetic communism. 
At the same time, many Serbs have left Kosovo before and after NATO’s intervention in 1999, whether fleeing from Albanian violence against them or simply lured by better opportunities in Serbia proper. 
Serbia’s claim to Kosovo is, to Serbs, far stronger than Russia’s claim to Chechnya, China’s to Xinjiang, India’s to Kashmir (a claim still disputed by Pakistan), and the Philippines’ to the island of Mindanao. 
All of these are provinces with Muslim majority populations that are part of non-Muslim majority states. 
But Russia, China, and India are big states and will not tolerate any detachment of their territories. 
So there is no serious international effort to force them to do so. 
The Philippines has effectively lost control of Mindanao, just as Serbia has lost control of Kosovo, yet no one has recognized Mindanao’s unilateral declaration of independence. 
So why should Kosovo’s declaration be accepted? 
Nor is it only Russia, China, and India that oppose Kosovo’s independence, but also Muslim-majority Nigeria, which retains Biafra, where a bloody civil war with Catholic Ibos was fought in the late 1960’s. 
Muslim-majority Indonesia lost its Catholic-majority East Timor through Western political intervention, but its claims to East Timor were tenuous, as it only invaded the island a few decades ago. 
Even in Europe, where Catalonia and the Basque region push for secession from Spain, some in Flanders want an end to Belgium, and Scotland’s ruling Scottish National Party wants eventually to break away from Britain, support for Kosovo’s independence is far from universal. 
Worse, ordinary Serbs see an obvious international double standard. 
The territorial integrity and sovereignty of Croatia and Bosnia were enforced in the 1990’s, despite declarations of independence by the Serbian “Republic of Krajina” in Croatia and the Serbian “Republika Srpska” in Bosnia. 
Why is Kosovo being treated differently? 
Today, there are roughly 700,000 Serb refugees in Serbia from Croatia and Bosnia who are unable or unwilling to return to their homes, including virtually all of Croatia’s Serbs, except those converted to Catholicism to become Croats. 
Indeed, Serbia currently contains the largest refugee population in Europe. 
If Kosovo gains independence, these numbers will swell, as an exodus of all remaining Serbs is likely unless their territorial bastions – particularly in northern Kosovo, around Mitrovica – join with Serbia. 
More broadly, to allow Kosovo’s independence would demonstrate that violent secessionism works. In that case, the world ought to get used to seeing the Kosovo “strategy” applied elsewhere. 
Not knowing where the enemy is hidden within the civilian population, security forces retaliate indiscriminately. Human rights violations elicit an international outcry and condemnation, followed by intervention and occupation by foreign military forces. 
Setting such a precedent in Kosovo must be avoided to ensure stability not only in the Balkans, but in all countries with dissatisfied ethnic minority populations. 
The territorial integrity and sovereignty of Serbia must be preserved in accordance with the United Nations Charter, the 1975 Helsinki Agreement Final Act guaranteeing the boundaries of Europe, and UN Resolution 1244 of 1999, which guaranteed Serbia’s existing borders. 
The former Yugoslavia has had enough destruction and mass killing. 
Preserving national integrity is a universal principle of peace from which Serbia should not be excluded. 

The Case for a Global Financial-Transaction Tax 
BERLIN – What went wrong with global financial markets? 
In a nutshell: the implosion of the brave new world of modern finance, and the economic crisis that followed, was rooted in the idea that free and unregulated capital markets always work for the public good, and are all that is needed for economic prosperity. 
The prologue to the crisis was a combination of cheap money, deregulation, and a race for returns by executives undeterred by the associated risks. 
When the housing bubble burst and financial markets collapsed in its wake, growth slumped worldwide as never before since the Great Depression. 
GDP in the advanced economies is expected to shrink about 4% this year. 
Total financial-sector losses in the world’s advanced economies stand at around $1.6 trillion. 
The IMF estimates that losses of more than double this total are yet to come. 
Jobs will continue to be shed. 
Future generations are being saddled with an explosion of public debt. 
It will take years before we recover fully. 
Despite all this pain, the remaining financial-market participants gained significant benefits from government bailouts. 
The G-20’s average headline support for the financial sector is more than 30% of GDP (including capital injections, guarantees, treasury lending and asset purchases, liquidity provision, and other central bank support). 
In our political response to this crisis, new forms of financing and fiscal burden-sharing will have to play a role. 
It is in this context that German Foreign Minister Frank-Walter Steinmeier and I have advanced our proposal for a global financial-transaction tax (FTT). 
Remaining financial-market participants are not pulling their weight in this crisis. 
But “Main Street” sees what happens on Wall Street – and in London and Frankfurt. 
Citizens are aware of the hundreds of billions of euros and dollars that have been used to prop up banks. 
Bonus payments in the financial sector now go hand in glove with massive job losses in the real economy. 
I came to realize that the political answer to this crisis must encompass more than improved regulatory regimes, risk-management strategies, and capital requirements. 
How governments handle the burden-sharing between Wall Street and Main Street will determine social cohesion, financial-market stability, ­and political leaders­’ reputations for years to come. 
Of course, compensation payments and fees for government guarantees are being levied on banks participating in taxpayer-funded stabilization schemes. 
But that’s not enough. 
Financial-market participants need to demonstrate that they understand their role in causing the crisis, and that they are willing to significantly contribute to preventing its recurrence. 
A global financial-transaction tax (FTT), applied uniformly across the G-20 countries and covering all financial transactions at a very low rate, is the obvious instrument of choice to ensure that all financial-market participants contribute equally. 
Foreign Minister Steinmeier and I are suggesting that the G-20 take concrete steps toward implementing an FTT of 0.05% on all trades of financial products within their jurisdictions, regardless of whether these trades occur on an exchange. 
National governments could establish a personal allowance to exempt retail investors. 
Based on calculations by the Austrian Institute of Economic Research, which studied the possible effects of general FTTs on behalf of the Austrian government, a global FTT of 0.05% could yield up to $690 billion per year, or about 1.4% of world GDP. 
Such a tax would not unduly burden financial-market participants, yet it would raise a significant amount of money to finance the costs of this crisis. 
Financial-market participants are fighting tooth and nail not to pay their fair share, putting forward a number of arguments against an FTT to camouflage their resistance. 
Some of them argue that such a tax would lead to evasive reactions by market participants and have distorting effects. 
But such evasive actions by market participants would be almost impossible if the G-20 stood united. 
Trading volume on G-20 and European Union exchanges accounts for roughly 97% of total global trading in exchange-traded equities, and about 94% of total volume in exchange-traded bonds. 
As the tax would be very low and would include transactions in exchange-based spot and derivatives markets and OTC markets, as well as all asset classes (equities, bonds, derivatives, and foreign exchange), there would not be much of a distorting effect, either. 
I don’t think such a tax would significantly impact market liquidity, but even if it did, a nudge towards buying and holding might not be such a bad thing. 
The debate among finance ministers in London in the run-up to the G-20 meeting in Pittsburgh revealed a basic agreement that the burdens imposed by the financial crisis ought to be shared in a fair manner. 
At the G-20 summit, we should discuss what fair and equitable burden-sharing between taxpayers and financial-market participants should look like. 
German Chancellor Angela Merkel has registered initial support for such an idea from British Prime Minister Gordon Brown and President Nicolas Sarkozy of France. 
We are receiving a wave of interest and readiness for further dialogue on this topic within the EU and beyond. 
There is a clear-cut case for a global FTT: it would be just, would do no harm, and would do a lot of good. 
If there is a better idea for fair burden-sharing between the world’s Main Streets and its Wall Streets, let’s hear it. 
If there isn’t, let’s have an FTT now. 

The Case for Fiscal Stimulus 
CAMBRIDGE – Governments around the world are now developing massive fiscal stimulus packages that will cause unprecedented peacetime budget deficits. 
The fiscal deficit in the United States this year is likely to exceed 10% of GDP. 
A substantial part of the increased deficit will be due to a wide range of new government spending. 
Under normal circumstances, I would oppose this rise in the budget deficit and the higher level of government spending. 
When an economy is closer to full employment, government borrowing to finance budget deficits can crowd out private investment that would raise productivity and the standard of living. 
Budget deficits automatically increase government debt, requiring higher future taxes to pay the interest on that debt. 
The resulting higher tax rates distort economic incentives and thus weaken future economic performance. 
Of course, some government spending is desirable or necessary. 
But an increase in government outlays often means wasteful spending that produces less value than consumers would get from those same dollars. 
Now, however, increased government spending and the resulting rise in the fiscal deficit are being justified as necessary to deal with the economic downturn – a sharp change from the reliance on monetary policy that was used to deal with previous recessions. 
Countercyclical fiscal policy had been largely discredited because of the delays involved in implementing fiscal changes and households’ weak response to temporary tax cuts. 
By contrast, the central bank could lower interest rates rapidly, which worked to raise household and business spending through a variety of channels. 
Nevertheless, I support the use of fiscal stimulus in the US, because the current recession is much deeper than and different from previous downturns. 
Even with successful countercyclical policy, this recession is likely to last longer and be more damaging than any since the depression of the 1930’s. 
The 40% decline in the US stock market and the dramatic fall in house prices have reduced American households’ wealth by more than $10 trillion, which is likely to reduce annual consumer spending by more than $400 billion. 
And the collapse of housing starts has lowered construction spending by another $200 billion. 
This $600 billion fall in demand is more than 3% of GDP. 
If not reversed, it will cause further cuts in production, employment, and earnings, leading to further reductions in consumer spending. 
The usual monetary-policy response of lowering interest rates is unable to reverse this sharp drop in demand. 
The dysfunctional credit markets caused by the uncertain value of asset-backed securities means that banks and other financial institutions are unable to raise funds and are unwilling to lend. 
As a result, the central bank’s lower interest rates do not translate into increased spending on interest-sensitive investment and consumption. 
So there is no alternative to fiscal policy if we want to reverse the current downturn. 
The resulting increase in the national debt is the price that we and future generations will pay for the mistakes that created the current economic situation. Those mistakes led to an underpricing of risk and the resulting increase in excessive leverage. 
There are many reasons for the underpricing of risk and the rise in leverage. 
The exceptionally easy monetary policy at the start of the decade contributed to financial investors’ willingness to buy low-quality financial assets in order to get higher yield and to an explosive rise in house prices. 
The rating agencies miscalculated the value of asset-backed securities. 
The increase in leverage was driven in part by government policies aimed at expanding home ownership among lower-income groups that have proven unable to afford that life style. 
Banking supervisors did not deal with many institutions’ low levels of capital and poor asset quality. 
A major challenge for the future is to fix the institutional policies that led to these problems. 
The new Obama administration and the Congress are still working out the structure of the fiscal stimulus for the US. 
Although I support the need for a large fiscal package, I disagree with many of the specific features of the plans now under consideration. 
Regardless of what is done to provide a fiscal stimulus, governments around the world must act to fix dysfunctional credit markets. 
Otherwise, credit will not flow and growth will not resume. 
In the US, reviving the credit markets requires stopping the mortgage defaults driven by negative equity. 
The US Treasury Department wasted valuable time in 2008 by not using the funds provided by Congress to deal with those housing-market problems. 
There is hope that the Congress and the new administration will now address that issue. 
When the recession is over, the US and virtually every other country will have substantially higher debt-to-GDP ratios. 
At that point, it will be important to develop policies to reduce gradually the relative level of government spending in order to shift to fiscal surpluses and reduce the debt burden. 

The Case for Mitigating Greenhouse Gas Emissions 
PALO ALTO -- Last fall, the United Kingdom issued a major government report on global climate change directed by Sir Nicholas Stern, a top-flight economist. 
The Stern Review Report on the Economics of Climate Change amounts to a call to action: it argues that huge future costs of global warming can be avoided by incurring relatively modest cost today. 
Critics of the Stern Review don’t think serious action to limit CO2 emissions is justified, because there remains substantial uncertainty about the extent of the costs of global climate change, and because these costs will be incurred far in the future. 
However, I believe that Stern’s fundamental conclusion is justified: we are much better off reducing CO2 emissions substantially than risking the consequences of failing to act, even if, unlike Stern, one heavily discounts uncertainty and the future. 
Two factors differentiate global climate change from other environmental problems. 
First, whereas most environmental insults – for example, water pollution, acid rain, or sulfur dioxide emissions – are mitigated promptly or in fairly short order when the source is cleaned up, emissions of CO2 and other trace gases remain in the atmosphere for centuries. 
So reducing emissions today is very valuable to humanity in the distant future. 
Second, the externality is truly global in scale, because greenhouse gases travel around the world in a few days. 
As a result, the nation-state and its subsidiaries, the typical loci for internalizing externalities, are limited in their remedial capacity. 
(However, since the United States contributes about 25% of the world’s CO2 emissions, its own policy could make a large difference.) 
Thus, global climate change is a public good (bad) par excellence . 
Cost-benefit analysis is a principal tool for deciding whether altering it through mitigation policy is warranted. 
Two aspects of that calculation are critical. 
First, it has to be assumed that individuals prefer to avoid risk. 
That is, an uncertain outcome is worth less than the average of the outcomes. 
Because the possible outcomes of global warming in the absence of mitigation are very uncertain, though surely bad, the uncertain losses should be evaluated as being equivalent to a single loss greater than the expected loss. 
The second critical aspect is how one treats future outcomes relative to current ones – an issue that has aroused much attention among philosophers as well as economists. 
At what rate should future impacts – particularly losses of future consumption – be discounted to the present? 
The consumption discount rate should account for the possibility that, as consumption grows, the marginal unit of consumption may be considered to have less social value. 
This is analogous to the idea of diminishing marginal private utility of private consumption, and is relatively uncontroversial, although researchers disagree on its magnitude. 
There is greater disagreement about how much to discount the future simply because it is the future, even if future generations are no better off than us. 
Whereas the Stern Review follows a tradition among British economists and many philosophers against discounting for pure futurity, most economists take pure time preference as obvious. 
However, the case for intervention to keep CO2 levels within bounds (say, aiming to stabilize them at about 550 ppm) is sufficiently strong to be insensitive to this dispute. 
Consider some numbers from the Stern Review concerning the future benefits of preventing greenhouse gas concentrations from exceeding 550 ppm, as well as the costs of accomplishing this. 
The benefits are the avoided damages, including both market damages and non-market damages that account for health and ecological impacts. 
Following a “business as usual” policy, by 2200, the losses in GNP have an expected value of 13.8%, but with a degree of uncertainty that makes the expected loss equivalent to a certain loss of about 20%. 
Since the base rate of economic growth (before calculating the climate change effect) was taken to be 1.3% per year, a loss of 20% in the year 2200 amounts to reducing the annual growth rate to 1.2%. 
In other words, the benefit of mitigating greenhouse gas emissions can be represented as the increase in the annual growth rate from today to 2200 from 1.2% to 1.3%. 
As for the cost of stabilization, estimates in the Stern Review range from 3.4% of GNP to -3.9% (since saving energy reduces energy costs, the latter estimate is not as startling as it appears). 
Let’s assume that costs to prevent additional accumulation of CO2 (and equivalents) come to 1% of GNP every year forever, and, in accordance with a fair amount of empirical evidence, that the component of the discount rate attributable to the declining marginal utility of consumption is equal to twice the rate of growth of consumption. 
A straightforward calculation shows that mitigation is better than business as usual – that is, the present value of the benefits exceeds the present value of the costs – for any social rate of time preference less than 8.5%. 
No estimate of the pure rate of time preference, even by those who believe in relatively strong discounting of the future, has ever approached 8.5%. 
These calculations indicate that, even with higher discounting, the Stern Review’s estimates of future benefits and costs imply that mitigation makes economic sense. 
These calculations rely on the report’s projected time profiles for benefits and its estimate of annual costs, about which there is much disagreement. 
Still, I believe there can be little serious argument about the importance of a policy aimed at avoiding major further increases in CO2 emissions. 

The Case for Opening Europe’s Borders 
It is time for Europe’s politicians to admit to voters that governments cannot stop people moving across borders. 
Despite efforts to build a Fortress Europe, over a million foreigners bypass its defences every year; some enter covertly, but most just overstay their visas and work illicitly. 
Even if Europe became a police state, migrants could get through: documents can be forged or stolen, visas overstayed, people smuggled, officials bribed. 
While draconian policies can curb migration somewhat, they mostly drive it underground. 
That creates huge costs. 
Aside from a humanitarian crisis, with thousands drowning each year trying to reach Europe and thousands more detained, there is the soaring expense of border controls and bureaucracy, a criminalized people-smuggling industry, and an expanding shadow economy, where illegal migrants are vulnerable to exploitation, labor laws are broken and taxes go unpaid. 
In addition, there is rising mistrust of politicians who cannot fulfill promises to halt immigration, accompanied by perceptions of immigrants as law-breakers rather than enterprising people, and mistreatment of refugees aimed at deterring people who want to work from applying for asylum. 
These problems are due not to immigrants, but to our immigration controls, which are not only costly and cruel, but also ineffective and counterproductive. 
Far from protecting us, they undermine law and order, just as Prohibition did more damage to America than drinking ever has. 
Pragmatic governments surely ought to legalize and regulate migration instead. 
Immigrants are not an invading army; they are mostly people seeking a better life who are drawn to Europe by the huge demand for workers to fill the low-end jobs that our aging and increasingly wealthy societies rely on, but which our increasingly well-educated and comfortable citizens are unwilling to take. 
Many services cannot readily be mechanized or imported – old people cannot be cared for by a robot or from abroad – while people increasingly pay others to perform tasks that they once did themselves, freeing up their own time for more productive work or leisure. 
Thus, as advanced economies create high-skilled jobs, they inevitably create low-skilled ones, too. 
In fact, low-skilled jobs still account for more than a quarter of Western Europe’s workforce. 
But, whereas only half of Europeans now aged 55-64 finished secondary education, four in five 25-34-year-olds have done so, and they naturally aspire to better things. 
Even Europeans with few or no qualifications increasingly shun dirty, difficult, and dangerous jobs. 
The only way to reconcile our aspirations to opportunity for all with the reality of drudgery for some is through immigration. 
Consider old-age care, the fastest-growing employment sector in Europe. 
Since young Europeans would rather work in a shop than a retirement home, persuading them otherwise would require a huge wage hike. 
Given fiscal constraints, that implies either less care for pensioners, budget cuts elsewhere, or tax hikes. 
Immigrants, however, face a different set of alternatives; with wages in Brussels far higher than in Manila, for example, Filipino immigrants are generally happy to do such work. 
This is not exploitation; everyone – migrants, taxpayers, and Europeans young and old – is better off. 
Nor does it undercut wages, since most Europeans do not want these jobs. 
And it does not undermine social standards, because legal migrants have recourse to trade unions and the law. 
Indeed, just as it is often mutually beneficial to import computers from China, IT services from India, and investment-banking services from Americans, it can also make sense to import Filipino care workers, Congolese cleaners, and Brazilian bar staff. 
Policymakers who want products and providers of high-skilled services to move freely but people who provide less-skilled services to stay put are not just hypocrites; they are also economically illiterate. 
Nor do immigrants merely take jobs; they also create them. 
As they spend their wages, they increase demand for people to produce the goods and services that they consume. 
Spain has admitted more immigrants in recent years than any other European country, yet its unemployment rate continues to fall; Britain, Ireland, and Sweden still have low unemployment after opening their labor markets to the Poles and other new EU members in 2004. 
This is also because immigrants often complement native workers’ efforts. 
A foreign nanny may allow a British doctor to return to work, where hard-working foreign nurses and cleaners enhance her productivity. 
While innovation sometimes comes from brilliant individuals – 21 of Britain’s Nobel prizewinners were refugees – it generally comes from the synergy of talented people in close proximity. 
Likewise, consider Silicon Valley: Intel, Yahoo!, Google, and eBay were all co-founded by immigrants. 
Millions of Europeans want EU governments to lower their barriers to developing countries’ exports, cancel Third World debt, and increase foreign aid. 
Yet increased migration would help the poor far more. 
Migrants from poor countries already send home $200 billion a year – perhaps another $400 billion informally – compared to the $80 billion in aid given by Western governments. 
These remittances are not wasted on weapons or siphoned off into Swiss bank accounts; they go straight into local people’s pockets. 
They pay for food, clean water, medicines, and to keep kids in school. 
And returning migrants bring back new skills, new ideas, and the money to start new businesses. 
Africa’s first Internet cafés were started by migrants returning from Europe. 
Politicians should have the courage to stop fighting an unwinnable war. 
If open borders are not politically feasible for now, our leaders should at least create a legal route for people from developing countries to enter and work. 
Of course, problems may arise; learning to live together can be tough. 
But Europe would thrive on the cosmopolitan dynamism that results from treating immigration as an opportunity rather than as a threat. 

The Case for Re-Regulating Capital Accounts 
NEW YORK – Today’s debates over “currency wars” reveal two paradoxical features of the global economy. 
The first is that there is no mechanism linking world trade rules to exchange-rate movements. 
Countries spend years negotiating trade rules, but exchange-rate movements can, within days, have a greater impact on trade than those painstaking deals. 
Furthermore, exchange-rate movements are essentially determined by financial flows and may have no effects in terms of correcting global trade imbalances. 
The second paradox is that monetary expansion may be largely ineffective in the country that undertakes it, but can generate large negative externalities on others. 
This is particularly true of the quantitative easing now underway in the United States, because the American dollar is the major global reserve currency. 
So far during the financial crisis and ensuing recession, the US has been incapable of kick-starting credit growth, the major transmission mechanism by which monetary expansion feeds through to domestic economic activity. 
But it is inducing massive capital flows to emerging markets, where they are generating asset-price bubbles. 
If this leads to a weakening of the dollar, it would also have negative effects on trading partners. 
(The same can be said of recent Japanese monetary-policy decisions.) 
Some proposals would resolve the first of these paradoxes by allowing countries to use the World Trade Organization’s dispute-resolution mechanism in cases of exchange-rate manipulation. 
But this is the wrong way to go, for it might serve only to erode one of the few effective mechanisms in place to make multilateral agreements binding. 
Unilateral countervailing duties against countries that are hypothetically manipulating their exchange rates are equally bad. 
This does not mean, of course, that China should take no action to correct the undervaluation of its currency, though some recognition should be given to the way in which it is already contributing to solving this problem by allowing domestic wages to rise. 
A much better way forward is to rethink seriously the role of cross-border capital-account regulations. 
One of the major areas of agreement during the recent crisis has been that deregulated financial activities can be a source of major macroeconomic disruptions. 
The G-20, however, has largely focused on re-regulating domestic finance, whereas cross-border finance has been left entirely off its agenda, as if it required no regulation –and indeed as if it were not part of global finance. 
A particular linguistic twist is also involved here: domestic financial regulations are called by that name, but if they involve cross-border flows, they are called “controls.” 
A serious discussion of global capital-account regulations would benefit both advanced and emerging-market economies. 
The effectiveness of monetary expansion could be enhanced in advanced countries by reducing the leakages generated by the carry trade and other short-term capital outflows. 
Actually, this would imply a return to the IMF’s founding principle: it is in the best interest of all members to allow countries to pursue their own full-employment macroeconomic policies, even if this requires regulating capital flows. 
This is why capital-account regulations are allowed under IMF rules, and why the attempt to introduce capital-account convertibility into the IMF’s Articles of Agreement was defeated in 1997. 
For emerging markets, the best way forward is to correct the incentives for interest-rate arbitrage at the source of capital flows. 
Such a reform would also serve as a mechanism of coordination at the international level, since coordinated capital-account regulations by recipient countries would be difficult to achieve. 
In the absence of such coordination, the unilateral approaches now in place could generate further distortions. 
This type of correction would also allow emerging markets to pursue more restrictive monetary policies, which they now need, given their greater macroeconomic strength. 
Indeed, the world will be characterized for several years by the asymmetry generated by advanced countries’ weakness and emerging economies’ strength, which calls for asymmetry in these two groups of countries’ monetary policies. 
That would be very difficult to manage without some form of capital-account regulation. 
Many regulations make sense, as the IMF has recognized in several cases. 
A reserve requirement on cross-border flows is one of them. 
Mutual and other private-sector funds require minimum terms for investments, and such mandatory lock-up periods should be applied to capital inflows as well. 
High capital and provision requirements for certain transactions, or prohibition of such transactions, should also be introduced for prudential reasons. 
This is particularly true with respect to lending in foreign currencies to economic agents that do not have revenues in those currencies. 
At the source, capital requirements for currency mismatches in portfolios, together with margin requirements on foreign-exchange derivatives, make sense. 
Non-deliverable forward contracts should be subject to close regulation and supervision in both source and destination countries. 
In fact, a tax on foreign-exchange transactions – the so-called “Tobin tax,” advocated by the late Nobel laureate economist James Tobin – might be the simplest way to go. 

The Case for Slowing Population Growth 
Global debates about population policy are confusing. 
One side argues that rising human populations threaten our environment and prosperity. 
Land, water, energy, and biodiversity all seem to be under greater stress than ever, and population growth appears to be a major source of that stress. 
The other side of the debate, mainly in rich countries, argues that households are now having so few children that there won't be enough to care for aging parents. 
Those who fret about population growth have the better argument. 
Issues confronting Europe, Japan, and to a lesser extent the United States and some middle-income countries concerning aging populations are manageable. 
Moreover, the benefits of slower population growth outweigh the adjustment costs. 
By contrast, if global populations continue to rise rapidly, the stresses on the world's resources will worsen. 
Governments should therefore refrain from deliberate policies to raise birthrates, even in places where birth rates are low. 
Part of the confusion of the public debate reflects different population trends in different parts of the world. 
The fastest population growth is taking place in the poorest regions. 
Poor people, especially poor people living on farms, tend to have the most children (often six or more per woman), and therefore the highest rates of population growth. 
Poor farm families rely on their children for farm chores and for security when parents reach old age. 
Poor families lack access to contraception and family planning. 
Finally, poor families have many children as a kind of insurance policy against high child mortality rates. 
As a result of high fertility rates in Africa, the UN Population Division predicts a doubling of Africa's population from around 900 million today to around 1.8 billion in 2050. 
Rapidly growing populations are also young populations, because of the high number of children per household. 
In Africa, the median age is now a mere 19 years and is projected to rise to around 28 years in 2050. 
In Europe, the trends run in the other direction. 
The UN projects a decline in population to around 630 million in 2050, from around 725 million people today. With few children and longer life expectancy, the median age of the population rises sharply in this forecast, from 39 years in 2005 to around 48 years in 2050. 
For the world as a whole, population is expected to continue to grow by another 2.5 billion people from 2005 to 2050. 
All of that growth will be in the developing world: 1.3 billion more people in Asia, 900 million more in Africa, the rest in Latin America and other regions. 
Adding another 2.5 billion people to the planet will put enormous strains not only on societies with rising populations, but on the entire planet. 
Total energy use is soaring, reflecting the combined effect of rising per capita incomes - and thus rising per capita energy use - and population growth. 
Higher energy use is already changing the world's climate in dangerous ways. 
Furthermore, the strains of increased global populations, combined with income growth, are leading to rapid deforestation, depletion of fisheries, land degradation, and the loss of habitat and extinction of a vast number of animal and plant species. 
Population growth in developing regions - especially Africa, India, and other parts of Asia - needs to slow. 
Public policies can play an important role by extending access to family planning services to the poor, expanding social security systems, reducing child mortality through public health investments, and improving education and job opportunities for women. 
A part of the European public, looking at Europe's looming population decline, wants to head in the other direction, promoting a return to larger families. 
That would be a big mistake. 
Advocates of faster European population growth worry that there won't be enough young workers to pay for public pensions. 
But this concern can be met through increased saving by today's young and middle-aged as they prepare for retirement, and by working past the age of 65. 
These workers will reap large benefits from living in societies with stable or gradually declining populations. 
Most obviously, they will spend much less in direct household expenditures to raise children. 
They will also save on investments in new roads, power plants, schools, and other public services. 
They will enjoy less congested cities and fewer environmental pressures on the countryside. 
European economies will face lower costs in limiting emissions of greenhouse gases from energy use, leading to more effective control of climate change. 
The quality of life, in short, will tend to improve as Europe's population declines in coming decades. 
There is nothing radical in calling for slower population growth. 
For tens of thousands of years, the human population tended to rise and fall without a substantial long-term trend. 
Only in the past two centuries, with the rise of modern economic life, did the world's population soar, from around one billion people in 1820 to 6.3 billion today and around 9 billion by 2050. 
This explosive growth was made possible by huge advances in science and technology. 
But this unprecedented growth has also put tremendous pressures on the planet. 
We should intensify our efforts to slow population growth through voluntary means, and we should recognize that leveling off of the Earth's population now would add to human happiness and strengthen environmental sustainability later. 

The Case of Myrna Mack: Laying out Guatemala's Crimes 
International pressure encouraged Guatemala to become a democracy and also supported the 1996 Peace Accords that ended our decades long civil war. 
But if Guatemala is to truly enjoy the fruits of a new era, global efforts must persist in helping our country develop the legal, judicial and political courage to confront its past. 
That history includes the brutal 1990 murder of my sister, Myrna Elizabeth Mack Chang. 
At the time, Myrna's murder symbolized the savagery of a 36 year civil war in which government forces killed more than 200,000 Guatemalans. 
Now it is an icon of our democracy's unfulfilled promises. 
The 12 year judicial journey that we have made in pursuing her case underscores the intransigence, rather than the retreat, of the old order. 
Myrna, an anthropologist, studied the populations of Mayans and other indigenous Guatemalans forced to abandon their ancestral homes during the worst years of the country's civil war. 
She visited remote areas and listened to the villagers talk of watching "their land laid to waste." 
She reported what she saw and heard. 
In doing so, she became an enemy of the state, because her work exposed the barbaric policies practiced against the displaced populations, uncovered the truth behind state actions, and called for the restoration of basic human rights. 
Myrna worked as an anthropologist, but the army failed to see her work as scholarly. 
Instead, intelligence officials viewed Myrna as an "internal enemy." 
Shortly after she published her first study, government security forces began to investigate her. 
Then on September 11 th , 1990 as Myrna left her office, two men stabbed her 27 times. 
Vinicio Cerezo, head of state at the time Myrna was killed, later informed law enforcement authorities that Myrna was "targeted" because intelligence reports indicated that her work posed risks for the counterinsurgency effort. 
As the chief petitioner in her case, I have sought justice in Guatemala's courts for nearly 12 years. 
In 1993, ex-Sergeant Major Noel de Jesús Beteta was sentenced to 25 years in prison, making him the first agent of the state and the first member of the army so punished. 
But, Beteta's conviction was only a partial victory. 
He was one of the men responsible for stabbing Myrna, but in Guatemala, human rights abuses begin at a much higher level. 
Responsibility for Myrna's death must be shared by the men in charge of government security in September 1990. 
My task is to insure that General Edgar Godoy Gaitán and colonels Juan Valencia and Guillermo Oliva are held legally accountable for their roles in the chilling process that led to Myrna's assassination. 
I am not alone in this belief. 
The Supreme Court of Justice ordered an investigation of these military officials to determine their responsibility for planning the crime. 
A military court issued a warrant for their arrest. 
In 1999, another judge ordered that they be tried. 
This was followed by the June 2001 court decision to set a date for trial, making it possible at last to present the evidence against these individuals. 
The courts' actions represent Guatemala's first effort to bring high military officials to trial. Regrettably, the trial has been delayed indefinitely because the defendants' lawyers appealed the case. 
Our successes in the matter of Myrna Mack are notable, but achieving them has proved difficult: the police investigator was assassinated; judges have been threatened; and witnesses have fled into exile. 
I have been harassed and campaigns to discredit me organized. 
Terror works. 
But so do bureaucratic bottlenecks that provide easy cover for defendants and permit the state to avoid its responsibility. 
Evidence and procedural documents are lost or destroyed; documents key to the legal process are altered; and state security is invoked to deny information. 
Add to these the fact that many Guatemalan judges have functioned as agents of impunity rather than as servants of justice and a legal system that can be manipulated by the defense through a series of frivolous lawsuits. 
Still, we persist. 
We have taken the struggle from the technical, legal, and political arena closer to a hearing in the courts. 
Although the trial has been delayed, the exposure has given the Myrna Mack Foundation and other civic efforts the time to propose ways to modernize and democratize the justice system. 
But the roadblocks are many so international pressure on Guatemala must persist to lift these obstacles. 
Reform of the judiciary, conceived 16 years ago and strengthened through the peace accords, is sadly still being debated. 
In name, Guatemala is a fledgling democracy. 
In reality, power remains in the hands of the military high command and political and economic conservatives who have for years determined the nation's direction. 
We lack the climate for a truly democratic arena, where criminal behavior that the state previously supported is prosecuted. 
To insure such an environment, certain conditions are required: the political desire to dismantle state control, strong and independent agencies, adherence to international human rights conventions, and a commitment to justice. 
Our success in Myrna's case depends on guaranteeing that legal reforms move forward, strengthened by political clout and a genuine emphasis on justice and democracy. 
Our need is an international community that continues to push Guatemala toward a better, more just future. 

The Caucasus Imperative 
YEREVAN – Summit season is upon us. 
Following the G-20 meetings in Seoul and the NATO summit in Portugal, the Organization for Security and Cooperation in Europe will hold its first summit in 10 years in Astana, Kazakhstan’s spanking new capital city. 
This is only the fourth post-Cold War summit convened by the OSCE. 
The first was held in 1994 in Budapest, the year the group transformed itself into a new, post-détente organization. 
There were two more, in Lisbon in 1996 and in Istanbul in 1999. 
Not coincidentally, the ten-year gap between summits overlaps with Russia’s re-emergence as a global player, following the trauma of the Soviet Union’s collapse. 
As a result of Russia’s revival, a range of disagreements has arisen within the OSCE – the only pan-European and trans-Atlantic organization that includes old Europe and the post-Soviet states. 
On challenges ranging from election monitoring to the Conventional Forces in Europe (CFE) Treaty, there is no common ground among the 56 member states. 
Worse, there is serious acrimony between Russia and the rest on many matters, including a new, alternative security architecture, which Russian President Dmitri Medvedev imagines could be placed under the OSCE’s umbrella. 
With so much to disagree about and no significant agreements ready to be concluded in Astana, this looks like a case of summitry for summitry’s sake. 
Without the usual pre-arranged outcomes, the delegations and their leaders will be searching for a success story to present to the world – whether in the OSCE’s human, economic, or security dimensions. 
That search could lead to the only conflict in the OSCE in which the organization has a direct role: the dispute between Armenians and Azerbaijanis over the ethnically Armenian Nagorno-Karabakh. 
The OSCE serves as mediator – through the Minsk Group co-chairs (the governments of France, Russia, and the United States) – in the most explosive of all the conflicts and security threats in the Caucasus. 
To be sure, unlike Georgia’s war with Russia, the two sides in this clash are not so unequal as to draw global attention. 
But, given Armenia’s alliance with Russia and Azerbaijan’s close ties with Turkey, an eruption over Karabakh could very well escalate regionally. 
Perhaps for this reason, there has been talk of a meeting in Astana between the presidents of Russia and France, the US secretary of state, and the presidents of Armenia and Azerbaijan. 
That prospect holds both great opportunity and serious risks. 
There is a reason that no such meeting has been held in the 20 years of the conflict. 
A meeting of presidents is, after all, the ultimate negotiating forum, and must lead to real, sustainable success. 
Otherwise, it will appear that no amount of negotiation can help set the Caucasus straight – powerfully undermining a key restraint preventing the two sides from trying again to achieve a military solution. 
Resolving the Nagorno-Karabakh conflict peacefully requires two parallel steps: a guarantee of non-resumption of military hostilities, and a clear, mutually binding blueprint for reaching a final settlement. 
In the absence of assurances of such an outcome, a presidential-level meeting should not be tried. 
This is especially true at a time when the other main deterrent to renewed violence – the military balance between the two sides – is also being weakened. 
This year, Azerbaijan’s military budget alone exceeded total state spending in Armenia and Karabakh. 
That, together with the more than 30 incidents occurring daily on the Line of Contact, does not bode well for peace, particularly given the absence of even a hint of agreement on a document, any document. 
An acceptable blueprint might emerge from high-level negotiations in Astana if it were to build on what succeeded in breaking previous negotiating deadlocks: the idea of a referendum in which the war-weary Karabakhis can determine their final status. 
The beauty of a referendum in these circumstances is that it recognizes the two fundamental principles at the heart of this conflict – self-determination and territorial integrity. 
But thus far, there is no agreement on the timing of a referendum. 
That failure remains the main obstacle to addressing the many other outstanding problems between the parties to the conflict. 
In just two months, South Sudan will hold a referendum on independence that was agreed to in 2005. 
A little more than two years ago, Kosovo voted for independence from Serbia. 
If, in Astana, a high-level group reinforces the idea of a referendum and sets a mutually acceptable date, this would be a significant achievement. 
The summit will have succeeded, the OSCE will have succeeded, and Karabakh will cease to be a synonym for conflict, but a laboratory for peace. 

Fatal Thaws 
MOSCOW – During the Cold War, the Soviet Union and, in a milder way, the United States imposed external limits on the activities of states and societies, causing longstanding conflicts among smaller countries to be “frozen.” 
Following the Soviet Union’s collapse in the 1990’s, those conflicts began to “unfreeze.” 
With interethnic tensions already on the rise, Yugoslavia was the first country to dissolve into conflict. 
Soon after, war broke out between Armenia and Azerbaijan, followed by fighting in Transdniestria and Chechnya. 
While some conflicts were addressed – the West finally intervened militarily in the former Yugoslavia; and Russia fought in Chechnya for almost a decade, and imposed peace in Transdniestria – others, such as that between Armenia and Azerbaijan, were simply frozen again. 
Fortunately, not all potential conflicts erupted. 
The Soviet Union did not dissolve into violence, as most other empires have – an outcome for which no explanation short of divine intervention or sheer luck seems to suffice. 
Despite rising nationalist sentiments and mutual suspicions, Central and Eastern European countries also managed to avoid conflict, thanks to their rapid acceptance into NATO and the European Union. 
At that point, the world breathed a collective sigh of relief. 
But, in the early 2000’s, globalization triggered the “second unfreezing” by facilitating rapid economic growth in Asian countries that, for two centuries, had been constrained by Western dominance, Cold War rules and institutions, and rampant poverty. 
With thriving economies came increased strategic clout, leading to the rise of regional geopolitics shaped by national interests and fears, rather than by external forces. 
The West’s failures in Iraq and Afghanistan, followed by the global economic crisis (which exposed severe structural weaknesses in the US and the EU that their democratic governments have been unable to resolve), accelerated this process. 
As a result, Europe has practically abandoned its global geopolitical role, with virtually no evidence of its presence, aside from trade, remaining in East Asia. 
Although the US has retained considerable influence, the combination of structural economic problems, a divided elite, and two de facto military defeats has impeded its ability to exercise that power. 
Old alliances – such as the Southeast Asia Treaty Organization, the Central Eastern Treaty Organization, and the Australia, New Zealand, United States Security Treaty – have died or are dying. 
And forming new alliances has proved difficult, with India rejecting what the US, with uncharacteristic humility, has proposed. 
Meanwhile, Asia is being roiled by intensifying territorial disputes in the South and East China Seas, as countries revive old claims against each other. 
East and South Asia are embroiled in an arms race, mainly at sea. 
Everyone is afraid of China, which remains relatively peaceable, but no longer bothers to conceal its growing military capacity. 
With no pan-Asian security architecture expected to emerge in the near future, the West’s departure from the region is generating a security vacuum. 
Furthermore, in the Greater Middle East, the fall of one secular dictatorship after another, coupled with the loosening of external control, has incited new – and rekindled old – suspicions, religious disagreements, and mistrust of outsiders in general and the West in particular. 
As a result, the region has entered a period of conflict, social degradation, rising nationalism, and growing religious fanaticism. 
Most threatening, however, is the possibility that the EU could collapse, triggering a third unfreezing. 
The EU, established to break the destructive cycle of European nationalism that had facilitated the rise of two totalitarian systems and caused two world wars, amounted to the creation of a prototype of a humane world order. 
After being its own – and thus the world’s – worst enemy for centuries, Europe became a beacon of peace. 
But, resting on the laurels of the EU’s founders, successive European leaders largely failed to perceive the competitive challenges posed by globalization. 
They seemed to forget that the European project’s underlying motivation was political, not economic, which led them to rush into enlargement and set unrealistic goals. 
Now, they must pay for their mistakes by overhauling the entire institutional framework of the EU and the eurozone. 
At the same time, Europeans must prepare for an even more profound transformation. 
In order to regain economic competitiveness, European countries will have to abandon many of their social-welfare policies and reform their political institutions. 
Most Europeans prefer to ignore the looming challenge of radical policy reform, owing to the decline in living standards that it implies. 
Global leaders must encourage Europe to tackle its problems decisively by offering advice, financial support, and constructive criticism. 
Russia must continue to press for an Alliance of Europe – a new framework for economic and diplomatic relations among the EU, Russia, and the rest of Greater Europe – which could offer a way out of Europe’s systemic crisis. 
The first unfreezing had serious consequences. 
Now, global leaders must work to minimize the fallout of the second, and use all available means to prevent a third. 


The Challenge of Balakot 
Along with a group of faculty, staff and students from my university in Islamabad, I journeyed to Balakot, close to the center of the Kashmir earthquake. 
This mountainous town, situated on the banks of the Kunhar River, has been destroyed. 
There is rubble and the gut-wrenching smell of decaying corpses. The rats have it good; the one I accidentally stepped upon was already fat. 
If there is a plan to clear the concrete rubble in and around the town, nobody seems to have any clue. 
But the Balakotis are taking it in their stride – nose masks are everywhere. 
But there is good news. 
We were just one of countless groups of ordinary citizens that were on the move after the enormity of the earthquake became apparent. 
The Mansehra to Balakot road, finally forced open by huge army bulldozers, is now lined with relief trucks bursting with supplies that were donated by people from across the country. 
This is one of those rare times that I have seen Pakistan’s people feel and move together as a nation. 
Even the armed bandits who waylay relief supplies – making necessary a guard of soldiers with automatic weapons, standing every few hundred yards – cannot destroy this moment. 
Islamic groups from across the country have also arrived. 
Some bring relief supplies; others simply harangue those who have lost loved ones and livelihoods, lecturing that their misdeeds brought about this catastrophe. 
None seem to have an explanation for why God’s wrath was especially directed to mosques, madrassas, and schools – all of which collapsed in huge numbers. 
None say why thousands of the faithful have been buried alive in this sacred month of fasting. Aid from across the world is making its way towards the destruction, and the US is here too. 
Double bladed Chinook helicopters, diverted from fighting Al-Qaida in Afghanistan, now fly over the heartland of jihad and the militant training camps in Mansehra to drop food and tents a few miles beyond. 
Temporarily birds of peace instead of war, they do immensely more to calm angry Islamists than the reams of glossy propaganda put out by the US information services in Pakistan. 
Their visibility makes relief choppers terrific propaganda, for good or for worse. 
This is undoubtedly why the Pakistani government refused an Indian offer to send in helicopters for relief work in and around Muzaffarabad, the flattened capital of Pakistani-administered Kashmir. Sadly, in spite of a much celebrated peace process, Pakistan refuses visas to Indian peace groups and activists that seek to help in the relief effort. 
It is still not too late to open this door and let Pakistanis, Indians and Kashmiris help each other. 
The challenges are many. 
The aid remains too little. 
There are not enough tents, blankets, and warm clothes to go around. 
Hundreds of tent clusters have come up, but thousands of families remain out under the skies, facing rain and hail, and with dread in their hearts. 
These families have lost everything but the tattered clothes on their backs. Some even lost the land they had lived upon for generations – the top soil simply slid away, leaving behind hard rock and rubble. 
Worst of all, aid is not reaching those most affected. Hundreds of destroyed communities are scattered deep in the mountains. 
We saw helicopters attempt aerial drops; landing is impossible in most places. 
But people told us that they often miss and the supplies land up thousands of feet or below in deep forests. Distribution is haphazard and uncoordinated, done with little thought. 
We saw relief workers throw packets of food and clothes from the top of trucks, causing a riot. 
Hustlers thrive, the weak watch passively. 
The clock is ticking. 
In two months, the mountains will get their first snowfall and temperatures will plummet below zero. 
Millions may have been made homeless. 
Those without shelter will die. 
Tents will not do. 
From a special university fund, we pledged to rebuild the homes of a dozen families. 
But ten thousand or more families will need homes in the Mansehra-Balakot-Kaghan area alone, not to speak of adjoining Kashmir. 
The task of saving lives has barely begun. 
For me personally, there is a sense of deja vu. 
Nearly 31 years ago, on 25th December 1974, a powerful earthquake flattened towns along the Karakorum Highway and killed nearly 10,000 people. 
I traveled with a university team into the same mountains for similar relief work. 
Prime Minister Zulfiqar Ali Bhutto had made a passionate appeal for funds around the world, had taken a token helicopter trip to the destroyed town of Besham, and then made fantastic promises of relief and rehabilitation. 
Hundreds of millions of dollars in relief funds received from abroad mysteriously disappeared. 
Some well-informed people believe that those funds were used to kick off Pakistan’s secret nuclear program. 
Will today’s government do better? 
This will only be assured if citizens organize themselves to play a more direct role in relief and rehabilitation for the long term. 

The Challenges Of EU Enlargement 
For more than 50 years, Europeans have shared aspirations for closer economic cooperation and political ties. 
The accession of ten new countries to the European Union earlier this year opened the latest and perhaps most dramatic chapter in this process. 
Expansion of the world's second-largest market offers historic opportunities for economic renewal. 
But with enlargement come challenges. 
At a time of slow growth, lingering high unemployment, and difficult fiscal situations in some countries, it is understandable that longer-standing members of the EU sometimes focus more on the potentially disruptive difficulties than the opportunities. 
Those problems are real, but their solutions lie in the new vistas of the enlarged EU: more trade in goods and services, integration of markets and better allocation of capital, and the potentially disciplining effect of economic unification on economic policies. 
The advantages for trade and investment - more than 450 million people in 25 countries - are self-evident. 
The addition of the faster-growing, middle-income economies of Central and Eastern Europe offers a larger, more diverse internal market with rising purchasing power and a well-educated workforce. 
Adoption of the Euro should foster even greater trade integration by eliminating exchange-rate risk, lowering transaction costs, and promoting greater price transparency and competition. 
The experience of current euro-area members thus far suggests trade gains of roughly 10% just from the single currency. 
Regrettably, one channel of greater integration has been muted: the free movement of labor. 
Most established member states - fearing potential dislocations - have chosen to protect, albeit temporarily, their labor markets. 
Several new members have adopted reciprocal restrictions. 
It is essential that all members keep these artificial barriers to a minimum. 
Europe also has much to gain from ongoing financial integration with the eventual goal of a truly pan-European financial market. 
Greater market access, market reform, and efforts at regulatory harmonization - including those under the EU's Financial Services Action Plan - should help advance this trend. 
Foreign direct investment is the most direct channel for integration. 
By some accounts, FDI between the old and new members might be as much as 70% lower than justified by economic fundamentals. 
Similarly, with bank credit to the private sector in the new members well below averages in the West, the scope for increasing lending activity is also substantial. 
Financial integration could catapult financial development for new member countries, including through the advent of new financial instruments and services. 
Enlargement of the euro area promises to spur further financial integration. 
Enhanced competition and economies of scale in larger, more closely integrated financial markets should narrow lending margins, lower intermediation costs, and allocate funds more efficiently. 
Greater diversification of portfolios and deeper cross-border linkages should help risk sharing, making the region more resilient to shocks. 
Ultimately, progress in both trade and financial integration rests on improved economic policies. 
New member states should continue pursuing macroeconomic stability and financial discipline, particularly with respect to public finances. 
Along with strong prudential supervision, this should help manage the vulnerabilities of capital-account volatility and credit booms, and lay the groundwork for the eventual adoption of the euro. 
Indeed, before joining the monetary union, the new member countries will need to make more progress toward the convergence criteria for interest rates, inflation, and public finances. 
Fiscal deficits in several new member countries will need to be reduced significantly. 
Trimming excessive social transfers and entitlements, together with proper use of EU structural funds, would help achieve this objective while also satisfying the need for public investment and infrastructure upgrades. 
Strong financial-market supervision will also be needed to contain risks stemming from credit booms, asset bubbles, and financial-market volatility. 
On the structural front, measures to enhance wage and price flexibility would improve resiliency to asymmetric shocks and would help the new countries' cyclical fluctuations become more attuned to the rest of the EU. 
For longstanding members, enlargement presents an opportunity to prepare public finances for coming demographic challenges. 
Restoring the credibility of the Stability and Growth Pact should be a top priority, but the larger challenge requires greater stability for long-term public financing. 
A growth-friendly approach to the burdens of aging populations is required, including steps to raise the retirement age and encourage life-long training. 
Enlargement should also give fresh impetus to policies to tackle deep-seated structural impediments and reverse sagging income prospects. 
The Lisbon Strategy adopted in March 2000 set an ambitious course for the EU, calling for greater focus on research and development, completion of the internal market, bold education and employment objectives, and promotion of active aging, all supported by appropriate macroeconomic policies. 
But as we approach the midpoint of this ten-year strategy, Europe stands well short of its many goals. 
As the recent Kok report reviewing the Strategy makes clear, "The disappointing delivery is due to an overloaded agenda, poor coordination, and conflicting priorities." 
I share this assessment. 
The Lisbon Strategy needs to be refocused. 
The issue is not the productivity of European workers when they are on the job, but rather the need to increase labor-force participation through policies that raise employment rates and reverse the decline in weekly work hours. 
More flexible labor markets and reform of entitlement programs would further allow Europe to confront the demands of greater competition without recourse to insular protections, such as those placed on labor migration. 
Evolving market access, competition, and integration may present Europe with challenges and some costs. 
But enlargement also creates new opportunities. 
Improved policies will amplify these opportunities, ensuring that economic gains will benefit hundreds of millions of people throughout Europe. 

The Chancellor Who Played with Fire 
BERLIN – German Chancellor Angela Merkel should be happy nowadays: her party’s approval ratings aren’t bad, and her own are very good. 
She no longer has serious rivals within the center-right Christian Democratic Union (CDU), while the left opposition is fragmented into four parties. 
Her response to the European crisis has prevailed – or at least that is the impression that she conveys, and that most Germans believe. 
So everything is fine and dandy, right? 
Not so fast. 
Two issues could complicate Merkel’s re-election bid in the autumn of 2013. 
Domestically, her coalition partner, the liberal Free Democrats (FDP), is disintegrating. 
Even if the FDP survives the next election (which is by no means certain), the current coalition is unlikely to retain its parliamentary majority, leaving Merkel increasingly dependent on the Social Democrats (SPD). 
While this need not matter to her too much as long as she retains the chancellorship, in Sigmar Gabriel, the SPD’s leader, she faces – for the first time – an opponent whom she would underestimate at her peril. 
But the real danger to Merkel is external: the European crisis. 
If she is unlucky, the crisis will come to a head at the start of the German election year, and all previous calculations could be moot, because, despite Germans’ frustration with Europe, the electorate would punish severely those who allowed Europe to fail. 
The European Union’s economy is sliding into a severe and, in all likelihood, long-lasting recession, largely self-inflicted. 
While Germany is still trying to banish the specter of hyperinflation with strict eurozone austerity measures, the EU crisis countries are facing a real threat of deflation, with potentially disastrous consequences. It is only a question of time – no longer very much time – before economic destabilization gives rise to political instability. 
Hungary, where democratic backsliding appears to be taking hold, provides a foretaste of a Europe in which the eurozone crisis and deflation persist. 
The mood in the Mediterranean EU members, as well as in Ireland, is heating up, owing not only to the tightening squeeze of austerity, but also – and perhaps more importantly – to the absence of policies that offer people hope for a better future. 
The explosive nature of current trends, which point to eventual re-nationalization of sovereignty from the bottom up, is greatly underestimated in Berlin. 
The crisis has now reached Italy and is threatening to spread to France. 
With Mario Monti’s premiership, Italy has mobilized its best people, and neither Italy nor Europe will get a better government for the foreseeable future. 
If Monti’s administration is toppled – either in parliament or in the streets – the EU’s fourth-largest economy could come crashing down. 
Monti is urgently calling for help. 
Where is it? 
Developments in France (the second-largest eurozone economy) should also not be underestimated in this presidential election year. 
If a majority of the French come to believe that a course of action is being imposed on them from outside – and by Germany, no less! – they will respond with traditional Gallic stubbornness. 
What is at stake is less the election’s outcome than the margin between President Nicolas Sarkozy and the far-right National Front leader, Marine Le Pen – and whether she overtakes him to qualify for the second-round run-off against the Socialist candidate. 
While she would be unlikely to win the presidency, she could reshape and realign the French right. 
For that reason, a Sarkozy debacle would drastically reduce his Socialist successor’s room for maneuver on European policy, fundamentally altering France’s position in Europe. 
But, while the French election’s outcome will hinge to a crucial extent on European crisis politics, Germany’s government acts as if this were none of its concern. 
Instead, the main – almost exclusive – topic in Berlin is the upcoming election. 
And the central question is not, “What needs to be done now in the interest of Europe?” 
Rather, it is, “How much can people in Germany be expected to accept – in particular, how much honesty?” 
No one will act in a way that jeopardizes their electoral prospects, at least while there are still alternatives. 
So it is conceivable that Germany is not at all interested in a serious effort to resolve Europe’s crisis, because that would mean taking big risks and investing a lot of money. 
The CDU-FDP coalition prefers to sugarcoat the situation by convincing themselves of an Anglo-Saxon conspiracy, abetted by those in the European crisis countries unwilling to perform and reform and whose only purpose is to make the Germans pay. 
So far, Merkel’s coalition is like someone driving against traffic, dead certain that everyone else is going the wrong way. 
Europe’s disintegration has already advanced much further than it might appear. 
Distrust and national egoism are spreading rapidly, devouring European solidarity and common purpose. 
Institutionally, Europe has been on the right track since the last summit, but it threatens to disintegrate from the bottom up. 
To save the euro – which is essential, because the European project’s fate depends on the success of monetary union – Europe needs action now: in addition to indispensable austerity measures and structural reforms, there is no way to succeed without a viable economic program that will assure growth. 
That won’t come cheap. 
If Merkel’s government believes that paying lip service to growth is enough, it is playing with fire: a euro collapse in which not only Germans would be badly burned. 

The Changing Climate On Climate Change 
The message, it seems, has finally gotten through: global warming represents a serious threat to our planet. 
At the recent World Economic Forum in Davos, world leaders saw climate change, for the first time, topping the list of global concerns. 
Europe and Japan have shown their commitment to reduce global warming by imposing costs on themselves and their producers, even if it places them at a competitive disadvantage. 
The biggest obstacle until now has been the United States. 
The Clinton administration had called for bold action as far back as 1993, proposing what was in effect a tax on carbon emissions; but an alliance of polluters, led by the coal, oil, and auto industries beat back this initiative. 
To the scientific community, the evidence on climate change has, of course, been overwhelming for more than a decade and a half. 
I participated in the second assessment of the scientific evidence conducted by the Intergovernmental Panel on Climate Change, which perhaps made one critical mistake: it underestimated the pace at which global warming was occurring. 
The Fourth Assessment, which was just issued, confirms the mounting evidence and the increasing conviction that global warming is the result of the increase in greenhouse gases in the atmosphere. 
The increased pace of warming reflects the impact of complex non-linear factors and a variety of “tipping points” that can result in acceleration of the process. 
For instance, as the Arctic ice cap melts, less sunlight is reflected. 
Seemingly dramatic changes in weather patterns – including the melting of glaciers in Greenland and the thawing of the Siberian permafrost – have at last convinced most business leaders that the time for action is now. 
Recently, even President Bush seems to have woken up. 
But a closer look at what he is doing, and not doing, shows clearly that he has mostly heard the call of his campaign contributors from the oil and coal industries, and that he has once again put their interests over the global interest in reducing emissions. 
If he were truly concerned about global warming, how could he have endorsed the construction of coal-fired electricity plants, even if those plants use more efficient technologies than have been employed in the past? 
What is required, first and foremost, are market-based incentives to induce Americans to use less energy and to produce more energy in ways that emit less carbon. 
But Bush has neither eliminated massive subsidies to the oil industry (though, fortunately, the Democratic Congress may take action) nor provided adequate incentives for conservation. 
Even his call for energy independence should be seen for what it is – a new rationale for old corporate subsidies. 
A policy that entails draining America’s limited oil supplies – I call it “drain America first” – will leave the US even more dependent on foreign oil. 
The US imposes a tariff of more than 50 cents per gallon on sugar-based ethanol from Brazil, but subsidizes inefficient corn-based American ethanol heavily – indeed , it requires more than a gallon of gasoline to fertilize, harvest, transport, process, and distill corn to yield one gallon of ethanol. 
As the world’s largest polluter, accounting for roughly a quarter of global carbon emissions, America’s reluctance to do more is perhaps understandable, if not forgivable. 
But claims by Bush that America cannot afford to do anything about global warming ring hollow: other advanced industrial countries with comparable standards of living emit only a fraction of what the US emits per dollar of GDP. 
As a result, American firms with access to cheap energy are given a big competitive advantage over firms in Europe and elsewhere. 
Some in Europe worry that stringent action on global warming may be counterproductive: energy-intensive industries may simply move to the US or other countries that pay little attention to emissions. 
And there is more than a grain of truth to these concerns. 
A striking fact about climate change is that there is little overlap between the countries that are most vulnerable to its effects – mainly poor countries in the South that can ill afford to deal with the consequences – and the countries, like the US, that are the largest polluters. 
What is at stake is in part a moral issue, a matter of global social justice. 
The Kyoto Protocol represented the international community’s attempt to begin to deal with global warming in a fair and efficient way. 
But it left out a majority of the sources of emissions, and unless something is done to include the US and the developing countries in a meaningful way, it will be little more than a symbolic gesture. 
There needs to be a new “coalition of the willing,” this time perhaps led by Europe – and this time directed at a real danger. 
This “coalition of the willing” could agree to certain basic standards: to forego building coal-fired plants, increase automobiles’ fuel efficiency, and provide targeted assistance to developing countries to enhance their energy efficiency and reduce emissions. 
Coalition members could also agree to provide stronger incentives to their own producers, through either more stringent caps on emissions or higher taxes on pollution. 
They could then agree to impose taxes on products from other countries – including the US – that are produced in ways that unnecessarily add substantially to global warming. 
What is at stake is not protecting domestic producers, but protecting our planet. 
The changing climate on climate change provides political leaders in Europe and other potential members of this “coalition of the willing” an unprecedented opportunity to move beyond mere rhetoric. 
The time to act is now. 

The Changing Face of Energy Security 
For three decades, the rich world has talked about curbing its addiction to imported oil. 
But, despite the anxious rhetoric, the oil-supply problem has become worse and energy security more complex. 
Notwithstanding politicians’ repeated calls for energy independence, over the past 30 years the United States, for example, has doubled its dependence on imported oil, which now accounts for nearly two-thirds of its oil needs. 
Threats to cut oil supplies in order to change a country’s foreign policy have a long history, particularly where the Middle East is concerned. 
Arab members of the Organization of Petroleum Exporting Countries called for an embargo at the time of the 1967 war, but it had little effect because the US was then largely self sufficient. 
But by the 1973 Yom Kippur war, the Arab oil embargo had a greater effect, owing to America’s growing demand for imported oil. 
The embargo drove up prices and unleashed a period of inflation and stagnation worldwide. 
It also demonstrated that oil is a fungible commodity. 
Even though the embargo was aimed at the US and the Netherlands, market forces shifted oil among consumers, and in the long term all consuming countries suffered shortages of supply and the same price shock. 
Oil embargos turned out to be a blunt instrument that hurt many besides the targeted countries. 
In the aftermath of the oil price shocks, energy security policy has had four components. 
By liberalizing energy prices, governments allowed markets to encourage conservation and new supply. 
In addition, governments introduced modest subsidies and regulations to encourage conservation and renewable energy sources. 
Some governments began to store oil in strategic petroleum reserves that could be used to for short periods in a crisis. 
Rich countries also helped to create the Paris-based International Energy Agency, which coordinates policies (including strategic reserves) among consumer countries. 
Such policies still make sense. 
They would probably not be adequate, however, to deal with a prolonged disruption of supplies. 
The world is not running out of oil, but two-thirds of oil reserves are located in the politically unstable Persian Gulf region. 
The US imports only a small portion of its oil from the Persian Gulf. 
Its largest supplier is its stable neighbor, Canada. 
But the lesson of 1973 is that a disruption of Gulf oil supplies would raise prices and damage both rich and poor economies, regardless of how secure their own sources of supply might be. 
Moreover, new dimensions of the problem of energy security have emerged in the last few years. 
One is the great increase in energy demand from the rapidly growing economies of Asia, particularly China. 
China appears to believe that it can secure its energy imports by locking up oil contracts with pariah states like Sudan. 
However, while this short-sighted mercantilist approach creates foreign policy problems over issues like Darfur, it will not really protect China in a time of supply disruption. 
It would be far better to bring China (and India) into the IEA, and encourage normal Chinese participation in world markets. 
Another new dimension of the energy security problem is the manner in which high prices and increased reserves have transferred power to energy producing countries. 
State-owned companies now control far more oil and gas reserves than do the traditional private energy companies once known as the seven sisters. 
Many of these state-owned companies in countries like Russia and Venezuela are not responding merely to market forces, but are using their newfound pricing power for political purposes. 
Finally, the energy security problem has been complicated by the problem of global climate change. 
As the science has become increasingly clear, climate change is now a major political issue at the global and national levels. 
Rising sea levels, drought in Africa, and increasingly turbulent storms all pose a new type of threat that must be taken seriously. 
So measures to deal with energy security must address the demand side even more than the supply side. 
Measures that some legislators favor, such as transforming coal into liquids, increase secure supplies, but they imply more carbon dioxide emissions than imported oil does. 
They should be avoided until technologies for clean coal or carbon capture are perfected. 
On the other hand, reducing demand through improved energy efficiency and conservation measures are beneficial for both the security of supplies and the global climate. 
But it is not enough for the US and European Union countries to improve their energy efficiency unless other countries do so as well. 
China and India can pursue security of supply by using their large coal resources, but unless they also have access to improved coal technology, the burdens they impose on the atmosphere will be large. 
This year, China will surpass the US in emissions of greenhouse gases. 
It builds nearly two new coal-fired electricity plants each week. 
In such a world, energy security can no longer be summed up as greater energy independence. 
Instead, we must find better ways to cope with energy interdependence. 

The Changing Face of France in Africa 
This week, many African heads of state will attend the 24th France-Africa summit in Cannes. 
Behind the glitz, the summit may mark a watershed in France’s relationship with Africa. 
France is preparing for its presidential elections this May, and as that battle for the presidency heats up, so, too, does the contest to forge new ties with Africa. 
In the post-Cold War era, “multilateralism” has become the latest political buzzword. 
Moreover, mistakes in Africa during the 1990’s, particularly in Rwanda, together with corruption scandals, have put pressure on French leaders to bring dramatic changes in foreign policy. 
In their wake, a notable shift has emerged, with a new generation of politicians claiming to herald a fresh approach and profound changes in French policy towards Africa. 
However, much work remains to be done to consolidate that shift. 
President Jacques Chirac launched important reforms such as redeploying French military forces in Africa, and restructuring how France distributes aid. 
But he has been unable to integrate these individual measures into a more concrete vision that could address the neo-colonial links that still beset Franco-African relations. 
Moreover, African affairs, and international politics more generally, do not seem to be a priority for the 2007 presidential candidates. 
Ségolène Royal, despite having been raised in Senegal when it was a French colony, appears disinterested in Africa, and her opponent, Nicolas Sarkozy, has evinced an interest in Africa only in the context of illegal immigration. 
The stark truth is that without strong political will and clear arguments, any future French president is unlikely to curb the strength of lobby groups and old networks that have dominated France’s relationship with Africa. 
It is against this backdrop that African leaders will arrive in Cannes for the France-Africa summit, an event that in many respects will be a stage for Chirac to bid them farewell. 
But the summit has also attracted controversy over whether President Robert Mugabe of Zimbabwe and his senior officials will be invited. 
The EU has imposed targeted sanctions on Zimbabwe, including a visa ban on senior officials, and there were protests when Mugabe appeared in Paris in February 2003 for the last France-Africa summit on European territory. 
Whatever is decided about Zimbabwe’s participation at the Cannes summit will also have an impact on plans for a major EU-Africa Summit in Lisbon this fall, during Portugal’s presidency of the EU. 
During the last Portuguese Presidency (January-June 2000), the EU-Africa Summit had to be cancelled because of a visa ban on Zimbabwean officials and the reluctance of Africans to attend if Mugabe was excluded. 
That issue is likely to continue to cause division, both within Europe and between Europe and Africa. 
A coalition of European civil-society organizations opposes Zimbabwean government participation on human rights grounds. 
But many EU states, fearful of China’s growing influence in Africa, want to ensure a successful EU-Africa Summit in Lisbon in order to counter last year’s China-Africa summit in Beijing. 
France would prefer to invite Mugabe and his officials to its summit in Cannes, but the British government has lobbied against this. 
By contrast, a number of African states, in particular South Africa, have lobbied for Mugabe’s participation. 
Indeed, South African President Thabo Mbeki has threatened not to participate unless Mugabe is invited. 
For France, there is no easy resolution. 
It needs British support on issues such as Côte d’Ivoire in the UN Security Council, but it also wants to improve its bilateral relationship with South Africa for political and economic reasons. 
Whatever happens regarding Zimbabwe in Cannes will directly influence the EU-Africa summit later this year. 
Unfortunately, that controversy may also overshadow the incipient changes in French policy. 

The Changing Map of Middle East Power 
BERLIN – The eruption of the Arab revolts in late 2010 and early 2011 put power relations among Middle Eastern countries in a state of flux, and both winners and losers have emerged. 
But, given that the strengths and weaknesses of most of the actors are highly contingent, the regional balance of power remains highly fluid. 
As that balance currently stands, Egypt continues to be one of the region’s most influential actors, with the success or failure of its political and economic transition affecting how other Arab countries develop. 
But Egypt is weighed down by domestic concerns, including a plummeting economy and a security situation in which the military is used for police tasks. 
The expansion of Egypt’s soft power will depend on the ability of its first democratically elected government, led by President Mohamed Morsi, to take difficult decisions and forge domestic consensus. 
Success in establishing effective governance would establish a model that many of Egypt’s neighbors would seek to emulate, at least partly. 
In this respect, Turkey is a good example. 
Turkey’s power rests primarily on its vibrant economy. 
Its impressive military strength is of limited use as an instrument of power, and its political clout has been overestimated, particularly in Syria. 
A rapprochement with Israel and, more important, a lasting peace with its Kurdish population, would boost Turkey’s regional influence. 
Israel also remains an overall winner, despite the changing strategic environment and its virtual lack of soft power in the region. 
The impending fall of Israel’s most reliable enemy, Syrian President Bashar al-Assad, concerns Israel almost as much as the loss of its ally, Egypt’s former President Hosni Mubarak. 
With Israel’s economy and deterrent capability stronger than ever, however, no regional player poses a genuine security threat to Israel in the short term. 
Meanwhile, Qatar’s diligent efforts to expand its influence over the last two decades have paid off, with the country developing considerable power of attraction. 
Since 2011, Qatar has scaled up its involvement in its neighbors’ affairs, backing the Libyan revolution, the Egyptian government, and the Syrian opposition. 
But the Qataris may be overplaying their hand. 
Qatar has money, but no other hard power, and it has been criticized for its interference in Syria and its support for the Muslim Brotherhood. 
If Qatar fails to use its resources wisely, it may lose the legitimacy that it needs to underpin its patronage. 
Meanwhile, Syria’s civil war highlights the loss of that country’s once-considerable influence in the region. 
Instead, Syria has become the object of a geopolitical struggle among other regional actors. 
But the efforts of the Gulf states to arm the Syrian opposition are insufficient to set the conflict on a definitive course, especially given the heavy weapons that the Assad regime has at its disposal. 
And the opposition has not been able to appropriate the reputation and clout that Assad has lost. 
In fact, regardless of the balance of power between the regime and its opponents, Syria probably will not reestablish a strong, centralized government for decades, if ever. 
At best, Syria will emerge from the current conflict with a decentralized or federal state; at worst, the country will go the way of Somalia. 
Either way, Syria is currently firmly in the loser’s camp. 
Iraq could have been a winner, had it been able to translate the recovery of its oil industry and the withdrawal of US troops into political stabilization and regional influence. 
But, with Prime Minister Nouri al-Maliki’s government widely considered to be another authoritarian and sectarian regime, Iraq has not been able to gain any soft power. 
Moreover, the chances that Iraqi Kurdistan will achieve de facto or de jure independence are greater than ever. 
Iraq’s Kurds may even be able to extend their influence into Kurdish-populated northern Syria, thereby becoming a more influential regional player than the Iraqi government in Baghdad. 
Neighboring Iran seems to be the quintessential survivor. 
It has coped with the international community’s increasingly stifling sanctions, while maintaining its nuclear program and continuing to participate in the diplomatic process with the P5+1 (the five permanent members of the United Nations Security Council, plus Germany). 
Iran has strengthened its influence in Iraq, and has helped to keep the Assad regime, a key ally, in power much longer than expected. 
But rising political polarization in the region could undermine Iran’s standing. 
As regional conflicts are increasingly defined along Sunni-Shia lines, it is becoming more difficult for Shia-dominated Iran to gain influence in Sunni-majority countries. 
And Iran’s support for Assad’s brutal regime in Syria is damaging further its once-considerable soft power in other Arab countries. 
Saudi Arabia can also be counted as a survivor, as it copes with deep strategic insecurity stemming from Iran’s efforts to undermine its position, social unrest in its neighbor and ally Bahrain, and the Muslim Brotherhood’s rise to power in Egypt. 
Saudi leaders have also become increasingly suspicious of their American allies, on whom the country’s security depends. 
At the same time, the Saudi leadership is facing significant domestic challenges, including vast economic disparities, inadequate services, growing frustration with the lack of political freedom, and a difficult succession process within the royal family. 
Nevertheless, though Saudi Arabia’s soft power is waning, its massive oil wealth will likely ensure that it remains a regional heavyweight. 
Non-state actors also play a crucial role in the Middle East’s balance of power. 
Religious minorities have become more insecure. 
The once-oppressed Kurds are gaining ground. 
Of the main transnational political groups, the Muslim Brotherhood has been the clearest winner. 
But success brings new challenges. 
Islamist-led governments must deliver on the socioeconomic front, while building democratic institutions. 
(Ironically, they will be able to claim success in having built a better state only when they accept their first electoral defeat.) 
Indeed, the challenge facing all of the region’s current winners is to translate today’s gains into credible, long-term power. 

The Chaotic Birth of South Sudan 
MADRID – The Comprehensive Peace Agreement (CPA) that was reached in 2005 between mostly Christian southern Sudan and the country’s Muslim North, ended one of the bloodiest civil wars in modern times. 
Lasting 22 years, that war left more than two million dead. 
Now the CPA is poised to face its most vital test: the South’s referendum on independence, scheduled for January 9. 
Whether or not a new state is born in one of the most strategically sensitive areas of the world is of utmost concern to Sudan’s neighbors and others. 
Vital issues are at stake: the scramble for oil; China’s robust presence in Sudan; the West’s desire to see a mostly Christian state break the contiguity of Muslim regimes – and the consequent threat of Islamic radicalism – in the region; the regional distribution of the Nile’s waters; and the possibility that independence for the South might lead to Sudan’s total dismemberment along ethnic and religious lines. 
The fact that Omar al-Bashir, Sudan’s president, is not especially keen to agree to the United Nations’ plan to beef up its peacekeeping force in the country ahead of the referendum raises concern about his intentions. 
He would certainly be happy to delay the vote – and, if it is held, to dispute its legitimacy. 
He might not find that very difficult. 
Preparations for the referendum are lagging and inadequate. 
Brinkmanship and broken agreements threaten to turn the referendum’s technical and political difficulties into yet another disaster for the country. 
The 2.5 million Southern Sudanese known to live in the North are under explicit instructions by the South’s Sudan People’s Liberation Army to boycott the referendum, as the SPLA has grounds to believe that Bashir would use their registration to rig the results in favor of unity. 
Indeed, if not convincingly deterred by the international community, it is extremely difficult to believe that Bashir would let the South secede without a fight. 
A crucial bone of contention that might ignite a new war is the future of the country’s oil industry and the North-South border demarcation. 
So far, the good offices of the Norwegian government have failed to produce an agreement on the key question of the post-independence distribution of oil revenues between North and South. 
Given that most of Sudan’s oil wealth is concentrated in the South, the management of the oil industry and its revenues after secession is an existential problem for Bashir’s regime and its capacity to control his vast and ethnically diverse country. 
It is in the oil-rich border areas that a new war might erupt. 
As one of the poorest and neediest countries in the world, for which oil revenues would be the only source of income for years to come, an independent South Sudan could not be expected to rescue the debt-ridden North. 
Its own challenge lies in reforming the entire oil industry, which for years has been brutally and irresponsibly exploited by Chinese and Malaysian companies, with devastating environmental consequences. 
Conspicuously, Bashir’s regime has been disqualified in the eyes of its neighbors in Africa and the Arab world to a degree that makes the South’s secession a more acceptable option to the main regional stakeholders than ever before. 
Indeed, the Arab world as a whole seems to have given up on Bashir. 
Some Arab leaders still toy with the idea that overthrowing him might yet salvage a united Sudan, but it is probably too late for that. 
After failing to moderate Bashir into accepting a secular decentralized or confederate Sudan, Egypt, a key Arab player concerned about the stability of its southern border, has come to accept the inevitability of secession – so long as the new state lines up with it on the issue of the Nile’s waters. 
Egypt’s fears are mainly of Sudan’s disintegration into a chaotic tapestry of mini-states controlled by warlords and plunged into lawlessness and bloody tribal feuds. 
In that case, what remains of “Sudan” – Khartoum, Gezira, and the two northern states – might degenerate even further, probably turning into a base for global Islamic terrorism. 
Black Africa, particularly the East African Community, cannot think of any solution other than secession. 
To EAC members, this is a matter of de-colonization, for southern Sudan’s people have been enslaved, dehumanized, and humiliated for centuries by the Arabs. 
Hence, as the Kenyans put it, the border between northern and southern Sudan should become the border between Black Africa and the Arab World. 
Concerned by Bashir’s delaying tactics, both Kenya and Uganda have advised their southern Sudanese friends not to make demarcation of the border a pre-condition for the referendum, as doing so would only play into Bashir’s hands. 
United States Secretary of State Hillary Clinton rightly defined the upcoming referendum as a “ticking time bomb.” 
She also made it clear, however, that the outcome, independence for the South, is “inevitable.” 
But, to avoid a cataclysm, the US and its allies must defuse the bomb by enforcing the provisions of the 2005 CPA, which they all endorsed. 
They would have virtually all of the regional stakeholders on their side as well. 

The Chimera of Russia’s Gas Power 
Russia began 2006 by cutting off natural gas exports to Ukraine after its government refused to pay a fourfold increase in the subsidized price. 
The crisis in Ukraine, many of whose Soviet-era industries depend on cheap Russian gas, soon spread to Europe, which consumes 80% of Russian gas exports, when Ukraine began to divert gas from the pipeline that crosses its territory. 
Ironically, 2006 is also the year that Russia takes over the chair of the Group of Eight industrialized countries, which is set to meet in Moscow this spring. 
The improbable theme that Russian President Vladimir Putin chose for the conference is energy security. 
Even though it is no longer a global superpower, Russia’s vast oil and gas reserves make it an energy superpower, and Putin seems intent on playing that card. 
Oil provides somewhat less economic power than gas because it is a fungible commodity, and interruptions of supply can be made up by purchases on world markets. 
But gas is expensive to transport, for it depends on costly pipelines or gas liquefaction facilities that cannot be replaced quickly when flows are interrupted. 
Gas provides a tempting form of leverage, and Russia had already used it against Georgia, Latvia, Lithuania, and Moldova. 
But when Gazprom, the Russian state gas monopoly, followed Putin’s instructions to turn off the spigot to Ukraine, Russia crossed a new threshold. 
At first glance, this looks like a classic case of a large country bullying a small country into submission. 
As Thucydides put it in his history of the Peloponnesian War, “The strong do as they will and the weak suffer what they must.” 
Russia had supported the losing side in Ukraine’s “Orange Revolution” a year ago, and it was time for payback. 
But, as it turned out, Putin miscalculed. 
He underestimated both Ukraine’s leverage as the primary conduit for Russian gas exports to Europe and Europe’s influence as the major consumer of Russian gas. 
In the process, he damaged Russia’s reputation as a reliable supplier of natural gas. 
The result was a hastily patched together deal in which Russia and Ukraine each gave ground on price, and a shadowy Swiss-based company half-owned by Gazprom rolled supplies of cheap gas from Turkmenistan into the equation. 
Some analysts, as well as former Ukrainian prime minister Yuliya Tymoshenko, raised accusations of corruption against the company, RosUkrEnergo. 
But, charges of corruption aside, this outcome indicates that gas is not such an easy source of hard economic power as it would first appear. 
Some economists argue that there is little power in relationships where buyers and sellers consent to a price that clears a market. 
However, in cases where buyers and sellers are not equally dependent upon the relationship, the greater vulnerability of the more dependent party can be used as a source of coercive power by the less dependent party. Russia thought it was less dependent than Ukraine, and decided to exercise that power. 
But it is one thing to hold the high hand in a game that you play only once. 
For the game to go on indefinitely, you must maintain the trust of the other players. 
In other words, the shadow of the future suggests that a moderate strategy is best. 
Russia quickly discovered that its threats against Ukraine were too costly to its reputation as a reliable supplier for Europe. 
When considered in this wider European context, there was more symmetry in the Russia-Ukraine energy relationship than the simple numbers on energy dependence implied at first glance. 
Where does this leave Europe’s energy security? 
Germany’s Economics Minister, Michael Glos, has said that Russia’s questionable dependability means that the time has come to explore other energy sources . 
That will not be easy. 
Gas provides nearly a quarter of Europe’s energy, compared to 14% for nuclear power. 
Even if governments rethink their ban on new nuclear plants, accelerate development of windmills and solar panels, and search for new gas supplies, Europe will remain dependent on Russian gas for more than a decade. 
At the same time, as Europe’s largest consumer of Russian gas, Germany has built its hopes for energy security on developing a rich web of economic ties with Russia. 
Former Chancellor Gerhard Schroeder even became chair of a Russian-German consortium to build a new gas pipeline from Russia to Germany. 
But, as the Ukraine episode indicates, pipelines dedicated to a single country may be less reliable than those that run through several countries. 
If Russia is going to throw its weight around, it is better to have allies among those affected. 
The key to energy security is diversity – of pipelines as well as sources of supply. 
Small neighbors without options will suffer, but Europe may not. 
In the end, the next decade will be marked by a delicate balance in which Europe remains dependent on Russian gas, but Russia’s need for export revenues will also make it dependent on Europe. 
The lesson from the Ukraine episode is that while Russia is less of a gas superpower than it would appear, Europe would be wise for to start building greater diversity into the energy relationship. 

The China Debate 
CAMBRIDGE: The growls between China and Taiwan have grabbed the world's attention recently, but China's economy is poised to retake center stage. 
World Bank chief economist, Joseph Stiglitz has called on China to pursue a beggar-thy-neighbor strategy, never mind that China is a trade surplus country, has large reserves, little debt, and grows at more than 7%. 
Is Mr. Stiglitz's devaluation the answer to China's current troubles and is it a good idea for the world economy? 
No. 
Large countries cannot expect to recover economically at the expense of the rest of the world; they need to find ways to boost their own domestic demand. 
Budget deficits and printing money, effective in the short run, provide only limited answers. 
Tung Tsu in the Art of War instructs commanders: "When encircled in deep ground, break out!" 
Good advice for China's leadership today. 
With its huge state enterprise sector and pervasive restrictions on just about anything, China has only one option: radical transformation of its economy. 
Chinese devaluation rumors abound and the most common view is that sometime next year one is inevitable. 
Of course, this won't take place before the 50th anniversary of Mao's revolution this October, but expect it soon afterwards. 
The continuing focus is the lack of growth in China -- it has fallen to "only" 7.1% -- along with deflation, the lack of confidence on the part of households who will feel the impact of the formidable restructuring problems in state enterprises, and the loss of international competitiveness. 
If big budget deficits don't do enough to get growth back to where China's leaders want it, and monetary policy will not do the trick, why not try devaluation? 
China's current account surplus and export growth have, indeed, fallen. 
In part that reflects an aggressive export strategy in Asia's other economies where the collapse of domestic demand brought about export dumping over and above what comes from increased competitiveness. 
But competitiveness is an issue, too. 
All of Asia's economies that suffered in the recent crisis, including Japan, have seen a fall in their dollar price level. 
For Japan this is insignificant. 
But for the other economies the decline in price levels ranges from 15-25%, and to nearly 50% in Indonesia. 
Moreover, inflation rates are not high and hence will not rapidly eliminate this real depreciation. 
Since 1998, with the rebound of Asian currencies and the strong Yen, there has been a significant improvement in China's competitiveness. 
This, however, has not been enough to return to 1997 or 1996 growth levels. 
A rough number for the loss in China's competitiveness in Asia is 10 to 15% -- by no means negligible, but not devastating either. 
Accordingly, the numbers don't get us much further than recognizing that there is a problem, that devaluation is the traditional medicine and the question of whether and when it will happen. 
Even if there is some loss of Chinese competitiveness, devaluation is not the answer. 
Urging large surplus, low debt countries to devalue is an invitation for beggar-thy-neighbor policies 1930s style, for a Chinese devaluation would trigger an outburst of devaluation across Asia, or at the very least the expectation of one. 
Asset prices would drop everywhere, including in Japan, and growth would fall. 
An already far too high dollar would be pushed even higher as Asia seeks to resolve its employment problems by ever-larger trade surpluses. 
Emerging market lending would once again get hit. 
China's accession to the WTO would become even more troubled, as protectionists everywhere get hit by another cheap-Asia wave. 
Clearly, this is not a good direction to go. 
China has been right to use monetary and fiscal policy to stimulate growth. 
As a temporary strategy, this cushions the impact on demand of a more difficult external environment. 
Exchange controls, after all, are most useful when you want to cut interest rates dramatically? 
Low debts are most useful for those who want to run temporary budget deficits. 
Yet these are temporary remedies that cushion the unfavorable external and domestic environment, they go no further than that. 
Something more needs to happen. 
China's problems won't be resolved by a devaluation of 20% or even 40%. 
Much of the trouble is not the loss in competitiveness from the recent devaluation of other Asian economies. 
China is stuck in a much more fundamental way, stuck between inefficient statism and free enterprise. 
China needs to make major moves in the way it organizes economic activity. 
A vast number of people can be employed if only the government stops protecting State enterprises by restrictions on production and internal trade. 
China needs to decentralize by opening up the production system to private initiative. 
Self-employment as well small and medium sized businesses have to be the way out. 
Aggressive lending from a cleaned up banking system with a new credit culture based on picking winners will supplement that strategy, as will business friendly taxation. 
Now is a time for radical moves. 
Opening up China to a major joint enterprise, foreign direct investment, or privatization drive provides a one-time bonus to prosperity over and beyond the supply side effects. 
The proceeds can be divided equally between workers, local authorities, a general tax cut and the central government. 
In a short time, money and self-interested initiative would create a boom in employment and activity because China has an immensely entrepreneurial culture. 
China's mistake has been excessive attachment to existing economic structures which have turned deeply counterproductive and need to be dismantled very fast before the loss in the population's confidence pushes the economy much deeper under water. 
Anyone who believes devaluation is an answer to China's problems misses the point. 
If China's leaders look to devaluation, they will add to their headaches and put Asia at risk. 

The China Question 
President Bush’s recent visit to Asia made little news – by design. 
But that’s because Bush didn’t begin to address the issue that is looming ever larger in the region: the changing face of security in Asia in view of China’s growing economic and military might. 
This summer, for example, China and Russia conducted their first-ever grand-scale joint military exercise. 
This was followed by Russian news reports that China, Russia, and India would conduct trilateral military exercises, named “Indira 2005,” on the same scale before the end of this year. 
In the past, such a combination of countries was almost unthinkable, and these exercises cannot be explained away as simple “one-off” affairs with little resonance. 
Instead, they reflect China’s long-term strategic goal of establishing hegemony across Asia. 
One tool of this ambition is the Shanghai Cooperation Organization (SCO), under which the Sino-Russian exercises took place. 
Established in June 2001, the SCO includes China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan. 
The SCO’s original purpose was to mitigate tensions on the borders of China and the Central Asian countries after the collapse of the Soviet Union and the arrival of the United States military with the war in Afghanistan. 
China regards the SCO as a stage for broadening its influence over a vast region, ranging from the Asia-Pacific to Southwest Asia, the Middle East, East Africa, and the Indian Ocean. 
Indeed, its members include about 45% of the world’s population, and 28% of the landmass ranging across the Eurasian continent. 
China’s active leadership of the SCO has resulted in policies that it favors. 
Gradually, the SCO shifted its focus to fighting Islamic radicals. 
Nowadays, however, the SCO is often used as a forum to campaign against supposed American unilateralism and to provide a united front – especially between China and Russia – against the US with respect to security and arms-reduction issues in the region. 
This includes joint anti-terror training and demands to reduce US forces in the region, particularly from Uzbekistan and Kyrgyzstan. 
The SCO provides China not only with a platform to confront the existing US-led alliance in the Asia-Pacific region, but is increasingly being used to prevent the formation of a US-led network to restrain China’s advance. 
Ultimately, it is feared that the SCO could develop into a military alliance similar to the Warsaw Pact of the Cold War era, with an embryonic “Great China Union” at its core. 
But China’s regional diplomacy goes far beyond the SCO. 
It seizes every opportunity that comes its way, including the Six Party Talks on North Korea’s nuclear ambitions, to emphasize its centrality to the settlement of any and all Asian issues. 
Moreover, it continues to build its “ string of pearls” of military bases at every key point on maritime transportation routes along the “arc of instability” from the Middle East to China’s coast. 
No one seems to know how to respond to China’s diplomatic and military muscle flexing in Asia, for the extent of China’s ambitions remains utterly unclear. 
But, while everyone else ponders China’s motives, its government is acting. 
Indeed, the UK’s premier security think tank, the Institute for International Strategic Studies, recently warned that, while the world focuses on the fight against international terrorism and the unfolding events in the Middle East, China is rapidly expanding its influence from Asia to Africa. 
The “pearls” in Africa include Sudan, Angola, Algeria, Gabon, Namibia, Zambia, Tanzania, Zimbabwe, Uganda, Djibouti, Mali, Central Africa, Liberia, Ethiopia, Mozambique, Sierra Leone, and the Democratic Republic of Congo. 
In each country, China is nurturing special military and commercial relations intended to promote loyalty to Chinese interests. 
As in Asia, there is a pattern at work: growing Chinese influence begets increased support for Chinese policies. 
Of course, it’s a two-way street. 
Whenever complaints come up in the United Nations’ Human Rights Committee, China can count on the support of many African countries that have their own human rights problems. 
Even the selection of Beijing as the site of the 2008 Olympics benefited from “African votes.” 
And China has publicly stated that it will back African nations in potential disputes at the World Trade Organization (WTO) and other international organizations. 
Similarly, many African states now seem to be leaning heavily toward China in its dispute with Taiwan. 
When Japan’s government tried to become a permanent member of the UN Security Council, few African countries backed its bid, despite receiving economic aid for decades. 
China likes to boast of its “peaceful rise.” 
But the rise of Bismarck’s Germany at the end of the nineteenth century was also peaceful – for a while. 
The question is not whether China rises to great-power status peacefully, but whether it intends to remain peaceful when it gets there. 
Just as the world confronted the “German Question” 125 years ago, it is now confronting the “China Question.” 
We need a better answer this time. 

The China Threat, Part Two? 
Lost in the debates about whether the European Union should lift its arms export embargo on China is a much broader and more pressing question: does the Bush administration once again see China as a strategic competitor, as it did in the early days of the Bush presidency, before the war on terror forced Bush to seek cooperation with China’s rulers? 
That Japan has joined the United States in standing alongside Taiwan in opposing an end to the EU’s arms embargo on China suggests that this is so. 
Never before has Japan’s government joined a US administration so closely on the Taiwan issue. 
When the two countries upgraded their alliance relationship in 1996, Japan’s military operational sphere was expanded far from the Japanese main island. 
But the government remained deliberately vague about its responsibilities, and refused to clarify the geographic boundaries of Japan Defense Force activities. 
Nearly ten years later, Japan is ready for strategic clarity. 
Shinzo Abe, the acting secretary-general of Japan’s ruling Liberal Democratic Party and a leading candidate to succeed Junichiro Koizumi as Japanese prime minister next year, put it bluntly: it would be wrong for Japan to send a signal to China that the US and Japan will watch and tolerate a Chinese military invasion of Taiwan. 
Monitoring this development and tracking its context, China’s government appears deeply disturbed. 
China’s foreign ministry condemned the US-Japanese move as interference in Chinese internal affairs and expressed resolute opposition to Abe’s statement. 
The Chinese regard Japan’s seizure of Taiwan in 1895 and the ensuing 50-year occupation as one of the most humiliating events in the country’s modern history. 
In particular, China’s government has resented any Japanese involvement in Taiwan since 1972, when Japan severed diplomatic ties with Taiwan’s government and recognized the communist regime. 
But in recent years, pro-Taiwan groups and politicians in Japan have been gaining momentum. 
For example, despite Chinese protests, Japan hosted a birthday reception for the Emperor in Taipei in 2003. 
Last year, Japan issued a visa to Taiwan’s former president, Lee Teng-hui, a man who explicitly advocates a US-Japan-Taiwan alliance against China. 
Japan’s growing coziness with Taiwan has been accompanied by worsening political relations with China. 
Despite the fact that China surpassed the US to become Japan’s largest trading partner last year, the top leaders of the two countries have not visited each other’s capitals since 2001. 
Japanese Prime Minister Junichiro Koizumi has insisted on paying an annual visit to the Yasukuni shrine, where Japan’s past aggressive wars are glorified, and where war criminals are among the buried, behavior that China’s government considers unacceptable. 
Tensions are also running high in the East China Sea, where the two countries dispute sovereignty over a number of islands. 
China is exploring gas fields close to the border as defined by Japan. 
A brief incursion by a Chinese submarine into Japanese territorial waters a few months ago caused further alarm in Tokyo. 
In response, a new Japanese defense review identified China as a threat. 
Japan’s Self Defense Forces outlined three scenarios of a potential Chinese invasion and are making preparations accordingly, while the Japanese government announced last month that it had formally taken control of an island chain over which China, Taiwan, and Japan all claim sovereignty. 
Moreover, America’s military is closely coordinating with Japan, redeploying its troops and strengthening its command and combat capabilities near Taiwan. 
So, barely two months into the second Bush administration, alarm bells about the China threat seem to be ringing again. 
Key US foreign policymakers now openly contradict conclusions reached last year by the Independent Task Force on Chinese Military Power headed by former defense secretary Harold Brown and retired admiral Joseph Prueher. 
That panel found that the balance of power between the US and China, both globally and in Asia, is likely to remain decisively in America’s favor beyond the next 20 years. 
More significantly, with the latest statement over Taiwan, the US and Japan are poised to use their joint military forces to deter, deny, and ultimately defeat potential Chinese military actions across the Taiwan Strait. 
What counter-measures China will deploy are yet to be discerned. 
Europe, however, needs to decide if it is ready to sign on with the US, as Japan has now clearly done, to contain China’s strategic and military ambitions. 


The Chinese Economy’s Secret Recipe 
BEIJING – China’s GDP growth this year may approach 10%. 
While some countries are still dealing with economic crisis or its aftermath, China’s challenge is – once again – how to manage a boom. 
Thanks to decisive policy moves to pre-empt a housing bubble, the real-estate market has stabilized, and further corrections are expected soon. 
This is good news for China’s economy, but disappointing, perhaps, to those who assumed that the government would allow the bubble to grow bigger and bigger, eventually precipitating a crash. 
Whether or not the housing correction will hit overall growth depends on how one defines “hit.” 
Lower asset prices may slow total investment growth and GDP, but if the slowdown is (supposedly) from 11% to 9%, China will avoid economic over-heating yet still enjoy sustainable high growth. 
Indeed, for China, the current annualized growth rate of 37% in housing investment is very negative. 
Ideally, it would slow to, say, 27% this year! 
China has sustained rapid economic growth for 30 years without significant fluctuations or interruption – so far. 
Excluding the 1989-1990 slowdown that followed the Tiananmen crisis, average annual growth over this period was 9.45%, with a peak of 14.2% in 1994 and 2007, and a nadir of 7.6% in 1999. 
While most major economies in their early stages of growth suffered crises, China’s story seems abnormal (or accidental), and has elicited periodic predictions of an “upcoming crash.” 
All such predictions have proved wrong, but the longer the story lasts, the more people forecast a bad end. 
For me, there is nothing more abnormal about China’s unbroken pattern of growth than effective macroeconomic intervention in boom times. 
To be sure, both economic development and institutional reforms may cause instability. 
Indeed, the type of central government inherited from the old planned economy, with its over-stretched growth plans, causes fluctuations, and contributed significantly to instability in the early 1980’s. 
But the central government must be responsible for inflation in times of overheating, lest a bursting bubble fuel unemployment. 
Local governments and state-owned enterprises do not necessarily have those concerns. 
They want high GDP growth, without worrying much about the macroeconomic consequences. 
They want to borrow as much as possible to finance ambitious investment projects, without worrying much about either repayment or inflation. 
Indeed, the main cause of overheating in the early 1990’s was over-borrowing by local governments. 
Inflation soared to 21% in 1994 – its highest level over the past 30 years – and a great deal of local debt ended up as non-performing loans, which amounted to 40% of total credits in the state banking sector in the mid-1990’s. This source of vulnerability has become less important, owing to tight restrictions imposed since the 1990’s on local governments’ borrowing capacity. 
Now, however, the so-called “animal spirits” of China’s first generation of entrepreneurs have become another source of overheating risk. 
The economy has been booming, income has been rising, and markets have been expanding: all this creates high potential for enterprises to grow; all want to seize new opportunities, and every investor want to get rich fast. 
They have been successful and, so far, have not experienced bad times. 
So they invest and speculate fiercely without much consideration of risk. 
The relatively high inflation of the early 1990’s was a warning to central government policymakers about the macroeconomic risks posed by fast growth. 
The bubble bursts in Japan’s economy in the early 1990’s, and the Southeast Asian economies later in the decade, provided a neighborly lesson to stop believing that bubbles never burst. 
Since then, the central government’s policy stance has been to put brakes on the economy whenever there is a tendency toward over-heating. 
Stringent measures were implemented in the early 1990’s to reduce the money supply and stop over-investment, thereby heading off hyperinflation. 
In the recent cycle, the authorities began cooling down the economy as early as 2004, when China had just emerged from the downturn caused by the SARS scare in 2003. 
In late 2007, when GDP growth hit 13%, the government adopted more restrictive anti-bubble policies in industries (steel, for example) and asset markets (real estate), which set the stage for an early correction. 
Economic theory holds that all crises are caused by bubbles or over-heating, so if you can manage to prevent bubbles, you can prevent crises. 
The most important thing for “ironing out cycles” is not the stimulus policy implemented after a crash has already occurred, but to be proactive in boom times and stop bubbles in their early stages. 
I am not quite sure whether all Chinese policymakers are good students of modern economics. 
But it seems that what they have been doing in practice happened to be better than what their counterparts in some other countries were doing – a lot on “de-regulation,” but too little on cooling things down when the economy was booming and bubbles were forming. 
The problem for the world economy is that everybody remembered Keynes’s lesson about the need for countercyclical policies only when the crisis erupted, after demanding to be left alone – with no symmetric policy intervention – during the preceding boom. 
But managing the boom is more important, because it addresses what causes crises in the first place. 
In a sense, what China has been doing seems to me to be the creation of a true “Keynesian world”: more private business and freer price competition at the micro level, and active countercyclical policy intervention at the macro level. 
There may be other factors that could slow down or interrupt China’s growth. 
I only hope that policymakers’ vigilance will prevail (and be improved upon), enabling China’s high-growth story to continue for another 10, 20, or 30 years. 

The Chinese Mirror 
TOKYO – The closing decade of the twentieth century offered a crystal ball for anyone peering into the future of the Asia-Pacific region. 
Japan’s economy, once the region’s leader, was “lost” after its asset bubble burst, whereas China overcame the economic stagnation that followed the Tiananmen Square crisis of 1989 to achieve its current path of strong growth. 
The debate raging 10 years ago about China’s rapid growth – whether it represents a danger or an opportunity – has now settled into broad agreement that wider regional development would be impossible without it. 
Further geo-political implications for the region and the world follow from three key changes in China. 
The first concerns the pattern of Chinese economic growth, which so far has been achieved mainly by rapid increases in factor inputs – labor, capital, and energy. 
But recent research suggests that about one-third of China’s economic growth comes from technological progress, or from the increase in total factor productivity. 
In other words, China’s growth pattern is becoming similar to that of industrialized economies, suggesting that growth will be increasingly balanced. 
The second transformation is the substantial appreciation of the renminbi that seems inevitable in the coming years. 
Today, given the importance of exports to China’s economy, its government is reluctant to permit a major revaluation, despite strong pressure by foreign governments to allow the renminbi to appreciate in line with the country’s huge trade surplus. 
But Chinese officials know that renminbi appreciation is also in China’s interest, as they seek to dampen inflationary pressures. 
China’s government therefore appears ready to allow the renminbi to appreciate, the question being how fast. 
From 2003-2005, long before the collapse of Lehman Brothers, the renminbi appreciated by 20%. 
In light of China’s rapid economic growth and the renminbi’s growing strength, Chinese GDP (based on the market dollar rate) will likely exceed that of the US much earlier than expected, possibly in 10-15 years. 
And, when measured in terms of purchasing power parity, China’s GDP will reach that of the US around 2015, thus changing the world’s balance of economic power. 
The third transformation is demographic: the fallout from China’s official one-child policy, which will cause the working-age population to start declining in the mid-2010’s. 
This will cause economic growth to slacken, complicating effective management of China’s domestic problems, which range from deep income disparities to the lack of political institutions capable of channeling popular grievances and demands. 
In these circumstances, the role of the country’s political leadership will become much more important. 
Although the current president, Hu Jintao, is due to step down in 2012, he will continue to hold a degree of power through the military, so the succession of power to the next generation will not be completed until around 2015. 
Although Chinese GDP is large and growing, its per capita income is still low, and its economic policies differ sharply from those prevailing in the region’s OECD countries. 
The geopolitical landscape that emerges around the middle of this decade will thus reflect significant changes elsewhere in Asia as well. 
Even so, Chinese policy choices significantly influence other Asian countries, with China’s “state capitalist” economic model now being mimicked elsewhere in the region. 
Of course, Japan, Korea, and Singapore had similar policy models in the past (though they later adapted them in line with their GDP growth). 
Now, however, these countries are once again espousing forms of state capitalism and a return to industrial policy (encouraged as well by the 2008 global financial meltdown, which gave a new rationale for a return to government intervention). 
In Japan, postal services that had been privatized are to be re-nationalized, and the role of government finance is being strengthened. 
Japan Air Lines, which was almost bankrupt, was rescued by a government bailout, a device that seems to be increasingly common. 
Similarly, while many Asian countries already have sovereign wealth funds, now South Korea’s government is establishing a new type of fund to support the construction sector’s export activities. 
In short, closer business-government relationships are being re-established throughout the Asian-Pacific region. 
Countries are especially seeking to strengthen their infrastructure exports through a combination of public- and private-sector activity. 
But that means that international regulations will be needed to limit government intervention, or at least to define the circumstances in which it will be deemed acceptable. 
To achieve this, the United States and China must reconcile their very different views of how a market economy should operate. 
As the world begins to grapple with the creation of a new economic order, the moderating role of a third party in conflicts between the US and China will be extremely important. 
It is a role that will fall to Japan for Asian-Pacific issues, but to European countries on global issues. 
If Europe can successfully manage this role, US-China tensions can be overcome, offering the entire world the opportunity to harness and benefit from the strength of its two largest economies. 

The Chinese Road to Pyongyang 
NEW YORK – Kim Jong Il’s visit to China this week was a gentle reminder that the road to Pyongyang leads through Beijing. 
China is the only power that has remained engaged with North Korea, through many ups and downs, whereas Russia, Japan, the United States, and South Korea have all come and gone. 
By keeping a door open to North Korea’s leaders, China is making a substantial contribution to regional peace. 
This is bold diplomacy – for which China is given little credit – at a highly sensitive moment. 
Nevertheless, China’s “leverage” over North Korea is in part illusory. 
Kim’s visit should be evaluated in terms of Chinese-North Korean relations as they are, rather than as others might wish them to be. 
Doing so reveals the role left to America and South Korea to engage the North in order to revive the denuclearization process and repair inter-Korean relations. 
Three widespread misconceptions distorted the coverage of Kim’s visit to China. 
The first misconception is that he desperately sought Chinese aid to prop up his regime in the face of seething discontent after botched currency reforms. 
But, although North Korea’s latest economic travails have shaken the leadership, the regime has weathered worse. 
And the economic relationship between China and North Korea is driven as much by material interests and economic factors as it is by concerns over geopolitical stability. 
Indeed, trade overshadows aid, and China – led by its border provinces – is now North Korea’s main trading partner and source of foreign investment. 
Chinese Premier Wen Jiabao announced a major trade package during his trip to Pyongyang last November, perhaps on the order of $10 billion. 
North Korea recently established the State Development Bank and Taepung International Investment Group (headed by a Korean-Chinese businessman), charged with attracting foreign investment. 
There has also been renewed interest in developing the port city of Rason near the China-Russia-North Korea border as a special economic zone. 
Although North Korea has doggedly stood behind its outmoded model of state control and central planning, Kim’s visits to the boom cities of Dalian and Tianjin reflect his tentative but ongoing interest in alternative ways to achieve “strength and prosperity” for his country. 
The second misperception is that Chinese President Hu Jintao offered Kim a “big package” of aid in exchange for returning to the Six Party Talks on North Korea’s nuclear program. 
Hu no doubt looked for ways to resuscitate the talks, but not by buying off Kim with aid. 
Rather, Hu would have determined the level of Kim’s readiness to resume, what preconditions and incentives are at play, and what room for maneuver exists, given the position of the other parties. 
Kim apparently reiterated his government’s willingness to return to the talks, but the question is what kind of assurances he was able to give Hu in order to persuade a wary US and hostile South Korea that he is really ready to deal. 
Moreover, Kim, too, needs assurances from Hu – not that Chinese aid is coming, but that the Americans, South Koreans, and Japanese are prepared to give and take. 
The final misconception is that Hu might have demanded an explanation from Kim as to the causes of the fatal sinking of a South Korean vessel in late March. 
Hu, having recently met with South Korean President Lee Myung-bak, may have discussed the issue with Kim, as well as the intense pressure Lee is under to respond, if not retaliate. 
But the Chinese do not assume that North Korea is guilty. 
Even in the face of strong evidence of North Korean wrongdoing, the Chinese are inclined to view the incident in the context of inter-Korean relations, and do not want to let it determine the fate of the Six Party Talks. 
Rather than criticize China, US President Barack Obama and Lee should now reach out to the Chinese for thorough debriefings about what was learned from Kim’s visit – on security as well as economic issues. 
China should continue to lead the effort to encourage reform and opening of the North Korean economy, with help from international financial institutions. 
The US, moreover, should actively seek a path back to the Six Party Talks, resisting both the fatalistic idea that North Korea can never be persuaded to roll back its nuclear program and the dangerous notion of simply waiting for the North Korean regime to come begging, if not collapse. 
South Korea undoubtedly faces the biggest dilemma, and the way forward will have to await the conclusions of the investigation into the sinking of its warship and the deaths of its sailors. 
But one way or another, President Lee needs to find a way to get inter-Korean relations back on a peaceful track. 

 

The Climate Change Revolution 
The world is in the midst of a great political transformation, in which climate change has moved to the center of national and global politics. 
For politicians in persistent denial about the need act, including US President George W. Bush, Australian Prime Minister John Howard, and Canadian Prime Minister Stephen Harper, there is no longer any place to hide. 
The science is clear, manmade changes in climate are being felt, and the electorate’s demand for action is growing. 
Though unlikely just a few months ago, a strong global agreement by 2010, one that will set a path for action for decades to come, now stands a good chance of being implemented. 
Political leaders in countries that produce coal, oil, and gas – like the US, Australia, and Canada – have pretended that climate change is a mere hypothesis. 
For several years, the Bush administration tried to hide the facts from the public, deleting references to manmade climate from government documents and even trying to suppress statements by leading government scientists. 
Until recently, Exxon Mobil and other companies paid lobbyists to try to distort the public debate. 
Yet truth has triumphed over political maneuvers. 
The climate itself is sending a powerful and often devastating message. 
Hurricane Katrina made the US public aware that global warming would likely raise the intensity of destructive storms. 
Australia’s great drought this past year has similarly made a mockery of Howard’s dismissive attitude toward climate change. 
Scientists themselves have operated with great seriousness of purpose in educating the public. 
We can thank the United Nations for that. 
The UN sponsors the Intergovernmental Panel on Climate Change (IPCC), a worldwide body of hundreds of climate scientists who report every few years to the public on the science of climate change. 
This year, the IPCC is releasing its fourth round of reports, starting with the one issued early in February. 
That report was unequivocal: there is a powerful scientific consensus that human activity, mainly the burning of fossil fuels (coal, oil, gas), as well as deforestation and other land uses (such as growing paddy rice), leads to massive emissions of carbon dioxide into the air. 
This is causing climate change, which is accelerating and poses serious risks to the planet. 
The single biggest threat comes from the production and consumption of energy for electricity, transport, and heating and cooling buildings. 
But the world’s scientists and engineers, as well as global technology leaders such as General Electric, are also sending a clear message: we can solve the problem at modest cost if we put our best thinking and action into real solutions. 
By shifting to alternative energy sources, economizing on energy use, and capturing and safely storing the carbon dioxide produced by fossil fuels, global society can limit its emissions of carbon dioxide to prudent levels at an estimated cost of under 1% of global income. 
The changeover to a sustainable energy system will not come quickly, and will require new kinds of electrical power plants, new kinds of automobiles, and “green buildings,” which economize on energy use. 
The process will take decades, but we must start now and act on a global basis, using carbon taxes and emission permits to create market-based incentives for companies and individuals to make the necessary changes. 
Those incentives will come at modest cost and huge benefit, and they can be designed to protect the poor and shift the climate-change burden to those who can afford it. 
A reasonable timetable is possible. 
By the end of 2007, all of the world’s governments should begin negotiations on a climate-change system for the years after 2012, when the current Kyoto Protocol expires. 
Basic principles should be established during 2008, and by 2009, the world community, including the two largest emitters of carbon dioxide, the US and China, should be ready to make a serious deal, which should be concluded by 2010 and ratified in time to replace the Kyoto Protocol. 
The Kyoto Protocol was the first attempt at such a system, but it applied only to rich countries and set only modest objectives. 
The richest country and biggest contributor to global climate change, the US, didn’t even sign. 
Neither did Australia. 
Canada signed but has failed to act. 
Nor did huge energy users like China and India, which must be part of any meaningful solution, face serious responsibilities under the Kyoto agreement. 
All of that will have to change. 
All countries will have to shoulder their responsibilities to the rest of the world and to future generations. 
There is now a way for individuals and companies to make their own voices heard. 
The Earth Institute at Columbia University, which I direct, hosted a Global Roundtable of leading businesses, environmental groups, and other international organizations to reach a consensus to help inform the upcoming negotiations. 
The Roundtable produced an important Statement of Principles and a longer overall statement that has been signed by many of the world’s largest businesses, including those based in the US, Europe, Canada, China, and India. 
Many of the world’s leading scientists signed, too. 
Global climate change requires global decisions, and initiatives like the Roundtable Statement show that we can find areas of agreement for powerful action. 
It’s time for the world’s political holdouts to join that effort. 

The Climate Imperative 
NEW DELHI – Today, international action on climate change is urgent and essential. 
Indeed, there can no longer be any debate about the need to act, because the Intergovernmental Panel on Climate Change (IPCC), of which I am chairman, has established climate change as an unequivocal reality beyond scientific doubt. 
For instance, changes are taking place in precipitation patterns, with a trend toward higher precipitation levels in the world’s upper latitudes and lower precipitation in some sub-tropical and tropical regions, as well as in the Mediterranean area. 
The number of extreme precipitation events is also increasing – and are increasingly widespread. 
Moreover, the frequency and intensity of heat waves, floods, and droughts are on the rise. 
This change in the amount and pattern of rainfall has serious implications for many economic activities, as well as for countries’ preparedness to handle emergencies such as large-scale coastal flooding or heavy snowfall. 
Some parts of the world are more vulnerable than others to these changes. 
The Arctic region, in particular, has been warming at twice the rate of the rest of the globe. 
Coral reefs, mega-deltas (which include cities like Shanghai, Kolkata, and Dhaka), and small island states are also extremely vulnerable to rising sea levels. 
Other negative effects of climate change include possible reductions in crop yields. 
In some African countries, for example, yields could decline by as much as 50% by 2020. 
Climate change would also lead to increased water stress, which by 2020 could affect 75-250 million people in Africa alone. 
Overall, temperature increases are projected to increase by the year 2100 within a range of 1.1 to 6.4˚C. In order to focus on this set of outcomes, the IPCC has come up with a best estimate at the lower end of this range of 1.8˚C, and 4˚C at the upper end. Even at the lower estimate, the consequences of climate change could be severe in several parts of the world, including an increase in water stress, serious effects on ecosystems and food security, and threats to life and property as a result of coastal flooding. 
There also may be serious direct consequences for human health if climate change is not checked, particularly increased morbidity and mortality as a result of heat waves, floods, and droughts. 
Moreover, the distribution of some diseases would change, making human populations more vulnerable. 
Because the impact of climate change is global, it is essential that the world as a whole take specific measures to adapt. 
But it is already clear that the capacity of some communities to adapt will quickly be exceeded if climate change goes unmitigated. 
To help these most vulnerable communities, it is essential for the world to devise a plan of action to limit the emission of greenhouse gases (GHGs). 
Several scenarios have been assessed by the IPCC, and one that would limit future temperature increase to between 2.0-2.4˚C would require that emissions peak no later than 2015, and decline thereafter. 
The rate of decline would then determine the extent to which the worst effects of climate change can be avoided. 
The IPCC also found that the cost of such a strict effort at mitigation would not exceed 3% of global GDP in 2030. 
Moreover, there are enormous co-benefits to mitigation: lower emissions of GHGs would be accompanied by lower air pollution and increased energy security, agricultural output, and employment. 
If these co-benefits were taken fully into account, that price tag of 3% of GDP in 2030 would be substantially lower, perhaps even negative. 
The world could actually enhance economic output and welfare by pursuing a path of mitigation. 
The need for international action, therefore, stems from two important observations arising out of the IPCC’s work. 
First, if we do not mitigate emissions of GHGs, the negative effects of climate change will be difficult to reverse, implying great hardship and possibly danger to mankind and other species. 
Second, the benefits of mitigating emissions of GHGs are so overwhelming that this, combined with the prospect of the harm resulting from inaction, makes it imperative for the world to devise an international response and a plan of action. 
Given the challenge facing us, the magnitude and nature of which were clearly brought out by the IPCC, the Copenhagen Conference later this year must produce a multi-lateral agreement that deals adequately with climate change. 

The Climate of Security 
CAMBRIDGE – While George W. Bush has begun to acknowledge the risks of global climate change, his administration failed to lead on the issue for eight years. 
That may change after the 2008 American election. 
Both presidential candidates, Barack Obama and John McCain, promise to take climate change more seriously. 
Emissions of carbon dioxide, a greenhouse gas that accumulates in the atmosphere and is a major cause of rising temperatures, is a byproduct of a wide range of normal economic activities. 
And, because CO2 emissions are what economists call a “negative externality” – emitters do not bear the full cost of the damage that they cause – there is little incentive to reduce them. 
Smoking is a similar example: non-smokers must bear part of the increased healthcare costs that smoking imposes. 
But, unlike smoking, which can be discouraged through taxes and regulations, there is no global government to regulate excessive CO2 emissions, and countries are tempted to leave remedies to others. 
Moreover, some countries, such as Russia, which could benefit economically from a warmer Siberia, have different incentives from countries like Bangladesh, a poor country that is likely to be flooded by rising sea levels that will accompany global warming. 
Some scientists predict that climate change will cause severe disruptions, such as weather-related natural disasters, droughts, and famines, which may lead to enormous loss of life. 
Global warming between 1.6 and 2.8 degrees Celsius over the next three decades would raise sea levels by half a meter. 
That is a conservative estimate, and if warming proceeds more rapidly because of the loss of the reflectivity of Arctic ice and the release of CO2 and methane from thawing permafrost, rising sea levels could lead to the submersion of low-lying islands and hence threaten the survival of entire nations. 
At the same time, in Africa and Central Asia, water will become more scarce, and drought will reduce food supplies. 
External shocks brought about by climate change will directly affect advanced economies. 
If rising sea levels flood the Maldive Islands, the effects of climate change would be as devastating as a nuclear bomb, and even for the United States and Europe, the damage to, say, Florida or the Netherlands could be just as costly. 
But such external shocks may also have indirect effects by aggravating the disparities between developed and developing countries and creating additional incentives for mass migration to rich, less affected, and more adaptable regions. 
In addition, climate change will put stress on weak governments in poor countries and may lead to an increase in the number of failed states and become an indirect source of international conflict. 
United Nations Secretary General Ban Ki Moon argued in 2007 that the Darfur conflict “began as an ecological crisis, arising in part from climate change.” 
Such direct and indirect effects from human activity, while not malevolent in intention like terrorism, argue for a broadening of our concept of security and the adoption of new policies. 
There are two basic instruments to reduce carbon emissions and thus mitigate global warming. 
Technological innovation and increased energy efficiency have considerable potential. 
For example, carbon sequestration allows the capture and storage of carbon in underground geological formations and deep oceans. 
Thus, less CO2 gets released into the atmosphere. 
But technological innovation alone is unlikely to be sufficient. 
The other basic instrument includes economic incentives and disincentives. 
The so-called emissions trading system aims to control carbon emissions by allocating tradable permits. 
A carbon tax has also been proposed as a method to reduce consumption of fossil fuels. 
Not everyone will embrace such instruments. 
In 2007, China surpassed the US as the world’s leading CO2 emitter. 
But China points out that on a per capita basis, US emissions are five times higher. 
China, India, and other countries argue that economic development in rich countries caused most of the existing problem, and it is only fair that developing countries should not have to reduce their emissions until they reach the rich countries’ levels of emissions. 
But this is a formula for global disaster. 
The world’s climate is affected by total emissions, regardless of their origin. 
China uses coal, a particularly CO2-intensive fuel, for 70% of its commercial energy supply, while coal accounts for a third of America’s total energy. 
China is now estimated to build two new coal-fired power plants each week. 
Coal is cheap and widely available in China, which is important as the country scrambles for energy resources to keep its many energy-intensive industries running. 
Given that the bombs, bullets, and embargos of traditional security policy are irrelevant, what can the US and other rich countries do about this security threat? 
A 2007 report from the International Energy Agency (created after the 1973 oil crisis to provide policy advice to industrial countries) urged a cooperative approach to helping China and India become more energy efficient. 
In other words, to prevent dangerous climate change and promote their own security, the US and other rich countries may have to forge a partnership with China, India, and others to develop creative ideas, technologies, and policies. 
Climate change is increasingly recognized as one of the transnational challenges with the greatest environmental, economic, and security implications, and a powerful global environmental movement constantly highlights its importance. 
The early statements from McCain and Obama are encouraging, but finding international agreement will remain a challenge no matter who is elected. 

The Closing of America? 
CAMBRIDGE – The United States is locked in debate over immigration. 
The state of Arizona recently enacted legislation that encourages local police to check the immigration status of people who were stopped for other reasons – and requires immigrants to produce proof of their legal status on demand. 
The Obama administration has criticized the law, church groups have protested that it is discriminatory, and a federal court has issued a temporary injunction, ruling that immigration is a federal issue. 
Regardless of the outcome of the legal case, the Arizona law has proven to be popular in other states, and represents the rising importance of immigration as a political issue. 
If the US turned inward and seriously curtailed immigration, there would be serious consequences for America’s position in the world. 
With its current levels of immigration, America is one of the few developed countries that may avoid demographic decline and keep its share of world population, but this might change if reactions to terrorist events or public xenophobia closed the borders. 
Fears over the effect of immigration on national values and on a coherent sense of American identity have existed since the nation’s early years. 
The nineteenth-century “Know Nothing” Party was built upon opposition to immigrants, particularly the Irish. 
Asians were singled out for exclusion from 1882 onward, and, with the Immigration Restriction Act of 1924, the influx of immigrants slowed for four decades. 
During the twentieth century, the nation recorded its highest percentage of foreign-born residents in 1910 – 14.7% of the population. 
Today, 11.7% of US residents are foreign born. 
Despite being a nation of immigrants, more Americans are skeptical about immigration than are sympathetic to it. 
Depending on the poll, either a plurality or majority wants fewer immigrants. 
The recession exacerbated such views, and in 2009 half of Americans favored reducing legal immigration, up from 39% in 2008. 
Both the numbers and origins of the new immigrants have caused concerns about immigration’s effects on American culture. 
Data from the 2000 census show a soaring Hispanic population, owing largely to waves of new immigrants, legal and illegal. 
Indeed, demographers predict that in 2050 non-Hispanic whites will be only a slim majority of US residents. 
Hispanics will be 25%, African-Americans 14%, and Asians 8%. 
Most of the evidence suggests that the latest immigrants are assimilating at least as quickly as their predecessors. 
The need to communicate effectively, together with market forces, produces a powerful incentive to master English and accept a degree of assimilation. 
Modern media also help new immigrants to know more about their new country beforehand than immigrants did a century ago. 
While too rapid a rate of immigration can cause social problems, proponents argue that, over the long term, immigration strengthens the power of the US. 
Indeed, 83 countries and territories, including most developed countries, currently have fertility rates below the level necessary to maintain a constant population level. 
To maintain its current population size, Japan, for example, would have to accept 350,000 newcomers a year for the next 50 years, which is difficult for a culture that has historically been hostile to immigration. 
By contrast, despite Americans’ ambivalence, the US remains a country of immigration. 
The Census Bureau projects that the American population will grow 49% over the next four decades. 
Today the US is the world’s third most populous country; 50 years from now it is still likely to be third (after only China and India). 
Not only is immigration relevant to economic power, but, given that nearly all developed countries are aging and face a burden of providing for older generations, it could help reduce the sharpness of the policy problem. 
In addition, even though studies suggest that the short-term, directly measurable economic benefits at the national level are relatively small, and unskilled workers may suffer from competition, skilled immigrants can be important to particular economic sectors. 
A 1% increase in the number of immigrant college graduates leads to a 6% increase in patents per capita. 
In 1998, Chinese- and Indian-born engineers were running one-quarter of Silicon Valley’s high-technology businesses, which accounted for $17.8 billion in sales, and in 2005, foreign-born immigrants had helped start one in four American technology start-ups over the previous decade. 
Equally important are immigration’s benefits for America’s soft power. 
The fact that people want to come to the US, together with immigrants’ upward mobility, enhances the country’s appeal. 
America is a magnet, and many people can envisage themselves as Americans, because many successful Americans look like people in other countries. 
Moreover, connections between immigrants and their families and friends back home help to convey accurate and positive information about the US. 
In addition, the presence of multiple cultures creates avenues of connection with other countries, and helps create an important broadening of American attitudes in an era of globalization. 
Rather than diluting hard and soft power, immigration enhances both. 
One senior Asian statesman, an acute long-time observer of both the US and China, concludes that China will not surpass the US as the leading power of the twenty-first century because of America’s ability to attract the best and brightest from the rest of the world and meld them into a diverse culture of creativity. 
China has a larger population to recruit from domestically, but in his view, its Sino-centric culture will make it less creative than the US. 
While one can understand the resistance of ordinary American citizens to competition from foreign immigrants during a period of high unemployment, it would be ironic if the current debate were to lead to policies that cut the US off from one of it unique sources of strength. 


The Coming Age of Financial Automation 
PRINCETON – Public debate, especially during economic crises, focuses on growth statistics, which become a kind of fever thermometer. 
But the readings are unreliable and change constantly, prompting statisticians to think about different ways of measuring an economy’s very different products. 
In particular, newly revised data have called into question the economic scope and role of financial services. 
At the end of July, the United States Bureau of Economic Analysis released revisions to American GDP data going back to 1929. The main consequence was to demonstrate that GDP is more volatile than had previously been assumed. 
The economy grew faster in good phases, and slumped more sharply in downturns. 
The annual growth rate from 1997 to 2008 was 2.8% rather than 2.7%. 
In 2008, the figure fell to 0.4%, rather than 1.1%, as previously assumed. 
The collapse in GDP in the first quarter of 2009 was also more substantial than previously thought. 
The logic underlying these changes is more interesting than the relatively small revisions of growth rates that resulted. 
One key intention was to allow for more honest accounting. 
In particular, spending on financial services was treated in a different way and shown more transparently. 
For example, medical expenditure is lower in the new calculation, because the costs that are attributable to insurance rather than to provision of medical services are now shown as spending on “financial services and insurance.” 
The new calculation makes it clearer than before how dramatically financial services expanded over the past decade. 
Spending on financial services roughly doubled between 1998 and 2007, now amounting to 8.2% of personal consumption – a figure that includes the income that is transferred from consumers to the now notorious bonuses of bankers and traders. 
The response to the current crisis is not likely to be a halt to financial innovation, but it is likely to cause rationalization and cost-cutting in the provision of financial services. 
There are clear historical precedents for reining in over-exuberant and over-innovative sectors. 
In the nineteenth century, an orgy of railroad building created duplicating lines, before severe cyclical downturns purged many of the companies, leaving a leaner and cheaper network. 
Similarly, in the early twentieth century, many entrepreneurs moved into automobile production. 
Only a handful of the most efficient producers survived the collapse of the initial boom. 
Many countries, including the US, have banking systems that are still overly complex. 
It is also now clear that financial products themselves were overly complex and that most if not all customers did not know what they were buying. 
Traditionally, banks were “black boxes,” in which operations were concealed from customers. 
The bank knew more about where its money went than its depositors and creditors did. 
Investment banks gave advice to corporations on mergers and acquisitions, but also issued securities and conducted their own proprietary trading. 
While so-called “Chinese walls” separated these activities, in practice market participants assumed some degree of leakage, and expected better returns from dealing with big banks, with their multifaceted, international operations. 
Thus, each counterparty in these transactions assumed that they were getting something special from the accumulated insights that the bank had acquired from its other branches of business, insights that derived fundamentally from permanent conflicts of interest. 
The genius of securitization, the great financial innovation of the 1990’s, was that it allowed investors – in theory – to bypass non-transparent black-box banks. 
Securities took the place of traditional bank credits. 
But banks used the innovation to place transparent securities in highly opaque “investment vehicles.” 
Banks’ black-box character survived, and became an even greater source of vulnerability. 
After all, black boxes are most lethal when they conceal a malevolent or fraudulent human being. 
It is possible to imagine that in the longer term finance will become less prone to problems of asymmetrical information, which demand a high level of confidence on the part of depositors and investors in order to reduce the risk of panic and crisis. 
But finance will no longer be our master only if there is no need for “insiders,” and that requires both transparency and the spread of financial knowledge. 
In the future, conflicts of interest might be handled by mathematical algorithms that authorize or prohibit transactions. 
In the same way that automated payment mechanisms have rendered trading floors mostly obsolete, many banking functions can and will become simply an interaction of software systems. 
As in previous transitional phases, when innovation leads to cost-saving, individuals who work in the financial industry will try to produce convincing arguments about why their business depends on the human touch. 
Harvesting machines were alleged to lower the quality of the grain collected, because it was no longer subject to immediate inspection by the human eye. 
Likewise, advanced automobile plants are now largely composed of robots, and their products are safer than ever. 
A personal banker is a status symbol, but nothing more, and certainly not a necessity. 
The “Monday morning car” – caused by an early and error-prone production run of a new model – is rapidly becoming a thing of the past. 
Its equivalent in the financial world should meet the same fate. 

The Coming Age of Interest 
One swallow does not make a summer, and one month of normal job growth, and rising prices in the United States does not mean that the Federal Reserve no longer fears economic malaise and deflation. 
But the time will come when world interest rates begin to rise, as central bankers prepare to resist the upward creep of inflation. 
Whenever that moment arrives - whether this fall, in 2005 or 2006, or in 2007 - America and the global economy will face financial vulnerabilities that reflect the success of the past three years of monetary stimulation in stemming declines in production and moderating unemployment. 
Short-term interest rates are astonishingly low: only 2% in the euro zone, just 1% in the US, and zero in Japan. 
Expansionary monetary policy has been successful, but only by pushing interest rates to historic lows - and by convincing investors that borrowing costs will remain at their current levels for a long time. 
The main result of monetary stimulus has been to boost asset prices: anything that pays a yield, a dividend, or a rent becomes much more attractive - and hence much more valuable in money terms - when interest rates are very low and expected to stay very low. 
This explains the large gaps between current prices for real estate in the US, equities in New York, London, and Frankfurt, and long-term bonds everywhere and what one would conventionally think their fundamental values should be. 
So what will happen when central banks start raising interest rates? 
In 1994, rising short-term rates caused increases in long-term rates - and declines in long-term bond prices - that were at least double what standard models at the time were predicting. 
Moreover, interest rates in the world's peripheral, developing economies rose far more than rates in the advanced industrial core. 
Thus, the first danger to worry about for 2005 and beyond - when world interest rates will most likely rise - is another wave of emerging-market financial crises. 
For countries like Mexico, Brazil, Turkey, Argentina, Korea, Malaysia, and Thailand, the record of the 1990's demonstrates that interest-rate spreads can widen and capital flows reverse remarkably rapidly, regardless of how favorably IMF officials and analyses by major banks view a country's policies. 
Emerging-market interest-rate spreads now are abnormally low. 
International money flows - aside from inflows into the US - are not yet at levels associated with "irrational exuberance," but there is still time for that to happen before interest rates start to rise. 
This is an alarming prospect, because if there is one lesson from the 1990's, it is that nobody should overestimate the stability of international financial flows. 
The second danger springs from high asset values within the advanced industrial core. 
The dominant mode of thought within the Federal Reserve - with which I agree - appears to be that the information-technology revolution is continuing, that the pace of growth of potential output in the US remains very fast, and that the output gap is thus relatively wide. 
This implies that interest rates may, in fact, need to stay low for a very considerable period. 
Moreover, confidence in the Federal Reserve is high, and the last remnants of the 1970's inflation risk premium have been wrung out of interest rates. 
As a result, even after output levels return to their potential, interest rates will stay low by the standards of the 1980's and the 1990's. 
All of this is, of course, good news for those who own assets like long-term bonds, stocks, and real estate. 
Indeed, elevating long-term asset prices was precisely the point of lowering interest rates: making bondholders and especially real estate owners richer, after all, provides a fillip to spending. 
But the bad news is that even if interest rates are expected to remain low for a while, they will not stay this low indefinitely. 
The bottom line is that when interest rates rise, asset values will fall. 
It is during such periods - particularly when asset values fall swiftly and substantially - that we discover exactly how good our central bankers are at their main job: reducing financial volatility and promoting economic stability. 
It is also during such periods that we discover how many people who are holding long-term bonds, real estate, or stocks are doing so not because they think current prices are attractive relative to fundamentals, but because their prices have gone up over the past several years. 
This is a crucial question for policy makers, because those who bought long-term assets due to what seemed like perpetually rising prices are also those who will sell as soon as price trends seem to be reversing. 
In particular, the US trade deficit looms as a massive source of instability should long-term asset prices fall significantly. 
To be sure, the challenges facing the world's economic policy makers during the next several years will be different from those that they have faced since the collapse of the NASDAQ bubble. 
The risks associated with inflation are probably less dangerous than those generated by collapsing output and the threat of deflation. 
But, as we learned in the 1990's, this does not mean that the coming challenges will be easier to handle. 

Four Marijuana Moments 
MEXICO CITY – Latin America and the United States have experienced what one could call a series of “marijuana moments” over the past few weeks. 
Given growing support for ending the senseless and bloody decades-long “war on drugs,” these signs of progress toward decriminalization and legalization should not pass unremarked. 
The first moment took place during the Organization of American States’ annual General Assembly, held this year in Antigua, Guatemala, at the beginning of June. 
The OAS Secretary General, José Miguel Insulza, presented a report entitled “The Drug Problem in the Americas,” which had been requested by the region’s heads of state when they met at last year’s Summit of the Americas in Cartagena, Colombia. 
The report was drawn up by experts from almost all OAS member states, and was divided into two parts: an excellent analytical section, and a brief and somewhat exasperating chapter devoted to future scenarios. 
The document itself represents a watershed, because it provides the data needed for a scientific and empirical discussion of an issue that is too often debated in ideological terms. 
The report breaks down the issue in a compelling way: by countries (producers, transit states, consumers, or all of these); by substances (marijuana, cocaine, heroin, and synthetic drugs); by links among these illicit substances; and by the consequences of consumption, production, or trade of each drug for societies, institutions, and international relations. 
The report also states explicitly that decriminalization of marijuana consumption is a legitimate, reasonable, and feasible option, though it does not recommend such a policy. 
This is only an initial step, but it is an enormous one. 
The second “marijuana moment” occurred in the US, where the states of Washington and Colorado have entered the final stages of fully legalizing marijuana usage, following popular referenda last November. 
Both states have just concluded the drafting and publication of the rules and regulations that will translate their referendum results into law: how to forbid consumption by minors; how to punish consumers driving under the influence; what kind of taxes and tax rates are most appropriate; and how non-residents will be treated, among other complicated and controversial issues. 
As legal pioneers in the US, both states will have to proceed by trial and error. 
But perhaps the most interesting and intriguing facet of this process is President Barack Obama’s eloquent indifference to the entire affair. 
So far, at least, he has refused to intercede in the discussion of whether federal law should trump state legislation, having said that he has “bigger fish to fry.” 
The third “marijuana moment” stems from recent decisions in New York and Illinois – the third and fifth most populous US states, respectively – to proceed with legalizing medical marijuana. 
In May, the Illinois legislature passed a highly restrictive bill governing marijuana use for therapeutic purposes, which the governor has not yet decided whether to sign. 
Soon after, the New York State Assembly passed a strict bill on medical marijuana, which the State Senate has yet to vote on. 
If New York and Illinois move forward, they will become the 19th and 20th of the 50 US states that, together with the District of Columbia, permit medical use of marijuana. 
Finally, earlier this month, the US-based international NGO Human Rights Watch formally adopted a stance that rejects criminalization of possession and consumption of all drugs and calls for a radically different approach. 
Most important, HRW did so from a human-rights perspective, and its statement is worth quoting: 
“Subjecting people to criminal sanctions for the personal use of drugs, or for possession of drugs for personal use, infringes on their autonomy and right to privacy. 
The right to privacy is broadly recognized under international law, including in the International Covenant on Civil and Political Rights and the American Convention on Human Rights. 
Limitations on autonomy and privacy cannot be justified unless they meet the criteria for any restriction of a basic right, namely legitimate purpose, proportionality, necessity, and non-discrimination. 
While protecting health is a legitimate government purpose, criminalizing drug use to protect people from harming themselves does not meet the criteria of necessity or proportionality.” 
None of these recent developments will lead, on its own, to decriminalization. 
International conventions still limit governments’ leeway, and the US government remains opposed to any backtracking from the punitive, prohibitionist strategy that it has pursued since 1981. 
Even the boldest Latin American governments – including those in Colombia, Uruguay, and Guatemala – are reluctant to advance much further, especially if they remain isolated. 
And presidents like Brazil’s Dilma Rousseff, Mexico’s Enrique Peña Nieto, and Argentina’s Cristina Fernández de Kirchner are sticking to their orthodox, conservative, and anachronistic stances, unwilling to budge until public opinion leaves them no other choice. 
Yet something is stirring in the hemisphere; as its “marijuana moments” arrive with greater frequency, can a milestone be far off? 

Where Europe Works 
STOCKHOLM – With Swedish cities roiled for weeks now by rioting by unemployed immigrants, many observers see a failure of the country’s economic model. 
They are wrong. 
The Swedish/Scandinavian model that has emerged over the last 20 years has provided the only viable route to sustained growth that Europe has seen in decades. 
Europeans should remember that perceptions of strength and weakness change fast. 
In the 1980’s, Scandinavian countries stood for chronic budget deficits, high inflation, and repeated devaluations. 
In 1999, The Economist labeled Germany “the sick man of the euro” – a monument of European sclerosis, with low growth and high unemployment. 
Now, however, the specter of devaluation has disappeared from northern European countries. 
Budgets are close to balance, with less public expenditure and lower tax rates, while economic growth has recovered. 
The transformation of the old European welfare state started in northern Europe, and it is proceeding to most of the rest of the continent. 
Today, it is difficult to imagine the mindset that prevailed before Margaret Thatcher came to power in the United Kingdom in 1979 and Ronald Reagan in the United States in 1981. Thatcher’s greatest achievement was the liberalization of the overregulated British labor market, while Reagan turned the tide with his inaugural address: “In this present crisis, government is not the solution to our problem; government is the problem.” 
The moral superiority of high marginal income taxes suddenly waned. 
Free-market ideas took hold. 
In northern Europe, the transformation of the welfare state started in Denmark in 1982. 
In deep financial crisis, traditionally social-democratic Denmark elected a conservative prime minister, Poul Schlüter, a jovial man with a bow tie. 
One of his first decisions was to peg the Danish krone to the Deutschmark to stop the inflation-devaluation cycle. 
The Danish peg – now to the euro – still holds. 
Schlüter’s second big decision was to deregulate the Danish economy, which now has the world’s largest number of enterprises per citizen. 
But he left the country’s high taxes and welfare state in place. 
In the early 1990’s, Norway, Sweden, and Finland experienced a horrendous real-estate, banking, and currency crisis. 
Output fell and unemployment skyrocketed. 
In 1991, Swedish voters broke the reign of the Social Democrats, electing a coalition government under conservative Prime Minister Carl Bildt, who called his program “the only way.” 
Bildt tried to follow Schlüter’s lead, but, in 1992, Sweden was forced to devalue – though his deregulation of markets did work well. 
Sweden’s greatest achievement was a gradual cut of public spending by no less than one-fifth of GDP from 1993 to 2007. 
Meanwhile, Sweden’s public debt was reduced from 73% of GDP to 39% of GDP, while taxes have been cut repeatedly. 
The Social Democrats returned to power in 1994, but they accepted Bildt’s new fiscal policies, and even carried out a revolutionary pension reform in 1998 that properly tied benefits to payments. 
In parallel with the Scandinavian crisis, communism collapsed in Eastern Europe in 1989 and in 1991 in the Baltic states. 
Poland’s first post-communist finance minister, Leszek Balcerowicz, showed an amazed world how communism could be abolished and a market economy built almost instantly. 
The rest of Central Europe and the Baltic states followed his lead. 
Former Estonian Prime Minister Mart Laar was the most radical European reformer. 
Indeed, his ideas about taxation have revolutionized Europe. 
In 1994, he introduced a flat personal-income tax, a policy that most Eastern European countries have since adopted. 
In 1999, when Laar became Prime Minister again, he abolished the tax on corporate profit, which was harming entrepreneurship. 
As a consequence of the ensuing tax competition, corporate-tax rates have fallen to 15-25% in most European countries. 
More broadly, Estonia has revolutionized public finances. 
Since 1992, it has maintained a more or less balanced budget, with hardly any public debt. 
It slashed public expenditure and capped spending at 35% of GDP – the same level as in the United States. 
As free-market thinking has taken hold and similar reforms have proliferated, the social-welfare state is being transformed into a social-welfare society. 
Government spending remains large enough to guarantee reasonable public services and a social safety net. 
Reformers have exposed the public sector to competition, not least from private providers, rendering it more efficient. 
The systematic reforms in the United Kingdom, Denmark, Sweden, Poland, and Estonia have much in common. 
First, all were caused by a profound crisis of the social-welfare state: falling output, rising unemployment, large budget deficits, inflation, and devaluation. 
Without severe crisis, no significant reform was likely. 
Second, a change of government through elections prompted reforms and gave them democratic legitimacy. 
Reform does not require a state of emergency, as is often argued. 
Third, reforms require a strong leader. 
No major reform has been undertaken through consensus, though successful reforms usually generate a broad consensus a few years later. 
At that point, reforms can be carried forward by those who had initially opposed them, as happened in Denmark and Sweden. 
Finally, fundamental reform of the social-welfare state requires leaders who embrace free-market ideas. 
Rethinking requires a new ideology, and, after one country has shown the right direction, neighbors often follow. 
Europe has now reached the point at which most of its laggards are prepared to accept the social-welfare society. 
This humane European capitalism is now hastening toward crisis-ridden southern Europe. 

The Coming Global Credit Glut 
HONG KONG – With world leaders meeting at the end of this week at the G-20 summit in Cannes, France, the next economic minefield that they will face is already coming into view. 
It is likely to take the form of an opaque global credit glut, turbocharged by the fragile mixture of too-big-to-fail global banking with a huge and largely unwatched and unregulated shadow banking sector. 
To be sure, that is not what many see. 
Federal Reserve Board Chairman Ben Bernanke and others have blamed the financial crisis of 2008 on a global savings glut, which fuelled flows of money from high-savings emerging-market economies – especially in Asia – that run chronic balance-of-payments surpluses. 
According to this school of thought, excessive savings pushed long-term interest rates down to rock-bottom levels, leading to asset bubbles in the United States and elsewhere. 
But Claudio Borio and Piti Disayat, economists at the Bank for International Settlements, have argued convincingly that the savings-glut theory fails to explain the unsustainable credit creation in the run-up to the 2008 crisis. 
They have shown that the major capital inflows were not from emerging markets, but from Europe, where there was no net balance-of-payments surplus. 
The alternative theory – of a global credit glut – gained more ground with the release last week of the Financial Stability Board’s report on shadow banking. 
The FSB report contains startling revelations about the scale of global shadow banking, which it defines as “credit intermediation involving entities and activities outside the regular banking system.” 
The report, which was requested by G-20 leaders at their summit in Seoul last November, found that between 2002 and 2007, the shadow banking system increased by $33 trillion, more than doubling in asset size from $27 trillion to $60 trillion. 
This is 8.5 times higher than the total US current-account deficit of $3.9 trillion during the same period. 
The shadow banking system is estimated at roughly 25-30% of the global financial system ($250 trillion, excluding derivatives) and at half of total global banking assets. 
This represents a huge regulatory “black hole” at the center of the global financial system, hitherto not closely monitored for monetary and financial stability purposes. 
Its importance was exposed only by analysis of the key roles played by structured investment vehicles (SIVs) and money-market funds (MMFs) in the 2008 meltdown. 
The shadow banking system is complex, because it comprises a mix of institutions and vehicles. 
Investment funds other than MMFs account for 29% of total, and SIVs make up 9%, but the shadow system also includes public financial institutions (such as the government-backed mortgage lender Fannie Mae in the US). 
They are some of the largest counterparties with the regular banking system, and their combined credit creation and proprietary trading and hedging may account for much of the global liquidity flows that make monetary and financial stability so difficult to ensure. 
The trouble is that, by 2010, the shadow banking system was about the same size as it was just before the 2007 market crash, whereas the regulated global banking system was 18% larger than in 2007. 
That is why the FSB report pinpoints the shadow banking system, together with the large global banks, as sources of systemic risk. 
But the global problem is likely to be much larger than the sum of its parts. 
Specifically, global credit creation by the regular and shadow banking systems is likely to be significantly larger than the sum of the credit creation currently measured by national statistics. 
There are several reasons for this. 
First, credit that can be, and is, created offshore and through off-balance-sheet SIVs is not captured by national balance-of-payments statistics. 
In other words, while a “savings” glut may contribute to low interest rates and fuel excess credit creation, it is not the main cause. 
Second, the volatile “carry trade” is notoriously difficult to measure, because most of it is conducted through derivatives in options, forwards, and swaps, which are treated as off-balance sheet – that is, as net numbers that are below the line in accounting terms. 
Thus, in gross terms, the leverage effects are larger than currently reported. 
Third, the interaction between the shadow banking system and the global banks is highly concentrated, because the global banks act as prime brokers, particularly for derivative trades. 
Data from the US Comptroller of Currency suggest that the top five US banks account for 96% of the total over-the-counter (OTC) derivative trades in the US. 
Indeed, the nightmare scenario haunting the world is the collapse of another shadow banking entity, causing global trade to freeze, as happened in 2008. 
The Basel III agreement on capital adequacy and other recent reforms still have not ring-fenced trade financing from these potential shocks. 
We urgently need to monitor and understand the role of shadow banking and the too-big-to-fail banks in creating the global credit glut. 

The Coming Global Energy Revolution 
PARIS – Humanity’s future, to say nothing of its prosperity, will depend on how the world tackles two central energy challenges: securing reliable supplies of affordable energy, and switching to efficient low-carbon energy. 
The Reference Scenario – in which no new policies are introduced – in the International Energy Agency’s 2008 World Energy Outlook sees annual global primary energy demand growing 1.6% on average up to 2030, from 11,730 million tons of oil equivalent (Mtoe) to just over 17,010 Mtoe – an increase of 45% in just over 20 years. 
China and India account for just over half of this increase, with Middle East countries contributing a further 11% to demand. 
Non-OECD countries account for 87% of the increase, so their share of world primary energy demand will rise from 51% to 62%. 
Most oil production increases are expected to come from just a few countries – mainly in the Middle East, but also Canada with its vast oil-sands reserves, the Caspian region, and Brazil. 
Gas production in the Middle East will triple, and more than double in Africa, where there are large low-cost reserves. 
The trend by which consuming countries grow steadily more reliant on energy from a small number of producing countries threatens to exacerbate energy-security worries. 
The supply stand-off between Russia and Ukraine of 2009 made these worries crystal clear in Europe, where gas imports are set to rise to 86% of demand by 2030, from 57% in 2006. 
Of course, increasing import dependence does not necessarily mean less energy security, any more than self-sufficiency guarantees uninterrupted supply. 
Yet greater short-term insecurity seems inevitable as geographic diversity of supply is reduced and reliance on vulnerable supply routes grows. 
Longer-term energy-security risks are also set to grow. 
As a small group of countries increasingly accounts for the world’s remaining oil reserves, their market dominance may threaten the pace of investment. 
The greater the demand for oil and gas from these regions, the more likely these regions are to seek higher prices, and to maintain them by deferring investment and limiting production. 
Unfettered growth in energy demand will clearly have serious consequences for the climate as well. 
Under the Reference Scenario, which represents “business as usual,” the IEA points to continuing growth in CO2 and other greenhouse-gas emissions; 
CO2 emissions are projected to rise 45% by 2030, with other greenhouse gases contributing to an eventual average temperature increase of up to 6°C. 
Three-quarters of the extra CO2 will come from China, India, and the Middle East, and as much as 97% from non-OECD countries as a whole – although non-OECD per capita emissions will still be far lower on average than in the OECD. 
Bucking the global trend, only the European Union and Japan will see lower emissions in 2030 than today. 
The energy sector has a relatively slow rate of capital replacement because of the long lifetimes of much of its infrastructure. 
More efficient technologies normally take many years to spread through the energy sector. 
As a result, both the public and private sectors must accept the need for additional investments, as well as the potential costs of early capital retirement, in order to accelerate this process and deliver deep cuts in emissions. 
Two IEA climate-policy scenarios show how we could stabilize the concentration of greenhouse gases at 550 or 450 parts per million of CO2 equivalent. 
The 550 scenario equates to an increase in global temperature of approximately 3°C, while the 450 scenario implies an increase of around 2°C. 
In the 550 scenario, energy demand up to 2030 rises by about 32%, with the share of fossil fuels falling markedly, and average demand up 1.2% yearly, compared to 1.6% in the Reference Scenario. 
Energy-related CO2 emissions would peak in 2025 and decline slightly by 2030. 
The 450 scenario presents an immense challenge. 
The 2030 emissions level for the entire world would be less than the emissions projected for non-OECD countries alone in the Reference Scenario. 
In other words, even if OECD countries reduce their emissions to zero, they alone could not put the world onto the 450-ppm trajectory. 
To do so would mean a technology shift that – in terms of scale and speed of deployment – is unprecedented. 
The good news is that we already know many of the policies and technologies that can deliver substantial savings in energy consumption and CO2 emissions. 
But making and implementing the right decisions must begin now. 
We’re talking about significant changes in the pattern of investment across the supply and demand chains, as well as huge additional spending on new capital stock, especially in power plants and in more energy-efficient equipment and appliances. 
Although the sheer scale of the transformation means placing a substantial burden on both the public private and sectors, the current financial crisis should be used as an opportunity rather than a barrier for launching it. 
Renewable energy will have a major role to play. 
Global renewables-based electricity generation (mainly hydro and wind, but also solar and biomass) is set to double between 2006 and 2030. In the EU, wind’s share in total power generation is set to rise to 14% by 2030, from 2% today, and would account for well over half the total increase in the EU power generation. 
In the 450 scenario, renewables comprise 30% of the EU power-generation mix in 2030, up sharply from 10% today. 
Governments must galvanize this transformation. 
Clear price signals, including carbon pricing, are crucial, and many non-OECD countries, in addition to needing financial support to help reduce their greenhouse gas emissions, can benefit from the removal of fuel subsidies. 
But clear price signals are not enough, as a low-carbon future requires major breakthroughs in technology development and deployment. 
Governments can create incentives to innovate, encourage research, and break down international barriers. 
And much of the additional spending needs be made by households, driven by a profound change in social attitudes to energy efficiency. 



The Coming Showdown with Iran 
FLORENCE – US President Barack Obama’s administration has lost little time in announcing that it will seek direct talks with the Iranian government. 
This means, at the very least, a tough confrontation over Iran’s quest for a regional strategic advantage in the form of a nuclear weapon. 
There is more at stake here than coming up with the right set of incentives and threats to change the Iranians’ minds. 
Rather, the time has come to approach the nuclear question in its full regional context rather than piecemeal and operationally. 
The entire world knows the risk posed by a nuclear Iran: a drastically altered balance of power in the Middle East and Central Asia, with Iran able to exert far more regional leverage – both overt and implicit – than it now possesses in pursuit of its interests. 
Moreover, nearby states are likely to launch or further their own nuclear programs in response, leading to a protracted nuclear arms race in one of world’s most volatile regions. 
It is not in the interest of the US or Europe for any of the states at the head of the list – Egypt, Turkey, Saudi Arabia, Syria, and Algeria – to have its own nuclear weapons capability. 
While neither outcome is certain, each remains likely. 
There is considerable domestic pressure in each of these countries – as there has been in Israel and Pakistan, currently the region’s only nuclear states – to secure the presumed benefits in power and prestige of possessing nuclear weapons. 
Such pressure is magnified when rivals and neighbors are perceived to have any kind of strategic advantage. 
Yet each of the region’s states has important security concerns and vulnerabilities. 
Iran, a multiethnic state whose rulers have struggled to advance national cohesion, is no different. 
Shi’a nationalism has followed Persian chauvinism as a rallying point, but neither has succeeded fully in bolstering Iran’s political institutions and securing the allegiance of its young population, nearly two-thirds of which is under the age of 30. 
The nation’s unity is periodically threatened by its clerical rulers’ unpopularity among large sections of the population, as well as by regional and ethnic divisions, conflict and instability in its immediate neighborhood, and the hostility engendered by its regional clients and/or proxies in Iraq, Lebanon, Afghanistan, and elsewhere. 
In theory, all of these factors are potential sources of leverage for outside powers like the US. 
But opposing Iran’s nuclear ambitions directly has had the opposite effect so far. 
Iran’s quest for nuclear weapons – with its boost to national pride and promise of regional preeminence – has played a critical unifying role, as well as a political and military one. 
The challenge is to craft a consistent policy that both contains and deters Iran’s ambitions without exacerbating its inherent sense of national vulnerability. 
The policy debate outside the region currently centers on whether to use force if talks fail. 
Iran, predictably, has refused to back down, which some observers have suggested reflects the failure of the world’s major powers to speak with a unified voice. 
This is true, but it is an insufficient explanation. 
Others have claimed that Iran’s leaders do not care one way or the other about world opinion. 
This, too, is an insufficient explanation, for no country, not even North Korea, lives in a vacuum. 
Formulating the right mix of carrots and sticks is extremely difficult, and the US is hardly seen in the region as an honest broker. 
Therefore, its focus should be less on calibrating tactics per se than on recasting the regional context in which Iran’s leaders will determine whether to proceed or desist. 
The starting point should be further enhancement of conventional military forces throughout the region, which means more than increasing weapons inventories. 
There should be more confidence-building measures, including joint training exercises and information exchanges, among all the region’s militaries. 
A major boost to confidence would be a clear-cut strategic commitment from the West in the form of an extension of NATO’s own deterrent to the Middle East. 
It need not single out Iran, and would be more effective than a unilateral US guarantee to Israel or any other single state. 
Instead, NATO members should pledge to defend any Middle Eastern state that is attacked with nuclear weapons. 
Under ideal diplomatic circumstances, Russia and China would be persuaded to join with NATO in a joint declaration. 
Such steps alone are unlikely to deter Iran or fully to reassure the region’s other states. 
But, along with continued international pressure from the United Nations Security Council and the International Atomic Energy Agency, they would send a clearer signal that the major powers of the world regard Middle Eastern peace and security as critical to their own. 
That would help to diminish the possibility of an unbridled regional arms race if talks fail and Iran someday tests a weapon. 

The Coming St. Putinsburg Summit 
St. Petersburg is a great place in early summer, when the “White Nights” bathe the city’s imperial palaces and avenues. 
Small wonder, then, that Russian President Vladimir Putin likes to show off his hometown. 
Three years ago, during the Tsarist capital’s 300th anniversary, Putin hosted some 40 heads of state, ranging from George W. Bush and Gerhard Schroeder to Belarusian dictator Alexandar Lukashenka and Turkmenistan’s Saparmyrat Nyazov, who styles himself “Turkmenbashi,” the father of Turkmen. 
Human rights activists questioned the wisdom of endorsing the leader of a growingly authoritarian Russia. 
Yet Putin managed simultaneously to celebrate his anti-Iraq war cooperation with Europe, have the US swallow this, and be recognized in front of his local minions as a world leader. 
This summer, St. Petersburg (dubbed by local wits “St. Putinsburg”) may see a repeat performance: Russia will preside over a G8 summit for the first time, despite increasing authoritarianism, the ongoing bloody war in Chechnya, and now support for Iran’s nuclear program. 
Deflecting mounting criticism, Bush rejects appeals to boycott the summit. 
“I need to be in a position where I can sit down with him [Putin] and be very frank about our concerns,” Bush said in late March at Freedom House in Washington. 
Is Bush wrong? 
The question of whether to meet with nasty but powerful people has dogged diplomacy since its inception, and both ends of the question have been argued endlessly – and inconclusively. 
So it is probably best to examine the merits of each case separately, looking to precedents and agendas for guidance. 
What is now known as the G8 was launched in 1975 as an informal group of the United States, Europe’s Big Four – Britain, France, Germany, and Italy – and Japan, with Canada added as an afterthought. 
It expanded to include Russia in 1998 for political, not economic, reasons. 
Russia’s unhappy status as a democratizing, but still potentially threatening, former superpower, played a role, as did its huge energy reserves, which is why China, incomparably more powerful economically but politically beyond the pale, was never invited to join. 
Indeed, though supposedly grouping the world’s largest economies, the G8 now includes a country with an economy the size of Holland’s, even if it is still excluded from deliberations of the other members’ finance ministers. 
In retrospect, Russian membership should probably be considered a mistake. 
Russia has stabilized under Putin, but its has become markedly less democratic. 
Its economy has boomed thanks to oil and gas exports, not to healthy market developments. 
The state still controls the economy as it sees fit, as the de-facto renationalization of Yukos amply demonstrates. 
On the other hand, the Kremlin has refrained from international adventurism, and rather consistently supported the US in its “war on terror.” 
As European economies grew more dependent on Russian oil and gas, and the US military in Central Asia on Russian acquiescence, reversing the decision to admit Russia to the G8 became politically unthinkable. 
The 2003 summit confirmed Russia’s privileged position. 
A repeat performance this summer would make it all but unshakeable. 
Has “being frank about our concerns,” the justification for hobnobbing with the likes of Putin, proven effective? 
Perhaps not. 
Nevertheless, although Russia has been backsliding since Putin took power in 2000, his policies might have been worse had he been ostracized. 
In any case, a US boycott of the forthcoming summit would be a Russian triumph, as it would throw the West into disarray. 
But there need to be limits to the West’s tolerance, particularly given the summit’s agenda, which features energy security, fighting disease, promoting education, counter-terrorism, and non-proliferation. 
Is Russia a trustworthy partner in these areas? 
Russia is, in fact, the main provider of energy insecurity in Europe. 
Its gas blackmail of Ukraine frightened the entire Continent, and its new Baltic pipeline to Germany has provoked howls of outrage from Poland and the Baltic states, which are angry at losing the economic and political dividends a land route gives them. 
They are also fearful that Russia will use the energy weapon against them in the future, once the new pipeline allows the Kremlin to do so without affecting Western Europe. 
This made little impression on their German EU partners – unsurprisingly, since Schroeder now chairs the consortium that will build the pipeline. 
As former French Prime Minister Pierre Mauroy put it in 1981, when he refused to cancel a gas deal with the USSR over the imposition of martial law in Poland, “Should the suffering of French people deprived of gas be added to the suffering of Polish people deprived of freedom?” 
Old habits die hard. 
Russia’s record is equally bleak on other items on the summit’s agenda. 
It heads the list on the spread of preventable diseases – not only HIV, but tuberculosis, with 32,000 deaths last year alone – and its education standards are in severe decline. 
On terrorism, Russia was the first country to host an official Hamas delegation after the Palestinian elections, and it continues to crush Chechen terror and resistance with methods that would bring it to an international court, were it not a Security Council member. 
On non-proliferation, just ask the ayatollahs in Teheran. 
Putin’s Russia is not a place for democratic leaders to hold a summit, especially after the paltry results of the last one. 
Nor does the summit’s agenda justify holding it there. 
While Putin’s policies could have been much worse – it is legitimate to give him credit where it is due – Russia should not be allowed to take the West for granted. 
Nothing would be gained by breaking with Russia and engaging in confrontation with it, but there is no reason not to respond to Realpolitik with Realpolitik. 

Merkel in the Land of Smiles 
BERLIN – Germany’s elections are over. 
The winners and losers are clear, and the political landscape has changed profoundly. 
The real drama, however, occurred not among the country’s main parties but on the boundaries of the political spectrum. 
Chancellor Angela Merkel is celebrating a landslide victory, with her Christian Democratic Union (CDU) having fallen just short of an outright parliamentary majority. 
But the scale of her triumph is mainly due to the collapse of her liberal coalition partner, the Free Democratic Party (FDP), which for the first time in the German Federal Republic’s history will not be represented in the Bundestag. 
The liberals have always formed a key part of German postwar democracy; now they are gone. 
Responsibility for that lies, first and foremost, with the FDP. 
No governing party can afford such woefully incompetent ministers and leadership; 
Merkel had merely to stand back and watch the liberals’ public suicide over the last four years. 
The opposition parties, too, paid the price for their failure to come to grips with reality. 
The economy is humming, unemployment is low, and most Germans are better off than ever before. 
But, rather than focusing on the government’s weaknesses – energy, Europe, education, and family policy – they bet their political fortunes on social justice. 
Merkel’s Panglossian campaign was much more in tune with the sentiment of the German electorate than the opposing parties’ tristesse about working-class distress, which was rightly seen as a ploy for raising taxes. 
Governing majorities (and therefore elections) in Germany are always won in the center. 
Merkel’s predecessor, the Social Democratic Party (SPD) leader Gerhard Schröder, knew this well. 
But this time her opponents – the SPD, Die Linke (The Left), and the Greens – cleared the center and cannibalized each other on the left. 
The leadership issue made matters worse – the SPD’s Peer Steinbrück and the Greens’ Jürgen Trittin never had the slightest chance against Merkel and Finance Minister Wolfgang Schäuble. 
The only new factor that could bring about a structural change in German politics is the rise of the new Alternative for Germany (AfD). 
Though its share of the popular vote fell just below the 5% threshold required to enter the Bundestag, the party performed surprisingly well. 
If its leadership can build on this success, the AfD will make news in next spring’s European Parliament elections. 
Indeed, the AfD scored well in eastern Germany – where three state elections will be held in 2014 – by gaining many votes from The Left. 
This implies that the AfD could establish itself on the German political landscape permanently, which would make a comeback for the FDP all the more difficult. 
Still, despite the FDP’s implosion and the opposition parties’ disastrous electoral strategy, Merkel needs a coalition partner. 
The Left is not an option, and any attempt at building a coalition with the Greens – a party that will be reeling from the shock of its poor performance for quite some time – would court instability. 
So Germany will be left with a grand coalition – just as the German electorate wanted. 
The SPD will recoil at the prospect, sit on the fence, and finally give in, because Merkel has a powerful disciplinary instrument: she could call a new election, in which the CDU would probably win an outright majority. 
A grand coalition is not the worst option. 
Nothing fades as quickly as the glow of an election victory, and the German idyll will soon be disturbed by harsh reality – the European Union’s simmering crisis, Syria, Iran, and energy policy. 
The need for consensus is especially acute with respect to the difficult decisions concerning Europe that the German government now faces. 
Greece needs more debt relief. 
A European banking union with joint liability cannot be put off much longer. 
The same is true of many other issues. 
A winter of discontent awaits Merkel, followed by a European election campaign that is likely to bring the CDU back down to earth. 
But no one should expect a significant change in Merkel’s EU policy or her approach to foreign affairs and security questions. 
Her positions on these issues have now been endorsed by a huge portion of the German electorate; and, from a certain age, most people – including those in high office – do not change easily. 
Besides, in these matters, there is no longer much difference between the center-right CDU and the center-left SPD. 
A grand coalition could show greater flexibility in addressing the euro crisis, but less on questions of foreign and security policy. 
In this respect, however, Germany would gain much from the opportunity to craft a proper foreign policy in the framework of the EU and the Western alliance that in recent years has had a dangerous void where Germany used to be – though this is more a vague hope than a concrete expectation. 
It will also be interesting to see if and how Merkel tackles Germany’s muddled Energiewende (energy turnaround) – the move to a low-carbon economy that is the most important domestic project of her tenure. 
Either she will succeed with it, or it will become a monumental disgrace for Germany and a disaster for the German economy. 
The decisive questions now are whether she musters the courage to concentrate all the necessary responsibilities for this mega-project in the energy ministry, and whom she entrusts with overseeing this Herculean task. 
The late editor of the weekly magazine Der Spiegel, Rudolf Augstein, who never liked former Chancellor Helmut Kohl, titled his commentary about German reunification “Congratulations, Chancellor!” 
For Merkel, Sunday’s election has opened a door, especially with respect to overcoming the euro crisis and to deepening European integration. 
But, until she walks through it, I will refrain from congratulating her. 

The Confidence Game. 
CAMBRIDGE – Next month marks the one year anniversary of the collapse of the venerable American investment bank, Lehman Brothers. 
The fall of Lehman marked the onset of a global recession and financial crisis the likes of which the world has not seen since the Great Depression of the 1930’s. 
After one year, trillions of dollars in public monies, and much soul searching in the world’s policy community, have we learned the right lessons? 
I fear not. 
The overwhelming consensus in the policy community is that if only the government had bailed out Lehman, the whole thing would have been a hiccup and not a heart attack. 
Famous investors and leading policymakers alike have opined that in our ultra-interconnected global economy, a big financial institution like Lehman can never be allowed to fail. 
No matter how badly it mismanages its business – Lehman essentially transformed itself into a real estate holding company totally dependent on a continuing US housing bubble – the creditors of a big financial institution should always get repaid. 
Otherwise, confidence in the system will be undermined, and chaos will break loose. 
Having reached the epiphany that financial restructuring must be avoided at all costs, the governments of the world have in turn cast a huge safety net over banks (and whole countries in Eastern Europe), woven from taxpayer dollars. 
Unfortunately, the conventional post-mortem on Lehman is wishful thinking. 
It basically says that no matter how huge the housing bubble, how deep a credit hole the United States (and many other countries) had dug, and how convoluted the global financial system, we could have just grown our way out of trouble. 
Patch up Lehman, move on, keep drafting off of China’s energy, and nothing bad ever need have happened. 
The fact is global imbalances in debt and asset prices had been building up to a crescendo for years, and had reached the point where there was no easy way out. 
The United States was showing all the warning signs of a deep financial crisis long in advance of Lehman, as Carmen Reinhart and I document in our forthcoming book This Time is Different: Eight Centuries of Financial Folly . 
Housing prices had doubled in a short period, spurring American consumers to drop any thought of saving money. 
Policymakers, including the US Federal Reserve, had simply let the 2000s growth party go on for too long. 
Drunk with profits, the banking and insurance industry had leveraged itself to the sky. 
Investment banks had transformed their business in ways their managers and boards clearly did not understand. 

The Confidence Game 
Confidence is a vital element of life, for nations and civilizations as much as for individuals. 
Confidence is the ingredient of hope. 
It allows you to project yourself into the future, to fulfill or even transcend your capabilities. 
It comes from within, but can be reinforced or weakened by the way others perceive you. 
But confidence, like blood pressure, must be balanced: the problem starts when you have too much or too little of it. 
Overconfidence tends to be as destabilizing as a lack of it. 
Consider, for example, America in Iraq. 
The Bush administration’s overconfidence in the validity of its objectives – democratizing the Middle East – much more than implementation failures, was the key factor behind the unfolding catastrophe there. 
I recently debated one of the key thinkers behind the decision to “liberate” Iraq from Saddam Hussein. 
A prominent neo-conservative, he seemed to me something of a Bolshevik of democracy, owing to his unshakeable confidence in the validity of his vision. 
According to him, the status quo in the Middle East was untenable and dangerous. 
Democracy in Iraq would not only bring peace in Jerusalem, but also a new, safer, and better equilibrium in the entire Arab world. 
Because the United States is the most powerful and wisest of nations, it has a unique role to play, and the world should rally behind it in courageously tackling this challenge. 
In other words, even as late as the early summer of 2007, he was, like the Bush administration, in a state of denial. 
For him, things were going well in Iraq, and a new balance of forces was being established – one that would benefit Iraq’s Shia majority, but not necessarily Iran. 
The courage and audacity of the US government and its army was finally “paying off.” 
Daily violence should not be allowed to hide deeper strategic realities: victory was around the corner, and soon, the world – despite all the anti-Bush propaganda – would recognize it. 
At such a level, overconfidence is generally the product of an excessive assessment of one’s capabilities and an insufficient appreciation of the capabilities of one’s adversary. 
Both are the product of an ideological reading of the world that bears little connection with reality. 
In invading Russia in 1941, Hitler, like Napoleon, demonstrated a military overconfidence that resulted in catastrophe. 
Saddam himself fatally overplayed his cards, convinced as he was that America would not dare to attack him. 
At the same time, lack of confidence on the part of a country, a culture, or a civilization can be just as dangerous. 
The deep conviction that reform can only lead to revolution and chaos results in a stultification of reality that can lead to immobility and despair – and thus become a dangerous and self-fulfilling prophecy. 
For example, in Egypt, which is highly representative of the prevailing political situation in the Middle East, the status quo is the result of the regime’s absolute lack of confidence in its ability to open up and reform. 
This same lack of confidence is behind the potentially explosive situations in Algeria, Tunisia, and even Morocco. 
Because their legitimacy does not rest upon the support of their people, these non-democratic regimes consider the risk of opening themselves greater than the cost of maintaining the status quo. 
Of course, confidence and self-doubt are not mutually exclusive. 
A country like Israel booms with economic confidence, but is full of self-doubt when it comes to strategic and political considerations. 
Can the right amount of confidence be instilled in countries or groups that badly need it? 
And if overconfidence is so dangerous, can restraint and modesty be taught to those who do not have it? 
Strangely, it may be easier to gain confidence than to restrain it. 
Confidence can come from three things: hope, pride, and progress. 
Success breeds confidence, and confidence brings progress. 
Today’s Chinese and Indians are now convinced that they are succeeding. 
They see in the West a mixture of respect for their achievements and apprehension for the challenge they now pose, and that fills them with pride. 
Attempting to impose democracy on others is an act of unbounded arrogance. 
But democracy is also the best remedy against overconfidence, because it allows ordinary people to decide whether their leaders are behaving arrogantly or responsibly. 
Only the self-correcting mechanisms of truly democratic regimes can ensure the right balance. 

The Consequences of Angela Merkel 
LONDON – Germany has been leading the opposition in the European Union to any write-down of troubled eurozone members’ sovereign debt. 
Instead, it has agreed to establish bailout mechanisms such as the European Financial Stability Facility and the European Financial Stabilization Mechanism, which can lend up to €500 billion ($680 billion) combined, with the International Monetary Fund providing an additional €250 billion. 
These are essentially refinancing mechanisms. 
Heavily indebted eurozone members can apply to borrow from them at less than the commercial rate, conditional on their committing to ever more drastic fiscal austerity. 
Principal and interest on outstanding debt have been left intact. 
Thus, creditors – mainly German and French banks – are not expected to suffer losses on their existing loans, while borrowers gain more time to “put their houses in order.” 
That, at least, is the theory. 
So far, three countries – Greece, Ireland, and Portugal – have availed themselves of this facility. 
In mid-July 2011, Greece’s sovereign debt stood at €350 billion (160% of GDP). 
The Greek government currently must pay 25% for its ten-year bonds, which are trading at a 50% discount in the secondary market. 
In other words, investors are expecting to receive only about half of what they are owed. 
The hope is that the reduction in borrowing costs on new loans, plus the austerity programs promised by governments, will enable bond prices to recover to par without the need for the creditor banks to take a hit. 
This is pie in the sky. 
Unless a large part of its debt is forgiven, Greece will not regain creditworthiness. 
(Indeed, by most accounts, it is about to default.) 
And the same is true, albeit to a lesser degree, for other heavily indebted sovereigns. 
Any credible bailout plan must require creditor banks to accept that they will lose at least half of their money. 
In the United States’ successful Brady Bond plan in 1989, the debtors – Mexico, Argentina, and Brazil – agreed to pay what they could. 
The banks that had loaned them the money replaced the old debt with new bonds at par value, which averaged 50% of the old bonds, and the US government provided some sweeteners. 
It was write-offs and devaluations, not austerity programs, that allowed bond prices to recover. 
In the Greek case, creditors have yet to accept the need for write-offs, and European governments have provided them with no incentives to do so. 
Germany’s opposition to debt forgiveness is thus bad economics, bad politics (except at home), and bad history. 
The Germans should remember the reparations fiasco of the 1920’s. 
In the Treaty of Versailles, the victorious Allies insisted that Germany should pay for “the cost of the war.” 
They added up the figures, and in 1921 they presented the bill: Germany “owed” the victors £6.6 billion (85% of its GDP), payable in 30 annual installments. 
This amounted to transferring annually 8-10% of Germany’s national income, or 65-76% of its exports. 
Within a year, Germany had asked for, and obtained, a moratorium. 
New bond issues, following a big debt write-down in 1924 (the Dawes Plan), enabled Germany to borrow the money to resume payments. 
There then followed a crazy system: Germany borrowed money from the US in order to repay Britain, France, and Belgium, while France and Belgium used a bit of it to pay back Britain, and Britain used more of it to pay back the US. 
This whole tangle of debts was finally de facto written off in 1932 in the middle of the global slump. 
But, until 1980, Germany continued repaying the loans that it had incurred to pay the reparations. 
From the start, the economist John Maynard Keynes had been a fierce critic of the reparations policy imposed on Germany. 
He made three main points: Germany didn’t have the capacity to pay were it to regain anything like a normal standard of living; any attempt to force it to reduce its standard of living would produce revolution; and to the extent that Germany was able to increase its exports to pay reparations, this would be at the expense of the recipients’ exports. 
What was needed was cancelation of reparations and inter-Allied war debts as a whole, together with a big reconstruction loan to put the shattered European economies back on their feet. 
In 1919, Keynes produced a grand plan for comprehensive debt cancellation, plus a new bond issue, guaranteed by the Allied powers, whose proceeds would go to victors and vanquished alike. 
The Americans, who would have had to provide most of the money, vetoed the plan. 
The point to which Keynes kept returning was that the attempt to extract debt payments over many years would have disastrous social consequences. 
“The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable,” he wrote, “even if it does not sow the decay of the whole civilized life of Europe.” 
History never repeats itself exactly, but there are lessons to be learned from that episode. 
Germans today would say that, unlike reparations, the Greek and Mediterranean debts were voluntarily incurred, not coerced. 
This raises the question of justice, but not the economic consequences of insisting on payment. 
Moreover, there is a fallacy of composition: if there are too many debt collectors, they will impoverish the very people on whom their own prosperity depends. 
In the 1920’s, Germany ended up having to pay only a small fraction of its reparation bill, but the long time it took to get to that point prevented the full recovery of Europe, made Germany itself the most conspicuous victim of the Great Depression, and bred widespread resentment, with dire political consequences. 
German Chancellor Angela Merkel would do well to ponder that history. 

Abenomics and Asia 
SEOUL – Japanese Prime Minister Shinzo Abe’s economic agenda – dubbed “Abenomics” – seems to be working for his country. 
Expansionary monetary policy is expected to inject liquidity into the Japanese economy until inflation hits the Bank of Japan’s 2% target, while expansionary fiscal policy is expected to continue until economic recovery takes hold. 
As a result, consumer and investor confidence is returning. 
The Japanese stock market has soared more than 40% since November of last year, when it became clear that Abe would form the next government, and exports and growth are also picking up. 
With a large output gap and low inflationary pressure, expansionary policies show great potential for reviving economic activity. 
But other countries – including neighboring Asian economies – fear that Japan is devaluing the yen to bolster exports and growth at their expense. 
Some have accused Japan of fueling a global “currency war.” 
Anticipation of aggressive monetary expansion has sharply weakened the yen, which has fallen by almost 20% against the dollar in just over four months. 
Of course, Japan’s escape from its 15-year deflationary trap and two decades of economic stagnation would be good for the world. 
Japan remains the world’s third-largest economy, the fourth-largest trader, and the third-largest export market for neighboring China and South Korea, which thus stand to benefit if “Abenomics” revitalizes Japanese domestic demand. 
More broadly, given Europe’s slide into recession and only a slow rise in world trade volume, renewed growth and stronger import demand in Japan would support global recovery. 
The question now is whether Abenomics can achieve its goals without destabilizing the world economy, especially neighboring Asian economies. 
Doing so requires Japanese policymakers to focus on more sustainable growth while averting a vicious cycle of competitive devaluation and protectionism with Japan’s trade partners. 
In particular, expansionary monetary and fiscal policies – which are helpful in the short term – must be accompanied by fundamental structural reforms. 
Japan’s deflation and economic stagnation over the last two decades stemmed largely from a dysfunctional financial system and a lack of private demand. 
The collapse of asset bubbles in the 1990’s left Japan’s financial system and private sector saddled with a huge debt overhang. 
Recovery began only after the balance-sheet weaknesses in the financial, household, and corporate sectors were addressed. 
Sustainable growth requires sustained private-sector demand. 
Monetary easing and fiscal stimulus, combined with structural measures to restore private firms to financial health, would stimulate household expenditure and business investment. 
Indeed, the impact of real exchange-rate depreciation on growth is likely to be short-lived unless increased corporate profits in the export sector lead to higher household consumption and investment. 
And yet risks to financial and fiscal stability could arise if higher inflation and currency depreciation were to spoil investors’ appetite for Japanese government bonds, thereby pushing up nominal interest rates. 
That is why the success of “Abenomics” hinges not on the short-term stimulus provided by aggressive monetary expansion and fiscal policies, but on a program of structural reform that increases competition and innovation, and that combats the adverse effects of an aging population. 
Japan, of course, is not alone in using exchange-rate policies to keep exports competitive. 
Many emerging economies’ authorities intervene in currency markets to prevent exchange-rate appreciation and a loss of export competitiveness. 
But if Japan starts to intervene directly in global currency markets to ensure a weaker yen, neighboring competitors will respond in kind. 
The danger of a currency war and protectionism should not be underestimated. 
In South Korea, the government and business leaders worry that a stronger won, which recently rose to its highest level against the yen since August 2011, will hurt key export sectors, including automobiles, machinery, and electronics. 
One report by a Korean research institute shows that the Korean economy will slip into recession if the yen-dollar exchange rate nears 118, its average level back in 2007. 
Moreover, unlimited quantitative easing by the Bank of Japan, the Federal Reserve, and the European Central Bank also increases the risk of volatile capital flows and asset bubbles in Asian emerging economies. 
Chinese policymakers have raised serious concerns about the growing risks of inflation and property bubbles. 
This delicate situation could escalate into further currency intervention, trade protectionism, and capital controls. 
Beggar-thy-neighbor policies could lower total trade volume – a zero-sum game from which no one would benefit. 
After all, Japanese exports rely on emerging and developing markets, with East Asia alone accounting for nearly half of Japan’s foreign sales. 
The regional economy would benefit from closer coordination of exchange-rate and monetary policies. 
Mechanisms like the G-20 and ASEAN+3 (ASEAN, with China, Japan, and South Korea) should be used more actively for policy dialogue and surveillance. 
East Asian economies could then, over time, cooperate to enhance regional exchange-rate stability, thereby creating a more conducive environment for intra-regional trade. 
Japan’s economy is moving at last, which bodes well for Asia and the world. 
But, despite its new vigor, the benefits of recovery could prove to be short-lived unless a sustainable and cooperative growth path is found. 

The Consequences of Korean Extremism 
SEOUL – Once again, the Korean peninsula is experiencing one of its periodic bouts of extremism, this time marked by the suicide on May 22 of former president, Roh Moo-hyun, and North Korea’s second test of a nuclear device. 
Roh’s suicide is a disaster for his family and a national shame, while North Korean leader Kim Jong-il’s nuclear blast is something of a temper tantrum, but one which may have dire consequences for the two Koreas and the world. 
The North Korean bomb, estimated at four kilotons, does not come anywhere near the magnitude of the atomic bombs of 15-21 kilotons that America dropped on Japan 64 years ago. 
Indeed, this vainglorious attempt by Kim Jong-il reminds Koreans of the mother bullfrog in Aesop’s Fables who puffed herself out to imitate an ox. 
Yet North Korea’s world-defying belligerency is not utter madness. 
Rather, it is a by-product of its own acute fears of regime collapse. 
As a Korean, I am always puzzled by Korean extremism. 
Where in the world can you find a more isolated, regimented and militarized dynastic mutation of a communist totalitarian system than in North Korea? 
Where on earth can you see a nuclear-armed, missile-shooting panhandler such as Kim Jong-il? 
Is there another country where only a father and his son have ruled like demigods for the last 61 years? 
Likewise, where else but in South Korea can you find a Christian church whose registered membership runs upwards of 800,000, and where nearly 100,000 adherents attend each of the three Sunday services every week? 
Where else can you witness an ex-president commit suicide by jumping off a cliff near his residence? 
And this in a country that had an estimated per capita income of $40 in the 1940’s but has now become the world’s 12th or 13th largest economy. 
Cornelius Osgood, an American anthropologist, attributed Korean extremism to the peninsula’s weather. 
He observed that the Korean temperament is a product of long, harsh Siberian winters and hot, humid summers, with only short springs and autumns. 
I believe, however, that Korean extremism stems from the country’s geography and history. 
Surrounded by hostile neighbors, such as Chinese, Mongols, and Manchus in the north and Japanese across the sea, Koreans have struggle tooth and nail for thousands of years to retain their ethnic, linguistic, cultural, and political identity. 
Setting the blame game aside, what can be done with North Korea? 
Unfortunately, putting the nuclear genie back in the bottle is next to impossible. 
The effectiveness of available options is limited, and all of them are pregnant with unpredictable political and military consequences. 
“Economic strangulation” of North Korea appears to be the fallback option. 
Strengthening and tightening United Nations Security Council Resolution 1718, crafted in the wake of North Korea’s first nuclear test in October 2006, should be the immediate task. The Security Council is already at work drafting a new resolution. 
But, to make the new resolution effective, China’s full and unwavering participation – which has not yet been the case – is critical. 
Any unilateral measures against North Korea by individual countries must be executed within the broader framework of the new resolution. 
And, even if new sanctions are imposed, the door to the Six-Party Talks must be left open for Kim Jong-il. 
In this eyeball-to-eyeball situation, the other five parties in the talks – China, Japan, Russia, the United States, and South Korea – must not give in first to North Korea. 
At present, public opinion worldwide, particularly in South Korea and Japan, is highly volatile. 
A cooling-off period is necessary. 
Seeking dialogue with North Korea immediately after its missile tantrum and nuclear brinkmanship is unwise and impractical. 
After tough and effective UN-led sanctions are imposed, the concerned parties must wait until North Korea feels the pain of the economic squeeze. 
But, as North Korea is one of the world’s poorest and least globalized states, the effectiveness of sanctions will be limited. 
At the same time, the nuclear threat is not the most immediate danger. 
The bigger threat today is actual combat, for, the day after North Korea’s nuclear test, South Korea announced its full participation in the US-led Proliferation Strategic Initiative, which seeks to intercept ships that may be involved in illegally transporting nuclear technology. 
North Korea blasted this South Korean decision as a “declaration of war.” 
So great care and cool heads will be needed in the seas around Korea in the days and weeks to come. 
Rising tension on the Korean Peninsula is shattering fast the glimmers of hope for re-unity that followed ten years of progress under the Kim Dae-Jung and Roh Moo-hyun governments. 
South Korean President Lee Myung-bak, through his flip-flops, and Kim Jong Il, with his renewed nuclear blackmail, both seem determined to see relations deteriorate. 
The two current leaders in Korea must not repeat the mistake of their predecessors in the latter part of the nineteenth century. 
Blinded by internecine domestic power struggles, they failed to see the great powers’ strategic gambits in the region. 
That failure led directly to the colonization of Korea by Japan. 
Worsening inter-Korean relations will certainly make both sides less secure and stable politically, economically, and militarily. 
Caught in this vicious spiral, North and South Korea will become far more vulnerable to neighboring powers’ strategic maneuvers. 
As a result, growing inter-Korean hostility may ultimately prove far more lethal to the well-being of all Koreans than Roh Moo-hyun’s tragic suicide and Kim Jong-il’s futile fireworks. 

The Syria Lessons 
PRINCETON – As the United States and Russia try to broker a conference that can bring the various sides in the Syrian conflict to the negotiating table, potential Western participants, at least, should be thinking about the larger implications of the Syrian conflict for dictators and democracies around the world. 
Here are the lessons thus far: 
Bad guys help their friends. 
The Russians and Iranians are willing to do whatever it takes to keep President Bashar al-Assad in power. 
Hezbollah, supplied by Iran, has now moved openly onto the battlefield in support of the Assad regime. 
Russia and Iran have kept the Syrian government supplied with heavy weapons and other military assistance, including a Russian shipment of sophisticated anti-ship missiles with advanced radar systems. These will help Assad hunker down and fend off all comers in an Alawite mini-state that will include the Russian-leased port facility at Tartus. 
Diplomacy without a credible threat of force is empty talk. 
“Speak softly and carry a big stick,” Theodore Roosevelt counseled. 
President Barack Obama rightly wants to lead in global affairs through civilian more than military power; he understands that military solutions to foreign-policy problems are hugely expensive and often counter-productive in terms of advancing US security and prosperity over the long term. 
But Obama’s strategy in Syria seems to be “speak loudly and throw away your stick.” 
Obama has made it clear over and over (as has NATO Secretary General Anders Fogh Rasmussen) that he has no interest in intervening militarily in Syria. 
And the US response to the latest Russian missile shipment? 
Secretary of State John Kerry said: “I think we’ve made it crystal clear we would prefer that Russia was not supplying assistance.” 
The US has cast aside one of its most important foreign policy tools, creating an incentive for the Syrian government and its supporters to keep fighting until they are in the most advantageous position possible to negotiate a settlement – that is, if they have any incentive to negotiate at all. 
If you are a dictator facing sustained political protests, be as brutal as possible and incite sectarian killing. 
Part of Syria’s agony is the self-fulfilling nature of the conflict. 
From March to December 2011, hundreds of thousands of Syrians marched every Friday, seeking the same political liberalization that Tunisians, Egyptians, Yemenis, Bahrainis, Jordanians, and others across the Middle East and North Africa sought in what was optimistically called “the Arab Spring.” 
Unarmed, they were shot in the streets by riot police and government snipers, until they finally started forming small local militias for self-protection – militias that gradually grew into the loose federation of forces now known as the Free Syrian Army. 
All the while, Assad was describing the violence as the product of terrorists and Sunni extremists seeking dominion over minority Alawites, Druze, Kurds, Christians, and other groups. 
He worked assiduously to fan the flames of sectarian civil war, succeeding to the extent that now the chief reason for not intervening to stop the killing is the impossibility of doing so effectively in an environment of sectarian violence. 
Regional organizations are still unable to solve regional problems without great-power leadership. 
Turkey has been threatening and calling for military action for 18 months, but US officials say that the Turks are not in fact ready to do anything beyond providing support for refugees and opposition fighters. 
Qatar and Saudi Arabia are also sending arms to Syrian opposition groups, but the Arab League and the Gulf Cooperation Council are paralyzed. 
Without a great power that is willing both to share the lead and to push from behind, regional organizations cannot take charge in their own neighborhood. 
Human suffering, even on a massive and destabilizing scale, will not move the world to action. 
In a recent conversation about Syria with a couple of well-known foreign policy experts, one participant suggested that the Middle East’s current borders, drawn in colonial times, cannot last and must be redrawn. 
I pointed out the possibility of a Middle East conflagration equivalent to the Thirty Years War in Europe, which is estimated to have killed between half and three-quarters of the population of some of the participating states. 
One of my interlocutors agreed, but said that we could do nothing to stop it, because “that’s the period of history we’re in.” 
For all the world’s pious proclamations about “never again,” a mantra arising from the Holocaust, mass murder almost never motivates foreign intervention. 
It is astounding to think that the world mobilized immediately to push Iraq out of Kuwait in 1991, but has dithered for more than two years as tens of thousands of Syrians have been killed, and their country, a cradle of civilization, laid waste. 
“Humanitarian” intervention – action that is motivated by our concern for the fate of fellow human beings – is often described as reflecting “moral concern.” 
But how many wars does it take for us to understand that killing always begets more killing? 
People who watch the butchering of their children and parents, the rape of their wives, daughters, and sisters, and the wanton destruction of their homes and livelihoods do not forget. 
They carry vengeance in their hearts from generation to generation, until a measure of justice is done, nursing their enmity in frozen conflicts that block economic growth, prevent the formation of social capital, and paralyze political institutions. 
When no side in a war has a reason to stop fighting, a peace conference cannot succeed. 
In Syria, the moral, strategic, and political arguments all converge in favor of decisive action to stop the killing, if not forever, at least for now, to create a space for peace. 
But if the lessons of the past two years are any guide, the wheels of violence will keep on turning. 


Syria’s Hijacked Struggle 
LONDON – As Syria’s civil war has progressed, the West’s views on arming the opposition have become increasingly confused, which reflects the growing muddle on the ground. 
While President Bashar al-Assad’s regime remains vicious and tyrannical, and some of its opponents’ motives remain altruistic, the conflict can no longer be defined simply as one of good versus evil. 
No unified, patriotic Syrian opposition has existed since extremists hijacked the peaceful protests in 2011. 
Indeed, some opposition tactics are as brutal as those of the Syrian regime. 
The United Nations estimates that security forces have suffered 15,000 fatalities, and the opposition 10,000, and that 45,000 civilians have died in the last two years of fighting. 
And the UN has condemned militant groups – which now form the majority of fighters in Syria – for murder, kidnap, torture, assault, corruption, and reliance on child soldiers. 
With Syria engulfed by chaos, the world does not know what to think. 
Martin Dempsey, Chairman of the US Joint Chiefs of Staff, has admitted that the United States lacks a clear picture of the situation in Syria. 
Moreover, Lakhdar Brahimi, the UN and Arab League special envoy for Syria, reports that opposition forces include 38 nationalities. 
Jihadi fighters connected to Al Qaeda are now in the majority. 
The United Kingdom’s Home Office has warned that hundreds of British and other European Muslims fighting in Syria alongside Al Qaeda-linked rebel groups could return home to carry out terrorist attacks. 
In February, Syria’s state news agency accused jihadi rebels of firing a rocket containing chemical materials in Khan al-Assal – an allegation that the British television outlet Channel Four backs. 
The rebels, however, blame the government for the attack (which neither side has been able to prove involved chemical weapons). 
The Free Syrian Army (FSA), which the US, the UK, and France support, has denied involvement in the alleged chemical attacks, but has not condemned the rebels’ brutal campaigns. 
Puzzlingly, US Secretary of State John Kerry, justifying plans to provide the FSA’s Supreme Military Council with additional assistance, has cited the danger of “letting this country, the heart of the Middle East … [become] hijacked by extremists.” 
But to oppose extremism and support the FSA is a blatant contradiction. 
Even the US Department of Justice has stated categorically that most of the FSA adhere to Al Qaeda’s ideology. 
The Supreme Military Council is overwhelmingly Islamist, with rebel-controlled areas of Syria already practicing sharia (Islamic law). 
Salim Idris, the council’s chief of staff, has expressed a willingness to fight alongside extremist groups that refuse to accept the unified command. 
He has labeled only the Al Qaeda-linked Jabhat al-Nusra as extremist (though he rejects America’s branding of the group as a “foreign terrorist organization.”) 
In this context, the West’s belief that it can channel assistance to certain elements of the opposition is absurd, as is the concept of “non-lethal” aid, such as night-vision goggles, medical equipment, and armor, given the conventionally “lethal” aid that is already pouring in from the Gulf states. 
The Guardianrecently reported that Jordan is accepting Saudi money to supply arms directly to Syrian rebels. 
Western proponents of such aid, such as Kerry and UK Foreign Minister William Hague, must recognize that these supply channels do not discriminate between opposition groups. 
More important, Western leaders must comprehend the danger of picking sides. 
And that means that they must stop ignoring the lessons of the campaign in Afghanistan in the 1980’s, which facilitated the Taliban’s rise to power, and the intervention in Libya in 2011, which produced a weak and divided government that remains locked in a power struggle with Islamist militias. 
France, the US, the UK, and Turkey have recognized the Syrian National Coalition as Syria’s future interim government, despite reports that two-thirds of the SNC’s 263 founders are linked to the Muslim Brotherhood. 
The SNC’s outgoing leader, Moaz Al-Khatib, has publicly criticized America’s decision to blacklist Jabhat al-Nusra – as has the SNC’s key backer, Turkey. 
It is ironic, to say the least, that the West’s democratically elected governments happily engage with members of the Muslim Brotherhood, but refuse to work with more liberal groups. 
Our views are much too liberal for the SNC, and its key backer, Turkey, whose foreign minister has said that jihad in Syria is not related to terrorism. 
They disregard the warnings of people like Alain Chouet, the former chief officer of the French General Directorate for External Security in Damascus, who recently denounced France’s provision of weapons to the rebels as “completely illegal” and described how “the jihadi militias have taken precedence over the others.” 
The repercussions of mishandling Syria will extend far beyond the country’s borders. 
After all, Syria is situated on a national, sectarian, regional, and geopolitical fault line, where the strategic interests of Russia, China, Iran, Iraq, and Lebanon confront those of NATO, Turkey, Saudi Arabia, Qatar, Kuwait, and Jordan. 
And regional tensions are running high. 
Improving Syria’s prospects for peace and democracy must begin with diplomacy. 
Democracy is about representation, and that should cover the full mosaic of Syria’s people. 
Every group with an interest in the country’s future – including the government, domestic opposition groups, and those in exile – should be invited to participate in official talks. 
And, in order to create a level playing field, it is essential to recognize that the Arab League (which has already given Syria’s seat to the Muslim Brotherhood-controlled SNC) represents the autocratic states that are encouraging sectarianism and extremism in Syria. 
During this process, Western governments must stop providing money or other kinds of aid to opposition groups in Syria, and put pressure on Turkey and the Gulf countries to stop supporting extremists. 
Any financial aid should be channeled through organizations like the Red Cross and UNICEF to supply medical care to civilians, or allocated to a fund for post-war reconstruction. 
Some leaders may be starting to recognize the need for a new narrative. 
The UN Security Council has condemned the opposition’s recent attack on a mosque in Damascus, which killed a senior pro-government Muslim cleric. 
US President Barack Obama recently expressed concern about Syria “becoming an enclave for extremism, because extremists thrive in chaos.” 
But, in reality, Syria has already become an enclave for extremism. 
Responding with military aid will simply turn a catastrophe into an apocalypse. 

The New-Model Nomad 
MOGADISHU – One of my earliest childhood memories is of swimming in a small gully near my grandmother’s home in Yaaq Bari Wayne, a dusty collection of tin-roofed adobe buildings huddled together in the plains of southern Somalia’s Bay region. 
After the Gu rains, the gully became a deep triangular cleft cut into the ground, filled with muddy water. 
Children gathered like ants to spilled sugar, jumping off ledges and diving into its murky depths with screams and whoops of excitement. 
Many were children of nomadic herders, who moved south in May and June in search of better pastures. 
When they arrived, brown domes made of crisscrossed branches and layers of multicolored mats would appear like crowds of dappled beetles on the outskirts of town. 
For me, the nomad was a romantic figure, akin to the American cowboy of the Wild West. 
In the world’s harshest environment, they trekked hundreds of kilometers, surviving on camel milk and dried meat, with all of their possessions strapped to a camel’s back. 
But, in the last two decades, the story of the Somali nomad has become far less romantic – and far more complex. 
Nomads have been victims of famine, violent conflict, and circumstance, accounting for a significant share of the deaths – as many as one million – caused by 22 years of civil war, and of the 260,000 Somalis who died of starvation in 2010-2012. 
At the same time, nomads have been perpetrators of violence and terrorism. 
And yet there is another way to view nomads: as survivors, entrepreneurs, providers, and agents of transformation. 
With global problems like food insecurity and climate change threatening livelihoods around the world, nomadic and pastoral lifestyles have the potential to protect and sustain millions of people. 
In fact, it was cataclysmic climate change – which transformed a lush, green Sahara into a harsh desert – that triggered the emergence of such lifestyles in East Africa 5,000 years ago. 
Cattle herding allowed nomads to create livelihoods in an increasingly unpredictable and challenging environment, characterized by an arid climate and scarce resources. 
Today, there are some 50 million nomadic herders in Sub-Saharan Africa, and as many as 150 million agro-pastoralists, who combine traditional nomadic animal-rearing with some form of agriculture. 
Policymakers often view nomadic pastoralism as an archaic and unproductive way of life, with little economic benefit. 
But the opposite is true. 
Pastoralist systems are 20% more productive than traditional ranching methods. 
And pastoralists are more market-savvy than many believe; the Horn of Africa’s pastoral livestock and meat trade is estimated to be worth $1 billion. 
Using land that cannot support conventional agriculture, pastoralists and agro-pastoralists produce meat, milk, and livestock products that sustain millions. 
Indeed, according to an OECD study, they are responsible for 10% of the world’s meat production; in some regions, they supply as much as 60% of the beef and 70% of the milk consumed. 
Pastoralism is thus an essential livelihood system, with the potential to help overcome food insecurity – particularly in Somalia, where more than 50% of the population are nomadic herders. 
In order to unleash this potential, a strong support system that improves pastoralists’ access to capital and markets, while bolstering human-resource development and capacity-building, is needed. 
Following the example of Mongolia, where pastoralists can purchase private insurance to protect against the loss of herds from drought, microcredit programs could be established to insure pastoralists against similar risks and thus provide funds for restocking after a disaster. 
In order to enhance their livelihoods’ stability and profitability further, pastoralists need to be integrated into the formal economy. 
Effective trade networks and access to livestock markets would enable them to increase sales substantially. 
Increased access to technology is also crucial to improving nomads’ economic prospects. 
In Niger, pastoralists use mobile phones to keep abreast of commodity prices in regional markets, which enables them to sell their camels where prices are highest and purchase grains where prices are lowest. 
In Kenya, veterinarians send text-message alerts to warn pastoralists of disease outbreaks and provide vaccination information. 
Providing such support systems for pastoralists could prove to be an effective strategy for advancing economic development, enhancing food security, and reducing dependence on food aid in Somalia and elsewhere. 
Indeed, for many countries, nomads – recast as intrepid entrepreneurs – could be the key to securing a prosperous future. 

The Conundrum of Scientific Fraud 
Science, and the behavior of scientists, has never been perfect. 
Consider the Korean scientist Hwang Woo-suk, whose claim to have extracted stem cells from human embryos that he cloned turned out to be based on phony research. 
Hwang has just been fired by Seoul National University, and six of his co-workers have been suspended or had their pay cut. 
Hwang and his colleagues are hardly alone. 
In response to the recurrence of well-publicized and highly damaging scandals in recent years, many universities and some entire national research funding agencies now convene “institutional review boards” to deal with breaches of what has come to be known as “research ethics.” 
But are such boards necessary? 
If so, in what spirit should they conduct their work? 
From artists to scientists, all intellectual workers are preoccupied with the giving and taking of credit. 
Hiring, promoting, and rewarding academic staff is increasingly based on “citation counts” – the number of times someone receives credit in peer-approved publications. 
Even if someone’s work is criticized, it must be credited properly. 
Credit is often given simply because someone has produced a creditable work. 
But, increasingly, the fixation on credit reflects the work’s potential monetary value. 
And, however one defines the creditworthiness of intellectual work, one thing is clear: reported cases of fraud are on the rise. 
Sometimes fraud consists in plagiarism: the culprit takes credit for someone else’s work. 
However, especially in the most competitive scientific fields, fraud often takes the form of forgery: the culprit fabricates data. 
Plagiarism is the sin of the classroom; forgery is the sin of the laboratory. 
But in neither case has a standard method emerged for ensuring the integrity of research – or of the scientists who carry it out. 
A useful simplification in addressing the potential work of research ethics panels is to consider two models of review: “inquisitorial” and “accusatorial.” 
Whereas the inquisitorial model presumes that fraud is rampant, but often undetected, the accusatorial model adopts a less paranoid stance, presuming that researchers are innocent until proven otherwise. 
The natural context for an inquisitorial system is a field where scientific integrity is regularly under threat because research is entangled with political or financial interests. 
Often, these entanglements are unavoidable, especially in the case of biomedical research. 
Here the inquisitors are part cost accountant, part thought police. 
They conduct spot-checks on labs to ensure that the various constituencies for scientific research are getting their money’s worth. 
Inquisitors must be invested with the power to cut off funding to transgressors, perhaps even excommunicating them, by barring a scientist from practicing or publishing in the future. 
Hwang, for example, has lost his research license and has been banned from assuming another public post for five years. 
However, the credibility of such a system relies on the inquisitors’ ability to uphold standards of science that are genuinely independent from special interests both inside and outside the research community. 
Otherwise, inquisitorial ethics reviews could come to be regarded as nothing more than intellectual vigilantism. 
Consider the Danish Research Council’s ominously named “Committee on Scientific Dishonesty,” which was convened in 2002 following complaints raised against the political scientist Bjørn Lomborg, whose book The Skeptical Environmentalist purported to demonstrate that ecologists systematically biased their interpretation of data to support their political objectives. 
The Committee initially found Lomborg guilty of much the same error that he had alleged of the ecologists. 
However, the Committee refused to comment on whether his behavior was normal or deviant for the field in question. 
This enabled Lomborg to appeal the verdict, successfully, claiming that the Committee had victimized him for political reasons, given his recent appointment as director of a major national institute for environmental research. 
In the end, the Committee on Scientific Dishonesty was itself reorganized. 
In retrospect, the Committee probably should have refused the case, given that Lomborg’s book was subject to intense public scrutiny, often by experts writing (favorably) in The Economist and (unfavorably) in Scientific American. 
His was a genuine case in which intellectual work was given a fair trial in the proverbial “court of public opinion” and required no further oversight. 
Indeed, Lomborg’s case would seem to support the accusatorial model of ethics review, which assumes that scientists adequately regulate their own affairs through normal peer-review procedures. 
Here, scientific integrity is understood not as a duty to stakeholders—funders, companies, or, as with Hwang, politicians concerned about national prestige—but as a collective responsibility that is upheld by identifying and correcting errors before they cause substantial harm. 
The accusatorial system is designed for those relatively rare cases when error slips through the peer-review net, resulting in some concrete damage to health or the environment, or causing the corruption of later research that assumes the validity of fraudulent work. 
To lodge an accusation, the accuser must establish that some harm has been committed, which is then shown to have been the fault of the accused. 
The countervailing assumptions of the inquisitorial and accusatorial systems reflect the ambiguity of the concept of scientific fraud. 
Many so-called frauds are cases in which researchers claimed credit for work they have not really carried out, but that pointed in the right direction and was eventually completed by others. 
Strictly speaking, they are guilty more of confusing the potential and the actual than the true and the false. 
Indeed, by today’s standards, Galileo and Mendel committed fraud, since they likely massaged their data to fit a neat mathematical formula. 
However, they remain scientific visionaries because others built so effectively on their “work.” 
Of course, in their cases, no money changed hands and no one’s life was jeopardized. 
Perhaps, from the point of view of research ethics, that makes all the difference. 

The Cooperative Alternative 
WASHINGTON, DC – In an era in which conventional models of finance, corporate governance, and corporate responsibility are increasingly debated, if not called into question, it may be time to revisit the alternative approach taken by economic cooperatives. 
The foundational values of cooperatives embody not only a humane vision, but also a pragmatic approach to production that has enabled the successful ones to thrive – and to spur economic growth in countries that desperately need it. 
Cooperative movements took shape in the Americas, Europe, Australia, and Japan in the 1800’s. 
Many grew from the simple proposition that ordinary people could overcome adversity in the marketplace by banding together to buy and sell goods at reasonable prices, and quickly realized the added benefits of sharing knowledge among members, promoting inclusion, and building social capital. 
Today, cooperatives cover a range of activities and come in a variety of shapes and sizes, from small-scale agricultural and consumer organizations in Africa to some of the leading agricultural brands and largest financial-service providers in North America and Europe. 
According to the International Cooperative Alliance, a cooperative is a “jointly owned and democratically controlled enterprise.” 
But, beneath this definition lie rich notions of voluntary association, accountability for strategic decisions, and concern for the communities that cooperatives serve. 
Cooperatives have helped to bring information and services to far flung rural communities, empower workers, and expand financial services, healthcare, education, and housing. 
In doing so, they have transformed the economic and social landscape in countless communities. 
The International Cooperative Alliance reports that more than 800 million people are members of cooperatives worldwide. 
Moreover, cooperatives account for a significant share of GDP in many countries, and an especially high share of the agricultural and consumer sectors. 
Cooperatives are also one of the largest providers of financial intermediation to the poor, serving an estimated 78 million people globally who live on less than $2 per day. 
Of course, cooperatives have sometimes struggled to live up to the ideal. 
In the most egregious cases, some have fallen victim to bad politics, weak governance, or mismanagement. 
Others are exposed to risks stemming from concentration in a single business sector, commodity, and/or geographic area. 
Cooperatives have also wrestled with questions of members’ entry and exit, financial disclosure, and relationships with the non-cooperative sector. 
And governments have often faced vexing questions with regard to financial regulation and taxation of cooperatives, including treatment of profits and consideration of exemptions. 
And now, in a more mobile and urban world, one might ask: can cooperatives maintain their essential character, based on inclusion and knowledge sharing within a community? 
In a world in which geography is a diminishing barrier to business, can cooperatives sufficiently distinguish themselves as a viable alternative model? 
Or will they evolve to serve virtual communities, organized around new sets of challenges and opportunities? 
The United Nations has declared 2012 the “Year of Cooperatives.” 
This provides a good opportunity to examine the extraordinary history of cooperatives, assess their strengths and weaknesses, and rekindle a discussion about a development model that promises higher levels of inclusion, ownership, self-determination, and concern for community. 
The World Bank is active in the development of producer and credit cooperatives around the world. 
Some of the most notable programs include the Indian Dairy Cooperative, which has created an estimated 250,000 jobs, mostly in rural areas. 
Similarly, Mexico’s National Savings and Financial Services Bank has helped to strengthen savings and credit institutions that serve millions of rural residents who would otherwise have been relegated to the margins of the formal financial sector. 
The Bank’s policy work has re-affirmed the notion that rural producer organizations are fundamental building blocks of agricultural development. 
And it has helped governments to supervise and regulate cooperative financial institutions. 
As we search for innovative solutions to today’s development challenges, we should consider what the cooperative movement can offer. 
That means not only greater economic inclusion, higher agricultural productivity, strengthened food security, and financial stability, but also lessons concerning responsible and sustainable business practices, corporate governance, and community relations. 
And we should consider how to facilitate the spread of cooperatives’ best practices while avoiding common pitfalls. 
The cooperative movement can prompt us to think in new, inspired ways. 
Capitalizing on cooperatives’ successes and learning from their mistakes can help us to expand the menu of options as we search for more inclusive and sustainable models of development, and new ways of building and sharing knowledge. 

The Copenhagen Panic 
COPENHAGEN – A sense of panic is setting in among many campaigners for drastic cuts in global carbon emissions. 
It is becoming obvious that the highly trumpeted meeting set for Copenhagen this December will not deliver a binding international treaty that will make a significant difference to global warming. 
After lofty rhetoric and big promises, politicians are starting to play the blame game. 
Developing countries blame rich countries for the lack of progress. 
Many blame the United States, which will not have cap-and-trade legislation in place before Copenhagen. 
The United Nations Secretary General says that “it may be difficult for President Obama to come with strong authority” to reach agreement in Copenhagen. 
Others blame developing countries – particularly Brazil, China and India – for a reluctance to sign up to binding carbon cuts. 
Wherever you turn, somebody is being blamed for Copenhagen’s apparent looming failure. 
Yet, it has been clear for a considerable time that there is a more fundamental problem: immediate promises of carbon cuts do not work. 
Seventeen years ago, industrialized nations promised with great fanfare in Rio de Janeiro to cut emissions to 1990 levels by 2000. 
Emissions overshot the target by 12%. 
In Kyoto, leaders committed to a cut of 5.2% below 1990 levels by 2010. 
The failure to meet that target will likely be even more spectacular, with emissions overshooting by about 25%. 
The plan was to convene world leaders in Copenhagen and renew vows to cut carbon while committing to even more ambitious targets. 
But it is obvious that even a last-minute scramble to salvage some form of agreement will fare no better in actually helping the planet. 
With such a poor track record, there is a need for soul-searching and openness to other approaches. 
A realistic “Plan B” does not mean plotting a second meeting after Copenhagen, as some have suggested. 
It means re-thinking our strategy. 
This year, the Copenhagen Consensus Center commissioned research from top climate economists examining feasible ways to respond to global warming. 
Their research looked at how much we could help the planet by setting different levels of carbon taxes, planting more trees, cutting methane, reducing black soot emissions, adapting to global warming, or focusing on a technological solution to climate change. 
The Center convened an expert panel of five of the world’s leading economists, including three Nobel Prize winners, to consider all of the new research and identify the best – and worst – options. 
The panel found that expensive, global carbon taxes would be the worst option. 
This finding was based on a groundbreaking research paper that showed that even a highly efficient global CO2 tax aimed at fulfilling the ambitious goal of keeping temperature increases below 2oC would reduce annual world GDP by a staggering 12.9%, or $40 trillion, in 2100. 
The total cost would be 50 times that of the avoided climate damage. 
And if politicians choose less-efficient, less-coordinated cap-and-trade policies, the costs could escalate a further 10 to 100 times. 
Instead, the panel recommended focusing investment on research into climate engineering as a short-term response, and on non-carbon-based energy as a longer-term response. 
Some proposed climate-engineering technologies – in particular, marine cloud-whitening technology – could be cheap, fast, and effective. 
(Boats would spray seawater droplets into clouds above the oceans to make them reflect more sunlight back into space, reducing warming). 
Remarkably, the research suggests that a total of about $9 billion spent implementing marine cloud-whitening technology might be able to offset this entire century’s global warming. 
Even if one approaches this technology with concerns – as many of us do – we should aim to identify its limitations and risks sooner rather than later. 
It appears that climate engineering could buy us some time, and it is time that we need if we are to make a sustainable and smooth shift away from reliance on fossil fuels. 
Research shows that non-fossil fuel energy sources will – based on today’s availability – get us less than halfway toward a path of stable carbon emissions by 2050, and only a tiny fraction of the way towards stabilization by 2100. 
If politicians change course and agree this December to invest significantly more in research and development, we would have a much greater chance of getting this technology to the level where it needs to be. 
And, because it would be cheaper and easier than carbon cuts, there would be a much greater chance of reaching a genuine, broad-based – and thus successful – international agreement. 
Carbon pricing could be used to finance research and development, and to send a price signal to promote the deployment of effective, affordable technology alternatives. 
Investing about $100 billion annually would mean that we could essentially resolve the climate-change problem by the end of this century. 
While the blame game will not solve global warming, the mounting panic could lead to a positive outcome if it means we re-consider our current approach. 
If we want real action, we need to pick smarter solutions that will cost less and do more. 
That would be a result for which every politician would be happy to accept responsibility. 

The Corporate-Tax Conundrum 
BERKELEY – The United States now has the highest statutory corporate-income tax rate among developed countries. 
Even after various deductions, credits, and other tax breaks, the effective marginal rate – the rate that corporations pay on new US investments – remains one of the highest in the world. 
In a world of mobile capital, corporate-tax rates matter, and business decisions about how and where to invest are increasingly sensitive to national differences. 
America’s relatively high rate encourages US companies to locate their investment, production, and employment in foreign countries, and discourages foreign companies from locating in the US, which means slower growth, fewer jobs, smaller productivity gains, and lower real wages. 
According to conventional wisdom, the corporate-tax burden is borne principally by the owners of capital in the form of lower returns. 
But, as capital becomes more mobile, relatively immobile workers are bearing more of the burden in the form of lower wages and fewer job opportunities. 
That is why countries around the world have been cutting their corporate-tax rates. 
The resulting “race to the bottom” reflects intensifying global competition for capital and technological knowhow to support local jobs and wages. 
Moreover, a high corporate-tax rate is an ineffective and costly tool for producing revenues, owing to innovative financial transactions and legal tax-avoidance mechanisms. 
A company’s legal residence and geographic sources of income can be and are manipulated for such purposes, and the incentives and scope for such manipulation are especially large in sectors where competitive advantage depends on intangible capital and knowledge – sectors that play a major role in the US economy’s competitiveness. 
In the absence of close and broad international cooperation, the US must join the race and lower its corporate-tax rate. 
A lower rate would strengthen incentives for investment and job creation in the US, and weaken incentives for tax avoidance. 
It would also reduce numerous efficiency-reducing distortions in the US tax code, including substantial tax advantages for debt financing over equity financing and for non-corporate businesses over corporate businesses. 
But each percentage-point reduction in the corporate-tax rate would reduce federal revenues by about $12 billion per year. 
These revenue losses could be offset by curtailing so-called “corporate-tax expenditures” – deductions, credits, and other special tax provisions that subsidize some economic activities while penalizing others – and broadening the corporate-tax base. 
Both President Barack Obama’s plan for business-tax reform and the Simpson-Bowles deficit-reduction plan propose reducing such expenditures to pay for a reduction in the corporate-tax rate. 
Corporate-tax expenditures narrow the base, raise the cost of tax compliance, and distort decisions about investment projects, how to finance them, what form of business organization to adopt, and where to produce. 
As Michael Greenstone and Adam Looney show in a just-released report, the resulting differences in effective tax rates for different kinds of business activity are substantial. 
That said, if the goal of corporate-tax reform is to boost investment and job creation, broadening the tax base to pay for a lower rate could be counterproductive. 
Eliminating “special interest” loopholes, like tax breaks for oil and gas, or for corporate jets, would not yield enough revenue to pay for a meaningful rate cut. 
And curtailing accelerated depreciation, the manufacturing production deduction, and the R&D tax credit – which account for about 80% of corporate-tax expenditures – would involve significant tradeoffs. 
Indeed, cutting these items to “pay for” a reduction in the corporate-tax rate could end up increasing the tax on corporate economic activity in the US. 
Eliminating accelerated depreciation for equipment would raise the effective tax rate on new investments; repealing the domestic-production deduction would increase the effective tax rate on US manufacturing; and rescinding the R&D tax credit would reduce investment in innovation. 
Instead of cutting proven tax incentives for business investment, the US should offset at least some of the revenue losses from a lower corporate-tax rate by raising tax rates on corporate shareholders. 
Most countries that reduced their corporate-tax rates have followed this path, while the US has done the opposite. 
At 15%, America’s tax rates on dividends and capital gains are at historic lows, while the profit share of national income is at an all-time high. 
Defenders of low rates for capital owners argue that it minimizes “double” taxation of corporate income – first of the corporation and then of its shareholders. 
A lower corporate-tax rate would weaken this justification. 
Moreover, pension funds, retirement plans, and non-profit organizations, which receive about 50% of all corporate dividends, do not pay tax on these earnings, and would benefit from a lower corporate-tax rate. 
Although individual taxes on corporate income reduce the after-tax return to savings, they have less distorting effects on investment location than corporate taxes do, and they are more likely to fall on owners of capital than on workers. 
Moreover, it is far easier to collect taxes from individual citizens and resident shareholders than from multinational corporations. 
Apple can use sophisticated techniques to manipulate the location of its corporate income, but individual US citizens who own Apple stock have to report the dividends and capital gains that they earn from it in their worldwide income. 
A recent study found that taxing capital gains and dividends as ordinary income, subject to a maximum 28% rate on long-term capital gains (the pre-1997 rate), could finance a cut in the corporate-tax rate from 35% to 26%. 
Such a change would reduce corporations’ incentives to move investments abroad or shift profits to low-tax jurisdictions, while increasing the progressivity of tax outcomes by shifting more of the burden of corporate taxation from labor to capital owners. 
An increase in the corporate-tax rate appeals to many US voters who believe that corporations are not paying their fair share of taxes and are worried about widening income inequality. 
But, in a world of mobile capital, raising the corporate tax rate – or simply leaving it at its current level – would be a bad way to generate revenue, a bad way to increase the tax system’s progressivity, and a bad way to help American workers. 

The Cost of America’s Free Lunch 
BRUSSELS – For decades, the world has complained that the dollar’s role as global reserve currency has given the United States, in a term usually attributed to Charles de Gaulle but actually coined by his finance minister, Valery Giscard d’Estaing, an “exorbitant privilege.” 
As long as exchange rates were fixed under the Bretton Woods system, the nature of that privilege was clear: the US was the only country that could freely determine its own monetary policy. 
All others had to adapt to the policy dictated by the US. 
This changed with the advent of floating exchange rates in the early 1970’s, which allowed more stability-conscious countries, such as Germany, to decouple from a US monetary policy that they considered too inflationary. 
But, even under floating exchange rates, the US retained an advantage: given that the dollar remained the key global reserve currency, the US could finance large external deficits at very favorable rates. 
Today, the US Treasury can still borrow unlimited amounts at rock-bottom interest rates. 
Indeed, the interest rate on inflation-protected bonds has now become -0.5%, even for a five-year maturity! 
The US government is thus essentially being paid in real terms to take investors’ money – a generous offer that it is accepting on a huge scale, in the hope that channeling these resources to American consumers will boost household spending and thus generate more jobs. 
The US seems to have come as close as one can imagine to getting the proverbial “free lunch” – except that, as economists are fond of pointing out, there is no such thing. 
And that is true here as well: performing the role of reserve currency enables the US to borrow on the cheap, but at the cost of any significant influence over the exchange rate, which is determined by the rest of the world’s demand for dollar assets. 
Germany discovered this during the 1960’s and 1970’s, and resisted the Deutschemark’s trend toward becoming an international reserve currency. 
The German authorities feared that the country’s export-oriented economy would suffer from the wide exchange-rate swings that are the norm for global reserve currencies. 
Given the weakness of other European currencies, however, and Germany’s desire to keep markets open, there was very little that its officials could do. 
As the DM became a major international reserve currency during the 1980’s and 1990’s, large gyrations in the dollar exchange rate did, indeed, have at times a dramatic impact on the German economy. 
One reason why Germany agreed to merge the DM into the euro was the hope that a monetary union would distribute the burden of the reserve-currency role over a wider area. 
The US economy is still rather closed (imports and exports account on average for only about 15% of GDP), and historically exports have never been the main engine of its growth. 
This is why the traditional US stance has been: “It is our exchange rate, but your problem.” 
So why is the US now singing a different tune? 
The answer is obvious: America’s high unemployment rate, which hovers between 9% and 10%. 
This is the price that the US must pay for its lunch: Americans can continue to consume a lot, but the jobs are elsewhere. 
Today, China has replaced Germany (and Japan) as the world’s top exporter – but with one difference: it manages its exchange rate tightly, using capital controls and massive intervention in currency markets. 
As the only major economy with capital controls, China has created its own “exorbitant privilege”: it can determine its exchange rate because no other big countries impose capital controls. 
The two global economic superpowers resent each other’s “exorbitant privilege.” 
The US would like to have the Chinese jobs, and the Chinese would like to have better investment opportunities. 
Neither side is budging, although either could easily break the impasse. 
The Chinese could abolish capital controls and let the renminbi’s exchange rate float. 
But the US could easily end China’s privilege by restricting sales of Treasury (and other US) debt to the Chinese monetary authorities. 
In doing so, the US would break no international commitments and would not start a trade war. 
Such a move is likely to be effective, given the sheer size of Chinese interventions (hundreds of billions of US dollars annually), which could not easily be recycled through offshore banks without exposing the China’s central bank to many other risks. 
Prohibiting the Chinese authorities from buying US debt would, of course, be tantamount to imposing capital controls, thereby breaking China’s monopoly on such instruments. 
But it might also mean an end to America’s position at the center of the world’s financial system – and thus an end to its own “exorbitant privilege.” 
There really is no free lunch. 
The US must choose between job creation, which requires a more competitive exchange rate, and cheap financing of its external and fiscal deficits. 
While China and the US battle it out, each trying to retain its own “exorbitant privilege,” Europe seems to be stuck in the middle, suffering from the same disadvantages of the US position, but enjoying none of its privileges. 
The euro is also a global reserve currency (albeit of secondary importance), but most eurozone governments’ financing costs are much higher than what the US Treasury pays. 
This is one of the costs of the incomplete nature of financial integration in Europe. 

The Cost of Dick Cheney 
LONDON – George W. Bush has started work on his memoirs. 
Count to ten before you respond. 
The autobiographies of political leaders are not a very elevated literary form. 
First, few leaders write well, though there are exceptions, like Nehru, Churchill, and de Gaulle. 
No wonder that most of them employ a “ghost,” like the one in Robert Harris’s excellent thriller of the same name, which is really a devastating critique of Britain’s former premier, Tony Blair. 
Second, these memoirs are usually little more than slabs of self-justification interspersed with lists of famous people met in the course of life at the top. 
To take one example, while Bill Clinton speaks with warmth, wit, and great eloquence in the flesh, his autobiography is not worth reading. 
Third, these books are usually written largely for a big paycheck. 
But it beats me how publishers ever recover the huge multi-million dollar advances they hand out. 
When the great General George C. Marshall – whose memoirs of World War II and of his tenure as America’s Secretary of State would have been worth every penny – was offered $1 million by a publisher in the1950’s for his autobiography, the old man replied, “Why would I want $1 million?” 
What a different world we now inhabit. 
The good news about the Bush project, so far title-free, is that it is apparently going to be different from the usual reputation polishing. 
Instead of starting at the beginning of his presidency, with all those dodgy Florida voting machines, and plodding on to the bitterly unpopular end, he intends to concentrate on the 20 most consequential decisions he made in the White House. 
He will also focus on key moments in his life, such as his decision to give up alcohol and to choose Dick Cheney as his Vice President. 
Shaking off his addiction to booze speaks extremely well of Bush, his strength of character and the support of his wife and family. 
To turn your back on an addiction is never easy. 
Those who do it, helped in Bush’s case by a growing religious faith, deserve sympathy and approval. 
It was never Bush’s determination that was in doubt, nor his geniality – despite that slightly annoying rich-boy joshing. 
Nor did I ever believe that the former president was stupid: a criticism leveled at him by many of his European peers who were themselves hardly philosopher kings. 
The problem with Bush was not lack of intelligence but a complete absence of intellectual curiosity. 
He was content to camp on his own shallow prejudices, and the rest of the world had to be fitted into this narrow terrain. 
This is where Cheney came in. 
It was certainly a key moment when Bush chose him. 
Imagine, for example, how different the world and the opinions of Bush’s presidency might have been if he had chosen Colin Powell or John McCain as his running mate? 
What Cheney did was to feed and nourish the Bush prejudices, and to move ruthlessly and energetically to occupy the policymaking ground left vacant by the President’s indolence and National Security Adviser Condoleezza Rice’s lack of political clout. 
What did Cheney believe? 
He thought that Ronald Reagan had shown that fiscal deficits don’t matter. 
He believed in capitalism – or at least in supporting big companies and the rich – though whether he understood how free markets should work under the rule of law is more doubtful. 
The law was never Cheney’s strong point. 
He was an apologist for American power, even though during the Vietnam years he had wriggled and dodged to avoid being at the sharp, conscripted end of it. 
He thought that the American president should operate beyond the checks and balances applied by the US Constitution, just as his country should not be constrained by any international rules. 
Rules were for others, and at the very end of his term in office his one public disagreement with Bush concerned the President’s refusal to pardon Cheney’s former chief of staff, Scooter Libby, who had been convicted of perjury. 
Cheney’s influence resulted in the bloody disaster of Iraq, the moral humiliation of Guantanamo, water-boarding and “extraordinary rendition,” the despair of friends and the contempt of critics, a full-dress parade of double standards around the globe. 
Mean-spirited and partisan, Dick Cheney was one of America’s most powerful vice presidents. 
I cannot think of one who did so much damage to America at home and to its reputation abroad. 
No wonder Bush regards the choice of Cheney as such a key decision. 
Ideas matter in politics and having only a few simplistic ones of his own, Bush found his agenda shaped and dominated by his clever surrogate and deputy. 
That is what eventually did him in. 
Bush’s presidency was discredited and sunk by the man whom he fatally selected to work for him. 
The bigger tragedy was that so many others paid a much higher price for this than Bush did. 
“The Cost of Dick Cheney” – perhaps that should be the title of Bush’s memoirs. 

The Cost of the Gender Gap 
Working women throughout the world have long complained of the unfairness implied by lower pay than what men receive. 
But the wage disparity between men and women is more than unjust. 
It is also economically harmful. 
Economists at the International Monetary Fund have calculated that the “gender gap” costs the world billions of dollars in economic growth each year. 
A cross section of 40 poor and rich countries shows that there is a strong relationship between women’s economic and social status and overall economic growth. 
Women’s lack of education, health care, and economic and social opportunities – both absolutely and relative to men – inhibits economic growth. 
By contrast, economic growth ameliorates women’s subordinated condition. 
In The State Of The World’s Children 2007 , UNICEF reports that gender equality renders a double dividend: healthy, educated women rear healthy, educated children. 
According to UNICEF, women feel greater responsibility than men for the household, and they spend more money on food, medicine, and educating children. 
But what UNICEF suggests as the solution for developing nations – that women be made responsible for the household and childrearing – is in fact the cause of the problem. 
Indeed, the “double dividend” is a curse rather than a blessing, because it confines women to the home. 
Policy measures that cultivate traditional role patterns should be abolished. 
Instead, one must promote the economic empowerment of women to help generate economic growth. 
Evidence for this can be found in Western Europe. 
According to the Dutch historians Tine de Moor and Jan Luyten van Zanden, the early break with patriarchy in Europe in the late Middle-Ages (1200-1500) accounts for the rise of capitalism and growing prosperity in the Western World. 
Girls were no longer married off, but selected their own spouses. 
As a result, it became worthwhile for parents to invest in girls’ education and wellbeing. 
As a result, Europe’s economy advanced much more than China’s over the next five centuries. 
However, the tables have turned. 
As The Economist pointed out last year, women have become the engine of global growth, especially in China and other Asian countries. 
The Asian economies seem to make much better use of the resources that women have to offer than Europeans do. 
In Asia, more women work, they work more hours, and they advance on the corporate ladder much faster than European women. 
In the Philippines, 89% of companies have women in senior management positions. 
China, Hong Kong, Indonesia, Taiwan, and Singapore follow closely in terms of women in top jobs. 
Even in India, where more than half of girls and women are illiterate, more women hold senior management positions than in countries like Germany and the Netherlands. 
In Europe, women long ago bridged the education gap with their male peers. 
Still, they occupy a mere 8.5% of corporate boardroom seats. 
Except for Scandinavia, the number of women on Europe’s top company boards is stagnating. 
In part, this is a classic insider-outsider tale. 
Male dominance in the marketplace works like a cartel, barring talented women from top jobs. 
On average, women’s take-home pay is half that of men. 
But European women are to blame as well. 
In European countries like Germany and the Netherlands, college-educated women often choose to be stay-at-home mothers or work part-time. 
Only one of 10 female professionals with children works full-time in the Netherlands, compared to nine of 10 male professionals with children. 
So it should not come as a surprise that employers don’t take women seriously. 
Women’s contribution to the Dutch economy is around 27%. 
A raw estimate shows that if women would work a bit more outside the home and thus increase their contribution to the Dutch economy to, say, 35%, this would generate an additional 11% in GDP growth, some €60 billion per year. 
Women would still be working only half as much as men outside the home. 
With the extra money women would generate, the government could take care of the aging population and still have billions to spend on education and childcare. 
What is true in the Netherlands and Europe is true all over the world: reducing the inequalities that exist between men and women is not only a matter of justice; it also makes economic sense. 

David Cameron’s Euro-Nemesis 
LONDON – Unlike some in Britain’s Conservative Party, Prime Minister David Cameron has not previously given the impression of being obsessed with Europe. 
He demonstrated no enthusiasm for the European Union, but he appeared clearly less exercised by its supposed iniquities than many Tories are. 
This view of Cameron’s position is now difficult to sustain. 
His long-gestating speech on Europe, although containing elements that many might share, also sows the seeds for a prolonged and acrimonious debate – and not just in Britain. 
Conservatives in the House of Commons (and in the wider party) want to be reassured that their leader shares their antagonism for the entire European integration process. 
They have not forgotten or pardoned his “treachery” in refusing to hold a referendum on the Lisbon Treaty, signed by his predecessor, Gordon Brown. 
With his speech, that reassurance may now have been given. 
Cameron, of course, faced a difficult task with his party, which required a statement from him of his European policy. 
Cameron then had to find something appropriate to say. 
He needed to placate Tories and his domestic critics while avoiding the economic and political havoc that would be caused by announcing an imminent referendum that might lead to the United Kingdom’s withdrawal from the EU. 
The time that he took to decide what he would say attests to the difficulty of squaring that circle. 
In fact, as Cameron’s speech made clear, his solution to his dilemma – to buy himself short-term peace from his critics at the expense of potentially making his (and Britain’s) problems more intractable in the long term – is hardly new. 
It was already clear that Cameron wanted to push any possibility of a referendum into the most distant possible future. 
The idea that he would seek to renegotiate the terms of Britain’s EU membership is also familiar from his earlier speeches and interviews. 
Now that position has been bluntly and uncompromisingly expressed. 
The demand for far-reaching change in the structure and functioning of the EU, including repatriation of powers to Britain, is a major new demarche at a difficult time for Europe. 
Cameron has said on several occasions that he wishes to avoid a referendum revolving around the simple choice of continued EU membership on the basis of the current terms of membership. 
Already some are claiming to discern in his European policy the makings of an heir to Harold Wilson, another famous “renegotiator” of Britain’s terms of membership in the then-European Community who went on to win a referendum on Europe. 
Britain’s relationship with European integration has been a difficult one, regardless of which party has been in power (Wilson, after all, was a Labour prime minister). 
This was inevitable from the outset, owing to Britain’s deep and irreconcilable disagreement with virtually all other EU member states on the fundamental issue of pooling sovereignty. 
Essentially, the British point of view has been that a loose confederation of nation-states cooperating on trade is as much Europe as the UK needs. 
But Britain joined the European Community, not just the free-trade area that Cameron now apparently wants. 
Nonetheless, the undertow of Euro-skepticism in British politics has never diminished and was evident in Cameron’s speech. 
Even the supremacy of European law in defined areas was accepted only reluctantly by Britain, and long after many others had done so. 
Indeed, in his speech, Cameron could not resist a passing shot at the European Court of Justice. 
Britain has made major positive contributions to Europe, particularly with respect to the single market. 
But it is no exaggeration to state that whenever Britain has perceived an opportunity to wage a war of attrition against the European supranational project, it has done so, opposing any substantial increase in the EU’s competences or resources. 
Given that this position reflects the British public’s attitude toward the EU, it is not surprising. 
But it nonetheless distresses other member states, particularly those, like Germany, that recognize the great benefit of having a country with a strongly pro-free trade position and a deep commitment to the rule of law play an important role in the EU. 
The prolonged period of renegotiation now proposed by Cameron implies high costs for both sides. 
For starters, it creates a source of deep and prolonged uncertainty at a time when the eurozone crisis already has called into question the EU’s long-term health, if not its survival. 
Moreover, Cameron’s strategy seems unlikely to lead to an outcome that satisfies anyone. 
If it is intended to be a negotiation that takes place in the context of broader treaty talks, it may not happen in the foreseeable future. 
European Council President Herman Van Rompuy, among others, seems to doubt the need for a new treaty, which would require the unanimous support of the member states – some of which are sharply opposed – to enter into force. 
Indeed, Cameron recognized this explicitly in his speech, so the new treaty to embody a “new settlement” for Britain may have to be negotiated with all member states as a separate exercise. 
Part of this negotiation apparently would entail a repatriation of powers, requiring the consent of all EU members – and making the conditions under which Cameron’s renegotiation is supposed to take place both legally and politically uncertain. 
Many European politicians would view a member state’s repatriation of competences as a totally destructive precedent, and thus would oppose it resolutely. 
The net result is that it seems highly probable that any attempted achievement of a “new settlement,” including repatriation of competences, will make it much more difficult for Britain to remain in the EU than would be the case if a straightforward “in/out” referendum were held now. 
So, far from reassuring anyone (including Tory Euro-skeptics), Cameron’s stance heralds a new era of turbulence and uncertainty for Britain and its European partners. 

Overcautious Obama 
PRINCETON – In this election season in the United States, President Barack Obama is two men in one. 
The Obama of the Cairo speech of 2009, when he called for a new beginning between the United States and Muslims around the world, has been increasingly eclipsed by Obama the terrorist-slayer, the commander-in-chief who has launched hundreds of drone strikes against Al Qaeda and its affiliates and who ordered the killing of Osama bin Laden. 
Commander-in-chief Obama is doing what he thinks is necessary to keep Americans safe, but he is ignoring the deeper roots of US security that the Cairo Obama understood so well. 
It may well be necessary for other Muslim countries to hold him to account. 
Consider Syria. 
Everything happening there was both predictable and predicted: a proxy war between Saudi Arabia and Iran, increasing sectarianism and ethnic segregation, the polarization of extremes and the silencing of moderates, de-stabilization of neighboring countries, infiltration by terrorist groups, and a bloodbath from which the country could take decades to recover. 
Syrian opposition groups beg for the kinds of weapons needed to fight President Bashar al-Assad’s planes, defend hard-won territory, provide safety for civilians, and signal to Assad that the world will not stand by as he does whatever it takes to subdue his own people. 
Every morning, Obama receives a briefing from men who warn him of every plot and conspiracy to kill Americans. 
He knows that any weapon capable of shooting down a Syrian warplane could also be used by a terrorist against a US airliner. 
He believes that he is doing the right thing and following the prudent course in waiting for the Syrian conflict to burn itself out in some way while minimizing the long-term risk to American lives. 
Other advisers warn him that any possible action – a safe zone on the Turkish border, for example, that could expand outward – requires taking out anti-aircraft defenses all over Syria. 
That would mean bombing Damascus, which could harden Syrian support for Assad. 
And perhaps it would do no good; it might save a few lives, they argue, but, with so many different countries fighting a proxy war via so many different groups of opposition fighters, it would not change the overall dynamic of the conflict. 
Moreover, other countries in the region will not use offensive force without approval by the United Nations Security Council, which the Russians and Chinese continue to block. 
And let’s not forget that US voters have no appetite for more military action in the Middle East, even if the price is years of civil war and the implosion and fragmentation of a country bordering Israel, Jordan, Iraq, Turkey, and Lebanon. 
These arguments are advanced in good faith and deserve serious consideration. 
But the art of leading rests on calculating costs and benefits and exercising judgment when the balance is unclear. 
No one speaks for the Syrian people in the Oval Office every morning. 
No one adds up the costs of betraying, yet again, what America claims to stand for, even while witnessing people willing to march – in the face of bullets – for precisely those universal values: dignity, freedom, democracy, and equality. 
The cost is yet another generation of Middle Eastern youth who will believe the worst about the US, no matter how far-fetched the rumor or extreme the claim. 
No one points out the huge opportunity cost of what could have been and what could still be – albeit barely – if the US took decisive action to save tens of thousands of Syrian lives and possibly tip the balance of the conflict. 
Consider the contrast with Libya, where one of the outcomes of US intervention was tens of thousands of Libyans marching in the streets with placards declaring their support of the US and their outrage and sorrow at the murder of the US ambassador. 
And, on the world stage, Russia and China have been encouraged to believe that America will never push past a veto, effectively giving them the final word. 
It may well be impossible to get the US to act before its presidential election in November. 
The only chance, in my view, is if countries in the region – Turkey, Saudi Arabia, Jordan, Qatar, and the United Arab Emirates – call openly for US leadership. 
They should remind Obama of what foreign-policy experts Nina Hachigian and David Shorr have recently called “the responsibility doctrine”: great powers have an active responsibility to uphold global norms and solve global problems. 
The Arab League should publicly charge the Security Council with abdicating its responsibility for preserving international peace and security and call on countries with important interests in the region to join with them in taking action. 
They should specifically call on the US to assume the mantle of global responsibility and, in the phrase that Obama used to describe the intervention in Libya, “create the conditions and coalitions for others to step up.” 
The League would be asking the US to live up to its values and pursue its interests, while at the same time fulfilling its own responsibility as a regional organization. 
The devastating and widening conflict in Syria does not present any good choices, only choices between bad and worse. 
But a leader must choose, and Obama is making the wrong choice – for Syria, for the region, and for the US. 

The Courage of Convictions 
Even those who disagree with British Prime Minister Tony Blair's stance on the Iraq crisis rarely fail to praise his courage. 
US President George W. Bush never faces hostile crowds in the way that Blair must. 
When Blair enters Parliament for the weekly ritual of Prime Minister's Questions, members of his own Labor Party heckle him and ask hostile questions. 
Outside Parliament, even on television, Blair confronts groups that emphatically demand peace. 
Throughout it all, Blair has shown the courage of his convictions. 
These are, quite simply, that Saddam Hussein is an evil ruler who potentially threatens his neighbors and the wider world, and that he has to go. 
Mr. Blair's posture is all the more remarkable at a time when political leaders depend on opinion polls and the views expressed by so-called "focus groups" to tell them what to think. 
Many politicians try to stay as close to prevailing majority views as possible. 
They regard this as "democratic" and hope that such fidelity to the popular will guarantees them re-election. 
Fortunately, such populism--for it is just that--is not ubiquitous. 
Prime Minister Jose Maria Aznar of Spain is not far behind Blair in showing the courage of his convictions. 
President Jacques Chirac of France has the support of his people, but he also has an agenda that appears to be concerned as much with French grandeur as with mere popular acclaim. 
The most flagrant absence of leadership on display today, in the name of following the apparent majority view of the people, is that of Chancellor Gerhard Schröder in Germany. 
He not only probably won his last election by openly opposing military action in Iraq, but he continues to behave as if he were heading a peace march rather than a country. 
Perhaps Schröder should spare a thought for his two great predecessors, Konrad Adenauer and Willy Brandt. 
When Adenauer took Germany firmly into the Western alliance, he was not only opposed in parliament (by the Social Democrats), but also by a popular majority that thought his policy would make reunification with Soviet-controlled East Germany impossible. 
Similarly, when Chancellor Brandt launched his Ostpolitik two decades later, he was widely accused of selling out to the Communists and jeopardizing West Germany's European and Atlantic destiny, which by this point had become generally accepted. 
Both leaders prevailed and in the end won elections. 
Other leaders have proved the same point. 
Charles de Gaulle prevailed politically after ending French colonial rule in Algeria. 
Mikhail Gorbachev did not, but he remains a prophet without honor in Russia for the policies of glasnost and perestroika that led to the demise of the Soviet Union and the rise of democratic Russia. 
There is a point in all these cases that cannot be overlooked. 
Each political leader espoused ideas, policies, or principles that were far ahead of their peoples. 
They had, as it were, only history on their side. 
These leaders seemed to be working against the grain, but the grain itself was about to change direction. 
Initially heterodox and apparently unacceptable views became the new orthodoxy accepted by most of their citizens. 
In a sense, this is the definition of true leadership: to take a country and its people to a better future which is not yet clear to most but that has been partly discovered and partly created by those in power who hold an unerring sense of direction. 
There are those who think that this is precisely what might happen to Mr. Blair over Iraq. 
They foresee a short war, the rapid collapse of the Baathist regime, and a new beginning for Iraq's people. 
Blair will then have triumphed in almost the classical sense of that word. 
Along with President Bush, he would be acclaimed as a great leader, while voices of dissent and opposition would be silenced. 
His re-election would hardly be an issue; on the contrary, those who opposed him will be in trouble. 
However, other scenarios loom, not so much of defeat as of confusion and the impossibility of creating sustainable peace. 
But what is at stake in the Iraq debate is not so much a vision of the future as a moral principle. 
It really is a matter of conviction. 
Blair, at least, is pursuing his Iraq policy because he is deeply convinced that he is right. 
He will still retain that conviction even if he fails, although the price he will pay is certain to be high. 
Unlike Adenauer, Brandt, and de Gaulle, Blair may really be going against the grain of his people rather than anticipating a changing general view. 
Mr. Blair knows all this, which is why he has hinted more than once that he has put his political career and his position as Prime Minister on the line. 
He is a true conviction politician, inspired less by a sense of the future as by a sense of morality. 
Such leaders risk a great deal--and not just for themselves. 
Perhaps they risk more than can be justified. 
In today's crisis, anyone who believes in Western values must hope that such politicians emerge victorious. 

The Cracks in the G-20 
MADRID – The world financial crisis has served as a quick and efficient catalyst to the G-20. 
The first three G-20 summits of chiefs of state, in Washington, London, and Pittsburgh, will be remembered for advancing multilateralism and coordinated global action. 
But the G-20 remains very much a work in progress – and one that needs much work to succeed, as its most recent summit in Toronto demonstrated. 
The G-20 summit in Washington in 2008 was the first at which the member countries’ chiefs of state met since the group’s creation in 1997. 
The G-8 was no longer an appropriate vehicle for global economic governance, given the need to stabilize financial markets around the world. 
The voices of countries such as China, India, and Brazil had to be heard if a coordinated response to the crisis was to be found. 
With the financial crisis worsening, the London summit in 2009 agreed to unprecedented fiscal and monetary stimulus and backed a stronger, more coherent regulatory and supervisory framework worldwide. 
In view of the G-20’s success, the Pittsburgh summit recognized it as the main forum for international economic cooperation. 
This recognition raised expectations for the G-20 and granted it the prestige that it deserved: it is the only forum in which world powers and emerging countries sit as equals at the same table. 
The premise is clear: as the crisis made more evident than ever, the interdependence of countries is inescapable. 
In the face of today’s global challenges, the only possible response must be global. 
There is no possible alternative. 
But the imprecision of the agreements reached at the summit in Toronto in June has left political leaders with a bitter taste in their mouths. 
Two clearly defined gaps stand out as causes of discord. 
The first is transatlantic divergence over how best to assure a return to solid growth. 
The United States favors continuing economic stimulus, while the European Union prefers fiscal consolidation. 
The other source of dissension is disagreement over a bank tax. 
The US, the EU, and Japan are in favor, while emerging countries, as well as Canada and Australia, are opposed. 
While an agreement has been reached (2013 has been set as the year to reduce budget deficits by half; 2016 to stabilize sovereign debt), consensus is not headed in the right direction. 
It is not a question of stimulus versus deficit. 
Both are necessary. 
Even respecting the idiosyncrasies of each context, there is still sufficient common ground for more precision in the agreements. 
The same can be said for transparency, accountability, and regulation of the bank tax. 
I know very well that this is not an easy task, but it is essential for world leaders – not markets – to lead reforms. 
Moreover, a custom has been repeated that should be changed. 
Obviously, holding a G-8 summit just before a G-20 summit, as happened in Canada this June, simply serves to prolong maintenance of separate clubs, which is unsustainable. 
The G-20’s role should increase further in importance, owing to emerging countries’ share of global GDP – projected to reach 60% in 2030 – and to the global nature of the challenges of the twenty-first century. 
If we want to make progress on global governance problems we will have to work together on getting through this economic crisis and on other essential issues, such as nuclear non-proliferation. 
The problem is that, despite the clear need for multilateralism, there is a risk of a relapse into bilateralism due to a lack of global leadership. 
The attention of US President Barack Obama is centered on matters of great importance, such as the Middle East, his evolving strategy in Afghanistan, and the struggling American economy. 
The same is true of the EU, where attention – and action – has been centered in recent months on defending the euro and resolving the economic difficulties on the Union’s periphery. 
Meanwhile, the emerging powers continue to lean toward bilateralism and are aligning themselves with other countries. 
Lack of agreement on the United Nations Security Council resolution against Iran does not help coordination and cooperation within the G-20, either. 
Summits should be well prepared and provide a forum to debate today’s great global issues. 
Coherent, well-defined, and precise proposals would produce results that are more acceptable to all. 
But just as important as making decisions is explaining them well. 
A G-20 summit is not something that happens every day. 
It is a global event. 
Especially in a time of crisis that has caused so much suffering, its decisions must be explained to the public clearly and without cacophony. 
People’s anguish demands this effort, and it was lacking in Toronto. 
The world remains in a very delicate transitional phase, and it is not clear yet in which direction the G-20 will lean. 
The main challenge now is to continue using the “geometry of 20” to build instruments of world governance. 
Although the economic storm has become less intense, it hasn’t calmed yet. 
So there remains much to do. 
With countries headed toward growth at different speeds, global strategy must continue to be a priority. 
The degree of interdependence among countries is increasing, and the global nature of our problems is inherent. 
Within the framework of multilateralism, countries must make the effort to smooth over their differences and deepen their relations: we must conquer the inertia that moves us towards old thinking – and old alliances. 

The Crimes of Ratko Mladić 
NEW YORK – Ratko Mladić is an easy man to hate. 
In his prime, he not only talked and behaved like a thug, but he also looked like one – the kind of bull-necked, pale-eyed, snarling psychopath who would gladly pull out your fingernails just for fun. 
Apart from many other cruelties, the Butcher of Bosnia was responsible, in the summer of 1995, for the killing of around 8,000 unarmed Bosnian Muslim men and boys in the woods around Srebrenica. 
So it will give most of us a feeling of warm satisfaction that he has finally been arrested in the Serbian village of Lazarevo. 
Serbia has gained respect by arresting Mladić, which should speed up its membership in the European Union. 
The former victims of Mladić’s Bosnian Serb forces will feel that some justice is being done at last. 
Yet the forthcoming trial of Ratko Mladić raises certain uncomfortable questions. 
Why, in the first place, can’t he be put on trial in Belgrade, instead of The Hague? 
And is it really wise to charge him with genocide, as well as crimes against humanity and war crimes? 
Both questions reveal how much we still live in the shadow of the Nuremberg Tribunal, where the Nazi leaders were tried by an international judicial panel. 
It was believed, perhaps correctly, that the Germans would be incapable of trying their own former leaders. 
And the Nazi crimes had been so horrendous in scale and intent that new laws – “crimes against humanity” – had to be created to try those who had been formally responsible for them. 
States, too, should be held accountable for their deeds – hence, in 1948, the Convention on the Prevention and Punishment of the Crime of Genocide. 
The Holocaust was not the main issue at stake in the Nuremberg Trials. 
Nevertheless, the allies thought that the Nazi project of exterminating an entire people called for an entirely new legal approach, to ensure that such an atrocity would never happen again. 
The problem with genocide, as a legal concept, is that it is vague. 
It refers to “acts committed with intent to destroy, in whole or in part, a national, ethnical, racial, or religious group.” 
The emphasis is on “intent,” not on the numbers of people whose lives are destroyed. 
Mao Zedong murdered up to 40 million Chinese, but did he intend to destroy them as a group? 
Surely not. 
We know that Hitler did intend to destroy every last Jewish man, woman, and child. 
Even though mass killings are not rare in history, Hitler’s extermination plan was, if not unique, certainly highly unusual. 
However, the laudable effort to prevent such a thing from recurring has had unfortunate consequences. 
For, in our zeal to learn lessons from history, we often learn the wrong ones, or distort history towards dubious ends. 
In a way, the killings at Srebrenica also were affected by the memories of World War II. 
The United Nations’ Dutch battalion promised to protect the Muslims there, even though it was in no position to do so. 
It was a promise that partly reflected the feeling of guilt that still haunts the Dutch for looking the other way as the Germans rounded up and deported two-thirds of their country’s Jewish population to death camps. 
This time, it would be different. 
This time, they would act. 
Alas, outnumbered and outgunned by Mladić’s forces, the Dutch surrendered Srebrenica to its fate. 
Because of the trauma of Hitler’s intention to murder all of the Jews, genocide has become the one compelling reason for military action, including armed invasion of other countries. 
But what constitutes genocide? 
Bernard Kouchner, the founder of Doctors Without Borders, wanted the world to intervene in Nigeria in 1970, because he saw the killing of Ibos by Nigerian troops as a genocidal echo of Auschwitz. 
Others saw a brutal civil war, and cautioned that intervention would make things worse. 
For some, we are forever living in 1938, or rather, 1942, when the Nazis approved what Hitler called “the final solution of the Jewish question.” 
President George W. Bush and his cheerleaders, invoking the Munich Agreement at every opportunity, regarded the terrorist attacks of September 11, 2001, as a call to arms. 
Saddam Hussein was Hitler, so we had to send in the troops. 
We should stop Sudan’s Omar al-Bashir’s genocide in Darfur. 
We must stop Col. Muammar el-Qaddafi from committing mass murder in Benghazi. 
And so on. 
Sometimes intervention might save lives. 
But wars often beget more wars, or longer ones. 
Military action can cause more violence, and more civilian deaths. 
This is especially true of intervention in civil wars, where the sides cannot easily be divided into victims and aggressors, good and evil. 
Of course, the world becomes much simpler if we choose to see it in black and white. 
And the Mladić trial will, no doubt, encourage this perception. 
He will be tried for genocide, because the UN’s tribunal for ex-Yugoslavia and the International Court of Justice decided that the Bosnian Serbs were genocidal. 
Since his subordinate, Radislav Krstić, was already sentenced for his complicity in the genocide at Srebrenica, Mladić will presumably be convicted. 
We need not feel sorry for Mladić. 
There is no doubt that he is guilty of serious war crimes. 
And a trial, however unsatisfactory, is in most cases still to be preferred to an assassination. 
But trying him for genocide, even though it will be hard to prove that he ever intended to exterminate Bosnian Muslims as a group, just because they were Muslims, will further muddy the term’s already vague definition. 
Mladić was engaged in ethnic cleansing, which, though reprehensible, is not the same as genocide. 
Loose definitions will encourage more military interventions, thus more wars. 
By invoking Hitler’s ghost too often, we trivialize the enormity of what he actually did. 

The Crises Nexus 
NEW YORK – Policymakers, academics, and journalists usually discuss the global financial crisis and the wars in Afghanistan and Iraq as if they somehow exist on parallel tracks. 
But today’s financial and foreign-affairs crises are in fact closely linked. 
Indeed, the way the world has sought to resolve the financial crisis offers interesting insights about how the foreign-affairs crisis should be approached. 
Today’s foreign-affairs crisis goes well beyond Afghanistan and Iraq. 
The record of countries that move from conflict to a fragile peace through military intervention or negotiated settlements is dismal: roughly half of them revert to conflict, leading to more human tragedy and large numbers of refugees. 
Moreover, failed states are an incubator for terrorism, trafficking of drugs and people, piracy, and other illicit activities. 
Of the half that remains at peace, the large majority end up highly dependent on foreign aid – hardly a sustainable model in the context of the global financial crisis. 
The two crises have created immense human suffering worldwide: thousands of families have lost loved ones in wars, and the financial crisis has taken people’s jobs, livelihoods, assets, pensions, and dreams, as well as worsening fiscal and debt conditions in most industrial countries. 
As a result, taxpayers in donor countries are demanding more transparency and accountability in how their money is spent both domestically and abroad – and rightly so. 
There are notable links between the two crises. 
The war in Iraq contributed in part to the increase in oil prices from $35 per barrel in 2003 to $140 in 2007. 
This increase put pressure on businesses and consumers, and was a major factor in the increase in world food prices. 
As prices went up and recessionary pressures increased, many homeowners failed to pay their mortgages. 
The sub-prime sector in the United States was hit, and the financial crisis spread from there. 
Both crises require policymaking that departs from “business as usual.” 
Short-term emergency policies are needed to deal with high unemployment, home foreclosures, business bankruptcies, and often with hunger, disease, and a number of other ills. 
Emergency or humanitarian policies may improve basic consumption in the short run, but they may also discourage investment, increase inflation, and lower prospects for economic in the long run. 
As a result, such policies should be discontinued as soon as possible. 
Recovering from both crises will require effective economic reconstruction to create jobs. 
In addition to restructuring the financial sector, recovery programs in the US, the United Kingdom, and other industrial countries hardest hit by the financial crisis must include relief for home and business owners, and job creation through infrastructure projects, clean-energy technologies, and improvements in healthcare and education. 
In Afghanistan and Iraq, reconstruction must include not only the rehabilitation of services and infrastructure, but – more challenging – the creation of a macroeconomic, legal, and regulatory framework for effective policymaking. 
To avoid a continuation of conflict and aid-dependency, the main focus of the international aid commitment should be to reactivate small enterprises and promote startup companies in various sectors in order to create viable economies that enable people to earn a legal and decent living. 
Despite their commonality, there has been a stark contrast in approaches to resolving these two crises. 
While programs in industrial and emerging economies aimed at addressing the financial crisis have been broadly debated at the national and international level, the debate about Afghanistan and Iraq has been narrowly focused on military and security issues, undermining the need for a major effort at effective reconstruction. 
Interestingly, whereas most Americans are well aware of the $700 billion price tag for restructuring banks and the $787 billion stimulus package, far less attention has been paid to the almost $1 trillion spent on the Afghanistan and Iraq wars. 
Many assume that the cost is so high because reconstruction is expensive. 
But only 6% of this amount was allocated for reconstruction and other aid programs. 
The rest was allocated to the US Department of Defense as a supplement to its annual budget, which has been between $500 and $650 billion in recent years. 
World leaders should recognize that a larger investment in reconstruction, together with a comprehensive and well-balanced strategy to ensure accountability and appropriate policies for lawful employment, could have prevented these vast military expenditures, both in Iraq since 2006 and in Afghanistan since the Taliban government was ousted in 2001. 
Just as world leaders have led the global discussion on policies to resolve the financial crisis, they should start a broad-based debate on the international community’s future involvement in Afghanistan, Iraq, and other war-torn countries, where better living conditions are needed to give the local population a stake in the peace process. 
The international community should recognize that military, security, and peacekeeping operations are costly and will not succeed in the absence of new, innovative, and integrated strategies for economic reconstruction. 

The Crisis Down Under 
CANBERRA – The Great Recession of 2008 reached the farthest corners of the earth. 
Here in Australia, they refer to it as the GFC – the global financial crisis. 
Kevin Rudd, who was prime minister when the crisis struck, put in place one of the best-designed Keynesian stimulus packages of any country in the world. 
He realized that it was important to act early, with money that would be spent quickly, but that there was a risk that the crisis would not be over soon. 
So the first part of the stimulus was cash grants, followed by investments, which would take longer to put into place. 
Rudd’s stimulus worked: Australia had the shortest and shallowest of recessions of the advanced industrial countries. 
But, ironically, attention has focused on the fact that some of the investment money was not spent as well as it might have been, and on the fiscal deficit that the downturn and the government’s response created. 
Of course, we should strive to ensure that money is spent as productively as possible, but humans, and human institutions, are fallible, and there are costs to ensuring that money is well spent. 
To put it in economics jargon, efficiency requires equating the marginal cost associated with allocation (both in acquiring information about the relative benefits of different projects and in monitoring investments) with the marginal benefits. 
In a nutshell: it is wasteful to spend too much money preventing waste. 
While the focus for the moment is on public-sector waste, that waste pales in comparison to the waste of resources resulting from a malfunctioning private financial sector, which in America already amounts to trillions of dollars. 
Likewise, the waste from not fully utilizing society’s resources – the inevitable consequence of not having had such a quick and strong stimulus – exceeds that of the public sector by an order of magnitude. 
For an American, there is a certain amusement in Australian worries about the deficit and debt: their deficit as a percentage of GDP is less than half that of the US; their gross national debt is less than a third. 
Deficit fetishism never makes sense – the national debt is only one side of a country’s balance sheet. 
Cutting back on high-return investments (like education, infrastructure, and technology) just to reduce the deficit is truly foolish, but especially so in the case of a country like Australia, whose debt is so low. 
Indeed, if one is concerned with a country’s long-run debt, as one should be, such deficit fetishism is particularly silly, since the higher growth resulting from these public investments will generate more tax revenues. 
There is another irony: some of the same Australians who have criticized the deficits have also criticized proposals to increase taxes on mines. 
Australia is lucky to have a rich endowment of natural resources, including iron ore. 
These resources are part of the country’s patrimony. 
They belong to all the people. 
Yet in all countries, mining companies try to get these resources for free – or for as little as possible. 
Of course, mining companies need to get a fair return on their investments. 
But the iron-ore companies have gotten a windfall gain as iron-ore prices have soared (nearly doubling since 2007). 
The increased profits are not a result of their mining prowess, but of China’s huge demand for steel. 
There is no reason that mining companies should reap this reward for themselves. 
They should share the bonanza of higher prices with Australia’s citizens, and an appropriately designed mining tax is one way of ensuring that outcome. 
This money should be set aside in a special fund, to be used for investment. 
The country will inevitably become poorer as it depletes its natural resources, unless the value of its human and physical capital increases. 
Another issue playing out down under is global warming. 
If not a climate-change denier, the previous Australian government led by John Howard joined President George W. Bush in being a climate-change free rider: others would have to take responsibility for ensuring the planet’s survival. 
This was especially strange, given that Australia has been one of the big beneficiaries of the Montreal convention, which banned ozone-destroying gases. 
Holes in the ozone layer exposed Australians to cancer-causing radiation. 
The international community banded together, banned the substances, and the holes are now closing. 
Nevertheless, the Howard government, like the Bush administration, was willing to expose the entire planet to the risks of global warming, which threaten the very existence of many island states. 
Rudd campaigned on a promise to reverse that stance, but the failure of the climate-change talks in Copenhagen last December, when President Barack Obama refused to make the kind of commitment on behalf of the United States that was required, left Rudd’s government in an awkward position. 
The failure of US leadership has global consequences. 
Citizens should consider the legacy they leave to their children, part of which is the financial debts they will pass down. 
But another part of our legacy is environmental. 
It is two-faced to claim to care about the future and then fail to ensure that the country is adequately compensated for the depletion of its resources, or ignore the degradation of the environment. 
It is even worse to leave our children without adequate infrastructure and the other public investments needed to be competitive in the twenty-first century. 
Every country faces these issues. 
Sometimes, one can see them with greater clarity by observing how others are confronting them. 
How Australians vote in their coming election may be a harbinger of things to come. 
Let’s hope – for their sake and for the world’s – that they see through the rhetorical flourishes and personal foibles to the larger issues at stake. 

The Crisis of Thai Democracy 
One year after he was re-elected in a landslide, Thailand’s Prime Minister Thaksin Shinawatra has been forced to dissolve the National Assembly and call a snap election. 
Although his Thai Rak Thai (TRT) party commands a 75% majority in the assembly, Thaksin is embattled. 
He remains immensely popular with rural voters and the urban poor, who comprise more than 60% of Thailand’s electorate, but he has been battling a fervent Bangkok-based insurrection against his rule by the intelligentsia and middle classes. 
They accuse Thaksin, Thailand’s wealthiest businessman, of corruption and treason for the tax-free sale of his family-owned Shin Corporation to the Singapore government’s Temasek Holdings for $1.9 billion. 
Thaksin’s rapid reversal of political fortune attests to the limits of the ballot box, as well as to democratic shortcomings that now beset a host of developing countries, including regional neighbors such as the Philippines. 
Until recently, Thaksin appeared to be as unassailable at home as he was bold and credible abroad. 
Exploiting Thailand’s deep urban-rural divide, Thaksin bulldozed his way to power in 2001 on a populist platform. 
He stirred up national pride and promised rural Thais that their country would rise to greatness following the devastating 1997 economic crisis. 
A raft of populist policies underpinned his first four-year government, from rural debt suspension and cheap universal healthcare to handing out $25,000 to each of 77,000 villages for entrepreneurial start-up funds. 
Reminiscent of development strategies prevalent in East Asia, Thaksin picked strategic niche industries to propel Thailand’s economic expansion, focusing on automobiles, fashion, food, healthcare, and tourism. 
In foreign affairs, Thaksin carved out his own space on the international stage with ambitious regional cooperation schemes anchored around the 25-member Asia Cooperation Dialogue (ACD), the Ayeyawady-Chao Phraya-Mekong Economic Cooperation (ACMECS) and a clutch of bilateral free-trade agreements with the major powers, including the US, China, Japan, India, and Australia. 
The ACD was designed to make Thailand the political center of gravity in Southeast Asia; 
ACMECS was to make it the region’s linchpin of economic development; and the bilateral agreements would cement relations with the biggest players in the region. 
At his zenith, many saw Thaksin as a worthy successor to former Malaysian Prime Minister Mahathir Mohamad, buoyed by authoritarian rule at home and assertive leadership abroad. 
Voters overwhelmingly returned Thaksin to office in February 2005. 
But his personal popularity then plummeted, owing to the spate of separatist violence in the Muslim-dominated south and the scourge of corruption. 
Sins overlooked during his first term – from harassment of the media and coercion of civil society groups to extrajudicial killings in an anti-drug campaign and conflicts of interest that benefited his Shinawatra telecommunications empire – soon caught up with him. 
The shady sale of Shin Corporation in February galvanized long-simmering discontents. 
The deal was viewed as the epitome of Thaksin’s sophisticated corruption and a betrayal of his proclaimed nationalism, thus exhausting his moral authority and political legitimacy. 
The company’s value quadrupled during Thaksin’s reign, with assets such as satellites, a mobile phone service, and an airline having originated from state concessions that were conditioned on majority Thai ownership. 
For Thaksin’s opponents, the sale of these assets to a foreign company owned by a foreign government amounted to putting Thailand’s economic sovereignty on the block. 
Thaksin’s days appear numbered, for Thailand seems poised to eject a popularly elected prime minister. 
The number of street protesters has since swelled from five digits to six. 
His predicament illustrates the common dictum in the politics of developing countries where rural electorates elect governments but urban elites get to throw them out. 
Indeed, the anti-Thaksin coalition will settle for no less than his ouster from office, permanent banishment from Thai politics, and possibly exile. 
But the opposition has decided to boycott the snap election, which the TRT would likely win again by a large margin, because Thaksin has captured and manipulated the institutions established by the constitution to safeguard against graft and uphold separation of powers within the state. 
Thai politics has thus reached an impasse. 
Only intervention by King Bhumibol Adulyadej, who is widely revered, seems capable of saving the day. 
In a fiercely contested battle between Thaksin and his opponents, King Bhumibol is the fundamental difference between Thailand and the Philippines, where “people power” revolts regularly undermine and sometimes overthrow presidents. 
The King’s intervention would put an unconditional stop to the street confrontations. 
But the Thai people cannot afford to look to their aging and ailing King every time they have a problem. 
Moreover, a royal intervention would risk returning Thailand to square one, seeking to rewrite its constitution to remedy the shortfalls of its democratic culture. 
What Thai democracy needs in order to mature is not a political safety net, but a vigilant citizenry to ensure disciplined enforcement of the constitution’s provisions and institutions, so that they can no longer be hijacked by the likes of a Thaksin. 

The Crisis of the Left 
After a series of electoral losses around the world, the left is in crisis. 
To restore it to health, some on the left argue for a return to their parties' historical roots. 
Others argue that the old myths should be abandoned in favor of a bold move forward. 
This debate is occurring not only in France after the defeat of the Socialists last April. 
It also characterizes the political situation in the US after the defeat of the Democrats in last November's mid-term elections. 
Both parties face the same dilemma, and this is precisely my point: that the crisis confronting the left is a deep, fundamental, one. 
In the past, the left was equipped with its own ideology, its own economic theory. 
The fundamental economic mechanism that determined how the world worked was the struggle for rents between workers and capitalists. 
With this "us versus them" view of the world, it was not hard to rally voters, from the most disenfranchised all the way up to the salaried middle class--more than enough for the left to secure electoral majorities. 
But the world has changed, and the left's old view simply no longer applies. 
More intense competition, within and across countries, has decreased the available rents. 
Financial capital can cross borders far more easily, and physical capital can relocate almost as quickly. 
The limits on redistribution through the market are much tighter: trying to appropriate the rents may lead firms to move to emerging countries, or else to go bankrupt. 
This reality has taken a while to sink in, and a number of parties on the left still cannot bring themselves to acknowledge the constraints imposed by market forces. 
Some do, of course, none more explicitly than the UK's Labor Party, led by Tony Blair. 
Others, typically old-line communist parties, have retained much of their traditional rhetoric, but this is largely for electoral consumption. 
They know all too well that the old nemesis, "capital," has become difficult or impossible to expropriate, yet they remain unready or unwilling to deliver the news to their constituency. 
The same tension exists within parties themselves. 
Witness the muddled debate within the French Socialist party in the aftermath of its defeat, with the "left of the left" and the "right of the left" in a fight for control both of the party and the route by which it should eventually return to power. 
And yet both available strategies--doing nothing or attempting to modernize--have obvious pitfalls. 
The old rhetoric, after all, still resonates powerfully with the most destitute parts of the electorate: minimum wage workers, the long-term unemployed, and all those who feel that anything would be better than what they have now. 
It also allows easier contact with fringe groups, such as anti-globalization protesters and the most zealous greens. 
But while the old religion still mobilizes the left, it makes it difficult to hold the center. 
The middle class has lost its faith in the old rhetoric, and wherever the left, by some chance, comes to power, reality quickly sinks in. 
Modernization runs into the opposite problems. 
Public discussion of new ways to finance retirement pension plans, or of introducing a negative income tax, sounds sweet to economists of all stripes, but it does not exactly mobilize public opinion. 
The poor don't care. 
The extreme left becomes disenfranchised. 
The middle class likes the tone, but wonders how different the program is from what they hear from the neo-liberal right. 
As the events of the French elections last spring demonstrated, when this dynamic prevails, the left loses the elections. 
Shift everything I just said regarding this strategic dilemma to the right a bit and you arrive at the problems of America's Democrats. 
The choice of a candidate for the next elections is about this strategic choice, not personalities. 
Shift everything a bit to the left, and you arrive at the problems facing President Lula Ignacio da Silva in Brazil. 
Should he return to the old Lula rhetoric and watch capital flee the country, or try "modernity" and disappoint many of those who voted for him? 
With minor adjustments, the left in Germany, Italy, Spain, Portugal, and so on faces the same Hobson's choice. 
So: Damned if you do; damned if you don't? 
No, or at least not quite. The fundamental feature that must distinguish the left and the right is not their respective views on the economy, but rather their stances regarding redistribution. 
One of the first lessons of economics is that there is a trade-off between efficiency and redistribution. 
The right focuses on efficiency. The left emphasizes redistribution. 
A clear commitment to the poor, the sick, and the unfortunate must be the message of the left. 
And the means, however "boring." must be appropriate to realizing this commitment: a combination of sustainable retirement systems, better designed unemployment benefit systems, negative income taxes, training programs, and the like. 
Only by employing the rhetoric of commitment to mobilize the troops while devoting careful attention to the center's concern with methods can the left hope to return to power. 

The Crooked Path of Financial Reform 
BRUSSELS – Two years ago, governments saved the necks of the world’s financial markets. 
Yet today, those same markets intimidate governments, or at least some of them. 
In Europe, the market for Greek debt has frozen, and interest-rate spreads between Irish and German euro-denominated debt recently reached alarming levels. 
Spain has succeeded in reducing its own spread vis-à-vis Germany but only after a policy U-turn. 
Portugal has announced a major austerity package, hoping for the same effect. 
But, even when they are not in danger of losing access to the bond market, most governments in the developed world nowadays anxiously await the pronouncements of the same rating agencies that they were recently vilifying. 
This change of fortune is shocking. 
To public opinion, it looks as if arrogant financial-market professionals learned nothing from the crisis, feeding the impression that nothing has changed – except for the worse. 
Governments with a mandate to domesticate financial markets appear to have produced a lot of sound and fury, but little reform. 
Whether deliberately or not, regulators seem to have missed their chance to implement serious changes to the rules of global finance, and governments are now so weakened that they are at the mercy of those who, not long ago, were begging them for help. 
This politically devastating sentiment fuels resentment against markets and financiers. 
Nevertheless, while no one is proclaiming, “mission accomplished,” it is not true that nothing has been done to reform finance. 
In a recent study from the Brussels-based think tank Bruegel, Stéphane Rottier and Nicolas Véron provide a comprehensive scoreboard of the progress achieved in reforming financial regulation over the last two years, starting from the program agreed in November 2008 at the G-20 meeting in Washington. 
To be sure, they find that implementation has been patchy, with a gap between items whose follow-up was assigned to strong international organizations, such as the International Monetary Fund, and those merely calling for coordination among national authorities. 
Overall, however, the result is far from zero. 
Indeed, the US adopted wide-ranging financial reform in July, Europe is in the final steps of approval of its legislative package, and the Basel committee has just given the green light to a substantial tightening of credit-risk rules. 
The benchmark for this study is admittedly far from ideal. 
The G-20’s Washington program (signed by George W. Bush) was neither ambitious nor well structured. 
It did not aim to domesticate global finance, and it was not based on a thorough analysis of the crisis. 
Under pressure to act without delay, and unable at this early stage to identify key priorities for structural reform, governments set themselves a long and ragbag to-do list. 
There was no sign of the more radical ideas that emerged later in the debate, such as the so-called Volcker rule separating banks and hedge funds (which is reflected in the US legislation), or a crisis-resolution mechanism whereby bank debt is converted semi-automatically into equity (which several countries are considering). 
Nor was there any mention of banks’ size and ways to address the too-big-to-fail issue. 
Almost two years on, financial reform remains incomplete, as the agenda itself is still evolving. 
This was inevitable, because new, better-defined priorities could emerge only after a period of reflection and debate. 
The downside is that some momentum has been lost, especially at the G-20 level. 
The appetite for global solutions has diminished while national politics have taken increasing control of the agenda. 
But one positive recent development is the creation of stronger public institutions. 
The era when London vaunted its light-touch regulation is over. 
Now the US and Europe are in the process of building institutions capable of supporting – and implementing – sustained reform. 
Indeed, in pausing to reflect, governments have not missed the political opportunity to be tough, nor have financial markets regained the upper hand. 
True, the balance of power certainly is not what it was two years ago. 
Regulatory capture is at work again, perhaps even more forcefully, because the stakes are higher. 
But it is not self-evident that governments’ ability to regulate has been seriously harmed by their status as borrowers. 
While Greece has virtually forfeited its access to capital markets, Germany has never borrowed on better terms. 
And, if governments’ dependence on bond markets’ willingness to lend has not rendered them unable to reform financial regulation, this is all the more true for the EU and the G-20. 
Just as we have learned to distinguish between governments as shareholders and as regulators – which must be done carefully, because the actions of one do not necessarily coincide with the interests of the other – today we must distinguish between governments as borrowers and as financial regulators. 
It would be unfortunate if governments requiring financial institutions to be more prudent in managing risk were at the same time asked to turn a blind eye to sovereign risk. 
Even if this sounds unfair, it is logical to expect rating agencies, which had been lax in evaluating credit risk, now to be rigorous in assessing all forms of risk, including sovereign risk. 
The history books are not yet written, nor the victor declared. 
Financial reform could still go belly up. 
But it is premature to write it off as a failure. 

The Cruelty of Chance 
MOSCOW – In Russia, somewhere behind every event lurks the question: Who is to blame? 
In the tragedy that claimed the lives of Polish President Lech Kaczynski and 95 other Polish leaders, we can answer that question with certainty in at least one respect: history is to blame. 
The event is so hideous that it seems like a bad joke, or an evil KGB plot, a mad conspiracy out of James Bond – or some combination of all three. 
Yet the crash that has sent all of Poland into mourning was none of these things. 
A tragedy that defies any logical explanation confirms only one thing: the cruelty of chance. 
What if no fog prevented the safe landing at Smolensk airport? 
What if the plane was not a 20-year-old, Russian-made Tupolev-154, but a newer and safer model? 
What if the Polish pilot had obeyed the Russian air traffic controller who tried to divert the plane to Moscow or Minsk? 
Unfortunately, the cruelty of chance also lies at the heart of the centuries of mistrust between Poland and Russia. 
The irony (if there is an irony at all) is that this tragedy came at a time when mistrust seemed, at long last, to be giving way to better, more businesslike relations and greater understanding between the two countries. 
After 70 years of denial, Russia’s leadership (if not yet ordinary Russians) were ready to admit that Joseph Stalin’s NKVD (precursor to the KGB) slaughtered more than 20,000 Polish officers, intellectuals, and clergy in the nearby Katyn forest in 1940. 
Indeed, Russian Prime Minister Vladimir Putin, a former KGB officer himself, invited his Polish counterpart, Donald Tusk, to commemorate that tragedy together. 
But Kaczynski, a member of Solidarity in the 1980’s who was eager to overthrow the communist regime, was more mistrustful of the Russians than Tusk. 
He put together his own delegation to visit Katyn, and wondered aloud if the Russians would give him a visa. 
Certainly, no Russians were invited. 
When the pilot of the presidential plane (ironically, again, Soviet made) was advised not to land in the thick fog, either he, or perhaps even the president himself, may have mistrusted the Russians’ willingness to give honest advice. 
Indeed, they may well have wondered if the cunning ex-KGB men around Putin simply wanted to make Kaczynski’s Katyn commemoration a mockery? 
Russian-Polish suspicions and disagreements date back to the sixteenth century, when Poland was the far greater power; indeed, the Grand Duchy of Moscow was a backwater. 
Across the centuries, there have been wars, started by both sides, and partitions of Poland executed by the Russians, followed by attempts at “Russification,” with the Russian Christian Orthodox Empire trying to control the “silver-tongued,” “deceptive,” West European-oriented Catholic Poland. 
Then there was the 1917 Bolshevik Revolution, which the Poles refused to join, and Marshal Jozef Pilsudski’s miraculous victory over the Red Army at the gates of Warsaw in 1920. Throughout the interwar years, Poland and the nascent Soviet regime were at daggers drawn almost without interruption. 
When Stalin signed the Molotov-Ribbentrop pact with Nazi Germany in 1939, it gave him an opportunity to invade Poland. 
The Katyn massacre was a direct result, with Stalin ordering the mass murder of Poland’s elite in order to decapitate Polish society and thus make it more pliable. 
Katyn was also the occasion for the Soviets to break off relations with Poland’s wartime government-in-exile in London. 
Because the Polish leaders refused to exonerate the Russians, Stalin accused the Poles of collaborating with the Germans in trying to shift the blame for Nazi crimes onto Russians. 
Soon after, the idea of establishing a puppet regime in Warsaw took root. 
Although the Nazi-Soviet Pact did not last long – Germany invaded Russia in 1941 – for Poland there was no way out. 
With Hitler’s defeat, it once again became part of the Russian sphere, this time of Soviet Russia. 
But Poland never stopped striding – and striking – for independence. 
The rise of Solidarity in the 1980’s was the earliest and most severe blow to the stagnating Soviet system. 
The Polish-born Pope John Paul II crystallized the anti-communist “threat” that Poland now posed to the Soviet Union. 
The Pope’s call for religious freedom around the world, including in the socialist countries, rubbed the atheistic Soviets – and Orthodox Russians – the wrong way. 
Indeed, throughout the twentieth century, animosity between Poland and Russia remained at fever pitch, manifested not only in politics but also culturally. 
This, of course, continued an old pattern, too. 
Alexander Pushkin, Nicolai Gogol, and Fyodor Dostoyevsky were all suspicious of the Poles, calling them “cold,” “distant,” and “manipulative,” and seeing Poland as always on the side of the West, rather than standing with its Slavic brothers. 
Indeed, Pushkin’s friendship with Adam Mickiewicz ended in acrimony over the 1830 Polish insurrection against Tsarist rule. 
In fact, the animosity ran so deep that when both countries were no longer communist, and Russia was looking to replace its November 7 Bolshevik Revolution holiday, it came up with November 4, the anniversary of the Russian boyars’ victory in 1612 over Polish King Sigismund’s short-lived occupation of Moscow. 
Now there is talk, in both Warsaw and Moscow, that the second tragedy of Katyn might usher in a new era in bilateral relations. 

The Cultural Bias of Genetics 
All cultures impose on their members ideas about who they are, how they came to be, and where they fit in socially. 
For example, pre-modern Europe believed that a woman who had sex before marriage might carry the imprint of her lover within her, so that her child born in wedlock would resemble the earlier lover, rather than the husband. 
This served to justify the premium placed on female chastity. 
Folk ideas about heredity are a particularly powerful cultural tool, but they are not unique to pre-modern societies. 
Even contemporary science has its own cultural ideologies about heredity, which are often difficult to disentangle from the complex data and high technology that we believe produces objective, value-free glimpses of nature. 
In the field of human origins, it is well-known that a human DNA sequence is nearly 99% identical to the corresponding part of a chimpanzee’s DNA. 
From there, it is not uncommon to hear the conclusion that we are ”nothing but” chimpanzees (and fated to be aggressive, or to possess whatever attributes are being imputed to apes these days), or that apes merit human rights. 
Once again, social meanings are enmeshed within beliefs about heredity. 
Actually, that overwhelming similarity between human and chimpanzee DNA is a product of two cultural facts: our familiarity with the chimpanzee’s body, and our unfamiliarity with DNA. 
After all, when the chimpanzee itself was new and interesting (in the 1700’s), contemporary scholars commonly judged it to be overwhelmingly similar to the human form – so much so, that it was commonly classified as a variant of humans. 
After several centuries studying apes, we are familiar with every subtle difference in form between our species and theirs. 
But the emergence of molecular comparisons in the 1960’s, and DNA technologies in the 1980’s, presented a new way of comparing species. 
The comparison of linear polymers – proteins made up of chains of amino acids, or DNA made up of chains of nucleotides – held out the promise of a simple tabular approach to evolution. 
When we compare the genetic material of humans and chimpanzees, we do, indeed, find that it corresponds at nearly 99 of every 100 comparable sites. 
But this method omits much of what has been learned about genomic evolution in the last quarter-century. 
Mutational processes are far more complex than was thought a few decades ago; with strand slippage, duplication, transposition, and illegitimate recombination producing qualitative differences between closely-related genomes. 
So, while measuring nucleotide similarity in homologous regions is indeed in the 98-99% range, this number does not incorporate or acknowledge the measured difference in the size of the human and chimp genomes, or the widespread differences in chromosome or genome structure. 
Because a DNA sequence is a one-dimensional entity, it lends itself much better to single-number comparisons than a four-dimensional body does. 
The genes that lead to the production of the human and chimpanzee femur may be 98-99% identical, but it is impossible to say whether the bones themselves are more or less similar than that. 
Perhaps the most seductive aspect of the DNA comparison is its lack of biological context. 
The value of 98-99% similarity between human and ape DNA stands outside the rest of life. 
We can gain some zoological perspective on what that number really means by comparing another species to apes and humans. 
Compared to the body of an oyster, for example, chimpanzees and humans are at least 99% identical – bone for bone, muscle for muscle, nerve for nerve, organ for organ. 
If anything, the DNA comparison underestimates the profound similarity of the human and ape bodies in the great tapestry of nature. 
Context reveals something at the low end of the scale as well. 
Two DNA sequences generated at random must be 25% identical, by virtue of the fact that DNA is a sequence of only four bases. 
Therefore, all multicellular life, having presumably developed from a single common ancestral form, must be over 25% identical in their DNA sequences. 
In other words, a human and a carrot have much in common genetically, despite their being little similarity between them physically. 
Here the DNA comparison grossly overestimates the actual relationships between species. 
Genetic comparisons simply do not afford an ”inner view” of the relationships between species, or an encapsulation of those relationships. 
In other words, this apparent fact of nature – the overwhelming genetic similarity of human and ape – is a fact constructed from culture. 
That is not to say it is inaccurate or false; just that its meaning is far less obvious than it may appear superficially. 
We make sense of the world, and of our place in it, culturally – and science provides more information for constructing that place. 
But like any other peoples, our own application of that information to the puzzle of our existence is strongly influenced by our non-scientific ideas, our pervasive folk ideologies of heredity. 

The Cultural Revolution at 40 
Mao’s Cultural Revolution was launched 40 years ago this month, yet, despite 20 years of economic liberalization, its wounds remain a taboo subject. 
Today’s rulers dare not face up to their own experiences or moral responsibility. 
So, three decades after the Cultural Revolution ended, the national self-examination that China requires has not yet begun. 
Of course, the Communist Party has deemed the Cultural Revolution a “catastrophe,” a judgment supported by mainstream opinion. 
But China’s rulers permit discussion of the Cultural Revolution only within this official framework, suppressing any and all unofficial reflections. 
The generalized official verdict, and the use of Lin Piao (once Mao Zedong’s Vice President and designated heir, who rebelled against him) and the “Gang of Four” as scapegoats, obscures the crimes of Mao and the Party, as well as the entrenched flaws in the system. 
The Cultural Revolution’s major figures, who wrought so much mindless violence, thus either maintain their silence or offer spurious self-defenses. 
Most victims also use various excuses to bottle up their memories. 
Those who both persecuted and were persecuted are willing to talk only about their being victims. 
For example, the fanatical Red Guard movement swallowed up almost every youth of the right age. 
Yet all but a few old Red Guards remain silent, saying, “it is not worth remembering.” 
During the Cultural Revolution’s early days, the Beijing-based Allied Movement, formed by the children of party cadres, committed horrendous acts of violence, operating under the slogan, “If the father is a hero, the son is a good man; if the father is a reactionary, the son is a turtle egg.” 
But the memoirs of these rebellious vanguards of yesteryear highlight only their youthful passion and pure idealism, or their sufferings and those of their parents. 
They do not mention their own barbaric assaults, vandalism, and looting, or their kangaroo courts. 
The revolution’s veterans refuse to discuss their arrogant presumption of “natural Redness,” or to mention that they rebelled because they wanted power. 
Worse still, they express no remorse toward their victims. 
The Cultural Revolution swept up all of China. 
So many people suffered that it is difficult to count the number of victims accurately. 
This is all the more true of the persecutors. 
Yet few reflect and apologize. 
The terror of the Red Guards, the armed fights between the rebellious sects, the teams established to “cleanse” the social classes, and all the bloody massacres are simply left to rot in China’s memory. 
The official ban blocks reflection, but human weakness and careerist self-interest among those who participated buttresses the official ban. 
Consider Ye Xiangzhen, the daughter of senior general Ye Jianying, who once discussed her family’s Cultural Revolution experiences on television. 
During the early stages of the Cultural Revolution, she played a dual role: daughter of a Chinese field marshal and leader of the rebels at the School of Art in the capital. 
She complained that she was “too famous,” “too active,” and “too stressed” at the time, and she provided extensive details about how Mao’s wife, Jiang Qing, persecuted the Ye family and how the Ye children went to prison. 
But she had only 58 words to say about her career as a Red Guard leader – no details or explanation of how she joined, which activities she participated in, and whether she was involved in “physical struggles” or persecuted others. 
To call for those people who applied violence and persecuted others to examine themselves and repent is not intended to mete out legal responsibility and moral judgment. 
But it would at least restore the truth about the Cultural Revolution, summarizing its lessons in order to avoid repetition. 
More positively, restoring truth would counter the traditional Chinese instinct to blame all disasters on external forces, and might lead to a spiritual epiphany for a people struggling to find value in the emerging new China. 
The person with the most responsibility for the catastrophe of the Cultural Revolution is, of course, Mao, yet he remains China’s savior. 
The children of Mao’s senior cadres who enjoyed the greatest fame during the Cultural Revolution are now the principal beneficiaries of today’s economic reforms. 
But this continuing silence by the guilty only transfers the costs to society as a whole, with Chinese life distorted by the weight of lies and evasions. 
As one generation after another continues to live in denial, the lies will corrode everything they touch. 
The Chinese people will no longer know what is personal honesty or historical truth, and they will repeatedly abuse, miss, or forsake historic opportunities. 
As long as the Cultural Revolution remains unaccounted for, it will not have ended. 
If historical truth is not restored, the lessons cannot be learned. 
No amount of material prosperity can make China a healthy society without this necessary reckoning with the past. 

The Culture of Entrepreneurship 
Governments around the world want to promote entrepreneurship. 
Though most business start-ups will never amount to much, each little company is an experiment, and a great deal of experimentation is necessary to produce the occasional firm that can transform a nation’s economy – or even rise to international significance. 
In short, entrepreneurship is an incubator, and one that is essential to long-term economic success. 
In explaining the variation in levels of entrepreneurship across countries, much attention is devoted nowadays to differences in national attitudes and policies. 
But there are also significant differences in levels of entrepreneurship within individual countries. 
People from Shanghai are said to be more entrepreneurial than people in Beijing. 
People in the Ukrainian town of Kherson are more entrepreneurial than people from Kiev. 
In a recent study, Mariassunta Giannetti and Andrei Simonov of the Stockholm School of Economics show the magnitude of differences in levels of entrepreneurship across Swedish municipalities. 
They define entrepreneurs as people who report income from a company that they control and work in at least part-time, and find that the proportion of entrepreneurs in the population differs substantially across the 289 municipalities that they studied, ranging from 1.5% to 18.5%. 
What can these differences tell us about the real causes of entrepreneurship? 
Policy changes at the national level cannot account for the variation Gianetti and Simonov found. 
In the 1980’s and early 1990’s, centralized wage-setting agreements were dissolved and the Swedish government cut personal and corporate tax rates. 
The level of entrepreneurial activity in the country as a whole doubled as a result, but the response was very different from one municipality to another. 
Why? 
Cultural variables seem to explain a lot: religion and politics accounted for about half of the variation across municipalities. 
Municipalities tended to have more entrepreneurs if they had a high proportion of pensioners who were members of the Church of Sweden (the official state church until 2000) and a high proportion of right-wing voters. 
Beyond that, a feedback mechanism appears to be in place: cities with more entrepreneurs tend to beget still more entrepreneurs. 
Once an entrepreneurial culture takes root, it typically spreads locally, as people learn about business and begin to feel attracted by it – even if it doesn’t yield an immediate or certain payoff. 
Indeed, Giannetti and Simonov discovered that the average income of entrepreneurs was lower in high-entrepreneurship municipalities than in the low-entrepreneurship ones. 
Similarly, studies from other countries show that entrepreneurs often have lower initial earnings and earnings growth than they would have as employees. 
What these studies suggest is that differences in the degree of entrepreneurship may be due less to better economic opportunities (the “supply” side of the entrepreneurship equation) than to cultural differences that make entrepreneurship personally more rewarding (the “demand” side). 
This hypothesis is supported by Giannetti and Simonov, who argue that differences in the prestige of entrepreneurs across municipalities may account for differences in levels of entrepreneurship. 
In some municipalities, entrepreneurs enjoy high social status, regardless of whether they are already successful; elsewhere they are looked down upon and other occupations are more admired. 
The idea that prestige is important is not new. 
In her book Money, Morals & Manners, the sociologist Michèle Lamont compared definitions of success in France and the United States. 
She interviewed people in both countries and asked them what it meant to be a “worthy person.” 
In essence, she was asking people about their sense of what is important in life and about their own personal sense of identity. 
Lamont’s study confirmed the conventional wisdom that Americans value business success, while the French place greater value on culture and quality of life. 
Likewise, open contempt of “money-hungry” businesspeople and competition is expressed more often in France than in America. 
But, while Lamont focused on differences between the French and the Americans, her study’s most interesting finding was that of significant differences between regions within France. 
She compared Clermont-Ferrand, the capital of Auvergne, in the center of France, with Paris. 
Auvergne’s inhabitants have a reputation for being parsimonious and stern, and, despite substantial recent progress, for a relative dearth of high culture. 
Lamont found that people in both Paris and Clermont-Ferrand tended to express contempt for “money-grubbing.” 
But the Clermontois valued “simplicity, pragmatism, hard work, and resolve,” while the Parisians put more stress on “pizzazz and brilliance.” 
She concluded that, “In many respects the Clermontois are closer to the Hoosiers (as the residents of the US mid-Western state of Indiana are called) than to the Parisians.” 
Her evidence suggests that in Clermont-Ferrand, as compared to Paris, there is a higher intrinsic demand for starting small businesses. 
Virtually every country is a pastiche of local cultures that differ in how they motivate people and shape their personal identity. 
Differences in how these cultures define what it means to be a worthy person, and how worthiness is signaled, probably explain much of the variation in levels of entrepreneurship. 
Economists and others often tend to look at countries as a whole and emphasize national attitudes and national policies as the main factors in encouraging or discouraging entrepreneurship. 
But, in fact, the national success in entrepreneurship depends on the evolution of local cultures and their interaction with national policies. 
Entrepreneurship can take root in culturally congenial regions of any country after economic barriers against it are lifted, and then feed on itself to grow to national significance. 

The Currency Quandary 
Two views about today's prevailing exchange rates exist: the dollar is overvalued dollar and the yen needs a deep depreciation. 
The implication of the two is an explosion upward for the Euro. 
But can Europe deal with such a shock, and what would happen to the US if that happened? 
Now that America's recovery is underway - and it arises from a slump not a recession - the current account deficit will widen even further and in no time discussions about the unsustainable high-flying dollar will become fashionable again. 
Yet, the very fact of a US upswing that is bigger, comes sooner, and is better than anywhere else - Europe remains plagued by growth cramps and Japan's economic policy kabuki is going nowhere - will support and even strengthen the dollar. 
All those who predicted the collapse of America's ``house of cards'' economy (who thought that Enron's collapse was finally the sign in the sky that they were right) must now be exhausted. 
No dollar collapse looms. 
Financial stability, strong productivity, flexibility and dynamism make the US one of the choice places for capital, and this influx of capital finances America's large current account deficits. 
It will continue doing so until, at the end of the rainbow, Japan or Europe compare favorably with the US investment climate. 
Don't hold your breath for that day; don't wait for the $1.20 per Euro that is touted as the ``equilibrium'' rate. 
But the dollar is not the only issue atop currency market debates. 
There is another strongly held belief: that Japan cannot recover without a steep decline in the yen. 
For those who hold this view, the yen would have to decline to 160 or even 200 yen/$. 
Without monetary policy, fiscal policy or supply side reforms, how else can Japan return to growth except by a depreciation-driven export boom? 
Because Japan's export sector is so small, barely 10% of GDP, the depreciation would have to be enormous to stoke the entire economy. 
Suppose we put the two propositions together: the yen depreciates 30% against the dollar while the dollar in turn depreciates 30% against the euro. 
These numbers are large but such falls are in everyday discussion. 
The implication, of course, is a huge appreciation of the euro against everybody else. 
Japan might get some growth, probably not even a full percentage point of GDP. 
For the US the story is mostly neutral: a gain in competitiveness toward Europe, a loss relative to Japan, and with no net gain or loss in competitiveness or trade, scant inflationary effects to speak about, no interest rate hikes or stock declines - nothing to get excited about. 
But that would not be the story in Europe. 
A huge yen depreciation and sizeable decline in the dollar would hit European competitiveness and growth hard. 
Empirical models that try to quantify the impact of exchange rate changes suggest that without an aggressive monetary policy response, a 40 % euro appreciation would knock 2.5% off European growth. 
This number is not at all surprising if we remember that growth in the past few years was substantially due to the euro's weakening; this time round, the euro strengthening would take it all back. 
Even as European growth turns down, sharply lower import prices would also bring down inflation. 
That opens the door for a dampening the damage if the European Central Bank vigorously responded by cutting rates. ``Vigorous,'' however, is not a word one often used to describe the ECB, so there is a serious problem. 
The message here is clear: Europe must hope that the dollar stays strong because, without domestic dynamism, the cheap euro is Europe's only growth ticket. 
In countries like Germany, which have been on the ropes since the signing of the Maastricht Treaty, a continuation of stagnation or outright recession would deeply strain budgets and credibility. 
But all this should not happen. 
A big appreciation in the euro is not on the cards. 
Europe's leading economies, like Germany, are a fiscal embarrassment. 
Their tardiness in reforming and hostility to capital creates an impression of eurosclerosis that won't attract capital. 
The euro was a great idea, but the economy that backs it is distinctly dull. 
So there is no way Europe will become a magnet for world capital flows anytime soon. 
The euro will stay at around 90% of the dollar and may not even pay a weekend visit at parity. 
There won't much European growth, but nor will there be an outright growth crisis either. 
Europe will keep talking about the American house of cards, but with a sense of yearning that its dynamism is a trick an ageing Europe can't master. 
Suppose all this is wrong, suppose suddenly the US cannot attract enough capital. 
No one shows up at Treasury auctions to buy US bonds, and fewer foreigners buy US stocks or companies and real estate. 
What would happen? 
Of course the dollar would fall in no time, and substantially so - enough to shrink the deficits or bring in capital to take advantage of a now undervalued dollar. 
But there is very little pain in that - inflation won't rise, stocks won't fall, manufacturers would cheer. 
Because America has low inflation and is financially stable, the exchange rate is not the risk factor it was in the 1970s. 
That situation was well characterized by a line from John Connolly, the then Treasury Secretary for President Nixon: `` the dollar is our money and their problem! '' 
The more things change, the more they remain the same. 


Keeping Calm on North Korea 
CANBERRA – North Korea’s latest nuclear test is bad news, both for Northeast Asia and for a world that needs to reduce its reliance on nuclear weapons. 
But international overreaction – with responses that raise rather than lower the temperature, and push the region closer to a nuclear arms race – would make bad news even worse. 
“Keep Calm and Carry On” – as the British government famously urged its citizens in 1939 – is advice that often lends itself to parody. 
But it is what needs to happen now. 
North Korea’s latest action follows behavior over the last decade that makes Iran look positively restrained in comparison. 
It walked away from the Nuclear Non-Proliferation Treaty (NPT) in 2003; resisted serious negotiations within the framework of the Six-Party Talks established that year by the United States, China, Russia, South Korea, and Japan; tested nuclear explosive devices in 2006 and 2009 in breach of a global moratorium; conducted a series of increasingly provocative missile tests; ignored United Nations Security Council resolutions and sanctions; sank a South Korean navy ship and shelled one of its islands in 2010; and maintained a steady flow of belligerent rhetoric. 
All of this has jarred regional nerves yet again, in South Korea and particularly in Japan. 
There is new talk about the resources that may need to be mobilized to counter what is perceived as an increasingly sophisticated threat. 
It is still not permissible in polite company to talk about these frontline states acquiring their own nuclear weapons. 
But putting US weapons back into South Korea; acquiring real missile capability; allowing the reprocessing of spent nuclear fuel; moving closer to breakout capability – all of these steps now have their advocates, and these voices will grow louder. 
Nor has North Korea’s behavior done anything to help the cause of global non-proliferation and disarmament. 
It has successfully thumbed its nose at international pressure, becoming a beacon to small, vulnerable, and badly behaved states whose leaders want to believe that nuclear weapons will buy them immunity from intervention, and that Iraq’s and Libya’s biggest mistake was to fail to acquire them. 
Major downsizing of the US nuclear arsenal, which President Barack Obama wants to achieve, will become politically more difficult. 
America’s tentative steps toward reducing the role of nuclear weapons in its overall security strategy, including defending its regional allies, will be harder to implement. 
This will all translate, inevitably, into calls for more toughness toward North Korea – less diplomacy and more sanctions, punitive measures, and isolation. 
How can anyone talk about returning to talks, offering incentives, or normalizing relationships with a regime that is so demonstrably recalcitrant? 
Shouldn’t we fight fire with fire? 
Less inevitably, but more alarmingly, there may now be greater tolerance for those who argue that a country has a right to defend itself against existential threats with equally threatening weapons, or that a world of multiple nuclear powers would be less, not more, dangerous –with threats deterred and risk effectively neutralized. 
Such responses would be serious overreactions. 
At a general level, Henry Kissinger, George Shultz, William Perry, and Sam Nunn were right to argue that, whatever the case might have been for nuclear weapons during the Cold War, a twenty-first-century world of multiple competing nuclear powers would be one of massively enhanced global risk. 
The core message of the NPT must continue to resonate: so long as anyone has nuclear weapons, others will want them; so long as anyone has them, they are bound one day to be used, by accident or miscalculation, if not by design; and any such use would be catastrophic not just for the states immediately affected, but for life on this planet. 
For that message to resonate, the major nuclear-armed states must not only remain committed to non-proliferation, but also get serious about disarmament. 
In the case of North Korea, the world must of course register its displeasure. 
There will, and should be, Security Council condemnation and measures taken to cause the regime, if not its long-suffering people, genuine pain. 
But, alongside all of that, the door should be kept wide open for negotiation. 
Before rushing to conclude that this is a regime with which no productive normalization and denuclearization talks will ever be possible, we need to revisit the record. 
World leaders signed the Agreed Framework with North Korea in 1994 (I was engaged in the process as Australia’s foreign minister), but we dragged our feet in building the nuclear reactors and delivering the heavy fuel oil promised, partly owing to a widespread belief that the regime’s collapse was imminent. 
The diplomatic trajectory re-established a few years later was halted by George W. Bush’s “Axis of Evil” declaration in 2002. 
When a potential new deal was negotiated by the US State Department in 2005, US Treasury officials slammed that window shut by warning the world’s banks against conducting transactions with any North Korean entity. 
The “Sunshine Policy,” which for a decade sustained hope of North-South reconciliation, ended abruptly with President Lee Myung-bak’s election in South Korea in 2008. 
The North Koreans are erratic, unpleasant, irresponsible, and unhelpful. 
But they don’t bear all the blame for the past, and are not behaving completely irrationally. 
New administrations, free of their predecessors’ baggage, are in place in all of the relevant regional capitals. 
If they, the US, and Russia stay calm, place enough on the table, and demand the same from the other side, diplomacy might move forward, and the future might not be irredeemably bleak. 

The Danger of Trans Fats 
Trans fats are unsaturated fatty acids with at least one double bond in the trans configuration. 
While small amounts of trans fats are naturally present in meats and dairy products from cows, sheep, and other ruminants, the great majority of trans fats in our diet are industrially-produced, contained in foods made with partially hydrogenated vegetable oils. 
Partial hydrogenation, which converts vegetable oils into semi-solid fats for use in margarines, commercial cooking, and manufacturing processes, converts approximately 30% of the natural fats to trans fats. 
In the US, consumption of trans fats averages between 2-4% of total energy, with major sources being deep fried fast foods, bakery products (cakes, cookies, muffins, pies, etc.), packaged snack foods, margarines, and breads. 
Considerable evidence exists for harmful effects of trans fat intake. 
Furthermore, trans fats from partially hydrogenated oils have no intrinsic health value. 
Thus, little justification can be made for the use of partially hydrogenated oils, compared with other natural oils or fats. 
Importantly, adverse effects are seen at very low intakes: for example, 1-3% of total energy, or approximately 2-7 grams (20-60 calories) for a person consuming 2000 calories/day. 
Thus, complete or near-complete avoidance of industrial trans fats (≤0.5% of energy) may be necessary to avoid adverse effects and minimize health risks. 
In 2004, Denmark became the first country to legislate limits on trans fat content of foods, largely eliminating industrial trans fats from all foods (including restaurants) in that country. 
Canada is considering similar legislation, and the city of Chicago is also considering banning industrial trans fats from restaurants. 
If restaurants and food manufacturers will not voluntarily eliminate trans fats (as has largely been done in the Netherlands), several points validate the need for, and the importance, of legislative measures to reduce the consumption of trans fats: 
1. 
The harmful health effects of trans fats are now better established than for nearly any other substance in our food supply. 
The strength of evidence and the potential magnitude of harm greatly exceed those of food contaminants or pesticide residues, which are appropriately regulated to very low levels. 
2. 
Extremely low levels of trans fat intake are associated with significantly increased risk of heart disease. 
In our analysis of prospective studies totaling 140,000 men and women, we determined that intake of 2% of total calories from trans fats (or 40 calories/day, for a typical 2000 calorie/day diet) was associated with 23% higher risk of heart attacks or death from heart disease. 
This indicates that for every 100,000 individuals suffering a heart attack or death from heart disease each year, 19,000 of these would be prevented if the average trans fat intake were reduced by approximately 40 calories/day. 
3. 
Individuals have no means of evaluating the trans fat content of meals in restaurants. 
In contrast to packaged foods which now have standardized labeling of trans fat content, it is impossible for an individual to determine how much trans fat is present in restaurant meals. 
Mandated standardized labeling of all restaurant meals would be neither practical nor cost-efficient, given the ever-changing menus and diverse mixtures of ingredients of meals served in restaurants. 
4. 
Use of trans fats in food manufacturing and restaurants can be limited without any significant effects on food taste, cost, or availability. 
While industry often expresses concern that limiting the use of trans fats will affect food taste or cost, no evidence exists to support this hypothesis. 
Conversely, substantial evidence exists that use of trans fats can be eliminated almost entirely without any effects on food taste, cost, or availability. 
This has been clearly demonstrated in both Denmark and the Netherlands. 
It should also be emphasized that much less is known about trans fat consumption in developing countries. 
The current evidence suggests that, compared with Western nations, the intake of trans fats from partially hydrogenated oils may be much higher in developing countries, typically because partially hydrogenated oils represent the cheapest (and often subsidized) choice of fat for cooking. 
Given that coronary heart disease is the leading cause of death in nearly all countries, including developing nations, intensive efforts must be undertaken to greatly reduce or eliminate use of partially hydrogenated oils in both the developed and the developing world. 
In summary, considerable evidence exists for harm, and little evidence for intrinsic health value, of consumption of trans fats from partially hydrogenated vegetable oils. 
Elimination of industrial trans fats from foods, either by voluntary or legislative measures, would likely prevent tens of thousands of heart attacks each year in the U.S. and other countries. 

The Danger of Weak States 
NEW YORK: Fateful events in Israel and Yugoslavia have obscured ongoing turmoil in Nigeria and Indonesia. 
Yet ethnic and religious conflict in both “megastates” is consuming many lives. 
We must not lose sight of the cataclysmic consequences that could result if such violence is not curbed. 
The problem is that both countries, hobbled by legacies of tyranny and degradation, are in danger of losing the capacity to curtail violence. 
The history of the struggle for rights from the Magna Carta to the Universal Declaration of Human Rights has been mainly about placing limits on state authority. 
So it may seem anomalous to argue that, if rights are to be protected, what is required today in various parts of the world is reinforcement of centralized governmental power. 
Liberal values, however, are threatened as thoroughly by state incapacity as by despotic power. 
All over the world, including two of its largest countries, the implications of this truth loom menacingly. 
The consequences for Nigeria’s 114 million people, for the rest of the troubled continent of Africa and for the international system would be catastrophic if Nigeria disintegrated. 
And though the government of President Olusegun Obasanjo is the most democratic and the least corrupt Nigeria has known since independence (including a period in the late 1970s when General Obasanjo was the country's military ruler until he stepped aside voluntarily to permit election of a civilian president), the country remains dangerously weak. 
President Obasanjo's administration has failed to prevent Islamic fundamentalists from imposing sharia law in several Northern states, triggering violence that has cost thousands of lives. 
Nor has it brought peace to the oil rich Niger delta whose impoverished people resent exploitation of the resources of their territory for the enrichment of a corrupt elite. 
Most recently, violence in Lagos between Hausas and Yorubas has cost hundreds of lives. 
Multiethnic, multilingual, multireligious Nigeria is now in greater danger of fragmentation than at any time since the genocidal war in Biafra a generation ago. 
Indonesia, another large, ethnically and – to a lesser extent – religiously diverse state many thousands of miles away, faces comparable difficulties. 
There, too, a committed democrat, Abdurrahman Wahid (Gus Dur), has become President after an extended period of corrupt and brutal military rule. 
As in Nigeria, however, the central government seems to lack the power to halt communal violence that has killed thousands. 
If President Wahid's government cannot stop the carnage, Indonesia, too, could break apart. 
These crises of governmental incapacity have arisen, in both Nigeria and Indonesia, at moments of great promise. 
These are states with vast riches. 
Given the opportunity to govern honestly and peacefully for a few years, the administrations of Presidents Obasanjo and Wahid could make vast improvements in the lives of ordinary Nigerians and Indonesians. 
They may not get that chance, however, because the governments they head lack the power to curb ethnic and religious conflict. 
The powerlessness of Presidents Obasanjo and Wahid is based in part on the unreliability of their armed forces. 
The military regimes that preceded them derived their strength from their soldiers. 
But armed might is of little use to democratic governments attempting to protect the rights of citizens if they must fear that their troops will commit abuses that foster separatist tendencies. 
That is the situation that confronts President Wahid who knows that much of the popular support for independence movements in Aceh and Irian Jaya derives from resentment against military violations of human rights, and that intervention by the army in the Maluka’s at very least exacerbated the conflict between Christians and Muslims who had long lived together peaceably and may even have provoked the violence. 
Perhaps an even more important factor in the weakness of these newly democratic governments is declining public identification with the state. 
Decades of misrule and deprivation deepened religious and ethnic divisions. 
It takes a state of great vitality, Machiavelli pointed out in “The Discourses” half a millennium ago, to survive not only changes in the membership of a government, but changes in the basic form of government. 
The Soviet Union and Yugoslavia, indeed, disintegrated at the point when they were making changes in their form of government. 
Because misrule sapped vitality from Nigeria and Indonesia, the same could happen to them during their transition to democratic government. 
If these new democracies are to survive, their governments will require generous assistance from the international community, including debt relief. 
Knowing the amount of wealth stolen and squandered by Obasanjo's predecessors, such as General Sani Abacha, and by the Suharto kleptocracy in Indonesia, pleas for such relief may not be welcomed easily. 
Yet Western leaders must recognize that if these states fall apart, their debts will never be paid and, inevitably, creditor countries will face vast additional costs. 
So giving democrats such as Obasanjo and Wahid a chance to hold their countries together could stave off immense suffering and may also be a matter of self-interest. 
For anyone concerned with human rights, disintegration in Nigeria or Indonesia would be a calamity. 
Though it is impossible to predict how events may unfold, there are precedents in the many conflicts triggered by the breakdowns of the Soviet Union and Yugoslavia. 
The violence that has already taken place in Nigeria and Indonesia makes one fear that if these states cannot be held together – and here, new creative types of thinking and approaches to advocacy may be called for on the part of the human rights community – the results could be far bloodier than anything we have yet seen. 


The Dangers of Gray Power 
With rare bipartisan agreement, the Bush administration is proposing a substantial increase in benefits for the elderly. 
The proposed reforms may cost US taxpayers more than President Bush's massive tax cut of 2001, and one that implies a very significant redistribution from America's young to its old. 
But while many observers have pointed out the risks associated with Bush's tax cuts, and the gaping deficits that have followed, few seem worried about the added deficits that will arise from this gift to the old. 
What is happening in America is but more evidence of the vast power exercised by the elderly in our societies. 
Similar moves are afoot throughout Europe, where the generosity of state-sponsored pension plans has become unsustainable, but reforming the system is almost impossible politically. 
The rise of pensioners' political power results from a multiplicity of factors. 
The first is simply that in every industrial society, people are living longer lives and having fewer children. 
Combine this with the generous retirement rules that were designed in the 1970's, when the post-war baby-boomers were just about to join the labor market and the welfare state seemed to be free of budget constraints, and you create an entitlement that no one wants to tinker with. 
The second factor empowering the pensioners' lobby is that the old are, on average, richer than the young, simply because they have been around longer and so have had more time to accumulate wealth. 
Being richer, they can provide more financial support to parties and politicians who will defend their interests than the young, who might want to push for pension reform. 
Finally, pensioners have time in their hands, which they dedicate to organize political activities in their own interest. 
Two examples: many trade union leaders in Italy are retirees, and retirees account for the largest proportion of the members of the most powerful and militant union, the CGIL. 
In the US, retirees tend to vote more than the young. 
Indeed, their power in America was perhaps best symbolized by the fact that a relatively few elderly men and women in Florida decided the last Presidential election! 
All of this generates a vicious circle: the stronger the political power of pensioners and of older workers, the greater the pressure on government to shorten working lives and increase pension benefits. 
This in turn raises the share of voters who are dependent on pensions, and thus the political power of retirees. 
In a recent article, Vincenzo Galasso and Paola Profeta from Bocconi university in Milan show that, in Italy, this nexus is now the major obstacle to pension reform. 
As time passes, the political support for reform dwindles, at least until the system blows up. 
Another aspect that makes reforms difficult is that public pensions systems redistribute income from the rich to the poor because these systems are typically structured as ``defined benefits'' systems. 
Pensions are linked to final wages rather than to the actual contribution made by the worker over his or her lifetime. 
The extent of this redistribution varies from one country to another, but it is present throughout the OECD, including in the US. 
Within the anti-reform coalition, those who favor redistribution, typically young and on the political left, thus often join retirees and older workers. 
The result is an extremely powerful political movement that extends from left to right, and includes young and old alike. 
The clear losers are young workers, and the future generations who will face the high tax burdens necessary to pay retirees their promised benefits. 
The redistribution implicit in many pension systems is often far from ``clean.'' 
Many systems entail politically motivated privileges for powerful lobbies. 
In Brazil, the pension plan of private sector workers runs a small surplus, but that of civil servants runs an enormous deficit, equivalent to of 4.5% of Brazil's GDP. 
French public-sector employees recently brought the country to a standstill when targeted by a reform whose main objective was rather modest: to bring their benefits into line with those in the private sector. 
It is encouraging that the French government eventually prevailed, and interesting how this happened. 
After weeks of paralyzing strikes, Prime Minister Raffarin's government began a campaign to convince voters that the reform was simply removing the privileges of a small minority. 
The point sold well and civil servants found themselves isolated. 
Of course, given the political risks, governments should not wait for confrontation with pensioners. 
Officials can take two obvious steps to avoid it altogether. 
First, increase the age of retirement. 
This has two obvious benefits: it cuts the overall cost of the system by shrinking the number of retirees, and thus weakens the constituency that opposes reform. 
Second, eliminate the redistribution implicit in the system. 
Any redistribution, indeed, should be transparent, and take place via taxation and non pension-related transfers. 
Of course, it is easy to understand why this does not happen: when redistribution is transparent, those who pay for it can complain. 
When redistribution takes place via the pension system, it is paid for by unborn generations, who have no voice in the next election. 
In the meantime, one can only suggest to our grandparents that they compensate their grandchildren by leaving them generous private bequests along with high tax burdens. 

The Dangers of Premature Euroization 
Thirteen years after the fall of the Berlin Wall, the postcommunist countries of Central and Eastern Europe stand poised to join the EU, uniting Europe at last. 
The price of reform has been high. 
But all the hard work these states have undertaken to prepare themselves for EU membership may be squandered should they choose to adopt the euro too soon. 
It is widely believed, even among the most Euro-skeptical of observers, that joining the eurozone will affirm these countries' successful transformation into modern market economies. 
Of course, the common currency's net long-term political and economic benefits are clear. 
But timing matters. 
Advocates of rapid euroization argue that it will promote and lock in fiscal, financial, and labor market reforms while expanding trade and boosting income. 
But the evidence for believing that euroization can precede sufficient institutional reforms is scant. 
Moreover, it is based on the experiences of diverse emerging-market countries whose relevance for postcommunist economies is questionable. 
By contrast, euroization so far has required a fair degree of prior fiscal consolidation, a credible and independent monetary policy, reasonably competitive financial institutions, and flexible labor markets. 
The debate about the timing and technical form of euroization must address which monetary regime--full-fledged euroization or floating exchange rates--is more effective in lowering risk premiums in the candidate countries. 
Smooth convergence of risk premiums for inflation, exchange rates, and, perhaps most importantly, debt default with those prevailing in the eurozone are crucial for alleviating possible shocks to the financial system. 
In hindsight, benchmarks of the candidates' ability to manage these risks should have supplemented the existing Maastricht criteria for adopting the euro. 
On purely technical grounds, euroization will push the inflation risk premium--the difference between the average short-term interest rate and the inflation rate--to the level prevailing in the eurozone, implying lower real interest rates. 
But this may not be optimal for the transition economies, which are still experiencing deep structural changes accompanied by sizable relative price adjustments and large capital inflows. 
Moreover, capital inflows to the EU candidates are likely to accelerate as accession draws near, adding to inflationary pressures. 
Premature euroization would keep interest rates low, but it could create a large gap between an imprudently low official inflation risk premium and the inflation risk premium that would be set by an independent monetary policy with floating exchange rates. 
This gap would lead to volatility of capital inflows and output, causing investors to shun long-term projects in the new, unstable part of the eurozone. 
In principle, euroization is likely to eradicate the exchange-rate risk premium for the new entrants. 
But in practical terms, this effect may be implausible if a high proportion of dollar-denominated debt burdens a candidate. 
At the end of 1997, the share of dollar-denominated debt in total external indebtedness among the leading EU candidates ranged from 46% in Poland to 78% in the Czech Republic. 
Entering the eurozone could drive up the candidates' external debt-service costs--thus adding to the fiscal burden--if the euro remains weaker in dollar terms than their national currencies. 
So far, these costs have been tamed by high domestic interest rates, keeping Central Europe's currencies strong. 
But if they "euroize" too soon, candidate countries could find themselves with lower domestic interest rates but a higher external default risk. 
Moreover, business failures due to premature euroization will inevitably increase as chronically weaker domestic firms and financial institutions become fully exposed to EU competition before making adequate corporate governance improvements and efficiency gains. 
Given the short-term net costs of premature euroization, the most compelling alternative is an independent monetary policy based on direct inflation targeting (DIT). 
A DIT framework would affirm the commitment to disinflation and price stability as the euro candidates struggle with pro-inflationary factors. 
This would bolster the credibility of monetary policy, enabling the candidates to lower their inflation and exchange-rate risk premiums. 
However, a DIT regime is feasible only for larger transition countries with relatively well developed financial markets. 
In smaller transition countries, such as the Baltic states, the financial infrastructure may not be sufficiently advanced to conduct monetary policy through open-market operations and to provide appropriate signals for policymakers. 
Hard pegs in the form of a strict currency board--these states' current arrangement--may be their only prudent policy choice. 
In order to facilitate monetary convergence effectively, DIT policies should follow a two-stage adjustment process. 
The initial policy emphasis should be exclusively on disinflation and on applying a strict inflation-targeting regime. 
Once a satisfactory level of price stability is achieved, euro candidates might apply a more flexible variant of inflation targeting that also targets exchange-rate stability . 
The Czech Republic, Poland, and Hungary have moved in this direction, preparing to target a steady, linear inflation path consistent with the long-term inflation forecast for the eurozone. 
But these countries' monetary authorities should base interest rates on conditional inflation forecasts rather than historical data during active disinflation. 
If Poland's central bank had applied a forward-looking DIT policy over the past two years, it would have cut interest rates (reducing the inflation risk premium) much faster. 
This would have ameliorated output losses and painful unemployment effects, sparing the bank recent political pressure. 
Flexible inflation targeting is intrinsically complex and thus must be conducted with a high degree of transparency. 
When financial markets and the public fully understand monetary policy goals, strategies, and tactics, private-sector inflation expectations will align with official forecasts. 
As expected inflation converges with the forecast for the eurozone, the financial markets will declare a candidate "ripe" for full-fledged euroization. 

The Dark Matter of Financial Globalization 
The recent turmoil in global financial markets – and the liquidity and credit crunch that followed – raises two questions: how did defaulting sub-prime mortgages in the American states of California, Nevada, Arizona, and Florida lead to a worldwide crisis? 
And why did systemic risk increase rather than decrease in recent years? 
Blame should go to the phenomenon of “securitization.” 
In the past, banks kept loans and mortgages on their books, retaining the credit risk. 
For example, during the housing bust in the United States in the late 1980’s, many banks that were mortgage lenders (the Savings ampamp; Loans Associations) went belly up, leading to a banking crisis, a credit crunch, and a recession in 1990-1991. 
This systemic risk – a financial shock leading to severe economic contagion – was supposed to be reduced by securitization. 
Financial globalization meant that banks no longer held assets like mortgages on their books, but packaged them in asset-backed securities that were sold to investors in capital markets worldwide, thereby distributing risk more widely. 
What went wrong? 
The problem was not just sub-prime mortgages. 
The same reckless lending practices – no down-payments, no verification of borrowers’ incomes and assets, interest-rate-only mortgages, negative amortization, teaser rates – occurred in more than 50% of all US mortgages in 2005-2007. 
Because securitization meant that banks were not carrying the risk and earned fees for transactions, they no longer cared about the quality of their lending. 
Indeed, a chain of financial intermediaries now earn fees without bearing the credit risk. 
As a result, mortgage brokers maximize their income by generating larger volumes of mortgages, as do the banks that package these loans into mortgage-backed securities (MBS’s). 
Investment banks then earn fees for re-packaging these securities in tranches of collateralized debt obligations, or CDO’s (and sometimes into CDO’s of CDO’s). 
Moreover, credit rating agencies had serious conflicts of interest, because they received fees from the managers of these instruments. 
Regulators sat on their hands, as the US regulatory philosophy was free-market fundamentalism. 
Finally, the investors who bought MBS’s and CDO’s were greedy and believed the misleading ratings. 
Nor could they do otherwise, as it was nearly impossible to price these complex, exotic, and illiquid instruments. 
Similar reckless lending practices prevailed in the leveraged buyout market, where private equity firms take over public companies and finance the deals with high debt ratios; the leveraged loan market, where banks provide financing to private equity firms; and the asset-backed commercial paper market, where banks use off-balance sheet schemes to borrow very short term. 
Small wonder that when the sub-prime market blew up, these markets also froze. 
Because the size of the losses was unknown – sub-prime losses alone are estimated at between $50 billion and $200 billion, depending on the magnitude of the fall in home prices, which is also unknown – and no one knew who was holding what, no one trusted counterparties, leading to a severe liquidity crunch. 
But the liquidity crunch was not the only problem; there was also a solvency problem. 
Indeed, in the US today, hundreds of thousands – possibly two million – households are bankrupt and thus will default on their mortgages. 
Around sixty sub-prime lenders have already gone bankrupt. 
Many homebuilders are near bankrupt, as are some hedge funds and other highly leveraged institutions. 
Even in the US corporate sector, defaults will rise, owing to sharply higher corporate bond spreads. 
Easier monetary policy may boost liquidity, but it will not resolve the solvency crisis. 
There are two reasons for this: 
1. massive uncertainty about the size of the losses. 
In part, the size will depend on how much home prices fall amp#45;amp#45; 10%? 20%? 
Moreover, it is hard to price losses on exotic instruments that are illiquid (i.e. do not have a market price). 
2. thanks to securitization, private equity, hedge funds, and over-the-counter trading, financial markets have become less transparent. 
This opacity means that no one knows who is holding what, which saps confidence. 
When the repricing of risk finally occurred in September, investors panicked causing a liquidity run and a credit strike. 
So what is to be done? 
It will be hard to reverse financial liberalization, but its negative side effects – including greater systemic risk – require a series of reforms. 
First, more information and transparency about complex assets and who is holding them are needed. 
Second, complex instruments should be traded on exchanges rather than on over-the-counter markets, and they should be standardized so that liquid secondary markets for them can arise. 
Third, we need better supervision and regulation of the financial system, including regulation of opaque or highly leveraged financial institutions such as hedge funds and even sovereign wealth funds. 
Fourth, the role of rating agencies needs to be rethought, with more regulation and competition introduced. 
Finally, liquidity risk should be properly assessed in risk management models, and both banks and other financial institutions should better price and manage such risk; most financial crises are triggered by maturity mismatches. 
These crucial issues should be put on the agenda of the G7 finance ministers to prevent a serious backlash against financial globalization and reduce the risk that financial turmoil will lead to severe economic damage. 

The Dead Cat Bounce 
NEW YORK – Mild signs that the rate of economic contraction is slowing in the United States, China, and other parts of the world have led many economists to forecast that positive growth will return to the US in the second half of the year, and that a similar recovery will occur in other advanced economies. 
The emerging consensus among economists is that growth next year will be close to the trend rate of 2.5%. 
Investors are talking of “green shoots” of recovery and of positive “second derivatives of economic activity” (continuing economic contraction is the first, negative, derivative, but the slower rate suggests that the bottom is near). 
As a result, stock markets have started to rally in the US and around the world. 
Markets seem to believe that there is light at the end of the tunnel for the economy and for the battered profits of corporations and financial firms. 
This consensus optimism is, I believe, not supported by the facts. 
Indeed, I expect that while the rate of US contraction will slow from -6% in the last two quarters, US growth will still be negative (around -1.5 to -2%) in the second half of the year (compared to the bullish consensus of +2%). 
Moreover, growth next year will be so weak (0.5 to 1%, as opposed to the consensus of 2% or more) and unemployment so high (above 10%) that it will still feel like a recession. 
In the euro zone and Japan, the outlook for 2009 and 2010 is even worse, with growth close to zero even next year. 
China will have a more rapid recovery later this year, but growth will reach only 5% this year and 7% in 2010, well below the average of 10% over the last decade. 
Given this weak outlook for the major economies, losses by banks and other financial institutions will continue to grow. 
My latest estimates are $3.6 trillion in losses for loans and securities issued by US institutions, and $1 trillion for the rest of the world. 
It is said that the International Monetary Fund, which earlier this year revised upward its estimate of bank losses, from $1 trillion to $2.2 trillion, will announce a new estimate of $3.1 trillion for US assets and $0.9 trillion for foreign assets, figures very close to my own. 
By this standard, many US and foreign banks are effectively insolvent and will have to be taken over by governments. 
The credit crunch will last much longer if we keep zombie banks alive despite their massive and continuing losses. 
Given this outlook for the real economy and financial institutions, the latest rally in US and global stock markets has to be interpreted as a bear-market rally. 
Economists usually joke that the stock market has predicted 12 out of the last nine recessions, as markets often fall sharply without an ensuing recession. 
But, in the last two years, the stock market has predicted six out of the last zero economic recoveries – that is, six bear market rallies that eventually fizzled and led to new lows. 
The stock market’s latest “dead cat bounce” may last a while longer, but three factors will, in due course, lead it to turn south again. 
First, macroeconomic indicators will be worse than expected, with growth failing to recover as fast the consensus expects. 
Second, the profits and earnings of corporations and financial institutions will not rebound as fast as the consensus predicts, as weak economic growth, deflationary pressures, and surging defaults on corporate bonds will limit firms’ pricing power and keep profit margins low. 
Third, financial shocks will be worse than expected. 
At some point, investors will realize that bank losses are massive, and that some banks are insolvent. 
Deleveraging by highly leveraged firms – such as hedge funds – will lead them to sell illiquid assets in illiquid markets. 
And some emerging market economies – despite massive IMF support – will experience a severe financial crisis with contagious effects on other economies. 
So, while this latest bear-market rally may continue for a bit longer, renewed downward pressure on stocks and other risky assets is inevitable. 
To be sure, much more aggressive policy action (massive and unconventional monetary easing, larger fiscal-stimulus packages, bailouts of financial firms, individual mortgage-debt relief, and increased financial support for troubled emerging markets) in many countries in the last few months has reduced the risk of a near depression. 
That outcome seemed highly likely six months ago, when global financial markets nearly collapsed. 
Still, this global recession will continue for a longer period than the consensus suggest. 
There may be light at the end of the tunnel – no depression and financial meltdown. 
But economic recovery everywhere will be weaker and will take longer than expected. 
The same is true for a sustained recovery of financial markets. 

The Dear Leader Cleans House for the Young General 
SEOUL – There was a time, not long after the Cold War’s end, when almost everyone assumed that North Korea would soon collapse. 
The sudden death in 1994 of Kim Il-sung, the founder of the tyrannical, economically disastrous North Korean experiment, reinforced this belief. 
That was then. 
Today, no one can credibly say that North Korea’s dynastic regime, now led by “Dear Leader” Kim Jong-il, a son of the late “Great Leader” Kim Il-sung, is certain to fall. 
From insistence that the end of the Kim dynasty was approaching, consensus is emerging on the continued existence of their regime. 
Immediately after the stroke that killed his father at an exclusive summer resort villa on a remote mountain, Kim Jong-il consolidated political power by concentrating it in the hands of a very few diehard loyalists – and jailing, torturing, and killing anyone he viewed as a political opponent. 
Nevertheless, despite his long tenure, the Dear Leader’s hold on power sometimes has been threatened by a small group of dissidents. 
And now that poor health has forced him to prepare to hand power to his third and youngest son, Kim Jong-un (the so-called “Young General”), opposition has become more visible. 
On April 22, 2004, a train explosion at Ryongchon killed 160 people and injured 1,300. 
Many believe that it was an attempt to assassinate Kim, whose custom-built train passed through Ryongchon a few hours before the blast. 
Since then, South Korean intelligence institutions have been assessing Kim Jong-il’s ability to organize an orderly dynastic succession. 
In particular, they have been monitoring the body count of senior North Korean officials who have suddenly retired, disappeared, or died in automobile accidents. 
Indeed, the number of recent changes in the North Korean hierarchy strongly suggests serious domestic opposition to the continuance of Kim’s misbegotten rule. 
Kim Il-chol, 80, an admiral and vice-minister for the armed forces, was removed from his post in May. 
He was sent into retirement supposedly because of his advanced age, but there are even older figures in North Korea’s gerontocracy. 
In addition, Pak Nam-gi, the senior finance ministry official considered responsible for North Korea’s botched issuance of a new currency last year, has disappeared, and Kim Yong-il, North Korea’s prime minister, was fired on June 7. 
Ri Je-gang, a senior Workers’ Party director, was killed in a bizarre car crash on June 2. 
The most common explanation for all of these changes is that Kim is circling the wagons around himself and the Young General. 
A disciplined succession plan is needed because Kim is 68 and in bad health (and thus unlikely to still be holding power in 2012, the year he targeted for North Korea to become a “Strong and Prosperous Country”). 
In the meantime, the armed forces appear to remain loyal to Kim, willing to carry out his orders even at the risk of bringing the country to the brink of war, such as by sinking the South Korean naval ship Cheonan in March and warning of “powerful nuclear deterrence” against joint South Korean and American military drills. 
While the United Nations Security Council debates how to reprimand North Korea for the attack on the Cheonan, few people in South Korea believe that any punishment will deter Kim or shorten the life of his regime. 
Moreover, from the beginning South Korea had little faith in the UN even trying to act, due to China’s veto in the Security Council. 
Indeed, China offered South Korea a veiled warning that it “should not sweat the small stuff,” implying that the unprovoked killing of 46 South Korean sailors is a petty matter, and certainly not one that will cause China to rethink its alliance with North Korea. 
North Korea’s unpredictability and China’s cynical irresponsibility appear to be boxing in South Korean President Lee Myung-bak’s conservative government. 
Lee must not only calculate how tough to be with North Korea in response to the death of the Cheonan sailors, but also find a way to keep working with Kim Jong-il’s police state. 
He will most likely opt for a tactical retreat in the confrontation. 
Instead of pushing for serious UN sanctions, Lee’s government will eventually, it seems, focus on reviving the six-party (South and North Koreas, the United States, China, Japan, and Russia) talks to end the North’s nuclear-weapons program. 
There is no way to know what will happen in North Korea when Kim dies. 
But it is time for Asia’s powers to start thinking creatively and acting cooperatively to prevent a violent implosion. 

The Dear Leader Nuclear Weapons Company 
TOKYO – Next week, world leaders will gather in New York to mark the 40th anniversary of the Nuclear-Non-Proliferation Treaty and to discuss means to further limit the dangers posed by nuclear weapons. 
This meeting follows on a recent summit in Washington to discuss nuclear security, and the new strategic arms reduction treaty signed by US President Barack Obama and Russian President Dmitri Medvedev in early April. 
All this diplomatic activity is good news for everyone, everywhere. 
But neither the US-Russia agreement, nor the global nuclear arms talks, will have much impact on today’s most perilous threat: the nuclear honeymoon between an Iran determined to acquire a nuclear weapons capacity and a North Korea willing to sell Iran much of that capacity for hard currency. 
Today, more than 6,000 North Koreans work in Iran and neighboring areas of the Middle East. 
Many are engaged in construction and the apparel business as low-wage workers. 
But in Iran and Syria, there are also a growing number of specialist workers. 
Indeed, when Israel attacked a nuclear facility in Syria in September 2007, it was revealed that North Koreans were involved in developing the site in cooperation with the Syria National Technical Research Center. 
Of the many North Koreans living in Iran, most are engaged in activities on behalf of the Korean Workers’ Party. 
Their mission is to propagandize the party’s ideology in the Islamic Republic. 
The daily life of these Koreans is constrained within a small community where the Party exercises total control over all personal exchanges. 
Some of these workers are directed by North Korea’s embassy in Teheran, which is primarily concerned with acting as a Party watchdog over fellow citizens stationed in Iran. 
North Korean diplomatic attaches are required to conduct weekly and monthly self-criticism sessions. 
Those seen as having failed to follow Party dictates in an appropriate way face severe recrimination. 
But other North Koreans in Iran do not take their marching orders from the embassy, and they are of three types. 
Those from “Office 99” report to the Munitions Industry Department in Pyongyang. 
Those from “Office 39” report to the Finance and Accounting Department. 
A final group reports directly to the Secretarial Office of North Korea’s “Dear Leader,” Kim Jong-Il. 
In 2002, it was estimated that more than 120 North Korean nationals were working at more than 10 locations across Iran that were relevant to missile or nuclear development. 
While North Koreans who work in the United Arab Emirates, Qatar, or Kuwait are basically cheap labor, the missile and nuclear business conducted by North Koreans in Iran serves as a cash cow, providing Kim Jong-Il’s regime with a pile of hard currency while forging a virtual anti-American alliance. 
By enhancing nuclear proliferation and the transfer of essential nuclear and related technologies to the Middle East’s most radical regime, Kim Jong-Il hopes to shape radical Islamic fundamentalism as a bastion of pro-North Korean feeling. 
Until 2009, the Department of Finance and Accounting and the Secretarial Office in North Korea have been responsible for the export of missiles and missile technologies to Iran through the dummy companies managed by Office 99. 
All such transactions have been conducted under the direct orders of Kim Jong-Il. 
This is how it works: the Second Economic Committee, which is under the command of the Party’s central leadership, manufactures missiles with the help of North Korea’s Second Academy of Natural Sciences. 
Companies under the control of Office 99 export the missiles to Iran. 
The foreign currency earned by the export of missiles and nuclear or other weapons goes either directly into Kim Jong-Il’s pocket, or is used to fund further nuclear development. 
Following the nuclear test conducted by North Korea in 2009, the United Nations imposed sanctions on Kim’s regime through Security Council Resolution 1874, which shut down the flow of foreign currency into North Korea. 
The irony is that the sanctions have made Iran an even more important partner for North Korea than it was before. 
So the nuclear relationship has been hardened, not disrupted, by sanctions. 
According to high-level internal Workers’ Party documents brought to Japan by North Korean informants, a new front apparatus, the Lyongaksan General Trading Corporation, was created in 2010. 
This organization, it appears, is now intended to play the central role in managing the export of missile and nuclear technologies to Iran. 
Of course, this is simply a new wrinkle on an old practice, for North Korea has regularly used dummy companies to export missiles. 
Names, addresses, and phone numbers for such companies are all non-existent, as has been proved by the documents found when the UN confiscated illegally exported weapons under Resolution 1874. 
So desperate is North Korea’s financial position that, this past December, the Ministry of People’s Security suspended the domestic use of foreign currency. 
Violations are punishable by death. 
Such a harsh measure suggests that, even though the sanctions have hardened North Korea’s desire to export nuclear weapons and technology to Iran, the process is becoming more difficult and the regime is losing its key mechanism to earn foreign currency. 
Kim Jong-Il will seek to maintain the relationship with Iran no matter what. 
If this trade is to be halted, China – through whose territory most shipments to and from North Korea pass – will need to play a more responsible role. 
But, given the scope of the Iranian-North Korean nuclear relationship, Asia’s democracies must start to think seriously about cooperating on regional missile defense in the way that NATO Secretary General Anders Fogh Rasmussen has urged NATO and Russia to cooperate. 

The Death-Defying Dollar 
BERKELEY – The blogosphere is abuzz with reports of the dollar’s looming demise. 
The greenback has fallen against the euro by nearly 15% since the beginning of the summer. 
Central banks have reportedly slowed their accumulation of dollars in favor of other currencies. 
One sensational if undocumented story has the Gulf States conspiring with China, Russia, Japan, and France – now there’s an odd coalition for you – to shift the pricing of oil away from dollars. 
Economists have no trouble explaining the dollar’s weakness after the fact. 
With American households saving more in order to rebuild their retirement accounts, the country has to export more. 
A weaker dollar is needed to make American goods more attractive to foreign consumers. 
Moreover, disenchantment with the sophisticated instruments that American financial institutions specialize in originating and distributing means more limited foreign capital flows into the United States. Fewer foreign purchases of US assets again imply a weaker dollar. 
Extrapolating the past into the future, forecasters predict that the dollar will decline further. 
The first thing to say about this is that one should be skeptical about economists’ predictions, especially those concerning the near term. 
Our models are, to put it bluntly, useless for predicting currency movements over a few weeks or months. 
I should know. 
When the sub-prime crisis erupted in early September 2007, I published an article entitled “Why Now is a Good Time to Sell the Dollar” in a prominent financial publication. 
What happened next, of course, was that the dollar strengthened sharply, as investors, desperate for liquidity, fled into US Treasury securities. 
Subsequently the dollar did decline. 
But then it shot up again following the failure of Bear Stearns and the problems with AIG. 
Over periods of several years, our models do better. 
Over those time horizons, the emphasis on the need for the US to export more and on the greater difficulty the economy will have in attracting foreign capital are on the mark. 
These factors give good grounds for expecting further dollar weakness. 
The question is, Weakness against what? 
Not against the euro, which is already expensive and is the currency of an economy with banking and structural problems that are even more serious than those of the US. 
Not against the yen, which is the currency of an economy that refuses to grow. 
Thus, for the dollar to depreciate further, it will have to depreciate against the currencies of China and other emerging markets. 
Their intervention in recent weeks shows a reluctance to let this happen. 
But their choice boils down to buying US dollars or buying US goods. 
The first option is a losing proposition. 
In the longer run, OPEC will shift to pricing petroleum in a basket of currencies. 
It sells its oil to the US, Europe, Japan, and emerging markets alike. 
It hardly makes sense for it to denominate oil prices in the currency of only one of its customers. 
And central banks, when deciding what to hold as reserves, will surely put somewhat fewer of their eggs in the dollar basket. 
Beyond this, the dollar isn’t going anywhere. 
It is not about to be replaced by the euro or the yen, given that both Europe and Japan have serious economic problems of their own. 
The renminbi is coming, but not before 2020, by which time Shanghai will have become a first-class international financial center. 
And, even then, the renminbi will presumably share the international stage with the dollar, not replace it. 
The one thing that could precipitate the demise of the dollar would be reckless economic mismanagement in the US. 
One popular scenario is chronic inflation. 
But this is implausible. 
Once the episode of zero interest rates ends, the US Federal Reserve will be anxious to reassert its commitment to price stability. 
There may be a temptation to inflate away debt held by foreigners, but the fact is that the majority of US debt is held by Americans, who would constitute a strong constituency opposing the policy. 
The other scenario is that US budget deficits continue to run out of control. 
Predictions of outright default are far-fetched. 
But high debts will mean high taxes. 
The combination of loose fiscal policy and tight monetary policy will mean high interest rates, sluggish investment, and slow growth. 
Foreigners – and residents – might well grow disenchanted with the currency of an economy with these characteristics. 
Mark Twain, the nineteenth-century American author and humorist, once responded to accounts of his ill health by writing that “reports of my death are greatly exaggerated.” 
He might have been speaking about the dollar. 
For the moment, the patient is stable, external symptoms notwithstanding. 
But there will be grounds for worry if he doesn’t commit to a healthier lifestyle. 

The Death of a Nation 
Belgium is in danger of falling apart. 
For more than six months, the country has been unable to form a government that is able to unite the French-speaking Walloons (32%) and Dutch-speaking Flemish (58%). 
The Belgian monarch, Albert II, is desperately trying to stop his subjects from breaking up the state. 
Apart from the King (who might be out of a job), who cares? 
First of all, the Walloons do. 
Although the French-speaking Belgians started the European Industrial Revolution in the nineteenth century, they are now living in a deprived rustbelt in need of federal subsidies, a substantial amount of which comes from taxes paid by the more prosperous, high-tech Flemish. 
A handful of right-wing Dutch dreamers care, too, for they have visions of uniting Belgian Flanders with the Dutch motherland. 
Alas for them, however, the Flemish have no such desire. 
Belgium, after all, became an independent state in 1830, precisely in order to liberate the Catholic Flemish, as well as the Walloons, from being second-class subjects in a Protestant Dutch monarchy. 
But perhaps we should all care at least a little, for what is happening in Belgium is unusual, but not at all unique. 
The Czechs and Slovaks already parted ways, as did the different nations of Yugoslavia. 
Many Basques would like to break away from Spain, as would many Catalans. 
Corsicans would love to be rid of France, and many Scots of Britain. 
Then, of course, there is the Tibetan problem in China, the Chechen problem in Russia, and so on. 
No doubt some of these peoples would be able to survive perfectly well on their own. 
But history does seem to suggest that the cumulative effect of states falling apart is seldom positive. 
Belgian separatists like to observe that Belgium was never a natural nation-state, but an accident of history. 
But so are many, perhaps most. 
The accident in the case of Belgium is usually placed in the early nineteenth century, the result of Napoleon’s European empire collapsing and Dutch arrogance. 
In fact, one might just as well set the accident in the sixteenth century, when the Habsburg Emperor hung on to the Southern Netherlands (today’s Belgium) while the Protestant northern provinces broke away. 
Be that as it may, nation-states were often formed in the eighteenth and nineteenth centuries to promote common interests that transcended cultural, ethnic, linguistic, or religious differences. 
This was true of Italy and Britain, no less than of Belgium. 
The problem now is that interests are no longer the same, or even held in common. 
The European Union, which actively promotes regional interests, has weakened the authority of national governments. 
Why rely on London, say the Scots, if Brussels offers greater advantages. 
When common interests no longer prevail, language and culture begin to matter more. 
One reason why Flemish Belgians resent having to prop up the Walloons with their tax money is that they regard them almost as foreigners. 
Most Flemish readers don’t read French-language newspapers or novels, and vice versa. 
TV stations are separate. And so are schools, universities, and political parties. 
Similarly, northern Italians don’t like their tax money being used to help the south, but at least they still have a language – more or less – in common, as well as TV stars, a national soccer team, and Silvio Berlusconi. 
The Belgians only have a king, who is descended, like most European monarchs, from Germans. 
Again, why should this matter? 
Don’t we feel sympathy for the Tibetans in their struggle for freedom? 
Why shouldn’t the Flemish go their own way? 
It is one thing to support a people that is being oppressed by an authoritarian government. 
And Tibetans are actually in danger of losing their culture. 
It is more disturbing when people choose to break up nation-states because they refuse to share their wealth, for linguistic or ethnic reasons. 
If Flemish citizens don’t want their taxes to go to the Walloons, what about helping out unemployed immigrants from Africa, a large chunk of which the Belgians once owned and exploited as a major source of their prosperity? 
It should come as no surprise that the Flemish nationalist party (Vlaams Belang) is hostile to immigrants too. 
So the fate of Belgium should interest all Europeans, especially those who wish the Union well. 
For what is happening in Belgium now could end up happening on a continental scale. 
Why, for example, should the prosperous Germans continue to have their tax money pooled to assist the Greeks or the Portuguese? 
It is difficult to sustain any democratic system, whether on a national or European scale, without a sense of solidarity. 
It helps if this is based on something deeper than shared interests: a language, a sense of common history, pride in cultural achievements. 
The European identity is still far from being solid. 
Perhaps the citizens of Belgium do not have enough in common anymore, and Flemish and Walloons would be better off being divorced. 
But one hopes not. Divorces are never painless. 
And ethnic nationalism unleashes emotions that are almost always undesirable. 
We know what happened when the twin pulls of blood and soil determined European politics before. 
Without having intended it, the EU now seems to be encouraging the very forces that postwar European unity was designed to contain. 

The Death of Death 
Once again killing on a great scale has been taking place, this time in a land in which Paradise is said to have once lay--the valley between the Tigris and Euphrates rivers. 
Today's killing is no worse than history's countless massacres, perhaps even more restrained. 
Some suggest that it was necessary to forestall future killings. 
In any case, it is the sad, solitary privilege of human beings to kill our own consciously, as well as to commit suicide. 
This is so, we can rightfully assume, because human beings are the only beings that comprehend death--that of others as well as our own. 
We all know that we will die one day. 
"You are one being among many/Only you hang on to Beauty/And know: you must part," wrote the poet Reiner Kunze. 
This knowledge penetrates every moment of our lives. 
Media in vita in morte sumus - in the midst of life, we are surrounded by death--went a medieval song. 
Heidegger made the knowledge of death key to the understanding of what it means to live. 
Death isolates every individual, because there is no such thing as collective dying. 
Everyone dies alone. 
Those who realize this are thus tempted to deny any meaning to human conduct; everything, it seems, is futile in the end, because in dying we leave society and society leaves us. 
On the other hand, only the knowledge of our mortality provides our existence with its preciousness. 
If we did not die, everything would lose meaning. 
Everything we do today, we could do tomorrow. 
At a golden wedding anniversary one may wish that, now, everything should really start in earnest. 
But endlessly? 
That would immediately ruin everything. 
Knowledge of the end opens up dimension of meaning, which also makes it possible for some things to be meaningless. 
"You hang on to beauty..." - this is the other characteristic that Kunze's poem ascribes to humanity. 
The experience of beauty is closely related to knowledge of death. 
Beauty does not derive its meaning from its value for our biological survival or its use for other people, who must also die. 
What we call beautiful has meaning in itself. 
It can be human gestures and actions, even when they are futile or squandered on the wrong people. 
Beauty is resistant to the hubbub of the absurd. 
For religious believers, as earlier with Plato, beauty is a foretaste of what survives death. 
How does society deal with dying and death? 
With death one ceases to be a member of society. 
A state can threaten death, but, as many totalitarian regimes have learned, no one is stronger - and possibly more dangerous - than those who have overcome the fear of death. 
The threat of death is a powerful weapon. 
To have to deliver on that threat is always a defeat. 
The ritualized culture of death and funerals in the old European tradition was an experience in which society was aware of its limits. 
By embedding death in rituals, society made its self-questioning into a part of itself. 
This attitude has a necessary religious dimension - and one that legitimized society. 
By acknowledging itself as finite and limited, society could think of itself as also sanctioned by God. 
Belief in immortality made the opposition between life and death relative. 
Mortals see death as the gateway to true life, much as a caterpillar might look at a butterfly. 
As the words inscribed on an execution sword in Munster put it: "When I raise this sword, I wish the poor sinner eternal life." 
Our atheist modern age understands the contrast between life and death as absolute. 
We search for some palliatives, but they are ineffective. 
"My life continues in the lives of my children," we say, but for an individual this is an empty phrase. 
We doggedly fight to prolong life, only to find that we cannot win this battle - and are left unable to produce authentic rituals to accompany the end of our existence. 
Because our societies have no sense of limits, they strive to eliminate death from our consciousness. 
More and more often, death takes place in a hidden hospital room. 
Death is suppressed socially, but the effect is that individuals' fear of death grows ever greater. 
Most people nowadays face death never having witnessed the death of someone else! 
Next comes a desire to eliminate quietly those who can no longer be seen as members of the social world. 
Holland, with its euthanasia law, is not internationally condemned; indeed, its killer-doctors see themselves as an avant-garde. 
Suddenly, such killings can't go fast enough. 
Definition of death as "brain death" allows one to declare breathing beings dead and to eliminate the process of dying, in order to exploit the dying as warehouses of spare parts for the living. 
Death no longer comes at the end of the process of dying, but - by decree of a Harvard commission - at the beginning. 
The Judeo-Christian custom of burial is rapidly being replaced - not by the ritual of an Indian pyre, but by a crematorium, i.e., the destruction of a corpse by means of high-temperature machines, a procedure from which the public is excluded. 
More and more people believe that they are doing their children a favor by letting themselves be buried anonymously "under the green grass" to spare them the costs of the funeral and the upkeep of the grave. 
The oldest distinction of homo sapiens - ritual burial of the dead - is disappearing. 

The Death of King Fahad 
Saudi Arabia’s decade long royal death watch is over. 
King Fahad, the longest-serving king in Saudi Arabia’s history (24 years), is dead. 
For six weeks, the King lay in a hospital fighting death, something he has done, in reality, ever since he suffered a massive stroke 10 years ago. 
The identity of the new king is clear, but who will really wield power is not. 
As when Marshal Tito was dying in a divided Yugoslavia, the King’s royal relations (who are also his political underlings) fear that the ruler’s death will unleash chaos. 
This fear comes at a time when the wider Middle East is abuzz with talk of democratic change. 
From Egypt to Lebanon to Iran, political passions are mounting, along with a renewed optimism. 
Street demonstrations, elections, and political debate in cafes and on the Internet are flowering as never before. 
Even the conservative states of the Arabian Peninsula are embroiled in lively disputes about women ministers, Shia representation, Islamist participation in the political process, and even the future of their ruling monarchies. 
In these dynamic circumstances, Saudi Arabia stands out. 
Indeed, Saudi Arabia seems trapped in a state of suspended animation, its body politic sick and infirm. 
The country is caught between two choices: progressive reform or continuing paralysis and decay. 
Divisions in the kingdom are sharper than ever, and the King’s death might deepen them further. 
Two rival camps - the so-called reformers and the hard liners - are forming in the Al Saud, the world’s largest ruling family, with 22,000 princes and princesses. 
The reformers have less authority but are the acceptable face of the Saudi dictatorship internationally. 
Their new leader, King Abdullah, appears to have legitimacy because of his seniority in the family. 
The reformers talk about partial municipal elections, national dialogue, and the rights of women, who they hint may one day even be allowed to drive cars! 
Even these limited efforts are obstructed by the hardline Wahhabi camp, which controls the security forces, the judiciary system, and the real levers of domestic power. 
Indeed, Prince Naif, the Minister of the Interior and leader of the hardliners, has either silenced or imprisoned hundreds of the key Saudi reformers. 
One reason for the weakness of Abdullah’s faction is that he has scant support within the family, because the Al Saud center of power lies with the al Fahads - the six full brothers of the dead King Fahad, most importantly Prince Sultan, the Minister of Defense, and Prince Naif. 
On the surface, the succession has proceeded as expected, with Crown Prince Abdullah becoming king now that Fahad has died. 
In spite of this, Abdullah may not be able to shape the future, because he seems doomed to lose any showdown with Naif’s forces. 
Abdullah’s power base is in the National Guard, and his claim on the support of Saudi Arabia's modernizing forces. 
Both are insufficient to check Naif. 
A key early test of Abdullah’s kingship will be if he can succeed in freeing the hundreds of political reformers now in prison, especially three respected academics whom he encouraged to make reform proposals, only to be incarcerated by Naif. 
Now that King Fahad is gone, old scores among his numerous brothers and half brothers, not to mention the thousands of princes in the next generation, will need to be settled. 
But don’t look for hope in the new generation, which is not necessarily young or progressive. 
Indeed, the Al Saud clan’s third and fourth generations are divided not only in political and religious affiliation, but also range in age from 20 to 90 years old. 
All await a chance to rule. 
So Saudi Arabia’s people confront this key question: can an authoritative ruler emerge who will reunite the country in the progressive tradition of the late King Faisal? 
The sad likelihood is that, given the power of the obstructionists under Naif, a decisive and energetic king is unlikely to emerge. 
The direction the country will take in the longer term can best be assessed by whom Abdullah chooses to name as the successor to Prince Sultan, Naif’s chief ally who has already been named Abdullah’s heir. 
If Abdullah (aged 83) can perhaps skip a generation and appoint a more open-minded younger figure, there may be hope. 
But Naif (age 77), his full brothers - including Sultan (age 82) - and their supporters within the Wahhabi establishment appear too entrenched to allow that to happen. 
Like the geriatric successions that preceded the collapse of the Soviet Union, the succession in Saudi Arabia seems to be only a step in an inexorable march toward political decay. 
Russia found a young reformer in Mikhail Gorbachev too late. 
It may also be too late for Saudi Arabia. 

The Death of NATO 
LONDON – NATO, whose foreign ministers will meet next week, is dying. 
Death, of course, comes to all living things. 
And, as NATO approaches its 60th birthday next spring, there seems no immediate urgency about writing its obituary; 60-year-olds may reasonably look forward to another decade, perhaps two or even three, of active and productive life. 
But perhaps it is now time for some discreet reflection on the fact that “the old man will not always be with us.” 
Human institutions, like human beings, can collapse with surprising speed once they have outlived their usefulness. 
The dramatic dissolution of the Soviet Union stands as a reminder of what can happen to organizations when doubts take hold as to whether they still serve any real interests other than those of their own apparatchiks – and how suddenly such doubts can grow when they attempt to convert themselves into something they are not. 
NATO has, of course, shown remarkable tenacity. 
It should have disappeared when the Soviet Union collapsed and the Warsaw Pact evaporated; its job was done. 
But then came the Balkans crises of the 1990s, culminating in the realization that only American military power could put a stop to Serbian President Slobodan Milosevic’s ethnic cleansing of Kosovo. 
And then came the terrorist attacks of September 11, 2001, making the “out of area or out of business” choice seem a no-brainer. 
So NATO remains in business, and in Afghanistan. 
But NATO’s repeated demonstrations of resilience should not blind us to the fact that it no longer provides a healthy basis for the transatlantic security relationship. 
As long as NATO’s raison d’être was to keep the Russians out and the United States in, NATO’s internal dynamic of American leadership and European obeisance was both inevitable and appropriate. 
This unbalanced relationship still has advantages for both parties. 
Americans may find their (old) European allies less pliable than before – but they can at least count on the absence of any serious alternatives for what NATO should become, or what it should do. 
Europeans can continue to avoid responsibility for their own security, and to invoke the catechism of “NATO, the corner-stone of our security” as a substitute for serious strategic thought. 
But each now resents the behavior of the other. 
Americans find their patience tried by Europeans who are free with their advice and criticism yet reluctant to shoulder risks. 
Moreover, the US learned from the Kosovo experience of “war by committee” to distrust NATO as a place to run operations, and now Afghanistan highlights the organization’s limitations as a mechanism for generating force contributions. 
As for Europeans, they are unhappy about pressure to participate in a US-led “global war on terror” that they regard as dangerous and misconceived, and to go along with policies seemingly designed to antagonize their more difficult neighbors like Russia and the Islamic world. 
So what is to be done? 
None of the ideas for another dose of NATO rejuvenation looks like the answer. 
All the talk of an improved NATO-European Union partnership is mainly wasted breath. 
“Intensified strategic dialogue in Brussels” in practice boils down to the chilling specter of interminable joint committee meetings at which one nation’s ambassador to NATO explains his government’s position to a compatriot diplomat who is accredited to the EU, and vice-versa. 
The problem is not institutional relationships between the two organizations, except in the important but narrow case of Turkey and Cyprus, which remain bent on pursuing their bilateral feud without regard to the real risks to the personnel of their allies and partners deployed in Afghanistan and Kosovo. 
The real problem is relations between the US and European countries, 21 of which belong to both organizations. 
Nor does the answer lie in developing an EU “caucus” within NATO. 
The 1990’s concept of a “European Defense Identity” within NATO proved to be unviable – and since then expansion of the alliance and proliferation of NATO “partners” has made the idea of a special collective role for EU members all the more improbable. 
A double layer of decision-making would only cause an already ponderous organization to seize up. 
There is nothing more dramatic to be done than to focus on upgrading the EU-US strategic dialogue. 
The annual summits need to be made more substantial, and their focus shifted from transatlantic, bilateral issues to aligning EU and US global policies and actions. 
The US president should keep an eye on the calendar of the European Council, which brings the EU presidents and prime ministers together four times a year, and solicit an occasional invitation. 
The US mission to the EU should be scaled up, and EU representation in Washington turned into a proper embassy. 
The more seriously the Americans show that they are willing to take the EU collectively, the more seriously the Europeans will take themselves. 
Winston Churchill once remarked that you could always count on the Americans to do the right thing, after having tried all the alternatives. 
In the same way, the Europeans will eventually find themselves having to speak with one voice and act as one body in the wider world, if only because a globalized world will not allow them the luxury of doing anything else. 
As Charles de Gaulle forecast, “It is not any European statesman who will unite Europe. Europe will be united by the Chinese.” 
Only collectively can Europeans be effective contributors to global security, or achieve a robust transatlantic security partnership. 
As NATO enters its twilight years, the US should encourage the EU to grow into its global responsibilities. 
For, despite all their differences and mutual dissatisfactions, Europe and the US know that each is the best friend either is likely to have for the foreseeable future. 

The Death of Pakistan? 
NEW DELHI – This is a tipping point for Pakistan. 
Will it survive the current maelstrom of challenges – exemplified by the recent assassination of Governor Salmaan Taseer of Punjab by one of his bodyguards, an Islamic zealot – or will it capsize? 
For the world, Pakistan’s fate is an urgent, perhaps even an existential, question. 
After all, Pakistan is a nuclear-armed, terrorist-spawning regional power. 
The roots of Pakistan’s instability run deep. 
Following World Wars I and II, the European powers and the United States sat around distant tables and fabricated frontiers, giving birth to Iraq, Israel, Kuwait, Jordan, and Saudi Arabia – and thus to most of the of the Middle East’s current ills. 
The region’s new map was based on the assumption that the fundamentals of “Muslim Asia” could be transformed by introducing the Western nation-state system. 
Instead, what formed was a region of entities that have largely failed to cohere as nations. 
In 1947, the Indian sub-continent, too, was vivisected in much the same way, with a religion-based entity carved out of it: Pakistan. 
Of course, it is pointless at this stage to re-examine that tragic folly. 
The consequences of partition, however, remain: Pakistan has not yet been able to evolve an administratively credible government. 
Indeed, if Muhammad Ali Jinnah, Pakistan’s founding father, had been right that Muslims are a separate nation, Bangladesh would not have broken away from it, and the country’s relations with its neighbor Afghanistan would be free of intrigue and violence. 
This brings us to the heart of the matter: the question of Islam and statehood. 
In his book Islam and the Destiny of Man, Gai Eaton put the matter with elegant precision: “Islamic society is theocentric…not theocratic.” 
This is an important distinction, for it calls into question the “validity of (the) concept of (an) Islamic state as distinct from a Muslim state.” 
The first, Eaton writes, is an “ideological proposition” that has “never materialized in Muslim history because no Muslim state has even been theocratic.” 
Whereas the centrality of the state in human affairs is a modern, European development, traditional societies like India or Pakistan have always regarded the state as no more than a necessary evil, since large societies cannot be managed on the old tribal basis. 
For Muslims, all sovereignty vests in God; indeed, nothing whatever exists or can exist outside of Him. 
As Eaton puts it, the Koran’s insistence that “there is no god but God” can also be interpreted to mean that “there is no legislator but the Legislator.” 
That is why in Islamic jurisprudence, laws must be derived from the Koran and the Sunnah of the Prophet, not handed down from British or classical philosophy. 
So the central issue in Islam has not been whether the state can be separated from religion, but whether society can be so separated. 
It cannot, which is why no Muslim state can be fully secular. 
Indeed, the issue that now lies at Pakistan’s core is whether it can become a theocratic state. 
Which brings us back to the horror of Taseer’s assassination and the strange and divided reaction to it in Pakistani civil society. 
Taseer’s assassination, unlike that of Indian Prime Minister Indira Gandhi by her bodyguards in 1984, was not a retaliatory revenge attack. 
Instead, the roots of Taseer’s assassination lay in the dark delusions of fanatical belief, his killing supposedly undertaken to protect the faith. 
Worse, many citizens, if not most, have reacted by supporting the assassin (some showering him with flower petals), while hundreds of Ulemas (religious leaders) welcomed his killing and called participation in his funeral “un-Islamic.” 
According to the chief of the Jamaat-e-Islami movement, “the killed is himself responsible for his killing.” 
This aggressive, fundamentalist path is inexorably leading Pakistan back centuries in time. 
Of course, Pakistan alone is responsible for the path it chooses, but it would not have so readily adopted its current course but for the tacit (and explicit) support that the US has given it, beginning in the 1980’s to counter the Soviet occupation of Afghanistan. 
Once again, we see how misplaced Western national priorities can bring ruin on a non-Western nation. 
In any contest of ideas, the extreme will usually triumph over the moderate. 
In Pakistan, the extremist now wears Islamic garb, and stands for the Creator, for faith, and for a theocratic order. 
What, by contrast, might a Pakistani liberal stand for? 
Indeed, who in Pakistan is calling for a liberal, democratic country? 
In the dark, congested alleys of Lahore, Karachi, Peshawar, or Quetta, the yearning is not for democratic liberalism, but for the believers to unite behind the one true faith. 


The Death of Russian Womanhood 
Valentina Tereshkova, the first female Soviet cosmonaut – indeed, the first woman to go into space – recently celebrated her 70th birthday. 
In an interview, she stated her only wish: to fly to Mars, even with a one-way ticket. 
It was an implicit wish for a spectacular form of suicide, for a spectacularly prosaic reason: the loss, experienced by thousands of Russian women of her generation, of her life’s existential foundation. 
Tereshkova’s generation, though it encompassed almost the entire era of Soviet rule, had been raised in the tradition of Russian womanhood. 
Much older than the Soviet regime, this tradition emphasizes a spirit of sacrifice – not just for loved ones, but also for great causes such as revolution, state, science, or art – that is deeply hostile to accumulation of money and material goods as the goal of life. 
After “perestroika” and the 1991 collapse of the USSR, these women did not change their lives and attitudes. 
They did not curse what they had glorified in the past and embrace what they had once condemned. 
They did not participate in “privatization” of state property or enter show business to make money. 
These women – and Tereshkova is undoubtedly among them – were shocked by the changes they saw before them. 
Indeed, probably more horrifying to them than the collapse of the Soviet regime was the rampant prostitution of daily life, for it negated the meaning of Russia and of Russian womanhood. 
What, then, might a woman of Tereshkova’s generation think of the changes during Vladimir Putin’s presidency? 
One should be fair to Putin’s regime. 
Along with its restraints on liberty and its dramatic increase in the power of the Kremlin bureaucracy, Putin has overseen the rise of a Russian middle class that has become increasingly similar to Western middle classes. 
There has been no “return” to Soviet or pre-revolutionary times, despite the regime’s attempts to appropriate the symbols of Czarist Russia. 
The prostitutes who lined up throughout downtown Moscow in the Yeltsin era have disappeared, and “dressing to kill” for a casual walk has gone out of fashion. 
But the Putin regime still bears greater resemblance to the Yeltsin era than to any prior period. 
So do most of the new generation of Russian women (and men): in their modern, calculating minds, there is little place for sacrifice, whether for family, art, culture, or science. 
As a result, the Putin era has become utterly sterile, producing no great works of science, literature, or art. 
Such pursuits have simply become passé – something that has never happened in modern Russian history, not even in the darkest days of Stalin’s purges. 
This culturally desiccated world is much more alien than the red desert of the Martian landscape that Tereshkova and her cosmonaut friends – including her husband – dreamed of in their youth. 
The collapse of the country for which she lived underscores her overwhelming sense of tragedy. 
This might seem strange to the Western mind, for which the great Soviet space achievements and the USSR existed as separate entities: while everyone praised Soviet science, very few admired the totalitarian USSR. 
But for Tereshkova and other women of her generation, the great Soviet state and the daring achievements of Soviet science were inseparable. 
The grand expansion of the Soviet empire enabled humankind’s exploration of the cosmos and its potential expansion beyond Earth. 
It is understandable that the collapse of the country, and of the spirit that nurtured Russian intellectuals – regardless of their political beliefs – for generations, is unbearable for Tereshkova and people like her. 
But Tereshkova’s dream about travel to Mars is not just suicidal nostalgia for a time when she was young and surrounded by people who were ready to sacrifice their lives for a greater cause. 
In fact, the allusion to space exploration has another dimension: the achievements of any great are not bound to one’s time or place of origin and can be transmitted to other cultures and generations. 
Tereshkova’s dream is a symbol not only of her desperation, which is the desperation of the creative mind in today’s Russia, but also of continuing belief in the great potential of the human spirit. 

The Death of the Globalization Consensus 
CAMBRIDGE – The world economy has seen globalization collapse once already. 
The gold standard era – with its free capital mobility and open trade – came to an abrupt end in 1914 and could not be resuscitated after World War I. Are we about to witness a similar global economic breakdown? 
The question is not fanciful. 
Although economic globalization has enabled unprecedented levels of prosperity in advanced countries and has been a boon to hundreds of millions of poor workers in China and elsewhere in Asia, it rests on shaky pillars. 
Unlike national markets, which tend to be supported by domestic regulatory and political institutions, global markets are only “weakly embedded.” 
There is no global anti-trust authority, no global lender of last resort, no global regulator, no global safety nets, and, of course, no global democracy. 
In other words, global markets suffer from weak governance, and therefore from weak popular legitimacy. 
Recent events have heightened the urgency with which these issues are discussed. 
The presidential electoral campaign in the United States has highlighted the frailty of the support for open trade in the world’s most powerful nation. 
The sub-prime mortgage crisis has shown how lack of international coordination and regulation can exacerbate the inherent fragility of financial markets. 
The rise in food prices has exposed the downside of economic interdependence without global transfer and compensation schemes. 
Meanwhile, rising oil prices have increased transport costs, leading analysts to wonder whether the outsourcing era is coming to an end. 
And there is always the looming disaster of climate change, which may well be the most serious threat the world has ever faced. 
So if globalization is in danger, who are its real enemies? 
There was a time when global elites could comfort themselves with the thought that opposition to the world trading regime consisted of violent anarchists, self-serving protectionists, trade unionists, and ignorant, if idealistic youth. 
Meanwhile, they regarded themselves as the true progressives, because they understood that safeguarding and advancing globalization was the best remedy against poverty and insecurity. 
But that self-assured attitude has all but disappeared, replaced by doubts, questions, and skepticism. 
Gone also are the violent street protests and mass movements against globalization. 
What makes news nowadays is the growing list of mainstream economists who are questioning globalization’s supposedly unmitigated virtues. 
So we have Paul Samuelson, the author of the postwar era’s landmark economics textbook, reminding his fellow economists that China’s gains in globalization may well come at the expense of the US; 
Paul Krugman, today’s foremost international trade theorist, arguing that trade with low-income countries is no longer too small to have an effect on inequality; 
Alan Blinder, a former US Federal Reserve vice chairman, worrying that international outsourcing will cause unprecedented dislocations for the US labor force; 
Martin Wolf, the Financial Times columnist and one of the most articulate advocates of globalization, writing of his disappointment with how financial globalization has turned out; and Larry Summers, the US Treasury chief and the Clinton administration’s “Mr. Globalization,” musing about the dangers of a race to the bottom in national regulations and the need for international labor standards. 
While these worries hardly amount to the full frontal attack mounted by the likes of Joseph Stiglitz, the Nobel-prize winning economist, they still constitute a remarkable turnaround in the intellectual climate. 
Moreover, even those who have not lost heart often disagree vehemently about the direction in which they would like to see globalization go. 
For example, Jagdish Bhagwati, the distinguished free trader, and Fred Bergsten, the director of the pro-globalization Peterson Institute for International Economics, have both been on the frontlines arguing that critics vastly exaggerate globalization’s ills and under-appreciate its benefits. 
But their debates on the merits of regional trade agreements – Bergsten for, Bhagwati against – are as heated as each one’s disagreements with the authors mentioned above. 
None of these intellectuals is against globalization, of course. 
What they want is not to turn back globalization, but to create new institutions and compensation mechanisms – at home or internationally – that will render globalization more effective, fairer, and more sustainable. 
Their policy proposals are often vague (when specified at all), and command little consensus. 
But confrontation over globalization has clearly moved well beyond the streets to the columns of the financial press and the rostrums of mainstream think tanks. 
That is an important point for globalization’s cheerleaders to understand, as they often behave as if the “other side” still consists of protectionists and anarchists. 
Today, the question is no longer, “Are you for or against globalization?” The question is, “What should the rules of globalization be?” 
The cheerleaders’ true sparring partners today are not rock-throwing youths but their fellow intellectuals. 
The first three decades after 1945 were governed by the Bretton Woods consensus – a shallow multilateralism that permitted policymakers to focus on domestic social and employment needs while enabling global trade to recover and flourish. 
This regime was superseded in the 1980’s and 1990’s by an agenda of deeper liberalization and economic integration. 
That model, we have learned, is unsustainable. 
If globalization is to survive, it will need a new intellectual consensus to underpin it. 
The world economy desperately awaits its new Keynes. 

The Death of Trust 
BANGKOK – A friend recently asked a seemingly naïve question: “What is money? 
How do I know I can trust that it is worth what it says it is worth?” 
We learn in introductory economics that money is a medium of exchange. 
But why do we accept that? 
Banknotes are just pieces of paper with a number attached to them. 
We believe in banknotes because we collectively decide to trust the government when it says that 100 is 100, not 10 or 50. 
Money, therefore, is about trust, without which no society can function. 
Just as we obey our leaders’ orders to fight and die because we trust their judgment, we entrust our careers and our money to those who run Citigroup and Goldman Sachs and other such banks, because we believe their leaders will be fair to their employees and clients, and honorable in their business practices. 
We do not grow up wishing to work for crooks and liars. 
Once that trust breaks, bad things happen. 
Money ceases to have credibility. 
Leaders become figures of contempt or worse. 
As I write, inflation in Zimbabwe has reached an unimaginable (if not unpronounceable) level of more than 500 quintillion per cent. 
One quintillion is one million trillion. 
A year ago, inflation was “only” 100,000%. 
This is what happens when trust vanishes. 
Fortunately, Zimbabwe is not a country of real consequence for world stability. 
But the Weimar Republic and China in the 1940’s were. 
One opted for Hitler and the other for Mao Zedong to restore trust. 
So the risks are clear. 
Are we now seeing an erosion of trust in America and in the United Kingdom? 
The first warning sign surfaced in 2001, with the bankruptcy of Enron in the United States. 
Its fraudulent accounts were certified by Arthur Andersen. 
Now, India’s Satyam, audited by PriceWaterhouseCoopers, is found to be missing billions in cash. 
If we cannot rely on the best auditors, can we continue to trust chartered accountants? 
Bond rating agencies have issued misleading ratings on companies in questionable health. 
Will we ever again be able to trust a triple A rating issued by, say, Moody’s? 
Banks have been holding our money for safekeeping since the fourteenth century, when the Florentines invented the practice. 
The Royal Bank of Scotland, founded in 1727, when laissez-faire philosopher Adam Smith was only four years old, has just become a socialist state-owned-enterprise thanks to the bank’s incompetent leaders, who acquired over-priced banks filled with toxic assets. 
Citicorp, Bank of America, Goldman Sachs, Merrill Lynch, and other symbols of “excellence” all would have collapsed but for public bailouts. 
And yet for decades we thought that the people who were managing those firms were much smarter than we were. 
We grew up admiring leaders such as Robert Rubin, John Thain, and Henry Paulson. 
Rubin, a former US Treasury Secretary and ex-Chairman of Goldman Sachs, presided over the collapse of Citigroup while taking home $150 million in bonuses. 
Should he really have been rewarded at all for his “performance”? 
Just this week, the technically bankrupt Citigroup’s senior executives were about to buy a new $50 million luxury French jet for themselves, until the White House stopped it. 
Thain, also a former president of Goldman Sachs, helped himself and his Merrill Lynch staff to $4 billion in bonus payments even after he had to sell the firm to Bank of America to save it from bankruptcy. 
After he was caught spending $1.2 million, even as Merrill Lynch disintegrated, to decorate his new office, Bank of America had to fire him to placate growing revulsion over Wall Street’s out-of-control culture of entitlement. 
Paulson, the outgoing Treasury Secretary and another Goldman Sachs veteran, left a loophole in his rescue package big enough for a truck to drive through. 
That loophole allowed his former friends and colleagues on Wall Street to pay themselves billion-dollar bonuses while keeping those firms afloat with taxpayers’ money. 
The universities these men attended – Harvard and Yale for Rubin; 
MIT and Harvard for Thain; 
Dartmouth and Harvard for Paulson – have been magnets for the world’s finest young minds. 
The rest of us thought that these institutions could instill the wisdom, insight, and character of which we all wished we had more. 
Perhaps parents all over the world should re-examine their often obsessive craving for these “name-brand” universities, pushing their children as if an Ivy League degree was an end in itself. 
Now we know that Wall Street’s titans were never all that smart, and certainly not very ethical, for they failed the only test that counts. 
All of the firms they led collapsed, and were saved only by money from those who could never get a senior job on Wall Street or a place at Harvard. 
These Wall Street princes were smarter in one way, however: they managed to pocket a fortune while the rest of us are stuck with the mess they left behind. 
Bernard Madoff who hailed from down-market part of New York City and attended a middling university will spend time behind bars, but none of the titans of Wall Street with blue-chip pedigree will ever do so. 
History has not been kind to societies that lose trust in the integrity of their leaders and institutions. 
We need to save our economic system from its abusers, or else. 

The Debt Death Trap 
NEW YORK – The Greek financial saga is the tip of an iceberg of problems of public-debt sustainability for many advanced economies, and not only the so-called PIIGS (Portugal, Italy, Ireland, Greece, and Spain). 
Indeed, the OECD now estimates that public debt-to-GDP ratios in advanced economies will rise to an average of around 100% of GDP. 
The International Monetary Fund has recently put out similar estimates. 
Within the PIIGS, the problems are not just excessive public deficits and debt ratios (in different degrees and measures in the five countries). They are also problems of external deficits, loss of competitiveness, and thus of anemic growth. 
These are economies that, even a decade ago, were losing market share to China and Asia, owing to their labor-intensive and low value-added exports. 
After a decade that saw wages grow faster than productivity, unit labor costs (and the real exchange rate based on those costs) appreciated sharply. 
The ensuing loss of competitiveness manifested itself in large and growing current-account deficits and slowing growth. 
The final nail in the coffin was the appreciation of the euro between 2002 and 2008. 
So, even if Greece and other PIIGS had the political resolve to reduce massively their large fiscal deficits – and that is a big if, given the political resistance to spending cuts and tax increases – fiscal contraction may, at least in the short run, make the current recession worse as higher taxes and lower spending reduce aggregate demand. 
If GDP falls, achieving a certain deficit and debt target (as a share of GDP) becomes impossible. 
This, indeed, was the debt death trap that engulfed Argentina between 1998 and 2001. 
Restoring sustained growth requires real currency depreciation. 
There are only three ways that this can occur. 
One is deflation that reduces prices and wages by 20-30%. 
But deflation is associated with persistent recession (see Argentina again), and no country’s society and political system can accept years of recession and fiscal austerity to achieve real depreciation. 
Default and an exit from the euro would occur well before that. 
The second path is to follow the German model of accelerating structural reforms and corporate restructuring to increase productivity growth while keeping wage growth moderate. 
But it took a decade for Germany to reduce its unit labor costs that way; if Greece or Spain were to start today, the short run costs of resource reallocation would be large, while the benefits in terms of higher growth would take too many years to achieve. 
Finally, the euro could fall sharply in value. 
But the main beneficiary would be Germany. 
And, in order for the euro to fall far enough, the risk of default in Greece would need to be so large, and the contagion to sovereign spreads of PIIGS so severe that the widening of those spreads would cause a double-dip eurozone recession before currency depreciation could yield benefits. 
Short of a miracle, Greece looks close to insolvency. 
At the onset of its crisis, Argentina’s budget deficit, public debt, and current-account deficit (as a share of GDP) were about 3%, 50% and 2%, respectively. 
Those ratios for Greece are far worse: 12.9%, 120% and 10%. 
So it will take a Herculean effort, luck, and support from the European Union and the IMF to reduce the probability of an eventual default and exit from the eurozone. 
Greece is currently too interconnected to be allowed to collapse: since it has about $400 billion of public debt – three-quarters of which is held abroad, mostly by European financial institutions – a disorderly default would lead to massive losses and risk a systemic crisis. 
Moreover, the contagion to the sovereign spreads of the other PIIGS would be massive, tipping over several of these economies. 
So, despite revulsion on the part of Germany and the European Central Bank at the idea of a “bailout,” Greece needs large official financial support this year at rates that are not unsustainable to prevent its current illiquidity from devolving immediately into insolvency. 
But official support will only kick the can down the road until next year. 
The magic trifecta of sustainable debt and deficit ratios, a real depreciation, and restoration of growth looks unlikely to be achievable even with official financial support. 
All successful rescues of countries in financial distress – Mexico, Korea, Thailand, Brazil, Turkey – require two conditions: the country’s credible willingness to impose the fiscal austerity and structural reforms needed to restore sustainability and growth; and massive amounts of front-loaded official support to avoid a self-fulfilling rollover crisis of maturing public and/or private short-term debts. 
Reform without money on the table does not work, as nervous and trigger-happy investors would rather pull their money out if the country lacks the foreign-currency reserves needed to prevent the equivalent of a bank run on its short-term liabilities. 
So, after a totally flawed plan that would have given money to Greece too late – only when the country risked a refinancing crisis – and at market rates that would make its debt unsustainable, the EU regained its senses and designed a new scheme that is closer to typical IMF conditionality: tranched support with some early front-loaded support and a semi-concessional interest rate. 
Only time will tell if this plan will work: i.e. whether Greece will turn out to be illiquid but solvent, conditional on credible fiscal austerity and structural reforms and with the help of large amounts of financial support. 
But, as with Argentina, Russia, and Ecuador, Greece may also be insolvent if adjustment fails to restore debt sustainability and growth. 
For now, the official community has decided to stick with Plan A; if that fails, Plan B is default to reduce unsustainable debts and a Greek exit from the eurozone to allow depreciation and restoration of competitiveness and growth. 

The Debt Delusion 
WASHINGTON, DC -- A second big American interest-rate cut in a fortnight, alongside an economic stimulus plan that united Republicans and Democrats, demonstrates that US policymakers are keen to head off a recession that looks like the consequence of rising mortgage defaults and falling home prices. 
But there is a deeper problem that has been overlooked: the US economy relies upon asset price inflation and rising indebtedness to fuel growth. 
Therein lies a profound contradiction. 
On one hand, policy must fuel asset bubbles to keep the economy growing. 
On the other hand, such bubbles inevitably create financial crises when they eventually implode. 
This is a contradiction with global implications. 
Many countries have relied for growth on US consumer spending and investments in outsourcing to supply those consumers. 
If America’s bubble economy is now tapped out, global growth will slow sharply. 
It is not clear that other countries have the will or capacity to develop alternative engines of growth. 
The business cycles of Presidents Ronald Reagan, George H.W. Bush, Bill Clinton, and George W. Bush share strong similarities and are different from pre-1980 cycles. The similarities are large trade deficits, manufacturing job loss, asset price inflation, rising debt-to-income ratios, and detachment of wages from productivity growth. 
The new cycle rests on financial booms and cheap imports. 
Financial booms provide collateral that supports debt-financed spending. 
Borrowing is also supported by an easing of credit standards and new financial products that increase leverage and widen the range of assets that can be borrowed against. 
Cheap imports ameliorate the effects of wage stagnation. 
This structure contrasts with the pre-1980 business cycle, which rested on wage growth tied to productivity growth and full employment. 
Wage growth, rather than borrowing and financial booms, fuelled demand growth. 
That encouraged investment spending, which in turn drove productivity gains and output growth. 
The differences between the new and old cycle are starkly revealed in attitudes toward the trade deficit. 
Previously, trade deficits were viewed as a serious problem, being a leakage of demand that undermined employment and output. 
Since 1980, trade deficits have been dismissed as the outcome of free-market choices. 
Moreover, the Federal Reserve has viewed trade deficits as a helpful brake on inflation, while politicians now view them as a way to buy off consumers afflicted by wage stagnation. 
The new business cycle also embeds a monetary policy that replaces concern with real wages with a focus on asset prices. 
Whereas pre-1980 monetary policy tacitly aimed at putting a floor under labor markets to preserve employment and wages, it now tacitly puts a floor under asset prices. 
This is not a matter of the Fed bailing out investors. 
Rather, the economy has become so vulnerable to declines in asset prices that the Fed is obliged to intervene to prevent them from inflicting broad damage. 
All these features have been present in the current economic expansion. 
Wages have stagnated despite strong productivity growth, while the trade deficit has set new records. 
Manufacturing has lost 1.8 million jobs. 
Prior to 1980, manufacturing employment increased during every expansion and always exceeded the previous peak level. 
Between 1980 and 2000, manufacturing employment continued to grow in expansions, but each time it failed to recover the previous peak. 
This time, manufacturing employment has actually fallen during the expansion, something unprecedented in American history. 
The essential role of asset inflation has been especially visible as a result of the housing bubble, which also highlights the role of monetary policy. 
Despite the massive tax cuts of 2001 and the increase in military and security spending, the US experienced a prolonged jobless recovery. 
That compelled the Fed to keep interest rates at historic lows for an extended period, and rates were raised only gradually because of fears about the recovery’s fragility. 
Low interest rates eventually jump-started the expansion through a house price bubble that supported a debt-financed consumer-spending binge and triggered a construction boom. 
Meanwhile, prolonged low interest rates contributed to a “chase for yield” in the financial sector that resulted in disregard of credit risk. 
In this way, the Fed contributed to creating the sub-prime crisis. 
However, in the Fed’s defense, low interest rates were needed to maintain the expansion. 
In effect, the new cycle locks the Fed into an unstable stance whereby it must prevent asset price declines to avert recession, yet must also promote asset bubbles to sustain expansions. 
So, even if the Fed and US Treasury now manage to stave off recession, what will fuel future growth? 
With debt burdens elevated and housing prices significantly above levels warranted by their historical relation to income, the business cycle of the last two decades appears exhausted. 
It is not enough to deal only with the crisis of the day. 
Policy must also chart a stable long-term course, which implies the need to reconsider the paradigm of the past 25 years. 
That means ending trade deficits that drain spending and jobs, and restoring the link between wages and productivity. 
That way, wage income, not debt and asset price inflation, can again provide the engine of demand growth. 


The Decline and Fall of America’s Decline and Fall 
CAMBRIDGE – The United States is going through difficult times. 
Its post-2008 recovery has slowed, and some observers fear that Europe’s financial problems could tip the American and world economy into a second recession. 
American politics, moreover, remains gridlocked over budgetary issues, and compromise will be even more difficult on the eve of the 2012 election, when Republicans hope that economic problems will help them unseat President Barack Obama. 
In these circumstances, many are predicting America’s decline, especially relative to China. 
And it’s not just pundits who think so. 
A recent Pew poll found that in 15 of 22 countries surveyed, most people believe that China either will replace or has replaced America as “the world’s leading superpower.” 
In Britain, those putting China on top rose to 47%, from 34% in 2009. 
Similar trends are evident in Germany, Spain, and France. 
Indeed, the poll found more pessimistic views of the US among our oldest and closest allies than in Latin America, Japan, Turkey, and Eastern Europe. 
But even Americans are divided equally about whether China will replace the US as a global superpower. 
Such sentiments reflect the slow growth and fiscal problems that followed the 2008 financial crisis, but they are not historically unprecedented. 
Americans have a long history of incorrectly estimating their power. 
In the 1950’s and 1960’s, after Sputnik, many thought that the Soviets might get the better of America; in the 1980’s, it was the Japanese. 
Now it is the Chinese. 
But, with America’s debt on a path to equaling its national income in a decade, and a fumbling political system that cannot seem to address the country’s fundamental challenges, are the “declinists” finally right? 
Much will depend on the uncertainties – often underestimated – brought about by future political change in China. 
Economic growth will bring China closer to the US in power resources, but that doesn't necessarily mean that China will surpass the US as the most powerful country. 
China’s GDP will almost certainly surpass that of the US within a decade, owing to the size of its population and its impressive economic-growth rate. 
But, measured by per capita income, China will not equal the US for decades, if then. 
Moreover, even if China suffers no major domestic political setback, many current projections are based simply on GDP growth. 
They ignore US military and soft-power advantages, as well as China’s geopolitical disadvantages. As Japan, India, and others try to balance Chinese power, they welcome an American presence. 
It is as if Mexico and Canada sought a Chinese alliance to balance the US in North America. 
As for absolute decline, the US has very real problems, but the American economy remains highly productive. 
America remains first in total R&D expenditure, first in university rankings, first in Nobel prizes, and first on indices of entrepreneurship. 
According to the World Economic Forum, which released its annual report on economic competitiveness last month, the US is the fifth most competitive economy in the world (behind the small economies of Switzerland, Sweden, Finland, and Singapore). 
China ranks only 26th. 
Moreover, the US remains at the forefront of such cutting-edge technologies as biotech and nanotechnology. 
This is hardly a picture of absolute economic decline. 
Some observers worry that American society will become sclerotic, like Britain at the peak of its power a century ago. 
But American culture is far more entrepreneurial and decentralized than was that of Britain, where industrialists’ sons sought aristocratic titles and honors in London. 
And despite recurrent bouts of concern throughout its history, America reaps huge benefits from immigration. 
In 2005, foreign-born immigrants had participated in 25% of technology start-ups in the previous decade. 
As Singapore’s Lee Kuan Yew once told me, China can draw on a talent pool of 1.3 billion people, but the US can draw on the world’s seven billion, and can recombine them in a diverse culture that enhances creativity in a way that ethnic Han nationalism cannot. 
Many commentators worry about America’s inefficient political system. 
True, America’s founding fathers created a system of checks and balances designed to preserve liberty at the price of efficiency. 
Moreover, the US is now experiencing a period of intense partisan polarization. 
But nasty politics is nothing new to the US: its founding era was hardly an idyll of dispassionate deliberation. 
American government and politics have always experienced such episodes, and, though overshadowed by current melodramas, they were sometimes worse than today’s. 
The US faces serious problems: public debt, weak secondary education, and political gridlock, to name just a few. 
But one should remember that these problems are only part of the picture – and, in principle, they can be solved over the long term. 
It is important to distinguish such problems from those that cannot, in principle, be solved. 
Of course, whether America can implement the available solutions is uncertain; several commissions have proposed feasible plans to change America’s debt trajectory by raising taxes and cutting expenditures, but feasibility is no guarantee that they will be adopted. 
Still, Lee Kuan Yew is probably right to say that China “will give the US a run for its money,” but not surpass it in overall power in the first half of this century. 
If so, the gloomy predictions of absolute American decline will turn out to be as misleading as similar predictions in decades past. 
And, in relative terms, while the “rise of the rest” means that America will be less dominant than it once was, this does not mean that China will necessarily replace the US as the world’s leading power. 

The Decline and Fall of Political Europe 
PARIS – A series of decisions taken over the last few years in Europe have alarmed me. 
The first imposed the rule of unanimity within the European Union for any decision regarding foreign policy or the use of armed force for other than humanitarian purposes. 
Because everyone must agree, nothing is agreed. 
As a result, Europe cannot develop a common foreign policy. 
The second alarming decision limited the Union’s budget to a mere 1% of EU GDP, thus preventing any new common policy initiative for much of the past decade. 
The third decision concerns the British vetoes of the candidacies of Jean Luc Dehaene and Jean Claude Juncker for President of the European Commission. 
When this last British “no” came down, I sadly declared the death of the political Europe, a charge that brought me harsh criticism, even from friends. 
These decisions have become more alarming over time as the need for “more Europe” has become progressively more obvious. 
Only a united and strong Europe can tackle the global fight against climate change, encourage the adoption of new financial rules in order to avoid the excesses that led to the crisis of 2008-2009, and handle a rising China that will soon account for 20% of world trade. 
The great banking, financial, and economic crises, which every country in the world still confronts, has made things worse. 
Ireland, by far the biggest beneficiary of EU membership has demonstrated a powerful anti-European reflex, despite being hit early and hard by the crisis. 
Meanwhile, Germany, long the proud holder of the European torch, has increasingly turned its back on that legacy, particularly after the markets reminded Germans that their country was much more Europeanized than they seemed to believe or realize. 
Germany rallied to Europe when the crisis was at its global nadir last year. 
But, now that fear of a global Armageddon has receded, Germany has turned inward. 
The timing of this is particularly odd, as this new insularity comes almost immediately after Germany, France, and Great Britain cynically agreed to endow the EU with both a president of the EU Council and a foreign affairs minister. 
But the nominees for those offices betrayed the intentions of all three EU powers: honorable and competent though President Herman Van Rompuy and Baroness Catherine Ashton may be, they are perfectly unknown and thus pose no threat to the powers that be in Berlin, Paris, and London. 
Of course, there is still the euro, Europe’s only great political success over the last two decades. 
But now even that is coming into question, thanks to Germany. 
Everyone admires Germany’s rigorous management and capacity to reform. 
We also admire its monetary seriousness, attachment to fiscal rigor, and quest for exports, despite its lack of consideration for the harm done to those enduring the deficits corresponding to Germany’s surpluses. 
But the crisis has changed everything. 
It impaired a number of European countries less robust than Germany. 
The three Baltic states, Hungary, and non-EU Iceland are bankrupt. 
Of course, they don’t belong to the eurozone, but Greece, Spain, Portugal, and Ireland do, and their problems are nearly as desperate. 
Yet Germany insists on imposing its own rigor on the eurozone as a whole, a strategy the above-mentioned states can pursue only at the risk of social chaos. 
These countries may exit the crisis – their crisis – only if monetary policy allows them room to grow. 
But Germany refuses this option, thus seriously endangering Europe’s common currency. 
In opposition to almost every eurozone foreign minister or president, the chairman of Ecofin, and the European Central Bank’s president, Germany insisted that the International Monetary Fund be brought to the rescue of Greece, a brute denial of the principle of solidarity behind the euro. 
And, thanks to Germany, the interest rates that Greece will pay for loan packages put together by other eurozone countries will be very high, which means that its economy will be unable to recover for some time, and that its financial drama will weigh heavily on the euro’s collective destiny. 
Moreover, German Chancellor Angela Merkel took the liberty of pondering whether imperiled states should be excluded from the eurozone. 
In doing so, she offered a solution that is totally excluded by the euro’s founding treaties, but served notice that Germany may be prepared to destabilize the zone and common currency to meet its own policy ends. 
While Merkel seems to believe that all eurozone countries should play by the same rules, she does not seem to realize that today it is Germany that is going it alone in pursuit of its own narrow national interests. 
Why is Merkel acting this way? 
One reason is that she leads a coalition government that is facing elections, and that finds itself in a very tricky situation with its own parliament. 
But if short-sightedness and domestic policy pressures lead every EU member to do anything and everything they want in their own interests, Europe will soon drift from an economic crisis to a political one. 
If “political Europe” had more power, the Greek crisis would have been dealt with through a brutal conversation at the top. 
But there is no political Europe – and not much energy left in the economic Europe. 
Given the state of global finance, the euro’s demise would be a phenomenal catastrophe. 
It can still be avoided, but only if all Europeans remember their solidarity and act with unusual courage and tenacity. 

The Decline of Ahmedinejad 
Iranian President Mahmoud Ahmedinejad may be gaining support across the Muslim world for his fervent criticism of the United States, but inside Iran, he is losing strength. 
His political rivals are gaining new positions of power, and the population is increasingly unhappy with the economy’s continuing decline. 
Since its inception, the Islamic Republic has had a weak presidency; ultimate authority rests with the Supreme Leader, first Ayatollah Khomeini and now Ayatollah Khamenei. 
The Islamic Republic’s first president, Abolhassan Bani Sadr, was dismissed from office a year after his election. 
Ever since, the regime has been intolerant of a strong president, and has repeatedly demonstrated that the office is subservient to the Supreme Leader. 
Ahmedinejad’s election two years ago came with great expectations, with the new president pledging to “bring oil prices to the dining table of all households in Iran,” and to crack down on corruption. 
Yet many of his first appointments were rewards to his supporters and cronies in the Islamic Revolutionary Guard Corps and the Basij militia, armed groups that mobilized voters on his behalf during the campaign. 
For example, an the Oil Ministry gave a $1.3 billion no-bid contract to an oil company associated with the Revolutionary Guard, and Ahmedinejad appointed his brother-in-law as cabinet secretary. 
Steps like these may have been overlooked in better economic times. 
But the Iranian budget is now running a 15%-of-GDP deficit, and foreign reserves are shrinking, despite the oil boom. 
Instead of distributing oil revenues through a program of low-cost loans, as promised, the government has been forced to ration gasoline, as economic promise has given way to crisis. 
Tensions have also been on the rise since Ahmedinejad fulfilled his campaign promise to enforce Islamic strictures on social life. 
For two years, police have waged an intense campaign against women and young people. 
Last summer, more than 150,000 women were arrested in Tehran for wearing “bad veils,” and barber shops have been given specific instructions on acceptable hairstyles for young men. 
Demonstrations by bus drivers, school teachers, women’s rights activists, and students have been brutally suppressed, with dozens of arrests. 
Photos and video clips of police beating civilians in Tehran and other cities have been disseminated on the Internet. 
But now Ahmedinejad’s opponents are moving to reassert longstanding constraints on the presidency. 
His foremost rival, Akbar Hashemi Rafsanjani, a former president who Ahmedinejad defeated to win the post, has had a remarkable reversal of fortune, reemerging as leader of the Assembly of Experts, the powerful body that elects Iran’s Supreme Leader and that can even remove a Supreme Leader from office. 
Moreover, conservatives who had aligned themselves with Ahmedinejad are now criticizing him openly. 
Even Ayatollah Khamenei, who as Supreme Leader is also commander-in-chief of the armed forces, has taken steps to demonstrate his authority, recently firing the leaders of the Revolutionary Guard and the Basij militia. 
Among Iran analysts, it is thought that these moves were intended to revitalize the military, particularly given the possibility of conflict with the US. 
But experts also note that the former commanders were close to Ahmedinejad and had made a great effort over the last two years to help him implement his agenda. 
While Ahmedinejad continues his verbal attacks on the US, he does not control the policy-making apparatus that will decide about Iran’s nuclear program and its relations with the international community. 
The threat of sanctions remains potent, and the Iranian business community – not to mention the public – has felt the sting of isolation. 
Considering the tangled involvement of Iran’s leaders in the economy, the effect of sanctions should not be underestimated. 
The economy remains the one area of Iranian life where Ahmedinejad retains considerable power. 
But here, his record is weak, and his pronouncements only exacerbate the problem by increasing Iran’s isolation from the global economy. 
So, as disputes with the West come to a head, it is important to recognize the power shifts underway inside Iran’s opaque political system. 
Ahmedinejad may be making increasingly challenging statements, but he does not have the authority to act on them. 
Indeed, only a military confrontation with the US can bring him back to the center of decision-making. 
American policymakers should bear that in mind. 

The Decline of America 
The first anniversary of the war in Iraq has arrived, and America's reputation continues to sink. 
One year ago, the US tried to bully the world into supporting an unprovoked war, claiming that anybody who didn't believe in Iraq's weapons of mass destruction was either a fool or an accomplice of terrorists. 
Now we know that the US government and its few allies were themselves either fools or liars. 
But this has not stopped the Bush administration's thuggish behavior. 
The US could be a great force for good. 
Studies like one by the World Health Organization's Commission on Macroeconomics and Health show that with an $11 trillion dollar annual national income, America could finance the control of AIDS, malaria, tuberculosis, and many other killer diseases for a small fraction of the money it wastes in Iraq. 
Instead, US financial assistance to the world's poor countries as a share of national income is the lowest of any donor country. 
The US can also be a force for great ill. 
America's military budget is currently about $450 billion, roughly equal to the rest of the world's combined military spending. 
The Bush Administration believes that US military power buys security, even though terrorism has increased since the Iraq War. 
But despite its wealth and military might, America's ability to project political power - for good or ill - will decline in future years, for at least five reasons: America's budget is in crisis. 
Thanks to Bush's tax cuts and military spending, which have contributed to budget deficits of $500 billion per year, the US will have to raise taxes and limit budget spending, whether or not Bush is re-elected. 
The annual military budget, which has increased by $150 billion since Bush took office, will need to be cut in coming years to get the budget under control; 
The US is borrowing massively from abroad. 
Asia's central banks have bought hundreds of billions of dollars of US securities. 
Japan alone has foreign exchange reserves of around $750 billion, much of that in US treasury bills. 
China, Hong Kong, India, Korea, Singapore, and Taiwan together have another $1.1 trillion or so in reported foreign exchange reserves. 
In short, the US is in deep and growing debt to Asia. 
Only massive buying of treasury bills by Asian central banks has prevented the dollar from falling even more precipitously than it has; 
The rest of the world is catching up. 
America's big technological lead will narrow relative to Brazil, China, India, and other major economic regions of the developing world. 
China will have an economy larger than the US economy within 25 years - potentially 50% larger by 2050. 
India, considerably poorer on average than China, will also close the wealth gap. 
By 2050, India will conceivably have an economy the size of America's, with four times the population and roughly one-fourth of the average income level per person; 
A narrower economic gap will reduce America's relative geopolitical power. 
China and India, which together account for about 40% of the world's population, will begin to play much larger roles on the world scene. 
The current xenophobic reactions to "outsourcing" of jobs to India's software engineers ­- a hot political issue in the US - reflects the underlying anxiety of a US population that wants to stay in the economic lead. 
With or without American protectionism, Asia's technological capacities and incomes will grow. 
This will be good for the world because prosperity will be more widely spread, even if America's ego gets hurt in the process. 
Demographics will weaken America's militaristic approach to the world. 
Much of Bush's support comes from white fundamentalist Christian men. 
This, in my opinion, is a social group that is fighting a rearguard battle against the growing social power of women, immigrants, and other religions. 
It is also fighting against secularism, such as the teaching of modern biology and evolutionary theory. 
The religious right's backward-looking agenda - and the Manichaean worldview that underlies it - is doomed. 
The US Census Bureau recently found that by 2050, the non-Hispanic white population of the US is likely to be only half of the total US population, down from 69% currently. 
By 2050, 24% of the population will be Hispanic, 14% will be African-American, and 8% Asian. 
The US will look more like the world, especially Latin America. 
In the face of these five factors, the dream of global empire held by many US right-wingers will most likely fade. 
This may happen sooner rather than later if Bush loses this November in an election that is certain to be very close. 
But whatever the outcome, the US cannot postpone forever its inevitable decline relative to the rest of the world. 

The Decline of France? 
The French are notoriously sensitive--if not defensive--about France's stature in the world. 
The French state spends vast amounts of money to propagate the French language and French culture, yet the French are painfully aware that the global position of their country is not what it once was. 
No surprise, then, that during the last presidential election, the publication of a European Commission report claiming France's economic rank among European countries had fallen from 3 rd to 10 th place in the span of ten years caused soul searching and controversy. 
Soon, President Jacques Chirac was accusing his rival, Lionel Jospin, of causing the "French decline." 
The OECD and Eurostat, the European body in charge of such data, thought they put an end to this aspect of the debate by showing that France, Germany, Italy, and Great Britain all enjoy roughly equal per capita living standards. 
But the broader controversy wouldn't go away. 
Worried talk about "French decline" reappeared with this year's street protests against pension reform, mounting disputes over fiscal policy with the European Commission, and bickering with America over the war in Iraq. 
Today's best-selling non-fiction book in France is a polemic by Nicolas Baverez, La France qui tombe (Falling France). 
Baverez's book is filled with quotations from de Gaulle and Napoleon. 
According to the author, France's last great achievements were in the 1970's, when the fast train, the TGV, and Airbus were launched. 
He castigates both Mitterrand and Chirac for their "common talent to win elections and turn France into a loser." 
The book's success is itself a sign of a kind of "malaise." 
But of which kind? 
Baverez's evidence of degeneration is not as convincing as he believes. 
For example, he cites the draining away of industrial jobs as the most glaring evidence of France's decline. 
But deindustrialization is common to all advanced countries. 
Indeed, France does actually better than most of its rich country rivals and, unlike Germany, the UK, or the US, has retained the same global market share in the industrial sector that it had in the early 1970's. 
Moreover, according to a better measure of comptetitiveness, foreign investment, France does very well. 
According to a recent report by the Economic Analysis Council, direct investment in France grew to 60 billion euros in 2001, almost twice that of Germany. 
French cost competitiveness also improved (by 20%) in the last three decades, with higher productivity offsetting rapid wage growth. 
But the core of France's long-run economic problems is precisely the fear of losing industrial jobs. 
France remains a strong industrial power in traditional areas such as automobile and aerospace industries, but it is falling behind in innovative markets, where smaller companies spread new technologies. 
France, for instance, spends only $30 billion annually on high tech R&D, compared with $51 billion in Germany, $98 billion in Japan, and $265 billion in the US. 
In short, Baverez's analysis points in the wrong direction. 
France has undergone a set of critically important reforms over the past two decades: economic and financial liberalization, elimination of price and foreign exchange controls, the end of credit restrictions, European liberalization, reduced inflation and trade deficits, the advent of the euro and the forced globalization of the country's firms. 
The French malaise has nothing to do with any of them. 
France's problem is that it fails to recognize the new world of which it already is a part. 
French state capitalism is dead, and France is finding it hard to come to terms with its passing. 
Indeed, France must be the only country in which a Prime Minister, Lionel Jospin, feels obliged to apologize the day after for saying on TV that "the state is not omnipotent." 
There are many reasons for this French schyzophrenia, but a critical one has to do with the political game of the past 20 years. 
Until 1981, France had a clear division between right and left. 
Since then, both the Mitterand and Chirac administrations blunted their ideological edge in order to carry the difficult process of adjustment towards Europe and globalization. 
A round of "shock therapy" à la Mrs. Thatcher two decades ago might have forged a new political consciousness. 
But the consensual dribbling out of reforms allowed the French to live in one world and think in another. 
This is a key reason for the political cataclysm that exploded during the last presidential campaign, when the far-right leader Jean-Marie Le Pen reached the second round of the presidential election, ahead of the incumbent Prime Minister, Lionel Jospin. 
The rise of the extreme left, which gathered 10% of the vote during that presidential campaign, also attests to this political failure. 
France needs a political revolution more than an economic one if it is to come to terms with reality, part of which is that "French decline" is a fear of the French people's own making. 

The Decline of the West Revisited 
MADRID – Since the publication in 1918 of the first volume of Oswald Spengler’s The Decline of the West, prophecies about the inexorable doom of what he called the “Faustian Civilization” have been a recurrent topic for thinkers and public intellectuals. 
The current crises in the United States and Europe – the result primarily of US capitalism’s inherent ethical failures, and to Europe’s dysfunction – might be seen as lending credibility to Spengler’s view of democracy’s inadequacy, and to his dismissal of Western civilization as essentially being driven by a corrupting lust for money. 
But determinism in history has always been defeated by the unpredictable forces of human will, and, in this case, by the West’s extraordinary capacity for renewal, even after cataclysmic defeats. 
True, the West is no longer alone in dictating the global agenda, and its values are bound to be increasingly challenged by emerging powers, but its decline is not a linear, irreversible process. 
There can be no doubt that the West’s military mastery and economic edge have been severely diminished recently. 
In 2000, America’s GDP was eight times larger than China’s; today it is only twice as large. 
Worse, appalling income inequalities, a squeezed middle class, and evidence of widespread ethical lapses and impunity are fueling a dangerous disenchantment with democracy and a growing loss of trust in a system that has betrayed the American dream of constant progress and improvement. 
This would not be, however, the first time that America’s values prevailed over the threat of populism in times of economic crisis. 
A variation of the fascist agenda once appeared in America, with Father Charles Coughlin’s populist onslaught in the 1930’s on Franklin Roosevelt´s “alliance with the bankers.” 
Coughlin’s National Union for Social Justice, whose membership ran into the millions, was eventually defeated by the American system’s powerful democratic antibodies. 
As for Europe, the eurozone crisis has exposed democracy’s weaknesses in dealing with major economic emergencies, as well as the flaws in the European Union’s design. 
In Greece and Italy, technocratic governments have taken over from failing politicians. 
In Hungary, Prime Minister Viktor Orbán has pressed for an authoritarian “re-establishment of the state.” 
Such cases seem to point to the return of a European past in which democracy’s failures gave way to more “expedient” forms of government. 
And yet, while Europe remains a question mark, economic growth and job creation, however fragile, are back in America. 
Moreover, even if China becomes the world’s largest economy in, say, 2018, Americans would still be far richer than Chinese, with per capita GDP in America four times higher than in China. 
To be sure, income inequality and social injustice are a concomitant of capitalist culture throughout the West. 
But challengers like China and India are in no position to preach. 
Compared to Indian capitalism, capitalism’s ethical failures elsewhere look especially benign. 
A hundred oligarchs in India hold assets equivalent to 25% of GDP, while 800 million of their compatriots survive on less than a dollar a day. 
Politicians and judges are bought, and natural resources worth trillions of dollars are sold to powerful corporations for a pittance. 
Having the largest economy is vital for a power aspiring to maintain military superiority and the ability to define the international order. 
Hence, the receding power of the West means a tougher fight to uphold the relevance of key components of its value system, such as democracy and universal rights. 
Europe, with its almost post-historical mentality, has long abandoned the pretension of being a military power. 
The same cannot be said of the US. 
But, rather than reflecting a decline in its military superiority, America’s setbacks in Iraq and Afghanistan are the result of wrongheaded policies that sought to use hard power to solve conflicts that were simply not amenable to it. 
The recent massive cuts to the US military budget need not signal decline; they can launch an age of smarter defense, one that relies on innovative ideas, strong alliances, and building partners’ capacity. 
The shift of US military priorities to the Asia-Pacific region is an understandable strategic rebalancing, given America’s excessive focus on the Middle East and its maintenance of an unnecessary military presence in Europe. 
Tempered by the US public’s fatigue with overseas adventures, America’s missionary zeal to save the world from the wickedness of faraway autocrats will be reduced substantially. 
But this does not necessarily mean that China will automatically take over ground from which America withdraws. 
Despite the recent cuts, America’s defense budget is still five times higher than China’s. 
More importantly, China’s long-term strategy requires that it focus in the short term on satisfying its vast appetite for energy and raw materials. 
Make no mistake: Euro-centrism and Western hubris have been dealt severe blows in recent years. 
But, for those in the West overtaken by fatalism and self-doubt, a message of hope is now emanating from the Arab Spring, and from the resumption in Russia of the unfinished revolution that ended communism. 
Nor has the inconsistency between China’s capitalism and its lack of civil liberties been resolved yet. 
A Chinese Spring cannot be ruled out. 
The West faces serious challenges – as it always has. 
But the values of human freedom and dignity that drive Western civilization remain the dream of the vast majority of humanity. 

The Global March Toward Peace 
CANBERRA – If we were hoping for peace in our time, 2012 did not deliver it. 
Conflict grew ever bloodier in Syria, continued to grind on in Afghanistan, and flared up periodically in West, Central, and East Africa. 
There were multiple episodes of ethnic, sectarian, and politically motivated violence in Myanmar (Burma), South Asia, and around the Middle East. 
Tensions between China and its neighbors have escalated in the South China Sea, and between China and Japan in the East China Sea. 
Concerns about North Korea’s and Iran’s nuclear programs remain unresolved. 
And yet, many feared eruptions within and between states did not occur. 
Strong international pressure helped to contain the Second Gaza War quickly. 
A long-sought peace agreement was secured for the southern Philippine island of Mindanao. 
Major strides were taken toward sustainable peace and reconciliation in Myanmar. 
There was no major new genocidal catastrophe. 
And, despite the United Nations Security Council’s paralysis over Syria, UN General Assembly member states made clear their continuing overwhelming acceptance of the responsibility to protect those at risk of mass-atrocity crimes. 
The bigger story has been concealed, as ever, by the media’s daily preoccupation with current bloodshed: Over the last two decades, major wars and episodes of mass violence worldwide have become much less frequent and deadly. 
After a high point in the late 1980’s and very early 1990’s, there has been a decline of well over 50% in the number of major conflicts both between and within states; in the number of genocidal and other mass atrocities; and in the number of people killed as a result of them. 
This “New Peace” phenomenon was first publicized by Andrew Mack’s Human Security Report Project, supported by the superb database of the Uppsala Conflict Data Program. 
Harvard’s Steven Pinker, in his seminal book The Better Angels of our Nature, put it in a larger historical context – not just the “Long Peace” between the major powers since 1945, but, more important, a centuries-old pattern of steady decline in the human appetite for violence. 
The many efforts that have been made to debunk this analysis (for example, by John Arquilla in Foreign Policy recently) have not been persuasive. 
True, there has been a resurgence since 2004 of what statisticians (if not humanists) would call “minor armed conflicts.” 
But, in the case of “high-intensity” conflicts or wars (defined as entailing 1,000 or more battle deaths in a year), the trend-line has been sloping unequivocally downward. 
And that goes for war-related civilian deaths as well. 
Explanations of this phenomenon vary. 
In the case of the post-Cold War New Peace, the best is simply the huge upsurge in conflict prevention, conflict management, negotiated peacemaking, and post-conflict peace-building activity that has occurred over the last decade and a half – most of it spearheaded by the much-maligned UN. 
For the Long Peace, the most intriguing explanation – and, I think, the most persuasive, though many may disagree – is that since the end of World War II, a fundamental normative shift has occurred among the major powers’ policymakers. 
Having witnessed the ravages of the last century, they simply no longer see any virtue, nobility, or utility in waging war, and certainly not aggressive nuclear war. 
That doesn’t mean that we cannot stumble into a war – or a nuclear exchange – through accident, miscalculation, system error, or sabotage; but, it hugely reduces the risk. 
The greatest test for this thesis in the years ahead will be how China and the United States react to the dramatic shift now occurring in their relative economic, and eventually military, power. 
President Barack Obama’s re-election offers reasonable hope that the US will give some strategic space to China through a policy of mutually accommodating cooperation, rather than insisting on dominance or primacy. 
But how will China behave under its new leadership? 
In a deeply thoughtful recent speech at the Brookings Institution in Washington, DC, Kevin Rudd, Australia’s Mandarin-speaking former prime minister, described possible external scenarios for China over the next decade. 
They ranged from actively pursuing zero-sum power politics aimed at dominating the hemisphere and beyond, to engaging strategically with the US and other partners in Asia to sustain and enhance the existing rules-based international order. 
While suggesting that it would be prudent for countries to hedge against the worst-case scenario, Rudd made clear that he is an optimist: provided the rest of the world maintains a policy of cooperative engagement with China, incoming President Xi Jinping and his team will choose a non-confrontational path. 
Optimism is a good call in this context, and also more generally. 
There are strong historical grounds for believing that waging aggressive war has simply run its course as an instrument of state policy. 
Having exhausted most of the alternatives over the years, national leaders have begun to internalize the virtues of cooperation. 
Moreover, in foreign policy, as in life itself, outlooks can be self-reinforcing, and self-fulfilling. 
Pessimists see conflict of one kind or another as more or less inevitable, and adopt a highly wary and competitive approach to the conduct of international relations. 
For optimists, what matters is believing in and nurturing the instinct of cooperation in the hope, and expectation, that decent human values will ultimately prevail. 
If we want to change the world for the better, we must start by believing that it is possible. 

The Defeated Remain Defiant 
HARARE: Before Zimbabwe's Presidential election earlier this month, I believed that if the election were not handled properly, there would be serious fallout in the country and throughout Southern Africa. Despite the shadows of war and terrorism, I called for a fair and free election. 
In the two years that led up to the Presidential vote, the people of Zimbabwe were subjected to severe intimidation, harassment and fear, all of which was carried out as part of a broader program of state-sponsored terrorism by Robert Mugabe's Zimbabwe African National Union-Patriotic Front (ZANU-PF). ZANU terrorism was conducted by rogue elements among the veterans of Zimbabwe's war of independence two decades ago, as well as by government militiamen and youths, all of whom were actively aided by the police. 
This intimidation and violence meant that my party, the Movement for Democratic Change (MDC) could not reach the electorate in large parts of the countryside. In addition, the government of President Mugabe, my opponent, effectively disenfranchised hundreds of thousands of urban voters, particularly in the capital city of Harare and in the city of Chitungwiza. 
Because of an inadequate number of polling stations, I believe that in Harare and Chitungwiza alone more than 360,000 people stood in a queue to vote but never gained the opportunity to cast their ballot. 
My concerns about the legitimacy of the election results are further raised by interference by Mugabe's militia, whose members prevented the MDC from placing polling agents in 52% of rural polling stations. 
By the end of the voting, our party had no observers at 6 out of 10 rural stations. 
This effectively meant that Mugabe's supporters could have their way at these stations. 
We are compiling a comprehensive list of the polling stations where ZANU supporters had solitary control. 
In our investigations so far, a pattern has emerged even at this early stage: these polling stations recorded the highest number of voters for Mugabe. 
In light of all the evidence, I cannot accept the Presidential election results in which Robert Mugabe, the sitting president, was declared a winner this month with 56% of the 3 million votes tallied. 
The official results do not reflect the true will of the people of Zimbabwe and are illegitimate in the eyes of the people. 
Zimbabwe's people have been cheated of their right to freely and democratically elect a President of their choice. 
The contest over the election results is a political issue that must be resolved politically. 
Food and fuel are in short supply, jobs are vanishing, inflation is running at more than 100%. 
The people of Zimbabwe deserve a celebration for their courage and determination. 
We may yet get one. 
As I write, I am saddened because Mugabe's regime remains intent on defying the people's will. 
Whatever may happen, I as the people's loyal servant am with them all the way. 
The government may want to arrest me. 
Indeed, I was arrested for treason even before the election. 
At worst, they may even wish to kill me. 
But the government will never destroy the spirit of the people to reclaim their rights and power. 
The power to achieve democratic change is in our hands. 
We may have moments of fear in the days ahead, but we must never let despair overwhelm us. 
The tide of political change is irreversible. 
But we must be prepared to pay a high price for our freedom. 
President Mugabe and his cronies are afraid of the people and we have heard they may do anything to kill the messenger. 
If they do, I only ask that the people of Zimbabwe remain strong and carry on the work that we began together. 
Among ordinary Zimbabweans walk heroes - heroes who waited hours and hours to vote, heroes who refused to be turned away. 
These are the heroes of the new Zimbabwe whose voices must be heard around the world. 
Together, we traveled a very harsh road together to achieve democratic change in my country. 
Rarely in the history of humankind have a people faced such brutality while retaining such gracious exuberance. 
I realize that the people of Zimbabwe are impatient. 
I understand why. 
But they must wait peacefully for the political process to unfold. 
They will not let this election stand but neither will they succumb to Mugabe's provocative traps and resort to violence. 
The people of Zimbabwe want constitutional change, legal change, legitimate change, and they are going to obtain it in spite of all the obstacles. 
In this, we know we are not alone. 
We know that throughout Africa, the will of the electorate has been thwarted. 
It appears in the majority of African states, whenever you have elections, you have irregularities, fraud, cheating. 
There's always a crisis of elections in Africa. 
There is, sad to say, a lack of sincerity on the part of governments across this continent when it comes time to give people the right to choose. 
But those who wish otherwise can take hope. 
Zimbabwe's struggle is not over. 
We have time to tally the lessons for Africa, and the world, of our experience. 
My people are in their hour of greatest need. 
I pledge not to abandon them. 


The Demise of Parliaments 
August is the traditional month when parliaments recess for the summer. It offers a moment to examine why they are so enfeebled. 
Across Europe, it is not only British Prime Minister Tony Blair who is accused of "presidentialism" nowadays. 
German Chancellor Gerhard Schröder faces the same charge in the current German election campaign. 
Prime Minister Silvio Berlusconi of Italy, indeed, does not even like being called Prime Minister. 
Because he is technically President of the Council (of ministers), he insists on using the title of President. 
France, of course, is a presidential democracy. 
To many, "presidentialism" sounds like the American constitution; but those who suspect in today's trend another facet of the Americanization of Europe are wrong. 
American presidents have powers which are severely restricted by Congress via the US constitution; they are but one in a triad of separate powers. 
Europe's "presidential" prime ministers, on the contrary, are what a British Lord Chancellor once called, "elective dictators." 
This means, above all, that they have ceased to take parliaments seriously. 
Some Prime Ministers rarely attend their parliaments. 
When they graciously consent to appear, they are treated with deference. 
Parliaments are in some cases handmaidens of the executive rather than the source of sovereignty. 
Prime Minister Berlusconi has persuaded the Italian Parliament to pass legislation which primarily benefits him and his business interests. 
The mother of parliaments itself, the British parliament at Westminster, frequently cuts short debates by a procedural device known as the "guillotine," so that important legislation, like the current Asylum Bill, remains largely undebated in the House of Commons. 
(The absurd consequence is that the unelected House of Lords becomes the real legislature of the country.) 
All governments have acquired the habit of using secondary legislation by orders and regulations without parliamentary control. 
The European Union sets a particularly bad example in all this. 
Its legislature is the Council of Ministers which sometimes allows the elected Parliament to engage in a little "co-decision-making." 
The Council of course meets in camera , that is without public scrutiny. 
How could this happen? 
What is the reason for the apparent demise of the central institution of democracy, parliament? 
Why is it no longer the place in which the representatives of the people debate great issues and hold the executive to account? 
Is democracy itself at risk? 
One can think of a number of reasons for the evisceration of parliaments. 
One is globalization. 
Decisions have emigrated from the spaces for which parliaments are elected. 
They take place in remote and often unknown places. 
These can be the boardrooms of companies, or private international meetings of leaders, or just a course of events which escapes all controls. 
The collapse of the "new economy" is an example, but in a curious way also the probable attack on Iraq will also be arrived at in such a way. 
Even if national parliaments tried to come to grips with such developments, they would fail. 
Another reason is the separation of the political game from the lives and concerns of most people. 
Parties have become machines for allocating power rather than for gathering and representing the interests of citizens. 
The party game has lost its representative quality. 
As a result, leaders have developed a tendency to turn directly to the people without allowing much debate. This can be done by opinion polls and the use of focus groups; it can also be achieved by referenda and plebiscites. 
In both cases, parliaments become dispensable. 
The danger of such developments is that they strengthen an already strong trend towards a new authoritarianism. 
The political class becomes a kind of nomenklatura of leaders who prefer popularity to debate. 
They find it awkward to give reasons for their policies and regard parliaments as no more than a reservoir for those with whom they are prepared to share power. 
As reasoned debate falls by the wayside, citizens lose interest in politics. 
They pursue their affairs and let those in power govern. 
Along with parties and parliaments, elections have lost their charm. 
Declining voter turnout tells the story. 
The demise of parliaments is above all a decline in democratic debate and scrutiny. 
It is not a development which defenders of the constitution of liberty can accept. 
The time has come for a revolt of parliaments against both the arrogance of those in power and voter apathy. 
In a sense, we need more rather than less presidentialism in Europe, at least if this is understood in the proper American way, in which legislative and executive powers are separately legitimated and equally strong. 

The Demise of the Development Round 
Hopes for a development round in world trade – opening up opportunities for developing countries to grow and reduce poverty – now seem dashed. 
Though crocodile tears may be shed all around, the extent of disappointment needs to be calibrated: Pascal Lamy, the head of the World Trade Organization, had long worked to diminish expectations, so much so that it was clear that whatever emerged would bring, at most, limited benefits to poor countries. 
The failure hardly comes as a surprise: The United States and the European Union had long ago reneged on the promises they made in 2001 at Doha to rectify the imbalances of the last round of trade negotiations – a round so unfair that the world’s poorest countries were actually made worse off. 
Once again, America’s lack of commitment to multilateralism, its obstinacy, and its willingness to put political expediency above principles – and even its own national interests – has triumphed. 
With elections looming in November, President George W. Bush could not “sacrifice” the 25,000 wealthy cotton farmers or the 10,000 prosperous rice farmers and their campaign contributions. 
Seldom have so many had to give up so much to protect the interests of so few. 
The talks bogged down over agriculture, where subsidies and trade restrictions remain so much higher than in manufacturing. 
With 70% or so of people in developing countries depending directly or indirectly on agriculture, they are the losers under the current regime. 
But the focus on agriculture diverted attention from a far broader agenda that could have been pursued in ways that would have benefited both North and the South. 
For example, so-called “escalating tariffs,” which tax processed goods at a far higher rate than unprocessed products mean that manufacturing tariffs discourage developing countries from undertaking the higher value-added activities that create jobs and boost incomes. 
Perhaps the most outrageous example is America’s $0.54 per gallon import tariff on ethanol, whereas there is no tariff on oil, and only a $0.5 per gallon tax on gasoline. 
This contrasts with the $0.51 per gallon subsidy that US companies (a huge portion of which goes to a single firm) receive on ethanol. 
Thus, foreign producers can’t compete unless their costs are $1.05 per gallon lower than those of American producers. 
The huge subsidies have meant that the US has become the largest producer of ethanol in the world. 
Yet, despite this huge advantage, some foreign firms can still make it in the American market. 
Brazilian sugar-based ethanol costs far less to produce than American corn-based ethanol. 
Brazil’s firms are far more efficient than America’s subsidized industry, which puts more energy into getting subsidies out of Congress than in improving efficiency. 
Some studies suggest that it requires more energy to produce America’s ethanol than is contained in it. 
If America eliminated these unfair trade barriers, it would buy more energy from Brazil and less from the Middle East. 
Evidently, the Bush administration would rather help Middle East oil producers, whose interests so often seem at variance with those of the US, than Brazil. 
Of course, the Administration never puts it that way; with an energy policy forged by the oil companies, Archer Daniels Midland and other ethanol producers are just playing along in a corrupt system of campaign-contributions-for-subsidies. 
In the trade talks, America said that it would cut subsidies only if others reciprocated by opening their markets. 
But, as one developing country minister put it, “Our farmers can compete with America’s farmers; we just can’t compete with America’s Treasury.” 
Developing countries cannot, and should not, open up their markets fully to America’s agricultural goods unless US subsidies are fully eliminated. 
To compete on a level playing field would force these countries to subsidize their farmers, diverting scarce funds that are needed for education, health, and infrastructure. 
In other areas of trade, the principle of countervailing duties has been recognized: when a country imposes a subsidy, others can impose a tax to offset the unfair advantage given to that country’s producers. 
If markets are opened up, countries should be given the right to countervail American and European subsidies. 
This would be a major step forward in trying to create a fair trade regime that promotes development. 
At the onset of the development round, most developing countries worried not only that the EU and the US would renege on their promises (which they have in large part), but also that the resulting agreement would once again make them worse off. 
As a result, much of the developing world is relieved that at least this risk has been avoided. 
Still, there was a second risk: that the world would think that the agreement itself had accomplished the objectives of a development round set forth at Doha, with trade negotiators then turning once again to making the next round as unfair as previous rounds. 
This concern, too, now seems to have been allayed. 
There remains one further concern: America has rushed to sign a series of bilateral trade agreements that are even more one-sided and unfair to developing countries, which may prompt Europe and others to do likewise. 
This divide-and-conquer strategy undermines the multilateral trade system, which is based on the principle of non-discrimination. 
Countries that sign these agreements get preferential treatment over all others. 
But developing countries have little to gain and much to lose by signing these agreements, which almost never deliver the promised benefits. 
Indeed, the entire world is the loser if the multilateral trade system is weakened. 
The rest of the world must not embrace America’s unilateral approach: the multilateral trade system is too precious to allow it to be destroyed by a US President who has repeatedly shown his contempt for global democracy and multilateralism. 

The Democracy Paradox 
PARIS – Elections stolen in Iran, disputed in Afghanistan, and caricatured in Gabon: recent ballots in these and many other countries do not so much mark the global advance of democracy as demonstrate the absence of the rule of law. 
Of course, elections that lead to illiberal outcomes, and even to despotism, are not a new phenomenon. 
Hitler, after all, came to power in Germany in 1933 through a free, fair, and competitive election. 
Moreover, problematic elections constitute a specific challenge for the West, which is simultaneously the bearer of a universal democratic message and the culprit of an imperialist past that undermines that message’s persuasiveness and utility. 
In a noted essay in 2004, for example, the Indian-born author Fareed Zakaria described the danger of what he called “illiberal democracy.” 
For Zakaria, America had to support a moderate leader like General Pervez Musharraf in Pakistan, despite the fact that he had not come to power through an election. 
By contrast, Zakaria argued, Venezuela’s populist president, Hugo Chávez, who was legitimately elected, should be opposed. 
In our globalized world, the potential divorce between elections and democracy has assumed a new dimension. 
With instantaneous communication and access to information, the less legitimate a regime, the greater will be the temptation for it to manipulate, if not fabricate, the results of elections. 
The “trendy” way is to manufacture a significant but not too massive victory. 
Today’s despots view near-unanimous Soviet-style electoral “victories” as vulgar and old fashioned. 
But another new aspect of this phenomenon are opposition forces that are willing to attempt to negate such machinations by the party in power. 
Confronted with this dual process of illegitimacy, the West often finds itself condemned to sit between two chairs, and to face criticism whatever the outcome. 
Those in power, as in Iran, accuse Western governments of supporting the opposition, and those in opposition accuse the West of supporting the government, as has happened to France in the case of Gabon. 
So what lessons should we draw from the inevitably messy nature of electoral processes in countries where there is either no middle class or only a rudimentary one, and where a democratic culture is at best in its infancy? 
The time has come for the West to reassess its policies in a fundamental way. 
It cannot switch from “activism” at one moment to abstention the next. 
A refusal to act, after all, is also a political choice. 
Of course, the temptations of isolationism are great, and will increase in the months and years ahead. 
But the West has neither the moral right nor a strategic possibility of withdrawing into an “ivory tower,” something which in most cases does not exist. 
It is impossible to say to Afghanistan, for example, “You have deeply disappointed us, so, from now on, you must clean up your own mess.” 
In Afghanistan, Gabon, Iran, Pakistan, and elsewhere, fundamental Western interests – though very different depending on the case – are at stake. 
In Afghanistan, the danger is that a terrorist haven could be reconstituted. 
The risk in Iran is an ever more hostile regime armed with nuclear weapons. 
In Gabon, the priority for France is to transcend neo-colonialism without losing its important links to the oil-rich African nation. 
But, in pursuit of these difficult objectives, the West must get both its ambitions and its methods right. 
Democracy is a legitimate objective, but it is a long-term one. 
In the medium term, the absence of the rule of law constitutes the most serious problem for the countries in question. 
French television, for example, recently aired a terrifying report on Haiti, where a local judge, without bothering to hide his actions, was protecting a narcotics dealer from the country’s own French-trained anti-drug force. 
Corruption eats away at a society from within, destroying citizens’ trust in a future based on a shared sense of common good. 
It is the West’s acceptance of corruption – either open or tacit – that makes it an accomplice to too many nefarious regimes, and makes its espousal of democratic principles appear either hypocritical or contradictory. 
On the other hand, setting the rule-of-law standard too high will also misfire. 
Singapore-style incorruptible one-party state bent on modernizing society is probably a far too ambitious goal for most non-democratic regimes. 
The distance that separates the West from countries that rely on sham elections is not only geographic, religious, or cultural; it is chronological. 
Their “time” is not, has never been, or is no longer the same as that of the West. 
How can they be understood without being judged, or helped without humiliating paternalism or, still worse, without an unacceptable “collateral damage,” as in Afghanistan? 
The West’s status in tomorrow’s world will largely depend upon how it answers this question. 
It cannot afford to ignore the issue any longer. 


The Democratic Hopes of Iraqis 
The escalating violence in Iraq gives a bleak impression of that country’s prospects. 
Sectarian conflict seems to be increasing on a daily basis, with militias massacring hundreds of Sunnis and Shiites solely on the basis of their religious identities. 
Yet it would be a mistake to think that this bloodlust represents widespread sentiment among Iraqis. 
While neither American nor Iraqi security officials have yet found a way to tame the militias, the Iraqi public is increasingly drawn toward a vision of a democratic, non-sectarian government for the country. 
In 2004 and 2006, I was involved in conducting two nationwide public opinion surveys in Iraq. 
Contrasting the findings of these surveys demonstrates that over the two years when sectarian violence has increased, Iraqis increasingly view their fate in a national, rather than communal, context. 
Over this period, the number of Iraqis who said that it was “very important” for Iraq to have a democracy increased from 59% to 65%. 
These same Iraqis saw a link between an effective democracy and the separation of religion and politics, as under a western system. 
Overall, those who responded that they “strongly agree” that “Iraq would be a better place if religion and politics were separated” increased from 27% in 2004 to 41% in 2006. 
Particularly significant were increases from 24% to 63% during this period among Sunnis and from 41% to 65% among Kurds. 
Opinion on this question within the majority Shiite community remained stable, with 23% strongly agreeing in both 2004 and 2006. 
Similarly, the survey found declining support for an Islamic state. 
Between 2004 and 2006, the number of Iraqis who said it was “very good to have an Islamic government where religious leaders have absolute power” fell from 30% to 22%. 
Declines occurred in all three leading ethnic communities: from 39% to 35% among Shiites, from 20% to 6% among Sunnis, and from 11% to 5% among Kurds. 
There was some increase in the number of Shiites who thought that there should be a strong religious element in national laws, the majority still opposed this. 
Nationalist sentiment is also increasing. 
Asked whether they considered themselves “Iraqis, above all” or “Muslims, above all,” the 2006 survey found that 28% of Iraqis identified themselves as “Iraqis, above all,” up from 23% in 2004. 
In the capital, Baghdad, the center of so much sectarian violence, the numbers were even more impressive, with the share of the population who saw themselves as “Iraqis, above all” doubling, from 30% to 60%. 
By contrast, similar surveys in other Arab capitals find a decided tilt toward a Muslim identity. 
In Amman, Jordan, the most recent figure is 12% who put their national identity ahead of their Muslim identity. 
The figure is 11% in Cairo, Egypt, and 17% in Riyadh, Saudi Arabia. 
Curiously, in Tehran, Iran, the choice is markedly in favor of Iranian, rather than Muslim, identity. 
Among residents of the Iranian capital, the share of “nationalists” soared from 38% in 2000 to 59% in 2005. 
At the same time, Iraqi attitudes show a strong reaction to daily violence. 
Between 2004 and 2006, the proportion who strongly agreed that life in Iraq is “unpredictable and dangerous” increased from 46% to 59%. 
The change was felt in all communities, rising from 41% to 48% among Shiites, from 77% to 84% among Sunnis, and from 16% to 50% among Kurds. 
At the same time, the surveys found little support among any of these three major groups for sectarian conflict. 
The violence has had a major effect on Iraqi attitudes toward foreigners. 
By 2006, distrust of Americans, British, and French had reached 90%, and attitudes toward Iraq’s neighbors were also tense. 
More than half of Iraqis surveyed said that they would not welcome Turks, Jordanians, Iranians, or Kuwaitis as neighbors. 
These feelings, it appears, are directly related to the violence gripping Iraq, and the role of foreigners in the country’s perilous security situation. 
So it appears that Iraqis are showing greater attachment to their national identity and are supportive of a non-sectarian approach to government. 
These are the basic traits of a modern political order. 
Among Sunnis, the decline in support for an Islamic state is most dramatic, and may have significant ramifications for the ability of religious extremists to recruit among them. 
Although Iraqis remain angry about the violence in their country, this anger has not undermined their sense of national identity. 
At the same time, they appear to be holding onto important democratic values. 
The key question, of course, remains whether these values can be translated into a peaceful reality. 

The Democratization of Aid 
The outpouring of aid in response to the Indian Ocean tsunami brought hope to a troubled world. 
In the face of an immense tragedy, working class families around the world opened their wallets to the disaster’s victims. 
Former US President Bill Clinton called this response a “democratization of development assistance,” in which individuals lend their help not only through their governments but also through their own efforts. 
But, while more than 200,000 people perished in the tsunami disaster, an equivalent number of children die each month of malaria in Africa, a disaster I call a “silent tsunami.” 
Africa’s silent tsunami of malaria, however, is actually largely avoidable and controllable. 
Malaria can be prevented to a significant extent, and can be treated with nearly 100% success, through available low-cost technologies. 
Yet malaria’s African victims, as well as those in other parts of the world, are typically too poor to have access to these life-saving technologies. 
A global effort, similar to the response to the Asian tsunami, could change this disastrous situation, saving more than one million lives per year. 
Herein lies the main message of the new report of the UN Millennium Project, which was delivered in mid-January to UN Secretary General Kofi Annan. 
The Project, which I direct on behalf of the Secretary General, represents an effort by more than 250 scientists and development experts to identify practical means to achieve the Millennium Development Goals to cut extreme poverty, disease, and hunger by the year 2015. 
Our new report, entitled Investing in Development: A Practical Plan to Achieve the Millennium Development Goals (available for download at www.unmillenniumproject.org ), shows that these goals can be achieved. 
The key to meeting the Millennium Development Goals in poor countries is an increase in investment in people (health, education, nutrition, and family planning), the environment (water and sanitation, soils, forests, and biodiversity), and infrastructure (roads, power, and ports). 
Poor countries cannot afford these investments on their own, so rich countries must help. 
If more financial aid is combined with good governance in poor countries, then the Millennium Development Goals can be achieved on time. 
In short, our new Report is a call to action. 
Rich countries and poor countries need to join forces to cut poverty, disease, and hunger. 
The reason that the Millennium Development Goals are feasible is that powerful existing technologies give us the tools to make rapid advances in the quality of life and economic productivity of the world’s poor. 
Illness and deaths from malaria can be reduced sharply by using insecticide-treated bed nets to stop the mosquitoes that transmit malaria, and by effective medicines when the illness strikes. 
The total cost of battling malaria in Africa would be around $2 to $3 billion per year. 
With around one billion people living in high-income countries, it would thus cost just $2 to $3 per person per year in the developed world to fund an effort that could save more than one million children annually. 
When child mortality is reduced, poor families choose to have fewer children, because they are more confident that their children will survive to adulthood. 
Thus, paradoxically, saving children’s lives is part of the solution to rapid population growth in poor countries. 
Malaria is an important example where specific investments can solve the problems of disease, hunger, and extreme poverty. 
Our report makes dozens of such practical recommendations. 
Investments in soil nutrients and water harvesting could help African farmers double or triple their food yields. 
Anti-retroviral medicines can help save millions from death due to AIDS. 
Rural roads, truck transport, and electricity could bring new economic opportunities to remote villages in Latin America, Africa, and Asia. 
School meal programs using locally produced food could boost attendance by poor children, especially girls, and improve their ability to learn, while also providing an expanded market for local farmers. 
These investments are an incredible bargain. 
Rich countries have long promised to increase their aid levels to 0.7% of national income (from around only 0.25% today). 
The promise of 0.7% means that the rich world would give developing countries a mere 70 cents out of each $100 of national income. 
In recent weeks, many European countries have pledged to honor the 0.7% commitment, and five European countries (Denmark, Luxembourg, the Netherlands, Norway, and Sweden) already do so. 
It’s up to the US and Japan to follow through on their promises as well. 
Moreover, with the “democratization” of aid now underway, we can look forward to increased private efforts alongside official development assistance. 
Of course, not all developing countries are sufficiently well governed to use an increase in aid in an honest, effective way. 
The world should therefore start this bold effort by focusing on the poor countries that are relatively well governed and that are prepared to carry out needed investments in an efficient and fair manner. 
Ghana, Senegal, Tanzania, Kenya, and Ethiopia are on that list. 
It is urgent that we get started in these and similarly well governed poor countries this year. 


The Democrats’ Line in the Sand 
BERKELEY – Ever since the 1928 work of Frank Ramsey, economists have accepted the utilitarian argument that a good economy is one in which returns on investment are not too great a multiple – less than three – of the rate of per capita economic growth. 
An economy in which profits from investment are high relative to the growth rate is an economy that is under-saving and under-investing. 
This idea has also given rise to a very strong presumption that if an economy as a whole is under-saving and under-investing, the government ought to help to correct this problem by running surpluses, not make it worse by running deficits that drain the pool of private savings available to fund investment. 
This is why most economists are deficit hawks. 
Of course, governments need to run deficits in depressions in order to stimulate demand and stem rising unemployment. 
Moreover, a lot of emergency government spending on current items is really best seen as national savings and investment. 
Franklin Delano Roosevelt could have made no better investment for the future of America and the world than to wage total war against Adolf Hitler. 
Likewise, Presidents George H.W. Bush and Bill Clinton ought to have recognized in the 1990’s that something like a Marshall Plan for Eastern Europe to help with the transition from communism would have been an excellent investment for the world’s future. 
But the rule is that governments should run surpluses and not deficits, so various American presidents’ economic advisers have been advocates of aiming for budget surpluses except in times of slack demand and threatening depression. 
This was certainly true of Eisenhower’s, Nixon’s, and Ford’s economic advisors, and of George H.W. Bush’s and Bill Clinton’s economic advisers. 
It was true of Reagan’s economic advisers as well. 
Some of Reagan’s advisers sincerely did not believe that the tax cuts of the early 1980’s would generate the large deficits that they did (Beryl Sprinkel and Lawrence Kudlow come to mind). 
Others, like Martin Feldstein and Murray Weidenbaum, understood the consequences of the Reagan tax cuts and were bitter bureaucratic opponents, even if they did not speak out publicly. 
In fact, since WWII, only George W. Bush’s economic advisers have broken with this consensus. 
A few have done so because they are making careers as party-line Republicans, so their priority is to tell Republican politicians what they want to hear (Josh Bolton and Mitch Daniels come to mind here). 
As for the rest, their reasons for supporting the Bush administration’s savings-draining policies remain mysterious. 
It is not as though they were angling for lifetime White House cafeteria privileges, or that having said “yes” to George W. Bush will open any doors for them in the future. 
But their failings do pose a dilemma for Democratic deficit-hawk economists trying to determine what good economic policies would be should Barack Obama become president. 
Those of us who served in the Clinton administration and worked hard to put America’s finances in order and turn deficits into surpluses are keenly aware that, after eight years of the George W. Bush administration, things look worse than when we started back in 1993. 
All of our work was undone by our successors in their quest to win the class war by making America’s income distribution more unequal. 
A chain is only as strong as its weakest link, and it seems pointless to work to strengthen the Democratic links of the chain of fiscal advice when the Republican links are not just weak but absent. 
Political advisers to future Democratic administrations may argue that the only way to tie the Republicans’ hands and keep them from launching another wealth-polarizing offensive is to widen the deficit enough that even they are scared of it. 
They might be right. 
The surplus-creating fiscal policies established by Robert Rubin and company in the Clinton administration would have been very good for America had the Clinton administration been followed by a normal successor. 
But what is the right fiscal policy for a future Democratic administration to follow when there is no guarantee that any Republican successors will ever be “normal” again? 
That’s a hard question, and I don’t know the answer. 
There is, however, one fiscal principle that must be respected. 
Fiscal deficits so large that they put the debt-to-GDP ratio on an explosive upward trend do not merely act as a drag on long-term economic growth; they also create the possibility that at any moment the economy might face an immediate macroeconomic and financial disaster. 
A more hawkish fiscal stance may no longer be possible in future Democratic administrations, and might not be good policy if it were, given the likely complexion of successor administrations. 
Stabilizing the debt-to-GDP ratio is thus the line in the sand that must not be crossed. 

America’s Blinders 
SINGAPORE – The time has come to think the unthinkable: the era of American dominance in international affairs may well be coming to an end. 
As that moment approaches, the main question will be how well the United States is prepared for it. 
Asia’s rise over the last few decades is more than a story of rapid economic growth. 
It is the story of a region undergoing a renaissance in which people’s minds are re-opened and their outlook refreshed. 
Asia’s movement toward resuming its former central role in the global economy has so much momentum that it is virtually unstoppable. 
While the transformation may not always be seamless, there is no longer room to doubt that an Asian century is on the horizon, and that the world’s chemistry will change fundamentally. 
Global leaders – whether policymakers or intellectuals – bear a responsibility to prepare their societies for impending global shifts. 
But too many American leaders are shirking this responsibility. 
Last year, at the World Economic Forum in Davos, two US senators, one member of the US House of Representatives, and a deputy national security adviser participated in a forum on the future of American power (I was the chair). 
When asked what future they anticipated for American power, they predictably declared that the US would remain the world’s most powerful country. 
When asked whether America was prepared to become the world’s second-largest economy, they were reticent. 
Their reaction was understandable: even entertaining the possibility of the US becoming “number two” amounts to career suicide for an American politician. 
Elected officials everywhere must adjust, to varying degrees, to fulfill the expectations of those who put them in office. 
Intellectuals, on the other hand, have a special obligation to think the unthinkable and speak the unspeakable. 
They are supposed to consider all possibilities, even disagreeable ones, and prepare the population for prospective developments. 
Honest discussion of unpopular ideas is a key feature of an open society. 
But, in the US, many intellectuals are not fulfilling this obligation. 
Richard Haass, the president of the Council on Foreign Relations, suggested recently that the US “could already be in the second decade of another American century.” 
Likewise, Clyde Prestowitz, the president of the Economic Strategy Institute, has said that “this century may well wind up being another American century.” 
To be sure, such predictions may well prove accurate; if they do, the rest of the world will benefit. 
A strong and dynamic US economy, reinvigorated by cheap shale gas and accelerating innovation, would rejuvenate the global economy as a whole. 
But Americans are more than ready for this outcome; no preparation is needed. 
If the world’s center of gravity shifts to Asia, however, Americans will be woefully unprepared. 
Many Americans remain shockingly unaware of how much the rest of the world, especially Asia, has progressed. 
Americans need to be told a simple, mathematical truth. 
With 3% of the world’s population, the US can no longer dominate the rest of the world, because Asians, with 60% of the world’s population, are no longer underperforming. 
But the belief that America is the only virtuous country, the sole beacon of light in a dark and unstable world, continues to shape many Americans’ worldview. 
American intellectuals’ failure to challenge these ideas – and to help the US population shed complacent attitudes based on ignorance – perpetuates a culture of coddling the public. 
But, while Americans tend to receive only good news, Asia’s rise is not really bad news. 
The US should recognize that Asian countries are seeking not to dominate the West, but to emulate it. 
They seek to build strong and dynamic middle classes and to achieve the kind of peace, stability, and prosperity that the West has long enjoyed. 
This deep social and intellectual transformation underway in Asia promises to catapult it from economic power to global leadership. 
China, which remains a closed society in many ways, has an open mind, whereas the US is an open society with a closed mind. 
With Asia’s middle class set to skyrocket from roughly 500 million people today to 1.75 billion by 2020, the US will not be able to avoid the global economy’s new realities for much longer. 
The world is poised to undergo one of the most dramatic power shifts in human history. 
In order to be prepared for the transformation, Americans must abandon ingrained ideas and old assumptions, and liberate unthinkable thoughts. 
That is the challenge facing American public intellectuals today. 

The Denial of Caste 
Deconstruction as an intellectual device has played havoc in universities across the West. 
Now it is casting its spell over developing countries, making a powerful play to rewrite India's past, as Deepak Lal suggests. 
India's ancient and medieval history is notoriously malleable. 
The country's Hindu nationalists unleashed the latest furor over the nature of India's past. 
They reject the widely accepted view, based on early sacred texts, that ancient believers did not ban the slaughter of cattle, and that such a ban probably became part of the Hindu moral code only around the fifth and sixth centuries AD, when the later Puranas were written. 
The trouble with reaching definitive conclusions about this or any other contested aspect of India's distant past is that, unlike in neighboring China, there is little in the way of an objective historical record to rely upon. 
Some archaeological evidence exists. 
But the main sources for ancient India are orally transmitted literary accounts dating to the Rigveda (around 1500-1300 BC) and the subjective records of foreign travelers. 
The social history of ancient India, as one scholar admits, "appears to be a string of conjectures and speculations." 
So it is hardly surprising that India's ancient past can be manipulated to fit alternative ideological preconceptions. 
Nowhere is this more evident than in discussions about the origins and nature of India's caste system. 
In the early 1980's, the predominant view on the Left was that the ancient Hindu caste system was a variant of European feudalism. 
The late Ashok Rudra, himself a man of the Left but an empiricist, provided the most cogent critique of this view. 
He pointed out a crucial difference between the conceptions of mutual social ties in the Hindu and European systems. 
Where individuals were the central actors in the characteristic rituals of dominance and homage in European feudalism, in Hindu society the relationships were always defined in terms of caste groups. 
Rudra assumed that caste existed in ancient India because, despite the unreliable historical record, the caste system is so manifest even today. 
But recent historians on the Left in India now question this assumption. 
A school of revisionist historians and anthropologists argue that caste is an invention of the colonial British Raj. 
They claim that the early British scholars and administrators who documented Indian customs and translated the early sacred texts were bamboozled by the Brahmins--the first Indians to learn English and thus the only available intermediaries--into believing that the Hindu social order was caste-based. 
This imagined order became reality when British census takers forced Indians to categorize themselves by caste. 
Before this, these historians argue, Hindus were allegedly no less individualistic than Europeans. 
Even hitherto sensible anthropologists and social historians seem to have succumbed to this travesty of scholarship. 
Much of the supposed evidence that this so-called "Subaltern" school of historians provides takes the form of contemporary anthropological studies of regions like southern India or parts of medieval central India. 
But, as Susan Bayley, a "Subaltern" convert, puts it, "the initial premise is that even in parts of the Hindu heartland of Gangetic upper India, the institutions and beliefs which are often described as the elements of traditional caste were only taking shape as recently as the early 18 th century." 
I can personally disprove this premise. 
While visiting Kerala in the late 1960's, I--a Hindu from the Gangetic heartland--went to the Sri Padmanabhaswamy temple in Trivandrum, where the usual "pandas" accosted me. 
One asked where I came from and asked about my jati and gotra . 
When I answered, he rattled off the names of at least six generations of my ancestors, while asking me to fill in the details about my cousins, the family into which I had married, and the names of our children. 
He did not ask for money; he was only interested in updating his records. 
Unless he had imagined my ancestors, he had just traced my caste-based past to well before the 17 th century. 
Aside from such examples, an economic rationale can also be provided for the origins of the Indian caste system as for European feudalism. 
The great Eurasian civilizations were all dependent on agriculture and needed to create institutional means of tying labor, which was then scarce, to the land, which was abundant. 
Serfdom, indenture, slavery, and the caste system all served this end. 
How did ancient Indian princes tie labor to the land if neither feudalism nor caste existed? 
Even if we are forced, faute de mieux , to speculate about ancient Indian social life, we must remain true to the common facts of economic and military life among European and Asian civilizations, which imposed similar institutional responses. 
These caveats, however, will no doubt leave the revisionists unmoved, for they are part of the "deconstructionist" movement that has deeply influenced the humanities in American and British universities. 
Deconstructionists do not believe that any settled "facts" exist. 
If they are right, there is no difference between the intellectual discipline of history, founded by the Greeks 2400 years ago to record the past truthfully, and the myths that every culture tells to affirm its self-worth. 
Without history, we will be exposed to the full force of the tales of our imagined pasts, which only mirror our current hates and loves. 

The Depopulation of Europe 
By common consent, the recent EU summit at Stockholm was a dull affair. 
EU leaders made some progress on creating a single financial market throughout the Union, and on establishing a standard European patent. 
Other proposals for economic liberalisation, were deadlocked. 
The idea of a single European air traffic control area was blocked because of a dispute between Britain and Spain over Gibraltar; proposals for liberalisation of gas and electricity supply were resisted by France, which promotes the public service advantages of public sector utilities. 
There was good news, however, in that the Stockholm summit witnessed the first signs that the EU may at last be creeping, crab-wise, toward an idea hitherto taboo: that the European Union may require an immigration policy. 
Until recently, member governments held two ideas on immigration: they all took the view that ordinary immigration must be restricted or prevented; they all agreed that asylum-seekers be vilified as “bogus” economic migrants and deterred through policies of harassment, intimidation and - in some cases - detention. 
In addition, some member governments, like those of Germany and Austria, have demonstrated serious anxiety that EU enlargement will incite a flood of job-seekers from Central and Eastern Europe, and made clear that they will demand a long delay in granting free movement of labour to any new member state. 
Eighteen months ago, at the Tampere summit, EU leaders said that they recognised “the need for more efficient management of migration flows.” 
What they really meant, however, was stronger measures to tackle illegal immigration. 
Stockholm came one step closer to admitting Europe’s real population problem, when it spoke of “the demographic challenge of an ageing population of which people of working age constitute an ever-smaller part.” 
Indeed, the summit communique said that “an in-depth discussion of immigration, migration and asylum” would take place at the EU summit at the end of this year. 
But EU leaders have yet to admit what everybody knows: that Europe’s population is not just ageing, it is starting to decline, and is likely to decline steeply in coming decades. 
At the Stockholm summit the leaders pretended that the solution to Europe’s ageing problem will be found in better job mobility, more flexibility, and further economic reform. 
The plain fact, however, is that Europe’s population decline can only be stemmed by substantial inward immigration. 
Last month (February 2001) the United Nations published its latest forecasts for world population over the next 50 years. 
The broad picture is that the population of the world’s less developed regions is expected to rise from 4.9 billion today to 8.2 billion in 2050, whereas the population of the developed regions will, in aggregate, remain roughly stable at 1.2 billion. 
Within the developed world, however, Europe’s population is expected to decline markedly. 
In some European countries, like France and Ireland, the population will actually rise. 
But in others there will be steep falls. 
The population of Germany will decline from 82m to just under 71m, that of Italy from 57.5m to 43m, and that of Spain from nearly 40m to just over 31m. “all in all, the population of the EU 15 will decline from 376m to 339.3m, a fall of 37m or 10%. 
Even sharper declines are expected in the candidate countries of Central and Eastern Europe, from a total of 105m to 85m, a fall of 20m, or about 20%. 
The implications are far-reaching. 
First, on a medium-term time-scale, the EU needs substantial immigrants. 
Second, the fear of a tidal wave of immigrants from Eastern Europe is largely a populist fantasy. 
Third, Eastern Europe will itself need substantial immigration. 
Two strategic footnotes need to be added to this scenario. 
First, Turkey’s population is likely to rise hugely in the next 50 years, from 66m to nearly 100m. 
Now, Turkey has in principle been accepted as a potential candidate for EU membership. 
But if UN projections are correct, Turkey’s population in 2050 would be far larger than any other member state, including Germany, and would represent nearly 20% of the population of the enlarged EU. 
The increase in Turkey’s population might almost balance out the decline in the population of the present EU 15; but it is unlikely that today’s existing member states will regard this satisfactory. 
Moreover, the strategic balance to Europe’s east will also be transformed, because the populations of Russia and the Ukraine are expected to decline even more steeply than those of the EU. 
Russia’s population, currently 145.5m, is expected to fall to 104.5m; Ukraine’s population is projected to fall from nearly 50m to 30m, a startling drop of 40%. 
This regional pattern, of population decline in Europe, Russia and Ukraine, needs to be set against the larger picture of a 3 billion increase globally, mainly in the developing world. 
It is difficult to avoid the implication that Europe’s need for immigrants is likely to combine with massive, and probably irresistible, migratory pressure from developing countries to the developed world. 
What is now required is that EU leaders stop pretending that Europe’s demographic ageing can be solved by more internal labor mobility. 
The EU will, instead, need a large, managed immigration policy. 
This is, undoubtedly, a difficult demand to make of politicians, particularly given the legacy of xenophobic politics in so many member states. 
But it must be done, and soon. 

The Devaluation Delusion Revisited 
"The dollar is our currency and your problem." So America's Treasury Secretary quipped before President Nixon pulled the plug on the Bretton Woods system three decades ago. 
What John Connolly's bluntness reflected was America's ability--and willingness--to export its economic problems by driving down the dollar's value while scapegoating countries opposed to that strategy. 
President George W. Bush seems hell-bent on repeating Nixon's misbegotten policy. 
Like the Nixon/Connolly team, the Bush administration is responding to America's massive budget and trade deficits by letting the dollar fall--and hard --while it also tries to distract attention from its responsibility by pointing an accusing finger at China as the cause for both US joblessness and deflationary pressures. 
This strategy, however, is likely to prove as ineffective now as it was for Nixon, who succeeded only in ushering in an era of stagnation. 
Bush's policy is doomed to fail because, as in the 1970's, America's economic problems are homegrown. 
They are not imported and cannot be fixed merely by changing the dollar's value. 
The world's reliance on the US as the one source of growth in global demand buttresses America's currency power play, but at the cost of aggravating vast global imbalances. 
Since 2000, America's excess productive capacity has outstripped the Euro area and Japan combined, its economy growing far more slowly than its 3.5% to 4% annual potential, with US unemployment rising. 
This pitiful performance incites angry cries that American jobs are disappearing abroad, and that low-cost exports may result in deflation. 
Sadly, America is not alone in viewing devaluation as a panacea for domestic problems. 
Too timid to undertake serious reforms at home, Japanese authorities fight to keep the yen's value as low as possible against the dollar and rival Asian currencies. 
Similarly, the European Union created the euro to give its members increased currency stability. 
When the euro was down, wounded pride forced EU governments to try talking it up. 
Now that the euro is up, those same governments are trying to talk it down. 
The euro's dizzying trade-weighted ascent over the past year is, indeed, exacerbating near-term pressures within the EU. 
But the Union's finance ministers would be better off pushing the internal reforms Europe needs, rather than following the Bush example and pressing the European Central Bank to force a strong currency down to earth. 
Yet America's currency strategy is the most reckless--another mighty error in an economic policy so wayward that it is hard to know where to begin listing the mistakes. 
Perhaps the best place to start is with the speedy deterioration in America's federal budget in the past two years. 
From a surplus of 1.4% of GDP in 2000, the Bush administration has delivered a deficit of 4.6% of GDP this year. 
US budget deficits may have spared America and the world economy even worse performances over the past two years, but fixing what ails the US is now far more difficult. 
Tightening fiscal policy would go a long way towards boosting confidence in the US. 
It might also help push the rest of the world into moving away from its reliance on America as the sole engine of growth. 
Growth elsewhere might help America export more. 
But this won't provide the quick fix that the Bush administration yearns for, because a declining dollar need not bring about an equivalent rise in the price of US imports. 
This is partly because the final price of an imported good reflects numerous costs such as distribution and marketing, which are unaffected by the exchange rate. 
Indeed, many countries that export to the US--especially Japan and China--price their goods in dollars. 
Because these countries are keen to maintain their share in the world's biggest market, they often absorb the effect of a drop in the dollar by cutting their profits rather than raise prices. 
As a recent study by J.P. Morgan's Chief Economist John Lipsky shows, the link between exchange rates and trade is weakening. 
What makes US strategy reckless is that the Bush administration is attacking China at the very moment that America's dependence on Chinese purchases of US government bonds is growing. 
Without these purchases, the US might face a rise in domestic interest rates that could threaten both its economic recovery and the global economy. 
Moreover, if China decided to sell its dollar holdings, the bond market would discount US government securities, raising US long-term interest rates and canceling much (perhaps all) of whatever stimulus has been provided by the dollar's depreciation. 
Luckily, China's government knows that America's advice to let the renminbi float right now is dangerous--both to China and for the world economy. 
Policies intended to benefit one country's economy at the expense of another, such as competitive devaluations, were widespread during the Great Depression of the 1930's. 
For most of the postwar era, governments appeared to have learned the lesson of that time. 
So it is bizarre that, today, leaders in the world's strongest economies are dabbling in such dangerous nonsense again. 
To fix its domestic problems, America must tighten its budget, not drive down the dollar's value. 
But with presidential elections looming, no US government would cut spending or raise taxes. 
So forget about the economically illiterate Bush administration daring to do either. 
The silver lining here is that this failure may revive the realization that no country--not even mighty America--can devalue its way out of trouble. 


The Digital Divide 
LONDON: A global division is arising between the world’s computer haves and have-nots. 
Call it the digital divide. 
Seven months ago at the Kyushu-Okinawa Summit the world’s leading industrial countries established a Digital Opportunity Taskforce (dotforce) to share information and communication technologies with poor countries. 
Are computer technologies, however, really so easily transferred? 
Moreover, will governments in poor and postcommunist countries seize upon the supposedly magical powers of computers as an excuse not to pursue coherent growth strategies? 
It is said that, unless developing and postcommunist countries catch up with the computer “revolution”, their economies will fall ever farther behind. 
True, integration in the world economy offers the best hope for growth. 
But global integration cannot be achieved by IT alone. 
Indeed, the word from Microsoft’s Bill Gates is that poor countries need sound development strategies, not a great leap into cyberspace. 
Poverty, underdevelopment, and mal-development result from macroeconomic and industrial policies, skewed income distribution, and flawed market infrastructures. 
Of these, only the latter may be affected positively by IT. 
Undoubtedly, the digital divide excludes much of the world’s population by age, income and residence from today’s computer revolution. 
To benefit from Information and Communication Technologies (ICTs) an economy requires, in addition to sophisticated telecommunications infrastructure, fundamental advances in basic literacy and secondary technical education. 
These are the pre-conditions for successful technology transfers. 
A liberal regulatory regime helps, too. 
So, clearly, the dotforce initiative is no stand-alone development tool. 
Governments must also act. 
Unfortunately, government actions usually obstruct more than help. 
Some developing and postcommunist countries censor the Internet by excess taxation and/or by limiting access. 
So, as international agencies invest in computers for developing countries they must identify the obstacles erected by governments to the diffusion of ICTs, as well as the costs for overcoming these obstacles. 
Moreover, technology transfer is not free. 
The technical expertise required for IT start-ups will only be transferred by investors if they are compensated. 
Still, even if governments do everything right, the benefits of ICTs for low-income countries are limited and difficult to predict. 
Right now, IT exports offer the most promise. 
High Tech provides 28% of East Asian and Pacific regional exports. 
The average level of high tech exports for all of South Asia is 4% with India topping 10%. 
India’s software exports, indeed, exceeded $4 billion in 2000, about 9% of India’s total exports. 
In Latin America and the Caribbean, high tech exports amount to 12% of manufactured exports. 
Fueled by microchip exports (38% of the total), Costa Rica’s economy grew 8.3% in 1999, the highest in Latin America. 
Domestic demand in developing and postcommunist countries lags behind because people are usually too poor to buy IT goods and services. 
Constraining demand even more is the fact that businesses in poor countries only need IT when they have educated workforces, which most poor country firms neither have nor need. 
To change all this, spending on education must change. 
In high-income countries public expenditure on education reached 5.4% of GDP in 1997, in middle income countries it was 4.8%, but only 3.3% in low income countries, and only 2.2% in Mali. 
India, which spends 3.2% of GDP on education, ranks lower than the average in Sub-Saharan Africa. 
Public spending, moreover, on education is often regressive. 
In Nepal, the richest quintile receives four times as much public education spending as the poorest quintile. 
Skills, including literacy, as well as infrastructure, will also hold the IT revolution back. 
The illiteracy rate is 68% in Central African Republic, 57% in India, 16% in South Africa. 
In Africa, there are 14 million telephone lines, a figure roughly comparable to that of any of the world’s major cities. 
The Internet is of no benefit if you can’t get online. 
To assure positive outcomes from ICT investment, policymakers should focus on integrated development, telecommunications infrastructure, and education as the foundation for gradual technology transfer. 
Privacy laws, taxation and openness are as important for the development of the Internet as for every other aspect of development. 
Institutional and political failures will limit the capacity of developing countries to benefit from investments in technology in the same measure as developed countries, even when they actually acquire computers in optimal numbers. 
Because of a lack of empirical evidence, it is too early to say that these obstacles are binding constraints. 
But it is clear that IT will deliver benefits only if sound development strategies are pursued. 
The failure of other ‘magic bullet’ cures for development should make everyone pause before placing unbounded faith in what the Internet can deliver. 

 

The Digital War on Poverty 
NEW YORK – The digital divide is beginning to close. 
The flow of digital information – through mobile phones, text messaging, and the Internet – is now reaching the world’s masses, even in the poorest countries, bringing with it a revolution in economics, politics, and society. 
Extreme poverty is almost synonymous with extreme isolation, especially rural isolation. 
But mobile phones and wireless Internet end isolation, and will therefore prove to be the most transformative technology of economic development of our time. 
The digital divide is ending not through a burst of civic responsibility, but mainly through market forces. 
Mobile phone technology is so powerful, and costs so little per unit of data transmission, that it has proved possible to sell mobile phone access to the poor. 
There are now more than 3.3 billion subscribers in the world, roughly one for every two people on the planet. 
Moreover, market penetration in poor countries is rising sharply. 
India has around 300 million subscribers, with subscriptions rising by a stunning eight million or more per month. 
Brazil now has more than 130 million subscribers, and Indonesia has roughly 120 million. 
In Africa, which contains the world’s poorest countries, the market is soaring, with more than 280 million subscribers. 
Mobile phones are now ubiquitous in villages as well as cities. 
If an individual does not have a cell phone, they almost surely know someone who does. 
Probably a significant majority of Africans have at least emergency access to a cell phone, either their own, a neighbor’s, or one at a commercial kiosk. 
Even more remarkable is the continuing “convergence” of digital information: wireless systems increasingly link mobile phones with the Internet, personal computers, and information services of all kinds. 
The array of benefits is stunning. 
The rural poor in more and more of the world now have access to wireless banking and payments systems, such as Kenya’s famous M-PESA system, which allows money transfers through the phone. 
The information carried on the new networks spans public health, medical care, education, banking, commerce, and entertainment, in addition to communications among family and friends. 
India, home to world-leading software engineers, high-tech companies, and a vast and densely populated rural economy of some 700 million poor people in need of connectivity of all kinds, has naturally been a pioneer of digital-led economic development. 
Government and business have increasingly teamed up in public-private partnerships to provide crucial services on the digital network. 
In the Indian states of Andhra Pradesh and Gujarat, for example, emergency ambulance services are now within reach of tens of millions of people, supported by cell phones, sophisticated computer systems, and increased public investments in rural health. 
Several large-scale telemedicine systems are now providing primary health and even cardiac care to rural populations. 
Moreover, India’s new rural employment guarantee scheme, just two years old, is not only employing millions of the poorest through public financing, but also is bringing tens of millions of them into the formal banking system, building on India’s digital networks. 
On the fully commercial side, the mobile revolution is creating a logistics revolution in farm-to-retail marketing. 
Farmers and food retailers can connect directly through mobile phones and distribution hubs, enabling farmers to sell their crops at higher “farm-gate” prices and without delay, while buyers can move those crops to markets with minimum spoilage and lower prices for final consumers. 
The strengthening of the value chain not only raises farmers’ incomes, but also empowers crop diversification and farm upgrading more generally. 
Similarly, world-leading software firms are bringing information technology jobs, including business process outsourcing, right into the villages through digital networks. 
Education will be similarly transformed. 
Throughout the world, schools at all levels will go global, joining together in worldwide digital education networks. 
Children in the United States will learn about Africa, China, and India not only from books and videos, but also through direct links across classrooms in different parts of the world. 
Students will share ideas through live chats, shared curricula, joint projects, and videos, photos, and text sent over the digital network. 
Universities, too, will have global classes, with students joining lectures, discussion groups, and research teams from a dozen or more universities at a time. 
This past year, my own university – Columbia University in New York City – teamed up with universities in Ecuador, Nigeria, the United Kingdom, France, Ethiopia, Malaysia, India, Canada, Singapore, and China in a “Global Classroom” that simultaneously connected hundreds of students on more than a dozen campuses in an exciting course on global sustainable development. 
In my book The End of Poverty , I wrote that extreme poverty can be ended by the year 2025. 
A rash predication, perhaps, given global violence, climate change, and threats to food, energy, and water supplies. 
But digital information technologies, if deployed cooperatively and globally, will be our most important new tools, because they will enable us to join together globally in markets, social networks, and cooperative efforts to solve our common problems. 

The Dilemma of Curiosity and Its Use 
Albert Einstein once said, “I have no special gift, but I am passionately curious.” 
Certainly, Einstein was being tremendously modest. 
But, just as certainly, curiosity is a powerful driving force in scientific discovery. 
Indeed, along with talent and interest, as well as mathematical or other quantitative abilities, curiosity is a necessary characteristic of any successful scientist. 
Curiosity betrays emotional passion. 
It is a state of being involuntarily gripped by something that is difficult to ward off and for which, since one cannot act otherwise, one is accountable only in a limited sense. 
We all come into the world curious, equipped with the psychological drive to explore the world and to expand the terrain that we think we master. 
It is no coincidence that a well-known book on developmental psychology bears the title The Scientist in the Crib, a work that traces the parallels between small children’s behavior and the processes and research strategies that are usual in science. 
But the urge for knowledge that drives inborn curiosity to transcend given horizons does not remain uncurbed. 
Parents can tell many a tale about how, with the beginning of school, their children’s playful approach suddenly changes, as they must now focus on objects dictated by the curriculum. 
Likewise, however desirable its ability to produce the unexpected and unforeseeable, science today cannot claim that it is not accountable to society. 
Curiosity is insatiable and, in research, it is inextricably tied to the unforeseeability of results. 
Research is an endless process, with a destination that no one can predict precisely. 
The more that unexpected results, brought forth by research in the laboratory, are a precondition for further innovations, the more pressure there is to bring the production of knowledge under control, to direct research in specific directions, and to tame scientific curiosity. 
But curiosity must not be limited too severely, lest science’s ability to produce new knowledge be lost. 
This dilemma is at the center of many policy debates surrounding scientific research. 
To be sure, not everything that arouses scientific curiosity is controversial; in fact, most scientific research is not. 
Still, the dilemma is obvious in pioneering fields like biomedicine, nanotechnology, and neurosciences. 
Research in these areas sometimes meets with vehement rejection, for example, on religious grounds with respect to stem-cell research, or owing to fear with respect to the possibility of altering human identity. 
Curiosity implies a certain immoderation, a certain necessary excess. 
That is precisely what makes it a passion: it is amoral and follows its own laws, which is why society insists on taming it in various ways. 
Private investment in research directs curiosity onto paths where new scientific breakthroughs promise high economic potential. 
Politicians expect research to function as a motor of economic growth. 
Ethics commissions want to establish limits on research, even if these require frequent re-negotiation. 
The demand for more democratic input, finally, also seeks to influence research priorities. 
These considerations must be borne in all efforts to support basic research. 
In Europe, the establishment of the European Research Council (ERC) is entering a decisive phase, with crucial implications concerning the role we are prepared to concede to scientific curiosity. 
For the first time, support for basic research is being made possible on the EU level. 
Individual teams are to enter a pan-European competition to determine the best of the best, opening a free space for scientific curiosity and enabling the unforeseeable outcomes that are characteristic of cutting-edge research. 
The dilemma – and it is a decisive one – is that today we cherish the passionate curiosity of an Albert Einstein. 
But we still want to control the unforeseeable consequences to which curiosity leads. 
The dilemma must be overcome by allowing curiosity to be protected and supported, while trying to capture those of its fruits that will benefit society. 
How we accomplish this must be continuously negotiated in the public sphere. 
Irreducible contradictions will remain, and therein lie the ambivalence that characterizes modern societies’ stance toward science. 

The Dilemma of Multiculturalism 
Many people have suddenly become very hesitant about using the term “multicultural society.” 
Or they hesitate to use it approvingly, as a desirable ideal that social reality should at least approximate. 
July’s terrorist attacks in London demonstrated both the strength and the weakness of the concept. 
London is certainly a multicultural metropolis. 
An indiscriminate attack such as a bomb in the Underground will necessarily hit people of many cultural backgrounds and beliefs. 
Sitting, or more likely standing, in the “tube” (as London’s Underground is affectionately known), one never ceases to be amazed at the ease with which Jewish mothers and Muslim men, West Indian youngsters and South Asian businessmen, and many others endure the same stressful conditions and try to lighten its impact by being civil to one another. 
The terror attacks demonstrated not only how particular people helped each other, but also how the whole city, with all the ingredients of its human mixture, displayed a common spirit of resilience. 
This is the positive side of a multicultural society. 
Careful observers have always noted that it is strictly confined to the public sphere, to life in those parts of the city that are shared by all. 
It does not extend in quite the same way to people’s homes, let alone to their ways of life in the private sphere. 
This is one reason why London has experienced the other, darker side of the multicultural society: the veneer of multiculturalism is thin. 
It does not take much to turn people of one group against those of others with whom they had apparently lived in peace. 
We know this because it lies at the core of the murderous environment that gripped the Balkans in the 1990’s. For decades (and in some cases much longer), Serbs and Croats, – indeed, Orthodox, Catholic, and Muslim “Yugoslavs” – had lived together as neighbors. 
Few thought it possible that they would turn against each other in a bloodletting of such brutal enormity that it is very unlikely that Bosnia-Herzegovina can ever become a successful multicultural society. 
Yet it happened, and in a different way it is happening now in Britain. 
It is important to recognize that we are not talking about the return of age-old hostilities. 
Ethnic and cultural conflicts today, often in the form of terrorism, are not the eruption of a supposedly extinct volcano. 
They are, on the contrary, a specifically modern phenomenon. 
For the terrorists themselves, such conflicts are one consequence of the unsettling effects of modernization. 
Beneath the veneer of integration into a multicultural environment, many people – especially young men with an immigrant background – are lost in the world of contradictions around them. 
Their seamless, all-embracing world of tradition is gone, but they are not yet confident citizens of the modern, individualistic world. 
The question is not primarily one of employment, or even poverty, but of marginalization and alienation, of the lack of a sense of belonging. 
It is in such circumstances that the key feature of terrorism comes into play: the preaching of hate by often self-appointed leaders. 
They are not necessarily religious leaders; in the Balkans and elsewhere, they are nationalists who preach the superiority of one nationality over others. 
But to call these hate-mongers “preachers” is fitting nonetheless, because they invariably appeal to higher values to sanctify criminal acts. 
The mobilization of criminal energies by such preachers of hate is itself a modern phenomenon. 
It is a far cry even from such doubtful claims as the self-determination of peoples defined as ethnic communities. 
Hate preachers use highly modern methods to enhance their personal power and to create havoc around them. 
But countering them does not involve warfare, or even a rhetorically looser “war on terror.” 
Of course, part of the answer is to identify the relatively small number of people who are prepared to use their lives to destroy the lives of others without distinction or purpose. 
But the more important issue is to identify the preachers of hate and stop their murderous incitement. 
This is why it is so important to capture and prosecute Radovan Karadzic, who spurred on the homicidal rage of so many Bosnian Serbs. 
And this is why militant Islamist preachers must be stopped. 
Beyond this carefully targeted – and, in principle, limited – task, there remains the need to strengthen the sphere of common values and cooperation in societies that will, after all, remain multicultural. 
This will be difficult, and it must not be approached naively. 
Differences will not – and need not – go away; but ensuring that all citizens can rely on each other requires us to find a way to extend and bolster the civic trust that we see in the public sphere. 

The Disappearance of Europe 
BRUSSELS – What will it mean to be European 25 years from now? 
Unlike the United States, whose history as a “melting pot” has given Americans a truly multi-ethnic character, native Europeans are becoming an endangered species. 
Europe badly needs immigrants, yet is not culturally prepared to welcome them. 
The coming decades will therefore see substantially greater social change in Europe than elsewhere, although the nature of that change is far from clear. 
At first glance, much of Europe’s current debate is about political and economic integration – about how far its nation states should go in pooling resources and sovereign powers in the European Union. 
But beneath the surface, the real tensions are about immigration and fears that national “cultures” are threatened by the influx of non-natives, both white and non-white. 
Immigration in Europe today is running at a higher rate than in the US, with almost two million people arriving officially every year, together with an unknown number of illegal immigrants. 
The most conservative estimate, by Eurostat, the EU’s statistical agency, puts the total number of newcomers to Europe between now and 2050 at 40 million. 
Inevitably, that sort of influx will ensure that Europe’s already vociferous right-wing extremist politicians win even greater support. 
The specter of rising racial tensions is worrying enough. 
But it is just one aspect of Europe’s urgent need to import people from Africa and Asia. 
Europeans will also see the dismantling of their welfare states and social security systems; the cherished “European model” of pensions, healthcare, and unemployment benefits risks being replaced by the despised and widely feared “American model.” This is not, needless to say, because Europeans crave the rigors of America’s less cosseted social conditions, but because it’s the only way that European governments will be able to stay afloat financially. 
The root cause of all these developments is Europe’s population shrinkage. 
The “demographic time bomb” that economic analysts have been discussing for a decade or more is now exploding. 
The result is widespread labor shortages in many EU countries and an alarming reduction in the proportion of working-age people whose taxes pay the pensions and medical costs of those who have retired. 
Many countries have themselves aggravated the problem, either by encouraging early retirement or – as with France – through job-creation nostrums like the 35-hour working week. 
About one-third of male workers in Europe quit their jobs by their early fifties. 
That, together with two generations in which birth rates across Europe have dropped well below the two-children-per-couple replacement rate, and what the European Commission describes as “spectacular” increases in longevity, means that by 2050, instead of four workers supporting each retiree, there will be only two. 
In short, European policymakers are in an impossible position. 
The political mindset in most EU countries remains firmly focused on unemployment as the chief ill to be cured, whereas the real threat is the worsening shortage of people to fill job vacancies. 
The European Commission has warned that this will put a lower ceiling on GDP growth rates. 
According to Klaus Regling, the Commission’s Director-General for Economic and Financial Affairs, Europe’s working population has so shrunk that from 2010 onward maximum annual economic growth in western Europe will drop to 1.8%, from an average of 2.3% in recent years, and to just 1.3% a year from 2030. 
Economic stagnation on this scale has alarming implications, because it means less and less tax revenues to fund all the reform projects and infrastructural investments Europe badly needs to regain its productivity and high-tech competitive edge. 
And if things look bad for Western Europe, they’re worse for the EU’s formerly communist newcomers, whose demographic trends imply that average potential growth will nosedive from today’s healthy 4.3% per year to just 0.9% after 2030. 
Much of Europe already suffers from under-performing labor markets in which job seekers and would-be employers either can’t or won’t find one another. 
Stubbornly high youth unemployment, along with Europe’s dwindling numbers of school-leavers, is already canceling out the positive effects of immigration. 
Here in Brussels, where the largely North African immigrant population comprises a quarter of the city’s inhabitants, hotels and restaurants recently resorted to an emergency on-line recruitment service to counter their worsening staff shortages. 
The manpower crisis is even more acute in sectors that demand greater skills and qualifications. 
Like the US, Europe’s manpower-related difficulties are accentuated by the rise of India and China. 

The Disappearing Sky 
Some months ago, an American astronaut accidentally let a tool escape into orbit, eliciting concern about its hazardous potential as a hurtling object that could destroy an expensive satellite or even threaten lives aloft. 
Shortly afterwards, China blew up one of its satellites, immediately doubling the type of fine orbiting debris that is dangerous because it is hard to track. 
Once again the world became aware of the strange situation emerging in our skies. 
The sky is a unique domain, and one that is inadequately regulated. 
With the advent of global pollutions and technologies, remedying this is becoming an increasingly urgent problem. 
In most cases, the laws for skies mirror those governing the world’s oceans. 
Oceans belong to everyone except those near landmasses, which are managed in a similar manner to the country's land-bound borders. 
As a result, the sky is usually conceptualized in terms of traffic. 
Airliners and fighter planes operate in “controlled” air close to the ground, while nationality is supposed to matter less the higher you go. 
Fragile treaties that cover this are enforced mostly by the fact that few nations can afford to place assets that high. 
But lately, more complex problems are beginning to arise from humanity’s sharing the atmosphere. 
Carbon and fluorocarbons affect everyone’s children. 
When Chernobyl exploded, it was not Ukraine alone that inherited generations of radioactive effects. 
Soon nations will colonize the moon, giving rise to the same unsatisfactory and tentative situation we have in Antarctica, where nations essentially take without legally owning. 
A more enlightened approach to shared resources is needed, one less dependent on neo-colonial control. 
Some suggest that sky governance follow the precedent set by the electromagnetic spectrum. 
The “airwaves” are used for a variety of communications, including government use and public access like radio. 
The range of usable territory – the spectrum – is administered by governments as though it were real estate, and is broken up according to wavelength, with an amount apportioned for cell phones, other bits for military pilots, and so on. 
This situation would be disastrous if it could not be closely managed, because people would broadcast on top of one another. 
Soon, we will see the spectrum become even more active, with the merger of cell phone infrastructure and the relatively unregulated Internet. 
This will likely be followed by more sophisticated means of communications based on access to the air. 
To some extent, everyone will benefit from this, because governments will be less able to censor information. 
But would it be a better model of atmospheric administration? 
Perhaps not. 
The problem is that at least some electromagnetic waves are dangerous. 
Consider this: at any given moment, the average citizen in the developed world has billions of messages passing through his or her brain. 
It can be shown that cells are able to detect these messages, but the extent to which they affect the body is unknown. 
However, it is known that bees are dying in the northern hemisphere. 
This is a major concern because so much food depends on bees for pollination. 
The primary causes of this recent epidemic are germs and mites, but these have always been with us. 
So why are they affecting bees now? 
A German study suggests that the proliferation of cell phone towers is weakening bees’ immune systems (the study correlates towers and signal strength to bee deaths). 
The jury is still out, but it may be that there is no safe level of exposure to many common radiations; the more we are exposed, the more damage we do. 
We would see the result of this in indirect effects, such as growing rates of asthma and hyperactivity in children. 
So perhaps the problem with existing regulatory models lies in the assumption that the entire atmosphere is available for unconstrained use. 
We have an intuitive understanding of the importance of limits when the loss of our sky is articulated in poetic terms. 
As light pollution covers more of the planet, we are losing one of our oldest connections to nature: the ancient ability to gaze at the stars. 
If dying bees do not inspire formal guidelines about how the sky should be shared, let us hope that empty space will. 
The sky must belong to the people. 
Abuse of it harms everyone, and profits from its use should benefit all as well, implying the need to establish worldwide democratic rights over what is an unarguably universal resource. 

The Discreet Terror of Fidel Castro 
This spring marks the third anniversary of the wave of repression in which Fidel Castro’s regime arrested and handed down long sentences to 75 leading Cuban dissidents. 
Soon afterwards, many friends and I formed the International Committee for Democracy in Cuba. 
The bravery of those who found their social conscience, overcame fear, and stood up to communist dictatorship remains fresh in my memory. 
It reminds me of the jingle of keys that rang out on Prague’s Wenceslas Square -- and later around the rest of what was then Czechoslovakia -- in the autumn of 1989. 
This is why I rang keys during the conference calling for democracy in Cuba that our committee held in Prague three years ago. 
I wanted to draw the international community’s attention to the human-rights situation in Cuba, to support that country’s opposition, and to encourage all pro-democratic forces. 
The European Union then introduced diplomatic sanctions, albeit mostly symbolic, against Castro’s regime. 
Soon after, however, a contrary position came to the fore. 
The EU opened a dialogue with the Cuban regime, sanctions were conditionally suspended, and it was even made clear to dissidents that they were not welcome at the embassies of several democratic countries. 
Cowardly compromise and political alibis – as so often in history – defeated a principled position. 
In return, the Cuban regime made a sham gesture by releasing a small number of the prisoners of conscience – mostly those who were tortured and seriously ill – who the regime most feared would die in its notorious prisons. 
Those of us who live in Europe’s new post-communist democracies experienced similar political deals when we lived behind the former Iron Curtain. 
We are also extremely familiar with the argument that European policies have not led to any mass arrests in Cuba. 
But democracy has shown weakness and the Cuban regime has in turn adapted its tactics. 
Respected organizations like Reporters without Borders and Amnesty International have collected ample evidence of violence and intimidation against freethinking Cubans, who can expect a different kind of ring than that from jangling keys. 
Their cases often do not end in courts but in hospitals. 
Groups of “fighters for the revolution” – in reality, the Cuban secret police – brutally attack their political opponents and accuse them of absurd crimes in an effort to intimidate them or to force them to emigrate. 
On the island, such planned harassments are called “actos de repudio” – “acts of rejection.” 
Political violence that creates the impression of mere street crime is never easy to prove, unlike jail terms of several years, and therefore it does not receive due attention from the world. 
However, thousands of former political prisoners in central and eastern Europe can attest to the fact that a kick from a secret policeman on the street hurts just as much as a kick from a warden behind prison gates. 
The powerlessness of the victim of state-organized street fights and threats against his family is experienced in the same way as the powerlessness of somebody harassed during a state security investigation. 
Many European politicians who have sought to see the situation on the ground have been barred in recent years. 
Some Europeans apparently regard Cuba as a faraway country whose fate they need take no interest in, because they have problems of their own. 
But what Cubans are enduring today is part of our own European history. 
Who better than Europeans, who brought communism to life, exported it to the world, and then paid dearly for it over many decades, know better about the torments inflicted upon the Cuban people? 
Humanity will pay the price for communism until such a time as we learn to stand up to it with all political responsibility and decisiveness. 
We have many opportunities to do so in Europe and Cuba. 
And it is no surprise that the new member countries of the EU have brought to Europe fresh historical experience, and with it far less understanding for and tolerance of concession and compromise. 
Representatives of the EU’s member states will meet in Brussels in mid-June to review a common policy towards Cuba. 
European diplomats should weigh up the consequences of accommodating Castro’s regime. 
They should show that they will neither ignore his practices nor neglect the suffering of Cuban prisoners of conscience. 
We must never forget the seemingly anonymous victims of Castro’s “acts of rejection.” 

The Diseases of Global Warming 
Today few scientists doubt that Earth's atmosphere is warming. 
Most also agree that the rate of heating is accelerating and that the consequences could become increasingly disruptive. 
Even schoolchildren can recite some projected outcomes: oceans will warm and glaciers will melt, causing sea levels to rise and salt water to inundate low-lying coastal areas. 
Regions suitable for farming will shift. 
But less familiar effects of global warming--namely, serious human medical disorders--are no less worrisome. 
Many are already upon us. 
Most directly, global warming is projected to double the number of deaths related to heat waves by 2020. 
Prolonged heat can increase smog and the dispersal of allergens, causing respiratory symptoms. 
Global warming also boosts the frequency and intensity of floods and droughts. 
Such disasters not only cause death by drowning or starvation, but also damage crops and make them vulnerable to infection and infestations by pests and choking weeds, thereby contributing to food shortages and malnutrition. 
They displace entire populations, leading to overcrowding and associated diseases, such as tuberculosis. 
Developing countries--where resources to prevent and treat infectious diseases are scarce--are most vulnerable to other infectious diseases associated with climate change as well. 
But advanced nations, too, can fall victim to surprise attack--as happened last year when the first outbreak of West Nile virus in North America killed seven New Yorkers. 
International commerce and travel enable infectious diseases to strike continents away from their sources. 
Of course, not all the human health consequences of global warming may be bad. 
Very high temperatures in hot regions may reduce snail populations, which have a role in transmitting schistosomiasis, a parasitic disease. 
High winds--caused by parching of the earth's surface--may disperse pollution. 
Warmer winters in normally chilly areas may reduce cold-related heart attacks and respiratory ailments. 
Overall, however, the undesirable effects of more variable and extreme weather are likely to overshadow any benefits. 
Diseases relayed by mosquitoes--malaria, dengue fever, yellow fever, and several kinds of encephalitis--are eliciting particularly grave concern as the world warms. 
These disorders are projected to become increasingly prevalent because cold weather limits mosquitoes to seasons and regions with certain minimum temperatures. 
Extreme heat also limits mosquito survival. 
But within their survivable range of temperatures, mosquitoes proliferate faster and bite more as the air becomes warmer. 
Greater heat also speeds the rate at which pathogens inside them reproduce and mature. 
The immature malaria parasite takes 26 days to develop fully at 68 degrees F, but only 13 days at 77 degrees F. The Anopheles mosquitoes that spread malaria live only several weeks, so warmer temperatures enable more parasites to mature in time for the mosquitoes to transfer the infection. 
As whole areas heat up, mosquitoes enter formerly forbidden territories, bringing illness with them, while causing more disease for longer periods in the areas they already inhabit. 
Malaria has already returned to the Korean peninsula, and parts of the US, southern Europe and the former Soviet Union have experienced small outbreaks. 
Some models project that by the end of this century, the zone of potential malaria transmission will contain about 60% of the world's population, up from 45% now. 
Similarly, Dengue (or "breakbone") fever--a severe flu-like viral illness that can cause fatal internal bleeding--has broadened its range in the Americas over the past 10 years, reaching down to Buenos Aires by the end of the 1990's. 
(It has also found its way to northern Australia.) 
Today it afflicts an estimated 50-100 million people in the tropics and subtropics. 
These outbreaks, of course, cannot be traced conclusively to global warming. 
Other factors--declines in mosquito-control and other public health programs, or rising drug and pesticide resistance--could be involved. 
But the case for a climatic cause becomes stronger when outbreaks coincide with other projected consequences of global warming. 
Such is the case in the world's highlands. 
In the 19th century, European colonists in Africa settled in the cooler mountains to escape the dangerous swamp air (" mal aria ") in the lowlands. 
Today many of those havens are compromised. 
As anticipated, warmth is climbing up many mountains. 
Since 1970, the elevation at which temperatures are always below freezing has ascended almost 500 feet in the tropics. 
Insect-borne infections are being reported at high elevations in South and Central America, Asia, and east and central Africa. 
More droughts and floods due to global warming will also probably fuel outbreaks of water-borne diseases. 
Paradoxically, droughts can favor water-borne diseases--including cholera, a cause of severe diarrhea--by wiping out supplies of safe drinking water, concentrating contaminants, and preventing good hygiene. 
Lack of clean water also limits safe rehydration of diarrhea or fever sufferers. 
Floods, meanwhile, wash sewage and fertilizer into water supplies, triggering expansive blooms of harmful algae that are either directly toxic to humans, or contaminate the fish and shellfish that humans consume. 
The human health toll taken by global warming will depend to a large extent on us. 
Effective surveillance of climate conditions and of the emergence or resurgence of infectious diseases (or their carriers) should be a global priority, as should providing preventive measures and treatments to at-risk populations. 
But we must also limit human activities that contribute to atmospheric heating, or that exacerbate its effects. 
Little doubt remains that burning fossil fuels contributes to global warming by spewing carbon dioxide and other heat-absorbing, or "greenhouse," gases into the air. 
Analysis of tree rings identifies fossil fuels as the source of the 30% increase in greenhouse gases over pre-industrial levels. 
Cleaner energy sources must be adopted, while forests and wetlands must be preserved and restored to absorb carbon dioxide, and to absorb floodwaters and filter contaminants before they reach water supplies. 
None of this will come cheap. 
But humanity will pay a far dearer price for inaction. 

The Diseases of Globalization 
Globalization is under strain as never before. 
Everywhere its stresses rumble. 
Most of sub-Saharan Africa, South America, the Middle East, and Central Asia are mired in stagnation or economic decline. 
North America, Western Europe, and Japan are bogged down in slow growth and risk renewed recession. 
War now beckons in Iraq. 
For advocates of open markets and free trade this experience poses major challenges. 
Why is globalization so at risk? 
Why are its benefits seemingly concentrated in a few locations? 
Can a more balanced globalization be achieved? 
No easy answers to these questions exist. 
Open markets are necessary for economic growth, but they are hardly sufficient. 
Some regions of the world have done extremely well from globalization - notably East Asia and China in recent years. 
Yet some regions have done miserably, especially sub-Saharan Africa. 
The US Government pretends that most problems in poor countries are of their own making. 
Africa's slow growth, say American leaders, is caused by Africa's poor governance. 
Life, however, is more complicated than the Bush Administration believes. 
Consider Africa's best governed countries - Ghana, Tanzania, Malawi, Gambia. 
Each experienced falling living standards over the past two decades while many countries in Asia that rank lower on international comparisons of governance - Pakistan, Bangladesh, Myanmar and Sri Lanka - experienced better economic growth. 
The truth is that economic performance is determined not only by governance standards, but by geopolitics, geography, and economic structure. 
Countries with large populations, and hence large internal markets, tend to grow more rapidly than countries with small populations. 
(Like all such economic tendencies, there are counterexamples). 
Coastal countries tend to outperform landlocked countries. 
Countries with high levels of malaria tend to endure slower growth than countries with lower levels of malaria. 
Developing countries that neighbor rich markets, such as Mexico, tend to outperform countries far away from major markets. 
These differences matter. 
If rich countries don't pay heed to such structural issues, we will find that the gaps between the world's winners and losers will continue to widen. 
If rich countries blame unlucky countries - claiming that they are somehow culturally or politically unfit to benefit from globalization - we will create not only deeper pockets of poverty but also deepening unrest. This, in turn, will result in increasing levels of violence, backlash, and yes, terrorism. 
So it's time for a more serious approach to globalization than rich countries, especially America, offer. 
It should begin with the most urgent task - meeting the basic needs of the world's poorest peoples. 
In some cases their suffering can be alleviated mainly through better governance within their countries. 
But in others, an honest look at the evidence will reveal that the basic causes are disease, climatic instability, poor soils, distances from markets, and so forth. 
An honest appraisal would further show that the poorest countries are unable to raise sufficient funds to solve such problems on their own. 
Rather than rich countries giving more lectures about poor governance, real solutions will require that rich countries give sufficient financial assistance to overcome the deeper barriers. 
One illustration makes the case vividly. 
Controlling disease requires a health system that can deliver life-saving medications and basic preventive services such as bed-nets to fight malaria and vitamins to fight nutritional deficiencies. 
Such a system costs, at the least, around $40 per person per year. 
That's a tiny amount of money for rich countries, which routinely spend over $2000 per person per year for health, but it is a sum out of reach for poor countries like Malawi, with annual incomes of $200 per person. 
A functioning health system would cost more than its entire government revenue! 
Even if Malawi is well governed, its people will die of disease in large numbers unless Malawi receives adequate assistance. 
Successful globalization requires that we think more like doctors and less like preachers. 
Rather than castigating the poor for their "sins," we should make careful diagnoses, as a good doctor would, for each country and region - to understand the fundamental factors that retard economic growth and development. 
In some regions, such as the Andes and Central Asia, the problem is primarily geographical isolation. 
Here the task is to build roads, air links, and internet connectivity to help these distant regions create productive ties with the world. 
Rich countries must help finance these projects. 
In sub-Saharan Africa, the basic challenges are disease control, soil fertility, and expanded educational opportunities. 
Once again, greater foreign assistance will be needed. 
In still other regions, the main problems may be water scarcity, discrimination against women or other groups, or one of a variety of specific problems. 
It is past time to take globalization's complexities seriously. 
The one-size-fits-all ideology of the Washington Consensus is finished. 
As we stand at the brink of war, it is urgent that the hard job of making globalization work for all gets started. 
This can be done, if we remove the ideological blinkers of the rich, and mobilize a partnership between rich and poor. 
Our common future depends on it. 

The Dismal Economist’s Joyless Triumph 
NEW YORK – I have long been forecasting that it was only a matter of time before America’s housing bubble – which began in the early days of this decade, supported by a flood of liquidity and lax regulation – would pop. 
The longer the bubble expanded, the larger the explosion and the greater (and more global) the resulting downturn would be.ampnbsp; 
Economists are good at identifying underlying forces, but they are not so good at timing. 
The dynamics are, however, much as anticipated. 
America is still on a downward trajectory for 2009 – with grave consequences for the world as a whole. 
For example, as their tax revenues plummet, state and local governments are in the process of cutting back their expenditures. 
American exports are about to decline. 
Consumer spending is plummeting, as expected. 
There has been an enormous decrease in (perceived) wealth, in the trillions, with the decline in house and stock prices. 
Besides, most Americans were living beyond their means, using their houses, with their bloated values, as collateral. 
That game is up.ampnbsp; 
America would be facing these problems even if it were not simultaneously facing a financial crisis. 
America’s economy had been supercharged by excessive leveraging; now comes the painful process of deleveraging. 
Excessive leveraging, combined with bad lending and risky derivatives, has caused credit markets to freeze. 
After all, when banks don’t know their own balance sheets, they aren’t about to trust others’.ampnbsp; 
The Bush administration didn’t see the problems coming, denied that they were problems when they came, then minimized their significance, and, finally, panicked. 
Guided by one of the architects of the problem, Hank Paulson, who had advocated for deregulation and allowing banks to take on even more leveraging, it was no surprise that the administration veered from one policy to another – each strategy supported with absolute conviction, until minutes before it was abandoned for another. 
Even if confidence really were all that mattered, the economy would have sunk. 
Moreover, what little action has been taken has been aimed at shoring up the financial system. 
But the financial crisis is only one of several crises facing the country: the underlying macroeconomic problem has been made worse by the sinking fortunes of the bottom half of the population. 
Those who would spend don’t have the money, and those with the money aren’t spending. 
America, and the world, is also facing a major structural problem, not unlike that at the beginning of the last century, when productivity increases in agriculture meant that a rapidly declining share of the population could find work there. 
Nowadays, increases in manufacturing productivity are even more impressive than they were for agriculture a century ago; but that means the adjustments that must be made are all the greater. 
Not long ago, there was discussion of the dangers of a disorderly unwinding of the global economy’s massive imbalances. 
What we are seeing today is part of that unwinding. 
But there are equally fundamental changes in the global balances of economic power: the hoards of liquid money to help bail out the world lie in Asia and the Middle East, not in West. 
But global institutions do not reflect these new realities. 
Globalization has meant that we are increasingly interdependent. 
One cannot have a deep and long downturn in the world’s largest economy without global ramifications. 
I had long argued that the notion of decoupling was a myth; the evidence now corroborates that view. 
This is especially so because America has exported not just its recession, but its failed deregulatory philosophy and toxic mortgages, so financial institutions in Europe and elsewhere are also confronting many of the same problems.ampnbsp; 
Many in the developing world have benefited greatly from the last boom, through financial flows, exports, and high commodity prices. 
Now, all of that is being reversed. 
Indeed, it is the ultimate irony that money is now flowing from poor and well-managed economies to the US, the source of the global problems. 
The point of reciting these challenges facing the world is to suggest that, even if Obama and other world leaders do everything right, the US and the global economy are in for a difficult period. 
The question is not only how long the recession will last, but what the economy will look like when it emerges. 
Will it return to robust growth, or will we have an anemic recovery, à la Japan in the 1990’s? 
Right now, I cast my vote for the latter, especially since the huge debt legacy is likely to dampen enthusiasm for the big stimulus that is required. 
Without a sufficiently large stimulus (in excess of 2% of GDP), we will have a vicious negative spiral: a weak economy will mean more bankruptcies, which will push stock prices down and interest rates up, undermine consumer confidence, and weaken banks. 
Consumption and investment will be cut back further. 
Many Wall Street financiers, having received their gobs of cash, are returning to their fiscal religion of low deficits. 
It is remarkable how, having proven their incompetence, they are still revered in some quarters. 
What matters more than deficits is what we do with money; borrowing to finance high-productivity investments in education, technology, or infrastructure strengthens a nation’s balance sheet. 
The financiers, however, will argue for caution: let’s see how the economy does, and if it needs more money, we can give it. 
But a firm that is forced into bankruptcy is not un-bankrupted when a course is reversed. 
The damage is long-lasting.ampnbsp; 
If Obama follows his instinct, pays attention to Main Street rather than Wall Street, and acts boldly, then there is a prospect that the economy will start to emerge from the downturn by late 2009. 
If not, the short-term prospects for America, and the world, are bleak. 

The Dissident and the Mahatma 
NEW DELHI – With the Nobel Peace Prize presented this month in the absence of this year’s laureate, the imprisoned Chinese dissident Liu Xiaobo, it might be wise to think of a man who never won the prize: Mahatma Gandhi. 
Despite that omission, there is no doubting Gandhiji’s worldwide significance – including for Liu. 
The Mahatma’s image now features in advertising campaigns for everything from Apple computers to Mont Blanc pens. 
When Richard Attenborough's film Gandhi swept the Oscars in 1983, posters for the film proclaimed that “Gandhi’s triumph changed the world forever.” 
But did it? 
The case for Gandhi-led global change rests principally on the American civil-rights leader Martin Luther King, Jr., who attended a lecture on Gandhi, bought a half-dozen books about the Mahatma, and adopted satyagraha as both precept and method. 
In leading the struggle to break down segregation in the southern United States, King used non-violence more effectively than anyone else outside India. 
“Hate begets hate. 
Violence begets violence,” he memorably declared. “We must meet the forces of hate with soul force.” 
King later avowed that “the Gandhian method of non-violent resistance...became the guiding light of our movement. 
Christ furnished the spirit and motivation, and Gandhi furnished the method.” 
Last month, Barack Obama told India’s Parliament that were it not for Gandhi, he would not be standing there as America’s president. 
So, yes, Gandhism helped to change America forever. 
But it is difficult to find many other instances of its success. 
India’s independence marked the dawn of the era of decolonization, but many nations threw off the yoke of empire only after bloody and violent struggles. 
Other peoples have since fallen under the boots of invading armies, been dispossessed of their lands, or terrorized into fleeing their homes. 
Non-violence has offered no solutions to them. 
Indeed, non-violence could only work against opponents vulnerable to a loss of moral authority – that is, governments responsive to domestic and international public opinion, and thus capable of being shamed into conceding defeat. 
In Gandhi’s own time, non-violence could have done nothing to prevent the slaughter of Jews in Hitler’s path. 
The power of Gandhian non-violence rests in being able to say, “To show you that you are wrong, I punish myself.” 
But that has little effect on those who are not interested in whether they are wrong and are already seeking to punish you. 
Your willingness to undergo punishment merely expedites their victory. 
No wonder Nelson Mandela, who told me that Gandhi had “always been a great source of inspiration,” explicitly disavowed non-violence as ineffective in South Africans’ struggle against apartheid. 
Indeed, Gandhi can sound frighteningly unrealistic: “The willing sacrifice of the innocent is the most powerful answer to insolent tyranny that has yet been conceived by God or man. 
Disobedience, to be ‘civil,’ must be sincere, respectful, restrained, never defiant, and it must have no ill will or hatred behind it. 
Neither should there be excitement in civil disobedience, which is a preparation for mute suffering.” 
For many around the world who suffer under oppressive regimes, such a credo would sound like a prescription for sainthood – or for impotence. 
Mute suffering is fine as a moral principle, but only Gandhi could use it to bring about meaningful change. 
The sad truth is that the staying power of organized violence is almost always greater than that of non-violence. 
Gandhi believed in “weaning an opponent from error by patience, sympathy, and self-suffering.” 
But, while such an approach may have won Burma’s Aung San Suu Kyi the Nobel that eluded the Mahatma himself, the violence of the Burmese state proved far stronger in preventing change than her suffering has in fomenting it. 
And, as the Mumbai terror attacks of November 2008 demonstrated, India today faces the threat of cross-border terrorism to which the Mahatma’s only answer – a fast in protest – would have left its perpetrators unmoved. 
In his internationalism, the Mahatma expressed ideals that few can reject. 
But the decades since his death have confirmed that there is no escaping the conflicting sovereignties of states. 
Some 20 million lives have been lost in wars and insurrections since Gandhi died. 
In a dismaying number of countries, including his own, India, governments spend more for military purposes than for education and health care combined. 
The current stockpile of nuclear weapons represents more than a million times the explosive power of the bomb whose destruction of Hiroshima so grieved him. 
Outside India, as within it, Gandhian techniques have been perverted by terrorists and bomb-throwers who declare hunger strikes when punished for their crimes. 
Gandhism without moral authority is like Marxism without a proletariat. 
Yet too few who have tried his methods worldwide have had his personal integrity or moral stature. 
None of these misguided or cynical efforts has diluted Gandhi’s greatness, or the extraordinary resonance of his life and his message. 
While the world was disintegrating into fascism, violence, and war, the Mahatma taught the virtues of truth, non-violence, and peace. 
He destroyed the credibility of colonialism by opposing principle to force. 
And he set and attained personal standards of conviction and courage that few will ever match. 
He was that rare kind of leader who was not confined by his followers’ inadequacies. 
Yet Gandhi’s truth was essentially his own. 
He formulated its unique content and determined its application in a specific historical context. 
Inevitably, few in today’s world can measure up to his greatness or aspire to his credo. 
The originality of Gandhi’s thought and the example of his life still inspire people around the world today – as Liu Xiaobo would readily admit. 
But his triumph did not “change the world forever.” 


The Disuniting Kingdom? 
Three hundred years after the first Scottish Parliament voluntarily voted itself out of existence in 1707, the Scottish National Party has won a plurality in the devolved Scottish parliament that is one of Tony Blair’s great legacies. 
Does an SNP-led government herald the break-up of the United Kingdom? 
More broadly, does nationalism, that product of nineteenth-century politics, still have a role to play in Europe? 
The answer to the first question is almost certainly no. 
Nationalist polled only 31.9% of the votes cast with parties supporting the union polling 59.6%. 
Proof positive that proportional representation can produce strange outcomes. 
Back in 1957, the motive for “laying the foundations of an ever closer union of the peoples of Europe” was to make war between European nations obsolete, and, in doing so, to bring internal stability to all European nations. 
For 50 years, the European Union was not much tested by this mission because nationalist impulses were crushed between the two great Cold War alliances. 
With those constraints gone, nationalism in both its Bismarckian state-making and ethnic state-breaking guises has gotten a second wind. 
When people nowadays speak of nationalism, sinister images from another era come to mind. 
But nationalism is, of course, not inevitably violent: it flares into conflict only in places with a flammable legacy. 
The break-up of the Soviet Union and its satellite empire shows that the way to address such a legacy is not to force unhappy peoples to live together in one country. 
It is to recognize that in some places divorce is inevitable, and to ensure that it is as amicable as possible. 
The world could not have prevented Yugoslavia’s spiral into civil war, but it might have made it less cruel by helping to negotiate terms of separation earlier. 
Some suggest that the SNP’s accession to power in Scotland does herald the rebirth of a nation, many others regard that claim as rhetoric which ignores the tremendous advances made in the quality of life, opportunity and living standards. 
If the claim were true it is a rebirth that is coming about in an extraordinary way. 
Except for some odd and hapless individuals, there have been no underground armies, separatist terrorists, campaigns of civil disobedience aimed at unseating governments, or even any mass demonstrations. 
The establishment of a Scottish Parliament vested with powers devolved from the United Kingdom Parliament at Westminster has been perhaps the first revolution of the modern era that was conducted by committees of lawyers, clergymen, and accountants rather than cells of bearded radicals. 
Moreover, it was achieved without a shot being fired. 
So it is not surprising that it has also been a revolution that – unlike that which divided Czechoslovakia 14 years ago – falls well short of achieving full statehood for Scotland. 
The Parliament at Westminster, to which Scots continue to elect MP’s, still controls defense and foreign affairs, macroeconomic policy, taxation, and social security. 
The Scottish Parliament, however, is able to legislate over health services, education, local government, housing, criminal and civil justice, and economic development. 
It can also raise or lower the basic rate of income tax – though by no more than 3% – and levy charges, such as road tolls. 
This semi-independence partly reflects the absence of linguistic motives in Scottish nationalism, unlike the Quebecois of Canada or Flemish nationalism in Belgium. 
Gaelic is spoken by only about 80,000 of Scotland’s 5.1 million inhabitants. 
Nor does religion play a discernible role; while Roman Catholics used to fear independence as being liable to result in Protestant hegemony, today Catholics and Protestants are roughly equal in their support of Scotland’s institutions. 
Moreover, unlike East European or Balkan nationalism, the Scottish variety has little to do with ethnicity or religion. 
Thus, in Scotland today there are none of the conditions that fomented rebellion in Ireland and led to Irish independence in 1922, the last great rupture in the political union of the British Isles. 
Scottish nationalists do look longingly at Ireland, but for its recent phenomenal economic growth. 
For most Scots, however, the Irish experience is not an appealing model – perhaps because it is associated with terrorism. 
They also know that the huge financial assistance which Ireland received form the European Union will never be repeated 
What motivates Scottish nationalism is the strong attachment to Scotland’s civic institutions. 
In this respect, Scotland differs from Wales, which was forcibly incorporated into England more than 400 years before the Scots signed the voluntary Act of Union in 1707. 
Distinctive Welsh institutions, apart from those concerned with the Welsh language, are difficult to identify. 
By contrast, Scotland’s institutional landscape – schools and universities with their own curriculum and exam structures, a legal system with its own codes and rules, a church independent of the state, and a distinctive system of local government – were left untouched by the union. 
Today’s Scottish parliament helps to dissipate Scottish discontents because it is revitalizing those institutions. 
But it is also propelling British politics into a new and unfamiliar decentralized political system. 
Westminster’s writ no longer runs north of the border, at least as far as things like education and health are concerned. 
Equally, it is now far harder for Scots to blame a distant government in London for their problems, although the SNP will now try to make blaming Westminster for all ills even more of an art form. 
So, far from being a harbinger of the break-up of Britain, devolution has brought fresh vitality to national life outside London. 
The new confidence in Edinburgh, which is experiencing an economic boom, is self-evident. 
What is arising is a different Scotland, and a different Britain, and this is Scotland’s lesson for Europe. 
Britain’s highly centralized political culture has been irreversibly changed. 
It is being replaced by a more diverse sort of politics, in which different regional and national identities gain encouragement and expression. 
By cooperating with the rest of the United Kingdom, rather than clashing, Scotland is giving new meaning to the phrase “ever closer union.” 

The Dollar and the Dragon 
CAMBRIDGE – For several years, American officials have pressed China to revalue its currency. 
They complain that the undervalued renminbi represents unfair competition, destroying American jobs, and contributing to the United States’ trade deficit. 
How, then, should US officials respond? 
Just before the recent G-20 meeting in Toronto, China announced a formula that would allow modest renminbi appreciation, but some American Congressmen remain unconvinced, and threaten to increase tariffs on Chinese goods. 
America absorbs Chinese imports, pays China in dollars, and China holds dollars, amassing $2.5 trillion in foreign-exchange reserves, much of it held in US Treasury securities. 
To some observers, this represents a fundamental shift in the global balance of power, because China could bring the US to its knees by threatening to sell its dollars. 
But, if China were to bring the US to it knees, it might bring itself to its ankles in the process. 
China would not only reduce the value of its reserves as the dollar’s value fell, but it would also jeopardize America’s continued willingness to import cheap Chinese goods, which would mean job losses and instability in China. 
Judging whether economic interdependence produces power requires looking at the balance of asymmetries, not just at one side of the equation. 
In this case, interdependence has created a “balance of financial terror” analogous to the Cold War, when the US and the Soviet Union never used their potential to destroy each other in a nuclear exchange. 
In February 2010, angered over American arms sales to Taiwan, a group of senior military officers called for the Chinese government to sell off US government bonds in retaliation. 
Their proposal went unheeded. 
Instead, Yi Gang, China’s director of state administration of foreign exchange, explained that “Chinese investments in US Treasuries are market investment behavior, and we don’t wish to politicize them.” 
Otherwise, the pain would be mutual. 
Nevertheless, this balance does not guarantee stability. 
There is always the danger of actions with unintended consequences, especially as both countries can be expected to maneuver to change the framework and reduce their vulnerabilities. 
For example, after the 2008 financial crisis, while the US pressed China to let its currency appreciate, officials at China’s central bank began arguing that America needed to increase its savings, reduce its deficits, and move toward supplementing the dollar’s role as a reserve currency with IMF-issued special drawing rights. 
But China’s bark was louder than its bite. 
China’s increased financial power may have increased its ability to resist American entreaties, but despite dire predictions, its creditor role has not been sufficient to compel the US to change its policies. 
While China has taken minor measures to slow the increase in its dollar-denominated holdings, it has been unwilling to risk a fully convertible currency for domestic political reasons. 
Thus, the renminbi is unlikely to challenge the dollar’s role as the largest component of world reserves (more than 60%) in the next decade. 
Yet, as China gradually increases domestic consumption rather than relying on exports as its engine of economic growth, its leaders may begin to feel less dependent than they now are on access to the US market as a source of job creation, which is crucial for internal political stability. 
In that case, maintaining a weak renminbi would protect the trade balance from a flood of imports. 
Asymmetries in currency markets are a particularly important aspect of economic power, since they underlie global trade and financial markets. 
By limiting the convertibility of its currency, China is avoiding currency markets’ ability to discipline domestic economic decisions. 
Compare, for example, the discipline that international banks and the IMF were able to impose on Indonesia and South Korea in 1998, with the relative freedom of the US – bestowed by denomination of American debt in dollars – to increase government spending in response to the 2008 financial crisis. 
Indeed, rather than weakening, the dollar has appreciated as investors regard the underlying strength of the US as a safe haven. 
Obviously, a country whose currency represents a significant proportion of world reserves can gain international power from that position, thanks to easier terms for economic adjustment and the ability to influence other countries. 
As French President Charles de Gaulle once complained, “since the dollar is the reference currency everywhere, it can cause others to suffer the effects of its poor management. 
This is not acceptable. 
This cannot last.” 
But it did. 
America’s military and economic strength reinforces confidence in the dollar as a safe haven. 
As a Canadian analyst put it, “the combined effect of an advanced capital market and a strong military machine to defend that market, and other safety measures, such as a strong tradition of property rights protection and a reputation for honoring dues, has made it possible to attract capital with great ease.” 
The G-20 is focusing on the need to “re-balance” financial flows, altering the old pattern of US deficits matching Chinese surpluses. 
This would require politically difficult shifts in consumption and investment, with America increasing its savings and China increasing domestic consumption. 
Such changes do not occur quickly. 
Neither side is in a hurry to break the symmetry of interdependent vulnerability, but both continue to jockey to shape the structure and institutional framework of their market relationship. 
For the sake of the global economy, let us hope that neither side miscalculates. 

The Dollar Hits an Oil Slick 
CAMBRIDGE – The rapid rise in the price of oil and the sharp depreciation of the dollar are two of the most noteworthy developments of the past year. 
The price of oil has increased by 85% over the past 12 months, from $65 a barrel to $120. 
During the same period, the dollar fell by 15% relative to the euro and 12% against the yen. 
To many observers, the combination of a falling dollar and a rise in oil prices appears to be more than a coincidence. 
But what is the link between the two? 
Would the price of oil have increased less if oil were priced in euros instead of dollars? 
Did the dollar’s fall cause the price of oil to rise? 
And how did the rise in the price of oil affect the dollar’s movement? 
Because the oil market is global, with its price in different places virtually identical, the price reflects both total world demand for oil and total supply by all of the oil-producing countries. 
The primary demand for oil is as a transport fuel, with lesser amounts used for heating, energy, and as inputs for petrochemical industries like plastics. 
The increasing demand for oil from all countries, but particularly from rapidly growing emerging-market countries like China and India, has therefore been, and will continue to be, an important force pushing up the global price. 
The thinking behind the question of whether oil would cost less today if it were priced in euros seems to be that, since the dollar has fallen relative to the euro, this would have contained the rise in the price of oil. 
In reality, the currency in which oil is priced would have no significant or sustained effect on the price of oil when translated into dollars, euros, yen, or any other currency. 
Here is why. 
The market is now in equilibrium with the price of oil at $120. 
That translates into 75 euros at the current exchange rate of around $1.60 per euro. 
If it were agreed that oil would instead be priced in euros, the quoted market-equilibrating price would still be 75 euros and therefore $120. 
Any lower price in euros would cause excess global demand for oil, while a price above 75 euros would not create enough demand to absorb all of the oil that producers wanted to sell at that price. 
Of course, the rate of increase of the price of oil in euros during the past year was lower than the rate of increase in dollars. 
The euro price of oil in May 2007 was 48 euros, or 56% below its current price. 
But that would be true even if oil had been priced in euros. 
The coincidence of the dollar decline and the rise in the oil price suggests to many observers that the dollar’s decline caused the rise in the price of oil. 
That is only true to the extent that we think about the price of oil in dollars, since the dollar has fallen relative to other major currencies. 
But if the dollar-euro exchange rate had remained at the same level that it was last May, the dollar price of oil would have increased less. 
The key point here is that the euro price of oil would be the same as it is today. 
And the dollar price of oil would have gone up 56%. 
The only effect of the dollar’s decline is to change the price in dollars relative to the price in euros and other currencies. 
The high and rising price of oil does, however, contribute to the decline of the dollar, because the increasing cost of oil imports widens the United States’ trade deficit. 
In 2007, the US spent $331 billion on oil imports, which was 47% of the US trade deficit of $708 billion dollars. 
If the price of oil had remained at $65 a barrel, the cost of the same volume of imports would have been only $179 billion, and the trade deficit would have been one-fifth lower. 
The dollar is declining because only a more competitive dollar can shrink the US trade deficit to a sustainable level. 
Thus, as rising global demand pushes oil prices higher in the years ahead, it will become more difficult to shrink America’s trade deficit, inducing more rapid dollar depreciation. 

The Dollar’s Last Days? 
CAMBRIDGE – Zhou Xiaochuan, the governor of the People’s Bank of China, recently suggested that replacing the dollar with the International Monetary Fund’s Special Drawing Rights as the dominant reserve currency would bring greater stability to the global financial system. 
The idea of reforming the system by introducing a supranational reserve currency is also, it appears, supported by Russia and other emerging markets. 
And a United Nations advisory committee chaired by the Nobel laureate Joseph Stiglitz has argued for a new global reserve currency, possibly one based on the SDR. 
Transforming the dollar standard into an SDR-based system would be a major break with a policy that has lasted more than 60 years. 
The SDR was introduced 40 years ago to supplement what was then seen as an inadequate level of global reserves, and was subsequently enshrined in the IMF’s amended Articles of Agreement as the future principal reserve asset. 
But the world soon became awash in dollars. 
So, instead of becoming the principal reserve asset of the global system, the proportion of SDRs in global reserves shrank to a tiny fraction, rendering the SDR the monetary equivalent of Esperanto. 
Although the euro, created in 1999, turned out to be a more serious competitor to the dollar, its share in total international reserves has probably remained below 30%, compared to 65% for the dollar (these shares are in part estimates, as China, the world’s largest holder of reserves, does not report the currency composition of its holdings). 
There are two ways in which the dollar’s role in the international monetary system can be reduced. 
One possibility is a gradual, market-determined erosion of the dollar as a reserve currency in favor of the euro. 
But, while the euro’s international role – especially its use in financial markets – has increased since its inception, it is hard to envisage it overtaking the dollar as the dominant reserve currency in the foreseeable future. 
Such an outcome is probably only possible if two conditions are met: first, the United Kingdom joins the euro area, and, second, the United States makes serious, confidence-sapping mistakes. 
The latter condition may already have been partially met, but US policies to stabilize its financial system should help avoid a major dollar slide. 
Moreover, the European Central Bank has repeatedly stated that it neither encourages nor discourages the euro’s international role. 
With the dollar’s hegemony unlikely to be seriously undermined by market forces, at least in the short and medium-term, the only way to bring about a major reduction in its role as a reserve currency is by international agreement. 
The Chinese proposal falls into this category. 
One way to make the SDR the major reserve currency relatively soon would be to create and allocate a massive amount of new SDRs to the IMF’s members. 
While the G-20 leaders have decided to support an SDR allocation of $250 billion, this will increase the share of SDRs in total international reserves to no more than 4%. 
In order to make the SDR the principal reserve asset via the allocation route, close to $3 trillion in SDRs would need to be created, an unrealistic proposition. 
But there is a more realistic way for the SDR’s importance to grow. 
Back in 1980, the IMF came close to adopting a so-called SDR Substitution Account. 
The idea was to permit countries whose official dollar holdings were larger than they were comfortable with to convert dollars into SDRs. 
Conversion would occur outside the market, and thus would not put downward pressure on the dollar. 
Member countries would receive an asset that was more stable than the dollar, as it was based on a basket of currencies, thereby providing better protection against losses. 
The plan fell apart when some major IMF shareholders could not accept the burden-sharing arrangements that would be necessary in case of losses due to exchange-rate movements. 
The US also lost interest in the scheme as the dollar strengthened. 
What are the chances of adopting a scheme of this kind today? 
Is the US prepared to go along with a reform of the international monetary system that reduces the dollar’s role? 
Until recently, I would have considered this unlikely. 
But the changed international climate, and the possibility of a bout of severe dollar weakness, could convince the US to go along with a conversion scheme that would alleviate excessive pressure on the dollar. 
And, apart from possible political considerations, large holders of dollars would find a substitution account attractive as a form of protection against strong fluctuations in the dollar’s value. 
What about possible losses suffered by the Substitution Account? 
This can be dealt with by setting aside part of the IMF’s large gold stock. 
Even if an SDR Substitution Account is established, it is unlikely that the dollar’s share in international reserves would fall to an insignificant level. 
The dollar will remain important for many countries as a vehicle for intervention in foreign-exchange markets, as well as for invoicing and for denominating internationally traded securities. 
But one can envisage a system in which international reserves are held each in roughly equal shares of dollars, euros (assuming a further gradual increase in its share), and SDRs. 
While there are currently other priorities, it would be useful for the IMF to study anew an SDR substitution account and similar schemes. 
If it does not, the debate will take place elsewhere. 

The Dollar’s Long Tail 
NEW DELHI – The ongoing economic crisis and the persistent deficits of the United States have increasingly called into question the dollar’s role as the world’s anchor currency. 
Recent moves to internationalize China’s renminbi have led to anticipation of a looming shift in the global monetary system. 
Many prominent economists, including the members of a United Nations panel headed by the Nobel laureate economist Joseph Stiglitz, are recommending a “Global Reserve System” to replace the dollar’s hegemony. 
But the long history of global anchor currencies suggests that the dollar’s days on top may be far from over. 
In ancient times, India ran a large trade surplus with the Roman empire. 
As Pliny wrote in the first century: “Not a year passed in which India did not take 50 million sesterces away from Rome.” 
That trade imbalance implied a continuous drain on gold and silver coin, causing shortages of these metals in Rome. 
In modern terms, the Romans faced a monetary squeeze. 
Rome responded by reducing the gold/silver content (the ancient equivalent of monetization), which led to sustained inflation in the empire. 
But the frequent discovery of Roman coins in India suggests that Roman coinage continued to be accepted internationally long after it must have been obvious that its gold or silver content had fallen. 
In the sixteenth century, Spain emerged as a superpower following its conquest of South America. 
Between 1501 and 1600, 17 million kilograms of pure silver and 181,000 kilograms of pure gold flowed from the Americas to Spain, which spent the money on wars in the Netherlands and elsewhere. 
This increase in liquidity caused both an economic boom and inflation across Europe. 
Despite this wealth, Spain became increasingly indebted, eventually defaulting three times – in 1607, 1627, and 1649 – and heading into sharp geopolitical decline. 
Yet Spanish silver coins (known as “pieces of eight” or Spanish dollars) remained the main currency used in world trade right up to the American Revolutionary War. 
In fact, Spanish coin remained legal tender in the US until 1857 – long after Spain itself had ceased to be a major power. 
By the middle of the nineteenth century, the world was functioning on a bi-metal system based on gold and silver. 
But, following the British example, most major countries had shifted to a gold standard by the 1870’s. 
The Bank of England stood ready to convert a pound sterling into an ounce of (11/12 fine) gold on demand. 
That system was disrupted by World War I, but Britain went back to a gold peg in 1925. 
As the Great Depression took root, however, the Bank of England was forced to choose between providing liquidity to banks and honoring the gold peg. 
It opted for the former in 1931. 
Yet pound sterling continued to be a major world currency until well after World War II. 
Even as late as 1950 – more than a half-century after the US had replaced Britain as the world’s largest industrial power – 55% of foreign-exchange reserves were held in sterling, and many countries continued to peg their currencies to it. 
Three things should be clear from this history. 
First, a global monetary system based on precious metals does not resolve the fundamental imbalances of a global economic system. 
Second, precious metals do not resolve the problem of inflation. 
And, finally, the anchor currency and the underlying eco-system of world trade often outlive the geopolitical decline of the anchor country by decades. 
A new economic order was established after World War II, with the US as the anchor country. 
The Bretton Woods system linked the US dollar to gold at $35 per ounce, with other currencies linked to the dollar (though occasionally allowed to make adjustments). 
The flaw in the system was that it underpinned global economic expansion for only as long as the US was willing to provide dollars by running up deficits – the same deficits that would eventually undermine America’s ability to maintain the $35/ounce gold price. 
In 1961, the US responded by creating the London Gold Pool, which obliged other countries to reimburse the US for half of its gold losses. 
But this arrangement quickly bred discontent, with France leaving the Gold Pool in 1967. 
The Bretton Woods system collapsed four years later. 
Or did it? 
Despite the problems of the 1970’s, the dollar remained the world’s dominant currency, with successive generations of Asian countries pegging their exchange rates to it. 
As with the Bretton Woods system, a peripheral economy (for example, China) could grow very rapidly even as the anchor economy (the US) enjoyed cheap financing. 
China’s relative rise did not diminish the dollar’s role – and may even have enhanced it. 
Indeed, like the Japanese during their period of rapid growth, the Chinese have, until recently, resisted internationalization of the renminbi. 
So, are we entering a post-dollar world? 
Despite all of the pain caused by the Great Recession, there is no sign that the world is forsaking the greenback. 
Investors remain willing to finance the US at rock-bottom interest rates, and the nominal trade-weighted index of the dollar has not collapsed. 
Even if China replaces the US as the world’s largest economy within a decade, an anchor currency can be more resilient than the economic and geopolitical dominance of its country of origin. 

The Dollar Wars Return 
Faced by uncertain re-election prospects, and worried about job losses, US President George W. Bush has begun to blame other countries, sending his Treasury Secretary to demand that they raise their exchange rates in order to make foreign goods more expensive for American consumers. 
That was John Snow's mission on his recent trip to China, but his goal was nothing new. 
Two of Snow's predecessors, John Connally and James Baker, followed a similar quest for politically desirable exchange rates. 
What Snow asked of China is an odd demand: we do not normally go into stores and ask the shopkeeper to raise his prices. 
But the emergence of powerful new currencies always provokes fresh attempts at the use of exchange rates for political purposes. 
For twenty years after WWII, there were just two major international currencies, as there had been through the interwar period: the British pound and the American dollar. 
By the end of the 1960's, the pound had been so weakened that international markets lost interest. 
Instead, two new major currencies emerged, as the strength of the Japanese and (West) German economies produced big trade surpluses. 
American producers and the US government complained that American workers were being priced out of jobs because the Yen and D-mark were being held at artificially low levels. 
The US government under President Richard Nixon pressed the Germans and Japanese to revalue their currencies. 
The Germans did but the Japanese did not, infuriating the US Treasury Secretary, who tried his best to bully Japan. 
John Connally complained that Japan had a "controlled economy" and did not play by the rules. 
All sides engaged in mudslinging about who was doing the most damage to the world economy. 
The Americans accused the Europeans and especially the Japanese of growing too slowly, while the Europeans and the Japanese argued that the US was exporting inflation to the rest of the world and abusing the international monetary system in order to sustain its military adventurism (at that time in Vietnam). 
Indeed, US monetary expansion had itself become a weapon in the war over exchange rates. 
High inflation in the US highlighted the exchange-rate problem by showing the instability of the dollar standard. 
Indeed, Connally called the dollar "our currency but your problem." 
In the end, the US forced the Japanese to revalue their currency by destroying the international monetary order in August 1971. The Americans first unilaterally suspended the gold convertibility of the dollar--the backbone of the fixed but adjustable exchange-rate regime created by the post-WWII Bretton Woods conference--and then teamed up with the Europeans to force on Japan a 16.9% revaluation of the Yen against the dollar. 
(Japan's Finance Minister had threatened to commit hara-kiri if the revaluation rate was set at 17%.) 
But the end of the fixed exchange-rate regime for industrial countries did not end activist management of currencies. 
The scenario of the early 1970's was replayed with floating rates in the mid-1980's, with the meetings of the major countries' finance ministers first forcing down the Yen and the D-mark against the dollar, and then trying in 1987 to hold rates stable. 
Both of these historical episodes ended in chaos. 
The breakdown of Bretton Woods in 1971, far from stopping inflation, unleashed a synchronized monetary surge. 
A decade later, efforts to keep the Yen in line with American views produced the Japanese bubble economy, for which many Japanese blamed America after it burst. 
Today, the US dollar is also looking at a challenge from two new or newly important currencies, China's Renmimbi and the Euro. 
As in the 1970's and the 1980's, the rising Asian currency is seen as a much greater threat because that is where the biggest trade imbalances lie. 
Moreover, the US still has a powerful weapon because other countries hold so many dollars: the current estimate is that 46% of US Treasury bonds are held overseas. 
This invites both sides to play a game of brinkmanship. 
America's leverage consists in the rest of the world's massive financial stake in the fate of the dollar. 
But the rest of the world can threaten a dollar sell-off. 
China's government today might find some useful lessons in the apparently remote dramas of the 1970's. The most immediate and most obvious is that it is difficult to hold out long against the US, especially when the American government is under pressure from major domestic interest groups whose strong lobbying power might be used to lead a push for new trade protectionism. 
But the world--and the US in particular--might also learn some lessons. 
Previous episodes in the politically driven creation of new exchange-rate systems have been highly chaotic, and resulted in increased levels of international tension. 
At an emotional level, debating exchange rates means blaming foreigners for whatever goes wrong in the domestic economy. 
This approach is both unhealthy and immature, yet not necessarily very damaging. 
What is worse is when the economic policy response becomes the equivalent of blaming foreigners: imposing new forms of trade barriers. 
Doing so may feel good in the short term, but it merely destroys wealth and undermines job creation everywhere. 

The Domestic Logic of Iran’s Foreign Plots 
WASHINGTON, DC – Though Saudi Ambassador Adel al-Jubeir is alive and well in Washington, the plot to assassinate him may have succeeded – if its aim was not to kill al-Jubeir, but rather Iranian President Mahmoud Ahmadinejad’s foreign policy. 
The history of the Islamic Republic is filled with cases of factions exploiting foreign policy to gain power against their domestic rivals. 
It is common for competing groups to sacrifice national interests – such as Iran’s international credibility – to achieve their own goals. 
During the Iran-Iraq war, Ronald Reagan’s national security adviser, Robert McFarlane, paid a clandestine visit to Iran with the approval of the country’s highest authorities, to pursue a deal that would have been to Iran’s advantage. 
But anti-American elements in the government leaked the news to an Arab newspaper, killing the deal and landing both the Reagan administration and the Iranian government in huge trouble. 
Mir Hossein Mousavi, the former prime minister who now leads the opposition, spelled out the problem more than 20 years ago. 
On September 5, 1988, he resigned in protest against then-president Ali Khamenei’s interference in his duties. 
In his resignation letter, Mousavi complained that the “government’s authority on foreign policy was taken away.” 
He charged that 
“[military and intelligence] operations outside the country are taking place without the government’s knowledge or orders....Only after an airplane is hijacked are we made aware of it. 
Only after a machine gun opens fire in one of Lebanon’s streets and its noise echoes everywhere do we find out. 
Only after [Saudi police] find explosive material in Iranian pilgrims’ baggage am I informed.” 
Iranian intelligence has assassinated more than 400 Iranian dissidents outside of Iran, including the last prime minister under the Shah, Shapour Bakhtiar, and four Kurds in Berlin’s Mikonos restaurant in 1992 (a German judge later officially named Iran’s Supreme Leader as one of the senior officials involved in the terrorist attack). 
Similarly, the Quds Force of Iran’s Revolutionary Guard has carried out hundreds of operations in Iraq, Afghanistan, Lebanon, and elsewhere. 
By contrast, the plot targeting al-Jubeir seems to have been highly unprofessional, almost unconcerned with success. 
So unlikely are the details that only a power struggle within Iran could justify it. 
If so, the plot’s target likely was not al-Jubeir himself, but rather those elements in the regime that seek a diplomatic opening to the US – namely, Ahmadinejad and his circle. 
When news about the assassination plot first appeared, the Supreme Leader, Ali Khamenei, was on his way to the western province of Kermanshah. 
In his first speech after the story broke, he made no reference to it, most likely expecting the president to make a statement. 
After two days of Ahmadinejad’s meaningful silence, Khamenei felt forced to reject the US allegations publicly. 
Only after five days did Ahmadinejad issue a statement denying the accusations – and not as strongly as did Khamenei. 
It is ironic to see Iran’s radical Islamist president portray himself as open to resuming US-Iran relations and suffer for it at the hands of a supposedly pragmatic Supreme Leader. 
But Ahmadinejad is no exception to the historical rule in Iran: every faction that loses out to its domestic rivals looks beyond the country for an alliance with outside powers. 
In the Islamic Republic, those interested in opening up to the West are typically those with little authority. 
Ahmadinejad and his faction face a two-edged problem: Khamenei has boxed them in politically, while rampant economic corruption and failed efforts at reform have disillusioned many of the president’s supporters. 
As a result, Ahmadinejad, in a further ironic twist, is seeking to glorify Iran’s pre-Islamic history in order to stir nationalist sentiment in his favor and accomplish what he is sure that Khamenei does not want: greater openness to the West, particularly to the US. 
He has repeatedly expressed his willingness to meet with US President Barack Obama – even sending him a congratulatory letter on his inauguration – and has traveled to New York to be interviewed by the American media much more often than his predecessors. 
Ahmadinejad is well aware that if he succeeds in portraying himself as someone who – in opposition to the Supreme Leader’s will – wants to solve major issues between Iran and the US, that could partly compensate for his economic failures and gain him some new supporters. 
For that plan to work, Ahmadinejad needs to survive through the next parliamentary election in March 2012 and the presidential election in June 2013, despite Khamenei’s determination to marginalize him. 
Regardless of whether Khamenei was aware of the plot against al-Jubeir, its purpose was to delegitimize Ahmadinejad’s foreign-policy agenda. 
So, if Khamenei really was unaware of the plot, it means that some elements in the government or the Revolutionary Guards are acting on their own, which is deeply troubling in its own right. 
If there are elements powerful enough to plan such a plot – even an unsuccessful one – they could do it again in the future. 
That raises an even more troubling question: If such “independent” decision-makers exist, are they able to affect Iran’s nuclear policy, too? 

The Domestic Wars of Hosni Mubarak 
The decision by Egyptian President Hosni Mubarak’s government to try two senior judges for blowing the whistle on vote rigging in last autumn’s parliamentary elections has rocked the country. 
Massive crowds have gathered to support the judges – and have caught Mubarak’s regime completely unaware. 
Mubarak’s government now seems to be backtracking as fast as it can. 
Judge Mahmoud Mekki has been acquitted, and Judge Hisham al-Bastawisy, who suffered a heart attack the night before, has merely been reprimanded. 
Yet Cairo remains restless, and the government fears another outpouring of support for democracy, as the judges have called for renewed nationwide demonstrations. 
Egyptian judges have a long-standing tradition of discretion and propriety. 
But they feel abused by government efforts to sugarcoat the manipulation of election after election by claiming that judges supervise the voting. 
What makes their struggle loom so large for a normally quiescent Egyptian public is partly that nearly all 9,000 judges are standing fast in solidarity. 
Their representative body, the Judges’ Club, has long pushed for a new law to restore judicial independence. 
Now the judges are insisting on their independence by themselves. 
The Mubarak regime is adamantly opposed, and resorts to extra-judicial means, such as emergency courts and national security and military courts, which do not observe international standards. 
Contrary to his campaign promises during his run for a fifth term as President, Mubarak has requested (and his rubber-stamp parliament has granted) a two-year extension of the Emergency Law by which Egypt has been ruled throughout his presidency. 
It is to this law, above all, that the judges and Egypt’s civil society object. 
The Emergency Law has been in force since the assassination of President Anwar Sadat in October 1981, and Mubarak claims that he needs another extension to combat terrorism. 
But, according to a recent human rights report, despite the Emergency Law, 89 people were killed and 236 wounded in terrorist attacks in Egypt during the previous 12 months. 
In neighboring Israel, which is still in a struggle with the Palestinians, only 18 were killed and 25 wounded in similar attacks during the same period. 
Yet Israelis do not live under an emergency law. 
Consider, moreover, that at the height of the Arab-Israeli conflict in 1973, Egypt’s armed forces stood at one million troops. 
Now only 350,000 serve in the military, while the internal security police recently hit the one-million mark. 
Mubarak’s first internal war was with Islamic militants during his early years in power, but he now finds himself caught in three more domestic wars. 
The battle with the judges has incited enough popular unrest to warrant Mubarak’s deployment of thousands of black-uniformed central security forces in the heart of Cairo. 
This deployment, lasting three weeks so far, is already longer than the combined duration of the last two wars with Israel. 
Another domestic war, with the Egyptian Bedouins of Sinai, broke out two years ago. 
Taking their cue from their Palestinian neighbors, if not from al-Qaeda, alienated young Bedouins apparently decided to rebel against their treatment as third-class citizens. 
All around them, but especially in the ebullient resorts of southern Sinai, billions are spent on roads, airports, and beaches; sizeable parcels of land are allocated generously to rich Egyptians from the Nile Valley and to foreigners, but not to Sinai natives. 
Indeed, Sinai Bedouins have the right of use but not ownership of land, because a lethargic, occasionally corrupt bureaucracy still deems the Sinai a military zone and its natives’ loyalty questionable. 
Two years ago, on the anniversary of the war of October 1973, young Sinai militants bombed the Taba Hilton. 
Last July, on another national holiday, they hit three tourist spots not far from the Mubarak family compound in Sharm el-Sheikh. 
These symbolic as well as lethal warnings to a family that has grown Pharaonic in scale, style, and power have gone unheeded. 
The third recent domestic war, this one over Christian Coptic citizenship rights, has been brewing for years. 
Copts are the original Egyptians, and they were the majority population until the tenth century. 
As Egypt was Arabized and Islamized, the Copts became a minority in their original homeland. 
In Mubarak’s Egypt, citizens’ legal equality, while stipulated in the constitution, is not respected or observed, especially with regard to the construction and protection of Coptic churches. 
Last November, when Muslim zealots attacked a Coptic church in Alexandria, several Copts were injured. 
Six months later, a fanatic targeted three churches during Sunday services, killing a few worshippers and injuring many. 
Copts marched in the streets of Alexandria for the next three days, protesting the security authorities’ leniency toward the culprits, the scapegoating of their community, or even an official hand in the attacks to justify an extension of the Emergency Law. 
Hosni Mubaraks’ four domestic wars are fuelled by Egypt’s excluded, who are increasingly in rebellion against a regime that has long outlived its legitimate mandate. 
The battle with the judges may well prove to be Mubarak’s Achilles’ heel. 
Justice is a central value for Egyptians, and its absence is at the core of all protests. 
There can be no evidence more compelling than the unprecedented numbers of people who have rallied peacefully in solidarity with the judges. 

The Dragon and the Bear 
Second honeymoons rarely, if ever, recapture the zest of lost love. 
Yet ever since the Soviet Union’s collapse in 1991, Russia and China have sought to rekindle the close relations that once supposedly existed between the USSR and Mao’s China before Khrushchev’s denunciation of Stalin in 1956. 
But that renewed Sino-Russian marriage always smacked more of convenience – aimed as it was at checking American hegemony – than of true romance. 
Now Russia’s invasion of Georgia has shattered even the illusion of attraction. 
In 1969, the Chinese and Soviet armies exchanged fire across their disputed border. 
Recently, the two countries signed an agreement that seemed to put an end to their long border dispute. 
The agreement was a sort of follow-up to the visit to Beijing of Dmitry Medvedev, who made China one of his first official trips abroad after being elected Russia’s president. 
During Vladimir Putin’s presidency, Chinese and Russian troops engaged in joint military maneuvers, and the two countries became dominant powers in the Shanghai Cooperation Organization (SCO), which, to some Western observers, looked like an effort to counterbalance NATO. 
There were also years of “Russia in China” and “China in Russia” cultural exchanges, meant to underscore that the two countries were tied together not just by geopolitical pragmatism, but by genuine cultural/historical ties as well. 
But the fact is that 17 years of high-level bilateral cooperation have produced little of substance. 
Indeed, in the wake of the invasion of Georgia, China may be seriously rethinking its relations with Russia. 
It may not yet be ready to embark on a full-fledged policy of “containment,” but in the wake of the dismemberment of Georgia – and with Russia claiming a zone of “privileged influence” throughout the former Soviet world – China clearly views Russia as an emerging strategic threat. 
For example, China has refused to endorse Russia’s recognition of the independence of South Ossetia and Abkhazia, and has encouraged the SCO’s other members to do the same. 
The reasons are not hard to find. 
As a general principle of foreign policy, China believes that national borders are sacrosanct. 
No power, not even the United Nations, should be allowed to change them without the consent of the country concerned. 
More importantly, China views the break-up of the USSR as one of the greatest strategic gifts in its history. 
Instead of confronting a (usually hostile) Russian/Soviet empire on its border, a vast swath of buffer states appeared after 1991. 
Their continued independence is now deemed essential to China’s national security. 
As a result, any more Russian efforts to establish even informal suzerainty over the Soviet successor states are, following the dismemberment of Georgia, likely to meet Chinese resistance. 
The economic components of the Sino-Russian relationship – where real attachments are tested – are also dissatisfactory, at least from China’s point of view. 
China’s major interest in Russia is oil and gas. 
But, while Russia is firmly committed to being a major supplier of gas and oil to Europe, it is hesitant to play a similar role with China. 
Moreover, Russia’s efforts to gain monopoly control of the gas pipeline networks across Eurasia pose a direct danger for China, because monopolists can not only gouge their consumers, but also shut off supplies for political purposes, as Russia has done repeatedly over the past two decades. 
So China’s national security interest is to ensure that the gas-supplying nations of Central Asia have outlets to sell their gas that are not under Kremlin control. 
Other than oil, gas, and other commodities, China has rather limited interests in Russia. 
Russia has been China’s major supplier of weapons since the late 1990’s. 
But, given the stagnant state of Russian science and technology, even the best Russian equipment nowadays seems out of date. 
Indeed, although the war with Georgia demonstrated the revived combat spirit of the Russian army – at least when compared to its ineptness in the two Chechen wars of the 1990’s – it also exhibited the grave defects of Russian military technology. 
Most of the arms used were yesterday’s weapons. 
As China is now able to harness its own technological might to produce sophisticated weapons, Russia’s usefulness in this area is waning fast. 
Nor do the Chinese have much interest in assuming de facto control of Asiatic Russia, despite shrieks from Russian strategic pundits that this is China’s real goal. 
China might, indeed, have an interest in some border areas with fertile soil and moderate climate. 
But it hardly wishes to colonize the frozen wastes of Siberia. 
In fact, Siberia is not much different from China’s own almost empty mountain/desert borderlands, where even agriculture is a daunting task. 
As for Russia’s Far East, the Chinese believe it will eventually fall to China anyway, so there is no need to hasten the process. 
China is far more interested in focusing on the United States, its major trade partner and rival, and on South Asia and Iran, which supplies much of China’s oil and regards it as a more reliable ally than Russia. 
Thus, the settling of the border dispute with Russia was not aimed so much at building a geopolitical marriage as securing each other’s rear, offering both sides a free hand to explore opportunities elsewhere. 
What China wants and what it gets may be different things. 
With its long borders with Russia, China knows it would have much to regret if a new, oil-fired Russian empire appeared on its doorstep. 

The Dream of Space 
More than 50 years ago, visionaries like the British science fiction writer Arthur C. Clarke and the German (and American) rocket engineer Wernher von Braun laid out a series of steps for the journey into space. 
Clark presented his vision in a 1951 book The Exploration of Space and von Braun’s proposals appeared in a series of Collier’s magazine articles published between 1952 and 1954. 
A few years later – indeed, 50 years ago this week – the Soviet Union launched the first earth orbiting satellite, inaugurating the space age. 
After 50 years, many elements of the original vision have been achieved, some have failed, and there have been more than a few surprises. 
Clarke and von Braun encountered a wall of skepticism when their proposals first appeared. 
The public viewed space travel as science fiction, a form of popular entertainment thought to have little chance of realization. 
But Clarke, von Braun, and others persevered. 
We would, they predicted, launch satellites, dispatch humans on orbital flights, assemble a large earth-orbiting space station, build reusable space shuttles, construct space telescopes, and send humans to the moon, Venus, and Mars. 
Clarke explained how humans could build communication satellites. 
Von Braun predicted that military forces would use orbiting platforms to observe troop movements and prevent surprise attacks. 
All of these visions appeared before the first artificial satellite was launched. 
In 1959, officials at the United States National Aeronautics and Space Administration (NASA) adopted most of these steps as part of their long-range plan. 
The Soviet Union engaged the US in a race to the moon. 
Government support for realizing the vision inspired the British film maker Stanley Kubrick to present the steps in his classic movie 2001: A Space Odyssey , released in 1968. Clarke helped to write the screenplay. 
The movie depicted a large space station, a winged space shuttle, a lunar base, and astronauts on a trip to the outer solar system. 
True to the plan, humans built scientific satellites, communication satellites, reconnaissance or “spy” satellites, space stations, and reusable space shuttles. 
They sent robotic spacecraft to the moon, Venus, Mars, and other planets, and humans to the moon. 
In those respects, the original vision was achieved. 
The human space effort, nonetheless, departed from the plan in unexpected ways. 
The International Space Station, currently under construction, does not resemble the large, rotating wheels presented by Kubrick, Clarke, and von Braun. 
Early planners viewed the space station as an assembly point for expeditions to the moon and planets. 
Kubrick’s 900-foot wide wheel rotated in such a fashion as to produce a sense of gravity equal to that felt on the moon, to which many of the station’s fictional occupants were bound. 
The real space station is a micro-gravity research laboratory with no capability to launch trips to the moon or beyond. 
Larger capabilities were part of the original space station plan, approved in 1984, but subsequently disappeared as the cost of the facility grew. 
Nor has the US space shuttle accomplished its goals. 
Von Braun predicted that the US would need to launch 364 space shuttles in less than one year to prepare for the first lunar voyage. 
When the space shuttle was approved in 1972, NASA officials predicted that they would launch one every week or two. 
But the space shuttle has proven far more difficult and costly to operate than anticipated, flying only four times per year on average. 
It has neither reduced the cost of space access nor made space flight safe and routine, as promised. 
When the shuttle is retired around 2010, NASA will replace it with an old-fashioned spacecraft with no wings at all. 
In contrast to human space flight, which has lagged behind expectations, the robotic space effort has exceeded them. 
Von Braun endorsed an automated telescope in space, but thought that astronauts would need to visit the instrument to change the film. 
Early plans for military reconnaissance stations assumed that soldiers would be stationed on board. 
Clarke believed that astronauts would be dispatched to maintain and operate communication satellites. 
Kubrick suggested that people – accompanied by a computer – would pilot spacecraft to explore planets like Jupiter and Saturn. 
But none of this proved necessary, owing to remarkable advances in robotics, solid-state electronics, imaging, data collection, and communication. 
Sensors that convert light waves into electronic signals eliminated the need for film on space telescopes, while computer chip technology (integrated circuits) allowed communication satellites to be operated without periodic human repair. 
Robotic spacecraft are currently returning information from the outer regions of the solar system and roving the surface of Mars. 
No military force has yet perceived the need to station soldiers on its various reconnaissance, communication, or navigation satellites. 
Robotic technology is advancing more rapidly than the technologies supporting human space flight. 
Around the world, clever scientists, engineers, and entrepreneurs are working to realize the remainder of the space exploration dream. 
Watch for humans to establish space tourism, return to the moon, and attempt an expedition to Mars. 
Advances in robotics will continue to occur, with automated spacecraft that can dig and swim, and telescopes that can look for earth-like planets around nearby stars. 
If the past is any guide, much of what seems like science fiction today will become reality tomorrow. 

The Drug War's Failures 
If we're lucky, our grandchildren will recall the global war on drugs of the late 20th and early 21st century as some bizarre mania to which only past generations could succumb. 
The world's drug problems are far more severe today than they were a century ago. 
Not that drug use has increased fantastically - after all, huge quantities of alcohol, opium and other drugs were consumed back then. 
The real problem is that today's drug control policies foster more harm than good; indeed, they probably cause more overall harm than drug abuse itself. 
Like alcohol Prohibition in the US during the 1920s and early 1930s, global drug prohibition has failed to reduce drug abuse even as it generates extraordinary levels of crime, violence, corruption and disease. 
In 1998, the UN estimated the total value of the illicit drug trade at $400 billion, or 7% of global trade. 
Critics say the figure is only half that - still a remarkable sum. 
Colombia today is far worse than Chicago under Al Capone. 
So, too, are other Latin American, Caribbean and Asian countries. 
Drug prohibition effectively imposes a tax on the global trade in illicit drugs that is enforced by governments and collected by those willing to violate the laws. 
No other set of laws produces so much revenue for criminals, terrorists and corrupt officials. 
No other laws generate so much corruption or such violence; and no other set of laws contributes so much to the spread of HIV/AIDS, hepatitis and other diseases. 
The war on drugs persists in part because of two myths. 
The first assumes that human beings are better off "drug free," and that all societies should strive to be drug free. 
But few - if any - drug free societies ever existed. 
The second myth presumes that prohibition reduces the harm associated with drugs. 
Global markets in cannabis, opium and coca products are basically similar to other global commodities markets, yet global drug control policies operate on the assumption that the drug markets bear more in common with smallpox and other infectious diseases for which there is no demand. 
Governments can act unilaterally and multilaterally to regulate commodity markets, but it is a mistake to perceive prohibition as the ultimate or maximum form of regulation. 
Prohibition in fact represents the abdication of regulation. 
Whatever is not suppressed is effectively unregulated, except by criminal organizations. 
Around the world, drug law violations account for the largest share of the roughly 8 million people incarcerated in local jails and prisons. 
In 1980, 50,000 people were incarcerated in the US for drug law violations. 
Today, the total approaches half-a-million, with a few hundred thousand more locked up on other prohibition-related offenses. 
That total represents almost 10% of all the world's inmates. 
Throughout the developing world, poor peasants involved in producing opium, coca and cannabis are arrested, sometimes beaten, and often extorted by government agents enforcing drug laws. 
In Bolivia and Peru, coca was integrated into society. 
The same was true of opium in Asia. 
Prohibitions imposed by the US and other governments decimated traditions that often "domesticated" these drugs so as to reduce their harm, while simultaneously encouraging transitions to refined drugs like heroin and cocaine. 
US law enforcement and intelligence agencies routinely provide information to other governments knowing that it will be used not just to arrest but to torture those they identify. 
All these consequences of the drug war can be defined as human rights abuses. 
But the core human rights issue is different - the notion that people should not be punished for what they put into their bodies. 
That right of sovereignty over one's mind and body - which also incorporates the right not to be forced to take drugs against one's will - represents in some respects the most fundamental of all rights. 
Heroin users are denied the most effective medication available to remedy their addiction, i.e., methadone. 
People unable or unwilling to stop injecting drugs are denied access to sterile syringes, with devastating consequences. 
Millions who smoke marijuana or consume other psychoactive drugs are harmed far more by state action than by drug use. 
More and more voices are calling for a systematic review and revision of the international anti-drug conventions that sustain today's failed policies. 
Some emphasize the anti-scientific and otherwise illegitimate basis for including cannabis and coca in the conventions. 
Others point to the contradictions between anti-drug conventions and international human rights conventions. 
Others note that the anti-drug conventions exacerbate the problems they seek to ameliorate. 
A new global drug control regime is needed. 
It must reject the foolish rhetoric of creating "a drug-free world" and acknowledge that the true challenge is learning to live with drugs so that they cause the least harm. 
An effective strategy needs to establish realistic objectives and criteria for evaluating success or failure, and these criteria must focus on reducing the death, disease, crime and suffering associated with both drug use and drug policies. 
It also must embrace the principle that people should not be punished for what they put into their bodies, but only for the harms they do others. 
Those are the key elements of a more ethical and effective drug control regime than the one that haunts today's world. 

The Duisenberg Legacy 
The European Central Bank's first president, Wim Duisenberg, is leaving office with his head held high. 
Under his leadership, Europe's first central bank has "grown up," going from infancy to eminence in little more than a mere five years. 
The euro has been firmly established as a world-class currency. 
Inflation in the euro-zone economy hovers around 2%--more or less in line with the definition of price stability favored by the ECB. 
Inflationary expectations are stable, and the Governing Council runs smoothly. 
Not everyone in Europe is happy with an anti-inflation central bank. 
Critics who want a more activist, growth-oriented monetary policy have tried--albeit unsuccessfully--to soften up the 68-year-old Dutchman with personal attacks and degrading insults. 
But the ECB head and the Governing Council refused to yield either to insults or to heavy-handed political pressure to cut interest rates, cut them again, and then cut them some more. 
The fledgling bank earned enormous credibility, but also considerable enmity, by sticking to its anti-inflation mandate. 
Of course, the ECB has had its problems--mainly in the communications area--and Duisenberg's candor sometimes did get him into trouble. 
But these were small matters that were vastly distorted by critics with their own agendas for the bank. 
Whatever problems may have existed in the early years--too many voices, too little clarity of message--were smoothed out over time. 
In a recent personal interview in his Frankfurt office, I asked Duisenberg what had been his single most important accomplishment in office. 
Without hesitation he responded that it was the smooth introduction and easy acceptance of the common currency. 
Now it can be told that the central bank had 25 to 30 disaster scenarios ready in case things went badly. 
None, in fact, was needed. 
The introduction of the euro currency was accomplished more smoothly than even the ECB had expected. 
But it was no single accomplishment that made Duisenberg's term in office a success. 
Rather, it was his consensual style of leadership. 
Forging twelve independent, proud, and, in some cases, powerful national central banks into a cohesive collective was no easy task. It would not have been possible with an authoritarian personality at the ECB helm. 
There is a myth now making the rounds that the search for consensus slowed down the ECB's decision-making process when setting monetary policy. 
But the ECB was "slow" to cut rates not because of the need for consensus, but because it is a non-activist bank that cuts rates only when the inflation picture justifies it. 
According to Mr. Duisenberg, there was not a single instance when an important monetary policy decision was delayed because of the need for consensus. 
Notwithstanding the ECB's significant achievements during the Duisenberg years, important problems remain for the new president, Jean-Claude Trichet of France. 
The promise of the euro--that it would set off a competitive dynamic inside the euro-zone economy that would compel structural reform--has yet to be fulfilled. 
So far, Europe's politicians have resisted reform, and scarcely an opportunity went by that Wim Duisenberg didn't scold Europe's politicians for this failure. 
The Growth and Stability Pact (which mandates a 3% of GDP limit on the size of the budget deficits of euro-zone members) is another contentious issue that awaits resolution. 
Controversy over the Pact has set off a nasty dispute between small and big countries in the euro-zone. 
There are well-founded complaints about double standards. The small countries follow the rules but the big countries act as if they are exempt. 
According to Nout Wellink, president of the Dutch Central Bank, failure to satisfactorily settle this issue could have serious negative consequences for the euro. 
Finally--and perhaps most important--is the problem of integrating the economies of the ten new member states into the euro area. 
This will not be easy. 
The bank must be careful not to bite off more than it can chew. 
Wim Duisenberg's appointment as first ECB president in May 1998 was mired in political controversy. 
But as he exits his post, there is a growing consensus that history will record the straight-talking Dutchman as being the right man for the right job at the right time. 
He deserves Europe's unequivocal gratitude for launching the ECB so successfully. 

The Dutch Retreat 
AMSTERDAM – The Dutch army has been operating as part of NATO in a remote and unruly part of Afghanistan since 2006. 
Fighting against the Taliban has been heavy at times. Twenty-one Dutch lives have been lost, out of about 1,800 men and women. 
The Dutch were supposed to have been relieved by troops from a NATO partner in 2008. 
No one volunteered. 
So their mission was extended for another two years. 
But now the Social Democrats in the Dutch coalition government have declared that enough is enough. 
The Dutch troops will have to come home. 
Since the Christian Democrats do not agree, the government has fallen. 
This is highly inconvenient for US President Barack Obama, who needs all the help he can get in Afghanistan, even from small allies, if only for political reasons. 
To many Americans, especially of the neo-conservative persuasion, Dutch behavior might confirm all their suspicions about perfidious Europeans, addicted to material comforts, while remaining childishly dependent on US military protection. 
When the going gets tough, they argue, the Europeans bow out. 
It is true that two horrendous world wars have taken the glamour out of war for most Europeans (Britain is a slightly different story). 
The Germans, in particular, have no stomach for military aggression, hence their reluctance in Afghanistan to take on anything but simple police tasks. 
Mindful of Ypres, Warsaw, or Stalingrad, not to mention Auschwitz and Treblinka, many regard this as a good thing. 
Still, there are times when pacifism, even in Germany, is an inadequate response to a serious menace. 
Pacifism, however, does not really explain what happened in the Netherlands. 
The reason the Dutch are wary of carrying on in Afghanistan is not the trauma of World War II, but of a small town in Bosnia called Srebrenica. 
In the mid-1990’s, the Dutch volunteered to protect Srebrenica from General Ratko Mladic’s Serbian forces. 
Under United Nations rules, the Dutch, bearing only sidearms, could fight only in self-defense. 
Air support, although promised, never came. 
Dutch hostages were taken and threatened with execution. 
The world then watched as the hapless Dutch allowed Mladic’s heavily armed Serbs to massacre about 8,000 Bosnian Muslim men and boys. 
Then, too, pacifism had nothing to do with what happened. 
Quite the contrary: the main reason the Dutch allowed themselves to be maneuvered into an impossible situation, without military support from the UN or from NATO allies, was their over-eagerness to play an important role, to be taken seriously by the larger powers, to play with the big boys. 
As a result, they were left holding the bag. 
Now that the Dutch have done their duty in Afghanistan, the Social Democrats want to make sure that this does not happen again. 
Hope of punching above their weight, of influencing the US, was also an important reason why Britain joined in the invasion of Iraq, even though public opinion was set against it. 
Tony Blair enjoyed the limelight, even if the light was reflected from the US. 
But this was not just national hubris; it exposed a basic condition of postwar Western Europe. 
In return for US protection, European allies always tended to fall in line with US security policies. 
This is what kept NATO going since 1949. 
It made sense while NATO did what it was designed to do: keep the Soviets out (and, sotto voce , the Germans down). 
After the fall of the Soviet Union, NATO suddenly found itself without a clear goal (and the Germans no longer needed to be kept down). 
It is never easy to mobilize people in democracies for military enterprises. 
It took a direct Japanese attack on the US Navy to bring America into World War II. 
And when the former Yugoslavia was sliding into serious violence in the 1990’s, neither the US nor the Europeans wanted to intervene. 
By the time NATO forces finally took military action against the Serbs, 200,000 Bosnian Muslims had already been murdered. 
A military alliance without a clear common enemy, or a clear goal, becomes almost impossible to maintain. 
NATO is still dominated by the US, and European allies still fall in line, if only just to keep the alliance going – and in the hope of exerting some influence on the only remaining superpower. 
This means that Europeans participate in US-initiated military adventures, even though national or European interests in doing so are far from clear. 
It is hard to see how this can continue for much longer. 
Democratic countries cannot be asked to risk the blood of their soldiers without the solid backing of their citizens. 
The only solution to this problem is for Europeans to reduce their dependence on the US and take greater responsibility for their own defense. 
This can no longer be accomplished on a purely national level. 
No European country is powerful enough. 
Yet, in the absence of a European government, there can be no common defense policy, let alone a common army. 
It is like the euro-zone’s problems: only political unity could solve them, but that is a step that most Europeans are still unwilling to take. 
So we are stuck with an unsatisfactory status quo , in which NATO casts about for a role, Americans are less and less able to afford to be the world’s policemen, and Europeans struggle to find a way to define their common interests. 
The alliance forged in the Cold War will become increasingly fragile. 
For, whatever Europe’s interests are, they are unlikely to be best represented by a seemingly endless war with the Taliban. 

The Dynamism of Nations 
Proposals for economic reform of Continental Europe keep coming. 
The process does not constitute a unified, reasoned debate so much as an ongoing political auction in which special interests seek votes for the policy change that will benefit them. 
Some say the bar to a good economy is the Continent's inflated welfare state and the solution is retrenchment, beginning with raising retirement ages. 
Others say the impediment is the entire overgrown public sector and the solution is to cut tax rates. 
The latest view, endorsed by the European Commission, blames a shortage of infrastructure and proposes more bridges and tunnels. 
This approach will never reach the heart of the matter. 
The West's core social values make high economic performance a moral imperative like free speech or trial by jury. 
Further, the Continent will undoubtedly need some transformative changes of its economic institutions to establish high-performance economies. 
To reach broad agreement on those changes requires facing some basic questions so far ignored. 
A real debate on basic reform has to start with an explicit conception of economic performance - of what constitutes a good business life. 
Productivity is an important element. Only a high-productivity economy can promise all or most working-age persons a range of careers at high wage rates. 
But high productivity is not the only element of high performance. 
The other element is thriving, prospering participants. This requires jobs to be rewarding in more than pecuniary ways - enlisting the minds of employees, engaging them in problem solving, leading them to discover some of their talents and expanding their abilities. 
This personal growth, while an end in itself, is also a source of job satisfaction, which in turn boosts participation in the labor force, and of high employee loyalty, which lowers unemployment, making more good jobs available. 
What is needed for high performance? 
Basically, it is productive change, which I call economic dynamism . 
For employees to develop, they must be imbedded in a stimulating workplace, with new problems to solve, harder tasks to be mastered, added abilities to strive for. 
Less obviously, a country does not want misguided or pointless change; it wants investments that appear to the financial sector as productive. 
The late 1990's produced evidence that low dynamism was associated with weak economic performance, particularly low prosperity. 
Of the 12 large OECD economies, three--Germany, Italy, and France--were conspicuously un-dynamic: they missed the 1990's investment boom or were awfully late to it. 
These same economies also ranked at or near the bottom in unemployment and labor-force participation, both before the boom and now. 
What are the requirements for dynamism? 
Yale University's Robert Shiller has suggested that I believe that Europeans lack dynamism owing to a deficiency of entrepreneurial "spirit." 
I have pondered the expressed uneasiness of Europeans about making money, and speculated that their schooling might drain away some playfulness and creativity. 
But that is not my explanation of Europe's problem. 
For one thing, it is hard to decide whether such cultural patterns are causes or effects of dynamic economies. 
My thesis is that the degree of dynamism in a nation's economy hinges on its development of some key economic institutions - company law and corporate governance, the population's preparation for business life, the development of financial instruments such as the stock market and so forth. 
Such general institutions as the rule of law and provision of enough personal and national security to safeguard earning, saving and investing are needed for any market economy, even market socialism; they are insufficient for dynamism. 
Evidence exists for this thesis. 
One could have predicted in advance of the recent boom how the 12 large OECD economies would rank simply by knowing the percentage of the population with a university degree, the OECD index of barriers to entrepreneurs, and the breadth of the stock exchange (measured by the market value of outstanding shares relative to GDP years before the boom). 
This evidence linking employment to dynamism and tracing dynamism to favorable institutions, such as a well-developed stock market, and to obstructive institutions, such as myriad licenses for entry by new firms, is an advance in our understanding of healthy economies. 
It is useful to know that there is vastly more to creating economic dynamism than private property; and that high unemployment is not to be laid solely to labor market restrictions. 
Is there evidence directly associating high performance - that is, high employment and high productivity - with the presence of institutions believed helpful to dynamism and the absence of those believed harmful? 
Such evidence emerges even with the small sample of just 12 large OECD economies. 
A cross-country analysis estimates that university education is good for all three elements of economic performance: the employment rate (relative to the working-age population), the unemployment rate (relative to labor force), and labor productivity too. 
Scoring high on the OECD index of barriers to entrepreneurs is bad for all three elements of performance. A high level of job protection is bad for productivity but does not have a clear effect on either employment rate or unemployment rate. 
I have suggested that the organizational structure of the Continental economies limits their performance. 
This corporatist structure - labor unions, workers councils, employer confederations, and big banks - facilitates direct interventions in economic decision making to give interest groups protection and veto power. 
In fact, among the 12 large OECD nations, a higher degree of corporatism as commonly measured is loosely associated with lower employment and lower productivity. 
The reason for these negative effects appears to be that high corporatism is strongly correlated with stifled entrepreneurship and obstructive job protection. 
The corporatist structure by itself does not detract from performance. 
Here again, the truth lies in the nuances. This is precisely why Europe should be debating about the Continent's real problems, not locking their economies into corporatism by enshrining the "social market economy" into the emerging EU constitution. 

 

The Earth Moves in Britain 
LONDON – Volcanoes have consequences – and I’m not just thinking about the chaos caused to air travel by Iceland’s unpronounceable last eruption (known to the Pentagon as E-15). 
In 1783, a volcano in Iceland spewed so much ash into the atmosphere that the entire northern hemisphere was cooled for almost three years. 
This resulted in crop failures and famine, and some historians argue that it helped to precipitate the French Revolution. 
Should we blame the “British Revolution” of 2010 on E-15? 
This undoubtedly would be going too far. 
But the agreement between the Conservatives and Liberal Democrats to form a coalition government does look revolutionary to many British voters. 
In London, governing arrangements that other countries take for granted look like a radically new type of politics. 
The election produced an inconclusive result, even though the Conservative Party received 7% more of the popular vote than the second-place Labour Party. 
The failure to equalize electorates in different constituencies counted heavily against the winners, as it takes more votes to send a Conservative MP to Westminster than it does a Labour MP. 
But the coalition negotiated by David Cameron’s Conservatives with the third-place Liberal Democrats (which should give the government a comfortable majority in Parliament) is not so novel as some people think. 
In the last years of the nineteenth century and the first half of the twentieth, coalition governments were quite common in Britain. 
It is only in the years since the Second World War that one-party government has been the rule, though the country did have an informal pact between Labour and Liberals in the 1970’s. 
Benjamin Disraeli, the nineteenth-century prime minister, famously said that Britain does not like coalitions. 
Although it is too early to judge, opinion polls suggest that the British people do at least like the look and the purpose of the current one. 
But can this infatuation possibly last? 
At the local level, Conservatives and Liberals tend to be at daggers drawn. 
This is partly because Liberals have usually thrived by winning seats from Conservatives when Conservative administrations are unpopular. 
Conservatives, for their part, think of Liberals as combining sanctimoniousness with hard-ball electoral tactics. 
Moreover, there are substantial policy differences between the two parties, with Liberals placing political reform at the top of their agenda, in order to establish an electoral system that would suit them better. 
Despite all this, the marriage has taken place, with the two parties’ smart, attractive, and socially similar leaders – David Cameron and Nick Clegg – taking a bold gamble on their ability to get this new show on the road and to keep it there. 
Cameron and Clegg have agreed, in a constitutional innovation, that the coalition should last the full five years until the deadline for the next election. 
They have hammered out a common platform that has involved give-and-take on both sides. 
The Liberals have taken five seats in the Cabinet, and more in the lower ministerial ranks. 
The Conservatives have agreed to hold a referendum on whether Britain should change its first-past-the-post electoral system to an alternative-vote arrangement. 
For both parties, the biggest justification for this unorthodox act of political courage is the scale of the economic problems facing Britain. 
The Liberal-Conservative coalition inherits, by common consent, the worst economic legacy since the war, with a huge hole in the public finances that is starting to look ever deeper as new ministers get a chance to inspect things for themselves. 
Indeed, Liam Byrne, the outgoing Labour budget chief, left a note to his successor saying “I’m afraid there is no money. 
Kind regards and good luck.” 
It was meant to be a joke. 
But there won’t be many laughs when cherished public programs are cut, welfare entitlements curbed, and taxes raised. 
The bond markets will demand quick and effective action. 
So the new government has no alternative but to begin the long haul of restoring the nation’s finances to the black. 
The lesson for other governments is clear: if you want independence of action, don’t put yourself in hock. 
From the Conservatives’ point of view, there is much to be said for sharing responsibility for what has to be done. 
The Liberals, meanwhile, have a golden opportunity to show that they are capable of government, rather than simply flakey representatives of the “None of the Above” party. 
As the months pass, both parties will probably find that they face their greatest political difficulty in managing the fringes of their own camps – rightists in the Conservative Party, who don’t like the centrist moderation of the coalition’s policies, and leftists in the Liberal Democratic Party who don’t want to support a largely Conservative government. 
But if the coalition works and lasts, then we will see not so much a political volcano in Britain as a real shift in the tectonic plates. 
Nothing will be quite the same again. 

The East Asian Miracle Revisited 
HONG KONG – Almost two decades ago, the World Bank published its landmark study The East Asian Miracle, analyzing why East Asian economies grew faster than emerging markets in Latin America, Africa, and elsewhere. 
These economies, the study concluded, achieved high growth rates by getting the basics right, promoting investment, nurturing human capital, and opening up to export manufacturing. 
But that was not all. 
The World Bank also acknowledged, grudgingly, that governments intervened – systematically and through multiple channels – to foster development, including in specific industries in specific locations via subsidies, tax incentives, and financial repression. 
In the intervening years, particularly after the Asian Financial Crisis, the pro-market, anti-intervention Washington Consensus fell out of favor. 
A “New Institutional Economics” (NIE) gained ground by filling in the gaps left by mainstream models, which ignored the central importance of institutions in managing the change and uncertainty that affect resource allocation and social choice. 
Indeed, in light of today’s Great Recession and the current European debt crisis, the main question remains that of the role of the state in promoting growth and development. 
It was the collapse of the Soviet bloc’s planned economies that spurred both free-market hubris and the realization that institutions matter. 
But it was China’s ability to sustain rapid economic growth for three decades that necessitated a revisionist look at statist capitalism. 
Nobel laureate economist Douglass North argued early on that human society created institutions to deal with information asymmetry, but that their creations immediately gave rise to the problem of how to constrain such institutions to fulfill their intended objectives. 
In 2000, Oliver E. Williamson classified four levels of social analysis for institutions – informal institutions, customs, traditions, norms, and religion; formal institutions with rules governing property rights, social order, the judiciary, and the bureaucracy; governance structures and their alignment to economize on transaction costs; and decentralized decision-making in resource allocation (the domain of neo-classical economics). 
According to Williamson, NIE is primarily concerned with the economic and political ramifications of formal rules and governance structures. 
But, for many emerging economies, it is the embeddedness of informal rules, norms, and beliefs, and their slowness to change, that prevents many economies’ breakthrough to more advanced, knowledge-based growth. 
Francis Fukuyama’s new book The Origins of Political Order attempts to address this problem. 
He examines the emergence of three categories of political institutions – the state, the rule of law, and accountable government, the latter two being constraints on the state that prevent it from becoming despotic. 
Fukuyama argues that patrimonialism – defined as the natural human propensity to favor family and friends – is the bane of the rule of law and accountable government. 
But, while patrimonialism may well be the main barrier to countries’ advance to middle-class democracy – and a key reason for autocratic states’ fragility – it may also be a more general feature of all political and economic systems. 
Witness the current debate about whether governments in advanced economies have been captured by financial interests – a question that Gillian Tett poses in a recent review article in Foreign Affairs. 
“Should governments rein in finance to crush the elite,” she asks, “or should they simply accept income differentials and financial savings as the inevitable price of dynamic societies?” 
This is not a trivial question, given the role of unabated inequality in growing social unrest and even revolution around the world. 
Indeed, the real surprise is that protests such as “Occupy Wall Street” have resulted in so little change, suggesting that institutions, once established, are “sticky” in preserving the status quo. 
This is particularly relevant to Asia’s growth story. 
Former British colonies like India and Malaysia inherited common law and institutional checks and balances, but several today confront institutional decay, rising corruption, and creeping patrimonialism. 
Other economies, such as China, are seeking ways to establish the rule of law by strengthening the institutional framework within the framework of one-party rule. 
Both Fukuyama and North conclude that strong state-led economies can be accountable, but become fragile should the ruling elites fail to respond to popular majorities and to global norms of behavior and governance. 
North argues that competition is a key force driving adaptive efficiency among institutions. 
A basic insight of NIE is that measuring transaction costs in various factor and product markets can reveal inefficiencies and barriers to better performance. 
An examination of transaction costs in global and domestic supply chains would reveal the extent to which rent-seeking activities and policy distortions deter the emergence of competitive markets. 
For advanced economies, the study of Williamson’s levels two and three – formal institutions and their governance – can lead to important insights. 
But, for emerging markets in Asia and elsewhere, we are convinced that the study of informal institutions, behavior, and norms offers a better understanding of the challenges of managing growth and performance. 
Simply put, in many emerging markets, it is not a lack of understanding of international best practices that holds back economic performance. Rather, it is the conflict between these practices and traditional or domestic social relations and practices that entrench vested interests opposed to change. 

The East Asian Triangle 
Once again, North Korea’s pursuit of nuclear weapons is threatening Asia’s stability. 
Japan’s new prime minister, Shinzo Abe, hastily arranged a summit in China with President Hu Jintao on the eve of North Korea’s nuclear test, a meeting that saw both men agree that such a move was “intolerable.” 
The meeting is a welcome development. 
But Abe comes into office with a reputation as a stronger nationalist than his predecessor, Junichiro Koizumi, whose insistence on visiting the controversial Yasukuni Shrine (where Class A war criminals from World War II are buried) helped sour relations with China. 
For stability to be preserved, Sino-Japanese relations must improve. 
Although North Korea’s nuclear ambitions are worrying and destabilizing, China’s rise is the key strategic issue in East Asia. 
For three decades, its economy has grown by 8% to 10% annually. 
Its defense expenditures have an even faster pace. 
Yet Chinese leaders speak of China’s “peaceful rise” and “peaceful development.” 
Some believe that China cannot rise peacefully, and will seek hegemony in East Asia, leading to conflict with the United States and Japan. 
Others point out that China has engaged in “good neighbor” policies since the 1990’s, settled border disputes, played a greater role in international institutions, and recognized the benefits of using soft power. 
A decade ago, I oversaw preparation of the US Pentagon’s East Asian Strategy Report , which has guided American policy under the Clinton and Bush administrations. 
Back then, there was a debate between those who wanted to contain China’s growing strength increased and those who urged China’s integration into the international system. 
Containment was unfeasible, because, unlike the Soviet Union during the Cold War, China’s neighbors did not see it as a clear and present danger. 
Moreover, treating China as an enemy would ensure that it became one, thus unnecessarily ignoring the possibility of benign outcomes. 
The strategy we chose was to “balance and integrate.” 
The East Asian balance of power rested on the triangle of China, Japan, and the US. 
By reaffirming the US-Japan security relationship in the Clinton-Hashimoto declaration of 1996, the US helped structure a favorable regional balance. 
By simultaneously encouraging China’s entry into the World Trade Organization and other institutions, we created incentives for good behavior. 
So integration was hedged by realism in case things went wrong. 
That strategy has largely worked. 
China’s military power has increased, but its behavior has been more moderate than it was a decade ago. 
China is a long way from posing the kind of challenge to American preponderance that the Kaiser’s Germany posed when it surpassed Britain at the beginning of the twentieth century. 
The key to military power in today’s information age depends on the ability to integrate complex systems of space-based surveillance, high speed computers, and “smart” weapons. 
It is not likely that China (or others) will soon close that gap with the US. 
Of course, the fact that China is unlikely to compete with the US on a global basis does not mean that it could not challenge the US in East Asia, or that war over Taiwan is not possible. 
If Taiwan were to declare independence, it is likely that China would use force, regardless of the perceived economic or military costs. 
But it would be unlikely to win such a war, and prudent policy on all sides can make such a war unlikely. 
So what is the strategic problem today? 
Stability in East Asia depends upon good relations between all three sides of the US-China-Japan triangle, but ties between China and Japan deteriorated in the Koizumi years. 
China permitted demonstrations, sometimes violent, against Japanese consulates in protest of changes in Japanese textbooks that softened descriptions of Japan’s invasion in the 1930’s. 
After 22 million Chinese signed a petition against Japanese membership of the United Nations Security Council, Premier Wen Jiabao announced China’s opposition to such a step. 
China also objected to Japanese statements about Taiwan. 
And there are territorial disputes about small islands and potential gas reserves near the China-Japan maritime boundary. 
The most contentious issue, however, has been prime ministerial visits to the Yasukuni Shrine, and, until Abe’s visit, China had been reluctant to engage in any summit meetings with Japan so long as such visits continue. 
Although China has become Japan’s largest partner in trade and foreign direct investment, nationalists in the two countries have fueled each other’s extremism, while their governments play with fire. 
American interests rest on regional stability and continued growth in trade and investment. 
So President George W. Bush could quietly tell Abe that we welcome good relations between Japan and China, and that prime ministerial visits to the Yasukuni Shrine undercut Japan’s own interests in East Asia. 
It reminds Asians of the repulsive Japan of the 1930’s rather than the attractive Japan of today. 
At the same time, the US can be cautious about involving Japan in Taiwan issues – a neuralgic point for China – while encouraging the development of Asian institutions that increase contacts and dampen conflict. 
This can include the development of the East Asian Summit, revival of the Asian Pacific Economic Cooperation (APEC), and the evolution of the current six-party talks on North Korea into a permanent Northeast Asia Security Dialogue. 
Fortunately, there are signs that both China and Japan are seeking to back away from the impasse of recent years. 
While Abe has maintained his position on Yasukuni, his summit with Chinese President Hu Jintao was a promising step forward. 
Some Chinese analysts, for their part, recognize the danger in stimulating too much nationalism toward Japan. 
The US should quietly try to nudge these steps forward. 
The US-Japan alliance remains crucial to stability in East Asia, but it takes three sides to make a triangle. 

The ECB Picks Up The Pace 
Buoyant US economic growth, so far, has provided the European Central Bank with the necessary global backdrop to raise interest rates from very low levels at a slow and steady pace that limits political friction with euro-zone political leaders but that gets the job done. 
That is about to change. 
The latest anecdotal evidence from the US indicates that the economy is taking a sharp downward turn, which should become manifest in the coming months. 
Unless the ECB picks up the pace of interest-rate increases now, the goal of interest-rate neutrality may not be politically feasible, jeopardizing achievement of the bank’s price stability goals. 
The ECB should act with greater alacrity not because there are increased prospects for future growth, but for the opposite reason: the fear that European growth will slow, thus limiting the possibility for future rate hikes. 
Indeed, even before the sudden downturn in the US economy, a growing number of members of the ECB’s Governing Council already had come to the conclusion that accelerating the pace of interest-rate increases was needed if its goal of monetary neutrality was to be achieved. 
The key reason is that several recent “reforms” announced by German Chancellor Angela Merkel – raising the value-added tax, increasing user charges for healthcare, and taxing interest payments as a part of so-called corporate tax reform – promise to reduce German economic growth, perhaps significantly, in 2007. 
When Germany sneezes, Europe catches a cold. 
As a result, Merkel’s reforms have increased the angst of euro-zone central bankers that the “window of opportunity” for future rate hikes might be closing. 
The latest ZEW survey of euro-zone business confidence buttresses these fears. 
It shows that current conditions are good, but that expectations about future conditions have dropped off significantly. 
The message for the ECB is clear: make haste while the sun shines. 
That is exactly what the ECB is doing. 
ECB President Jean-Claude Trichet indicated at his July press conference that the bank plans to raise interest rates by 25 basis points on August 3, not August 31, as expected. 
This implies an interval of two months between interest-rate moves instead of the three-month interval that has become standard ECB practice in the current interest-rate cycle. 
The next rate hike in the normalization process is expected in October, two months after the expected August move. 
Ironically, the October meeting of the ECB’s Governing Council will take place in Paris this year. 
French politicians have been the most aggressive in putting political pressure on the ECB to relax its interest-rate normalization policy. 
French Finance Minister Thierry Breton recently warned the ECB about “nasty surprises.” 
Prospective French presidential candidate Nicolas Sarkozy wants the ECB to promote economic growth, not just price stability. 
The Paris meeting affords the ECB an opportunity to make a political statement – its “Declaration of Independence,” so to speak – by raising interest rates on French soil. 
Trichet already has cleared the way for this to happen. 
In June, the ECB jettisoned its long-standing practice of not changing rates outside of Frankfurt, increasing them by 25 basis points in Madrid. 
Trichet is a clever and resourceful person. 
But even he might find it daunting to reconcile the conflicting demands of the ECB to accelerate the interest-rate normalization process and those of the French political establishment to maintain the status quo. 
But the recent good economic numbers coming out of France should make an October rate hike easier for French politicians to accept. 
The ECB is accelerating the pace of normalization at precisely the right moment. 
The danger is that it will be blamed if European growth falters. 
However, with the German and US economies slowing precipitously, the ECB would have a perfect cover for its interest-rate moves. 
The ECB could convincingly argue that Merkel’s reforms and the US, not its interest-rate hikes, are responsible for the European slowdown, should one occur. 
Politically, the path is clear for the ECB to act. 

The ECB’s Honeymoon is Over 
The honeymoon for the European Central Bank is over. 
Because European interest rates no longer are clearly out of whack with the fundamentals of the euro-zone economy, monetary policy has become more complex. 
At the same time, France has given a strong mandate to its new president, Nicolas Sarkozy, who is without question the most formidable political adversary the ECB has had to face in its brief history. 
Sarkozy stands ready to pounce on any mistakes the Bank may make in this more difficult policy environment. 
With European interest rates up 200 basis points since late 2005 and the euro near a record high, Sarkozy wants the ECB to stop raising rates now. 
ECB president Jean-Claude Trichet and the Governing Council strongly disagree. 
At the ECB press conference in early July, Trichet signaled at least one more rate hike—either in September or October. 
Some Council members are known to support two more rate hikes before year-end. 
What makes monetary policy tricky at this point is that the German economy—which has been Europe’s locomotive during the current cyclical upturn—may be reaching a turning point. 
Surveys of business and investor confidence have softened—the respected IFO index of German business sentiment fell from 107.0 to 106.4 in Julyamp#45;amp#45;and the so-called “hard data”—industrial production, retail sales, etc.amp#45;amp#45;- has been mixed. 
Second quarter German GDP has stalled after a surprisingly strong first quarter. 
The jury is out but there is reason to be concerned. 
The euro is at record levels, oil prices are surging and interest rates are expected to go higher. 
The euro-zone economy—including Germany’samp#45;amp#45;is not bulletproof though the hawks in the Governing Council often talk as if it were. 
Just as last year when there was unwarranted growth pessimism in Europe, this year there is unwarranted growth euphoria. 
Many Germans, in particular, are in denial that the cyclical upturn may be coming to an end. 
Were the Governing Council to miss the coming turn in the European economy while blithely raising interest rates, they would be portrayed as drunken sailors on a rate-raising binge. 
The roar for greater political control over Europe’s central bank would be deafening—and not only from France. 
The political costs for the ECB of making this type of mistake could be exorbitant. 
This is why the ECB must be very prudent as it considers whether to maintain the current pace of rate hikes, in which case it would raise rates by 25 basis points in September, or slow the pace down a bit, in which case the next rate hike would come in October at the earliest. 
In the current political environment, the dangers to the ECB from outside political interference are much greater from raising rates too fast than too slowly. 
If it goes too slow, the ECB has earned sufficient credibility as an inflation fighter to make up for it in the future with little if any economic or political cost. 
But if it goes too fast, the political cost could be substantial and irreversible. 
Politicians will push for more control and probably get it, Maastricht treaty or no Maastricht treaty. 
Waiting until October for the next move up is like buying insurance against a catastrophic loss. 
But will the ECB see it this way? 
As a matter of principle, the hawks refuse to consider the political costs of their actions. 
In earlier times with no formidable adversaries in the political arena, this was a harmless affectation. But it is an extremely dangerous attitude with people like Sarkozy ready, willing and able to impose high political costs upon the bank should it stumble. 
There is more interest in Sarkozy’s populist ideas about currency intervention and adding a new political dimension to monetary policy decisions than is commonly realized. 
The hawks also suffer from what can be called a “catch up” complex. 
No matter how high rates go, they think they’re behind. 
They want to go in September so that they can go again in December (even before knowing the data)—and they won’t stop there either. 
Even the doves might support a rate hike in September to counter-act the charge that they are being bullied out of a September hike by Sarkozy. 
There is no doubt that Sarkozy’s attacks on the ECB are having a counter-productive effect in this regard. They are pressuring the ECB to raise rates sooner than later. 
But a September rate move also serves Sarkozy’s interests, as it will give him more ammunition to portray the ECB as out of control and in need of political disciplining. 
For the ECB to protect itself from such charges, far better to wait until October when the bank can go to the public and say in effect; “Look, do you see how reasonable we have been. 
Now we must raise rates.” 
In the final analysis, whether the next rate increase comes in September, October or whenever—and it looks like September notwithstanding current warning signs like IFO that suggest a possible slowdown in the coming monthsamp#45;amp#45; the data will determine how far the ECB goes with its rate hikes if the bank is savvy enough to keep the politicians at bay. 
But this is a big “if”. 
The fight is on between the two French titans—Trichet and Sarkozy—with the fate of Europe’s central bank hanging in the balance. 


The ECB’s Tone-Deaf President 
PALO ALTO – Once upon a time, European Central Bank President Jean-Claude Trichet communicated effectively with the outside world. 
Not anymore. 
More than a few eyebrows were raised after the ECB’s January Governing Council meeting, when Trichet threatened that the Bank would act “preemptively” if labor unions tried to embed higher energy and food prices into new contracts, risking a wage-price spiral. 
This threat took a heavy toll on the ECB’s credibility, since an interest-rate hike in the midst of the most serious financial crisis in decades was obviously absurd. 
No one believed it, and the ECB not only withdrew its clumsy threat the next month, but it adopted a policy of interest-rate neutrality. 
But the announcement of this policy change at the February meeting also did not go smoothly. 
Trichet somehow garbled the Council’s message in his press conference, making it sound as if the ECB wanted to shift to an easing bias instead of “wait and see” neutrality. 
European fixed-income markets rallied strongly as a result, only to reverse course days later when Trichet and his colleagues made it clear that the markets had “misread” him. 
So there was unwelcome and unneeded market volatility because Trichet couldn’t get the message out straight. 
Indications that Trichet’s communicative skills were slipping already had become evident last September, when the Governing Council could not follow through with the rate increase the ECB president had promised the previous month. 
For some unknown reason, Trichet is keen not to surprise markets over the very short term. He tips them off about what he plans to do one month in advance, using code words like “vigilance” to signal policy change, all the while maintaining with a straight face that the bank never “pre-commits” its policy stance. 
Many on the Governing Council object to this childish game of code words, because it eliminates their freedom of action once the Council commits itself to a course of action. 
The Council may then be forced to choose between doing the right thing and preserving the credibility of the ECB’s communications. 
This is precisely what happened in September, when the financial crisis made it impossible for the ECB to proceed with the interest-rate hike that it had “announced” in August. 
Code word communications, which only work in a stable and crisis-free economic and financial environment, had damaged ECB credibility. 
Calm economic waters had given the ECB and Trichet a honeymoon until last fall. 
But, with financial markets now in turmoil and likely to stay that way, the time has come for the ECB to jettison its use of code words – a poor substitute for real central bank transparency in any case. 
What also needs to be jettisoned from the ECB’s communications policy is its obsession with the short run. 
With the United States now in recession (and the possibility of a deep recession not that remote), it is striking how positive ECB officials sound about the European economy: Europe’s “economic fundamentals are sound,” the economy is “robust,” economic performance is “just below potential,” and so on. 
The ECB’s policymakers are not blind, merely shortsighted. 
They fear that honesty about Europe’s economic prospects over the next year or so might cause markets to force it into an unwanted rate cut now. 
So they exaggerate and tell stories about how the European economy is fundamentally different from the US economy. 
This is a major mistake, for which the ECB could pay dearly. 
Yes, today the European economy is not doing badly. 
But how long is this likely to last with the US falling into a deep slump? 
The ECB should be preparing Europeans for what many of its own officials admit in private: Europe has not “de-coupled” from the US. 
On the contrary, America’s current economic difficulties will hit Europe hard, but with a time lag – the best guess being 2009. 
This is not to argue, of course, that the ECB should cut interest rates now. 
On the contrary, the Bank’s current policy of fighting inflationary pressures by slower growth, a stronger euro, and the credit crunch seems just about right for the time being. 
But, after all the happy talk about the European economy, how much credibility will the ECB have if Europe eventually succumbs to recessionary pressures from abroad? 
The ECB’s independence is still a contentious political issue in Europe. 
It is more prudent that it voice concern for Europe’s future economic prospects today than face a deceived and angry public tomorrow. 

The ECB’s Two Pillars - A Success 
In October 1998, just before the start of the European Monetary Union, the Governing Council of the European Central Bank (ECB) adopted a stability oriented monetary policy strategy. 
This strategy comprises three elements: First and foremost it contains a clear commitment to the primary goal of the ECB, which is to safeguard price stability. 
Price stability was defined as an annual increase in the price level of below two percent over the medium term. 
The other two elements, which soon became famous under the headline of “two pillars”, serve as a means to assess the risks to the goal of price stability . 
The monetary analysis pillar comprises all information coming from various monetary and credit aggregates and serves to figure out the risks to price stability over the medium- to long-run . 
The economic analysis pillar is based on a wide set of domestic and international economic indicators from the real and financial sectors (wages, import prices, interest and exchange rates etc.). 
It provides a basis for the assessment of short- to medium-term price developments. 
This two pillar approach constitutes a framework for cross-checking indications from the shorter-term economic analysis with those from the longer-term monetary analysis in order to obtain a robust view about the risks to price stability. 
In the standard model of the neo-keynesian approach, which has become more and more “state-of-the-art”, the usefulness of money to monetary policy analysis is challenged; there is no need for monetary cross-checking, monetary analysis has no value-added and is superfluous. 
I am not convinced by these arguments. 
Customary inflation forecasts and economic analysis alone are not a sufficient basis for monetary policy decisions. 
While such decisions must not ignore longer-term developments, the time horizon for inflation forecasts is usually only one to two years, beyond it gets highly uncertain. 
Moreover, while monetary policy has always to be conducted under uncertainty, the ECB was confronted with a situation of extreme uncertainty. 
There was uncertainty concerning the state of the economy. 
The data situation around the start was very unsatisfactory. 
Unobservable indicators like the output gap, which plays e.g. a central role in neo-keynesian recommendations for monetary policy, are generally known to be very difficult to estimate in real time. 
Estimates for the output gap of the euro area at that time were especially doubtful with data coming from different international institutions varying widely, and being revised substantially at later stages. 
Nor was it clear which models provide the most reasonable account of the functioning of the economy, especially in a case where more or less heterogeneous countries were to form a monetary union. 
This was compounded by strategic uncertainty related to how markets, investors and consumers would react to the replacement of national currencies with the Euro. 
In this highly uncertain environment, monetary policy decisions which did not rely on a solid framework could have been misguided. 
This posed a risk of substantial policy errors, which would have constituted a deadly blow on reputation, the most important capital of any central bank. 
Thus the ECB needed to rely on the few robust results theory and experience can provide. 
The long-run connection between money and price developments is among the most robust economic relationships. 
“Inflation is always and everywhere a monetary phenomenon”. 
This statement by the late Nobel laureate Milton Friedman has never lost its validity. 
And who would deny that monetary policy has to do with money? 
Certainly, monetary analysis is no easy task, though this is true for all relevant economic explanations. 
No question, the neo-keynesian approach is useful for a central bank’s policy analysis. 
But including monetary analysis in a monetary policy strategy is vital to the central bank’s decision making process. 
It would be strange to suggest that any central bank could ignore the information from money. 
Many studies have also shown that there is hardly any major asset price inflation episode which was not accompanied if not preceded by strong growth of money and/or credit. 
The question is not whether or not to include monetary analysis in the monetary policy strategy, but how to reconcile the results from the monetary and the economic analyses to achieve a comprehensive and consistent assessment of the risks to price stability. 
In the strategy of the ECB this is the role of crosschecking. 
It is not surprising that in a world of low inflation central banks as well as academics have lost interest in “money”. 
One can only hope that the world does not have to go through the same process of pathological learning via high inflation which followed the neglect of money during the fifties and sixties of the last century. 
After all, is it not premature – if not plainly arrogant- to claim that all this evidence collected over many centuries and across numerous countries has lost any meaning for the present and the future? 
Can models without an explicit, well developed financial sector be expected to explain an economic world in which financial markets play an ever-increasing role? 
How could central banks, which depend on these financial markets to serve as the transmission mechanism of monetary policy, possibly rely on such models? 
The ECB has never claimed that its strategy is the ultimate solution to the challenges monetary policy is confronted with. 
But, it has recognised the need to include monetary analysis – in a very broad sense – into its policy considerations. 
And the strategy was flexible enough to integrate the broadening and deepening of both the monetary and economic analysis. 
The two pillar strategy responds to the fact that we (still) lack a model which encompasses both dimensions, the economic or real and the monetary, in a consistent and robust manner. 
As long as such a “one-pillar-approach” is unavailable, there is no convincing reason why the ECB should change a strategy which has served it well and allowed it to establish a remarkable track record. 

Are Emerging Markets Submerging? 
CAMBRIDGE – With economic growth slowing significantly in many major middle-income countries and asset prices falling sharply across the board, is the inevitable “echo crisis” in emerging markets already upon us? 
After years of solid – and sometimes strong – output gains since the 2008 financial crisis, the combined effect of decelerating long-term growth in China and a potential end to ultra-easy monetary policies in advanced countries is exposing significant fragilities. 
The fact that relatively moderate shocks have caused such profound trauma in emerging markets makes one wonder what problems a more dramatic shift would trigger. 
Do emerging countries have the capacity to react, and what kind of policies would a new round of lending by the International Monetary Fund bring? 
Has the eurozone crisis finally taught the IMF that public and private debt overhangs are significant impediments to growth, and that it should place much greater emphasis on debt write-downs and restructuring than it has in the past? 
The market has been particularly brutal to countries that need to finance significant ongoing current-account deficits, such as Brazil, India, South Africa, and Indonesia. 
Fortunately, a combination of flexible exchange rates, strong international reserves, better monetary regimes, and a shift away from foreign-currency debt provides some measure of protection. 
Nonetheless, years of political paralysis and postponed structural reforms have created vulnerabilities. 
Of course, countries like Argentina and Venezuela were extreme in their dependence on favorable commodity prices and easy international financial conditions to generate growth. 
But the good times obscured weaknesses in many other countries as well. 
The growth slowdown is a much greater concern than the recent asset-price volatility, even if the latter grabs more headlines. 
Equity and bond markets in the developing world remain relatively illiquid, even after the long boom. 
Thus, even modest portfolio shifts can still lead to big price swings, perhaps even more so when traders are off on their August vacations. 
Until recently, international investors believed that expanding their portfolios in emerging markets was a no-brainer. 
The developing world was growing nicely, while the advanced countries were virtually stagnant. 
Businesses began to see a growing middle class that could potentially underpin not only economic growth but also political stability. 
Even countries ranked toward the bottom of global corruption indices – for example, Russia and Nigeria – boasted soaring middle-class populations and rising consumer demand. 
This basic storyline has not changed. 
But a narrowing of growth differentials has made emerging markets a bit less of a no-brainer for investors, and this is naturally producing sizable effects on these countries’ asset prices. 
A step toward normalization of interest-rate spreads – which quantitative easing has made exaggeratedly low – should not be cause for panic. 
The fallback in bond prices does not yet portend a repeat of the Latin American debt crisis of the 1980’s or the Asian financial crisis of the late 1990’s. 
Indeed, some emerging markets – for example, Colombia – had been issuing public debt at record-low interest-rate spreads over US treasuries. 
Their finance ministers, while euphoric at their countries’ record-low borrowing costs, must have understood that it might not last. 
Yes, there is ample reason for concern. 
For one thing, it is folly to think that more local-currency debt eliminates the possibility of a financial crisis. 
The fact that countries can resort to double-digit inflation rates and print their way out of a debt crisis is hardly reassuring. 
Decades of financial-market deepening would be undone, banks would fail, the poor would suffer disproportionately, and growth would falter. 
Alternatively, countries could impose stricter capital controls and financial-market regulations to lock in savers, as the advanced countries did after World War II. 
But financial repression is hardly painless and almost certainly reduces the allocative efficiency of credit markets, thereby impacting long-term growth. 
If the emerging-market slowdown were to turn into something worse, now or in a few years, is the world prepared? 
Here, too, there is serious cause for concern. 
The global banking system is still weak in general, and particularly so in Europe. 
There is considerable uncertainty about how the IMF would approach an emerging-market crisis after its experience in Europe, where it has had to balance policies aimed at promoting badly needed structural change in the eurozone and those aimed at short-run economic preservation. 
That is a topic for another day, but the European experience has raised tough questions about whether the IMF has a double standard for European countries (even those, like Greece, that are really emerging markets). 
It is to be hoped, of course, that things will not come to that. 
It seems unlikely that international investors will give up on emerging markets just yet, not when their long-term prospects still look much better than those of the advanced economies. 
Besides, the current sentiment that the eurozone has gotten past the worst seems exceedingly optimistic. 
There has been only very modest structural reform in countries like Italy and France. 
Fundamental questions, including how to operate a banking union in Europe, remain contentious. 
Spain’s huge risk premium has almost disappeared, but its debt problems have not. 
Meanwhile, across the Atlantic, the political polarization in Washington is distressing, with another debt ceiling debacle looming. 
Today’s retreat to advanced-country asset markets could quickly revert to retreat from them. 
The emerging-market slowdown ought to be a warning shot that something much worse could happen. 
One can only hope that if that day should ever arrive, the world will be better prepared than it is right now. 

The Defense Dividend 
BRUSSELS – On a hillside overlooking the Turkish city of Gaziantep, Patriot missile launchers are keeping watch under NATO command and control. 
This is just one of six Patriot batteries from three Allied countries – Germany, the Netherlands, and the United States – providing protection for millions of people along Turkey’s southeastern border with Syria. 
The deployment shows NATO’s enduring commitment to its core task: safeguarding its members’ security. 
It also shows that, when a crisis erupts, there is no substitute for effective deterrence and defense. 
Virtually every day brings fresh evidence that an arc of crisis – from terrorism and weapons proliferation to cyber-attacks and piracy – is spreading from the Middle East and the Sahel to Central Asia. 
These risks will not disappear while NATO members focus on fixing their finances. 
The fact is that our way of life is predicated on security and stability, without which investment withers, employment collapses, and economies shrink. 
In these tough economic times, we are all acutely aware that security comes at a price. 
But we must not forget that the cost of insecurity is unacceptable. 
Defense is our essential insurance policy in a complex and unpredictable world. 
Conflicts take a terrible human toll, while restoring peace and supporting reconstruction is extremely expensive. 
For example, the total cost of the Balkan wars of the 1990’s is estimated at $150 billion. 
Today, NATO continues to maintain a safe and secure environment for all of Kosovo’s people, and is helping the entire region progress along the path of Euro-Atlantic integration. 
Another example is piracy, which can threaten vital trade and energy routes. 
The overall cost of piracy off the coast of Somalia in 2011 was estimated at $7 billion. 
But, with concerted international efforts, including by NATO ships, pirate attacks have dropped sharply. 
Although the situation remains precarious, for the last eight months pirates off the Horn of Africa have been unsuccessful in their attacks against merchant vessels. 
Finally, we have seen cyber-attacks not just swamping Web sites, but targeting entire countries, such as NATO ally Estonia in 2007. 
The Estonian presidency, parliament, government ministries, political parties, news organizations, banks, and communications companies were all hit. 
In fact, everything on which a modern democracy and knowledge-based economy relies was attacked. 
Today, as part of our continuing drive to improve the security of our members’ networks, Estonia’s capital, Tallinn, hosts a NATO cyber-defense center of excellence. 
These examples show that hard power and soft power go together. 
To be effective, we need both. 
When dealing with international security challenges, diplomacy remains the primary tool; but, by investing in defense, we can back up our statements with military strength and improve our chances of addressing challenges successfully. 
It is also an investment in our most innovative and technologically advanced industries. 
Indeed, research programs led by defense industries have already changed our lives, giving us the jet engine, the Internet, and satellite navigation. 
In the future, technology developed for military aerial surveillance could have major civilian benefits – for example, helping to control traffic and reduce road congestion, and assisting in the dispatch of rescue teams and humanitarian assistance. 
Expertise in the defense sector has been built up over generations. 
Like any other high-tech industry, it is constantly evolving. 
If we cut defense spending too much, for too long, we will sacrifice that hard-won expertise, which will be impossible to regenerate quickly when we need it most. 
A strong defense also helps to ensure that the benefits of security are shared across countries. 
NATO itself embodies that goal. 
Our 28 allies have more security together than they could achieve on their own. 
While this helps them to defend their own interests more effectively, it also allows them to play a much more active role in international crisis management, such as the protection of civilians in Libya in 2011. 
So defense investment is also investment in security and stability, in diplomacy and cooperation, and in technology and innovation. 
It is an investment in a safer and more prosperous future for our own countries and for the rest of the world. 
Even though defense budgets are under pressure in this time of austerity, it is essential that NATO members hold the line on defense spending and are prepared to increase it when their economies recover. 
The decisions that we take on defense today will have a profound impact on our children’s security tomorrow. 


Water Risk on the Rise 
WASHINGTON, DC – Water is never far from the news these days. 
This summer, northern India experienced one of its heaviest monsoon seasons in 80 years, leaving more than 800 people dead and forcing another 100,000 from their homes. 
Meanwhile, Central Europe faced its worst flooding in decades after heavy rains swelled major rivers like the Elbe and the Danube. 
In the United States, nearly half the country continues to suffer from drought, while heavy rainfall has broken records in the Northeast, devastated crops in the South, and now is inundating Colorado. 
Businesses are starting to wake up to the mounting risks that water – whether in overabundance or scarcity – can pose to their operations and bottom line. 
At the World Economic Forum in Davos this year, experts named water risk as one of the top four risks facing business in the twenty-first century. 
Similarly, 53% of companies surveyed by the Carbon Disclosure Project reported that water risks are already taking a toll, owing to property damage, higher prices, poor water quality, business interruptions, and supply-chain disruptions. 
The costs are mounting. 
Deutsche Bank Securities estimates that the recent US drought, which affected nearly two-thirds of the country’s lower 48 states, will reduce GDP growth by approximately one percentage point. 
Climate change, population growth, and other factors are driving up the risks. 
Twenty percent of global GDP already is produced in water-scarce areas. 
According to the International Food Policy Research Institute (IFPRI), in the absence of more sustainable water management, the share could rise to 45% by 2050, placing a significant portion of global economic output at risk. 
Companies know that sound risk-management strategies depend on solid data. 
When it comes to financial risks, data crunchers have access to vast amounts of information. 
But that has not been the case with water – until now. 
The World Resources Institute has joined with companies like Goldman Sachs, General Electric, and Shell to develop an online platform, called Aqueduct, to help measure and map water risks. 
Aqueduct uses the latest data and state-of-the-art modeling techniques to offer a rich, granular picture of water risks worldwide. 
Empowered with this data, companies can make better and more informed decisions. 
For example, CERES, a non-profit organization, has combined Aqueduct’s water-stress maps with hydraulic fracturing data (from FracFocus.org) to find that nearly one-half of shale oil and gas wells in the US are located in areas with high water stress. 
Early next year, Aqueduct will offer future projections of water stress based on the latest scientific analysis, including predicted effects of climate change. 
Major companies are already seizing on water-risk data. 
McDonald’s, for example, has asked more than 350 of its top supply-chain facilities to report on their water-risk exposure, using data from the Aqueduct tool. 
Incorporating water risk into McDonald’s Environmental Scorecard is an important step in engaging suppliers not only on water efficiency, but also in overall stewardship, including cooperation with local watershed stakeholders. 
The international clothing company H&M is working to reduce water-quality risk in its supply chain. 
Through its Cleaner Production Program, the company works with NGOs in Bangladesh and China to implement cost-saving improvements that reduce their fabric mills’ impact on local water quality. 
Similarly, the beverage company SABMiller is targeting a 25% reduction in the water intensity of its beer production between 2008 and 2015, and is now enhancing its water resilience throughout its global operations. 
Through its Water Futures Partnership, the company has identified which of its facilities are located in areas facing water-security risks and has created partnerships in the local watersheds to address these risks. 
The message is clear: water-risk management is shifting into the mainstream of business practices. 
More than 90 signatories of the United Nations Global Compact’s CEO Water Mandate have pledged to develop, implement, and report on water-sustainability policies and practices in both their own and their suppliers’ operations, and to work with stakeholders beyond their own operations to address water risk. 
Leading companies are showing that sustainable water management benefits all involved. 
While many executives have traditionally underappreciated the risks from climate change and resource degradation, understanding water risk – and acting to minimize it – is just one way that businesses are starting to incorporate natural-resource management into their core strategy and operations. 
Smart business leaders are investing in new tools that can provide comprehensive and up-to-date data, and companies are increasingly moving beyond recognition of natural risks to developing strategic responses to them. 
As more companies do so, laggards will be at a growing competitive disadvantage. 
They, too, will have to act before the next flood or drought strikes. 


The Economic Consequences of the Arab Revolt 
NEW YORK – Political turmoil in the Middle East has powerful economic and financial implications, particularly as it increases the risk of stagflation, a lethal combination of slowing growth and sharply rising inflation. 
Indeed, should stagflation emerge, there is a serious risk of a double-dip recession for a global economy that has barely emerged from its worst crisis in decades. 
Severe unrest in the Middle East has historically been a source of oil-price spikes, which in turn have triggered three of the last five global recessions. 
The Yom Kippur War in 1973 caused a sharp increase in oil prices, leading to the global stagflation of 1974-1975. 
The Iranian revolution in 1979 led to a similar stagflationary increase in oil prices, which culminated in the recession of 1980-1981. 
And Iraq’s invasion of Kuwait in August 1990 led to a spike in oil prices at a time when a US banking crisis was already tipping America into recession. 
Oil prices also played a role in the recent finance-driven global recession. 
By the summer of 2008, just before the collapse of Lehman Brothers, oil prices had doubled over the previous 12 months, reaching a peak of $148 a barrel – and delivering the coup de grâce to an already frail and struggling global economy buffeted by financial shocks. 
We don’t know yet whether political contagion in the Middle East will spread to other countries. 
The turmoil may yet be contained and recede, sending oil prices back to lower levels. 
But there is a serious chance that the uprisings will spread, destabilizing Bahrain, Algeria, Oman, Jordan, Yemen, and eventually even Saudi Arabia. 
Even before the recent Middle East political shocks, oil prices had risen above $80-$90 a barrel, an increase driven not only by energy-thirsty emerging-market economies, but also by non-fundamental factors: a wall of liquidity chasing assets and commodities in emerging markets, owing to near-zero interest rates and quantitative easing in advanced economies; momentum and herding behavior; and limited and inelastic oil supplies. 
If the threat of supply disruptions spreads beyond Libya, even the mere risk of lower output may sharply increase the “fear premium” via precautionary stockpiling of oil by investors and final users. 
The latest increases in oil prices – and the related increases in other commodity prices, especially food – imply several unfortunate consequences (even leaving aside the risk of severe civil unrest). 
First, inflationary pressure will grow in already-overheating emerging market economies, where oil and food prices represent up to two-thirds of the consumption basket. 
Given weak demand in slow-growing advanced economies, rising commodity prices may lead only to a small first-round effect on headline inflation there, with little second-round impact on core inflation. 
But advanced countries will not emerge unscathed. 
Indeed, the second risk posed by higher oil prices – a terms-of-trade and disposable income shock to all energy and commodity importers – will hit advanced economies especially hard, as they have barely emerged from recession and are still experiencing an anemic recovery. 
The third risk is that rising oil prices reduce investor confidence and increase risk aversion, leading to stock-market corrections that have negative wealth effects on consumption and capital spending. 
Business and consumer confidence are also likely to take a hit, further undermining demand. 
If oil prices rise much further – towards the peaks of 2008 – the advanced economies will slow sharply; many might even slip back into recession. 
And, even if prices remain at current levels for most of the year, global growth will slow and inflation will rise. 
What policy responses are available to dampen the risk of stagflation? 
In the short run, there are very few: Saudi Arabia – the only OPEC producer with excess capacity – could increase its output, and the US could use its Strategic Petroleum Reserve to increase the supply of oil. 
Over time – but this could take years – consumers could invest in alternative energy sources and reduce demand for fossil fuels via carbon taxes and new technologies. 
Because energy and food security are matters of economic as well as social and political stability, policies that reduce commodity-price volatility should be in the interest of producers and consumers. 
But the time to act is now. 
The transition from autocracy to democracy in the Middle East is likely to be bumpy and unstable, at best. 
In countries with pent-up demand for higher income and welfare, democratic fervor could lead to large budget deficits, excessive wage demands, and high inflation, ultimately resulting in severe economic crises. 
So a bold new assistance program should be designed for the region, modeled on the Marshall Plan in Western Europe after WWII, or on the support offered to Eastern Europe after the collapse of the Berlin Wall. 
Financing should come from the International Monetary Fund, the World Bank, the European Bank for Reconstruction and Development, as well as from bilateral support provided by the US, the European Union, China, and the Gulf states. 
The goal should be to stabilize these countries’ economies as they undertake their delicate political transitions. 
The stakes are high. 
Unstable political transitions could lead to high levels of social disorder, organized violence, and/or civil war, fueling further economic and political turmoil. 
Given the current risk-sensitivity of oil prices, the pain would not be confined to the Middle East. 

The Economic Consequences of War with Iraq 
War with Iraq seems inevitable, with or without the support of the UN. 
The economic costs of such a war could be huge, both in direct American outlays for war and its aftermath, and in the indirect spillovers on the world economy. 
This war would take place against a background of weak economic conditions globally, and would exacerbate those weaknesses, perhaps throwing the world economy into recession. 
The economic outcome of war could well depend on the diplomatic context. 
If America acts alone, the likely costs of war to the world economy will be higher than if it has the backing of the UN. 
The costs of war must be balanced against the costs of alternative actions. 
A high cost of war is certainly not a case for inaction, especially in the face of a serious risk that Iraq could obtain, and eventually use, weapons of mass destruction. 
Yet pursuing war where diplomatic means - weapons inspections, threats of retaliation in the face of Iraqi aggression, readiness of the UN to act if dangers from Iraq become imminent - might suffice could result in huge and avoidable economic (as well as other) costs. 
The traditional textbook view of war is that war stimulates an economy, at least in the short term. 
But that simple view of wartime economics is too narrow to describe the possible effects of an Iraqi war. 
We must also recognize that a war with Iraq, even a limited war, could profoundly disrupt the international flow of goods, services, and investments upon which our global economy now rests. 
These disruptive effects would not only dampen production, but would undermine investor and consumer confidence and thereby limit both private investment and consumer spending. 
The direct macroeconomic stimulus that could arise from military spending may be overwhelmed by the uncertainties and disruptions that would accompany military conflict. 
Such uncertainties are already visible. 
Oil prices have risen several dollars a barrel since late summer. 
Since June, US and world stock markets have declined by around 20% in dollar terms. 
Each rise in the probability of war has tended to push the markets down further. 
The modern world economy is built upon a complex network of global economic connections, and those connections are directly threatened by war. 
War would pose obvious and direct risks to shipping, notably shipping of oil from the Middle East. 
The increased costs could further depress the drop of cross-border capital flows that has been underway for two years, since the end of the US stock market boom. 
The decline in cross-border flows intensified after the September 11 attacks last year. 
Foreign direct investment in many developing regions has dried up, and emerging markets that depend on such capital flows, particularly in South America, have seen their economies thrown into a renewed financial crisis. 
Even if the US economy might experience some short-term demand boost from increased military spending, the rest of the world would not. 
Most countries would feel only negative effects - disruptions of trade, higher oil prices, withdrawals of international capital, cutbacks on investment plans - without any offsetting direct stimulus. 
America's macroeconomic situation is also worrisome. 
The Bush Administration's fiscal policies, combined with the bursting of the US financial bubble of the late 1990s, have pushed America onto an unstable fiscal trajectory. 
In contrast to budget surpluses "as far as the eye could see," the US now has large budget deficits that will linger for many years to come. 
War with Iraq would likely cause those budget deficits to soar. 
Rising budget deficits will poison US domestic politics and lead to budgetary gridlock. 
That in turn, could lead to a loss of consumer confidence. 
Since consumer spending has been the remaining bulwark of the US economy since the collapse of the financial bubble, war with Iraq could puncture the last point of stability in the US economy. 
Of course, US policymakers have a hidden "ace in the hole." 
They believe that the war will be quick, virtually effortless, and self-financing, as the US. effectively gains control of Iraqi oil supplies, which will not only drive down world oil prices but also finance Iraq's postwar reconstruction. 
An alluring prospect, but perhaps improbable. 
War might not be quick at all. 
Postwar Iraq could be unstable even if the war is brief. 
An alternative scenario is huge uncertainty and turmoil throughout the Middle East, with major disruptions in oil flows, for political if not military reasons. 
The geopolitical costs of a unilateral US war will be even higher. 
A quick and successful war, strongly and explicitly backed by the UN, offers the greatest chance of avoiding a huge negative economic fallout. 
A war that pits America against the world could call into doubt the progress of globalization, particularly international trade negotiations. 
Moreover, if the US acts alone, no doubt the post-conflict costs that America will bear alone will be higher as well. 
Open and deep political divisions between America and other major countries will incite a loss of investor confidence, undermining global economic stability. 

The Economic Future of Egypt’s Revolution 
CAMBRIDGE – For Egypt, the question of the day is whether the country will build an open, democratic political system or relapse into some form – new or old – of autocracy. 
But an equally important question – above all for Egyptians, but also for other developing countries (and for development experts) – is the economic impact of its revolution. 
For the past quarter-century, a major agenda item for the international development organizations, such as the International Monetary Fund and the World Bank, has been to bolster developing nations’ financial markets. 
Stronger financial markets can move savings to where they can do the most to spur economic growth. And that capacity has been seen as one of the handful of key prerequisites for economic development. 
Making finance work should boost economic development significantly. 
Economic historians point to financial revolutions as setting the stage for strong economic development in England (in the seventeenth and eighteenth centuries, following the Glorious Revolution), in the United States (after Alexander Hamilton in the 1790’s built up major financial structures in a primarily agricultural country), and in Japan (after the Meiji Restoration). 
The World Bank, the IMF, and dozens of academics have studied long and hard what makes financial markets grow and what holds them back. 
Many focus on the quality of institutions, such as courts and tax authorities. 
Others emphasize the quality of corporate law. Still others look at policies, like trade openness or lightness of taxation. 
Everyone extols property rights. 
Yet, when one looks at what actually happens in developing countries, the lessons are disappointing. 
Though some countries have fixed their court systems, streamlined their tax administrations, and begun to get a handle on corruption, the impact on financial markets has been uneven. 
Worse still for some theories of what makes financial markets flourish are the examples of the US, Great Britain, and Japan. 
Financial markets leaped forward in eighteenth-century Great Britain, and in the nineteenth and early twentieth centuries in Japan and the US – a time when several key institutions, such as corporate law and the court system, were woefully substandard. 
American courts in the nineteenth century were notably corrupt, sometimes incompetent, and often irrelevant, yet stock and bond markets grew, and continent-spanning firms rose up and got the financing they needed to operate, expand, and industrialize the US economy. 
The core protective legal institution for outside finance, the federal securities laws, didn’t fall into place until the 1930’s – decades after US financial markets had grown to finance America’s economic rise. 
Britain and Japan seem to have followed the same sequence: finance first, protective institutions later. 
Japan had no corporate law until complex business finance started developing at the end of the nineteenth century. 
Yet that sequence is the opposite of what one might have expected: only after financial markets developed did those with a stake in them press for better legislation to protect investors. 
So, in Britain, Japan, and the US, something more foundational must have been in place before financial markets started operating. 
Something else must affect which countries are most likely to get strong finance, which won’t, and when it all happens. 
That “something” now usually seems to be basic political stability, preferably of the democratic kind. 
In a stable political environment, informal mechanisms – such as reputations for reliability, trade associations, and stock exchanges – can develop and facilitate financial dealings. 
Investors and businesses don’t fear that a new regime can take power and call off all, or too many, bets, leading to losses on their investments. 
The data linking democratic political instability and financial backwardness in the modern era, which Jordan Siegel of the Harvard Business School and I analyze in a forthcoming article, show unmistakably that instability powerfully predicts an inability to develop financial markets. 
Democratic political stability is the most important harbinger of financial development. 
There is a deep logic to this finding. 
Even if all of the rules for finance are right, few will part with their money if they fear that an unfavorable regime change might occur during the lifetime of their investment. 
More importantly, the grim stability of the type displayed by Hosni Mubarak’s Egypt is oftentimes insufficient for genuine financial development. 
Authoritarian regimes, especially those with severe income and wealth inequality, inherently create a risk of arbitrariness, unpredictability, and instability. 
They are themselves arbitrary. 
And everyone knows that beneath the stability of the moment lurk explosive forces that can change the regime and devalue huge investments. 
Because financiers and savers have limited confidence in the future, such regimes can’t readily build and maintain strong foundations for financial development. 
By contrast, democratic regimes with widespread property ownership typically best protect property rights over the long term, because enough people in the polity want to protect property. 
Yes, the rules of the game count for finance. 
But what counts even more is that the polity has a continuing, stable stake in keeping those rules in place and making them work for finance and economic growth. 
So, what does this mean for Egypt? 
The Egyptian revolution is political thus far, not economic. 
Yet, if the revolution leads to a more open, democratic, middle-class-oriented political system, in which enough people believe that they have a stake in the government’s continuity, the economic benefits for Egyptians could be large. 
Financial markets will more likely flourish, and more rapid and equitable development will more likely follow. 

The Economic Governance the EU Needs 
BRUSSELS – Two lessons have emerged from Europe’s financial crisis. 
First, there is no substitute for timely and coordinated action when the single currency is under pressure. 
Second, all eurozone countries are effectively in the same boat. 
If the boat springs a leak, everyone sinks. 
A quicker and more concerted response might have limited the fall-out from the crisis, and thus its cost. 
The European Financial Stabilization Facility (EFSF), hurriedly established in May 2010 in an effort to stop the rot, will shortly be able to call on some €500 billion in the event that any more eurozone countries face serious liquidity problems. 
And eurozone member states have agreed to perpetuate this financial-stability mechanism from 2013 onwards, and even to amend the Lisbon treaty to avoid any legal ambiguity. 
Despite all this, markets remain unconvinced by the eurozone’s shows of solidarity. 
Greek sovereign debt has been downgraded to below that of Egypt. 
Portugal has had to ask for assistance from the EFSF and the International Monetary Fund. 
Irish banks reportedly need an additional €24 billion to stay afloat. 
And Spain is doing all it can to avoid the contagion. 
The irony is that the euro has been a hugely successful project, bringing considerable stability to participating countries. 
Indeed, without the single currency, many of these countries would have succumbed to a downward spiral of devaluation, default, and recourse to the IMF. 
The European Central Bank has played a crucial role in preventing a worst-case scenario, but the obvious lacuna in Europe’s economic and monetary union (EMU) remains: EMU established only a monetary union and largely omitted the economic union that has proven so closely linked to the euro’s strengths and weaknesses. 
The real crisis facing Europe is one of economic governance. 
Eurozone member states have increasingly gone their own way, even overtly defending nationalist economic policies that harm the eurozone as a whole. 
This is not to say that a single economic policy should be imposed on everyone; but Europe does need a higher degree of coordination and convergence to ensure that everyone is at least heading in the same direction. 
Like cars on a highway, some may drive more slowly than others, but there are minimum and maximum speeds and all must go with the flow of traffic. 
Moreover, all motorists must respect the rules of the road, and anyone who breaches them must be held to account, and possibly penalized, because even one rogue driver will most likely cause a major pile-up if not stopped. 
So it is with economic governance: anarchy would be devastating. 
Agreement is needed on both the rules and the impartial body to enforce them. 
European Union leaders have in recent summits come close to identifying a number of economic-policy areas where closer coordination would improve competitiveness, including sustainability of pensions, wage-to-productivity ratios, corporate taxation, investment in research and development, and the financing of major infrastructure projects. 
Yet the same EU members have failed to endow the European Commission with overall responsibility for holding member governments to their commitments and, where necessary, imposing penalties for breaches. 
This intergovernmental approach lay behind the Lisbon Agenda’s failure to deliver the results needed to make Europe more competitive and dynamic by 2010, and the same shortcomings will bedevil its successor, the new “Europe 2020” strategy. 
Indeed, it is a failure of governance that has characterized the Stability and Growth Pact, designed (largely by Germany) to ensure sound macroeconomic policy by limiting national debt and deficit ratios. 
Most eurozone members are now in breach of the Pact, yet none has been subjected to the penalties envisaged by its architects. 
Recently adopted changes create a more sensible and graduated system for sanctioning recalcitrant countries, but still leave the decision to initiate an excessive deficit procedure to member states, rather than establishing the more automatic mechanism sought by the European Commission. 
Meanwhile, the Commission already polices the internal market – one of Europe’s major policy successes – by monitoring member states’ compliance with the single market’s rules. 
It also launches infringement proceedings against member states that have not implemented valid directives on time, or in the correct manner. 
Similarly, EU competition policy has stood firm for many years against monopolies and abuse of dominant market positions. 
Here, too, the Commission plays the role of neutral judge. 
There may be disputes in some cases, but the system has brought a degree of legal certainty across the single market that the EU’s member states could not have achieved on their own. 
The challenge now for EU leaders is not to repackage old policies, but to express a collective vision and will to act together. 
I have been arguing for a Community Act that would bring together all elements of economic governance under a single framework, with the European Commission at its center. 
As with the single-market program of the 1980’s, the Commission could be in charge of overseeing a convergence of national economic policies, within certain parameters, throughout the EU. 
Straying outside of those parameters would lead to warnings and sanctions, but otherwise there would be some flexibility for member states to pursue the EU’s collective goals at a pace adapted to their national circumstances. 
A cluster of EU commissioners holding economic-related portfolios could even be made responsible for guiding the process forward, providing it with direction and momentum. 
If European countries are to emerge stronger from the current crisis, they need to think bigger and put more faith, not less, in the collective enterprise that is the EU. 
After all, European unification was conceived as a project of pooled sovereignty, not surrendered prosperity. 

The Disruptive Dozen 
SAN FRANCISCO – History is littered with technologies that were once hailed as the next big thing. 
That can be annoying for consumers when they realize that, say, the quadrophonic stereo they purchased was a waste of money. 
But when companies bet on the wrong technologies, the consequences can be devastating for them. 
In the late 1990’s, for example, the belief that B2B exchanges would prove to be the “killer app” for commerce resulted in the formation of more than 1,500 of them. 
Most have since vanished, taking billions of dollars in investment with them. 
To help cut through the hype that surrounds the arrival of almost all new technologies, the McKinsey Global Institute examined more than 100 rapidly evolving technologies and identified 12 that are almost certain to disturb the status quo in the coming years. 
The MGI estimates that the combined annual economic impact of this “disruptive dozen” – which span information technology, machinery and vehicles, energy, bioscience, and materials – will reach $14-33 trillion by 2025. 
Much of this value – in many cases, a significant majority – is likely to accrue to consumers. 
Consider the mobile Internet, with an annual economic impact that is projected to reach $10 trillion by 2025. As advanced-country consumers continue to amass benefits from constant access to an increasing amount of information, apps, and online services, more than two billion developing-country citizens could gain access to the same benefits from technological progress in the rest of the world. 
The value of these benefits would dwarf the value likely to be reaped by suppliers of mobile devices and Internet services. 
Similar user-oriented value shifts are occurring across Internet-related technologies, including those not among the disruptive dozen. 
For example, only a small fraction of the $1 trillion in estimated annual value of online search will likely go to the service providers. 
But, for workers, the news is not all positive, with machines replacing humans in an increasing number of domains – far beyond routine physical and clerical activities. 
As computer-processing power grows and artificial-intelligence software advances, machines are increasingly able to perform complex tasks requiring abstract thinking, such as inferring meaning and making judgments. 
As a result, companies are beginning to automate more highly skilled knowledge-based jobs in fields like law and medicine. 
While this process will generate a significant amount of value – more than $5 trillion in 2025, according to MGI estimates – it will not be distributed evenly among workers, leaving many to confront the need to retrain for new jobs. 
Entrepreneurs, executives, and stockholders face similar uncertainty as disruptive technologies change the rules of the game by reducing entry barriers and lowering the minimum efficient scale (the smallest amount a company must produce while still taking full advantage of economies of scale). 
For example, 3D printing allows start-ups and small companies to “print” highly complicated prototypes, molds, and products in a variety of materials with no tooling or setup costs. 
Likewise, cloud computing gives small enterprises IT capabilities that were previously available only to larger firms – as well as a growing assortment of back-office services – on the cheap. 
This is an unwelcome development for software providers whose business model is based on licensing and annual maintenance fees, not electricity usage. 
Indeed, large companies in almost every field are vulnerable, as start-ups become better equipped, more competitive, and capable, like larger firms, of reaching customers and users everywhere. 
Moreover, disruptive technologies will cause value to shift among economic sectors, as occurred when television overtook radio or, more recently, when online media gained predominance over print publication. 
Businesses in all sectors now must invest in understanding new technologies, so that they are prepared to seize opportunities or mount an effective defense quickly. 
Indeed, CEOs and other top executives need to be technologists, or at least technology-savvy, and constantly assess how innovations will affect the status quo, specifically their profit pools. 
But, in devising relevant strategies, business leaders should recognize that the disruptive dozen’s economic potential is exactly that – potential. 
Rather than assume that the value is theirs for the taking, bosses must develop innovative business models that monetize technology’s potential and avert value shifts to competitors or players in other sectors, who will increasingly be able to participate – often more efficiently and with few legacy constraints – in any sector. 
Experience shows that companies that develop innovative business models can win. 
Google, for example, continues to provide search and other online services for free, while using the expressed search intentions and other behavioral data to sell targeted advertising – a model that has proved highly profitable. 
This kind of “multi-sided” business model is appearing in other sectors, too, as companies use big-data analytics to find ways to monetize the information that they would collect anyway. 
While consumers stand to reap the rewards of disruptive technologies, workers and companies can take nothing for granted. 
Workers must come to terms with the imperative of life-long learning, as their skills’ half-lives shrink, while companies must anticipate and adapt to rapid change. 
Governments, too, must be prepared to cope with the ripple effects of technological disruptions. 
Policymakers will need to meet new demands for education and training, and implement effective mechanisms for regulating, say, self-driving cars or the use of genomic data to develop personalized drugs. 
In an innovation-driven economy, only innovative solutions can work. 

The Economics of Happiness 
NEW YORK – We live in a time of high anxiety. 
Despite the world’s unprecedented total wealth, there is vast insecurity, unrest, and dissatisfaction. 
In the United States, a large majority of Americans believe that the country is “on the wrong track.” 
Pessimism has soared. 
The same is true in many other places. 
Against this backdrop, the time has come to reconsider the basic sources of happiness in our economic life. 
The relentless pursuit of higher income is leading to unprecedented inequality and anxiety, rather than to greater happiness and life satisfaction. 
Economic progress is important and can greatly improve the quality of life, but only if it is pursued in line with other goals. 
In this respect, the Himalayan Kingdom of Bhutan has been leading the way. 
Forty years ago, Bhutan’s fourth king, young and newly installed, made a remarkable choice: Bhutan should pursue “gross national happiness” rather than gross national product. 
Since then, the country has been experimenting with an alternative, holistic approach to development that emphasizes not only economic growth, but also culture, mental health, compassion, and community. 
Dozens of experts recently gathered in Bhutan’s capital, Thimphu, to take stock of the country’s record. 
I was co-host with Bhutan’s prime minister, Jigme Thinley, a leader in sustainable development and a great champion of the concept of “GNH.” 
We assembled in the wake of a declaration in July by the United Nations General Assembly calling on countries to examine how national policies can promote happiness in their societies. 
All who gathered in Thimphu agreed on the importance of pursuing happiness rather than pursuing national income. 
The question we examined is how to achieve happiness in a world that is characterized by rapid urbanization, mass media, global capitalism, and environmental degradation. 
How can our economic life be re-ordered to recreate a sense of community, trust, and environmental sustainability? 
Here are some of the initial conclusions. 
First, we should not denigrate the value of economic progress. 
When people are hungry, deprived of basic needs such as clean water, health care, and education, and without meaningful employment, they suffer. 
Economic development that alleviates poverty is a vital step in boosting happiness. 
Second, relentless pursuit of GNP to the exclusion of other goals is also no path to happiness. 
In the US, GNP has risen sharply in the past 40 years, but happiness has not. 
Instead, single-minded pursuit of GNP has led to great inequalities of wealth and power, fueled the growth of a vast underclass, trapped millions of children in poverty, and caused serious environmental degradation. 
Third, happiness is achieved through a balanced approach to life by both individuals and societies. 
As individuals, we are unhappy if we are denied our basic material needs, but we are also unhappy if the pursuit of higher incomes replaces our focus on family, friends, community, compassion, and maintaining internal balance. 
As a society, it is one thing to organize economic policies to keep living standards on the rise, but quite another to subordinate all of society’s values to the pursuit of profit. 
Yet politics in the US has increasingly allowed corporate profits to dominate all other aspirations: fairness, justice, trust, physical and mental health, and environmental sustainability. 
Corporate campaign contributions increasingly undermine the democratic process, with the blessing of the US Supreme Court. 
Fourth, global capitalism presents many direct threats to happiness. 
It is destroying the natural environment through climate change and other kinds of pollution, while a relentless stream of oil-industry propaganda keeps many people ignorant of this. 
It is weakening social trust and mental stability, with the prevalence of clinical depression apparently on the rise. 
The mass media have become outlets for corporate “messaging,” much of it overtly anti-scientific, and Americans suffer from an increasing range of consumer addictions. 
Consider how the fast-food industry uses oils, fats, sugar, and other addictive ingredients to create unhealthy dependency on foods that contribute to obesity. 
One-third of all Americans are now obese. 
The rest of the world will eventually follow unless countries restrict dangerous corporate practices, including advertising unhealthy and addictive foods to young children. 
The problem is not just foods. 
Mass advertising is contributing to many other consumer addictions that imply large public-health costs, including excessive TV watching, gambling, drug use, cigarette smoking, and alcoholism. 
Fifth, to promote happiness, we must identify the many factors other than GNP that can raise or lower society’s well-being. 
Most countries invest to measure GNP, but spend little to identify the sources of poor health (like fast foods and excessive TV watching), declining social trust, and environmental degradation. 
Once we understand these factors, we can act. 
The mad pursuit of corporate profits is threatening us all. 
To be sure, we should support economic growth and development, but only in a broader context: one that promotes environmental sustainability and the values of compassion and honesty that are required for social trust. 
The search for happiness should not be confined to the beautiful mountain kingdom of Bhutan. 

The Unstarvable Beast 
CAMBRIDGE – As the world watches the United States grapple with its fiscal future, the contours of the battle reflect larger social and philosophical divisions that are likely to play out in various guises around the world in the coming decades. 
There has been much discussion of how to cut government spending, but too little attention has been devoted to how to make government spending more effective. 
And yet, without more creative approaches to providing government services, their cost will continue to rise inexorably over time. 
Any service-intensive industry faces the same challenges. 
Back in the 1960’s, the economists William Baumol and William Bowen wrote about the “cost disease” that plagues these industries. 
The example they famously used was that of a Mozart string quartet, which requires the same number of musicians and instruments in modern times as it did in the nineteenth century. 
Similarly, it takes about the same amount of time for a teacher to grade a paper as it did 100 years ago. 
Good plumbers cost a small fortune, because here, too, the technology has evolved very slowly. 
Why does slow productivity growth translate into high costs? 
The problem is that service industries ultimately have to compete for workers in the same national labor pool as sectors with fast productivity growth, such as finance, manufacturing, and information technology. 
Even though the pools of workers may be somewhat segmented, there is enough overlap that it forces service-intensive industries to pay higher wages, at least in the long run. 
The government, of course, is the consummate service-intensive sector. 
Government employees include teachers, policemen, trash collectors, and military personnel. 
Modern schools look a lot more like those of 50 years ago than do modern manufacturing plants. 
And, while military innovation has been spectacular, it is still very labor-intensive. 
If people want the same level of government services relative to other things that they consume, government spending will take up a larger and larger share of national output over time. 
Indeed, not only has government spending been rising as a share of income; so, too, has spending across many service sectors. 
Today, the service sector, including the government, accounts for more than 70% of national income in most advanced economies. 
Agriculture, which in the 1800’s accounted for more than half of national income, has shrunk to just a few percent. 
Manufacturing employment, which accounted for perhaps a third of jobs or more before World War II, has shrunk dramatically. 
In the US, for example, the manufacturing sector employs less than 10% of all workers. 
So, even as economic conservatives demand spending cuts, there are strong forces pushing in the other direction. 
Admittedly, the problem is worse in the government sector, where productivity growth is much slower even than in other service industries. 
Whereas this might reflect the particular mix of services that governments are asked to provide, that can hardly be the whole story. 
Surely, part of the problem is that governments use employment not just to provide services, but also to make implicit transfers. 
Moreover, government agencies operate in many areas in which they face little competition – and thus little pressure to innovate. 
Why not bring greater private-sector involvement, or at least competition, into government? 
Education, where the power of modern disruptive technologies has barely been felt, would be a good place to start. 
Sophisticated computer programs are becoming quite good at grading middle-school essays, if not quite up to the standards of top teachers. 
Infrastructure is another obvious place to expand private-sector involvement. 
Once upon a time, for example, it was widely believed that drivers on privately operated roads would constantly be waiting to pay tolls. 
Modern transponders and automatic payment systems, however, have made that a non-issue. 
But one should not presume that a shift to greater private-sector provision of services is a panacea. 
There would still be a need for regulation, especially where monopoly or near-monopoly is involved. 
And there would still be a need to decide how to balance efficiency and equity in the provision of services. 
Education is clearly an area in which any country has a strong national interest in providing a level playing field. 
As US President in the 1980’s, the conservative icon Ronald Reagan described his approach to fiscal policy as “starve the beast”: cutting taxes will eventually force people to accept less government spending. 
In many ways, his approach was a great success. 
But government spending has continued to grow, because voters still want the services that government provides. 
Today, it is clear that reining in government also means finding ways to shape incentives so that innovation in government keeps pace with innovation in other service sectors. 
Without more ideas about how to innovate in the provision of government services, battles such as one sees playing out in the US today can only become worse, as voters are increasingly asked to pay more for less. 
Politicians can and will promise to do a better job, but they cannot succeed unless we identify ways to boost government services’ efficiency and productivity. 


The Economics of Peace in Afghanistan 
KABUL – Suicide bombings, assassinations of top Afghan leaders, brutal attacks on Charikar and other places close to Kabul, Afghanistan’s capital, and a rapid increase in civilian deaths from drone attacks are jeopardizing the withdrawal of American and NATO forces from the country. 
So pervasive has the violence become that Ahmed Rashid, the renowned expert on the Taliban, has concluded that speeding up the peace process through dialogue with the insurgents is the only option. 
The economics of what an Afghanistan at peace would look like must be a critical part of any negotiations. 
But what, precisely, does the economics of peace entail, and why is it so important? 
One main objective should be to transform Afghanistan’s vast underground economy, which has thrived, despite the large number of NATO forces, by creating profitable opportunities for Taliban and other groups involved in the fighting. 
To reintegrate these fighters into the productive economy will require a change in policies, including a rapid reactivation of rural development schemes and the promotion of local entrepreneurship, public works, and other legal activities. 
In particular, the United States, together with other donors and NATO troop contributors, should heed “Ten Commandments” during and after the negotiations. 
First, apply the dictum of T.E. Lawrence (Lawrence of Arabia) that it is better to let “them” do it than it is to try to “do it better” for them. 
Thus, let national negotiators, local leaders, and communities determine what their economic needs and priorities are, and let insurgents determine their preferred venue for reintegration. 
Unless the participants are empowered and take ownership, programs will not be sustainable, resources will go to waste, and peace will not endure. 
Second, ensure integration – rather than merely coordination – of economic factors into the political and security agenda. 
This would entail using reintegration and other economic programs as a carrot to support the negotiations, and would also support peace and stability in the long run. 
Third, support a peace agreement designed in accordance with the country’s financial and technical capacity to implement it. 
This requires reasonable projections for domestic tax revenue and aid, as well as the right mix of foreign expertise to support the process. 
Avoid overly optimistic projections that lead to unworkable plans and unreasonable expectations, which the government will not be able to fulfill, as happened in Guatemala, for example, when its civil war ended. 
Fourth, channel aid through the central government budget, or through local authorities, so that officials can acquire legitimacy by providing services and infrastructure, and provide subsidies and price-support programs to replace poppies with licit crops such as cotton, which was produced in the past. 
Fifth, ensure that such aid moves quickly from short-run humanitarian purposes – to save lives and feed those giving up war – to reconstruction activities aimed at creating investment, productivity growth, and the sustainable employment that will enable people to live dignified lives. 
What needs to be avoided is a failure – such as occurred in Haiti following its devastating earthquake – to move from the first stage to the second. 
Sixth, establish well-planned and synchronized programs for demobilization, disarmament, and reintegration, which are sine qua non for making the transition from war to peace irreversible. 
In doing so, remember that the “vagueness versus specificity” dilemma also applies to economic issues. 
Too much specificity on some variables and too much vagueness with regard to others required a renegotiation of the arms-for-land agreement in El Salvador to make it implementable. 
Seventh, establish different programs for higher-level commanders, providing more orientation, training, credit, and technical assistance. 
The United Nations acknowledged better results from the “Plan 600” in El Salvador than from programs for lower-ranking combatants, which lacked such support. 
Eighth, increase support for NGOs with successful records in creating entrepreneurs in rural development, in carpet weaving, jewelry design, or any other activity that Afghans want to develop. 
Active policies to promote new start-ups and local companies’ expansion through credit, training, and technical support are imperative. 
Ninth, establish economic reconstruction zones to jump-start sustainable economic activity, create jobs and export earnings, improve aid effectiveness and accountability, and avoid aid dependency. 
The zones could combine integrated rural development for domestic consumption and labor-intensive manufacturing and agro-businesses for export. 
The US and other countries should open their markets to goods produced in these zones. 
Finally, ensure that the political or peace objective prevails at all times, even if it delays economic stability and development. 
This often means accepting that optimal and best-practice economic policies are not attainable – or, indeed, even desirable. 
The independence of the central bank and the “no overdraft” rule for budget financing will almost certainly prove too restrictive to carry out critical peace-supporting activities in Afghanistan. 
In settling the Afghan war, the government and donors should seek to eschew the pattern of unkept promises that has bedeviled reconstruction of the country in the past. 
Only then will Afghanistan be able to break out of its decades-long vicious circle of violence, insecurity, corruption, unemployment, drug trafficking, and aid dependency. 

The Economics of Strategic Containment 
NEW DELHI – At their recent summit in Cannes, the G-20 shelved, if not buried, the World Trade Organization’s moribund Doha Development Round of multilateral trade negotiations. 
Crisis-weary Europe and America face a rising tide of protectionism at home, and are trying to find ways to blunt the edge of China’s non-transparent trade competitiveness. 
Turning his attention from the Atlantic to the Pacific, US President Barack Obama – with his eye, once again, trained on China – has now unveiled a new regional trade initiative. 
Why was the US unwilling to move forward on the Doha Round, but willing to pursue a regional free-trade agreement? 
The answer lies in the fact that the Trans-Pacific Partnership (TPP), launched by Obama and the governments of eight other Pacific economies – Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam – is not just about trade. 
While Obama chose to stick to the economic factors driving the TPP, US Secretary of State Hillary Clinton, on the eve of the just-concluded Asia Pacific Economic Cooperation gathering in Hawaii, laid out the initiative’s wider strategic context. 
“The United States will continue to make the case that….[the region] must pursue not just more growth, but better growth,” which “is not merely a matter of economics,” Clinton said. 
“Openness, freedom, transparency, and fairness have meaning far beyond the business realm,” she continued. “Just as the United States advocates for them in an economic context, we also advocate for them in political and social contexts.” 
Following up on these remarks, Obama drew attention to persistent US concern about China’s exchange-rate policy, inadequate protection of intellectual property, and impediments to market access. 
“For an economy like the United States – where our biggest competitive advantage is our knowledge, our innovation, our patents, our copyrights – for us not to get the kind of protection we need in a large marketplace like China is not acceptable,” Obama observed. 
The TPP initiative should be viewed against this background, and not just in the context of the collapse of the Doha Round. 
The TPP’s nine sponsors have resolved “to establish a comprehensive, next-generation regional agreement that liberalizes trade and investment and addresses new and traditional trade issues and twenty-first-century challenges.” 
These leaders also agreed to fast-track the TPP initiative, and to consider opening it to other members – most importantly Japan, a late convert to the idea of a Pacific region free-trade agreement. 
The TPP’s agenda is divided into three categories: core, cross-cutting, and emerging issues. 
The core agenda is to stitch together a traditional free-trade agreement focused on industrial goods, agriculture, and textiles. 
The agreement would also have provisions for intellectual-property protection and what are dubbed the social and environmental issues. 
In short, the TPP’s core agenda will offer the region a “Doha Round-type” agreement that includes the social and environmental agenda that developing economies have been resisting within the WTO. 
Going beyond the core, the cross-cutting issues include investor-friendly regulatory systems and policies that enable “innovative” or “employment-creating” small and medium-size enterprises to operate freely across borders within the TPP region. 
Finally, the TPP seeks to bring into the ambit of a trade and investment agreement “new and emerging” issues. 
These include “trade and investment in innovative products and services, including digital technologies, and ensuring state-owned enterprises compete fairly with private companies and do not distort competition in ways that put US companies and workers at a disadvantage.” 
In short, the US has moved to bring together all of the economies in the region that are worried about China’s beggar-thy-neighbor trade and exchange-rate policies. 
For the US, the eight other TPP countries, with a combined population of 200 million, constitute its fourth largest export market, behind only China, the European Union, and Japan. 
If Japan joins, the TPP’s importance would rise dramatically. 
While the economics of the TPP is important, the strategic component is even more so. 
This is the second leg of America’s new “Pacific offensive,” aimed at offering nations in the region an alternative to excessive and rapidly growing dependence on a rising China. 
The first leg of the offensive was the idea of the “Indo-Pacific” region, which Clinton developed a year ago and followed up this year with an essay called “America’s Pacific Century.” 
There, she defines the new region of US strategic engagement as “stretching from the Indian subcontinent to the western shores of the Americas.” 
Extending east from the Indian Ocean and west via the Pacific, the US is creating a new strategic framework for the twenty-first century. 
The TPP is just one of the pillars of that new edifice. 

The Economy of Fear 
The global economy seems to be walking on water, shrugging off soaring oil prices, policy paralysis in Europe, unsustainable borrowing by the United States, and record housing prices. 
Is it because, as G-8 leaders would have us believe, investors are in a buoyant mood, confident in their leaders’ stewardship of the global economy? 
Or are we being governed by a pathology of fear, fed by events such as the recent London bombings, that is holding down long-term interest rates thereby covering up a host of simmering problems? 
The role of phenomenally low long-term (inflation-adjusted) interest rates in covering up a multitude of weaknesses in the global economy is all too apparent. 
Soaring house prices worldwide are propping up consumer demand in many countries, and, according to a recent study by the International Monetary Fund, continually falling long-term interest rates explain two-thirds or more of the global price rise. 
Europe has benefited less, but its economies would be a lot worse off if long-term interest rates climbed back to their 25-year average. 
Similarly, Latin America has been booming in recent years, despite high debt burdens and a mixed record of policy reform. 
Low long-term interest rates have kept the region’s debts manageable, while high consumer demand has helped bid up prices for the region’s commodity exports. 
Why hasn’t the huge spike in oil prices cut the world to its knees, as it has on so many other occasions? 
Again, the answer is low interest rates. 
Ordinarily, a sharp rise in oil prices quickly translates into higher inflation expectations, followed by rising interest rates at all maturities. 
But this time, even as the US Federal Reserve keeps hiking its short-term lending rate to keep inflation in line, long-term interest rates – which are far more important – have been magically declining. 
Indeed, America has been the single biggest beneficiary of this freakish low-interest-rate environment, with everyone seeming to borrow money like it is going out of style. 
Homeowners, backed by rising house prices, are piling up debt. 
The Federal government has thrown fiscal prudence out the window. 
The country as a whole is absorbing an astounding three-quarters of global excess savings. 
But, as long as interest rates remain low and growth high, Americans can laugh at predictions that their excesses are laying the seeds of ruin. 
But if low long-term interest rates are helping so many economies walk on water, why are rates so low, and will they stay that way? 
Perhaps the situation is far more fragile than many policymakers would have us believe. 
Perhaps people have come to feel less , not more, secure about their long-term future, either because of fears about terrorism, a global pandemic, or a severe rash of financial crises. 
I am not claiming that investors are hysterical, just that they may have become a bit more concerned about the long-term outlook. 
As a consequence, they are crowding into bonds and debt instruments that they view, rightly or wrongly, as safe vehicles. 
Other convincing explanations are lacking. 
To be sure, emerging markets have been on an unusual savings spree, rebuilding reserves and improving balance sheets, but nobody expects this to go on forever. 
Even US Federal Reserve Chairman Alan Greenspan ordinarily the Oracle of Delphi on interest-rate matters, has declared the current situation “a conundrum.” 
History suggests that the global technology boom has yet to play itself out, with US productivity gains likely to radiate out across the world, raising growth rates everywhere. 
Ordinarily, rapid global growth translates into high long-term interest rates – that is, unless, deep down, people have become nervous. 
Suppose investors are worried about a small chance of catastrophe over the next five to ten years. 
(According to experts on nuclear terrorism and pandemics, the dangers are real.) 
Suppose investors believe that growth will probably continue to be strong, but that maybe – just maybe – things will fall apart. 
In this case, it is entirely possible to have very low interest rates co-exist with strong growth. 
True, some economists point to the halcyon days of the 1950’s and early 1960’s, when Europe, the US, and Japan prospered, but interest rates generally remained well below the rate of economic growth. 
Since that was a golden era for global growth, why worry if we are seeing the same phenomenon today? 
What the optimists forget is that the 1950’s and 1960’s were also a period of massive insecurity. 
Many people realistically feared the outbreak of World War III – and with good reason, according to many historians. 
Back then, the specter of the Apocalypse helped keep borrowing cheap. 
Happily, investors’ darkest fears were not realized, and we can only hope for the same. 
But if insecurity is a major undercurrent of today’s record-low interest rates, then G-8 leaders should be more cautious in their self-congratulation. 
Investors’ collective psychology is notoriously fragile. 
If they ever calm down, interest rates will shoot up, and that could well bring the global economy’s simmering imbalances to a raging boil. 

The Economy of Fear 
The global economy seems to be walking on water, shrugging off soaring oil prices, policy paralysis in Europe, unsustainable borrowing by the United States, and record housing prices. 
Is it because, as G-8 leaders would have us believe, investors are in a buoyant mood, confident in their leaders’ stewardship of the global economy? 
Or are we being governed by a pathology of fear, fed by events such as the recent London bombings, that is holding down long-term interest rates thereby covering up a host of simmering problems? 
The role of phenomenally low long-term (inflation-adjusted) interest rates in covering up a multitude of weaknesses in the global economy is all too apparent. 
Soaring house prices worldwide are propping up consumer demand in many countries, and, according to a recent study by the International Monetary Fund, continually falling long-term interest rates explain two-thirds or more of the global price rise. 
Europe has benefited less, but its economies would be a lot worse off if long-term interest rates climbed back to their 25-year average. 
Similarly, Latin America has been booming in recent years, despite high debt burdens and a mixed record of policy reform. 
Low long-term interest rates have kept the region’s debts manageable, while high consumer demand has helped bid up prices for the region’s commodity exports. 
Why hasn’t the huge spike in oil prices cut the world to its knees, as it has on so many other occasions? 
Again, the answer is low interest rates. 
Ordinarily, a sharp rise in oil prices quickly translates into higher inflation expectations, followed by rising interest rates at all maturities. 
But this time, even as the US Federal Reserve keeps hiking its short-term lending rate to keep inflation in line, long-term interest rates – which are far more important – have been magically declining. 
Indeed, America has been the single biggest beneficiary of this freakish low-interest-rate environment, with everyone seeming to borrow money like it is going out of style. 
Homeowners, backed by rising house prices, are piling up debt. 
The Federal government has thrown fiscal prudence out the window. 
The country as a whole is absorbing an astounding three-quarters of global excess savings. 
But, as long as interest rates remain low and growth high, Americans can laugh at predictions that their excesses are laying the seeds of ruin. 
But if low long-term interest rates are helping so many economies walk on water, why are rates so low, and will they stay that way? 
Perhaps the situation is far more fragile than many policymakers would have us believe. 
Perhaps people have come to feel less , not more, secure about their long-term future, either because of fears about terrorism, a global pandemic, or a severe rash of financial crises. 
I am not claiming that investors are hysterical, just that they may have become a bit more concerned about the long-term outlook. 
As a consequence, they are crowding into bonds and debt instruments that they view, rightly or wrongly, as safe vehicles. 
Other convincing explanations are lacking. 
To be sure, emerging markets have been on an unusual savings spree, rebuilding reserves and improving balance sheets, but nobody expects this to go on forever. 
Even US Federal Reserve Chairman Alan Greenspan ordinarily the Oracle of Delphi on interest-rate matters, has declared the current situation “a conundrum.” 
History suggests that the global technology boom has yet to play itself out, with US productivity gains likely to radiate out across the world, raising growth rates everywhere. 
Ordinarily, rapid global growth translates into high long-term interest rates – that is, unless, deep down, people have become nervous. 
Suppose investors are worried about a small chance of catastrophe over the next five to ten years. 
(According to experts on nuclear terrorism and pandemics, the dangers are real.) 
Suppose investors believe that growth will probably continue to be strong, but that maybe – just maybe – things will fall apart. 
In this case, it is entirely possible to have very low interest rates co-exist with strong growth. 
True, some economists point to the halcyon days of the 1950’s and early 1960’s, when Europe, the US, and Japan prospered, but interest rates generally remained well below the rate of economic growth. 
Since that was a golden era for global growth, why worry if we are seeing the same phenomenon today? 
What the optimists forget is that the 1950’s and 1960’s were also a period of massive insecurity. 
Many people realistically feared the outbreak of World War III – and with good reason, according to many historians. 
Back then, the specter of the Apocalypse helped keep borrowing cheap. 
Happily, investors’ darkest fears were not realized, and we can only hope for the same. 
But if insecurity is a major undercurrent of today’s record-low interest rates, then G-8 leaders should be more cautious in their self-congratulation. 
Investors’ collective psychology is notoriously fragile. 
If they ever calm down, interest rates will shoot up, and that could well bring the global economy’s simmering imbalances to a raging boil. 

The Education Myth 
We all know that more education is a Good Thing, especially for our economic futures. 
This is why many countries, particularly in Europe, have numerical targets driving their education policies: 50% participation in post-secondary education in the UK or Sweden, for example, or 80% to baccalaureate level in France. 
Chancellor Schroeder’s big idea for solving Germany’s economic problems is, of course, education: including yet more undergraduates in a system struggling to cope with those it has. 
Governments see their main job as delivering economic prosperity, and they view education as a necessary and reliable tool for achieving that end. 
But is it? 
We are told that in a “knowledge economy,” a country needs ever more graduates and formal qualifications to stay competitive. 
But education simply does not deliver economic growth the way our politicians – and businessmen – believe: more education in does not mean more growth out. 
Worse, the education policies that follow from current beliefs have serious negative consequences for opportunities for young people and the quality of education itself. 
The argument that education matters for the economy is plausible because, at one level, it is obviously right. 
A modern society does need educated people: not just engineers, chemists, and doctors, but millions of people who can write coherent letters, fill in complicated forms, explain insurance policies, and interpret statistical data from machines on factory floors. 
Some of these skills can be learned only in universities; others can (and should) be mastered in primary and secondary schools. 
Employers naturally tend to hire the most educated workers on offer, and so as the number of graduates increase, so does the number of “graduate” jobs. 
However, every study I know of – whether British, Scandinavian, or American – agrees that large numbers of these “graduate” jobs require no more than they did when non-graduates performed them perfectly well. 
In this sense, many societies are already “over-educated.” 
But perhaps this is irrelevant. 
Maybe better-educated workers do their jobs more efficiently, in which case we will surely find a clear relationship between educational attainment and economic growth. 
Alas, no. 
A few recently industrialized countries have pursued successful government-driven education strategies that seem to boost economic development. 
But for every such case – South Korea is the favorite example – there is another, like Hong Kong, where meteoric economic growth had nothing to do with centrally planned education policy. 
Instead, parents pushed their children towards the best schools to give them an individual head start – something parents do the world over – only after they got richer. 
Moreover, for every South Korea, and every Hong Kong, we can also find developing countries where expanding education merely fueled competition for white-collar jobs in a bloated, deadweight state bureaucracy. 
Countries like this explain why large international studies often find a negative relationship between education and growth rates. 
Egypt is a classic example of this. 
Between 1970 and 1998, its primary school enrollment rates grew to over 90%, secondary schooling soared from 32% to 75%, and university education doubled. 
Egypt started the period as the world’s 47th poorest country; it ended the period as the 48th poorest. 
But it is not only among developing countries that links between education and growth prove elusive. 
Switzerland has been one of the richest countries in the world for a century – and not because of its natural resources. 
Yet it has the lowest rate of university attendance in Western Europe. 
If you look for a relationship between children’s performance on international surveys of achievement, and their countries’ growth rates twenty years on, you will look in vain. 
No such relationship exists. 
So, while any developed country obviously needs an educated population, the idea that having the most education will get you the most prosperity is a chimera. 
Does this matter, though? 
Surely, education has other virtues, over and above its economic role. 
So maybe we should stop criticizing and start celebrating governments’ enthusiasm for spending on education. 
But this would ignore the dark underside of our educational spiral. 
The creation of more “graduate” jobs only proves that as credentials become more common, they become more important. 
Moreover, in the past, someone who left school without the “right” qualifications could still succeed, through an apprenticeship or by working his way up from the shop floor. 
Today, that is becoming impossible: we are creating societies in which the sheep and the goats are marked for life in their teens. 
As university attendance becomes more common, fewer capable young people enter vocational training. 
Yet our economies still need highly trained craftspeople far more than another batch of arts graduates. 
Moreover, rapid expansion of university education all too often comes at the expense of quality. 
Education is expensive because it uses people: there are no vast economies of scale or leaps in productivity. 
Relative pay for teachers has been dropping as their total numbers increase, which affects teacher quality. 
University classes become larger, which means that students are taught less effectively. 
It becomes harder to maintain good university-based research because of the demands of other parts of the education budget. 
Is this really the best route to a vibrant economy and a civilized, cultured, and open society? 

The Egyptian Crucible 
MADRID – As Egyptians tensely awaited the results of their country’s presidential elections, a thread of pessimism ran through the discourse of the young people and secular liberals who had brought down Hosni Mubarak in January 2011. 
The “anything is possible” sensation of the Tahrir Square rebellion had faded, and now two candidates whom the protesters deeply opposed, the Muslim Brotherhood’s Mohamed Morsi, and Ahmed Shafiq, a factotum of the old regime (and of the current military government), prepared to face off in the second round. 
The triad of fundamental forces driving Egypt since the beginning of the Arab Spring – the military, the mosque, and the masses in Tahrir Square, each with different types of power and interests – was thus broken. 
Those who filled Tahrir Square 16 months ago were silenced, and the expected transfer of power from the military to a civilian, democratic government was thrown into doubt. 
Since assuming power after Mubarak’s fall, the Supreme Council of the Armed Forces (SCAF), led by Field Marshal Mohamed Hussein Tantawi, a defense minister for two decades under Mubarak, has consistently undermined the delicate work of democratic transition. The week before the presidential elections, the SCAF-allied Constitutional Court dissolved the recently elected parliament, alleging illegality in the voting process. 
And, foreseeing Morsi’s victory, SCAF assumed all legislative powers; severely limited the president’s powers; seized the authority to appoint the committee tasked with drafting the new Constitution; took control of the country’s budget; and claimed sole power over domestic and foreign security. 
As a result, Egypt’s power struggle will continue, with the junta no longer battling those in Tahrir Square, but political Islam. 
After a decades-long clandestine (although tolerated) existence within Egyptian society, Islamist forces were able to take advantage of the Tahrir protests, despite playing no integral part in them. 
The secular liberal forces’ political fragmentation and lack of organization cost them dearly in the parliamentary elections six months ago, and, in the second round of the presidential election, a majority of Egyptians chose Morsi over a restoration of the old regime. 
But Morsi’s narrow margin of victory (just 3.5 percentage points) over Shafiq, and low voter turnout – 46.4% in the first round and 51.8% in the second – reflect a polarized, exhausted society that lacks confidence in the electoral process and the candidates. 
Moreover, the outcome has merely fueled further uncertainty about Egypt’s direction. 
With Morsi’s victory, some now fear that the Muslim Brotherhood will seek to implement radical policies aimed at Islamizing a Muslim country that is already conservative, but that has had a secular government for decades. 
Others do not believe that the Muslim Brotherhood will go so far, but nonetheless doubt that the Brothers will defend a secular, truly democratic regime in the ongoing negotiations with SCAF on a transition to civilian rule. 
In either scenario, Morsi has little room to maneuver in a country that, for the time being, is in political limbo – with neither a constitution nor a parliament – and whose people want tangible results in terms of good governance, institutional consolidation, and improvements to a tottering economy. 
Indeed, living standards have been under severe pressure since Mubarak’s downfall. 
In 2011 alone, net capital inflows fell nearly 90% year on year, tourism was down 30%, the trade deficit soared to $28 billion, and GDP growth slowed from 3.8% to 1%. 
The success or failure of Morsi’s government will rest largely on the economy. 
For the Muslim Brotherhood, this scenario constitutes a serious challenge, one that can be overcome only by finding an adequate balance between SCAF, with its overweening power, and Egypt’s liberal political forces – which won a combined 11 million votes, five million more than Morsi, in the presidential election’s first round. 
Only this will give a Morsi administration the necessary legitimacy and capacity to carry out a joint transition with the military for a true change of regime. 
The liberals, for their part, did not support Morsi in the run-off with Shafiq. 
But it was their efforts that made the presidential election possible in the first place, and many now believe that close collaboration with the Brothers is the only available option that can restore some of the spirit of an endangered revolution in which they were the protagonists. 
This presupposes that the Brothers reorganize themselves internally and find ways to distance themselves from more radical factions, and that they promote inclusive policies toward vulnerable groups and social minorities. 
For now, the Brothers have announced that they will name a Christian and a woman as Vice Presidents. 
Obviously, that represents an encouraging first step in bridging Egypt’s divides. 
But, just as obviously, it is only a first step. 

The Egyptian Endgame 
PRINCETON – Can Egypt’s long history help us to understand the uprising, already labeled a revolution, now underway in Cairo, and how it might turn out? 
I believe so. 
After all, the demonstrations by millions of people to demand an end to the rule of President Hosni Mubarak and his National Democratic Party (NDP) are not an unprecedented phenomenon in the country. 
Egypt’s history is replete with powerful and famous rulers (starting with Ramses II in pharaonic times, and including Saladin, Muhammad Ali, Napoleon Bonaparte, Lord Cromer, all the way up to the Egyptian military trio of Gamal Abdel Nasser, Anwar El Sadat, and Mubarak). 
This suggests that, although Egyptians may not necessarily prefer strongman rule, they are entirely comfortable with it and may even believe that it is necessary. 
To be sure, popular revolts are nothing new for Egypt. 
Crowds rose against Napoleon’s French forces in 1798, against the monarchy in 1881-1882, against British dominance in 1919 and 1952, against Sadat in 1977, and against Mubarak in 1986. 
These uprisings were repressed, often brutally, first by foreign troops (the French army in 1798 and British soldiers in 1882 and 1919) and more recently by the Egyptian army. 
Unfortunately, while angry protesters have sometimes forced unwelcome rulers out of power, they have been unable to replace tyrants with governments that respect the public’s wishes. 
Will this long history of authoritarian rule now be broken? 
The first days of the current uprising favored the people. 
The crowds were enormous and peaceful, not only in Cairo, the historic node for protest, but in all of Egypt’s cities. 
In addition, the army, called out ostensibly to restore order, held back, a markedly different response from its repression of past uprisings. 
French and British soldiers did not hesitate to put down resistance. 
Nor did the Egyptian army in 1952, 1977, and 1986. 
The uprising in 1952 is particularly revealing, because it was widespread and intensely popular, for it was directed against the much-hated British. 
Although the British had 100,000 troops stationed near the Suez Canal at the time, they chose not to intervene. 
Instead, it was the small and highly professional Egyptian army that crushed the uprising, to the dismay of the young officer corps, who were already well advanced in their plans to seize power. 
Years of fighting in Arab-Israeli conflicts, however, transformed the army, giving rise to a massive conscript force that totals approximately 400,000 soldiers today. 
The army’s lower ranks are now filled with young men, drawn from all segments of Egyptian society, whose backgrounds are no different from those of the people they may be called upon to suppress. 
Today’s Egyptian army is a people’s army, and, unlike the reviled security forces, it is widely admired. 
Senior officers surely know the risks that they will incur if they order these men to fire on friends and relatives. 
Moreover, the current mass demonstrations are radically different from previous protest movements that the army suppressed. 
In 1977, many rose to oppose an end to food and other consumer subsidies; in 1986, poorly paid security forces went on a rampage. 
The numbers involved in those protests were miniscule compared to now. 
Nor were the protesters’ actions peaceful. 
They threatened property and undermined political order from the outset. 
The Egyptian high command did not need to worry that rank-and-file soldiers would disobey orders, because they were protecting the citizenry. 
Yet, the current protest, which started so peacefully and with such ebullience, took a dramatic and violent turn several days ago. 
Mubarak’s promise that he would not run for re-election this coming September, which might have mollified his critics two weeks earlier, was no longer enough. 
When this concession failed, Mubarak and the ruling NDP began to work behind the scenes, encouraging their followers to attack protesters and provoke violence. 
But Mubarak has also prepared the way for a new set of leaders – all strongly committed to the old order. 
Almost all of them are high-ranking military officers, now elevated to the government’s most important offices. 
Generals now hold the positions of Vice-President, Prime Minister, Deputy Prime Minister, Minister of Defense, and Minister of the Interior. 
Nor are the anti-government protesters likely to find robust support from the United States, always deeply involved in Egyptian affairs, regardless of how often President Barack Obama and Secretary of State Hillary Clinton emphasize America’s commitment to freedom and democracy. 
Yes, the Americans want Mubarak to leave – and quickly. 
But the anchor of US policy in the Middle East is the Egyptian-Israeli peace treaty, negotiated by Sadat in 1979, maintained by Mubarak, and well liked by Egypt’s military high command, which controls the strongest Arab army, is US-trained, and has been supplied with top-shelf American weaponry. 
A popular government in which the Islamist Muslim Brotherhood is represented would worry the Americans and the Egyptian military, owing to the prospect that it would repudiate the peace treaty with Israel and jeopardize relations with the US. 
But that is not the most immediate concern. 
Should violence increase, ordinary soldiers would likely once again feel duty-bound to intervene to restore order and prevent further bloodshed. 
If not, the prospects for a transition to a government formed by leaders of the much-respected Egyptian army and moderates representing business and political elites seem high. 

The Eighteenth Brumaire of Arnold Schwarzenegger 
Replacing a governor whom they re-elected only a year before with Arnold Schwarzenegger must have given Californian voters an enormous--if guilty--pleasure. 
Some members of the opposition in Germany would dearly love to do the same to Chancellor Gerhard Schröder, though they have not (yet!) found a film star to replace him. 
Several other European governments find themselves in a similar state of unpopularity not long after being elected. 
Beyond Europe this is true even for the recently acclaimed Brazilian President Luis Inacio "Lula" da Silva, to say nothing of Mexican President Vicente Fox and South Korean President Roh Moo-hyun, the latter having called for a referendum to help arrest his sinking popularity. 
Electoral success, it appears, fades fast nowadays. 
So should every country adopt a recall procedure to maintain the legitimacy of governments? 
Absolutely not. 
Democracy, in the words of the philosopher Karl Popper, is about being able to remove those in power without violence; it is in this sense about trial and error. 
But leaders must be given the chance to govern. 
Indeed, they need a chance to make mistakes and to learn and recover from their errors, as long as their decisions do not affect the foundations of the democratic order itself. 
Trial and error implies the opportunity to err before we try again. 
Californian voters' first mistake is thus what may be called "the lure of the immediate"--none too surprising in a state where instant gratification is supposedly a core value. 
But sometimes this desire seems overwhelming in post-modern democracies everywhere. 
Indeed, democracy nowadays has embraced a pop culture of rapidly passing fads; today's hysteria-generating pop group is forgotten tomorrow, and there are always more waiting in the wings. 
In politics this can be dangerous, because it encourages basing decisions, no matter how weighty, on whatever popular opinion momentarily prevails. 
The call for more referenda both reflects and fuels this trend. 
Referenda are for the most part snapshots. 
Switzerland, with its generally slower pace and its thorough political debates before votes are held, may be the exception. As a rule however, referenda measure the popularity of political leaders at a particular moment, regardless of the issue at stake. 
If and when Britain votes on joining the Euro, the result will most likely tell us all sorts of things about Tony Blair and about the European Union, but little about the merits of the common currency. 
So the case for representative government remains strong. 
Democracy is government by debate, by taking important decisions after thorough deliberation of the kind that--at least in large countries--must be conducted in a parliament through elected representatives. 
Sometimes parliaments wish to act quickly, and perhaps must do so, but as a rule they take enough time to examine issues fully. 
Parliaments talk before reaching conclusions; hence their name. 
Consider Germany, where some leaders of the opposition Christian Democrats yearn to sink the Schröder government. 
Clearly, the reforms proposed and already partly enacted by the government are unpopular, and there is little doubt that, a year after their re-election, the coalition of the Social Democrats and the Greens would not stand much of a chance at the polls. 
But who knows what the electorate will think in three years, at the end of the government's full term in office? 
By the time of the next regularly scheduled election, it could become clear that there were no real alternatives to Schröder's policies, and it could even be the case that the predicted beneficial effects of painful reforms will become apparent by then. 
Leadership needs time to take and implement unpopular decisions as well as popular ones. 
Leaders themselves need the nerve to take often precarious parliamentary majorities through the troughs of popularity. 
This is why they should commit their cruelest deeds in the first year and soften up as the next election approaches. 
The uneasy partnership of Prime Minister Tony Blair and Chancellor of the Exchequer Gordon Brown is a good example of this tactic. 
Leaders who never risk their popularity are not worth their position. 
So California has set a bad example, and Californians will probably pay a heavy price for it. 
They may not pay as heavy a price as France a century and a half ago, when the popularly elected Louis Napoleon transformed himself, via a wildly popular referendum, into Napoleon III--that vote being the last the French would enjoy until the end of the Second Empire. 
Californians, of course, won't be disenfranchised, but their willfulness threatens to yield a wayward and irresponsible form of state politics. 
To be sure, democracy implies limiting the time that the powerful have to exercise their power without challenge. 
An effective democracy must give them enough time to win the support of those elected to legislate and to carry out their program. 
These two imperatives are inherently contradictory, but the balance between them is still best achieved through representative, parliamentary democracy. 
Anything else is likely to be about as stable as this week's top ten pop songs. 

Securing a Sustainable Future 
LONDON – When Karl Marx and Friedrich Engels wrote that “All that is solid melts into air,” they intended it as a metaphor for the disruptive transformations that the Industrial Revolution implied for established social norms. 
Today, their words can be taken literally: Carbon-dioxide emissions and other industrial pollutants released into the atmosphere are changing the planet – with huge implications for the environment, health, population movements, and social justice. 
The world is at a crossroads, and much of the progress we have made in these areas could vanish into thin air. 
In 2007, Nelson Mandela founded The Elders to address just such risks, mandating this independent group of former leaders to “speak truth unto power.” 
That is what we will do at the launch of the new Sustainable Development Goals at the United Nations General Assembly later this month. 
The SDGs will succeed the Millennium Development Goals, which guided international development efforts from 2000-2015. The MDGs helped millions of people escape illiteracy, disease, and hunger, and placed development at the heart of the global political agenda. 
However, their overall impact was often inadequate, particularly in fragile, conflict-ridden states – and they failed to include sustainability in their targets. 
The SDGs represent a quantum leap forward, because they recognize the vital links among challenges – including poverty in all its forms, gender inequality, climate change, and poor governance – that must be addressed in tandem. 
Seventeen separate goals may seem unwieldy, but their cumulative effect should mean that no topic or constituency falls through the cracks. 
Sustainability is finally being integrated into global development, in line with what campaigners have been demanding for decades. 
As former leaders from the global North and South, respectively, we are particularly pleased that the SDGs will apply to all UN member states and not just those in the developing world. 
In this way, we hope they will become as “universal” as the Universal Declaration of Human Rights – a vital element of the civic armory in the fight for fairness. 
Implementation and accountability are key. 
Fine words are not enough; leaders must commit to putting them into action, and civil society must be vigilant in tracking progress and blowing the whistle when not enough is being done. 
Too often, summit declarations have melted into air once the delegations went home and short-term political calculus regained the upper hand. 
This time, the stakes are too high. 
The decisions taken this year, at the SDG summit and at the climate conference in Paris in December, will have a lasting impact on our planet’s future. 
A stable climate underpins prosperity, poverty reduction, and the rule of law. 
If world leaders in Paris do not agree to credible measures to keep a rise in temperatures to below two degrees Celsius, the SDGs will not be realized. 
We do not face a choice between reducing poverty and addressing climate change, as the fossil-fuel companies maintain. 
Indeed, the dangerous effects of climate change threaten to undo the development gains that the MDGs helped to achieve. 
We risk a world of suffocating heat waves, severe droughts, disastrous floods, and devastating wildfires. 
Entire regions could experience catastrophic declines in food production. 
Sea levels could rise, drowning major cities and small island states. 
Large populations would be displaced, exacerbating existing economic strains and social tensions. 
At the same time, there is an emerging consensus – among grassroots organizations and central bankers alike – that inequality poses a serious threat to people’s livelihoods and prosperity worldwide. 
Globalization has led to a weakening of social contracts within nation-states and regional blocs and even among continents. 
The answer to inequality cannot be to build walls, hoard wealth, and stigmatize the poor and vulnerable. 
Sustainable prosperity requires that all groups within a society share equitably in the benefits of economic growth – especially as our societies become ever more interdependent. 
For this reason, we are particularly encouraged by Goal 10 of the SDGs, with its commitment to reducing inequality within and among countries, as well as the focus on gender equality throughout the goals. 
We know that any framework or process will have its limitations. 
International summits are too often conducted in a way that is remote and alienating for people outside the conference hall. 
Back in the 1980s, the UN commissioned what became known as the Brundtland Report to address mounting global concern about damaging environmental, social, and economic trends. The report defined the concept of “sustainable development” and called for radical change. 
It warned that, “Unless we are able to translate our words into a language that can reach the minds and hearts of people young and old, we shall not be able to undertake the extensive social changes needed to correct the course of development.” 
Sustainable growth and development policies cannot be imposed by diktat; they must be designed and implemented in a way that heeds the views and experiences of ordinary citizens. 
To implement the SDGs and minimize climate change, massive shifts will be required to move away from our fossil-fuel-driven economic model. 
Public understanding and consent will be crucial. 
World leaders must have the courage to take bold decisions, explain their necessity, and implement them in a just and effective way. 
They have no right to deny a decent future to our grandchildren. 
It is no longer a question of choices, but an obligation to prevent catastrophe. 
The time for action is now. 
We must not allow this opportunity to melt away. 

The Electronic Money Revolution 
Most journalistic accounts of the new forms of electronic money misleadingly spin the story as the emergence of yet another convenience for the technologically pampered. 
So what if we can pull out a "smart card" rather than carry coins? 
Big deal. 
These new forms of money sound like power windows on cars, or remote control for TV sets. 
Maybe we'd be better off without these gadgets. 
But media coverage has failed to look far enough into the future, and to comprehend the full extent of the changes that will be wrought by new forms of electronic money, as people and businesses invent new ways of doing business. 
Electronic money is not a channel changer: as it develops, it will help transform the world economy. 
Two benefits of electronic money stand out, and will likely contribute to its growth. 
Most important, it will have profound intellectual benefits by creating incentives for the active pursuit of ideas. 
Second, electronic money will advance globalization , expanding the scope and versatility of the Internet and making it easier for people to interact constructively with others around the world. 
Taken together, these two benefits will enable millions of minds to work together far more effectively than ever before. 
To understand electronic money's potential significance, consider the invention of coins, the first form of true money, in Lydia (now Turkey) in the seventh century BC and, independently, in China. 
This was an important advance, and thus one that spread quickly. 
The reason is straightforward. 
Before the invention of coins, commerce depended on precious metals. 
But the amounts had to be cut to the size of the transaction and weighed out with balance scales. 
People had to carry the scales, accompanying weights, and sometimes even tools to cut the metal, just to be able to transact. 
Archeologists still find elaborate (and probably expensive in those days) two-pan balance scales and weights on sunken bronze-age merchant ships. 
Most people didn't have them. 
Another difficulty with using undifferentiated precious metals for exchange was that some trust or expertise was required to assure people that the metal was pure. 
The same problem occurred with other commodities that people tried to use for exchange, such as gems or shells; their value was too uncertain. 
As a result of these obstacles, it was hard to carry out small transactions before the invention of standardized and identical coins, and trade must have been largely confined to big deals between major parties. 
With the introduction of coins, it became possible to develop many new kinds of business. 
One could easily establish and operate a business selling food by the serving or providing small household items to anyone who happened to pass by. 
But, most importantly, the invention of coins greatly enhanced the spread of knowledge. 
After the invention of coins, it became easy to sell books, lessons, and instructions. 
The development of coins is part of the reason that both the classical world around ancient Lydia and China in the Han Dynasty were so advanced compared to other parts of the world. 
The lesson is that the magnitude of transaction costs and contracting costs ultimately determine much of an economy's structure. 
As new forms of money reduce these costs, the richness and complexity of our economy will be increased. 
Lower transaction costs mean that exchange can be dramatically more fine-grained. 
With the latest forms of electronic money we can sell millions of little things, to millions of different people all over the world. 
Nowhere is this more important than in the realm of ideas. 
Credit card companies now routinely charge the firms accepting credit card payments US$0.25 plus between two and three percent of the amount transferred per payment. 
This fee structure makes it difficult to run a business selling items for less than ten dollars, and impossible to run a business selling items for less than one dollar: transaction costs eat up the profits. 
Through superior payments software, micropayments companies like Paypal (founded in 1998), Yaga (founded in 2000), Peppercoin (founded in 2001) and BitPass (founded in 2002) are able to offer much lower transaction costs than credit card companies, greatly expanding the number of transactions. 
A company can now charge people less than a dollar for a service (such as viewing a web page), and get significant returns by high volume. 
There are skeptics who say that the public is resistant to buying digital content, because people are accustomed to getting it for free. 
That is what people used to say years ago about cable TV. 
Excellent TV programming is not given away for free. 
Neither are other substantial intellectual creations. 
These skeptics overlook the profound changes that new technologies gradually make in our habits as we discover their possibilities. 
Already, we have seen the success of Apple's iTunes, which sells music for US$0.99 per song. 
Created in 2003, the iTunes Music Store recently surpassed its 100 millionth sale. 
That is certainly high volume. 
What iTunes sells is one form of intellectual content. 
Other forms will follow. 
It will be exciting to see what new forms of intellectual content are invented in coming years and decades. 
The economic revolution - both online and offline - that will be triggered as we learn how to use electronic money may be as profound as that wrought by our ancient ancestors' invention of coins. 

The Elephant’s Choices 
New Delhi – A month after they first queued to vote in India’s mammoth general election, the country’s voters will learn the outcome on May 16. 
The election, staggered over five phases – involving five polling days over four weeks, rather than one “election day” – will determine who rules the world’s largest democracy. 
Only one thing is certain: no single party will win a majority on its own. 
India is set for more coalition rule. 
That may not be a bad thing. 
India’s last two governments each served a full term and presided over significant economic growth, even though they comprised 23 and 20 parties, respectively. 
Coalition politics gives representation to the myriad interests that make up a diverse and complex society, and ensures that the country as a whole accepts the policies ultimately adopted. 
But coalition rule can also often mean governance of the lowest common denominator, as resistance by any of the government’s significant members to a policy can delay or even thwart it. 
In India’s parliamentary system, if a coalition loses its majority, the government falls, and keeping allies together can sometimes prove a greater priority than getting things done. 
India’s national elections are really an aggregate of thirty different state elections, each influenced by its own local considerations, regional political currents, and different patterns of political incumbency. 
Soon after May 16, the largest single party that emerges will seek to construct a coalition out of a diverse array of victors from the various states. 
Several outcomes are possible. 
The most likely is that Prime Minister Manmohan Singh’s Indian National Congress, currently leading the government, emerges once again as the largest single party and assembles a new ruling coalition. 
The main alternative would be majority alliance put together by the Bharatiya Janata Party (BJP), led by the 82-year-old Lal Krishna Advani. 
But there is a third possibility: a motley collection of regional parties, together with the Communists, gets enough seats to prevent either of the two big parties from forming a government. 
In that case, a “hung parliament” could see a “third front” coming to power as a minority government, supported tactically by one of the big parties. 
This has happened before – and each time, the government that resulted fell within a year. 
Each alternative could have serious implications for India. 
Though the big parties are broadly committed to continuing an economic policy of liberalization and growth, the BJP is mostly focused on the well-being of India’s merchant class, whereas Congress wishes to redistribute enhanced government revenues to the poor through generous social programs. 
The left, which would strongly influence any “third front” government, are staunchly opposed to economic liberalization and wish to strengthen, rather than dilute, India’s large public sector. 
In foreign policy, India’s growing closeness with the United States under both the BJP and the Congress has proved controversial at home, with leftist parties threatening to scrap the Indo-US nuclear deal and break defense ties with Israel if they come to power. 
Should the regional parties dominate the government, domestic politics would strongly impact India’s foreign policy: the anger of Tamil voters over events in Sri Lanka, or of Muslims over Gaza, would be reflected in the government and therefore constrain policy options. 
The BJP has promised a more hawkish security posture than Congress in the wake of the Mumbai terrorist attacks, but when it was in power it conducted itself remarkably similarly to its rival, initiating a peace process with Pakistan. 
The biggest differences among the various groupings consist in the tone and tenor of their respective visions of India. 
Congress remains a “big tent” party, committed to preserving India’s pluralism and conscious of the multiple identities and interests of India’s many peoples. 
The BJP, which accuses Congress of “appeasing” India’s minorities, hews to a staunchly Hindu-chauvinist line, and has received support from some of the most bigoted and intolerant sections of Indian society. 
The “third front” involves assorted petty particularisms – parties representing the sectarian interests of specific castes, sub-regions, or linguistic groups. 
The danger is that such groups could accentuate the divisions of a fractious society, rather than pull everyone together in the collective national interest. 
That would be a startling change from five years ago. 
The 2004 elections were won by the Congress party, led by a woman political leader of Roman Catholic faith and Italian descent (Sonia Gandhi), who made way for a Sikh prime minister (Manmohan Singh) to be sworn by a Muslim (President Abdul Kalam) in a country that is 81% Hindu. 
That single moment captured much of what elections have meant for this diverse democracy. 
But the ultimate reality will remain that of a coalition government trying to make progress in a contentious polity. 
In India, policy changes require political consensus within the ruling coalition, labor laws are strongly defended by unions and political parties, and controversial decisions can be challenged on the streets, in the courts, and ultimately at the polls. 
Necessary policy reforms advocated by a ruling party are often held hostage to the prejudices of its allies. 
So change comes slowly. 
But it does come, and once a policy consensus has been established, it tends to be durable. 
Indian democracy has often been likened to the stately progress of the elephant – ponderous in its gait and reluctant to change course, but not easily swayed from its new path when it does. 
The elephant of Indian democracy will acquire a new set of mahouts before the month’s end. 
Who they are will have a major impact on the fortunes and prospects of one-sixth of humanity. 
That alone makes the election results due on May 16 worth the world’s attention. 

The Elixir of Education? 
Many people see education as a cure-all. 
They believe that societies can be transformed by pouring money into raising educational standards. 
But, while it is right to believe in the power of education – indeed, many scholars are convinced that it creates healthier, more prosperous citizens – such enthusiasm doesn’t tell us how to get more children to stay in school longer, or how to ensure that they learn useful skills while they are there. 
Today, virtually every Latin American and Caribbean child enrolls in primary school, and most complete several years of secondary education – remarkable progress compared to a half-century ago. 
Yet Latin American and Caribbean children gain fewer skills in each year of school than students do in high-income countries – and even in some other developing countries. 
Indigenous children have a significantly lower chance of educational success. 
Guatemala, Haiti, Honduras, Nicaragua, and Paraguay lag behind even other Latin American countries. 
Despite the widespread enthusiasm for lifting educational performance in Latin America and the Caribbean, little effort has been devoted to working out how to maximize investments in education. 
Which policies work best? 
There are myriad options. 
The World Bank recommends decentralizing school administration and decision-making so that schools are more responsive to local needs. 
But no reliable studies have established this strategy’s effectiveness. 
Bilingual education is another suggestion that requires further research if we are to establish the benefits. 
Research in Africa suggests that giving de-worming medicine to primary school pupils reduces the prevalence of health problems that lower children’s concentration and attendance. 
A program to provide teachers with monetary incentives and professional training was recently established in Mexico, but research conducted to date has found no significant impact on educational outcomes. 
Clearly, there is a deficit of useful information and serious scientific research in this field. 
However, three options should be promoted. 
First, there is credible evidence that children who are better nourished in their first years of life stay in school longer and learn more each year that they remain there. 
This was first demonstrated in the 1960’s, when Guatemalan researchers gave children in two randomly selected villages a nutritious porridge each day, and a much less nutritious fruit drink to children in two other villages. 
More recently, Bolivia launched the Proyecto Integral de Desarrollo Infantil (PIDI), which gave low-income urban children food and extra educational activities. 
This policy can be very affordable: providing porridge in Guatemala cost just $23.25 per child per year, while the monetary value of the increase in the children’s future wages is between two and four times higher. 
A second option is Conditional Cash Transfer Programs, which provide cash payments to poor households whose children attend school regularly. 
These programs have been shown to increase enrollment and attendance. 
Families in some rural communities of Honduras, Nicaragua, and Mexico get monthly cash payments if their children’s school attendance rates are 85% or higher. 
In Nicaragua, these programs have increased school enrollment rates by about 13 percentage points. 
However, such incentives do not address the problem of low-quality education, and research shows that the benefits do not always outweigh the costs. 
Policymakers may choose instead to follow the example of Chile and Colombia, which give students government money to pay for private education. 
In Colombia, scholarships were provided to 125,000 students from poor, urban communities in the early 1990’s. 
Where demand exceeded supply, private education “voucher” recipients were selected by lottery. 
Each voucher cost the Colombian government $24 a year more than its previous education spending per student, but the vouchers increased attendance rates and test scores. 
It is estimated that children in the program increased their future incomes by $300 per year. 
With the benefits exceeding the costs by between 10 and 25 times, this seems to be a sound option. 
Yet an analysis of Chile’s voucher program found no positive effect on students’ test scores or years in school. 
Instead, the program’s main effect seems to have been to encourage the best students in public schools to switch to private schools. 
Investing in education is vital for Latin America and the Caribbean. 
But much remains unknown. 
Many policy options unravel when examined closely; others show promise but require more study. 
The most expensive programs aren’t necessarily the most successful. 
Merely waxing lyrical about the benefits of education will do nothing to help Latin American and Caribbean countries catch up with developed countries. 
Instead, governments and international organizations should support education policies that have been shown to be effective, encourage research and evaluation of other types of education policies and programs, and back non-education policies and programs that improve the quality of life in developing countries. 

The Elusive Legacy of 1968 
“Dany, you have been so successful. 
But don’t let yourself be manipulated by those far-left forces that would lead you to destroy everything that could arise from what you are creating.” 
Forty years later, those words on March 22, 1968, by Jean Baudrillard – then an assistant professor at Nanterre University – still sound right. 
I may disappoint my supporters and those enticed by “The Revolution,” but I’m not the leader of a revolution that allegedly occurred in 1968. 
Forget it: “’68” is over – buried under cobblestones, even if those cobblestones made history and triggered radical change in our societies! 
At first it seems baffling. 
But, as I made clear at the time in my interview with Jean-Paul Sartre in Le Nouvel Observateur , I was only the loudspeaker for a rebellion. 
Thus, “’68” symbolized the end of revolutionary myths – to the benefit of liberation movements extending from the 1970’s until now. 
After all, the world of the 1960’s – the first global movement broadcast live on radio and TV – was defined by a variety of inter-connected revolts. 
The change wrought by “’68” affected, above all, traditional culture, hidebound moralism, and the principle of hierarchical authority. 
It altered social life, ways of being, ways of talking, ways of loving, and so on. 
But, despite its scope, the movement steered clear of violence in order to create a new mode of rebellion. 
Students, workers, and families – all had their legitimate demands, and all nonetheless converged on the same desire for emancipation. 
The revolt was a form of political expression, but its aim was not to seize political power as such. 
Indeed, its existential essence rendered it “politically untranslatable.” 
The desire for freedom that carried the movement forward necessarily eluded archaic modes of thinking. 
As a result, the sterile categories of political tradition could gain no purchase on events. 
In France, conservatism was so entrenched on both the left and the right that both missed the movement’s meaning and could only fall back on stereotyped revolutionary interpretations. 
As for the anarchists, their utopia of widespread self-management – tied to outdated historical references – appeared entirely unsuitable. 
Starting from an initial rejection of political institutions and parliamentarism, we understood only later that the democratic challenge lies in occupying a politically “normalized” space. 
Faced with the anarchists, with their confining minimalist political grammar – reflected in the famous slogan elections, piege à cons (“elections, a trap for idiots”) – and with the Communist Party, whose revolutionary ideal was eventually linked to totalitarian types of society, the future of May 1968 could only shift to the right with the election victory of General de Gaulle. 
It was, undeniably, a political failure. 
But just as undeniable was the huge tremor that shook our antediluvian conceptions of society, morals, and the state. 
Challenging authoritarianism, the revolt triggered an explosion at the heart of the typically French two-headed power structure, which combined a dominant Gaullism and a Communist Party managing the working class. 
Thus, the radicalism of the upheaval eventually liberated the pleasure to live. 
With a new generation emerges a new political imagination and poetic mottos written on walls. 
The surrealist essence of the rebellion was somehow symbolized by Gilles Caron’s famous photograph, in which an insolent smile at a riot policeman subverts the frozen, established order to the point of making it ridiculous. 
Of course, some people have never overcome the end of the ecstasy of those five weeks of craziness and joy, while others still wait for “’68” to culminate in God only knows what kind of “D-Day.” 
For my part, I accepted the “principle of reality” long ago, without nostalgia – and without minimizing the importance of what happened. 
For “’68” was, indeed, a rebellion joining two eras. 
It cracked the yoke of conservatism and totalitarian thought, enabling the desire for personal and collective autonomy and freedom to express itself. 
From the cultural point of view, we won. 
So, revisit “’68”? 
Yes, but only in order to understand it, grasp its scope, and retain what still makes sense today. 
Knowing, for example, that 23 years after World War II, a multicolored France demonstrated against my deportation by claiming “We are all German Jews” provides food for thought. 
But this does not justify the hasty comparison – and even less the identification – of every protest today with “’68.” 
After 40 years, the context has changed radically. 
The world of the Cold War is gone, as are schools and factories organized like barracks, authoritarian trade unions, gay bashing, and women’s obligation to receive permission from their husbands before being able to work or open a bank account. 
That world has been replaced by a multilateral world, which includes AIDS, unemployment, energy and climate crises, and so on. 
So let’s permit new generations to define their own battles and desires. 
Demystifying “’68” also exposes the pretense of those who would blame it for all the wrongs of today’s world. 
Because the “’68 generation” wrote on the walls “It is forbidden to forbid,” some hold it responsible for urban violence, extreme individualism, the crisis in education, executives’ “golden parachutes,” the decline of authority, and – why not? – climate change. 
In this way, such people hope that they can evade their duty to explain today’s problems. 
But how can one not interpret this as a political trick aimed at sabotaging the modernization of expression, thereby closing off any space for rational debate? 

The Elusive Search for Global Financial Rules 
BRUSSELS – If the financial crisis is global, it is said, then the solution must be global : an international financial system that works better. 
And, because the Bretton Woods institutions (BWIs) – the World Bank and the International Monetary Fund – form the center of the international financial system, they must be included in the solution. 
An enhanced international financial system must pursue two main lines of action. 
The first is to broaden the scope of international cooperation. 
At the moment, the Financial Stability Board, whose members include the G-20 countries, mainly pursues initiatives in this field. 
A second line of action is to strengthen the international institutions’ soft powers to aim for more consistent economic policies, especially by systemically important economies. 
This would directly involve the Bretton Woods institutions, notably the IMF. 
A strengthening of the IMF was agreed after the Asian crisis in the 1990’s, and the G-7 summit in Cologne in 1999 mandated the Fund to play a strong surveillance role to ensure greater transparency and encourage early adjustment by countries with unsustainable balance-of-payments positions. 
But, over the last decade, the expectations raised by this mandate have not been met. 
Some emerging economies did not let their currencies float but, instead, continued to peg them at undervalued exchange rates in order to promote their exports and build up reserves as a form of insurance in case of crisis. 
Moreover, the IMF has not succeeded in convincing countries to pursue macroeconomic policies consistent with sustainable current-account positions. 
Nor have advanced economies, particularly the United States, taken IMF advice fully into consideration. 
The accumulation of large surpluses, especially in emerging Asian economies and oil-exporting countries, enabled the US to finance its current-account deficit. 
It also lowered long-term interest rates in the US and made monetary conditions there more expansionary. 
Emerging economies, following the advanced countries, also attached less importance to Fund surveillance, especially as their accumulation of external assets made them less dependent on IMF financing and advice. 
For example, the Fund has been unable to complete a surveillance program with China for three years. 
All this occurred against the background of emerging-market economies’ claims that their relatively low representation in the BWIs denied the IMF legitimacy. 
In recent months, the Fund played an important role in resolving the crisis, in particular by assessing the gravity of the situation and providing countries with external finance. 
But, if we are to create an international monetary system in which crises are the exception, the Fund must play a greater preventive role. 
There seems to be a sense of denial in several countries that large external imbalances were a cause of the crisis. 
These imbalances ultimately reflected the accumulation of excessive international liquidity by countries like the US, stemming from excessive savings by countries like China. 
This spurred an unsustainable consumption boom, as well as unwarranted risk-taking by consumers and financial institutions, which contributed to the large distortions and bubbles in global financial markets that were the preconditions for the current crisis. 
The risk now is that the forces favoring earlier and effective adjustment of imbalances have been weakened. 
Indeed, few today are calling for the IMF to play a stronger role in preventing the accumulation of excessive external imbalances and in fostering more disciplined domestic policies. 
An example of this is the way the IMF’s Decision on Bilateral Surveillance over Members’ Policies, aimed at identifying fundamental exchange-rate misalignments, was modified to allow greater discretion in surveillance, especially over exchange rates. 
This might look like a tactical choice, but I doubt that it will result in a stronger hand for the IMF. 
Emerging and developing countries are demanding a stronger voice in the IMF, but they also seem to be suggesting that they would like it to be less intrusive and less able to impose conditionality – while simultaneously providing more and cheaper financing. 
This might be appropriate in times of systemic crisis, but it is not sustainable in normal times. 
Indeed, some thought should be given to an exit strategy from cheap and unconditional IMF financing. 
Instead, most IMF shareholders seem to favor making the organization’s financing easier. 
Enhancing the role of its Special Drawing Rights (SDRs), or supplementing the dollar with another world reserve currency, would help facilitate the financing needs of both deficit and surplus countries. 
For deficit countries, borrowing from international institutions outside the markets would be easier, giving the issuer of such currency some form of international lender-of-last-resort function. 
For surplus countries that want to accumulate reserves, it would reduce exchange-rate risk. 
But, if financing were to become easier, it would be unclear how both creditors and debtors would perceive the risk of excessive imbalances. 
The real danger is that adjustment would take place even later, with imbalances left to accumulate for a longer period of time. 
Under these circumstances, crises could be even greater, and the adjustments harsher – as occurred under the last world currency, the gold standard. 
A viable international financial system requires a mechanism to keep imbalances in check. 
An essential element of such a mechanism is to give the IMF a prominent role in two areas: strong and effective surveillance in order to prevent crises, and responsible lending to countries in need, but with appropriate limits and conditionality. 
We don’t need to reinvent the wheel; we just need to follow up on the commitments made ten years ago. 
Dealing with the short-run challenges of the current crisis should not distract us from the objective of preventing future meltdowns. 

The Emerging “New Middle East” 
President George W. Bush’s Middle East policy undeniably managed to achieve one thing: it has thoroughly destabilized the region. 
Otherwise, the results are not at all what the United States had hoped to accomplish. 
A democratic, pro-Western Middle East is not in the cards. 
But, while things are not developing as American neo-conservatives had intended, they are nevertheless developing. 
The historical failure named Iraq war, the demise of secular Arab nationalism and the soaring oil and gas prices have wrought profound changes in the region. 
From Damascus to Dubai, from Tel Aviv to Teheran, a new Middle East is now emerging. 
The old Middle East arose from the borders and political identities created by the European powers after the fall of the Ottoman Empire in 1918. 
Its driving ideological force was a European-inspired secular nationalism, which strove for political and social modernization through top-down government action. 
This type of nationalism, or “Arab socialism,” reached its apex during the Cold War, when it could lean on Soviet military, political, and economic support. 
Its end came with that of the Soviet Union, as it petrified into authoritarian, corrupt, and inefficient military regimes and dictatorships. 
The end of the Soviet Union also triggered a profound military crisis in many Arab states: without Soviet support as an external guarantor of their military capabilities, the nationalist regimes were no longer able to keep pace with military modernization. 
The nationalist regimes thus gradually lost domestic popular legitimacy, creating a vacuum that non-state actors have now largely filled. 
The ideological forces and the currency of power have also changed, with political Islam replacing secularism while skillfully integrating social issues and revolutionary, anti-Western nationalism. 
Today, the old Middle East can still be found in Syria, Egypt, Yemen, Tunisia, Algeria, and Fatah-controlled Palestine. 
The new Middle East includes Dubai, the Gulf emirates, and Israel, as well as Hezbollah, Hamas, and jihadi terrorism – and, partly, Iran and Saudi Arabia. 
Jordan and Morocco are also trying to associate themselves with the new Middle East. 
Obviously, as these examples suggest, “new” does not necessarily mean better, but simply different and more modern. 
Indeed, modernization by no means implies a solution to the conflicts that continue to fester in the region. 
Instead, these conflicts are themselves “modernized,” which could make them even more dangerous than in the past. 
An aspect of such modernization could be seen in the 2006 Lebanon war between Israel and Hezbollah, where tank warfare was rendered obsolete by missiles and Katyushas. 
At the same time, non-state actors, such as Hezbollah, Hamas, and al-Qaeda, have taken the place of traditional armies, and suicide bombers equipped with road-side and car bombs or explosive belts have replaced guerrilla fighters with their Kalashnikovs. 
Perhaps the most important change is the shift in the region’s political and military center of gravity. 
While Israel, Palestine, and Lebanon defined the most important hot spots in the old Middle East, regional power and politics in the wake of the Iraq war is now centered in the Persian Gulf. 
The dominant conflict is no longer the Israeli-Palestinian struggle, but the threat of a confrontation between Iran and Saudi Arabia for sub-regional supremacy, and between Iran and the US for regional hegemony. 
Indeed, it is by now virtually impossible to implement any solution to the Israeli-Palestinian conflict without Iran and its local allies – Hezbollah in Lebanon and Hamas in Palestine. 
In a way, then, the war in Iraq forms the strategic and military bridge between the old and the new Middle East. 
The US intervention has brought about four far-reaching changes in the region: 
· Iran’s hegemonic ambitions have been unleashed, and the country has been helped to a strategic position that it could never have reached on its own. 
· The democratization of Iraq has empowered the Shi’a majority, which in turn greatly strengthened Iran’s influence. 
Indeed, the war in Iraq has transformed the centuries-old Shi’a-Sunni conflict by infusing it with modern geopolitical significance and extending it to the entire region. 
· The rise of Iran poses an existential threat to Saudi Arabia, because the country’s oil-rich northeast is populated by a Shi’a majority. 
A Shi’a government in Baghdad, dominated by Iran, would, in the medium term, threaten Saudi Arabia’s territorial integrity – a scenario that the Saudis cannot, and will not, accept. 
· Should Iran manage to become a nuclear power, the Saudis’ existential fears would dramatically escalate. 
More generally, the currency of conventional military power in the Middle East would largely lose its value, inevitably resulting in a regional nuclear arms race. 
Emanating from this new situation is the threat of disintegration of the whole Anglo-French system of states in the Middle East. 
The first candidate is, of course, Iraq. 
Whether Iraq can be held together despite the ethnic and religious confrontations that pit Kurds against Arabs and Sunnis against the Shi’a is one of the most pregnant questions for the new Middle East. 
For Iraq’s disintegration would be hard to contain; indeed, it could bring about a thorough balkanization of the region. 
Another important question is whether political Islam will move toward democracy and acceptance of modernity or remain trapped in radicalism and invocation of the past? 
The forefront of this battle is, at the moment, not in the Middle East, but in Turkey; nevertheless, the result is bound to have more general significance. 
The emergence of the new Middle East may present an opportunity to establish a regional order that reflects the legitimate interests of all the actors involved, provides secure borders, and replaces hegemonic aspirations with transparency and cooperation. 
If not, or if such an opportunity is not seized, the new Middle East will be much more dangerous than the old one. 

The Emerging Lessons of the New Economy 
CAMBRIDGE: Debates about the New Economy have raged for years, yet preliminary conclusions are now possible. 
The New Economy, built on advances in information technology (IT), is real, and is reshaping global industry and services, increases in US productivity in recent years being the clearest demonstration. 
Simultaneously, the stock market valuations associated with the New Economy are unreal, in the sense that they reflect more of a speculative bubble than fundamental valuations. 
A third conclusion is that like many technologies, adoption and diffusion of information technologies depends not just on private market forces, but on government. 
The US, which portrays itself as the bastion of free enterprise, is pursuing the IT revolution through a concerted "industrial policy" as well as through market forces. 
Other countries should also adopt national strategies to accelerate the uptake of the new technologies. 
The reality of the New Economy is best captured in the data on economic growth and productivity in the US, where the New Economy is most advanced. 
Until about five years ago, American economists bemoaned a "growth slowdown," a downturn in productivity growth beginning in the 1970s. 
Studies seemed to show that the computer revolution had contributed little to improvements in productivity. 
Economic historians warned that it takes many years for new technologies to show up in actual improvements in industrial productivity, which was true for past major technological leaps. 
By the mid-1990s, those predictions were proving correct. 
Productivity growth began to soar, from around 1.5% per year, to around 3% per year. 
Higher productivity growth in turn resulted in an acceleration in GDP growth, from around 2.5% per year during 1990-96 to more than 4% per year since 1997. 
The deserved enthusiasm for the real economy translated into an undeserved enthusiasm for the stock market prices of IT-based enterprises. 
There is a big difference between productivity growth and profits, and this basic point was largely ignored by market enthusiasts. 
Even though productivity gains are likely to be substantial, most benefits will accrue to consumers in the form of lower prices, or to workers in the form of higher wages relative to prices, rather than to firms in the form of higher profits. 
This is because of a basic aspect of internet technology: freedom of entry of new firms, and therefore the very high contestability of markets. 
Yes, early movers in internet technology such as Amazon.com, the electronic bookseller, will maintain an advantage, but that advantage is likely to remain modest, since the potential entry of competitors will keep profit margins low. 
In fact, even as Amazon increased its revenues in recent years, it sustained losses. 
Recent reversals in the US stock market, quickly transmitted around the world, are the first glimmers that market participants are waking up to these basic facts. 
While the number of new dot-com billionaires created each day is likely to diminish drastically, the benefits of IT to the real economy will continue to spread. 
And the gains will not just be in the US and Europe. 
East Asian economies are surging in their rapid take-up of the internet, with particularly striking examples in Hong Kong, Singapore, Korea, and Taiwan. 
It is estimated that around one-third of all Koreans are now on the internet, a share rising to two-thirds by the end of this year. 
Connectivity in China will also boom, with internet use doubling in the past year (from around 4 million to 8.9 million), and likely to increase substantially when nationwide wireless internet services are inaugurated in May. 
Singapore launched a major telecoms liberalization which will reduce internet costs and raise usage. 
While the US and Canada still dominate in estimated internet usage (around 140 million users as of March 2000), compared with Europe (83 million users), and Asia/Pacific (70 million users), and with South America (10 million users) and Africa (3 million users) far behind, the laggards have a chance to narrow the gap in with the right policies. 
Every government should understand that the rapid adoption of the internet benefits strongly from supportive government policies, not just "free market" policies. 
The internet was actually first created by a government project (ARPANET), fostered by the National Science Foundation, which helped to get universities and scientists on-line. 
Since those early days, the US Government has continued to pour billions of dollars into research and development of IT technologies. 
In addition, the Internet Tax Freedom Act established a moratorium on taxation of e-commerce transactions, while the Telecommunications Act of 1996 provided funding and government support for wiring of schools and public libraries. 
Developing countries will need their own strategies, and soon. 
Market reforms are critical, especially freeing telecommunications from state monopolies so that private companies are free to invest in needed physical infrastructure. 
But governments should also foster an environment where much of the population gets on-line. 
Government agencies and public schools should be put on-line as fast as possible. 
As in the US, tax policies must foster the uptake of the new technologies. 
Curricula in schools and universities should be re-designed to ensure the training to support national IT systems. 
International donor agencies and foundations can be attracted to provide vital funding to very poor countries to help overcome the "digital divide." 
Harvard University and IBM teamed up in the past year to prepare an "IT Readiness Guide" as a public service to help developing country governments and communities around the world assess where they are in the IT revolution and New Economy. 
This guide provides one useful tool for the formulation of an IT strategy. 
The guide can be retrieved, free of charge, from the internet website: http://www.readinessguide.org. 

The Emotional Clash of Civilizations 
Throughout the so-called “war on terror,” the notion of a “clash of civilization” between Islam and the West has usually been dismissed as politically incorrect and intellectually wrongheaded. 
Instead, the most common interpretation has been that the world has entered a new era characterized by conflict “within” a particular civilization, namely Islam, with fundamentalist Muslims as much at war against moderates as against the West. 
The strategic conclusion derived from such an analysis was clear, ambitious, and easily summarized: democratization. 
If the absence of democracy in the Islamic world was the problem, bringing democracy to the “Greater Middle-East would be the solution, and it was the historical duty of the United States, as the most powerful and moral nation, to bring about that necessary change. 
The status quo was untenable. 
Implementing democracy, with or without regime change, was the only alternative to chaos and the rise of fundamentalism. 
Today, Iraq may be on the verge of civil war between Shiites and Sunnis. 
Iran under a new and more radical president is moving irresistibly towards possessing a nuclear capacity. 
A free electoral process brought Hamas to power in Palestine, and the unfortunate episode of the Danish newspaper cartoons illustrated the almost combustible nature of relations between Islam and the West. 
All of these developments are paving the way to new interpretations. 
Rather than a “clash of civilizations,” we might instead be faced by multiple layers of conflict, which interact with each other in ways that increase global instability. 
Indeed, it appears that the world is witnessing a triple conflict. 
There is a clash within Islam, which, if the violence in Iraq spreads to neighboring countries, risks causing regional destabilization. 
There is also a clash that is best described not as being between Islam and the West, but between the secularized world and a growing religious one. 
At an even deeper and atavistic level, there is an emotional clash between a culture of fear and a culture of humiliation. 
It would be a gross oversimplification to speak, as some are doing, of a clash between civilization and barbarism. 
In reality, we are confronted with a widening divide over the role of religion, which runs between the West (with the US being a complicated exception) and much of the rest of the world (the most notable exception being China), but particularly the Islamic world. 
The divide reflects how religion defines an individual’s identity within a society. 
At a time when religion is becoming increasingly important elsewhere, we Europeans have largely forgotten our (violent and intolerant) religious past, and we have difficulty understanding the role that religion can play in other peoples’ daily lives. 
In some ways, “they” are our own buried past and, with a combination of ignorance, prejudice, and, above all, fear, “we” are afraid that “they” could define our future. 
We live in a secular world, where free speech can easily turn into insensitive and irresponsible mockery, while others see religion as their supreme goal, if not their last hope. 
They have tried everything, from nationalism to regionalism, from communism to capitalism. 
Since everything has failed, why not give God a chance? 
Globalization may not have created these layers of conflicts, but it has accelerated them by making the differences more visible and palpable. 
In our globalized age, we have lost the privilege – and, paradoxically, the virtue – of ignorance. 
We all see how others feel and react, but without the minimal historical and cultural tools necessary to decipher those reactions. 
Globalization has paved the way to a world dominated by the dictatorship of emotions – and of ignorance. 
This clash of emotions is exacerbated in the case of Islam. 
In the Arab world, in particular, Islam is dominated by a culture of humiliation felt by the people and nations that consider themselves the main losers, the worst victims, of a new and unjust international system. 
From that standpoint, the Israel-Palestine conflict is exemplary. 
It has become an obsession. 
It is not so much that Arabs and Muslims really care about the Palestinians. 
On the contrary, the Islamic world left the Palestinians without real support for decades. 
In reality, for them the conflict has come to symbolize the anachronistic perpetuation of an unfair colonial order, to represent their political malaise, and to embody the perceived impossibility of their being masters of their destiny. 
In the eyes of the Arabs (and some other Muslims), Israel’s strength and resilience is a direct consequence of their own weakness, divisions, and corruption. 
The majority of Arabs may not support al-Qaeda, but they do not oppose it with all their heart. 
Instead, there is the temptation to regard Osama bin Laden as a type of violent Robin Hood, whose actions, while impossible to condone officially, have helped them to recover a sense of Arab pride and dignity. 
Here, perhaps, is the real clash of civilizations: the emotional conflict between the European culture of fear and the Muslim, particularly Arab, culture of humiliation. 
It would be dangerous to underestimate the depth of so wide an emotional divide, and to recognize its existence is the first step to overcoming it. 
But that will be difficult, for transcending the emotional clash of civilizations presupposes an opening to the “other” that neither side may yet be ready to undertake. 

The Empire of Human Rights 
NEW YORK – Why are French, British, and American warships, but not Chinese or Malaysian warships, sitting near the Burmese coast loaded with food and other necessities for the victims of Cyclone Nargis? 
Why has the Association of South East Asian Nations (ASEAN) been so slow and weak in its response to a natural calamity that ravaged one of its own members? 
The French junior Human Rights Minister, Rama Yade, declared that the United Nations’ principle of the “responsibility to protect” should be applied to Burma, forcibly if necessary. 
And the Malaysian opposition leader Lim Kit Siang has said that Asian countries’ inaction “reflects dismally on all ASEAN leaders and governments. 
They can definitely do more.” 
So, are Europeans and Americans simply more compassionate than Asians? 
Given the West’s record of horrendous warfare and often brutal imperialism, this seems unlikely. 
Moreover, the way ordinary Chinese rallied to help victims of the earthquake in Sichuan has been quite remarkable, as have been the spontaneous efforts of people in Burma to assist their fellow citizens, even as the military did very little. 
Buddhism stresses compassion and mercy as much as Christianity does. 
Indifference to suffering is not inherent to any Asian culture. 
Indeed, none of the Asian members disagreed when the UN General Assembly adopted the Universal Declaration of Human Rights in 1948. 
The declaration held that “recognition of the inherent dignity and of the equal and inalienable rights of all members of the human family is the foundation of freedom, justice, and peace in the world.” 
Nevertheless, there may be cultural differences in understanding how compassion should be applied. 
The ideal of universal equality and rights does owe something to the history of Western civilization, from Socrates’ “natural justice” to Christianity and France’s Declaration of the Rights of Man. 
Western peoples have not always lived up to their universalist ideals, but they have in modern times built institutions designed to implement them, in Europe and beyond. 
There is, so far, no Asia-wide institution to protect the human rights of Asians, let alone mankind. 
In fact, Chinese and other Asians frequently criticize the West for using human rights as an excuse to impose “Western values” on former colonial subjects. 
To be sure, such accusations are especially common in autocracies whose rulers, and their apologists, view the idea of universal human rights as a threat to their monopoly on power. 
But distrust of universalism in Asia is not confined to autocrats. 
In many Asian countries, favors invariably create obligations, which is perhaps why people are sometimes disinclined to interfere in the problems of others. 
You are obliged to take care of your family, your friends, or even your fellow countrymen. 
But the idea of universal charity is too abstract, and smacks of the kind of unwelcome interference that Western imperialists – and the Christian missionaries who followed them – practiced in the East for too long. 
The notion of “Asian values,” promoted mostly by Singaporean official scribes, was partly a critique of universalist Western claims. 
Asians, according to this theory, have their own values, which include thrift, deference to authority, the sacrifice of individual to collective interests, and the belief that countries should not stick their noses into others’ affairs. 
Hence, the hesitant response of Southeast Asian governments – and public opinion – to the Burmese disaster. 
One possible line of criticism of this kind of thinking is simply to claim the superiority of Western values. 
But another, more sympathetic response would be to show that individual rights and notions of freedom are by no means alien to non-Western civilizations. 
Amartya Sen, the Nobel Prize-winning economist, has pointed out that great Indian rulers, such as Ashoka (third century BC) and Akbar (sixteenth century), advocated pluralism, tolerance, and reason long before the European Enlightenment. 
He has also observed that famines don’t occur in democracies, because freedom of information helps to prevent them. 
Sen, not surprisingly, is a trenchant critic of the “Asian values” school. 
It has, nonetheless, become a commonly held opinion that democracy, like universal human rights, is a typically Western idea, and that Asian autocracy, as practiced in China, for example, is not only more suited to Asians, but also more efficient. 
Democratic governments are hampered by lobby groups, special interests, public opinion, party politics, and so forth, while Asian autocrats can make unpopular but necessary decisions. 
The two recent natural disasters in Burma and China have put this idea to a severe test. 
China has not fared too badly, largely because its government was forced by the Burmese example, bad publicity surrounding the Tibetan demonstrations, and the impending Olympic Games to allow far more freedom of information than it normally does. 
One can only hope that this crack of freedom will widen in time. 
Burma failed miserably, and, despite belated efforts to make the best of terrible circumstances, so has ASEAN. 
In the end, of course, it doesn’t matter much whether or not we ascribe the failures of autocracy and non-intervention to anything specifically “Asian.” 
Whatever the cause, the consequences remain deplorable. 

Global Institutions after the Crisis 
OXFORD – When Lehman Brothers collapsed and the global financial crisis erupted five years ago, many glimpsed a silver lining: the promise of more effective global economic governance. 
But, despite a flurry of early initiatives, the world remains as far from that goal as ever. 
The Financial Stability Board (FSB), established after the G-20 summit in London in April 2009, has no legal mandate or enforcement powers, nor formal processes for including all countries. 
The International Monetary Fund still awaits the doubling of its capital (another early vow), while its existing resources are heavily tied up in Europe and its governance reforms are stalled. 
The World Bank has received a modest increase in resources, but it has yet to build capacity to lend rapidly and globally beyond existing borrowers and loan arrangements, and its income trajectory is diminishing. 
Yet the need for effective global economic governance remains more urgent than ever. 
Banks and other financial firms roam internationally, greatly assisted by market-opening rules embedded in trade and investment treaties, but with no legally enforceable responsibility to provision adequately for their own losses when things go wrong. 
Instead, massive risks have supposedly been held at bay by voluntary standards promulgated by a patchwork of public and private “standard-setting” organizations. 
The crisis proved that this was inadequate. 
The titans of Wall Street and the City of London were exposed as hugely over-leveraged. 
Extraordinary profits when their bets paid off increased their financial and political power – which they still enjoy – with taxpayers left to bail them out when their bets turned bad. 
The G-20 promised stronger global institutions to prevent this from recurring. 
But the FSB is not a treaty-based global regulator with enforcement powers. 
It continues to be a “standard setter” in a world with strong incentives to evade standards and negligible sanctions for doing so. 
Furthermore, although the FSB’s standards are ostensibly “universal,” it does not represent all countries or have formal mechanisms to inform and consult them. 
Regulators face a Sisyphean task, owing to the absence of strong and consistent political support for reining in the financial titans. 
A well-resourced financial sector intensively lobbies the most influential governments in global finance. 
The reforms of the IMF, another pillar of global financial management, cannot be implemented until the US Congress approves them – and there is no sign of that. 
Even the new Basel 3 banking standards have been diluted and postponed. 
For Brazil, Russia, India, and China, the delay in reforming the IMF is a serious annoyance. 
They became major contributors to the Fund’s emergency loan pool (the New Arrangements to Borrow) immediately after the crisis and now provide 15.5% of the NAB’s resources. 
But the greater voice and voting power that they were promised – commensurate with their status as four of the IMF’s top ten shareholders – has not been delivered. 
Even the selection of the organization’s managing director remains a European droit du seigneur. 
More seriously, an astounding 89.2% of the IMF’s General Resources Account is outstanding to European countries, with just three countries (Greece, Portugal, and Ireland) accounting for 68%. 
The IMF’s resources are neither adequate nor available to respond to a crisis elsewhere. 
Similarly, the G-20’s pledge in 2009 to protect the poorest and most fragile countries and communities from the effects of the crisis remains unfulfilled. 
The World Bank is at the heart of these efforts, because it can pool risks globally and offset the capriciousness of official and private-sector aid flows, which create “donor darlings” (like Rwanda) and “donor orphans.” 
But, while the Bank has more than doubled its lending relative to the four years prior to 2008, this was achieved mostly by front-loading existing loans. 
Crisis-hit countries that were not already borrowers were largely left out. 
The Bank’s failure to lend to new clients partly reflects its slowness. 
Even after its loan cycle had been speeded up, the Bank took an average of 13.5 months to approve credits – a long time for a country to await “emergency” help. 
But the Bank is also hampered by worsening resource constraints, as the biggest post-crisis capital infusions went to regional development banks. 
The African Development Bank’s capital was increased by 200%, as was the Asian Development Bank’s. 
The Inter-American Development Bank got a 70% increase. 
Meanwhile, the World Bank received an increase of 30%, while its lending arm for the poorest countries, the International Development Association, received an increase of only 18%. 
Crucially, it is not obvious that the Bank has “buy-in” from emerging economies, with Brazil, Russia, India, and China, which pledged significant resources to the IMF, pledging only about 1% of IDA funding. 
Further exacerbating the Bank’s financial woes, its powerful creditors have opted to “pull back” its lending in order to protect its resources. 
As a result, compared to the regional development banks, the Bank will be lending less to fee-paying clients, who provide income, and engaging in more “concessional lending,” which does not. 
The 2008 crisis highlighted the need for international cooperation to regulate finance and mitigate the effects of a crisis. 
Yet the global resources and instruments needed to manage (if not avert) the next crisis have not been secured. 
Instead, regions and countries are quietly finding their own ways to manage finance, create pooled emergency funds, and strengthen development finance – an outcome that heralds a more fragmented and decentralized set of regulatory regimes and a modest de-globalization of finance and aid. 


The End of Austria's Social Partnership? 
Few changes of government in Europe attract sensational journalism of the type that Austria's October 1999 elections - which brought Jörg Haider's Freedom Party into government - did. 
Two years later, with the EU sanctions imposed after the government's formation now lifted, it is time to assess the impact of this government on Austria's economy, the field where the ruling coalition's pre-election rhetoric promised the biggest changes. 
To understand what Austria's government is doing, it is necessary to understand where Austria has been. 
Austria's economy performed solidly throughout the 1990s, roughly in line with EU and Euro Area averages. 
Yet, due to Austria's accession to the EU in 1995 and the country's trade and investment in reshaping neighboring economies in Eastern Europe, many Austrians expected higher growth. 
Two factors incited Austria's lower than expected economic dynamics: delayed fiscal consolidation and lagging structural reforms. 
Efforts at fiscal consolidation in the 1990s were usually followed by wider structural deficits, and although market reforms were discussed, few were implemented. 
Both problems contributed to the breakdown of the long-ruling coalition government of Social Democrats and Conservatives (the Volkspartei). 
The Conservative and Freedom Party coalition formed after the 1999 elections confronted a difficult job. 
Although the program of the coalition partners shared many points, a contradiction existed concerning Europe. 
By introducing more flexibility in product and labor markets and by committing itself to overhaul public sector management, the Conservatives hoped that Austria would increase its competitiveness and thus achieve higher growth. 
In contrast, the Freedom Party has never been Pro-European, at least since 1990; nor has it been open to EU accession by former communist states in Eastern Europe. 
The EU sanctions imposed on Austria after the election boosted the Freedom Party by attracting anti-European sentiments within Austria to it. 
As a consequence, it remains unclear whether or not Austria's current government looks at Europe and EU expansion eastward as a basis on which to secure a better international profile and added growth. 
Early on in its tenure, the coalition government initiated a stability program designed to eliminate the government's deficit by 2002. 
This goal may be achieved this year, mainly by raising revenues in the form of higher indirect taxes (e.g., levies on electricity, increases on the vehicle insurance tax, tobacco tax, as well as by introducing tuition fees at universities). 
Stricter corporate taxes were also adopted. 
On the expenditure side, structural measures were implemented, notably pension reform as well as phased reductions in government employment and a more focused targeting of social transfers. 
But these expenditure restraints are occurring only slowly, which means that the stability program is front-loaded with an increased tax burden reaching unprecedented levels. 
These steps towards a balanced budget were, in part, courageous because they stirred up resistance by the people and institutions affected. 
Some measures were well-designed, such as reform of the state pension system (although a need for further reform remains) - while others, such as the measures aimed at raising revenues and reducing costs in the health care system, were too hastily implemented - e.g. the new system of health co-payments requires redesign. 
Moreover, so far, health care reform has failed to yield the savings that were expected. 
The new government also began to change broad areas of public administration. 
It reduced government employment, granted only moderate wage increases and slashed public investment. 
All this helped consolidate the budget but created a climate of opposition. 
Administrative reforms normally require meticulous preparation, which the government tried to generate quickly through a study conducted by the Task Reform Commission, which was published in March 2001. 
So far, suggestions as to how to raise public sector efficiency are numerous, but legislative initiatives, based on the Commission's suggestions, are rare or have not been worked out satisfactorily. 
Admittedly, it is politically difficult to turn government agencies into more entrepreneurial units. 
Past experience in Austria has shown few positive examples. 
One reason may be that entrepreneurial spin-offs were often created with unrealistic goals and without any thorough analyses of the expected benefits and costs. 
In 2000 and 2001, many state holdings in industry were privatized, sharply reducing the debt position of the mother company of the nationalized industries (ÖIAG). 
Its debts stem from a decision, taken by the old coalition government, whereby the losses of nationalized industries were assumed by the state. 
In addition to continued privatization, many policy measures were initiated by the new government that aimed to improve the functioning of the market: e.g., opening the electricity and gas markets to competition ahead of other EU countries, opening the telecommunication sector, strengthening equity markets through changes in the tax system, unification of financial market supervision and other measures. 
Despite these reforms, many inflexibilities remain. 
For example, shop opening-hours still must comply with highly restrictive rules. 
Indeed, within the OECD, Austria retains one of the tightest retail sector regulations. 
Many labor market inflexibilities also persist. 
But a deeper question about the nature of Austria's political/economic system remains unanswered. 
Austria's economic success and political stability after World War II was premised on a system of social partnership. 
Economic policy was often determined by the four social partners: the Chamber of Commerce, the association of Chambers of Agriculture, the Chamber of Labor, and the Austrian Trade Union. 
The first are associated with the Conservatives, the latter two with the Social Democrats. 
The formation of the Conservative/Freedom Party coalition government called that partnership into question. 
The short-term consequences of this may not be negative, since it was a lack of agreement among the social partners that caused the structural problems of the 1990s to go unresolved. 
So the current government's efforts to resolve them may be helpful. 
But the long-term consequences of a breakdown in the social partnership remain unknown. 
Given that social partnership delivered stability and prosperity to Austria for decades, it must be hoped that today's changes serve as a catalyst for renewed social consensus. 

The End of Banks? 
BARCELONA ­– Are banks doomed as a result of the current financial crisis? 
The securitization of mortgages originally was seen as a triumph, because it shifted risk to financial markets, while taking deposits and making and monitoring loans – the purview of traditional banks – was regarded as narrow and old-fashioned. 
By contrast, modern banks would seek finance mainly in the interbank market and securitize their loan portfolios. 
In theory, such banks should be immune to runs, because the interbank market is supposed to be extremely efficient, and risk would be shifted to investors willing to bear it. 
Deposits would be replaced by mutual funds, which, as we know, are also immune to runs, and the risk of structured investment vehicles (SIV’s) would be assessed accurately by rating agencies. 
All this financial engineering would avoid the obsolete capital requirements that burden banks’ operation. 
The current crisis killed off this optimistic scenario. 
The interbank market has almost collapsed, because banks do not trust each other in the same way that we tend not to trust an eager seller of a second-hand car. 
This is a textbook market failure. 
The origin of the problem is uncertainty about banks’ exposure to sub-prime mortgages, the risks of which have been carelessly assessed by rating agencies due to conflicts of interest. 
Northern Rock in the United Kingdom has been a victim of this modern banking strategy, as has Bear Stearns in the United States. 
Others may follow soon. 
Moreover, institutions that thought they had transferred risk to the market realized that the demise of sponsored SIV’s would damage their reputations irreversibly. 
This implied that they had to rescue these SIV’s. 
Alas, they failed to set aside enough capital for this unforeseen contingency, and external investors such as the sovereign wealth funds of China, Singapore, and the Middle East have had to come to the rescue. 
Finally, mutual funds are at risk as well, because their supposedly safe investments may sour and the insurance that backs them now appears shaky. 
The sub-prime contamination of money market funds would prove disastrous, with consequences far beyond what we have seen up to now. 
The supposed transfer of risk would turn out to have been a mirage. 
Are banks, markets, or regulators to blame? 
The answer may indicate what future awaits banks. 
Some regulators were irresponsible for not anticipating the rational profit-maximizing behavior of institutions with a limited liability charter and of executives effectively protected from failure. 
After all, what should banks do when, instead of keeping sub-prime mortgages on their books, monitoring their performance, and incurring capital requirements, they can securitize them advantageously (because the rating agencies have a stake in the business), avoid capital requirements, and profit from investors’ inexperience with such products. 
Indeed, even if things turned ugly and banks’ equity suffered, executives knew that their own generous bonuses and pension packages most likely would not. 
Given this, regulators should have thought twice before permitting off-balance sheet operations without any further provision. 
The fundamental question today is who monitors opaque loans, whether of the sub-prime or any other variety. 
Traditionally, the answer was banks; in the securitized world, it remains a question. 
So, is there an alternative to the old-fashioned monitoring of loans by banks? 
Perhaps if those securitized packages had been properly rated, the originating institution would be obliged to retain a share to signal to the market that risk was being controlled. 
And, clearly, the idea that capital requirements were not needed for banks’ off-balance sheet activities (because the banks were not bearing the risk), was simply wrong. 
Appropriate regulation – including regulation of rating agencies – would most likely make traditional banks popular again. 
A reconsideration of banks’ limited liability charter would go even further in restoring credibility. 
The principle is simple: when your own money is at stake, you tend to be careful. 
But when you can play with others’ money and expect a very high reward for success and no punishment for failure, the incentives for irresponsible risk-taking become enormous. 

America’s Bond-Market Blues 
BEIJING – The market for United States Treasury securities is one of the world’s largest and most active debt markets, providing investors with a secure stock of value and a reliable income stream, while helping to lower the US government’s debt-servicing costs. 
But, according to the US Treasury Department, overseas investors sold a record $54.5 billion in long-term US debt in April of this year, with China slashing its holdings by $5.4 billion. 
This dumping of US government debt by foreign investors heralds the end of an era of cheap financing for the US. 
As it stands, the US government holds roughly 40% of its debt through the Federal Reserve and government agencies like the Social Security Trust Fund, while American and foreign investors hold 30% each. 
Emerging economies – many of which use large trade surpluses to drive GDP growth and supplement their foreign-exchange reserves with the resulting capital inflows – are leading buyers of US debt. 
Over the last decade, these countries’ foreign-exchange reserves have swelled from $750 billion to $6.3 trillion – more than 50% of the global total – providing a major source of financing that has effectively suppressed long-term US borrowing costs. 
With yields on US ten-year bonds falling by 45% annually, on average, from 2000 to 2012, the US was able to finance its debt on exceptionally favorable terms. 
But the ongoing depreciation of the US dollar – which has fallen by almost half since the Bretton Woods system collapsed in 1971 – together with the rising volume of US government debt, undermines the purchasing power of investors in US government securities. 
This diminishes the value of these countries’ foreign-exchange reserves, endangers their fiscal and exchange-rate policies, and undermines their financial security. 
Nowhere is this more problematic than in China, which, despite the recent sell-off, remains by far America’s largest foreign creditor, accounting for more than 22% of America’s foreign-held debt. 
Chinese demand for Treasuries has enabled the US to increase its government debt almost threefold over the last decade, from roughly $6 trillion to $16.7 trillion. 
This, in turn, has fueled a roughly 28% annual expansion in China’s foreign-exchange reserves. 
China’s purchases of American debt effectively transferred the official reserves gained via China’s trade surplus back to the US market. 
In early 2000, China held only $71.4 billion of US debt and accounted for 8% of total foreign investment in the US. 
By the end of 2012, this figure had reached $1.2 trillion, accounting for 22% of inward foreign investment. 
But China’s reserves have long suffered as a result, yielding only 2% on US ten-year bonds, when they should be yielding 3-5%. 
Meanwhile, outward foreign direct investment yields 20% annually, on average. 
So, whereas China’s $3 trillion in foreign-exchange reserves will yield only about $100 billion annually, its $1.53 trillion in foreign direct investment could bring in annual returns totaling around $300 billion. 
Despite such low returns, China has continued to invest its reserves in the US, largely owing to the inability of its own under-developed financial market to generate a sufficient supply of safe assets. 
In the first four months of this year, China added $44.3 billion of US Treasury securities to its reserves, meaning that such debt now accounts for 38% of China’s total foreign-exchange reserves. 
But the growing risk associated with US Treasury bonds should prompt China to reduce its holdings of US debt. 
The US Federal Reserve’s announcement in May that it may wind down its quantitative easing (QE) program – that is, large-scale purchases of long-term financial assets – by the end of this year has sparked fears of a 1994-style bond-market collapse. 
Concerns that a sharp rise in interest rates will cause the value of bond portfolios to plummet have contributed to the recent wave of foreign investors dumping US debt – a trend that is likely to continue to the extent that the Fed follows through on its exit from QE. 
Yields on ten-year US bonds are now 2.94%, a 58% increase since the first quarter of this year, causing the interest-rate gap between two- and ten-year bonds to widen to 248 basis points. 
According to the Congressional Budget Office, the yield rate on ten-year bonds will continue to rise, reaching 5% by 2019 and remaining at or above that level for the next five years. 
While it is unlikely that this will lead to a 1994-style disaster, especially given that the current yield rate remains very low by historical standards, it will destabilize the US debt market. 
For China, the benefits of holding large quantities of US dollars no longer outweigh the risks, so it must begin to reduce the share of US securities in its foreign-exchange reserves. 
Given that China will reduce the overall size of its reserves as its population ages and its economic-growth model shifts toward domestic consumption, a substantial sell-off of US debt is inevitable – and, with it, a large and permanent increase in America’s financing costs. 

The End of Financial Triumphalism? 
CAMBRIDGE – Will today’s ever widening global financial crisis mark the end of the era of financial triumphalism? 
Ask a lay person to list the ten great innovations that drive our world today and you probably won’t find too many who mention the Black-Scholes formula for pricing options. 
But for the financial community, pioneering formulas that paved the way for modern hedging strategies should get just as much credit for the passing period of rapid global growth as cell phones, computers, and the Internet. 
Until the last 12 months, finance advocates seemed to have a strong case. 
By helping to spread risk, high-tech finance could help economies grow faster. 
Macroeconomists celebrated the “Great Moderation” of the global business cycle, with recessions seeming to become milder and less frequent. 
And, of course, the financial community was making money hand over fist, creating scores of millionaires and even billionaires worldwide. 
Governments were cheerleaders, too. 
In anglophone countries, presidents and prime ministers, not to mention some leading central bankers, boasted of superior financial systems that were the envy of the world. 
When French and German leaders complained that the sprawling and unregulated tentacles of new finance posed huge risks to the global economy, they were derided as sore losers. 
Small countries such as Iceland decided to get in on the action by privatizing their banks and setting up their own financial centers. 
If you cannot be Silicon Valley, then why not create a mini-Wall Street? 
Now Iceland’s banks, having borrowed several times the national GDP, are in desperate trouble, with debts far beyond what the small country’s taxpayers can absorb. 
Even the conservative Swiss gave into the temptations of high-tech finance and the riches it promised. 
Today, the two largest Swiss banks are sinking in liabilities that exceed seven times the country’s income. 
Of course, the mother of all bailouts is the absurd blank check the United States government is granting the giant home mortgage lending agencies Fannie Mae and Freddie Mac, which hold or guarantee $5 trillion in mortgages that are looking increasingly dubious. 
It is ironic indeed that US Treasury Secretary Hank Paulson, a former head of Goldman Sachs, a firm that exemplifies financial triumphalism, is spearheading the effort to save government-sponsored behemoths that have so conspicuously outlived their usefulness. 
Advances in the field of finance have potentially had a beneficial impact in raising and smoothing global growth. 
But there is also a cyclical element to the flowering of finance. 
When home prices were soaring, the geniuses behind mortgage finance seemed infallible. 
Now that prices are falling, the genius strategies don’t seem quite so brilliant. 
It is an old story. 
Back in the early 1980’s, financial engineers invented “portfolio insurance,” a fancy active hedging strategy for controlling downside risk. 
They made piles of money. 
Unfortunately, when global stock markets crashed in October 1987, the insurance turned out to be useless, mainly because markets for hedging collapsed. 
In the late 1990’s, the US hedge fund Long-Term Capital Management convinced the world that its partners were masters of the universe. 
For a while, it consistently made outsized profits, supposedly due to its Nobel-prize backed financial expertise. 
In 1998, when LTCM went bust, it became all too clear that the firm was basically making massive quantities of simple bond trades, with huge leverage and huge risk. 
For governments, the key to success in regulating financial markets lies in maintaining reasonable constraints during boom times that prevent taxpayer funds from being put excessively at risk. 
Unfortunately, this is difficult to do, because boom times make people who warn of risks seems like doom mongers. 
That is why it is so important that governments allow financial firms to fail occasionally. 
That is the only way to impose real discipline on shareholders, bondholders, and corporate leaders. 
Is the current gilded era of financial triumphalism over? 
There is talk in many countries, even the US, that the time has come to ensure that the entire financial system, including hedge funds and investment banks, become subject to much stricter regulation. 
Financial firms are screaming murder, but it is not obvious that broader and better financial regulation would be a bad thing. 
In my research on the history of international financial crisis with Professor Carmen Reinhart, we find that eras of heavy financial regulation tend to have significantly fewer financial crises than lightly regulated free-wheeling eras, such as those associated with the recent period of financial triumphalism. 
No one is suggesting that we go back to the “financial repression” of the 1950’s, but the latest crisis has left little doubt that the entire system for global financial regulation is in serious need of an update. 
Financial innovation ought to be allowed to flourish, but not without better checks and balances. 
Otherwise, we will be forever trapped in a framework where taxpayers are forced to bail out banks in bad times, while wealthy shareholders reap huge profits in good times. 
It is time to leaven financial triumphalism with some humility and common sense. 

The End of Fiscal Sovereignty in Europe 
MILAN – The late Milton Friedman said that a common currency – that is, a monetary union – cannot be sustained without a deep form of economic and political union. 
By this, he meant an open economy that ensures the free flow of goods, labor, and capital, together with a disciplined central fiscal authority and a strong central bank. 
The latter two are pillars of a strong currency. 
They work in tandem. 
But the other pieces are no less important. 
The eurozone, currently wrestling with fiscal imbalance and sovereign debt risk, has a strong and autonomous central bank, but is fiscally fragmented and only partly unified politically. 
Enter the Maastricht Treaty, which in theory imposes fiscal discipline by placing limits on government deficits and debt levels – clearly a structure designed to prevent free riding on the fiscal discipline of others. 
Maastricht was thus intended to prevent a situation like the current one in Greece. 
It didn’t work. 
Eurozone sovereign debt turned out not to be homogenous with respect to risk. 
In a stable world, Maastricht Treaty’s rules-based framework, if enforced, might do the job. 
But in a shock-prone world, it is a fragile system, because it precludes anything but modest countercyclical policy. 
No wonder, then, that the treaty’s strict limits were breached early in the euro’s first decade bycore countries as well as peripheral ones. 
Indeed, with a large shock, much of the breach happens automatically, as tax revenues shrink and social-insurance payments expand. 
Recent analysis by the International Monetary Fund suggests that as much as 80% of the fiscal stimulus in advanced countries during the current crisis is non-discretionary. 
That kind of built-in counter-cyclicality is not a bad thing. 
But if it produces the threat of fiscal instability and excessive sovereign-debt risk after a large shock, then the starting point was not sufficiently conservative – in other words, deficits or debt levels (or both) were too high. 
Counter-cyclicality does not mean running modest deficits in the good times and huge deficits in major downturns. 
If the current EU budget rules are too rigid and are ignored in the face of a shock, then the door is open for imprudent fiscal behavior. 
In theory, strict in-depth monitoring could distinguish genuinely prudent countercyclical responses from profligacy. 
But in practice it is hard to enforce. 
The eurozone’s immediate challenge is declining fiscal stability in a subset of countries whose credit ratings are falling and debt-service costs rising. 
Absent external assistance and a credible plan for restoring fiscal order, Greek sovereign debt could not be rolled over, forcing a default, probably in the form of a restructuring of Greek debt. 
Even with external assistance, many view default as a near certainty, because the arithmetic of restoring fiscal balance is so daunting. 
Eurozone membership precludes inflation and devaluation as adjustment mechanisms. 
An alternative is domestic deflation combined with extreme fiscal tightening – that is, a period of slow or negative growth in wages, incomes, and some prices of non-traded goods. 
But deflation is painful and cannot realistically be pursued for political reasons. 
The constraints for eurozone countries are similar to those of a state in America that gets into fiscal trouble. 
Devaluation is not an option because of the common currency. 
The Federal Reserve will not willingly resort to inflation. 
Moreover, in the United States, there are rules and conventions (similar to Maastricht) that disallow or discourage states from running long-term deficits. 
This means that state fiscal behavior tends to be pro-cyclical in the face of large shocks like the recent one. 
So why isn’t a federal system equally fragile? 
There are two key safety valves. 
One is the central government’s ability to run deficits and to act decisively. 
The other is labor mobility. 
The EU does not have a robust centralized fiscal structure with a counter-cyclical mandate. 
And labor mobility, a long-run goal in the EU, is constrained by language, laws, and diverse regulatory regimes. 
In addition, state bonds are not treated as equals, and the markets penalize profligate states. 
If the EU wants a monetary union in which sovereign debt is relatively homogenous with respect to risk, fiscal discipline must be similarly homogenous. 
But that also means that it will need a more robust mechanism for countercyclical responses to shocks. 
The EU’s leaders recently stated their intention to revisit the Maastricht structure, which in principle is a good idea. 
They might take the route of adapting the Maastricht rules to allow for more inter-temporal flexibility at the national level. 
But that approach would be complicated. 
One would need a sophisticated capability for monitoring and enforcing fiscal policy and sovereign debt – or else end up with a repeat of the current situation. 
A better long-term solution is a central EU fiscal capacity that accumulates the resources to respond to shocks during periods of growth. 
One could think of it as a stabilization tax that becomes negative in downturns. 
But a move in this direction does involve some degree of fiscal centralization. 
And it probably would require that the EU be able to issue sovereign debt. 
It is unclear whether there is the political will to do all that. 
But a step in the right direction could be taken by partial fiscal centralization with a limited countercyclical mandate. 
That would enable effective enforcement of fiscal discipline at the national level and provide the euro with the fiscal discipline it needs to survive. 
When the eurozone was created, it was widely understood that fiscal discipline was a crucial underpinning. 
The current crisis vividly underscores the point. 
The challenge now is to achieve a combination of discipline and flexibility that protects the collective interest. 
That will involve a loss of full fiscal sovereignty, but facing up to that reality is required to sustain the monetary union. 

The End of History Comes to Tunisia 
PARIS – Tunisia’s “Jasmine Revolution” is still unfolding, but we can already read into it lessons about democracy and democratization that extend far beyond the Maghreb. 
To set the Jasmine Revolution in historical perspective, we must recall June 4, 1989 – that pivotal Sunday when the Poles voted the communists out of power and, at the other end of Eurasia, the Communist Party of China crushed a burgeoning democratic movement on Tiananmen Square. 
In retrospect, that day looks like a fork in the road of human history. 
One path led to the demise of communism and a new birth of freedom and democracy – at times bloody and painful – in Europe. 
The other path traced an alternative course, with China remaining under the grip of its ruling party, but delivering prosperity to its impoverished masses through astounding and sustained growth. 
As the revolutionary year of 1989 was unfolding, Francis Fukuyama, presciently yet controversially pondered whether the path chosen in Europe heralded the “end of history.” 
Following Hegel, Fukuyama made the case that history is directional – that it is leading somewhere – for two reasons. 
First, the ceaseless spread of technology and of the economic liberal order, which has a homogenizing effect. 
Second, the Hegelian “struggle for recognition” has been a pervasive driving force of mankind, powerful enough to lead countless individuals to the ultimate sacrifice. 
But, while a widespread consensus held that communism was nothing but a dead end, China’s economic success, and the authoritarian backlash in Russia following Boris Yeltsin’s departure from the Kremlin a decade ago, prompted a more pessimistic analysis. 
Theories of “democratic rollback” and of a resurgence of “authoritarian great powers” surfaced to unveil the potential of systems that combined nationalism and state-led growth-yielding capitalism. 
Some argued that authoritarian rule provided a much surer and safer path to welfare than democracy could offer, others extolled the virtues of “Asian values,” and still others argued that democracy in the Arab or Muslim world would only pave the way for Islamic fundamentalists to take power. 
Not surprisingly, autocrats everywhere embraced such views. 
But the message of Tunisia’s Jasmine Revolution rings loud and clear: democracy – and the liberal political order in which it is rooted – is not merely a Western concept (or a Western conspiracy), but holds universal attraction, powered by the craving for “recognition.” 
Moreover, it can be accessed at an early stage of a country’s modernization. 
To be sure, authoritarian rule can manage the early stages of industrialization. But a “knowledge economy” cannot operate with muzzled minds. 
Even the smartest authoritarian rulers are unable to manage complexity on this scale – not to mention the corruption that inevitably breeds in the protected shadows of autocracy. 
Challenging the “myth of the autocratic revival,” the American political scientists Daniel Deudney and John Ikenberry have examined China and Russia, finding “little evidence for the emergence of a stable equilibrium between capitalism and autocracy such that this combination could be dignified as a new model of modernity.” 
While neither country qualifies as a liberal democracy, both “are much more liberal and democratic than they have ever been, and many of the crucial foundations for sustainable liberal democracy are emerging” – one main hurdle being the centrifugal forces that democracy might unleash. 
But most countries that are unburdened by such a threat have, quietly or spectacularly, rallied to the liberal order over the past decades. 
Asian countries such as Japan, South Korea, Taiwan, and Indonesia have done so without being hampered by their supposed “Asian values.” 
Similarly, Latin America, once the playground of myriad juntas and golpes, is now largely anchored in political liberalism. 
Turkey is ruled by a mildly Islamist party that plays by the rules of democracy. 
And, in the spring of 2009, the presidential campaign in Iran evinced a formidable craving for freedom. 
What is obvious from these cases is that development activates the two channels that Fukuyama identifies as shaping the direction of history: cumulative economic and technological change and the desire for recognition. 
Both foster individual empowerment, which is the gateway to freedom and democracy. 
The paths differ between countries, setbacks are not uncommon, and it can take decades, but the leap can occur when the circumstances are ripe – as in Tunisia. 
Indeed, the Jasmine Revolution embodies all the tenets of the liberal political order that the West has been advocating since the Atlantic Charter of 1941: a yearning for freedom, opportunity, and the rule of law. 
Moreover, Tunisia’s revolution was indigenous, not imported as part of some forcible regime change. 
The Tunisian people, led by a frustrated middle class that refused to be cowed, thus provide a healthy reminder of the steady and compelling forces driving the behavior of individuals and nations nowadays. 
They illustrate the catalytic effect of digital connectivity (clearly visible, too, among China’s “twittering classes”). 
And they might embolden other Arab peoples, as may be happening in Egypt, to force accountability upon their rulers. 
Whatever the outcome in Tunisia, those who believe that democracy, to paraphrase Woodrow Wilson, makes the world a safe place – and that more democracy makes it safer – have every reason to rejoice at such an auspicious development. 

The End of Kamikaze Pacifism? 
Terror and Japan's Peace Constitution 
Although I knew December 7, 2001 marked its 60 th anniversary, I never imagined that the phrase ``Pearl Harbor '' would be heard so often this year. 
Its repetition began in a prosaic way, with the release of the Disney movie ``Pearl Harbor'' last June. 
After September 11 th , however, many Americans spoke of the terrorist assaults as ``the first attack against the US since Pearl Harbor.'' 
One person even told me that, because of those attacks, Japan had received a golden opportunity to clear its name of the stigma of Pearl Harbor. 
The way to achieve this, it seems, was for Japan to provide military support to the US. 
Critics of Japan's defense posture over the years have sometimes been unforgiving. 
The Economist, indeed, once derided the Japanese as ``kamikaze pacifists.'' 
The reality is that defense debates within Japan are invariably traumatic, based on sharp memories of the war and the horrors of Hiroshima and Nagasaki. 
Yet, despite this, Japan responded to the terrorist acts of September by passing a new law that allows the country to support American forces in the war against terrorists. 
The Anti-Terrorism Special Law, passed by Japan's Diet in October, enabled Japan to send its Self-Defense Forces (SDF) overseas to support - through supply, transportation, repair, maintenance, medical services and so on - American forces. 
Even though the SDF still cannot participate in combat, the Anti-Terrorism law is the first that allows Japan to dispatch armed forces to join in military operations outside Japanese territory and territorial waters while the shooting war is on. 
That Japan acted with alacrity after September 11 th reflects the trauma experienced during the Gulf War a decade ago. 
Although Japan paid much of the costs of that war by raising domestic taxes, its supportive actions went largely unnoticed. 
Indeed, the word ``Japan'' was nowhere to be seen in the advertisements Kuwait's government published after the war to thank the thirty nations of the international coalition that fought to expel Iraq from Kuwait. 
These debates are also traumatic for an institutional reason. 
Japan's so-called ``Peace Constitution,'' including Article 9 which prohibits the country from possessing ``war potential,'' was created after WWII under strong American pressure, and in atmosphere of deep self-reflection toward the Pacific War. 
Some of the concepts the Constitution contained were so alien to Japanese tradition that new ideograms had to be created to express them. 
The Cold War, however, soon made Article 9 seem excessively idealistic, at least to some. 
Ever since, Japan has witnessed a severe confrontation between Constitutional revisionists and those who want to protect the Peace Constitution as it was written. 
In reality, Japan has been realistic in interpreting the Constitution according to events. 
Over the years it did not revise the Constitution in a formal way but, instead, expanded its meaning by re-interpreting critical clauses. 
Such an informal revision allowed Japan to first create the SDF as well as to support the presence of American forces in Japan. 
Still, for most of the postwar era, we understood that Japan could not send the SDF abroad even to support allies. 
This was why Japan did not send the SDF to the Gulf. 
Previous to September 11 th , Japan undertook a big step toward dispatching military forces beyond its territory when it concluded an agreement with the US in 1997 - the ``Guideline for Defense Cooperation'' - that restricted operations to the ``area surrounding Japan.'' 
The new Anti-Terrorism Law virtually eliminated this restriction, making it possible for Japan to send its troops anywhere in the world at any time. 
To revise or not to revise the constitution, especially Article 9, remains a divisive political issues here, for pressures for change come not only from within by conservative politicians, but from without. 
The so-called Armitage Report of 2000, produced by a committee headed by the now Deputy US Secretary of State Richard L. Armitage, stirred up a hornet's nest when it said that ``Japan's prohibition against collective defense is a constraint on alliance cooperation'' and that ``lifting this prohibition would allow for closer and more efficient security cooperation.'' 
Here was a de facto request from America that Japan broaden its military cooperation. 
Because Mr. Armitage and many other American members of the joint committee became high officials in the Bush administration, Japan's politicians regarded a response to this report as vital. 
Arguments within the Japanese government concerning collective defense received greater focus. 
But establishing a practical meaning for ``collective defense'' remained difficult. 
Japan's new Anti-Terrorist law was one effort to impose clarity on the idea of ``collective defense.'' 
Prime Minister Koizumi testified in the Diet that the Constitution contained obscure and unclear terms and that Japan must interpret them with common sense. 
In the end, however, Mr. Koizumi avoided any formal commitment to act in ``collective defense'' or to revise the Constitution. 
Although both the Upper and Lower Houses of the Diet created special committees to investigate Constitutional revision - especially Article 9 - change remains hard, for several reasons. 
First, a majority of Japanese do not want to change Article 9, as opinion polls consistently show. 
Article 9 remains a cherished symbol of Japan's peaceful posture, and a barrier against possible re-militarization. 
Japan was able to pass the new Anti-Terrorist law without revising the Constitution, but the limits of expansive Constitutional interpretation may one day be reached. 
The reaction of other Asian countries, especially China and South Korea, also creates limits on Constitutional revision. 
When Prime Minister Koizumi explained Japan's new Anti-Terrorist law in China and Korea in October, leaders in both countries offered sharp cautions, with Korea's President Kim Dae Jung telling Prime Minister Koizumi that, ``I hope the SDF behaves within the limits of the Peace Constitution.'' 
Whether or not Japan maintains Article 9 as it is, the Japanese public must begin to argue seriously and thoroughly about the country's proper future defense policy. 
Formulating a basic law governing national security, a law that would define the role and limit the actions of the SDF, is a mechanism we should seriously consider. 



The End of Physics? 
When communism collapsed, people spoke of the "End of History." 
Some now speak in a similar way of the "End of Physics." 
They claim that all the fundamental issues are understood; that all the great questions are answered. 
Others suggest that even if some fundamental issues remain outstanding they are essentially abstractions, irrelevant to human aspirations. 
So, are there any burning problems left for physicists to tackle or should physicists accept with grace the close of their science? 
Questions about the end of physics are not new. 
In 1890, buoyed by centuries of successful applications of Newtonian mechanics and the electromagnetism of Faraday and Maxwell, eminent voices proclaimed physics at an end. 
The decade to follow, however, overturned this exuberance. 
Radioactivity, x-rays and the discovery of the electron opened up a new world. 
Soon after, physics reached new heights as it developed the two revolutionary pillars of 20th century physics: Quantum Mechanics and General Relativity, another of Einstein's pivotal contributions to modern science. 
So, will man's hubris be capsized again? 
To grasp where physics might go it is necessary to know how far it has come. 
Physics emerged in the 16th century as a quantitative, mathematically based set of laws through which humans could comprehend the inanimate world. 
Mysteries that confounded the ancients were replaced by an ever more concise set of principles so that the flight of projectiles, the fall of an apple, the orbit of the moon, and the trajectories of planets could be quantitatively accounted for. 
Definitions of space, time, matter and energy became, thanks to physics, precise. 
Complex phenomena: eclipses, comets, tides, the properties of matter (e.g. solids, liquids and gases), the stability of structures (e.g. bridges, towers, ships), the behavior of light, the processes involving heat flow, temperature, the colors of the rainbow and the more subtle colors emitted by heated substances, electrical charges and magnetism, gravitation and radioactivity were all organized into a small number of "laws of physics." 
The twentieth century brought a profound understanding of the properties of the physical world, now considered as "understood" by physics. 
Stars, galaxies, the evolution of the universe as well as biological entities such as proteins, cells and genes all came under the purview of physics. 
With this record of advance behind it, what remains for physics to achieve? 
Let me focus on a few areas where major advances may take place in the coming decades. 
In particle physics and cosmology we are now on the verge of solving problems that have confounded science since antiquity: what are the ultimate blocks of matter? 
How does the universe work? 
Our ambition is to find an answer so elegant and simple that it will fit easily on the front of a T-shirt. 
Today, however, we have only achieved a powerful, but flawed, summary, the so-called "Standard Model," which reduces all reality to a dozen or so particles and four basic forces in nature. 
Why is the "Standard Model" flawed? 
One obvious flaw is aesthetic - ie, it is too complex. 
The model does not explain why there are so many fundamental particles and why they differ so much. 
Another flaw in the standard model is that one of the fundamental forces in nature is not included: gravity. 
We are still searching for a simple, all-encompassing theory that reconciles all these forces. 
This effort is specially important for cosmology where peaceful coexistence between relativity, which is the theory of gravity, and quantum theory is needed to understand the universe's beginning. 
During the earliest moments after the creation of the universe in the Big Bang 12 billion years ago, the universe was extremely small and dense and the laws of physics governed perhaps only one kind of particle and one force. 
Unification of relativity and quantum theory is therefore necessary in order for us to understand the earliest moments of creation, when other particles and forces came into being. 
With that understanding, cosmologists will begin to grasp how this dense universe started to expand and why more than 90% of its mass remains invisible to our instruments. 
Over time we will begin to reveal all the essential features of the cosmos to explain how a single event billions of years ago not only created galaxies, stars and planets but the atoms that assembled into living beings intricate enough to ponder their origins and purposes. 
Of course, some say that physics is unlikely to provide an ultimate explanation for evolution, the event that lies at the basis of biology and medicine. 
However, I think that application of the principles of physics to chemistry and especially to biology will also assume greater prominence. 
As biology becomes a quantitative, hard science, physics - in its techniques, computational power and basic laws - will influence biologists more and more. 
Indeed, the ultimate role of physics may be to unify all human knowledge. 
Edmund O. Wilson, the noted Harvard biologist, wrote in his book "Consilience" of the eventual unification of the hard sciences, the social sciences and the humanities. 
As revolutionary as this sounds, one can - even now - glimpse its possibility through the bridge of human consciousness, because the brain appears to work by the laws of physics and these, utilizing the probabilities of quantum science and the complexity of chaos theory, may be amenable to logical analysis. 
Will this knowledge hijack emotion, love, music, poetry, art? 
Or will this scientific union enrich the great glories of the human spirit? 
Must we fear, with Keats, to "unweave the rainbow?" 
Richard Feynman, the great theoretical physicist, has offered a simple yet powerful retort: "Does our understanding of the mechanisms of stellar activity diminish in any way our appreciation of the beauty and splendor of the night sky?" 

The End of Population Growth 
NEW DELHI – According to the United Nations’ Population Division, the world’s human population hit seven billion on October 31. 
As always happens whenever we approach such a milestone, this one has produced a spike in conferences, seminars, and learned articles, including the usual dire Malthusian predictions. 
After all, the UN forecasts that world population will rise to 9.3 billion in 2050 and surpass 10 billion by the end of this century. 
Such forecasts, however, misrepresent underlying demographic dynamics. 
The future we face is not one of too much population growth, but too little. 
Most countries conducted their national population census last year, and the data suggest that fertility rates are plunging in most of them. 
Birth rates have been low in developed countries for some time, but now they are falling rapidly in the majority of developing countries. 
Chinese, Russians, and Brazilians are no longer replacing themselves, while Indians are having far fewer children. 
Indeed, global fertility will fall to the replacement rate in a little more than a decade. 
Population may keep growing until mid-century, owing to rising longevity, but, reproductively speaking, our species should no longer be expanding. 
What demographers call the Total Fertility Rate is the average number of live births per woman over her lifetime. 
In the long run, a population is said to be stable if the TFR is at the replacement rate, which is a little above 2.3 for the world as a whole, and somewhat lower, at 2.1, for developed countries, reflecting their lower infant-mortality rates. 
The TFR for most developed countries now stands well below replacement levels. 
The OECD average is at around 1.74, but some countries, including Germany and Japan, produce less than 1.4 children per woman. 
However, the biggest TFR declines in recent years have been in developing countries. 
The TFR in China and India was 6.1 and 5.9, respectively, in 1950. 
It now stands at 1.8 in China, owing to the authorities’ aggressive one-child policy, while rapid urbanization and changing social attitudes have brought down India’s TFR to 2.6. 
An additional factor could depress future birth rates in China and India. 
The Chinese census suggests that there are 118.6 boys being born for every 100 girls. 
Similarly, India has a gender ratio at birth of around 110 boys for every 100 girls, with large regional variations. 
Compare this to the natural ratio of 105 boys per 100 girls. 
The deviation is usually attributed to a cultural preference for boys, which will take an additional toll on both populations, as the future scarcity of women implies that both countries’ effective reproductive capacity is below what is suggested by the unadjusted TFR. 
Indeed, after adjusting for the gender imbalance, China’s Effective Fertility Rate (EFR) is around 1.5, and India’s is 2.45. 
In other words, the Chinese are very far from replacing themselves, and the Indians are only slightly above the replacement rate. 
The EFR stands at around 2.4 for the world as a whole, barely above the replacement rate. 
Current trends suggest that the human race will no longer be replacing itself by the early 2020’s. Population growth after this will be mostly caused by people living longer, a factor that will diminish in significance from mid-century. 
These shifts have important implications for global labor supply. 
China is aging very rapidly, and its working-age population will begin to shrink within a few years. 
Relaxing the one-child policy might have some positive impact in the very long run, but China is already past the tipping point, pushed there by the combined effect of gender imbalance and a very skewed age structure. 
The number of women of child-bearing age (15-49 years) in China will drop 8% between 2010 and 2020, another 10% in the 2020’s and, if not corrected, at an even faster pace thereafter. 
Thus, China will have to withdraw an increasing proportion of its female workforce and deploy it for reproduction and childcare. 
Even if China can engineer this, it implies an immediate outflow from the workforce, with the benefits lagging by 25 years. 
Meanwhile, the labor force has peaked or is close to peaking in most major economies. 
Germany, Japan, and Russia already have declining workforces. 
The United States is one of a handful of advanced countries with a growing workforce, owing to its relative openness to immigration. 
But this may change as the source countries become richer and undergo rapid declines in birth rates. 
Thus, many developed countries will have to consider how to keep people working productively well into their seventies. 
India, the only large economy whose workforce will grow in sufficient scale over the next three decades, may partly balance the declines expected in other major economies. 
But, with birth rates declining there, too, current trends suggest that its population will probably stabilize at 1.55 billion in the early 2050’s, a full decade ahead of – and 170 million people below – the UN’s forecast. 
Given this, it is likely that world population will peak at nine billion in the 2050’s, a half-century sooner than generally anticipated, followed by a sharp decline. 
One could argue that this is a good thing, in view of the planet’s limited carrying capacity. 
But, when demographic dynamics turn, the world will have to confront a different set of problems. 

The End of Russia's Second Revolution 
MOSCOW: Sooner or later, all revolutions end. 
People are so sickened by crime and uncertainty that ‘law and order’ becomes their primary goal. 
At this point, society either succumbs to dictatorship or forges a new social compact that accepts the revolution’s key results. 
In Russia, the Revolution of the 1990s has clearly entered its stabilization phase: there is broad acceptance of the market and private property; the period of feeble state authority and weak government is giving way to enhanced state power as an exhausted society allows today’s rulers wider latitude for political maneuver. 
So there now exists a real possibility for a new social/political compact. 
Yet a critical question remains: how will Russia’s rulers use their enhanced powers and freedom to maneuver? 
They are now in a position to conduct a constructive policy and address problems too long ignored. 
But there is also a danger that these stronger powers may forge an undemocratic regime; that stabilization may be followed by authoritarianism. 
Hope is to be found here in the fact that market economics is no longer seriously challenged. 
Struggles over the re-distribution of property, and debates about the form of the market economy continue, of course, but everybody sees Russia’s market economy as a reality. 
The Primakov government, which came to power in 1998, depended on the Communist majority in the Duma; yet even it did not dare dismantle any market institution. 
On this issue, basic agreement seems to have been achieved. 
That agreement matters. 
After years of decline, Russia’s economy is growing fast, in industrial production, investment and incomes. 
This is not, in my view, primarily due to economic reforms (which are too recent to have had this effect), nor is it due to a fall in the ruble or rising oil prices. 
The true explanation is that, in the past few years, there has formed in Russia a critical mass of well-managed, market-oriented enterprises capable of normal production, with resources released from the inefficient Soviet-era public sector. 
Encouraged by improved economic performance, last year the government had the will to introduce a program of in-depth structural transformations. 
It started on tax reform: a 'flat' income tax, a single regressive social tax, a ban on the turnover tax, etc. 
The country also advanced down the road of fiscal federalism: channeling all of VAT into the federal budget, and the income tax to the regions, makes for a sensible system of distributing budgetary resources among the tiers of authority. 
The second important area of progress has been reform of Russia’s federation: establishment of federal districts and reform of the Federation Council. 
These changes are controversial, but a federation whose laws are not observed by some of its constituent members cannot function normally; a federation in which the observance of laws depends on the whim of local administrators simply cannot exist. 
President Putin’s moves to strengthen an integrated power system are therefore logical and correct. 
As a result, Russia is today a realistic, even if imperfect, federation. 
Yet, in this phase of post-revolutionary stabilization, there is real danger that the central authorities, having strengthened the ‘vertical power structure,’ might interfere in affairs that are within the competence of the regions and local government. 
The third important area of progress is in military reform, including a decision to cut the numerical strength of the Armed Forces over the next three years. 
There will be bitter resistance here, however, for the interests of strong political forces are at stake. 
As the first revolution in the post-industrial world, the Russian revolution of the 1990s was characterized by limited violence and broad compromises with the old elites. 
The main danger for today’s stabilization period concerns the functioning of democratic institutions and the preservation of freedom of speech. 
These risks to democracy are greatest because of the bad and sad traditions of Soviet power and the centuries of the pre-Soviet epoch. 
Admittedly, the ‘oligarchs’ helped discredit freedom of speech in this country. 
But Russia and all its citizens – not just Gusinsky and Berezovsky – need freedom of speech and democratic institutions. 
Despite this, many supposedly liberal economists toy with the naive and dangerous idea that “We don’t need democracy, give us a Russian Pinochet and to hell with freedom.” 
Yes, economically efficient authoritarian regimes have existed, but they were exceptions. 
With our traditions, authoritarianism here would likely be so corrupt as to be incapable of conducting a sensible economic policy. 
Democracy may be imperfect, but compared to other arrangements it remains the best instrument for adapting to the world with flexibility and efficiency. 
Today’s threats to freedom of speech and to our democratic institutions are realistic. 
We see examples in many of our neighbors, where democracy seems to exist formally, but where everybody understands that it is a toy democracy. 
In this country, democracy is – so far – a young but realistically working instrument. 
Preserving and strengthening it is and must be our paramount objective. 

The End of Secularism? 
When the end of ideology was celebrated – first in the 1950’s and then, more emphatically still, in the 1990’s – no one foresaw that religion, the bane of politics in the first half of the twentieth century, would return to that role with a vengeance. 
Daniel Bell and Raymond Aron wrote about the end of fascist and communist ideology in the hope that we would enter an age of pragmatism in which politics would be a subject of argument and debate, not belief and total worldviews. 
Karl Popper’s approach to politics, one of reason and critical discourse, had come to prevail. 
And when, after the collapse of communism, the end of history seemed near, ideological politics was thought to have vanished forever. 
But history does not end, and it is forever full of surprises. 
Francis Fukuyama’s End of History and Samuel Huntington’s Clash of Civilisations appeared within a mere three years of each other in the 1990’s, and a decade later the return of religion to politics is visible for all to see – and for many to suffer. 
Those books are not just academic discourse, but mirror real developments. 
By the time the false religions of totalitarian ideologies were defeated, real religions – so it seemed – had long passed from the political scene. 
In some countries, formal allegiance to religious faith was symbolized by gestures and rites. 
Yet no one thought much about it when American presidents of different faiths swore their oath of office to God and country. 
In Westminster, every parliamentary sitting begins with Christian prayers presided over by Speakers who could be Christians or Jews or non-believers. 
Not all democracies were as strict as France in their formal secularism but all were secular: the law is made by the sovereign people and not by some superhuman being or agency. 
Suddenly, however, this secular commitment is no longer so clear. 
Religious fundamentalists claim that the law must be anchored in the belief in a supreme being, or even be based on revelation. 
Christian fundamentalism in the United States has come to dominate large segments of the Republican Party. 
In Europe, the Vatican lobbied for acknowledgement of God in the preamble to the proposed European Constitutional Treaty. 
Israel has long avoided drafting a constitution, because its secular citizens fear that orthodox Jews would impose their values on them. 
Likewise, the sharia , Islamic law, entered political life in its least enlightened version in hopeful democracies like Nigeria, to say nothing of Iran. 
Islamic fundamentalism – Islamism – has spread to all countries in which there are significant numbers of Muslims. 
Why has religion returned to secular and democratic politics? 
The main reason is probably that the enlightened countries of the world have become unsure of their values, even of the Enlightenment itself. 
A moral relativism has spread, leading many to accept the taboos of all religious groups in the name of tolerance and multiculturalism. 
Cartoons of Mohammed are not published, and Mozart’s opera Idomeneo is not performed in order to avoid offending religious sensitivities; and when, in the end, the publication and the performance take place, they become a demonstration almost intended to offend. 
One can understand that enlightened believers in Islam (of whom there are many) find it upsetting that the world in which they want to live is in fact frail and vulnerable. 
The return of religion to politics – and to public life in general – is a serious challenge to the rule of democratically enacted law and the civil liberties that go with it. 
The response by enlightened communities is therefore important. 
Perhaps it is right that the use of religious symbols has become the subject of public debate, though I think that wearing headscarves and even veils is as much a part of individual freedom as is the wearing of Jewish skullcaps and Christian crosses. 
But there are far more important issues – above all, freedom of speech, including the freedom to say and write things that annoy, even upset, many. 
In the interest of enlightened discourse, the limits of free speech should be drawn as widely as possible. 
In the free world, people are not forced to read a newspaper or listen to a speech that they do not like, and they can oppose without fear what is said by those in positions of authority. 
Today’s counter-Enlightenment fashion can easily get out of hand. 
Those who are committed to liberty must learn to appreciate and defend it now, lest they someday have to fight to get it back. 

The End of South Africa’s Honeymoon 
The honeymoon is over for South Africa and the international community. 
Domestic problems and regional instability mean foreign policy is becoming an increasingly rocky road for the ruling African National Congress (ANC) government of President Thabo Mbeki. 
South Africa’s internal problems, most notably the upsurge in the AIDS epidemic, have been well documented since the ANC came to power more than ten years ago, but the country’s stance as a player within the international community has been less obvious. 
There were high expectations, both at home and abroad, that South Africa could and would punch above its weight in international affairs, capitalizing on the extraordinary and unexpected constitutional settlement achieved by Nelson Mandela and F. W. de Klerk in 1994. 
Initially, a foreign policy based on Nelson Mandela’s shining global reputation enabled the country to project itself as an exemplary international citizen. 
The government aspired to play a constructive role across Africa, act as a spokesman for Third-World interests at the UN and elsewhere, and promote an end to the plethora of conflicts bedeviling the continent. 
In time, however, as the impact of Mandela’s reputation faded, South Africa became just another country desperately trying to cope with immense social and economic deprivation and anxious for the foreign investment crucial to economic growth. 
There was also recognition of limits to what the government could achieve on the international stage, despite some important accomplishments such as its helpful role in the renegotiation of the Nuclear Non-Proliferation Treaty in 1995. 
The activist trend in South Africa’s foreign policy was initially accelerated under the presidency of Thabo Mbeki after he was first elected in 1999. 
He extolled the notion of an “African renaissance” in which Africans are committed to find African solutions for African problems. 
NEPAD, the New Partnership for Africa’s Development, an organization designed to promote decent and appropriate standards of economic and political development throughout the continent, has been at the core of this policy. 
Despite its domestic problems and the loss of global visibility that accompanied Mandela’s retirement, South Africa is still perceived as an emerging power comparable in status and aspiration to, say, Brazil, India, and Nigeria. 
Such powers seek an effective and constructive regional role, and possibly, in some instances, a global one. 
They tend to have proactive and assertive foreign policies and aspire to more than the middle-power status and limited niche-style influence enjoyed by Canada, Sweden, or Saudi Arabia. 
South Africa seeks a wider and more influential role reinforced by its obvious standing as a regional hegemon. 
But South Africa’s aspiration to play a dynamic role beyond its borders is proving increasingly difficult, primarily because the regional environment – indeed, the continental environment – is not hospitable, defying the best efforts of Mbeki’s government to produce meaningful and sustained political and economic change. 
The persistence of civil wars, periodic failure of ceasefires and mediation efforts, and protagonists that are sometimes warlords and rapacious militias – rather than states capable of making rational decisions – all add to the difficulty of conflict resolution by diplomatic means and traditional peacekeeping. 
Zimbabwe is perhaps the key example of South Africa’s foreign policy problems. 
Mbeki’s “quiet diplomacy” has not succeeded. 
More importantly, South Africa’s ruling elite clearly believes that black liberation solidarity of the kind that links Mbeki with Mugabe inevitably trumps human rights. 
The persistence of the Zimbabwean crisis profoundly damages South Africa’s claim to leadership of efforts at African transformation via organizations such as NEPAD, which is largely dependent on Western aid. 
But any agreement at, say, the G-8 Summit in July to disperse such aid in the massive proportions advocated by the recent Report by the Blair Commission on Africa may be difficult to achieve. 
In the face of Western and, in particular, American skepticism about South Africa’s failure, and that of the Africa Union, to engineer an acceptable outcome to the Zimbabwean crisis, money may not be forthcoming. 
The long-term future of South Africa’s foreign policy is uncertain: its emergence as a power of substance with a claim to a seat in a reformed UN Security Council will ultimately depend on the government’s capacity to attract foreign investment sufficient to help deliver economic and social goods to the country’s black majority. 
For, as with everywhere else, a successful foreign policy inevitably begins at home. 

The End of the Age of Friedman 
BERKELEY – Harvard professor Dani Rodrik – perhaps the finest political economist of my generation – recently reported on his blog that a colleague has been declaring the past three decades “the Age of Milton Friedman.” 
According to this view, the coming to power of Ronald Reagan, Margaret Thatcher, and Deng Xiaoping led to an enormous upward leap in human liberty and prosperity. 
I say yes – and no – to this proposition. 
Friedman adhered throughout his life to five basic principles: 
1. 
Strongly anti-inflationary monetary policy. 
2. 
A government that understood that it was the people’s agent and not a dispenser of favors and benefits. 
3. 
A government that kept its nose out of people’s economic business. 
4. 
A government that kept its nose out of people’s private lives. 
5. 
An enthusiastic and optimistic belief in what free discussion and political democracy could do to convince peoples to adopt principles (1) through (4). 
Measured against these principles, Reagan failed on (2) and (4) and adopted (1) only by default – Paul Volcker’s anti-inflation policy in the 1980’s dismayed many of Reagan’s close aides. 
Thatcher failed on (4). 
And Deng – while a vast improvement over his predecessors Lenin, Stalin, Khrushchev, and Mao – failed on all five, with the possible exception of (3). 
We do not know what Deng’s desired set of economic arrangements for a system of “socialism with Chinese characteristics” was, and, in all likelihood, he did not know, either. 
But I say yes in part to the “Age of Friedman” proposition, because only Friedman’s set of principles self-confidently proposed both to explain the world and to tell us how to change it. 
Still, I would build up a counterbalancing set of principles, because I believe that Friedman’s principles do not, ultimately, deliver what they promise. 
My principles would start from the observation that market economies and free and democratic societies are built atop a very old foundation of human sociability, communication, and interdependence. 
That foundation had a hard enough time functioning when human societies had 60 members – eight orders of magnitude less than our current global society’s six billion. 
So my principles would then be developed from Karl Polanyi’s old observation that the logic of market exchange puts considerable pressure on that underlying foundation. 
The market for labor compels people to move to where they can earn the most, at the price of potentially creating strangers in strange lands. 
The market for consumer goods makes human status rankings the product of responsiveness to market forces rather than the result of social norms and views about justice. 
This critique of the market is, of course, one-sided. 
After all, other arrangements for allocating labor appear to involve more domination and alienation than the labor market, which offers people opportunities, not constraints. 
Similarly, “social norms” and “views about distributive justice” usually turn out to favor whomever has the biggest spear or can convince others that obedience to the powerful is obedience to God. 
Market arrangements have a larger meritocratic component than the alternatives, and they encourage positive-sum entrepreneurship, making it easier to do well by doing good. 
Nevertheless, the distribution of economic welfare produced by the market economy does not fit anyone’s conception of the just or the best. 
Rightly or wrongly, we have more confidence in the correctness and appropriateness of political decisions made by democratically-elected representatives than of decisions implicitly made as the unanticipated consequences of market processes. 
We also believe that government should play a powerful role in managing the market to avoid large depressions, redistributing income to produce higher social welfare, and preventing pointless industrial structuring produced by the fads and fashions that sweep the minds of financiers. 
Indeed, there is a conservative argument for social-democratic principles. 
Post-WWII social democracy produced the wealthiest and most just societies the world has ever seen. 
You can complain that redistribution and industrial policy were economically inefficient, but not that they were unpopular. 
It seems a safe bet that the stable politics of the post-WWII era owe a great deal to the coexistence of rapidly growing, dynamic market economies and social democratic policies. 
Friedman would respond that, given the state of the world in 1975, a move in the direction of his principles was a big improvement. 
When I think of Jimmy Carter’s energy policy, Arthur Scargill at the head of the British mineworkers’ union, and Mao’s Cultural Revolution, I have a hard time disagreeing with Friedman about the world in the mid-1970’s. But there I would draw the line: while movement in Friedman’s direction was by and large positive over the past generation, the gains to be had from further movement in that direction are far less certain. 

The End of the Beginning of Ending Poverty 
With President Bush at the table, the “spin masters” who put a victorious gloss on all his actions had little need to lower expectations concerning the outcome of the G-8 meeting in Scotland. 
Any agreement would be seen as a major achievement. 
The write-off of multilateral debt for the world’s poorest countries – thanks to Britain’s leadership – is nonetheless especially welcome. 
Agreement by the G-8 to debt relief is a major event, but we should not be fooled by the seeming magnanimity of the gesture: much of the debt would not have been repaid in any case. 
More debt relief – encompassing more countries and more debt (including bilateral debt) – is needed. 
But debt relief should be viewed as just a start. 
As Britain itself has pointed out, developing countries need more assistance and a fairer international trade regime. 
Perhaps not surprisingly, the IMF has tried to pour cold water on international enthusiasm for its generosity. 
New studies, it warns, suggest that aid does not in general lead to faster growth. 
This came as a relief for the Bush administration, which claims to have given as much as its “budgetary processes” allow. 
The world’s richest country, which blithely gave its richest citizens a series of tax cuts worth hundreds of billions of dollars, now says that it simply can’t afford to spend much more on aid. 
Even after the increases in annual assistance promised by Bush at the UN’s meeting in Monterey, Mexico, in 2002, the United States is still giving less than a quarter of its commitment of 0.7% of GDP. 
Now, the IMF offers the following reassurance: ”You may be stingy, you may not be living up to your commitments, but the money probably wouldn’t have made much difference anyway.” 
Of course, not all foreign-aid money is well spent. 
But the same is true of money spent on, say, national defense. 
Even if Americans have not been cheated by Defense Department suppliers like Halliburton, it is clear that the money spent in Iraq has not bought the promised peace and security in the Middle East. 
But no one argues that the US should cut off defense expenditures. 
The objective should be to improve the efficiency of government, to make sure that we get the most value for what we spend. 
In this, surprisingly, there have been marked improvements in recent years. 
The World Bank, for example, has been allocating more of its money to countries with a proven track record in spending money well. 
It has been exploring new ways of “delivering” aid, sometimes using state and local governments where that appears more effective. 
Similarly, so-called “Social Funds,” whereby communities design projects and compete for money, have enhanced participation and “ownership” of development projects. 
In one village, a bridge was built to connect two neighborhoods separated during the rainy season. 
A simple project like this can make an enormous difference to the life of a community. 
For instance, children who live on one side of the river can now attend school on the other side during the rainy season. 
Likewise, micro-credit schemes throughout the developing world have provided finance for the poor to expand their economic enterprise, with repayment rates that are truly impressive. 
The IMF warns about “Dutch disease” problems, when an influx of foreign exchange drives up the local currency’s exchange rate, making it difficult to create jobs in the export sector or to protect jobs against an onslaught of cheaper foreign imports. 
On this, the IMF is partly right. 
Countries need to rely on themselves and mobilize domestic resources (although the IMF frequent insistence on tight monetary and fiscal policies often makes this more difficult.) 
But there continues to be an enormous need for imported goods – medicines to promote health, technology to reduce the knowledge gap between the developing countries and the rest of the world, and machines to enhance productivity. 
In any case, not much weight, in my judgment, should be given to the IMF’s statistical studies of the impact of foreign aid on growth, partly because the results do not appear to be very robust. 
Different studies, with slightly different data sets, different countries, different techniques, and different years yield markedly different results. 
An earlier set of studies, for instance, showed that aid does make a difference in countries with good governance and sound macro-economic policies. 
Equally important, historically much foreign aid was provided not to promote development, but to purchase friendship, especially during the Cold War. 
When the West gave money to Mobutu, they knew that the funds were going to Swiss bank accounts rather than benefiting the people of Zaire (now Congo). 
The money worked as intended – not to promote development, but to keep Zaire on the side of the West. 
Of course, Mobutu’s boundless corruption challenges us to be thoughtful about foreign aid, both about how the money is spent and who is responsible for “delivering” assistance. 
Some governments have demonstrated a better capacity than others for using funds well. 
In countries where governments are deficient, there are often alternative ways of providing assistance, including NGO’s. 
Global support for “making poverty history” shows how the issue of Third-World poverty has finally struck a responsive chord. 
Debt relief is a good beginning. 
But that is all it is. 

The Real Interest-Rate Risk 
BEIJING – Since 2007, the financial crisis has pushed the world into an era of low, if not near-zero, interest rates and quantitative easing, as most developed countries seek to reduce debt pressure and perpetuate fragile payment cycles. 
But, despite talk of easy money as the “new normal,” there is a strong risk that real (inflation-adjusted) interest rates will rise in the next decade. 
Total capital assets of central banks worldwide amount to $18 trillion, or 19% of global GDP – twice the level of ten years ago. 
This gives them plenty of ammunition to guide market interest rates lower as they combat the weakest recovery since the Great Depression. 
In the United States, the Federal Reserve has lowered its benchmark interest rate ten times since August 2007, from 5.25% to a zone between zero and 0.25%, and has reduced the discount rate 12 times (by a total of 550 basis points since June 2006), to 0.75%. 
The European Central Bank has lowered its main refinancing rate eight times, by a total of 325 basis points, to 0.75%. 
The Bank of Japan has twice lowered its interest rate, which now stands at 0.1%. 
And the Bank of England has cut its benchmark rate nine times, by 525 points, to an all-time low of 0.5%. 
But this vigorous attempt to reduce interest rates is distorting capital allocation. 
The US, with the world’s largest deficits and debt, is the biggest beneficiary of cheap financing. 
With the persistence of Europe’s sovereign-debt crisis, safe-haven effects have driven the yield of ten-year US Treasury bonds to their lowest level in 60 years, while the ten-year swap spread – the gap between a fixed-rate and a floating-rate payment stream – is negative, implying a real loss for investors. 
The US government is now trying to repay old debt by borrowing more; in 2010, average annual debt creation (including debt refinance) moved above $4 trillion, or almost one-quarter of GDP, compared to the pre-crisis average of 8.7% of GDP. 
As this figure continues to rise, investors will demand a higher risk premium, causing debt-service costs to rise. 
And, once the US economy shows signs of recovery and the Fed’s targets of 6.5% unemployment and 2.5% annual inflation are reached, the authorities will abandon quantitative easing and force real interest rates higher. 
Japan, too, is now facing emerging interest-rate risks, as the proportion of public debt held by foreigners reaches a new high. 
While the yield on Japan’s ten-year bond has dropped to an all-time low in the last nine years, the biggest risk, as in the US, is a large increase in borrowing costs as investors demand higher risk premia. 
Once Japan’s sovereign-debt market becomes unstable, refinancing difficulties will hit domestic financial institutions, which hold a massive volume of public debt on their balance sheets. 
The result will be chain reactions similar to those seen in Europe’s sovereign-debt crisis, with a vicious circle of sovereign and bank debt leading to credit-rating downgrades and a sharp increase in bond yields. 
Japan’s own debt crisis will then erupt with full force. 
Viewed from creditors’ perspective, the age of cheap finance for the indebted countries is over. 
To some extent, the over-accumulation of US debt reflects the global perception of zero risk. 
As a result, the external-surplus countries (including China) essentially contribute to the suppression of long-term US interest rates, with the average US Treasury bond yield dropping 40% between 2000 and 2008. 
Thus, the more US debt that these countries buy, the more money they lose. 
That is especially true of China, the world’s second-largest creditor country (and America’s largest creditor). 
But this arrangement is quickly becoming unsustainable. 
China’s far-reaching shift to a new growth model implies major structural and macroeconomic changes in the medium and long term. 
The renminbi’s unilateral revaluation will end, accompanied by the gradual easing of external liquidity pressure. 
With risk assets’ long-term valuation falling and pressure to prick price bubbles rising, China’s capital reserves will be insufficient to refinance the developed countries’ debts cheaply. 
China is not alone. 
As a recent report by the international consultancy McKinsey & Company argues, the next decade will witness rising interest rates worldwide amid global economic rebalancing. 
For the time being, the developed economies remain weak, with central banks attempting to stimulate anemic demand. 
But the tendency in recent decades – and especially since 2007 – to suppress interest rates will be reversed within the next few years, owing mainly to rising investment from the developing countries. 
Moreover, China’s aging population, and its strategy of boosting domestic consumption, will negatively affect global savings. 
The world may enter a new era in which investment demand exceeds desired savings – which means that real interest rates must rise. 

The End of the End of History 
Throughout modern times liberal states have always co-existed alongside many kinds of tyranny. 
Similarly, the modern world has always contained numerous economic systems - many varieties of capitalism, planned and guided economies, and a host of hybrid economic systems not easily classified. 
Diplomacy and international law developed to cope with the fact of diverse regimes. 
Yet throughout the 20 th century global politics was shaped by the project of unifying the world within a single regime. 
Insofar as it remained committed to Marxist ideology, the long-term goal of the Soviet regime was world communism. 
The whole world was to be a single socialist economy, administered by forms of governance that were to be everywhere the same. 
This Marxist project is now widely and rightly viewed as utopian. 
Even so, its disappearance as a force in world politics has not been accompanied by an acceptance of a diversity of political systems. 
With communism's fall we were, in Francis Fukuyama's famous phrase, at the "end of history", a time when western governments could dedicate themselves to unifying the international system into a single regime based on free markets and democratic government. 
But this project is as utopian as Marxism once was, and promises to be considerably more short-lived than the Soviet Union. 
Many reasons exist for why the Soviet bloc collapsed, but--contrary to conventional opinion--economic inefficiencies were not central among them. 
The Soviet bloc disintegrated because it could not cope with nationalist dissent in Poland and the Baltic states and more generally because a single economic and political system could not meet the needs of vastly different societies and peoples. 
Marxism is a version of economic determinism. 
It predicts that differences between societies and peoples narrow as they achieve similar levels of economic development. 
Nationalism and religion have no enduring political importance, Marxists believed. 
In the short run, they can be used to fuel anti-imperialist movements. Ultimately, they are obstacles to the construction of socialism. 
Guided by these beliefs, the Soviet state waged an incessant war on the national and religious traditions of the peoples they governed. 
In practice, Soviet rulers were compelled to compromise in order to remain in power. 
Few could be described as wholehearted ideologues. 
Even so, the Soviet system's rigidity was largely the result of the fact that it was established on a false premise. 
The basis of the Soviet system was the Marxian interpretation of history in which every society is destined to adopt the same economic system and the same form of government. 
The USSR fell apart because its monolithic institutions could not accommodate nations--Czechs and Uzbeks, Hungarians and Siberians, Poles and Mongols--whose histories, circumstances and aspirations were radically divergent. 
Today, the global free market constructed in the aftermath of the Soviet collapse is also falling apart--and for similar reasons. 
Like Marxists, neo-liberals are economic determinists. 
They believe that countries everywhere are destined to adopt the same economic system and therefore the same political institutions. 
Nothing can prevent the world from becoming one vast free market; but the inevitable process of convergence can be accelerated. 
Western governments and transnational institutions can act as midwives for the new world. 
Implausible as it sounds, this ideology underlies institutions such as the International Monetary Fund. 
Argentina and Indonesia have very different problems, but for the IMF the solution is the same: they must both become free-market economies. 
Russia at the time of communism's fall was a militarized rust-belt, but the IMF was convinced that it could be transformed into a western-style market economy. 
An idealized model of Anglo-Saxon capitalism was promoted everywhere. 
Unsurprisingly, this highly ideological approach to economic policy has not succeeded. 
Indonesia is in ruins, while Argentina is rapidly ceasing to be a first-world country. 
Russia has put the neo-liberal period behind it and is now developing on a path better suited to its history and circumstances. 
Countries that have best weathered the economic storms of the past few years are those--like India, China and Japan--which took the IMF model with a large grain of salt. 
To be sure, like the few remaining Marxists who defend central economic planning, the ideologues of the IMF claim that their policies did not fail; they were not fully implemented. 
But this response is disingenuous. 
In both cases, the policies were tried - and failed at great human cost. 
If the global free market is unraveling, it is not because of the human costs of its policies in countries such as Argentina, Indonesia and Russia. It is because it no longer suits the countries that most actively promote it. 
Under the pressure of a stock market downturn, the US is abandoning policies of global free trade in favor of more traditional policies of protectionism. 
This turn of events is not surprising. 
Throughout its history, America has always tried to insulate its markets from foreign competition. 
So history has once more triumphed over ideology. 
With America's loss of interest the chief prop of neo-liberal policies has been pulled away. 
Mainstream politicians may still nod reverently when the global free market is invoked, but in practice the world is reverting to an older and more durable model. 
It is being tacitly accepted that in future, as in the past, the world will contain a variety of economic systems and regimes. 
The global free market is about to join communism in history's museum of discarded utopias. 

After the Gold Rush 
VENICE – The run-up in gold prices in recent years – from $800 per ounce in early 2009 to above $1,900 in the fall of 2011 – had all the features of a bubble. 
And now, like all asset-price surges that are divorced from the fundamentals of supply and demand, the gold bubble is deflating. 
At the peak, gold bugs – a combination of paranoid investors and others with a fear-based political agenda – were happily predicting gold prices going to $2,000, $3,000, and even to $5,000 in a matter of years. 
But prices have moved mostly downward since then. 
In April, gold was selling for close to $1,300 per ounce – and the price is still hovering below $1400, an almost 30% drop from the 2011 high. 
There are many reasons why the bubble has burst, and why gold prices are likely to move much lower, toward $1,000 by 2015. 
First, gold prices tend to spike when there are serious economic, financial, and geopolitical risks in the global economy. 
During the global financial crisis, even the safety of bank deposits and government bonds was in doubt for some investors. 
If you worry about financial Armageddon, it is indeed metaphorically the time to stock your bunker with guns, ammunition, canned food, and gold bars. 
But, even in that dire scenario, gold might be a poor investment. 
Indeed, at the peak of the global financial crisis in 2008 and 2009, gold prices fell sharply a few times. 
In an extreme credit crunch, leveraged purchases of gold cause forced sales, because any price correction triggers margin calls. 
As a result, gold can be very volatile – upward and downward – at the peak of a crisis. 
Second, gold performs best when there is a risk of high inflation, as its popularity as a store of value increases. 
But, despite very aggressive monetary policy by many central banks – successive rounds of “quantitative easing” have doubled, or even tripled, the money supply in most advanced economies – global inflation is actually low and falling further. 
The reason is simple: while base money is soaring, the velocity of money has collapsed, with banks hoarding the liquidity in the form of excess reserves. 
Ongoing private and public debt deleveraging has kept global demand growth below that of supply. 
Thus, firms have little pricing power, owing to excess capacity, while workers’ bargaining power is low, owing to high unemployment. 
Moreover, trade unions continue to weaken, while globalization has led to cheap production of labor-intensive goods in China and other emerging markets, depressing the wages and job prospects of unskilled workers in advanced economies. 
With little wage inflation, high goods inflation is unlikely. 
If anything, inflation is now falling further globally as commodity prices adjust downward in response to weak global growth. 
And gold is following the fall in actual and expected inflation. 
Third, unlike other assets, gold does not provide any income. 
Whereas equities have dividends, bonds have coupons, and homes provide rents, gold is solely a play on capital appreciation. 
Now that the global economy is recovering, other assets – equities or even revived real estate – thus provide higher returns. 
Indeed, US and global equities have vastly outperformed gold since the sharp rise in gold prices in early 2009. 
Fourth, gold prices rose sharply when real (inflation-adjusted) interest rates became increasingly negative after successive rounds of quantitative easing. 
The time to buy gold is when the real returns on cash and bonds are negative and falling. 
But the more positive outlook about the US and the global economy implies that over time the Federal Reserve and other central banks will exit from quantitative easing and zero policy rates, which means that real rates will rise, rather than fall. 
Fifth, some argued that highly indebted sovereigns would push investors into gold as government bonds became more risky. 
But the opposite is happening now. 
Many of these highly indebted governments have large stocks of gold, which they may decide to dump to reduce their debts. 
Indeed, a report that Cyprus might sell a small fraction – some €400 million ($520 million) – of its gold reserves triggered a 13% fall in gold prices in April. 
Countries like Italy, which has massive gold reserves (above $130 billion), could be similarly tempted, driving down prices further. 
Sixth, some extreme political conservatives, especially in the United States, hyped gold in ways that ended up being counterproductive. 
For this far-right fringe, gold is the only hedge against the risk posed by the government’s conspiracy to expropriate private wealth. 
These fanatics also believe that a return to the gold standard is inevitable as hyperinflation ensues from central banks’ “debasement” of paper money. 
But, given the absence of any conspiracy, falling inflation, and the inability to use gold as a currency, such arguments cannot be sustained. 
A currency serves three functions, providing a means of payment, a unit of account, and a store of value. 
Gold may be a store of value for wealth, but it is not a means of payment; you cannot pay for your groceries with it. 
Nor is it a unit of account; prices of goods and services, and of financial assets, are not denominated in gold terms. 
So gold remains John Maynard Keynes’s “barbarous relic,” with no intrinsic value and used mainly as a hedge against mostly irrational fear and panic. 
Yes, all investors should have a very modest share of gold in their portfolios as a hedge against extreme tail risks. 
But other real assets can provide a similar hedge, and those tail risks – while not eliminated – are certainly lower today than at the peak of the global financial crisis. 
While gold prices may temporarily move higher in the next few years, they will be very volatile and will trend lower over time as the global economy mends itself. 
The gold rush is over. 

The End of the Russia-China Debate 
Ten years ago, comparing the reform processes in China and Russia was an intellectual fashion. 
Was it preferable to start with economics – try and get rich, quick, but don’t rock the boat politically – in the manner of the Chinese? 
Or was it better to start with politics – recover liberty and prosperity may follow – which seemed to be Russia’s path under Mikhail Gorbachev and Boris Yeltsin? 
Today, a new comparative debate has started. 
This time the subject is no longer Russia versus China, because Russia has long ceased to be a point of comparison. 
Instead, the new comparative debate involves Asia’s two new economic, demographic, and political giants, China and India. 
China’s annual economic growth has been roughly 8-9% for the last 26 years; 
India has recorded similar rates for the last decade. 
In the “flat world” of globalization – to borrow Thomas Friedman’s powerful metaphor – it seems that Russia no longer has a place. 
Of course, Russia is still the second-largest nuclear power in the world, and, as one of the world’s leading exporters of oil and gas, it benefits from today’s high energy prices. 
But Russia’s population is disappearing before our eyes. 
With average male life expectancy just 57 years, the country is losing close to 800,000 people annually. 
Indeed, Russia is more a fragile oil-producing state than a modernizing economic giant. 
To put it bluntly, Russia is no longer in the same category as China. 
Whereas the “Middle Kingdom” is proudly regaining its former global status after centuries of decline, Russia is defiantly trying to resurrect its former imperial status, but in a manner that appears doomed to fail. 
Russia has clearly taken giant steps in the wrong direction, at a time when China has taken steps, however small, in the right direction. 
When you meet today’s “new Russian Nomenklatura,” you experience a sudden feeling of being 20 years younger, awash as they are in nostalgia for Cold War posturing. 
By contrast, seen from afar, in their new suits, you might think that Chinese economic elites are Japanese. 
Where Russia represents a return to the past, one sees in China an opening, however ambiguous, to the future. 
Of course, some bias is involved here. 
As a European, I and people like me almost instinctively expect more from Russia. 
It is, after all, a European nation in cultural, if not political terms, whereas progress in China will not be measured by the introduction of Western-style democracy, but eventually, one hopes, by Singapore-style rule of law. 
The diverse paths followed by Russia and China may be explained in part by how the two peoples perceive themselves. 
The Chinese are comforted in their self-image by the world’s combination of admiration for their dynamism, greed for the market they constitute, and apprehension for the competition they represent. 
Russians, by contrast, seem to be animated by a dark form of narcissism. 
They do not find anything to be proud of in the eyes of others. 
They are respected for what they control – the Soviet legacy of nuclear arms and “Christian energy resources,” to quote Vladimir Putin’s bizarre remark on his first official trip to Paris – but not for their economic performance or their essence. 
China and Russia tend to relate to their respective pasts and futures in very different ways – with self-confidence in China’s case, with self-diffidence in the case of Russia. 
Chinese elites are convinced that time is working in their favor, and that it is only natural that China should regain its rank amongst the world leading powers, perhaps even emerging on top one day. 
Indeed, their serene patience stands in stark contrast to the anxious reticence of Russian leaders, who have yet to surmount the humiliation that Russia suffered as a result of the Soviet Union’s disintegration at the end of the Cold War. 
Russia may be experiencing a global “restoration” phase, but in politics and economics, and also with respect to its empire, restoration is headed in the wrong direction. 
With Putin’s current clampdown on civil society, re-nationalization of key segments of the economy, failure to develop any political approach to resolving the conflict in Chechnya, and cultivation of imperial nostalgia, Russia is killing its only chance to matter in the future. 
Yet there is no reason for China to declare victory. 
The gap between the respective qualities of China’s economic and scientific elites, on the one hand, and its ruling political elites, on the other, is simply too monumental – and still growing – for stability to be taken for granted. 
One senses in China the birth pangs of civil society, making the introduction of the rule of law increasingly urgent. 
Without political reforms, China’s confidence in herself will quickly turn into disillusion, or even delusion. 
If that happens, the Russia-China debate might be revived, this time as a comparison of competitive decadence. 

The End of the Special Relationship? 
TEL AVIV – Israeli Prime Minister Benjamin Netanyahu’s recent visit to Washington highlighted fundamental disagreements between Israel’s current government and President Barack Obama’s administration. 
Netanyahu persists in questioning Obama’s infatuation with the two-state solution to the Israeli-Palestinian conflict, and he refuses to see the link that Obama believes exists between an Israeli-Palestinian peace and his capacity to curtail Iran’s nuclear ambitions. 
Nor is Netanyahu especially happy with Obama’s reluctance to set a firm deadline for talks with Iran. 
Israelis believe that Iran is galloping into the nuclear club, and will shrewdly use the prospect of talks with the US to pre-empt tougher sanctions or a military strike. 
Crises and profound disagreements are not new in the relations between these two unequal allies. 
But, however fundamental the current differences might be, it is the underlying suspicion that Obama is poised to shift America away from its unique relationship with the Jewish state that most worries Israelis. 
A convergence of interests and a profoundly emotional attitude to Israel’s story and to the Jewish narrative since the Holocaust have been the motive forces behind what is perhaps one of the most intriguing alliances in international relations. 
In fact, there is no single, exclusive explanation for America’s persistent vindication of its commitment to Israel, and for the uniquely vigorous resonance that Israel’s cause has had in the United States. 
American presidents since Harry Truman, the first world leader to recognize Israel in 1948 (against the advice of then Secretary of State General George C. Marshall), have embodied in varying degrees either the emotional or the realpolitik aspect – some represented both – of the relationship. 
The suspicion today is that Barack Obama is committed to neither. 
Obama is a revolutionary phenomenon in American history; he certainly does not fit the traditional pattern of American presidents after World War II. 
He was far less shaped by religious and biblical teachings than all of them, and the narrative of Jewish history and of Israel’s heroic emergence out of the ashes of the Holocaust is not the primordial sentiment in his attitude toward the Arab-Israeli conflict. 
The narrative of the Palestinian tragedy is certainly no less central in defining his view of the Middle East. 
But even when US administrations have not embodied an emotional attachment to Israel, they have still backed Israel’s cause, provided that doing so can be sustained by considerations of realpolitik. 
That was clearly the case with Richard Nixon, who never suffered from an excess of love for Jews, but was nonetheless one of the staunchest allies that Israel ever had in the White House. 
Devoid of sentimental attachment to Israel’s cause and deeply disturbed by its policies in the occupied territories, Obama represents the specter of a White House where neither love nor interests are shared with the Jewish state. 
The thrust of Obama’s Middle East policy – reconciling America with the Arab and Muslim world – clashes with Netanyahu’s strategy. 
For Obama’s emerging policy assumes that the best way to address the challenge of Islamic terrorism and stop the region’s decline into uncontrolled nuclear proliferation is to force Israel to stop building new settlements, withdraw from the occupied territories in order to allow the creation of a Palestinian state with East Jerusalem as its capital, and make peace with Syria by giving back the Golan Heights. 
But this does not necessarily mean that we are witnessing the end of the US-Israel “special relationship.” 
Even a revolutionary president will not depart from America’s core commitments to an Israel that fights for reasonable and morally defensible positions. 
So far, Obama has been careful not to depart from any of the traditional American positions pertaining to Israel’s security. 
He has accepted the logic of Israel’s special nuclear status and its position as a major recipient of American military aid. 
Moreover, the watchdog of Israel’s interests, the US Congress, remains vigilant. 
Netanyahu knows that the daunting task of maintaining Israel’s relationship with the US is as much a vital strategic necessity as it is a compelling domestic requirement. 
There is bound to be more convergence down the road, when he decides to define Israel’s real, not ideological, red lines. 
It is because Netanyahu is driven by an almost Messianic determination to prevent Iran from acquiring the means to destroy Israel, that he might be amenable to a fundamental change in his position on Palestine, provided Obama makes visible headway in his drive to stop Iran’s nuclear program. 
In Netanyahu’s view, solving the Palestinian problem would not remove the Iranian challenge; rather, it is the neutralization of that existential threat that would pave the way to the creation of a Palestinian state. 
Netanyahu also knows that the Arab side’s failures have nurtured radical Zionism. 
As John Kerry, the Chairman of the US Senate’s Foreign Affairs Committee, put it, “this peace process is not a one way street” in which the onus is put exclusively on Israel. 
It remains to be seen if the abysmally dysfunctional Arab world and the powerful non-state agents in its midst, such as Hamas and Hezbollah, will respond the way Obama expects. 
More importantly, the Palestinian leadership must reshape and reunite its polity to face the challenge of statehood. 
So far, the task of reconciling Hamas and Fatah seems to be no less daunting than that of striking a peace deal with Israel. 

The End of the Two-State Solution? 
BERLIN – Since its establishment in 1948, Israel has fought seven wars against its neighbors, including the recent war in Gaza. 
If you add the Palestinians’ first and second Intifada in the occupied territories, the total rises to nine. 
From a military perspective, Israel eventually won all of these wars – or at least didn’t lose them. 
But neither have these wars changed much for Israel in strategic terms. 
Indeed, the core conflict between Israel and the Palestinians has remained almost unchanged throughout the past 60 years. 
The United Nations’ Partition Plan of 1947, which split the former British Mandate of Palestine between both peoples, was not and still is not accepted until this day. 
Sometimes one side rejects it; sometimes the other. 
This is why, to this day, people on both sides are dying. 
Of course, Israel made a “cold peace” with Egypt and Jordan, and also established diplomatic relations with a few other Arab countries, but nothing has really changed at the core of the conflict, despite the Oslo peace process of the 1990’s and other treaties and agreements with the Palestinians. 
The central question for both sides remains unanswered: where does Israel end and Palestine start? 
Without a territorial compromise between Israel and the Palestinians, the conflict will go on endlessly, for it is viewed as existential by both sides. 
All those involved know that, in the end, only the borders of June 1967 – including Jerusalem and a negotiated, smaller territorial exchange – can be acceptable to both sides, however painful. 
Everything else is evil wishful thinking for which more innocents will continue losing their lives. 
But, while it is abundantly clear that Israel will not vanish, and that the Palestinians will not wave the white flag, the conditions for a two-state solution are deteriorating. 
It took more than four decades for the PLO to recognize Israel. 
But, with Hamas’s victory over Fatah, the Palestinians have gone back to square one, to the rejection of 1948. 
Hamas rejects any peace with Israel, and is at best prepared to agree to a temporary truce. 
Moreover, as part of the Muslim Brotherhood it also pursues an Islamist agenda, supported by Syria and Iran. 
On the Israeli side, approximately 200,000 settlers on the West Bank and further development of the settlements weigh heavier than all noble words about two states. 
Given the facts on the ground created by Israel, there are justified doubts about whether a two-state solution is feasible at all. 
The war in Gaza will harden this negative trend. 
For one thing can already be said with almost complete certainty: the political casualties on the Palestinian side will include President Mahmoud Abbas and Fatah. 
Their loss of legitimacy will not be reparable. 
Whatever becomes of Hamas in military terms following the recent fighting in Gaza, politically it has finally taken over the PLO’s role as the legitimate representative of the Palestinians. 
This means that the West’s policy of isolating Hamas in order to weaken it, which has been pursued since Hamas’s victory in a free and fair election in 2006, has failed. 
When the weapons remain silent and the dead in Gaza are buried, the question of a political solution will re-emerge. 
An initial truce, by means of international mediation, can lead to a monitored long-term truce and reconstruction in Gaza. 
But what then? 
Both Israel and the West will no longer be able to postpone the question of how to deal with Hamas, because Abbas and Fatah are now too weak and discredited to negotiate a peace settlement. 
And there is no easy answer, because Hamas will gain status through negotiations while maintaining its position to destroy Israel. 
Or do we de facto accept Hamas’s position that peace between Israel and the Palestinians is not possible, and that peace talks therefore make no sense? 
In that case, we would have to make do with organizing a truce until the next crisis. 
But that would finally make any two-state solution a lost cause, and, although Hamas would have lost militarily, politically it would have won. 
The alternative to a two-state solution is continuation of the conflict and the de facto reality of a one-state solution in which Palestinians between the Jordan River and the Mediterranean will, sooner rather than later, constitute a majority. 
For Israel and the Palestinians, this is a dire perspective from both a strategic and a humanitarian point of view. 
Indeed, it is hopeless. 
Trying to extricate both parties from the strategic dead-end into which they have maneuvered themselves will be possible only from outside. 
First, the United States must attempt to integrate Syria and Iran into a regional solution that also fundamentally changes conditions for both Israelis and Palestinians. 
Second, the US must impose a two-state solution on the parties involved, which will require both determination and maintaining the unity of the main international actors. 
If an imposed solution fails, the entire region will begin to slip into a dangerous confrontation during the first years of Barack Obama’s presidency. 
And that confrontation will not be limited to Israelis and Palestinians. 

The End of Treason (or the Beginning?) 
To paraphrase a famous line from Tolstoy, those loyal to their country are faithful in the same way. 
They fight in armies, pay their taxes, and vote in elections. 
Among the disloyal, however, each becomes a traitor in his own way. 
Take the American and German postwar experiences. 
The US has not seen a treason prosecution since World War II, and Germany has, arguably, abolished treason in the traditional sense, retaining only a general crime of sedition designed to protect the government from overthrow by anti-democratic forces. 
Now focus on the postcommunist states, where a new wave of treason trials seems about in the offing. 
The prosecution in the Czech Republic of two 78 year old men (Milos Jakes, and Jozef Lenart), both veterans of the Soviet invasion of 1968, and the four-year-long trial in Vladivostok of Grigory Pasko, a Russian naval officer, suggest the earliest stages of a cycle where injured states respond to perceptions of betrayal with charges of treason. 
Why does treason appear to be dying in some countries and coming alive in others? 
Some history may help here. 
As originally defined by Parliament in 14 th century England, the Anglo-American version of treason includes a whole range of acts that threatened the Crown. 
To even think of murdering the King (then quaintly called ``compassing'') was punishable by death. 
Counterfeiting and rape of the Queen (contaminating the blood line) were thrown into the statute to assure that the King's currency and his House were safe. 
Levying war against the King was a primary charge of treason, but a catch limits the crime's scope. 
To be a traitor you must first have a duty to be loyal. 
The French have no such duty toward the English Crown. 
Only the English do. 
So, one requirement of treason, virtually everywhere, is that only citizens and permanent residents of a country can commit treason. 
If you intentionally kill a foreigner, then you are guilty of murder. 
But as a matter of definition, if you have no duty of loyalty to a foreign country, then you cannot commit treason against it. 
The Americans who signed the Declaration of Independence, as British citizens, were all guilty of treason for levying war against King George III. 
Understandably, when they won independence and escaped prosecution, they trimmed the 14 th century definition of treason. 
Their anxieties about treason are recorded in America's Constitution, which limits the offense to levying war and to a famous phrase originating in the 14 th century statute: ``adhering to the enemy, giving them aid and comfort.'' 
Still, language of such breadth could accommodate virtually any action sympathetic to a foreign power, yet Americans are reluctant to invoke their catch-all criminal charge. 
Witness the debate about whether or not to prosecute John Walker, the Californian who fought for the Taliban in Afghanistan. 
He surely adhered to the enemy, giving much more than aid and comfort. 
Yet Americans seem reluctant to brand him a traitor. 
Perhaps he will be imprisoned for assisting terrorists, but his betrayal generates little resentment. Secure states tend to forget about treason. 
Insecure states are quicker to sense acts of betrayal. 
The Soviets, with their fragile legitimacy, always feared betrayal. 
They called their crime izmena rodine - betrayal of the motherland - and they married this high moral language to minor transgressions, such as leaving the country illegally. 
Anyone who endangered the international security of the Soviet Union was deemed a traitor deserving death. 
When a group of dissident Jews conspired in 1970 to highjack an airplane, they were charged with attempted treason. 
Two of the organizers were sentenced to death. 
(Worldwide protests induced the Soviets to modify the penalty). 
When Anatoly Shcharansky allegedly gave sensitive material to an American journalist, he was convicted of treason. 
Shcharansky's case helps us understand the recent story of Grigory Pasko, convicted after a four-year trial for allegedly providing information for a Japanese television report on the Russian army dumping nuclear waste at sea. 
The Russians modified the Communist definition of treason, eliminating the death penalty and changing the name to ``governmental treason.'' 
But they retained the clause subjecting any Russian to charges of treason for creating risks to the international security of the state. 
Security, as the Russians understand it, seems to be endangered when foreign journalists write articles that bring Russia's state into disrepute. 
The story in the Czech Republic differs. 
Jakes and Lenart may have sided with the Russian enemy in 1968, but it is not clear what the state gains by beating a dead regime with yet another trial. 
Germany's experience with treason is rife with paradox but may point toward the future. 
If you examine the statute in force today you will be struck by the apparent absence of the citizenship requirement. 
Anyone - foreigners as well as Germans - can commit Hochverrat [high treason] by using force or the threat of force to undermine the Basic Law, the German constitution. 
The temptation is to think that postwar Germans, sickened by the nationalism of the Nazi period, eliminated the duty of national allegiance. 
But things are more complicated than that. 
Hitler changed the law in 1934 in the megalomaniac belief that the whole world owed him a duty of loyalty. 
Still, by substituting the Basic Law for the Fuehrer in the postwar amendment of the crime, contemporary Germans have in effect nullified the crime of treason. 
Even though the label of treason is used, the offense now resembles the American concept of sedition and seeks to prevent a violent overthrow of the government. 
From the English King, to the American republic, to the Russian motherland, to the German constitution, the object of required loyalty is constantly changing. 
Perhaps the German model will win out and we will become duty-bound to revere not a leader or a patria but a set of democratic principles. 
But fears of ``enemies within,'' such as Russia's Pasko, or the French, British, and other European Muslims who fought alongside the Taliban, are also gaining ground. 
Treason is dead, or it might be just aborning. 

The End of Ukraine? 
Ukraine’s future as an independent democratic state hangs in the balance. 
President Leonid Kuchma stands accused of complicity in the murder of Georgy Gongadze, a journalist whose headless, mutilated body was identified this week, months after his disappearance. 
Revelations about Mr Kuchma’s involvement in a host of crimes from murder to corruption came from a former bodyguard, who after secretly bugging the President’s office, leaked tapes, which – if proved authentic – are a devastating indictment. 
Mr Kuchma has now endorsed an investigation, even suggesting that foreign experts be included. 
While a praiseworthy gesture, it cannot be converted into reality unless Mr Kuchma stands aside and allows the investigation to go forward. 
Even as he claims to support an investigation, President Kuchma, takes any available opportunity to lash out at his opponents. 
In a letter to The Financial Times, he said “my main accusers are precisely the same people who have blocked Ukraine’s transformation to a free economy” – condemning his critics for using Mr Gongadze’s death as “a political weapon designed to destabilize Ukraine”. 
Mr Kuchma publicly denounced the crowds of protesters against him as “a herd under various flags”. 
If Mr Kuchma remains recalcitrant, continues to harass political opponents and the media, and drags his feet on the investigation, he risks relegating Ukraine to the same fate as neighbouring Belarus, where a repressive regime, embraced only by Russia, silences independent voices and political opposition 
The outside world cannot stand idly by. 
Western governments are already deeply involved in Ukraine. 
Among former Soviet republics, Ukraine is the single biggest recipient of US aid and, worldwide, the fourth largest recipient of American aid. 
In the period 1991-97, the European Union, and member states gave ECU 4.2 billion of which 1.8 billion was in grants. 
Since the early 1990s, the World Bank has approved more than $3 billion in loans and grants and two guarantees amounting to $220 million. 
This large-scale Western involvement was motivated mainly by geopolitical considerations. 
I, too, have been deeply engaged in Ukraine, but my aim has been to help Ukraine and other former Soviet countries make the transition from closed to open societies. 
I established the Ukrainian Renaissance Foundation in 1989, two years before Ukraine became an independent country. 
Since then I have given more than $100 million to support Ukraine. 
I first met Mr Kuchma when he was a candidate in the 1994 presidential elections. 
President Richard Nixon had invited us to lunch. 
As fate would have it, Mr Nixon died that day so Mr Kuchma and I dined alone. 
At the time the Ukrainian politician impressed me as more energetic and dedicated than his predecessor. 
After his promising start, I watched the decline in Mr Kuchma's performance with dismay. 
I observed the increasing pressure on the independent media and the use of questionable methods during his re-election campaign. 
I cautioned the West against tolerating the President's excesses because of Ukraine's sensitive geopolitical position. 
I warned that his re-election would strengthen corrupt oligarchs, such as Oleksander Volkov, who had bankrolled his campaign. 
In February, Mr Kuchma awarded Volkov, whose money laundering was Mr Gongadze's final investigative target, Ukraine highest order of merit. 
I last saw Mr Kuchma in November. 
It was a one-on-one meeting in the President’s office on Bankova. 
I was taken aback by his scathing, virulent remarks about Prime Minister Viktor Yushchenko and former Deputy Prime Minister Yulia Timoshenko. 
I told him that earlier that day I had seen Mr Yushchenko, who professed loyalty to Mr Kuchma. 
It stood in stark contrast to the President's statements. 
I pleaded that it would be better for the future of his country if the two could work together. 
Later, I found myself in the uncomfortable position of urging Mr Yushchenko to try to accommodate the President. 
That was before the disclosure of Mr Kuchma's possible role in Gongadze's assassination. 
Now, Ukrainian public opinion is demanding an independent investigation into the circumstances of Mr. Gongadze’s death. 
Demonstrators turn out for protests, which are growing in strength, to call for an investigation and increasingly, for Mr Kuchma’s resignation. 
If Mr. Kuchma cares about Ukraine’s survival as an independent democratic state, he must take responsibility for his actions and step aside, pending the results of the investigation. 
The West must now take a clear position, denouncing Mr Kuchma’s behavior and actions. 
The international community to cannot continue to do business with Mr Kuchma until an impartial investigation has been completed and those responsible are held accountable. 
The population needs to know that the West stands with them, opposing any attempt by Mr Kuchma to evade responsibility – and ultimately, the law. 
I remain committed to helping the development of open society in Ukraine. 
I urge other donors to maintain their support for civil society there. 
It would be tragic if Mr Kuchma's failings were to compel the international community to abandon Ukraine’s civil society in these most difficult times. 

The End of Want? 
Quarter after quarter the macroeconomic news from the United States teaches the same lesson: real GDP growth at a sustained rate of 3% per year is not enough to increase America's employment level. 
Not even real GDP growth at a sustained annual rate of 4% is sufficient to increase the share of American adults who have jobs. 
The underlying rate of labor productivity growth in the US, which we pegged at 1.2% per year at the start of the Clinton administration and at 2% to 2.5% per year at the end of the 1990's boom, now seems even higher: it is getting harder and harder to keep the estimated labor productivity growth trend below 3% per year. 
How long this boom in productivity growth will continue is anyone's guess: optimists point to the fact that waiting behind the information technology revolution, ready for takeoff, is the biotechnology revolution, and behind that is a looming nanotechnology revolution. 
If such improvements in productivity do last, the vistas this will open are amazing: an America 50 years from now in which the average full-time worker earns not $40,000 a year, but the equivalent of today's $160,000 a year. 
The US is at one pole of the world economy. 
China - even with its economic miracle since Deng Xiaoping went on his Southern Expedition - is at the other. 
But China's labor productivity is now growing at roughly 6% per year. 
If that rate can be sustained - and if the Chinese economy becomes and remains integrated enough for us to be able to speak of it as a single entity - China's labor productivity will be comparable to today's America sometime before 2050. 
And India? 
If the growth rates of the past 15 years continue, and if India remains united, its labor productivity in 2050 will be comparable to that of Spain today. 
Now the world of 2050 will not be a paradise. 
There will still be some regions where failed states do not protect property, enforce the law, encourage commerce, educate their citizens, or construct the physical, social, and organizational infrastructure necessary for people to make use of the magical technologies we have developed since the start of the Industrial Revolution. 
Similarly, there will still be wars, fought with ever more brutal and destructive weapons. 
But we have good reason to hope that there will be fewer of them. 
Next winter, it will be sixty years since an army crossed the Rhine River bringing death and destruction- the longest such period since at least the late second century B.C., when the Cimbri and Teutones challenged the army of the Roman Consul Gaius Marius in the Rhone Valley. 
The world of 2050 will not have "solved the economic problem." 
The economy is the realm of things that have value. 
Things have value when they are both desirable and scarce. 
We humans are very good at figuring out ways to make scarce things desirable. 
But we do have an opportunity - and hence a duty - shared by no previous human generation: to make a world by 2050 in which nearly everyone has enough food to avoid hunger, enough clothing to keep warm, and enough shelter to remain dry - plus a super-broadband Internet connection. 
The stakes in this round of humanity's poker game are huge. 
The first step toward winning the jackpot is to shape global public opinion in support of creating a world without want - to make progress towards this goal is the touchstone of international relations today. 
We no longer have large states driven by powerful, aggressive ideologies to remake the world in their own image by any means necessary. 
The major sources and uses of power in the world today are softer, although not weaker. 
As long as we can keep it this way, we humans have a good chance of achieving our most important collective task. 

The Endless Iranian Nuclear Crisis 
Iran will continue to enrich uranium regardless of whether a Republican or a Democrat is America’s president. 
At the same time, the United States will oppose any Iranian nuclear program – even a civilian program – because this will contribute to the stability of the regime in Tehran. 
As a result, nuclear tensions are likely to bedevil US-Iranian relations for years to come. 
Iran, it is often claimed, has no need for nuclear power, given its abundant oil and natural gas reserves. 
But the Iranian government is under economic and political pressure to supply increasing amounts of electricity to its growing population and fragile economy. 
Using oil or natural gas for domestic electricity threatens oil and gas exports, which are the principle source of government revenues. 
Indeed, with domestic oil consumption growing at a higher rate than production, government revenues from oil exports are already in decline. 
Thus, nuclear power will halt the decline in government revenues by freeing more oil and natural gas for export. 
Iran’s natural gas resources, if developed, would not be a substitute for cheap nuclear power, because gas is more profitable in other uses than in power generation. 
The Iranian government fears that electricity shortages, slow economic growth, and high unemployment will turn the populace against it. 
As social tensions increase, political turmoil will follow. 
Nuclear power offers the possibility of cheap, plentiful electricity, which will contribute to social and political stability. 
Iranian experts argue that, in considering the trade-off between internal unrest and external sanctions, the Iranian government must choose between domestic security and international security. 
Domestic pressure could very well bring down the regime, but international pressure will not. 
History is on the side of the Iranian government. 
The Islamic Revolution has survived a brutal war with Iraq, economic sanctions, and decades of international pressure and isolation from the US. 
Moreover, Iran’s leaders remember that the Shah was forced to flee the country in 1979, despite having strong international support. 
While there may be security reasons for any future US administration to oppose even a civilian nuclear program, American policymakers also recognize the strategic impact that nuclear energy will have in stabilizing the Iranian regime. 
The US and Iran have been fighting proxy wars since 1979, and their ongoing conflict means that proxy wars will continue in Lebanon, Iraq, Afghanistan, and the Caspian Sea region, as will trade and investment wars. 
Indeed, as long as China and Russia have money to invest and arms to sell, most UN sanctions will be toothless. 
Iran will continue to threaten the world community that it will use its oil weapon, but this is highly unlikely. 
It is not in Iran’s interest, under any scenario, to decrease oil exports, let alone halt them. 
However, domestic pressure, a sense of nationalism, and the need to improve its bargaining position with Western countries might force the Iranian government to respond to harsh UN sanctions or an air attack on its nuclear facilities. 
But even under these extreme circumstances, Iran will still need its oil revenue. 
A symbolic cut or embargo, while possible, would have little impact on world oil markets. 
Iran’s government has more effective options to respond to attacks from the US and its allies. 
Its supporters in Iraq might cripple Iraqi oil exports from Basra, which would damage US plans in Iraq while boosting Iran’s oil revenues, or limit the availability of fuel to the US Army by attacking roads and bridges, especially the Kuwait City-Baghdad highway. 
The world community will continue to pay a high price for the nuclear standoff, which will cast a shadow over world oil markets for years to come. 
Some experts argue that it has already raised oil prices by about $15 per barrel. 
Ironically, an Iranian civilian nuclear program would enhance US and world energy security by making more oil and gas available in the global market. 
But America’s determination to destabilize Iran and the Iranian government’s determination to retain power reduce the likelihood of this scenario. 

The Enigma of China's Economic "Miracle" 
The People's Republic of China is a country in precarious transition from one political/ economic system to another. 
Monumental contradictions abound. 
Indeed, probably no nation of global significance has more unresolved issues concerning its ruling principles and structures. 
But what really makes forecasting China's future so difficult is not only that recent developments have so often defied prediction, but that virtually opposite, if logical, scenarios are plausible. 
China emerged over the past decade and a half as a paradigm of economic energy, determination, and progress. 
Few other areas in the world have been deemed an "economic miracle" for so long. 
Through thick and thin, China has managed to maintain impressively high economic growth rates. 
In 1989, China rose from the ashes of the Tiananmen Square Massacre. 
In the early 1990's, it weathered the implosion of the Japanese economic miracle, and maintained a steady course through the Asian economic crisis later in the decade. 
In 2003, it came through the SARS epidemic with banners flying. 
Now it seems to have repelled US efforts to force it into revaluing its currency. 
Anyone who has visited China's large cities over the past few years must be impressed by the energy, pace, and scale of development. 
The sheer number of projects--from highways, ports, railroads, and airports to skyscrapers, housing developments, telecom infrastructure, and industrial parks--leaves even skeptics gasping in awe. 
But behind the dazzling skylines and impressive statistics, another reality exists, one replete with unresolved problems and daunting numbers that suggests a far darker scenario. 
Consider the following: 
China must create some 12-15 million new jobs annually just to keep up with population growth; 
The government must deal with an estimated 270 million unemployed or underemployed people; 
A "floating population" (dispossessed rural workers who have moved to the cities to find work) of between 100-150 million is growing by almost 5% annually, representing the largest migration in human history. 
These migrants exist with no job security, no long-term housing, and no health care; 
800 million rural peasants have been largely left out of China's latest boom, creating rising, but frustrated, expectations; 
China has no functioning pension system, and the cost of creating one is estimated in the hundreds of billions of dollars; 
New stock markets are all too often little more than elite-manipulated casinos, leaving China without the capacity to form the kind of indigenous pools of investment capital needed to power its own development; 
State banks must provide 98% of all financing for local companies. 
But, having been used to keep state-owned enterprises afloat for too long, the banks are essentially insolvent. 
Standard and Poor's estimates that it would cost around $518 billion (40% of GDP) to clean up their non-performing loans. 
Environmental degradation from rapid industrialization, overpopulation, and uncontrolled resource exploitation is extreme and, given the pressure to maintain high growth rates, very difficult to remedy; 
Since 1998, the Chinese government has become increasingly reliant on ever larger bond issues for fiscal stimulus, pushing debt onto the next generation; 
Estimates of the government's growing aggregate liabilities (bank debt, un-funded pension plans, bonded indebtedness for infrastructural projects, etc.) range from 70% to over 150% of GDP. 
The government's ability to collect tax revenue remains weak, yielding less than the equivalent of 15% of GDP. 
Fears of an investment bubble caused by uncontrolled, indiscriminate, and excessively exuberant investment and growth have led many experts to worry about a meltdown akin to that experienced by Silicon Valley in the late 1990's. 
These fears are compounded by the fact that China's Leninist one-party government, now almost completely dependent on its "economic miracle" for legitimacy, has shown few signs of implementing political reforms to complement economic reform. 
So China's entire system is in a state of perilously balanced transition. 
And since every economy is cyclical in nature, even some of China's most ardent boosters are left to wonder what resources the Party and government will have to draw on, should growth rates drop, even to a respectable 3-4%. 
What would the government rely on for legitimacy if unemployed workers begin agitating; if angry peasants begin to besiege local government office in large numbers; if factionalism incites a crisis in leadership; conflict erupts in the Taiwan Straits; or the global economy remains sluggish? 
China may have seemed a "miracle" over the past decade. 
But good economic times rarely test a political system. 
The real test is a political system's ability to survive the inevitable cyclical downturns, political shocks or social upheavals that almost inevitably challenge a country, particularly developing ones. 
Economists and political observers who are skeptical about the durability of China's "economic miracle"--and there are many of them--point to the country's sclerotic political system, its precarious economic institutions, the hazardous balance of hundreds of millions of marginal Chinese, and the economy's reliance on outside capital. 
They are right to wonder whether the "miracle" can continue to survive the kind of shocks that have rocked almost every other part of Asia to its foundations at one time or another over the last decade. 
China has weathered much, but its big test has yet to come. 


The Environment Fights Back 
Our political systems and global politics are largely unequipped for the real challenges of today’s world. 
Global economic growth and rising populations are putting unprecedented stresses on the physical environment, and these stresses in turn are causing unprecedented challenges for our societies. 
Yet politicians are largely ignorant of these trends. 
Governments are not organized to meet them. 
And crises that are fundamentally ecological in nature are managed by outdated strategies of war and diplomacy. 
Consider, for example, the situation in Darfur, Sudan. 
This horrible conflict is being addressed through threats of military force, sanctions, and generally the language of war and peacekeeping. 
Yet the undoubted origin of the conflict is the region’s extreme poverty, which was made disastrously worse in the 1980’s by a drought that has essentially lasted until today. 
It appears that long-term climate change is leading to lower rainfall not only in Sudan, but also in much of Africa just south of the Sahara Desert – an area where life depends on the rains, and where drought means death. 
Darfur has been caught in a drought-induced death trap, but nobody has seen fit to approach the Darfur crisis from the perspective of long-term development rather than the perspective of war. 
Darfur needs a water strategy more than a military strategy. 
Its seven million people cannot survive without a new approach that gives them a chance to grow crops and water their animals. 
Yet all of the talk at the United Nations is about sanctions and armies, with no path to peace in sight. 
Water stress is becoming a major obstacle to economic development in many parts of the world. 
The water crisis in Gaza is a cause of disease and suffering among Palestinians, and is a major source of underlying tensions between Palestine and Israel. 
Yet again, billions of dollars are spent on bombing and destruction in the region, while virtually nothing is done about the growing water crisis. 
China and India, too, will face growing water crises in the coming years, with potentially horrendous consequences. 
The economic takeoff of these two giants started 40 years ago with the introduction of higher agricultural output and an end to famines. 
Yet part of that increased agricultural output resulted from millions of wells that were sunk to tap underground water supplies for irrigation. 
Now the water table is falling at a dangerous pace, as the underground water is being pumped much faster than the rains are recharging it. 
Moreover, aside from rainfall patterns, climate change is upsetting the flow of rivers, as glaciers, which provide a huge amount of water for irrigation and household use, are rapidly receding due to global warming. 
Snow pack in the mountains is melting earlier in the season, so that river water is less available during summer growing seasons. 
For all of these reasons, India and China are experiencing serious water crises that are likely to intensify in the future. 
The United States faces risks as well. 
Midwestern and southwestern states have been in a prolonged drought that might well be the result of long-term warming, and the farm states rely heavily on water from a huge underground reservoir that is being depleted by over-pumping. 
Just as pressures on oil and gas supplies have driven up energy prices, environmental stresses may now push up food and water prices in many parts of the world. 
Given the heat waves, droughts, and other climate stresses across the US, Europe, Australia, and elsewhere this year, wheat prices are now shooting up to their highest levels in decades. 
Thus, environmental pressures are now hitting the bottom line – affecting incomes and livelihoods around the world. 
With rising populations, economic growth, and climate change, we will face intensifying droughts, hurricanes and typhoons, powerful El Niño’s, water stress, heat waves, species extinctions, and more. 
The “soft” issues of environment and climate will become the hard and strategic issues of the twenty-first century. 
Yet there is almost no recognition of this basic truth in our governments or our global politics. 
People who speak about hunger and environmental crises are viewed as muddle-headed “moralists,” as opposed to the hard-headed “realists” who deal with war and peace. 
This is nonsense. 
The so-called realists just don’t understand the sources of tensions and stresses that are leading to a growing number of crises around the world. 
Our governments should all establish Ministries of Sustainable Development, devoted full-time to managing the linkages between environmental change and human well-being. 
Agriculture ministers by themselves will not be able to cope with water shortages that farmers will face. 
Health ministers will not be able to cope with an increase in infectious diseases due to global warming. 
Environment ministers will not be able to cope with the pressures on oceans and forests, or the consequences of increasing extreme weather events like last year’s Hurricane Katrina or this year’s Typhoon Saomai – China’s worst in many decades. 
A new powerful ministry should be charged with coordinating the responses to climate change, water stress, and other ecosystem crises. 
At the global level, the world’s governments should finally understand that the treaties that they have all signed in recent years on climate, environment, and biodiversity are at least as important to global security as all of the war zones and crisis hotspots that grab the headlines, budgets, and attention. 
By focusing on the underlying challenges of sustainable development, our governments could more easily end the current crises (as in Darfur) and head off many more crises in the future. 

The Environment of the Economy 
No economy is a closed, autonomous universe, governed by rules independent from law, morals, and politics. 
Indeed, the most interesting economic questions are generally located on the borderline with neighboring disciplines. 
But nowhere is this clearer than in the interaction between economic processes and the natural environment. 
The distinctive feature of this exchange is that it is governed not by the laws of mechanics, but by thermodynamics, particularly the law of entropy, according to which the quantity of free energy that can be transformed into mechanical work diminishes with time – an irreversible process culminating in “heat death.” 
Numerous researchers, inspired by the late Nicholas Georgescu-Roegen’s pioneering work on the relationship between economic processes and physics, tried – not very successfully – to formulate an “entropic” theory of economy and society, especially during the 1970’s. 
The entropic view assumes that economic processes produce irreversible consequences because of their multiple interactions with nature. 
We draw from stocks of non-renewable natural resources (for example, oil and metal ores), and we deteriorate or modify the quality of other resources (for example, water and arable land) by imposing on them a rhythm of exploitation superior to their capacity for regeneration. 
In fact, the exploitation of non-renewable resources frees the speed of economic growth from that of ecological renewal, aggravating the deterioration of the biosphere, including irreversible climate changes. 
The law of entropy reminds us that we will leave to future generations a degraded natural patrimony, probably less adequate to their needs than what we inherited. 
Unfortunately, there are no simple answers. 
For the sake of what principle can we ask China and India, for example, to limit their economic dynamism so that they use smaller amounts of the planet’s natural resources? 
After all, the advanced countries’ slower growth is not the consequence of voluntary self-limitation, but of our superior standard of living – and of our incapacity to settle our own economic imbalances. 
We cannot impose an ecological rhythm on people who are poorer than we are when it is the very fact that we freed ourselves from that rhythm that made us richer. 
Economic contraction, or even stagnation, is not a solution for the developed countries, either, for a similar reason: it would imply that we either accept existing inequalities or impose a regime aiming at an equal redistribution of resources. 
That choice boils down to an unbearable cynicism or a totalitarian utopia. 
But, happily for us, our evolution is determined not only by entropy, but also by the accumulation of knowledge and technological progress – a process that is just as irreversible as the decrease in stocks of non-renewable resources and the degradation of environmental quality. 
Thus, the economy is entropic for resources and historical for the production, organization, and spread of knowledge, with the prospects for economic and environmental sustainability residing in the space left between those two dynamic processes: the level of growth we choose must be conditioned on a sufficient level of knowledge to ensure the system’s survival. 
Yet nature, like knowledge, is a public good that needs state intervention to be “produced” in sufficient quantities. 
The only way to overcome the finiteness of our world is to maintain as much space as possible between entropy and history by investing in education and research aimed at increasing renewable energies, reducing the energy intensity of our standards of living, and slowing the pace of environmental erosion. 
It is widely believed that such a strategy would be useless if the only effect is to allow others to get rich faster by opting out. 
But if that strategy is conceived as mastering two dynamic processes, overcoming the ecological constraint could be an accelerator of growth. 

The Environmental Bullying of New Europe 
RIGA -- Instead of helping all EU member states to meet their own Kyoto goals, the European Commission is shifting what should be a shared burden onto its newest members, which are already the most environmentally efficient in the European Union. 
In doing so, the Commission is rewarding inefficiency and reducing the effectiveness of its commitments to clean up the environment. 
The Commission’s decision on Latvia’s National Allocation Plan (NAP) for 2008-2012 left only 55% of the CO2 emissions that Latvia requested. 
Similarly, Estonia and Lithuania received only 52-53% of their requested quotas. 
Serious cuts were also made to other new EU members’ quotas, prompting Poland, the Czech Republic, and Slovakia, as well as Latvia, to launch legal challenges. 
Yet almost all of the old EU members received more than 90% of the requested quotas. 
What is going on here? 
The Commission’s approach is misguided. 
According to its own information, the aim of the European Union Emissions Trading Scheme (EU-ETS) is to help countries meet their 2010 Kyoto targets by using market instruments to encourage companies to reduce their CO2 emissions. 
Logically, quotas should be linked to each member’s progress in complying with the Kyoto Protocol. 
New EU member states are meeting their individual Kyoto commitments. 
Most are committed to reducing emissions by 8% by 2010. 
Latvia is already projected to lower its emissions by 46% by that date, even without implementing any additional CO2 reduction policies. 
Indeed, the new EU members are projected to reduce their greenhouse gas emissions by at least 21% by 2010. 
Old EU members also have a collective Kyoto target of lowering their CO2 emissions by 8% by 2010, but they are projected to achieve a mere 4.6% reduction. 
Despite this, countries such as Belgium and the Netherlands, which are not expected to meet their Kyoto commitments, are being allowed to increase their emissions. 
It is imperative that the European Commission distributes all burdens evenly and fairly among the EU’s 27 members. 
Most new members have met or are approaching their Kyoto targets, and they need rapid economic growth to catch up with the rest of the EU. 
But their ability to grow is being impaired because they lack the resources to confront the massive business lobbies of the EU’s most developed and richest countries. 
Making the Union’s newest members carry a disproportionate share of the burden of reducing the EU’s total amount of pollution is both unjust and foolish. 
Latvia’s example is the most acute. 
After regaining its independence from the Soviet Union, only remnants of the industrial behemoths of the communist era remained. 
As trade links with the former Soviet world collapsed, most of these giant firms collapsed. 
Starting almost from an economic “point zero,” Latvian entrepreneurs have built a new and modern economy, based on new and efficient technologies. 
As a result, Latvia has the lowest per capita greenhouse gas emissions in the EU. 
But, despite being the EU’s third poorest country, the European Commission’s rulings mean that it must purchase emission quotas from richer and more polluting EU members that have done little to meet their Kyoto commitments. 
This unbalanced approach is jeopardizing the economic development of Latvia and other vulnerable new member states, while old members enjoy a free ride. 
In small economies such as Latvia and many of the other new member states, even one large project is important for the whole country’s progress. 
The Commission’s decision to cut their CO2 emissions quotas may lead investors in desperately needed development projects to move outside of the EU, to countries with weaker environmental regulations, where their activities would contribute to higher global emissions. 
Additional emissions would occur when the goods are transported back to the EU. 
As if this weren’t bad enough, the Commission is preparing an emission-trading scheme for EU airlines, with 2004 as the base year for setting quotas. 
This is a clear disadvantage for airlines from the new EU members, as the number of passengers they carry increased sharply only after 2004, when these countries joined the EU. 
A recent decision to increase the share of energy from renewable sources to 20% by 2020 will also cause problems. 
Latvia, for example, already generates 37% of its energy from renewable sources, but will now likely be slapped with a target of around 50%, while some other members will have targets below 10%. 
Why are Latvia’s people, among the poorest in the Union, expected to pay for something that Europe’s richest people are finding difficult to do? 
Latvia and other new EU members have little recourse but to challenge the European Commission in court. 
But suits and countersuits are not how we imagined the EU working when we struggled to join it. 
We thought that Europe believed in sharing its burdens equitably. 
Unfortunately, when it comes to the environment, Europe’s have-nots are being told to carry the load by themselves. 

The Environmental Effect of Tsunamis 
Reports about the tsunamis that devastated Southeast Asia barely a month ago have understandably been dominated by tales of death, suffering, and the physical destruction of infrastructure. 
But man was not alone in feeling the impact. 
Ecosystems and other species were also hit. 
To be sure, photographic and video images relayed by the media have shown trees swept away by waves and water-drenched lands. 
Other reports have mentioned wildlife that escaped the destruction, as some sort of instinct seemed to tell them to seek higher ground prior to the arrival of the tsunami waves. 
And yet the full scope of the tsunamis’ environmental impact remains under-reported, despite its obvious importance for the recovery of the affected areas and the well being of the survivors. 
Experience from previous tsunamis and other major floods suggests that the environmental damage they inflict is linked to saltwater intrusion in ground water and to the disappearance or relocation of beaches. 
Tsunamis may make small, low islands uninhabitable. 
Vegetation in large stretches of lowland can be hurt substantially as saltwater-tolerant mangroves and grasses take over from other species. 
For rare animals with specific reproduction sites, like marine turtles, the tsunami’s effects could spell extinction. 
But whereas the damage to the environment on land can be seen, the ravages imposed on the marine environment are hidden. 
Obviously, when extremely strong waves hit coral reefs, some coral breaks off. 
But this is a comparatively small problem. 
The surface of coral is highly sensitive, and will now be exposed to major damage from all sorts of silt and debris carried back by water receding from flooded land. 
At the same time, the material brought back from land to sea include nutrients and trace elements that cause a boom among plankton, which in turn feed other marine biota. 
Locally, but sometimes still at a grand scale, the shock waves cause major sediment slides on steep underwater slopes such as those of the continental shelves. 
Closer to the shore, many natural ecosystems, most notably coral reefs and mangroves, act as natural shock absorbers and wave breakers. 
During the past several decades, these ecosystems have been damaged and reduced in most countries along the Indian Ocean. 
Indeed, the damage from the tsunami waves was far more devastating than it would have been had they still been intact. 
Wildlife may fare better than the physical environment. 
This is particularly true of fish stocks, owing to large-scale destruction to fisheries. 
More than 13,000 fishermen were killed and another 5,000 evacuated in Sri Lanka alone, with 80% of the fishing fleet lost or severely damaged. 
On the Thai coast, according to the UN Food and Agriculture Organization, 4,500 fishing vessels were smashed, jeopardizing the livelihoods of 120,000 people in fishing villages there. 
The situation on Sumatra is similarly grim, and it is perhaps even worse in the Maldives, Laccadives, Andamans, and Nikobar islands, where not only fishermen and boats were lost, but harbours were ruined. 
Along the coast of the Indian states of Andhra Pradesh and Tamil Nadu, some 30% of the fishery capacity was lost. 
Mozambique, Somalia, and Tanzania on the African side of the Indian Ocean have also reported severe damage to their fishing. 
Such major losses in fishing capacity, with their far-reaching negative socio-economic consequences on the human populations affected, are bound to have major, mostly favourable, effects on the fish stocks. 
The reason is simple: with most fish populations nowadays hit hard by over-fishing, fewer fishermen will mean more fish. 
Another factor that will help fish stocks is a religiously motivated hesitation by the public in some areas to eat marine fish, as they are perceived to have fed on human corpses washed to sea. 
It may seem cruel or cold-hearted to focus on such environmental outcomes in the wake of vast human loss and suffering. 
But as the world attempts to mount a civilized response to Southeast Asia’s human tragedy, it must also confront the humbling amorality of nature, and thus comprehend the environmental effects that will shape the lives of survivors and their descendants. 


The Environmental Fallout of the War in Lebanon 
In any war, the primary focus is on dead, wounded and displaced people. 
The number of people killed as a result of Israel’s offensive in Lebanon at the time of this writing is reported to be roughly 800 Lebanese and 120 Israelis – not an atypical ratio for Arab-Israeli conflicts. 
The UN estimates the number of displaced persons to be more than a million, about 800,000 of them Lebanese. 
Damage to infrastructure and the environment will also continue to be felt once hostilities cease. 
Of course, infrastructure can be rebuilt much more quickly than the environment can be restored or recover on its own. 
In the case of Lebanon, however, the two are closely linked, as much of the environmental damage comes from destroyed infrastructure. 
As in most modern wars, oil spills are one of the most visible – and therefore most reported – forms of environmental damage. 
Until the war started, Lebanon’s beaches were among the cleanest in the Mediterranean. 
They are now to a large extent covered with oil. 
For a rare species of sea turtle this is bad news, as the eggs laid in the sand on those very beaches in the annual spawning season are due to hatch at precisely this time of the year. 
The total amount of oil released into the sea is now well over 100,000 tons. 
Naturally, oil cisterns are not the only targets, and coastal locations are not the only regions hit. 
It is far too early to assess the damage done by releases of other, less visible, chemicals, but it is safe to assume that ground water will be contaminated for a long time. 
The drier the environment, the worse the problem. 
Moreover, bombs and grenades not only ignite buildings, but also grass, bushes, and trees. 
The number of forest and brush fires that start is thus much higher than during a normal summer. Worse still, there is little capacity to fight them, as existing fire-fighting resources are used to try to save human lives. 
Consequently, bushes and forests burn, reducing the stands of cedar trees – a symbol of Lebanon as much as the bald eagle is of the United States – by the day towards extinction. 
A unique ecosystem is being lost. 
There have also been reports, more often on the Internet than in the press, about despairing Lebanese doctors, who, not recognizing the wounds patients have sustained after Israeli air strikes, have described what they see and asked colleagues around the world for help. 
One such type of wound reportedly resembles second-degree burns over large parts of bodies, but with the hairs intact – not a typical reaction to fire and heat. 
There have been suggestions that agents containing some acid or alkali were possibly stored in buildings destroyed in the bombing. 
According to this theory, such agents were dispersed after a missile or bomb hit, rather than being delivered with incoming warheads. 
The last word probably has not been heard. 
One has only to recall “Gulf War Syndrome,” which emerged after the 1991 conflict, and the controversy surrounding the issue of what, if anything, affected US soldiers, to understand how difficult it can be to answer such questions until well after the fact. 
The worst environmental effect on health is probably the one most directly associated with the destruction of infrastructure: the release of asbestos. As in many parts of the world with hot climates, apartment and office buildings in Lebanon use asbestos for heat insulation. 
This has been standard practice for decades, and most buildings that have been erected or restored since Israel’s last bombings in 1982 have plenty of it. 
When pulverized by bombs and missiles, asbestos fibers are freed and can be inhaled with the rest of the dust. 
The protective suits that specially-trained people are legally required to wear in the European Union or the US when demolishing, rebuilding, or repairing any building containing asbestos underscore the risk of pulmonary fibrosis and lung cancer for Lebanese who inhale dust from bombed-out houses and offices. 
Indeed, US companies have been forced to pay tens of billions of dollars to ex-employees who worked with asbestos. 
Lebanon cannot afford to pay anything close to such a sum. 
But this is just one of many environmental debts that will somehow have to be paid in long after the fighting has stopped – by the victims, if by nobody else. 

The Error of the War on Terror 
Israel’s failure to subdue Hezbollah demonstrates the many weaknesses of the war-on-terror concept. 
One weakness is that even if the targets are terrorists, the victims are often innocent civilians, and their suffering reinforces the terrorist cause. 
In response to Hezbollah’s attacks, Israel was justified in attacking Hezbollah to protect itself against the threat of missiles on its border. 
However, Israel should have taken greater care to minimize collateral damage. 
The civilian casualties and material damage inflicted on Lebanon inflamed Muslims and world opinion against Israel and converted Hezbollah from aggressors to heroes of resistance. 
Weakening Lebanon has also made it more difficult to rein in Hezbollah. 
Another weakness of the war-on-terror concept is that it relies on military action and rules out political approaches. 
Israel withdrew from Lebanon and then from Gaza unilaterally, rather than negotiating political settlements with the Lebanese government and the Palestinian authority. 
The strengthening of Hezbollah and Hamas was a direct consequence of that approach. 
The war-on-terror concept stands in the way of recognizing this fact because it separates “us” from “them” and denies that our actions may shape their behavior. 
A third weakness is that the war-on-terror concept lumps together different political movements that use terrorist tactics. 
It fails to distinguish between Hamas, Hezbollah, al Qaeda or the Sunni insurrection and the Mahdi militia in Iraq. 
Yet all these terrorist manifestations are different and require different responses. 
Neither Hamas nor Hezbollah can be treated merely as targets in the war on terror because they have deep roots in their societies; yet profound differences exist between them. 
Looking back it is easy to see where Israeli policy went wrong. 
When Mahmoud Abbas was elected president of the Palestinian Authority, Israel should have gone out of its way to strengthen him and his reformist team. 
When Israel withdrew from Gaza the former head of the World Bank, James Wolfensohn, negotiated a six-point plan on behalf of the Quartet for the Middle East (Russia, the United States, the European Union and the United Nations). 
It included opening crossings between Gaza and the West Bank, an airport and seaport in Gaza, opening the border with Egypt, and transferring the greenhouses abandoned by Israeli settlers into Arab hands. 
None of the six points was implemented. 
This contributed to Hamas’s electoral victory. 
The Bush administration, having pushed Israel to allow the Palestinians to hold elections, then backed Israel’s refusal to deal with a Hamas government. 
The effect was to impose further hardship on the Palestinians. 
Nevertheless, Abbas was able to forge an agreement with the political arm of Hamas for the formation of a unity government. 
It was to foil this agreement that the military branch of Hamas, run from Damascus, engaged in the provocation that brought a heavy handed response from Israel—which in turn incited Hezbollah to further provocation, opening a second front. 
That is how extremists play off against each other to destroy any chance of political progress. 
Israel has been a participant in this game and President Bush bought into this flawed policy, uncritically supporting Israel. 
Events have shown that this policy leads to an escalation of violence. 
The process has advanced to the point where Israel’s unquestioned military superiority is no longer sufficient to overcome the negative consequences of its policy. 
Israel is now more endangered in its existence than it was at the time of the Oslo Agreement. 
Similarly, the US has become less safe since President Bush declared war on terror. 
The time has come to realize that today’s policies are counterproductive. 
There will be no end to the vicious circle of escalating violence without a political settlement of the Palestine question. 
In fact, the prospects for engaging in negotiations are better now than they were a few months ago. 
Israelis must realize that a military deterrent is not sufficient on its own. 
And Arabs, having redeemed themselves on the battlefield, may be more willing to entertain a compromise. 
Strong voices argue that Israel must never negotiate from a position of weakness. 
They are wrong. 
Israel’s position is liable to become weaker the longer it persists on its present course. 
Similarly Hezbollah, having tasted the sense but not the reality of victory (and egged on by Syria and Iran) may prove recalcitrant. 
But that is where the difference between Hezbollah and Hamas comes into play. 
The people of Palestine yearn for peace and relief from suffering. 
The political--as distinct from the military-- wing of Hamas must be responsive to their desires. 
It is not too late for Israel to encourage and deal with an Abbas led Palestinian unity government as the first step toward a better balanced approach. 
Given how strong the U.S.-Israeli relationship is, it would help Israel achieve its own legitimate aims if the U.S. government were not blinded by the war-on-terror concept. 


The Eternal Life of America’s Megabanks 
WASHINGTON, DC – The world economy faces a major problem: the largest banks in the United States remain “too big to fail,” meaning that if one or more of them were in serious trouble, they would be saved by government action – because the consequences of inaction are just too scary. 
This problem is widely acknowledged, not just by officials but by bankers themselves. 
In fact, there is near unanimity that fixing it is a top policy priority. 
Even Jamie Dimon, the powerful head of the very large JP Morgan Chase, emphasizes that “too big to fail” must end. 
Unfortunately, the Obama administration’s proposed approach to ending “too big to fail” – now taken up by the US Congress – will not work. 
The current center of legislative attention is Senator Christopher Dodd’s financial reform bill, which has passed out of the Senate Banking Committee and will presumably soon be debated on the Senate floor. 
Dodd’s bill would create a “resolution authority,” meaning a government agency with the legal power to take over and close down failing financial institutions. 
The bill’s proponents argue that this approach builds on the success of the Federal Deposit Insurance Corporation (FDIC), which has a long track record of closing down small- and medium-sized banks in the US with minimal disruption and no losses for depositors. 
In this context, “resolution” means that a bank’s managers are fired, shareholders are wiped out, and unsecured creditors can suffer losses. 
Essentially, this is a form of bankruptcy, but with more administrative discretion (and presumably more protection for depositors) than would be possible in a court-supervised process. 
Applying this process to large banks and to financial institutions that are not formally banks – and that do not have insured retail deposits – sounds fine on paper. 
But in practice there is an insurmountable difficulty with this approach. 
Think about the critical moment of decision – when a megabank, like JP Morgan Chase (with a balance sheet of roughly $2 trillion), may be on the brink of failure. 
You are a senior decision maker – perhaps the Secretary of the Treasury or a key adviser to the US president – for this is the level at which the plug must be pulled. 
You have Senator Dodd’s Resolution Authority and you enter the decisive meeting determined not to save the troubled bank – or, at worst, to save it with a substantial “haircut” (i.e., losses) for unsecured creditors. 
Then someone reminds you that JP Morgan Chase is a complex global financial institution. 
The Dodd Authority allows the US government only to determine the terms of an official takeover within the US. 
In dozens of other countries where JP Morgan operates subsidiaries, branches, or other kinds of business, there would be “plain vanilla” bankruptcy – while some governments would jump in with various ad hoc arrangements. 
The consequences of this combination of uncoordinated responses would be widespread, scary, and bordering on chaos. 
This is exactly what happened when Lehman Brothers failed in September 2008, and what happened when AIG was taken over by the US government (actually in a resolution-type structure, with losses implied for creditors) two days later. 
The existence of a US resolution authority does not help contain the damage or limit the panic arising from a big global bank in trouble. 
The failure of such a bank could be managed in a more orderly fashion by using a cross-border resolution authority. 
But there is no such mechanism in place, and there is no chance that one will be created in the near future. 
Responsible policymakers in other G-20 countries are very clear on this point: no one will agree ex ante to a specific way of handling the failure of any global bank. 
At the moment when JP Morgan Chase – or any of America’s six largest banks – fails, the choice will be just like that of September 2008: do you rescue the bank in question or do you let it fail, and face likely chaos in markets and a potential re-run of the Great Depression? 
What will the president decide? 
He or she may have promised, even in public, that creditors would face losses, but on the edge of the precipice, which way will you, the beleaguered adviser, urge the president to go? 
Will you really argue that the president should leap over the edge, thereby plunging millions of people – their jobs, their homes, and their families – into a financial abyss? 
Or will you pull back and find some ingenious way to save the bank and protect its creditors using public money or the Federal Reserve or some other emergency power? 
You will, in all likelihood, step back. 
When the chips are down, it is far less scary to save a megabank than to let it go. 
And of course the credit markets know this, so they lend more cheaply to JP Morgan Chase and other megabanks than to smaller banks that really can fail. 
This enables the bigger banks to get bigger. 
And the bigger they are, the safer creditors become – you see where this goes. 
Senator Dodd’s bill, as currently drafted, will not end “too big to fail.” 
As you can infer from the title of my new book, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (co-authored with James Kwak), the global consequences will be dire. 

The Eternal Wall 
PARIS – Walls designed to keep people in or out – whether they are in Berlin, Nicosia, Israel, or Korea – are always the product of fear: East German leaders’ fear of a mass exodus by their citizens seeking freedom and dignity; Greek and Turkish Cypriot leaders’ fear of continued war; 
Israelis’ fear of terrorism; or the North Korean leadership’s fear of “abandonment” by their martyred people. To freeze a fragile status quo, to consolidate one’s position, or to remain separate from others perceived as temptations or threats (or both) – such have always been the goals of politicians who build walls. 
Why is there such a difference between the fate of Berlin – now a capital city where the progress of the present is slowly covering the many scars of the past – and the fate of Nicosia, where time has been frozen, or that of Israel, whose “security wall” is expanding like a fresh scar, not to mention the North Korean regime’s unlikely consolidation behind its walls of paranoia and oppression? 
To understand these different situations, one must consider the will of people to destroy their walls in the case of East Germany, to expand them in the case of Israel, and to freeze them in the case of Cyprus and the government of North Korea. 
Of course, the qualities – or lack of them – of the respective leaders are also an important factor. 
The Berlin Wall collapsed in 1989 much more rapidly than most West Germans would have dreamed (or dreaded). 
They had underestimated the strength of “German national feeling” in the East. 
And they grossly overestimated the Soviet Union’s ability and will to keep its empire at all costs. 
Above all, Mikhail Gorbachev will remain the man who had the vision and the courage not to oppose the course of history. 
He may not have fully understood what was happening before his eyes and the forces that he had unleashed, but his restraint constitutes true greatness. 
The miracle of today’s reunified Berlin is a challenge – even a provocation – to all walls. 
It is proof that in a globally interdependent world, walls are unnatural and artificial – and thus doomed. 
Yet the truth is far more complex, for walls are a multilayered reality, and it is always dangerous to rewrite history in a Manichean manner, while confusing the realities of the past with those of the present. 
Nicosia, the divided capital of Cyprus, is the perfect antithesis to Berlin, and as such the best illustration of what happens when history does freeze. 
There, empty windows filled with sandbags continue to face each other defiantly, symbols of a past that has not passed for decades. 
Of course, crossing the Green Line that separates the Greek and Turkish parts of the city is nothing like crossing Berlin’s infamous Checkpoint Charlie. 
It is no longer a traumatic experience, just a bureaucratic hassle. 
East Germans wanted to unify the German state for the sake of the unity of their nation: “We are one people” was their motto. 
Are Greek Cypriots seriously interested in reunifying their island? 
Do they wish to extend to the Turkish Northern Cyprus the evident benefits that they derive from membership in the European Union, which came in 2004? 
Most likely, they do not. 
As for Turkey’s government, its official priority remains its own entry into the EU. 
It cannot say loud and clear that it is not seriously interested in the fate of Cyprus, but that is probably not far from the truth. 
In any case, the two sides have wasted so many opportunities in the past decades – owing in part to leaders characterized by what might best be described as “competitive mediocrity” – that it is difficult to see a miracle in the horizon. 
Israel is closer to Nicosia than to Berlin, not only in geographic but also in political terms, because successive Israeli and Palestinian leaders have likewise failed to demonstrate qualities of vision and imagination. 
A wall is a bad international symbol, especially at the time when the fall of the Berlin Wall is being commemorated. 
It is also a symbol of futility, because it does not constitute a viable long-term solution. 
But the situation is unfortunately more complex. 
As time goes by, Israelis and Palestinians increasingly want to divorce themselves from each other. 
And Israel, contrary to North Korea – a regime doomed to disappear into a single Korea united by freedom and capitalism – is here to stay. 
Israel’s wall constitutes a sad but probably inevitable component of its security. 
What must be discussed is the security wall’s unnecessary and aggressive geography, accompanied by the provocation of further Israeli settlements on the West Bank, not the principle that stands behind it. 
After all, security alternatives that would prevent further bloodshed at the time of the Second Intifada did not exist. 
Ultimately, “walls” represent the realities that lay behind their construction – realities that, unfortunately, later generations may be unable or unwilling to change. 

The Ethics of “Biosecurity” 
An ominous new word has crept into the life sciences and biomedical research: “biosecurity.” 
The term reflects a growing awareness that rapid developments in these fields offer the potential for great benefits, but that the knowledge, tools, and techniques that enable scientific advances also can be misused to cause deliberate harm. 
Any effort to address this “dual use” dilemma must ultimately be international, since biotechnology research is a genuinely global enterprise. 
The international scientific community has a key role to play in ensuring that efforts to manage the risks improve security and strengthen international collaboration to ensure non- maleficent use of scientific advances. 
Professor Ronald Atlas of the University of Louisville and I recently presented a proposed Code of Ethics for the Life Sciences in the journal Science . 
Our proposal what we need for a code and for its contents have both met with strongly conflicting views. 
The scientific community increasingly recognizes that science itself is not a value-free activity and, therefore, the choice of what research to undertake and how to undertake it must be governed by ethical principles. 
But there is still a nucleus of scientists who oppose that concept, arguing that there must be no restrictions on the search for new knowledge, and that ethical principles only become relevant in the application of that knowledge. 
In our Science article, we speculated on scientists’ reasons for holding such a view. 
But, as we noted, “even those who question the value of a code agree that research in the life sciences, including biodefense research, must be conducted in a safe and ethical manner.” 
Bodies speaking out publicly about this need include the General Assembly of the World Medical Association, the British Medical Association, the US National Research Council, the British Parliament, and the Asia-Pacific Economic Cooperation (APEC) leaders. 
A code of ethics is needed because the power of science to result in harm, if it is not well governed, has grown vastly. 
Society has entrusted scientists and scientific institutions to show respect for life, in particular human life. 
Safeguards are needed to ensure fulfillment of that trust, in particular, to ensure that science is not used in the cause of bioterrorism or biowarfare. 
A code of ethics offers several benefits. 
It would underscore the importance of ethics reviews of proposed scientific research and monitoring of ongoing research, especially research involving humans or animals as subjects. 
It can also establish a basic presumption of scientific openness and transparency, while allowing for exceptions when there is a real risk that scientific knowledge could be used to cause serious harm. 
Moreover, a code of ethics could help protect “whistle blowers” who bring ethical breaches to the attention of the relevant authorities or the public. 
Finally, it could allow for conscientious objection to participation in certain research. 
In short, a code can help to embed ethics in all aspects of scientific research from its inception. 
Although no consensus has yet emerged on a code of ethics, there is wide agreement among scientists that a robust public health system is an essential safeguard against biological threats, whether intentional or unintentional. 
Security and public health concerns now overlap, whereas traditionally they had been separate areas that elicited different kinds of policy responses. 
Strengthening the response to naturally occurring infectious diseases or poisoning is needed to protect against the deliberate misuse of science to spread disease or poison. 
In short, promoting public health, biosafety, and biosecurity, on the one hand, and protecting against bioterrorism, on the other, are linked, complementary activities. 
But contemplating potential new bioweapons raises deeply worrying possibilities that return us to the problem of how to ensure ethics in scientific research. 
For instance, “synthetic biology” involves the creation of living material from its DNA components, so that we can re-engineer life in the manner of our choosing. 
The technology making this possible will most likely become common within the next two years at a substantially reduced cost. 
Safeguards such as a moratorium on such developments or registering the equipment needed to implement them should be considered. 
There are ancient taboos on the use of “poison or plague” as weapons or for warfare, and doing so has long been stigmatized in many cultures and prohibited by customary international law and international treaties. 
The taboo is the companion to the sacred: that which we regard as sacred we protect with taboos. 
We have lost both concepts in relation to much conduct in our contemporary world, but we urgently need to re-find them in relation to the new possibilities opened up by the life sciences if we are to continue to respect all life, especially human life. 
The challenge is no less than to prevent the life sciences from becoming the death sciences. 
That will require complex, multiple, varied, and integrated responses from a very wide variety of sources at individual, institutional, societal, and global levels. 
Above all, it will require integrity, honesty, trust, courage, and sometimes restraint. 
This is no small order at the level of international relations and cooperation. 

The Ethics of Eating 
Global meat consumption is predicted to double by 2020. 
Yet in Europe and North America, there is growing concern about the ethics of the way meat and eggs are produced. 
The consumption of veal has fallen sharply since it became widely known that to produce so-called “white” – actually pale pink – veal, newborn calves are separated from their mothers, deliberately made anemic, denied roughage, and kept in stalls so narrow that they cannot walk or turn around. 
In Europe, mad cow disease shocked many people, not only because it shattered beef’s image as a safe and healthy food, but also because they learned that the disease was caused by feeding cattle the brains and nerve tissue of sheep. 
People who naively believed that cows ate grass discovered that beef cattle in feed lots may be fed anything from corn to fish meal, chicken litter (complete with chicken droppings), and slaughterhouse waste. 
Concern about how we treat farm animals is far from being limited to the small percentage of people who are vegetarians or even vegans – eating no animal products at all. 
Despite strong ethical arguments for vegetarianism, it is not yet a mainstream position. 
More common is the view that we are justified in eating meat, as long as the animals have a decent life before they are killed. 
The problem, as Jim Mason and I describe in our recent book, The Way We Eat, is that industrial agriculture denies animals even a minimally decent life. 
Tens of billions of chickens produced today never go outdoors. 
They are bred to have voracious appetites and gain weight as fast as possible, then reared in sheds that can hold more than 20,000 birds. 
The level of ammonia in the air from their accumulated droppings stings the eye and hurts the lungs. 
Slaughtered at only 45 days old, their immature bones can hardly bear the weight of their bodies. Some collapse and, unable to reach food or water, soon die, their fate irrelevant to the economics of the enterprise as a whole. 
Conditions are, if anything, even worse for laying hens crammed into wire cages so small that even if there were just one per cage, she would be unable to stretch her wings. 
But there are usually at least four hens per cage, and often more. 
Under such crowded conditions, the more dominant, aggressive birds are likely to peck to death the weaker hens in the cage. 
To prevent this, producers sear off all birds’ beaks with a hot blade. 
A hen’s beak is full of nerve tissue – it is, after all, her principal means of relating to her environment – but no anesthetic or analgesic is used to relieve the pain. 
Pigs may be the most intelligent and sensitive of the animals that we commonly eat. 
When foraging in a rural village, they can exercise that intelligence and explore their varied environment. 
Before they give birth, sows use straw or leaves and twigs to build a comfortable and safe nest in which to nurse their litter. 
But in today’s factory farms, pregnant sows are kept in crates so narrow that they cannot turn around, or even walk more than a step forward or backward. 
They lie on bare concrete without straw or any other form of bedding. 
The piglets are taken from the sow as soon as possible, so that she can be made pregnant again, but they never leave the shed until they are taken to slaughter. 
Defenders of these production methods argue that they are a regrettable but necessary response to a growing population’s demand for food. 
On the contrary, when we confine animals in factory farms, we have to grow food for them. 
The animals burn up most of that food’s energy just to breathe and keep their bodies warm, so we end up with a small fraction – usually no more than one-third and sometimes as little as one-tenth – of the food value that we feed them. 
By contrast, cows grazing on pasture eat food that we cannot digest, which means that they add to the amount of food available to us. 
It is tragic that countries like China and India, as they become more prosperous, are copying Western methods and putting animals in huge industrial farms to supply more meat and eggs for their growing middle classes. 
If this continues, the result will be animal suffering on an even greater scale than now exists in the West, as well as more environmental damage and a rise in heart disease and cancers of the digestive system. 
It will also be grossly inefficient. 
As consumers, we have the power – and the moral obligation – to refuse to support farming methods that are cruel to animals and bad for us. 

The EU, Serbia, and the Balkans 
BRUSSELS: On September 24, despite a system heavily rigged against them, Serbia’s people voted – in huge numbers – for spring after a long political winter. 
They demanded a new start for their country – the chance to consign to history the economic and political misery endured in recent years. 
Today, they have that new start. 
Ten years after the rest of postcommunist Europe, Serbia must begin establishing an open, democratic society. 
The EU has made clear its willingness to help a democratic Serbia re-join the family of Europe. 
The EU symbolizes one of history’s most successful attempts by countries and peoples to overcome division through partnership and co-operation, where competition on a level playing field replaces battlefield conflict. 
Fifty years ago, few thought that possible. 
Much of Western Europe was rubble. 
Enmities smoldered. 
With generous support from America, we built a robust community of democracies, whose economic wealth and political liberty helped us stand firm in the face of tyranny. 
Yugoslavia’s enmities, and the ruins of its economy, need to be addressed in a similar spirit. 
The EU’s record is clear. 
When Communism collapsed, we set about helping the countries of Eastern Europe to establish democracy and make the transition to the market economy. 
We did so with the same commitment and faith in their ability to succeed that the US devoted to re-building Western Europe after WWII. 
In the ten years since the Berlin Wall’s fall these countries have been transformed and are on the way to joining the EU. 
War in Europe, we told ourselves, could never happen again. 
But it did, in the Balkans. 
All Europe’s demons had not been exorcised. 
After a decade of war, we are now humbler, wiser, I hope – but more determined to turn the page, to work with the countries and peoples of Southeast Europe not to escape their neighborhood, but to transform it. 
That is what the Stability Pact is about – a recognition that the region’s problems must be tackled in the round; a recognition that coping with crisis after crisis is far more costly than implementing a long-term strategy for peace. 
The EU, indeed, faces few greater tests of its ability to project stability than in the Balkans. 
Last year in Kosovo, America bore the brunt of the military campaign. 
American and European peacekeepers serve alongside each other in Kosovo and in Bosnia. 
Nearly two thirds of those troops – some 30,000 of them – are from EU nations. 
Our overall strategy is clear: to build a strong, stable network of democracies in the region, a network that – we hope – will now include Serbia. 
We are starting to implement such a strategy by building, literally and metaphorically, Southeast Europe’s road to integration with the rest of Europe and the Euro-Atlantic community. 
That road is built on a foundation in which solid reform is backed by substantial assistance. 
We have spent nearly 8bn euros in reconstruction and humanitarian assistance in the region since 1991; EU financial assistance to the region during those years amounts to 17bn euros. 
This year, the European Commission is spending nearly 600m euros rebuilding lives in Kosovo and Bosnia, backing brave and newly elected leaders in Croatia, supporting reform in the Former Yugoslav Republic of Macedonia (fYROM) and Albania. 
In Montenegro, the EU provided considerable support as its government stood up to Milosevic. 
We doubled – to 20 million euros – the EU’s assistance to Montenegro this year. 
The European Council in Lisbon ordered further assistance to help alleviate the immediate financial needs of Montenegro. 
We stand ready to offer assistance to Serbia in the same spirit. 
When Serbia’s new leaders look around, indeed, they can see real progress in the region: in Croatia, which has blazed a democratic trail since elections earlier this year; in the former Yugoslav Republic of Macedonia, which has nearly concluded negotiations with the EU for a Stabilization and Association Agreement, the first country to do so; in Albania, which is persevering with political and economic reforms; and in Bosnia, where refugee return has accelerated. 
Even in Kosovo, where obstacles remain formidable, progress is being made. 
That progress is taking place at a regional level too: a regional investment compact, a regional anti-corruption initiative, media reform. 
Agreements to upgrade the Blace border-crossing between fYROM and Kosovo, and to build a new bridge over the Danube between Bulgaria and Romania have been made. 
These are real achievements, which the Stability Pact helped broker. 
Europe is also funding a substantial package of >Quick Start’ projects – ready to begin now or in the next twelve months – to upgrade bridges, roads, airports, water systems, and electricity networks across the region. 
Just as important are projects to install institutional >software’ - public administration, a free media, independent judiciaries, functioning, accountable institutions in which all members of the community can place trust and confidence. 
The European Commission pledged 530 million euros for projects under the Quick Start package. 
Cooperation, however, is a two-way street. 
To succeed, these efforts must be matched with equal determination by the countries of the region in delivering on reform. 
That approach – help for self-help, inextricably linked to actual reforms – lies at the heart of the EU’s Stabilization and Association process. 
That process will bring – is already starting to bring – substantial benefits to the region in terms of trade access, political dialogue, and regional co-operation. 
Indeed, we recently agreed radical proposals to expand trade access – through asymmetric trade measures – to the EU market for the countries of the region. 
These come into effect on 1 November. 
Eighteen months after the air strikes in Kosovo, we are making headway. 
The changes in Serbia provide evidence that the people of Serbia, too, have noticed what is happening in the rest of their region and no longer want to miss out. 
We, too, don’t want them to miss out on better ties to Europe. 

The EU and the War Machine 
BRUSSELS: For many years, the most glaring weakness in the European Union has been its inability to mobilise a common foreign and security policy (CFSP). 
NATO's bombing of Serbia and Kosovo has highlighted these problems again. 
Structural factors go a long way to explain this deficiency. 
Essentially, a CFSP cannot be put together by the slow and careful negotiations which characterise the normal EU process. 
War is different from economic integration, largely because it cannot be waged collectively by the assembling of cautious legislative procedures. 
Such factors of inertia are systemic: they cannot be overcome internally by some ingenious system of majority voting. 
And yet it begins to look as though they may nevertheless be in the process of being overcome by the irresistible imperatives of the Kosovo crisis. 
As so often in the EU, the French have a neat word for this: éngrenage (machinery), suggesting the image of someone getting caught up in the cogs of a machine, by which they mean the process of being drawn involuntarily along by the machinery of integration. 
One striking example of such éngrenage is Economic and Monetary Union. 
Few member states would spontaneously have gone for a Single Currency; but they found that this was the almost unavoidable consequence of the Single Market which they had already set in train. 
The analogy with the two-phase tragedy in the Balkans may turn out to be rather close, though in negative terms. 
In the first phase, the three-sided civil war in Bosnia, some European leaders trumpeted that this was a European problem. 
But in practice European governments were absolutely determined not to get involved in the war; the furthest they would go in risking their troops was, at first, for humanitarian aid, and later (after some American bombing) for peace-keeping. 
The 1995 Dayton agreement restored some semblance of calm to Bosnia. 
But the preceding savagery of Serbian, Croatian and Bosnian ethnic cleansing, in that first phase of the Balkan tragedy, and the lily-livered impotence of the EU, had been so shocking and so shameful for the Europeans, that when they saw President Slobodan Milosevic embarking on an even more outrageous process of ethnic cleansing in Kosovo, with the prospective death or displacement of tens or hundreds of thousands of Albanian Kosovars, they were compelled, almost willy nilly, to intervene more forcefully this time round. 
At first the Europeans, and their American allies in NATO, believed or hoped that they could, by negotiation, persuade President Milosevic to back down from his policy of repression and massacre in Kosovo. 
But when they found that Milosevic was resistant to moral pressure, the NATO allies were forced to raise the ante by threatening the use of military force. 
When they found that he was stone deaf to their threats, NATO was forced to raise the ante again, by actually bombing military targets in Yugoslavia. 
That bombing has been going on for over three weeks now, but there is still no sign that the NATO allies are succeeding in bending Milosevic to their will. 
It is here that they have got caught up in the process of éngrenage: 
* First, the stakes have been raised much higher than anyone thought six months ago. 
It does not at the moment seem likely that NATO can count on winning this battle of wills by only a continuation of the bombing. 
And since bombing is liable to produce rising casualties among civilians, even the simple continuation of the bombing may be difficult to sustain. 
Yet if NATO were to give up the struggle and leave Milosevic in control of the field, the consequences of such a defeat would be horrific for the NATO alliance, for the US, and particularly for the European Union. 
It is hard to believe that any of the allies is prepared to contemplate that kind of defeat. 
* Secondly, if defeat is unacceptable, the NATO allies may be forced to raise the ante even higher. 
From the beginning, they have repeatedly declared (foolishly) that they would never send in troops on the ground. 
This may have been intended to reassure voters at home, but in fact it only encouraged Milosevic. 
So the time may be coming where the only option, if NATO wants to avert defeat, is to send in troops. 
Yet it is most unlikely that all NATO members would agree to such a change of policy; and even more unlikely that all would be prepared to provide a national contingent. 
In other words, NATO's unity, and perhaps its future, could be imperilled, both by a decision to send troops, and by a decision not to send troops. 
The third part of the Balkan éngrenage, is that NATO's strategic objectives have started to change out of all recognition. 
Before the bombing, NATO's aim was to broker a new deal in Kosovo, in which Milosevic would abandon ethnic cleansing, and the Kosovars would get limited autonomy within Yugoslavia, but not independence. 
The option of such a compromise seems by now to have been ruled out by the savagery of Milosevic's repression of the ethnic Albanians. 
Even if he were to sign a deal, it is very hard to believe he would stick to it. 
As a result, Western objectives have shifted in the direction of some kind of protectorate for Kosovo, quite independent of Milosevic. 
It is difficult to overstate what is now at stake for the Western allies, to say nothing of the interests of the people of Kosovo. 
If the Europeans back away from the costs of victory, they will give dramatic proof of their reluctance to develop a European CFSP: the systemic obstacles coupled with cowardice will have proved stronger than the éngrenage. 
If the Europeans help defeat Milosevic, they will have been carried far further towards a CFSP than any of them expected - or wanted. 


The EU Constitution Can Work 
The final stage in drafting an EU Constitutional Treaty is underway. 
Smaller and bigger EU members seem to be lining up in opposing camps. 
Here Danish Prime Minister Anders Fogh Rasmussen offers his hopes for what type of treaty will emerge. 
After the historic decision on enlargement, the European Union now faces the task of making a Union with 25 or more Member States a success. 
That is the task of the Intergovernmental Conference, which started its work on October 4th. 
Governments of the 15 current member states and the 10 new members will negotiate a Constitutional Treaty that will form the framework for European co-operation in the future. 
We aim for a Treaty that can stand for several years without further changes. 
Denmark has a clear goal in these talks: to ensure a strong, democratic and transparent Union. 
The Intergovernmental Conference works on the basis of the draft Treaty presented by the European Convention. 
The Convention worked in full transparency for more than a year, designing a single, consolidated draft Treaty that was agreed upon by a broad consensus among its members. 
The Convention's draft Treaty provides for a more simple and comprehensible structure for the EU based on more democratic and transparent co-operation between member states. 
Indeed, it underlines the fact that the member states are the defining building blocks of the EU and defines the competences of the Union clearly. 
The Intergovernmental Conference should therefore not re-open the main political compromises of the Convention. 
There are, however, a number of questions that need further deliberation. 
This is the case with some of the more technical issues relating to individual policy areas. And it is especially the case concerning institutional questions. 
Denmark therefore fully supports the Italian Presidency's aim to complete the work of the Intergovernmental Conference by the end of the year. 
Like the Italian President, we believe the negotiations should focus mainly on the central institutional questions. 
Denmark's priorities are clear. 
The new Treaty must fulfil two basic demands: 
it must respect the central role of member states and it must maintain the balance between larger and smaller members; 
the institutional structure must be efficient, democratic, and transparent. 
The three central institutional questions confronting the Intergovernmental Conference are the future organization of the Commission and the Council, as well as determining the role of the future President of the European Council. 
We must find a solution that realizes the full potential of all three actors. 
Denmark presented a proposal on how to strengthen the organization of the Commission that reflects two considerations. 
On the one hand, the principle of one commissioner per Member State with full voting powers carries great importance to many member states and to many citizens. 
At the same time, we must ensure that the Commission can work effectively with 25 or more members. 
Our proposal seeks to retain the Convention's idea of limiting the number of portfolios in the Commission while giving all commissioners full voting rights. 
We suggest that the work of the Commission be concentrated in 15-19 portfolios. The heaviest portfolios should be shared among a number of commissioners, one of them responsible for coordination. 
This model will ensure an efficient Commission with strong public legitimacy. 
Strengthening the Commission must go hand in hand with strengthening the Council. 
It is not a zero-sum game. 
The Council Presidency, in my view, should remain embedded in the member states. 
With 25 and more members, however, it is necessary to improve the present rotating Presidency (in particular the lack of continuity). 
While being open towards the idea of a "Team Presidency" involving, for example, three countries for a period of one year or eighteen months, I worry that it would make horizontal co-ordination and the smooth daily conduct of business more difficult. 
Therefore, I believe that we should modernize the present rotating Presidency. 
But whether we continue with the current format for the Presidency or introduce a team model, we must consider how the President of the European Council can play a role in coordinating work within the Council. 
The purpose of the European Council Chair is to ensure the coherence and decision-making capacity of the European Council. 
He or she must of course be given the necessary means to perform this task. 
At the same time we must avoid creating a presidential system that functions independently of the Council, the Commission, and the member states. 
But if we do not integrate the President of the European Council into the existing institutional structure and relegate the presidency to presiding over the meetings of the European Council, we will miss an important chance to strengthen the overall decision-making capacity of the Union. 
We also risk creating competing structures that will weaken the institutions as a whole. 
Denmark seeks an ambitious result in the institutional negotiations. 
We wish to strengthen the EU's ability to solve the problems of the member states. 
In order to accomplish this goal, we owe it to ourselves to create a strong, democratic, and transparent framework for co-operation in an enlarged Union. 

The EU is Missing in Action in Afghanistan 
The withdrawal of Britain’s Paddy Ashdown as a candidate for the post of UN envoy in Afghanistan means that the international community still has some way to go before it speaks with one voice in that country. 
Such a unified voice is needed, for six years of war and the biggest military operation in NATO’s history have failed to subdue the Afghan insurgency, leaving President Hamid Karzai’s increasingly corrupt government dependent on the continued presence of international forces. 
Afghanistan remains the world’s fifth poorest country and its biggest opium producer, with a weak central state that is further debilitated by warlordism and the Taliban insurgency. 
There are many reasons for this outcome, but at least some of the blame lies with the European Union. 
On paper, the EU effort looks impressive. 
Twenty-five EU nations have contributed troops to NATO’s 35,000-strong army in Afghanistan, and now represent more than half of all troops. 
EU states command a third of all Provincial Reconstruction Teams (PRTs), and, together with the European Commission, have paid for a third of the country’s post-2001 reconstruction. 
But European support for the Afghan mission is in fact limited, and cooperation between the biggest EU donor governments and the European Commission remains inadequate. 
Public support for Europe’s engagement has been plummeting, and most EU governments have failed to act on NATO’s request to boost troop levels. 
One exception is the United Kingdom, which has recently pledged to increase its troop numbers in the restive poppy-growing province of Helmand. 
But European troop contributions continue to fall short of the 17,000 US troops deployed with the International Security Assistance Force (ISAF) and its 8,000 Coalition Force troops outside of ISAF. 
Apart from 1,500 Dutch soldiers in the neighboring Uruzgan province and a Polish and Romanian presence in Ghazni, Paktika, and Zabul, no other EU nations are willing to operate in the insurgency-ridden southern and eastern parts of the country, giving the Taliban free reign. 
Overall, there are at least 60 such operating restrictions – known as “caveats” – on European troops, preventing commanders from deploying military assets where they are most needed. 
In areas such as policing, the rule of law, and counter-narcotics, EU states have pursued policies entirely independently of each other. 
The EU Police Mission (EUPOL), launched in June 2007, was meant to address this lack of coordination, but in the end its focus was narrowed to police reform, with the Commission funding a separate judicial program. 
EUPOL started poorly, losing its first commander, and faces serious problems recruiting high-caliber staff. 
Finally, the Commission’s annual development assistance to Afghanistan is falling this year, from €200 million to €150 million. 
Individual commitments are also being cut – for example, France’s five-year, €33 million pledge for reconstruction support is strikingly low compared to its total foreign-aid budget of €9 billion. 
The EU cannot alter the international coalition’s strategy alone. 
But a united EU can act as a powerful advocate for a better and more coordinated international approach. 
The US has argued that more troops are needed to dominate the terrain, lambasting EU governments for failing to step up their efforts as the US commits 3500 additional marines to the fray. 
European countries, meanwhile, criticize the current military strategy. 
They fear that more troops may only lead to more civilian casualties, antagonizing Afghans. 
Without a grand bargain between the US and the EU that ensures increased European support and troops, success in Afghanistan will be elusive and alliance-testing tensions with the US will remain. 
Such a bargain must contain two elements. 
First, the EU should commit to sending more troops, trainers, and civilians to the Afghan mission, as well as lifting all remaining “caveats” on its troops. 
The mission needs a 10% troop increase, more military and police trainers, and more military equipment, including helicopters. 
In addition, the Commission should reverse the decline in assistance and spend more money though local governments and the PRTs. 
In exchange, the US should accept a strategic shift from combat operations to human security. 
Such a strategy means focusing more attention on ordinary Afghans, gradually expanding NATO’s security presence outward from population centers, and working hand-in-glove with state and local authorities. 
This new strategy would be further strengthened if the international community abandoned the current counter-narcotics policy – including an end to aerial eradication – and helping Karzai reach a political settlement with mid-ranking, “moderate” insurgents. 
All of this will require leadership that cuts across institutional boundaries, which can be provided only by the UN and a strong-willed individual. 
The appointment of a new UN envoy should prove a more efficient way of coordinating Afghanistan’s international helpmates. 
And it is to be hoped that whoever is chosen may be able to foster the grand bargain between the US and EU that is so badly needed. 
Despite the deteriorating situation in Afghanistan, all is not lost. 
But turning the situation around will require changing the way the international community operates. 
By striking a bargain with the US, the EU should lead the way. 

The EU Moves Ahead At Last 
With much noise and commotion, the European Union has sidestepped catastrophe – but only just. 
It was damned close. 
In a united effort, a major crisis that would have openly divided the Union for years to come and which would have made Europe a global laughingstock was averted. 
The EU ran aground two years ago when France and the Netherlands said no to the European constitution. 
With the new agreement, the Union has once again started to move. 
While the mandate for an intergovernmental conference to develop a new treaty will create something less than a constitution, the coming treaty will go well beyond the present Treaty of Nice – provided things go according to what has been agreed. 
But two steep hurdles still need to be overcome: the intergovernmental conference and ratification through the national parliaments or by means of a referendum in all member states. 
Still, German Chancellor Angela Merkel can be proud of what was achieved. 
It is her first real success in international diplomacy. 
That Friday night in Brussels involved very real and tough decisions. 
The German chancellor played for high stakes and won. 
She deserves respect and recognition. 
If the new treaty comes into being, the institutional reforms that the union needs will become a reality, and a new double majority voting procedure will take effect, even if with some delay. 
The EU has worked for 20 years on these reforms. 
The enlarged Union, inevitable when Europe’s Cold War division ended in 1989, needed new institutions to act efficiently and with transparency. 
The new treaty is supposed to become effective in 2009. Twenty years seems to be what it takes Europe to change, and that is anything but reassuring. 
The treaty calls for a new EU foreign minister – although he is formally denied that title, this is what everyone will call him – with a strong administrative infrastructure in the European Commission and the Council. 
The rotating presidency will be replaced by an elected President of the Council. 
A new balance will be struck between the EU and member states, and a stronger role will be given to the European Parliament and the national parliaments. 
EU citizens will be endowed with legally binding fundamental rights, and majority decisions will become the general norm. 
A high price had to be paid for this agreement. 
The new treaty is not simpler or more transparent than the rejected Constitution, quite the contrary. 
And the wrangling in the run-up to and in Brussels itself surely did not contribute to the EU’s popularity among its citizens. 
Indeed, the damage sustained in the process will linger. 
The following consequences are already foreseeable: 
First, that night of hard negotiations in Brussels reinforced the two-tier Europe for the next two decades. 
The recalcitrant states achieved a Pyrrhic victory because it will quickly become clear to them that, even if the EU is getting a new institutional framework, the avantgarde countries will decide among themselves what the concrete arrangements will look like. 
Enhanced cooperation among these countries and the Euro zone will be the instrument for this. 
Second, Franco-German cooperation has shown itself all the more indispensable in the enlarged Union. 
Despite all the differences that might exist between the two countries – differences that are likely to grow – there is no alternative to their alliance. 
Third, the UK has once again weakened its own position within Europe. 
Its policy of “opting out” keeps Britain on the sidelines of the EU. 
This will further reduce the importance of Britain, both in Europe and in the world. 
The political and economic significance of all the mid-sized European powers is waning, and they are shrinking relative to the US and the rising giants of Asia. 
Only a strong Europe can provide the necessary counterweight. 
A UK that plays a marginal role within the EU will thus lose its influence even faster, including its special voice in the US. 
Fourth, Poland has to ask itself what kind of role it wants to play within the EU. 
Poland is an important country within the Union. 
Properly considered, Poland’s existential interests, its geopolitical location, and its history, demand that it do everything to contribute as much as possible to a strong EU. 
Instead, the nationalistic government in Warsaw is bent on isolating itself within Europe. 
The Poles should ask themselves the following question: Would, Poland’s traditional security concern, Russia, be happy or sad if the Polish government had really carried out its threat and used its veto to block the Brussels agreement? 
The answer is clear: of course, the Russians would have rubbed their hands in jubilation and secretly celebrated the twin brothers at the head of the Polish state. 
Ukraine, on the other hand, whose cause in Europe the Poles ostensibly champion, would have been in serious difficulties in the wake of a Polish veto. 
It is not for nothing that Ukraine’s President Viktor Yushchenko tried, or so it is said, to make this clear to the Polish leadership in several telephone calls. 
The damage to German-Polish relations also goes beyond the spat between the two governments, and reaches deep into both German and Polish societies. 
It will not be easily repaired. 
This is important because a consistent European policy toward Russia – one of the key urgent challenges facing Europe – depends on close cooperation between Poland and Germany. 
As I said, it is too early to celebrate. 
The time for celebrations will come only after the new treaty is ratified. 
Indeed, the circumstances under which the Brussels compromise has been reached leave a bitter aftertaste. 
But still, last Friday the EU took a decisive step in the right direction. 

The EU Must Act in Darfur 
For four years, violence and terror have ruled in Darfur. 
After many futile efforts, the EU must get tough with the perpetrators. 
Darfur is a humanitarian catastrophe: more than 200,000 dead, thousands raped and tortured, and 2.6 million people displaced, owing to the Sudanese government’s war against its own people. 
Originally an anti-insurgency effort, the campaign quickly mutated into a killing and expulsion operation. 
Sudan’s government has been recruiting and paying the local “Janjaweed” militiamen, who have attacked hundreds of defenseless villages and towns, often in close co-ordination with the Sudanese air force. 
The consequences are devastating. 
Roughly a third of Darfur’s population has been forced from their homes and are now in displaced persons camps inside Sudan, where they remain subject to the Janjaweed terror, or in equally vulnerable refugee settlements in Chad. 
International humanitarian efforts to help those in Sudan are hampered by Sudanese government harassment and pointless bureaucratic hassles. 
Even if the aid arrives, the point, to quote one senior UN official, seems to be “keeping people alive with our humanitarian assistance until they are massacredampquot;. 
Darfur demands consistent and firm international action. 
We all bear responsibility to help the displaced return to their homes. 
In the last three years, the United Nations Security Council has passed ten resolutions requiring the Sudanese government to change course and fulfill its obligation to protect its own people. 
These include a demand from the Security Council to disarm the Janjaweed. 
Yet the Sudanese government never follows through on its repeated promises to do so. 
In November 2004, a peaceful solution was within reach, when the government and rebels signed a ceasefire and humanitarian agreement. 
For a short moment, there was reason to hope that peace was at hand. 
A Security Council resolution and international negotiation efforts had paved the way to end the 20-year war in southern Sudan – a breakthrough that in fact led to a deal signed by the government and southern rebels in January 2005. 
At that time, it appeared that a similar breakthrough in western Sudan would follow. 
But the worst was yet to come. 
After an apparent lull in aerial bombardments, the planes soon returned, and the Janjaweed resumed their campaign of murder and destruction. 
The next round of peace negotiations, which opened in December 2004, stalled because the government launched a military offensive just as they started, in defiance of the ceasefire. 
This behavior is symptomatic of the lack of respect Sudan’s government has shown towards its obligations. 
A Security Council resolution last August mandated a 20,300-strong UN peacekeeping force to replace the small and overwhelmed African Union mission currently on the ground. 
Not surprisingly, the government in Khartoum rejected the idea. 
Subsequent negotiations led to a compromise agreement in November for a hybrid AU-UN force that would deploy in three stages. 
Talks continue to this day, but despite the occasional newspaper headline announcing a deal, the Sudanese government has been using every opportunity to delay or to attempt to add conditions to the force’s mandate. 
The result is, the second phase of the deployment has still not taken place even though it was accepted by Khartoum six months ago. 
The heart of the matter is this: the Sudanese government is either unable or unwilling to protect its own citizens from mass violence. 
In accordance with the “responsibility to protect” doctrine, adopted unanimously by heads of state and government at the UN World Summit in September 2005, if a state fails to meet this primary obligation, responsibility shifts to the international community, which may exercise various measures, including, if absolutely necessary, military force. 
But military intervention in Darfur without the Sudanese government’s consent is not an option today. 
Not only is there insufficient political will for an international force, but, more importantly, there are valid doubts about the feasibility and prospects for the success of such an operation. 
Even so, the international community still has options. 
Although it would be best if these options were adopted by the UN Security Council, the EU itself can and must act to increase the costs to the Sudanese government of its continued obstruction of aid deliveries and its delaying tactics on deployment of international peacekeepers. 
That is why it is so important that EU foreign ministers heed the European Parliament’s call for serious sanctions against the Sudanese government, whose key players were clearly identified by a UN Commission of Inquiry and Panel of Experts. 
The EU must freeze these individuals’ assets and impose an EU-wide travel ban on them. 
In addition, measures should target the Sudanese government where it hurts most: revenue and foreign investment inflows into Sudan’s petroleum sector, and supply of goods and services to that and associated sectors. 
The EU and its member states’ governments must enact legislation to ban companies based in their countries from direct involvement in Sudan's petroleum sector and in industries related to it. 
Moreover, an investigation into the offshore accounts of Sudanese businesses affiliated with the National Congress Party, the ruling majority party in Khartoum, should be launched, paving the way for sanctions against the regime’s commercial entities, which form the main conduit for financing its Janjaweed proxies in Darfur. 
Such targeted sanctions would affect the power and privileges of the key players in this crisis. 
By imposing them, Europe would finally take a real step towards stopping the killing in Darfur and extending meaningful help to its people. 

The EU Must Start Negotiations with Turkey 
On December 17 of last year, the European Council decided to open accession negotiations with Turkey this October. 
Two conditions were put to the Turkish government: a comprehensive legal reform aimed at reinforcing the rule of law and human rights, and approval of the Adaptation Protocol of the Ankara Agreement, which extends the customs union with the EU to all new member states, including the Republic of Cyprus. 
Turkey has met these conditions: the legal reform entered into force on June 1, and the Protocol was signed on July 29. 
A formal recognition by Turkey of the Republic of Cyprus, including its extension to the Northern part of the island, was not requested as a precondition for starting accession talks. 
This is a complex matter related to the efforts by UN Secretary General Kofi Annan to negotiate a comprehensive settlement leading to reunification of the island. 
Last year, both Turkey and the Turkish Cypriot community accepted the Secretary General’s proposals, which were, however, rejected by the Greek Cypriot side. 
There is every reason to expect Annan to resume his good offices soon and to bring the question to a positive conclusion well before Turkey’s possible entry into the EU around 2015. 
The Cyprus issue should therefore not be construed as an obstacle to the start of negotiations. 
The same is true of the reported intention of some EU governments to have the so-called “Privileged Partnership” concept explicitly included in the negotiating framework as an alternative to full membership. 
This proposal was discussed at last December’s European Council meeting and rejected, resulting in a reference to “open-ended negotiations” in the Council’s conclusions. 
That wording – never used in previous enlargement rounds – may have ruffled Turkey’s feathers, but it was finally accepted as the type of constructive ambiguity that is so often used in international diplomacy. 
It is nonetheless obvious from the very nature of accession negotiations that full membership must be the goal. 
Without that prospect, no candidate country would go through the painful process of adopting the tens of thousands of rules and regulations contained in the Acquis Communautaire (the body of EU law). 
To ensure that it does, is, after all, the main purpose of accession talks. 
Moreover, it is difficult to imagine what advantages could be offered to Turkey in the framework of a “Privileged Partnership” beyond its long-time status as an Associate Member of the EU. 
The Customs Union concluded ten years ago allows free trade for all but agricultural goods. 
Turkey is invited to Council meetings, it can participate in various EU programs and in manifestations of the European Common Foreign Policy, and, as a member of NATO, it is a partner in EU-NATO security cooperation. 
Finally, like all candidate countries, Turkey also receives financial and technical assistance in support of ongoing reform programs. 
Short of full membership, there is hardly room for added value in Turkey’s relationship with the EU. 
Enlargement Commissioner Olli Rehn has spelt it out with the necessary clarity: “If we stick to what we have ourselves decided at the highest political level in the European Council, as we should, I am reasonably confident that the negotiations shall start on the October 3.” 
This statement is to the credit of the European Commission, and there is not much to be added, except to emphasize that it is up to EU governments to treat Turkey with the fairness that all candidate countries deserve. 
To renege on formal decisions and commitments, or to add last-minute obstacles, would make a mockery of the Union’s credibility. 
Negotiations therefore must begin on October 3. 

The EU or the Christmas Pig 
"We must see to it that the pig--this animal that we, the Romanian nation, cannot afford to live without--is not wiped out." So a socialist deputy in Romania's Parliament exclaimed in panic a few weeks ago. 
"Within a year, 4.5 million pigs will be killed, but chickens will still enter the European Union before we do," chirped the president of Romania's Pig Breeders Association. 
Across Romania, fear is growing of a looming porcine genocide as the country prepares to negotiate its way into the EU. 
For the fact is that most pigs are bred and slaughtered here in a way that fails to meet EU standards, and no one is prepared to invest the money needed to get our piggeries up to Union levels. 
But will our beloved pig be permitted to put the supreme national interest in jeopardy? 
Romania is due to end its membership negotiations with the EU in 2004. 
Of course, we have lots of problems that the EU wants to see resolved: unfettered corruption, poor public administration, a justice system that makes a mockery of impartiality, and an economy which, despite some progress, has not yet been declared a "functioning market" by the European Commission. 
But it is agriculture, and in particular the Romanian pig, that is causing the severest headaches in Bucharest and in Brussels. 
Although Romania is just a few hundred miles away from the EU countries, it is a few centuries away in terms of agriculture. 
Some 40% of our population lives in rural areas, with 80% of the land divided into small lots. 
For centuries Romanian farmers have bred a few pigs each year, out of which the biggest are slaughtered just before Christmas, on St. Ignatius' Day. 
It is an almost pagan sacrifice: in the farm's backyard the animal is held down by a pair of strong men, the pig squealing as much as it can. Suddenly, a third man cuts the pig's throat, a fountain of blood sprinkling everyone. 
Then the carcass is singed on a fire and cut into pieces according to the different cuts of meat. 
People dance around, drink heavily, and prepare for a monstrous feast. 
Unfortunately, in terms of the European Commission, nothing is less "European" than this porcine hecatomb. 
In fact, EU regulations demand that pigs be raised and killed as humanely as possible, in order to make them suffer as little as possible. 
Pigs should be vaccinated, given anesthesia, provided even with the chance of a merciful euthanasia. 
Better yet, the pig should die in his sleep, finished off peacefully by trained executioners. 
Everything should be supervised by vets. 
Otherwise, you are infringing EU regulations and are guilty of exercising "unnecessary cruelty" upon animals. 
Either Romania, as an EU applicant, complies with these regulations or it must abandon pig breeding on a familiar scale and, as a consequence, increase the share of pork importation. 
Unless breeders adapt to the new, coming European era, Romanian pigs, at least those bred on thousands and thousands of small farms scattered across the countryside, seem doomed. 
The problem is that, in Romania, we have a hard enough time comprehending and protecting human rights, let alone animal rights. 
Veterinarians are few, but our human health services are in ruin as well. 
Indeed, most people cannot afford proper medication, and hospitals suffer from gross under-funding. 
So it seems to most Romanians not only preposterous, but immoral , for the EU to care so much for a pig's last moments of life when it seems to care so little for the everyday life of ordinary Romanians. 
Moreover, how is our government supposed to get millions of farmers to give up their barbaric ancestral habit? 
By trying to coerce them with fines? 
In America, I am told, a slang word for the police is "pigs." 
Are we to have pig police here? 
Our ruling social democratic party has its stronghold in Romania's rural areas. 
If Romania's peasants come to believe that the EU insists that they hug their pigs, not butcher them with knives, their fidelity towards the social democrats will wither. 
Those lost votes, however, won't go to responsible center-right parties, but to the fiercely nationalistic, anti-European, Greater Romania Party, perhaps the closest thing Europe now has to a fascist party. 
This is a nightmare that both European and mainstream Romanian politicians want to avoid. 
Fortunately, there seems to be a way to conciliate both EU bureaucrats and even our most diehard peasants. 
Our ugly pre-Christmas ritual butchery can be christened a "traditional, folk custom," a sacred rite deeply embedded in the fabric of Romanian nationhood. 
The proximity of Christmas will provide the ritual with a religious patina. 
Because national, religious, and folk traditions are supposed to be protected across the Union, our unsavory habit of slaughtering squealing pigs can be preserved even as Romania enters the EU. 
The sad fate of our porcine population will not be frowned upon as primitive and anti-European, but will be condoned as a venerable national tradition, preserved in accordance with the best European standards. 
So our Romanian pig may survive after all--at least until the next St. Ignatius' Day--thanks to multi-culturalism. 
But perhaps before we Romanians are asked to establish animal rights, we should told to pay more attention to ensuring respect for our own. 

A Green European Budget 
PARIS – However predictable the difficult negotiations that accompany European politics may seem to be, in the end they seldom fail to surprise. 
A crucial European Union summit aimed at securing a deal on the EU budget for 2014-2020, the so-called multi-annual financial framework (MFF), will take place later this week, and the mood music surrounding it has been intense, to say the least. 
Before even a word has been spoken, Europeans are being told that the negotiations in Brussels will be “bad-tempered,” with vetoes by individual member states looming large. 
Unfortunately, such talk could well become a self-fulfilling prophecy. 
Consider this: A group of major companies based in various EU countries – the likes of Tesco, Shell, Barilla, and Philips – are insisting that whatever its final size, the MFF deal should commit to a proposed minimum of 20% of spending in 2014-2020 on green and low-carbon growth. 
These are the same companies that Europe’s national governments court and listen to on a daily basis. 
But, when it comes to the MFF, Europe’s national leaders appear not to be listening closely. 
Nor do they say much about the obvious dividends that such spending could provide, from the United Kingdom in the west to the EU’s newest candidate country, Croatia, in the east. 
Europe’s 500 million citizens may not be surprised by what is playing out in the corridors of power, but they ought to find it very disturbing. 
The issue is not only what could be lost in the race to the bottom in which many EU national governments are now engaging, but also the manipulative anti-EU sentiment coming from many quarters of the European press, which appears intent on pushing various national leaders into another budget showdown. 
In the EU’s western, net-contributor states, the MFF debate remains narrowly focused on how much money can be cut from the European Commission’s proposed €1.033 trillion ($1.3 trillion) budget for 2014-2020. 
Next to nothing, though, is being said about the Commission’s more important, and more integral, proposal: the 20% spending commitment for projects and initiatives that can stimulate resource-efficient business, protect Europe’s collective, boundary-less environment, and ensure a better future for families across the continent. 
The dividends promised by a “green” MFF (which recently received the support of the European Parliament) are at least threefold: a higher share of jobs in one of the world’s fastest-growing economic sectors; lower energy bills for households throughout Europe; and help in achieving the reductions in greenhouse-gas emissions to which all EU states have agreed as part of their “Europe 2020” commitments. 
The green potential within EU spending has already taken root. 
In France, for example, social housing organizations have rapidly deployed €320 million of EU money in the last few years to improve energy efficiency in existing housing stock. 
This European finance triggered additional investment of €2.2 billion, created 15,000 local jobs, and has resulted in savings of €98 per month per household, thanks to a 40% average decrease in heating costs. 
Recently, Michael Heseltine, a former minister in Margaret Thatcher’s government, stressed the importance of wind energy for deprived regions of the United Kingdom, such as the northeast of England. 
And yet the penny has not dropped in London that focusing European investment funds accordingly would create opportunities to build stronger businesses and increase competitiveness in the technologies of the future – and to share these gains within and beyond the EU. 
Instead, in the UK and elsewhere, the predictable MFF chest-thumping that is now underway threatens to dispatch this kind of opportunity to the bin beneath the negotiating table. 
Europe has come a long way since 1951 and the creation of the European Coal and Steel Community, the forerunner of the EU. 
But we are now in the process of constructing the EU economy anew, striving to overcome the economic crisis, and creating a more sustainable, globally competitive, and resilient European economy – an economy that can be green as well as productive. 
The EU’s heads of government need to understand the bigger picture as they prepare for this week’s MFF summit. 
Europe’s common good – indeed, its most promising path to a prosperous future – is at stake. 

The EU’s Appeasement of Russia 
Once again, Ukraine is in the eye of a political hurricane. 
Faced with a possible constitutional coup that would have eviscerated his powers, President Viktor Yushchenko has dissolved Ukraine’s parliament and called for new elections. 
His political opponent – Prime Minister Viktor Yanukovych – is violently opposing that move, fueling a bitter constitutional struggle that ultimately will settle Ukraine’s future orientation. 
Will Ukraine continue its turn towards the West, as Yushchenko and his Orange Revolution ally Yuliya Tymoshenko want, or return to Russia’s strategic embrace, as Yanukovych and his allies want? 
It was Russia’s attempt, only two and a half years ago, to install Yanukovych as President via rampant electoral fraud that touched off the “Orange Revolution.” 
After months of struggle, Yushchenko rightfully claimed the presidency. 
But the revolution petered out, former partners were soon at loggerheads, giving Yanukovych and his allies a chance to return to power. 
Throughout this difficult period, the European Union has failed Ukraine, bluntly declaring that it should not hold any hope of future membership and justifying this stance by citing its internal problems – the stranded Constitutional Treaty – and growing public sentiment against further enlargement. 
But political leaders in the EU are merely succumbing to ill-informed fears. 
Rather than informing their populations about the economic and political benefits of the recent enlargements, most are playing on voters’ “enlargement fatigue.” 
This has denied Ukraine the lighthouse that helped guide other post-communist states – most recently Bulgaria and Romania – towards Western-style democracy and rule of law. 
As a result, there is now an obvious risk of a new internal split in the country. 
Even current EU members feel abandoned by the Union: there is a growing sense in the three Baltic Countries, Poland, and Hungary that the EU is allowing them to be squeezed by Russia, particularly on energy policy. 
Of course, EU membership gives these countries a greater sense of security. 
But the EU’s old members have brought on an enormous sense of disappointment by ignoring its new members’ security concerns in favor of preserving their own ties with Russia, particularly in cutting energy deals that they think will assure them of supplies. 
Other post-Soviet countries are also experiencing internal pressure to re-orient themselves towards Russia and feel abandoned by the EU. 
Georgia and Moldova both face secessionist-minded, Russian-dominated enclaves that are to a large extent controlled from Moscow – Abkhasia and South Ossetia in Georgia and Transdniestria in Moldova. 
Both countries suffer from Russian trade embargoes on their most important export products – wines and foodstuffs. 
Moldova appears set to cave in to Russia’s pressure, partly to attract desperately needed inward investment at a time when little aid has come from the West, particularly the EU. 
Indeed, like Ukraine, Moldova and Georgia have been left without any clear signals from the EU that they will have the prospect of membership at some point in the future. 
Russia is also flexing its muscles over the question of Kosovo’s future, raising objections in the United Nations Security Council to the UN’s plan for independence and openly supporting Serbia’s quest to maintain its supremacy over Kosovo. 
Russia argues that independence for Kosovo may “create a precedent” – a veiled threat to mobilize its secessionist proxies not only in Georgia and Moldova, but also in Ukraine’s Crimea region. 
Moreover, Russia is hinting at the many worries within EU countries about potential demands for self-rule, by, for example, the Basques in Spain, the Turks in northern Cyprus, and the large Hungarian minorities in Romania and Slovakia. 
All of these countries are now acting with great hesitation in the debate about Kosovo, clearly influenced by Russian warnings about “setting a precedent.” 
But this argument overlooks the fundamental difference between Kosovo and the situation in all other areas with large national minorities. 
Whereas Kosovo was part of a federation, the former Republic of Yugoslavia, the EU’s other potential trouble spots are all parts of unitary nation states. 
Thus, independence for Kosovo in no way creates a “precedent.” 
Of course, Russia knows this. 
But, by using its energy resources and recovered confidence to fuel instability and discord, it is seeking to expand its sphere of interest – an outcome that can be averted only by a unanimous and determined EU response. 
Unfortunately, instead of reaching out to endangered nations like Ukraine, the EU beacon remains dark and its leaders silent. 

The EU's Catch-22 
COPENHAGEN: Worrying signs are mounting that the European Union’s enlargement process is losing steam. 
Bringing into the EU applicant countries from Central and Eastern Europe, as well from the Baltic region, however, remains the single most important item on the European agenda in our time. 
It would be a mistake of historic proportions to delay it. 
For stalling could pose a serious threat to European stability far out of proportion to enlargement’s costs. 
Enlargement will undoubtedly pose many practical problems. 
But the magnitude of the economic costs should not be exaggerated: after all, the aggregate GNP of the 10 applicant countries from the former communist bloc is smaller than the GNP of Holland! 
Structural support to new members from current EU members, indeed, is expected to be less than 4% of Dutch GNP. 
Transfers of wealth on the scale of what took place between West and East Germany won’t happen. 
Indeed, enlargement’s total cost will be less than the annual increase in the EU Commission’s own resources which "normal" economic growth provides. 
Costs, of course, are not the only difficulty. 
One additional problem concerns the establishment within applicant countries of administrative and democratic structures compatible to those that exist in today’s EU. 
But if present EU members erect conditions on membership that are too harsh for newcomers to meet, they run the risk of creating a "Catch-22" situation. 
In his novel of that title Joseph Heller described the situation faced by some fighter pilots in WWII: medics can ground anyone who is crazy, provided that the pilot requests to be grounded. 
Because fear in the face of danger is a normal human reaction, however, anyone who requests grounding cannot be crazy and so cannot be grounded. 
That’s "Catch-22". 
The same might be said about joining the EU: if you can only become a member by living up to the standards of the Union, you will never become a member, since you need membership to entrench those standards. 
Keep in mind that European integration is a political endeavour. 
Economics are the means, politics the purpose. 
This was made clear in the preamble to the Treaty of Rome more than 40 years ago: "...pooling their resources to preserve and strengthen peace and liberty....". 
The six founding members - Germany, France, Italy, and the Benelux-countries - waged war against each other several times during the first half of the 20th century. 
Nowadays, however, war between members of the EU is not only unlikely and unbelievable, but also impossible. 
This proves the point: European integration is first and foremost an instrument to preserve and strengthen peace and liberty. 
This was the guiding principle behind past enlargements to include democracies that were, at the time of their admission, new and fragile: first Greece, then Spain and Portugal. 
It is in full conformity with its original vision that the Union now be enlarged to include the new democracies of Eastern and Central Europe and the Baltics. 
This process must not be delayed by lack of perspective. 
One corner of Europe is in particular need of prompt action: the Baltic Sea Region. 
Estonia, Latvia and Lithuania cannot join NATO for the foreseeable future. 
Therefore it is necessary to bring them into the EU as soon as possible in order to make it absolutely clear to their big neighbour, Russia, that in today’s Europe Aspheres of interest” no longer exist; that the Baltic three are equal members of the European family. 
When you discuss this issue with our American allies, they fail to understand why an EU of 350 million people hesitates to absorb less than 8 million people in order to mend historic fences. 
Bringing in Lithuania, Latvia, and Estonia would strengthen stability in the Baltic area, because the rules of the game would be crystal clear to everyone, both with regard to security and to human and minority rights. 
There would be no room left for adventures on either side. 
Alas, as always, the Devil is in the details: the EU’s institutions were originally designed for 6 members, but within a decade or two the EU will probably have 25-30 (perhaps more) member states. 
So reform is vital. 
But calls to reform can also be used as delaying tactics. 
When I listen to the grand, visionary speeches about Europe’s future put forward recently by some EU political leaders - President Chirac’s recent speech to the Bundestag being the most otherworldly - I am struck by the thought that these visions are worthless if designed to cover up a lack of enthusiasm to face the challenges of enlargement. 
Now is not the time to discuss far-reaching visions, nor to start constructing "inner circles" in the Union. 
Now is the time to give concrete direction and pledges regarding enlargement. 
For Europe’s task is to maintain and strengthen structures of cooperation that retain the advantages of diversity and independence without reviving the old curse of the European nation state: xenophobia, bloodshed, and war. 
A stronger, wider EU must be our priority. 

The EU’s Global Mission 
In some quarters, pessimism, sad to say, dominated the recent celebrations marking the European Union’s 50th birthday. 
Unease about the EU’s future is, of course, understandable, especially given the uncertainty surrounding efforts to revive the Constitutional Treaty. But the European project has been an enormous success, not only for Europe, but also for the world. 
Europeans should not be dismayed by comparisons of GDP growth in Europe and, say, the United States. 
Of course, Europe faces great challenges in perfecting its economic union, including the need to reduce unemployment and boost the economy’s dynamism. 
But, while GDP per capita has been rising in the US, most Americans are worse off today than they were five years ago. 
An economy that, year after year, leaves most of its citizens worse off is not a success. 
More importantly, the EU’s success should not be measured only by particular pieces of legislation and regulation, or even in the prosperity that economic integration has brought. 
After all, the driving motivation of the EU’s founders was long-lasting peace. 
Economic integration, it was hoped, would lead to greater understanding, underpinned by the myriad interactions that inevitably flow from commerce. Increased interdependence would make conflict unthinkable. 
The EU has realized that dream. 
Nowhere in the world do neighbors live together more peacefully, and people move more freely and with greater security, than in Europe, owing in part to a new European identity that is not bound to national citizenship. 
This stands as an example that the world should emulate – one of shared rights and responsibilities, including the obligation to help the less fortunate. 
Here, too, Europe has led the way, providing more assistance to developing countries than anyone else (and at a markedly higher fraction of its GDP than the US). 
The world has faced a difficult period during the past six years. 
The commitment to democratic multilateralism has been challenged, and rights guaranteed under international conventions, such as the Convention Against Torture, have been abrogated. 
Many lessons have emerged, including the dangers of hubris and the limits of military power, and the need for a multi-polar world. 
Europe, with more people than any nation except China and India, and the largest GDP in the world, must become one of the central pillars of such a world by projecting what has come to be called “soft power” – the power and influence of ideas and example. 
Indeed, Europe’s success is due in part to its promotion of a set of values that, while quintessentially European, are at the same time global. 
The most fundamental of these values is democracy, understood to entail not merely periodic elections, but also active and meaningful participation in decision making, which requires an engaged civil society, strong freedom of information norms, and a vibrant and diversified media that are not controlled by the state or a few oligarchs. 
The second value is social justice. 
An economic and political system is to be judged by the extent to which individuals are able to flourish and realize their potential. 
As individuals, we are part of an ever-widening circle of communities, and we can realize our potential only if we live in harmony with each other. 
This, in turn, requires a sense of responsibility and solidarity. 
The EU demonstrated that sense powerfully by its assistance to Europe’s post-Communist countries. 
The transition from Communism to the market has not been easy, but Europe’s unprecedented generosity has paid off: the countries that have joined the EU have outperformed all the others, and not just because of access to Europe’s markets. 
Even more important was the institutional infrastructure, including the binding commitment to democracy and the vast array of laws and regulations that we too often take for granted. 
Europe has succeeded in part because it recognizes that the rights of individuals are inalienable and universal, and because it created institutions to protect those rights. 
America, by contrast, has witnessed a massive assault on those rights, including that of habeas corpus – the right to challenge one’s detention before an independent judge. 
Fine distinctions are made, for example, between the rights of citizens and non-citizens. 
Today, only Europe can speak with credibility on the subject of universal human rights. 
For the sake of all of us, Europe must continue to speak out – even more forcibly than it has in the past. 
Likewise, while the European project sought to bring about the “harmony” of people living together in peace, we also must live in harmony with our environment – the scarcest of all of our resources. 
In this area, too, Europe has taken the lead, especially concerning global warming, showing that petty selfishness can be put aside to achieve a common good. 
In today’s world, too, there is much that is not working well. 
While economic integration helped achieve a broader set of goals in Europe, elsewhere, economic globalization has contributed to widening the divide between rich and poor within countries and between rich and poor countries. 
Another world is possible. 
But it is up to Europe to take the lead in achieving it. 

The EU’s Hour, or Europe’s Darkest Hour? 
COPENHAGEN – So far, Europe’s leaders seem to be mostly preoccupied with finding national answers to the global economic crisis. 
In particular, the leaders of “Old Europe” have been reluctant to open up their coffers for the countries of “New Europe.” 
If this attitude prevails, there is a grave risk that the European Project will become paralyzed. 
This will not only delay the restoration of economic growth, but will also have dire political consequences. 
The European Union’s new members from eastern and central Europe have been hit much harder by the crisis than the old member states; they are also much less prepared to confront the situation psychologically and socially. 
Many were gravely disappointed when European leaders earlier this month rejected pleas to establish a special support program for them. 
Of course, German Chancellor Angela Merkel was right to point out that each country should be dealt with according to its situation. 
But she and her colleagues should have voiced clearer and more emphatic support for the new member states. 
Emotions and expectations ran high when the new democracies from the former East Bloc joined the EU only five years ago. 
Until the crisis hit last year, the enlargement had proven to be a profitable business for Old Europe: high growth rates in most of New Europe injected energy into Old Europe’s sagging economies, much to the surprise of those who had predicted that enlargement would become an economic millstone around the neck of the established member states. 
But then the financial system crumbled growth rates fell like a ton of bricks. 
The new democracies were shaken as public protests erupted in some of their capitals, and some governments have fallen. 
Expectations and confidence in democracy, the market economy, and the larger European project have suffered as well. 
If this is allowed to continue, we might end up opening a Pandora’s Box, setting free the nationalistic and xenophobic ghosts of the past. 
Some of these democracies are very young and fragile. 
The optimism created by their peaceful return to a free and democratic Europe has been shattered to a degree that none of us could have foreseen. 
This is where political leadership is needed. 
The leaders of the well established European democracies must explain to their own voters that enlargement has greatly benefited them, and that it will also be to their benefit to share the responsibilities and costs of steering the hardest-hit countries through the crisis. 
There were always exaggerated claims that bringing in the new members would be a costly affair, just as petty and narrow prejudices blemished the willingness to open up Europe’s borders for “Polish plumbers.” 
Any sober appraisal of what has actually happened since expansion would put the problems in perspective: when enlargement was agreed, the combined size of the ten new members’ economies roughly equaled that of the Netherlands. 
Today, after five years of much stronger growth among the newcomers, their combined GNP is somewhat smaller than that of the Benelux countries. 
Thus, the sheer magnitude of the task of reviving these economies is not overwhelming. 
But the political consequences of failure to deliver a message of genuine European solidarity will be. 
This is, indeed, “the hour of Europe.” 
I remember when this phrase was last used: in 1991, when the chairman of the European Council of Ministers visited what was still Yugoslavia and eagerly accepted the empty promises of Slobodan Milosevic and his clique that they were ready to accept European pleas for a peaceful resolution to the conflicts there. 
The chairman stated: “This is the hour of Europe, not the hour of the Americans.” 
As we all are embarrassingly aware, it was the Americans who had to produce the intervention that finally stopped the bloodshed in the Balkans. 
But this time we Europeans cannot expect others to step in. 
Turning to the International Monetary Fund or others when it comes to pulling our chestnuts out of the fire will not bring us the needed confidence in the European project. 
So this must be the hour of Europe. 
And that means that a clear message should be sent to those who are becoming doubtful about the EU’s worth: We are in this together. 
We will find common European solutions. 
Solidarity among members is not just something we talk about when the future looks bright and rosy. 

The EU's Istanbul Train 
The Islamic and non-Islamic worlds now seem locked in a vicious circle of hatred, one that is convincing many moderates on both sides that the cultural and political divide is too large to bridge. 
This fatalistic vision is tragic and could become a self-fulfilling nightmare. 
In this context, Europe's dickering over Turkey's possible membership in the European Union takes on a special significance for the world. 
Turkey's membership will likely be discussed at December's Copenhagen summit of EU leaders. 
Since the 1960s, there has been loose talk in Western Europe that Turkey might one day become a member of the European Community, now the EU. 
But no practical steps towards membership took place as Europe regularly - and rightly - pointed out that Turkey had failed to fulfill many conditions for membership, especially in regard to respect for human rights and the rule of law. 
Yet lurking beneath those specific issues is a more general worry: whether Europe would accept Turkey, an Islamic society, into the European fold under any conditions. 
Anti-Islamic feelings run deep across Europe, reflecting 1,000 years of rivalry, war, and cultural clashes. 
Many Turks fear that their country's exclusion from the EU has nothing to do with specific policies or institutions, but rather with Europe's permanent hostility to Islamic societies. 
With eastward enlargement of the EU now poised to happen, it is no surprise that deeply felt and dangerous notions are rising to the surface. 
Former French President Valery Giscard d'Estaing, currently the President of the Convention on the Future of Europe, recently declared that "Turkey is not a European country," and that Turkey's admission to the EU would be "the end of Europe." 
Advocates of Turkey's admission, he continued, are "the adversaries of the European Union." 
As both an admirer of the EU and a supporter of Turkey's accession to the EU, I believe Giscard wrong in his crude characterization. 
Yet I know that he reflects a deep-seated viewpoint, though one far from claiming a majority in Europe. 
Several years ago, I heard another leading public figure in Europe explain in a public lecture that Europe is a Christian society and therefore can never admit an Islamic member. 
Giscard's outburst was provocative for another reason. 
Turkey has just demonstrated the vibrancy of its democratic credentials by holding national elections despite a deep economic crisis. 
The winner was the Justice and Development Party. 
The new Prime Minister, Abdullah Gul, immediately declared gaining accession to Europe a priority. 
"Our aim is to show the world that a country which has a Muslim population can also be democratic, transparent, modern, and cooperative with the world." 
To now rule out Turkish membership in the EU would be needlessly provocative. 
The founder of the modern Turkish state, "taturk", accomplished an enormous amount three-quarters of a century ago to bring Turkish political, cultural, and economic institutions into line with those of Europe. 
After World War II, Turkey was a recipient of Marshall Plan aid, joined the Council of Europe in 1949, joined NATO in 1952, became an associate member of the European Union in 1964, applied for membership in the European Community in 1987, and completed a customs union with Europe in 1995. 
So its quest for EU membership has deep roots. 
If Europe conducts serious negotiations with Turkey over eventual accession, the results will benefit both parties and also the wider world. 
On the economic front, the move towards membership would force Turkey to continue to upgrade its institutions and to enhance the rule of law, thus adding long-term institutional stability to Turkey's political institutions, which will in turn help stabilize North Africa and the Middle East. 
Each accession to the EU over the past quarter century, such as Spain and Portugal's drive before 1986, and more recently the efforts of the Central European postcommunist candidates, has spurred institutional modernization and contributed to stability and moderation in domestic politics. 
The "prize" of European membership has helped to forge political consensus within candidate countries, and the same would happen with Turkey. 
By spurring this institutional reform, moreover, economic prospects also brighten, not least by Turkey's ability to attract larger flows of foreign direct investment. 
On the political front, the worldwide demonstration effect of Turkey's membership in the EU would have huge consequences. 
The claims of the Islamic fundamentalists - that the West is anti-Islamic - would be proven wrong. 
Turkey itself could serve as a stronger bridge to the unstable Turkic societies of Central Asia, from Azerbaijan to Kyrgyzstan, countries now at risk of destabilization from the war on terrorism and struggles over oil and other natural resources. 
Fortunately, when Giscard voiced his dangerous sentiments, many in the European Commission and throughout Europe declared that the former French President spoke only for himself. 
Now the European Union must make that point more forcefully by demonstrating its good faith in rising to the historic challenge of negotiating Turkey's membership in the EU. 

The EU’s Kosovo Catalyst 
Kosovo’s declaration of independence has put stability in the Western Balkans back on Europe’s agenda. 
Unless the European Union acts quickly, the whole region could slide backwards, with dire social, economic, and security consequences. 
The EU needs a comprehensive regional approach, focusing on the remaining steps that would lead each country towards membership. 
The Western Balkans − a term used only since 1999 − comprises Albania, Bosnia and Herzegovina, Croatia, Macedonia (FYROM), Montenegro, Serbia, and Kosovo, with a combined population of roughly 22 million. 
Economic developments in the region are promising, with almost all its economies posting high growth, fueled by increasing industrial output and exports. 
Inward investment is steadily rising, as business seems to believe that the remaining political and security challenges – the possible negative effects of post-independence Kosovo and Bosnia’s malaise – will be overcome sooner rather than later. 
Much work has already been done to re-establish and improve regional relations. 
The EU-led Stability Pact for South Eastern Europe has since 1999 successfully stimulated regional cross-border cooperation, for the first time since the breakdown of Yugoslavia. 
Energy, transport infrastructure – roads, railways, and waterways – and crime prevention have all benefited. 
The Stability Pact has now been transferred to local control, re-emerging as the Sarajevo-based Regional Cooperation Council, ready to develop regional and multilateral standards for its members. 
The recently revived Central European Free Trade Agreement (CEFTA) is meant to be the main regional engine for trade and business generally, and will adhere both to WTO rules and the parties’ obligations towards the EU. 
Similarly, the South-East European Cooperation Process is one of the relatively new regional organizations that contribute to candidate and potential candidate countries’ preparations for EU membership, providing the first genuine region-wide policy forum where both EU members and candidates participate. 
But these bodies must not be seen as substitutes for the far more comprehensive accession process, which only the EU itself can initiate. 
And yet, despite the region’s favorable prospects and relatively small size, the Union has been slow in doing so. 
Certainly, the pace of candidate countries’ approach to the Union depends on the speed of their reforms. 
And Europe, with the vital support of the United States, worked hard to stop the carnage of the 1990’s and subsequently to help rebuild the Balkan countries. 
But the EU has so far failed to prepare the Western Balkans for accession, in line with its leaders’ promise at their Thessaloniki summit in 2003 to admit the Western Balkan states when they meet the Union’s standards. 
That promise was not a matter of charity; the Balkans would add value to the EU. 
To be sure, the EU’s lengthy internal crisis over the proposed constitution was a major distraction, and damaged the Union’s reputation in the Balkans. 
Let us hope that the new Reform Treaty will help to reassure the critics and pave the way for a new – and more robust – phase of integration. 
If not, one would have to ask what had happened to the European spirit of the 1970’s and 1980’s, when countries such as Greece, Portugal, and Spain, which had just emerged from dictatorship and civil unrest, were welcomed into the European community of democratic states. 
Political decisions taken then were far more risky than those at hand in the Balkans, and the Greek and Iberian success stories demonstrate the wisdom of the courageous decisions taken at that time. 
What about today? 
The most recent EU members, Bulgaria and Romania, are both in the Balkans and both are examples of countries with special needs. 
While the EU at first took their accession negotiations a bit too casually, it subsequently decided to continue monitoring the two countries even after accession in order to ensure that they develop the effective administrative and judicial systems that are an obligation of membership. 
The EU must learn from this experience to develop an accession strategy for the Western Balkans, whose development has been delayed by a complex post-conflict transition process. 
Their special needs should be taken into account in any new EU approach, giving them hope while mitigating the fallout from Kosovo. 
It is in Europe’s interest as much as it is in the interest of the region to accelerate the integration process. 
A reinvigorated accession process would contribute to the EU’s consolidation, both territorially and politically, while strengthening its role in its wider neighborhood – the Mediterranean, the Middle East, and around the Black Sea. 

The EU’s Kyoto Shell Game 
RIGA – With each passing year, the impending crisis of global warming looms closer and closer. 
Time is running out for preventative action to be taken. 
The European Union’s “20-20-20” mantra aims to cut greenhouse gas (GHG) emissions by 20% relative to their level in 1990 and to increase the share of renewable resources to 20% by the year 2020. 
Is it really viable? 
The EU seemingly has a long-term record of championing action to prevent climate change. 
In 1994, the EU committed itself to the GHG reductions set forth by the Kyoto Protocol and ratified it in 2002. 
The EU-15 promised an 8% reduction in GHG emissions by 2010. 
Every the industrial nation that has not ratified the Kyoto protocol, first and foremost the United States, has been criticized for being “environmentally irresponsible.” 
But in the 15-year period between 1990 and 2005, the EU-15 managed to reduce GHG emissions by only 2%, and it is now obvious that the EU-15 will not fulfill its Kyoto commitment. Only five of the EU-15 countries are on track to meet their targets. 
The EU-15 could, under the best of circumstances, reduce its emissions by 4.6% by 2010. 
The failure of the EU-15 to meet its Kyoto target does not come as a big surprise. 
However, what is surprising is that the EU-15 have managed to market their failure as a success. 
When the 20-20-20 commitment was adopted in March 2007, the decision was much trumpeted and sold to the public as another success for EU climate change policy. 
Then EU Council President Angela Merkel called it “a breakthrough,” and European Commission President José Manuel Barroso proclaimed it “the most ambitious package ever.” 
However, when it came to sharing the burden of emissions reduction among EU member states, the European Commission proposed in January 2008 to change the base year from 1990 to 2005. 
This approach – endorsed as a basis for negotiation in the recent EU Council – amounted to allowing some member states not to fulfill their supposedly binding Kyoto burden-sharing targets. 
The reason was simple: The EU-12 – the new members admitted in 2004 – have been outperforming the EU-15. 
The new members have not agreed to a collective Kyoto goal, but as a group they are projected to reduce emissions relative to 1990 by around 20% by 2010. 
Latvia, Lithuania, and Estonia have, for example, managed to more than halve their 1990 emissions by 2005. This can partly be attributed to the collapse of heavily polluting Soviet-style industry. 
But, in changing the base year for absolute emission levels from 1990 to 2005, the Commission also seems to be trying to cover up the EU-15’s failure while pushing excessively large reduction targets onto the EU member states that are already the most environmentally efficient. 
By sacrificing the needs of growing economies that have met their goals to those of more established markets, the Commission is rewarding inefficiency and reducing the effectiveness of the European Union’s climate change policy and its common market. 
With the EU-15 comprising around 80% of all EU GHG emissions, these countries should be the ones taking a leading role in EU climate change policy. 

 

The EU's New Agenda for a Political Europe 
VIENNA/BUCHAREST: One month after the European Summit at Cologne the historic contours of that meeting are becoming visible. 
The Cologne summit marked a watershed not just because of a new policy declaration on security and defence. 
Rather, it seems to me, this was a summit which may prefigure the transformation of the whole of the European Union's agenda, in terms which are explicitly strategic and political. 
In their "Declaration on Strengthening the Common European Policy on Security and Defence", EU governments announced the setting up of new permanent security institutions in Brussels, including a Political-Military Committee of civil servants and a Military Committee of staff officers. 
Moreover, they appeared ready to turn words into actions, with the launching of a Stability Pact for the Balkan countries, as a first step towards admitting them to membership of the European Union. 
With the proposed Balkan Stability Pact, the governments have at last come close to defining the future outer limits of the European Union, to include not just the 10 countries of Central and Eastern Europe, but also eventually the countries of the west Balkans. 
This is a deeply significant event, for at least four reasons. 
First, the perspective of membership is being held out to the Balkan countries, not for economic reasons or because they have asked for it, but because it appears to be politically and strategically essential for the stability of Europe as a whole. 
This is the first time, indeed, that the initiative for enlargement has come from the European Union rather than as a request from a candidate country. 
Second, it is now no longer possible to think of the enlargement of the European Union just as a serial process which happens one case at a time. 
Membership negotiations will of course continue to take place country by country, and this process will be spread over many years; probably at least 20. 
But in planning terms, the member states must start to think, right away, of the implications of a Union of 30-35 members. 
Third, the governments must start thinking, therefore, not in terms of enlargement, but in terms of the restructuring of Europe. 
For it is obvious that a European Union with 30-35 members will not be the same European Union that we know today, but with 15-20 more members. 
Instead, it is likely to be radically different in many important ways. 
The vast disparity in political and economic development, between the most developed and the least developed countries, makes it virtually impossible that this will be a unitary Union, in which all member states implement all the same policies. 
Until now, it has been a cardinal dogma of the Union that all candidates for membership must accept the "acquis communautaire", as the inherited backlog of Community legislation is known. 
Yet the dogma has been seriously eroded by the determination of Britain and Denmark to opt out of the Single Currency. 
And this precedent of flexibility will inevitably be much more widespread in a mega-Union. 
Indeed, it is possible that the EU may have to think in terms of different kinds of members, or perhaps of different gradations of membership. 
But in any case, the EU must start thinking, right away, in terms of a Europe-wide system of integration, in which some candidates are already negotiating for membership, and others are not yet negotiating, but in which all are systematically connected to the European Union constellation. 
The fourth and most important consequence of this pan-European perspective, is that the European Union will have to re-think its function and purpose. 
And almost inevitably this will imply a re-thinking in political terms. 
For a very large and very diverse Union can only be held together by a much more explicit enunciation of its political, strategic and even constitutional rationale. 
At its beginnings in the 1950s, the declared purpose of the European Community was to prevent yet another war between France and Germany. 
Has this political purpose now been finally achieved? 
Or has it instead been transformed, as the Balkan Stability Pact implies, into the larger and more general purpose of preventing any wars between states inside the European system? 
The conclusion I draw, is that it is no longer enough for Europe's leaders to seek to make a success of the current wave of enlargement. 
The urgent priority is to launch a much larger strategic debate about the medium-term implications of the creation of a mega-Europe. 
It is obvious that a European Union of 35-odd member states must have a much more federal structure than the existing EU, if it is not to seize up from sheer weight of numbers. 
If, therefore, the governments of the member states are serious in their professed intention to move from a limited Europe of 15 to a mega-Europe of 35-odd, they must show how they propose to recommend this transformation to their voters and their citizens. 
Until now, member governments have largely evaded open debate on the pros and cons of federalism, because they were divided on the Union's long-term destination. 
But if the restructuring of Europe is to become possible, member governments will, for the first time, have to start talking seriously about an explicit re-adjustment of the political bargain in the European Union, in ways in which voters and citizens will believe that they are being compensated in political coin, for the erosion of the influence of the traditional political structures of the nation states. 
This compensation could take place either through the entrenching of Union guarantees for fundamental human rights, or through the negotiation of a new constitutional settlement in Europe, or both. 
But it will no longer be possible for governments to evade the question of Europe's political destiny. 

The EU's Next Priority After Enlargement? 
Le défi Americain 
The European Union summit that just ended in Copenhagen has more or less settled the EU's future frontiers. 
Ten new members, from Central Europe and the Mediterranean, will be admitted in 2004. 
Two other countries, Bulgaria and Romania, can aim for membership three years after that. 
Turkey, after much huffing and puffing, has had its status as an officially recognized candidate for membership reaffirmed, even if mighty doubts remain as to when it will actually join. 
Because this enlargement round is likely to be the last for a long time, if not forever, it is urgent for member states to think seriously about re-writing the EU treaties to deal with the new reality, in terms which will be workable for the long term. 
In particular, member states will need to think much more radically about developing a strong EU foreign and security policy, for two reasons. 
First, enlargement will take the EU right up to the frontier of Russia and the former Soviet Union; if Turkey joins, the EU will extend to the heart of the Middle East as well. 
Second, the international context in which the EU operates is being transformed by the strategic revolution underway in Washington. 
For the past 50 years, the EU was largely able to count on a benign partnership with the US in a multilateral context; that assumption no longer holds, even if we do not yet know the extent of America's new unilateralism. 
The problem is aggravated by the fact that the EU remains wholly unprepared for its "big bang" enlargement, even as it is set to begin. 
No one has any idea how to run a Union of 25 or more member states--not even in terms of basic logistics, starting with the geometric escalation in translation requirements. 
Or consider the laboriousness of conducting negotiations in a room with 25 national delegations, 10 of whom will be unfamiliar with the way the EU works. 
But the enlargement schedule agreed at Copenhagen will define the final limit of the Union. 
Norway may one day possibly seek to join, and that would pose no problems; it is conceivable that Switzerland may seek to join, and that too would not be a problem (except to the Swiss). 
Otherwise, it is difficult to imagine further EU enlargement. 
Aside from the poor, war-ravaged Balkan states--Albania, Bosnia, Croatia, Macedonia, and whatever Serbia and Montenegro end up deciding to call themselves--the only imaginable additional candidates, assuming that they are classified as "European," are Russia, Belarus and Ukraine. 
The key country here is Russia. 
Leaving aside all questions of human rights, democracy, and the rule of law, Russia is just too big, too Asiatic, too nuclear, and too much of a "great power," to be accommodated inside the EU. 
In theory, the advantage of this "big bang" enlargement is that it may concentrate minds on the need for a radical re-think of the decision-making processes in a bigger EU. 
Past enlargements have been in packets of one, two, or at most three new members. 
On these occasions existing members pretended that they need not fundamentally change the EU's institutional arrangements. 
With 10 new members joining, that pretence is no longer tenable. 
Fortunately, the ground is being prepared for reform by the Convention on the future of the Union being chaired by former French President Valéry Giscard d'Estaing, which should make its institutional proposals next spring. 
The trouble is that the steep escalation of enlargement coincides with a swing of opinion in a number of member countries in favor of a more intergovernmental EU, with more emphasis on cooperation between sovereign states and less attention to strengthening common EU institutions. 
This is most notable among big member states like Britain, France, and Spain, and one can see why; these are former "great powers," which fear being submerged in a mega-Europe. 
They hope to perpetuate their influence by asserting claims of national sovereignty. 
But this is the wrong solution to the problem of a bigger EU. 
Decision-making is already difficult in an EU with 15 members. 
It will become impossible in an EU of 25-30, unless the scope for majority voting is enlarged, and the veto power of individual states reduced. 
In short, a large EU will have to have much more the character of a federation than a small EU. 
This is not a question of ideology; it is a question of arithmetic. 
An analogous argument applies to the development of a more effective EU foreign policy. 
Russia is no longer perceived as a military threat. 
But if the US continues to downgrade its commitment to multilateralism, and instead determines to intervene militarily wherever it pleases, then the world will become a much more dangerous place. 
British Prime Minister Tony Blair says that Europe should be a partner, not a servant or a rival, of the US. 
That would certainly be progress on the European side compared with what we have now, and would require much closer foreign policy cooperation within Europe than Britain, France, or Germany seem prepared to consider. 
But it takes two to tango. 
Unless there is a fundamental change in the posture of the Bush administration, it seems doubtful that partnership will be on offer at all. 
In short, if we are living in a world in which the US acts solely in its own immediate national interests, the EU will be compelled to do likewise. 
No EU government, however, yet seems prepared to face this. 

The EU’s Small Leaders 
The defeat of the EU’s Constitutional Treaty in referendums in France and the Netherlands has, it seems, given rise to a new consensus that further enlargement of the Union should be slowed down, or even stopped. 
Advocates of this position see EU voters as terrified by the consequences of the May 2004 enlargement of the EU, when eight formerly communist states joined, and angry that they were not consulted about it. 
One set of fears concerns the labor market – the so-called “Polish plumber” question. 
In this interpretation, wages were eroded and jobs were lost because of the inflow of poorly qualified and cheap central Europeans. 
Particular cases, such as the elimination of German meat processing and packing jobs, or casual workers in France, were widely discussed as evidence of a new threat. 
But the “Polish plumber” is actually a weak bogeyman. 
First, there had already been a substantial flow of workers before enlargement. 
Poles had worked in some agricultural jobs – in sugar beet and wine harvesting – even during the communist era. 
With the fall of the Iron Curtain in 1989, labor flows, both legal and illegal, became much greater. 
Second, inflows of new workers bring substantial benefits as well as losses: in France, which suffers a shortage of some 6,000 plumbers, there must be plenty of households that would be pleased to find someone qualified to do repair work. 
Finally, the enlargements of the 1980’s, when Greece and then Spain and Portugal joined the then European Community, were not very disruptive. 
By themselves, the labor-market implications of poor countries’ accession to the EU simply are not very dislocating. 
What makes the debate so passionate in 2005 is a new fear that did not exist in the 1980’s: that the new members have a different social model, in which workers’ rights and the welfare state will be eroded. 
It is not so much the Polish plumber as it is the Slovak 19% flat tax that is the challenge to the older West European social model and welfare state. 
The EU’s large states feel particularly vulnerable, and it is there that the biggest shock to expectations has occurred. 
In the past, France and Germany were the motors of European integration. 
Now they are the countries that feel most threatened, and bookshops in both countries are full of alarmist and sensational accounts of national decline. 
Germany’s post-1949 Federal Republic was accustomed to being regarded as Europe’s great economic success story, but it never really recovered from the post-unification recession of the early 1990’s, with growth sluggish to non-existent. 
The consensual society that was at the center of the Federal Republic’s Wirtschaftswunder now looks inflexible, throwing up obstacles to change. 
Germany is surrounded by small states that all seem to be prospering more in today’s geo-political and geo-economic environment. 
These include not only the rapidly growing formerly communist countries to the east, Poland and the Czech Republic, but also Denmark, the Netherlands, Austria, and Switzerland, upon which Germans traditionally looked down. 
Now, as one mordant and widespread slogan puts it, Austria is “the better Germany.” 
Many French writers also express a vivid feeling of national decline, and many ordinary citizens believe that the rules of the global economy work against French national interests. 
In short, the large states still have illusions, encouraged by their political elites, about what the state can do to guide economic development. 
By contrast, the small European states – whether in Eastern or Western Europe – have been much more flexible in responding to the challenges of the modern globalized economy. 
Politics can offer all kinds of goods that voters find very attractive: tax breaks, subsidies, and social benefits. 
But small states are less likely to think that they can create the rules of the game, and accordingly they are more willing and able to make adjustments. 
They are more keenly aware that if they try to redistribute too much, they will simply drive away the factors of production: capital will flow elsewhere, and labor will likewise migrate. 
The same sort of logic applies to the large states: France and Germany are losing skilled labor at the same time as they are drawing in cheaper labor from Eastern Europe. 
The result is that they are feeling less French or German, creating greater political room, on both the left and the right, for nationalist ressentiment. 
In the earlier rounds of European integration, from the 1950’s to the 1980’s, the big states received very obvious gains, which their politicians could easily present as such to voters. 
But since 1989 – or since the Maastricht Treaty came into force in 1992 – the political dynamic has changed. 
It is now the EU’s smaller states that gain the most from wider and deeper European integration. 
If the large states are to obtain similar gains, and their politicians are to recover voters’ respect, their governments will have to accept the small-state logic and abandon the Great Power posturing of the past. 

The EU’s Turn in Afghanistan 
Time is running out for success in Afghanistan. 
The NATO summit in Riga of November 28-29 may be the last chance to pull that country back from the brink. 
NATO assumed responsibility for providing security for all of Afghanistan in October. 
While about 8,000 of the 20,000 US troops in Afghanistan operate independently, the rest have joined the most ambitious military venture in NATO’s history, the International Security Assistance Force (ISAF). 
Each of the 26 NATO allies has troops in Afghanistan, as do 11 other countries. 
Some, like Macedonia and Finland, belong to the Alliance’s Partnership for Peace. 
Others, like Australia and South Korea, come from farther afield. 
Soldiers from different countries operate almost as a single unit with shared objectives, similar methods, compatible equipment, and complementary skills. 
A half-century of working together, plus a decade and a half of adapting to new threats and demands, is paying off. 
The bad news is that the 40,000 foreign troops in Afghanistan are not enough. 
A few Afghan provinces, including those along parts of the border with Pakistan and its Taliban sanctuaries, have little or no ISAF presence and no Provincial Reconstruction Teams. 
Abysmal air and land transport limit the ability to move fighting forces to where they are needed most. 
Several countries, including NATO allies, have imposed “national caveats” that limit where their troops can be deployed or the tasks they undertake. 
So, before any operation, commanders must determine which troops can take part and in what capacity, hampering both efficiency and effectiveness. 
Nevertheless, NATO would succeed if outside civilian efforts, resources, organization, and leadership in Afghanistan were equal to its own. 
Unfortunately, there is no central direction or even coordination of civilian efforts. 
Although non-governmental organizations are doing an effective job, responsibilities assigned to different European countries – such as helping the Afghan government with law enforcement and poppy eradication – have fallen short of both needs and promises. 
Poppy production is soaring, experiments with alternative crops are lagging, and there are not enough forces to provide security for farmers willing to try growing something different. 
So the Taliban are obtaining ample funds from the heroin trade – easily Afghanistan’s largest single source of foreign earnings. 
Western drug addicts are putting more money into Afghanistan’s economy than Western governments. 
The shortfalls of the civilian effort and the unwillingness or inability of the Afghan government to provide good governance are the country’s central problems. 
These factors largely explain the Taliban’s violent revival, and the uncertainty of many Afghans about whom to support. 
NATO has “bet the alliance” on Afghanistan. 
No amount of “transformation” or “partnerships” or anything else will matter much if NATO fails for the first time in its history – even if that failure is not of its own making. 
Firm commitments at Riga of more allied troops and equipment for the ISAF and fewer national “caveats” must be part of the answer. 
But allied leaders must also act on the knowledge that NATO does not have the skills, resources, or experience to take full charge of meeting Afghanistan’s requirements for external civilian help. 
That task must belong to the European Union, the one institution with the collective means, skills, resources, and – potentially – the leadership to relieve NATO and ISAF of burdens for which they are not suited. 
Yet the EU holds back. 
Turf battles with NATO intrude, as well as competition between the EU’s executive Commission and the member-based Council. 
Even though 19 of NATO’s 26 members also belong to the EU, leaders and bureaucrats in most of these countries have been unwilling to back the commitment of their troops with the economic resources needed. 
At the Riga summit, NATO should challenge the EU to take its proper share of responsibility for success in Afghanistan. 
This will require the EU to contribute money, manpower, and officials on the ground of the rank and stature of ISAF commanders, in an equal partnership with NATO. 
By coincidence, the EU’s rotating presidency is now held by Finland. 
NATO’s presidents and prime ministers could simply cross the Baltic Sea from Riga for a half-day Afghanistan summit with the EU in Helsinki. 
One or two EU countries might object that this would mix institutional apples and oranges. 
But for Europeans who claim equal status with NATO for the EU’s Common Foreign and Security Policy, this is the time to put up or shut up. 
Even if leaders balk at an extra half-day of meetings to address the most serious threat to NATO’s future, the Riga summit can issue a demand that its own 19 dual members, and the rest of the EU, agree to assume shared responsibility in Afghanistan. 
NATO is in Afghanistan largely owing to shared concerns about terrorism. 
But NATO is also acting because some European countries want to show Washington that they can pull their security weight even though they refuse to go near the war in Iraq. 
All NATO allies and EU members want the US to remain committed to Europe’s future, to take the lead elsewhere in meeting security needs on which all agree, and to admit Europe into its strategic confidence. 
That now requires supporting the EU’s deep involvement in Afghanistan as its key contribution to repairing and reforming the Atlantic Alliance. 

The EU’s Viennese Mirror 
If a European Union bureaucrat could travel to fin de siècle Vienna, he would be surprised by how closely the Hapsburg Empire resembled today’s EU. 
Like the EU, Austria-Hungary was an experiment in supranational engineering, comprising 51 million inhabitants, 11 nationalities, and 14 languages. 
Presiding over this microcosm of Europe was a double-throned Emperor-King and twin parliaments representing the largely independent Austrian and Hungarian halves of the realm. 
The Hapsburg Empire acted as a stabilizing force for its peoples and for Europe. 
To its scattered ethnic groups, it performed the twin roles of referee and bouncer, pacifying indigenous rivalries and protecting pint-sized nations from predatory states. 
It also filled a geopolitical vacuum at the heart of the continent, placing a check on Germany and Russia. 
So long as it performed these functions, Austria was viewed as a “European necessity” – a balancer of nationalities and of nations for which there was no conceivable substitute. 
But, by the early 1900’s, the empire faced two problems that cast doubt on its ability to fulfill these missions. 
First, it proved incapable of reconciling and representing its constituents’ interests. 
The heart of the problem was the 1867 Compromise, which divided the empire into Austrian and Hungarian halves. 
By excluding the Slavs – who accounted for half the empire’s population – the Compromise was seen as a vehicle for German/Magyar domination. 
All attempts at modifying the arrangement stopped short of what was needed: a political settlement between Germans and Slavs like that between Germans and Magyars. 
Second, due in part to internal nationalist crises, the empire found it increasingly difficult to chart a unified, independent course in international affairs. 
Confronted after 1906 with a more assertive Russia, Austria-Hungary resorted to increasing reliance on Germany, thereby relinquishing the empire’s special status as a geopolitical stabilizer. 
These problems inflicted irreparable damage to Austria-Hungary’s image as a “necessity” – both for its subjects, who came to see national self-determination as a superior alternative to supra-nationalism, and for outside powers, which dismembered the empire in 1918. 
So ended the first European union. 
Like Austria-Hungary, the EU’s raison d’etre consists in its ability to transcend the indigenous balance of power among its members, and the service this renders to the international system. 
On both counts, the EU confronted challenges in 2007 much like those confronting Austria-Hungary in 1907. 
Many of the EU’s newest members continue to grapple with questions of geopolitical trust. 
This is revealed in the tensions that have existed between Poland, which fears domination by the EU’s steering group, and Germany, which is reluctant to shoulder the financial burden for a union in which it is under-represented. 
If allowed to fester, this feud could metastasize, leaving the EU in a state of crisis like that which plagued Austria-Hungary. 
A second set of problems confronts the EU externally. 
Like Austria-Hungary, the EU finds itself lodged between two powerful neighbors: a resurgent Russia intent on regaining lost influence, and a seemingly revisionist United States preoccupied with foreign military adventures. 
Three lessons of Austria-Hungary’s experience are instructive for the EU. 
First, despite enjoying greater political inclusion than the Habsburg Slavs, many Central Europeans see themselves as lacking equal standing with the EU-15, both economically and strategically. 
The upshot may be a tendency for the new members to press their national interests more forcefully in EU fora. 
Fearing a new era of obstructionism, EU leaders have revived talk of a two-speed union, in which a vanguard of western states seeks deeper integration, leaving the newcomers to catch up. 
But, as Habsburg history shows, such arrangements create entrenched privileges among the “haves” and grudges among the “have-nots.” 
In a union of many parts, there are no shortcuts: the EU must provide the same level of integration at the periphery as at the imperial core. 
Second, just as Austria needed a settlement between Germans and Slavs, the EU needs to repeat the Franco-German reconciliation of 1952 between its largest western and eastern members, Germany and Poland. 
The shared steel initiative of 1952 could find its parallel in a German-Polish initiative to jointly manage natural gas imports. 
Finally, much as Austria-Hungary formed an alliance with Germany to fill a strategic need for military security, EU members have sought, through their intake of Russian gas, to meet a strategic need for energy security. 
However, over-reliance on Russia for a strategically vital commodity widens the divergence of interests between members, like Germany, that share a privileged partnership with Russia, and those, like Poland, that consider the Kremlin a threat. 
Much as Austria’s alignment with Germany drove the Slavs to seek Russian patronage at the expense of imperial unity, European alignments with Russia drive the new members to seek US patronage at the expense of EU unity. 
As Austria-Hungary discovered, once geopolitical dependency starts, the dominant power will seek to use the dependent ally as an extension of its own interests rather than see it regain freedom of maneuver. 
While the EU is unlikely to ever achieve independence from Russian energy, it can improve its ability to cope with dependence by finding what Austria-Hungary lacked: a source of leverage to maintain the relationship on relatively equal terms. 
This means, above all, establishing a united voice on energy. 
In the end, many who fought to bring about Austria-Hungary’s demise would live to mourn its passing; as subsequent events would show, the old empire was still more of a necessity than they realized. 
By learning from its mistakes, today’s Europeans may yet be able to reform and reinvigorate an “empire” whose most important work still lies ahead. 

Europe’s Bad Trade Gamble? 
PARIS – The start of negotiations for a free-trade agreement between the European Union and the United States – officially called the Transatlantic Trade and Investment Partnership (TTIP) – marks a key turning point for EU and world trade. 
It also reinforces both sides’ shift away from multilateral trade policy in recent years. 
That might be the right move for America, but it could spell serious trouble for Europe. 
Over the past half-century, the EU, which represents only 7% of the global population, has managed to maintain an exceptionally strong trade position, despite the rise of emerging markets like China. 
So, while the US and Japan have seen their respective shares of global exports fall, the EU’s share has remained stable, at around 20%. 
Indeed, EU trade power contrasts sharply with the perception of a weakened Europe. 
Most important, Europe was able to achieve it only by investing heavily in a multilateral trade system through the GATT and then the World Trade Organization. 
And yet, while the EU owes much to the multilateral trade system, since 2006, it, too, has shifted to bilateralism, scoring its biggest successes with free-trade agreements with Latin America and South Korea. 
An agreement with Canada is now within reach (though bilateral negotiations with India seem to have stalled, probably because the Indians do not believe that a free-trade agreement would help them much). 
Officially, the EU considers a bilateral approach to trade to be perfectly compatible with a return to multilateralism. 
But the facts belie this. 
First, it is clear that bilateralism is growing as multilateralism wanes. 
Since 2008, when the WTO’s Doha Round of global free-trade talks collapsed, the Europeans have proved unable to bring the US, China, and India back to the multilateral negotiating table. 
More important, they evidently have given up trying. 
This is reflected in the EU’s reluctance to press emerging countries to become parties to the WTO’s multilateral Agreement on Government Procurement, as if it has accepted that this issue can be resolved only bilaterally. 
Moreover, since 2008, US trade policy has deliberately abandoned multilateralism in order to pursue containment of China via a two-pronged strategy: the planned Trans-Pacific Partnership (TPP) and the TTIP. 
The reason for this change is simple: The US no longer has the power to set the rules of the global trade system, but it considers itself strong enough to work around them. 
The EU partly shares America’s strategic objective here, because it, too, has grievances against emerging powers in terms of market access, compliance with intellectual-property rights, access to government procurement, and subsidies to state companies. 
But Europe must avoid alignment with this new and narrow US trade focus for several reasons. 
First, Europe does not have an Asian strategy or TPP equivalent. 
Granted, an agreement between the EU and Japan would be very beneficial to Europe and would diminish America’s advantages in Asia. 
But if the US concludes the TPP before the Europeans secure an agreement with Japan, the Japanese government’s bargaining power vis-à-vis the EU would automatically increase. 
In this sense, for both the US and Europe, agreement with Japan will be the key measure of bilateralism’s success or failure. 
Second, and more fundamentally, the US is a political-military power in addition to being an economic power. 
As a result, its partners’ trade calculus will always be shaped by strategic considerations, which are not a factor for them when dealing with Europe. 
This is especially relevant with respect to China. 
The US very clearly wants to check China by raising global trade standards. 
But, if broader geopolitical considerations brought these two countries to an agreement, Europe could suffer. 
Something akin to this happened during the climate-change conference in Copenhagen in 2009, where the US and China decided to oppose a comprehensive global agreement, effectively dismissing Europe. 
Likewise, the US has no real interest in revitalizing multilateral trade negotiations, because bilateralism is much more effective in extracting concessions from emerging powers. 
Europe has neither the same geopolitical interests as the US, nor, more important, the same means, which implies that it has a greater stake in revitalizing multilateral trade. 
Indeed, the proliferation of bilateral agreements, with their own mechanisms for resolving differences, will inevitably weaken the WTO’s dispute-settlement mechanism, further undermining multilateralism. 
The need to revive multilateralism is all the more important given that EU-US negotiations will likely be difficult and prolonged, owing especially to resistance from European and American regulators. 
European regulators have already decided to tighten conditions for authorizing genetically modified organisms, as if to show US trade negotiators that they will not move easily from cherished positions. 
Now that the TTIP talks have officially been launched, Europe must try to obtain the best terms that it can. 
Above all, the EU must accept that global trade is a merciless political game, played according to a paramount rule: keep all of one’s options open at all times. 

The Euro: At the Crossroads So Soon? 
ROME: Six weeks into the Euro's life, Europe's economic policies are out of whack. 
Europe has high public debts, taxes near 50% of national product, and years of high unemployment and mediocre growth. 
So what's the response? 
A tilt toward monetary rigidity and an expansive fiscal policy through a creeping abandonment of the EU Stability Pact. 
In addition, proposed employment strategies will do little to reduce labor market rigidity. 
Europe craves the opposite mix: more monetary flexibility, fiscal policies that reduce taxation and national debt, and a labor policy that makes Europe's labor markets more akin to America's. 
These three cardinal policies are related. 
Monetary Policy. 
The European Central Bank (ECB) pursues price stability defined as annual inflation of around 1%. 
At this delicate moment in the world economy the ECB is seeking to establish its anti-inflation credibility at the very moment when the spectre of deflation is appearing for the first time in half-a-century. 
Debtors worldwide face a risk of bankruptcy which, if widespread, could lead to a dangerous recession. 
The ECB's choice, strangely, focuses more on its own anti-inflation posture than deflation. 
Compare European monetary policy with American actions. 
America's Fed follows a rule of monetary policy whereby the prime objective of controlling inflation permits, according to precise parameters, a reaction to changes in the rate of growth. 
This policy works, leading to a long period of stable, uninterrupted growth. 
The ECB should follow a similar course. 
So, what should be the objective regarding inflation? 
Price growth of, say, 3% per annum (instead of 1) has clear additional costs, but may facilitate the adjustment of relative prices and wages across Europe. 
This does not mean that collective bargaining agreements do not take into account inflation, but only that at a micro level a little inflation permits more "flexibility" in relative real wages. 
Fiscal Policy. 
Europe must reduce the deadweight of debt and taxes. 
How? 
By reducing primary expenses, then reducing taxes. 
But European politicians, of right and left, believe that public expenditures are the engine of growth. 
Wrong: economies grow with more markets not with more public expenditures. 
Ireland, the European country with the highest rate of growth is also the one that most reduced its deficit and public debt by cutting expenditures and taxes. 
Elsewhere in Europe, there is talk about abandoning the Stability Pact before the Pact even goes into effect. 
For example: we no longer hear about cutting Italy's public debt in half (in relation to GDP). 
In fact Italy's government was among the first to support the idea of jettisoning the Stability Pact, and had to be rebuked by the EU Commission for "over optimistic" budget projections. 
Germany, too, has traveled far from its anti-inflationary obsessions. 
Minister Lafontaine seems to love inflation and public debt without thinking about the consequences. 
France's socialist government continues to believe, despite contrary evidence, that a vast, centralized public sector is compatible with a dynamic market economy. 
Widespread ideas about major public investments financed by bloating deficits should be forgotten. 
Public infrastructure investments displace private investments and the taxes necessary to finance them introduce further distortions in demand. 
In any case, the lions share of public expenditures goes to pensions, transfers, and public sector salaries. 
Without drastic reform of the social state, European fiscal policy will continue to have feet of clay. 
Labor Policy. 
Every few weeks European ministers proclaim new initiatives concerning "labor policy." 
Most are useless. 
The only employment policy that makes sense reduces fiscal burdens on the cost of labor and increases flexibility in the market. 
Consider this: in Italy in the last 10 years the cost of each job is equal to 1.7 of the average salary; the average in other countries of EMU is around 1.4; the same number for the United States is around 1.25. 
These numbers tell only part of the story. 
Increases in income taxes imply that unions demand higher gross salaries in order to compensate for the fall in net salaries due to tax increases. 
Therefore income taxes, in part, impact the cost of labor, contributing to high unemployment. 
In fact, average unemployment in the countries of the EU in the last 10 years is around 10%. 
Today it is still high, while in the US it was around 6% and is now 4.5%. 
Europe is trapped in a vicious circle: those employed recoil from more flexibility and the risk of losing their jobs. 
But unemployment is high because of taxes and excessive protection for those employed, which prevents the market from creating new employment opportunities. 
So the unemployed ask for more social protection, instead of flexibility, increasing the fiscal drain on the economy. 
Given lax fiscal discipline, the ECB will likely react with more monetary rigidity, pushing politicians, already enamored with the social state, to spend and tax even more. 
Europe and the euro face a crossroads. 
One road is where the ECB digs in its heels on price stability and politicians forget about fiscal discipline and the fact that a market economy cannot work with half of GDP absorbed by taxes. 
Such a combination would force the ECB to be even more rigid in an economy where the employed and their representatives (trade unions) are preoccupied exclusively with protecting existing jobs and excluding outsiders, i.e. the unemployed. 
The other road reduces the fiscal burden of the social state, reinvigorating the economy by reducing taxes and providing the employed not with social protection but with more assurance of finding another job if they lose their current one. 
If Europe takes this road, monetary policy could help by assuring the minimal stabilization of cyclical fluctuations, without having to keep nominal interest at too high a level. 
The first road is that of eurosclerosis, the second takes the best of what the US can teach Europe. 

The Euro and Europe's Welfare State, or How the Eu 
SAN FRANCISCO: Hidden behind the euro's falling exchange rate is a life-and-death struggle between it and Europe's welfare state. 
Either the euro subverts the welfare state, or Europe's welfare state will subvert the euro. 
Despite today's weakness, smart money should bet on the euro. 
The euro's disappointing performance - falling from a value of a $1.18 at its inception to a recent low below $.90 - is in large part due to Europe's reluctance to adopt structural reforms to increase economic flexibility. 
ECB Chief Economist Otmar Issing writes: "Germany and other European Union countries share the blame for the euro's weakness because they failed to make their economies more flexible." 
But there is a world of difference between the euro's need to tame the welfare state and its ability to do so. 
Harvard economist Martin Feldstein, indeed, believes that "the single currency will be a political impediment to reform." 
"Politicians", writes Feldstein, "can now blame the ECB for high unemployment and complain that it is a powerful force beyond national control." 
Another, more likely, outcome exists: if anti-competitive policies pursued by a country sink the euro, they will be condemned as "anti-European." 
For Europe's political leadership, the euro is a sine qua non -- an experiment that cannot, and will not, be allowed to fail. 
If short-sighted national economic policies threaten the euro, they will spark powerful countervailing political pressures on offending parties to cease and desist. 
The recent Vodafone-Mannesmann merger is an example here. 
When Britain's Vodafone signaled its intention to takeover Germany's Mannesmann, Chancellor Gerhard Schroeder protested against the merger on grounds that it would cost German jobs. 
The euro fell in value with this news. 
ECB Chief Wim Duisenberg responded brilliantly, pinning an Aanti-European@ tail on the German donkey by proclaiming that the euro was threatened by Schroeder's anti-competitive actions. 
Unwilling to be labeled anti-European, Schroeder backed down. 
Besides equating welfare state policies with anti-Europeanism, the euro will spark reform by forcing EU member governments to compete to attract mobile capital. 
The euro increases capital mobility inside Europe by eliminating exchange-rate risk on intra-European transactions. 
No longer trapped in a single country by fears of adverse currency movements, firms can relocate anywhere within the euro-zone. 
That means they can bargain with member governments to get the best deal possible on taxes, government regulations, and labor rules. 
To encourage companies to locate in the Netherlands, for example, the Dutch are willing to bargain on taxes. 
Belgium and Denmark have passed business-friendly laws and regulations. 
This "race to the bottom" in anti-competitive measures will spark a corresponding "race to the top" in European growth rates. 
The result can only strengthen the euro. 
Europe's left saw this coming and is trying to squelch government competition by using the European Commission to "harmonize" European taxes, regulations, and labor standards at high, anti-competitive levels. 
Former German Finance Minister Oskar Lafontaine tried and failed to use this tax harmonization ploy to trap German capital in high-tax Germany. 
Brussels is said to be taking aim at the Netherlands to harmonize away its competitive concessions. 
In addition to EU harmonization, some European politicians propose restrictions on internal EU market activity to fend off the "race to the bottom." 
At the recent Lisbon EU summit, Nicole Fontaine, President of the European Parliament, asserted that "ruthless exploitation of the disparities between social and fiscal legislation in member countries" justified restrictions on corporate takeovers. 
Such talk only adds to the euro's woes. 
Not all European leaders attribute the euro's weakness to structural factors. 
Some think the US dollar's strength against the euro reflects the fact that America and Europe are at different stages in the business cycle. 
Once the US slows down and Europe picks up, the euro will do better. 
But Europe's economy has been stronger than Japan's, yet the euro has fallen dramatically against the yen as well as the dollar. 
Other knowledgeable European voices point to the fact that the DM hit all-time highs against the US dollar when Germany's structural problems were even more severe than at present. 
But the DM is not the euro. 
In the past, German Bundesbank enjoyed a credibility gap vis-ŕ-vis the Federal Reserve. 
Today, the ECB suffers a credibility gap vis-ŕ-vis the Fed. 
In the past, foreign exchange markets paid less attention to structural factors. 
Today, an economy's ability to compete in a globalized economy is paramount to how foreign exchange markets value a currency. 
This is particularly true for the euro as the currency of the "New Europe." 
If the "New Europe" fails, so will the euro. 
Once Europe's political leaders recognize their failure to make necessary reforms is threatening not only the euro's foreign exchange value but also its existence, reforms will be made and the euro will soar. 

The Euro and European Prices 
Among the hoped-for effects of the Euro's physical arrival are an increased transparency of the differences in retail prices between different EMU countries, and a subsequent pressure to equalize these prices. 
The argument for the latter is simple: with national currencies eliminated and everything priced in Euros, how can similar cars or loaves of bread have different prices on either side of a border? 
Pressures will be formidable to buy where prices are low and sell, or at least not to buy, where prices are high. 
That argument, however, is naive, for it does not take a genius to compare the price of a car in Germany with the price of the same car in France. 
Everybody makes such calculations when they decide where to take vacations abroad, so why believe that they do not do it for other goods and services? 
People are not as stupid or lazy as politicians and bureaucrats think. 
The interesting question is this: how much are price discrepancies due to sheer ignorance and inertia, and how much are they due to factors that are unlikely to change with the Euro's arrival? 
Start with the evidence on retail prices. 
UBS, the Swiss banking group, prices a standard basket of 111 goods and services in various cities around the world. 
For European cities, the results are listed in the table below, which uses Germany as the benchmark. 
Obviously, huge price differences exist- if people in Finland were to do their shopping in Spain, they would increase their purchasing power by 50%! 
So, if price equalization were to happen, citizens in rich countries would feast and those in poorer countries would pay through the nose. 
But that won't happen; price level differences will not change much, the Euro notwithstanding. 
The UBS survey shows that prices in Frankfurt are 8% higher than in Berlin. 
Prices in Houston, Texas (to use prices in a similar unitary monetary area, the US) are 26% less than in NY, and somewhat less than in Los Angeles. 
Both differences matter because they show that price equalization does not occur simply because a common currency exists. 
What, then, is behind lasting differences in prices within and between countries? 
There are three important factors: 
anti-competitive practices. 
Of course free trade exists in principle, but there are often important snags at borders and within countries. 
In America, for example, it is illegal to ship wine privately from California to Massachusetts because wine wholesalers in Massachusetts managed to have a Federal law established that protects their huge profit margins. 
What would be easy arbitrage using the Internet and delivery services gets stopped in its tracks by trade organizations and manufacturers who convince legislators and/or bureaucrats to protect their monopoly rents. 
In Europe, anti-competitive practices are rampant. 
If the EU is serious about creating one market, plenty of work remains to be done. 
differences in competition and scale. 
The smaller the market, the fewer the number of distributors that can serve it profitably. 
But the fewer the number of distributors, the less competition there is. 
So margins become fatter and prices higher. 
Often competition is limited by regulations that fragment markets, but sometimes it is a matter of it being unprofitable to arbitrage to, say, bring in your croissants from Belgium each morning. 
retail prices. 
The critical point here is that a retail price includes not only the price of the goods but also distribution costs - wages of shop personnel, rent, advertising, profit margins, etc. 
These differ vastly across countries, as the table suggests. 
There are no big productivity differences between Finland and Portugal when it comes to standing behind a counter selling stockings. 
Yet wages are vastly different and hence we expect lower retail prices in poorer cities and countries than in richer ones. 
New York versus Houston makes that point just as well as France versus Greece. 
What goes for wages also goes for other distribution costs. 
In principle, the entire Eurozone forms a single market, but that is not how things work out in practice. 
There is a famous saying in America that "all politics are local." 
The same is true of prices. 
A survey of the cost of grooming a poodle in the Greater Boston Area conducted by Harvard's Kennedy School of Government revealed price differences in excess of 100%. 
A surprise? 
Of course not, pet grooming is expensive in rich parts of Boston and cheap in poor parts, just as haircuts are. 
What is the upshot here? 
Price divergences are here to stay. The Euro will do little to change that. 
Over time, there will be a tendency for these divergences to be compressed, but that won't be a result of the Euro. 
It will arise from Brussels, the spread of web-based buying habits, and the emergence of EU-wide retail distribution. 
When all is said and done, however, European prices will look as they do in the US, where large divergences exist a century after free trade and a common currency were established between the states. 

The Euro and the Dollar 
PARIS: Oskar Lafontaine's resignation has only brought a brief respite to the Euro. 
Its weakness will now continue. 
If things keep going as they are going, the Euro will soon stand at a value of less than one euro to the dollar. 
This is a threshold fraught with symbolism: within just a few short months of its birth the "strong" euro that its architects seemed to prophecy will have transformed itself into a weak euro. 
All sorts of old wounds will inevitably open up if the euro falls so far so soon. 
Many European inferiority complexes toward America, which the advent of the euro were supposed to banish forever, could easily reappear. 
In Paris, the suggestion is growing that Washington must be made to stabilize exchange rates between the main currencies, in particular the euro/dollar exchange rate. 
Replace the euro with the French franc, and the dollar with the DM, and the discussion evokes a strong feeling of déjŕ vu. 
So one must now again repeat some old truths that many Europeans seem to be deliberately forgetting. 
Just as the strong franc, the so-called franc fort of the 1990s, did not imply an economically strong France, a strong euro should not be equated with an powerfully growing Europe. 
The exchange rate is a price, not a score in the last game of the World Cup. 
Like all other prices, it must sometimes increase, sometimes decrease, according to market demands. 
It is true, of course, that exchange rates are different from many other prices in that they are directly influenced by central bank policies. 
As a result, the Federal Reserve Bank and the European Central Bank do possess the means to stabilize the exchange rates. 
But it would be a grave mistake to embark on that course. 
Stabilization of exchange rates implies an aggressive targeting of interest rates. 
Intervening on the currency markets without altering interest rates - a measure economists call a "sterilized intervention" - would affect the exchange rate for a few minutes, at the most for a few days. 
America's Federal Reserve Board chairman Alan Greenspan is choosing the dollar's interest rate to stand as a function of what is happening in the United States. 
The ECB is choosing the euro interest rate as a function of what happens in Europe. 
Both choices are good things. 
So long as the two central banks behave this way and as the two regions are subjected to highly different choices (which, as a matter of fact, will be so indefinitely), American and European interest rates will each continue to evolve on different paths, and their exchange rates will keep fluctuating. 
This is what is currently happening. 
The risk of drifting into a recession is larger in Europe than it is in the United States. 
As a result, in the coming year interest rates are far more likely to fall in Europe than they are in the United States. 
The euro/dollar exchange rate mirrors this anticipated change. 
A lower valuation for the euro diminishes the risk of recession in Europe. 
Once again, this is good news for Europeans. 
To stabilize the euro's rate at this stage would be equivalent to a European Central Bank's announcement that it prefers stabilizing the euro at a higher value to avoiding recession. 
Alternatively, from the other side of the Atlantic, to keep the euro/dollar exchange where it now is would be tantamount to the Fed's declaring that, in spite of an unemployment rate as low as 4.4%, it will decrease interest rates and perhaps revive the corpse of inflation. 
Both strategies would be idiotic. 
Fortunately, both are unlikely to happen (never mind that I have more confidence in the Fed than in the ECB). 
Therefore, the Fed and the ECB must continue to tend to their own shops and leave it to the currency markets to set the exchange rate. 
Does this mean that the world's two great central banks should not only be passive, but mute? 
No, silence is a bad idea. 
There is no need to remind ourselves that currency markets occasionally lose their cool, and that exchange rate movements are at times totally disconnected from the real economy, if not from reality itself. 
Here is where central banks, in particular the ECB, can play an important role as carriers and disseminators of information. 
They can indicate - in the austere language that is so much their speciality - that it is time for currency traders to come back to reality. 
Can they succeed? 
Alan Greenspan's attempts to talk and cajole the American stock market down to earth from what he called "irrational exuberance" are not quite reassuring on that account. 
Perhaps he was too reserved, but such efforts are the responsible course for today's two great central banks. 

The Euro Ark 
BRUSSELS – The euro is celebrating its tenth anniversary against the background of the most difficult economic climate since its birth. 
The financial storm that swept in from the United States, and the onset of a severe economic downturn, confronts Europe with unprecedented challenges. 
Faced with the biggest test in its history, the euro is far from steering into disaster, as the Nobel laureate economist Milton Friedman predicted ten years ago. 
On the contrary, Europe’s Economic and Monetary Union is proving a major asset in these tumultuous times. 
Doubters should remember that the euro was itself born out of crisis. 
The single currency was conceived as an answer to the upheavals of the postwar period – double-digit inflation, high unemployment, and speculative attacks on the pound, the lira, and the French franc. 
It was the crisis of the European Monetary System that drove the euro’s launch on January 1, 1999. 
In ten short years, the euro revolutionized the global economic environment, rising to the status of the world’s second currency and rivaling the dollar as a medium for international trade and finance. 
The EMU is now the world’s largest market, and continues to grow. 
With Slovakia’s entry on January 1, the euro spans 16 countries and 329 million citizens. 
The benefits of a monetary union based on a stable macroeconomic framework and governed by an independent central bank are manifest: the euro area has enjoyed low inflation and low interest rates for much of the last decade, a boost in trade and investment, and rapid integration of financial markets. 
Moreover, 16 million jobs have been created over the last 10 years – a record more successful than even the US. 
Today’s financial turmoil and economic downturn are highlighting the EMU’s advantages in several important ways. 
First, the euro has eliminated the possibility of exchange-rate turbulence and speculative currency attacks that more vulnerable economies could have expected in the current turmoil. 
As a stable and strong world currency, the euro is also limiting exchange-rate instability globally. 
Second, the euro area benefits from an independent European Central Bank whose swift actions to ease liquidity constraints and coordinate monetary policy have recently helped to avert a financial meltdown. 
Such rapid, coordinated steps by 16 national central banks would have been unthinkable. 
Third, the EMU’s stability-oriented macroeconomic framework has better prepared euro-area countries for economic storms. 
Thanks to the fiscal rules of the Stability and Growth Pact, the euro area achieved its soundest budgetary position in 2007, bringing deficits to their lowest levels in 25 years. 
This allowed many European Union countries to approach the crisis with room for maneuver. 
Such are the EMU’s benefits that the visible costs of remaining a non-member are beginning to recast the political debate surrounding euro adoption in several countries. 
Of course, the euro is no panacea, nor has it functioned perfectly over the last decade. 
Divergences between euro-area economies in terms of growth and inflation have been a persistent challenge. 
Though differences are no bigger than those found within larger economies such as the US or Germany, they risk being amplified by the crisis. 
This is why it is even more important that we continue to improve the EMU’s functioning. 
This requires not just reinforcing resilience in the face of crisis, but also equipping euro-area economies for the longer-term challenges of globalization, aging, resource scarcity, and climate change. 
In a potentially more volatile twenty-first century global economy, we must reap the maximum benefits of economic integration in terms of growth and jobs. 
The key to a better functioning EMU is closer surveillance and deeper coordination of economic policies. 
Leaders must start living up to the responsibilities that come with sharing a single currency. 
They must recognize the impact that national economic policies have on the euro area as a whole, and thus discuss and coordinate economic programs at the euro-area level. 
Here, the launch of the European Economic Recovery Plan – the initiative for an EU-wide fiscal stimulus equivalent to 1.5% of GDP, endorsed by the European Heads of Government in December – constitutes a major step forward. 
This must now be followed by closer budgetary monitoring, particularly given that fiscal stimulus measures, the economic downturn, and bank rescue plans will take a toll on public finances. 
The Stability and Growth Pact must remain the cornerstone of the EU’s budgetary framework, and effective surveillance and peer support will be vital to help member states work towards balanced budgets once the economy rebounds. 
Deeper fiscal surveillance should be matched by broader economic surveillance, especially since current-account imbalances have become more acute during the crisis. 
The European Commission is now working on extending the focus of surveillance beyond fiscal policy so that we can identify risks stemming from macroeconomic imbalances or changes in competitiveness and address them before they become entrenched. 
Finally, euro-area nations must strive harder to find common positions on international issues and to speak with a single voice in the global arena. 
This is the only way to promote and defend the EMU’s economic interests in a world where the challenges are global and overcoming them will increasingly depend on multilateral cooperation. 
Consider November’s international summit on the financial crisis. 
Agreeing a common position ahead of the meeting gave Europe a greater role. 
When the euro area manages to agree swiftly on a coordinated position, this can be instrumental to finding agreement in the EU as a whole and internationally. 
It is vital we now build on this success and develop a genuine international strategy for the euro. 
The European single currency has been a major success, but it remains a work in progress. 
A decade after the euro’s introduction, we must follow the example of its founders and turn crisis into opportunity by uniting in a spirit of cooperation and ambition – and thereby reinforce the EMU’s foundations. 

The Euro at Mid-Crisis 
CAMBRIDGE – Now that the European Union and the International Monetary Fund have committed €67.5 billion to rescue Ireland’s troubled banks, is the eurozone’s debt crisis finally nearing a conclusion? 
Unfortunately, no. 
In fact, we are probably only at the mid-point of the crisis. 
To be sure, a huge, sustained burst of growth could still cure all of Europe’s debt problems – as it would anyone’s. 
But that halcyon scenario looks increasingly improbable. 
The endgame is far more likely to entail a wave of debt write-downs, similar to the one that finally wound up the Latin American debt crisis of the 1980’s. 
For starters, there are more bailouts to come, with Portugal at the top of the list. 
With an average growth rate of less than 1% over the past decade, and arguably the most sclerotic labor market in Europe, it is hard to see how Portugal can grow out of its massive debt burden. 
This burden includes both public debt (owed by the government) and external dent (owed by the country as a whole to foreigners). 
The Portuguese rightly argue that their situation is not as dire as that of Greece, which is already in the economic equivalent of intensive care. 
But Portugal’s debt levels are still highly problematic by historical benchmarks (based on my research with Carmen Reinhart). 
With a baseline scenario of recession or sluggish growth amid budget austerity for years ahead, Portugal will likely seek help sooner rather than later. 
Spain is a more difficult case. 
The central government is arguably solvent, but a significant chunk of municipal and provincial bank debt seems underwater. 
The big question in Spain is whether, as in Ireland, the central government will allow itself to be gamed into taking on private (and also municipal) debt. 
Here again, history gives no cause for optimism. 
It is very difficult for a central government to sit on the sidelines when the economy’s key players are on the brink of collapse. 
But bailouts for Portugal and Spain are only the next – and not necessarily final – phase of the crisis. 
Ultimately, a significant restructuring of private and/or public debt is likely to be needed in all of the debt-distressed eurozone countries. 
After all, bailouts from the EU and the IMF are only a temporizing measure: even sweetheart loans, after all, eventually must be repaid. 
Already facing sluggish growth before fiscal austerity set in, the so-called “PIGS” (Portugal, Ireland, Greece, and Spain) face the prospect of a “lost decade” much as Latin America experienced in the 1980’s. 
Latin America’s rebirth and modern growth dynamic really only began to unfold after the 1987 “Brady plan” orchestrated massive debt write-downs across the region. 
Surely, a similar restructuring is the most plausible scenario in Europe as well. 
It sometimes seems that the only eurozone leader who is willing to face the likely prospect of future debt restructuring is German Chancellor Angela Merkel. 
The Germans have been widely castigated for pointing out that Europe has no clear mechanism for sorting out sovereign (government) defaults, and that surely it needs one. 
Many pundits would have one believe that Ireland would have pulled through unscathed absent Germany’s blundering statements. 
That is nonsense. 
With huge private debts, falling house prices, and external claims on Ireland amounting to more than 10 times national income (according to the Reinhart-Rogoff database), there was never going to be an easy way out. 
Allowing European debt problems to fester and grow by sweeping them under the carpet through dubious theatrics can only make those problems worse. 
Indeed, only last July the eurozone made a big show of its financial “stress tests” of its banks, giving almost all of them, including in Ireland, a clean bill of health. 
Denial is a not a useful policy for dealing with a financial crisis. 
Europe’s debt problems should, in fact, still be quite manageable – provided the requisite write-downs and debt restructurings are implemented. 
Here is where the latest Irish bailout is particularly disconcerting. 
What Europe and the IMF have essentially done is to convert a private-debt problem into a sovereign-debt problem. 
Private bondholders, people and entities who lent money to banks, are being allowed to pull out their money en masse and have it replaced by public debt. 
Have the Europeans decided that sovereign default is easier, or are they just dreaming that it won’t happen? 
By nationalizing private debts, Europe is following the path of the 1980’s debt crisis in Latin America. 
There, too, governments widely “guaranteed” private-sector debt, and then proceeded to default on it. 
Finally, under the 1987 Brady plan, debts were written down by roughly 30%, four years after the crisis hit full throttle. 
Most post-mortems of the Latin American crisis suggest that all parties would have been far better served had they been able to agree on partial debt forgiveness much earlier. 
Latin America might have returned to growth far sooner than it did. 
Creditors might even have received more in the end. 
As European policymakers seek to move from one stage of denial to another, perhaps it is time to start looking ahead more realistically. 
As any recovering alcoholic could tell them, the first step is admitting, with Merkel, that Europe has a problem. 

The Euro at Ten 
PALO ALTO – The beginning of 2009 will long be remembered for terrible economic news and controversial economic policy in virtually every country. 
It also marks the 10th anniversary of the euro, the common currency further knitting together several hundred million Europeans in their economic and financial affairs. 
It is worth pausing to commemorate this remarkable event, and the effect the euro’s existence has had on the current global crisis. 
The euro was launched in January 1999 for a complex set of economic, financial, political, and historical reasons. 
It was the final icing on the cake of the plan by many post-World War II leaders, driven by the memory of two horrible world wars originating in and consuming Europe in the previous half-century, to forge closer economic and political ties. 
Ten years ago, there were real concerns about launching the new currency. 
Would people give up their old national currencies and use the new euro? 
Would it maintain its value against the dollar? 
(Launched at $1.18, it plunged to almost $0.80 early on, then rose, peaking at nearly $1.60 in 2007-2008, before falling back to around $1.30.) 
When a group of individual currencies is replaced by a single currency, as the Deutsche mark, French franc, Italian lira, Spanish peseta, and others were by the euro, there are two primary benefits: lower transaction costs and greater transparency. 
Having neither the cost and inconvenience of constant currency transactions nor the uncertainty that arises from fluctuations among currencies is a boon to the common currency area. And pricing of goods and labor throughout the currency area, which previously had different exchange rates, becomes much more transparent. 
The cost of cell-phone minutes in Italy, for example, is much more easily compared to those in Germany or France. 
These twin benefits complement the scale advantages of free-trade areas. 
Europe is still realizing the full potential of these benefits, but struggling with natural cross-border mergers and the failure or replacement of prominent national companies by better competitors from other countries. 
Many proponents of the euro claimed that it would quickly evolve as an alternative reserve currency alongside the dollar, or even replace it, in global markets. 
Most of world trade is still invoiced in dollars, but the euro has gradually emerged as a viable alternative – a strong currency backed by the hard-earned inflation credibility of the European Central Bank. 
What, then, of the costs? 
Why don’t all nations join currency areas, or why not create a single global currency, as Nobel laureate Robert Mundell suggests? 
One obvious reason is that there are also disadvantages to a common currency area. 
Suppose that southern Europe is hit much harder by today’s recession than northern Europe. 
An economy has two potential ways to adapt to and mitigate its downturn. 
First, its currency would naturally depreciate, making exports more competitive and imports more expensive. 
This partially cushions the downturn. 
Alternatively, labor could migrate from high-unemployment southern Europe to lower-unemployment northern Europe. 
The United States offers an important example of such labor mobility. 
In the early 1980’s, when US unemployment reached almost 11%, many workers moved from the so-called Rust Belt – the hardest-hit industrial area of the upper Midwest – to other parts of the country. 
In the early 1990’s, when California had a more severe recession, people sought jobs in neighboring states. 
Labor migration operated as a safety valve against even worse unemployment. 
Labor migration in Europe is, historically, far less extensive. 
Many don’t want to abandon the deep roots they have in their home regions; others don’t want to move to another country, where language and culture may be obstacles. 
With limited labor mobility, and the euro removing the other shock absorber (exchange-rate adjustments), great pressure will fall on those countries with the worst downturns. 
This has led some economists to question whether the euro zone is a good idea at all, and to predict that, when confronted with a test of a severe differential recession, it will break apart. 
Low inflation, no currency risk, decreased transaction costs, and greater transparency have made the euro a success. 
But the decreased flexibility in response to economic shocks will certainly test it. 
At present, it is boldly highlighting the disparate, even discordant, fiscal responses now being embraced by European Union governments. 
This raises the old question about whether a currency union can work without a fiscal union, or at least stronger and more binding fiscal rules (the Maastricht deficit commitments are too easily breached). 
To that we must add coordinated financial regulation and bailout policies, as deposits flow rapidly across borders in response to national guarantees and insurance in the euro zone. 
Will the euro’s second decade be as successful as the first? 
The financial crisis and deepening recession have created many challenges. 
The euro zone’s less competitive economies are tethered to monetary policy (interest rates) set by the ECB, but pursue diverse approaches to bank bailouts and fiscal stimulus. 
Italy and Greece, in particular, face serious debt issues amid financial market concerns about the possibility of default or their leaving the euro zone. 
The gaps between German bond yields and Italian and Greek yields are at record levels. 
The price of default insurance has tripled. 
But the weaker economies get the inflation credibility of the ECB and protection from severe exchange-rate swings. 
Indeed, avoiding continuous competitive devaluations is more a blessing than a curse. 

The Euro Grows Up 
On January 1, the euro celebrated its sixth birthday. 
Today, we look back on a period in which the European Central Bank has successfully pursued a stability-oriented single monetary policy serving more than 300 million citizens. 
This is a remarkable achievement. 
When the Maastricht Treaty was ratified in 1993, many people doubted whether Economic and Monetary Union would work. The Treaty’s objective was widely thought to be laudable – but realizable only in the indefinite future. 
To the surprise of many, Europe demonstrated great determination to ensure that the single currency became a reality. 
A single monetary policy for a currency area comprising 11 – and later 12 – countries, each with a sovereign national government, was something entirely new. 
Would it be compatible with autonomous national fiscal policies? 
Given the decentralized nature of the system, would national interests distort the conduct of monetary policy? 
I see several reasons underlying the ECB’s success in implementing a supranational monetary policy – and thus in firmly establishing the euro’s stability. 
First, the ECB’s mandate – enshrined in the Maastricht Treaty – is to deliver and maintain price stability. 
Focusing on the goal of maintaining a low and stable rate of inflation is the best contribution that monetary policy can make to economic welfare, sustainable growth, and job creation. 
Second, the Treaty made the ECB perhaps the most independent central bank in the world. 
The political temptation is always there to resort to inappropriate monetary expansions that bring temporary relief at the expense of harming longer-term growth. 
Institutional independence has allowed the central bank to conduct its monetary policy in a consistent manner, insulated from short-term political influences. 
Admittedly, the ECB’s first years were a “baptism of fire.” 
Blessed at the start with a very low inflation rate in the euro area, the common currency soon faced a series of one-off shocks. 
The biggest impact initially came from sharply rising oil prices and later from a rapidly weakening exchange rate, which led to a sharp rise in import prices. 
By the end of 2000, oil prices had risen to levels not seen since the beginning of the 1990’s. 
These shocks were naturally beyond the ECB’s control. 
The policy response, however, required preventing these shocks from becoming entrenched in medium to long-term inflation expectations. 
In this context – and in view of the robust economic growth recorded in 1999 and 2000, the still-booming stock markets, and the continued accumulation of excess liquidity – the ECB’s Governing Council progressively tightened policy, thereby keeping upward risks to price stability from materializing. 
A bigger challenge came with the protracted stock market slowdown, the terrorist attacks on the United States in 2001, and the wars in Afghanistan and Iraq. 
These events hindered the global economy by thwarting confidence and momentum. 
Another period of excessive pessimism arose a year ago. 
In the summer of 2003, public debate and market sentiment in the euro area were influenced by Japan’s protracted deflation and the expectation of a possibly severe disinflationary process in America. 
Some observers saw a risk of sustained deflation in the euro area as well. 
Our assessment was different. 
Inflation in the euro area was then slightly above 2%. 
Given the movements in the euro’s exchange rate in previous months and sluggish growth in the euro area, we expected that inflation rates would decline, but only to levels close to 2%. 
Indeed, our monetary analysis suggested that the risk of protracted deflation was negligible. 
So we did not overreact. 
We continued to guide monetary policy by our assessment of the risks to price stability over the medium term. 
This medium-term orientation paid off. 
Fears of euro-area deflation soon vanished and an incipient recovery started later in 2003. 
Several lessons can be learned from these episodes. 
First, in all cases we remained clearly focused on the mandate of price stability. 
Second, we kept a steady hand, guided by our medium-term orientation, while eschewing oversimplified diagnostics and mechanistic reactions to a few indicators. 
Third, we aimed at guiding markets and inspiring confidence in monetary policy, thereby helping to stabilize the economy by keeping inflation expectations anchored at levels compatible with our definition of price stability. 
So the brief history of the ECB’s monetary policy is already a success story. 
Most of the initial uncertainties and concerns – and, to a large extent, the skepticism – have been dispelled. 
A still relatively young institution – and the common currency that it manages – has quickly gained public and global confidence. 
A current indicator is that the world’s central banks are holding an increasing share of their foreign-exchange reserves in euros rather than US dollars. 
The main question now is whether the ECB will be able to sustain its hard-won reputation following enlargement of the euro zone in coming years. 
Indeed, when the ECB was established, some observers raised concerns even then about possible inefficiencies resulting from its supposedly outsized Governing Council and about possible distortions in its deliberations due to national considerations. 
However, these concerns were misplaced. 
So are concerns about the effect of further enlargement of the euro area. 
The voting rules unanimously approved by the Governing Council and adopted by the European Council in early 2003 have prepared the ECB well. 
All Governors, whatever their voting rights, will continue to attend meetings of the Governing Council and to participate fully in its discussions. 
Furthermore, the “one member, one vote” principle will remain valid and apply to all members exercising a voting right. 
Thus, the voting system is sufficiently robust to accommodate up to 27 euro-area members. 
Moreover, the new voting system is transparent and, above all, automatic, thereby reinforcing the ECB’s independence. 
This will facilitate the conduct of monetary policy by reducing uncertainty and bolstering credibility still further. 
As the world has learned, credibility and reliability are the ECB’s two most important attributes. 

 

The Euro’s Final Countdown? 
The introduction of the euro in 1999, it was claimed, would narrow the economic differences between the member countries of the monetary union. 
Unemployment rates would converge, as would other important macroeconomic variables, such as unit labor costs, productivity, and fiscal deficits and government debt. 
Ultimately, the differences in wealth, measured in terms of income per capita, would diminish as well. 
After the common currency’s first decade, however, increased divergence, rather than rapid convergence, has become the norm within the euro area, and tensions can be expected to increase further. 
The differences between member states were already large a decade ago. 
The euro became the common currency of very wealthy countries, such as Germany and the Netherlands, and much poorer countries, such as Greece and Portugal. 
It also became the currency of the Finns, runners-up in innovation and market flexibility, and of Italy, which lacked both, earning the apt moniker “the sick man of Europe.” 
Such differences were a highly complicating factor for the newly established European Central Bank (ECB), which had to determine the appropriate interest rate for all members (the so-called “one size fits all” policy). The larger the differences have become during the euro’s first decade, the more the ECB’s policy could be described as “one size fits none.” 
We have compared the performance of the best-performing and worst-performing euro-zone countries between 1999 and 2009. To avoid comparing apples and oranges, we have compared the data for the 11 countries that were included in the first wave in 1999, supplemented by Greece, which joined shortly thereafter. 
Because the ECB was given the sole task of achieving and maintaining price stability in the euro area, inflation rates seem the most logical starting point for comparison. 
In 1999, the difference between the euro-zone countries with the lowest and highest inflation rate was two percentage points. 
By the end of 2009, the difference had almost tripled, to 5.9 percentage points. 
As for economic growth, we have made an exception. 
For that variable, we looked at the average yearly GDP growth in the first five years after the introduction of euro banknotes and coins in 2002. 
The difference between Ireland and Portugal in the first half of the decade was 4.8 percentage points. 
By 2009, it had increased to six percentage points. 
Moreover, the productivity difference increased from 25 index points in 1999 to 66.2 in 2008; the difference in unit labor costs went from 5.4 percentage points to 31.8; and the difference in the unemployment rate rose from 10.1 percentage points to 15.4. 
Nor could we find any convergence regarding government deficits and debt. 
In 1999, Finland boasted the smallest government debt, equal to 45.5% of GDP. 
The difference with the largest debtor in the euro area, Italy, was 68.2 percentage points. 
Despite the most severe financial and economic crisis in almost a century, the Finnish national debt actually decreased by 2009, to 39.7%. 
Italy, meanwhile, failed to use the significant windfall from the steep decline in long-term interest rates caused by the introduction of the euro and a decade of rapid economic growth to repair its debt position. 
Italy’s debt barely budged and stayed well above 100% of GDP. 
As a result, the difference between the debt positions of Finland and Italy, the most prudent and most profligate euro-zone members, shot up to 73.3 percentage points in 2009. (The situation is even worse for government deficits.) 
The implications of these increasing differences could be severe. 
Increasing tensions between the euro countries on economic policy are likely, as are growing rifts within the ECB governing council in the coming years. 
We might get a sneak preview this year and in 2011, when European leaders must select a new ECB president and vice-president. 
As always, those seats will be hotly contested, but, with more at stake than ever, the fight for them could be fiercer than it would otherwise. 
Tensions at the ECB and between the euro-zone countries do not bode well for the stability of the common currency, both externally, vis-à-vis other currencies, and internally, in terms of inflation. 
The ECB will be scapegoated for that. 
If it keeps its interest rate too low for too long, countries like Germany and the Netherlands will protest. 
If it hikes the interest rate, the southern euro-zone countries will complain. 
In any case, support for the euro, already fragile, will erode further, weakening the common currency and fueling even greater tensions. 
In 1990, the Italian singer Toto Cutugno won the annual Eurovision song contest with his passionate call to Europeans to unite. 
The refrain of his winning song, “Together: 1992,” was “Unite, unite Europe.” 
Almost 20 years later, the Swedish band Europe’s hit song, “The Final Countdown,” seems more appropriate for the euro area with every passing day. 

The Euro’s Greek Tragedy 
AMSTERDAM – When the euro was introduced in 1999, European countries agreed that fiscal discipline was essential for its stability. 
While the common currency has benefited all countries that have adopted it – not least as an anchor in the current economic crisis – the failure of euro-zone members to abide by their agreement risk could yet turn the euro into a disaster. 
Indeed, too many members simply behave as if there were no Stability and Growth Pact. 
The state of Greek public finances, for example, is “a concern for the whole euro zone,” according to European Commissioner for Monetary Affairs Joaquin Almunia. 
Greece’s fiscal deficit is expected to reach 12.7% of GDP this year, far exceeding the SGP’s 3%-of-GDP cap. 
Of course, every euro-zone country is breaching the SGP’s deficit ceiling as a result of the current crisis. 
But consider the Netherlands, which will do so this year for only the second time since 1999. 
When the Netherlands first exceeded the SGP limit – by only 0.1% of GDP – the government immediately took tough measures to rein in the deficit. 
Germany and Austria behaved the same way. 
Those countries are already working to reduce their crisis-inflated deficits as soon as possible. 
Down in southern Europe, things look very different. 
Exceeding the SGP’s deficit cap is the rule rather than the exception. 
Indeed, throughout the euro’s first decade, Greece managed to keep within the SGP limits only once, in 2006 (and by a very narrow margin). 
Moreover, the Greek government turned out to be untrustworthy. 
In 2004, Greece admitted that it had lied about the size of its deficit ever since 2000 – precisely the years used to assess Greece’s application to join the euro zone. 
In other words, Greece qualified only by cheating. 
In November 2009, it appeared that the Greek government lied once again, this time about the deficit in 2008 and the projected deficit for 2009. 
Italy also has a long history of neglecting European fiscal rules (as do Portugal and France). 
Like Greece, Italy was admitted to the euro zone despite being light-years away from meeting all the criteria. 
Public debt in both countries was well above 100% of GDP, compared to the SGP’s threshold of 60% of GDP. 
Italy did not fulfill another criterion as well, as its national currency, the lira, did not spend the mandatory two years inside the European Exchange Rate Mechanism. 
Ten years later, it seems as if time has stood still down south. 
Both the Greek and Italian public debt remain almost unchanged, despite the fact that both countries have benefited the most from the euro, as their long-term interest rates declined to German levels following its adoption. 
That alone yielded a windfall of tens of billions of euros per year. 
But it barely made a dent in their national debts, which can mean only one thing: massive squandering. 
That is evident from their credit ratings. 
Greece boasts by far the lowest credit rating in the euro zone. 
Standard & Poor’s has put the already low A- rating under review for a possible downgrade. 
Fitch Ratings has cut the Greek rating to BBB+, the third-lowest investment grade. 
Indeed, those scores mean that Greece is much less creditworthy than for example Botswana and Malaysia, which are rated A+ . 
What if Greece gets into so much trouble that it cannot service its debt? 
That is not impossible. 
According to calculations by Morgan Stanley, with relatively low long-term interest rates, Greece needs a primary surplus of at least 2.4% of GDP each year just to stabilize its national debt at 118% of GDP. 
Current European rules prohibit other European countries or the EU itself from helping Greece. 
But recent history teaches us that European rules are made to be broken. 
Already, many (former) politicians and economists (no prizes for guessing whence they mostly hail) are proposing that the EU issue its own sovereign debt, which would alleviate the problems of countries such as Greece and Italy. 
But such schemes would come at a high cost. 
They would punish fiscally prudent governments, as interest rates would inevitably increase in countries like the Netherlands or Germany. 
Just a 0.1% increase in borrowing costs would mean hundreds of millions of euros in extra debt-service payments a year. 
Moreover, even if the plan for EU sovereign debt never takes off, fiscally prudent euro-zone countries will face higher borrowing costs. 
As financial integration in Europe deepens, the lack of fiscal discipline in one or more euro-zone countries will push up interest rates throughout the currency area. 
A member of the euro zone cannot be expelled under current rules, allowing countries like Greece to lie, manipulate, blackmail, and collect more and more EU funds. 
In the long term, this will be disastrous for greater European cooperation, because public support will whither. 
Europe should therefore consider bearing the high short-term costs of changing the rules of the game. 
If expelling even one member could establish a more credible mechanism for guaranteeing fiscal discipline in the euro zone than the SGP and financial fines have proven to be, the price would be more than worth it. 

The Euro’s Imagined Community 
NEW HAVEN – Great significance – probably too much – has been attached to a possible breakup of the eurozone. 
Many believe that such a breakup – if, say, Greece abandoned the euro and reintroduced the drachma – would constitute a political failure that would ultimately threaten Europe’s stability. 
Speaking before the Bundestag last October, German Chancellor Angela Merkel put the matter starkly: 
“Nobody should believe that another half-century of peace and prosperity in Europe is guaranteed. 
It is not. 
So I say: If the euro fails, Europe fails. 
That must not happen. 
We have a historical obligation to protect by all prudent means at our disposal Europe's unification process begun by our forefathers more than fifty years ago after centuries of hatred and spilling of blood. 
None of us can foresee what the consequences would be if we were to fail.” 
Europe has had more than 250 wars since the beginning of the Renaissance in the mid-fifteenth century. 
So, it is not alarmist to worry aloud about preserving the sense of community that Europe has enjoyed for the past half-century. 
In a fascinating, but largely overlooked book, How Enemies Become Friends,Charles A. Kupchan reviews many historical case studies of how nation-states with a long history of conflict managed eventually to become secure and peaceful friends. 
His examples include the formation of the Swiss Confederation (1291-1848); the creation of the Iroquois Confederation in the century or so before the first Europeans arrived in America; the establishment of the United States (1776-1789); the unification of Italy (1861), and of Germany (1871); the Norway-Sweden rapprochement (1905-1935); the formation of the United Arab Emirates (1971); and the Argentine-Brazilian rapprochement of the 1970’s. 
Kupchan also examines some notable failures of friendship: the United States’ Civil War (1861-65); the end of the Anglo-Japanese Alliance (1923); the breakdown of Sino-Soviet relations (1960); the demise of the United Arab Republic (1961); and the expulsion of Singapore from Malaysia (1965). 
Kupchan never mentions a common currency as a condition of comity among nations; in fact, economic integration tends to follow, rather than precede, achievement of political unity. 
Rather, he regards diplomatic engagement as the essential element to strategic accommodation and mutual trust, and this is more easily accomplished if the states have similar social orders and ethnicities. 
But Kupchan’s analysis implies that a common currency can help nation-states to build lasting friendships, for he argues that friendship-building is most secure after an identity-changing “narrative” takes root, leading to a sense that the nations are like members of a family. 
A common currency can help to generate such a narrative. 
For example, the Iroquois tell the story of a great warrior and skilled orator named Hiawatha, who, traveling with the mystic Deganawidah, negotiated the treaties that established their confederation. 
He advocated new condolence ceremonies to commemorate lost warriors – and to replace wars of vengeance. 
The new narrative was reinforced with physical symbols, akin to a currency or a flag, in the form of belts of beads made of wampum, the Iroquois’ money. 
A surviving Hiawatha belt, dating from the eighteenth century (and probably a copy of earlier belts), contains symbols of the five nations – Seneca, Cayuga, Onondaga, Oneida, and Mohawk – much as the US flag contains stars representing each of its states. 
The belt also preserves Hiawatha’s status as the confederation’s forefather. 
Flags may be a more inspiring symbol of common destiny, but most of us do not carry them around, and many people never display them, except perhaps at major sports events; their origin, rooted in battle standards, can seem uncomfortably aggressive. 
There is a European Union flag, but it is rarely seen anywhere but outside of EU government buildings. 
A British schoolteacher expressed the sentiment well in 1910: “We suspect the man who talks patriotism and imperialism, just as we suspect him who talks religion or any of the things that are of deepest value in life. 
We think him either a humbug or a shallow person who has not realized the inadequacy of words to express what is deepest.” 
And yet national currency, which we display every time we make a cash purchase, arouses no such suspicions. 
So currency works as a constant, if latent, reminder of identity. 
In using it, one has the psychological experience of participating with others in a common venture, and thus developing a sense of trust in both the endeavor and one’s fellow-participants. 
Every currency union chooses symbols of common cultural values for its coins and notes, and these symbols become part of the sense of shared identity. 
We see the human faces on the notes so often that they come to seem like family, creating what the political scientist Benedict Anderson called the “imagined community” that underlies and sustains a sense of nationhood. 
The euro notes feature bridges as they appeared throughout Europe in various epochs, rather than images of actual structures that might seem to imply preferential regard for some countries. 
The town of Spijkenisse in the Netherlands is now in the process of building all seven bridges depicted on the euro notes. 
But the bridges remain symbols of European culture, in which presumably all Europeans share. 
Modern electronic technology will not eliminate paper notes and coins soon, so there is still plenty of time to make use of the symbolic value of a common currency. 
Indeed, even if the eurozone breaks up, each European country could adopt a different currency but retain common symbols. 
For example, there could be a Greek euro, a Spanish euro, etc. 
The notes could even show the same pictures of bridges. 
Even electronic transactions should be able to generate symbols of peace, trust, and unity. 
The point is that if Europe can keep these symbols alive, even a eurozone breakup would not have the dire political consequences for Europe that so many predict. 

The Euro’s Latest Reprieve 
NEW YORK – Like an inmate on death row, the euro has received another last-minute stay of execution. 
It will survive a little longer. 
The markets are celebrating, as they have after each of the four previous “euro crisis” summits – until they come to understand that the fundamental problems have yet to be addressed. 
There was good news in this summit: Europe’s leaders have finally understood that the bootstrap operation by which Europe lends money to the banks to save the sovereigns, and to the sovereigns to save the banks, will not work. 
Likewise, they now recognize that bailout loans that give the new lender seniority over other creditors worsen the position of private investors, who will simply demand even higher interest rates. 
It is deeply troubling that it took Europe’s leaders so long to see something so obvious (and evident more than a decade and half ago in the East Asia crisis). 
But what is missing from the agreement is even more significant than what is there. 
A year ago, European leaders acknowledged that Greece could not recover without growth, and that growth could not be achieved by austerity alone. 
Yet little was done. 
What is now proposed is recapitalization of the European Investment Bank, part of a growth package of some $150 billion. 
But politicians are good at repackaging, and, by some accounts, the new money is a small fraction of that amount, and even that will not get into the system immediately. 
In short: the remedies – far too little and too late – are based on a misdiagnosis of the problem and flawed economics. 
The hope is that markets will reward virtue, which is defined as austerity. 
But markets are more pragmatic: if, as is almost surely the case, austerity weakens economic growth, and thus undermines the capacity to service debt, interest rates will not fall. 
In fact, investment will decline – a vicious downward spiral on which Greece and Spain have already embarked. 
Germany seems surprised by this. 
Like medieval blood-letters, the country’s leaders refuse to see that the medicine does not work, and insist on more of it – until the patient finally dies. 
Eurobonds and a solidarity fund could promote growth and stabilize the interest rates faced by governments in crisis. 
Lower interest rates, for example, would free up money so that even countries with tight budget constraints could spend more on growth-enhancing investments. 
Matters are worse in the banking sector. 
Each country’s banking system is backed by its own government; if the government’s ability to support the banks erodes, so will confidence in the banks. 
Even well-managed banking systems would face problems in an economic downturn of Greek and Spanish magnitude; with the collapse of Spain’s real-estate bubble, its banks are even more at risk. 
In their enthusiasm for creating a “single market,” European leaders did not recognize that governments provide an implicit subsidy to their banking systems. 
It is confidence that if trouble arises the government will support the banks that gives confidence in the banks; and, when some governments are in a much stronger position than others, the implicit subsidy is larger for those countries. 
In the absence of a level playing field, why shouldn’t money flee the weaker countries, going to the financial institutions in the stronger? 
Indeed, it is remarkable that there has not been more capital flight. 
Europe’s leaders did not recognize this rising danger, which could easily be averted by a common guarantee, which would simultaneously correct the market distortion arising from the differential implicit subsidy. 
The euro was flawed from the outset, but it was clear that the consequences would become apparent only in a crisis. 
Politically and economically, it came with the best intentions. 
The single-market principle was supposed to promote the efficient allocation of capital and labor. 
But details matter. 
Tax competition means that capital may go not to where its social return is highest, but to where it can find the best deal. 
The implicit subsidy to banks means that German banks have an advantage over those of other countries. 
Workers may leave Ireland or Greece not because their productivity there is lower, but because, by leaving, they can escape the debt burden incurred by their parents. 
The European Central Bank’s mandate is to ensure price stability, but inflation is far from Europe’s most important macroeconomic problem today. 
Germany worries that, without strict supervision of banks and budgets, it will be left holding the bag for its more profligate neighbors. 
But that misses the key point: Spain, Ireland, and many other distressed countries ran budget surpluses before the crisis. 
The downturn caused the deficits, not the other way around. 
If these countries made a mistake, it was only that, like Germany today, they were overly credulous of markets, so they (like the United States and so many others) allowed an asset bubble to grow unchecked. 
If sound policies are implemented and better institutions established – which does not mean only more austerity and better supervision of banks, budgets, and deficits – and growth is restored, these countries will be able to meet their debt obligations, and there will be no need to call upon the guarantees. 
Moreover, Germany is on the hook in either case: if the euro or the economies on the periphery collapse, the costs to Germany will be high. 
Europe has great strengths. 
Its weaknesses today mainly reflect flawed policies and institutional arrangements. 
These can be changed, but only if their fundamental weaknesses are recognized – a task that is far more important than structural reforms within the individual countries. 
While structural problems have weakened competitiveness and GDP growth in particular countries, they did not bring about the crisis, and addressing them will not resolve it. 
Europe’s temporizing approach to the crisis cannot work indefinitely. 
It is not just confidence in Europe’s periphery that is waning. 
The survival of the euro itself is being put in doubt. 

The Euro’s PIG-Headed Masters 
CAMBRIDGE – Europe is in constitutional crisis. 
No one seems to have the power to impose a sensible resolution of its peripheral countries’ debt crisis. 
Instead of restructuring the manifestly unsustainable debt burdens of Portugal, Ireland, and Greece (the PIGs), politicians and policymakers are pushing for ever-larger bailout packages with ever-less realistic austerity conditions. 
Unfortunately, they are not just “kicking the can down the road,” but pushing a snowball down a mountain. 
True, for the moment, the problem is still economically manageable. 
Eurozone growth is respectable, and the PIGs account for only 6% of the eurozone’s GDP. 
But by stubbornly arguing that that these countries are facing a liquidity crisis, rather than a solvency problem, euro officials are putting entire system at risk. 
Major eurozone economies like Spain and Italy have huge debt problems of their own, especially given anemic growth and a manifest lack of competitiveness. 
The last thing they need is for people to be led to believe that an implicit transfer union is already in place, and that reform and economic restructuring can wait. 
European Union officials argue that it would be catastrophic to restructure any member’s debts proactively. 
It is certainly the case that contagion will rage after any Greek restructuring. 
It will stop spreading only when Germany constructs a firm and credible firewall, presumably around Spanish and Italian central-government debt. 
This is exactly the kind of hardheaded solution that one would see in a truly integrated currency area. 
So, why do Europe’s leaders find this intermediate solution so unimaginable? 
Perhaps it is because they believe they do not have the governance mechanisms in place to make tough decisions, to pick winners and losers. 
The European Union’s weak, fractured institutions dispose of less than 2% of eurozone GDP in tax revenues. 
Any kind of bold decision essentially requires unanimity. 
It is all for one and one for all, regardless of size, debt position, and accountability. 
There is no point is drawing up a Plan B if there is no authority or capacity to execute it. 
Might Europe get lucky? 
Is there any chance that the snowball of debt, dysfunction, and doubt will fall apart harmlessly before it gathers more force? 
Amidst so much uncertainty, anything is possible. 
If eurozone growth wildly outperforms expectations in the next few years, banks’ balance sheets would strengthen and German taxpayers’ pockets would deepen. 
The peripheral countries might just experience enough growth to sustain their ambitious austerity commitments. 
Today’s strategy, however, is far more likely to lead to blowup and disorderly restructuring. 
Why should the Greek people (not to mention the Irish and the Portuguese) accept years of austerity and slow growth for the sake of propping up the French and German banking systems, unless they are given huge bribes to do so? 
As Stanford professor Jeremy Bulow and I showed in our work on sovereign debt in the 1980’s, countries rarely can be squeezed into making net payments (payments minus new loans) to foreigners of more than a few percent for a few years. 
The current EU/International Monetary Fund strategy calls for a decade or two of such payments. 
It has to, lest the German taxpayer revolt at being asked to pay for Europe in perpetuity. 
Perhaps this time is different. 
Perhaps the allure of belonging to a growing reserve currency will make sustained recession and austerity feasible in ways that have seldom been seen historically. 
I doubt it. 
True, against all odds and historical logic, Europe seems poised to maintain the leadership of the IMF. 
Remarkably, in their resignation to the apparently inevitable choice for the top position, emerging-market leaders do not seem to realize that they should still challenge the United States’ prerogative of appointing the Fund’s extremely powerful number-two official. 
The IMF has already been extraordinarily generous to the PIGs. 
Once the new bailout-friendly team is ensconced, we can only expect more generosity, regardless of whether these countries adhere to their programs. 
Unfortunately, an ultra-soft IMF is the last thing Europe needs right now. 
With its constitutional crisis, we have reached exactly the moment when the IMF needs to help the eurozone make the tough decisions that it cannot make on its own. 
The Fund needs to create programs for Portugal, Ireland, and Greece that restore competitiveness and trim debt, and that offer them realistic hope of a return to economic growth. 
The IMF needs to prevent Europeans from allowing their constitutional paralysis to turn the eurozone’s debt snowball into a global avalanche. 
Absent the IMF, the one institution that might be able to take action is the fiercely independent European Central Bank. 
But if the ECB takes over entirely the role of “lender of last resort,” it will ultimately become insolvent itself. 
This is no way to secure the future of the single currency. 
The endgame to any crisis is difficult to predict. 
Perhaps a wholesale collapse of the euro exchange rate will be enough, triggering an export boom. 
Perhaps Europe will just boom anyway. 

The Euro's Troubles 
CAMBRIDGE: The script for the euro has become pure improvisation. 
Everyone remembers the popping champagne corks and pride that greeted the birth of European Monetary Union. 
At long last the dollar would be challenged; perhaps even dethroned. 
Europe's great political project - the EU - now had an equal economic project. 
Today, however, all those dreams seem up for grabs. 
Daily, the euro sinks. 
No longer is it inconceivable that the US Treasury may step in to bail out Europe's new money. 
What an irony: a currency designed to challenge the dollar for supremacy among global currencies, now needs US assistance to stop its meltdown. 
But that is where we may be heading. 
All this is happening as Europe approaches the introduction of real euro notes in January 2002. 
Small wonder that, in Germany, the coming disappearance of the D-mark in favor of euro notes is causing deep disquiet. 
No wonder that the French, who have rarely had a hard currency to call their own, are nervous and want something, anything, to be done. 
Such anxieties are exaggerated. 
It is painful for Europe to lose pride in its new currency so fast, but in strict economics terms, no harm arises from the euro's present weakness. 
Europe's embarrassment is not likely to worsen, nor last very long. 
Five questions are useful at this point: 
- Who is to blame? 
- What can be done? 
- Is the bottom near or can things get worse? 
- How long will the euro's weakness last? 
- What will bring about change? 
Looking for something, or someone, to blame comes naturally to politicians and those who fear having made a big mistake. 
In these circumstances, however, that instinct is wrong. 
The new European Central Bank, the main public suspect, is not to blame. 
The ECB's performance so far is unimpressive, but it has nonetheless handled the euro's decline well. 
There has been no loss of nerve, no departure from the ECB's price stability target, and its public presentation is increasingly good. 
The chief reason for the euro's pains is the performance of the US economy. 
Even when things look more difficult in the US, as when inflation began to run higher recently and productivity growth lowered, the stock market sell-off that followed did not burst the overall market bubble. 
The euro's slide is based upon Europe's absolute and relative decline in reference to the American economy. 
What can be done? 
Here another common mistake beckons: do something, anything, just do it! 
But anything Europe could do at this stage would make matters worse. 
Raising interest rates to the sky won't be credible because it would cause a recession and the ECB could not hold to such a policy for long. 
Intervention is even less plausible. 
The world has too many currency choices. 
So this is the time to let markets take their course. 
True, the US could turn the euro around, something no European head of government or finance minister could accomplish. 
Alan Greenspan might achieve this result simply by muttering that the Euro is too weak, but he rightly saves his words for more important issues. 
The euro has not necessarily reached the bottom. 
In 1985, the value of European currencies as a basket reached 67 US cents, 25% below today's levels. 
It is unlikely, but not impossible, that the euro could fall that low again. 
More likely, the euro will stabilize at some point in the range of 80 US cents, then begin to climb back up. 
But it is worth remembering that a weak euro is not all pain; it makes European businesses highly competitive. 
Without such stimulus, growth might be significantly less than today's 3%. 
What will make the euro recover? 
The answer almost certainly has to come from America. 
If and when America's economy slows, and when the valuations of US assets become far more dubious, the euro will become an attractive investment. 
At that point, disenchanted holders of euro positions will take a fonder view of their holdings and outsiders from the US and Japan will begin to believe that diversification into the euro is viable. 
After all, the euro can now be bought cheap. 
If and when that point is reached, a bit of ECB intervention can initiate the long march upwards. 
That time could be months or a year off. 
Meanwhile, the fragile euro is certain to remain on front pages, and debates about whom to blame and what to do will remain alive. 
Benign neglect is the right answer, but let no European banker say it loud. 

The Euro Zone’s Default Position 
WASHINGTON, DC – Kazakhstan may be far removed from the euro zone, but its recent economic experiences are highly relevant to the euro’s current travails. 
As the euro zone struggles with debt crises and austerity in its weaker members, Kazakhstan is emerging from a massive banking-system collapse with a strong economic recovery. 
For most of the last decade, Kazakhstan gorged on profligate lending, courtesy of global banks – just like much of southern Europe. 
The foreign borrowing of Kazakh banks amounted to around 50% of GDP, with many of these funds used for construction projects. 
As the money rolled in, wages rose, real-estate prices reached to near-Parisian levels, and people fooled themselves into thinking that Kazakhstan had become Asia’s latest tiger. 
The party came to a crashing halt in 2009, when two sharp-elbowed global investment banks accelerated loan repayments – hoping to get their money back. 
The Kazakh government, which had been scrambling to support its overextended private banks with capital injections and nationalizations, gave up and decided to pull the plug. 
The banks defaulted on their loans, and creditors took large “haircuts” (reductions in principal value). 
But – and here’s the point – with its debts written off, the banking system is now recapitalized and able to support economic growth. 
Despite a messy default, this fresh start has generated a remarkable turnaround. 
The West European approach to dealing with crazed banks is quite different. 
Ireland, Europe’s (Celtic) tiger over the last decade, grew in part due to large credit inflows into its “Banking Real Estate Complex.” 
The Irish banking system’s external borrowing reached roughly 100% of GDP – two Kazakhstans. 
When the world economy dove in 2008-2009, Ireland’s party was also over. 
But here’s where the stories diverge, at least so far. 
Instead of making the creditors of private banks take haircuts, the Irish government chose to transfer the entire debt burden onto taxpayers. 
The government is running budget deficits of 10% of GDP, despite having cut public-sector wages, and now plans further cuts to service failed banks’ debt. 
Greece is now at a crossroads similar to that of Kazakhstan and Ireland: the government borrowed heavily for the last decade and squandered the money on a bloated (and unionized) public sector (rather than modern – and vacant – real estate), with government debt approaching 150% of GDP. 
The arithmetic is simply horrible. 
If Greece is to start paying just the interest on its debt – rather than rolling it into new loans – by 2011 the government would need to run a primary budget surplus (i.e., excluding interest payments) of nearly 10% of GDP. 
This would require roughly another 14% of GDP in spending cuts and revenue measures, ranking it among the largest fiscal adjustments ever attempted. 
Worse still, these large interest payments will mostly be going to Germany and France, thus further removing income from the Greek economy. 
If Greece is ever to repay some of this debt, it will need a drastic austerity program lasting decades. 
Such a program would cause Greek GDP to fall far more than Ireland’s sharp decline to date. 
Moreover, Greek public workers should expect massive pay cuts, which, in Greece’s poisonous political climate is a sure route to dangerous levels of civil strife and violence. 
European leaders are wrong if they believe that Greece can achieve a solution through a resumption of normal market lending. 
Greece simply cannot afford to repay its debt at interest rates that reflect the inherent risk. 
The only means to refinance Greece’s debt at an affordable level would be to grant long-term, subsidized loans that ultimately would cover a large part of the liabilities coming due in the next 3-5 years. 
And, even on such generous terms, Greece would probably need a daunting 10%-of-GDP fiscal adjustment just to return to a more stable debt path. 
The alternative for Greece is to manage its default in an orderly manner. 
Reckless lending to the Greek state was based on European creditors’ terrible decision-making. 
Default teaches creditors – and their governments – a lesson, just as it does the debtors: mistakes cost money, and your mistakes are your own. 
With each passing day, it becomes more apparent that a restructuring of Greek debt is unavoidable. 
Some form of default will almost surely be forced upon Greece, and this may be the most preferable alternative. 
A default would be painful – but so would any other solution. 
And default with an “orderly” restructuring would instantly set Greece’s finances on a sustainable path. 
After tough negotiations, the government and its creditors would probably eventually slash Greece’s debt in half. 
Greek banks would need to be recapitalized, but then they could make new loans again. 
A default would also appropriately place part of the costs of Greece’s borrowing spree on creditors. 
The Germans and French would need to inject new capital into their banks (perhaps finally becoming open to tighter regulation to prevent this from happening again), and the whole world would become more wary about lending to profligate sovereigns. 
Ultimately, by teaching creditors a necessary lesson, a default within the euro zone might actually turn out to be a key step toward creating a healthier European – and global – financial system. 



The European Economic Model Lives 
Back in the early 1990's, American officials like me who were making long-term forecasts for the Clinton administration cautioned that it would be rash to forecast an average long-run growth rate of more than 2.5% per year - and that actual growth might turn out to be even slower. 
Now we look back at a decade during which the American economy has grown at an average rate of 3.4% per year. 
Indeed, the United States today is 9% richer than we would have dared forecast a decade ago, and that is true despite labor-market slack and thus the largest production shortfalls below potential output in two decades. 
In America, the "new economy" has proven to be real, and there is every reason to think that growth in the next decade will be faster than it was in the past. 
The acceleration of US economic growth in the late 1990's posed a puzzle for those of us who looked across the Atlantic at Western Europe: where was Europe's "new economy"? 
We could see it in Scandinavia, and in scattered pockets elsewhere, but the strong imprint of improved computer and communications technologies on the growth rates of output and productivity economy-wide seemed to be missing. 
Europe seemed to be falling further and further behind the US. 
Yet today, if we look at transatlantic comparisons, Western Europe appears to be doing much better than one would expect if one were to judge from the past decade's business press. 
Western Europe's productivity per hour worked, for example, is now only 10% or so below America's. 
Northwestern University economist Robert Gordon points out several interesting features of America's GDP that should give cheerleaders of the US model and critics of Europe cause for greater circumspection. 
For example, Americans must buy cars because public transport is so lousy. 
The value of the cars is calculated in American GDP, but European public-transport systems are counted not at their value to passengers but as a cost to government. 
Similarly, Americans keep two million of their fellow citizens in jail: the cost of building the prisons and paying the jailers is also included in GDP. 
Professor Gordon also points out that America's more extreme climate - colder winters (save in Florida and California) and hotter summers (save in Washington, Oregon, and California) - must spend more on heating and cooling. 
The net result of all these calculations? 
Western Europeans work some 25% less than Americans, yet they have a level of social welfare (including climate) that is only around 15% lower than Americans, and they have more equal income distributions and lower poverty rates as well. 
From this perspective, Western Europe appears to have at least as good a claim to the title of "Good Society" as does the US. 
Moreover, the economy-wide productivity gap between the US and Western Europe does not appear to be widening very rapidly, if at all. 
Western European productivity growth almost matches America's, suggesting that the new economy is coming to Western Europe, only quietly and with much less fanfare than in America. 
Of course, all favorable judgments of the state of the Western European economy must come with fine print. 
European unemployment, for example, appears to be half again as high as in the US. 
Labor force participation is lower - and a substantial part of that lower labor force participation is not the result of untrammeled choice but of discouraged workers and institutions that make it very difficult for households that have every adult at work. 
Moreover, European labor productivity figures are inflated by the fact that potential workers who would be less productive are much less likely to hold any jobs at all. 
Looming over everything is the impending demographic crisis of Western Europe's social-insurance state as its population ages. 
But where is the country or region without serious economic worries and deep structural problems? 
During the late 1990's, the US had an amazingly long run of economic good luck, assisted by some very good institutions and some quite good economic policies. 
By 2000, European senior bureaucrats began to dread the approach of each international meeting as the likely occasion for yet another lecture by the Americans on how Europe needed to become much more like America right now. 
Thus, it is important to note how little - if any - ground America has gained relative to Europe in the past decade according to the yardstick of social welfare. 
Learning needs to go both ways. 

The European Museum 
In the late nineteenth century, Europe viewed Asia mainly as either a source of inspiration for its artists or a focus of imperial ambition. 
Asians, for their part, viewed Europe as either a model of modernity, as in Meiji Japan, or a barometer of decay, as in China. 
A century later, the Japanese economic miracle had transformed the image of at least a small part of Asia in European eyes into a place of rapid technological and industrial progress. 
Now, in the first years of the twenty-first century, the perception of Europe in Asia and of Asia in Europe is changing dramatically, as Asia’s economies boom while the European Union finds itself mired in a crisis of identity and confidence. 
Prominent Asians, such as former Singaporean leader Lee Kuan Yew, are now warning Europeans that if they continue on their current course, Europe will rapidly become irrelevant for anything other than tourism and high-end real estate. 
A prominent Chinese businessman who divides his time between Hong-Kong and London was even more specific. 
At a private gathering of top business and political leaders in Paris a few weeks ago, he said, “You Europeans are becoming a Third World country, you spend time on the wrong subjects –the constitution, the welfare state, the pensions crisis – and you systematically give the wrong answers to the questions you raise.” 
Europeans’ views of Asia in general, and China in particular, are more complex and swing from lucid adjustment to a new and respected competitor to pure ideological rejection. 
In May 1968, in France, the students – or some of them, at least – who took to the streets to invent a new world were dreaming of Maoist China, a China in the midst of the brutal and senseless Cultural Revolution. 
Their absurd and baroque infatuation was as much the product of ignorance of Mao’s crimes as it was the result of boredom in a prosperous society where unemployment was virtually nonexistent. 
Today, by contrast, their heirs are openly criticizing the Asian capitalist model. 
Yesterday China was an anti-capitalist lodestar for utopian revolutionaries; today it has become an ultra-liberal nemesis for a new generation of utopian reactionaries – the defenders of the status quo in Europe. 
The student demonstrators in the streets of Paris recently don’t want to become like Chinese and Indians; they reject the logic of globalization and refuse to surrender hard-won social guarantees. 
European economic elites perceive China and India very differently. 
They are now fully aware that their slightly nostalgic post-colonial view of these countries as large export markets and deep reservoirs of cheap labor has become outdated. 
China and India have become genuine competitors who deserve respect, if not sheer awe. 
Quality, costs, and delivery times in auto manufacturing, for example, are reaching the European level. 
Europe retains an advantage in terms of pure science, as in the pharmaceutical industry, but emerging world-class companies, particularly in India, are increasingly able to recruit M.I.T. and Harvard graduates, while maintaining lower labor costs and thus global competitiveness. 
Unfortunately, although European leaders recognize the Asian challenge, they have failed to use it as a reality test in the irresistible process of globalization and as a call to arms in social and economic terms. 
In fact, it would be fair to say that European politicians, with few exceptions, such as Tony Blair, have been slow to adjust their worldviews in accordance with the revolutionary pace of change in Asia. 
Caught between their lack of long-term strategic vision and their obsession with short-term interests, Europe’s political leaders have largely failed to win the respect of their Asian counterparts, in contrast to European companies, which are faring much better in Asian eyes. 
Of course, on a continent that has largely failed to bury its past and close the door to nationalist ghosts, the EU is also often regarded by Asians as a model of reconciliation, peace, and prosperity. 
But if Europe’s performance continues to decline, would this perception survive? 
Perhaps Asians would then come to regard the European model as a political version of Venice – a place to visit with nostalgia for its past glory and admiration for its museum-like quality. 

The European Union's Battle for Turkey 
When the plotters behind the recent suicide attacks in Istanbul launched their human bombs against Jewish synagogues and British office buildings, they had several audiences in mind. 
One audience--and potentially the most important--are the citizens of the European Union, which Turkey's political class is eager to join as soon as possible. 
The battle over Turkish membership in the EU will be fought on many fronts: in the country itself, where the government is currently undertaking major reforms in order to qualify for candidate status; at the negotiating table once the European Council in December 2004 authorizes the Commission to enter into formal accession talks; and among the public within the existing member countries. 
Of the three fronts, the latter will be the most demanding. 
Most EU citizens are uneasy today over the prospect of Turkish membership. 
Those responsible for the atrocities in Istanbul may have calculated that Islamic terrorism will increase that uneasiness further. 
Traditionally, Europe's citizens have always accepted the new members that queued up to join the club as it went from the original group of six countries to the 25 that will form the EU in 2004. 
Once a purely West European community, the Union has pushed out its frontiers in all directions. 
From next year, it will stretch from the north of Finland to Cyprus and Malta in the south, from Ireland in the west to the Baltic states in the east. 
While the people inside have often worried that newcomers would take away their jobs and subsidies, they usually acquiesced in the end. 
But Turkey is different. 
The 10 new countries that will join next year--and even the Balkan countries that are now being offered the prospect of future membership--are all embraced by a traditional definition of Europe. 
None of them is of a size that could upset the EU's current balance. 
Neither applies to Turkey. 
Except for a small stretch of land, its territory lies in Asia, not Europe; its culture is Islamic, not Christian, and if it should join in, say, 2013, its population will be by far the largest--and youngest--of any EU member. 
Moreover, because Turkey borders on such countries as Iran, Iraq and Syria, it will bring to the EU a disturbing neighborhood: a part of the world incapable of developing a regional order on its own, a cockpit of Islamic radicalism and terrorism, a collection of fragile states imbued with nationalism, a field of competition for arms, even nuclear arms, a region where the US will remain strategically involved and where Israel will continue to provide a rallying point for anti-Western sentiments. 
With Turkey as a member, the EU will be part of the troubled and troubling wider Middle East, the most challenging region in today's world. 
Yet it is precisely because of these implications that the advantages of having Turkey inside the EU far outweigh the risks. 
First and foremost, the prospect of membership is the most powerful force for modernization in Turkey, and a modern, democratic, and prosperous Turkey is of central interest to Europe, whether inside or outside. 
Moreover, including within the EU the moderate type of Islam for which Turkey stands will be a major help in integrating Muslim minorities within European countries--already large and growing even without the addition of Turkey's population. 
Finally, with the opportunities that Turkey's Islamic traditions, regional contacts, resources, and geography provide, the EU will be much better placed to exert a stabilizing influence on a region that will affect Europe's security in any case. 
These are powerful arguments. 
The big question is whether they are powerful enough to sway a skeptical European public. 
It would take only one country out of perhaps 30 EU members in 2013 to bloc Turkey's accession. 
No doubt some of them will put the matter to a referendum that will leave the decision to the people, not just their parliaments. 
Even in Germany, where referenda are not envisaged by the constitution, there are calls to hold one over Turkey's entry; one opposition party has already announced that it will make this a central issue in next year's election campaign for the European Parliament. 
Once public unease towards Turkey can find focus in a referendum on the country's potential EU membership, the chances for it joining look fairly slim. 
At the end of the negotiations it may thus come to pass that Turkey is ready for Europe, but Europe is not yet ready for Turkey. 
This is why the battle over Turkish membership has already begun, and the bombers of Istanbul seem to have understood this. 
Those who believe that the EU is right for both Turkey and Europe must also start to fight for what they profess. 
Nothing would be worse--for both Turkey and Europe--than European governments wanting Turkey in but then failing to take their people along. 
Terrorists will no doubt continue to instill fear of an Islamic Turkey among Europe's fainthearted. 
Let us hope that in the end, the attacks on innocent people in the crowded streets of Istanbul do not foster European fears, but rather a sense of solidarity with that moderate and dynamic country in the face of a common enemy. 

The Erosion of Europe 
BERLIN – Just weeks ago, the worst of the financial crisis in Europe seemed to be over. 
Stability seemed to be returning. 
But appearances proved to be deceptive. 
A minor problem (at least in scale) like Cyprus, when combined with an almost unbelievable degree of incompetence among the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund), was enough to turn a molehill into a mountainous crisis. 
While markets remained calm, the Cyprus crisis revealed the full extent of the political disaster that the eurozone crisis has wrought: the European Union is disintegrating at its core. 
Europeans’ current crisis of confidence concerning Europe is far more dangerous than renewed market anxiety, because it cannot be overcome with another liquidity injection by the ECB. 
Europe’s old political order was based on competition, mistrust, power rivalries, and, ultimately, war among sovereign states. 
It collapsed on May 8, 1945, and was replaced by a system based on mutual trust, solidarity, the rule of law, and compromise. 
But, with the crisis eroding these foundations, trust is giving way to mistrust, solidarity is succumbing to ancient prejudices (and even new hatred between the poor south and the rich north), and compromise is being overwhelmed by diktat. 
And Germany is once again at the center of the process of disintegration. 
That is because Germany, by far the EU’s strongest economy, has enforced a strategy for overcoming the eurozone crisis that worked for Germany at the beginning of the millennium, but under completely different internal and external economic conditions. 
For the distressed southern European states, the German-backed mixture of austerity and structural reforms is proving fatal, because the decisive third and fourth components – debt relief and growth – are missing. 
It is only a matter of time before one of the large European crisis countries elects a political leadership that no longer accepts the austerity diktats. 
Even now, come election time, national governments more or less openly promise to protect their citizens from Europe, because Germany has seen to it that austerity and structural reforms take pride of place in managing the crisis. 
The argument that “tough love” was necessary in southern Europe, because nothing there would ever have changed otherwise, has been settled. 
The love has been very tough indeed, generating rapid economic contraction, massive unemployment (upwards of 50% among young people), and continued fiscal deterioration, owing to rising debt-service costs. 
Indeed, all eurozone members are now experiencing weak economic growth, if not recession. 
What does Germany want? 
A German Europe would never work, and the country’s political class lacks both the courage and the determination to pursue a European Germany. 
So, does Germany want to hold together the monetary union and thus preserve the EU, or will it allow dithering and a lack of vision to hasten the erosion of Europe’s foundations? 
In this crisis, intention takes a back seat to action (or lack thereof). 
The International Herald Tribunerecently quoted Winston Churchill: “It’s not enough that we do our best; sometimes we have to do what’s required.” 
That is precisely the order of the day in Europe and the eurozone. 
What needs to be done has long been clear. 
The price of the monetary union’s survival, and thus that of the European project, is more community: a banking union, fiscal union, and political union. 
Those who oppose this because they fear common accountability, transfers from rich to poor, and a loss of national sovereignty will have to accept Europe’s re-nationalization – and thus its exit from the world stage. 
No alternative – and certainly not the statusquo – will work. 
It has become common knowledge in Europe that the ongoing crisis will either destroy the EU or bring about a political union, and that, without a solidarity-based solution to existing debt and a partial mutualization of new debt, the euro cannot be saved. 
Such steps will make far-reaching transfers of sovereignty unavoidable. 
Is Germany – or France – willing to do that? 
The real crisis of the EU and the monetary union is not financial but political – or, more precisely, it is a leadership crisis. 
A lack of vision, courage, and strength of purpose is on display in all European capitals, but especially so in Berlin (and on the part of government and opposition alike). 
Europe’s national politicians routinely criticize the EU for its lack of democratic legitimacy, yet they bear part of the responsibility for it. 
Or have pro-Europeans become so faint-hearted and dejected that they prefer simply to hand over the reins to anti-European populists and nationalists? 
That would be a disaster, because the crisis now runs too deep to be resolved by technocratic means. 
Germany is preparing for a national election in which – much like in last year’s French presidential election – the European crisis is to play no part, or at least only a minor one. 
Both government and opposition believe that it would be better to tell the people the truth concerning the most vital question of the day only after the election (and in measured doses). 
Such an outcome would make a mockery of democracy. 
But things may turn out very differently if the dynamics of Europe’s crisis throw German politicians’ plans into disarray. 
An unpleasant surprise cannot be ruled out; at this point, it might be Europe’s greatest source of hope. 

The Europeanization of Russia 
In less than four years, Russia has undergone an astonishing sea change. 
Macroeconomic stabilization is but the start. 
Underlying the economy's rapid recovery is the emergence of a common set of fundamental political values. 
No one questions whether private property should be the basis of economic life. 
Tight monetary and fiscal policies are now de rigueur (until quite recently printing money to finance the budget deficit was widely considered acceptable). 
All major political forces (even of the left) support reducing taxes. 
In short, the ideological vestiges of communist economics have been swept away. 
The achievement of broad political consensus means that institutional change can now become more purpose-oriented and consistent. 
Indeed, the consolidation of political parties has given Russia's government a stable parliamentary majority for the first time since the postcommunist transition began. 
But, unlike economic stabilization, near-universal rules do not apply to institutional reform. 
While there has been noticeable progress on the legal framework of the strategic plan that the government unveiled in 2000 (the so-called "Gref Program," named after Economics Minister German Greff), a breakthrough has yet to be achieved. 
Of more than one hundred reforms planned for 2000-2001, little more than a dozen were fully implemented. 
Many in Russia now seek to accelerate the pace of reform by pursuing closer ties with the EU. 
Just as the global strategic realignment that has marked the war against terrorism led to quasi-membership for Russia in NATO, the attraction is mutual. 
The EU's Common Strategy on Russia referred in 1999 to "the future establishment of an EU-RF free-trade area ." 
By 2001, the EU declared an even more ambitious goal: a Common European Economic Area based on gradual approximation of EU legislation and standards. 
Romano Prodi's declaration last week that Russia was now a fully-fledged "market economy" is a step toward this cooperative notion. 
A common economic area with the EU promises to provide fundamental institutional guidelines for Russia's socioeconomic transformation - a blueprint of postcommunist reform that has driven reforms in the former Soviet bloc countries of Central and Eastern Europe. 
For the first time since communism's collapse, Russia can formulate its own long-term development path - one with defined criteria for appraising policy decisions. 
Adapting European standards to Russian conditions can now be viewed as a set of medium-term strategic targets - institutional objectives to be achieved within the next 10-15 years. 
These targets are increasingly compatible with Russia's social and economic development, as well as its strategic rapprochement with the West. 
The level of educational attainment, the evolution of the political system, and the structure of GDP make the choice of European standards the most natural and appropriate. 
But several caveats are in order. 
First, the use of EU institutional criteria must not be confused with the goal of EU accession. 
The latter is a political issue, and Russian society is not yet ready to discuss it. 
Russia needs standards that are developed in Russia and for Russia, not a set of mechanical rules implemented under the control of European entities. 
The idea is that Russia should determine its own targets and goals rather than formalize its desire to join the EU. 
Second, and related to the first caveat, there should be no formal approximation to EU institutions when this would impair Russia's competitive advantages. 
Indeed, reforms of the past few years have already put Russia ahead of the EU in several areas, including tax legislation, fiscal policy (which aims at balanced budgets), and labor rules. 
Russia's agricultural policy is similarly more efficiency-oriented than that of the EU. 
Third, the legal and technical parameters of the proposed Common European Economic Area remain vague. 
More work is needed to develop detailed targets for Russia. 
But a precedent exists: the European Economic Area (EAA), which incorporates EU countries along with Norway, Iceland, and Liechtenstein. 
EEA membership implies a common market and substantial progress towards legislative harmonization with the EU, but it does not envisage establishment of supranational bodies (except for a dispute resolution mechanism). 
Adaptation of the EU's economic criteria should focus on the following areas: 
existence of a functioning market economy; 
effective competition and operation of market forces; 
structural reforms aimed at establishing secure property rights, meaningful bankruptcy legislation, an efficient tax system, and a stable financial sector; 
monetary and fiscal policies that promote sustainable growth; 
establishment of strong administrative and regulatory institutions. 
None of this, of course, will happen overnight. 
Nor is it realistic to believe that Russia will come close anytime soon to meeting the EU's Maastricht criteria for macroeconomic performance. 
Russia's fiscal balance has improved dramatically over the last two years, but the rapid economic growth and moderate currency depreciation that Russia needs to catch up with Europe will keep inflation higher than the Maastricht ceiling. 
Higher inflation invariably means that long-term interest rates will also exceed EU limits. 
But establishment of a Common European Economic Area to include Russia would make plausible a scenario unthinkable only four years ago. 
Russia can now aim for a position in Europe that resembles the current partnership between the EU and Norway. 
This scenario will become even more plausible following Russia's admission to the WTO. 
Russia does not need to join the EU to create institutions worthy of Europe. 

The False Promise of a Eurozone Budget 
BRUSSELS – A key question confronts the four presidents of Europe’s major institutions (the European Commission, the European Council, the European Central Bank, and the Eurogroup) as they prepare their report on how to reform the common currency: Does the eurozone need its own budget? 
They are facing the argument that the United States’ monetary union works much better because there is a large federal budget to smooth the impact of asymmetric shocks – that is, shocks to individual states. 
The eurozone, it is claimed, should have its own budget to provide similarly automatic insurance to its members. 
This argument, however, misreads the US experience. 
True, in the US, as in most existing federal states, the federal budget redistributes income across regions, thus offsetting at least part of the interregional differences in income. 
But, while this has been repeatedly documented in many cases, the inference that redistribution is equivalent to a shock absorber is wrong. 
For example, in the US, the federal budget offsets a substantial part (estimated at 30-40%) of the differences in per capita income levels across states, because poorer states contribute less income tax, on average, and receive higher transfer payments. 
But this does not imply that these mechanisms also provide insurance against shocks (sudden changes in income for individual states). 
Many of the transfers from the federal government – especially basic social support like food stamps – vary little with the local business cycle. 
On the revenue side, the degree to which federal taxation absorbs shocks at the state level cannot be very large for the simple reason that the main source of federal revenues that does react to the business cycle, the federal income tax, accounts for less than 10% of GDP. 
The low sensitivity of both federal expenditure and federal revenues to local business-cycle conditions explains why only a small fraction (estimated at about 10-15 %) of any shock to the GDP of any individual state is absorbed via automatic transfers to and from the US federal budget. 
One idea that has been mooted repeatedly in Europe is to create some European, or at least eurozone, unemployment insurance fund. 
This idea is attractive at first sight. 
But here, too, the reference to the US experience is misleading. 
In the US, unemployment insurance is organized at the state level. 
The federal government intervenes only in the case of major nationwide recessions and provides some supplementary benefits for the long-term unemployed. 
But this support is given to all states and thus does not provide those most affected with much more support than the others receive. 
Moreover, unemployment benefits are not as important as is often assumed. 
In most countries, they amount to only about 2-3% of GDP, even during a major recession. 
In the US, the annual supplementary federal expenditure has amounted to only about 1% of GDP in recent years. 
It is thus clear that a eurozone unemployment insurance system would never be able to offset major shocks, such as those hitting Ireland or Greece, where GDP has shrunk by more than 10%. 
The case of Spain illustrates another feature of European economies that makes it difficult to argue for a federal unemployment scheme. 
Spanish unemployment is now close to 30%, which a priori should be a good justification for some form of shock absorber. 
But Spanish unemployment has typically been consistently higher than the eurozone average, and fell to single-digit levels only as a result of an unsustainable building boom. 
Any common eurozone unemployment scheme would thus risk financing the long-term unemployment created by rigid national labor-market institutions, which for decades have proved impervious to reforms. 
All in all, it is difficult to base the argument for some eurozone shock absorber on the US experience. 
But how can one explain the fact that the global financial crisis led to no regional banking crises in the US, whereas several eurozone countries’ banking systems are under such stress that their governments have had to rescue them (and then be rescued in turn by the eurozone’s bailout fund)? 
This reflects another aspect of US arrangements that, again, is not widely appreciated. 
The US “banking union” provides tangible insurance against local financial shocks. 
For example, the local real-estate boom and bust in Nevada was as severe as that in Spain or Ireland. 
But, in Nevada, which is similar in size to Ireland, the local banking system’s losses were absorbed to a large extent by US “banking union” institutions, particularly the Federal Deposit Insurance Corporation (FDIC) and the federal mortgage-refinancing agencies, Fannie Mae and Freddie Mac. 
For Nevada, such support can be estimated at 10-20% of its “national” income. 
Ireland would certainly be in much better shape if it had received a similar transfer. 
This leads to a simple conclusion: The euro’s long-term stability depends far more on completing plans for a European banking union than it does on creating some new budget for the eurozone. 


The Eurozone’s Fork in the Road 
BUENOS AIRES – Many observers have recently declared that the eurozone debt crisis is practically resolved, or at least on hold for a few years. 
The falling yields at the Italian government’s last bond auctions in 2011 suggested a significant reduction in the perceived sovereign-default risk. 
Since Italian bonds are regarded as the bellwether of the crisis, many interpret this is a sign that the European debt market is normalizing. 
The “solution” to the crisis was putatively facilitated by the European Central Bank’s decision to lend unlimited funds to commercial banks for three-year terms at very low rates. 
But a central bank would normally do even more to fulfill its role as lender of last resort. 
So why all the renewed optimism? 
The immediate answer is that national banks will now use the scheme to borrow cheaply from the ECB and invest in short-term sovereign bonds, using the interest-rate spread to create a profitable “sovereign carry trade.” 
Despite the inefficiencies and distortions arising from such monetary financing, the ECB may indeed provide some breathing space for governments. 
But the real reason why this otherwise standard policy decision seems like such an important step is that, for the first time, the ECB has recognized the need to address a fundamental flaw in the eurozone’s architecture: the ECB itself. 
At the core of the problem is currency. 
In the 1990’s, emerging-market crises were first and foremost currency crises: sharp corrections of overvalued currencies that bankrupted public and private sector debtors. 
By contrast, the currency issue in the European crisis is difficult to pinpoint. 
Is Italian euro debt denominated in local or foreign currency? 
Whose currency is the euro? 
And whose central bank is the ECB? 
These questions are key to the European predicament. 
Indeed, the possible answers suggest two very different versions of the eurozone. 
One version of the eurozone conceives it as a unity, externally and fiscally balanced, and with a fully functioning monetary union. 
It is also heavily indebted, but in domestic currency. 
The alternative conception assumes that the eurozone is a group of individual countries within a common currency area. 
Most of the countries are unbalanced and are indebted in a currency (the euro) that they cannot print on demand. 
This is equivalent to foreign-currency debt. 
In the first version (the euro crisis minus the currency problem), the scenario looks more like the United States than like Latin America in the 1990’s (with Italy resembling California rather than Argentina). 
In the second version, however, the eurozone saga is comparable to the emerging markets’ story. 
Like a dysfunctional family, the northern “advanced” countries ponder whether or not to bail out the southern “emerging” economies. 
The prognoses for each case are starkly different. 
In the former version, interest rates converge and the default risk is nil, because, with the ECB backstopping its members’ liabilities, as the Federal Reserve does in the US, the euro becomes “local currency.” 
And how often do we hear about sovereign restructurings of local-currency debt? 
In the latter version of the eurozone, there is differential credit risk and, ultimately, bank runs, de-euroization, and default: the common currency is at odds with the needs of the member states. 
Which of these two alternatives should prevail is a question for eurozone members to decide. 
But two things are clear. 
First, the eurozone’s future will be determined largely by the ECB’s role. 
Second, there is little flexibility – European policymakers cannot overcome the crisis if they do not eliminate the currency problem and the resulting default risk. 
This helps to explain the misgivings about the International Monetary Fund’s massive aid to the region. 
Why would the IMF lend Europe special drawing rights (the Fund’s unit of account), rather than euros, thereby creating a currency imbalance? 
Such an imbalance is at the root of all emerging-market crises; the IMF’s actions therefore suggest that Europe is already giving up on the euro. 
Today, the euro faces a fork in the road. 
One route, a currency area without sovereign backstopping, will lead to debt, currency crises, and the eurozone’s dissolution. 
The other, a monetary union with a proper central bank, internal fiscal transfers, and active, regionally-oriented monetary policy, will lead to a slow but steady recovery without default. 
Clearly, to paraphrase Robert Frost, the road taken will make all the difference. 
For that reason, the euro’s fate lies not in Athens, or in Rome, but at the ECB’s headquarters in Frankfurt. 

The Eurozone’s Last Stand 
NEW YORK – The eurozone crisis is reaching its climax. 
Greece is insolvent. 
Portugal and Ireland have recently seen their bonds downgraded to junk status. 
Spain could still lose market access as political uncertainty adds to its fiscal and financial woes. 
Financial pressure on Italy is now mounting. 
By 2012, Greek public debt will be above 160% of GDP and rising. 
Alternatives to a debt restructuring are fast disappearing. 
A full-blown official bailout of Greece’s public sector (by the International Monetary Fund, the European Central Bank, and the European Financial Stability Facility) would be the mother of all moral-hazard plays: extremely expensive and politically near-impossible, owing to resistance from core eurozone voters – starting with the Germans. 
Meanwhile, the current French proposal of a voluntary rollover by banks is flopping, as it would impose prohibitively high interest rates on the Greeks. 
Likewise, debt buybacks would be a massive waste of official resources, as the residual value of the debt increases as it is bought, benefiting creditors far more than the sovereign debtor. 
So the only realistic and sensible solution is an orderly and market-oriented – but coercive – restructuring of the entire Greek public debt. 
But how can debt relief be achieved for the sovereign without imposing massive losses on Greek banks and foreign banks holding Greek bonds? 
The answer is to emulate the response to sovereign-debt crises in Uruguay, Pakistan, Ukraine, and many other emerging-market economies, where orderly exchange of old debt for new debt had three features: an identical face value (so-called “par” bonds); a long maturity (20-30 years); and interest set well below the currently unsustainable market rates – and close to or below the original coupon. 
Even if the face value of the Greek debt were not reduced, a maturity extension would still provide massive debt relief – on a present-value basis – to Greece as a euro of debt owed 30 years from now is worth much less today than the same euro owed a year from now. 
Moreover, a maturity extension resolves rollover risk for the coming decades. 
The advantage of a par bond is that Greece’s creditors – banks, insurance companies, and pension funds – would be able and allowed to continue valuing their Greek bonds at 100 cents on the euro, thereby avoiding massive losses on their balance sheets. 
That, in turn, would sharply contain the risk of financial contagion. 
Rating agencies would consider this debt exchange a “credit event,” but only for a very short period – a matter of a few weeks. 
Consider Uruguay, whose rating was downgraded to “selective default” for two weeks while the exchange was occurring, and then was upgraded (though not to investment grade) when, thanks to the exchange’s success, its public debt became more sustainable. 
The ECB and creditor banks can live for two or three weeks with a temporary downgrade of Greece’s debt. 
Moreover, there would be few holdouts that refuse to participate in the exchange. 
Previous experience suggests that most hold-to-maturity investors would accept a par bond, while most mark-to-market investors would accept a discount bond with a higher coupon (that is, a bond with a lower face value) – an alternative that could be offered (and has been in the past) to such investors. 
At the same time, the best way to contain financial contagion would be to implement a pan-European plan to recapitalize eurozone banks. 
This implies using official resources like the EFSF not to backstop an insolvent Greece, but to recapitalize the country’s banks – and those in Ireland, Spain, Portugal, Italy, and even Germany and Belgium that need more capital. 
In the meantime, the ECB must continue to provide unlimited resources to banks under liquidity stress. 
To reduce the risk of financial pressures on Italy and Spain, both countries need to press ahead with fiscal austerity and structural reforms. 
Moreover, their debt could be ring-fenced with a larger package of EFSF resources and/or with the issuance of Eurobonds – a further step towards European fiscal integration. 
Finally, the eurozone needs policies to restart economic growth on its periphery. 
Without growth, any austerity and reform will deliver only social unrest and the constant threat of a political backlash, without restoring debt sustainability. 
To revive growth, the ECB needs to stop raising interest rates and reverse course. 
The eurozone should also pursue a policy – partially via looser monetary policy – that weakens the value of the euro significantly and restores the periphery’s competitiveness. 
And Germany should delay its austerity plan, as the last thing that the eurozone needs is a massive fiscal drag. 
The eurozone’s current muddle-through approach is an unstable disequilibrium: kicking the can down the road, and throwing good money after bad, will not work. 
Either the eurozone moves toward a different equilibrium – greater economic, fiscal, and political integration, with policies that restore growth and competitiveness, including orderly debt restructurings and a weaker euro – or it will end up with disorderly defaults, banking crises, and eventually a break-up of the monetary union. 
The status quo is no longer sustainable. 
Only a comprehensive strategy can rescue the eurozone now. 

The Everlasting Schism 
Christianity's holiest days always seem to incite fresh disputes between Roman Catholicism and Russian Orthodoxy, between the first Rome and the third Rome. 
This Easter is no different. 
What's new this time is that the current storm came out of the blue. 
Last year, Russia's Patriarch Aleksei gave his blessing to a visit to Moscow by the Catholic girls' choir of the Saint Danilov monastery. 
Soon after, and more importantly, the Patriarch raised the level of Orthodoxy's representation at an ecumenical prayer called by Pope John Paul II in Assisi on January 24 th . 
This was to be followed by a visit to Moscow by a senior Vatican cleric, Cardinal Walter Kasper, President of the Pontifical Council for Promoting Christian Unity and the man who helped organize last year's papal visits to Ukraine, Kazakhstan and Armenia. 
An invitation for the Pope to visit Moscow (a cherished dream of John Paul II) seemed near at last. 
This budding goodwill ended when the Vatican announced plans to reorganize Catholic structures overseas, including within Russia. 
A Roman Catholic arch-diocese (headed by either a Cardinal or Archbishop) was to be created for Moscow. 
Four other apostolic districts in Russia were to be turned into dioceses. 
These changes were intended to ``grant greater opportunities for Catholic believers,'' according to Dr. Joaquin Navarro-Valls, the Vatican press officer. 
The pope's press secretary called this a matter of mere ``technical change'' with nothing to do with ``proselytism.'' 
Similar measures, indeed, had recently been undertaken by the Moscow Patriach in relation to Orthodox parishes in Berlin, Vienna and Brussels. 
Moscow's reaction was quick and withering. 
Archbishop Clement of Kaluga and Borovsk, the vice-chairman of Department for External Church Relations, declared that ``the actions outlined by the Vatican are in contravention of the canonical principles and norms of interchurch relations and stand as a serious obstacle to the development of dialogue between the two churches.'' 
Soon after, Cardinal Kasper's visit was canceled. 
Not to be outdone, Russia's foreign ministry joined the fray. 
Foreign Minister Igor Ivanov expressed ``regret'' at the Vatican's actions and, for the first time in many years, failed to make the obligatory call on the Holy See on his trip to Rome this March. 
A resolution to ``save Orthodoxy'' was rushed through the Duma and street protests aimed at the papal nuncio took place. 
All of this was taking place around the time that Pope John Paul II was making a ``virtual'' pilgrimage to Moscow via the internet. 
This was accomplished through a televised transmission which connected the Apostolic Palace of the Vatican with the Church of the Immaculate Conception in Moscow. 
Speaking on gigantic television screens, Karol Wojtyla blessed Catholic believers in Russian. 
But this rather innocuous meeting did not go off without problems as, until the very last moment, the customs office at Moscow's international airport refused to approve the import of electronic equipment for the televised transmission. 
Why is it that, at a time when America and Russia can begin to work together, Catholicism and Orthodoxy prefer to keep going after each other's throats? 
The current crisis has actually been burning underground for some time, and has broken to the surface now because the Moscow Patriarchate fears that there is a real possibility that John Paul II will be invited by President Putin to visit Russia on governmental matters. 
The Pope will be invited as a head of state (the Vatican) not in his spiritual capacity. 
A stick with which to beat back any instinct in the Kremlin to issue such an invitation was needed by the Patriarch, and so the Vatican's decision to reorganize its dioceses in Russia must have seemed a godsend. 
The leadership of the Orthodox Church does not want to see the current Roman pontiff ever invited to Russia, and appear to be awaiting his replacement as the head of the Holy See. 
Why is this? 
First, because the next pope will almost certainly not be Polish - indeed, is unlikely to be any sort of Slav. 
Second, the next Pope will not be endowed initially with such enormous moral authority as John Paul II has acquired across the world, and so the Patriarch will be able to speak publicly with him, and be measured against him, on something more like equal terms. 
The sharp reactions of the Orthodox Patriarchate to the actions of the Holy See reflect an ongoing crisis of leadership and legitimacy within the Russian Orthodox church, where a battle is clearly underway for the succession of Aleksey II. 
After almost a century of oppression, the Orthodox Church is still struggling to define its role in Russia's postcommunist society, and finds it difficult to compete with more nimble (and self-assured) churches. 
Moreover, although younger than John Paul II, Patriarch Aleksey II has entered his own ``autumn of the patriarch.'' 
Sad to say, reconciliation between the two churches is thus unlikely to gain momentum until two new leaders begin to command their believers. 

The Evita Syndrome 
On the day last month that Argentina commemorated the 50th anniversary of the death of Eva Perón, patron saint of the descamisados and of jobs for everyone, the worst unemployment rate in the country's history, 24%, was announced. 
Four years of recession and devaluation of the peso, has seen Argentina descend into a veritable economic hell. 
Only a head of household--one third of the population--may draw monthly government assistance equal to $1.30 per day. 
This amount cannot begin to cover basic needs. 
More than 19 million people, 53% of the population, live in poverty. 
The middle class continues to cling to the hope that their savings can be salvaged, but these funds, which are now frozen in the nation's banks, are unlikely ever to be at anyone's disposal. 
Under the rule of President Carlos Menem, who rid the country of inflation and opened the economy to the world, Argentina became the darling of international investors and institutions. 
After half a century of stagnation, Menem looked good. 
But Argentina, a society that historically lacked the means to defend itself against authoritarianism, has long been the agreeable victim of populist and autocratic rulers. 
So it was not hard to convince such a nation that " menemismo " was the price that had to be paid to become a member of the "first world." 
Shopping sprees by the rich and famous became synonymous with popular approval for the corruption, legal impunity, and frivolity that surrounded Menem's cronies and his sales of state assets. 
The country's already thin social fabric frayed. 
In the end, shopping sprees could not keep reality at bay. 
After Menem handed over the presidential sash to Fernando De la Rua, Argentina began to unravel: President de la Rua resigned his office well before the official end of his term. 
Four temporary heads of state later, Eduardo Duhalde, a senator and powerful peronista chieftain, is now trying to hold the country together. 
To the three constitutionally established branches of government (executive, legislative, and judicial), a fourth power has been added: the provincial governors, the "barons of peronismo ." 
Determined to carry on as they always have, no matter what, the governors turn a deaf ear to the IMF and resist instituting fiscal reforms. 
Many have their sights set on the presidency. 
The real title-holders of internal power, the governors owe their long incumbencies to the generosity with which they hand out state jobs. 
At times charming, at times eccentric, and often behaving like bandits, these provincial chieftains share several attributes: high rates of poverty in their provinces, comfortable lifestyles for themselves, and a disdain for democratic institutions. 
Their misrule has made Argentina into a kind of global pariah. 
Because of them, we won't pay our debts or reform the financial system. 
Poverty grows and the indecisive Peronista government (governors included) inspires little trust. 
Argentina cannot hope to reach an accommodation with the IMF so long as these officials retain a virtual veto. 
The call to schedule elections for March of next year, although demanded by most Argentines, has failed to calm nerves. 
Everyone knows that lacking a true opposition to the current government, the presidential candidate will emerge from today's divided and fragmented brand of peronismo . 
But the only remaining vestige of Perón's rule is embodied in the worst habits of his heirs, who, with the least provocation, demonstrate their propensity for authoritarianism, demagoguery, and a mentality always favorable to corruption. 
Indeed, today's peronismo , known officially as the "Partido Justicialista," unites individuals only in a desire to perpetuate their power. 
Everything they do turns on this, including the hatred between Menem and Duhalde. 
In November the party will hold open internal talks, an occasion that will increase competition between each governor. 
Their differences are slight. 
There is the "progressive feudalism" of the governor of the depopulated Patagonian province of Santa Cruz; the "feudal populism" of Adolfo Rodríguez Sáa, briefly the country's president during last December's saga of successive presidential resignations. 
Rodríguez Sáa is also the ex-governor of San Luis, where he governed with a sure despotic hand for 19 years--a reign the poor endured because he bribed them as well. 
There is also the "liberalism" of José Manuel de la Sota, who steered the indebted province of Córdoba and who is President Eduardo Duhalde's dauphin. 
Finally, casting a long shadow over everything, is Menem. 
Although hectored by criminal accusations and the discovery of a Swiss bank account in his name, he is trying to rise above scandal to recapture the presidency. 
One newspaper refers to this political infighting as "the peronista carnage." 
First to fall victim was Carlos Reuteman, the ex-backer of Formula 1 auto racing who is now governor of Santa Fe. 
The first anointed dauphin of President Duhalde, Reuteman's joy at this prospect was short-lived. 
He declined to put himself forward, his exit speech reviving memories of Argentina's "dirty war" and "disappeared": "I have seen something that I cannot discuss, and may never be able to discuss." 
Argentines are left to endure wretched hours languishing in economic and political chaos. 
People in the streets increasingly fear that they will never get to cast their ballot or have their say. 

The Extinction Puzzle 
With six billion humans and counting – and our individual consumption growing – we face enormous challenges in using our natural resources sustainably. 
And there is one clear measure of how we perform at that task: extinction rates. 
For this reason, some colleagues and I have calculated the rate at which bird species became extinct in the recent past and the rate at which they will likely become extinct in the future. 
Bird extinctions are our best window onto humanity’s massive and irreversible environmental impact. 
For every one of the world’s 10,000 bird species, there may be 10 or perhaps even 100 other unknown species of animals, plants, or fungi. 
Birds’ popularity means that they provide an unrivaled source of information about which species live where and how well those species are doing. 
Estimates of the number of extinctions have tended to vary wildly, owing to differences in the assumed total number of species, which range from the one million species that have scientific names to an implausibly high estimate of 100 million species. 
To avoid such uncertainties, my colleagues and I introduced the extinction rate – the number of extinctions per year per species or, to make the numbers more reasonable, extinctions per million species-years — E/MSY. 
With the exception of the past five mass extinction events, estimates from the fossil record suggest that an approximate background rate is one extinction per million species-years, (1 E/MSY). 
For the 10,000 bird species, there should only be one extinction in each century. 
Before European exploration, the Polynesian expansion across the Pacific probably exterminated species at the rate of one every year or two, which is 50 to 100 times more extinctions than should occur naturally. 
For example, parrots, rails, and doves once occured across the Pacific on sufficiently large islands. 
Those islands that have been well explored archaeologically yield bones of species the Polynesians exterminated, while the islands now lack them. 
We can predict which islands were likely large enough to have once supported unique species and so estimate how many species are missing. 
The total is nearly 1,000. 
We have yet to do comparable analyses on the fate of Caribbean and Indian Ocean islands following first human contact, but it is likely that large numbers of extinctions occurred there, too. 
Early European exploration likely continued this rapid pace of extinction. 
The number of species known to have expired between 1500 and 1800 is increasing as taxonomists describe new species from skeletal remains they find in caves, for example, where bones survive. 
These searches are far from complete. 
Linneaus invented the modern process of naming species in the mid-1700’s, although naming did not get under way until the peace following Napoleon Bonaparte’s defeat in 1815. 
Whereas bird taxonomists had described only 2,000 bird species by 1815, in the next 50 years they described about 5,000 more. 
This means that most of what we know about birds and their extinctions dates from the 1800’s. 
To get an accurate picture of extinction, we must adjust the total number of extinctions for the length of time science has known bird species. 
A second adjustment is necessary because conservationists follow the principle that a species survives even if it is not recently recorded in its native habitat. 
This assumption prevents terminating conservation efforts prematurely, even as it underestimates the total number of extinctions. 
We added species that are probably extinct, too. 
With these two adjustments, the extinction rate has been about a 100 times higher than natural over the last two centuries. 
Our predictions of twenty-first century extinctions jump an order of magnitude to 1,000 E/MSY. 
Not only are 12% of bird species already in danger of extinction, but more than twice that proportion have small geographical ranges (the key predictor of threat) and mostly live in habitats that are seriously threatened. 
Tropical forests, for example, hold the majority of bird species – and likely most other kinds of species too. 
If present trends of deforestation continue, we project bird extinction rates to climb to 1,500 E/MSY by the last decades of this century. 
Moreover, our calculations are conservative, as they do not include extinctions caused by invasive species, the expansion of human technologies (such as the long-line fishing that harms many seabirds), or global warming. 
All would increase our estimates. 
Likewise, birds are poor models for other kinds of species, because public concern over birds generally leads to rapid actions to save them. 
Indeed, we showed that aggressive conservation actions have reduced bird extinction rates over the last few decades to about 25 E/MSY – still very high, but down sharply from the 100 E/MSY projected were conservation actions not in place. 
Certainly, some other species also benefit from the protections that we afford birds, but many other species do not. 
Moreover, human actions threaten substantially higher proportions of other well-known groups – such as flowering plants and amphibians. 
Our results show that conservation efforts can reduce the irreversible loss of biodiversity. 
Nevertheless, future rates of extinction constitute a problem that will be very much harder to solve. 

The Extremists Unbound 
JERUSALEM – The pattern of policymaking in the Middle East, as it was defined since President Bush’s “axis if evil” speech of January 2002, is undergoing a momentous change of direction. 
Bush’s foreign-policy paradigm of an alliance of “moderates” to defeat the “extremists” – a model too enthusiastically seconded by an unimaginative Israeli leadership and by those Arabs (led by Egypt and Saudi Arabia) who dread the forces of radical change – has collapsed. 
The “extremists,” whom Bush expected to be defeated through economic sanctions, diplomatic isolation, and military action, have prevailed. 
It is the “moderates” who must now adapt their policies. 
Israel and the United States failed resoundingly in their attempt to dislodge Hamas from Gaza, or in forcing it to accept conditions for an end to the international boycott. 
Fearing the costs of an invasion of Gaza’s urban alleys, Israel handed a strategic victory to Hamas. 
It accepted a truce, brokered by an Egyptian government fearful of Iran’s influence in neighboring Gaza, that not only gave Hamas political legitimacy and undermined the international community’s policy of not negotiating with this fundamentalist group, but that also allowed it to continue rearming. 
Indeed, Hamas now poses a strategic threat to Israel’s urban centers and military facilities. 
Israel’s war in 2006 in Lebanon against Hezbollah, supported by the US and the entire Arab “moderate” camp, was no more successful. 
In fact, Hezbollah is now not only militarily stronger than ever – Security Council Resolution 1701, which called for its disarmament, has proven to be an utter failure – but also more politically robust than before the war. 
Admirably adept at weaving together all of Lebanon’s political, religious, and nationalists threads, Hezbollah’s leader, Hassan Nazrallah, is today the undisputed master of Lebanon. 
The Syrian patron of Hezbollah, President Bashar al-Assad, another member of the “axis of evil,” is also doing well, thank you. 
Not only Israel and the US, but also Egypt and Saudi Arabia have hoped for the political demise of this friend of every radical regional cause – from Hamas and Iran to the anti-Western forces in Lebanon – that they oppose. 
But Assad managed to emerge from Syria’s forced withdrawal from Lebanon in 2005 to become the broker without whom a Lebanese government could not be created and a president could not be elected. 
This, and the indirect negotiations with Israel that are now underway in Turkey – which Assad knows cannot produce major results, given Israeli Prime Minister Ehud Olmert’s political weakness and Bush’s lame-duck status – have helped to open for Syria the gates of Europe, where he had also once been a pariah. 
Moreover, desperate to recover its relevance in Middle East politics, the US has now radically changed its attitude and agreed to a meeting between US Undersecretary of State for Near East Affairs David Welch and Riad Daoudi, Syria’s chief negotiator with Israel. 
America’s drive to force Iran to stop its nuclear program through an ineffective sanctions regime has been no more successful than any of its other schemes to isolate the region’s extremists. 
Indeed, the US has now completely reversed its position of not negotiating with Iran until it stops uranium enrichment. 
The participation of Under Secretary of State William Burns in the European dialogue with Iran, together with plans to station American diplomats in Teheran for the first time since the 1979 Islamic Revolution, represents a momentous shift in America’s policy, and also an indication to Israel to refrain from a military strike. 
Bogged down in Iraq and Afghanistan, America is in no mood to open a third front against the Islamic world. 
The consequences of an Israeli attack on Iran “would be extremely stressful for us,” warned Chairman of the Joint Chiefs of Staff General Michael Mullen. 
With the defeat of his ideologically inspired foreign policy, Bush has finally decided not to remain blind to the benefits of engaging Syria and Iran. 
However isolated within the Arab family the Syrians may be, and however embattled their Iranian allies are, the two countries hold the keys to Middle East stability. 
They are crucial players in Lebanon, they have a role to play in pacifying Iraq, they can influence a change of attitude of powerful and extremely destabilizing non-state actors like Hamas and Hezbollah, and their leverage on Hamas is vital for the stability of the Palestinian front. 
Engaging Iran is also the only way to stave off a nuclear apocalypse in the region. 
Of course, the overall cooling of political tensions reflects the collapse of another misconception of the Bush administration – that the “axis of evil” is an irrational coalition interested only in spreading evil. 
Pursuing radical goals does not necessarily mean that a country will act irrationally. 
Neither Syria nor Iran – in fact, not even North Korea – has an interest in being the pariahs of the world community, and they fully understand the economic consequences of isolation. 
Their policies are about more than spreading terror and revolution; they are about promoting negotiable interests. 
They are both mindful of the limits of the politics of destabilization, and they are clearly looking forward to a more dialogue-oriented American administration willing to address their political and strategic concerns. 

The Face of Evil 
NEW YORK – Standing with Slobodan Milosevic 13 years ago on the veranda of a government hunting lodge outside Belgrade, I saw two men in the distance. 
They left their twin Mercedes and, in fading light, started toward us. 
I felt a jolt go through my body; they were unmistakable. 
Ratko Mladic, in combat fatigues, stocky, walking as though through a muddy field; and Radovan Karadzic, taller, wearing a suit, with his wild, but carefully coiffed, shock of white hair. 
The capture of Karadzic and his arrival at the war crimes tribunal in The Hague took me back to a long night of confrontation, drama, and negotiations – the only time I ever met him. 
It was 5 p.m. on September 13, 1995, during the height of the war in Bosnia. 
After years of weak Western and United Nations response to Serb aggression and ethnic cleansing of Muslims and Croats in Bosnia, United States-led NATO bombing had put the Serbs on the defensive. 
Our small diplomatic negotiating team was trying to end a war that had taken the lives of nearly 300,000 people. 
Milosevic, Mladic, and Karadzic were the primary reason for that war. 
Mladic and Karadzic had already been indicted as war criminals by the International Criminal Tribunal for the Former Yugoslavia. 
(Milosevic was not to be indicted until 1999.) 
In a change of strategy, the negotiating team had decided to marginalize Karadzic and Mladic and to force Milosevic, as the senior Serb in the region, to take responsibility for the war and for the negotiations that we hoped would end it. 
Now Milosevic wanted to bring the two men back into the discussions, probably to take some of the pressure off of himself. 
We had anticipated this moment and agreed in advance that, while we would never ask to meet with Karadzic and Mladic, if Milosevic offered such a meeting, we would accept – but only once, and only under strict guidelines that would require Milosevic to be responsible for their behavior. 
I told each member of our negotiating team to decide for himself or herself whether to shake hands with the mass murderers. 
I hated these men for what they had done. 
Their crimes included, indirectly, the deaths of three of our colleagues – Bob Frasure, Joe Kruzel, and Nelson Drew, who had died when the armored personnel carrier they were in plunged down a ravine as we attempted to reach Sarajevo by the only route available, a dangerous dirt road that went through sniper-filled, Serbian-controlled territory. 
I did not shake hands, although both Karadzic and Mladic tried to. 
Some of our team did; others did not. 
Mladic, not Karadzic, was the dominant figure that evening. 
He engaged in staring contests with some of our team as we sat across the table. 
Karadzic was silent at first. 
He had a large face with heavy jowls, a soft chin, and surprisingly gentle eyes. 
When he heard our demand that the siege of Sarajevo be lifted immediately, he exploded. 
Rising from the table, the American-educated Karadzic raged in passable English about the “humiliations” his people were suffering. 
I reminded Milosevic that he had promised that such harangues would not occur. 
Karadzic responded emotionally that he would call former President Jimmy Carter, with whom he said he was in touch, and started to leave. 
For the only time that long night, I addressed Karadzic directly, telling him that we worked only for President Bill Clinton and that he could call Carter if he wished but that we would leave and that the bombing would intensify. 
Milosevic said something to Karadzic in Serbian; he sat down again, and the meeting got down to business. 
After ten hours, we reached an agreement that would end the siege, after more than three years of war. 
The next day, we were able to fly into the reopened airfield in Sarajevo. 
That indomitable city was already beginning to come back to life. 
Two months later, the war would end at Dayton, never to resume. 
But while the Dayton agreement gave NATO the authority to capture Karadzic and Mladic, an arrest didn’t occur for nearly 13 years. 
During that period, Karadzic spread a completely false rumor that Secretary of State Madeleine Albright and I had made a deal that, with Karadzic’s disappearance from public view, NATO would not seek his arrest. 
Of course, this another ridiculous fabrication from the same man who famously said that the Bosnian Muslims had shelled their own villages in order to lure NATO into the war. 
Finally, one of these dreadful murderers is in The Hague. 
It is imperative that Mladic follow Karadzic on this one-way journey. 
Karadzic’s capture is all the more important because Serbian authorities accomplished it. 
Serbian President Boris Tadic deserves great credit for this action, especially since his good friend Zoran Djindjic, then prime minister of Serbia, was assassinated in 2003 as a direct result of his courage in arresting Milosevic and sending him to The Hague in 2001. 
Karadzic’s arrest is no mere historical footnote; it removes from the scene a man who was still undermining peace and progress in the Balkans and whose enthusiastic advocacy of ethnic cleansing merits emphatic repudiation. 
It also moves Serbia closer to European Union membership. 
Moreover, Karadzic’s arrest is another reminder of the value of war crimes tribunals. 
Even though almost 13 years is an inexcusably long time, the war crimes indictment kept Karadzic on the run and prevented him from resurfacing. 
In far-away Khartoum, Sudanese President Omar Hassan al-Bashir, now indicted by the International Criminal Court, should be paying close attention. 

Five Years of Financial Non-Reform 
STANFORD – Five years after the collapse of Lehman Brothers triggered the largest global financial crisis since the Great Depression, outsize banking sectors have left economies shattered in Ireland, Iceland, and Cyprus. 
Banks in Italy, Spain, and elsewhere are not lending enough. 
China’s credit binge is turning into a bust. 
In short, the world’s financial system remains dangerous and dysfunctional. 
Worse, despite years of debate, no consensus about the nature of the financial system’s problems – much less how to fix them – has emerged. 
And that appears to reflect the banks’ political power. 
For example, Vince Cable, the United Kingdom’s business secretary, recently accused Bank of England regulators – whom he called “capital Taliban” – of holding back the country’s economic recovery by imposing excessive burdens on banks. 
Cable appears to believe the banks’ lobbyists when they claim that lending and growth would suffer if banks were forced to “hold more capital.” 
Such claims by senior policymakers are hardly unique to the UK; but they are false and misleading. 
Bank capital is not cash reserves that must be “set aside”; it is unborrowed money that can be used to make loans. 
Simply put, lending and economic growth have suffered since 2007 because highly indebted financial institutions could not absorb their losses, not because of regulations that sought to reduce their indebtedness. 
The regulations in place when the crisis erupted were both inadequate and inadequately enforced, and the reforms proposed since then do little better. 
The proposed Basel III reforms, for example, would allow banks to fund up to 97% of their assets with borrowed money; some investments could be made entirely by borrowed funds. 
The perils of this approach should be obvious by now. 
When homeowners cannot pay their mortgages, they may lose their house, blighting the entire neighborhood. 
The same is true of financial institutions, as the Lehman bankruptcy showed. 
Moreover, the effects of heavy borrowing are felt before borrowers default. 
Distressed or “underwater” homeowners do not invest much in maintenance or improvements. 
Similarly, weak banks with overhanging debts that prevent them from funding worthy investments are a drag on the economy. 
Flawed regulations further distort weak banks’ behavior – for example, by biasing them in favor of making loans to governments or investing in marketable securities over lending to businesses. 
Regulators too often tolerate, and sometimes support, weak banks, denying the reality of their dire condition. 
This is counterproductive. 
Instead, regulators must take forceful steps to unwind zombie banks and compel viable banks to rely more on equity markets, where risk is traded and priced, to become stronger. 
Banning payouts to shareholders and requiring banks to raise funds by selling new shares would bolster them without restricting their ability to lend. 
Banks that cannot sell their shares at any price may be too weak to survive without subsidies. 
Such banks are dysfunctional and must be unwound. 
If we want safer and healthier banks, there can be no substitute for requiring banks to reduce their reliance on borrowing. 
As lenders, banks lose when borrowers default. 
Banks themselves, however, are the heaviest borrowers, routinely funding more than 90% – and sometimes more than 95% – of their investments by taking on debt. 
(By contrast, non-financial corporations rarely borrow more than 70% of their assets, and often much less, despite the absence of any regulation of their leverage ratios.) 
Cyprus illustrates the problem. 
Beginning in 2010, Cypriot banks invested some of their deposits in Greek government bonds, which promised interest rates of more than 10% – sometimes even 15% or 20%. 
As long as Greece paid these high rates, Cypriot banks could pay their depositors attractive rates, such as 4.5%, and thrive. 
Cypriot banks passed stress tests in July 2011. 
Yet, in early 2012, their Greek bonds lost 75% of their value. 
Because the banks made their investments with too little unborrowed money, they became insolvent. 
After being kept afloat for a year with help from the European Central Bank, the Cypriot banks were forced to face their losses. 
One was shut. 
Deposits over €100,000 ($133,000) incurred losses. 
Eurozone taxpayers provided €10 billion in bailout funds. 
Remarkably, regulators had allowed Cypriot banks to engage in the practices that led to their troubles. 
Although investing in Greek bonds was risky – reflected in the high rates the bonds promised – the regulations ignored the possibility of a loss. 
While the upside of the risks played out, the banks’ profits benefited their shareholders and managers, politicians were happy, and the banks grew enormously relative to the economy. 
The proposed Basel III regulations set wholly insufficient minimum capital requirements and maintain a failed approach to adjusting the requirements to risk. 
Within the eurozone, for example, banks can extend loans to any government using exclusively borrowed money. 
The French-Belgian bank Dexia, like Cypriot banks and many others since 2008, failed or were bailed out from losses on risky investments that regulators had considered safe. 
Regulations everywhere appear to be based on the false notion that banks should have “just enough” equity. 
Equity is not scarce for viable banks, and the “science” of complex risk weights and stress tests is a harmful illusion. 
Instead, regulation should seek to force banks’ investors to bear much more of their own risk, and thus to care much more about managing it, in order to limit the collateral damage of their excessive borrowing. 
Some say that banks are inherently special, because they allocate society’s savings and create liquidity. 
In fact, banks have become special mainly in their ability to get away with so much gambling at others’ expense. 
Nothing about financial intermediation justifies allowing banks to distort the economy and endanger the public as much as they do. 
Unfortunately, despite the enormous harm from the financial crisis, little has changed in the politics of banking. 
Too many politicians and regulators put their own interests and those of “their” banks ahead of their duty to protect taxpayers and citizens. 
We must demand better. 

The Failure of China Bashing 
With China's rapid growth increasingly affecting a wide range of issues worldwide, it has become expedient for US presidential candidates to blame China for some of America's domestic problems. 
But in this year's US presidential election campaign, China bashing has been virtually non-existent. 
There are good reasons for this welcome change. 
Recent US elections rarely spared China, which found itself a frequent target of populist demagoguery. 
Its exchange-rate regime, which pegs the Renminbi to the US dollar, was blamed for the mounting US trade deficit. 
Never mind that America's bilateral trade deficit with China, even including Hong Kong, accounts for less than one-fifth of the total US deficit: growing imports from China and more direct investment by US companies supposedly fueled US unemployment. 
Similarly, the unfinished reforms in China's banking sector and state-owned enterprises have been used as evidence of state subsidies for dumping activities. 
Although the majority of China's exports now come from private companies that receive virtually no loans from state banks , American candidates in previous elections routinely sought to curry favor with working class voters by vowing to protect US jobs against China's supposedly unfair business practices. 
The jobs issue could be exploited further by citing poor working conditions, low wages, child labor, and other problems commonly found in developing countries. 
Attacking a communist country has always seemed to offer American politicians a convenient way to appeal to the average voter. 
After all, most US voters can be trusted not to learn how other countries, let alone countries in the Far East, really work. 
But this time, George W. Bush and John Kerry both know that it would be unwise to bash China too hard. 
American companies and the entire US economy have a huge stake in China now, so both candidates have no interest in rocking the boat. A candidate may promise more anti-dumping actions against Chinese goods, vow to press harder on China to change its exchange rate regime, or sharpen criticism of China's weak enforcement of intellectual property rights; but over-protectionism may make a candidate look irresponsible in 2004. 
Indeed, protectionism can do nothing to reduce America's trade deficit and stanch domestic unemployment. 
No matter how much politicians blame others, growing US imports mean greater reliance on international markets, and some China factor in America's investment portfolio is needed to compete against European and Japanese firms. 
There is no hiding these facts from American voters anymore. 
George W. Bush failed to honor his anti-Chinese protectionist campaign promises of 2000, as did Bill Clinton throughout his presidency. 
Any China-bashing and protectionist pleas this time around will most likely ring just as hollow. 
Moreover, China's geopolitical importance to the US has grown immensely since the terrorist attacks on New York and Washington D.C. of September 11, 2001. 
At least for now, engaging China in the global fight against terrorism is in America's interest. China does have some common interests in fighting Islamic extremist terrorism, and it did not try to block America's path to the Iraqi war in the UN Security Council. 
China has also been cooperating constructively with the US and its allies in dealing with North Korea's nuclear capabilities. 
Of course, America still wants to contain China and prevent it from becoming a major regional and world power. 
But that remains a long-term strategic goal, not the stuff of presidential campaigns, especially when China seems too weak to pose any immediate threat to the US on any front in the foreseeable future. 
China has never been a positive factor in American politics; so, from its perspective, the less it is mentioned in this US election season, the better. 
The relative silence about China in the US these days may be due merely to the news dominance of the Iraq War. 
Yet it may also indicate that America's political elites are in the process of facing up to new realities and adjusting their view of China accordingly. 

The Failure of Inflation Targeting 
New York – The World’s central bankers are a close-knit club, given to fads and fashions. 
In the early 1980’s, they fell under the spell of monetarism, a simplistic economic theory promoted by Milton Friedman. 
After monetarism was discredited – at great cost to those countries that succumbed to it – the quest began for a new mantra. 
The answer came in the form of “inflation targeting,” which says that whenever price growth exceeds a target level, interest rates should be raised. 
This crude recipe is based on little economic theory or empirical evidence; there is no reason to expect that regardless of the source of inflation , the best response is to increase interest rates. 
One hopes that most countries will have the good sense not to implement inflation targeting; my sympathies go to the unfortunate citizens of those that do. 
(Among the list of those who have officially adopted inflation targeting in one form or another are: Israel, the Czech Republic, Poland, Brazil, Chile, Colombia, South Africa, Thailand, Korea, Mexico, Hungary, Peru, the Philippines, Slovakia, Indonesia, Romania, New Zealand, Canada, the United Kingdom, Sweden, Australia, Iceland, and Norway.) 
Today, inflation targeting is being put to the test – and it will almost certainly fail. 
Developing countries currently face higher rates of inflation not because of poorer macro-management, but because oil and food prices are soaring, and these items represent a much larger share of the average household budget than in rich countries. 
In China, for example, inflation is approaching 8% or more. 
In Vietnam, it is even higher and is expected to approach 18.2% this year, and in India it is 5.8% . 
By contrast, US inflation stands at 3%. 
Does that mean that these developing countries should raise their interest rates far more than the US? 
Inflation in these countries is, for the most part, imported . 
Raising interest rates won’t have much impact on the international price of grains or fuel. 
Indeed, given the size of the US economy, a slowdown there might conceivably have a far bigger effect on global prices than a slowdown in any developing country, which suggests that, from a global perspective, US interest rates, not those in developing countries, should be raised. 
So long as developing countries remain integrated into the global economy – and do not take measures to restrain the impact of international prices on domestic prices – domestic prices of rice and other grains are bound to rise markedly when international prices do. 
For many developing countries, high oil and food prices represent a triple threat: not only do importing countries have to pay more for grain, they have to pay more to bring it to their countries and still more to deliver it to consumers who may live a long distance from ports. 
Raising interest rates can reduce aggregate demand, which can slow the economy and tame increases in prices of some goods and services, especially non-traded goods and services. 
But, unless taken to an intolerable level, these measures by themselves cannot bring inflation down to the targeted levels. 
For example, even if global energy and food prices increase at a more moderate rate than now – for example, 20% per year – and get reflected in domestic prices, bringing the overall inflation rate to, say, 3% would require markedly falling prices elsewhere. 
That would almost surely entail a marked economic slowdown and high unemployment. 
The cure would be worse than the disease. 
So, what should be done? 
First, politicians, or central bankers, should not be blamed for imported inflation, just as we should not give them credit for low inflation when the global environment is benign. 
Former US Federal Reserve Chairman Alan Greenspan, it is now recognized, deserves much blame for America’s current economic mess. 
He is also sometimes given credit for America’s low inflation during his tenure. 
But the truth is that America in the Greenspan years benefited from a period of declining commodity prices, and from deflation in China, which helped keep prices of manufactured goods in check. 
Second, we must recognize that high prices can cause enormous stress, especially for lower-income individuals. 
Riots and protests in some developing countries are just the worst manifestation of this. 
Advocates of trade liberalization touted its advantages; but they were never fully honest about its risks, against which markets typically fail to provide adequate insurance. 
Over a quarter-century ago, I showed that, under plausible conditions, trade liberalization could make everyone worse off. 
I was not arguing for protectionism, but rather sounding a cautionary note that we must be aware of the downside risks and be prepared to deal with them. 
When it comes to agriculture, developed countries, such as the US and European Union members, insulate both consumers and farmers from these risks. 
But most developing countries do not have the institutional structures, or the resources, to do likewise. 
Many are imposing emergency measures like export taxes or bans, which help their own citizens, but at the expense of those elsewhere. 
If we are to avoid an even stronger backlash against globalization, the West must respond quickly and strongly. 
Bio-fuel subsidies, which have encouraged the shift of land from producing food into energy, must be repealed. 
In addition, some of the billions spent to subsidize Western farmers should now be spent to help poorer developing countries meet their basic food and energy needs. 
Most importantly, both developing and developed countries need to abandon inflation targeting. 

The Fall of France 
French influence in Europe is declining, and President Jacques Chirac is largely to blame. 
He made the right choice before the Iraq war - America's intervention was never justified and has yielded a terrible failure - and so found himself in sync with an emerging European, even global, opposition to the Bush administration. 
But he has failed to transform his position into one of ongoing leadership. 
Chirac's stature and experience should have allowed him to rally all of Europe before, during or after the crisis. 
But he never sought such a role. 
Faced with American unilateralism, he failed to promote realistic multilateral solutions. 
On the contrary, despite being right about Iraq, Chirac became isolated, an isolation that grew because he also failed to re-establish satisfactory relations with President Bush. 
Indeed, under Chirac, France appears increasingly arrogant, a nation convinced of the righteousness of its views and the universality of its model - the very charges so often levelled against George W. Bush's America. 
Chirac compounded his errors over Iraq in his approach to the new European Commission. 
On the old commission headed by Romano Prodi, France was powerfully represented, with Pascal Lamy holding the trade portfolio. 
Lamy is widely acknowledged for his skill, his intellect, and his strong personality. 
Maintaining France's weight within the European Union should have led Chirac to re-confirm Lamy when José Manuel Barroso took over as President of the Commission. 
But, in Chirac's eyes, Lamy possessed two fatal flaws: he is a socialist, and he favors reform of the Common Agricultural Policy. 
Chirac, Georges Pompidou's agriculture minister in the 1970's, wants to keep the CAP as it is. 
So Chirac replaced Lamy with Jacques Barrot, an honorable and experienced politician, but one with little knowledge of EU affairs and no language other than French. 
No surprise, then, that Barrot was given a minor role on a new European Commission that is liberal and Atlanticist, quite out of sync with French positions. 
Barrot received the transportation portfolio, a minor post far below the type of position - competition or domestic affairs - that Chirac demanded. 
True, Barroso offered Barrot the symbolic title of Commission Vice-President, but this is a mere consolation prize that doesn't fool anyone. 
Chirac's very character works against French influence in Europe. 
He seems to belong to an era when France considered Europe a "French formal garden." 
He is nostalgic for the 1960's and the Gaullist ideology that shaped both France and himself. 
These biases matter because they do not jibe with the enlarged Europe of today. 
France was a core part of Europe when the Union had only six members and reflected the primary goal of Franco-German reconciliation. 
The fall of the Berlin Wall changed all that. 
Of course, the French vision still plays a major part in today's Europe of 25 members; our "exceptionality" - be it cultural or political - remains important, even if it is less well regarded. 
But French ideas are not necessarily central to a Europe no longer driven by the Franco-German engine. 
Given this change in European dynamics, France should have looked for new ways to assert influence. 
Instead, Chirac demeaned and sometimes humiliated his European partners, gradually rallying everyone against him. 
No one should be surprised that so contemptuous a French attitude, one utterly disdainful of the Union's Solidarity Pact and competition regulations, provoked a reaction detrimental to France. 
That contempt is also manifested in France's nominees to serve on the Commission. 
Unlike, for example, Great Britain, France rarely nominates young and talented persons capable of shaping the EU's future. 
Of course, this decline must not be overestimated. 
France remains a major European country: it is a founder of the Union, one of the world's richest nations, and holds a permanent seat on the UN Security Council. 
It defends, with its nuclear power, an autonomous and important foreign and defense policy. 
France represents values, a culture, and a history that grant it a durable global audience. 
It matters and will continue to matter in the European Council and the European Parliament. 
Moreover, France needs to avoid the temptation to overcompensate for the diminishing role of the Franco-German tandem, which may no longer be sufficient to power the Union, but nonetheless remains necessary. 
In this respect, the composition of the Barroso Commission worries me: the role given to my friend, the German Social Democrat Günter Verheugen, is no more enviable than that given to Barrot. 
A Commission that keeps France and Germany at bay and entrusts its major posts to representatives of "small countries," to more liberal actors, and partisans of the American intervention in Iraq, will not be successful. 
This is why I cannot trust such a Commission. 
France will also have to reform its European strategy if it is to regain influence. 
I wish France could adopt a more humble attitude, show more respect for its partners and the EU's institutions, and view Europe as more than an extension of its own philosophy. 
Here I have no confidence in Jacques Chirac. 
Thankfully, his reign won't last forever. 
The decline of French influence in Europe is undeniable, but it is neither fatal nor desirable. 
It must be stopped. 
But this won't be achieved by invoking past glory. 
For the rising generation of French political leaders, the essential task is to spur France to lead a reunited Europe by working within it. 

The Fall of the House of Murdoch 
NEW YORK – During the four decades since the Watergate affair engulfed US President Richard Nixon, politicians have repeatedly ignored the scandal’s main lesson: the cover-up is worse than the crime. 
Like Nixon, they have paid a higher price for concealing their misdeeds than they would have for the misdeeds alone. 
Now, for once, comes a scandal that breaks that rule: the United Kingdom’s phone-hacking affair, which has shaken British politics to its foundations. 
Over the past decade, the tabloid newspaper The News of the World, owned by Rupert Murdoch’s News Corporation, targeted 4,000 people’s voicemail. 
The list includes not only royalty, celebrities, and other VIPs, but also the families of servicemen killed in Afghanistan and Iraq, and those of victims of the July 2005 terrorist attack in London. 
It all unraveled when The Guardian reported that the tabloid had hacked into the voicemail of missing 13-year-old Milly Dowler, apparently in the hope of obtaining some private expressions of family members’ grief or desperation that it could splash on its front page. 
When the girl’s murdered body was found six months later, the family and the police thought she might still be alive, because The News of the World’s operatives were deleting messages when her phone’s mailbox became full. 
(According to Scotland Yard, Murdoch hacks reportedly bribed mid-level police officers to supply information as well.) 
In the extensive annals of eavesdropping, all of this is something new. 
Not even Stalin wiretapped the dead. 
A cover-up ensued. 
James Murdoch, Rupert’s son and Chairman and Chief Executive of News Corporation’s European and Asian operations, authorized a secret payment of £1 million ($1.6 million) to buy the silence of hacking victims. 
Millions of in-house emails reportedly have been destroyed. 
Still, it seems safe to say that the peculiarly repellant inhumanity of the original deeds will remain more shocking than the details of this or any other cover-up. 
Even so, the political consequences of the phone-hacking scandal will depend on far more than the outcome of the official investigations now underway in Britain. 
Above all, the scandal’s impact will depend on how governments and citizens assess what News Corporation really is. 
The Murdochs call News Corporation a journalistic enterprise. 
In fact, it is, first, an entertainment company, with the bulk of its revenue coming from its film and television holdings. 
Second, and more importantly, it is a propaganda machine for right-wing causes and political figures. 
This is News Corporation’s main face in the US, in the form of Fox News, whose hallmark has been relentless propagation of right-wing ideology. 
Whereas political propaganda had once been the domain of governments and political parties, Fox News is formally independent of both – though itoverwhelmingly serves the interests of America’s Republican Party. 
In Britain, News Corporation has been creating a sort of state unto itself by corrupting the police, assuming police powers of surveillance, and intimidating politicians into looking the other way. 
In the US, it has behaved similarly, using corporate media power to breathe life into a stand-alone political organization, the Tea Party. 
All of this is far removed from what a journalistic organization is supposed to do. 
Journalism’s essential role in a democracy is to enable people to fulfill their roles as citizens by providing information about government, other powerful institutions, civil movements, international events, and so on. 
But News Corporation replaces such journalism with titillation and gossip, as it did when it took over the 168-year-old News of the World and turned it into a tabloid in 1984, and with partisan campaigns, as it did when it created Fox News in 1996. 
Not surprisingly, at Fox News, as at many other News Corporation outlets, editorial independence is sacrificed to iron-fisted centralized control. 
News and commentary are mingled in an uninterrupted stream of political campaigning. 
Ideology trumps factuality. 
And major Republican figures, including possible contenders for the party’s presidential nomination, are hired as “commentators.” 
Indeed, its specific genius has been to turn propaganda into a popular and financial success. 
Given The News of the World’s profitability, no one should be surprised if the Murdochs have been replicating their sunken British flagship’s reprehensible behavior elsewhere. 
But, whatever else is revealed, the UK phone-hacking scandal is of a piece with the Murdochs’ transformation of news into propaganda: both reflect an assault on democracy’s essential walls of separation between media, the state, and political parties. 
The Murdochs are fusing these entities into a single unaccountable power that, as we see in Britain today, lacks any restraint or scruple. 
That effort should compel us to confront an uncomfortable reality underlying both the British phone-hacking scandal, with its penumbra of appalling cruelty and wanton corruption, and Fox News, America’s most popular news channel: too many people want what the News Corporation has been offering. 
And what too many people want can be dangerous to a civilized, law-based society. 
To glimpse just how dangerous, consider Italy, where Prime Minister Silvio Berlusconi’s MediaSet conglomerate has seduced broad swathes of the electorate since the 1980’s with a Murdoch-like combination of insipid variety shows and partisan political theater. 
When Italy’s postwar party system collapsed in the early 1990’s, Berlusconi was able to establish his own political party, win power, and, over the course of three governments, bend laws and government institutions to serve his business and personal interests. 
The News Corporation seems determined to take Britain and the US down a similar path. 
But now, at least in Britain, the political class is in revolt. 
Prime Minister David Cameron – who previously cultivated close ties with News Corporation leaders, even employing as his press secretary The News of the World’s former editor, who was recently arrested for his role in the scandal – called the phone hacking “disgusting.” 
Meanwhile, Labour leaders, who had also sought the Murdochs’ favor, have vowed to block News Corporation’s bid for full ownership of Britain’s largest pay-television broadcaster. 
Whether the rebellion will jump across the Atlantic remains to be seen. 

The Fall of the Hyper Power 
Listen carefully these days to Israelis and South Koreans. 
What they are hinting at is no less than a tectonic shift in the international system: the shift from a unipolar to a multipolar world. 
Israelis are rediscovering Europe. 
They intuitively sense that they can no longer rely only on the absolute security guarantee represented by the United States’ combination of active and passive support. 
The war in Lebanon, so frustrating for Israel, accelerated that subtle change. 
Now Europe and its various contingents are playing a leading role in picking up the pieces there. 
America, of course, remains Israel’s life insurance policy, but enlargement and diversification of diplomatic alliances is starting to be seen as crucial by Israeli diplomats, if not by Israeli society. 
The Quartet (the US, Russia, the European Union, and the United Nations) used to be regarded as “One plus Three,” but that is no longer the case. 
Europe and Russia no longer see themselves as secondary players, because the US, not to mention Israel, needs them. 
As for the South Koreans, they are counting on China to deal with the North Korean nuclear crisis. 
They, too, see the world through a prism that makes America continue to appear essential, but no longer preeminent. 
Recently, a high South Korean official listed in hierarchical order the countries that mattered most in the North Korean nuclear crisis. 
China came first, followed by the US, Russia, Japan, and South Korea, whereas Europe was absent. 
These are only a few signs among many others. 
One could also mention the recent Sino-African summit in Beijing, or the intensification of Venezuelan-Iranian relations. 
All these developments subtly indicate a deep trend that can be formalized in one sentence: America’s unipolar moment, which began in 1991 with the collapse of the Soviet Empire, is over. 
Of course, one should not “bury” the US too soon. 
America is much more resilient than its critics believe. 
It has a unique capacity to rebound, and it controls unparalleled military, intellectual, economic, and even political resources. 
The Republicans’ defeat in this month’s mid-term Congressional elections is a sign that Americans want to sanction their leaders for their strategic and ethical shortcomings, and they did so with gusto. 
But this resilience should not hide a deeper evolution. 
The US is no longer alone. 
America no longer qualifies, if it ever did, as a “hyper power,” to use former French foreign minister Hubert Vedrine’s term, though it is still far from being a “normal” power. 
America’s inadvertent “passivity” in the Clinton years and the wrong directions of the Bush years coincided with the rise of China and India, as well as Russia’s renewed international clout as a result of high oil prices. 
These developments ushered in the slow, imperfect return of an unbalanced multi-polar system. 
The world in which we live may be moving toward the multi-polarity wished for by French President Jacques Chirac, but not necessarily in a successful and stable way. 
If, contrary to the traditional “Gaullist” vision, multi-polarity is not bringing stability, but instead generating chaos, there are two reasons for this outcome. 
First, key emerging actors – China, Russia, and India – are not ready, willing, or even capable of performing a stabilizing international role. 
They are either too cynical or timid in their vision of the world, or they have others priorities, or both. 
They probably contemplate with barely disguised pleasure the difficulties currently encountered by the US in Iraq and elsewhere, but they do not feel any sense of a “compensating responsibility” for global stability. 
The common good is not their cup of tea. 
They have too much to catch up with, in terms of national ego and national interest, to care for others. 
Second, the EU is the only natural American ally in terms of values. 
It is the EU that can make multi-polarity work if it plays its role positively. 
If the EU appears more concerned with the best ways to avoid the responsibilities that may befall it as a result of America’s new and enforced modesty, then multi-polarity will result – by default, not by design – in a more chaotic world, rather than leading to greater stability. 
Europe has a unique chance to demonstrate that it can make a difference in America’s post-unipolar moment. 
It starts right now in the Middle-East. 
The world that Europe has called for is coming closer, and it can fail abysmally without the EU or improve at the margin thanks to it. 
In some ways, the end of a unipolar world could truly be the “Hour of Europe.” 
But that can happen only if the EU regains its confidence and steps into a positive role – one that it must play with, not against, the US. 

The Rupee’s Wake-Up Call 
PRINCETON – The Indian rupee has weakened rapidly in recent months, with the exchange rate against the US dollar dropping by 11%, to around 60 rupees, since early May. 
As a symbol of India’s economic strength, the rupee’s fall has provoked more than the usual hand-wringing and angst at home and abroad. 
There is indeed reason to be worried, but not because the rupee’s value has declined. 
In fact, the slide has been long in coming, and recent market uncertainty has merely been a wake-up call. 
The real reason to worry is that India has lost international competitiveness and has been buying time by borrowing from fickle lenders. 
Growth momentum has fizzled and, with inflation persistently high, Indian producers are struggling to compete in world markets. 
The current-account deficit is increasing relentlessly, owing to a widening trade deficit (now at 13% of GDP), raising the danger of a balance-of-payments crisis. 
Indian GDP grew at heady rates of 8-10% per year between 2004 and 2007, a period that seemed to herald a decisive break from the anemic “Hindu rate of growth.” 
Reforms had unleashed new entrepreneurial energies and the prospect of a brighter future lifted people’s aspirations. 
With foreign manufacturers piling in to satisfy a new hunger for consumer durables, India turned its gaze outward. 
The global economy – in a phase of buoyant expansion – welcomed India’s information technology services. 
Bangalore (the information-technology hub), Bollywood, and yoga became symbols of India’s soft power. 
That was the moment to invest in the future. 
But the opportunity was wasted. 
Infrastructure did not keep pace with the economy’s needs. 
And, more deplorably, educational standards lagged. 
For a country positioning itself as a leader in the global knowledge economy, neglecting investment in education was a grave error, with other countries now staking a claim to the role to which India aspired. 
And, even when times were good, India never gained a foothold in the global manufactured-goods trade. 
Today, domestic investment has plummeted, exports are languishing, and GDP growth is down to around 4.5% per year. 
Moreover, India has developed a tendency for chronic inflation, owing to an unhappy combination of supply bottlenecks (caused by poor infrastructure) and excessive demand (thanks to persistent public deficits). 
Budget deficits offered what appeared to be a free lunch, as the resulting inflation eroded the real value of public debt, while the government had privileged access to private savings at near-zero real interest rates. 
With so much largesse to spread around, the government became a source of contracts with annuity-like earnings, which offered robust returns for those with political access. 
That weakened the incentives for entrepreneurship. 
And, as India’s external position deteriorated, the rupee became significantly overvalued between early 2009 and late 2012, trading in a narrow range while domestic inflation galloped ahead in a global environment of relative price stability. 
Amid weakening competitiveness, the rupee was propped up by increasingly unstable foreign sources of funds. 
Traditionally, nearly half of India’s trade deficit has been financed by remittances from Indian expatriates. 
Part of this flow is steady, because it supports families at home; but much of it is opportunistic investment seeking real returns. 
According to recent data, remittances have slowed or even fallen slightly. 
Similarly, long-term foreign investors have had reason to pause. 
This is not surprising, given the slowdown in consumption growth (car sales, for example, are suffering a prolonged decline). 
India has been left to finance its external deficit increasingly through short-term borrowing, the most capricious form of international capital. 
As Rudi Dornbusch, the late MIT economics professor, once warned, a crisis takes longer than expected to arrive but moves faster than anticipated when it does. 
India may be particularly vulnerable, because all players there have been complicit in a silent conspiracy of denial. 
An overvalued exchange rate strengthens repayment capacity, so international bankers cheer it on – until they cut and run. 
And the Indian government played a large part in fueling rupee appreciation by easing companies’ ability to borrow abroad. 
Indeed, at a time when restricting access to short-term international funds has acquired intellectual respectability, the government’s reluctance to enforce curbs has been puzzling. 
The International Monetary Fund, which now supports selective imposition of capital controls, seems unconcerned: the rupee, its annual review concludes, is fairly valued. 
This benign assessment is consistent with the IMF’s record of overlooking gathering crises. 
With an overvalued rupee, there are no good policy choices. 
To avert a disorderly fall, short-term macroeconomic management requires officially engineered depreciation through administrative methods and restraints on external borrowing. 
A depreciated rupee should help revive Indian exports and lift growth. 
But, in the absence of complementary action, depreciation – whether engineered or market-driven – will make matters worse. 
To dampen the additional inflationary pressures implied by a weaker rupee, more aggressive fiscal retrenchment is needed. 
Even so, a depreciated rupee will increase the burden of repaying foreign debt, and deepen the woes of domestic companies and banks. 
To reclaim its promise, India must foster a new generation of productivity growth. 
The time for action is now. 
Unfortunately, a serious crisis may be required to initiate that response. 


The Fall of the UN 
Saddam Hussein's reign of terror is about to end. 
His Ba'athist government, however, will not go alone. 
In a fitting irony, the United Nations is going down with him. 
Perhaps the entire UN will not disappear. 
Those parts devoted to "good works" (i.e., the low-risk peacekeeping bureaucracies or those that fight AIDs and malaria or protect children) will remain. 
The looming chatterbox on New York's East River will also continue to bleat. 
What died with the Security Council's unwillingness to sanction force to implement its own resolutions on Iraq's possession of weapons of mass destruction was the decades-old fantasy of the UN as the bedrock of world order. 
As we sift the debris of the war to liberate Iraq, it will be important to preserve-the better to understand-the intellectual wreckage of the liberal conceit of security through international law administered by international institutions. 
As free Iraqis document the quarter-century nightmare of Saddam's rule, we must not forget who supported this war and who did not, who held that the international community's moral authority was enshrined in pleas for more time for the UN arms inspectors, and who marched against "regime change". 
In the spirit of post-war reconciliation that diplomats are always keen to engender, we must not reconcile ourselves to the timid, blighted notion that world order requires us to recoil before rogue states that terrorize their citizens and menace our own. 
Decent, thoughtful, high-minded, the millions who marched against holding Iraq to account were catalyzed by the idea that only the UN Security Council has the authority to legitimize the resort to force. 
A voluntary coalition of liberal democracies willing to put their own soldiers in harm's way isn't good enough. 
It does not seem to matter that such troops are being used to enforce the UN's own demands. 
If a country or coalition of countries other than the UN Security Council uses force, even as a last resort, "anarchy", not international law, would prevail, destroying all hope of world order. 
Or so the protestors believed. 
But this is a dangerously wrong idea, an idea that leads inexorably to handing great moral (and even existential politico-military decisions) to the likes of Syria, Cameroon, Angola, Russia, China, and France. 
If a policy is right when the Security Council approves, how can it be wrong just because communist China or Russia or France or a gaggle of minor dictatorships withhold approbation? 
Those who opposed the actions of the coalition in Iraq usually fall back on the answer that "order" must have primacy over "anarchy". 
But is this right? 
Is the UN Security Council the institution most capable of ensuring order and saving us from anarchy? 
History suggests not. 
The UN arose from the ashes of a war that the League of Nations was unable to avert. 
The League was simply not up to confronting Italy in Abyssinia, much less (had it survived that debacle) taking on Nazi Germany. 
In the euphoric aftermath of the victory in World War Two, the hope that security could be made collective was reposed in the UN Security Council-with abject results. 
During the Cold War the Security Council was hopelessly paralyzed. 
Indeed, the decision to defend South Korea from attack in 1950 was taken by the Council only because Stalin ordered his diplomats to boycott UN proceedings, which meant that no Soviet ambassador was around to cast a veto. 
It was a mistake the Soviets would not make again. 
In both 1967 and 1973, with war looming, the UN withdrew from the Middle East, leaving Israel to defend itself. 
The Soviet empire was wrestled to the ground, and Eastern Europe liberated, not by the UN but by the mother of all coalitions, NATO. 
Facing Milosevic's multiple aggressions, the UN could not stop the Balkan wars or even protect its victims. 
Remember Sarajevo? 
Remember Srebrenica and the slaughter of thousands of Muslims under the supposed protection of the UN? 
It took a coalition of the willing to save Bosnia from extinction. 
When the war was over, peace was made in Dayton, Ohio, not at the UN. 
The rescue of Kosovo's Muslims was not a UN action: their cause never gained Security Council approval. 
This century now challenges the hopes for a new world order in new ways. 
We will not defeat or even contain fanatical terror unless we can carry the war to the territories from which it is launched. 
This will sometimes require that we use force against states that harbor terrorists, as we did in destroying the Taliban regime in Afghanistan. 
The most dangerous of these states are those that possess weapons of mass destruction, the chemical, biological, and nuclear weapons that can kill not hundreds or thousands but hundreds of thousands. 
Iraq was such a state, but there are others. 
Whatever hope exists that they can be persuaded to withdraw support or sanctuary from terrorists rests on the certainty and effectiveness with which they are confronted. 
The chronic failure of the Security Council to enforce its own resolutions (with respect to Iraq) is unmistakable: it is simply not up to the task. 
So we are left with coalitions of the willing. 
Far from disparaging them as a threat to a new world order, we should recognize that they are, by default, the best hope for that order, and the true alternative to the anarchy caused by the dismal failure of the United Nations. 

The Fall of the Wall Revisited 
BERLIN: I learned that the Berlin Wall was falling during an official visit to Poland ten years ago. 
On the evening of November 9th, Prime Minister Tadeusz Mazowiecki invited my delegation to a banquet in the former palace of Prince Radziwill. 
Before arriving at dinner, the Secretary of the Chancellery, Rudolf Seiters, called from Bonn. 
He told me that the district chairman of communist East Berlin had suddenly announced temporary regulations permitting travel by private citizens. 
Permits to visit the West were to be granted to all applicants even on short notice. 
With that simple decision, I knew that German history would soon change, for easier travel meant that the Wall was passable for everyone. 
Still, at first I did not foresee those spectacular and joyous night time celebrations that were about to take place in Berlin. 
Throughout my career I never doubted that Germany would one day regain its unity some time in the future. 
But I never dared to dream that reunion of east and west would happen during my term as Chancellor. 
Only with Mikhail Gorbachev and his policies of perestroika and glasnost did reunification become a real possibility. 
Without Gorbachev and his singular courage, the stream of events across Europe during fall of 1989 never would have been possible. 
For with Gorbachev's ascendance, more and more people in East Germany took heart and stopped being afraid of their repressive regime. 
They realized that the realities of East Germany were not fixed in stone after all; that it was possible to achieve change, which many brave dissidents and proponents of civil rights trapped behind the wall had demanded for so long a time. 
Their commitment against the injustice of the communist regime is for me one of the best chapters in German history. 
The opening of Hungary's borders that autumn and the seeking of refuge by East German citizens in the German embassies of Prague and Warsaw already had shaken communist and Stasi rule to its their foundations. 
But on the night of November 9th, when the wall and the barbed wire which had failed to irrevocably divide Germans over many decades of bitter separation began to crumble, communism's collapse became irreversible. 
We had entered a new era. 
From that day, the wheel of history spun faster. 
When I returned from the banquet to watch the news from Berlin on television, I decided to cut short my visit to Warsaw. 
It was not easy to persuade my hosts that, at such an historic moment, the place of the German Chancellor could only be in our old capital, among the celebrating crowds . 
My instincts to return home were also aroused by the scenes that unravelled the next night, November 10th, during a rally in front of Berlin's Town Hall. 
A mob of extreme leftists succeeded in drowning out the German hymn sung by people celebrating the Wall's approaching collapse. 
I was determined to show that the extremists were not representative of Berliners! 
On the contrary: most people simply felt like expressing feelings of utter joy. 
They yearned for unity, justice and freedom for their homeland. 
So I flew to Berlin, but before I addressed the crowds from the balustrade of Schoeneberg's Town Hall, I received a call from Mikhail Gorbachev. 
The Soviet leader asked me to control public enthusiasm in order to prevent chaos and bloodshed. 
He had received reports that the situation was growing out of control. 
He wanted to know whether it was true that angry mobs were storming Soviet army facilities. 
One of my staff conveyed my answer to Gorbachev. 
I assured him that his information was wrong. 
He believed me. 
It helped that we had gotten to know each other on a human level and to trust each other during his visit to Germany in June 1989. 
In spite of differences concerning, for example, the German question, peace was for both of us not just a word but an existential and basic necessity. 
Later, Gorbachev told me that he had been intentionally misinformed by opponents of reform who wanted Soviet troops in East Germany to intervene. 
To this day, I remain thankful to Gorbachev for not listening to agitators but to my arguments. 
When faced with the choice of leaving the tanks in their barracks or calling them out onto the streets, he opted for a peace and later accepted the new reality that people in East Germany had created with so much courage. 
For his foresight and bravery, one cannot give him too much credit. 
After November 9th, the process gained more and more momentum. 
In an unbelievably short period of only eleven months, German unity became a reality. 
For me, it was a dream-come-true. 
Yet I felt two strong obligations for the future. 
One commitment can be loosely described by the image of German and European unity as constituting two sides of the same coin. One could not exist without the other. 
I expressed the other obligation by talking about the necessity of creating blooming landscapes in the new eastern states of Germany. 
Both were extraordinarily large and demanding tasks. 
In the ten years since the fall of the wall, I believe that both goals, although not in their entirety, have been reached in their essence. 
Unified Germany has a strong commitment to both Europe and the Transatlantic Alliance. 
With regard to the new German states, both the transition toward democracy and a free society, and the structural changes made to the former communist economy, have been successful, though these tasks will undoubtedly require the energy and labors of several generations before they are completely fulfilled. 
Most importantly, Germans regard themselves today as one people, once again. 
With the help of sound policies, we are poised as a modern society to win the future. 

The Fallen Heroes of the Financial Crisis 
PARIS – Oscar Wilde said that experience is the name we give to our mistakes. 
Last year, we tried to analyze the errors that led the world into economic crisis. 
Now it is time to analyze the mistakes we made when trying to get out of it. 
When the scale of the crisis became clear last year, many were certain that it would be managed badly. 
But perhaps we should be grateful that it was managed at all. 
Unlike in the 1930’s, decision-makers acted quickly, ignoring dogmas that warned against rapid intervention. 
Moreover, they knew that, in contrast to the inter-war period, close international coordination would be needed. 
In 2008-2009, the influence of the G-20 grew, at the expense of the G-8. 
People became aware of the need for truly global governance. 
And, at long last, a number of proposals emerged aimed at making such governance a reality. 
Experience, it turns out, is not just the name we give to our mistakes. 
As the financial crisis has shown, it is also the process that enables us to increase our understanding and ultimately to envisage a new world. 
Unfortunately, however, this process has not gone far enough, enabling many banks, governments, and international institutions to return to “business as usual.” 
Indeed, today the global economy’s arsonists have become prosecutors, and accuse the fire fighters of having provoked flooding. 
At the peak of the crisis, governments had an opportunity to create a new global financial infrastructure. 
But they let it slip through their fingers. 
The fact that many Western economies got out of recession last year should not fool us into thinking that the crisis was only a brief interlude, and that the post-crisis world can return to the pre-crisis status quo. 
There is pressure to re-write the history of this crisis by depicting effects as if they were causes, and to blame the governments that managed the crisis for starting it. 
A low point – perhaps one should say the height of ridiculousness – was reached last year when rating agencies intensified their surveillance of government debt, and markets that had been victimized by the agencies’ incompetence and bad faith became fixated on their evaluations. 
Lehman Brothers had been awarded a high rating on the very eve of its collapse, yet now the rating agencies criticize governments that pulled the global economy back from the abyss for violating accounting principles. 
Are rating agencies and the markets really so ill-informed about public spending? 
According to the International Monetary Fund, G-20 countries earmarked 17.6% of their GDP on average to supporting their banking systems, although they spent much less. 
Likewise, spending to stimulate the real economy totaled only 0.5% of GDP in 2008, 1.5% in 2009, and probably 1% this year. 
In total, the recovery plans of European Union members came to only 1.6% of GDP compared with 5.6% in the US. 
Governments took the right measures to save the banks, but ignored the political consequences. 
By doling out vast sums of money to rescue the financial system, without asking for genuine guarantees in return, they showed a lack of foresight. 
Acknowledging that rating agencies were incompetent without doing anything to regulate them was inexcusable. 
As a result, taxpayers may need to pay twice, once for the bailout and again for the low-quality debt they have incurred during the bailout, as the austerity programs unveiled in Europe attest. 
Paradoxically, the growing sense that a catastrophe has been averted has given rise to a growing demand for governments to cut public and social spending, and to refrain from proposing investment programs. 
People are racing back to the policies that caused the crisis in the first place. 
But governments are not guilty of deceiving the public; if anything, they acted naïvely and are now paying the price. 
Governments really have no choice: they must take responsibility and exercise power, even if it requires swimming against the tide of public opinion – and especially if it can help alleviate the social suffering brought on by the crisis. 
Indeed, we should remember that economic growth was sustainable only in countries with highly developed social welfare systems, like France. 
Yes, these countries will recover at a slower pace than elsewhere, but countries that have fallen into a deep hole must work harder than those that have fallen into a shallow one. 
Perhaps most importantly, the drive for greater competitiveness, regardless of the cost, will only aggravate the crisis. 
After all, export-led growth policies can succeed only if other countries are willing to run deficits. 
Given that the global imbalances that led to the crisis remain unaddressed, increased competitiveness will be a Pyrrhic victory – and one that will exact a severe toll on domestic living standards and consumption. 

The Fallen Pharaoh 
Egypt’s Kifaya Movement has raised the ante in its opposition to President Hosni Mubarak’s regime by issuing a massive report that dares to name names and detail corruption among the country’s leaders. 
Nothing in Egypt’s long history has ever equaled this airing of the country’s dirtiest laundry. 
Kifaya’s action is especially bold in the midst of a government crackdown to prepare the way for the succession of Mubarak’s son, Gamal. 
For example, a recent law mandates punishment for anyone who spreads rumors that Gamal is to be the next president. 
Corruption in Egypt, as in other Arab states, is so extensive as to undermine the possibility of economic advancement, higher living standards, a free media, independent courts, and democracy. 
Egypt’s political elite, fearful of critical media coverage, defeat in fair elections, and even imprisonment, prefer the existing regime and oppose any significant reform. 
This is a key theme of the report, entitled Corruption in Egypt: A Black Cloud That Never Passes. 
As long as the system is corrupted from above, and as long as the only way common people can deal with the government is through bribery, says the report, inefficiency will reign and people will cheat each other. 
The only way to break this vicious circle is to replace the regime. 
At the same time, as was seen in Yasir Arafat’s Palestine Authority, a corrupt regime encourages people to turn to radical Islamists, who work hard to present themselves as honest. 
If the Muslim Brotherhood comes to power in Egypt one day, Kifaya’s report will explain a lot about how it happened. 
The report begins by joking that Egypt’s name should be changed to “Fasadistan,” the land of corruption. 
It documents cases relating to housing, business, health, transportation, trade, banks, drugs, agriculture, politics, culture, and the media. 
One chapter covers how the security forces control appointments to all key jobs, including in schools and universities. 
But the most dramatic part of the book concerns Mubarak himself. 
An anecdote in the report, which rings true, has Mubarak meeting with officers of the Third Army two years ago. 
Some of the younger officers complained about corruption. 
Mubarak apparently surprised them by saying that he knew that many leading people in the country were thieves, but that he believed they had stolen enough to keep them happy. 
He was afraid, he explained, that if he appointed new people they would start over in their depredations, putting a much heavier burden on Egypt. 
According to the report, however, Mubarak; his wife, Susan; and his two sons, Gamal and Alaa, are far from being mere bystanders. 
When Mubarak became president in 1981, parliament granted him the right to control all military contracts without legislative oversight. 
In effect, the report states, he has a monopoly on military spending and imports, apparently a rich source of kickbacks each time he approves a deal. 
Similarly, Susan Mubarak is the head of as many as 100 charities that often exist only on paper. 
The report charges that as much as $5 million might go to one of these institutions in a year, but that a large portion is then siphoned off to her secret foreign bank accounts. 
Ironically, Susan Mubarak, says the report, urged the passage of a 1992 law that permitted Egyptian non-governmental organizations to receive foreign funds – a provision used by some opposition groups – in order to provide channels for the NGO’s she runs. 
The president’s son Gamal also has his own charities that provide him with money, claims Kifaya, including the famous al-Mustaqbal organization. 
Mubarak’s two sons are said by the report to receive profit-making partnerships – without making any investment – in a large number of companies, including Phillip Morris, Skoda Auto, Movenpick, Vodafone, McDonalds, and many others. 
They can also, it adds, obtain unsecured bank loans for themselves and their friends. 
The report maintains that these funds are often used to participate in illegal financial transactions, arms’ dealing, and money laundering. 
The sons’ interests allegedly also include forays into drug smuggling and illegal exports of archaeological treasures – Egypt’s cultural heritage – in partnership with Culture Minister Faruq Husni, who is supposed to safeguard them. 
Anyone who stands in their way, according to the report, can be thrown into prison on false charges of drug dealing. 
Other cabinet ministers are no better, Kifaya claims. 
Boutros Ghali, nephew of the former UN Secretary-General, Interior Minister Habib Aladli, and such powerful figures as Ibrahim Suleiman and Safwat Sharif are engaged in similar deals, sometimes in partnership with Mubarak’s sons. 
In short, the report says, officials can do what they like, unbound by law or transparency. 
By using the “emergency law,” which has restricted freedom since 1981, together with censorship and rigged elections, Egypt’s government treats its citizens like serfs. 
Meanwhile, massive corruption is devastating Egypt’s economy, with growth falling by half in the last two years, accompanied by rising unemployment, higher inflation, and currency depreciation. 
Foreign investment is also declining, and local production is paralyzed, necessitating expensive imports. 
The discontent fueled by these failures is a major potential cause of unrest. 
By issuing such a detailed report and daring to name Mubarak and his family as the prime culprits, Kifaya is challenging the regime head-on. 
The need for reform, it argues, is not based merely on a desire for better government or abstract rights, but is necessary to save a country that is being strangled. 
The regime may respond by trying to tighten the noose. 

The Falling Dollar 
CAMBRIDGE – When the euro’s value reached an all-time high of $1.52, Jean-Claude Trichet, the president of the European Central Bank, told the press that he was concerned about its rapid appreciation and wanted to “underline” the United States Treasury’s official policy of supporting a strong dollar. 
Several European finance ministers subsequently echoed a similar theme. 
In reality, of course, the US does not have a dollar policy – other than letting the market determine its value. 
The US government does not intervene in the foreign exchange market to support the dollar, and the Federal Reserve’s monetary policy certainly is not directed toward such a goal. 
Nor is the Fed specifically aiming to lower the dollar’s value. 
Although cutting the Federal Funds interest rate from 5.25% in the summer of 2007 to 3% now contributes to dollar depreciation, this has been aimed at stimulating a weakening economy. 
Nevertheless, all US Treasury secretaries, going back at least to Robert Rubin in the Clinton administration, have repeated the mantra that “a strong dollar is good for America” whenever they were asked about the dollar’s value. 
But, while this seems more responsive than “no comment,” it says little about the course of current and future US government action. 
Indeed, the Treasury’s only explicit currency goal now is to press the Chinese to raise the value of the renminbi, thereby reducing the dollar’s global trade-weighted average. 
The pressure on China is, however, entirely consistent with the broader US policy of encouraging countries to allow the financial market to determine their currencies’ exchange rate. 
There is, of course, truth to the statement that a strong dollar benefits the American public, since it allows Americans to buy foreign products at a lower cost in dollars. 
But, while the declining dollar does reduce Americans’ purchasing power, the magnitude of this effect is not large, because imports account for only about 15% of US gross domestic product. 
A 20% dollar depreciation would therefore reduce Americans’ purchasing power by only 3%. 
At the same time, the lower dollar makes American products more competitive in global markets, leading to increased exports and reduced imports. 
The dollar has declined during the past two years against not only the euro but also against most other currencies, including the Japanese yen and the renminbi. 
On a real trade-weighted basis, the dollar is down about 13% relative to its value in March 2006. 
This improved competitiveness of American goods and services is needed to shrink the massive US trade deficit. 
Even with the dollar’s decline and the resulting 25% rise in US exports over the past two years, the US still had an annualized trade deficit at the end of fourth quarter of 2007 of about $700 billion (5% of GDP). 
Because US imports are nearly twice as large as US exports, it takes a 20% increase in exports to balance a 10% increase in imports. 
That means that the dollar must fall substantially further to shrink the trade deficit to a sustainable level. 
Investors around the world to want to reduce their dollar holdings for three major reasons. 
First, interest rates are higher on euro and British bonds than on similar US securities, making investments in those currencies more rewarding than investments in dollars. 
Second, since the US has a large trade deficit that can only be cured by a more competitive dollar (while the euro-zone countries collectively have a trade surplus), investors expect a trend decline in the dollar. 
That predictable dollar decline makes the relative return on holding dollar bonds even lower than the interest-rate differential alone implies. 
Finally, investors are adding nearly a trillion dollars worth of net dollar securities to their positions every year, thus increasing the risk of continued dollar accumulation. 
With a lower total yield and increased portfolio risk, it is not surprising that investors worldwide want to sell dollars. 
Although individual foreign investors can sell the dollar securities that they own, they can only sell them to other foreign investors. 
As long as the US has a current account deficit, the stock of foreign-owned claims on the US economy must rise. 
But when foreign investors don’t want to continue to hold dollar securities, their attempts to sell them will push down their value until the combination of reduced exposure and reduced fear of further dollar decline makes them willing to hold the outstanding stock of dollar securities. 
Instead of simply wishing that the dollar would stop falling, European governments need to take steps to stimulate domestic demand to replace the loss of sales and jobs that will otherwise accompany the more competitive dollar. 
This is not an easy task, because the European Central Bank must remain vigilant about rising inflation, and because many EU countries maintain large fiscal deficits. 
While the ECB has limited room for maneuver, regulatory changes and revenue-neutral shifts in the tax structure (for example, a temporary investment tax credit financed by a temporary increase in the corporate tax rate) could provide the stimulus needed to offset declining net exports. 
It is therefore important that EU governments turn their attention to this challenge. 

The Fallout from India’s Nuclear Tests 
NEW YORK: India’s test of five nuclear bombs in two days (setting off three in a day is something new in history) is one of those rare events that redraws the map of the world. 
A terrifying nuclear arms race in South Asia is likely, with the distinct danger of "nuclear battle" between India and Pakistan. 
The world now awaits Pakistan's decision whether or not to test the bombs already reported to be in its possession. 
North Korea is reneging on agreements to yield key nuclear materials. 
China is contemplating a full nuclear security guarantee to Pakistan, creating a complex, unstable four-sided nuclear stand-off in Asia between India, Pakistan, China, and, of course, Russia. 
Nuclear war, many regional experts say, is more likely now than it ever was in the Cold War. 
Unlike Russians and Americans of that bygone era, South Asia’s peoples actually have been killing each other over the years, by the millions during the partition of India in 1948, and in three wars since then. 
Moreover, India and Pakistan remain divided by a bitter territorial dispute over Kashmir. 
But this possibility of nuclear war, horrifying as it is, may not be the most important consequence of India's test. 
That consequence is the gaping hole punched in the (little known) system the world has relied upon against nuclear dangers in the post-Cold War era. 
Like sleepers awakened by a shock, people across the globe are startled to discover that they are still living in the nuclear age. 
That little noted system of protection is the one mandated by the Nuclear Nonproliferation Treaty of 1968, signed by 185 nations, which created two tiers of states. 
The first consisted of the five nations possessing nuclear weapons (America, Russia, Britain, France, and China), which promised (under the Treaty's Article Six) to get rid of them; the second consisted of nations that lacking nuclear weapons, which promised not to get them. 
The NPT was an abolition treaty, specifying that non-nuclear nations would start at the goal of zero nuclear weapons, and that nuclear-armed nations would commit themselves to reaching that goal. 
At some point the two tiers would fuse, and the world would be nuclear-weapon-free. 
Nothing like this occurred during the Cold War. 
Nuclear-armed nations built nearly 100,000 nuclear weapons, bearing the explosive power of about a million six hundred thousand Hiroshima-size bombs. 
With the Cold War’s end, arms reductions began, but the nuclear powers - America in particular - publicly disavowed total nuclear disarmament for "the indefinite future," in the recent words of Robert Bell, of the US National Security Council. 
The US and the other nuclear powers proposed to keep the two-tier system in virtual perpetuity. 
This is the context in which India's plunge into folly and peril took place. 
("The news of the day is: India defies world opinion," Prime Minister Atal Bihari Vajpayee proclaimed with insane arrogance.) 
India was in effect saying that if there were to be two classes of nations in the post-Cold-War world, then India was going to be in the first class. 
It would be "a global player," in the words of Pramod Mahajan, an aide to the Prime Minister. 
This gambit makes perfect sense if you assume that the post-cold-war world is going to remain nuclear armed and that nuclear arms will remain the main currency of power. 
But is that to be the case? 
Do the nuclear powers intend to hold on to their nuclear arsenals "indefinitely?" 
Or are these powers (now including India) prepared, by joint agreement, to commit themselves to creating a world without nuclear weapons? 
This is the question India has placed before the world. 
India's tests mean that the days of the two-tiered system are over. 
The world is moving toward a single standard, and the question is whether that standard will be possession of nuclear weapons or renunciation of them. 
While India posed this question, it cannot answer it. 
The world, preeminently the US, must do that. 
If President Clinton were to embrace the goal of a world without nuclear weapons (or other weapons of mass destruction), there is reason to hope that other nuclear powers would follow. 
Welcome as American sanctions against India are, the most important response to the Indian tests would be an international debate. 
Indeed, a considerable number of the most prominent figures of the Cold War, in Russia and the US support abolition of nuclear weapons, including former German chancellor Helmut Schmidt, Paul Nitze, considered by many the author America's Cold War nuclear policy; former NATO commander Andrew J. Goodpaster, and Russia’s General Aleksander Lebed. 
While proponents admit that a world without nuclear weapons would not be without dangers - especially from governments that might decide to violate abolition agreements - these dangers rate far below the perils of living in the world of uncontrolled nuclear proliferation toward which the Indian tests point. 
In announcing his sanctions to India's leaders, President Clinton said, "They have to define the greatness of India in twenty-first century terms, not in terms that everyone else has rejected." 
But have America and the other nuclear powers really rejected those terms? 
Are they ready to follow the advice now being given India and let go of their nuclear arsenals? 
The great nuclear power should demonstrate their resolve not only in words, but in deeds. 

The False Panacea of Labor-Market Flexibility 
AMSTERDAM – Competitiveness has become one of the economic buzzwords of our time. 
Barack Obama trumpeted it during his State of the Union address in January, and European leaders from the Tory David Cameron in Britain to the Socialist José Luis Zapatero in Spain to Japan’s new Minister of Economics Kaoru Yosano have embraced it as a priority. 
But what sort of competitiveness do they have in mind? 
Asked during an interview in September 2007 whether European governments should liberalize their countries’ labor codes, former United States Federal Reserve Chairman Alan Greenspan responded that Europe’s labor-protection laws significantly inhibited economic performance and resulted in chronically high unemployment across the continent. 
In the United States, people are fired more easily than in any other country, and the unemployment rate at the time was among the lowest in the world. 
But it’s no longer September 2007, and US unemployment stands at 9.4%, not 4.5%. 
And, according to Greenspan’s successor, Ben Bernanke, there is no reason to assume that the unemployment rate will approach 5% – generally considered to be the natural rate of unemployment – any time soon. 
In the 2000’s, the US lost two million private-sector jobs on balance, with the total falling from 110 million in December 1999 to 108 million in December 2009, despite massive consumer spending. 
That 1.4% decline came during a decade in which the US population grew by about 9.8%. 
To understand what is happening, consider Evergreen Solar, the third-largest maker of solar panels in the US, which announced in January that it would close its main American factory, lay off its 800 workers there within two months, and shift production to China. 
Evergreen’s management cited the much higher government support available in China as its reason for the move. 
Evergreen is only one of many cases suggesting that the US might find itself in the midst of what Princeton-economist Alan Blinder in 2005 dubbed the Third Industrial Revolution. 
According to Blinder, 42-56 million US jobs – about one-third of all public- and private-sector jobs in the country – are vulnerable for offshoring. 
Blinder also predicted that the flexible, fluid US labor market would adapt better and faster to globalization than European labor markets would. 
If anything, we are only in the early stages of that revolution, and the outcome remains uncertain. 
But a preliminary comparison between Europe’s largest economy, Germany, and the US suggests that the former is better equipped to hold its own in the age of globalization. 
German multinationals like Siemens and Daimler are ratcheting up investment to meet both emerging-market and domestic demand. 
The companies plan to add hundreds of thousands of jobs worldwide this year alone. 
While many of these jobs will be in Asia, both companies say that they will add high-skill jobs in Germany as well. 
Is Germany’s labor-market rigidity to thank for that? 
It may indeed be part of the explanation. 
A recent study by the Central Planning Bureau in the Netherlands shows that workers with a permanent contract receive more employer-funded training than workers with a temporary contract. 
For US employers, it is much easier to purge workers from the payroll – or, as Robert Gordon of Northwestern University puts it, to toss out every deck chair – than it is for German employers. 
Germany’s labor code bars such layoffs, but German employers also are presumably less inclined than US employers to shed workers, because they have invested more in their companies’ human capital. 
With fewer firm-specific skills than their German counterparts, American workers are more susceptible to layoffs. 
Indeed, Siemens, apparently conscious of the benefits of labor-market rigidity, has taken the unusual step of promising its employees a job for life. 
Last year, the company sealed an agreement with the trade union IG Metall that includes a no-layoff pledge for its 128,000-strong German workforce. 
A more important explanation for Germany’s current economic success may be the substantial government support that German industries receive on a structural basis, especially the car industry. 
The US economy, on the other hand, is bogging down in its policymakers’ persistent emphasis on consumption and tax cuts (most notably for the super-rich) over investment. 
The US needs to change its economic-policy course. 
A decade of historically low interest rates has led to economic imbalances in favor of sectors that are highly leveraged: the financial sector, the housing market, and private equity. 
This has come at the expense of sectors that are more dependent on equity financing. 
Now that the housing bubble has burst, the US finds itself out-trained, out-educated, and out-maneuvered in the global competition for employment. 
We now know that labor-market deregulation does not ensure economic resilience and rapid job creation. 
On the contrary, the best solution is probably a diversity of labor contracts. 
A certain amount of labor-market rigidity may make economic sense for jobs that require firm-specific skills and training, alongside greater flexibility for jobs that require fewer skills. 

The False Promise of “Targeted” Sanctions 
Despite his bellicose rhetoric, George W. Bush would very much like to avoid a choice between air strikes on Iranian nuclear sites and accepting a nuclear Iran. 
For the moment, administration officials are hoping that “targeted” sanctions aimed directly at Iran’s leadership will compel a compromise. 
The United Nations Security Council’s recent decision to tighten existing sanctions on Iran by prohibiting dealings with 15 individuals and 13 organizations aims at precisely that. 
But, while some within the US government argue that similar sanctions induced North Korea to compromise on its nuclear program, there are several reasons why the same strategy is unlikely to work with Iran. 
First and foremost, targeted sanctions did not, in fact, really work with North Korea. 
The freeze on $25 million of the leadership’s assets held at Banco Delta Asia in Macau has certainly irritated the North Koreans. 
But the asset freeze did not prevent Kim Jong-Il from ordering a ballistic missile test last July or an underground nuclear test in October. 
Instead, North Korea’s willingness to resume negotiations partly reflects the Americans’ decision to stop insisting on the “complete, verifiable, irreversible dismantlement” of North Korea’s nuclear program as a pre-condition for talks on normalizing relations. 
The Bush administration has accepted that North Korea is a nuclear power and that outsiders can do little about it, so the United States has shifted its diplomatic stance from the hard-line Japanese approach to the more flexible and stability-oriented Chinese position. 
That shift is understandable. 
Given its simultaneous military commitments in Iraq and Afghanistan, together with North Korea’s demonstrated nuclear capability, the Bush administration can’t credibly threaten Kim with force. 
Sanctions have rattled the North Korean leadership, but not nearly enough to compel them to surrender fully the nuclear program, which is their ultimate guarantee of security. 
At the same time, the North Koreans’ willingness to make a deal also reflects China’s decision to put its foot down. 
China remains the only foreign power with any real leverage over Kim’s government. 
Exasperated by Kim’s refusal to ease international tensions, Chinese officials have made clear their refusal to protect and subsidize North Korea’s elite if it continues to push the US toward confrontation. 
The Chinese can’t force Kim to disarm fully, but they can persuade him to negotiate with a now more flexible US. 
As a result, the US and North Korea have agreed a deal that differs from the Clinton-era “Agreed Framework,” mainly because North Korea now has a track record as both a deal breaker and a nuclear weapons state. 
Having returned to the bargaining table in a position of strength, North Korea now hopes to secure a compromise that frees up the leadership’s assets and brings new benefits that help buttress the regime a little longer. 
As long as the Chinese talk tough and the US remains willing to negotiate, the agreement may hold. 
But neither diplomatic stance is likely to continue indefinitely. 
In any case, none of this will help the Bush administration with Iran. 
No outside actor has the leverage with Iran that China has with North Korea, and even if the US offered Iran a more conciliatory approach, the Democratic-led Congress isn’t likely to follow suit. 
Buffeted by criticism that their position on the war in Iraq is incoherent and that they are soft on security threats, the Democrats appear determined to ratchet up pressure on Iran, favoring much broader sanctions than the Bush administration has proposed. 
For example, House Foreign Affairs Committee Chairman Tom Lantos has introduced legislation that would extend the extra-territorial reach of US law to foreign governments’ export credit agencies, financial institutions, insurers, underwriters, and guarantors. 
It would bar foreign subsidiaries of US companies from investing more than $20 million in Iran’s energy sector, and would eliminate the president’s authority to waive these penalties. 
It would also designate Iran’s Revolutionary Guard as a terrorist group and impose further limits on exports to the country’s civil aviation industry. 
Moreover, Republicans are getting in on the act. 
Representative Ileana Ros-Lehtinen has introduced legislation that would require US government pension funds, private pension funds, and mutual funds sold or distributed in the US to divest from companies that invest more than $20 million in Iran. 
Finally, just as Iran faces no China – an outside player with considerable domestic influence – North Korea faces no Israel, a neighbor that believes its security could depend on an act of military pre-emption. 
Israel does not want to take on Iran without US support and will maintain pressure on both Congress and the president to threaten Iran with every means at its disposal. 
The appeal of targeted sanctions against Iran is obvious: they are meant to help the administration avoid military action, which could create more problems than it solves. 
They allow the White House to argue that it means to undermine Iran’s leadership, not its people. 
They are also much more likely to win international support than sanctions that would remove Iran’s oil and gas supplies from the international marketplace. 
But the chances are slim that sanctions, whether targeted or otherwise, can undermine the consensus within Iran in favor of the nuclear program. 
As in North Korea, a nuclear capability constitutes a powerful symbol of the country’s sovereignty and international clout – and would be the ultimate guarantee that America could never do there what it has done in Iraq. 
Sanctions give lawmakers and diplomats plenty to talk about. 
But unless a sea change occurs in Iranian domestic politics, they will merely postpone the difficult (and increasingly likely) choice between military action and accepting a nuclear Iran. 

The False Promise of Debt Relief 
With debt relief for poor countries shaping up as a focal issue at the July G-8 summit in Scotland, it is a shame that so few people appreciate what a farce such measures could turn out to be. 
Unfortunately, most of the public, egged on by well-meaning rock stars, religious leaders, and other popular figures, seem brainwashed into believing that debt relief is a giant step on the road to ending world poverty. 
But forgiving poor countries’ debts without agreeing on a better framework for future aid flows is an empty gesture. 
At first glance, it seems incredibly generous and statesman-like for G-8 leaders to endorse debt relief for the world’s poorest nations. 
But no one really expects the debts to be paid anyway. 
Indeed, thanks to ongoing grants and future loans from national aid agencies and multilateral lenders like the World Bank, most of the poor “debtor” countries look set to receive considerably more money than they pay back, with no end in sight. 
Citizens of rich countries may be self-centered and self-indulgent, but things are not quite as horrible as some would have us believe. 
True, the ultra-rich United States does only give a pathetic 0.2% of its income in aid. 
But at least it doesn’t tax poor countries, as rich-country imperialists did until well into the twentieth century. 
Besides, it is not like there is huge profit for G-8 leaders in trying to collect coins from impoverished peoples living on a dollar a day. 
What would the G-8 leaders do, station troops in Africa to seize coffee beans and peanuts? 
Re-colonize Africa? 
Debt collection from poor nations is an absurdity, now and into the distant future. 
The real issue is how much money rich-country governments will be giving poor-country governments, not vice versa. 
Third-world debt burdens are little more than a scorecard for past development failures. 
Generously interpreted, past loans reflected naïve optimism that with a bit of seed money, politically and economically backward countries would generate majestic growth and effortlessly repay their loans. 
A not-so-generous interpretation of modern aid history is that rich countries’ legislatures were too cheap to give outright grants to the poorest countries, and could be persuaded to help out only if they were told that the money would be repaid. 
Of course, I am focusing mainly on official loans, but private-sector lending to the world’s poorest countries is generally a relatively minor issue. 
So now rich countries want to feel magnanimous for “forgiving” debts that should have been given as outright grants in the first place. 
As all but the most belligerent critics of US President George W Bush will acknowledge, America has taken an important lead in trying to make things marginally better. 
The Bush administration has put outright grants at the center of its foreign-assistance policy, a commitment that is embodied in its new aid agency, the “Millennium Challenge Account.” 
Moreover, following recent changes at the World Bank, the US is aiming to follow the classic doctor’s dictum: “First, do no harm.” 
It is increasing aid, but it is trying to focus the benefits on countries that are reasonably well governed. 
The aim is praiseworthy: to ensure that aid will be unambiguously beneficial, and won’t merely be exploited by bad governments to extend their hold on power. 
Admittedly, there is still a fierce debate over the right way to assist poor countries, and this will play out behind the scenes at the G-8 summit. 
Many Europeans believe that aid agencies like the World Bank will shrivel and die if left to depend on grants for income. 
But I believe that the problem could easily be solved by, say, giving the World Bank an endowment of rich-country bonds and permitting it to expend the interest. 
The United Nations Development Program has championed the position that all countries should get significant aid, regardless of how they are governed, on the grounds that thousands of children die every day and there is no room for sanctimonious extremism. 
I beg to differ; my reading of the evidence suggests that donors really do need to take extreme care not to make things worse, and that this is far more difficult to achieve in corrupt countries than the UN suggests. 
In short, the fundamental problem with the debt-relief mantra is that it looks backward rather than forward. 
If the G-8 leaders are serious about helping poor countries, finding a reliable way to support grant aid and promote accountability for donors and recipients, not debt relief, is the place to start. 
If the political will were there, it would be neither difficult nor expensive to restructure aid agencies like the World Bank and the regional development banks as grants-only agencies. 
For example, Professor Jeremy Bulow of Stanford University and I have shown that by endowing the World Bank with $100 billion dollars, it could carry out the tasks that it performs best more effectively and with greater transparency than it does today through borrowing and lending. 
Given today’s exceptionally low long-term interest rates, the annual cost would be, well, peanuts. 

The False Promise of Financial Liberalization 
Something is amiss in the world of finance. 
The problem is not another financial meltdown in an emerging market, with the predictable contagion that engulfs neighboring countries. 
Even the most exposed countries handled the last round of financial shocks, in May and June 2006, relatively comfortably. Instead, the problem this time around is one that relatively calm times have helped reveal: the predicted benefits of financial globalization are nowhere to be seen. 
Financial globalization is a recent phenomenon. 
One could trace its beginnings to the 1970’s, when recycled petrodollars fueled large capital inflows to developing nations. 
But it was only around 1990 that most emerging markets threw caution to the wind and removed controls on private portfolio and bank flows. 
Private capital flows have exploded since, dwarfing trade in goods and services. 
So the world has experienced true financial globalization only for 15 years or so. 
Freeing up capital flows had an inexorable logic – or so it seemed. 
Developing nations, the argument went, have plenty of investment opportunities, but are short of savings. 
Foreign capital inflows would allow them to draw on the savings of rich countries, increase their investment rates, and stimulate growth. 
In addition, financial globalization would allow poor nations to smooth out the boom-and-bust cycles associated with temporary terms-of-trade shocks and other bouts of bad luck. 
Finally, exposure to the discipline of financial markets would make it harder for profligate governments to misbehave. 
But things have not worked out according to plan. 
Research at the IMF, of all places, as well as by independent scholars documents a number of puzzles and paradoxes. 
For example, it is difficult to find evidence that countries that freed up capital flows have experienced sustained economic growth as a result. 
In fact, many emerging markets experienced declines in investment rates. 
Nor, on balance, has liberalization of capital flows stabilized consumption. 
Most intriguingly, the countries that have done the best in recent years are those that relied the least on foreign financing. 
China, the world’s growth superstar, has a huge current-account surplus, which means that it is a net lender to the rest of the world. 
Among other high-growth countries, Vietnam’s current account is essentially balanced, and India has only a small deficit. 
Latin America, Argentina and Brazil have been running comfortable external surpluses recently. 
In fact, their new-found resilience to capital-market shocks is due in no small part to their becoming net lenders to the rest of the world, after years as net borrowers. 
To understand what is going on, we need a different explanation of what keeps investment and growth low in most poor nations. 
Whereas the standard story – the one that motivated the drive to liberalize capital flows – is that developing countries are saving-constrained, the fact that capital is moving outward rather than inward in the most successful developing countries suggests that the constraint lies elsewhere. 
Most likely, the real constraint lies on the investment side. 
The main problem seems to be the paucity of entrepreneurship and low propensity to invest in plant and equipment – what Keynes called “low animal spirits” – especially to raise output of products that can be traded on world markets. 
Behind this shortcoming lay various institutional and market distortions associated with industrial and other modern-sector activities in low-income environments. 
When countries suffer from low investment demand, freeing up capital inflows does not do much good. 
What businesses in these countries need is not necessarily more finance, but the expectation of larger profits for their owners. 
In fact, capital inflows can make things worse, because they tend to appreciate the domestic currency and make production in export activities less profitable, further weakening the incentive to invest. 
Thus, the pattern in emerging market economies that liberalized capital inflows has been lower investment in the modern sectors of the economy, and eventually slower economic growth (once the consumption boom associated with the capital inflows plays out). 
By contrast, countries like China and India, which avoided a surge of capital inflows, managed to maintain highly competitive domestic currencies, and thereby kept profitability and investment high. 
The lesson for countries that have not yet made the leap to financial globalization is clear: beware. 
Nothing can kill growth more effectively than an uncompetitive currency, and there is no faster route to currency appreciation than a surge in capital inflows. 
For those countries that have already made the leap, the choices are more difficult. 
Managing the exchange rate becomes much more difficult when capital is free to come and go as it pleases. 
But it is not impossible – as long as policymakers understand the critical role played by the exchange rate and the need to subordinate capital flows to the requirements of competitiveness. 
Given all the effort that the world’s “emerging markets” have devoted to shielding themselves from financial volatility, they have reason to ask: where in the world is the upside of financial liberalization? 
That is a question all of us should consider. 

The False Promise of Global Governance Standards 
Cambridge – In the wake of last year’s global financial meltdown, there is now widespread recognition that inadequate investor protection can significantly affect how stock markets and economies develop, as well as how individual firms perform. 
The increased focus on improving corporate governance has produced a demand for reliable standards for evaluating governance in publicly traded companies worldwide. 
World Bank officials, shareholder advisers, and financial economists have all made considerable efforts to develop such standards. 
The notion of a single set of criteria to evaluate the governance of publicly traded firms worldwide is undoubtedly appealing. 
Both investors and publicly traded firms are operating in increasingly integrated global capital markets. 
But the quest for a single set of global governance standards is misguided. 
Yes, over the last decade, there has been growing use of global governance standards, largely developed in the United States, to assess how countries and companies around the world protect minority investors. 
But these efforts have overlooked fundamental differences between controlled companies, which have a controlling shareholder, and widely held firms that lack such a controller. 
While widely held firms dominate the capital markets of the US and the UK, controlled companies dominate in most other countries. 
Widely held and controlled companies differ considerably in the governance problems their investors face. 
In widely held firms, the concern is about opportunism by managers, who exercise de facto control; in controlled firms, the concern is about opportunism by the controlling shareholder at the expense of minority shareholders. 
Because the basic governance problems in the two types of firms are considerably different, arrangements that benefit investors in widely held firms might be irrelevant or even counterproductive in controlled firms, and vice versa. 
As a result, applying a single standard for assessing investor protection worldwide is bound to miss the mark with respect to widely held firms, controlled firms, or both. 
Consider, for example, the Corporate Governance Quotient system, developed by the US firm RiskMetrics, the world’s dominant shareholder advisory firm. 
RiskMetrics’ system, which is used by institutional investors around the world, attaches considerable weight to the arrangements governing contests for control. 
These arrangements are, indeed, important for investors in widely held firms. 
When a company has a controlling shareholder, however, control contests are not possible, and the arrangements governing such contests are thus irrelevant. 
Investors and public officials in countries where controlled companies dominate should stop using global governance standards based on the designers’ experience with widely held firms in the US. 
Rather, they should strive to develop standards appropriate for controlled firms. 
Most obviously, assessments of controlled companies should not give significant weight to arrangements governing contests for corporate control. 
Similarly, arrangements that make the firm’s board of directors more responsive to the wishes of a majority of shareholders, such as making it easier for shareholders to replace directors, can serve the interests of investors in widely held firms, but are counterproductive for investors in controlled firms. 
In controlled firms, where the concern is diversion from minority shareholders, making directors even more responsive to the controller will likely make minority investors still more vulnerable. 
Moreover, in countries that have many controlled firms, close attention should be paid to related-party transactions and to the taking of corporate opportunities – the main ways in which value may be diverted from minority investors in such firms. 
To address such problems, arrangements that enable a minority of shareholders to veto related party transactions – arrangements which are not warranted in widely held firms – could well be valuable. 
Finally, when assessing controlled companies, the independence of directors should not be judged largely by looking at the extent to which they are independent of the company on whose board they serve. 
Rather, considerable attention should be given to their independence from the controlling shareholder. 
To improve corporate governance and investor protection, public officials and investors in countries whose capital markets are dominated by controlled companies should be wary of global governance standards developed for US companies. 
They should focus on the special problems of controlled companies and on the rules that would work best for protecting smaller investors in such companies. 

The False Promise of Later Retirement 
EU Economics Commissioner Pedro Solbes warns that Europe's shrinking population will soon hit the Continent's economies hard. 
Reforms to defuse the crisis are needed. 
Alain Jousten examines one alluring but false reform that is often discussed. 
Social welfare systems are shaking as never before. 
Not only in Europe, but in parts of North and South America, and Asia as well. 
A collapse in fertility rates, coupled with longer life expectancy, is driving a rapid and pronounced aging of populations. 
Worse still, the demographic threat is being heightened by the way most countries finance their public pension schemes. 
Many retirement systems rely heavily on a pay-as-you-go (PAYG) philosophy. 
Rather than forcing each generation to pay for its own retirement, benefits paid to today's pensioners are financed by contributions from the young. 
Inter-generational solidarity, however, is only as strong as the number of entrants into the labor force. 
When this number falls as a result of lower fertility rates, and when higher life expectancy swells the ranks of pensioners, the only way to sustain PAYG systems is to decrease the level of benefits relative to contributions. 
The technical remedies for restoring financial balance are rather straightforward and entail either explicit or implicit measures. 
An explicit remedy is to raise revenues through higher contributions, increased labor force participation, stronger productivity growth, or larger transfers from general tax revenue. 
Alternatively, the number of working years required to qualify for a full retirement benefit can be increased. 
What is the most effective method? 
Many experts advocate raising the official retirement age as an efficient tool, because it would-in theory, at least-increase the pool of contributors while shrinking the pool of benefit recipients. 
Unfortunately, this intuitively simple expectation does not fit with what actually happens in most industrialized countries. 
What actually happens is that the average retirement age is sometimes noticeably lower than the earliest eligible age for the normal retirement system. 
The period between departure from paid employment and entry into PAYG programs is bridged on a country-specific basis by a plethora of public, private, or mixed early-retirement benefit arrangements, such as unemployment insurance, disability insurance, or some form of severance pay. 
Besides the generosity of benefits, there is the issue of when one can first claim them. 
Individuals respond to the incentives created by the variety of early-retirement and retirement programs. 
The accessibility of early retirement varies widely across different countries and different sectors. 
While paths to retirement as early as age 50 exist in some countries, in others the lowest eligible age is much higher. 
Recent studies show that financial incentives to promote earlier retirement are sometimes powerful, so much so that continuing to work becomes a prohibitively expensive. 
The implicit tax from working another year and forgoing pension benefits can sometimes be close to a person's net earnings during that year. 
This type of extreme financial incentive is particularly true in some countries like Belgium or the Netherlands with easily accessible early retirement schemes - schemes which, to boot, often fail to adjust benefit levels to offset their longer duration. 
It is argued that early retirement systems cater to needs that are different from those addressed by traditional PAYG schemes. 
Many European governments used compulsory early retirement to push down the unemployment rate, effectively reducing the number of applicants for any given job by ridding the labor market of older, more expensive workers. 
Such policies also facilitated structural change, as older workers often lack the skills required in emerging economic sectors. 
However, early retirement schemes also imply tremendous-and often neglected-costs for government budgets and the pension systems by increasing benefit payments while reducing contributions. 
But even leaving aside the fiscal implications, many labor economists now believe that early retirement has failed to open up jobs for young people and reduce unemployment rates. 
Early retirement policies everywhere stand in clear need of reform. 
It is illogical to continue subsidizing a compulsory exit from the labor force while simultaneously trying to safeguard public retirement systems in the face of tremendous demographic challenges. 
It is all the more irrational in view of the rather modest effects early retirement plans have on unemployment in general, and on youth unemployment in particular. 
But reform should not be confined to public retirement systems. 
Instead, change must be comprehensive and include an overhaul of the myriad pathways to early retirement. 
An increase in the official retirement age - currently close to 65 in most countries - is pointless to the extent that many people no longer exit the labor force directly into official retirement systems. 
In Belgium, for example, only one-third of men exit the labor force directly to one of the public retirement systems. 
The rest pass through some type of early retirement scheme. 
Tightening the rules governing accessibility to different early retirement systems is more likely to be effective than raising the "official" retirement age. 
But reform of early retirement rules should not completely cut off access to social insurance programs before, say, age 60. 
There is a considerable degree of heterogeneity in any population, so it is neither fair nor desirable that everyone should be forced to retire at the same age. 

The False Promise of Private Pensions 
One of the strangest claims made in the debates about social insurance now roiling the world’s richest countries is the that government-funded defined-benefit pension programs (such as America’s Social Security system) are outmoded. 
These programs were fine, the argument goes, for the industrial economy of the Great Depression and the post-World War II generation, but they have become obsolete in today’s high-tech, networked, post-industrial economy. 
Advocates of this argument propose a different model. Just as corporations today are much happier supporting workers’ pensions by contributing to employees’ private accounts, so governments today should offer (or require) contributions to privately owned accounts. 
The value of these accounts would fluctuate with the market rather than resting on a defined-benefit scheme that guarantees a fixed real sum of resources available upon retirement. 
This argument is strange because it gets the economics of the situation backward. 
When there are lots of companies offering workers long-term defined-benefit retirement pensions, there are fewer advantages to the government in setting up a parallel defined-benefit scheme and requiring workers to participate in it. 
After all, in such a world, workers who set great value on a defined-benefit pension can go to work for firms that offer such pensions. 
The major benefits that arise from the government’s requiring that workers also participate in a national Social Security system accrue to those workers who really ought to value a defined-benefit pension highly but have not been able to figure out what their true preferences are. 
They also accrue to relatively poor workers who lack the bargaining power to induce bosses to offer the pensions they really want – and need. 
But there aren’t a lot of companies today that are willing to offer long-term defined-benefit pension schemes. 
One reason is that companies nowadays are much more aware of their own long-run fragility than they were in the post-World War II decades. 
Not even America’s IBM – which prides itself on stability – wants to take the risk of offering defined-benefit schemes. 
The risk from defined-benefit pensions used to be offset by two benefits for companies that offered them. 
First, the fact that leaving the company usually meant cashing in one’s pension at a discount increased worker loyalty. 
Second, complaisant accountants’ optimistic assumptions about returns on pension reserves, together with large firms’ greater risk-bearing capacity, brightened the financial picture that companies could report to investors. 
Today, the risks are seen to be much greater, and the benefits are seen to be less. 
As a result, an ever-smaller slice of employers are offering anything like defined-benefit pensions. 
This fall-off in private defined-benefit pensions all across the rich core of the world economy is a bad thing, because the configuration of asset prices suggests that young and middle-aged workers value defined-benefit pensions extremely highly. 
Historically, the gap between expected returns on low-risk assets like government or investment-grade bonds and high-risk assets like stocks and real estate has been very high. 
To some degree, as economists like Harvard’s Robert Barro and mathematicians like Benoit Mandelbrot argue, this may be because high-risk investments are in reality much more risky than the theories and math of standard finance techniques suggest. 
In my opinion, at least, this is partly because the memory of years like 1930 and 2000, when stocks performed very badly, occupies too large a place in investors’ minds. 
Workers and other asset holders place a very high value on safety, security, and predictability, so a defined-benefit pension plan is extremely valuable. 
But in today’s world, only national governments are large enough to be able to do so with any assurance that the pension assets will actually be there when workers retire. 
I am enough of a social democrat to believe that if there is an economic service or benefit that citizens value extremely highly and that only the government can provide, then the government should provide it. 
We economists know that there are many drawbacks to expanding government beyond its basic role of providing true public goods like defense, public safety, and justice, as well as providing citizens with incentives to counterbalance the effects of true market failures. 
If the private market has the flexibility of two hands, government bureaucracy has at best two thumbs. 
But the collection of payroll taxes from tens of millions of workers and the writing of tens of millions of pension checks is the kind of routine, semi-automatic task that government can do well. 
With private companies backing away from defined-benefit programs, it is even more important and valuable that government do it in our post-industrial network-age society than it was in the past. 

The False Promise of Stability 
France, Portugal and Germany are all flagrantly flaunting the Stability Pact, the agreement among Eurozone members to keep their deficits below a critical threshold (3% of GDP today, but lower, supposedly, in the future). 
France's Prime Minister, Pierre Raffarin, defends his government's position by saying that France was not prepared to impose austerity on its own people. If France will not, other European leaders must wonder, why should they? 
Monsieur Raffarin was right to say that austerity would result if France obeyed the Pact's strictures, but in debates over economic policy, the truth is seldom appreciated. 
Telling the truth is something best left to academics, whose squabbles make it difficult to discern who is right and who is wrong. 
A few years ago, Alan Blinder, then Vice Chairman of America's Federal Reserve Board, was excoriated for stating the obvious: that monetary policy should target not only inflation, but also unemployment, and that, at least in the short run, there may be a trade-off between the two. 
There is a long list of central bankers' homilies that are not supposed to be questioned; do so and you are exiled from the small circle of those who supposedly know how the world "really" works. 
Here are three: 
An independent central bank is necessary for sound macro-economic policy. 
The truth: countries that do not have an independent central bank, like India, manage to contain inflation as effectively as those with independent central banks. 
In Russia, an independent central banker, Viktor Gerashencko, could not be removed for years, though he tolerated both inflation and corruption. 
More generally, there is little evidence that countries with independent central banks grow faster, have higher wages, or generate higher incomes--indeed, that they perform better in any real sense--than those that do not. 
Once inflation starts, it increases at a faster and faster rate, and the costs of reversing it are high. 
The truth: there is no evidence of an inflation precipice, or that the costs of reversing inflation (in terms, say, of pushing unemployment to high levels) are any greater than the benefits from inflation (in terms, say, of allowing unemployment to fall to low levels). 
Inflation is bad for growth and productivity. 
The truth: below a critical threshold--a threshold far beyond the levels of inflation that now prevail in Europe and North America--there is no evidence of significant adverse effects from inflation. 
On the contrary, recent research by Nobel laureate economist George Akerlof and his colleagues suggests that pushing inflation too low may impede growth, and that the critical threshold is higher for countries, such as the post-communist transition economies, engaged in large structural changes. 
When an economy faces a downturn, one should engage in expansionary fiscal policies. 
But in a downturn tax revenues fall. 
Thus, debt must increase. 
But the EU's Stability Pact, as commonly interpreted, requires either that tax rates be raised (always difficult, especially in a recession) or that expenditures be cut. 
Either way, such policies will exacerbate the downturn. 
The Stability Pact put into place an automatic economic destabilizer . 
But the EU--indeed, every country--should seek automatic stabilizers, policies that automatically boost the economy in a downturn. 
The US is facing, albeit in somewhat weaker form, a similar problem. 
Most of America's 50 states have constitutional amendments that effectively impose a balanced budget. 
As tax revenues drop due to the economic downturn, the states are cutting back on expenditures, exacerbating America's slump--and the world's. 
I warned of this problem more than a year ago, and I suggested that the Federal government pick up the tab for the shortfall in state tax revenue, because the states did not cause the country's slowdown. 
At the time, there was some disagreement about how long the downturn would last (I was a pessimist, and unfortunately I have been proved right). 
But I argued that this was irrelevant: making up the states' shortfall would cost the government nothing if the optimists turned out to be right, but it would be just the right medicine if pessimists like me were correct. 
Instead, the Bush administration pushed ahead with tax cuts for the rich, tax cuts that were not designed to stimulate the economy and that, no surprise, have failed to stimulate the economy. 
The lesson for Europe is clear: the EU should redefine its Stability Pact in terms of the structural or full employment deficit--what the fiscal deficit would be if the economy were performing at full employment. 
To do otherwise is irresponsible. 
There does need to be a commitment to fiscal responsibility. 
In the long run, governments should run balanced budgets, with surpluses in good years making up for deficits in bad years. 
But to insist on an arbitrary budgetary position in an economic downturn is to ignore everything we have learned about economics in the past seventy years, risking the well being of millions of workers who are thrown out of employment. 
The Stability Pact holds another important lesson: casting in stone institutional arrangements designed to address the problems of the past is a recipe for failure in the future. 
In America in the 1990's, the Clinton Administration fought demands by Republicans for a balanced budget amendment to the US constitution. 
US Democrats argued that if America faced an economic downturn, the government needed the flexibility to run a deficit. 
Is there any reason to believe that excessive policy inflexibility works better in Europe? 

Balancing the Technocrats 
ISTANBUL – A simplistic (actually, naive) view of markets is that they exist almost in a “state of nature,” and that the best of all worlds is one where they are free to operate without government interference. 
An equally simplistic view of democracy is that it is a political system in which periodic competitive elections give the winner the right to govern without constraint. 
The reality is far more complex, of course. 
Markets can function only within an institutional and legal framework that includes property rights, enforcement of contracts, quality and information controls, and many other rules to govern transactions. 
Similarly, while competitive elections are essential to any democratic system, a “winner-take-all” attitude to electoral outcomes, with the victor concentrating power, is incompatible with democracy in the long term. 
Well-functioning democracies are embedded in complex constitutional and other laws that separate executive, legislative, and judicial power, and that protect freedom of speech, assembly, and peaceful dissent by those who lose elections. 
Regulatory institutions – such as bank supervisory agencies and bodies that oversee the telecommunications, food, and energy industries – play a vital role by maintaining the always-delicate balance between “free” markets and the actions of elected governments and legislatures. 
The central bank is perhaps the most important of these institutions, for it conducts monetary policy (and sometimes serves as the financial-sector regulator). 
The policy and regulatory mistakes that contributed to the subprime mortgage crisis – and thus to the US financial system’s near-meltdown and the eurozone’s travails – have brought the issue of optimal economic regulation and its relation to democracy to the fore once again. 
In the US, a significant share of the Republican Party favor abolishing not only the Department of Energy and the Environmental Protection Agency, but also the Federal Reserve! 
In their view, markets and private initiative require no significant regulation. 
The role of politics is to elect majorities that can abolish regulations and regulatory bodies. 
Others around the world similarly oppose regulatory institutions, but for very different reasons. 
They argue that politicians can regulate and supervise without intermediate bodies that have some degree of autonomy. 
In their minds, these bodies merely impede and constrain realization of the people’s will. 
If an elected government wants a bank to offer cheap credit to a group of enterprises so that they can hire more people, why should a supervisor be able to obstruct this democratic will? 
If these enterprises are told to hire the governing party’s supporters as an implicit condition of obtaining subsidized credit, that, too, is the expression of electorally legitimized popular will. 
At the other end of the spectrum are technocratic super-defenders of regulatory bodies who believe that politicians and electorates are hopelessly confused, uneducated, and often corrupt. 
Management of the economy should be entrusted to competent and independent experts, a group of “Platonic Guardians” empowered to act in the state’s higher interests, regardless of electoral outcomes or public opinion. 
The International Monetary Fund, the European Commission, and the European Central Bank are often viewed as such technocratic institutions – and as supporting the technocratic element within states and societies around the world. 
At the height of the eurozone crisis, the IMF, the EC, and the ECB (not to mention financial markets) warmly welcomed the economists Mario Monti and Lucas Papademos as highly respected “technocratic” prime ministers for Italy and Greece, respectively. 
Experience in recent decades has shown that a balanced and “moderate” approach is needed on these matters. 
Electoral cycles (and the accompanying political pressures) are such that monetary policy, banking, and many other areas of policy and economic activity must be overseen by those with professional competence and a much longer time horizon than that of politicians. 
Day-to-day politics cannot dominate the regulation that markets need. 
The single most important institutional reform underlying price stability throughout the world has been the stronger independence of central banks. 
But, if independent technocrats are allowed to determine long-term policy and set objectives that cannot be influenced by democratic majorities, democracy itself is in serious jeopardy. 
I find it undemocratic, for example, that the ECB can set the eurozone-wide inflation target unilaterally. 
How much inflation a society finds desirable or tolerable (taking into account other important variables, such as employment, GDP growth, or poverty) is an inherently political question that should be debated in parliament. 
The central bank should be consulted, but its role should be to implement the objective without political interference: independence in terms of policy tools, not goals. 
Globalization and the increasing complexity of financial and other markets make it imperative that the domains of private activity, political decision-making, and regulation be clarified. 
The challenge is even greater because some regulatory agencies must be multilateral, or at least intergovernmental, given the global nature of much economic activity. 
The difference and the distance between markets and politics must be clear – and, for the sake of both effectiveness and legitimacy, it must be based on rules that are well understood and on popular consent. 


The Fatal Myth of a Drug-Free World 
VIENNA – Negotiations at the United Nations High Level Summit on drugs in Vienna last week fell flat. 
Although 25 countries officially stated their support for proven methods such as needle exchange and overdose prevention, the summit’s outcome was a watered-down political declaration that fails to acknowledge crucial lessons that have been learned over the last decade. 
The refusal to include the words “harm reduction” seems motivated by ideology rather than science, despite clear evidence showing that needle exchange and substitution treatment keep drug users alive and free of deadly infections. 
Those advocating for harm reduction accept that drugs have always been a part of human history and aim to decrease the damage caused by their production and use. 
A vocal few disagree with this approach, labeling it, in the Vatican’s words, “anti-life.” 
Those who strive for the futile goal of a “drug-free world” refuse to recognize the proven benefits of harm reduction. 
But the evidence against the “war on drugs” is overwhelming: prisons swelling with non-violent drug offenders, billions of dollars spent on military action to curb production while the availability of illicit drugs increases and prices drop, and increasing HIV rates throughout the former Soviet Union and parts of Asia. 
Elsewhere, the stories of futility in the “war on drugs are more brutal: capital punishment for drug-related offenses; extra-judicial killings in the name of creating drug-free societies; drug users sent to labor camps as a form of “treatment”; and drug-using women handcuffed to beds during childbirth. 
The list goes on. 
But there is reason for hope. 
Since assuming office, President Barack Obama has made clear his desire to lift the federal ban on needle exchange in the United States. 
Indeed, while the previous Bush administration led the global opposition to harm reduction, the US delegation struck a more conciliatory tone at the Vienna summit, indicating what some perceive as a fresh start to drug policy. 
Ten years ago, when a “drug-free world” became the global drug-policy mantra, no one imagined that in 2009 two million people in the former Soviet Union, and over a million in Asia, would be infected with HIV through intravenous drug use. 
Also missing from Vienna was a discussion about increased numbers of destabilized countries becoming narco-states. 
There is, moreover, still an important region where drug use has not contributed significantly to HIV infection rates: Africa. 
Sadly, when we meet again in ten years, this will no longer hold true. 
Even though no African countries voiced their support in Vienna for harm reduction, African leaders should take heed of those countries with pragmatic and humane drug policies. 
Instead of signaling a new way forward for international drug policy, the Vienna declaration represents the same, failed politics of the past. 
Unless that changes quickly, the result will be continued suffering and death for millions of people around the world. 

The Vision and the Fantasy 
JERUSALEM – Israel, an audacious vision that came true, is now celebrating its 65th anniversary with a sense of well-deserved satisfaction at its extraordinary domestic achievements. 
In its relations with the outside world, however, the Jewish state still has a long way to go. 
Historically, the Jewish experience in international relations has not been particularly edifying. 
A Jewish state has existed for only short periods in Judaism’s history, and it twice committed political suicide. 
The reasons were always the same: politico-religious fanaticism and the blunder of challenging the prevailing world powers – hence modern Zionism’s obsessive quest for a binding alliance with a superpower. 
Ethnocentrism is bound to distort a people’s relations with the rest of the world, and Israel’s doctrine of power was drawn from the depths of Jewish experience, particularly the eternal, unforgiving hostility of a Gentile world. 
The role of the Holocaust as the constituent myth of the Zionist meta-narrative reinforced Israel’s tendency to face “the world,” an amorphous but imposing construct with which the Jews wage a dispute that cannot be resolved through the traditional tools of international relations. 
It was through Zionism, an essentially secular nationalist movement, that the Jews were returned to political action and developed the necessary diplomatic tools. 
But, while early Zionism was blessed with pragmatism and diplomatic savoir-faire, the preponderance of the military ethos of the nation in arms has relegated Zionism’s extraordinary foreign-policy achievements to a remote corner of Israelis’ collective memory. 
A crucial moment in the history of Israel’s oscillation between diplomatic and military “activism” took place on the eve of the 1967 war. 
That crossroads exposed a deep cleavage between the young, self-confident Israeli-born generals, who were spiteful of the older generation’s “submissive” attitude, and the Diaspora-born politicians who, haunted by Holocaust memories and existentially fearful of international isolation, resisted making a break with the old politics of diplomatic Zionism. 
The pragmatic wisdom of early Zionism is easily explained: in contrast to the anti-Semitic cliché about “Jewish power,” Zionism was the national movement of a weak people, decimated by oppression and genocide – a people that might face annihilation if it made the wrong choice at a moment of decision. 
Admittedly, the Zionist leaders never really abandoned wider territorial dreams; but they would never have considered delaying the establishment of the Jewish state for the sole reason that it would not have access to the Western Wall or the Temple Mount. 
The positive ethos of building a new society was supposed to compensate for the poverty of the territorial solution. 
The 1967 war, however, represented an ominous watershed. 
Israel’s lightning victory recalls Hegel’s dictum about “the impotence of the winners.” 
Military victories are never final and definitive. 
In 1980, in a famous open letter entitled “The Homeland Is in Danger,” the historian Jacob Talmon tried to share this simple lesson with Prime Minister Menachem Begin. 
Talmon criticized the Israeli right’s belief that one major “event”would radically and permanently change the situation in Israel’s favor, and he repudiated the “religious sanction” used to justify unrealistic policies in the Occupied Territories. 
He explained the Messianic illusions that were reborn with the Six-Day War as false compensation for the martyrdom of the Shoah. 
There was nothing mysterious about Israel’s victory, he claimed; it was the result of a simple concatenation of circumstances. 
A small country like Israel, lacking a serious demographic foundation or favorable geopolitical conditions, could never perpetuate its presence in occupied territories, Talmon argued. 
Hence, the danger to Israel lay in the Sisyphean effort to subjugate the Palestinians. 
“Blind is the leader who does not see that a war of races is what lies ahead,” he wrote. 
Israel’s annexationist right would dismiss its “defeatist” detractors with the claim that the entire Zionist enterprise was an unrealistic dream that miraculously came true. 
In fact, Israel materialized because historical and political conditions favored it, and because Zionist diplomacy successfully navigated the international-relations challenges that it encountered. 
But the victory of June 1967 was not a license for Israel to set utterly unrealistic objectives for itself. 
Not every fantasy is a vision. 
The ethos of Israel’s far right consists in its insistence on blurring this distinction. 
The right’s fatalism about the chances of peace is a useless adviser in foreign policy. 
Political positions are not eternal; they are always susceptible to change. 
Nor is it true that nothing can sway the Arab world from its hostility to Israel. 
The Arabs might never accept the moral justice of Zionism, but, as the Arab Peace Initiative indicates, they would consider accepting the political legitimacy of a Jewish state. 
Not even Israel’s staunchest allies will risk an indefinite confrontation with the entire international community by supporting Israel’s territorial ambitions. 
Reasonable border modifications are one thing; legitimizing a Jewish empire is quite another. 
Indeed, international acquiescence to the situation created by Israel’s victory in 1967 proved to be extremely short-lived. 
When a war of salvation and survival turned into a war of conquest, occupation, and annexation, the international community recoiled and Israel went on the defensive. 
It has remained there ever since. 

The Fear Factor in US-China Relations 
Opinion polls indicate that one-third of Americans believe that China will “soon dominate the world,” while nearly half view China’s emergence as a “threat to world peace.” 
In turn, many Chinese fear that the United States will not accept their “peaceful rise.” 
Americans and Chinese must avoid such exaggerated fears. 
Maintaining good US-China relations will be a key determinant of global stability in this century. 
Perhaps the greatest threat to the bilateral relationship is the belief that conflict is inevitable. 
Throughout history, whenever a rising power creates fear among its neighbors and other great powers, that fear becomes a cause of conflict. 
In such circumstances, seemingly small events can trigger an unforeseen and disastrous chain reaction. 
Today, the greatest prospect of a destabilizing incident lies in the complex relationships across the Taiwan Strait. 
China, which regards Taiwan as an integral part of its territory that has sheltered behind the US navy since the days of the Chinese civil war, vows that any Taiwanese declaration of independence will be met by force. 
The US does not challenge China’s sovereignty, but it wants a peaceful settlement that will maintain Taiwan’s democratic institutions. 
In Taiwan itself, there is a growing sense of national identity, but a sharp division between pragmatists of the “pan-blue alliance,” who realize that geography will require them to find a compromise with the mainland, and the ruling “pan-green alliance,” which aspires in varying degrees to achieve independence. 
The two sides in Taiwan will face off in a presidential election on March 22. 
Current polls suggest that former Taipei Mayor Ma Ying-jeou of the Kuomintang (KMT) leads Frank Hsieh of the ruling Democratic Progressive Party (DPP). 
But some observers fear that the incumbent DPP President Chen Shui-bian will seek a pretext to prevent a defeat for the pro-sovereignty camp. 
He is currently advocating a referendum on whether Taiwan should join the United Nations, which China views as provocative. 
Chen replies that it is China “that is acting provocatively today.” 
America is clearly concerned. 
Recently, US Secretary of State Condoleezza Rice told a news conference that “we think that Taiwan’s referendum to apply to the UN under the name ‘Taiwan’ is a provocative policy. 
It unnecessarily raises tensions in the Taiwan Strait and it promises no real benefits for the people of Taiwan on the international stage.” 
She also reiterated the administration policy opposing “unilateral threat by either side to change the status quo.” 
The same day, Secretary of Defense Robert Gates criticized China for unexpectedly curtailing American ship visits to Chinese ports because of American arms sales to Taiwan. 
According to Gates, he had told Chinese officials that American arms sales were consistent with past policy and that “as long as they continued to build up their forces on their side of the Taiwan Strait, we would continue to give Taiwan the resources necessary to defend itself.” 
Gates added, however, that despite China’s rising defense budget, “I don’t consider China an enemy, and I think there are opportunities for continued cooperation in a number of areas.” 
In principle, the Taiwan issue need not lead to conflict. 
With increasing change in China and growing economic and social contacts across the strait, it should be possible to find a formula that allows the Taiwanese to maintain their market economy and democratic system without a placard at the UN. 
Thus far, the US has tried to allow for this evolution by stressing two bright lines: no independence for Taiwan and no use of force by China. 
But, given the danger of incidents that could grow out of political competition in Taiwan or growing impatience in the Peoples’ Liberation Army on the mainland, the US would be wise to encourage more active contacts and negotiations by the two sides. 
The US has a broad national interest in maintaining good relations with China, as well as a specific human rights interest in protecting Taiwan’s democracy. 
The US does not have a national interest in helping Taiwan become a sovereign country with a seat at the UN, and efforts by some Taiwanese to do so present the greatest danger of a miscalculation that could create enmity between the US and China. 
Already, some Chinese suspect the US of seeking an independent Taiwan as an “unsinkable aircraft carrier” for use against a future Chinese enemy. 
They are wrong, but such suspicions can feed a climate of enmity. 
If America treats China as an enemy today, it will ensure future enmity. 
While we cannot be sure how China will evolve, it makes no sense to foreclose the prospect of a better future. 
America’s current policy combines economic integration with a hedge against future uncertainty. 
The US-Japan security alliance means China cannot play a “Japan card.” 
But, while such hedging is natural in world politics, modesty is important for both sides. 
If the overall climate is one of distrust, what looks like a hedge to one side can look like a threat to the other. 
There is no need for the US and China to go to war in this century. 
Both sides must take care that an incident concerning Taiwan does not lead in that direction. 
Americans and Chinese must avoid letting exaggerated fears create a self-fulfilling prophecy. 

The Fear Factor 
LOS ANGELES – The debate over fiscal expansion versus consolidation continues to divide the developed world. 
In response to the global recession of 2008, the United Kingdom embarked on an austerity program while the United States enacted an $800 billion fiscal stimulus. 
Despite a softening economy, British Prime Minister David Cameron is promising to stay the austerity course. 
Obama, too, is sticking to his guns with his recent proposal for an additional $450 billion of government expenditure and tax cuts to help boost employment. 
Unemployment in the US has remained above 9% for 22 of the last 24 months. 
While some are supporting additional stimulus, others are calling for UK-style austerity. 
But would either of these approaches reduce unemployment most effectively, or would a new round of “quantitative easing” (an unconventional form of economic stimulus by which the central bank purchases financial assets) work better? 
With Nobel prize-winning economists on both sides of the current debate about how to solve the unemployment problem, the public is rightly confused. 
Paul Krugman and Joseph Stiglitz are calling for an even larger fiscal stimulus to target government spending on education and infrastructure investment. 
On the other side, Robert Mundell, Myron Scholes, and Reinhard Selten have called for “draconian measures” to tame debt levels. 
The American Recovery and Reinvestment Act (ARRA) that Obama passed barely three weeks after his inauguration was disappointing. 
An $800 billion stimulus did not have the effect for which its proponents hoped, largely because it was accompanied by a big increase in private savings. 
Backers of the stimulus plan now claim that things would have been much worse without ARRA. 
I am skeptical. 
A better approach to reducing unemployment would be a new and expanded round of quantitative easing. 
I am heartened by calls for this in the UK, and that the talk is now turning to the purchase of risky assets, such as corporate bonds or bundles of loans to the private sector, as opposed to long-term government securities. 
This is a step in the right direction that I have been advocating for the past three years. 
But I would go even further. 
My work provides a new and coherent approach to macroeconomics that explains how a lack of confidence can lead to persistent unemployment. 
It supports the purchase of equities by central banks to reduce asset-price volatility, restore the value of wealth, and prevent a future market crash. 
When businessmen and women are afraid, they stop investing in real assets. 
Lack of confidence is reflected in low and volatile asset values. 
The environment of fear that arises has little to do with bad government policies, although bad policy may exacerbate the situation. 
Businessmen and women become afraid that stocks, and the values of the machines and factories that back those stocks, may fall further. 
Fear feeds on itself, and the prediction that stocks will lose value becomes self-fulfilling. 
The 2008 recession was triggered by the collapse of a real-estate bubble. 
Housing wealth in the US has fallen by 34% since its peak in 2006, and is still declining. 
The stock market fell by almost 50% from its 2007 peak and remains down by nearly a third. 
This enormous loss of wealth caused a large and persistent drop in consumption demand, which has led to an increase in unemployment. 
Until we are willing to explore new solutions, the misery experienced by millions of unemployed workers will continue. 
A quantitative-easing policy in which a central bank buys risky assets can prevent price fluctuations and restore the value of financial wealth. 
These purchases would need Treasury support, since this tactic is in effect a fiscal policy, not a monetary policy. 
And, by involving the Treasury, the purchase of risky assets could be financed by issuing debt, rather than by printing more money, thereby attenuating inflationary fears. 
The Great Recession did not turn into Great Depression II because of coordinated action by governments around the world. 
Although fiscal expansion may have played a role in this success, central bank intervention was the most important component by far. 
Quantitative easing works by increasing the value of wealth. 
In both the US and the UK, it reduced the real expected return on long-term government bonds, which in turn nurtured a recovery in the stock market. 
We need not tolerate 9% unemployment as the new normal. 
Confidence is a self-fulfilling prophecy, and we can, and should, manage it by direct intervention in asset markets. 
The way ahead leads through science, not ideology, dogma, or failed theories. 

The Fear Profiteers 
OXFORD – Just when it seemed that America’s “Homeland Security state” could not get more surreal, the United States Transportation Security Administration has rolled out a costly Scylla and Charybdis at major airports: either you accept dangerous doses of radiation and high-resolution imaging of your naked body, or, worried about the health risks of cumulative radiation, you opt out of the new full-body x-ray machines (rapidly dubbed “porno-scanners”). 
But if you opt out, you are now subjected, as I was last week, to an extraordinarily sexualized and invasive “pat-down” by TSA officials. 
“I will now touch your private parts,” a very uncomfortable female TSA official said to me when I flew out of New York’s Kennedy Airport. 
And, sure enough, I experienced the invasive touching of genitals and breasts that is now standard policy for US travelers. 
Men report handling of their testicles and penises, TSA officials are instructed to open and peer down waistbands, and YouTube is now rife with videos of frightened children being – to describe it accurately – sexually molested, though this is the last thing most TSA officials wish to do. 
Are we free not to be radiated or groped? 
We are not. 
Passengers who have refused to be patted down on their genitals have been handcuffed to chairs. 
Each new terror alert or high-tech innovation, it seems, makes new demands on our liberty in the name of security. 
But travelers’ recent experiences in the US should give security officials elsewhere good reason to avoid implementing similar policies. 
In fact, America’s bizarre new policy is likely to remain unique among airports in the industrialized countries, if not the entire world. 
Israeli security officials, for example, scoff at genital pat-downs, which they say accomplish nothing. 
That is not exactly true. 
Twenty-four per cent of women have been sexually assaulted, or molested by a trusted adult in childhood or adolescence – as have 17% of men. 
Many of these survivors will be re-traumatized when strangers grope their genitals. 
And children will be placed most at risk of profound negative effects. 
Years of sensitive educational outreach have finally made it the norm for American children to understand that their bodies are their own, that adults should not touch them intimately or in ways that make them uncomfortable, and that they can expect to be protected from such violation. 
By desensitizing children to sexually inappropriate touching, the pat-downs are destroying those hard-won gains. 
It gets worse. 
TSA officials have been advised to tell small children that the sexual pat-downs are a game. 
To anyone who has ever counseled survivors of childhood sexual abuse, this should set off alarm bells: the most common ploy of sexual predators is to portray the abuse as a “game.” 
As Ken Wooden of the organization Child Lures Prevention puts it, the TSA’s “incredibly misinformed and misguided” advice “is completely contrary to what we in the sexual-abuse prevention field have been trying to accomplish for the past 30 years.” 
Americans, for once, are fighting back against this latest violation of their rights. 
Two states, New Jersey and Idaho, recently introduced legislation to seek to opt out of the new policy. 
Questions about the change in practice have reached US Secretary of State Hillary Clinton – who admitted that she herself would resist a sexual pat-down – and President Barack Obama. 
So what led to a policy that is appalling to citizens, damaging to children, and ineffective for improving our security? 
Welcome to America’s current reality, in which threats are hyped so that a handful of insiders can make a killing. 
Shortly after former Secretary of Homeland Security Michael Chertoff made the rounds of TV shows arguing in favor of such measures to thwart “bad guys,” one of his consulting firm’s clients, Rapiscan, won the $350 million contract to provide the full-body x-ray machines. 
As one TSA supervisor said to me after my own sexualized pat-down, “This is about bureaucracy – people trying to cover their asses – and there is a ton of money involved as well.” 
Meanwhile, the supervisor confirmed – as has online discussion by TSA employees – that workers ordered to molest travelers are traumatized, too. 
One army veteran said that he cries every day from the resistance and outcry he now faces from passengers, and that the stress is worse than being on active military deployment. 
Others say they feel degraded and ashamed. 
Indeed, TSA workers are now working in a sexually hostile environment, which is illegal. 
Finally, one must ask: is there a psychological element to the US requirement of submission to genital groping by uniformed officials? 
It is impossible to forget the many strange sexual twists of Bush administration policies, from forced nudity of prisoners – which post-Abu Ghraib records show was systemic, not an aberration – to the sexual threats and sexual assaults against such prisoners, the sexualized hazing rituals and accounts of rape practiced with impunity by contractors, and so on. 
I am not suggesting that sexually degrading practices are a conscious part of the TSA’s new policy. 
But the history of closing societies shows that nudity and forced or degrading sexualized practices become, consciously or unconsciously, part of the state's consolidation of power. 
It is not too extreme to put this into context: billions of dollars in profit now depend on insiders like Chertoff maintaining US society in a state of overhyped alert that demands increasingly costly technology. 
Maintaining these profits requires a population conditioned by this theater of fear to submit to anything – even the sexual quasi-abuse of themselves and their children. 

The Fed vs. the Financiers 
In his August 31 address to the world’s most influential annual monetary policy conference in Jackson Hole, Wyoming, United States Federal Reserve Chairman Ben Bernanke coolly explained why the Fed is determined to resist pressure to stabilize swooning equity and housing prices. 
Bernanke’s principled position – echoed by European Central Bank head Jean Claude Trichet and Bank of England head Mervyn King – has set off a storm in markets, accustomed to the attentive pampering lavished on them by Bernanke’s predecessor, Alan Greenspan. 
This is certainly high-stakes poker, with huge sums hanging in the balance in the $170 trillion global financial market. 
Investors, who viewed Greenspan as a warm security blanket, now lavish him with fat six-figure speaking fees. 
But who is right, Bernanke or Greenspan? 
Central bankers or markets? 
A bit of intellectual history is helpful in putting today’s debate in context. 
Bernanke, who took over at the Fed in 2006, launched his policy career in 1999 with a brilliant paper presented to the same Jackson Hole conference. 
As an academic, Bernanke argued that central banks should be wary of second-guessing massive global securities markets. 
They should ignore fluctuations in equity and housing prices, unless there is clear and compelling evidence of dangerous feedback into output and inflation. 
Greenspan listened patiently and quietly to Bernanke’s logic. 
But Greenspan’s memoirs, to be published later this month, will no doubt strongly defend his famous decisions to bail out financial markets with sharp interest rate cuts in 1987, 1998, and 2001, arguing that the world might have fallen apart otherwise. 
On the surface, Bernanke’s view seems intellectually unassailable. 
Central bankers cannot explain equity or housing prices and their movements any better than investors can. 
And Bernanke knows as well as anyone that none of the vast academic literature suggests a large role for asset prices in setting monetary policy, except in the face of extraordinary shocks that influence output and inflation, such as the Great Depression of the 1930’s. 
In short, no central banker can be the Oracle of Delphi. 
Indeed, many academic economists believe that central bankers could perfectly well be replaced with a computer programmed to implement a simple rule that adjusts interest rates mechanically in response to output and inflation. 
But, while Bernanke’s view is theoretically rigorous, reality is not. 
One problem is that academic models assume that central banks actually know what output and inflation are in real time. 
In fact, central banks typically only have very fuzzy measures. 
Just a month ago, for example, the US statistical authorities significantly downgraded their estimate of national output for 2004! 
The problem is worse in most other countries. 
Brazil, for example, uses visits to doctors to measure health-sector output, regardless of what happens to the patient. 
China’s statistical agency is still mired in communist input-output accounting. 
Even inflation can be very hard to measure precisely. 
What can price stability possibly mean in an era when new goods and services are constantly being introduced, and at a faster rate than ever before? 
US statisticians have tried to “fix” the consumer price index to account for new products, but many experts believe that measured US inflation is still at least one percentage point too high, and the margin of error can be more volatile than conventional CPI inflation itself. 
So, while monetary policy can in theory be automated, as computer programmers say, “garbage in, garbage out.” 
Stock and housing prices may be volatile, but the data are much cleaner and timelier than anything available for output and inflation. 
This is why central bankers must think about the information embedded in asset prices. 
In fact, this summer’s asset price correction reinforced a view many of us already had that the US economy was slowing, led by sagging productivity and a deteriorating housing market. 
I foresee a series of interest rate cuts by the Fed, which should not be viewed as a concession to asset markets, but rather as recognition that the real economy needs help. 
In a sense, a central bank’s relationship with asset markets is like that of a man who claims he is going to the ballet to make himself happy, not to make his wife happy. 
But then he sheepishly adds that if his wife is not happy, he cannot be happy. 
Perhaps Bernanke will soon come to feel the same way, now that his honeymoon as Fed chairman is over. 

The Federal Reserve Diet 
LONDON – Markets around the world were relieved by the US Senate’s confirmation of Federal Reserve Board Chairman Ben Bernanke’s reappointment. 
It was the right decision from the perspective of financial stability; change at the top would have thrown in doubt the Fed’s determination to respond decisively to the crisis – and, indeed, its long-term commitment to low inflation. 
Bernanke’s performance over the last two years has won high praise, and an extended political fight over control of US monetary policy was the last thing the world needed at what is still a very delicate moment for the global economy. 
Nevertheless, 30 senators voted against Bernanke. 
This may, in part, have just been partisan politics, but Bernanke was appointed by President George W. Bush, and there were other voices, both Democrat and independent, raised against his reappointment. 
The case against Bernanke rested partly on his performance before the crisis. 
Was he not a hard-core member of the “Greenspan consensus,” which held that it was not the Fed’s responsibility to look out for bubbles, whether of asset prices or credit, and that it should limit itself to mopping up after the event? 
Bernanke had also supported the low-interest-rate policy implemented after the dot-com collapse, which, in the view of many economists, was maintained for too long, fueling the boom and contributing to the bust. 
Indeed, just recently he defended that policy, whereas many other central bankers have tacitly or explicitly accepted that they need a new approach to credit and asset prices. 
That was, I think, part of the reason for many commentators’ doubts about Bernanke’s continued suitability. 
But these arguments became tangled up in a broader critique of the Fed’s actions. 
Should it have been allowed to rescue the insurance giant AIG so expensively, without approval by the US Congress? 
How is it that the Fed’s balance sheet can expand so dramatically, potentially committing large sums of taxpayer dollars, without Congress having a purchase on its decisions, except well after the event? 
These questions have led to pressure for audits of the Fed’s actions, and for greater political control over its decision-making. 
Congressman Ron Paul has been leading the pack hunting the Fed, but he is by no means as isolated a voice as he was two years ago. 
This is dangerous territory. 
Any suggestion that monetary-policy decisions would in future be subject to political override would, to use a non-technical term, spook the markets. 
Most developed countries have concluded that central-bank independence makes good sense. 
Politicians acknowledge, in their more rational moments (yes, they have them), that they can’t be trusted with the interest-rate weapon, especially as an election approaches. 
So they have handed it over to technocrats, in the hope that they make rational choices that benefit everyone. 
I share this consensus view. 
But there is a problem, and the crisis has highlighted it. 
The arguments that apply strongly in the case of interest rates are less clear when it comes to other functions that central banks may carry. 
If a central bank is committing public funds in support of individual firms, even with a systemic justification, do not different accountability considerations apply? 
And if it is a direct institutional supervisor, as well as being the lender of last resort, there are different considerations again. 
Supervisors make decisions that, in effect, have an impact on private financial returns and property rights. 
They must operate within tight legal constraints, and with rigorous accountability frameworks, involving the government and the legislature. 
In its proposed reforms of the regulatory system, the Obama administration plans to give the Fed more of these powers. 
That has inevitably strengthened the hands of those who argue that more power requires more accountability. 
The problem is how to establish two different types of accountability for two different functions. 
Is it possible to maintain a rigorously independent chairman when it comes to interest rates, and a tightly accountable chairman when he is making supervisory decisions? 
Only with great difficulty, is my answer. 
It is very hard to make legislators understand these delicate distinctions. 
There is bound to be some contagion from one function to another. 
So the proposals to strengthen the Fed’s regulatory role carry great risks. 
It would be far better, in my view, to leave the Fed with an overall systemic role, which raises fewer new accountability issues. 
Below it, there is the opportunity to create a single banking supervisor, combining the functions of the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the regulatory functions of the regional Feds. 
In a perfect world, one would add in the state banking regulators, but I recognize that at this point I have begun to trample on cherished features of the US Constitution! 
This regulatory architecture would leave the Fed free to speak openly about the development of the financial system as a whole, without worrying about the implications for individual institutions in its care. 
The crisis has demonstrated that we need this plain speaking. 
Moreover, such a solution would protect the Fed’s crucial independence in its monetary-policy role. 
President Obama should not draw the conclusion that arguments about the Fed’s accountability have gone away with Bernanke’s confirmation. 
If he proceeds with plans to give it more functions, they will persist. 
To protect the Fed’s independence, which is a global public good of the highest importance, he should cut back the Fed’s authority to its core role. 

The Trapdoors at the Fed’s Exit 
MUMBAI – The ongoing weakness of America’s economy – where deleveraging in the private and public sectors continues apace – has led to stubbornly high unemployment and sub-par growth. 
The effects of fiscal austerity – a sharp rise in taxes and a sharp fall in government spending since the beginning of the year – are undermining economic performance even more. 
Indeed, recent data have effectively silenced hints by some Federal Reserve officials that the Fed should begin exiting from its current third (and indefinite) round of quantitative easing (QE3). Given slow growth, high unemployment (which has fallen only because discouraged workers are leaving the labor force), and inflation well below the Fed’s target, this is no time to start constraining liquidity. 
The problem is that the Fed’s liquidity injections are not creating credit for the real economy, but rather boosting leverage and risk-taking in financial markets. 
The issuance of risky junk bonds under loose covenants and with excessively low interest rates is increasing; the stock market is reaching new highs, despite the growth slowdown; and money is flowing to high-yielding emerging markets. 
Even the periphery of the eurozone is benefiting from the wall of liquidity unleashed by the Fed, the Bank of Japan, and other major central banks. 
With interest rates on government bonds in the US, Japan, the United Kingdom, Germany, and Switzerland at ridiculously low levels, investors are on a global quest for yield. 
It may be too soon to say that many risky assets have reached bubble levels, and that leverage and risk-taking in financial markets is becoming excessive. 
But the reality is that credit and asset/equity bubbles are likely to form in the next two years, owing to loose US monetary policy. 
The Fed has signaled that QE3 will continue until the labor market has improved sufficiently (likely in early 2014), with the interest rate at 0% until unemployment has fallen at least to 6.5% (most likely no earlier than the beginning of 2015). 
Even when the Fed starts to raise interest rates (some time in 2015), it will proceed slowly. 
In the previous tightening cycle, which began in 2004, it took the Fed two years to normalize the policy rate. 
This time, the unemployment rate and household and government debt are much higher. 
Rapid normalization – like that undertaken in the space of a year in 1994 – would crash asset markets and risk leading to a hard economic landing. 
But if financial markets are already frothy now, consider how frothy they will be in 2015, when the Fed starts tightening, and in 2017 (if not later), when the Fed finishes tightening? 
Last time, interest rates were too low for too long (2001-2004), and the subsequent rate normalization was too slow, inflating huge bubbles in credit, housing, and equity markets. 
We know how that movie ended, and we may be poised for a sequel. 
The weak real economy and job market, together with high debt ratios, suggest the need to exit monetary stimulus slowly. 
But a slow exit risks creating a credit and asset bubble as large as the previous one, if not larger. 
Pursuing real economic stability, it seems, may lead again to financial instability. 
Some at the Fed – Chairman Ben Bernanke and Vice Chair Janet Yellen – argue that policymakers can pursue both goals: the Fed will raise interest rates slowly to provide economic stability (strong income and employment growth and low inflation) while preventing financial instability (credit and asset bubbles stemming from high liquidity and low interest rates) by using macro-prudential supervision and regulation of the financial system. 
In other words, the Fed will use regulatory instruments to control credit growth, risk-taking, and leverage. 
But another Fed faction – led by Governors Jeremy Stein and Daniel Tarullo – argues that macro-prudential tools are untested, and that limiting leverage in one part of the financial market simply drives liquidity elsewhere. 
Indeed, the Fed regulates only banks, so liquidity and leverage will migrate to the shadow banking system if banks are regulated more tightly. 
As a result, only the Fed’s interest-rate instrument, Stein and Tarullo argue, can get into all of the financial system’s cracks. 
But if the Fed has only one effective instrument – interest rates – its two goals of economic and financial stability cannot be pursued simultaneously. 
Either the Fed pursues the first goal by keeping rates low for longer and normalizing them very slowly, in which case a huge credit and asset bubble would emerge in due course; or the Fed focuses on preventing financial instability and increases the policy rate much faster than weak growth and high unemployment would otherwise warrant, thereby halting an already-sluggish recovery. 
The exit from the Fed’s QE and zero-interest-rate policies will be treacherous: Exiting too fast will crash the real economy, while exiting too slowly will first create a huge bubble and then crash the financial system. 
If the exit cannot be navigated successfully, a dovish Fed is more likely to blow bubbles. 

The Federal Reserve’s Relevance Test 
NEW YORK – With interest rates near zero, the US Federal Reserve and other central banks are struggling to remain relevant. 
The last arrow in their quiver is called quantitative easing (QE), and it is likely to be almost as ineffective in reviving the US economy as anything else the Fed has tried in recent years. 
Worse, QE is likely to cost taxpayers a bundle, while impairing the Fed’s effectiveness for years to come. 
John Maynard Keynes argued that monetary policy was ineffective during the Great Depression. 
Central banks are better at restraining markets’ irrational exuberance in a bubble – restricting the availability of credit or raising interest rates to rein in the economy – than at promoting investment in a recession. 
That is why good monetary policy aims to prevent bubbles from arising. 
But the Fed, captured for more than two decades by market fundamentalists and Wall Street interests, not only failed to impose restraints, but acted as cheerleaders. 
And, having played a central role in creating the current mess, it is now trying to regain face. 
In 2001, lowering interest rates seemed to work, but not the way it was supposed to. 
Rather than spurring investment in plant and equipment, low interest rates inflated a real-estate bubble. 
This enabled a consumption binge, which meant that debt was created without a corresponding asset, and encouraged excessive investment in real estate, resulting in excess capacity that will take years to eliminate. 
The best that can be said for monetary policy over the last few years is that it prevented the direst outcomes that could have followed Lehman Brothers’ collapse. 
But no one would claim that lowering short-term interest rates spurred investment. 
Indeed, business lending – particularly to small businesses – in both the US and Europe remains markedly below pre-crisis levels. 
The Fed and the European Central Bank have done nothing about this. 
They still seem enamored of the standard monetary-policy models, in which all central banks have to do to get the economy going is reduce interest rates. 
The standard models failed to predict the crisis, but bad ideas die a slow death. 
So, while bringing down short-term T-bill rates to near zero has failed, the hope is that bringing down longer-term interest rates will spur the economy. 
The chances of success are near zero. 
Large firms are awash with cash, and lowering interest rates slightly won’t make much difference to them. 
And lowering the rates that government pays has not translated into correspondingly lower interest rates for the many small firms struggling for financing. 
More relevant is the availability of loans. 
With so many banks in the US fragile, lending is likely to remain constrained. 
Moreover, most small-business loans are collateral-based, but the value of the most common form of collateral, real estate, has plummeted. 
The Obama administration’s efforts to deal with the real-estate market have been a dismal failure, perhaps succeeding only in postponing further declines. 
But even optimists don’t believe that real-estate prices will increase substantially any time soon. 
In short, QE – lowering long-term interest rates by buying long-term bonds and mortgages – won’t do much to stimulate business directly. 
It may help, though, in two ways. 
One way is as part of America’s strategy of competitive devaluation. 
Officially, America still talks about the virtues of a strong dollar, but lowering interest rates weakens the exchange rate. 
Whether one views this as currency manipulation or as an accidental by-product of lower interest rates is irrelevant. 
The fact is that a weaker dollar resulting from lower interest rates gives the US a slight competitive advantage in trade. 
Meanwhile, as investors look outside the US for higher yield, the flood of money out of the dollar has bid up exchange rates in emerging markets around the world. 
Emerging markets know this, and are upset – Brazil has vehemently expressed its concerns – not only about the increased value of their currency, but that the influx of money risks fueling asset bubbles or triggering inflation. 
The normal response of emerging-market central banks to bubbles or inflation would be to raise interest rates – thereby increasing their currencies’ value still more. 
US policy is thus delivering a double whammy on competitive devaluation – weakening the dollar and forcing competitors to strengthen their currencies (though some are taking countermeasures, erecting barriers to short-term inflows and intervening more directly in foreign-exchange markets). 
The second way that QE might have a slight effect is by lowering mortgage rates, which would help to sustain real-estate prices. 
So QE would produce some – probably weak – balance-sheet effects. 
But potentially significant costs offset these small benefits. 
The Fed has bought more than $1 trillion of mortgages, the value of which will fall when the economy recovers – which is precisely why no one in the private sector wants to buy them. 
The government may pretend that it has not experienced a capital loss, because, unlike banks, it is not required to use mark-to-market accounting. 
But no one should be fooled, even if the Fed holds the bonds to maturity. 
The attempt to ensure that the losses are not recognized might tempt the Fed to rely excessively on untested, uncertain, and costly monetary-policy tools – like paying high interest rates on reserves to induce banks not to lend. 
It is good that the Fed is trying to make amends for its dismal pre-crisis performance. 
Regrettably, it is far from clear that it has changed its thinking and models, which failed to maintain the economy on an even keel before – and are certain to fail again. 
The Fed’s previous mistakes proved extraordinarily costly. 
So will the new mistakes, even if the Fed strives to hide the price tag. 

The Feminine Mystique Revisited 
OLYMPIA, WASHINGTON amp#45;amp#45; This year marks the 45th anniversary of the publication of Betty Friedan’s The Feminine Mystique . 
Today, many social conservatives still blame Friedan and feminism for inducing women to abandon the home for the workplace, thus destabilizing families and placing their children at risk. 
But feminism was always more of a response to women entering the labor force than its cause. 
In Western Europe and the United States, early capitalism drew huge numbers of young, single women into industries like textiles. 
Mill owners often built dormitories to house young female workers. 
Many of these workers became early supporters of both the anti-slavery and the women’s rights movements, while middle-class women were energized by (and sometimes envious of) working women’s vigorous participation in the public sphere. 
By the time Friedan’s book was published in 1963, capitalism was drawing married women into the expanding service, clerical, and information sectors. 
Friedan’s ideas spoke to a generation of women who were starting to view paid work as something more than a temporary break between adolescence and marriage, and were frustrated by society’s insistence that the only source of meaning in their lives should be their role as housewives. 
Wherever women enter the labor force in large numbers, certain processes unfold. 
Women begin to marry later and have fewer children, especially as they make inroads into higher education or more remunerative careers. 
They are also more likely to challenge laws and customs that relegate them to second-class status in the public sphere or mandate their subordination within the family. 
Often, governments and employers then find that it is in their interest to begin to remove barriers to women’s full participation. 
The dramatic decrease in laws and customs perpetuating female subordination over the past 40 years has been closely connected to women’s expanded participation in paid employment. 
Societies where women remain substantially under-represented in the labor market, such as in the Middle East, remain especially resistant to women’s rights. 
Political scientist Michael Ross argues that the extreme gender inequality found in Saudi Arabia and the United Arab Emirates is not caused by the intractability of Islamic tradition. 
Rather, it is the result of how oil wealth shifted economic development away from manufacturing jobs that have historically pulled women into the labor force, while promoting jobs in construction, which tend to be dominated by men. 
Within the Muslim Middle East, the oil-rich states score much lower on indices of gender equity than oil-poor states such as Morocco, Tunisia, Lebanon, and Syria. 
Social conservatives are wrong to blame women’s entry into work on feminism. 
But women who work are much more likely to adopt feminist-inspired agendas and to reject traditional ideas about marriage. 
And when women gain economic and political clout, traditional family life is, indeed, destabilized. 
In Western Europe and North America, divorce rates soared as married women poured into the workplace in the 1970’s and 1980’s, with women initiating most divorces. 
Although divorce rates leveled off in the 1990’s, cohabitation and unwed childbearing have continued to rise. 
Nevertheless, the best hope for improving family life today is not to roll back women’s rights, but to further women’s economic and political integration. 
Increases in women’s power and resources are most threatening to family stability in societies marked by gender inequality, where successful women often rebel against marriage. 
In countries such as Japan, Italy, and Singapore, where the terms of marriage remain favorable to men, and women have a hard time combining work and family, working women postpone marriage and motherhood much longer than in the US, leading to declines in birth rates that threaten these societies’ future. 
As women gain collective rights, and especially as men accept women’s changed roles, many of the disruptive effects of family change are ameliorated. 
In the US, divorce rates for well-educated women are now much lower than for less-educated women, and women with good jobs or who have completed college are more likely than more traditional women to be married at age 35. 
In the past, when a stay-at-home wife went to work, the chance that her marriage would dissolve increased. 
Today, going to work decreases the chance of divorce. 
In families where the wife has been employed longer, men tend to do more and better child-care, with measurable payoffs in child outcomes. 
Of course, marriage will never again be as stable or predictable as when women lacked alternatives. 
But even where family change continues apace, it has far less negative consequences when women have access to economic rights than when they do not. 
In the Nordic countries, out-of-wedlock births are much higher than in the US, but children of single mothers are much less likely to experience poverty, and spend more time on average with both biological parents, because cohabitation there is more stable than in many American marriages. 
In poorer countries, women’s access to paid labor is a better predictor of children’s well-being than the stability of marriage. 
In parts of Africa and Latin America, children are better nourished and have more access to education in female-headed households where the woman has a job than in two-parent households where the man earns the income. 

The Fight for Food 
GENEVA – Every year, 3.5 million mothers and children below the age of five die in poor countries because they do not have the nutrition they need to fight common diseases. 
Three-quarters of them could have survived diarrhea or malaria if they had been properly nourished. 
For those who do survive, the future looks grim: all studies show that children who are undernourished in the first two years of life suffer health problems and lag in development for the rest of their lives. 
Insufficient nourishment impedes their capacity to learn, fitness to work, and ability to develop their talents. 
Besides the human suffering, the economic costs of malnutrition are huge: according to the World Bank, countries where malnutrition is most prevalent lose, on average, between 2% and 3% of their GDP. 
The issue is not severe and acute malnutrition, which hits populations suddenly, usually as a result of conflict. 
The question is how we attract the attention of the European Union and the G8 countries to the malnutrition that experts call “hidden hunger,” which affects one in every three people worldwide. 
It is caused by imbalanced nutrition or a lack of vitamins and essential minerals that enable the human body to grow and that maintain its vital functions. 
For example, recent data show that even a moderate deficiency of Vitamin A results in higher mortality. 
In fact, we could avoid the death of at least one million children every year by improving their intake of it. 
Doing so would not be difficult. 
Humans have added essential vitamins or minerals to their foods since time immemorial; indeed, since the beginning of the twentieth century, food fortification has been a major government policy in developed countries to reduce nutritional deficiencies and improve public health. 
All scientific studies of such interventions prove that fortification of basic foodstuffs works. 
Chile promoted the addition of iron to milk, resulting in a 66% reduction of anemia amongst babies. 
The fortification of maize meal with folic acid in South Africa – one of the projects supported by the Global Alliance for Improved Nutrition (GAIN) – was followed by a 40% reduction in spina bifida, a serious deformation of the neural tube in new-born babies. 
Moreover, these essential interventions cost little and deliver a lot: to enrich cooking oil with Vitamin A costs less than $0.10 per liter, and fortification in general has a benefit-to-cost ratio of at least eight to one. 
What is missing is the willingness to act. 
At GAIN, we are convinced that there is an urgent need to fight malnutrition if the world wants to achieve the United Nations’ Millennium Development Goals, which commit the world to halving global poverty and hunger by 2015. 
Fighting malnutrition is the first step toward reaching this objective. 
Science has demonstrated the cost-effectiveness of food fortification, and the technologies and know-how are available in the private sector, which has the capacity to innovate and deliver products to the poorest. 
Europe and the G8 must act. 
Not only do they need to make the fight against malnutrition a policy priority; they also must invest. 
The equation is straightforward: €160 million for fortification programs could improve the health of one billion people. 
To put that amount into perspective, the regular move of EU institutions between Brussels and Strasbourg costs €200 million per year. 
While the latter is an understandable expense historically, the time has come for the EU and G8 to make different political choices that help keep 3.5 million mothers and children alive and well. 

The Fight for Middle Germany 
BERLIN – Germany has made its choice. 
It voted the grand coalition out of office with a bang, consigning the Social Democrats to the political abyss. 
Only ruins remain of the once-proud Gerhard Schröder’s SPD. 
Despite a clear win for the center-right, the Christian Democrats (CDU) did not escape unscathed. 
But while their losses were moderate, CDU’s Bavarian sister-party, the CSU, experienced a debacle second only to the Social Democrats. 
So it looks like SPD hit rock bottom, CSU is in freefall, and CDU the worse for wear. 
The clear winners are Guido Westerwelle and his Liberal party, followed by the Left, and the Greens – all three of which got their highest vote count ever. 
But the reality is a bit more complicated. 
The clearest winner is Angela Merkel. 
The chancellor played for high stakes, seemingly against the odds, and hit the jackpot. 
Unlike her party, she is now stronger than ever. 
So will we see a new Merkel, a chancellor who, freed from the restraints of SPD in the governing coalition, will be more decisive, reformist, and willing to take political risks? 
Don’t bet on it. 
Merkel barely avoided political oblivion in the last general election, after the CDU had embraced market radicalism and then campaigned on it in 2005. 
Her savior came in the unlikely form of the then Social Democratic Chancellor Gerhard Schröder, whose wild performance on election night handed her the chancellorship. 
To be sure, fortune and success are inseparable in politics. 
But Merkel hasn’t tried to press her luck since then. 
On the contrary, she has unflinchingly steered the CDU towards the left, because she learned three things from the CDU’s election defeat in 2002 and its narrow victory in 2005: Germans don’t want to go to war, don’t think much of economic reform, and are mostly to the left of the CDU/CSU. 
Merkel could attempt this strategy because she knew that her right flank was covered by the FDP, which would attract voters dissatisfied with the CDU’s leftward turn, but then join in a CDU-led coalition. 
At the same time, by moving to the left, Merkel ousted the SPD from the political center – where elections are won and lost in Germany – while still being able to form a workable majority in the new five-party system without risking new coalition constellations and fierce internal conflict. 
In other words, the secret of Merkel’s election victory was to secure a majority for the center-right in order to pursue, more or less, a center-left policy agenda. 
A change of tack by Merkel now would merely reinvigorate the devastated SPD. 
To be sure, the “black and yellow” CDU-FDP coalition will make some policy corrections – slowing the nuclear phase-out, cosmetic changes to the tax system, etc. – in order not to disappoint parts of their constituency and economic supporters. 
But there will be no clear-cut change in policy direction. 
That said, governing will hardly be a cinch for Merkel. 
In the coming years, she will face the economic crisis, increasing unemployment, mounting public debt, and demographic challenges at home, as well as tough foreign-policy choices in Afghanistan, Iran, Pakistan and the Middle East. 
Moreover, with the grand coalition gone, she will no longer be able to blame SDP’s obstructionism for her inaction. 
Indeed, Merkel’s room for maneuver will be reduced. 
Until now, Merkel had to deal with a weak or non-existent opposition. 
This will change very quickly, particularly given the possibility of NATO troop increases in Afghanistan. 
From now on, she will require a trait that she has lacked so far: leadership and decision-making skills. 
The victory of black and yellow has, moreover, defined the alternative: red, dark red, and green. 
The political camps of old – left and right – are back for the time being. 
If this situation prevails beyond 2013, the SPD will face an unenviable challenge. 
It will have to manage a realignment that includes a possible coalition with the Left at the federal level, but without moving too far to the left in policy terms. 
The SPD, together with the Greens, will have to take the fight to the political center, which precludes competing with the Left for fringe voters. 
Moreover, the Left – a party that is descended from the former East Germany’s ruling Communists and Social Democratic dissenters – will have to play ball by embracing political realism. 
The best way to achieve this is through the Left’s participation in regional ( länder) governments. 
But it is difficult to predict whether such a division of labor with the disenchanted former Social Democrat Oskar Lafontaine will be possible. 
And the Greens? 
Their part in such a constellation will be to represent middle-class and ecologically oriented voters. 

The Fight for Pakistan’s Soul 
CAMBRIDGE – As its army confronts, ever more bloodily, the Taliban in the Swat Valley, Pakistan is fighting for its very soul. 
The army appears to be winning this time around, in marked contrast to its recent half-hearted confrontations with Taliban forces in neighboring tribal areas. 
For now, the Taliban are on the run, some with shaved beards and some in burqas , to avoid being recognized and thrashed. 
The reason is simple: increasingly, people across Pakistan support the army’s action. 
This support persists despite the terrible humanitarian cost: more than 1.5 million internal refugees. 
This round of fighting was preceded by a negotiated calm, as the government sought to quell militants in Pakistan’s tribal areas by striking a deal with the Taliban leader, Sufi Mohammad. 
The deal, which instituted a version of Sharia law in the region in exchange for a commitment that militants would lay down their weapons, was blessed by the comparatively liberal Awami National Party (ANP), which governs the North-West Frontier Province (NWFP), where Swat is located. 
But the Taliban’s assurances of a lower profile were upended by two incidents that exposed its real face. 
First, private news channels broadcast across the country a video clip recorded on a cell phone of the public flogging of a 17-year-old Swat girl. 
This gave the public a stark sense of what Taliban justice really meant. 
Then, Mohammad was interviewed on GEO TV, where he explained his political views. 
According to Mohammad, democracy is un-Islamic, as are Pakistan’s constitution and judiciary, and Islam bars women from getting an education or leaving their homes except to perform the Hajj in Mecca. 
Religious conservatives were stunned. 
Leaders of the religious parties rushed to denounce Mohammad’s views. 
The Pakistani media revisited a famous comment by Mohammad Iqbal, the poet-philosopher who devised the idea of an independent Muslim state in Pakistan. 
“The religion of the mullah,” he said, “is anarchy in the name of Allah.” 
Still, it’s not over until it’s over – and in the short term a lot depends on the state’s capacity to hold the Swat area and re-establish civilian institutions there. 
And, even if the state succeeds, re-asserting control over Swat will only be the first step. 
The Taliban is spread throughout the NWFP and the Federally Administered Tribal Areas. 
“Punjabi Taliban” militants from the fighting in Kashmir against India continue to shuttle between the Punjab heartland and the Northwest Territories, posing another serious challenge to government authority. 
In the long-term, however, what really matters is whether the Muslims of South Asia will be able to roll back the spread of Talibanization altogether. 
The answer to that question lies within the various Muslim communities of the region, not just in Pakistan. 
Afghanistan faces an election later this year. 
A clear and transparent vote will make a real difference in establishing the credibility of the Afghan government. 
In Pakistan, the democratic transition, after years of military rule, is still not complete. 
There is much hope, though, in the vibrancy of the Pakistani media, as well as in the energy that the legal community generated last March in restoring deposed Chief Justice Iftikhar Mohammad Chaudhry to his seat on the Supreme Court. 
Then there is the Pakistani army, the country’s “super political party.” 
To a large degree, Pakistan’s relations with India, Afghanistan, and the United States depend on the military. 
Army commander Ashfaq Kiyani has shown no interest in taking over the state, as his predecessor, General Pervez Musharraf, did. 
But the army must accept its subservience to Pakistan’s political leadership. 
The army command must finally recognize that repeated military interventions have not served the country well. 
Most significantly, in the face of martial law and political assassination, Pakistanis have not given up their dream of democracy. 
A living example of this is Afzal Lala, a Pashtun politician associated with the Awami National Party who, despite all the threats from the bloodthirsty Tehrik-e-Taliban Pakistan, remained in Swat through the recent fighting. 
Democracy will be decisive because it generates investments in education, health, and economic empowerment that reward ordinary voters. 
Talibanization gains ground when people lose faith in the capacity of the modern state to improve their lives. 
While poor law enforcement needs urgent attention, counter-terrorism is never solely a military affair. 
Financial pledges from the US and the “Friends of Pakistan” consortium (the European Union, China, and Japan) are important, but when it comes to investing wisely in development projects, Pakistan’s track record is nothing to be proud of. 
Effective oversight from donors and Pakistan’s private sector will be critical. 
Only one condition should be imposed on aid for Pakistan: the first money should be spent on rebuilding all the bombed-out girls’ schools in Swat. 
If need be, the army should guard these schools around the clock. 

The Fight for Shareholder Rights in Russia 
MOSCOW: Abuse of shareholders by managers and majority owners cripples foreign investment in Russia. 
No surprise, then, that improving corporate governance and protecting minority shareholders is becoming a concern of the Putin government. 
Refusing shareholders entry to shareholders meetings, or striking their names off share registers – two popular gimmicks of a few years ago – are rarer nowadays. 
Some “oligarchs” have undergone Damascene conversions and are trying to improve their image among investors. 
A few companies, such as the oil giant Yukos, even appoint independent directors from abroad. 
These private sector improvements, however, are nowhere to be seen among large businesses controlled by Government, even though many of these firms have a substantial minority of private shareholders who need protection from managerial abuse. 
Management in these firms, indeed, has become more arrogant and inventive in violating shareholder rights. 
As an independent member of the boards of electricity utility RAO UES and the gas giant Gazprom, I know directly of their waywardness. 
United Energy Systems (UES) is headed by Anatoly Chubais, a former deputy prime minister with a reputation as a reformer. 
At board meetings, tame in-house managers usually outvote me. 
If UES bosses want to buy a skyscraper despite UES’s making a $350 million loss, it is fine with them. 
In November we were asked to approve – without review – huge overpayments on administration. 
Sometimes we hear that UES has acquired a TV station or finances a political faction in the Duma via a subsidiary. 
Extracting information on any of these matters is almost impossible. 
After 3 years as CEO, Chubais decided to “restructure” UES, thinking that glib talk about competition and liberalization will garner him continued support from London and New York. 
He tried to brow-beat investors at a board meeting in the Kremlin where – in good Soviet tradition – everyone was expected to vote unanimously to split the company into small pieces so as to sell them at low prices to cronies, political allies, and friendly oligarchs. 
When shareholders balked, Chubais sought to neutralize his opponents, unilaterally changing the agreement with the Bank of New York to control the votes of most holders of American Depository Rights (ADRs). 
Disgusted, many UES shareholders sold their shares. 
Others are fighting on – calling an extraordinary shareholders meeting, complaining to Government, possibly suing. 
What do investors want? 
To solve the issue of government set electricity rates, to stop theft and mismanagement, to put the company’s house in order before any “restructuring.” 
No investor believes that current management will sell UES assets at fair prices. 
Similar misdeeds, with added twists, exist in the energy giant Gazprom, where old-style Soviet managers misrule. 
The issue, again, is shareholder value, with shareholders worrying that billions of dollars are disappearing from the company. 
These suspicions are bolstered by the fact that Gazprom’s shares have underperformed the market for years and the fact that the company does not pay proper dividends. 
Shareholders know of hundreds of agricultural enterprises, hotels, luxury villas, banks, investment companies and corporate jets owned by Gazprom. 
These have little to do with Gazprom’s main business, are loss-making and are probably used to channel company money to managers. 
Indeed, subsidiaries where managers hold shares through their children and other relatives – say, the huge construction company Stroitransgaz which has billion-dollar contracts with Gazprom – are created regularly and shareholders seem powerless to stop such practices. 
Shareholders also hear of Gazprom providing financial guarantees to parties which – officially at least – have nothing to do with its business. 
One example is the Media/Most group which, for reasons unknown, was financed by Gazprom to the tune of more than half a billion dollars! 
It is even said in Moscow that a reason behind the recent arrest of Media/Most’s owner, Vladimir Gusinsky, in Spain on an Interpol warrant is the desire by Moscow prosecutors to discover everything Gusinsky knows about Gazprom’s inner workings. 
But secret deals with Media/Most are but the tip of the iceberg. 
Creating boundless suspicions are Gazprom’s links to the Florida-based company ITERA, which grew into a multibillion enterprise on par with Gazprom in only a few years. 
Investors suspect such phenomenal growth was achieved at Gazprom’s expense. 
In Ukraine, for example, billions of dollars of Russian gas supplies go unpaid every year. 
Russia’s Government talks with Ukraine’s government. 
To no avail. 
Suddenly, we discover that one-third of Ukraine’s gas supplies are controlled by ITERA, and wonder why this is so and where the money is going. 
Because the Government has not sufficiently liberalized domestic gas prices, manipulation is easy. 
Gazprom’s sales in Russia are often disguised as murky barter deals. 
Despite this, Gazprom’s holding company appears to be rolling in cash while its production subsidiaries mostly appear bankrupt and never pay their taxes in full. 
As a minister I once put pressure on Gazprom over taxes and was summoned to parliament by indignant deputies. 
Many Duma members and local governors owe their jobs to Gazprom. 
Managers of Government-controlled companies like Gazprom and UES live in a style befitting oligarchs, create nest eggs for themselves, and play around in politics. 
Why are clear suspicions of corruption, asset-stripping and outright theft not investigated and punished, even though both companies are majority-owned by the Government and most of the board membership is state appointed? 
Putin’s inaction looks like weakness, and these scandals discourage foreign investment. 
President Putin’s silence here is surprising. 
To make progress in corporate governance at state-controlled companies Putin does not need new laws or IMF loans. 
He should pick up the phone and fire managers who compromise Russia. 
This would be the clearest sign of his intention to put reform on the right track. 
Private investors – indeed, all Russia’s citizens – are watching and waiting. 

The Final Defeat of Thomas Malthus? 
The UN recently revised its population projections. 
Some 6.3 billion people now live on Earth. 
If fertility rates in relatively poor countries continue to follow the trends set by today's relatively rich countries, we are within shouting distance of the world's maximum population-9-10 billion-to be reached in 2050-2100. 
But population may well decline thereafter. 
Literate, well-educated women with many social and economic options in today's rich countries have pulled fertility below the natural replacement rate. 
The problem is not that such women on average want fewer than two children; in fact, on average they wish to have a bit more than two. 
But because many of them delay childbearing until their thirties, actual fertility falls short of what they desire. 
A world population that peaks at 9-10 billion is not one in which we have to worry about Parson Malthus, the English 19th century economist who prophesied a future in which people multiply faster than the resources needed to sustain them and hence starve to death by the millions. 
Indeed, it comes as somewhat of a shock to realize that the age of the population explosion may be coming to an end. 
Just thirty years ago, people like Stanford University's Paul Ehrlich were telling us that the Malthusian Angel of Death was at the door. 
They assured us that it was too late to stop the famines that would kill hundreds of millions in the Indian subcontinent, and that humanity's destiny in the 21st century was one of war and struggle for the resources to feed national populations an extra crust of bread. 
Today, however, the political flashpoint over food is not that there is too little, but that there is too much. 
Developing-country politicians and populations complain bitterly that the rich industrial countries are growing too much food. 
"Exporting food is one of the few ways we can earn the foreign exchange we need to buy modern industrial technology," they say. 
"But your agricultural subsidy programs block us from establishing any sort of comparative advantage in most agricultural products. 
You say free trade is good in those manufactures that you export-you say that enforcing property rights is critically important for your investors-but somehow you go deaf when the topic turns to a level playing field in agricultural trade..." 
They are right. 
Not every developing country can grow rich by making and exporting computer chips, or plastic toys, or bananas. 
Some need to export steel. 
Others will have to export furniture or textiles. 
Still others will have to export citrus, grains, processed foods, etc. 
Yet there has been little forward motion in opening up world trade for nearly a decade. 
Given the complexion of the US Democratic Party's key constituencies, this is not surprising. 
On the contrary, what is surprising is that President Clinton was so willing to swim against the tide generated by his own labor/protectionist base in 1993 and 1994 and establish NAFTA and the WTO. 
It is also very surprising that the post-2000 Republican administration of George W. Bush has been so hostile to freer trade. 
Indeed, Bush has backed several major anti-liberal initiatives: a steel tariff, the expansion of agricultural subsidies, and a declaration that FTAA [Free Trade Agreement of the Americas] negotiations cannot even consider the impact of US agricultural subsidy programs on trade. 
Blockages to world trade jeopardize global economic development. 
Technology transfer is incredibly difficult. 
It may well turn out that $4 worth of aid are a poor substitute for even $1 worth of exports, because there are few better schools in which to internalize the organizational forms and technologies built since the start of the Industrial Revolution than the school of exporting. 
If global development is at risk, then so is the final defeat of Malthus. 
If the poorest countries stay poor, their rates of population growth might fall much more slowly than the United Nations predicts. 
Falling birthrates depend on a rise in the status of women, confidence in public health, growing prosperity, and strong cultural cues to convince people that there are other, better indicators of success than a large family. 
The fact that most countries are completing the demographic transition does not guarantee that all will. 
Perhaps Malthus will rule again, in geographically small but densely populated and immensely poor parts of the globe. 
The world's high- and middle-income countries should not imagine that the relatively rich can fence themselves off indefinitely from poverty and misery in the poorest countries. 
Nationalism has long been a powerful cause of political violence. 
Nothing is more likely to strengthen nationalism and turn it to violence than a sense that one's own homeland is being exploited-kept poor and powerless-by other nations to satisfy their own selfish interests. 
The world today is too small for any of us to be able to afford for any corner of it to be left out of the conquest of Malthusianism. 

The Financial Crisis One Year After 
NEW YORK – It is now almost a year since the world economy teetered on the edge of calamity. 
In the span of three days, September 15-17, 2008, Lehman Brothers filed for bankruptcy, the mega-insurance company AIG was taken over by the United States government, and the failing Wall Street icon Merrill Lynch was absorbed by Bank of America in a deal brokered and financed by the US government. 
Panic ensued and credit stopped circulating. 
Non-financial companies could not get working capital, much less funding for long-term investments. 
A depression seemed possible. 
Today, the storm has broken. 
Months of emergency action by the world’s leading central banks prevented financial markets from crashing. 
When banks stopped providing short-term liquidity to other banks and industrial companies, central banks filled the gap. 
As a result, the major economies avoided a collapse of credit and production. 
The sense of panic has subsided. 
Banks are once again lending to each other. 
Although the worst was avoided, much pain remains. 
The crisis culminated in a collapse of asset prices at the end of 2008. 
Middle-class and wealthy households around the world felt poorer and therefore cut their spending sharply. 
Sky-high oil and food prices added to the pain, and thus to the downturn. 
Enterprises could not sell their output, leading to production cuts and layoffs. 
Rising unemployment compounded the loss of household wealth, throwing families into deep economic peril and leading to further cutbacks in consumer spending. 
The big problem now is that unemployment continues to rise in the US and Europe, because growth is too slow to create enough new jobs. 
Dislocations are still being felt around the world. 
A huge debate has ensued around the so-called “stimulus spending” in the US, Europe, and China. 
Stimulus spending aims to use higher government outlays or tax incentives to offset the decline in household consumption and business investment. 
In the US, for example, roughly one-third of the $800-billion two-year stimulus package comprises tax cuts (to stimulate consumer spending); one-third is public outlays on roads, schools, power, and other infrastructure; and one-third takes the forms of federal transfers to state and local governments for health care, unemployment insurance, school salaries, and the like. 
Stimulus packages are controversial, because they increase budget deficits, and thus imply the need to cut spending or raise taxes sometime in the near future. 
The question is whether they successfully boost output and jobs in the short term, and, if so, whether they do enough to compensate for the inevitable budget problems down the road. 
The true effectiveness of these packages is not clear. 
Suppose that the government gives a tax cut in order to increase consumers’ take-home pay. 
If consumers expect that their taxes will rise in the future, they may decide to save the tax cut rather than boost consumption. 
In that case, the stimulus will have little positive effect on household spending, but will worsen the budget deficit. 
An early assessment of the stimulus packages suggests that China’s program has worked well. 
The sharp fall in China’s exports to the US has been compensated by a sharp rise in the Chinese government’s spending on infrastructure – say, on subway construction in China’s biggest cities. 
In the US, the verdict is less clear. 
The tax cut has probably been saved rather than spent. 
The infrastructure component has not yet been spent because of long lags in turning the US stimulus package into real construction projects. 
The third part – the transfer to state and local governments – almost surely has been successful in maintaining spending on schools, health, and the unemployed. 
In short, the US stimulus effects on spending have probably been positive but small, and without a decisive effect on the economy. 
Moreover, concerns about the enormous US budget deficit, now running at $1.8 trillion (12% of GNP) per year, are bound to increase, not only creating enormous uncertainties in politics and financial markets, but also dimming consumer confidence as households focus their attention on potential future budget cuts and tax increases. 
The US has reached the practical limits of reliance on short-term stimulus spending, and will need to start cutting the budget deficit and fostering alternative pathways to growth. 
When the crisis deepened a year ago, Barack Obama introduced into the presidential campaign the theme of a “green recovery,” based on a surge of investment in renewable energies, new electric vehicles, environmentally efficient “green” buildings, and ecologically sound agriculture. 
In the heat of the battle against financial panic, policy attention turned away from that green recovery. 
Now the US needs to return to this important idea. 
Debt-burdened consumers in the US and Europe will limit their spending for years to come as they rebuild their wealth and pension assets. 
But the resulting economic slack gives us the historic opportunity – and need – to compensate for low consumer spending with increased investment spending on sustainable technologies. 
Government policies in the US and other rich countries should stimulate those investments through special incentives. 
These include a cap-and-trade system for greenhouse-gas emissions, subsidies for research and development on sustainable technologies, feed-in tariffs and regulatory incentives for renewable energy, consumer subsidies and other inducements for the uptake of new “green” technologies, and implementation of “green” infrastructure programs, such as mass transit. 
The rich world should also provide the poorest countries with grants and low-interest loans to buy sustainable energy technologies, such as solar and geothermal power. 
Doing so would add to the global recovery, improve long-term environmental sustainability, and accelerate economic development. 
The crisis can yet be an opportunity to turn from a path of financial bubbles and excessive consumption to a path of sustainable development. 
In fact, seizing this opportunity is the only recipe for genuine growth that we have left. 

The Financial Hurricane Hits Latin America 
LOS ANGELES – A few weeks ago, the world was on the edge of disaster. 
Fortunately, the decisive actions taken by the advanced countries’ monetary authorities – including provision of unprecedented amounts of liquidity – prevented a complete financial meltdown. 
The world has avoided the “Argentinization” of the international financial system. 
What has not been avoided is a recession that will be deep, long, and global. 
In the coming months, nearly every region in the world will experience economic deceleration, with exports declining and unemployment increasing. 
Recent events have disproved the notion that emerging nations had “decoupled” themselves from the advanced economies. 
The facts have shown the opposite to be true. 
Most emerging economies are still fragile and affected by what goes on in the advanced countries. 
The effects of this recession will be particularly severe in Latin America. 
Brazil and Mexico have been the hardest hit so far, to the point that the value of their firms has fallen by approximately 50%. 
The situation in these countries is so serious that a few days ago the United States granted them credit for up to $60 billion. 
But Brazil and Mexico are not the only ones hit by financial volatility: Chile’s currency has lost a third of its value, in Peru the cost of external financing has soared, and in Argentina the government has had to resort to extreme measures – such as the nationalization of the pension system – in order to avert an imminent fiscal calamity. 
Indeed, with the recession possibly lasting 18 months or more – which would make it the longest since World War II – Argentina will be one of the hardest hit. 
Its external financing needs are enormous, and its exports will fall sharply. 
But politics will also play a role in Argentina’s economic distress. 
The administration of President Cristina Fernández de Kirchner generates a great deal of distrust among local and foreign investors, who fear arbitrary measures. 
The recent decision of Standard and Poor’s to lower Argentina’s rating is fully justified and reflects many analysts’ fear that Argentina will again default on its public debt. 
Mexico and Central America will also suffer from the long recession. 
For many years, their economic fate has been closely tied to that of the US. 
These ties increased with the signing of bilateral free-trade treaties with the US, so there is a good chance that they could experience negative growth in 2009 and, perhaps, in the first half of 2010, as the US goes into recession. 
Less affected by the financial crisis and the US recession will be those that have developed with an eye toward Asia nations – particularly Chile, Colombia, and Peru –, and have accumulated resources to meet unexpected financial storms. 
They will be quicker to recover their levels of employment. 
But the most important question is what will happen in Brazil, Latin America’s giant. 
Over the past few years, analysts and investors around the world began to see Brazil as an economic power in the making. 
There was mention of a miracle, and many argued that Brazil would grow spectacularly like China and India, and no longer be the eternal country of “the future.” 
Unfortunately, everything suggests that this was an illusion based on wishful thinking. 
Brazil’s boom of the past few years stood on an incredibly weak foundation. 
President Luiz Inácio Lula da Silva did indeed decide to avoid the rampant populism of Hugo Chávez of Venezuela, and successfully tackled inflation. 
But it takes more than that to become a great economic power. 
What Lula did was simply to decide that Brazil would be a “normal” country. 
But more than controlled inflation is needed to create a robust economy with a high and sustainable growth rate. 
Agility, dynamism, productivity, and economic policies that promote efficiency and enterprise are required. 
As many studies have shown, Brazil has not been able – or has not wanted – to adopt the modernizing reforms needed to promote a productivity boom. 
Brazil is still an enormously bureaucratic country, with an educational system in crisis, very high taxes, mediocre infrastructure, impediments to the creation of businesses, and a high level of corruption. 
It is sad but true: in recent years Brazil did not opt for modernization and efficiency and will have to pay the consequences during the difficult years ahead. 

The Fire Down Below 
WARSAW: Bombing Serbia and Serb forces in Kosovo are not exactly what NATO's new members in Central Europe expected when they joined the West's premier security organization. 
Poland, but also Hungary and the Czech Republic, believed they were joining yesterday's NATO - an alliance to protect Europe against threats from the East. 
It is this goal that made them mobilize resources and public opinion in order to join the privileged group. 
Now they find themselves in an organization in the process of radical transformation. 
It is said of NATO's attack on Serbia that it is the first war of the 21st century. 
Fighting in Kosovo is the first significant conflict which, for one side at least, involves no considerations of strategy, territory, population, natural resources, or even ideology. 
The West is fighting a war over principles, a war, as President Clinton put it, "to end a moral tragedy." 
At issue is an attempt to stop an epidemic, the carriers of which in 20th century Europe have been nazism, communism, fascism, and now, nationalism. 
NATO, for the first time, has intervened in the internal affairs of another country. 
This is a significant change in NATO policy, which downgrades the idea of the sovereignty of states and elevates the status of ethical norms in international relations. 
A lot seems to rest on a consensus about moral norms and about who is right and who is wrong. 
While few question the immorality of Serbs' behavior, future moral crusades may be more controversial. 
In addition to moral considerations, the decision to intervene was motivated by concerns about the future of European-American relations, and of NATO after the cold war. 
The fall of the Soviet Union undercut the primary source of NATO's legitimacy. 
Who is threatened by Russia today? 
It is Russia's weakness that is a threat, and raises fears of chaos, unforseen uses of nuclear weapons, or another Chernobyl. 
NATO is in the process of working out a new doctrine that is to be adopted later this month in Washington during the celebrations of NATO's 50th anniversary. 
It remains a defensive alliance, but one ready to attack to protect peace and stability or to fight terrorism and nuclear proliferation. 
The new NATO raises the urgent issue of public support. 
Why, people ask, should the allied countries pay the heavy price of war, and perhaps sacrifice the lives of their soldiers, when there is no danger to their national security or vital national interests? 
In the era of immediate access to information and the shock of television images, wars cannot be conducted without popular support. 
Superficially, this makes morally motivated wars easier: scenes of misery on TV incite visceral emotional reactions and feelings of solidarity. 
But public opinion can change when a conflict does not involve one's own security or vital interests, especially when the allied victims are one's sons and brothers, or the other party responds with terrorist attacks. 
Fear of the fickleness of public opinion leads to reliance on technology and the doctrine of "zero victims" - the myth of war without risks that dominates today's allied actions. 
All are aware that ground troops are necessary to end the expulsions of ethnic Albanians and chase the Serbs from Kosovo. 
Nevertheless Presidents Clinton and Chirac, Prime Ministers Blair and Shroeder, cling to the notion that ground troops will only enter the fray in what Clinton euphemistically calls a "permissive environment." 
Bombing is thus a compromise between activity and inactivity, between the necessity of intervention and the unwillingness to bear risks. 
Declaring in advance - in defiance of the elementary rules of war making - that NATO will not use ground troops gave Milosevic the advantages of initiative and a sense of security. 
While NATO conducted its air attacks, paramilitary Serbian bands, more or less controlled by Belgrade, conducted their own war against civilians. 
How pathetic the reaction of NATO's Secretary General, Javier Solana: "We may not have the means to stop it, but we have shown that we have the will to try." 
We are thus faced with a dramatic contradiction between universalist aspirations and an unwillingness to pay the price these aspirations demand. 
The result is a choice of palliatives. 
Here is the root of NATO's weakness and a serious question about its future. 
The Soviet threat generated a readiness to defend oneself and to bear heavy burdens. 
Can one count on this readiness when the threat is real, but more diffuse, abstract, potential, and often geographically remote? 
The durability of the alliance depends on the answer to this question. 
The West has lost the battle of Kosovo, but certainly not yet the war. 
The stakes are high. 
From the perspective of the allies, they involve more than the dramatic fate of the expelled Kosovars and Balkan stability. 
At stake is NATO and the future of European-American relations. 
Paradoxically, NATO's recent actions have undermined the very credibility they were supposed establish in the new post-cold-war environment. 
Prominent among those who anxiously await a solution to this paradox are the newest members of the Atlantic alliance. 

 

The Fire This Time in Haiti 
Haiti, once again, is ablaze. 
President Jean-Bertrand Aristide is widely blamed, and he may be toppled soon. 
Almost nobody, however, understands that today's chaos was made in Washington - deliberately, cynically, and steadfastly. 
History will bear this out. 
In the meantime, political, social, and economic chaos will deepen, and Haiti's impoverished people will suffer. 
The Bush Administration has been pursuing policies likely to topple Aristide since 2001. 
The hatred began when Aristide, then a parish priest and democracy campaigner against Haiti's ruthless Duvalier dictatorship, preached liberation theology in the 1980's. 
Aristide's attacks led US conservatives to brand him as the next Fidel Castro. 
They floated stories that Aristide was mentally deranged. 
Conservative disdain multiplied several-fold when President Bill Clinton took up Aristide's cause after he was blocked from electoral victory in 1991 by a military coup. 
Clinton put Aristide into power in 1994, and conservatives mocked Clinton for wasting America's efforts on "nation building" in Haiti. 
This is the same right wing that has squandered $160 billion on a far more violent and dubious effort at "nation building" in Iraq. 
Attacks on Aristide began as soon as the Bush administration assumed office. 
I visited President Aristide in Port-au-Prince in early 2001. 
He impressed me as intelligent and intent on good relations with Haiti's private sector and the US. 
No firebrand, he sought advice on how to reform his economy and explained his realistic and prescient concerns that the American right would try to wreck his presidency. 
Haiti was clearly in a desperate condition: the most impoverished country in the Western Hemisphere, with a standard of living comparable to sub-Saharan Africa despite being only a few hours by air from Miami. 
Life expectancy was 52 years. 
Children were chronically hungry. 
Of every 1000 children born, more than 100 died before their 5th birthday. 
An AIDS epidemic, the worst in the Caribbean, was running unchecked. 
The health system had collapsed. 
Fearing unrest, tourists and foreign investors were staying away, so there were no jobs to be had. 
But Aristide was enormously popular in early 2001. 
Hopes were high that he would deliver progress against the extraordinary poverty. 
Together with Dr. Paul Farmer, the legendary AIDS doctor in Haiti, I visited villages in Haiti's Central Plateau, asking people about their views of politics and Aristide. 
Everybody referred to the President affectionately as "Titid." Here, clearly, was an elected leader with the backing of Haiti's poor, who constituted the bulk of the population. 
When I returned to Washington, I spoke to senior officials in the IMF, World Bank, Inter-American Development Bank, and Organization of American States. 
I expected to hear that these international organizations would be rushing to help Haiti. 
Instead, I was shocked to learn that they would all be suspending aid, under vague "instructions" from the US. 
America, it seemed, was unwilling to release aid to Haiti because of irregularities in the 2000 legislative elections, and was insisting that Aristide make peace with the political opposition before releasing any aid. 
The US position was a travesty. 
Aristide had been elected President in an indisputable landslide. 
He was, without doubt, the popularly elected leader of the country - a claim that George W. Bush cannot make about himself. 
Nor were the results of the legislative elections in 2000 in doubt: Aristide's party had also won in a landslide. 
It was claimed that Aristide's party had stolen a few seats. 
If true - and the allegation remains unproved - it would be nothing different from what has occurred in dozens of countries around the world receiving support from the IMF, World Bank, and the US itself. 
By any standard, Haiti's elections had marked a step forward in democracy, compared to the decades of military dictatorships that America had backed, not to mention long periods of direct US military occupation. 
The more one sniffed around Washington the less America's position made sense. 
People in positions of responsibility in international agencies simply shrugged and mumbled that they couldn't do more to help Haiti in view of the Bush veto on aid. 
Moreover, by saying that aid would be frozen until Aristide and the political opposition reached an agreement, the Bush administration provided Haiti's un-elected opposition with an open-ended veto. 
Aristide's foes merely had to refuse to bargain in order to plunge Haiti into chaos. 
That chaos has now come. 
It is sad to hear rampaging students on BBC and CNN saying that Aristide "lied" because he didn't improve the country's social conditions. 
Yes, Haiti's economic collapse is fueling rioting and deaths, but the lies were not Aristide's. 
The lies came from Washington. 
Even now, Aristide says that he will share power with the opposition, but the opposition says no. 
Aristide's opponents know that US right-wingers will stand with them to bring them violently to power. 
As long as that remains true, Haiti's agony will continue. 

The Fiscal Cliff and US Foreign Policy 
PRINCETON – The world should be worried. 
The possibility that US President Barack Obama and the Republicans in Congress will fail to reach a compromise before mandatory deep spending cuts and tax increases take effect on January 1 is very real. 
Global markets are well aware of the danger of the United States falling over the “fiscal cliff,” and are watching nervously. 
They know that this outcome could well throw the US – and the world – back into recession. 
Foreign ministries around the world should be equally nervous. 
Unless the US can get its fiscal house in order, it will be forced to abdicate leadership on a wide range of critical global issues. 
In the short term, Syria and its neighbors are already paying the price of America’s inability to focus on anything other than domestic politics since Obama’s re-election. 
In my view, the Syrian crisis is at a tipping point: while it is now apparent that the opposition will eventually win and President Bashar al-Assad will fall, the endgame’s duration will be a key element determining who actually comes into power and on what terms. 
Syria’s implosion, and the chaos and extremism that are likely to breed there, will threaten the entire Middle East: the stability of Lebanon, Jordan, Turkey, Iraq, Gaza, the West Bank, Israel, Iran, and Saudi Arabia hangs in the balance. 
But we do not even know who will succeed Hillary Clinton as US Secretary of State when Obama’s second term formally begins in January, or who will be on the White House security team. 
In the medium term, the world abounds with tensions and potential crises that US leadership is likely to be indispensable to resolving. 
As events over the past two weeks in Egypt have demonstrated all too vividly, the Arab awakening is still only in its first act in many countries. 
Indeed, democracy is fragile, at best, across North Africa; and, in the Middle East, Jordan, the Palestinian territories, Kuwait, and Saudi Arabia have only begun to feel the ripples of the tidal wave sweeping the region. 
Bahrain remains a flashpoint; Iraq is deeply unstable; and the simmering conflict between Iran and Israel could flare up at any time. 
Even when the US is not on the front lines, it has played a vital role in behind-the-scenes diplomacy, nudging wary rivals closer to one another to create a united opposition, and working with regional leaders like Turkey, Egypt, and Saudi Arabia to broker deals. 
In Asia, the US has been playing a similar role in pushing for multilateral resolution of dangerous bilateral disputes between China and its many neighbors over territories in the East and South China Seas, while at the same time restraining US allies who might otherwise provoke crises. 
And, on big global issues like climate change, organized crime, trade, and prevention of atrocities, the absence of the US as a policy catalyst and active negotiator will be quickly and keenly felt. 
Avoiding this fate requires the US to “rebuild itself at home,” as the Obama administration’s 2010 National Security Strategy promises. 
But, if US politicians spend the next two years the way they have spent the last two – patching together temporary policy fixes while avoiding the hard issues that voters and markets expect them to face – America’s voice will grow fainter, and weaker, in international institutions and affairs. 
Equally worrisome is the prospect of deep, across-the-board cuts in the US defense budget at a time when many rising powers are increasing their defense spending. 
As much as many countries may dislike the US military, the availability and extraordinary capabilities of America’s soldiers, ships, aircraft, and intelligence assets often function as a global insurance policy. 
In the long term, the challenge is more vague, but deeper. 
The longer the US obsesses over its own political dysfunction and attendant economic stagnation, the less likely it is to bear the mantle of global responsibility and leadership. 
Openly isolationist political forces, such as the Tea Party and libertarians like Ron Paul, will grow stronger. 
A retreating US will, in turn, guarantee the emergence of what foreign-policy analyst Ian Bremmer describes as a “G-Zero world,” in which no country will take the lead and marshal the necessary economic and political coalitions to solve collective problems. 
Individual presidents and secretaries of state will certainly try. 
But, without Congressional support, they will bring fewer and fewer resources to the table and will suffer from an increasing credibility gap when they seek to negotiate with other countries. 
Global leaders can do more than stand by and watch. 
Why not remind US politicians of their global responsibilities? 
The G-7 or G-8 leaders could issue a statement, for instance, urging the US to get its fiscal house in order. 
NATO allies could make a similar statement. 
Indeed, other regional organizations, such as the African Union or the Arab League, could weigh in. 
Even G-20 members, were they so moved, could make a statement. 
Of course, when we think about the G-20, we immediately wonder who, other than the US, could organize the issuance of such a statement. 
That is precisely the problem, and it could get much worse. 

The Fish that Shrank 
A thousand years ago, the Norse settlers of my home city of York ate cod that weighed as much as eight kilograms. 
We know this from archaeologists and the fascination they have for medieval waste heaps. 
But today you would be lucky to find a cod that weighs more than two kilograms. 
What have we done to our fish stocks to bring about changes like this, and does it matter? 
Fisheries policy is designed to allow small fish to grow. 
This is for the best of reasons - fish that are caught when they are too small will produce a small yield. 
Moreover, the fish will not have had a chance to reproduce, undermining the fish stock altogether. 
For example, the avowed intention of the EU Common Fisheries Policy is "to protect fish resources by regulating the amount of fish taken from the sea, by allowing young fish to reproduce , and by ensuring that measures are respected." 
As it stands, however, we have "fished down" our stocks, until few large, old individuals remain. 
To see this, consider North Sea cod. 
Suppose you start with ten thousand individuals aged one year. 
If there is only natural mortality, about one thousand of these individuals survive to reach age eight years. 
A moderate level of fishing mortality brings the number of survivors down to about one hundred individuals. 
But the levels of fishing mortality we have been applying over the last twenty years bring the number of survivors down to about three. 
Mortality acts cumulatively, so, given the way we manage fisheries, few individuals survive to become big and old. 
Yet left to their own devices, cod are thought to live for at least thirty years. 
It is a testament to the great efficiency with which we exploit living marine resources that fish like cod are now much more likely to die at the hands of fishermen than for all other reasons put together, once they get into the fisheries. 
The absence of big, old individual cod and other fish is worrisome from the standpoint of the short-term ecological health of the stock, as well its longer-term genetic health. 
The short-term issue concerns egg production, which in many fish is proportional to body size: large individuals contribute far more to future generations than small individuals. 
In fact, first attempts at spawning can be relatively unsuccessful, so a fisheries policy that depends for the most part just on first-time spawners (which is what we are approaching now), could be especially flawed. 
The policy is also suspect because the success of spawning is notoriously variable from year to year. 
A bad year for recruitment in a fished-down stock means losing both the new cohort and most of the spawners, because the latter are caught before they can spawn again. 
By contrast, a stock with lower mortality for large individuals at least maintains an adequate reserve of large individuals available as spawners next year. 
The long-term concern is that fishing is intended to be selective; fishermen aim to harvest the most profitable species and the most profitable sizes within species. 
Like all other forms of life, fish stocks change genetically when directional selection is applied. 
The effect of fishing-down is to give an advantage to genes causing slow growth but early adulthood. 
Indeed, there is evidence from many fisheries of earlier maturation; such changes take place fast enough to be detected over the decades. 
For example, early in the twentieth century, you would not find a mature cod in the North Sea less than about 50 centimeters in length, whereas by the 1980's mature cod were as small as 15 centimeters. 
So there is a lot of under-age sex out there in the sea. 
By cherishing our large, old fish we would reverse the selection for early maturation while selecting for faster growth through the size classes most vulnerable to fishing. 
The genetic changes that we are bringing about in our fish stocks are going largely unrecognized. 
Yet the precautionary principle places some responsibility on us to hand down the living resources of the marine realm in a form that can be used as much by future generations as by us. 
Radical new thinking is needed in fisheries management to overcome the ecological and evolutionary problems generated by current practice. 
If only one change in the prevailing mindset could be made, it should be to realize that, in the case of fish like cod, big is beautiful. 
To reconstruct our approach to fisheries management with measures that increase the survival of large, old individuals would be good for the health of our stocks in the short term and would be appreciated by our descendants. 

The Flawed Options in Darfur 
The long-sought joint peacekeeping force for Darfur, which would combine the existing 7,000-man African Union force with as many as 20,000 additional military personnel and civilian police under UN command, has now been approved. 
But several roadblocks still stand in the way, making it very difficult for the joint AU-UN mission to bring about a peaceful settlement to the Darfur conflict. 
Although UN Secretary-General Ban Ki-moon pressed the UN Security Council to move rapidly to authorize the proposed joint force, member governments remain deadlocked over its mandate. 
With the encouragement of Sudan’s government, China and Russia have thus far blocked a resolution sponsored by Britain and France that would allow the proposed hybrid force “to use all necessary means” to protect humanitarian workers and other civilians. Sudan’s UN ambassador has called for a draft whose language is “more Sudan-friendly.” 
Moreover, UN analysts estimate that most of the additional troops will not arrive in Darfur until early next year. 
The preceding phase envisages only providing the existing AU force with extra logistical support from non-African countries, such as engineers from China. 
French Foreign Minister Bernard Kouchner has called for merging these two phases to accelerate progress, which would require substantial funds to secure and deploy the additional UN peacekeepers. 
According to Jean-Marie Guehenno, the head of UN peacekeeping operations, any hybrid force must be “robust” because of the “very challenging” situation in Darfur. 
The draft British-French resolution would provide for an authorized ceiling of 19,555 military troops and 6,400 police officers, with an estimated cost of over $2 billion during its first year. 
The Bush administration has been a leading advocate of deploying a robust peacekeeping operation in Darfur. 
But the United States is impeding this process by falling far behind in its obligatory payments to the UN peacekeeping budget, with total US arrears estimated at more than $500 million – and possibly exceeding $1 billion by the end of 2007. 
The EU has also encountered difficulties in fulfilling its pledged financial assistance to the existing AU force in Darfur. 
Moreover, the division of labor for any joint mission – especially regarding financing and command – remains unresolved. 
Many African leaders insist that they should retain principal control of any peacekeeping force in Darfur. 
Their preferred model calls for the UN to provide the funding and most other support for the mission, while allowing the AU to maintain its leadership role. 
Many Western governments, however, refuse to place their forces under AU command, owing to its perceived weaknesses, and have conditioned further support for peacekeeping operations in Darfur on the UN’s assuming control. 
But the UN has found it difficult to attract sufficient volunteers for such a force, since foreign governments have acceded to Sudanese demands that the hybrid force remain predominantly African. 
At the same time, the complex chain of command envisaged for an AU-UN force recalls some of the worst features of NATO-UN operations in the former Yugoslavia during the 1990’s. 
AU commanders on the ground would retain tactical control, a joint AU-UN command would exercise operational supervision, and the UN would establish the force’s overall strategic objectives. 
Such a convoluted command system will make it difficult to react to any rapidly developing crisis or threat. 
Indeed, even if foreign troops reduce the violence, peace might last only as long as they remain deployed, since the conflict has evolved from a struggle between rebel groups and the Sudanese government into one between various clans and ethnic groups, with the government intervening on behalf of its allies. 
The example of Kosovo is revealing. 
Eight years after the 1999 NATO intervention, a 17,000-strong international force is still needed to prevent a resurgence of violence, and Kosovo’s ultimate political status remains unresolved. 
A major peacekeeping operation in Darfur would likely produce a similar situation: protracted uncertainties regarding the region’s future political status, impeded socioeconomic development, persistently diverging expectations among the conflicting parties, unresolved tensions resulting from non-fulfillment of these expectations, and the likelihood of renewed violence should the foreign intervention force withdraw. 
In addition, an extensive military operation in Darfur would not necessarily secure the region unless it also addressed the problems in the rest of Sudan. 
The UN Human Rights Committee has found that widespread and systematic human rights abuses extend throughout Sudan, not just Darfur. 
Foreign Policy magazine considers Sudan the country most at risk of state failure. 
For these reasons, any major peace operation involving Western countries would soon lead their governments to consider regime change in Khartoum as the most viable exit strategy. 
Because the Sudanese government recognizes this as well, it will resist any such deployment, regardless of foreign threats and blandishments. 

The Fog of Finance 
Military leaders talk about the “fog of war” – the condition of fundamental uncertainty that marks combat. 
The recent credit and liquidity crisis has revealed a similar condition in financial markets, because no one, not even central banks, seems to understand its nature or magnitude. 
It is often suggested that what is called the “subprime” crisis was the result of lax monetary policies that led to excess liquidity in financial markets. 
But there is an obvious paradox here, because how can an excess of liquidity result ultimately in a shortage of liquidity that has to be made up by central banks? 
In fact, monetary laxity can be a symptom not of excess liquidity, but of excess saving. 
This is reflected in increasing income inequality in much of the developed world, and the vertiginous surpluses of oil-producing countries and Asian nations. 
The emergence of sovereign wealth funds like those of China and the Gulf states to invest the savings of these countries’ budget surpluses is but the tip of the global excess savings iceberg. 
Whereas excess liquidity is inflationary and calls for higher interest rates, excess saving is deflationary and calls for lower rates. 
This brings us to the dilemma faced by central banks. 
When central bankers cannot avoid a crisis – or when they contribute to create one – their fundamental mission is to do everything in their power to contain its impact. 
Their actions, their every word or wink, suddenly assumes immense importance. 
The central banker is not only a lender of last resort, but also a speaker of last resort. 
In both respects, the United States Federal Reserve has fared much better than the European Central Bank in this most recent crisis. 
If the problem is excess saving, and if uncertainty erodes confidence, a massive injection of liquidity such as the ECB’s in response to the subprime crisis may be necessary but not sufficient. 
A rate cut also may be required to restore confidence. 
The Fed has understood that message. 
Europe needs to know why the ECB has not. 
Moreover, the Fed’s efforts were ultimately stabilizing, because it stated its intentions clearly prior to taking action. 
By contrast, in late August, the ECB’s governor, Jean-Claude Trichet, referred to the monetary-policy decision taken before the crisis to justify the possibility of a rate hike, then left rates on hold. 
On September 6, Trichet said that the ECB had maintained the status quo , leaving it unclear what he meant. 
Indeed, whereas the ECB seemed to have implicitly accepted an objective of economic growth, it maintained its hard line against inflation on October 4. 
The reason for the ECB’s inertia, obscurity, and rigidity is simple: the ECB is only incidentally in charge of economic growth in the euro area; its primary objective is “price stability.” 
Yet the current crisis, like others that preceded it, shows that monetary policy governs anticipations, not only of inflation but also of growth, whether central banks like it or not. 
So long as the ECB does not acknowledge the doubts now hovering around Europe’s economies, there is a risk of a crash. 
The ECB is convinced that benign neglect is the right exchange rate policy, and that the G7 is the right place to address currency volatility. 
But the euro is a European affair. 
Why should a situation in which Europe is bearing the burden of weak currencies in the US and Asia be remedied in a global forum? 
In the middle of a financial crisis, the only thing worse than doubt is false certainty. 
The paradox is that the ECB could have secured its independence by cutting interest rates on September 6, and again on October 4. 
Now it will be forced to do so. 
A victim of its backward-looking bias, the ECB chose to wait for the worst instead of preventing it. 
As a result, the inevitable European rate cut, when it comes, will probably not have the stabilizing effect that it should. 

The Folklore of Buried Memories 
How victims remember trauma is the most controversial issue facing psychology and psychiatry today. 
Many clinical trauma theorists believe that combat, rape, and other terrifying experiences are seemingly engraved on the mind, never to be forgotten. 
Others disagree, arguing that the mind can protect itself by banishing memories of trauma from awareness, making it difficult for victims to remember their most horrific experiences until it is safe to do so many years later. 
While acknowledging that trauma is often all too memorable, these certain clinical trauma theorists assert that a condition known as “traumatic dissociative amnesia” leaves a large minority of victims unable to recall their trauma, precisely because it was so overwhelmingly terrifying. 
However, these clinical trauma theorists do not argue that “repressed” or “dissociated” memories of horrific events are either inert or benign. 
On the contrary, these buried memories silently poison the lives of victims, giving rise to seemingly inexplicable psychiatric symptoms, and therefore must be exhumed for healing to occur. 
This is no ordinary academic debate. 
The controversy has spilled out of the psychology laboratories and psychiatric clinics, capturing headlines, motivating legislative changes, and affecting outcomes in civil lawsuits and criminal trials. 
Whether individuals can repress and recover memories of traumatic sexual abuse has been especially contentious. 
During the 1990’s, many adult psychotherapy patients began to recall having been sexually abused during childhood. 
Some took legal action against the alleged perpetrators, often their elderly parents. 
While complaints against parents, based on allegedly repressed and recovered memories of abuse, have declined, those against large institutions, such as the Catholic Church, have increased. 
Strikingly, both advocates and skeptics of the concept of traumatic dissociative amnesia adduce the same studies when defending their diametrically opposed views. 
But it is the advocates who misinterpret the data when attempting to show that victims are often unable to recall their traumatic experiences. 
Consider the following. 
After exposure to extreme stress, some victims report difficulties remembering things in everyday life. 
Advocates of traumatic amnesia misconstrue these reports as showing that victims are unable to remember the horrific event itself. 
In reality, this memory problem concerns ordinary absentmindedness that emerges in the wake of trauma; it does not refer to an inability to remember the trauma itself. 
Ordinary forgetfulness that emerges after a trauma must not be confused with amnesia for the trauma. 
Consider, too, that one symptom of posttraumatic stress disorder is an “inability to recall an important aspect of the trauma.” 
This symptom, however, does not mean that victims are unaware of having been traumatized. 
Indeed, the mind does not operate like a video recorder, and thus not every aspect of a traumatic experience gets encoded into memory in the first place. 
High levels of emotional arousal often result in the victim’s attention being drawn to the central features of the event at the expense of other features. 
Incomplete encoding of a trauma must not be confused with amnesia – an inability to recall something did get into memory. 
Moreover, a rare syndrome called “psychogenic amnesia” is sometimes confused with traumatic amnesia. 
Victims of psychogenic amnesia suddenly lose all memory of their previous lives, including their sense of personal identity. 
Occasionally, this sudden, complete memory loss occurs after severe stress, but not invariably. 
After a few days or weeks, memory abruptly returns. 
In contrast, the phenomenon of dissociative amnesia supposedly entails victims’ inability to remember their traumatic experiences, not an inability to remember their entire lives or who they are. 
Several surveys show that adults reporting childhood sexual abuse often say that there was a period of time when they “could not remember” their abuse. 
Claims of prior inability to remember imply that they had attempted unsuccessfully to recall their abuse, only to remember it much later. 
Yet if these individuals were unable to remember their abuse, on what basis would they attempt to recall it in the first place? 
Most likely, they meant that there was a period of time when they did not think about their abuse. 
But not thinking about something is not the same thing as being unable to remember it. 
It is inability to remember that constitutes amnesia. 
Research conducted in my laboratory on adults reporting histories of childhood sexual abuse provides a solution to this bitter controversy. 
Some of our participants reported having forgotten episodes of nonviolent sexual abuse perpetrated by a trusted adult. 
They described it as having been upsetting, confusing, and disturbing, but not traumatic in the sense of being overwhelmingly terrifying. 
Failing to understand what had happened to them, they simply did not think about it for many years. 
When reminders prompted recollection many years later, they experienced intense distress, finally understanding their abuse from the perspective of an adult. 
These cases count as recovered memories of sexual abuse, but not as instances of traumatic dissociative amnesia. 
That is, the events were not experienced as traumatic when they occurred, and there is no evidence that they were inaccessible during the years when they never came to mind. 
Sexual abuse is not invariably traumatic in the sense of being overwhelmingly terrifying. 
Of course, it is always morally reprehensible, even when it fails to produce lasting psychiatric symptoms. 

The Forgotten Side of the War on Terrorism 
During the past decade – particularly since the September 11, 2001, attacks on the United States – Westerners have generally considered international terrorism to be the most urgent threat to human security. 
Accordingly, vast resources have been mobilized and expended to counter its many forms. 
Unfortunately, however, the US-led invasion of Afghanistan and the subsequent invasion – without UN authority – of Iraq underscore the primacy of military solutions in the strategic thinking of affluent nations. 
At the same time, developing countries have continued to grapple with the persistence of mass poverty, endemic disease, malnutrition, environmental degradation, and gross income inequity, all of which have caused a degree of human suffering that far exceeds what has been caused by terrorist attacks. 
We need, therefore, to revisit today’s global challenges from a Third-World perspective. 
Indeed, a fundamental lesson of terrorist attacks and insurgencies, we now know, is that no nation, however self-sufficient, can afford to remain heedless of whether others sink or swim. 
For much of the developing world, the basic instability of international relations – owing to terrorist strikes, guerrilla warfare, and the preemptive wars that America threatens on its enemies – is aggravating socioeconomic anxieties and fueling doubts about the benefits of globalization. 
Certainly, we are all beginning to realize how precarious that process is – how easily market mechanisms can be rolled back by cultural resentments stemming from economic exploitation, political oppression, and social injustice. 
People in the industrialized countries are already an estimated 74 times richer per capita than those in the poorest countries. 
Today, one-quarter of the world’s population still lives on the equivalent of less than one US dollar a day, and the World Bank says that the daily spending power of 1.2 billion people is roughly equal to the price of a hamburger, two soft drinks, or three candy bars in the West. 
According to the UN Food and Agriculture Organization, 815 million people, including 200 million children under the age of five, go to bed hungry each night. 
Obviously, there must be an intensification of efforts to reduce global poverty, which has become a breeding ground of resentment, envy, and despair – hence, a ready producer of violence and suicide bombers. 
The G-8 countries’ agreement last year to a debt write-off for the 18 poorest states – 16 in Africa and two in Latin America – is a splendid, but insufficient, beginning. 
The 100 most indebted countries still find the burden of servicing their collective $2.3 trillion in official debt increasingly hard to bear, leaving them hard put to finance national programs spelled out by the UN’s Millennium Development Goals (MDG’s), which seek to halve global poverty by 2015. 
If we are to close the global gap in personal security and economic well-being, the community of nations will need to cultivate a new ethos of mutual responsibility. 
The Philippine government has proposed that half of all scheduled debt payments be withheld for a specified period, to be invested in reforestation, clean water, housing, food production, primary healthcare, sanitation, basic education, farm-to-market roads, ecologically sound tourism, micro-finance, and related MDG projects. 
For lenders, debt could be converted, wherever possible, into equity in MDG projects with earning potential, while building up poor countries’ capacity for self-reliance. 
But self-reliance will be impossible to achieve as long as the rich countries favor free markets and free trade only when it suits them. 
Even UN Secretary-General Kofi Annan has warned that the unrestrained tide of globalization might not raise all boats, but only the yachts – while overturning a lot of canoes. 
The most glaring injustice in this respect has been the failure of the US and the European Union to deliver substantially on their promises of market access to agricultural exports from poor countries. 
Bimal Ghosh, a former director of the UN Development Program, famously calculated that the daily subsidy for every cow in the EU – currently amounting to €2.50 – exceeds the daily income of millions of poor people around the world. 
The poor countries argue that broader liberalization in the EU, the US, and Japan alone would yield benefits worth up to $142 billion by 2015. 
The G-8 nations and the global alliance that America leads must aim not merely to defeat terrorism. 
They must address all aspects of human security, including people’s well-being and safety in their homes, neighborhoods, and workplaces. 
And they must win people’s allegiance by the power of their values and their ideals – not only by isolating terrorists and extremists, but also by helping, in meaningful ways, poor countries to prosper. 
Above all, those who lead us today must create a genuinely new global order in which all peoples take part – with dignity and an assurance of fairness. 

The Forgotten Virtues of Free Trade 
LONDON – “Laissez-faire,” French President Nicolas Sarkozy recently declared, “is finished.” 
Perhaps, but should we really be satisfied if he is right? 
If laissez-faire has run its course, what will possibly replace it as the foundation of an open, global society? 
Now more than ever, it is worth remembering that the last great financial crash not only inspired the New Deal in the United States, but also plunged the world into a new dark age of economic nationalism and imperialism. 
Free trade is far from perfect, but the alternatives are worse. 
Protectionism is bad for wealth, bad for democracy, and bad for peace. 
Yet a new wave of protectionism is a genuine danger. 
Barack Obama, appealing to swelling protectionist sentiment among Americans, threatened during his presidential campaign to rewrite the North American Free Trade Agreement unilaterally. 
This July, the World Trade Organization’s Doha trade round fell to pieces, partly because the US refused to lower its agricultural subsidies. 
The world is on a slippery slope toward nationalism and exclusion. 
If a government can step in to bail out failing banks, why not to protect its failing businesses or farmers as well? 
We need a new deal for trade. 
There is now widespread talk of a “Bretton Woods II” that would restructure global finance, promote sustainability, and offer developing countries “aid for trade.” 
But, to be effective, any new deal to promote trade must involve more than a new set of international institutions. 
It requires democratic reform from the bottom up. 
In fact, this requirement is rooted in history. 
We have become so accustomed to thinking of free trade as a specialist matter for liberal economists and trade negotiators in dark suits that we forget how a century ago, free trade was a core belief for many democrats, radicals, women activists, and, indeed, organized labor. 
Back then, Britain was in a position not unlike that of the US today: a superpower in relative decline, facing new competitors and a backlash against globalization. 
In the late nineteenth century, all powers raised their trade barriers – except Britain. 
Britain’s stance holds lessons for today. 
Most economists stress the superiority of the free-trade model and point to the power of lobbies and interest groups to explain its unpopularity in practice. 
As US Federal Reserve Chairman Ben Bernanke has argued, trade expansion inevitably creates some losers, whose protests distract attention from the benefits of globalization. 
This is true, but it is only half the story, for it ignores how, at crucial moments in history, free trade has mustered the support of the many winners. A century ago, during an earlier crisis of globalization, the demand for free trade in Britain inspired a genuine mass movement. 
It was not just a cause dear to bankers, merchants, or the young John Maynard Keynes. It mobilized millions of people. 
For women, who remained disenfranchised, free trade was a kind of substitute citizenship: parliament safeguarded their interests as consumers by keeping the door open for cheap imports. 
For many democrats, it was a force for peace and social justice, minimizing the power of special interests and teaching citizens about fairness and international understanding. 
We should not romanticize this earlier era of free trade. 
Poverty did not vanish. Many British people believed in a “Free Trade Empire.” 
Others fanned the flames of Anglo-German antagonism, caricaturing protectionist Germany as a barbarian society surviving on horse sausages and dog-meat; 
Lloyd George, the future prime minister, told audiences that he was more afraid of the German sausage than he was of the German navy. 
One reason that free trade defeated protectionism in Britain a century ago was that its supporters appealed to people’s emotions and identities, not just their rational interest in more wealth and cheap food. 
Liberals and radicals organized traveling shows, color posters, and political entertainment. 
In towns, displays in shop windows illustrated the costs of tariffs to ordinary consumers. 
In the countryside, people watched political slide shows late into the night. 
Meetings in seaside resorts reached almost a million people in 1910. 
When was the last time you went to the beach and found yourself pulled into a debate about tariffs? 
The First World War and the 1920’s shattered any naïve belief in pure free trade. 
Like today, consumers discovered that markets could leave them helpless, leading to calls for regulation. 
Internationalists had to come to terms with the simple fact that, on its own, trade did not automatically enable peace. Economic globalization had outpaced politics, creating new tensions over oil and other strategic resources. 
Political institutions needed to catch up. 
Bretton Woods and the General Agreement on Tariffs and Trade created a new order after the Second World War. 
In economic terms, they have had considerable success. 
Tariffs have fallen, although non-tariff barriers and preferential agreements have been on the rise. 
But in terms of democratic culture, GATT also led to a further separation of trade from everyday politics. 
This is why free trade has been left so defenseless in the face of anti-globalization protests. 
The good news is that people have not stopped caring about the ethics of trade. 
On the contrary, they have switched to other movements like fair trade and trade justice. 
To be fair, the WTO under Pascal Lamy has tried to reach out to such groups. 
Still, there is a long way to go to reconnect freer trade with citizenship and global solidarity. 

The Forty-Year Palestinian Tragedy 
Forty years ago, Israel captured the West Bank, Gaza, and the Golan Heights after a lightning six-day war that repelled the armies of Egypt, Jordan, and Syria. 
Today, ending the occupation of Palestinian territories that began that June seems as distant a dream as ever. 
The Somalia-like chaos and civil war that is now unfolding in Gaza as a result of this decades-old stalemate can be blamed partly on ill-conceived Israeli policies, and partly on an American administration that, for six long years, relegated the cause of Israeli-Palestinian peace to the bottom of its agenda. 
But it is misleading to attribute the failure of the Palestinians to develop an orderly system of self-government only to the pernicious effects of Israeli occupation and American policies. 
The Palestinian crisis is first and foremost one of leadership. 
True, Yasser Arafat was not a model democrat, but his charisma and political acumen were crucial for holding all the Palestinian factions together. 
Now, not even Fatah, Arafat’s own party, can claim to be a coherent organization. 
Hamas’ electoral victory in January 2006 was to a large extent due to Fatah’s fragmentation under Arafat’s successor, Mahmoud Abbas. 
With no effective central authority to inspire fear or respect and the PLO devoid of legitimacy precisely because of its refusal to give Hamas its rightful share in the organization, a grotesquely ineffective brand of “cohabitation” between a Fatah president and a Hamas prime minister has emerged. 
As a result, Palestinian politics has degenerated into a naked struggle for the spoils of power. 
Last February’s Mecca agreement, which created the Fatah-Hamas unity government, was supposed to establish a civilized system of power-sharing. 
But that deal now appears to be collapsing. 
The current flare-up is largely due to the fact that Fatah, encouraged by the international community’s boycott of Hamas, never really accepted its electoral defeat and Hamas’s right to govern. 
Moreover, since Hamas’s rise to power, Fatah’s challenge to the new Palestinian rulers was enhanced by lavish financial support it secured from the United States and Europe, and by a generous supply of weapons from both the US and Arab countries. 
Thus, the current conflict is essentially a pre-emptive war by Hamas – aggravated by lawlessness and banditry, clashing free-lance militias, tribes, and families, and a spiral of senseless massacres – to prevent Fatah from being turned by the international community into a formidable challenger to its democratic right to govern. 
For Hamas, this is a life-and-death struggle. 
It has not shrunk from bombarding Abbas’s presidential compound, attacking Fatah’s command centers, and targeting Fatah military leaders like Rashid Abu Shbak, the commander of Fatah’s internal security and many others, all of them lieutenants of the supreme Fatah military authority in the Gaza strip, Mohamed Dahlan. 
Hamas’s determination to assert its authority can be gauged by the desecrated corpses of Fatah fighters, many of them with bullets fired at their heads, a practice dubbed “confirmation of death.” 
The rocket attacks against Israeli territory are a transparent attempt to divert attention and rally the masses around Hamas as the true champions of the Palestinian cause. 
Tragically, all this is not only about human victims, but also about the Palestinians’ political horizon. 
Three times in their history – in 1937,1947, and 2000 – the Palestinians were offered a state, and three times their leaders failed to meet the challenge – admittedly never an easy one for a nation built on such an unwavering ethos of dispossession. 
Today, when America finally understands how vital an Israeli-Palestinian peace is for its fortunes in the broader Middle East, and the Arab world is for the first time committed to pursuing a comprehensive settlement with Israel, anarchic Palestinian politics is making a decision for peace well nigh impossible. 
However vibrant, Israel’s democracy is not exactly manageable or predictable, either. 
But although Prime Minister Ehud Olmert might seek to regain his popular credibility by a major new peace demarche, the two-headed Palestinian Authority, always a dubious partner in the eyes of the Israelis, is now more suspect than ever. 
“Every day that goes by only causes more people to wish for the renewal of the Israeli occupation of Gaza. 
Let the Jews come already and save us!” 
But that despairing hope, uttered by a desperate Gazan, will not materialize. 
Israel will avoid at all costs a large ground incursion. 
Yet, engaged in a war driven by fury and vengeance, the Israelis are now focused again on a manhunt for gang chieftains, targeted killings of Hamas squads, and the arrest of its political leaders, not on peace overtures. 
Only a dramatic move by external powers can still save Gaza from becoming a second Mogadishu and both Palestinians and Israelis from a total war that would only breed more rage and desperation. 
For the building blocks of a renewed peace process to be sustainable, an international force must be deployed along Gaza’s border with Egypt to prevent the constant smuggling of weapons and isolate the conflict. 
Simultaneously, the international community must help make the unity government work by recognizing Hamas’ right to govern in exchange for a performance-based stability plan. 

The Fountain of Youth Revealed 
Since the dawn of human consciousness, we have contemplated our own mortality and dreamed of ways of overcoming it. 
Until recently, achieving control over our own longevity was the stuff of fairy tales, disconnected from actual scientific progress. 
But new research suggests that the molecular basis of aging may soon be understood in detail. Applying this knowledge could be close behind. 
Recent scientific breakthroughs have come from research not on humans, or even on rats and mice, but on simple laboratory organisms like yeast and roundworms. 
These primitive life forms have yielded important, generally valid clues that have forced a comprehensive re-evaluation of the nature of the aging process. 
Traditional evolutionary thought views aging as a process that occurs by default in the post-reproductive phase of life. 
After all, Darwinian natural selection cannot prevent the wholesale decline of an individual whose genes have already been passed on to the next generation. 
According to this view, many cellular and organic processes thus degrade concurrently, and aging has many causes. 
As a result, the post-reproductive shortcomings of a great many genes would have to be remedied to slow the aging process. 
Recent research on yeast and roundworms suggests otherwise. It turns out that mutations even in single genes can lead to a substantial lengthening of life span and an accompanying slowdown in the aging process. 
But how can this be possible if aging has many concurrent causes, as evolutionary theory maintains? 
The answer can be found by examining the molecules that make up the genes in which mutations extend life span. 
For example, a universal gene called SIR2 determines the life span of both yeast cells and roundworms. 
In both organisms, if an extra copy of SIR2 is added by genetic intervention, the life span is extended. Conversely, if the SIR2 gene is deleted, the life span is shortened. 
In both yeast and worms, SIR2 appears to sense the availability of food and stall the aging process in times of deprivation by stimulating the formation of specialized body types--spores in yeast and dauers in worms--that can survive for extraordinarily long periods without nutrition. 
When conditions improve, the dormant life forms revive and reproduce. 
The survival function that SIR2 exists to serve--forestalling aging and reproduction during famine--is adaptive and therefore pervasive in nature. 
So the classical evolutionary theory of aging must be modified. 
In times of plenty, the aging process plays out as evolutionary biologists say, with reproduction followed by the failure of many genes and a wholesale decline of individual organisms. 
But in times of scarcity, the survival program kicks in to slow the aging process. 
Even more intriguingly, a single gene can promote this survival mechanism across a wide swath of nature's creatures. 
Does SIR2 also promote survival in mammals? 
Interestingly, in cultured mouse or human cells, the mammalian SIR2 gene determines a cell's response to DNA damage. 
When faced with damaging agents, cells have the ability to commit suicide. 
The mammalian SIR2 gene modulates this process, and higher levels of it dampen the cell death response. 
Just like in yeast and worms, mammalian SIR2 promotes survival, in this case of cultured cells. 
Does this mean that mammalian aging is at least partly caused by the gradual loss of cells and the accompanying failure of organs? 
Possibly, but we must bear in mind that the cell death response is a way to cull genetically damaged cells before they progress into tumors. 
So increasing SIR2 activity in mammals may actually cause cancer by keeping bad cells alive too long. 
Yet this seems unlikely for two reasons. 
First, as an evolutionary matter, it makes little sense that a gene anointed by nature to promote survival would also cause cancer. 
Second, recent experiments in genetically altered mice show that the cell death response may be slowed without causing cancer. 
This suggests that there is a window of slowing cell death that does not cause cancer and may promote longevity. 
Obviously, the practical implications of these findings could prove extraordinary. 
If single genes can determine the life span of mammals, it should be possible to develop drugs that bind to these genes' proteins and alter their activities. 
Thus, drugs that slow the aging process could be around the corner. 
But will such drugs prolong youth and vitality, or simply extend our stay in nursing homes? 
To answer this question, consider the effects of calorie restriction, which has been found to increase life span in organisms ranging from yeast to mammals. 
In yeast, where the process has been studied in molecular detail, the longevity triggered by calorie restriction is mediated by SIR2. 
In mammals, we have not yet discovered the molecular basis of the longevity. 
But we do know that restricted animals are vigorous and healthy for the duration of their longer lives. 

The Fragile Roots of Productivity Growth 
How fast is the US economy now growing? 
Smart investors are now betting that the most recent economic data will show an annual GDP growth rate of 3% for the second quarter of 2003. 
They are also betting that the current third quarter may well show a growth rate as high as 5% per year. 
July saw American industrial production jump by half a percent, while Intel, the big microprocessor maker, is reporting very strong growth in demand for its key products, suggesting that business investment spending is finally accelerating. 
Although Japan continues to stagnate, and Western Europe hovers on the edge of recession, a solid "output-growth" recovery in the US should prove to be a big help in boosting demand in the rest of the world. 
But this good news about the US business cycle has been accompanied by bad news about employment. 
Hours worked in American business fell at a 2.7% annual rate in the second quarter. 
Employment-particularly manufacturing employment-fell in July. 
It is very likely that hours worked will continue to fall in the third quarter. 
What accounts for this wide divergence? 
How can America see reasonably rapid output growth and yet rising unemployment? 
The answer is that the underlying trend of productivity growth in the American economy continues to be exceptionally positive. 
The 5.7% annual productivity gain recorded in the second quarter seems likely to be matched in July-September. 
With America's workers producing more in less time, it is no wonder that a wedge is being driven between the (good) output news and the (bad) employment news. 
In the short run, rapid productivity growth poses dilemmas for macroeconomic management, because what would otherwise be seen as reasonably strong demand growth is proving to be insufficient to keep unemployment low. 
But the short-run view is not the important one. 
Rapid productivity growth is-in the long run-good news for America: a higher-productivity economy is better at enhancing human welfare. 
In the long run, this is also good news for America's trading partners: there is more value to be gained by trading with a richer economy than with a poorer one. 
The continuation of rapid US productivity growth through the recent recession and into the subsequent low-wattage recovery is a very strong piece of evidence that America's long-run rate of GDP and productivity growth has shifted upward permanently, or, if not permanently, at least for a period of time likely to be measured in decades. 
America, of course, is not alone among industrial nations that have seen productivity growth accelerate since the second half of the 1990's. 
Australia, Ireland, and the Scandinavian countries all had their own sustained bursts of unexpectedly rapid growth. 
But the rest of Western Europe and Japan have not. 
Western Europe and Japan have vibrant high-tech sectors, able executives, and cultures easily as capable as the US of taking advantage of the boom promised by the rapidly falling prices of information technology. 
So you would think that the same productivity revolution would happen in those countries. 
Yet there has been no sign of it. 
Why not? 
The current conventional wisdom, most strongly advocated by the American economist Robert Gordon, is that the burst of productivity growth that the US is currently experiencing (and that will turn into a full-fledged economic boom whenever demand growth becomes rapid enough) is due to synergy. 
According to this view, the US is especially well positioned to benefit from rapidly falling prices of information technology, owing to its openness to competition and new ways of doing business, particularly in distribution. 
The comparison between the late 1990's and early 2000's in America and in Western Europe compels us to reflect on how fragile the underlying institutional mechanisms needed to support rapid economic growth truly are. 
Western Europe and the US are both post-industrial democracies. 
Both possess market economies. 
Both have large and powerful social insurance systems. 
Of course, institutional differences between America and Western Europe do exist: in the regulation of labor, in restrictions on land-use and redevelopment, in the tolerance of competition authorities for resale price maintenance and related practices. 
But are these differences really so large as to affect macroeconomic performance so dramatically? 
In Robert Gordon's estimation-and in mine-the roots of an economy-wide high-tech productivity boom like the one seen in the US are so delicate that they flourish in American but not in continental European soil. 

The Fragility of a Flat World 
The world is flat! 
So says the columnist Thomas Friedman, who chose that provocative title for his bestselling book to awaken people to the dramatic effects that technology is having on the world economy. 
Distance is shrinking. 
Geographical barriers no longer provide easy protection. 
Manufacturing workers and high-tech professionals alike in Europe and America are being challenged by global competition. 
Western consumers who call a local company are likely to speak to someone in India. 
Skeptics have pointed to the limits of Friedman’s metaphor. 
As one put it, the world is not flat, but “spiky.” 
A contour map of economic activity in the world would show mountains of prosperity and many ravines of deprivation. 
Moreover, distance is far from dead. 
Even neighbors with low tariff barriers, like Canada and the United States, trade more internally than across borders. 
Seattle and Vancouver are close geographically, but Vancouver trades more with distant Toronto than with nearby Seattle. 
Such criticism notwithstanding, Friedman makes an important point. 
Globalization, which can be defined as interdependence at inter-continental distances, is as old as human history. 
Witness the migration of peoples and religions, or trade along the ancient silk route that connected medieval Europe and Asia. 
But globalization today is different, because it is becoming quicker and thicker. 
After the first trans-Atlantic cable in 1868, Europe and America could communicate in a minute. 
In 1919, the economist John Maynard Keynes described the possibility of an Englishman in London using a telephone to order goods from around the world to be delivered to his house by the afternoon. 
But Keynes’s Englishman was wealthy and thus exceptional. 
Today, hundreds of millions of people around the world have access to global goods in their local supermarkets. 
Similarly, as recently as two decades ago, instantaneous global communication existed, but was economically out of reach for most people. 
Now, virtually anyone can enter an Internet café and enjoy a capability that was once available only to governments, multinational corporations, and a few individuals or organizations with large budgets. 
Tremendous declines in computing, communication, and transport costs have democratized technology. 
Only a decade ago, two-thirds of all Internet users were in the US. 
Today, less than a quarter are located there. 
Knowledge is power, and more people have access to information today than at any time in human history. 
Non-state actors now have capabilities that were once limited to governments. 
The nation-state is not about to be replaced as the dominant institution of world politics, but it will have to share the stage with more actors, including organizations like Oxfam, celebrities like Bono, and transnational terrorist networks like Al Qaeda. 
But flattening is reversible. 
It has happened before. 
The world economy was highly integrated in 1914, but economic interdependence declined during the next three decades. 
The global economy did not recover that same level of integration until 1970, and even then it remained divided by the Iron Curtain. 
World War I was the trigger that set off the reversal, with economic globalization declining while military globalization increased, as witnessed by two world wars and a global cold war. 
This reflected deeper problems of domestic inequality created by nineteenth-century economic progress. 
Politics did not keep pace, and the result was the rise of pathological ideologies – fascism and communism – that divided nations and the world. 
The creation of the welfare state in Western countries after World War II helped to create a safety net for people disadvantaged by economic change, thereby encouraging them to accept the return of international economic interdependence. 
Some analysts see China playing a role today similar to Germany’s role in the twentieth century. 
A rising power, beset with internal inequality, turns to nationalism and challenges the dominant power, provoking a war that turns back the progress of economic globalization. 
While the American and Chinese economies are highly interdependent today, so, too, were Germany and Britain before 1914. 
But the analogy is imperfect. 
Germany had surpassed Britain in industrial production by 1900. 
Even at its current high rates of growth, China’s economy is unlikely to equal that of the US for at least two more decades. 
The greater threat to a flat world is likely to come from the non-state and transnational forces that have been unleashed by the diffusion of technology. 
On September 11, 2001, a non-state network killed more Americans in a surprise attack than the government of Japan did at Pearl Harbor in 1941. 
I have called this the privatization of war. 
If such actors obtain nuclear and biological materials, the world will look very different. 
Borders will become harder to cross for both people and goods. 
And if such actors disrupt the flow of oil from the Persian Gulf, home to two-thirds of the world’s reserves, a global depression like that of the 1930’s could strengthen protectionism further. 
Globalization has two driving forces: technology and policy. 
Thus far, policy has reinforced the flattening effects of technology. 
As the world’s largest economy, the US has taken the lead in promoting policies that reduce barriers. 
But the events described above could reverse such policies. 
Some critics of globalization might welcome such an outcome. 
But the result, as we saw after 1914, would be the worst of both worlds – reversal of the economic globalization that spreads technology and power, but reinforcement of negative dimensions of military and ecological globalization, such as war, terror, climate change, and the spread of infectious diseases. 
In that case, the flat world could become a desert. 

The French Socialists’ New European Identity 
The French Socialist Party may well have just saved ratification of the European Union’s draft Constitutional Treaty by France in next summer’s referendum. 
At the beginning of December, party members and supporters voted overwhelmingly in favor of the treaty. 
With the popularity of President Jacques Chirac and Prime Minister Jean-Pierre Raffarin – and French rightist forces more broadly – in steep decline, a “no” vote could have tipped the public against ratification. 
But the French Socialists’ vote is also important for the European Left. 
The French Socialist Party never had its “aggiornamento” or “Bad Godesberg” (where the German SPD in 1959 renounced its last vestiges of Marxism). 
Instead, the party long defended the theory of a revolutionary “rupture” with capitalism, never clearly acknowledging its reformist nature. 
As a result, French Socialists always positioned themselves to the left of their European partners, giving a major economic role to the state following the big nationalizations that took place in 1981 after François Mitterrand was first elected president. 
Later it fought against Tony Blair’s “Third Way” and Gerhard Schröder’s “new center” in the late 1990’s. 
The party did choose Europe over dogma in 1983, when Mitterrand decided to remain in the European Monetary System. 
But the party never debated or theorized this choice, simply accepting former Prime Minister Lionel Jospin’s claim that the fiscal stability and financial modernization resulting from the decision was but a “parenthesis.” 
That December vote on the EU Constitutional Treaty closed this parenthesis: by approving of it, the Socialists consciously accepted a reformist, social democratic, European identity. 
They have positioned themselves as a great power on the left, with a central position in the European Socialist Party, offering an alternative to the prescriptions of New Labour and the SPD. 
This outcome did not come without a fight. 
Powerful mainstream Socialists, such as former Prime Minister Laurent Fabius, joined traditional leftist minorities in the party – either rigidly euroskeptic or unrealistically euromaximalist – to rally around refusal. 
This stance came as a shock from Fabius, a signatory of the Single Act of 1986, a party leader during the Maastricht Treaty negotiations, and Finance Minister when France adopted the euro in 2001. 
Clearly, political calculations played a role: Fabius intuitively felt that the French, especially those on the left, oppose the construction of Europe in its current form, and that carrying the banner of rejection could win him the party leadership – and thus its presidential nomination in 2007. 
This reasoning proved wrong: the Socialists’ members and voters know that there is no alternative to Europe and accepted the Treaty as a means of going further, despite its imperfections. 
But limiting the significance of the “no” vote to mere political calculation would be a mistake, for it also reflects the importance of the “French malaise” about Europe. 
The French perceive Europe as distant, technocratic, and often the Trojan horse of liberal globalization and deindustrialization. 
These doubts are even stronger among those who consider the ideals of a social Europe insufficiently fulfilled, owing to the right’s political dominance: control of 18 of 25 governments, the same number of European commissioners, and a majority in the European Parliament. 
Moreover, Lionel Jospin’s elimination from the presidential election in 2002 by the far-right Jean-Marie Le Pen is widely interpreted – wrongly in my opinion – as the result of the Socialists’ pro-European position. 
But the Socialist “yes” to Europe should not be confused with the “yes” given by the right. 
French Socialists support the Constitutional Treaty as a way to strengthen political effectiveness and democratic accountability in the EU, and because it advances the cause of social progress by integrating the Charter of Fundamental Rights and defining goals such as full employment, sustainable development, anti-discrimination, and gender equality. 
The Socialist “yes” also means support for increasing Europe’s standing as a global power through the creation of an EU ministry of foreign affairs. 
This doesn’t amount to a conversion to liberal principles or a substitution of Europe for the ideals of the left and of socialism. 
The treaty is but a necessary step to successful EU enlargement and further progress on Europe’s construction; it is not an end in itself. 
The essential task for the European Socialist Party now is to build a vision for Europe that addresses its constituencies’ concerns and inspires their hopes. 
The party cannot evade demands for a more social Europe and for solutions to weak growth and high unemployment. 
The European Socialists will also have to define a more ambitious budget strategy, with higher spending for research, education, and other social investments, develop an industrial policy that transcends the simplistic logic of competitiveness, affirm a legal framework for European public services, and support greater EU-wide social and fiscal homogeneity. 
There has been progress on all these issues, guided by a report entitled “For a progressive Europe” delivered by Pascal Lamy to the European Socialist Party’s leader, former Danish Prime Minister Poul Nyrup Rasmussen. 
But European Socialists remain divided: German and British members oppose higher spending and fiscal homogeneity. 
Clearly, the French “yes” did not solve everything. 
Europe’s left must still clarify its vision of the future. 
The internal debates will be heated and their conclusions difficult for some to accept. 
But I am happy that the French Socialists have made a powerful statement on behalf of the Treaty. 

The French Way of Crisis 
PARIS – France is in disarray. 
According to opinion polls, Nicolas Sarkozy’s popularity is at the lowest point seen in decades for a French president. 
Last week, two ministers resigned, but a parliamentary and media-sustained storm continues, fueled by conflict-of-interest charges against a minister suspected of corruption when raising money for Sarkozy’s presidential campaign. 
Some ministers don’t care much about public perceptions when using public funds, and it is clear that the political atmosphere has become poisonous. 
The atmosphere in parliament is execrable, and may be enough to topple the government in a no-confidence motion. 
But the constitution established by General Charles de Gaulle is strong, and Sarkozy will keep his position until the end of his mandate in 2012. 
The main opposition Socialist Party’s weak electoral prospects are also helping Sarkozy. 
The size of France’s political crisis seems to be out of proportion with the country’s real situation. 
To be sure, France has been severely hit by the global financial crisis and economic downturn. 
But the consequences have been somewhat less dramatic than in many other European countries. 
Two of the three Baltic countries and Greece are in deep financial distress. 
Much the same is true of Portugal, Spain, Hungary, and Iceland. 
Ireland, Belgium, Italy, and the United Kingdom are still under threat, owing to large public debts or current-account deficits. 
But the Netherlands, and Austria – and, to a lesser extent, Germany and France – are faring slightly better. 
In the short term, the situation in Germany is less severe than in France. 
Its trade balance is positive, and total public debt is not as high as it is in other countries. 
Despite high unemployment and low growth, Germany does not face a short-term threat to macroeconomic stability, though the country’s population is declining and aging, implying huge challenges in the decades ahead. 
The short-term situation for France is more worrying. 
The fiscal deficit is higher than 6% of GDP, the trade balance is negative, and public debt – albeit lower than in all other European countries except Germany and the Netherlands – is nonetheless 80% of GDP. 
France urgently needs structural reforms – and thus a strong government. 
Of course, unethical behavior by officials – the root of the current crisis – is unacceptable. 
But if growth were higher and unemployment were falling, such scandals would not be treated as such a drama. 
Two factors are intensifying the pressure on Sarkozy. 
First, the public is increasingly aware that urgent and straightforward policies are desperately needed in the areas of pension and healthcare payments, and in state organization. 
Second, in recent decades the French have been 10%-20% more pessimistic than the rest of the world when asked about their happiness and their attitudes toward the future for themselves or for France. 
Not only is the market economy less popular in France than in all other European countries or the US, but it is less popular than in Russia or in China! 
Is the future more promising? 
All emerging countries answer “yes.” 
That is also the answer of a large majority in the US and in Europe. 
But in France, the majority says “no.” 
This deep pessimism militates against any public debate or reform, and exaggerates the importance of the current political crisis. 
Since the first polling companies were created in the US, the UK, and France in the 1930's, they have asked questions about happiness and attitudes about the future. 
At first, the French gave the same answer as other people. 
But, in June 1940, the sky fell on their heads. 
This very centralized and proud country, where the state matters more than elsewhere and the military had won so many wars, witnessed the complete collapse of both in the span of just two weeks. 
A non-elected government that capitulated to Hitler offered a parochial, vassal-like future. 
The French never really recovered from that trauma. 
Despite a beautiful rebirth after the war, the moral defeat of the elite and the hesitancy of the political system remain. 
Dire pessimism has become permanent, making consensus nearly impossible to reach – an impasse made worse by the under-development of civil society in France. 
So expect big shocks. 
Balancing cuts in public spending in order not to endanger growth and employment requires a stable and smart government – and time. The UK and Germany are, with their excessive restrictions, are preparing the ground for recessions at home. 
Will France address the issue with greater subtlety and avoid this risk? 
The grumpy, moaning, and intractable people of France have demonstrated many times that they can wake up and meet the challenges of the day. 
The Enlightenment, after all, was born in France. There is the French Revolution, the Napoleonic epic, the Battle of the Marne – won in 1914 thanks to spontaneous initiative when the government and the state failed – and the great revival of 1945-1950. 
France also has a higher birth rate than all other European countries, and is the only one that renews each generation. 
Thirty years ago, there was not a single French enterprise among the world’s top 100 enterprises, whereas today there are 15. 
France’s education and health-care systems, despite difficulties, are still among the best in the world. 
Its intelligentsia and its scientists remain very creative, and are among the best in many fields. 
So don’t bury France just yet. 
The French will undergo major shocks in the years to come, but France might be the only European country standing tall 30 years from now. 

The Front Line of Democracy 
BENGHAZI – This week, I flew to Benghazi to meet Libya’s Transitional National Council (TNC), a visit coordinated with European Union High Representative Catherine Ashton and NATO allies. 
I was the first Western foreign minister to travel to Libya since the crisis began. 
What I saw reminded me of my country 20 years ago, just after Poland’s first free elections, which, together with the fall of the Berlin Wall barely six months later, came to symbolize the Cold War’s end. 
Peoples in transition from authoritarian rule – peaceful in Poland in 1989, bloody in Libya today – grapple with decisions that determine their fate for decades. 
How should the former regime’s worst wrongdoers and security police, with their insidious archives, be treated? 
Should the former ruling party be banned? 
How can civilian, democratic control of the army and police be secured? 
What role should religion play in public affairs? 
Should the constitution establish a presidential or parliamentary system? 
The former communist world made those choices 20 years ago. 
But very different choices – for better and for worse – were made in Poland, Hungary, and Czechoslovakia, in the Baltic states, across the former Soviet Union, in Central Asia, and in East Germany. 
The results form a crucial database of experience. 
Today’s Arab reformers thus can draw on our successes – and avoid our mistakes. 
We central Europeans knew the misery of communism. 
Yet we knew what we wanted to replace it with – a system based on modern European democratic market values. 
Building democratic structures requires time, discipline, pain, and patience. 
But it pays off. 
In July, Poland will assume the EU presidency for the first time; we have earned this responsibility to lead European affairs over the next six months. 
Poland learned the hard way that demanding change and defying oppression are much less difficult than formulating and delivering a clear, reasonable program for a better future. 
Not all popular demands for freedom succeed: in the confusion, reactionary forces can make their move. 
The fall of the Shah in Iran had ruinous consequences for that country. 
Belarus won independence in 1991, but, since 1994, President Alexander Lukashenko has shamelessly embraced communist symbols – and methods – to cling to power. 
Europe has unfinished business here. 
Today, across North Africa, millions of people are demanding a voice in their own destiny. 
Each country is looking to change and move forward. 
In Morocco, the King has announced constitutional reforms, including guarantees for public participation in national decision-making, an independent judiciary, and new regional authorities. 
This measured, inclusive reform can be a model for others. 
And reformers in the Arab world have had tremendous support from Qatar, which has provided an example of strong leadership, particularly in Libya, but also through the news channel Al Jazeera – a real force for change in the region. 
Libya is experiencing a deadly struggle between people insisting on change, and a desperate, greedy regime determined to cling to power after 40 years of crass misrule. 
The United Nations Security Council, supported by the Arab League, has authorized the use of all necessary means to protect Libyans from the cruelty of their own leaders. 
Our NATO allies launched proportionate military operations aimed at denying Col. Muammar Qaddafi’s regime the means to attack civilian targets. 
Governments worldwide have frozen illicit assets stashed abroad by the regime – money that should be used to help the opposition to build a new society. 
I went to Benghazi to assess the intentions and credibility of the Transitional National Council and Libyan opposition. 
We brought medical supplies for the Benghazi Medical Center, where injured people from Misurata and elsewhere are being treated. 
Around the table sat improbable allies: some had been prominent officials in Qaddafi’s regime; others had spent many years in prison under sentence of death. 
They were united in recognizing that their country deserved a new start. 
I was reminded of Poland’s “roundtable” in 1989, when Solidarity sat with the ruling communists to negotiate the end of the regime. 
I talked frankly with TNC Chairman Mustafa Abdul Jalil, Deputy Chairman Abdul Hafez Ghoga, and TNC Defense Minister Jalal Dheili, himself a former political prisoner. 
They were grateful for the international community’s involvement, but described in moving terms the huge loss of life that Qaddafi had inflicted on his own people. 
I told them that we considered the TNC to be our new legitimate political interlocutors in Libya and were ready to support them, but that in return we expected the TNC to work towards the best standards of transparent democratic government. 
They had to realize that they need a plan – revolutionary moments are moments to be seized. 
Poland would help by offering training for TNC officials. 
Following this visit, my message to European leaders is twofold. 
First, Libya’s TNC is the best bet we can make now for Libya’s future. 
Its leaders are cooperating in an effort to bring about real reform in a way that was unthinkable a few months ago. 
They deserve the world’s energetic support. 
Second, while Europe has much to offer its North African neighbors in terms of financial support, advice, and training, the region needs to find its own path to freedom and success. 
Let us approach this task in the best spirit of European solidarity, but also with a certain humility. 
Europe’s former communist countries can make a special contribution to the process of transition across North Africa. 
Above all, we understand that sustained reform requires assuming responsibility by mobilizing the energy of one’s own people, not relying on well-intentioned but often ill-focused outside help. 
Poland is ready to lead the way, on its own and as EU President. 
For example, former President Lech Wałesa recently visited Tunisia to offer advice as part of a Polish program to help Tunisia devise robust constitutional reforms and election laws. 
North Africa’s people know what they don’t want – and won’t accept. 
But they are struggling to identify what they do want, and how to build it. 
As I saw in Benghazi, there is a fair chance that Libya’s emerging leaders will be good, realistic partners for good realistic policies. 

The Fusion Myth 
France is now rushing to construct the International Thermonuclear Experimental Reactor, (ITER), which is supposed to show that nuclear fusion can be used to power nuclear power stations. 
ITER is often presented as the long-term solution to the problem of global warming, because nuclear fusion can provide an infinite and clean source of energy. 
But ITER will do nothing of the sort. 
In the fission reactions that nuclear power generation relies on today, heavy elements such as uranium break into smaller ones, while in nuclear fusion small elements such as hydrogen stick together and form heavier elements (helium). 
Both fission and fusion produce a lot of energy. 
Some political leaders explain that nuclear fusion is at work in the sun, and that, thanks to ITER, we will harness it. 
They often add that, since fusion burns hydrogen, which can be found in seawater, it is an infinite source of energy. 
Unfortunately, political leaders know little about the scientific issues involved. 
That nuclear fusion is a source of energy has been known since the invention of the hydrogen bomb. 
But its control is still a fundamental challenge for research institutes, not some minor technical difficulty that can be easily overcome. 
Confining a little sun inside a box is an extremely difficult task for three main reasons. 
First, the nuclear fuel is not seawater, but a mixture of the two heavy isotopes of hydrogen, deuterium and tritium, a radioactive element that has been produced in small quantities for hydrogen bombs. 
Any development of fusion reactors would require producing tritium with industrial methods that have yet to be invented. 
Second, the deuterium-tritium fusion reaction starts at around 100 million degrees. 
To achieve this requires using a magnet to accelerate a plasma that is a big flame of deuterium and tritium nuclei. 
This must be done in a ultra-high vacuum in a large chamber. 
ITER is not designed to produce electricity, but to study the stability of the flame in the magnet. 
Since the fusion reactions produce alpha particles, which pollute the plasma, one has to insert a “divertor” inside the flame at 100 million degrees in order to clean it. 
Nobody has ever accomplished this, but ITER may be able to try around 2030 – that is, if it solves the previous problem. 
Third, fusion also emits neutrons that will produce helium gas bubbles inside the wall material, which tends to explode. 
The supporters of ITER explain that if the walls are porous, the bubbles can escape. 
But nothing can be both leak-proof and porous, and ITER is not designed to study this contradiction. 
In the future, a “blanket” should be inserted between the plasma and the walls, with two objectives: to protect the outer walls and to produce tritium from nuclear reactions within a circulating fluid containing lithium. 
This might work, but the first wall of the blanket will need to be not only leak-proof and porous, but also sufficiently permeable to neutrons, which have to hit the lithium atoms beyond it. 
The problem of materials is an entire research field in itself. 
In order to study it, it has been decided to build the International Fusion Materials Irradiation Facility (IFMIF) in Japan. 
Some scientists have argued that the neutron irradiation in IFMIF won’t be the same as in fusion reactors, but it should be noted that its cost, at one billion euros, will be one-tenth that of ITER. 
So why can’t we wait for IFMIF’s results before building ITER? 
It all depends on one’s budget. 
If ITER could really solve the planet’s energy problem, €10 billion would be a negligible investment – less than the net profit of the oil company TOTAL (€13 billion in 2006) and equivalent to ten days of waging the war in Iraq. 
But if fusion is ever to work in industrial power stations, it will take many decades. 
Even if ITER is successful, and if one solves the tritium and material problems, everything would need to be tested in real size, and only then could a first prototype of an industrial reactor be built. 
A drastic reduction of CO2 emissions is an urgent priority, but fusion is unlikely to produce sufficient energy to achieve that goal before the twenty-second century. 
In fact, ITER is a big instrument for fundamental research, so its €500 million Euros annual cost needs to be compared with similar scientific initiatives, such as the European Organization for Nuclear Research (CERN), which costs one billion Swiss francs per year. 
In my opinion, searching for the fundamental structure of particles is far more important than studying the stability of a plasma. 
In France, the contribution to ITER is more than all the available funding for research projects in all our physics laboratories. 
So the danger is that ITER will squeeze out funding for other vital research. 
We already have the bad example of the International Space Station, a waste of $100 billion that has produced no scientific results. 
ITER will not solve our energy problem. 
Although it has some scientific interest in plasma physics, the participating countries should clearly state that funding it won’t affect the rest of their research efforts. 
At the same time, the international community should support research on energy saving and storage, and accelerate the development of fourth-generation nuclear reactors, which will use fission and be both clean and durable. 

The Future of China’s Growth 
BEIJING – The slowdown of China’s economy has captured the headlines in recent weeks. 
Whether it is a permanent or temporary adjustment, the Chinese authorities have much work to do in laying the groundwork for strong economic performance in the medium and long term. 
Despite extraordinary growth since the start of its transition to a market economy in 1979, China is facing serious challenges simultaneously: rising inequality, large and growing levels of environmental degradation, stubborn external imbalances, and an aging society. 
Fortunately, China’s 12th Five-Year Plan (2011-2015) recognizes the need to deepen market-oriented reform, change the country’s development model, and focus on the quality of growth, structural reforms, and social inclusion to overcome the rural-urban divide and stem the rise in income inequality. 
In line with this bold, long-term approach, a new report, China 2030: Building a Modern, Harmonious, and Creative High-Income Society, proposes reforms that my country needs to develop a mature, well-functioning market economy by 2030. 
The report is the result of a longstanding China-World Bank partnership. 
Commemorating the 30th anniversary of China’s membership, World Bank President Robert B. Zoellick proposed to the country’s leaders a joint effort to identify and analyze China’s medium-term development challenges. 
China 2030 calls for structural reforms that would redefine the role of government, overhaul state-owned enterprises and banks, develop the private sector, promote competition, and deepen liberalization of the land, labor, and financial markets. 
While providing relatively fewer tangible public goods and services directly, the Chinese government will need to provide more intangible public goods and services like rules, standards, and policies. 
Such policies and institutional improvements increase productivity, promote competition, facilitate specialization, enhance the efficiency of resource allocation, protect the environment, and reduce risks and uncertainties. 
In the enterprise sector, the focus will need to be on increasing competition in all sectors, reducing barriers to entry and exit for private companies, and strengthening state-owned enterprises’ competitiveness. 
In the financial sector, the banking system must be commercialized, thereby gradually allowing interest rates to be set by market forces, while capital markets must be deepened in tandem with the development of the legal and supervisory infrastructure needed to ensure financial stability. 
In the labor market, China needs to accelerate reforms of the hukou (household registration) system to ensure that, by 2030, workers can move more freely in response to market signals. 
Currently, anyone who moves to another part of the country without a hukou risks losing access to education, social services, and the housing market. 
China’s policymakers also need to introduce measures to increase labor-force participation rates, rethink wage policy, and make social-insurance programs portable nationwide. 
Finally, farmers’ rights need to be protected, the efficiency of land use must be increased, and policies for acquisition of rural land for urban use should be overhauled. 
China’s medium-term success will also require creating an open system in which competitive pressures encourage Chinesecompanies to engage in product and processinnovation, not only through their ownresearch-and-development efforts, but also through participationin global Rampamp;Dnetworks. 
The priority is to increase the quality of Rampamp;D, rather than just its quantity. 
Policymakers will need to focus on increasing the technical and cognitive skills of university graduates, and on building a few world-class research universities with strong links to industry. 
An enlightened strategy must encourage China to “grow green,” as opposed to growing rapidly now and facing massive environmental costs later. 
Encouraging new investments in low-pollution, energy- and resource-efficient industries would lead to greener development, spur investments in related upstream and downstream manufacturing and services, and build an international competitive advantage in a global sunrise industry. 
China 2030 also calls for expanding opportunities, promoting social security, and reducing the country’s relatively high social and economic inequality by addressing the rural-urban disparities in access to jobs, finance, and high-quality public services. 
Doing so will require greater sustained attention to underserved rural areas and migrant populations, and to restructuring social policies in order to ensure secure safety nets. 
Moreover, it is vital to strengthen China’s fiscal positionby mobilizing additional revenues and ensuring that local governments have adequate financing to meet their rising expenditure responsibilities. 
Such reforms can help to ensure that budgetary resources are available at different levels of government (central, provincial, prefectural, county, township, and village), and are commensurate with expenditure responsibilities. 
Last but not least, China should become a proactive stakeholder in the global economy. 
By continuing to intensify its global trade, investment, and financial links, which have served it well over the past three decades, China would benefit from further specialization, increased investment opportunities, and higher returns to capital, as well as mutually beneficial flows of ideas and knowledge. 
China must remain committed to resuscitating the stalled Doha Round of multilateral trade negotiations, and support a global agreement on investment flows. 
Global integration of China’s financial sector will require opening the capital account, which will have to be carried out steadily and with considerable care; but it will be a key step toward internationalizing the renminbi as a global reserve currency. 
The proposals contained in China 2030 could provide a framework for Chinese policymakers as they seek to achieve their goal of sustainable and harmonious growth. 
With the global economy entering a dangerous phase, China’s government will need to respond to new risks, shocks, and vulnerabilities as they arise. 
But, in doing so, it should adhere to the principle that policy responses to short-term problems must uphold, not undermine, long-term reform priorities. 


The Future of Facts 
BUDAPEST – At a recent conference of newspaper editors in which I took part, a small crowd gathered to talk about journalism and new media. 
When I told the group that I had begun my career as a magazine fact-checker, several of them grew misty-eyed, as if someone had told a group of priests about his childhood as an altar boy. 
I brought up my past because I think that fact-checking is the single best training not just for journalism, but for life in general. 
It teaches you to think skeptically. 
It is easy to believe something when someone who appears knowledgeable asserts it. 
But if you have a responsibility for checking facts, you listen more carefully. 
On what sources does the speaker base his facts? 
Is there something in it for him – a higher stock price, an advertising fee, or someone else’s gratitude? 
Or is he simply biased because of the people he knows, the company he works for, or the attitudes he picked up at home? 
I spent hours picking through sources – mostly dusty papers in the years before the Internet, or strangers on the telephone – to clarify questions of fact: Was this really the first such product? 
Was Mr. Smith 42 or already 43? 
Was his claim that revenues had grown for the last five years true merely because of acquisitions that his company had made? 
And so on. 
My life was ruled by tk – which stands for “to kum,” or “to come,” in the jargon of reporters. 
We fact-checkers would joke about the lazy reporters who would hand us copy such as, “Juan Tigar, tk years old, grew up in tk before studying at tk. 
Now tk title at Widgets Corp., he…” Our job was to fill in the tk’s. 
But we learned an enormous amount. 
We learned not just thousands of facts that I have since forgotten, but an attitude of skepticism coupled with reverence for the truth. 
That attitude contrasts with the skepticism I once heard from a Russian reporter about her early days on the job. 
“Whenever we read an article about the health dangers of butter, we would immediately run out and buy as much butter as we could find,” she told me. 
“We knew it meant there was about to be a butter shortage.” 
In other words, Russians looked only for the agenda, the motivation behind the assertion. 
The actual truth was irrelevant. 
Of course, spin, propaganda, and censorship persist in journalism, but with one big difference: Almost anyone can now operate as a reporter. 
How can we ensure that these self-nominated reporters respect the truth? 
In the United States, the Federal Trade Commission has announced plans to require bloggers and celebrity endorsers to disclose gifts or payments from vendors and others seeking the bloggers’ positive comments online. 
But what about other kinds of bias? 
As the journalistic priesthood erodes and everyone can become a citizen reporter or commentator, regulating or training all would-be journalists is not the answer. 
In line with the bottom-up, do-it-yourself ethos of the Internet, where people book their own flights, publish their own photos, and sell their own second-hand goods, it should be the users’ responsibility to do their own fact-checking. 
This is not to say that journalists should not check their own facts (or that priests should not observe the tenets of their own religion). 
But in the end, everyone has to become a better reader – more skeptical and more curious. 
Why is this story getting so much attention? 
Does this blogger ever say anything negative, or is she always talking about the great products she uses? 
Does she have any kind of disclosures on her blog? 
Why is this politician saying nice things about that politician? 
What company does the product reviewer work for? 
Governments can impose regulations, but in the end we will get the kind of journalism for which we ask. 
If we ask for it, Web sites will offer not just content but reputation systems, so that contributors will have reputations as reliable sources (or not). 
We should not outlaw anonymity (which has its uses), but we can ask for details about the people whose words we are reading. 
Someone may legitimately want to remain anonymous, but we can draw our own conclusions about their reasons. 
That much thinking may sound like a lot of work, but it is what is required of a responsible adult these days. 
Compared to a century ago, more people spend less time laboring to ensure their physical existence. 
But, in this increasingly confusing world, we need to spend a little more time laboring to ensure our own intellectual integrity – a task that we cannot outsource to governments or even to media. 
Facts are holy, but not all media that claim to report them, “new” or old, can be trusted. 

The Future of Power 
CAMBRIDGE – Global government is unlikely in the twenty-first century, but various degrees of global governance already exist. 
The world has hundreds of treaties, institutions, and regimes for governing interstate behavior involving telecommunications, civil aviation, ocean dumping, trade, and even the proliferation of nuclear weapons. 
But such institutions are rarely self-sufficient. 
They still require the leadership of great powers. 
And it remains to be seen whether this century’s great powers will live up to this role. 
As the power of China and India increases, how will their behavior change? 
Ironically, for those who foresee a tri-polar world of the US, China, and India at mid-century, all three of these states – the world’s most populous – are among the most protective of their sovereignty. 
Some argue that our current global institutions are sufficiently open and adaptable for China to find it in its own interests to become what Robert Zoellick, president of the World Bank, once called a “responsible stakeholder.” 
Others believe that China will wish to impose its own mark and create its own international institutional system as its power increases. 
The countries of the European Union have been more willing to experiment with limiting state sovereignty, and they may push for more institutional innovation. 
But it is unlikely that, barring a disaster like World War II, the world will witness “a constitutional moment” such as it experienced with the creation of the United Nations system of institutions after 1945. 
Today, as a universal institution, the UN plays a crucial role in legitimization, crisis diplomacy, peacekeeping, and humanitarian missions, but its very size has proven to be a disadvantage for many other functions. 
As the 2009 UN climate-change summit in Copenhagen demonstrated, meetings of 192 states are often unwieldy and subject to bloc politics and tactical moves by largely extraneous players that otherwise lack the resources to solve functional problems. 
As US Secretary of State Hillary Clinton put it recently, “the UN remains the single most important global institution…but we are constantly reminded of its limitations….The UN was never intended to tackle every challenge; nor should it.” 
Indeed, the main dilemma that the international community faces is how to include everyone and still be able to act. 
The answer is likely to lie in what Europeans have dubbed “variable geometry.” 
There will be many multilateralisms and “mini-lateralisms,” which will vary by issue with the distribution of power resources. 
For example, on monetary affairs, the Bretton Woods conference created the International Monetary Fund in 1944, and it has since expanded to include 186 countries. 
But the dollar’s global pre-eminence was the crucial feature of monetary cooperation until the 1970’s. 
After the weakening of the dollar and President Richard M. Nixon’s decision to end its convertibility into gold, in 1975 France convened leaders of five countries in the library of the Chateau de Rambouillet to discuss monetary affairs. 
The group soon grew to seven, and later broadened in scope and membership – including Russia and a vast bureaucratic and press apparatus – to become the G-8. 
Subsequently, the G-8 began the practice of inviting five guests from the emerging economies. 
In the financial crisis of 2008, this framework evolved into the G-20, which boasts a more inclusive membership. 
At the same time, the G-7 continued to meet on a narrower monetary agenda; new institutions, such as the Financial Stability Board, were created, while bilateral discussions between the US and China played an increasingly important role. 
As one experienced diplomat put it, “if you’re trying to negotiate an exchange-rate deal with 20 countries or a bailout of Mexico, as in the early Clinton days, with 20 countries, that’s not easy. 
If you get above 10, it just makes it too darn hard to get things done.” 
He’s right, of course. 
After all, with three countries, there are three bilateral relationships; with ten, there are 45; and with 100 players, there are nearly 5,000. 
That is why, on issues like climate change, the UN will continue to play a role, but more intensive negotiations are likely to occur in smaller groups such as the Major Economies Forum, where fewer than a dozen countries account for 80% of greenhouse gas emissions. 
Much of the work of global governance will rely on formal and informal networks. 
Network organizations (such as the G-20) are used for setting agendas, building consensus, coordinating policy, exchanging knowledge, and establishing norms. 
As Anne-Marie Slaughter, Director of Policy Planning in the US State Department, argues, “the power that flows from this type of connectivity is not the power to impose outcomes. 
Networks are not directed and controlled as much as they are managed and orchestrated. 
Multiple players are integrated into a whole that is greater than the sum of its parts.” 
In other words, the network provides power to achieve preferred outcomes with other players rather than over them. 
To cope with the transnational challenges that characterize a global information age, the international community will have to continue to develop a series of complementary networks and institutions that supplement the global framework of the UN. 
But if major countries are divided, it is unlikely that even network organizations like the G-20 can set the agenda for the UN and the Bretton Woods financial institutions to act upon. 
In the immediate aftermath of the 2008 financial crisis, the G-20 seemed to help governments to coordinate their actions and avoid rampant protectionism. 
The world waits anxiously to see how it will perform when it meets again in Seoul this November. 

The Future of the Japan-US Alliance 
Cambridge – Many analysts currently detect malaise in Japan about its alliance with the United States. 
Some of this relates to North Korea’s nuclear weapons and a concern that the US will not adequately represent Japan’s interests (such as accounting for Japanese citizens abducted by North Korea years ago.) 
Other issues concern the basing of US marines in Okinawa and sharing the costs of moving some to Guam. 
The list is long, but they might best be thought of as “housekeeping” issues: many a couple can quarrel over them without contemplating divorce. 
There is a deeper level of concern, however, which relates to Japan’s fear of being marginalized as the US turns toward a rising China. 
For example, some Japanese complain that China receives far more attention than Japan in the American election campaign. 
Such anxiety is not surprising: US and Japanese defense capabilities are not symmetrical, and that is bound to agitate the more dependent party. 
Over the years, various suggestions have been made with a view to making the alliance more symmetrical, including that Japan become a “normal” country with a full panoply of military capabilities, even nuclear weapons. 
But such measures would raise more problems than they would solve. 
Even if Japan implemented them, they would still not equal the capacity of the US or eliminate the asymmetry. 
It is worth noting that during the Cold War, America’s European allies had similar anxieties about dependency and abandonment, despite their own military capabilities. 
The real guarantee of American resolve to defend Japan is the presence of US troops and bases, and cooperation on issues – such as ballistic missile defense – aimed at protecting both Americans and Japanese. 
Moreover, there are two good answers to the question of whether the US would abandon Japan in favor of China: values and threat. 
Japan and the US, unlike China, are both democracies, and they share many values. 
In addition, both Japan and the US face a common challenge from China’s rise and have a strong interest in ensuring that it does not become a threat. 
The US regards a triangular Japan-China-US relationship as the basis of stability in East Asia, and wants good relations between all three of its legs. 
But the triangle is not equilateral, because the US is allied with Japan, and China need not become a threat to either country if they maintain that alliance. 
On the other hand, China’s power should not be exaggerated. 
A recent poll indicates that one-third of Americans believe that China will “soon dominate the world,” while 54% see its emergence as a “threat to world peace.” 
To be sure, measured by official exchange rates, China is the world’s fourth largest economy, and it is growing at 10% annually. 
But China’s income per capita is only 4% that of the US. 
If both countries’ economies continue to grow at their current rates, China’s could be larger than America’s in 30 years, but US per capita income will still be four times greater. 
Furthermore, China’s lags far behind in military power, and lacks America’s “soft power” resources, such as Hollywood and world-class universities. 
China’s internal evolution also remains uncertain. 
It has lifted 400 million people out of poverty since 1990, but another 400 million live on less that $2 per day. 
Along with enormous inequality, China has a migrant labor force of 140 million, severe pollution, and rampant corruption. 
Nor has its political evolution matched its economic progress. 
While more Chinese are free today than ever before in Chinese history, China is far from free. 
The danger is that Party leaders, trying to counter the erosion of communism, will turn to nationalism to provide ideological glue, which could lead to an unstable foreign policy – including, for example, conflict over Taiwan. 
Faced with such uncertainty, a wise policy combines realism with liberalism. 
By reinforcing their alliance, the US and Japan can hedge against uncertainty while at the same time offering China integration into global institutions as a “responsible stakeholder.” 
The greatest danger is that an escalating fear of enmity in the three countries becomes a self-fulfilling prophecy. 
In that sense, the US-Japan alliance rests on deeply rooted joint interests. 
There is a new dimension to the alliance, however, and to the relationship with China. 
This year, China surpassed the US as the world’s largest emitter of greenhouse gases. 
China argues, correctly, that it is still behind the US and Japan in per capita emissions, but this does not reduce the costs imposed on the world (including Japan and the US). 
A cooperative program that helps China to burn its coal more cleanly is in the interests of all three countries. In general, transnational threats such as climate change or pandemics can cause damage on a scale equivalent to military conflict. 
(In 1918, avian flu killed more people than died in World War I). 
Responding to such threats requires cooperation, soft power, and non-military instruments, and this is an area in which Japan is a much more equal and important ally. 

The Future(s) of Civil Aeronautics 
HAMPTON, VIRGINIA -- Civil aeronautics is in the midst of becoming a “mature” industry, with all the drawbacks that this entails. 
For decades, technological advances have been essentially incremental, and the industry remains largely based on long-haul transport aircraft, with an emerging small jet component and a legacy of general aviation markets and products. 
But it has become increasingly clear that the industry cannot survive in this form. 
The problems bedeviling the industry include pollution from emissions, increasing competition (particularly from communications technology, which has made business travel less necessary), air traffic control delays and inefficiencies, expanding noise restrictions, safety and security concerns, and an overall business environment highly dependent on fuel prices. 
Solutions for all of these problems will probably require a complete reinvention of airplane technology. 
The greatest hope is to be found in the ongoing information, Bio-, Nano-, Energetics, and Quantum technology revolutions. 
The IT revolution and associated “swarm” technologies enable the foremost solution: a “digital airspace” that is wholly automatic in terms of air traffic control, navigation, and vehicle operations. 
Automatic aircraft operation is already becoming commonplace – especially in the military – but further increases will require a similarly automatic airspace. 
A digital airspace would in turn enable a complete revolution in personal mobility. 
Together with new technologies enabling Super-Short Takeoff and Landing (superSTOL) a digital airspace would put safe, quiet, affordable, street-in-front-of-your-house personal air vehicles within sight. 
So-called flying HumVee’s (high mobility multipurpose wheeled vehicles) would create a superb transportation system for areas lacking intercity roads, and eventually would supplement – or perhaps supplant – automobiles. 
The variety of machines currently under study is accessible at www.roadabletimes.com . 
The estimated worldwide market for such vehicles is in the range of $1 trillion, and their use would erode the scheduled domestic airline customer base by enabling 300 kilometer “commutes” and providing huge cost avoidance for roads and bridges. 
Nevertheless, even given eventual development of an affordable, safe, fly/drive, airport-independent personal transportation system, there would still be a need to re-invent long-haul transport, especially for transoceanic flights. 
The current machines of this genre are direct descendants of the Boeing 707, and, after many decades of evolutionary improvement, this design approach simply lacks the scope to address the many problems that must be solved. 
There are several alternatives, such as the blended wing body and strut/truss braced wings, which offer major potential increases in lift-to-drag ratio and improvements in structural weight fraction. 
Such improvements in these parameters would provide design margins to address most of the current problems, with the exception of emissions. 
The issue of water emissions can be addressed by designs that enable long-haul aircraft to cruise below 9,000 meters. 
Such designs could be enabled by using circulation control for high lift and employed at cruising altitude for ride quality. 
The resulting STOL (short takeoff and landing) performance could also improve airport productivity. 
On the other hand, emissions of carbon dioxide can be reduced simply by using biofuels, made from plants whose carbon dioxide “price” was paid via uptake of the very same gas from the atmosphere during their growth. 
Reductions of other greenhouse gases, such as nitric oxide, are attainable through clever combustor design. 
Given the number and severity of problems currently plaguing civil aeronautics, the conventional approach of evolutionary changes to current paradigms is no longer sufficient. 
Instead, the industry must re-invent itself. 
With the advent of a digital airspace, and with appropriate research support, success would be both possible and likely. 

The G-20’s Empty Promises 
CAMBRIDGE – Talk about “exit strategies” will be high on the agenda when the heads of the G-20 countries gather in Pittsburgh a few days from now. 
They will promise to reverse the explosive monetary and fiscal expansion of the past two years, to do it neither too soon nor too late, and to do it in a coordinated way. 
These are the right things to promise. 
But what will such promises mean? 
Consider first the goal of reversing the monetary expansion, which is necessary to avoid a surge of inflation when aggregate demand begins to pick up. 
But it is also important not to do it too soon, which might stifle today’s nascent and very fragile recovery. 
But promises by heads of government mean little, given that central banks are explicitly independent of government control in every important country. 
The US Federal Reserve’s Ben Bernanke, the Bank of England’s Mervyn King, and the European Central Bank’s Jean-Claude Trichet will each decide when and how to reverse their expansionary monetary policies. 
Bernanke doesn’t take orders from the US president, and King doesn’t take orders from the British prime minister (and it’s not even clear who would claim to tell Trichet what to do). 
So the political promises in Pittsburgh about monetary policy are really just statements of governments’ confidence that their countries’ respective monetary authorities will act in appropriate ways. 
That will be particularly challenging for Bernanke. 
Although the Federal Reserve is technically independent and not accountable to the President, it is a creation of the US Congress and accountable to it. 
Because of the lagged effects of monetary policy and the need to manage expectations, early tightening by the Fed would be appropriate. 
But the unemployment rate could be over 9% – and possibly even more than 10 – when it begins to act. 
If so, can we really expect Congress not to object? 
In fact, Congress might tell the Fed that it should wait until there are clear signs of inflation and a much lower unemployment rate. 
Because Congress determines the Fed’s regulatory powers and approves the appointments of its seven governors, Bernanke will have to listen to it carefully – heightening the risk of delayed tightening and rising inflation. 
Reversing the upsurge in fiscal deficits is also critical to the global economy’s health. 
While the fiscal stimulus packages enacted in the past two years have been helpful in achieving the current rise in economic activity, the path of future deficits can do substantial damage to long-run growth. 
In the US, the Congressional Budget Office has estimated that President Barack Obama’s proposed policies would cause the federal government’s fiscal deficit to exceed 5% of GDP in 2019, even after a decade of continuous economic growth. 
And the deficits run up during the intervening decade would cause the national debt to double, rising to more than 80% of GDP. 
Such large fiscal deficits would mean that the government must borrow funds that would otherwise be available for private businesses to finance investment in productivity-enhancing plant and equipment. 
Without that investment, economic growth will be slower and the standard of living lower than it would otherwise be. 
Moreover, the deficits would mean higher interest rates and continued international imbalances. 
In contrast to monetary policy, the US president does have a powerful and direct impact on future fiscal deficits. 
If the presidential promise to reduce the fiscal deficit was really a commitment to cut spending and raise taxes, we could see today’s dangerous deficit trajectory be reversed. 
Unfortunately, Obama shows no real interest in reducing deficits. 
The centerpiece of his domestic agenda is a health-care plan that will cost more than a trillion dollars over the next decade, and that he proposes to finance by reducing waste in the existing government health programs (Medicare and Medicaid) without reducing the quantity and quality of services. 
A second major policy thrust is a cap-and-trade system to reduce carbon emissions. 
But, instead of raising revenue by auctioning the emission permits, Obama has agreed to distribute them without charge to favored industries in order to attract enough congressional votes. 
Add to this the pledge not to raise taxes on anyone earning less than $250,000 and you have a recipe for large fiscal deficits as long as this president can serve. 
I hope that the other G-20 leaders do a better job of reining in their budgets. 
Finally, there is the G-20’s promise to reduce monetary and fiscal excesses in an internationally coordinated way. 
While the meaning of “coordinated” has not been spelled out, it presumably implies that the national exit strategies should not lead to significant changes in exchange rates that would upset existing patterns of trade. 
In fact, however, exchange rates will change – and need to change in order to shrink the existing trade imbalances. 
The dollar, in particular, is likely to continue falling on a trade-weighted basis if investors around the world continue to set aside the extreme risk-aversion that caused the dollar’s rise after 2007. 
Once the Chinese are confident about their domestic growth rate, they can allow the real value of the renminbi to rise. 
Other exchange rates will respond to these shifts. 

The G-20’s Helpful Silence on Capital Controls 
NEW YORK – When French President Nicolas Sarkozy took the reins as host of this year’s G-20 summit, to be held in Cannes on November 3-4, he called on the International Monetary Fund to develop an enforceable “code of conduct” for the use of capital controls (or capital-account regulations, as we prefer to call them) in the world economy. 
The IMF followed through by publishing a preliminary set of guidelines this past April. 
Regulation of cross-border capital flows has been strangely absent from the G-20’s agenda, which is aimed at strengthening financial regulation. 
But they are a central element in the financial volatility that incited calls for stronger regulation in the first place. 
The IMF has shown that those countries that deployed capital-account regulations were among the least hard-hit during the worst of the global financial crisis. 
Since 2009, it has accepted and even recommended that such regulations are useful to manage the massive inflows of “hot money” into emerging markets. 
That said, while the IMF’s proposed code is a step in the right direction, it is misguided. 
So, the G-20’s endorsement of the Fund’s guidelines would not be wise for a world economy trying to recover from one financial crisis while preventing the next one. 
With low interest rates and a slow recovery in the developed countries, accompanied by high interest rates and rapid growth in emerging markets, the world’s investors flocked from the former to the latter – Brazil, Chile, South Korea, Taiwan, and others. 
Then, in recent months, they flocked out of those emerging countries, showing once again how volatile and dangerous such flows are. 
Indeed, as the IMF has pointed out in its World Economic Outlook, these flows threaten to inflate asset bubbles, make it harder for countries to pursue an independent monetary policy, and trigger currency appreciation and associated losses in export competitiveness. 
Brazil’s currency, for instance, appreciated more than 40% from 2009 until August 2011, before weakening in recent months. 
Some countries responded by doing nothing, but many, including industrialized countries like Japan and Switzerland, intervened heavily in currency markets. 
Some resorted to capital-account regulations on inflows, such as taxes on the foreign purchases of bonds, equities, and derivatives, reserve requirements on short-term inflows, and so forth. 
Brazil’s finance minister referred to these numerous actions as the “currency wars.” 
This is where Sarkozy came in, using his platform as G-20 host to try to forge a set of enforceable guidelines to govern capital-flow management. 
The IMF’s proposed guidelines recommend that countries deploy capital-account regulations only as a last resort – that is, after such measures as building up reserves, letting currencies appreciate, and cutting budget deficits. 
In response to these suggestions, an independent Task Force, made up of former government officials and academics, was established to examine the use of capital-account regulations and come up with an alternative set of guidelines for the use of such regulations in developing countries. 
Among other findings and recommendations, our task force pointed out that in the cases where the IMF found capital-account regulations to be effective, such measures were part of a broader macroeconomic toolkit, and were deployed early on, alongside other measures, not as a “last resort.” 
Unless countries have signed trade and investment treaties that restrict the use of such regulations (and many have), the IMF’s Articles of Agreement give them full policy scope to manage capital flows as they see fit. 
Consigning such measures to “last resort” status would reduce the available options precisely when countries need as many tools as possible to prevent and mitigate crises. 
Rather than embracing a globally enforceable code of conduct that could paradoxically lead to a compulsory opening of capital accounts across the globe, the IMF, the G-20, the Financial Stability Board, and other bodies should try to reduce the stigma attached to capital-account regulations and protect countries’ ability to deploy them. 
Indeed, the IMF could help countries to prevent evasion of the regulations, and, together with the G-20 and the FSB, should lead a global dialogue about the extent to which countries should coordinate such regulations. 
Countries’ interests are considerably aligned in favor of such coordination. 
Industrialized economies are seeking to recover from the crisis, and want credit and capital to stay home to boost growth, while developing countries have little interest in gaining short-term capital inflows. 
This could form the basis for industrialized countries to adjust their tax codes and deploy other types of regulation to keep capital at home, while emerging markets implement measures aimed at changing the composition and reducing the level of potentially destabilizing inflows. 

The G-20’s New Thinking For the Global Economy 
NEW YORK – The Seoul G-20 summit was notable for the increasing political weight of the emerging economies. 
Not only was it located in one, but, in many ways, it was also dominated by them. 
In two crucial areas, macroeconomics and global economic development, the emerging economies’ view prevailed. 
And an excellent proposal to link the two agendas – macroeconomics and development – emerged from the summit, and should be implemented in 2011. 
A key feature of the world economy today is that it is running at two speeds. 
The United States and much of Europe remain mired in the aftermath of the financial crisis that erupted in the fall of 2008, with high unemployment, slow economic growth, and continuing bank-sector problems. 
Emerging markets, however, have generally surmounted the crisis. 
Whereas 2009 was a tough year for the entire global economy, emerging markets bounced back strongly in 2010, while rich countries did not. 
Recent data from the International Monetary Fund’s World Economic Outlook tell the story. 
During 2010, high-income countries are expected to achieve modest annual GDP growth of around 2.7%, while the G-20’s emerging economies, together with the rest of the developing world, are expected to grow at a robust 7.1% rate. 
Asia’s developing economies are soaring, with 9.4% growth. 
Latin America is expected to grow at 5.7%. 
Even sub-Saharan Africa, the traditional laggard, is expected to grow at 5% in 2010. 
This two-speed global economy largely reflects the fact that the 2008 financial crisis began with over-borrowing by the rich countries themselves. 
Two high-income economies got themselves into trouble. 
The US, where consumers – assisted by reckless lending to non-creditworthy households – had borrowed heavily to buy houses and cars, was the main culprit. 
The periphery of the European Union – Ireland, Portugal, Spain, and Greece – also began a borrowing binge a decade ago, upon joining the euro, fueling a real-estate boom that likewise went bust. 
Emerging economies, for the most part, avoided this disastrous over-borrowing. 
One reason, certainly, was the vivid memory in Asia of the 1997 financial crisis, which underscored the need for limits on bank borrowing and capital inflows. 
By and large, Asian emerging economies were more prudently managed during the past decade. 
The same can be said about Brazil, which learned from its own crisis in 1999, as well as Africa and other regions. 
In the run-up to the Seoul summit, the US government put forward a proposal that the surplus regions of the world should increase their domestic demand – mainly consumption – to boost imports and thereby help the deficit regions (including the US) to recover. 
The G-20’s emerging economies were not impressed. 
Their answer was straightforward: the crisis began with US over-borrowing, so it is America’s responsibility, not theirs, to clean up the mess. 
The US should cut its budget deficit, increase its saving rate, and generally get its own house in order. 
The emerging economies reacted similarly to a second US initiative, the Federal Reserve’s so-called “quantitative easing.” 
Emerging economies once again spoke nearly in unison. 
They told the US not to boost the money supply artificially, as this would create the risk of yet another financial bubble, this time in the emerging economies and in commodity markets. 
Once again, the clear message to the US was to stop using gimmicks like fiscal stimulus or printing money and instead undertake a serious longer-term economic restructuring to boost saving, investment, and net exports. 
For their part, emerging economies wanted to change the subject from short-term macroeconomic stimulus and imbalances to longer-term development issues. 
The host government, South Korea, was especially dynamic here. 
South Korea called on the G-20’s members to focus on challenges such as meeting the United Nations’ Millennium Development Goals, raising agricultural production, and building sustainable infrastructure in developing economies. 
This was the first time that long-term development issues had been put so clearly on the G-20 agenda, and it is a sign of the growing geopolitical weight of the group’s emerging-market members. 
The result of the deliberations is a new framework for the G-20’s engagement with the rest of the developing countries, known as the Seoul Development Consensus for Shared Growth. 
The G-20 rightly decided to focus on those areas of the global development agenda where the major economies have a comparative advantage: financing of infrastructure such as roads and power; business development; and support for agricultural upgrading in the poorer countries. 
Other parts of the development agenda – for example, health and education – will not be the G-20’s focus. 
The new G-20 development agenda offers an excellent way to merge concerns about global imbalances with the need to accelerate the pace of development in the poorer countries. 
The US has been pushing China, Germany, Japan, and others to raise consumption in order to boost demand. 
But there is a better way to put these surplus countries’ high saving rates to use. 
Rather than pushing their households to consume more, the G-20 should work harder to channel these savings to the poorest countries in order to finance urgently needed investments in infrastructure. 
India’s Prime Minister Manmohan Singh put the matter perfectly. 
He noted that sub-Saharan Africa is now in a position to absorb more capital inflows to build infrastructure. 
He recommended that G-20 surpluses be recycled to those countries, and to other poor countries, to finance such investments. 
“In other words,” said Singh, “we should leverage imbalances of one kind to redress imbalances of the other kind.” 
By channeling the savings of China, Germany, Japan, and other surplus countries into infrastructure investments in the poor countries, the world’s economies truly would be working in harmony. 

The G-20’s Next Test 
BRUSSELS – The G-20 meetings this month, first in Busan, South Korea for finance ministers, and later this month in Toronto for heads of government, mark the moment when the major players in the world economy shift gear from budgetary stimulus to retrenchment. 
Not everyone is in agreement about this. 
Before the Busan meeting, United States Treasury Secretary Tim Geithner warned against “a generalized, undifferentiated move to pull forward consolidation plans,” and emphasized the need to “proceed in step with the strengthening of the private-sector recovery.” 
But the other finance ministers did not echo Geithner’s warnings. 
Instead, they emphasized the “importance of sustainable public finances” and the need for “measures to deliver fiscal sustainability.” 
Gone is the stress on cautious, gradually phased-in exit strategies; the search for a rebalancing was almost unnoticeable in the meeting’s communiqué. 
This change affects Europe first and foremost. 
Shortly before the Busan meeting, the countries of southern Europe announced major consolidation efforts in the hope of soothing debt markets. 
Soon after this, British Prime Minister David Cameron announced “years of pain ahead,” German Chancellor Angela Merkel outlined a $100bn retrenchment plan, and French Prime Minister François Fillon a similar $80bn plan. . 
The advanced countries face a dismal budgetary situation, with deficits averaging 9% of GDP in 2009 and the prospect of public-debt ratios rising from roughly 70% of GDP prior to the crisis to more than 100% of GDP in 2015. According to IMF calculations, to reach a 60% debt ratio in 2030 would require a budgetary adjustment of almost nine percentage points of GDP on average between 2010 and 2020. 
How painful will the adjustment be? 
In the past, some countries have enjoyed tearless consolidation, because the launch of a retrenchment program was accompanied by a drop in long-term interest rates, a decline in private savings, or a surge in exports thanks to exchange-rate depreciation (or all of these at the same time). 
But conditions today are characterized by low interest rates and high private debt, so none of these are likely to help, except possibly for exchange-rate effects. 
Indeed, depreciation has already started for Europe, and many observers consider the euro’s fall, from 1.5 dollars in late 2009 to 1.2 dollars in recent days, sufficient to offset in the short term the retrenchment’s negative impact on growth. 
But this can work only as long as the US does not follow suit and continues to serve as consumer of last resort. 
This may not happen. 
Even if the US further postpones retrenchment, the US Congress is unlikely to tolerate an appreciation of the US dollar that makes European exporters more competitive and shifts the burden of sustaining the recovery onto US consumers. 
More importantly, increasingly nervous bond markets will at some point start questioning the sustainability of US public finances. 
The US fiscal position is no better than that of major European countries like Germany, France, or the United Kingdom; in fact, it is worse. 
It is only because the EU is fragmented, so markets started off by questioning the solvency of the weakest countries within it, and because Europe does not benefit from a safe-haven effect that it was the first to suffer the pressure. 
Fortunately, the public-finance situation is entirely different in the developing world, which in some cases has been hit by capital-flow reversals stemming from the collapse of world trade, but does not face an internal adjustment challenge. 
While domestic credit booms may be a threat in the future, emerging-market banks have mostly remained immune from the fallout of the financial crisis. 
As a result, domestic non-financial sectors do not face the prospect of deleveraging. 
More importantly, the fiscal challenge for these economies is of much lower magnitude than in the advanced world; in fact, it barely exists. 
The starting points are a 40% public debt-to-GDP ratio and an average budget deficit that, as a share of GDP, is four percentage points lower than in the advanced world. 
Against the background of much faster potential growth, only a minor effort is needed to keep the debt ratio around the 40% level. 
So, what if Europe and the US both enter a phase of prolonged budgetary adjustment while the emerging world stays on course? 
What if the divergence between the North and South within the G-20 widens further? 
Four consequences are likely. 
First, there will be a significant drag on world growth. 
Whatever the emerging world does to sustain domestic demand and reorient exports from advanced countries to other emerging countries, the European and US elephants (not to mention Japan) are just too big for their illness to have no effect on world growth. 
Second, the growth differential between emerging and advanced countries will widen, which will in turn intensify flows of capital and skilled labor towards the developing world. 
Third, the advanced countries will need monetary support, which implies low policy rates for years to come, while the monetary needs in the emerging and developing countries will be radically different. 
This will inevitably make fixed exchange-rate links crack under pressure as the same monetary policy cannot possibly be appropriate for both regions. 
Finally, instead of managing common challenges, as in 2009, the G-20 members will need to manage their divergence. 
This will be a major test of resilience for an institution that demonstrated effectiveness in the crisis but still has to pass the test posed by this new phase in the global economy. 
The Toronto summit will provide a first opportunity to assess the G-20’s ability to adapt to new conditions. 

The G-8’s Broken Aid Promises 
The Millennium Development Goals are the world’s agreed goals to cut poverty, hunger, and disease. 
Established in 2000, their targets were to be met by 2015. 
We are now at the halfway point. 
So far, despite endless words about increasing aid to poor countries, the rich G-8 countries are reneging on their part of the bargain. 
Cynicism abounds here. 
At the G-8 Gleneagles Summit in 2005, member countries pledged to double aid to Africa by 2010. 
Soon after the summit, I was invited to a small, high-level meeting to discuss the summit’s follow-up. 
I asked for a spreadsheet showing the year-by-year planned increases, and the allocation of those planned increases across donor and recipient countries. 
The response I received was chilling. 
“There will be no spreadsheets. 
The US has insisted on no spreadsheets.” 
The point was clear. 
Though the G-8 had made a clear promise, there was no plan on how to fulfill it; indeed, there were clear instructions that there would be no such plan. 
The G-8 is now reaping the consequences of its inaction. 
For the first year after the Gleneagles meeting, aid numbers were padded by misleading accounting on debt cancellation operations. 
With those debt cancellation operations largely completed, the data are now revealing the stark truth: development aid to Africa and to poor countries more generally is stagnant, contrary to all the promises that were made. 
Specifically, between 2005 and 2006, overall aid to Africa, excluding debt cancellation operations, increased by a meager 2%. 
In fact, total official development assistance to all recipient countries, net of debt cancellation, actually declined by 2% between 2005 and 2006. 
Even the World Bank, which usually takes the donors’ point of view, recently acknowledged that except for debt cancellation, “promises of scaled up aid have not been delivered.” 
Private reactions among senior government officials in the G-8 are surprising. 
One senior G-8 official told me that the aid promises are all lies anyway. 
I don’t agree with that, but the cynicism that such a view reflects is alarming. 
It shows the nature of discussions at the highest reaches of the G-8. 
All this would seem to be insurmountable if the basic economics were not clear. 
We are not talking about unachievable financial goals. 
Indeed, the sum of money is minuscule. 
The G-8, representing nearly one billion people, has promised to increase aid to Africa from $25 billion in 2004 to $50 billion in 2010 – a difference that represents less than one-tenth of one 1% of the income of the rich donor world! 
To put it in perspective, the Christmas bonuses paid this year on Wall Street – just the bonuses – amounted to $24 billion. 
Spending on the Iraq war, which achieves nothing but violence, is more than $100 billion per year. 
So the G-8’s commitment could be honored, if rich countries cared to honor it. 
To salvage its credibility, the G-8 needs to make crystal clear ­– once again – that it will honor its commitment to increase aid to Africa by $25 billion per year by 2010. 
That way, cynics within the G-8 governments can understand their assignments. 
Moreover, unlike in 2005, the G-8 needs to present a plan of action. 
The lack of specific commitments by specific countries is a shocking display of governance at its poorest. 
Finally, recipient countries need to be informed about the year-to-year increases in aid that they can expect, so that they can plan ahead. 
The increased aid should be directed at building roads, power grids, schools, and clinics, and at training teachers, doctors, and community health workers. 
All of that investment requires plans and years of implementation. 
Aid cannot be a guessing game. 
It must be committed in clear terms over a period of several years, so that recipients can use it in a sensible and accountable manner. 
Admittedly, part of the problem with the G-8 is not simply lack of good faith or political will, but basic competence. 
The US government doesn’t really know what it is doing in Africa, because over the years America’s aid agency has been largely emptied of its leading thinkers and strategists. 
Moreover, the Bush administration politicized the delivery of aid by channeling it through private religious groups that are part of the administration’s political coalition. 
That’s the reason that much of the US funding on AIDS follows religious strictures rather than science. 
Fortunately, what needs to be done is not complicated. 
African countries have already identified their high-priority investments in health, education, agriculture, and infrastructure (including roads, power, and internet connectivity). 
These investments could be increased systematically during the period from now until 2015, in order to enable these countries to achieve the Millennium Development Goals. 
The plans are already on the table, or at least on the shelf, waiting for the G-8 funding to arrive. 
It’s time for the rich countries to stop giving lectures to the poor, and instead to follow through on their own words. 
And G-8 citizens must hold their governments accountable for what they have pledged but not delivered. 


The Gangs of Central America 
Central America’s presidents recently met in Tegucigalpa, Honduras, to devise a united policy to deal with the region’s rampaging street gangs. 
Honduran President Ricardo Maduro, himself elected on a campaign slogan of Zero Tolerance, summed up their collective wisdom: “The gangs have internationalized and we are going to respond with force, with a strong hand.” 
The problem of juvenile gangs in Central America is not new. 
In El Salvador, the gangs became an issue at the end of the 1980’s; in Guatemala and Honduras, the gangs appeared in the first half of the 1990’s. 
Since then, their membership has multiplied. 
Most explanations of the gangs’ growth focus on two causes: the prolonged civil wars that savaged Central America during the 1980’s, and America’s deportation policies. 
These theories, however, fail to reflect local realities. 
Honduras, the country with the most serious gang problem, never had a civil war. 
Nicaragua and Mexico, which receive many deportees from the United States, have never had the number of gang members seen in El Salvador and Guatemala. 
There is no denying that the region’s civil wars and American deportations aggravate the gang crisis, but the fundamental reasons young men and women join gangs can be found in domestic social conditions. Gang members emerge out of dysfunctional and violent families, the historic and systematic socioeconomic marginalization of the region’s poor, and a culture of aggression. 
Gangs flourish because weak institutions fail to guarantee and respect the fundamental rights of children and young people. 
True, such conditions exist throughout Latin America, but elsewhere they do not have the same potency. 
Not even in Nicaragua, which shares many of the characteristics of the other countries of the region, have gangs become dedicated to killing and terrorizing the population in the way that they do in Guatemala, Honduras, El Salvador, and now in Chiapas, Mexico. 
Part of the problem lies in how Central American governments confront the phenomena. 
For many years, officials simply ignored the emerging gang problem. They were more interested in the process of political transition and putting in place the Washington Consensus. 
As a result, they disregarded social problems and devoted their energies to reforming their political and economic systems. 
Far from strengthening social institutions, this lack of attention weakened them. 
Sheltered by indifference, the gangs grew. 
Officials saw increased crime as the natural cost of war, and many predicted that as young members matured, the gangs would disappear. 
This hasn’t happened, and officials now acknowledge that they have a huge problem on their hands. 
But it wasn’t increasing homicide rates that made officials pay attention; it was the realization that the violence hurt the region’s image abroad and made it difficult to attract foreign investment. 
The response of the countries involved has been fragmented and repressive. 
Plans with names like “Strong Hand” in El Salvador, “The Broom” in Guatemala, and “Blue Liberty” in Honduras have been created to deal with the problem, but all ignore prevention, overlook the social roots of the phenomena, and concentrate on applying force. 
Instead of articulating policies to return fundamental rights to the region’s young people, Central American governments are preparing to wage war against gangs in the name of national security. 
Such policies yield substantial political benefits: they help to win elections and attract the admiration and favor of the Bush administration. 
Officials from America’s FBI and Department of Homeland Security have visited Central America to share experiences in combating gangs. 
Still, this war on gangs, like the so-called war on drugs, is only making matters worse. 
The gangs are now more organized in El Salvador because the authorities confine many of them in separate jails according to their specific group. 
This gives each gang an opportunity to recruit new members among prison inmates, elect national leaders, and establish lines of authority and decision-making that are respected by all. 
In Honduras, the gangs are more connected with organized crime, because the policy of cleaning the streets has pushed many gang members to align with drug traffickers for protection. 
And now the gangs appear to be invading southern Mexico, because Central America’s repressive policies have sent many gang members running north. 
Internationalizing the “strong hand” model across the region will incite the gangs to spread to Nicaragua and Costa Rica, which have so far been successful in preventing gang violence. 
If we continue to ignore the social conditions that create gangs, their numbers will grow. 
But the outlook for a new, sensible policy is not promising. 
At the end of the summit of Central American presidents, El Salvador’s President Antonio Saca talked about a regional prevention plan. 
Unfortunately, no one paid much attention to his idea. 

The Gaza Prison 
GAZA CITY – It is easier to enter a maximum-security prison than it is to enter the strip of land – 45 kilometers long and maybe eight wide – that is home to Gaza’s 1.5 million Palestinians. 
Surrounded by a forbidding wall, watchtowers, and deadly buffer zones, I entered with a hard-to-obtain visa at the Erez crossing – iron gates, an interrogation by bored young immigration officers and scanners. 
On the other side is a kilometer-long caged walkway that leads into this part of Palestine, trapped between Israel, Egypt, the Mediterranean, and the general indifference of the international community. 
The view walking – in sweltering heat – through that long cage is apocalyptic. 
Small groups of Palestinians smash up the remains of Gaza’s bombed industrial infrastructure – the concrete blocks that litter the sandy landscape. 
They pummel the blocks for gravel and the steel bars inside. 
The result of their labor is hauled away in carts pulled by mangy horses or donkeys. 
This is much of what passes for industry in Gaza. 
The world periodically wakes up to the horrors of life in Gaza, and then goes back to watching the World Cup or planning summer holidays. 
We were awakened, for example, by the military assault of December 2008 and January 2009, when more than 1,300 Palestinians (including over 300 children) and 13 Israelis died. 
We noticed the long-running horror story again when the Israeli Defense Forces attacked a Turkish flotilla, carrying relief supplies, in May, with nine civilian fatalities. 
You have to be careful with language when discussing Israeli actions. 
Those who argue that there is a humanitarian crisis in Gaza should not compare the situation with Ethiopia or Sudan in the middle of a drought or a war. 
Conditions in Gaza are harsh and the population does suffer. 
Israel’s government has denied that people are starving and has relaxed its import restriction regime. 
But the siege was never intended to starve Gazans; as Dov Weissglass, a former aid to Ariel Sharon, famously observed, the aim was “to put the Palestinians on a diet.” 
The intention was collective punishment, imposed partly in response to Hamas’s political control of Gaza. 
Hamas won the 2006 elections in the whole of occupied Palestine and formed a national unity government with Fatah. 
America, Israel, and much of the international community then torpedoed that arrangement. 
It was all very well having elections – until the wrong side won. 
With the changes in the import controls on Gaza – there is now a list of what cannot be taken in, rather than of what can – more goods should arrive. 
But the ability to buy the jams, muesli, balsamic vinegar, and pots of lemon curd that I saw in an up-market Gazan supermarket will not do much for ordinary people, 80% of whom depend on emergency food rations. 
Moreover, ordinary Gazans cannot rebuild their homes and schools, because building materials remain proscribed, or are dribbled in only for UN projects. 
No raw materials, which would allow the revival of Gaza’s commerce and industry, are permitted. 
This is a central part of Israel’s policy, in flat defiance of international law and customary norms of civilized behavior. 
With chocolate and cardamom now allowed into Gaza, Israel is applying a “smarter” siege, which will keep Palestinians here isolated, poor, and aid-dependent, but not starving. 
When I was in Gaza before the Second Intifada, there were many examples of entrepreneurial activity – factories and farms. 
Most of that has been stamped out. 
As the assault on Gaza ended in 2009, Israeli military bulldozers flattened factories. 
The imposition of a border zone has gobbled up 29% of the strip’s agricultural land. 
But Israel and Egypt – partners in the siege – turn a blind eye most of the time to tunnels (perhaps as many as a thousand) that snake under the Egyptian border at Rafah and bring in black-market goods, which Hamas then taxes. 
Decent would-be Palestinian businessmen (the potential backbone of a middle class) are destroyed. 
Racketeers flourish. 
Kafkaesque politics produces “Alice in Wonderland” economics. 
You see some of the humanitarian problems stemming from the siege most clearly when visiting hospitals, as I did with the charity Medical Aid for Palestinians, of which I am President. 
Life-saving drugs are in short supply, and equipment often does not work because of power cuts or the absence of spare parts. 
Seriously ill patients require permission to be treated in West Bank hospitals, and some are reportedly pressed to collaborate with Israel’s security services in return for being allowed out. 
Doctors and students can leave Gaza only rarely to attend conferences or universities abroad. 
I strongly opposed the international call a year ago to boycott Israel’s universities. 
But the Gaza blockade means that Israel boycotts Palestinian academic life. 
It is time that Israel took its boot off Gaza’s windpipe. 
Some in Israel, such as Foreign Minister Avigdor Lieberman, seem to want to cut off Gaza completely from the West Bank, in contravention of the Oslo accords (and the prospect of a two-state solution!), and push it in the direction of Egypt. 
But Gaza remains an integral part of Palestine – and a growing part. 
With its population increasing at 3.5% a year, the number of Gazans will double in about 15 years (the same timeframe in which the World Health Organization estimates that Gaza will run out of water for its population). 
What type of world will the children you see in such prodigious numbers in Gaza inherit? 
Will collective punishment make them moderate, law-abiding helots? 
History is not on the side of this immorality. 
I want to see Israel, a free, democratic society, live up to its original values and be at peace with its neighbors. 
It will not achieve this through its appalling Gaza policy. 
The world – starting with the US administration and the European Union – should tell that to Israel. 

The Gazpromization of European Energy Security 
The term “energy security” in Europe has been hijacked to empower suppliers and weaken importers, implying a drastic reduction in competition, rising political vulnerability, and the erosion of the rule of law. 
The fact that Russian President Vladimir Putin’s likely successor, Dmitry Medvedev, is Chairman of Gazprom leaves little doubt about the Kremlin’s determination to maintain an iron grip on the energy sector. 
But the asymmetry in European Union-Russian energy relations must end. 
Concerns in the EU over energy security, fueled by increasing dependence on Russia, have never been greater. 
Together with the Russian authorities’ expropriation of oil company Yukos, foreigners have been squeezed out of Russia’s energy extraction sector. 
Inevitably, many in Europe are questioning the value of the Kremlin’s word. 
Rather than turning away, the EU should seek deeper engagement and reciprocity. 
It should facilitate further incorporation of Gazprom into the EU market through market liberalization and downstream integration. 
Yet it must also press for Gazprom’s ultimate restructuring and real market entry into Russia for European companies, because Russia’s unwillingness to do so guarantees energy insecurity for Europe. 
Indeed, the Putin administration established a track record of bending rules and bullying foreign investors, with the support of prosecutors, tax authorities, regulatory agencies, and courts. 
At the same time, Gazprom has evolved into the dominant market-maker in gas for Europe, and its actions have made a mockery of EU efforts at greater collaboration with Russia. 
Gazprom strategy deploys three tactics: co-optation – cultivating partnerships with certain countries, political leaders, and corporations, as levers of its interests; preemption – using upstream power and Russian diplomacy to manipulate downstream conditions and scoop up assets; and disaggregation – dividing the EU through bilateral deals. 
Gazprom’s co-optation of Europe has been achieved mainly through Germany, where its partnerships with energy companies and banks have helped align the authorities with Russian aims. 
Extensive lobbying, directly and by proxy, is underway to persuade European regulators to allow long-term supply contracts in the EU – despite their deadening effect on competition. 
Preemption by Gazprom has been accomplished through a raft of acquisitions. 
Gazprom has flooded the market in Turkey, withheld gas in Ukraine, threatened to do so in Belarus, and offered preferential market access to willing partners, such as Italy. 
In the Caucasus, the Kremlin has prevented Iran from establishing infrastructure to compete as a supplier of gas to Europe. 
To stop Iran’s gas, Russia effectively bought Armenia’s entire energy sector, while its support for Iran’s nuclear program helps maintain Iranian isolation, keeping away the Western money Iran would need to become a rival gas exporter. 
Gazprom’s dominance is reinforced by activities coordinated with the Kremlin to assert its influence in markets like Spain and Italy. 
In exchange for gas deals with rival suppliers, such as Algeria, Russia has offered vast concessions on arms and preferential debt terms. 
In other cases, the Kremlin acts punitively, as when it cut off oil supplies to Lithuania following the sale of the Mazeikiu Nafta refinery to a Polish company, or to Ukraine after its people voted for the “wrong” party. 
The prime example of disaggregation is the Nord Stream pipeline, which appeals to Germany while angering Poland and the Baltic countries. 
The undersea pipeline will cost three times as much as a new pipeline along existing land routes, undermines the energy security of Germany’s eastern neighbors, and threatens the Baltic Sea’s fragile ecosystem. 
But, by delivering exports directly to Germany, Russia will be able to cut off gas to Ukraine, Poland, and the Baltic states without directly affecting West European supplies – and Russia’s recent behavior indicates that this is a real threat. 
But Gazprom is worried about its upstream capabilities, as is evident from the decision to divert gas from its Shtokman field to Europe rather than liquify it for new North American markets. 
As long as Gazprom remains opaque, Europe cannot know whether its key supplier is spending enough to develop future reserves. 
The Kremlin’s political battle to win control of Russia’s energy sector has resulted in a dramatic reduction in the growth rate of domestic oil and gas production. 
That is a problem for Europe. 
Gazprom cannot be a partner to Europe if it does not invest in its own infrastructure, yet plays a leading role in stripping Russian private businesses, invests $14 billion in non-core assets, such as news media, and is run from the Office of the Presidential Administration. 
The lights must not go out across Europe. 
Brussels must demand transparency, symmetry, and the rule of law from Moscow, with the goal being a revolutionary integration of European and Russian energy markets. 
Simultaneously, through the diversification of supply sources, massive investments in liquified natural gas (LNG), and a strong push in favor of the Nabucco pipeline and inter-connectors between the Mediterranean rim countries, Europe can move closer toward energy security. 
The very downstream access Gazprom wants in Europe is the EU’s trump card. 
The EU should tell Gazprom that access to Europe’s downstream assets is conditional on the reciprocal openness of Russia’s energy sector. 
The result would be a welcome place in the European energy market for a Russia that is both trusted and respected by its international partners. 

The Genetic Temptation 
A gene for social skills, we are told, has now entered the fast growing Pantheon of genes "for" various human behaviors and dispositions--taking its place alongside genes for risk-taking, happiness, aggression, and sexual orientation, among others. 
One gets the impression that we are well on the way to figuring ourselves out, and that we are far simpler than anyone imagined. 
After all, adeptness at cocktail party conversation--or addiction to the cocktails--may be no less genetically determined than hair color. 
Defining the role that genes play in behavior, however, is not so easy. 
Many of the results of human studies are highly preliminary and do not actually identify a gene. 
In fact, they cannot, for genetic experimentation on humans is impossible. 
Even in animals whose genes are more easily studied and much better understood, such as Drosophila , the tiny fruit fly, there is no simple one-to-one correspondence between gene and behavioral trait. 
Instead, a wide variety of genes influence each characteristic. 
Fruit fly genes are surprisingly similar to ours--as they are to those of most other creatures. 
Even many aspects of their behavior resemble our own. 
For example, when training a fruit fly to prefer one odor to another in a simple learning task, it will remember better if trained at repeated intervals over a long time rather than in one intense session. 
Fruit flies are not geniuses, but "cramming" works no better for them than it does for us. 
Even more recently, scientists at the Neurosciences Institute in San Diego have shown that according to all essential definitional criteria, fruit flies sleep at night. 
But those of us who study how genes affect behavior are humbled by the fruit fly's complexity. 
Moreover, fruit flies exhibit this complexity under conditions in which "nurture" is kept constant--a condition that is never true of humans. 
If the relationship between fruit fly genes and behavior is so complex, can it be any less so with humans? 
The view that an individual gene could account for a complete biological trait is as old as genetics itself. 
Whether describing genes for the color of flowers in pea plants or the shape of the fruit fly's wings, geneticists at the beginning of the last century believed that each gene governed one unique characteristic. 
Soon, a few of the early geneticists, founders of the Eugenics movement, made the odious assertion that "licentiousness," "shiftlessness," and "criminality" could all be attributed to individual genes as well. 
As time passed and scientific knowledge accumulated--much of it from the fruit fly--the true complexity of the relationship between genes and characteristics became clear. 
By the 1920s, most geneticists had abandoned the idea of a single gene for each characteristic and were loath to ascribe human behavior solely to genes. 
Those in the Eugenics movement remained hold-outs, convinced that the salvation of the human race would be found in limiting the birth-rate of those they deemed to be genetically "unfit." 
We are now in the midst of an explosion of genetic information. 
New technologies are uncovering more genes every day and comprehensive lists have been drawn up for worms, mice, and humans. 
But these species' behavior, no less than that of the fruit fly, is the product of a vast array of genes, none of which acts in isolation. 
Genes influence each other and are in turn influenced by the surrounding world. 
The result is always a unique individual. 
The reason for this is simple. 
Any creature that reproduces sexually is made up of a unique combination of its species' gene set, which it inherits from its parents. 
All humans, for example, have the same set of genes--the same genetic context--but not exactly the same versions of each gene. 
(The exceptions to this in any species are identical twins and clones.) 
These slight variations are part of what makes each of us different from other members of our species. 
The importance of genetic context has been shown in studies of behavioral mutants in fruit flies and mice. 
The same mutation may have a strong effect in one genetic context but not in another. 
Beyond genetics, all creatures experience a non-identical sequence of life events. 
This is as true for genetically identical bacteria growing in a uniform environment as it is for a person living in Paris, Tokyo, Moscow or Buenos Aires. 
Granted, the differences between any two Muscovites' experiences are greater than the differences between the experiences of any two bacteria in a test tube culture. 
But that is just the point. 
Genetically identical bacteria represent an extreme case. 
We expect them to be uniform. 
So if contingency holds for them, then it certainly holds for us. 
Genes enable life, but they clearly do not determine it. 
So the real issue is not whether we humans are servants of our genes, but rather our infatuation with the idea that our behavior could so easily be explained and predicted. 
Perhaps we should not be so eager to be relieved of the burden of reflection, evaluation, and choice--in short, of grappling with what lies at the true heart of our humanity. 

The Geopolitical Consequences of the Financial Crisis 
PRINCETON – Worried investors and policymakers are becoming obsessed with Great Depression analogies. 
But the lesson of 1931 is only in part financial or economic. 
The 1931 crisis was so big and so destructive because it was a financial drama that played out on a geo-political stage. 
Two surprising conclusions are emerging in today’s discussions, but only one has been fully digested. 
First, big public sector action is needed. 
Second, such action is complicated because in a globalized world the need for assistance spans borders. 
First, private sector solutions have been tried but have failed in a breathtakingly short space of time. 
The most frequent consolation in this failure is that a really bad crisis is purgative. 
Insolvent businesses close, bad loans are written off, and lenders can lend with new confidence again. 
Hank Paulson, who came to America’s Treasury from the strongest US investment bank, Goldman Sachs, made the purgation gamble in allowing Lehman Brothers to go under. 
He argued that the US could not tolerate a bailout culture. 
A firm denial by the government should be seen as a sign that most of the American economy is fundamentally sound, and that American financial markets are sophisticated enough to be able to identify sound business practices. 
America’s Treasury Secretary in the Great Depression was also a titan of finance, Andrew Mellon. 
Mellon’s immediate conclusion in the face of the 1929 stock market panic has subsequently become notorious: “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate… purge the rottenness out of the system.” 
It is already clear that the high risk bet of 2008 has not paid off, any more than it did in 1929. 
On the contrary, the failure to perform one rescue has made more rescues necessary: of AIG, of HBOS in Britain. 
That is unlikely to be the end. 
There are lists circulating of which institution is next on the ladder to fall off – or be picked off. 
The most appropriate analogy for this kind of mood is Agatha Christie’s “And Then There Were None …” in which each murder produces more paranoia. 
In a financial system that has become so demented, only institutions with more or less infinite resources can stem the tide. 
Such institutions can conceivably be self-help organizations, such as pools of powerful banks. 
The US Treasury indeed tried to put together such a pool on Sunday, September 14th. 
But in a climate of profound uncertainty, self-help is not enough. 
Governments or central banks are needed, because only they are both big and quick enough. 

The Geopolitical Message from Libya 
NEW DELHI – Will “mission creep” in the West’s intervention in Libya end up creating, inadvertently, a jihadist citadel at Europe’s southern doorstep? 
Of course, the Western powers must be applauded for their efforts, with the support of Qatar and the United Arab Emirates, to prevent a slaughter of Libya’s civilian population. 
The democratic world should never stand by idly while a tyrant uses military force to massacre civilians. 
But, if despots are to be deterred from untrammeled repression, any intervention – whether military or in the form of economic and diplomatic sanctions – must meet the test of impartiality. 
The current political upheaval in the Arab world could transform the Middle East and North Africa in the same way that the fall of the Berlin Wall in 1989 fundamentally changed Europe. 
Indeed, 1989 was a watershed, producing the most profound global geopolitical changes in the most compressed timeframe in history. 
But, in the decades since, the Arab world’s rulers, regimes, and practices seemed to have remained firmly entrenched. 
In 1989, Francis Fukuyama claimed in a famous essay that the Cold War’s end marked the end of ideological evolution, “the end of history,” with the “universalization of Western liberal democracy as the final form of human government.�� Yet, two decades on, the global spread of democracy has been encountering increasingly strong headwinds. 
Only a small minority of states in Asia, for example, are true democracies. 
In fact, a new bipolar, Cold War-style ideological divide has emerged. 
The rise of authoritarian capitalism – best symbolized by China, but also embraced by countries as disparate as Malaysia, Singapore, Kazakhstan, and Qatar – has created a new model that competes with (and challenges) liberal democracy. 
The popular upsurge in the Arab world shows that democratic empowerment hinges on two key internal factors: the role of security forces and the technological sophistication of the state’s repressive capacity. 
In recent weeks, security forces have shaped developments in different ways in three Arab states. 
Yemen’s popular uprising has splintered the security establishment, with different military factions now in charge of different neighborhoods in the capital, Sana. 
In Bahrain, by contrast, the monarchy has used the foreign Sunni mercenaries that dominate its police force to fire on demonstrators, who are predominantly Shia. 
In Egypt, it was the military’s refusal to side with former President Hosni Mubarak that helped end his 30-year dictatorship. 
Long used to wielding power, the military had become increasingly wary of Mubarak’s efforts to groom his son as his successor. 
Yet today’s heady talk of freedom cannot obscure the reality that the people’s “revolution” has so far led only to a direct military takeover, with the decades-old emergency law still in force and the country’s political direction uncertain. 
As for the second key internal factor, a state’s ability to police mobile and electronic communications and Internet access has become as important as jackboots and truncheons. 
China, for example, is a model of despotic efficiency: its internal-security system extends from state-of-the-art surveillance and extralegal detention centers to an army of paid informants and neighborhood patrols that looks out for troublemakers. 
In response to calls by some overseas Chinese for people to gather on Sundays at specific sites in Shanghai and Beijing to help launch a molihua (jasmine) revolution, China has revealed a new strategy: preemptively flood the protest-designated squares with police to leave no room for protesters. 
More importantly, as the world’s leader in stringent, real-time censorship of electronic communications, China is strongly placed to block any Arab contagion from reaching its shores. 
External factors are especially important in smaller, weaker countries. 
Nothing illustrates this better than Bahrain, where Saudi Arabia – which has contributed more than any other country to the spread of global jihad – sent forces under the Gulf Cooperation Council banner to crush peaceful protests. 
Indeed, Saudi Arabia’s effort to prop up the Bahraini regime parallels the Soviet Union’s intervention in Afghanistan in 1979 to bolster a besieged allied regime – an invasion that led to the multibillion-dollar, CIA-scripted arming of Afghan rebels and the consequent rise of transnational Islamic terrorists. 
Libya, too, is a weak, divided country. 
Indeed, with the CIA conducting covert operations inside Libya and aiding the rebels there, the danger is that the West could be creating another jihadist haven. 
After all, the broadening of the NATO-led mission from a limited, humanitarian goal to an all-out assault on Libya’s military signals to some Arabs that this war is really about ensuring that the region does not slip out of Western control. 
The intervention has seemingly been driven by a geopolitical imperative to bottle up or eliminate Col. Muammar el-Qaddafi so that his regime cannot exploit the political vacuum in neighboring Egypt and Tunisia. 
While it is now clear that much of the Arab world is in transition, the end point is not yet clear. 
But Barack Obama’s administration apparently has concluded that Arab monarchs are likely to survive, whereas Arab presidents are more likely to fall, and that it is acceptable for the United States to continue to coddle tyrannical kings. 
Unfortunately, this double standard sends a message that democratic empowerment in any society is possible only if it is in the interest of the great powers. 
No one has a greater interest in broad acceptance of this noxious idea – that promotion of human freedom is nothing more than a geopolitical tool – than the world’s largest, oldest, and most powerful autocracy, China. 

The Geopolitics of Football 
In football, defeat is never definitive, but it is always passionate. 
For football lovers, FIFA (the governing body of international football) should have been awarded the Nobel Peace Prize long ago. 
For others, exasperated by football and the emotions it stirs up, the sport is no longer a game, but a type of war that stokes the basest sort of nationalist emotions. 
Is there a relationship between football (and sports in general) and a spirit of nationalism and militarism? 
During the Middle Ages, sports were regularly forbidden in England because they came at the expense of military training. 
After France’s defeat by Bismarck’s Germany in the Franco-Prussian War, Baron Pierre de Coubertin (who re-launched the Olympic Games a few decades later) recommended a renewed national emphasis on sport, which by this point was seen as a form of military preparation. 
In a football match, the rituals – the flag waving, the national anthems, the collective chants –and the language that is employed (the match starts with a “breakout of hostilities,” one “bombs” the goal, blows up the defense, launches “missile”) reinforce the perception of war by other means. 
And, in fact, real war has actually broken out over football. In 1969, Honduras and Salvador clashed after a qualification game for the World Cup. 
Football matches can, it seems, revive national rivalries and conjure the ghosts of past wars. 
During the 2004 Asia Nations Cup final, which pitted China against Japan, Chinese supporters wore 1930’s-style Japanese military uniforms to express their hostility to the Japanese team. 
Other Chinese fans brandished placards with the number “300,000” written on it, a reference to the number of Chinese murdered by the Japanese army in 1937. 
But can one really say that football is responsible for the currently bad diplomatic relations between China and Japan? 
Of course not. 
Hostility on the football pitch merely reflects the existing tense relations between the two countries, which carry the weight of a painful history. 
At the opposite end of the spectrum, the dramatic semi-final between France and Germany in Seville in 1982 produced no political ripples, either for diplomatic relations between the two countries or for relations between the two peoples. 
Antagonism was confined to the stadium, and ended when the match did. 
What football really provides is a residual area of confrontation that allows for the controlled expression of animosity, leaving the most important areas of interaction between countries unaffected. 
France and Germany will soon have a common army – they already have a common currency – yet the survival of national teams channels, within a strictly limited framework, lingering rivalry between the two countries. 
Football can also be the occasion of positive gestures. 
The joint organization of the 2002 World Cup by Japan and South Korea helped accelerate bilateral reconciliation. 
The performance of the South Korean players was even applauded in North Korea. 
Sport, indeed, seems to be the best barometer of relations between the divided Korean people. 
Moreover, football, more than long speeches or international resolutions, can help induce progress towards peaceful solutions for military conflicts. 
After their qualification for this year’s World Cup, the Ivory Coast’s national team, including players from the north and south, addressed all of their fellow citizens, asking the warring factions to lay down their weapons and to put an end to the conflict that has shattered their country. 
After Haiti’s President Jean-Bertrand Aristide was overthrown a few years ago, Brazil’s football team acted as an ambassador for the United Nations’ Brazilian-led peacekeeping forces. 
And, when conflict stops, from Kosovo to Kabul, football is the first sign of a society returning to normal. 
The former president of the FIFA, Joao Havelange, often dreamed of a football match between Israelis and Palestinians: the American vice-president Al Gore regarded such a match as a means to help Washington solve the Israeli-Palestinian conflict. 
Perhaps one day it will take place. 
Certainly the Iran-United States football game in 1998 offered a moment of fraternization between the two teams. 
Another Iran-US match might be helpful at this difficult time. 
It is because football allows for symbolically limited confrontations, with no major political risks, that it is useful. 
Its impact on national and international public opinion is broad, but not deep. 
As the sociologist Norbert Elias put it: “The spectators of a football match can enjoy the mythical excitement of battles taking place in the stadium, and they know that neither the players nor they will suffer any harm.” 
As in real life, fans can be torn between their hopes for victory and their fear of defeat. 
But in football, the elimination of an adversary is always temporary. 
A return match is always possible. 
As a Frenchman, I cannot wait for the next World Cup match between France and Germany. 
But I want France to avenge its defeat at the last World Cup in Seville, not its defeat at Verdun. 

The German Tortoise and the American Hare 
CAMBRIDGE: For almost a decade Germany has searched its soul about its economic viability. 
Is there too little flexibility in our labor markets? 
Are wages too high? 
Is there too much regulation? 
How can German firms which should be world-beaters succeed if they have to fight with one arm tied behind their back by their very own government and workers? 
Of course, one would not want American ways of doing business imported here. 
Still, things have got to change. 
But the talk drones on and on without any change being decided upon. 
For a brief moment earlier this year the debate came to a grinding stop as former finance minister Oskar Lafontaine jerked the questioning onto entirely different grounds. 
Squeeze big business, that was Oskar's answer to Germany's dilemma. 
But it did take long before the corporatism underpinning Germany's economic model reasserted itself. 
Lafontaine's brief and turbulent bid for mastery in Germany, and his spectacular crash, opened a rare opportunity to see how the country's domestic interests are really aligned; what can happen and what must not take place. 
Lafontaine, it seems, had forgot that the deepest belief of German social democracy is "don't rock the boat". Don't rock the boat stepping on the toes of big business, which was Lafontaine's error, nor on union sensibilities, as Chancellor Schroeder almost did as he dickered about making a Thatcher/Blair style bid to reshape Germany's economy. 
The Economist, indeed, recently asked if Germany and Europe are really doing so bad in comparison with the United States. 
Over the past 2 decades, America has had higher growth and higher productivity growth. 
But have living standards in the US raced ahead? 
If they haven't, isn't it all the talk about the new American model just hype and bubble? 
Indeed, perhaps it is even a dangerous hype. 
Perhaps it is even possible to argue that Germany's, and Europe's, lack of competition and flexibility are the very attributes that produce long term economic performance? 
Perhaps the world economy is at a turning point, just ahead of the American bubble bursting at last, so that it is even now possible to put the US success in perspective as something that "obviously could not last", not with America's big external deficits, scant household savings, and prosperity driven by paper wealth. 
If we accept sheer GDP growth as the bottom line, yes the US has done better over the past 20 years, 2.8% on average versus 2.2% in Germany. But that is hardly something to write home about. 
Even if it means that over say half a century it makes for a 35% difference; the gap is nice but not spectacular. 
But the difference goes further: America has overcome it's #1 enemy of the past, inflation while Germany has lost the battle against its great enemy, unemployment. 
Joblessness in Germany seems here to stay. 
The US has won its battle against its enemy #2, the budget deficits that ballooned under President Reagan. 
Today, the US is running surpluses and is seeing a rapidly falling debt ratio while Germany, by contrast, has just negotiated a truce called the Waigel Pact. 
Third and most importantly, America has created vast public enthusiasm for capitalism and self-responsibility while in Germany the government is still expected to be the answer of last resort. 
In Germany ministers and the entire civil service bank on the premise that there is such a thing as a knowledgeable society and that a country with a good education has a seat in the front row. 
They have not figured out that even more important than high school education or a university degree is self-reliance, initiative and entrepreneurship; without these attributes, education is like a car on square wheels. 
It looks like the real thing, but it won't move. 
There is a nasty little story of one of Germany's mega-businesses that went shopping to buy a high tech boutique in the US. 
The domestic staff back home revolted: "we can do the same things the Americans do". 
Asked why they didn't, the staff replied "nobody asked us". 
Of course, no generalization can do better than describe the average. 
But today Germany, like Japan, is merely a finalist in midlevel technology. 
But the shift to the frontier of "cool" and "soft" and "high" tech defies Germany's disciplined and ingrained engineering culture, the organization of business where administrators predominate over greedy entrepreneurs. 

The Ghost in the Recovery Machine 
NEW HAVEN – The International Monetary Fund’s October World Economic Outlook proclaimed that, “Strong public policies have fostered a rebound of industrial production, world trade, and retail sales.” 
The IMF, along with many national leaders, seem ready to give full credit to these policies for engineering what might be the end of the global economic recession. 
National leaders and international organizations do deserve substantial credit for what has been done to bring about signs of recovery since the spring. 
The international coordination of world economic policies, as formalized in the recent G-20 statement, is unprecedented in history. 
But one also suspects that world leaders have been too quick to claim so much credit for their policies. 
After all, recessions generally tend to come to an end on their own, even before there were government stabilization policies. 
For example, in the United States, the recessions of 1857-8, 1860-61, 1865-7, 1882-85, 1887-88, 1890-91, 1893-94, 1895-97, 1899-1900, 1902-04, 1907-8, and 1910-12 all ended without help from the Federal Reserve, which opened its doors only in 1914. 
Economic theorists long ago developed models that describe how recessions end on their own. 
In his 1959 book The Business Cycle , in a chapter entitled “The Lower Turning Point,” Cambridge University economist R. C. O. Matthews summarized a host of factors that business-cycle theorists of his day argued tend to bring on recovery automatically. 
For example, demand for investment goods may rebound, especially in certain hard-hit sectors, after a recession has caused physical capital to become technologically obsolete. 
Moreover, interest rates tend to decline in a recession, even if there is no central bank, stimulating investment demand further. 
Similarly, manufacturing can expand to restore inventories depleted by over-contraction of output, while random shocks such as major innovations or harvest variations may have an asymmetric effect in a recession, with upward shocks in some sectors having a greater impact than the downward shocks in others. 
On the financial front, the failure of weaker banks in a recession leaves survivors that benefit from greater public confidence and are therefore able to resume profitable business. 
Some of these factors, rather than just the actions taken by governments and multilateral organizations, plausibly played a role in the current economic improvement. 
Unpredictable human psychology also plays a role. 
Such factors, indeed, matter very much for the economic outlook, and for judging the success of the recovery program. 
One can start with the stock-market turnaround since March of this year, which has been stunning. 
Using monthly Sampamp;P Composite data, the 38% increase from March to September was the second-largest six-month increase since 1871, surpassed only by a 71% increase from February to August 1933, during the Great Depression. 
This rebound is all the more remarkable given that it followed the second-largest six-month decrease ever, as stock prices fell 38% from September 2008 to March 2009. 
(The largest six-month decrease was, you guessed it, during the Great Depression, when the index fell 47% from November 1931 to May 1932.) 
Moreover, this same sharp turnaround occurred in many countries – and for many assets, including oil prices, gold, and, in some countries, residential real estate. 
Any solid understanding of the causes of this turnaround is likely to prove elusive. 
People are still puzzling over the reasons for other major market upturns (1933, 1982, etc.). 
A market boom, once started, can continue for a while as a sort of social epidemic, and can foster inspiring “new era” stories that are spread by news media and word of mouth. 
The stories themselves help magnify the boom, becoming part of the feedback that sustains it. 
The agreements reached at recent G-20 meetings stand as one of these stories, for they suggest a new era of international cooperation and economic professionalism – a narrative that has probably been exaggerated in the psychology of recovery. 
The G-20 story is particularly salient in the developing world, for the international recognition that the G-20’s expanded role has given to developing countries is highly resonant psychologically. 
Beyond that, stories of highly profitable banks paying huge bonuses to their executives have also inspired people to think that things are not so bad in the business world. 
Anger at these profits and bonuses only tends to increase the contagion of the story. 
But any such speculative boom is inherently unstable, as the stories evolve in time and with new shocks, whose effect on markets is most uncertain. 
It was, in fact, an excessive speculative boom in the stock market and the housing market that got us into this financial mess in the first place. 
To be sure, governments and multilateral institutions made some reasonable attempts to restore confidence. 
But they did not “engineer” a recovery. 
They got lucky, and the G-20, as well as the governments that instituted stimulus packages, are currently in a honeymoon period of apparent success. 
Where our still-ailing world economy goes from here is as uncertain as the speculative markets that played such an important role in both the financial crisis and the recovery. 
We can only wish that formulating economic policy were as clear-cut as, say, mechanical engineering. 
It is not: a host of poorly understood natural cyclical factors play a role, and so do the vagaries of human psychology. 

The Ghost of Appeasement 
PRAGUE – One of the fundamental pillars of Europe’s political architecture is a strong and enduring belief in the universal validity of equal, universal, and inalienable human rights. 
At the core of this is a belief in the rights of human beings to a life of freedom and the protection of their dignity. 
In the years after World War II, this humanist ideal became the basis of Europe’s spiritual and political identity and hence it is contained in the founding documents of the European Union. 
Of course, this does not mean that the EU could or would want to conquer the rest of the world in the name of imposing its values, rules and culture on the rest of humanity. 
Far from it. 
What Europe’s devotion to humanism does mean, however, is a determination, no matter the circumstances, to stand firm and not abandon the fundamentals of European civilization and European unification. 
As a result, Europe places a primary emphasis on the universality of human rights and freedoms. 
To be sure, there are many places around the globe where human rights and civil liberties continue to be trampled underfoot: North Korea, Iran, Burma, Tibet, Zimbabwe, and many others. 
This week, a meeting of the EU’s General Affairs and External Relations Council (GAERC) will discuss once more relations between the EU and Cuba. 
Despite repeated reminders from the EU, the Cuban government has done none of the things that the Union has been urging it to do for many years – above all, to release all political prisoners and stop the persecution of independent civil-society groups and the regime’s political opponents. 
On the contrary, the Cuban government continues to detain prisoners of conscience and to criminalize demands for a society-wide dialogue. 
This year, the peoples of Europe are marking the twentieth anniversary of the fall of the Iron Curtain that once divided Europe in two. 
That 20 years after this epochal event an iron curtain remains around Cuba makes this anniversary poignant. 
Of course, the tourists who crowd Cuba’s beaches are not aware of this iron curtain. 
But, regardless of this ignorance and of its economic interests, the EU should insist on the release of political prisoners and use all international institutions to bring pressure to bear on the Cuban government to respect the human and civil rights of Cuba’s people. 
During any negotiations with Cuba’s leaders, European politicians and diplomats should remind their Cuban partners of their obligations. 
They should also be in contact with Cuban civil society to express their solidarity with the families of the political prisoners. 
From its own experiences in the twentieth century, Europe knows what catastrophes can result when concessions are made to evil. 
The history of the twentieth century is an object lesson in this. 
Time and again, Europe paid a high price for policies of compromises with evil that were dictated by economic interests or the illusion that evil can be appeased and will disappear of its own accord. 
The EU should not and must not repeat this error. 

The Ghost of Biafra 
When Nigerian President Olusegun Obasanjo made his surprise announcement on 13 January to begin a nationwide dialogue to discuss constitutional reform, he was bowing to the inevitable. 
The clamor by disaffected politicians and human rights activists for such a conference had reached a crescendo. 
Obasanjo and the ruling Peoples Democratic Party were re-elected in May 2003 in controversial circumstances. 
Opposition forces, led by Muhammadu Buhari, the candidate of the All Nigeria People’s Party, accused Obasanjo of using the police to intimidate voters and falsify the election results. 
Initially, it looked like Obasanjo would weather the storm and serve out his last term without making concessions to his opponents. 
However, in late December 2004, the national election tribunal, sitting in Abuja, the capital, ruled that while the election had been free and fair in most parts of the country, the number of votes was larger than the population in Ogun, the President’s home state. 
The opposition seized on the ruling and called on Obasanjo to resign. 
Simultaneously, the eastern part of the country descended into anarchy. 
Political thugs linked to the president resorted to strong-arm tactics in an attempt to remove one of the governors, angry that he had not given them lucrative public contracts. 
Obasanjo refused to call them to order, even after they invaded and razed government offices. 
In the Niger delta, where oil production and official neglect have devastated the environment and wrecked livelihoods, enraged youths took to the swamps and led an insurgency against Federal troops. 
But the most powerful push for the conference came from politicians in the largely Christian south, apprehensive that power would return to the Muslim north in 2007 after Obasanjo, himself a southern Christian, completed his second term. 
Since political independence in 1960, politics has revolved round Nigeria’s major ethnic groups – the Igbo and Yoruba in the south, and the Hausa and Fulani in the north. 
Southerners’ apprehension is well founded. 
The north dominated the armed forces following the Biafra civil war in the late 1960’s. 
As military rule became the norm in Africa in the 1970’s, northern army officers imposed an authoritarian and predatory mode of governance on the country, a vicious grip that was loosened only when a resurgent civil society forced them to return to the barracks in 1999. 
Obasanjo’s election marked the return of civilian rule. 
The demand for a new constitution emulating Nigeria’s First Republic of the early 1960’s, when the country was a federation of powerful regions enjoying a large measure of fiscal autonomy, grew over the years as Nigeria’s economy plummeted. 
But Obasanjo is a passionate advocate of unitary government and counts many influential northerners as personal friends. 
The northern business and political elite see him as a bulwark against their increasingly restive southern rivals who openly threaten a repeat of the Igbo attempt to secede in 1967 that caused the Biafra conflict, taking the rich oil fields of the Niger delta with them. 
Obasanjo’s latest move, his proposed “National Political Reform Conference” in March, is an attempt to steal the opposition’s thunder. 
There will be 400 delegates, but the bulk of them nominated by the president and his party, and the government-controlled National Assembly will vet their proposals. 
The opposition has responded by calling on Nigerians to boycott the conference, arguing that it lacks legitimacy. The opposition, grouped in the Pro-National Conference Organization (PRONACO), a new umbrella coalition of political parties and human rights groups, has said it would convene an alternative national conference in June. 
PRONACO has formidable leaders in Wole Soyinka, the Nobel literature laureate, and Anthony Enahoro, an elderly politician who made his name as a fiery young nationalist in the 1940’s. 
The group’s demands include dividing the country into six or eight new regions along broad ethnic lines with powers to generate and spend revenue. 
Opposition leaders also intend to debate such issues as the rights of women and minority groups, and the place of Shari’a, the Islamic legal code, which has replaced civil courts in several northern states. 
Reformers also have the Obasanjo government’s neo-liberal economic policies, which they describe as “punitive and intellectually bankrupt,” in their sights. 
But it is PRONACO’s demand that at least 50% of the oil revenue derived from the Niger delta and other states in the south be retained in the area of production that most threatens the survival of the country’s survival as a united entity. 
The Biafra war was largely an oil war, prosecuted by northern officers and politicians to win back the delta oil fields from the Igbo. 
It is not likely that northern elites will stand by idly as a fresh attempt is made to take away what they consider a glittering prize. 
For now, the north appears divided. 
But a hardening of the mood there, and a brokered armistice between its disenchanted youth and older but vastly more experienced political war horses, will not only present PRONACO with a formidable opponent, but could throw West Africa into turmoil if matters degenerate into a frontal clash. 

The Ghost of Pinochet 
The death of General Augusto Pinochet, Chile’s former military dictator, provides perhaps an appropriate end for a year that saw the Latin American left return to glory, a revival that Hugo Chavez’s overwhelming reelection in Venezuela is but the strongest sign. 
For unlike in the days of Pinochet, fear of the left has mostly vanished across the continent. 
Indeed, the left has won in countries in which it has previously never held power. 
Despite the fact that the victories of Felipe Calderon in Mexico, Alvaro Uribe in Colombia and Alan Garcia in Peru put a stop to a supposed tsunami of Socialist victories, the trend toward the left is unmistakable. 
Chavez is no longer a lonely populist. 
In the Andean region, he is accompanied by two clones that are reheating his recipes: Evo Morales in Bolivia and Rafael Correa in Ecuador. 
In the rest of the continent, the other left - the one deemed reliable by Wall Street and London bankers - will not join Chavez’s postures, but neither will it join a crusade to unseat him. 
This other left, however, is not radical. 
The return to power from the political wilderness of Daniel Ortega in Nicaragua and Alan Garcia in Peru, two of the most demonized enemies of US foreign policy during the 1980’s, provides sardonic testimony to this. 
Ortega won thanks to an alliance with the heirs of Nicaragua’s old dictator Somoza. 
His only ideology nowadays is Daniel Ortega. 
García defeated Ollanta Humala, who would have presumably joined the drift toward Chavez. 
That the Latin American right can sleep at night despite this leftward tide is not merely the result of communism’s disappearance, nor does it mean that the US has given up its hegemonic intentions. 
The explanation lies in the fact that much of today’s left is not the left as we have known it. 
Instead, today’s left looks at growth, fiscal discipline and competitiveness with pragmatism, and not as ideological red flags. 
Its economic proposals do not define its character: it feels at ease with policies such as those followed by President Luis Inacio Lula da Silva during his first term in Brazil or those implemented by the Socialist Presidents Ricardo Lagos and Michele Bachelet in Chile. 
Easy applause can no longer be had by attacking big business or the IMF. 
Yet there is a frontier between today’s left and right, and it is found in the realm of social issues: same-sex couples and marriages, religious freedom, abortion and female equality. 
These matters have been increasing in importance, and are inciting a clash between the political forces that have just come to power and their conservative opposition. 
Foreign affairs also forms another divide. 
The Latin American left does not share George W. Bush’s view of the world. 
On global issues, it has not backed the US in the Iraq war, it does not tolerate American disdain for multilateralism and it is unwilling to join the anti-terror crusade. 
In Latin American affairs, it balks at the Free Trade Area of the Americas (FTAA) and generally wants relations with the US that allow it to promote their local initiatives. 
Right leaning rulers such as President Uribe in Colombia still like to speak about their special relationship with Bush or their backing of his foreign policy. 
President Lula and others on the left mostly prefer to hold their tongues. 
Everything suggests that the new moderate Latin American left is more political than economic. 
And it is here where its biggest challenges will emerge. 
An excessive focus on growth and macroeconomic balances can lead to frustration among those sectors that are demanding better living conditions when they raised this new social democratic left to power. 
Education - its quality more than its coverage - was a key issue in Chile’s recent presidential elections. 
The debate over the ability of growth alone to reduce poverty has become heated. 
If the new left does not manage to answer these questions satisfactorily, it will be seen as having failed. 
There is a paradox at the heart of this process: the electoral victories by the left are a clear sign of democratic maturity. 
However, even though rulers are chosen through popular vote, there are worrying signs of weakness in the region’s democratic institutions. 
Presidents are too easily re-elected or returned to power - Uribe, Lula, Chavez, Ortega, Garcia - with a consequent concentration of power and limits on the emergence of new leaders. 
Moreover, the military remains politically influential in Chile, Ecuador, Venezuela and Colombia. 
Electoral systems are precarious enough to generate pathetic situations such as that which prevailed in Mexico throughout the autumn, with its “two Presidents.” 
Parties lose ground against the caudillist adventures of people like Lopez Obrador in Mexico and Chavez in Venezuela, and congresses are assured only of public antipathy. 
Across Latin America, voters – voicing their economic hopes -- have opted for a new left. 
That left has obtained historic victories thanks to a democracy whose survival is still not guaranteed. 
So the ghost of Augusto Pinochet lingers. 

The Ghost of the Stability Pact 
Murdered when France and Germany refused to abide by its rules, the Stability Pact's ghost is haunting Europe, particularly the postcommunist countries that join the European Union in May. 
By breaking the Pact's ban on fiscal deficits exceeding 3% of GDP, France and Germany undermined this limit as a key criterion for determining whether countries are ready for eurozone membership. 
Would denial of admission to the eurozone because a country fails to fulfil rules that current members spurn really be legitimate? 
The convergence criterion on exchange rates is in similar disarray. 
Countries must remain within the European exchange rate mechanism (ERM II) for two years in order to ensure the "right" exchange rate when they adopt the euro. 
Germany satisfied the criterion with ease during 1996-8, though by most measures the Deutschemark was 20% overvalued compared to the franc and other eurozone currencies. 
This damaged Germany's economy, and continues to be a drag on growth in the whole eurozone. 
The European Commission spent the last three years trying to tighten the exchange rate criterion, which would make it an insurmountable obstacle for eurozone candidates. 
Although the criterion requires only that countries remain within the ERM's normal fluctuation band - 15% on either side of a central parity - the Commission says that it will base recommendations concerning candidate countries' admission on whether their exchange rates remain within a 2.25% band. 
The final two criteria - inflation and interest rates - are also a mess. 
A eurozone candidate's inflation must not be more than 1.5 percentage points above the average of the three best performing EU states for one year. 
But the three countries that prospective members can be compared to may be outside the eurozone. 
Indeed, in September 2003, the three "reference" countries would have been Lithuania, Poland, and the Czech Republic, were they already members of the EU (they join in May). 
Moreover, the inflation criterion fails to allow for higher inflation in services and construction in faster-growing countries. 
But such inflation represents a natural adjustment of relative prices resulting from faster growth. 
It harms no one, and should not be penalized. 
Finally, the interest rate criterion requires that rates on 10-year government bonds not be more than two percentage points above the rates in the three countries performing best in terms of inflation . 
Again, these could easily prove to be three new EU members outside the eurozone. 
Here is the core problem: the criteria were devised when the eurozone did not exist. 
Four large countries and several small ones had to be brought into nominal convergence to ensure that the anchor of a common currency did not rip their economies apart. 
But the small countries now wishing to join the eurozone, which together make up 6% of the zone's economy, cannot impose significant damage on existing members were they to get convergence wrong, let alone anything like the damage caused by Germany joining with an overvalued currency. 
In any case, the Stability Pact's death means that a new fiscal framework is needed. This means that new convergence criteria are needed too. 
For the inflation and interest rate criteria, one possibility is to require the same margins as now, but over the average for the entire eurozone. 
However, the possibility that rapid growth might generate higher inflation in fast-growing accession countries suggests that a slight increase in the permitted inflation margin - to, say, 2.5 percentage points - should be allowed. 
On the exchange rate, a narrow fluctuation band should be avoided. 
I suggest creating an "ERM light." 
As at present, there would be a central rate with a fluctuation band of 15% on either side to guide market expectations. 
However, intervention would not be required at these margins. 
If the margins were exceeded, members would consider re-alignment. 
The exchange rate criterion could be assessed later on the basis of a narrower band, as the European Commission proposes, although a limit of 6% fluctuation on either side of the central parity seems more reasonable than 2.25%. 
Intervention inside the narrow band would be discouraged (banned?), so that rather than trying to force the foreign exchange market to fit the policies of a candidate country, we would be "listening" to what markets say about the best rate for conversion to the euro. 
The result might be a longer stay within the new ERM, but without the crises that the original eurozone members suffered. 
It would certainly be better than joining the euro at a disastrously overvalued rate, as Germany did. 
The hardest challenge is redefining the fiscal criterion, but one thing is clear: it would be absurd if candidates had to pass a test that was never applied after entry. 
If fiscal rules are unnecessary, then a fiscal convergence criterion is also unnecessary. 
Of course, most economists believe that fiscal rules are needed to prevent some countries from free riding on low interest rates and running up debt to what would otherwise be unsustainable levels. 
But equality requires that any new accession criterion must be based on the fiscal rules that actually operate within the eurozone. 

The Ghosts of Economics Past 
In Charles Dicken's great novel "A Christmas Carol," the soulless businessman Ebeneezer Scrooge is tormented by a visit from the Spirit of Christmas Past. 
Today, economists are similarly troubled by unwanted ghosts, as they ponder the reappearance of economic ills long thought buried and dead. 
From Stephen Roach at Morgan Stanley to Paul Krugman at Princeton, to the Governors of the US Federal Reserve and the senior staff at the European Central Bank, to almost everyone in Japan, economists all over the world are worrying about deflation. 
Their thoughts retrace the economic thinking of over fifty years ago, a time when economists concluded that the thing to do with deflation was to avoid it like the plague. 
Back in 1933 Irving Fisher --Milton Friedman's predecessor atop America's monetarist school of economists-- announced that governments could prevent deep depressions by avoiding deflation. 
Deflation --a steady ongoing decline in prices-- gave businesses and consumers powerful incentives to cut spending and hoard cash. 
It reduced the ability of businesses and banks to service their debt, and might trigger a chain of big bankruptcies that would destroy confidence in the financial system, providing further incentives to hoard. 
Such strong incentives to hoard rather than spend can keep demand low and falling, and unemployment high and rising, for a much longer time than even the most laissez-faire-oriented politician or economist had ever dared contemplate. 
Hence the Keynesian solution: use monetary policy (lower interest rates) and fiscal policy (expanded government spending and reduced taxes) to keep the economy from ever approaching the precipice where deflation becomes possible. 
But if this is an issue solved over fifty years ago, why is it haunting us now? 
Why is this menace a matter of grave concern in Japan today, and a threat worth worrying about in the US? 
In the late 1940s, those present at the creation of the post-World War II international economic order tried to create an international monetary system that would (a) allow for exchange rates stable enough for producers and consumers to escape the risks of excessive and irrational exchange rate fluctuations, (b) allow countries to follow their own domestic macroeconomic policies, and (c) prevent the catastrophic panics affecting not just individual banks but whole countries that produced the destructive international financial crisis of the Great Depression. 
The result was the fixed-but-adjustable exchange rate system of Bretton Woods, which over time mutated into the floating-rate system of the 1980s. 
Then came the 1990s. 
All of a sudden tremendously destructive herd-driven financial crises were back: Mexico, Thailand, Korea, Brazil, and so on looked like nothing as much as the US financial panic of 1873 or the Austrian Creditanstalt crisis of 1931. 
Argentina's crisis at the end of 2001 looked remarkably like Argentina's Baring Brothers crisis of 1890 -- save that politicians and international bankers seem to have had a much better idea of what to do to minimize the damage in 1890 than they do today. 
But if those who built the post-World War II international monetary system worked to guard against the dangers posed by panic-driven international financial crises, why are these financial devils back? 
The truth is that economic policymakers are juggling sets of potential disasters, exchanging the one that appears most threatening for a threat that seems more distant. 
In the US, the Bush Administration is skeptical of the stimulative power of monetary policy and wants bigger fiscal deficits to reduce unemployment, hoping that the future dangers posed by persistent deficits -- low investment, slow growth, loss of confidence, uncontrolled inflation and exchange rate depreciation-- can be finessed, or will not become visible until after the Bush team leaves office. 
In Europe, the European Central Bank believes that the danger of uncontrolled inflation following a loss of public confidence in its commitment to low inflation outweighs the costs of European employment that is far too high. 
In developing countries, capital controls to prevent financial crises are feared as obstacles to attracting the finance necessary for industrialization, and as potential sources of corruption as financial flows somehow pass through the hands of the Vice Minister of Finance's nephew-in-law. 
Flexible exchange rates, designed to allow the market to signal when confidence in the currency is declining, also put exporters at a competitive disadvantage against foreign-country producers whose prices aren't batted around by unpredictable exchange rates. 
Even the import-substitution policies, now universally scorned, were originally adopted by the developing world for good (as well as bad) reasons: the protectionist shutting-off of developed-country markets during the Great Depression which had disastrous consequences for the developing economies. 
The ghosts of economics' past return because the lessons of the present are always oversold. 
Politicians and policymakers advance their approach to economics as the "One True Doctrine." 
But what they are doing, however, is dealing with the biggest problem of the moment but at the price of removing institutions and policies that policymakers before them had put into place to control problems which they felt to be the most pressing. 
Ebeneezer Scrooge's nocturnal visitors were able to convince him of the errors of his ways. 
Let's hope that today's economists also learn the lessons of their unwanted ghosts. 


The Ghosts of Summits Past 
PRINCETON – The world is confronted by a dramatic financial crisis that many policymakers believe is more severe than the interwar Great Depression. 
Before 2008, experts said that a new Great Depression was impossible because of the strength and the depth of the cooperative mechanisms set up at the end of World War II. 
The G-20 summit has thus created enormous expectations that internationalism may once again overcome a plethora of economic problems. 
Unfortunately, the magnitude of the expectations alone suggests that disappointment is almost certain. 
The symbolism of the location is unfortunate, as it carries a reminiscence of the main abortive attempt to manage the world economy during the Great Depression. 
The 1933 World Economic Conference also met in London, at the Geological Museum, with an even broader range of participants from 66 countries. 
The participants at the 2009 summit may not visit the Geological Museum, but they will have to deal with the specter of conferences past, for the failure in 1933 offers important lessons for our current leaders. 
First, as with the G-20 summit, everyone expected the London Conference to fail. 
The plenary meeting was paralyzed by the way in which the preparatory commissions had worked. 
Monetary experts argued that an agreement on currency stabilization would be highly desirable, but that it required a prior agreement on the dismantling of trade barriers – all the high tariffs and quotas that had been introduced in the course of the depression. 
Trade experts met in parallel and made the mirror image of this argument. 
They agreed that protectionism was obviously a vice, but thought that it was a necessary one that could not be addressed without monetary stability. 
Only leadership by a determined great power, prepared to sacrifice its particular national interests in order to break the resulting impasse, might conceivably have saved the meeting. 
But such leadership was as unlikely then as it is now. 
Indeed, the second lesson of the London Conference of 1933 consists in governments’ unwillingness in times of great economic difficulty to make sacrifices that might entail a short-term cost. 
Even if the result would have been longer-term stability, the immediate political consequences were too unpleasant. 
In adverse economic circumstances, governments felt vulnerable and unsure, and they could not afford to alienate public support. 
Finally, faced by a realization of inevitable failure, participants look for a scapegoat. 
The 1933 Conference looked like a classic detective novel in which every party had a reason to be a suspect. 
Britain and France had turned away from internationalism, adopting trade systems known as “Imperial Preference,” which favored their vast overseas empires. 
Germany’s president had just appointed Adolf Hitler’s radical and aggressive government. 
The German delegation was led by Alfred Hugenberg, who was not a Nazi but wanted to show that he was an even more implacable nationalist than Hitler himself. 
The Japanese government had just sent troops into Manchuria. 
Of all the major powers in London, the United States looked the most reasonable and internationalist by far. 
It had a new, charismatic president, who was known as an Anglophile and a cosmopolitan spirit. 
Franklin Roosevelt was already taking vigorous action against the depression, and was trying to reorder the failed US banking system. 
Roosevelt did not know what line to take at the conference, and his stream of advisers offered inconsistent counsel. 
At last, he lost patience and announced that for the moment the US had no intention of stabilizing the dollar. 
This message, delivered on July 3, 1933, was known as “the bombshell.” 
Roosevelt talked about the need to restore “the sound internal economic system of a nation” and condemned the “old fetishes of so-called international bankers.” 
Everyone pretended to be shocked at the failure of internationalism. 
But, at the same time, they were delighted to have found someone who could be blamed for the failure of the conference. 
In 2009, we face a similar set of circumstances. 
The lines of conflict have been clearly drawn in advance. 
The US wants the world to embark on macroeconomic stimulus programs, and thinks that the complicated task of reinventing and reordering financial supervision and regulation can wait. 
Many European countries cannot afford a stimulus package, owing to overstretched public finances, and instead want to make progress on the international regulation of banking. 
The alibis for failure are also already prepared. 
The new summit is unlikely to produce either a coordinated stimulus package or a detailed blueprint for a foolproof system of financial regulation. 
Throughout the meeting, participants will be waiting for the moment when one of the leaders (maybe Angela Merkel) loses patience and makes the obvious and true remark that the process is a waste of effort. 
Then everyone will denounce this honest politician for having wrecked internationalism. 
In the 1930’s, it was the autocratic and belligerent governments of Germany and Japan that could derive the most capital from the failure of the London conference. 
Failure at today’s London conference is also likely to be used as a rhetorical weapon against the large Western governments, and to provide a rationale for implementing new forms of state capitalism. 

The Global Cost of Turkey’s Crisis 
Turkey will hold its parliamentary election in July, four months earlier than scheduled, thereby narrowly avoiding a constitutional crisis over the choice of the country’s next president. 
Nonetheless, Turkey’s bout with political instability has damaged its foreign policy and international standing. 
At the center of the storm are Prime Minister Recep Tayyip Erdogan, head of the moderately Islamist Justice and Development Party (AKP), and Yasar Buyukanit, Chief of the General Staff of the Turkish military, which regards itself as the guardian of the secular republican tradition established by Kemal Ataturk. 
When Erdogan contemplated moving from the prime minister’s job to the presidency earlier this spring, the military and secular political parties indicated profound dissatisfaction. 
General Buyukanit said in April that the country’s new president must be secular “not just in words, but in essence.” 
Having met and conversed with Erdogan on more than one occasion, I found him a moderate and reasonable man. 
Moreover, the AKP has broad support among Turkish voters and an admirable record of economic growth, human rights legislation, and improvement in the treatment of Turkey’s Kurdish minority. 
Foreign Minister Abdullah Gul, a close associate of Erdogan in the AKP, pressed Turkey’s application to join the European Union. 
So when Erdogan decided to nominate Gul as the AKP candidate for the presidency, I was surprised by the strength of the secularist opposition. 
The secular establishment argues that the AKP’s moderation thus far reflects the checks and balances implied by secularist control of the presidency. 
They argue that if the AKP comes to control the presidency, it may no longer pursue moderate policies. 
Secularists point with concern to other AKP, such as Speaker of the Parliament Bulent Arinc, who are noted for their pronounced religious and social conservatism. 
When the Turkish Parliament attempted to elect the president on April 27, Gul did not receive enough votes to win on the first ballot. 
The main opposition party argued that the vote was invalid, and the General Staff issued a statement that it was “watching this situation with concern.” 
Massive public demonstrations were held in Istanbul to support Turkey’s Kemalist secular tradition. 
The issue went to Turkey’s highest court, which annulled the parliamentary vote, effectively blocking Gul’s candidacy, resulting in Erdogan’s decision to call an early election. 
These events were closely watched in Washington and Brussels. 
The United States had been pressing the EU to advance Turkey’s application for admission, but Turkish membership was already controversial in several EU countries. 
This reflects concerns about Turkey’s Muslim culture and its large population, as well as concern that any further enlargement will overly dilute the European project. 
Now opponents of Turkey’s EU accession bid have seized upon recent events to argue that the country does not meet the democratic standards necessary for full membership. 
They point out that Turkey’s military has ousted four elected governments since 1960, and continues to play an inappropriately large role in Turkish politics. 
While the high court decision and the appeal to the electorate means that Turkish democracy has dodged a bullet for now, the progress of Turkey’s EU accession negotiations has been further slowed. 
This is unfortunate for both Turkey and Europe. 
With a slowdown in accession negotiations, Turkish politicians will have less incentive to continue the reforms necessary for membership. 
Turkey suffers from nationalist sensitivity, and extremist groups have orchestrated several unfortunate incidents, including attacks on minorities and harassment of cultural figures like the Nobel Prize-winning novelist Orhan Pamuk. 
If Turkey pulls away from Europe, the EU’s claim that it successfully wields “soft power” in world politics will be powerfully undermined. 
In the larger picture, Turkey is not only an important member of NATO, with influence both in the Balkans and the Middle East, but it also plays a vital role in the wider world. 
One of the crucial questions of twenty-first century politics will be how the world copes with the rise of political Islam. 
For radical Islamists (and some Westerners), the rise of Islam sets the scene for a “clash of civilizations,” which they welcome as a polarizing device that will allow them to recruit from the much larger Muslim mainstream. 
But Turkey has the potential to show the shallowness of such a scenario by demonstrating the compatibility of liberal democracy and Islam. 
Unfortunately, this appears to have been lost on the neo-conservatives in the Bush administration, for whom it was the invasion of Iraq and its liberation from Saddam Hussein that was supposed to provide a beacon for a wave of democratization that would transform the Middle East. 
What they produced instead was an “electocracy” that, in the absence of liberal institutions, replaced the tyranny of the Sunni minority with a tyranny of the Shiite majority and a religious sectarian civil war. 
Indeed, the invasion of Iraq also hurt Turkey, both economically and by strengthening the base for the Kurdish terrorist PKK organization operating from northern Iraq. 
The result has been a dramatic increase in anti-Americanism in Turkish politics. 
If the neo- conservatives had instead focused their attentions on strengthening the soft power of Turkey, they could have done far more to advance the cause of democracy in the Middle East. 

The Global Economics of Desire 
How concerned should advanced countries be about the outsourcing of manufacturing to China or software development to India? 
Fear of jobs lost to low-wage countries strikes a populist chord, but misses a vital point: the prosperity of developed countries depends primarily on entrepreneurship. 
After all, no economy can raise living standards forever through innovations that make production of existing goods more efficient. 
In the short run, increased efficiency reduces the cost of a good or service, so people consume more of it. 
But eventually, consumers refuse to buy more even if prices continue to fall. 
After that, further efficiencies require shedding workers. 
Creating and satisfying new consumer desires keeps the system going by absorbing the labor and purchasing power released by the increasingly efficient satisfaction of old ones. 
At the other end of this process, producers who satisfy old desires continue economizing, because they compete for employees and consumers with producers who satisfy new desires. 
Similarly, outsourcing to low-wage countries improves living standards only if the human capital released can be used to make new goods and services. 
Otherwise, outsourcing merely reduces demand for domestic labor, just like other efficiency gains. 
For many advanced countries, expansion of markets for new goods and services facilitates - and has been facilitated by - imports from low-wage countries. 
More than half of all manufactured goods consumed in the US are made abroad, particularly low technology, mass-produced labor-intensive products. 
Virtually all the toys and shoes sold in the US are made in the Far East. 
China alone accounts for 86% of the US bicycle market. 
Resources released by these imports fostered the growth of industries that satisfy new needs. 
Cheap Asian televisions gave Western households the wherewithal to purchase PC's powered by Intel microprocessors and Microsoft software, which are designed by engineering graduates who would otherwise have worked for TV manufacturers. 
To be sure, the speed and magnitude of the integration of nearly a billion Chinese and Indian workers into global labor markets is unprecedented and will hurt some workers and communities in developed countries. 
But as long as these economies churn out new desires, outsourcing represents an opportunity for prosperity on both sides. 
The problem, of course, is that producers of new goods and services do not create jobs at exactly the same rate as efficiency gains or imports reduce the demand for labor. 
Following the Internet boom of the late 1990's, job creation slowed, while efficiency improvements continued to reduce the labor required by the "old" goods and services. 
Nor does the usual argument for free trade apply. 
Low-cost call centers in India or Chinese made bicycles do not reflect any "natural" comparative advantage. 
Rather, costs are low because for almost two centuries colonial powers and then domestic governments hobbled markets and restricted international trade, leaving a legacy of wages so low that they offset weaker productivity. 
Moreover, exports to low-wage countries cannot compensate for job losses. 
A Chinese worker simply cannot buy the same goods and services as a worker in the EU, and workers in low-wage countries spend only a small portion of their incomes on EU products. 
As incomes in China grow, imports from other low or middle-income countries rise faster than imports from high-wage countries. 
China's trade surplus with the US exceeds $100 billion, but it runs a deficit with India. 
Uncertainty about jobs breeds anxiety, and anxiety stokes protectionist sentiments. 
But, apart from a few industries, such as toys and bicycles, far fewer jobs are lost to imports than to efficiency improvements. 
Manufacturing employment in the US fell in 2003 to its lowest level since 1964, but thanks to a tripling in output per worker, total manufacturing output was roughly three times larger. 
Pressure to reduce costs in the recent downturn may have accelerated the movement of jobs to low-wage locations, but this accounts for only 15-35% of the decline in employment since the downturn began. 
The Austrian economist Joseph Schumpeter attributed the boom-and-bust cycles of the 19th century to periodic bursts of "creative destruction" followed by lulls in innovative activity. 
More effective use of counter-cyclical policies may have subsequently smoothed out the economic cycle, but this cannot explain why productivity and incomes also grew more rapidly than in the 19th century. 
Standard supply-side arguments fare no better. 
After all, tax rates were higher in the 20th century and regulation more extensive. 
A critical factor is large scale, non-destructive creation. 
Inventions from 1850 to 1900 may well overshadow those of the entire 20th century, but they were the result of a few inventors, such as Thomas Edison, who satisfied a small wealthy clientele. 
In the 20th century, many entrepreneurs, large companies, financiers, and inventors developed products and services for the masses. 
Moreover, their innovations created and satisfied many new consumer desires. 
Airplanes, for instance, didn't reduce demand for automobiles: people fly when they would not otherwise have driven. 
These new mass markets sustained a steady increase in average incomes and total employment. 
Simply put, the long-term prosperity of developed economies depends on their capacity to create and satisfy new consumer desires. 
Provided this capacity remains in good repair, job "losses" - through improvements in the efficiency of domestic production or through outsourcing to low-wage countries - will enhance standards of living. 
But if this capacity is impaired, neither the low road of protection nor the high road of free trade can do much good. 

The Global Economy’s Corporate Crime Wave 
NEW YORK – The world is drowning in corporate fraud, and the problems are probably greatest in rich countries – those with supposedly “good governance.” 
Poor-country governments probably accept more bribes and commit more offenses, but it is rich countries that host the global companies that carry out the largest offenses. 
Money talks, and it is corrupting politics and markets all over the world. 
Hardly a day passes without a new story of malfeasance. 
Every Wall Street firm has paid significant fines during the past decade for phony accounting, insider trading, securities fraud, Ponzi schemes, or outright embezzlement by CEOs. 
A massive insider-trading ring is currently on trial in New York, and has implicated some leading financial-industry figures. 
And it follows a series of fines paid by America’s biggest investment banks to settle charges of various securities violations. 
There is, however, scant accountability. 
Two years after the biggest financial crisis in history, which was fueled by unscrupulous behavior by the biggest banks on Wall Street, not a single financial leader has faced jail. 
When companies are fined for malfeasance, their shareholders, not their CEOs and managers, pay the price. 
The fines are always a tiny fraction of the ill-gotten gains, implying to Wall Street that corrupt practices have a solid rate of return. 
Even today, the banking lobby runs roughshod over regulators and politicians. 
Corruption pays in American politics as well. 
The current governor of Florida, Rick Scott, was CEO of a major health-care company known as Columbia/HCA. 
The company was charged with defrauding the United States government by overbilling for reimbursement, and eventually pled guilty to 14 felonies, paying a fine of $1.7 billion. 
The FBI’s investigation forced Scott out of his job. 
But, a decade after the company’s guilty pleas, Scott is back, this time as a “free-market” Republican politician. 
When Barack Obama wanted somebody to help with the bailout of the US automobile industry, he turned to a Wall Street “fixer,” Steven Rattner, even though Obama knew that Rattner was under investigation for giving kickbacks to government officials. 
After Rattner finished his work at the White House, he settled the case with a fine of a few million dollars. 
But why stop at governors or presidential advisers? 
Former Vice President Dick Cheney came to the White House after serving as CEO of Halliburton. 
During his tenure at Halliburton, the firm engaged in illegal bribery of Nigerian officials to enable the company to win access to that country’s oil fields – access worth billions of dollars. 
When Nigeria’s government charged Halliburton with bribery, the company settled the case out of court, paying a fine of $35 million. 
Of course, there were no consequences whatsoever for Cheney. 
The news barely made a ripple in the US media. 
Impunity is widespread – indeed, most corporate crimes go un-noticed. 
The few that are noticed typically end with a slap on the wrist, with the company – meaning its shareholders – picking up a modest fine. 
The real culprits at the top of these companies rarely need to worry. 
Even when firms pay mega-fines, their CEOs remain. 
The shareholders are so dispersed and powerless that they exercise little control over the management. 
The explosion of corruption – in the US, Europe, China, India, Africa, Brazil, and beyond – raises a host of challenging questions about its causes, and about how to control it now that it has reached epidemic proportions. 
Corporate corruption is out of control for two main reasons. 
First, big companies are now multinational, while governments remain national. 
Big companies are so financially powerful that governments are afraid to take them on. 
Second, companies are the major funders of political campaigns in places like the US, while politicians themselves are often part owners, or at least the silent beneficiaries of corporate profits. 
Roughly one-half of US Congressmen are millionaires, and many have close ties to companies even before they arrive in Congress. 
As a result, politicians often look the other way when corporate behavior crosses the line. 
Even if governments try to enforce the law, companies have armies of lawyers to run circles around them. 
The result is a culture of impunity, based on the well-proven expectation that corporate crime pays. 
Given the close connections of wealth and power with the law, reining in corporate crime will be an enormous struggle. 
Fortunately, the rapid and pervasive flow of information nowadays could act as a kind of deterrent or disinfectant. 
Corruption thrives in the dark, yet more information than ever comes to light via email and blogs, as well as Facebook, Twitter, and other social networks. 
We will also need a new kind of politician leading a new kind of political campaign, one based on free online media rather than paid media. 
When politicians can emancipate themselves from corporate donations, they will regain the ability to control corporate abuses. 
Moreover, we will need to light the dark corners of international finance, especially tax havens like the Cayman Islands and secretive Swiss banks. 
Tax evasion, kickbacks, illegal payments, bribes, and other illegal transactions flow through these accounts. 
The wealth, power, and illegality enabled by this hidden system are now so vast as to threaten the global economy’s legitimacy, especially at a time of unprecedented income inequality and large budget deficits, owing to governments’ inability politically – and sometimes even operationally – to impose taxes on the wealthy. 
So the next time you hear about a corruption scandal in Africa or other poor region, ask where it started and who is doing the corrupting. 
Neither the US nor any other “advanced” country should be pointing the finger at poor countries, for it is often the most powerful global companies that have created the problem. 

The Global Economy’s Dialogue of the Deaf 
CHICAGO – As governments do more to try to coax the world economy out of recession, the danger of protectionism is becoming more real. 
It is emerging in ways that were unforeseen by those who founded our existing global institutions. 
Unfortunately, the discussion between countries on trade nowadays is very much a dialogue of the deaf, with countries spouting platitudes at one another, but no enforceable and verifiable commitments agreed upon. 
There is an urgent need to reform global institutions – and more dramatically than envisaged by the G-20 thus far. 
Protectionism is not just about raising tariffs on imports; it is any government action that distorts the global production and allocation of goods, services, and capital to favor domestic producers, thereby reducing overall efficiency. 
So, for example, government pressure on multinational banks to lend domestically, or to withdraw liquidity from foreign branches, is protectionism, as are capital injections into multinational companies with the explicit requirement that domestic jobs be preserved. 
Such actions are problematic not only because they insulate inefficient forms of production, but also because foreign countries respond by adopting similar measures towards their national champions, so that everyone is worse off. 
The number of inefficient workers protected by these measures is offset by the number of efficient workers laid off by foreign multinationals responding to political pressures in their home country. 
Perhaps of greatest concern, moreover, is that the public, especially in poor countries that cannot undertake offsetting measures, will come to distrust global integration, with multinationals viewed as Trojan horses. 
In addition to explicit protectionist measures, governments now plan actions that will affect others across the globe. 
For example, the large volume of public debt that industrial countries will issue will undoubtedly raise interest rates and affect developing country governments’ borrowing costs. 
There is little dialogue about how industrial country issuances can be staggered to minimize the impact on global markets, and what alternatives can be developed for countries that are shut out. 
If developing countries are left to their own devices, they will conclude that they should self-insure by rebuilding foreign-exchange reserves to even higher levels, a strategy that has clearly hurt global growth. 
We need a moderate-sized representative group of leaders of the world’s largest economies to meet regularly to discuss such issues, informed by an impartial secretariat that will place its analyses before the group. 
Initially, the group should only exert peer pressure on its members to comply with international responsibilities. 
But, as confidence in the group’s decision-making – and in the impartiality of the secretariat – improves, members might give it some teeth, such as the ability to impose collective economic sanctions on recalcitrant members. 
The United Nations is too large to serve this purpose, and the most obvious candidate for the group, the G-20, is not representative. 
There is, however, a representative alternative – the International Monetary and Financial Committee (IMFC), a group of finance ministers and central bank governors that meets twice a year to advise the International Monetary Fund. 
While the IMFC could be shrunk (for example, if euro-zone countries agree to a common seat), the real challenge is to make it a venue in which countries talk to one another rather than at one another. 
To meet this goal, some changes would be in order. 
First, the frequency of meetings should be increased, especially in times of crisis, and the level of a few of these meetings enhanced. 
So, for example, two meetings a year at the head-of-government level and quarterly meetings at the finance-minister level (with more at the deputy-minister level) would provide ample time for dialogue, and thus for trust-building, and would allow the commitments made by the heads of government to be monitored. 
Second, the IMF’s permanent Executive Board, established in an era when travel was costly and communications difficult, and consisting of mid-level government functionaries, should be abolished. 
Important decisions should be vetted by the IMFC and others delegated to IMF management. 
Current executive directors typically do not have the authority to make commitments on their countries’ behalf, so their effort is often diverted to minutiae. 
And, in an attempt to preserve its turf, the Board constantly attempts to keep the IMFC from discussing anything of substance. 
Third, the obvious secretariat is the IMF. 
Unfortunately, the Fund is not regarded as being impartial, especially by countries that have been seared by its past conditionality. 
The IMF has, however, become far more neutral than it is given credit for – though it could take more steps to distance itself from its past. 
These include abolishing any region or country’s right to appoint IMF management; allowing the Fund to borrow from markets, so that it does not have to keep seeking key countries’ permission to expand; eliminating any country’s official veto power over major decisions; and having its agenda set by the IMFC rather than outside bodies. 
Industrial countries should be happy that developing countries would take greater responsibility for global economic outcomes, rather than simply sulking about their lack of voice and representation. 
Developing countries, in turn, would gain greater voice, but would also be forced to contribute ideas (and resources) to deal with global problems. 
And maybe, just maybe, we would preserve faith in globalization. 

The Global Economy's Gathering Storm 
MUNICH – From 2004 to 2007, the world economy experienced an unusually long and strong boom, with growth rates of nearly 5% and with many countries participating. 
The European Union (EU15) recorded 2.4% growth on average during these years. 
In Germany, where growth averaged 1.8% during this period, some journalists proclaimed a new economic miracle. 
Now, however, increasingly bad news is giving rise to serious doubts; dark clouds are hovering over the United States, in particular. 
Is the world economy on the brink of recession? 
In the US, real-estate prices remain in free fall, and the banking crisis is still claiming new victims (Bear Stearns, IndyMac, First Heritage Bank, First National Bank of Nevada, First Priority Bank, Fannie Mae, Freddie Mac, etc.). 
In the banking world as a whole, expected write-offs now considerably exceed the €400 billion mark projected just last spring. 
Unemployment, moreover, is rising at its fastest rate in seven years. 
Overall employment, which is still high in historical terms, has been declining continuously since the beginning of 2008. 
It is surprising that America’s stock market hasn’t crashed yet, since all other indicators are pointing downward. 
The Standard ampamp; 
Poor’s price/earnings ratio recently stood at around 20, well above the long-term average of around 16 since 1881. 
Disturbing signals for the world economy have also come from recent surveys of economic activity. 
The Ifo World Economic Climate index deteriorated in the third quarter of 2008 for the fourth consecutive time. 
That decline was primarily the result of more unfavorable appraisals of the current economic situation, but also reflected another downward revision of expectations for the next six months. 
Today, the index is at its lowest level since the fourth quarter of 2001. 
The cooling of the Ifo World Economic Climate index was particularly marked in Western Europe and Asia. 
This has dispelled hopes that Asia economic activity could develop separately from that of the US, thereby offsetting European exporters’ losses in America. 
In the third quarter of 2008, the Ifo index for Asia was at its lowest level since the attack on the World Trade Center in 2001, with particularly poor economic assessments coming from Japan. 
In the US, the climate indicator declined again, after having sunk dramatically in the second quarter, bringing it to its lowest level since 1991. 
The University of Michigan’s Consumer Sentiment Index fell in June 2008 to its lowest level in decades and has since recovered only insignificantly. 
Also for the euro area, the Ifo Economic Climate index registered a dramatic decline. 
Europe’s largest economy, Germany, is now going into the doldrums. 
The Ifo Business Climate index, which, though based on a survey for Germany, is regarded as Europe’s most important economic activity indicator, has been falling with few interruptions since the autumn of last year. 
It is now clearly in territory that implies an economic downturn. 
In addition, export expectations for German manufacturing are heading south. 
Incoming orders in manufacturing, the most important indicator in the official statistics, fell more sharply in the first two quarters of 2008 than at any time since the beginning of 1993. 
In the second quarter, the German economy shrank at an annualized, seasonally and calendar adjusted rate of 2%. 
All in all, there is now hardly any doubt that the economic upturn in Germany that began in the summer of 2005 is now coming to an end. 
Amid this gloomy outlook, we anxiously look for encouraging signs. 
The price of crude oil, which hit a record level of $148 a barrel in July, has since fallen almost 25%, or $36. 
Whether recent developments in America’s economy give reason for hope is now the question. 
With an annualized 1.9% quarterly rise in GDP in April-June, growth was twice as high as in the first quarter (0.9%). 
This largely reflects the impact of $152 billion in tax rebates (roughly 1% of GDP), but, given the continuing and intensifying real-estate crisis, this boost to growth still does not mark a turnaround. 
In Japan, with an economy of about half the size of the US, growth forces remain weak. 
In the second quarter of 2008, the Japanese economy shrank at an annualized rate of 2.4%, primarily due to weak exports. 
With all this discouraging news, it is little comfort that some areas of the world are still displaying considerable growth rates: China is expected to grow by 9.5% this year and in 2009, with India growing by 8%, Russia up by 6.5%, owing to higher oil prices, and Latin America growing by 4.5% on average during this period. 
Unfortunately, the weight of these countries and regions is small; 
China, the biggest of them, accounts for only 5% of the world economy. 
So the signs of a worldwide economic slowdown have increased. 
The American crisis is now spreading to other areas of the world. 

The Global Economy’s Inevitable Hard Landing 
In recent weeks, the global liquidity and credit crunch that started last August has become more severe. 
This is easy to show: in the United States, the euro zone, and the United Kingdom, spreads between Libor interest rates (at which banks lend to each other) and central bank interest rates – as well as government bonds – are extremely high, and have grown since the crisis began. 
This signals risk aversion and mistrust of counterparties. 
To be sure, major central banks have injected dozens of billions of dollars of liquidity into the commercial banking sector, and the US Federal Reserve, the Bank of England, and the Bank of Canada have lowered their interest rates. 
But worsening financial conditions prove that this policy response has failed miserably. 
So it is no surprise that central banks have become increasingly desperate in the face of the most severe crisis since the advent of financial globalization. 
The recent announcement of coordinated liquidity injections by the Fed and four other major central banks is, to be blunt, too little too late. 
These measures will fail to reduce interbank spreads significantly, because monetary policy cannot address the core problems underlying the crisis. 
The issue is not just illiquidity – financial institutions with short-term liabilities and longer-term illiquid assets. 
Many more economic agents face serious credit and solvency problems, including millions of households in the US, UK, and the Eurozone with excessive mortgages, hundreds of bankrupt sub-prime mortgage lenders, a growing number of distressed homebuilders, many highly leveraged and distressed financial institutions, and, increasingly, corporate-sector firms. 
At the same time, monetary injections cannot resolve the generalized uncertainty of a financial system in which globalization and securitization have led to a lack of transparency that has undermined trust and confidence. 
When you mistrust your financial counterparties, you won’t want to lend to them, no matter how much money you have. 
The US is now headed towards recession, regardless of what the Fed does. 
The build-up of real and financial problems – the worst US housing recession ever, oil at $90 a barrel or above, a severe credit crunch, falling investment by the corporate sector, and savings-less and debt-burdened consumers buffeted by multiple negative shocks – make a recession unavoidable. 
Other economies will also be pulled down as the US contagion spreads. 
To mitigate the effects of a US recession and global economic slump, the Fed and other central banks should be cutting rates much more aggressively, rather than relying on modest liquidity injections that are bound to fail. 
The Fed’s 25-basis-point cut in December was puny relative to what is needed; similar cuts by the Bank of England and Bank of Canada do not even begin to address the increase in nominal and real borrowing rates that the sharp rise in Libor rates has induced. 
Central banks should have announced a coordinated 50 basis-point reduction to signal their seriousness about avoiding a global hard landing. 
Likewise, the European Central Bank’s decision not to cut rates – deluding itself that it may be able to raise them once the allegedly “temporary” credit crunch is gone – is mistaken. 
With deflating housing bubbles, high oil prices, and a strong euro already impeding growth, the ECB is virtually ensuring a sharp euro-zone slowdown. 
In any case, the actions recently announced by the Fed and other central banks are misdirected. 
Today’s financial markets are dominated by non-bank institutions – investment banks, money market funds, hedge funds, mortgage lenders that do not accept deposits, so-called “structured investment vehicles,” and even states and local government investment funds – that have no direct or indirect access to the liquidity support of central banks. 
All these non-bank institutions are now potentially at risk of a liquidity run. 
Indeed, US legislation strictly forbids the Fed from lending to non-depository institutions, except in emergencies. 
But this implies a complex and cumbersome approval process and the provision of high-quality collateral. 
And never in its history has the Fed lent to non-depository institutions. 
So the risk of something equivalent to a bank run for non-bank financial institutions, owing to their short-term liabilities and longer-term and illiquid assets, is rising – as recent runs on some banks (Northern Rock), money market funds, state investment funds, distressed hedge funds suggests. 
There is little chance that banks will re-lend to these non-banks the funds they borrowed from central banks, given these banks’ own severe liquidity problems and mistrust of non-bank counterparties. 
Major policy, regulatory, and supervisory reforms will be required to clean up the current mess and create a sounder global financial system. 
Monetary policy alone cannot resolve the consequences of inaction by regulators and supervisors amid the credit excesses of the last few years. 
So a US hard landing and global slowdown is unavoidable. 
Much greater and more rapid reduction of official interest rates may at best affect how long and protracted the downturn will be. 

The Economic Fundamentals of 2013 
NEW YORK – The global economy this year will exhibit some similarities with the conditions that prevailed in 2012. 
No surprise there: we face another year in which global growth will average about 3%, but with a multi-speed recovery – a sub-par, below-trend annual rate of 1% in the advanced economies, and close-to-trend rates of 5% in emerging markets. 
But there will be some important differences as well. 
Painful deleveraging – less spending and more saving to reduce debt and leverage – remains ongoing in most advanced economies, which implies slow economic growth. 
But fiscal austerity will envelop most advanced economies this year, rather than just the eurozone periphery and the United Kingdom. 
Indeed, austerity is spreading to the core of the eurozone, the United States, and other advanced economies (with the exception of Japan). 
Given synchronized fiscal retrenchment in most advanced economies, another year of mediocre growth could give way to outright contraction in some countries. 
With growth anemic in most advanced economies, the rally in risky assets that began in the second half of 2012 has not been driven by improved fundamentals, but rather by fresh rounds of unconventional monetary policy. 
Most major advanced economies’ central banks – the European Central Bank, the US Federal Reserve, the Bank of England, and the Swiss National Bank – have engaged in some form of quantitative easing, and they are now likely to be joined by the Bank of Japan, which is being pushed toward more unconventional policies by Prime Minister Shinzo Abe’s new government. 
Moreover, several risks lie ahead. 
First, America’s mini-deal on taxes has not steered it fully away from the fiscal cliff. 
Sooner or later, another ugly fight will take place on the debt ceiling, the delayed sequester of spending, and a congressional “continuing spending resolution” (an agreement to allow the government to continue functioning in the absence of an appropriations law). 
Markets may become spooked by another fiscal cliffhanger. 
And even the current mini-deal implies a significant amount of drag – about 1.4% of GDP – on an economy that has grown at barely a 2% rate over the last few quarters. 
Second, while the ECB’s actions have reduced tail risks in the eurozone – a Greek exit and/or loss of market access for Italy and Spain – the monetary union’s fundamental problems have not been resolved. 
Together with political uncertainty, they will re-emerge with full force in the second half of the year. 
After all, stagnation and outright recession – exacerbated by front-loaded fiscal austerity, a strong euro, and an ongoing credit crunch – remain Europe’s norm. 
As a result, large – and potentially unsustainable – stocks of private and public debt remain. 
Moreover, given aging populations and low productivity growth, potential output is likely to be eroded in the absence of more aggressive structural reforms to boost competitiveness, leaving the private sector no reason to finance chronic current-account deficits. 
Third, China has had to rely on another round of monetary, fiscal, and credit stimulus to prop up an unbalanced and unsustainable growth model based on excessive exports and fixed investment, high saving, and low consumption. 
By the second half of the year, the investment bust in real estate, infrastructure, and industrial capacity will accelerate. 
And, because the country’s new leadership – which is conservative, gradualist, and consensus-driven – is unlikely to speed up implementation of reforms needed to increase household income and reduce precautionary saving, consumption as a share of GDP will not rise fast enough to compensate. 
So the risk of a hard landing will rise by the end of this year. 
Fourth, many emerging markets – including the BRICs (Brazil, Russia, India, and China), but also many others – are now experiencing decelerating growth. 
Their “state capitalism” – a large role for state-owned companies; an even larger role for state-owned banks; resource nationalism; import-substitution industrialization; and financial protectionism and controls on foreign direct investment – is the heart of the problem. 
Whether they will embrace reforms aimed at boosting the private sector’s role in economic growth remains to be seen. 
Finally, serious geopolitical risks loom large. 
The entire greater Middle East – from the Maghreb to Afghanistan and Pakistan – is socially, economically, and politically unstable. 
Indeed, the Arab Spring is turning into an Arab Winter. 
While an outright military conflict between Israel and the US on one side and Iran on the other side remains unlikely, it is clear that negotiations and sanctions will not induce Iran’s leaders to abandon efforts to develop nuclear weapons. 
With Israel refusing to accept a nuclear-armed Iran, and its patience wearing thin, the drums of actual war will beat harder. 
The fear premium in oil markets may significantly rise and increase oil prices by 20%, leading to negative growth effects in the US, Europe, Japan, China, India and all other advanced economies and emerging markets that are net oil importers. 
While the chance of a perfect storm – with all of these risks materializing in their most virulent form – is low, any one of them alone would be enough to stall the global economy and tip it into recession. 
And while they may not all emerge in the most extreme way, each is or will be appearing in some form. 
As 2013 begins, the downside risks to the global economy are gathering force. 

The Global Economy Ten Years After 
LONDON – Much will be said about the tenth anniversary of the 2008 financial crisis, so I will focus on the global economy, which has not been nearly as weak as many seem to think. 
According to the International Monetary Fund, the rate of real (inflation-adjusted) world GDP growth averaged 3.7% in 2000-2010, and would have been close to 4% if not for the so-called Great Recession. 
By comparison, the average annual growth rate so far this decade has been 3.5%, which is slightly lower than the average rate in the 2000s, but above the 3.3% rate in the 1980s and 1990s. 
By my reckoning, China has contributed an even larger share of global growth in this decade than it did in the last, with its GDP having almost tripled from $4.6 trillion at the end of 2008 to around $13 trillion today. 
That additional $8 trillion accounts for more than half of the increase in global GDP over the past decade. 
I have long attributed the financial crisis to imbalances within and between the United States and China, the world’s two largest economies. 
While the US’s current-account deficit was close to 5% of GDP in 2008 (and closer to 7% in some quarters of 2007), China was maintaining a whopping current-account surplus of 9% or higher. 
Following the crisis, I predicted that the US and China would have to swap places to some extent over the course of the next decade. 
China needed to save less and spend more; and the US needed to save more and spend less. 
Judging by their current accounts today, both countries appear to have made significant progress. 
In 2018, China’s surplus will have fallen to around .5-1% of GDP, which is remarkable considering that its GDP has more than doubled since 2008. 
Equally remarkable, the US will register a deficit of 2-2.5% of GDP, which is within the 2-3% range that many economists consider sustainable. 
Other global indicators, however, are not as encouraging. 
Back in 2008, the eurozone ran a current-account deficit of 1.5% of GDP, with Germany recording a surplus of around 5.5%. 
But Germany’s large surplus owed much to large deficits in other eurozone countries, and that imbalance gave rise to the euro crisis after 2009. 
Worryingly, Germany’s surplus has since ballooned to around 8% of GDP. 
As a result, the eurozone now has a surplus close to 3.5%, despite, and probably because of, years of weak domestic demand in the Mediterranean member states. 
This is surely a sign of further instability ahead. 
In fact, the slow-brewing crisis in Italy may be a harbinger of what awaits the bloc. 
A central feature of the economy prior to the financial crisis was the US housing bubble, which itself resulted from the financial sector’s invention of increasingly intricate (and dubious) methods of recycling global savings. 
A decade on, it bears mentioning that many “global cities” like London, New York, Sydney, and Hong Kong now have home prices that only a very small minority of their permanent residents can afford, owing to the growing demand from wealthy investors abroad. 
But as of this year, there are growing signs that housing prices in these and other cities may be undergoing a reversal. 
This may simply reflect actions taken by municipal governments to provide more affordable housing to their residents; but it also could indicate that marginally affluent new buyers are becoming scarcer. 
To be sure, a gradual decline in house prices in these cities would be a welcome development in terms of economic and social equality. 
But one would search in vain for a time when declining home prices did not produce damaging side effects. 
Having now assumed the chairmanship at Chatham House, I am eager to encourage more research into how factors such as housing costs relate to larger issues of income and wealth inequality. 
To my mind, the world needs much better metrics for tracing these interconnections. 
For example, it is clear that wealth inequality has increased much more than income inequality over the past decade, with the rapid rise in urban housing prices playing a central role. 
In many developed countries, including the United Kingdom, economic inequality is a serious problem. 
Yet in terms of income, the latest data show that inequality has actually fallen back to the (still-too-high) levels of the 1980s. 
If common perceptions about inequality tend to inflate what is actually happening, that is because many companies’ top executives are earning increasingly massive sums relative to the workers under them. 
Such compensation packages can be rationalized in the context of share-price performance, but that hardly makes them justifiable. 
This is another issue that I hope we will be studying at Chatham House. 
The strange equity-market rally that has been proceeding almost uninterrupted since 2009 has been fueled in large part by major corporations’ stock buybacks. 
In some important cases, companies have even issued debt to finance the repurchase of their shares. 
Does the growing prevalence of buybacks explain why fixed investment and productivity have remained so weak across the West? 
And might those macroeconomic factors explain some of the political upheavals in Western democracies such as the UK and the US in recent years? 
On both counts, I suspect that the answer is yes. 
Unless we can recover a world in which business profits actually serve a purpose, the likelihood of more economic, political, and social shocks will remain intolerably high. 

The Global Home 
Homes are the most local of investments, rooted to a particular place like a tree, and thus thriving or withering in response to local economic conditions. 
The whole world flashes by on our television screens, but the market for our homes, which is comprised almost entirely of local amateurs, remains grounded right there in our own backyard. 
Soon, however, this could all change. 
Within a month, the Chicago Mercantile Exchange (CME), in collaboration with my company, MacroMarkets, as well as Fiserv and Standard & Poor’s, will launch futures and options contracts on home prices in ten cities in the United States. 
The contracts will be settled on the S&P/Case-Shiller Home Price Indices, which developed out of academic work that my colleague Karl Case and I pioneered almost twenty years ago. 
For many years we have been campaigning for housing futures, but no exchange wanted to use such indices to create a futures market until now. 
The futures markets on home prices will allow investors around the world to invest in US homes indirectly, by buying interests in them through these markets. 
An investor in Paris, Rio de Janeiro, or Tokyo will be able to invest in owner-occupied homes in New York, Los Angeles, and Las Vegas. 
A fundamental principle of financial theory – “diversification” or “risk spreading” – implies that interest in the new contracts will be high. 
People and businesses in New York, for example, are overexposed to their local real estate risks, so they should reduce this risk by selling New York home price futures. 
People in Tokyo will assume some of this risk by purchasing New York home price futures if the price is right. 
The New Yorkers still live in their own homes, but now they have spread their investment risk worldwide. 
A genuine futures market on single-family homes has not been attempted since 1991 when the London Futures and Options Exchange (now merged into Euronext.liffe) failed in its effort to launch such a market in Britain. 
That attempt never generated much trading volume. 
The Exchange threw a party and no one came. 
British spread-betting markets for home prices, and some retail online markets, have never amounted to much either. 
Will it be different this time? 
To be sure, starting a new market is always an uncertain proposition: people want to go to parties only if a lot of other people are there; if no one is there, no one wants to come. 
Likewise, in markets without many investors, not enough trades can be executed to generate the returns needed to attract them. 
As is often true of great parties, it can be a bit of a mystery how substantial new markets get started, but we know that it does happen from time to time. 
Initial indications suggest growing interest in futures trading for home prices, particularly as so much talk about the “housing bubble” underscores the importance of diversifying risk. 
After the CME’s announcement, one of its competitors, the Chicago Board Options Exchange, said that it plans to create futures and options contracts on major US regions, to be based on the median home price published by the National Association of Realtors. 
But, aside from strong public interest in investing in housing and in hedging housing risks, another critical issue must be resolved if futures markets are to succeed: prices must be revealed, and investors must understand what these prices mean. 
I believe there is a very good chance that many of these futures markets will soon be predicting substantial price declines in some US cities over the next year. 
They will be in what traders call “backwardation”: the future price in the market today is lower than the price of a home today. 
Maybe backwardation won’t appear on the first day that housing futures are traded, but there is a good chance it will come within a matter of months. 
We may need backwardation in some of these markets if they are to fulfill their function. 
Everyone knows that there has been a huge real estate boom in many of these cities (and elsewhere in the world) in recent years. 
International investors are not likely to want to invest in these cities unless expectations of a price decline are built into the futures markets, as people in Tokyo understand from their own bitter experience. 
But if backwardation is strong enough, even investors who think that the US housing market is headed for a fall will still be able to expect a good return from home price futures, because they are already getting a discounted price in the futures market. 
Nevertheless, it will require some adjustment for New Yorkers seeking to hedge their own real estate investments to sell futures contracts that have a built-in price decline. 
They will have to get used to the idea that the market already expects the decline, and that they can protect themselves only for that margin of possible future price declines that exceed this expectation. 
In fact, such adjustments in our thinking will likely occur when we actually see the futures market prices. 
Until now, the future course of real estate prices has been merely a matter of diverse opinion. 
When markets create an international consensus on the future price of homes in cities around the world, we will be better able to manage the risks facing these cities, thereby stabilizing their economies – and our own lives. 

The Global Impact of America’s Health Care Debate 
CAMBRIDGE – Since assuming the presidency earlier this year, Barack Obama’s primary legislative focus has been on reforming the financing of American health care. 
Yet his proposals are meeting strong opposition from fiscally conservative Democrats as well as from Republicans, owing to their potential impact on future fiscal deficits. 
Because those deficits are the primary cause of America’s current-account deficit – and thus of global imbalances – the health-care debate’s outcome will affect governments and investors around the world. 
About 85% of all Americans are now covered by some form of health insurance. 
All individuals over the age of 65 are eligible to be insured by the federal government through the Medicare program. 
Low-income families (and those whose income and assets are depleted by high medical costs) are covered by the Medicaid program, which is financed jointly by the states and federal government. 
Many uninsured get free care in emergency rooms of public and private hospitals and receive free care for chronic conditions in those same institutions. 
In the most recent budget, the federal government’s outlays for Medicare in 2010 are projected to be over $500 billion, while Medicaid will cost taxpayers over $250 billion. 
Private health insurance is generally provided by employers, which is encouraged by treating employer payments for health insurance as a tax-deductible business expense while not including the value of that insurance as taxable income to employees. 
That rule reduces income and payroll taxes by more than $200 billion. 
In short, an overwhelming majority of Americans are insured, with government a major financer of health care. 
But there remain about 54 million individuals who are not formally insured, and some insured individuals still face the risk of financially ruinous medical costs if they have very expensive medical treatment. 
Obama campaigned on the goals that everyone should have health insurance, that high medical costs should not bankrupt anyone, and that increased efficiency in the production and delivery of care should slow the overall growth of health-care costs. 
But, rather than producing a specific proposal, he left it to Congress to design the legislation. 
Several competing plans emerged from the different Congressional committees that have jurisdiction over the issue. 
The leading proposal, produced by the Senate Finance Committee, fails to achieve any of Obama’s goals. 
It would cut the number of uninsured roughly in half, but would still leave about 25 million people uninsured – with the threat of ruinously high medical bills deterring them from getting care. 
There is also no clear plan to slow the growth of health-care costs. 
As a sign of their support for the administration’s goals, the pharmaceutical industry and the hospital industry have together promised to reduce costs by a total of about $20 billion a year – a token amount, given government health spending of roughly $1 trillion and total health outlays of more than $2 trillion. 
The non-partisan Congressional Budget Office (CBO) estimates that the Senate Finance Committee plan would cost about $800 billion between now and 2019. 
Most of this increased cost would, in principle, be financed by $215 billion of taxes on high-premium insurance policies, and by about $400 billion of cuts in payments to physicians and hospitals that provide services to older patients in the Medicare program. 
If the cost and financing estimates are accurate, and if Congress does not change any of these provisions in the future, the CBO’s calculations imply that the Senate Finance Committee plan would reduce fiscal deficits between now and 2019 by $49 billion, less than 1% of the projected deficits of more than $7 trillion. 
In fact, there is a strong risk that this legislation would ultimately add to the fiscal deficit. 
Increasing the number of insured by 35 million and broadening protection for some who are now insured implies increased demand for health care, which could raise the cost of care paid for by the government as well as by private health-care buyers. 
In addition, both sources of financing are also uncertain. 
Taxes on high-premium insurance policies would lead many employees and employers to shift their sources of tax-free income from these health-insurance benefits to other forms of untaxed compensation. 
If they do this, the government would not collect the additional revenue from the insurance companies, employers, or employees. 
Similarly, the proposed cuts in payments to providers of services to Medicare patients are unlikely to receive the necessary Congressional support in future years, especially if it turns out that doing so would reduce the volume of services, rather than just providers’ incomes. 
There is a long history of legislating such spending cuts, only to reverse them in subsequent years. 
In considering the fiscal implications of Obama’s health proposals, it is important that the current legislation would still leave 25 million individuals without insurance. 
How much would it cost to insure them if the gross cost is now projected at $800 billion for the easier-to-insure 35 million? 
And how could that cost be financed if the proposed taxes on existing health policies and the reductions in Medicare outlays have already been used? 
Closing that gap could add more than $1 trillion to the government’s cost over the next 10 years. 
It is clear that there is a significant danger that the current legislation would add substantially to future US deficits – and establish a precedent for even more expensive expansions of health care in the future. 
This would come on top of the currently projected fiscal deficits in both the near term and over the coming decade – and before America’s demographic shift substantially raises the cost of Social Security and Medicare. 
Surprisingly, the bond market still seems almost oblivious to this risk. 
But holders of US debt worldwide have every reason to be concerned. 

The Global Impact of America’s Housing Crisis 
CAMBRIDGE – The bursting of America’s housing bubble in the summer of 2006 triggered the global financial crisis and recession. 
The sharp fall in house prices that followed caused a dramatic downturn in household wealth, leading to lower consumer spending and an overall fall in GDP. 
By now, wealth in the form of owner-occupied housing is down about 30%, equivalent to a loss of more than $6 trillion of household wealth. 
The fall in house prices also led to a sharp rise in mortgage defaults and foreclosures, which has increased the supply of homes on the market and caused house prices to fall further. 
As a result, one-third of all American homeowners with mortgages are already “underwater” – their mortgage debt exceeds the value of the house. 
For one-sixth of these homes, the debt is 20% higher than the price of the house. 
In addition, high loan-to-value ratios in the US interact with household financial problems to increase the number of defaults and foreclosures. 
More specifically, the rising unemployment rate, along with the large number of employees on involuntary part-time work, has increased the number of people who cannot afford their monthly mortgage payments. 
Unlike virtually every other country, US residential mortgages are effectively “no recourse” loans. 
If a homeowner stops making mortgage payments, the creditor can take the property but cannot take other assets or a fraction of wages. 
Even in those states where creditors have the legal authority to take other assets or wage income, the personal bankruptcy laws are so restrictive that creditors don’t bother to try. 
Although it is tempting to think of this as a purely domestic problem affecting the United States, nothing could be further from the truth. 
When homeowners default, banks lose money, and uncertainty about the extent of future defaults undermines confidence in banks’ capital, making it more difficult for them to raise funds and causing them to reduce their lending in order to conserve existing resources. 
As a result, the recession has been deeper and longer than it would otherwise have been. 
The resulting weakness of the US economy will mean lower US import demand. 
And, if the downward spiral in house prices continues, the value of mortgage-backed securities held by financial institutions around the world will continue to decline, affecting the supply of credit far beyond the US. 
Some recent data suggest that the decline in house prices may be coming to an end. 
The rate of decline of US house prices fell in the past three months for which we have data (ending in May), and the figures for May show essentially no decline at all. 
If that trend continues, it will prevent further erosion of household wealth and strengthen the banks’ capital positions. 
But the recent data, while encouraging, may be the result of temporary factors rather than an indication that the fall in house prices has actually come to an end. 
Mortgage interest rates fell below 5% in March and April, but have risen significantly since then. 
Moreover, a government program of subsidies to first-time homebuyers may have released a backlog of pent-up demand. 
And banks had a voluntary moratorium on foreclosures, holding supply off the market. 
All of this may have caused a temporary improvement in house prices. 
In short, we will have to wait for the data on house prices in June and July to know whether there has been a permanent turnaround. 
The recent rise in existing home sales in the US may also be misleading, since a large proportion are sales of foreclosed properties. 
Indeed, property that has either been foreclosed or is on the verge of foreclosure now accounts for nearly one-third of all existing home sales. 
Foreclosed property is generally sold at auction, guaranteeing that there will be a buyer – but driving down prices. 
Significantly, foreclosures rose 7% month on month in June, and a whopping 32% compared to June 2008. 
The Obama administration has enacted legislation aimed at helping individuals who are having difficulty making their monthly mortgage payments because of a decline in their incomes or a rise in the interest rate on their mortgage. 
For individuals with high monthly mortgage payments relative to their disposable income, the US government will share with the creditor bank the cost of reducing the monthly payment to 31% of disposable income. 
This is a new program, and it remains to be seen how well it will work to prevent future defaults. 
Some limited previous experience with mortgage modifications is not encouraging. 
Nearly 50% of those who had their mortgages modified nevertheless defaulted within six months. 
Unfortunately, there is no program to deal with the defaults and foreclosures caused by high loan-to-value ratios. 
Given the large number of negative-equity homeowners, there is a risk that defaults and foreclosures will continue. 
If they do, the sale of foreclosed properties will continue to depress house prices, reducing household wealth and hurting financial institutions. 
Unless house prices have stopped declining, it is important for the Obama administration to turn to the problem of high loan-to-value ratios. 
That would help not only the US economy, but also the economies of all of America’s trading partners. 

The World After November 
MADRID – On November 6, either Barack Obama or Mitt Romney will emerge victorious after an exhausting electoral race, setting the wheels in motion for the coming four years. 
An ocean away, on November 8, more than 2,000 members of the Chinese Communist Party (CCP) will gather in Beijing. 
Approximately a week later, the members of the Politburo Standing Committee will walk out in hierarchical order, preparing to take charge of a growing country of 1.3 billion people. 
The leaders of the world’s two largest economies are changing. 
So is the world itself. 
The Middle East, in particular, is experiencing a moment of intense transformation. 
While reconstruction – both literal and figurative – is commencing in some parts of the region, countries like Syria are aflame. 
Others, such as Iran, with its moribund revolution, have never ceased rumbling. 
Amidst a crumbling economy, the country remains belligerent, using its Lebanese proxy, Hezbollah, to launch at least one successful drone flight above Israel and reportedly initiating recent cyber attacks. 
As a result, relations among regional actors remain tense. 
After his speech at the United Nations appealing for a “red line” on the Iranian nuclear program in the spring or summer of 2013, Israeli Prime Minister Binyamin Netanyahu called an early general election, which could potentially give him a strong mandate for action against Iran. 
Egypt, meanwhile, is finding its own equilibrium, both domestically, drafting a new constitution, and in terms of foreign policy. 
Then there is Turkey, straddling Europe and the Middle East. 
An emerging economy poised to become a regional power, it has exchanged fire with its neighbor to the south, Syria, and has called on its NATO allies to bolster its security. 
This is part of the changing panorama that new world leaders will inherit in the Middle East – a region in which the United States has been deeply involved. 
After nearly a decade of draining military engagement, the US combat mission in Iraq concluded in 2010, and the combat mission in Afghanistan is set to end in 2014. 
The next American president will also inherit a country with a markedly changed geopolitical perspective. 
Technological advances and innovation have begun to turn the longstanding dream of energy independence into a reality. 
Whereas extraction of America’s extensive reserves of natural gas was previously thought to be unfeasible, technologies such as hydraulic fracturing (“fracking”) have ushered in a shale-gas revolution. 
Indeed, the US is on the cusp of energy self-sufficiency. 
Last year, for the first time in 15 years, less than one-half of the oil consumed in the US was imported. 
Annual growth in shale-gas production has increased from 17% between 2000 and 2006 to 48% between 2006 and 2010. 
By 2035, shale gas is projected to account for roughly one-half of total US energy production. 
The repercussions of this revolution will not be only economic. 
Politically, reduced reliance on foreign oil may allow the US to concentrate on its foreign-policy shift toward Asia. 
But it is not just the new US leader who will inherit a changed world. 
Across the Pacific, the days of record-breaking economic growth in Asia – a key component of social and political stability – may be coming to an end. 
Indeed, events in China in recent months have revealed internal unease. 
Though nationalist sentiment directed against external foes tends to divert attention temporarily from internal turmoil, the country’s serious domestic problems need to be addressed. 
China’s economy and politics, ideologically transformed in all but name, will soon need to be adapted to address rising social inequality. 
Despite global economic headwinds, China’s leaders will surely remain focused on maintaining and boosting growth, in order to lift more Chinese out of poverty and avert social unrest; they are also certain to continue monitoring the oil-rich Middle East. 
After years of relying on America’s presence in the region, playing an advantageous waiting game, China’s next leaders may embrace a more active role. 
And, because China’s reputation in the region is untainted by a legacy of imperialism, they may be in a rather advantageous position to do so. 
Meanwhile, the European Union is struggling with its own demons. 
Despite the EU’s need to focus inward while weathering the global economic crisis, the Union must not abandon its neighbors to the south. 
It is crucial to engage with the southern Mediterranean region as a critical meeting point – a place of political, economic, and energy cooperation. 
In this respect, the EU’s most valuable tools are its signature, Nobel Prize-winning model of multilateral dialogue and soft power. 
Next door, Russia, too, must respond to new vulnerabilities stemming from changing global conditions. 
The Kremlin continues to support Syrian President Bashar al-Assad’s regime, maintaining a strict aversion to military intervention and seeking to defend its strategic interests, including its naval base in the Syrian city of Tartus. 
That stance has translated, most obviously, into repeated vetoes of UN Security Council resolutions aimed at ending a conflict that has already produced tens of thousands of victims. 
International inaction on Syria is bad news not only for the country’s people; it is also eroding the legitimacy of one of the world’s most important multilateral institutions. 
Given that the issues of Iran and Syria are closely connected, internal division among the Security Council’s five permanent members (the US, China, Britain, France, and Russia) could be extremely damaging to the search for a solution to Iran’s nuclear-enrichment drive. 
That is reflected in the current stalemate in talks between them (plus Germany) and Iran. 
Too much is at stake, which is why all possible tracks for a negotiated outcome must be pursued. 
Whether or not recent rumors of bilateral US-Iran talks prove true, such initiatives should be welcomed. 
While the big players remain preoccupied with their internal changes, the region continues to smolder. 
The main question now is whether the leaders who emerge in November will be firefighters or fire starters. 

Mental Health for All 
MELBOURNE – One spring evening in 1997, when I was a mental-health researcher at the Australian National University in Canberra, I was discussing with my wife, Betty Kitchener, a registered nurse who taught first-aid courses for the Red Cross in her spare time, the inadequacy of conventional first-aid training. 
Such courses typically neglect mental-health emergencies, leaving participants poorly equipped to help people who are struggling with suicidal thoughts, panic attacks, post-traumatic stress, the effects of alcohol or drug abuse, or a diminishing grip on reality. 
Betty knew firsthand the potential consequences of this lack of knowledge. 
When she was 15, she experienced an episode of severe depression, which culminated in a suicide attempt. 
But her family and teachers failed to recognize the problem, so she received no support or professional help. 
This lack of early treatment undermined her recovery, and she has continued to experience episodes of depression throughout her life. 
In order to help ensure that more people did not have to suffer alone as Betty had, we resolved to create a mental-health first-aid training course in our local community. 
Three years later, when Betty reduced her paid employment in order to develop Mental Health First Aid training, we were finally able to launch the course. 
The benefits of this initiative quickly became apparent, with evaluation studies showing that participants became more accepting of the health significance of mental illnesses, more confident in their ability to help others, and motivated to apply their knowledge after completing the course. 
Such positive results helped to drive the course’s expansion. 
By 2005, it was operating across Australia and in Scotland and Hong Kong, and has since spread to more than 20 other countries. 
Over 200,000 people in Australia alone – more than 1% of the population – have now received the training. 
This rapid growth should not be surprising, given the prevalence of mental-health problems worldwide. 
In Australia, roughly one in five adults is affected by a diagnosable mental-health problem each year, but many of these people receive no professional help. 
The statistics are similar in other developed countries. 
This means that everyone will either be personally affected by a mental-health problem or have close contact with someone who is. 
Indeed, most people will have contact, whether they are aware of it or not, with someone who is suicidal. 
Research shows that whether or not a person obtains professional help is strongly influenced by the encouragement and attitudes of those close to them. 
People with strong support networks have a significantly better chance of recovery than those whose problems go undetected or are ignored or minimized. 
Given this, ensuring awareness and acceptance in communities, while enhancing people’s ability to identify potential mental-health problems in others and to provide help, is vitally important. 
This need is particularly pressing for those – such as parents, teachers, youth workers, and sports coaches – who are in regular contact with young people. 
Mental-health problems tend to arise early in life, with the first episode occurring during adolescence or early adulthood – a critical phase of development, when people are completing their education, joining the work force, building key relationships, and forming health habits. 
Without a strong support system, mental-health problems can disrupt these developments, damaging the future prospects of those whom they affect. 
While the Mental Health First Aid course’s rapid expansion has helped to improve the situation in many communities, there is much left to do. 
In the short term, all developed countries should aim to achieve 1% participation rates in mental-health first-aid courses, as Australia has. 
In the longer term, countries should aim to match participation rates in conventional first-aid courses. 
In the last three years, 11% of Australia’s population has completed such a course, partly owing to requirements that people in certain positions, such as child-care workers, have a first-aid certificate. 
Requiring that people in particular occupations – including high-school teachers, nurses, and police officers – acquire a mental-health first-aid certificate would significantly enhance participation, thereby strengthening support for those who are struggling with mental-health problems. 
Such certifications are even more important in the developing world, given the limited availability of mental-health professionals. 
Pilot work in rural India shows that the mental-health first-aid approach can be successfully adapted to the needs of communities with limited resources. 
In developed and developing countries alike, the scope of the problem is too large to be left exclusively to mental-health professionals. 
Every member of the community must be empowered to protect and improve their own mental health, and that of those around them. 

The Global Innovation Revolution 
BERKELEY – As countries around the world struggle to lay the foundations for stronger sustainable growth in the future, they would do well to focus on policies that encourage innovation. 
Empirical studies across time and countries confirm that innovation is the primary source of technological change and productivity growth. 
And investments in research and development, as well as in the scientific and engineering workforce on which they depend, are critical drivers of innovation and national competitiveness. 
A new study by the National Science Board, the governing body of the National Science Foundation in the United States, examines trends in such investments for both individual countries and regions. 
These trends indicate that the global landscape for innovation changed significantly during the last decade. 
That landscape is likely to change further as several Asian economies, particularly China and South Korea, increase their investments in R&D and scientific and engineering education to secure their place as significant hubs of innovation. 
At the same time, crushing debt burdens may compel the US, Europe, and Japan to reduce their investments in these areas. 
The US remains the global leader in R&D investment, spending an estimated $400 billion in 2009 – a total boosted by President Barack Obama’s stimulus package, and higher than China, Japan, and Germany combined. 
But, in terms of R&D spending as a share of GDP, the US ranked only eighth in 2009 (at 2.9% of GDP). 
The US share remained above the OECD average, but this was mainly the result of national differences in the amount of R&D defense spending. 
Indeed, defense accounted for 52% of US R&D in 2009, and for more than 50% during the last 25 years. 
The defense share of R&D in the European Union and Japan has been and remains markedly lower – less than 10% in the EU and less than 5% in Japan in 2009 (no comparable data are available for China and South Korea). 
Over the next decade, sizeable cuts in defense spending as part of overall deficit reduction could mean a significant reduction in R&D investment in the US. 
Between 1999 and 2009, global R&D spending grew at an average annual rate of 7%, accelerating to 8% during the last five years, despite the global recession. 
During the entire period, R&D spending grew significantly faster than global output, reflecting both increasing government support and a rising share of technology-intensive industries in global production and trade. 
But these aggregate figures obscure differences among countries and regions. 
Over the decade, the US share of global R&D fell from 38% to 31%, the EU share fell from 27% to 23%, and Asia’s share rose from 24% to 32%. 
Within Asia, R&D spending in China grew at an astounding 20% annual pace – twice the country’s GDP growth rate – and by 2009 China had surpassed Japan to become the world’s second-largest investor in R&D. Spending on R&D also grew rapidly – about 10% annually – in South Korea. 
By contrast, R&D spending grew by 4% in Japan, 5% in the US, and roughly 6% in Europe. 
Throughout the world, the business sector remains both the predominant performer and the predominant funder of R&D investment. 
In 2009, business accounted for 75% of R&D funding in Japan, 73% in South Korea, 72% in China, 67% in Germany, and 60% in the US, whose companies are the largest R&D investors in terms of absolute purchasing power, spending more than twice as much as Japanese businesses. 
But business investment as a share of GDP has changed very little in the US over the last decade, while it has risen rapidly in many other countries, including China, Singapore, South Korea, and Israel. 
Global multinational companies are the largest business-sector R&D investors in the US and other countries. 
For example, multinational companies, whether headquartered in the US or elsewhere, accounted for about 84% of private (non-bank) R&D investment in the US in 2009, about the same as a decade earlier. 
And US multinationals still locate about 84% of their R&D activities in the US, often in innovation clusters around research universities. 
But this share has declined during the last decade, as US multinationals have shifted some of their R&D from the US and Europe to Asia in response to rapidly growing markets, ample scientific and engineering talent, and generous subsidies. 
Global competition for multinational companies’ R&D activity, and for the local benefits that it brings, is likely to intensify in the future, with many countries already offering sizeable tax credits and extended tax holidays. 
The Asian economies have been particularly aggressive in the use of such incentives. 
And, recognizing that the availability of a workforce with the necessary skills is a key determinant of where businesses locate their R&D activities, many countries are increasing their investments in tertiary education and training in science, engineering, and technology. 
Engineering accounts for only 4% of all bachelor’s degrees in the US, compared to 19% in Asia – which now accounts for half of all engineering degrees being awarded – and 33% in China. 
Many countries are also changing their immigration laws to make it easier to attract highly skilled workers, especially scientists and engineers, who are increasingly mobile. 
Meanwhile, immigration policies in the US and Europe are making it more difficult to attract and retain such workers, compelling companies to shift R&D abroad to find the talent that they need. 
As a result of these changes, the global landscape for innovation has been transformed over the last decade. 
Ours is now a world in which many emerging-market countries have made advancement in science and technology a top priority, and in which multinational companies’ R&D investments have become much more mobile. 
As the US and other developed countries embark on austerity plans to contain their debt, they must heed these changes in the innovation landscape and boost their investments in R&D – and in science and engineering education – even as they make painful cuts elsewhere. 

The Globalization of Ethics 
Many Europeans doubt that Asia can catch up with Europe in terms of regional integration. 
But Asia not only has the type of stable common ethical foundations that were so important to European integration; it also has a well developed set of moral principles, some of which were an established part of Asian culture long before similar principles were adopted in Europe. 
Indeed, these Asian principles can serve as a part of an emerging common global ethic. 
Of course, Asia does not yet have a cohesive core culture comparable to that of Europe, which is founded on the Judeo-Christian tradition and the Enlightenment. 
But Europeans ought not to be too arrogant, because, in recent years, that common European culture has itself proven to be fragile, particularly in light of the Bush administration’s divide-and-rule strategy pitting “Old Europe” against “New Europe.” 
And, just as the inhuman terror attacks of September 11, 2001 severely damaged Islam’s credibility in many people’s eyes, the invasion of Iraq, which was based on lies, has damaged both Christianity and the Western community of values. 
Although Asia seems to lack Europe’s cultural core, there are core ethical constants that have long governed Asian societies and indicate common ethical foundations. 
Indeed, in some respect, Asia has more experience with intercultural relations than Europe. 
As early as the third century B.C., Buddhism spread peacefully from India to Sri Lanka and to large parts of Southeast Asia. 
In the first century C.E., it continued its advance, spreading along the Silk Road to Central Asia and China, and finally made its way to Korea and Japan centuries later. 
Ethnically homogeneous Japan is an example of how three different religions – Shinto, Confucianism, and Buddhism – can coexist peacefully and, in many cases, intermingle. 
Even Islam – which mostly spread in the wake of military conquests in the Middle East, India, and North Africa – expanded rather peacefully into Southeast Asia in the footsteps of merchants, scholars and mystics. 
Moreover, there was a historically important and ethically oriented humanism in China as early as the fifth century B.C. The concept of “ren,” which corresponds to our “humanum” is a central term in the Chinese tradition. 
Likewise, Confucius was the first to formulate the Golden Rule of Reciprocity: “Never impose on others what you would not choose for yourself.” 
Through the spread of Chinese characters, the concept of ren and the Golden Rule spread throughout the vast Chinese-influenced area that reaches from Central Asia to Taiwan and from Korea to Singapore. 
This Golden Rule, however, also appears in the Indian tradition. 
In Jainism, it is stated as: “A man should wander about treating all creatures as he himself would be treated.” 
In Buddhism: “A state that is not pleasant or delightful to me must also be so to him; and a state that is not pleasing or delightful to me, how could I inflict that upon another?” 
In Hinduism: “One should not behave towards others in a way which is disagreeable to oneself. This is the essence of morality.” 
This “Golden Rule” can also, of course, be found in the Abrahamic religions. 
Rabbi Hillel (60 B.C.) said: “What is hurtful to yourself do not do to your fellow man.” 
Jesus worded it positively: “So in everything, do to others what you would have them do to you.” 
Islam, too, has a similar concept: “None of you believes until he wishes for his brother what he wishes for himself.” 
Moreover, such commonalities go beyond the principle of humanity and the Golden Rule of Reciprocity. 
Four concrete ethical rules were laid down in the Buddhist canon by Patanjali, the founder of Yoga, in the Chinese tradition and, of course, in the three prophetic religions: “Do not kill,” “do not steal,” “do not bear false witness,” and “do not abuse sexuality.” 
These trans-cultural ethical rules form structural elements of a common human ethic, whatever we call it, and make almost irrelevant the idea of a deep antagonism between “Asian” and “Western” values. 
If Asia focuses on its trans-cultural ethical core, an entirely new spirit of unity can be developed that uses soft power instead of military force and does not know enemies, but only partners and competitors. 
In this way, Asia could catch up with the West in terms of its cultural integration while contributing to the establishment of a genuinely peaceful new world order. 
This project differs from the West’s human rights movement, which is based on natural law thinking. 
The point is rather to integrate values, standards, and attitudes of ethical-religious traditions that, while appearing in each culture in a specific form, are common to all, and that can be supported by non-religious people as well. 

The Globalization of Mass Politics 
Globalization has assumed a new form: global mass politics. 
Of course, political protests have been global for decades, as past marches against the Vietnam War, nuclear weapons, and globalization itself demonstrated. 
The revolutions of 1989 and 1991 in Eastern Europe and the former Soviet Union blanketed a huge region within months. 
But the anti-Iraq War protests reveal a new dynamic. 
Up to 10 million protestors in some 60 countries and 600 cities took to the streets on schedule on a single day, February 15, showing that mass politics can now be approached globally. 
Communications and mass media have long enabled "copycat" effects--protests in one place ignite similar actions elsewhere. 
The overthrow of King Louis Phillipe in France in 1848 was carried by the recently introduced telegraph to Germany, igniting revolution. 
Television images of the fall of the Berlin Wall spurred revolutionary changes throughout the former Soviet bloc. 
On other occasions, protests such as May Day marches were transformed into widespread social mobilization, as happened in France on May 1, 1968. 
What is distinctive about the recent mass protests against US plans for a war against Iraq is that the February 15 event was planned ahead of time, at short notice, for a specific date, and with an explicit goal of worldwide scale. 
The decision to launch February 15 as a day of mass protest was apparently taken at a meeting of activists at the European Social Forum in Florence in November last year. 
In ninety days, these organizers turned out more than 5 million protestors worldwide. 
There are three keys to this phenomenon: 
The Internet allowed for a rapid worldwide dissemination of organizational plans at an extraordinarily low cost to the organizers. 
Mass action depended on local organizations seizing the initiative, based on a loose global plan. 
This is what network theorists call "self-organizing" behavior. 
As each unit took its own steps, these local actions were communicated to the rest of the world through Web sites that tracked and disseminated global plans, as well as offering information, advice, and encouragement. 
A worldwide common concern: the prospect of an Iraq War. 
There was a fourth specific feature fuelling the global protests, too: the exceptionally high level of arrogance and ineptitude displayed by the Bush Administration. 
US Defense Secretary Donald Rumsfeld provoked the world's ire through a mocking disdain for global public opinion. 
Rumsfeld's juvenile attack on "old Europe" no doubt helped bring millions into the streets. 
Indeed, it's no longer possible in an age of mass communication to "play to the home audience" without the world also listening. 
Bush's swaggering style plays well in Texas, but not in Paris and Berlin. 
It is unlikely that worldwide protests will stop the Bush Administration's war plans, but they will help shape the political, security, and economic ramifications of such a war. 
The war is likely to proceed because the US can carry out the military phase of the war largely on its own, and because the Bush Administration has no easy way to back down from its military mobilization. 
Moreover, the uncertainties over war are hurting America's economy (and economies elsewhere), by causing a postponement of business plans and falling consumer confidence. 
If today's stalemate drags on, the weak economy will threaten Bush's re-election bid in November 2004. 
His political advisors may well advise him that it will soon be "now or never" to launch the war. 
But America will pay dearly for launching a war against global public opinion. 
Unless the Bush administration is vindicated in its actions--for example, if Saddam Hussein launches weapons of mass destruction that unite the world against him, or if the US discovers hidden nuclear weapons in the Iraqi desert--anti-American sentiments, and terrorism, unleashed by war, are likely to be massive. 
America's people have never been told about the huge financial and political burdens that lie ahead, and they are not ready to bear them. 
Already the US is facing huge fiscal deficits and a squeeze on popular programs, even before the costs of war and its aftermath are taken into account. 
Cheap and instantaneous means of global communication are here to stay. 
February 15 demonstrates that people throughout the world will use them to demand their right to help shape global political decisions. 

The Globalization of Old Age 
Anti-globalization campaigners gripe that the rich are getting richer. 
That's true in many ways. 
But rich countries are also getting older. 
This "graying" of the world's richest nations will profoundly affect not only these societies, but poorer countries as well. 
According to the UN, the world's population now stands at 6.3 billion and will reach 9.3 billion by mid-century. 
People aged 60 or more are projected to increase from 629 million now to nearly 2 billion by 2050. 
Furthermore, the elderly population itself is aging. 
The 80+ age group makes up the fastest-growing segment of the population; its share of the over-60 population will increase from 12% to 19% by 2050. 
This "graying of the world" is a natural result of falling fertility rates and rising life expectancy. 
While the decline in fertility is global, its speed varies across countries. 
Rich countries in Europe, North America, and East Asia have a sharply higher share of the elderly than developing countries. 
Fertility reductions in the richer parts of the world have already brought population growth rates close to zero. 
Furthermore, due to improved access to quality health care and better living conditions, life spans in rich countries are now much longer than in the developing world. 
People aged 60 or more represent almost 20% of the population in rich countries today, whereas in the world as a whole this ratio is not expected to be reached before 2050. 
By that point, this age group in industrial countries will claim one-third of the total population. 
It will take another century for the rest of the world to catch up. 
One result of all this is that the relative number of working-age individuals between 15-64 who pay the taxes to support pensioners is declining much faster in the industrial world than in developing countries, where populations remain young and grow rapidly. 
Rich economies are already challenged by this decline, and so are scrambling to meet the insatiable demands of public pension and health care systems, which causes their fiscal balances to deteriorate. 
The effects of population aging will become even more obvious and widespread in the decades ahead, as domestic labor supply in rich countries shrinks even further. 
Moreover, because the elderly tend to spend more and save less, rich countries will also face changes in the ratio of savings to consumption in their national income, as well as in the composition of what is purchased. 
These demographically induced developments will not only affect investment and growth patterns of industrial economies, but the allocation of resources as well. 
In a globalized world, what happens in rich countries has an impact on developing economies. 
Yet, there is little discussion of the opportunities and challenges this presents. 
Nowadays, most talk focuses on migration as a means of letting overpopulated developing countries fill the labor shortages of developed countries with graying populations. 
Japan's population, for example, is projected to decline by 17.9 million by 2050, while the share of its 60+ population will climb to 42%, and the share of its 80+ population will exceed 10%. 
The number of working-age Japanese will thus fall sharply, bringing the ratio of workers to retirees to about one. 
Estimates suggest that Japan would need 10 million immigrants per year until 2050 just to maintain the ratio of workers to pensioners that it had in 1995! 
Will developed countries really allow for migration on such a scale? 
Or will they instead increase their imports of manufactured products and food, thus creating jobs in developing countries that might help absorb their surplus labor? 
Even if rich countries choose increased imports, the growing volume of trade will merely expand an existing channel for routing the effects of an aging population onto developing countries. 
Trade serves as such a channel because nations with aging populations are economically powerful and so are capable of setting the terms on which they trade with poorer countries. 
Developing countries that trade intensively with advanced economies must adopt their relative prices and allocate their resources accordingly. 
But these relative prices will increasingly reflect the changed demands of the aging citizenry of industrial nations. 
International capital flows will also magnify such demographic spillover effects, as capital is traded at the interest rates determined in large industrial economies. 
These rates will increasingly be influenced by the changing age composition within advanced countries. 
Because the old save less, lower aggregate savings in rich countries will crimp the relative abundance of capital available to poorer economies. 
The powerful combination of globalization and aging will make developing economies ever more susceptible to changes in the terms of trade, interest rates, and exchange rates in rich countries. 
All developing countries should monitor these demographic developments closely, even if they have yet to experience population aging themselves. 
Young nations such as Mexico and Turkey should be particularly careful, due to their strong economic ties with NAFTA and the EU, where the gradual aging of populations is well under way. 

The Globalization of Protest 
NEW YORK – The protest movement that began in Tunisia in January, subsequently spreading to Egypt, and then to Spain, has now become global, with the protests engulfing Wall Street and cities across America. 
Globalization and modern technology now enables social movements to transcend borders as rapidly as ideas can. 
And social protest has found fertile ground everywhere: a sense that the “system” has failed, and the conviction that even in a democracy, the electoral process will not set things right – at least not without strong pressure from the street. 
In May, I went to the site of the Tunisian protests; in July, I talked to Spain’s indignados; from there, I went to meet the young Egyptian revolutionaries in Cairo’s Tahrir Square; and, a few weeks ago, I talked with Occupy Wall Street protesters in New York. 
There is a common theme, expressed by the OWS movement in a simple phrase: “We are the 99%.” 
That slogan echoes the title of an article that I recently published, entitled “Of the 1%, for the 1%, and by the 1%,” describing the enormous increase in inequality in the United States: 1% of the population controls more than 40% of the wealth and receives more than 20% of the income. 
And those in this rarefied stratum often are rewarded so richly not because they have contributed more to society – bonuses and bailouts neatly gutted that justification for inequality – but because they are, to put it bluntly, successful (and sometimes corrupt) rent-seekers. 
This is not to deny that some of the 1% have contributed a great deal. 
Indeed, the social benefits of many real innovations (as opposed to the novel financial “products” that ended up unleashing havoc on the world economy) typically far exceed what their innovators receive. 
But, around the world, political influence and anti-competitive practices (often sustained through politics) have been central to the increase in economic inequality. 
And tax systems in which a billionaire like Warren Buffett pays less tax (as a percentage of his income) than his secretary, or in which speculators, who helped to bring down the global economy, are taxed at lower rates than those who work for their income, have reinforced the trend. 
Research in recent years has shown how important and ingrained notions of fairness are. 
Spain’s protesters, and those in other countries, are right to be indignant: here is a system in which the bankers got bailed out, while those whom they preyed upon have been left to fend for themselves. 
Worse, the bankers are now back at their desks, earning bonuses that amount to more than most workers hope to earn in a lifetime, while young people who studied hard and played by the rules see no prospects for fulfilling employment. 
The rise in inequality is the product of a vicious spiral: the rich rent-seekers use their wealth to shape legislation in order to protect and increase their wealth – and their influence. 
The US Supreme Court, in its notorious Citizens United decision, has given corporations free rein to use their money to influence the direction of politics. 
But, while the wealthy can use their money to amplify their views, back on the street, police wouldn’t allow me to address the OWS protesters through a megaphone. 
The contrast between overregulated democracy and unregulated bankers did not go unnoticed. 
But the protesters are ingenious: they echoed what I said through the crowd, so that all could hear. 
And, to avoid interrupting the “dialogue” by clapping, they used forceful hand signals to express their agreement. 
They are right that something is wrong about our “system.” 
Around the world, we have underutilized resources – people who want to work, machines that lie idle, buildings that are empty – and huge unmet needs: fighting poverty, promoting development, and retrofitting the economy for global warming, to name just a few. 
In America, after more than seven million home foreclosures in recent years, we have empty homes and homeless people. 
The protesters have been criticized for not having an agenda. 
But this misses the point of protest movements. 
They are an expression of frustration with the electoral process. 
They are an alarm. 
The anti-globalization protests in Seattle in 1999, at what was supposed to be the inauguration of a new round of trade talks, called attention to the failures of globalization and the international institutions and agreements that govern it. 
When the press looked into the protesters’ allegations, they found that there was more than a grain of truth in them. 
The trade negotiations that followed were different – at least in principle, they were supposed to be a development round, to make up for some of the deficiencies highlighted by protesters – and the International Monetary Fund subsequently undertook significant reforms. 
So, too, in the US, the civil-rights protesters of the 1960’s called attention to pervasive institutionalized racism in American society. 
That legacy has not yet been overcome, but the election of President Barack Obama shows how far those protests moved America. 
On one level, today’s protesters are asking for little: a chance to use their skills, the right to decent work at decent pay, a fairer economy and society. 
Their hope is evolutionary, not revolutionary. 
But, on another level, they are asking for a great deal: a democracy where people, not dollars, matter, and a market economy that delivers on what it is supposed to do. 
The two are related: as we have seen, unfettered markets lead to economic and political crises. 
Markets work the way they should only when they operate within a framework of appropriate government regulations; and that framework can be erected only in a democracy that reflects the general interest – not the interests of the 1%. 
The best government that money can buy is no longer good enough. 

The Globalization of Science 
SAN FRANCISCO – Science provides an invaluable source of guidance to individuals and governments. This is true, in part, because scientists can often predict the future consequences of current actions. 
For example, we know that someone who smokes two packs of cigarettes a day is likely to have a serious problem with cancer some 40 years later. 
And science predicts that, unless we severely constrain consumption of oil and coal around the world, the climate will continue to warm, increasing ocean volume and melting huge amounts of ice in the Arctic and Antarctic – thereby causing disastrous rises in sea level. 
These are but two examples of thousands of instances in which it makes good sense for decision-makers to take into account what science can predict about the future. 
And yet, what science knows is far too often overlooked when high-stakes decisions are made. 
This is not to say that scientists should dominate the government decision-making process. 
It is the business of politicians, not scientists, to consider the relative costs and benefits of the options before them, weighing them as they see fit in reaching their conclusions. 
But many such judgments will be poor ones without effective scientific input. 
For example, the United States government is well-served by an organization called the National Academies, based on three honorary organizations composed of the nation’s most distinguished scientists, engineers, and health professionals (the National Academy of Sciences, National Academy of Engineering, and Institute of Medicine, respectively). 
This independent, non-governmental organization produces more than 200 reports a year, most in response to specific requests from the US government. 
These requests range from questions about the health hazards of trace amounts of arsenic in drinking water, to questions about how best to support various forms of scientific research. 
Through a rigorous review process, the Academies insist that each report be limited to what science can say about the subject based on evidence and logic, without preempting the decisions that need to be made by others. 
Thus, for example, the report on drinking water predicted the frequency of bladder cancers that would eventually occur in a population exposed to levels of five, 10, or 20 parts per billion of arsenic. 
But it did not say what maximum arsenic concentration the government should legislate. 
The full text of some 3,000 reports by the Academies are available online (at www.nap.edu ), and each can be downloaded for free in any of 146 countries. 
The dangers of arsenic are the same across the globe, and in this case a US-based report can help all nations. 
However, there are other important science-based issues that require study by internationally-based organizations in order to be widely accepted. 
To meet this need, the InterAcademy Council (IAC) in Amsterdam was founded in 2000 by a worldwide organization of science academies called the InterAcademy Panel (IAP). 
The IAC is governed by a Board that includes a rotating group of 15 Academy presidents from around the world, representing nations at a range of economic development levels, and its reports present a truly international perspective backed by the world’s best scientists and engineers. 
The IAC provides advice on subjects requested by the United Nations and other international organizations, all of which is freely available at www.interacademycouncil.net . 
The first IAC report was entitled Inventing a Better Future: A Strategy for Building Worldwide Capacities in Science and Technology . 
It argued convincingly for the importance of supporting science and technology institutions in every nation that focus on harnessing the increasing store of international scientific and technical knowledge to meet that nation’s needs. 
Inventing a Better Future also provided detailed guidance to governments and international organizations on how to build institutional capacities for science and technology in both developing and industrialized countries. 
The IAC’s most recent effort, entitled Lighting the Way: Toward a Sustainable Energy Future, presents an ambitious science-based agenda for meeting the world’s enormously challenging energy requirements. 
An important audience for each IAC report are the 100 academies of science that belong to the IAP. 
Each has a special responsibility for disseminating a report’s recommendations throughout its own country, which can considerably enhance the academy’s effectiveness in influencing national policies. 

The God of Suffering? 
PRINCETON – Do we live in a world that was created by a god who is all-powerful, all-knowing, and all good? 
Christians think we do. 
Yet a powerful reason for doubting this confronts us every day: the world contains a vast amount of pain and suffering. 
If God is all-knowing, he knows how much suffering there is. 
If he is all-powerful, he could have created a world without so much of it – and he would have done so if he were all good. 
Christians usually respond that God bestowed on us the gift of free will, and hence is not responsible for the evil we do. 
But this reply fails to deal with the suffering of those who drown in floods, are burned alive in forest fires caused by lightning, or die of hunger or thirst during a drought. 
Christians sometimes attempt to explain this suffering by saying that all humans are sinners, and so deserve their fate, even if it is a horrible one. 
But infants and small children are just as likely to suffer and die in natural disasters as adults, and it seems impossible that they could deserve to suffer and die. 
Once again, some Christians say that we have all inherited the original sin committed by Eve, who defied God’s decree against eating from the tree of knowledge. 
This is a triply repellant idea, for it implies that knowledge is bad, disobeying God’s will is the greatest sin of all, and children inherit the sins of their ancestors, and may justly be punished for them. 
Even if we were to accept all this, the problem remains unresolved. 
For animals also suffer from floods, fires, and droughts, and, since they are not descended from Adam and Eve, they cannot have inherited original sin. 
In earlier times, when original sin was taken more seriously than it generally is today, the suffering of animals posed a particularly difficult problem for thoughtful Christians. 
The seventeenth-century French philosopher René Descartes solved it by the drastic expedient of denying that animals can suffer. 
Animals, he maintained, are merely ingenious mechanisms, and we should not take their cries and struggles as a sign of pain, any more than we take the sound of an alarm clock as a sign that it has consciousness. 
People who live with a dog or a cat are not likely to find that persuasive. 
Last month, at Biola University, a Christian college in southern California, I debated the existence of God with the conservative commentator Dinesh D’Souza. 
In recent months, D’Souza has made a point of debating prominent atheists, but he, too, struggled to find a convincing answer to the problem I outlined above. 
He first said that, because humans can live forever in heaven, the suffering of this world is less important than it would be if our life in this world were the only life we had. 
That still fails to explain why an all-powerful and all-good god would permit it. 
Relatively insignificant as this suffering may be from the perspective of eternity, the world would be better without it, or at least without most of it. 
(Some say that we need to have some suffering to appreciate what it is like to be happy. 
Maybe, but we surely don’t need as much as we have.) 
Next, D’Souza argued that since God gave us life, we are not in a position to complain if our life is not perfect. 
He used the example of a child born with one limb missing. 
If life itself is a gift, he said, we are not wronged by being given less than we might want. 
In response I pointed out that we condemn mothers who cause harm to their babies by using alcohol or cocaine when pregnant. 
Yet since they have given life to their children, it seems that, on D’Souza’s view, there is nothing wrong with what they have done. 
Finally, D’Souza fell back, as many Christians do when pressed, on the claim that we should not expect to understand God’s reasons for creating the world as it is. 
It is as if an ant should try to understand our decisions, so puny is our intelligence in comparison with the infinite wisdom of God. 
(This is the answer given, in more poetic form, in The Book of Job .) 
But once we abdicate our powers of reason in this way, we may as well believe anything at all. 
Moreover, the assertion that our intelligence is puny in comparison with God’s presupposes just the point that is under debate – that there is a god who is all-knowing, all-powerful, and all good. 
The evidence of our own eyes makes it more plausible to believe that the world was not created by any god at all. 
If, however, we insist on believing in divine creation, we are forced to admit that the god who made the world cannot be all-powerful and all good. 
He must be either evil or a bungler. 

The Gold Bubble and the Gold Bugs 
NEW YORK – Gold prices have been rising sharply, breaching the $1,000 barrier and in recent weeks rising towards $1,200 an ounce and above. 
Today’s “gold bugs” argue that the price could top $2,000. 
But the recent price surge looks suspiciously like a bubble, with the increase only partly justified by economic fundamentals. 
Gold prices rise sharply only in two situations: when inflation is high and rising, gold becomes a hedge against inflation; and when there is a risk of a near depression and investors fear for the security of their bank deposits, gold becomes a safe haven. 
The last two years fit this pattern. 
Gold prices started to rise sharply in the first half of 2008, when emerging markets were overheating, commodity prices were rising, and there was concern about rising inflation in high-growth emerging markets. 
Even that rise was partly a bubble, which collapsed in the second half of 2008, when – after oil reached $145, killing global growth –the world economy fell into recession. 
As concerns about deflation replaced fear of inflation, gold prices started to fall with the correction in commodity prices. 
The second price spike occurred when Lehman Brothers collapsed, leaving investors scared about the safety of their financial assets – including bank deposits. 
That scare was contained when the G-7 committed to increase guarantees of bank deposits and to backstop the financial system. 
With panic subsiding towards the end of 2008, gold prices resumed their downward movement. 
By that time, with the global economy spinning into near-depression, commercial and industrial gold use, and even luxury demand, took a further dive. 
Gold rose above $1,000 again in February-March 2009, when it looked like most of the financial system in the United States and Europe might be near insolvency, and that many governments could not guarantee deposits and backstop the financial system, because banks that were too big to fail were also too big to be saved. 
That panic subsided – and gold prices started to drift down again – after US banks were subjected to “stress tests,” America’s Troubled Asset Relief Program further backstopped the financial system by removing bad assets from banks’ balance sheets, and the global economy gradually bottomed out. 
So, with no near-term risk of inflation or depression, why have gold prices started to rise sharply again in the last few months? 
There are several reasons why gold prices are rising, but they suggest a gradual rise with significant risks of a downward correction, rather than a rapid rise towards $2,000, as today’s gold bugs claim. 
First, while we are still in a world of global deflation, large, monetized fiscal deficits are fueling concerns over medium-term inflation. 
Second, a massive wave of liquidity, via easy monetary policy, is chasing assets, including commodities, which may eventually stoke inflation further. 
Third, dollar-funded carry trades are pushing the US dollar sharply down, and there is an inverse relation between the value of the dollar and the dollar price of commodities: the lower the dollar, the higher the dollar price of oil, energy, and other commodities – including gold. 
Fourth, the global supply of gold – both existing and newly produced – is limited, and demand is rising faster than it can be met. 
Some of this demand is coming from central banks, such as those of India, China, and South Korea. 
And some of it is coming from private investors, who are using gold as a hedge against what remain low-probability “tail” risks (high inflation and another near-depression caused by a double-dip recession). 
Indeed, investors increasingly want to hedge against such risks early on. 
Given the inelastic supply of gold, even a small shift in the portfolios of central banks and private investors towards gold increases its price significantly. 
Finally, sovereign risk is rising – consider the troubles faced by investors in Dubai, Greece, and other emerging markets and advanced economies. 
This has revived concerns that governments may be unable to backstop a too-big-to-save financial system. 
But, since gold has no intrinsic value, there are significant risks of a downward correction. 
Eventually, central banks will need to exit quantitative easing and zero-interest rates, putting downward pressure on risky assets, including commodities. 
Or the global recovery may turn out to be fragile and anemic, leading to a rise in bearish sentiment on commodities – and in bullishness about the US dollar. 
Another downside risk is that the dollar-funded carry trade may unravel, crashing the global asset bubble that it, together with the wave of monetary liquidity, has caused. 
And, since the carry trade and the wave of liquidity are causing a global asset bubble, some of gold’s recent rise is also bubble-driven, with herding behavior and “momentum trading” by investors pushing gold higher and higher. 
But all bubbles eventually burst. 
The bigger the bubble, the greater the collapse. 
The recent rise in gold prices is only partially justified by fundamentals. 
Nor is it clear why investors should stock up on gold if the global economy dips into recession again and concerns about a near depression and rampant deflation rise sharply. 
If you truly fear a global economic meltdown, you should stock up on guns, canned food, and other commodities that you can actually use in your log cabin. 

The Golden Haves 
CAMBRIDGE -- Lately, I have been trying to explain to my eleven-year-old son Gabriel the astronomical differences between people’s income. 
Microsoft founder Bill Gates first penetrated Gabriel’s consciousness a couple of years ago, when his father served as a warm-up act to Gates at a large conference sponsored by the Danish government. 
Ever since, Gabriel has been fascinated by the seemingly infinite possibilities of having $60 billion. 
For example, whenever I tell Gabriel that something is unbelievably valuable (even, say, a great painting in a museum), he invariably says, “But Bill Gates could buy it, right?” 
Yes, Gates could buy the whole museum. 
But then he would just turn around and give it back so everyone else can see it, so there is no point. 
Gabriel is not entirely convinced. 
Gabriel has decided that if he can’t become a professional basketball player when he grows up, then he’d like to buy a team. 
As an economics professor, I cannot help but ask him if he knows that it costs $300-500 million to buy a National Basketball Association team. 
“But Bill Gates could do it. 
He could buy all the teams in the league, right?” 
Yes, I say. 
But if Bill Gates were to own the entire NBA, how would he decide which team to root for? 
Gabriel concedes the point, but I can tell that again he is not convinced. 
Gates is not the only one who can easily buy teams and paintings. 
The latest Forbes list of America’s wealthiest individuals showed that last year’s highest nine earners, whose ranks include New York City’s mayor, Michael Bloomberg, managed to increase their wealth by $5-9 billion last year. 
Yes, that is just the annual increase in their wealth. 
Collectively, their $55 billion in earnings outstripped the entire national income of more than 100 countries. 
To put these astronomical numbers in perspective, I had Gabriel try to confirm that to be among the top nine earners in the United States, you had to pull in at least $150 per second , including time spent eating and sleeping. 
That is $9,000 per minute, or $540,000 per hour. 
How much do America’s highest income earners make compared to the world’s billion poorest individuals? 
Well, if the top nine donated their earnings, it would be the equivalent of about three months income for the bottom billion. 
(Gabriel knows, of course, that Bill Gates and Warren Buffet have donated tens of billions already.) 
As for the other nine months, given that the US accounts for only 25% of world income, it is a fair guess that there are some very wealthy individuals elsewhere who might be able to kick in. 
(Mexican telephone magnate Carlos Slim, for example, is a close competitor to Gates for the title of the world’s richest man.) 
Mind you, the idea that the ultra-rich could easily solve poverty is stupefyingly naïve. 
Most serious academic research strongly supports the view that rich countries can best help poor regions like Africa by opening their markets, and by providing assistance in building physical and institutional infrastructure. 
The greatest successes in fighting global poverty have come from China and India, two countries that have largely pulled themselves up by their own bootstraps. 
But this seems too complicated to explain to Gabriel just yet. 
So I retreat to the simplistic rock star/United Nations view of how great it would be if we could give more money. 
Are massive income and wealth differences an inevitable outcome of fast growth? 
By and large, the answer from history is “yes.” 
China, whose growth performance since 1970 has now broken every record, is well on its way to having the world’s most unequal income distribution. 
Indeed, China has passed the US and is nearing Latin American levels of inequality. 
Policy solutions are not easy. 
Many super-earners are also super-creative and bring enormous value. 
Places like the United Kingdom actively court wealthy foreign nationals through extraordinary preferential treatment of their investment income. 
The ultra-rich are an ultra-mobile group, too. 
If you are earning $540,000 an hour, it does not take too long to save up to buy an apartment, even in London. 
Anyway, there are limits to how much tax pressure the political system can apply to the ultra-rich. 
Consider that any of the top nine American earners make more in two days than leading US Presidential candidate Hillary Clinton raises for her campaign in a good quarter of the year. 
Rather than punitively taxing wealth, globalization strengthens the case for shifting to a flat tax on income (or better yet consumption) with a moderately high exemption. 
Aside from the usual efficiency arguments, it is just going to become increasingly difficult and costly to maintain complex and idiosyncratic national tax arrangements. 
Unfortunately, movements towards fundamental tax reform are on the back burner in most countries. 
One can only hope that our children’s generation will grow up to live in a world that does a better job of balancing efficiency and equity than we do. 
Gabriel says he is going to think about it. 

The Good Fallout from Iraq 
Reconciling morals with how a society is organized - in other words, reconciling ethics with politics - is one of humanity's oldest ambitions. 
Hammurabi, Raamses II, Solon, Confucius, and Pericles were among the first great figures to embark on this effort. 
The emergence of the nation-state in the eighteenth century, and the extreme level of barbarism reached in the twentieth century, may have created the impression that an ethical politics was an unrealizable dream, or that it was a dream growing ever more distant as it receded into the future. 
Yet, despite the rivalry of nations and the bloodiness of modern warfare, democracy is spreading. 
Indeed, in but half a century, Latin Americans rid themselves of all of that continent's military and civilian dictatorships, and Africa has eliminated more than half of the despots that have blighted its era of independence. 
Compared with all the other political regimes known to mankind, democracy represents ethical progress twice over: first, because it is based on respect for human rights; and secondly, because the universal suffrage that modern democracy embraces prohibits neglecting or oppressing minorities. 
Of course, progress towards more democracy and morality in international public affairs remains extremely slow. 
Yet the year 2004 may leave to history some of the greatest progress in this area that humanity has seen. 
Signs of hope and progress abound. 
A Spanish government was overthrown because it lied to its public about the origin of the terrorist bombs that ripped apart Madrid's train station last spring. 
Tony Blair and George W. Bush are having huge problems with their electorates, also because they lied about the reasons they gave to justify their war in Iraq. 
Democracy is alive and well in the developing world, too. 
The electoral process in Indonesia is reaching a level of equity and accountability hitherto unknown in that country. 
Morocco and Algeria are working to strengthen women's rights. 
Turkey has committed itself to a vast legislative effort to improve human rights, freedom of thought, treatment of prisoners, and civilian control over the military. 
Even China, though highly insensitive to democratic principles, is discovering, with the dangerous spread of AIDS, an obligation to listen to popular clamor, and the need for public support to justify government actions. 
The US, owing to its horrific treatment and torture of prisoners in Baghdad, has had no option but to search for international legitimacy after denying and defying it for so long, in order to extricate itself from the chaos and drama of what is now Iraq. 
Israel has seen both the legitimacy of its "security wall," as well as the wall's proposed path through Palestinian territory, called into question - differently, but in a parallel manner - by both its own Supreme Court and by the International Court of Justice in The Hague. 
Israel will not be able to ignore completely the rulings of either court. 
In replacing the Organization of African Unity with the African Union, Africa, for its part, is making a huge effort to control conflict on the continent, as well as to spread observance of human rights and pursue the struggle against poverty. 
Moreover, capitalism itself is feeling pressure in every direction. 
It sees ever increasing anger against bloated payments to bosses, risky speculation, and outright fraud. 
The creation of the International Criminal Court strengthens all of these efforts to bring abuses of power by the powerful to book. 
So, despite the Iraq war and the seeming impotence of world institutions, the beginning of the twenty-first century could well bring faster global improvement in political ethics than at any time in the past. 
But for this trend to truly take hold, good politics needs something more than morals alone. 
States must begin to explain their toughest actions, those deeds that the search for security and the inevitable mistrust among states make necessary. 
"Reason of State" will not disappear entirely. 
But for democracy to continue its march of ethical progress, reasons of state must be submitted to greater public accountability and justification. 

The Good Fight against Malaria 
LONDON – The tsunami in Japan, the earthquake in Haiti, and Hurricane Katrina are among the world’s most notorious recent natural disasters. 
Their fierce devastation claimed thousands of lives, destroyed vital infrastructure, and crippled economies. 
The communities affected could not be more different from one another, and yet the similarities in the responses are striking. 
The worldwide outpouring of support demonstrated what humanity is capable of at its best. 
While international support in a time of crisis demonstrates a seemingly innate moral response to the suffering of others, it also highlights with disquieting clarity that the same level of empathy is more difficult to evoke when a crisis is chronic instead of sudden, unexpected, and dramatic. 
One of the most devastating global health challenges on the planet is malaria, which claims more than 800,000 lives annually, primarily among young African children. 
According to the Roll Back Malaria Partnership, 2,000 children die of the disease each day. 
Yet, unlike the aftermath of a natural disaster, there are no photographs to capture the scope of this tragedy. 
The loss of life is every bit as devastating, but without the onslaught of grisly images, it is much easier to become indifferent to malaria’s victims. 
Malaria deaths represent nothing less than a moral issue. 
This is why the United Nations, World Bank, Global Fund, Tony Blair Faith Foundation, African heads of state, and many other governments, organizations, and individuals have felt compelled to act. 
In 2008, United Nations Secretary-General Ban Ki-moon declared the goal of ensuring universal access to malaria-control interventions by the end of 2010 for all those at risk of the disease, with the ultimate goal of reaching near-zero malaria deaths by 2015. 
Since those goals were set, major progress has been made. 
Hundreds of thousands of lives have been saved, and the international community now is redoubling its efforts to reach the 2015 milestone. 
Three years ago, when more than $3 billion in new money was committed to the malaria effort, mosquito nets and indoor spraying protected less than 20% of Africa’s at-risk population. 
Today, the proportion is more than 90%. 
These gains occurred only because of the commitment of leaders, agencies, and individuals who realized that lessening the malaria burden is not only an opportunity, but also a responsibility. 
No organization better embodies the moral imperative of ending malaria deaths than the African Leaders Malaria Alliance (ALMA). 
Formed during the UN General Assembly in September 2009 under the leadership of President Jakaya Kikwete of Tanzania, and supported by the African Union, the group has added government advocacy and accountability to the combined efforts being made to halt and reverse the spread of malaria on the continent. 
Recognizing that the death of a child from a mosquito bite is unacceptable in the twenty-first century, ALMA leaders understand that the most effective way to ensure that recent gains are sustained is to assume leadership and ownership of the challenge. 
They are taking concrete actions, such as ensuring that essential malaria-control interventions are exempted from taxes and tariffs that add unnecessary costs to life-saving items, and that supplies are purchased in bulk to reduce costs. 
Most powerful of all, perhaps, is an innovative “scorecard,” which is being prepared to track progress in the struggle to end malaria deaths, and to “flag” problems that arise before they reach a critical stage. 
The scorecard will be open and accessible to all. 
While African political leaders have ultimate responsibility for protecting their citizens, faith communities share deeply in this commitment. 
The Tony Blair Faith Foundation is conducting a global campaign, Faiths Act, which calls for greater engagement by faith communities in preventing malaria deaths. 
Supporters of every religion in 106 countries have answered the call. 
Though accurate statistics are hard to come by, the World Health Organization estimates that faith communities provide, on average, 40% of total health-care services in sub-Saharan Africa. 
What faith communities have working in their favor are networks, infrastructure, and influential leaders to deliver health messages. 
In many instances, they can reach deep into inaccessible rural areas to deliver services. 
When well resourced, faith leaders can adopt holistic approaches to major killer diseases and use their networks effectively for immunization and combating pandemics. 
In Nigeria, which accounts for one-quarter of the continent’s malaria deaths, the Nigerian Inter-Faith Action Association has been particularly effective in training religious leaders for health messaging against malaria and in the correct use of bed nets. 
This initiative has received the backing of the Sultan of Sokoto, Sa’ad Abubakar III, the country’s leading Muslim, and the Catholic Archbishop of Abuja, John Oneiyekan. 
There is a full-time, centrally organized office and team to co-ordinate this program. 
If it succeeds, the impact will be dramatic – and not just in Nigeria. 
For example, Sierra Leone, with its small population, excellent Muslim-Christian relations, and uphill struggle to improve its health-care system after the depredations of civil war, has a longstanding relationship with the United Kingdom. 
The Tony Blair Faith Foundation has been in consultation with the country’s religious leaders and inter-faith association to develop a national program with the Ministry of Health that would promote the government’s key public-health messages, participate in education for bed-net use, and use available health assets and faith community networks. 
Now is no time for indifference. 
Much significant progress has already been made; now we must consolidate our gains. 
As foreign aid stands to suffer from cutbacks around the world, we must remember that malaria is a “natural disaster” that is devastating communities every second of every day. 
Earthquakes, tsunamis, and hurricanes can never be stopped. 
Malaria can be. 

The Gospel According to Gates 
Bill Gates and Warren Buffett, the richest and second richest person in America, and perhaps the world, are often described as admirers of Andrew Carnegie’s famous 1889 essay “The Gospel of Wealth.” 
Carnegie’s treatise, an American classic, provides a moral justification for the concentration of wealth that capitalism tends to create by arguing that immense wealth leads to well-spent charitable contributions and support of the arts and sciences. 
In short, Carnegie thought that great personal wealth leads to great civilizations. 
”The Gospel of Wealth” is based on the premise that business competition results in “survival of the fittest” – the fittest being those endowed with the most “talent for organization.” 
Carnegie argued that those who thrive in business and acquire huge personal fortunes are better at judging how the world really works, and thus are better qualified to judge where resources should be directed. 
Successful people, according to Carnegie, should retire from business while they still retain those talents and devote their remaining years to spending their fortunes on philanthropy. 
Carnegie also advocated an inheritance tax as an incentive, arguing that it would “induce the rich man to attend to the administration of wealth during his life.” 
Encouraging the rich to spend their fortunes on good causes while still alive, Carnegie maintained, is far better than leaving the disposition of their wealth to the care of their (probably untalented) children. 
Last month, Bill Gates announced that he will do what Carnegie recommended: in two years, he will change his priorities so that he can work full time for the Bill and Melinda Gates Foundation, which he and his wife founded. 
Even earlier than Carnegie, who quit at 65, Gates will devote his life to spending his huge fortune on philanthropy. 
Warren Buffett, by contrast, is 76, so he has missed his chance to apply his talents to running a charitable foundation. 
But, by leaving the bulk of his fortune, approximately $31 billion, to the Gates Foundation, he will have done the next best thing. 
Bill Gates is a controversial figure, but few doubt that he is smart. 
Even so, whereas Carnegie’s theory makes some sense (which is why his essay is remembered so well more than a century later), it isn’t obvious that he was right to believe that successful business people are the best administrators of charitable foundations. 
Useful traits in business, like aggressiveness or political savvy, might be poorly suited to philanthropy. 
Likewise, running a foundation may well require studying social problems or the arts and sciences – activities that may not accord with former capitalists’ inclinations and talents. 
The deeper flaw in Carnegie’s theory may be that it is just too difficult psychologically for business people to make the mid-life career transition to philanthropy. 
Having accumulated great wealth as “survivors” of the business world, will they really turn their talents to the task of giving it away? 
Regardless of whether Gates lives up to his promise, are people like him the exception that proves the rule? 
It is easy to be skeptical that his example will spur a new wave of early retirements to run philanthropies. 
The public-spirited justification of the concentration of wealth offered in “The Gospel of Wealth” has more support in the United States than elsewhere, which reflects Americans’ relatively greater admiration of business people. 
But Carnegie’s argument never became received doctrine even in America, because most people reject the view that rich business people are smarter and morally superior. 
Certainly, Gates and Buffett claim nothing of the sort. 
Similarly, even in America, movies and TV shows do not dramatize the lives of great tycoon philanthropists. 
Americans, like everyone else, prefer portrayals of business people who are truly evil and in the end receive their just deserts. 
And yet there is more charitable giving in the US than in other countries, reflecting a greater sense in America that private benevolence is an obligation. 
According to the Johns Hopkins University Comparative Nonprofit Sector Project, headed by Lester Salamon, the US leads major countries in private contributions to nonprofits. 
Excluding donations to churches, such contributions amount to 1% of GDP in the U.S., which is six times higher than in Germany or Japan, and 30 times higher than in Mexico. 
However, 1% of GDP is still not a very big number, and the Gates Foundation, with about $60 billion after Buffett’s bequest, now accounts for a substantial share of the total. 
Of course, Gates and Buffett deserve praise, and we should certainly wish them well. 
But we should not yet consider their example a vindication of “The Gospel of Wealth.” 

The Gospel of Growth 
CANBERRA/SEOUL – Almost four years after the start of the global financial crisis, the world economy remains fragile and unemployment is unacceptably high. 
There are roughly 200 million unemployed people worldwide, including nearly 75 million young people. 
Growth is weakening in many countries, risks are mounting, and uncertainty has intensified, owing especially to events in Europe. 
Only swift and sustained recovery can stem the rise in the human cost of economic stagnation. 
When the G-20 meets in Los Cabos, Mexico, on June 18-19, its challenge will be to shift public perceptions from pessimism and concern about the future to an optimistic mindset of growth and stability. 
We need resolute action to address the uncertainty confronting the global economy and to chart a path toward self-sustaining recovery and job creation. 
We see two components to such a strategy. 
First, we need a clear message from Europe – the immediate source of global economic concern – that it is taking decisive steps to stabilize and strengthen its banks, and that it is focused on restoring growth while credibly committing itself to fiscal consolidation. 
A crucial element of restoring confidence in Europe is agreement on a “roadmap” for the eurozone to underpin its monetary union with a fiscal union and a banking union, including pan-European supervision and deposit insurance. 
It is essential that Europe move quickly to ensure that its banks are adequately capitalized and backstopped. 
In this regard, we welcome the recent decision by Spain to seek financial assistance from the European Union to recapitalize its banks as required. 
Decisive steps to safeguard the banking sector’s health are necessary not only to reduce some of the risks that are preoccupying markets, but also because healthy financial institutions are vital for economic growth. 
Europe must have credible fiscal-consolidation plans to restore debt sustainability, but it is also essential that it has a growth strategy that includes policies aimed at boosting investment, freeing up product and labor markets, deregulating business, promoting competition, and building skills. 
These reforms, including deeper institutional integration, will be politically difficult and their benefits will take time to become fully apparent; but setting a clear pathway will underpin public confidence in Europe’s long-term growth and cooperation. 
We do not underestimate the magnitude of the reforms that Europe has achieved in recent years. 
Since the G-20’s meeting at Cannes last November, for example, Europe has increased its financial firewalls by €200 billion ($252 billion), restructured Greek debt, taken steps towards strengthening its banks and banking regulations, established rules for fiscal discipline, and implemented a range of labor- and product-market reforms. 
But the magnitude of the challenges confronting Europe implies an urgent need for far more decisive reforms. 
We are confident that Europe will act together to meet these challenges, and we will continue to support such efforts, because European stability and growth matter for us all. 
Second, we need a clear message from the G-20 that all of its members are delivering policies for strong, sustainable, and balanced growth. 
To be meaningful, the message must be backed up with action: G-20 members must demonstrate that their policies are clearly directed toward restoring economic growth and creating jobs, and that they will be accountable for meeting their commitments in full. 
And world leaders must be unambiguous about resisting protectionism and opening trade and investment. 
In particular, we believe that an international agreement on trade facilitation is the right step, as it would reduce export and import costs and restore momentum to global trade liberalization. 
The G-20 must demonstrate in Los Cabos that reform of the International Monetary Fund is continuing. 
That means that countries must deliver on their commitment to increase IMF resources by more than $430 billion, and that the Fund’s quota and governance structure must reflect the ongoing global shifts in economic influence. 
Economic growth and new jobs are crucial to improving people’s livelihoods now and to ensuring the prosperity of future generations. 
The reforms needed to secure these objectives are not easy, and change will not happen overnight. 
But the world expects the G-20 to deliver. 


The Grand Illusions 
Politicians are often accused of promising what cannot be delivered. 
In Argentina, economists sold politicians on two dreams that could not be fulfilled. 
Their failure plunged the country into its deepest political and financial crisis in decades. 
President Fernando de la Rúa was brought down by riots that left 29 dead. 
Citizens, facing unpaid salaries, frozen bank accounts and unemployment of 20%, are suffering the consequences of two grand economic illusions. 
The first concerned the supposed restorative powers of a currency board. 
Call it the magic wand illusion. 
When in 1991 Argentina tied the peso to the dollar and prevented its central bank from printing pesos freely, the world applauded - with good reason. 
The new policy ended decades of high inflation and currency debauchery. 
But the currency board was not just a monetary system; it was also a reform strategy. 
That overreach began Argentina's undoing. 
The country had not reformed previously - the theory went - because it did not need to. 
If unions bid up wages too high, a devaluation could fix the problem; if provincial governments spent a little too much, a quick round of peso printing would save the day. 
Inflation was the grease that had kept the wheels of Argentine politics going. 
Shut off the peso spigot - economists counseled - and politics would fix itself. 
Without an inflationary cushion labor markets would have to be modernized, and peso wages would fall to the point were the country could compete internationally. 
Fiscal policy would also be straightened out because the central bank was no longer the lender of last resort. 
Local banks and corporations would never again overborrow, knowing that no safety net would catch them when they fell. 
Even politicians liked this theory, since they could blame the monetary straightjacket for some of their unfulfilled promises. 
The magic wand illusion was not invented in Argentina. 
Like many things in that country, it was imported from Europe. 
Adopt a common currency, many a Continental economist had promised, and fiscal laggards such as Italy and Greece would shape up. 
In Europe, the combined carrot of northern transfers and the stick of northern reproach did the trick. 
Most southern European nations today display public finances that are Lutheran in their prudence. 
In Argentina the currency board did the trick - at the start. 
In the early-to-mid 1990s budget deficits turned into surpluses, bank and financial supervision tightened and labor market reform was repeatedly attempted (if never achieved). 
Argentina was briefly Wall Street's darling. 
Then came Mexico's crisis, and Russia's, and Asia's. 
The world economy turned sour for emerging markets. 
At that point Argentina fell victim to the second false promise - call it the golden child illusion. 
The world economy will help you as long as you help yourself, policy gurus told Argentina's politicians. 
If you suffer a shock, just turn the other cheek. 
If you need to borrow for liquidity, world market will supply those funds at reasonable interest rates. 
No matter what, don't touch the currency board, the linchpin of your credibility. 
Until late in the game, Argentina did as it was told. 
President de la Rúa countered the terms of trade and interest rate shocks from abroad with domestic tax increases, even as the economy contracted. 
Contrary to conventional wisdom, the government did not go on a spending binge. 
Despite the temptation to spend its way out of slump, Argentina's non-interest expenditure remained roughly constant. 
In 2000 the nation ran a budget surplus of 1% of domestic output, which became a total deficit of 2.4% once interest payments were added in. 
Public debt stood at a moderate 45% of output. 
In short, it did as much as the once-golden child in the class could have been expected to. 
World capital markets did not reciprocate. 
Spreads charged on loans to Argentina went from huge to obscene. 
Interest payments drove up the deficit, which spooked investors who demanded even higher spreads, enlarging the deficit even more. 
Most governments forced to pay 40% a year or more on dollar loans would eventually run out of money and stop paying. 
This is what has happened to Argentina. 
In the endgame, the consequences of a policy based on illusions reared their ugly heads. 
The temporary discipline imposed by the currency board had masked the absence of crucial reforms. 
The weakest link was the fiscal regime tying the federal government and the rest of the country together, which remained discretional and full of loopholes. 
As the budget situation deteriorated, transfers from Buenos Aires to provincial governments became a matter for day-to-day political bargaining. 
The lack of a fiscal framework hindered credibility. 
Cut off from credit, Argentina entered a deflationary spiral. 
Never mind that Cavallo promised a zero-deficit policy, spending only what the government took in. 
Budget cuts reduced demand and output, which caused revenue to collapse, making additional budget cuts inevitable. 
The lesson would have been obvious to Keynes: with monetary policy immobilized by the currency board, and with fiscal policy immobilized by lack of financing, the economy could only go down. 
The shock absorbers that were dismissed as unnecessary for a golden child (world capital markets, remember, were supposed to finance your way out of a slump) turned out to be crucial. 
In defending the currency board and trying to avoid a default vis-à-vis those who hold pesos in their pockets, Argentina ended up defaulting against everyone else: its public employees, whose salaries were either never paid or arbitrarily cut; its provinces, who have not received the transfers accorded them by law; its depositors, who can no longer withdraw their funds freely from the bank; and, crucially, its democracy, with the mandate of a popularly elected president cut short by rioting and looting. 
Now is the time to cut free of these two illusions. 
Since no one will save Argentina, Argentines must save themselves. 
A necessary step is to abandon convertibility and let the peso float, while transforming outstanding obligations to pesos so as to prevent the devaluation from wrecking the balance sheets of local banks and corporations. 
The moratorium on foreign debt payments announced by incoming President Rodríguez Saá will help cushion the blow. 
With the currency at a level that makes Argentina competitive again, reconstruction can begin. 
With no currency board to instill a false sense of discipline, real institutional reform will have to be tried. 
Provincial finances will finally have to be cleaned up. 
It will be a long, painful road. 
But this time Argentina will not travel under the illusions fostered by economic scribblers, both dead and alive. 

The Great American Tea Party 
NEW YORK – Who were those flag-waving, cheering, hollering, singing, and praying Americans who gathered in Washington DC on the last Saturday in August at a rally to “restore the honor” of the United States? 
This tax-free jamboree of patriotism was ostensibly non-partisan (otherwise it could not have been tax-free). 
The main organizer and speaker was Glenn Beck, the right-wing populist radio and TV personality, who promised to restore not only the nation’s honor, but “American values,” too. 
The other star was Sarah Palin, the darling of the populist Tea Party crowds, who began by paying her respect to Martin Luther King, Jr. For it was here, on this very same spot and date, that he gave his “I have a dream” speech in 1963. 
She then quickly proceeded to give a long celebratory speech about the heroism of US soldiers “fighting for freedom” abroad. 
It seemed an odd – and to many offensive – transition: from King’s great plea for civil rights to Palin’s sentimental clichés about the military. 
But then there was something odd about the entire event, just as there is something odd about the Tea Party movement itself. 
This latest surge of American populism is financed by some extremely wealthy men, including a couple of oil billionaires named David and Charles Koch, who favor cutting taxes for the super-rich and abolishing government subsidies for the poor, such as Social Security and President Barack Obama’s health-care plan. 
This agenda might seem selfish, though understandable from the point of view of an oil billionaire. 
But who are all those people wildly cheering for the billionaire’s dream, on of all days the anniversary of Martin Luther King’s speech? 
They are almost uniformly white, largely middle-aged and above, and for the most part far from wealthy. 
The majority have no college degree. 
Many say that they are afraid of losing their jobs. 
No doubt quite a few of them would have trouble paying the astronomical costs of American health-care bills without government assistance. 
In other words, they would benefit from the publicly financed programs that the Tea Party’s sponsors wish to abolish. 
And yet, there they are, denouncing as “socialism” Obama’s health-care legislation, or a slight tax increase for the richest 1% of the population. 
To them, “socialism” means “European”, or simply “un-American.” 
Unlike the movement’s sponsors, the crowds chanting “USA! 
USA!” do not appear to be motivated by economic self-interest. 
It is possible that many Americans are still so convinced that anyone who works hard will end up rich that they will support anything that favors billionaires. 
But it is more likely that the grassroots of American populism are motivated by something else. 
Populism everywhere is driven by fear and resentment: fear of being powerless, without status or privilege, and resentment of those – educated liberal elites, foreigners who supposedly take our jobs, and Muslims, Jews, blacks, or illegal immigrants – who seem to enjoy undeserved benefits. 
These fears and resentments exist everywhere, now more than ever. 
But they are not expressed in the same way in every country. 
Rural Americans, living on the vast plains, uprooted and isolated from the outside world, have a history of expressing their longing for community and mystical identity by gathering in large numbers in churches and tents, listening to the grand statements of charismatic hucksters. 
Sarah Palin and Glenn Beck are heirs to a long line of preachers and politicians who made their fortunes by stirring up anxious crowds, promising them Heaven on Earth, or at least a place in Heaven. 
In the case of Beck’s rally in Washington DC, the link with history of rural churches and religious “revival” meetings was overt. 
America, after “wandering in darkness… today begins to turn back to God,” Beck declared, in the typical style of a TV evangelist. 
Part of such rabble-rousers’ stock-in-trade is to conflate patriotism, freedom, and God. 
This is the myth of the US, the God-blessed land of the free. 
Underlying Beck’s “non-partisan” preacher’s talk about restoring American honor and values was a message that everyone in the crowd understood: such un-American elements as the liberal elites in New York and Washington, Democrats, and other God-less socialists had robbed America of its honor and values. 
After the event, Beck gave an interview, in which he criticized Obama – not for his tax policies, but for having the wrong religious beliefs. 
Obama, he said, believes in “liberation theology,” which means that he must be a “socialist,” thus un-American. 
This is also what Palin means when she tells her Tea Party crowds that they are the “real Americans,” implying that all Americans who disagree with her views are not. 
They are aliens who have no right to govern the nation. 
The success of the Tea Party movement has made many Democrats (and some sober Republicans) nervous. 
There are calls for the Democrats to fight back. 
This is not impossible. 
Democratic politicians have a populist tradition, too. 
Talk of God, freedom, and nation is not unique to right-wing radicals or Republicans. 
Franklin D. Roosevelt knew how to inspire the patriotism of working men. 
John F. Kennedy was good at selling the American dream. 
Lyndon B. Johnson had the common touch of rural Texas. 
Barack Obama is from urban Hawaii but has all the rhetorical gifts of an old-fashioned preacher. 
Alas, he has several distinct disadvantages, too: he was educated at two elite universities, his middle name is Hussein, and his father was black. 
Any one of these would be a handicap at a time of rising populism, but the combination of all three is lethal. 
The Tea Party movement – an economic agenda for the rich masquerading as the salvation of God-fearing white Americans – knows that all too well. 

The Great Ape Debate 
In his History of European Morals, published in 1869, the Irish historian and philosopher W.E.H. Lecky wrote: 
At one time the benevolent affections embrace merely the family, soon the circle expanding includes first a class, then a nation, then a coalition of nations, then all humanity and finally, its influence is felt in the dealings of man with the animal world... 
The expansion of the moral circle could be about to take a significant step forwards. 
Francisco Garrido, a bioethicist and member of Spain’s parliament, has moved a resolution exhorting the government “to declare its adhesion to the Great Ape Project and to take any necessary measures in international forums and organizations for the protection of great apes from maltreatment, slavery, torture, death, and extinction.” 
The resolution would not have the force of law, but its approval would mark the first time that a national legislature has recognized the special status of great apes and the need to protect them, not only from extinction, but also from individual abuse. 
I founded the Great Ape Project together with Paola Cavalieri, an Italian philosopher and animal advocate, in 1993. Our aim was to grant some basic rights to the nonhuman great apes: life, liberty, and the prohibition of torture. 
The Project has proven controversial. 
Some opponents argue that, in extending rights beyond our own species, it goes too far, while others claim that, in limiting rights to the great apes, it does not go far enough. 
We reject the first criticism entirely. 
There is no sound moral reason why possession of basic rights should be limited to members of a particular species. 
If we were to meet intelligent, sympathetic extraterrestrials, would we deny them basic rights because they are not members of our own species? 
At a minimum, we should recognize basic rights in all beings who show intelligence and awareness (including some level of self-awareness) and who have emotional and social needs. 
We are more sympathetic to the second criticism. 
The Great Ape Project does not reject the idea of basic rights for other animals. 
It merely asserts that the case for such rights is strongest in respect to great apes. 
The work of researchers like Jane Goodall, Diane Fossey, Birute Galdikas, Frans de Waal, and many others amply demonstrates that the great apes are intelligent beings with strong emotions that in many ways resemble our own. 
Chimpanzees, bonobos, and gorillas have long-term relationships, not only between mothers and children, but also between unrelated apes. 
When a loved one dies, they grieve for a long time. 
They can solve complex puzzles that stump most two-year-old humans. 
They can learn hundreds of signs, and put them together in sentences that obey grammatical rules. 
They display a sense of justice, resenting others who do not reciprocate a favor. 
When we group chimpanzees together with, say, snakes, as “animals,” we imply that the gap between us and chimpanzees is greater than the gap between chimpanzees and snakes. 
But in evolutionary terms this is nonsense. 
Chimpanzees and bonobos are our closest relatives, and we humans, not gorillas or orangutans, are their closest relatives. 
Indeed, three years ago, a group of scientists led by Derek Wildman proposed, in the Proceedings of the National Academy of Sciences, that chimpanzees have been shown to be so close to humans genetically that they should be included in the genus Homo. 
Like any important and novel idea, Garrido’s proposal has aroused considerable debate in Spain. 
Some are concerned that it will interfere with medical research. 
But the only European biomedical research that has used great apes recently is the Biomedical Primate Research Centre at Rijswijk, in the Netherlands. 
In 2002, a review by the Dutch Royal Academy of Science found that the chimpanzee colony there was not serving any vital research purposes. 
The Dutch government subsequently banned biomedical research on chimpanzees. 
Thus, there is no European medical research currently being conducted on great apes, and one barrier to granting them some basic rights has collapsed. 
Some of the opposition stems from misunderstandings. 
Recognizing the rights of great apes does not mean that they all must be set free, even those born and bred in zoos, who would be unable to survive in the wild. 
Nor does it rule out euthanasia if that is in the interest of individual apes whose suffering cannot be relieved. 
Just as some humans are unable to fend for themselves and need others to act as their guardians, so, too, will great apes living in the midst of human communities. 
What extending basic rights to great apes does mean is that they will cease to be mere things that can be owned and used for our amusement or entertainment. 
A final group of opponents recognizes the strength of the case for extending rights to great apes, but worries that this may pave the way for the extension of rights to all primates, or all mammals, or all animals. 
They could be right. 
Only time will tell. 
But that is irrelevant to the merits of the case for granting basic rights to the great apes. 
We should not be deterred from doing right now by the fear that we may later be persuaded that we should do right again. 

The Great Bank Robbery 
NEW YORK – For the American economy – and for many other developed economies – the elephant in the room is the amount of money paid to bankers over the last five years. 
For banks that have filings with the US Securities and Exchange Commission, the sum stands at an astounding $2.2 trillion. 
Extrapolating over the coming decade, the numbers would approach $5 trillion, an amount vastly larger than what both President Barack Obama’s administration and his Republican opponents seem willing to cut from further government deficits. 
That $5 trillion dollars is not money invested in building roads, schools, and other long-term projects, but is directly transferred from the American economy to the personal accounts of bank executives and employees. 
Such transfers represent as cunning a tax on everyone else as one can imagine. 
It feels quite iniquitous that bankers, having helped cause today’s financial and economic troubles, are the only class that is not suffering from them – and in many cases are actually benefiting. 
Mainstream megabanks are puzzling in many respects. 
It is (now) no secret that they have operated so far as large sophisticated compensation schemes, masking probabilities of low-risk, high-impact “Black Swan” events and benefiting from the free backstop of implicit public guarantees. 
Excessive leverage, rather than skills, can be seen as the source of their resulting profits, which then flow disproportionately to employees, and of their sometimes-massive losses, which are borne by shareholders and taxpayers. 
In other words, banks take risks, get paid for the upside, and then transfer the downside to shareholders, taxpayers, and even retirees. 
In order to rescue the banking system, the Federal Reserve, for example, put interest rates at artificially low levels; as was disclosed recently, it also has provided secret loans of $1.2 trillion to banks. 
The main effect so far has been to help bankers generate bonuses (rather than attract borrowers) by hiding exposures. 
Taxpayers end up paying for these exposures, as do retirees and others who rely on returns from their savings. 
Moreover, low-interest-rate policies transfer inflation risk to all savers – and to future generations. 
Perhaps the greatest insult to taxpayers, then, is that bankers’ compensation last year was back at its pre-crisis level. 
Of course, before being bailed out by governments, banks had never made any return in their history, assuming that their assets are properly marked to market. 
Nor should they produce any return in the long run, as their business model remains identical to what it was before, with only cosmetic modifications concerning trading risks. 
So the facts are clear. 
But, as individual taxpayers, we are helpless, because we do not control outcomes, owing to the concerted efforts of lobbyists, or, worse, economic policymakers. 
Our subsidizing of bank managers and executives is completely involuntary. 
But the puzzle represents an even bigger elephant. 
Why does any investment manager buy the stocks of banks that pay out very large portions of their earnings to their employees? 
The promise of replicating past returns cannot be the reason, given the inadequacy of those returns. 
In fact, filtering out stocks in accordance with payouts would have lowered the draw-downs on investment in the financial sector by well over half over the past 20 years, with no loss in returns. 
Why do portfolio and pension-fund managers hope to receive impunity from their investors? 
Isn’t it obvious to investors that they are voluntarily transferring their clients’ funds to the pockets of bankers? 
Aren’t fund managers violating both fiduciary responsibilities and moral rules? 
Are they missing the only opportunity we have to discipline the banks and force them to compete for responsible risk-taking? 
It is hard to understand why the market mechanism does not eliminate such questions. 
A well-functioning market would produce outcomes that favor banks with the right exposures, the right compensation schemes, the right risk-sharing, and therefore the right corporate governance. 
One may wonder: If investment managers and their clients don’t receive high returns on bank stocks, as they would if they were profiting from bankers’ externalization of risk onto taxpayers, why do they hold them at all? 
The answer is the so-called “beta”: banks represent a large share of the S&P 500, and managers need to be invested in them. 
We don’t believe that regulation is a panacea for this state of affairs. 
The largest, most sophisticated banks have become expert at remaining one step ahead of regulators – constantly creating complex financial products and derivatives that skirt the letter of the rules. 
In these circumstances, more complicated regulations merely mean more billable hours for lawyers, more income for regulators switching sides, and more profits for derivatives traders. 
Investment managers have a moral and professional responsibility to play their role in bringing some discipline into the banking system. 
Their first step should be to separate banks according to their compensation criteria. 
Investors have used ethical grounds in the past – excluding, say, tobacco companies or corporations abetting apartheid in South Africa – and have been successful in generating pressure on the underlying stocks. 
Investing in banks constitutes a double breach – ethical and professional. 
Investors, and the rest of us, would be much better off if these funds flowed to more productive companies, perhaps with an amount equivalent to what would be transferred to bankers’ bonuses redirected to well-managed charities. 

The Great Brain Race 
WASHINGTON, DC – For decades, research universities in the United States have been universally acknowledged as the world’s leaders in science and engineering, unsurpassed since World War II in the sheer volume and excellence of the scholarship and innovation that they generate. 
But there are growing signs that the rest of the world is gaining ground fast – building new universities, improving existing ones, competing hard for the best students, and recruiting US-trained PhDs to return home to work in university and industry labs. 
Is the international scholarly pecking order about to be overturned? 
There is no question that the academic enterprise has become increasingly global, particularly in the sciences. 
Nearly three million students now study outside their home countries – a 57% increase in the last decade. 
Foreign students now dominate many US doctoral programs, accounting for 64% of PhDs in computer science, for example. 
Tsinghua and Peking universities together recently surpassed Berkeley as the top sources of students who go on to earn American PhDs. 
Faculty are on the move, too. 
Half of the world’s top physicists no longer work in their native countries. 
And major institutions such as New York University and the University of Nottingham are creating branch campuses in the Middle East and Asia. 
There are now 162 satellite campuses worldwide, an increase of 43% in just the past three years. 
At the same time, growing numbers of traditional source countries for students, from South Korea to Saudi Arabia, are trying to improve both the quantity and quality of their own degrees, engaging in a fierce – and expensive – race to recruit students and create world-class research universities of their own. 
All this competition has led to considerable hand-wringing in the West. 
During a 2008 campaign stop, for instance, then-candidate Barack Obama spoke in alarmed tones about the threat that such academic competition poses to US competitiveness. 
“If we want to keep on building the cars of the future here in America,” he declared, “we can’t afford to see the number of PhDs in engineering climbing in China, South Korea, and Japan even as it’s dropped here in America.” 
Nor are such concerns limited to the US. 
In some countries, worries about educational competition and brain drains have led to outright academic protectionism. 
India and China are notorious for the legal and bureaucratic obstacles they place in front of Western universities that want to set up satellite campuses catering to local students. 
And sometimes students who want to leave face barriers. 
Several years ago, the president of one of the prestigious Indian Institutes of Technology effectively banned undergraduates from accepting academic or business internships overseas. 
There are other impediments to global mobility, too, not always explicitly protectionist, but all having the effect of limiting access to universities around the world. 
In the years following the terrorist attacks of September 11, 2001, for example, legitimate security concerns led to enormous student-visa delays and bureaucratic hassles for foreigners aspiring to study in the US. 
Student numbers have since rebounded, despite intermittent problems, but there remain severe limits on work and residency visas, which should serve as an enticement for the best and brightest to study in the US. 
Perhaps some of the anxiety over the new global academic enterprise is understandable, particularly in a period of massive economic uncertainty. 
But educational protectionism is as big a mistake as trade protectionism. 
The globalization of higher education should be embraced, not feared – including in the US. 
There is every reason to believe that the worldwide competition for human talent, the race to produce innovative research, the push to extend university campuses to multiple countries, and the rush to train talented graduates who can strengthen increasingly knowledge-based economies will be good for the US as well. 
Above all, this is because the expansion of knowledge is not a zero-sum game. 
More PhD production and burgeoning research in China, for instance, doesn’t take away from America’s store of learning; on the contrary, it enhances what we know and can accomplish. 
Because knowledge is a public good, intellectual gains by one country often benefit others. 
Chinese research may well provide the building blocks for innovation by US entrepreneurs – or those from other countries. 
Indeed, the economic benefits of a global academic culture are significant. 
Just as free trade provides the lowest-cost goods and services, benefiting both consumers and the most efficient producers, global academic competition is making free movement of people and ideas, on the basis of merit, more and more the norm, with enormously positive consequences for individuals, universities, and countries. 
Today's swirling patterns of mobility and knowledge transmission constitute a new kind of free trade: free trade in minds. 
The US should respond to the globalization of higher education not with angst but with a sense of possibility. 
Neither a gradual erosion in the US market share of students, nor the emergence of ambitious new competitors in Asia, Europe, and the Middle East means that American universities are on an inevitable path to decline. 
By resisting protectionist barriers at home and abroad, by continuing to recruit and welcome the world’s best students, by sending more students overseas, by fostering cross-national research collaboration, and by strengthening its own research universities, the US can sustain its well-established academic excellence while continuing to expand the sum total of global knowledge and prosperity. 

The Great Contraction of 2008-2009 
CAMBRIDGE – A popular view among economic forecasters and market bulls is that “the deeper the recession, the quicker the recovery.” 
They are right – up to a point: immediately after a normal recession, economies do, indeed, often grow much faster than usual over the ensuing twelve months. 
Unfortunately, the Great Recession of 2008-2009 is far from being a normal global recession. 
The Great Recession was turbo-charged by a financial crisis, making it a far more insidious affair that typically has far more long-lasting effects. 
As Carmen Reinhart and I argue in our new book This Time is Different: Eight Centuries of Financial Folly , the Great Recession is better described as “The Great Contraction,” given the massive and simultaneous contraction of global credit, trade, and growth that the world has experienced. 
Fortunately, despite a hobbled recovery in the developed world, emerging markets in Asia, Latin America, and the Middle East have enormous latent growth potential. 
Most should be able to grow strongly, despite the challenging global environment. 
Nevertheless, the legacy of the huge contraction in credit is not likely to go away anytime soon. 
Yes, if you are a bank, particularly a big one, you can raise money easily enough, thanks to sweeping explicit and implicit government guarantees. 
But, for everyone else, particularly small and medium-size firms, the credit environment continues to be very challenging. 
Even firms in established industries such as energy report facing great difficulties in raising capital. 
The optimists say not to worry. 
Credit will soon come to everyone else as easily as it has to the banks. 
After all, credit also dried up during the 1991 global recession, and yet funds were flowing briskly within 18 months. 
But this parallel fails to recognize the fact that balance sheets remain far more impaired this time. 
Housing prices are being propped up temporarily by myriad subsidies, while a commercial real-estate tsunami looms. 
Many banks’ weaknesses are simply being masked by government guarantees. 
Indeed, G-20 governments now face the daunting prospect of trying to rein in the monster they have created. 
It is now very clear that the taxpayer will always be there to guarantee that bondholders get paid. 
Unchecked, large financial firms will be able to tap bond markets for decades to come at rates just above what the government pays, regardless of the inherent risk of their asset positions. 
Lenders to banks will not bother worrying about what kinds of gambles and investments financial institutions are making, or whether regulation is effective. 
The good news is that most governments do see the need to implement significant new regulation on financial firms. 
But here’s the rub: financial regulation is enormously complicated, all the more so given that there must be some degree of international consistency. 
It would be a disaster if countries were to rush in individually to implement their own new system. 
On the other hand, if regulators take their time to “get it right,” there will be a huge shadow of uncertainty hanging over the financial system. 
Banks know that they face higher capital requirements, which will force them to scale back lending relative to their resources). 
But how much higher? 
There is much discussion of breaking up banks that are too big to fail. 
But what will actually happen? 
Given this environment, no wonder credit is still contracting in the United States, Europe, and elsewhere. 
If banks don’t know what the rules of the game are going to be, they have to be very cautious about over-extending their balance sheets. 
So government regulators – and ultimately all of us – are caught between a rock and a hard place. Regulate in haste, repent at leisure. 
Overly strict regulation could seriously impair global growth for decades. 
But if regulation is too soft, the next monster global financial crisis could come within a decade. 
And even if regulators take their time to try to get it right, as most of us think they should, the world may have to live with weak credit expansion as banks hold back, awaiting a clearer verdict on their future. 
And here is another painful thought that Harvard historian Niall Ferguson often emphasizes: many of the leaders and legislators who are passing judgment on new rules for banks are the same leaders and legislators who oversaw the regulation in the run-up to the financial crisis. 
I am often asked why economies get themselves into such a bind again and again throughout economic history. 
Unfortunately, as Reinhart and I document empirically for hundreds of financial crises, covering 66 countries and eight centuries, the answer is all too simple: arrogance and ignorance. 
Investors and policymakers are often altogether ignorant of the myriad historical experiences with financial crises. 
And the few that are dimly aware of what has happened in other times and other places all too often say, “Don’t worry, this time is different.” 
Perhaps the Great Contraction of 2008-2009 will be different from other deep financial crises, and we will see a sustained sharp recovery worldwide. 
But G-20 policymakers are best advised not to bet on it, and to counsel patience, particularly in epicenter countries. 

The Great Debt Scare 
NEW HAVEN – It might not seem that Europe’s sovereign-debt crisis and growing concern about the United States’ debt position should shake basic economic confidence. 
But they apparently have. 
And loss of confidence, by discouraging consumption and investment, can be a self-fulfilling prophecy, causing the economic weakness that is feared. 
Significant drops in consumer-confidence indices in Europe and North America already reflect this perverse dynamic. 
We now have a daily index for the US, the Gallup Economic Confidence Index, so we can pinpoint changes in confidence over time. 
The Gallup Index dropped sharply between the first week of July and the first week of August – the period when US political leaders worried everyone that they would be unable to raise the federal government’s debt ceiling and prevent the US from defaulting on August 2. 
The story played out in the news media every day. 
August 2 came and went, with no default, but, three days later, a Friday, Standard & Poor’s lowered its rating on long-term US debt from AAA to AA+. 
The following Monday, the S&P 500 dropped almost 7%. 
Apparently, the specter of government deadlock causing a humiliating default suddenly made the US resemble the European countries that really are teetering on the brink. 
Europe’s story became America’s story. 
Changes in public confidence are built upon such narratives, because the human mind is very receptive to them, particularly human-interest stories. 
The story of a possible US default is resonant in precisely this way, implicating as it does America’s sense of pride, fragile world dominance, and political upheavals. 
Indeed, this is arguably a more captivating story than was the most intense moment of the financial crisis, in 2008, when Lehman Brothers collapsed. 
The drop in the Gallup Economic Confidence Index was sharper in July 2011 than it was in 2008, although the index has not yet fallen to a lower level than it reached then. 
Most confidence indices today are based on survey questions that ask respondents to assess the economy today or in the near future. 
George Gallup, the pioneer of survey methods and creator of the Gallup poll, created a confidence index in 1938, late in the Great Depression, when he asked Americans, “Do you think business will be better or worse six months from now?” 
He interpreted the answers as measuring “public optimism” and “the intangible mental attitude which is recognized as one vital element in the week-to-week fluctuations of business activity.” 
But it hardly seems likely that big changes in people’s confidence (the kind of confidence that affects their willingness to spend or invest) are rooted in expectations over so short a time horizon. 
When George Gallup wrote, almost nine years after the Great Depression began, a sense of ultimate futility – a belief that high unemployment would never end – was widespread. 
That sentiment probably held back consumption and investment far more than any opinions about changes in the next six months. 
After all, consumers’ willingness to spend depends on their general situation, not on whether business will be a little better in the short term. 
Likewise, businesses’ willingness to hire people and expand operations depends on their longer-term expectations. 
The Consumer Sentiment Survey of Americans, created by George Katona at the University of Michigan in the early 1950’s, and known today as the Thomson-Reuters University of Michigan Surveys of Consumers, has included a remarkable question about the reasonably long-term future, five years hence, and asks about visceral fears concerning that period: 
“Looking ahead, which would you say is more likely – that in the country as a whole we’ll have continuous good times during the next five years or so, or that we will have periods of widespread unemployment or depression, or what?” 
That question is usually not singled out for attention, but it appears spot-on for what we really want to know: what deep anxieties and fears do people have that might inhibit their willingness to spend for a long time. 
The answers to that question might well help us forecast the future outlook much more accurately. 
Those answers plunged into depression territory between July and August, and the index of optimism based on answers to this question is at its lowest level since the oil-crisis-induced “great recession” of the early 1980’s. 
It stood at 135, its highest-ever level, in 2000, at the very peak of the millennium stock market bubble. 
By May 2011, it had fallen to 88. 
By September, just four months later, it was down to 48. 
This is a much bigger downswing than was recorded in the overall consumer-confidence indices. 
The decline occurred over the better part of a decade, as we began to see the end of debt-driven overexpansion, and accelerated with the latest debt crisis. 
The timing and substance of these consumer-survey results suggest that our fundamental outlook about the economy, at the level of the average person, is closely bound up with stories of excessive borrowing, loss of governmental and personal responsibility, and a sense that matters are beyond control. 
That kind of loss of confidence may well last for years. 
That said, the economic outlook can never be fully analyzed with conventional statistical models, for it may hinge on something that such models do not include: our finding some way to replace one narrative – currently a tale of out-of-control debt – with a more inspiring story. 

The Great Denial 
CAMBRIDGE: Social security is the great cash cow of irresponsible governments. 
At their beginning, when governments introduce a traditional social security system they gain quite a few decades to collect taxes before the first sizeable payouts to retirees show up. 
But then, yet a few decades later and reinforced by longer life expectancy and sharply lower birth rates, the system goes bust: tax inflows are insufficient to balance the outflows in the form of payments to retirees. 
What was attractive as a way of financing government in the second half of the 20th century becomes a formidable headache 20 years from now. 
The size of the problem, the fact that it hits so many countries at the same time, and the great difficulty of doing something about it all call for confronting it as soon as possible. 
Yet, the Great Denial is practiced by governments and international institutions alike. 
This is as true in Japan as it is in Europe even though their problems are by far the worst in the world. 
In the past decade attention has focused on bringing down budget deficits, establishing the EU convergence targets and the like. 
But these targets have been organized around the explicit public debt already on the books with absolutely no provision for the implicit debt implied by social security liabilities. 
Yet, these liabilities are just as real as the existing public debt and, in quite a few cases, their present value is as high or higher than the public debt numbers. 
In Japan, for example, existing public debt is near 100%, but there is an extra 150% of GDP in net pension liabilities. 
The sum is stunningly large and presumably unpayable. 
Moreover, the prospect is not a distant one, but something knocking at the door: population (hence the number of taxpayers) is already declining, the social security accounts are already turning to deficits and 15 years hence the debt mountain will be crushing capital markets. 
In such a situation one needs urgent reforms that create more taxpayers, not fewer as is now the case as a result of partial restructuring without deregulation, good budgets and lots of growth. 
Japan has none of these. 
But Japan is no exception. 
China has its problems. 
But, unlike Japan, it responds dramatically: the 1-child-per-family rule has just been junked. 
Why, because 20 or 30 years from now China needs a lot of taxpayers to fund a wave of retirees; opening up the rules on births now provides taxpayers down the road. 
That long horizon is entirely appropriate; the view that the problem can be solved once we get there does not work because demographics is a slow process which now is on a very adverse trend. 
In Europe the trend is dramatically unfavorable, more so in all the transition economies. 
A simple number to watch is this: what is the growth rate of the population group of 1 to 14 yearsCthe taxpayers of 2030? 
In Poland that number is B1.9%, -2.3% in Hungary, -2.5% in the Czech Republic, -2.3% in Romania and so on. 
Here is a crisis in the making because giving the old nothing means a huge poverty problem, giving them something means huge tax burdens on a shrinking labor force. 
In Western Europe, with substantial differences across countries, the situation is not much better. 
Spain, Italy, Germany all have negative growth rates for young population groups. 
They all have very large net social security liabilities; they all have excessive entitlements and too few future taxpayers to shoulder the burden. 
Those born now will live in a richer economy, but they will get less of it because they will be paying through their nose to look after the large group of retirees who will vote the taxes. 
Are there exceptions to the gloomy outlook? 
Yes, of course. 
In Britain, the Thatcher government decoupled entitlements from current wages. 
The result is that net social security liabilities are essentially zero. 
In the US, an effective social security system and sound public finance with surpluses at full employment increasingly funds for future retirees. 
What to do at this stage, with the problem as yet distant but the lead-time for heading off catastrophe very long? 
The right policies focus on three fronts. 
First, workers need to be encouraged to provide for their own retirement. 
In part this is accomplished by explicitly reducing entitlements and raising retirement age from absurdly low levels. 
But it is also accomplished by privatization of social security such that the mandatory contributions are taken out of the hands of government and invested for the future rather than dissipated in current spending. 
Second, governments have to start running budget surpluses and use privatization to set aside revenues that can be invested to meet future claims. 
Third, governments need to focus on policies that create employment and taxpayers. 
Paying people not to work, as is common in Western Europe, is scandalous and ultimately undermines public finance. 
Regulatory reform is essential so that as large firms increasingly restructure and shed labor, workers can easily move into newly created jobs rather than winding up on the unemployment rolls. 
It is time to stop denying the problem. 
Radically different strategies of reform and restructuring on a broad front, in the market and in public finance, need to be phased in rapidly to create a prospect for dealing with the problem. 
Adverse demographic trends combined with bad welfare state policies have created a time bomb that cannot be defused once it is about to go off. 

The Great Depression Analogy 
PRINCETON – Whenever today’s economic crisis is discussed, analogies to the Great Depression are never far away. 
In its latest “World Economic Outlook,” the IMF examines the analogy explicitly, in terms not only of the collapse of financial confidence, but also of the rapid decline in global trade and industrial activity. 
In general, history, rather than economic theory, seems to offer a guide to interpreting wildly surprising and inherently unpredictable events. 
Almost every contemporary use of the depression analogy takes the year 1929 as a reference point. 
But two completely different pathologies were manifest in the Great Depression; each called for different diagnoses – and different cures. 
The first, and most famous, pathology was the stock market crash of October 1929 in the United States. 
No other country had a stock market panic of similar magnitude, in large part because no other country had experienced the euphoric run-up of stock prices that sucked large numbers of Americans, from very different backgrounds, into financial speculation. 
The second pathology was decisive in turning a bad recession into the Great Depression. 
A series of bank panics emanated from central Europe in the summer of 1931 and spread financial contagion to Great Britain, then to the US and France, and finally around the world. 
The 1929 panic has dominated all analysis of the depression for two rather peculiar reasons. 
First, no one has ever been able to explain satisfactorily the October 1929 market collapse in terms of a rational cause, with market participants reacting to a specific news event. 
So the crash presents an intellectual puzzle, and economists can build their reputations on trying to find innovative accounts. 
Some people conclude that markets are simply irrational. 
Others strain to produce complicated models, according to which investors might have been able to foresee the Depression, or ponder the likelihood of protectionist reactions in other countries to the American tariff act, though the US legislation had not yet even been finalized. 
The second reason that 1929 has been popular with academic and political commentators is that it provides a clear motive for taking particular policy measures. 
Keynesians have been able to demonstrate that fiscal stimulus can stabilize market expectations, and thus provide an overall framework of confidence. 
Monetarists tell an alternative but parallel story of how stable monetary growth avoids radical perturbations. 
The 1929 crash had no obvious cause, but two very plausible solutions. 
The European banking disaster of 1931 was exactly the other way round. 
No academic laurels are to be won by finding innovative accounts as its cause: the collapses were the result of financial weakness in countries where bad policies produced hyper-inflation, which destroyed banks’ balance sheets. 
Intrinsic vulnerability made for heightened exposure to political shocks, and disputes about a Central European customs union and about war reparations was enough to topple a house of cards. 
But repairing the damage was tough. 
Unlike 1929, there were (and are) no obvious macroeconomic answers to financial distress. 
Some famous macroeconomists, including Larry Summers, the current chief economic thinker of the Obama administration, have tried to play down the role of financial-sector instability in causing depressions. 
The answers, if they exist, lie in the slow and painful cleaning up of balance sheets; and in microeconomic restructuring, which cannot simply be imposed from above by an omniscient planner, but requires many businesses and individuals to change their outlook and behavior. 
The improvement of regulation and supervision, while a good idea, is better suited to avoiding future crises than to dealing with the consequences of a catastrophe that has already occurred. 
The consequence of the long academic and popular discussion of the 1929 crisis is that people have come to expect that there must be easy answers. 
But the collapse of Lehman Brothers in September 2008 was a 1931-like event, highly reminiscent of the world of depression economics. 
Austrian and German bank collapses would not have driven the entire world from recession into depression if those countries had simply been isolated or self-contained economies. 
But they had built their economies on borrowed money – chiefly from America – in the second half of the 1920’s. 
That dependence is analogous to the way in which money from emerging economies, mostly in Asia, flowed into the US in the 2000’s, when an apparent economic miracle was based on China’s willingness to lend. 
The bank collapses in 1931, and in September 2008, have shaken the confidence of the international creditor: then the US, now China. 
Both lessons – about the slowness and painfulness of bank reconstruction, and about dependence on a large external provider of capital – are unpalatable. 
For a long time, it was much easier to repeat the soothing mantra that the world community had collectively learned how to avoid a 1929-style collapse, and that the world’s central banks clearly showed this in 1987 or 2001. 
Governments undoubtedly merit praise for stabilizing expectations, and thus preventing crises from worsening. 
But it is misleading when officials tout simple, if not simplistic, policy proposals as the basis for hoping that we can avoid a long period of difficult economic adjustment. 

The Great Depression in Economic Memory 
PARIS – The dispute that has emerged in the United States and Europe between proponents of further government stimulus and advocates of fiscal retrenchment feels very much like a debate about economic history. 
Both sides have revisited the Great Depression of the 1930’s – as well as the centuries-long history of sovereign-debt crises – in a controversy that bears little resemblance to conventional economic-policy controversies. 
The pro-stimulus camp often refers to the damage wrought by fiscal retrenchment in the US in 1937, four years after Franklin Roosevelt’s election as US president and the launch of the New Deal. 
According to computations by the economist Paul van den Noord, the net result of the 1937 budget was a fiscal contraction amounting to three percentage points of GDP – certainly not a trivial amount. 
Economic growth plummeted from 13% in 1936 to 6% in 1937, and GDP shrank 4.5% in 1938, while unemployment rose from 14% to roughly 20%. 
Although fiscal policy was not the only cause of the double dip, ill-timed retrenchment certainly contributed to it. 
So, are we in 1936, and does the budgetary tightening contemplated in many countries risk provoking a similar double-dip recession? 
Clearly there are limits to the comparison. 
For starters, much less time has elapsed since the financial crisis, the recession has been much shallower, and recovery has come faster. 
Moreover, important developments that occurred between the 1929 stock-market crisis and the 1937 fiscal retrenchment – especially America’s turn to protectionism in 1930 and the monetary turmoil of subsequent years – have no analog today. 
Nevertheless, the 1937 episode does seem to illustrate the dangers of attempting to consolidate public finances at a time when the private sector is still too weak for economic recovery to be self-sustaining. 
(Another case with similar consequences was Japan’s value-added tax increase in 1997, which precipitated a collapse of consumption). 
Fiscal hawks also rely on history-based arguments. 
The economists Carmen Reinhart and Kenneth Rogoff have studied centuries of sovereign-debt crises, and remind us that today’s developed world has a forgotten history of sovereign default. 
A particularly telling example is the aftermath of the Napoleonic wars of the early nineteenth century, when a string of exhausted states defaulted on their obligations. 
The 1930’s are relevant here as well, given another series of defaults among European states, not least Germany. 
What history tells us here is that defaults are not the privilege of poor, under-governed countries. 
They are a threat to all, especially in times of high capital mobility, when governments rely too much on foreign lenders’ apparent willingness to provide funds and find themselves in dire straits when capital inflows stop. 
Again, there are limits to comparisons: it is especially hard to infer from past episodes the limits to public debt. 
After all, British public debt exceeded 250% of GDP in the aftermath of World War II, and Britain did not default. 
But an important insight from history is that unsustainable fiscal policies are more likely to result in defaults when fiscal problems cannot be inflated away. 
This was the case under the gold-based monetary regimes such as the Gold Standard of the nineteenth century, and it is the case today for countries that have relinquished their monetary autonomy, such as the members of the eurozone. 
In normal times, history is left to historians and economic-policy debate relies on models and econometric estimates. 
But attitudes changed as soon as the crisis erupted in 2007-2008. 
Indeed, central bankers and ministers were obsessed at the time by the memory of the 1930’s, and they consciously did the opposite of what their predecessors did 80 years ago. 
They were right to do so. 
In extraordinary times, history is, in fact, a better guide than models estimated with data from ordinary times, because it captures variance that standard time-series techniques ignore. 
If one wants to know how to deal with a banking crisis, the risk of a depression, or the threat of a default, it is natural to examine times when those dangers were around, rather than to rely on models that ignore such dangers or treat them as distant clouds. 
In times of crisis, the best guides are theory, which captures the essence of a problem, and the lessons of past experience. 
Everything in between is virtually useless. 
The danger with relying on history, however, is that we have no methodology to decide which comparisons are relevant. 
Loose analogies can easily be regarded at proofs, and a vast array of experiences can be enrolled to support a particular view. 
Policymakers (whose knowledge of economic history is generally limited) are therefore at risk of being drowned in contradictory historical references. 
History can be an essential compass when past experience provides unambiguous headings. 
But an undisciplined appeal to history risks becoming a confusing way to express opinions. 
Governance by analogy can easily lead to muddled governance. 

The Great Escapism 
NEW YORK – Barack Obama, however mixed his accomplishments to date as US president, has sought to rebrand America and reclaim its former signature asset: its ability to embody universally admired values. 
As popular culture is usually the way those values are transmitted, it is worth considering what it is about American cinema, music, and popular literature that makes them so compelling to many other parts of the world. 
After all, much of what America once monopolized in Hollywood movies and other pop-culture exports is now being reproduced locally. 
Bollywood competes with California in terms of glamorous stars and big production numbers; 
Japan and South Korea mint their own pop singers and fashion trends. 
But consider Entourage, the American TV show that centers on a rising male film star and his posse of dudes. 
Or a recent article in The New Yorker about two scruffy young chefs who have set out across the country to start the great adventure of running their own crazy restaurant, called Animal. 
Or Swingers, the 1996 worldwide hit movie about a twenty-something guy in Hollywood and his band of male friends who drag him to Las Vegas to mend his broken heart. 
One of America’s last competitive cultural exports, it seems, is the post-adolescent male escape fantasy. 
Ever since Huck Finn took his friends down the Mississippi River on a raft, American men have created and consumed fantasies of setting out with their males friends for parts unknown, or of traveling in an all-male group to have adventures closer to home. 
In the 1950’s, Jack Kerouac took his buddy careening across the country in On the Road. 
A decade later, Ken Kesey took his buddies, the Merry Pranksters, across the country in the other direction in their painted bus (granted, with female hangers-on). 
From Easy Rider in the 1960’s to the Harold and Kumar movies today, the “buddy film” – typically involving travel-based adventure – has become an established genre. 
Savvy American politicians even make use of it for their own purposes. 
Both John McCain and George W. Bush cleverly tapped into this fantasy – with its easy bonhomie and absence of wives and kids – to capture the hearts of the male journalists aboard their campaign buses, who could imagine themselves once again as tough, unfettered, and venturesome Kerouac figures. 
President Obama even gave the actor who played Kumar a job in the White House (which he has now left to return to Hollywood). 
As you survey the rest of global culture, the male-escape scenario is hard to spot emerging from any other place. 
Save for the recent hit film 3 Idiots, Bollywood doesn’t send groups of Indian guys off on merry, irresponsible adventures. 
Male protagonists in French films don’t take off together in convertibles for the Pyrenees; they stay home and urbanely have affairs. 
Nor does Japanese pop culture manufacture escape fantasies aimed at Japanese men. 
Yet men all over the world tune in to American-made fantasies of male bonding and male escape – escape from the bonds of work and domesticity, and, if only for a youthful period of the male lifespan, from long-term commitment to women themselves. 
This fantasy, derived, no doubt, from American history – from westward expansion and Manifest Destiny, from the Gold Rush and a settlement policy that valorized staking a claim to the wilderness and subduing it – is powerfully appealing to men in general, and to many women as well. 
Indeed, American women have recently begun to film and export their own versions of this fantasy – starting with the groundbreaking 1991 film Thelma and Louise and continuing in a growing trend of girl-group travel and escape packages. 
Other countries’ lack of male escape fantasies in their popular culture may be no less historically rooted: less transient, more traditional societies will not warmly welcome homegrown films and pop songs about local young men taking off and fleeing their responsibilities. 
But, judging by the appetite shown worldwide for this narrative, it seems clear that identification with such adventures is almost universal. 
It seems to speak to a deep longing in men – and in the women who also enjoy these films and TV shows – for a time in one’s life when one could dash toward freedom, adventure, and self-reinvention, unencumbered by social ties and family obligations. 
At its best, this genre is part of America’s gift to the rest of the world. 
At its worst, it is part of America’s curse. 
That whiff of careening, heedless adolescent fecklessness is part of what makes the archetypal American male presence alarming when he is equipped with a global cudgel. 

The Great Firewall of China 
Writing from 1930’s Shanghai, China’s great essayist Lu Xun once observed: “Today there are all kinds of weeklies. 
Although their distribution is not very wide, they are shining in the darkness like daggers, letting their comrades know who is attacking the old, strong castles.” 
Muckraking broadsheets in the first half of the last century played cat-and-mouse games with Chinese government censors, ultimately helping to expose the corruption and moral bankruptcy of the Nationalist (KMT) government and contributing to the Communist victory in 1949. 
If that sounds familiar, its is because the Chinese Communist Party never forgets its history – and is determined to prevent history from repeating itself. 
Thus, China’s rulers acted in character last December, when they cracked down on news organizations that were getting a bit too assertive. 
The editor and deputy editors of Beijing News, a relatively new tabloid with a national reputation for exposing corruption and official abuse, were fired. 
In protest, more than 100 members of the newspaper’s staff walked out. 
Most Chinese might not have known about the walkout if it hadn’t been for Chinese bloggers. 
An editorial assistant at the New York Times, Zhao Jing, writing under the pen name Michael Anti, broke the news on his widely read Chinese-language blog. 
He exposed details of behind-the-scenes politics and called for a public boycott of the newspaper, evoking strong public sympathy for the journalists, expressed online in chatrooms and blogs. 
Zhao’s blog wasn’t under the direct control of the Party’s Propaganda Department. 
It was published through a Chinese-language blog-hosting service run by Microsoft’s MSN Spaces. 
On December 30, Zhao’s blog disappeared. 
Since then, Microsoft has confirmed that its staff removed the blog from an MSN Internet server, citing the need to respect Chinese law when doing business in China. 
Microsoft’s contribution to Chinese political repression follows Yahoo’s role in the sentencing of a dissident reporter and Google’s decision not to display search results that are blocked by what has become known as the “Great Chinese Firewall.” 
Indeed, China has developed the world’s most sophisticated system of Internet blocking and censorship, thereby hiding information unfavorable to China’s rulers from all but the most technologically savvy. 
The system is bolstered by human surveillance and censorship carried out not only by government employees, but also by private service providers. 
Some liken Microsoft’s behavior to IBM’s infamous collaboration with the Nazis in Germany. 
Human rights activists in the United States are calling for legislation that would prevent American companies from engaging in business practices that help repressive regimes stifle democratic movements. 
But the companies argue that there is absolutely no other way to compete – they must either comply with censorship or discontinue business. 
If MSN Spaces did not censor its Chinese blogs, Microsoft argues, the Great Chinese Firewall would simply be programmed to block Chinese Internet users from accessing its service. 
In fact, most international blog-hosting services are blocked in China, which provides a competitive boon to several hundred domestic blog-hosting services. 
These services, with names like Bokee.com, Blogbus.com and Blogcn.com, all comply with Chinese government censorship requirements. 
Software prevents users from posting politically sensitive words, and provocative content that gets past the automated controls is frequently removed. 
These businesses would not be allowed to exist otherwise. 
Despite the censorship, the Chinese blogosphere is blossoming, with probably somewhere between 5-10 million active blogs. 
The Chinese public has grown expert over the years at finding plenty of things to do and talk about while avoiding politically dangerous issues. 
Chinese bloggers are no different. 
New pop cultural celebrities are emerging online, and people are creating their own radio and even TV shows. 
Naturally, the Chinese companies that provide most of the tools used to create and host this content have censorship built into their software, management structure, and business models. 
But most Chinese bloggers accept this as part of the reality of life in China. 
They are not willing to fight for greater freedom of speech and are even willing to censor each other in order to preserve what they have. 
Which brings us back to China’s greatest modern writer, Lu Xun. 
In 1921, he wrote a biting piece of social criticism, “The True Story of Ah Q,” about a hapless character who adjusts his values to whatever the circumstances and people around him seem to demand. 
Unfortunately, faced with a choice between protecting the long-term interests and human rights of their customers and complying with laws implemented by unelected power-holders, technology firms like Microsoft, Yahoo, and Google seem to have embraced the Ah Q spirit. 
They have made it clear that when it comes to free expression, their priorities lie on the side of surrender. 
In the long run, this does not bode well for their global reputations, which depend on users’ trust in the openness and independence of their products and services. 
One day, perhaps, censorship will no longer make good business sense anywhere. 

The Great Game’s New Players 
NEW DELHI – Two “great games” currently roil South Asia. 
In the West, Afghanistan – and what Henry Kissinger calls “Islamist Jihadists” – challenges the international order. 
In the East, a large number of Chinese troops have entered Pakistani-held territory high in the mountain fastness of the Kashmir Karakorams, in the picturesque Gilgit-Baltistan region, not far from the glacial battlefield of Siachen, where India and Pakistan confront each other. 
Senge Hasan Sering, from Skardu, the director of the Gilgit-Baltistan National Congress, believes that the number of Chinese People’s Liberation Army troops now present “could be over 11,000,” as there are also additional “PLA construction corps personnel” deployed. 
It is here that China is currently investing “billions of dollars in mega projects like expressways, tunnels, and oil and gas pipelines.” 
This, Sering says, is “surely not on account of any overflowing altruism.” 
The Chinese say that some of their troops are present in Pakistan because of another sort of “overflowing,” of which there has been a great deal in this part of Kashmir and in the rest of Pakistan. 
This year’s heavy monsoon rains have wrought havoc in the area, severing road connections, washing away bridges, and rendering over half a million people homeless in these mountains – without “dwellings, farmlands, moveable assets,” or even “graveyards.” 
This is over and above the many thousands in the Hunza region, who in January lost everything on account of a cloudburst that wiped out several villages and created a highly unstable artificial lake. 
Rudyard Kipling’s old “Great Game” now has new contestants. 
Instead of an expansionist Russian empire confronting Imperial Britain, it is now a China hungry for land, water, and raw materials that is flexing its muscles, encroaching on Himalayan redoubts and directly challenging India. 
China’s incursion reaffirms the ancient strategic axiom that “geography is the real determinant of history” – and, as a result, of foreign and security policy, too. 
Robert Kaplan wisely observes that “Indian geography is the story of invasions from a northwesterly direction,” and “India’s strategic challenges still inhere in this fact,” which is why Afghanistan, to Indian eyes, is linked to the sub-continent’s history, and thus our future. 
It is also why there exists an “organic connection of India to Central Asia,” the key to that link lying in the Himalayas, which is where the India-China rivalry is currently focused. 
Fortunately, at least for the present, this rivalry is far less emotional than India-Pakistan relations, having not been born of historical grievances. 
The Chinese urge is to break from the confines of their country’s history, and thus China’s own geography. 
An assertive and relatively stable China, it seems, must expand, lest pent-up internal pressures tear it apart. 
A strong and stable India, on the other hand, will always be a status quo power. 
It is against this backdrop that the latest contest between India and China must be assessed. 
Several thousand PLA troops are indisputably stationed in the Khunjerab Pass on the Xinjiang border to protect the Karakoram Highway, which PLA soldiers are now repairing in several places. 
The road, after all, is a vital link in China’s quest for direct access to the Arabian Sea. 
But this is also Indian territory, wherein lies the rub, for the region is now victim to a creeping China acquisitiveness, with Pakistan acquiescing as a willing accomplice. 
Despite India’s historically established territorial claims to the region, China terms the area “disputed,” a description that it has now begun to extend to the whole of the Indian state of Jammu and Kashmir. 
This sort of verbal trickery to hide a strategic objective has been seen before. 
Indeed, some years back, a planned visit to Indian Ladakh by the PLA’s commander of the Lanzhou Military Region was canceled on the grounds that Pakistan had protested – implying that Pakistan had a legitimate claim to the area. 
It would be a mistake to presume that the vast expansion of trade between India and China, currently worth more than $60 billion annually (with China now India’s largest trading partner), must lead to improved bilateral relations. 
Even while trade expands, China is attempting to confine India within greatly foreshortened land and sea borders through its so-called “string of pearls policy.” 
This effort to encircle India by sea with strategically positioned naval stations from Hainan in the East to Gwadar in the West, and on land by promoting bogus Pakistani claims that undermine India’s territorial integrity, takes the “Great Game” to a new and more dangerous level. 
Indeed, the pincer of Afghanistan and Gilgit/Baltistan poses the gravest challenge to India’s statecraft since Independence. 
More than that, the struggle now underway at the top of the world may well determine whether this will be an “Asian Century” or a “Chinese Century.” 

The Great Illusion 
The saddest of the books on my office bookshelf is an old one published nearly a century ago: Norman Angell's The Great Illusion: A Study of the Relation of Military Power in Nations to Their Economic and Social Advantage , which tried to prove that military conquest was obsolete. 
Angell's argument was simple: in all prolonged modern industrial wars, everybody loses. 
Losers lose the most, but winners also are worse off than if peace had been maintained. 
Many fathers, sons, and husbands are dead, and so are many mothers, wives, and daughters. 
Much wealth has been blown up. 
Much architecture has been turned into rubble. 
Confiscation damages the rule of law on which modern industrial prosperity rests. 
The most that even the winners can say is that they are little losers rather than big losers. 
Modern industrial war is, as the computer in the 1982 movie War Games put it, a very peculiar game: "The only way to win is not to play." 
At the time that Angell wrote, some people argued that war was an important means to promote national prosperity; that commercial prosperity was the fruit of military power. 
Angell puzzled over how pre-WWI pan-German politicians could believe that German prosperity required a big battle fleet when the absence of one made no difference to the prosperity of Norway, Denmark, or Holland. 
He looked forward to the coming of an age of rational statesmanship, when every prime minister and foreign minister would recognize that regardless of the matter in dispute, binding arbitration between nations was a better strategy than war. 
He was, of course, right in his judgment that the only way to prevent any modern industrial war from becoming a destructive tragedy for all was to quickly conclude a ceasefire. 
Governments that view aggressive war as a means to prosperity have been rare since the end of World War I: the Imperial Japanese government that launched World War II in the Pacific and Saddam Hussein's two grabs for oilfields are examples that spring immediately to mind. 
In one sense, governments have learned the lesson Norman Angell preached. 
But what makes The Great Illusion the saddest book on my office bookshelf is that we have found other reasons to fight wars, and the years since Angell wrote his book have seen the most terrible and bloody wars ever. 
We have fought wars to preserve colonial domination and wars to end it. 
We have seen civil wars. 
We have seen ideological wars. 
We have seen wars of extermination like the one that Hitler and the Nazis waged against not just Jews and Gypsies, but Poles and Russians. 
We have seen ethnic wars and wars fought to make governments stop killing their citizens. 
Indeed, we have seen more religious wars than at any time since the end of the Thirty Years War in 1648. 
Yet there is cause for hope. 
From the pro-consulate of Julius Caesar until 1945, there was most likely at least one army crossing or about to cross or thinking of crossing the Rhine in arms. 
Now there are none. 
A little more than a century and a half ago the United States appeared willing to go to war with the world's only superpower of the time to try to turn Vancouver, British Columbia, into a city ruled from Washington, D.C. rather than from Ottawa or London. 
Vancouver is a lovely city, and I would love to have the voters of British Columbia inside the US, because I think they would add much health to the American electorate. 
But nobody thinks that idea worth fighting a war over. 
A century ago, a French politician was no more likely to advocate peace and detente with Germany than a modern Arab politician is likely to advocate peace and detente with Israel. 
Academic foreign policy "realists" (who somehow strike me as not a very realistic bunch) attributed the end of Franco-German antagonism to the fact that they had something bigger to be scared of: Russia, which was terrifying under Stalin, frightening under Khrushchev, and worrisome under Brezhnev. 
Let the Cold War end, they said, and then we will see France and Germany begin to rattle their sabers again, for that is the tragedy of international power politics. 
Yet the Cold War has been over for fifteen years, and military conflict between France and Germany today seems as unlikely as military conflict between America and Canada. 
I hope that it is the fact of European interdependence - an interdependence carefully constructed by Jean Monnet, Robert Schumann, Konrad Adenauer, and those who followed in their footsteps - and not the memory of the horror of World War II that has caused the armies that used to cross the Rhine in arms to vanish. 
If so, there is a chance that the globalized economic age to which we look forward will be a more peaceful age than the twentieth century was. 
If not, then Angell may well continue to be as irrelevant as he was right. 

The Great Job Machine 
Until the third quarter of this year, the number one doubt facing the US economy concerned the Pyrrhic character of its "jobless" recovery. 
Then, during September and October of this year, net employment grew by 290,000, well ahead of most forecasts. 
But while more than 300,000 new jobs were created in services, over 50,000 manufacturing jobs were lost. 
This is more than can be explained by the long-term shift of the economy out of industry and into services. 
At the same time, the jump in labor productivity in manufacturing--by 7.2% in the third quarter--indicates that there remains a great deal of excess capacity in the manufacturing sector. 
So don't look for any improvement in US employment to come through factory jobs. 
Instead, it is the greater flexibility of services that has produced the resumption of employment growth in the US. 
Evidence for such growth abounds. 
For example, Kohl's, a large department store, has opened 48 new sites in October, hiring some 140 people at each of them. 
Stop & Shop, a chain of supermarkets, has reintroduced a delivery service from cashiers to a client's car--something done away with decades ago--and has extended opening hours in many stores. 
America's reborn service economy stands in stark contrast to what is found in Europe. 
Thanks to the European Commission's tough competition policy, Europe has gone a long way towards making its industries more viable. 
In the service sector, by contrast, deregulation has been much more limited, probably because services are much less exposed to international competition, which means that old hidebound rules are easier to preserve. 
The outcome is that in Europe, contrary to the US, an increase in the demand for services produces higher rents, rather than more jobs. 
Take the simple case of taxi licenses: if the number of taxi licenses is fixed, and consumers start using taxis more often, what you will observe is, at most, an increase in the demand for powerful Mercedes cars that taxi drivers use, not an increase in jobs. 
In other words, a good indicator of the state of the US economy is how many people take care of you at a supermarket cashier. 
In many European countries, you should instead look at the quality of the stereo in your taxi. 
The labor market flexibility in the US service sector is truly remarkable. 
During recessions and booms, you can feel the changes in quality and number of waitresses in restaurants, in the size of staffs in shops, in the availability of cleaning services. 
In the roaring 1990's, it was almost impossible to find qualified restaurant staff to fill vacant jobs. 
During the stagnant economic years of the Bush administration, such workers were plentiful. 
In Europe, you simply certainly can't see these differences: waiters, busboys, and cooks all have job security. 
Part of the problem here is that temporary, short-term jobs in Europe have a very bad connotation. 
To be sure, the little employment growth that has been seen recently in Europe has mostly been as a result of temporary jobs. 
Even so, such jobs are widely regarded as a "plot" by companies seeking to fire employees at their leisure. 
The fact that obstacles to short-term employment contracts lead to long-term unemployment traps is often forgotten. 
Such perceptions reflect a deeper difference. 
By and large, workers and management in Continental Europe retain many of the old class antagonisms that first emerged with the rise of industrialism in the 19 th Century. 
To this day, they often still see each other as "enemies." 
In the US, such sentiments are much less ingrained in the culture. 
Leading 19 th -Century American thinkers--and even trade unionists--spoke of a "harmony of interests" between labor and capital, and workers and managers continue to view each other more as a partner than an adversary. 
This is all the more remarkable in light of the enormous--and still growing--disparities in compensation within US companies. 
The pay gap between workers and CEO's is far wider in the US than in Europe, and yet resentment of the "boss" appears to be far higher in Europe. 
Yet beneath the surface, things are beginning to move in Europe. 
Stealthily, the competition authorities of the European Commission are starting to get tougher on professional services (consider, for example, "Competition Policy and Liberal Professions," a statement that can be found on the European Commission's Web site, www.europa.eu.int ). 
Once they have brought the cozy cartels of lawyers and accountants into line, other service industries seem destined to be opened up to greater competition, and hence to become great engines of job creation. 
Notwithstanding Europe's labor unions, temporary jobs are starting to be accepted. 
The American service industry job machine may be on its way across the Atlantic. 

The Great Man Syndrome 
In our globalized age, vast impersonal forces are supposed to determine events. 
Globalized markets, unfettered trade, militant Islam, China’s awakening: these are the things historians and strategists usually portray as the key forces shaping our destiny. 
But most people don’t see things this way. 
Instead, most people still instinctively look at “great men” as the agents of history, the men (and women) who seem to forge events through their political vision, personal charisma, and the force of their moral claims. 
By sheer force of conviction and personality, such figures, many of us believe, can carry the day, bringing a glimmer of hope to an otherwise detached and impersonal universe. 
This yearning for providential men or women in our global age results from at least three factors. 
The first concerns the complexity and vulnerability of our world. 
The second, paradoxically, reflects our growing cynicism towards politics and politicians. 
And the third is the result of our media culture, obsessed as it is with putting a “face” to events. 
Confronted with the problem of bringing about positive changes in a domestic or international environment that seems to defy the power of “normal” leaders, one looks for new Alexanders to untie the “Gordian knot” and transcend complexity by sheer force of will and dynamism. 
For example, structural reforms in Europe are thought impossible to enact unless imposed by some reincarnation of Margaret Thatcher. 
In the Middle East, everyone waits for a new Anwar Sadat to arise among the Arabs. 
Disillusion with politics and politicians also is a key element of our yearning for providential leaders. 
In France for example, the overly flattering commemoration of President François Mitterrand’s death ten years ago primarily reflects widespread disillusion with his successor, Jacques Chirac. 
Indirect criticism of the present is usually a key element in idealized views of the past. 
The less we expect from a “normal” politician, the more we look for a hero. 
With the world becoming a global stage, the media’s role in fueling the appetite for providential leaders is essential. 
The public demands quick answers to complex problems that, unsolved, risk endangering the planet. 
They need figures with whom they can identify, immediately recognize, and, above all, trust. 
The emergence of an embryonic “world civil society” heightens demand for universal and charismatic figures, holding out the hope of global accountability, but also carrying populist overtones. 
In a world searching for providential leaders, the case of Ariel Sharon is both symbolic and paradoxical, for this universal man remains one of the most controversial figures of recent decades. 
He has become a nearly revered figure in his country, and large segments of Western public opinion believe that his political demise represents a potentially fatal blow to any hope of progress in the region, even as he remains hated in large parts of the Arab and Muslim world. 
Sharon’s transformation from villain to hero within the space of a mere few years is a source of fascination for his people, the region, and the world – all the more so because his ultimate intentions will remain a subject of endless dispute among historians tomorrow and among politicians claiming to be his faithful heirs today. 
Was Sharon really convinced by demographers that the “Great Israel” that once seemed to be his dream would actually mean the end of a Jewish State, or did his disengagement strategy of “Gaza first” really mean “Gaza last”? 
For those who support one or the other reading, Sharon will forever hold the benefit of the doubt. 
That Sharon’s stroke could be compared – in terms of political consequences – with the assassination of Yitzak Rabin demonstrates that his personality had become associated with hope and security. 
The “bulldozer” had become the grandfather of most Israelis and the last card of Western diplomacy, for Americans and, surprisingly, for Europeans, too. 
He alone seemed to incarnate the combination of reassuring strength and vision to carry the majority of Israelis behind him in a process of unilateral disengagement. 
In fact, one may wonder if the world has made of Sharon a providential man because it wanted so much to believe that there was still “hope around the corner” in the Middle East. 
Was this wishful thinking or self-fulfilling prophecy? 
We will never know. 
What is certain is that the vacuum left by Sharon’s departure from politics is all the more striking in view of the images of chaos emerging from the Gaza that Israel has vacated, and the collapse of the Palestinian authority before our eyes. 
Nor will the emergence of another providential figure come easily. 
Not all exceptional periods create their Bonapartes, and this is probably a good thing, for exceptional leaders may give the illusion that all problems have solutions, which is far from true. 
The natural course of history in the most optimistic sense is progress “at the margin,” but the rapid pace of technological change is pushing us to expect equally rapid progress in human affairs. 
Many of us believe that such an impossible wager can be fulfilled only by a providential man, with all the hopes – and dangers – that this entails. 

The Great Moderation 
It has been 20 years since Alan Greenspan became chairman of America’s Federal Reserve Bank. 
The years since then have seen the fastest global average income growth rate of any generation, as well as remarkably few outbreaks of mass unemployment-causing deflation or wealth-destroying inflation. 
Only Japan’s lost decade-and-a-half and the hardships of the transition from communism count as true macroeconomic catastrophes of a magnitude that was depressingly common in earlier decades. 
This “great moderation” was not anticipated when Alan Greenspan took office. 
America’s fiscal policy was then thoroughly deranged – much more so than it is now. 
India appeared mired in stagnation. 
China was growing, but median living standards were not clearly in excess of those of China’s so-called “golden years” of the early 1950’s, after land redistribution and before forced collectivization turned the peasantry into serfs. 
European unemployment had just taken another large upward leap, and the “socialist” countries were so incompatible with rational economic development that their political systems would collapse within two years. 
Latin America was stuck in its own lost decade after the debt crisis at the start of the 1980’s. 
Of course, the years since 1987 have not been without big macroeconomic shocks. 
America’s stock market plummeted for technical reasons in the fall of that year. 
Saddam Hussein’s invasion of Kuwait in 1991 shocked the world oil market. Europe's fixed exchange rate mechanism collapsed in 1992. 
The rest of the decade was punctuated by the Mexican peso crisis of 1994, the East Asian crisis of 1997-98, and troubles in Brazil, Argentina, Turkey, and elsewhere, and the new millennium began with the collapse of the dot-com bubble in 2000 and the economic fallout from the September 11, 2001, terrorist attacks. 
Moreover, today’s global imbalances and misaligned real exchange rates threaten to bring on not just mild recession, but significant and prolonged depression. 
Yet, so far, none of these events – aside from Japan starting in the early 1990’s and the failures of transition in the lands east of Poland – has caused a prolonged crisis. 
Economists have proposed three explanations for why macroeconomic catastrophes have not caused more human suffering and deranged long-run economic growth over the past generation. 
First, some economists argue that we have simply been lucky, because there has been no structural change that has made the world economy more resilient. 
According to this view, we have simply rolled the dice and won five times in a row. 
We should be happy and grateful, but we should not expect it to continue. 
Second, central bankers have finally learned how to do their jobs. 
Before 1985, according to this theory, central bankers switched their objectives from year to year. 
One year, they might seek to control inflation, but the previous year they sought to reduce unemployment, and next year they might try to lower the government’s debt refinancing costs, and the year after that they might worry about keeping the exchange rate at whatever value their political masters prefer. 
The lack of far-sighted decision-making on the part of central bankers meant that economic policy lurched from stop to go to accelerate to slow down. 
When added to the normal shocks that afflict the world economy, this source of destabilizing volatility created the unstable world before 1987 that led many to wonder why somebody like Alan Greenspan – who had previously only spent a couple of years in government – would want the job. 
The final explanation is that financial markets have calmed down. 
Today, the smart money in financial markets takes a long-term view that asset prices are for the most part rational expectations of discounted future fundamental values. 
Before 1985, by contrast, financial markets were overwhelmingly dominated by the herd behavior of short-term traders, people who sought not to identify fundamentals, but to predict what average opinion would expect average opinion to be, and to predict it before average opinion did. 
Thus, central bankers were stuck trying to control a world economy shocked by random changes in the animal spirits of investors and traders. 
When I examine these issues, I see no evidence in favor of the first theory. 
Our luck has not been good since 1985. On the contrary, I think our luck – measured by the magnitude of the private sector and other shocks that have hit the global economy – has, in fact, been relatively bad. 
Nor do I see any evidence at all in favor of the third explanation. 
It would be nice if our financial markets were more rational than those of previous generations. 
But I don’t see any institutional changes that have made them so. 
So my guess is that we would be well-advised to put our money on the theory that our central bankers today are more skilled, more far-sighted, and less prone to either short-sightedly jerking themselves around or being jerked around by political masters who unpredictably change the objectives they are supposed to pursue year after year. 
Long may this state of affairs continue. 

The Great Real Estate Bust of 2008 
NEW HAVEN – What brought on the collapse of home prices in 2008 that is the root of the financial crisis now enveloping much of the world? 
Home prices in the United States, as measured by the Standard ampamp; 
Poor’s/Case-Shiller Home Price Indices, have plummeted more than 40% in real inflation-adjusted terms in some major cities since the peak around the beginning of 2006. 
Nationally, including all cities, the fall is over 25%. 
The futures market at the Chicago Mercantile Exchange is now predicting declines of around 15% more before the prices bottom out in 2010. 
These are the market’s forecasts – and it is not a very liquid market. 
But those who make these forecasts are implying real declines, from peak to trough, of more than 50% in some places. 
Why are we seeing such big price drops? 
And why does the housing market in so many other countries now reflect similar conditions? 
The answer has both proximate and underlying causes. 
The proximate answer for the US is that a decline in lending standards helped people buy houses at ever-increasing prices before 2006. Freer lending meant that people were freer to bid up prices of homes to ridiculous levels. 
Shacks were selling for a million dollars. 
After the peak, lenders tightened their standards. 
When buyers find it difficult to finance home purchases, sellers have to cut the asking price. 
The up and down of lending represents a credit cycle, and credit cycles have played a major role in economic fluctuations for centuries. 
In his 1873 book Lombard Street , Walter Bagehot, the British businessman and editor of The Economist , described these cycles perfectly. 
The boom just before the depression of the 1870’s that he described sounds a lot like what happened just before the current crisis. 
When credit expands, he wrote, “The certain result is a bound of national prosperity; the country leaps forward as if by magic. 
But only part of that prosperity has a solid reason…this prosperity is precarious.” 
But the credit cycle was not the ultimate cause of the 1870’s depression or the crisis we are seeing today. 
Ultimately, one must always ask why lending standards were loosened and then tightened. 
The credit cycle is an amplification mechanism. 
The instability in the lending sector is always there, and the crisis manifests itself only if some precipitating factor triggers it. 
Moreover, the extreme weakening and then tightening of credit standards seems particularly prominent only in the US, while the housing boom-bust cycle is prevalent throughout much of the world. 
The precipitating factor that led to the current situation has to do with our evolving world culture, spread rapidly through enhanced media outlets and the Internet, and its perceptions of the markets. 
It has to do with the deep admiration of markets that has developed during the boom, in line with the “efficient markets theory” in academic finance. 
It became widely believed that financial markets are such sublime poolers of information that they represent a collective judgment that transcends that of any mere mortal. 
James Surowiecki’s bestselling 2004 book, with the outrageous title The Wisdom of Crowds , pressed this idea forward at the very height of the real estate boom. 
The boom in the world’s housing markets and stock markets between 2003 and 2006 was caused by this faulty idea, and the idea that investments in homes and equities are a sure route to wealth. 
It had become an article of faith that the value of both types of assets only goes up in the long run, and that it is foolish to try to “time the market.” 
It was sincerely believed, and supported by deep intuitive judgment, that interruptions in this upward trajectory could only be small and transient. 
People seemed to think that rapid appreciation in these markets had become a universal constant, like the speed of light. 
Nothing else ultimately explains lenders’ immense willingness, in the boom up to 2006, to lower their credit standards on home mortgages, regulators’ willingness to let them do it, rating agencies’ willingness to rate mortgage securities highly, and investors’ willingness to gobble them up. 
There is no theory in economics that provides a reason to think that prices in these markets can only go up. 
On the contrary, economic theorists have been puzzled by the historical rate of increase in the stock market, which they call “the equity premium puzzle.” 
They do not have a corresponding name for the behavior of the housing market, because, historically, its prices (correcting for inflation) have not generally gone up very much on average, until the post-2000 bubble. 
The booms in these markets can be traced substantially to the growth of the idea that one should always continually hold as many of these assets as possible, just as that you should drink green tea or eat dark chocolate every day for antioxidants. 
Such ideas create artificial demand – but only for a while. 
After all, we no longer smoke cigarettes to prevent infections. 
People will believe many things if they have the impression that the rich and famous believe them, too. 
But their belief can suddenly be disrupted if plainly visible events contradict it. 
That is what is happening now, and 2009 will shape up as a year of even more profound disenchantment. 

The Greek Crisis and Beyond 
NEW YORK – As euro-zone leaders face growing uncertainty in financial markets about the public finances of Greece and other member countries, their statements, albeit somewhat vague, underscore a much larger story – one that will force firms and investors to question their assumptions about Europe’s economic, financial, and political environment. 
Let’s first dispense with a powerful emerging myth. 
Greece’s troubles have encouraged some to wonder aloud if the euro zone can survive its growing internal imbalances. 
But such doubts ignore the political and cultural factors that buttress a deep European commitment to preserve the monetary union. 
The euro was created partly in order to bolster internal market efficiency and prevent currency volatility. 
But it is also the product of a deep-rooted European conviction that transnational institutions and economic interdependence have helped establish and sustain peace across the continent for the past six decades. 
In a world of weak multilateral institutions – including a G20 beset by substantial differences of opinion on basic questions – it is more important than ever that euro-zone governments bolster their collective clout in an uncertain, unprecedented, and competitive global environment. 
For member states, the euro zone is simply too important to fail. 
That means that solutions to the many problems they now face will require adjustment to the way each of them taxes and spends. 
Yet, from one government to the next, the result will be massively uneven – a recurring problem during Europe’s multi-decade drive for internal currency stability. 
This divergence on fiscal policy has many causes, and no single shock will alter it. 
Understanding the increased importance of fiscal policy is complicated by confusion over how various euro-zone governments actually make policy decisions – a process that relies on an ever-changing, complex mix of opaque institutional factors and domestic political dynamics that vary considerably from one country to another. 
In an era in which transparency and disclosure are the prevailing norm in most aspects of European governance, the politics of fiscal policy still look like conference diplomacy, circa 1815. 
This is Europe’s new reality, not a momentary lapse in good order. 
Companies and investors exposed to risk in Europe must assume much more volatility in interest rates within the euro zone and increasingly uneven growth and inflation prospects. 
The convergence of sovereign debt yields implied and required by the establishment of the common currency need not return. 
The absence of a stable framework will force investors to re-think asset-allocation decisions and risk pricing. 
As the bond market begins, finally, to price in greater relative risk in euro-zone sovereigns, the intellectual underpinnings of the idea of a global division between emerging-market and developed-market bonds will be fundamentally tested. 
These shifts will be gradual, persistent, and less predictable than what investors had come to expect during the deceptive calm of the euro’s first decade, when the currency union’s establishment, together with EU enlargement and liberalization, appeared to create a stable and benign environment. 
Finally, remarkable and lasting policy shifts will not be limited to countries in immediate financial trouble. 
German fiscal policy could soon look very different from the zero-deficit bias that prevailed under the grand coalition that governed from 2005 until 2009. 
During that period, the deficit-reduction camps within both the Social Democrats and the Christian Democrats made common cause to fend off pressures from other factions within their respective parties for a change in policy. 
That structure is no more. 
Today, the right wants tax cuts and the left, now reconstituting itself, may push for higher spending. 
No one believes that Germany is at risk of default, but investors overlook this sort of policy shift at their own risk. 
After all, a significant change in policy direction within the euro zone’s biggest economy could have a much larger effect on the currency union than developments in Greece. 
Given internal conflict over taxes and spending, maybe Germany, not Greece, will become the euro zone’s first country to see a government fall. 

The Green Guevara’s 
“Bolivia is rich,” a Tacana Indian woman told me last week inside Madidi National Park. 
Earlier in the day, we’d witnessed a hundred capuchin and squirrel monkeys rush down from the Amazon jungle canopy and were now relaxing beside Lake Chalalan while her cousin, a shaman, blessed coca leaves as the evening’s traditional drumming and dancing began. 
This is Chalalan Lodge, a wholly Indian-owned and -operated ecotourism outfit through which a hundred indigenous families lifted themselves out of poverty – while creating benefits worth a half million dollars for the Bolivian economy each year. 
It is one of dozens of similar operations – from the world’s largest salt flats in the south, to Lake Titicaca in the west, to the eastern Pantanal wetlands – that combine economic growth with conservation. It seems improbable that such enterprises should exist in Bolivia, a fragile democracy, and the hemisphere’s poorest place next to Haiti. 
As the December 18 presidential elections approach, the front-runners could not look much different from one another. 
In first place is Evo Morales, an Amayra Indian running under the Movement Toward Socialism banner who is sometimes seen as Che Guevara’s second coming. 
Running behind “Evo” is Jorge “Tuto” Quiroga, a millionaire former IBM executive from the European-descended Bolivian elite; he is closely aligned with America’s Republican Party and is married to a Texas blonde named Ginger. 
Tuto warns that, should Evo win, he might consolidate a Latin American axis-of-evil connecting a leftist Bolivia with Fidel Castro’s Cuba and Hugo Chávez’s Venezuela. 
Evo counters that Tuto is too linked to Bolivia’s corrupt political establishment – one of the most dishonest in the world according to the watchdog group Transparency International – to do much for Bolivia’s two-thirds Indian majority. 
Whichever man wins will face Bolivia’s seemingly intractable pair of ills: social-exclusion and poverty. 
It’s a combination that has led to the overthrow of two presidents in the last three years. 
Workable solutions will lie not in ideology but rather in capitalizing on what the nation has to offer to the global economy: its stock of pristine ecology. 
Noel Kempff, for example, one of Bolivia’s national parks, is home to the world's biggest forest-based Kyoto Protocol experiment. 
The park contains the biggest chunk of virgin cerrado habitat left on Earth, with tapirs, red brocket deer, silvery marmosets, and pumas living amid twenty waterfalls crashing off the Huanchaca Mesa into forests. 
The park’s waterways contain one-tenth of the world’s remaining 1,000 giant river otters, along with black and speckled caiman, pink river dolphins, and capybaras. 
The 2,000 Chiquitanos living around the park contend that a tree holds up the Amazon’s seven skies, and they are living that belief in a modern way: by using their forests to help reduce the stratospheric greenhouse gasses that cause global warming. 
British Petroleum and American Electric Power, the largest electricity supplier in the United States, have helped the Chiquitanos buy up logging concessions, thereby doubling Noel Kempff to three million acres. 
The firms earn cap-and-trade carbon credits to fulfill their Kyoto requirements. 
Bolivia’s Indians have also used their eco-clout to convince the energy companies to bankroll their fight for a 750,000-acre homeland bordering Kempff. 
It now pays for nature to stay, as the locals earn their neo-traditional living by ranching oxygen traded on the Chicago Climate Exchange (CCX), and through shipping certified timber and organic palm-hearts to Chile and Europe. 
Bolivia destroys the myth that Third World countries are too poor to be green, and casts serious doubt on the famous “environmental Kuznets Curve” – the theory that environmental quality correlates with wealth. 
Bolivia’s track record is remarkable: the world’s first debt-for-nature swap; the world’s largest protected dry tropical forest; experimental Indian park management; a rapidly growing protected-areas system; a National Environmental Fund; a world leader in international efforts to protect the endangered vicuna; progressive forestry legislation; a national biodiversity conservation agency; and a total ban on trade in domestic species. 
Conservation resonates with local political parties. 
On the left, Evo delivers homilies exalting Pacha Mama, or Mother Nature; on the right, Tuto favors market mechanisms like Kyoto over command and control. 
Both candidates want jobs to be created in ecological services. 
Regardless of who comes to power, the West should channel a larger portion of the billions of dollars in development aid each year, including the newly approved $535 million for the country from the UN’s Millennium Challenge Account, to foster a local spirit of natural capitalism instead of providing charity. 
The Indian-run lodge I visited is part of a $175 million ecological tourism industry that has been growing at 20% a year precisely because of the country’s natural splendor. 
Economists argue that should the current trickle of 350,000 visitors each year grow to a quite reasonable million, every Bolivian would be employed. 
“Bolivia is where Costa Rica was 20 years ago,” an eco-tourism expert told me at the first national summit on the industry on the shores of Lake Titicaca. 
Finally, the Bush administration must ratify the Kyoto Protocol, in order to allow both global firms and Bolivian community entrepreneurs to create yet more rainforest ranches and other creative initiatives that reduce poverty, harbor biodiversity, and cool a warming world. 
Perhaps Bolivia is indeed rich – in a way that could benefit all of us well into the future. 

The Green Inquisition 
COPENHAGEN – When it comes to global warming, extreme scare stories abound. 
Al Gore, for example, famously claimed that a whopping six meters (20 feet) of sea-level rise would flood major cities around the world. 
Gore’s scientific advisor, Jim Hansen from NASA, has even topped his protégé. 
Hansen suggests that there will eventually be sea-level rises of 24 meters (80 feet), with a six-meter rise happening just this century. 
Little wonder that fellow environmentalist Bill McKibben states that “we are engaging in a reckless drive-by drowning of much of the rest of the planet and much of the rest of creation.” 
Given all the warnings, here is a slightly inconvenient truth: over the past two years, the global sea level hasn’t increased. 
It has slightly decreased . 
Since 1992, satellites orbiting the planet have measured the global sea level every 10 days with an amazing degree of accuracy – 3-4 millimeters (0.2 inches). 
For two years, sea levels have declined. (All of the data are available at sealevel.colorado.edu.) 
This doesn’t mean that global warming is not true. 
As we emit more CO2, over time the temperature will moderately increase, causing the sea to warm and expand somewhat. 
Thus, the sea-level rise is expected to pick up again. 
This is what the United Nations climate panel is telling us; the best models indicate a sea-level rise over this century of 18 to 59 centimeters (7-24 inches), with the typical estimate at 30 centimeters (one foot). 
This is not terrifying or even particularly scary – 30 centimeters is how much the sea rose over the last 150 years. 
Simply put, we’re being force-fed vastly over-hyped scare stories. 
Proclaiming six meters of sea-level rise over this century contradicts thousands of UN scientists, and requires the sea-level rise to accelerate roughly 40-fold from today. 
Imagine how climate alarmists would play up the story if we actually saw an increase in the sea-level rise. 
Increasingly, alarmists claim that we should not be allowed to hear such facts. 
In June, Hansen proclaimed that people who spread “disinformation” about global warming – CEOs, politicians, in fact anyone who doesn’t follow Hansen’s narrow definition of the “truth” – should literally be tried for crimes against humanity. 
It is depressing to see a scientist – even a highly politicized one – calling for a latter-day Inquisition. 
Such a blatant attempt to curtail scientific inquiry and stifle free speech seems inexcusable. 
But it is perhaps also a symptom of a broader problem. 
It is hard to keep up the climate panic as reality diverges from the alarmist predictions more than ever before: the global temperature has not risen over the past ten years, it has declined precipitously in the last year and a half, and studies show that it might not rise again before the middle of the next decade. 
With a global recession looming and high oil and food prices undermining the living standards of the Western middle class, it is becoming ever harder to sell the high-cost, inefficient Kyoto-style solution of drastic carbon cuts. 
A much sounder approach than Kyoto and its successor would be to invest more in research and development of zero-carbon energy technologies – a cheaper, more effective way to truly solve the climate problem. 
Hansen is not alone in trying to blame others for his message’s becoming harder to sell. 
Canada’s top environmentalist, David Suzuki, stated earlier this year that politicians “complicit in climate change” should be thrown in jail. 
Campaigner Mark Lynas envisions Nuremberg-style “international criminal tribunals” against those who dare to challenge the climate dogma. 
Clearly, this column places me at risk of incarceration by Hansen & Co. 
But the globe’s real problem is not a series of inconvenient facts. 
It is that we have blocked out sensible solutions through an alarmist panic, leading to bad policies. 
Consider one of the most significant steps taken to respond to climate change. 
Adopted because of the climate panic, bio-fuels were supposed to reduce CO2 emissions. 
Hansen described them as part of a “brighter future for the planet.” 
But using bio-fuels to combat climate change must rate as one of the poorest global “solutions” to any great challenge in recent times. 
Bio-fuels essentially take food from mouths and puts it into cars. 
The grain required to fill the tank of an SUV with ethanol is enough to feed one African for a year. 
Thirty percent of this year’s corn production in the United States will be burned up on America’s highways. 
This has been possible only through subsidies that globally will total $15 billion this year alone. 
Because increased demand for bio-fuels leads to cutting down carbon-rich forests, a 2008 Science study showed that the net effect of using them is not to cut CO2 emissions, but to double them. 
The rush towards bio-fuels has also strongly contributed to rising food prices, which have tipped another roughly 30 million people into starvation. 
Because of climate panic, our attempts to mitigate climate change have provoked an unmitigated disaster. 
We will waste hundreds of billions of dollars, worsen global warming, and dramatically increase starvation. 
We have to stop being scared silly, stop pursuing stupid policies, and start investing in smart long-term R&D. Accusations of “crimes against humanity” must cease. 
Indeed, the real offense is the alarmism that closes minds to the best ways to respond to climate change. 

The Green Paradox 
The protesters have returned to their home countries, the injured are licking their wounds, the heads of state are back to business as usual, and Heiligendamm, the old spa on Germany’s Baltic coast, is resuming its dream of imperial beauty. 
And German Chancellor Angela Merkel achieved a substantial diplomatic success. 
With charm and unassuming clear-headedness, she wrought a compromise from the G8 countries that may help save the world from the most severe devastations caused by global warming. 
The world’s eight richest countries promised to “seriously consider” halving their CO2 emissions by 2050. 
The wording may sound vague, but, given the positions the countries held at the outset, the outcome was an important achievement. 
The United States, in particular, shifted its stance significantly since its rejection of the Kyoto Protocol, even accepting that the United Nations will have to organize the future negotiations. 
But, while the compromise is more than could have been hoped for at the outset, several important countries did not partake of it. 
To be sure, China, India, Brazil, South Africa, and Mexico signed on; but many countries, including the Asian tigers and most European countries, did not, despite their large contributions to polluting the world’s atmosphere. 
Moreover, the oil sheiks and other producers of fossil fuels who ultimately control the amount of carbon released to the atmosphere were not part of the deal. 
If major consumer countries and most producer countries do not join the agreement to reduce CO2 emissions, it could be useless. 
Many believe that aggregate CO2 emissions are the result of independent decisions in individual countries. 
Thus, if a group of countries decides to have lower emissions, worldwide emissions will decline by the sum of these countries’ reductions. 
Sure, it would be better if all countries curtailed their emissions, but it is already a great help if at least some countries do so. 
Unfortunately, this view is too good to be true, because one country’s emissions are not independent from those of another. 
If countries decide to cut their emissions, they will have to reduce their consumption of fossil fuels, in particular oil. 
This will reduce the world price of these fuels, inducing other countries to consume even more than they otherwise would. 
Countries that cut their emissions would, in effect, be subsidizing their competitors’ growth, not necessarily reducing the speed of global warming. 
The sacrifices of the participating countries would alleviate the CO2 problem only if their restraint meant that some of the fossil resources they do not consume remain underground. 
They must succeed in inducing the oil sheikhs and other producers of fossil fuels to throttle their pumps. 
If the sheikhs are stubborn and continue to extract as much as they had planned to extract without the G8’s restraint, the price of fuels will fall sufficiently to induce so much extra consumption among the non-participating countries that the net effect on aggregate CO2 emissions will be nil. 
Will the oil sheikhs reduce output of fossil fuels? 
At first glance, it seems natural to assume this, as most suppliers reduce production when the price falls. But the sheikhs are sitting on fixed stocks of oil. 
If they do not extract it today, they will have to do it in the future if they want to make a profit. 
At best, it seems that the time path of extractions can be tilted toward the future. 
This would not solve the CO2 problem in the long run, but at least it would postpone the catastrophe. 
The oil sheikhs would likely be inclined to postpone extraction only if they could reasonably assume that the demand reductions of the signing countries and the comparative price reduction that this implies are stronger today than they will be in the future. This is not plausible. 
Indeed, the sheikhs will know that, in all likelihood, concerns about global warming will increase over time. They will therefore speed up rather than reduce production, in order to avoid selling their oil when anxiety about CO2 peaks and the artificial measures of the signing countries to reduce their consumption have dampened the oil price most. 
Thus, green policies will paradoxically accelerate rather than mitigate global warming. 
Two lessons arise from these considerations. 
First, all polluters must sit at the negotiating table and be forced or induced to participate in reducing pollution. 
The commitments of single countries like Germany to over-fulfill their duties are useless. 
Germany has already contributed three-quarters of the aggregate EU-wide reductions of CO2 emission from 1990 to 2008-2012 to which the EU committed in the Kyoto protocol. 
Such a policy simply subsidizes other polluters’ CO2 emissions, but does not alleviate the problem of global warming. 
Second, and more difficult, the oil sheikhs and other producers of fossil fuels must be talked into postponing their extraction plans or, better yet, not to extract some of their resources at all. 
The best policy against global warming is to keep the CO2 imbedded in fossil resources deep underground. 
The good news from Heiligendamm is that the UN will now have to organize a common solution. 
The bad news is that this is unlikely to happen in the foreseeable future, and that the owners of natural resources will therefore make every attempt to extract their resources and thus pump the fossil carbon into the atmosphere before the UN finds a way out of this impasse. 

The Green Pseudo-Revolution 
COPENHAGEN – With a worldwide recession advancing, strong action on global warming has been thrown into jeopardy. 
This matters, because in little more than a year, the world will sit down in Copenhagen to negotiate the follow-on treaty to the failed Kyoto Protocol. 
Yet, with people losing jobs and income, immediate economic help seems to matter more than temperature differentials 100 years from now. 
Many green pundits have, however, started saying that the financial crisis only makes the need for action on climate change greater. 
They urge America’s president-elect Barack Obama to pursue a “green revolution” with big investments in renewable energy, arguing that this could create millions of new “green collar” jobs and open huge new markets. 
Such sentiments, no surprise, are strongly voiced by business leaders who live off such subsidies. 
But are such pleas smart investments for society? 
The problem with the green revolution argument is that it doesn’t trouble itself about efficiency. 
It is most often lauded for supplying new jobs. 
But billions of dollars in tax subsidies would create plenty of new jobs in almost any sector: the point is that many less capital-intensive sectors would create many more jobs for a given investment of taxpayers’ money. 
Similarly, green initiatives will open new markets only if other nations subsidize inefficient technologies bought abroad. 
Thus, the real game becomes which nations get to suck up other nations’ tax-financed subsidies. 
Apart from the resulting global inefficiency, this also creates a whole new raft of industry players that will keep pushing inefficient legislation, simply because it fills their coffers. 
A good illustration is Denmark, which early on provided huge subsidies for wind power, building thousands of inefficient turbines around the country from the 1980’s onwards. 
Today, it is often remarked that Denmark is providing every third terrestrial wind turbine in the world, creating billions in income and jobs. 
A few years ago, however, the Danish Economic Council conducted a full evaluation of the wind turbine industry, taking into account not only its beneficial effects on jobs and production, but also the subsidies that it receives. 
The net effect for Denmark was found to be a small cost , not benefit. 
Not surprisingly, the leading Danish wind producer is today urging strong action on climate change that would imply even more sales of wind turbines. 
The company sponsors the “Planet in Peril” show on CNN, which helps galvanize public pressure for action. 
The crucial point is that many green technologies are not cost-effective, at least not yet. 
If they were, we wouldn’t need to subsidize them. 
The standard reply is that green technologies seem more expensive only because the price of fossil fuels does not reflect their climate costs. 
That makes some sense. 
Given that fossil fuels contribute to global warming, standard economic theory suggests we should tax them according to their cumulative negative effects. 
But this would make little difference to the inefficiency of most green technologies. 
The most comprehensive economic meta-study shows that total future climate impacts justify a tax of €0.012 per liter of petrol ($0.06 per gallon in the US.) 
This is dwarfed by the tax that many European countries already impose, and it is much less than in the European trading system. 
Yet it is argued that much higher taxes and subsidies are the best way to increase research and development in new, cheaper renewable energy sources. 
This is untrue. 
During the massive investment associated with the Kyoto treaty, the participating countries’ investment in R&D as a percentage of GDP has declined , not increased. 
It is rather obvious that if you invest massively in inefficient solar panels, most of your money will go to buy the physical panels, whereas only a very small part will go to R&D. If you want more R&D, you should spend your money directly on R&D. This could tackle global warming in the longer run. 
Finally, it is often claimed that high CO2 taxes and subsidies for green technology will actually do good, and again Denmark is often taken as an example. 
After all, it is argued, Denmark has kept its CO2 emissions flat while enjoying 70% economic growth since 1981. 
But could it have grown more if it had not restricted CO2 emissions? 
During the same period, US emissions grew 29%, but its GDP grew 39% more than Denmark’s, indicating a simple truth: CO2 cuts and subsidies don’t necessarily mean no growth, but they probably do mean slower growth. 
President-elect Obama is now facing countless people who claim that subsidies for renewable energy and CO2 taxes are great ways to tackle global warming and forge a new green economy. 
Unfortunately, this is almost entirely incorrect. 
Taxes and subsidies are always expensive, and will likely impede growth. 
Moreover, if we really want to tackle global warming, we shouldn’t spend vast sums of money buying inefficient green technology – we should invest directly in R&D to make future green technology competitive. 
Obama should seize the initiative and make the meeting in Copenhagen next year not about bloated subsidies for inefficient technologies, but about lean investments in future breakthroughs. 
That is the way to tackle global warming and support a genuinely vibrant economy. 

The Greening of Bush 
The United States is usually regarded as an environmental laggard, with President George W. Bush perceived as being little better than the head of a gang of willful polluters who do everything they can to obstruct global action to protect the environment. 
Of course, there is some truth in this characterization of America (and quite a lot in that of Bush), but the picture is not uniformly bleak. 
Indeed, the environmental movement – like most modern social movements – began in the US. 
The roots of America’s “environmental movement” lie in the nineteenth century, when the damage wrought by the industrial revolution and the fragmentation of the natural landscape by individual property rights and tenures first became apparent. 
But it was the publication in 1962 of the book Silent Spring – a polemic against the use of pesticides in agriculture – by the biologist Rachel Carson that jump-started the modern ecological movement. 
Carson drew on scientific findings, but also voiced fundamental misgivings about consumer capitalism and a “postmaterialistic” belief in the primacy of the quality of life over economic growth. 
In Carson’s wake, the “Woodstock” generation of the 1960’s, with its Earth Days, soon began to organize a broad campaign, which saw, in April 1970, around 20 million Americans take to the street to defend the environment. 
In this new movement, the libertarian tendencies of the New Left and the protectionist tendencies of the traditional right became intertwined. Paul Ehrlich’s bestseller The Population Bomb exerted an influence that lasts to this day. 
America’s environmental movement was soon exported to Europe and elsewhere: on one hand, the pragmatic Friends of the Earth and the media-oriented organization Greenpeace , and, on the other hand, eco-fundamentalist groups like Earth First! and the Environmental Justice Movement (EJM) or lobbying groups like the World Wildlife Fund. 
This movement managed to force the first environmental laws out of the conservative Nixon administration: the National Environmental Act of 1969, the Clean Air Act of 1970, the Clean Water Act of 1972, and the Endangered Species Act of 1973. 
Then as now, the focus in America was on “green” topics (clean water, fresh air, and biological diversity) rather than with the “brown” topics of ecological disasters such as the Chernobyl (or Harrisburg) disaster, which have played a dominant role in mobilizing Europeans. 
America’s influential Environmental Protection Agency (EPA) also was established under Nixon. 
Environmentalists hired scientists, lawyers, and lobbyists who made sure that laws weren’t just passed in Congress, but also implemented in practice. 
But the current Bush administration has been hacking away at these 1970’s laws from all directions. 
He approved oil exploration in closed nature reserves, and also systematically fought to suppress scientific evidence on climate change. 
Now, however, due to the surge in crude oil prices, even Bush has had to begin to consider alternative energy sources, and it won’t be possible to limit these to nuclear power or ethanol, which is so popular among farmers, a key Bush constituency. 
Indeed, even Bush’s own political base, the Christian fundamentalists, are becoming “green,” pressuring the administration to sign the Kyoto Protocol because they believe that the environment must be protected just like unborn life. 
“Eco-theology” and evangelical pro-life propaganda have become one of the liveliest branches of the US environmental movement. 
“Green” eco-activists, while feeling awkward about support from this quarter, nonetheless find them useful allies. 
Indeed, the greening of America is becoming a general proposition. 
Many Americans can only shake their heads at the energy lobbyists who surround Bush and Vice-President Dick Cheney, and for a long time now a majority has been in favor of signing multilateral agreements, particularly in the area of climate protection. 
Catastrophic events like Hurricane Katrina have reinforced this stance. 
All this has caused Bush to seek to accommodate – verbally, at least – the will of an overwhelming majority of Americans to conserve energy. 
Moreover, although Bush has given mainly national security reasons for his seeming change of heart, America’s federal system, helps the country get around even a roadblock as powerful as the president, as “localism” promotes eco-political initiatives at the state level and even within municipalities. 
It is not just California Governor Arnold Schwarzenegger who has recognized the signs of the times and proclaimed bold Kyoto targets for his state that may become a pacemaker of All-American modernization again. 
Political climate change has also been brought about by people like Jerome Ringo, the president of the National Wildlife Federation (NWF) , whose 4.5 million members make it one of the largest environmental organizations. 
Ringo also heads the Apollo Alliance , a coalition of trade unions, environmentalist groups, managers, and local politicians that demands clean energy and good jobs. 
How green America will actually become remains to be seen, of course, but, as an ecological avant-garde, the US might even regain its lost influence in the world. 
Those who disdain environmental concerns have been ousted at the polls in large numbers, companies invest huge amounts in environmental technologies, states are suing car producers for their climate-adverse policies, and the requirements of the Kyoto Protocol have long been surpassed by some states – a lesson for German and European cities and municipalities. 
As in the past, the effectiveness of these initiatives ultimately will depend on whether these impulses reach Europe and Japan, as well as emerging nations like China and Brazil. 
It is time for Greens everywhere to start attending to ecological matters again – and, strange as it may sound, to look again to America for inspiration. 

The Greening of China 
Two countries – the United States and China – remain aloof from global efforts to create a new post-Kyoto framework on climate change. 
Fifty years ago, the rest of the world might have carried on with remedying the problem of conventional and greenhouse gas emissions and let China and the US stew in their own waste. 
But the world is now so interdependent that what happens in one place affects all others. 
For example, visitors and residents alike have long thought of Hong Kong as a beautiful city clinging to the South China coast. 
But, for at least five years, Hong Kong’s citizens have found themselves starting to cough and wheeze from the city’s increasingly degraded air. 
Corporate employers are even complaining about not being able to attract overseas talent. 
Pollution from Hong Kong’s own power generation plants, growing number of vehicles, and burgeoning shipping industry can certainly be reduced. 
But the lion’s share of this industrial haze – like the growing pollution of its coastal waters – is a direct result of the rapid industrialization of the Pearl River Delta across the border in China’s Guangdong Province. 
China is exporting not only more and more goods, but also its environmental degradation. 
The inescapable truth is that the futures of Hong Kong and China are integrally linked. 
There are roughly 58,000 factories in the Pearl River Delta with Hong Kong connections, and together they employ more than 10 million workers. 
Guangdong accounts for about 30% of China’s total foreign trade, while Hong Kong is China’s international finance center. 
Officials in both Hong Kong and Guangdong are powerless to clean up their environmental problems on their own. 
In fact, development plans in China may be heading in the opposite direction. 
Political heavyweights in Guangdong still favor a form of development that relies on speed and quantity while ignoring overall environmental quality. 
And Hong Kong’s economic blueprint also focuses on accelerating large infrastructure projects whose environmental impact has not been rigorously examined. 
It will not be easy for leaders on either side of the border to reverse gears, but there is still chance that people and companies can make a difference. 
Increasingly loud complaints about deteriorating air quality have goaded Hong Kong and Guangdong into embarking on a joint program in which a series of monitoring stations now provides emissions data. 
Hong Kong’s data have been released regularly, and in 2006, Guangdong’s data were made publicly available for the first time. 
There is now also talk about monitoring water quality. 
These are laudable steps for China, given its poor record on transparency. 
Indeed, the joint air-monitoring network provides a foundation for the region to develop a sophisticated regional air management program. 
Furthermore, new coal-fired power plants may no longer be allowed on either side of the border, necessitating greater use of natural gas and renewable energy sources. 
The first challenge for authorities is to regulate power generation very differently. 
People are used to paying for the electricity that they actually use. 
But, to optimize efficiency, utilities need to be rewarded for what they help consumers save. 
In other words, utilities must be given incentives to help consumers use less power. 
This idea is clearly feasible. 
Amory Lovins of the Rocky Mountain Institute has proposed what he calls the “negawatt,” or energy that is never used. 
All that is needed are the right financial incentives to induce utility companies to produce less electricity (and still be more profitable) and consumers to reduce their use (and gain savings without sacrificing comfort). 
This can be done by refitting households with high-efficiency light bulbs and other technological improvements, and by retrofitting industrial plants with energy-saving technologies. 
Another innovative idea that Hong Kong and Guangdong are exploring is the “P2E2” scheme. 
To help industries in the region upgrade environmentally, firms can now obtain special loans for which the Asian Development Bank assumes the risk – a program made possible by Hong Kong’s sound banking practices. 
Another initiative worth watching is the Hong Kong stock exchange’s exploratory project to offer a trading platform for emissions derivatives, which will most likely include conventional pollutants as well as carbon. 
The exchange will undertake a study this summer, with trading to begin as early as 2008. 
If these reforms are not trumped by efforts to maintain high growth at all costs, the region could not only clean itself up while continuing to prosper, but could also establish a model for all of China. 
Nothing is more necessary in a country that, according to the United Nations Development Program, contains 16 of the world’s 20 most polluted cities. 
Hong Kong’s leaders to do not want to end up on that infamous list. 
By saving themselves, they may also be able to play an instrumental role in saving China. 

The Greening of New York 
In the coming days, the United States will make a critical decision that has the potential to change America’s standing in the world: whether to approve a $537 million grant that will help make New York City the first environmentally sustainable megacity in the twenty-first century. 
Officials at the US Department of Transportation must appreciate that their decision to fund Mayor Michael Bloomberg’s visionary project, called PlaNYC, will determine the quality of air that more than 10 million New Yorkers breathe daily and the amount of carbon dioxide emissions the city coughs into the atmosphere. 
Already, New York City produces more CO2 emissions than all of Norway. 
More importantly, officials must realize that their actions will shape America’s response to the global challenge of unparalleled urbanization and carbon-induced climate change. 
This year, for the first time in human history, more people will live in urban areas than rural communities. 
In the US, the urban population has grown from 97 million in 1950 to 222 million in 2000. 
Today, nearly 80% of Americans live in urban areas. 
Such unprecedented and unplanned urbanization wreaks environmental havoc by increasing carbon emissions, since higher population density results in greater automobile and energy use. 
PlaNYC encourages the use of public transportation systems by creating powerful disincentives to automobile use. 
The plan’s proposed congestion charge on automobile use during peak times in certain parts of the city would reduce traffic and generate revenue that would go toward improving public transportation. 
Mayor Bloomberg’s plan comes at the right time for a city burdened by worsening traffic and pollution problems. 
Vehicles cause nearly a fifth of New York City’s CO2 emissions. 
Traffic congestion, in particular, is not only environmentally detrimental; it also imposes substantial time and resource costs on drivers. 
Americans lose around 3.7 billion hours and 2.3 billion gallons of fuel sitting in traffic jams. 
This implies an annual cost of around $200 billion. 
Due to congestion, New Yorkers face the longest commutes in the US, and their children have the highest rate of asthma hospitalization. 
PlaNYC would impose the congestion charge on the 4.6% of New York City residents who drive to work, while its benefits would accrue to everyone. 
New Yorkers would enjoy cleaner air, shorter average commuting time, and better public transportation. 
Neither the economy in general, nor the retail sector in particular, should be adversely affected. 
In fact, service and delivery providers in Manhattan, among others, would benefit from shorter travel times and fewer delays. 
However, despite its many advantages, congestion charges face some skepticism. 
Fortunately, we can learn from other cities such as Stockholm, Singapore, and London, which have successfully implemented them. 
In all of these cities, CO2 emissions declined sharply and congestion was significantly reduced, with Singapore experiencing an immediate 45% drop in traffic. 
These cities have also benefited from more efficient public transportation. 
In London, bus-travel rose by 46%. 
According to an independent report, almost 60% of the businesses in London judged the program’s impact on the economy as positive or neutral. 
Automobile dependent countries like America need smart solutions to ensure environmentally sustainable development. 
Having one of the largest urban populations and the highest per capita CO2 emissions, the US has the responsibility – and the means – to lead the world on this front. 
If the US does not act soon, American cities will lag behind not only European capitals, but also developing country cities such as Bogota (Colombia) and Curitiba (Brazil), which are already implementing innovative environmentally friendly solutions. 
New York City has always been a global leader in finance, the arts, and many other fields. 
It is an ideal candidate for creating a blueprint for cleaner and more efficient urbanization in the US and the world. 

The Greening of Work 
MONACO – When environment ministers from some 100 countries meet here on February 20-22 for UNEP’s Governing Council and Environmental Forum, talks will focus on environmentally friendly “green growth” and ways and means by which the world can achieve a low-carbon economy. 
The employment and development potential of combating climate change is only now being understood as a part of this effort. 
UNEP has invited the International Labour Organization and the International Trade Union Confederation to contribute to these discussions. 
Changes underway are a result of the Kyoto Protocol, but they are also partly being made in anticipation of deeper emission cuts to come. 
Equally important, the perception of organized labor and industry concerning environmental issues is changing dramatically. 
Environmental regulation was sometimes viewed with suspicion and concern for business and labour. 
Now, business sees profits and unions see jobs. 
Consider these facts: 
·A Washington-based consulting firm estimates that the U.S. environmental industry generated more than $340 billion in sales and almost $50 billion in tax revenues in 2005. 
The 5.3 million workers in the environmental industry outnumber pharmaceutical workers ten to one. 
·A British company specializing in improving the energy efficiency of homes was floated on the London Stock Exchange last June and now employs 4,000 people who once worked in nearby, now closed, coal mines. 
·A study prepared for the German Ministry of Environment estimates that employment in the German environmental technology industries will surpass employment in the automobile industry by 2020. 
·China has some 1,000 solar thermal energy firms, generating sales of $2.5 billion and employing 600,000 workers in manufacturing and installation. 
·The Indian city of Delhi is introducing new eco-friendly compressed natural gas buses, which will create an additional 18,000 new jobs. 
These trends look set to continue. 
The United Nations Environment Programme’s Sustainable Energy Finance Initiative estimates that investment in renewable energy has reached $100 billion worldwide, or 18% of new investment in the power sector. 
The Initiative, which involves some 170 financial institutions, also estimates that market financing for clean and renewable energies could reach $1.9 trillion by 2020. 
International efforts are now beginning to bear fruit. 
The Clean Development Mechanism of the Kyoto Protocol could channel $100 billion in funds from North to South for investment in carbon offsetting projects such as renewable energy schemes and tree planting. 
The Bali conference last year agreed to include avoided deforestation in tropical countries into a new climate regime, which could generate new employment opportunities in sustainable management, conservation, and tourism. 
Several countries, including Costa Rica, Norway, and New Zealand, have pledged carbon neutrality, which in turn will require investment and employment in carbon-friendly sectors. 
Significantly, labor is adding to the effort. 
At Bali, the global trade union movement signaled its commitment to an 85% reduction in global greenhouse gas emissions by 2050, underlining the perceived value of environmentally sustainable development and a future in “green jobs.” 
These jobs will play a vital role in reducing the environmental footprint of economies and promoting sustainable production and consumption patterns. 
In a rapidly greening labor market, those jobs lost to environmental unsustainability will have to be replaced by just transitions involving the promotion of social security, economic diversification and retraining. 
Yet green jobs are not enough. 
Meeting the challenge of climate change will require a new development model that combines reduced emissions with a better future for the vast majority of people and the opportunity to earn a living in a decent job. 
Last month, President Hu Jintao of China called for the realization of sustainable development and decent work by advancing “economic globalization in the direction of balanced development, shared benefit and win-win progress and to make sure that international economic, trade and financial institutions provide favorable conditions … so that the 21st century is genuinely a century of development for all … to realize sustainable development and for the vast majority of workers to enjoy decent work”. 
Clearly, change is in the air. 
Our responses to climate change must have a social dimension. 
Workers, employers and governments must engage in dialogue to put in place the social policies which ensure that green jobs are decent jobs. 
Only in this way can the poor and the jobless from Marseille to Mumbai and Sao Paulo to Shanghai be optimistic that creating an environmentally-sustainable world will also deliver decent, environmentally-sustainable work. 

Missing America 
BERLIN – Madeleine Albright, the former US secretary of state, once described the United States as the “indispensable nation.” 
Current developments around the world are proving her right. 
But the proof has been almost entirely negative: Today, America’s importance has become apparent from the absence of US leadership in one crisis after another – an absence that is most immediately obvious in Syria. 
In fact, a post-American world is taking shape before our eyes, characterized not by a new international order, but by political ambiguity, instability, and even chaos. 
This is unfortunate, and could turn out to be so dangerous that even die-hard anti-Americans end up longing for the passé American century and the US role as a global force for order. 
Both subjectively and objectively, the US is no longer willing or able to play that role. 
There have been many causes: a decade of war in the greater Middle East, with its enormous cost in “blood and treasure”; the financial and economic crisis; high public debt; reorientation toward internal problems; and a new focus on Pacific affairs. 
Add to this America’s relative decline in view of China’s ascendance and that of other large emerging countries. 
I am relatively certain that the US will successfully manage its reorientation and realignment, but the relative weight and reach of its power will nonetheless decline in the new world of the twenty-first century, as others grow in strength and catch up. 
Certainly, America’s global role will not be called into question. 
China will be busy addressing its own internal contradictions for a long time yet. 
Nor is India or Russia likely to pose a serious challenge. 
And Europe’s din of conflicting voices appears to preclude it from claiming America’s mantle. 
But, while none of these powers represents a serious alternative to America’s global role, the US will no longer be able to act unilaterally, as it did after the Cold War’s end, and it will be weakened substantially. 
This change has become particularly obvious in the Middle East and the Asia-Pacific region. 
In the Middle East, the regional order created by the colonial powers, France and Britain, following World War I, was maintained throughout the Cold War and the brief era of unilateral US domination that followed; the convulsions of recent years, however, could well bring about its end. 
The colonial borders are being called into question, and what will become of Syria, Lebanon, Iraq, and Jordan is difficult to forecast. 
The potential for regional disintegration and reconstitution – a process that can unleash untold violence, as in Syria – is greater than ever. 
Moreover, while there is no new regional hegemon to follow America, there are numerous contenders for the role. 
But none – Iran, Turkey, and Saudi Arabia being the most prominent – is strong enough to decide matters in its own favor. 
Given the lack of a new force for order in the region in the foreseeable future, and the old one’s unwillingness to act, the danger of long-lasting violent confrontation is growing. 
Even if America once again pursued military intervention in the region, its power would no longer be sufficient to enforce its will. 
Indeed, it is precisely because the US, after more than a decade of war, understands this only too well that any American administration will think twice before intervening militarily in the region again. 
Things look different in Asia, where the US not only remains present, but has increased its commitments. 
In East and South Asia, nuclear powers (China, Russia, India, Pakistan, and North Korea) or near-nuclear powers (Japan and South Korea) are all entangled in dangerous strategic rivalries. 
Add to this a regular dose of North Korean irrationality. 
While the US presence in the region has so far prevented its numerous conflicts and rivalries from intensifying, sources of uncertainty are multiplying. 
Will China be wise enough to seek reconciliation and partnerships with its neighbors, large and small, rather than aiming for regional domination? 
What will become of the Korean Peninsula? 
And what implications does Japan’s nationalist turn – and its risky economic policy – hold for the region? 
Can India and China stem the deterioration in bilateral relations? 
Is state failure looming in Pakistan? 
Imagine this situation without America’s military and political strength. 
The region would be dramatically more dangerous. 
At the same time, America’s straitened resources mean that its new global role will require more careful consideration of national interests in setting priorities. 
Clearly, the Asia-Pacific region takes precedence in US calculations. 
This new, more focused and limited American role thus raises the following question for America’s European partners: Can they afford the luxury of being unable to defend themselves without US help? 
Certainly, America’s guarantee of its NATO allies’ security will not become worthless; but it will become far more difficult to redeem it in full. 
And, if a post-American world entails greater risk of chaos and its consequences than hope for a new, stable order – a risk that affects Europe in particular – then perhaps Europe should reverse course on its apparent determination to dismantle itself. 

The Gucci Archipelago 
MOSCOW: By following Western economic advice - devised in good faith to bring Russia to democracy and prosperity - Yeltsin and Co., true to the national character, created yet another form of dictatorship, with the leader ensconced in the Kremlin utterly indifferent to his subject's well-being. 
The difference between today's Russia and the old Soviet Union is that the Gulag archipelago of labour camps has been shunted aside in favour of what can only be called a "Gucci archipelago" or a casino camp. 
Under communism, Soviet citizens were locked in. 
Russian citizens under today's sham market economy are locked out: locked out of the normal conditions of life; out of decently paid jobs, or what is even more common, out of paid jobs altogether. 
Most importantly, they are locked out of hope to overcome the everlasting Russian curse. 
Former prime minister Victor Chernomyrdin conveyed this dilemma in his usual lethargic way. By privatising state property "we wanted things to be better, but it still ended up ‘like always'." 
"Like always," in Russia means a never-ending gulag-type arrangement for the average Russian citizen. 
The power of the KGB was simply replaced by the power of corrupt private oligarchs and an even more morally bankrupt state apparatus. 
Nowadays, the well-guarded marble facades of Russia's (often insolvent) banks and businesses have assumed the role in domestic demonology once played by the frightening "Big House" on Lubyanka Square in Moscow where the KGB did its night work. 
Before 1991 everyone was overwhelmed by the very real fear of losing your freedom; now people are overwhelmed by the fear of having too much freedom. 
Those who are not up to the new challenges are dismissed with a shrug as "leftovers from the past" and chucked onto the dustbin of history, a place overflowing with "human refuse" after years of communism. 
Inequality is said to be inevitable in the process of Russia's Westernisation, and most people accept this. 
No Western adviser ever suggested, however, that the coming of free markets did not require a rule of law with everyone equal before it, and the development of sensible tax structures that provide for a public safety net. 
The distorted markets imposed on Russia by the new oligarchs created by Russia's market "deforms" (I refuse to let such monstrosities parade under the name of reform) has brought the country back full circle. 
Today the old KGB (Prime Minister Evgeny Primakov was a career denizen of this central institution of the Soviet/Stalinist state, and headed its successor body after communism's collapse) has been given the ruling hand in a last bid to impose some sort of order. 
Primakov's battle against corruption, directed primarily against the financial magnate and former minister for relations with the old Soviet nations like Ukraine, Secretary Boris Berezovsky, is sending a clear message: we will punish the guilty and impose discipline on rich and poor alike. 
(That battle is highly selective. 
For example, those Central Bank figures who spirited billions of the country's foreign exchange reserves out of Russia to a secret account in the British Channel islands remain strangely immune from worry.) 
But Primakov's so far cautious smack of firm government, weakened by the miserable condition of Russian state finances, might yet fail in tranquilizing today's disillusioned Russian masses. 
The mushrooming growth of the "Party Against Yids," organized by Duma member General Makashov, as well as frequent marches and demonstrations by fascist groups with ersatz swastika signs and black outfits suggests a hideous resemblance to pre-Nazi Germany in the early 1930s. 
The popularity of these "new model" Nazis grows in proportion to the despair incited by unpaid wages, unheated apartments, vanishing supplies of food, and the increasingly ugly and public squabbles around the decrepit occupant of the Kremlin throne. 
Hungry and poor people are looking with hope at the leather clad, well-trained, and iron-disciplined youth of these street gangs. 
These roving bands don't appear to spend their time and energy on acquiring money, or receiving concessions, or fighting for high positions. 
They are starting to ACT. 
These black/brown/red brigades don't just promise investigations and some sort of punishment for Russia's privatized oligarchs and their allies in the bureaucratic den of thieves. 
Their agenda is a no nonsense hanging of the corrupt, a restoration through state subsidies of industrial (for large numbers of people) jobs, paying equal wages to everybody, and stopping crime by clamping down hard on the streets. 
In short, they seek to establish an iron "poriadok" (order), a magic, soothing, nostalgic notion in today's bankrupt and chaotic Russia. 
Within Russia, historically, there are only two forces that would seek to stand against this looming political plague: the intelligentsia and the army. 
Parts of the intelligentsia, however, men like Berezovsky (who was a renowned mathematician), went into business and politics and discredited themselves. 
The army leadership, men like General Lebed, did something of the same thing. 
Murder in the ranks, starvation and suicides in distant army bases, run-away conscripts, even the spectre of soldiers selling out their fellow soldiers to Chechyn kidnappers, have become common in today's Russian military, which now sullenly sees itself as disgraced. 
There is a third force still in play, though much cursed, abused, misused but relied upon and hoped for - Western help. 
On March 23 the Gore-Primakov Commission will hold fresh meetings that could determine whether or not the IMF approve another $4 billion-dollar loan as well as lead to restructuring Russia's debt after the default of last summer. 
Russia's fate will, in some ways, be decided that day - it will either sink into more chaos and despair, the streets increasingly ruled by brown-black fascist youth, or Russia will receive a little breathing room, maybe its last, to find a viable course, somewhere in between the extreme archipelagos of Gulag and Gucci. 

The Gulag of the Russian Mind 
It is now 15 years since the failed coup of August 1991 against Mikhail Gorbachev. 
At the time, Gorbachev’s policies of perestroika and glasnost were seen by Soviet hardliners as a sell-out of communist Russia to the capitalist West. 
But it is now clear that the KGB and the military who launched the coup were not defending the idea of communism. 
Instead, they were protecting their idea of Russia’s imperial mission, a notion that had given the Kremlin commissars greater control of the vast Russian empire, and of Russia’s neighbors, than any of the Tsars had ever enjoyed. 
Gorbachev’s reforms not only liberated ordinary Russians from the straitjacket of Marxism-Leninism, but also released the national aspirations of people who had been locked in the empire for centuries. 
Having seen the peoples of Central Europe free themselves from Soviet domination just two years before, the constituent nations of the USSR were beginning to seek the same freedom for themselves. 
The Baltic republics of Estonia, Latvia, and Lithuania were the first to insist on traveling their own national path, and have since linked their fate to Europe as members of the European Union and NATO. 
Others soon followed. 
By December 1991, the Soviet empire was no more. 
But only the Baltics have secured the sort of independence dreamed of in 1991. 
Georgia, which is both European and Asiatic, teeters on the edge of instability. 
Traditionally Asian Uzbekistan and Turkmenistan have resumed the tribal forms of autocracy they practiced throughout the centuries. 
Azerbaijan and Kazakhstan have in essence become their presidents’ wholly owned family fiefs. 
Ukraine’s break with Russia was perhaps the most wrenching, both for those in the Kremlin nostalgic for imperial control and for ordinary Russians who see Ukraine as the wellspring of Russian civilization. 
The Orange Revolution of 2004, which overturned a rigged presidential election, proved that Ukraine was no longer a Malorossiya (a small Russia), an inferior and subordinate Slavic brother. 
Indeed, that peaceful revolution, led by Viktor Yushchenko and Yuliya Tymoshenko, was a reminder of how enlightened Kievan Rus had been before it was forced to give way to the despotic princes of Moscow. 
Two years after the Orange revolt, Yushchenko (a politician who seems out of his depth) has now accepted the Kremlin placeman Viktor Yanukovych, the foe he had vanquished in 2004, as his new prime minister. 
Nonetheless, the Orange movement – now led by Yushchenko’s former partner and prime minister, Tymoshenko – has not fully lost its way, and still aims to preserve Ukraine as a truly independent and free country. 
Malorossiya , for the majority of Ukrainians, remains a thing of the past. 
Despite all these epochal changes, Russians cannot accept the loss of their imperial role. 
The dream of empire is, indeed, the gulag that imprisons the Russian mind. 
Most Russians do not regard Europe’s approach to their country’s borders as a sign that they have, at long last, fully united with the civilization of which they are a part, but as a source of insecurity. 
Something more is at work here than mere nostalgia. 
During the chaotic years of Boris Yeltsin’s presidency, it was perhaps understandable that Russians regretted their loss of great power status. 
Something had to be blamed for their dire economic conditions. 
Yet under President Vladimir Putin, with the economy growing robustly, these feelings have hardened, not diminished. 
Russians are reverting to the past – to the grand pronouncements of Russia as a unique great nation, destined to rule the world. 
As before the advent of Gorbachev – indeed, restoring a centuries-old tendency – Russians yet again believe that the people should be willing to forfeit their freedoms for the sake of the greatness of the state, which wins wars and launches Sputniks. 
A free press, free speech, and free elections, it is feared, may diminish the brute power that is needed for Russia to assert itself. 
Russians have long boasted of their various unique forms of greatness: first it was the holy Russian soul, so superior to Western practicality. 
In the fifteenth century, Moscow was declared a “Third Rome,” the savior of spiritual Christianity. 
The seventeenth century united this spiritual mission with imperial expansion, which eventually encompassed a landmass spanning 11 times zones. 
In the early twentieth century, the imperial and spiritual mission became one, as Russia became the bastion of world communism. 
All these forms of greatness, however, demanded that ordinary Russians accept their debasement and enslavement. 
Development is not seen as a means of improving people’s lives, but as helping Russia prove itself to be superior to everybody else. 
So, ultimately, the material achievements of Russian development always come with a body count. 
Joseph Stalin’s industrialization killed millions – and became obsolete in only 30 years. 
Putin’s Russia doesn’t go in for mass killing, yet it has not lost the country’s “superiority” complex. 
For Russia’s elite, a restaurant bill cannot be too expensive, and one can never have enough bodyguards waiting out front for you. 
On a grander scale, Putin’s Russia has become a great power in terms of energy production, but that looks to be temporary, as scant investment is being made to maintain and improve the oil and gas fields. 
What matters is selling the reserves and being rich now, not finding more for later. 
So, as always, the trouble with Russia is that the state develops, but society doesn’t. 
The good of the people is sacrificed for the good of the nation. 
The dream of great Russia remains the gulag of the Russian mind. 

The Gulf War at 20 
NEW YORK – It was 20 years ago this month that Saddam Hussein, then the unchallenged ruler of Iraq, invaded Kuwait. 
What ensued was the first great international crisis of the post-Cold War era, one that, in less than a year, led to the liberation of Kuwait, along with the restoration of its government. 
This was accomplished with only modest human and economic cost to the extraordinary multi-national coalition assembled by President George H.W. Bush. 
Since then, the United States has used military force numerous times for a range of purposes. 
Today, the US is working to extricate itself from a second conflict involving Iraq, trying to figure out a way forward in Afghanistan, and contemplating the use of force against Iran. 
So the question naturally arises: what can we learn from the first Iraq war, one widely judged as a military and diplomatic success? 
One important lesson stems from the rationale for war. 
It is one thing to modify the behavior of a state beyond its borders, but quite another to alter what takes place within another country’s territory. 
The 1990-1991 Gulf war was about reversing Iraq’s armed aggression, something that was fundamentally inconsistent with respect for sovereignty, the most basic of all rules governing relations among states in today’s world. 
Once Iraqi military forces were expelled from Kuwait in 1991, the US did not march on Baghdad to replace Iraq’s government – or remain in Kuwait to impose democracy there. 
The 2001 war against Afghanistan and the 2003 war against Iraq were markedly different. 
Both interventions sought to oust the governments in place at the time, and both succeeded in that goal. 
I maintain that the effort against Afghanistan was justified (to remove the Taliban government that helped bring about the 9/11 attacks), and that ousting Saddam Hussein was not. 
But, regardless of one’s position on these questions, it cannot be disputed that replacing a government with something better and lasting is a different and much more ambitious goal than changing a government’s behavior. 
Successful regime change requires a long-term commitment of military force, of civilian experts trained to build a modern society, and of money and attention – and even then there is no assurance that the results will justify the investment. 
Another set of lessons from the first Iraq war (and the second as well) suggests a limit to what can be expected from economic sanctions. 
Sanctions alone, even those supported by the United Nations Security Council and backed by military force, could not persuade Saddam Hussein to withdraw from Kuwait, control of which was a major prize for him. 
Nor could sanctions trigger a change in government in Baghdad. 
Indeed, over time their ability to bring results diminished. 
A third set of lessons concerns international support. 
The participation of many governments not only distributes the costs of going to war, but also lends legitimacy to the enterprise. 
Multilateral backing can help sustain domestic approval, or at least tolerance, in the US and other countries, including the one where the hostilities are taking place. 
So what do these lessons tell us about how to move forward in Iraq, Afghanistan, and Iran? 
In the case of Iraq, President Barack Obama has repeated his pledge to end all US combat operations by the end of August, and to withdraw all US military forces by the end of next year. 
But, judging by Iraqi politicians’ inability to form a new government months after national elections, their failure to provide essential services, and, above all, the continuing deadly violence, nation-building in Iraq is far from complete. 
The Obama administration may want to reconsider its commitment to leave and, instead, negotiate a new accord (one that would allow as many as 20,000 US troops to stay in Iraq for years to come) if and when a new Iraqi government emerges. 
In Afghanistan, the lessons revolve around the nature of what is being sought. 
History suggests that the US ought to think twice before continuing its effort to remake Afghan society or its government. 
Instead, the US would be wiser to limit itself to a narrower counterterrorism mission, one akin to what is being done in Somalia and Yemen (and, to some extent, in Pakistan). 
In the case of Iran, the first Iraq war teaches us that economic sanctions will likely not be enough to persuade the Revolutionary Guards (who increasingly dominate the country) to accept verifiable limits on their nuclear program. 
Sanctions may, however, persuade some other powerful constituencies within Iran, namely the clerics, the businessmen of the bazaar, and political conservatives, to turn on President Mahmoud Ahmadinejad and his Revolutionary Guard base. 
But, if not, the question of whether to use military force to slow the development of an Iranian nuclear weapon will come to the fore. 
Only a few governments, at most, will support doing so. 
No one can predict or assume what a limited attack on Iran’s nuclear installations would accomplish, cost, or lead to. 
But not acting, in effect accepting Iran’s nuclear might, risks bringing about a more dangerous and possibly costlier future. 
As a result, it is Iran, even more than Iraq or Afghanistan, where the lessons of the Gulf war are likely to be debated and, ultimately, applied. 

The Guns and Gold of August 
CAMBRIDGE – China and Russia have just provided the world with sharp contrasts in the use of power. 
As the French analyst Dominique Moisi recently put it, “whereas China intends to seduce and impress the world by the number of its Olympic medals, Russia wants to impress the world by demonstrating its military superiority – China’s soft power versus Russia’s hard power.” 
Some American analysts, such as Edward Luttwak, have concluded that Russia’s invasion of Georgia proves the “irrelevance” of soft power, and the dominance of hard military power. 
In reality, the story will turn out to be more complicated for both countries. 
Soft power is the ability to get what you want through attraction rather than coercion or payment. 
It is not the solution to all problems. 
North Korean dictator Kim Jong Il’s fondness for Hollywood movies is unlikely to affect his nuclear weapons program. 
And soft power got nowhere in dissuading Afghanistan’s Taliban government from supporting Al Qaeda in the 1990’s. 
But other goals, such as the promotion of democracy and human rights, are better achieved by soft power, which can also create an enabling or disabling environment, as the United States discovered in the aftermath of the invasion of Iraq. 
Skeptics who belittle soft power because it does not solve all problems are like a boxer who fights without using his left hand because his right hand is stronger. 
Soft power is rarely sufficient, but it is often crucial to combine soft and hard power to have an effective “smart power” strategy. 
As the American Defense Secretary Robert Gates said last year, “I am here to make the case for strengthening our capacity to use soft power and for better integrating it with hard power.” 
Military force is obviously a source of hard power, but the same resource can sometimes contribute to soft power behavior. 
The impressive job by the American military in providing humanitarian relief after the Indian Ocean tsunami in 2004 and the South Asian earthquake in 2005 helped restore America’s attractiveness. 
On the other hand, misuse of military resources can undercut soft power. 
The Soviet Union had a great deal of soft power in the years after World War II, but destroyed it by the way the Kremlin used its hard power against Hungary and Czechoslovakia. 
Russia is now going through a period of nationalistic reaction to what it regards as the humiliation it suffered after the Soviet empire collapsed. 
With the rise in energy prices boosting its economy, Russia has seen an opportunity to reassert its power over its neighbors. 
In addition, it felt aggrieved by plans for further expansion of NATO, a proposed ballistic missile defense system in Eastern Europe, and Western recognition of Kosovo’s secession from Russia’s ally, Serbia. 
Russia has sought to weaken Georgia’s government for some time. 
In early August, Russia set a trap in South Ossetia, and Georgia foolishly walked into it. 
If the Russians had used their “peacekeeping” force solely to protect South Ossetians’ “self-determination” (citing the precedent of Western actions in Kosovo), they would have done little damage to their soft power, and the benefits could have exceeded the costs. 
By bombing, blockading, and occupying many parts of Georgia, delaying its withdrawal, parading blindfolded Georgian soldiers, and failing to protect Georgian citizens, Russia lost its claims to legitimacy and sowed fear and mistrust in much of the world. 
Neighbors such as Ukraine have become more wary. 
An immediate cost was Poland’s reversal of its resistance to an American anti-ballistic missile system. 
When Russia appealed for support of its Georgia policy to its fellow members of the Shanghai Cooperation Organization, China and others refused. 
Longer-term costs may include the failure of Russia’s proposal for a new European security system, a revived European interest in the Nabucco and White Stream gas pipelines that skirt Russia, and a decline in foreign investment. 
In contrast, China ended August with its soft power enhanced by its successful Olympic Games. 
In October 2007, President Hu Jintao declared China’s intent to increase its soft power, and the Olympics were an important part of that strategy. 
With its establishment of Confucius Institutes to promote Chinese culture, increased international broadcasting, attraction of foreign students to its universities, and softer diplomacy toward its neighbors in Southeast Asia, China has made major investments in soft power. 
Opinion polls show an improvement in its international reputation. 
But China’s government did not achieve all its Olympic objectives. 
By not keeping its promises to allow peaceful demonstrations and free Internet access, China undercut its soft-power gains. 
It will take more than a successful Olympics to overcome these self-imposed limits. 
For example, a recent Pew poll showed that despite China’s efforts to increase its soft power, the US remains dominant in all soft-power categories. 
So, while China won the most gold medals, the Beijing Olympics did not turn the tables on the US outside the sports arenas. 
One hopes that China’s leaders will learn the importance of free expression for establishing soft power. 
Of course, only time will tell the ultimate outcomes of the guns and gold of August for Russia and China. 
Unlike an Olympic competition, their recent performance will not be given a final score until well after their power games have been played. 

The Hague Tribunal: Belgrade's View 
BELGRADE: Opinion polls in Serbia show that large majorities believe the International Criminal Tribunal for the Former Yugoslavia to be a political instrument to bash Serbs. 
So they oppose extradition of the indicted - including ex-president Milosevic - to the Hague Tribunal. 
When the Tribunal's chief prosecutor, Carla del Ponte, comes to Belgrade this Tuesday her welcome will not be warm. 
Democratic politicians everywhere vie for the support of ethnic lobbies. 
To gain the Cuban vote in Florida, American politicians are tough on Fidel Castro; to secure Jewish votes in New York, they are soft on Israel. 
At the same time as they play this game, US policymakers (both Democrats and Republicans) demand that Vojislav Kostunica, President of Yugoslavia, cooperate with the Hague Tribunal unconditionally. 
Kostunica, however, is a sensible politician. 
He knows that, although the Serbian lobby is weak in the US, it is all�powerful in Serbia. 
Taking the mood of his voters seriously, Kostunica criticizes the Tribunal and expresses reservations about receiving Mrs. del Ponte. 
Long before the civil war in former Yugoslavia, I concluded that the world needed an international court to try governments and army commanders for war crimes, crimes against humanity, and genocide. 
But ever since the International Criminal Tribunal for the Former Yugoslavia was established in 1993 by the UN Security Council, I have been disappointed. 
I feel like some communist true believer who, in the 1930s, suddenly realized that terror existed in the Soviet Union. 
Why this change of heart? 
Biljana Plavsic, professor of biology and a leader of Bosnia’s Serbs, recently appeared before the Hague Tribunal to face charges of genocide. 
But the prosecutor merely repeated accusations about crimes committed by the Bosnian Serbs that have been known for years. 
Not a shred of new or recent evidence was presented. 
When Mrs. Plavsic was the pro�Western president of the Serbian part of Bosnia - between 1996 and 1998 - and in conflict with her more nationalist colleagues, she was hailed in the West as a democrat and champion of tolerance. 
I remember seeing President Jacques Chirac kiss her hand at the entrance to the Elysee Palace. 
I am reminded of Stalin's purges. 
One day you are a Hero of the Soviet Union, and the next you are shot as an enemy of the people. 
On May 27, 1999, at the height of the NATO bombing campaign, Judge Louise Arbour of Canada, Mrs. del Ponte’s predecessor as the Hague Tribunal’s chief prosecutor, issued a warrant for the arrest of President Slobodan Milosevic. 
The indictment was based on evidence gathered by American and British intelligence services about the expulsions and killings of Albanians in Kosovo. 
Milosevic could have been charged by the Tribunal years before because of his responsibility for the war in Bosnia. 
But America’s State Department needed his support to conclude the Dayton peace agreement of 1995, so Milosevic’s crimes of the time were conveniently forgotten. 
Soon after the warrant for Milosevic was issued, I heard in Belgrade that Vuk Draskovic, an opposition leader, was being threatened with indictment by US officials for the activities of his short�lived paramilitary organization during the 1991 war in Croatia. 
It seems as if the Americans were saying: stop creating conflicts with other opposition leaders, or we will indict you. 
Is it really so easy to dismiss out of hand as unreconstructed nationalists those Serbs who ask: why was Franjo Tudjman (the former president of Croatia) never indicted? 
Under his rule almost half a million Serbs were expelled from Croatia; he, too, sent troops into Bosnia to partition Bosnian territory. 
What of Alija Izetbegovic, the Muslim former president of Bosnia, who never wanted a multi�ethnic (Muslim�Serb�Croat) Bosnia, but rather the first Muslim state in Europe? 
Under his rule, Sarajevo was "cleansed" of most of its Serbs and Croats. 
And what of Hashim Thaci, the young leader of the Kosovo Liberation Army? 
When, in June 1999, Serbian troops moved out of Kosovo and NATO moved in, it was the KLA that really took over. 
Since then it has destroyed dozens of Serbian Orthodox churches and monasteries, killed hundreds of civilians, and expelled almost all Serbs and other non�Albanians. 
Last but definitely not least can we avoid asking questions about NATO’s responsibility? 
Perhaps several thousand Serbian civilians were killed during the NATO bombing. 
It may turn that the depleted uranium bullets used during the Kosovo war cause lethal radiation and that some commanders and politicians knew about this. 
By bombing Serbia's infrastructure, NATO also violated Article 14 of the 1977 Protocol of the Geneva Convention of 1949, which prohibits attacks on "objects indispensable to the survival of the civilian population." 
America will never accept the jurisdiction of an independent international court over its political leaders and military forces. 
Nor will any other great power. 
The spokesman for the International Relations Committee of the U.S. House of Representatives has stated this bluntly: "You're more likely to see the UN building dismantled brick�by�brick and thrown into the Atlantic than see NATO pilots go before a UN tribunal.” 
Instead of being fair and delivering justice, the Hague Tribunal has surrendered to political pressures and manipulation. 
Rather than helping Serbs achieve a moral catharsis by punishing their guilty leaders for their misdeeds, the Hague Tribunal is only reinforcing anti�Western prejudices and the sense of victimization already pervasive in Serbia. 

The Haitian Miracle? 
This spring’s presidential election in Haiti sadly re-enforced the country’s blighted reputation. 
The paradox is that today Haiti has a chance, perhaps the best in its modern history, to escape from its long history of extreme poverty and turmoil. 
A mere one-hour flight from Miami, the country struggles with poverty levels akin to the poorest parts of sub-Saharan Africa. 
But, whereas many parts of the world are extremely poor because of their isolation, Haiti is extremely poor despite its proximity to the world’s largest market. 
Now, Haiti can turn its geography into a competitive advantage, but only if the United States helps. 
Haiti recalls a famous lament once heard about another US neighbor, Mexico: “So far from God and so close to the United States.” 
As with Mexico, Haiti’s proximity to the US has cut both ways in its history. 
Proximity to the US should, of course, be an advantage for exports and attracting investment. 
However, proximity has also meant US meddling. 
Haiti was the second country, after the US, to win its independence from Europe, following a slave rebellion in 1804. 
But America regarded Haiti as a threat rather than as a colleague in freedom, refusing to extend diplomatic recognition until after the outbreak of the Civil War, which finally brought an end to slavery in the US. 
Even after recognition by President Abraham Lincoln in 1862, relations remained sour. 
Haiti was exploited and occasionally occupied by US troops, rather than being regarded as a legitimate partner in trade and diplomacy. 
Meanwhile, Haiti’s ecological and demographic conditions posed huge development challenges that have never been overcome. 
The island is hit regularly by devastating hurricanes. 
It has been massively deforested, and its soils have been depleted of nutrients. 
Tropical diseases remain killers to this day. 
A devastating economic blow occurred in the mid-nineteenth century, when Europe learned to produce sugar from a temperate-zone crop, beets, rather than from tropical sugar cane. 
World sugar prices collapsed, and Haiti fell into deeper disarray. 
Extreme poverty bred illiteracy and miserable governance, which in turn intensified hunger, disease, and instability. 
Haiti’s recent economic history is marked by a remarkable and tragic downslide since the mid-1980’s, exacerbated by sometimes well-intentioned but typically disastrously executed US diplomacy. 
In an attempt to push Haiti toward democracy, the US imposed economic sanctions, which crippled Haiti’s fragile and newly emerging export sector, especially apparel and other labor-intensive production. 
Unemployment soared. 
Urban violence spiraled. 
The US then entered into a destructive 15-year relationship with Jean-Bertrand Aristide, who is massively popular among Haiti’s poor, but distrusted by most of the business sector and many leading US politicians. 
When Aristide came to power in 2001, the Bush administration cut off most international aid, thereby helping to send the economy into a freefall. 
Aristide’s government was ousted under highly contested circumstances in 2004. 
The newly elected president, Rene Preval, is a highly talented and experienced agronomist, and thus has the perfect background to revive Haiti’s degraded rural economy. 
With the US market close by, Haiti could achieve a remarkable recovery of exports of horticulture, fruits, and other agricultural products, as well as tourism and light manufactured goods. 
The key will be for the new government to provide a sound framework which combines key public investments – roads, power, soil nutrients, improved seed varieties, public health, safe water – with confidence-building outreach to the business community and fruitful relations with the US and other donor countries. 
This time, the US has a strong interest in cooperating fully to promote economic progress: another round of failure would only provoke chaos, including massive numbers of new refugees to the US. 
The gap between Haiti’s performance and its potential is now so large that great gains can be achieved in income levels, farming, health, education, and more. 
Crop yields are below one ton of cereal per hectare of farmland – far less than half of what is readily achievable if farmers are helped to gain access to fertilizers, improved seeds, and basic infrastructure. 
Similarly, health conditions are horrendous, but could be improved dramatically just with immunization, de-worming, safe water, antibiotics, and anti-malaria bed nets. 
Community health workers could be trained in a matter of months to extend basic health care throughout rural areas, which could then be better mobilized to fend off the debilitating results of future hurricanes. 
On the economic front, Haiti can become a profitable exporter of tropical crops such as groundnuts, mangos, cut flowers, string beans, and bamboo – a source of progress among Haiti’s Caribbean-basin neighbors. 
Preval’s own hometown has successfully used a modest level of external donor support to create new rural cooperatives to market improved crops. 
And, with its beautiful beaches and remarkable arts and music, Haiti could once again become a major tourist destination. 
Indeed, Haiti can become an inspiration for many other fragile and impoverished new democracies. 
The US, France, Canada, and other major donor countries must not miss this historic opportunity to give vital help to Preval’s democratically elected new government. 

The Hamas Earthquake 
Hamas’s crushing defeat of Fatah in this week’s elections brings the Palestinian people to a crossroads. 
An Islamist political party that previously abstained from national politics and rejects Fatah’s policy of negotiations with Israel, is now in charge in Palestine. 
Hamas won 76 of 132 seats in the Palestinian Legislative Council, and can count on support from four independent deputies. 
Overall, that’s 60% of the seats in Parliament, won in nearly every district in the West Bank and Gaza. 
Hamas entered electoral politics only recently, but its massive victory was preceded by wide success in municipal elections. 
Hamas’s political moment has come. 
Under Palestinian law, Mahmoud Abbas, the Palestinian president, must now ask Hamas to form a new government. 
For their part, Fatah officials seem unwilling to join a Hamas-led government. 
Although Hamas has said that it would seek such a coalition, Fatah’s humiliating defeat has left it with little credibility as a governing partner. 
So far, Fatah’s senior leaders have declared that they will be a loyal opposition in Parliament, leaving governmental responsibility to Hamas. 
Instead, they will have to focus on rebuilding and reenergizing Fatah. 
Hamas is well aware of the shock that its victory has produced. 
If Fatah refuses to join a coalition, Hamas may opt for a government of independents and technocrats. 
It is unlikely that Hamas will form a government composed of hardliners. 
The political, security, and economic circumstances of the Palestinians require a government focused on solving problems, not ideological purity. 
The most urgent challenge facing the new government is rampant lawlessness and anarchy throughout Palestinian society. 
Murder, kidnapping, and extortion have reached record heights. 
Armed individuals resort to kidnapping to get jobs, free family members from prison, and exact revenge. 
Often, the people involved in these crimes belong to local gangs or even to the militias of large clans. 
In opposition, Hamas adamantly refused to collect illegal weapons. 
Now, it will have to deal with a Palestinian society that is armed to the teeth, with poverty rates reaching 70% and unemployment at 35% . 
Having benefited from overwhelming political rejection of Fatah, Hamas will now be judged by how it uses its new authority. 
For the first time, a political clock is ticking for Hamas. 
Senior Hamas officials are well aware of the challenge, and have promised a complete overhaul of Palestinian public services and administration. 
More than anything else, Hamas’s success in the coming months will be measured by its response to these issues. 
Will Hamas be able to root out corruption and incompetence, and deliver services fairly and efficiently? 
How will its election affect Palestine’s foreign aid inflows, which form major component of the national budget? 
Initial international reaction to the Hamas victory has been severe. 
The Bush administration has declared that it will not deal with a Hamas government, because Hamas remains committed to Israel’s destruction. 
This, indeed, is the language of Hamas’s 1988 covenant. 
Interestingly, however, Hamas’s election platform combined different approaches to the issue of a Palestinian state. 
On the one hand, Hamas agreed for the first time to the establishment of a Palestinian state in the West Bank and Gaza, with East Jerusalem as its capital. 
On the other hand, the platform repeats Hamas’s refusal to relinquish even an inch of historic Palestine. 
Whether Hamas can actually be transformed into a more moderate organization is impossible to say right now. 
But it is clear that Hamas is now vulnerable to public opinion and, as a governing authority, will have to deal with the international response to its victory. 
Immediately after the election, a senior Hamas official, Mahmoud al-Zahar, said that Hamas would maintain the cease-fire with Israel begun last February, if Israel did the same. 
Hamas may be signaling that it will not provoke Israel. 
Perhaps its governing responsibilities will push Hamas toward ongoing discussions with the United States and the international community. 
In any case, despite the election results, and even without Fatah in government, Abbas remains in charge of negotiations with Israel. 
He has quickly called for a revival of peace talks, although Israel, like the US, has refused to deal with Hamas. 
Palestinians have entered uncharted waters. 
They turned out in droves to vote in an election that former US President Jimmy Carter described as honest, fair and unmarked by violence. 
They elected a party which called for “reform and change” in response to a decade of violence and lawlessness. 
And Palestinians accepted Hamas’s view that negotiations based on the Oslo Accords could not achieve Palestinian rights and political ambitions. 
Victory achieved, Hamas will take on the responsibility for the Palestinian side in the Israeli-Palestinian conflict. 
With the Palestinians’ future at stake – not to mention the future of Israel and the Middle East – no one can say if Hamas is up to the task. 

The Hamas Moment 
Hamas’s capture of the Gaza Strip has created, along with Iran, a second radical Islamist state in the Middle East. 
The region, probably the Arab-Israeli conflict, and certainly the Palestinian movement, will never be the same. 
Fatah’s defeat in Gaza is not due to American foreign policy, Israel, or anyone but Fatah itself. 
It is Yasir Arafat’s ultimate legacy, for he encouraged not only terrorist violence against Israel, but also anarchy and corruption within his own organization. 
Most importantly, Arafat failed to resolve the conflict or give his people an alternative vision to one of extreme radicalism and endless fighting. 
By rejecting a compromise peace solution in 2000 that would have created an independent Palestinian state with its capital in east Jerusalem and $23 billion in international aid, Arafat made clear that there would be no alternative, moderate scenario for resolving the Palestinians’ problems. 
It was clear before the January 2006 elections that Hamas was heading toward a victory. 
Under weak leadership, Fatah did nothing to address its deep-seated divisions and corruption. 
Competing Fatah candidates split the vote, ensuring that Hamas nominees won. 
Even after the defeat, Fatah implemented not a single reform or leadership change. 
Its leaders squabbled, regarding themselves as the sole possible rulers and engaging in wishful thinking that some external factor would hand them whatever they wanted. 
Meanwhile, like communist and fascist parties in the past, Hamas moved forward, with a clear doctrine, relative discipline, and grim determination. 
Fatah’s ideology and practice laid the basis for Hamas to advance. 
With Fatah demonizing Israel, rejecting compromise, demanding total victory, glorifying terrorist violence, and portraying moderation as treason, Hamas merely needed to prove that it was better at pursuing this course. 
No one should underestimate Hamas’s extremism. 
Indeed, the only difference between Hamas and al-Qaeda – though the two groups do not generally work together – is that the latter emphasizes attacks on Western targets, while the former has until now focused on Israel. 
Consequently, Hamas will not moderate its stance, and its victory sets back the chances of Israel-Palestinian peace for decades. 
Buoyed by its triumph, enjoying backing from Syria (where its headquarters are located) and Iran, Hamas will pursue its genocidal and openly stated goal: the extinction of Israel and its people. 
Any thought of concession or compromise is gravely mistaken. 
Four specific issues now move to center-stage: the fate of the Palestinians in the Gaza Strip, the future of the Fatah-ruled West Bank, the world’s attitude toward Israel, and the strategic impact of Hamas’s victory on the Middle East. 
Until now, while Gazans have suffered from the constant fighting and economic failures brought about by their leaders’ policies, they have been left alone in their private lives. 
Hamas might go slower or faster with an “Islamicizing” program. 
Nevertheless, it is determined to transform the lives of those it rules. 
It will kill as it chooses, abolish women’s rights, and indoctrinate schoolchildren with hatred and the ambition to be suicide bombers. 
Gaza has suffered from anarchy; now it will be under the heel of a ruthless dictatorship. 
For example, when Hamas forces seized the Shati refugee camp, they deliberately executed three women – two teenagers and a 75-year-old – because they were relatives of Fatah officials. 
Those truly concerned with the Palestinians’ well-being should direct their criticism at that people’s leaders and seek to protect their human rights in the Gaza Strip. 
Fatah’s rule is still strong in the West Bank, but even the Gaza catastrophe is unlikely to lead it to change its ways. 
Israel’s willingness to work with Mahmoud Abbas’s Fatah regime and resumption of full-scale aid by the United States are intended to consolidate a relatively moderate Palestinian government on the West Bank. 
But, whereas Abbas appointed Salam Fayyad, a veteran economist who is respected in the West, as his new prime minister, he probably should have picked someone capable of being tough, organizing his forces, and fighting back. 
Logically, Fatah should now embrace moderation, crack down on cross-border terrorism, and seek some kind of peace with Israel. 
But Fatah has its own view of what is logical – one that might not coincide with such prescriptions. 
As wildly different as the two cases are, Fatah resembles the French monarchy before the revolution, incapable of learning from experience or taking the steps needed to avoid its own downfall. 
The world cannot save Fatah; only Fatah can save itself. 
For Israel, of course, developments in Gaza pose a great challenge. 
Israel has long since decided that it has no interest in renewing its control over the Gaza Strip. 
In some ways, Hamas’s coup makes things clearer. Gaza is ruled by a completely hostile regime. 
Israel will feel free to retaliate for cross-border attacks and continuing rocket fire at civilian targets within the country. 
At last, the world must recognize that the hopes stirred by the 1990’s peace process have been completely dashed. 
In effect, Hamas has returned the conflict to the 1960’s and 1970’s, when progress toward peace had to await the PLO’s readiness to stop using terrorism and accept Israel’s existence. 
Israel’s survival and right to self-defense now has to be supported internationally, and the slander and demonization of recent years should come to an end. 
The strategic implications for the region are equally grim. 
Hamas’s takeover of Gaza is a victory for the bloc comprising Iran, Syria, and Hezbollah, as well as the separate branches of the Muslim Brotherhood (of which Hamas is one) seeking to capture power in their own countries. 
These forces fully comprehend that the most important global contest today is between radical Islamism and the rest of the world. 
The question is when the rest of the world will figure that out. 

The Hamas Veto 
GAZA CITY – The resumption of direct peace talks between the Palestinians and Israelis has broken 20 months of stalemate, and marked the entry of Prime Minister Binyamin Netanyahu into this round of diplomacy. 
But these difficult talks face significant challenges from outside the negotiating room, particularly from Hamas, which is intent on ensuring that nothing happens without its approval. 
Hamas refuses all direct peace negotiations with Israel, and has vowed to derail the current talks through violence. 
Their first blow came on the eve of the talks, when the al-Qassam Brigades, Hamas’ military wing, carried out an ambush on Israeli settlers in Hebron, killing four people. 
Hamas has vowed to continue launching its attacks from inside the West Bank, but not from Gaza. 
This follows from Hamas leaders’ frequent statements since the 2008 Gaza war that they do not want to provoke another Israeli attack, which could cost them their governing position. 
Israel does not recognize a distinction between Hamas-planned attacks from the West Bank and from Gaza. 
However, a large-scale Israeli assault on Hamas’s Gaza redoubt in response to the West Bank killings could bring the negotiations to a halt. 
Hamas’s strategy is to expose the Palestinian Authority’s weakness by demonstrating that it cannot control the West Bank, as it promises in negotiations. 
Moreover, Hamas is well aware that their attacks cause Israel to insist even more strongly on security as the centerpiece of any agreement. 
This, in turn, puts the spotlight on ongoing security cooperation between Israel, the PA, and the United States, again undermining the PA’s claims to represent the Palestinian people. 
Rhetoric aside, Hamas’s opposition to direct talks with Israel is intended to make clear to the US that Hamas is central to the political reality of the region and cannot be ignored. 
If Hamas is not part of the process, there will be no process. 
Hamas insists that Palestinian President Mahmoud Abbas does not have the legitimacy to negotiate on behalf of the Palestinians, and that any deal he reaches with Israel is not binding. 
Hamas claims to be the Palestinians’ true representative, having won the majority of seats in the Palestinian Legislative Council (PLC) in January 2006 (the PLC’s term expired in January 2010, but fresh elections have yet to be held). 
As Hamas knows, the US holds the key to ending the political isolation imposed on it after its victory in 2006. 
Indeed, Hamas leaders recently acknowledged sending messages to the Obama administration calling for dialogue. 
The most recent note, sent through a group of visiting American academics, asked the US government to take a more balanced position in the Israeli-Palestinian conflict. 
Hamas, for its part, has expressed its willingness to accept a Palestinian state on the West Bank and Gaza, subject to a return of all refugees and Israel’s release of all Palestinian prisoners. 
But Hamas has not taken what the US considers the critical step of recognizing Israel – and thus accepting a two-state solution. 
For now, Hamas and the Palestinians of Gaza are excluded from the peace talks, which means that the negotiations will most likely not lead to an end to the Palestinian-Israeli conflict. 
But every day that Gazans are left to stew in an unhealthy mix of siege, poverty, and unemployment is a day that strengthens the Hamas hardliners. 
The US has invested much in shuttle diplomacy to bring Netanyahu and Abbas to the negotiating table and is not ready to see these talks collapse. 
But the continuing US boycott of Hamas reinforces the logic of those who are trying to sabotage the negotiations. 
What do they have to lose? 
The future of these direct peace talks thus depends not only on Netanyahu and Abbas, but also on how they relate to the extremists within their camps. 
Will Netanyahu abandon his ideological rhetoric, negotiate seriously with the Palestinians, and make the needed concessions? 
Can the Palestinians rise to the political moment and take advantage of the pressure coming from US President Barack Obama? 
The stakes are high, and failure would be costly to Americans, Israelis, and Palestinians. 
If the talks collapse, US foreign policy in the Middle East would be further discredited, and nothing would remain to keep the parties from launching another round of conflict. 
For Palestinians, this is likely to be Abbas’s last chance. 
He is wagering his scant remaining authority on the talks’ success, and Palestinians will be counting down his days in office should he fail. 
For Netanyahu, perhaps maintaining the status quo will be seen as a victory, at least in the short term. 
But Israel’s margin for strategic error will shrink even further. 
Meanwhile, Hamas bides its time. 
A failure of Palestinian-Israeli talks would only prove Hamas’s basic point: nothing moves forward without us. 

The Hard Right Goes Soft 
PARIS – The central paradox of French politics was confirmed once again on March 27. 
In a nationwide vote to select local authorities (the so called Conseiller Général), the far-right National Front gained 11% of the votes cast, but secured only 0.1% of the seats. 
This discrepancy between the National Front’s popular strength and its actual representation has been a permanent feature of French politics since Jean-Marie Le Pen established the party 40 years ago. 
But Le Pen was replaced in January by his no less charismatic daughter, Marine. 
And, with that change, the fate of the Front may be changing, too. 
The Front’s scant number of elected officials reflects the strategy pursued by its two main adversaries, the Socialist Party and President Nicolas Sarkozy’s Union pour un Mouvement Populaire (UMP, formerly the Gaullist party), which have essentially shared all elected posts at the national and local level since the 1980’s. In order to preserve their shared domination, they have more or less agreed to a “Republican Front” strategy aimed at excluding the National Front in the second round of all elections. 
Thus, in a direct run-off between a Front candidate and a Socialist or UMP candidate, the Socialists and the UMP usually vote for each other. 
The most striking demonstration of this “Republican” alliance was the 2002 Presidential election, when, with Socialist support, Jacques Chirac, the Gaullist incumbent, received 85% of the popular vote in the run-off against Jean-Marie Le Pen. 
So far, this “Republican Front” strategy of exclusion has succeeded in keeping the far right out of any significant political office for four decades, but it has never reduced the size of its electoral base. 
On the contrary, the National Front gains credibility by never having to test its program in government. 
For last Sunday’s run-off, however, Sarkozy broke with convention: in races where a Socialist candidate faced off against the National Front, his position was “No, neither.” 
As a result, UMP voters split between abstaining, supporting the Socialist, and voting for the National Front. 
Compared to Chirac’s rigid refusal to consider any kind of rapprochement with the Front, Sarkozy’s policy is thus a small step towards recognition of the Front’s legitimacy. 
The left has, of course, denounced this move as risking fascism. 
But, like it or not, the Front is a legal party. 
It may be xenophobic, but its leaders never denigrate the Republic: there may be fascists members within it, but the party plays by the democratic rules. 
And, like it or not, the Republican Front may crumble altogether under Marine Le Pen’s leadership of the party her father founded. 
Her father was, above all, an ideologue, a “populist” Napoleon who would never moderate his vision of a white and Catholic France in need of a moral revival. 
Thus, he rejected the French Revolution and the modern welfare state as much as he opposed Muslim immigration. 
Gaullists and Socialists are proud that they never compromised with Jean-Marie Le Pen, but he would not have negotiated with them, anyway. 
Le Pen’s ambition was always to “save” France, not to become Minister of Tourism. 
His daughter, however, has clearly softened the tone. 
Since Marine Le Pen took the helm, she has proven herself able to combine the National Front’s trademark anti-immigration stance, the hard core of its ideology, with praise for the state and the Republic. 
And she has brought a fresh anti-capitalist tone to the Front’s rhetoric – always a crowd pleaser in France. 
Marine Le Pen is seeking the same path to power traveled by Italy’s Northern League, the Flemish Interest Party, Liveable Netherlands, and the Danish People’s Party, all of which first became “soft” populist parties. 
As a result of this shift, in the near future Sarkozy’s conservatives may have no choice but to ally with the Front. 
Sarkozy’s attempt to co-opt far-right rhetoric on security and immigration has not worked, because, when it comes to national chauvinism, the French prefer its authentic purveyors. 
And the French – and voters elsewhere in Europe – vote for far-right parties the most when the far left is weakest. 
Indeed, the National Front is strongest precisely where the Communist Party once was the leading force. 
Between one-quarter and one-third of Continental Europeans feel permanently disenfranchised, and are prepared to vote for any “protest” party, whether far right or far left. 
The reason is essentially the same throughout Europe: slow economic growth implies few prospects for a better life, while the welfare state has failed to create jobs. 
The far left indicts capitalism; the far right points the finger of blame at immigrants. 
The far left would recommend revolution; the far right, ethnic cleansing. 
Anti-capitalist revolution was tried in half of Europe in the last century, with dire results. 
Expulsion of immigrants has not. 
Given a slow economy, a failed welfare state, and uncontrolled immigration – challenges for which no mainstream parties on the right or the left have any coherent proposals – the appeal of the far right’s soft populism will continue to haunt France and Europe. 


The Healing of Taiwan 
BANGKOK – Last week, a Taiwanese court sentenced Chen Shui-bien, Taiwan’s president from 2000 until 2008, to life imprisonment for corruption. 
Chen had been caught stealing millions of dollars of public funds. 
He did not act alone. 
His wife (who also received a life sentence), children, and other relatives all helped to hide the stolen loot in overseas accounts. 
Taiwan’s former first family turned out to be a den of common thieves. 
Chen and his ruling Democratic Progressive Party camouflaged their personal and parochial financial interests behind the patriotic mask of ensuring the survival of a democratic Chinese society in an independent Taiwan. 
For years, Chen was perceived as a brave David fighting the communist Goliath, and attracted many admirers around the world (including me at one point). 
Presenting himself and his Party as champions of democracy, Chen sought to create the impression among Taiwan’s voters that their freedom would perish in the hands of the Kuomintang (KMT) or any party other than his own. 
But in fact, it was the late President Chiang Ching-kuo, the son of Generalissimo Chiang Kai-shek, who instituted the unprecedented democratic reforms that paved the way for the eventual electoral triumph of Chen’s formerly banned DPP. 
Chen’s personal wealth grew conspicuously shortly after he assumed office, but no one could produce hard evidence of his corruption back then. 
His political supporters initially brushed aside the mushrooming rumors of his self-enrichment as opposition KMT propaganda. 
But, one by one, most of the DPP’s founding fathers all left the party, accusing Chen of corruption and autocratic behavior even within his own party – which Chen dismissed as sour grapes from people who wanted their share of the political spoils. 
In fact, Chen was always more concerned with consolidating his own power than with defending Taiwan. 
His most controversial political moves were aimed at his domestic opponents, not the Chinese government on the mainland. 
He led a vicious campaign to portray all Taiwanese with mainland Chinese roots, even if born and bred in Taiwan, as untrustworthy carpetbaggers – wai shen ren , or “not native people” – as if they were aliens from a different culture. 
This official effort to portray native “Taiwanese” as a separate ethnic group, with scant relation to Chinese culture, was extended to language, as Chen favored using the Fujian dialect in lieu of the Mandarin spoken by 1.3 billion Chinese and taught all over the world. 
Meanwhile, the Ministry of Education sought to expunge all references to China in school textbooks. 
So insistent was Chen’s campaign that it reminded some people of Mao’s Cultural Revolution, a time when Chinese were divided into “us” and “them.” 
Indeed, under Chen’s policy, Taiwan nearly became a rigidly divided society, where “local” and “not native” Chinese lived as potential enemies. 
Taiwan ’s sole aboriginal parliamentarian once provided the logical rebuttal to Chen and the DPP, delivering a speech to a packed Congress entirely in his native tongue, which nobody else in the chamber could understand. 
The message was obvious: his was the only group with a legitimate claim to being native Taiwanese. 
In the end, Chen’s effort was as futile as it was foolish. 
The Chinese culture embodied in the daily lives of 23 million Taiwanese of whatever political beliefs was not so easily eliminated by decree. 
Moreover, the attempt to do so angered the overwhelming majority of Taiwanese, who finally understood the stupidity of Chen’s policy, particularly how it led to economic stagnation at a time when mainland China was booming. 
Indeed, Taiwanese capital and know-how built much of China’s hi-tech industries, and well over a half-million Taiwanese live and work near Shanghai in a virtual replica of Hsin Chu, Taiwan’s Silicon Valley. 
But in Chen’s Taiwan, domestic squabbles took precedence over economic development. 
Chen invariably blamed the KMT for blocking sensible economic plans, but even some of his moneyed supporters knew better. 
When it was finally proved that power had turned Chen into a common criminal, the KMT was voted back into power. 
But, while Chen’s legacy of lies and corruption has ended, the reborn KMT under President Ma Ying-jeou has much to do to convince a cynical public that Chen’s ways, reminiscent of KMT’s own darker past, have not become embedded in the system. 
Chen’s jail sentence should also serve to remind the DPP that it must become a party for all Taiwanese, “local” or not if it is to have any chance at a revival. 

The Health of American Politics 
CAMBRIDGE – When the United States Congress approved President Barack Obama’s plan to extend health-care coverage to nearly all Americans, it marked the most important social legislation the country had seen since the 1960’s. 
While Republican opposition remains strong, the law was a major domestic political victory for Obama. 
Its enactment also has broader implications, because, like Obama’s election in 2008, it addresses questions about the health of America’s political system. 
After all, it was once widely asserted that an African-American without a political machine could not become president. 
Recently, many observers argued that America’s gridlocked political system would prevent the country from translating its abundant power resources into leadership. 
As one perceptive journalist recently argued, “America still has the means to address nearly any of its structural weaknesses… energy use, medical costs, the right educational and occupational mix to rebuild a robust middle class. 
That is the American tragedy of the early 21st century: a vital and self-renewing culture that attracts the world’s talent and a governing system that increasingly looks like a joke.” 
Power conversion – translating power resources into effective influence – is a long-standing problem for the US. 
The Constitution is based on an eighteenth-century liberal view that power is best controlled by fragmentation and countervailing checks and balances. 
In foreign policy, the US Constitution has always invited the president and Congress to struggle for control. 
Strong economic and ethnic pressure groups fight for their self-interested definitions of the national interest. 
Congress always pays attention to squeaky wheels, and special interests press it to legislate foreign-policy tactics, codes of conduct, and sanctions for other countries. 
As Henry Kissinger once noted, “what is presented by foreign critics as America’s quest for domination is very frequently a response to domestic pressure groups.” 
The cumulative effect, Kissinger continued, “drives American foreign policy toward unilateral and bullying conduct. 
For, unlike diplomatic communications, which are generally an invitation to dialogue, legislation translates into a take-it-or-leave-it prescription, the operational equivalent of an ultimatum.” 
There is also a concern about the decline of public confidence in US institutions. 
In 2010, only one-fifth of Americans said that they trusted the government to do what is right all or most of the time. 
As former Clinton administration official William Galston put it, “trust is never more important than when citizens are asked to make sacrifices for a brighter future. 
Mistrust of the government making this request could be the harbinger – even the cause – of national decline.” 
The US was founded in part on mistrust of government, and a long tradition traceable to Thomas Jefferson holds that Americans should not worry too much about low levels of confidence in government. 
When asked not about day-to-day governance but about the underlying constitutional framework, the public is positive. 
Indeed, if you ask Americans where the best place to live is, 80% say the US. 
If asked whether they like their democratic system of government, 90% say yes. 
Few people believe that the system is rotten and must be overthrown. 
Some aspects of the current mood are probably cyclical, while others represent discontent with political bickering and deadlock. 
True, when compared to the recent past, party politics has become more polarized. 
But nasty politics is nothing new, and much of the evidence for loss of trust in government comes from polling data, which weighs responses that are sensitive to the way questions are asked. 
Moreover, the sharpest decline occurred more than four decades ago, in the late 1960’s and early 1970’s. 
This does not imply that expressions of declining confidence in government are not problematic. 
Whatever the reasons for the decline, if the public becomes unwilling to provide such crucial resources as tax dollars, or to comply voluntarily with laws, or if bright young people refuse to go into government service, governmental capacity will be impaired and people will become more dissatisfied with it. 
A climate of distrust can also trigger extreme actions by deviant members of the population, such as the bombing of a federal office building in Oklahoma City in 1995. 
So far, such behavioral results do not seem to have materialized. 
The Internal Revenue Service sees no increase in tax cheating. 
By many accounts, government officials have become less corrupt than in earlier decades, and the World Bank gives the US a high score (above the 90th percentile) on “control of corruption.” 
Moreover, after a 40-year drop in voting rates in presidential elections, from 62% to 50%, the decline stopped in 2000, and returned to 58% in 2008. 
Citizens’ behavior does not seem to have changed as dramatically as have their responses to poll questions. 
Three-quarters of Americans feel connected to their communities, and say the quality of life there is excellent or good; 40% say working with others in their community is the most important thing that they can do. 
In recent years, American politics and political institutions have become more polarized than the distribution of opinions in the American public would suggest. 
The situation was exacerbated by the economic downturn after 2008. 
As an editorial in The Economist recently concluded, “America’s political system was designed to make legislation at the federal level difficult, not easy. 
Its founders believed that a country the size of America is best governed locally, not nationally….So the basic system works; but that is no excuse for ignoring areas where it could be reformed,” such as the gerrymandered safe seats in the House of Representatives and the blocking procedures of Senate rules and filibusters. 
Whether the American political system can reform itself and cope with such problems remains to be seen. 
Obama’s health-care victory, like his 2008 election, suggests that America’s political system is not as broken as critics who draw analogies to the fall of Rome or other empires would have us believe. 

The Healthier Poor 
Life expectancy in the world’s high-income countries is now 78 years, while it is only 51 years in the least-developed countries, and as low as 40 years in some AIDS-ridden African countries. 
For every 1,000 children born in rich countries, seven die before their fifth birthday; for every 1,000 births in the poorest countries, 155 children die before their fifth birthday. 
These deaths are not only human tragedies, but also calamities for economic development, systematically reducing economic growth and helping to keep the poorest countries trapped in poverty. 
But a growing number of programs around the world are proving that the death and illness of the poor can be reduced sharply and rapidly with targeted investments in public health programs. 
Big victories in recent years have come through the Global Fund to Fight AIDS, Tuberculosis, and Malaria. 
The Fund, established six years ago, has provided financing to more than 130 countries to scale up their programs against these three killer diseases. 
Since then, Global Fund programs have helped roughly one million Africans to receive anti-retroviral medicines to treat AIDS, financed the distribution of around 30 million bed nets to combat malaria, and supported treatment of around two million people with TB. 
Malaria can be brought under decisive control through bed nets, indoor spraying of insecticides, and making medicines freely available to poor people in malaria-prone villages. 
In just two days last year, Kenya’s government distributed more than two million bed nets. 
Similar mass distribution programs have been implemented in Ethiopia, Rwanda, Togo, Niger, Ghana, and other places. 
The results are amazing. 
The poor use the bed nets effectively, and the burden of malaria comes down rapidly. 
Likewise, a campaign led by Rotary International and several partners has nearly eradicated polio. 
The number of cases worldwide each year is now in the hundreds, compared to many tens of thousands when the campaign began. 
Success is being achieved in even the most remote and difficult places, such as the poverty-stricken states of northern India. 
Indeed, India is doing much more with its remarkable National Rural Health Mission (NRHM), which is the single largest mobilization of public health measures in the world. 
An astounding half-million young woman have recently been hired as health workers to link impoverished households and public clinics and hospitals, which are being improved, and to increase women’s access to emergency obstetrical care in order to avoid tragic and unnecessary deaths in childbirth. 
Another remarkable success in India is the safe home-care of newborn infants in the first few days of life. 
Currently, an alarming number of newborns die because of infection, mothers’ failure to breastfeed during the first days, or other preventable causes. 
By training community health workers, the NRHM has achieved a marked reduction in newborn deaths in Indian villages. 
All these programs refute three widely held myths. 
The first is that the burden of disease among the poor is somehow inevitable and unavoidable, as if the poor are bound to get sick and die prematurely. 
In fact, the poor die of known and identifiable causes that are largely preventable and treatable at very low cost. 
There is no excuse for millions of deaths from malaria, AIDS, TB, polio, measles, diarrhea, or respiratory infections, or for so many women and infants to die in or after childbirth. 
The second myth is that aid from rich countries is inevitably wasted. 
This fallacy is repeated so often by ignorant leaders in rich countries that it has become a major barrier to progress. 
The rich like to blame the poor, partly because it lets them off the hook, and partly because it gives them a feeling of moral superiority. 
But poor countries are capable of establishing effective public health programs rapidly when they are helped. 
Recent success stories have been made possible through a combination of increased spending from poor countries’ budgets, supplemented by aid from rich-country donors. 
The third myth is that saving the poor will worsen the population explosion. 
But households in the least-developed countries have many children – an average of five per woman – partly because fear of high childhood death rates leads them to overcompensate with large families. 
When childhood death rates come down, fertility rates tend to decline even more, since families are now confident that their children will survive. 
The result is slower population growth. 
It is time to make good on a basic global commitment – that everybody, poor and rich alike – should have access to basic health services. 
If just 0.1% of rich-world income were devoted to life-saving health care for the poor, it would be possible to raise life expectancy, decrease child mortality, save mothers in childbirth, slow population growth, and spur economic development throughout the poor world. 
The success stories in public health for the poor are multiplying. 
Given the low cost and the huge benefits of supporting such efforts, there is no excuse for inaction. 

The Heart of The Matter 
KIEV: Recently I visited two cities -- Chernobyl and Yalta -- that have moved beyond notations on a map to become symbols of our century. 
Chernobyl is a ghost town -- a contaminated, deserted place where time stands still. 
Its name is a warning, informing humanity that the great inventions produced by rational minds also expose us to unprecedented dangers. 
For when we touch the heart of matter, we also touch the hidden order of Being beyond scientific understanding. 
We must honour this order if we do not want to fall prey to the arrogant belief that discovering fragments of truth may enable us to master the universe. 
Until recently, people in the Europe savagely controlled by totalitarian regimes also lived in a tainted and oppressed environment. 
A warning against the arrogance of rationality is at the same time a warning against the arrogance of social engineers -- those who believe that a freer and happier life for mankind can be secured solely by devising scientific plans for it from above. 
We who experienced communism know well the outcomes of such beliefs: dead, artificial cities; gigantic waterworks that fail only after destroying diverse ecosystems; vast, largely anonymous and thus irresponsible states deciding where and how we shall dwell, work, relax or amuse ourselves. 
Such beliefs engineer a dull and gray life, devoid of anything unique, because individuality is deemed irrational, non-systemic, unnecessary. 
Chemobyl holds out another message: a radioactivity that ignores national boundaries reminds us that we live -- for the first time in history -- in one interconnected civilization wrapping the planet. 
Whatever happens in one place can, for better or worse, affect us all. 
The word Yalta, too, has assumed a life of its own, serving for years as a symbol of a division of the world by the great powers: of the large and powerful deciding the fate of the small and powerless without asking their advice, of inadmissibly pragmatic concessions or compromises by democratic governments vis-?-vis the overpowering strength of a totalitarian regime. 
For decades our world existed under a shell of bipolarity, with two power blocs opposing each other on values, ideas and political convictions. 
Both systems held relatively firmly together, though the glue that bound them was different, and both attempted to strengthen their positions throughout the world. 
Under that shell, however, there was change. 
The world today is completely different from what it was when the Iron Curtain was hung. 
With the tottering tower of communist totalitarianism collapsed, the Iron Curtain's fall revealed the actual contours of the world as well as the depth of its challenge. 
Difficult as it was for the forces of freedom and democracy to prevail over totalitarianism, it will be even more difficult to win the peace, to develop and enforce optimal patterns for a new life together of states and nations on this planet that addresses the world's present condition. 
One of the many principles that I believe should govern this great undertaking is to develop in the international community the maximum degree of respect for the democratically and freely expressed will of individual nations or states. 
Each should have the unreserved right to decide their futures, their international associations, and where they belong or want to belong. 
The more the international community respects this will -- provided that this does not interfere with the legitimate will of other nations -- the more stable the world will be. 
The last few decades, as well as previous history, offer ample evidence that an imposed order will inevitably collapse. 
The collapse of an artificial order often takes a toll, indeed, may be as exacting as the price first paid for the imposition of that order. 
In other words: there should be no more symbolic Yaltas. 
Never again should others decide the future of peoples and countries; at the very least, nobody should undertake such decisionmaking without knowing and respecting the legitimate and freely expressed ambitions of the nations concerned. 
No state must be denied the right to freely decide to which regional groupings -- political, security, economic -- it wants to belong. 
Decisions about admission should not be determined by the geopolitical interests of others, but solely by the measure of a state’s readiness, tested by objective criteria, to adopt the standards of these groupings and respect their underlying principles. 
As we confront the warnings of Chemobyl and Yalta, it is time to seek that which transcends the horizon of mere rational or scientific thought and the limits of the illusory pretensions of Chernobyl's social engineers and Yalta's geopolitical strategists. 
As individuals and as a community, we must delve into our history, our souls, and all our experience to try to dig out our vanishing respect for the universe's mysterious order, for the unique human being, for cultural and community identities -- and restore humble acceptance of the fact that we are all but component parts of the universe, and not its masters. 

The Hedge Fund Hegemon 
The recent volatility in global capital markets should give pause to those who say German leaders, who have been arguing for greater transparency in global hedge funds, are just sore losers US and UK policymakers, in particular, say the German whining is nonsense, and that hedge funds, along with other new age financial entities such as private equity firms are key innovators in today’s, global economy. 
This debate is at the cutting edge of today’s globalization, yet it is clouded by a healthy dose of national self-interest. 
With New York and London the centers of global finance, the United States and Britain have enormous profits at stake. 
So it is convenient for them to downplay the likelihood that risks to the world’s financial system will be spread more evenly than the benefits. 
German leaders, by contrast, must reckon with a populace that is deeply resistant to rapid change, particularly when it involves job cuts. 
Many German workers believe, as one trade unionist recently lamented, that takeovers are being driven by a philosophy of “buy it, strip it, and flip it.” 
To be sure, the profits currently being earned by the leading financial firms are dizzyingly high. 
Goldman Sachs, the venerable Wall Street firm at the epicenter of financial globalization, paid more than $16 billion dollars in compensation to its 25,000 employees in 2006, and spun out another $9 billion for its shareholders – a total that is greater than the annual income of most African countries. 
The spectacular profits on Wall Street and elsewhere in the financial industry also have a huge macroeconomic impact. 
The US is running an $800 billion annual trade deficit in traditional goods and services. 
Yet, because Americans consistently earn a higher return on their investments abroad than foreigners earn on their US investments, US debt is rising at perhaps only half the rate that it might otherwise. 
Even we economists who believe that global financial innovation yields huge net benefits must admit that today’s hedge fund boom is becoming like the tech bubble. 
My own recent experience is perhaps emblematic. An “Eddie” in Los Angeles sent me an email asking if I wanted to serve on the advisory board to his new hedge fund. 
Eddie’s accompanying flattery aside, I would normally trash such a letter, figuring it was a fraud or scam of some kind. 
However, my curiosity was piqued when I noticed a missing attachment outlining the firm’s planned investment strategy. 
I shot a line back, requesting the missing attachment. 
I should have stifled myself: Eddie, figuring he had a live one, sent the missing attachment with a note saying “We are so glad someone of your stature might be interested and, by the way, if you have any friends or colleagues who might be interested, could you please forward this email to them also?” 
The point is that in today’s go-go ultra-high liquidity environment, Eddie was probably successful in raising money with similar techniques. 
Of course, roughly 1,000 of the world’s 9,000 hedge funds went out of business last year. 
The big question is whether this Wild West mentality poses broader risks to the global financial system, particularly given circumstances where a large number of firms are all collectively making the same bet. 
If they lose, a long string of bankruptcies can cut deeply into banking systems that had generated huge profits by lending to these same hedge funds. 
At the moment, the most glaring weakness is the so-called “yen carry trade.” 
Hedge funds have borrowed hundreds of billions of dollars at ultra-low interest rate in Japan, and invested the proceeds in countries like Brazil and Turkey, where interest rates are high. 
As long as the yen remains weak, this investment strategy will be a money machine. 
But if the yen appreciates sharply, as it easily could given Japan’s huge current account surplus, some hedge funds will suffer huge capital losses and the yen carry trade will implode. 
And, while today’s main risk is the yen, in a couple months it could be something completely different. 
So pressure outside the US and Britain to put the hedge fund industry on a tighter regulatory leash is hardly surprising. 
The Germans, for example, want to reduce risk by forcing hedge funds to adhere to stricter reporting requirements. 
The funds respond to such proposals by arguing that if they are required to reveal their investment strategies, they will lose their incentive to innovate, and a recent US government report – a multi-agency effort headed by Treasury Secretary Hank Paulson (formerly of Goldman Sachs) – supports that position. 
Greater regulation would be a mistake, the report argues, because the global economy’s best defense against systemic risk is the exercise of common sense and “due diligence” by each and every person who invests or interacts with hedge funds. 
In other words, the US is telling investors to carry their own guns, because, as in the Wild West, there might not be a sheriff around to help. 
But frankly, as we are reminded by recent events, it is hard to see how at least a small increase in transparency can hurt. 
The Germans, in chairing the G8 this year, should not surrender on this issue. 
No country wants to put itself at the mercy of the likes of Eddie. 

The Hero of His Time 
Boris Yeltsin was utterly unique. 
Russia’s first democratically elected leader, he was also the first Russian leader to give up power voluntarily, and constitutionally, to a successor. 
But he was also profoundly characteristic of Russian leaders. 
Using various mixtures of charisma, statecraft, and terror, Peter the Great, Catherine the Great, Alexander II, Peter Stolypin (the last tsar’s prime minister), Lenin, and Stalin all sought to make Russia not only a great military power, but also an economic and cultural equal of the West. 
Yeltsin aimed for the same goal. 
But he stands out from them in this respect: he understood that empire w